AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 04, 2007
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------
FORM 20-F/A
----------
AMENDMENT NO 1
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______________ to ______________
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report ______________
Commission file number: 1-32535
BANCOLOMBIA S.A.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
REPUBLIC OF COLOMBIA
(Jurisdiction of incorporation or organization)
CALLE 50 NO. 51-66
MEDELLIN, COLOMBIA
(Address of principal executive offices)
SECURITIES REGISTERED OR TO BE REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
AMERICAN DEPOSITARY SHARES New York Stock Exchange
PREFERRED SHARES New York Stock Exchange*
----------
* Bancolombia's Preferred Shares are not listed for trading directly, but
only in connection with its American Depositary Shares, which are evidenced
by American Depositary Receipts, each representing 4 Preferred Shares.
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Not applicable
(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act.
Not applicable
(Title of Class)
Indicate the number of outstanding shares of each of the issuer's
classes of capital or common stock as of the close of the period
covered by the annual report.
Common Shares .................................................... 509,704,584
Preferred Shares ................................................. 218,122,421
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes X No
--- ---
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 of 15(d) of
the Securities Exchange Act of 1934
Yes No X
--- ---
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the
Exchange Act. (check one):
Large accelerated filer X Accelerated filer Non-accelerated filer
--- --- ---
Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 Item 18 X
--- ---
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act) Yes
Yes No X
--- ---
================================================================================
EXPLANATORY NOTE
This Amendment No. 1 on Form 20-F/A (this "Amendment No. 1") to our annual
report on Form 20-F for the year ended December 31, 2005, filed with the
Securities and Exchange Commission (the "SEC") on June 23, 2006 (the "original
filing"), is filed to correct inadvertent errors in the disclosure of effects of
the Conavi/Corfinsura Business Combinations in the Supplemental Consolidated
Condensed Statements of Operations and in the Supplemental Consolidated
Condensed Statements of Cash Flow for the year ended December 31, 2005, and the
reclassification of cash flows related to trading securities from investing
activities to operating activities in the Supplemental Consolidated Condensed
Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003,
prepared in accordance with accounting principles generally accepted in the
United States of America ("U.S. GAAP"). There is no impact on the Consolidated
Net Income and Stockholders' Equity for any of the years presented under U.S.
GAAP as reported in the original filing and the effects of these corrections and
reclassifications are being presented as restatements in Note 32 to the
financial statements.
Furthermore, this Amendment No. 1 amends Item 15 within the original filing
to clarify the opinion of our President Jorge Londono Saldarriaga and Finance
Vice-President Jaime Alberto Velasquez Botero with respect to the effectiveness
of our internal controls over financial reporting as of December 31, 2005 as a
result of the corrections mentioned above.
Accordingly, we hereby replace Item 15 beginning on page 217 of the
original filing with the amended Item 15 included in Part II of this Amendment
No. 1.
Also, amounts included in Item 18, Financial Statements and Item 19,
Exhibits have been restated, in each case, solely as a result of, and to
reflect, the correction of the error, by amending only the following pages:
ITEM 18. FINANCIAL STATEMENTS
Page F-2 (Report of independent registered public accounting firm);
Page F-86, F-87 and F-88 (Supplemental Consolidated Financial Statements
under U.S.GAAP); and
Page F-131 (Note 32 Restatement to Supplemental Consolidated Financial
Statements under U.S.GAAP)
In addition, the Bank has attached hereto the exhibits required as a result
of this Amendment No. 1 and accordingly amended the following page:
ITEM 19. EXHIBITS
Page 220 (Exhibit index)
12.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated May 04, 2007.
12.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002, dated May 04, 2007.
13.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated May 04, 2007.
13.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, dated May 04, 2007.
Except for the certifications, this Amendment No. 1 speaks as of the filing
date of the original filing. Other than as set forth above, this Amendment No. 1
does not, and does not purport to, amend, update or restate any other
information or disclosure included in the original filing or reflect any events
that have occurred after the filing date of the original filing. This amendment
should be read in conjunction with the Bank's filings made with the SEC
subsequent to the original filing, as information in such reports and documents
may update or supersede certain information contained in this amendment. This
amendment retains the page numbering of the original filing for ease of
reference.
PART II
ITEM 15. CONTROLS AND PROCEDURES
An evaluation has been carried out, under the supervision and with the
participation of BC's management, including President Jorge Londono Saldarriaga
and Finance Vice-President Jaime Alberto Velasquez Botero, of the effectiveness
of the design and operation of our "disclosure controls and procedures" as
defined in Exchange Act Rules 13a-15(e). Our disclosure controls and procedures
are designed to ensure that the financial and non-financial information required
to be disclosed in reports that we file or submit under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. Based upon that evaluation, our management, including
President Jorge Londono Saldarriaga and Finance Vice-President Jaime Alberto
Velasquez Botero, concluded that our disclosure controls and procedures are
effective as of December 31, 2005.
In connection with this evaluation and given the nature and cause of the
restatement, BC's management, including President Jorge Londono Saldarriaga and
Finance Vice-President Jaime Alberto Velasquez Botero, has concluded that the
restatement of our Supplemental Consolidated Condensed Income Statement and the
Supplemental Consolidated Condensed Statements of Cash Flow under U.S.GAAP for
the year ended December 31, 2005, did not impact the conclusion that our
disclosure controls and procedures are effective as of December 31, 2005.
Changes in Internal Controls. On July 30, 2005 Conavi (Conavi Banco
Comercial y de ahorros S.A.) and Corfinsura (Corporacion Financiera Nacional y
Suramericana S.A.) merged with and into Bancolombia as surviving entity (for
more information please see Item 4 - Information on the Company, A - History and
Development of the Company). As of December 31, 2005, a full transition of the
Conavi and Corfinsura's systems into Bancolombia's systems, including, but not
limited to, core processing of transactions and certain policies and procedures
was not complete. In connection with this transition process, additional
controls and procedures were put in place during the second semester of 2005.
Achievement of a full transition is ongoing and is expected to be completed by
the second semester of 2006. Until the full transition has occurred, BC's
management will continue adding internal control measures to reasonably ensure
that controls pertaining to financial reporting and safeguarding of assets are
effective.
PART III
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F - 1 through F - 132.
ITEM 19. EXHIBITS
The following exhibits are filed as part of this Annual Report.
12.1. CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated May 04, 2007.
12.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated May 04, 2007.
13.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, dated May 04, 2007.
13.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, dated May 04, 2007.
SIGNATURE
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this Amendment No. 1 on its behalf.
Dated: May 04, 2007
BANCOLOMBIA S.A.
By: /s/ JAIME ALBERTO VELASQUEZ BOTERO
----------------------------------
Name: Jaime Alberto Velasquez Botero.
Title: Vice President, Finance.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED BALANCE SHEETS
Year Ended December 31, 2004 and 2005 F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2003, 2004 and 2005 F-5
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 2003, 2004 and 2005 F-7
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2003, 2004 and 2005 F-8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-10
(DELOITTE(R) LOGO) Deloitte & Touche Ltda.
Edificio Corfivalle
Calle 16 Sur No 43A-49 Piso 9 y 10
A.A. 404
Nit. 860.005.813-4
Medellin
Colombia
Tel. +57(4) 3138899
Fax: +57(4) 3133225
www.Deloitte.com.co
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of directors and shareholders of Bancolombia S.A.:
We have audited the accompanying consolidated balance sheets of Bancolombia S.A.
and subsidiaries (the "Bank") as at December 31, 2005 and 2004, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2005. These financial
statements are the responsibility of the Bank's management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Bank is not required to have,
nor were we engaged to perform, an audit of its internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the internal control over financial reporting. Accordingly, we
express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Bank as at
December 31, 2005 and 2004, and the consolidated results of its operations and
its cash flows for each of the three years in the period ended December 31, 2005
in conformity with accounting principles generally accepted in Colombia and the
regulations of Superintendency of Finance in Colombia, collectively Colombian
GAAP.
Colombian GAAP varies in certain significant respects from accounting principles
generally accepted in the United States of America ("U.S. GAAP"). Information
relating to the nature and effect of such differences is presented in Note 31 to
the consolidated financial statements.
As discussed in Note 32, the Supplemental Consolidated Condensed Statements of
Operations for the year ended December 31, 2005 and Statement of Cash Flows for
the three years ended December 31, 2005 under U.S.GAAP and presented in Note 31
have been restated.
Our audits also comprehended the translation of Colombian pesos amounts into
U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2 c). Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
By: /s/ Deloitte & Touche Ltda.
---------------------------
Deloitte & Touche Ltda.
Medellin, Colombia, January 28, 2006, except for Notes 30 and 31 as to which the
date is June 20, 2006 and for Note 32 as to which the date is May 04, 2007.
Auditoria. Impuestos. Consultoria. Finanzas Corporativas.
Una Firma miembro
de Deloitte &
Touche Tohmatsu
F-2
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2005
(Stated in millions of pesos and thousands of U.S. Dollars)
Notes 2004 2005 2005 (1)
------ ------------- -------------- -------------
U.S. Dollar
(Unaudited)
ASSETS
Cash and cash equivalents:
Cash and due from banks 4 Ps 768,514 Ps 1,241,435 US$ 543,483
Overnight funds 480,846 488,587 213,897
------------- -------------- -------------
TOTAL CASH AND CASH EQUIVALENTS 1,249,360 1,730,022 757,380
------------- -------------- -------------
Investment securities: 5
Debt securities: 4,922,792 8,264,885 3,618,253
Trading securities 2,245,756 5,400,950 2,364,461
Available for sale 1,943,685 1,842,556 806,646
Held to maturity 733,351 1,021,379 447,146
Equity securities 393,044 268,286 117,452
Trading securities 129,964 50,805 22,242
Available for sale 263,080 217,481 95,210
Market value allowance (65,625) (73,468) (32,164)
------------- -------------- -------------
TOTAL INVESTMENT SECURITIES 5,250,211 8,459,703 3,703,541
------------- -------------- -------------
Loans and financial leases: 6,29
Commercial loans 7,353,956 11,949,501 5,231,326
Consumer loans 1,655,066 2,437,727 1,067,203
Small business loans 90,000 115,031 50,359
Mortgage loans 56,107 1,463,437 640,673
Financial leases 880,110 2,660,556 1,164,755
Allowance for loans and financial leases losses 7 (434,378) (705,882) (309,025)
------------- -------------- -------------
LOANS AND FINANCIAL LEASES, NET 9,600,861 17,920,370 7,845,291
------------- -------------- -------------
Accrued interest receivable on loans and financial leases:
Accrued interest receivable on loans and financial leases 125,879 206,921 90,587
Allowance for accrued interest losses 7 (4,603) (8,655) (3,789)
------------- -------------- -------------
INTEREST ACCRUED, NET 121,276 198,266 86,798
------------- -------------- -------------
Customers' acceptances and derivatives 8 43,894 133,420 58,409
Accounts receivable, net 9,29 173,875 590,313 258,431
Premises and equipment, net 10 346,243 623,729 273,060
Operating leases, net 11 8,311 143,974 63,030
Foreclosed assets, net 15 12,206 31,360 13,729
Prepaid expenses and deferred charges 12 15,950 26,898 11,776
Goodwill 14 73,607 50,959 22,309
Other assets 13 315,394 563,588 246,731
Reappraisal of assets 16 267,941 330,915 144,870
------------- -------------- -------------
TOTAL ASSETS Ps 17,479,129 Ps 30,803,517 US$13,485,355
============= ============== =============
MEMORANDUM ACCOUNTS 25 Ps 78,232,437 Ps 138,595,535 US$60,675,213
============= ============== =============
F-3
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2004 and 2005
(Stated in millions of pesos and thousands of U.S. Dollars)
Notes 2004 2005 2005 (1)
------ ------------ ------------- -------------
U.S. Dollar
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits 29
Non-interest bearing: Ps 2,690,679 Ps 3,530,279 US$ 1,545,507
Checking accounts 2,523,505 3,171,182 1,388,299
Other 167,174 359,097 157,208
Interest bearing: 9,171,437 14,854,703 6,503,184
Checking accounts 1,275,618 1,068,409 467,735
Time deposits 4,361,206 6,259,800 2,740,454
Savings deposits 3,534,613 7,526,494 3,294,995
------------ ------------- -------------
TOTAL DEPOSITS 11,862,116 18,384,982 8,048,691
------------ ------------- -------------
Overnight funds 616,494 1,329,913 582,218
Bank acceptances outstanding 66,593 63,126 27,636
Interbank borrowings 17 246,282 1,705,468 746,630
Borrowings from domestic development banks 18 857,919 2,222,083 972,797
Accounts payable 729,448 1,250,084 547,270
Accrued interest payable 109,164 182,292 79,805
Other liabilities 19 232,932 459,968 201,368
Long-term debt 20 552,531 1,648,312 721,608
Accrued expenses 21 71,649 130,859 57,288
Minority interest in consolidated subsidiaries 43,278 49,140 21,513
------------ ------------- -------------
TOTAL LIABILITIES 15,388,406 27,426,227 12,006,824
------------ ------------- -------------
Stockholders' Equity (2) 22,24
Subscribed and paid in capital: 355,119 430,684 188,548
Nonvoting preference shares 101,579 121,422 53,157
Common shares 253,540 309,262 135,391
Retained earnings: 1,589,159 2,712,879 1,187,661
Appropriated 23 1,010,481 1,765,998 773,130
Unappropriated 578,678 946,881 414,531
Reappraisal of assets 16 42,237 110,479 48,366
Gross unrealized net gain or loss on investments 104,208 123,248 53,956
STOCKHOLDERS' EQUITY 2,090,723 3,377,290 1,478,531
------------- -------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY Ps 17,479,129 Ps 30,803,517 US$13,485,355
============= ============== =============
MEMORANDUM ACCOUNTS 25 Ps 78,232,437 Ps 138,595,535 US$60,675,213
============= ============== =============
----------
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
(1) See note 2 (ff)
(2) A summary of significant adjustments to stockholders' equity that would be
required if U.S. GAAP had been applied is disclosed in Note 31.
F-4
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2003, 2004 and 2005
(Stated in millions of pesos and thousands of U.S. Dollars,
except per share data)
Notes 2003 2004 2005(2) 2005 (1)
----- ----------- ----------- ----------- ------------
U.S. Dollar
(Unaudited)
Interest income and expenses:
Interest on loans Ps 918,791 Ps 1,140,955 Ps 2,050,274 US$ 897,582
Interest on investment securities 546,207 549,328 824,709 361,046
Overnight funds 14,046 18,375 33,629 14,722
Leasing 58,774 94,450 291,472 127,602
----------- ----------- ----------- ------------
TOTAL INTEREST INCOME 1,537,818 1,803,108 3,200,084 1,400,952
----------- ----------- ----------- ------------
Interest expense
Checking accounts 11,622 13,505 20,311 8,892
Time deposits 249,911 267,558 449,367 196,727
Saving deposits 113,968 141,288 241,889 105,896
----------- ----------- ----------- ------------
TOTAL INTEREST ON DEPOSITS 375,501 422,351 711,567 311,515
----------- ----------- ----------- ------------
Interbank borrowings 5,293 7,389 54,630 23,916
Borrowings from domestic development banks 58,456 73,549 156,509 68,517
Overnight funds 38,423 41,215 73,910 32,357
Bonds 2,840 41,239 153,658 67,269
----------- ----------- ----------- ------------
TOTAL INTEREST EXPENSE 480,513 585,743 1,150,274 503,574
----------- ----------- ----------- ------------
NET INTEREST INCOME 1,057,305 1,217,365 2,049,810 897,378
----------- ----------- ----------- ------------
Provision for loan and accrued interest
losses, net 7 (162,057) (110,455) (185,404) (81,167)
Recovery of charged-off loans 31,701 49,032 61,829 27,068
Provision for foreclosed assets and other
assets (68,892) (33,127) (63,969) (28,005)
Recovery of provisions for foreclosed assets
and other assets 16,949 27,926 56,504 24,737
----------- ----------- ----------- ------------
TOTAL NET PROVISIONS (182,299) (66,624) (131,040) (57,367)
----------- ----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOANS AND ACCRUED INTEREST LOSSES 875,006 1,150,741 1,918,770 840,011
----------- ----------- ----------- ------------
Commissions from banking services 39,363 53,082 101,355 44,372
Electronic services and ATMs fees 29,873 39,163 101,299 44,347
Branch network services 28,594 37,929 48,984 21,445
Collections and payments fees 25,604 38,654 56,670 24,809
Credit card merchant fees 29,533 8,251 10,076 4,411
Credit and debit card annual fees 62,158 80,290 205,606 90,011
Checking fees 46,910 49,391 54,846 24,011
Warehouse services 42,705 49,072 62,155 27,211
Fiduciary activities 39,469 50,425 60,131 26,325
Brokerage fees 5,687 8,669 68,231 29,871
Check remittance 12,877 10,850 10,579 4,631
International operations 23,860 23,997 36,484 15,972
----------- ----------- ----------- ------------
FEES AND OTHER SERVICE INCOME Ps 386,633 Ps 449,773 Ps 816,416 US$ 357,416
------------ ----------- ----------- ------------
FEES AND OTHER SERVICE EXPENSES (32,361) (40,715) (48,087) (21,052)
----------- ----------- ----------- ------------
TOTAL FEES AND INCOME FROM SERVICES, NET 354,272 409,058 768,329 336,364
----------- ----------- ----------- ------------
F-5
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2003, 2004 and 2005
(Stated in millions of pesos and thousands of U.S. Dollars,
except per share data)
Notes 2003 2004 2005(2) 2005 (1)
----- ----------- ----------- ----------- ------------
U.S. Dollar
(Unaudited)
Other operating income:
Net foreign exchange gains (expenses) 36,287 (100,925) (53,361) (23,361)
Forward contracts in foreign currency 9,672 149,381 141,055 61,752
Gains (losses) on sales of investments on
equity securities 5,878 (27) 8,097 3,545
Dividend income 30,734 30,546 42,731 18,707
Revenues from commercial subsidiaries 76,445 78,973 45,020 19,709
Communication, postage, rent and others 2,037 7,447 10,406 4,556
----------- ----------- ----------- ------------
TOTAL OTHER OPERATING INCOME 161,053 165,395 193,948 84,908
----------- ----------- ----------- ------------
TOTAL INCOME 1,390,331 1,725,194 2,881,047 1,261,283
----------- ----------- ----------- ------------
Operating expenses
Salaries and employee benefits 320,886 363,557 615,121 269,292
Bonus plan payments 22,423 32,923 26,826 11,744
Compensation 22,959 15,169 8,030 3,515
Administrative and other expenses 27 350,517 393,592 793,179 347,243
Deposit security, net 31,877 22,945 55,050 24,100
Donation expenses 1,708 11,060 615 269
Depreciation 10 40,625 46,872 87,633 38,365
Merger expenses -- -- 45,703 20,008
Goodwill amortization 59,773 26,303 22,648 9,915
----------- ----------- ----------- ------------
TOTAL OPERATING EXPENSES 850,768 912,421 1,654,805 724,451
----------- ----------- ----------- ------------
NET OPERATING INCOME 539,563 812,773 1,226,242 536,832
----------- ----------- ----------- ------------
Non-operating income (expense)
Other income 33,822 51,514 109,770 48,055
Minority interest 330 (2,425) (6,496) (2,844)
Other expense (41,696) (44,374) (105,120) (46,020)
----------- ----------- ----------- ------------
TOTAL NON-OPERATING INCOME (EXPENSE) (7,544) 4,715 (1,846) (809)
----------- ----------- ----------- ------------
Income before income taxes 532,019 817,488 1,224,396 536,023
----------- ----------- ----------- ------------
Income tax expense 21 (62,635) (238,810) (277,515) (121,492)
----------- ----------- ----------- ------------
NET INCOME(3) Ps 469,384 Ps 578,678 Ps 946,881 US$ 414,531
----------- ----------- ----------- ------------
EARNINGS PER SHARE Ps 814 Ps 1,003 Ps 1,301 US$ 0,57
=========== =========== =========== ============
----------
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
(1) See accompanying notes to consolidated financial statements - See Note 2
(ff).
(2) The consolidated statement of operations for the year ended December 31,
2005 includes Conavi's and Corfinsura's results since the beginning of the
year.
(3) A summary of significant adjustments to net income that would be required
if U.S. GAAP had been applied is disclosed in Note 31.
F-6
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2003, 2004 and 2005
Expressed in terms of the purchasing power of Colombian pesos as of
December 31, 2005
(Stated in millions of pesos and thousands of U.S. Dollars, except share data)
Non Voting Preference
Shares Voting Common Shares
------------------------ ------------------------
Number Par Value Number Par Value
----------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 2002 178,435,787 Ps 101,579 398,259,608 Ps 253,540
Net income -- -- -- --
Transfer to appropriated
retained earnings -- -- -- --
Valuation of investment -- -- -- --
Dividends declared -- -- -- --
Other -- -- -- --
----------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 2003 178,435,787 101,579 398,259,608 253,540
Net income -- -- -- --
Transfer to appropriated
retained earnings -- -- -- --
Valuation of investment -- -- -- --
Dividends declared -- -- -- --
Other -- -- -- --
----------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 2004 178,435,787 101,579 398,259,608 253,540
Net income -- -- -- --
Transfer to appropriated
retained earnings -- -- -- --
Issuance of preference and
common shares 39,686,634 19,843 111,444,976 55,722
Valuation of investment -- -- -- --
Merger effect -- -- -- --
Dividends declared -- -- -- --
Other -- -- -- --
----------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 2005 218,122,421 Ps 121,422 509,704,584 Ps 309,262
=========== ========== =========== ==========
BALANCE AT DECEMBER 31, 2005
(UNAUDITED)(1) 218,122,421 US$ 53,157 509,704,584 US$135,391
=========== ========== =========== ==========
Retained Earnings Surplus Total
------------------------- ------------------------------ -------------
Gross unrealized
gain or loss on
investments
Appro- Unappro- Reappraisal available Stockholders'
priated priated of assets for sale equity
------------ ---------- ----------- ---------------- -------------
BALANCE AT DECEMBER 31, 2002 Ps 566,187 Ps 210,380 Ps 37,368 Ps 115,294 Ps 1,284,348
Net income -- 469,384 -- -- 469,384
Transfer to appropriated
retained earnings 210,380 (210,380) -- -- --
Valuation of investment -- -- (7,282) (20,858) (28,140)
Dividends declared (76,124) -- -- -- (76,124)
Other 39,911 -- -- -- 39,911
------------ ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 2003 740,354 469,384 30,086 94,436 1,689,379
Net income -- 578,678 -- -- 578,678
Transfer to appropriated
retained earnings 469,384 (469,384) -- -- --
Valuation of investment -- -- 12,151 9,772 21,923
Dividends declared (156,861) -- -- -- (156,861)
Other (42,396) -- -- -- (42,396)
------------ ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 2004 1,010,481 578,678 42,237 104,208 2,090,723
Net income -- 946,881 -- -- 946,881
Transfer to appropriated
retained earnings 578,678 (578,678) -- -- --
Issuance of preference and
common shares 160,646 -- -- -- 236,211
Valuation of investment -- -- (179,033) 31,690 (147,343)
Merger effect 193,673 -- 247,275 (12,650) 428,298
Dividends declared (216,838) -- -- -- (216,838)
Other 39,358 -- -- -- 39,358
------------ ---------- ----------- ---------- ------------
BALANCE AT DECEMBER 31, 2005 Ps 1,765,998 Ps 946,881 Ps 110,479 Ps 123,248 Ps 3,377,290
============ ========== =========== ========== ============
BALANCE AT DECEMBER 31, 2005
(UNAUDITED)(1) US$ 773,130 US$414,531 US$ 48,366 US$ 53,956 US$1,478,531
============ ========== =========== ========== ============
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
(1) See Note 2 (ff).
F-7
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2004 and 2005
(Stated in millions of pesos and thousands of U.S. Dollars)
2003 2004 2005(1) 2005(2)
------------ ------------ ------------ -------------
(Unaudited)
Cash flows from operating activities:
Net income (loss) Ps 469,384 Ps 578,678 Ps 946,881 US$ 414,531
Adjustments to reconcile net income to net
cash provided (used) by operating activities:
Depreciation 40,625 46,872 87,633 38,365
Amortization 86,010 39,377 77,111 33,759
Minority interest (9,577) 1,719 5,862 2,566
Provision for loan, accrued interest and accounts
receivable losses 305,673 191,207 395,369 173,087
Provision for foreclosed assets 32,458 23,002 44,665 19,554
Provision for losses on investment securities and
equity investments 29,381 2,821 10,317 4,517
Provision for premises and equipment 5,665 2,223 302 132
Provision for other assets 723 4,953 1,825 799
Reversal of provision for investments (8,400) (4,500) (5,330) (2,333)
Reversal of provision for loans and accounts
receivable (143,615) (85,152) (220,224) (96,411)
Reversal of provision for foreclosed assets (5,493) (17,239) (45,445) (19,895)
Reversal of provision for other assets (41) (38) (3,943) (1,726)
Reversal of provision for premises and equipment (3,016) (6,149) (1,787) (782)
Loss (gain) on sales of premises and equipment 393 (839) -- --
Loss (gain) on sales on investments securities (5,878) 27 -- --
Realized and unrealized loss (gain) on derivative
financial instruments 5,409 (129,616) (67,180) (29,410)
Loss (gain) on sales on foreclosed assets 2,867 3,433 -- --
Valuation gain (loss) on investment securities (246,871) (266,428) (476,139) (208,447)
Foreclosed assets donation 1,029 10,854 45 20
(Increase) in accounts receivable (11,724) (28,454) (514,867) (225,402)
Decrease (increase) in other assets (63,752) (161,362) 92,256 40,388
Increase in accounts payable 116,060 293,293 593,764 259,942
Increase in other liabilities 3,745 58,614 227,036 99,393
(Increase) in loans (1,941,055) (1,565,627) (8,521,859) (3,730,752)
------------ ------------ ------------ -------------
Other 1,069 15,476 59,210 25,921
------------ ------------ ------------ -------------
Net cash provided by operating activities (1,338,931) (992,855) (7,314,498) (3,202,184)
------------ ------------ ------------ -------------
Cash flows from investing activities:
Decrease (increase) in customers' acceptances Ps (17,827) Ps 118,021 Ps (25,813) US$ (11,301)
Proceeds from sales of property, plant and
equipment 35,737 48,454 92,815 40,633
F-8
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2003, 2004 and 2005
(Stated in millions of pesos and thousands of U.S. Dollars)
2003 2004 2005(1) 2005(2)
------------ ------------ ------------ -------------
(Unaudited)
Proceeds from sales of foreclosed assets 10,384 16,315 98,090 42,942
(Purchases) of property, plant and equipment (290,947) (96,333) (589,212) (257,949)
(Purchases) sales of investment securities 96,942 (635,634) (2,719,300) (1,190,472)
Proceeds from sales of long term investments 120,702 -- -- --
----------- ----------- ------------ -------------
Net cash used in investing activities (45,009) (549,177) (3,143,420) (1,376,147)
----------- ----------- ------------ -------------
Cash flows from financing activities:
Dividends declared (76,124) (156,861) (216,838) (94,929)
Increase in deposits 1,443,839 1,630,119 6,522,866 2,855,620
Increase in long-term debt 9,036 480,713 1,095,781 479,718
Increase (decrease) in overnight funds 507,981 (501,645) 713,419 312,325
Increase (decrease) in interbank borrowings and
borrowings from domestic development banks 94,580 (107,395) 2,823,352 1,236,025
----------- ----------- ------------ -------------
Net cash provided by financing activities 1,979,312 1,344,931 10,938,580 4,788,759
----------- ----------- ------------ -------------
Increase (decrease) in cash and cash equivalents 595,372 (197,101) 480,662 210,428
Cash and cash equivalents at beginning of year 851,089 1,446,461 1,249,360 546,952
----------- ----------- ------------ -------------
Cash and cash equivalents at end of year Ps1,446,461 Ps1,249,360 Ps 1,730,022 US$ 757,380
=========== =========== ============ =============
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest Ps 459,893 Ps 173,846 Ps 1,033,420 US$ 452,417
=========== =========== ============ =============
Income taxes Ps 5,988 Ps 207,856 Ps 190,014 US$ 83,185
=========== =========== ============ =============
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
----------
(1) The consolidated statements of operations for the year ended December 31,
2005, includes Conavi and Corfinsura's result since the beginning of the
year.
(2) See Note 2 (ff).
F-9
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(1) ORGANIZATION AND BACKGROUND
Bancolombia S.A., the "Bank" previously known as Banco Industrial
Colombiano S.A. is a private commercial bank incorporated under Colombian law on
January 24, 1945. On April 3, 1998, Banco Industrial Colombiano S.A. merged with
Banco de Colombia S.A. and the surviving entity was renamed Bancolombia S.A. The
registered office and business address of the Bank is in Medellin.
On July 30, 2005, Conavi Banco Comercial y de Ahorros S.A. ("Conavi") and
Corporacion Financiera Nacional y Suramericana S.A. (post-spin off)
("Corfinsura") were merged into the Bank (the "Merger"). The Merger was approved
at the Bank's Ordinary Shareholders' Meeting held on March 28, 2005 and was also
duly approved by the Annual Shareholder Meetings of Conavi and Corfinsura,
respectively. The Superintendency of Banking (now the Superintendency of
Finance) also approved the transaction by means of Resolution No. 1050 dated
July 19, 2005. The Merger was formalized through Public Deed No. 3947, executed
before Notary Public No. 29 of the Circuit of Medellin, and registered in the
Commercial Registry of the Medellin Chamber of Commerce on August 1, 2005. By
virtue of this Merger, the Bank acquired the entire property, rights and
obligations of Conavi and Corfinsura, entities which were dissolved without
being liquidated.
In order to proceed with the exchange of shares resulting from the Merger
and for the purpose of facilitating the future growth of the Bank, a partial
amendment to the Bank's by-laws was recorded in the Commercial Registry of the
Medellin Chamber of Commerce on July 26, 2005, by virtue of which the Bank's
authorized capital was increased from Ps 335,000 to Ps 500,000 and the Bank's
Corporate Governance policies were modified.
Once shares in Conavi and Corfinsura had been exchanged for Bancolombia
shares as a result of the Merger, as of November 30, 2005 Bancolombia's
subscribed and paid-in capital totaled Ps 430,684 reflecting the new shares
issued by the Bank in exchange for shares of Conavi and Corfinsura.
The Bank's purpose of business is to carry out all operations,
transactions, acts and services inherent to the banking business, by means of
the banking establishment that carries its name and according to all applicable
legislation.
The Bank, on a non-consolidated basis, has 11,571 employees and operates
through 678 branches.
The attached financial statements consolidate the assets, liabilities,
earnings, contingent accounts and memorandum accounts of the Bank and
Subsidiaries in which it holds, directly or indirectly, 50% or more of the
outstanding voting shares (the "Subsidiaries"). The consolidated Subsidiaries
are:
F-10
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
PARTICIPATION PARTICIPATION
PERCENTAGE PERCENTAGE DATE OF
ENTITY LOCATION BUSINESS DEC-2004 DEC-2005 CREATION
------ ---------------------- -------------------- ------------- ------------- --------------
Almacenes Generales de Deposito
Mercantil S.A. ALMACENAR(5) Colombia Warehousing and 98.25 98.25 February 1953
logistics
Fiducolombia S.A. Colombia Trust 96.16 98.81 January 1992
Bancolombia Panama S.A. Panama Banking 100 100 January 1973
Bancolombia Cayman Cayman Islands Banking 100 100 August 1987
Leasing Colombia S.A. (6) Colombia Leasing 99.99 100 December 1978
Compania Suramericana de
Financiamiento Comercial S.A.
SUFINANCIAMIENTO Colombia Financial services 99.99 99.99 November 1971
Colcorp S.A. Corporacion Financiera Colombia Investment Banking 100 100 July 1994
Comisionista de Colombia S.A.(2) Colombia Securities Brokerage 99.99 -- December 1991
Abocol S.A. (3) Colombia Chemical 92.32 -- March 1960
Various Commercial
Valores Simesa S.A. Colombia Investments 71.75 71.75 December 2000
Inmobiliaria Bancol S.A. Colombia Real estate broker 98.95 99.09 June 1995
Fundicom S.A. Colombia Metals engineering 79.87 79.90 May 2000
Unicargo de Colombia S.A. (5) Colombia Freight service 98.35 98.35 August 1994
Sistema de Inversiones y Negocios S.A. Panama Commercial entity 100 100 September 1975
Sinesa Holding Company British Virgin Islands Commercial entity 100 100 June 1988
Todo UNO Colombia S.A. Colombia E-commerce 53.92 89.55 June 2001
Future Net Inc. Panama E-commerce 60.02 99.58 November 2000
Compania Metalurgica
Colombiana S.A. COMECOL(1) Colombia Metals engineering 39.65 40.51 December 1996
Sociedad Portuaria Mamonal S.A. (4) Colombia Customs office 92.69 -- August 1991
Chemical products
Abocol Costa Rica S.A. (4) Costa Rica commercial 92.43 -- December 2001
Chemical products
Fertillanos Ltda. (4) Colombia commercial 55.39 -- October 2001
Ditransa S.A. (5) Colombia Freight service -- 52.69 September 1994
Compania Suramericana de Arrendamiento
Operativo S.A.Surenting Colombia Operating leasing -- 75.50 October 1997
Suleasing Internacional S.A. Panama Leasing -- 76 August 1993
Suleasing Internacional Inc. USA Leasing -- 76 July 2003
Inversiones CFNS Ltda. Colombia Comercial entity -- 100 April 1998
Compania Suramericana de Valores S.A.
Suvalor Colombia Securities Brokerage -- 100 May 1991
Suvalor Panama Panama Securities Brokerage -- 100 April 2005
Banco Corfinsura Internacional Inc. Puerto Rico Banking -- 100 December 1997
Multienlace S.A. Colombia Contact Center -- 98.20 March 1997
3001 S.A. (in the process of being
wound up) Colombia E-commerce -- 98.96 December 2000
F-11
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(1) Controlled through other subsidiaries (Valores Simesa S.A. and Colcorp
S.A.)
(2) On October 1, 2005, Comisionista de Colombia S.A Comicol merged with and
into Compania Suramericana de Valores S.A. Suvalor Comisionista de Bolsa as
surviving entity.
(3) On December 30, 2005 Colcorp S.A., sold its position in Abonos Colombianos
S.A. - Abocol S.A, to V. International Ventures Inc. The sell price was US$
20,070,843.
(4) Were affiliates of Abonos Colombianos S.A. - Abocol S.A.
(5) On November 22, 2005, the Bank entered into a preliminary agreement with
Incorbank Banqueros de Inversion, Inversiones en Logistica y Seguridad de
Transporte Ltda. Inverloset, Equity Investment S.A, Rodriguez Azuero
Asociados S.A. and other individuals to being negotiations relating to
proposed purchase agreement, by which the Bank would sell all of the
shares it holds in Almacenar S.A.
(6) On November 30, 2005 Suleasing S.A. merged with and into Leasing Colombia
S.A. as surviving entity.
Chapter XVII of 1995 External Circular 100 issued by the
Superintendency of Banking (now Superintendency of Finance) establishes
that the goodwill will amortize in proportional monthly installments
affecting the statement of operations during the time in which it is
reasonably expected that future benefits will be obtained and that, in any
case, such term may not exceed ten (10) years. Notwithstanding, in
consideration that results allow, management amortized one hundred percent
of the value of this goodwill in the statement of operations of 2003, in
this way avoiding affecting future results. This fact was made known in a
timely manner to the Superintendency of Banking (now Superintendency of
Finance).
(2) MAIN ACCOUNTING POLICIES
(A) BASIC ACCOUNTING AND CONSOLIDATION POLICY
Accounting practices and the preparation of financial statements of
the Bank and its Subsidiaries follow the special regulations of the
Superintendency of Finance (before Superintendency of Banking), or, in the
absence of such regulations, generally accepted accounting principles in
Colombia.
For consolidation purposes, financial statements of foreign
Subsidiaries were adjusted as required by Colombian regulations with regard
to investments, loans and leased assets. The Bank also unified accounting
policies related to inflation adjustments with the Superintendency of
Finance (before Superintendency of Banking).
The Bank consolidates companies in which it holds, directly or
indirectly, 50% or more of outstanding voting shares. Some of these
Subsidiaries also consolidate subsidiaries of their own. The Bank's
Subsidiary Bancolombia Panama S.A. consolidates Bancolombia Cayman, Sistema
de Inversiones y Negocios S.A., Sinesa Holding Company and Future Net Inc.
The Bank's Subsidiary Almacenar S.A. consolidates Unicargo de Colombia S.A.
and Ditransa S.A. The Subsidiary Colcorp S.A. consolidates Inmobiliaria
Bancol S.A., Inversiones CFNS, Comecol S.A., Valores Simesa S.A., Fundicom
S.A. and Todo Uno Colombia. The Bank's subsidiary Leasing Colombia S.A.
consolidates Surenting S.A., Suleasing Internacional S.A. and Suleasing
Internacional Inc. The Bank's subsidiary Suvalor S.A. consolidates Suvalor
Panama S.A..
F-12
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The consolidated financial statements are prepared for presentation to
the stockholders, but are not taken as a basis for the distribution of
dividends or appropriation of profits.
Intercompany transactions and balances are eliminated upon
consolidation.
(B) INFLATION ACCOUNTING
From January 1, 1992 to December 31, 2000, the consolidated financial
statements were adjusted for inflation based on the variation in the CPI
(Consumer Price Index) for middle-income earners. The adjustment was
applied monthly to non-monetary assets, equity (except for the reappraisal
of assets and exchange adjustment), contingent accounts and memorandum
accounts. No adjustment was made to income, costs or expenses, and the
financial statements for the preceding period did not have to be
reamesured.
(C) CONVERSION OF FOREIGN CURRENCY TRANSACTIONS AND BALANCES
As an authorized exchange dealer, the Bank and its Colombian
Subsidiaries are authorized by the Superintendency of Banking (now
Superintendency of Finance) to make direct foreign exchange purchases and
sales on the exchange market.
Operations in foreign currencies other than U.S. dollars are converted
into U.S. dollars using the rate of exchange published by Reuters and then
reamesured in (Ps) at the Representative Market Rate (RMR) calculated on
the last business day of the month and certified by the Superintendency of
Finance (before Superintendency of Banking). The Representative Market Rate
at December 31, 2004 and 2005 was Ps 2,389.75 and Ps 2,284.22,
respectively.
The foreign currency position is the difference between assets and
liabilities denominated in foreign currency, recorded in and out of the
balance, realized or contingent, including those that are settled in
Colombian local currency, which correspond to the financial statements that
include operations within the national territory.
The spot foreign currency position is the difference between assets
and liabilities, denominated in foreign currency, based on the unique chart
of accounts; investments available for sale in equity and debt securities,
held to maturity and capital contributions in foreign branches and derivate
arrangements (i.e., forward contracts, futures contracts, swaps and profit
or loss in option valuation). Operations that can be settled in local
currency are not included in this position.
The maximum amount of the Bank's position in any currency that is not
Pesos cannot exceed the equivalent in foreign currency of twenty percent
(20%) of the technical capital and the minimum amount may be negative,
without exceeding the equivalent in foreign currency of five per cent (5%)
of the Bank's technical capital.
The maximum amount corresponding to the Bank's spot foreign currency
position cannot exceed fifty percent (50%) of the technical capital and
cannot be negative.
F-13
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The assets and liabilities in foreign currency of the Subsidiaries
abroad included in the consolidated financial statements were converted
into Colombian Pesos using the Representative Market Rate calculated the
last business day of the month.
The equity accounts were converted into Colombian Pesos using
historical exchange rates.
The income accounts were converted at an average rate of Ps 2,626.22
and Ps 2,320.77 per Dollar for the years 2004 and 2005, respectively. Said
rates correspond to the average value of the representative market exchange
rate on the business days in the period from January 1 to December 31 of
each year.
(D) COMPARABILITY
The consolidated financial statements for the year ended December 31,
2004 include the financial information of the parent company and its
subsidiaries. These however, do not include any effects of the Merger of
the Bank, Conavi and Corfinsura (spun-off corporation), which was completed
on July 30, 2005. The consolidated financial statements for the year ended
December 31, 2005 includes the financial information of the parent company
and its subsidiaries, which includes all additional subsidiaries acquired
as a result of the Merger with Conavi and Corfinsura (spun-off
corporation). For this reason, financial statements for 2004 and 2005
should be read taking into account the impacts of the Merger.
(E) CASH AND CASH EQUIVALENTS
The statement of cash flows was prepared using the indirect method.
These cash flows were calculated by taking the net differences in the
balances shown on the consolidated balance sheet on December 31, 2005 and
December 31, 2004, not taking into account independently the effect of the
Merger with Conavi and Corfinsura. Overnight funds sold with reselling
agreements are considered to be cash equivalents for the purposes of this
statement.
(F) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of financial statements and the reported amounts of revenues and
expenses during the reporting period. The most significant estimates are:
allowance for loans, accrued interest losses, allowance for foreclosed
assets and valuation of investments and derivatives. Actual results could
differ from those estimates.
F-14
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(G) REAL VALUE UNIT RATE (UVR)
The main operations that the Bank carries out with regard to mortgage
loans are linked to the Unidad de Valor Real (Real Value Unit, the "UVR")
and adjusted on a daily basis according to the daily value of the UVR, as
published by the Central Bank.
The values assigned by the Central Bank to the UVR, in Colombian
pesos, on December 31, 2004 and December 31, 2005, were Ps 145.9324 and Ps
153.4858, respectively.
The UVR rate corresponds to the monthly variance in the CPI(10) during
the calendar month immediately prior to the month for which the UVR rate is
being calculated. In light of the above, the annualized UVR rate at
December 31, 2004 and December 31, 2005 was 1.66% and 2.04%, respectively.
(H) OVERNIGHT FUNDS SOLD AND RESELLING AGREEMENTS
This represents the funds directly placed by the Bank and its
subsidiaries in other financial institutions with or without investment
collateral, using surplus liquidity, with or without a commitment to
resell, at terms of up to 30 days. The account also includes overnight
deposits with banks abroad using Bank funds deposited outside Colombia.
Transactions not repaid within 30 days are reclassified as
investments, loans or financial lease operations, as the case may be.
The difference between present value (cash received) and future value
(resale price) is income booked to financial yields.
(I) INVESTMENTS
This includes investments acquired by the Bank and its Subsidiaries to
maintain secondary liquidity, investments in companies that Bancolombia has
less than 50% of outstanding shares, to satisfy requirements of law or
regulation, or simply to eliminate or significantly reduce market risks to
which assets, liabilities or other balance sheet items are exposed.
1. CLASSIFICATION
The investments are classified as "trading investments", "investments
available for sale" and "investments held to maturity". The first two of
these groups may include investments in debt or equity securities. The
third shall only include investments in debt securities.
----------
(10) CPI - Consumer Price Index, or inflation, is certified by Departamento
Administrativo Nacional de Estadistica (National Administrative Department
of Statistics, or "DANE").
F-15
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Debt securities are those which make the holder the creditor of the
issuer, whereas equity investments are those which make the holder a
part-owner of the issuer.
TRADING SECURITIES
Trading investments are those acquired for the main purpose of
obtaining profits from fluctuations in short-term prices.
HELD TO MATURITY
Investments "held to maturity" are debt securities acquired with the
stated purpose and legal, contractual, financial and operational capacity
to hold them until maturity or redemption. They may not be used for
liquidity operations unless they are mandatory investments entered into on
the primary market and provided that the counter party for the operation is
the Colombian Central Bank, the General Treasury Direction of Colombia,
institutions overseen by the Superintendency of Finance (before
Superintendency of Banking and the Securities Superintendency) or in the
exceptional cases that the Superintendency of Finance may determine.
AVAILABLE FOR SALE
These are the investments which do not fall into either of the other
two classifications, for which the investor has the stated intention and
legal, contractual, financial, and operational capacity to hold them for at
least one year from the date of this classification.
This classification covers equity investments with low exchange
turnover or which are unquoted and those held as parent or controlling
stockholder of the issuer. There is no one-year minimum holding period
required for the purposes of sale.
One of the Bank's subsidiaries, Bancolombia Panama S.A., classifies
the investments it holds for the purpose of exercising control as permanent
in accordance with Panama Superintendency of Banking Order 7 of 2000.
2. VALUATION
The purpose of valuation is to record the fair market value for a
given investment as of a determined date.
2.1 DEBT SECURITIES
Debt securities are valued daily and the result is recorded daily. The
procedures are defined in 1995 External Circular 100, Chapter I, numeral
6.1 issued by the Superintendency of Banking (now Superintendency of
Finance).
F-16
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank determines the market value of trading debt securities and
available for sale debt securities by using the prices, reference rates and
margins that the Bolsa de Valores de Colombia (the "Colombian Stock
Exchange") calculates and publishes daily.
Investments in debt securities held to maturity are valued
exponentially as of the internal rate of return calculated on the purchase
date.
2.2 EQUITY SECURITIES
Equity investments are valued monthly and the results of such
valuations are recorded monthly. They are valued based on the level of
exchange volume at the time of valuation, as follows:
- High-volume: They are valued based on the daily weighted average
trading price published by the exchange.
- Medium-volume: They are valued based on the average price
published by the exchange, being the weighted average trading
price on the last five days on which securities are traded.
- Low volume and unquoted: They are valued based on the increase or
decrease according to the investor's share of the variations in
equity value calculated based on the most recent audited
financial statements that cannot be older than six months since
valuation date, or more recent statements, if available.
2.3 SECURITIES DENOMINATED IN FOREIGN CURRENCY, IN UVR OR IN OTHER UNITS
The Bank determines the market value of the respective security in its
original currency or unit before converting it into U.S. dollars.
As of January 2004, pursuant to 2004 External Circular 003 issued by
the Superintendency of Banking (now the Superintendency of Finance), if the
security is denominated in a currency other than the U.S. dollar, the value
of the security determined in its original currency is converted into U.S.
dollars using the foreign exchange translation rates published on the
valuation date on the European Central Bank web page. The value thus
obtained is multiplied by the Representative Market Rate effective on the
valuation date (which is the current rate for the next day) and certified
by the Superintendency of Finance or by the effective unit for the same
day, as the case may be.
F-17
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
3. RECORDING
3.1 TRADING INVESTMENTS
The difference between current and previous market value is used to
adjust the value of the investment and is credited or charged to earnings
as income or expense, respectively.
3.2 INVESTMENTS HELD TO MATURITY
The present value corresponds to the exponential valuation using the
internal rate of return calculated at the time of purchase and its updated
value is recorded as the greater of the investment value and its offsetting
entry is recorded as income in the fiscal period operations statement.
These investments are recorded at amortized cost and interest accruals
are recorded in earnings.
3.3 INVESTMENTS AVAILABLE FOR SALE
3.3.1 DEBT SECURITIES
Changes in the values of these securities are recorded using the
following procedure:
The difference between the present value on the valuation date and the
previous present value increases or decreases the value of the investment
and is credited to earnings. The present value is arrived at by applying an
exponential calculation based on an internal rate of return established at
the time of purchase.
The difference between the market value and the present value of the
investment increases or decreases its value and is recorded in the equity
account as unrealized earnings or loss account.
3.3.2 EQUITY INVESTMENTS
The changes found in these securities have accounting entries made
according to the investment trading volume, as follows:
3.3.2.1 INVESTMENTS IN SECURITIES WITH LOW VOLUME OR UNQUOTED SECURITIES
If the investment value based on the investor's shares of the equity
of the investee is greater than the value at which the investment is
registered, the difference will affect, in the first
F-18
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
place, the provision or devaluation until it runs out, and the excess is
registered as a surplus for valuation in stockholders' equity against
reappraisal of the assets account.
If the investment value based on the investor's shares of the equity
of the investee is less than the value at which the investment is
registered, the difference will affect, in the first place, the surplus for
valuation of the corresponding investment until it runs out, and the excess
is registered as devaluation of said investment within equity, against
devaluation of the assets account.
When the dividends or profits are distributed in kind, including those
from capitalizing the equity revaluation account, the portion recorded as
the surplus for valuation must be recorded as income, charged against the
investment and the surplus must be reversed. When the dividends or profits
are distributed in cash, the value recorded as surplus for valuation must
be recorded as income, the surplus reversed and the excess amount of the
dividends must be recorded as a lesser investment value.
3.3.2.2 HIGH OR MEDIUM - VOLUME
The update of the market value of these securities is recorded as an
accumulated unrealized gain or loss, within the equity accounts, crediting
or debiting the investment.
Dividends or profits distributed in kind or in cash, including those
from capitalizing the equity revaluation account, must be recorded as
income up to the amount corresponding to the investor of profits or equity
revaluation that the issuer has recorded since the investment acquisition
date, charged to accounts receivable.
Before External Circular 049 dated November 30, 2004 issued by
Superintendency of Banking (now Superintendency of Finance) became
effective, dividends or profits distributed in kind or in cash, including
those from capitalizing the equity revaluation account, had to be recorded
up to the amount that had been recorded as accumulated unrealized gains,
during the fiscal year to which the profits and equity revaluation
distributed corresponded, and were charged to the latter. The collection of
the dividends in cash had to be recorded as a lesser value of the
investment.
4. PROVISIONS OR LOSSES DUE TO CREDIT RISK CLASSIFICATION
The prices of trading and available for sale debt securities that do
not have fair exchange prices, those classified as held to maturity as well
as the price for equity securities with low or minimum volume or that are
unquoted must be adjusted on each valuation date, based on the credit risk
classification.
Internal or external debt securities issued or guaranteed by the
Republic of Colombia or the Colombian Guarantee Fund for Financial
Institutions ("Fogafin" for its Spanish initials) or issued by the Central
Bank are not subject to this adjustment.
F-19
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
4.1 SECURITIES ISSUED ABROAD OR WITH FOREIGN RANKING
Securities that are rated by a rating firm acknowledged by the
Superintendency of Finance (before Securities Superintendency) or
securities issued by entities that are rated by those rating firms cannot
be registered for an amount that exceeds the following percentages of their
nominal net amortization value made up to the valuation date:
LONG TERM MAX. AMOUNT SHORT TERM MAX. AMOUNT
RANKING % RANKING %
--------- ----------- ---------- -----------
BB+, BB, BB- Ninety (90) 3 Ninety (90)
B+, B, B- Seventy (70) 4 Fifty (50)
CCC Fifty (50) 5 y 6 Zero (0)
DD, EE Zero (0)
Provisions for investments classified as held to maturity, for which
it is possible to establish a fair exchange value, correspond to the
difference between the recorded value and the fair exchange value.
4.2 SECURITIES FROM ISSUES OR ISSUERS WITHOUT ANY FOREIGN RATING AND EQUITY
SECURITIES
These securities are rated and classified according to the methodology
defined by the Bank and its Subsidiaries. The maximum value, as defined by
the Superintendency of Finance (formerly Superintendency of Banking), at
which these investments are posted, according to their category is:
MAX.
REGISTERED
CATEGORY AMOUNT %(1) INVESTMENT CHARACTERISTICS
-------- ----------- ---------------------------------------------
B Acceptable risk, Eighty (80) Present factors of uncertainty that could
greater than affect the capacity to continue adequately
normal fulfilling debt service and weaknesses that
could affect their financial situation.
C Appreciable risk Sixty (60) Present medium-high probabilities of
non-fulfillment of timely payments of capital
and interest in their financial situation
that may compromise the recovery of the
investment.
D Significant risk Forty (40) Present non-fulfillment of agreed terms of
the security and material deficiencies in
their financial situation, the probability of
recovering the investment is highly doubtful.
E Unrecoverable Zero (0) Recovery highly improbable.
----------
(1) On the net nominal amortization values made up to the valuation date for
debt securities or the acquisition cost less allowances for equity
securities.
F-20
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollors)
(J) LOANS AND FINANCIAL LEASE OPERATIONS
These accounts record loans and financial leases made by the Bank and
its Subsidiaries in the various modalities permitted. They are funded by
the Bank's own capital, public deposits and other internal and external
sources of funds.
Loans are recorded at face value, except for acquisition of accounts
receivable (factoring operations) which are recorded at cost, and foreign
currency operations, which are converted into local currency.
The Subsidiary Bancolombia Panama S.A., authorized by the Panama
Superintendency of Banking, includes participating credit loans in its loan
portfolio. These are loans for which the subsidiary assumes no credit risk,
which, in spite of having been sold and 100% paid up, are not taken out or
omitted from the portfolio group. The profit in this business activity is
seen in the net interest margin between the loan participation portfolio
and the original loan portfolio.
External Circular 040 dated October 23, 2003 modified the treatment of
financial leases. Since January 1, 2004, they have been included as part of
the loan portfolio. For additional information see Note 2 (q).
The institutions overseen by the Superintendency of Finance (before
Superintendency of Banking) must have a Credit Risk Administration System
that puts in place policies, processes, models, and control mechanisms to
enable risk identification, mitigation and measurement.
Credit risk evaluation is done pursuant to effective regulations,
using an ongoing monitoring process and periodical portfolio classification
as described below.
For provisions, the Bank applies Superintendency of Finance
regulations as described below; in addition, the Bank calculates probable
expected losses and tests estimating provisions using this methodology.
During the month of December 2004, External Circular 052 modified 1995
External Circular 100 Chapter II issued by the Superintendency of Banking
(now Superintendency of Finance), which sets forth guidelines for credit
risk administration. This Circular defines the basic elements of the system
for the management of credit risk (SARC, for its initials in Spanish) and
introduces reference models and a time schedule for submitting the internal
models to the Superintendency of Finance, among others. The Bank has
adopted all required modifications and will continue its in-depth develop
of the proposed schemes as described below.
F-21
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollors)
1. CLASSIFICATION
Loans and financial lease contracts are classified as follows:
MORTGAGE LOANS
These are loans, no matter what their value, made to individuals for
the purchase of new or used housing or to build a home, all in accordance with
Law 546 of 1999. Such loans include: those denominated in UVR or local currency,
that are guaranteed by a senior mortgage on the property and that are financed
with a total repayment term of at least 5 and up to 30 years.
CONSUMER LOANS
These are loans and financial leases, no matter what their value,
granted to individuals for the purchase of consumer goods or to pay for
non-commercial or business services.
SMALL BUSINESS LOANS
These are loans and financial leases granted to microbusinesses, whose
total balance outstanding with the Bank does not exceed twenty-five (25) times
the effective legal minimum monthly salaries ("SMLVs").
"Microbusiness" means any economic exploitation unit owned by an
individual or corporate entity, in entrepreneurial, farming and livestock,
industrial, commercial or service activities, whether rural or urban, whose
staff does not exceed ten (10) workers and whose total assets are under five
hundred one (501) effective legal minimum monthly salaries ("SMLVs").
COMMERCIAL LOANS
Commercial loans are those that are granted to individuals or
companies in order to carry out organized economic activities. These are
different from those granted as microcredit loans.
Loan-related commissions and other receivables are classified within
the accounts for the type of loan to which they are related.
2. EVALUATION FREQUENCY
The Bank and its Subsidiaries make continuous evaluations of their
lending and financial lease operation risk, making all necessary modifications
to the respective classifications when there are new analysis or data to justify
such changes.
As a part of the previous process, in the months of May and November,
the Bank and
F-22
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollors)
its Subsidiaries evaluate all loans and financial leases that are past due after
having been restructured and that at the time of the evaluation exceed
three-hundred (300) effective SMLVs, as well as loans from debtors whose debt
from the different loan types exceeds this same amount.
3. EVALUATION CRITERIA
The Bank and its Subsidiaries evaluate loans and financial leases
using the following criteria required by the Superintendency of Finance (before
Superintendency of Banking):
They evaluate the ability to pay of the debtor/co-debtors/guarantors
or any other person directly or indirectly unconditionally liable for the debt,
and project the cash flow for such entities, if any. The following is the
minimum information required from the debtor: income and outgoing cash flows,
economic solvency, information on its current and past compliance with its
obligations as well as the financial and credit history of debtors in risk
centers, the number of times loans have been restructured, possible financial
risks to cash flow, legal, operational and strategic risks, and the possibility
of contagion.
4. CLASSIFICATION
The Bank and its Subsidiaries classify loans and financial leases on
the basis of the above criteria into the following credit risk categories:
CATEGORY COMMERCIAL CONSUMER
-------- ------------------------------------ ------------------------------------
"A" Normal Risk current - and up to 1 month past due current - and up to 1 month past due
"B" Acceptable Risk, Above Normal 1-3 months past due 1-2 months past due
"C" Appreciable Risk 3-6 months past due 2-3 months past due
"D" Significant Risk 6-12 months past due 3-6 months past due
"E" Risk of Unrecoverability over 12 months past due over 6 months past due
CATEGORY SMALL BUSINESS LOANS MORTGAGE
-------- ------------------------------------ ------------------------------------
"A" Normal Risk current - and up to 1 month past due current - and up to 2 months past due
"B" Acceptable Risk, Above Normal 1-2 months past due 2-5 months past due
"C" Appreciable Risk 2-3 months past due 5-12 months past due
"D" Significant Risk 3-4 months past due 12-18 months past due
"E" Risk of Unrecoverability over 4 months past due over 18 months past due
F-23
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollors)
RULES OF ALIGNMENT
A Bank and/or Subsidiary classification of B, C, D or E for any loan
or financial lease would automatically classify all of that debtor's accounts in
the same category, unless it can be shown to the Superintendency of Finance
(before Superintendency of Banking) that the Bank has sound reasons for a lower
risk classification.
Under the terms of the Colombian Commercial Code Articles 260-262,
financial institutions that are related will receive the same classification as
the parent institution unless the Superintendency of Finance is shown that there
are good reasons for maintaining such entities in a lower risk category.
The Superintendency of Finance requires that entities align their
classifications with other financial institutions when at least two of them have
classified the debtor into a higher risk category, where the debt represents at
least 20% of the debtor's total indebtedness according to the most recent
information available from credit bureaus. In this event, there may not be more
than one level of difference in risk classification.
The Superintendency of Finance can order reclassifications and
reranking of the classifications assigned by financial institutions. It can also
order loan portfolio reclassifications for an economic sector, geographical zone
or for one debtor or a group of debtors, whose borrowings must be accrued
pursuant to rules on individual debt limits.
5. SUSPENSION OF ACCRUALS
The Superintendency of Finance (before Superintendency of Banking)
established that interest, UVR, lease payments and other items of income cease
to be accrued in the statement of operations and begin to be recorded in
memorandum accounts until effective payment is collected, after a loan is in
arrears for more than a certain time:
ARREARS
TYPE OF LOAN IN EXCESS OF:
------------ -------------
Mortgage 2 months
Consumer 2 months
Small business loans 1 month
Commercial 3 months
Until December 31, 2004, the suspension of accruals for mortgage and
small business loans were applied after a credit is in arrears for more than 4
months and 2 months, respectively.
The Bank and its subsidiaries adopted a policy, according to which all
loans and financial leasing operations of any type, with the exception of
mortgage loans, that are more than 30 days past due, cease to accumulate
interest on the statement of operations and instead are recorded in the
memorandum accounts until such time the client proceeds with their payment.
F-24
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Those loans that become past due and that at some point have stopped
accruing interest, UVR, leave payments or other items of income, will stop
accruing said income from their collection. Their entries will be recorded in
memorandum accounts until such loans are collected.
6. PROVISIONS
The Bank makes provisions against earnings for each period as follows:
General Provision:
Until September 30, 2005, the Bank and its subsidiaries used to set up
a general provision corresponding to one per cent (1%) of the total value of the
gross loan portfolio.
In accordance with External Circular 035 issued in October 2005, the
Superintendency of Banking (now Superintendency of Finance) implemented a
methodology of monthly aliquots, therein stipulated, allowing for the percentage
provision to be increased by an additional one per cent (1%) during 21 months .
In this way, by July 1, 2007, there would be a general provision of 2% totally
set up on the total value of the gross loan portfolio.
However on, December 30, 2005, the Superintendency of Finance enacted
External Circular 004, decreasing the general provision to the original one per
cent (1%) of the value of the total gross loan portfolio. Also, the aliquots
corresponding to the months of October and November were required to be applied
to the individual provisions for Categories "A" and/or "B".
As a result of the above, the general provision continues to be one
per cent (1%) of the value of the total gross loan portfolio. Said provision,
however, may be increased if approved by the General Shareholders Meeting, and
is updated on a monthly basis according to the increases or decreases in the
loan portfolio.
Individual Provisions:
Until December 30, 2005, the Bank set up individual provisions on its
portfolio, according to rules and regulations issued by the Superintendency of
Finance, corresponding to percentages calculated according to the different
ratings on the net unpaid balance net of guarantees, while the internal
methodology was implemented for the calculation of the provisions considering
the expected losses in the case of default.
Considering the impact that will be caused by the change in provisions
once the MRC (Reference Model for Commercial Portfolio) enters into effect as
well as the dynamics shown in different types of loans, and the gradual
convergence between the default classification system and the models of expected
losses, the Superintendency of Finance by means of External Circular 004, issued
on December 30, 2005, which increased its provision percentages on "A" and "B"
rated loans to 1% and 3.2%, respectively.
F-25
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
To cover the additional value that this increase represents with
respect to the individual provisions, the institutions regulated by the
Superintendency of Finance will have a total period of nineteen (19) months
beginning as of December 2005, to follow the aliquot methodology according to
instructions contained in Subsections 2.1.1 and 2.1.2 of Exhibit 1 of Chapter II
of Circular 100 issued by the Superintendency of Banking (now Superintendency of
Finance).
Furthermore, in compliance with instructions given by means of
External Circular 004 of 2005, the Bank applied the total amount of aliquots
generated in the form of general provision in the months of October and
November, on the "B" rated loan portfolio pertaining to the Commercial Category.
Increases in the individual provisions for the "A" and "B" rated
loans, as provided for by External Circular 004 of December 2005, must be set up
without deducting the value of the corresponding guarantees, carried out on the
balance of the gross portfolio.
Based on the regulations issued by the Superintendency of Finance
minimum allowances for loans and financial leases must correspond to the
following percentages:
COMMERCIAL CONSUMER SMALL BUSINESS LOANS
------------------------ ------------------------ ------------------------
Capital Interest/Other Capital Interest/Other Capital Interest/Other
------- -------------- ------- -------------- ------- --------------
A- Normal Risk 1 1 1
B- Acceptable Risk, Above Normal 3.2 1 3.2 1 3.2 100
C- Appreciable Risk 20 100 20 100 20 100
D- Significant Risk 50 100 50 100 50 100
E- Risk of Unrecoverability 100 100 100 100 100 100
HOME MORTGAGE % CAPITAL
---------------------------------
ON GUARANTEED ON NON-GUARANTEED
PORTION PORTION INTEREST/OTHER
------------- ----------------- --------------
A- Normal Risk 1 1 --
B- Acceptable Risk, Above
Normal 3.2 100 1
C- Appreciable Risk 10 100 100
D- Significant Risk 20 100 100
E- Risk of Unrecoverability 30 100 100
F-26
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In the case of the mortgage portfolio, if the loan has remained in
Category E for 2 consecutive years the provision for the guaranteed portion is
increased to 60% and if it remains for another year in this category, the
provision to be set up is for 100%, unless there is any indication of a possible
recoupment by means of actions previously taken by the Bank.
Notwithstanding, until the new methodology set forth through External
Circular 052, issued by the Superintendency of Banking (now Superintendency of
Finance) on December 30, 2004, is implemented, the Bank administration, seeking
to anticipate the effects of calculating expected losses, decided to maintain
the decision taken in March 2004 of setting up provisions corresponding to 30%
for the loan and financial leasing portfolios, net of guarantees, pertaining to
the "B" rated consumer and small business categories, as follows:
Consumer % Small Business Loans %
-------------------------------------- --------------------------------------
CAPITAL CAPITAL
-------------------------- --------------------------
ON NON- ON NON-
ON GUARANTEED GUARANTEED INTEREST/ ON GUARANTEED GUARANTEED INTEREST/
PORTION PORTION OTHERS PORTION PORTION OTHERS
------------- ---------- --------- ------------- ---------- ---------
A - Normal Risk 1 1 1 1
B- Acceptable Risk, Above
Normal 3.2 30 30 3.2 30 100
C- Appreciable Risk 50 100 60 100
D- Significant Risk 100 100 100 100
E- Risk of Unrecoverability 100 100 100 100
However, the Bank and its Subsidiaries set up additional provisions
based on an analysis of loss and probabilities of recoupment.
7. THE EFFECT OF SECURITY ON PROVISIONS
In the case of mortgage loans, the value of the corresponding
guarantees to be considered in order to calculate the provisions is 100% of
their value. Comercial, consumer and small business categories are valued at no
more than 70% of their value. Notwithstanding, depending on whether the security
is a mortgage or not and on the length of time the loan has been in arrears, the
Bank only take into consideration the percentages of the total security value
indicated below.
TIME ELAPSED FROM DEFAULT DATE TO
SECURITY NON-EXECUTION
--------------------------------------------
APPROPRIATE MORTGAGE
% COVER OF SECURITY SECURITY/ESCROW NON-MORTGAGE SECURITY
------------------- -------------------- ---------------------
70 0-18 months 0 - 12 months
50 18-24 months 12-24 months
30 24-30 months --
15 30-36 months --
0 Over 36 months Over 24 months
F-27
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
However, increases in individual provisions for the "A" and "B"- rated
portfolio, as provided for by External Circular 004 of December 2005, must be
set up without deducting the value of the corresponding guarantees.
The security is admissible when it is formalized and if it has a
professionally-established and objective value to provide effective legal
backing to repayment of the secured loan, giving the lender or creditor
preferential or prior rights to obtain payment, and if it is reasonably
marketable.
APPRECIATION OF MORTGAGE COLLATERAL
The value of the collateral posted by the Bank is established based on
parameters set out in External Circular 034 of 2001 issued by the
Superintendency of Banking (now Superintendency of Finance) and listed below:
- In the case of mortgage collateral consisting of property to be
used for housing purposes, the market value shall be the initial
appraisal value of the collateral duly adjusted according to the
housing price index published by the National Planning
Department. The value shall be updated on at least a quarterly
basis, based on the aforementioned index.
- In the case of mortgage collateral consisting of property
different from housing, the market value shall be the appraisal
value of the property given over in guarantee when the loan is
issued or the new appraisal value as subsequently calculated on a
periodic basis.
For the purpose of calculating provisions, the value of the collateral
pledged on the debtor's commercial or industrial establishments is not taken
into account. Also, the property which forms part and the respective
establishment or mortgages on property where the establishment operates or
functions, are not taken into account.
The Bank and its Subsidiaries do not base their lending decisions on
the amount and/or type of collateral offered, since they understand that the
source of payment of the loan or financing arrangement is provided by the
capacity of the beneficiary of the loan to generate cash flows, whether this is
an individual or a company. However, in the case of new projects and/or mid to
long-term financing, alternative sources are required, as a matter of prudence,
in order to recoup the loan. Bearing in mind that the Bank has made inroads on
the SME segment, its policy is to take out coverage with the Fondo Nacional de
Garantias and the Fondo Agropecuario de Garantias.
F-28
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
8. MORTGAGE DEBT RELIEF
Mortgage relief originates from the large-scale process of
reliquidating mortgage loans as a result of the change in the housing financing
system, introduced by Law 546 of 1999. Credit institutions carried out this
reliquidation process based on the difference between the DTF and the UPAC
rates, this for the purpose of comparing how the UPAC rate is performing with
regard to the UVR rate, so that these might be accorded the same reduction as
that corresponding to the UPAC-linked credit. The Colombian Government, for its
part, proceeded to credit to the value of the obligations the total amount of
the difference produced by this reliquidation process and for the purpose of
paying the amounts credited issued UVR-denominated Treasury Bonds (TES).
On the other hand, Decree 712 of 2001, which amended Decree 2221 of
2000, establishes in its Article One the following grounds for returning the
debt relief applied for credit institutions, to the Republic of Colombia via the
Ministry of Finance and Public Credit.
DUE TO DEFAULT ON THE PART OF THE BENEFICIARY OF THE CREDITED AMOUNT
When the beneficiary of the credited amount, according to the
provisions of Law 546 of 1999, defaults on more than twelve (12) successive
monthly payment installments, as of the date on which the amount is credited to
the individual long-term mortgage loan.
DUE TO FAILURE TO PAY THE INDIVIDUAL MORTGAGE LOAN ON THE PART OF THE
BENEFICIARY OF THE CREDITED AMOUNT
If the credit institution has started collection proceeding against
the mortgagor prior to the expiry of the term of default established in the
prior section.
DUE TO PAYMENT OF MORTGAGE CREDITS FOR MORE THAN ONE DWELLING PER PERSON
The amounts credited on mortgage loans for more than one dwelling per
person must be returned.
DUE TO WAIVING THE AMOUNT CREDITED
Should the mortgagor have selected the loan for which he or she wishes
the credited amount to be applied, as provided for by Article 40 of Law 546 of
1999, the mortgagor should provide written notification of his or her intent to
waive the credit on other loans, if applicable. If the credit to which the
mortgagor is waiving should have been made prior to the waiver made, the
corresponding entity must review the credited amount applied to the loan and
make the corresponding refund to the Nation.
DUE TO AMOUNTS CREDITED BEING HIGHER THAN THOSE DUE
When amounts higher than those due are credited, the excess amount
must be refunded to the Nation together with the corresponding interest paid up
to the date on which the refund is made.
F-29
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
9. LOANS TO REGIONAL AUTHORITIES
The evaluation of loans to regional authorities includes not only the
criteria applicable to regular borrowers but also the provisions set forth in
Law 358 of 1997 and Law 617 of 2000.
10. RESTRUCTURED LOANS
A "restructured loan" is a loan for which a legal agreement exists
whose purpose or effect is to modify some of the terms of the loan for the
debtor's benefit and at its request. This includes informal or non-moratorium
agreements, Law 550 of 1999 agreements, Law 617 of 2000 agreements, and special
restructuring as defined in the Superintendency of Banking (now Superintendency
of Finance) Circular 39 of 1999.
Restructured loans shall not be considered to include the credit
relief stipulated by law, as was the case of the relief stipulated in Law 546 of
1999, for the housing loan portfolio.
For the loans restructured as indicated above or using other
restructuring modes which include the capitalization of interest recorded in
memorandum accounts or balances written off, including capital, interest and
other items, the amounts capitalized are recorded as deferred income and they
are amortized in proportion to the amounts actually collected.
11. CHARGE OFFS
The Bank writes off debtors classified as "unrecoverable", following
the criteria given below, at the latest at the close of the half-year in which
that classification was made, provided they meet the following conditions:
- Provision of 100% of all amounts past due (capital, interest and
other items)
- One hundred eighty (180) days past due for consumer and small
business loans
- Three hundred sixty (360) days past due for commercial loans
- One thousand six hundred twenty (1620) days past due for mortgage
loans
All write-offs must be approved by the Board of Directors. Even if a
loan is charged off, management remains responsible for its decisions in respect
of the loan, and neither the Bank nor its Subsidiaries are relieved of their
obligations to pursue recovery as appropriate.
F-30
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Charge-offs in Bancolombia Panama S.A.
In the case of the subsidiary in Panama, the Bank takes into account
the Republic of Panama Superintendency of Banking Order 6-2000, dated June 28,
2000, which requires that Bancolombia Panama charge off all loans classified as
unrecoverable at the latest by the end of the fiscal period in which they were
so classified.
12. SECURITIZED NON-PERFORMING LOANS
The non-performing mortgage loan portfolio was securitized by the Bank
for the following purposes:
- To reduce the level of overdue loans, and as a result reduce the
systemic risk presented given the concentration of long-term
assets vs. short-term liabilities.
- Improve upon the Bank's financial indicators.
- Mobilize and free up resources from the economy to the production
system based on a non-performing asset which would otherwise not
afford this benefit.
- Involve the Bank in the process of making the capital market more
sophisticated.
The securitization process carried out on the mortgage loan portfolio
was made in accordance with subsection one of Article 12 of Law 546 of 1999. The
Bank proceeded to completely separate and isolate from its equity the total
amount of underlying assets that were securitized, forming part of a
Universality, according to that indicated in Article 2 of Resolution 775 of 2001
issued by the Superintendency of Banking (now Superintendency of Finance)
issuing A, B and C-rated credit securities to finance the building and purchase
of housing. A- rated securities were sold to the Securitizing Party and the B-
and C- rated securities were recorded as - Trust Rights - Investments - pursuant
to instructions received from the Superintendency of Finance. All expenses
incurred in taking possession of the guarantee are paid for by the Bank; in
exchange the Bank receives the amount remaining after paying out the total
amount of principal and interest on said securities.
(K) ACCEPTANCES AND DERIVATIVES
ACCEPTANCES
The Bank issues local currency bank acceptances for up to 180 days for
import or export operations or for local purchases of merchandise, pursuant to
legal provisions.
They are treated as active loans and may not exceed the Bank's paid in
capital and legal reserve. The asset and liability are initially recorded at the
same time.
F-31
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
If unpaid at maturity, the asset is reclassified to a loan account and
the liability to "past due bank acceptances" until it is paid, and as of
maturity, these acceptances are subject to reserve requirements for on demand
liabilities for payment within 30 days.
The term granted by the beneficiary abroad to the client in Colombia
to pay for the goods is governed by International Chamber of Commerce rules and
may exceed 180 days under the internationally-accepted deferred credit mode for
up to one year. The ledgers may therefore contain foreign currency acceptances
for more than 180 days.
DERIVATIVES
The Bank and its Subsidiaries record the amount of agreements between
two or more parties to purchase or sell assets at a future date, whose
compliance or settlement is agreed upon more than two business days following
the operation initiation date, in order to provide or obtain hedging, in the
terms defined by competent authorities. Therefore, these agreements create
reciprocal and unconditional rights and obligations. Operations are formalized
by contract or letter of intent. The Bank has contracts for forwards, for
options, swaps and futures.
Currency derivatives are designed to cover exchange exposure risks on
structural or traded open positions by setting up a reciprocal operation or
synthetic coverage for up to the maximum exposures allowed by the regulation and
control agencies.
The difference between rights and obligations is recorded as income or
expense, as the case may be.
NEXT DAY OPERATIONS
These include all agreements or contracts entered into by two parties
and to be fulfilled within two business days immediately following the date on
which the agreement or contract is made.
FORWARD CONTRACTS
A forward contract is any agreement or contract that meets the needs
of two parties acting outside the market for the purpose of accepting or
delivering a specific quantity of a product or underlying asset with defined
specifications regarding price, date, place and means of delivery.
FUTURE CONTRACTS
These are standard contracts for future delivery, specifying due date,
quantities, amounts, qualities, etc. The valuation is calculated pursuant to the
stock market practices where the securities are traded.
F-32
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Futures may be liquidated in cash, by a reciprocal operation prior to
the due date, by physical delivery of a product or by liquidating against an
index.
SWAP CONTRACTS OR FINANCIAL EXCHANGE CONTRACTS
A swap contract or financial exchange contract is a contract between
two parties that agree to exchange flows of money within the time set forth in
the obligations, which is financially similar to a series of Forward Contracts
whose objective is to reduce costs and risks due to variations in exchange rates
or in interest rates.
SIMULTANEOUS OPERATIONS
Simultaneous operations are those that are set up as a result of
purchase and sale agreements by virtue of which a person (original seller) sells
fixed-income securities to another (original buyer), with the undertaking that
the latter shall sell back to the former, at a later date and at a price
established at the beginning of the operation, securities equivalent to those
originally handed over. Likewise, the original seller is obliged to purchase the
securities handed over to the original buyer, according to the terms and
conditions that were expressly stipulated in the agreement or contract.
OPTION CONTRACTS
In option contracts, the holder of an option has the right, but not
necessarily the obligation, to purchase or sell a specific quantity of an asset
at a given price on a given date or during a determined period. The Bank has
established an accepted technique for valuing these operations, taking into
account market risks, operational risks and legal risks.
Derivatives are accounted for at fair value on a daily basis and
results of the valuation are recorded on the same basis.
(L) FORECLOSED ASSETS
The Bank and its Subsidiaries record the adjusted value of assets
received in payment of unpaid loans in this account.
The following criteria apply to the recording of foreclosed assets:
- The initial value recorded is the value specified in the court
award or the one agreed upon by the debtors.
- If the property received in payment is not in a sellable
condition, its book value is increased by the expenses the Bank
and its Subsidiaries incur to put it into a sellable condition.
F-33
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
- If the proceeds of the sale are more than the settlement value
agreed upon with the debtor, that difference is recorded as an
account payable to the debtor. If the proceeds of sale are
expected to be insufficient to cover the outstanding debt, the
difference must be immediately recorded on the income statement.
- Moveable assets received in payment corresponding to investment
securities are valued by applying the criteria indicated in this
note in letter (i) Investments, but taking into account provision
requirements for the periods referred to below.
- When the commercial value of the property is lower than its book
value, a provision must be made for the difference.
LEGAL TERM FOR THE SALE OF FORECLOSED ASSETS
Institutions must sell the goods that have been transferred in payment
of debts previously contracted in the course of business or that have been
adjusted at public auction due to mortgages in their name no later than two
years after the foreclosing date, except when upon the Board of Directors'
request, the Superintendency of Finance (before Superintendency of Banking)
extends the term. However, in no case may the extension exceed an additional
period of two years.
PROVISIONS FOR FORECLOSED ASSETS
With the issuance of the Superintendency of Banking (now
Superintendency of Finance) External Circular 034 of August 2003, (Current since
October 2003) supervised banks must design and adopt their own internal models
for the calculation of provisions for foreclosed assets, by means of which
expected losses for all types of assets are estimated. The Bank and its
Subsidiaries do not have their own internal model for calculating provisions for
foreclosed assets through which expected losses are estimated by type of asset
and approved by the Superintendency of Finance (before Superintendency of
Banking).
Until such model is presented and approved by the Superintendency of
Finance (before Superintendency of Banking), provisions will be made following
the parameters set forth below.
Real estate
A provision equal to 30% of the value of the asset at the time of
receipt must be made in proportional monthly installments within the first year
following receipt. This provision will increase an additional 30% in
proportional monthly installments within the second year following receipt of
the asset. Once the legal term for sale has expired without authorization to
extend, the provision must be 80% of the value upon receipt. In case the term
extension is granted, the remaining 20% of the provision may be constituted
within said term.
F-34
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Moveable Assets
A provision equal to 35% of the value of the asset at the time of
acquisition must be made in proportional monthly installments within the first
year following receipt. Said provision must be increased an additional 35% in
proportional monthly installments within the second year following receipt of
the asset. Once the legal term for sale has expired without authorization to
extend, the provision must be 100% of the book value of the asset prior to
provisions. If the term extension is granted, the remaining 30% of the provision
may be constituted within said term.
Based on individual analysis related to the feasibility of realizing a
return on some foreclosed assets, the Bank records provisions for them, which
are higher than the provisions that the Superintendency of Finance (before
Superintendency of Banking) requires.
(M) LOAN FEES
Loan origination and commitment fees, as well as direct loan
origination and commitment costs, are recorded in the consolidated statement of
operations as collected or incurred.
(N) PROPERTY, PLANT AND EQUIPMENT
This account records tangible assets acquired or leased assets,
constructed or in the process of importation or construction and permanently
used in the course of the Bank's business which useful life exceeds one year.
Property and equipment is recorded at the cost of acquisition, including direct
and indirect costs and expenses incurred up to the time that the asset is in a
usable condition.
Additions, improvements and non-routine repairs that significantly
prolong the useful life of an asset are capitalized. Payments for routine
maintenance and repairs are charged to expense in the period in which they are
incurred.
Depreciation is calculated on a straight-line basis over the estimated
useful life of the asset. The annual depreciation rates for each asset item are:
Buildings 5%
Equipment, furniture and fittings 10%
Computer equipment 20%
Vehicles 20%
The individual net book value of real estate (cost less accumulated
depreciation) is compared against market values taken from independent
professional appraisals. If the market value is higher, a reappraisal is
recorded; otherwise, the difference is charged to expenses for the period.
Valuations must be made at least every three years.
F-35
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
At December 31, 2004 and 2005, the Bank had insurance cover for
fidelity and financial risks and civil liability cover for risks inherent to its
business. Other policies protect assets against fire, earthquake, explosion,
civil disturbance, riot, terrorism, damage to computers and vehicles.
Maintenance policy:
Corrective maintenance provides for the immediate replacement of
parts, accessories or elements that may affect safety or proper operation.
Preventive maintenance consists of regular checks of architectural and
electrical items, conducted twice a year and the maintenance of equipment,
furniture and fittings is done three to four times a year.
(O) BRANCHES AND AGENCIES
This account records the operations between the Bank's branches and
agencies.
Balances are reconciled monthly and pending items are adjusted within
thirty (30) calendar days. On the date of the financial statements, the Bank
reclassifies net balances representing branch and agency transactions to asset
or liability accounts and the respective income or expense is recorded.
(P) PREPAID EXPENSES AND DEFERRED CHARGES
Prepaid expenses are payments made by the Bank and its Subsidiaries in
the normal course of business, the benefits of which are recovered over more
than one period and are recoverable assuming continuous delivery of services.
Deferred charges are goods and services received, for which the Bank expects to
obtain future economic benefits.
Amortization of prepaid expenses and deferred charges is calculated
from the date which they contribute to the generation of income, considering the
following factors:
Prepaid Expenses
Prepaid expenses include mainly the following monetary items:
interest, amortized monthly during the period prepaid; insurance, over the life
of the policy; rent, over the period prepaid; equipment maintenance, over the
life of the contract; and other prepaid expenses over the period in which
services are received or costs and expenses are incurred.
F-36
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Deferred Charges
Deferred charges are non-monetary items:
- Software is amortized over a maximum of three years.
- The goodwill is amortized based on due authorization granted by
the Superintendency of Finance and arises from the difference
between the value paid and the intrinsic value of investment at
the moment of purchase.
- Stationery is amortized as and when consumed.
- Bonuses under the voluntary retirement plan are amortized as
permitted by the Superintendency of Finance (before
Superintendency of Banking).
- Contributions and affiliations are amortized over the period
prepaid.
The Bank does not record deferred charges corresponding to renovations
and improvements on leased property, studies and projects, institutional
advertising and publicity. The value of the disbursements made regarding these
items are recorded directly on the statement of operations.
(Q) LEASED ASSETS
Subsidiaries Leasing Colombia S.A., Suleasing Internacional, Suleasing
Internacional Inc, Sufinanciamiento S.A., Banco Corfinsura Internacional and
Bancolombia Panama S.A. record the value of assets delivered under financial
leases.
The loans and financial leasing agreements issued by the companies are
recorded according to the different methods authorized. The resources used in
granting the loans are provided by the entity's own funds, public funds in the
form of time deposits and other internal and external sources of financing.
On October 23, 2003, the Superintendency of Banking (now the
Superintendency of Finance) through its External Circular 040 modified the
treatment of financial leases. Starting January 1, 2004, instead of recording
financial leases as property, plant and equipment, companies must account for
them in their loan portfolio.
Financial leasing agreements that were formerly recorded in the
account titled "Leased Assets" were reclassified in the account titled
"Portfolio of Financial Leasing Operations and Loans", by virtue of which the
policies governing the Loan and Financial Leasing Portfolio shall be applied to
said agreements. The operating leasing agreements entered into by the Companies,
upon signing said documents, provide the user for his or her use the
corresponding leased assets, which shall henceforth be recorded under Leased
Assets.
Financial leases that were recorded in an independent line were
reclassified to loan portfolio line.
F-37
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Operational leases entered into by the Companies, are accounted for as
assets given in operational lease, after the respective contract is entered into
by the parties and the leased asset is given to the user.
Depreciation will be recorded for the lesser of the useful life of the
good and the lease contract term. The Companies use the depreciation methodology
that requires that the depreciation expense is recorded for each month or
fraction thereof.
(R) REAPPRAISALS
This account records reappraisals of available for sale investments
with low exchange volume or which are unquoted, property and equipment, real
estate and works of art and culture.
Valuations are subject to the accounting policy for each type of
asset.
(S) INTERBANK FUNDS PURCHASED AND REPURCHASE AGREEMENTS
This account records funds obtained by the Bank from other financial
institutions to satisfy transient liquidity needs. These transactions have a
maximum term of thirty (30) calendar days, except the operations with the
Colombian Central Bank. Purchases not repaid within that term are reclassified
as bank loans and other financial obligations.
The difference between present value (cash received) and future value
(repurchase price) is a financial expense.
(T) DEFERRED INCOME
This account records deferred income and income received in advance in
the course of business. Amounts recorded in this account are amortized over the
period to which they relate or in which the services are rendered.
The capitalization of yields on restructured loans that have been
recorded in memorandum accounts or as charge - off loan balances is included
here as indicated in Note 2 (j).
(U) BONDS
Credit institutions are authorized by the Superintendency of Finance
(before Superintendency of Banking) to issue or place ordinary bonds or general
collateral bonds. In any case, every time a new issue is planned, the
Superintendency of Finance must be informed of the total value, series, number
of bonds, date of issue, term and frequency of payment, the corresponding
return, the place and form of payment of said return as duly provided for by
applicable legislation.
F-38
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The bonds issued are recorded in the National Register of Securities
for all legal effects and may be subject to a public offer without any need for
further authorization from the Superintendency of Finance.
The term for repaying the bonds issued, either partially or totally,
may not be less than one (1) year and these shall cease to yield a return as of
the date established for collecting said payment.
At December 31, 2001, Conavi, having been duly authorized by FOGAFIN -
the Colombian Guarantee Fund for Financial Institutions, issued convertible
bonds, subscribed in their entirety by FOGAFIN, for the purpose of strengthening
Conavi's equity, as provided for by Article 6 of Resolution 006 of 2001 issued
by FOGAFIN. Conavi's shareholders undertook to repurchase such bonds, upon
paying off the loan made by FOGAFIN in full. The financial cost, on December 31,
2005 was 9.35% (Effective Annual Rate - E.A.R.). At December 31, 2004 this came
to 10.73% (E.A.R.).
(V) DEFERRED CREDIT TAX
This is a tax that is deferred due to the temporary differences
between commercial income and taxable income. This tax is canceled upon
reverting the differences giving rise to said tax.
(W) RETIREMENT PENSIONS
The Bank and its Subsidiary Almacenar S.A. apply the provisions in
Decree 1517 of 1998, which requires a distribution of charges to amortize the
actuarial calculation by 2010. As of December 31, 2005, the Bank has amortized
the total actuarial calculation.
(X) ACCRUALS AND PROVISIONS
The Bank and its Subsidiaries record provisions to cover estimated
liabilities, such as fines, sanctions, litigations and lawsuits where:
- The Bank has acquired a right, and therefore an obligation
- Payment may be demanded or is probable, and
- The provision is justifiable, quantifiable and verifiable
This account also records estimates for taxes.
F-39
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(Y) RECOGNITION OF INTEREST REVENUE
Interest revenue is recognized in current earnings as it accrues.
Interest is suspended when due and there is a doubt regarding its
collectibility.
(Z) CONTINGENT ACCOUNTS
These accounts record operations in which the Bank and its
Subsidiaries acquire rights or assume obligations conditioned by possible future
events with varying degrees of probability, such as definite, possible or
remote. Likewise, they include financial yields as of when loan portfolio and
financial lease interest entry into the statement of operations is suspended.
Contingent accounts are included in the caption memorandum accounts of the
balance sheet.
(AA) MEMORANDUM ACCOUNTS
These accounts record third party operations whose nature does not
affect the financial situation of the Bank. They also include tax memorandum
accounts that record the figures used in preparing tax returns, internal control
or management information and reciprocal operations between the Bank and its
Subsidiaries.
(BB) NET INCOME PER SHARE
To determine net income per share, the Bank uses the weighted average
of the number of shares outstanding during the accounting period. For the
periods ended December 31, 2004 and 2005, the weighted average of the Bank's
outstanding shares was 576,695,395 and 652,882,756, respectively.
(CC) ASSET AND LIABILITY MANAGEMENT
The Bank evaluates asset and liability management and
off-balance-sheet positions, estimating and controlling the level of exposure to
major market risks, in order to provide protection against losses due to
possible variations in asset or liability values.
(DD) CAPITAL ADEQUACY
Capital Adequacy for Banks is required to be not less than 9% of their
total credit risk weighted assets and credit contingencies. Under Decree 1720 of
2001 calculation of capital adequacy must incorporate market risk in addition to
the credit risk. This new risk for capital adequacy requirement was covered 100%
in 2004 and 2005. Calculations are made each month on an unconsolidated basis
and in June and December on consolidated accounts which include the Bank's
financial Subsidiaries in Colombia and abroad.
F-40
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As of June 2004 when Decree 2061 was issued, modifications to Decree
1720 of 2001 were set forth that provide new rules for calculating mandatory
convertible bonds and currency-linked bonds in the additional equity of credit
institutions, as well as modifications to the classification and weighting of
mortgage loans, derivative operations and securities from securitization
processes.
As of December 31, 2004 and 2005 the capital adequacy ratio was 13.44%
and 10.93%, respectively.
(EE) LEGAL RESERVE
According to Colombian law, credit institutions must constitute a
legal reserve that will amount to at least fifty percent (50%) of the subscribed
capital, formed with ten percent (10%) of the net income of each period.
(FF) CONVENIENCE TRANSLATION TO U.S. DOLLARS
The Bank maintains its accounting records and prepares its financial
statements in Colombian pesos. The U.S. dollar amounts presented in the
financial statements and accompanying notes have been converted from peso
figures solely for the convenience of the reader at the exchange rate of Ps
2,284.22 per US$ 1, which is approximately the exchange rate, in effect at
December 31, 2005. This translation may not be construed to represent that the
Colombian peso represents or has been or could be converted into U.S. dollars at
that or any other rate.
(GG) INCOME TAX
The income tax is determined as follows: from the ordinary and
extraordinary income realized in the period, that being susceptible of produce
net increase of shareholders' equity in the moment they incurred and, that have
not been excepted, are reduced returns, reductions and discounts to obtain net
income. As appropriated, realized costs that have a direct relation with income
are reduced to determine income before taxes. Deductions are applied to income
before taxes to obtain the taxable income for the ordinary system.
For purposes of income tax, it is presumed that the taxable income is
not lower than 6% of shareholder's equity at the last day of the immediately
previous taxable period. The excess of taxable income determined under the
ordinary system over presumed income becomes taxable income to which the
statutory tax rate applies.
When income tax is paid on presumed income, the difference between
this and the income tax calculated under ordinary system can be adjusted in the
following five years.
Deferred income taxes are generally recognized for timing differences
for commercial and manufacturing subsidiaries. For financial companies, the
Superintendency of Finance (before Superintendency of Banking) has restricted
inclusion of timing differences related to the
F-41
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
amortization of fiscal losses and the excess of presumed income over ordinary
income as a deferred tax asset.
(HH) BUSINESS COMBINATION
Upon a business combination, the purchase method of accounting
requires that (i) the purchase price be allocated to the acquired assets and
liabilities on the basis of their book value, (ii) the statement of income of
the acquiring company for the period in which a business combination occurs
include the income of the acquired company as if the acquisition had occurred on
the first day of the reporting period and (iii) the costs directly related to
the purchase business combination not be considered as a cost of the
acquisition, but deferred and amortized over a reasonable period as determined
by management.
The pooling of interest method of accounting requires the aggregate of
the shareholder's equity of the entities included in the business.
Conavi and Corfinsura acquisition was accounted for using the pooling
of interests method in accordance with the methodology suggested by the
Superintendency of Finance. Sufinanciamiento acquisition was accounted for using
the purchase method under Colombian GAAP.
The line merger effect in the consolidated statement of stockholder's
equity under Colombian GAAP includes the difference between the issuance of
shares and the carring amount of the net asset acquired from Conavi and
Corfinsura.
(3) TRANSACTIONS IN FOREIGN CURRENCY
The Superintendency of Banking (now Superintendency of Finance) sets
limits on the amount of foreign-currency assets and liabilities. The Bank was in
compliance with the subject rules as of December 31, 2004 and 2005.
Substantially all foreign currency holdings are in U.S. dollars. The
consolidated foreign currency assets and liabilities of the Bank at December 31,
2004 and 2005 were as follows:
2004 2005
------------ ------------
ASSETS:
Cash and due from banks US$ 73,391 US$ 81,327
Overnight funds 180,720 213,897
Investment securities 562,723 786,733
Loans 825,371 1,734,049
Customers' acceptances (203,714) (500,176)
Accounts receivable 13,574 47,351
Premises and equipment, net 2,433 21,625
F-42
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
------------ ------------
Other assets 3,379 40,933
------------ ------------
TOTAL FOREIGN CURRENCY ASSETS US$1,457,877 US$2,425,739
------------ ------------
LIABILITIES:
Deposits 1,176,207 1,155,250
Bank acceptances outstanding 21,121 21,071
Borrowings from domestic development banks 815 90,234
Interbank borrowings 103,058 746,630
Other liabilities 12,682 243,266
------------ ------------
TOTAL FOREIGN CURRENCY LIABILITIES 1,313,883 2,256,451
------------ ------------
NET FOREIGN CURRENCY ASSET POSITION US$ 143,994 US$ 169,288
============ ============
The Bank's unconsolidated net foreign currency asset position amounted
to US$ 209,513 and US$ 308,272 at December 31, 2004 and 2005, respectively. The
Bank has the required net foreign currency position within the legal terms.
At December 31, 2004 and 2005, the Subsidiaries Bancolombia Panama
S.A. and Bancolombia Cayman had 67.85% and 51.09% of the consolidated assets in
foreign currency and 83.31% and 48.15% of the consolidated liabilities in
foreign currency, respectively.
(4) CASH AND DUE FROM BANKS
The balances of cash and due from banks at December 31, 2004 and 2005
consisted of the following:
2004 2005
---------- ------------
COLOMBIAN PESO DENOMINATED:
Cash Ps 492,243 Ps 740,615
Due from the Colombian Central Bank 52,830 279,909
Due from domestic banks 25,770 15,237
Remittances of domestic negotiated checks in transit 22,625 19,991
Provision (339) (86)
---------- ------------
TOTAL LOCAL CURRENCY 593,129 1,055,666
---------- ------------
FOREIGN CURRENCY:
Cash 77,304 20,999
Due from the Colombian Central Bank 8,514 5,379
Due from foreign banks 85,465 153,106
Remittances of foreign negotiated checks in transit 4,276 6,299
Provision (174) (14)
---------- ------------
TOTAL FOREIGN CURRENCY 175,385 185,769
---------- ------------
TOTAL CASH AND DUE FROM BANKS Ps 768,514 Ps 1,241,435
========== ============
F-43
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Reserves against transactions and time deposits with the Colombian
Central Bank amounted to Ps 516,648 and Ps 1,098,712 at December 31, 2004
and 2005, respectively. The restriction, which is prescribed by the
Colombian Central Bank, is based on a percentage of deposits maintained at
the Bank by its customers.
(5) INVESTMENT SECURITIES
Investment securities at December 31, 2004 and 2005 consisted of the
following:
2004 2005
------------ ------------
TRADING SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps 1,223,762 Ps 3,305,131
Colombian Central Bank 261 15
Government entities 65,478 44,674
Financial institutions 564,115 1,044,838
Corporate bonds 19,930 64,228
Other marketable equity securities 68,316 192,535
------------ ------------
TOTAL COLOMBIAN PESO DENOMINATED 1,941,862 4,651,421
------------ ------------
FOREIGN CURRENCY DENOMINATED:
Colombian government 282,897 136,111
Government entities 150,961 --
Financial institutions -- 664,223
Total foreign currency denominated 433,858 800,334
------------ ------------
Total trading securities 2,375,720 5,451,755
------------ ------------
Allowance for trading securities (53) (1,100)
------------ ------------
TRADING SECURITIES, NET Ps 2,375,667 Ps 5,450,655
============ ============
The foreign currency denominated securities issued or secured by the
Colombian government are bonds denominated in U.S. dollars, purchased at
par value, with annual average interest rates of 4.60% and 5.68% for 2004
and 2005, respectively.
The Bank had pledged investments securities of Ps 787,957 and Ps
1,723,109 as collateral to secure lines of credit at international banks,
domestic development banks and other financial institutions as of December
31, 2004 and 2005, respectively.
The Bank sold Ps 118,823,601 and Ps 234,428,554 of investment
securities during the years ended December 31, 2004 and 2005, respectively.
F-44
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
------------ ------------
AVAILABLE FOR SALE - DEBT SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps 1,279,564 Ps 897,155
Financial institutions 14,687 27,655
Other marketable equity securities -- 3,434
------------ ------------
TOTAL LOCAL CURRENCY DENOMINATED 1,294,251 928,244
------------ ------------
FOREIGN CURRENCY DENOMINATED:
Colombian government 289,584 496,726
Financial institutions 114,322 339,633
Other marketable equity securities 245,528 77,953
------------ ------------
TOTAL FOREIGN CURRENCY DENOMINATED 649,434 914,312
------------ ------------
TOTAL AVAILABLE FOR SALE - DEBT SECURITIES Ps 1,943,685 Ps 1,842,556
------------ ------------
PARTICIPATION PARTICIPATION
PERCENTAGE AT PERCENTAGE AT
DECEMBER 31, 2004 2004 DECEMBER 31, 2005 2005
----------------- --------- ----------------- ---------
AVAILABLE FOR SALE - EQUITY SECURITIES
"Conavi" Banco Comercial y de Ahorro 28.52% Ps 88,681 -- Ps --
Todo Uno Services 39.05% 52,152 38.86% 49,849
Corporacion Financiera Suramericana S.A.
Corfinsura 4.61% 55,749 -- --
Urbanizacion Chico Oriental No. 2 Ltda 24.37% 7,848 24.37% 7,848
Carreteras Nacionales del Meta S.A. 8.44% 5,615 8.44% 5,509
Sociedad Administradora de Fondos de
Pensiones y de Cesantias Proteccion S.A. 7.42% 7,014 23.44% 19,481
Sociedad de Servicios Tecnicos y
Administrativos Multienlace S.A. 48.60% 6,957 -- --
Fideicomiso Devinorte 10.31% 5,277 10.31% 5,277
Concesiones CCFC S.A. 25.50% 4,358 25.50% 4,358
Venrepa C.A. 99.62% 2,697 99.62% 2,578
Banco Latinoamericano de exportaciones
BLADEX S.A. 0.20% 2,183 0.20% 2,131
Deposito Centralizado de Valores de
Colombia Deceval S.A. 6.98% 1,527 11.38% 2,954
Compania de Inversiones Bogota S.A. 13.00% 653 -- --
3001 S.A. in the process
of being wound up) 5.85% 955 -- --
Urbanizacion Sierras del Chico Ltda 0.55% 203 0.55% 203
Concesiones Urbanas S.A. 33.32% 8,446 33.32% 8,449
Titularizadora Colombia S.A. -- -- 21.25% 11,162
Promotora la Alborada -- -- 25.81% 14,001
Compania Suramericana de Inversiones
S.A. Surainversiones -- -- 0.73% 64,672
Redeban Red Multicolor 10% 700 20.36% 4,396
F-45
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
PARTICIPATION PARTICIPATION
PERCENTAGE AT PERCENTAGE AT
DECEMBER 31, 2004 2004 DECEMBER 31, 2005 2005
----------------- ----------- ----------------- ----------
Terminal Maritimo Muelles El Bosque 7.01% 3,390 7.01% 3,390
Muelles El Bosque Operadores Portuarios 7.93% 1,242 7.93% 1,242
Sutecnologia -- -- 49.00% 343
Cadenalco S.A. Titularizacion 3.33% 2,490 3.33% 2,490
Bolsa de Valores de Colombia -- -- 8.54% 2,628
Other 4,943 4,520
---------- ----------
TOTAL EQUITY SECURITIES 263,080 217,481
Allowance for other-than-temporary
impairment in value (60,685) (67,532)
---------- ----------
EQUITY SECURITIES, NET Ps 202,395 Ps 149,949
========== ==========
Dividends received from equity investments amounted to Ps 30,734, Ps
30,546 and Ps 42,731 for the years ended December 31, 2003, 2004 and 2005,
respectively.
Most of the equity investments were classified as Category "A". The
following investments are classified in categories other than "A":
2004 2005
-------------------- --------------------
VALUATION VALUATION
CATEGORY ALLOWANCE CATEGORY ALLOWANCE
-------- --------- -------- ---------
Todo Uno Services D Ps 48,153 D Ps 45,872
Urbanizacion Chico Oriental No. 2 Ltda. E 7,848 E 7,848
Urbanizacion Sierras del Chico Ltda. E 203 E 203
Industria Colombo Andina Inca S.A. E 300 E 300
Venrepa C.A. E 2,697 E 2,578
3001 S.A. (in the process of
being wound up) E 955 -- --
Sociedad Portuaria San Andres E 3 E 3
Sociedad Promotora Siderurgica
Colombiana E.U. E 387 E 534
Tesicol E 4 -- --
Promotora La Alborada -- -- E 9,897
2004 2005
---------- -----------
HELD TO MATURITY SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps 424,731 Ps 873,679
Government entities 3,719 --
Financial institutions 47,276 55,757
Other 2,999 16,147
---------- ----------
TOTAL HELD TO MATURITY SECURITIES 478,725 945,583
F-46
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
--------- -----------
FOREIGN CURRENCY DENOMINATED:
Colombian government 233,040 34,876
Financial institutions 6,195 5,955
Other 15,391 34,965
--------- -----------
TOTAL FOREIGN CURRENCY DENOMINATED 254,626 75,796
--------- -----------
733,351 1,021,379
--------- -----------
Allowance for other-than-temporary
impairment in value (4,887) (4,836)
--------- -----------
TOTAL HELD TO MATURITY SECURITIES,
NET Ps728,464 Ps1,016,543
========= ===========
(6) LOANS AND FINANCIAL LEASES
The following represents the classification of the total loan
portfolio and financial lease contracts as of December 31, 2004 and 2005 in
accordance with the provisions of the Superintendency Banking (now
Superintendency of Finance):
DECEMBER 31, 2004
FINANCIAL
CLASSIFICATION MORTGAGE COMMERCIAL CONSUMER SMALL LOAN LEASES TOTAL
-------------- -------- ----------- ----------- ---------- --------- ------------
"A" Normal Risk Ps56,067 Ps6,803,951 Ps1,560,599 Ps81,859 Ps824,922 Ps 9,327,398
"B" Acceptable Risk 3 251,638 36,752 2,979 29,587 320,959
"C" Appreciable Risk -- 58,548 14,719 1,208 18,700 93,175
"D" Significant Risk -- 176,448 21,804 864 5,228 204,344
"E" Unrecoverable 37 63,371 21,192 3,090 1,673 89,363
-------- ----------- ----------- -------- --------- ------------
TOTAL LOANS AND FINANCIAL
LEASES(1) Ps56,107 Ps7,353,956 Ps1,655,066 Ps90,000 Ps880,110 Ps10,035,239
======== =========== =========== ======== ========= ============
----------
(1) On October 23, 2003, the Superintendency of Banking (now Superintendency of
Finance) through its External Circular 040, modified the treatment of
financial leases. Since January 1, 2004 it is accounted for as part of the
loan portfolio.
DECEMBER 31, 2005
FINANCIAL
CLASSIFICATION MORTGAGE COMMERCIAL CONSUMER SMALL LOAN LEASES TOTAL
-------------- ----------- ------------ ----------- ---------- ----------- ------------
"A" Normal Risk Ps1,359,428 Ps11,099,403 Ps2,286,217 Ps106,654 Ps2,507,379 Ps17,359,081
"B" Acceptable Risk 62,670 400,804 58,154 2,650 113,853 638,131
"C" Appreciable Risk 23,846 125,473 26,963 1,242 25,410 202,934
"D" Significant Risk 5,158 206,023 33,638 869 6,947 252,635
"E" Unrecoverable 12,335 117,798 32,755 3,616 6,967 173,471
----------- ------------ ----------- --------- ----------- ------------
TOTAL LOANS AND FINANCIAL LEASES Ps1,463,437 Ps11,949,501 Ps2,437,727 Ps115,031 Ps2,660,556 Ps18,626,252
=========== ============ =========== ========= =========== ============
F-47
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Promissory notes by means of which loans amounting to Ps
1,129,825 and Ps 1,352,071 at December 31, 2004 and 2005, respectively,
have been documented were duly endorsed to domestic development banks, as
required for laws regulating such type of loans.
The following represents a summary of restructured loans as of
December 31, 2004 and 2005:
2004 2005
----------- ----------
Ordinary restructurings Ps 406,964 Ps 424,781
Extraordinary restructurings 13,060 8,526
Under law 550 61,255 74,558
Under law 617 156,617 184,317
Creditor agreement proceedings 9,793 12,472
Performance Agreement 3,420 2,844
Interest and other receivable items 9,767 8,726
---------- ----------
660,876 716,224
Allowances for loan losses (205,074) (256,041)
---------- ----------
NET OF RESTRUCTURED LOANS Ps 455,802 Ps 460,183
========== ==========
(7) ALLOWANCE FOR LOANS, FINANCIAL LEASES AND ACCRUED INTEREST LOSSES
An analysis of the activity in the allowance for loans and
financial leases losses during the years ended December 31, 2003, December
31, 2004 and December 31, 2005 is as follows:
2003 2004 2005
---------- --------- ----------
Balance at beginning of year Ps 332,324 Ps387,263 Ps 434,378
Balance at beginning of year (Conavi, Corfinsura and subsidiaries) -- -- 236,013
Balance at beginning of year (Sufinanciamiento) 11,854 -- --
Allowance for financial lease reclassification (1) -- 7,002 --
Provision 286,170 186,480 374,744
Charge-offs (112,393) (55,032) (115,455)
Effect of changes in exchange rate (284) (12,751) (3,955)
Decrease on allowance for securitization -- -- (11,947)
Recoveries (130,408) (78,584) (207,896)
---------- --------- ----------
Balance at end of year Ps 387,263 Ps434,378 Ps 705,882
========== ========= ==========
Ratio of charge-offs to average outstanding loans 1.61% 0.62% 0.66%
========== ========= ==========
----------
(1) On October 23, 2003, the Superintendency of Banking (now Superintendency of
Finance) through its External Circular 040, modified the treatment of
financial leases. Since January 1, 2004 they are accounted for as part of
the loan portfolio.
F-48
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The activity in the allowance for accrued interest losses during
the year ended December 31, 2003, 2004 and 2005 is as follows:
2003 2004 2005
--------- -------- ---------
Balance at beginning of year Ps 15,074 Ps 5,170 Ps 4,603
Balance at beginning of year (Conavi, Corfinsura and subsidiaries) -- -- 9,609
Balance at beginning of year (Sufinanciamiento) 769 -- --
Allowance for financial lease reclassification (1) 473 --
Provision 5,316 4,483 12,379
Charge-offs (4,089) (2,072) (4,657)
Recoveries (11,897) (3,332) (13,267)
Effect of changes in exchange rate (3) (119) (12)
--------- -------- ---------
Balance at end of year Ps 5,170 Ps 4,603 Ps 8,655
========= ======== =========
----------
(1) On October 23, 2003, the Superintendency of Banking (now Superintendency of
Finance) through its External Circular 040, modified the treatment of
financial leases. Since January 1, 2004 they are accounted for as part of
the loan portfolio.
(8) CUSTOMER ACCEPTANCES AND DERIVATIVES
The Bank's rights and commitments from derivatives operations as
of December 31, 2004 and December 31, 2005 were as follows:
2004 2005
---------- ---------
CUSTOMER ACCEPTANCES
Current Ps 64,515 Ps 62,282
Overdue 1,979 704
---------- ---------
TOTAL 66,494 62,986
---------- ---------
DERIVATIVES
(Fair value of derivatives instruments)
NEXT DAY OPERATIONS
Foreign exchange rights contracts to buy 94,891 296
Foreign exchange rights contracts to sell 9,122 1,630
Financial instruments rights to buy (local currency) 2,451 14,805
Financial instruments rights to sell (Local currency) 3,010
---------- ---------
Total rights 106,464 19,741
---------- ---------
Foreign exchange commitments contracts to buy (95,133) (295)
Foreign exchange commitments contracts to sell (9,102) (1,614)
Financial instruments commitments to buy (local currency) (2,448) (14,756)
Financial instruments commitments to sell (local currency) -- (3,006)
---------- ---------
Total obligations (106,683) (19,671)
---------- ---------
F-49
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
------------ ------------
TOTAL NEXT DAY OPERATIONS (219) 70
FORWARD CONTRACTS
Foreign exchange rights contracts to buy 2,988,149 2,284,278
Foreign exchange rights contracts to sell 4,142,648 3,304,346
Financial instruments rights to buy (local currency) 338,543 956,244
Financial instruments rights to sell (local currency) 273,656 821,967
Other rights 2,385 --
------------ ------------
Total rights 7,745,381 7,366,835
Foreign exchange commitments contracts to buy (3,078,485) (2,372,882)
Foreign exchange commitments contracts to sell (4,076,909) (3,184,882)
Financial instruments commitments to buy (local currency) (336,544) (950,569)
Financial instruments commitments to sell (local currency) (275,713) (824,432)
------------ ------------
Total obligations (7,767,651) (7,332,765)
------------ ------------
TOTAL FORWARD CONTRACTS (22,270) 34,070
------------ ------------
FUTURES CONTRACTS
Foreign exchange rights contracts to buy Ps 14,578 Ps 14,860
Foreign exchange rights contracts to sell 52,723 9,151
Financial instruments rights to buy (local currency) -- 9,394
Financial instruments rights to sell (local currency) -- 9,412
------------ ------------
Total rights 67,301 42,817
------------ ------------
Foreign exchange commitments contracts to buy (14,578) (14,860)
Foreign exchange commitments contracts to sell (52,723) (9,151)
Financial instruments commitments to buy (local currency) -- (9,394)
Financial instruments commitments to sell (local currency) -- (9,412)
------------ ------------
Total obligations (67,301) (42,817)
------------ ------------
TOTAL FUTURE CONTRACTS -- --
------------ ------------
SWAPS
Foreign exchange right contracts -- 765,046
Interest rate rights contracts 8,227 33,248
Foreign exchange commitments contracts -- (729,238)
Interest rate commitments contracts (8,338) (32,633)
------------ ------------
TOTAL SWAPS (111) 36,423
------------ ------------
OPTIONS
Foreign exchange call options -- (18)
Foreign exchange put options -- (111)
------------ ------------
TOTAL OPTIONS -- (129)
------------ ------------
------------ ------------
TOTAL CUSTOMER ACCEPTANCES AND DERIVATIVES Ps 43,894 Ps 133,420
------------ ------------
F-50
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank currently has an investment portfolio in local and foreign
currencies that allows it to offer foreign exchange and interest rate
coverage to its clients. By using derivatives, the Bank hedges exchange
risk and protects its foreign-currency investment portfolio. These
derivatives help protect the Bank against exchange-rate fluctuation and
increase the predictability of the Bank's yield on foreign-currency
investments.
The Bank derivatives' policy is to maintain active and passive
positions with clients with the intent to reduce interest rate and exchange
rate risk as much as possible. Within the amount of credit granted to the
Bank's clients there is a portion for the management of derivatives.
For this reason, the Bank never carries out any operation of this type
unless the client has the capacity to obtain a credit from the Bank.
Under the rules of the Superintendency of Banking, the Bank's
derivatives portfolio is marked to market daily. Unrealized gains and
losses are expressed in the statement of operations.
For forward contracts as of December 31, 2005, the average cost of
rights and commitments relating to the purchase of financial instruments is
8.73% with an average maturity of 8 days and the average yield from rights
and commitments relating to the sale of financial instruments is 6.79% with
an average maturity of 2 days.
The average yield from rights and commitments relating to the sale of
foreign currency as of December 31, 2005 is 2.38% annually with an average
maturity of 101 days. The average yield from rights and commitments
relating to the purchase of foreign currency is 1.57% annually with an
average maturity of 72 days.
The rates and the maturities indicated for forward contracts are the
same for futures contracts.
The average value of hedging portfolio during the year 2005 was US$
3,578 and the average yield was 1.03%.
(9) ACCOUNTS RECEIVABLE
As of December 31, 2004 and 2005, accounts receivable consisted of the
following:
2004 2005
-------- ---------
Credit card compensation Ps90,417 Ps242,225
Overnight funds sold 668 836
Commissions 8,875 17,561
Sierras del Chico y Chico Oriental 3,098 3,462
REFCO -- 53,036
Sale of Abocol and Subsidiaries -- 27,770
Renting 448 727
F-51
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
--------- ---------
Advances to contractors and honoraries 12,923 81,064
Commitment seller 3,183 10,639
Warehousing services 9,135 8,134
Dividends 632 1,319
Services and properties sells 34,102 58,250
Employee advances 273 267
Banco de Comercio Exterior de Colombia ("Bancoldex") 900 900
Fondo de Garantias de Instituciones Financieras ("Fogafin") 8,139 26,167
Other receivables 15,922 88,940
--------- ---------
TOTAL ACCOUNTS RECEIVABLE 188,715 621,297
Allowance for accounts receivable losses (14,840) (30,984)
--------- ---------
ACCOUNTS RECEIVABLE Ps173,875 Ps590,313
========= =========
The activity in the allowance for accounts receivable during the years
ended December 31, 2003, 2004 and 2005 is as follows:
2003 2004 2005
-------- -------- --------
Balance at beginning of year Ps 7,140 Ps15,367 Ps14,840
Provision for uncollectible amounts 13,303 6,923 25,121
Charge-offs (1,474) (2,292) (7,851)
Balance at beginning of year (Sufinanciamiento) 593 -- --
Effect of exchange rate -- -- (163)
Reversal of provision and recoveries (1)(2) (4,195) (5,158) (963)
-------- -------- --------
Balance at end of year Ps15,367 Ps14,840 Ps30,984
======== ======== ========
----------
(1) Includes lease reclassification required by Superintendency of Banking (now
Superintendency of Finance) by External Circular 048 of 2004 and
liquidation of CTI Cargo Company.
(2) For 2005, includes addition of Conavi, Corfinsura and Suleasing, in this
way includes reversal of Abocol, Sociedad Portuaria Mamonal, Fertillanos
and Abocol Costa Rica.
(10) PREMISES AND EQUIPMENT
At December 31, 2004 and December 31, 2005 premises and equipment
consisted of the following:
2004 2005
---------- -----------
PREMISES AND EQUIPMENT
Land Ps 49,357 Ps 65,750
Buildings 212,036 305,895
Warehouses 29,663 18,352
Furniture, equipment and fixtures 126,099 191,189
F-52
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
---------- -----------
Computer equipment 199,196 370,532
Vehicles 4,281 7,231
Construction in progress 17,415 54
Machinery and equipment 70,070 14,956
Equipment in - transit(1) 38,113 210,920
---------- -----------
Total 746,230 1,184,879
Less accumulated depreciation (375,069) (537,454)
Allowance (24,918) (23,696)
---------- -----------
PREMISES AND EQUIPMENT, NET Ps 346,243 Ps 623,729
========== ===========
----------
(1) Includes goods being imported to be allocated to leasing.
Premises and equipment depreciation expense for the years ended
December 31, 2003, December 31, 2004 and December 31, 2005, amounted to
Ps37,738, Ps42,832 and Ps79,293 respectively.
(11) OPERATING LEASES
At December 31, 2004 and 2005 operating leases consisted of the
following:
2004 2005
-------- ---------
OPERATING LEASES
Machinery and equipment Ps 1,358 Ps 1,989
Vehicles 2,273 172,745
Furniture, equipment and fixtures -- 3,428
Computer equipment 10,396 27,550
Real goods -- 1,505
-------- ---------
TOTAL 14,027 207,217
Rents 243 4,229
Less accumulated depreciation (5,878) (66,169)
Allowance (81) (1,303)
-------- ---------
OPERATING LEASES, NET Ps 8,311 Ps143,974
======== =========
Operating lease depreciation expense for the years ended December 31,
2003, 2004 and 2005, amounted to Ps2,887, Ps4,040 and Ps8,340
respectively.
F-53
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(12) PREPAID EXPENSES AND DEFERRED CHARGES
At December 31, 2004 and December 31, 2005, prepaid expenses and
deferred charges consisted of the following:
2004 2005
-------- --------
PREPAID EXPENSES:
Insurance premiums Ps 5,242 Ps13,677
Interest 59 30
Other 1,199 913
-------- --------
TOTAL PREPAID EXPENSES 6,500 14,620
-------- --------
DEFERRED CHARGES:
Studies and projects 204 1,669
Computer programs 6,726 5,971
Remodeling 593 7
Leasehold improvements 815 1,017
Deferred taxes non-banking entities 240 958
Stationery and supplies 239 424
Contributions 5 --
Other 628 2,232
-------- --------
TOTAL DEFERRED CHARGES Ps 9,450 Ps12,278
-------- --------
TOTAL PREPAID EXPENSES AND DEFERRED CHARGES Ps15,950 Ps26,898
======== ========
(13) OTHER ASSETS
At December 31, 2004 and December 31, 2005 other assets consisted of
the following:
2004 2005
--------- ---------
OTHER ASSETS:
Value added tax deductible and withholding taxes Ps111,532 Ps 37,708
Investment in Trust 53,349 70,764
Deposits 20,543 89,564
Assets to place in lease contracts 70,746 352,079
Inventory 52,202 5,295
Other 7,022 8,178
--------- ---------
TOTAL OTHER ASSETS Ps315,394 Ps563,588
========= =========
F-54
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(14) GOODWILL
The activity of the goodwill during the years ended December 31, 2003,
December 31, 2004 and December 31, 2005 is as follows:
2003 2004 2005
--------- --------- ---------
Balance at beginning of year Ps118,903 Ps 99,910 Ps 73,607
Balance at beginning of year (Sufinanciamiento) 4,433 -- --
Additions 36,347 -- --
Amortization (2) (59,773) (26,303) (22,648)
--------- --------- ---------
Balance at end of year (1) Ps 99,910 Ps 73,607 Ps 50,959
========= ========= =========
----------
(1) In the Annual Report of year 2003, goodwill was included in the line
"prepaid expenses, deferred charges and other assets" of the consolidated
balance sheet. For year 2004, goodwill is disclosed independently.
(2) As of December 31, 2003, included the amortization of the goodwill derived
from: merger with Banco de Colombia, the acquisition of Sufinanciamiento
and the increase in the participation on Fiducolombia.
(15) FORECLOSED ASSETS
At December 31, 2004 and December 31, 2005, foreclosed assets
consisted of the following:
2004 2005
---------- ----------
Equity securities Ps 54,866 Ps 52,273
Real estate 95,637 179,498
Other assets 2,568 4,765
---------- ----------
TOTAL 153,071 236,536
Allowance (140,865) (205,176)
---------- ----------
TOTAL FORECLOSED ASSETS, NET Ps 12,206 Ps 31,360
========== ==========
The following is a summary of equity securities classified as
foreclosed assets:
2004 2005
-------- --------
Urbanizacion Sierras del Chico Ltda Ps11,567 Ps11,567
Chico Oriental Numero 2 Ltda. 14,053 14,053
Pizano S.A. 3,663 3,663
Convertible Securities Pizano S.A. 3,221 3,221
Lineas Agromar trust 1,399 1,547
Emcocables 2 Santa Ana trust 837 1,752
F-55
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
-------- --------
Pagos Procampo trust 7,044 7,044
Textiles Fabricato 4,313 297
Conconcreto S.A. 2,622 2,622
Holguines Cali -- 1,485
Other 6,147 5,022
-------- --------
TOTAL Ps54,866 Ps52,273
======== ========
The activity of the valuation allowance for foreclosed assets during
the years ended December 31, 2003, December 31, 2004 and December 31, 2005
is as follows:
2003 2004 2005
--------- --------- ---------
Balance at beginning of year Ps107,871 Ps135,090 Ps140,865
Balance at beginning of year (Conavi,
Corfinsura and subsidiaries) -- -- 65,814
Balance at beginning of year (Sufinanciamiento) 222 -- --
Provision 32,458 23,002 44,665
Charge-offs -- -- (772)
Recoveries (5,461) (17,227) (45,445)
Reclassifications -- -- 52
Effect of changes in exchange rates -- -- (3)
--------- --------- ---------
Balance at the end of year Ps135,090 Ps140,865 Ps205,176
========= ========= =========
(16) REAPPRAISAL OF ASSETS
The following describes reappraisals of assets at December 31, 2004
and December 31, 2005:
2004 2005
--------- ---------
Asset revaluations Ps267,941 Ps330,915
Less: proportional equity revaluations (198,072) (196,159)
Less: minority interests (27,632) (24,277)
--------- ---------
TOTAL EQUITY REVALUATIONS Ps 42,237 Ps110,479
========= =========
The proportional equity revaluations refer to the acquisition of
investments in Colcorp S.A., Almacenar S.A., Leasing Colombia S.A.,
Fiducolombia S.A., Suvalor S.A., Sufinanciamiento S.A., Banco Corfinsura
Internacional Inc, Multienlace S.A., 3001 S.A. (in the process of being
wound up) and affiliates calculated on acquisition date. Consolidation
rules require this value to be unchanged while the investment is held or
no new acquisitions are made.
F-56
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(17) INTERBANK BORROWINGS
Interbank borrowings, primarily denominated in U.S. dollars, at
December 31, 2004 and 2005 are summarized as follows:
2004 2005
--------- -----------
FOREIGN BANKS
Short-term Ps137,965 Ps1,381,696
Long-term 108,317 323,772
--------- -----------
TOTAL Ps246,282 Ps1,705,468
========= ===========
Short-term interbank borrowings, obtained from other banks for
liquidity purposes, are unsecured and generally have maturities ranging
from 90 to 180 days.
Interest rates on U.S. dollar denominated short-term borrowings from
foreign banks averaged 2.65% and 3.62% in 2004 and 2005, respectively.
For long term interbank borrowings, the average interest rate was
2.26% and 3.70% in 2004 and 2005, respectively, and maturities at December
31, 2005 were as follows:
2005
---------
2006 Ps196,566
2007 67,273
2008 59,933
---------
Ps323,772
=========
(18) BORROWINGS FROM DOMESTIC DEVELOPMENT BANKS
The Colombian government has established programs to promote the
development of specific sectors of the economy. These sectors include
foreign trade, agriculture, tourism and many other industries. These
programs are under the administration of the Colombian Central Bank and
various government entities.
Under such programs, the Bank receives a loan request from an
applicant operating in a designated economic sector. The Bank then performs
a full credit analysis of the applicant based upon its normal credit
criteria. If such criteria are met, the Bank applies to the appropriate
government agency for funding. The government agency reviews the loan
application to determine its compliance with policy objectives and may also
perform an independent credit analysis of the applicant. Upon approval, the
agency disburses funds to the Bank. The Bank, in turn, disburses the loan
to its customer and assumes all credit risk.
F-57
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
These loans generally bear interest from 3% to 6% above the average
rates paid by domestic banks on short-term time deposits. Loan maturities
vary depending on the program (ranging from one to ten years). The Bank
funds approximately 0% to 15% of the total loan balance, with the remainder
being provided by the respective government agencies. Loans to customers
are in the same currency and maturities as the borrowings from the
agencies.
As of December 31, 2004 and December 31, 2005, borrowings from
domestic development banks received from certain Colombian government
agencies consisted of the following:
2004 2005
--------- -----------
Fondo para el Financiamiento del Sector Agropecuario Ps216,631 Ps 383,904
Banco de Comercio Exterior de Colombia ("Bancoldex") 334,855 957,511
Findeter 220,820 612,297
Other 85,613 268,371
--------- -----------
TOTAL Ps857,919 Ps2,222,083
========= ===========
Interest rates on borrowings from domestic development banks averaged
8.38% and 7.03% in 2004 and 2005, respectively, in local currency and 7.45%
and 5.12% in 2004 and 2005, respectively, in foreign currency. Maturities
at December 31, 2005 were as follows:
2006 Ps 448,774
2007 286,707
2008 424,452
2009 318,946
2010 377,837
2011 and thereafter 365,367
-----------
TOTAL Ps2,222,083
===========
(19) OTHER LIABILITIES
As of December 31, 2004 and December 31, 2005, other liabilities
consisted of the following:
2004 2005
------- --------
Unearned income Ps8,760 Ps15,373
Accrued severance Law 50, net of advances 5,033 14,453
Accrued severance pre-Law 50, net of advances to employees
of Ps 11,652 and Ps 11,354 in 2004 and 2005, respectively 12,378 13,259
Accrued payroll and other severance benefits 23,413 37,707
F-58
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
--------- ---------
Accrued pension obligations net of deferred cost 86,353 88,682
Negative goodwill 1,426 9,959
Deferred interest on restructured loans 45,286 56,974
Deferred tax liability 1,112 100,353
Advances 42,080 103,213
Other 7,091 19,995
--------- ---------
TOTAL Ps232,932 Ps459,968
========= =========
Unearned income consists of prepayments of interest by customers.
Terms for the prepayment of interest are established when the loan is
originated. Unearned income is generally amortized on a straight-line basis
over the term for which interest has been prepaid.
Colombian labor regulations entitle each employee hired before
January 1, 1991 to severance pay in an amount equal to such employee's last
monthly salary multiplied by the number of years in service. The Bank
increases the accrued liability for such severance benefits whenever an
employee's salary is increased. To allow greater flexibility in labor
contracts, the Colombian government enacted Law 50 in 1990, which, among
other things, permits companies to negotiate a waiver of the retroactivity
component of severance pay with their employees. In August 1994, the Bank
and its executive employees agreed on a plan, which waived the
retroactivity component of severance pay.
In accordance with the Colombian Labor Code, employers must pay
retirement pensions to employees who fulfill certain requirements as to age
and time of service. However, the Social Security Institute and other
private funds have assumed a large portion of this obligation.
Pension obligation
The following is an analysis of the Bank's pension obligations
for the years ended December 31, 2003, December 31, 2004 and December 31,
2005:
PROJECTED
PENSION
LIABILITY DEFERRED COST NET
--------- ------------- ---------
BALANCE AT DECEMBER 31, 2002 Ps 78,563 Ps(10,241) Ps 68,322
========= ========= =========
Adjustment per actuarial valuation 10,120 (10,120) --
Benefits paid (9,245) -- (9,245)
Pension expense -- 19,501 19,501
--------- --------- ---------
BALANCE AT DECEMBER 31, 2003 Ps 79,438 Ps (860) Ps 78,578
========= ========= =========
Adjustment per actuarial valuation 17,064 (17,064) --
Benefits paid (9,364) -- (9,364)
Pension expense -- 17,139 17,139
--------- --------- ---------
F-59
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
PROJECTED
PENSION
LIABILITY DEFERRED COST NET
--------- ------------- ---------
BALANCE AT DECEMBER 31, 2004 Ps 87,138 Ps (785) Ps 86,353
========= ========= =========
Balance at beginning of year (Corfinsura) 356 -- 356
Decrease for Abocol sale (5,292) 785 (4,507)
Reclassification (51) -- (51)
Adjustment per actuarial valuation 16,715 (16,715) --
Benefits paid (10,184) -- (10,184)
Pension expense -- 16,715 16,715
--------- --------- ---------
BALANCE AT DECEMBER 31, 2005 Ps 88,682 Ps -- Ps 88,682
========= ========= =========
The present value of the obligation for pensions as of December 31,
2003, 2004, and 2005 was determined on the basis of actuarial calculations
in conformity with Colombian law. The significant assumptions utilized in
the actuarial calculations for the years ended December 31, 2003 2004 and
2005 were as follows:
2003 2004 2005
----- ----- -----
Discount rate 23.03% 21.23% 19.06%
Future pension increases 15.33% 13.72% 12.01%
(20) LONG TERM-DEBT
The scheduled maturities of long term-debt at December 31, 2005 are as
follows:
2006 Ps 675,001
2007 457,396
2008 195,622
2009 203,282
2010 105,281
2011 and thereafter 11,730
-----------
Ps1,648,312
===========
Long term debt consists of bonds issued by Bancolombia
(unconsolidated), Leasing Colombia S.A., Fundicom S.A., Sufinanciamiento
S.A. and by Surenting S.A. bearing interest at the following rates:
F-60
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
BANCOLOMBIA S.A.
----------------------------------
Issue Date Maturity Date Rate
---------- ------------- -----
1997(1) 03-Sep-07 13.38%
2000(1) 30-Nov-02 8.96%
2001(1) 04-Apr-07 8.96%
2001 20-Dec-10 9.35%
2002(1) 21-Jun-10 8.59%
2004 11-Feb-06 8.31%
2004 11-Feb-07 9.14%
2004 11-Feb-07 8.64%
2004 11-Feb-09 9.98%
2004 11-Feb-09 9.03%
(1) Each of this issues has a different nominal rate; for this reason annual
rates showed above are calculated based on the interest accrued in 2005.
LEASING COLOMBIA S.A.
Issue Date Maturity Date Rate
---------- ------------- ----
2001 From 18 to 60 months Up to an annual rate of the DFT plus 3%
2002 From 18 to 72 months Up to an annual rate of the DFT plus 3%
2003 From 12 to 60 months Up to DFT annual rate + 5.00% annual rate
Up to CPT - 12.00% annual effective rate
2004 From 18 to 60 months DTF or CPI
2004 From 18 to 60 months DTF or CPI
FUNDICOM S.A.
Issue Date Maturity Date Rate
---------- ------------- ----
10-Aug-03 10-Aug-15 CPI
SUFINANCIAMIENTO S.A.
Issue Date Maturity Date Rate
---------- ------------- -------
11-Mar-04 11-Mar-14 CPI + 2%
29-Nov-05 06-Dec-15 CPI + 2%
SURENTING S.A.
Issue Date Maturity Date Rate
---------- ------------- ----------
30-Aug-00 30-Aug-07 CPI + 9.49%
28-Jan-03 28-Jan-08 CPI + 7.25%
28-Jan-03 28-Jan-06 DTF + 2.5%
28-Jan-03 28-Jan-07 DTF + 3%
28-Jan-03 28-Jan-09 CPI + 6.7%
----------
DTF: Average weekly rate of time deposits (issued by commercial and mortgage
banks and commercial finance companies) with a maturity of 90 days.
CPI: Consumer price index
F-61
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(21) ACCRUED EXPENSES
As of December 31, 2004 and December 31, 2005, accrued expenses
consisted of the following:
2004 2005
-------- ---------
Interest payable Ps 1,046 Ps --
Income tax payable 10,547 41,125
Fines and sanctions (1) 38,829 64,486
Labor obligations 7,617 9,643
Other 13,610 15,605
-------- ---------
TOTAL Ps71,649 Ps130,859
======== =========
----------
(1) See Note 26(d) as it refers to the Bank.
For 2003, 2004 and 2005 the statutory income tax was 37% for
Bancolombia unconsolidated, Leasing Colombia S.A., Colcorp S.A. and
Fiducolombia S.A. according to an agreement of tax stability and 38.5% for
the other Subsidiaries, respectively.
The Bank's tax liability is calculated based on the greater of (i) net
taxable income and (ii) presumed income, which, in 2004 and 2005 is 6% of
stockholders' equity.
The following is a reconciliation of taxable income before income
taxes for the years ended December 31, 2003, December 31, 2004 and December
31, 2005:
2003 2004 2005
---------- ---------- -----------
Income before income taxes Ps 532,019 Ps 817,488 Ps1,224,396
Adjustments for consolidation purposes, net (26,722) 209,987 37,032
Difference between net operating loss
carry-forwards and presumed income 16,404 (134,715) 8,149
Non-deductible provisions, costs and expenses 107,926 176,454 130,528
Non-taxable or exempt income (71,559) (350,338) (364,663)
Difference between monetary correction for
tax purposes and for financial reporting purposes (40,040) (47,484) (38,028)
Excess of accrued income over valuation income (50,514) (20,905) (130,265)
Amortization of excess of presumed income over
ordinary income (298,180) (9,242) (94,562)
Valuation derivatives effect -- (11,788) (100,495)
Other -- -- (156,122)
---------- ---------- -----------
Taxable income Ps 169,334 Ps 629,457 Ps 515,970
---------- ---------- -----------
Statutory tax rate 36.84% 37.75% 34.69%
---------- ---------- -----------
Estimated current income tax Ps 62,391 Ps 237,620 Ps 178,992
Deferred income tax expense (benefit) 244 1,190 98,523
---------- ---------- -----------
TOTAL Ps 62,635 Ps 238,810 Ps 277,515
========== ========== ===========
F-62
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Income taxes for the years ended December 31, 2004 and 2005 are
subject to review by the tax authorities. The Bank management and its legal
advisors believe that no significant liabilities in addition to those
recorded will arise from such a review.
The following table presents, for the fiscal years cited, which
amortizations of losses can be recorded and the excess of presumed income
over ordinary income:
FISCAL LOSSES TO AMORTIZE
INMOBILIARIA
BANCOL S.A. FUNDICOM S.A. COMECOL S.A. TOTAL
------------ ------------- ------------ -------
2006 Ps-- Ps 267 Ps 154 Ps 421
2007 -- -- 915 915
2008 -- 2,378 550 2,928
2009 91 -- 497 588
2010 -- -- -- --
----- -------- -------- --------
Ps 91 Ps 2,645 Ps 2,116 Ps 4,852
===== ======== ======== ========
EXCESS OF PRESUMED INCOME OVER ORDINARY INCOME
BANCOLOMBIA INMOBILIARIA FUNDICOM COMECOL ALMACENAR SURENTING
S.A. COLCORP S.A. BANCOL S.A. S.A. S.A. S.A. S.A. TOTAL
----------- ------------ ------------ -------- ------- --------- ---------- ----------
2006 Ps -- Ps -- Ps -- Ps 669 Ps -- Ps -- Ps -- Ps 669
2007 25,554 -- -- 153 461 -- -- 26,168
2008 29,795 3,667 -- 894 390 1,621 -- 36,367
2009 35,931 4,430 63 535 335 2,403 1,718 45,415
2010 -- -- 99 -- -- 2,354 -- 2,453
--------- -------- ------ -------- -------- -------- -------- ----------
Ps 91,280 Ps 8,097 Ps 162 Ps 2,251 Ps 1,186 Ps 6,378 Ps 1,718 Ps 111,072
========= ======== ====== ======== ======== ======== ======== ==========
As a result of the Merger, amortization of the excess of presumed
income over ordinary income originated in Conavi and Corfinsura for
Ps 25,266 and Ps 66,014 respectively, can be recorded by Bancolombia.
(22) SUBSCRIBED AND PAID-IN CAPITAL
Subscribed and paid-in capital consisted of the following:
2003 2004 2005
----------- ----------- -------------
AUTHORIZED SHARES 670,000,000 670,000,000 1,000,000,000
=========== =========== =============
ISSUED AND OUTSTANDING:
Common shares with a nominal value of 500 pesos 398,259,608 398,259,608 509,704,584
Preference shares with a nominal value of 500 pesos 178,435,787 178,435,787 218,122,421
=========== =========== =============
F-63
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Non-voting shares with a preferred dividend will be entitled to
receive a minimum preferred dividend equal to one percent (1%) of the
initial offering price per preferred share for each fiscal year the bank
reports profits after the Bank deducts an amount to compensate for any
losses that affected its capital and any necessary contribution to a
reserve account that must be made by law, and in compliance with Colombian
regulation, but before the Bank creates or increases any other reserve. In
addition, the dividend per share paid on preferred stock cannot be less
than the dividend per share paid on ordinary stock (and will be increased
if a higher dividend on ordinary stock is declared).
Each non-voting share with preferred dividend confers on its holder
the right to participate in the shareholders' meetings and to vote solely
on the matters provided for by law and in the By-laws.
A foreign capital institutional investment fund in Colombia has been
constituted to hold certain non-voting preferred shares issued by the Bank
as custodian and American Depositary Shares (ADSs) related to those
non-voting preferred shares have been issued abroad.
(23) APPROPRIATED RETAINED EARNINGS
Pursuant to Colombian law, 10% of the net income of the Bank and its
Colombian Subsidiaries in each year must be appropriated with a credit to a
"legal reserve fund" until its balance is equivalent to at least 50% of the
subscribed capital. This legal reserve may not be reduced to less than the
indicated percentage, except to cover losses in excess of undistributed
earnings.
The component "other" in the consolidated statements of stockholders'
equity corresponds to the Subsidiaries' retained earnings that are not
eliminated in the consolidation process, because the investment in the
subsidiaries is accounted for at cost.
Appropriated retained earnings consist of the following:
2003 2004 2005
--------- ----------- -----------
Legal reserve Ps497,075 Ps 638,716 Ps 886,159
Additional paid - in capital 107,359 107,359 268,005
Other reserves 135,920 264,406 611,834
--------- ----------- -----------
TOTAL Ps740,354 Ps1,010,481 Ps1,765,998
========= =========== ===========
In addition, paid-in capital of Ps 107,359 at December 31, 2003, 2004
and Ps 268,005 at December 31, 2005 was recorded as part of the legal
reserve, as required by the Superintendency of Finance (before
Superintendence of Banking).
F-64
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(24) DIVIDENDS DECLARED
The Bank's shareholders declared common stock dividends with respect
to the preceding year's earnings of the Bank to be payable during 2004,
2005 and 2006 as indicated below:
2004 2005 2006
--------------------------- --------------------------- ---------------------------
Preceding year's unconsolidated
earnings (losses) Ps309,772 Ps 430,807 Ps737,389
272 pesos per share payable 376 pesos per share payable 508 pesos per share payable
in four quarterly in four quarterly in four quarterly
installments of 68 pesos installments of 94 pesos installments of 127 pesos
Dividends in cash per share from April 2004 per share from April 2005 per share from April 2006
on 398,259,608 and on 398,259,608 and on 509,704,584 and
178,435,787 common and 178,435,787 common and 218,122,421 common and
preferred shares, preferred shares, preferred shares,
respectively. respectively. respectively.
Total dividends declared Ps156,861 Ps 216,838 Ps369,736
Dividends payable at December 31 Ps 44,099 Ps73,478
(25) MEMORANDUM ACCOUNTS
At December 31, 2004 and 2005, memorandum accounts consisted of the
following:
2004 2005
------------ ------------
TRUST:
Investment trusts Ps14,551,133 Ps31,845,679
COMMITMENTS:
Unused credit card limits 1,721,090 2,287,359
Civil demands against the Bank 1,982,256 2,148,018
Issued and confirmed letters of credit 421,643 493,220
Uncommitted lines of credit 347,833 549,161
Bank guarantees 137,375 347,556
Approved credits not disbursed 17,824 408,949
Nation account payable (546 law) -- 105,459
Other 1,250 12,201
------------ ------------
TOTAL Ps19,180,404 Ps38,197,602
============ ============
F-65
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
OTHER MEMORANDUM ACCOUNTS:
2004 2005
------------ -------------
MEMORANDUM ACCOUNTS RECEIVABLE:
Tax value of assets Ps12,383,426 Ps 25,950,846
Assets and securities given in custody 3,985,019 6,837,310
Assets and securities given as a collateral 934,208 2,209,380
Negotiable investments in debt securities 2,143,814 5,199,740
Written-off assets 638,654 935,438
Quotas of leasing to receive 1,082,024 3,030,656
Investments held to maturity 767,261 1,113,369
Adjustments for inflation of assets 217,785 181,512
Accounts to receive yields trading investments
in debt titles 165,073 214,358
Investments available for the sale in debt titles 1,672,536 1,587,299
Remittances sent for collection 27,259 28,869
Amortized debt securities investment -- 2,209,254
Other memorandum account receivable 1,265,149 2,998,143
------------ -------------
TOTAL Ps25,282,208 Ps 52,496,174
------------ -------------
MEMORANDUM ACCOUNTS PAYABLE:
Assets and securities received as collateral Ps 8,406,554 Ps 17,714,293
Qualification commercial loans 7,459,747 12,113,735
Assets and securities received in custody 1,776,613 1,867,850
Tax value of shareholders' equity 2,205,064 4,333,289
Qualification consumer loans 1,653,473 2,449,782
Adjustment for inflation of equity 490,297 897,280
Qualification small loans 91,168 116,508
Merchandise in owned warehouses 66,339 61,545
Merchandise in third-party warehouses 47,026 48,048
Underwriting -- 25,000
Qualification financial leasing 887,669 2,684,627
Qualification operating leasing 8,392 145,277
Qualification mortgage loans 291 1,415,812
Other memorandum account payable 10,677,192 4,028,713
------------ -------------
TOTAL Ps33,769,825 Ps 47,901,759
------------ -------------
TOTAL MEMORANDUM ACCOUNTS Ps78,232,437 Ps138,595,535
============ =============
F-66
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(26) COMMITMENTS AND CONTINGENCIES
THE BANK
A) CONTINGENCIES COVERED BY FOGAFIN:
During the privatization process of Banco de Colombia (which merged
with and into the Bank in 1998), completed on January 31, 1994, the Fogafin
made a commitment to assume the cost of contingent liabilities resulting
from events that occurred before the date when the stock was sold, that
should be claimed within the five (5) subsequent years. Fogafin's guarantee
covers eighty percent (80%) of the first Ps 10,000, discounting allowances,
and thereafter, one hundred percent (100%), all annually adjusted according
to the consumer price index.
As established in the guarantee contract, Banco de Colombia committed
to transfer to the Fogafin all the rights that it then had in Sierras del
Chico Ltda. and Chico Oriental Numero Dos Ltda. for an amount no lesser
than the book value as of December 31, 1993, including inflation
adjustments and excluding any valuations. A judicial process was initiated
questioning the validity and binding effect of the commitment to transfer
these rights to Fogafin, but no final ruling has been made.
At December 31, 2004 and 2005, the civil contingencies covered by the
guarantee amounted to approximately Ps 12,185 and Ps 11,167, respectively,
with allowances at the same dates amounting to Ps 1,370 and Ps 957. Labor
contingencies amount to Ps 305 and have allowances of Ps 153 respectively;
these figures show no variation with respect to 2004.
B) LEGAL PROCESSES
At December 31, 2004 and 2005, other than the litigation discussed
under (a) above, there were labor-related claims against the Bank amounting
to approximately Ps 10,015 and Ps 11,885, respectively (the final result of
such litigation is not predictable due to the controvertible nature of the
obligations). The allowances for contingencies on those dates amounted to
Ps 4,911 and Ps 5,938, respectively.
At December 31, 2004 and 2005, there were ordinary civil lawsuits,
group actions, and civil actions within criminal and executive processes
against the Bank with total claims of approximately Ps 301,823 and Ps
369,452, respectively and with allowances on the same dates of Ps 4,327 and
Ps 16,729, respectively.
Allowances are recorded when processes are ruled in the first instance
against the Bank or based on the opinion of the attorneys handling the
litigations.
At December 31, 2005, the Superintendency of Finance (before
Superintendency of Banking) has imposed fines on the Bank amounting to Ps
1,738, for which complete allowances have been created.
F-67
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
At December 31, 2005, Bancolombia (unconsolidated) contingencies in an
amount over Ps 5,000 was:
ACTUAL
EXPOSURE AT
INITIAL DECEMBER 31,
PROCESS EXPOSURE 2005 ALLOWANCE LIKELIHOOD
------- ---------- ------------ --------- ----------
Arbitration process Jaime Gilinski and Others against
Bancolombia and some of its administrators US$675,000 US$720,000 -- Remote
Felix Gaitan Cendales and others. Civil Court 29 of Bogota Ps 187,045 Ps 187,045 -- Remote
Popular action Carlos Julio Aguilar and Other
Administrative Tribunal of the Department
of Valle 22,040 22,040 -- Remote
Rodrigo Garavito and others against Bancolombia
Administrative Tribunal of the Department of Cundimarca 20,000 20,000 -- Remote
Class action Luis Alberto Duran (1) 421,080 21,469 21,469 Probable
Vizcaya Centro Comercial S.A. 14,000 14,000 -- Remote
Pavicon 11,166 12,552 -- Remote
Inversiones C.B. S.A. 12,468 12,468 -- Remote
Editorial Oveja Negra Ltda. and Jose Vicente Katerain
Velez 10,240 10,240 512 Remote
Murgueitio and Santander 8,000 8,000 -- Remote
Invico Ltda. Processes. Civil Court 9 of Bogota 5,000 6,601 -- Remote
Costrucc.Rojas Jimenez & CIA. S. EN C. 6,277 6,277 628 Probable
Julio Enrique Olaya. Civil Court 14 of Bogota 1,523 5,594 5,594 Probable
Constructodo against Corvivienda. Civil Court 18 of Bogota 3,500 5,070 -- Remote
Jaime Augusto Rueda Angel. Civil Court 29 of Bogota 1,706 8,660 -- Remote
Income and complementary taxes 1996 2,409 7,332 7,332 Probable
Income and complementary taxes 1996 2,341 6,087 3,044 Probable
----------
(1) The allowance correspond to principal and interest
F-68
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
C) CONTINGENCIES RELATED TO THE PURCHASE OF 51% OF FORMER BANCO DE
COLOMBIA S.A. ("BANCO DE COLOMBIA") STOCK AND LATER MERGER WITH BANCO
INDUSTRIAL COLOMBIANO ("BIC", NOW BANCOLOMBIA)
The Gilinski Case
Contingency guarantee, former Banco de Colombia
With respect to the arbitration process filed by Bancolombia against
Jaime Gilinski, as joint and several debtor, discovery is soon expected,
addressing the claims presented by the Bank regarding the contingencies of
former Banco de Colombia, and putting into effect the trust guarantee set
up for this purpose, covering a value of up to US$ 30,000. The total amount
claimed in this arbitration process is of approximately Ps 50,614,
excluding monetary adjustment and interest.
Criminal Investigation
On December 26, 2003, the Special Unit for Crime against Public
Administration attached to the Public Prosecutor's Office formally rejected
grounds for a criminal investigation against Jorge Londono Saldarriaga and
Federico Ochoa Barrera, President and Vice-president of Bancolombia,
respectively; this criminal investigation arose as a result of a complaint
filed by the Gilinski family. This decision was subsequently confirmed in
the second instance by the Delegated Unit before the Supreme Court of
Justice of the Public Prosecutor's Office on July 8, 2004.
The Public Prosecutor's Office found that the alleged crimes of fraud,
unauthorized operations with shareholders and the illegal use of public
funds had not been committed and consequently the Bank was fully exonerated
from the indemnity claims filed by the plaintiffs.
In 2005, Messrs. Jaime and Isaac Gilinski filed before the Civil
Division of the Supreme Court of Justice, a writ for the protection of
rights against the Public Prosecutor's Office, the Delegated Prosecutor's
Office before the Supreme Court of Justice and the National Unit of
Prosecutors Specialized in Crimes Against Public Administration, with a
view to reopening the investigation arguing that certain evidence,
collected abroad, was not taken into consideration when first pronouncing
upon this case, thereby constituting a de facto prevention of due process.
By means of a final court ruling issued on August 25, 2005, the Civil
Appeal Division of the Court rejected this writ for protection of rights,
considering that the Public Prosecutor's Office, upon resolving this point
in the second instance, considered that the evidence requested by the
Public Ministry was not relevant to the investigation, which was precisely
what was being alleged by the plaintiffs' attorney. The plaintiffs
therefore lodged an appeal against this decision before the Labor Division
of the Supreme Court, who upheld the original decision given the fact that
a writ for the protection of rights cannot be filed against court rulings.
The writ of protection was selected by the Constitutional Court for
review and a decision in this respect remains pending.
F-69
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Arbitration
With regard to the arbitration resorted by Jaime Gilinski and Isaac
Gilinski and some foreign successor companies of Bancol y cia S. en C.
against the Bank and some of its administrators, in which charges similar
to those previously filed with various administrative and judicial agencies
were alleged, relating to the acquisition process of the majority share of
the former Banco de Colombia by BIC, and the later merger of these two
institutions. The period for producing evidence ended on November 22, 2005,
after which the final arguments were heard. A decision is now pending.
The cause of action consists of the declaration of the inefficacy of
BIC's acquisition of the majority share in the capital of the former Banco
de Colombia, and as secondary causes of action, the declaration that the
contract with the commitment to purchase and sell entered into by and
between the parties is absolutely null and void and does not even exist,
that the acquisition of the Banco de Colombia GDS's and Notes is absolutely
null and void, the declaration of the Bank liability regarding the damages
caused by alleged fraudulent operations and fraudulent representations
regarding the above-mentioned contract; and the last secondary cause of
action if none of the above should prosper was the declaration that the
Bank had defaulted on the above-mentioned contract.
The Bank considers that the possibility of incurring any liability
from this proceeding is remote, given the fact that the legal action lacks
legal and probatory support, and considering that there have been prior
court pronouncements that have exonerated the Bank and its administrators
from similar petitions or petitions related to the petitions made in this
proceeding.
Class Action Luis Alberto Duran Valencia
As of December 31, 2005, the Bogota Supreme Court decision is still
pending on the special appeal for annulment filed by the Bank regarding
reviewing the effective regulations on the decision proffered by
arbitration following the class action filed by Luis Alberto Duran Valencia
and other shareholders of the former Banco de Colombia.
The appeal solely seeks to annul the portion of the award that is
questioned, and that has to do with the court order to pay Ps 19,214, since
with respect to the rulings regarding the rest of the claims, the award
carries a res judicata status.
The Bank considers that a liability to be incurred by the Bank, is
unlikely given the existence of serious arguments that may lead to a
decision that would acknowledge some of the grounds invoked in the appeal
for annulment. The Bank has an allowance in the amount of Ps 21,470, as it
awaits the definitive decision regarding this matter.
F-70
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Popular Action Maximiliano Echeverri M
With respect to the popular action filed by the attorney Maximiliano
Echeverri against the Bank and the Superintendency of Banking and
Securities Superintendency (now known as the Superintendency of Finance)
before the Contentious-Administrative Tribunal in the Department of
Cundinamarca, a final ruling was produced on August 10, 2005, rejecting the
claims of the plaintiff.
The cause of action of this legal action is the declaration of
violation of the group interests for administrative morality and free
economic competition, due to alleged omissions by the Colombian state
supervision and control agencies in the acquisition process of the former
Banco de Colombia and the later merger with BIC, and alleged Bank maneuvers
to prevent the shareholders of the first institution from having all of the
information they required to make the decisions at hand. The appeal filed
by the plaintiff shall be heard by the Council of State, and the
contingency is considered to be somewhat remote, since the merger and
purchase process was carried out in full compliance with all applicable
legislation and following the highest business ethics.
D) NATIONAL TAX AND CUSTOMS AGENCY ("DIAN")
Income and complementary taxes corresponding to 1993 - Conavi
Conavi filed a tax return on April 15, 1994 for the fiscal year of
1993, showing a tax figure of Ps 6,233 and prepayments of Ps 5,194 for a
total of Ps 11,427. In answer to an official notification received from
DIAN, Conavi proceeded to correct its tax return, showing a tax figure of
Ps 6,233 and prepaid tax of Ps 5,929 for a total of Ps 12,162, this being
Ps 735 higher than that initially calculated.
Subsequently DIAN notified Conavi of an order to pay Ps 257, including
interest and bringing the amount in arrears up to date, to which Conavi
proposed an exception from payment, which was declared as having no grounds
by the Collection Division.
Conavi then proceed to file an appeal for reversal. The suit filed by
Conavi for the purpose of annulling the order to pay was rejected by the
Administrative Tribunal of the Department of Antioquia, a decision that was
confirmed on appeal before the Council of State, by means of a ruling
issued November 23, 2005, ordering its return to the tribunal. The sum in
dispute totals Ps 940, including the tax in question plus default interest.
A provision has been set up for this entire amount.
F-71
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Industry and Commerce Tax corresponding to 1995 - Conavi
On April 9, 1996, Conavi filed its Industry and Commerce Tax return on
the basis of 1995, for the fiscal year of 1996 and subsequent payment in
this same period. The Medellin City Council, by means of Settlement Review
Note No. 586 dated May 22, 1998, modified said return on the basis that the
discount totaling Ps 30,200 from the monetary correction account was not
legally authorized. Conavi filed a motion to annul this decision and
reestablish its right, since the aforementioned discount was authorized by
Article 20 Subsection 7 of the Municipal Agreement 061/89 and in Article
212 of Decree 1333 of 1986. The provision of Ps 363 was set up for this tax
contingency, which is considered probable.
Income and complementary taxes corresponding to 1996 former Banco de
Colombia
For the taxable year 1996, when determining the income tax and
complementary taxes, the former Banco de Colombia requested that donations
to universities be considered deductions and a tax discount at the same
time. DIAN proceeded to reject the deduction of the mentioned donations,
arguing that this constituted dual benefit on one sole economic item, and
it deemed that was not allowed pursuant to applicable law.
On April 4, 2000, the Bank filed with the Honorable Cundinamarca
Administrative Court a legal action to declare null and reestablish the
right against administrative acts that modify private liquidation. On April
26, 2001, the Honorable Court proffered its decision not granting the
Bank's petitions. Due to the above, an appeal was filed with the Honorable
Council of State on September 18, 2001. On August 9, 2002, the Honorable
Council of State revoked the first instance sentence; it annulled the
sanction due to inaccuracy and confirmed the greater tax officially
settled, not because of the simultaneous nature of the benefits, but
because of the destination of the resources that the Bank had donated. On
September 24, 2002, a special petition for reconsideration against the
sentence was filed with the Open Court of the Honorable Council of State.
This sentence is still pending pronouncement.
On July 30, 2003 the Bank reached a conciliation agreement with DIAN,
under the terms in 2002 Law 788 Article 98, and paid the sum of Ps 2,538,
but on February 26, 2004, the Honorable Council of State rejected the
request to approve the conciliation agreement entered into by the parties,
and that unfavorable decision was later confirmed for a regular petition
for reconsideration.
The allowance that was constituted is Ps 7,332. The contingency is
deemed probable because the Honorable State Council Open Court seldom
revokes sentences that its regional courts proffer.
F-72
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Income and complementary taxes corresponding to 1996 - Conavi
On April 11, 1997, Conavi filed a tax return for fiscal year of 1996,
and included under the heading "Discounts and Requested Deductions" a sum
of Ps 9,568 corresponding to donations to non-profit institutions dedicated
to providing education, based on the provisions of Article 125 and in
keeping with standards set out in the Tax Code. After a thorough
discussion, DIAN accepted the donation discount but rejected the deductions
and fined Conavi for not providing precise information. Conavi filed a
motion to annul this decision and reestablish its right before the
Administrative Tribunal of Antioquia, who ruled in favor of Conavi. The
Legal Tax Division attached to the National Tax Administration of Medellin
filed an appeal against this ruling, which is currently being heard by the
Council of State for subsequent ruling.
A provision of Ps 3,044 was set up for this tax contingency, which is
considered remote.
Industry and Commerce Tax corresponding to 1997 - Conavi
Conavi filed its Industry and Commerce Tax return in Medellin on the
basis of 1997 (for the fiscal year of 1998 for subsequent payment in this
same period) and included figures for taxable operating income which
coincided with the information reported by the Superintendency of Banking
(now Superintendency of Finance) to Medellin City Council. The Municipal
Tax Division notified Conavi of a special requirement, by means of which it
intended to increase its tax base by Ps 233 given income from other towns
as well as Ps 45,981 corresponding to the value of nontaxable monetary
correction. Subsequently the Division accepted the explanations regarding
the increase in the tax base but maintained its position with regard to
tax-exempt monetary correction and proceeded to issue a Settlement Review
Note. Conavi filed a motion to annul the decision and reestablish its
right, with regard to which the Administrative Tribunal of Medellin
abstained from hearing the motion, considering that an appeal to government
authority must be filed beforehand. Conavi then filed an appeal to be heard
by the Council of State. A provision of Ps 444 was set up for this tax
contingency, which is considered probable.
Income and complementary taxes corresponding to 1999
The petition for reconsideration filed by the Bank against the
Official Revised Settlement of the income tax and complementary taxes for
the year 1999, through which the deduction for incentives from collecting
customers' taxes in the amount of Ps 4,263 was disregarded, was decided
against the Bank on April 30, 2004 and the Official Revised Settlement was
confirmed. The dispute pending represents Ps 3,421, which includes the tax
in dispute plus late payment interests, and there is a 100% allowance for
it. On September 9, 2004, a legal action was filed with the Antioquia
Administrative Court, which was admitted on November 23, 2004.
F-73
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Industry and Commerce Tax corresponding to 2001 - Conavi
The Administrative Tribunal of Antioquia is currently ruling on a
motion to annul a decision and reestablish rights filed by Conavi and
admitted in May 2005, against the Settlement Review Note issued by Medellin
City Council with regard to the Industry and Commerce Tax corresponding to
the fiscal year of 2001. The Medellin City Council wished to include in
Conavi tax base the income from UVR monetary correction that used to apply
to the former savings and loan corporations.
A provision of Ps 99 was set up for this tax contingency, which is
considered remote.
Financial Flows Tax (GMF)
At December 31, 2005, Bancolombia S.A. had received from DIAN
(National Tax and Customs Agency) 39 special notifications formally
advising of a tax of Ps 18,113 due on the same number of weeks in 2003, by
virtue of which it proposed that the Bank modified its weekly tax returns
corresponding to the Financial Flows Tax (4x1000) with regard to Repos,
drafts and foreign exchange operations carried out by Bancolombia with its
customers. Out of these special notifications, 17 have been subject to an
official settlement review note on the part of DIAN, amounting to Ps 11,930
in tax payable and a Ps 9,800 fine for lack of precision in the
information.
In the opinion of the tax authorities, the Bank must withhold the
aforementioned tax from its customers and proceed to pay this, whilst the
Bank considers that these are operations that it pays for itself, and are
therefore exempt from taxes by virtue of the tax stability benefit that
Bancolombia currently enjoys.
With regard to these official settlement reviews, Bancolombia filed
motions to reconsider the decision, without having obtained a definite
response from DIAN to date.
About this matter, the Bank's legal advisors believe that the Bank has
acted in accordance with all applicable legislation and that the
possibility of any adverse effect is indeed remote.
Taxes Collection DIAN & DDI
At December 31, 2005, DIAN and the DDI (Direccion Distrital de
Impuestos de Bogota, District Tax Direction of Bogota) have imposed fines
on the Bank amounting to Ps 3,896 for tax collection. The Bank has filed
the pertinent appeals and legal actions and has made provisions in the
amount of Ps 2,130 for such fines.
F-74
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
FIDUCOLOMBIA S.A.
Executive processes have been filed against the Bank's Trust
subsidiary (Fiducolombia), which in the opinion of management and attorneys
handling the litigations are not likely to result in an unfavorable ruling
or to affect the Trust Company.
Carlos Paz Mendez Process
At December 31, 2005, there is a proceeding underway against Banco de
Colombia (currently, the Bank) and the Trust Company at Civil Court 12 of
Bogota. The plaintiff is Mr. Carlos Paz Mendez, and the proceedings
commenced on July 16, 1993. On November 5, 1998, the tribunal issued a
ruling favorable to Fiducolombia and ordered the plaintiff to pay costs.
The defendant's appeal was accepted on December 14, 1998. On appeal, the
Bank's and Fiducolombia's lawyer requested an audience under Article 360 of
the Civil Procedural Code, and that audience was held on May 9, 2001. By
means of the decision dated March 25, 2003, proceeding for annulment was
admitted which has been decided and the pronouncement confirmed the first
instance sentence in favor of the Trust Company and the Bank. At present,
the appeal for reversal filed by the plaintiff's attorney against the
sentence proffered by the Bogota Judicial District High Court on December
19, 2002, and the pronouncement confirming the first instance sentence in
favor of the Trust Company and the Bank, is pending.
This process is expressly covered by the contract of liability
contingencies subscribed with Fogafin, contained in Public Deed No. 0182 of
January 18, 1994 of Notary Two of Bogota D.C., according to protocol
relationship in the aforementioned public document named Annex No. 1. The
Trust Company's management and attorneys consider that the likelihood of
obtaining a favorable ruling is high. By virtue of the above, Fiducolombia
has not made any allowances for this concept.
Silvana Trust
Seven proceedings are underway in the civil courts of the Bogota
Circuit and in an Arbitration Court which ruled in favor of the Trust
Company. All of the proceedings arise from Fiducolombia S.A.'s role as
trustee in the guarantee mercantile trust agreement entered into on
December 1, 1993, with Gallego Inmobiliaria S.A. and the appraisal Vector
(appraisal company) made of the property.
Two of the aforementioned proceedings terminated because of
expiration. However, on December 11, 2003, a new ordinary proceeding was
initiated against Fiducolombia, following a legal action filed during the
month of September 2003. The Circuit Civil Court Nine ordered for all of
the proceedings to be consolidated into the Tarazona Bermudez Proceeding,
in order to ensure one sole legal proceeding, and it is currently in the
discovery stage. Except in the case of the action filed by Guillermo Acosta
in which a favorable ruling was obtained in the second instance from the
Superior Court of Bogota.
As indicated by the Trust Company's attorneys, management considers
that there will be no liability based on the facts established in the
processes. The plaintiffs claim amounts to approximately Ps 718.
F-75
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Grancolombiano Group
The "Grupo Grancolombiano" Trust that was managed by Banco de Colombia
S.A. and liquidated on June 29, 1990, is subject to contingencies, among
them, labor contingencies. For that purpose, a sum of money has been
reserved through the "Contingency Fund" Trust managed by Fiducolombia.
These sums were contributed by former trustors of the "Grupo
Grancolombiano" trust with the purpose of covering such contingencies. As
recommended by the lawyer for, and in compliance with the purpose
established in the Minutes of Liquidation of the "Grupo Grancolombiano", 24
of the 29 proceedings filed were reconciled before a judge. Five more
reconciliations occurred outside court with charge to the funds of the
Contingency Fund of Grupo Grancolombiano. In the proceedings of Jorge
Euclides Garcia Prado, on December 4, 2003, the fourth proceeding took
place to be followed next by a decision. The proceedings of Jose del Carmen
Racero Toribio, Pedro Antonio Alvarez Serpa and David Salcedo Mejia were
not reconciled because the employment relationship ended when the building
in which they worked was the property of the Compania Nacional de
Chocolates S.A. The plaintiff integrated the litis consorcio with this
company. In one case, the Court of Law in a first instance ruling limited
the payment of a retirement pension, with the possibility of repeating
against Nacional de Chocolates S.A. In two cases, it declared that the
exception of petition before time was proven. In the remaining case, the
court absolved the Bank of any liability. An appeal was filed by the
parties, as a result of which the Antioquia High Court confirmed the
sentence proffered by the Caucasia Circuit Civil Court. Several legal
actions were filed in 2003 and 2004 that were subsequently consolidated
into the Dagoberto Tulio Correa proceeding, which is being decided by the
Caucasia Circuit Civil Court in which an exception to res judicata was
declared at the first hearing.
The Trust Company's management and legal advisors do not believe that
these cases will result in any additional liabilities. If any liability
does result, it will affect the trust's reserve fund but not Fiducolombia
itself.
Comerintegral Ltda. Process
The Arbitration Court summoned by Comerintegral Ltda., against
Fiducolombia, proffered a decision on June 25, 2004 in favor of the Trust
Company.
Invico Ltda. Processes
Invico Ltda. has a suit pending against the Bank and Fiducolombia S.A.
in Civil Court 6 of Bogota. The plaintiff seeks a ruling declaring that the
Bank and Fiducolombia S.A. must exercise the alternate right contained in
Article 1948 of the Civil Code, in reference to the land lot denominated
"Granjita", pursuant to the trust mandate contracted claims amount to Ps
4,000. Proceedings began on November 9, 2001, and on January 17, 2002, the
court issued a ruling dismissing the claim and ordering the plaintiff to
pay costs. By means of writ dated July 16, 2002, a settlement hearing was
ordered for November 5, 2002. The diligence of reconciliation was declared
a failure. At present, this case is in the discovery stage and Fiducolombia
is waiting for the expert appointed who has agreed to give his expert
decision. However, it is still premature to give any views regarding said
proceeding.
F-76
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Invico has also pursued "Accountability" proceedings against the Bank
and Fiducolombia S.A. in Civil Court 9 of Bogota. In these proceedings
Invico seeks to hold the Bank and Fiducolombia S.A. accountable for their
time as trustees of its property, as a result of the appointment and choice
that the former and its creditors made. The amount sought is Ps 3,000.
Settlement hearings on December 4, 2001, failed. The case went to trial on
November 27, 2001, beginning with the collection of evidence. On November
19, 2002, the edict dated the 25th of the same month proffered a sentence
in favor of the trust company and the Bank. The sentence was appealed by
the plaintiff, to which the Court confirmed the ruling given in the first
instance.
LEASING COLOMBIA S.A.
Leasing Colombia S.A. has fifty-one (51) litigations against it, out
of which forty-six (46) correspond to extra-contractual civil liability
proceedings, as a result of damages caused by company-owned vehicles and
leased vehicles. There are court precedents and evidence in favor of
Leasing Colombia S.A., to the extent that no leasing company has ever been
found guilty of the alleged claims.
The five remaining proceedings involve contractual liability claims by
virtue of alleged Leasing Colombia S.A. default; these will probably be
ruled in Leasing Colombia favor as the claims lack legal support.
The economic amount of such contingencies represents the sum of Ps
13,042. This sum has not been provisioned, by virtue of the above
considerations.
SUFINANCIAMIENTO
Actions filed against this company total an estimated amount of Ps
6,799. According to the Company's attorneys, none of these actions
represent a probable loss for the Company, and therefore Company Management
does not consider it necessary to set up the corresponding provision.
ALMACENAR S.A.
At December 31, 2004 and 2005, labor and civil proceedings against
Almacenar S.A. were underway. Due to the debatable nature of the
obligations, they are difficult to quantify.
At December 31, 2004 and 2005, there are allowances amounting to Ps
509 and Ps 1,036, respectively, to cover any liability resulting from these
proceedings.
F-77
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SULEASING INTERNACIONAL S.A.
Suleasing International S.A.'s branch in Colombia faces a labor action
filed by Mrs. Leonor Aguilar against Bancolombia S.A., Leasing Colombia
S.A. and Suleasing Internacional S.A., involving an amount of approximately
Ps 300.
FUNDICOM S.A.
At December, 31, 2005, there is one labor action filed against
Fundicom for an estimated amount of Ps 294.
DITRANSA S.A.
At December 31, 2005 eleven criminal, civil and administrative actions
have been filed against Ditransa totaling an amount of approximately Ps
246.
COMPANIA SURAMERICANA DE ARRENDAMIENTOS - SURENTING S.A.
At December 31, 2005, there were twelve civil liability lawsuits filed
against Surenting. There is no possibility of any adverse ruling being
issued in 11 of these, since these are all lawsuits originating in the use
customers have made of the vehicles leased to them. However, Surenting
should be found guilty in any way, there is an insurance policy with
Compania Suramericana de Seguros that covers the amounts at stake.
One of the lawsuits has been filed directly against Surenting for
civil liability since it involved an accident caused by an employee in a
company car. The claim is for Ps 1,209 and this is being negotiated with
third parties. The corresponding payment shall be covered by Compania
Suramericana de Seguros through the insurance policy held with them for
this purpose.
COMPANIA SURAMERICANA DE VALORES S.A. - SUVALOR - COMISIONISTA DE BOLSA
At December 31, 2005, the Company faced 2 actions. One is an ordinary
civil action filed in Cali for which an unfavorable ruling has been
pronounced in the first instance and which was subsequently appealed before
the Superior Court. The cost of this judgment in the first instance could
reach Ps 300.
The other is a labor action for which a favorable ruling was obtained
in the first instance with the corresponding court sentence pending. The
value of this could reach approximately Ps 30.
F-78
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
3001 S.A. (IN THE PROCESS OF BEING WOUND UP)
With respect to the 3001 S.A., as of December 31, 2005, there was a
pending complaint on the part of Treasury Secretary of the Medellin City
Council, regarding a special notification in which 3001 S.A. (in the
process of being wound up) was ordered to pay a fine of Ps 28 for lack of
precision in information submitted. The Municipal Authorities, by means of
Resolution 16203 dated September 8, 2004, decided not to accept as a lower
value of the tax base for the Industry and Commerce tax for the base year
of 2002/taxable year of 2003, the income corresponding to the difference in
the exchange rate on investments made by this company abroad. The company
filed the corresponding objections within the designated term, and has not
yet been informed of any decision.
The other subsidiaries have not reported any other contingencies
existing as of December 31, 2005.
(27) ADMINISTRATIVE AND OTHER EXPENSES
Administrative and other expenses for the years ended December 31,
2003, December 31, 2004 and December 31, 2005 consisted of the following:
2003 2004 2005
--------- --------- ---------
Public services Ps 27,882 Ps 28,558 Ps 47,175
Advertising 17,328 20,754 50,235
Industry and trade, property, vehicle and other taxes 44,774 55,145 121,699
Communication, postage and freight 36,937 39,564 48,254
Insurance 13,724 12,224 27,446
Security services 17,167 18,404 29,339
Stationery and supplies 13,854 15,399 28,370
Amortization of deferred charges 26,237 13,074 54,463
Rental expenses 14,167 16,963 56,375
Maintenance and repairs 38,049 49,794 99,678
Contributions and membership dues 5,762 8,335 14,587
Temporary services 7,579 9,174 17,440
Travel expenses 9,942 10,690 17,799
Professional fees 17,614 29,167 56,004
Call center services 7,094 8,672 20,041
Information processes outsourcing 10,722 13,420 18,218
Other 41,685 44,255 86,056
--------- --------- ---------
TOTAL Ps350,517 Ps393,592 Ps793,179
========= ========= =========
F-79
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(28) RELATED PARTY TRANSACTIONS
Significant balances and transactions with related parties were as
follows:
2003
SHAREHOLDERS WITH
PARTICIPATING
STOCK LOWER THAN
SHAREHOLDERS WITH BANK'S 10% OF THE BANK'S
PARTICIPATING OFFICERS CAPITAL AND WITH
STOCK EQUAL TO OR NON- AND BOARD OPERATIONS HIGHER
HIGHER THAN 10% CONSOLIDATED OF THAN 5%
OF BANK'S CAPITAL INVESTMENTS DIRECTORS TECHNICAL EQUITY
----------------- ------------ --------- -----------------
BALANCE SHEET
Investment securities -- 2,355 -- --
Loans -- 11,061 12,246 --
Accounts receivable -- 3,085 150 --
---- -------- -------- --------
TOTAL Ps-- Ps16,501 Ps12,396 Ps --
==== ======== ======== ========
Deposits 4 36,561 1,441 83,793
Overnight funds -- 84 -- --
Accounts payable -- 141 8 --
---- -------- -------- --------
TOTAL Ps 4 Ps36,786 Ps 1,449 Ps83,793
==== ======== ======== ========
TRANSACTIONS
INCOME
Dividends received -- 25,777 -- --
Interest -- 2,297 1,205 74
Other -- 269 24 --
---- -------- -------- --------
TOTAL Ps-- Ps28,343 Ps 1,229 Ps 74
==== ======== ======== ========
EXPENSES
Interest 1 12,330 61 5,883
Other -- 2,261 69 --
---- -------- -------- --------
TOTAL Ps 1 Ps14,591 Ps 130 Ps 5,883
==== ======== ======== ========
F-80
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004
SHAREHOLDERS WITH
PARTICIPATING
STOCK LOWER THAN
SHAREHOLDERS WITH BANK'S 10% OF THE BANK'S
PARTICIPATING OFFICERS CAPITAL AND WITH
STOCK EQUAL TO OR NON- AND BOARD OPERATIONS HIGHER
HIGHER THAN 10% CONSOLIDATED OF THAN 5%
OF BANK'S CAPITAL INVESTMENTS DIRECTORS (1) TECHNICAL EQUITY
----------------- ------------ ------------- -----------------
BALANCE SHEET
Investment securities -- 21,443 -- --
Loans -- 5,135 14,995 --
Customer's acceptances
and derivatives -- 27 -- --
Accounts receivable -- 9,958 3,045 --
----- --------- --------- ---------
TOTAL Ps -- Ps 36,563 Ps 18,040 Ps --
===== ========= ========= =========
Deposits 6 32,349 812 222,226
Overnight funds -- 106 -- --
Accounts payable -- -- -- --
Bonds -- 10,000 -- 11,500
---- --------- -------- ----------
TOTAL Ps 6 Ps 42,455 Ps 812 Ps 233,726
==== ========= ======== ==========
TRANSACTIONS
INCOME
Dividends received -- 25,814 -- --
Interest and fees -- 2,693 1,626 153
Other -- 354 -- --
----- --------- -------- ---------
TOTAL Ps -- Ps 28,861 Ps 1,626 Ps 153
===== ========= ======== =========
EXPENSES
Interest -- 4,762 14 6,925
Fees -- -- 99 --
Other -- -- -- --
----- -------- -------- ---------
TOTAL Ps -- Ps 4,762 Ps 113 Ps 6,925
===== ======== ======== =========
----------
(1) For 2003 and 2004, includes, in addition to the Members of the Board of
Directors, the President and the Vice-Presidents, as well as other
employees who have legal representation of the Bank.
F-81
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005
SHAREHOLDERS WITH
PARTICIPATING
STOCK LOWER THAN
SHAREHOLDERS WITH BANK'S 10% OF THE BANK'S
PARTICIPATING OFFICERS CAPITAL AND WITH
STOCK EQUAL TO OR NON- AND BOARD OPERATIONS HIGHER
HIGHER THAN 10% CONSOLIDATED OF THAN 5%
OF BANK'S CAPITAL INVESTMENTS DIRECTORS (1) TECHNICAL EQUITY
----------------- ------------ ------------- -----------------
BALANCE SHEET
Investment securities -- 293,073 -- --
Loans -- 149,889 18,802 3
Customer's acceptances
and derivatives -- 43,147 306 118,362
Accounts receivable -- -- -- 175,095
----- ---------- --------- ----------
TOTAL Ps -- Ps 486,109 Ps 19,108 Ps 293,460
===== ========== ========= ==========
Deposits 157 96,664 996 393,088
Accounts payable -- 1,768 -- 198
Bonds -- 3,310 -- 18,960
------ ---------- -------- ----------
TOTAL Ps 157 Ps 101,742 Ps 996 Ps 412,246
====== ========== ======== ==========
TRANSACTIONS
INCOME
Dividends received -- 6,403 -- --
Interest and fees -- 19,965 1,963 64
Other -- 73 133 --
----- --------- -------- ---------
TOTAL Ps -- Ps 26,441 Ps 2,096 Ps 64
===== ========= ======== =========
EXPENSES
Interest 23 3,459 629 29,667
Fees -- -- 100 --
Other -- -- 3 --
----- --------- -------- ---------
TOTAL Ps 23 Ps 3,459 Ps 732 Ps 29,667
===== ========= ======== =========
F-82
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(29) PURCHASE OF ASSETS AND LIABILITIES
As part of its growth strategy, the Bank entered into certain
transaction for the purchase and sale of assets and liabilities with the
following companies:
In 2004, the Bank purchased a loan portfolio in local currency from
Sufinanciamiento for the amount of Ps926 with a discount of 45% on face
value; from Comercia S.A. loan portfolio in local currency for the amount
of Ps51,405; and another loan portfolio in local currency from Central de
Inversiones S.A. (CISA) for the amount of Ps20,544, with a discount of 10%
on face value.
In 2005, the Bank purchased from Banco Corfinsura International a loan
portfolio in foreign currency for the amount of US$7,718, equivalent to
Ps18,004 on the actual date of purchase; from the Banco del Estado, a loan
portfolio in local currency for the amount of Ps8,612; from Citibank a loan
portfolio in local currency for the amount of Ps 483; from Suleasing, a
loan portfolio in local currency for the amount of Ps13,657; from CISA a
loan portfolio for the amount of Ps770, with a discount of 6% on face
value; from Fogafin, a loan portfolio for the amount of Ps42, with a
discount of 15% on face value; from Titularizadora Colombiana S.A., a loan
portfolio for the amount of Ps16,190, with a discount of 8% on face value;
from Comercia S.A., a loan portfolio for the amount of Ps26,453; and from
Davivienda and Granbanco Bancafe, a loan portfolio for the amount of
Ps30,151.
SALE OF ASSETS AND LIABILITIES
In 2004, the Bank sold a loan portfolio in local currency with funds
from FINAGRO resources to Leasing del Valle in the amount of Ps148.
During 2003 and 2004, the Bank made sales of its deteriorated and
written-off farming and livestock loan portfolio in the amount of Ps1,079
and Ps 95, respectively, pursuant to an agreement entered into with Finagro
in October 2001, as administrator of the National Farming and Livestock
Reactivation Program resources within the legal framework set forth in
Ministry of Agricultural and Rural Development Decree 967 of 2000. With
this value, the total amount of the loans is understood as paid.
In 2005, the Bank sold a loan portfolio in foreign currency to
Bancolombia Panama for the amount of US$38,241 which was equivalent to
Ps88,211 on the actual selling date; a loan portfolio in local currency to
Comercia S.A for the amount of Ps300, with a discount of 50% on face value;
a loan portfolio in local currency to Finagro for the amount of Ps36, with
a discount of 62% on face value; a loan portfolio in local currency to
Sufinanciamiento, for the amount of Ps8,075,with a discount of 2% on face
value; a loan portfolio in local currency to Suleasing for the amount of
Ps26,243; and a loan portfolio in local currency to Colcorp for the amount
of Ps17,159.
F-83
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(30) SUBSEQUENT EVENTS
On March 30, 2006, the arbitration proceedings initiated by
Bancolombia against Jaime Gilinski, as debtor, jointly and severally liable
with the companies that sold the majority of the shares of the former Banco
de Colombia S.A., resulted in an award. Through the arbitration
proceedings, Bancolombia sought to gain recognition of various claims that
it presented to ensure the effectiveness of the guaranty that was granted
with respect to the sold shares, the value of which is now US$30,000. The
award orders the defendant to pay Ps63,216 in favor of Bancolombia,
including inflation adjustments and interest. The defendant filed an action
for cancellation, which has not yet been considered.
On May 16, 2006, the arbitration proceeding initiated by Mr. Jaime
Gilinski against Bancolombia resulted in an award ruling in favor of
Bancolombia on the majority of the claims. However, the Tribunal ruled that
Bancolombia should pay Ps40,570 to the plaintiffs with respect to their
allegations of insufficient capitalization compensated with external
borrowings.
The Arbitration Tribunal denied all the plaintiffs' claims against the
senior management and exonerated them from all liability, ordering the
plaintiffs to pay the court costs.
On June 7, 2006, the Bank filed an extraordinary cancellation action
before the Superior Tribunal of Bogota pursuant to Articles 163 (7), (8)
and (9) of Decree 1818 of 1998, challenging the May 16, 2006 ruling of the
Arbitration Tribunal. In the cancellation action, the Bank argued that the
ruling contained mathematical mistakes, that the Arbitration Tribunal did
not decide issues that were material to the arbitration, that the
Arbitration Tribunal instead decided issues that were not material to the
arbitration and that the Arbitration Tribunal improperly granted more than
the relief requested. In addition, the Bank offered to provide security in
accordance with the terms of the third paragraph of Article 331 of the
Civil Procedure Code of Colombia in order to stay the award while the
cancellation action is pending.
After hearing a people's action filed by the lawyer Maximiliano
Echeverri against the Bank and the Colombian Superintendencies of Banking
and Securities (now the Superintendency of Finance), the Contentious
Administrative Court of Cundinamarca ruled against the plaintiff's claims
on August 10, 2005. On June 7, 2006, the Council of State upheld the
original decision against the plaintiff in a judgment on appeal.
These resolutions were issued after the date when financial statements
under Colombian GAAP were approved by General Shareholders' meeting and
therefore the Bank did not record neither the asset or the liability
associated with them, as of December 31, 2005.
On May 8, 2006, BC acquired 9,863,685 shares of Comercia S.A.,
equivalent to 55.61% of its outstanding shares, from Textiles Fabricato
Tejicondor S.A. by means of a transaction duly authorized by the
Superintendency of Finance. The value paid by the Bank was Ps24,610. We
currently expect to acquire an additional participation equivalent to
38.96% of the outstanding shares of Comercia S.A., which are currently held
by Patrimonio Autonomo Textiles Fabricato Tejicondor, administered by
Santander Investment Trust S.A. No assurance can be given as to the timing
of the acquisition of this additional participation.
F-84
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(31) DIFFERENCES BETWEEN COLOMBIAN ACCOUNTING PRINCIPLES FOR BANKS AND U.S. GAAP
The Bank's financial statements are prepared in accordance with
generally accepted accounting principles and practices prescribed by the
Superintendency of Finance and other legal provisions ("Colombian GAAP").
Because these principles and regulations differ in certain significant
respects from accounting principles generally accepted in the United States
of America ("U.S. GAAP"), this note presents a reconciliation of net income
and stockholders' equity to U.S. GAAP.
A) RECONCILIATION OF NET INCOME:
The following summarizes the principal differences between accounting
practices under Colombian GAAP and U.S. GAAP and their effects on net
income for the years ended December 31, 2003, 2004 and 2005:
2003 2004 2005
---------- --------- ----------
CONSOLIDATED NET INCOME UNDER COLOMBIAN GAAP Ps 469,384 Ps578,678 Ps 946,881
a) Deferred income taxes (140,555) 49,073 121,025
b) Employee benefit plans 1,757 1,203 (1,733)
c) Inflation adjustment -- -- (4,423)
d) Revaluation of assets -- -- --
e) Allowance for loans, financial leases losses and foreclosed assets 55,908 (159) 115,461
f) Loan origination fees and costs 11,719 7,100 3,277
g) Interest recognition on non-accrual loans 729 1,205 3,976
h) Deferred charges 31,787 9,422 (1,761)
i) Investment securities -- 1,111 27,159
j) Investments in unaffiliated companies (591) (252) (4,085)
k) Investments in affiliates 10,168 (29,548) 18,277
l) Lessor accounting -- -- 1,931
m) Business combinations
m.i) Adjustment goodwill (10,314) (8,504) (4,719)
m.ii) Adjustment amortization 41,452 22,577 31,819
m.iii) Business combinations Conavi and Corfinsura -- -- (366,044)
n) Securitization non-performing loans -- -- 5,851
o) Foreign currency translation adjustment 2,975 10,220 1,651
p) Minority interest -- -- (3,422)
---------- --------- ----------
CONSOLIDATED NET INCOME UNDER U.S. GAAP Ps 474,419 Ps642,126 Ps 891,121
---------- --------- ----------
NET INCOME FROM CONTINUING OPERATIONS Ps 466,290 Ps621,342 Ps 904,351
INCOME (LOSS) FROM OPERATIONS AND DISPOSAL OF DISCONTINUED
OPERATIONS Ps 8,129 Ps 20,703 Ps (13,230)
F-85
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
B) RECONCILIATION OF STOCKHOLDERS' EQUITY:
The following summarizes the principal differences between accounting
practices under Colombian GAAP and U.S. GAAP and their effects on stockholders'
equity for the years ended December 31, 2003, 2004 and 2005:
2003 2004 2005
----------- ----------- -----------
CONSOLIDATED STOCKHOLDERS' EQUITY UNDER COLOMBIAN GAAP Ps1,689,379 Ps2,090,723 Ps3,377,290
a) Deferred income taxes (45,234) 6,317 135,904
b) Employee benefit plans (27,855) (36,129) (70,738)
c) Inflation adjustment 43,216 43,216 38,793
d) Revaluation of assets (30,086) (42,237) (110,479)
e) Allowance for loans, financial leases losses and
foreclosed assets 102,362 102,203 217,664
f) Loan origination fees and costs 43,356 50,456 53,733
g) Interest recognition on non-accrual loans 827 2,032 6,008
h) Deferred charges (10,697) (1,275) (3,036)
i) Investment securities (89) -- 14,936
j) Investments in unaffiliated companies (7,416) (7,668) (11,753)
k) Investments in affiliates 41,848 12,300 30,577
l) Lessor accounting -- -- 1,931
m) Business combinations
m.i) Adjustment goodwill (31,543) (40,047) (44,766)
m.ii) Adjustment amortization 64,818 87,395 119,214
m.iii) Business combinations Conavi and Corfinsura -- -- 368,289
n) Securitization non performing loans -- -- 5,851
o) Foreign currency translation adjustment -- -- --
p) Minority interest -- -- (3,422)
----------- ----------- -----------
143,507 176,563 748,706
----------- ----------- -----------
CONSOLIDATED STOCKHOLDERS' EQUITY UNDER U.S. GAAP Ps1,832,886 Ps2,267,286 Ps4,125,996
=========== =========== ===========
C) SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS UNDER U.S.GAAP:
The followings are the supplemental consolidated condensed financial
statements under U.S.GAAP for years ended December 31, 2004 and 2005:
F-86
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEETS
2004 2005
------------ ------------
ASSETS:
Cash and cash equivalents Ps 1,249,360 Ps 1,730,022
Investment securities, net 5,254,843 8,493,463
Loans and financial leases, net 9,703,064 17,802,410
Accrued interest receivable on loans, net 126,056 207,347
Customers' acceptances and derivatives 43,894 133,420
Accounts receivable, net 173,875 590,313
Premises and equipment, net 389,459 707,631
Other assets 754,018 1,905,912
------------ ------------
TOTAL ASSETS PS17,694,569 PS31,570,518
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits 11,862,116 18,329,466
Borrowings 1,104,201 3,927,551
Other liabilities 2,460,966 5,187,505
Shareholders' equity 2,267,286 4,125,996
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY PS17,694,569 PS31,570,518
============ ============
SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
2003 2004 2005
----------- ----------- ------------------
Restated (Note 32)
Total interest income Ps1,538,028 Ps1,803,763 Ps2,627,277
Total interest expense (471,899) (577,442) (1,032,923)
----------- ----------- -----------
Net interest income 1,066,130 1,226,321 1,594,354
Total net provisions (125,832) (66,181) (11,822)
----------- ----------- -----------
Net interest income after provision and
financial leasing 940,298 1,160,140 1,582,532
Other income 457,106 633,681 935,738
Other expenses (739,860) (979,742) (1,464,378)
----------- ----------- -----------
Income before income taxes 657,544 814,079 1,053,892
Income tax expense (191,254) (192,656) (149,541)
----------- ----------- -----------
Net income before discontinued operations 466,290 621,423 904,351
----------- ----------- -----------
DISCONTINUED OPERATIONS (1) 8,129 20,703 (13,230)
NET INCOME PS 474,419 PS 642,126 PS 891,121
=========== =========== ===========
----------
(1) Correspond to discontinued operations of Abocol, Almacenar and their
Subsidiaries.
F-87
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
2003 2004 2005
------------------ ------------------ ------------------
Restated (Note 32) Restated (Note 32) Restated (Note 32)
Net income (loss) Ps 474,419 Ps 642,126 Ps 891,121
Adjustments to reconcile net income to net cash
provided (used) by operating activities (1,964,394) (608,738) (5,215,860)
------------ ------------ ------------
Net cash provided by operating activities (1,489,975) 33,388 (4,324,739)
Net cash used in investing activities 106,035 (1,575,420) (6,133,179)
Net cash provided by financing activities 1,979,312 1,344,931 10,938,580
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents Ps 595,372 Ps (197,101) Ps 480,662
============ ============ ============
Cash and cash equivalents at beginning of year 851,089 1,446,461 1,249,360
------------ ------------ ------------
Cash and cash equivalents at end of year PS 1,446,461 PS 1,249,360 PS 1,730,022
============ ============ ============
D) ANALYSIS OF CHANGES IN STOCKHOLDERS' EQUITY:
The following summarizes the changes in stockholders' equity
under U.S. GAAP for the years ended December 31, 2003, 2004 and 2005:
2003 2004 2005
----------- ----------- -----------
Balance at beginning of year Ps1,413,445 Ps1,832,886 Ps2,267,286
Shares issued at market value (1) -- -- 1,164,218
Net income 474,419 642,126 891,121
Dividends declared (76,124) (156,861) (216,838)
Other comprehensive income (loss) (18,765) (8,469) (19,148)
Other (2) 39,911 (42,396) 39,357
----------- ----------- -----------
Balance at end of year Ps1,832,886 Ps2,267,286 Ps4,125,996
=========== =========== ===========
----------
(1) The line shares issued for Ps 236,212 in the Consolidated Statement of
Stockholder's Equity under Colombian GAAP, reflects the par value of
shares, the line shares issued for Ps 1,164,218 in this table reflects the
fair market value of shares issued under U.S. GAAP.
(2) Correspond to the Subsidiaries' retained earnings that are not eliminated
in the consolidation process.
E) STATEMENT OF COMPREHENSIVE INCOME (LOSS):
2003 2004 2005
--------- --------- ---------
Net Income Ps474,419 Ps642,126 Ps891,121
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Foreign currency translation adjustments (2,975) (10,220) (1,651)
Unrealized gain or (loss) on securities available for sale (13,196) 7,716 2,106
Additional minimum pension liability
offset to shareholder's equity (2,594) (5,965) (19,603)
--------- --------- ---------
Other comprehensive income (loss) (18,765) (8,469) (19,148)
--------- --------- ---------
Comprehensive income Ps455,654 Ps633,657 Ps871,973
========= ========= =========
F-88
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
OTHER COMPREHENSIVE INCOME (LOSS) 2003
BEFORE-TAX (TAX EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ------------- ----------
Unrealized gain or (loss) on securities
available for sale Ps (20,947) Ps 7,751 Ps (13,196)
Additional minimum pension liability (4,064) 1,470 (2,594)
Foreign currency translation adjustment (2,975) -- (2,975)
----------- -------- -----------
Other comprehensive income (loss) Ps (27,986) Ps 9,221 Ps (18,765)
=========== ======== ===========
2004
BEFORE-TAX (TAX EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ------------- ----------
Unrealized gain or (loss) on securities
available for sale Ps 8,750 Ps(1,034) Ps 7,716
Additional minimum pension liability (9,477) 3,512 (5,965)
Foreign currency translation adjustment (10,220) -- (10,220)
----------- -------- -----------
Other comprehensive income (loss) Ps (10,947) Ps 2,478 Ps (8,469)
=========== ======== ===========
2005
BEFORE-TAX (TAX EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ------------- ----------
Unrealized gain or (loss) on securities
available for sale Ps 6,816 Ps (4,710) Ps 2,106
Additional minimum pension liability (32,876) 13,272 (19,603)
Foreign currency translation adjustment (1,651) -- (1,651)
----------- -------- -----------
Other comprehensive income (loss) Ps (27,711) Ps 8,562 Ps (19,148)
=========== ======== ===========
F-89
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
ACCUMULATED OTHER COMPREHENSIVE INCOME
ADDITIONAL FOREIGN UNREALIZED ACCUMULATED
MINIMUM CURRENCY GAINS (LOSSES) OTHER
PENSION TRANSLATION ON COMPREHENSIVE
LIABILITY ADJUSTMENT SECURITIES INCOME
---------- ----------- -------------- -------------
Beginning balance 2003 Ps (1,760) Ps 4,534 Ps 71,865 Ps 74,639
Current-period change (2,594) (2,975) (13,196) (18,765)
--------- --------- --------- ---------
Ending balance 2003 (4,354) 1,559 58,669 55,874
========= ========= ========= =========
Beginning balance 2004 (4,354) 1,559 58,669 55,874
Current-period change (5,965) (10,220) 7,716 (8,469)
--------- --------- --------- ---------
Ending balance 2004 (10,319) (8,661) 66,385 47,405
========= ========= ========= =========
Beginning balance 2005 (10,319) (8,661) 66,385 47,405
Current-period change (19,603) (1,651) 2,106 (19,148)
--------- --------- --------- ---------
Ending balance 2005 Ps(29,922) Ps(10,312) Ps 68,491 Ps 28,257
========= ========= ========= =========
SUMMARY OF SIGNIFICANT DIFFERENCES AND REQUIRED U.S. GAAP DISCLOSURES
A) DEFERRED INCOME TAXES:
Under Colombian GAAP, deferred income taxes are generally recognized
for timing differences (not temporary differences as in SFAS No. 109) for
commercial and manufacturing subsidiaries. For financial companies, the
Superintendency of Finance has restricted inclusion of timing differences
related to the amortization of fiscal losses and the excess of presumed
income over ordinary income as a deferred tax asset.
Under U.S. GAAP, deferred tax assets or liabilities must be recorded
for all temporary differences between the financial and tax bases of assets
and liabilities. A valuation allowance is provided for deferred tax assets
to the extent that it is more likely than not that they will not be
realized.
Income tax expense under U.S. GAAP is comprised of the following
components for the years ended at December 31, 2003, 2004 and 2005:
2003 2004 2005
--------- --------- ---------
Current income tax expense Ps 62,391 Ps237,620 Ps178,992
Deferred income tax (benefit) expense 140,799 (47,883) (22,502)
--------- --------- ---------
TOTAL Ps203,190 Ps189,737 Ps156,490
========= ========= =========
F-90
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Temporary differences between the amounts reported in the financial
statements and the tax bases for assets and liabilities result in deferred
taxes. Deferred tax assets and liabilities at December 31, 2004 and 2005
were as follows:
2004 2005
--------- ---------
DEFERRED TAX ASSETS AND LIABILITIES
DEFERRED TAX ASSETS:
Accrual of employee benefits Ps 13,410 Ps 26,194
Allowance for loan losses -- 23,155
Fixed assets 67,321 138,213
Tax losses 36,357 43,496
Forward, future and swaps effect 8,362 --
Allowance for foreclosed assets 27,863 7,407
Fiduciary assets 5,671 --
Accrued expenses 17,110 15,336
Business combination -- 50,503
Other 18,248 29,462
--------- ---------
Total gross deferred tax assets 194,342 333,766
Less valuation allowance (5,330) (4,440)
--------- ---------
NET DEFERRED TAX ASSET Ps189,012 Ps329,326
--------- ---------
DEFERRED TAX LIABILITIES:
Unrealized gain on investment securities Ps 35,943 Ps 40,653
Allowance for loan losses 3,677 --
Loan origination fees and cost 18,707 17,766
Forward, future and swaps effect -- 26,862
Intangible assets 26,819 80,382
Inflation adjustments 48,637 68,403
Goodwill recognition 33,012 --
Excess of accrued income over valuation income 8,924 48,833
Fair value of financial instruments -- 5,674
Other 7,848 4,244
--------- ---------
TOTAL DEFERRED LIABILITIES 183,567 292,817
--------- ---------
NET DEFERRED ASSET (LIABILITY) Ps 5,445 Ps 36,509
========= =========
The valuation allowance for deferred tax assets as of December 31,
2004 and 2005 was Ps 5,330 and Ps 4,440, respectively. The net change in
the total valuation allowance for the year ended December 31, 2004 was a
decrease of Ps 78,254 and for the year ended December 31, 2005 was a
decrease of Ps 890. In assessing the realizability of deferred tax assets,
management considers whether it is more likely than not that some portion
or all of the deferred tax assets will not be realized. The ultimate
realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal
of deferred tax liabilities, projected future taxable income and tax
planning strategies in making this assessment. Based upon the level of
historical
F-91
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
taxable income and projections for future taxable income over the periods
which the deferred tax assets are deductible, management believes it is
more likely than not the company will realize the benefits of these
deductible differences, net of the existing valuation allowances at
December 31, 2005. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of
future taxable income during the carry forward period are reduced.
The 37% income tax nominal rate for years 2003, 2004 and 2005 differs
from 30%, 23% and 14.94% effective rate for years 2003, 2004 and 2005, due
to the following:
2003 2004 2005
---------- --------- -----------
Income before tax U.S. GAAP Ps 677,609 Ps831,863 Ps1,047,611
---------- --------- -----------
37% tax 250,716 307,789 387,616
Non-deductible items / provisions 26,946 15,433 48,225
Non-taxable income(1) (63,295) (26,507) (164,457)
Excess of accrued income over
valuation income (18,690) (7,735) (52,793)
Amortization of excess of presumed
income over ordinary income (110,326) (3,420) (30,393)
Others 95,511 (17,569) (30,818)
---------- --------- -----------
Increase (decrease) valuation allowance 22,328 (78,254) (890)
---------- --------- -----------
Income tax Ps 203,190 Ps189,737 Ps 156,490
========== ========= ===========
----------
(1) For 2005, includes Off Shore subsidiaries's income tax, dividend income
tax, gain on sales of stocks tax, interest income over mortgage securities
tax, interest income on VIS housing loans tax and recoveries of deductible
items tax.
As of December 31, 2005, the Bank had the intention of capitalize the
results from its off-shore Subsidiaries. Accordingly, no deferred income
tax liability was recorded for the undistributed profits of Bancolombia
Panama and its subsidiaries. The undistributed profits in such Subsidiaries
is Ps 318,338 at December 31, 2005.
B) EMPLOYEE BENEFIT PLANS:
U.S. GAAP requires the recognition of pension cost based on actuarial
computations under a prescribed methodology which differs from that used
under Colombian GAAP. For purposes of the U.S. GAAP reconciliation, the
transition obligation calculated at the date the Bank adopted SFAS 87 is
being amortized from January 1, 1989, for a period of 18 years for the
pension plan and 27 years for the severance plan.
F-92
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Pension Plan
In 1967, the Social Security Institute assumed the pension obligation
for the majority of the Bank's employees; however, employees who had more
than ten years of service prior to that date, continue to participate in
the Bank's noncontributory unfounded defined benefit pension plan. Under
this plan, benefits are based on length of service and level of
compensation. As of December 31, 2005, there were 1,023 participants
covered by the Plan.
While Colombian GAAP requires calculation of the estimated liability
using actuarial methodology given by the law, the actuarial assumptions,
based on nominal discount, salary and pension increase rates, and the
method of computing the net periodic pension costs differ from those
required by U.S. GAAP.
Severance obligation
Under Colombian labor regulations, employees are entitled to receive
one month's salary for each year of service. This benefit accumulates and
is paid to the employees upon their termination or retirement from the
Bank; however, employees may request advances against this benefit at any
time. In 1990, the Colombian government revised its labor regulations to
permit companies, subject to the approval of the employees, to pay the
severance obligation to their employees on a current basis. Law 50 from
1990, also enabled each worker freely to choose the pension fund that will
manage the amount of his/her severance paid accrued during the year. This
amount must be transferred by headquarters to the pension funds no later
than the following period.
Under U.S. GAAP, a curtailment is an event that significantly reduces
the expected years of future service of present employees or eliminates for
a significant number of employees the accrual of defined benefits for some
or all of their future services. Consequently, this modification reduces,
rather than increase, the projected benefit obligation. Such a reduction is
used to reduce any existing unrecognized prior service cost, and the
excess, if any, is amortized on the same basis as the cost of benefit
increases.
As of December 31, 2005 there were 1,855 participants remaining in the
original severance plan.
Until December 31, 2004 the determination of pension plan and
severance obligation included employees from Bancolombia S.A. (the parent
company), Almacenar S.A. and Abocol S.A.. As a result of the sale of Abocol
S.A. dated December 29, 2005, 55 Abocol's employees who participated in the
pension plan and 3 employees who participated in Severance plan were not
included in the calculation. Bancolombia does not maintain any pension or
severance obligation with Abocol's employees after the sale.
Conavi and Corfinsura did not have a defined benefit plan to its
employees and their employees are not entitled to join Bancolombia's
defined benefit plan.
F-93
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
DISCLOSURE AND CALCULATION OF DIFFERENCES UNDER U.S. GAAP
The combined costs for the above mentioned benefit plans, determined
using U.S. GAAP, for the years ended December 31, 2003, 2004 and 2005 are
summarized below:
2003 2004 2005
---------- ---------- ----------
CHANGE IN BENEFIT OBLIGATION
Unfunded benefit obligation at beginning of year Ps 107,257 Ps 113,715 Ps 127,629
Service cost 1,557 1,543 1,604
Interest cost 25,616 25,624 27,504
Actuarial gain (loss) (1,025) 7,763 4,028
Effect of curtailments/settlements (*) (4,545)
Benefits paid (19,690) (21,016) (22,722)
---------- ---------- ----------
Unfunded benefit obligation at end of year Ps 113,715 Ps 127,629 Ps 133,498
========== ========== ==========
Funded status (113,715) (127,629) (133,498)
Unrecognized net transition loss 6,541 5,493 4,388
Unrecognized net actuarial loss (gain) (4,872) 2,809 4,997
Unrecognized prior service cost 860 716 559
---------- ---------- ----------
Accrued benefit cost under U.S.GAAP (111,186) (118,611) (123,554)
========== ========== ==========
Accrued benefit cost under Colombian GAAP (90,103) (98,731) (101,941)
---------- ---------- ----------
Difference to be recognized under U.S. GAAP (21,083) (19,880) (21,613)
---------- ---------- ----------
Additional minimum pension liability
offset to Stockholders' equity (6,772) (16,249) (49,125)
---------- ---------- ----------
TOTAL DIFFERENCE TO BE RECOGNIZED UNDER
U.S. GAAP STOCKHOLDERS' EQUITY Ps (27,855) Ps (36,129) Ps (70,738)
========== ========== ==========
----------
(*) The effect of curtailment/settlement is related to the sale of Abocol S.A.
The economic assumptions adopted are shown below in nominal terms.
Those assumptions used in determining the actuarial presents value of
pension obligation and the projected pension obligations for the plan years
were as follows.
2003 2004 2005
----- ----- ----
Discount rate 13.94% 13.40% 8.68%
Rate of compensation increases 7.61% 7.10% 6.33%
Rate of pension increases 5.50% 5% 4.50%
===== ===== ====
The economic assumptions used in the determination of pension
obligation under U.S. GAAP differ from those used under Colombian GAAP
because these are established annually by the Colombian law.
F-94
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004 2005
-------- -------- ---------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost Ps 1,557 Ps 1,543 Ps 1,604
Interest cost 25,616 25,624 27,504
Amortization of prior service 143 143 143
Amortization of unrecognized net transition
obligation 1,047 1,048 1,048
Amortization of actuarial unrecognized net gain
(loss) 5 82 562
-------- -------- ---------
Net periodic pension cost under U.S. GAAP 28,368 28,440 30,861
Net periodic pension cost under Colombian
GAAP, net 30,125 29,643 29,128
-------- -------- ---------
Difference to be recognized under U.S. GAAP Ps 1,757 Ps 1,203 Ps(1,733)
======== ======== =========
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service,
as appropriate, are expected to be paid:
PENSION OTHER
BENEFITS BENEFITS
-------- --------
2006 11,962 10,484
2007 11,037 7,235
2008 10,582 8,690
2009 10,461 10,487
2010 10,540 9,471
Years 2011 - 2015 52,207 88,416
======== ========
C) INFLATION ADJUSTMENT
Since January 1, 1992, and up to December 31, 2000, the consolidated
financial statements were adjusted for inflation based on the variation in
the CPI for middle income-earners. The adjustment was applied monthly to
non-monetary assets, equity (except for the revaluation surplus and
exchange adjustment), contingent accounts and memorandum accounts. No
adjustment was made to income, costs and expenses, and the financial
statements for the preceding period did not have to be re-measured.
Financial statements are adjusted for inflation under U.S. GAAP when
an entity operates in a hyperinflationary environment. The U.S. GAAP
adjustment represents the cumulative inflation adjustment on the Bank's
non-monetary assets for inflation occurring prior to January 1, 2001, less
depreciation expense.
F-95
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
D) REVALUATION OF ASSETS
In accordance with Colombian GAAP, reappraisals of a portion of the
Bank's premises and equipment, equity investments and other non-monetary
assets are made periodically and recorded in offsetting accounts which are
shown under the asset caption "reappraisal of assets" and the stockholders'
equity caption "Surplus from reappraisals of assets". The last valuation
was in December 2005. Under U.S. GAAP, reappraisals of assets are not
permitted.
E) ALLOWANCE FOR LOAN LOSSES
The methodology for evaluating loans under Colombian GAAP, as
discussed in Note 2 (j), is based on their inherent risk characteristics
and serves as a basis for recording loss allowances based on loss
percentage estimates, established by the Superintendency of Finance. Under
both Colombian GAAP and U.S. GAAP, the loan loss allowance is determined
and monitored on an ongoing basis, and is established through periodic
provisions charged to operations.
Under U.S. GAAP, allowance for loan losses represents management's
estimate of probable losses inherent in the portfolio. Attribution of the
allowance is made for analytical purposes only, and the entire allowance is
available to absorb probable loan losses inherent in the portfolio
including unfunded commitments. Additions to the allowance are made by
means of the provision for loan losses. Loan losses are deducted from the
allowance, and subsequent recoveries are added. Securities received in
exchange for loan claims in debt restructurings are initially recorded at
fair value, with any gain or loss reflected as a recovery or charge-off to
the allowance, and are subsequently accounted for as securities
available-for-sale.
In the corporate portfolio, large-balances, non-homogeneous exposures
representing significant individual credit exposures are evaluated based
upon the borrower's overall financial condition, resources, and payment
record; the prospects for support from any financially responsible
guarantors; and, if appropriate, the realizable value of any collateral.
Reserves are established for these loans based upon an estimate of probable
losses for individual larger-balance, non-homogeneous loans deemed
impaired. This estimate considers all available evidence including, as
appropriate, the present value of the expected future cash flows discounted
at the loan's contractual effective rate, the secondary market value of the
loan and the fair value of collateral. The allowance for loan losses
attributed to the remaining portfolio is established via a process that
estimates the probable loss inherent in the portfolio based upon various
statistical analysis. These analysis consider historical and projected
default rates and loss severities; internal risk rating, industry, and
other environmental factors. The Bank also considers overall portfolio
indicators including trends in internally risk-rated exposures, classified
exposures, cash-basis loans, historical and forecasted write-offs, and a
review of industry, and portfolio concentrations, including current
developments within those segments. In addition, the Bank considers the
current business strategy and credit process, including credit limit
setting and compliance, credit approvals, loan underwriting criteria, and
loan workout procedures.
F-96
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Each portfolio of small-balances, homogeneous loans, including
consumer revolving credit, credit cards, and most other consumer loans, is
collectively evaluated for impairment. The allowance for credit losses
attributed to these loans is established via a process that estimates the
probable losses inherent in the portfolio, based upon various statistical
analysis. These include migration analysis, in which historical delinquency
and credit loss experience is applied to the current aging of the
portfolio, together with analysis that reflect current trends and
conditions. The Bank also considers overall portfolio indicators including
historical credit losses, delinquent, non-performing and classified loans,
and trends in volumes and terms of loans; an evaluation of overall credit
quality and the credit process, including lending policies and procedures;
and economic, geographical, product and other environmental factors.
In general, commercial loans, which are 91 or more days past due and
consumer loans, small business loans, and mortgage loans which are 61 or
more days past due, together with certain other loans identified by
management, are deemed to be impaired.
The following summarizes the allowance for loan and financial lease
losses under Colombian GAAP and U.S. GAAP at December 31, 2003, 2004 and
2005:
2003 2004 2005
--------- --------- ----------
ALLOWANCE FOR LOANS, FINANCIAL LEASE LOSSES AND FORECLOSED
ASSETS UNDER COLOMBIAN GAAP
Allowance for loans and financial lease losses Ps400,838 Ps434,378 Ps705,882
Allowance for accrued interest and other receivable 5,597 4,729 10,358
Allowance for foreclosed assets 135,121 140,865 205,182
--------- --------- ---------
Ps541,556 Ps579,972 Ps921,422
--------- --------- ---------
ALLOWANCE FOR LOAN LOSSES UNDER U.S. GAAP
Allowance for loans, financial lease, accrued interest
losses and other related receivable
363,068 393,138 552,364
Allowance for foreclosed assets 76,126 84,631 151,394
--------- --------- ---------
Ps439,194 Ps477,769 Ps703,758
DIFFERENCE TO BE RECOGNIZED AS AN ADJUSTMENT TO
COLOMBIAN GAAP STOCKHOLDERS' EQUITY
Ps102,362 Ps102,203 Ps217,664
========= ========= =========
An analysis of the activity in the allowance for loans and financial
lease losses under U.S. GAAP during the year ended December 31, 2004 and
2005 is as follows:
2004 2005
---------- ----------
Provision at the beginning of the period 363,068 393,138
Currency Translation and other adjustments (12,751) (3,955)
Charge-offs (55,032) (115,455)
Recoveries (78,584) (207,896)
Charged to profit and loss account 176,437 486,532
---------- ----------
F-97
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
---------- ----------
Provision at the end of the period (1) 393,138 552,364
========== ==========
Gross Loans and financial leases 10,035,239 18,626,252
Closing customers provisions as a
percentage of gross loans 3.92% 2.97%
Customers charges against profits as
percentage of gross loans 1.76% 2.61%
----------
(1) Includes financial leases.
At December 31, 2003, 2004, and 2005, the carrying value of loans
considered to be impaired, under SFAS No. 114 (not including restructured
loans) was approximately Ps 329,864, Ps 118,710 and Ps 211,423,
respectively, and the related allowance for loan losses on those impaired
loans totaled Ps 153,089, Ps 22,243 and Ps 92,611, respectively.
For the years ended December 31, 2003, 2004 and 2005, the Bank
recognized interest income of approximately Ps 5,586, Ps 6,653 and Ps
10,918 respectively, on such impaired loans.
The total amount of loans evaluated under a methodology different than
SFAS 114 and SFAS 15 methodology was Ps 18,042,686.
Foreclosed assets
Under Colombian GAAP, the Bank must design and adopt its own internal
models for the calculation of provisions for foreclosed assets by means of
which the expected loss for all types of assets is estimated. For real
estate, the provision is equal to 30% of the value of the asset at the time
of receipt and must be constituted in proportional monthly installments
within the first year following receipt. This provision will increase an
additional 30% in proportional monthly installments within the second year
following receipt of the asset. Once the legal term for sale has expired
without authorization to extend, the provision must be 80% of the value
upon receipt. In case the term extension is granted, the remaining 20% of
the provision may be constituted within said term.
For moveable assets, the provision is equal to 35% of the value of the
asset at the time of acquisition and must be constituted in proportional
monthly installments within the first year following receipt. Said
provision must be increased and additional 35% within the second year
following receipt of the asset. Once the legal term for sale has expired
without authorization to extend, the provision must be 100% of the book
value of the asset prior to provisions. In case the term extension is
granted, the remaining 30% of the provision may be constituted within said
term.
Under U.S. GAAP, in order to assess for impairment its foreclosed
assets, the Bank applies the methodology described by the SFAS 144 and SFAS
15 with respect to the method to evaluate the recoverability of the assets
and to the measurement of the impairment loss.
F-98
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Accordingly, after a troubled debt restructuring, the Bank accounts for
assets received in satisfaction of a receivable the same as if the assets
had been acquired for cash. The application of SFAS 15 results in the
measurement of a new cost basis for the long-lived asset received in full
satisfaction of a receivable. A loss is recognized for any initial or
subsequent write-down to fair value less cost to sell. A gain is recognized
for any subsequent increase in fair value less cost to sell, but not in
excess of the cumulative loss previously recognized for a write-down to
fair value less cost to sell.
F) LOAN ORIGINATION FEES AND COSTS
Under Colombian GAAP, the Bank recognizes commissions (origination
fees) on loans, lines of credit and letters of credit when collected and
records related direct costs when incurred. For U.S. GAAP, under SFAS
No.91, "Accounting for Non-refundable Fees and Costs Associated with
Origination or Acquiring Loans and Initial Direct Costs of Leases", loan
origination fees and certain direct loan origination cost are deferred and
recognized over the life of the related loans as an adjustment of yield.
G) INTEREST RECOGNITION - NON-ACCRUAL LOANS
For Colombian GAAP purposes, interest income is not accrued on (i)
commercial loans that are more than 90 days past due, and (ii) consumer
loans that are more than 60 days past due. From January 1, 2005, the
Superintendency of Finance (before Superintendency of Banking) established
that, interest income is not accrued on (i) small business loans that are
more than 30 days past due, and (ii) mortgage loans that are more than 60
days past due.
Once a loan is non-performing, an allowance is established for 100% of
the accrued interest receivable and the Bank ceases to recognize interest
income on that loan. The Bank recognizes interest income on a cash basis
non-accrual loans.
Since March 25, 2003, the Bank established that commercial, consumer
and small business loans that are past due more than thirty days will stop
accruing interest in the statement of operations and their entries will be
made in memorandum accounts until such time that the customer does not
proceed to cancel.
For U.S. GAAP purposes, all accrued interest is reversed against
interest income once a loan becomes more than 90 days past due. U.S. GAAP
also requires that, if the collectibility of the principal of a non-accrual
loan is in doubt, cash payments should be applied to reduce the principal
to the extent necessary to remove such doubt.
For the years 2003 and 2004, interest income on past due commercial,
consumer and small business loans between 31 and 90 days past due, was
accounted as accrued interest.
Additionally, for the year 2005, interest income on past due mortgage
loans between 61 and 90 days past due, was accounted as accrued interest.
F-99
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
H) DEFERRED CHARGES
The Bank and its Subsidiaries have deferred certain pre-operating
expenses and other deferred charges, which are expensed as incurred under
U.S. GAAP.
I) INVESTMENT SECURITIES
In September 2002, the Superintendency of Banking (now Superintendency
of Finance) issued External Circular 033, which changed the classification
of investment securities as "trading", "held to maturity", and "available
for sale". According to this norm, an investment will be classified as
"trading" when the Bank acquires it for the purpose of selling it in the
near term, as "held to maturity" when the Bank has the intention and
ability to hold it to maturity, and as "available for sale" when the
investment is not classified as trading or held to maturity.
Under U.S. GAAP, investment securities that have readily determinable
market values are accounted for as follows:
- Debt and equity securities that are bought and held principally
for the purpose of selling them in the short term are classified
as "trading" securities and are reported at fair value, with
unrealized gains and losses included in earnings.
- Debt securities that the Bank has the positive intent and ability
to hold to maturity are classified as "held to maturity"
securities and are reported at amortized cost.
- Debt and equity securities not classified as either "held to
maturity" or "trading" securities are classified as "available
for sale" securities and reported at fair value, with unrealized
gains and losses excluded from earnings and reported net of
taxes, as a separate component of stockholders' equity. Any loss
in value of an investment considered other than temporary is
recognized in earnings.
FOREIGN EXCHANGE GAINS AND LOSSES ON SECURITIES AVAILABLE FOR SALE
Under Colombian GAAP, movements resulting from changes in foreign
currency exchange rates are reflected in consolidated statements of
operations. Under U.S. GAAP, EITF 96-15, Accounting for the Effects of
Changes in Foreign Currency Exchange Rates on Foreign-Currency-Denominated
Available-for-Sale Debt Securities, the change in value of available for
sale debt securities as a result of changes in foreign currency exchange
rates is reflected in shareholders' equity.
As of December 31, 2004 and 2005, the Bank's portfolio was classified
as "trading", "held to maturity" and "available for sale".
The carrying amounts, gross unrealized gains and losses and
approximate fair value of debt securities classified as held-to-maturity
and available for sale under U.S. GAAP are shown below:
F-100
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
AVAILABLE FOR SALE - DEBT SECURITIES
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps1,569,148 Ps67,258 Ps 385 Ps1,502,275
Securities issued or secured by government entities 19,060 34 -- 19,026
Securities issued or secured by financial entities 190,261 3,130 5,506 192,637
Other investments 165,216 466 647 165,397
----------- -------- ------- -----------
Ps1,943,685 Ps70,888 Ps6,538 Ps1,879,335
=========== ======== ======= ===========
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
AVAILABLE FOR SALE - DEBT SECURITIES
DECEMBER 31, 2005
Securities issued or secured by Colombian government Ps1,393,881 Ps60,540 Ps 868 Ps1,334,209
Securities issued or secured by government entities 3,431 256 -- 3,175
Securities issued or secured by financial entities 106,242 646 2,164 107,760
Other investments 339,002 1,776 2,713 339,939
----------- -------- ------- -----------
Ps1,842,556 Ps63,218 Ps5,745 Ps1,785,083
=========== ======== ======= ===========
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
HELD TO MATURITY
DECEMBER 31, 2004
Securities issued or secured by Colombian government Ps590,444 Ps17,115 Ps87,441 Ps660,770
Securities issued or secured by financial entities 20,728 235 2,085 22,578
Other investments 48,212 246 2,037 50,003
--------- -------- -------- ---------
Ps659,384 Ps17,596 Ps91,563 Ps733,351
========= ======== ======== =========
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
HELD TO MATURITY
DECEMBER 31, 2005
Securities issued or secured by Colombian government Ps817,008 Ps 9,251 Ps100,798 Ps 908,555
Securities issued or secured by financial entities 47,768 629 1,271 48,410
Other investments 61,156 1,290 4,548 64,414
--------- -------- --------- -----------
Ps925,932 Ps11,170 Ps106,617 Ps1,021,379
========= ======== ========= ===========
F-101
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
AVAILABLE FOR SALE - EQUITY SECURITIES
DECEMBER 31, 2004
Corfinsura Ps55,749 Ps38,748 Ps-- Ps17,001
-------- -------- ---- --------
Ps55,749 Ps38,748 Ps-- Ps17,001
======== ======== ==== ========
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
AVAILABLE FOR SALE - EQUITY SECURITIES
DECEMBER 31, 2005
Compania Suramericana de Inversiones S.A
Surainversiones Ps64,672 Ps64,665 Ps-- Ps7
-------- -------- ---- ---
Ps64,672 Ps64,665 Ps-- Ps7
======== ======== ==== ===
The scheduled maturities of debt securities at December 31, 2005 were as
follows:
HELD TO MATURITY AVAILABLE FOR SALE
----------------------- -------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
----------- --------- ----------- -----------
Due in one year or less Ps 49,024 Ps 49,111 Ps 132,393 Ps 132,496
Due from one year to five years 585,142 590,530 1,475,492 1,523,357
Due from five years to ten years 387,070 286,184 172,646 181,892
Due more ten years 143 107 4,552 4,811
----------- --------- ----------- -----------
TOTAL Ps1,021,379 Ps925,932 Ps1,785,083 Ps1,842,556
=========== ========= =========== ===========
Investments classified as "Held to maturity" for purposes of U.S. GAAP
are securities issued or secured by the Colombian government, which the
Bank has the intention and ability to hold to maturity.
The cost of available for sale securities was determined based on its
carrying amount plus gross unrealized losses minus gross unrealized gains.
The cost of securities classified as held to maturity is equal to the
carrying amount under Colombian GAAP, as these investments are not
accounted for at fair value.
The Bank is not required under Colombian GAAP to disclose the proceeds
from the sale of investment securities nor gains or losses resulting from
such sales. As a result, it is not feasible to obtain that information in a
reasonable manner for disclosure under U.S. GAAP.
F-102
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
UNREALIZED LOSSES DISCLOSURE
Investments that have been in continuous unrealized loss position for
less than 12 months are:
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
---------- ---------- ---------
AVAILABLE FOR SALE
DECEMBER 31, 2005
Securities issued or secured by Colombian government Ps246,622 Ps 868 Ps247,490
Securities issued or secured by financial entities 19,777 47 19,824
Other investments 86,754 2,513 89,267
--------- ------- ---------
TOTAL Ps353,153 Ps3,428 Ps356,581
========= ======= =========
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
---------- ---------- ---------
HELD TO MATURITY
DECEMBER 31, 2005
Securities issued or secured by Colombian government Ps 94,968 Ps31,077 Ps126,045
Securities issued or secured by financial entities 22,362 127 22,489
Other investments 10,683 4,544 15,227
--------- -------- ---------
TOTAL Ps128,013 Ps35,748 Ps163,761
========= ======== =========
Investments that have been in continuous unrealized loss position for
12 months or longer are:
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
---------- ---------- --------
IMPAIRMENT AVAILABLE FOR SALE
DECEMBER 31, 2005
Securities issued or secured by financial entities Ps17,976 Ps2,117 Ps20,093
Other investments 40,786 200 40,986
-------- ------- --------
TOTAL Ps58,762 Ps2,317 Ps61,079
======== ======= ========
F-103
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
GROSS
UNREALIZED COST
FAIR VALUE LOSSES BASIS
---------- ---------- --------
IMPAIRMENT HELD TO MATURITY
DECEMBER 31, 2005
Securities issued or secured by Colombian government Ps228,802 Ps69,721 Ps298,523
Securities issued or secured by financial entities 8,848 1,144 9,992
Other investments 5,453 4 5,457
--------- -------- ---------
TOTAL Ps243,103 Ps70,869 Ps313,972
========= ======== =========
SECURITIES ISSUED OR SECURED BY COLOMBIAN GOVERNMENT: The unrealized
losses on this category are related to mandatory investments issued by the
Ministry of Finance. The unrealized losses were caused by interest rate
increases. Because the Bank has the ability and intent to hold those
investments until a recovery of fair value, which may be maturity, the Bank
does not consider those investments to be other-than-temporarily impaired
at December 31, 2005.
As of December 31, 2005, 322 investment securities presented gross
unrealized losses.
No other-than-temporary impairment has been recognized for the
investment in debt securities held to maturity because the Bank has the
ability and the positive intent to hold these securities until the
amortized cost is recovered, there does not appear to be any credit
deterioration, and recovery seems probable. Held to maturity investments
that presented gross unrealized losses correspond to mandatory investments.
The amount of unrealized holding gain or loss on trading securities
included in earnings during 2004 and 2005 was Ps266,428 and Ps476,139,
respectively.
The Bank conducts regular reviews to assess whether other than
temporary impairment exists. A number of factors are considered in
performing an impairment analysis of securities.
Those factors include:
(a) the length of time and the extent to which the market value has
been less than cost;
(b) the financial condition and near-term prospects of the issuer,
including any specific events which may influence the operations
of the issuer (such as changes in technology that may impair the
earnings potential of the investment, or the discontinuance of a
segment of a business that may affect the future earnings
potential); or
F-104
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(c) the intent and ability of the Bank to retain its investment in
the issuer for a period of time sufficient to allow for any
anticipated recovery in market value.
The Bank also takes into account changes in economic conditions
globally, regionally, or related to specific issuers or industries that
could adversely affect these values.
J) INVESTMENT IN UNAFFILIATED COMPANIES. HIGH AND MEDIUM VOLUME QUOTATION
INVESTMENT SECURITIES CLASSIFIED AS "AVAILABLE FOR SALE" UNDER COLOMBIAN
GAAP
For purposes of Colombian GAAP, an investment in High and Medium
volume quotation equity securities of an investee is recorded using the
average price published by the exchange. The result of the valuation is
recorded as unrealized gain or loss in shareholders' equity. The investee
also records common stock dividends as income.
Under U.S. GAAP, an investment in non-marketable equity securities of
an investee is recorded at cost if the investor cannot exercise significant
influence. However, dividends paid in the form of additional shares of
common stock are not recorded as income. Instead, the costs of the shares
previously held are allocated equitably to the total shares held after
receipt of the stock dividend. When any shares are later disposed of, a
gain or loss is determined on the basis of the adjusted cost per share.
K) INVESTMENTS IN AFFILIATES. INVESTMENTS IN LOW, MINIMUM EXCHANGE OR UNQUOTED
EQUITY SECURITIES CLASSIFIED AS "AVAILABLE FOR SALE" FOR PURPOSES OF
COLOMBIAN GAAP
Under Colombian GAAP, low and minimum volume and unquoted equity
securities are valuated pursuant the shareholders' equity comparison
method. Under this method, the Bank accounts for increases of shareholders'
equity of the investee as reappraisal, and decreases as devaluation. If at
the valuation date the shareholders' equity of the investee is less than
its previous value, and the Bank had registered a reappraisal, this
reappraisal is affected until it runs out. Once reappraisal runs out, the
Bank records a devaluation. Likewise, if on the valuation date the
shareholders' equity of the investee is greater than its previous value,
and the Bank had registered a devaluation, this reappraisal is affected
until it runs out. Once devaluation runs out, the Bank records a
reappraisal.
Under U.S. GAAP, an investment in non-marketable equity securities is
recorded using the equity method when the investor can exercise significant
influence or the cost method when significant influence cannot be
exercised.
F-105
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
L) LESSOR ACCOUNTING
The Bank's Subsidiaries, Bancolombia Panama S.A., Sufinanciamiento
S.A., Suleasing Internacional, Surenting S.A., Banco Corfinsura
Internacional and Leasing Colombia S.A., lease certain assets to third
parties under non-cancelable lease arrangements. These lease arrangements
involve machinery and equipment, computer equipment, automobile and
furniture and fixtures (with terms between three and five years).
Under Colombian GAAP, for financial entities, leases are classified
into financial leases and operating leases. Since January 1, 2004, goods
given in financial lease to third parties with a purchase option are
recorded in the loan portfolio. Goods given in operating lease are recorded
as property, plant and equipment. For both types of leasing, the initial
record must represent the value to be financed of the good given in leasing
(that is, the acquisition or construction cost) and the value of the
improvement and expenses that can be capitalized, which represent a greater
value of the lease operation to be financed.
Under U.S. GAAP, a net investment in direct financing leases would be
established in an account representing the present value of the minimum
lease payments plus the unguaranteed residual value accruing to the benefit
of the lessor.
Surenting applied a specific provision of Colombian GAAP for leases.
Under this regulation, leases are classified as operating leases, even if
the contracts were signed with a purchase option. Under U.S. GAAP some of
their contracts classified as financial leasing after applying the criteria
for classifying leases established in SFAS 13.
Disclosure lessor accounting
The following lists the components of the net investment in direct
financial leases as of December 31, 2004 and 2005:
2004 2005
----------- -----------
Total minimum lease payments to be received Ps1,091,505 Ps3,033,438
Estimated residual values of leased property 55,937 174,866
Less: Unearned income (285,896) (721,848)
----------- -----------
Net investment in direct financial leases Ps 861,546 Ps2,486,456
=========== ===========
The following schedule shows the future minimum lease payments to be
received on direct financial leases for each of the next five years and
thereafter.
F-106
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
YEAR ENDED DECEMBER 31,
2006 Ps 681,431
2007 674,681
2008 675,241
2009 348,211
2010 300,525
Later years, through 2011 353,349
-----------
TOTAL MINIMUM FUTURE LEASE PAYMENTS TO BE RECEIVED Ps3,033,438
===========
The following schedule shows the future minimum lease payments to be
received on direct operating leases for each of the next five years and
thereafter.
YEAR ENDED DECEMBER 31,
2006 Ps 59,402
2007 47,138
2008 28,506
2009 11,278
2010 4,780
Later years, through 2011 --
---------
TOTAL MINIMUM FUTURE LEASE PAYMENTS TO BE RECEIVED Ps151,104
=========
M) BUSINESS COMBINATIONS
Purchase method of accounting
Upon a business combination, the purchase method of accounting under
U.S. GAAP requires that (i) the purchase price be allocated to the
identifiable acquired assets and liabilities on the basis of fair market
value, (ii) the statement of operations of the acquiring company for the
period in which a business combination occurs include the income of the
acquired company after the date of acquisition, and (iii) the costs
directly related to the purchase of a business combination be included as a
cost of the acquisition and, therefore, recorded as a component of
goodwill.
Upon a business combination, the purchase method of accounting under
Colombian GAAP requires that (i) the purchase price be allocated to the
acquired assets and liabilities on the basis of their book value, (ii) the
statement of income of the acquiring company for the period in which a
business combination occurs include the income of the acquired company as
if the acquisition had occurred on the first day of the reporting period
and (iii) the costs directly related to the purchase business combination
not be considered as a cost of the acquisition, but deferred and amortized
over a reasonable period as determined by management.
F-107
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Conavi and Corfinsura acquisition was accounted for using the pooling
of interests method under Colombian GAAP, in accordance with the
methodology suggested by the Superintendency of Finance.
Sufinanciamiento acquisition
On December 29, 2003, the Bank and its Subsidiaries acquired 99.99% of
the outstanding common shares of Sufinanciamiento S.A. Under U.S. GAAP, the
results of Sufinanciamiento's operations have been included in the
consolidated financial statements since that date. Sufinanciamiento is a
commercial financing company, specializing in automobile loans.
The acquisition of Sufinanciamiento will allow the Bank and its
Subsidiaries to complement its portfolio of products improving commercial
financing activities, more specifically automobile financing. The aggregate
purchase price was Ps 75,016 paid in cash.
The following table summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
FAIR VALUE OF ASSETS ACQUIRED AND
LIABILITIES ASSUMED UNDER U.S. GAAP
FROM SUFINANCIAMIENTO
AS OF DECEMBER 31, 2003
-----------------------------------
TOTAL PURCHASE PRICE, NET OF CASH ACQUIRED Ps 63,622
---------
Assets acquired 304,256
Premises and equipment, net 7,358
Liabilities assumed 269,268
---------
NET ASSETS ACQUIRED Ps 42,346
=========
EXCESS OF COST OVER THE FAIR VALUE OF
ACQUIRED NET ASSETS 21,276
INTANGIBLE ASSET 1,562
---------
GOODWILL Ps 19,714
=========
The excess of purchase price amounted to Ps 21,276 and Ps 1,562 was
assigned to a contract with Almacenes Exito (intangible assets) while the
remaining Ps 19,714 was assigned to goodwill.
In 2003 Sufinanciamiento S.A. signed an agreement with Almacenes
Exito, a major retailer in Colombia, whereby the former will be the only
financing provider to the latter's clients. Given the significance of this
agreement to Sufinanciamiento's operations and the future benefits it will
bring to the Bank's strategic and financial positions, this contractual
relationship has been identified as an intangible asset and fair valued by
the Bank.
F-108
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following unaudited pro forma information for 2002 and 2003
reflects the consolidated results of operations as if the acquisition had
occurred at the beginning of each year presented and includes the
amortization of intangibles, as appropriate. The unaudited pro forma
financial information presented is not necessarily indicative of the
results of operations that might have occurred had the transaction been
completed at the beginning of the year specified, and does not purport to
represent what the consolidated results might be for any future period.
2003
---------
U.S. GAAP Net income 481,736
Revenues 1,465,973
Earnings per share 1,088.44
=========
Under Colombian GAAP, the Bank consolidated Sufinanciamiento's
earnings since January 1, 2003, as if the acquisition had occurred at the
beginning of the year. Accordingly, virtually all of the amounts for
pre-acquisition periods in the primary financial statements are different
from the amounts that would be presented under U.S. GAAP. In effect, the
financial statements presented as the primary financial statements are of a
different reporting entity than would be required under U.S. GAAP.
The Bank understands that, in these circumstances, reconciliation of
net income and stockholders' equity alone will not produce information
content substantially similar to U.S. GAAP with respect to the
pre-acquisition periods. However, given the insignificance of
Sufinanciamiento's operations, the Bank decided not to present a columnar
reconciliation removing the acquired business. The Bank also believes that
the differences are not so pervasive that U.S. GAAP condensed income and
cash flow statements are necessary.
Conavi and Corfinsura acquisition
On July 30, 2005, Bancolombia acquired 71.18 percent and 95.39 percent
of the outstanding common shares of Conavi and Corfinsura respectively. For
purposes of U.S. GAAP, the results of Conavi and Corfinsura's operations
have been included in the consolidated financial statements since that
date.
Conavi and Corfinsura were leading financial institutions in the
Colombian market. Conavi, a bank devoted to raising resources from
individuals through savings accounts and to mortgage banking. Conavi was
the country's leader in mortgage lending with a market share of 19.3% as of
the date of the Merger, according to the Superintendency of Finance.
F-109
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Corfinsura was the largest financial corporation in Colombia as of the
date of the Merger with a market share in net loans of 55.9%, according to the
Superintendency of Finance. Known for its expertise in handling large and
mid-sized corporate credit and financial services through close customer
relationships, Corfinsura also has a highly respected investment bank, as well
as a modern and diversified treasury department, focused on strucured products.
As of December 31, 2004, Corfinsura's consolidated total asset value amounted to
Ps6,396 billion.
At the time of the Merger Corfinsura (after the spin-off) was the
holding company of Banco Corfinsura Internacional Inc. a Bank domiciled in
Puerto Rico, as well as other important financial institutions in Colombia, such
as Suvalor S.A. Comisionista de Bolsa, Colombia's leading security brokerage
firm, Suleasing S.A., one of the two leading leasing companies in the country
(together with Leasing Colombia S.A., Bancolombia's Subsidiary) as of the date
of the Merger, which was in turn the holding company of leasing companies
domiciled in Panama and Florida, United States; Surenting S.A., the leading
fleet renting in Colombia at the time of the Merger and Fiduciaria Corfinsura
S.A., a fiduciary trust company.
With this Merger, the Bank has become the most important financial
institution in Colombia and one of the largest in Latin America, obtaining
significant advantages such as reducing operating costs in the mid term, greater
risk diversification by lessening the degree of concentration of such and
providing an integrated portfolio of services, among others. Furthermore,
overall equity has been extended with this Merger, allowing in turn for the
financing of larger scale projects, contrary to those that each of our
individual companies was able to finance in the past.
The aggregate purchase price, net of cash was Ps 1,133,728, paid in
through the issuance of common and preferred shares in exchange for Corfinsura
and Conavi's shares. The value of the 111,444,976 common shares and the
39,686,634 preferred shares issued was determined based on the average market
price of Bancolombia's common and preferred shares over the 2-day period before
and after the terms of the acquisition were agreed to and ann The aggregate
purchase price includes merger expenses of Ps 10,524.
For Colombian GAAP purposes the results of operations of the acquired
entities were included in the consolidated statements of operations of the
combined entity since January 1, 2005.
In the acquisition agreement for the Merger there are not specified
contingent payments, options, or commitments.
The following tables summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition. Bancolombia
is in the process of obtaining third-party valuations of certain intangible
assets; thus, the allocation of the purchase price is subject to refinement.
F-110
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
FAIR VALUE OF ASSETS
ACQUIRED AND LIABILITIES
ASSUMED UNDER U.S. GAAP
FROM CONAVI
AS OF JULY 31, 2005
------------------------
TOTAL PURCHASE PRICE, NET OF CASH ACQUIRED Ps 316,864
-----------
Assets acquired 2,921,925
Premises and equipment, net 209,535
Liabilities assumed 3,006,974
-----------
NET ASSETS ACQUIRED Ps 124,486
===========
Excess of cost over the fair value of acquired net assets 192,378
Intangible Asset 122,269
-----------
GOODWILL Ps 70,109
===========
FAIR VALUE OF ASSETS
ACQUIRED AND LIABILITIES
ASSUMED UNDER U.S. GAAP
FROM CORFINSURA
AS OF JULY 31, 2005
------------------------
TOTAL PURCHASE PRICE, NET OF CASH ACQUIRED Ps 816,864
-----------
Assets acquired 4,969,839
Premises and equipment, net 142,872
Liabilities assumed 4,739,515
-----------
NET ASSETS ACQUIRED Ps 373,196
===========
Excess of cost over the fair value of acquired net assets 443,668
Intangible Asset 105,294
-----------
GOODWILL Ps 338,374
===========
Of the Ps227,563 of acquired intangible assets, Ps73,134 was assigned
to registered brands that are not subject to amortization and Ps 154,429
was assigned to service asset, asset management and Customers
relationships. The acquired intangible assets subject to amortization have
a weighted-average useful life of approximately 14 years.
The following are the descriptions for each intangible asset valued. A
detailed breakdown of intangibles values is showed above in the goodwill
and intangible assets section:
Brand
Brand intangibles are obtained from the Companies capacity to capture
a greater market share through new customers.
Customer relationships and contractual agreements
Customer relationships and contractual agreements intangibles are
obtained from the level of repeat clients, remaining with the Company and
providing gains for a specific period of time.
F-111
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following unaudited pro forma information for 2004 and 2005
reflects the consolidated results of operations as if the acquisition of
Conavi and Corfinsura had occurred at the beginning of each year presented
and includes the amortization of intangibles, as appropriate. The unaudited
pro forma financial information presented is not necessarily indicative of
the results of operations that might have occurred had the transaction been
completed at the beginning of the year specified, and does not purport to
represent what the consolidated results might be for any future period.
2004
-----------
U.S. GAAP Net income Ps 787,778
Revenues 5,446,198
Earnings per share Ps 1,731.38
===========
2005
-----------
U.S. GAAP Net income Ps 996,311
Revenues 7,196,028
Earnings per share Ps 2,189.70
===========
The following is a breakdown of the adjustments to the Stockholders'
Equity related to Conavi and Corfinsura business combination:
2005
----------
Fair value of fixed and foreclosed assets Ps 85,545
Service asset 6,023
Fair value of time deposits and long term debt 55,516
Fair value of loans (317,293)
Securitization of non performing loans 27,503
Conavi and Corfinsura net income from January to July 2005 (113,296)
Goodwill and other intangible assets 624,291
----------
BUSINESS COMBINATION CONAVI AND CORFINSURA Ps 368,289
==========
FAIR VALUE OF FIXED AND FORECLOSED ASSETS
The difference between the fair value of fixed and foreclosed assets
and their book value is adjusted by the effect of the depreciation and by
the effect of sales and written - offs.
F-112
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
FAIR VALUE OF TIME DEPOSITS, LONG TERM DEBT AND LOANS
The difference between the fair value of loans, time deposits and long
term debt and their book value is adjusted by the effect of the
amortization of the discount or the premium during the estimated average
life of these assets and liabilities.
SECURITIZATION OF NON PERFORMING LOANS
Under U.S. GAAP securitization of non performing loans carried out by
Conavi, does not meets the definition criteria of transfers of financial
assets by sale. The adjustment correspond to the recognition of a secured
borrowing under U.S. GAAP which under Colombian GAAP is not accounted for.
SERVICE ASSET
Under Colombian GAAP Conavi did not recognize any asset or liability
associated with the service of the securitizated performing loans. For U.S.
GAAP purposes the Bank has recognized a service asset. This asset is
adjusted by the effect of the amortization during its estimated average
life.
Goodwill and intangible assets
Under U.S. GAAP, from January 1, 2002, the Bank no longer amortizes
goodwill, but it is subject to an annual impairment test.
Prior to December 31, 2001, the Bank recognized an excess of fair
value of acquired net assets over cost (commonly referred to as negative
goodwill) on certain business combinations. Under Colombian GAAP, negative
goodwill is recorded as a liability and it is amortized over a period of
five years.
Under U.S. GAAP, as explained previously, the Bank adopted SFAS No.
141 on January 1, 2002. Upon adoption of SFAS No. 141, any unamortized
negative goodwill related to an excess over cost arising from business
combinations for which the acquisition date was before July 1, 2001 was
written off and recognized as the effect of a change in accounting
principle.
The Bank has performed the required impairment test of each reporting
unit's goodwill and concluded that there was no impairment of goodwill.
Accordingly, the Bank reversed the amortization of goodwill from Colombian
GAAP for the year ended 2005.
The activity of the goodwill and intangible assets during the years
ended December 31, 2003, 2004 and 2005 is as follows:
F-113
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004 2005
--------- --------- ---------
GOODWILL
Balance at beginning of year Ps141,553 Ps161,267 Ps161,267
Additions 19,714 -- 408,483
--------- --------- ---------
Balance at end of year Ps161,267 Ps161,267 Ps569,750
========= ========= =========
Goodwill by segments was as follows:
DECEMBER 31, DECEMBER 31,
2004 2005
------------ ------------
Commercial Banking Ps 33,114 Ps251,703
Retail Banking 104,443 151,420
Small Business Banking 23,710 27,784
Leasing -- 54,238
Trust -- 2,493
Offshore Commercial Banking -- 31,534
Brokerage -- 43,722
Government Banking -- 1,199
Builder Banking -- 4,326
Other segments -- 1,331
--------- ---------
Total Goodwill Ps161,267 Ps569,750
========= =========
2004 2005
------- ---------
INTANGIBLE ASSETS
Balance at beginning of year Ps1,562 Ps 1,406
Additions -- 227,563
Amortization (156) (5,889)
------- ---------
Balance at end of year Ps1,406 Ps223,080
======= =========
Intangible assets were as follows:
DECEMBER 31, 2004 DECEMBER 31, 2005
----------------------------- -----------------------------
GROSS CARRYING ACUMMULATED GROSS CARRYING ACUMMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
-------------- ------------ -------------- ------------
Non-Amortizable intangible assets Ps -- Ps 73,134
Amortizable intangible assets Ps1,562 Ps156 Ps155,991 Ps6,045
======= ===== ========= =======
F-114
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following table shows the amortizable intangible assets, detailed
with their respective useful lives.
ESTIMATED USEFUL
VALUE LIFE (MONTHS)
--------- ----------------
Service asset Ps 6,206 169
Asset management 30,004 125
Loan 77,354 201
Deposits 20,027 166
Customer relationship 22,400 105
---------
Ps155,991
=========
Until December 31, 2004 the total amount of goodwill outstanding was
tax deductible in accordance with tax regulations in Colombia. Accordingly,
deferred income taxes were recorded for the difference between the
unamortized amount of goodwill under Colombian GAAP and the balance under
U.S. GAAP. Since January 1, 2005 under Colombian GAAP this amount is no
longer deductible and this difference is accordingly treated as permanent
under U.S. GAAP and not recorded as deferred tax.
N) SECURITIZATION
The Bank has securitized both performing and non-performing mortgage
loans which, according to Colombian GAAP, have been accounted for as sales
and, as such, said loans have been removed from the Bank's balance sheet.
Upon applying the principle set out in Paragraph 9 of SFAS No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" to the securitization operations carried
out, the Bank finds that the securitization of non-performing loans does
not comply with the conditions qualifying a transfer by means of sale
according to U.S. GAAP. For this reason, and for the purposes of U.S. GAAP,
the securitization of non-performing loans are accounted for as a secured
borrowing.
O) FOREIGN CURRENCY TRANSLATION ADJUSTMENT
For Colombian GAAP, the translation adjustments resulting in the
conversion of foreign currency statements was included in the determination
of net income.
Under U.S. GAAP, according to SFAS No. 52 and SFAS No. 130, the
translation adjustments shall be reported as a component of stockholders'
equity, in other comprehensive income.
F-115
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
P) MINORITY INTEREST
The minority interest corresponds to the proportional adjustments to
the shareholders equity and net income originated by the subsidiaries where
Bancolombia holds less than 100% of participation.
Q) DISCONTINUED OPERATIONS
In 2005, Bancolombia sold its business Abocol. On November 22, 2005,
the Bank entered into a preliminary agreement with Incorbank Banqueros de
Inversion, Inversiones en Logistica y Seguridad de Transporte Ltda.
Inverloset, Equity Investment S.A, Rodriguez Azuero Asociados S.A. and
other individuals to begin negotiations relating to a proposed purchase
agreement, by which the Bank would sell all of the Almacenar S.A. shares it
holds directly (94.33%) and through Colcorp S.A. (3.92%). Both businesses
qualify as discontinued operations under U.S. GAAP. The results of the
discontinued operations under U.S. GAAP were as follows:
2004 2005
-------- ---------
Profit from discontinued operations
including profit on disposal of Ps18,072 Ps20,703 Ps(13,230)
======== =========
R) GUARANTEES
In order to meet the needs of its customers, the Bank issues financial
standby letters of credit and bank guarantees. At December 31, 2004 and
2005, outstanding letters of credits and bank guarantees issued by the Bank
totaled Ps 559,018 and Ps 838,675, respectively.
The table below summarizes, at December 31, 2004 and 2005, all of the
Bank's guarantees where the Bank is the guarantor. The maximum potential
amount of future payments represents the notional amounts that could be
lost under the guarantees if there were a total default by the guaranteed
parties, without consideration of possible recoveries under recourse
provisions or from collateral held or pledged. Such amounts bear no
relationship to the anticipated losses on these guarantees and greatly
exceed anticipated losses.
MAXIMUM POTENTIAL
EXPIRE WITHIN ONE EXPIRE AFTER ONE TOTAL AMOUNT AMOUNT OF FUTURE
YEAR YEAR OUTSTANDING PAYMENTS
--------------------- -------------------- --------------------- ---------------------
2004 2005 2004 2005 2004 2005 2004 2005
--------- --------- -------- --------- --------- --------- --------- ---------
Financial standby letters of Ps402,969 Ps474,159 Ps18,674 Ps19,061 Ps421,643 Ps493,220 Ps421,643 Ps493,220
credit
Bank guarantees 69,104 122,280 68,271 223,175 137,375 345,455 137,375 345,455
--------- --------- -------- --------- --------- --------- --------- ---------
TOTAL Ps472,073 Ps596,439 Ps86,945 Ps242,236 Ps559,018 Ps838,675 Ps559,018 Ps838,675
========= ========= ======== ========= ========= ========= ========= =========
F-116
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Financial standby letters of credit include guarantees of payment
of credit facilities, promissory notes and trade acceptances.
Bank guarantees are performance guarantees that are issued to
guarantee a customer's tender bid on a construction or systems installation
project or to guarantee completion of such projects in accordance with
contract terms. They are also issued to support a customer's obligation to
supply specified products, commodities or maintenance or warranty services
to a third party.
S) ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS
As required by U.S. GAAP, the estimated fair value of the Bank's
financial instruments, their carrying values and the major assumptions and
methodologies used to estimate fair values at December 31, 2004 and 2005
are presented hereunder. The fair value of a financial instrument is
defined as the amount at which the instruments could be exchanged in a
current transaction between willing parties, other than in a forced or
liquidation sale.
For those financial instruments with no quoted market prices
available, fair values have been estimated using present value or other
valuation techniques. These techniques are inherently subjective and are
significantly affected by the assumptions used, including the discount
rates, estimates of future cash flows and prepayment assumptions.
In addition, the fair values presented below do not attempt to
estimate the value of the Bank's fee generating businesses and anticipated
future business activities, that is, they do not represent the Bank's value
as a going concern.
DECEMBER 31, 2004 DECEMBER 31, 2005
--------------------------- ---------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------ ------------ ------------
FINANCIAL ASSETS
Cash and cash equivalents Ps 1,249,360 Ps 1,249,360 Ps 1,730,022 Ps 1,730,022
Investment securities 5,250,211 5,176,244 8,459,703 8,358,209
Loans and accrued interest receivable on loans, net 9,722,137 9,767,980 18,118,636 17,965,219
Customers' acceptances 66,494 66,494 62,986 62,986
Forward contracts (22,270) (22,270) 34,070 34,070
Swaps (111) (111) 36,423 57,094
Next day operations (219) (219) 70 70
Options -- -- (129) (129)
Cap -- -- 10 323
FINANCIAL LIABILITIES:
Deposits Ps11,862,116 Ps12,030,870 Ps18,384,982 Ps18,505,044
Overnight funds 616,494 616,494 1,329,913 1,329,913
Bank acceptances outstanding 66,593 66,593 63,126 63,126
Interbank borrowings 246,282 246,282 1,705,468 1,705,468
Borrowings from domestic development banks 857,919 857,919 2,222,083 2,222,083
Long term debt 552,531 564,417 1,648,312 1,709,017
============ ============ ============ ============
F-117
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following notes summarize the methods and assumptions used in
estimating the fair values of financial instruments:
Short-term financial instruments
Short-term financial instruments are valued at their carrying amounts
included in the consolidated balance sheet, which are reasonable estimates
of fair value due to the relatively short period to maturity of the
instruments. This approach was used for cash and cash equivalents,
customers' acceptances, accrued interest receivable, accounts receivable,
accounts payable, accrued interest payable and bank acceptances
outstanding.
Investment securities
The fair value of these financial instruments which include time
deposits in financial entities are calculated by the Colombian Stock
Exchange, except for financial instruments classified "held to maturity",
for which the fair value was determined using discounted cash flows with
actual market rates for similar assets.
Loans
The Bank has estimated the fair value of the loan portfolio pursuant
three methods depending of the type of loan being analyzed. Estimated fair
value of the homogeneous loan portfolio, including consumer, mortgage and
small business loans, has been determined based upon various statistical
analysis. These include migration analysis, in which historical delinquency
and credit loss experience is applied to the current aging of the
portfolio, together with analysis that reflect current trends and
conditions. Estimated fair value of loans with collateral has been
calculated using the realizable value of collateral. Estimated fair value
of restructured loans has been determined based on the present value of
expected future cash flow method discounted at the loan's contractual
effective rate.
Derivatives
The Bank's derivatives are recorded at fair value on a daily basis in
conformity with the rules prescribed by the Superintendency of Finance, in
accordance with the class of instrument, as follows:
Foreign exchange forward contracts:
The purchase or sale value of the exchange rate is estimated to obtain
the net value in foreign currency at valuation day and calculate the net
gain or loss.
F-118
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Financial instruments forward contracts:
The fair value without yields is estimated to value the agreed amount
to present value and calculate the net gain or loss.
Balance sheet classification:
Under Colombian GAAP, the Bank's derivative instruments are grouped
and presented net as either an asset or a liability.
U.S. GAAP restricts the ability to offset where the right of set off
exists between two parties (that is, where a debtor-creditor relationship
exists).
Typically, under U.S. GAAP, financial assets and liabilities can be
offset and the net amount reported in the balance sheet when (a) each of
two parties owes the other determinable amounts, (b) the reporting party
has the right to set off the amount owed with the amount owed by the other
party, (c) the reporting party intends to set off and (d) the right of
setoff is enforceable at law.
Consequently, the relevant assets and liabilities would be increased
by Ps144,979 as of December 31, 2005 in a U.S. GAAP balance sheet, with no
effect on net income or shareholders' equity.
Futures Contracts
The fair value of futures contracts and other derivatives traded in
stock markets are calculated by the respective stock market where the Bank
has conducted its operation.
Deposits
The fair value of time deposits was estimated based on the discounted
value of contractual cash flows using the rates currently offered for
deposits of similar remaining maturities.
Fair value of deposits with undefined maturities represents the amount
payable on demand as of the balance sheet date.
Interbank borrowings and borrowings from domestic development banks
Short-term interbank borrowings and borrowings from domestic
development banks have been valued at their carrying amounts because of
their relatively short-term nature. Long-term and domestic development bank
borrowings have also been valued at their carrying amount because they bear
interest at variable rates.
F-119
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Long term debt
Long term debt are bonds issued by the Bank, Leasing Colombia S.A.,
Fundicom S.A., Surenting S.A. and Sufinanciamiento S.A.
The fair value of bonds issued by the Bank, Leasing Colombia S.A. and
Surenting S.A. were estimated using quoted market prices. Bonds issued by
Fundicom S.A. and Sufinanciamiento S.A. are non marketable. For this reason
the carrying amounts were considered to approximate fair value.
T) PAID-IN-CAPITAL
In accordance with Colombian GAAP, paid-in capital in excess of par
value of shares issued is credited to a legal reserve. Under U.S. GAAP,
capital in excess of par value is credited to paid-in capital.
U) UNEARNED INTEREST INCOME
Under Colombian GAAP, unearned interest income is recorded as a
liability in the balance sheet. For U.S. GAAP purposes, only the net
amounts (loan amount less unearned interest) would be classified as a loan.
Under Colombian GAAP, unearned interest is amortized on a straight-line
basis whereas U.S. GAAP requires the use of the effective interest method.
However, the difference does not have a material impact on the Bank's
financial statements.
V) EARNINGS PER SHARE
Under Colombian GAAP, earnings per share ("EPS") are computed by
dividing net income by the weighted average number of both common and
preference shares outstanding for each period presented.
U.S. GAAP requires dual presentation of basic and diluted EPS for
entities with complex capital structures, as well as a reconciliation of
the basic EPS computation to the diluted EPS computation. Basic EPS is
calculated by dividing net income available to common stockholders by the
weighted average number of common shares outstanding. Diluted EPS assumes
the issuance of common shares for all dilutive potential common shares
outstanding during the reporting period. For the years ended December 31,
2003, 2004 and 2005, the Bank had a simple capital structure. Therefore,
there was no difference between basic or diluted EPS for these years.
The following summarizes information related to the computation of
basic EPS for the years ended December 31, 2003, 2004 and 2005 (millions of
pesos, except per share data):
F-120
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2003 2004 2005
---------- ---------- ----------
U.S. GAAP consolidated net income Ps 474,419 Ps 642,126 Ps 891,121
Less preferred share dividends 48,535 67,092 110,806
---------- ---------- ----------
Income attributable to common stockholders 425,884 575,034 780,315
========== ========== ==========
Income from continuing operations
attributable to common shareholders 417,555 554,331 793,145
Income (loss) from operations and disposal
of discontinued operations 8,129 20,703 (13,230)
---------- ---------- ----------
Income attributable to common shareholders 425,884 575,034 780,315
========== ========== ==========
Weighted average number of common shares
outstanding used in basic EPS
calculation (in millions) 398 398 455
Basic and Diluted earnings per share
(U.S. GAAP):
Income from continuing operations 1,049.64 1,392.79 1,744.05
Income (loss) from operations and disposal
of discontinued operations
20.42 52.02 (29.08)
---------- ---------- ----------
Income attributable to common shareholders Ps1,070.06 Ps1,444.81 Ps1,714.97
========== ========== ==========
W) CASH FLOW
During 2005, reserves against transactions and time deposits with the
Central Bank amounted to Ps 1,098,712. Under Colombian GAAP, this amount is
classified as cash and cash equivalent, while, for U.S. GAAP purposes,
restricted cash does not represent part of cash and cash equivalents for
cash flow statement presentation because it cannot be withdrawn without
prior notice or penalty.
Also during 2005 the Bank has the following items which are non cash
transactions: Ps 69,594 related to restructured loans were transferred to
foreclosed assets; shares issued for Ps 75,566, Ps 27,770 related to
accounts receivable for Abocol sale and foreign exchange loss for Ps
51,711. Such transactions affect the Bank's balance sheet but do not result
in cash receipts or cash payments in the period.
X) SEGMENTS DISCLOSURE
Operating segments are defined as components of an enterprise about
which separate financial information is available that is regulary used by
the Finance Vice President (the Chief Operating decision maker) in deciding
how to allocate resources and assessing performance.
The Bank has strategically aligned its operations into twelve major
business segments based on its market segmentation, customer's needs and
trading partners. Additionally, the Bank manages and measures the
performance of its operations through these business segments using an
internal profitability reporting system.
F-121
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank does not have any individual external customer which
represents 10% or more of the enterprises revenues.
The following presents information about reported operating segment
profit or loss, and segment assets:
F-122
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in Millions of pesos and thousands of U.S. dollars)
2003
Governmental
Small And
Retail Commercial Business Institutional Corporate
Banking Banking Banking Banking Treasury Headquarters
----------- ----------- ----------- ------------- ----------- ------------
Revenues from external customers Ps 212,472 Ps 32,502 Ps 34,906 Ps 19,007 Ps -- Ps (30,675)
Revenues from transactions with
other operating segments of the
same enterprise 34,422 22,731 19,795 24,530 -- (83,150)
Interest income 453,975 179,113 132,127 56,075 265,720 120,332
Interest expense 147,647 17,395 18,361 59,119 145,153 (5,293)
Net interest revenue 306,328 161,718 113,766 (3,044) 120,567 125,625
Depreciation and amortization
expense -- -- -- -- -- 33,544
Provision for loan losses 62,068 12,781 365 1,133 330 58,822
Administrative and other expense 336,412 40,112 38,541 24,275 5,200 163,593
Income tax expense or benefit -- -- -- -- -- 35,498
Other income or expense, net 3,354 (462) (449) 153 -- 29,576
Segment profit before distribution
of income (expense) for treasury
funds 158,096 163,596 129,112 15,238 115,037 (250,081)
Distribution of income (expense)
for treasury funds (1) 96,777 (75,379) (49,667) 50,866 (449) (22,148)
----------- ----------- ----------- --------- ----------- -----------
Segment profit Ps 254,873 Ps 88,217 Ps 79,445 Ps 66,104 Ps 114,588 Ps (272,229)
=========== =========== =========== ========= =========== ===========
Segments assets Ps3,127,442 Ps1,838,100 Ps1,449,736 Ps665,609 Ps3,060,778 Ps1,170,020
=========== =========== =========== ========= =========== ===========
Offshore
Commercial All other
Banking Trust Leasing Brokerage Manufacturing Segments Total
----------- -------- --------- --------- ------------- --------- ------------
Revenues from external customers Ps 7,742 Ps38,424 Ps 47,186 Ps 5,113 Ps 31,400 Ps 92,044 Ps 490,121
Revenues from transactions with
other operating segments of the
same enterprise (7,276) 773 (314) (111) 16,555 2,249 30,204
Interest income 150,602 5,366 8,174 10,856 (6) 13,095 1,395,429
Interest expense 63,874 109 50,274 274 9,008 14,733 520,654
Net interest revenue 86,728 5,257 (42,100) 10,582 (9,014) (1,638) 874,775
Depreciation and amortization
expense 882 1,032 3,377 1,059 2,747 3,203 45,844
Provision for loan losses 50,360 2,239 3,564 -- 237 7,918 199,817
Administrative and other expense 7,122 23,368 12,739 10,475 26,035 48,531 736,403
Income tax expense or benefit -- 6,430 4,240 2,577 1,528 12,361 62,634
Other income or expense, net 89,901 1,308 11,773 2,463 (783) 12,352 149,186
Segment profit before distribution
of income (expense) for treasury
funds 118,731 12,693 (7,375) 3,936 7,611 32,994 499,588
Distribution of income (expense)
for treasury funds (1) -- -- -- -- -- -- --
----------- -------- --------- -------- --------- --------- ------------
Segment profit Ps 118,731 Ps12,693 Ps (7,375) Ps 3,936 Ps 7,611 Ps 32,994 Ps 499,588
=========== ======== ========= ======== ========= ========= ============
Segments assets Ps3,748,134 Ps73,395 Ps554,073 Ps83,218 Ps221,222 Ps513,204 Ps16,504,931
=========== ======== ========= ======== ========= ========= ============
----------
(1) Those costs are calculated based on the funds that segments use or provide
and do not have an impact in the final result.
F-123
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004
Governmental
Small And
Retail Commercial Business Institutional Corporate
Banking Banking Banking Banking Treasury Headquarters
----------- ----------- ----------- ------------- ----------- ------------
Revenues from external customers Ps 226,318 Ps 33,013 Ps 34,582 Ps 20,277 Ps -- Ps 5,661
Revenues from transactions with
other operating segments of
the same enterprise 48,585 27,669 36,438 24,402 -- (104,324)
Interest income 597,066 208,387 200,207 43,857 471,270 41,192
Interest expense 138,503 29,896 20,877 81,164 152,702 (8,665)
Net interest revenue 458,563 178,491 179,330 (37,307) 318,568 49,857
Depreciation and amortization
expense -- -- -- -- -- 41,584
Provision for loan losses 51,614 3,265 4,358 (326) 4,028 (28,444)
Administrative and other expense 371,517 46,997 46,078 28,622 6,915 201,930
Income tax expense or benefit -- -- -- -- -- 200,967
Other income or expense, net (1,121) (528) -- -- -- (42,172)
Segment profit before
distribution of income
(expense) for treasury funds 309,214 188,383 199,914 (20,924) 307,625 (507,015)
Distribution of income (expense)
for treasury funds(1) 56,937 (46,341) (74,825) 99,032 (18,449) (16,354)
----------- ----------- ----------- --------- ----------- -----------
Segment profit Ps 366,151 Ps 142,042 Ps 125,089 Ps 78,108 Ps 289,176 Ps (523,369)
=========== =========== =========== ========= =========== ===========
Segments assets Ps4,064,951 Ps2,162,364 Ps2,125,485 Ps597,028 Ps4,095,094 Ps1,310,694
=========== =========== =========== ========= =========== ===========
Offshore
Commercial All other
Banking Trust Leasing Brokerage Manufacturing Segments Total
----------- -------- ----------- --------- ------------- --------- ------------
Revenues from external customers Ps 7,234 Ps49,178 88,265 Ps 7,842 Ps 42,285 Ps 90,355 Ps 605,010
Revenues from transactions with
other operating segments of
the same enterprise 4,063 817 (582) 196 10,720 8,382 56,366
Interest income 172,103 6,412 21,918 8,894 444 16,195 1,787,945
Interest expense 47,919 2 88,676 2,923 11,191 11,332 576,520
Net interest revenue 124,184 6,410 (66,758) 5,971 (10,747) 4,863 1,211,425
Depreciation and amortization
expense 357 1,085 4,462 469 958 3,818 52,733
Provision for loan losses 36,046 1,165 20,293 148 1,735 2,504 96,386
Administrative and other expense 8,262 26,112 18,951 11,123 28,645 56,299 851,451
Income tax expense or benefit -- 10,355 10,278 3,980 4,344 8,886 238,810
Other income or expense, net 19,304 1,275 15,721 8,250 (650) 1,544 1,623
Segment profit before
distribution of income
(expense) for treasury funds 110,120 18,963 (17,338) 6,539 5,926 33,637 635,044
Distribution of income (expense)
for treasury funds(1) -- -- -- -- -- -- --
----------- -------- ----------- -------- --------- --------- ------------
Segment profit Ps 110,120 Ps18,963 Ps (17,338) Ps 6,539 Ps 5,926 Ps 33,637 Ps 635,044
=========== ======== =========== ======== ========= ========= ============
Segments assets Ps3,463,813 Ps91,306 Ps1,003,995 Ps24,389 Ps247,032 Ps560,357 Ps19,746,508
=========== ======== =========== ======== ========= ========= ============
----------
(1) Those costs are calculated based on the funds that segments use or provide
and do not have an impact in the final result.
F-124
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005
Governmental
Small And
Retail Commercial Business Builder Institutional Corporate
Banking Banking Banking Banking(2) Banking Treasury Headquarters
----------- ----------- ----------- ---------- ------------- ----------- ------------
Revenues from external customers Ps 474,916 Ps 32,652 Ps 50,724 Ps 1,104 Ps 15,092 Ps -- Ps 19,572
Revenues from transactions with other
operating segments of the same
enterprise 76,998 145,022 161,358 3,118 27,850 -- (414,894)
Interest income 1,059,092 379,434 375,839 40,244 82,570 828,418 (3,320)
Interest expense 245,978 87,318 127,094 1,642 38,579 358,932 33,110
Net interest revenue 813,114 292,116 248,745 38,602 43,991 469,486 (36,430)
Depreciation and amortization expense -- -- -- -- -- -- 2,103
Provision for loan losses 77,229 3,497 13,338 1,774 1,913 27,560 16,176
Administrative and other expense 697,565 76,472 85,086 4,763 36,397 10,895 418,951
Income tax expense or benefit -- -- -- -- -- -- 202,362
Other income or expense, net 193 5 5 -- -- -- (34,392)
Segment profit before distribution of
income (expense) for treasury funds 590,427 389,826 362,408 36,287 48,623 431,031 (1,105,736)
Distribution of income (expense) for
treasury funds(1) 102,443 (84,480) (87,934) (20,556) 17,486 73,041 --
----------- ----------- ----------- --------- --------- ----------- ------------
Segment profit Ps 692,870 Ps 305,346 Ps 274,474 Ps 15,731 Ps 66,109 Ps 504,072 Ps(1,105,736)
=========== =========== =========== ========= ========= =========== ============
Segments assets Ps7,710,861 Ps3,757,603 Ps3,730,214 Ps328,150 Ps825,460 Ps7,375,750 Ps 997,949
=========== =========== =========== ========= ========= =========== ============
Offshore
Commercial All other
Banking Trust Leasing Brokerage(3) Manufacturing Segments Total
----------- --------- ----------- ------------ ------------- ---------- ------------
Revenues from external customers Ps 12,618 Ps 58,431 Ps 308,027 Ps 67,346 Ps 3,461 Ps 83,161 Ps 1,127,104
Revenues from transactions with other
operating segments of the same
enterprise 10,604 753 6,654 (2,547) (707) 22,823 37,032
Interest income 178,409 9,902 67,845 59,488 129 25,460 3,103,510
Interest expense 75,422 -- 210,411 29,204 362 14,579 1,222,631
Net interest revenue 102,987 9,902 (142,566) 30,284 (233) 10,881 1,880,879
Depreciation and amortization expense 706 1,280 11,871 1,254 441 12,998 30,653
Provision for loan losses 28,538 850 19,459 11 12 1,765 192,122
Administrative and other expense 8,952 30,427 57,950 56,345 2,532 83,413 1,569,748
Income tax expense or benefit -- 13,351 32,389 19,047 622 9,742 277,513
Other income or expense, net 12,346 904 6,546 14,313 704 8,310 8,934
Segment profit before distribution of
income (expense) for treasury funds 100,359 24,082 56,992 32,739 (382) 17,257 983,913
Distribution of income (expense) for
treasury funds(1) -- -- -- -- -- -- --
----------- --------- ----------- --------- --------- --------- ------------
Segment profit Ps 100,359 Ps 24,082 Ps 56,992 Ps 32,739 Ps (382) Ps 17,257 Ps 983,913
=========== ========= =========== ========= ========= ========= ============
Segments assets Ps4,166,424 Ps129,858 Ps3,452,069 Ps421,797 Ps 87,888 Ps538,059 Ps33,522,082
=========== ========= =========== ========= ========= ========= ============
(1) Those costs are calculated base on the funds that segments use or provide.
Those do not have an impact in the final result.
(2) This segment was incorporated from Conavi as a result of the Merger. It
targets the building construction industry.
(3) In the Annual Report of 2003 and 2004 Brokerage was not considered by the
management as an individual operating segment, it was included in all other
segments of the segments disclosure. For year 2005 and with the
introduction of Suvalor as a result of the Merger, brokerage become in an
operating segment susceptible to evaluation by the management. For
comparability effects it was necessary to break out the segment brokerage
for years 2003 and 2004.
F-125
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following is a reconciliation of reportable segments revenues,
profit or loss and assets, to the Banks' consolidated totals:
2003 2004 2005
------------ ------------ ------------
REVENUES
Total revenues for reportable segments Ps 1,808,366 Ps 2,334,389 Ps 4,136,202
Other revenues 307,342 140,253 111,278
------------ ------------ ------------
Total 2,115,708 2,474,642 4,247,480
------------ ------------ ------------
Elimination of intersegment revenues (30,204) (56,366) (37,032)
------------ ------------ ------------
TOTAL REVENUES FOR REPORTABLE SEGMENTS (1) Ps 2,085,504 Ps 2,418,276 Ps 4,210,448
============ ============ ============
PROFIT OR LOSS
Total profit or loss for reportable segments Ps 466,594 Ps 601,407 Ps 966,656
Other profit or loss 32,994 33,637 17,257
------------ ------------ ------------
Total 499,588 635,044 983,913
------------ ------------ ------------
Elimination of intersegment profits (30,204) (56,366) (37,032)
------------ ------------ ------------
NET INCOME (LOSS) Ps 469,384 Ps 578,678 Ps 946,881
============ ============ ============
ASSETS
Total assets for reportable segments Ps15,991,727 Ps19,186,151 Ps32,984,023
Other assets 513,204 560,357 538,059
------------ ------------ ------------
Total 16,504,931 19,746,508 33,522,082
------------ ------------ ------------
Elimination of intersegment assets (1,328,802) (2,267,379) (2,718,565)
------------ ------------ ------------
CONSOLIDATED TOTAL Ps15,176,129 Ps17,479,129 Ps30,803,517
============ ============ ============
----------
(1) Total revenues for reportable segments include interest, fees, other
services and other operating income.
The following summarizes the Bank's revenues and long-lived assets
attributable to Colombia and other foreign countries:
F-126
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005
---------------------------- ----------------------------
LONG LONG
REVENUES LIVED - ASSETS REVENUES LIVED - ASSETS
----------- -------------- ----------- --------------
GEOGRAPHIC INFORMATION
Republic of Colombia Ps2,284,240 Ps340,304 Ps3,990,600 Ps734,419
Republic of Panama and Cayman Islands 183,400 1,692 202,018 29,810
Puerto Rico -- -- 42,897 131
USA (1) 7,002 577 11,965 326
----------- --------- ----------- ---------
Total 2,474,642 342,573 4,247,480 764,686
Eliminations (56,366) (1,119) (37,032) 7,144
----------- --------- ----------- ---------
TOTAL, NET Ps2,418,276 Ps341,454 Ps4,210,448 Ps771,830
=========== ========= =========== =========
----------
(1) Information relating to Bancolombia Miamy Agency is included since 2004,
because it started operations at the end of 2003. Additionally, the amounts
for the year 2005 include Suleasing Internacional Inc. as a result of the
Merger among Bancolombia, Conavi and Corfinsura.
The segments reported embrace the following activities:
RETAIL BANKING: The Bank's Retail Banking segment provides a wide
range of financial products and services to individuals and SMEs. This
segment is important for the Bank's funding and generation of revenues.
COMMERCIAL BANKING: The Commercial Banking Segment provides commercial
banking products and services to all sectors of the economy. Corporate
customers are segmented by their economic activity as well as by their
size. This segmentation assures adequate support and adequate pricing
according to their risk level.
SMALL BUSINESS BANKING: This segment includes legal entities with
annual sales of from Ps 250 to Ps 10 billion, as well as individuals who
work independently in the retail, cattle-raising and agricultural sectors,
among others. On 2005, the structure of this segment changed aiming to
enhance competitiveness in the SMEs banking market as well as the corporate
banking market.
BUILDER BANKING: The Builder Banking segment provides services to the
professional Building construction industry. Builder customers are
segmented by the number of construction projects belonging to them.
GOVERNMENTAL AND INSTITUTIONAL BANKING: This segment provides services
to institutional customers subject to the supervision of the
Superintendency of Finance the Superintendency of Health or the
Superintendency of Family Subsidy, and also electric and financial
corporations. The governmental customers include public sector entities.
F-127
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
TREASURY: The Bank's Treasury Division is responsible for the
management of the Bank's treasury products and its proprietary liquidity as
well as its foreign exchange and securities positions. Additionally the
Bank realized operations of treasury with its customers.
OFFSHORE COMMERCIAL BANKING: Bancolombia Panama S.A. and Bancolombia
Cayman, located in Panama and the Cayman Islands, respectively, Suvalor
Panama S.A. and Banco Corfinsura Internacional Inc, located in Panama and
Puerto Rico, respectively, provide a complete line of banking services
mainly to Colombian customers, which includes loans to private sector
companies, brokerage services (Suvalor Panama S.A.), trade financing, lease
financing, financing for industrial projects as well as a complete
portfolio of cash management products, such as checking accounts,
international collections and payments and PC Banking. Through these
Subsidiaries, the Bank also offers to its high net worth customers and
private banking customers investment opportunities in U.S. dollars, in
savings accounts and in checking accounts, CD-time deposits, and investment
funds.
TRUST: The Bank offers, through its Subsidiary Fiducolombia S.A., a
family of five mutual funds and one voluntary retirement fund, all of which
are designed to provide customers with the opportunity to diversify their
investments. As of December 31, 2005, it had Ps 2,878,543 in total assets
under management, increasing 42.5% from Ps 2,020,227 in 2004. Additionally,
Fiducolombia offers a broad range of products and services by type of
trust, among which the following stand out: Public trust, management and
payment trust, individual investment trust, real estate trust and guarantee
trust.
LEASING: Leasing Colombia S.A. Surenting S.A. and Sufinanciamiento
S.A., as the Bank's Subsidiaries specialized in lease activities, offer
financial and operational leases. The main activities that require lease
financing are infrastructure, import of goods, international leases, real
estate, vehicles for executives, leasing for suppliers, and cattle raising.
Leasing Colombia provides leased assets, usually involving equipment, for a
fixed term that is shorter than the assets useful life. Once the
corresponding term ends, the customer has the option of acquiring the
assets for their commercial value. Surenting S.A., a non-financial
subsidiary of Leasing Colombia, offers broad solutions for large companies'
transport and vehicle needs. Surenting provides vehicle renting and fleet
management services for individuals and entities.
BROKERAGE: On October 3, 2005, Comisionista de Colombia S.A Comicol
Merged with and into Compania Suramericana de Valores S.A. Suvalor
Comisionista de Bolsa as surviving entity. According to data as of
September 30, 2005, Suramericana de Valores S.A. - Suvalor - and
Comisionista de Colombia S.A - Comicol -
The following are investment alternatives offer by Suvalor: Fixed and
variable yield instruments; Stock Investments; SURENTA Investment Funds;
International Investments; Specialized Products such as Portfolio
Management and capital markets advisory services and Structured Products.
F-128
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
MANUFACTURING: The manufacturing segment of the Bank provides a wide
range of products to individuals and companies such us: metal parts in gray
and ductile iron, both wrought and finished, such as brake systems for
passenger automobiles and trucks, accessories for aqueducts and agriculture
machinery.
ALL OTHER SEGMENTS: Provide the following products and services:
- Warehouse and logistics services through Almacenar S.A., a
Subsidiary of the Bank;
- Colcorp S.A. is a Subsidiary of the Bank that specializes in
providing investment banking services to a variety of the Bank's
customers;
Y) RECENT U.S. GAAP PRONOUNCEMENTS
In May 2005, the FASB issued Statement No. 154 ("SFAS 154"),
Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20,
Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements, and amends the requirements for the accounting for
and reporting of a change in accounting principle. This Statement applies to all
voluntary changes in accounting principle. It also applies to changes required
by an accounting pronouncement in the unusual instance that the pronouncement
does not include specific transition provisions. When a pronouncement includes
specific transition provisions, those provisions should be followed. This
statement is effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. The impact of SFAS 154 will
depend on the accounting change, if any, in a future period.
In February 2006, the FASB issued Statement No. 155 ("SFAS 155"),
Accounting for Certain Hybrid Financial Instruments. This Statement amends FASB
Statements No. 133, Accounting for Derivative Instruments and Hedging
Activities, and No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities. This Statement resolves issues
addressed in Statement 133 Implementation Issue No. D1, "Application of
Statement 133 to Beneficial Interests in Securitized Financial Assets". This
Statement:
a. Permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation
b. Clarifies which interest-only strips and principal-only strips
are not subject to the requirements of Statement 133
F-129
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
c. Establishes a requirement to evaluate interests in securitized
financial assets to identify interests that are freestanding
derivatives or that are hybrid financial instruments that contain
an embedded derivative requiring bifurcation
d. Clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives
e. Amends Statement 140 to eliminate the prohibition on a qualifying
special purpose entity from holding a derivative financial
instrument that pertains to a beneficial interest other than
another derivative financial instrument.
This Statement is effective for all financial instruments acquired or
issued after the beginning of an entity's first fiscal year that begins after
September 15, 2006. The Bank is currently evaluating the potential impact, if
any, that the adoption of SFAS 155 will have on our consolidated financial
statements.
In March 2006, the FASB issued Statement 156 ("SFAS 156"), Accounting
for Servicing of Financial Assets. This Statement amends FASB Statement No. 140,
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, with respect to the accounting for separately recognized
servicing assets and servicing liabilities. This Statement permits, but does not
require, the subsequent measurement of servicing assets and servicing
liabilities at fair value. An entity that uses derivative instruments to
mitigate the risks inherent in servicing assets and servicing liabilities is
required to account for those derivative instruments at fair value. Under this
Statement, an entity can elect subsequent fair value measurement to account for
its separately recognized servicing assets and servicing liabilities. By
electing that option, an entity may simplify its accounting because this
Statement permits income statement recognition of the potential offsetting
changes in fair value of the servicing assets, servicing liabilities, and
related derivative instruments in the same accounting period. An entity that
elects to subsequently measure servicing assets and servicing liabilities at
fair value is expected to recognize declines in fair value of the servicing
assets and servicing liabilities more consistently than by reporting
other-than-temporary impairments.
An entity should adopt this Statement as of the beginning of its first
fiscal year that begins after September 15, 2006. Bancolombia is evaluating the
impacts of SFAS 156.
In July 2005, the FASB posted FSP APB 18-1, "Accounting by an Investor
for Its Proportionate Share of Accumulated Other Comprehensive Income of an
Investee Accounted for Under the Equity Method in Accordance With APB Opinion
No. 18 Upon a Loss of Significant Influence".
The FSP requires that when equity method accounting ceases upon the
loss of significant influence of an investee, the investor's proportionate share
of the investee's OCI should be offset against the carrying value of the
investment. To the extent that this results in a negative carrying value, the
investor should adjust the carrying value to zero and record the residual
balance through earnings.
An entity should adopt this Staff Position as of the first reporting
period beginning after July 12, 2005. The impact of FSP APB 18-1 will depend on
the loss of significant influence of an investee accounted under equity method,
if any, in a future period.
F-130
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments". On November 3,
2005, the FASB issued FSP FAS 115-1 and FAS 124-1, "The Meaning of
Other-Than-Temporary Impairment and Its Application to Certain
Investments". This FSP nullifies certain requirements of Issue 03-1 and
supersedes EITF Abstracts, Topic No. D-44, "Recognition of
Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose
Cost Exceeds Fair Value". This FSP specifically:
a. Nullifies the requirements of paragraphs 10-18 of Issue 03-1
in EITF Abstracts
b. Carries forward the requirements of paragraphs 8 and 9 of
Issue 03-1 in EITF Abstracts with respect to cost-method
investments
c. Carries forward the disclosure requirements included in
paragraphs 21 and 22 of Issue 03-1 and related examples in
EITF Abstracts
d. References existing other-than-temporary impairment
guidance.
The guidance in this FSP shall be applied to reporting periods
beginning after December 15, 2005. Earlier application is permitted. The
adoption of FSP FAS 115-1 and FAS 124-1 is not expected to have a material
impact on BC consolidated financial statements.
(32) RESTATEMENT OF SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
UNDER U.S.GAAP
The Bank Supplemental Consolidated Statements of Operations for
the year ended December 31, 2005 and the Supplemental Consolidated
Condensed Stataments of Cash Flows for the three years ended December 31,
2005, prepared in accordance with U.S. GAAP, were restated to correct
inadvertent errors. There is no impact on the Consolidated Net Income and
Stockholders' Equity for any of the years presented under U.S. GAAP as
reported in the original filing.
As described in Note 31(m) the acquisition of Conavi and
Corfinsura was accounted for using the pooling of interests method under
Colombian GAAP and purchase accounting under US GAAP. In order to provide
comparative financial information under US GAAP, the Bank presented
Supplemental Consolidated Financial Statements in note 31 (c). The
restatement of the Supplemental Consolidated Condensed Statements of
Operations and the Supplemental Consolidated Condensed Statements of Cash
Flow for the year ended December 31, 2005, is a consequence of the
inadvertent failure to eliminate on a line by line basis of the results and
cash flows of Conavi and Corfinsura for the period from January 1, 2005 to
July 30, 2005. The Supplemental Consolidated Condensed Statement of Cash
Flows for the years ended December 31, 2005, 2004 and 2003 are being
restated for the reclassification of cash flows related to trading
securities from investing activities to operating activities.
F-131
BANCOLOMBIA S. A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
2005
---------------------------
PREVIOUSLY
REPORTED RESTATED
------------ ------------
Total interest income Ps 2,972,967 Ps 2,627,277
Total interest expense (1,198,334) (1,032,923)
------------ ------------
NET INTEREST INCOME 1,774,633 1,594,354
Total net provisions (14,965) (11,822)
------------ ------------
NET INTEREST INCOME AFTER PROVISION AND FINANCIAL
LEASING
1,759,668 1,582,532
Other income 1,141,720 935,738
Other expenses (1,847,496) (1,464,378)
------------ ------------
INCOME BEFORE INCOME TAXES 1,053,892 1,053,892
Income tax expense (149,541) (149,541)
------------ ------------
NET INCOME BEFORE DISCONTINUED OPERATIONS 904,351 904,351
------------ ------------
Discontinued operations (13,230) (13,230)
NET INCOME Ps 891,121 Ps 891,121
============ ============
SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
2003 2004 2005
---------------------------- --------------------------- ---------------------------
PREVIOUSLY PREVIOUSLY PREVIOUSLY
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
------------ ------------- ------------ ------------ ------------ ------------
Net income (loss) Ps 474,419 Ps 474,419 Ps 642,126 Ps 642,126 Ps 891,121 Ps 891,121
Adjustments to reconcile net
income to
net cash provided (used) by
operating activities: (1,803,773) (1,964,394) (1,663,670) (608,738) (8,164,268) (5,215,860)
------------ ------------- ------------ ------------ ------------ ------------
Net cash provided by operating
activities (1,329,354) (1,489,975) (1,021,544) 33,388 (7,273,147) (4,324,739)
Net cash used in investing
activities (54,586) 106,035 (520,488) (1,575,420) (3,184,771) (6,133,179)
Net cash provided by financing
activities 1,979,312 1,979,312 1,344,931 1,344,931 10,938,580 10,938,580
------------ ------------- ------------ ------------ ------------ ------------
(Decrease) increase in cash and
cash equivalents Ps 595,372 Ps 595,372 Ps (197,101) Ps (197,101) Ps 480,662 Ps 480,662
============ ============= ============ ============ ============ ============
Cash and cash equivalents at
beginning of year 851,089 851,089 1,446,461 1,446,461 1,249,360 1,249,360
------------ ------------- ------------ ------------ ------------ ------------
Cash and cash equivalents at end
of year Ps 1,446,461 Ps 1,446,461 Ps 1,249,360 Ps 1,249,360 Ps 1,730,022 Ps 1,730,022
============ ============= ============ ============ ============ ============
F-132