AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 23, 2006
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
(Mark One)
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 No X
----- -----
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TABLE OF CONTENTS
CERTAIN DEFINED TERMS..................................................... i
INTERNET SITES NOT PART OF ANNUAL REPORT.................................. ii
ROUNDING; COMPARABILITY OF DATA........................................... ii
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION................... iii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS...................... v
PART I.................................................................... 1
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS........... 1
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE......................... 1
ITEM 3. KEY INFORMATION................................................. 1
A. SELECTED FINANCIAL DATA............................................. 1
B. CAPITALIZATION AND INDEBTEDNESS..................................... 6
C. REASONS FOR THE OFFER AND USE OF PROCEEDS........................... 6
D. RISK FACTORS........................................................ 7
ITEM 4. INFORMATION ON THE COMPANY...................................... 16
A. HISTORY AND DEVELOPMENT OF THE COMPANY.............................. 16
B. BUSINESS OVERVIEW................................................... 24
C. ORGANIZATIONAL STRUCTURE............................................ 93
D. PROPERTY, PLANT AND EQUIPMENT....................................... 94
E. SELECTED STATISTICAL INFORMATION.................................... 95
ITEM 4A. UNRESOLVED STAFF COMMENTS....................................... 132
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS.................... 132
A. OPERATING RESULTS................................................... 132
B. LIQUIDITY AND CAPITAL RESOURCES..................................... 147
C. PATENTS, LICENSES AND CONTRACTS..................................... 151
D. TREND INFORMATION................................................... 151
E. OFF-BALANCE SHEET ARRANGEMENTS...................................... 153
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS....................... 154
G. CRITICAL ACCOUNTING POLICIES AND ESTIMATES.......................... 154
H. RECENT U.S. GAAP PRONOUNCEMENTS..................................... 155
I. RELATED PARTY TRANSACTIONS.......................................... 157
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES...................... 157
A. DIRECTORS AND SENIOR MANAGEMENT..................................... 157
B. COMPENSATION........................................................ 163
C. BOARD PRACTICES..................................................... 164
D. EMPLOYEES........................................................... 166
E. SHARE OWNERSHIP..................................................... 167
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS............... 167
A. MAJOR SHAREHOLDERS.................................................. 167
B. RELATED PARTY TRANSACTIONS.......................................... 169
C. INTEREST OF EXPERTS AND COUNSEL..................................... 170
ITEM 8. FINANCIAL INFORMATION........................................... 170
A. CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL
INFORMATION......................................................... 170
B. SIGNIFICANT CHANGES................................................. 173
ITEM 9. THE OFFER AND LISTING........................................... 174
A. OFFER AND LISTING DETAILS........................................... 174
B. PLAN OF DISTRIBUTION................................................ 175
C. MARKETS............................................................. 175
D. SELLING SHAREHOLDERS................................................ 176
E. DILUTION............................................................ 176
F. EXPENSES OF THE ISSUE............................................... 176
ITEM 10. ADDITIONAL INFORMATION.......................................... 176
A. SHARE CAPITAL....................................................... 176
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.............................. 176
C. MATERIAL CONTRACTS.................................................. 183
D. EXCHANGE CONTROLS................................................... 184
E. TAXATION............................................................ 185
F. DIVIDENDS AND PAYING AGENTS......................................... 190
G. STATEMENT BY EXPERTS................................................ 190
H. DOCUMENTS ON DISPLAY................................................ 190
I. SUBSIDIARY INFORMATION.............................................. 190
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK...... 190
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.......... 216
PART II................................................................... 217
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES................. 217
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
USE PROCEEDS.................................................... 217
ITEM 15. CONTROLS AND PROCEDURES......................................... 217
ITEM 16. RESERVED........................................................ 217
ITEM.16.A AUDIT COMMITTEE FINANCIAL EXPERT................................ 218
ITEM.16.B CORPORATE GOVERNANCE AND CODE OF ETHICS......................... 218
ITEM.16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES.......................... 219
ITEM.16.D PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED
PURCHASERS...................................................... 219
PART III.................................................................. 220
ITEM 17. FINANCIAL STATEMENTS............................................ 220
ITEM 18. FINANCIAL STATEMENTS............................................ 220
ITEM 19. EXHIBITS........................................................ 220
CERTAIN DEFINED TERMS
Unless otherwise specified or if the context so requires, in this
annual report:
References to the "Annual Report" refer to this annual report on Form
20-F.
References to "Conavi" refer to Conavi Banco Comercial y de Ahorros
S.A. as it existed immediately before the Merger (as defined below).
References to "Corfinsura" refer to Corporacion Financiera Nacional y
Suramericana S.A. as it existed immediately before the Merger, taking into
account the effects of its spin-off of a portion of its investment portfolio
effective July 29, 2005.
References to the "Merger" refer to the Merger of Conavi and
Corfinsura with and into Bancolombia S.A., with Bancolombia S.A. as the
surviving entity, which took effect on July 30, 2005 pursuant to a Merger
agreement dated February 28, 2005.
References to "Subsidiaries" refer to subsidiaries of Bancolombia S.A.
in which Bancolombia S.A. holds, directly or indirectly, 50% or more of the
outstanding voting shares.
References to "Bancolombia", "BC", the "Bank", "us" or "we" refer to
Bancolombia S.A., a banking institution organized under the laws of the Republic
of Colombia, which may also act under the name of Banco de Colombia S.A.,
including its Subsidiaries and taking into account the effects of the Merger.
References to "Colombia" refer to the Republic of Colombia.
References to "peso", "pesos" or "Ps" refer to Colombian pesos.
References to "U.S. dollar", "U.S. dollars", and "US$" are to United
States dollars.
The term "billion" means one thousand million (1,000,000,000).
i
INTERNET SITES NOT PART OF ANNUAL REPORT
We maintain an Internet site at www.bancolombia.com.co. In addition,
certain of our Subsidiaries maintain Internet sites referred to in this Annual
Report, such as www.corfinsura.com and www.suvalor.com. We also refer to certain
websites in this Annual Report as sources for certain information contained
herein. Information contained in or otherwise accessible through these websites
is not a part of this Annual Report. All references in this Annual Report to
these and other Internet sites are inactive textual references to these URLs, or
"uniform resource locators", and are for your informational reference only.
ROUNDING; COMPARABILITY OF DATA
Certain monetary amounts, percentages and other figures included in
this annual report have been subject to rounding adjustments. Accordingly,
figures shown as totals in certain tables may not be the arithmetic aggregation
of the figures that precede them, and figures expressed as percentages in the
text may not total 100% or, as applicable, when aggregated may not be the
arithmetic aggregation of the percentages that precede them.
ii
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
We maintain accounting records in Colombian pesos. The audited
consolidated financial statements of Bancolombia (including its Subsidiaries)
for the years ended December 31, 2003, 2004 and 2005 contained in this Annual
Report (collectively, including the notes thereto, the "Financial Statements")
are expressed in pesos.
This Annual Report translates certain peso amounts into U.S. dollars
at specified rates solely for the convenience of the reader. Unless otherwise
indicated, such peso amounts have been translated at the rate of Ps2,284.22 per
US$1.00, which corresponds to the Tasa Representativa del Mercado
("Representative Market Rate") calculated the last business day of December
2005. The Representative Market Rate is computed and certified by the
Superintendencia Financiera (the "Superintendency of Finance"), the Colombian
banking regulator, on a daily basis and represents the weighted average of the
buy/sell foreign exchange rates negotiated on the previous day by certain
financial institutions authorized to engage in foreign exchange transactions
(including BC). The Superintendency of Finance also calculates and certifies the
average Representative Market Rate for each month for purposes of preparing
financial statements, and converting amounts in foreign currency to Colombian
pesos. Such conversion should not be construed as a representation that the peso
amounts correspond to, or have been or could be converted into, U.S. dollars at
that rate or any other rate. On May 31, 2006, the Representative Market Rate was
Ps2,486.07 per US$1.00.
The accounting practices and the preparation of financial statements
of the Bank and its Subsidiaries follow the special regulations of the Colombian
Superintendency of Finance, or, in the absence of such regulations, generally
accepted accounting principles in Colombia ("Colombian GAAP"). Together, these
requirements differ in certain significant respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). References to
Colombian GAAP in this Annual Report are to Colombian GAAP as supplemented by
the applicable rules of the Colombian Superintendency of Finance.
For consolidation purposes under Colombian GAAP, financial statements
of the Bank and its Subsidiaries must be prepared under uniform accounting
policies. In order to comply with this requirement, financial statements of
foreign Subsidiaries were adjusted as required by Colombian regulations with
regard to investments, loans and leased assets.
The Bank consolidates companies in which it holds, directly or
indirectly, 50% or more of outstanding voting shares. The Bank's subsidiary
Bancolombia (Panama) S.A. ("Bancolombia Panama") consolidates the following
companies: Bancolombia Cayman S.A., Sistema de Inversiones y Negocios S.A.,
Sinesa Holding Company Limited and Future Net S.A.. The Bank's subsidiary
Almacenes Generales de Deposito Mercantil S.A. - Almacenar ("Almacenar")
consolidates the companies Unicargo de Colombia S.A. and Compania de
Distribucion y Transporte S.A. - Ditransa. The subsidiary Colcorp S.A.
Corporacion Financiera - ("Colcorp") consolidates the companies Inmobiliaria
Bancol S.A., Valores Simesa S.A., Fundicom S.A., Comecol S.A and Todo Uno
Colombia S.A. The Bank's subsidiary Leasing Colombia S.A. Compania de
Financiamiento Comercial ("Leasing Colombia") consolidates the following
companies: Compania Suramericana de Arrendamiento Operativo S.A. Surenting
("Surenting") and Suleasing Internacional S.A. (which consolidates Suleasing
Internacional Inc.). The Bank's subsidiary Compania Suramericana de Valores S.A.
Suvalor Comisionista de Bolsa ("Suvalor") consolidates Suvalor Panama S.A.
iii
On April 3, 1998, Banco Industrial Colombiano S.A. ("BIC") merged with
Banco de Colombia. In connection with this merger, BIC changed its name to
Bancolombia S.A. and began conducting its commercial activities, products and
services under the commercial name of "Bancolombia". Then, in July 30, 2005,
Conavi and Corfinsura merged with and into Bancolombia, after Corfinsura
spun-off a portion of its investment portfolio. For more information please see
Item 4. Information on the Company - A. History and Development of the Company.
iv
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains certain forward-looking statements within
the meaning and subject to the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995 and information relating to us that is
not based on historical facts but instead on the beliefs of management as well
as assumptions made on the basis of information currently available to us. When
used in this document, the words "anticipate", "believe", "estimate", "expect",
"intend", "plan", "predict", "target", "forecast", "guideline", "should",
"project" and similar expressions, as they relate to us or our management, are
intended to identify forward-looking statements. Such statements appear
throughout this Annual Report and reflect our current views with respect to
future events and are subject to certain risks, uncertainties and assumptions.
Many factors could cause our actual results, performance or achievements to be
materially different from any future results, performance or achievements that
may be expressed or implied by such forward-looking statements, including, but
not limited to, changes in general economic and business conditions; changes in
laws, regulations or policies in the jurisdictions in which we do business;
sovereign risks; liquidity risks; changes in currency exchange rates and
interest rates; the failure of management to realize expected synergies related
to the Merger; introduction of competing products by other companies; lack of
acceptance of new products or services by our targeted customers; changes in
business strategy and various other factors both referenced and not referenced
in this Annual Report. Should one or more of these risks or uncertainties
materialize, or should our underlying assumptions prove incorrect, actual
results may vary materially from those described herein as anticipated,
believed, estimated, expected, intended, planned or projected. Forward-looking
statements speak only as of the date they are made and are subject to change,
and the Bank does not intend, and does not assume any obligation, to update
these forward-looking statements in light of new information or future events.
Factors that could cause actual results to differ materially and
adversely include, but are not limited to:
- changes in general economic, business, political, fiscal or
other conditions in Colombia or changes in general economic
or business conditions in Latin America;
- changes in capital markets or in markets in general that may
affect policies or attitudes towards lending to Colombia or
Colombian companies;
- increased costs;
- unanticipated increases in financing and other costs or the
inability to obtain additional debt or equity financing on
attractive terms; and
- the factors discussed under Item 3. Key Information - D.
Risk Factors; Item 5. Operating and Financial Review and
Prospects; and elsewhere in this Annual Report and in the
documents that it incorporates by reference.
New factors emerge from time to time, and it is not possible for the
Bank to predict all of these factors. By means of this cautionary note, the Bank
intends to avail itself of the safe harbor from liability with respect to
forward-looking statements provided by Section 27A of the Securities Act of 1933
(the "Securities Act") and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act").
v
Neither our independent auditors, nor any other independent
accountants, have compiled, examined, or performed any procedures, with respect
to the prospective financial information contained herein, nor have they
expressed any opinion or any other form of assurance on such information or its
achievability, and they assume no responsibility for, and disclaim any
association with, the prospective financial information.
vi
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 2004 and
2005, and for each of the three fiscal years in the period ended December 31,
2005 set forth below has been derived from our audited Consolidated Financial
Statements included in this Report. The selected consolidated financial data as
of December 31, 2001, 2002 and 2003, and for each of the two fiscal years in the
period ended December 31, 2002 set forth below have been derived from our
audited consolidated financial statements for the respective periods, which are
not included herein.
The Consolidated Financial Statements for the years ended December 31,
2003, 2004 and 2005 were audited by Deloitte & Touche Ltda., independent
accountants. For the years ended December 31, 2001 and 2002, our Consolidated
Financial Statements were audited by KPMG Ltda. independent accountants.
The selected consolidated financial data should be read in conjunction
with the consolidated financial statements, related notes thereto, and the
reports of the independent public accounting firms.
In order to provide a better understanding of BC's financial
statements, certain reclassifications were made in the consolidated balance
sheets for fiscal years 2001, 2002 and 2003. As a result, certain figures
provided in this Annual Report for the years ended December 31, 2001, 2002 and
2003, such as net accounts receivable, net foreclosed assets, net operating
leases, net and other assets differ from those reported in the Bank's annual
reports for the years ended December 31, 2001, 2002 and 2003. These
reclassifications do not affect the Bank's stockholders' equity for any of the
years for which the Consolidated Balance Sheets were reclassified. Additionally,
reclassifications were made in the consolidated statement of operations for the
periods ended December 31, 2001, 2002, 2003 and 2004, in order to unify the
presentation with our quarterly reports. As a consequence, certain figures
provided in this Annual Report for the years ended December 31, 2001, 2002, 2003
and 2004 differ from those reported in the Bank's Annual Report for each of the
years mentioned above. These reclassifications did not have an impact on the net
income for any of the years for which the consolidated statement of operations
were reclassified.
1
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
2001 2002 2003 2004 2005(9) 2005(2)
------------- ------------- ------------- ------------- ------------- ------------
(In millions of Ps and thousands of US$(2), except per share and per American
Depositary Share ("ADS") amounts)
CONSOLIDATED STATEMENT OF
OPERATIONS(1):
COLOMBIAN GAAP:
Interest income..................... Ps 1,077,354 Ps 1,150,734 Ps 1,537,818 Ps 1,803,108 Ps 3,200,084 US$1,400,952
Interest expense.................... (529,074) (466,223) (480,513) (585,743) (1,150,274) (503,574)
------------- ------------- ------------- ------------- ------------- ------------
NET INTEREST INCOME.............. 548,280 684,511 1,057,305 1,217,365 2,049,810 897,378
Provisions for loans and accrued
interest losses, net of
recoveries(3).................... (73,953) (115,154) (130,356) (61,423) (123,575) (54,099)
Provision for foreclosed assets and
other assets, net of recoveries.. (63,537) (71,212) (51,943) (5,201) (7,465) (3,268)
------------- ------------- ------------- ------------- ------------- ------------
NET INTEREST INCOME AFTER
PROVISIONS.................... 410,790 498,145 875,006 1,150,741 1,918,770 840,011
Fees and income from services and
other operating income, net...... 424,591 416,427 515,325 574,453 962,277 421,272
Operating expenses.................. (696,963) (755,801) (850,768) (912,421) (1,654,805) (724,451)
------------- ------------- ------------- ------------- ------------- ------------
NET OPERATING INCOME (LOSS)...... 138,418 158,771 539,563 812,773 1,226,242 536,832
Net non-operating income (loss)..... 51,000 79,787 (7,874) 7,140 4,650 2,035
INCOME (LOSS) BEFORE TAXES....... 189,418 238,558 531,689 819,913 1,230,892 538,867
Minority interest (loss)............ (1,310) 14,440 330 (2,425) (6,496) (2,844)
Income taxes........................ (31,575) (42,618) (62,635) (238,810) (277,515) (121,492)
------------- ------------- ------------- ------------- ------------- ------------
NET INCOME (LOSS)............. Ps 156,533 Ps 210,380 Ps 469,384 Ps 578,678 Ps 946,881 US$ 414,531
============= ============= ============= ============= ============= ============
Weighted average of Preferred and
Common Shares outstanding(4)..... 576,695,395 576,695,395 576,695,395 576,695,395 652,882,756
Basic and Diluted net operating
income (loss) per share(4) (5)... Ps 240 Ps 275 Ps 857 Ps 1,297 Ps 1,878 US$ 0.82
Basic and Diluted net operating
income (loss) per ADS............ 960 1,101 3,427 5,189 7,513 3.28
Basic and Diluted net income (loss)
per share(4)(5).................. 271 365 814 1,003 1,450 0.63
Basic and Diluted net income (loss)
per ADS.......................... 1,084 1,460 3,256 4,012 5,800 2.54
Cash dividends declared per share(6) 84 132 272 376 508 0.22
Cash dividends declared per ADS..... 336 528 1,088 1,504 2,032 0.88
U.S. GAAP:(7)
Net income (loss)................... Ps 226,048 Ps 207,152 Ps 474,419 Ps 642,126 Ps 891,121 US$ 390,120
Basic and Diluted net income (loss)
per share(8)..................... 530 461 1,070 1,445 1,715 0.75
Basic and Diluted net income (loss)
per ADS(8)....................... 2,120 1,844 4,280 5,780 6,860 3.00
----------
(1) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for fiscal years 2001,
2002, 2003 and 2004 was reclassified. This change did not have any impact
on net income.
(2) Amounts stated in US$ have been translated at the rate of Ps2,284.22 to
US$1.00, which is the Representative Market Rate calculated the last
business day of December 2005, as reported and certified by the
Superintendency of Finance.
(3) Includes a provision for accrued interest losses amounting to Ps4,965
million, Ps4,518 million, Ps5,316 million, Ps4,483 million and Ps12,379
million for the years ended December 31, 2001, 2002, 2003, 2004 and 2005,
respectively.
(4) For fiscal years 2001, 2002, 2003, and 2004, these figures include
398,259,608 Common Shares and 178,435,787 Preferred Shares. For fiscal year
2005, it includes 454,621,115 Common Shares and 198,261,641 Preferred
Shares.
(5) The figure for fiscal year 2001 reflects all dividends per share
distributed through December 31, 2001. Net income (loss) per share is
calculated for each fiscal year on the basis of average outstanding shares
during that fiscal year.
(6) This data is presented on an annualized basis.
(7) Refer to Note 31 to the Financial Statements for the reconciliation with
U.S. GAAP.
(8) Reflects all dividends per share distributed up to December 31, 2001. Under
U.S. GAAP, these shares are considered outstanding since the beginning of
the earliest period presented. Net income per share under U.S. GAAP is
presented on the basis of net income available to common stockholders
divided by the weighted average number of Common Shares outstanding (398
million for each of 2001, 2002, 2003 and 2004; and 509.7 million for 2005).
See Note 31 to the Financial Statements.
(9) The consolidated statement of operations for the year ended December 31,
2005, includes Conavi and Corfinsura's results since the beginning of the
year.
2
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------
2001 2002 2003 2004 2005(5) 2005 (1)
------------ ------------ ------------ ------------ ------------ -------------
(In millions of Ps and thousands of US$ (1), except per
share and per American Depositary Share ("ADS") amounts)
CONSOLIDATED BALANCE SHEET
COLOMBIAN GAAP:
ASSETS:
Cash and due from banks...................... Ps 536,813 Ps 643,405 Ps 848,052 Ps 768,514 Ps 1,241,435 US$ 543,483
Overnight funds.............................. 176,666 207,684 598,409 480,846 488,587 213,897
Investment securities, net................... 2,984,552 4,343,458 4,336,724 5,250,211 8,459,703 3,703,541
Loans and financial leases, net.............. 5,078,476 5,864,991 7,642,405 9,600,861 17,920,370 7,845,291
Accrued interest receivable on loans, net.... 77,681 83,459 103,209 121,276 198,266 86,798
Customers' acceptances and derivatives....... 39,907 (15,662) 1,539 43,894 133,420 58,409
Accounts receivable, net..................... 104,436 149,955 163,310 173,875 590,313 258,431
Premises and equipment, net.................. 320,080 317,724 337,964 346,243 623,729 273,060
Foreclosed assets, net....................... 57,012 46,002 27,676 12,206 31,360 13,729
Prepaid expenses and deferred charges........ 84,483 58,403 27,831 15,950 26,898 11,776
Goodwill..................................... 141,552 118,904 99,910 73,607 50,959 22,309
Operating leases, net(4)..................... 244,195 373,499 537,207 8,311 143,974 63,030
Other assets................................. 186,879 147,949 198,480 315,394 563,588 246,731
Reappraisal of assets........................ 241,727 259,811 253,413 267,941 330,915 144,870
------------- ------------- ------------- ------------- ------------- -------------
TOTAL ASSETS.............................. Ps 10,274,459 Ps 12,599,582 Ps 15,176,129 Ps 17,479,129 Ps 30,803,517 US$13,485,355
============= ============= ============= ============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY:
Deposits..................................... Ps 7,580,848 Ps 8,788,158 Ps 10,231,997 Ps 11,862,116 Ps 18,384,982 US$ 8,048,691
Borrowings................................... 830,654 1,117,015 1,211,595 1,104,201 3,927,551 1,719,427
Other liabilities............................ 892,506 1,410,061 2,043,158 2,422,089 5,113,694 2,238,706
Shareholders' equity......................... 970,451 1,284,348 1,689,379 2,090,723 3,377,290 1,478,531
------------- ------------- ------------- ------------- ------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY Ps 10,274,459 Ps 12,599,582 Ps 15,176,129 Ps 17,479,129 Ps 30,803,517 US$13,485,355
============= ============= ============= ============= ============= =============
U.S. GAAP(2):
Shareholders' equity......................... Ps 1,147,989 Ps 1,413,445 Ps 1,832,886 Ps 2,267,286 Ps 4,125,996 US$ 1,806,304
Shareholders' equity per share(3)............ 1,991 2,451 3,178 3,932 6,320 2.77
Shareholders' equity per ADS(3).............. 7,964 9,804 12,712 15,728 25,280 11,07
----------
(1) Amounts stated in US$ have been translated at the rate of Ps 2,284.22 to
US$1.00, which is the Representative Market Rate calculated the last
business day of December 2005, as reported and certified by the
Superintendency of Banking (Now Superintendency of Finance).
(2) Refer to Note 31 to the Financial Statements for the reconciliation for
U.S. GAAP.
(3) Shareholders' equity per share is calculated on the basis of the number of
Common Shares and Preferred Shares. The weighted average (rounded to the
nearest million) of Preferred and Common Shares outstanding was 577 million
for the fiscal years ended December 31, 2001, 2002, 2003 and 2004 and 653
million for the fiscal year ended December 31, 2005.
(4) In 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. Additionally, according to this
Circular, the assets given in financial lease contracts and recovered by
the lessor because the purchase option is not exercised or because of the
lessee's failure to make payments are to be classified as foreclosed assets
starting January 1, 2004. In the annual report for fiscal year 2003 , these
assets were included in the line "Other assets". The Bank did not recla
ssify for these assets in the balance sheet for fiscal years 2001, 2002 and
2003.
(5) The consolidated balance sheet for the year ended December 31, 2005,
includes Conavi and Corfinsura's results since the beginning of the year.
Please see Item 8. Financial Information - A. Consolidated Financial
Statements And Other Financial Information - A.3. Dividend Policy, for
information about the dividends declared per share in both pesos and U.S.
dollars during the fiscal years 2001, 2002, 2003, 2004 and 2005.
3
DIFFERENCES BETWEEN COLOMBIAN AND U.S. GAAP RESULTS
The consolidated financial statements have been prepared in accordance
with accounting principles and policies as summarized in Note 2 to the Financial
Statements. These accounting principles and policies differ in some respects
from U.S. GAAP. A reconciliation of net income, stockholders equity and cash
flows under U.S. GAAP is included in Note 31 to the Financial Statements.
Consolidated net income under U.S. GAAP for the year ended December
31, 2005 was Ps 891,121 million (compared with Ps 642,126 million for fiscal
year 2004 and Ps 474,419 million for fiscal year 2003). The significant
adjustments between Colombian and U.S. GAAP results primarily relate to Note 31
- Differences Between Colombian Accounting Principles for Banks and U.S. GAAP -
to the Financial Statements.
4
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2002 2003 2004 2005(12)
------ ------ ------ ------ --------
(percentages, except for operating data)
SELECTED RATIOS:(1)
COLOMBIAN GAAP:
PROFITABILITY RATIOS:
Net interest margin(2)(11)......................................... 7.30 7.43 9.22 8.75 8.12
Return on average total assets(3).................................. 1.65 1.88 3.40 3.62 3.30
Return on average shareholders' equity(4).......................... 14.58 20.42 31.14 32.14 31.49
EFFICIENCY RATIO:
Operating expenses as a percentage of interest, fees,
services and other operating income(11)......................... 71.64 68.65 54.10 50.92 54.94
CAPITAL RATIOS:
Period-end shareholders' equity as a percentage of period-end
total assets.................................................... 9.45 10.19 11.13 11.96 10.96
Period-end regulatory capital as a percentage of period-end risk-
weighted assets(5).............................................. 10.61 11.61 13.08 13.44 10.93
CREDIT QUALITY DATA:
Non-performing loans as a percentage of total loans(6)(10)......... 4.54 1.77 0.95 0.88 1.48
"C", "D" and "E" loans as a percentage of total loans(9)(10)....... 9.70 9.71 4.93 3.86 3.38
Allowance for loan and accrued interest losses as a
percentage of non-performing loans(10).......................... 122.91 316.80 515.13 496.30 259.02
Allowance for loan and accrued interest losses as a
percentage of "C", "D" and "E" loans(9)(10)..................... 57.57 57.71 99.07 113.47 113.59
Allowance for loan and accrued interest losses as a
percentage of total loans(10)................................... 5.58 5.61 4.89 4.37 3.84
OPERATING DATA:
Number of branches(7).............................................. 323 340 354 377 678
Number of employees(8)............................................. 7,518 7,581 8,001 8,609 14,562
----------
(1) Ratios were calculated on the basis of monthly averages.
(2) Defined as net interest income divided by average interest-earning assets.
(3) Net income divided by average total assets.
(4) Net income divided by average shareholders' equity.
(5) For an explanation of risk-weighted assets and Technical Capital, see Item
4. Information on the Company - B. Business Overview - B.7. Supervision and
Regulation - Capital Adequacy Requirements.
(6) Non performing loans are small business loans that are past due 30 days or
more, mortgage and consumer loans that are past due 60 days or more and
commercial loans that are past due 90 days or more. (Each category includes
financial leases).
(7) Number of branches does not include branches of the Bank's Subsidiaries.
(8) The number of employees includes employees of the Bank's consolidated
Subsidiaries.
(9) See Item 4. Information on the Company - E. Selected Statistical
Information - E.3. Loan Portfolio - Classification of the Loan Portfolio
and Credit Categories for a description of "C", "D" and "E" Loans.
(10) In October 23, 2003, the Superintendency of Banking (now the
Superintendency of Finance) through its External Circular 040, modified the
treatment of financial leases. Starting Janua ry 1, 2004, instead of
recording financial leases as property, plant and equipment, companies must
account for them in their loan portfolio.
(11) For fiscal years 2001, 2002, 2003 and 2004, the Net Interest Margin was
modified, due to the reclassifications made in the Consolidated Statement
of Operations. Additionally, the efficiency ratio was modified for fiscal
years 2003 and 2004 for the same reason.
(12) Selected Ratios for the year ended December 31, 2005, include Conavi and
Corfinsura's results since the beginning of the year.
5
EXCHANGE RATES
On May 31, 2006, the Representative Market Rate was Ps2,486.07 per
US$1.00. The Federal Reserve Bank of New York does not report a rate for pesos;
the Superintendency of Finance calculates the Representative Market Rate based
on the weighted averages of the buy/sell foreign exchange rates quoted daily by
certain financial institutions, including BC, for the purchase and sale of U.S.
dollars.
The following table sets forth the high and low peso per U.S. dollar
exchange rates for the last six months:
RECENT EXCHANGE RATES OF PESO PER US$1.00:
MONTH LOW HIGH
--------------------- -------- --------
December 2005 ....... 2,272.95 2,286.83
January 2006 ........ 2,262.04 2,284.22
February 2006 ....... 2,308.58 2,365.79
March 2006 .......... 2,245.71 2,289.98
April 2006 .......... 2,288.67 2,375.66
May 2006 ............ 2,329.35 2,518.34
Source: Superintendency of Finance.
The following table sets forth the average peso per U.S. dollar
Representative Market Rate for each of the five most recent financial years,
calculated by using the average of the exchange rates on the last day of each
month during the period.
PESO/US$1.00
REPRESENTATIVE MARKET RATE
PERIOD AVERAGE
--------------------- --------
2001 ................ 2,301.74
2002 ................ 2,534.22
2003 ................ 2,875.05
2004 ................ 2,614.79
2005 ................ 2,320.77
Source: Superintendency of Finance.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
6
D. RISK FACTORS
The factors referred to below, as well as all other information
presented in this Annual Report, should be considered by investors when
reviewing any forward-looking statements contained in this Annual Report, in any
document incorporated by reference, if any, in this Annual Report, in any of the
Bank's future public filings or press releases, or in any future oral statements
made by the Bank or any of its officers or other persons acting on its behalf.
The risks and uncertainties described below are not the only ones that the Bank
faces. Additional risks and uncertainties that the Bank does not know about or
that the Bank currently thinks are immaterial may also impair our business
operations. Any of the following risks, if they actually occur, could materially
and adversely affect our business, results of operations, prospects and
financial condition.
D.1. RISKS RELATING TO COLOMBIA
Most of the Bank's operations, property and customers are located in
Colombia. Accordingly, the quality of our assets, financial condition and
results of operations depend primarily on macroeconomic and political conditions
prevailing in Colombia.
D.1.I. POLITICAL, ECONOMIC AND FINANCIAL RISK FACTORS
Political Risk Factors
Although President Alvaro Uribe Velez was re-elected for the next four
years, there is no guarantee that initiatives such as the Free Trade Agreement,
the tax reform and other structural reforms required for the transfer,
administrative, royalty and finance system shall be passed by Congress not only
because of possible opposition from the Polo Democratico (Colombian Political
Party) and Liberal parties, but because of the fragmented political groups
supporting the President.
Economic Risk Factors
Unforeseen changes on the international scene and adverse trends in
domestic macroeconomic variables may affect the country's financial stability
and consequently the overall climate for investment. In this sense, phenomena
affecting international interest rates or creating volatility with respect to
the exchange rate could well have an overall negative effect on the Bank's
results. Also, impacts to exchange terms, financial panics, shock effects from
other crises and other factors that could affect the incoming flow of capital to
the Colombian economy, could exacerbate difficulties with regard to the Bank's
international business.
7
On an internal level, changes in the country's monetary, exchange and
trade policies could affect the overall business environment. Thus, should
Central Bank raise interest rates this could negatively affect the Bank's
assets and restrict their respective growth; variations in price levels could
also affect household income and brake the current rate of investment; increases
in the exchange rate could negatively affect the borrowers' financial structure
in foreign currency; setbacks in trade relations with Venezuela as well as with
negotiating the Free Trade Agreement with the United States could affect the
financial position of the Bank's more important customers. All this would entail
a negative effect on the Bank's financial statements.
Financial Risk Factors
Negative impacts on household income could affect the quality of the
Bank's consumption loan portfolio; this is a source of instability in the mid-
to long-term for the financial system as greater levels of household leverage
make consumers more sensitive to changes in the economic situation, thereby
increasing the probability of consumers defaulting on their credit obligations
with the Bank. On the other hand, due to the amount of public debt instruments
conforming the investment portfolios of Colombian financial institutions, any
drop in the price of these would negatively affect the Bank's results; these
losses could increase as the portfolio grows in size and the magnitude of the
price drops increase. Also, any nervous tension on the world's main stock
exchanges as a result of levels of volatility on international markets, could
trigger a greater flow of capital towards lower-risk assets, with the consequent
devaluation of the stock market, thereby affecting the trading of ADRs.
D.1.II. COLOMBIA'S ECONOMY REMAINS VULNERABLE TO EXTERNAL SHOCKS THAT COULD BE
CAUSED BY SIGNIFICANT ECONOMIC DIFFICULTIES EXPERIENCED BY ITS MAJOR
REGIONAL TRADING PARTNERS OR BY MORE GENERAL "CONTAGION" EFFECTS, WHICH
COULD HAVE A MATERIAL ADVERSE EFFECT ON COLOMBIA'S ECONOMIC GROWTH AND ITS
ABILITY TO SERVICE ITS PUBLIC DEBT
Emerging-market investment generally poses a greater degree of risk
than investment in more mature market economies because the economies in the
developing world are more susceptible to destabilization resulting from domestic
and international developments.
A significant decline in the economic growth of any of Colombia's
major trading partners, such as the United States and Venezuela, could have a
material adverse impact on Colombia's balance of trade and adversely affect
Colombia's economic growth. The United States is Colombia's largest export
market. A decline in U.S. demand for imports could have a material adverse
effect on Colombian exports and Colombia's economic growth, which would, in
turn, have detrimental results on the business activities of the Bank. In
addition, because international investors' reactions to the events occurring in
one emerging market country sometimes appear to demonstrate a "contagion"
effect, in which an entire region or class of investment is disfavored by
international investors, Colombia could be adversely affected by negative
economic or financial developments in other emerging market countries. In the
past, Colombia has been adversely affected by such contagion effects on a number
of occasions, including following the 1997 Asian financial crisis, the 1998
Russian financial crisis, the 1999 devaluation of the Brazilian real and the
2001 Argentine financial crisis.
8
Similar developments can be expected to affect the Colombian economy
in the future. Such a contagion effect could be expected to lower market prices
of Bancolombia's stock and threaten its liquidity, cause higher rates of past
due loans in Bancolombia's loan portfolios, lead to significant weaknesses in
Bancolombia's investment portfolio and diminish Colombia's ability to make
payments on its public debt, which represents a significant proportion of
Bancolombia's investment portfolio.
D.1.III. COLOMBIA HAS EXPERIENCED SEVERAL PERIODS OF VIOLENCE AND INSTABILITY
AND SUCH INSTABILITY COULD AFFECT THE ECONOMY AND THE BANK
The Colombian government (excluding departmental and municipal
governments, the "Government") has historically exercised substantial influence
over the Colombian economy, and its policies are likely to continue to have an
important effect on Colombian entities (including the Bank), market conditions,
prices, and rates of return on Colombian securities (including the Bank's
securities).
The market value of the Bank's securities and any dividends
distributed by the Bank may also be affected by changes in labor costs,
inflation, interest rates, taxation, social instability and other political or
economic developments in Colombia. The Bank cannot provide any assurance that
future developments in government policies or in the Colombian economy will not
impair its business or financial condition or the market value of its stock.
Colombia has experienced several periods of criminal violence over the
past four decades, primarily due to the activities of guerilla groups and drug
cartels. In response, the Government has implemented various security measures
and has strengthened its military and police forces by creating specialized
units. Despite these efforts, drug-related crime and guerilla activity continue
to exist in Colombia. These activities, their possible escalation and the
violence associated with them may have a negative impact on the Colombian
economy or on the Bank in the future.
The Bank has taken measures that are standard industry practices in
Colombia to protect itself against violence. Examples of these measures include
hiring specialized private security, implementing security technology and
obtaining insurance against terrorism, fire, strikes and vandalism, among other
measures.
D.1.IV. RESTRICTIONS REGARDING FOREIGN INVESTMENT IN COLOMBIA
Colombia's International Investment Statute (Decree 2080 of 2000, as
amended) regulates the manner in which non-Colombian-resident entities and
individuals can invest in Colombia and participate in the Colombian securities
markets. Among other requirements, the statute mandates registration of certain
foreign exchange transactions with the Central Bank and specifies procedures to
authorize and administer certain types of foreign investments. Decree 1844 of
2003 modified Decree 2080 of 2000, simplifying the procedures for foreign
investors to register their investment in Colombia with the Central Bank.
International investments are regulated by the Central Bank by means of External
Resolution 8 of 2000 and External Circular DCIN 83 of December 2004, setting
forth in detail certain procedures regarding registration of foreign investment
in Colombia.
Investors who wish to participate in the Bank's American Depositary
Receipt ("ADR") facility and hold American Depositary Shares ("ADSs") of the
Bank will be required
9
to submit to the custodian of the ADR facility certain information and comply
with certain registration procedures required under the foreign investment
regulations in connection with foreign exchange controls restricting the
conversion of pesos into U.S. dollars. Holders of ADRs who wish to withdraw the
underlying preferred shares will also have to comply with certain registration
and reporting procedures among other requirements. Under the foreign investment
regulations, the failure of a non-resident investor to report or register with
the Central Bank foreign exchange transactions relating to investments in
Colombia on a timely basis may prevent the investor from obtaining remittance
rights, constitute an exchange control infraction and result in a fine.
Article 36 of Decree 2080 of 2000 had been modified by Decree 4210 of
2004, which established that foreign portfolio investments must remain in
Colombia for at least a one-year period following the date the investment was
processed through the exchange market. Even though under Decree 2080 the ADR
program is considered a foreign portfolio investment fund, Fiducolombia S.A.,
the entity that acts as local custodian, expressly stated to the Central Bank
and the Superintendency of Finance that such provision shall not be applicable
to the ADR program given its differences from other foreign portfolio capital
investment funds and the fact that it does not represent movements of money but
the registry of shares. Decree 4474 of December 2005 expressly established that
receipt programs such as the ADR program shall not be subject to Decree 4210. On
June 13, 2006, Article 36 of Decree 2080 of 2000 was further modified by Decree
1940 of 2006, which established that foreign portfolio investments may remain in
Colombia less than one year following the date the investment was processed
through the exchange market.
Despite the easing of restrictions imposed for foreign investment in
Colombia, we cannot provide any assurance that the Colombian Government,
Colombian Congress or the Central Bank will further eliminate restrictions to
foreign investments, nor that they will not implement more restrictive rules in
the future. Currently, Colombia has a free float exchange rate system. However,
we cannot provide any assurance that other restrictive rules for the exchange
rate system will not be implemented in the future. In the event that a more
restrictive exchange rate system is implemented, financial institutions,
including the Bank, may be unable to transfer U.S. dollars abroad to pay their
financial obligations. See Item 4. Information on the Company - B. Business
Overview - B.7. Supervision and Regulation and Item 10. Additional Information -
E. Taxation.
D.1.V. INSTABILITY OF COLOMBIAN TAX LEGISLATION COULD ADVERSELY AFFECT THE
BANK'S CONSOLIDATED RESULTS
One of the characteristics of legislation in Colombia is its
instability. This instability can be especially relevant with respect to tax
legislation. Legislation, regulation and jurisprudence can affect tax burdens by
increasing tax rates and fees, creating new taxes, limiting stated expenses and
deductions, and eliminating incentives and non-taxed income.
Since January 1, 2000, Bancolombia (unconsolidated), Fiducolombia,
Leasing Colombia and Colcorp have enjoyed the benefits of a tax stability regime
promulgated under the Estatuto Tributario (the "Fiscal Statute"), that will be
in effect until the year 2010. During the effective term of the program, no new
national taxes or increases in income tax rates will apply to the Bank. For more
information, see Item 5. Operating and Financial Review and Prospects - A.
Operating Results - A.1. General Discussion of the Changes in Results.
10
Other taxes to which the Bank is subject, such as sales tax, stamp
tax, and the municipal Industry and Trade Tax, have remained relatively stable.
If future tax reforms increase the respective rates for these taxes, they are
not expected to have a significant impact on the Bank's consolidated financial
statements.
D.1.VI. COLOMBIAN CORPORATE DISCLOSURE AND ACCOUNTING STANDARDS MAY DIFFER FROM
THOSE IN THE UNITED STATES
Colombian banking regulations are designed to ensure the safety and
soundness of the banking system and to limit its exposure to risk. While many of
the policies underlying these regulations are similar to those underlying
regulations applicable to banks in other countries, including those in the
United States, Colombian regulations can differ in a number of material respects
from those other regulations. For example, under Colombian GAAP, allowances for
non-performing loans are computed by establishing each non-performing loan's
individual inherent risk, using criteria established by the Superintendency of
Finance that differs from that used under U.S. GAAP (See Item 4. Information on
the Company - E. Selected Statistical Information - E.4. Summary of Loan Loss
Experience - Allowance for Loan Losses). Capital adequacy requirements for banks
under Colombian regulations differ from those under U.S. regulations. In
addition, under Colombian GAAP, there is not one unified accounting method for
business combinations. Under U.S. GAAP, all business combinations are accounted
for using the purchase method.
Changes in banking laws and regulations, or in their official
interpretation, may have a material effect on our business and operations. Since
banking laws and regulations change frequently, their interpretation, and the
manner in which these laws and regulations are applied to financial
institutions, is continuously evolving. No assurance can be given generally that
laws or regulations will be adopted, enforced or interpreted in a manner that
will not have an adverse effect on the Bank's business. Also, we cannot assure
that there will be no changes in banking laws or regulations in other countries
where the Bank has subsidiaries, such as Panama, Puerto Rico and the Cayman
Islands.
Pursuant to Law 550 of 1999, the Government began a review of the
present regulations relating to accounting, audit, and information disclosure,
with the intention of conforming them to international standards and proposing
pertinent modifications to Congress.
For more information see Item 4. Information on the Company - B.
Business Overview - B.7. Supervision and Regulation.
11
D.2. RISKS RELATING TO OUR INDUSTRY AND OUR OPERATIONS
D.2.I. THE BANK'S HEAVY RELIANCE ON COLOMBIA'S SOVEREIGN DEBT IN ITS INVESTMENT
PORTFOLIO LEAVES IT VULNERABLE TO FLUCTUATIONS IN PUBLIC DEBT VALUATIONS
AND SOVEREIGN RISK.
During the past three years, public debt trading securities have
represented approximately 70% of the Bank's total investment portfolio,
resulting in the Bank's significant exposure to a default by Colombia on its
debt and to lower valuations of Colombia's debt in the secondary market. At
December 31, 2005, the Bank's holdings of bonds issued by the Colombian Treasury
was valued at Ps5,678,695 million, representing 68.8% of the Bank's total
investment portfolio as of that date.
D.2.II. THE QUALITY OF THE BANK'S LOAN PORTFOLIO AND OF OTHER ASSETS MAY DECLINE
If the Bank's loan portfolio continues to grow in all targeted
segments, such as retail, Small-and Medium-Sized Enterprises ("SMEs"), large
corporations and mortgages, the Bank may experience higher levels of past due
and non-performing loans than in the past and may be required to increase its
allowances for non-performing loans.
In particular, if the Bank successfully increases the participation of
consumer and small business credits in its loan portfolio, it may experience
detrimental changes in its credit risk levels. Furthermore, there can be no
assurance that the Bank will maintain its current level of asset quality and
credit risk in the future.
D.2.III. THE BANK'S CONCENTRATION IN AND RELIANCE ON SHORT-TERM DEPOSITS MAY
INCREASE ITS FUNDING COSTS
The Bank's principal sources of funds are short-term deposits,
checking accounts and savings accounts; they represented a share of 72.3%, 76.8%
and 66% of total funds at the end of 2003, 2004 and 2005, respectively. Since it
relies primarily on short-term deposits for its funding, there can be no
assurance that, in the event of a sudden or unexpected shortage of funds in the
Colombian banking system and money markets, the Bank will be able to maintain
its current level of funding without incurring higher costs or liquidating
certain assets.
D.2.IV. INCREASED COMPETITION AND CONSOLIDATION IN THE FINANCIAL INDUSTRY COULD
ADVERSELY AFFECT OUR MARKET SHARE
The Colombian financial system is highly competitive. Since the 1990s,
when the Colombian financial market was deregulated and international capital
flows resumed, there has been an ongoing process of financial system
consolidation. The Bank expects this consolidation to lead to the creation of
large institutions that benefit from economies of scale, presenting the risk
that the Bank could lose a portion of its share in the industry.
12
D.2.V. POST-MERGER INTEGRATION AND BUSINESS ACTIVITY ENTAIL COMPLEX PROCESSES
THAT MAY NEGATIVELY AFFECT THE BANK'S RESULTS
There are significant risks and uncertainties associated with mergers,
such as our Merger with Conavi and Corfinsura. The Merger between Bancolombia,
Conavi and Corfinsura has been completed, but the integration process in areas
such as operations, technology and commercial banking is still underway. In
order to offer customers the same services through the integrated distribution
network, we will be required to integrate the Bancolombia, Conavi and Corfinsura
branch offices into one single network. Due to the complexity of these
processes, not only the quality of our customer service may be affected, but
also the estimated completion dates for this integration could be delayed, which
could eventually cause a loss of market share. We also have anticipated to
derive certain growth opportunities and cost savings from the Merger, which we
may fail to realize. In addition, it is possible that the integration process
could result in the loss of key employees or that the disruption of ongoing
business from the Merger could adversely affect our ability to maintain
relationships with customers or suppliers. We will be subject to similar risks
and difficulties in connection with decisions to downsize, sell or close units
or otherwise change the business mix of Bancolombia.
D.2.VI. INCREASE IN THE BANK'S SHARE OF THE MORTGAGE MARKET FURTHER EXPOSES
BANCOLOMBIA TO RISKS ASSOCIATED WITH THIS SEGMENT
As a result of the Merger, Bancolombia acquired Conavi's mortgage loan
portfolio, resulting in a mortgage loan market share of 20.52% at December 31,
2005, which accounted for 7.9% of the Bank's total loan portfolio. With the
transaction, the Bank acquired an exposure to the risks inherent to Colombia's
highly regulated mortgage market, which has historically been affected by
various macroeconomic factors. Nonetheless, the Bank now has the opportunity to
actively participate in this market, taking full advantage of its potential. For
more information see Item 4 - Information on the Company, B - Business Overview,
B.3. - Our Business, B.3.iii. Mortgage & Building Banking Business.
D.3. RISKS RELATING TO OUR ADRS
D.3.I. MARKET FOR ADRS AND PREFERRED SHARES; RELATIVE ILLIQUIDITY OF THE
COLOMBIAN SECURITIES MARKETS
The Bank's ADRs are listed on the New York Stock Exchange ("NYSE") and
commenced trading in 1995 under the symbol "CIB". Average daily trading volume
of ADRs was 38,847 in 2003, 136,377 in 2004 and 324,492 in 2005. Before 1995,
the Bolsa de Bogota (the "Bogota Stock Exchange"), the Bolsa de Medellin (the
"Medellin Stock Exchange") and the Bolsa de Occidente (the "Occidente Stock
Exchange") were the only trading markets for our Common Shares and Preferred
Shares. These three stock exchanges merged on July 3, 2001 into a single
exchange, the Bolsa de Valores de Colombia (the "Colombian Stock Exchange"),
headquartered in Bogota and with regional offices in Medellin and Cali. The
Colombian Stock Exchange is relatively small and illiquid compared to stock
exchanges in major financial centers. In addition, very few issuers represent a
disproportionately large percentage of market capitalization and trading volume
on the Colombian Stock Exchange.
There can be no assurance that a liquid trading market for the common
or preferred stock will continue or expand. A limited trading market may impair
the ability of an ADR
13
holder to sell Preferred Shares obtained upon withdrawal of such shares from the
ADR Facility on the Colombian Stock Exchange in the amount and at the price and
time such holder desires, and could increase the volatility of the price of the
ADRs.
D.3.II. PESO DEVALUATION MAY DEPRESS THE VALUE OF DIVIDENDS PAYABLE TO HOLDERS
OF ADRS
In September 1999, the Central Bank significantly liberalized the
Colombian exchange market. However, the Central Bank maintains the power to
intervene on the exchange market so as to consolidate or dispose of
international reserves, as well as to control any volatility in the exchange
rate. The mechanism used for this purpose is to sell call options when the
Representative Market Rate is 2% either above or below its rolling average as
recorded over the previous 20 business days. This new range came into full force
and effect on December 19, 2005. Prior to that date, the applicable range was 4%
above or below the rolling average as recorded over the previous 20 business
days. Also, as of September 2004, the Central Bank began to operate a
discretionary intervention mechanism, by means of which it managed to acquire
US$ 1,325 million in 2004 and US$ 4,658 million in 2005.
The appreciation of the peso against the dollar was 3.02% in 2003. In
2004, the peso appreciated against the U.S. dollar by 14%, and during 2005, the
peso again appreciated against the U.S. dollar by 4.42%. A peso revaluation
would have a negative impact on the U.S. dollar value of dividends paid to
holders of ADRs. Conversely, a decrease in oil exports, a slight increase in
U.S. Federal Reserve interest rates and an adjustment in the U.S. trade balance
could produce a slight devaluation, which would have a negative impact on the
value of ADRs. Although the foreign exchange market is allowed to float freely,
there is no assurance that the Central Bank or the Government will not intervene
in the exchange market in the future.
D.3.III. REQUIRED GOVERNMENT APPROVALS RELATING TO OWNERSHIP OF OUR PREFERRED
SHARES AND ADRS MAY AFFECT THE MARKET LIQUIDITY OF THE PREFERRED SHARES AND
ADRS
Pursuant to Colombian banking regulations, any transaction resulting
in an individual or a corporation holding 10% or more of the capital stock of
any Colombian financial institution, including, in the case of the Bank,
transactions in ADRs representing 10% or more of the Bank's outstanding stock,
requires prior authorization from the Superintendency of Finance. Transactions
entered into without the Superintendency of Finance's prior approval are void,
and cannot be recorded in the stock registry of the relevant financial
institution.
In addition to the above restriction, pursuant to Colombian securities
regulations, any transaction involving the sale of publicly traded stock of any
Colombian company, including, in the case of the Bank, any sale of Preferred
Shares (but excluding any sale of ADRs) or Common Shares, for 66,000 or more
Unidades de Valor Real ("UVR")(1), must be effected through the Bolsa de Valores
de Colombia (the "Colombian Stock Exchange").
----------
(1) The UVR is an inflation-adjusted monetary index generally used for pricing
home-mortgage loans.
14
D.3.IV. OUR PREFERRED SHARES HAVE LIMITED VOTING RIGHTS
Under the Bank's by-laws and Colombian corporate law, holders of
Preferred Shares (and consequently, holders of ADRs) have no voting rights in
respect of Preferred Shares, other than the right to one vote per Preferred
Share, in the following events:
- In the event that changes in the Bank's by-laws may impair
the conditions or rights assigned to such shares and when
the conversion of such shares into Common Shares is to be
approved.
- When voting the anticipated dissolution, merger or
transformation of the corporation or change of its corporate
purpose.
- When the preferred dividend has not been fully paid during
two consecutive annual terms. In this event, holders of such
shares shall retain their voting rights until the
corresponding accrued dividends have been fully paid to
them.
- When the General Shareholders' Meeting orders the payment of
dividends with issued shares of the Bank.
- If at the end of a fiscal period, the Bank does not produce
sufficient profits to pay the minimum dividend and the
Superintendency of Finance, by its own decision or upon
petition of holders of at least ten percent (10%) of
Preferred Shares, determines that benefits were concealed or
shareholders were misled with regard to benefits received
from the Bank by the Bank's directors or officers decreasing
the profits to be distributed, the Superintendency of
Finance may resolve that holders of Preferred Shares should
participate with speaking and voting rights at the General
Shareholders' Meeting, in the terms established by law.
- When the register of shares at the Colombian Stock Exchange
or at the National Register of Securities is suspended or
canceled. In this event, voting rights shall be maintained
until the irregularities that resulted in such cancellation
or suspension are resolved.
Holders of ADRs and Preferred Shares are not entitled to vote for the
election of directors or to influence the Bank's management policies.
The Bank's corporate affairs are governed by its by-laws and Colombian
law. Under Colombian law, the Bank's preferred shareholders may have fewer
rights than shareholders of a corporation incorporated in a U.S. jurisdiction.
D.3.V. PREEMPTIVE RIGHTS MAY NOT BE AVAILABLE TO HOLDERS OF ADRS
The Bank's by-laws and Colombian law require that, whenever the Bank
issues new shares of any outstanding class, it must offer the holders of each
class of shares (including holders of ADRs) the right to purchase a number of
shares of such class sufficient to maintain their existing percentage ownership
of the aggregate capital stock of the Bank. These rights are called preemptive
rights. United States holders of ADRs may not be able to exercise their
preemptive rights through The Bank of New York, which acts as depositary (the
"Depositary")
15
for the Bank's ADR facility, unless a registration statement under the
Securities Act is effective with respect to such rights and stocks or an
exemption from the registration requirement thereunder is available. Although
the Bank is not obligated to, it intends to consider at the time of any rights
offering the costs and potential liabilities associated with any such
registration statement, the benefits to the Bank from enabling the holders of
the ADRs to exercise those rights and any other factors deemed appropriate at
the time, and will then make a decision as to whether to file a registration
statement. Accordingly, no assurance can be given that any such registration
statement will be filed.
To the extent holders of ADRs are unable to exercise these rights
because a registration statement has not been filed and no exemption from the
registration requirement under the Securities Act is available, the Depositary
may attempt to sell the holders' preemptive rights and distribute the net
proceeds from that sale, if any, to such holders. The Depositary, after
consulting with the Bank, will have discretion as to the procedure for making
preemptive rights available to the holders of ADRs, disposing of such rights and
making any proceeds available to such holders. If by the terms of any rights
offering or for any other reason the Depositary is unable or chooses not to make
those rights available to any holder of ADRs, and if it is unable or for any
reason chooses not to sell those rights, the Depositary may allow the rights to
lapse. Whenever the rights are sold or lapse, the equity interests of the
holders of ADRs will be proportionately diluted.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Bancolombia (formerly, Banco Industrial Colombiano S.A. or "BIC") was
incorporated in the First Notary's Office of Medellin, Colombia, on January 24,
1945. In January 1998, pursuant to a merger agreement approved on December 3,
1997 by the shareholders of BIC and Banco de Colombia S.A. ("Banco de
Colombia"), BIC purchased 51% of the outstanding common shares of Banco de
Colombia from certain individual shareholders. Effective April 3, 1998, BIC
merged with Banco de Colombia. In connection with this merger, BIC changed its
name to Bancolombia S.A. and began conducting its commercial activities,
products and services under the commercial name of "Bancolombia".
Pursuant to a Merger agreement dated February 28, 2005, on July 30,
2005, Conavi and Corfinsura merged with and into Bancolombia, with Bancolombia
as the surviving entity after Corfinsura spun off part of its investment
portfolio.
The Bank was originally established for a fifty-year term, starting on
December 9, 1944. In 1994, this term was extended for fifty more years, until
December 8, 2044. The Bank is domiciled in Colombia and operates under Colombian
laws and regulations, mainly the Colombian Code of Commerce and Decree 663 of
1993, as a sociedad comercial por acciones, de la especie anonima (See Item 4.
Information on the Company - B. Business Overview - B.7. Supervision and
Regulation for an explanation of the main regulations governing the Bank's
activities). The address and telephone number of the Bank's principal place of
business are: Calle 50 No. 51-66, Medellin, Colombia; telephone +(574) 510-8896.
Our agent for service of process in the United States is Puglisi & Associates,
presently located at 850 Library Avenue, Suite 201, Newark, Delaware 19715.
16
Since 1995, the Bank has maintained a listing on the NYSE, where its
ADSs are traded under the symbol "CIB". See Item 9. The Offer and Listing.
RECENT DEVELOPMENTS
On February 28, 2005, Bancolombia entered into a Merger agreement (the
"Merger Agreement") with Conavi and Corfinsura whereby the parties agreed to
merge Conavi and Corfinsura with and into Bancolombia, with Bancolombia as the
surviving entity (the "Merger") after Corfinsura spun off part of its investment
portfolio to a new entity formed by the former shareholders of Corfinsura.
The exchange terms set forth in the Merger Agreement were established
in accordance with the independent technical valuation study presented by BNP
Paribas S.A. (the "BNP Report"). In addition, each of the three entities engaged
an investment banking firm to issue a fairness opinion on the financial terms of
the transaction. Conavi engaged Citigroup Global Markets Inc., Corfinsura
engaged NM Rothschild & Sons (Mexico), S.A. de C.V. and Bancolombia's Board of
Directors engaged Credit Suisse First Boston LLC to evaluate the exchange ratios
provided in the Merger Agreement and the BNP Report.
On March 28, 2005, the General Shareholders' Meetings of Bancolombia,
Conavi and Corfinsura approved the Merger Agreement.
Before its completion the Merger was subject to certain closing
conditions, including, among others: (i) approval by the Colombian
Superintendency of Securities of the alternative that was presented to
Corfinsura's ordinary bondholders as a result of the spin-off and certain other
conditions regarding the spin-off and Merger (Resolution 571 of July 14, 2005
issued by the Superintendency of Securities of Colombia); (ii) approval by the
Colombian Superintendency of Banking (now Superintendency of Finance) of the
spin-off of Corfinsura (Resolution 1043 of July 19, 2005 issued by the
Superintendency of Banking of Colombia) (iii) a required statement by the
Superintendency of Banking, Resolution 1050 of July 19, 2005, by which the
Superintendency of Banking of Colombia declared that it had no objection to the
proposed Merger between Bancolombia, Conavi and Corfinsura (post spin-off); (iv)
completion of the spin-off of Corfinsura on July 29, 2005 through the issue of
the spin-off's public deed and the request for its publication in the commercial
register of the Chamber of Commerce of Medellin.
Once these conditions were met, the Merger was completed on July 30,
2005. In accordance with Colombian Law, with the completion of the Merger,
Conavi and Corfinsura were dissolved without being liquidated, and the Bank
acquired all assets, rights and liabilities of Conavi and Corfinsura. The Merger
was effective with respect to third parties upon the filing of the public deed
in the public commercial record of the Chamber of Commerce of Medellin, which
took place on August 1, 2005.
17
CONAVI, CORFINSURA AND ITS SUBSIDARIES
Conavi and Corfinsura were leading financial institutions in the
Colombian market. Conavi was a bank devoted to mortgage banking and raising
resources from individuals through savings accounts. Conavi was the country's
leader in mortgage lending with a market share of 19.3% as of the date of the
Merger; Conavi's assets totaled Ps 4,651 billion as of December 31, 2004.
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%. Known for its
expertise in handling large and mid-sized corporate credit and financial
services, through close client relationships, Corfinsura also has a highly
respected investment bank, as well as a modern and diversified treasury
department, focused on structured products. As of December 31, 2004 Corfinsura's
consolidated total asset value was Ps 6,396 billion.
At the time of the Merger, Corfinsura (post 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, US; Surenting S.A., the leading fleet renting
in Colombia at the time of the merger, and Fiduciaria Corfinsura S.A., a
fiduciary trust company.
Once the Merger was completed, the Bank began the process of merging
its financial subsidiaries that had similar corporate purposes. On August 1,
2005, Fiduciaria Corfinsura S.A. merged with and into Fiducolombia S.A.. On
October 3, 2005, Comisionista de Colombia Comicol S.A. (the Bank's securities
brokerage subsidiary) merged with and into Suvalor S.A.. On November 30, 2005
Suleasing S.A. merged with and into Leasing Colombia S.A. as the surviving
entity. Additionally, due to the fact that Bancolombia S.A. (the parent company,
as a banking institution independent from its Subsidiaries) cannot engage in
investment banking activities under Colombian Law, on July 30, 2005, Colcorp
S.A. (BC's Financial Corporation Subsidiary) acquired Corfinsura's Investment
Banking Division (a commercial establishment).
SHARE EXCHANGE PROCESS AND CHANGES IN THE CAPITAL STRUCTURE
In accordance with the BNP Report, which included, among other things,
(i) the relative valuation of the respective contributions of Bancolombia,
Conavi and Corfinsura to the Merger and (ii) the exchange ratios applicable to
the Merger, the shares of Conavi were exchanged at a ratio of one (1) share of
Bancolombia Common Shares or one (1) share of Bancolombia Preferred Shares, at
the shareholder's option, for 115.39184295 shares of Conavi, and the shares of
Corfinsura were exchanged at a ratio of one (1) share of Bancolombia Common
Shares or one (1) share of Bancolombia Preferred Shares, at the shareholder's
option, for 1.48709574 shares of Corfinsura.
Credit Suisse First Boston LLC assisted Bancolombia's Board of
Directors in evaluating the exchange ratios provided in the Merger Agreement and
the BNP Report.
18
According to the BNP Report, the relative valuation of the
contributions of the entities to the combined entity was 75.5% for Premerger
Bancolombia(2), 12.7% for Corfinsura after the spin-off and 11.8% for Conavi.
Taking into account the stock that Premerger Bancolombia and Corfinsura held in
Conavi before the Merger, which represented 28.5188% and 6.4639% of Conavi,
respectively, as well as the stock that Premerger Bancolombia held of Corfinsura
before the Merger, which represented 4.6131% of Corfinsura, it is estimated that
the former shareholders of Premerger Bancolombia hold 79.25% of the Bank, while
the former shareholders of Conavi and Corfinsura hold the remaining 20.75% of
the Bank.
On November 1, 2005, the process of exchanging shares of Conavi and
Corfinsura (post spin-off) for Bancolombia shares as a result of the Merger was
completed. The resulting number of exchanged shares and the new number of
outstanding shares of Bancolombia are shown in the table below:
DATE COMMON SHARES PREFERRED SHARES TOTAL
------------------------- ------------- ---------------- -----------
July 31, 2005 398,259,608 178,435,787 576,695,395
Shares exchanged as of
November 1, 2005. 111,444,976 39,686,634 151,131,610
Shares outstanding as of
November 1, 2005. 509,704,584 218,122,421 727,827,005
Current capital structure 70.03% 29.97% 100%
CAUTIONARY NOTE
No assurances can be given that any of the expected benefits and
advantages of the Merger will be realized to the extent contemplated by
management, if at all. Moreover, the Merger could require the Bank to invest
more capital or more time and effort by management than it originally expected
or currently expects in order to realize the benefits anticipated to result from
the Merger. If the Company fails to manage the integration of the businesses of
the Premerger Bancolombia, Conavi and Corfinsura effectively, the Bank's
operations and financial results may be affected, both materially and adversely.
For more information see Item 3. Key Information, D. Risk Factors, D.2.v.
Post-merger integration and business activity entail complex processes that may
negatively affect the Bank's results.
OTHER RECENT DEVELOPMENTS
On November 21, 2005, Suvalor Panama S.A. began operations. Suvalor
Panama S.A. is a brokerage firm located in Panama, wholly owned by Suvalor S.A.
(Bancolombia's Colombian brokerage subsidiary). For more information see Item 4
- Information on the Company - B. Business Overview - B.5. Products and Services
- B.5.ix - Brokerage
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%).
----------
(2) In this section, references to "Premerger Bancolombia" refer to Bancolombia
as it existed immediately before the Merger took effect.
19
On December 2, 2005, Suleasing Internacional do Brasil Locacao de Bens
S.A. (Suleasing do Brasil) was incorporated in Sao Paolo under Brazilian law.
Suleasing do Brasil's corporate purpose is the promotion in Brazil of leasing
and renting services offered by the Bank's subsidiaries in Colombia, U.S.A. and
Panama and the management of international leasing operations in such country.
Bancolombia holds 100% of Suleasing do Brasil's shareholders' equity,
through Suleasing International USA, Inc. and Suleasing Internacional S.A.
(Panama), both subsidiaries of Leasing Colombia. As of December 31, 2005,
Suleasing do Brasil was in a pre-operative stage.
On December 12, 2005, the Bank, together with its affiliates, issued a
proposal for the acquisition of all of the outstanding shares of Comercia S.A.
Compania de Financiamiento Comercial ("Comercia"), for a price of Ps 44,250
million. Textiles Fabricato - Tejicondor S.A. (Fabricato), is Comercia's largest
shareholder, holding 98.57% of the outstanding shares directly and through its
subsidiaries.
The Superintendency of Finance granted the necessary authorization and
the investment banking firm engaged by Textiles Fabricato (Tejicondor S.A.)
issued its fairness opinion.
As of December 31, 2005, Comercia's shareholders' equity totaled Ps
28,090 million, and its assets totaled Ps 179,461 million, including a loan
portfolio of Ps 147,188 million. Net accrued income at the same date totaled Ps
2,469 million.
Comercia is the eighth Commercial Finance Company among the fifteen
that currently operate in Colombia by asset value, loan portfolio value and
income value. The main businesses of Comercia are factoring and loan portfolio
discount and purchase.
With the acquisition of Comercia, which became the Bank's subsidiary,
the Bank complemented the broad fin ancial services offered to its corporate
clients.
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 Ps 24,610 million. 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.
On December 30, 2005, Colcorp sold its position in Abonos Colombianos
S.A. - Abocol S.A. -, to V. International Ventures Inc. The sale price was US$
20,070,843.
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 million. The award orders the
defendant to pay Ps 63,216 million in favor of Bancolombia, including inflation
adjustments and interest. The defendant filled an action for cancellation, which
has not yet been considered.
20
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 Ps 40,570 million 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 See Item 8. Financial Information, A.2. Legal
Proceedings.
On June 7, 2006, the Bank filed an extraordinary cancellation action
before the Superior Tribunal of Bogota pursuant to Article 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.
CAPITAL EXPENDITURES AND DIVESTITURES
During 2003, the Bank invested Ps 10,456 million in upgrading the
central computing system.
In 2004 and 2005, the Bank made a series of capital investments
totaling Ps 96,762 million. The most important of these were as follows:
- The Bank invested Ps 23,006 million in its Merger with
Conavi and Corfinsura. This investment was made mainly in
hardware (Ps 16,245 million) and furniture and equipment (Ps
4,921 million). This entire expenditure was carried out in
2005.
- In 2004, the Bank invested a total of Ps 5,373 million in
upgrading the central computing system. In 2005, this figure
amounted to Ps 3,257 million.
- Ps 8,405 million were invested in 2004 in purchasing new
ATMs as well as upgrading existing ones. In 2005, this
figure totaled Ps 6,763 million.
- During the second half of 2004, the Bank began to overhaul
its computer technology at the branch office level at a
total cost of Ps 9,063 million, of which Ps 5,415 million
was financed through leasing arrangements. In 2005, this
same figure amounted to Ps 18,121 million, of which Ps
14,314 million were financed through leasing arrangements.
These investments were carried out for the purpose of
increasing the Bank's commercial efficiency.
- In 2004, Ps 17,597 million were invested in maintenance and
renovation work on the existing network of branch offices,
whereas in 2005, this same figure totaled Ps 1,313 million.
21
- In 2004, Ps 11,360 million were spent on renovating both the
Bank's own buildings as well as those it rents. This expense
resulted from growth considerations and a need for more
physical space. In 2005, this figure totaled Ps 2,398
million.
- Ps 4,541 million and Ps 3,412 million were invested in
physical security at the branch level in 2004 and 2005,
respectively.
- During the second half of 2005, the Bank initiated the
preliminary stages for the building of its new
administrative headquarters in Medellin. The total estimated
cost of the project is Ps 118,059 million, which will be
invested from 2006 to 2008.
In 2005, capital expenditure totaled Ps 58,043 million broken down as
follows:
- Ps 34,737 million in hardware
- Ps 12,299 million in furniture and equipment
- Ps 671 million in software.
The following table summarizes the Bank's capital contributions and
divestitures for the years 2003, 2004 and 2005:
CAPITAL CONTRIBUTIONS 2003 2004 2005 TOTAL
--------------------- ----- ------ ------ -------
ACH Colombia -- -- 503 503
Banco Corfinsura -- -- 23,613 23,613
Deceval -- -- 1,192 1,192
Fiducolombia -- -- 5,317 5,317
Leasing Colombia -- 27,177 74,609 101,726
Multienlace -- -- 6,318 6,318
Proteccion -- -- 12,464 12,464
Redeban Multicolor -- -- 2,198 2,198
3001 S.A. (in the process
of being wound up) -- 255 19,382 19,637
Suleasing Internacional 5,711 5,711
Suramericana de Inversiones -- -- 58,525 58,525
Suvalor -- -- 33,135 33,135
Tecnibanca -- -- 26 26
Titularizadora Colombiana -- -- 11,161 11,161
Sutecnologia -- -- 113 113
Surenting -- -- 15,831 15,831
Inversiones CFNS -- -- 7,700 7,700
Comisionista de Colombia -- -- 4 4
Fundicom S.A -- 850 36 886
Promotora de Hoteles Medellin S.A -- 42 7 49
Patrimonio Autonomo Autoamerica
(Titularizacion) -- -- 3,460 3,460
Inmobiliaria Bancol -- -- 27 27
Grupo Aval Acciones y Valores -- -- 13 13
22
CAPITAL CONTRIBUTIONS 2003 2004 2005 TOTAL
--------------------- ----- ------ ------ -------
Textiles Fabricato Tejicondor -- -- 11 11
Todo 1 Services 3,498 -- -- 3,498
Future Net -- 2,136 -- 2,136
DIVESTITURES 2003 2004 2005 TOTAL
------------ ----- ---- ------ ------
Abocol (2) -- -- 27,863 27,863
Sociedad Portuaria Mamonal (2) -- -- 109 109
Sufinanciamiento (2) -- -- 4 4
Carreteras Nacionales del Meta (2) -- -- 106 106
Compania Metalurgica Colombiana(1) -- -- 195 195
Acerias Paz del Rio (2) -- -- 1 1
Minerales Industriales (2) -- -- 1,718 1,718
Novaventa (2) -- -- 76 76
CTI Cargo S.A. (1) 545 -- -- 545
Industrias Forum S.A. (1) 4,480 -- -- 4,480
Transmetano ESP S.A. (2) 2,673 -- -- 2,673
Interconexion Electrica S.A. (2) -- 500 -- 500
----------
(1) Investments Charged-off
(2) Investments Sold
During 2005, and as of the date of this Annual Report, there have been
no public takeover offers by third parties in respect to the Bank's shares or by
the Bank in respect to another company's shares, with the exception of the
Merger, as mentioned above.
23
B. BUSINESS OVERVIEW
B.1. GENERAL
The Bank provides general banking products and services to large
industrial companies, SMEs and individuals. We have three main segments: retail,
corporate and mortgages. Our products and services include depositary services,
personal and corporate loans, mortgage loans, credit and debit cards, electronic
banking, cash management, investment banking, fiduciary and custodial services
and dollar-denominated products, foreign and trade brokerage services, among
others. In addition, BC's customers have access to a large network of branches
and ATMs in Colombia. BC has the largest service network of any private
financial institution in Colombia, with 678 branch offices operating in 146
cities as of December 31, 2005. For the year ended December 31, 2005, BC had a
positive return on average assets of 3.30% and a positive return on average
shareholders' equity of 31.49%. See Item 5. Operating and Financial Review and
Prospects for a detailed discussion on the results of the Bank's operations.
The following table sets forth the Bank's (unconsolidated) market
share of the Colombian banking market according to information compiled by the
Superintendency of Finance for the years 2003, 2004 and 2005 :
BANCOLOMBIA'S (UNCONSOLIDATED) JANUARY - DECEMBER JANUARY - DECEMBER JANUARY - DECEMBER
MARKET SHARE 2003 2004 2005
------------------------------ ------------------ ------------------ ------------------
Total net loans 13.0% 13.8% 20.8%
Total checking accounts 17.4% 17.9% 19.5%
Total savings accounts 10.6% 10.5% 18.5%
Total time deposits 11.6% 11.8% 18.0%
----------
Source: Superintendency of Finance. Average for the twelve-month period of each
year.
B.2. OPERATIONS
The following tables set forth BC's revenues by category of activity
for each of the last three fiscal years:
24
YEAR ENDED DECEMBER 31, 2003
(in millions of Ps)
Governmental
Small and Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Treasury Headquarters Banking
--------- ---------- --------- ------------- --------- ------------ ----------
Revenues from external
customers Ps212,472 Ps32,502 Ps 34,906 Ps19,007 Ps -- Ps(30,675) Ps 7,742
Revenues from transactions
with other operating
segments of the Bank 34,422 22,731 19,795 24,530 -- (83,150) (7,276)
Interest income 453,975 179,113 132,127 56,075 265,720 120,332 150,602
Provision for loans losses Ps 62,068 Ps12,781 Ps 365 Ps 1,133 Ps 330 Ps 58,822 Ps 50,360
All other
Trust Leasing Brokerage (1) Manufacturing Segments TOTAL
-------- -------- ------------- ------------- --------- -----------
Revenues from external
customers Ps38,424 Ps47,186 Ps 5,113 Ps31,400 Ps 92,044 Ps 490,121
Revenues from transactions
with other operating
segments of the Bank 773 (314) (111) 16,555 2,249 30,204
Interest income 5,366 8,174 10,856 (6) 13,095 1,395,429
Provision for loans losses Ps 2,239 Ps 3,564 Ps -- Ps 237 Ps 7,918 Ps 199,817
YEAR ENDED DECEMBER 31, 2004
(in millions of Ps)
Governmental
Small and Offshore
Retail Commercial Business Institutional Corporate Commercial
Banking Banking Banking Banking Treasury Headquarters Banking
--------- ---------- --------- ------------- --------- ------------ ----------
Revenues from external
customers Ps226,318 Ps 33,013 Ps 34,582 Ps20,277 Ps -- Ps 5,661 Ps 7,234
Revenues from transactions
with other operating
segments of the Bank 48,585 27,669 36,438 24,402 -- (104,324) 4,063
Interest income 597,066 208,387 200,207 43,857 471,270 41,192 172,103
Provision for loans losses Ps 51,614 Ps 3,265 Ps 4,358 Ps (326) Ps 4,028 Ps (28,444) Ps 36,046
All other
Trust Leasing Brokerage (1) Manufacturing Segments TOTAL
-------- -------- ------------- ------------- --------- -----------
Revenues from external
customers Ps49,178 Ps88,265 Ps7,842 Ps42,285 Ps90,355 Ps 605,010
Revenues from transactions
with other operating
segments of the Bank 817 (582) 196 10,720 8,382 56,366
Interest income 6,412 21,918 8,894 444 16,195 1,787,945
Provision for loans losses Ps 1,165 Ps20,293 Ps 148 Ps 1,735 Ps 2,504 Ps 96,386
YEAR ENDED DECEMBER 31, 2005
(in millions of Ps)
Governmental
Small and
Retail Commercial Business Builder Institutional Corporate
Banking Banking Banking Banking Banking Treasury Headquarters
----------- ---------- --------- -------- ------------- --------- ------------
Revenues from external
customers Ps 474,916 Ps 32,652 Ps 50,724 Ps 1,104 Ps15,092 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)
Provision for loans losses Ps 77,229 Ps 3,497 Ps 13,338 Ps 1,774 Ps 1,913 Ps 27,560 Ps 16,176
Offshore
Commercial All other
Banking Trust Leasing Brokerage (1) Manufacturing Segments TOTAL
---------- --------- ---------- ------------- ------------- --------- -----------
Revenues from external
customers Ps 12,618 Ps58,431 Ps 308,027 Ps67,346 Ps3,461 Ps83,161 Ps1,127,104
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
Provision for loans losses Ps 28,538 Ps 850 Ps 19,459 Ps 11 Ps 12 Ps 1,765 Ps 192,122
----------
(1) 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.
25
The following table sets forth BC's geographic revenues and long-lived
assets distribution as of December 31, 2003, 2004 and 2005:
2003 2004 2005
---------------------------- ---------------------------- ----------------------------
LONG LONG LONG
GEOGRAPHIC INFORMATION REVENUES LIVED - ASSETS REVENUES LIVED - ASSETS REVENUES LIVED - ASSETS
---------------------- ----------- -------------- ----------- -------------- ----------- --------------
Republic of Colombia Ps1,964,640 Ps754,204 Ps2,284,240 Ps340,304 Ps3,990,600 Ps734,419
Republic of Panama and
Cayman Islands 151,068 117,863 183,400 1,692 202,018 29,810
Puerto Rico -- -- -- -- 42,897 131
USA (1) -- -- 7,002 577 11,965 326
----------- --------- ----------- --------- ----------- ---------
Total 2,115,708 872,067 2,474,642 342,573 4,247,480 764,686
Eliminations of
intersegment operations (30,204) (1,958) (56,366) (1,119) (37,032) 7,144
----------- --------- ----------- --------- ----------- ---------
TOTAL, NET Ps2,085,504 Ps870,109 Ps2,418,276 Ps341,454 Ps4,210,448 Ps771,830
=========== ========= =========== ========= =========== =========
----------
(1) Information relating to Bancolombia Miami 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.
The following table summarizes and sets forth BC's total revenue over the
last three fiscal years:
2003 2004 2005
----------- ----------- -----------
REVENUES
Revenues for reportable segments Ps1,808,366 Ps2,334,389 Ps4,136,202
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) Ps2,085,504 Ps2,418,276 Ps4,210,448
=========== =========== ===========
----------
(1) Total revenues for reportable segments include interest, fees, other
services and other operating income.
The following table lists the main revenue-producing fees along with
their variation from the prior fiscal year:
AS OF GROWTH
DEC - 2003 DEC - 2004 DEC - 2005 2005/2004
---------- ---------- ---------- ---------
(Ps million)
MAIN FEES AND COMMISSIONS
Commissions from banking services Ps 39,363 Ps 53,082 Ps101,355 90.9%
Electronic services and ATMs fees 29,873 39,163 101,299 158.7%
Branch network services 28,594 37,929 48,984 29.1%
Collections and payments fees 25,604 38,654 56,670 46,6%
Credit card merchant fees 29,533 8,251 10,076 22.1%
Credit and debit card annual fees 62,158 80,290 205,606 156.1%
26
AS OF GROWTH
DEC - 2003 DEC - 2004 DEC - 2005 2005/2004
---------- ---------- ---------- ---------
Checking fees 46,910 49,391 54,846 11.0%
Warehouse services 42,705 49,072 62,155 26.7%
Fiduciary activities 39,469 50,425 60,131 19.2%
Brokerage fees 5,687 8,669 68,231 687.1%
Check remittance 12,877 10,850 10,579 (2.5%)
International operations 23,860 23,997 36,484 52.0%
Fees and other service expenses (32,361) (40,715) (48,087) 18.1%
--------- --------- --------- -----
TOTAL Ps354,272 Ps409,058 Ps768,329 87.8%
========= ========= ========= =====
B.3. OUR BUSINESS
The Bank is a full service financial institution engaged in retail
banking, corporate banking and other financial activities directed toward its
major customer segments, retail, corporate and mortgage. The Bank offers
traditional banking products and services, such as checking accounts, saving
accounts, time deposits, lending (including overdraft facilities), mortgage
loans, credit cards, and cash management services. It also offers
non-traditional products and services, such as pension banking, bancassurances,
international transfers, fiduciary and trust services, leasing, brokerage
services and investment banking.
The Bank organizes its activities into three primary divisions: Retail
and SMEs Banking, Corporate Banking and Mortgage & Building Banking. This
section explains our business activities in each of these three divisions.
SEASONALITY OF DEPOSITS
Historically, the Bank has experienced some seasonality in its
checking account deposits, with higher average balances at the end of the year
(when customers need increased liquidity and lower balances) than in the first
quarter of the year (when customers move their funds from checking accounts to
savings and mortgage institutions). During December 2003, the aggregate amount
deposited in checking accounts was Ps 3,546 billion, which declined 18.3% to Ps
2,899 billion by March 31, 2004. During December 2004, the aggregate amount
deposited in checking accounts was Ps 3,799 billion, which declined 16.6% to Ps
3,170 billion by March 31, 2005. During December 2005, the aggregate amount
deposited in checking accounts was Ps 4,240 billion, which declined 7.8% to Ps
3,911 by March 31, 2006. As of December 31, 2005, deposits in checking accounts
represented 23.1% of the Bank's total deposits.
B.3.I. RETAIL AND SMALL-AND MEDIUM-SIZED ENTERPRISES (SMES) BANKING
In Item 4. B.3.i. Retail and Small-and Medium-Sized Enterprises (SMEs)
Banking, references to "Bancolombia", "BC", the "Bank", "us" or "we" refer to
Bancolombia S.A., a banking institution organized under the laws of the Republic
of Colombia, which may also act under the name of Banco de Colombia S.A.,
including its Subsidiaries and taking into account the effects of the Merger.
Additionally, references to "Premerger Bancolombia" refer to Bancolombia as it
existed immediately before the Merger took effect.
27
As a result of the Merger, Bancolombia's branch network for Retail and
SMEs Banking is currently an amalgamation of the several branch networks of
Premerger Bancolombia, Conavi and Corfinsura as those branch networks existed
before the Merger. These three branch networks segment their clientele according
to different customer segmentation standards, as they did before the Merger. In
2005, the Bank undertook a new customer segmentation policy which shall be
implemented progressively in 2007 for its Retail and SMEs Banking Business. The
following descriptions, however, refer to the customer segmentation standards
used by each of the three branch networks of the merged entities as of December
31, 2005.
We provide Retail and SMEs Banking services to both individuals and
entities through a wide portfolio of products and services.
This line of business has been of significant importance in funding
and generating income as well as bank commissions. The Retail and SMEs Banking
segment serves more than 4 million customers as of December 31, 2005, excluding
any overlapping that may have resulted from the Merger.
As of December 31, 2003, 2004 and 2005, our Retail and SMEs Banking
segment represented 34%, 37% and 27%, respectively, of the Bank's total loan
portfolio, including loans for individuals, and microfinancing and commercial
loans for SMEs. The average value of the loan portfolio for the Retail and SMEs
Banking segment in fiscal year 2005 totaled Ps5,204 billion, a figure which has
been growing steadily. As of December 31, 2005, 3.5% of total Retail and SMEs
Banking loans were past due. Retail and SMEs Banking deposits represented 53.12%
of the Bank's total deposits and generated 80.36% of the Bank's fee income.
Retail and SMEs Banking is comprised of the Personal Banking,
Preferential Banking, Prestige Banking, SMEs, Entrepreneurial and Government
segments.
The following is a description of each of these segments, the
portfolio of products and services we offer in each segment and a summary of the
progress and certain innovations made in 2005.
B.3.I.A. PERSONAL BANKING SEGMENT
The Personal Banking Segment serves customers who are students,
housewives, individuals with independent means, employees, pensioners and
freelance professionals who comply with the following pre-established income
parameters.
BC's Personal Banking Segment of the Premerger Bancolombia branch
network serves customers with a monthly income of up to Ps5 million. This
segment is further subdivided into sub-segments based on monthly income,
measured in multiples of Salario Minimo Legal Vigente (the effective legal
minimum monthly salary or "SMLV"). One SMLV is equal to Ps381,500 per month for
2005, as established by the Government and published monthly by the Ministry of
Social Protection. These sub-segments offer different value proposals for each
type of customer. The number of customers and the cross-selling indicator (CSI)
distribution for the various sub-segments is as follows. CSI is the average of
products that each customer has with the Bank and is calculated by dividing the
number of current products by the number of current customers.
28
NUMBER OF CUSTOMERS IN THE PERSONAL BANKING SEGMENT
CSI AT
DECEMBER,
SUB-SEGMENTS DEC - 2003 DEC - 2004* DEC - 2005 2005
------------ ----------- ----------- ----------- ---------
Basic (1) 900,211 968,924 1,123,053 1.71
Middle (2) 185,255 213,552 254,098 2.29
High (3) 129,175 220,013 257,326 2.83
----------- ----------- ----------- ----
TOTAL PERSONAL BANKING Ps1,214,611 Ps1,402,489 Ps1,634,477 1.98
=========== =========== =========== ====
----------
(1) Basic: Customers with a monthly income of less than 2.5 SMLV.
(2) Average: Customers with a monthly income from 2.5 to 5 SMLV.
(3) High: Customers with a monthly income from 5 SMLV to Ps5 million.
* There was an increase in High sub-segment customers due to a change in the
definition of the sub-segment, as the maximum monthly income for inclusion
in this sub-segment was increased from Ps3.7 million to Ps5 million.
Personal Banking customers of the Conavi branch network have income of
up to Ps4 million per month. The number of customers for each sub-segment in
the Conavi branch network is as follows:
SUB-SEGMENT AT THE CONAVI BRANCH NETWORK NOVEMBER 2005
---------------------------------------- -------------
Low-Income Massive (1) Ps 974,835
High-Income Massive (2) 920,469
Average-Income (3) 426,377
-----------
TOTAL CUSTOMERS-PERSONAL BANKING Ps2,321,681
===========
----------
(1) Low-Income: Customers with a monthly income from 0 to 1 SMLV
(2) High-Income: Customers with a monthly income from 1 to 2.5 SMLV
(3) Average-Income: Customers with a monthly income from 2.5 SMLV to 4 SMLV
The Bank offers the following products and services to its customers
in the Personal Banking Segment. The Basic Portfolio is offered to all customers
of this segment while the Complementary Portfolio is offered according to the
customer's particular needs.
Basic Portfolio
- Savings accounts
- Debit cards
- Bancassurance - (life, tuition and homeowners insurance)
- Personal loans, "Ideal" credit cards, mortgage loans,
personal credit cards (MasterCard, Visa and American
Express) and rotating lines of credit ("Audioprestamo" or
"Crediagil")
29
Complementary Portfolio
- Checking accounts and overdrafts
- Trust or investment funds (managed by Fiducolombia and
Suvalor)
- Time deposits
- Payroll loans, educational credit, second credit cards
- "AFC" Accounts (savings accounts with tax benefits for house
purchasing)
Progress and Innovations
- We are a leading bank in the insurance placement market due
in part to our ability to provide a comprehensive portfolio
with the support of Suramericana de Seguros S.A. The
agreement with Suramericana de Seguros S.A. allows us to
offer life, hospitalization, household and tuition
insurance. The integration between the three networks -
Corfinsura, Conavi and Bancolombia - allowed us to continue
to protect and ensure a better quality of life for
Colombians.
- In 2005, Bancolombia signed four agreements with
international remittance agencies, allowing it to reach
thousands of Colombians receiving money transfers from
abroad and thereby reaching a total of ten agreements with
entities in the remittance business for both the Premerger
Bancolombia and Conavi branch networks. We have also made
great efforts to introduce these customers to our range of
products for individuals who were not previously users of
banking services having their first financial services
experience.
- We managed to increase the number of more profitable
customers within Premerger Bancolombia's network, offering
deposit, loan and protection products.
B.3.I.B. PREFERENTIAL BANKING SEGMENT (HIGH-INCOME CUSTOMERS)
BC's Preferential Banking Segment of the Premerger Bancolombia branch
network serves individuals, including employees, pensioners, students,
housewives, individuals with independent means and freelance professionals, with
monthly income of more than Ps5 million or annual sales of more than Ps100
million.
The added value proposal for these customers consists of personalized
attention provided by an Account Manager or Executive, a specialized portfolio
of products and services as well as preferential attention with regards to
certain BC banking procedures.
The table below shows the evolution in recent years of the number of
customers and the CSI corresponding to this segment of the Premerger Bancolombia
branch network:
30
NUMBER OF CUSTOMERS IN THE PREFERENTIAL BANKING SEGMENT (HIGH-INCOME CUSTOMERS)
AT THE PREMERGER
BANCOLOMBIA
NETWORK BRANCHES DEC - 2003 DEC - 2004* DEC - 2005
---------------- ---------- ----------- ----------
Numbers of Customer 147,128 51,526 58,641
CSI 3.43 5.05 5.22
----------
* There was a decrease in the number of customers due to a change in the
definition of the segment, as the minimum monthly income for inclusion in
this sub-segment was increased from Ps 3.7 million to Ps 5 million.
In the Conavi branch network, this segment is known as High-Income
Banking, serving individuals with monthly income ranging from Ps 4 million to
Ps 13 million. As of December 31, 2005, there were 73,754 customers in this
segment.
In the Corfinsura branch network, retail banking consists of the
following segments based on the total value of a customer's investments:
- Customers with investments under Ps 20 million
- Customers with investments of Ps 20 million or above, but
below Ps 50 million
- Customers with investments of Ps 50 million or above, but
below Ps 200 million
- Customers with investments of Ps 200 million or above, but
below Ps 300 million
- Customers with investments of more than Ps 300 million
The added value proposal for customers of Corfinsura's network is
based on the advisory services relating to the different investment alternatives
offered to these customers, including bonds, time deposits, security funds and
voluntary pension funds.
The Bank offers the following products and services to its customers
in the Preferential Banking Segment. The Basic Portfolio is offered to all
customers of this segment while the Complementary Portfolio is offered according
to the customer's particular needs.
Basic Portfolio
- Preferential accounts with the following features:
- Checking accounts with overdraft line of credit
- Savings accounts
- Preferential debit cards
- "Audioprestamo" loans (disbursed by telephone or
internet)
- Credit cards (personal, gold and platinum)
- Mortgage loans and "Prestahogar" housing loans
31
- Fiducuenta (Fiducolombia's ordinary mutual fund)
- AFC Accounts
Complementary Portfolio
- Personal loans and preferential loans
- "Vehiprestamo" loans for vehicles
- Pension banking (Fiducolombia's product)
- Mutual funds (Fiducolombia's product)
- Offshore accounts
- Offshore Visa Cayman credit cards
- Financial leasing for vehicles and housing
Progress and Innovations
- Permanent media campaigns were launched during 2005,
promoting pre-approved levels of credit for the
"AudioPrestamo" (telephone/online) and Personal Credit loans
so as to increase our consumer loan portfolio in this
segment. As a result, the average retail loan portfolio
showed an accumulated growth of 61.50%, compared to 21.10 %
in 2004.
- In 2005, a centralized customer management program was
implemented. Through this program, an account executive
manages customers from different Bancolombia branch offices.
Additionally, supermarket branch executives also started to
manage customers.
- During 2005, the products and services targeting
Preferential Customers were strengthened and improved. The
percentage of Preferential Customers with Preferential
Accounts rose from a total coverage of 7.8% in December 31,
2004 to 21.6% in December 31, 2005 of Preferential Customers
with Preferential Accounts. Customers continued to exchange
common debit cards for Preferential Debit Cards, reaching
62% coverage as of December 31, 2005. We also implemented
preferential customer queues in 27 BC branches throughout
the country.
- We also launched a new line of mortgage loans with fixed
installments and a fixed interest rate, payable within a
total term ranging from 5 to 10 years. This new line is
available at the Conavi branches for all customers of BC
seeking an easy-access alternative for house purchasing.
32
B.3.I.C. PRESTIGE BANKING SEGMENT
The Prestige Banking Segment serves individuals with a net worth
totaling more than US$100,000. The added value proposal for these customers is
to provide them with advice on the administration of their net worth in order to
promote the achievement of customers risk and rate of return objectives.
The Merger has allowed us to improve the portfolio of products offered
by our Prestige Banking Segment, given the introduction of specialized products
offered by Corfinsura's subsidiaries, Suvalor in Colombia and Banco Corfinsura
Internacional, Inc. abroad. This has allowed us to differentiate the products
and strengthen the value added proposal offered to this segment. After just one
year, thanks to the addition of Suvalor's portfolio, the Prestige Banking
segment now has more than 2,000 customers. Currently, we are able to offer a
broad portfolio of banking, brokerage and fiduciary products, both in Colombia
and abroad.
B.3.I.D. ENTREPRENEURIAL BANKING (MICRO-FINANCING) SEGMENT
The Entrepreneurial Banking Segment serves customers that meet the
following conditions:
- Their annual sales are between Ps30 million and Ps250
million;
- They have been in business for more than one year;
- They have fixed assets of less than 501 SMLV;
- They have a maximum of 10 employees; and
- The owner/applicant is between 21 and 69 years old.
The following table shows the evolution in the number of customers in
the different sub-segments that comprise the Entrepreneurial banking segment:
NUMBER OF CUSTOMERS IN THE ENTREPRENEURIAL BANKING SEGMENT
SUB-SEGMENT OF THE PREMERGER
BANCOLOMBIA BRANCH NETWORK DEC-2004 DEC-2005
---------------------------- -------- --------
Subsistence (1) 120,463 136,448
Simple Accumulation (2) 5,937 12,564
Extended Accumulation (3) 4,214 7,831
------- -------
TOTAL 130,614 156,843
======= =======
----------
(1) Subsistence: annual sales between Ps0 and Ps50 million
(2) Simple accumulation: annual sales between Ps50 million and Ps120 million
(3) Extended accumulation: annual sales between Ps120 million and Ps250
million
33
The Bank offers the following products and services to its customers
in the Entrepreneurial Banking Segment. The basic portfolio is offered to all
customers of this segment while the complementary portfolio is offered according
to the customer's particular needs.
Basic Portfolio
- Savings account
- Debit cards
- Credit (for working capital, purchase of fixed assets or
substitution of fixed assets)
Complementary Portfolio
- Life insurance
- Checking accounts
- Overdraft accounts
- Credit card (transfers of credit card balances from other
banks offered to customers with a minimum of six months of
credit history with the Bank)
- Plan Semilla (Investment fund managed by Fiducolombia)
In the Entrepreneurial Banking Segment of the Premerger Bancolombia
branch network, BC offers a personalized service through a network of 11
specialized branches in the main cites of Colombia (Bogota, Medellin, Cali and
Barranquilla), where 94 credit executives offer their entrepreneurial customers
banking services based on an analysis of their financial and personal profile.
Progress and Innovations
- As of December 31, 2005, loans for a total value of Ps 30.9
billion had been disbursed to entrepreneurial customers
since March 2004, with Ps 2,241,116 average per loan and an
average term of 13 months.
- Our CSI for customers who were assisted by the credit
executives was 3.30 as of December 31, 2005, increasing the
level of profitability per customer.
- For 46% of the customers of this segment, their relationship
with Bancolombia was their first banking experience.
- 86% of the customers, who were assisted by the credit
executives, in this segment of Bancolombia's network
contribute positive profitability to BC.
34
B.3.I.E. SMALL-AND MEDIUM-SIZED ENTERPRISES (SMES) BANKING SEGMENT
The SMEs Banking Segment serves legal entities with annual sales from
Ps 250 million to Ps 10 billion, as well as individuals who work independently
in the retail, cattle-raising and agricultural sectors, among others, with
annual sales between Ps 250 million and Ps 10 billion. In 2005, the structure of
this segment changed, aiming to enhance competitiveness in the SMEs banking
market as well as the corporate banking market.
The SMEs Banking Segment is composed of managed and non-managed
customers. A branch or SMEs banking executive is assigned to provide
personalized attention and permanent advisory services to each managed customer.
Each branch manager or SMEs executive handles an average of 120 customers. The
distribution is shown below:
NUMBER OF CUSTOMERS IN THE SMES BANKING SEGMENT
CUSTOMERS AT THE PREMERGER
BANCOLOMBIA'S BRANCH NETWORK DEC - 2004 DEC - 2005(*)
---------------------------- ---------- -------------
Managed customers 29,451 30,683
Non-managed customers 44,491 48,624
------ ------
TOTAL 73,942 79,307
====== ======
----------
* Segmentation parameters were modified in 2005, establishing a maximum sales
limit of Ps 10 billion country wide for this segment instead of Ps 17
billion for Bogota and Ps 11.2 billion for the rest of the country.
The value added proposal offered to the SMEs Banking Segment consists
of the following:
- Personalized attention by a senior executive or branch
manager, with comprehensive knowledge of the customer;
- Basic proposals according to different economic sectors;
- Online and e-mail solutions; and
- Advisory services and educational programs for customers
The Bank offers the following products and services to its customers
in the SMEs Banking Segment. The Basic Portfolio is offered to all customers of
this segment while the Complementary Portfolio is offered according to the
customer's particular needs.
Basic Portfolio
- Checking accounts
- Savings accounts
- MIT (Integrated Treasury Management):
-- Payroll payments
-- Supplier payments
35
-- Collection systems
-- Corporate online banking
- Local currency loan portfolio
-- Ordinary loans
-- Online Credipago loans
- Corporate credit cards
- Tax and customer duty payments
Complementary Portfolio
- Foreign currency loans
- Loans funded by Colombian development banks
- Leasing
- Treasury loans
- "Bancolombia Distribucion" (credit card) and direct loan
- Discounting of invoices
- Trade finance
- Acquiring services
- Mutual and investment funds
- Special lines of credit guaranteed by the Colombian National
Guaranty Fund (Fondo Nacional de Garantias or the "FNG"), a
Government entity responsible for issuing guaranties to
micro-small and medium-sized businesses, and the Colombian
Agricultural Guaranty Fund (Fondo Agricola de Garantias)
- Fiducolombia special products and services
Progress and Innovations
- The FNG awarded two prizes to BC in 2005: one for
originating the highest total value of FNG guaranteed loans
in the country and the other for being the financial
institution with the lowest rate of claims on the FNG
guaranties supporting its loans.
- This segment has a total loan portfolio of Ps 2,200 billion
as of December 31, 2005, with an annual growth of 49.1%. The
leasing business achieved 75.8% growth, reaching Ps 543
billion.
- In April 2005, BC launched a new specialized SMEs website
section in order to offer financial advisory services for
small and medium-sized businesses in Colombia. This website
section offers detailed information regarding the portfolio
of products, economic reports and useful information for
decision-making purposes. Additionally, customers are able
to access all online transactions, advisory services, loans
in both
36
pesos and U.S. dollars, cash management products, investment
products in both local and foreign currency, as well as
other information concerning logistics, links of interest to
the sector and business success stories.
- In 2005, a new group of 21 SMEs advisors was assigned to
SMEs non-managed customers, producing positive results. At
December 31, 2005, this sales force served a total of 4,531
customers at the Premerger Bancolombia branch network, which
has shown the following growth:
AT THE PREMERGER % INCREASE
BANCOLOMBIA DEC-2004 DEC-2005 DEC-2005 /
BRANCH NETWORK (IN Ps MILLIONS) (IN Ps MILLIONS) DEC-2004
---------------- ---------------- ---------------- ----------
Total SMEs assets 16,393 30,051 83%
Total SMEs liabilities 27,174 41,644 53%
SMEs net financial contribution 2,144 4,245 98%
B.3.I.F. GOVERNMENT BANKING SEGMENT
In August 2005, after the Merger between Bancolombia, Conavi and
Corfinsura, BC decided to create a new business segment targeting government
entities as part of its Retail and SMEs Banking strategy.
The customers that comprise the Government Banking Segment are:
- Municipalities with income lower than 30,000 SMLV, as well
as all municipalities located in areas where corporate
banking services are not offered, albeit with higher levels
of income, along with their respective decentralized
entities.
- Regional entities (departamentos) with income lower than Ps
46,543 million, as well as all regional entities located in
areas where corporate banking services are not offered,
together with their decentralized entities.
The Government Banking Segment had a total of 1,539 customers served
by 196 branches at December 31, 2005.
The Bank offers the following products and services to its customers
in the Government Banking Segment. The Basic Portfolio is offered to all
customers of this segment while the Complementary Portfolio is offered according
to the customer's particular needs.
Basic Portfolio
- Checking accounts (following the regulations of the
Direccion del Tesoro Nacional, the Colombian Treasury
Department)
37
- Savings accounts (with a preferential interest rate)
- Time deposits
- Colombian tax collection services (according to an agreement
between BC and the government tax agency for the collection
of national taxes through the branch network)
- Collections and payments
- Corporate online banking and PC Banking - Enlinea
Complementary Portfolio
- Ordinary loans
- Loans funded by Colombian Development banks
- Homebanking system (Conavitel)
- Leasing
- Investment funds
- Trust:
-- Public trust
-- Management and payments trust
-- Guaranties trust
Progress and innovations
- From January 2005 to December 2005, the amount of savings
accounts in this segment grew 32%.
- A total of five government segment managers located in each
of the regional offices are responsible for providing
customers with specialized service, which has positively
impacted the branch managers' performance.
- Thanks to our mobile branches - Puntos de Atencion Moviles
-, the Government Banking segment provides services to 58
municipalities where Bancolombia has no "brick and mortar"
presence. As of December 31, 2005, the total amount of
managed funds in the Government Banking Segment was Ps 12.3
billion.
B.3.II. CORPORATE BANKING
Corporate Banking 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 specialized pricing according to the customer's risk level.
38
As of December 31, 2005, the Bank had 4,934 corporate customers
managed by account managers, including corporate customers from the Corfinsura
and Conavi branch networks. Customers are classified by economic sector as
follows:
SECTOR 2003 2004 2005
------ ----- ----- -----
Agriculture (1) 217 233 315
Commerce (2) 666 695 1,101
Construction (3) 149 231 174
Government (4) 82 96 101
Manufacturing of Industrial Products (5) 430 426 553
Manufacturiing of Consumer Products (6) 485 481 619
Telecom and Media (7) 77 89 98
Individuals (8) 202 126 134
Natural Resources 120 156 194
Financial Services (9) 337 413 451
Non Financial Services (10) 429 499 806
Other (11) -- 100 388
----- ----- -----
TOTAL 3,194 3,545 4,934
===== ===== =====
----------
(1) AGRICULTURE: Classified into sub-sectors, like crops, cattle, poultry
farming and fishing, as the most important economic activities.
(2) COMMERCE: Classified into sub-sectors, like supermarkets, distributors and
retail, as the most important economic activities.
(3) CONSTRUCTION: Composed of the sub-sector of infrastructure.
(4) GOVERNMENT: Central administration, territorial and decentralized entities
constitute this sector.
(5) MANUFACTURING OF INDUSTRIAL PRODUCTS: Including manufacturing of metallic
products; building materials; paper & packing products; plastics and
chemical products
(6) MANUFACTURING OF CONSUMER PRODUCTS: Including manufacturing products
related to food, drinks, tobacco, textiles, apparel, footwear,
pharmaceuticals and health & personal care products.
(7) TELECOM AND MEDIA: Comprised of sub-sectors, the most important of which
are telecommunications and media companies.
(8) INDIVIDUALS: Includes individuals related to companies in any sector who
share the same risk as the company.
(9) FINANCIAL SERVICES: Composed of sub-sectors that include all companies in
the financial sector.
(10) NON-FINANCIAL SERVICES: Divided into sub-sectors, the most important of
which are education, health, transportation and tourism services.
(11) OTHER: Companies with no uniform international industrial classification
available.
Customers are grouped by size into the following four segments:
- MIDDLE MARKET: Customers with annual sales above Ps 10
billion.
- CORPORATE: Customers with annual sales over Ps 45 billion.
- INSTITUTIONAL: Customers subject to the supervision of the
Superintendency of Finance, the Superintendency of Health or
the Superintendency of Family Subsidy, as well as
electricity and public utility companies and financial
corporations.
- GOVERNMENT: Public sector entities, such as municipalities,
the central administration, territorial and decentralized
entities, among others.
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The total amount of corporate banking loans, which includes all types
of credits extended to customers of this segment, was Ps 9,539,307 million in
2005, as compared to Ps 5,413,956 million in 2004 and Ps 5,272,290 million in
2003. As of December 31, 2003, 2004 and 2005, total corporate loans represented
66%, 54% and 51%, respectively, of the Bank's total loan portfolio. As of
December 31, 2005, 0.8% of all corporate banking loans were past due.
The Bank offers a portfolio for corporate customers based on their
economic activity. A Basic Portfolio fits all customers' needs and can be
supplemented with a Complementary portfolio that can be adjusted to the
customer's particular requirements.
Basic Portfolio for all economic sectors
- Checking and savings accounts,
- Internet and PC banking,
- Cash management,
- Money payments and collections and
- Subsidiaries Products.
Manufacturing Complementary Portfolio
- Loans for working capital, factoring and leasing,
- Offshore products in Panama, Cayman, Banco Corfinsura
Internacional, Inc. and Bancolombia Miami Agency,
- Warehouse and logistics,
- Checking and savings accounts,
- Leasing and
- Suvalor Products.
Commerce Complementary Portfolio
- Loans for working capital, loans funded by development banks
and credit and distribution cards,
- Foreign exchange and international trade,
- Offshore checking accounts and
- Means of payment in foreign currency.
Agriculture Complementary Portfolio
- Long term loans funded by development banks and working
capital loans,
- Offshore checking accounts and associated payment products
and
- Foreign exchange and international trade.
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Non Financial Services Complementary Portfolio
- Leasing and loans funded by development banks,
- Money collection and payment services,
- Investment funds and
- Repurchase agreements and DAT(3).
Natural Resources Complementary Portfolio
- Long term loans, leasing and structured credits,
- Investment funds,
- Offshore checking accounts,
- Foreign Exchange and International trade,
- Leasing and
- Investment Banking.
Financial Services Complementary Portfolio
- Automatic money collection systems,
- Automatic payment systems and
- Investment funds.
Telecom And Media Complementary Portfolio
- Long term loans and infrastructure development financing
through leasing,
- Massive money collection systems and
- Investment banking.
Construction Complementary Portfolio
- Working capital loans, long term loans, housing construction
loans and leasing,
- Trusts and
- Investment banking.
Government Complementary Portfolio
- Investment banking and
- Short and long term loans and loans funded by development
banks.
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(3) Deposito de Ahorro a Termino or " DAT": A short-term bank deposit agreement
that allows holders to receive interest payments from BC pursuant to the
legal policy and specific regulations approved by the Superintendency of
Finance.
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B.3.III. MORTGAGE & BUILDING BANKING
This segment was incorporated from Conavi as a result of the Merger.
It targets the building construction industry. Certain financial and other
information about Conavi as of December 31, 2004 is provided in this section for
comparison purposes.
Customers in Mortgage & Building Banking are grouped according to the
following segments:
- Building SMEs: 1 project (providing they are professionally
dedicated to the construction business or represent more
than Ps 10,000 million in annual sales).
- Building Corporate 1: 2 to 5 projects.
- Building Corporate 2: More than 5 projects.
There were 596 Mortgage & Building Banking customers as of December
31, 2005.
Portfolio
The Bank offers the following products and services to its customers
in the Mortgage & Building Banking Business:
- Working capital loans
- Construction loans
- Trust arrangements (Funds and Equity Management)
- Credit cards
- Checking accounts
- Savings accounts
- DAT
- Time Deposits
- Repurchase agreements
- Investment Funds
Structure
Mortgage & Building Banking services are provided by our sales team,
which is responsible for serving the professional builder industry, through
Account Managers.
42
We also have a team of commercial advisors responsible for attending
individuals in the sales rooms of the different construction projects belonging
to our builder customers or on the actual property being sold. They are also
responsible for providing support for mortgage loans at our own offices.
Progress and innovations
- As of December 31, 2005, construction loans amounted to Ps
236,127 million, showing an increase of 66% compared to Ps
141,968 million at December 31, 2004.
- At December 31, 2005, BC had a 38% share of the market in
construction loans calculated based on Ps 620,477 million
total value. Source: Colombian Institute of Saving and
Housing - ICAV (Instituto Colombiano de Ahorro y Vivienda).
- At December 31, 2005, BC had more construction loans than
any other mortgage bank in terms of number of loans (751)
and value (Ps 326,276 million). Source: ICAV.
Background Information
In 1972, the Colombian Government, as part of its development plan,
considered it convenient to channel funds to the building sector. Consequently,
as a result of Decree 677 issued on May 2, 1972, the Government established that
these funds would be acquired from the market via a savings promotion plan that
incorporated a constant value mechanism to preserve the purchasing power of
invested funds.
Therefore, the Government authorized the creation of Private Savings
and Housing Loan Corporations for the purpose of encouraging private savings and
channeling these funds towards the building sector by means of Decree 678 of
1972. These Private Savings and Housing Loan Corporations utilized a constant
value system that periodically adjusted the value of invested funds based on
variations in the purchasing power of the peso in order to safeguard that both
savings and loans would maintain their value.
Based on the constant value system, the Unidad de Poder Adquisitivo
Constante (the Purchasing Power Unit or "UPAC") was first established as a basis
for denominating loans originated by Private Savings and Housing Loan
Corporations as well as for paying interest on the savings deposited with them.
The UPAC was initially linked to inflation in order to preserve the
purchasing power of the peso. Later on, interest rates were included in the
calculation of this rate and finally it was exclusively based on the DTF
(average interest rate paid by banks on fixed term deposits).
In 1998, the DTF registered an unusual increase and since the UPAC was
calculated on the basis of the DTF rate, the resulting hike in interest rates
had an adverse effect on the value of UPAC-linked obligations in pesos. For this
reason, many borrowers could not pay off their loans.
43
In November 1998, the Colombian Government declared a state of
economic and social emergency and as a result issued Decree 2331 of 1998, in
which it established a series of debt relief arrangements for existing housing
loans.
In 1999, the UPAC was declared unconstitutional by the Constitutional
Court in a sentence pronounced May 27, 1999, stating that the DTF rate could not
be included in the UPAC calculation methodology since this affected the people's
right to decent housing, as provided for by Article 51 of the Colombian
Political Constitution of 1991.
On December 23, 1999, Law 546, the "Housing Framework Law", was
passed, regulating home financing and creating the UVR, which reflected the
variations in the purchasing power of the peso, based exclusively on the
increase in the Consumer Price Index - CPI calculated by DANE -.
Law 546 of 1999 established the guidelines which govern the long-term
financing of housing and, among other things, allowed housing loans to be
granted in pesos and in UVRs; prohibited capitalization of interest; permitted
loan prepayments; prevented financing arrangements based on percentages that
exceed the maximum limit set by the Colombian Government, established terms that
range from 5 to 30 years for housing loans and required a first mortgage on the
property that is being financed as collateral. In general, this law provided the
regulatory framework for residential financing in Colombia.
Interest rates have a ceiling or cap, both for "VIS" housing (Vivienda
de interes social - low income housing - classified up to a maximum value of 135
SMLV) and non - VIS housing. As of December 31, 2005, the Bank offers mortgage
loans with interest rates below the maximums established by law.
Mortgage loans represent tax benefits for the borrower, who may deduct
the interest paid on mortgage loans during the previous year from his or her tax
payments and also reduce his or her tax base by up to 30% by saving in an AFC
account, providing the amount saved is used to pay the downpayment on the
property or the corresponding monthly mortgage payments.
The government also grants subsidies for housing purchases that range
from Ps 2,670,500 to Ps 8,011,500 for persons belonging to the lower income
population (earning up to the equivalent of 4 SMLV).
B.4. DISTRIBUTION NETWORK
The Bank distributes its products and services and executes
transactions through seven main channels: the branch network, the ATM network,
the Personal Virtual Branch and the Corporate Virtual Branch, Automatic Payment
Systems, PC Banking, Conavitel and Telephone banking. BC has been increasing its
distribution channels' capacity with more branches and more functionality in the
electronic channels, while providing new transactions and services and selling
products through internet and telephone banking. As of December 31, 2005, the
branch network totaled 678 branch offices at 146 locations in the primary urban
centers and regions of Colombia. This traditional distribution channel is
reinforced by a unified management system that includes Internet Banking, the
network of ATMs, telephone banking and client on-site branches. Through these
channels, customers may carry out most transactions related to deposit accounts
or credit cards, including inquiries, cash withdrawals, payment of credit card
statements and utility and other bills, transfers and deposits.
44
B.4.I. BRANCH NETWORK
As of December 31, 2004, BC had 377 branch offices located in 127
Colombian cities. As a result of the Merger, BC acquired 256 Conavi branch
offices and 19 Corfinsura branch offices. Additionally, in fiscal year 2005, we
have opened 27 branch offices and closed 1. As of December 31, 2005, we reached
a total of 678 branch offices in 146 cities and towns throughout the country.
The branch network continues to be concentrated mainly in the major
urban centers of Colombia.
During 2005, we continued to increase our market coverage with our
mobile branches - Puntos de atencion Moviles-, servicing a total of 7,817
customers. Mobile branches consist of a commercial advisor who visits small
towns on specific days, to offer BC's products and services to the local
population. At December 31, 2004, there were 35 Bancolombia mobile branches and
as of December 31, 2005, we had a total of 58 mobile branches. Seven of these
mobile branches were converted to Extension Branch Offices due to their
commercial growth. Extension Branch Offices are offices opened near an existing
BC branch. Through its Extension Branch Offices, BC offers different types of
services, financial assessment and product sales, using a multiple task cashier
and a multiple task commercial advisor. The Manager of the closest branch is the
Manager of the Extension Branch Office. In addition, these extension branch
offices have Bancolombia's electronic distribution channels.
In 2005, the Bank also introduced Mass-Market Collection Centers,
where mass-market transactions are centralized (collection of mobile phone,
public services, social security and pensioners' payments, among others) in
order to support the growth of commercial businesses, strengthen our efficiency
in cash transactions through the specialization of operations and provide
transactional support to the traditional branch network. As of December 31,
2005, we had a total of 12 of these Collection Centers.
B.4.II. ELECTRONIC DISTRIBUTION CHANNELS
BC has a network of alternative electronic distribution channels,
designed to enable cost-effective transactions and services. To decongest its
branch offices, the Bank has worked to transfer customer transactions from
branch offices to electronic distribution channels. Transactions effected
through electronic distribution represented more than 80% of all transactions in
2005.
The following are the electronic distribution channels offered by the
Bank:
B.4.II.A. AUTOMATIC TELLER MACHINES
As of December 31, 2004, BC had 517 ATMs, located in 127 urban
centers. During 2005, BC installed 59 ATMs in strategic locations and new branch
offices. Additionally, as a result of the Merger, Bancolombia incorporated 613
Conavi ATMs for a total of 1,189 ATMs in 157 cities and towns throughout the
country as of December 31, 2005.
45
BC's ATMs offer access to the Cirrus and Plus networks as well as to
the Colombian Redeban-Multicolor network. This channel is widely used by both
our own customers and by customers from other banks, reaching a total monthly
average of 12.7 million transactions for 2005.
During the last quarter of 2005, Bancolombia purchased 150 new ATMs,
which are scheduled to be installed in the first half of 2006 in new branch
offices, shopping malls, gas stations, supermarkets and other places of
business. Out of these 150 new machines, 50 are fully functional ATMs capable of
receiving checks and cash.
B.4.II.B. INTERNET BANKING
BC estimates that the number of transactions carried out through the
Internet and PC Banking remained stable between 2004 and 2005, accounting for
approximately 28% of the Bank's transactions with its customers. The Bank offers
the following Internet channels:
Personal Virtual Branch. Since the Merger, BC has maintained the
existing websites of the three merged entities (www.bancolombia.com;
www.corfinsura.com; www.conavi.com), maintaining the different characteristics
and advantages offered by each website. These websites will remain separate
until the systems are integrated in one single website, which is currently
expected to occur by the end of fiscal year 2006, along with the integration of
many of the Bank's others applications.
The www.corfinsura.com website provides its customers and visitors
access to BC's products and services as well as to economic and financial
information and periodic research reports, which can be viewed through the
website or received by e-mail subscribers.
The Colombian Chamber of IT and Telecommunications (Camara Colombiana
de Informatica y Telecomunicaciones) awarded Corfinsura with the 2005 Prize for
the Best Website in the Large Virtual Companies category based on its content,
structure, user-friendly accessability, graphic design, interactivity,
functionality and general appreciation of the site.
Considering that data security is one of the main concerns of our
customers when accessing online services, during 2005, BC focused its security
strategy on user data security. Among the different activities carried out, BC
implemented a virtual keyboard for entering passwords in order to access the
transactional options, thereby preventing the copying of data by keylogging
devices on the physical keyboard. Additionally, since June 2004, a second
password is required for online payments to third parties made through the
Virtual Branch. These measures were accompanied by a strong communications and
media campaign designed to raise awareness among customers of the risks involved
in Internet use and how these can be prevented or minimized.
The average monthly volume of online transactions completed through
Bancolombia, Conavi and Corfinsura websites increased by 38.0% from 3,951,992 in
fiscal year 2004 to 5,452,860 in fiscal year 2005. Likewise, the number of
online customers increased by 33.1% over fiscal year 2005, totaling 429,454
customers as of December 31, 2005.
Corporate Virtual Branch. In 2005, BC concentrated its efforts on
improving the performance of its Corporate Virtual Branch and educating
customers about its various uses. This platform allows corporate customers to
consult their account balances and monitor transactions in their deposit
accounts, loans and credit cards, disburse loans, make payroll and
46
supplier payments and complete other transactions in real time with the superior
level of security that we believe our customers require. The number of
transactions carried out through this service increased from approximately 9.6
million to 23 million per year. This was mainly due to a similar increase in the
number of customers, considering that at the end of 2005 there were more than
22,500 customers using this service for their treasury needs compared to
approximately 18,500 customers at the end of 2004.
Facturanet. Facturanet was the first electronic bill payment system
introduced in Colombia, developed by TODO 1 Services, a company with a business
model designed to generate revenue from online banking, e-commerce and
e-business. Facturanet is available to BC's customers and former Conavi
customers. Through Facturanet, Bancolombia's customers can make payments and
receive alerts via e-mail when a new bill is submitted for payment from any
entity that has signed an agreement with the Bank. As of December 31, 2005,
741,354 payments were made via Facturanet, demonstrating an increase of 849%
compared to the previous year as a result of the Merger.
Payment Button. Bancolombia offers two means of making purchases and
payments via Internet:
- e-Pagos is a button through which only the Bank's customers
can make purchases and payments via the Internet.
- Proveedor de Servicios Electronicos or (Electronic Services
Supplier or "PSE") is a centralized, standardized system,
developed by ACH Colombia S.A. ("ACH") by means of which
companies may allow their users to purchase and pay for
items over the Internet, debiting the corresponding amounts
from the financial institution where the users have their
account and transferring these amounts to the payee
accounts. This button accepts payments and purchases from
customers pertaining to all banks that form part of the ACH
network.
A total of 101,097 transactions were carried out via the e-Pagos
button, which represents an annual growth of 42%. There are more than 200
companies that currently have this button installed on their websites and we
believe the potential offered by this payment mean continues to increase.
Additionally, a total of 7,181 transactions were carried out using the
PSE system in fiscal year 2005. Comparing the number of transactions performed
during the second half of the year with those during the first half, there was a
1.173% increase.
B.4.II.C. AUTOMATIC PAYMENT SYSTEMS
BC's customers may place standing payment orders and pre-register
payments to be automatically and periodically debited from their accounts. The
Bank's automatic payment system also enables its customers to perform
transactions with any banking institution in Colombia, through the country's
authorized clearinghouse, ACH.
During 2005, approximately 21,500,000 payments were conducted via the
automatic payment systems, compared to 17,900,000 payments during 2004, which is
an increase of 20.1%.
47
Adding the number of payments conducted via Conavi's automatic payment
system during 2005 (aproximately 17,500,000) would result in a rise in the total
number of automatic payments to approximately 39,000,000, on a pro forma basis,
which would represent an increase of 81.3% in 2005.
B.4.II.D. PC BANKING
The remote access platform to the Bank, named Enlinea Bancolombia,
allows corporate customers to connect to the Bank via modem through an
application installed on a computer at the customer's location. This cash
management solution has fewer features than the Corporate Virtual Branch, but
has been operating as a corporate solution since before the creation of the
Corporate Virtual Branch. This was the solution that the Bank provided before
creating its Corporate Virtual Branch, which now represents a large part of the
transactions carried out online.
In 2005, approximately 44,011,529 transactions were carried out using
the Enlinea service. Compared to the 34,832,000 transactions last year, this
represents an increase of 20.85%. At December 31, 2005, 4,154 customers were
using this service. Conavi had a similar system that is still available to
11,000 Conavi branch customers. We expect the number of Enlinea users will
further increase once Conavi and Bancolombia systems are fully integrated.
B.4.II.E. TELEPHONE BRANCH
In 2005, as a result of the Merger, the Telephone Branch Banking
Service went from servicing a monthly average of 400,000 customers to 500,000
(400,000 are Bancolombia branch customers and 100,000 are Conavi branch
customers), resulting in an increase of 25%. Through this service, customers
carried out approximately 37 million transactions in 2005.
The telesales line is attended by specialized sales representatives
that offer products and services to customers according to their needs. In 2005,
we sold 17,000 products of BC and its subsidiaries through the telesales line,
making this an important sales increasing vehicle.
In 2005, new services and transactions were introduced to the
Telephone Branch in order to increase customer satisfaction, including:
- A customer service line for preferential customers located
in Bogota, staffed with specialized sales representatives.
- The VTO tool that gives institutional or campaign messages
to the customer while the call is being transferred to the
operator, reducing customer dropped calls during this
waiting time.
- A customer retention line for those customers who wish to
cancel their credit cards with the Bank.
- A call centralization initiative, through which all calls
made to the branch offices are received by a Contact Center,
removing some operational burden from our branch offices.
48
- A transfer service from Bancolombia accounts to other
Colombian bank accounts.
B.4.II.F. CONAVITEL
This is a point of service ("POS") system consisting of a special
terminal that is linked to the Bank's network through a telephone line. It
offers BC's customers a broad transaction menu, including account balance check
and transfers from savings and checking accounts to a customer's own or third
party BC accounts.
As of December 31, 2005, there were a total of 10,411 Conavitel
machines installed, which performing an average of 1,386,000 transactions per
month, including the following: payments to both BC accounts and those of other
banks, account consultation services, credit card advances, transfers to both BC
accounts and those of other banks, countermanding checks, freezing accounts and
changing passwords.
B.4.III. SALES FORCE
As of December 31, 2005, BC's sales force numbered more than 7,160
employees, organized as follows:
- 806 employees offer preferential service to BC's managed
customers from the higher value-generating segments;
- 177 employees are dedicated to our business and corporate
banking services, each specialized in the different economic
sectors to provide customized attention to BC's larger
customers. This team includes 14 managers specialized in
construction banking ensuring the retention of key customers
involved in construction projects, allowing for the further
development of mortgage banking;
- 2,992 employees provide advisory services and sell products
to the Retail and SMEs Banking Segment, working from the
branch network or providing individuals with banking
services at home;
- 2,486 secretaries and tellers service and advise customers
in matters relating to both transactions and services,
suggesting different products, detecting sales opportunities
and referring customers to the sales team;
- The Contact Center team is composed of a total of 652
employees, 407 of whom recommend and sell products;
- More than 200 employees comprise the Extended Sales Team,
selling BC's more specialized products, including foreign
currency and cash management products and services;
- The subsidiaries specialized sales force have a total of 433
employees providing specialized advisory services to all
segments, offering different financial management products
required by our customers.
49
In fiscal year 2005, BC sold a total of 2,219,932 products, as
compared to 979,812 products in fiscal year 2004, showing an increase of 127%.
Approximately 570 employees of the total sales force have variable
compensation plans based on the amount of value created. Next year, we expect to
extend this arrangement to approximately 230 employees, in order to have a total
of more than 800 employees with incentive-based variable compensation
arrangements. The rest of the sales personnel are remunerated in accordance with
a commercial management plan, under which the employees receive a quarterly or
half-yearly bonus for achieving their established targets. This allows for the
team to be swiftly and effectively managed.
The entire sales force works as a team, using a comprehensive customer
referral plan. During 2005, a total of 4,455 customers were referred among the
sales personnel, generating 2,036 individual sales. For each customer
successfully referred, a referral commission is paid to the referring sales
person. The size of the commission depends on the profitability of the segment
to which the customer belongs.
B.4.IV. MARKETING PROGRAM
In 2005, BC continued its customer relations strategies, based on a
creative marketing approach to the sales cycle, with brand management activities
to attract new customers and analytical marketing to extend customer awareness.
These strategies allow BC to reach customers with adequate cross-selling offers
and to encourage customer loyalty to current products.
In light of these strategies, in 2005, we developed more than 3
million personalized, customer-specific campaigns, based on each customer's
individual needs, assigning customers to the commercial team through different
channels, such as branch offices, telesales and specialized sales forces with a
contact effectiveness of 35% and a sale per contact indicator of 50%.
B.5. PRODUCTS AND SERVICES
B.5.I. LOAN PORTFOLIO
The following is the loan portfolio available for each of the segments
of customers of the Bank:
B.5.I.A. PERSONAL BANKING LOAN PORTFOLIO
The different loans available in this segment are listed below.
- PERSONAL LOANS: Unrestricted loans that can be used for any
purpose with short and mid-term financing for individuals
qualifying under the Bank's policies At December 31, 2005, BC's
total personal loans in this segment amounted to Ps 1,335
billion, with an annual growth of 38.73%, 157,874 customers and
360,788 obligations.
50
- PAYROLL LOANS: The Bank offers employees of companies that have
an agreement with the Bank an unrestricted loan that can be used
for any purpose. The company deducts the corresponding loan
payments from the employee's salary or wage payments and in turn
authorizes the Bank to deduct this value from the amounts due and
payable from the company's accounts.
- EDUCATIONAL LOAN ("CREDIESTUDIO"): Through this loan the Bank
finances undergraduate and graduate studies at preferential
rates. This loan is offered for studies in first class
universities throughout the country duly authorized by the
Colombian Institute for the Promotion of Higher Learning (ICFES -
"Instituto Colombiano para el Fomento de la Educacion Superior").
At December 31, 2005, BC's line of educational loans totaled Ps 4
billion, with an annual growth of 1,119% as a result of the
Merger.
- VIRTUAL LOAN ("AUDIOPRESTAMO" O "CREDIAGIL"): The Bank offers its
customers a rotating line of credit, exclusively for individuals.
Disbursements are carried out in real time and the corresponding
amounts are deposited in the customers's primary account or in
the account of a third party who has previously registered
through the Internet, Contact Center or Conavitel. The credit
limit is adjusted as the loan is gradually paid off, allowing for
the ongoing use of the line of credit. At December 31, 2005, BC's
line of virtual loans totaled Ps 348 billion, with a year- over-
year growth of 29%, a customer base of 101,171 and Ps 916 billion
in individual credit limits.
- MICRO-BUSINESS LOAN ("MICROCREDITO"): The Bank offers a loan for
Colombian micro-businesses, specially designed to finance their
working capital or investment needs with an automatic guarantee
for 70% of the loan with the FNG (National Guarantee Fund). This
product is complemented by advisory services and tuition
specially designed for micro-businesses needs. Micro-business
loans in Colombia are regulated by the Law 590 of 2000 as
amended. The maximum term for this type of loan is 36 months. As
of December 31, 2005, BC's line of micro-business loans amounted
to Ps 19 billion, with an annual growth of 56.58%.
- OVERDRAFTS IN CHECKING ACCOUNTS: This is a service whereby
individuals are entitled to issue checks, carry out online
transactions and purchase products and services at any
establishment accepting MasterCard, both at home and abroad,
without necessarily having the corresponding funds in their
checking accounts. The amount above the amount available in the
customer's checking accounts is credited to the amount of
overdraft that has been assigned and subsequently communicated to
the customer.
- VEHICLE LOAN ("VEHIPRESTAMO"): With this loan the Bank finances
the purchase of vehicles for private or commercial use (excluding
public transportation vehicles), at competitive rates of interest
and ample repayment terms.
- EXECUTIVE LOAN ("EJECUTIVO EMPRESARIAL"): A loan with
preferential rates, aimed at satisfying the investment and
financing needs of employees who work in companies that are
Bank's customers.
51
- FREE INVESTMENT LOAN: A loan index-linked to the UVR (Unit Of
Real Value) rate for individuals and entities in all segments.
- The loan is guaranteed by a first mortgage on the property,
a life insurance policy for the borrowers and fire and
earthquake insurance.
- The maximum loan amount corresponds to 60% of the property's
commercial value over a term ranging from 5 to 10 years.
- FIXED RATE LOAN IN PESOS: An unrestricted loan in pesos that can
be used for any purpose, this loan offered to preferential and
prestige segment customers that wish to purchase
residential/commercial property, land lots or wish to remodel
existing property. This loan can also be used for the borrower's
own consumption and has a maximum term of 59 months.
- The minimum loan amount is Ps 38.1 million and the maximum
loan amount corresponds to 70% of the property's commercial
value or 50% for residents in Colombia who receive foreign
currency remittances as part of their regular income.
- The loan is guaranteed by a first mortgage on the property,
life insurance policy for the borrowers as well as fire and
earthquake insurance.
B.5.I.B. SMES (SMALL AND MEDIUM-SIZED ENTERPRISES) LOAN PORTFOLIO
At December 31, 2005, Bancolombia's line of SMEs loans totaled Ps 2.2
billion, with a year- over- year growth of 48.70%, a customer base of 79,307 and
224,356 financial obligations.
- ORDINARY LOAN PORTFOLIO: Loans granted to SMEs based on the
resources maintained in their Checking Accounts, Savings Accounts
and CDs/time deposits, in order to satisfy customers' needs.
- TREASURY LOANS: A line of credit that seeks to satisfy customers'
working capital needs as generated by temporary liquidity needs
and tax payments.
- LOANS FUNDED BY COLOMBIAN DEVELOPMENT BANKS:
- BANCOLDEX (Banco de Comercio Exterior de Colombia): Line of
credit for financing export and import activities,
throughout the chain of production, channeling national and
foreign currency resources and credit to financial
institutions which operate in the country and abroad.
- FINAGRO (Fondo para el Financiamiento del Sector
Agropecuario): Line of credit for financing the different
phases in goods production, commercialization and/or
transformation processes stemming directly from, connected
to or complementary to farming and livestock, forestry,
fishing, water, poultry and beekeeping industry activities.
- FINDETER (Financiera de Desarrollo Territorial): Line of
credit that, with credit resources, seeks to support the
execution of programs, projects or investments that generate
local, regional or national development.
52
The programs, projects or investments financed must be
common interest-oriented and aimed at improving community
living conditions.
- "CREDICAFE": A rotating credit limit to be used for the purchase
of raw materials and the payment of workers in the coffee
producing industry. It is easy to use and grants immediate
recurring or sporadic disbursements, consultations and payments
by using Bancolombia's Telephone Branch.
This product is aimed at customers who are coffee growers, in
segments such as SMEs. It requires a prior study of financial
statements and of specific financing needs based on the payments
that stem from the customer's business.
- "CREDIPAGO VIRTUAL": A rotating line of credit that can be
accessed at any time. It may be used for any purpose and is easy
to use, with immediate recurring or sporadic disbursements, as
well as consultations and payments through Bancolombia's Virtual
Branch. This credit has a minimum disbursement limit of Ps 1
million and 3, 6, 9, 12, and 24 month terms. At December 31,
2005, the Bank has 6,474 SMEs enrolled in this product, Ps 132
billion in loans and Ps 251 billion in the value of assigned
limits available for use.
- INFLATION-INDEXED LOAN: An inflation-indexed line of credit
designed to serve corporate customers who seek different types of
financing in accordance with market evolution and inflation
expectations.
- ACQUISITION OF ACCOUNTS RECEIVABLE (FACTORING):
- Simple Factoring:
A service through which the current or present amount of an
obligation with a future due date (no later than 180 days
after the date of the discount) is settled or discounted at
a market rate or discount rate, depending on the risk, the
segment and the rating of the individual or company that
becomes obligated to the Bank.
Usually, the provider customer (the one who sells a good or
renders a service) requests the acquisition by the Bank of
its accounts receivable because it seeks additional
liquidity and the purchasing customer (the one who receives
the merchandise or service) agrees to pay the Bank on the
due date.
- Virtual Acquisition of Accounts Receivable ("Factoring
Virtual"):
Internet based transaction that offers immediate liquidity
for our customers. Companies are able to discount invoices
with less paperwork and easier transactional steps, thus
allowing for total control of the operations.
- Triangular Factoring:
BC pays the vendor in cash, obtaining the prompt payment
discount that the vendor offers to the customer, and shares
this discount with the buyers, providing them with an
additional term for the payment of the invoices, at no
financial cost.
53
- ENVIRONMENT LINE OF CREDIT: A line of credit specially designed
for investments intended to have a positive impact on the
environment. This line includes an incentive depending on the
level of environmental impact that the company makes. The
incentive is provided by the Secretary for Economic Issues of the
Swiss Government (SECO).
- PRIVATE AND DIRECT LINE OF CREDIT: A line of credit based on an
agreement entered into by and between a company (Distributor) and
the Bank, through which the Bank, using rotating credit, finances
the company's customers' acquisition of goods and/or services
provided by such company. This line could have the total
endorsement of the company's debt.
The following table summarizes loans extended to individuals and SMEs
in 7 categories and the amount past due for each category:
AS A % AS A %
OF TOTAL OF TOTAL
LOAN LOAN PAST DUE/
PORTFOLIO PORTFOLIO PAST DUE TOTAL
2003 2004 2005 2004 2005 LOANS 2005 TYPE OF LOAN
----------- ----------- ----------- --------- --------- ---------- ------------
(Ps million except percentages)
RETAIL (1)
Credit cards Ps 335,172 Ps 392,900 Ps 582,533 3.9% 3.1% Ps 25,967 4.5%
Personal loans 814,885 1,111,250 1,556,429 11.1% 8.4% 63,008 4.0%
Vehicle loans 229,737 381,723 629,326 3.8% 3.4% 23,829 3.8%
Overdrafts 81,294 89,867 101,957 0.9% 0.5% 10,234 10.0%
Loans funded by
domestic development
banks 330,246 359,494 403,414 3.6% 2.2% 8,391 2.1%
Trade financing 19,644 54,189 76,643 0.5% 0.4% 658 0.9%
Working capital loans 898,239 1,295,643 1,612,650 12.9% 8.7% 41,000 2.5%
----------- ----------- ----------- ---- ---- --------- ----
TOTAL RETAIL Ps2,709,217 Ps3,685,066 Ps4,962,952 36.7% 26.7% Ps173,087 3.5%
=========== =========== =========== ==== ==== ========= ====
----------
(1) Includes loans to high-income individuals and SMEs.
B.5.I.C. HOUSING/MORTGAGE LOANS IN RETAIL BANKING
As a result of the Merger, BC now offers a wide range of housing and
mortgage loans, previously offered by Conavi.
BC, through the Conavi branch network, offers a pre-approved credit
limit for purchasing residential property, which credit-limit is granted before
the customer chooses the property. This credit limit is valid for a period of 6
months, guaranteed by a life insurance policy covering the beneficiaries. This
service is called "Supercredito".
On December 15, 2005, BC securitized Ps 48,506 million of its
non-performing mortgage loan portfolio. This securitization as well as those
executed by Conavi before the Merger had the purpose of reducing the level of
past due loans, and as a result reduced the systemic risk presented, given the
concentration of long-term assets versus short-term liabilities.
54
There are 101,013 of mortgage loans held by BC for individuals
including Mortgage Securitization. There has been a 13.9% growth from year 2004
to year 2005 in housing loans, including the securitized portfolio.
- HOMEOWNER LOAN (IN "UVR'S" - UNITS OF REAL VALUE): A line of
credit for purchasing used or new homes, that is index-linked to
the UVR rate, which in turn is based on the performance of the
inflation rate.
- The maximum loan amount corresponds to 70% of the property's
commercial value or 50% for residents in Colombia who
receive foreign currency remittances as part of their
regular income. The term of this loan ranges from 5 to 15
years. Three types of amortization plans are offered, as
regulated by the Colombian Government.
- The loan is guaranteed by a first mortgage on the property,
life insurance policy for the borrowers as well as fire and
earthquake insurance.
- PURCHASES OF REAL ESTATE OTHER THAN HOUSING: A line of credit
that is index-linked to the UVR rate offered to individuals and
entities in all segments for purchasing real estate other than
housing.
- The maximum loan amount corresponds to 60% of the property's
commercial value over a term ranging from 3 to 8 years.
- The loan is guaranteed by a first mortgage on the property,
life insurance policy for the borrowers as well as fire and
earthquake insurance.
- LOW-INCOME HOUSING (VIS) REMODELING LOAN: A line of credit,
index-linked to the UVR rate, for remodeling low-income housing
(houses with a commercial value of less than 135 SMLV, in
accordance with Colombian law).
- The maximum loan amount corresponds to 70% of the property's
commercial value. The term of this loan ranges from 5 to 15
years. Three types of amortization plans are offered, as
regulated by the Colombian Government.
- The loan is guaranteed by a first mortgage on the property,
life insurance policy for the borrowers as well as fire and
earthquake insurance.
- HOUSING CONSTRUCTION LOAN FOR INDIVIDUALS: A line of credit that
is index-linked to the UVR rate and offered to individuals for
the purpose of building their own homes.
- The maximum loan amount corresponds to 70% of the total
costs involved. This loan is offered over the term of
construction plus up to 15 years. Three types of
amortization plans are offered, as regulated by the
Colombian Government.
- The loan is guaranteed by a first mortgage on the property,
life insurance policy for the borrowers as well as fire and
earthquake insurance.
- REAL ESTATE CONSTRUCTION LOANS OTHER THAN HOUSING: A line of
credit that is index-linked to the UVR rate and offered to
individuals and entities in all segments for the purpose of
building property other than housing.
55
- The maximum loan amount corresponds to 60% of the total
costs involved. This loan is offered over the term of
construction plus up to 8 years.
- The loan is guaranteed by a first mortgage on the property,
life insurance policy for the borrowers as well as fire and
earthquake insurance.
- HOUSEHOLD LOAN ("PRESTAHOGAR" - OFFERED WITHIN THE PREMERGER AT
BANCOLOMBIA BRANCH NETWORK): This line of credit is aimed at
financing the purchase or remodeling of residential property. At
December 31, 2005, BC's line of home loans came to Ps 162
billion, with a year- over- year growth of 58.77%.
B.5.I.D. CORPORATE BANKING LOAN PORTFOLIO
BC has a wide range of products to satisfy the capital needs of our
Corporate Banking customers, including working capital loans, trade financing
and loans funded by Colombian development banks.
- Working capital loans are the most common type of loan in the
corporate market. These loans are predominantly variable rate or
based on CD-Time deposit rates, and re-priced every quarter.
- Trade financing loans are typically dollar-denominated, variable
rate loans. Due to legal restrictions, the loans have maturities
of six months or less, whereas some capital assets are financed
up to three years.
- Loans funded by Colombian development banks are variable rate,
based on CD-Time deposit rates or LIBOR with maturities between
six months and five years.
- Treasury Loans: This is a short- term credit designed to finance
working capital needs. Its term can be between 30 and 180 days.
These loans are variable rate. Additionally, it is a line of
credit that seeks to satisfy customers' working capital needs as
generated by temporary liquidity needs and tax payments.
The following table summarizes loans extended to corporate customers
in six categories and the amount past due for each category:
AS A % AS A %
OF TOTAL OF TOTAL
LOAN LOAN PAST DUE/
PORTFOLIO PORTFOLIO PAST DUE TOTAL
2003 2004 2005 2004 2005 LOANS 2005 TYPE OF LOAN
----------- ----------- ----------- --------- --------- ---------- ------------
(Ps million except percentages)
CORPORATE
Trade financing Ps 149,582 Ps 253,632 Ps 783,894 2.5% 4.2% Ps 9,728 1.2%
Loans funded by
domestic development
banks 394,947 770,331 948,659 7.7% 5.1% 7,463 0.8%
Working capital loans 4,687,153 4,298,354 7,702,420 42.8% 41.4% 55,355 0.7%
Credit cards 8,237 24,621 42,293 0.2% 0.2% 1,616 3.8%
Overdrafts 32,371 67,018 62,041 0.7% 0.3% 4,177 6.7%
------------ ------------ ------------ ---- ---- --------- ---
TOTAL CORPORATE Ps 5,272,290 Ps 5,413,956 Ps 9,539,307 53.9% 51.2% Ps 78,339 0.8%
============ ============ ============ ==== ==== ========= ===
56
B.5.II. DEPOSIT PRODUCTS
The Bank offers its customers a variety of checking accounts, savings
accounts, fixed term deposits and tax collection services. At December 31, 2005,
based on information compiled by the Superintendency of Finance, BC was the
largest bank nationwide in terms of deposits, with a total of Ps 14,226 billion
on a non-consolidated basis, representing 15.92% of the Colombian market. 25.10%
of BC (non-consolidated) total deposits are in checking accounts, 49.90% in
savings accounts, 19.96% in fixed term deposits (including time deposits). BC
has 36.9% of the market share of national taxes and customs duties payments.
B.5.II.A. CHECKING ACCOUNTS
A deposit product that allows customers to deposit sums of money in
cash and/or checks and to dispose of balances, totally or partially, through
checks, automatic withdrawals/debits, cash withdrawals, and electronic
transfers. As of December 31, 2005, on a non-consolidated basis, BC had
approximately 427,961 checking accounts with total deposits of Ps 3,309 billion,
registering an approximate 18.77% increase vs. the Ps 2,786 billion posted at
December 31, 2004. Checking accounts usually reach their highest level at the
end of the year, affected by the season. As of December 31, 2005 BC had 18.81%
of the market share for checking accounts in the country.
B.5.II.B. SAVINGS ACCOUNTS
BC savings accounts are designed for individuals; they settle and
disburse interest on available balances on a daily basis. BC savings accounts
offer different alternatives of return, handling fee, transactions, and required
minimum balances, all according to customer needs. As of December 31, 2005, on a
non-consolidated basis, BC had approximately 4,405,436 savings accounts with
total deposits of Ps 7,332 billion, increasing approximately 114.83% over Ps
3,413 billion in 2004. In addition, BC offers "Payroll Payment Accounts" to
satisfy company payroll payment needs. Also, BC offers a savings account called
"Pension Payment Account", exclusively for the payment of retiree benefits.
B.5.II.C. AFC SAVINGS ACCOUNTS
AFC savings accounts were established by the Colombian Government in
order to promote the construction industry and the purchase of housing through
banks that offer mortgage loans. AFC accounts offer tax benefits to all those
assigning their savings to paying off mortgage loans (disbursed for new and used
property after September 26, 2001). This is a product aimed at individual, over
-18 freelance professionals or employees who earn income subject to withholding
tax as well as tax-payers who wish to reduce their net taxable income.
57
B.5.II.D. CDS - TIME DEPOSITS
These time deposits, negotiable on the secondary market, are used to
manage liquidity surpluses for terms greater than 30 days, with higher interest
rates than those paid on savings accounts. As of December 31, 2005, on a
non-consolidated basis, BC had a total of 114,196 issued CDs, totaling Ps 2,750
billion, compared with 65,711 issued CDs worth Ps 2,411 billion in 2004.
B.5.II.E. DAT - SAVING DEPOSITS
A short-term savings deposit that allows holders to earn interest
according to certain specific regulations approved by the Colombian
Superintendency of Finance.
B.5.III. CREDIT CARDS, DEBIT CARDS AND ACQUIRING BUSINESS
As a result of the Merger BC consolidated its leadership in the card
business, increasing its portfolio of products and overall position in the
industry both as an issuer of credit and debit cards as well as in the acquiring
business.
B.5.III.A. CREDIT CARD
At December 31, 2005, BC had 555,342 outstanding credit cards,
distributed in the following franchises: American Express 19%, MasterCard 47%
and Visa 34%. In 2005, BC remained in No. 2 position in the credit card billing
industry in Colombia, amounting to Ps 2,788 billion, with a growth of 16.97%
(industry growth 24.08%) from 2004 and a total market share of 22.28%.
The main strategies implemented to achieve these results were the
following:
- AMERICAN EXPRESS BUSINESS EXPANSION: At December 31, 2005, we had
105,003 outstanding cards which continued to increase their
market share, reaching 3.04% of total outstanding credit cards
and 4.13% in total credit card billing.
- AMERICAN EXPRESS THROUGH CONAVI BRANCHES: Taking full advantage
of the Merger on November 15, 2005, BC launched the American
Express sales campaign through Conavi branches. This was aimed
mainly at our VIP customers, pre-approved customers for the
American Express Card and customers who visit the branches.
- CREDIT CARD FOR ENTITIES: BC continues to lead the commercial
solutions business targeting its corporate customers, with 26.76%
of the total amount invoiced by the entire industry. As a result
of the Merger, BC incorporated two new products to this
portfolio.
- THE CENTRALIZED AIR TICKET ACCOUNT (CUENTA CENTRALIZADORA
AEREA CTA): This account enables large companies to
centralize their expenditure on air tickets.
- VIRTUAL CARD: This product is offered to individuals and
entities exclusively for purchasing on the Internet. The
credit limit available
58
through the virtual card is linked to the total credit limit
of the physical credit card.
- CO-BRANDING CREDIT CARD: The co-branding credit card Exito
Bancolombia (resulting from the alliance with Almacenes Exito
supermarket and retail chain) showed very positive results in
2005, with 41% growth in total billing, 17 percentage points
above the industry average, and 32% growth in number of
outstanding cards, 9 percentage points above the industry
average. As of December 31, 2005, shared-label cards totaled
29,360, with accumulated billing of Ps 84 billion.
- PRIVATE LABEL CREDIT CARD: This product, has been designed to be
used exclusively for the purchase of products and services
offered by companies with which an agreement exists. As of
December 31, 2005, BC had a total of 4 private credit card
agreements. Comfama and Club Rodeo private label credit cards
were launched in 2005 (See Item 4. Information on the Company -
B. Business Overview - B.5. Products and Services - B.5.xiii -
New products or services). The private label credit cards
launched before January 1, 2005 were:
- YANBAL PRIVATE LABEL CREDIT CARD: At December 31, 2005,
there were 26,390 Yanbal credit cards, representing total
billing of Ps 81 billion. Yanbal produces and distributes
make-up and beauty products.
- COUNTRY CLUB PRIVATE LABEL CREDIT CARD: At December 31,
2005, there were 5,009 Country Club cards, representing
total billing of Ps 9 billion. County Club is a private
social club located in Medellin, Colombia.
- STRENGTHENING THE LOW-INCOME "IDEAL" CREDIT CARD: The "Ideal"
Card continues to promote MasterCard placements. At December 31,
2005, there were a total of 26,525 outstanding "Ideal" credit
cards with a growth of 68% in total billing in 2005 as compared
to 2004. This business growth is mostly explained by an increase
in payroll customers.
- CUSTOMER RETENTION PLAN: In February 2005, the Customer Retention
Center (initially for Personal Cards) was established for the
purpose of servicing customers who wish to cancel their credit
cards with the Bank, offering additional advisory services using
a client performance software in order to retain these customers.
During 2005, this center had had contact with a total of 514
customers, retaining 113 customers, 25.9% of the total.
- THE CAYMAN VISA BANCOLOMBIA CREDIT CARD: At December 31, 2005
there were a total of 3,835 outstanding credit cards. Billing
amounted to US$ 19,480,700, growing 16% in 2005.
59
B.5.III.B. DEBIT CARDS
BC achieved first place in Colombia's Debit Card Industry for the
number of outstanding cards with a total share of 31.3%. Billing in points of
sale transactions, represented 43.2% of the total market share and accumulated
billing in POS and ATM's represented 36.4% of the total market share. As of
December 31, 2005, the bank had a total of 3,747,697 outstanding debit cards and
total billing of Ps 19 billion.
The Bank offers four types of debit cards:
- BANCOLOMBIA Maestro Debit Card: 1,642,862 outstanding cards of
which 4,347 are Preferential Debit Cards.
- CONAVI Maestro Debit Card: 1,943,208 outstanding cards.
- BANCOLOMBIA MasterCard Debit Card: 161,627 outstanding cards of
which 33,141 are Preferential Mastercard Debit Cards.
- BANCOLOMBIA Prepaid Debit Card: 30,750 outstanding cards (Prepaid
card is a debit card that is not associated to a saving account
and is used to payroll, bonus and prizes among others payments).
The drivers of this growth are: an increase in the use of Debit Cards,
the affiliation of new retailers, the strengthening of exclusive channels for
cards, such as Conavitel, withdrawals and balance checking services free of
charge for debit cards through our ATM network, and our strategy of linking the
opening of a savings or checking account with a debit or payroll card.
B.5.III.C. ACQUIRING BUSINESS
BC's market share in the acquiring business reached 39.96%, with a
growth in 2005 of 22% in amounts paid and 64.45% in commissions received,
positioning the Bank as No. 1 in Colombia in amounts paid and commissions
received as well.
From April 1, 2005, financial institutions in Colombia underwent a
series of important changes in their collection processes with establishments
affiliated to debit and credit card services. The most important of these
changes is that each bank establishes the discount commission to be charged to
the retailers, which was formerly established by the card franchises.
Payer and acquiring business in Bancolombia:
- VISA, MASTERCARD AND AMERICAN EXPRESS PAYER BUSINESS: At December
31, 2005, BC had more than 12,000 commercial establishments
affiliated to the Bank. As of December 31, 2005, this business
showed an annual growth in amounts paid out of 22%, and
commissions grew by an accumulated 64.45%, because of the
increase in market share, transactions carried out with highly
profitable clients during the year as well as new product income
corresponding to commission margins on purchases made with debit
cards and with MasterCard issued abroad in establishments
affiliated to the Bank. In 2005, BC continued to lead this market
with a 39.96% share (measured in accumulated amounts paid at
December 31, 2005).
60
- ACQUIRING BUSINESS - AMERICAN EXPRESS: At December 31, 2005, this
franchise had a total of 68,599 affiliated establishments,
registering a 23.29% growth vs. the prior year. BC continues to
be the only acquiring bank of this franchise in Colombia, and as
such has assumed all the responsibility of affiliating
establishments, defining discount commissions, remunerating and
paying sales made by the affiliated establishments in Colombia.
CREDIT CARD BUSINESS - GROWTH AND SHARE OF THE MARKET
CREDIT CARD -
ACCUMULATED BILLING
(As of December 31, 2005 INCREASE
- in Ps million) 2004(1) 2005 2004/2005 SHARE-2004(1) SHARE-2005
------------------------ ----------- ----------- --------- ------------- ----------
Master Card Ps 889,193 Ps1,391,484 56.49% 8.80% 11.12%
Visa 523,916 879,462 67.86% 5.20% 7.03%
American Express 389,357 517,309 32.86% 3.90% 4.13%
----------- ----------- ------ ------ -----
TOTAL BANCOLOMBIA Ps1,802,466 Ps2,788,256 54.69% 17.90% 22.8%
=========== =========== ====== ====== =====
----------
(1) These amounts and percentages include information only for Premerger
Bancolombia(4).
B.5.IV. OTHER PRODUCTS
As a full service bank, BC offers a broad portfolio of financial
products and services. Some important services not reported above are listed in
this section.
B.5.IV.A. INTERNATIONAL REMITTANCES
BC continued to expand its share of the family remittance business. In
2005, BC signed various agreements with other banking entities and money
remitters. The new agreements that entered into effect in 2005 were the
following: Associated Foreign Exchange Inc. (AFEX), Dollar Express Inc. (DolEx),
Europhil, Viamericas, UNO Money Transfer, La Caixa and Caja Madrid. These joined
the already existing agreements with RIA Telecomunications Inc., Remesas
Quisqueyana, Grupo Banco Popular (Spain) and the Bank of New York.
With this, BC has consolidated its position on the family remittance
business in the main destination points for Colombians migrating abroad,
including the US, Spain, Italy, the UK, France and Germany, among others.
B.5.IV.B. LOCAL REMITTANCES
BC accepts for deposit checks drawn on other banks and from other
cities than the city where the account is held.
----------
(4) "Premerger Bancolombia" refer to Bancolombia as it existed immediately
before the Merger took effect.
61
B.5.IV.C. TAX AND CUSTOMS DUTY PAYMENTS
BC offers its customers the convenience of paying national taxes and
customs duties through its branch network. BC transfers all the funds collected
to the Government Tax and Custom Duty Agency. This represents a no-cost,
short-term funding source for the Bank. BC holds more than 36.9% of the tax
collection market, 34.95% of the market share of national tax and 43.7% to
customs duties payments.
B.5.IV.D. BANCASSURANCE - (LIFE/TUITION/RESIDENTIAL INSURANCE)
Through its branch network, the Bank offers several insurance products
(life insurance, home insurance and personal accident insurance) from Compania
Suramericana de Seguros, one of the major insurance companies in Colombia.
Bancolombia was the first bank in Colombia in this business.
These products are mainly targeted to the Entrepreneurial and Personal
customers, who traditionally do not have this type of insurance.
In the bancassurance business, BC is the leader of the market, with
230,853 insurance policies sold in 2005 (18% more than in 2004) and with a total
of 420,892 outstanding insurance policies (15.2% more than in 2004).
Regarding the insured value, life insurance totaled Ps 7,100 billion,
with an average insured value of Ps 14.4 million; in home insurance, this figure
amounts to Ps 220 billion, and in tuition insurance, Ps 6,130 million, as of
December 31, 2005.
B.5.IV.E. PENSION BANKING ("BANCAPENSIONES")
Through its branch network, the Bank offers a Voluntary Pension Fund
"Rentapension", administered by Fiducolombia. The fund allows customers to
obtain, through periodic contributions, tax benefits and interest payments, and
the fund functions as a proposed voluntary savings goal to complement customers'
state pensions. BC sold 14,748 pension plans in 2005 as compared to 10,359
pension plans in 2004. The assets under management in this pension fund
represent Ps 149 billion at December 31, 2005 as compared to Ps 79 billion at
December 31, 2004, which represents an 89% increase.
B.5.IV.F. TREASURY PRODUCTS
The Bank's Treasury Division is responsible for the management of the
Bank's treasury products and its proprietary liquidity as well as its foreign
exchange and securities positions. The Treasury Division works under the
guidelines established by the Vice Presidency of Risk related to market and
liquidity risk.
Treasury products were more dynamic during 2005, showing a significant
increase in the volume of operations with customers in product lines like
foreign exchange spot and forward transactions and public debt.
62
Internal and external interest rates and the macroeconomic environment
translated into important capital gains from bond price increases for all the
Bank proprietary portfolios. This factor was the main determinant of BC's
treasury results during 2005.
In the local market, the prices of bonds rose due to the high monetary
liquidity provided by the Central Bank and strong economic fundamentals.
In the international market, a high level of global liquidity, strong
economic fundamentals in emerging economies and a supportive US Treasury market
during 2005 translated into an important reduction in the credit spread of the
bond portfolio yielding important capital gains and positive results for BC.
This division conducts the following operations for the Bank and for
its customers, in addition to other activities:
OVERNIGHT FUNDS:
- INTER-BANKING: These are operations in which BC lends or borrows
funds in Colombian pesos or U.S. dollars to or from financial
institutions on a short term basis (30 days maximum), without
receipt or delivery of a guarantee in exchange. This product
allows short-term management of liquidity surpluses or shortages.
- REPO: In Repo operations, BC lends or borrows funds in Colombian
pesos or U.S. dollars for a short term (maximum 30 days) to or
from financial or non-financial institutions, in exchange for a
guarantee.
ISSUANCE OF CDS-TIME DEPOSITS: BC captures funds in Colombian pesos by
issuing Time Deposits. Interest rates on such CDs can be fixed or linked to the
DTF (Colombia's average of term deposits) or the CPI (consumer price index).
PRIVATE DEBT INVESTMENT PORTFOLIO: With its private debt portfolios, BC
purchases and sells securities issued by private entities of the Colombian
financial and industrial sectors.
PUBLIC DEBT INVESTMENT PORTFOLIO: With investment in public debt
portfolios, BC purchases and sells securities issued by public entities or those
managed by the Government of Colombia.
SPOT COLOMBIAN PESO / U.S. DOLLAR AND SPOT FOREX: In spot operations
involving the Colombian peso and the U.S. dollar, BC sells and purchases U.S.
dollars in exchange for Colombian pesos in order to serve its customers, assume
a long or short position in the course of an exchange rate swap, or hedge
operations involving derivatives, or obligations or rights of the Bank in a
foreign currency. In Spot Forex operations, BC performs the same role with
currencies other than the U.S. dollar.
SOVEREIGN AND CORPORATE SECURITIES INVESTMENT PORTFOLIO: BC invests in
fixed yield sovereign securities issued by the governments and corporations of
different countries.
63
CREDIT DERIVATIVES INVESTMENT PORTFOLIO: Through its subsidiary Bancolombia
Panama, BC invests in credit -linked notes and credit -linked deposits issued by
international banks. Such instruments contain embedded derivatives in which one
party transfers to the other for a period of time the credit risk associated
with another issuer in exchange for a periodic premium. This type of transfer is
commonly defined as a Credit Default Swap ("CDS").
FORWARD COLOMBIAN PESO/U.S. DOLLAR: BC purchases and sells U.S. dollars in
exchange for futures contracts for Colombian pesos, determining a date, price,
and specific amount. This is done to fill customer needs, to take a long or
short position in connection with an exchange rate swap or to hedge assets and
liabilities denominated in U.S. dollars. Such operations are not standardized
with respect to length or minimum amounts. In forward forex operations, BC
performs the same role with currencies other than the U.S. dollar.
SECURITIES FORWARD: BC purchases and sells securities with a settlement
date that is more than three days ahead of the trade date, specifying in advance
the amount, price and date of the transaction.
INTEREST RATE SWAP: BC enters into Interest Rate Swap contracts with
entities and other financial institutions in which the Bank exchanges a fixed
interest rate for a floating interest rate or vice versa. This type of contract
is used for hedging purposes and for the improved matching of assets and
liabilities.
CROSS CURRENCY SWAP: BC enters into swap contracts with entities and other
financial institutions in which the Bank exchanges a given cash flow usually
related to a loan or security denominated in a specific currency (US$, Peso,
Euro) for another cash flow denominated in a different currency.
US$/PESO OPTIONS: BC buys and sells options or "rights" to buy (Call
options) or sell (Put Options) U.S. dollars in exchange for Colombian pesos in
the future, for a premium.
B.5.V. FIDUCIARY
On August 1, 2005, Fiduciaria Corfinsura merged with and into
Fiducolombia, with Fiducolombia as surviving entity, strengthening
Fiducolombia's position as leading trust company in terms of assets managed and
operating income. According to data as of June 30, 2005, compiled by the
Superintendency of Finance, Fiduciaria Corfinsura and Fiducolombia registered
assets managed of Ps 591 billion and Ps 16,572 billion, respectively, which
represented market shares of 0.8% and 23.7%, respectively. As of July 31, 2005,
Fiduciaria Corfinsura and Fiducolombia had operating income of Ps 1,678 million
and Ps 39,734 million, respectively.
The Bank offers, through its subsidiary Fiducolombia, a family of five
mutual funds and one voluntary retirement fund, all of which are designed to
provide customers with the opportunity to diversify their investments. As of
December 31, 2005, it had Ps 2,878,543 million in total assets under management,
increasing 42.5% from Ps 2,020,227 million in 2004.
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FIDUCUENTA: This fixed income fund seeks to attain stable income in the
short term, preserving the immediate availability of cash. As of December 31,
2005, these funds had Ps 1,990,969 million in assets under management,
increasing 35.1% from Ps 1,473,565 million in 2004.
FIDURENTA: This fixed income fund seeks to attain stable income in the
medium and long term, with a minimum 30-day investment term. As of December 31,
2005, it had Ps 618,250 million in assets under management, increasing 55.2%
from Ps 398,338 million in 2004.
FIDUDIVISAS: This fund comprises fixed or variable income securities issued
in international markets, with a minimum 90-day investment term. As of December
31, 2005, it had Ps 801 million in assets under management, decreasing 70.3%
from Ps 2,697 million in 2004. This decrease is explained by the volatility of
the exchange rate.
PLAN SEMILLA: This savings alternative pursues the goal of capital
accumulation, which can, in accordance with a customer's needs, assist in paying
for education, purchasing a home, or buying a vehicle. It has a minimum one-year
investment term. As of December 31, 2005, it had Ps 94,137 million in assets
under management, increasing 80.4% from Ps 52,189 million in 2004.
RENTA PENSION: This long-term programmed savings alternative enjoys tax
benefits and can either complement the mandatory state pension or assist in the
pursuit of capital accumulation goals. As of December 31, 2005, it had Ps
148,115 million in assets under management, increasing 71.3% from Ps 86,473
million in 2004.
INDEACCION: This investment alternative allows participation in the local
and international stock markets with the goal of long-term gains. The minimum
investment term is 90 days. As of December 31, 2005, it had Ps 26,271 million in
assets under management, increasing 277.2% from Ps 6,965 million in 2004.
ASSET MANAGEMENT BUSINESSES
In the area of asset management businesses, as of December 31, 2005,
Fiducolombia had Ps 19,218 billion in assets under management, increasing 48.96%
from Ps 12,902 billion in 2004. Fiducolombia offers a broad range of products
and services by type of trust, including:
PUBLIC TRUST: When managing a public trust for state-owned companies,
Fiducolombia performs collection, payment and asset management operations while
simultaneously performing follow-up, control and reviews of performance as well
as any other activities provided for in the trust contract. Public trust, is
divided in two categories: Public Trust and Pension Trust of Territorial
Entities. As of December 31, 2005, Public Trust and Pension of Territorial
Entities had Ps 4,018 billion and Ps 4,449 billion in assets under management,
respectively.
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MANAGEMENT AND PAYMENT TRUST: Fiducolombia manages assets transferred to it
by an individual or company, performing activities such as collection, payment
and portfolio control, document control, verification of budgetary performance
and presentation of operating results. As of December 31, 2005, these trusts had
Ps 6,348 billion in assets under management, an increase of 132.50% from Ps
2,730 billion in 2004.
INDIVIDUAL INVESTMENT TRUST: Fiducolombia manages resources transferred to
it by an individual or a company, designing an investment portfolio that takes
into account the customer's requirements in terms of liquidity, security and
profitability. As of December 31, 2005, these trusts had Ps 3,336 billion in
assets under management, an increase of 40.13% from Ps 2,380 billion in 2004.
REAL ESTATE TRUST: Fiducolombia manages third-party resources designated
for the development of housing and/or commercial real estate projects during the
pre-sale, construction and title transfer stages, thus contributing to project
feasibility as well as promotional and sales activities. As of December 31,
2005, these trusts had Ps 207,959 million in assets under management, an
increase of 16.48% from Ps 178,544 million in 2004.
GUARANTEE TRUST: Through this trust business, the trustee or founder of a
trust transfers ownership of one or several of his assets to an autonomous
entity in order to guarantee other financial obligations that the trustee or
founder has incurred. As of December 31, 2005, these trusts had Ps 859,488
million in assets under management, decreasing 38.87% from Ps 1,406 billion in
2004.
Other products and services offered by the Fiducolombia are:
SECURITIES MANAGEMENT: Fiducolombia carries out management activities with
the goal of improving efficiency in the administration of the shareholders'
matters in a corporation. Fiducolombia can also act as agent for payments,
recording agent and transfer agent.
SECURITIZATION: This financial mechanism allows companies to obtain
financial resources through the public securities markets by the conversion of
assets that are traditionally illiquid into liquid assets, usually through the
establishment of an autonomous entity with assets that serve as collateral for
the issuance of securities. The fiduciary has participated in the securitization
process of cattle, real estate, and loan portfolios, among other items.
ISSUANCE MANAGEMENT: This product is specifically designed for companies
that wish to obtain resources directly from the capital markets by issuing
securities. Fiducolombia, as managing agent, provides advice, securities
issuance, placement through a local broker, interest payment and capital
redemption.
CUSTODY: Fiducolombia has been approved by Morgan Guaranty Trust and The
Bank of New York to act as custodian for ADRs and GDRs since 1995.
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B.5.VI. LEASING
On November 30, 2005, Suleasing merged with and into Leasing Colombia
as surviving entity, strengthening Leasing Colombia's position as leading
leasing company in terms of assets and leasing arrangements. According to data
as of October 31, 2005, compiled by the Superintendency of Finance, Suleasing
and Leasing Colombia registered assets of Ps 1,607 billion and Ps 1,375 billion,
respectively, which represented market shares of 26.3% and 22.51%, respectively.
As of October 31, 2005, Suleasing and Leasing Colombia had 7,709 and 10,043
leasing arrangements, respectively.
As of December 31, 2005, total assets amounted to Ps 3,309 billion,
with a local market share of 48.7% and shareholders equity of Ps 248 billion.
Leasing Colombia, as a BC subsidiary specialized in leasing
activities, offers a wide range of financial leasing, operating leasing, loans
as well as CD-time deposits and bonds.
The following table shows Leasing Colombia's number of lease
contracts, customers and its net value:
NET VALUE
YEAR NUMBER OF LEASE CONTRACTS NUMBER OF CUSTOMERS (Ps MILLION)
---- ------------------------- ------------------- ------------
2003 5,933 3,814 445,670
2004 8,851 5,449 818,483
2005 19,742 9,399 2,362,105
- FINANCIAL LEASES: Through this product, Leasing Colombia allows
customers to lease previously selected assets, with the option to
purchase them at lease-end.
The financial leasing arrangements offered include:
-- Import leasing, in which Leasing Colombia undertakes
the entire procedure of importing the assets into the
country.
-- Real estate leasing: includes different types of
property such as warehouses, commercial establishments,
industrial plants and offices.
-- Infrastructure leasing: includes all types of
infrastructure projects in the following sectors:
telecommunications, energy, transport, drinking water
and basic sanitation sectors.
-- Vehicle leasing for corporate executives: through this
product corporate customers provide their executives
with vehicles for their private use as an incentive.
-- Cattle leasing: this form of leasing applies to dairy
and multi-purpose cattle.
- RESIDENTIAL LEASING: In 2005, Leasing Colombia developed a
Residential Leasing product for house financing under the
conditions and advantages established by law. Residential Leasing
allows customers to choose their new,
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used or pre-construction stage house or apartment, for long term
financing with the option to purchase the property at lease-end.
- OPERATING LEASES: Leasing Colombia provides operating leasing
arrangements, by means of which the customer pays periodic rent
for the use and enjoyment of the asset. Once the corresponding
term ends, the customer had the option of returning the asset to
Leasing Colombia or acquiring it for its commercial value.
Surenting S.A., ("Surenting") a non-financial subsidiary of Leasing
Colombia, provides vehicle renting and fleet management services for individuals
and entities. Surenting offers broad solutions for large companies' transport
and vehicle needs.
Products offered by Surenting S.A.:
-- Traditional renting for sales force executives and/or
working vehicles.
-- Surenting Company Car: A full service renting product for
company executives. During the lease contract term,
Surenting pays the vehicle's taxes, insurances and
maintenance payments (except gas and driver payments).
-- Rent-back arrangements: Surenting purchases the transport
fleet from the customer and rents it back to the customer.
-- Used vehicle sales: Sale of vehicles returned by customers
once the renting contract expires.
The following table shows Surenting's number of customers, lease
assets and its net value:
LEASED ASSETS LEASED ASSETS
YEAR NUMBER OF CUSTOMERS (UNITS) (Ps MILLION)
---- ------------------- ------------- -------------
2003 203 2,270 107,476
2004 233 2,604 136,671
2005 291 3,039 167,736
- CROSS -BORDER LEASING: Suleasing Internacional S.A., a subsidiary
of Leasing Colombia located in Panama, directly and through its
subsidiary Suleasing Internacional Inc., located in Fort
Laurderdale, United States, offers cross -border financial leases
and infrastructure leases for the acquisition of productive fixed
assets. These are alternatives for customers who wish to acquire
equipment from suppliers located in other countries.
Additionally, Suleasing Internacional S.A. structures leasing
operations in Central America, the Caribbean and Andean Regions,
Mexico and Brazil, according to the applicable legislation of
those countries.
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Suleasing Internacional S.A., develops structures suitable for
customers' needs, with medium and long term cross-border leasing
in financing and structuring projects. In addition, Suleasing
Internacional can help optimize the fiscal position of their
customers through its cross border leasing products.
The following table shows Suleasing Internacional's number of
customers, new leasing operations per year and the net investment in direct
financing leases:
VALUE OF NEW NET INVESTMENT IN DIRECT
NUMBER OF LEASING OPERATIONS FINANCING LEASES
YEAR CUSTOMERS (Ps MILLIONS) (Ps MILLION)
---- --------- ------------------ ------------------------
2003 24 35,177 73,186
2004 50 65,100 99,683
2005 50 97,628 155,190
B.5.VII. WAREHOUSING AND LOGISTICS
Almacenar, the warehousing and logistics subsidiary of BC, offers the
following portfolio of services:
- Warehousing: custody of customer merchandise.
- Custom Brokerage: assistance with import and export related
processes.
- Inventory Management: warehousing distribution, inventory
control.
- Picking and Packing: product handling, POP (point of purchase)
material handling.
- Distribution: coordination of transportation.
- File Management: custody and file organization.
- Warrants: issuance of certificates of deposit as guaranty for
bank loans.
Almacenar has been expanding its logistics business, which at December
31, 2005, represented 65% of its portfolio of services, including considerable
penetration in the Pharmaceutical market.
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, Equitiy Investment S.A., Rodriguez Azuero
Asociados S.A. and other individuals to begin negotiation relating to a proposed
purchase agreement, by which the Bank would sell all of the shares it holds in
Almacenar S.A. directly (94.33%) and through Colcorp S.A. (3.92%). For more
information please refer to Item 4. Information on the Company - A. History and
Development of the Company - Recent Developments.
B.5.VIII. INVESTMENT BANKING
Colcorp is a subsidiary of BC that specializes in providing investment
banking services to private companies as well as government entities in areas
such as mergers and acquisitions, project finance and sindicated loan
facilities. Colcorp also owns and manages a diversified equity portfolio, which
invests in companies in different sectors of the Colombian economy, including
agriculture, telecommunications and toll road concessions. In July 2005, as a
result of the Merger between Bancolombia, Conavi and Corfinsura, Colcorp
acquired
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Corfinsura's Investment Banking Division (Establecimiento de Comercio Banca de
Inversion Corfinsura), with its 45 years of experience and prestige in the
market. As of December 31, 2005, Colcorp's equity portfolio book value was Ps
170,573 million.
B.5.IX. 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 - registered
assets of Ps 540,498 million and Ps 30,949 million, respectively, which
represented market shares of 15% and 1%, respectively.
Through its subsidiary Suvalor S.A. Comisionista de Bolsa, BC offers
brokerage services with a broad experience on the Colombian Stock Exchange.
Suvalor offers the following investment alternatives: 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.
On October 2004, the rating agency Duff & Phelps of Colombia gave
Suvalor for the sixth consecutive year the maximum Triple A rating, for its
outstanding Portfolio Management strength.
At December 31, 2005, Suvalor managed total assets of Ps 13 billion
(equivalent to US$ 5,696 million) and US$ 12 million in international assets,
corresponding to 93,229 customers of which 93% are individuals and 7% are
entities.
PORTFOLIO
INVESTMENT IN FIXED-INTEREST SECURITIES AND SHARES
Suvalor offers its customers a range of investment alternatives in
fixed-interest securities and shares. Suvalor's financial advisors team is
responsible for structuring the businesses and diversifying the respective
portfolios according to the customer's risk profile.
SURENTAS'S INVESTMENT FUNDS: Suvalor offers 10 different investment funds
with alternatives in pesos, U.S. dollars, shares or in domestic public debt
securities. We believe these are well diversified, with maturities meeting the
particular investment needs of each customer. As of December 31, 2005 and 2004,
Suvalor's asset managed portfolio amounted to Ps 1,640 billion and Ps 642,958
million, respectively, showing an increase of 140%. The investment funds are:
SURENTA: Short-term, open mutual fund, composed by debt instruments with
conservative risk. Visible funds savings modality with immediate availability,
in which experts are constantly assessing the different market alternatives to
conform a portfolio of securities with diversified risk and excellent
profitability. Assets in pesos include: Security Funds, Treasury Bonds (TES),
Time Deposit, Bonds, Repos, other Fixed-Interest Securities and Shares.
At December 31, 2005, the assets under management totaled Ps 466,443
million, increasing 56% in regard to Ps 298,419 million as of December 31, 2004.
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SURENTA30: Short term, open mutual fund, composed of debt instruments with
conservative risk, with a minimum 30 days investment term. At December 31, 2005
the assets under management totaled Ps 262,721 million, increasing 100% from Ps
131,307 million as of December 31, 2004.
SURENTA90: Medium term, open mutual fund, composed of debt instruments with
conservative risk, with a minimum 90 days investment term. At December 31, 2005,
the assets under management totaled Ps 378,829 million, increasing 87% from Ps
202,280 million as of December 31, 2004.
SURENTA180: An open mutual fund with a minimum 180 days investment term,
which requires an agreement guaranteeing the customer's minimum term. This fund
is composed of debt securities with an average maturity of more than 5 years. As
of December 31, 2005, the assets under management amounted to Ps 208,625
million, increasing 34,904% from Ps 596 million as of December 31, 2004.
SURENTA SHARES: An open mutual fund mostly composed of a portfolio of
shares of companies from different economic sectors listed in the Colombian
Stock Exchange. As of December 31, 2005, the assets under management totaled Ps
215,928 million, increasing 13,370% from Ps 1,603 million as of December 31,
2004.
SURENTA TREASURY BONDS (TES): An open mutual fund with a portfolio
consisting mainly of domestic public debt instruments. At December 31, 2005, the
assets under management totaled Ps 9,883 million, increasing 4,938% from Ps 196
million as of December 31, 2004.
SURENTA DOLLARS: An open mutual fund with immediate availability of funds
and a portfolio consisting of foreign assets. As of December 31, 2005, assets
under management amounted to US$ 134,095. This fund was introduced on September
6, 2005.
SURENTA90 DOLLARS: Medium term; open mutual fund concentrated in securities
abroad, where customers invest in pesos with a return in dollars; 90-day minimum
term; dollar-denominated; fixed-income fund; without foreign-exchange red tape
or registering international investments. As of December 31, 2005, the assets
under management totaled Ps 3,191 million, decreasing 63% from Ps 8,557 million
as of December 31, 2004.
OPCION COLOMBIA: An open mutual fund providing immediate availability of
cash with a portfolio composed of debt instruments. As of December 31, 2005, the
assets under management totaled Ps 82,295 million, decreasing 38% from Ps
132,162 million as of December 31, 2004.
CAPITAL: An open mutual fund designed to preserve the initial investment,
with a portfolio composed of debt instruments. At December 31, 2005, total
assets managed amounted Ps 12,683 million.
The Surenta Investment Funds and Opcion Colombia Fund, are distributed
through Suvalor's sales force as well as Bancolombia's network.
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INTERNATIONAL INVESTMENTS
Suvalor offers different investment alternatives abroad: investments
in securities issued abroad by the Colombian Central Bank, as well as different
investment options through its subsidiary Suvalor Panama S.A.. It also offers
international investment products by means of the correspondent banking
arrangements it has with Smith Barney, UBS International, UBS AG-Switzerland and
Man Investments. Additionally, Suvalor offers different investment alternatives
through Banco Corfinsura Internacional in Puerto Rico. As of December 31, 2005,
Suvalor managed international investments portfolio in U.S. dollars amounting
US$ 304 million, with an increase of 68% from US$ 181 million as of December 31,
2004.
SUVALOR PANAMA S.A.: Suvalor Panama S.A. is a brokerage firm located in
Panama wholly- owned by Suvalor S.A.. Suvalor Panama is authorized to conduct
both local and international operations. Suvalor Panama S.A. began operations on
November 21, 2005, allowing Suvalor S.A. to acquire a more competitive position
and expand its operations, customers base and products abroad, which we believe
will increase its market share of foreign-based assets products and services.
BANCO CORFINSURA INTERNACIONAL, INC.: Through Suvalor, customers are given
access to Certificates of Deposit and current accounts in U.S. dollars (money
market accounts). At December 31, 2005, Suvalor had a total volume administered
by the Banco Corfinsura Internacional of US$ 412,465 showing a drop of 59% vs.
December 31, 2004 when total volume was US$ 995,214.
Suvalor has signed correspondent agreement with the following
entities, which allow the customer access to a wide range of international
products:
ASSETS UNDER ASSETS UNDER
PRODUCTS OFFERED TO MANAGEMENT AS OF MANAGEMENT AS OF
COMPANY BUSINESS SUVALOR'S CUSTOMER'S DECEMBER 31, 2005 DECEMBER 31, 2004
------- ------------------- ----------------------- --------------------- -------------------
Smith Barney (Citigroup) Banking/Brokerage Offshore Mutual Funds, US$165 million of US$148 million of
Coverage Funds, dollar denominated dollar denominated
Fixed-Interest assets assets
Securities, Shares,
Structured Notes and
Money Managers
UBS International Broker/Dealer Offshore Mutual Funds, US$104 million dollar This agreement
Hedging Funds, Fixed denominated assets wasn't established
Income, Equities, as of December 31,
Structured Notes, Money 2004
Managers and Annuities
UBS AG - Switzerland (1) Financial firm Investments in US$ 0 This agreement
international products wasn't established
and Swiss bank accounts as of December 31,
2004
MAN Investments AG Introducing broker, Options in foreign US$34 million US$32 million
foreign fund currencies: Alternate
representative Investments
----------
(1) UBS AG Switzerland and Suvalor signed the correspondent agreement in
October 2005.
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SPECIALIZED PRODUCTS
ASSET MANAGEMENT: Through this service, customers give Suvalor total
management of their investment portfolio to be administered under Suvalor's
judgment in accordance with the objectives and guidelines established by the
customer. This service includes back, middle and front office functions. At
December 31, 2005, the total amount managed totaled Ps 551,277 million.
STRUCTURED PRODUCTS: These portfolio structures provide customers with a
diversified asset base with a well-distributed rate of return thereby reducing
loss of capital risk. Structured products include the following types: Treasury
Bonds (TES) structured products and shares structured products with a level of
protection. At December 31, 2005, total assets under management amounted to Ps
44,208 million.
ADVISORY IN CAPITAL MARKETS: Through this service, Suvalor provides
customers with advice on the administration of their investment portfolio in
order to promote the achievement of customers risk and rate of return
objectives. Suvalor offers its customers its entire team of personnel,
specialized in risk and portfolio management as well as the firm's investment
strategy.
SUVALOR SERVICES
SECURITIES MANAGEMENT: Suvalor offers its customers custody and management
of all kind of securities listed on the Colombian National Register of
Securities and Brokers (Registro Nacional de Valores e Intermediarios - RNVI -).
This service is offered through the Colombian Securities Centralized Deposits:
DECEVAL and DCV. Additionally, Suvalor manages and holds on behalf of customers
securities issued in the international market, through CLEAR STREAM and Euro
Clear.
ECONOMIC RESEARCH: Suvalor's Department of Economic Research, with more
than 13 years of experience, has a team of highly-skilled personnel that provide
customers with top-quality information for their investments decisions. The
Economic Research link on Suvalor's website (www.suvalor.com), provides
investment recommendations and periodic reports on the local stock, fixed-income
securities and foreign exchange markets, as well as information on international
markets that can be consult through the website or received through email.
Suvalor's On-Line Services:
INTERNET: In order to offer our customers and visitors a top-quality
website, Suvalor incorporated the latest international website trends to its
web-page, which now has a much more user-friendly design providing easier
browsing through its three specialized sections: Transactions, Economic Research
and Products and Services.
CUSTOMER SERVICE CENTER: Through Suvalor's Customer Service Line, customers
are able to contact a Commercial Advisor and receive personalized assistance
when carrying out transactions involving Suvalor's Funds. Customers can consult
the account statements for their different investment products, and we also
offer "Audiovalor", which is an automatic voice response service.
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B.5.X. OFF-SHORE BANKING
- BANCOLOMBIA (PANAMA) S.A. AND BANCOLOMBIA CAYMAN: Bancolombia
(Panama) S.A. and Bancolombia Cayman, BC's international
subsidiaries located in Panama and the Cayman Islands,
respectively, provide a complete line of banking services mainly
to Colombian customers, which include loans to private sector
companies, trade financing, lease financing, financing for
industrial projects as well as a complete portfolio of cash
management products, such as checking accounts, international
collections and payments and PC Banking. Through these
subsidiaries, BC also offers to its high net worth customers and
prestige banking customers investment opportunities in U.S.
dollars, in savings accounts and in checking accounts, CD-Time
deposits, and investment funds.
As of December 31, 2005, Bancolombia Panama S.A. and Bancolombia
Cayman had 7,825 customers. As of December 31, 2005, Bancolombia
Cayman had 7,106 outstanding Visa credit cards.
In 2005, the loan portfolio increased more than 100% with regard
to the previous year. This growth is due in part to the Bank's
strategy to channel loans in foreign currency through its
subsidiaries abroad and to the larger customer base that resulted
from the Merger with Conavi and Corfinsura.
- BANCO CORFINSURA INTERNATIONAL, INC: Located in the financial
district of San Juan, Puerto Rico, Banco Corfinsura
Internacional, Inc., BC's subsidiary, is an international banking
entity under Act 52 of August 11, 1989 and Regulation Number 5356
(International Banking Center Regulatory Act). Banco Corfinsura
Internacional, Inc. offers a portfolio of international products
and financial services in order to attend to its customers'
objectives.
Products portfolio includes: Savings accounts and Commercial
Loans (including International leasing and international
factoring). Banco Corfinsura Internacional, Inc. offers
specialized short, medium and long- term credit lines granted by
international banks and a diversity of CD-Time deposits such as:
CD-Time Deposit with fixed term, CD-Time Deposit with variable
interest (a medium term product starting at 18 months), CD-Time
Deposit in Euros and CD-Time Deposit with Increasing Interest.
As of December 31, 2005, Banco Corfinsura Internacional, Inc. had
more than 3,200 active customers.
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B.5.XI. BANCOLOMBIA MIAMI AGENCY
Bancolombia Miami Agency is an international banking agency that
offers a broad range of deposit-taking products and services to non-U.S.
residents, mainly BC customers, including savings, money market and checking
accounts, time deposits, trade finance, working capital and personal loans, and
funds transfers among others. Through the Miami - Agency, the Bank supports its
customers in international trade offering cash management services, and
processing of import and export letters of credits, stand by letters of credit,
guarantees, collections and foreign exchange negotiations. The Agency enhances
its products and services portfolio offering new investment and saving
opportunities in the U.S. for both individuals and entities.
As of December 31, 2005, after two years of operation, the Agency
total assets amounted to US$138 million and its net income totaled US$425
thousand.
Deposit products sales in 2005 increased 77% over the previous year.
At December 31, 2005, deposits totaled over US$71 million with more than one
thousand customers.
In 2005, the loan portfolio showed an annual increase of 330%,
totaling more than US$100 million as of December 31, 2005.
B.5.XII. COMMERCIAL FINANCE COMPANY ("SUFINANCIAMIENTO")
Sufinanciamiento, BC's finance company subsidiary, targets the
personal banking segment that is not traditionally served by commercial banks,
specializing in risk products such as vehicle financing and loans to use at the
customers discretion. Sufinanciamiento also finances insurance premiums and
payroll loans.
As of December 31, 2005, Sufinanciamiento had 300,243 customers, with
an increase of 58.6% compared to 189,320 customers as of December 31, 2004. Most
of its customers are reached at the point of sale.
PRIVATE BRAND CREDIT CARD
In November 2005, Sufinanciamiento, in alliance with Almacenes Exito,
a major retailer in Colombia, launched the private brand credit card "Tarjeta
Exito" product to replace "Cupofijo Exito". We believe this new product offers
improved conditions and solventages to customers, such as: discounts in
purchases; different payment alternatives selected by the customers on a monthly
basis, which can be done directly in the retail store; minimum requisites to
obtain the credit card and the terms of payment up to 48 months. In the first
month, more than 22,000 new cards were allocated.
In addition to the previous product, Sufinanciamiento has developed
alliances with other retailers, including, among others, "Alkosto", "Makro" and
"La 14", with the goal of keeping its leadership in the market of private brand
credit cards.
As of December 31, 2005, Sufinanciamiento had 309,413 customers, with
an increase of 57.8% compared to 196,075 customers as of December 31, 2004. Most
of its customers are reached at retail chains.
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As of December 31, 2005, Sufinanciamiento's loan portfolio amounted to
Ps779,103 million increasing 67.23% compared to Ps465,880 million at December
31, 2004. This growth was mostly due to the upward trend in the vehicle loan
business, which represented 81% of the company's portfolio.
According to the figures published by the Superintendence of Finance,
Sufinanciamiento reached the first place, by outstanding loans, among Colombian
Commercial Finance Companies in April 2005.
B.5.XIII. NEW PRODUCTS OR SERVICES
During 2005, the Bank launched the following products and services:
B.5.XIII.A. HOMEOWNER LOANS IN PESOS
During the second half of 2005, a new line of long term mortgage loans
was introduced for purchasing new or used residential property with fixed
installments and fixed interest rates for the entire term of the loan.
The maximum loan amount corresponds to 70% of the lowest value between
the price stated in the purchase contract and the commercial value of the
property, or 50% for Colombian residents whose income consists mainly of
remittances from abroad. The loan term ranges from 5 to 10 years, and the
amortization is in accordance with the "Constant Installment in Pesos
Amortization Plan" as regulated by the Colombian Government.
The loan is guaranteed by a first mortgage on the property, a life
insurance policy for the borrowers as well as fire and earthquake insurance.
B.5.XIII.B. CHEVY CREDIT CARD
In October 2005, a co-branding credit card named Bancolombia
Colmotores Chevycard, was launched. This card is promoted by 16 sales
representatives located at authorized Chevrolet dealers. The Bank worked closely
with the dealerships to promote and position the product.
B.5.XIII.C. COMFAMA PRIVATE LABEL CREDIT CARD
In 2005, we launched a new private label credit card in conjunction
with the family compensation bureau - Comfama. This product targets the basic
(low-income) sub segment and consists of a rotating credit limit which is given
to Comfama and distributed among its members as means of financing. This card is
accepted in all those retail establishments with valid agreements with Comfama.
At December 31, 2005, there were 5,591 outstanding credit cards, representing
total billing of Ps1,779 million.
76
B.5.XIII.D. RODEO CLUB PRIVATE LABEL CREDIT CARD
This card was launched in 2005 and targets members of the Rodeo Club
(private social club in Medellin, Colombia). It is used for consumption within
the Club and for paying the fixed monthly membership fee. At December 31, 2005,
there were 1,833 cards, representing total billing of Ps2,615 million.
B.5.XIII.E. VIRTUAL LOANS "AUDIOPRESTAMO A LA MEDIDA"
For the purpose of extending a rotating line of credit to more
customers, BC designed the Audioprestamo a la medida loan, for individuals with
income ranging between 2.5 and 5 SMLV. In the first stage we offered this
product to the Bank's payroll customers, and in the following stages we expect
it shall be extended to other segments. At December 31, 2005, we had total loans
amounting to Ps710 million, having disbursed Ps1,426 million, serving a total
of 617 customers.
B.5.XIII.F. ONLINE RECEIVABLES - "RECAUDO INTEGRADO"
Through this Web Services-based solution, customers can provide the
Bank with information regarding all invoices due for payment, which allows their
customers real-time identification of their payments at any of our nationwide
branches.
Our customers also receive online information of all collected
payments, enabling them to immediately update their accounting system and
provide important data to other areas of their companies.
B.5.XIII.G. EUROPEAN OPTIONS (PLAN VANILLA)
Bancolombia received these European options as a result of the Merger.
These were part of Corfinsura's portfolio. An option can be defined as a
contract which gives the purchaser the right, but not the obligation, to buy or
sell an underlying asset at a set price on a given date, according to the type
of option in question. This contract therefore represents an obligation on the
part of the seller to purchase or sell the asset whenever the buyer decides to
exercise this right.
This product offers hedging coverage to individuals and entities
exposed to fluctuations in the exchange rate.
B.5.XIII.H. SWAPS
Swaps covering both exchange and interest rates, were part of
Corfinsura and Conavi's portfolio. Although Bancolombia had carried out this
type of operation in the past, overall volume had been quite low and was only
conducted with institutional customers. Swaps consist of a bilateral obligation
(between Bancolombia and individuals and entities exposed to fluctuations in the
interest or exchange rates) to exchange cash flows from these operations for
coverage purposes, allowing them, for example, to transfer a debt from one
currency to another or from a fixed rate to a variable interest rate.
77
B.5.XIII.I. INFLATION - INDEXED LOANS
BC offers an Inflation-indexed line of credit designed to serve
corporate customers who seek different types of financing in accordance with
market evolution and inflation expectations.
B.5.XIII.J. STAGGERED - SPREAD LOANS
BC offers financing loans for large projects in which special interest
rate structures are needed. BC can offer personalized scales of annual or
semi-annual interest rates with adjusted amortization periods.
B.5.XIII.K. FLOATING - MARGIN LOANS
BC offers lines of credit based on CD- Time deposit rates, with
interest rates that move between two fixed ranges. It allows for hedging
coverage against large interest rate fluctuations.
B.6. COMPETITION
B.6.I. DESCRIPTION OF THE COLOMBIAN FINANCIAL SYSTEM
The Colombian financial system was historically comprised of
specialized institutions operating in market niches that were regulated and
delineated by law. However, Law 45 of 1990, Law 35 of 1993 and the Estatuto
Organico del Sistema Financiero (Decree 663 of 1993, as amended) significantly
deregulated the Colombian financial system, providing commercial banks with the
opportunity to set up subsidiaries to compete in different markets, and
permitting other financial institutions to enter markets in the Colombian
financial system from which they had previously been excluded. These laws have
increased competition among the different types of financial institutions,
promoted consolidation of the financial industry and created considerable
overlap in the permitted scope of business activities of the various types of
financial institutions, particularly with respect to foreign exchange
operations. This legal framework also permits foreign investment in all types of
financial institutions.
Additional laws have since been promulgated with the purpose of
further deregulating the Colombian financial system. Besides Law 35 and Decree
663, Law 510 of 1999, Law 546 of 1999 and Law 795 of 2003 further broadened the
scope of activities permitted to financial institutions, set forth general
circumstances under which the government may intervene in the financial sector,
prescribed the rules governing intervention and established the instruments that
the government may use.
78
Over recent years, the Colombian banking system has been undergoing a
period of readjustment given the series of mergers and acquisitions that have
taken place within the sector, reflecting worldwide tendencies towards a greater
consolidation on the part of ever growing financial institutions. More
specifically, several mergers and acquisitions took place in 2005, including the
acquisition of Banco Aliadas S.A by Banco de Occidente S.A. and the subsequent
merger of the two entities; the merger between Banco Tequendama and Banco
Sudameris Colombia; the merger between the Colmena and the Caja Social banks;
and the Merger, involving Bancolombia S.A., Banco Comercial y de Ahorro S.A
(Conavi) and Corporacion Financiera Nacional y Suramericana S.A (Corfinsura).
Similarly, Banco Davivienda S.A. acquired Banco Superior S.A.; the Colombian
subsidiary of the BBVA Spanish bank acquired the state-owned Banco Granahorrar
S.A.; Banco de Occidente S.A., acquired Banco Union Colombiano; and Banco Bogota
acquired Banco de Credito y Desarrollo Social Megabanco S.A.. The mergers
between these acquiring and acquired entities are expected to take place during
2006.
At December 31, 2005, the principal participants in the Colombian
financial system were the Central Bank, 21 commercial banks (12 domestic banks,
6 foreign banks, and 3 state-owned banks), 2 finance corporations, 15 commercial
finance companies, 8 leasing companies and 9 government-owned development banks.
In addition, trust companies, cooperatives, insurance companies, insurance
brokerage firms, bonded warehouses, and pension and severance pay funds also
participate in the Colombian financial system.
FINANCIAL SYSTEM EVOLUTION IN 2005
In 2005, the Colombian financial system's recovery process was
strengthened. For 2005, credit Institution system profits reached Ps3.37
trillion, a growth of 17.3% over the previous year.
The positive results in the financial sector in 2005 were, to a great
extent, the product of increased revenues from the valuation of investments at
market prices and improved efficiency levels. These causes were accompanied by
increased demand in the credit market, better asset quality and coverage
indicators, and a higher return on equity. In addition, credit institution
solvency remains at high levels, surpassing the legal minimum of 9.0% by 450
basis points. Also, the monetary policy aimed at expanding the economy has
enabled sustained high levels of liquidity and consequently low interest rates.
With these results, this sector solidified its importance in the Colombian
economic environment.
B.6.II. BANCOLOMBIA AND ITS COMPETITORS
INDICATORS FOR BANCOLOMBIA AND ITS COMPETITORS
In 2005, the capital adequacy, loan portfolio risk exposure,
profitability and efficiency indicators improved for the financial system at
large. BC's unconsolidated solvency indicator was 12.1%. (For information on how
the solvency ratio is measured, see Item 4. Information on the Company - B.
Business Overview - B.7. Supervision and Regulation - Capital Adequacy
Requirements). At December 31, 2005, the unconsolidated efficiency indicator
(measured as administrative expense divided by total assets) was 5.8% while the
quality of the loan portfolio (past due loans/total loans) was 2.02%. Similarly,
portfolio coverage (provisions /past due loans) reached 208.24%.
79
The following table lists key indicators for BC and its main
competitors:
PAST DUE LOAN/ ALLOWANCES/PAST CAPITAL
ROE ROA TOTAL LOANS DUE LOANS ADEQUACY
--------------- --------------- --------------- --------------- ---------------
DEC-04 DEC-05 DEC-04 DEC-05 DEC-04 DEC-05 DEC-04 DEC-05 DEC-04 DEC-05
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Bancolombia (unconsolidated) 22.2% 22.9% 3.1% 3.1% 1.5% 2.0% 288.0% 208.2% 13.3% 12.1%
Banco de Bogota 24.5% 20.4% 2.7% 2.8% 1.7% 2.0% 207.7% 174.9% 13.1% 15.2%
Banco de Occidente 23.1% 21.0% 2.5% 2.4% 2.3% 2.3% 258.2% 208.9% 11.1% 12.5%
BBVA 17.3% 15.0% 1.4% 1.2% 2.8% 2.0% 245.9% 331.4% 11.1% 12.7%
Citibank 20.5% 18.0% 3.1% 3.2% 1.4% 1.4% 120.6% 188.2% 14.1% 14.7%
Davivienda 23.1% 29.3% 2.8% 3.6% 3.3% 3.3% 209.9% 247.4% 18.7% 16.5%
Banco Popular 23.0% 25.1% 2.2% 2.8% 3.5% 2.6% 153.1% 185.8% 13.0% 12.4%
==== ==== === === === === ===== ===== ==== ====
Source: Superintendency of Banking
(Now Superintendency of Finance)
BC is Colombia's market leader in most types of loans and deposits.
Its main competitors in the corporate sector are Banco de Bogota, Banco de
Occidente, BBVA, and Citibank. In the consumer sector, the main competitors are
Banco Popular, Banco de Occidente and Davivienda.
The graphs that follow show BC's (unconsolidated) and its main
competitors' market shares in the total net loans, checking accounts, savings
accounts and time deposits product categories, according to data compiled by the
Superintendency of Finance for the years 2003, 2004 and 2005.
TOTAL NET LOANS
MARKET SHARE
(BAR CHART)
DEC-03 DEC-04 DEC-05
------ ------ ------
Bancolombia 13.0% 13.6% 20.8%
Bogota 8.8% 10.5% 10.7%
BBVA 6.7% 7.7% 8.0%
Davivienda 5.7% 5.6% 5.5%
Popular 5.3% 5.5% 5.4%
80
CHECKING ACCOUNTS
MARKET SHARE
(BAR CHART)
DEC-03 DEC-04 DEC-05
------ ------ ------
Bancolombia 18.3% 17.8% 19.5%
Bogota 14.4% 18.6% 18.6%
BBVA 10.3% 9.5% 8.7%
Occidente 9.7% 11.9% 13.2%
Popular 6.7% 6.0% 5.3%
SAVING ACCOUNTS
MARKET SHARE
(BAR CHART)
DEC-03 DEC-04 DEC-05
------ ------ ------
Bancolombia 9.7% 10.6% 18.5%
Occidente 5.2% 5.2% 6.1%
Bogota 8.3% 11.2% 11.7%
Davivienda 8.5% 7.4% 8.7%
BBVA 7.2% 7.5% 8.3%
81
TIME DEPOSITS
MARKET SHARE
(BAR CHART)
DEC-03 DEC-04 DEC-05
------ ------ ------
Bancolombia 11.2% 12.4% 14.5%
AV Villas 7.3% 6.9% 6.8%
Davivienda 6.9% 7.1% 6.5%
Bogota 4.5% 6.2% 7.3%
BBVA 6.1% 6.2% 8.3%
B.7. SUPERVISION AND REGULATION
COLOMBIAN BANKING REGULATORS
The principal bodies regulating the Colombian financial system are the
Superintendency of Finance, the Ministry of Finance and the Board of Directors
of the Central Bank. Colombia's National Congress prescribes the general
framework under which the government may regulate the financial system.
SUPERINTENDENCY OF FINANCE:
- The Superintendency of Banking was, until November 25, 2005,
the authority responsible for supervising and regulating all
entities classified as financial institutions under
Colombian law, including commercial banks such as BC,
finance corporations, commercial finance companies,
financial services companies (trust companies, warehouse
companies, and pension and severance pay administration
companies) and insurance companies.
- The Superintendency of Securities was, until November 25,
2005, charged with monitoring, promoting and regulating the
market for publicly traded securities in Colombia and
oversees, its main participants, including the Colombian
Stock Exchange, brokers, dealers, mutual funds, and issuers.
Since BC's Common Shares and Preferred
82
Shares are publicly traded on the Colombian Stock Exchange,
certain aspects of BC's operations as issuer were supervised
by the Superintendency of Securities.
- On November 25, 2005, the Superintendency of Finance was
created as a result of the merger between the
Superintendency of Banking and the Superintendency of
Securities through Decree 4327 issued by the President of
the Republic of Colombia.
- All the responsibilities and attributions of the former
Superintendency of Banking and Superintendency of Securities
set fort in Decree 663 of 1993, as amended, Decree 2739 of
1991, as amended, and Law 964 of 2005, were assigned to the
newly created Superintendency of Finance.
- The Superintendency of Finance is a technical entity annexed
to the Colombian Ministry of Finance and Public Credit that
acts as the inspection, supervision and control authority of
the financial, insurance and securities exchange sectors and
any other activities related to the investment or management
of the public's savings. The Superintendency of Finance has
been entrusted with the objective of supervising the
Colombian financial system with the purpose of preserving
its stability and trustworthiness, as well as promoting,
organizing and developing the Colombian securities market
and protecting the users of financial and insurance services
and investors.
- Financial institutions must obtain the authorization of the
Superintendency of Finance before initiating operations.
- Violations to provisions of Colombia's financial system are
subject to administrative sanctions and, in some cases, may
have criminal consequences. The Superintendency of Finance
may inspect Colombian financial institutions on a
discretionary basis, and has the authority to impose fines
on such institutions, their directors and officers for
violations of Colombian laws, regulations, or such financial
institutions' own by-laws.
- In addition, the Superintendency of Finance continues to
make on-site inspections of Colombian financial
institutions, including BC, on a regular basis, as did the
Superintendency of Banking.
- Both as a financial institution and as an issuer of
securities traded in the Colombian Stock Exchange,
Bancolombia is subject to the supervision and regulation of
the Superintendency of Finance.
- Additionally, Bancolombia's subsidiaries that are financial
entities, (finance corporations, commercial finance
companies, trust companies, warehouse companies) and its
brokerage firm are each subject to the supervision and
regulation of the Superintendency of Finance.
MINISTRY OF FINANCE:
- As part of its duties, the Ministry of Finance issues
Decrees relating to financial matters that may affect
banking operations in Colombia.
83
CENTRAL BANK:
- The Central Bank exercises the customary functions of a
central bank, including price stabilization, legal currency
issuance, regulation of currency circulation, credit and
exchange rate monitoring and administration of international
reserves. Its Board of Directors is the regulatory authority
for monetary, currency exchange and credit policies, and is
responsible for the direction and execution of the Central
Bank's duties. The Central Bank also acts as lender of last
resort to financial institutions.
- Pursuant to the Colombian Constitution of 1991, the Central
Bank has autonomy from the government in the formulation of
monetary policy and for administrative matters. More
specifically, the Constitution of 1991 established
administrative, technical, budgetary and legal autonomy for
the Central Bank and its Board of Directors in respect of
monetary, credit and foreign exchange matters. The Central
Bank reports only to the National Congress; its Board of
Directors has seven members, one of whom is the Minister of
Finance.
REGULATORY FRAMEWORK FOR COLOMBIAN BANKING INSTITUTIONS
The basic regulatory framework for the operations of the Colombian
financial sector is set forth in Decree 663 of 1993, modified among others, by
Law 510 of 1999, Law 546 of 1999 and Law 795 of 2003. Laws 510 and 795
substantially modified the control, regulation and surveillance powers of the
Superintendency of Banking (now Superintendency of Finance). Law 510 also
streamlined the procedures for the Fondo de Garantias de Instituciones
Financieras ("Fogafin"), a fund meant to assist troubled financial institutions,
to intervene on behalf of economically troubled companies. The main objective of
Law 510 is to increase the solvency and stability of Colombia's financial
institutions, by establishing rules for their incorporation, the permitted
investments of credit institutions, insurance companies and investment
companies. Law 546 of 1999 regulated the system of long-term home loans. Later
on, Law 795 was issued with the main objective of broadening the scope of
activities to be performed by financial institutions and to update Colombian
regulations with the latest principles of the Basel Committee. Law 795 also
increased the minimum capital requirements in order to incorporate a financial
institution (for more information see "Minimum Capital Requirements" below) and
authorized the Superintendency of Finance to take precautionary measures,
consisting mainly in preventive interventions with respect to financial
institutions whose capital falls below certain thresholds. Such financial
institutions, in order to avoid a temporary take-over by the Superintendency of
Finance, must submit to such Superintendency a restructuring program to restore
their financial situation.
In order to implement and enforce the provisions related to Colombia's
financial system, the Superintendency of Finance and the Board of Directors of
the Central Bank issue periodic circulars and resolutions. In External Circular
007 of 1996, as amended, the Superintendency of Banking (now Superintendency of
Finance) compiled all the rules and regulations covering banking institutions,
and in External Circular 100 of 1995, as amended, it compiled all regulations
applicable to the accounting and financial treatment of banking institutions.
84
Violations of Laws 510, 795 and specified provisions of Decree 663 and
their relevant regulations are subject to administrative sanctions and, in some
cases, criminal penalties.
KEY INTEREST RATES
Colombian commercial banks, finance corporations and commercial
finance companies are required to report to the Central Bank, on a weekly basis,
data regarding the total volume (in pesos) of certificates of deposit issued
during the prior week and the average interest rates paid for certificates of
deposit with maturities of 90 days. Based on such reports, the Central Bank
computes the Tasa de Captaciones de Corporaciones Financieras ("TCC") and the
Depositos a Termino Fijo ("DTF") rates, which are published at the beginning of
the following week for use in calculating interest rates payable by financial
institutions. The TCC is the weighted average interest rate paid by finance
corporations for deposit maturities of 90 days. The DTF is the weighted average
interest rate paid by finance corporations, commercial banks and commercial
finance companies for certificates of deposit with maturities of 90 days. For
the week of May 22-26, 2006, the DTF was 5.95% and the TCC was 6.68%.
CAPITAL ADEQUACY REQUIREMENTS
Capital adequacy requirements for Colombian financial institutions
(set forth in Decree 1720 of 2001, as amended) are based on the standards of the
Basel Committee. The regulations establish four categories of assets, which are
each assigned different risk weights, and require that a credit institution's
Technical Capital (as defined below) be at least 9% of that institution's total
risk-weighted assets.
Technical Capital for the purposes of the regulations consists of
basic capital ("Primary Capital") and additional capital ("Secondary Capital")
(collectively, "Technical Capital"). Primary Capital consists mainly of:
- outstanding and paid-in capital stock;
- legal and other reserves;
- profits retained from prior fiscal years;
- the total value, of the reappraisal of equity account (if
positive) and the foreign currency translation adjustment
account;
- current fiscal year profits in a proportion equal to the
percentage of prior fiscal year profits that were
capitalized, or allocated to increase the legal reserve, or
used to cover accrued losses;
- any representative shares held as guarantee by the Fondo de
Garantias de Instituciones Financieras ("Fogafin") when the
entity is in compliance with a recovery program aimed at
bringing the Bank back into compliance with capital adequacy
requirements (if the Superintendency of Finance establishes
that such recovery program has failed, these shares shall
not be computed);
85
- bonds issued by financial institutions and subscribed by
Fogafin when they comply with the requirements stated in the
regulations;
- the part of the surplus capital account from donations that
complies with the requirements set fort in the applicable
regulation;
- the value of dividend declared to be paid in shares; and
- the value of the liabilities owed by minority interests.
Items deducted from Primary Capital are:
- any prior or current period losses;
- the total value of the capital revaluation account (if
negative);
- accumulated inflation adjustment on non-monetary assets
(provided that the respective assets have not been
transferred);
- investments in shares or convertible bonds issued by
entities (excluding subsidiaries) subject to the supervision
of the Superintendency of Finance excluding appraisals and
investments in Finagro credit establishments subject to the
conditions set forth in the regulation); and
- investments in shares or convertible bonds issued by foreign
financial institutions where the investor holds at least 20%
of the capital of said institution (excluding subsidiaries).
This amount includes foreign currency translation and
excludes appraisals.
Secondary Capital consists of other reserves and retained earnings,
which are added to the Primary Capital in order to establish the total Technical
Capital. Secondary Capital includes:
- 50% of the accumulated inflation adjustment of non-monetary
assets (provided that such assets have not been disposed
of);
- 50% of asset reappraisal (excluding revaluations of
foreclosed assets);
- 50% of the gross unrealized gain or loss on investments
available for sale;
- mandatory convertible bonds, with maturities of up to 5
years, (provided that the terms and conditions of their
issuance were approved by the Superintendency of Finance);
- market value of subscribed subordinated bonds as long as
said bonds do not exceed 50% of Primary capital, and comply
with additional requirements stated in the regulations;
- the total value of the devaluation accounts associated to
investments in shares and mandatory convertible bonds issued
by entities (excluding subsidiaries) subject to the
supervision of the Superintendency of Finance, that complies
with the requirements set fort in the applicable regulation;
and
86
- general allowances made in accordance with the instructions
issued by the Superintendency of Finance.
The following items are deducted from Secondary Capital:
- 50% of the direct or indirect capital investments (in
entities subject to the supervision of the Superintendency
of Finance excluding subsidiaries) and mandatory convertible
bonds reappraisal, that complies with the requirements set
fort in the applicable regulation;
- the value of the devaluation of equity investments with low
exchange volume or which are unquoted.
In computing Technical Capital, Secondary Capital may not exceed (but
can be less than) the total amount of Primary Capital.
The following table sets forth certain information regarding the
Bank's capital adequacy as of December 31, 2005:
AS OF DECEMBER 31,
2005
-------------------
(Ps million, except
percentages)
Subscribed capital ....................................................... Ps 430,685
Capital Advance Payments ................................................. 215
Legal reserve and other reserves ......................................... 1,765,997
Unappropriated retained earnings ......................................... 49,140
Net Income ............................................................... 94,688
Subordinated bonds subscribed by Fogafin ................................. 20,581
LESS:
Long - term investments ............................................... (19,481)
Non - monetary inflation adjustment ................................... (172,344)
------------
Primary capital (Tier I) ................................................. Ps 2,169,481
============
Reappraisal of assets .................................................... Ps 106,845
Provision loans .......................................................... 186,720
Non-monetary inflation adjustment ........................................ 90,757
Subordinated bonds ....................................................... 9,500
------------
Computed secondary capital (Tier II) ..................................... Ps 393,822
============
Primary capital (Tier I) ................................................. Ps 2,169,481
Secondary capital (up to an amount equal to primary capital) (Tier II) ... 393,822
------------
Technical Capital ........................................................ Ps 2,563,303
============
Capital ratios
Primary capital to risk-weighted assets (Tier I) ......................... 9.25%
Secondary capital to risk-weighted assets (Tier II) ...................... 1.68%
------------
Technical capital to risk-weighted assets ................................ 10.93%
============
Risk weighted assets included market risk ................................ Ps23,457,768
============
87
As of December 31, 2005, the Bank's Technical Capital ratio was
10.93%, thereby exceeding the requirements of the Colombian government and the
Superintendency of Finance by 193 basis points. The Bank's capital has
fluctuated over time. There can be no assurance that the Bank will not continue
to experience such fluctuations in the future. The Bank expects, however, to be
able to continue to meet all capital adequacy requirements under Colombian law.
Liquidity risks are currently regulated and market risks are currently
governed by External Circular 100 of 1995, as amended, issued by the former
Superintendency of Banking (now Superintendency of Finance). This circular
defines criteria and procedures for measuring the Bank's exposure to interest
rate risk, foreign exchange risk, and market risk. Under the regulations, the
Bank must send to the Superintendency of Finance information on the net present
value, duration, and interest rate of its assets, liabilities, and derivative
positions. Since January 2002, Colombian Banks have also been required to
calculate, for each position on the balance sheet, a volatility rate and a
parametric VaR (value at risk), which is calculated based on net present value,
modified duration and a risk factor computed in terms of a basis points change.
Each risk factor is calculated and provided by the Superintendency of Finance.
MINIMUM CAPITAL REQUIREMENTS
The minimum capital requirements for banks on an unconsolidated basis
is established in article 80 of Decree 633 of 1993, as amended. The minimum
capital requirement for 2006 is Ps 56,820 million. Failure to meet such
requirements can result in the imposition of a fine by the Superintendency of
Finance of 3.5% of the difference between the required minimum capital and the
Bank's effective capital. The Bank has met all such requirements.
FOREIGN CURRENCY POSITION REQUIREMENTS
According Resolution 5 of 2005 issued by the Board of Directors of the
Central Bank a financial entity's Currency Position "Posicion Propia" is the
difference between the entity's foreign currency-denominated assets and
liabilities (including any off-balance sheet items), made or contingent,
including those that may be sold in Colombian legal currency.
Resolution 5 of 2005 of the Board of Directors of the Central Bank,
provides that the average of a bank's Foreign Currency Position for 3 business
days cannot, if assets are greater than liabilities, exceed 20% of the bank's
Technical Capital. Currency exchange intermediaries such as BC are permitted to
hold a 3 business day's average negative Foreign Currency Position not exceeding
the equivalent in foreign currency of 5% of its Technical Capital (with
penalties being payable after the first business day). As of May 28, 2006, BC
had an unconsolidated dollar-denominated positive net assets position of US$
66.7 million, which falls within the aforementioned regulatory guidelines. For
further discussion, see Note 3 to the Financial Statements.
Resolution 5 of 2005 also defines the Foreign Currency Position in
Cash ("Posicion Propia de Contado en Moneda Extranjera") as the difference
between all foreign currency-denominated assets and liabilities. A bank's 3
business day's average Foreign Currency Position in cash can not exceed 50% of
the bank's Technical Capital.
In accordance with Resolution 5 of 2005, the 3 day average shall be
calculated on a daily basis.
88
In order to control the peso appreciation that occurred during 2003,
on January 23, 2004, the Board of Directors of the Central Bank issued External
Resolution No. 1 forbidding currency exchange intermediaries, such as BC, to
hold negative Foreign Currency Positions in Cash, and therefore established a
minimum of zero for the Foreign Currency Positions in Cash applicable from March
31, 2004. This prohibition did not affect BC until it was eliminated on October
3, 2005, when Resolution 5 of 2005 came into force.
RESERVE REQUIREMENTS
Commercial banks are required by the Central Bank's Board of Directors
to satisfy reserve requirements with respect to deposits. Such reserves are held
by the Central Bank in the form of cash deposits and their required amounts
vary. According to the Central Bank's Board of Directors' Resolution 19 of 2000,
the reserve requirements for Colombian banks for deposits received on or after
December 31, 2000 are:
RESERVE
REQUIREMENT (%)
---------------
Private demand deposits.......... 13
Government demand deposits....... 13
Other deposits and liabilities... 13
Savings deposits................. 6
Time Deposits (1)................ 0 - 2.5
----------
(1) 2.5% for deposit with maturities of under 540 days, and 0% for deposits
with maturities above 540 days.
FOREIGN CURRENCY LOANS
The Board of Directors of the Central Bank requires every Colombian
resident and institution borrowing under foreign currency loans, regardless of
the term or conditions of the loan, to maintain at the Central Bank a
non-interest bearing deposit for a percentage of the respective indebtedness and
during a term specified by the Central Bank's Board of Directors. Resolution 08,
dated May 5, 2000, lowered this deposit to zero.
The Bank is not required to register with the Central Bank loans in
foreign currency but must submit to the Central Bank a report of all foreign
currency loans made subject to certain exceptions.
NON-PERFORMING LOAN ALLOWANCE
The former Superintendency of Banking (now Superintendency of Finance)
has issued guidelines on non-performing loan allowances for Colombian credit
institutions. See Item 4. Information on the Company - E. Selected Statistical
Information - E.4. Summary of Loan Loss Experience - Allowance for Loan Losses.
89
LENDING ACTIVITIES
Through the issuance of Decrees 2360 and 2653, each of 1993, as
amended, the government set the maximum amounts that each financial institution
may lend to a single borrower (including for this purpose all related fees,
expenses and charges). These maximum amounts may not exceed 10% of a commercial
bank's Technical Capital. The limit is raised to 25% when any amounts lent above
5% of Technical Capital are secured by guarantees that comply with the financial
institutions' guidelines, in accordance with the requirements set forth in
Decrees 2360 and 2653. Also, according to Decree 1886 of 1994, the Bank may not
make a loan to any shareholder that holds directly more than 10% of its capital
stock, for one year after such shareholder reaches the 10% threshold. In no
event may a loan to a shareholder holding directly or indirectly 20% or more of
the Bank's capital stock exceed 20% of the Bank's Technical Capital. In
addition, no loan to a single financial institution may exceed 30% of the Bank's
Technical Capital, with the exception of loans funded by Colombian development
banks which have no limit. As of December 31, 2005, the Bank's lending limit per
borrower on an unconsolidated basis was Ps 217,610 million for unsecured loans
and Ps 544,025 million for secured loans. If a financial institution exceeds
these limits, the Superintendency of Finance may impose a fine up to twice the
amount by which any such loan exceeded the limit. At December 31, 2005, the Bank
was in compliance with these limitations.
Risk exposure calculation includes loans, leasing transactions and
equity and debt investments.
The Central Bank also has the authority to establish maximum limits on
the interest rates that commercial banks and other financial institutions may
charge on loans. However, interest rates must also be consistent with market
terms with a maximum limit established by the Superintendency of Finance.
OWNERSHIP RESTRICTIONS
The Bank is organized as a sociedad anonima under Colombian law and is
governed by laws that regulate the activities of private companies, such as the
Colombian Commerce Code. The Commerce Code requires companies such as the Bank
to have at least five shareholders at all times and provides that no single
shareholder may own 95% or more of the Bank's subscribed capital stock. Article
262 of the Colombian Commerce Code prohibits the Bank's Subsidiaries from
acquiring capital stock of the Bank.
Pursuant to Decree 663 adopted by the government on 1993, as amended
by Law 795 of 2003, any transaction resulting in an individual or corporation
holding 10% or more of any class of capital stock of any Colombian financial
institution, including in the case of BC, transactions resulting in holding ADRs
representing 10% or more of the outstanding stock of BC, must receive prior
authorization from the Superintendency of Finance. In granting its approval, the
Superintendency of Finance will evaluate the proposed transaction based on the
criteria and guidelines specified in Law 510 of 1999, as amended by Law 795 of
2003. Transactions entered into without the Superintendency of Finance's prior
approval are void and cannot be recorded in the stock registry of the financial
institution. These restrictions apply equally to foreign investors and Colombian
persons.
90
In addition to the above restriction, pursuant to Article 1.2.5.6 of
Resolution 400 of 1995, as amended, issued by the former Superintendency of
Securities (now Superintendency of Finance), any entity or group of entities
ultimately representing the same beneficial owner, directly or through one or
more intermediaries, may only become the beneficial owner of more than 10% of
the outstanding common stock of a company that is publicly traded in Colombia by
making a tender offer directed at all holders of the common stock of that
company, following the procedures established by the Superintendency of Finance.
Additionally, any beneficial owner of more than 10% of the outstanding common
stock of a company who wants to acquire additional common stock of the company
representing more than 5% of the company's outstanding common stock may only do
so by making a tender offer directed at all holders of the company's common
stock, following the procedures established by the Superintendency of Finance.
These requirements need not be met if the purchase is approved by 100% of the
holders of the outstanding capital stock of the company, or if the purchaser
acquires the percentages indicated above through a public stock auction made on
the Colombian Stock Exchange. Any transaction involving the sale of
publicly-traded stock of any Colombian company, including any sale of our
Preferred Shares (but not a sale of ADRs) for the peso-equivalent of 66,000
Unidades de Valor Real ("UVRs")(5) or more must be effected through the
Colombian Stock Exchange.
DEPOSIT INSURANCE
To protect the customers of commercial banks and certain financial
institutions, Resolution No. 1 of 1988 of the Board of Directors of Fogafin, as
amended, requires mandatory deposit insurance. Under this Resolution No. 1,
banks must pay an annual premium of 0.5% of total funds received on saving
accounts, checking accounts and certificates of deposit. If a bank is
liquidated, the deposit insurance will cover 75% of all funds deposited by an
individual or corporation with such bank, up to a maximum of Ps 20 million.
Thus, the maximum amount that a customer of a liquidated financial institution
is entitled to recover under deposit insurance is Ps 15 million.
INTERVENTION POWERS OF THE SUPERINTENDENCY OF FINANCE
According to laws 510 of 1999 and 795 of 2003, and subject to the
prior consent of the Advisory Board of the Ministry of Finance and the Minister
of Finance's approval, the Superintendency of Finance may seize the operations
and assets of a bank in order to manage it with the purpose of preventing its
liquidation or proceed with its liquidation, in the cases it cannot be avoided
if such bank:
- suspends the payment of its debts;
- does not allow the Superintendency of Finance to inspect its
records;
- has unlawfully refused to answer an interrogatory under oath
relating its business;
- repeatedly fails to comply with the instructions of the
Superintendency of Finance;
- repeatedly violates Colombian law or its own by-laws;
- repeatedly manages its operations in an unauthorized or
unsafe manner;
----------
(5) The UVR is an inflation-adjusted monetary index generally used for pricing
home-mortgage loans. As of December 31, 2005, the UVR was equivalent to Ps
153,49.
91
- allows its shareholders' equity to fall below 50% of its
outstanding capital stock;
- provides materially misleading information to the
Superintendency of Finance;
- fails to comply with applicable capital adequacy
requirements;
- fails to comply with the adopted recovery programs;
- fails to comply with the instruction of the Superintendency
of Finance for the exclusion of assets or liabilities, or
- fails to comply with the program of graduate closing
operations agreed with the Superintendency of Finance.
The Superintendency of Finance may immediately seize the operations
and assets of a bank if: (a) its Technical Capital falls below 40% of the
minimum capital adequacy requirements, or (b) the term to present a
restructuring program mandated by the Superintendency of Finance has lapsed or
its purpose has not been accomplished. Rather than seizing the operations and
assets of a bank, the Superintendency of Finance may adopt other preventive
measures, such as imposing additional reserve requirements on the commercial
bank, ordering the increase of its capital stock or the investment of certain or
all of its assets, and placing the bank under special surveillance.
ANTI-MONEY LAUNDERING PROVISIONS
The regulatory framework to prevent and control money laundering is
contained among others, in Decree 663 of 1993, External Circulars 040 of 2004,
and 034 of 2004 and 025 of 2003 issued by the former Banking Superintendency
(now Superintendency of Finance) as well as Law 599 of 2000 - The Colombian
Penal Code.
The External Circulars issued by the former the Superintendency of
Banking (now Superintendency of Finance), regulate and control anti-money
laundering issues for financial institutions in Colombia. These Circulars adopt
the latest guidelines related to anti-money laundering and other terrorist
activities established by the Financial Action Task Force on Money Laundering -
FATF. Colombia, as a member of the GAFI- SUD (a FATF style regional body)
follows all of FATF Forty Recommendations and FATF Eight Special
Recommendations. These rules emphasize "know your customer" policies, as well as
complete knowledge by financial institutions of their users and markets. They
also establish processes and parameters to identify and monitor a financial
institution's customers. According to these regulations, financial institutions
must cooperate with the competent authorities to prevent and control money
laundering and terrorism.
TROUBLED FINANCIAL INSTITUTIONS
In response to the crisis faced by the Colombian financial system
during the early 1980s, in 1985 the government created the Fondo de Garantias de
Instituciones Financieras ("Fogafin"), a fund meant to assist troubled financial
institutions. Subject to specific limitations, Fogafin is authorized to provide
equity (whether or not reducing the par value of the recipient's shares) and/or
secured credits to troubled financial institutions, and to insure deposits of
commercial banks and certain other financial institutions. In 1998 and 1999, to
address the adverse effects of the economic crisis, Law 550 (Ley de Reactivacion
Economica), Law 546
92
(Ley de Vivienda), External Circular 039 and External Circular 044 were also
adopted. These regulations sought to aid the recovery of the Colombian economy,
by helping troubled companies and had some influence on the Bank's credit
policies for such companies. Notably, under Law 546 of 1999, savings and loan
institutions were required to convert into commercial and savings banks. Also,
under this law, commercial banks cannot have participation in other commercial
banks for more than 5 years. Therefore, the Bank's participation in Conavi (a
commercial bank) was only permitted until December 2004. Nevertheless, on
December 3, 2004, considering the proposed Merger between Bancolombia, Conavi
and Corfinsura, the Superintendency of Banking (now Superintendency of Finance)
granted BC an extension of 9 months on the permitted term, allowing the Bank to
maintain its participation in Conavi until September 2005. On July 30, 2005
Conavi and Corfinsura (after its spin off) merged with and into Bancolombia as
surviving entity. Detailed information on the Merger can be found in Item 4.
Information on the Company - A. History and Development of the Company.
B.8. RAW MATERIALS
The Bank is not dependent on sources or availability of raw materials.
C. ORGANIZATIONAL STRUCTURE
The following is a list of BC's significant subsidiaries as of December 31,
2005:
SUBSIDIARIES
JURISDICTION OF
ENTITY INCORPORATION BUSINESS SHAREHOLDING
------ --------------------- ------------------------------ ------------
Almacenes Generales de Deposito Mercantil S.A.
ALMACENAR Colombia Warehousing and logistics 98.25%
Fiducolombia S.A. Colombia Trust 98.81%
Bancolombia Panama S.A. Panama Banking 100.00%
Bancolombia Cayman Cayman Islands Banking 100.00%
Leasing Colombia S.A. Colombia Leasing 100.00%
Compania Suramericana de Financiamiento Comercial
S.A. SUFINANCIAMIENTO Colombia Financial Services 99.99%
Colcorp S.A. Corporacion Financiera Colombia Investment Banking 100.00%
Valores Simesa S.A. Colombia Various Commercial Investments 71.75%
Inmobiliaria Bancol S.A. Colombia Real Estate Broker 99.09%
Fundicom S.A. Colombia Metals Engineering 79.90%
Unicargo de Colombia S.A. Colombia Freight Service 98.35%
Sistema de Inversiones y Negocios S.A. Panama Commercial Entity 100.00%
Sinesa Holding Company British Virgin Island Commercial Entity 100.00%
Todo UNO Colombia Colombia E-commerce 89.55%
Future Net Inc. Panama E-commerce 99.58%
Compania Metalurgica Colombiana S.A.
COMECOL (1) Colombia Metals Engineering 40.51%
Ditransa S.A. Colombia Freight Service 52.69%
93
JURISDICTION OF
ENTITY INCORPORATION BUSINESS SHAREHOLDING
------ --------------------- ------------------------------ ------------
Compania Suramericana de Arrendamiento
Operativo S.A. Surenting Colombia Operating leasing 75.50%
Suleasing Internacional S.A. Panama Leasing 76.00%
Suleasing Internacional Inc. USA Leasing 76.00%
Inversiones CFNS Ltda. Colombia Commercial entity 100.00%
Compania Suramericana de Valores S.A. Suvalor Colombia Securities Brokerage 100.00%
Suvalor Panama Panama Securities Brokerage 100.00%
Banco Corfinsura Internacional Inc. Puerto Rico Banking 100.00%
Multienlace S.A. Colombia Contact Center 98.20%
3001 S.A. (in the process of being wound up) Colombia E-commerce 98.96%
----------
(1) Controlled through other subsidiaries (Valores Simesa S.A. and Colcorp
S.A.)
D. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2005, the Bank owned Ps 754.56 billion in
equipment. Ps 240.27 billion correspond to land and buildings, of which
approximately 86.64% are administrative real estate and branches, located in 82
municipalities, but mainly in the cities of Bogota, Medellin and Cali. Ps 131.27
billion correspond to computer equipment, of which 26.74% corresponds to the
central computer and servers and the rest are PCs, ATMs, telecommunications
equipment and other equipment.
In addition to its own branches, the Bank occupies 402 rented offices.
The Bank does not have any liens on its property.
94
E. SELECTED STATISTICAL INFORMATION
The following information is included for analytical purposes and
should be read in conjunction with Item 5. Operating and Financial Review and
Prospects.
Consolidated Selected Statistical Information at December 31, 2004
include the selected statistical information of the parent company and its
subsidiaries, without reflecting any effect of the Merger and Consolidated
selected statistical information at December 31, 2005 correspond to the Bank
plus subsidiaries, including all additional subsidiaries acquired as a result of
the Merger with Conavi and Corfinsura (spun-off corporation); for this reason,
selected statistical information for 2004 and 2005 should be read taking into
account the impacts of the Merger.
E.1. DISTRIBUTION OF ASSETS, LIABILITIES AND STOCKHOLDERS' EQUITY; INTEREST
RATES AND INTEREST DIFFERENTIAL
Average balances have been calculated as follows: for each month, the
actual month-end balances were established. The average balance for each period
is the average of such month-end balances. For purposes of the presentation in
the following tables, non-performing loans have been treated as
non-interest-earning assets.
REAL AVERAGE INTEREST RATES
The real average interest rates set forth in the tables below have
been calculated by adjusting the nominal average interest rates on
peso-denominated assets and liabilities using the following formula:
1 + N(P)
R(P)= -------- -1
1 + I
WHERE:
R(P) = real average interest rate on peso-denominated assets and
liabilities for the period.
N(P) = nominal average interest rate on peso-denominated assets and
liabilities for the period.
I = inflation rate in Colombia for the period (based on the Colombian
wholesale inflation rate).
Under this adjustment formula, assuming positive nominal average
interest rates, the real average interest rate on a portfolio of
peso-denominated assets or liabilities would be equal to the nominal
average interest rate on that portfolio if the inflation rate were
zero. The real average interest rate can be negative for a portfolio
of peso-denominated interest-earning assets when the inflation rate
for the period is higher than the average nominal rate of this
interest-earning asset portfolio for the same period. In addition,
the real average interest rate would be negative if the inflation
rate were greater than the average nominal interest rate.
95
AVERAGE BALANCE SHEET
The following tables show for the years ended December 31, 2003, 2004
and 2005, respectively:
- average annual balances calculated using actual month-end
balances for all of the Bank's assets and liabilities;
- interest income and expense amounts; and
- nominal and real interest rates for the bank's
interest-earning assets and interest-bearing liabilities.
In the table below, the nominal rate for dollar-denominated items is
also considered to be the real interest rate, given that this activity
originated outside of Colombia and would not be impacted by the inflation and
devaluation levels that would impact domestic activity.
96
AVERAGE BALANCE SHEET AND INCOME FROM INTEREST-EARNING ASSETS
FOR THE FISCAL YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
2003 2004
--------------------------------------------- ---------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
------------ ----------- -------- -------- ------------ ----------- -------- --------
(Ps million, except percentages)
ASSETS(6)
INTEREST-EARNING ASSETS(1):
Overnight funds(5)
Peso-denominated ................ Ps 2,158 Ps 16 0.7% -5.4% Ps 7,681 Ps 1,759 22.9% 16.5%
Dollar-denominated .............. 403,788 4,747 1.2% 1.2% 332,953 5,414 1.6% 1.6%
------------ ----------- ------------ -----------
Total ........................ 405,946 4,763 1.2% 340,634 7,173 2.1%
Investment securities (3)
Peso-denominated ................ 2,328,676 309,287 13.3% 6.4% 2,937,411 382,648 13.0% 7.1%
Dollar-denominated .............. 1,719,568 236,920 13.8% 13.8% 1,654,701 166,680 10.1% 10.1%
------------ ----------- ------------ -----------
Total ........................ 4,048,244 546,207 13.5% 4,592,112 549,328 12.0%
Loans(2) (4)
Peso-denominated ................ 5,526,391 900,740 16.3% 9.2% 7,043,820 1,127,833 16.0% 10.0%
Dollar-denominated .............. 1,485,688 76,825 5.2% 5.2% 1,928,495 107,572 5.6% 5.6%
------------ ----------- ------------ -----------
Total ........................ 7,012,079 977,565 13.9% 8,972,315 1,235,405 13.8%
Total interest-earning assets
Peso-denominated ................ 7,857,225 1,210,043 15.4% 8.4% 9,988,912 1,512,240 15.1% 9.1%
Dollar-denominated .............. 3,609,044 318,492 8.8% 8.8% 3,916,149 279,666 7.1% 7.1%
------------ ----------- ------------ -----------
Total ........................ 11,466,269 1,528,535 13.3% 13,905,061 1,791,906 12.9%
NON INTEREST-EARNING ASSETS:
Cash due from banks and Central
Bank
Peso-denominated ............. 463,495 503,402
Dollar-denominated ........... 161,124 205,868
------------ ------------
Total ........................ 624,619 709,270
Allowance for loan losses
Peso-denominated ................ (293,112) (335,539)
Dollar-denominated .............. (69,455) (89,142)
------------ ------------
Total ........................ (362,567) (424,681)
Non-performing loans
Peso-denominated ................ 85,318 86,024
Dollar-denominated .............. 17,063 7,119
------------ ------------
Total ........................ 102,381 93,143
Customers' acceptances
Peso-denominated ................ 153,776 545,029
Dollar-denominated .............. (127,673) (487,565)
------------ ------------
Total ........................ 26,103 57,464
Accounts receivable, net
Peso-denominated ................ 217,143 138,710
AVERAGE BALANCE SHEET AND INCOME FROM
INTEREST-EARNING ASSETS FOR THE FISCAL YEARS
ENDED DECEMBER 31,
---------------------------------------------
2005
---------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------ ----------- -------- --------
(Ps million, except percentages)
ASSETS(6)
INTEREST-EARNING ASSETS(1):
Overnight funds(5)
Peso-denominated ................ Ps 55,779 Ps 3,032 5.4% 0.6%
Dollar-denominated .............. 433,111 13,366 3.1% 3.1%
------------ -----------
Total ........................ 488,890 16,398 3.4%
Investment securities (3)
Peso-denominated ................ 5,851,619 716,771 12.2% 7.1%
Dollar-denominated .............. 1,626,509 107,938 6.6% 6.6%
------------ -----------
Total ........................ 7,478,128 824,709 11.0%
Loans(2) (4)
Peso-denominated ................ 13,794,002 2,110,574 15.3% 10.0%
Dollar-denominated .............. 3,483,715 231,172 6.6% 6.6%
------------ -----------
Total ........................ 17,277,717 2,341,746 13.6%
Total interest-earning assets
Peso-denominated ................ 19,701,400 2,830,377 14.4% 9.1%
Dollar-denominated .............. 5,543,335 352,476 6.4% 6.4%
------------ -----------
Total ........................ 25,244,735 3,182,853 12.6%
NON INTEREST-EARNING ASSETS:
Cash due from banks and Central
Bank Peso-denominated ........... 964,410
Dollar-denominated .............. 237,608
------------
Total ........................ 1,202,018
Allowance for loan losses
Peso-denominated ................ (605,615)
Dollar-denominated .............. (90,401)
------------
Total ........................ (696,016)
Non-performing loans
Peso-denominated ................ 246,580
Dollar-denominated .............. 10,091
------------
Total ........................ 256,671
Customers' acceptances
Peso-denominated ................ 1,070,341
Dollar-denominated .............. (975,030)
------------
Total ........................ 95,311
Accounts receivable, net
Peso-denominated ................ 303,137
97
AVERAGE BALANCE SHEET AND INCOME FROM INTEREST-EARNING ASSETS
FOR THE FISCAL YEARS ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
2003 2004
--------------------------------------------- ---------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE BALANCE EARNED RATE RATE
------------ ----------- -------- -------- ------------ ----------- -------- --------
(Ps million, except percentages)
Dollar-denominated .............. 43,232 11,947
------------ ------------
Total ........................ 260,375 150,657
Foreclosed assets, net
Peso-denominated ................ 38,063 23,890
Dollar-denominated .............. -- --
------------ ------------
Total ........................ 38,063 23,890
Premises and equipment, net (4) .... --
Peso-denominated ................ 627,628 346,870
Dollar-denominated .............. 119,042 10,704
------------ ------------
Total ........................ 746,670 357,574
Other assets ....................... --
Peso-denominated ................ 804,439 1,106,888
Dollar-denominated .............. 94,429 (7,523)
------------ ------------
Total ........................ 898,868 1,099,365
Total non interest-earning assets
Peso-denominated ................ 2,096,750 2,415,274
Dollar-denominated .............. 237,762 (348,592)
------------ ------------
Total ........................ 2,334,512 2,066,682
Total interest and non interest-
earnings assets
Peso-denominated ................ 9,953,975 1,210,043 12,404,186 1,512,240
Dollar-denominated .............. 3,846,806 318,492 3,567,557 279,666
------------ ----------- ------------ -----------
TOTAL ASSETS ................. Ps13,800,781 Ps1,528,535 Ps15,971,743 Ps1,791,906
============ =========== ============ ===========
AVERAGE BALANCE SHEET AND INCOME FROM
INTEREST-EARNING ASSETS FOR THE FISCAL YEARS
ENDED DECEMBER 31,
---------------------------------------------
2005
---------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------ ----------- -------- --------
(Ps million, except percentages)
Dollar-denominated .............. 15,287
------------
Total ........................ 318,424
Foreclosed assets, net
Peso-denominated ................ 56,641
Dollar-denominated .............. --
------------
Total ........................ 56,641
Premises and equipment, net (4) ....
Peso-denominated ................ 557,866
Dollar-denominated .............. 20,342
------------
Total ........................ 578,208
Other assets .......................
Peso-denominated ................ 1,506,162
Dollar-denominated .............. 149,404
------------
Total ........................ 1,655,566
Total non interest-earning assets
Peso-denominated ................ 4,099,522
Dollar-denominated .............. (632,699)
------------
Total ........................ 3,466,823
Total interest and non interest-
earnings assets
Peso-denominated ................ 23,800,922 2,830,377
Dollar-denominated .............. 4,910,636 352,476
------------ -----------
TOTAL ASSETS ................. Ps28,711,558 Ps3,182,853
============ ===========
----------
(1) Throughout this analysis, the nominal interest rate for the
dollar-denominated activity is also considered to be the real interest
rate, given that this activity originated outside of Colombia and would not
be impacted by the inflation and devaluation levels that would impact
domestic activity. Individual item's interest rate subtotals are based on
weighted averages using the average balances of the item.
(2) Includes performing loans only.
(3) Variation in the average nominal interest rate for 2003, reflect new
regulations issued by the Superintendency of Banking (now Superintendency
of Finance) and effective as of September 1, 2002. See note 2 (i) to the
financial statements.
(4) 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, instead of recording financial
leases as property, plant and equipment, companies must account for them in
their loan portfolio.
(5) Overnight Funds interest earned is different to this same concept in the
consolidated statements of operations for a commissions reclassifications.
(6) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for the years 2001,
2002, 2003 and 2004 were reclassified. This change did not have any impact
in the net income.
98
AVERAGE BALANCE SHEET AND INTEREST PAID ON
INTEREST-BEARING LIABILITIES FOR THE
FISCAL YEARS ENDED DECEMBER 31, 2003
----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------ --------- -------- --------
(Ps million, except percentages)
LIABILITIES AND SHARE-HOLDERS' EQUITY (1)
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated......................... Ps 154,098 Ps 3,596 2.3% -3.9%
Dollar-denominated....................... 851,005 8,026 0.9% 0.9%
------------ ---------
Total................................. 1,005,103 11,622 1.2%
Savings deposits
Peso-denominated......................... 2,452,320 112,875 4.6% -1.8%
Dollar-denominated....................... 118,905 1,093 0.9% 0.9%
------------ ---------
Total................................. 2,571,225 113,968 4.4%
Time deposits
Peso-denominated......................... 2,477,658 200,881 8.1% 1.5%
Dollar-denominated....................... 1,742,845 49,030 2.8% 2.8%
------------ ---------
Total................................. 4,220,503 249,911 5.9%
Overnight funds
Peso-denominated......................... 691,205 35,247 5.1% -1.3%
Dollar-denominated....................... 32,776 3,176 9.7% 9.7%
------------ ---------
Total................................. 723,981 38,423 5.3%
Borrowings from domestic development
banks
Peso-denominated......................... 654,684 57,537 8.8% 2.2%
Dollar-denominated....................... 33,538 919 2.7% 2.7%
------------ ---------
Total................................. 688,222 58,456 8.5%
Interbank borrowings
Peso-denominated......................... -- --
Dollar-denominated....................... 317,258 5,293 1.7% 1.7%
------------ ---------
Total................................. 317,258 5,293 1.7%
Long-term debt
Peso-denominated......................... 64,299 2,840 4.4% -1.9%
Dollar-denominated....................... -- --
------------ ---------
Total................................. 64,299 2,840 4.4%
Total interest-bearing liabilities
Peso-denominated......................... 6,494,264 412,976 6.4% -0.1%
Dollar-denominated....................... 3,096,327 67,537 2.2% 2.2%
------------ ---------
Total................................. 9,590,591 480,513 5.0%
AVERAGE BALANCE SHEET AND INTEREST PAID ON
INTEREST-BEARING LIABILITIES FOR THE
FISCAL YEARS ENDED DECEMBER 31, 2004
----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------ --------- -------- --------
(Ps million, except percentages)
LIABILITIES AND SHARE-HOLDERS' EQUITY (1)
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated......................... Ps 189,362 Ps 4,822 2.5% -2.8%
Dollar-denominated....................... 985,168 8,683 0.9% 0.9%
------------ ---------
Total................................. 1,174,530 13,505 1.1%
Savings deposits
Peso-denominated......................... 2,886,563 140,237 4.9% -0.6%
Dollar-denominated....................... 133,130 1,051 0.8% 0.8%
------------ ---------
Total................................. 3,019,693 141,288 4.7%
Time deposits
Peso-denominated......................... 2,672,930 229,416 8.6% 2.9%
Dollar-denominated....................... 1,592,067 38,142 2.4% 2.4%
------------ ---------
Total................................. 4,264,997 267,558 6.3%
Overnight funds
Peso-denominated......................... 802,920 37,890 4.7% -0.7%
Dollar-denominated....................... 61,501 3,326 5.4% 5.4%
------------ ---------
Total................................. 864,421 41,216 4.8%
Borrowings from domestic development
banks
Peso-denominated......................... 777,871 73,383 9.4% 3.7%
Dollar-denominated....................... 8,491 166 2.0% 2.0%
------------ ---------
Total................................. 786,362 73,549 9.4%
Interbank borrowings
Peso-denominated......................... -- --
Dollar-denominated....................... 312,969 7,389 2.4% 2.4%
------------ ---------
Total................................. 312,969 7,389 2.4%
Long-term debt
Peso-denominated......................... 443,522 41,239 9.3% 3.6%
Dollar-denominated....................... -- --
------------ ---------
Total................................. 443,522 41,239 9.3%
Total interest-bearing liabilities
Peso-denominated......................... 7,773,168 526,987 6.8% 1.2%
Dollar-denominated....................... 3,093,326 58,757 1.9% 1.9%
------------ ---------
Total................................. 10,866,494 585,744 5.4%
AVERAGE BALANCE SHEET AND INTEREST PAID ON
INTEREST-BEARING LIABILITIES FOR THE
FISCAL YEARS ENDED DECEMBER 31, 2005
------------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------ ----------- -------- --------
(Ps million, except percentages)
LIABILITIES AND SHARE-HOLDERS' EQUITY (1)
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated......................... Ps 188,678 Ps 5,223 2.8% -2.0%
Dollar-denominated....................... 887,497 15,088 1.7% 1.7%
------------ -----------
Total................................. 1,076,175 20,311 1.9%
Savings deposits
Peso-denominated......................... 6,905,512 240,016 3.5% -1.3%
Dollar-denominated....................... 135,822 1,872 1.4% 1.4%
------------ -----------
Total................................. 7,041,334 241,888 3.4%
Time deposits
Peso-denominated......................... 4,869,923 393,898 8.1% 3.1%
Dollar-denominated....................... 1,760,073 55,468 3.2% 3.2%
------------ -----------
Total................................. 6,629,996 449,366 6.8%
Overnight funds
Peso-denominated......................... 1,039,540 68,830 6.6% 1.7%
Dollar-denominated....................... 122,134 5,080 4.2% 4.2%
------------ -----------
Total................................. 1,161,674 73,910 6.4%
Borrowings from domestic development
banks
Peso-denominated......................... 1,970,391 152,791 7.8% 2.8%
Dollar-denominated....................... 71,513 3,718 5.2% 5.2%
------------ -----------
Total................................. 2,041,904 156,509 7.7%
Interbank borrowings
Peso-denominated......................... -- --
Dollar-denominated....................... 1,349,987 54,630 4.0% 4.0%
------------ -----------
Total................................. 1,349,987 54,630 4.0%
Long-term debt
Peso-denominated......................... 1,812,802 153,658 8.5% 3.5%
Dollar-denominated....................... -- --
------------ -----------
Total................................. 1,812,802 153,658 8.5%
Total interest-bearing liabilities
Peso-denominated......................... 16,786,846 1,014,416 6.0% 1.1%
Dollar-denominated....................... 4,327,026 135,856 3.1% 3.1%
------------ -----------
Total................................. 21,113,872 1,150,272 5.4%
99
AVERAGE BALANCE SHEET AND INTEREST PAID ON
INTEREST-BEARING LIABILITIES FOR THE FISCAL
YEARS ENDED DECEMBER 31,
2003
----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------ --------- -------- --------
(Ps million, except percentages)
NON-INTEREST-BEARING LIABILITIES:
Checking accounts
Peso-denominated......................... 1,685,115
Dollar-denominated....................... --
------------
Total................................. 1,685,115
Other deposits
Peso-denominated......................... 64,013
Dollar-denominated....................... 63,641
------------
Total................................. 127,654
Bank Acceptances Outstanding
Peso-denominated......................... 3,477
Dollar-denominated....................... 28,973
------------
Total................................. 32,450
Other liabilities
Peso-denominated......................... 821,364
Dollar-denominated....................... 36,127
------------
Total................................. 857,491
Shareholders' equity
Peso-denominated......................... 1,130,654
Dollar-denominated....................... 376,826
------------
Total................................. 1,507,480
Total non-interest bearing liabilities
and shareholders' equity
Peso-denominated......................... 3,704,623
Dollar-denominated....................... 505,567
------------
Total................................. 4,210,190
Total interest and non-interest bearing
liabilities and shareholders' equity
Peso-denominated......................... 10,198,887 412,976
Dollar-denominated....................... 3,601,894 67,537
------------ ---------
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY................................... Ps13,800,781 Ps480,513
============ =========
AVERAGE BALANCE SHEET AND INTEREST PAID ON
INTEREST-BEARING LIABILITIES FOR THE FISCAL
YEARS ENDED DECEMBER 31,
2004
----------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------ --------- -------- --------
(Ps million, except percentages)
NON-INTEREST-BEARING LIABILITIES:
Checking accounts
Peso-denominated......................... 1,926,334
Dollar-denominated....................... --
------------
Total................................. 1,926,334
Other deposits
Peso-denominated......................... 79,552
Dollar-denominated....................... 107,589
------------
Total................................. 187,141
Bank Acceptances Outstanding
Peso-denominated......................... 6,758
Dollar-denominated....................... 40,039
------------
Total................................. 46,797
Other liabilities
Peso-denominated......................... 1,099,367
Dollar-denominated....................... 45,335
------------
Total................................. 1,144,702
Shareholders' equity
Peso-denominated......................... 1,431,112
Dollar-denominated....................... 369,163
------------
Total................................. 1,800,275
Total non-interest bearing liabilities
and shareholders' equity
Peso-denominated......................... 4,543,123
Dollar-denominated....................... 562,126
------------
Total................................. 5,105,249
Total interest and non-interest bearing
liabilities and shareholders' equity
Peso-denominated......................... 12,316,291 526,987
Dollar-denominated....................... 3,655,452 58,757
------------ ---------
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY................................... Ps15,971,743 Ps585,744
============ =========
AVERAGE BALANCE SHEET AND INTEREST PAID ON
INTEREST-BEARING LIABILITIES FOR THE FISCAL
YEARS ENDED DECEMBER 31,
2005
------------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------ ----------- -------- --------
(Ps million, except percentages)
NON-INTEREST-BEARING LIABILITIES:
Checking accounts
Peso-denominated......................... 2,378,865
Dollar-denominated....................... --
------------
Total................................. 2,378,865
Other deposits
Peso-denominated......................... 154,719
Dollar-denominated....................... 93,753
------------
Total................................. 248,472
Bank Acceptances Outstanding
Peso-denominated......................... 9,666
Dollar-denominated....................... 46,997
------------
Total................................. 56,663
Other liabilities
Peso-denominated......................... 1,847,002
Dollar-denominated....................... 60,104
------------
Total................................. 1,907,106
Shareholders' equity
Peso-denominated......................... 2,565,158
Dollar-denominated....................... 441,422
------------
Total................................. 3,006,580
Total non-interest bearing liabilities
and shareholders' equity
Peso-denominated......................... 6,955,410
Dollar-denominated....................... 642,276
------------
Total................................. 7,597,686
Total interest and non-interest bearing
liabilities and shareholders' equity
Peso-denominated......................... 23,742,256 1,014,416
Dollar-denominated....................... 4,969,302 135,856
------------ -----------
TOTAL LIABILITIES AND SHAREHOLDERS
EQUITY................................... Ps28,711,558 Ps1,150,272
============ ===========
----------
(1) Throughout this analysis, the nominal interest rate for the
dollar-denominated activity is also considered to be the real interest
rate, given that this activity originated outside of Colombia and would not
be impacted by the inflation and devaluation levels that would impact
domestic activity. Individual item's interest rate subtotals are based on
weighted averages using the average balances of the item.
100
CHANGES IN NET INTEREST INCOME AND EXPENSES--VOLUME AND RATE ANALYSIS
The following table allocates, by currency of denomination, changes in
the Bank's net interest income to changes in average volume, changes in nominal
rates and the net variance caused by changes in both average volume and nominal
rate for the fiscal year ended December 31, 2005 compared to the fiscal year
ended December 31, 2004; and the fiscal year ended December 31, 2004 compared to
the fiscal year ended December 31, 2003. Volume and rate variances have been
calculated based on movements in average balances over the period and changes in
nominal interest rates on average interest-earning assets and average
interest-bearing liabilities. Net changes attributable to changes in both volume
and interest rate have been allocated to the change due to changes in volume.
2003-2004 2004-2005
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
--------------------------------- --------------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
--------- --------- --------- ----------- ---------- -----------
(Ps million)
INTEREST-EARNING ASSETS:
Overnight funds
Peso-denominated ......... Ps 1,265 Ps 478 Ps 1,743 Ps 2,614 Ps (1,341) Ps 1,273
Dollar-denominated ....... (1,152) 1,819 667 3,091 4,861 7,952
--------- --------- --------- ----------- ---------- -----------
Total ................. 113 2,297 2,410 5,705 3,520 9,225
Investment securities
Peso-denominated ......... 79,298 (5,937) 73,361 356,965 (22,841) 334,124
Dollar-denominated ....... (6,534) (63,706) (70,240) (1,871) (56,871) (58,742)
--------- --------- --------- ----------- ---------- -----------
Total ................. 72,764 (69,643) 3,121 355,094 (79,712) 275,382
Loans
Peso-denominated ......... 242,966 (15,873) 227,093 1,032,823 (50,082) 982,741
Dollar-denominated ....... 24,700 6,047 30,747 103,201 20,399 123,600
--------- --------- --------- ----------- ---------- -----------
Total ................. 267,666 (9,826) 257,840 1,136,024 (29,683) 1,106,341
Total interest-earning assets
Peso-denominated ......... 323,529 (21,332) 302,197 1,395,333 (77,195) 1,318,138
Dollar-denominated ....... 17,014 (55,840) (38,826) 103,466 (30,656) 72,810
--------- --------- --------- ----------- ---------- -----------
TOTAL ................. Ps340,543 Ps(77,172) Ps263,371 Ps1,498,799 Ps(107,851) Ps1,390,948
========= ========= ========= =========== ========== ===========
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated ......... Ps 898 Ps 328 Ps 1,226 Ps (19) Ps 420 Ps 401
Dollar-denominated ....... 1,182 (525) 657 (1,660) 8,065 6,405
--------- --------- --------- ----------- ---------- -----------
Total ................. 2,080 (197) 1,883 (1,679) 8,485 6,806
Savings deposits
Peso-denominated ......... 21,097 6,265 27,362 139,687 (39,908) 99,779
Dollar-denominated ....... 112 (154) (42) 37 784 821
--------- --------- --------- ----------- ---------- -----------
Total ................. 21,209 6,111 27,320 139,724 (39,124) 100,600
Time deposits
Peso-denominated ......... 16,760 11,775 28,535 177,701 (13,219) 164,482
Dollar-denominated ....... (3,612) (7,276) (10,888) 5,295 12,031 17,326
--------- --------- --------- ----------- ---------- -----------
Total ................. 13,148 4,499 17,647 182,996 (1,188) 181,808
Overnight funds
Peso-denominated ......... 5,272 (2,629) 2,643 15,667 15,273 30,940
Dollar-denominated ....... 1,553 (1,403) 150 2,522 (768) 1,754
--------- --------- --------- ----------- ---------- -----------
Total ................. 6,825 (4,032) 2,793 18,189 14,505 32,694
Borrowings from domestic
development banks
Peso-denominated ......... 11,621 4,225 15,846 92,472 (13,064) 79,408
Dollar-denominated ....... (490) (263) (753) 3,277 275 3,552
--------- --------- --------- ----------- ---------- -----------
Total ................. 11,131 3,962 15,093 95,749 (12,789) 82,960
101
2003-2004 2004-2005
INCREASE (DECREASE) INCREASE (DECREASE)
DUE TO CHANGES IN: DUE TO CHANGES IN:
--------------------------------- --------------------------------------
NET NET
VOLUME RATE CHANGE VOLUME RATE CHANGE
--------- --------- --------- ----------- ---------- -----------
(Ps million)
Interbank borrowings
Peso-denominated ......... -- -- -- -- -- --
Dollar-denominated ....... (101) 2,197 2,096 41,965 5,276 47,241
-------- -------- --------- --------- --------- ---------
Total ................. (101) 2,197 2,096 41,965 5,276 47,241
Long-term debt
Peso-denominated ......... 35,260 3,139 38,399 116,064 (3,645) 112,419
Dollar-denominated ....... -- -- -- -- -- --
-------- -------- --------- --------- --------- ---------
Total ................. 35,260 3,139 38,399 116,064 (3,645) 112,419
Total interest-bearing
liabilities
Peso-denominated ......... 90,908 23,103 114,011 541,572 (54,143) 487,429
Dollar-denominated ....... (1,356) (7,424) (8,780) 51,436 25,663 77,099
-------- -------- --------- --------- --------- ---------
TOTAL ................. Ps89,552 Ps15,679 Ps105,231 Ps593,008 Ps(28,480) Ps564,528
======== ======== ========= ========= ========= =========
----------
(1) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for the years 2001,
2002, 2003 and 2004 were reclassified. This change did not have any impact
on the net income.
INTEREST-EARNING ASSETS--NET INTEREST MARGIN AND SPREAD
The following table analyzes the levels of average interest-earning
assets and net interest income of the Bank and illustrates the comparative net
interest margin and interest spread obtained for the fiscal years ended December
31, 2003, 2004 and 2005, respectively.
INTEREST-EARNING ASSETS-YIELD SPREAD
FOR THE FISCAL YEAR ENDED DECEMBER 31,
------------------------------------------
2003 2004 2005
------------ ------------ ------------
(in millions of pesos, except percentages)
Total average interest-earning assets
Peso-denominated..................... Ps 7,857,225 Ps 9,988,912 Ps19,701,400
Dollar-denominated................... 3,609,044 3,916,149 5,543,335
------------ ------------ ------------
TOTAL............................. Ps11,466,269 Ps13,905,061 Ps25,244,735
Net interest earned (1)
Peso-denominated..................... Ps 797,067 Ps 985,253 Ps 1,815,961
Dollar-denominated................... 250,955 220,909 216,620
------------ ------------ ------------
TOTAL............................. Ps 1,048,022 Ps 1,206,162 Ps 2,032,581
Average yield on interest-earning assets
Peso-denominated..................... 15.4% 15.1% 14.4%
Dollar-denominated................... 8.8% 7.1% 6.4%
------------ ------------ ------------
TOTAL............................. 13.3% 12.9% 12.6%
Net interest margin (2)
Peso-denominated..................... 10.1% 9.9% 9.2%
Dollar-denominated................... 7.0% 5.6% 3.9%
------------ ------------ ------------
TOTAL............................. 9.1% 8.7% 8.1%
Interest spread (3)
Peso-denominated..................... 9.0% 8.4% 8.3%
Dollar-denominated................... 6.6% 5.2% 3.2%
------------ ------------ ------------
TOTAL............................. 8.3% 7.5% 7.2%
----------
(1) Net interest earned is interest income less interest paid and includes
interest earned on investments.
(2) Net interest margin is net interest income divided by total average
interest-earning assets.
(3) Interest spread is the difference between the average yield on
interest-earning assets and the average rate paid on interest-bearing
liabilities.
102
E.2. INVESTMENT PORTFOLIO
The Bank acquires and holds investment securities for liquidity and
other strategic purposes, or when it is required by law, including fixed income
debt and equity securities.
As of September 1, 2002, investments had to be classified as
"trading", "available for sale" or "held to maturity". Trading investments are
those acquired primarily to obtain profits from fluctuations in short-term
prices and are recorded at market value. The difference between current and
previous market value is added to or subtracted from the value of the investment
and credited or charged to earnings. "Available for sale" investments are those
held for at least one year (except for Bancolombia Panama's "available for sale"
investments, which have no term restrictions) and they are recorded at market
value with changes to the values of these securities recorded in a separate
account in the equity section. "Held to maturity" investments are those acquired
to be held until maturity and are valued at amortized cost. As of December 31,
2005, the value of BC's dollar- and peso-denominated portfolio on a consolidated
basis was Ps 8,258,947 million.
Investments are fully reviewed in June and December and partially
reviewed in March and September of each year for impairment by considering the
related solvency risk, market exposure, currency exchange and country risk.
Investment securities with a rating by external agencies recognized by the
Superintendency of Finance cannot be recorded on the balance sheet of the Bank
for an amount higher than certain percentages of the face value (shown in the
table below), including the accrued income or excluding returns received in an
anticipated manner. Depending on the results of the review and on the likelihood
of loss of the investment, allowances are recorded for 10% to 100% of the cost
of the investment, and for 100% of accrued income.
LONG - TERM CLASSIFICATION MAXIMUM FACE VALUE (%)
-------------------------- ----------------------
BB+, BB, BB- Ninety (90)
B+, B, B- Seventy (70)
C Fifty (50)
D, E Zero (0)
Allowances for investment securities for which no computation methods
have been provided by the Superintendency of Finance are calculated based on
other methods. If there are no such methods, the solvency risk levels, as
defined by the Superintendency of Finance, have to be used: "A"- Normal, "B"-
Subnormal, "C"- Deficient, "D"- Doubtful Recovery, and "E"- Unrecoverable. Fixed
rate or variable rate investments classified in categories B, C, D and E cannot
be recorded on the balance sheet of the Bank for an amount higher than 80%, 60%,
40% and 0%, respectively, of the face value, including the accrued income or
excluding returns received in an anticipated manner. Furthermore, an equity
investment's net value cannot be recorded on the balance sheet of the Bank for
an amount higher than 80%, 60%, 40% and 0% of the purchase cost, respectively.
Internal or external debt securities issued or guaranteed by the
Republic of Colombia are not subject to this adjustment, as well as those issued
by the Central Bank and those issued or guaranteed by Fogafin.
As of December 31, 2005, BC has recorded Ps 5,936 of allowances for 16
investment debt securities.
The following table sets forth the Bank's fair value of investments in
government and corporate securities and certain other financial investments as
of the dates indicated:
103
AS OF DECEMBER 31,
---------------------------------------------
2003(1)(2)(3) 2004(1)(2)(4) 2005(1)(2)(5)
------------- ------------- -------------
(in millions of pesos)
DOLLAR-DENOMINATED
Securities issued by the Colombian Government ... Ps1,303,377 Ps 805,602 Ps 667,713
Euronotes and Eurobonds ......................... 297,906 326,534 737,328
Securities issued by foreign governments ........ 87,109 24,085 252,263
Others .......................................... 98,324 186,232 103,357
----------- ----------- -----------
Subtotal ..................................... 1,786,716 1,342,453 1,760,661
----------- ----------- -----------
PESO-DENOMINATED
Securities issued by the Colombian Government ... 1,887,881 2,900,305 5,010,982
Securities issued by the Central Bank ........... 6,815 4,190 2,582
Securities issued by government entities ........ 107,479 45,806 111,114
Securities issued by other financial entities ... 282,187 457,378 985,835
Others .......................................... 91,342 167,721 387,773
----------- ----------- -----------
Subtotal ..................................... 2,375,704 3,575,400 6,498,286
----------- ----------- -----------
TOTAL ..................................... Ps4,162,420 Ps4,917,853 Ps8,258,947
=========== =========== ===========
----------
(1) Includes debt securities only. Net in equity securities were Ps 174,304
million, Ps 332,358 million and Ps 200,754 million for 2003, 2004 and 2005,
respectively.
(2) These amounts are net of allowances for decline in value which were Ps
9,171 million for 2003, Ps 4,939 million for 2004 and Ps 5,936 million for
2005.
(3) As of December 31, 2003, BC held one security issued by the U.S. Treasury
Department for Ps 78,544 million (US$ 27,979,448) and one security issued
by the Republic of El Salvador for Ps 8,565 million (US$ 3,051,198).
(4) As of December 31, 2004, BC holds one security issued by the Republic of
Brazil for Ps 14,327 million (US$ 5,995), one security issued by the
Republic of Panama for Ps 5,026 million (US$ 2,103) and one security issued
by the Republic of El Salvador for Ps 4,732 million (US$ 1,980).
(5) As of December 31, 2005, BC held securities issued by the Republic of
Brazil for Ps 247,425 million (US$ 108,319,266) and one security issued by
the Republic of Panama for Ps 4,838 million (US$ 2,118,008).
INVESTMENT SECURITIES PORTFOLIO MATURITY
The following table analyzes the remaining maturities and weighted
average nominal yields of the Bank's investment securities as of December 31,
2005:
AS OF DECEMBER 31, 2005
----------------------------------------------------------------------------------
MATURING IN ONE YEAR OR MATURING AFTER ONE YEAR MATURING AFTER FIVE YEARS
LESS THROUGH FIVE YEARS THROUGH TEN YEARS
-------------------------- --------------------------- -------------------------
BALANCE(1) (3) YIELD %(2) BALANCE(1) (3) YIELD %(2) BALANCE(1) YIELD %(2)
-------------- ---------- -------------- ----------- ------------ -----------
(in millions of pesos, except yields)
DOLLAR-DENOMINATED:
Securities issued by the
Colombian government .... Ps 36,384 5.75% Ps 582,458 5.62% Ps 44,039 6.28%
Euronotes and Eurobonds .... 322,204 5.16% 415,124 6.20% -- --
Securities issued by foreign
governments ............. 7,781 4.14% 244,482 5.96% -- --
Others ..................... 47,320 4.36% 48,349 5.46% 7,688 8.50%
------------ ----------- -----------
Subtotal ................ 413,689 5.10% 1,290,413 5.86% 51,727 6.61%
------------ ----------- -----------
PESO-DENOMINATED
Securities issued by the
Colombian government .... 1,719,104 5.84% 2,413,722 6.29% 876,645 4.00%
Securities issued by
the Central Bank ........ 2,564 0.97% 18 1.63% -- --
AS OF DECEMBER 31, 2005
-------------------------------------------------
MATURING AFTER TEN YEARS TOTAL
------------------------ -----------------------
BALANCE(1) YIELD %(2) BALANCE(1) YIELD %(2)
---------- ---------- ----------- ----------
(in millions of pesos, except yields)
DOLLAR-DENOMINATED:
Securities issued by the
Colombian government .... Ps 4,832 7.16% Ps 667,713 5.68%
Euronotes and Eurobonds .... -- -- 737,328 5.74%
Securities issued by foreign
governments ............. -- -- 252,263 --
Others ..................... -- -- 103,357 5.18%
-------- -----------
Subtotal ................ 4,832 7.16% 1,760,661 5.71%
-------- -----------
PESO-DENOMINATED
Securities issued by the
Colombian government .... 1,511 1.29% 5,010,982 5.73%
Securities issued by
the Central Bank ........ -- -- 2,582 0.98%
104
AS OF DECEMBER 31, 2005
----------------------------------------------------------------------------------
MATURING IN ONE YEAR OR MATURING AFTER ONE YEAR MATURING AFTER FIVE YEARS
LESS THROUGH FIVE YEARS THROUGH TEN YEARS
-------------------------- --------------------------- -------------------------
BALANCE(1) (3) YIELD %(2) BALANCE(1) (3) YIELD %(2) BALANCE(1) YIELD %(2)
-------------- ---------- -------------- ----------- ------------ -----------
(in millions of pesos, except yields)
Securities issued by
government entities...... 15,170 6.26% 74,435 7.05% 18,855 7.89%
Securities issued by other
financial entities....... 553,447 6.27% 298,270 6.38% 134,118 5.80%
Others...................... 12,939 6.98% 82,573 5.38% 230,762 2.32%
------------ ----------- -----------
Subtotal................. 2,303,224 5.95% 2,869,018 6.29% 1,260,380 3.95%
------------ ----------- -----------
TOTAL.................... Ps2,716,913 Ps4,159,431 Ps1,312,107
------------ ----------- -----------
AS OF DECEMBER 31, 2005
-------------------------------------------------
MATURING AFTER TEN YEARS TOTAL
------------------------ -----------------------
BALANCE(1) YIELD %(2) BALANCE(1) YIELD %(2)
---------- ---------- ----------- ----------
(in millions of pesos, except yields)
Securities issued by
government entities...... 2,654 8.36% 111,114 7.11%
Securities issued by other
financial entities....... -- -- 985,835 6.24%
Others...................... 61,499 5.34% 387,773 3.61%
-------- -----------
Subtotal................. 65,664 5.36% 6,498,286 5.70%
-------- -----------
TOTAL.................... Ps70,496 Ps8,258,947
-------- -----------
----------
(1) These amounts are net of allowances for decline in value which were Ps
5,936 million in 2005.
(2) Yield was calculated using internal return rate (IRR) as of December 31,
2005 and without taxes deduction
(3) As of December 31, 2005, BC holds one security issued by the Republic of
Brazil with maturity in one year or less for Ps 2,943 million, and another
with maturity after one year through five years for Ps 244,482 million. The
security issued by the Republic of Panama for Ps 4,838 million had a
maturity of one year or less.
As of December 31, 2005, the Bank had the following investments that
exceeded 10% of its shareholders' equity:
ISSUER FAIR VALUE AMORTIZED COST
----------- ----------- --------------
(Ps million)
Securities issued or secured Ministry of
by Colombian government Finance Ps5,464,209 Ps5,495,917
Securities issued by other
government entities Fogafin 420,121 422,959
----------- -----------
TOTAL Ps5,884,330 Ps5,918,876
=========== ===========
BC increased the diversification, decreased the size, and shortened
the duration of the dollar denominated portfolio in response to a less positive
outlook for dollar denominated securities in the fixed income market for 2006.
During 2005, BC increased the amount of its peso denominated portfolio
to Ps 6,498 billion, keeping participation in securities issued by the Colombian
government at 77%. As part of BC's strategy to further stabilize its income, the
amount of the portfolio classified as available for sale was increased.
E.3. LOAN PORTFOLIO
In March of 2002, the Colombian Superintendency of Banking (now the
Superintendency of Finance), through its External Circular 011, introduced new
modifications to Chapter II of the External Circular 100 of 1995 ("Basic
Accounting Circular"), related to credit risk management. This norm establishes
the general principles and criteria that institutions must adopt in order to
maintain adequately evaluated credit risks associated with the loan portfolio.
It also defines credit categories, determines qualifications that must be
granted to such operations according to their perceived risk, establishes the
frequency with which these qualifications should be reviewed, stipulates the
re-qualification mechanisms, provides instructions on the accounting criteria
and provisions to be made and on the content and frequency of the reports to be
submitted to the Superintendency of Finance, and
105
fixes internal control mechanisms that institutions must adopt to assure the
adequate fulfillment of this regulation.
The current regulations also require that institutions develop a
system for the management of credit risk (SARC, for its initials in Spanish),
establishing strategies, policies, methods, processes and structures for the
evaluation, monitoring, and control of credit risk. See Item 4. Information on
the Company - E. Selected Statistical Information - E.4. Summary of Loan Loss
Experience - New Provision System (or Credit Risk Management System - "SARC").
The Bank classifies its loan portfolio into the following categories:
- Corporate loans, which include loans to medium and large
corporations;
- Retail loans, which include loans to individuals, such as
personal lines of credit, vehicle loans and credit card
loans, small business loans;
- Financial leases; and
- Mortgage loans, for the acquisition and building of new or
used housing.
In 2005, Bancolombia, concentrated its efforts in adjusting its Credit
Risk Management system - ("SARC") - in the context of the Merger with Conavi and
Corfinsura. New credit processes and policies were implemented in order to
adequate the Bank's SARC to the new markets and business lines that resulted
from the Merger. Furthermore, new analysis tools (granting and behavioral
models) were established, based on the different characteristics of these lines,
striving to implement best practices with regard to scoring and rating systems.
The main adjustments made to the Bank's credit policies were:
- Changes in the structure of credit approval and delegation
of attributions.
- Adjustments were made to credit policies for treasury
operations and international customers.
- New policies for mortgage and builder loans approval.
In 2005, we also continued to work on enhancing our expected loss
models that shall be used to manage the loan portfolio in the near future, based
on the rules and regulations issued by the Superintendency of Finance, with the
additional purpose of achieving competitive advantages. The main activities
carried out were as follows:
- Incorporation of a scoring for mortgage loans, and rating
scales for builder customers and entities belonging to the
financial sector.
- Additional tests to verify the quality of the data so as to
determine expected losses were incorporated.
- Update of the parameters used to determine expected losses
(default probability, exposure at the time of default and
loss in the event of default).
- Set up of a reference model pilot test for provisions
established by the Superintendency of Finance.
106
The aforementioned activities were carried out as a result of the
progress made in enhancing and taking greater advantage of data mining and
warehousing tools, which have facilitated the process of incorporating the
credit history information of Conavi and Corfinsura's customers. With this, we
expect to recalibrate the models and adjust the expected loss factors in 2006,
including not only a wider sample of customers, but the entire range of business
lines that compose the Bank's current portfolio.
The following table shows the Bank's loan portfolio classified into
corporate, retail and mortgage loans:
AS OF DECEMBER 31,
---------------------------------------------------------------------
2001 2002 2003 2004 2005
----------- ----------- ----------- ------------ ------------
(Ps million)
CORPORATE
Trade financing............................... Ps 95,649 Ps 166,620 Ps 149,582 Ps 253,632 Ps 783,894
Loans funded by domestic development banks.... 292,609 376,378 394,947 770,331 948,659
Working capital loans......................... 3,040,469 3,650,585 4,687,153 4,298,354 7,702,420
Credit cards.................................. 3,892 5,218 8,237 24,621 42,293
Overdrafts.................................... 22,755 48,591 32,371 67,018 62,041
Other 22,886 -- -- -- --
----------- ----------- ----------- ------------ ------------
Total corporate............................ 3,478,260 4,247,392 5,272,290 5,413,956 9,539,307
----------- ----------- ----------- ------------ ------------
RETAIL (1)
Credit cards.................................. 231,965 254,876 335,172 392,900 582,533
Personal loans................................ 457,677 561,558 814,885 1,111,250 1,556,429
Automobile loans.............................. 15,713 24,476 229,737 381,723 629,326
Overdrafts.................................... 73,372 68,490 81,294 89,867 101,957
Loans funded by domestic development banks.... 138,415 276,157 330,246 359,494 403,414
Trade financing............................... 38,643 28,112 19,644 54,189 76,643
Working capital loans......................... 881,649 698,160 898,239 1,295,643 1,612,650
----------- ----------- ----------- ------------ ------------
Total retail............................... 1,837,434 1,911,829 2,709,217 3,685,066 4,962,952
----------- ----------- ----------- ------------ ------------
FINANCIAL LEASES (2) ............................ -- -- -- 880,110 2,660,556
MORTGAGE 34,511 38,094 48,161 56,107 1,463,437
----------- ----------- ----------- ------------ ------------
TOTAL LOANS................................ 5,350,205 6,197,315 8,029,668 10,035,239 18,626,252
Allowance for loan losses........................ (271,729) (332,324) (387,263) (434,378) (705,882)
----------- ----------- ----------- ------------ ------------
TOTAL LOANS, NET........................... Ps5,078,476 Ps5,864,991 Ps7,642,405 Ps 9,600,861 Ps17,920,370
=========== =========== =========== ============ ============
----------
(1) Includes loans to upper-income individuals and small companies.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004.
As of December 31, 2005, BC's total loan portfolio amounted to Ps
18,626,252 million, representing an increase of 85.61% from Ps 10,035,239
million in 2004. In 2004, the Bank's total loan portfolio increased 24.98% to Ps
10,035,239 million from Ps 8,029,668 million in 2003, due primarily to the
recovery of the Colombian economy and the Bank's strategic targeting of
additional market segments.
The increase in the loan portfolio as of December 31, 2005 in each of
the categories is explained by the following reasons:
107
- As of December 31, 2005, corporate loans amounted Ps 9,539,307
million, increasing 76% compared with Ps 5,413,956 million as of
December 31, 2004. This increase is explained in part by the
Merger with Conavi and Corfinsura. Working capital loans showed
the highest growth (79%) passing from Ps 4,298,354 million in
2004 to Ps 7,702,420 million in 2005.
Furthermore, the performance of the Colombian economy,
particularly domestic demand in the second half of 2005, was
another driver for the increase in overall credit demand. At the
end of the third quarter, the economic sectors that showed the
highest growth rates with regard to this same quarter of 2004
were as follows: Retail, Restaurants and Hotels with 37.91%,
Construction 14.97% and Mining 7.21%.
According to figures obtained from the Colombian Superintendency
of Finance, the Commercial Loan/GDP ratio showed a slight growth
with regard to 2003 and 2004, reaching 16% in 2005, and it is
believed that over the next couple of years, the Colombian
economy shall register further growth thanks to an important
level of financial leverage.
In 2004, total corporate loans increased 2.69% to Ps 5,413,956
million due primarily to a 95.05% increase in loans funded by
domestic development banks and a 69.56% increase in trade
financing loans.
As of December 31, 2003, 2004 and 2005 total corporate loans
represented 66%, 54% and 51% respectively, of the Bank's total
loan portfolio.
- In 2005, Retail loans increased 34.68% with regard to 2004,
passing from Ps 3,685,066 million in 2004 to Ps 4,962,952 million
in 2005 due primarily to a 64.86% increase in vehicle loans,
48.26% increase in credit card billing and 40.06% increase in
personal retail loans. On a macroeconomic level, these growth
rates were driven by a reduction in the unemployment rate, which
went from almost 16% at the beginning of 2005 to almost 12% at
end of the year. Furthermore, the retail industry grew by more
than 10%, which encouraged the use of the Bank's products, such
as credit cards and personal credit.
The increase in retail loans was also driven by the opening of 27
new branches and the implementation of new mobile branches, in
different cities nationwide, as well as the increase in the
number of outstanding credit cards and the expansion of
Sufinanciamiento business.
Total retail loans increased 36.02% in 2004 from Ps 2,709,217
million in 2003 to Ps 3,685,066 million in 2004, due primarily to
a 36.37% increase in personal loans, a 66.16% increase in vehicle
loans and a 44.24% increase in working capital loans.
As of December 31, 2003, 2004 and 2005, retail loans represented
34%, 37% and 27%, respectively, of the Bank's total loan
portfolio.
- As a result of the Merger, BC acquired the mortgage loan
business, where Conavi was one of the leading entities in
Colombia. As of December 31, 2005, mortgage loans amounted to Ps
1,463,437 million representing approximately 8% of the total loan
portfolio, driven by the favorable performance of the
construction sector as well as the
108
sale strategy adopted by the Bank.
- As of December 31, 2005, BC, through its subsidiaries Leasing
Colombia and Sufinanciamiento, is the entity leader in financial
lease contracts origination in accordance with amounts published
by the Superintendency of Finance. With the subsidiaries
mentioned above, and Suleasing Internacional, Banco Corfinsura
Internacional and Bancolombia Panama, at December 31, 2005, the
financial lease loan portfolio amounted to Ps 2,660,556 million,
representing approximately 14% of the total loan portfolio at the
end of the year. The favorable performance of the different
economic sectors and the sale strategies of these entities
allowed BC to achieve these position.
- As of December 31, 2005, the aggregate outstanding principal
amount of the Bank's 25 largest borrowing relationships
represented approximately 10.65% of the total loan portfolio, and
no single borrowing relationship represented more than 0.7% of
the total loan portfolio. Approximately 17.62% of such loans are
denominated in foreign currencies (U.S. dollars) 100% of these
loans are corporate and, as of December 31, 2005, 92.42% of these
relationships were classified as "A" loans, 3.65% as "B" and
3.93% as "D".
MATURITY AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturities of the Bank's loan portfolio:
DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ----------- ------------
(Ps million)
PESO-DENOMINATED LOANS AND FINANCIAL LEASES:
CORPORATE
Trade financing .............................. Ps 98,931 Ps 22,732 Ps 24,948 Ps 146,611
Loans funded by domestic development banks ... 62,983 258,824 132,215 454,022
Working capital loans ........................ 1,389,486 2,416,948 1,381,268 5,187,702
Credit cards ................................. 5,499 33,526 69 39,094
Overdrafts ................................... 61,827 -- -- 61,827
----------- ----------- ----------- ------------
Total corporate ........................... 1,618,726 2,732,030 1,538,500 5,889,256
----------- ----------- ----------- ------------
RETAIL (1)
Credit cards ................................. 74,440 442,383 5,475 522,298
Personal loans ............................... 237,929 1,310,570 7,817 1,556,316
Vehicle loans ................................ 28,508 597,590 3,178 629,276
Overdrafts ................................... 101,957 -- -- 101,957
Loans funded by domestic development banks ... 46,466 318,516 38,131 403,113
Trade financing .............................. 46,051 13,454 214 59,719
Working capital loans ........................ 632,273 835,904 80,614 1,548,791
----------- ----------- ----------- ------------
Total retail .............................. 1,167,624 3,518,417 135,429 4,821,470
----------- ----------- ----------- ------------
FINANCIAL LEASES ................................ 99,145 1,851,422 450,152 2,400,719
MORTGAGE ........................................ 15,600 154,482 1,293,317 1,463,399
----------- ----------- ----------- ------------
TOTAL PESO-DENOMINATED LOANS .............. Ps2,901,095 Ps8,256,351 Ps3,417,398 Ps14,574,844
=========== =========== =========== ============
109
DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ----------- ------------
(Ps million)
DOLLAR-DENOMINATED LOANS
CORPORATE
Trade financing .............................. Ps 525,015 Ps 74,650 Ps 37,618 Ps 637,283
Loans funded by domestic development banks ... 1,639 1,891 491,107 494,637
Working capital loans ........................ 1,265,957 1,022,172 226,589 2,514,718
Credit cards ................................. 473 2,726 -- 3,199
Overdrafts ................................... 214 -- -- 214
----------- ----------- ----------- ------------
Total corporate ........................... 1,793,298 1,101,439 755,314 3,650,051
----------- ----------- ----------- ------------
RETAIL (1)
Credit cards ................................. 19,933 40,302 -- 60,235
Personal loans ............................... 57 56 -- 113
Vehicle loans ................................ 30 20 -- 50
Overdrafts ................................... -- -- -- --
Loans funded by domestic development banks ... 148 152 -- 301
Trade financing .............................. 16,924 -- -- 16,924
Working capital loans ........................ 38,770 25,089 -- 63,859
----------- ----------- ----------- ------------
Total retail .............................. 75,862 65,619 -- 141,482
----------- ----------- ----------- ------------
FINANCIAL LEASES (2) ............................ 50,186 158,689 50,962 259,837
MORTGAGE ........................................ -- -- 39 38
----------- ----------- ----------- ------------
TOTAL DOLLAR-DENOMINATED LOANS ............... 1,919,346 1,325,747 806,315 4,051,408
----------- ----------- ----------- ------------
TOTAL LOANS ............................... Ps4,820,441 Ps9,582,098 Ps4,223,713 Ps18,626,252
=========== =========== =========== ============
----------
(1) Includes loans to upper-income individuals and small companies.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004
As of December 31, 2005, 51.44% of BC's loan portfolio's maturities
were between 1 and 5 years. As part of its credit policies, BC verifies at least
annually the Maximum Lending Limits and performs financial evaluations of its
customers. Additionally, all those customers with outstanding loans grater than
300 SMLV (Ps 114 million as of December 31, 2005) are rated on a half-yearly
basis. This guarantees the permanent monitoring of the financial situation of
BC's customers.
The following table shows the interest rate sensitivity of the Bank's
loan portfolio due after one year and within one year or less as of December 31,
2005:
AS OF DECEMBER 31,
2005 (1)
(Ps million)
------------------
LOANS AND FINANCIAL LEASES DUE AFTER ONE YEAR:
VARIABLE RATE
Peso-denominated................................ Ps10,697,565
Dollar-denominated.............................. 1,853,228
------------
Total........................................ 12,550,793
------------
FIXED RATE
Peso-denominated................................ 976,183
Dollar-denominated.............................. 278,835
------------
Total........................................ 1,255,018
------------
110
AS OF DECEMBER 31,
2005 (1)
------------------
(Ps million)
LOANS AND FINANCIAL LEASES DUE IN ONE YEAR OR LESS:
Peso-denominated................................ 2,901,096
Dollar-denominated.............................. 1,919,345
------------
Total ....................................... 4,820,441
------------
TOTAL LOANS AND FINANCIAL LEASES.......... Ps18,626,252
============
----------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004.
LOANS BY ECONOMIC ACTIVITY
The following table analyzes the Bank's loan portfolio for the periods
indicated by the principal activity of the borrower using the Primary Standard
Industrial Classification Codes. Where the Bank has not assigned a code to a
borrower, classification of the loan has been made based on the purpose of the
loan as described by the borrower:
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004 % 2005(1) %
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
Agricultural................ Ps 136,201 2.5% Ps 135,554 2.2% Ps 183,293 2.3% Ps 480,414 4.8% Ps 844,651 4.5%
Mining products and oil..... 43,881 0.8% 103,624 1.7% 84,414 1.0% 140,137 1.4% 273,580 1.5%
Food, beverage and
tobacco.................. 68,651 1.3% 174,818 2.8% 133,859 1.7% 666,602 6.6% 1,371,696 7.4%
Chemical production......... -- 0.0% 11,453 0.1% 174 0.0% 386,434 3.9% 572,000 3.0%
Other industrial and
manufacturing products... 1,550,141 29.0% 1,738,250 28.0% 1,929,007 24.0% 1,762,447 17.6% 2,982,246 16.0%
Government.................. 91,146 1.6% 152,453 2.4% 836,832 10.4% 1,027,009 10.2% 1,226,597 6.6%
Construction................ 181,788 3.4% 163,755 2.6% 180,704 2.3% 575,679 5.7% 2,980,173 16.0%
Trade and tourism........... 712,333 13.3% 816,090 13.2% 893,729 11.1% 1,760,120 17.5% 2,693,730 14.5%
Transportation and
communications........... 302,100 5.6% 299,184 4.8% 408,285 5.1% 720,031 7.2% 1,496,371 8.0%
Public services............. 284,031 5.3% 464,054 7.5% 472,451 5.9% 469,658 4.7% 941,975 5.0%
Consumer services........... 1,619,689 30.5% 1,840,735 29.9% 2,380,162 29.6% 1,601,132 16.0% 2,134,950 11.5%
Commercial services......... 360,244 6.7% 297,345 4.8% 526,758 6.6% 445,576 4.4% 1,108,283 6.0%
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
TOTAL LOANS.............. Ps5,350,205 100.0% Ps6,197,315 100.0% Ps8,029,668 100.0% Ps10,035,239 100.0% Ps18,626,252 100.0%
=========== ===== =========== ===== =========== ===== ============ ===== ============ =====
----------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004.
As a result of the Merger with Conavi and Corfinsura, BC's loan
portfolio for 2005 posted an 85.61% growth. Upon dividing up this total among
the different economic sectors, each and every one of these showed significant
increases. The Construction sector is indeed a case in point, since as mentioned
previously at the time of the Merger, Conavi was one of the main financial
institutions in the country with regard to mortgage loans. It is also important
to note how well the Colombian economy has been performing thanks to, among
other factors, better conditions of law and order, as well as a better business
climate driving the demand for credit in the majority of the economic sectors.
111
POLICIES FOR THE GRANTING AND REVIEW OF CREDITS
The Bank's credit standards and policies aim to achieve a high level
of credit quality in the Bank's loan portfolio, efficiency in the processing of
loans and the specific assignment of responsibilities for credit risk.
To maintain credit quality and manage the risk arising from its
lending activities, the Bank has established general loan policies for
evaluation of credits, lending limits to a single customer or economic group
that conform to those required by law, the level of management authority
required to approve a loan, maximum terms of loans, and collateral required for
certain types of loans and their valuation. In addition, the Bank has
established a centralized area for credit analysis, the disbursement process and
the management and custody of promissory notes and guarantees.
BC's policies require every credit to be analyzed using the following
factors: the character, reputation and credit history of the borrower, the type
of business the borrower engages in, the borrower's ability to repay the loan,
the coverage and suitability of the proposed collateral for the loan,
information received from the credit risk center, debt serviceability and
compliance with the loan terms and the country risk where the debtor is
headquartered in the event of overseas credits.
In addition to an analysis of the borrower, the Bank engages in the
analysis of the different economic sectors to which the Bank makes loans and has
established guidelines for financial analysis of the borrower and for
participation in investment projects in and outside Colombia. The Bank applies
the lending limits established under Colombian law, which require that:
- uncollateralized loans to a single customer or economic
group not to exceed 10% of the Bank's (unconsolidated)
Technical Capital (the Bank's largest such loan as of
December 31, 2005 is for Ps209,125 million, which
represents 9.61% of the Bank's (unconsolidated) Technical
Capital as of that date and is current and performing in
accordance with its terms);
- collateralized loans to a single customer or economic group
not to exceed 25% of the Bank's (unconsolidated) Technical
Capital (the Bank's largest such loan as of December 31,
2005 is for Ps200,436 million, which represents 9.21% of the
Bank's (unconsolidated) Technical Capital as of that date
and is current and performing in accordance with its terms);
- a loan to a shareholder of the Bank, with a share exceeding
20% of the Bank's Capital, may not exceed 20% of the Bank's
(unconsolidated) Technical Capital (no shareholders own more
than 20% of the Bank as of December 31, 2005); and
- a loan to a financial institution may not exceed 30% of the
Bank's (unconsolidated) Technical Capital (the Banks'
largest such loan as of December 31, 2005 is for Ps126,221
million, which represents 5.8% of the Bank's
(unconsolidated) Technical Capital as of that date and is
current and performing in accordance with its terms).
In general, the term of a loan will depend on the type of guarantee,
the credit history of the borrower and the purpose of the loan, averaging in
length from one to five years.
Loan applications, depending on their amount, are presented for
approval to branch managers, the zone or regional managers, the Vice Presidents,
the President, the Credit Committee and the Board of Directors of BC. In
general, loan application decisions are made by the Bank's
112
management in the corresponding committee. Loan applications up to a maximum of
200 SMLV or Ps76.3 million (approximately US$ 33,403) must also be submitted
for approval to the Bank's centralized credit scoring area.
The following table sets forth the size limits for loan application
approval by authorization level as established by the Board of Directors of BC:
MAXIMUM LOAN APPROVAL LIMITS (1)
---------------------------------------------------
UNSECURED LOANS (2) SECURED LOANS
------------------------ ------------------------
(U.S. (U.S.
dollar) (Ps million) dollar) (Ps million)
AUTHORIZATION LEVEL:
Approval limits are Approval limits are
granted by upper granted by upper
management, and the management, and the
Branch Managers.................... actual amounts are actual amounts are
determined bearing in determined bearing in
mind the length of the mind the experience in
experience in the post, the post, ability to
ability to identify risk identify risk factors,
factors, knowledge of knowledge of credit
Zone Managers...................... credit policies and policies and
regulations, as well as regulations, as well as
the sound judgment the sound judgment
exercised by each of the exercised by each of the
incumbents to whom said incumbents to whom said
powers are delegated. powers are delegated.
The amounts delegated
are reduced to 60% of
the total when there is
no guarantee or security
for the corresponding
operations.
Regional Managers Corporate
Banking............................ 1,211,376 2,760 2,018,960 4,600
Middle-corporate and Personal
Banking Regional Managers.......... 1,053,370 2,400 1,755,617 4,000
Middle-corporate and Personal
Banking Vice Presidents(3)......... 5,613,588 12,790 9,356,566 21,318
Corporate Banking, Financial and
International Vice Presidents(3)... 5,613,588 12,790 9,356,566 21,318
President............................. 5,613,588 12,790 9,356,566 21,318
All loans, other than All loans, other than
those requiring the those requiring the
approval of the Board of approval of the Board of
Directors, within the Directors, within the
Credit Committee...................... limits established by limits established by
law. law.
----------
(1) Approval limits are measured in nominal pesos or their equivalent in U.S.
dollars.
(2) Includes loans with a personal guarantee.
(3) This approval limit corresponds to a percentage of the Bank's technical
capital. Vice Presidents approval limits are established depending on the
borrower credit risk level. The amounts set in the table below are
established to grant loans to borrowers with the lowest credit risk level,
the approval limits decrease as the borrower credit risk level increase.
Loans to employees and affiliates of the Bank must be approved by the
Board of Directors, which has the authority to grant loans in any principal
amount subject to the Bank's legal lending limit. Approval at each level also
requires the agreement of each lower level of the approval hierarchy. For
example, a loan approval by regional managers would also require approval from
the branch managers.
113
The Bank has established policies for the valuation of collateral
received as well as for the determination of the maximum loan amount that can be
granted against the value of the collateral. Periodically, the Bank undertakes a
valuation of collateral held as security for loans. In addition, when a loan
becomes 60 days past due, the loan is given to a specialized division where
various steps are taken to recover the loan. The Asset Recovery Division may,
acting in coordination with the Commercial area, begin a recovery process before
the 60-day past due date.
With respect to monitoring outstanding loans, the Bank, in accordance
with the requirements of the Superintendency of Finance, has implemented,
through the creation of regional committees and a central qualification office,
a review policy providing for a biannual evaluation, during the months of May
and November of all debtors whose indebtedness for the various credit facilities
exceeds 300 SMLV (Ps114 million). Additionally, all the Bank's loans are
evaluated monthly based on the days they are past due. When reviewing loans, BC
evaluates and updates their risk classification and makes corresponding
adjustment in the provision, if needed. When monitoring outstanding loans, the
Bank examines current financial statements including, for material loans with a
term greater than one year, current cash flow statements. The Bank centralized
its credit review process through its information systems, including the
necessary adjustments of credit scoring for personal lines of credit. In
addition, the Bank keeps track of the loans reviewed every month and carries out
a credit audit process that reviews the 200 largest debtors and randomly reviews
a selection of its other debtors.
CLASSIFICATION OF THE LOAN PORTFOLIO
As indicated by External Circular 011 of March 2002, for purposes of
classifying loans, the Bank first determines whether the loan has become due and
then classifies the loan according to the number of days past due. In addition,
whether or not a loan is past due, the Bank analyzes loans to determine if there
are "potential weaknesses", "deficiencies" or "serious deficiencies" based on
the existence and magnitude of the following factors:
- the expected ability of payment of a debtor and co-debtor,
or the project to be financed, analyzing the income flow and
expenses;
- the debtor's solvency, through variables such as the level
of indebtedness and the quality and composition of the
debtor's and/or project's assets, liabilities, equity and
contingencies;
- information on the debtor's current and past compliance with
obligations;
- the timely payment of all installments as well as the
financial and credit-based history as shown by risk controls
and risk classifiers of the debtor or any other relevant
source;
- the number of times that the loan has been restructured and
the nature of the respective restructuring(s);
- the possible effects of the financial risks that the cash
flow of the debtor and/or the project to be financed may be
exposed to; these include:
- Possible market gaps of currencies, maturities and
interest rates in the balance sheet structure and in
off-balance sheet operations, such as financial
derivatives;
114
- for those loans with variable rates or rates indexed to
UVR or another index, projections, and possible
scenarios for the evolution of payments according to
estimates of interest rates, foreign exchange rates,
inflation, and other variables that may directly affect
the payment of debt;
- for loans denominated in foreign currencies, the market
risk derived from the volatility of the corresponding
exchange rates and its possible impact on the debtor's
ability to pay; for loans made abroad, an in-house and
market analysis of the risk of the country where the
debtor is domiciled to identify the risks of transfer
and exchange of the currencies required to serve the
loan and the legal, operating and strategic risks of
spreading the ability to pay of the debtor or the
project to be financed may be exposed to.
CREDIT CATEGORIES
For the purpose of credit risk evaluation, application of accounting
regulations, and constitution of provisions in accordance with External Circular
052, the Superintendency of Finance requires banking institutions to classify
their credit portfolio into four categories: consumer loans, small business
loans, mortgages and commercial loans.
- Consumer loans are loans granted to individuals for the
purpose of financing the acquisition of consumer goods or
the payment of services for non-commercial or non-corporate
objects.
- Small business loans are loans granted to very small
corporations with indebtedness levels with the corresponding
entity not higher than 25 SMLV (Ps9.5 million) (a small
corporation is every unit of economic exploitation, whether
individual or corporation, in entrepreneurial, farming and
livestock, industrial, commercial or utilities activities,
rural or urban, with a staff no larger than 10 workers and
with total assets lower than 501 SMLV (Ps191.1 million)).
- Mortgages are loans of any amount granted to individuals to
acquire new or used homes or for the construction of
individual homes.
- Commercial loans are all loans, except mortgage, consumer
and small business loans, as defined above (includes
ordinary, preferential and treasury loans).
From January 1, 2004, in accordance with External Circular 040 of the
Superintendency of Banking (now Superintendency of Finance), financial leases
make up part of the loan portfolio and are classified according to the above
categories. Nevertheless, BC has decided to present these operations as an
independent line on its balance sheet, given its importance. In accordance with
the foregoing, when we make reference to the loan portfolio, it should be
understood to include financial leases unless we otherwise state.
According to the classification system established by the
Superintendency of Finance, in 2005, commercial loans represented 64.15% of the
Bank's total loan portfolio, showing, a growth of 62.49%, with regard to 2004.
As a percentage of the total loan portfolio, financial leases represented
14.28%, consumer loans represented 13.09%, mortgage loans represented 7.86% and
Small Business Loans represented 0.62%.
The following table shows the Bank's loan portfolio categorized in
accordance with the regulations of the Superintendency of Finance in effect for
the relevant periods:
115
LOAN PORTFOLIO BY TYPE OF LOAN
AS OF DECEMBER 31,
---------------------------------------------------------------------
2001(2) 2002(3) 2003 2004 2005
----------- ----------- ----------- ------------ ------------
(Ps million)
Commercial Loans................................. Ps 4,354,031 Ps 5,219,460 Ps 6,624,494 Ps 7,353,956 Ps 11,949,501
Consumer Loans................................... 961,663 870,898 1,273,159 1,655,066 2,437,727
Small Business Loans............................. -- 68,863 83,854 90,000 115,031
Financial Leases(4).............................. -- -- -- 880,110 2,660,556
Mortgages(1)..................................... 34,511 38,094 48,161 56,107 1,463,437
------------ ------------ ------------ ------------ -------------
TOTAL LOANS AND FINANCIAL LEASES.............. 5,350,205 6,197,315 8,029,668 10,035,239 18,626,252
Allowance for Loans and Financial Lease Losses... 271,729 332,324 387,263 434,378 705,882
------------ ------------ ------------ ------------ -------------
TOTAL LOANS AND FINANCIAL LEASES, NET......... Ps 5,078,476 Ps 5,864,991 Ps 7,642,405 Ps 9,600,861 Ps 17,920,370
============ ============ ============ ============ =============
----------
(1) This category was established by the Superintendency of Banking (now
Superintendency of Finance ) in External Circular 050 of 2001.
(2) For 2001, a different regulation was in force (External Circular 039 of
1999 and External Circular 070 of 2000) regarding the criteria for the
establishment of credit categories.
(3) External Circular 050 of 2001, which was ratified by External Circular 011
of 2002, modified criteria to classify loans in commercial, consumer, small
business and mortgage, establishing that the classification should be based
on the loan destination and not based on the amount as it was in previous
years.
(4) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004.
External Circular 011 of 2002 provides the following minimum risk
classifications, according to the past due days of the obligation:
Category A or "Normal Risk": Loans and financial leases in this
category are appropriately serviced (not past due). The debtor's financial
statements or its projected cash flows, as well as all other credit information
are available to the Bank, reflect adequate paying capacity. The following loans
would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
--------- -------------------------
Mortgage from 0 and up to 2
Consumer from 0 and up to 1
Small business loans from 0 and up to 1
Commercial from 0 and up to 1
Category B or "Acceptable Risk, Above Normal": Loans and financial
leases in this category are acceptably serviced (not past due) and guaranty
protected, but there are weaknesses which may potentially affect, on a
transitory or permanent basis, the debtor's paying capacity or its projected
cash flows, to the extent that, if not timely corrected, would affect the normal
collection of credit or contracts.
116
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
--------- -------------------------
Mortgage more than 2 and up to 5
Consumer more than 1 and up to 2
Small business loans more than 1 and up to 2
Commercial more than 1 and up to 3
Category C or "Appreciable Risk": Loans and financial leases in this
category represent insufficiencies in the debtors' paying capacity or in the
project's cash flow, which may compromise the normal collection of the
obligations.
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
--------- -------------------------
Mortgage more than 5 and up to 12
Consumer more than 2 and up to 3
Small business loans more than 2 and up to 3
Commercial more than 3 and up to 6
Category D or "Significant Risk": Loans and financial leases in this
category have the same deficiencies as loans in category C, but to a larger
extent; consequently, the probability of collection is highly doubtful.
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
--------- -------------------------
Mortgage more than 12 and up to 18
Consumer more than 3 and up to 6
Small business loans more than 3 and up to 4
Commercial more than 6 and up to 12
Category E or "Risk of Non-Recoverability": Loans and financial leases
in this category are deemed uncollectible.
The following types of loans would fall into this category:
LOAN TYPE NUMBER OF MONTHS PAST DUE
--------- -------------------------
Mortgage more than 18
Consumer more than 6
Small business loans more than 4
Commercial more than 12
117
Additionally, if a loan to a borrower is downgraded by the Bank to a
classification of "B", "C", "D" or "E", all of the Bank's loans to that customer
are similarly downgraded. The Superintendency of Finance may require additional
allowances under certain circumstances.
The following table presents the Bank's loan portfolio using the
classification system of the Superintendency of Finance in effect at the end of
each period:
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004(1) % 2005 %
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
(Ps million, except percentages)
"A" Normal Ps4,228,248 79.0% Ps5,115,889 82.6% Ps7,288,273 90.8% Ps 9,327,398 93.0% Ps17,359,081 93.2%
"B" Subnormal 603,068 11.3% 479,429 7.7% 345,297 4.3% 320,959 3.2% 638,131 3.4%
"C" Deficient 103,761 1.9% 142,782 2.3% 109,615 1.4% 93,175 0.9% 202,934 1.1%
"D" Doubtful Recovery 259,811 4.9% 180,630 2.9% 196,075 2.4% 204,344 2.0% 252,635 1.4%
"E" Unrecoverable 155,317 2.9% 278,585 4.5% 90,408 1.1% 89,363 0.9% 173,471 0.9%
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
Total loans Ps5,350,205 100.0% Ps6,197,315 100.0% Ps8,029,668 100.0% Ps10,035,239 100.0% Ps18,626,252 100.0%
=========== ===== =========== ===== =========== ===== ============ ===== ============ =====
Loans classified as "C",
"D" and "E" as a
percentage of total
loans 9.7% 9.7% 4.9% 3.9% 3.4%
----------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004.
Note: In 2000 and 2001, the Bank reported the loan portfolio classified
according to the risk category considering the past due term and
additional subjects such as debtor's capacity of payment, debt
service, and information from external risk agencies.
The Bank continues to accrue interest on a loan until it is considered
non-performing. Once a loan is deemed non-performing, an allowance is made for
100% of the unpaid interest recorded as income, and, going forward, instead of
recording interest on that loan in the consolidated statement of operations,
such interest is recorded in memorandum accounts. See Notes to Consolidated
Financial Statements, Note (2) Main Accounting Policies, (j) Loans and Financial
Lease Operations.
In accordance with the regulations of the Superintendency of Finance,
loans are considered non-performing if an installment of principal or interest
is (i) in the case of a commercial loan more than 90 days past due, (ii) in the
case of a consumer loan more than 60 days past due, (iii) in the case of a small
business loans more than 30 days past due or (iv) in the case of a mortgage loan
more than 60 days past due.
Additionally, beginning March 25, 2003, the Bank established as policy
that any loans different from mortgage loans that are past due more than 30 days
will stop accruing interest in the statement of operations and their entries
will be made in memorandum accounts until the customer recommences payments.
If one installment payment is 31 or more days past the actual due
date, then the entire loan is considered past due for purposes of the
regulations of the Superintendency of Finance.
The following table sets forth the breakdown of the Bank's loans at
least one day past due by type of loan in accordance with the criteria of the
Superintendency of Finance in effect at the end of each period:
118
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004(3) % 2005 (3) %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(Ps million, except percentages)
PERFORMING PAST DUE
LOANS:(1)
Consumer loans past due
from 31 to 60 days .. Ps 19,543 24.8% Ps 17,537 38.6% Ps 24,899 57.3% Ps 21,987 38.7% Ps 34,630 19.7%
Small loans past due
from 31 to 60
days(4) ............. -- 0.0% 777 1.7% 2,054 4.7% 1,845 3.2% -- 0.0%
Commercial loans past
due from 31 to 90
days ............... 59,066 74.9% 27,149 59.7% 16,518 38.0% 26,398 46.5% 46,485 26.5%
Mortgage loans past due
from 31/60/90/120
days(4) ............ 202 0.3% 22 0.0% -- 0.0% -- 0.0% 84,156 47.9%
Financial leases past
due from 31 to 60/90
days (2) (3) ....... -- 0.0% -- 0.0% -- 0.0% 6,593 11.6% 10,301 5.9%
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total performing past
due loans and
Financial leases
(3) .............. 78,811 100.0% 45,485 100.0% 43,471 100.0% 56,823 100.0% 175,572 100.0%
NON-PERFORMING PAST DUE
LOANS:
Consumer loans past due
from 61 to 180
days ................ 9,711 4.0% 8,993 8.2% 14,304 18.8% 29,120 32.9% 45,203 16.4%
Small loans past due
31/61 to 180
days(4) ............. -- 0.0% 1,633 1.5% 3,040 4.0% 3,781 4.3% 5,979 2.1%
Consumer loans past due
more than 180 days .. 10,019 4.1% 10,678 9.7% 10,765 14.0% 11,762 13.3% 20,918 7.6%
Commercial loans past
due more than 90
days ................ 224,024 91.8% 88,217 80.5% 48,069 63.2% 40,171 45.4% 114,496 41.5%
Mortgage loans past due
more than 61/91/121
days(4) ............. 138 0.1% 138 0.1% 4 0.0% 37 0.0% 77,394 28.1%
Financial leases past
due more than 61/91
days (3) ............ -- 0.0% -- 0.0% -- 0.0% 3,580 4.1% 11,874 4.3%
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total non-performing
past due loans and
Financial leases
(3) ................. 243,892 100.0% 109,659 100.0% 76,182 100.0% 88,451 100.0% 275,864 100.0%
Total past due loans and
Financial leases
(3) ................ Ps 322,703 Ps 155,144 Ps 119,653 Ps 145,274 Ps 451,436
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total non-performing
past due loans and
Financial leases
(3) ................. 243,892 109,659 76,182 88,451 275,864
Allowance for loan and
financial leases
losses (3) ......... (271,729) (332,324) (387,263) (434,378) (705,882)
Foreclosed assets ...... 163,000 153,873 162,766 153,071 236,536
Allowance for estimated
losses on foreclosed
assets .............. (105,988) (107,871) (135,090) (140,865) (205,176)
Other accounts
receivable more than
180 days past due ... 17,875 8,655 25,848 5,813 28,980
Allowance for accounts
receivable and
accrued interest
losses .............. (42,707) (24,891) (26,182) (18,807) (40,727)
---------- ---------- ---------- ---------- ----------
Total non-performing
assets, net ......... Ps 4,343 Ps(192,899) Ps(283,739) Ps(346,715) Ps(410,405)
---------- ---------- ---------- ---------- ----------
Loans at least one day
past due as a
percentage of total
loans (3) ........... 6.0% 2.5% 1.5% 1.5% 2.5%
Allowance for loan
losses as a
percentage of loans
at least one day past
due (3) ............. 84.2% 214.2% 323.7% 299.0% 156.4%
Allowance for loan
losses as a
percentage of loans
classified as "C",
"D" and "E" (3) ..... 52.4% 55.2% 97.8% 112.3% 112.2%
Percentage of performing
loans to total loans
(3) ................. 95.5% 98.2% 99.1% 99.1% 98.5%
----------
(1) Performing past due loans are loans upon which the Bank continues to
recognize income although interest has not been received for the periods
indicated. Once interest is unpaid on accrual loans for a longer period
than is specified above, the loan is classified as non-performing. Under
Colombian Banking regulations, a loan is past due when it is at least 31
days past the actual due date.
(2) The Consumer loans are due from 31 to 60 days and the commercial loans are
due from 31 to 90 days.
(3) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance )and effective
as of January 1, 2004.
(4) From January 1, 2005, External Circular 052 of 2004 of the Superintendency
of Banking (now Superintendency of Finance) modified the classification
between performing and non - performing loans. According to the new
regulation mortgage and small business loans classified as non performing
when are past due more than 60 and 30 days, respectively.
The following table analyzes the quality of the Bank's loan portfolio
using the classification system of the Superintendency of Finance in effect at
the end of each period:
119
AS OF DECEMBER 31,
-------------------------------------------------------
2001 2002 2003 2004(1) 2005
-------- ---------- --------- --------- ---------
(Ps million, except percentages)
Loans secured by real guarantees as a percentage
of total loans ............................... 44.8% 37.5% 32.9% 40.1% 44.3%
Loans classified as "A" as a percentage of total
loans ........................................ 79.0% 82.6% 90.8% 92.9% 93.2%
Loans classified as "B" as a percentage of total
loans ........................................ 11.3% 7.7% 4.3% 3.2% 3.4%
Loans classified as "C", "D" and "E" as a
percentage of total loan ..................... 9.7% 9.7% 4.9% 3.9% 3.4%
Total allowance for loan losses as a percentage
of non-performing loans ...................... 111.4% 303.1% 508.3% 491.1% 255.9%
Total allowance for loan losses as a percentage
of loan classified as "C", "D" and "E" ....... 52.4% 55.2% 97.8% 112.3% 112.2%
Non-performing loans as a percentage of total
loans ........................................ 4.6% 1.8% 0.9% 0.9% 1.5%
Loans and financial leases classified as "C", "D"
and "E" ...................................... Ps518,889 Ps601,997 Ps396,098 Ps386,882 Ps629,040
TOTAL NON-PERFORMING LOANS ................ Ps243,892 Ps109,659 Ps 76,182 Ps 88,451 Ps275,864
----------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004.
The following table shows BC's past due loan portfolio by type of
loan:
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004 % 2005 %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(Ps million, except percentages)
CORPORATE
Trade financing ........ Ps 5,398 1.6% Ps 143 0.0% Ps 2,841 2.3% Ps 3,862 2.7% Ps 9,728 2.2%
Loans funded by domestic
development banks ... 7,950 2.5 1,360 0.9 1,149 1.0 1,705 1.2 7,463 1.7
Working capital loans .. 210,281 65.2 75,333 48.6 30,706 25.7 21,211 14.6 55,354 12.3
Credit cards ........... 103 0.0 90 0.1 136 0.1 1,273 0.9 1,616 0.4
Overdrafts ............. 1,583 0.5 -- 0.0 1,032 0.9 1,668 1.1 4,177 0.9
Other .................. -- 0.0 -- 0.0 -- 0.0 -- 0.0 -- 0.0
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total corporate ..... 225,315 69.8% 76,926 49.6% 35,864 30.0% 29,719 20.5% 78,338 17.4%
RETAIL (1)
Credit cards ........... 10,606 3.3 14,930 9.6 12,204 10.2 13,785 9.5 25,967 5.8
Personal loans ......... 17,442 5.4 25,516 16.4 32,876 27.5 43,945 30.2 63,008 14.0
Vehicle loans .......... 323 0.1 534 0.3 6,453 5.4 9,697 6.7 23,829 5.3
Overdrafts ............. 8,491 2.6 -- 0.0 7,967 6.6 8,637 5.9 10,234 2.3
Loans funded by domestic
development banks ... 6,843 2.1 3,840 2.5 5,299 4.4 6,382 4.4 8,391 1.9
Trade financing ........ 1,841 0.6 890 0.6 355 0.3 156 0.1 658 0.1
Working capital loans .. 50,563 15.7 31,644 20.4 18,084 15.1 22,743 15.7 41,000 9.1
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total retail ........ 96,109 29.8% 77,354 49.8% 83,238 69.5% 105,345 72.5% 173,087 38.3%
FINANCIAL LEASES (2) ... -- 0.0% -- 0.0% -- 0.0% 10,173 7.0% 22,175 4.9%
MORTGAGE ............... 1,279 0.4% 864 0.6% 551 0.5% 37 0.0% 177,836 39.4%
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
TOTAL PAST DUE
LOANS ............ Ps322,703 100.0% Ps155,144 100.0% Ps119,653 100.0% Ps145,274 100.0% Ps451,436 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
----------
(1) Includes loans to upper-income individuals and small companies.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2005.
The total amount of past due loans increased 211% from Ps 145,274
million in 2004 to Ps 451,436 million in 2005. This increase is mostly explained
by the Merger in general and by the incorporation of Conavi's mortgage loan
portfolio, specifically, since in historical terms mortgage loans presented past
due levels that were much higher than the other segments of the Colombian
finance sector. As previously mentioned, this segment considerably increased its
share of the Bank's overall portfolio as a result of the Merger with Conavi. The
percentage of past due loans as a percentage of the Bank's total portfolio went
from 1.45% in 2004 to 2.42% in 2005.
120
The past due portfolio increased 21.41% between 2003 and 2004, from Ps
119,653 million at December 31, 2003, to Ps 145,274 million at December 31,
2004, mainly due to an increase in past due Retail loans as a result of the
Bank's growth in these types of loans.
The Bank believes that future increases in average nominal interest
rates may result in additional past due loans. There can be no assurance that
the increases in past due performing loans will not continue in the future. If
performing past due loans are not made current, they will become categorized as
non-performing past due loans and additional allowances for loan losses will
have to be established.
The following table presents information with respect to the Bank's
loan portfolio at least 31 days past due based on the nature of the collateral
for the loan:
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004 % 2005 %
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
(Ps million, except percentages)
SECURED
Current Ps2,203,986 41.2% Ps2,261,968 36.5% Ps2,596,226 32.3% Ps 3,950,303 39.4% Ps 7,947,554 42.7%
Past due loans from 31
to 60 days
(consumer) .......... -- 0.0 3,686 0.1 5,690 0.1 7,027 0.1 8,946 0.0
Past due financial
leases from 31 to 60
days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 79 0.0 534 0.0
Past due loans from 61
to 90 days
(consumer) .......... 4,009 0.1 -- 0.0 2,020 0.0 3,441 0.0 4,336 0.0
Past due financial
leases from 61 to 90
days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 78 0.0 134 0.0
Past due loans from 31
to 60 days (small
loans) .............. -- 0.0 246 0.0 466 0.0 665 0.0 712 0.0
Past due loans from 61
to 90 days (small
loans) .............. -- 0.0 89 0.0 315 0.1 411 0.0 445 0.0
Past due loans from 31
to 90/120 days
(mortgage) .......... 202 0.0 22 0.0 -- 0.0 -- 0.0 131,268 0.7
Past due loans from 91
to 180 days
(consumer) .......... 1,823 0.0 1,881 0.0 2,995 0.1 6,074 0.1 5,380 0.0
Past due financial
leases from 91 to 180
days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 83 0.0 344 0.0
Past due loans from 91
to 180 days (small
loans) .............. -- 0.0 415 0.0 476 0.0 926 0.0 1,130 0.0
Past due loans from
91/121 to 180 days
(mortgage) .......... -- 0.0 -- 0.0 4 0.0 -- 0.0 13,631 0.1
Past due loans from 31
to 90 days
(commercial) ........ 51,414 1.0 9,617 0.2 10,935 0.1 16,295 0.2 30,193 0.2
Past due financial
leases from 31 to 90
days (commercial)
(2) ................. -- 0.0 -- 0.0 -- 0.0 6,514 0.1 9,767 0.1
Past due loans from 181
days to 360 days
(consumer) .......... 2,835 0.1 -- 0.0 2,589 0.0 3,348 0.0 4,487 0.0
Past due financial
leases from 181 to
360 days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 76 0.0 149 0.0
Past due loans from 181
to 360 days (small
loans) .............. -- 0.0 -- 0.0 -- 0.0 -- 0.0 -- 0.0
Past due loans from 181
days to 360 days
(mortgage) .......... 138 0.0 138 0.0 -- 0.0 37 0.0 16,651 0.1
Past due loans from 91
to 180 days
(commercial) ........ 35,933 0.7 8,736 0.1 5,751 0.1 8,730 0.1 14,306 0.1
Past due financial
leases from 91 to 180
days (commercial)
(2) ................. -- 0.0 -- 0.0 -- 0.0 1,845 0.0 4,900 0.0
Past due loans from 121
to 360 days
(commercial) ........ 47,628 0.9 10,452 0.2 8,995 0.1 6,156 0.1 17,938 0.1
Past due financial
leases from 121 to
360 days (commercial)
(2) ................. -- 0.0 -- 0.0 -- 0.0 924 0.0 3,304 0.0
Past due loans more than
360 days ............ 50,554 0.9 29,501 0.5 17,217 0.2 9,661 0.1 24,636 0.1
Past due financial
leases more than 360
days (2) ............ -- 0.0 -- 0.0 -- 0.0 573 0.0 3,043 0.0
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
TOTAL .................. Ps2,398,522 44.9% Ps2,326,751 37.6% Ps2,653,679 33.1% Ps 4,023,246 40.2% Ps 8,243,788 44.2%
=========== ===== =========== ===== =========== ===== ============ ===== ============ =====
UNSECURED(1)
Current ................ Ps2,823,516 52.8% Ps3,780,203 61.0% Ps5,313,789 66.2% Ps 5,939,662 59.2% Ps10,227,262 55.0%
Past due loans from 31
to 60 days
(consumer) .......... 15,534 0.3 13,851 0.2 19,209 0.2 14,960 0.1 25,684 0.1
Past due loans from 61
to 90 days
(consumer) .......... -- 0.0 -- 0.0 -- 0.0 7,115 0.1 13,678 0.1
Past due loans from 31
to 60 days (small
loans) .............. -- 0.0 531 0.0 1,588 0.0 1,180 0.0 923 0.0
Past due loans from 61
to 90 days (small
loans) .............. -- 0.0 308 0.0 793 0.0 557 0.0 664 0.0
121
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004 % 2005 %
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
(Ps million, except percentages)
Past due loans from 91
to 180 days
(consumer) .......... 7,888 0.1 7,112 0.1 9,289 0.1 12,490 0.1 21,809 0.1%
Past due loans from 91
to 180 days (small
loans) .............. -- 0.0 821 0.0 1,456 0.0 1,887 0.0 2,105 0.0
Past due loans from 31
to 90 days
(commercial) ........ 7,652 0.1 17,532 0.3 5,583 0.1 10,103 0.1 16,292 0.1
Past due loans from 181
days to 360 days
(consumer) .......... 7,184 0.1 10,678 0.2 8,176 0.1 8,414 0.1 16,431 0.1
Past due loans from 91
to 180 days
(commercial) ........ 3,493 0.1 9,358 0.2 2,980 0.0 3,980 0.0 27,230 0.1
Past due loans from 121
to 360 days
(commercial) ........ 34,077 0.6 9,192 0.1 8,889 0.1 6,863 0.1 19,017 0.1
Past due loans more than
360 days 52,339 1.0 20,978 0.3 4,237 0.1 4,782 0.0 11,369 0.1
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
TOTAL .................. Ps2,951,683 55.1% Ps3,870,564 62.4% Ps5,375,989 66.9% Ps 6,011,993 59.8% Ps10,382,464 55.8%
=========== ===== =========== ===== =========== ===== ============ ===== ============ =====
TOTAL CURRENT LOANS AND
FINANCIAL LEASES
(2) ................. Ps5,027,502 94.0% Ps6,042,171 97.5% Ps7,910,015 98.5% Ps 9,889,965 98.6% Ps18,174,816 97.7%
Past due loans from 31
to 60 days
(consumer) .......... 15,534 0.4 17,537 0.3 24,899 0.3 21,987 0.2 34,630 0.2
Past due financial
leases from 31 to 60
days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 79 0.0 534 0.0
Past due loans from 61
to 90 days
(consumer) .......... 4,009 0.0 -- 0.0 2,020 0.0 10,556 0.1 18,014 0.1
Past due financial
leases from 61 to 90
days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 78 0.0 134 0.0
Past due loans from 31
to 60 days (small
loans) .............. -- 0.0 777 0.0 2,054 0.0 1,845 0.0 1,635 0.0
Past due loans from 61
to 90 days (small
loans) .............. -- 0.0 397 0.0 1,108 0.0 968 0.0 1,109 0.0
Past due loans from 31
to 90/120 days
(mortgage) .......... 202 0.0 22 0.0 -- 0.0 -- 0.0 131,268 0.7
Past due loans from 31
to 90 days
(commercial) ........ 59,066 1.1 27,149 0.4 16,518 0.2 26,398 0.3 46,485 0.2
Past due financial
leases from 31 to 90
days (commercial)
(2) ................. -- 0.0 -- 0.0 -- 0.0 6,514 0.1 9,767 0.1
Past due loans from 91
to 180 days
(consumer) .......... 9,711 0.2 8,993 0.1 12,284 0.2 18,564 0.2 27,189 0.1
Past due financial
leases from 91 to
180 days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 83 0.0 344 0.0
Past due loans from 91
to 180 days (small
business loans) ..... -- 0.0 1,236 0.0 1,932 0.0 2,813 0.0 3,235 0.0
Past due loans from
91/121 to 180 days
(mortgage) .......... -- 0.0 -- 0.0 4 0.0 -- 0.0 13,631 0.1
Past due loans from 91
to 180 days
(commercial) ........ 39,426 0.7 18,094 0.3 8,731 0.1 12,710 0.1 41,536 0.2
Past due financial
leases from 91 to 180
days (commercial)
(2) ................. -- 0.0 -- 0.0 -- 0.0 1,845 0.0 4,900 0.0
Past due loans from 121
to 360 days
(commercial) ........ 81,705 1.5 19,644 0.3 17,884 0.2 13,019 0.2 36,955 0.2
Past due financial
leases from 121 to
360 days (commercial)
(2) ................. -- 0.0 -- 0.0 -- 0.0 924 0.0 3,304 0.0
Past due loans from 181
days to 360 days
(consumer) .......... 10,019 0.2 10,678 0.2 10,765 0.1 11,762 0.1 20,918 0.1
Past due financial
leases from 181 to
360 days (consumer)
(2) ................. -- 0.0 -- 0.0 -- 0.0 76 0.0 149 0.0
Past due loans from 181
days to 360 days
(mortgage) .......... 138 0.0 138 0.0 -- 0.0 37 0.0 16,651 0.1
Total past due loans
more than 360 days .. 102,893 1.9 50,479 0.9 21,454 0.4 14,443 0.1 36,005 0.2
Total past due financial
leases more than 360
days (2) ............ -- 0.0 -- 0.0 -- 0.0 573 0.0 3,043 0.0
TOTAL PAST DUE LOANS
AND FINANCIAL
LEASES (2) ....... 322,703 6.0 155,144 2.5 119,653 1.5 145,274 1.4 451,436 2.3
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
Total gross loans and
financial leases
(2) ................. 5,350,205 100.0 6,197,315 100.0 8,029,668 100.0 10,035,239 100.0 18,626,252 100
Allowance for loan and
financial lease
losses (2) .......... (271,729) (5.1) (332,324) (5.4) (387,263) (4.8) (434,378) (4.3) (705,882) (3.8)
----------- ----- ----------- ----- ----------- ----- ------------ ----- ------------ -----
TOTAL LOANS AND
FINANCIAL LEASES,
NET (2) .......... Ps5,078,476 94.9% Ps5,864,991 94.6% Ps7,642,405 95.2% Ps 9,600,861 95.7% Ps17,920,370 96.2%
=========== ===== =========== ===== =========== ===== ============ ===== ============ =====
----------
(1) Includes loans with personal guarantees.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as of January 1, 2004.
122
NON-PERFORMING, PAST DUE AND RESTRUCTURED LOANS
The following table presents a summary of loans accounted for on a
non-performing basis and restructured loans with respect to the Bank's loan
portfolio:
AS OF DECEMBER 31,
---------------------------------------------------------
2001 2002 2003 2004 2005
--------- --------- --------- --------- ---------
(Ps million, except percentages)
Non-performing loans........ Ps243,892 Ps109,659 Ps 76,182 Ps 88,451 Ps275,864
Restructured loans, net..... Ps738,974 Ps679,885 Ps583,056 Ps455,802 Ps460,183
As of December 31, 2001, 2002, 2003, 2004 and 2005, BC didn't have
performing loans which were contractually past due 90 days or more.
E.4. SUMMARY OF LOAN LOSS EXPERIENCE
ALLOWANCE FOR LOAN LOSSES
The Bank complies with Colombian regulations regarding allowances for
loan losses by setting aside specific allowances on past due performing and
non-performing loans based on the length of time such loans have been past due.
The Superintendency of Banking (now Superintendency of Finance), through
External Circular 044 of July 23, 1999, tightened loan allowance rules for
Colombian banks. In addition, banks started to accumulate a general allowance,
which should amount to 1% of the total loans within three years starting July
31, 1999. The regulations contained in External Circular No. 070 dated October
5, 2000 ratified this general 1% provision and eliminated the risk coefficient
and the obligation to make additional provision for this item. The regulations
of the Superintendency of Finance required the Bank to review commercial loans
every six months, and consumer and mortgage loans at least monthly. The current
regulation contained in External Circular 011 of March, 2002, requires that all
debtors whose indebtedness for the different categories of credit exceeds 300
SMLV (Ps 122.4 million for 2005), be evaluated twice a year. Additionally, the
regulation requires that all loans be evaluated every month on their past due
days basis.
The Bank establishes its loan allowances by classifying its loan
portfolio according to the loan classification system determined by the
Superintendency of Finance and by applying to each such classification the
applicable allowance percentage formula, also as specified by the
Superintendency of Finance. The Bank believes that its application of the loan
classification system and allowance formula results in the establishment of
allowances that are reasonable and adequate for the credit risk associated with
BC's loan portfolio. Every six months, the Bank evaluates all debtors whose
indebtedness for the various credit facilities exceeds 300 SMLV (Ps 122.4
million); additionally, these credits, and those which do not meet this
condition, are evaluated monthly based on the days they are past due. In
addition, through the Bank's Vice President for Risk Management office, the Bank
performs an ongoing review of the loan portfolio from time to time to adjust its
allowances for loan losses as necessary.
Guidelines for the establishment of the allowance for loan losses by
Colombian credit institutions, including commercial banks, are set by the
Superintendency of Finance.
123
The following table shows the allowance for loan losses required to be
taken, expressed as a percentage of the value of the loan to the extent not
covered by collateral applicable until November 30, 2005 (including principal,
interest and commissions and fees) for commercial, small business, consumer and
mortgage loans classified as follows:
"A" "B" "C" "D" "E"
--- --- --- --- ---
0% 1% 20% 50% 100%
External Circular 004 issued by Superintendency of Finance on December
29, 2005 amended these allowance percentages for loans classified in risk
categories "A" and "B". This new regulation has been in force since December 1,
2005.
For mortgage loans, the new allowance percentages are as follows:
"A" "B" "C" "D" "E"
--- --- --- --- ---
On Guaranteed Portion 1% 3.2% 10% 20% 30%
On Non- Guaranteed Portion 1% 100% 100% 100% 100%
In the case of commercial, small business and consumer loans, the
corresponding allowance percentages are as follows:
"A" "B" "C" "D" "E"
--- --- --- --- ---
1% 3.2% 20% 50% 100%
The Superintendency of Finance established a period of 19 months since
December 2005 to adjust the allowance using a installment methodology.
This amendment intends to adjust the total allowance for loans and
financial lease losses in accordance with the Reference Model for Commercial
Loans - credit risk management system. Additionally this regulation was
established considering the specific dynamics of the different loan categories.
The Bank allocates the allowance for loan losses on the basis of
whether the loans are secured and, among those secured loans, whether such
security is collateralized or personal guaranteed. The largest amount of
allowances is allocated to consumer, commercial and small business loans that
are secured by personal guarantees or unsecured. The allowance for loan losses
is calculated including the value of the underlying security. External Circular
011 of March, 2002, issued by the Superintendency of Banking (now
Superintendency of Finance), establishes that for allowances on loans, the
security that guarantees the loan will only support the principal of the loan.
Consequently, allowances are calculated in accordance with the loan
classification system's percentage, which is applied to the difference between
the amount outstanding and 70% of the value of the security supporting the loan.
In addition, for establishing provisions, the percentages of the total amount of
such guarantee must be taken into consideration, as follows:
124
For mortgage-backed guarantees:
TIME ELAPSED BETWEEN THE DATE OF DEFAULT AND
THE DATE OF NON-REALIZATION OF THE GUARANTEE PERCENTAGE
-------------------------------------------- ----------
0 to 18 Months 70%
Over 18 Up to 24 Months 50%
Over 24 Up to 30 Months 30%
Over 30 Up to 36 Months 15%
Over 36 Months 0%
For guarantees not backed by mortgages:
TIME ELAPSED BETWEEN THE DATE OF DEFAULT AND
THE DATE OF NON-REALIZATION OF THE GUARANTEE PERCENTAGE
-------------------------------------------- ----------
0 to 12 Months 70%
Over 12 Up to 24 Months 50%
Over 24 Months 0%
However, External Circular 004 establishes that the increases in the
individual allowances for loans in Categories A and B (1% in Category A and 2.2%
in Category B) must be calculated on the total amount of the unpaid balance and
not on the difference between said amount and the value of the guarantees.
There are special requirements for the allowance needed for loan
losses in respect of loans of borrowers involved in proceedings with their
creditors. The Bank may make additional allowances not required by the
regulations of the Superintendency of Finance when, in its judgment, an
additional allowance is guaranteed for restructured loans with wide maturities
secured by guaranties that could prove difficult to sell. Through the office of
the Bank's Vice President for Risk Management, the Bank undertakes a monthly
review of its past due and non-performing loan portfolio.
Additionally, on July 26, 2004, the Bank established an internal
policy to increase allowances for small business and consumer loans. The
following table shows the allowance required to be taken, expressed as a
percentage of the value of the loan to the extent not covered by collateral
(including principal, interest and commissions and fees):
SMALL
CLASSIFICATION CONSUMER BUSINESS LOANS
-------------- -------- --------------
A 0% 0%
B 30% 30%
C 50% 60%
D 100% 100%
E 100% 100%
The following table sets forth the activity in the allowance for loan
and financial lease losses:
125
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
2001 2002 2003 2004 2005
--------- --------- ---------- --------- ----------
(Ps million)
Balance at beginning of period.............. Ps285,565 Ps271,729 Ps 332,324 Ps387,263 Ps 434,378
Balance at beginning of period (Conavi,
Corfinsura and subsidiaries)............. -- -- -- -- 236,013
Balance at beginning of period
(Sufinanciamiento)....................... -- -- 11,854 -- --
Allowance for financial leasing
reclassification (4)..................... -- -- -- 7,002 --
Provisions for loan losses.................. 86,793 143,361 286,170 186,480 374,744
Charge-offs................................. (83,586) (71,592) (112,393) (55,032) (115,455)
Effect of difference in exchange rate (3)... -- 10,366 (284) (12,751) (3,955)
Reclassification-Securitization............. -- -- -- -- (11,947)
Recoveries (17,043) (21,540) (130,408) (78,584) (207,896)
--------- --------- ---------- --------- ----------
BALANCE AT END OF YEAR(1)(2)............ Ps271,729 Ps332,324 Ps 387,263 Ps434,378 Ps 705,882
========= ========= ========== ========= ==========
----------
(1) The provision for past due accrued interest receivable, which is not
included in this item, amounted to Ps 4,965 million, Ps 4,518 million, Ps
5,316 million, Ps 4,483 million and Ps 12,379 million for the years ended
December 31, 2001, 2002, 2003, 2004 and 2005 respectively.
(2) The allowance past due accrued interest receivable, which is not included
in this item, amounted to Ps 27,011 million, Ps 15,074 million, Ps 5,170
million, Ps 4,603 million and Ps 8,655 million for the years ended December
31, 2001, 2002, 2003, 2004 and 2005 respectively,
(3) For year 2001, the effect of difference in exchange interest rate was
included as a part of recoveries.
(4) Includes allowance for financial leases, according to regulations issued by
the Superintendency of Banking (now Superintendency of Finance) and
effective as of January 1, 2004.
The following table shows the allocation of the Bank's allowance for
loan and financial lease losses by type of loan using the classification of the
Superintendency of Banking (now Superintendency of Finance):
AS OF DECEMBER 31,
---------------------------------------------------------
2001 2002 2003 2004(2) 2005
--------- --------- --------- --------- ---------
(Ps million)
Commercial loans............................ Ps178,471 Ps243,835 Ps276,285 Ps271,296 Ps387,473
Consumer loans.............................. 46,723 22,668 27,429 49,350 88,052
Small business loans........................ -- 1,260 2,082 4,271 4,679
Financial leases............................ -- -- -- 6,529 16,342
Mortgage.................................... 1,116 849 440 37 22,747
General(1).................................. 45,419 63,712 81,027 102,895 186,589
--------- --------- --------- --------- ---------
TOTAL ALLOWANCE FOR LOAN LOSSES.......... Ps271,729 Ps332,324 Ps387,263 Ps434,378 Ps705,882
========= ========= ========= ========= =========
----------
(1) This is a provision established in 1999 by Circular 044 issued by the
Superintendency of Banking (now Superintendency of Finance).
(2) Includes financial leases, according to regulations issued by the
Superintendency of Banking (now Superintendency of Finance) and effective
as January 1, 2004.
The following table shows the allocation of the Bank's allowance for
loan and financial lease losses by type of loan:
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004 % 2005 %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(Ps million, except percentages)
CORPORATE
Trade financing............ Ps 491 0.2% Ps 3,073 0.9% Ps 217 0.1% Ps 3,496 0.8% Ps 23,598 3.3%
Loans funded by domestic
development banks....... 845 0.3 812 0.2 57,745 14.9 10,057 2.3 20,886 3.0
Working capital loans...... 177,135 65.2 212,108 63.8 202,403 52.3 243,862 56.2 315,725 44.7
Credit cards............... -- 0.0 107 0.0 34 0.0 971 0.2 1,435 0.2
Overdrafts................. -- 0.0 1,313 0.4 370 0.1 919 0.2 1,781 0.3
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total corporate......... 178,471 65.7 217,413 65.3 260,769 67.4 259,305 59.7 363,425 51.5
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
126
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------------------
2001 % 2002 % 2003 % 2004 % 2005 %
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
(Ps million, except percentages)
RETAIL (1)
Credit cards............... 5,823 2.1 9,568 2.9 6,452 1.7 11,965 2.8 21,815 3.1
Personal loans............. 5,947 2.2 9,816 3.0 15,687 4.1 27,718 6.4 45,955 6.5
Vehicle loans.............. 99 0.0 77 0.0 8,550 2.2 6,121 1.4 13,837 2.0
Overdrafts................. 2,727 1.0 3,318 1.0 1,908 0.5 2,791 0.6 4,186 0.6
Loans funded by domestic
development banks....... 851 0.3 1,507 0.5 642 0.2 1,770 0.4 3,970 0.6
Trade financing............ 349 0.1 792 0.2 119 0.0 59 0.0 430 0.1
Working capital loans...... 30,927 11.3 25,272 7.6 11,669 2.9 15,188 3.6 26,586 3.8
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
Total retail............ 46,723 17.2 50,350 15.2 45,027 11.6 65,612 15.2 116,779 16.7
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
FINANCIAL LEASES(3)........ -- 0.0 -- 0.0 -- 0.0 6,529 1.4 16,342 2.3
MORTGAGE................... 1,116 0.4 849 0.3 440 0.1 37 0.0 22.747 3.2
GENERAL(2)................. 45,419 16.7 63,712 19.2 81,027 20.9 102,895 23.7 186,589 26.3
--------- ----- --------- ----- --------- ----- --------- ----- --------- -----
TOTAL ALLOWANCE FOR
LOAN AND FINANCIAL
LEASE LOSSES......... Ps271,729 100.0% Ps332,324 100.0% Ps387,263 100.0% Ps434,378 100.0% Ps705,882 100.0%
========= ===== ========= ===== ========= ===== ========= ===== ========= =====
----------
(1) Includes allowances for loans to upper-income individuals and small
companies.
(2) This is a provision established in 1999 by Circular 044 issued by the
Superintendency of Banking (now Superintendency of Finance).
(3) At December 31, 2004 allowance for financial leases is included in the
allowance for loans.
At December 31, 2005, the allowance for loan and financial lease
losses increased 62.5% from Ps 434,378 million at December 31, 2004 to Ps
705,882 million. This increase is partly explained by the Merger and
additionally by the increase in the individual allowance percentages for loans
classified in "A" and "B", as established by the Superintendency of Finance in
External Circular 004 of 2005.
As of December 31, 2004, the allowance for loan and financial lease
losses increased 12.2% from Ps 387,263 million at December 31, 2003, to Ps
434,378 million at December 31, 2004, due primarily to an increase in general
allowances and working capital loans.
As of December 31, 2005, the breakdown per type of loan in the total
allowance is as follows: Corporate loans 51.5%, retail loans 16.5%, finance
leases 2.3% and mortgage loans 3.2%. Allowance/past due loans ratio was 156%.
NEW PROVISION SYSTEM (OR CREDIT RISK MANAGEMENT SYSTEM - "SARC")
Through External Circular 011 of March 5, 2002, which modifies Chapter
II of External Circular 100 of 1995 (Basic and Accounting Circular), regarding
management of credit risk, the Superintendency of Banking (now Superintendency
of Finance) requires entities subject to its supervision to develop a credit
risk management system ("Sistema de Administracion de Riesgo Crediticio" -
"SARC"). As a consequence, the Bank must establish strategies, policies,
methodologies, processes and structures to evaluate, rate, monitor, and control
its credit risks.
SARC requires that the entities under the supervision of the
Superintendency of Finance permanently evaluate the credit risk and the paying
capacity of each debtor, and to this end, they must internally define a
methodology which will take into account at least the following:
127
- Probability of impairment or change in the rating of credit
risk (probability of non-payment or expected delay in
payment rate);
- Estimate or quantification of the expected loss that may be
incurred by the entity, should the foregoing event occur,
during a determined lapse of time (e.g., 12 months). For
this estimate, it is important, among other things, to
compute the value or rate of recovery of the active value,
in the event that the loan would become unrecoverable. The
existence and suitability of the collateral that supports
the loans are an important factor that should be taken into
account in the context.
The allowances for loans must be based on the estimate of the expected
losses and a general allowance of 1% on the total gross portfolio is maintained.
For the estimate of expected losses and allowances, the Bank has to
follow guidelines established by the methodological documents published by the
Basel Internal Rating Approach. This model is based on three fundamental factors
which must be estimated to compute the expected loss for each business line
being analyzed:
EXPECTED LOSS = PD X EAD X LGD
Where:
PD = Probability of default
EAD = Exposure at the time of default
LGD = Loss if default occurs
The Bank has adequately fulfilled each one of the phases established
by the Superintendency of Finance and, through December 31, 2005, continues with
the parallel provision system. During 2006, the entity will continue making the
necessary adjustments to comply with the general guidelines and deadlines as
established by said Superintendency in periodic External Circulars.
CHARGE-OFFS
The following table shows the allocation of the Bank's charge-offs by
type of loan as of December 31, 2001, 2002, 2003, 2004 and 2005:
128
YEAR ENDED DECEMBER 31,
------------------------------------------------------
2001 2002 2003 2004 2005
-------- -------- --------- -------- ---------
(Ps million)
Trade financing.............................. Ps -- Ps24,470 Ps 546 Ps 100 Ps 630
Loans funded by domestic development banks... -- -- 1,760 2,832 4,573
Working capital loans........................ 49,460 36,022 72,298 15,350 18,190
Credit cards ................................ -- 517 10,035 9,015 14,960
Personal loans .............................. 17,338 9,140 19,475 20,251 37,775
Vehicle loans ............................... 506 35 1,419 1,981 2,508
Overdrafts .................................. 13,902 1,086 6,394 3,981 3,808
Mortgage & other............................. 2,380 322 466 385 31,742
Financial leases (1) ........................ -- -- -- 1,137 1,269
-------- -------- --------- -------- ---------
TOTAL CHARGE-OFFS......................... Ps83,586 Ps71,592 Ps112,393 Ps55,032 Ps115,455
======== ======== ========= ======== =========
----------
(1) In 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 loan
portfolio.
The ratio of charge-offs to average outstanding loans for years ended
December 31, 2001, 2002, 2003, 2004 and 2005:
YEAR ENDED DECEMBER 31,
--------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
Ratio of charge-offs to average outstanding loans... 1.69% 1.31% 1.61% 0.62% 0.66%
The Bank has a policy of actively pursuing the collection of
charged-off balances. In practice, the manager of the branch where the loan was
made and the attorney handle the collection process until a final judgment is
obtained. In addition, non-payment by the debtor is reported to the Banking
Association of Colombia credit risk center where the creditor's name and the
outstanding debt is registered. In the process of credit analysis every
Colombian financial institution consults this credit risk center.
Charge-offs are only made after the manager of the branch and the
attorney handling the case have exhausted all means to secure payment of the
judgment against any known assets of the borrower and the charge-off has been
approved by the Board of Directors. The Bank informs the Superintendency of
Finance, on a quarterly basis, of the amount of charge-offs it approves. For the
period ended December 31, 2005, the Bank registered Ps61,829 million in
recoveries of charged-off loans from previous periods.
CROSS - BORDER OUTSTANDING LOANS AND INVESTMENTS
As of December 31, 2003 and 2004 and 2005, total cross-border
outstanding loans and investments amounted to approximately US$162 million,
US$175 million and US$312 million, respectively. At 2005, total outstanding
loans to borrowers in foreign countries amounted to US$100 million, and total
investments were US$212 million. As of December 31, 2005, total cross-border
outstanding loans and investments represented 2.31% of total assets.
129
The following table presents information with respect to the Bank's
cross-border outstanding loans and investments for the years ended on December
31, 2003, 2004 and 2005:
2003 2004 2005
---------- ---------- ----------
(U.S. thousand dollars)
Mexico US$ 52,249 US$ 77,200 US$ 69,907
Brazil 42,790 30,980 156,084
United States 29,000 22,048 3,279
Chile 2,000 10,034 --
British Virgin Island -- 9,912 26,469
Puerto Rico -- 5,000 --
Bolivia -- 5,000 1,000
Peru 3,403 3,633 150
Ecuador 1,726 3,200 3,611
Panama 7,552 2,652 4,457
El Salvador 3,000 2,000 --
Cayman Islands 11,712 1,745 5,740
Dominican Republic 4,696 1,027 --
Costa Rica 2,000 1,000 6,949
Guatemala 1,590 -- 3,000
Venezuela 500 -- 2,000
Germany -- -- 15,643
Guyana -- -- 5,000
Honduras -- -- 2,626
United Kingdom -- -- 5,870
---------- ---------- ----------
TOTAL CROSS-BORDER OUTSTANDING
LOANS AND INVESTMENTS US$162,218 US$175,431 US$311,785
========== ========== ==========
E.5. DEPOSITS
The following table shows the composition of the Bank's deposits for
2003, 2004 and 2005:
AS OF DECEMBER 31,
------------------------------------------
2003 2004 2005
------------ ------------ ------------
(Ps million)
NON-INTEREST BEARING DEPOSITS:
Checking accounts............. Ps 2,193,069 Ps 2,523,505 Ps 3,171,182
Other deposits ............... 126,718 167,174 359,097
------------ ------------ ------------
Total ..................... 2,319,787 2,690,679 3,530,279
------------ ------------ ------------
INTEREST BEARING DEPOSITS:
Checking accounts............. 1,353,123 1,275,618 1,068,409
Time deposits ................ 4,237,345 4,361,206 6,259,800
Savings deposits.............. 2,321,742 3,534,613 7,526,494
------------ ------------ ------------
Total ..................... 7,912,210 9,171,437 14,854,703
------------ ------------ ------------
TOTAL DEPOSITS............. Ps10,231,997 Ps11,862,116 Ps18,384,982
============ ============ ============
130
The following table shows the time deposits held by the Bank at
December 31, 2005, by amount and maturity for deposits:
AS OF DECEMBER 31,
----------------------------------------
PESOS U.S. DOLLARS TOTAL
----------- ------------ -----------
(Ps million)
Up to 3 months (1)........................... Ps 575,917 Ps 796,169 Ps1,372,087
From 3 to 6 months (1)....................... 454,750 212,189 666,938
From 6 to 12 months (1)...................... 695,081 75,905 770,985
More than 12 months (1)...................... 1,014,814 235,201 1,250,015
Time deposits less than Ps 228 million (2)... 1,824,833 374,942 2,199,775
----------- ----------- -----------
TOTAL ....................................... Ps4,565,395 Ps1,694,406 Ps6,259,800
=========== =========== ===========
----------
(1) Time deposits higher than Ps228 million (the equivalent of US$100,000 at
the Representative Market Rate as of December 31, 2005).
(2) The equivalent of US$100,000 at the Representative Market Rate as of
December 31, 2005.
For a description of the average amount and the average rate paid of
deposits, see Item 4. Information on the Company - E. Selected Statistical
Information - E.1. Distribution of Assets, Liabilities and Stockholders' Equity;
Interest Rates and Interest Differential.
E.6. RETURN ON EQUITY AND ASSETS
The following table presents certain selected financial ratios of the
Bank for the periods indicated:
FOR THE FISCAL YEAR
ENDED DECEMBER 31,
---------------------
2003 2004 2005
----- ----- -----
(in percentages)
Net income as a percentage of:
Average total assets........................ 3.40 3.62 3.30
Average shareholders' equity................ 31.14 32.14 31.49
Dividends declared per share as a percentage of
net income per share(1)..................... 33.42 37.47 39.05
Average shareholders' equity as a percentage of
average total assets........................ 10.92 11.27 10.47
Return on interest-earning assets(2)........... 13.3 12.9 12.6
----------
(1) Dividends are paid based on unconsolidated earnings. Net income per share
is calculated using the average number of Common Shares outstanding during
the year.
(2) Defined as total interest earned divided by average interest-earning
assets.
E.7. INTERBANK BORROWINGS
The following table sets forth interbank borrowings by the Bank for
the periods indicated:
131
AS OF DECEMBER 31,
--------------------------------------------------------------------------
2003 2004 2005
---------------------- ---------------------- ------------------------
AMOUNT RATE(1) AMOUNT RATE(1) AMOUNT RATE(1)
------------ ------- ------------ ------- -------------- -------
(Ps million, except percentages)
End of period................................... Ps 456,059 1.24% Ps 246,282 2.77% Ps 1,705,468 3.02%
Weighted average during period.................. 317,258 1.67% 312,969 2.36% 1,349,987 4.05%
Maximum amount of borrowing at any month-end... (2)477,975 (3)417,187 (4)1,975,415
Interest paid during the year................... 5,293 7,389 54,630
----------
(1) At the end of the year, the Bank typically increases its dollar-denominated
interbank borrowings, which represent the great majority of interbank
borrowings and which have lower interest rates.
(2) November.
(3) January.
(4) November.
ITEM 4A. UNRESOLVED STAFF COMMENTS
As of the date of the filing of this Annual Report on 20-F we do not
have any unresolved comments from the Securities and Exchange Commission staff
regarding our periodical reports under the Exchange Act.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS(6)
The results for the period ended December 31, 2005 include not only
operating results and trends, but also significant changes due to the Merger
with Conavi and Corfinsura that took place in July 2005, as explained in Item 4.
Information on the Company, A.- History and Development of the Company.
As of December 31, 2005, the Bank's average total assets grew 79.8%
from Ps15,971,743 million as of December 31, 2004, to Ps28,711,558 million as of
December 31, 2005. This is mainly explained by the interest-earning loan
portfolio increase of 92.6%, reaching an average of Ps17,277,717 million
compared to an average of Ps8,972,315 million as of December 31, 2004.
Consequently, the interest-earning loan portfolio went from representing 64.5%
of total interest earning assets in 2004 to 68.4% in 2005, changing the balance
sheet structure, reducing the share of investments, overnight funds and
non-interest bearing assets. These changes strengthened BC's position in its
core business. Additionally the interest earning assets share showed a marginal
increase with respect to the total assets. However, interest-bearing liabilities
increased as a result of the considerable amount of deposits acquired from
Conavi and Corfinsura. This increase entailed a drop in the interest-earning
assets over interest-bearing liabilities ratio.
----------
(6) Average balance sheet numbers are used in this section, unless otherwise
stated.
132
With regard to the deposit mix in 2005, the proportion of savings
accounts increased significantly while the proportion of time deposits, which
have a higher cost for the Bank, decreased. However, other interest-bearing
liabilities such as borrowings from domestic development banks, interbank
borrowings and volume of bonds showed considerable increases as a result of the
Merger. All of the above explain a lower share of non-interest bearing
liabilities in the total funding structure that added to the decrease in the
interest earning assets, resulted in a 60 basis points drop in net interest
margin with respect to 2004.
As of December 31, 2005, interest-earning assets showed a 12.6%
average rate of return, which is 30 basis points lower than that of last year
due mainly to a more competitive scenario partially as a result of the
consolidation of the financial sector. Also, for this same period, the cost of
interest-bearing liabilities remained stable at 5.4%, despite the aforementioned
increase in interest-bearing liabilities.
For the period ended December 31, 2005, the Bank's net income
increased 64% compared to the same period in 2004. This increase is explained by
a growth of 68.4% in net interest income and a growth of 87.8% in the income
from fees and services net, compared to a 57.9% increase in labor costs,
excluding merger and goodwill amortization expenses. As a result of the Merger,
the operating expenses (including merger expenses and goodwill amortization)
over operating income ratio increased from 51% as of December 31, 2004 to 55% as
of December 31, 2005. This ratio may improve in the future as a result of
synergies in the operating structure expected from the Merger. The Bank's
provision for income tax only increased 16.2%, thanks to Conavi and Corfinsura's
tax credits assumed by the Bank as a result of the Merger.
A.1. GENERAL DISCUSSION OF THE CHANGES IN RESULTS
RESULTS FROM OPERATIONS
BC's net income at December 31, 2005 totaled Ps946,881 million, which
represents a 63.6% increase as compared to Ps578,678 million posted at the end
of 2004. This result reflects the effect of the Merger, the actions and efforts
that the Bank made during the year and the positive performance of the Colombian
economy.
Balance Sheet Structure
The general structure of the balance sheet remained stable throughout
2004 and 2005. The ratio of the average interest-earning assets over total
average assets rose from 87% in 2004 to 88% in 2005, and the ratio between
average interest-earning assets over interest-bearing liabilities dropped from
the 128% posted in 2004 to 120% in 2005.
The loan portfolio share of total interest-earning average assets rose
from 65% in 2004 to 68% in 2005, whereas the investment portfolio share
continued on a downward trend, moving from 33% to 30% during the same period.
The remaining portion of interest-earning average assets corresponds to
overnight funds, the average volume share of which dropped from 2.4% in 2004 to
1.9% in 2005.
133
For the total resource structure (liabilities and shareholders'
equity), on average, the percentage of liabilities increased slightly from 88.7%
in 2004 to 89.5% in 2005. Interest-bearing liabilities went from an average of
77% of total liabilities in 2004 to 82% in 2005, or 68% to 74% of total
resources, respectively. Deposits, including non-interest earning checking
accounts, decreased from an average of 73% of total liabilities in 2004 to 67%
in 2005. In 2005, and as a share of said deposits, average checking accounts
represented 20%, average time deposits 39% and average savings accounts 41%, as
compared to the 30%, 41%, and 29% recorded for these same in 2004. The
substantial percentage increase in savings accounts obeyed to the volume that
Conavi brought with it to the Merger.
Finally, on average, shareholders' equity as a share of the total
resource went from 11.3% in 2004 to 10.5% in 2005, reflecting an increase in the
leverage ratio, estimated as the average total assets over average shareholders'
equity, which went from 887% in 2004 to 955% in 2005. The capital adequacy ratio
dropped from 13.44% in 2004 to 10.93% in 2005, 193 basis points higher than the
minimum required by Colombian law.
Balance Sheet Dynamics
Average total assets increased 79.8% in 2005 reaching Ps28,711,558
million compared to Ps15,971,743 million in 2004, due not only to the Merger
with Conavi and Corfinsura in July 2005, but also to the growth of the average
loan portfolio. In 2004, average total assets increased 15.7% from Ps13,800,781
million in 2003.
The total gross loan portfolio registered 92.6% growth with regard to
2004, going from an average of Ps8,972,315 million to an average of Ps17,277,717
million in 2005, whereas the investment portfolio posted 62.8% growth, going
from an average of Ps4,592,112 million in 2004 to an average of Ps7,478,128
million in 2005.
Total average liabilities grew 81.4%, totaling Ps25,704,978 million
in 2005 as compared to Ps14,171,468 million recorded in 2004. Deposits grew
64.9%, going from an average of Ps10,385,554 million in 2004 to an average of
Ps17,126,370 million in 2005. With regard to deposits, it is worthwhile
pointing out the growth in low-cost deposits, such as savings accounts, which
grew 133% over the period, while time deposits grew 55%.
Balance Sheet Quality
At December 31, 2005, the non-performing past due loans share of the
total loan portfolio came to 1.5%, compared with 0.9% at the end of 2004, while
past due loans as a share of the total loan portfolio increased from 1.45% to
2.42% in this same period. Likewise, non-performing loans plus net foreclosed
assets as a share of shareholders' equity increased from 4.8% in 2004 to 9.1% in
2005.
The coverage ratio represented by the allowances for loan losses over
the total past due loan portfolio went from 299.0% at December 31, 2004, to
156.4% at December 31, 2005, due mainly to the volume of past due mortgage loans
belonging to Conavi. Nonetheless, this indicator is in line with BC's policies
showing an adequate credit risk coverage for this type of asset.
134
Income Statement's Structure - Breakdown Analysis
Upon analyzing the composition of the net income obtained during 2005,
the total operating income, excluding provisions, recorded at the end of the
year reached Ps3,012,087 million, growing 68.1% as compared to 2004. Of this
amount, income corresponding to net interest, including leasing and gains on
sales of investments, represented 68% (Ps2,049,810 million), fees and services
net 26% (Ps768,329 million), and other operating income the remaining 6%
(Ps193,948 million). There was a similar composition in 2004 for operating
income, excluding provisions, posting 68%, 23%, and 9%, respectively
On the other hand, provisions for loan portfolio losses, accrued
interest, and foreclosed assets, net of recoveries came to 4% of total operating
income in 2004 and remained at exactly the same level in 2005 (Ps131,040
million), whereas operating expenses, including merger and goodwill amortization
expenses, which in 2004 represented 51% of said income, increased to 55% in
2005.
As a result of the above, the operating margin after total operating
expenses and provisions was 41% of total operating income in 2005 (Ps1,226,242
million) as compared to 45% in 2004.
Finally, provisions for income taxes represented a net income
deduction of 29.2% in 2004, compared to 22.7% in 2005. The tax rate decline is
explained by the usage of tax credits earned by both Corfinsura and Conavi.
General Income Statement Dynamics
In 2005, net income increased 63.6% compared to 2004. This increase is
explained by a growth of 68.4% in net interest income and a growth of 87.8% in
fees and services, compared to a 81.4% increase in operating expenses, including
merger and goodwill amortization expenses.
The increase in net interest income in 2005 was mainly due to the
result observed in interest on loans (including income from operating leases)
that totaled Ps2,341,746 million, increasing 89,6% as compared to the interest
on loans obtained in 2004. On the other hand, interest on investments, totaled
Ps824,709 million for 2005, increasing 50.1% during the period 2004 to 2005
which was considerably more than the slight increase of 0.6% posted for the
prior period of 2003 to 2004, and this is explained by the favorable rates of
return for public debt securities (Treasury Bonds).
Other net operating income, the most important items being gains from
sales of investments on equity securities, foreign currency derivatives
contracts and income from dividends and subsidiaries posted a growth of 17.3%
for 2005 with regard to the prior year, going from Ps165,395 million to
Ps193,948 million.
The different sources of fee generation continued their positive
trend. Income from fees and services for 2005 increased 81.5% over the period,
going from Ps449,773 million in 2004 to Ps816,416 million in 2005.
As far as costs are concerned, operating costs, including goodwill
amortization and merger expenses, rose from Ps912,421 million in 2004 to
Ps1,654,805 million in 2005, which entailed a growth of 81.4%.
135
YEAR ENDED DECEMBER 31,
----------------------------------------
2003 2004 2005
----------- ----------- ------------
(Ps million)
NET INCOME:(1)
Net interest income................................... Ps1,057,305 Ps1,217,365 Ps 2,049,810
Provision for loan and accrued interest losses, net... (162,057) (110,455) (185,404)
Recovery of charged-off loans......................... 31,701 49,032 61,829
Provision for foreclosed assets and other assets...... (68,892) (33,127) (63,969)
Recovery of provisions for foreclosed assets and other
assets............................................. 16,949 27,926 56,504
Total fees and income from services, net.............. 354,272 409,058 768,329
Total other operating income.......................... 161,053 165,395 193,948
Total operating expenses ............................. (850,768) (912,421) (1,654,805)
Total non-operating income (expense).................. (7,544) 4,715 (1,846)
Income before income taxes............................ 532,019 817,488 1,224,396
Income tax expense.................................... (62,635) (238,810) (277,515)
----------- ----------- ------------
NET INCOME......................................... Ps 469,384 Ps 578,678 Ps 946,881
=========== =========== ============
----------
(1) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for the years 2001,
2002, 2003 and 2004 were reclassified. This change did not have any impact
on the net income.
INTEREST INCOME
Interest income for the year ending December 31, 2005, totaled Ps
3,200,084 million, representing a 77.5% increase on the Ps 1,803,108 million
obtained in 2004, which in turn was 17.3% higher than the level posted in 2003.
The average volume of interest-earning assets showed an increase of
81.6%, going from Ps 13,905,061 million in 2004 to Ps 25,244,735 million in
2005. Said increase was due to the Merger with Conavi and Corfinsura and to the
tendency shown in the loan portfolio, which posted an average growth of 92.6%,
increasing from Ps 8,972,315 million in 2004 to Ps 17,277,717 million in 2005.
The average loan portfolio grew from Ps 7,012,079 million in 2003 to
Ps 8,972,315 million in 2004, an increase of 28%, reflecting the expansion of
and increased confidence in the Colombian economy. Although the average rate of
return for the loan portfolio remained relatively stable, decreasing from 13.9%
in 2003 to 13.8% in 2004, interest income from the loan portfolio (including
operating leasing) increased 26.4% in the same period.
Past due loans at December 31, 2005 increased by 210.7% with regard to
December 31, 2004, whereas non-performing loans increased by 156.8% in the same
period, going from 60.8% of the total past due portfolio at year end 2004 to
61.1% at year end 2005, which also drove interest income.
Likewise, the average volume of the investment portfolio increased
from Ps 4,592,112 million in 2004 to Ps 7,478,128 million in 2005, representing
an increase of 62.8%. The average volume increase for 2004 with regard to 2003
came to 13.4% .
The volume increase in the loan portfolio drove, in turn, an increase
in interest income of 89.6%, going from Ps 1,235,405 million in 2004 to Ps
2,341,746 million in 2005. This growth was favored by the Merger as well as by
more favorable placement levels and more stable rates between 2004 and 2005.
136
Income from financial leases signaled another good year for BC. At
December 31, 2005, leasing income totaled Ps 291,472 million, representing an
increase of 209% as compared to Ps 94,450 million in 2004, thanks to the Merger
and to the outperforming growth of leasing business in Colombia. BC subsidiaries
Bancolombia (Panama) S.A., Leasing Colombia, Banco Corfinsura Internacional and
Suleasing Internacional provide lease financing to commercial customers, while
Sufinanciamiento provides lease financing to consumers. Income from leasing
operations increased 60.7% in 2004, from Ps 58,774 million at December 31, 2003
to Ps 94,450 million at December 31, 2004. This increase was influenced by tax
reforms (Law 863 of December 29, 2003) that provide an incentive for Colombian
companies to enter into leasing contracts.
Income obtained on the investment portfolio grew by 50.1% going from
Ps 549,328 million in 2004 to Ps 824,709 million in 2005. This increase was
driven mainly by the increase in the number of securities as well a drop in
rates during the second half of the year, reaching their lowest level in
September.
During 2005, interest income rose to Ps 3,200,084 million. The main
drivers of this growth were the loan portfolio, leasing and the debt securities
portfolio.
INTEREST EXPENSE
Interest expense at December 31, 2005 totaled Ps 1,150,274 million,
representing an increase of 96.4% compared with Ps 585,743 million obtained in
2004, given higher deposit levels as a result of the Merger.
In 2004, interest expense rose 3.1%, passing from Ps 480,513 million
at December 31, 2003, to Ps 585,743 million at December 31, 2004. This growth
resulted from an increase in the nominal rates of return for time deposits, from
5.9% in 2003 to 6.3% in 2004, and for savings deposits, from 4.4% in 2003 to
4.7% in 2004. However, the average volume of time deposits rose 1% in 2004, and
the volume of savings deposits rose 17%. These increases reflect efforts made by
the commercial areas of BC to attract additional low-cost deposits, as well as a
general decrease in Colombian market rates due to high liquidity.
The average volume of interest-bearing liabilities showed an increase
of 94.3% during the year, going from Ps 10,866,494 million in 2004 to Ps
21,113,872 million in 2005. The average volume in checking accounts for 2005
increased by 8.4%, savings accounts 133.2% and time deposits 55.5%, reaching Ps
3,455,040 million, Ps 7,041,334 million and Ps 6,629,996 million, respectively.
In February 2004, BC issued bonds in the amount of Ps 400,000 million,
for the purpose of extending the duration of BC's interest-bearing liabilities.
Additionally, Leasing Colombia issued ordinary bonds in the amount of Ps 160,000
million in 2004 and Sufinanciamiento issued subordinated bonds in the amount of
Ps 4,500 million in 2004 and in the amount of Ps 5,000 million in 2005.
With regard to interest accrued on interest-bearing liabilities, the
average volume of bonds increased from Ps 443,522 million in 2004 to Ps
1,812,802 million in 2005 given the volume of bonds issued by the entities that
were absorbed by the Merger, thereby increasing interest accrued by 272.6%,
going from Ps 41,239 million in 2004 to Ps 153,658 in 2005.
137
In 2005, interest paid out on savings accounts and time deposits
showed growths of 71.2% and 68% respectively with regard to the prior year. As
in the case of interest-earning assets, this was mainly due to the increased
volume. The average nominal interest rate paid on savings accounts dropped from
4.7% in 2004 to 3.4% in 2005, and the time deposit rate increased 50 basis
points, reaching 6.8% in 2005 as compared to 6.3% in 2004. In spite of the high
levels of market liquidity in both 2005 and 2004, market competition drove an
increase in time deposit rates. The 96.4% increase in interest expense was due
to the growth in interest bearing liabilities, since the average interest rate
continued stable at 5.4%.
NET INTEREST INCOME
As previously mentioned, net interest income posted a 68.4% increase,
going from Ps 1,217,365 million at December 31, 2004 to Ps 2,049,810 million at
December 31, 2005. This together with the variations produced in
interest-earning assets, led to a stable result for the net interest margin
which, expressed as net interest income over the average volume of
interest-earning assets for 2004 and 2005, shows a drop from 8.7% to 8.1%. BC's
net interest income at December 31, 2004, totaled Ps 1,217,365 million, an
increase of 15.1% from Ps 1,057,305 million in 2003. This increase resulted in
part from BC's efforts to improve the funding mix through an increase in
low-cost deposits and an increase in interest-earnings assets.
The increases in interest-earning assets and interest-bearing
liabilities came to 82% and 94%, respectively, as explained in more detail above
in the respective breakdowns of interest income and expense. Interest-earning
assets as a share of total assets improved from 87% in 2004 to 88% in 2005 and
as a share of interest-bearing liabilities dropped from 128% to 120% in the same
period.
The nominal average interest-earning asset rate was 12.6% for 2005,
posting a 30 basis point drop compared to the 12.9% posted in 2004. On the other
hand, the nominal average interest-bearing liabilities rate remained stable at
5.4% for 2005.
As a result of these variations in volumes and rates, and as
previously explained in detail in the corresponding sections, net interest
income increased by 68.4% from 2004 to 2005, as compared to a growth of 96.4% in
interest expense. The growth in income can be totally attributed to the increase
in the overall volume and was limited by the effect of the drop in the average
nominal yield for both the loan and investment portfolios.
138
AVERAGE NOMINAL INTEREST RATE AND
NET INTEREST MARGIN
1999-2005
(PERFORMANCE GRAPH)
1999 2000 2001 2002 2003 2004 2005
---- ---- ---- ---- ---- ---- ----
Interest earning assets 20.2% 14.2% 11.7% 8.0% 13.3% 12.9% 12.6%
Interest bearing liabilities 13.2% 8.6% 8.2% 5.9% 9.1% 8.7% 8.1%
Net interest margin 6.7% 6.5% 4.7% 3.0% 5.0% 5.4% 5.4%
The following table shows components of the Bank's consolidated net
interest income before provisions for loan and accrued interest losses:
YEAR ENDED DECEMBER 31,
---------------------------------------
2003 2004 2005
----------- ----------- -----------
(Ps million, except percentages)
INTEREST INCOME:(1)
Loans................................................ Ps 918,791 Ps1,140,955 Ps2,050,274
Investment securities................................ 546,207 549,328 824,709
Overnight funds...................................... 14,046 18,375 33,629
Leasing.............................................. 58,774 94,450 291,472
----------- ----------- -----------
TOTAL INTEREST INCOME............................. 1,537,818 1,803,108 3,200,084
----------- ----------- -----------
INTEREST EXPENSE:
Checking accounts.................................... 11,622 13,505 20,311
Time deposits 249,911 267,558 449,367
Savings deposits..................................... 113,968 141,288 241,889
Interbank borrowings................................. 5,293 7,389 54,630
Borrowings from domestic development banks........... 58,456 73,549 156,509
Amortized premium on investments ................... 38,423 41,215 73,910
Long-term debt....................................... 2,840 41,239 153,658
----------- ----------- -----------
TOTAL INTEREST EXPENSE............................ 480,513 585,743 1,150,274
----------- ----------- -----------
NET INTEREST INCOME............................... Ps1,057,305 Ps1,217,365 Ps2,049,810
=========== =========== ===========
Average nominal interest rates on loans.............. 13.9% 13.8% 13.6%
Average nominal interest rates on time deposits...... 5.9% 6.3% 6.8%
Average nominal interest rates on savings deposits... 4.4% 4.7% 3.4%
----------
(1) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for the years 2001,
2002, 2003 and 2004 were reclassified. This change did not have any impact
on net income.
139
PROVISIONS FOR LOAN AND ACCRUED INTEREST LOSSES
The Colombian economy continued growing in 2005, reflecting the
ability of Colombian companies to pay off their loans. However, the provision
for the loan portfolio and corresponding interest and foreclosed assets, net of
recoveries, posted an increase of 96.7%, going from Ps 66,624 million at
December 31, 2004 to Ps 131,040 million at December 31, 2005, due mainly to the
increased volume of loans and investments and to the type of loans that the Bank
took on, since a large part of Conavi's mortgage loans had relatively low levels
of provisions. Because these had to be increased in keeping with BC's policies,
this increased overall provisions by quite a high percentage.
Another explanation for the increase in provisions was the change in
individual provisions policies that the Superintendency of Finance introduced by
means of External Circular 004, issued December 30, 2005, increased provision
percentages on "A" and "B" rated loans to 1% and 3.2%, respectively. For more
information please See Notes to Consolidated Financial Statements, Note (2) Main
Accounting Policies, (j) Loans and Financial Lease Operations, (6) Provisions of
Financial Statements.
In 2004, BC amended its policy for consumer and small business loans,
for the purpose of extending its risk coverage, levels of which were duly
determined when the Sistema de Administracion de Riesgo Crediticio (the Credit
Risk Management System ("SARC") was implemented. This change increased
provisions for consumer and small business loans on the balance sheet of 80% and
105%, respectively. Provisions for loan portfolio losses on the balance sheet
rose from Ps 387,263 million in 2003 to Ps 434,378 million in 2004, representing
a growth of 12%. At December 31, 2005, the total provision for losses came to Ps
705,882, showing a 63% increase.
Therefore, as of December 31, 2005, just 61.1% of the Bank's past due
loans were non-performing as compared to 60.8% at December 31, 2004. The past
due loans coverage reached 156% and the non-performing loan coverage 256% in
2005.
Provisions for Loan and Accrued Interest Losses also includes
recovered charged-off loans, as well as the recovery of provisions on foreclosed
assets; property, plant and equipment, and other assets.
Provisions for loan portfolio and accrued interest losses in 2004
decreased 63.5% from Ps 182,299 million in 2003 to Ps 66,624 million in 2004.
This favorable performance during 2004 with regard to that obtained at year-end
2003 resulted in large part from a substantial amount of charged-off loans that
was recovered, contributing to a growth of almost 55%. Furthermore, by donating
fixed assets and foreclosed assets, BC recovered the provisions associated with
such assets and goods.
The allowances for loan losses under U.S. GAAP differ from those under
Colombian GAAP. Under Colombian GAAP, an allowance for loan losses is created
for each individual loan based on the risk classification system established by
the Superintendency of Banking (now Superintendency of Finance). Additionally,
the Superintendency of Banking (now Superintendency of Finance) requires a
general allowance of 1% of the total loans. This general reserve, not tied to
any specific loans, is established to absorb losses inherent in the existing
loan portfolio in future periods. Under U.S. GAAP, FASB Statement No. 114
established an individual test for impaired loans. This is measured based on the
present value of expected future cash flows, market price or fair value of
collateral, if the loan is collateral dependent. As of December 31, 2003, 2004
and 2005, the allowances for loan losses existing under Colombian GAAP were Ps
387,263 million, Ps 434,378 million and Ps 705,882, respectively, and the
allowances that would have been required under U.S. GAAP were Ps 363,068
million, Ps 393,138 million and Ps 552,364 million respectively.
140
FEES AND INCOME FROM SERVICES
Fees include all the commissions from banking services, electronic
services fees, credit card merchant fees, credit and debit card annual fees,
checking fees, warehouse and logistic services fees, brokerage fees and fees
from fiduciary activities and letters of credit. Service charges consist
primarily of money transfer fees, remittances, bank acceptances and automated
services.
Net income from fees and services increased by 81.5% totaling Ps
816,416 million in 2005 as compared to Ps 449,773 million in 2004. Similarly,
there was a 687% increase in brokerage fees due mainly to the Merger.
Net income from fees and services increased 15.5% from Ps 354,272
million in 2003, to Ps 409,058 million in 2004.
OTHER OPERATING INCOME
BC's other operating income consists of foreign exchange gain, forward
contracts gain in foreign currencies, gains on sales of investments on equity
securities, dividend income, revenues from commercial subsidiaries and income
from communication, postage, rent and other sources.
Foreign exchange operations (including income from forward contracts),
another component of operating income, also yielded gains in 2005, rising from
Ps 48,456 million at December 31, 2004, to Ps 87,694 million at December 31,
2005, showing an increase of 81%, whereas at December 31, 2003 this same figure
came to Ps 45,959 million.
On the other hand, dividend income rose 40%, from Ps 30,546 million in
2004 to 42,731 million in 2005, due mainly to the dividends that BC received
from profits earned in 2004 and, until July 2005, by Conavi and Corfinsura.
Additionally, this increase is explained by the investment that BC still holds
in Proteccion S.A..
Commercial subsidiaries also provide revenue from the production and
commercialization of agro-chemical fertilizers, load transportation, and
royalties stemming from mining operations. At December 31, 2005, income from
subsidiaries pertaining to the real sector dropped by 43%, reaching Ps 45,020
million, compared with the Ps 78,973 million obtained in 2004. This decrease was
mainly explained by the sale of Abocol and its subsidiaries that took place on
December 30, 2005.
Revenue from these operations showed a 3.3% increase over the course
of 2004 from Ps 76,445 million at December 31, 2003.
The following table summarizes the components of the Bank's other
operating income for the last three fiscal years:
141
YEAR ENDED DECEMBER 31,
----------------------------------
2003 2004 2005
--------- ---------- ---------
(Ps million)
OTHER OPERATING INCOME:(2)
Foreign exchange gain (loss), net ............ Ps 36,287 Ps(100,925) Ps(53,361)
Forward contracts gain (loss) in
foreign currency, net ..................... 9,672 149,381 141,055
Gains (losses) on sales of investments on
equity securities ......................... 5,878 (27) 8,097
Dividend income (1) .......................... 30,734 30,546 42,731
Revenues from commercial subsidiaries ........ 76,445 78,973 45,020
Communication, postage, rent and others ...... 2,037 7,447 10,406
--------- ---------- ---------
TOTAL OTHER OPERATING INCOME .............. Ps161,053 Ps 165,395 Ps193,948
========= ========== =========
----------
(1) Income from dividends represents only the recognition of income from
unconsolidated subsidiaries under Colombian GAAP.
(2) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for the years 2001,
2002, 2003 and 2004 were reclassified. This change did not have any impact
on net income.
OPERATING EXPENSES
At December 31, 2005, Bancolombia's operating expenses, including
merger expenses and Goodwill Amortization, increased to Ps 1,654,805 million,
compared with the Ps 912,421 million in 2004, thereby posting an increase of
81.4%.
Wages/salaries and employee benefits amounted to Ps 615,121 million at
December 31, 2005, compared with Ps 363,557 million in 2004. This increase was
largely due to the increase in headcount, as a result of the Merger, which went
from 7,027 in 2004 to 11,571 in 2005, on a non-consolidated basis.
Administrative expenses and other expenses totaled Ps 793,179 million
at December 31, 2005, representing an increase of 101.5% compared to the Ps
393,592 million posted in 2004.
Efficiency indicators that reflect these costs, continued on the same
trend as last year. Therefore, the ratio between operating expense and total
average assets, including goodwill amortization and merger expense, went from
5.71% in 2004 to 5.76% in 2005, and the ratio between operating expense and
operating income went from 50.9% in 2004 to 54.9% in 2005. Net fees and services
as a share of operating expense went from 44.8% in 2004 to 46.4% in 2005.
MERGER EXPENSES AND GOODWILL AMORTIZATION
BC completed its merger with Banco de Colombia S.A. on April 3, 1998.
For fiscal year 2005, the amortization of goodwill recorded in connection with
the merger with Banco de Colombia S.A. totaled Ps 22,648 million. As of December
31, 2005, outstanding goodwill from the merger totaled Ps 50,959 million, which
the Bank intends to amortize at Ps 22,648 million each year for the next three
years. As of December 31, 2004, outstanding goodwill from the merger totaled Ps
73,607 million. In 2003, BC amortized Ps 29,627 million of goodwill related to
the acquisition of Sufinanciamiento S.A.. BC also amortized Ps 6,721 million of
the goodwill derived from its increased investment in Fiducolombia S.A.
Additionally, with respect to the Merger among Conavi, Corfinsura and
Bancolombia in July 30, 2005, BC incurred merger expenses of a total of Ps
45,703 million for the period ended December 31, 2005, associated mainly with
financial advisory merger fees and bonuses to specific personnel.
142
The following table summarizes the principal components of BC's
operating expenses for the last three fiscal years:
YEAR ENDED DECEMBER 31,
-----------------------------------
2003 2004 2005
--------- --------- -----------
(Ps million)
OPERATING EXPENSES:(2)
Salaries and employee benefits ...... Ps320,886 Ps363,557 Ps 615,121
Bonus plan payments ................. 22,423 32,923 26,826
Compensation ........................ 22,959 15,169 8,030
Administrative and other expenses ... 350,517 393,592 793,179
Deposit security, net ............... 31,877 22,945 55,050
Donation expenses ................... 1,708 11,060 615
Depreciation ........................ 40,625 46,872 87,633
Merger expenses ..................... -- -- 45,703
Goodwill amortization (1) ........... 59,773 26,303 22,648
--------- --------- -----------
TOTAL OPERATING EXPENSES ......... Ps850,768 Ps912,421 Ps1,654,805
========= ========= ===========
----------
(1) As of December 31, 2003, included the amortization of the goodwill derived
from: merger with Banco de Colombia, the acquisition of Sufinanciamiento
and the increase in the participation in Fiducolombia.
(2) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for the years 2001,
2002, 2003 and 2004 were reclassified. This change did not have any impact
on net income.
NON-OPERATING INCOME (EXPENSES)
Non-operating income includes gains from the sale of foreclosed
assets, property, plant and equipment and other assets and income from minority
interests.
Net non-operating expense at December 31, 2005 totaled Ps 1,846
million, versus net non-operating income of Ps 4,715 million obtained in 2004.
This result was due to the increase in other income and in other expenses.
Increases in other income are associated with gains obtained in the sale of
property, plant and equipment and to the income from other rents. The growth in
other expenses is explained by the losses from the sale of foreclosed assets.
The following table summarizes the components of BC's non-operating
income and expenses for the last three fiscal years:
YEAR ENDED DECEMBER 31,
----------------------------------
2003 2004 2005
--------- --------- ----------
(Ps million)
NON-OPERATING INCOME (EXPENSES):(1)
Other income(2) ................................. Ps 33,822 Ps 51,514 Ps 109,770
Minority interest ............................... 330 (2,425) (6,496)
Other expenses(3) ............................... (41,696) (44,374) (105,120)
--------- --------- ----------
TOTAL NON-OPERATING INCOME (EXPENSES), NET ... Ps (7,544) Ps 4,715 Ps (1,846)
========= ========= ==========
----------
(1) In order to unify the presentation of the consolidated statement of
operations with quarterly reports, the information for the years 2001,
2002, 2003 and 2004 were reclassified. This change did not have any impact
on net income.
(2) Other income include gains from the sale of foreclosed assets, property,
plant and equipmet and other assets.
(3) Other expenses include losses from sinisters and from the sale of
foreclosed assets, property, plant and equipmet and payments for fines,
sanctions, lawsuits and indemnities.
143
INCOME TAX EXPENSES
Provisions for income tax expense for 2005 came to Ps 277,515 million
compared with Ps 238,810 million in 2004. Income tax for 2005, as was the case
in 2004, was calculated based on net taxable income, whereas prior to this it
had been calculated on the basis of presumptive income.
Law 788 of 2002 established a surcharge tax that increased the income
tax rate for corporations from 35% to 38.5% until 2006. This surcharge tax,
however, did not apply to those corporations that had been accepted in the
stability regime established by the Colombian government. Bancolombia (the
parent company), Leasing Colombia, Fiducolombia and Colcorp are covered by this
regime for ten years beginning on January 2001. Sufinanciamiento has requested
to be covered by the regime of tax stability, but a definite decision has not
been given yet.
Pursuant to the tax stability regime, Bancolombia (the parent
company), Leasing Colombia, Fiducolombia and Colcorp agreed to be taxed at a
total income tax rate of 37% beginning on January 1, 2001 (2% higher than the
prevailing income tax rate at that time), in exchange for exemption from
increases in the income tax rate and from any other new taxes until December 31,
2010. As a result, these companies currently benefit from a 37% income tax rate,
rather than the 38.5% rate generally applicable to other corporations.
NET INCOME INFORMATION UNDER U.S. GAAP
The Financial Statements included elsewhere in this Annual Report have
been prepared in accordance with Colombian GAAP, which differs in certain
significant respects from U.S. GAAP. The principal differences between U.S. and
Colombian GAAP that affect net income include the methods of accounting for
income taxes, employee benefit plans, loan origination fees and costs, business
combinations and allowances for loan losses. For a summary of the most
significant adjustments required to calculate net income under U.S. GAAP, see
Note 31 to the Financial Statements.
A.2. IMPACT OF ECONOMIC, FISCAL AND MONETARY POLICIES AND POLITICAL FACTORS IN
BANCOLOMBIA'S RESULTS
Bancolombia's operations have been affected by factors such as: the
growth of the Colombian economy, the dynamics of the financial sector, interest
rates, domestic price levels, the exchange rate, fiscal policy, foreign trade as
well as competition with other financial institutions.
GROWTH OF THE COLOMBIAN ECONOMY AND THE DYNAMICS OF THE FINANCIAL SECTOR
Colombia's economy and financial system have shown a dynamic growth
over recent years, with average annual growth rates of 5.13% and 6.66%
respectively for 2005. These high rates of economic growth have entailed better
results of the credit establishments; between January and December 2005, net
interest income increased an average of 12.69%, while commissions grew an
average of 8.39%. In this same period, net income grew an average of 18.38%,
with an overall improvement in their financial indicators at the end of 2005:
return on equity (22.38%), efficiency (an income/operating cost ratio of 57.67%)
and asset quality (a past due portfolio to total portfolio ratio of 3.29%).
144
Future prospects for the financial sector in general, and for BC in
particular, shall depend on the factors listed below:
FAVORABLE FACTORS FOR THE COLOMBIAN UNFAVORABLE FACTORS FOR THE COLOMBIAN
ECONOMY - MID-TERM ECONOMY - MID-TERM
----------------------------------- -------------------------------------
- Policies supporting - Contraction effect of fiscal
macroeconomic stabilization adjustments
- Progress made in democratic - Drop in proven oil reserves
security
- New tax burdens to cover the fiscal
- Greater confidence in the deficit
economy
- Increases in international interest
- Growth of aggregate demand rates and decline in foreign
investment
- Greater perspectives of
financial services levels - Uncertainty about the results
growing as a percentage of GDP Presidential elections
- Greater use of installed - Completion of transitory transfer
capacity system in 2008(1)
- Increases in exports to the - State pension deficit
United States and Venezuela
- End of transitory taxes: financial
- Higher foreign demand for transaction tax and the 10% income
non-traditional products surtax in 2008
----------
(1) Between 2002 and 2008, the amount of resources in the General
Participations System (money that the government receives form current
receipts and assign to territorial entities) is set to grow at the rate
equal to inflation plus a further increase that is to be gradually built up
as follows: +2% for 2002, 2003, 2004 and 2005; and + 2.5% for 2006, 2007
and 2008.
Once the transition period has been completed, the total resources in the
General Participations System shall be increased on a yearly basis by a
percentage equal to the average percentage variance registered in the
State's current revenues during the 4 previous years, including the change
in the State's current budgetary capacity.
In spite of the prevailing favorable conditions, there is no guarantee
of a sustained economic growth. New tax restrictions may bring a decline in
demand; increases in international interest rates may affect the inflow of
capital, both of which would lower economic growth, affecting the Colombian
financial system in general and Bancolombia in particular.
INTEREST RATES
In 2005, the Reference Market Interest Rate (DTF - Colombia's average
of time deposits) showed a downward tendency, with an Effective Annual Rate
average of 7.05%; on the other hand the real interest rate in 2005 reached 1.86%
Effective Anual Rate. All of this contributed to the growth of the economy,
since no monetary instability was caused and neither were there inflationary
concerns. Looking ahead to 2006, it is possible that the stance taken with
monetary policy will in fact change should there be any increases in the
intervention interest rates, in order to accommodate new pressures on the
demand. This could affect Bancolombia's results given increased funding costs.
DOMESTIC PRICE LEVELS
The inflation rate for 2005 ended at 4.85%, which was very close to
the lower end of the target proposed by the Colombian Central Bank (4.5% -
5.5%). Looking ahead, an increase in price levels could affect the quality of
the loan portfolio, given the relation between increases in inflation and the
consequent rise in interest rates, all of which could have a negative effect on
BC's financial statements. However, for 2006, inflation is expected to remain
low (between 4% and 5%) which could drive a growth in economic activities and
encourage good levels of performance within the financial sector, with all the
inherent benefits for Bancolombia.
145
EXCHANGE RATE
The real exchange rate index remained at competitive levels throughout
2005 (with an average of 118.5) which allowed Colombia to benefit from bilateral
agreements such as ATPDEA (Andean Trade Promotion and Drug Eradication Law) and
justify certain advantages that arise from the negotiation of the Free Trade
Agreement with the United States. Also, the effective control of inflation has
become one of the country's main instruments in safeguarding its
competitiveness. Any volatility of the exchange rate could affect BC's foreign
currency business which, at December 2005, represented 9.26% of its total
non-consolidated assets.
FISCAL POLICY
One of the difficulties that Colombia has faced in recent years has
been financing its public sector budget. In 2004 the deficit of the CPS
(Consolidated Public Sector) represented 1.2% of the country's GDP, for 2005 the
deficit was 0% and for 2006 deficit of 1.5% is expected.
Gobierno Nacional Central (Central National Government), has been
implementing a policy aimed at substituting its foreign debt with domestic debt
so as to reduce the exchange rate risk and take advantage of the Colombian peso
- dollar revaluation. With regard to internal indebtedness, the financial system
has become the main buyer of Colombian Treasury Bonds (TES). Bancolombia is the
largest broker of public debt in Colombia and therefore there could exist
certain amount of risk given the significant exposure involved in holding this
type of security.
As far as the deficit within the non-financial public sector, the
Government has considered the implementation of new structural reforms (tax,
pension and transfers) in order to correct budgetary imbalances. Continuous
increases in taxes could affect the growth dynamics of the Colombian economy and
its financial sector, given the adverse affects these would have on the demand.
Given the fact that Bancolombia is protected by the tax stability
regime until 2010 it is not subject to any national taxes created as of 2001,
such as the financial transaction tax and the 0.3% tax on net worth, applicable
until December 2006. See Item 5. Operating and Financial Review and Prospects -
A. Operating Results - A.1. General Discussion of the Changes in Results -.
FOREIGN TRADE
Foreign trade continues to be a source of opportunities for
strengthening the growth of the Colombian economy. This situation could well
continue to prevail thanks to agreements such as ATPDEA, in force until December
2006 and the Free Trade Agreement with the US, which is in process of
negotiation. Likewise, the support provided by multilateral banks, the IMF
(International Monetary Fund) and the IDB (Inter-American Development Bank) as
well as countries such as the US, has been and shall continue to be of great
importance. BC may benefit from this, if it offers a range of products that
facilitate foreign trade.
On the other hand, the continuous rise in remittances (incoming
transfers of foreign currency from Colombians living abroad) has exceeded export
levels of traditional products such as coffee. According to Central Bank,
remittances in 2004, totaled US$ 3,170 million and for 2005 this same figure
came to US$ 3,314 million. Bancolombia has been increasing its share of the
remittance market, by extending its remittance receiving capabilities.
146
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS
During the last two years, a series of mergers and acquisitions
between several entities within the financial system has allowed larger and more
efficient financial institutions, generating scale economies and consolidating
the financial system. See Item 4 - Information on the company, B- Business
Overview - B.6. Competition - Description of the Colombian Financial System.
This has increased competitiveness within the different segments of the market.
Although Bancolombia is currently leader with regard to the majority of the
financial products offered in Colombia, the dynamics of this ongoing
merger/acquisition tendencies could compromise its leadership position.
Bancolombia's results and, more specifically, ADR prices will
partially depend on developments affecting each of the factors described above.
B. LIQUIDITY AND CAPITAL RESOURCES
B.1. LIQUIDITY AND FUNDING
The Central Bank establishes reserve requirements that determine the
minimum amount of liquidity for Colombian banks. In order to meet its own
working capital needs, to honor withdrawals of deposits, to make payments upon
maturity of liabilities, and to extend loans, we maintain a proper balance
between maturity distribution and diversity of funding sources.
Interest rate volatility and political uncertainty in the Colombian
financial system have led investors to prefer short-term investments, making
medium and long-term financing harder to acquire. BC's deposit base is
short-term, but its stable nature has enabled BC to offer longer-term loans with
a wider margin. We believe that longer term funding will soon become more
available and will enable financial institutions to minimize liquidity risks. We
believe that our working capital is sufficient for present requirements. For
additional information about risk management see Item 11. Quantitative and
Qualitative Disclosures about Market Risk.
BC maintained a short-term negative gap during 2005 and also 2004 in
terms of maturities. Checking and savings accounts and time deposits are our
most important sources of funding.
However, we have different sources of liquidity, including short-term
and trading investments, borrowings from domestic development banks, interbank
borrowing and securities repurchase transactions, overnight funds and access to
funds from the Central Bank, all of which were used from time to time on a
short-term basis.
The following chart shows checking, time deposits and saving deposits
as a percentage of BC's overall deposits for the years, 2003, 2004 and 2005:
2003 2004 2005
---- ---- ----
Checking deposits 28.0% 26.8% 16.7%
Time deposits 33.4% 30.7% 24.7%
Saving deposits 18.3% 24.9% 29.7%
==== ==== ====
147
BC relies primarily on short-term deposits for its funding but manages
its risk and maintains reserves with the intention, although not the guarantee,
that in the case of a sudden shortage of funds in the Colombian banking system
and money markets, BC will be able to maintain its levels of funding while
minimizing funding costs and avoiding liquidation of assets.
In the event that the Bank has a liquidity shortfall, it might be
required to sell assets at a discount rate in order to increase liquidity. The
Bank manages this risk by analyzing the maturity of its assets and liabilities.
In addition, Management believes that the relative high volume and quality of
net liquid assets is sufficient to maintain the Bank's liquidity and its ability
to comply with its commitments when due. However, no assurance can be given
that, in the event of a liquidity shortfall, BC would not be required to sell
assets at a discount rate.
As part of the Bank's strategy to acquire longer-term financing,
during 2005 Bancolombia sustituted most of its short term time deposits issued
through the money desk for longer term time deposits with maturities between 1.5
and 5 years, and linked to CPI and DTF rates. As of December 31, 2005 the long
term time deposits aggregate face value issued by the Bank through the money
desk was Ps 1,206,143 million.
As a result of the strategy mentioned above and the long term deposits
acquired from Corfinsura as a result of the Merger, Bancolombia has improved its
liability structure by extending the duration of its liabilities. This provides
the Bank with greater liquidity to fund its long-term loans, reducing reliance
on short-term borrowings and thus reducing risk. The Bank may intend to continue
and increase the use of this type of funding strategies in the future.
Cash flows for the Bank include net cash provided for operating
activities, net cash used in investing activities and net cash provided by
financing activities. The following table shows those flows for the years ended
December 31, 2003, 2004 and 2005:
Ps million 2003 2004 2005
---------- ------------ ----------- ------------
Operating Activities Ps(1,338,391) Ps (992,855) Ps(7,314,498)
Investing activities (45,009) (549,178) (3,143,420)
Financing activities 1,979,312 1,344,931 10,938,580
============ =========== ============
During 2004, operating activities depleted cash reserves to a lesser
extent than in 2003 due generally to the end of loan portfolio contract terms, a
decrease in accounts payable and the advantageous movement of derivative
financial instruments, which generated cash. The significant changes experienced
during 2005 are clearly identifiable with the Merger, for which the main impact
was the loan portfolio increase proportionated by Conavi and Corfinsura
acquisitions. In relation to investing activities, during 2004, there was an
inclination to invest excess cash in debt instruments and this was the more
significant amount for this activity. For years 2004 and 2005, financing
activities were the principal source of cash and were visible in deposits, long
term debt, borrowings from domestic development banks and interbank borrowings
increases.
148
AS OF DECEMBER 31,
---------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
2003 FUNDING 2004 FUNDING 2005 FUNDING
------------ ---------- ------------ ---------- ------------ ----------
(Ps million, except percentages)
CHECKING DEPOSITS
Peso-denominated ........ Ps 2,536,169 20.0% Ps 2,699,776 19.1% Ps 3,449,321 13.6%
Dollar-denominated ...... 1,010,023 8.0% 1,099,347 7.7% 790,270 3.1%
------------ ----- ------------ ----- ------------ -----
Total ............... 3,546,192 28.0% 3,799,123 26.8% 4,239,591 16.7%
------------ ----- ------------ ----- ------------ -----
TIME DEPOSITS
Peso-denominated ........ 2,432,245 19.2% 2,871,531 20.2% 4,633,373 18.3%
Dollar-denominated ...... 1,805,100 14.2% 1,489,675 10.5% 1,626,427 6.4%
------------ ----- ------------ ----- ------------ -----
Total ................ 4,237,345 33.4% 4,361,206 30.7% 6,259,800 24.7%
------------ ----- ------------ ----- ------------ -----
SAVINGS DEPOSITS
Peso-denominated ........ 2,184,902 17.2% 3,395,749 23.9% 7,396,501 29.2%
Dollar-denominated ...... 136,840 1.1% 138,864 1.0% 129,993 0.5%
------------ ----- ------------ ----- ------------ -----
Total ................ 2,321,742 18.3% 3,534,613 24.9% 7,526,494 29.7%
------------ ----- ------------ ----- ------------ -----
OTHER DEPOSITS
Peso-denominated ........ 69,403 0.5% 84,220 0.6% 266,942 1.0%
Dollar-denominated ...... 57,315 0.5% 82,954 0.6% 92,155 0.4%
------------ ----- ------------ ----- ------------ -----
Total ................ 126,718 1.0% 167,174 1.2% 359,097 1.4%
------------ ----- ------------ ----- ------------ -----
INTERBANK BORROWINGS
Peso-denominated ........ -- 0.0% -- 0.0% -- 0.0%
Dollar-denominated ...... 456,059 3.6% 246,282 1.7% 1,705,468 6.8%
------------ ----- ------------ ----- ------------ -----
Total ................ 456,059 3.6% 246,282 1.7% 1,705,468 6.8%
------------ ----- ------------ ----- ------------ -----
OVERNIGHT FUNDS
Peso-denominated ........ 1,118,139 8.8% 616,494 4.3% 915,378 3.6%
Dollar-denominated ...... -- 0.0% -- 0.0% 414,535 1.6%
------------ ----- ------------ ----- ------------ -----
Total ................ 1,118,139 8.8% 616,494 4.3% 1,329,913 5.2%
------------ ----- ------------ ----- ------------ -----
DOMESTIC DEVELOPMENT BANK
BORROWINGS
Peso-denominated ........ 737,417 5.8% 855,970 6.0% 2,015,968 8.0%
Dollar-denominated ...... 18,119 0.2% 1,949 0.0% 206,115 0.8%
------------ ----- ------------ ----- ------------ -----
Total ................ 755,536 6.0% 857,919 6.0% 2,222,083 8.8%
------------ ----- ------------ ----- ------------ -----
BANK ACCEPTANCES OUTSTANDING
Peso-denominated ........ 8,304 0.1% 16,119 0.1% 14,996 0.0%
Dollar-denominated ...... 27,529 0.2% 50,474 0.4% 48,130 0.2%
------------ ----- ------------ ----- ------------ -----
Total ................ 35,833 0.3% 66,593 0.5% 63,126 0.2%
------------ ----- ------------ ----- ------------ -----
LONG TERM DEBT
Peso-denominated ........ 71,818 0.6% 552,531 3.9% 1,648,312 6.5%
Dollar-denominated ...... -- 0.0% -- 0.0% -- 0.0%
------------ ----- ------------ ----- ------------ -----
Total ............... 71,818 0.6% 552,531 3.9% 1,648,312 6.5%
------------ ----- ------------ ----- ------------ -----
TOTAL FUNDING
Peso-denominated ........ 9,158,397 72.2% 11,092,390 78.1% 20,340,791 80.2%
Dollar-denominated ...... 3,510,985 27.8% 3,109,545 21.9% 5,013,093 19.8%
------------ ----- ------------ ----- ------------ -----
Total ................ Ps12,669,382 100.0% Ps14,201,935 100.0% Ps25,353,884 100.0%
============ ===== ============ ===== ============ =====
B.2. FINANCIAL INSTRUMENTS AND TREASURY ACTIVITIES
The Treasury Division, through its currency desks, is able to make all
operations in local or foreign currency legally authorized in Colombia. These
include Derivative operations, purchase and sale of fixed income securities, and
securities indexed to a rate or index, operations with agreements of repurchase
or resale, short sales, temporary securities transfers, simultaneous operations,
and operations on the foreign exchange market.
The products negotiated in the markets mentioned above are ruled by
specific policies regarding liquidity risk, market risk, legal risk, credit and
operational risk management.
149
In order to be able to control market and liquidity risks BC has set
limits to keep the exposure levels of its positions and losses within certain
ranges as determined by the board of directors.
The Treasury Division maintains liquidity control through daily
verification by making sure that the difference between the interbank asset
funds and the interbank liability funds does not exceed 7.5% of the sum of
deposits and interbank borrowings and other financial liabilities and
obligations.
With regard to investments in local and foreign currency, the Division
must verify the availability of funds for investment as well as each
investment's compatibility with the Bank's liquidity structure before taking any
additional positions.
The market risk stated in the treasury book will be measured using
methodologies of value in risk (VaR), and the limits of the positions will be
subject to the results that they show. Along whit this methodology, and
according to the definitions of capital consumption for market risk, there
should have a methodology for maximum losses of the positions in determined
periods of time.
LIMIT CONCEPT VALUE
----- ------- -----
Position limits (US$ millions) Foreign currency position(1) -5% Less than or Equal to - Greater than
or Equal to 20% of Technical Capital
Spot foreign currency position(2) 0 Less than or Equal to - Greater than
or Equal to 50% of Technical Capital
Market risk limits Stop loss 70% of the daily VaR in 12 months or its
proportions
Daily losses 15% of the average VaR for the past 10 days
Alert situations Monthly losses 30% of the average VaR for the past 10 days
----------
(1) 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.
(2) Spot foreign currency's position is the difference between assets and
liabilities, denominated in foreign currency, based on the unique chart of
accounts; investments available for sale in equity and debt securities,
held to maturity and capital contributions in foreign branches and
derivates as indicated: forward contracts, futures contracts, swaps and
profit or loss in option valuation. Operations that can be settled in local
currency are not included in this position.
Investments in local and foreign currencies are kept in electronic
custody by local custody providers (Deposito Centralizado de Valores - Deceval).
Foreign securities are kept in the custody of Clearstream Bank.
The local currency portfolio is divided into public debt, primarily
local treasury securities issued at a fixed rate or at a floating rate indexed
to inflation (TES UVR), and private debt, securities issued at a fixed rate or
at a floating rate indexed to DTF or CPI.
The foreign currency portfolio is made up of fixed rate bonds issued
by the Republic of Colombia and denominated in U.S. dollars and in Euros,
although BC is not exposed to fluctuations in the exchange rates of these
currencies, as it enters into forward sale agreements with terms of 180 and 360
days. Generally, the maximum maturity term of the securities is 10 years,
nevertheless there is a duration close to 2 years.
Additionally, the Bank trades foreign exchange forward agreements with
two main purposes:
150
- To protect against foreign exchange rate volatility in its
foreign exchange position (cash and investment portfolio).
- As a speculative position through which, by selling and
buying forward agreements, the Bank takes advantage of
market opportunities.
In the foreign subsidiaries, the investment portfolio is held in U.S.
dollars and comprises fixed rate investments and floating rate investments, such
as those indexed to the Libor rate. With regard to the management of issuers,
the foreign subsidiaries manage Latin American issuers for which an individual
credit study has been made according to the methodology defined in the Bank's
Treasury Division guidelines. Bancolombia's investment policies do not include
restrictions regarding the maturity of the securities held in the portfolio, but
do include a target duration for the entire portfolio instead.
The Bank's investment portfolio includes among its assets credit
linked notes (CLN's) which are bought to take advantage of market opportunities.
Through the use of these instruments, BC sells credit protection against
Colombian Sovereign risk.
B.3. COMMITMENT FOR CAPITAL EXPENDITURES
See Item 4. Information on the Company - A. History and Development of
the Company - Capital Expenditures and Divestitures.
C. PATENTS, LICENSES AND CONTRACTS
BC is not dependent on research and development of patents or
licenses, nor is dependent on an industrial, commercial or financial contract
(including contracts with customers or suppliers) individually considered.
D. TREND INFORMATION
ECONOMIC TRENDS
In 2005, the Central Bank implemented expansive economic policies, increasing
liquidity in the market. The average M3 growth rate for 2005 reached 15.5%
versus 12.1% for 2004 which explains why the interbank interest rate remained
below the Central Bank's expansion rate. Even when the Central Bank lowered its
reference rate, as was the case in September 2005, the interbank rate continued
well below the Central Bank's rate. No substantial variations are anticipated in
the country's monetary policy in 2006, although it is expected that the Central
Bank shall slightly increase its interest rates during the second half of the
year, given the decreasing difference between internal and external interest
rates. While the Bank did not assume meaningful interest rate shifts from our
previous views, Colombia's central bank started its preemptive tightening
campaign in April 2006 and currently is expected to continue to increase the
interest rate at a gradual pace until the end of the year so that it is expected
to end with a 100 basis points Refi rate(7) hike or 7% by December 2006.
----------
(7) Refi Rate is the Central Bank's lending rate to the banking system
151
Meanwhile, fiscal policy has continued on a neutral path, with a
certain expansionary tendency, not just because of greater public spending -
although this is rather inflexible - but also because the effects of a wider tax
coverage have been clearly evident with a strong increase in tax revenues over
the last two years. For 2006 and 2007, fiscal policy should continue to become
more expansive, given on one hand the growth in spending will continue to
outweigh the growth in income, and on the other, due to the proposed tax
reforms. Since the exchange rate has increased during the last two months and
has shifted from a slightly appreciated rate to a modestly depreciated rate for
the year, some fiscal accounts can be assumed to experience slight impacts.
First, external interest payments should increase by approximately US$
200,000,000 from the government's original financial plan. Second, due to higher
oil prices and a stronger dollar or weaker peso, revenues from the state oil
company should increase by nearly US$ 273,000,000. Therefore, the net impact of
the fiscal numbers for 2006 is still favorable to the Colombian government.
Lastly, the government has announced a reduction of US$ 200,000,000 on local
debt auctions for 2006 to limit the impact of higher local interest rates on its
2006 budget.
The most popular of these proposals has to do with passing a tax
reform bill during the second half of the year, reducing income tax from 38.5%
to 28%. For the second half of the year, a more structural reform has been
proposed by means of which VAT (Value Added Tax) is to be simplified and
extended to all products available in the economy. This measure would also seek
to decrease current evasion of this tax, which represents an estimated 21% of
the total potential revenue.
BC's current expectations with regard to the different economic
policies for 2006, indicate a favorable environment encouraging a moderate
increase in internal interest rates. Therefore, BC's own projected growth rate
for 2006 of approximately 4.4% is based on the estimated up trends both in
employment and in public and private consumption, as well as the favorable
tendencies that capital investment and trade terms for Colombian exports are
showing at the moment. In its first quarter inflation report, Colombia's central
bank raised its growth forecast to 4.8% based on higher consumption growth rates
and higher commodities prices. Even with a higher growth prospect, the Central
Bank called on lower inflation rates expected by the end of 2006 and 2007 from
what it had previously forecast in December 2005. Nevertheless, Colombia's
Central Bank said that due to the prospect of increased gas and energy prices
and a higher average exchange rate for the year, it should follow a preemptive
restrictive monetary policy stance. Looking forward it is plausible that the
preemptive moves will be gradual in magnitude and speed.
As of February 27, 2006, the Free Trade Agreement negotiations between
Colombia and the United States were closed. Currently, this Free Trade Agreement
is in the process of being presented for approval by the Congress of Colombia
and the United States, which shall doubtlessly entail a certain amount of
restructuring within the Colombian production sector but is undeniably an
excellent opportunity for attracting foreign investment, modernizing the economy
and continuing to allow a greater amount of international participation in the
Colombian economy, all of which shall in turn bring about clear advantages such
as encouraging a greater level of price stability and lowering the cost of
capital. Finally, most Colombian financial assets have been hit by a more
hostile external environment were the Federal Reserve of the United States is
expected to go higher in its tightening cycle than expected a few months ago,
while growth concerns have increased due to higher gasoline prices. Although the
short term local fundamental outlook is still constructive some risk awareness
and risk aversion could further hit local financial assets.
152
BC's total assets increased 69.97% over the year to Ps 30,965 billion
as of March 31, 2006 from Ps 18,218 billion as of March 31, 2005. Net loans
increased 80.8% over the year to Ps 18,365 billion from Ps 10,159 billion as of
March 31, 2005. The investment securities amounted to Ps 8,315 billion as of
March 31, 2006 increasing 56.48% as compared to Ps 5,314 billion as of March 31,
2005. As of March 31, 2006 the investment in debt securities accounted for 97.8%
of total investment securities.
Stockholders' equity totaled Ps 3,199 billion at the end of the first
quarter of 2006, increasing 61.34% compared to Ps 1,983 billion for the first
quarter of 2005.
E. OFF-BALANCE SHEET ARRANGEMENTS
The following are the off-balance sheet arrangements in which BC is
involved: standby letters of credit and bank guarantees.
In order to meet the needs of its customers, BC issues financial
standby letters of credit and bank guarantees. At December 31, 2003, 2004 and
2005, outstanding letters of credits and bank guarantees issued by BC totaled Ps
692,795 million, Ps 559,018 million and Ps 838,675 million, respectively.
Financial standby letters of credit include guarantees of payment of
credit facilities, promissory notes and trade acceptances.
Bank guarantees are performance guarantees that are issued to
guarantee a customer's tender bid on a construction or systems installation
project or to guarantee completion of such projects in accordance with contract
terms. They are also issued to support a customer's obligation to supply
specified products, commodities, or maintenance or guaranty services to a third
party.
The table below summarizes at December 31, 2004 and 2005 all of BC's
guarantees where the Bank is the guarantor. The maximum potential amount of
future payments represents the notional amounts that could be lost under the
guarantees if there were a total default by the guaranteed parties, without
consideration of possible recoveries under recourse provisions or from
collateral held or pledged. Such amounts bear no relationship to the anticipated
losses on these guarantees and greatly exceed anticipated losses.
MAXIMUM POTENTIAL AMOUNT OF
EXPIRE WITHIN ONE YEAR EXPIRE AFTER ONE YEAR TOTAL AMOUNT OUTSTANDING FUTURE PAYMENTS
---------------------- --------------------- ------------------------ ---------------------------
2004 2005 2004 2005 2004 2005 2004 2005
--------- --------- -------- --------- --------- --------- --------- ---------
Financial standby
letters of credit Ps402,969 Ps474,159 Ps18,674 Ps 19,061 Ps421,643 Ps493,220 Ps421,643 Ps493,220
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
========= ========= ======== ========= ========== ========= ========= =========
As of December 31, 2005, the bank held Ps 5.8 billion of securities
issued by the Republic of Colombia that exceeded 10% of the Bank's shareholders'
equity.
153
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table shows BC's known contractual obligations as of
December 31, 2005:
LESS THAN 1-3 3-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL 1 YEAR YEARS YEARS YEARS
----------------------- ----------- ----------- ----------- --------- --------
(Ps millions)
Long-term debt obligations Ps1,664,739 Ps 691,430 Ps 653,018 Ps308,562 Ps11,729
Time deposits 6,366,616 5,071,136 1,026,302 251,347 17,831
Commitments to originate loans 408,949 408,949 -- -- --
Commitments of repurchase of investments 1,329,913 1,329,913 -- -- --
Employee benefit plans(1) 88,682 11,901 25,667 28,055 23,059
----------- ----------- ----------- --------- --------
TOTAL Ps9,858,899 Ps7,513,329 Ps1,704,987 Ps587,964 Ps52,619
=========== =========== =========== ========= ========
----------
(1) In 2003, the Bank amortized the total actuarial calculation.
G. CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following are considered critical accounting policies, given their
significant impact on the financial condition and operating performance of BC.
This information should be read together with Note 2 of the Consolidated
Financial Statements.
EVALUATION OF LOAN PORTFOLIO RISK AND DETERMINATION OF ALLOWANCES FOR
LOAN LOSSES: BC currently evaluates loan portfolio risk according to the rules
issued by the Superintendency of Banking, which establish qualitative and
quantitative standards for assigning a risk category to individual assets. The
qualitative analysis includes the evaluation of "potential weaknesses",
"deficiencies" or "serious deficiencies" based on the existence and magnitude of
the specific factors, according to the judgment of management. For the
quantitative evaluation, the Bank first determines whether the loan has become
due and then classifies the loan according to the number of days past due.
The Superintendency of Finance requires minimum allowance levels for
each category of credit risk and each type of loan in the Bank's portfolio. In
addition, the Superintendency of Finance requires BC to maintain a general
allowance equal to 1% of the gross loan portfolio.
BC considers that the accounting estimates used in the methodology to
determine the allowance for loans losses are "critical accounting estimates"
because: (a) by its nature, the allowance requires us to make judgments and
assumptions regarding our loan portfolio, (b) the methodology used in its
determination is based on the existence and magnitude of determined factors that
are not necessarily an indication of future losses and (c) the amount of the
provision is set using a percentage based on the risk category assigned to the
loan and it is impossible to ensure that said percentage will exactly reflect
the probability of loss.
154
CONTINGENT LIABILITIES: We are subject to contingent liabilities,
including judicial, regulatory and arbitration proceedings and tax and other
claims arising from the conduct of our business activities. Allowances are
established for legal and other claims by assessing the likelihood of the loss
actually occurring as possible, probable or remote. The contingency is recorded
as a provision when all the information available indicates that it is probable
that we will incur in future disbursements for events that happened before the
balance sheet date and the amounts may be reasonably estimated. We involve
internal and external experts in assessing probability and in estimating any
amounts involved.
Throughout the life of a contingency, our internal experts may learn
of additional information that can affect the assessments about probability or
about the estimates of amounts involved. Changes in these assessments can lead
to changes in recorded allowances.
BC considers that the estimates used to determine the allowance for
contingent liabilities are "critical accounting estimates" because the
probability of their occurrence is based on our attorneys' judgment, which will
not necessarily coincide with the future outcome of the proceedings.
PENSION PLAN: The Bank and its Subsidiaries Almacenar S.A. apply the
provisions of Decree 1517 of 1998, which requires a distribution of charges to
amortize the actuarial calculation by 2010. The distribution is calculated by
taking the percentage amortized up to December 1997 and annually adding the
minimum percentages needed to complete amortization by 2010. Under the Bank's
noncontributory unfunded defined benefit pension plan, benefits are based on
length of service and level of compensation.
BC considers that the accounting estimates related to its pension plan
are "critical accounting estimates" because the determination of the
contributions to the plan involves judgments and assumptions made by the
actuaries related to the future macroeconomic and employees demographics
factors, among others.
H. RECENT U.S. GAAP PRONOUNCEMENTS
In 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
155
b. Clarifies which interest-only strips and principal-only strips
are not subject to the requirements of Statement 133
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. We are 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.
156
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.
I. RELATED PARTY TRANSACTIONS
See Item 7. Major Shareholders and Related Party Transactions - B.
Related Party Transactions.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. DIRECTORS AND SENIOR MANAGEMENT
On December 31, 2005, the following persons acted as directors,
alternate directors and senior management of BC:
DIRECTORS
Juan Camilo Ochoa Restrepo was born in 1939. He is the President of
Suramericana de Inversiones S.A.. Previously, he was President of Corfinsura
S.A. from 2000 to March 2004 and Manager of Compania de Investigaciones
Economicas Prospeccion S.A. from 1990 to 2000. He was Associate Professor in the
Mathematics and Economics Departments of the Mines Faculty of the Universidad
Nacional of Colombia from 1969 to 1973 and from 1978 to 1990, and Teaching and
Research Assistant in the Mathematics and Education Departments of the
University of California, Berkley, USA from 1973 to 1977. He also worked for the
Economics Research Department of the National Industrial Association (Asociacion
Nacional de Industriales "ANDI") from 1966 to 1969. Mr. Ochoa Restrepo worked as
Design Engineer in the Engineering Department of Integral Ltda. from 1963 to
1966.
Mr. Ochoa Restrepo is the President of the board of directors of
Bancolombia S.A. and is a member of the boards of directors of Inversura S.A.,
Inversiones Argos S.A. (the former Cementos Argos S.A.), Grupo Nacional de
Chocolates S.A, Tipiel S.A. and Vidrio Andino S.A.
157
Carlos Enrique Piedrahita Arocha was born in 1954. He has been the
President of Compania Nacional de Chocolates S.A. since 2000 and President of
Inversiones Nacional de Chocolates S.A. (now Grupo Nacional de Chocolates S.A.)
since 2003. He was President of Banco Corfinsura Internacional Inc. (Puerto
Rico) from 1998 to 2000, President of Corfinsura from 1993 to 2000, Vice
President of Finance of Compania Suramericana de Seguros S.A. from 1989 to 1993,
Vice President of Personal Banking of Banco Industrial Colombiano from 1986 to
1989, National Manager of Credit Cards of Banco Industrial Colombiano from 1984
to 1986, and General Manager of Suleasing S.A. from 1981 to 1984.
Mr. Piedrahita Arocha is a member of the boards of directors of
Suramericana de Inversiones S.A., Inversiones Argos S.A., ANDI and Fogafin. He
is also a member of the Boards of Directors of the following civic associations:
Hospital San Vicente de Paul, Corporacion de Investigaciones Biologicas CIB,
Proantioquia and Consejo Empresario de America Latina.
Jose Alberto Velez Cadavid was born in 1950. He assumed the Presidency
of Inversiones Argos S.A. (the former Compania de Cemento Argos S.A.) in
November 2003 and the Presidency of Cementos Argos S.A. (the former Cementos del
Caribe S.A.) in 2005. Since 1984, he has held several managerial positions at
Suramericana de Seguros S.A., including Vice President of Marketing and Sales,
Vice President of Investments, Vice President of Enterprise Development and
President of Inversura S.A. and Suramericana de Seguros S.A.
Mr. Velez Cadavid is also a member of the boards of directors of
Suramericana de Inversiones S.A., Grupo Nacional de Chocolates S.A., Calcetines
Cristal S.A. and Almacenes Exito S.A.
Gonzalo Alberto Perez Rojas was born in 1958. He is the President of
Inversura S.A. He held different managerial positions at Compania Suramericana
de Seguros since 1981, such as Vice President of Corporate Businesses and Vice
President of Insurance and Capitalization.
Mr. Perez Rojas is also a member of the boards of directors of
Interoceanica de Seguros S.A. (Republica de Panama) and ANDI. He is also
Alternate Director of the boards of directors of Inversiones Argos S.A. and
Colombiana de Inversiones S.A.
Ricardo Sierra Moreno was born in 1951. He has been the President of
Productora Distrihogar S.A. since 1989. Before he had held positions as Chief
Financial Officer of Suramericana de Seguros S.A. from 1982 to 1989 and Regional
Manager of Corporacion Financiera Suramericana S.A. Corfinsura from 1979 to
1982.
Mr. Sierra Moreno is also a member of the boards of directors of
Conconcreto S.A. and Calcetines Cristal S.A.. He is also a member of the ANDI's
sectional board since 1992.
ALTERNATE DIRECTORS
Luis Mariano Sanin Echeverri was born in 1945. He has been the
President of Fabricato Tejicodor S.A. since the year 2000. Previously, he was
President of Tejidos El Condor S.A. from 1996 to 2000, General Manager of
Cryogas S.A. from 1984 to 1996, Technical Vice President of Corporacion
Financiera Nacional from 1977 to 1984 and Manager of Exportations and Planning
of Pantex and Fabricato from 1973 to 1977. He also held positions at the ANDI
from 1968 to 1969 and from 1971 to 1973.
158
Mr. Sanin Echeverri is member of the boards of directors of Compania
Colombiana de Tabaco S.A., Colombiana de Inversiones S.A, Industrias Estra S.A.,
Diagonal, Ascoltex, Inexmoda, Promotora de Hoteles S.A. and Fabrisedas.
German Botero Arango was born in 1948. He is currently running his
civil engineering private practice. He was the General Manager of Cementos El
Cairo S.A. from 1986 until June 30, 2005. Previously, he was the Director of the
Colombian Institute of Cement Producers.
Mr. Botero Arango is a member of the boards of directors of Omya
Andina S.A. and Suramericana de Inversiones S.A.
Luis Alberto Zuleta Jaramillo was born in 1946. He is an economist and
has worked as private consultant in Economics and Finance since 1986. He worked
as a researcher at Fedesarrollo from 1987 to 1996 and from 1999 to 2004, First
Director of Fondo de Garantias de Instituciones Financieras from 1985 to 1986
and Sub-Manager of Development of the Central Bank from 1984 to 1985. He has
also worked as consultant for different governmental institutions.
Mr. Zuleta Jaramillo is member of the boards of directors of Inversura
S.A., Calcetines Cristal S.A. and Fundacion Proninez.
Carlos Mario Giraldo was born in 1960. He has been the President of
Inveralimenticias S.A. since 1997 and was the Vicepresident of International
Business of the same company from 1994 until 1997. Previously he was the
Secretary General and Director of the Legal Department of C.I. Uniban S.A.. He
also held various positions in the Economics Research Department of the ANDI,
such as General Manager for the Antioquia Region and Presidency and Legal Vice
Precidency Assistant. He was also a civic controller and the Presidency
Assistant of the Antioquia Cattle Federation (Federacion Antioquena de
Ganaderos).
Mr. Giraldo is an alternate member of the board of directors of
COMFAMA. He is also a member of the board of directors of Aerorepublica. He is
the President of the Commission for Colombian and Venezuelan Bilateral Relations
(Comision de Relaciones Bilaterales Colombo Venezolana) and a member of the
Consult Committee of the Latin American Bimbo Group Organization.
Alejandro Gaviria Uribe was born in 1965. Since 2004, he has been a
Professor and Researcher at Andes University (Bogota, Colombia) and a columnist
for the weekly publication "El Espectador". Previously, he was the Subdirector
of the National Planning Department from 2002 to 2004 and the Subdirector of
Fedesarrollo from 2000 to 2002. He was an associate researcher for Fedesarrollo
from 2000 to 2001, a Researcher for the Inter-American Development Bank - BID
from 1998 to 2000, and the Head of the National Planning Department of Colombia
from 1993 to 1994. He has also held positions as economist in the National
Coffee Producers Federation and civil engineer for Suramericana de Seguros S.A.
On March 2, 2006, the General Shareholders' Meeting approved an
amendment to the By-laws of Bancolombia which increased the number of principal
and alternate directors from five to seven. At the same meeting, the
Shareholders appointed the individuals to serve as members of the Board of
Directors for the April 2006 - March 2008 period. Therefore, German Botero
Arango and Luis Mariano Sanin Echeverri were removed, and Juan Camilo Restrepo
Salazar, David Bojanini Garcia, Carlos Raul Yepes Jimenez, Juan Sebastian
Betancur Escobar, Francisco Moncaleano Botero and Maria Angelica Arbelaez
Restrepo were appointed as disclosed in Item 6 - Directors, Senior Management
and Employees, C - Board Practices.
159
Certain information about the new appointed members of the Board of
Directors is set forth below:
Juan Camilo Restrepo Salazar was born in 1946. He has held different
public charges such as Secretary and Adviser of the board of directors of the
Banco de la Republica of Colombia, Banking Superintendent, President of the
National Securities Commission (Comision Nacional de Valores), Commercial
Manager of the Federacion Nacional de Cafeteros, Minister of Mines and Energy,
Minister of Finance, and Ambassador of Colombia in France. He has also held
certain positions in the private sector such as President of Fedeleasing,
Representative of the Federacion Nacional de Cafeteros in the International
Coffee Organization in London. He has been member of the boards of directors of
various companies such as Bansuperior, Seguros Atlas S.A., Seguros Atlas de
Vida, Almacafe, Banco Cafetero, BCH, Bancoldex, La Previsora S.A., the Caja de
Credito Agrario, and Federacion Nacional de Cafeteros. Currently, he is a member
of the board of directors of the Empresas Publicas de Medellin and Cusezar. He
is the author of various articles and publications, and is a professor in
different universities.
David Emilio Bojanini Garcia was born in 1956. He has been the
President of Proteccion S.A. since 1991. He previously worked in Suramericana de
Seguros S.A. Currently, he is a member of the boards of directors of Grupo
Nacional de Chocolates S.A., Inversiones Cementos Argos S.A., Leasing Colombia
S.A. and Asofondos.
Carlos Raul Yepes Jimenez was born in 1964. He is the Legal Vice
President of Cementos Argos S.A.. He was previously the Legal Director of
Bancolombia S.A. and also the Legal Director of CI Union de Bananeros de Uraba
"Uniban". He is a member of the boards of directors of CI Carbones del Caribe
and Corporacion de Cemento Andino Venezuela.
Juan Sebastian Betancur Escobar was born in 1943. He is the President
of Fundacion para el Progreso de Antioquia "Proantioquia". He has also held
other positions such as General Manager of ANDI, President of Telecom, President
of the Asociacion Nacional de Anunciantes, Vice President of Corporative
Subjects of Suramericana de Seguros and Suramericana de Inversiones. He was the
representative of the President of Colombia on the board of directors of Telecom
and Colciencias. Currently, he is a member of the boards of directors of
Cementos Paz del Rio, Brinks, Grupo Nacional de Chocolates S.A., Tipiel S.A.,
Fedesarrollo, Coinvertir, Corporacion Excelencia de la Justicia, Corporacion
Antioquia Presente and the Fundacion Ideas para la Paz.
Francisco Jose Moncaleano Botero was born in 1958. He is the President
of Codiscos S.A. and Vice President of Operations of Caledco Corporation in
Miami. He has held other charges such as Vice President of Operations of
Hemisphere Services Miami, which is the holding company of ROV Limited, and Vice
President of Finance of the Ganadero and Colpatria Banks' Miami Agency. He is a
member and President of the board of directors of Codiscos S.A. and a member of
the board of directors of JLT Re de Colombia S.A..
Maria Angelica Arbelaez Restrepo was born in 1965. She was the Vice
President of Economics of Asociacion Bancaria y de Entidades Financieras de
Colombia- ASOBANCARIA from 2004 to 2005. She held different positions at
Fedesarrollo from 1997 to 2004, where she is currently an associate researcher.
She was external consultant of the Organization of American States ("OAS") in
1997. She worked for the Ministry of External Commerce from 1992 to 1997.
160
SENIOR MANAGEMENT
Jorge Londono Saldarriaga was born in 1947. He has been the President
of Bancolombia since 1996, and was previously a member of its Board of Directors
for three years. Mr. Londono was Vice President of Investing (CIO) of
Suramericana de Seguros S.A. from 1993 to 1996, President (CEO) of the
stockbrokerage firm Suvalor S.A. from 1991 to 1993 and Secretary of Finance of
the City of Medellin from 1983 to 1984.
Mr. Londono holds a degree in Business Administration from EAFIT
University in Medellin, and a masters degree in Economic Development from the
University of Glasgow in Scotland.
Sergio Restrepo Isaza was born in 1961. He has been Executive Vice
President of Corporate Development of Bancolombia since the Merger that took
place on July 30, 2005 (for more information about the Merger see Item 4-
Information on the Company, A- History and Development of the Company).
Previously, he had been President (CEO) of Corfinsura since 2004 and held
various managerial positions at Corfinsura such as Vice President of Investment
Banking from 1996 to 2004, Vice President of Investment and International
Affairs from 1993 to 1996, and before that, Assistant to the CEO, Regional
Manager, International Sub-manager and Project Director.
Mr. Restrepo holds a B.A. degree from EAFIT University in Medellin and
an MBA degree from Stanford University.
Juan Carlos Mora was born in 1965. He has been the Risk Management
Vice President of Bancolombia since the Merger that took place on July 30, 2005.
He served as the Vice President of Operations of Corfinsura since 2003 and held
various positions within the corporation such as Corporate Finance Manager from
1995 to 2003, account executive from 1992 to 1995 and credit analyst from 1991
to 1992.
Mr. Mora holds a B.A. degree from EAFIT University and an MBA degree
from Babson College.
Santiago Perez Moreno was born in 1955. He has been the Vice President
of Personal and Medium and Small Business Banking since 1989, and has held
different managerial positions at BC since 1981, such as Personal Banking
Manager for the Bogota Region, International Commerce Manager for the Bogota
Region, and assistant for the Vice Presidency of International Commerce.
Mr. Perez holds an Industrial Economics degree from Los Andes
University in Bogota and an MBA from IESE in Barcelona.
Jaime Alberto Velasquez Botero was born in 1960. He has been the Vice
President of Finance of Bancolombia since 1997. From 1989 through 1997, he held
several managerial positions in the Economic Department and Investor Relations
Department. Previously, he worked at C.I. Banacol from 1987 to 1989.
Mr. Velasquez holds an Economics Degree from Antioquia University in
Medellin.
Margarita Maria Mesa Mesa was born in 1960. She has been the Legal
Vice President and Secretary General of Bancolombia since the Merger that took
place on July 30, 2005. She held the position of Secretary General of Corfinsura
S.A. since 1993, becoming an executive officer in 2002.
161
Mrs. Mesa graduated from UPB University Law School in Medellin,
obtained a post graduate degree in Commercial Law from the UPB University, and
an MBA from EAFIT University in Medellin.
Jorge Ivan Toro Villegas was born in 1948. He has been the Vice
President of Technology of Bancolombia since the Merger that took place on July
30, 2005. Mr. Toro was the Vice President of Media and Technology of Conavi from
2003 until the Merger. Mr. Toro first joined Conavi in 1973, where he held
positions as Vice President of Business Development, Vice President of Planning
and systems analyst. Mr. Toro was also the President of TODO 1 S.A. (Colombia)
and CEO of TODO 1 Services Inc. (Miami), both affiliated companies of Conavi.
From 1994 to 1996, he was the President of Unisys de Colombia S.A. Previously,
he worked as a systems analyst for the City of the Medellin from 1971 to 1974.
Mr. Toro taught Financial Mathematics from 1971 to 1985 and Project
Management from 1993 to 2000 in the University of Medellin. He also taught in
the Banking Studies Degrees of the Andes University in Bogota from 1989 to 2000,
the UIS University from 1995 to 1996 and the EAFIT University in Medellin from
1990 to 1993.
Mr. Toro holds a Civil Engineer degree from Medellin University and a
post graduate degree in Financial Institutions Management from Northwestern
University (USA).
Gonzalo Toro Bridge was born in 1960. He has been Vice President of
Corporate Banking of Bancolombia since 2003. From 1988 until 1994, he was the
Assistant of the Vice Presidency of Corporate and International Banking and from
1994 to 2003 he was the Vice President of Corporate and International Banking.
Mr. Bridge holds a B.A. degree from EAFIT University in Medellin and a
certificate of attendance from the Advanced Management Program for overseas
bankers from the University of Pennsylvania.
Federico Ochoa Barrera was born in 1947. He has been the Executive and
Services Vice President of Bancolombia since 1998. Before the merger of Banco
Industrial Colombiano and Banco de Colombia, he held several positions at Banco
de Colombia, including National Branches Vice President, Administrative Vice
President, Executive and Commercial Vice President and Executive President.
Mr. Ochoa holds a B.A. from Harvard College and an attendance
certificate for the Executives Program from Carnegie-Mellon University.
Hernan Dario Ramirez Giraldo was born in 1958. He has been the
Administrative Vice President of Bancolombia since the Merger that took place on
July 30, 2005. Previously, he had been the Vice President of Internal Audit
since 1998. Mr. Ramirez has worked for Bancolombia and its subsidiaries since
1985, holding positions such as Chief Accountant Officer from 1991 to 1996,
Internal Auditor from 1996 to 1998 and Operations Manager of FiduBIC from 1994
to 1996.
Mr. Ramirez holds an industrial engineering degree from Antioquia
University in Medellin, an accounting degree from the Medellin University and a
certificate of attendance from the Strategic Management Program for Top
Directors from the University of Monterrey in Mexico.
Luis Fernando Montoya Cusso was born in 1964. He has been the Vice
President of Operations since 1998. Since 1973, he has occupied several
positions at Bancolombia, including Manager of Northern, Bogota and Cucuta
Regions and Operations Manager.
162
Mr. Montoya holds a B.A. degree from EAFIT University in Medellin.
Jairo Burgos de la Espriella was born in 1965. He has been the Vice
President of Human Resources since 1998. Since 1990, he has held several
positions in the Bank's Human Resources Department. Previously, Mr. Burgos held
positions as Legal Director of the Compania del Telesferico a Montserrate S.A.
from 1987 to 1989 and of the Fundacion San Antonio de la Arquidiocesis de Bogota
S.A. from 1989 to 1990.
Mr. Burgos graduated from Pontificia Universidad Javeriana (PUJ) Law
School in Bogota, obtained post graduate degrees in Corporate Law and Labor Law
from the PUJ University, and a Masters degree in Science of Management from the
Arthur D. Little School of Management in Boston.
Luis Fernando Munoz Serna was born in 1956. He has been the Vice
President of Mortgage Banking since the Merger that was completed on July 30,
2005. Before, Mr. Munoz acted as CEO of Conavi since June 2005. Mr. Munoz joined
Conavi in 1989 as Regional Manager for Bogota, holding various positions at
Conavi such as Vice President of Business Development and VP of Corporate
Banking since 1994. Previously, Mr. Munoz worked as Branch Manager for the main
office of BIC in Bogota from 1983 to 1989 and Branch Manager for the main office
of Banco Real de Colombia in Bogota from April to October 1989.
Mr. Munoz holds an industrial engineering degree from Pontificia
Universidad Javeriana in Bogota.
Luis Arturo Penagos Londono was born in 1950. He has been the Vice
President of Internal Audit since January of 2006. He had previously been the
Internal Auditor of Conavi since 1993 and the Compliance Officer since 1996. He
was the CEO of El Mundo daily paper from 1990 to 1991 and the External Auditor
of Uniban S.A. from 1980 to 1983. He also worked as audit assistant to Coltejer
S.A. from 1977 to 1990 and was the Dean of the B.A. Department of EAFIT
University from 1983 to 1993.
Mr. Penagos is a CPA from Antioquia University in Medellin and has an
MBA degree and a specialization diploma in Systems Audit from EAFIT University.
There are no family relationships between the directors and senior
management of Bancolombia listed above.
No arrangements or understandings have been made by major
shareholders, customers, suppliers or others pursuant to which any of the above
directors or members of senior management were selected.
B. COMPENSATION
Bancolombia compensates each of its directors Ps 1,200,000 per
meeting. The directors receive no other compensation or benefit. Consistent with
Colombian law, we do not disclose to our shareholders, or otherwise make public,
information regarding the compensation of our individual officers. The aggregate
amount of remuneration paid by BC and consolidated Subsidiaries to all
directors, alternate directors and senior management during the fiscal year
ended December 31, 2005 was Ps25,926 million.
163
BC has established an incentive compensation plan that awards bonuses
bi-annually to its vice presidents, department directors and certain managers.
In determining the amount of any bonuses, the Bank takes into consideration the
overall return on equity of BC and its executives achievement of individual
goals. BC's variable compensation has deferred elements and depending on the
amount awarded, the bonuses are payable in cash or as a combination of cash, a
right to receive in three years an amount in cash determined with reference to
the value of BC Common or Preferred Shares and an entitlement to a share in a
pool of unvested bonuses. The pool of unvested bonuses is an account of
preliminary bonuses, payable once it is established that the results that are
the basis of such bonuses have been sustained over time and were not the result
of a particular, extraordinary transaction that does not reflect better
performance, according to guidelines designed by the Bank. Such elements are
solely paid when certain future profits are obtained. At December 31, 2005,
based on internal analysis, there was a provision maintained for future
compensation payments in the amount of Ps2,423 million.
The Bank paid a total of Ps523,720 million for salaries of personnel
employed directly by the Bank and upper management of its affiliates. The sum of
Ps17,930 million that was paid for the incentive compensation plan is included
in that amount.
C. BOARD PRACTICES
The following are the terms of office and the period during which the
principal and alternate directors have served BC, as of December 31, 2005:
NAME FIRST ELECTED TO THE BOARD TERM EXPIRES
---- -------------------------- ------------
Juan Camilo Ochoa Restrepo 2004 2006
Carlos Enrique Piedrahita Arocha 1994(1) 2006
Jose Alberto Velez Cadavid 1996 2006
Gonzalo Alberto Perez Rojas 2004(2) 2006
Ricardo Sierra Moreno 1996(3) 2006
Luis Mariano Sanin 2002 2006
German Botero Arango 2002 2006
Luis Alberto Zuleta Jaramillo 2004 2006
Carlos Mario Giraldo Moreno 2005 2006
Alejandro Gaviria Uribe 2005 2006
----------
(1) Carlos Enrique Piedrahita Arocha had previously served as BC's Director
during the period 1990-1993.
(2) Gonzalo Alberto Perez Rojas had previously served as BC's Director during
the period 1990-1994.
(3) Ricardo Sierra Moreno had previously served as BC's Director during the
period 1982-1988.
On May 2, 2006 the General Shareholders' Meeting approved an amendment
to the By-laws of Bancolombia which increased the number of principal and
alternate directors from five to seven. On the same meeting, the Shareholders
appointed the following individuals to serve as members of the Board of
Directors of Bancolombia for the April 2006 - March 2008 period:
PRINCIPAL / FIRST ELECTED
NAME ALTERNATE TO THE BOARD TERM EXPIRES
---- ----------- ------------- ------------
Juan Camilo Ochoa Restrepo Principal 2004 2008
Jose Alberto Velez Cadavid Principal 1996 2008
Carlos Enrique Piedrahita Arocha Principal 1994(1) 2008
Gonzalo Alberto Perez Rojas Principal 2004(2) 2008
164
PRINCIPAL / FIRST ELECTED
NAME ALTERNATE TO THE BOARD TERM EXPIRES
---- ----------- ------------- ------------
Ricardo Sierra Moreno Principal 1996(3) 2008
Juan Camilo Restrepo Salazar Principal 2006 2008
Alejandro Gaviria Uribe Principal 2005 2008
David Bojanini Garcia Alternate 2006 2008
Carlos Raul Yepes Jimenez Alternate 2006 2008
Juan Sebastian Betancur Escobar Alternate 2006(4) 2008
Carlos Mario Giraldo Moreno Alternate 2005 2008
Francisco Moncaleano Botero Alternate 2006 2008
Luis Alberto Zuleta Jaramillo Alternate 2004 2008
Maria Angelica Arbelaez Restrepo Alternate 2006(5) 2008
----------
(1) Carlos Enrique Piedrahita Arocha had previously served as BC's Director
during the period 1990-1993.
(2) Gonzalo Alberto Perez Rojas had previously served as BC's Director during
the period 1990-1994.
(3) Ricardo Sierra Moreno had previously served as BC's Director during the
period 1982-1988.
(4) Juan Sebastian Betancur Escobar had previously served as BC's Director
during the period 1994-2002.
(5) Maria Angelica Arbelaez Restrepo had previously served as BC's Director
during the period 2004-2005.
The following are the current terms of office and the period during
which the members of senior management have served BC. There are no defined
expiration terms.
NAME PERIOD SERVED
---- -------------
PRESIDENT
Jorge Londono Saldarriaga Since 1996
VICE PRESIDENTS
Sergio Restrepo Isaza Since 2005
Federico Ochoa Barrera Since 1984
Jaime Alberto Velasquez Botero Since 1997
Juan Carlos Mora Uribe Since 2005
Margarita Maria Mesa Mesa Since 2005
Santiago Perez Moreno Since 1989
Gonzalo Toro Bridge Since 1998
Luis Fernando Munoz Serna Since 2005
Jorge Ivan Toro Villegas Since 2005
Luis Arturo Penagos Londono Since 2006
Hernan Dario Ramirez Giraldo Since 1998
Luis Fernando Montoya Cusso Since 1998
Jairo Burgos de la Espriella Since 1998
Neither BC nor its Subsidiaries have any service contracts with BC's
directors providing for benefits upon termination of employment.
BC, in accordance with the requirements of External Circular 007 of
2001 issued by the former Superintendency of Banking, as amended, has an audit
committee whose main purpose is to support the Board of Directors in supervising
the effectiveness of the Bank's internal controls. The committee consists of
five directors who are elected by the Board of Directors for a period of two
years, one of whom must be a financial expert. The current principal members are
Luis Alberto Zuleta Jaramillo, Jose Alberto Velez Cadavid, Ricardo Sierra
Moreno, Carlos Raul Yepes Jimenez and Juan Sebastian Betancur Escobar. The audit
committee may also designate independent advisors to support its activity.
165
As established by the Superintendency of Finance, the audit committee
has a charter that establishes its composition, organization, objectives,
duties, responsibilities and extension of its activities. The audit committee
must meet at least quarterly and must present a report of its activities at the
General Shareholders' Meeting.
BC currently complies with applicable requirements of the Sarbanes
Oxley Act of 2002 for foreign issuers with respect to the composition and
functions of its audit committee, and the rules there under by the U.S.
Securities and Exchange Commission (the "SEC"). As soon as they are applicable
to foreign issuers, BC will comply with any additional requirements.
The Board of Directors of BC has established a remuneration committee
whose members are Ricardo Sierra Moreno and Carlos Enrique Piedrahita. The main
function of this committee is to determine policies for hiring, compensation and
development of the Bank's executive officers. The committee will also supervise
the goals established in the compensation programs and recommend the adoption of
new remuneration programs for BC's executive officers.
D. EMPLOYEES
The following table sets forth the number of employees of BC for the
last three fiscal years:
TOTAL NUMBER OF EMPLOYEES NUMBER OF
EMPLOYED BY BC AND ITS EMPLOYEES EMPLOYED
AS OF DECEMBER 31 CONSOLIDATED SUBSIDIARIES BY BC DIRECTLY
----------------- ------------------------- ------------------
2003 8,001 6,473
2004 8,609 7,027
2005 14,562 11,571
====== ======
On December 31, 2005, Bancolombia and its consolidated Subsidiaries
had 14,562 employees of which 11,571 were employed directly by the Bank. Of the
11,571 employees directly contracted by the Bank, 8,386 belong to operations
personnel and 3,185 are management employees. Of the 11,571 employees,
approximately 26.58% are located in the Bogota Region, 14.04% in the South
Region, 18.77% in the Antioquia Region, 21.60% in the Medellin headquarters,
10.01% in the Central Region and 9.01% in the North Region. During 2005, the
Bank contracted an average of 126 employees per month through temporary
personnel service companies. Of the employees, approximately 12.48% belong to a
labor union called Sintrabancol and 9.65% are members of an industry union
called UNEB. A collective bargaining agreement with both unions has been in
effect since November 1, 2005 and is set to expire on October 31, 2008. This
agreement is applied approximately to 8,386 employees.
The Bank is satisfied with the existing collective bargaining
agreement, both for the labor costs and its implications, as well as for the
relationship it has helped to develop with the labor unions and BC employees.
166
E. SHARE OWNERSHIP
The following directors and managers owned Common Shares in BC as of
December 31, 2005: Juan Camilo Ochoa Restrepo, Ricardo Sierra Moreno, Gonzalo
Alberto Perez Rojas, German Botero Arango, Jorge Londono Saldarriaga, Luis
Santiago Perez Moreno and Gonzalo Toro Bridge. None of their shareholdings,
individually or in the aggregate, exceeded 1% of BC's outstanding Common Shares.
Luis Santiago Perez Moreno is the only executive officer of BC who
owned any Preferred Shares in BC as of December 31, 2005. His shareholding did
not exceed 1% of BC's outstanding Preferred Shares.
As of December 31, 2005, BC had no outstanding options to acquire any
of its outstanding Common Shares or Preferred Shares.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. MAJOR SHAREHOLDERS
The following table sets forth, solely for purposes of United States
securities laws, certain information regarding the beneficial ownership of BC's
capital stock by each person known to BC to own beneficially more than 5% of
each class of BC's outstanding capital stock as of December 31, 2005. A
beneficial owner includes anyone who has the power to receive the economic
benefit of ownership of the securities.
% OWNERSHIP % OWNERSHIP % OWNERSHIP
OF COMMON OF PREFERRED OF TOTAL
NAME COMMON SHARES PREFERRED SHARES SHARES(1) SHARES(1) SHARES(1)
---- ------------- ---------------- ----------- ------------ -----------
Suramericana de Inversiones and Subsidiaries(2) 230,874,330 1,045,318 45.3% 0.5% 31.9%
Inversiones Argos S.A.(3) 72,386,256 7,727,568 14.2% 3.5% 11.0%
ADR Program -- 141,935,536 0% 65.1% 19.5%
Fondo de Pensiones Obligatorias Proteccion S.A. 5,517,271 23,113,334 1.1% 10.6% 3.9%
=========== =========== ==== ==== ====
----------
(1) Common shares have one vote per share; Preferred Shares have limited voting
rights under certain circumstances specified in the by-laws of BC filed as
Exhibit 1 to this Annual Report.
(2) Represents ownership of Suramericana de Inversiones S.A. directly and
through its subisidiaries Portafolio de Inversiones Suramericana S.A.,
Fideicomiso Citirust-Suramericana-IFC, Inversiones SPC S.A., Inversiones la
Merced S.A. Compania Suramericana de Construcciones S.A., Cia.Suramericana
de Seguros S.A., Cia. Suramericana de Seguros de Vida S.A and Suramericana
Administradora de Riesgos Profesionales y Seguros SURATEP.
(3) Represents ownership of Inversiones Argos S.A. directly and through
subsidiary Cementos Argos S.A.
167
As of December 31, 2005 a total of 509,704,584 Common Shares and
218,122,421 Preferred Shares were registered in the Bank's shareholder registry
in the name of 19,476 shareholders. A total of 8,329,873 Common Shares,
representing 1.6% of outstanding Common Shares, were directly held by 35 record
holders in the United States, a total of 141,935,536 representing 65.1% of
Preferred Shares were held directly by 1 record holder in the United States (ADR
Program), and a total of 1,237,216 representing 0.6% of outstanding Preferred
Shares, were directly held by 21 record holders in the United States. Because
certain of the Preferred Shares and ADSs are held by nominees, the number of
record holders may not be representative of the number of beneficial owners.
Changes shown in the percentage ownership held by major shareholders
in the last year are partially a direct result of the Bank's Merger with Conavi
and Corfinsura that took place on July 30, 2005 (See Item 4. Information on the
Company - A. History and Development of the Company - Recent Developments).
As a result of the Merger, shareholders of Conavi and Corfinsura
received shares of Bancolombia in exchanges for their Conavi and Corfinsura
shares in accordance with the exchange ratios provided for in the Merger
Agreement and the BNP Report.
In accordance with the Merger Agreement, starting from the business
day following the Merger and for the three month period that ended October 31,
2005 shareholders of Conavi and Corfinsura were able to choose the class of
Bancolombia shares (common or non voting preferred shares) to receive in
exchange for their Conavi and Corfinsura shares. Shareholders of Conavi and
Corfinsura which did not exercise their right to choose during the specified
three month period, received common shares of Bancolombia.
As a result of the issuance of new shares for purposes of the Merger
the number of outstanding common and preferred shares of Bancolombia increased
as follows:
COMMON SHARES PREFERRED SHARES TOTAL
------------- ---------------- -----------
Number of shares outstanding as of July 29, 2005 398,259,608 178,435,787 576,695,395
Shares issued in exchange for Conavi and
Corfinsura shares as of November 1, 2005. 111,444,976 39,686,634 151,131,610
Shares outstanding from November 1, 2005. 509,704,584 218,122,421 727,827,005
Current capital structure as of November 1, 2005 70.03% 29.97% 100%
Some of Bancolombia's major shareholders also held shares of Conavi
and or Corfinsura, directly or through their subsidiaries, at the time of the
Merger and therefore received additional Bancolombia shares in exchange for
their Conavi and Corfinsura shares, increasing or maintaining, therefore, their
percentage ownership as a result of the Merger.
In addition, on September 27, 2005, the Venezuelan company Mercantil
Servicios Financieros C.A. sold (through the Colombian Stock Exchange) the
entire position it held in the Bank, directly and through its subsidiaries,
which was composed entirely of common shares and corresponded to approximately
4.4% of the Bank's capital stock after the Merger.
There has not been any other significant changes in the percentage
ownership held by any major shareholder during the last three years.
168
Major shareholders of the Bank do not have different voting rights.
They all vote according to their participation in the Bank's outstanding shares.
There are no arrangements known to the company whose operation may at
a subsequent date result in a change in control of the company.
To the extent known to the Bank, and in accordance with Colombian law,
BC is not directly or indirectly owned or controlled by any other entity or
person.
B. RELATED PARTY TRANSACTIONS
From time to time, BC makes loans to affiliates and other related
parties and engages in other transactions with such parties. Such loans have
been made in the ordinary course of business, on substantially the same terms,
including interest rates and required collateral, as those prevailing at the
time for comparable transactions with other similarly situated persons, and have
not involved more than the normal risk of collectibility or presented other
unfavorable features.
None of the related party transactions are considered material to the
company or to the related party and there are no transactions that are unusual
in their nature or conditions.
BC had a total amount of Ps296,635 million in loans outstanding to
related parties as of April 30, 2006. This amount includes the largest amount
outstanding as of April 30, 2006, which is a working capital loan to Concesiones
Urbanas S.A. outstanding in the amount of Ps119,801 million and accrued interest
for Ps1,825 million. As of April 30, 2006, the average interest rate for this
loan is 10.97%.
During 2005, significant balances and transactions with related
parties were as follows:
2005
ENTERPRISES THAT
DIRECTLY OR
INDIRECTLY THROUGH
ONE OR MORE
INTERMEDIARIES,
CONTROL OR ARE
CONTROLLED BY, OR
ARE UNDER COMMON
CONTROL WITH, THE KEY
COMPANY AND MANAGEMENT
ASSOCIATES PERSONNEL
------------------ ----------
(Ps million)
BALANCE SHEET
Investment securities Ps293,073 Ps --
Loans 149,892 18,802
Customers' acceptances
and derivatives 161,509 306
Accounts receivable 175,095 --
--------- --------
TOTAL Ps779,569 Ps19,108
========= ========
Deposits 489,909 996
Accounts payable 1,966 --
Bonds 22,270 --
--------- --------
TOTAL Ps514,145 Ps 996
========= ========
TRANSACTIONS INCOME
Dividends received 6,403 --
Interest and fees 20,029 1,963
Other 73 133
--------- --------
TOTAL Ps 26,505 Ps 2,096
========= ========
169
2005
ENTERPRISES THAT
DIRECTLY OR
INDIRECTLY THROUGH
ONE OR MORE
INTERMEDIARIES,
CONTROL OR ARE
CONTROLLED BY, OR
ARE UNDER COMMON
CONTROL WITH, THE KEY
COMPANY AND MANAGEMENT
ASSOCIATES PERSONNEL
------------------ ----------
(Ps million)
EXPENSES
Interest 33,149 629
Fees -- 100
Other -- 3
-------- -----
TOTAL Ps33,149 Ps732
======== =====
C. INTEREST OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED FINANCIAL STATEMENTS AND OTHER FINANCIAL INFORMATION
A.1. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to pages F- 1 through F - 131.
A.2. LEGAL PROCEEDINGS
The Bank (unconsolidated) is involved in normal collection
proceedings, restructuring proceedings with respect to certain borrowers and
other legal procedures in the ordinary course of business. For the purpose of
its audited financial statements, the Bank has various contingent liabilities,
including contingent liabilities relating to ordinary commercial and civil
litigation outstanding at December 31, 2005 amounting to Ps369,452 million. As
of December 31, 2005, Ps11,167 million of these liabilities are covered in a
guarantee contract entered into by Fogafin and private investors when Banco de
Colombia was sold to investors. This guarantee contract remains in force in
connection with litigation that was commenced before the privatization of Banco
de Colombia. In the opinion of management, after consultation with its external
Colombian legal counsel, the outcome of these contingent liabilities relating to
ordinary commercial and civil litigation is not expected to have a material
adverse effect on BC's financial condition or results of operations and the
possibility of loss by BC as a result of such litigation is not likely to exceed
the recorded allowance at December 31, 2005 of Ps16,729 million.
170
OTHER LEGAL PROCEEDINGS
The legal claims in which the Bank has been linked as defendant are
duly provisioned in the cases required, in accordance with Colombian
regulations, as shown in the notes to the financial statements. No event has
occurred in those legal proceedings that may significantly and negatively impact
the regular course of business of the Bank or its results.
On December 26th, 2003, the Special Unit of the Attorney General's
Office for Crime Against Public Administration delivered a preclusion order
related to the criminal investigation against Jorge Londono Saldarriaga and
Federico Ochoa Barrera, President and Vice-President respectively of
Bancolombia, which was initiated as a result of an accusation filed by the
Gilinski family. This decision was upheld in the second instance by the Attorney
General's Delegated Unit before the Supreme Court of Justice on July 8th, 2004.
The Attorney General's Office established that the alleged crimes of
fraud, unauthorized operations with shareholders and improper use of public
resources had not been committed and as a result the Bank was completely
exonerated from the claims for damages filed by the plaintiffs.
In 2005, before the Civil Division of the Supreme Court of Justice,
Messrs. Jaime and Isaac Gilinski filed an action for the protection of rights
against the Attorney General's Office, the Delegated Attorney General's Unit
before the Supreme Court of Justice and the National Unit of Attorney General
Offices Specialized in Crimes against Public Administration, in an attempt to
reopen the investigation, alleging that certain evidence gathered abroad was not
taken into account when deciding on the merits of the case, thereby constituting
a principle of administrative law obstructing due process.
By means of an award granted August 25, 2005, the Civil Division of
the Supreme Court of Justice rejected this claim, considering that the Attorney
General's Office in the second instance, upon resolving this issue, considered
that the evidence that was requested by the Public Prosecutor's Office was not
relevant to the investigation, a conclusion that at one time was stated by the
plaintiffs' own attorney. The plaintiffs then proceeded to file an appeal
against this decision before the Labor Division of the Supreme Court of Justice,
which then upheld the original decision considering that no action for the
protection of rights was warranted with regard to court decisions.
The action for the protection of rights was accepted for review by the
Constitutional Court, and a decision in this regard is still pending.
In 2004, an arbitration process was initiated by the Bank under the
auspices of the Bogota Chamber of Commerce to resolve certain claims related to
hidden contingencies and liabilities that the Bank believes are payable by the
former owners of Banco de Colombia and to ensure the effectiveness of the
guaranty that was granted with respect to the sold shares, the value of which is
now US$30 million. BC's claim under this suit amounted to approximately Ps
50,614 million, not including interest updates.
On March 30, 2006, the arbitral tribunal issued an award ordering the
defendant to pay Bancolombia Ps63,216 million, including inflation adjustments
and interest. The defendant filed an action for cancellation, which has not yet
been considered.
On June 2, 2004, another arbitration was initiated by the Sellers of
Banco de Colombia against Bancolombia and some of its administrators, based on
charges similar to those presented in the past before various administrative and
judicial authorities, related to the process of acquisition by BIC of a majority
of the stock of the old Banco de Colombia and the later merger of both entities.
171
On May 16, 2006, the arbitration tribunal issued an award that ruled
in favor of Bancolombia on the majority of the claims. However, the tribunal
ruled that Bancolombia should pay Ps40,570 million to the plaintiffs with
respect to their allegations of insufficient capitalization compensated with
external borrowings.
The arbitration tribunal denied all the plaintiffs' cla ims against
the senior management and exonerated them from all liability, ordering the
plaintiffs to pay the court costs.
In addition, the arbitration tribunal held that plaintiffs had failed
to prove that Bancolombia and its senior managers committed any fraudulent
operations or fraudulent representations regarding the above-mentioned
agreement, and denied any moral damages in favor of the plaintiffs.
On June 7, 2006, the Bank filed an extraordinary cancellation action
before the Superior Tribunal of Bogota pursuant to Article 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.
The Bank has filed an extraordinary cancellation action against an
award given as a result of arbitration proceedings filed by Mr. Luis Alberto
Duran against Bancolombia before the Superior Tribunal of Bogota by means of
which the Bank requests such Tribunal to determine if the arbitrators' decision
was taken according to current Colombian procedure and regulations. The
cancellation action refers exclusively to the award against Bancolombia. In all
matters favorable to the Bank, the arbitration award is final.
At December 31, 2005, the Bank had set up a provision of Ps21,470
million for this contingency until the Superior Court of Bogota grants a final
decision in this regard.
On the other hand, 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. The plaintiff had sought to have the merger and acquisition
process declared contrary to the people's rights to administrative morality and
free economic competition, alleging omissions by these monitoring and control
authorities with regard to the merger and acquisition process, as well as
supposed maneuvers on the part of BIC to prevent Banco de Colombia shareholders
from obtaining all relevant information with which to make the corresponding
decisions. On June 7, 2006, the Council of State upheld the original decision
against the plaintiff in a judgment on appeal.
Additional information about the Bank (unconsolidated) and its
Subsidiaries relating to these and other legal proceedings may be found in Note
26 Commitments and Contingencies to the Consolidated Financial Statements.
172
A.3. DIVIDEND POLICY
The declaration, amount and payment of dividends is based on BC's
unconsolidated earnings. Dividends must be approved at the ordinary annual
shareholders' meeting upon the recommendation of the Board of Directors and the
President of BC. Under the Colombian Commerce Code, after payment of income
taxes and appropriation of legal and other reserves, and after setting off
losses from prior fiscal years, BC must distribute to its shareholders at least
50% of its annual net income, or 70% of its annual net income if the total
amount of reserves exceeds its outstanding capital. Such dividend distribution
must be made to all shareholders, in cash or in issued stock of Bancolombia, as
may be determined by the shareholders, and within a year from the date of the
ordinary annual shareholders' meeting in which the dividend was declared.
Pursuant to Colombia's Law 222 of 1995, the minimum dividend per share
requirement of 50% or 70%, as the case may be, may be waived by an affirmative
vote of the holders of 78% of the shares present at the shareholders' meeting.
Under Colombian law, the annual net profits of BC must be applied as
follows:
- first, an amount equal to 10% of BC's net profits to a legal
reserve until such reserve is equal to at least 50% of the
Bank's paid-in capital;
- second, to the payment of the minimum dividend on the
Preferred Shares (for more information, see Item 10.
Additional Information - B. Memorandum and Articles of
Association); and
- third, as may be determined in the ordinary annual
shareholders' meeting by the vote of the holders of a
majority of the shares entitled to vote, upon the
recommendation of the Board of Directors, and may, subject
to further reserves required by BC's by-laws, be distributed
as a dividend.
The following table sets forth the annual cash dividends paid on each
Common Share and each Preferred Share during the periods indicated:
DIVIDENDS DECLARED
WITH RESPECT TO CASH DIVIDENDS CASH DIVIDENDS
NET INCOME EARNED IN: PER SHARE(1)(2) PER SHARE(1)(3)
--------------------- --------------- ---------------
(Ps) (U.S. DOLLARS)
2001 ................ 84 0.036
2002 ................ 132 0.045
2003 ................ 272 0.101
2004 ................ 376 0.159
2005................. 508 0.222
----------
(1) Includes Common Shares and Preferred Shares.
(2) Cash dividends for 2001, 2002, 2003 and 2004 were paid in quarterly
installments and cash dividends for 2005 will be paid in quarterly
installments.
(3) Amounts have been translated from pesos at the Representative Market Rate
in effect at the end of the month in which the dividends were declared
(February or March, as applicable).
B. SIGNIFICANT CHANGES
There has not been any significant changes since the date of the
annual financial statements included in this document.
173
ITEM 9. THE OFFER AND LISTING.
A. OFFER AND LISTING DETAILS
BC is a NYSE listed company and its ADSs are listed under the symbol
"CIB". The table below sets forth, for the periods indicated, the reported high
and low market prices and share trading volume for the Preferred Shares on the
Medellin Stock Exchange until July 3, 2001, and the Colombian Stock Exchange
after July 3, 2001, when the Medellin Stock Exchange, the Bogota Stock Exchange
and the Occidente Stock Exchange merged to form the Colombian Stock Exchange.
The table also sets forth the reported high and low market prices and the
trading volume of the ADSs on the NYSE for the periods indicated:
MEDELLIN/COLOMBIA
STOCK EXCHANGE NEW YORK STOCK EXCHANGE
----------------- ------------------------------
Ps PER
PREFERRED SHARE US$ PER ADS
----------------- ------------ TRADING VOLUME
HIGH LOW HIGH LOW (NUMBER OF ADSS)
------ ----- ----- ---- ----------------
YEAR ENDING
December 31, 2001 1,300 650 3.20 1.00 4,702,300
December 31, 2002 1,800 1,025 2.88 1.35 8,195,800
December 31, 2003 3,800 1,750 5.35 2.32 9,789,400
December 31, 2004 9,030 3,839 14.12 5.30 31,487,800
December 31, 2005 17,000 7,670 29.25 12.4 81,772,000
Source: NYSENet (Composite Index), Medellin Stock Exchange and Colombia Stock
Exchange.
COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
----------------------------- --------------------------
Ps PER TRADING TRADING
PREFERRED SHARES VOLUME US$ PER ADS VOLUME
---------------- (NUMBER ------------- (NUMBER
HIGH LOW OF SHARES) HIGH LOW OF ADSS)
------- ------ ---------- ----- ----- ----------
(in nominal pesos)
2004
First quarter 5,690 3,839 31,425,717 7.56 5.30 11,619,300
Second quarter 5,420 4,040 17,645,435 8.05 6.20 5,671,600
Third quarter 5,590 3,945 13,801,666 8.89 6.23 4,276,600
Fourth quarter 9,030 5,180 18,496,334 14.12 7.86 9,920,300
2005
First quarter 9,680 7,670 10,303,797 17.78 12.40 17,090,700
Second quarter 9,400 8,180 13,202,593 16.16 13.30 7,984,600
Third quarter 13,820 8,950 30,237,280 24.40 15.85 30,055,300
Fourth quarter 17,000 11,100 21,295,801 29.25 18.52 26,641,400
2006
First quarter 19,800 15,800 20,538,652 35.00 28.50 22,267,300
Source: Colombia Stock Exchange, NYSENet (Composite Index).
174
COLOMBIA
STOCK EXCHANGE NEW YORK STOCK EXCHANGE
---------------- --------------------------
Ps PER TRADING
PREFERRED SHARE US$ PER ADS VOLUME
---------------- ------------- (NUMBER
HIGH LOW HIGH LOW OF ADSS)
------ ------ ----- ----- ----------
MONTH
December 2005 17,000 14,500 29.25 25.7 5,994,700
January 2006 19,100 15,800 33.79 28.95 7,780,200
February 2006 18,700 16,260 33.20 28.50 7,232,800
March 2006 19,800 17,500 35.00 30.51 7,254,300
April 2006 20,700 19,020 36.18 32.71 5,383,100
May 2006 20,020 15,020 35.15 24.78 13,716,900
Source: NYSENet (Composite Index) and Colombia Stock Exchange.
ADRs evidencing ADSs are issuable by The Bank of New York, as
Depositary, pursuant to the Deposit Agreement, dated as of July 25, 1995,
entered into by BC, the Depositary, the owners of ADRs from time to time and the
owners and beneficial owners from time to time of ADRs, pursuant to which the
ADSs are issued (as amended, the "Deposit Agreement"). The Deposit Agreement was
amended and restated on August 8, 2005. Copies of the Deposit Agreement are
available for inspection at the Corporate Trust Office of the Depositary,
currently located at 101 Barclay Street, New York, New York 10286, and at the
office of Fiducolombia S.A., as agent of the Depositary, currently located at
Carrera 43A, No. 11A-44, Medellin, Colombia or Calle 30A No. 6-38, Bogota,
Colombia. The Depositary's principal executive office is located at One Wall
Street, New York, New York 10286.
On September 30, 1998, BC filed a registration statement on Form F-3
with the SEC to register ADSs evidenced by ADRs, each representing four
Preferred Shares, issued in connection with the merger between BIC and Banco de
Colombia for resale by the holders into the U.S. public market from time to
time. On January 24, 2005, the Board determined to deregister the unsold ADSs
registered under the registration statement on Form F-3. On March 14, 2005, BC
filed an amendment to the registration statement deregistering the remaining
unsold ADSs. On August 8, 2005, Bancolombia filed, through the Depositary, a
registration statement on Form F-6 registering 50,000,000 ADSs evidenced by ADRs
in connection with the Merger.
B. PLAN OF DISTRIBUTION
Not applicable.
C. MARKETS
BC's ADSs, each of which represents the right to receive four
Preferred Shares deposited in Colombia with the Custodian under the Deposit
Agreement, have been listed on the NYSE since July 1995. The Preferred Shares
have also been listed on the Colombian Stock Exchange since July 1995(with a
listing on the Medellin Stock Exchange, a predecessor to the Colombia Stock
Exchange, through July 3, 2001). Through the ADS program, the NYSE is the
principal U.S. trading market for the Preferred Shares. As of August 17, 2005,
the NYSE approved Bancolombia's application for the listing of up to 50,000,000
additional ADSs, each representing the right to receive four Preferred Shares
deposited in Colombia with the Custodian under the Deposit Agreement, in
connection with the Merger and the registration of additional ADSs described
above.
175
On December 31, 2005, there were 509,704,584 Common Shares
outstanding, of which 8,329,873 were directly held by record holders in the
United States, and 218,122,421 Preferred Shares outstanding, of which
141,935,536 were represented by 35,483,884 ADSs.
The Colombian Stock Exchange is the principal non-U.S. trading market
for the Preferred Shares and the sole market for the Common Shares. As of
December 31, 2005, the market capitalization for BC's Preferred Shares on the
Colombian Stock Exchange was Ps 3,616,470 million. There are no official market
makers or independent specialists in the Colombian Stock Exchange to assure
market liquidity and, therefore, orders to buy or sell in excess of
corresponding orders to sell or buy will not be executed. The Colombian Stock
Exchange is relatively volatile compared to major world markets. The aggregate
equity market capitalization of the Colombian Stock Exchange as of December 31,
2005, was Ps 115,471,609 million (US$ 50.6 billion), with 105 companies listed
as of that date. A substantial portion of the trading on the Colombian Stock
Exchanges consists of trading in debt securities.
D. SELLING SHAREHOLDERS
Not applicable.
E. DILUTION
Not applicable.
F. EXPENSES OF THE ISSUE
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. SHARE CAPITAL
Not applicable.
B. MEMORANDUM AND ARTICLES OF ASSOCIATION
BC'S CORPORATE PURPOSE
Pursuant to Article Four of its by-laws, BC's corporate purpose
consists of all kinds of banking operations, business, acts and services.
Subject to applicable law, BC may carry out all the activities and investments
authorized to banking establishments. BC is authorized to participate in the
capital stock of other companies, subject to any restrictions imposed by
applicable law.
176
BOARD OF DIRECTORS
The directors of BC must abstain from participating, directly or
through an intermediary, in their own interest or in the interest of a third
party, in activities that may compete against the company or in
conflict-of-interest transactions, unless the General Shareholders Meeting
grants express authorization to such director. For such purposes, the directors
shall provide the Shareholders Meeting with all the relevant information
necessary for the meeting to reach a decision. If the director is a shareholder,
his or her vote shall be excluded from the respective decision process. In any
case, the General Shareholders Meeting will only grant its authorization if the
act does not impair BC's interests.
The Shareholders Meeting, not the Board of Directors Meeting, is the
corporate body entitled to determine the compensation to be granted to
directors.
Pursuant to the by-laws of BC, the Board of Directors has the power to
authorize the execution of any agreement, within the corporate purpose of BC,
and to adopt the necessary measures in order for the Bank to accomplish its
purpose, but these do not provide for any specific borrowing powers exercisable
by the Board of Directors.
The by-laws of BC do not provide for: (i) any age limit requirement
for the retirement or non-retirement of directors or (ii) any number of shares
required for director's qualification.
DESCRIPTION OF SHARE CAPITAL
VOTING RIGHTS
Common Shares
The holders of Common Shares will be entitled to vote on the basis of
one vote per share on any matter put to a vote to the shareholders at any
general shareholders' meeting. These general meetings may be ordinary meetings
or extraordinary meetings. Ordinary general meetings occur at least once a year
during the three months after the end of the prior fiscal year, for the
following purposes:
- to consider the approval of BC's annual report, including
the financial statements for the preceding fiscal year;
- to review the annual report of the external auditor;
- to determine the compensation for the members of the Board
of Directors, the External Auditor and the Client
Representative ("Defensor del Cliente")(8);
- to elect directors, the Client Representative and the
External Auditor (each for a two-year term); and
----------
(8) The Client Representative acts as spokesman of the clients and users before
the Bank, his primary duty is to objectively solve, free of charge and
within the terms established by law, the individual complaints submitted by
clients.
177
- to determine the dividend policy and the allocation of
profits, if any, of the preceding fiscal year, as well as
any retained earnings from previous fiscal years.
Directors are elected under a proportional representation voting
system. Under that system:
- each holder of Common Shares is entitled at the annual
general shareholders' meeting to nominate for election one
or more directors;
- each nomination of one or more directors constitutes a group
for the purposes of the election;
- each group of nominees must contain a hierarchy as to the
order of preference for nominees in that group to be
elected;
- once all groups have been nominated, holders of Common
Shares may cast one vote for each common share held in favor
of a particular group of nominees. Votes may not be cast for
particular nominees in a group; they may be cast only for
the entire group;
- the total number of votes cast in the election is divided by
the number of directors to be elected. The resulting
quotient is the quota of votes necessary to elect particular
directors. For each time that the number of votes cast for a
group of nominees is divisible by the quota of votes, one
nominee from that group is elected, in the order of the
hierarchy of that group; and
- when no group has enough remaining votes to satisfy the
quota of votes necessary to elect a director, any remaining
board seat or seats are filled by electing the highest
remaining nominee from the group with the highest number of
remaining votes cast until all available seats have been
filled.
Extraordinary general shareholders' meetings may take place when duly
called for a specified purpose or purposes, or, without prior notice, when
holders representing all outstanding shares entitled to vote on the issues
presented are present at the meeting.
Quorum for both ordinary and extraordinary general shareholders'
meetings to be convened at first call requires the presence of two or more
shareholders representing at least half plus one of the outstanding shares
entitled to vote at the relevant meeting. If a quorum is not present, a
subsequent meeting is called at which the presence of two or more holders of
shares entitled to vote at the relevant meeting constitutes a quorum, regardless
of the number of shares represented. General meetings (whether ordinary or
extraordinary) may be called by the Board of Directors, the President or the
External Auditor of BC. In addition, two or more shareholders representing at
least 20% of the outstanding shares have the right to request that a general
meeting be convened. Notice of ordinary general meetings must be published in
one newspaper of wide circulation at BC's principal place of business at least
15 business days prior to an ordinary general meeting. Notice of extraordinary
general meetings, listing the matters to be addressed at such a meeting must be
published in one newspaper of wide circulation at BC's principal place of
business at least five calendar business days prior to an extraordinary general
meeting.
178
Except when Colombian law or BC's by-laws require a special majority,
action may be taken at a general meeting by the vote of two or more shareholders
representing a majority of Common Shares present. Pursuant to Colombian law
and/or BC's by-laws, special majorities are required to adopt the following
corporate actions:
- a favorable vote of at least 70% of the Common Shares
represented at a general shareholders' meeting is required
to approve the issuance of stock without granting a
preemptive right in respect of that stock in favor of the
shareholders;
- a favorable vote of at least 78% of the holders of Common
Shares present to decide not to distribute as dividend at
least 50% of the annual net profits of any given fiscal year
as required by Colombian law;
- a favorable vote of at least 80% of the holders of shares
present to approve the payment of a stock dividend and
- a favorable vote of at least 70% of the holders of Common
Shares and of subscribed Preferred Shares to effect a
decision to impair the conditions or rights established for
such Preferred Shares, or a decision to convert those
Preferred Shares into Common Shares.
Adoption of certain of the above-mentioned corporate actions also
requires the favorable vote of a majority of the Preferred Shares as specified
by Colombian law and the by-laws. If the Superintendency of Finance determines
that any amendment to the by-laws fails to comply with Colombian law, it may
demand that the relevant provisions be modified accordingly. Under these
circumstances, BC will be obligated to comply in a timely manner.
Preferred Shares
The holders of Preferred Shares are not entitled to receive notice of,
attend or vote at any general meeting of holders of Common Shares except as
described below.
The holders of Preferred Shares will be entitled to vote on the basis
of one vote per share at any shareholders' meeting, whenever the shareholders
vote on the matters described on Item 3. Key Information - D. Risk Factors -
D.3. Risks Relating to Our ADRs - D.3.iii. Our Preferred Shares Have Limited
Voting Rights.
BC will cause a notice of any meeting at which holders of Preferred
Shares are entitled to vote to be mailed to each record holder of Preferred
Shares. Each notice will include a statement stating:
- the date of the meeting;
- a description of any resolution to be proposed for adoption
at the meeting on which the holders of Preferred Shares are
entitled to vote; and
- instructions for the delivery of proxies.
179
DIVIDENDS
Common Shares
The holders of Common Shares, once they have approved the financial
statements, determine the allocation of distributable profits, if any, for the
preceding year. This is done by a resolution adopted by the vote of the holders
of a majority of the Common Shares at the annual general meeting of holders of
Common Shares pursuant to the recommendation of the Board of Directors and
President.
Under the Colombian Commerce Code, a company must, after payment of
income taxes and appropriation of legal reserves, and after off-setting losses
from prior fiscal years, distribute at least 50% of its annual net profits to
all shareholders, payable in cash, or as determined by the shareholders, within
a period of one year following the date on which the shareholders determine the
dividends. If the total amount segregated in all reserves of a company exceeds
its outstanding capital, this percentage is increased to 70%. The minimum common
stock dividend requirement of 50% or 70%, as the case may be, may be waived by a
favorable vote of the holders of 78% of a company's common stock present at the
meeting.
Under Colombian law and BC's by-laws annual net profits are to be
applied as follows:
- first, an amount equivalent to 10% of net profits is
segregated to build a legal reserve until that reserve is
equal to at least 50% of BC's paid-in capital;
- second, payment of the minimum dividend on the Preferred
Shares; and
- third, allocation of the balance of the net profits is
determined by the holders of a majority of the Common Shares
entitled to vote on the recommendation of the Board of
Directors and President and may, subject to further reserves
required by the by-laws, be distributed as dividends.
Under Colombian law, the dividends declared on the Common Shares
cannot exceed the dividends declared on the Preferred Shares. BC's by-laws
require it to maintain a reserve fund equal to 50% of paid-in capital. All
Common Shares that are fully paid and outstanding at the time a dividend or
other distribution is declared are entitled to share equally in that dividend or
other distribution. Common shares that are only partially-paid participate in a
dividend or distribution in the same proportion that those shares have been paid
at the time of the dividend or distribution.
The general shareholders' meeting may allocate a portion of the
profits to welfare, education or civic services, or to support economic
organizations of the Bank's employees.
Preferred Shares
Holders of Preferred Shares are entitled to receive dividends based on
the profits of the preceding fiscal year, after canceling losses affecting the
capital and once the amount that shall be legally set apart for the legal
reserve has been deducted, but before creating or accruing for any other
reserve, of a minimum preferred dividend equal to one per cent (1%) yearly of
the subscription price of the Preferred Share, provided this dividend is higher
than the dividend assigned to Common Shares, in which case, the dividend shall
be increased to an amount that is equal to the per share dividend on the Common
Shares. The dividend received by holders of Common Shares may not be higher than
the dividend assigned to Preferred Shares.
180
Payment of the preferred dividend shall be made at the time and in the
manner established by the general shareholders' meeting and with the priority
indicated by Colombian law.
In the event that the holders of Preferred Shares have not received
the minimum dividend for a period in excess of two consecutive fiscal years,
they will acquire voting rights. See Item 3. Key Information - D. Risk Factors -
D.3. Risks Relating to Our ADRs - D.3.iii. Our Preferred Shares Have Limited
Voting Rights.
General
The dividend periods may be different from the periods covered by the
general balance sheet. The general shareholders' meeting will determine such
dividend periods, the effective date, the system and the place for payment of
dividends.
Dividends declared on the Common Shares and the Preferred Shares will
be payable to the record holders of those shares, as they appear on BC's stock
registry, on the appropriate record dates as determined by the general
shareholders' meeting.
Any stock dividend payable by BC will be paid in Common Shares to the
holders of Common Shares and in Preferred Shares to the holders of Preferred
Shares. Nonetheless, a general shareholders' meeting may authorize the payment
in Common Shares to all shareholders.
Any stock dividend payable in Common Shares requires the approval of
80% or more of the shares present at a shareholders' meeting, which will include
80% or more of the outstanding Preferred Shares. In the event that none of the
holders of Preferred Shares is present at such meeting, a stock dividend may be
paid to the holders of Common Shares that approve such a payment.
Liquidation Rights
BC will be dissolved if certain events take place, including the
following:
- its term of existence, as stated in the by-laws, expires
without being extended by the shareholders prior to its
expiration date;
- losses cause the decrease of its shareholders' equity below
50% of its outstanding capital stock, unless one or more of
the corrective measures described in the Colombian Commerce
Code are adopted by the shareholders within six months;
- by decision of the general shareholders' meeting.
- in certain other events expressly provided by law and in the
by-laws.
Upon dissolution, a liquidator must be appointed by a general meeting
of the shareholders to wind up its affairs. In addition, the Superintendency of
Finance has the power to take over the operations and assets of a commercial
bank and proceed to its liquidation under certain circumstances and in the
manner prescribed in the Estatuto Organico del Sistema Financiero Decree 663 of
1993. For more information see Item 4. Information On The Company - B. Business
Overview - B.7. Supervision And Regulation Intervention Powers of the
Superintendency of Finance.
181
Upon liquidation, holders of fully paid Preferred Shares will be
entitled to receive in pesos, out of the surplus assets available for
distribution to shareholders, pari passu with any of the other shares ranking at
that time pari passu with the Preferred Shares as regards participation in BC's
surplus assets or the liquidation parity shares, a liquidation distribution of
an amount equal to the subscription price of those Preferred Shares before any
distribution or payment may be made to holders of Common Shares and any other
shares at that time ranking junior to the Preferred Shares as regards BC's
participation in BC's surplus assets. If, upon any liquidation, assets that are
available for distribution among the holders of Preferred Shares and liquidation
parity shares are insufficient to pay in full their respective liquidation
preferences, then those assets will be distributed among those holders pro rata
in accordance with the respective liquidation preference amounts payable to
them.
Subject to the preferential liquidation rights of holders of Preferred
Shares, all fully paid Common Shares will be entitled to participate equally in
any distribution upon liquidation. Partially paid Common Shares must participate
in a distribution upon liquidation in the same proportion that those shares have
been paid at the time of the distribution.
To the extent there are surplus assets available for distribution
after full payment to the holders of Common Shares of the initial subscription
price of the Common Shares, the holders of shares of capital stock will be
entitled to receive an amount per share equivalent to the difference between the
initial subscription price paid on each of their respective shares and the
highest subscription price paid, at any given time, in the issuance of any
series or our Preferred Shares. Any surplus assets available after such a
distribution is effected will be distributed among all holders of shares of
capital stock pro rata in accordance with their respective holdings of shares.
Preemptive Rights and Other Anti-Dilution Provisions
Pursuant to the Colombian Commerce Code, BC is allowed to have an
amount of outstanding capital stock smaller than the authorized capital stock
set out in its by-laws. Under BC's by-laws, the holders of Common Shares
determine the amount of authorized capital stock, and the Board of Directors has
the power to (a) order the issuance and regulate the terms of subscription of
Common Shares up to the total amount of authorized capital stock and (b)
regulate the issuance of shares with rights to a preferential dividend but
without the right to vote, when expressly delegated by the general shareholders'
meeting. The issuance of Preferred Shares must always be first approved by the
general shareholders' meeting, which shall determine the nature and extent of
any privileges, according to the by-laws and Colombian law.
At the time a Colombian company is formed, its outstanding capital
stock must represent at least 50% of the authorized capital. Any increases in
the authorized capital stock or decreases in the outstanding capital stock must
be approved by the majority of shareholders required to approve a general
amendment to the by-laws. Pursuant to Decree 663, the Superintendency of Finance
may order a commercial bank to increase its outstanding capital stock under
certain special circumstances.
The Bank's by-laws and Colombian law require that, whenever the Bank
issues new shares of any outstanding class, it must offer the holders of each
class of shares the right to purchase a number of shares of such class
sufficient to maintain their existing percentage ownership of the aggregate
capital stock of the Bank. These rights are called preemptive rights. See Item
3. Key Information - D. Risk Factors - D.3. Risks Relating to Our ADRs - D.3.iv.
Preemptive Rights May Not Be Available to Holders of ADRs.
182
A general meeting of shareholders may suspend preemptive rights with
respect to a particular capital increase by a favorable vote of at least 70% of
the shares represented at the meeting. Preemptive rights must be exercised
within the period stated in the share placement terms of the increase, which
cannot be shorter than 15 business days following the publication of the notice
of the public offer of that capital increase. From the date of the notice of the
share placement terms, preemptive rights may be transferred separately from the
corresponding shares.
The Superintendency of Finance will authorize decreases in the
outstanding capital stock decided by the holders of Common Shares only if:
- BC has no liabilities;
- BC's creditors consent in writing; or
- the outstanding capital stock remaining after the reduction
represents at least twice the amount of BC's liabilities.
No Redemption
Colombian law prohibits BC from repurchasing shares of its capital
stock, including the Preferred Shares.
C. MATERIAL CONTRACTS
On December 29, 2003, BC and certain of its subsidiaries acquired
99.99% of Compania Suramericana de Financiamiento Comercial S.A.
Sufinanciamiento from Portafolio de Inversiones Suramericana S.A., Compania
Suramericana de Inversiones S.A., Compania Suramericana de Construcciones S.A.,
Corporacion Financiera Nacional y Suramericana S.A. Corfinsura, and Fundacion
Suramericana. The purchase price paid by BC and its relevant subsidiaries was Ps
75,016 million.
On February 28, 2005, Bancolombia, Conavi and Corfinsura entered into
a Merger agreement, whereby the parties agreed to merge Conavi and Corfinsura
with and into the Bank, as surviving entity, after Corfinsura has spun-off part
of its investment portfolio, which was transferred to a new entity formed by the
shareholders of Corfinsura. On July 30, 2005, the Merger was completed. (For
more information about this Merger please see Item 4 - Information on the
Company, A - History and Development of the Company).
On November 22, 2005, the Bank entered into a preliminary agreement to
begin negotiations relating to a proposed purchase agreement, by which the Bank
would sell all of the shares it holds in Almacenar S.A. directly (94.33%) and
through Colcorp S.A. (3.92%).
On December 12, 2005, the Bank, together with its affiliates, issued a
proposal for the acquisition of all of the outstanding shares of Comercia S.A.
Compania de Financiamiento Comercial, for a price of Ps 44,250,000,000.
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On May 8, 2006, BC by means of a transaction duly authorized by the
Superintendency of Finance, acquired from Textiles Fabricato Tejicondor S.A.
9,863,685 shares of Comercia S.A., equivalent to 55.61% of the outstanding
shares of such company. The value paid by the Bank was Ps 24,610 million. We
currently expects 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.
On December 30, 2005 Colcorp sold its position in Abonos Colombianos
S.A. - Abocol S.A, and subsidiaries to V. International Ventures Inc.
Information on the agreements signed during 2005 can be found in Item
4. Information on the Company - A. History and Development of the Company.
D. EXCHANGE CONTROLS
The Central Bank has consistently made foreign currency available to
Colombian private sector entities to meet their foreign currency obligations.
Nevertheless, in the event of renewed shortages of foreign currency, there can
be no assurance that foreign currency would continue to be available to private
sector companies or that foreign currency needed by BC to service foreign
currency obligations could be purchased in the open market without substantial
additional cost.
The Foreign Exchange Statute is contained in Law 9 of 1991 and
External Resolution No. 8 of 2000, which was regulated by the External
Regulating Circular DCIN 83 of 2004 of the Board of Directors of the Central
Bank. The International Investment Statute of Colombia is also contained in
Decree 2080 of 2000 and Decree 1844 of 2003, as amended, and regulates the
manner in which foreign investors can participate in the Colombian securities
markets and undertake other types of investment, prescribes registration with
the Central Bank of certain foreign exchange transactions and specifies
procedures pursuant to which certain types of foreign investments are to be
authorized and administered.
Each individual investor who deposits Preferred Shares into the ADS
deposit facility for the purpose of acquiring ADSs (other than in connection
with or reacquisition of the ADSs pursuant to the ADS offerings) will be
required, as a condition to acceptance by Fiducolombia, as custodian of such
deposit, to provide or cause to be provided certain information to Fiducolombia,
to enable it to comply with the registration requirements under the foreign
investment regulations relating to foreign exchange. A holder of ADSs who
withdraws Preferred Shares from the ADS deposit facility under certain
circumstances may be required to comply directly with certain registration and
other requirements under the foreign investment regulations. Under such
regulations, the failure of a non-resident investor to report or register
foreign exchange transactions relating to investments in Colombia with the
Central Bank on a timely basis may prevent the investor from obtaining
remittance rights, constitute an exchange control infraction and result in a
fine.
Under Colombian law and the by-laws of BC, foreign investors receive
the same treatment as Colombian citizens with respect to the ownership and the
voting of ADSs and Preferred Shares. For a detailed discussion of ownership
restrictions see Item 4. Information on the Company - B. Business Overview -
B.7. Supervision and Regulation - Ownership Restrictions.
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E. TAXATION
COLOMBIAN TAXATION
In Colombia, dividends received by foreign companies or other foreign
entities, non resident individuals and successions of non residents are subject
to income taxes.
Pursuant to the International Investment Statute (see Item 10.
Additional Information - D. Exchange Controls) the Preferred Shares deposited
under the Deposit Agreement constitute a "Foreign Institutional Capital
Investment Fund". Under Article 18-1 of the Estatuto Tributario, Decree 624 of
1989 as amended (the "Fiscal Statute"), dividends paid to foreign institutional
capital investment funds are not subject to Colombian income, withholding,
remittance or other taxes, provided that such dividends are paid in respect of
previously taxed earnings of BC. Therefore, provided that distributions are made
by BC to the holders of ADRs through the Depositary, all distributions by BC
made on account of Preferred Shares to holders of ADRs evidencing ADSs who are
not resident in Colombia, as defined below, will be exempt from Colombian
income, withholding and remittance taxes, except in the case of distributions
paid out of non-taxed earnings of BC (which would bear a 35% tax).
Dividends paid to a holder of Preferred Shares (as distinguished from
the ADSs representing such Preferred Shares) who is not a resident of Colombia,
as defined below, and who holds the Preferred Shares in his own name, rather
than through another institutional or individual fund, will be subject to
Colombian income taxes at a special rate of 7%. However, if such dividends do
not correspond to BC's profits that have been taxed at the corporate level, the
applicable rate is 35% (and will be the new basis for the especial flat rate of
7%).
In the event that a holder of ADRs who is not a resident of Colombia
chooses to surrender its ADSs and withdraw the underlying Preferred Shares,
dividends to such non-resident holder would be subject to withholding tax at the
rates set forth in the preceding paragraph, unless such non-resident holder
takes the necessary actions under Colombian law to hold such Preferred Shares
through either an "institutional fund" or an "individual fund" under foreign
investment regulations, in which case dividends payable with respect to the
Preferred Shares would receive the same preferential treatment as a holder of
ADRs.
For purposes of Colombian taxation, an individual is a resident of
Colombia if he or she is physically present within Colombia for more than six
months during the calendar year or the six months are completed within that
taxable period. For purposes of Colombian taxation, a legal entity is a resident
of Colombia if it is organized under the laws of Colombia.
Foreign companies and individuals that are non Colombian residents are
required by law to file an income tax declaration in Colombia when dividends
have been subject to withholding taxes. However, foreign institutional capital
investment funds are not required under law to file income tax declaration in
Colombia.
In accordance with article 36-1 of the Fiscal Statute, earnings
obtained by a non resident of Colombia derived from stock trading are not
subject to income, withholding, remittance or other taxes in Colombia when the
stock is registered in the Colombian Stock Exchange and the transaction does not
involve the sale of 10% or more of the company's outstanding stock by the same
beneficiary.
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In all cases in which earnings derived from stock trading are subject
to income and remittance taxes, the applicable rate for income tax will be 14%
and the applicable rate for remittance tax will be 1% (after income tax). The
filing of an income tax declaration is required in this case.
UNITED STATES FEDERAL INCOME TAXATION
IN GENERAL
This section describes the material United States federal income tax
consequences generally applicable to ownership by a U.S. holder (as defined
below) of Preferred Shares or ADSs. It applies to you only if you hold your
Preferred Shares or ADSs as capital assets for U.S. federal income tax purposes.
This section does not apply to you if you are a member of a special class of
holders subject to special rules, including:
- a dealer in securities;
- a trader in securities that elects to use a mark-to-market
method of accounting for securities holdings;
- a tax-exempt organization;
- a life insurance company;
- a person liable for alternative minimum tax;
- a person that actually or constructively owns 10% or more of
our voting stock;
- a person that holds Preferred Shares or ADSs as part of a
straddle or a hedging or conversion transaction; or
- a U.S. holder whose functional currency is not the U.S.
dollar.
This section is based on the Internal Revenue Code of 1986, as
amended, its legislative history, existing and proposed regulations, published
rulings and court decisions all as currently in effect. These laws are subject
to change, possibly on a retroactive basis. There is currently no comprehensive
income tax treaty between the United States and Colombia.
You are a U.S. holder if you are a beneficial owner of Preferred
Shares or ADSs and you are:
- a citizen or resident of the United States;
- a domestic corporation;
- an estate whose income is subject to United States federal
income tax regardless of its source; or
- a trust if a United States court can exercise primary
supervision over the trust's administration and one or more
United States persons are authorized to control all
substantial decisions of the trust.
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You should consult your own tax advisor regarding the United States
federal, state and local and the Colombian and other tax consequences of owning
and disposing of Preferred Shares and ADSs in your particular circumstances.
This discussion addresses only United States federal income taxation.
TAXATION OF DIVIDENDS
Under the United States federal income tax laws, and subject to the
passive foreign investment company, or PFIC, rules discussed below, if you are a
U.S. holder, the gross amount of any dividend we pay out of our current or
accumulated earnings and profits (as determined for United States federal income
tax purposes) is subject to United States federal income taxation. If you are a
noncorporate U.S. holder, dividends paid to you in taxable years beginning
before January 1, 2009 that constitute qualified dividend income will be taxable
to you at a maximum tax rate of 15% provided that you hold the Preferred Shares
or ADSs for more than 60 days during the 121-day period beginning 60 days before
the ex-dividend date or if the dividend is attributable to a period or periods
aggregating over 366 days, provided that you hold the Preferred Shares or ADSs
for more than 90 days during the 181-day period beginning 90 days before the
ex-dividend date and meet other holding period requirements. Dividends we pay
with respect to the Preferred Shares or ADSs generally will be qualified
dividend income provided that, in the year that you receive the dividend, the
Preferred Shares or ADSs are readily tradable on an established securities
market in the United States. We believe that our Preferred Shares and ADSs,
which are listed on the NYSE, are readily tradable on an established securities
market in the United States; however, there can be no assurance that our
Preferred Shares and ADSs will continue to be readily tradable on an established
securities market.
You must include any Colombian tax withheld from the dividend payment
in this gross amount even though you do not in fact receive it. The dividend is
taxable to you when you, in the case of Preferred Shares, or the Depositary, in
the case of ADSs, receive the dividend, actually or constructively. The dividend
will not be eligible for the dividends-received deduction generally allowed to
United States corporations in respect of dividends received from other United
States corporations. The amount of the dividend distribution that you must
include in your income as a U.S. holder will be the U.S. dollar value of the
peso payments made, determined at the spot peso/U.S. dollar rate on the date the
dividend distribution is includible in your income, regardless of whether the
payment is in fact converted into U.S. dollars. Generally, any gain or loss
resulting from currency exchange fluctuations during the period from the date
you include the dividend payment in income to the date you convert the payment
into U.S. dollars will be treated as ordinary income or loss and will not be
eligible for the special tax rate applicable to qualified dividend income. The
gain or loss generally will be income or loss from sources within the United
States for foreign tax credit limitation purposes. Distributions in excess of
current and accumulated earnings and profits, as determined for United States
federal income tax purposes, will be treated as a non-taxable return of capital
to the extent of your basis in the Preferred Shares or ADSs and thereafter as
capital gain.
Subject to certain limitations, the Colombian tax withheld and paid
over to Colombia will generally be creditable or deductible against your U.S.
federal income tax liability. Special rules apply in determining the foreign tax
credit limitation with respect to dividends that are subject to the maximum 15%
tax rate.
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Dividends will be income from sources outside the United States, but
dividends paid in taxable years beginning before January 1, 2007 generally will
be "passive" or "financial services" income, and dividends paid in taxable years
beginning after December 31, 2006 will, depending on your circumstances, be
"passive" or "general" income which, in either case, is treated separately from
other types of income for purposes of computing the foreign tax credit allowable
to you. You should consult your own tax advisor regarding the foreign tax credit
rules.
TAXATION OF CAPITAL GAINS
Subject to the PFIC rules discussed below, if you are a U.S. holder
and you sell or otherwise dispose of your Preferred Shares or ADSs, you will
recognize capital gain or loss for United States federal income tax purposes
equal to the difference between the U.S. dollar value of the amount that you
realize and your tax basis, determined in U.S. dollars, in your Preferred Shares
or ADSs. Capital gain of a noncorporate U.S. holder that is recognized in
taxable years beginning before January 1, 2009 is generally taxed at a maximum
rate of 15% where the holder has a holding period greater than one year. The
deductibility of capital losses is subject to limitations. The gain or loss will
generally be income or loss from sources within the United States for foreign
tax credit limitation purposes.
PFIC RULES
We believe that our Preferred Shares and ADSs should not be treated as
stock of a PFIC for United States federal income tax purposes, but this
conclusion is a factual determination that is made annually and thus may be
subject to change.
In general, if you are a U.S. holder, we will be a PFIC with respect
to you if for any taxable year in which you held our Preferred Shares or ADSs:
- at least 75% of our gross income for the taxable year is
passive income; or
- at least 50% of the value, determined on the basis of a
quarterly average, of our assets is attributable to assets
that produce or are held for the production of passive
income.
Passive income generally includes dividends, interest, royalties,
rents (other than certain rents and royalties derived in the active conduct of a
trade or business), annuities and gains from assets that produce passive income.
If a foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and as
receiving directly its proportionate share of the other corporation's income.
If we are treated as a PFIC, and you are a U.S. holder that did not
make a mark-to-market election, as described below, you will be subject to
special rules with respect to:
- any gain you realize on the sale or other disposition of
your Preferred Shares or ADSs; and
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- any excess distribution that we make to you (generally, any
distributions to you during a single taxable year that are
greater than 125% of the average annual distributions
received by you in respect of the Preferred Shares or ADSs
during the three preceding taxable years or, if shorter,
your holding period for the Preferred Shares or ADSs).
Under these rules:
- the gain or excess distribution will be allocated ratably
over your holding period for the Preferred Shares or ADSs,
- the amount allocated to the taxable year in which you
realized the gain or excess distribution will be taxed as
ordinary income;
- the amount allocated to each prior year, with certain
exceptions, will be taxed at the highest tax rate in effect
for that year; and
- the interest charge generally applicable to underpayments of
tax will be imposed in respect of the tax attributable to
each such year.
If you own Preferred Shares or ADSs in a PFIC that are treated as
marketable stock, you may make a mark-to-market election. If you make this
election, you will not be subject to the PFIC rules described above. Instead, in
general, you will include as ordinary income each year the excess, if any, of
the fair market value of your Preferred Shares or ADSs at the end of the taxable
year over your adjusted basis in your Preferred Shares or ADSs. These amounts of
ordinary income will not be eligible for the favorable tax rates applicable to
qualified dividend income or long-term capital gains. You will also be allowed
to take an ordinary loss in respect of the excess, if any, of the adjusted basis
of your Preferred Shares or ADSs over their fair market value at the end of the
taxable year (but only to the extent of the net amount of previously included
income as a result of the mark-to-market election). Your basis in the Preferred
Shares or ADSs will be adjusted to reflect any such income or loss amounts.
In addition, notwithstanding any election you make with regard to the
Preferred Shares or ADSs, dividends that you receive from us will not constitute
qualified dividend income to you if we are a PFIC either in the taxable year of
the distribution or the preceding taxable year. Moreover, your Preferred Shares
or ADSs will be treated as stock in a PFIC if we were a PFIC at any time during
your holding period in your common shares, even if we are not currently a PFIC.
For purposes of this rule, if you make a mark-to-market election with respect to
your Preferred Shares or ADSs, you will be treated as having a new holding
period in your Preferred Shares or ADSs beginning on the first day of the first
taxable year beginning after the last taxable year for which the mark-to-market
election applies. Dividends that you receive that do not constitute qualified
dividend income are not eligible for taxation at the 15% maximum rate applicable
to qualified dividend income. Instead, you must include the gross amount of any
such dividend paid by us out of our accumulated earnings and profits (as
determined for United States federal income tax purposes) in your gross income,
and it will be subject to tax at rates applicable to ordinary income.
If you own Preferred Shares or ADSs during any year that we are a PFIC
with respect to you, you must file Internal Revenue Service Form 8621.
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OTHER TAX CONSIDERATIONS
As of the date of this report, there is no income tax treaty and no
inheritance or gift tax treaty in effect between Colombia and the United States.
Transfers of ADSs or Preferred Shares from non- residents to residents or
non-residents of Colombia by gift or inheritance are not subject to Colombian
gift or inheritance taxes. Transfers of ADSs or Preferred Shares by gift or
inheritance from residents to residents or non residents of Colombia will be
subject to Colombian gift or inheritance tax at a flat rate of 35%, in the value
of the Preferred Shares transferred. There are no Colombian stamp, issue,
registration, transfer or similar taxes or duties payable by holders of
Preferred Shares or ADSs.
F. DIVIDENDS AND PAYING AGENTS
Not applicable.
G. STATEMENT BY EXPERTS
Not applicable.
H. DOCUMENTS ON DISPLAY
BC files periodic reports and other information with the SEC. You may
read and copy any document that BC files at the SEC's public reference room at
450 Fifth Street, N.W., Washington, D.C. 20549. Some of our SEC filings are also
available to the public from the SEC's website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
The following section describes the market risks to which BC is
exposed and the tools and methodology used to measure these risks as of December
31, 2005.
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BC's Board of Directors and senior management have formalized BC's
policies, procedures, strategies and rules of action for market risk
administration in the "Market Risk Manual". This manual defines the roles and
responsibilities within each subdivision of the Bank and their interaction to
ensure adequate market risk administration. It also includes policies for
identifying, measuring, monitoring, reporting and controlling market risks.
Moreover, the manual contains detailed procedures and methodologies that are
applied on a periodic basis to the Bank's portfolios.
The main objective of risk management is to plan, coordinate, monitor,
report and propose policies for market and liquidity risks of the Bank. The risk
management efforts of the organization facilitate the efficient administration
of its assets and liabilities.
The Bank's Market Risks Management Office is responsible for: a)
identifying, measuring, monitoring, analyzing and controlling the market risk
inherent in the Bank's business, b) knowing and informing market situation under
stress and verifying the business, compliance with policies established by
senior management under this situation, c) designing the methodologies for
valuation of the market value certain of securities approved by the Board of
Directors, d) reporting any violation of the policies that the Board of
Directors has approved, e) reporting to the senior management on a daily basis
the levels of market risk that are inherent to the treasury book of BC (the
"Treasury Book"), f) proposing policies that guarantee the maintenance of
predetermined risk levels to the Board of Directors and to Senior management.
The Bank's assets include both trading and non-trading instruments.
Trading instruments are recorded in Treasury Book and include primarily fixed
income securities. Instruments included in the Treasury Book as well as the rest
of the Bank's assets and liabilities, including primarily loans, time deposits,
checking accounts and savings accounts.
The Bank uses a value at risk ("VaR") calculation to limit its
exposure to market risk. The Board of Directors is responsible for establishing
the maximum VaR according to its judgment about the appropiate level of risk for
BC. The Asset and Liabilities Committee ("ALCO") is responsible for establishing
maximum VaR by type of investment (e.g., fixed income in public debt) and by
type of risk (e.g., currency risk). These limits are supervised on a daily basis
by the Market Risk Management Office.
Trading in derivatives is limited to forward contracts in foreign
currency operations, plain vanilla options on US$/Ps currency and interest rate
swaps. For new products, the Bank has designed an approval process by different
subdivisions of the Bank. This process guarantees that every subdivisions of the
Bank involved is prepared to adopt a new product into their procedures, that
every risk is considered before the product is incorporated and that the Board
of Directors approves the new product before it can be sold.
Currently, the Bank measures the market risk of each position
reflected on the balance sheet, Bank Book or Treasury Book by computing the
corresponding VaR in accordance with Chapter XXI of the Basic Accounting
Circular (External Circular 100 of 1995), as updated by the External Circular
031 of 2004, each as issued by the Superintendency of Banking (now
Superintendency of Finance). For purposes of VaR calculations, a risk factor is
any market variable capable of influencing the corresponding position's market
value when the variable fluctuates. The VaR calculation represents the probable
loss value based on fluctuations of such risk factors. The aggregate VaR is
considered in the Bank's solvency calculation, in accordance with Decree 1720 of
2001.
The relevant risk factors for which VaR is computed by BC are:
191
- interest rate risks relating to local currency, foreign
currency and UVR;
- foreign exchange rate risk; and
- UVR price risk and stock price risk.
The following is a brief explanation of the VaR model used by BC to calculate
the market risk based on interest rate risk, foreign exchange rate risk and
stock price risk. In addition, there is a presentation of the market risk
reports and analysis produced by BC.
In accordance with Chapter XXI of the Basic Accounting Circular
(Circular Externa 100 de 1995) issued by the Superintendency of Banking (now
Superintendency of Finance), all of Colombian financial organizations must
calculate the total market risk without separating the measure into instruments
for trading purposes and other than trading, this measure is used to affected
the solvency rate. The Superintendency of Finance is working in a new
methodology that will allow measure the market risk separately.
The Bank's Market Risks Management Office on a daily basis measures
and controls the level of market risk of trading book. This internal methodology
is different from the one that is used to measure the total market risk, because
it works with historic simulation and not with risk factors, and it has not been
approved by the Superintendency of Finance.
VAR MODEL
INTEREST RATE RISK
BC calculates the interest rate risk for local currency, foreign
currency and UVR in accordance with Chapter XXI of the Basic Accounting Circular
(External Circular 100 of 1995 issued by the Superintendency of Banking -now
Superintendency of Finance). The interest rate risk is the probability of loss
of value of a position due to fluctuations in market interest rates. As
previously indicated, the methodology used in this Annual Report to measure such
risk consists of computing VaR, which, in the case of interest rate
fluctuations, begins by determining the net present value ("NPV") of the
relevant balance position. The NPV is then multiplied by the Modified Duration
(as defined below) of the position and by the interest rate's estimated
fluctuation ("(DELTA)i") with a 99% confidence level, which is established by
the Superintendency of Finance according to the market's historic performance.
VAR = MODIFIED DURATION * NPV * (DELTA)I
NPV: Sum of the discounted values of a position's cash flow (including both
positive and negative payments), computed on the basis of the yield
and maturity (including expected or established depreciation).
DURATION: Weighted average of the expected times to each cash flow under an
instrument or position. The weight applied to each expected time is
the present value of the
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corresponding cash flow divided by the total cash flow
under the instrument or position.
Y: The instrument's or position's yield.
MODIFIED DURATION: Duration / (1 + Y). Corresponds to the percentage variation
of the market value of an investment or a position given a
1% increase of the yield (Y). Consequently, modified
duration measures the sensitivity of the value of a
position to interest rate changes.
(DELTA)I: Maximum probable variation of the interest rate for the
instrument or position.
FOREIGN EXCHANGE RISK
The Foreign Exchange Risk is the probability of loss due to
fluctuations in the exchange rates of the currencies in which the Bank maintains
positions. As indicated above in this Annual Report, the methodology used to
measure such risk consists of computing VaR, which in the case of exchange rate
fluctuations is derived from multiplying the net position ("NP") held in each of
the foreign currencies by the estimated variation of the foreign exchange rate
for such currency ("(DELTA)e") with a 99% confidence level, as the same may be
derived from statistical analysis, established by the Superintendency of Finance
according to the market's historic performance. The NP is the difference,
expressed in pesos, between all the active and passive positions denominated or
indexed in each currency. The active or passive positions include commitments to
buy and sell in foreign currency (forward contracts over foreign currencies) and
the (DELTA)e of the options, as the case may be.
VAR = NP * (DELTA)E
STOCK PRICE RISK
The stock price risk is the probability of loss due to fluctuations in
the price of stocks in which the Bank maintains a position ("PosA"). As
previously indicated, the methodology used in this Annual Report to measure such
risk consists of computing VaR, which, in the case of prices of publicly traded
stocks, is derived by multiplying the PosA by the maximum probable variation in
the price of such positions ("(DELTA)p"). The (DELTA)p is determined by
reference to the volatility of the price index of the Colombian Stock Exchange,
as estimated by the Superintendency of Finance. In the case of non-publicly
traded stocks, (DELTA)p is further augmented by 20%.
For publicly traded stocks:
VAR = POSA* (DELTA)P
For non-publicly traded stocks:
VAR = POSA* 1.2* (DELTA)P
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TOTAL MARKET RISK VAR
As defined by the Superintendency of Finance in Chapter XXI of the
Basic Accounting Circular (External Circular 100 of 1995), a portfolio is built
by instruments and positions, which by being mutually related, make the
portfolio's aggregate risk lower than the sum of each instrument's individual
risk. This is known as correlation, which helps to diversify the risk of a
portfolio. Once the correlation is determined between each risk factor and a
correlations matrix is built, the overall market risk faced by the Bank can be
calculated.
After individually calculating the VaR of a position in the balance
sheet in respect of interest rate, exchange rate and stock price risk factors,
and taking into account the correlations defined by the Superintendency of
Finance between such various risk factors, a total VaR, which includes interest
rate, exchange rate and stock price risk factors, is computed for each position.
Then, taking into account the correlation among the VaR of different assets, a
total VaR for all assets is computed. The same procedure is followed to compute
the total VaR for all liabilities. Finally, taking into account the correlation
between the VaR for assets and the VaR for liabilities, an overall VaR for
market risk is calculated (the "VaR TOTAL"). Such Total Market Risk VaR is
included in the solvency calculation in accordance with Decree 1720 of 2001.
(FORMULA)
The Superintendency of Finance requires Bancolombia (unconsolidated),
Colcorp, Suvalor, Leasing Colombia, Sufinanciamiento and Fiducolombia, to
calculate the interest rate VaR of local currency and foreign currency positions
in the Bank Book, which contains all of the instruments that appear on the
balance sheet and the Treasury Book, which records the securities contained in
the organization's portfolio, for the remaining maturities of each of the
positions separately according to the following time categories:
- 1 month or less,
- more than 1 month but not more than 2 months,
- more than 2 months but not more than 6 months,
- more than 6 months but not more than 12 months,
- more than 12 months, but not more than 24 months, and
- more than 24 months.
The VaR of Suleasing Internacional, Banco Corfinsura, Bancolombia
Panama and Bancolombia Cayman is not required by the Superintendency of Finance
because those companies are not supervised by this control entity.
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ASSUMPTIONS AND LIMITATIONS OF VAR MODELS
Although VaR models represent a recognized tool for risk management,
they have inherent limitations, including reliance on historical data that may
not be indicative of future market conditions or trading patterns. Accordingly,
you should not view VaR models as predictive of future results. We may incur
losses that could be materially in excess of the amounts indicated by the models
on a particular trading day or over a period of time, and there have been
instances when results have fallen outside the values generated by our VaR
models. A VaR model does not calculate the greatest possible loss. The results
of these models and analysis thereof are subject to the judgment of our risk
management personnel.
BC and its subsidiaries' VaR models assume that variations in the
market risk factors have a normal distribution. In addition, the models assume
that the correlations and variations in market rates or prices included in the
historical data are independent, identically distributed random variables and
provide a good estimate of the correlation and the rate or price variations in
the future.
According to the Superintendency of Finance regulations, the net
present values of the Bank's checking accounts and savings accounts have to be
distributed in time categories as mentioned above, after matching positions in
assets and liabilities. The duration of the checking accounts and savings
accounts classified in the first bracket is equal to five (5) days and the
duration of the values classified in each time horizon bracket is equal to the
weighted average duration of the assets for each time horizon. As a result, the
duration of the checking accounts and savings accounts on the Bank's information
is equal to the weighted average durations of these accounts for each time
category.
BANCOLOMBIA (UNCONSOLIDATED)
The table below provides information about BC's (unconsolidated) VaR
calculations for all balance sheet items that are in pesos. It shows the
following information for each group of assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
NPV DUR Y (DELTA)I VAR
---------- ----- ----- -------- -------
ASSETS
Trading securities issued by the Colombian government - TES
IPC rate 69,832 12.16 7.49% 150 1,048
Trading securities issued by the Colombian government - TES
fixed rate 1,949,395 29.99 7.02% 150 72,130
Other trading securities issued by the Colombian government 51,871 8.95 6.47% 30 115
Trading Securities Issued by financial institutions 744,264 1.94 6.41% 30 359
Other marketable trading securities 181,789 14.71 7.46% 30 664
Held to maturity securities issued by the Colombian
government - TES fixed rate 447,798 19.41 7.82% 250 17,792
Held To Maturity Securities Issued by financial institutions 151,520 2.20 8.25% 126 346
Other held to maturity securities 12,049 14.82 9.02% 126 186
195
NPV DUR Y (DELTA)I VAR
---------- ----- ----- -------- -------
ASSETS
Available for sale securities issued by the Colombian
government - TES fixed rate 157,430 19.87 6.54% 250 6,409
Available for sale securities issued by financial
institutions 30,409 3.29 7.72% 126 104
Other available for sale securities 3,551 10.76 6.90% 126 40
Commercial loans - fixed rate 700,772 3.34 16.69% 126 2,412
Commercial loans - variable rate 7,527,084 9.11 14.60% 126 70,757
Mortgage loans in pesos 60,698 37.47 14.60% 126 2,348
Consumer loans - fixed rate 1,084,691 7.30 18.76% 222 14,312
Consumer loans - variable rate 1,169,093 2.78 14.60% 30 803
Small business loans - fixed rate 30,201 8.81 15.70% 222 482
Small business loans - variable rate 100,604 2.38 14.60% 30 59
Customers' acceptances 14,857 1.25 0.00% 126 19
Rights buyback trading securities issued by the Colombian
government - TES fixed rate 408,629 9.03 6.09% 150 4,559
Other rights buyback trading securities issued by the
Colombian government 254 6.08 6.36% 30 0
Rights buyback trading securities issued by financial
institutions 5,606 1.80 7.49% 30 3
Other rights buyback trading securities 608 8.58 6.74% 30 1
Rights buyback permanent securities issued by the Colombian
government - TES fixed rate 726,679 30.62 7.01% 250 45,569
LIABILITIES
Non-interest bearing checking accounts 3,192,082 18.88 0.00% 126 62,798
Interest bearing checking accounts 274,987 6.47 2.28% 126 1,843
Time deposits 2,862,578 2.08 7.04% 126 6,189
DAT 2,766,306 27.37 7.03% 126 78,589
Saving deposits 4,376,108 8.06 3.12% 126 36,668
Repurchase agreements 872,918 0.10 4.90% 250 179
Bank acceptances outstandings 14,857 1.25 0.00% 126 19
Interbank borrowings 944,788 12.37 7.37% 126 12,128
Long term debt 1,257,926 2.62 8.39% 126 3,413
INTEREST RATES DERIVATIVES
Interest rate SWAP - Variable part, long position 694,131 5.66 6.79% 30 977
Interest rate SWAP - Fixed part, short position (116) 28.24 8.11% 30 (1)
Interest rate SWAP - Variable part, short position (686,065) 5.91 6.91% 30 (1,009)
Forward contracts long position issued by the Colombian
government - TES fixed rate 320,125 24.93 6.61% 150 9,856
Other forward contracts long position issued by the
Colombian government 4,264 64.24 8.83% 30 68
Forward contracts long position securities issued by
financial institutions 122,866 3.06 6.51% 30 93
Forward contracts long position others securities 34,495 8.42 7.40% 30 72
Forward contracts short position synthetic (478,536) 0.88 4.99% 30 (104)
Forward contracts short position issued by the Colombian
government - TES IPC rate (6,721) 13.13 7.92% 150 (109)
Forward contracts short position issued by the Colombian
government- TES fixed rate (451,876) 53.42 7.90% 150 (29,778)
Other forward contracts short position Issued by the
Colombian government (11,997) 73.32 9.06% 30 (218)
Forward contracts short position securities Issued by
financial institutions (11,341) 4.46 7.63% 30 (13)
Forward contracts short position others securities (4,187) 3.39 6.85% 30 (4)
Forward contracts long position others securities 482,159 0.21 4.93% 30 25
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in local
currency (Ps) 3,567,579 3.38 7.08% 30 2,990
Foreign exchange contracts short position in local
currency (Ps) (2,302,145) 2.97 6.55% 30 (1,696)
The significant interest rate risk factors in local currency for BC
(unconsolidated) are the average interest rate paid by banks on fixed term
deposits ("DTF"), repurchase agreement ("repo") rate, the interbanking rate, the
consumer credit rate and the Colombian Treasury bonds rate ("TES"). The DTF and
the TES are the most volatile and have the largest VaR outcomes. In the table
above, all the securities issued by financial institutions and the other
securities are affected by the DTF risk factor. Although the largest assets are
the loans, their average duration is 7.95 months compared to the
196
average duration of TES, which is 25.82 months, and the average duration of the
checking accounts and savings accounts, which is 12.41 months. The checking
accounts and savings accounts are principally responsible for the effect on the
DTF risk factor outcome.
Ps million
RISK FACTOR VAR
----------- --------
DTF (122,251)
Repurchase Agreements' Rate (179)
Interbank Rate 0
Consumer Loan Rate 14,794
TES Rates 127,476
=======
The average VaR for the TES factor in 2005 was Ps 124,065 million with
a standard deviation of Ps 17,440 million. The DTF factor includes assets such
as commercial loans and other investments different from TES. The DTF factor
also includes all liabilities in local currency except repos, overnight fund and
derivatives different from TES and forward contracts relating to foreign
currency. As a result, the average VaR for the DTF factor for 2005 is Ps
(103,797) million with a standard deviation of Ps 13,626 million of local
currency. These values can be negative when the assets affected by a certain
risk factor are smaller than the liabilities affected by the same risk factor.
The table below provides information about BC's (unconsolidated) VaR
calculations for all balance sheet items that are in a currency other than the
peso or UVR. It shows the following information for each group of assets and
liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
(DELTA)
NPV DUR Y I VAR
-------------- ----- ----- ------- ---------
ASSETS
Overnight funds 92,779,192 0.10 4.15% 12 924
Trading securities issued by the Colombian government - U.S.
dollar, denominated TES 13,417,070 19.96 6.40% 12 26,624
Trading securities issued by the Colombian government - TES yankees 80,947,526 24.83 6.37% 12 199,944
Trading Securities Issued by financial institutions 509,350 5.53 5.49% 12 280
Other marketable trading securities 176,926,689 2.84 6.63% 12 49,993
Held to maturity securities issued by the Colombian government - TES yankees 15,204,128 28.94 7.04% 41.18 149,843
Other held to maturity securities 15,006,029 14.41 4.47% 41.18 73,796
Available for sale securities issued by the Colombian government - TES yankees 37,336,273 35.23 5.63% 41.18 448,441
Available for sale trading securities issued by the Colombian government 16,280,139 24.27 3.93% 41.18 134,898
Available for sale securities issued by financial institutions 24,294,997 5.53 5.49% 41.18 45,814
Other available for sale securities 44,502,167 11.29 5.20% 41.18 171,253
Commercial loans - fixed rate 38,659,939 17.03 2.15% 41.18 225,423
Commercial loans - variable rate 643,448,632 3.46 0.06% 41.18 763,001
Consumer loans - fixed rate 18,274,800 3.56 15.39% 41.18 22,013
Consumer loans - variable rate 586,481 0.78 6.18% 6.86 26
197
NPV DUR Y (DELTA)i VAR
-------------- ----- ----- -------- ---------
Rights buyback trading securities issued by the Colombian
government - TES yankees 3,666,767 47.80 6.05% 12.00 17,432
Rights buyback permanent securities issued by the Colombian
government - TES yankees 72,878,093 37.18 5.70% 41.18 923,856
LIABILITIES
Non-interest bearing checking accounts 21,870,379 41.97 0.00% 12.00 91,731
Interest bearing checking accounts 25,178,403 41.97 1.46% 12.00 105,478
Time deposits 29,058,959 30.42 3.76% 41.18 301,821
Saving deposits 2,626,268 41.97 1.50% 12.00 11,002
Repurchase agreements 61,271,530 0.25 4.57% 12.00 1,525
Interbank borrowings 803,116,583 4.53 3.74% 41.18 1,243,553
INTEREST RATES AND DERIVATIVES
Interest rate SWAP - Variable part, long position 68,420,523 2.61 4.28% 7 10,185
Interest rate SWAP - Fixed part, long position (68,737,421) 20.30 4.22% 7 (79,454)
Forward contracts short position issued by the Colombian
government - TES yankees (3,638,078) 52.28 6.16% 12 (18,914)
Other forward contracts short position issued by the Colombian government (509,350) 5.53 5.49% 12 (280)
Forward contracts long position others securities 4,180,893 0.40 3.85% 12 167
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in forex 1,232,813,054 3.24 5.22% 12 397,786
Foreign exchange contracts short position in forex (1,773,079,884) 3.11 4.54% 12 (548,878)
The risk factors of the interest rate risk in foreign currency are the
LIBOR and the Money Market rates. These rates are not very volatile. The average
VaR for the LIBOR factor in 2005 was Ps 1,949 million with a standard deviation
of Ps 975 million. The LIBOR rate risk factor affects assets such as commercial
and consumer loans and long-term investments. The average VaR for the Money
Market factor for 2005 is Ps (50) million with a standard deviation of Ps 525
million. The Money Market factor affects Colombian short-term Treasury bonds,
liabilities and foreign exchange forward contracts.
Ps million
RISK FACTOR VAR
----------- -----
LIBOR 3,069
Money Market US$ (193)
=====
The table below provides information about BC's (unconsolidated) VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
198
INTEREST RATE RISK IN UVR
(UVR)
NPV DUR Y (DELTA)i VAR
------------- ----- ----- -------- ----------
ASSETS
Trading securities issued by the Colombian
government - TES fixed rate 3,235,463,951 27.36 1.33% 12.4 9,128,336
Other trading securities issued by the Colombian
government 462,235,300 65.09 0.00% 12.4 3,107,214
Trading securities issued by financial institutions 384,125,727 22.45 2.10% 12.4 889,135
Other marketable trading securities 1,697,448,324 30.82 3.25% 12.4 5,385,121
Held to maturity securities issued by the
Colombian government - TES fixed rate 109,320,763 17.86 4.12% 12.4 200,919
Other held to maturity securities issued by the
Colombian government 2,480,860,699 92.07 0.00% 12.4 23,589,257
Other held to maturity securities 232,835,117 22.87 2.60% 12.4 548,956
Commercial loans 1,959,935,663 19.00 11.18% 12.4 3,811,706
Mortgage loans in UVR 9,655,671,200 28.52 11.18% 12.4 28,190,284
INTEREST RATES DERIVATIVES
Forward contracts long position issued by the
Colombian government - TES fixed rate 89,546,731 66.91 2.68% 12.4 617,421
Forward contracts short position synthetic (89,099,177) 0.17 0.04% 12.4 (1,564)
Forward contracts short position issued by the
Colombian government - TES fixed rate (529,795,299) 61.62 2.60% 12.4 (3,363,273)
Forward contracts short position others securities (11,499,917) 53.13 2.85% 12.4 (62,948)
Forward contracts long position others securities 540,374,657 0.95 0.10% 12.4 53,012
The risk factor for all of BC's positions in UVR is the real interest
rate factor. The average VaR for the real interest rate factor in 2005 was Ps
9,696 million with a standard deviation of Ps 2,029 million.
Ps million
RISK FACTOR VAR
----------- ------
Real interest rate 11,065
======
The table below provides information about BC's (unconsolidated) VaR
calculations for changes in the price of a currency other than the peso. It
shows the following information for each specific currency:
NET POSITION: Net position for that currency presented in the original
currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net position of that currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for changes in the price of the currency
199
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
--------------- -------- ----------------- -------- ---------------
U.S. Dollars (52,921,847) 2,284.22 (120,885,141,903) 2.63% (3,179,279,232)
VALUE AT RISK (120,885,141,903) (3,179,279,232)
UVR 19,782,963,200 153.49 3,036,403,933,101 3.90% 118,419,753,391
Available for sale investments - tradable(1) 879,928,300,047 6.00% 52,795,698,003
Available for sale investments - nontradable(1)
- not registered in exchange 98,735,178,277 9.00% 10,663,399,254
Investments in funds 3,624,061,036 12.06% 437,061,761
VALUE AT RISK 179,136,633,177
----------
(1) Available for sale investments are those investments that do not are listed
in stock market, the subsidiaries, and those that are listed in the stock
market, doesn't have any control, however, the intention is to maintain
them at least 1 year within portfolio.
As defined by the Superintendency of Finance, Available for sale
investments - tradable refers to those positions that are classified as
tradable by the Colombian Stock Exchange, the subsidiaries investments, and
the national or foreign investments on capital in financial and insuring
organizations.
In Available for sale investments - non tradable - not registered in
exchange refers to those investments that are classified as non tradable by
the Colombian Stock Exchange or those that are not listed in the stock
market.
The risk factors regarding foreign exchange risk are the TRM (Tasa
Representativa del Mercado, the dollar representative market rate ). The net
position could be negative if the short position is larger than the long
position. The UVR risk factor is considered to be a price risk factor, which
means that a UVR position has two kinds of market risk: interest rate risk and
price risk. For positions in local stocks, we have the IGBC (Indice General de
la Bolsa de Colombia, the Colombian Stock Exchange General Index) risk factor.
Finally, two new price risk factors were incorporated in the model in 2004: risk
factor RFOND (Rentabilidad en Fondos de Inversion, Rentability of Investments
Funds), which is the risk factor that applies for investments in national funds,
and risk factor DJIA (Dow Jones Industrial Average) which applies for
investments in foreign funds (stocks) and investment in foreign funds (other
investments). The more representative VaR outcomes are the UVR and IGBC risk
factors followed by the TRM. The average VaR for the UVR factor in 2005 was Ps
97,758 million with a standard deviation of Ps 23,317 million. The average VaR
for the IGBC factor in 2005 was Ps 93,798 million with a standard deviation of
Ps 32,718 million. The average VaR for the TRM factor in 2005 was Ps 2,026
million with a standard deviation of Ps 4,931 million.
Ps million
RISK FACTOR VAR
----------- -------
UVR 118,420
TRM (3,179)
IGBC 63,459
RFOND 437
=======
After using the VaRTOTAL formula, as set forth above under "Total
Market Risk VaR", the aggregate market VaR of the Bank (unconsolidated) on
December 31, 2005 was equal to Ps 118,002 million of local currency. The Bank
follows the Superintendency of Banking regulations. After December 31, 2003 the
Bank (unconsolidated) had to include in the solvency rate formula 100% of the
aggregate market VaR.
200
SOLVENCY RATE FORMULA:
Capital
---------------------------------->or=9%
[ (100)]
Risk_Weighted_Assets + [Var*(---)]
[ ( 9 )]
The Bank's (unconsolidated) average Total Market Risk VaR for 2005 was
Ps 125,181 million with a standard deviation of Ps 12,480 million. The maximum
value during 2005 was Ps 158,424 million in October 2005, and the minimum value
during 2005 was Ps 111,484 million in August 2005. Most of the increase in the
Total Market Risk VaR during 2005 is related to an increase in the Bank's
portfolio of securities issued by the Colombian government.
The total market risk VaR as of December 31, 2005, increased 48% if
compared to the same period of the previous year. This increase was due to the
Merger of Bancolombia, Conavi and Corfinsura (for more information about this
Merger please see Item 4 - Information on the Company, A - History and
Development of the Company). The risk factors that presented the greatest
variation were the real inflation rate, the UVR and the LIBOR.
COLCORP
The table below provides information about the VaR calculations for
Colcorp, a subsidiary of BC, for all balance sheet items that are denominated in
pesos. It shows the following information for each group of assets and
liabilities described:
NPV: Sum of the net present values
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
NPV DUR Y (DELTA)I VAR
------- ----- ---- -------- ---
ASSETS
Trading securities issued by the Colombian government - TES fixed rate 20,329 30.46 6.8% 150 764
Trading securities issued by financial institutions 16,653 4.15 7.4% 30 18
Other marketable trading securities 47,032 11.34 8.1% 30 147
Other held to maturity securities issued by the Colombian government 319 8.23 4.4% 126 3
Other held to maturity securities 1,824 1.23 5.1% 126 3
Permanent securities issued by the Colombian government - TES fixed rate 6,252 27.84 6.6% 250 357
Commercial loans - fixed rate 17,000 5.85 11.8% 126 122
Other assets 905 35.57 11.2% 126 35
LIABILITIES
Time deposits 100,453 1.76 7.9% 126 186
INTEREST RATES DERIVATIVES
Forward contracts short position others securities (4,165) 13.80 8.0% 30 (14)
Forward contracts long position others securities 4,055 0.12 6.1% 30 0
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts short position in local currency 2,287 0.10 8.0% 30 0
201
The table below provides information about Colcorp's VaR calculations
for all balance sheet items that are denominated in a currency other than pesos
or UVR. It shows the following information for each group of assets and
liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
NPV DUR Y (DELTA)I VAR
---------- ----- ---- -------- -----
ASSETS
Other marketable trading securities 1,109,960 45.18 6.65% 12 4,935
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts short position in forex (1,000,000) 0.10 5.00% 12 (10)
The table below provides information about Colcorp's VaR calculations
for all balance sheet items that are in UVR. It shows the following information
for each group of assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN UVR
(UVR)
NPV DUR Y (DELTA)I VAR
---------- ----- ---- -------- -------
ASSETS
Trading securities issued by the Colombian government - TES fixed rate 12,157,200 22.46 1.07% 12.4 28,176
Trading securities issued by financial institutions 13,779,210 25.92 0.90% 12.4 36,857
Other held to maturity securities issued by the Colombian government 22,500,501 89.76 0.16% 12.4 208,557
The table below provides information about Colcorp's VaR calculations
for changes in the price of a currency other than the peso. It shows the
following information for each group which represents a specific currency:
NET POSITION: Net position for that currency presented in the
original currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net position of that currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the price
of the currency
202
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
--------------- -------- ------------- -------- ------
U.S Dollars 209,960 2,284.22 479,594,831 2.63% 13
VALUE AT RISK 13
UVR 48,436,911 153.49 7,434,378,034 3.90% 290
Available for sale investments nontradable 106,271,050,752 9.00% 11,477
Investments in mutual funds 361,599,578 9.00% 39
VALUE AT RISK 11,818
Ps million
-------------------------
RISK FACTOR VAR
---------------- ------
DTF 128
Real Rate 42
Money Market US$ 11
TES Rate 1,121
UVR 290
TRM 13
IGBC 11,516
Colcorp's main assets are investments in stocks and other securities,
which together were the most relevant positions affecting the IGBC risk factor.
Its most significant liabilities are CDs, interbank borrowings and repurchase
agreements.
The average VaR for IGBC during 2005 was Ps 16,225 million with a
standard deviation of Ps 1,675 million. The average VaR for TES during 2005 was
Ps 1,524 million with a standard deviation of Ps 465 million. As of December 31,
2005, Colcorp's Total Market Risk VaR was Ps 13,122 million. Its average Total
Market Risk VaR during 2005 was Ps 18,360 million, with a maximum value during
2005 of Ps 20,466 million and a minimum value during 2005 of Ps 13,122 million.
The VaR for IGBC on 2005 decreased by 33% less if compared to 2004.
This resulting was determined by a less position in capital investment. Taking
into account the correlations between the risk factors the Total Market Risk
Value decreased 22%.
BANCOLOMBIA PANAMA AND BANCOLOMBIA CAYMAN
BC's Subsidiaries Bancolombia Panama and Bancolombia Cayman apply the
same VaR methodology to measure market risk. The only difference is that
Bancolombia Panama and Bancolombia Cayman calculate the volatility of the risk
factors using the JP Morgan risk metrics methodology (for more information about
this methodology visit J.P. Morgan's Web page on the internet:
http://www.riskmetrics.com/rmcovv.html).
203
As we mentioned before, BC (unconsolidated) and its local Subsidiaries
use the volatilities published by the Superintendency of Finance. Bancolombia
Panama and Bancolombia Cayman measure the market value at risk since August
2003.
Bancolombia Panama's and Bancolombia Cayman's market risks are mainly
related to their portfolio of investments, which at the end of 2005 were
diversified on securities issued in Colombia, Mexico, Brazil and Peru.
The table below provides information about Bancolombia Panama's and
Bancolombia Cayman's VaR calculations for portfolio of investments items that
are in U.S. thousands dollars. It shows the following information for each group
of investments described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average market yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate and
foreign currency
PORTFOLIO OF INVESTMENTS
(US$ thousands)
NPV DUR Y (DELTA)I (DELTA)I FX VAR
------- ---- ---- -------- ----------- -----
Available for sale securities issued by the Colombian government 101,235 36.6 4.84 16.11 1,432
Trading securities issued by the Colombian government 61,739 17.9 4.37 23.87 1,911
Trading securities issued by Colombia corporations 3,006 47.4 7.17 12.24 182
Available for sale securities issued by Colombian corporations 85 5.4 5.29 41.95 1
Available for sale securities issued by Colombian government in Euro 73 21.0 3.79 11.04 108.57 2
Available for sale securities issued by the Brazilian government 101,573 34.7 5.98 10.42 1,052
Trading for sale securities issued by Brazilian financial institutions 5,870 33.9 6.35 10.51 208
Available for sale securities issued by the Brazilian government in Euro 3,837 24.1 3.87 10.57 108.57 103
Available for sale sucurities issued by Mexican corporations 2,130 18.5 5.28 10.13 7
Trading securities issued by Mexican corporations 25,404 24.6 3.77 10.73 700
Trading securities issued by the Mexican government 9,961 48.0 4.66 10.59 541
Available for sale securities issued by Peru corporations 3,188 49.9 8.50 9.68 65
US$ thousands
RISK FACTOR VAR
------------------------- -----
Republic of Colombia 2006 967
Republic of Colombia 2007 1,096
Republic of Colombia 2009 1,443
Republic of Brazil 2007 4
Republic of Brazil 2008 81
Republic of Brazil 2010 1,204
Republic of Mexico 2007 119
Republic of Mexico 2008 337
Republic of Mexico 2010 791
US Treasury 2015 65
EUR Currency 76
TRM Index 21
=====
204
As of December 31, 2005, the Total Market Risk VaR was US$ 4,574,770.
The average Total Market Risk VaR was US$ 6,059,527 with a maximum value of US$
10,877,937 on March and a minimum value of US$ 2,630,311 on February. The
decline of the market VaR of Panama's and Cayman's during 2005 was determined by
the reduction of the size of portfolio and the reduction of the volatility of
the risk factors.
As of December 31, 2004, the Total Market Risk Value was US$
2,546,292. The increase of the VaR of Bancolombia Panama and Bancolombia Cayman
as compared to the same period of the previous year was determined by an
increase in the size of the portfolio in Colombia and in the Federative Republic
of Brazil.
SUVALOR
The table below provides information about BC's Subsidiary Suvalor's
VaR calculations for all balance sheet items that are in pesos. It shows the
following information for each group of assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
ASSETS NPV DUR Y (DELTA)I VAR
------ ------ ----- ---- -------- -----
Trading securities issued by the Colombian government - TES fixed rate 12,862 30.28 6.74% 150 481
Other trading securities issued by the Colombian government 6,041 3.83 7.47% 30 6
Trading securities issued by financial institutions 47,471 7.24 6.89% 30 87
Other marketable trading securities 15,468 23.83 7.52% 30 33
Other held to maturity securities issued by the Colombian government 172 7.96 5.97% 30 0
Rights buyback trading securities issued by the Colombian government-
TES fixed rate 41,555 69.85 8.60% 150 3,579
Rights buyback trading securities issued by financial institutions 2,815 5.74 7.08% 30 4
ITEREST RATE DERIVATIVES
Forward contracts long position issued by the Colombian government - TES
fixed rate 41,555 0.16 8.60% 150 8
Forward long position securities issued by financial institutions 2,784 2.87 7.90% 30 2
The table below provides information about Suvalor's VaR calculations
for all balance sheet items that are in a currency other than pesos or UVR. It
shows the following information for each group of assets and liabilities
described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
205
INTEREST RATE RISK IN FOREIGN CURRENCY
NPV DUR Y (DELTA)I VAR
--------- ---- ---- -------- -----
ASSETS
Trading securities issued by the Colombian
government- TES yankees 106,191 0.96 4.99% 12 0
Other marketable trading securities 1,109,960 6.87 5.94% 12 5,330
The table below provides information about Suvalor's VaR calculations
for all balance sheet items that are in UVR. It shows the following information
for each group of assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
INTEREST RATE RISK IN UVR
(UVR)
NPV DUR Y (DELTA)I VAR
---------- ----- ---- -------- -----
ASSETS
Rights buyback trading securities issued
by the Colombian government -
TES fixed rate 11,461,097 17.98 0.81% 12.4 5,713
INTEREST RATE DERIVATIVES
Forward contracts long position issued by
the Colombian government - TES
fixed rate 11,349,166 0.56 0.81% 12.4 634
The table below provides information about Suvalor's VaR calculations
for changes in the price of a currency other than pesos. It shows the following
information for each group which represent a specific currency:
NET POSITION: Net position for that currency presented in the original
currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net position of that currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the price of
the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
------------ -------- ------------- -------- -----------
U.S. Dollars 3,419,915 2,284.22 7,811,838,654 2.63% 205,451,357
British Pound 17,049 3,927.60 66,959,999 2.63% 1,761,048
European Currency Unit EUR 141,739 2,693.21 381,732,969 5.45% 20,804,447
VALUE AT RISK 228,016,851
206
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
------------- ------ ------------- -------- -----------
UVR 11,461,097 153,49 1,759,177,497 3.90% 68,607,922
Trading securities 25,167,154 6.00% 1,510,029
Available for sale investments - tradable 3,684,302,672 6.00% 221,058,160
Investments in funds 3,196,711,966 12.06% 385,523,463
VALUE AT RISK 904,716,426
Ps million
RISK FACTOR VAR
---------------- -----
DTF 318
Real Rate 6
Money Market US$ 12
TES Rate 6,394
UVR 19
TRM 207
EURO 21
IGBC 1
=====
Suvalor's Total Market Risk VaR is determined by its investments. The
most significant risk factor during 2005 was the TES. As of December 31, 2005,
the Total Market Risk VaR was Ps 6,567 million.
The Total Market Risk Value as of December 31, 2005 increased Ps 6,508
million if compared with the same period of the previous year, as a result of
the merger between Comicol and Suvalor on October 3, 2005. The risk factor that
presented the greatest variation was the TES rate.
LEASING COLOMBIA
The table below provides information about Leasing Colombia's VaR
calculations for all balance sheet items that are in pesos. It shows the
following information for each group of assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
207
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
NPV DUR Y (DELTA)I VAR
--------- ----- ----- -------- -----
ASSETS
Trading securities issued by the Colombian government TES IPC rate 2,171 13.67 8.11% 150 37
Trading securities issued by the Colombian government - TES fixed rate 33,455 21.13 6.47% 150 873
Other trading securities issued by the Colombian government 1,568 9.55 6.65% 30 4
Trading securities issued by financial institutions 20,960 1.57 6.47% 30 8
Other marketable trading securities 7,790 11.64 6.94% 30 23
Other held to maturity securities issued by the Colombian government 218 8.14 5.12% 126 2
Commercial loans - fixed rate 2,350 12.96 13.22% 126 31
Real state leasing - fixed rate 1,037 45.53 16.13% 126 49
Commercial loans - variable rate 2,582,700 3.23 13.27% 126 8,630
Real state leasing - variable rate 904 9.70 15.95% 126 9
Consumer loans - fixed rate 519 10.98 14.94% 222 10
Consumer loans - variable rate 38,643 3.03 13.50% 30 29
Small loans - variable rate 18 5.83 15.28% 30 0
Accounts receivable 76,179 3.76 13.51% 126 296
Other assets 3,135 8.69 12.12% 126 28
Asset contingencies 212,348 2.55 13.66% 126 559
LIABILITIES
Time deposits 1,198,207 3.38 8.14% 126 4,204
Interbank borrowings 1,170,317 1.75 8.55% 126 2,127
Long term debt 462,812 2.29 8.39% 126 1,098
Boceas 5,007 3.00 6.31% 126 16
FORWARDS
Foreign exchange contracts long position in local currency (Ps) 11,654 0.65 6.32% 30 2
The table below provides information about Leasing Colombia's VaR
calculations for all balance sheet items that are in a currency other than pesos
or UVR. It shows the following information for each group of assets and
liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
NPV DUR Y (DELTA)I VAR
---------- ---- ----- -------- -----
ASSETS
Comercial loans - fixed rate 12,070 4.77 16.29% 41.18 19
Asset contingencies 1,433,355 0.8 8.02% 41.18 390
LIABILITIES
Interbank borrowings 5,392,907 1.13 5.99% 41.18 2,085
FORWARDS
Foreign exchange contracts short position in forex (5,085,689) 0.65 5.44% 12 (329)
The table below provides information about Leasing Colombia's VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described:
208
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN UVR
NPV DUR Y (DELTA)I VAR
----------- ----- ---- -------- -------
ASSETS
Trading securities issued by the Colombian government - TES fixed rate 24,375,791 36.57 1.75% 12.4 91,927
Other trading securities issued by the Colombian government 110,955,808 83.74 1.97% 12.4 958,063
Trading securities issued by financial institutions 87,909,320 21.26 2.46% 12.4 192,667
Other marketable trading securities 38,856,924 1.37 0% 12.4 5,517
Other held to maturity securities issued by the Colombian government 90,093,100 98.89 0.00% 12.4 920,067
The table below provides information about Leasing Colombia's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information for each group, which represents a specific currency:
NET POSITION: Net position for that currency presented in the
original currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net position of that currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the price of
the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
-------------- -------- -------------- -------- -------------
U.S. Dollars 2,983,534 2,284.22 6,815,048,741 2.63% 179,235,781
VALUE AT RISK 6,815,048,741 179,235,781
UVR 352,345,156 153.49 54,079,978,144 3.90% 2,109,119,147
Permanent securities - marketable 12,077,165,753 6.00% 724,629,945
Permanent securities - not marketable 27,037,393,128 9.00% 2,920,038,457
Investments in mutual funds 621,184,354 12.06% 74,914,833
VALUE AT RISK 5,828,702,383
Ps million
---------------------------
RISK FACTOR VAR
------------------- -----
DTF 2,224
Real Rate 333
LIBOR (4)
Consumer Loans Rate 10
Money Market (1)
TES Rate 910
UVR 2,109
209
Ps million
---------------------------
RISK FACTOR VAR
------------------- -----
TRM 179
IGBC 3,645
RFOND 75
=====
Leasing Colombia's main assets are the leasing operations that are
included in the loan portfolio. Its liabilities are primarily time deposits and
interbank borrowings where the DTF is also the main risk factor.
The average VaR for the DTF during 2005 was Ps 1,285 million with a
standard deviation of Ps 666 million and the average VaR for UVR during 2005 was
Ps 2,228 million with a standard deviation of Ps 202 million. As of December 31,
2005, Total Market Risk VaR was Ps 2,806 million. The average Total Market Risk
VaR during 2005 was Ps 2,811 million, with a maximum value during 2005 of Ps
4,367 million and a minimum value of Ps 2,171 million.
The Total Market Risk Value as of December 31, 2005 increased Ps 1,432
million if compared to the same period of the previous year, as a result of the
merger between Leasing Colombia and Suleasing on November 30, 2005. The risk
factors that present the greatest variations were the IGBC, the DTF and the UVR.
SUFINANCIAMIENTO
The table below provides information about BC's Subsidiary
Sufinanciamiento's VaR calculations for all balance sheet items that are
denominated in pesos. It shows the following information for each group of
assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
NPV DUR Y (DELTA)I VAR
------- ---- ----- -------- -----
ASSETS
Commercial loans - fixed rate 4,238 3.40 26.24% 126 15
Commercial loans - variable rate 427,864 0.54 26.24% 126 237
Consumer loans - fixed rate 14,452 3.48 26.24% 222 90
Consumer loans - variable rate 355,253 0.52 26.24% 30 45
Other assets 2,152 0.53 26.24% 126 1
LIABILITIES
Time deposits 710,631 3.68 7.98% 126 2,711
Interbank borrowings 106 2.06 11.88% 126 0
Long term debt 10,818 9.56 7.10% 126 107
210
The table below provides information about Sufinanciamiento's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information.
NET POSITION: Net position for the currency presented in the original
currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net position of the currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the price of
the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
------------- ----- ----------- -------- -----------
Available for sale investments nontradable 2,975,355,000 9.00% 321,338,340
VALUE AT RISK 321,338,340
Ps million
----------------------------
RISK FACTOR VAR
------------------- ------
DTF (2,520)
Consumer Loans Rate 90
IGBC 321
======
Sufinanciamiento's main assets are loans, where the risk factor is the
DTF. Its liabilities are primarily Time Deposits and long term debt, where the
DTF is the risk factor.
As of December 31, 2005, the Total Market Risk VaR was Ps 2,716
million. The average Total Market Risk VaR of Sufinanciamiento during 2005 was
Ps 1,820 million, a maximum value of Ps 2,716 million and a minimum value of Ps
1,307 million.
As of December 31, 2005, the Total Market Risk increased 89% if
compared to the same period of the previous year, as a result of a larger
position in time deposits, which increased in Ps 305,514 million.
FIDUCOLOMBIA
The table below provides information about BC's Subsidiary
Fiducolombia's VaR calculations for all balance sheet items that are in pesos.
It shows the following information for each group of assets and liabilities
described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
211
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
ASSETS NPV DUR Y (DELTA)I VAR
------ ------ ----- ----- -------- -----
Trading securities issued by the Colombian government - TES IPC rate 4,900 5.99 6.41% 150 36
Trading Securities Issued by the Colombian government - TES fixed rate 32,741 29.78 6.95% 150 1,203
Other trading securities issued by the Colombian government 2,056 9.34 7.52% 30 5
Trading securities issued by financial institutions 20,555 2.66 6.71% 30 14
Other marketable trading securities 9,002 3.19 7.08% 30 7
Held to maturity securities issued by the Colombian government - TES fixed rate 2,170 6.77 10.90% 250 30
Permanent securities issued by the Colombian government-TES fixed rate 6,499 17.14 6.38% 250 228
Foreign exchange contracts long position in local currency 2,171 2.40 6.41% 30 1
The table below provides information about Fiducolombia's VaR
calculations for all balance sheet items that are in a currency other than pesos
or UVR. It shows the following information for each group of assets and
liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
NPV DUR Y (DELTA)I VAR
-------- ---- ---- -------- ----
ASSETS
Trading securities issued by the Colombian government - U.S. Dollars,
denominated TES 31,993 2.43 6.44% 12 8
Held to maturity securities issued by the Colombian government - US Dollar,
denominated TES 951,849 2.43 5.46% 12 790
Foreign exchange contracts short position in forex (912,293) 2.40 4.81% 12 (218)
The table below provides information about Fiducolombia's VaR
calculations for all balance sheet items that are in UVR. It shows the following
information for each group of assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN UVR
(UVR)
ASSETS NPV DUR Y (DELTA)I VAR
------ ---------- ----- ---- -------- -------
Trading securities issued by the Colombian government - TES fixed rate 81,280,100 18.44 0.87% 12.4 154,624
Other marketable trading securities 6,068,227 5.00 0.00% 12.4 3,136
Held to maturity securities issued by financial institutions 31,788,345 24.90 4.85% 12.4 81,425
212
The table below provides information about Fiducolombia's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information for each group which represents a specific currency:
NET POSITION: Net position for the currency presented in the original
currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net Position of that currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the price of
the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
------------- -------- -------------- -------- -----------
U.S. Dollars 62,942 2,284.22 143,772,956 2.63% 3,781,229
VALUE AT RISK 3,781,229
UVR 119,167,774 153.49 18,290,561,077 3.90% 713,331,882
Available for sale investments -
nontradable - not registered
in exchange 1,254,539,362 9.00% 135,490,251
Investments in mutual funds 1,161,292,514 12.06% 140,051.877
VALUE AT RISK 275,542,128
Ps million
------------------------
RISK FACTOR VAR
----------- -----
DTF 27
Real Rate 37
Money Market US$ 0
TES Rate 1,498
UVR 713
TRM 4
IGBC 135
LIBOR 2
RFOND 140
=====
Fiducolombia's Total Market Risk VaR relates to its investments. The
most significant risk factor is the TES. The average VaR for the TES during 2005
was Ps 1,077 million with a standard deviation of Ps 244 million. As of December
31, 2005, the Total Market Risk VaR was Ps 2,024 million. The average Total
Market Risk VaR of Fiducolombia during 2005 was Ps 1,591 million, with a maximum
value of Ps 2,024 million and a minimum value of Ps 1,300 million.
As of December 31, 2005, the Total Market Risk increased 61% as
compared to the previous year, as a result of a larger position in securities
issued by the Colombian Government.
213
BANCO CORFINSURA
The table below provides information about BC's Subsidiary Banco
Corfinsura's VaR calculations for all balance sheet items that are in a currency
other than pesos or UVR. It shows the following information for each group of
assets and liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average market yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
NPV DUR Y (DELTA)I VAR
----------- ----- ---- -------- -------
ASSETS
Other marketeable trading securities 1,138,051 23.42 3.82% 12.00 2,655
Other held to maturity securities 304,500 0.16 2.70% 41.18 17
Commercial loans - fixed rate 5,525,511 1.34 6.06% 41.18 2,515
Commercial loans - variable rate 164,865,979 4.35 6.43% 41.18 244,119
LIABILITIES
Interest bearing checking accounts 163,070 0.16 2.70% 12.00 3
Time deposits 137,563,962 4.22 7.02% 41.18 197,747
Interbank borrowings 5,003,862 0.97 3.92% 41.18 1,653
The table below provides information about Banco Corfinsura's VaR
calculations for changes in the price of a currency other than pesos. It shows
the following information for each group which represent an specific currency:
NET POSITION: Net position for the currency presented in the original
currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net Position of that currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the price of
the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELAT)E VAR
------------ -------- -------------- -------- -------------
U.S. Dollars 26,378,744 2,284.22 60,254,854,441 2.63% 1,584,702,672
European Currency Unit EUR (40,367) 2,693.21 (108,716,495) 5.45% (5,925,049)
214
Ps million
-------------------------
RISK FACTOR VAR
----------- -----
LIBOR 108
MONEY MARKET US$ 6
TRM 1,585
-----
EURO (6)
=====
Banco Corfinsura's main assets are loans, where the risk factor is the
LIBOR. Its most significant liabilities are time deposits, and interbank
borrowings where the LIBOR is the main risk factor. As of December 31, 2005, the
Total Market Risk VaR was Ps 1,571 million.
SULEASING INTERNACIONAL
The table below provides information about BC's Subsidiary Suleasing
Internacional's VaR calculations for all balance sheet items that are in pesos.
It shows the following information for each group of assets and liabilities
described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELAT)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
INTEREST RATE RISK IN LOCAL CURRENCY
(Ps MILLION)
NPV DUR Y (DELAT)I VAR
--- ---- ---- -------- ---
ASSETS
Other assets 96 4.77 9.05 126 0
The table below provides information about Suleasing Internacional's
VaR calculations for all balance sheet items that are in a currency other than
pesos or UVR. It shows the following information for each group of assets and
liabilities described:
NPV: Sum of the net present value
DUR: Weighted average duration
Y: Weighted average yield
(DELTA)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest rate
215
INTEREST RATE RISK IN FOREIGN CURRENCY
(U.S. DOLLARS)
ASSETS NPV DUR Y (DELAT)I VAR
------ ---------- ----- ------ -------- ------
Commercial loans - fixed rate 8,734,226 13.84 9.23% 41.18 41.092
Commercial loans - variable rate 49,255,970 4.25 9.23% 41.18 71.226
Asset contingencies 9,478,401 3.22 8.58% 41.18 10.379
LIABILITIES
Interbank borrowings 59,879,328 3.86 607.00% 41.18 78,839
The table below provides information about Suleasing Internacional's
VaR calculations for changes in the price of a currency other than pesos. It
shows the following information for each group which represent an specific
currency:
NET POSITION: Net position for the currency presented in the original
currency
PRICE: Price of the currency in Ps on the day of calculation
PESOS VALUE: Net Position of that currency presented in Ps
(DELTA)e: Maximum variation of the price of the currency
VaR: Value at risk for the group for changes in the price of
the currency
FOREIGN EXCHANGE RISK AND PRICE RISK
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (DELTA)E VAR
------------ -------- -------------- -------- -----------
U.S. Dollars 10,831,018 2,284.22 24,740,427,525 2.63 650,673,244
Ps million
-----------------
RISK FACTOR VAR
----------- ---
DTF 0
LIBOR 100
TRM 651
===
Suleasing Internacional's main assets are loans, where the risk factor
is the LIBOR, which is also the main risk factor for the liabilities. As of
December 31, 2005, the Total Market Risk VaR was Ps 647 million.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
216
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There has not been a material default in the payment of principal,
interest, a sinking or purchase fund installment in BC operation.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
An evaluation has been carried out, under the supervision and with the
participation of BC's management, including President Jorge Londono Saldarriaga
and Finance Vice-President Jaime Alberto Velasquez Botero, of the effectiveness
of the design and operation of our "disclosure controls and procedures" as
defined in Exchange Act Rules 13a-15(e). Our disclosure controls and procedures
are designed to ensure that the financial and non-financial information required
to be disclosed in reports that we file or submit under the Exchange Act, is
recorded, processed, summarized and reported within the time periods specified
in SEC rules and forms. Based upon that evaluation, our management, including
the President Jorge Londono Saldarriaga and Finance Vice-President Jaime Alberto
Velasquez Botero, concluded that our disclosure controls and procedures are
effective 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.
ITEM 16. RESERVED
217
ITEM.16.A AUDIT COMMITTEE FINANCIAL EXPERT
Luis Alberto Zuleta Jaramillo serves as the board of directors audit
committee financial expert, complying with the requirements of Sarbanes Oxley
Act regarding audit committee financial experts. As of April 1, 2006, Mr. Zuleta
does not own any shares of Bancolombia. There is not business relationship
between Mr. Zuleta and the Bank, except for standard personal banking services.
There is no fee arrangement between Mr. Zuleta and the Bank, except in
connection with his capacity as a member of the Board.
Mr. Zuleta Jaramillo is considered an independent director under
Colombian law and the Bank's Corporate Governance Code as well as NYSE's
director independence standards.
ITEM.16.B CORPORATE GOVERNANCE AND CODE OF ETHICS
Under the NYSE's Corporate Governance Standards, Bancolombia, as a
listed foreign private issuer, must disclose any significant ways in which its
corporate governance practices differ from those followed by U.S. companies
under NYSE listing standards.
Corporate Governance in Colombia. In Colombia, a series of laws and
regulations set forth corporate governance requirements. Among them, Resolution
275 of the former Superintendency of Securities (issued on May 23, 2001)
contains the corporate governance standards to be followed by companies issuing
securities that may be purchased by Colombian pension funds. Additionally, Law
964 of 2005 (issued on June 8, 2005) established new mandatory Corporate
Governance requirements for all issuers who's securities are publicly traded in
the Colombian market. Bancolombia's corporate governance standards comply with
these legal requirements and follow regional recommendations, including the
OECD's White Paper on Corporate Governance for Latin America and the Andean
Development Corporation's (CAF) Corporate Governance Code.
Independence of Directors. Law 964 requires the Board of Directors to
be composed of at least 25% of independent directors. Additionally, Colombian
law mandates that all directors exercise independent judgment under all
circumstances. Bancolombia's Corporate Governance Code includes a provision
stating that directors shall exercise independent judgment and requires that
Bancolombia's management recommends to its shareholders to propose lists of
directors composed of at least 25% of independent directors.
Structure of the Board of Directors. Bancolombia's Board of Directors
includes seven (7) principal directors and seven (7) alternate directors(9).
Even though it is customary that only principal directors attend meetings of the
Board of Directors, alternate directors perform an active role in Bancolombia's
corporate governance, as they are members of some Committees.
Although there is no prohibition under Colombian regulations for
officers to be members of the Board of Directors, it is customary for Colombian
companies to maintain separation between the directors and management.
Bancolombia's Board of Directors does not include any management members,
although the CEO attends the monthly meetings of the Board of Directors (but is
not allowed to vote) and Committees have some officers or employees as permanent
members to guarantee an adequate flow of information between employees,
management and directors. In accordance with the Law 964 and the Bank's By-laws
no executive officer can be elected as Chairman of the Board of Directors.
----------
(9) At the annual General Shareholders' Meeting of Bancolombia S.A. held March
2, 2006, Bancolombia shareholders approved a By-laws amendment, by which
the number of principal and alternate directors was increased form five to
seven.
218
Committees of the Board of Directors. The Board of Directors has a
"Board Issues Committee", a "Nomination, Compensation and Development Committee"
and an "Audit Committee", each of which is composed of both directors and
officers. These committees have drafted charters and address various corporate
governance subjects, in accordance with NYSE Corporate Governance Standards, and
Bancolombia's Audit Committee complies with NYSE Corporate Governance Standards
applicable to foreign private issuers.
Bancolombia has adopted an Ethics Code and a Corporate Governance
Code, both of which are directed to all employees, officers and directors.
English translations of the Ethics Code and the Corporate Governance Code are
available at Bancolombia's website at www.bancolombia.com.co. The Spanish
versions of these codes will prevail for all legal purposes.
ITEM.16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES
The aggregate fees billed under the caption audit fees for
professional services rendered to BC for the audit of its financial statements
and for services that are normally provided in connection with statutory or
regulatory filings or engagements, totaled Ps 1,654 million at December 31, 2004
and Ps 4,134 million at December 31, 2005.
There were no fees corresponding to audit related fees, tax fees or
other fees billed to BC in the last two years.
The Bank's audit committee charter includes the following pre-approval
policies and procedures, which are included in the audit committe's charters:
The audit committee will approve each year the work plan of the
external auditors, which will include all services that according to the
applicable law may be rendered by the external auditors.
For those events in which additional services are required to be
provided by the external auditors, such services must be previously approved by
the audit committee. Whenever this approval cannot be given at a meeting held by
the audit committee, the approval will be obtained through the Vice Presidency
of Internal Audit, who will be responsible of reaching each of the audit
committee members. The approval will be obtained with the favorable vote of the
majority of its members.
Every request of approval of additional services must be adequately
sustained, including complete and effective information regarding the
characteristics of the service that will be provided by the external auditors.
In all cases, the budget of the external auditors must be approved by the
General Shareholders Meeting.
ITEM.16.D PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Bancolombia did not repurchase any shares in 2005.
219
PART III
FINANCIAL STATEMENTS
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F - 1 through F - 131.
ITEM 19. EXHIBITS
The following exhibits are filed as part of this Annual Report.
1. Corporate by-laws (estatutos sociales) of the registrant, as
amended through March 2, 2006, together with an English
translation.
12.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated June 23, 2006.
12.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, dated June 23, 2006.
13.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated June 23, 2006.
13.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002, dated June 23, 2006.
220
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 Annual Report on its behalf.
Dated: June 23, 2006
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.
Accounting principles generally accepted in Colombia vary in certain significant
respects from accounting principles generally accepted in the United Stales of
America. Information relating to the nature and effect of such differences is
presented in Note 31 to the consolidated financial statements.
Our audits also comprehended the translation of Colombian pesos amounts into
U.S. dollar amounts and, in our opinion, such translation has been made in
conformity with the basis stated in Note 2 c). Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
/s/ Deloitte & Touche
Deloitte & Touche Ltda.
Medellin, Colombia, January 28,2006, except for Notes 30 and 31 as to which the
date is June 20, 2006.
Auditoria. Impuestos. Consultoria. Finanzas Corporativas.
Una Firma membro 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) SUMMARIZED CONSOLIDATED FINANCIAL STATEMENTS UNDER U.S. GAAP:
The followings are the consolidated 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)
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 Ps 17,694,569 Ps 31,570,518
============= =============
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 Ps 17,694,569 Ps 31,570,518
============= =============
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
2003 2004 2005
----------- ----------- ------------
Total interest income Ps 1,538,028 Ps 1,803,763 Ps 2,972,967
Total interest expense (471,899) (577,442) (1,198,334)
------------ ------------ ------------
Net interest income 1,066,130 1,226,321 1,774,633
Total net provisions (125,832) (66,181) (14,965)
------------ ------------ ------------
Net interest income after provision for loans
and accrued Interest losses 940,298 1,160,140 1,759,668
Total non interest income 457,106 633,681 1,141,720
Total non interest expenses (739,860) (979,742) (1,847,496)
----------- ----------- ------------
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)
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
2003 2004 2005
------------ ------------ ------------
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 (1,803,773) (1,663,670) (8,164,268)
------------ ------------ ------------
Net cash provided by operating activities (1,329,354) (1,021,544) (7,273,147)
Net cash used in investing activities (54,586) (520,488) (3,184,771)
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 Ps 1,832,886 Ps 2,267,286 Ps 4,125,996
============ ============ ============
----------
(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 Ps 455,654 Ps 633,657 Ps 871,973
========== ========== ==========
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.
F-131