AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 10, 2007
================================================================================
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, 2006
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ___________
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report __________________
Commission file number: 001-32535
BANCOLOMBIA S.A.
(Exact name of Registrant as specified in its charter)
N/A
(Translation of Registrant's name into English)
REPUBLIC OF COLOMBIA
(Jurisdiction of incorporation or organization)
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]
================================================================================
TABLE OF CONTENTS
CERTAIN DEFINED TERMS........................................................... i
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION......................... ii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS............................ iv
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......................................... 24
A. HISTORY AND DEVELOPMENT OF THE COMPANY............................. 24
B. BUSINESS OVERVIEW.................................................. 33
C. ORGANIZATIONAL STRUCTURE.......................................... 110
D. PROPERTY, PLANT AND EQUIPMENT..................................... 111
E. SELECTED STATISTICAL INFORMATION.................................. 112
ITEM 4A. UNRESOLVED STAFF COMMENTS.......................................... 149
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS....................... 149
A. OPERATING RESULTS.................................................. 149
B. LIQUIDITY AND CAPITAL RESOURCES.................................... 166
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC. .............. 170
D. TREND INFORMATION.................................................. 170
E. OFF-BALANCE SHEET ARRANGEMENTS..................................... 171
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS...................... 172
G. CRITICAL ACCOUNTING POLICIES AND ESTIMATES......................... 172
H. RECENT U.S. GAAP PRONOUNCEMENTS.................................... 174
I. RELATED PARTY TRANSACTIONS......................................... 176
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES......................... 176
A. DIRECTORS AND SENIOR MANAGEMENT.................................... 176
B. COMPENSATION OF DIRECTORS AND OFFICERS............................. 183
C. BOARD PRACTICES.................................................... 183
D. EMPLOYEES.......................................................... 187
E. SHARE OWNERSHIP.................................................... 187
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS.................. 188
A. MAJOR SHAREHOLDERS................................................. 188
B. RELATED PARTY TRANSACTIONS......................................... 189
C. INTEREST OF EXPERTS AND COUNSEL.................................... 192
ITEM 8. FINANCIAL INFORMATION.............................................. 192
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION............ 192
B. SIGNIFICANT CHANGES................................................ 198
ITEM 9. THE OFFER AND LISTING.............................................. 198
A. OFFER AND LISTING DETAILS.......................................... 198
B. PLAN OF DISTRIBUTION............................................... 199
C. MARKETS............................................................ 199
D. SELLING SHAREHOLDERS............................................... 200
E. DILUTION........................................................... 200
F. EXPENSES OF THE ISSUE.............................................. 200
ITEM 10. ADDITIONAL INFORMATION............................................. 200
A. SHARE CAPITAL...................................................... 200
B. MEMORANDUM AND ARTICLES OF ASSOCIATION.................................................. 200
C. MATERIAL CONTRACTS...................................................................... 208
D. EXCHANGE CONTROLS....................................................................... 209
E. TAXATION................................................................................ 209
F. DIVIDENDS AND PAYING AGENTS............................................................. 215
G. STATEMENT BY EXPERTS.................................................................... 215
H. DOCUMENTS ON DISPLAY.................................................................... 215
I. SUBSIDIARY INFORMATION.................................................................. 215
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.............................. 215
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES.................................. 244
PART II.............................................................................................. 245
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES......................................... 245
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS............ 245
ITEM 15. CONTROLS AND PROCEDURES................................................................. 245
ITEM 16. RESERVED................................................................................ 246
ITEM.16.A AUDIT COMMITTEE FINANCIAL EXPERT........................................................ 246
ITEM.16.B CORPORATE GOVERNANCE AND CODE OF ETHICS................................................. 247
ITEM.16.C PRINCIPAL ACCOUNTANT FEES AND SERVICES.................................................. 248
ITEM.16.D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES.............................. 248
ITEM.16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS.................. 249
PART III............................................................................................. 250
ITEM 17. FINANCIAL STATEMENTS.................................................................... 250
ITEM 18. FINANCIAL STATEMENTS.................................................................... 250
ITEM 19. EXHIBITS................................................................................ 250
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 "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 on a consolidated basis, unless otherwise indicated
or the context otherwise requires.
The term "billion" means one thousand million (1,000,000,000).
The term "trillion" means one million million (1,000,000,000,000).
References to "billing" or "billings" refer to credit card balances.
References to "Central Bank" refer to the Central Bank of Colombia.
References to "Colombia" refer to the Republic of Colombia.
References to "Conavi" refer to Conavi Banco Comercial y de Ahorros S.A. as
it existed immediately before the Conavi/Corfinsura merger (as defined below).
References to "Corfinsura" refer to Corporacion Financiera Nacional y
Suramericana S.A., as it existed immediately before the Conavi/Corfinsura
merger, taking into account the effects of its spin-off of a portion of its
investment portfolio effective July 29, 2005.
References to the "Conavi/Corfinsura 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 "peso", "pesos" or "Ps" refer to Colombian pesos.
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 "U.S." or "United States" refer to the United States of
America.
References to "U.S. dollar", "U.S. dollars", and "US$" are to United States
dollars.
References to "UVR" refer to Unidades de Valor Real, a Colombian
inflation-adjusted monetary index calculated by the board of directors of the
Central Bank and generally used for pricing home-mortgage loans.
References to "SMMLV" refer to Salario Minimo Mensual Legal Vigente, the
effective legal minimum monthly salary.
i
PRESENTATION OF CERTAIN FINANCIAL AND OTHER INFORMATION
ACCOUNTING PRINCIPLES
The accounting practices and the preparation of the Bank's consolidated
financial statements follow the special regulations of the Superintendencia
Financiera or Colombian Superintendency of Finance ("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"). Note 31 to the Bank's audited consolidated
financial statements included in this Annual Report provides a description of
the principal differences between Colombian GAAP and U.S. GAAP as they relate to
the Bank's audited consolidated financial statements and provides a
reconciliation of net income and shareholders' equity for the years and dates
indicated herein. References to Colombian GAAP in this Annual Report are to
Colombian GAAP as supplemented by the applicable rules of the Superintendency of
Finance.
For consolidation purposes under Colombian GAAP, financial statements of
the Bank and its Subsidiaries must be prepared under uniform accounting
policies. In order to comply with this requirement, financial statements of
foreign Subsidiaries were adjusted as required by Colombian regulations with
regard to investments, loans and leased assets.
The Bank's consolidated financial statements include companies in which it
holds, directly or indirectly, 50% or more of outstanding voting shares. The
consolidated financial statements of the Bank's subsidiary Bancolombia Panama
S.A. ("Bancolombia Panama") includes the following companies: Bancolombia Cayman
S.A., Sistema de Inversiones y Negocios S.A., Sinesa Holding Company Limited and
Future Net S.A. The consolidated financial statements of the Bank's subsidiary
Almacenes Generales de Deposito Mercantil S.A. or Almacenar ("Almacenar")
includes Unicargo de Colombia S.A. and Compania de Distribucion y Transporte
S.A. ("Ditransa"). The consolidated financial statements of the Bank's
subsidiary Banca Inversion Bancolombia S.A. Corporacion Financiera ("Banca
Inversion Bancolombia"), formerly "Colcorp", includes the companies Inmobiliaria
Bancol S.A., Valores Simesa S.A., Inversiones Valores Simesa S.A., Fundicom
S.A., Inversiones CFNS Ltda. and Todo Uno Colombia S.A. The consolidated
financial statements of the Bank's subsidiary Leasing Bancolombia S.A. Compania
de Financiamiento Comercial ("Leasing Bancolombia"), formerly "Leasing
Colombia", includes the following companies: Renting Colombia S.A., formerly
"Surenting", and Suleasing Internacional S.A. (which consolidates Suleasing
International, USA, Inc. and Suleasing Internacional do Brasil Locacao de Bens
S.A.). The consolidated financial statements of the Bank's subsidiary Valores
Bancolombia S.A. Comisionista de Bolsa ("Valores Bancolombia"), formerly
"Suvalor", includes Suvalor Panama S.A.
On April 3, 1998, Banco Industrial Colombiano S.A. ("BIC") merged with
Banco de Colombia S.A. In connection with this merger, BIC changed its name to
Bancolombia S.A. and began conducting its activities under the commercial name
of "Bancolombia". On July 30, 2005, Conavi and Corfinsura merged with and into
Bancolombia, after the spin-off of a portion of Corfinsura's investment
portfolio. For more information see Item 4. Information on the Company - A.
History and Development of the Company.
ii
CURRENCIES
The Bank maintains accounting records in Colombian pesos. The audited
consolidated financial statements of Bancolombia (including its Subsidiaries)
for the years ended December 31, 2004, 2005 and 2006 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 Ps 2,238.79 per
US$ 1.00, which corresponds to the Tasa Representativa del Mercado
("Representative Market Rate") calculated on December 29, 2006 the last business
day of the year. The Representative Market Rate is computed and certified by the
Superintendency of Finance, the Colombian banking regulator, on a daily basis
and represents the weighted average of the buy/sell foreign exchange rates
negotiated on the previous day by certain financial institutions authorized to
engage in foreign exchange transactions (including 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
March 31, 2007, the Representative Market Rate was Ps 2,190.30 per US$ 1.00.
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.
INTERNET SITES NOT PART OF ANNUAL REPORT
The Bank maintains an Internet site at www.grupobancolombia.com. In
addition, certain of the Bank's subsidiaries maintain Internet sites referred to
in this Annual Report, such as www.valoresbancolombia.com. This Annual Report
also refers to certain websites as sources for certain information contained
herein. Information contained in or otherwise accessible through these websites
is not a part of this Annual Report. All references in this Annual Report to
these and other Internet sites are inactive textual references to these URLs, or
"uniform resource locators", and are for your informational reference only.
iii
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report contains statements which may constitute forward-looking
statements within the meaning of the safe harbor provisions of the U.S. Private
Securities Litigation Reform Act of 1995. These forward-looking statements are
not based on historical facts but instead represent only the Bank's belief
regarding future events, many of which, by their nature, are inherently
uncertain and outside the Bank's control. The words "anticipate", "believe",
"estimate", "expect", "intend", "plan", "predict", "target", "forecast",
"guideline", "should", "project" and similar words and expressions, are intended
to identify forward-looking statements. It is possible that the Bank's actual
results may differ, possibly materially, from the anticipated results indicated
in these forward-looking statements.
Information regarding important factors that could cause actual results to
differ, perhaps materially, from those in the Bank's forward-looking statements
appear in a number of places in this Annual Report, principally in "Item 3. Key
Information - D. Risk Factors" and "Item 5 -- Operating and Financial Review and
Prospects", and include, but are not limited to:
- changes in general economic, business, political, social, 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;
- unanticipated increases in financing and other costs or the inability to
obtain additional debt or equity financing on attractive terms;
- inflation, changes in foreign exchange rates and/or interest rates;
- sovereign risks;
- liquidity risks;
- increases in defaults by the Bank's borrowers and other loan delinquencies;
- lack of acceptance of new products or services by the Bank's targeted
customers;
- competition in the banking, financial services, credit card services,
insurance, asset management and other industries in which the Bank
operates;
- adverse determination of legal or regulatory disputes or proceedings;
- changes in official regulations and the Colombian government's banking
policy as well as changes in laws, regulations or policies in the
jurisdictions in which the Bank does business;
- regulatory issues relating to acquisitions; and
- changes in business strategy.
iv
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.
Neither the Bank's 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.
v
PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. SELECTED FINANCIAL DATA
The selected consolidated financial data as of December 31, 2005 and 2006,
and for each of the three fiscal years in the period ended December 31, 2006 set
forth below has been derived from the Bank's audited consolidated financial
statements included in this Annual Report. The selected consolidated financial
data as of December 31, 2002, 2003 and 2004, and for each of the two fiscal
years in the period ended December 31, 2003 set forth below have been derived
from the Bank's audited consolidated financial statements for the respective
periods, which are not included herein.
The Bank's consolidated financial statements for each period were prepared
in accordance with Colombian GAAP.
The selected consolidated financial data should be read in conjunction with
the Bank's consolidated financial statements, related notes thereto, and the
report of the independent registered public accounting firm.
1
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
2002 2003 2004 2005(7) 2006 2006(1)
----------- ------------ ------------- ------------ ------------ ----------------
(In millions of Ps and thousands of US$(1), except per share and per American Depositary Share
("ADS") amounts)
CONSOLIDATED STATEMENT OF
OPERATIONS:
COLOMBIAN GAAP:
Interest income .................. Ps 1,150,734 Ps 1,537,818 Ps 1,803,108 Ps 3,200,084 Ps 3,013,732 US$ 1,346,143
Interest expense ................. (466,223) (480,513) (585,743) (1,150,274) (1,246,229) (556,652)
------------ ------------ ------------- ------------ ------------ ---------------
NET INTEREST INCOME ............. 684,511 1,057,305 1,217,365 2,049,810 1,767,503 789,491
Provisions for loans and accrued
interest losses, net of
recoveries(2) .................. (115,154) (130,356) (61,423) (123,575) (195,361) (87,262)
Provision for foreclosed assets
and other assets, net of
recoveries ..................... (71,212) (51,943) (5,201) (7,465) 45,179 20,180
------------ ------------ ------------- ------------ ------------ ---------------
NET INTEREST INCOME AFTER
PROVISIONS....................... 498,145 875,006 1,150,741 1,918,770 1,617,321 722,409
Fees and income from services
and other operating income, net. 416,427 515,325 574,453 962,277 1,139,094 508,798
Operating expenses ............... (755,801) (850,768) (912,421) (1,654,805) (1,871,000) (835,719)
------------ ------------ ------------- ------------ ------------ ---------------
NET OPERATING INCOME (LOSS) ..... 158,771 539,563 812,773 1,226,242 885,415 395,488
Net non-operating income (loss) .. 79,787 (7,874) 7,140 4,650 45,346 20,255
INCOME (LOSS) BEFORE TAXES ...... 238,558 531,689 819,913 1,230,892 930,761 415,743
Minority interest (loss) ......... 14,440 330 (2,425) (6,496) (6,352) (2,837)
Income taxes ..................... (42,618) (62,635) (238,810) (277,515) (174,880) (78,114)
------------ ------------ ------------- ------------ ------------ ---------------
NET INCOME (LOSS) ................ PS 210,380 PS 469,384 PS 578,678 PS 946,881 PS 749,529 US$ 334,792
============ ============ ============= ============ ============ ===============
Weighted average of Preferred and
Common Shares outstanding(3) ...... 576,695,395 576,695,395 576,695,395 652,882,756 727,827,005
Basic and Diluted net operating
income (loss) per share(3) ...... Ps 275 Ps 857 Ps 1,297 Ps 1,878 Ps 1,217 US$ 0.54
Basic and Diluted net operating
income (loss) per ADS ........... 1,101 3,427 5,189 7,513 4,866 2.16
Basic and Diluted net income
(loss) per share(3) ............. 365 814 1,003 1,450 1,030 0.46
Basic and Diluted net income
(loss) per ADS .................. 1,460 3,256 4,012 5,800 4,119 1.84
Cash dividends declared per
share(4) ........................ 132 272 376 508 532
Cash dividends declared per
share(4) (stated in US Dollars).. 0.05 0.10 0.16 0.22 0.24
Cash dividends declared per ADS ... 528 1,088 1,504 2,032 2,128
Cash dividends declared per ADS
(stated in US Dollars) .......... 0.20 0.39 0.63 0.88 0.95
U.S. GAAP:(5)
Net income (loss) ................. Ps 207,152 Ps 474,419 Ps 642,126 Ps 891,121 Ps 941,183 US$ 420,398
Basic and Diluted net income
(loss) per share(6) ............. 461 1,070 1,445 1,715 1,619 0.72
Basic and Diluted net income
(loss) per ADS(6) ............... 1,844 4,280 5,780 6,860 6,476 2.89
----------------
(1) Amounts stated in U.S. dollars have been translated at the rate of Ps
2,238.79 to US$ 1.00, which is the Representative Market Rate calculated on
December 29, 2006 the last business day of the year, as reported and
certified by the Superintendency of Finance.
(2) Includes a provision for accrued interest losses amounting to Ps 4,518
million, Ps 5,316 million, Ps 4,483 million, Ps 12,379 million and Ps
14,825 million for the years ended December 31, 2002, 2003, 2004, 2005 and
2006, respectively.
(3) The weighted average of preferred and common shares outstanding for fiscal
years 2002, 2003 and 2004, included 178,435,787 preferred shares and
398,259,608 common shares. For fiscal year 2005, it included 198,261,641
preferred shares and 454,621,115 common shares. For fiscal year 2006, it
included 218,122,421 preferred shares and 509,704,584 common shares.
(4) This data is presented on an annualized basis.
(5) Refer to Note 31 to the Financial Statements included in this Annual Report
for the reconciliation with U.S. GAAP.
(6) 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 2002, 2003 and 2004; 454.6 million for
2005 and 509.7 million for 2006). See Note 31 to the Financial Statements.
(7) 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,
---------------------------------------------------------------------------------------------
2002 2003 2004 2005(5) 2006 2006(1)
------------- ------------- ------------- -------------- ------------- --------------
(In millions of Ps and thousands of US$(1), except per share and per American Depositary
Share ("ADS") amounts)
CONSOLIDATED BALANCE SHEET
COLOMBIAN GAAP:
ASSETS:
Cash and due from banks ......... Ps 643,405 Ps 848,052 Ps 768,514 Ps 1,241,435 Ps 1,548,752 US$ 691,781
Overnight funds ................. 207,684 598,409 480,846 488,587 457,614 204,402
Investment securities, net ...... 4,343,458 4,336,724 5,250,211 8,459,703 5,677,761 2,536,085
Loans and financial leases, net . 5,864,991 7,642,405 9,600,861 17,920,370 23,811,391 10,635,831
Accrued interest receivable on
loans, net .................... 83,459 103,209 121,276 198,266 255,290 114,030
Customers' acceptances and
derivatives ................... (15,662) 1,539 43,894 133,420 166,395 74,324
Accounts receivable, net ........ 149,955 163,310 173,875 590,313 562,598 251,296
Premises and equipment, net ..... 317,724 337,964 346,243 623,729 712,722 318,351
Foreclosed assets, net .......... 46,002 27,676 12,206 31,360 18,611 8,313
Prepaid expenses and deferred
charges ....................... 58,403 27,831 15,950 26,898 46,462 20,753
Goodwill ........................ 118,904 99,910 73,607 50,959 40,164 17,940
Operating leases, net(4) ........ 373,499 537,207 8,311 143,974 167,307 74,731
Other assets .................... 147,949 198,480 315,394 563,588 675,265 301,620
Reappraisal of assets ........... 259,811 253,413 267,941 330,915 348,364 155,604
------------- ------------- ------------- -------------- ------------- --------------
TOTAL ASSETS .................. Ps 12,599,582 PS 15,176,129 PS 17,479,129 Ps 30,803,517 Ps 34,488,696 US$ 15,405,061
============= ============= ============= ============== ============= ==============
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Deposits ........................ Ps 8,788,158 PS 10,231,997 PS 11,862,116 Ps 18,384,982 PS 23,216,467 US$ 10,370,096
Borrowings ...................... 1,117,015 1,211,595 1,104,201 3,927,551 3,516,426 1,570,681
Other liabilities ............... 1,410,061 2,043,158 2,422,089 5,113,694 4,109,191 1,835,452
Shareholders' equity ............ 1,284,348 1,689,379 2,090,723 3,377,290 3,646,612 1,628,832
------------- ------------- ------------- -------------- ------------- --------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY ........ Ps 12,599,582 PS 15,176,129 PS 17,479,129 Ps 30,803,517 PS 34,488,696 US$ 15,405,061
============= ============= ============= ============== ============= ==============
U.S. GAAP(2):
Shareholders' equity ............ Ps 1,413,445 PS 1,832,886 PS 2,267,286 Ps 4,125,996 PS 4,549,018 US$ 2,031,909
Shareholders' equity
per share(3) .................. 2,451 3,178 3,932 6,320 6,250 2.79
Shareholders' equity
per ADS(3) .................... 9,804 12,712 15,728 25,280 25,001 11.17
-------------------
(1) Amounts stated in U.S dollars have been translated at the rate of Ps
2,238.79 to US$ 1.00, which is the Representative Market Rate calculated on
December 29, 2006 the last business day of the year, as reported and
certified by the 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, 2002, 2003 and 2004, 653 million
for the fiscal year ended December 31, 2005 and 728 million for the fiscal
year ended December 31, 2006.
(4) In October 23, 2003, the Superintendency of Banking (now the
Superintendency of Finance), through its External Circular 040 of 2003,
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
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 ended in December 31, 2002, 2003, 2004, 2005 and
2006.
3
DIFFERENCES BETWEEN COLOMBIAN AND U.S. GAAP RESULTS
The Bank's consolidated financial statements have been prepared in
accordance with accounting principles and policies as summarized in Note 2 to
the Bank's Financial Statements included in this Annual Report. 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 included in this Annual Report.
Consolidated net income under U.S. GAAP for the year ended December 31,
2006 was Ps 941,183 million (compared with Ps 891,121 million for fiscal year
2005 and Ps 642,126 million for fiscal year 2004). 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 included in this Annual Report.
4
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
2002 2003 2004 2005(11) 2006
------------- ------------- -------------- ------------- -------------
(Percentages, except for operating data)
SELECTED RATIOS: (1)
COLOMBIAN GAAP:
PROFITABILITY RATIOS:
Net interest margin(2)........................... 7.43 9.22 8.75 8.12 6.19
Return on average total assets(3)................ 1.88 3.40 3.62 3.30 2.31
Return on average shareholders' equity(4)........ 20.42 31.14 32.14 31.49 22.10
EFFICIENCY RATIO:
Operating expenses as a percentage of interest,
fees, services and other operating income...... 68.65 54.10 50.92 54.94 64.37
CAPITAL RATIOS:
Period-end shareholders' equity as a percentage
of period-end total assets..................... 10.19 11.13 11.96 10.96 10.57
Period-end regulatory capital as a percentage of
Period-end risk-weighted assets(5)............. 11.61 13.08 13.44 10.93 11.05
CREDIT QUALITY DATA:
Non-performing loans as a percentage of total
loans(6) (10).................................. 1.77 0.95 0.88 1.48 1.36
"C", "D" and "E" loans as a percentage of total
loans(9) (10).................................. 9.71 4.93 3.86 3.38 2.54
Allowance for loan and accrued interest losses as
a percentage of non-performing loans (10)...... 316.80 515.13 496.30 259.02 252.87
Allowance for loan and accrued interest losses as
a percentage of "C", "D" and "E" loans(9) (10). 57.71 99.07 113.47 113.59 135.06
Allowance for loan and accrued interest losses as
a percentage of total loans (10)............... 5.61 4.89 4.37 3.84 3.43
OPERATING DATA:
Number of branches(7) ........................... 340 354 377 678 701
Number of employees(8)........................... 7,581 8,001 8,609 14,562 16,222
-------------
(1) Ratios were calculated on the basis of monthly averages.
(2) Net interest income divided by average interest-earning assets.
(3) Net income divided by average total assets.
(4) Net income divided by average 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 of 2003,
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.
(11) Selected Ratios for the years ended December 31, 2005, include Conavi and
Corfinsura's results since the beginning of the year.
5
EXCHANGE RATES
On April 30, 2007, the Representative Market Rate was Ps 2,104.16 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 U.S. DOLLARS PER PESO:
MONTH LOW HIGH
--------------------------------- -------- --------
November 2006.................... 2,268.47 2,320.64
December 2006.................... 2,225.44 2,295.99
January 2007..................... 2,218.05 2,261.22
February 2007.................... 2,211.46 2,255.17
March 2007 ...................... 2,155.06 2,246.88
April 2007....................... 2,110.67 2,190.30
Source: Superintendency of Finance.
The following table sets forth the average peso/ U.S. dollar Representative
Market Rate for each of the five most recent financial years, calculated by
using the average of the exchange rates on the last day of each month during the
period.
PESO/US$ 1.00
---------------------------------------------------
REPRESENTATIVE MARKET RATE
---------------------------------------------------
PERIOD AVERAGE
--------------------------------- --------
2002............................. 2,534.22
2003............................. 2,875.05
2004............................. 2,614.79
2005............................. 2,320,77
2006............................. 2,359.13
Source: Superintendency of Finance.
B. CAPITALIZATION AND INDEBTEDNESS
Not applicable.
C. REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
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 is not aware of, or that
the Bank currently thinks are immaterial may also impair the Bank's business
operations. If any of the following risks occur, it could materially and
adversely affect the Bank's business, results of operations and financial
condition.
THE QUALITY OF THE BANK'S LOAN PORTFOLIO AND OF OTHER ASSETS MAY DECLINE.
The continuous growth in both family and corporate income levels in
Colombia, as well as the profitability in the prices of goods and interest
rates, have triggered a significant annual growth in the Bank's loan portfolio
(including the Bank's mortgage loan portfolio) of approximately 32% as of
December 31, 2006. Unforeseen changes in the income levels of the Bank's
borrowers, increases in the inflation rate or an unexpected increase in interest
rates could have a negative effect on the quality of the Bank's loan portfolio,
causing the Bank to increase provisions for loan losses and resulting in reduced
profits. In particular, the Bank might not be able to maintain its current level
of asset quality and credit risk in the future. Furthermore, if the Bank
successfully increases the participation of consumer, mortgage and small
business credits in its loan portfolio, it may experience detrimental changes in
its credit risk levels.
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, each of which represented a share of 76.8%, 66.4%
and 72.8% of total funds at the end of 2004, 2005 and 2006, respectively.
Because the Bank relies primarily on short-term deposits for its funding, in the
event of a sudden or unexpected shortage of funds in the Colombian banking
system and money markets, the Bank might not be able to maintain its current
level of funding without incurring higher costs or liquidating certain assets.
7
THE BANK'S BUSINESSES RELY HEAVILY ON DATA COLLECTION, PROCESSING AND STORAGE
SYSTEMS, THE FAILURE OF WHICH COULD MATERIALLY AND ADVERSELY AFFECT THE
EFFECTIVENESS OF ITS RISK MANAGEMENT AND INTERNAL CONTROL SYSTEM AS WELL AS ITS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
All of the Bank's principal businesses are highly dependent on the ability
to timely collect and process a large amount of financial and other information
across numerous and diverse markets and products at its various branches, at a
time when transaction processes have become increasingly complex with increasing
volume. The proper functioning of financial control, accounting or other data
collection and processing systems is critical to the Bank's businesses and to
its ability to compete effectively. A partial or complete failure of any of
these primary systems could materially and adversely affect its decision making
process, its risk management and internal control systems as well as the Bank's
ability to respond on a timely basis to changing market conditions. If the Bank
cannot maintain an effective data collection and management system, its business
operations, financial condition and results of operations could be materially
and adversely affected.
The Bank is also dependent on information systems to operate its website,
process transactions, respond to customer inquiries on a timely basis and
maintain cost-efficient operations. The Bank may experience operational problems
with its information systems as a result of system failures, viruses, computer
"hackers" or other causes. Any material disruption or slowdown of its systems
could cause information, including data related to customer requests, to be lost
or to be delivered to the Bank's clients with delays or errors, which could
reduce demand for the Bank's services and products and could materially and
adversely affect the Bank's results of operations and financial position.
ADVERSE ECONOMIC AND POLITICAL CONDITIONS IN COLOMBIA MAY ADVERSELY AFFECT THE
BANK'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The Bank is a Colombian financial institution, and most of the Bank's
operations, property and customers are located in Colombia. As a result, the
quality of its assets, financial condition and results of operations depend
primarily on macroeconomic and political conditions prevailing in Colombia.
Colombia is subject to political, economic and other uncertainties, including
renegotiation, or nullification of existing contracts, currency exchange
restrictions and international monetary fluctuations. Furthermore, changes in
Colombia's monetary, exchange and trade policies could affect the overall
business environment in Colombia, which would impact the Bank's financial
condition and results of operations. For example, the Central Bank could raise
interest rates, which could negatively affect the Bank's assets and restrict
their growth. Increases in exchange rates could negatively affect borrowers'
foreign currency position, while setbacks in trade relations with Venezuela and
Ecuador, as well as any difficulties with the approval of the Free Trade
Agreement with the United States, could affect the financial position of the
Bank's larger customers. Any of these events could have a negative impact on the
Bank's financial condition.
Furthermore, decreases in the growth rate in the Colombian economy, periods
of negative growth or increases in inflation or interest rates could result in
lower demand for the Bank's services and products, lower real pricing of its
services and products, or cause it to shift to lower margin services and
products. Because a large percentage of the Bank's costs and expenses are fixed,
it may not be able to reduce costs and expenses upon the occurrence of any of
these events and its profit margins could suffer as a result.
8
In addition adverse economic and political conditions in other countries
where the Bank has subsidiaries may adversely affect the Bank's financial
condition and results of operations.
COLOMBIAN GOVERNMENT POLICIES WILL LIKELY SIGNIFICANTLY AFFECT THE ECONOMY AND,
AS A RESULT, THE BANK'S BUSINESS AND FINANCIAL CONDITION.
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
Bank's business and financial condition could be adversely affected by changes
in policy involving exchange controls and other matters such as currency
devaluation, inflation, interest rates, taxation, banking laws and regulations
and other political or economic developments in or affecting Colombia. Future
developments in Government policies could impair the Bank's business or
financial condition or the market value of its securities.
COLOMBIA HAS EXPERIENCED SEVERAL PERIODS OF VIOLENCE AND INSTABILITY, AND SUCH
INSTABILITY COULD AFFECT THE ECONOMY AND THE BANK.
Colombia has experienced several periods of criminal violence over the past
four decades, primarily due to the activities of guerilla groups and drug
cartels. In response, the 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 administration of the president of Colombia, Alvaro Uribe, who was
re-elected for the period from 2006 to 2010, is implementing a plan prioritizing
the protection of civil rights and the strengthening of democratic authority.
Nevertheless, the plan may not achieve its objectives and economic and social
conditions could deteriorate in the future, giving rise to outflows of capital
and a general devaluation of Colombian financial assets. The Bank's business or
financial condition, or the market value of the Bank's securities and any
dividends distributed by it, could be adversely affected by rapidly changing
economic and social conditions in Colombia and by the Government's response to
such conditions. Moreover, additional deterioration in the economic and
political situation of neighboring countries could affect national stability or
the Colombian economy by disrupting Colombia's diplomatic or commercial
relationships with these countries.
9
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.
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 securities 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 portion of
Bancolombia's investment portfolio).
THE BANK MAY NOT BE ABLE TO DETECT MONEY LAUNDERING AND OTHER ILLEGAL OR
IMPROPER ACTIVITIES FULLY OR ON A TIMELY BASIS, WHICH COULD EXPOSE THE BANK TO
ADDITIONAL LIABILITY.
The Bank is required to comply with applicable anti-money laundering,
anti-terrorism laws and other regulations. These laws and regulations require
the Bank, among other things, to adopt and enforce "know your customer" policies
and procedures and to report suspicious and large transactions to the applicable
regulatory authorities. While the Bank has adopted policies and procedures aimed
at detecting and preventing the use of its banking network for money laundering
activities and by terrorists and terrorist-related organizations and individuals
generally, such policies and procedures have in some cases only been recently
adopted and may not completely eliminate instances where it may be used by other
parties to engage in money laundering and other illegal or improper activities.
To the extent the Bank may fail to fully comply with applicable laws and
regulations, the relevant government agencies to which it reports have the power
and authority to impose fines and other penalties on the Bank. In addition, the
Bank's business and reputation could suffer if customers use the Bank for money
laundering or illegal or improper purposes.
10
PREEMPTIVE RIGHTS MAY NOT BE AVAILABLE TO HOLDERS OF ADRS.
The Bank's by-laws and Colombian law require that, whenever the Bank issues
new shares of any outstanding class, it must offer the holders of each class of
shares (including holders of ADRs) the right to purchase a number of shares of
such class sufficient to maintain their existing percentage ownership of the
aggregate capital stock of the Bank. These rights are called preemptive rights.
United States holders of ADRs may not be able to exercise their preemptive
rights through The Bank of New York, which acts as depositary (the "Depositary")
for the Bank's ADR facility, unless a registration statement under the
Securities Act is effective with respect to such rights and stocks or an
exemption from the registration requirement thereunder is available. Although
the Bank is not obligated to, it intends to consider at the time of any rights
offering the costs and potential liabilities associated with any such
registration statement, the benefits to the Bank from enabling the holders of
the ADRs to exercise those rights and any other factors deemed appropriate at
the time, and will then make a decision as to whether to file a registration
statement. Accordingly, the Bank might decide not to file a registration
statement in some cases.
To the extent holders of ADRs are unable to exercise these rights because a
registration statement has not been filed and no exemption from the registration
requirement under the Securities Act is available, the Depositary may attempt to
sell the holders' preemptive rights and distribute the net proceeds from that
sale, if any, to such holders. The Depositary, after consulting with the Bank,
will have discretion as to the procedure for making preemptive rights available
to the holders of ADRs, disposing of such rights and making any proceeds
available to such holders. If by the terms of any rights offering or for any
other reason the Depositary is unable or chooses not to make those rights
available to any holder of ADRs, and if it is unable or for any reason chooses
not to sell those rights, the Depositary may allow the rights to lapse. Whenever
the rights are sold or lapse, the equity interests of the holders of ADRs will
be proportionately diluted.
THERE ARE RESTRICTIONS ON FOREIGN INVESTMENT IN COLOMBIA.
Colombia's International Investment Statute, which has been modified from
time to time through related decrees and regulations, 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.
Investors who wish to participate in the Bank's American Depositary Receipt
("ADR") facility and hold American Depositary Shares ("ADSs") of the Bank will
be required to submit to the custodian of the ADR facility certain information
and comply with certain registration procedures required under the foreign
investment regulations in connection with foreign exchange controls restricting
the conversion of pesos into U.S. dollars. Holders of ADRs who wish to withdraw
the underlying preferred shares will also have to comply with certain
registration and reporting procedures, among other requirements. Under these
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. The Colombian Government, Colombian Congress or the Central
Bank might not reduce restrictions on foreign investments, and any of them could
implement more restrictive rules in the future.
11
In addition, Colombia currently has a free float exchange rate system;
however, other restrictive rules for the exchange rate system could 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.
ADRS DO NOT HAVE THE SAME TAX BENEFITS AS OTHER EQUITY INVESTMENTS IN COLOMBIA.
Although ADRs represent Bancolombia's preferred shares, they are held
through a fund of foreign capital in Colombia which is subject to a specific tax
regulation regime. Accordingly, the tax benefits applicable in Colombia to
equity investments, in particular, those relating to dividends and profits from
sale, are not applicable to ADRs, including the Bank's ADRs. For more
information see Item 10. Additional Information.-E. Taxation- Colombian
Taxation.
ANY ADDITIONAL TAXES RESULTING FROM CHANGES TO TAX REGULATIONS OR THE
INTERPRETATION THEREOF IN COLOMBIA COULD ADVERSELY AFFECT THE BANK'S
CONSOLIDATED RESULTS.
Uncertainty relating to tax legislation poses a constant risk to Colombian
entities, like the Bank, and Colombian national authorities have levied new
taxes in recent years. Changes in legislation, regulation and jurisprudence can
affect tax burdens by increasing tax rates and fees, creating new taxes,
limiting stated expenses and deductions, and eliminating incentives and
non-taxed income.
Additional tax regulations could be implemented that could require the Bank
to make additional tax payments, negatively affecting its financial condition,
results of operation and cash flow. In addition, either national or local taxing
authorities may not interpret tax regulations in the same way that the Bank
does. Differing interpretations could result in future tax litigation and
associated costs.
INSTABILITY OF COLOMBIAN BANKING LAWS AND REGULATIONS COULD ADVERSELY AFFECT THE
BANK'S CONSOLIDATED RESULTS.
Changes in banking laws and regulations, or in their official
interpretation, may have a material effect on the Bank's business and
operations. Since banking laws and regulations change frequently, their
interpretation and, in particular, the manner in which these laws and
regulations are applied to financial institutions like the Bank are continuously
evolving. Laws or regulations could be adopted, enforced or interpreted in a
manner that has an adverse effect on the Bank's business. In addition, banking
laws or regulations may change in other countries where the Bank has
subsidiaries, such as Panama, Puerto Rico and the Cayman Islands.
12
COLOMBIAN BANKING REGULATIONS, ACCOUNTING STANDARDS AND CORPORATE DISCLOSURE
DIFFER FROM THOSE IN THE UNITED STATES.
While many of the policies underlying Colombian banking regulations are
similar to those underlying regulations applicable to banks in other countries,
including those in the United States, Colombian regulations can differ in a
number of material respects from those other regulations. For example, capital
adequacy requirements for banks under Colombian regulations differ from those
under U.S. regulations.
The Bank prepares its annual audited financial statements in accordance
with Colombian GAAP, which differs in significant respect to U.S. GAAP. Thus,
Colombian financial statements and reported earnings may differ from those of
companies in other countries in these and other respects. Some of the main
significant differences affecting earnings and shareholders' equity include the
accounting treatment for restructuring, capitalization of foreign exchange gains
(losses) on deferred costs, inflation accounting, deferred taxes and the
accounting treatment for depreciation expense.
Moreover, under Colombian GAAP, allowances for non-performing loans are
computed by establishing each non-performing loan's individual inherent risk,
using criteria established by the Superintendency of Finance that 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).
Although the Government has undertaken a review of present regulations
relating to accounting, audit, and information disclosure, with the intention of
conforming them to international standards and proposing pertinent modifications
to Congress, current regulations continue to differ in certain respects from
those in other countries. Accordingly, there may be less publicly available
information about the Bank than is regularly published by or about U.S. issuers.
THE BANK'S FINANCIAL RESULTS ARE CONSTANTLY EXPOSED TO MARKET RISK. THE BANK IS
SUBJECT TO FLUCTUATIONS IN INTEREST RATES AND OTHER MARKET RISKS, WHICH MAY
MATERIALLY AND ADVERSELY AFFECT ITS FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
Market risk refers to the probability of variations in the Bank's net
interest income or in the market value of its assets and liabilities due to
interest rate volatility. Changes in interest rates affect the following areas,
among others, of the Bank's business:
- net interest income;
- the volume of loans originated;
- the market value of the Bank's securities holdings;
- asset quality; and
- gains from sales of loans and securities.
Changes in short-term interest rates may affect the Bank's net interest
income, which comprises the majority of the Bank's revenue.
13
Increases in interest rates may reduce the volume of loans the Bank
originates. Sustained high interest rates have historically discouraged
customers from borrowing and have resulted in increased delinquencies in
outstanding loans and deterioration in the quality of assets.
Increases in interest rates may reduce the value of the Bank's financial
assets. The Bank holds a substantial portfolio of loans and debt securities that
have both fixed and floating interest rates. The market value of a security with
a fixed interest rate generally decreases when the prevailing interest rates
rise, which may have an adverse effect on the Bank's earnings and financial
condition. In addition, the Bank may incur costs (which, in turn, will impact
its results) as it implements strategies to reduce future interest rate
exposure. The market value of an obligation with a floating interest rate can be
adversely affected when interest rates increase due to a lag in the
implementation of repricing terms.
Increases in interest rates may reduce gains or require the Bank to record
losses on sales of its loans or securities.
THE BANK'S LOAN AND INVESTMENT PORTFOLIOS ARE SUBJECT TO RISK OF PREPAYMENT,
WHICH COULD NEGATIVELY AFFECT ITS NET INTEREST INCOME BECAUSE THE BANK WOULD NOT
BE ABLE TO RECEIVE THE INTEREST INCOME FROM THE PREPAYMENT DATE TO THE MATURITY
DATE.
The Bank's loan and investment portfolios are subject to prepayment risk,
which results from the ability of a borrower or issuer to pay a debt obligation
prior to maturity. Generally, in a declining interest rate environment,
prepayment activity increases which reduces the weighted average lives of the
Bank's earning assets and adversely affects its operating results. The Bank
would also be required to amortize net premiums into income over a shorter
period of time, thereby reducing the corresponding asset yield and net interest
income. Prepayment risk also has a significant adverse impact on credit card and
collateralized mortgage obligations, since prepayments could shorten the
weighted average life of these portfolios, which may result in a mismatch in
funding or reinvestment at lower yields.
THE BANK IS SUBJECT TO CONCENTRATION DEFAULT RISKS IN ITS LOAN PORTFOLIO.
PROBLEMS WITH ONE OR MORE OF ITS LARGEST BORROWERS MAY ADVERSELY AFFECT ITS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The aggregate outstanding principal amount of the Bank's 25 largest
borrowing relationships, in a non consolidated basis, represented approximately
10.98% of its total consolidated loan portfolio as of December 31, 2006.
Approximately 1.23% of the Bank's total loan portfolio as of that date
represented transactions with related parties. Problems with one or more of the
Bank's largest borrowers could materially and adversely affect its results of
operations and financial position.
14
THE BANK'S INCREASING FOCUS ON INDIVIDUALS AND SMALL AND MEDIUM-SIZED BUSINESSES
COULD LEAD TO HIGHER LEVELS OF NON-PERFORMING LOANS AND SUBSEQUENT CHARGE-OFFS.
As part of the Bank's business strategy, it seeks to increase lending and
other services to individuals and to small and medium-sized companies. Low to
medium income individuals and small and medium-sized companies are, however,
more likely to be adversely affected by downturns in the Colombian economy than
are large corporations and high-income individuals. Consequently, in the future
the Bank may experience higher levels of non-performing loans, which could
result in higher provisions for loan losses. The levels of non-performing loans
and subsequent charge-offs could be higher in the future.
As of December 31, 2004, 2005 and 2006, the Bank's Retail and Small-and
Medium-Sized Enterprises (SMEs) banking division represented 37%, 27% and 28%,
respectively, of BC's total loan portfolio.
THE BANK'S HEAVY RELIANCE IN ITS INVESTMENT PORTFOLIO ON DEBT SECURITIES ISSUED
BY THE COLOMBIAN GOVERNMENT LEAVES IT VULNERABLE TO FLUCTUATIONS IN PUBLIC DEBT
VALUATIONS.
As of December 31, 2006, the Bank's investment portfolio in Colombian debt
securities valued at Ps 2,856,921 million, representing approximately 52% of the
Bank's total investment portfolio. In 2004 and 2005, investments in public debt
securities represented 75.36% and 68.76%, respectively of Bank's total
investment portfolio. In 2006, following the increase in interest rates in
foreign markets which in turn negatively impacted the market price of Colombia's
public debt securities, the Bank reduced the portion of public debt securities
in its portfolio. However, the Bank's investment portfolio still contains a
significant amount of public debt securities, and, therefore, the Bank continues
to be exposed to the possibility of non-payment by Colombia and could suffer
future losses if the value of Colombian public debt securities on the secondary
market decreases.
THE BANK IS EXPOSED TO RISKS ASSOCIATED WITH THE MORTGAGE LOAN MARKET.
As a result of its merger with Conavi in 2005, the Bank acquired Conavi's
mortgage loan portfolio and became a significant player in Colombia's mortgage
loan market. With the launching in 2006 of the Casa Propia para Todos homeowner
plan, the Bank became one of the leaders of such market and increased its
mortgage loan market share (including securitized loans) from 18.9% as of
December 31, 2005 to 23.9% as of December 31, 2006.
Colombia's mortgage loan market is highly regulated and has historically
been affected by various macroeconomic factors. Risks associated with this
market to which the Bank is exposed include the risk of increases in interest
rates that may reduce the volume of mortgage loans that the Bank originates.
Sustained high interest rates have historically discouraged customers from
borrowing and have resulted in increased defaults in outstanding loans and
deterioration in the quality of assets.
15
INCREASED COMPETITION AND CONSOLIDATION IN THE COLOMBIAN FINANCIAL INDUSTRY
COULD ADVERSELY AFFECT THE BANK'S 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 local institutions and the possibility of foreign entities banks entering
the market, presenting the risk that the Bank could lose a portion of its share
in the industry affecting the Bank's net interest margin.
FUTURE ACQUISITIONS AND STRATEGIC PARTNERSHIPS MAY NOT PERFORM IN ACCORDANCE TO
EXPECTATIONS OR MAY DISRUPT OUR OPERATIONS AND HURT OUR PROFITS.
A key element of our business strategy is to identify and pursue
growth-enhancing strategic opportunities. As part of that strategy, we acquired
interests in various institutions during recent years. For example, on December
22, 2006, Bancolombia Panama, S.A., our affiliate, entered into a Stock Purchase
Agreement with a group of shareholders of Banagricola S.A. ("Banagricola") to
acquire a controlling stake of 52.9% and up to 100% of all issued and
outstanding shares of Banagricola.
In 2006, we also acquired Factoring Bancolombia (formerly Comercia). In
2005, we completed the Conavi/Corfinsura merger including the integration
process in areas such as operations, technology and commercial banking. For more
information on these acquisitions and mergers, see Item 4.A. "Information on the
Company - History and Development of the Company - Public takeover offers" and
Item 4.A. "Information on the Company - History and Development of the Company -
Recent Developments".
The Bank will continue to actively consider other strategic acquisitions
and partnerships from time to time. We must necessarily base any assessment of
potential acquisitions and partnerships on assumptions with respect to
operations, profitability and other matters that may subsequently prove to be
incorrect. The Banagricola acquisition, if and when consummated, and other
future acquisitions, significant investments and alliances may not perform in
accordance with our expectations and could adversely affect our operations and
profitability. In addition, new demands on our existing organization and
personnel resulting from the integration of new acquisitions could disrupt our
operations and adversely affect our operations and profitability.
16
IF THE BANK IS UNABLE TO EFFECTIVELY CONTROL THE LEVEL OF NON-PERFORMING OR POOR
CREDIT QUALITY LOANS IN THE FUTURE, OR IF ITS LOAN LOSS RESERVES ARE
INSUFFICIENT TO COVER FUTURE LOAN LOSSES, THE BANK'S FINANCIAL CONDITION AND
RESULTS OF OPERATIONS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Non-performing or low credit quality loans can negatively impact the
Bank's results of operations and financial condition. The Bank might not be able
to effectively control and reduce the level of the impaired loans in its total
loan portfolio. In particular, the amount of the Bank's reported non-performing
loans may increase in the future as a result of growth in its total loan
portfolio, including as a result of loan portfolios that the Bank may acquire
through auctions or otherwise, or factors beyond the Bank's control, such as the
impact of macroeconomic trends and political events affecting Colombia or events
affecting specific industries. In addition, the Bank's current loan loss
reserves may not be adequate to cover an increase in the amount of
non-performing loans or any future deterioration in the overall credit quality
of its total loan portfolio. As a result, if the quality of its total loan
portfolio deteriorates the Bank may be required to increase its loan loss
reserves, which may adversely affect its financial condition and results of
operations. Moreover, there is no precise method for predicting loan and credit
losses, and loan loss reserves might not be sufficient to cover actual losses.
If the Bank is unable to control or reduce the level of its non-performing or
poor credit quality loans, its financial condition and results of operations
could be materially and adversely affected.
IF THE BANK IS UNABLE TO REALIZE THE COLLATERAL OR GUARANTEES SECURING ITS LOANS
TO COVER THE OUTSTANDING PRINCIPAL AND INTEREST BALANCE OF ITS LOANS, ITS
FINANCIAL CONDITION AND RESULTS OF OPERATIONS MAY BE ADVERSELY AFFECTED.
As of December 31, 2006, 45% of the Bank's loans and financial leases were
secured by collateral or guarantees. The Bank's loan collateral primarily
includes real estate and other assets that are located in Colombia, the value of
which may significantly fluctuate or decline due to factors beyond the Bank's
control, including macroeconomic factors and political events affecting the
Colombian economy. An economic showdown in Colombia may lead to a downturn in
the Colombian real estate market, which may in turn result in declines in the
value of the collateral, consisting primarily of real estate, securing many of
the Bank's loans to levels below the outstanding principal balance of such
loans. Any decline in the value of the collateral securing the Bank's loans may
result in a reduction in the recovery from collateral realization and an impact
in its results of operations and financial condition.
In addition, the Bank may face difficulties in enforcing its rights as a
secured creditor. In particular, timing delays and procedural problems in
enforcing against collateral provided, and local protectionism, may make
foreclosures on collateral and enforcement of judgments in its favor difficult,
and hence may result in losses, which could materially and adversely affect its
results of operations and financial position.
As a result, any significant decline in the value of the collateral
securing the Bank's loans or deterioration of the economic condition of the
guarantors of such loans or the Bank's inability to enforce its rights as a
secured creditor could materially and adversely affect its results of operations
and financial position.
17
OPERATIONAL RISKS
The Bank businesses are dependant on the ability to process a large number
of transactions efficiently and accurately. Operational risks and losses can
result from fraud, employee errors, failure to properly document transactions or
to obtain proper internal authorization, failure to comply with regulatory
requirements, breaches of conduct of business rules, equipment failures, natural
disasters or the failure of external systems. The Bank's currently adopted
procedures may not be effective in controlling each of the operational risks
faced by the Bank.
THE BANK IS SUBJECT TO CREDIT RISKS WITH RESPECT TO ITS NON-TRADITIONAL BANKING
BUSINESSES SUCH AS INVESTING IN SECURITIES AND ENTERING INTO TYPES OF
DERIVATIVES TRANSACTIONS.
A portion of the Bank's businesses are not in the traditional banking
businesses of lending and deposit-taking and therefore expose it to credit risk.
Non-traditional sources of credit risk can, for example, arise from:
- investing in securities of third parties;
- entering into derivative contracts under which counterparties have
obligations to make payments to the Bank; and
- executing securities, futures, currency or commodity trades, from
its proprietary trading desk, that fail to settle at the required
time due to non-delivery by the counterparty or systems failure by
clearing agents, exchanges, clearing houses or other financial
intermediaries.
Any significant increases in exposure to any of these non-traditional
risks could materially and adversely affect the Bank's results of operations and
financial position.
THE FAILURE TO SUCCESSFULLY IMPLEMENT AND CONTINUE TO UPGRADE THE BANK'S CREDIT
RISK MANAGEMENT SYSTEM COULD MATERIALLY AND ADVERSELY AFFECT ITS BUSINESS
OPERATIONS AND PROSPECTS.
One of the principal types of risks inherent in the Bank's business is
credit risk. The Bank may not be able to, on a timely basis, upgrade its credit
risk management system. For example, an important part of its credit risk
management system is to employ an internal credit rating system to assess the
particular risk profile of a client. As this process involves detailed analyses
of the client's credit risk, taking into account both quantitative and
qualitative factors, it is subject to human error. In exercising their judgment,
the Bank's employees may not always be able to assign an accurate credit rating
to a client or credit risk, which may result in the Bank's exposure to higher
credit risks than indicated by the Bank's risk rating system. The Bank may not
be able to timely detect these risks before they occur, or due to limited
resources or tools available to it, the Bank's employees may not be able to
effectively implement its credit risk management system, which may increase its
exposure to credit risk. As a result, the Bank's failure to implement
effectively, consistently follow or continuously refine its credit risk
management system may result in a higher risk exposure for the Bank, which could
materially and adversely affect its results of operations and financial
position.
18
THE BANK IS SUBJECT TO MARKET AND OPERATIONAL RISKS ASSOCIATED WITH ITS
DERIVATIVE TRANSACTIONS, AS WELL AS STRUCTURING RISKS AND THE RISK THAT ITS
DOCUMENTATION WILL NOT INCORPORATE ACCURATELY THE TERMS AND CONDITIONS OF ITS
DERIVATIVES TRANSACTIONS.
The Bank enters into derivative transactions primarily for hedging
purposes and, to a lesser extent, on behalf of its customers. The Bank is
subject to market and operational risks associated with these transactions,
including basis risk (the risk of loss associated with variations in the spread
between the asset yield and the funding and/or hedge cost) and credit or default
risk (the risk of insolvency or other inability of the counterparty to a
particular transaction to perform its obligations thereunder).
In addition, the market practice and documentation for derivative
transactions is less well developed in Colombia than in other countries, and
Colombian courts have limited experience in dealing with issues related to
derivative transactions. Given that the derivatives market and related
documentation are not yet well developed in Colombia, there are structuring
risks and the risk that the Bank's documentation will not incorporate accurately
the terms and conditions of derivatives transactions. In addition, the execution
and performance of these types of transactions depend on the Bank's ability to
develop adequate control and administration systems, and to hire and retain
qualified personnel. Moreover, the Bank's ability to adequately monitor, analyze
and report these derivative transactions depends, to a great extent, on its
information technology systems. These factors may further increase the risks
associated with these transactions and could materially and adversely affect the
Bank's results of operations and financial position.
THE CREDIT CARD INDUSTRY IS HIGHLY COMPETITIVE AND ENTAILS SOME RISKS. THE BANK
MAY HAVE DIFFICULTIES COMPETING IN THIS INDUSTRY, AND ITS SUCCESS MAY DEPEND
SIGNIFICANTLY ON ITS ABILITY TO GROW ORGANICALLY OR TO STRENGTHEN ALLIANCES WITH
ITS STRATEGIC PARTNERS.
The credit card business is subject to a number of risks and
uncertainties, including the composition and risk profile of credit card
customers. The success of the Bank's credit card business will also depend, in
part, on the success of the Bank's product development, product rollout efforts
and marketing initiatives, including the marketing of credit card products to
existing retail and mortgage loan customers, and the Bank's ability to continue
to successfully target creditworthy customers.
As part of its credit card business, the Bank faces risks relating to the
price of merchant fees. There has been an ongoing dispute in Colombia, between
retailers and banks, regarding merchant fees. For example, the Superintendency
of Commerce and Industry has issued resolutions related to Credibanco and
Redeban, the entities that manage the credit card system in Colombia, in order
to prevent an agreement on the prices of the merchant fees. As a result, the
clearance fees among the banks and the fees collected from the customers have
decreased. These types of disputes could result in a decrease in income from
credit card merchant fees or could also lead to changes in commercial strategies
that could impact the Bank's financial results.
19
THE INCREASE OF CIVIL CONSTITUTIONAL (ACCIONES POPULARES) AND CLASS ACTIONS
AGAINST FINANCIAL INSTITUTIONS MAY AFFECT THE BANK'S BUSINESSES.
Under the Colombian Constitution, individuals may initiate civil or class
actions to protect their collective or class rights, respectively. During 2006,
the aggregate number of such type of actions brought against Colombian financial
institutions, including the Bank, has increased substantially. The great
majority of such actions are related to fees, financial services and interest
rates, and their outcome is uncertain. The number of such type of actions may
continue to increase in the future and could significantly affect the Bank's
businesses.
REDUCTIONS IN THE BANK'S CREDIT RATINGS WOULD INCREASE ITS COST OF BORROWING
FUNDS AND MAKE ITS ABILITY TO RAISE NEW FUNDS, ATTRACT DEPOSITS OR RENEW
MATURING DEBT MORE DIFFICULT.
The Bank's credit ratings are an important component of its liquidity
profile. Among other factors, its credit ratings are based on the financial
strength, credit quality and concentrations in its total loan portfolio, the
level and volatility of its earnings, its capital adequacy, the quality of
management, the liquidity of its balance sheet, the availability of a
significant base of core retail and commercial deposits, and its ability to
access a broad array of wholesale funding sources. Changes in the Bank's credit
ratings would increase its cost of raising funds in the capital markets or of
borrowing funds. The Bank's ability to renew maturing debt may be more difficult
and expensive. In addition, its lenders and counterparties in derivative
transactions are sensitive to the risk of a rating downgrade.
The Bank's ability to compete successfully in the marketplace for deposits
depends on various factors, including its financial stability as reflected by
the Bank's credit ratings. A downgrade in its credit rating may adversely affect
perception of the Bank's financial stability and the Bank's ability to raise
deposits.
THE BANK'S ABILITY TO MAINTAIN ITS COMPETITIVE POSITION DEPENDS MAINLY ON ITS
CAPACITY TO FULFILL NEW CUSTOMERS' NEEDS THROUGH THE DEVELOPMENT OF NEW PRODUCTS
AND SERVICES AND ITS ABILITY TO OFFER ADEQUATE SERVICES AND STRENGTHEN ITS
CUSTOMERS BASE THROUGH CROSS SELLING. BANK'S BUSINESS WILL BE AFFECTED IF THE
BANK MAY NOT BE ABLE TO MAINTAIN ITS CURRENTLY CUSTOMERS' WITH EFFICIENT
SERVICE'S STRATEGIES.
As the Bank expands the range of its products and services, some of which
are at an early stage of development in the Colombian market, it will be exposed
to new and potentially increasingly complex risks. The Bank's employees and its
risk management systems may not be adequate to handle such risks. Any or all of
these factors, individually or collectively, could materially and adversely
affect the Bank's results of operations and financial position.
20
ANY FAILURE TO EFFECTIVELY IMPROVE OR UPGRADE THE BANK'S INFORMATION TECHNOLOGY
INFRASTRUCTURE AND MANAGEMENT INFORMATION SYSTEMS IN A TIMELY MANNER COULD
ADVERSELY AFFECT ITS COMPETITIVENESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
The Bank's ability to remain competitive will depend in part on its
ability to upgrade the Bank's information technology infrastructure on a timely
and cost-effective basis. The Bank must continually make significant investments
and improvements in its information technology infrastructure in order to remain
competitive. In particular, as the Bank continues to open new branches
throughout Colombia, it needs to improve its information technology
infrastructure, including maintaining and upgrading its software and hardware
systems and its bank-office operations. The information available to and
received by the Bank's management through its existing information systems may
not be timely and sufficient to manage risks or to plan for and respond to
changes in market conditions and other developments in its operations. In
addition, the Bank may experience difficulties in upgrading, developing and
expanding its information technology systems quickly enough to accommodate its
growing customer base. Any failure to effectively improve or upgrade the Bank's
information technology infrastructure and management information systems in a
timely manner could materially and adversely affect its competitiveness,
financial condition and results of operations.
THE BANK IS SUBJECT TO COLOMBIAN REGULATORY INSPECTIONS, EXAMINATIONS, INQUIRIES
OR AUDITS, AND ANY FUTURE SANCTIONS, FINES AND OTHER PENALTIES RESULTING FROM
SUCH INSPECTIONS AND AUDITS COULD MATERIALLY AND ADVERSELY AFFECT THE BANK'S
BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND REPUTATION.
The Bank is subject to comprehensive regulation and supervision by
Colombian banking authorities. These regulatory authorities have broad powers to
adopt regulations and other requirements affecting or restricting virtually all
aspects of its capitalization, organization and operations, including the
imposition of anti-money laundering measures and the authority to regulate the
terms and conditions of credit that can be applied by Colombian banks. Moreover,
Colombian financial regulatory authorities possess significant powers to enforce
applicable regulatory requirements in the event of the Bank's failure to comply
with them, including the imposition of fines, sanctions or the revocation of
licenses or permits to operate its business. In the event the Bank encounters
significant financial problems or becomes insolvent or in danger of becoming
insolvent, Colombian banking authorities would have the power to take over the
Bank's management and operations.
Colombian banking and financial services laws and regulations are subject
to continuing review and changes, and any such changes in the future may have an
adverse impact on, among other things, the Bank's ability to make and collect
loans and other extensions of credit on terms and conditions, including interest
rates, that are adequately profitable, which could materially and adversely
affect its results of operations and financial position.
FUTURE COLOMBIAN GOVERNMENT RESTRICTIONS ON INTEREST RATES OR BANKING FEES COULD
NEGATIVELY AFFECT THE BANK'S PROFITABILITY.
In the future, the Colombian Government could impose limitations or
additional informational requirements regarding interest rates or fees. A
portion of the Bank's revenues and operating cash flow is generated by its
consumer credit services and any such limitations or additional informational
requirements could materially and adversely affect the Bank's results of
operations and financial position.
21
RELATIVE ILLIQUIDITY OF THE COLOMBIAN SECURITIES MARKETS MAY IMPAIR THE ABILITY
OF AN ADR HOLDER TO SELL PREFERRED SHARES.
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 136,377 in 2004, 324,492 in 2005 and 374,183 in 2006. The Bolsa de
Valores de Colombia (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.
A liquid trading market for the Bank's securities might not develop on the
Colombian Stock Exchange. A limited trading market could impair the ability of
an ADR holder to sell preferred shares (obtained upon withdrawal of such shares
from the ADR Facility) on the Colombian Stock Exchange in the amount and at the
price and time such holder desires, and could increase the volatility of the
price of the ADRs.
PERFORMANCE OF THE EXCHANGE RATE MAY AFFECT THE VALUE OF THE DIVIDENDS PAYABLE
TO HOLDERS OF ADRS.
Pursuant to the Colombian Constitution and Law 31 of 1992, the Central
Bank maintains the power to intervene on the exchange market in order to
consolidate or dispose of international reserves, as well as to control any
volatility in the exchange rate, acting through a variety of mechanisms,
including discretionary ones.
The appreciation of the peso against the U.S. dollar was 13.98% in 2004,
4.42% in 2005 and 1.99% in 2006. Revaluation of the peso has a positive impact
on the U.S. dollar value of dividends paid to holders of the Bank's ADRs.
Unforeseen events in the international markets, fluctuations in interest rates
or changes in capital flows, could depress the value of the U.S. dollar thereby
decreasing the value of the dividends paid to holders of the Bank's ADRs.
REQUIRED GOVERNMENT APPROVALS RELATING TO OWNERSHIP OF THE BANK'S 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 restrictions, 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
UVRs, must be effected through the Colombian Stock Exchange.
22
THE BANK'S PREFERRED SHARES HAVE LIMITED VOTING RIGHTS
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.
Holders of the Bank's ADRs and preferred shares are not entitled to vote for the
election of directors or to influence the Bank's management policies.
Under the Bank's by-laws and Colombian corporate law, holders of preferred
shares (and consequently, holders of ADRs) have no voting rights in respect of
preferred shares, other than 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 on 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; and
- 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 THE BANK'S ADSS MAY ENCOUNTER DIFFICULTIES IN THE EXERCISE OF
DIVIDEND AND VOTING RIGHTS.
You may encounter difficulties in the exercise of some of your rights with
respect to shares if you hold ADSs rather than shares. If the Bank makes a
distribution in the form of securities, the depositary is allowed, in its
discretion, to sell on your behalf those securities and instead distribute the
net proceeds to you. Also, under some circumstances, you may not be able to vote
by giving instructions to the depositary.
23
THE BANK IS SUBJECT TO TRADING RISKS WITH RESPECT TO ITS TRADING ACTIVITIES.
The Bank's trading income is highly volatile. The Bank derives a portion
of its profits from its proprietary trading activities and any significant
reduction in its trading income could adversely affect the Bank's results of
operations and financial position.
The Bank's trading income is dependent on numerous factors beyond its
control, such as the general market environment, overall market trading
activity, interest rate levels, fluctuations in exchange rates and general
market volatility. A substantial amount of its trading income has been derived
from alternative investment strategies such as same-day foreign exchange trades
and adjustable-rate bond instruments. A significant decline in the Bank's
trading income, or incurring a trading loss, could adversely affect its results
of operations and financial position.
ITEM 4. INFORMATION ON THE COMPANY
A. HISTORY AND DEVELOPMENT OF THE COMPANY
Founded in 1945 as Banco Industrial Colombiano S.A. or "BIC", Bancolombia
is one of Colombia's leading independent financial institutions, providing a
wide range of financial products and services to a diversified individual and
corporate customer base throughout Colombia. Our businesses comprise the
following segments: Retail Banking, Commercial Banking, Small Business Banking,
Construction Banking, Government and Institutional Banking, Treasury, Off-shore
Commercial Banking, Trust, Leasing, Brokerage, Investment Banking, Manufacturing
among others.
Bancolombia has grown substantially over the years both through organic
growth and acquisitions. As of December 31, 2006, Bancolombia had, on a
consolidated basis:
- Ps 34,489 billion in total assets;
- Ps 23,811 billion in total net loans and financial leases;
- Ps 23,216 billion in total deposits; and
- Ps 3,647 billion in shareholders' equity.
Bancolombia's consolidated net income for the period ended December 31,
2006 was Ps 749,529 million, representing an average return on equity of 22.10%
and an average return on assets of 2.31%.
Bancolombia 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 commercial por acciones, de la especie anonima. In 1998, BIC
merged with Banco de Colombia S.A. ("Banco de Colombia"), changed its legal name
to Bancolombia S.A. and began conducting its activities under the commercial
name of "Bancolombia".
24
The address and telephone number of the Bank's principal place of business
are as follows: Calle 50 No. 51-66, Medellin, Colombia; telephone +(574)
510-8866. Our agent for service of process in the United States is Puglisi &
Associates, presently located at 850 Library Avenue, Suite 201, Newark, Delaware
19715.
Since 1995, Bancolombia has maintained a listing on the NYSE, where its
ADSs are traded under the symbol "CIB", and on the Colombian Stock Exchange,
where our preferred shares are traded under the symbol "PFBCOLOM". Since 1981
our common shares have been traded on Colombian Exchanges under the symbol
"BCOLOMBIA". Bancolombia is currently the only Colombian company listed in the
NYSE. See Item 9. The Offer and Listing.
In 2005, Conavi and Corfinsura merged with and into Bancolombia, with
Bancolombia as the surviving entity after the spin-off of part of Corfinsura's
investment portfolio to a new entity formed by the former shareholders of
Corfinsura.
The Conavi/Corfinsura merger was completed on July 30, 2005 and 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.
Once the Conavi/Corfinsura 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. (now Fiduciaria Bancolombia 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. (now Valores Bancolombia S.A.) On
November 30, 2005, Suleasing S.A. merged with and into Leasing Colombia S.A.,
with Leasing Colombia, S.A. (now Leasing Bancolombia S.A. Compania de
Financiamiento Comercial) as the surviving entity. Additionally, due to the fact
that Bancolombia (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
currently named Banca de Inversion Bancolombia S.A.) acquired Corfinsura's
Investment Banking Division (a commercial establishment). On November 1, 2005,
the process of exchanging shares of Conavi and Corfinsura (post spin-off) for
Bancolombia shares as a result of the Conavi/Corfinsura merger was completed.
RECENT DEVELOPMENTS
As of June 30, 2006, BC had acquired 16,672,094 shares of Comercia S.A.
(currently Factoring Bancolombia S.A. Compania de Financiamiento), which was
equivalent to 94.57% of Comercia S.A.'s outstanding shares, from Textiles
Fabricato Tejicondor S.A. by means of transactions duly authorized by the
Superintendency of Finance. The total value paid by the Bank was approximately
Ps 41.85 billion. This purchase was completed through multiple transactions
executed in May and June, 2006.
On October 6, 2006, Bancolombia sold UVR indexed mortgage loans to
Titularizadora Colombiana S.A. ("Titularizadora") amounting to approximately Ps
586.25 billion. Such mortgage loans were secured by the Titularizadora through
the issuance of mortgage-backed securities TIPS E-8. The purpose of this
transaction was to transfer to the capital markets a portion of the Bank's
mortgage loans and improve BC's profitability margins and liquidity.
25
On November 9, 2006, the Board of Directors of Bancolombia, approved the
beginning of the construction of the new headquarters of Bancolombia Group,
located in the city of Medellin, at Avenida de los Industriales. The constructed
area will be 125 thousand square meters and will have the capacity to accomodate
4,200 employees. It is estimated that the project will be completed in two
years. The total investment will be of approximately Ps 316 billion.
It is expected, based on the analysis carried out by the Bank under
applicable Colombian accounting and tax law, that the effects of this investment
on the Bank's future consolidated financial will not be material and will be
offset mostly by the sale of more than ten buldings where the Bank is currently
operating in Medellin.
On November 14, 2006, in the interest of establishing itself as a
customer-oriented financial group based on a universal banking model
characterized by its strength, innovation and a wide portfolio of products and
services for all segments, Bancolombia and its subsidiaries changed its
corporate image.
From that date, the financial group and the following subsidiaries and
affiliates of Bancolombia S.A., are denominated as:
- Grupo Bancolombia (formerly Organizacion Bancolombia).
- Fiduciaria Bancolombia S.A. Sociedad Fiduciaria (formerly
Fiducolombia S.A.)
- Banca de Inversion Bancolombia S.A. Corporacion Financiera
(formerly Colcorp S.A.)
- Valores Bancolombia S.A. Comisionista de Bolsa (formerly
Suvalor S.A.)
- Factoring Bancolombia S.A. Compania de Financiamiento
Comercial (formerly Comercia S.A.)
- Leasing Bancolombia S.A. Compania de Financiamiento Comercial
(formerly Leasing Colombia S.A.)
- Bancolombia Puerto Rico Internacional, Inc. (formerly Banco
Corfinsura Internacional Inc.)
- Renting Colombia S.A. (formerly Surenting S.A.)
During December 2006, Bancolombia sold mortgage loans stated in pesos to
Titularizadora amounting to approximately Ps 318.66 billion. Such mortgage loans
were secured by Titularizadora through the issuance of mortgage-backed
securities called TIPS E-2. The purpose of this transaction was to continue with
the securitization of part of Bancolombia's mortgage loans portfolio and improve
BC's profitability margins and liquidity.
26
On December 13, 2006, Almacenar S.A., in a transaction duly authorized by
the Superintendency of Finance, spun off by means of public deed No. 10,131 of
the 71st Notary's Office of Bogota. The spin-off was effective with respect to
third parties upon the filing of the public deed in the public commercial
records of the Chamber of Commerce of Bogota and Medellin on December 20 and 28,
2006, respectively. Due to the spin-off, Almacenar S.A. was divided into three
different companies: the surviving entity named Almacenar S.A. and two other
non-financial companies named Inversiones Valores y Logistica S.A. and LAB
Investment & Logistics S.A.
On December 26, 2006, Bancolombia sold to Portal de Inversiones S.A. its
share holding in LAB Investment & Logistics S.A., one of the three corporations
resulting from the spin-off of Almacenar S.A., consisting of a 94.33% direct
interest and a 3.92% interest held indirectly through Banca de Inversion
Bancolombia S.A. Corporacion Financiera (formerly Colcorp S.A). The price of
sale amounted to approximately Ps 17.29 billion.
Portal de Inversiones S.A. is an entity incorporated by the parties with
which Bancolombia entered into a preliminary agreement on November 23, 2005, and
with which Bancolombia signed a binding letter of intent for the sale of
Bancolombia's share holding in Almacenar S.A. on July 14, 2006. Some of the
original shareholders of Portal de Inversiones S.A. were former officers and
employees of Almacenar S.A.
On February 26, 2007, in a transaction duly authorized by the
Superintendency of Finance, Bancolombia sold to LAB Investment & Logistics S.A.
and Portal de Inversiones S.A. 91.08% of its direct interest and 3.79% of its
indirect interest, held through Banca de Inversion Bancolombia S.A. Corporacion
Financiera, in Almacenar S.A. The transaction price amounted to approximately Ps
11.20 billion.
On April 30, 2007, in a transaction duly authorized by the Superintendency
of Finance, Bancolombia sold to LAB Investment & Logistics S.A. and Portal de
Inversiones S.A., 3.567% of its direct interest in Almacenar S.A. The
transaction price amounted to approximately Ps 2.1 billion.
Bancolombia will temporarily use Inversiones Valores y Logistica S.A., the
other company resulting from the spin-off of Almacenar, for the purposes of
holding certain real estate and other assets.
On December 21, 2006, by means of a transaction duly authorized by the
Superintendency of Finance, Valores Simesa S.A. spun-off and was divided into
two companies: the surviving entity still named Valores Simesa S.A. and a
company named Inversiones Valsimesa S.A. After the spin-off, Compania
Metalurgica Colombiana S.A. - Comecol merged with and into Valores Simesa S.A,
with Valores Simesa S.A as the surviving entity.
Also, during 2006, as duly authorized by the General Shareholders Meeting
and the Board of Directors, Bancolombia made donations to different entities in
a total amount of Ps 22,596 million represented mainly in fixed and foreclosed
assets. The beneficiary entities contribute to social development, protection
and welfare, culture, civic-mindedness, charity, health and/or education.
Bancolombia does not have any commercial relations with such beneficiary
entities except for those related to the rendering of financial services.
Bancolombia will try to obtain an additional income tax deduction of up to 25%
of the amount of such donations in accordance with the terms of Colombian tax
regulations currently in effect.
27
Also during 2006, Bancolombia purchased beneficiary rights of Patrimonio
Autonomo Fideicomiso CV Sufinanciamiento for an approximate amount of Ps 267,862
million. The Patrimonio Autonomo Fideicomiso CV Sufinanciamiento was constituted
by Sufinanciamiento S.A. - Compania de Financiamento Comercial and Fiduciaria
Bancolombia S.A. for the purpose of transferring Sufinanciamiento's loans.
Pursuant to the contract, Fiduciaria Bancolombia S.A. manages the transferred
loans, collects the payments and uses the payments according to certain
instructions. In the same contract, the fiduciary delegated the management and
collection of payments of the transferred loans to Sufinanciamiento who has to
report to the fiduciary the performance of the loans.
As of December 31, 2006, the transferred loans amounted to Ps 198,681
million.
On January 9, 2007, Bancolombia made a capitalization of Sufinanciamiento
S.A. - Compania de Financiamento Comercial of approximately Ps 23.72 billion.
As of January 25, 2007, Bancolombia Panama S.A. had acquired 50,000 shares
of Suleasing Internacional S.A., equivalent to 100% of Suleasing Internacional
S.A.'s outstanding shares, from Inversiones CFNS Ltda., Bancolombia S.A. and
Leasing Bancolombia S.A. Compania de Financiamiento Comercial. The acquisition
was completed in a series of transactions duly authorized by the Superintendency
of Banking of Panama. The value paid by the Bancolombia Panama was approximately
US$ 12.7 million.
On March 30, 2007, Bancolombia made a capitalization of Sufinanciamiento
S.A. - Compania de Financiamento Comercial in the amount of Ps 28.47 billion.
PUBLIC TAKEOVER OFFERS
During 2006, 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.
On December 22, 2006, Bancolombia announced, that it has reached a
definitive agreement with a group of the controlling shareholders of Banagricola
S.A., a sociedad anonima organized under the laws of Panama, ("Banagricola"),
through Bancolombia's wholly owned subsidiary Bancolombia Panama S.A., to
acquire their 52.9% (currently 53.089144%) controlling interest and up to 100%
of the outstanding shares of Banagricola S.A. and its subsidiaries for an
aggregate amount of approximately Ps 2,004 billion (approximately US$ 900
million) in cash (including transaction expenses) pursuant to a public tender
offer to be made simultaneously in Panama and El Salvador.
Banagricola is a holding company with several subsidiaries dedicated to
banking, commercial and consumer activities, insurance, pension funds and
brokerage, among which are Banco Agricola S.A. in El Salvador and Banco Agricola
(Panama) S.A. in Panama.
The transaction will include the acquisition of all of Banagricola's
subsidiaries, including the commercial and retail banking, insurance, pension
funds and brokerage activities.
28
According to financial sector information from the El Salvadorian
Financial System Superintendency, Banagricola has a strong franchise in the El
Salvadorian financial market, including a large retail bank in El Salvador which
holds through its subsidiary Banco Agricola a 29% market share in terms of loans
and deposits; it is a significant pension fund manager and holds through its
subsidiary AFP Crecer a 52% market share in terms of affiliates; and it is also
the largest insurer in El Salvador, through its subsidiary Asesuisa, with a 23%
market share.
As of December 31, 2006, Banagricola had a loan portfolio of over US$ 2.3
billion and a solid and growing client base of over one million clients who are
served through a network in El Salvador that is comprised of approximately 122
branches, 347 ATMs and 133 additional points of sale.
The acquisition of Banagricola will position Bancolombia as a one of
several key players in Central America. Thanks to El Salvador's high credit
rating status, its dollarized economy and Banagricola's solid financial
performance, Bancolombia expects to be able to increase its income generation
and diversify its loan portfolio mix, which we expect will reduce risk and
exposure concentration.
Banagricola's low cost, broad and diversified retail deposit base coupled
with efficient cost controls give Banagricola key competitive advantages. In
addition, potential synergies from this transaction, such as improvement in
international funding for Bancolombia, transfer of know how, best practices and
cross selling opportunities, are expected to further enhance Bancolombia's
earnings. This transaction is expected to be accretive to earnings from 2007
onwards, excluding any effect of potential synergies and one-off charges.
On December 29, 2006, after the announcement of the Banagricola
acquisition by Bancolombia, Fitch Ratings placed the "C" (individual), "BBB-"
(local currency long term) and "F3" (local currency short term) ratings of the
Bank and its subsidiaries on "negative watch" rating due to the possible impact
that such transaction may have on Bancolombia's consolidated capital adequacy.
On May 2, 2007, Fitch ratings defined the ratings for Bancolombia and its
debt as follows: "C/D" (individual), "BB+" (local currency long term IDR) and
"B" (local currency short term). It was also announced that the following
ratings remain the same "BB+" (foreign currency long term IDR) and "B" (foreign
currency short term).
On March 27, 2007, pursuant to resolution S.B.P. No. 33, the
Superintendency of Banking of Panama authorized Bancolombia Panama, to acquire
up to 100% of the outstanding shares of Banagricola.
On March 30, 2007, pursuant to resolution No. 004969, the Superintendency
of the Financial System of El Salvador authorized Bancolombia Panama, to acquire
indirectly, through the Panamanian corporation Banagricola S.A., the Salvadorian
corporations Inversiones Financieras Banco Agricola S.A., Banco Agricola S.A.
and Aseguradora Suiza Salvadorena S.A.
Other related authorizations were previously granted by the Salvadorian
Antitrust Regulator ("Superintendencia de Competencia de El Salvador") pursuant
to Resolution SC-010-S/C/R-2007 dated March 29, 2007 pursuant to which it was
approved the market concentration derived from the acquisition of shares of
Banagricola by Bancolombia Panama.
29
The Bank has obtained loans from foreign financial institutions amounting
to US$ 590 million which will be used for the purchase of foreign currency loans
of Bancolombia Panama at market conditions and pursuant the corresponding
authorizations and applicable law. The proceeds of these transactions will be
used by Bancolombia Panama S.A. for the acquisition of Banagricola.
On April 2, 2007 Bancolombia Panama S.A. entered into Stock Purchase
Agreement with the majority shareholders of Bienes y Servicios, S.A. ("BYSSA")
whereby it undertook to acquire a controlling stake in BYSSA, a corporation
organized and existing under the laws of the Republic of El Salvador. The Stock
Purchase Agreement provided that Bancolombia Panama S.A. will launch a tender
offer in El Salvador in order to acquire at least 50.8349% and up to 100% of all
the issued and outstanding shares of BYSSA. The maximum purchase price payable
in the BYSSA tender offer could amount to approximately US$ 75 million. BYSSA
has a significant number of shareholders in common with Banagricola. BYSSA
and its subsidiaries provide printing, outsourcing and other services to
different companies of the Conglomerado Financiero Banagricola (Banagricola
Financial Group). In addition, BYSSA is the sole shareholder of Banagricola de
El Salvador, Inc., a company organized and existing under the laws of the State
of California, which is engaged in the money transmittal business in states such
as California, Maryland, Nevada, New Jersey, Virginia and in the District of
Columbia. If the BYSSA Stock Purchase Agreement is terminated, BYSSA is obliged
to transfer to Bancolombia Panama S.A., Banagricola de El Salvador, Inc. for US$
6 million and to enter into a long-term service agreement with Banagricola
and/or its subsidiaries.
On April 9, 2007, after obtaining all the required authorizations,
Bancolombia Panama S.A. initiated a simultaneous public tender offer in El
Salvador and Panama, for the acquisition of not less than 53.089144% and up to
of 100% of the common shares of Banagricola S.A. The tender offer was completed
on May 8, 2007. As of May 9, 2007, the preliminary results indicate that the
total number of shares tendered represented approximately 89% of the total
issued and outstanding shares of Banagricola S.A. We currently expect the tender
offer to settle on May 16, 2007.
CAPITAL EXPENDITURES AND DIVESTITURES
During 2004, total capital expenditures of the Bank amounted to Ps 46.86
billion. Such investments were made mainly in hardware (Ps 26.88 billion),
software (Ps 5.29 billion), and furniture and equipment (Ps 14.69 billion).
During 2005, total capital expenditures of the Bank, amounted to
approximately Ps 51.15 billion. Such investments were made mainly in hardware
(Ps 34.74 billion), software (Ps 671 million), and furniture and equipment (Ps
12.3 billion).
During 2006, total capital expenditures of the Bank, amounted to
approximately Ps 104.57 billion. Such investments were made mainly in hardware
(Ps 55.40 billion), software (Ps 1.05 billion), and furniture and equipment (Ps
18.31 billion).
In addition, in 2005 and 2006, the Bank made, on an unconsolidated basis,
a series of capital investments amounting to approximately Ps 155.72 billion,
the most relevant of which are described below.
30
- In 2005, approximately Ps 23 billion was invested in
connection with the Conavi/Corfinsura merger, mainly in
hardware (Ps 16.24 billion) and in furniture and equipment (Ps
4.92 billion). In 2006, such related investments amounted to
Ps 41.94 billion.
- Also in 2005, the Bank invested a total of approximately Ps
3.26 billion in upgrading its central computing system. In
2006, no investments were made in connection with the
upgrading of such system.
- Ps 6.76 billion were invested in 2005 in purchasing new ATMs
as well as upgrading the existing ones. In 2006, such
investments amounted approximately Ps 16.33 billion and the
Bank also invested a total of Ps 2.5 billion in purchasing new
electronic points of service ("Punto de Atencion Cercano" or
"PAC").
- In 2006, the Bank finished the overhauling of its computer
technology system at branch level, for a total cost of Ps
27.20 billion which was invested as follows: Ps 9.06 billion
in 2004; Ps 18.12 billion in 2005; and Ps 19 million in 2006.
- The Bank also invested approximately Ps 4.54 billion, Ps 3.4
billion and Ps 5.1 billion in physical security at branch
level during 2004, 2005 and 2006, respectively.
- In addition, during 2005, approximately Ps 2.4 billion were
spent on renovations of the Bank's own buildings as well as of
those buildings the Bank rents. In 2006, such investments
amounted to approximately Ps 897 million. Also in 2006, Ps 188
million were invested in renovation and maintenance work at
the branch network level.
- During the second half of 2005, the Bank initiated the
preliminary stages related to the building of its new
administrative headquarters in Medellin. In 2006 the scope of
the project was increased to include the Bank's subsidiaries.
The current estimated cost of the project is Ps 315.74
billion.
The following table summarizes the Bank's capital expenditures and
divestitures for the years 2004, 2005 and 2006, as of December 31:
31
CAPITAL EXPENDITURES (PS MILLION) 2004 2005 2006 TOTAL
------------------------------------------- ------ ------ ------ -------
ACH Colombia - 503 - 503
Bancolombia Puerto Rico Internacional, Inc. - 23,613 - 23,613
Deceval - 1,192 - 1,192
Fiduciaria Bancolombia - 5,317 - 5,317
Leasing Bancolombia 27,177 74,609 30,999 132,785
Multienlace - 6,318 - 6,318
Proteccion - 12,464 - 12,464
Redeban Multicolor - 2,198 - 2,198
3001 255 19,382 14,551 34,188
Suleasing Internacional 5,711 8,685 14,396
Suramericana de Inversiones - 58,525 - 58,525
Valores Bancolombia - 33,135 - 33,135
Tecnibanca - 26 - 26
Titularizadora Colombiana - 11,161 - 11,161
Sutecnologia - 113 1,192 1,305
Renting Colombia - 15,831 - 15,831
Inversiones CFNS - 7,700 - 7,700
Comisionista de Colombia - 4 - 4
Fundicom 850 36 - 886
Promotora de Hoteles Medellin 42 7 - 49
Patrimonio Autonomo Autoamerica
(Securitization) - 3,460 - 3,460
Inmobiliaria Bancol - 27 - 27
Grupo Aval Acciones y Valores - 13 - 13
Textiles Fabricato Tejicondor - 11 234 245
Future Net 2,136 - 1,712 3,848
Factoring Bancolombia - - 44,238 44,238
Todo Uno Colombia - - 796 796
Sufinanciamiento - - 8 8
Suleasing International USA, Inc - - 1,119 1,119
Suleasing Internacional do Brasil - - 22 22
Camara de Compensacion de Divisas de Colombia - - 80 80
Almacenar - - 2,050 2,050
Colombiana de Inversiones - - 675 675
Inverargos - - 348 348
ETB - - 310 310
Exito - - 59 59
Tablemac - - 64 64
====== ======= ======= =======
TOTAL EXPENDITURES 30,460 281,356 107,142 418,958
DIVESTITURES (PS MILLION) 2004 2005 2006 TOTAL
----------------------------------------------- ---- ------ ------ ------
Abocol (2) - 27,863 - 27,863
Sociedad Portuaria Mamonal (2) - 109 - 109
Sufinanciamiento (2) - 4 - 4
Carreteras Nacionales del Meta (2) - 106 5,509 5,615
32
DIVESTITURES (PS MILLION) 2004 2005 2006 TOTAL
----------------------------------------------- ---- ------ ------ ------
Compania Metalurgica Colombiana(1) - 195 - 195
Acerias Paz del Rio (2) - 1 - 1
Minerales Industriales (2) - 1,718 - 1,718
Novaventa (2) - 76 - 76
Interconexion Electrica S.A. (2) 500 - - 500
Fideicomiso Devinorte S.A. (2) - - 5,277 5,277
Venrepa(1) - - 2,535 2,535
3001(3) - - 34,873 34,873
Sociedad Portuaria regional de Barranquilla (2) - - 230 230
Ferrominera en liquidacion(1) - - 60 60
Promotora de Manufactura para Exportaciones - - 11 11
Suramericana de Inversiones(2) - - 67,004 67,004
Lab Investment & Logistics(2) - - 17,704 17,704
Grupo Aval acciones y valores(2) - - 13 13
=== ====== ======= =======
TOTAL DIVESTITURES 500 30,072 133,216 163,788
----------
(1) Investments Charged-off
(2) Investments Sold
(3) Settlement
B. BUSINESS OVERVIEW
B.1. GENERAL
The Bank offers a wide range of banking products and services to large
corporate customers, small and medium-sized enterprises ("SME") and individuals.
In its three main customers segments (retail, corporate and construction), the
Bank's products and services include deposits, 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.
According to financial sector information disclosed by the Superintendency of
Finance, BC has the largest service network of any private financial institution
in Colombia, with 701 branch offices and 1,330 ATMs operating in 162 cities as
of December 31, 2006. For the year ended December 31, 2006, BC had a positive
return on average assets of 2.31% and a positive return on average shareholders'
equity of 22.10%. See Item 5. Operating and Financial Review and Prospects for a
detailed discussion on the results of the Bank's operations.
33
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 2004, 2005 and 2006:
BANCOLOMBIA'S (UNCONSOLIDATED) MARKET JANUARY - DECEMBER JANUARY - DECEMBER JANUARY - DECEMBER
SHARE (1) 2004 2005 2006
------------------------------------- ------------------ ------------------ ------------------
Total net loans 13.8% 20.8% 20.9%
Total checking accounts 17.9% 19.5% 20.9%
Total savings accounts 10.5% 18.5% 18.4%
Total time deposits 11.8% 18.0% 15.5%
---------------------------
(1) Including fomer Conavi and Corfinsura since 2005.
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:
34
YEAR ENDED DECEMBER 31, 2004
(in millions of Ps)
Small Governmental
Retail Commercial Business and 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 and expenses from transactions
with other operating segments of the Bank 48,585 27,669 36,438 24,402 - (104,324)
Interest income 597,066 208,387 200,207 43,857 471,270 41,192
Provision for loans losses Ps 51,614 Ps 3,265 Ps 4,358 Ps (326) Ps 4,028 Ps (28,444)
Offshore
Commercial All other
Banking Trust Leasing Brokerage (1) Manufacturing Segments TOTAL
---------- --------- --------- ------------- ------------- --------- -----------
Revenues from external customers Ps 7,234 Ps 49,178 Ps 88,265 Ps 7,842 Ps 42,285 Ps 90,355 Ps 605,010
Revenues and expenses from transactions
with other operating segments of the Bank 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
Provision for loans losses Ps 36,046 Ps 1,165 Ps 20,293 Ps 148 Ps 1,735 Ps 2,504 Ps 96,386
----------
(1) In the Annual Report of 2004, Brokerage was not considered by the
management as an individual operating segment, it was included in "All
Other Segments". For year 2005 and with the introduction of Suvalor as a
result of the Conavi/Corfinsura merger, brokerage become an operating
segment subject to evaluation by the management.
YEAR ENDED DECEMBER 31, 2005
(in millions of Ps)
Small Governmental
Retail Commercial Business Construction and 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 Ps 15,092 Ps - Ps 19,572
Revenues and expenses from
transactions with other operating
segments of the Bank 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 (2) 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 and expenses from
transactions with other operating
segments of the Bank 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
----------
(2) In the Annual Report of 2004, Brokerage was not considered by the
management as an individual operating segment, it was included in "All
Other Segments". For year 2005 and with the introduction of Suvalor as a
result of the Conavi/Corfinsura merger, brokerage become an operating
segment subject to evaluation by the management.
YEAR ENDED DECEMBER 31, 2006
(in millions of Ps)
Small Governmental
Retail Commercial Business Construction and Institutional Corporate
Banking Banking Banking Banking Banking Treasury Headquarters
---------- ---------- ---------- ------------ ----------------- --------- ------------
Revenues from external customers Ps 428,531 Ps 134,992 Ps 117,282 Ps 2,341 Ps 36,377 Ps - Ps (1,012)
Revenues and expenses from
transactions with other operating
segments of the Bank 69,727 297,645 92,006 2,967 54,498 - (455,981)
Interest income 820,398 756,876 387,043 65,823 172,830 400,053 7,462
Provision for loans losses Ps 86,327 Ps (7,179) Ps 37,829 Ps 1,456 Ps (37,106) Ps(30,134) Ps 80,446
Offshore
Commercial All other
Banking Trust Leasing Brokerage Manufacturing Segments TOTAL
---------- --------- --------- ----------- ------------- ----------- -----------
Revenues from external customers Ps 130 Ps 64,550 Ps 38,515 Ps 71,066 Ps 2,999 Ps 82,755 Ps 978,526
Revenues and expenses from
transactions with other operating
segments of the Bank 12,493 1,112 12,691 (850) (705) 73,500 159,103
Interest income 495,222 4,419 437,977 62,454 217 6,629 3,617,403
Provision for loans losses Ps 13,316 Ps 533 Ps 51,741 Ps 3,862 Ps 43 Ps 1,638 Ps 202,772
35
The following table sets forth BC's geographic revenues and long-lived
assets distribution as of December 31, 2004, 2005 and 2006:
AS OF DECEMBER 31,
------------------------------------------------------------------------------------------------
2004 2005 2006
------------------------------ ------------------------------- ----------------------------
(Ps million)
------------------------------------------------------------------------------------------------
LONG LONG LONG
GEOGRAPHIC INFORMATION REVENUES LIVED-ASSETS REVENUES LIVED-ASSETS REVENUES LIVED-ASSETS
---------------------- ------------ -------------- -------------- -------------- ------------ --------------
Republic of Colombia Ps 2,284,240 Ps 340,304 Ps 3,990,600 Ps 734,419 Ps 3,801,365 Ps 878,917
Republic of Panama and Cayman
Islands 183,400 1,692 202,018 29,810 512,629 12,285
Puerto Rico - - 42,897 131 37,171 141
USA 7,002 577 11,965 326 31,630 928
------------ ---------- -------------- -------------- ------------ -----------
Total 2,474,642 342,573 4,247,480 764,686 4,382,795 892,271
Eliminations of intersegment
operations (56,366) (1,119) (37,032) 7,144 (159,103) (13)
------------ ---------- -------------- -------------- ------------ -----------
TOTAL, NET Ps 2,418,276 Ps 341,454 Ps 4,210,448 Ps 771,830 Ps 4,223,692 Ps 892,258
============ ========== ============== ============== ============ ===========
The following table summarizes and sets forth BC's total revenue over the
last three fiscal years:
FOR THE YEARS
---------------------------------------------
2004 2005 2006
------------ ------------ ------------
(Ps million)
---------------------------------------------
REVENUES
Revenues for reportable segments(1) Ps 2,499,321 Ps 4,267,646 Ps 4,755,032
Non-operating income(2) (24,679) (20,166) (372,237)
Elimination of intersegment revenues (56,366) (37,032) (159,103)
------------ ------------ ------------
Total revenues for reportable segments(3) Ps 2,418,276 Ps 4,210,448 Ps 4,223,692
============ ============ ============
---------------
(1) Total revenues for reportable segments includes Revenues from external
customers, Revenues and expenses from transaction with other operating
segments of the same enterprise and interest income.
(2) Non-operating income represent other income classified as revenue for
segment reporting purposes.
(3) 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:
36
FOR THE YEARS GROWTH
----------------------------------------- ---------
2004 2005 2006 2006/2005
----------------------------------------- ---------
(Ps million)
----------------------------------------- ---------
MAIN FEES AND COMMISSIONS
Commissions from banking services Ps 53,082 Ps 101,355 Ps 162,273 60.10%
Electronic services and ATMs fees 39,163 101,299 85,049 (16.04%)
Branch network services 37,929 48,984 62,403 27.39%
Collections and payments fees 38,654 56,670 74,708 31.83%
Credit card merchant fees 8,251 10,076 8,150 (19.11%)
Credit and debit card annual fees 80,290 205,606 238,898 16.19%
Checking fees 49,391 54,846 60,083 9.55%
Warehouse services 49,072 62,155 72,494 16.63%
Fiduciary activities 50,425 60,131 62,114 3.30%
Brokerage fees 8,669 68,231 67,034 (1.75%)
Check remittance 10,850 10,579 11,040 4.36%
International operations 23,997 36,484 34,281 (6.04%)
Fees and other service expenses (40,715) (48,087) (70,866) 47.37%
---------- ----------- ---------- -----
TOTAL FEES AND INCOME FROM SERVICES, NET Ps 409,058 Ps 768,329 Ps 867,661 12.93%
========== =========== ========== =====
B.3. OUR BUSINESS
Bancolombia is a full service financial institution engaged in retail
banking, corporate banking and other financial activities directed toward its
major customer segments which are retail, corporate and construction. The Bank
offers traditional banking products and services, such as checking accounts,
saving accounts, time deposits (which are tradable certificates of 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 business activities into three primary segments:
"Retail and SMEs Banking", "Corporate Banking" and "Construction Banking", the
main characteristics are briefly explained in this section.
These segments are also disclosed in the Notes to Consolidated Financial
Statements as follows: "Retail and SMEs Banking" is divided into two reportable
segments, Retail Banking and Small Business Banking while "Corporate Banking" is
included in the reportable segment Commercial Banking. "Construction Banking" is
included in the Notes to Consolidated Financial Statements without any
difference from this section.
37
B.3.i. RETAIL AND SMALL-AND MEDIUM-SIZED ENTERPRISES ("SMEs") BANKING
In moving towards a universal banking model, the Bank provides retail and
SMEs banking services to a total of 7 customer segments, comprised of both
individuals and corporations, offering the Bank's customers a wide range of
products and services. This is an important banking division with regard to the
volume of deposits and commissions obtained, which at the same time creates
value for the Bank as a whole. According to BC's customer information system,
this division of the Bank had more than 5,112,878 customers as of December 31,
2006.
As of December 31, 2004, 2005 and 2006, BC's Retail and SMEs banking
division represented 37%, 27% and 28%, respectively, of BC's total loan
portfolio. As of December 31, 2006, this banking division represented 46% of
BC's total loan porfolio, in a non consolidated basis. This includes retail,
commercial, housing and microfinancing loans, representing an increase of 40% as
compared to 2005. As of December 31, 2006, past due loans for these banking
divisions represented 4.0%. As of the same date, in terms of deposits, the
Retail and SMEs Banking Division represented 60.3% of the aggregate and 72.8% of
the commissions received by BC. This division represented 63.7% of the total
commercial management income (including intermediary income and fees) for both
BC and subsidiaries, representing a 26.3% increase in 2006.
In 2006, as a result of the Conavi/Corfinsura merger, BC redefined its
Retail and SMEs service segmentation policy, by adding the Personal Plus Banking
segment (for the mid-income bracket) in order to provide BC customers with more
adequate value proposals for their financial needs.
Following is a brief description of each of the 7 customers segments in
this division (Personal Banking, Personal Plus Banking, Preferential Banking,
Prestige Banking, SMEs Banking, Entrepreneurial Banking and Government SMEs
Banking), including their respective portfolio of products and services as well
as certain significant achievements accomplished in 2006.
B.3.i.a. PERSONAL BANKING SEGMENT
The Personal Banking segment provides services to individuals with monthly
income of up to Ps 1 million, such as employees, housewives, pensioners,
children, young students and freelance professionals.
BC offers to customers in this segment the possibility of accessing the
financial markets, providing them with a portfolio of products that are both
economic and easily handled. In addition, this segment offers permanent customer
service via BC's extensive network of branch offices located throughout Colombia
and in different channels, thereby presenting a solution to their financial
needs and providing an excellent service to customers, many of whom are having
their first experience in the financial sector.
38
The number of customers for each sub-segment that comprises this segment,
is as follows:
SUB-SEGMENTS AS OF DECEMBER 31, 2006
---------------------- -----------------------
High Income 738,890
Low Income 2,787,033
---------
Total Personal Banking 3,525,923
=========
The subsegmentation of the Bank's customers is a tool used by BC's sales
force which allow them to market and target products that are suited for the
customers' level of income and its other needs.
The Bank offers the following products and services to the customers in
the Personal Banking segment (the basic portfolio is offered to all customers in
this segment while the complementary portfolio is offered according to the
customer's particular needs).
Basic Portfolio
These customers are, in general, dealing with their first experience in
the financial sector and, given their economic capacity, are provided with
straightforward products that are easy to handle and have special tariffs. Some
of these products include:
- Different savings accounts plans;
- Debit cards;
- Bancassurance (life/tuition insurance), for more information
see Item 4. Information on the company - B. Business Overview
- B.5. Products and Services - B.5.iv. Other Products -
B.5.iv.d Bancassurance (Life/Tuition/Residential Insurance;
- Plan Semilla (an investment fund managed by Fiduciaria
Bancolombia);
- Mortgage loans for low income housing (Vivienda de Interes
Social- VIS) ; and
- Credit card (MasterCard Ideal).
Complementary Portfolio
Some of the products offered as part of the complementary portfolio are:
- Children's and Young People's savings accounts (up to the age
of 25);
- Voluntary pension funds;
- Personal loans;
- Credit card (Visa Exito; cobranding card);
- International money transfers;
39
- Prepaid card (debit card that is not associated to a savings
account and is used among other things for payroll, bonus and
prizes);
- Credit cards (MasterCard Classic, Visa Classic and American
Express);
- Student credit card (Gente U credit card);
- Payroll loans;
- Time deposits;
- Household insurance; and
- Mutual investment funds.
Progress and Innovations
Below is a summary of certain key features of this segment in 2006.
- 50% of customers in this segment are employees, and for this
group the Bank has developed a portfolio of products combining
different savings and financing options which are described
below.
- In November 2006, BC introduced the MasterCard Ideal Credit
Card on a large-scale level. This card was designed especially
for the low-income bracket. As of December, 31 2006, BC had
38,000 cards in circulation.
- In 2006, BC paid more than 1,000,000 international money
transfers, through 9 agreements that the Bank has signed with
remittance agencies and 4 financial institutions. 22% of said
transfers were automatically credited to customer accounts.
- In 2006, BC sold more than 300,000 insurance policies for
life, tuition and home-owners insurance, making BC the second
largest insurance policies vendor in Colombia(1).
- Non-banking correspondents ("Corresponsales No Bancarios"), a
new distribution channel incorporated in 2006, had a
significant impact in this segment. For more information about
this channel see Item 4. Information on the Company - B.
Business Overview - B.4. Distribution Network.
B.3.i.b. PERSONAL PLUS BANKING SEGMENT
The Personal Plus Banking segment provides services to individuals with
monthly income between Ps 1 million and Ps 5 million such as employees,
individuals with independent means, freelance professionals, pensioners and
housewives.
-------------
(1) Source: Federacion de Aseguradores Colombianos - Fasecolda
40
BC offers to customers in this segment a broad portfolio of products and
services designed to satisfy all the customers needs with regard to
transactions, investment and financing. BC also offers these customers a
comprehensive network of branch offices as well as on-line access to products
and services.
This segment is divided into the following two subsegments:
CUSTOMERS AS OF DECEMBER 31,
2006 (CUSTOMER INFORMATION
SUB-SEGMENTS SYSTEM)
----------------------------------- ---------------------------------
Basic (1) 908,929
High-End (2) 258,070
Total Personal Plus Banking Segment 1,166,999
----------
(1) Basic: Customers earning monthly incomes ranging from Ps 1 million to Ps 2
million.
(2) High-End: Customers earning monthly incomes ranging from Ps 2 million to
Ps 5 million.
The Bank offers the following products and services to the customers in
the Personal Plus Banking segment (the basic portfolio is offered to all
customers within this segment while the complementary portfolio is offered
according to the customer's particular needs).
Basic Portfolio
- Savings accounts and debit cards;
- Credit cards (MasterCard Classic, Visa Classic and American
Express Blue);
- Personal credit, AudioPrestamo loans (disbursed by
phone/Internet) or payroll loans;
- Mortgage loans (Casa Propia para Todos - CPT);
- Funds offered by BC's subsidiaries (Valores Bancolombia y
Fiduciaria Bancolombia); and
- Insurance policies (life, home and tuition insurance).
Complementary Portfolio
- Checking accounts and overdrafts;
- Credit card (American Express Green);
- Time deposits with BC and its subsidiaries (Leasing
Bancolombia and Sufinanciamiento);
- AFC savings accounts (Ahorro para el Fomento de la
Construccion - AFC);
- Pension banking (Bancapensiones); and
- International money transfers.
41
Progress and Innovations
Below is a summary of certain key features of this segment in 2006.
- As it relates to the MasterCard franchise, in 2006 BC lead the
market in purchase volume, number of cards issued and
accumulated billings. The Bank also offers its customers a
degree of distinction and recognition with the American
Express credit cards, an exclusive franchise for the benefit
of BC's customers.
- On March 6, 2006, the CPT product was launched, consisting of
loans targeting individuals wanting to purchase new or
existing housing or to build their own homes. The impact in
the market together with the extensive experience that former
Conavi has in the mortgage loan segment, has positioned BC as
one of the lead players in this product and has been
instrumental in more Colombians being able to acquire their
own homes.
- BC is also a leader in sales to collective customer groups
(i.e. customers with similar characteristics, needs and
expectations such as pay roll employees and pensioners) by
means of specialized sales forces. Using this method the Bank
is able to handle, advise and assist its customers much more
efficiently.
B.3.i.c. PREFERENTIAL BANKING SEGMENT
The Preferential Banking segment provides services to individuals with
monthly incomes of more than Ps 5 million or annual sales of more than Ps 100
million such as employees, pensioners, students, housewives, individuals with
independent means or freelance professionals.
BC offers to these customers personalized attention provided by an account
manager or executive, as well as an exclusive portfolio of products and services
and certain preferential banking procedures.
The increase in the number of customers in this segment and the
cross-selling indicator ("CSI") are shown in the table below:
2004 2005 2006(i)
----------------- ---------------- ---------------
Numbers of Customers 51,526 58,641 77,132
Cross-selling indicator 5.05 5.22 4.87
================= ================ ===============
------------
(i) Includes the number of customers who are serviced by the preferential
service branch and the high-income branch format.
(Source: BC's customer information system)
42
The Bank offers the following products and services to the customers in
the Preferential Banking segment (the "basic portfolio" is offered to all
customers in 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 an overdraft line of credit;
- Savings accounts;
- Preferential debit cards; and
- AudioPrestamo loans (disbursed by telephone or
internet);
- Fiducuenta (fixed income fund);
- Mortgage loans and Prestahogar housing loans;
- AFC saving accounts; and
- Credit cards (Personal, Gold and Platinum).
Complementary Portfolio
- Personal loans and preferential loans;
- Vehiprestamo loan for purchase of vehicles;
- Pension banking ;
- Mutual funds;
- Time deposits (in Colombian pesos or U.S. dollars);
- U.S. dollar accounts;
- Credit cards (Visa Cayman);
- Financial leasing for vehicles and housing; and
- Insurance policies (life, home, tuition insurances).
As of December 31, 2006, the Bank offered to the Preferential Banking
customers the following exclusive portfolio of products:
- Preferential accounts;
- Preferential loans;
- Loans and Audioprestamo loans (at a preferential rate);
- Preferential debit cards;
43
- Preferential savings; and
- Credit cards (Platinum).
Progress and Innovations
The following is a summary of certain key features of this segment in 2006.
- Four new Preferential Banking service branches were opened in
Bogota, Medellin, Cali and Barranquilla for the exclusive purpose
of attending the most important customers in this segment.
- The management program of this segment has been extended to the
former Conavi network. In this program the Bank has selected the
former Conavi's customers who satisfy the Preferential Banking
Segment's parameters required by this banking segment.
Approximately 15,000 customers from the former Conavi network
were selected in order to proceed with this initiative. This
initiative lead to the training of 190 managers and 95 tutors
(Account Managers) in the philosophy and characteristics of this
segment and its specialized customer service.
- The centralized management of this segment was extended to
Bogota, where two executives service customers from different
branches.
- In 2006, this segment launched a new line of credit in which
pensions held with Proteccion S.A.(2) may be pledged. As of
December 31, 2006 a total of Ps 10.7 billion were loans
disbursed.
- In 2006, commercial initiatives were deployed to increase the CSI
and the financial contribution provided by the customers in this
segment, mainly promoting mortgage loans with the CPT product,
pre-approved credit quotas and credit cards and upgrading the
Classic credit cards to Gold credit cards.
B.3.i.d. PRESTIGE BANKING SEGMENT
The Prestige Banking segment works with both individuals and family
businesses with managed assets with a net worth of more than US$ 100,000. The
added value proposal focuses on providing the segment with optimum management
and comprehensive advisory services, as well as the opportunity to access other
products for the purpose of managing both local and international portfolios.
As of December 31, 2006, this segment consisted of more than 1,400
customers managed by the Bank and more than 2,000 customers with assets
exceeding US$ 100,000 who are managed by Valores Bancolombia.
-----------
(2) Proteccion S.A. is a Colombian pension and severance fund.
44
The Bank offers the following products and services to the customers in the
Prestige Banking segment (the basic portfolio is offered to all customers in
this segment while the complementary portfolio is offered according to the
customer's particular needs).
Basic Portfolio
- Off-shore:
- Checking accounts, savings accounts and time deposits issued
by Bancolombia Panama, Bancolombia Cayman and Bancolombia
Miami Agency.
- Fixed and variable income products offered through Suvalor
Panama.
- Fixed and variable income products offered through different
correspondent agreements that Valores Bancolombia has
entered into with Smith Barney, UBS International and Man
Investments.
- In Colombia:
- Time deposits offered through Bancolombia and its
subsidiaries in the country.
- Trust and securities funds offered by Fiduciaria Bancolombia
and Valores Bancolombia, respectively.
- Fixed and variable income products offered through Valores
Bancolombia.
Complementary Portfolio
- Credit cards issued by Bancolombia Cayman;
- Secured loans; and
- Purchase of foreign exchange, forwards, options, etc.
Progress and Innovations
Below is a summary of certain key features of this segment in 2006.
- In 2006, this segment was further consolidated with a
portfolio including both BC products and those obtained by
correspondent bank agreements through Valores Bancolombia
and Suvalor Panama.
- In 2006, Bancolombia's integrated business model was
defined, thus the Bank expects an increase in the results
obtained by the entire
45
team management and the consolidation of the strategic
handling of this segment into a single business unit.
B.3.i.e. SMEs BANKING SEGMENT
The SMEs Banking segment serves both individuals and corporations with
annual sales ranging between Ps 250 million to 10.5 billion who work
independently (as part of the retail, cattle-farming and agricultural sectors,
among others).
The SMEs Banking Segment is divided into managed and non-managed
subsegments. Customers in the managed subsegment are directly serviced by a
branch manager or a SMEs executive responsible for providing permanent
assistance and advice. Each manager or SMEs executive is responsible for an
average of 120 customers. Customers in the non-managed subsegment instead are
served by non-especific managers.
The value added proposal offered to customers in the SMEs Banking segment
consists of the following:
- Personalized customer service by a senior executive or branch manager,
with comprehensive knowledge of the customer;
- Basic product portfolio according to different economic sectors;
- Online and e-mail solutions; and
- Advisory services and educational programs for customers.
The number of customers in this segment has increased as follows:
% INCREASE
CUSTOMERS 2004 2005 2006 2006/2005
--------------------- ------ ------ ------- ---------
Managed customers 29,450 30,601 40,603 32.69%
Non-managed customers 44,487 46,275 76,496 65.31%
------ ------ ------- -----
TOTAL 73,937 76,876 117,099 52.32%
====== ====== ======= =====
The Bank offers the following products and services to the customers in the
SMEs Banking segment (the basic portfolio is offered to all customers in this
segment while the complementary portfolio is offered according to the customer's
particular needs).
Basic Portfolio
- Checking accounts;
- Savings accounts;
- Integrated Treasury Management ("Manejo Integral de
Tesoreria" or "MIT");
- Local currency loan portfolio (including ordinary and online
Credipago loans;
- Corporate credit cards; and
46
- Colombian taxes and customs duty payments.
Complementary Portfolio
- Foreign currency loans;
- Loans funded by Colombian development banks;
- Leasing;
- Treasury loans;
- Discounting of invoices;
- Trade finance;
- Acquiring business (See Item 4. Information on the Company -
B. Business Overview - B.5. Products and Services -
B.5.iii.c. Acquiring Business);
- Mutual and investment funds;
- Special lines of credit guaranteed by the Colombian National
Guaranty Fund (Fondo Nacional de Garantias or "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 or
"FAG"); and
- Fiduciaria Bancolombia special products and services.
Progress and Innovations
Below is a summary of certain key features of this segment in 2006.
- The FNG awarded Bancolombia for being the bank that
disbursed the greatest volume of FNG-guaranteed loans within
the SMEs Banking segment in the entire country as of
December 31, 2006. As of such date, BC had disbursed a total
of Ps 1 billion in loans secured by the FNG.
- This segment grew 36.7% with regard to its commercial loan
portfolio, reaching Ps 2,891 billion as of December 31,
2006. Its leasing portfolio grew 74% reaching a total of Ps
1,096 billion as of December 31, 2006.
- In 2006, a "pre-management" initiative was commenced with
regard to customers from the former Conavi network (a total
of 5,316 customers), producing excellent results.
- In 2006, BC continued with its efforts to encourage customer
loyalty in the SMEs Banking segment through training events,
where BC was able to train a total of 3,200 customers in
subjects such as "Corporate Governance", "Family business",
"Coaching" and "Strategic Planning". These events were held
in main cities and towns in Colombia to ensure the best
possible nationwide coverage.
47
B.3.i.f. ENTREPRENEURIAL BANKING SEGMENT
This Entreprenurial Banking segment serves customers with annual sales of
up to Ps 250 million and with assets in an aggreagate amount of up to 501 SMMLV
which as of December 31, 2006 was equivalent to Ps 204.4 million, such as
corporations and individuals with independent means, retailers, manufacturers of
goods and service-providers, agricultural farmers, cattle farmers and
transporters directly involved in these activities.
Freelance professionals with a degree, who exercise their profession in an
independent manner such as dentists, lawyers and accountants, among others, do
not qualify for this segment.
The added value proposal for this segment consists of the following:
- A product portfolio based on satisfying the financing,
transaction, savings, investment and insurance needs of the
customer.
- Service and access to all the products available via the
virtual branch, telephone banking and ATMs, as well as PAC
located in outlying areas.
- Extensive network of branches throughout Colombia.
- A responsive, comprehensive and specialized service for BC's
customers.
As a result of the Conavi/Corfinsura merger, the Entrepreneurial Banking
segment was divided in the following subsegments:
NUMBER OF CUSTOMERS AS
OF DECEMBER 31, 2006
(CUSTOMER INFORMATION
SUB-SEGMENTS SYSTEM)
----------------------- -----------------------
Without sales (1) 154,527
Simple (2) 39,793
Extended (3) 18,263
Expanded (4) 9,266
-------
TOTAL 221,849
=======
----------
(1) Without sales: annual sales between Ps 0 and Ps 1 million
(2) Simple: annual sales between Ps 1 million and Ps 50 million
(3) Extended: annual sales between Ps 50 million and Ps 120 million
(4) Expanded: annual sales between Ps 120 million and Ps 250 million
The Bank offers the following products and services to the customers in the
Entrepreneurial Banking segment (the basic portfolio is offered to all customers
in this segment while the complementary portfolio is offered according to the
customer's particular needs).
48
Basic Portfolio
- Credit (for working capital, purchase of fixed assets or
substitution of fixed assets);
- Savings account;
- Debit cards; and
- Bancassurance.
Complementary Portfolio
- Plan Semilla;
- International money transfers;
- Account for deposits originated from international money
transfers (Cuenta Giros);
- Checking accounts; and
- Credit cards.
There are two service methodologies for customers in the Entrepreneurial
Banking segment:
- Services provided through the BC's network, which include
products such as deposits, loans, credit cards, insurance and
others. 57% of BC's customers are provided with an electronic
payment solution via debit cards or credit cards.
- Service provided through BC's "Specialized Executive" model which
consists of a personalized service with a network of 13
specialized offices located in the main cities of Colombia
(Bogota, Medellin, Cali, Barranquilla and Bucaramanga), where 100
credit executives provide banking services based on the personal
and financial profiles obtained from customer analysis. In order
to receive this personalized service, customers must meet certain
additional criteria, such as maximum loan disbursements of Ps
10.2 million (in 2006); maximum of 10 employees; and not having
business registrations that would otherwise allow them easy
access to the financial sector.
Progress and Innovations
Below is a summary of certain key features of this segment in 2006.
- As of December 31, 2006, the loan portfolio was Ps 21.9 billion
for customers who were serviced by the specialized team with an
49
average maturity term of 13 months. This represents a growth rate
of 28% as compared to 2005.
- As of December 31, 2006, the CSI for the customers serviced by
BC's team of specialized executives was 3.32 products per
customer.
- 27% of the customers in this segment use BC as their first time
provider of financial services.
B.3.i.g. GOVERNMENT SMEs BANKING SEGMENT
In August 2005, after the Conavi/Corfinsura merger, a decision was made to
create a new line of business to attend the governmental segment as part of the
Bank's Retail and SMEs Banking services.
The customers that comprise this segment are:
- Municipalities with income levels lower than the equivalent of
30,000 SMMLV, as well as towns with income in excess of this
figure where corporate and government banking services are not
available, together with their respective decentralized entities.
- Regional entities (departamentos) where there are no corporate
banking services available, along with their respective
decentralized entities.
BC provides customers in this segment with specialized support in
connection with regulation compliance and the dynamics of the public sector
through five "government" managers responsible for rendering personalized
customer service and advice through BC's nationwide network of offices.
Likewise, the Bank also provides a specific line of credit for the customers in
this segment, in compliance with applicable legislation in Colombia.
As of December 31, 2006, the Government SMEs Banking segment had a total of
1,750 customers distributed in 245 branches.
The Bank offers the following products and services to the customers in the
Government SMEs Banking segment (the basic portfolio is offered to all customers
in this segment while the complementary portfolio is offered according to the
customer's particular needs).
Basic Portfolio
- Checking accounts (following the regulations of the Colombian
Treasury Department (Direccion del Tesoro Nacional));
- Savings accounts;
- Time deposits with BC and its subsidiaries;
- Collection and payment services;
- Corporate virtual banking and PC banking (Enlinea);
50
- Ordinary loans;
- Loans funded by Colombian development banks; and
- Treasury loans.
Complementary Portfolio
- Leasing;
- Investment funds;
- Trust funds including public trust, management and payment
services and guaranty trusts;
- Todo1 (e-commerce and e-business); and
- The PACs, located in outlying areas).
Progress and Innovations
Below is a summary of certain key features of this segment in 2006.
- In 2006, the Government SMEs Banking segment presented a 37%
increase in savings account deposits, 14% in checking account
deposits and 56% in the total loan portfolio as compared to 2005.
- Due to the expansion of the PACs, this segment secured a
substantial growth achieving a total of 211 PACs and registering
businesses (deposits and loans) amounting to Ps 36.8 billion as
of December 31, 2006 of the volume of business handled by BC's
PAC, 63% corresponds to the Government SMEs Banking segment.
B.3.ii. CORPORATE BANKING
The Corporate Banking segment provides commercial banking products and
services to customers active in substantially all sectors of the economy.
Corporate customers are segmented by their economic activity as well as by their
size. This segmentation ensures adequate support and specialized pricing
according to the customer's risk level.
As of December 31, 2006, the Bank had 5,620 corporate customers managed by
account managers. Customers are classified by economic sector as follows:
SECTOR 2004 2005 2006
--------------------------------------- ------- ------- -------
Agriculture (1) 233 315 417
Commerce (2) 695 1,101 1,319
Construction (3) 231 174 224
Government (4) 96 101 116
Manufacturing of Industrial Products (5) 426 553 556
Manufacturiing of Consumer Products (6) 481 619 647
Telecom and Media (7) 89 98 126
51
SECTOR 2004 2005 2006
--------------------------------------- ------- ------- -------
Individuals (8) 126 134 148
Natural Resources 156 194 268
Financial Services (9) 413 451 548
Non-Financial Services (10) 499 806 1,004
Other (11) 100 388 257
------- ------- -------
TOTAL 3,545 4,934 5,630
======= ======= =======
----------
(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: Includes the manufacturing of
metallic products, building materials, paper & packing products, plastics
and chemical products.
(6) MANUFACTURING OF CONSUMER PRODUCTS: Includes the manufacturing of products
related to food, drinks, tobacco, textiles, apparel, footwear,
pharmaceuticals and health and 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 level of 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 five subsegments:
- MIDDLE MARKET: customers with annual sales above Ps 10.5 billion.
- CORPORATE: customers with annual sales above 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,
central administration, territorial and decentralized entities.
- INTERNATIONAL: corporations with presence/operations in more than
six countries in all economic sectors.
In 2006, the total amount of corporate banking loans, which includes all
types of credits extended to customers of this segment, was Ps 12,757,849
million as compared to Ps 9,539,307 million in 2005 and Ps 5,413,956 million in
2004. As of December 31, 2006, 2005 and 2004, total corporate loans represented
52%, 51% and 54%, respectively, of the Bank's total loan portfolio. As of
December 31, 2006, 0.8% of all corporate banking loans were past due.
The Bank offers products and services to customers in the Corporate Banking
segment based on their economic activity (the basic portfolio is offered to all
customers in a particular Corporate Banking segment while the complementary
portfolio is offered according to the customer's particular requirements).
52
Basic Portfolio for all economic sectors
- Checking and savings accounts;
- Internet and PC banking;
- Cash management;
- Money payments and collections; and
- Products offered by BC's subsidiaries.
Manufacturing Complementary Portfolio
- Loans for working capital and factoring;
- Off-shore products offered through Bancolombia Panama,
Bancolombia Cayman, Bancolombia Puerto Rico Internacional, Inc.
and Bancolombia Miami Agency;
- Warehouse and logistics;
- Checking and savings accounts;
- Leasing; and
- Products offered byValores Bancolombia.
Retailing Complementary Portfolio
- Loans for working capital, loans funded by development banks and
credit and distribution cards (distribution cards enable the Bank
to handle everything from risk analysis to account receivables
collection. The use of this card is restricted and goods or raw
materials can only be bought from the vendor company, ensuring
that the line of credit can only be used for this purpose);
- Foreign exchange and international trade;
- Off-shore checking accounts; and
- Means of payment in foreign currency.
Agriculture Complementary Portfolio
- Long-term loans funded by development banks and working capital
loans;
- Off-shore checking accounts and associated payment products; and
- Foreign exchange and international trade.
Non-Financial Services Complementary Portfolio
- Leasing and loans funded by development banks;
- Money collection and payment services;
53
- Investment funds; and
- Repurchase agreements and DAT ("Deposito de Ahorro a Termino" or
"DAT") (3).
Natural Resources Complementary Portfolio
- Long-term loans 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.
----------
(3) A short-term bank deposit agreement that allows holders to receive interest
payments from BC as provided in specific regulations approved by the
Superintendency of Finance.
54
Basic Portfolio for International Corporate Customers:
- Factoring;
- Project finance; and
- Leasing.
B.3.iii. CONSTRUCTION BANKING SEGMENT
The Construction Banking segment targets the construction industry and, as
of December 31, 2006, Bancolombia had 702 customers in this segment.
Customers in this segment are grouped according to the following
subsegments:
- Construction SMEs: Customer currently developing 2 projects
(applied to the construction business amounting for more than Ps
1,000 million and less than Ps 10,000 million in annual sales).
- Construction Corporate 1: Customer currently developing 3 to 4
projects (applied to the construction business for an amount
between Ps 10,000 million and Ps 20,000 million in annual sales).
- Construction Corporate 2: Customer currently developing More than
5 projects (applied to the construction business amounting for
more than Ps 20,000 million in annual sales).
Portfolio
The Bank offers the following products and services to its customers in the
Construction Banking Business:
Savings and Investment:
- Checking accounts;
- Savings accounts;
- DAT; and
- Time deposits.
Products offered through Fiduciaria Bancolombia:
- Pre-sales trust management services;
- Complete property trust services;
- Cash management trust services; and
- Construction project management and payment trust services.
55
Credit and Financing:
- Construction loans;
- Loans for pre-operative expense;
- Working capital loans;
- Treasury loans; and
- Property leasing.
Structure
Construction Banking services are provided by BC's sales team, which is
responsible for servicing the professional construction industry, through
account managers and by an extended commercial team (Equipo Comercial Ampliado
or "ECA") which is responsible for providing this segment with a broad portfolio
of products and services that provide a solution to the customer's financial
needs.
We also have a team of commercial advisors responsible for servicing
individuals in the sales rooms of different construction projects of BC's
construction customers or on actual property being sold. Commercial advisers are
also responsible for providing support for mortgage loans at BC's branches and
providing advisory services for customers that are part of the Proteccion
Pension and Severance Fund, both at the customers' officers and at Proteccion's
branches.
B.4. DISTRIBUTION NETWORK
The Bank provides its products and services through a branch network,
mobile branches (or "Puntos de Atencion Moviles", which consist of a commercial
advisor who visits small towns on specific days, to offer BC's products and
services to the local population), non-banking correspondents, an ATM network,
the personal virtual branch, the corporate virtual branch, content portals,
Facturanet, the payment button, PC banking, telephone banking systems and PACs.
Through these channels, customers may carry out a wide variety of
transactions related to account balances or credit cards, cash withdrawals,
payment of credit card statements, personal and utilities bills and transfer of
funds among others.
Please find below a brief description of each of such channels.
B.4.i. BRANCH NETWORK
As of December 31, 2006, BC's branch network consisted of 701 offices
located in 152 cities and towns throughout Colombia. During 2006, BC opened 30
new branches, 6 of which are located in towns where the Bank had no presence
before. Branches in main cities are distributed as follows: Bogota 179, Medellin
120, Cali 57 and Barranquilla 34. A total of 7 branch offices were closed during
2006.
56
As of December 31, 2006, BC had 19 mass-market collection offices, where
mass-market transactions are centralized (collection of mobile phones, public
services, social security and pensioners' payments, among others) in order to
support the growth of commercial businesses, to strengthen its efficiency in
cash transactions, through the specialization of operations, and to provide
transactional support to the traditional branch network.
BC continues to expand its market share with its mobile branch network and
currently renders services to 12,801 customers. At the beginning of 2006, BC had
a network of 58 PAMs which the Bank expanded to a total of 211 as of December
31, 2006. Five 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, by using multiple task cashiers and
multiple task commercial advisors. In addition, these extension branch offices
include Bancolombia's electronic distribution channels.
Likewise, the Bank opened 4 offices with a preferential banking format.
These offices are specially created to service the Private Banking segment and
High-Income customers. Through these offices, BC offers specialized services
which focuse on commercial management and a low level of transactions as they
relate to cash management.
Decree 2233 of 2006, extended the scope of the Colombian financial system
authorizing the rendering of financial services through what is known as
non-banking correspondents. Such legislation allowed for points of service to be
opened without the need to make substantial investments in building adaptations
in order to provide people in towns that previously had no banking facilities
whatsoever with access to banking services. Taking full advantage of this
legislation, BC pioneered the concept of non-banking correspondents in Colombia
with a point of service created in the town of Chipata. This point of service in
Chipata currently handles an average of 17 transactions per day.
BC offers, through its non-banking correspondents, the following services
as authorized by Article 2 of Decree 2233 of 2006:
- Collection (include public services) and transfer services;
- Credit card advances;
- Savings and checking account deposits and withdrawals;
- Credit card payments; and
- Payment of loans.
As of December 31, 2006, BC had 25 points of service under this new format
and as of February 28, 2007, BC had 31 non-banking correspondents.
B.4.ii. ELECTRONIC DISTRIBUTION CHANNELS
BC has a network of alternative electronic distribution channels, designed
to enable cost-effective transactions and services. In order to make its branch
offices more efficient, the Bank has worked to transfer customer transactions
from branch offices to electronic distribution channels.
Transactions effected through electronic distribution represented more than
83% of all transactions in 2006.
57
The following are the electronic distribution channels offered by the Bank:
B.4.ii.a. AUTOMATIC TELLER MACHINES - ATM NETWORK
As of December 31, 2006, BC's ATM network consisted of 1,330 machines,
located in a total of 162 cities and towns throughout Colombia, representing a
monthly average of 15,000,000 transactions. In 2006, a total of 165 new machines
were installed in branch offices, shopping malls, service stations, supermarkets
and companies which substantially increased the number of transactions
performed.
During the last quarter of 2006, Bancolombia purchased 200 new ATMs, 23 of
which were installed in October replacing an identical number of ATMs that had
to be withdrawn upon having reached the end of their useful life. The remaining
177 ATMs are scheduled to be installed in 2007.
BC's ATMs offer access to the Cirrus and Plus networks as well as to the
Colombian Redeban-Multicolor network. This service is widely used by both BC's
own customers and by customers from other banks.
B.4.ii.b. INTERNET BANKING
BC offers the following Internet banking channels.
Corporate Virtual Branch
This platform allows corporate customers to consult their account balances
and monitor transactions in their deposit accounts, loans and credit cards, make
virtual term investments, disburse loans, make payroll and supplier payments and
complete other transactions in real time with the superior level of security
that BC believes its customers require.
In 2006, BC migrated the former Conavi electronic management system
providing customers with a safe and robust platform that allows customer access
to the transactions described in the previous paragraph. Also, BC offers
different types of security arrangements are offered based on customer needs.
The number of transactions carried out through the Corporate Virtual Branch
increased from 23 million in 2005 to 34 million in 2006, with a 48% increase
resulting from customers' migration from the former Conavi electronic management
to the Corporate Virtual Branch channel in November 2006. This increase was also
due to the increase in the number of customers who, in addition to checking
their account balances online, also used the system for other online
transactions. The number of customers also increased by 36% from 22,500 in 2005
to a total of 30,620 in 2006.
58
Personal Virtual Branch
In 2006, BC was focused on technological development required to integrate
the transactions performed through Bancolombia, the former Conavi and the former
Corfinsura onto a single website.
The integration of these three different websites was completed on November
4, 2006, allowing customers access to BC's Personal Virtual Branch which
provides access to the customers' checking and savings accounts, credit cards,
bank loans and other products.
In February 2006, BC enabled funds to be transferred to accounts in other
banks through the ACH network, as well as registering third-party accounts in
order to transfer these funds. These transactions have been widely accepted
among the users of this channel.
In 2006, 101,430,475 transactions were performed through the Personal
Virtual Branch, which represented an annual increase of 48% as compared to 2005.
Likewise, the number of online customers increased by 30% over fiscal year 2006,
totaling 1,414,193 customers as of December 31, 2006.
Content Portals
After integrating both the technology and the brands of all 3 entities
(Bancolombia, former Conavi and former Corfinsura), their respective websites
were combined under the single BC's site www.grupobancolombia.com, where
products from both BC and its subsidiaries (Bancolombia Panama, Bancolombia
Cayman, Bancolombia Puerto Rico Internacional, Inc., Bancolombia Miami Agency,
Banca de Inversion Bancolombia S.A. - Corporacion Financiera, Factoring
Bancolombia S.A. - Compania de Financiamiento Comercial, Fiduciaria Bancolombia
S.A., Leasing Bancolombia S.A. - Compania de Financiamiento Comercial, Renting
Colombia S.A, Sufinanciamiento S.A. - Compania de Financiamiento Comercial,
Suleasing Internacional, Valores Bancolombia S.A. - Sociedad Comisionista de
Bolsa, Suvalor Panama S.A.) are offered, with these being classified according
to the following segments: Personal, Personal Plus, Preferential, Prestige,
Entrepreneurial, SMEs, Corporate and Government. Also, following Bancolombia's
web strategy, there is a website for each subsidiary, with a uniform
presentation format for the different products and services offered.
Also, customers and visitors to the Bank's website have access to economic
and financial information through periodic analyses published by BC's economic
and strategic research department.
In 2006, the Colombian Chamber of Information Technology and
Telecommunications awarded Valores Bancolombia (formerly Suvalor) with a prize
for the best transaction site in Colombia in the category of Best On-Line
Banking Website.
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. 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.
59
As of December 31, 2006, a total of 1,150,103 payments were made through
Facturanet, representing an increase of 51% as compared to the same period in
2005. This increase was mainly due to the increase in payments made by Corporate
Banking customers.
Payment Button
Bancolombia offers two options for making purchases and payments via
Internet:
- e-Pagos, a button through which only the Bank's customers can
make purchases and payments via the Internet.
- Electronic Services Supplier (Provedor de Servicios Electronicos,
or "PSE"), a centralized, standardized system, developed by ACH
Colombia S.A. ("ACH") through 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.
The number of transactions made through these payment buttons in 2006 was
219,832 representing a 98% increase as compared to the same period in 2005. This
increase was mainly in the PSE channel, since a large number of companies are
paying their employees' social security contributions through this service.
This increase can also be attributed to the amount of new payment buttons
being granted to companies and retail establishments that are now entering the
e-commerce business.
B.4.ii.c. PC BANKING
Enlinea Bancolombia, the remote access platform of the Bank, allows
corporate customers to connect to the Bank via modem through an application that
is installed on a computer at the customer's location. This cash management
application has fewer features than the Corporate Virtual Branch but it has been
a business solution for many years now. Historically it was an application that
the Bank provided its customers before creating the Corporate Virtual Branch.
In 2006, approximately 27,034,000 transactions were performed using the
Enlinea service, as compared to 44,011,529 transactions performed the year
before. This represents a decrease of 38% due to the former Conavi's customers'
migration which was focused on the Corporate Virtual Branch and not on the PC
Banking. As of December 31, 2006, a total of 4,110 customers were using this
service.
B.4.ii.d. TELEPHONE BANKING
BC's telephone banking offers customized and convenient advisory services,
efficient transactions and the sale of products and services, extending BC's
commercial and service strategy to customers of all segments.
60
The telephone banking service received 47,937,799 calls during 2006;
representing an increase of 6% as compared to 2005. Also, customers completed
approximately 54 million transactions through telephone banking in 2006.
In 2006, an average monthly total of 561,135 customers were serviced from
both the Bancolombia and former Conavi networks. The segment that most uses this
channel is the Personal segment with an average participation of 81%, whereas
the Preferential Banking segment which has a constant participation of 8%. 26%
of the customers serviced through this channel used a commercial advisor.
The telesales line is serviced by specialized sales representatives that
offer products and services to customers according to their needs. In 2006, the
telesales line's process was integrated within the system, thereby creating a
tool that enables all requests recorded via the incoming line to be duly
monitored and followed up. After this new tool was launched in June, 2006, a
total of 58,160 requests have been received (both from the Bancolombia as well
as the former Conavi networks), which represent a total of 20,089 products.
The telesales line serviced a total of 123,000 requests in 2006, with a
total penetration rate of 46%, and an effective sales rate of 4% with regard to
the volume of contacts made. This in turn represented a total of 3,481 products.
In order to increase customer satisfaction, in 2006 new services and
transactions were introduced through the telephone banking including:
- CPT LINE: A new specialized line servicing mortgage loans for
housing. This line is managed by 22 advisors who receive an
average of 35,000 calls per month;
- CUSTOMER LOYALTY SUPPORT LINE: Through this line, BC's customers
may redeem the miles or points awarded to them as part of BC's
loyalty programs, so that these may either be credited to
frequent flyer programs with the participating airlines or
exchanged for articles or products that appear in the
corresponding catalogues;
- CUSTOMER RETENTION CENTER: With this service, customer retention
is extended through this channel going from a product- orientated
strategy to a customer-orientated strategy. The retention
strategy is carried out by both qualitative and quantitative
benefits;
- ETHICS LINE: This line is available to employees of both
Bancolombia and its subsidiaries to report possible fraudulent
dealings;
- SUPPORT LINE FOR THE ELECTRONIC POINT OF SERVICE: Formerly known
as Conavitel, the purpose of this support line is to provide
functional and operating support to all those customers that have
been assigned an Electronic Point of Service;
- VALORES BANCOLOMBIA'S VOICE RESPONSE: Such service was modified
in order to provide support to and clarify questions from Valores
Bancolombia's employees regarding the securities discounting
procedure via an interactive voice response system ("IVR"). Under
this system, the employee calls in order to resolve
61
his/her questions about this procedure in the moment he/she
assists a customer;
- RENTING COLOMBIA'S VOICE RESPONSE SERVICE: Such service was
modified in order to provide an emergency assistance option,
which is handled by the Suramericana line (Sulinea);
- SUPPORT FOR THE LEASING BANCOLOMBIA OFFICES: where calls from the
Medellin and Bogota headquarters are relayed onto Multienlace
S.A. who is responsible for channeling these calls. When
necessary, these calls are transferred to the corresponding
personnel at Leasing Bancolombia;
- CUSTOMER SERVICE LINE FOR BANCOLOMBIA PUERTO RICO INTERNACIONAL,
INC.: where customers are provided with general information and
advice regarding the products and services offered by this
subsidiary;
- SETTING UP THE PASSWORD FOR THE CORPORATE LINE: where a group of
specialized advisors provide support for business customers to
create passwords for the Corporate Virtual Branch;
- CORPORATE CREDIT CARD SERVICE HOTLINE: Such hotline was
transferred to Multienlace S.A., a customer service call-center,
in order to optimize services for business customers requesting
information concerning their credit cards;
- CHANGE IN THE IVR MENU: where customers can pay their Tigo
mobile-phone invoices or purchase prepaid mobile-phone minutes
for such mobile operator;
- TELEMARKETING (CUSTOMERS REJECTED FROM CPT): the purpose of this
line is to cancel customer appointments in connection with
advisory services scheduled for mortgage loans (CPT), once the
customer has been rejected based on their credit references;
- TELEMARKETING (DOCUMENT REQUESTS): In order to provide support to
the claims department, outgoing calls are made through this
channel by requesting the documents needed in order to facilitate
the investigations made in connection with possible cases of
fraud as reported by the customers. An average of 50 to 60 calls
are made to customers per day; and
- TELEMARKETING (WELCOME TO MORTGAGE BANKING): To offer a
post-sales service, after the mortgage loan is disbursed, calls
are made to the customers in order to welcome them to the Bank
and inform them of the date on which the first mortgage loan
installment is due. In 2006, 3,150 calls were made welcoming a
total of 517 customers.
62
B.4.ii.e. ELECTRONIC POINT OF SERVICE ("PACS"):
As part of the launching of the Bank's new image, the point of service
formerly known as Conavitel has been renamed Electronic Point of Service (Punto
de Atencion Cercano Electronico). Through such service BC's customers may
consult balances and carry out transactions in checking and savings accounts,
transfers funds to their own accounts or to those of third parties at BC or
other financial institutions, make payments to public utility services, make
credit card payments, make disbursements of loans into accounts and make changes
to credit and debit card passwords.
As of December 31, 2006, there were a total of 9,928 machines, which
accounted for a total of 16,212,830 transactions.
During the last quarter of 2006, 12,904 new machines were purchased to
replace all the installed equipment and to service the sales of this product
during 2007, guaranteeing the best possible security for customers in performing
their transactions and complying with international standards required by Visa
and MasterCard for this type of machines.
B.4.iii. SALES FORCE
As of December 31, 2006, more than 8,700 employees were part of BC's sales
force and were organized as follows:
- 1,086 employees offer preferential service to BC's managed
customers from the higher value-generating segments;
- 224 employees are dedicated to BC's business and corporate
banking services, each specialized in the different economic
sectors to provide customized attention to BC's larger customers.
This team includes 23 managers specialized in construction
banking, ensuring the retention of key customers involved in
construction projects, and allowing for the further development
of mortgage banking;
- 3,190 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;
- 3,072 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 (we also have 596 employees
responsible for ensuring that the tellers interact with customers
in a proper manner and in compliance with the Bank's parameters
and international rules, among others);
- The Contact Center team is composed of a total of 558 employees,
499 of whom recommend and sell products;
- More than 280 employees comprise the extended sales team, selling
BC's more specialized products, including foreign currency and
cash
63
management products and services; 224 of the employees in this
group work in the Business and Corporate Banking Segment; and
- The subsidiaries specialized sales force have a total of 540
employees providing specialized advisory services to all
segments, offering different financial management products
required by BC's customers.
In 2006, the BC network (not including former Conavi and Corfinsura
network) sold a total of 1,374,383 products, as compared to 1,115,786 products
sold in 2005, showing an increase of 23%. In 2006, the BC network (including
former Conavi and Corfinsura network) sold 2,287,901 products.
Approximately 1,075 employees of the total sales force have variable
compensation plans based on the amount of value created. The rest of the sales
personnel are remunerated in accordance with a commercial management plan, under
which the employees receive a quarterly or semi-annual 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 within different departments of the Bank, providing incentives to
those employees that successfully differs customers that become sales. During
2006, a total of 17,067 customers were referred among the sales personnel,
generating 11,312 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.5. PRODUCTS AND SERVICES
B.5.i. LOAN PORTFOLIO
The following is the loan portfolio available for Retail and SMEs Banking
segments:
B.5.i.a. PERSONAL BANKING LOAN PORTFOLIO
The different loans available in individual and entrepreneurial segments
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. As of December 31, 2006, BC's total personal loans
amounted to Ps 1,380 billion arising from 504,656 loans, with an
annual growth of 3.37% as compared to December 31, 2005.
- 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
64
from the amounts due and payable from the company's accounts.
- EDUCATIONAL LOAN ("CREDIESTUDIO"): Through this loan the Bank finances
undergraduate and graduate students at preferential rates. This loan
is offered for students in tier one universities authorized by the
Colombian Institute for the Promotion of Higher Learning (ICFES or
"Instituto Colombiano para el Fomento de la Educacion Superior").
- VIRTUAL LOAN ("AUDIOPRESTAMO"): The Bank offers its individual
customers a revolving line of credit. Disbursements are carried out in
real time and the corresponding amounts are deposited in the
customers' primary account or in the account of a third party who has
previously registered through the Internet, Contact Center or
Electronics Points of Service. The amount of credit available is
adjusted as the loan is gradually paid off, allowing for the ongoing
use of the line of credit. As of December 31, 2006, BC's line of
virtual loans totaled Ps 388 billion, with a year-over-year growth of
11.5%, a customer base of 105,361 and Ps 805 billion in individual
credit limits.
- MICRO-BUSINESS LOAN ("MICROCREDITO"): The Bank offers this loan to the
Entrepreneurial segment. It is especially designed to finance this
segment's working capital or investment needs with an automatic
guarantee of 70% of the loan with the FNG. This product is
complemented by advisory services and tuition especially 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, 2006, BC's line of
micro-business loans amounted to Ps 23 billion, with an annual growth
of approximately 21.05%.
- 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 financing needs of employees who work
in companies that are Bank's customers.
- FREE INVESTMENT LOAN: UVR-linked rate loans for individuals and
entities in all segments.
65
- The loan is generally guaranteed by a first mortgage on the
property, a lien on a life insurance policy covering the
borrowers and a lien on the fire and earthquake insurance
covering the property itself.
- The maximum loan amount corresponds to 60% of the property's
commercial value and the loan's term ranging from 5 to 10
years.
B.5.i.b. SMEs LOAN PORTFOLIO
- ORDINARY LOAN PORTFOLIO: These loans are granted to SMEs based on the
assets maintained in their checking accounts, savings accounts and
time deposits, in order to satisfy customers' needs. BC's ordinary
loan portfolio also extends to certain special lines such as:
- ENVIRONMENTAL LINE OF CREDIT: A line of credit especially
designed for investments intended to provide a positive
impact on the environment. This line of credit includes an
incentive depending on the level of environmental impact
involved. The incentive is provided by the Secretary for
Economic Issues of the Swiss Government (SECO).
- BUSINESS DEVELOPMENT LINE: In order for companies to access
advisory and consulting programs developed with Vision
(Universidad de la Sabana - Bogota) and all related
activities, BC has launched a Business Development line of
credit (using its own funds) in order to satisfy the needs
of this market segment.
- INDUSTRIAL MODERNIZATION LINE: A line of credit (using BC's
own funds), created to finance all those companies hoping to
modernize their equipment, tools and machinery and who are
implementing a project structured by Banca de Inversion
Bancolombia S.A.
- STANDARD IMPLEMENTATION CREDIT FOR BUSINESSES (Norma Tecnica
Colombiana or "NTC" and International Organization for
Standardization or "ISO"): A line of credit that BC uses to
finance all those companies interested in implementing and
obtaining quality certification for all Colombian Technical
Standards as well as all those other standards granted by
agencies that are duly authorized by the Colombian
Superintendency of Industry and Commerce. Companies may use
co-financing funds from government agencies especially
authorized for this purpose.
- SEVERANCE LINE OF CREDIT: A line of credit through which BC
helps companies to pay employee severance payments, whether
through Proteccion or through any other similar fund.
- TREASURY LOANS: A line of credit that seeks to satisfy customers'
working capital needs generated by temporary liquidity needs and tax
payments.
- Loans funded by Colombian development banks:
66
- BANCOLDEX (Banco de Comercio Exterior de Colombia): A 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 Colombia and abroad.
- FINAGRO (Fondo para el Financiamiento del Sector
Agropecuario): A line of credit for financing the different
phases in goods production, commercialization and/or
transformation processes directly from, connected to, or
complementary to farming and livestock, forestry, fishing,
water, poultry and beekeeping industry activities.
- FINDETER (Financiera de Desarrollo Territorial): A line of
credit that, with credit resources, seeks to support the
execution of programs, projects or investments that generate
local, regional or national development.
The programs, projects or investments financed must be directed toward the
common interest and aimed at improving community living conditions.
- "CREDICAFE" LINE OF CREDIT: A revolving credit limit to be used for
the purchase of raw materials and the payment of workers in the
coffee-producing industry. Easy to use since it grants immediate,
recurring or sporadic disbursements, consultations and payments using
BC's telephone banking.
This product is aimed at the Bank's coffee-growing customers, in
segments such as SMEs. It requires a prior analysis of financial
statements and of specific financing needs based on the payments that
result from the customer's business.
- "CREDICANA" LINE OF CREDIT (FOR THE SUGAR-GROWING INDUSTRY): This line
of credit is part of BC's portfolio of ordinary credit and is financed
with BC's own funds. It is designed to satisfy the needs of the
sugar-growing industry and targets the following cultivation phases:
- Planting;
- Cultivation and crop maintenance; and
- Crop renewal.
- VIRTUAL "CREDIPAGO" LINE OF CREDIT: A revolving 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 is available in 3, 6, 9, 12, and 24 month terms. As of December
31, 2006, the Bank has 3,128 SMEs enrolled in this product, Ps 158
billion in loans and Ps 164 billion in the value of assigned limits
available for use.
The following table summarizes loans extended to individuals and SMEs
in 7 categories and the amount past due for each category:
67
AS A % OF AS A % OF
TOTAL TOTAL
AS OF AS OF AS OF LOAN LOAN PAST DUE/
DECEMBER DECEMBER DECEMBER PORTFOLIO PORTFOLIO PAST DUE TOTAL
31, 2004 31, 2005 31, 2006 2005 2006 LOANS 2006 TYPE OF LOAN
--------------- --------------- --------------- ---------- --------- ---------- -------------
(Ps million except percentages)
RETAIL (1)
Credit cards Ps 392,900 Ps 582,533 Ps 796,175 3.1% 3.2% 40,307 5.1%
Personal loans 1,111,250 1,556,429 2,281,177 8.4% 9.3% 113,514 5.0%
Vehicle loans 381,723 629,326 963,072 3.4% 3.9% 41,641 4.3%
Overdrafts 89,867 101,957 119,882 0.5% 0.5% 11,771 9.8%
Loans funded by domestic
development banks 359,494 403,414 386,283 2.2% 1.6% 12,166 3.1%
Trade financing 54,189 76,643 70,406 0.4% 0.3% 1,403 2.0%
Working capital loans 1,295,643 1,612,650 2,331,999 8.7% 9.5% 57,976 2.5%
------------- ------------ ------------ -------- ------ --------- --------
TOTAL RETAIL Ps 3,685,066 Ps 4,962,952 Ps 6,948,994 26.7% 28.3% 278,778 4.0%
============= ============ ============ ======== ====== ========= ========
-------------------
(1) Includes loans to high-income individuals and SMEs.
B.5.i.c. HOUSING/MORTGAGE LOANS IN RETAIL BANKING
BC offers a pre-approved amount of financing for the purchase of housing.
Such amount is awarded to the customer before the customer chooses the property,
is valid for a period of 9 months and is guaranteed by a life insurance policy.
This service is called "Supercredito".
On October 6, 2006, BC securitized Ps 584.9 billion in UVRs and
subsequently on December 5, 2006, securitized another Ps 316.6 billion of its
loan portfolio in pesos for a total of Ps 901.5 billion in 2006. This measure
was taken in order to improve BC's profitability margins.
BC has granted 103,661 mortgage loans to individuals including its
securitized portfolio. This indicates a year-on-year increase of 7.9%, including
the securitized portfolio.
All such loans are guaranteed with a first mortgage, a life insurance
policy for both the debtor and the co-debtors as well as a fire and earthquake
insurance policy covering the property itself.
- HOMEOWNER LOAN: This is a line of credit that can be used for
purchasing new or existing housing that may be taken either at a fixed
rate of interest for the entire term of the loan or at a UVR linked
rate of interest which is based on the inflation rate.
68
The maximum percentage of financing offered with this line of credit
is 70% of the property's commercial value and 50% of the property's
commercial value in the case of Colombian residents, whose income
consist of remittances from abroad. The term of this loan ranges from
5 to 15 years in the case of the UVR-linked rate and up to 10 years in
the case of the fixed rate of interest, and there are four
amortization plans available, all regulated by the Colombian
Government.
- PURCHASES OF REAL ESTATE OTHER THAN HOUSING: This is a UVR-linked line
of credit that can be used for acquiring property other than housing
that benefits both individuals and entities from all segments.
The maximum amount to be financed is 60% of the property's commercial
value with a term of financing ranging from 3 to 8 years.
- LOW-INCOME HOUSING (VIS) REMODELING LOAN: This is a UVR-linked line of
credit used for remodeling low-income housing (valued at less than the
equivalent of 135 SMMLV.
The maximum amount to be financed is 70% of the total commercial
value of the property in question. The term of this line of credit
ranges from 5 to 15 years and three amortization plans are available,
all of which are regulated by the Colombian Government.
- HOUSING CONSTRUCTION LOAN FOR INDIVIDUALS: This UVR-linked line of
credit is available to individuals that would like to build their own
housing.
The maximum amount to be financed is 70% of the total costs to be
incurred. The term of financing is the period of time it takes for the
housing to be built plus 15 years and three amortization plans are
available, all of which are regulated by the Colombian Government.
- REAL ESTATE CONSTRUCTION LOANS OTHER THAN HOUSING: This is a
UVR-linked line of credit for building property other than housing,
for the benefit of both individuals and entities from all banking
segments.
The maximum amount to be financed is 60% of the total costs to be
incurred. The term of this type of loan is the period of time it takes
for the property to be built plus 8 years.
- SHORT-TERM HOUSING LOANS: This line of credit is for financing the
purchase or remodeling of housing for terms less than 60 months, with
possibilities of paying interest based on either a DTF-linked or a
fixed rate of interest.
B.5.i.d. CORPORATE BANKING LOAN PORTFOLIO
BC has a wide range of products to satisfy the capital needs of BC's
Corporate Banking customers, including working capital loans, trade financing
and loans funded by Colombian development banks.
69
- Working capital loans are the most common type of loan in the
corporate market. These loans are predominantly variable rate or based
on Time Deposit rates, and are 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 for up to
three years.
- Loans funded by Colombian development banks have a variable interest
rate, based on 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. These loans have a variable interest rate.
Additionally, it is a line of credit that seeks to satisfy customers'
working capital needs 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 % OF AS A % OF
TOTAL TOTAL
AS OF AS OF AS OF LOAN LOAN PAST DUE PAST DUE/
DECEMBER DECEMBER DECEMBER 31, PORTFOLIO PORTFOLIO LOANS TOTAL
31, 2004 31, 2005 2006 2005 2006 2006 TYPE OF LOAN
-------------- -------------- -------------- ------------- -------------- ----------- -------------
(Ps million except percentages)
CORPORATE
Trade financing Ps 253,632 Ps 783,894 Ps 777,417 4.2% 3.2% 18,218 2.3%
Loans funded by domestic
development banks 770,331 948,659 321,263 5.1% 1.3% 6,820 2.1%
Working capital loans 4,298,354 7,702,420 11,534,148 41.4% 46.8% 67,267 0.6%
Credit cards 24,621 42,293 50,803 0.2% 0.2% 2,669 5.3%
Overdrafts 67,018 62,041 74,218 0.3% 0.3% 7,716 10.4%
------------- ------------- -------------- ------------ ------------- ----------- -----------
TOTAL CORPORATE Ps 5,413,956 Ps 9,539,307 Ps 12,757,849 51.2% 51.8% 102,690 0.8%
============= ============= ============== ============ ============= =========== ===========
B.5.i.e. CONSTRUCTOR'S LOAN PORTFOLIO
The following is the loan portfolio available for Constructor's customers.
Credit and Financing:
- CONSTRUCTOR LOANS: This line of credit facilitates the building and
commercialization of construction projects to all those companies
dedicated to this business. The project cash flows are managed
allowing the constructor access to the necessary funds as the project
advances Some of its key features are as follows:
70
- Amount to be financed: Up to 80% of the costs of the
project. The financiable costs are: direct costs + indirect
costs + town planning costs + financial costs.
- Guarantee: A mortgage on the plot of land where the property
to be financed is to be built. The building company must
also issue a signed promissory note and it may be necessary
for the partners to provide a guarantee depending on the
degree of risk offered by the project in question.
- Term: The time it takes for the project to be completed plus
a maximum of 9 months in order to sell the property.
- Rates: Depend on the customer segment involved and the
credit risk offered.
- LOANS FOR PRE-OPERATIVE EXPENSE: This is a line of credit offered to
professional constructors for the purpose of facilitating investments
required prior to developing a housing project. Some of its key
features are as follows.
- Amount to be financed: Up to 5% of the costs of the project,
with a ceiling of 50% of the commercial value of the plot of
land.
- Term: Maximum term is the time it takes for the project to
be built.
- Rate: UVR-linked rate.
- Guarantee: A first mortgage on the plot of land.
- PROPERTY LEASING: Property Leasing is an excellent financing
alternative for new and existing property or property being built,
without having to assign working capital for this purpose. The
customer selects the property desired, Leasing Bancolombia acquires it
and it is leased to the customer for the time originally agreed upon.
Once the contract expires, the customer is entitled to acquire the
property for a percentage of its initial value, which is agreed upon
at the outset in the form of a purchase option.
Products offered through Fiduciaria Bancolombia
- PRE-SALES TRUST MANAGEMENT SERVICES: This is an arrangement in which
the constructor signs a trust management agreement with the Trust
Company, Fiduciaria Bancolombia protecting the interests of the
parties participating in the construction project (option-holders).
Once the conditions agreed upon in the trust agreement (break-even
points) are met, the funds received are handed over to the property
developer, or whichever party is responsible for developing the
project, as stipulated in the respective agreement. In fulfilling the
purpose of this agreement, the funds provided by the option-holders
are collected via an extensive network of branch offices and then
invested in individual accounts held in the Fiducuenta ordinary fund,
administered by Fiduciaria Bancolombia.
- COMPLETE PROPERTY TRUST SERVICES: In order to provide the utmost
transparency and professional handling of project funds, the
constructor sets up a separate, self-standing fund by entering into a
commercial trust contract containing the plot of land, the initial
installments, the credit disbursements requested by the
71
constructor and all the other funds that are required for completing
each stage of the project. Fiduciaria Bancolombia is responsible for
administering these funds until the project is completed and the
individual property units are transferred to the buyers.
- CASH MANAGEMENT TRUST SERVICES: When Fiduciaria Bancolombia signs a
commercial trust contract with the constructor of a project,
Fiduciaria Bancolombia proceeds to handle all or part of the funds
belonging to the property development project so as to direct these
exclusively and on behalf of the constructor toward the actual
execution of the project.
- CONSTRUCTION PROJECT MANAGEMENT AND PAYMENT TRUST SERVICES: This is a
type of trust arrangement for constructor offering an efficient
management and administrative capacity for their projects. This
arrangement offers the constructor centralized management capabilities
for all those funds channeled into the project including making all
payments relating thereto, under the complete direction of the Trustor
who details these in the self-standing fund in the form of the
Trustor's contribution to the trust and with this understanding,
retains his or her capacity as constructor and project developer with
regard to all those third parties interested in acquiring the units of
property built. With this arrangement the constructor is able to
simplify the bookkeeping aspects of the project, besides having the
necessary flexibility to implement the contractual relations and
obligations with regard to all those third parties taking part in the
project.
B.5.ii. DEPOSIT PRODUCTS
The Bank offers its customers a variety of checking accounts, savings
accounts, fixed term deposits and other investment products as a result of
arrangements made with BC subsidiaries. As of December 31, 2006, based on
information compiled by the Superintendency of Finance, BC was the number one
bank nationwide in terms of deposits, with a total of Ps 17.46 trillion on a
non-consolidated basis, representing 18.34% of the Colombian market. 25.59% of
BC (non-consolidated) total deposits are in checking accounts, 55.76% in savings
accounts, 17.24% in time deposits and 1.41% to other deposits.
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 at branches, card payments at
authorized points of service, electronic transfers as well as other different
payment and collection means. As of December 31, 2006, on a non-consolidated
basis, BC had approximately 438,875 checking accounts with total deposits of
approximately Ps 4.47 trillion, registering an approximate 35.03% increase as
compared to the approximately Ps 3.31 trillion at December 31, 2005. Checking
accounts usually reach their highest level at the end of the year, affected by
the season. As of December 31, 2006, BC had 20.20% of the market share for
checking accounts in Colombia.
72
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, 2006, on a
non-consolidated basis, BC had approximately 6,213,931 savings accounts with
total deposits of approximately Ps 9.74 trillion, increasing approximately
32.82% as compared to approximately Ps 7.33 trillion in 2005. In addition, BC
offers "Payroll Payment Accounts" to satisfy company payroll payment needs.
Also, BC offers a savings account called "pension payment accounts", exclusively
for the payment of retiree benefits.
B.5.ii.c. AFC SAVINGS ACCOUNTS (AHORRO PARA EL FOMENTO DE LA CONSTRUCCION, OR
"AFC")
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,
freelance professionals or employees who earn income subject to withholding tax
as well as tax-payers who would like to reduce their net taxable income.
As of December 31, 2006, BC had approximately 16,526 AFC savings accounts,
representing a total of Ps 43.1 billion, with a year-on-year increase of 50.69%
as compared to Ps 28.6 billion in 2005.
B.5.ii.d. PROGRAMMED SAVINGS ACCOUNTS
These are savings accounts dedicated exclusively for housing purposes under
a programmed savings method as described in Articles 22 and 23 of Decree 975
dated March 31, 2004. These accounts are available to all those persons
interested in obtaining family housing subsidies(4) provided by the Government
as described in Decree 975 of 2004.
At December 31, 2006, BC had approximately 55,207 programmed savings
accounts, totaling Ps 25.7 billion.
B.5.ii.e. 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, 2006, on a
non-consolidated basis, BC had issued a total of 103,084 time deposits,
amounting to Ps 3,011 billion, as compared to 114,196 time deposits issued which
amounted to Ps 2,750 billion in 2005. It is important to mention that a
considerable volume of time deposits are directly issued by BC's branch network
which guarantees a higher degree of profitability for this product.
----------
(4) The family housing subsidy is a monetary contribution provided by the
Government, which is given to the beneficiary in a lump sum, without having
to be reimbursed, thereby supplementing the beneficiary's savings to be
used to purchase or renovate low-income housing. (Decree 975 / 2004.
Article 2)
73
B.5.ii.f. CASH MANAGEMENT PRODUCTS
BC offers a suite of financial options through its money desk that
facilitate a more adequate handling of liquidity surpluses or shortfalls, serve
as a comprehensive risk management mechanism for both the interest and exchange
rates, and effectively channel foreign exchange operations.
We provide a brief description of these products that additionally
are designed to fulfill the needs of both BC's Personal and SMEs Banking
segments in Item 4. Information on the Company - B. Business Overview - B.5.
Products and Services - B.5.iv. Other Products - B.5.iv.g Treasury Products.
B.5.iii. CREDIT CARDS, DEBIT CARDS AND ACQUIRING BUSINESS
As of December 31, 2006, according to information provided by card
franchiser and their representatives in Colombia, BC was ranked number one in
debit card market, was ranked second in the credit card market, and is market
leader in the acquiring business market.
B.5.iii.a. CREDIT CARD
As of December 31, 2006, BC had a total of 671,522 outstanding
credit cards, including both personal as well as corporate cards, which are
distributed among the following franchises: 288,068 MasterCard credit cards,
234,066 Visa credit cards and 149,388 American Express credit cards. In 2006,
according to information provided by card franchiser and their representatives
in Colombia, BC was ranked second in the credit card billing industry in
Colombia, amounting to Ps 3,277 billion, with a growth of 17.54% as compared to
Ps 2,788 billion in 2005.
The main strategies implemented to achieve these results, both in
number of cards as well as billing volume, were the following:
- MASTERCARD "IDEAL" CREDIT CARD: The 44% increase in the number
of this type of credit card in circulation was the principal
factor driving the growth in performance of MasterCard in
2006. In terms of billings, the growth was 55.2%, which
represents 28.1 points above the rest of the industry's
average. As of December 31, 2006, BC commenced open sales of
this product and therefore the Bank expects good results for
2007.
- VISA CREDIT CARDS: The Visa Classic Card obtained the best
placement levels in 2006 due to the card placement campaign
carried out by BC's sales force.
- COMMERCIAL SOLUTIONS BUSINESS: Bancolombia leads the corporate
credit card market in Colombia, with a 28% share in terms of
billings and a 45.4% share in number of outstanding cards as
of December 31, 2006. Also as of such date, BC had an
aggregate amount of 60,082 outstanding cards and an aggregate
amount of billings volume of Ps 691.2 billion representing
increases from 2005 of 29.7% and 35.8%, respectively.
74
BC's portfolio is comprised of corporate credit cards used
mainly for travel expense, credit cards for centralizing
travel tickets, the BC Distribution Card (tarjeta Bancolombia
Distribucion) and Cash Management Cards for centralizing
business expense.
- CONTINUING EXPANSION OF AMERICAN EXPRESS BUSINESS: BC has held
the exclusive representation of the American Express franchise
in Colombia since November 2002. As of December 31, 2006, the
Bank continued the expansion of its share of the personal
credit card market with a total of 149,388 outstanding cards,
representing 3.3% of the total industry and 4.1% of the
industry in terms of billings. Likewise, American Express has
played an important role in driving the growth in the BC's
credit card business, with an annual increase of 42.27% in
2006, and representing 22.09% of the aggregate number of cards
that BC has placed in circulation in Colombia as compared to
Visa and MasterCard outstanding credit cards.
In March 2006, BC began to sell the American Express cards in
all of the former Conavi branches, selling 22,914 cards in
2006 through this network.
- VISA CREDIT CARD ISSUED BY BANCOLOMBIA CAYMAN: The Bancolombia
Cayman Visa credit card is part of the international Visa
system, can be used worldwide, and is issued by Bancolombia
Cayman. This is a means of payment and financing for customers
in the BC Prestige Banking Segment as well as BC's
subsidiaries abroad. This card offers financing arrangements
with longer terms than the conventional financing. The
financing conditions depend on the balance of the card and the
payments made each month, including advance payments and
purchases made.
- CUSTOMER RETENTION CENTER: The Customer Retention Center
(initially for personal cards) was established for the purpose
of servicing customers who wanted to cancel their credit
cards, offering additional advisory services using a client
performance software in order to retain these customers. This
Retention Center was launched on a nationwide level on June
12, 2006, and has already had a significant impact on BC's
results. During 2006, 9,278 customers were assisted at this
Center, 2,486 of which were retained. The number of customers
retained on a monthly basis has shown a constant uptrend in
2006. At December 31, 2006, the retention indicator was 27%.
B.5.iii.b. DEBIT CARDS
As of December 31, 2006, according to the information provided by
card franchisers and their representatives in Colombia, Bancolombia had the
first position in the Colombian market with a total of 4,132,241 outstanding
debit cards and a 30.76% share of the market. The share of total billings at the
Point-of-Sale level was 11.96% and in terms of aggregate billings (Point-of-Sale
usage and ATMs) BC's share was 38.56% of the total market. The total amount
invoiced was Ps 25,948 billion.
BC's portfolio of debit products consists of the following types of
card:
- Bancolombia Maestro Debit Cards: 3,956,645 outstanding cards;
75
- Bancolombia Maestro Preferential Debit Cards: 5,434
outstanding cards;
- Bancolombia MasterCard Debit Cards: 132,373 outstanding cards;
- Bancolombia MasterCard Preferential Debit Cards: 37,789
outstanding cards; and
- Bancolombia Prepaid Debit Cards: 71,773 outstanding prepaid
debit cards (these are debit cards not associated to any
savings account and are used for payroll, bonus and prizes
among others payments).
As of December 31, 2006, BC had an aggregate amount of 4,132,241
Bancolombia Debit Cards and 71,773 Bancolombia Pre-paid debit cards.
The main factors contributing to this growth have been: (i) the
growth dynamics of the Colombian economy over recent years, (ii) a greater
tendency amongst consumers to use credit and debit cards, (iii) new retail
establishments accepting debit card payments, (iv) implementing exclusive
channels for card usage such as PAC's, (v) encouraging transactions, (vi) for
some deposit plans, account balance consultations and cash withdrawals through
BC's network of ATMs as a free service for Debit Cards, (vii) the strategy of
coupling the opening up of a savings or checking account with a debit card as an
access key, and (viii) the payroll business which has leveraged the placement of
both Maestro debit cards and Prepaid debit cards due to the different plans
based on the customer's purchasing volumes.
B.5.iii.c. ACQUIRING BUSINESS
BC's market share in the acquiring business, this is retail
establishments that accept credit and debit cards issued by BC, reached 42% as
of December 31, 2006, with Ps 7,703 billion in amounts paid to affiliated
establishments and Ps 23.1 billion in commissions received, positioning the Bank
as number one in the market with a 3 point gain in market share.
Since April, 2005 a transaction rate was established, which banks
use in order to determine the commission they will charge to the retail
establishment. As a result, competition among banks in the acquiring business
has grown dramatically, with only 6 Banks maintaining more than a 6% share of
the market. In spite of the considerable pressure on pricing, BC has
consolidated its leadership position on the market.
Bancolombia-Payer and Acquiring Business-:
- VISA, MASTERCARD AND AMERICAN EXPRESS PAYER BUSINESS: At
December 31, 2006, BC had a total of 14,495 affiliated
commercial establishments and an aggregate amount of 25,040
single codes, representing an increase of 11% in affiliates
since 2005. The growth in billings on the part of BC's
affiliated establishments is due in part to the excellent
dynamics of the industry as well as to the constant growth in
affiliation rates and amounts paid.
- ACQUIRING BUSINESS - AMERICAN EXPRESS: As of December 31,
2006, this franchise had an aggregate amount of 62,048
affiliated establishments, registering a 22.6% growth compared
to the prior year. BC continues to be the only acquiring bank
of this franchise in Colombia and has maintained a steady
growth in the number of affiliated retail establishments.
76
BC's responsibilities are signing-up new establishments,
defining discount commissions for the different types of
commerce and paying the sales carried out by the affiliated
establishments in Colombia.
CREDIT CARD BUSINESS - GROWTH
CREDIT CARD - ACCUMULATED BILLING INCREASE
(As of December 31, 2006 - in Ps million) 2005 2006 2005/2006
-------------- ------------ ---------
Master Card Ps 1,391,484 Ps 1,565,211 12.48%
Visa 879,462 1,062,085 20.77%
American Express 517,309 649,902 25.63%
-------------- ------------- ------
TOTAL BANCOLOMBIA Ps 2,788,256 Ps 3,277,198 17.54%
============== ============= ======
B.5.iv. OTHER PRODUCTS
As a full service bank, BC offers a broad portfolio of financial
products and banking services. Some important services not reported above are
listed in this section.
B.5.iv.a. INTERNATIONAL REMITTANCES
BC has become one of the leading banks in the family remittance
market. In 2006, BC entered into 3 new agreements with money remitters abroad
which, together with previous 10 agreements (6 money remitters companies and 4
banks) and BC's strategy to extend banking services to a wider range of
customers, has allowed BC to offer highly attractive services to Colombians
living abroad and to their respective families in Colombia.
B.5.iv.b. LOCAL REMITTANCES
BC accepts check deposits drawn on other banks or from cities
other than the city where the account was opened.
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, thereby acting as intermediary
between the Colombian tax authority - National Deparment of Tax and Customs
(Departamento de Impuestos y Aduanas Nacionales or "DIAN", and the taxpayers.
This represents a no-cost, short-term funding source for the Bank. As of
December 31, 2006, BC held 36% of the tax collection market share, 34% of the
national tax collection market share and 42% of the customs duty collection
market share.
77
Taxes are tipically collected during the months of April, May and
June, when income tax payments are usually due. In addition, there are also
monthly withholding tax payments and payments made in May in connection with the
deadlines for the Value Added Taxes ("VAT") and the first installment of the
taxes on capital gains. Customs duties are usually due at the beginning or the
end of each month, since this is when permanent customs users make their monthly
payments. BC ratifies its commitment to the progress of Colombia by assisting
the general public with the fulfillment of their tax obligations.
B.5.iv.d. BANCASSURANCE - (LIFE/TUITION/RESIDENTIAL INSURANCE)
Through its branch network, BC offers various insurance products
(life insurance, home insurance and personal accident insurance) from Compania
Suramericana de Seguros, one of the major insurance companies in Colombia. BC
was the first bank in Colombia to enter the Bancassurance line of business in
1997.
The various products offered in this area are mainly targeted to the
Personal, Personal Plus and Entrepreneurial customers, who traditionally do not
have this type of insurance.
BC is the market leader in the bancasurance business, with 306,388
insurance policies sold in 2006, representing an increase of 32.7% as compared
to 2005. BC also has a total of 506,000 outstanding insurance policies,
representing a 20% increase as compared to 2005.
B.5.iv.e. PENSION BANKING ("BANCAPENSIONES")
Through its branch network, the Bank offers a voluntary pension fund
"Rentapension", managed by Fiduciaria Bancolombia, which allows for tax benefits
to be obtained through periodic savings, complements the beneficiary's mandatory
pension, provides interest payments, allows for proposed savings targets to be
secured and improves the beneficiary's overall standard of living.
In 2006, BC sold 8,100 pension plans as compared to 14,748 sold in
2005, which represents a 45% decrease. As of December 31, 2006, this pension
fund managed assets totaling Ps 137.1 billion as compared to Ps 149 billion as
of December 31, 2005, representing an 8% decrease.
These decreases are due to a high volatility level on the domestic
public debt market (prices of fixed-income securities have fallen) since the
beginning of the year but specifically since March, 2006. As a consequence,
investment funds, pension funds and trust funds, among others, were adversely
affected.
BC offers to the Preferential Banking segment, the voluntary pension
fund "Multinversion", managed by Administradora de Fondos, Pensiones y Cesantias
Proteccion S.A. "Multinversion", a savings plan associated with Proteccion's
voluntary pension fund, was created to provide customers with an easy and modern
investment alternative with access to both domestic and international markets
and, at the same time, tax benefits. As of December 31, 2006, this pension fund
managed assets totaling Ps 21,268 billion and the number of customers affiliated
in the Preferential Banking segment was 3,244.
78
B.5.iv.f. AUTOMATIC PAYMENT SYSTEM
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 2006, approximately 43,000,000 payments were conducted via
the automatic payment system.
B.5.iv.g. TREASURY PRODUCTS
The Bank's Treasury Division is responsible for the management of
the Bank's treasury products and its proprietary liquidity as well as its
foreign exchange and securities positions. The Treasury Division complies with
the guidelines established by the Vice Presidency of Risk related to market and
liquidity risk.
Treasury products were more dynamic during 2006, showing a
significant increase in the number and amount of operations with customers in
product lines like foreign exchange spot market and forward transactions, and
public debt. During 2006 there was a large increase of transactions with SMEs,
which is the segment of small companies attended by Bancolombia.
Internal and external interest rates and the macroeconomic
environment translated into significant volatility of bond prices that affected
the results of the Bank's proprietary portfolios. This factor was the main
driver of BC's treasury results during 2006.
In the local market, the yield of bonds increased after the first
quarter due to a change of the monetary policy of the Colombian Central Bank
that started to increase its short-term reference rate. Due to the strong
Macroeconomic performance during the second semester, the prices of the bonds
increased and it reflected positively in the results of the portfolios.
In the international market, a high level of global liquidity,
strong economic fundamentals in emerging economies and a supportive US Treasury
market during 2006 translated into a significant reduction in the credit spread
of the bond portfolio yielding important capital gains and positive results for
BC.
Among other activities, 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.
79
- REPURCHASE AGREEMENTS OR "REPOS": In Repo transactions, 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 TIME DEPOSITS: BC captures funds in Colombian pesos by issuing
time deposits. Interest rates on such time deposits can be fixed or linked to
the Colombia's average of term deposits ("DTF") or the consumer price index
("CPI").
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.
TAX-FREE DEBT INVESTMENT PORTFOLIO ("TIPS"): These securities, issued by
Titularizadora Colombiana, resulted from a mortgage loans securitization process
and allow investors such as Bancolombia to get and additional benefit because of
its tax - free income.
PUBLIC DEBT INVESTMENT PORTFOLIO: 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.
The Bank is authorized to purchase and sell the following currencies: U.S.
dollars, Euros, Pounds Sterling, Swiss Francs, Japanese Yen, Swedish Kronas,
Danish Kronas, Canadian dollars, Australian dollars and Venezuelan Bolivars, and
generally any other foreign currency that is published by international
information systems as provided for by applicable legislation and has been
approved by BC.
SOVEREIGN AND CORPORATE SECURITIES INVESTMENT PORTFOLIO: BC invests in
fixed yield sovereign securities issued by the governments and corporations of
different countries.
CREDIT DERIVATIVES INVESTMENT PORTFOLIO: 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 amount. This is done to fulfill 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.
The Bank is authorized to purchase and sell the following currencies: U.S.
dollars, Euros, Pounds Sterling, Swiss Francs, Japanese Yen, Swedish Kronas,
Danish Kronas, Canadian dollars, Australian dollars and Venezuelan Bolivars, and
generally any other foreign currency
80
that is published by international information systems as provided for by
applicable legislation and has been previously approved by BC.
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.
SIMULTANEOUS OPERATIONS: Simultaneous operations are those in which a
person (the original seller) sells to another (the original buyer) fixed-income
securities with the understanding that the latter shall sell to the former on a
later date and at the price established when the operation is carried out,
securities equivalent to those originally sold. Likewise, the original seller is
bound to re-purchase all those securities sold to the original buyer, according
to the terms and conditions agreed upon in the contract governing this
arrangement.
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$, Peso,
Euro) for another cash flow denominated in a different currency.
EUROPEAN OPTION: BC offers an option that can be defined as an arrangement
which grants the buyer of an option the right, but not the obligation of
purchasing (Call Option) or selling (Put Option) in U.S. dollars, at a
particular time according to the type of option granted. This arrangement
obliges the seller to buy or sell U.S. dollars, in the case that the buyer
decides to exercise this right, and the buyer is obliged to pay the premium
agreed upon on the date the operation is carried out. Currently BC only trades
options linked to US$/Peso.
B.5.v. FIDUCIARY
The Bank offers, through its subsidiary Fiduciaria Bancolombia, a
family of five mutual funds and one voluntary pension fund, all of which are
designed to provide customers with the opportunity to diversify their
investments. As of December 31, 2006, BC had Ps 2,603,347 million in total
assets under management, decreasing 9.56% from Ps 2,878,543 million in 2005, due
to a period of exceptional volatility which lasted from March 2006 to June 2006
and negatively affected all funds valuation in the domestic market. Despite the
Ps 275,196 million decrease, the funds managed by the fiduciary increased their
market share 219 basic points in 2006.
During May 2006, Fiduciaria Bancolombia obtained from BRC Investor
Services the AAA local rating as counterparty, this was the fifth consecutive
year that the company obtained this recognition. Also, during June 2006,
Fiduciaria Bancolombia obtained, from the same rating agency, the AAA local
rating for its quality in Asset Management. In its report, BRC Investor Services
emphasized the experience and knowledge of the directors of Fiduciaria
Bancolombia.
81
Finally, in November 17, 2006, Duff and Phelps of Colombia assigned
the AAA local rating to the Strength in Asset Management to Fiduciaria
Bancolombia for the seventh consecutive years, highlighting the efficient
methodologies and tools used to identify, measure and monitor the different kind
of risks.
FIDUCUENTA: This fixed income fund seeks to attain stable income in the
short-term, preserving the immediate availability of cash. As of December 31,
2006, these funds had Ps 2,032,115 million in assets under management,
increasing 2.07% as compared to Ps 1,990,969 million in 2005.
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,
2006, this fund had Ps 283,860 million in assets under management, decreasing
54.09% as compared to Ps 618,250 million in 2005. This behavior is explained by
an increase in rates shown in the local fixed income market during the second
quarter 2006.
FIDUDIVISAS: This fund comprises fixed or variable income securities
issued in international markets, with a minimum 90-day investment term. As of
December 31, 2006, this fund had Ps 1,143 million in assets under management,
increasing 42.70% as compared to Ps 801 million in 2005.
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, 2006, Fiduciaria Bancolombia had Ps 123,895
million in assets under management, increasing 31.61% as compared to Ps 94,137
million in 2005.
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, 2006, Fiduciaria
Bancolombia had Ps 137,128 million in assets under management, decreasing 7.42%
as compared to Ps 148,115 million in 2005. Even though the fund has a long term
investment horizon and that its results were better than those shown by the
market during the second quarter 2006, the lower than expected returns exposed
in this period caused a reduction in volume.
INDEACCION: This investment alternative allows participation in the local
and international stock markets with the goal of long-term gains. As of December
31, 2006, Fiduciaria Bancolombia had Ps 25,206 million in assets under
management, decreasing 4.05% as compared to Ps 26,271 million in 2005. During
the second quarter 2006 the local equity market fell near 45% of its prices. As
a consequence, the dedicated funds investing in this market reduced their
volume, explaining the performance of Indeaccion.
ASSET MANAGEMENT BUSINESSES
In the area of asset management businesses, as of December 31, 2006,
Fiduciaria Bancolombia had Ps 19,088 billion in assets under management,
decreasing 0.90% as compared to Ps 19,262 billion in 2005. This reduction is
explained, to some extent, by the dynamics of pension business that reduced
their volume of assets under management (even though the income increased)
during the past year. Fiduciaria Bancolombia offers a broad range of products
and services by type of trust, including:
82
PUBLIC TRUST: When managing a public trust for state-owned companies,
Fiduciaria Bancolombia 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, 2006, Public Trust and Pension of
Territorial Entities had Ps 4,833 billion and Ps 2,539 billion in assets under
management, respectively.
MANAGEMENT AND PAYMENT TRUST: Fiduciaria Bancolombia 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,
2006, these trusts had Ps 7,016 billion in assets under management, an increase
of 13.05% as compared to Ps 6,206 billion in 2005.
INDIVIDUAL INVESTMENT TRUST: Fiduciaria Bancolombia 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, 2006, these trusts had
Ps 3,580 billion in assets under management, an increase of 7.31% as compared to
Ps 3,336 billion in 2005.
REAL ESTATE TRUST: Fiduciaria Bancolombia manages third-party resources to
be used 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, 2006, these trusts had Ps 242,031 million in assets under
management, an increase of 16.38% as compared to Ps 207,959 million in 2005.
GUARANTY TRUST: Through this trust business, the trustor 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 trustor or
founder has incurred. As of December 31, 2006, these trusts had Ps 877 billion
in assets under management, decreasing 12.46% as compared to Ps 1,002 billion in
2005.
Other products and services offered by the Fiduciaria Bancolombia
are:
SECURITIES MANAGEMENT: Fiduciaria Bancolombia perfoms management
activities with the goal of improving efficiency in the administration of the
shareholders' matters in a corporation. Fiduciaria Bancolombia can also act as
agent for payments, recording agent and transfer agent.
SECURITIZATION: This financial mechanism allows companies to obtain
financial resources through the capital 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 others.
ISSUANCE MANAGEMENT: This product is specifically designed for companies
that would like to obtain resources directly from the capital markets by issuing
securities. Fiduciaria Bancolombia, acting as managing agent, provides advice,
securities issuance, placement through a local broker, interest payment and
capital redemption.
83
CUSTODY: Fiduciaria Bancolombia has been approved by Morgan Guaranty Trust
and The Bank of New York to act as custodian for ADRs and GDRs since 1995.
B.5.vi. LEASING
Leasing Bancolombia, a subsidiary of BC specializing in leasing
activities, offers a wide variety of financial and operating leasing
arrangements coupled with loans, time deposits and bonds.
As of December 31, 2006, Leasing Bancolombia's total assets amounted
to Ps 4,226,930 million, with a local market share of 46.39% and shareholders
equity of Ps 346,209 million.
The following table illustrates Leasing Bancolombia's number of
lease agreements, customers and the corresponding net value:
YEAR ENDED NUMBER OF LEASE NUMBER OF NET VALUE
DECEMBER 31 CONTRACTS CUSTOMERS (Ps MILLION)
----------- --------------- --------- ------------
2004 8,851 5,449 818,483
2005 19,742 9,399 2,362,105
2006 23,497 10,380 3,158,717
====== ====== =========
Leasing Bancolombia provides the following products and services:
- FINANCIAL LEASES: With this product, Leasing Bancolombia
allows customers to lease predetermined assets, with the
option of purchasing them once the lease agreement expires.
The financial leasing arrangements offered include:
- Import leasing: Leasing Bancolombia is responsible
for the entire procedure of importing the assets
into Colombia.
- Real estate leasing: includes different types of
property such as warehouses, commercial
establishments, industrial plants and offices.
- Infrastructure leasing: includes different types
of infrastructure projects in sectors such as:
telecommunications, energy, transport, drinking
water and basic sanitation sectors.
- Vehicle leasing for corporate executives: with
this product corporate customers provide their
executives with vehicles for private use as an
incentive.
- Cattle leasing: this form of leasing is available
for dairy farming and cattle-raising activities.
84
- RESIDENTIAL LEASING: In 2005, Leasing Bancolombia developed a
residential leasing product for financing housing, based on
the conditions and advantages prescribed by law. Residential
leasing allows customers to choose a house or apartment, that
may be new, existing, being designed or under construction for
long-term financing with the option to purchase said property
at the end of the lease.
- OPERATING LEASES: Leasing Bancolombia provides leased assets,
usually equipment, for fixed terms that are shorter than the
asset's useful life. Once the lease ends, the customer has the
option of acquiring the assets at their commercial value, or
returning them to Leasing Bancolombia, who then proceeds to
sell these assets.
Renting Colombia, a non-financial subsidiary of Leasing Bancolombia,
provides vehicle renting and fleet management services for both individuals and
entities. Renting Colombia offers a wide range of solutions for the
transportation and vehicular needs of large companies.
Products offered by Renting Colombia:
- Traditional Vehicle Renting: Arrangements for
sales force executives and/or working vehicles.
- Company Car: A full service renting product for
company executives. During the term of the lease,
Renting Colombia pays all cost associated with
road taxes, car insurance and maintenance costs
(except for gas and driver expenses).
- Rent-back Arrangements: Renting Colombia purchases
the transport fleet from the customer and rents it
back to the customer.
- Used Vehicle Sales: Selling off all those vehicles
returned by customers once the renting contract
expires.
The following table shows Renting Colombia's volume of customers,
leased assets together with their net value:
YEAR ENDED AS OF NUMBER OF LEASED ASSETS LEASED ASSETS
DECEMBER 31 CUSTOMERS (UNITS) (Ps MILLION)
---------------- --------- ------------- -------------
2004 233 2,604 136,671
2005 291 3,039 167,736
2006 349 3,708 207,601
=== ===== =======
In 2006, Renting Colombia, acquired a franchise owned by a Brazilian
company, called Localiza, a leading car-rental firm in Latin America with more
than 45,000 vehicles and a presence in 9 Latin American countries. Localiza is
one of the largest buyers and dealers of vehicles in Latin America.
85
Localiza, rents vehicles based on a daily rate (Rent a Car) to both
individual and entities for terms that range from one (1) day to one (1) year.
The age of the vehicles offered vary from new to 18 months old. Operations began
in Medellin in December 2006 and are scheduled to commence in Bogota in March
2007. The franchise is also expected to begin operations in Panama during the
first half of 2007.
After 2 years of research on the car-rental industry in Latin
America, Renting Colombia established its first international subsidiary in Peru
in January 2007, which operates under the name of Renting Peru. With a total
capitalization of US$ 5 million, to be paid over a maximum period of two years,
this company began to function with a staff of 9, and is expected to end 2007
with total billings of almost US$ 1.5 million. Peru was chosen out of a number
of other Latin American countries because its economy is performing quite well
and the renting industry is a very incipient business in Peru with a shortage of
new vehicles and limited ability to replace vehicles in circulation. Current
legislation allows for used vehicles to be imported until December 31, 2007.
- CROSS-BORDER LEASING: Suleasing Internacional S.A., a
subsidiary of Leasing Bancolombia located in Panama, directly
and through its subsidiary Suleasing International USA, Inc.,
located in Fort Laurderdale, United States, offers
cross-border financial leases and infrastructure leases for
the acquisition of fixed assets. These are alternatives for
customers who would like to acquire equipment from suppliers
located in other countries.
Additionally, Suleasing Internacional S.A. structures leasing
operations in Central America, the Caribbean and Andean
Region, Mexico and Brazil, pursuant to the applicable
legislation of those countries.
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 for 2004, 2005 and 2006, and the net
investment in direct financing leases:
VALUE OF NEW NET INVESTMENT IN
NUMBER OF LEASING OPERATIONS DIRECT FINANCING
YEAR CUSTOMERS (Ps MILLIONS) LEASES (Ps MILLION)
---- --------- ------------------ -------------------
2004 50 65,100 99,683
2005 50 97,628 155,190
2006 57 60,215 84,873
== ====== =======
86
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 and 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.
On February 26, 2007, in a transaction duly authorized by the
Superintendency of Finance, Bancolombia sold to Lab Investment & Logistics S.A.
and Portal de Inversiones S.A. 91.08% of its direct interest and 3.79% of its
indirect interest, held through Banca de Inversion Bancolombia S.A. Corporacion
Financiera in Almacenar S.A. 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
Banca de Inversion Bancolombia S.A. Corporacion Financiera (formerly
Colcorp) is a subsidiary of BC that specializes in providing investment banking
services to corporate customers in areas such as mergers and acquisitions,
project finance, issues of debt and equity securities and syndicated loan
transactions. Banca de Inversion Bancolombia also owns and manages a diversified
equity portfolio, which invests in different sectors of the Colombian economy,
including agriculture, telecommunications and toll road concessions. As of
December 31, 2006, its equity portfolio book value was approximately Ps 212
billion.
B.5.ix. BROKERAGE AND ASSET MANAGEMENT
Valores Bancolombia S.A., ("Valores Bancolombia"), formerly known as
Compania Suramericana de Valores S.A. Comisionista de Bolsa - Suvalor, is a
subsidiary of BC that provides brokerage and asset management services and
channels all its professional experience and efforts into providing solutions
and proposing differentiated investment alternatives to its customers.
In April 2006, Duff & Phelps granted Valores Bancolombia a maximum
Triple A rating for the seventh time, based on the firm's outstanding asset
management capacity and strength.
As of December 31, 2006, Valores Bancolombia S.A registered an
accumulated income of approximately Ps 121.3 billion. It also ranked as one of
the top firms of the sector on an accumulated net profits basis, registering a
total of approximately Ps 18.9 billion.
87
2006 was a difficult year for the Colombian brokerage sector due to
the collapse of the international markets and the devaluation of local assets
during the second quarter of the year. Because of such difficulties, the sector
experienced a decrease in overall profits from Ps 213.9 billion in 2005 to Ps 71
billion which represented a 67% decrease. Notwithstanding that, Valores
Bancolombia managed to finish the year relatively well with a decrease of only
42% on its net profits.
Valores Bancolombia offers its customers investment alternatives
both domestically and internationally.
In the domestic market, customers may access through Valores
Bancolombia investments in fixed income securities, equity securities and a wide
range of mutual funds, including a series of Renta Valores Bancolombia
investment funds (with different risk levels, minimum investment terms and
portfolio composition) and the Opcion Colombia and Capital investment funds,
which are distributed through Valores Bancolombia's own sales force as well as
through the Bank's banking network.
In the international market, Valores Bancolombia is able to offer
diversified off-shore investment alternatives to its customers, including
investments in securities issued by the Republic of Colombia overseas. Such
investments are generally carried out through its subsidiaries Suvalor Panama,
Bancolombia Puerto Rico International, Inc., Bancolombia Panama and Bancolombia
Cayman or through different correspondent banks and agencies including Smith
Barney, UBS International, UBS AG Switzerland and Man Investments.
Valores Bancolombia also offers to its customers specialized service
products such as third-party portfolio management, capital markets advisory
services and structured products, as well as a wide range of investment related
services such as economic research (with investment recommendations and periodic
reports) and custody of securities (including through Deposito Centralizado de
Valores de Colombia, or "Deceval" and Deposito Central de Valores del Banco de
la Republica, or "DCV", and in the international market, through Clearstream
Banking, Luxembourg, societe anonyme).
As of December 31, 2006, Valores Bancolombia registered Ps 15.70
trillion in total assets under management of which Ps 14.37 trillion
corresponded to assets denominated in pesos and US$ 591 million to international
assets.
These amounts represent investments made by a total of 82,866
customers of which 38,659 are direct customers (84% individuals and 16%
institutional) and 44,207 are users from different banking networks.
88
B.5.x. OFF-SHORE BANKING
BANCOLOMBIA (PANAMA) S.A. AND BANCOLOMBIA CAYMAN
Bancolombia (Panama) S.A. and Bancolombia Cayman, BC's international
subsidiaries are located in Panama and the Cayman Islands, respectively. These
companies 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 and checking accounts, time
deposits, and investment funds.
As of December 31, 2006, Bancolombia Panama S.A. and Bancolombia
Cayman had 7,959 customers. As of December 31, 2006, Bancolombia Cayman had
issued 5,873 Visa credit cards.
In 2006, the Bancolombia Panama S.A. and Bancolombia Cayman's loan
portfolio increased more than 100% as compared to the previous year. This growth
is mainly explained by the acquisition of 85% of the Suleasing Internacional's
loan portfolio for approximately US$ 30 million. This acquisition took place on
December 2006 by Bancolombia Panama.
BANCOLOMBIA PUERTO RICO INTERNACIONAL, INC.
Located in the financial district of San Juan, Puerto Rico, BC's
subsidiary, is an international banking entity under Act 52 of August 11, 1989
and Regulation Number 5356 (International Banking Center Regulatory Act).
Bancolombia Puerto Rico Internacional, Inc. offers a portfolio of international
products and financial services servicing its customers' needs.
The products portfolio includes savings accounts and commercial
loans (including international leasing and international factoring). The
portfolio also offers specialized short, medium and long-term lines of credit
granted by international banks. Other products include: Time Deposit with fixed
term, Time Deposit with variable interest (a medium term product starting at 18
months), Time Deposit in Euros and Time Deposit with increasing interest.
As of December 31, 2006, Bancolombia Puerto Rico Internacional, Inc.
had more than 4,200 active customers.
B.5.xi. BANCOLOMBIA'S MIAMI AGENCY
Bancolombia's 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, standby letters of credit,
guarantees, collections and foreign exchange negotiations. The Agency enhances
its products and services portfolio by offering new investment and saving
opportunities in the U.S. for both individuals and entities.
89
After three years of operation, 2006 was a period of consolidation
for the Agency. As of December 31, 2006, total assets amounted to US$ 288
million, reflecting a 107% increase as compared to 2005. This excellent
performance was primarily due to the dymanism of the loan portfolio, which
totaled US$ 172 million as of December 31, 2006, increasing 69% as compared to
the previous year. The loan portfolio has achieved a significant level of
diversification, including operations in Colombia, the U.S., Mexico, Brazil and
others. Similarly, net income increased 205%, reaching US$ 1.3 million over the
year. Finally, it is important to note that the outstanding growth in customer
deposits amounted to US$ 267 million at the end of 2006.
B.5.xii. COMMERCIAL FINANCE COMPANIES
SUFINANCIAMIENTO
Sufinanciamiento, BC's finance company subsidiary, targets the
personal banking segment that is not traditionally served by commercial banks by
specializing in risk products such as vehicle financing, private brand credit
cards and personal loans to be used at the customers discretion.
Sufinanciamiento also finances insurance premiums and payroll loans.
As of December 31, 2006, Sufinanciamiento had 779,519 customers
representing, a 159.6% increase as compared to 300,243 customers as of December
31, 2005. Most of Sufinanciamiento's customers are targeted at retail chains.
PRIVATE BRAND CREDIT CARD
Sufinanciamiento, in alliance with Almacenes Exito, a major retailer
in Colombia, issues the private brand credit card "Tarjeta Exito". This product
offers improved conditions and advantages 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 requirements to
obtain the credit card and terms of payment up to 48 months. As of December 31,
2006, 710,587 cards were issued.
In addition to the previous product, Sufinanciamiento has developed
alliances with other retailers, including, among others, "Alkosto" and "La 14",
with the purpose of maintaining its leadership in the market of private brand
credit cards.
Sufinanciamiento has experienced significant loan portfolio growth
during the last three years. In 2006, it increased in an amount of 64.5%. This
growth was due to both the upward trend in the vehicle loan business, which
represented 67.24% of the company's portfolio and the increase in the "Tarjeta
Exito" product.
According to the figures published by the Superintendency of
Finance, in December of 2006, Sufinanciamiento held the first place, in terms of
outstanding loans, among Colombian traditional commercial finance companies.
90
FACTORING BANCOLOMBIA:
Factoring Bancolombia S.A. Compania de Financiamiento Comercial is
BC's new finance company subsidiary, a legally established credit institution,
whose headquarters are in Medellin. Since it belongs to the financial sector and
is an issuer of securities, it is duly subject to the control and supervision of
the Superintendency of Finance and is registered in the Colombian National
Guarantee Fund. For more information, please see Item 4. Information on the
Company - A. History and Development of the Company - Recent Developments.
On June, 2006, the rating agency Duff & Phelps of Colombia gave
Factoring Bancolombia the AA rating, for its long-term debt.
As of December 31, 2006, Factoring Bancolombia's assets and equity
amounted Ps 208,524 million and Ps 27,984 million, respectively.
Portfolio
As of December 31, 2006, Factoring Bancolombia had a portfolio
composed of the following products among others:
- "LINEA TRIANGULAR": This product has been on the market
since before 2004. Factoring Bancolombia finances
customer's purchases, based on a prior agreement with
one or more customer's suppliers, offering an additional
term to that normally provided by said suppliers, based
on suitable economic terms and conditions and in keeping
with the operating cycle of the customer's business.
- TARGETED FACTORING: here the supplier is paid for all
those invoices owed by the customer (buyer). The
customer is the party who sends the request on the day
on which the disbursement is required, and for this
reason it this the customer who earns the prompt payment
discounts. This product allows for additional financing.
- PLUS FACTORING: this is the discounting of negotiable
instruments in which the present-day value of the
document maturing in the future is recognized. The
present-day value is calculated at a discounted rate
depending on the risk, segment and rating of the obligor
party. Payment is made on the date on which the security
becomes due and payable or on the expected payment date.
B.5.xiii. NEW PRODUCTS OR SERVICES
In 2006, BC continued its effort to consolidate the products and
services portfolio integration of the three entities involved in the
Conavi/Corfinsura merger. The following are products and services that started
being offered prior to the end of the integration process and which constituted
a substantial opportunity to both Bancolombia and former Conavi:
- International money transfers for the former Conavi network;
- American Express credit cards for the former Conavi network;
- Mortgage loans (including CPT) for the Bancolombia network;
and
91
- Additional assistance for the SMEs Banking Segment consisting
of the approval of credit limits secured by the FNG for the
former Conavi network.
B.5.xiii.a. "CASA PROPIA PARA TODOS" - CPT HOUSING LOANS
In March 2006, the Bank launched the CPT ("housing for all"), a
homeowner plan designed to dynamize the mortgage loan market in Colombia. This
strategy was based on lowering housing market interest rate to 1% monthly
nominal interest rate, additional consumers and credit card loans for remodeling
purchased housing and on providing virtual advisory services through the
website: www.creditocpt.com which used an innovative system for making
appointments with customers through the BC branch network in order to provide
advisory services and conduct sales. The CPT homeowner plan applied to both BC's
new and existing customers. The strategy also benefited BC's construction
segment since sales of property increased thereby encouraging more new projects
to be built. BC's construction loan portfolio increased by 94.11%.
As of December 31, 2006, BC placed a total of Ps 1,004 billion for
loans, representing an increase of 190% in the amount of loans disbursed as
compared to 2005. In addition BC's housing loan portfolio at year end totalled
Ps 2,390 billion (including its securitized portfolio), representing an increase
of 28.47%.
B.5.xiii.b. LINES OF CREDIT BASED ON PLEDGED VOLUNTARY PENSION FUND
CONTRIBUTIONS TO PROTECCION S.A. PENSION FUND
This is a line of credit to be used freely by individual customers
and is guaranteed by pledged contributions to Proteccion's voluntary pension
fund. With this type of guarantee, customers are entitled to lower interest
rates and a higher debt availability.
B.5.xiii.c. NEW "VIDA PLENA" LIFE INSURANCE
During the first half of 2006, BC launched the distribution of a new
insurance product, a life insurance policy with a coverage that includes serious
illness, designed especially for American Express customers and sold through the
telesales line. This product results from the alliance between Bancolombia and
Compania Suramericana de Seguros. Since its launching, BC has sold 219 policies.
B.5.xiii.d. NATIONAL CHECKS
One of the main benefits of the Conavi/Corfinsura merger for the
Bank's customers is that checks drawn on BC's checking accounts are now
considered "national" as opposed to "local", meaning that checks are treated as
local checks in parts of Colombia where BC had no prior presence. As
beneficiaries of BC's checks, the customers do not have to pay remittance fees
for receiving deposits in the form of Bancolombia or former Conavi checks in
their checking or savings accounts. As drawers, customers enjoy a greater scope
of acceptance, given the advantages available for the beneficiaries of said
checks. BC expects to increase both its resources and number of accounts, in
addition to increasing the funds deposited in customer accounts (checking and
savings) because remittance fees are not charged on BC checks.
92
B.5.xiii.e. VIRTUAL PAYMENTS THROUGH THE INTEGRATED SOCIAL SECURITY AND
PARAFISCAL CONTRIBUTION TEMPLATE
BC's customers are now able to access the Integrated Social Security
and Parafiscal Contribution Template through the Bank's web page. The system
calculates the amount of contribution due according to the number of employees
that the company has and allows it to electronically pay any amounts through
BC's Corporate Virtual Branch.
B.5.xiii.f. MASTER ACCOUNT SERVICE
In order to comply with the Decree No. 4,693 of 2005 issued by
Colombia's Ministry of Social Protection in order to regulate the use of funds
obtained by municipalities through the Government's subsidized healthcare and
educational regime, Bancolombia developed a new master account service offered
to municipal authorities. Such master accounts (which include both checking and
savings accounts), were designed to facilitate the rigorous monitoring of the
municipal accounts as required by the above mentioned decree. They are
exclusively managed, with debits only being allowed if the funds are being
transferred to another bank account belonging to a subsidized regime
administrator duly registered with the Ministry of Social Protection.
B.5.xiii.g. LIBOR INDEXED TIME DEPOSIT
BC offers a new Libor-indexed Time Deposit product to its customers
who seek different types of investment in accordance with market evolution and
expectations.
B.5.xiii.h. SWIFT'S E-MAIL CONFIRMATION - "FAXMAIL"
Through this new service, the Bank provides its customers with
information regarding SWIFT messages related to their international trade
operations (import letter of credits, standby letter of credits, etc).
B.5.xiii.i. GUARANTEE FOR THE ENERGY INDUSTRY
The Bank now offers to its customers in the electric energy sector a
standby financial guarantee pursuant to which the Bank agrees to pay a specific
amount of money to Colombia's energy exchange system operator upon failure by
such customer to pay any amounts due in connection with its energy trading
activities carried out through such energy exchange system.
93
B.5.xiii.j. MARKET RISK MANAGEMENT MODEL
The new market risk management model developed in 2006 by BC,
together with its subsidiary Banca de Inversion Bancolombia, allows BC's
Corporate Banking customers to take full advantage of specialized advisory
services on how to quantify and cover market risk in the most cost-efficient
way. Through such model the Bank seeks to provide its customers with a
comprehensive and independent range of risk management products including a
foreign exchange risk management model and an interest rate risk management
model.
B.6. COMPETITION
B.6.i. DESCRIPTION OF THE COLOMBIAN FINANCIAL SYSTEM
Overview
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. Law 510 of 1999, Law 546 of
1999 and Law 795 of 2003 further broadened the scope of activities permitted to
financial institutions and set forth general circumstances under which the
Government may intervene in the financial sector, as well as the rules governing
such intervention.
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
Conavi/Corfinsura merger, the acquisition of Banco Aliadas by Banco de
Occidente, the merger of Banco Tequendama and Banco Sudameris, as well as the
merger of the Colmena and the Caja Social banks. The trend towards mergers and
acquisitions continued throughout 2006, with the conclusion of certain
transactions first announced during 2005. These include the acquisition of Banco
Superior by Davivienda, of Banco Granahorrar by BBVA Colombia and of Banco Union
by Banco de Occidente. Also during 2006, Banco de Bogota acquired Megabanco and
Davivienda announced its acquisition of Bancafe. In addition, General Electric
(GE) Money announced the proposed acquisition of Colpatria and Bancolombia
announced its proposed acquisition of Banagricola of El Salvador. Both such
transactions are expected to be concluded in 2007. For more information on the
proposed acquisition of Banagricola by Bancolombia please Item 4. Information on
the Company-A. History and Development of the Company.
94
As a result, as of December 31, 2006, the principal participants in
the Colombian financial system were the Central Bank, 18 commercial banks (10
domestic banks, 6 foreign banks, and 2 state owned banks), 2 finance
corporations, 24 commercial finance companies (9 leasing companies and 15
traditional finance companies) and 10 special state owned institutions or
Instituciones Oficiales Especiales. In addition, trust companies, cooperatives,
insurance companies, insurance brokerage firms, bonded warehouse, pension and
severance pay funds, and fiduciaries also participate in the Colombian financial
system.
FINANCIAL SYSTEM EVOLUTION IN 2006
The year of 2006 was characterized by a higher performance in the
macroeconomic variables and financial indicators, as compared to those of
previous years. In the context of economic growth, the financial system's loan
portfolio continued to expand in 2006, as it did in previous years, recording an
increase of 32.7% as of December 31, 2006. This performance was spurred mainly
by consumption and microcredit loans, which registered individual annual growth
rates of 49.4% and 33.7% respectively, along with increases in commercial and
mortgage loans of 28.4% and 10.8% respectively.
The dynamic of the financial system's loan portfolio was associated
with indicators of quality of loan portfolio (past due loans/total loans) of
2.62% and coverage (provisions/past due loans) of 153.58% as compared with
indicators of 2.66% and 166.88%, respectively as of December 31, 2005.
Financial portfolio investment decreased during the second half of
the year given the increase in interest rates for Colombia Treasury Bonds
("TES") which resulted in a reduction in the value of the portfolio investment
and generated a reorganization in the composition of assets in favor of the loan
portfolio. The loan portfolio as a percentage of total assets went from 52.4% as
of December 31, 2005 to 60.6% as of December 31, 2006. In the case of the
investment portfolio, such number went from 32.7% of the total assets as of
December 31, 2005 to 24.2% as of December 31, 2006.
As of December 31, 2006, the financial system registered total
assets in an amount of Ps 155.23 trillion as compared with Ps 134.31 trillion
for the previous year. The financial system's total composition of assets shows
banks with a market share of 88.2%, followed by commercial financing companies
with 9.4%, financial corporations with 2.4%, and cooperative organizations with
0.1%.
In terms of profits, the financial system registered a total of Ps
3.55 trillion as of December 31, 2006, an increase of 5.3% if compared to the
same period of 2005 when it registered Ps 3.37 trillion. The technical capital
ratio for credit institutions was 12.7% (including banks, financing companies
and commercial financing companies), which is well above the minimum legal
requirement of 9%.
B.6.ii. BANCOLOMBIA AND ITS COMPETITORS
In 2006, Bancolombia ratified its leading position on the Colombian
finance sector, among 18 different players, and ranked first in terms of assets
according to the Superintendency of Finance. Its main competitors in the
corporate sector are Banco de Bogota, Banco de Occidente, BBVA and Citibank. In
the consumer sector its main competitors are Banco Popular, Banco de Occidente
and Davivienda.
95
INDICATORS FOR BANCOLOMBIA AND ITS COMPETITORS
The following table shows the key profitability and loan portfolio
quality indicators for Bancolombia and its main competitors. The table also
shows the capital adequacy requirements for Bancolombia and its main competitors
as of December 31, 2006 as compared to the previous year.
PAST DUE LOAN/ ALLOWANCES/PAST
ROE ROA TOTAL LOANS DUE LOANS CAPITAL ADEQUACY
-------------- -------------- -------------- -------------- ----------------
DEC-05 DEC-06 DEC-05 DEC-06 DEC-05 DEC-06 DEC-05 DEC-06 DEC-05 DEC-06
------ ------ ------ ------ ------ ------ ------- ------ ------ ------
Bancolombia (unconsolidated) 22.9% 17.2% 3.1% 2.2% 2.0% 1.87% 208.2% 191.12% 12.1% 11.6%
Banco de Bogota 20.4% 13.9% 2.8% 1.9% 2.0% 1.83% 174.9% 185.27% 15.2% 12.6%
Banco de Occidente 21.0% 16.4% 2.4% 2.1% 2.3% 2.18% 208.9% 186.85% 12.5% 9.8%
BBVA 15.0% 19.1% 1.2% 1.8% 2.0% 2.58% 331.4% 213.09% 12.7% 14.0%
Citibank 18.0% 11.1% 3.2% 1.5% 1.4% 2.35% 188.2% 145.86% 14.7% 12.3%
Davivienda 29.3% 16.3% 3.6% 1.7% 3.3% 4.13% 247.4% 143.80% 16.5% 11.4%
Banco Popular 25.1% 22.4% 2.8% 2.5% 2.6% 2.27% 185.8% 211.59% 12.4% 13.2%
==== ==== === === === ==== ===== ====== ==== ====
Source: Colombian Superintendency of Finance. Bancolombia's calculations
The following charts show the market share of Bancolombia
(unconsolidated) and its main competitors with respect to various key products,
based on figures published by the Superintendency of Finance for the years ended
December 31, 2004, 2005 and 2006:
TOTAL NET LOANS
MARKET SHARE
[BAR GRAPH]
DEC-04 DEC-05 DEC-06
------ ------ ------
Bancolombia 14.3% 20.9% 20.3%
Bogota 10.2% 10.1% 14.0%
Occidente 5.1% 6.1% 6.6%
Citibank 3.6% 3.8% 4.4%
BBVA 7.9% 8.1% 10.8%
Davivienda 5.8% 5.5% 9.1%
Popular 5.7% 5.4% 4.8%
96
CHECKING ACCOUNTS
MARKET SHARE
[BAR GRAPH]
Dec-04 Dec-05 Dec-06
------ ------ ------
Bancolombia............ 17.5% 19.0% 21.0%
Bogota................. 16.1% 16.3% 17.0%
Occidente.............. 10.2% 11.2% 12.8%
Citibank............... 3.1% 3.0% 3.3%
BBVA................... 9.8% 9.6% 9.6%
Davivienda............. 2.5% 2.7% 6.1%
Popular................ 6.8% 6.2% 5.6%
TIME DEPOSITS
MARKET SHARE
[BAR GRAPH]
Dec-04 Dec-05 Dec-06
------ ------ ------
Bancolombia............ 11.7% 14.6% 13.8%
Bogota................. 3.2% 5.7% 9.6%
Occidente.............. 2.2% 3.4% 3.1%
Citibank............... 4.7% 3.4% 5.6%
BBVA................... 6.7% 7.8% 11.0%
Davivienda............. 7.8% 6.6% 12.8%
Popular................ 2.8% 2.7% 2.9%
97
SAVING ACCOUNTS
MARKET SHARE
(BAR GRAPH)
DEC-04 DEC-05 DEC-06
------ ------ ------
Bancolombia .................... 10.9% 18.6% 20.1%
Bogota ......................... 11.3% 11.3% 12.8%
Occidente ...................... 5.2% 6.4% 6.2%
Citibank ....................... 1.8% 2.5% 3.4%
BBVA ........................... 8.9% 8.3% 12.8%
Davivienda ..................... 7.6% 8.8% 10.7%
Popular ........................ 7.5% 8.4% 6.9%
B.7. SUPERVISION AND REGULATION
COLOMBIAN BANKING REGULATORS
Colombia's National Congress prescribes the general framework under which
the Government may regulate the financial system. The principal bodies
regulating the Colombian financial system are the board of directors of the
Central Bank, the Ministry of Finance and Public Credit and the Superintendency
of Finance.
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 a last resort
lender 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
98
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.
MINISTRY OF FINANCE AND PUBLIC CREDIT:
- One of the functions of the Colombian Ministry of Finance and
Public Credit is to intervene in all aspects of finance,
insurance and activities relating to receiving deposits of
money from the public. It is also responsible for inspecting,
supervising and controlling all those entities engaged in such
activities, specifically through the Superintendency of
Finance.
- As part of its duties, the Ministry of Finance issues decrees
relating to financial matters that may affect banking
operations in Colombia.
SUPERINTENDENCY OF 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, responsible for monitoring, promoting and regulating the
market for publicly traded securities in Colombia and
overseas, its main participants, including the Colombian Stock
Exchange, brokers, dealers, mutual funds, and issuers. Since
BC's common shares and preferred shares are publicly traded on
the Colombian Stock Exchange, certain aspects of BC's
operations as issuer 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 branch of 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
99
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.
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, Law 795 of 2003 and Law 964 of 2005. 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 was to increase the solvency and stability of Colombia's financial
institutions, by establishing rules regarding their incorporation, as well as
permitted investments of credit institutions, insurance companies and investment
companies. Law 546 of 1999 was enacted in order to regulate the system of
long-term home loans. Afterwards, 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
100
interventions with respect to financial institutions whose capital falls below
certain thresholds(5). Law 964 envisaged that in the event the Superintendency
of Banking joined with the Superintendency of Securities to form one single
regulating agency, the resulting entity would take on all the functions of both
Superintendencies.
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 applicable to financial
institutions, and in External Circular 100 of 1995, as amended ("Basic
Accounting Circular"), it compiled all regulations applicable to the accounting
and financial treatment of banking financial institutions.
Violations of Laws 510, 795 and 964, as well as of specific provisions of
Decree 663 and their relevant regulations are subject to administrative
sanctions and, in some cases, criminal sanctions.
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 March 26-30, 2007, the DTF was 7.60% and the TCC was 6.50%.
CAPITAL ADEQUACY REQUIREMENTS
Capital adequacy requirements for Colombian financial institutions (as 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;
----------
(5) For example, in order to avoid a temporary taken of possession by the
Superintendency of Finance, such financial institutions must submit to
the Superintendency of Finance a restructuring program to restore their
financial situation.
101
- the total value, of the revaluation of equity account
(revalorizacion del patrimonio) (if positive) and of the
foreign currency translation adjustment account (ajuste por
conversion de estados financieros);
- current fiscal year profits in a proportion equal to the
percentage of prior fiscal year profits that were capitalized,
or allocated to increase the legal reserve, or all profits
that must be used to cover accrued losses;
- any representative shares held as guarantee by the Fogafin
when the entity is in compliance with a recovery program aimed
at bringing the Bank back into compliance with capital
adequacy requirements (if the Superintendency of Finance
establishes that such recovery program has failed, these
shares shall not be computed);
- subordinated bonds issued by financial institutions and
subscribed by Fogafin when they comply with the requirements
stated in the regulations;
- the part of the surplus capital account from donations that
complies with the requirements set forth in the applicable
regulation;
- the value of 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, mandatory convertible bonds,
subordinated bonds that may be convertible into shares or
subordinated debt instruments issued by entities (excluding
subsidiaries) subject to the supervision of the
Superintendency of Finance excluding appraisals and
investments in Finagro credit establishments and investments
undertaken pursuant to article 63 of Decree 663 of 1993,
subject to the conditions set forth in the regulation; and
- investments in shares, mandatory convertible bonds,
subordinated bonds that may be convertible into shares or
subordinated debt instruments issued by foreign financial
institutions where the investor directly or indirectly holds
at least 20% of the capital of said institution (excluding
subsidiaries). This amount includes foreign currency
translation and excludes appraisals.
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:
102
- 50% of the accumulated inflation adjustment of non-monetary
assets (provided that such assets have not been disposed of);
- 50% of asset reappraisal (excluding revaluations of foreclosed
assets or assets received as payment of credits);
- mandatory convertible bonds effectively subscribed and paid,
with maturities of up to 5 years, (provided that the terms and
conditions of their issuance were approved by the
Superintendency of Finance and subject to the conditions set
forth by the Superintendency of Finance);
- subordinated monetary obligations as long as said obligations
do not exceed 50% of Primary Capital, and comply with
additional requirements stated in the regulations;
- the part of the surplus capital account from donations that
complies with the requirements set fort in the applicable
regulation; and
- general allowances made in accordance with the instructions
issued by the Superintendency of Finance.
The following items are deducted from 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;
- 50% of the direct or indirect capital investments (excluding
subisidiaries) and mandatory convertible bonds reappraisal, of
foreign financial entities with respect to which the bank's
share is or exceeds 20% of the entity's subscribed capital.
- 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, 2006:
AS OF DECEMBER 31,
2006
--------------------
(Ps million, except
percentages)
Subscribed capital ............................................................. Ps 430,684
Capital Advance Payments ....................................................... 205
Legal reserve and other reserves ............................................... 2,313,607
Unappropriated retained earnings ............................................... 48,889
Net Income ..................................................................... 365,995
Subordinated bonds subscribed by Fogafin........................................ 9,795
LESS:
Long - term investments ............................................... (25,312)
Non - monetary inflation adjustment ................................... (157,772)
--------------
Primary capital (Tier I)........................................................ Ps 2,986,091
==============
103
AS OF DECEMBER 31,
2006
-------------------
Reappraisal of assets .......................................................... Ps. 66,878
Provision loans................................................................. 245,372
Non-monetary inflation adjustment .............................................. 83,471
Subordinated bonds ............................................................. 32,500
--------------
Computed secondary capital (Tier II)............................................ Ps 428,221
==============
Primary capital (Tier I)........................................................ Ps 2,986,091
Secondary capital (up to an amount equal to primary capital) (Tier II).......... 428,221
--------------
Technical Capital .............................................................. Ps 3,414,312
==============
Capital ratios
Primary capital to risk-weighted assets (Tier I)................................ 9.67%
Secondary capital to risk-weighted assets (Tier II)............................. 1.38%
--------------
Technical capital to risk-weighted assets ...................................... 11.05%
==============
Risk weighted assets included market risk ...................................... Ps 30,885,195
==============
As of December 31, 2006, the Bank's Technical Capital ratio was 11.05%,
exceeding the requirements of the Government and the Superintendency of Finance
by 205 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 and market risks are currently governed by the Basic
Accounting Circular, issued by the former Superintendency of Banking (now
Superintendency of Finance), which defines criteria and procedures for measuring
the Bank's exposure to interest rate risk, foreign exchange risk, and market
risk. Under such 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.
The Superintendency of Finance, in its External Circular 037 of 2004,
provided that financial institutions must maintain a ratio between its Technical
Capital and credit/market risk-weighted assets of more than 9%.
BC's loan portfolio, net of provisions, is 100% weighted as risk-weighted
assets. By measuring credit risk, the provisions corresponding to each of BC's
operations is duly determined. For this purpose, different levels of risk are
set up, and different ratings are awarded (A, B, C, D and E) to the different
credit operations showing the gradual increase in risk. Each of these ratings
have a minimum provision level, as established by the Superintendency of Finance
in Chapter II of the Basic Accounting Circular, which are duly complied with in
the case of each of the Bank's credit transactions.
104
MINIMUM CAPITAL REQUIREMENTS
The minimum capital requirement for banks on an unconsolidated basis is
established in article 80 of Decree 633 of 1993, as amended. The minimum capital
requirement for 2007 is Ps 62,069 million. Failure to meet such requirement can
result in a fine by the Superintendency of Finance of 3.5% of the difference
between the required minimum capital and the Bank's effective capital for each
month in arrears. As of December 31, 2006, the Bank has met all such
requirements.
Capital Investment Limit
All investments in subsidiaries and other authorized capital investments,
other than those carried out in order to fulfill legal provisions, may not
exceed 100% of the total aggregate of the capital, equity reserves and the
equity reappraisal account of the respective bank, financial corporation or
commercial finance company, excluding unappraised fixed assets and including
deductions for accumulated losses.
FOREIGN CURRENCY POSITION REQUIREMENTS
According to External Resolution 5 of 2005 issued by the board of
directors of the Central Bank, a financial institution's foreign currency
position (posicion propia en moneda extranjera) is the difference between such
institution's foreign currency-denominated assets and liabilities (including any
off-balance sheet items), made or contingent, including those that may be sold
in Colombian legal currency.
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 exceed the equivalent in Colombian pesos of 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 March 31, 2007 BC
had an unconsolidated positive foreign currency position of US$ 21.37 million,
which falls within the aforementioned regulatory guidelines. For further
discussion, see Note 3 to the Bank's consolidated financial statements included
in this Annual Report.
Resolution 5 of 2005 also defines foreign currency position in cash
(posicion propia de contado en moneda extranjera) as the difference between all
foreign currency-denominated assets and liabilities. A bank's 3 business days
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 and the foreign currency position in cash cannot be
negative.
On May 6, 2007, the board of directors of Central Bank issued Resolution 4
of 2007. However, this resolution did not change any of the above described
requirements.
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 and
Resolution 3 of 2007, the reserve requirements for Colombian banks as of May 7,
2007 are:
105
RESERVE REQUIREMENT (%)
-----------------------
Private demand deposits..................................... 27
Government demand deposits.................................. 27
Other deposits and liabilities.............................. 27
Savings deposits............................................ 12.5
Time deposits (1)........................................... 0-5
----------
(1) 5% for deposit with maturities 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 post with 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. According to External
Resolution 2 of 2007, the deposit is required to be 40% of the amount received
from any such borrowings, which must be converted into pesos using the
representative market rate for the date in which the deposit will be made. Such
deposit is non-interest bearing and has a term of 6 months. The receipt whereby
the deposit is evidenced is not negotiable.
External Resolution 8 of 2000, which contains the principal foreign
exchange regulations applicable in Colombia, sets forth exemptions to the
obligation of posting the deposit mentioned in the previous paragraph. Among
such exceptions, pursuant to article 59 of such resolution, banks that obtain
financing in a foreign currency from foreign financial entities or
intermediaries acting in the foreign exchange market or through the issuance of
securities and subsequently lend such borrowings in a foreign currency for a
term not exceeding the original term of such financing are exempted from the
deposit requirement.
NON-PERFORMING LOAN ALLOWANCE
The 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.
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, 2006, the Bank's lending limit per
borrower on an unconsolidated basis was Ps 277,026 million for unsecured loans
and Ps 692,565 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, 2006, the Bank
was in compliance with these limitations.
106
Also, Decree 2360 set a maximum limit for risk concentrated in one single
party, equivalent to 30% of the Bank's Technical Capital, the calculation of
which includes loans, leasing operations and equity and debt investments.
The Central Bank also has the authority to establish maximum limits on the
interest rates that commercial banks and other financial institutions may charge
on loans. However, interest rates must also be consistent with market terms with
a maximum limit established by the Superintendency of Finance.
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.
In addition, 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. Moreover, 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 the Bank's preferred shares (but not a
sale of ADRs) for the peso-equivalent of 66,000 UVRs or more must be effected
through the Colombian Stock Exchange.
DEPOSIT INSURANCE
To protect the customers of commercial banks and certain financial
institutions, Resolution No. 1 of 1988 of the board of directors of Fogafin, as
amended, requires mandatory
107
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 assume control of 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;
- 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.
108
ANTI-MONEY LAUNDERING PROVISIONS
The regulatory framework to prevent and control money laundering is
contained among others, in Decree 663 of 1993, External Circulars 025 of 2003,
034 of 2004, 040 of 2004 and 04 of 2006, issued by the Superintendency of
Finance, as well as Law 599 of 2000 (The Colombian Criminal Code).
The External Circulars issued by the Superintendency of Finance regulate
and control anti-money laundering issues for financial institutions in Colombia,
adopting 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 appropriate authorities to prevent and control money
laundering and terrorism.
The Colombian Superintendency of Finance is currently drafting an External
Circular which shall replace the aforementioned regulations. Also, the Colombian
Senate is currently drafting a bill in order to introduce new administrative and
penal rules and regulations in Colombian legislation to prevent, control,
detect, eliminate and judge and try all that relating to financing terrorism. BC
has been directly involved in discussing and drafting the proposed regulations
considering both necessary and of great benefit for the entire financial sector.
TROUBLED FINANCIAL INSTITUTIONS
In response to the crisis faced by the Colombian financial system during
the early 1980s, in 1985 the Government created Fogafin. Subject to specific
limitations, Fogafin is authorized to provide equity (whether or not reducing
the par value of the recipient's shares) and/or secured credits to troubled
financial institutions, and to insure deposits of commercial banks and certain
other financial institutions. In 1998 and 1999, to address the adverse effects
of the economic crisis, Law 550 (Ley de Reactivacion Economica), Law 546 (Ley de
Vivienda), External Circular 039 and External Circular 044 were also adopted.
These regulations sought to aid the recovery of the Colombian economy, by
helping troubled companies and had some influence on the Bank's credit policies
for such companies. Notably, under Law 546 of 1999, savings and loan
institutions were required to convert into commercial and savings banks. Also,
under this law, commercial banks cannot have participation in other commercial
banks. 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. Additional information on the Conavi/Corfinsura merger can be found in
Item 4. Information on the Company - A. History and Development of the Company.
109
REGULATORY FRAMEWORK FOR SUBSIDIARIES WHO DO NOT BELONG TO THE FINANCE
SECTOR
All BC's subsidiaries that do not belong to the finance sector are
governed by that stipulated in the Colombian Civil Code and the Colombian Code
of Commerce as well as any rules and regulations issued by the Colombian
Superintendency of Industry and Commerce and the Superintendency of Corporations
or any other type of special regulations that may be applicable to the
commercial and industrial activities carried out by said subsidiaries.
B.8. RAW MATERIALS
The Bank on a consolidated basis is not dependent on sources or
availability of raw materials.
B.9. PATENTS, LICENCES AND CONTRACTS
BC is not dependent on patents or licenses, nor is dependent on an
industrial, commercial or financial contract (including contracts with customers
or suppliers) individually considered.
B.10. 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). In 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. In 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. In December 2006, the aggregate amount deposited in checking accounts was
Ps 5,366 billion, which declined 7.9% to Ps 4,941 billion by March 31, 2007. As
of December 31, 2006, deposits in checking accounts represented 23.1% of the
Bank's total deposits.
C. ORGANIZATIONAL STRUCTURE
The following is a list of Bancolombia's subsidiaries as of December 31,
2006:
SUBSIDIARIES
SHAREHOLDING
JURISDICTION OF DIRECTLY AND
ENTITY INCORPORATION BUSINESS INDIRECTLY
-------------------------------------------------------- ---------------------- -------------------- ----------------
Leasing Bancolombia S.A. (formerly Leasing Colombia
S.A.) Colombia Leasing 100%
Fiduciaria Bancolombia S.A. (formerly Fiducolombia
S.A.) Colombia Trust 98.81%
Bancolombia Panama S.A. Panama Banking 100%
Bancolombia Cayman Cayman Islands Banking 100%
110
SHAREHOLDING
JURISDICTION OF DIRECTLY AND
ENTITY INCORPORATION BUSINESS INDIRECTLY
-------------------------------------------------------- ---------------------- -------------------- ----------------
Sistema de Inversiones y Negocios S.A. Panama Investments 100%
Sinesa Holding Company Ltd. British Virgin Islands Investments 100%
Future Net Inc Panama E-commerce 100%
Banca de Inversion Bancolombia S.A. (formerly Colcorp
S.A. Corporacion Financiera) Colombia Investment Banking 100%
Inversiones Valores Simesa S.A. (1) Colombia Investments 71.75%
Inmobiliaria Bancol S.A. Colombia Real estate broker 99.09%
Fundicom S.A. Colombia Metals engineering 79.90%
Valores Simesa S.A. Colombia Investments 71.75%
Todo UNO Colombia S.A. Colombia E-commerce 89.92%
Almacenes Generales de Deposito Mercantil S.A. Warehousing and
ALMACENAR Colombia logistics 98.31%
Unicargo de Colombia S.A. Colombia Freight service 98.41%
Ditransa S.A. Colombia Freight service 52.73%
Compania Suramericana de Financiamiento Comercial S.A.
Sufinanciamiento Colombia Financial services 99.98%
Renting Colombia S.A. (formerly Compania Suramericana
de Arrendamiento Operativo S.A. Surenting) Colombia Operating leasing 75.50%
Patrimonio Autonomo Localiza Colombia Car rental 75.50%
Suleasing Internacional S.A. Panama Leasing 100%
Suleasing International USA, Inc. USA Leasing 100%
Suleasing Internacional do Brasil Locacao de Bens S.A. Brazil Leasing 100%
Inversiones CFNS Ltda. Colombia Investments 100%
Valores Bancolombia S.A. (formerly Suvalor S.A.) Colombia Securities brokerage 100%
Suvalor Panama S.A. Panama Securities brokerage 100%
Bancolombia Puerto Rico Internacional, Inc (formerly
Banco Corfinsura Internacional Inc.) Puerto Rico Banking 100%
Multienlace S.A. Colombia Contact center 98.20%
Inversiones IVL S.A. (2) Colombia Investments 98.31%
Factoring Bancolombia S.A. (formerly Comercia S.A.) Colombia Financial services 99.97%
Patrimonio Autonomo CV Sufinanciamiento Colombia Loan management 100%
-------------
(1) Entity resulting from the spin-off of Valores Simesa S.A. that took place
on December 21, 2006.
(2) Entity resulting from the spin-off of Almacenar S.A. that took place on
December 13, 2006.
D. PROPERTY, PLANT AND EQUIPMENT
As of December 31, 2006, the Bank owned Ps 873.65 billion in equipment. Ps
254.24 billion correspond to land and buildings, of which approximately 94.78%
are administrative real estate and branches, located in 84 municipalities, but
mainly in the cities of Bogota, Medellin and Cali. Ps 132.89 billion correspond
to computer equipment, of which 33.20% 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 416 rented offices.
The Bank does not have any liens on its property.
111
E. SELECTED STATISTICAL INFORMATION
The following information is included for analytical purposes and should
be read in conjunction with the Bank's consolidated financial statements as well
as Item 5. Operating and Financial Review and Prospects. This information has
been prepared based on the Bank's financial records, which are prepared in
accordance with Colombian GAAP and do not reflect adjustments necessary to state
the information in accordance with U.S. GAAP. See Note 31 to the Bank's
consolidated financial statements as of December 31, 2006 included in this
Annual Report for a summary of the significant differences between Colombian
GAAP and U.S. GAAP.
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 Conavi/Corfinsura 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 Conavi/Corfinsura 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) -1
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
inflation rate).
112
Under this adjustment formula, assuming positive nominal average interest
rates, the real average interest rate on a portfolio of peso-denominated assets
or liabilities would be equal to the nominal average interest rate on that
portfolio if the inflation rate were zero. The real average interest rate can be
negative for a portfolio of peso-denominated interest-earning assets when the
inflation rate for the period is higher than the average nominal rate of this
interest-earning asset portfolio for the same period. In addition, the real
average interest rate would be negative if the inflation rate were greater than
the average nominal interest rate.
AVERAGE BALANCE SHEET
The following tables show for the years ended December 31, 2004, 2005 and
2006, 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 tables below, the nominal interest rate for U.S. dollar-denominated
items is considered to be the real interest rate because this activity was
originated outside of Colombia and would not be impacted by the inflation and
devaluation levels that would impact domestic activity.
In addition, individual item's interest rate subtotals are based on
weighted average using the average balances of the item.
113
AVERAGE BALANCE SHEET AND INCOME FROM INTEREST-EARNING ASSETS FOR THE FISCAL
YEARS
ENDED DECEMBER 31,
2004 2005
--------------------------------------------- ---------------------------------------------
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
INTEREST-EARNING ASSETS
Overnight funds (3)
Peso-denominated..................... Ps 7,681 Ps 1,759 22.9% 16.5% Ps 55,779 Ps 3,032 5.4% 0.6%
Dollar-denominated................... 332,953 5,414 1.6% 1.6% 433,111 13,366 3.1% 3.1%
------------ ------------ ------------ ------------
Total.............................. 340,634 7,173 2.1% 488,890 16,398 3.4%
Investment securities
Peso-denominated..................... 2,937,411 382,648 13.0% 7.1% 5,851,619 716,771 12.2% 7.1%
Dollar-denominated................... 1,654,701 166,680 10.1% 10.1% 1,626,509 107,938 6.6% 6.6%
------------ ------------ ------------ ------------
Total.............................. 4,592,112 549,328 12.0% 7,478,128 824,709 11.0%
Loans(1) (2)
Peso-denominated..................... 7,043,820 1,127,833 16.0% 10.0% 13,794,002 2,110,574 15.3% 10.0%
Dollar-denominated 1,928,495 107,572 5.6% 5.6% 3,483,715 231,172 6.6% 6.6%
------------ ------------ ------------ ------------
Total.............................. 8,972,315 1,235,405 13.8% 17,277,717 2,341,746 13.6%
Total interest-earning assets
Peso-denominated..................... 9,988,912 1,512,240 15.1% 9.1% 19,701,400 2,830,377 14.4% 9.1%
Dollar-denominated................... 3,916,149 279,666 7.1% 7.1% 5,543,335 352,476 6.4% 6.4%
------------ ------------ ------------ ------------
Total.............................. 13,905,061 1,791,906 12.9% 25,244,735 3,182,853 12.6%
NON INTEREST-EARNING ASSETS:
Cash due from banks and Central Bank
Peso-denominated..................... 503,402 964,410
Dollar-denominated................... 205,868 237,608
------------ ------------
Total.............................. 709,270 1,202,018
Allowance for loan losses
Peso-denominated..................... (335,539) (605,615)
Dollar-denominated................... (89,142) (90,401)
------------ ------------
Total.............................. (424,681) (696,016)
Non-performing loans
Peso-denominated..................... 86,024 246,580
Dollar-denominated................... 7,119 10,091
------------ ------------
Total.............................. 93,143 256,671
Customers' acceptances
Peso-denominated..................... 545,029 1,070,341
Dollar-denominated................... (487,565) (975,030)
------------ ------------
Total.............................. 57,464 95,311
Accounts receivable, net
Peso-denominated..................... 138,710 303,137
2006
---------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------ ------------ -------- --------
(Ps million, except percentages)
ASSETS
INTEREST-EARNING ASSETS
Overnight funds (3)
Peso-denominated..................... Ps 36,581 Ps 4,695 12.8% 8.0%
Dollar-denominated................... 261,159 20,504 7.9% 7.9%
------------ ------------
Total.............................. 297,740 25,199 8.5%
Investment securities
Peso-denominated..................... 5,102,999 144,715 2.8% -1.6%
Dollar-denominated................... 1,792,735 128,482 7.2% 7.2%
------------ ------------
Total.............................. 6,895,734 273,197 4.0%
Loans(1) (2)
Peso-denominated..................... 17,410,381 2,397,421 13.8% 8.9%
Dollar-denominated 3,928,500 299,251 7.6% 7.6%
------------ ------------
Total.............................. 21,338,881 2,696,672 12.6%
Total interest-earning assets
Peso-denominated..................... 22,549,961 2,546,831 11.3% 6.5%
Dollar-denominated................... 5,982,394 448,237 7.5% 7.5%
------------ ------------
Total.............................. 28,532,355 2,995,068 10.5%
NON INTEREST-EARNING ASSETS:
Cash due from banks and Central Bank
Peso-denominated..................... 1,126,746
Dollar-denominated................... 256,202
------------
Total.............................. 1,382,948
Allowance for loan losses
Peso-denominated..................... (679,635)
Dollar-denominated................... (96,517)
------------ -
Total.............................. (776,152)
Non-performing loans
Peso-denominated..................... 242,503
Dollar-denominated................... 16,318
------------
Total.............................. 258,821
Customers' acceptances
Peso-denominated..................... 858,677
Dollar-denominated................... (728,614)
------------
Total.............................. 130,063
Accounts receivable, net
Peso-denominated..................... 414,436
114
AVERAGE BALANCE SHEET AND INCOME FROM INTEREST-EARNING ASSETS FOR THE FISCAL
YEARS
ENDED DECEMBER 31,
2004 2005
--------------------------------------------- ---------------------------------------------
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............... 11,947 15,287
------------- -------------
Total.......................... 150,657 318,424
Foreclosed assets, net
Peso-denominated................. 23,890 56,641
Dollar-denominated............... - -
------------- -------------
Total.......................... 23,890 56,641
Premises and equipment, net (2)
Peso-denominated................. 346,870 557,866
Dollar-denominated............... 10,704 20,342
------------- -------------
Total.......................... 357,574 578,208
Other assets
Peso-denominated................. 1,106,888 1,506,162
Dollar-denominated............... (7,523) 149,404
------------- -------------
Total.......................... 1,099,365 1,655,566
Total non interest-earning assets
Peso-denominated................. 2,415,274 4,099,522
Dollar-denominated............... (348,592) (632,699)
------------- -------------
Total.......................... 2,066,682 3,466,823
Total interest and non interest-
earnings assets
Peso-denominated................. 12,404,186 1,512,240 23,800,922 2,830,377
Dollar-denominated............... 3,567,557 279,666 4,910,636 352,476
------------- ------------ ------------- ------------
TOTAL ASSETS.................. PS 15,971,743 PS 1,791,906 PS 28,711,558 PS 3,182,853
============= ============ ============= ============
2006
-------------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE EARNED RATE RATE
------------- -------------- --------- ---------
(Ps million, except percentages)
Dollar-denominated............... 24,571
-------------
Total.......................... 439,007
Foreclosed assets, net
Peso-denominated................. 24,658
Dollar-denominated............... -
-------------
Total.......................... 24,658
Premises and equipment, net (2)
Peso-denominated................. 633,137
Dollar-denominated............... 28,038
-------------
Total.......................... 661,175
Other assets
Peso-denominated................. 1,451,121
Dollar-denominated............... 333,291
-------------
Total.......................... 1,784,412
Total non interest-earning assets
Peso-denominated................. 4,071,643
Dollar-denominated............... (166,711)
-------------
Total.......................... 3,904,932
Total interest and non interest-
earnings assets
Peso-denominated................. 26,621,604 2,546,831
Dollar-denominated............... 5,815,683 448,237
------------- --------------
TOTAL ASSETS.................. PS 32,437,287 PS 2,995,068
============= ==============
---------
(1) Includes performing loans only.
(2) Since January 1, 2004, instead of recording financial leases as property,
plant and equipment, companies must account for them in their loan
portfolio.
(3) Overnight funds interest earned includes commissions and therefore differs
from the concept in the consolidated statements of operations.
115
AVERAGE BALANCE SHEET AND INTEREST PAID ON INTEREST-BEARING LIABILITIES
FOR THE FISCAL YEARS ENDED DECEMBER31,
2004 2005
------------------------------------------ --------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE BALANCE PAID RATE RATE
------------- ---------- -------- -------- ------------- ------------ -------- --------
(Ps million, except percentages)
LIABILITIES AND SHARE-HOLDERS'
EQUITY
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated.............. Ps 189,362 Ps 4,822 2.5% -2.8% Ps 188,678 Ps 5,223 2.8% -2.0%
Dollar-denominated............ 985,168 8,683 0.9% 0.9% 887,497 15,088 1.7% 1.7%
------------- ---------- ------------- ------------
Total....................... 1,174,530 13,505 1.1% 1,076,175 20,311 1.9%
Savings deposits
Peso-denominated.............. 2,886,563 140,237 4.9% -0.6% 6,905,512 240,016 3.5% -1.3%
Dollar-denominated............ 133,130 1,051 0.8% 0.8% 135,822 1,872 1.4% 1.4%
------------- ---------- ------------- ------------
Total....................... 3,019,693 141,288 4.7% 7,041,334 241,888 3.4%
Time deposits
Peso-denominated.............. 2,672,930 229,416 8.6% 2.9% 4,869,923 393,898 8.1% 3.1%
Dollar-denominated............ 1,592,067 38,142 2.4% 2.4% 1,760,073 55,468 3.2% 3.2%
------------- ---------- ------------- ------------
Total....................... 4,264,997 267,558 6.3% 6,629,996 449,366 6.8%
Overnight funds
Peso-denominated.............. 802,920 37,890 4.7% -0.7% 1,039,540 68,830 6.6% 1.7%
Dollar-denominated............ 61,501 3,326 5.4% 5.4% 122,134 5,080 4.2% 4.2%
------------- ---------- ------------- ------------
Total....................... 864,421 41,216 4.8% 1,161,674 73,910 6.4%
Borrowings from domestic
development banks
Peso-denominated.............. 777,871 73,383 9.4% 3.7% 1,970,391 152,791 7.8% 2.8%
Dollar-denominated............ 8,491 166 2.0% 2.0% 71,513 3,718 5.2% 5.2%
------------- ---------- ------------- ------------
Total....................... 786,362 73,549 9.4% 2,041,904 156,509 7.7%
Interbank borrowings
Peso-denominated.............. - - - -
Dollar-denominated............ 312,969 7,389 2.4% 2.4% 1,349,987 54,630 4.0% 4.0%
------------- ---------- ------------- ------------
Total....................... 312,969 7,389 2.4% 1,349,987 54,630 4.0%
Long-term debt
Peso-denominated.............. 443,522 41,239 9.3% 3.6% 1,812,802 153,658 8.5% 3.5%
Dollar-denominated............ - - - -
------------- ---------- ------------- ------------
Total....................... 443,522 41,239 9.3% 1,812,802 153,658 8.5%
Fiduciary deposits
Peso-denominated - - - -
Dollar-denominated - - - -
Total - - - -
Total interest-bearing
liabilities
Peso-denominated.............. 7,773,168 526,987 6.8% 1.2% 16,786,846 1,014,416 6.0% 1.1%
Dollar-denominated............ 3,093,326 58,757 1.9% 1.9% 4,327,026 135,856 3.1% 3.1%
------------- ---------- ------------- ------------
Total....................... 10,866,494 585,744 5.4% 21,113,872 1,150,272 5.4%
2006
---------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------- ----------- -------- ---------
(Ps million, except percentages)
LIABILITIES AND SHARE-HOLDERS'
EQUITY
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated.............. Ps 294,062 Ps 6,568 2.2% -2.2%
Dollar-denominated............ 939,789 26,108 2.8% 2.8%
------------- -----------
Total....................... 1,233,851 32,676 2.6%
Savings deposits
Peso-denominated.............. 8,252,173 261,550 3.2% -1.3%
Dollar-denominated............ 136,420 2,831 2.1% 2.1%
------------- -----------
Total....................... 8,388,593 264,381 3.2%
Time deposits
Peso-denominated.............. 5,275,213 376,919 7.1% 2.6%
Dollar-denominated............ 1,796,282 82,594 4.6% 4.6%
------------- -----------
Total....................... 7,071,495 459,513 6.5%
Overnight funds
Peso-denominated.............. 1,086,896 80,413 7.4% 2.8%
Dollar-denominated............ 397,212 20,463 5.2% 5.2%
------------- -----------
Total....................... 1,484,108 100,876 6.8%
Borrowings from domestic
development banks
Peso-denominated.............. 2,218,433 174,108 7.8% 3.2%
Dollar-denominated............ 181,326 6,399 3.5% 3.5%
------------- -----------
Total....................... 2,399,759 180,507 7.5%
Interbank borrowings
Peso-denominated.............. - -
Dollar-denominated............ 1,574,870 94,872 6.0% 6.0%
------------- -----------
Total....................... 1,574,870 94,872 6.0% 6.0%
Long-term debt
Peso-denominated.............. 1,442,367 113,404 7.9% 3.2%
Dollar-denominated............ - -
------------- -----------
Total....................... 1,442,367 113,404 7.9% 7.9%
Fiduciary deposits
Peso-denominated - -
Dollar-denominated - -
Total - -
Total interest-bearing
liabilities
Peso-denominated.............. 18,569,144 1,012,962 5.5% 0.9%
Dollar-denominated............ 5,025,899 233,267 4.6% 4.6%
------------- -----------
Total....................... 23,595,043 1,246,229 5.3%
116
AVERAGE BALANCE SHEET AND INTEREST PAID ON INTEREST-BEARING LIABILITIES
FOR THE FISCAL YEARS ENDED DECEMBER 31,
2004 2005
------------------------------------------ -----------------------------------------------
AVERAGE AVERAGE AVERAGE AVERAGE
NOMINAL REAL NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE BALANCE PAID RATE RATE
------------- ---------- -------- -------- ------------- --------------- -------- --------
(Ps million, except percentages)
NON-INTEREST-BEARING
LIABILITIES:
Checking accounts
Peso-denominated............. 1,926,334 2,378,865
Dollar-denominated........... - -
------------- -------------
Total...................... 1,926,334 2,378,865
Other deposits
Peso-denominated............. 79,552 154,719
Dollar-denominated........... 107,589 93,753
------------- -------------
Total...................... 187,141 248,472
Bank Acceptances Outstanding
Peso-denominated............. 6,758 9,666
Dollar-denominated........... 40,039 46,997
------------- -------------
Total...................... 46,797 56,663
Fiduciary deposits
Peso-denominated - - - -
Dollar-denominated - - - -
Total - - - -
Other liabilities
Peso-denominated............. 1,099,367 1,847,002
Dollar-denominated........... 45,335 60,104
------------- -------------
Total...................... 1,144,702 1,907,106
Shareholders' equity
Peso-denominated............. 1,431,112 2,565,158
Dollar-denominated........... 369,163 441,422
------------- -------------
Total...................... 1,800,275 3,006,580
Total non-interest bearing
liabilities and
shareholders' equity
Peso-denominated........... 4,543,123 6,955,410
Dollar-denominated......... 562,126 642,276
------------- -------------
Total........................ 5,105,249 7,597,686
Total interest and
non-interest
bearing liabilities
and shareholders'
equity
Peso-denominated............. 12,316,291 526,987 23,742,256 1,014,416
Dollar-denominated........... 3,655,452 58,757 4,969,302 135,856
------------- ---------- ------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY PS 15,971,743 Ps 585,744 PS 28,711,558 PS 1,150,272
============= ========== ============= ===============
2006
---------------------------------------------
AVERAGE AVERAGE
NOMINAL REAL
AVERAGE INTEREST INTEREST INTEREST
BALANCE PAID RATE RATE
------------- ------------- -------- ---------
(Ps million, except percentages)
NON-INTEREST-BEARING
LIABILITIES:
Checking accounts
Peso-denominated............. 3,040,103
Dollar-denominated........... -
-------------
Total...................... 3,040,103
Other deposits
Peso-denominated............. 188,841
Dollar-denominated........... 107,122
-------------
Total...................... 295,963
Bank Acceptances Outstanding
Peso-denominated............. 5,861
Dollar-denominated........... 61,933
-------------
Total...................... 67,794
Fiduciary deposits
Peso-denominated - -
Dollar-denominated - -
Total - -
Other liabilities
Peso-denominated............. 1,957,354
Dollar-denominated........... 88,888
-------------
Total...................... 2,046,242
Shareholders' equity
Peso-denominated............. 2,732,001
Dollar-denominated........... 660,141
-------------
Total...................... 3,392,142
Total non-interest bearing
liabilities and
shareholders' equity
Peso-denominated............. 7,924,160
Dollar-denominated........... 918,084
-------------
Total........................ 8,842,244
Total interest and
non-interest
bearing liabilities
and shareholders'
equity
Peso-denominated............. 26,493,304 1,012,962
Dollar-denominated........... 5,943,983 233,267
------------- -------------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY PS 32,437,287 PS 1,246,229
============= =============
117
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, 2006 compared to the fiscal year
ended December 31, 2005; and the fiscal year ended December 31, 2005 compared to
the fiscal year ended December 31, 2004. 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.
2004-2005 2005-2006
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 2,614 Ps (1,341) Ps 1,273 Ps (2,464) Ps 4,127 Ps 1,663
Dollar-denominated............. 3,091 4,861 7,952 (13,500) 20,638 7,138
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 5,705 3,520 9,225 (15,964) 24,765 8,801
Investment securities
Peso-denominated............... 356,965 (22,841) 334,124 (21,230) (550,826) (572,056)
Dollar-denominated............. (1,871) (56,871) (58,742) 11,913 8,631 20,544
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 355,094 (79,712) 275,382 (9,317) (542,195) (551,512)
Loans
Peso-denominated............... 1,032,823 (50,082) 982,741 497,978 (211,131) 286,847
Dollar-denominated............. 103,201 20,399 123,600 33,881 34,198 68,079
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 1,136,024 (29,683) 1,106,341 531,859 (176,933) 354,926
Total interest-earning assets
Peso-denominated............... 1,395,333 (77,195) 1,318,138 321,721 (605,268) (283,546)
Dollar-denominated............. 103,466 (30,656) 72,810 32,897 62,864 95,761
------------ ------------- ------------- ------------- ------------- ------------
TOTAL........................ PS 1,498,799 PS (107,851) PS 1,390,948 PS 354,618 PS (542,404) PS (187,785)
============ ============= ============= ============= ============= ============
INTEREST-BEARING LIABILITIES:
Checking deposits
Peso-denominated............... Ps (19) Ps 420 Ps 401 Ps 2,354 Ps (1,009) Ps 1,345
Dollar-denominated............. (1,660) 8,065 6,405 1,453 9,567 11,020
------------ ------------- ------------- ------------- ------------- ------------
Total........................ (1,679) 8,485 6,806 3,807 8,558 12,365
Savings deposits
Peso-denominated............... 139,687 (39,908) 99,779 42,682 (21,148) 21,534
Dollar-denominated............. 37 784 821 12 947 959
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 139,724 (39,124) 100,600 42,694 (20,201) 22,493
Time deposits
Peso-denominated............... 177,701 (13,219) 164,482 28,958 (45,937) (16,979)
Dollar-denominated............. 5,295 12,031 17,326 1,665 25,461 27,126
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 182,996 (1,188) 181,808 30,623 (20,476) 10,147
Overnight funds
Peso-denominated............... 15,667 15,273 30,940 3,504 8,079 11,583
Dollar-denominated............. 2,522 (768) 1,754 14,171 1,212 15,383
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 18,189 14,505 32,694 17,675 9,291 26,966
Borrowings from domestic
development banks
Peso-denominated............... 92,472 (13,064) 79,408 19,467 1,850 21,317
Dollar-denominated............. 3,277 275 3,552 3,875 (1,194) 2,681
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 95,749 (12,789) 82,960 23,342 656 23,998
118
2004-2005 2005-2006
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............. 41,965 5,276 47,241 13,547 26,695 40,242
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 41,965 5,276 47,241 13,547 26,695 40,242
Long-term debt
Peso-denominated............... 116,064 (3,645) 112,419 (29,125) (11,129) (40,254)
Dollar-denominated............. - - - - - -
------------ ------------- ------------- ------------- ------------- ------------
Total........................ 116,064 (3,645) 112,419 (29,125) (11,129) (40,254)
Total interest-bearing
liabilities
Peso-denominated............... 541,572 (54,143) 487,429 67,840 (69,294) (1,454)
Dollar-denominated............. 51,436 25,663 77,099 34,723 62,688 97,411
------------ ------------- ------------- ------------- ------------- ------------
TOTAL........................ PS 593,008 PS (28,480) PS 564,528 PS 102,563 PS (6,606) PS 95,957
============ ============= ============= ============= ============= ============
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, 2004, 2005 and 2006, respectively.
INTEREST-EARNING ASSETS-YIELD SPREAD FOR THE FISCAL
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2004 2005 2006
-------------- ----------------- -----------------
(in millions of pesos, except percentages)
Total average interest-earning assets
Peso-denominated................................... Ps 9,988,912 Ps 19,701,400 Ps 22,549,961
Dollar-denominated................................. 3,916,149 5,543,335 5,982,394
-------------- ----------------- -----------------
TOTAL............................................ Ps 13,905,061 Ps 25,244,735 Ps 28,532,355
Net interest earned (1)
Peso-denominated................................... Ps 985,253 Ps 1,815,961 Ps 1,533,869
Dollar-denominated................................. 220,909 216,620 214,970
-------------- ----------------- -----------------
TOTAL............................................ Ps 1,206,162 Ps 2,032,581 Ps 1,748,839
Average yield on interest-earning assets
Peso-denominated................................... 15.1% 14.4% 11.3%
Dollar-denominated................................. 7.1% 6.4% 7.5%
-------------- ----------------- -----------------
TOTAL............................................ 12.9% 12.6% 10.5%
Net interest margin (2)
Peso-denominated................................... 9.9% 9.2% 6.8%
Dollar-denominated................................. 5.6% 3.9% 3.6%
-------------- ----------------- -----------------
TOTAL............................................ 8.7% 8.1% 6.1%
Interest spread (3)
Peso-denominated.................................. 8.4% 8.3% 5.8%
Dollar-denominated................................. 5.2% 3.2% 2.9%
-------------- ----------------- -----------------
TOTAL............................................ 7.5% 7.2% 5.2%
-----
(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.
119
E.2. INVESTMENT PORTFOLIO
The Bank acquires and holds investment securities for liquidity and other
strategic purposes, or when it is required by law, including fixed income debt
and equity securities.
The Superintendency of Finance requires investments to be classified as
"trading", "available for sale" or "held to maturity". Trading investments are
those acquired primarily to obtain profits from fluctuations in short-term
prices and are recorded at market value. The difference between current and
previous market value is added to or subtracted from the value of the investment
and credited or charged to earnings. "Available for sale" investments are those
held for at least one year (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. Bancolombia, as part
of its investment strategy keeps portfolios classified as trading, available for
sale and held to maturity. As of December 31, 2006, the value of BC's dollar-
and peso-denominated portfolio on a consolidated basis was Ps 5,516,035 million.
In accordance with the Chapter 1 of Circular 100 of 1995 issued by
Superintendency of Finance, investments in debt securities are fully reviewed in
June and December and partially reviewed each three months for impairment, by
considering the related solvency risk, market exposure, currency exchange and
country risk. Investments in 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 (as shown in the table below), net of the amortizations recorded as of the
valuation date.
LONG-TERM CLASSIFICATION MAXIMUM FACE VALUE (%)
------------------------ ----------------------
BB+, BB, BB- Ninety (90)
B+, B, B- Seventy (70)
CCC Fifty (50)
DD, EE Zero (0)
SHORT-TERM CLASSIFICATION MAXIMUM FACE VALUE (%)
------------------------- ----------------------
3 Ninety (90)
4 Fifty (50)
5 y 6 Zero (0)
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, 2006, the Bank has recorded allowances of Ps 14.53
billion for 58 investment debt securities.
As of December 31, 2005, the Bank has recorded allowances of Ps 5,936
million for 16 investment debt securities.
120
The following table sets forth the fair value of the Bank's investments in
Government and corporate securities and certain other financial investments as
of the dates indicated:
AS OF DECEMBER 31,
----------------------------------------
2004(1)(2) 2005(1)(2) 2006(1)(2)
------------ ------------ ------------
(in millions of pesos)
DOLLAR-DENOMINATED
Securities issued or secured by the Colombian Government............ Ps 805,602 Ps 667,713 Ps 840,508
Euronotes and Eurobonds............................................. 326,534 737,328 383,988
Securities issued by foreign governments............................ 24,085 252,263 66,530
Others.............................................................. 186,232 103,357 58,368
------------ ------------ ------------
Subtotal......................................................... 1,342,453 1,760,661 1,349,394
------------ ------------ ------------
PESO-DENOMINATED
Securities issued or secured by the Colombian Government............ 2,900,305 5,010,982 2,016,413
Securities issued by the Central Bank............................... 4,190 2,582 267
Securities issued by government entities............................ 45,806 111,114 565,575
Securities issued by financial entities............................. 457,378 985,835 1,385,698
Others.............................................................. 167,721 387,773 198,688
------------ ------------ ------------
Subtotal......................................................... 3,575,400 6,498,286 4,166,641
------------ ------------ ------------
TOTAL................................................ Ps 4,917,853 Ps 8,258,947 Ps 5,516,035
============ ============ ============
----------
(1) Includes debt securities only. Net in equity securities were Ps 332,358
million, Ps 200,754 million and Ps 161,726 million for 2004, 2005 and
2006, respectively.
(2) These amounts are net of allowances for decline in value which were, Ps
4,939 million for 2004, Ps 5,936 million for 2005 and Ps 14,525 million
for 2006 respectively.
As of December 31, 2004, 2005 and 2006 BC holds securities issued by
foreign governments and in the amounts, describe as follows:
INVESTMENT AMOUNT -
INVESTMENT AMOUNT - BOOK BOOK VALUE - (U.S.
AS OF DECEMBER 31, ISSUER VALUE - (IN MILLION OF PESOS) DOLLARS)
------------------ ----------------------- ----------------------------- -------------------
2004 Republic of Brazil Ps 14,327 US$ 5,995,338
Republic of Panama Ps 5,026 US$ 2,103,316
Republic of El Salvador Ps 4,732 US$ 1,980,374
2005 Republic of Brazil Ps 247,425 US$ 108,319,266
Republic of Panama Ps 4,838 US$ 2,118,008
2006 Republic of Brazil Ps 58,717 US$ 26,227,198
U.S. Treasury Ps 7,812 US$ 3,489,830
The Bank 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 2007
and in order to achieve the liquidity needed to serve increasing portfolio of
loans.
During 2006, the Bank decreased the amount of its peso denominated
portfolio to Ps 4,167 billion, keeping investments in securities issued by the
Government at 48% of such portfolio. Such strategy is based on the Bank's
concerns regarding the low level of internal interest rates and expectations
regarding a more restricted monetary police by the Central Bank, as well as on
the Bank's needs of liquidity to serve the increasing loan portfolio
disbursements.
121
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, 2006:
AS OF DECEMBER 31, 2006
---------------------------------------------------------------------------
MATURING IN LESS THAN 1 MATURING BETWEEN 1 AND MATURING BETWEEN 5 AND
YEAR 5 YEARS 10 YEARS
----------------------- ------------------------ ------------------------
BALANCE(1) YIELD %(2) BALANCE(1) YIELD %(2) BALANCE(1) YIELD %(2)
----------- ---------- ------------ ---------- ------------ ----------
(in millions of pesos, except yields)
DOLLAR-DENOMINATED:
Securities issued or
secured by Colombian
government.................. Ps 39 7.63% Ps 611,884 5.86% Ps 213,371 7.26%
Euronotes and Eurobonds....... 73,762 7.61% 310,225 7.80% - -
Securities issued by foreign
governments................ 26,971 5.50% 36,999 5.38% 2,560 4.75%
Others........................ 35,462 4.12% 22,906 7.71% - -
----------- ------------ ------------
Subtotal................... 136,234 6.28% 982,014 6.50% 215,932 7.23%
----------- ------------ ------------
PESO-DENOMINATED
Securities issued or
secured by Colombian
government.................... 346,977 6.66% 1,035,632 7.99% 608,358 8.07%
Securities issued or
secured by the Central Bank... 103 6.90% 164 6.83% - -
Securities issued or
secured by government
entities...................... 471,923 7.87% 49,805 8.72% 32,580 9.44%
Securities issued by
financial entities............ 149,391 7.72% 555,964 6.13% 519,644 6.74%
Others........................ 5,118 8.40% 114,337 9.02% 73,761 9.54%
----------- ------------ ------------
Subtotal................... 973,512 7.42% 1,755,902 7.49% 1,234,343 7.63%
----------- ------------ ------------
TOTAL...................... Ps1,109,746 Ps 2,737,916 Ps 1,450,275
=========== ============ ============
AS OF DECEMBER 31, 2006
-----------------------------------------------
MATURING MORE THAN
10 YEARS TOTAL
--------------------- ------------------------
BALANCE(1) YIELD%(2) BALANCE(1) YIELD %(2)
---------- --------- ------------ ----------
(in millions of pesos, except yields)
DOLLAR-DENOMINATED:
Securities issued or
secured by Colombian
government.................. Ps 15,214 6.74% Ps 840,508 6.23%
Euronotes and Eurobonds....... - - 383,988 7.76%
Securities issued by foreign
governments................ - - 66,530 5.41%
Others........................ - - 58,368 5.53%
---------- ------------
Subtotal................... 15,214 6.74% 1,349,394 6.60%
---------- ------------
PESO-DENOMINATED
Securities issued or
secured by Colombian
government.................... 25,446 8.79% 2,016,413 7.80%
Securities issued or
secured by the Central Bank... - - 267 6.86%
Securities issued or
secured by government
entities...................... 11,267 9.60% 565,575 8.07%
Securities issued by
financial entities............ 160,699 6.77% 1,385,698 6.60%
Others........................ 5,472 9.38% 198,688 9.21%
---------- ------------
Subtotal................... 202,884 7.25% 4,166,641 7.50%
---------- ------------
TOTAL...................... Ps 218,098 Ps 5,516,035
========== ============
----------
(1) Amounts are net of allowances for decline in value which amounted to Ps
14,525 million in 2006.
(2) Yield was calculated using the internal return rate (IRR) as of December
31, 2006.
As of December 31, 2006, the Bank had the following investments that
exceeded 10% of its shareholders' equity:
ISSUER FAIR VALUE AMORTIZED COST
-------------- ------------ --------------
(Ps million)
Securities issued or secured by Ministry of
Colombian government Finance Ps 2,856,921 Ps 2,973,321
Securities issued by other
government entities Finagro 463,148 463,228
Securities issued by other Titularizadora
entities Colombiana 840,982 843,605
------------ --------------
TOTAL Ps 4,161,051 Ps 4,280,154
============ ==============
As of December 31, 2006, the bank held Ps 4,161 billion of securities
issued by the Republic of Colombia that exceeded 10% of the Bank's shareholders'
equity.
122
E.3. LOAN PORTFOLIO
In March of 2002, through its External Circular 011, the Colombian
Superintendency of Banking (now the Superintendency of Finance), introduced
modifications to Chapter II of the Basic Accounting Circular, related to credit
risk management. Such regulation 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 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 2006, Bancolombia, concentrated its efforts in adjusting its credit
risk management system SARC by enhancing the expected loss models to be used in
the management of the loan portfolio in the near future. Such adjustments were
based on the rules and regulations issued by the Superintendency of Finance but
also had the additional purpose of achieving competitive advantages. The main
adjustments made to the Bank's credit risk management system included:
- Migration of the historical loans and customer information
from former Conavi and Corfinsura to the Datawarehouse built
for Bancolombia.
- Update of parameters used to determine expected losses
(default probability, exposure at the time of default and loss
in the event of default) including former Corfinsura and
Conavi historical information.
- Systems and adjustments required for the implementation of the
reference model for provisions established by the
Superintendency of Finance for commercial loans.
123
The following table shows the Bank's loan portfolio classified into
corporate, retail, financial leases and mortgage loans:
AS OF DECEMBER 31,
----------------------------------------------------------------------
2002 2003 2004 2005 2006
------------ ------------ ------------ ------------- -------------
(Ps million)
CORPORATE
Trade financing........................... Ps 166,620 Ps 149,582 Ps 253,632 Ps 783,894 Ps 777,417
Loans funded by domestic
development banks....................... 376,378 394,947 770,331 948,659 321,263
Working capital loans..................... 3,650,585 4,687,153 4,298,354 7,702,420 11,534,148
Credit cards.............................. 5,218 8,237 24,621 42,293 50,803
Overdrafts................................ 48,591 32,371 67,018 62,041 74,218
Other..................................... -- -- -- -- --
------------ ------------ ------------ ------------- -------------
Total corporate....................... 4,247,392 5,272,290 5,413,956 9,539,307 12,757,849
------------ ------------ ------------ ------------- -------------
RETAIL (1)
Credit cards.............................. 254,876 335,172 392,900 582,533 796,175
Personal loans............................ 561,558 814,885 1,111,250 1,556,429 2,281,177
Vehicle loans............................. 24,476 229,737 381,723 629,326 963,072
Overdrafts................................ 68,490 81,294 89,867 101,957 119,882
Loans funded by domestic
development banks......................... 276,157 330,246 359,494 403,414 386,283
Trade financing........................... 28,112 19,644 54,189 76,643 70,406
Working capital loans..................... 698,160 898,239 1,295,643 1,612,650 2,331,999
------------ ------------ ------------ ------------- -------------
Total retail.......................... 1,911,829 2,709,217 3,685,066 4,962,952 6,948,994
------------ ------------ ------------ ------------- -------------
FINANCIAL LEASES (2) ......................... -- -- 880,110 2,660,556 3,553,286
MORTGAGE ..................................... 38,094 48,161 56,107 1,463,437 1,385,445
------------ ------------ ------------ ------------- -------------
TOTAL LOANS...................... 6,197,315 8,029,668 10,035,239 18,626,252 24,645,574
Allowance for loan losses..................... (332,324) (387,263) (434,378) (705,882) (834,183)
------------ ------------ ------------ ------------- -------------
TOTAL LOANS, NET............... Ps 5,864,991 Ps 7,642,405 Ps 9,600,861 Ps 17,920,370 Ps 23,811,391
============ ============ ============ ============= =============
----------
(1) Includes loans to high-income individuals and small companies.
(2) Includes financial leases, according to regulations issued by the
Superintendency of Finance and effective as of January 1, 2004.
As of December 31, 2006, BC's total loan portfolio amounted to
approximately Ps 24.65 trillion, representing an increase of 32.32% as compared
to approximately Ps 18.63 trillion in 2005. This increase was due to the
positive performance of the Colombian economy and the increase of credit demand
during 2006. In 2005, the Bank's total loan portfolio increased 85.61% to
approximately Ps 18.63 trillion from approximately Ps 10.04 trillion in 2004,
due primarily to the effect of the Conavi/Corfinsura merger, the recovery of the
Colombian economy and the Bank's strategic targeting of additional market
segments.
Below is a brief explanation of the factors that contributed to the
increase in the loan portfolio as of December 31, 2006 in each of the loan
portfolio's categories.
Corporate Loans
As of December 31, 2006, corporate loans amounted to approximately Ps 12.76
trillion, increasing 33.74% as compared to approximately Ps 9.54 trillion as of
December 31, 2005. Working capital loans represented the highest growth (49.75%)
increasing from approximately Ps 7.70 trillion in 2005 to approximately Ps 11.53
trillion in 2006.
124
The performance of the Colombian economy, particularly the domestic demand
in 2006, was the principal factor for the increase in overall credit demand. At
the end of the 2006, the following economic sectors presented the highest growth
rates as compared to 2005: retail, maintenance, restaurants and hotels sector
with 10.69%, construction with 14.36% and manufacturing industry with 10.79%,
according to the information provided by Departamento Administrativo Nacional de
Estadistica (the "National Administrative Department of Statistics" or "DANE").
According to figures obtained from the Colombian Superintendency of
Finance, the Commercial Loan/GDP ratio and the Consumer Loan/GDP ratio showed
high growths in 2006 as compared to 2005, reaching 16.5% and 7.94% respectively.
The Bank expects that the Colombian economy will continue to grow over the next
few years as a result of an important level of financial leverage.
In 2005, total corporate loans increased 76.20% to approximately Ps 9.54
trillion primarily due to a 79.19% increase in working capital loans and a
209.07% increase in trade financing loans.
As of December 31, 2004, 2005 and 2006 total corporate loans represented
54%, 51% and 52% respectively, of the Bank's total loan portfolio.
Retail Loans
In 2006, retail loans increased 40.02% as compared to 2005, increasing from
approximately Ps 4.96 trillion in 2005 to approximately Ps 6.95 trillion in
2006. This increase was primarily due to a 53.03% increase in vehicle loans,
36.67% increase in credit card billing and 46.56% increase in personal retail
loans. On a macroeconomic level, these growth rates were driven by 14.11% growth
on retail sales in 2006 (this information is provided by the DANE in the
"Encuesta Muestra Mensual De Comercio Al Por Menor" or Survey Shows Monthly of
Commerce al in Detail) 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 30 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's business.
Total retail loans increased 34.68% in 2005 from approximately Ps 3.69
trillion in 2004 to approximately Ps 4.96 trillion in 2005. This increase was
primarily due to a 40.06% increase in personal loans, a 64.86% increase in
vehicle loans and a 48.26% increase in credit card billing.
As of December 31, 2004, 2005 and 2006, retail loans represented 37%, 27%
and 28%, respectively, of the Bank's total loan portfolio.
Mortgage Loans
As a result of the Conavi/Corfinsura merger, BC acquired the mortgage loan
business, where former Conavi was one of the leading entities in Colombia. As of
December 31, 2006, mortgage loans amounted to approximately Ps 1.39 trillion
representing approximately 6% of the total loan portfolio, driven by the
favorable performance of the construction sector as well as the sale strategy
adopted by the Bank. Additionally, the Bank sold mortgage loans to
"Titularizadora Colombiana S.A." amounting to approximately Ps 905 billion in
the last quarter of 2006.
125
Financial Leases
According to information published by the Superintendency of Finance as of
December 31, 2006, BC, through its subsidiaries Leasing Bancolombia and
Sufinanciamiento, is the leader in financial lease contracts origination.
Including the subsidiaries mentioned above, and with Factoring Bancolombia,
Suleasing Internacional, Bancolombia Puerto Rico Internacional, Inc. and
Bancolombia Panama, as of December 31, 2006, the financial lease loan portfolio
amounted to approximately Ps 3.55 trillion, 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.
Borrowing Relationships
As of December 31, 2006, the aggregate outstanding principal amount of the
Bank's 25 largest borrowing relationships, in a non-consolidated basis,
represented approximately 10.98% of the total consolidated loan portfolio, and
no single borrowing relationship represented more than 1.01% of the total loan
portfolio. As of December 31, 2006, approximately 6.24% of such loans were
denominated in foreign currencies (U.S. dollars), 100% of those loans were
corporate and 93.81% of these relationships were classified as "A" loans, 2.34%
as "B" and 3.85% as "D".
MATURITY AND INTEREST RATE SENSITIVITY OF LOANS
The following table shows the maturities of the Bank's loan portfolio as of
December 31, 2006:
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 115,221 Ps 31,231 Ps 33,617 Ps 180,069
Loans funded by domestic development banks ........ 30,853 224,548 65,537 320,938
Working capital loans ............................. 3,324,924 3,931,904 1,602,289 8,859,117
Credit cards ...................................... 7,617 38,842 957 47,416
Overdrafts ........................................ 74,218 -- -- 74,218
------------ ------------- ------------ -------------
Total corporate ............................... 3,552,833 4,226,525 1,702,400 9,481,758
------------ ------------- ------------ -------------
RETAIL
Credit cards ...................................... 117,118 606,949 1,581 725,648
Personal loans .................................... 284,322 1,962,303 34,511 2,281,136
Vehicle loans ..................................... 38,848 887,650 36,550 963,048
Overdrafts ........................................ 119,882 -- -- 119,882
Loans funded by domestic development banks ........ 41,495 301,737 42,946 386,178
Trade financing ................................... 47,431 2,324 -- 49,755
Working capital loans ............................. 1,002,683 1,181,967 78,830 2,263,480
------------ ------------- ------------ -------------
Total retail .................................. 1,651,779 4,942,930 194,418 6,789,127
------------ ------------- ------------ -------------
FINANCIAL LEASES ...................................... 191,583 2,474,545 583,485 3,249,613
MORTGAGE .............................................. 26,201 109,258 1,249,986 1,385,445
------------ ------------- ------------ -------------
TOTAL PESO-DENOMINATED LOANS Ps 5,422,396 Ps 11,753,258 Ps 3,730,289 Ps 20,905,943
============ ============= ============ =============
DOLLAR-DENOMINATED LOANS
CORPORATE
Trade financing ............................. Ps 471,117 Ps 31,379 Ps 94,852 Ps 597,348
126
DUE AFTER ONE
DUE IN ONE YEAR THROUGH DUE AFTER
YEAR OR LESS FIVE YEARS FIVE YEARS TOTAL
------------ ------------- ------------ -------------
(Ps million)
Loans funded by domestic
development banks ................ 325 -- -- 325
Working capital loans .............. 922,281 1,383,343 369,407 2,675,031
Credit cards ....................... 487 2,900 -- 3,387
Overdrafts ......................... -- -- -- --
------------ ------------- ------------ -------------
Total corporate ................ 1,394,210 1,417,622 464,259 3,276,091
------------ ------------- ------------ -------------
RETAIL
Credit cards ....................... 20,436 50,091 -- 70,527
Personal loans ..................... 5 36 -- 41
Vehicle loans ...................... 24 -- -- 24
Overdrafts ......................... -- -- -- --
Loans funded by domestic
development banks ................ 77 28 -- 105
Trade financing .................... 18,152 2,499 -- 20,651
Working capital loans .............. 48,021 5,666 14,832 68,519
------------ ------------- ------------ -------------
Total retail ................... 86,715 58,320 14,832 159,867
------------ ------------- ------------ -------------
FINANCIAL LEASES ....................... 51,357 210,758 41,558 303,673
MORTGAGE ............................... -- -- -- --
------------ ------------- ------------ -------------
TOTAL DOLLAR-DENOMINATED LOANS ....... 1,532,282 1,686,700 520,649 3,739,631
------------ ------------- ------------ -------------
TOTAL LOANS .................... Ps 6,954,678 Ps 13,439,958 Ps 4,250,938 Ps 24,645,574
============ ============= ============ =============
As of December 31, 2006, 54.53% 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 of its customers based on its performance
and financial evaluations. Additionally, outstanding loans greater than 300
SMMLV (Ps 122 million as of December 31, 2006) are rated on a semi-annual basis.
This process 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,
2006:
AS OF DECEMBER 31,
2006
------------------
(Ps million)
LOANS AND FINANCIAL LEASES DUE AFTER ONE YEAR:
VARIABLE RATE
Peso-denominated....................................... Ps 13,313,747
Dollar-denominated..................................... 1,608,099
---------------
Total................................................ 14,921,846
---------------
FIXED RATE
Peso-denominated....................................... 2,169,800
Dollar-denominated..................................... 599,250
---------------
Total................................................ 2,769,050
---------------
LOANS AND FINANCIAL LEASES DUE IN ONE YEAR OR LESS:
Peso-denominated....................................... 5,422,396
Dollar-denominated..................................... 1,532,282
---------------
Total................................................ 6,954,678
---------------
TOTAL LOANS AND FINANCIAL LEASES................... Ps 24,645,574
===============
127
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 (SIC) codes. Where the Bank has not assigned a code to
a borrower, classification of the loan has been made based on the purpose of the
loan as described by the borrower:
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------------------------
2002 % 2003 % 2004(1) % 2005 % 2006 %
------------ ------ ------------ ------ ------------- ------ ------------- ------ ------------- ------
Agricultural ....... Ps 135,554 2.2% Ps 183,293 2.3% Ps 480,414 4.8% Ps 844,651 4.5% Ps 996,091 4.0%
Mining products
and oil .......... 103,624 1.7% 84,414 1.0% 140,137 1.4% 273,580 1.5% 456,770 1.9%
Food, beverage
and tobacco ...... 174,818 2.8% 133,859 1.7% 666,602 6.6% 1,371,696 7.4% 1,665,850 6.8%
Chemical
production ....... 11,453 0.1% 174 0.0% 386,434 3.9% 572,000 3.0% 805,900 3.3%
Other industrial
and manufacturing
products ......... 1,738,250 28.0% 1,929,007 24.0% 1,762,447 17.6% 2,982,246 16.0% 3,867,432 15.7%
Government ......... 152,453 2.4% 836,832 10.4% 1,027,009 10.2% 1,226,597 6.6% 602,585 2.4%
Construction ....... 163,755 2.6% 180,704 2.3% 575,679 5.7% 2,980,173 16.0% 1,534,816 6.2%
Trade and tourism .. 816,090 13.2% 893,729 11.1% 1,760,120 17.5% 2,693,730 14.5% 2,791,340 11.3%
Transportation
and communications.. 299,184 4.8% 408,285 5.1% 720,031 7.2% 1,496,371 8.0% 1,924,129 7.8%
Public services .... 464,054 7.5% 472,451 5.9% 469,658 4.7% 941,975 5.0% 1,183,361 4.8%
Consumer services .. 1,840,735 29.9% 2,380,162 29.6% 1,601,132 16.0% 2,134,950 11.5% 5,804,779 23.6%
Commercial services 297,345 4.8% 526,758 6.6% 445,576 4.4% 1,108,283 6.0% 3,012,521 12.2%
------------ ------ ------------ ------ ------------- ------ ------------- ------ ------------- ------
TOTAL LOANS ...... Ps 6,197,315 100.0% Ps 8,029,668 100.0% Ps 10,035,239 100.0% Ps 18,626,252 100.0% Ps 24,645,574 100.0%
============ ====== ============ ====== ============= ====== ============= ====== ============= ======
----------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Finance and effective as of January 1, 2004.
As a result of the high performance of the Colombian economy, BC's loan
portfolio for 2006 presented a 32.32% growth, as each of the different economic
sectors also presented significant increases. It is important to note the strong
performance of the Colombian economy which is primarily due to better conditions
of law and order, and a better business climate driving the demand for credit in
the majority of the economic sectors, among others factors.
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 customers 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.
128
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 uncollateralized loan as of December 31, 2006
is in the amount of Ps 281.94 billion, which represents 8.52% of
the Bank's (consolidated with the Bank's financial subsidiaries)
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, 2006 is in the
amount of Ps 147.83 billion, which represents 5.34% 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, 2006); 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, 2006 is in the amount of Ps 98.32
billion, which represents 3.55% 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 management in the
corresponding committee. Loan applications up to a maximum of 200 SMMLV or Ps
81.6 million (approximately US$ 36,448) may also be submitted to the Bank's
centralized credit area where the approval is done using a credit scoring
methodology.
The following table sets forth the size limits, measured in nominal pesos
or their equivalent in U.S. dollars, for loan application approval by
authorization level as established by the board of directors of BC:
129
MAXIMUM LOAN APPROVAL LIMITS
---------------------------------------------------------------
UNSECURED LOANS(1) SECURED LOANS
------------------------------ ------------------------------
AUTHORIZATION LEVEL:
Approval limits are set by
upper management, and the
Approval limits are set by actual amounts are determined
upper management, and the bearing in mind the experience
Branch Managers ............. actual amounts are determined in the past, ability to
bearing in mind the length of identify risk factors,
the experience in the past, knowledge of credit policies
ability to identify risk and regulations, as well as
factors, knowledge of credit the sound judgment exercised
Zone Managers................ policies and regulations, as by each of the incumbents to
well as the sound judgment whom said powers are
exercised by each of the delegated. The amounts
incumbents to whom said powers delegated are reduced to 60%
are delegated. of the total when there is no
guarantee or security for the
corresponding operations.
(U.S. dollar) (Ps million) (U.S. dollar) (Ps million)
Regional Managers Corporate
Banking.................... 2,278,016.25 5,100 3,796,693.75 8,500
Small and Medium Sized
Enterprises and Personal
Banking Regional Managers.... 1,072,007.65 2,400 1,786,679.41 4,000
Small and Medium Sized
Enterprises and Personal
Banking Vice Presidents(2)... 7,055,597 15,796 11,759,923.89 26,328
Vice President of Mortgage Banking 3,527,798.49 7,898 5,879,961.94 13,164
Corporate Banking and Financial
Vice Presidents(2).................. 7,055,597 15,796 11,759,923.89 26,328
Vice President of Human Resources 105,414.08 236 175,987.92 394
President....................... 3,082,021.99 6,900 5,136,703.31 11,500
All loans, other than those All loans, other than
requiring the approval of those requiring the
the Board of Directors, approval of the Board of
within the limits Directors, within the
Credit Committee................ established by law. limits established by law.
----------
(1) Includes loans with a personal guarantee.
(2) 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 above are
established to grant loans to borrowers with the lowest credit risk level,
the approval limits decrease as the borrower credit risk level increases.
Loans to managers, directors 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.
130
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.
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 SMMLV (Ps 122 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 credit
risk bureaus 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
including: (i) possible market gaps of currencies, maturities and
interest rates in the balance sheet structure and in off-balance
sheet operations, such as financial derivatives; (ii) 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; and (iii) for loans denominated in
foreign currencies, the market risk derived from
131
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 of 2004, 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 SMMLV (Ps 10.8 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 SMMLV (Ps
217.3 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).
Since January 1, 2004, pursuant to External Circular 040 of 2003 of the
Superintendency of Banking (now Superintendency of Finance), financial leases
are 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 reference is made to the loan portfolio, it should be
understood to include financial leases unless otherwise stated.
In 2006, according to the classification system established by the
Superintendency of Finance, commercial loans represented 65.04% of the Bank's
total loan portfolio, representing an increase of 34.14%, as compared to 2005.
As a percentage of the total loan portfolio, consumer loans represented 14.56%,
financial leases represented 14.42%, mortgage loans represented 5.62% and Small
Business Loans represented 0.37%.
132
The following table shows the Bank's loan portfolio categorized in
accordance with the regulations of the Superintendency of Finance in effect for
the relevant periods:
LOAN PORTFOLIO BY TYPE OF LOAN
AS OF DECEMBER 31,
---------------------------------------------------------------------------
2002 2003 2004 2005 2006
-------------- ------------- -------------- ------------- -------------
(Ps million)
Commercial Loans................ Ps 5,219,460 Ps 6,624,494 Ps 7,353,956 Ps 11,949,501 Ps 16,028,505
Consumer Loans.................. 870,898 1,273,159 1,655,066 2,437,727 3,587,260
Small Business Loans............ 68,863 83,854 90,000 115,031 91,078
Financial Leases(1)............. -- -- 880,110 2,660,556 3,553,286
Mortgage........................ 38,094 48,161 56,107 1,463,437 1,385,445
-------------- ------------- -------------- ------------- -------------
TOTAL LOANS AND FINANCIAL
LEASES.......................... 6,197,315 8,029,668 10,035,239 18,626,252 24,645,574
Allowance for Loans and
Financial Lease Losses.......... 332,324 387,263 434,378 705,882 834,183
-------------- ------------- -------------- ------------- -------------
TOTAL LOANS AND FINANCIAL
LEASES, NET................ Ps 5,864,991 Ps 7,642,405 Ps 9,600,861 Ps 17,920,370 Ps 23,811,391
============== ============= ============== ============= =============
----------
(1) Includes financial leases, according to regulations issued by
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. The debtor's financial statements or its projected
cash flows, as well as all other credit information available to the Bank,
reflect adequate paying capacity. 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 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.
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
133
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
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.
134
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 (1),
-----------------------------------------------------------------------------------------------------
2002 % 2003 % 2004 % 2005 % 2006 %
------------ ------ ------------ ------ ------------- ------ ------------- ------ ------------- -----
(Ps million, except percentages)
"A" Normal Ps 5,115,889 82.6% Ps 7,288,273 90.8% Ps 9,327,398 93.0% Ps 17,359,081 93.2% Ps 23,310,545 94.6%
"B" Subnormal 479,429 7.7% 345,297 4.3% 320,959 3.2% 638,131 3.4% 708,774 2.9%
"C" Deficient 142,782 2.3% 109,615 1.4% 93,175 0.9% 202,934 1.1% 209,386 0.8%
"D" Doubtful Recovery 180,630 2.9% 196,075 2.4% 204,344 2.0% 252,635 1.4% 242,763 1.0%
"E" Unrecoverable 278,585 4.5% 90,408 1.1% 89,363 0.9% 173,471 0.9% 174,106 0.7%
------------ ----- ------------ ----- ------------- ----- ------------- ----- ------------- -----
Total loans Ps 6,197,315 100.0% Ps 8,029,668 100.0% Ps 10,035,239 100.0% Ps 18,626,252 100.0% Ps 24,645,574 100.0%
============ ===== ============ ===== ============= ===== ============= ===== ============= =====
Loans classified as
"C", "D" and "E" as
a percentage of
total loans 9.7% 4.9% 3.9% 3.4% 2.5%
------------
(1) Financial leases is included in loans since 2004, according to regulations
issued by the Superintendency of Finance.
The Bank continues to accrue interest on a loan until it is considered
non-performing. Once a loan is deemed non-performing, an allowance is made for
100% of the unpaid interest recorded as income, and, going forward, instead of
recording interest on that loan in the consolidated statement of operations,
such interest is recorded in memorandum accounts. See Note 2 (j) to BC's audited
consolidated financial statements included in this Annual Report.
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
pursuant to which any loans (other than mortgage loans) that are more than 30
days past due will stop accruing interest in the statement of operations and
their entries will be made in memorandum accounts until the customer restarts
making payments.
If one payment installment is 31 or more days past due, then the full
outstanding amount of the loan is considered past due for purposes of the
regulations issued by 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:
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------
2002 % 2003 % 2004(3) % 2005(4) % 2006 %
------------ ------ ----------- ----- ----------- ----- ----------- ----- ----------- -----
(Ps million, except percentages)
PERFORMING PAST DUE
LOANS:(1)
Consumer loans past due
from 31 to 60 days.......... Ps 17,537 38.6% Ps 24,899 57.3% Ps 21,987 38.7% Ps 34,630 19.7% Ps 62,201 26.4%
Small loans past due from
31 to 60 days(4) ........... 777 1.7% 2,054 4.7% 1,845 3.2% - 0.0% - 0.0%
Commercial loans past due
from 31 to 90 days.......... 27,149 59.7% 16,518 38.0% 26,398 46.5% 46,485 26.5% 74,577 31.8%
Mortgage loans past due
from 31/60/90/120 days(4)... 22 0.0% - 0.0% - 0.0% 84,156 47.9% 62,919 26.8%
135
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------------
2002 % 2003 % 2004(3) % 2005(4) % 2006 %
------------ ------ ----------- ----- ----------- ----- ----------- ----- ----------- -----
(Ps million, except percentages)
Financial leases past due
from 31 to 60/90 days
(2) (3) .................. - 0.0% - 0.0% 6,593 11.6% 10,301 5.9% 35,150 15.0%
------------ ------ ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total performing past due
loans and Financial leases
(3)....................... 45,485 100.0% 43,471 100.0% 56,823 100.0% 175,572 100.0% 234,847 100.0%
NON-PERFORMING PAST DUE
LOANS:
Consumer loans past due
more than 61
days...................... 19,671 17.9% 25,069 32.9% 40,882 46.2% 66,121 24.0% 114,101 34.1%
Small loans past due more
than 31 days(4)........... 1,633 1.5% 3,040 4.0% 3,781 4.3% 5,979 2.1% 10,003 3.0%
Commercial loans past due
more than 90 days......... 88,217 80.5% 48,069 63.1% 40,171 45.4% 114,496 41.5% 133,987 40.0%
Mortgage loans past due
more than 60/90/120
days(4)................... 138 0.1% 4 0.0% 37 0.0% 77,394 28.1% 65,187 19.5%
Financial leases past due
from 31 to 60/90
days (3).................. - 0.0% - 0.0% 3,580 4.1% 11,874 4.3% 11,210 3.4%
------------- ------ ----------- ----- ----------- ----- ----------- ----- ----------- -----
Total non-performing past
due loans and Financial
leases (3)................ 109,659 100.0% 76,182 100.0% 88,451 100.0% 275,864 100.0% 334,488 100.0%
Total past due loans
and Financial
leases (3)................ Ps 155,144 Ps 119,653 Ps 145,274 Ps 451,436 Ps 569,335
------------ ----------- ----------- ----------- -----------
Total non-performing past
due loans and Financial
leases (3)................ 109,659 76,182 88,451 275,864 334,488
Allowance for loan and
financial leases losses
(3)....................... (332,324) (387,263) (434,378) (705,882) (834,183)
Foreclosed assets.......... 153,873 162,766 153,071 236,536 193,004
Allowance for estimated
losses on foreclosed
assets.................... (107,871) (135,090) (140,865) (205,176) (174,393)
Other accounts receivable
more than 180 days past
due....................... 8,655 25,848 5,813 28,980 29,146
Allowance for accounts
receivable and accrued
interest losses........... (24,891) (26,182) (18,807) (40,727) (34,936)
------------ ----------- ----------- ----------- -----------
Total non-performing
assets, net............. Ps (192,899) Ps (283,739) Ps (346,715) Ps (410,405) Ps (486,874)
------------ ----------- ----------- ----------- -----------
Loans at least one day past
due as a percentage of
total loans (3)........... 2.5% 1.5% 1.5% 2.5% 2.3%
Allowance for loan losses
as a percentage of loans
at least one day past due
(3)........................ 214.2% 323.7% 299.0% 156.4% 146.5%
Allowance for loan losses
as a percentage of loans
classified as "C", "D"
and "E" (3)................ 55.2% 97.8% 112.3% 112.2% 133.2%
Percentage of performing
loans to total loans (3)... 98.2% 99.1% 99.1% 98.5% 98.6%
-------------
(1) Performing past due loans are loans upon which the Bank continues to
recognize income although interest has not been received for the periods
indicated. 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 financial leases are due from 31 to 60 days and the
commercial financial leases are due from 31 to 90 days.
(3) Includes financial leases, according to regulations issued by the
Superintendency of Finance and effective as of January 1, 2004.
(4) Effective as of January 1, 2005, External Circular 052 of 2004 of the
Superintendency of Finance modified the classification between performing
and non - performing loans. According to the new regulation mortgage and
small business loans are 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:
136
AS OF DECEMBER 31,
----------------------------------------------------------
2002 2003 2004(1) 2005 2006
---------- ---------- ---------- ---------- ----------
(Ps million, except percentages)
Loans secured as a percentage of total loans and
financial leases........................................ 37.5% 32.9% 40.1% 44.3% 45.0%
Loans classified as "A" as a percentage of total
loans and financial leases.............................. 82.6% 90.8% 92.9% 93.2% 94.6%
Loans classified as "B as a percentage of total
loans and financial leases.............................. 7.7% 4.3% 3.2% 3.4% 2.9%
Loans classified as "C", "D" and "E" as a percentage
of total loan and financial leases...................... 9.7% 4.9% 3.9% 3.4% 2.5%
Total allowance for loan losses as a percentage of
non-performing loans and financial leases............... 303.1% 508.3% 491.1% 255.9% 249.4%
Total allowance for loan losses as a percentage of
loan and financial leases classified as "C", "D"
and "E"................................................. 55.2% 97.8% 112.3% 112.2% 133.2%
Non-performing loans as a percentage of total loans
and financial leases.................................... 1.8% 0.9% 0.9% 1.5% 1.4%
Loans and financial leases classified as "C", "D"
and "E"..................................................... Ps 601,997 Ps 396,098 Ps 386,882 Ps 629,040 Ps 626,255
TOTAL NON-PERFORMING LOANS AND FINANCIAL LEASES......... Ps 109,659 Ps 76,182 Ps 88,451 Ps 275,864 Ps 334,488
========== ========== ========== ========== ==========
--------------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Finance and effective as of January 1, 2004.
The following table illustrates BC's past due loan portfolio by type of
loan:
AS OF DECEMBER 31,
---------------------------------------------------------------------------------------------
2002 % 2003 % 2004 % 2005 % 2006 %
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
(Ps million, except percentages)
CORPORATE
Trade financing........... Ps 143 0.0% Ps 2,841 2.3% Ps 3,862 2.7% Ps 9,728 2.2% Ps 18,218 3.2%
Loans funded by domestic
development banks....... 1,360 0.9 1,149 1.0 1,705 1.2 7,463 1.7 6,820 1.2
Working capital loans..... 75,333 48.6 30,706 25.7 21,211 14.6 55,354 12.3 67,267 11.8
Credit cards.............. 90 0.1 136 0.1 1,273 0.9 1,616 0.4 2,669 0.5
Overdrafts................ - 0.0 1,032 0.9 1,668 1.1 4,177 0.9 7,716 1.4
Other..................... - 0.0 - 0.0 - 0.0 - 0.0 -
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total corporate......... 76,926 49.6% 35,864 30.0% 29,719 20.5% 78,338 17.4% 102,690 18.0%
RETAIL
Credit cards.............. 14,930 9.6 12,204 10.2 13,785 9.5 25,967 5.8 40,307 7.1
Personal loans............ 25,516 16.4 32,876 27.5 43,945 30.2 63,008 14.0 113,514 19.9
Vehicle loans............. 534 0.3 6,453 5.4 9,697 6.7 23,829 5.3 41,641 7.3
Overdrafts................ - 0.0 7,967 6.6 8,637 5.9 10,234 2.3 11,771 2.1
Loans funded by domestic
development banks......... 3,840 2.5 5,299 4.4 6,382 4.4 8,391 1.9 12,166 2.1
Trade financing........... 890 0.6 355 0.3 156 0.1 658 0.1 1,403 0.2
Working capital loans..... 31,644 20.4 18,084 15.1 22,743 15.7 41,000 9.1 57,976 10.2
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
Total retail............ 77,354 49.8% 83,238 69.5% 105,345 72.5% 173,087 38.3% 278,778 49.0%
FINANCIAL LEASES (1)...... - 0.0% - 0.0% 10,173 7.0% 22,175 4.9% 46,359 8.1%
MORTGAGE.................. 864 0.6% 551 0.5% 37 0.0% 177,836 39.4% 141,508 24.9%
---------- ----- ---------- ----- ---------- ----- ---------- ----- ---------- -----
TOTAL PAST DUE
LOANS................ Ps 155,144 100.0% Ps 119,653 100.0% Ps 145,274 100.0% Ps 451,436 100.0% Ps 569,335 100.0%
========== ===== ========== ===== ========== ===== ========== ===== ========== =====
----------------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Finance and effective as of January 1, 2004.
The total amount of past due loans increased 26.12% from Ps 451,436
million in 2005 to Ps 569,335 million in 2006. The percentage of past due loans
as a percentage of the Bank's total portfolio went from 2.42% in 2005 to 2.31%
in 2006.
The past due portfolio increased 210.75% between 2004 and 2005, from Ps
145,274 million at December 31, 2004, to Ps 451,436 million at December 31,
2005. This increase was due to the Conavi/Corfinsura merger, more specifically
to the incorporation of former Conavi's mortgage
137
loan portfolio, since mortgage loans historically have presented past due levels
much higher than the other segments of the Colombian finance sector.
We believe 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 be 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,
------------------------------------------------------------------------------------------------------
2002 % 2003 % 2004 % 2005 % 2006 %
------------ ---- ------------ ---- ------------ ---- ------------- ---- ------------- -----
(Ps million, except percentages)
SECURED
Current..................... Ps 2,261,968 36.5% Ps 2,596,226 32.3% Ps 3,950,303 39.4% Ps 7,947,554 42.7% Ps 10,762,717 43.7%
Past due loans from 31 to 90
days (commercial).......... 9,617 0.2 10,935 0.1 16,295 0.2 30,193 0.2 41,594 0.2
Past due financial leases 31
to 90 days (commercial)
(2)........................ - 0.0% - 0.0% 6,514 0.1% 9,767 0.1% 32,993 0.1
Past due loans from 31 to 60
days (consumer)............ 3,686 0.1 5,690 0.1 7,027 0.1 8,946 0.0 11,910 0.1
Past due financial leases
from 31 to 60 days
(consumer) (2)............. - 0.0 - 0.0 79 0.0 534 0.0 2,157 0.0
Past due loans from 31 to 60
days (small business
loans)..................... 246 0.0 466 0.0 665 0.0 712 0.0 1,054 0.0
Past due loans from 31 to
120 days (mortgage)........ 22 0.0 - 0.0 - 0.0 131,268 0.7 99,885 0.4
Past due loans from 61 to 90
days (consumer)............ - 0.0 2,020 0.0 3,441 0.0 4,336 0.0 5,150 0.0
Past due financial leases
from 61 to 90 days
(consumer) (2)............. - 0.0 - 0.0 78 0.0 134 0.0 770 0.0
Past due loans from 61 to 90
days (small business
loans)..................... 89 0.0 315 0.1 411 0.0 445 0.0 644 0.0
Past due loans from 91 to
180 days (commercial)...... 8,736 0.1 5,751 0.1 8,730 0.1 14,306 0.1 19,582 0.1
Past due financial leases
from 91 to 180 days
(commercial) (2)........... - 0.0 - 0.0 1,845 0.0 4,900 0.0 4,143 0.0
Past due loans from 91 to
180 days (consumer)........ 1,881 0.0 2,995 0.1 6,074 0.1 5,380 0.0 6,938 0.0
Past due financial leases
from 91 to 180 days
(consumer) (2)............. - 0.0 - 0.0 83 0.0 344 0.0 418 0.0
Past due loans from 91 to
120 days (small business
loans) .................... 415 0.0 476 0.0 926 0.0 1,130 0.0 2,274 0.0
Past due loans from 121 to
180 days (mortgage)........ - 0.0 4 0.0 - 0.0 13,631 0.1 11,248 0.1
Past due loans from 181 to
360 days (commercial)...... 10,452 0.2 8,995 0.1 6,156 0.1 17,938 0.1 21,733 0.1
Past due financial leases
from 181 to 360 days
(commercial) (2)........... - 0.0 - 0.0 924 0.0 3,304 0.0 3,946 0.0
Past due loans from 181 days
to 360 days (consumer)..... - 0.0 2,589 0.0 3,348 0.0 4,487 0.0 5,118 0.0
Past due financial leases
from 181 to 360 days
(consumer) (2)............. - 0.0 - 0.0 76 0.0 149 0.0 164 0.0
Past due loans from 121 to
360 days (small business
loans)..................... - 0.0 - 0.0 - 0.0 - 0.0 - 0.0
Past due loans from 181 days
to 360 days (mortgage)..... 138 0.0 - 0.0 37 0.0 16,651 0.1 16,973 0.1
Past due loans more than 360
days....................... 29,501 0.5 17,217 0.2 9,661 0.1 24,636 0.1 33,676 0.1
Past due financial leases
more than 360 days (2)..... - 0.0 - 0.0 573 0.0 3,043 0.0 1,769 0.0
------------ ---- ------------ ---- ------------ ---- ------------- ---- ------------- -----
TOTAL....................... Ps 2,326,751 37.6% Ps 2,653,679 33.1% Ps 4,023,246 40.2% Ps 8,243,788 44.2% Ps 11,086,856 45.0%
============ ==== ============ ==== ============ ==== ============= ==== ============= =====
UNSECURED(1)
Current..................... Ps 3,780,203 61.0% Ps 5,313,789 66.2% Ps 5,939,662 59.2% Ps 10,227,262 55.0% Ps 13,313,522 54.0%
Past due loans from 31 to
90 days (commercial)....... 17,532 0.3 5,583 0.1 10,103 0.1 16,292 0.1 32,983 0.1
Past due loans from 31 to 60
days (consumer)............ 13,851 0.2 19,209 0.2 14,960 0.1 25,684 0.1 50,291 0.2
Past due loans from 31 to
60 days (small business
loans)..................... 531 0.0 1,588 0.0 1,180 0.0 923 0.0 1,879 0.0
138
AS OF DECEMBER 31,
------------------------------------------------------------------------------------------------------
2002 % 2003 % 2004 % 2005 % 2006 %
----------- ------ ----------- ----- ------------ ------ ------------- ----- ------------ -----
(Ps million, except percentages)
Past due loans from
61 to 90 days (consumer).. - 0.0 - 0.0 7,115 0.1 13,678 0.1 23,495 0.1
Past due loans from 61
to 90 days (small
business loans)........ 308 0.0 793 0.0 557 0.0 664 0.0 943 0.0
Past due loans from 91
to 180 days (commercial).. 9,358 0.2 2,980 0.0 3,980 0.0 27,230 0.1 10,206 0.0
Past due loans from 91
to 180 days (consumer).... 7,112 0.1 9,289 0.1 12,490 0.1 21,809 0.1 36,662 0.2
Past due loans from 91
to 180 days (small
business loans).......... 821 0.0 1,456 0.0 1,887 0.0 2,105 0.0 3,209 0.0
Past due loans from
181 to 360 days
(commercial)............. 9,192 0.1 8,889 0.1 6,863 0.1 19,017 0.1 21,957 0.1
Past due loans from 181
days to 360 days
(consumer)............... 10,678 0.2 8,176 0.1 8,414 0.1 16,431 0.1 36,738 0.2
Past due loans more than
360 days.................. 20,978 0.3 4,237 0.1 4,782 0.0 11,369 0.1 26,833 0.1
------------ ---- ------------ ---- ------------ ---- ------------- ---- ------------- ----
TOTAL Ps 3,870,564 62.4% Ps 5,375,989 66.9% Ps 6,011,993 59.8% Ps 10,382,464 55.8% Ps 13,558,718 55.0%
============ ==== ============ ==== ============ ==== ============= ==== ============= ====
TOTAL CURRENT LOANS AND
FINANCIAL LEASES (2)...... Ps 6,042,171 97.5% Ps 7,910,015 98.5% Ps 9,889,965 98.6% Ps 18,174,816 97.7% Ps 24,076,239 97.7%
Past due loans from 31 to
90 days (commercial)...... 27,149 0.4 16,518 0.2 26,398 0.3 46,485 0.2 74,577 0.3
Past due financial leases
from 31 to 90 days
(commercial) (2)......... - 0.0 - 0.0 6,514 0.1 9,767 0.1 32,993 0.1
Past due loans from 31
to 60 days (consumer)..... 17,537 0.3 24,899 0.3 21,987 0.2 34,630 0.2 62,201 0.3
Past due financial leases
from 31 to 60 days
(consumer) (2)........... - 0.0 - 0.0 79 0.0 534 0.0 2,157 0.0
Past due loans from 31 to
60 days (small business
loans)................... 777 0.0 2,054 0.0 1,845 0.0 1,635 0.0 2,933 0.0
Past due loans from 31 to
120 days (mortgage)....... 22 0.0 - 0.0 - 0.0 131,268 0.7 99,885 0.4
Past due loans from 61 to
90 days (consumer)........ - 0.0 2,020 0.0 10,556 0.1 18,014 0.1 28,645 0.1
Past due financial leases
from 61 to 90 days
(consumer)(2)............ - 0.0 - 0.0 78 0.0 134 0.0 770 0.0
Past due loans from 61
to 90 days (small
business loans)......... 397 0.0 1,108 0.0 968 0.0 1,109 0.0 1,587 0.0
Past due loans from 91 to
180 days (commercial)..... 18,094 0.3 8,731 0.1 12,710 0.1 41,536 0.2 29,788 0.1
Past due financial leases
from 91 to 180 days
(commercial)(2)......... - 0.0 - 0.0 1,845 0.0 4,900 0.0 4,143 0.0
Past due loans from 91 to
180 days (consumer)....... 8,993 0.1 12,284 0.2 18,564 0.2 27,189 0.1 43,600 0.2
Past due financial leases
from 91 to 180 days
(consumer)(2)............ - 0.0 - 0.0 83 0.0 344 0.0 418 0.0
Past due loans from 91 to
120 days (small
business loans).......... 1,236 0.0 1,932 0.0 2,813 0.0 3,235 0.0 5,483 0.0
Past due loans from 121
to 180 days (mortgage).... - 0.0 4 0.0 - 0.0 13,631 0.1 11,248 0.1
Past due loans from 181
to 360 days (commercial).. 19,644 0.3 17,884 0.2 13,019 0.2 36,955 0.2 43,690 0.2
Past due financial leases
from 181 to 360 days
(commercial) (2)......... - 0.0 - 0.0 924 0.0 3,304 0.0 3,946 0.0
Past due loans from 181
days to 360 days
(consumer)............... 10,678 0.2 10,765 0.1 11,762 0.1 20,918 0.1 41,856 0.2
139
AS OF DECEMBER 31,
------------------------------------------------------------------------------------------------------
2002 % 2003 % 2004 % 2005 % 2006 %
----------- ------ ----------- ------ ------------ ------ ------------- ----- ------------ -----
(Ps million, except percentages)
Past due financial leases
from 181 to 360 days
(consumer)(2)............ - 0.0 - 0.0 76 0.0 149 0.0 164 0.0
Past due loans from 181
days to 360 days
(mortgage)............... 138 0.0 - 0.0 37 0.0 16,651 0.1 16,973 0.1
Total past due loans more
than 360 days............. 50,479 0.9 21,454 0.4 14,443 0.1 36,005 0.2 60,509 0.3
Total past due financial
leases more than 360 days
(2)...................... - 0.0 - 0.0 573 0.0 3,043 0.0 1,769 0.0
TOTAL PAST DUE LOANS
AND FINANCIAL LEASES
(2)................... 155,144 2.5 119,653 1.5 145,274 1.4 451,436 2.3 569,335 2.3
------------ ---- ------------ ----- ------------ ---- ------------- ---- ------------- ----
Total gross loans and
financial leases (2)..... 6,197,315 100.0 8,029,668 100.0 10,035,239 100.0 18,626,252 100 24,645,574 100%
Allowance for loan and
financial lease losses
(2)..................... (332,324) (5.4) (387,263) (4.8) (434,378) (4.3) (705,882) (3.8) (834,183)(3.4)
------------ ---- ------------ ----- ------------ ---- ------------- ---- ------------- ----
TOTAL LOANS AND
FINANCIAL LEASES,
NET (2)............. Ps 5,864,991 94.6% Ps 7,642,405 95.2% Ps 9,600,861 95.7% Ps 17,920,370 96.2% Ps 23,811,391 96.6%
============ ==== ============ ===== ============ ==== ============= ==== ============= ====
-----------------
(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.
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,
--------------------------------------------------------------------------
2002 2003 2004 2005 2006
----------- ------------- ----------- ----------- ------------
(Ps million, except percentages)
Non-performing loans............................ Ps 109,659 Ps 76,182 Ps 88,451 Ps 275,864 Ps 334,488
Restructured loans, net......................... Ps 679,885 Ps 583,056 Ps 455,802 Ps 460,183 Ps 650,276
As of December 31, 2002, 2003, 2004, 2005 and 2006, BC didn't have
performing loans which were past due for 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 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. External Circular 070 of 2000 ratified this general 1% provision and
eliminated the risk coefficient and the obligation to make additional provisions
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 on a monthly basis. Currently, External Circular 011 of March,
2002, requires all debtors whose indebtedness for the different categories of
credit exceeds 300 SMMLV (Ps 122 million for 2006), to be evaluated twice a
year.
140
Additionally, such 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 SMMLV (Ps 122 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.
The following table shows the allowance for loan losses required to be
recorded, 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 of 2005 issued by Superintendency of Finance
modified the 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 allowance percentages are as follows:
"A" "B" "C" "D" "E"
--- --- --- --- ----
On Secured Portion 1% 3.2% 10% 20% 30%
On Unsecured 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 starting
from December 1, 2005, to adjust the allowance using an installment methodology.
141
The main purpose of such changes was 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, taking into consideration 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 a personal guarantee. 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, with respect to loan allowances, the security that guarantees
the loan will only cover the principal amount of the loan. Consequently,
allowances are calculated in accordance with percentage allocated pursuant to
the loan classification system, which is applied to the difference between the
amount outstanding and 70% of the value of the security covering the loan. In
addition, for purposes of recording provisions, the percentages of the total
amount of the guarantee must be taken into consideration, as follows:
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 of 2005 establishes that 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
required 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 recorded, expressed as a percentage of the
value of the loan to the extent not covered by collateral (including principal,
interest and commissions and fees):
142
CLASSIFICATION CONSUMER SMALL BUSINESS LOANS
-------------- -------- --------------------
B 30% 30%
C 50% 60%
D 100% 100%
E 100% 100%
The following table sets forth the changes in the allowance for loan and
financial lease losses:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
2002 2003 2004 2005 2006
----------- ------------- ------------ ------------ --------------
(Ps million)
Balance at beginning of period ............................ Ps 271,729 Ps 332,324 Ps 387,263 Ps 434,378 Ps 705,882
Balance at beginning of period (Factoring Bancolombia) - - - - 5,625
Balance at beginning of period (Conavi, Corfinsura and
subsidiaries).............................................. - - - 236,013 -
Balance at beginning of period (Sufinanciamiento) ......... - 11,854 - - -
Allowance for financial leasing reclassification(3)........ - - 7,002 - -
Provisions for loan losses(1).............................. 143,361 286,170 186,480 374,744 568,679
Charge-offs................................................ (71,592) (112,393) (55,032) (115,455) (136,789)
Effect of difference in exchange rate..................... 10,366 (284) (12,751) (3,955) (1,210)
Reclassification-Securitization............................ - - - (11,947) -
Reversals of provisions.................................... (21,540) (130,408) (78,584) (207,896) (308,004)
----------- ------------- ------------ ------------ --------------
BALANCE AT END OF YEAR(2).............................. Ps 332,324 Ps 387,263 Ps 434,378 Ps 705,882 Ps 834,183
=========== ============= ============ ============ ==============
---------------
(1) The provision for past due accrued interest receivable, which is not
included in this item, amounted to Ps 4,518 million, Ps 5,316 million, Ps
4,483 million, Ps 12,379 million and Ps 14,825 million for the years ended
December 31, 2002, 2003, 2004, 2005 and 2006 respectively.
(2) The allowance past due accrued interest receivable, which is not included
in this item, amounted to Ps 15,074 million, Ps 5,170 million, Ps 4,603
million, Ps 8,655 million and Ps 11,644 million for the years ended
December 31, 2002, 2003, 2004, 2005 and 2006 respectively,
(3) 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 recoveries of charged-offs loans are recorded in the consolidated
statement of operations and are not included in provisions for loan losses.
The following table sets forth the allocation of the Bank's allowance for
loan and financial lease losses by type of loan using the classification of the
Superintendency of Finance:
AS OF DECEMBER 31,
----------------------------------------------------------------------
2002 2003 2004(1) 2004 2006
----------- ------------- ------------ ------------ --------------
(Ps million)
Commercial loans .......................................... Ps 243,835 Ps 276,285 Ps 271,296 Ps 387,473 Ps 356,272
Consumer loans ............................................ 22,668 27,429 49,350 88,052 152,842
Small business loans....................................... 1,260 2,082 4,271 4,679 6,365
Financial leases .......................................... - - 6,529 16,342 49,463
Mortgage................................................... 849 440 37 22,747 23,948
General.................................................... 63,712 81,027 102,895 186,589 245,293
----------- ------------- ------------ ------------ ------------
TOTAL ALLOWANCE FOR LOAN LOSSES........................ Ps 332,324 Ps 387,263 Ps 434,378 Ps 705,882 Ps 834,183
=========== ============= ============ ============ ============
-----------------
(1) Includes financial leases, according to regulations issued by the
Superintendency of Finance and effective as January 1, 2004.
143
The following table sets forth the allocation of the Bank's allowance for
loan and financial lease losses by type of loan:
AS OF DECEMBER 31,
----------------------------------------------------------------------------------------------
2002 % 2003 % 2004 % 2005 % 2006 %
--------- ------ --------- ------ --------- ----- --------- ----- ---------- -----
(Ps million, except percentages)
CORPORATE
Trade financing.......... Ps 3,073 0.9% Ps 217 0.1% Ps 3,496 0.8% Ps 23,598 3.3% Ps 17,154 2.1%
Loans funded by
domestic
development banks..... 812 0.2 57,745 14.9 10,057 2.3 20,886 3.0 7,057 0.8
Working capital loans.... 212,108 63.8 202,403 52.3 243,862 56.2 315,725 44.7 261,589 31.4
Credit cards............. 107 0.0 34 0.0 971 0.2 1,435 0.2 2,324 0.3
Overdrafts............... 1,313 0.4 370 0.1 919 0.2 1,781 0.3 3,617 0.4
--------- ------ --------- ----- --------- ----- --------- ----- ---------- -----
Total.corporate....... 217,413 65.3 260,769 67.4 259,305 59.7 363,425 51.5 291,741 35.0
--------- ------ --------- ----- --------- ----- --------- ----- ---------- -----
RETAIL
Credit cards............. 9,568 2.9 6,452 1.7 11,965 2.8 21,815 3.1 36,062 4.3
Personal.loans........... 9,816 3.0 15,687 4.1 27,718 6.4 45,955 6.5 92,625 11.1
Vehicle loans............ 77 0.0 8,550 2.2 6,121 1.4 13,837 2.0 30,698 3.7
Overdrafts............... 3,318 1.0 1,908 0.5 2,791 0.6 4,186 0.6 4,274 0.5
Loans funded by
domestic
development banks..... 1,507 0.5 642 0.2 1,770 0.4 3,970 0.6 5,817 0.7
Trade financing.......... 792 0.2 119 0.0 59 0.0 430 0.1 1,254 0.2
Working capital loans.... 25,272 7.6 11,669 2.9 15,188 3.6 26,586 3.8 53,008 6.4
--------- ------ --------- ----- --------- ----- --------- ----- ---------- -----
Total retail......... 50,350 15.2 45,027 11.6 65,612 15.2 116,779 16.7 223,738 26.9
--------- ------ --------- ----- --------- ----- --------- ----- ---------- -----
FINANCIAL LEASES(1)...... - 0.0 - 0.0 6,529 1.4 16,342 2.3 49,463 5.9
MORTGAGE................. 849 0.3 440 0.1 37 0.0 22,747 3.2 23,948 2.9
GENERAL.................. 63,712 19.2 81,027 20.9 102,895 23.7 186,589 26.3 245,293 29.3
--------- ------ --------- ----- --------- ----- --------- ----- ---------- -----
TOTAL ALLOWANCE FOR
LOAN AND
FINANCIAL LEASE
LOSSES............... Ps332,324 100.0% Ps387,263 100.0% Ps434,378 100.0% Ps705,882 100.0% Ps 834,183 100.0%
========= ====== ========= ===== ========= ===== ========= ===== ========== =====
----------
(1) The allowance for financial leases is included in the allowance for loans
since 2004.
As of December 31, 2006, the allowance for loan and financial lease losses
increased 18.18% from Ps 705,882 million as of December 31, 2005, to Ps 834,183
million. This increase was mainly due to an increase in allowances in personal
loans, financial leases and general allowances.
As of December 31, 2005, the allowance for loan and financial lease losses
increased 62.5% from Ps 434,378 million as of December 31, 2004, to Ps 705,882
million. This increase is partly due to the Conavi/Corfinsura merger and was
also due to 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, 2006, the breakdown per type of loan in the total
allowance was as follows: corporate loans 34.97%, retail loans 26.82%, finance
leases 5.93% and mortgage loans 2.87%. Allowance/past due loans ratio was 147%.
144
PROVISION SYSTEM (OR CREDIT RISK MANAGEMENT SYSTEM - "SARC")
Through External Circular 011 of 2002, which modified Chapter II of the
Basic Accounting Circular regarding management of credit risk, the
Superintendency of Banking (now Superintendency of Finance) requires
institutions 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, policies, methodologies, processes and
structures to evaluate, rate, monitor, and control its credit risk.
External Circular 011 of 2002 was updated by External Circulars 052 of
2004 and 035 of 2006. Through these regulations the Superintendency of Finance
defined the required characteristics internal credit risk models must meet when
evaluating the expected losses of the loan portfolio and established reference
models, which must be used by financial institutions while the use of their
internal models is approved. The reference models will be implemented by stages
depending on the credit categories, the model for commercial loans should be
applied by financial institutions begining on July 2007 and the model for
consumer loan portfolio begining on July 2008. Reference models for mortgage and
small business loans have not yet been released.
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 if the
internal models do not involve anti-cyclical provisions.
Both internal and reference models require the quantification of expected
losses through the following factors:
- Probability of Default: probability of non-payment or expected
delay in payment rate within a period of 12 months;
- Estimate or quantification of the expected loss that may be
incurred by the entity, should the foregoing event occur. For
this estimate, it is important, among other things, to compute
the rate of recovery of the active value (in the event that
the loan would become unrecoverable) and the existence and
suitability of the collateral that supports the loans.
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
145
The Bank has adequately fulfilled each one of the phases established by
the Superintendency of Finance. In December 31, 2006, the Bank continues with
the parallel provision system that allows the Bank to monitor the effect of
SARC's implementation. During 2007, the Bank will continue making the necessary
adjustments to fulfill the requirements established by the Superintendency of
Finance in order to have an approval for its internal model, meanwhile the Bank
will begin the operation of the reference models.
The Superintendency of Finance has established a system in which banks
will be able to implement internal models under the Internal Ratings Based
("IRB") approach only after the implementation of the reference models designed
by the regulator.
CHARGE-OFFS
The following table shows the allocation of the Bank's charge-offs by type
of loan as of December 31, 2002, 2003, 2004, 2005 and 2006:
YEAR ENDED DECEMBER 31,
---------------------------------------------------
2002 2003 2004 2005 2006
-------- --------- -------- --------- ---------
(Ps million)
Trade financing ........................ Ps24,470 Ps 546 Ps 100 Ps 630 Ps 5,507
Loans funded by domestic development
banks ................................. - 1,760 2,832 4,573 -
Working capital loans .................. 36,022 72,298 15,350 18,190 49,474
Credit cards ........................... 517 10,035 9,015 14,960 10,067
Personal loans ......................... 9,140 19,475 20,251 37,775 46,095
Vehicle loans .......................... 35 1,419 1,981 2,508 6,483
Overdrafts ............................. 1,086 6,394 3,981 3,808 4,544
Mortgage & other ....................... 322 466 385 31,742 12,795
Financial leases (1) ................... - - 1,137 1,269 1,824
TOTAL CHARGE-OFFS ................. Ps71,592 Ps112,393 Ps55,032 Ps115,455 Ps136,789
======== ========= ======== ========= =========
----------
(1) Includes financial leases according to regulations issued by the
Superintendency of Finance and effective as of January 1, 2004.
The ratio of charge-offs to average outstanding loans for years ended
December 31, 2002, 2003, 2004, 2005 and 2006 was as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
2002 2003 2004 2005 2006
---- ---- ---- ---- ----
Ratio of charge-offs to average
outstanding loans................ 1.31% 1.61% 0.62% 0.66% 0.63%
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.
146
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, 2006, the Bank registered Ps 70,746 million in recoveries of
charged-off loans from previous periods.
CROSS - BORDER OUTSTANDING LOANS AND INVESTMENTS
As of December 31, 2004 and 2005 and 2006, total cross-border outstanding
loans and investments amounted to approximately US$ 175 million, US$ 312 million
and US$ 592 million, respectively. At 2006, total outstanding loans to borrowers
in foreign countries amounted to US$ 349 million, and total investments were US$
243 million. As of December 31, 2006, total cross-border outstanding loans and
investments represented 3.85% of total assets.
The following table presents information with respect to the Bank's
cross-border outstanding loans and investments for the years ended on December
31, 2004, 2005 and 2006:
2004 2005 2006
------------------------------------
(thousand of U.S. dollars)
Mexico US$ 77,200 US$ 69,907 US$ 79,312
Brazil 30,980 156,084 79,736
United States 22,048 3,279 166,380
Chile 10,034 - 85,281
British Virgin Island 9,912 26,469 25,596
Puerto Rico 5,000 - -
Bolivia 5,000 1,000 -
Peru 3,633 150 7,125
Ecuador 3,200 3,611 6,633
Panama 2,652 4,457 9,144
El Salvador 2,000 - 9,300
Cayman Islands 1,745 5,740 1,690
Dominican Republic 1,027 - -
Costa Rica 1,000 6,949 7,255
Guatemala - 3,000 3,533
Venezuela - 2,000 2,000
Germany - 15,643 -
Guyana - 5,000 4,000
Honduras - 2,626 4,313
United Kingdom - 5,870 23,209
Spain - - 17,345
Switzerland - - 40,330
Netherlands - - 20,180
TOTAL CROSS-BORDER OUTSTANDING LOANS AND
INVESTMENTS US$ 175,431 US$311,785 US$ 592,362
=========== ========== ===========
147
E.5. DEPOSITS
The following table shows the composition of the Bank's deposits for 2004,
2005 and 2006:
AS OF DECEMBER 31,
-----------------------------------------
2004 2005 2006
------------- ------------ ------------
(Ps million)
NON-INTEREST BEARING DEPOSITS:
Checking accounts.................. Ps 2,523,505 Ps 3,171,182 Ps 4,121,506
Other deposits..................... 167,174 359,097 459,143
------------- ------------ ------------
Total.......................... 2,690,679 3,530,279 4,580,649
------------- ------------ ------------
INTEREST BEARING DEPOSITS:
Checking accounts.................. 1,275,618 1,068,409 1,244,348
Time deposits...................... 4,361,206 6,259,800 7,377,586
Savings deposits................... 3,534,613 7,526,494 10,013,884
------------- ------------ ------------
Total.......................... 9,171,437 14,854,703 18,635,818
------------- ------------ ------------
TOTAL DEPOSITS................. Ps 11,862,116 Ps18,384,982 Ps23,216,467
============= ============ ============
The following table shows the time deposits held by the Bank at December
31, 2006, by amount and maturity for deposits:
AT DECEMBER 31, 2006
----------------------------------
PESOS U.S. DOLLARS TOTAL
--------- ------------ ---------
(Ps million)
Time deposits higher than US$ 100,000 (1)
Up to 3 months ......................... 1,090,943 518,004 1,608,947
From 3 to 6 months...................... 589,136 625,695 1,214,831
From 6 to 12 months .................... 314,551 140,106 454,657
More than 12 months .................... 1,405,097 207,255 1,612,352
Time deposits less than US$ 100,000 (1).... 2,114,233 372,566 2,486,799
--------- --------- ---------
TOTAL 5,513,960 1,863,626 7,377,586
========= ========= =========
--------------
(1) Equivalent to Ps 224 million at the Representative Market Rate as of
December 31, 2006.
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,
---------------------
2004 2005 2006
----- ----- -----
(in percentages)
Net income as a percentage of:
Average total assets ............................ 3.62 3.30 2.31
Average shareholders' equity .................... 32.14 31.49 22.10
Dividends declared per share as a percentage of
net income per share(1) ......................... 37.47 39.05 51.65
148
FOR THE FISCAL YEAR
ENDED DECEMBER 31,
---------------------
2004 2005 2006
----- ----- -----
(in percentages)
Average shareholders' equity as a percentage of
average total assets ............................ 11.27 10.47 10.46
Return on interest-earning assets(2) .............. 12.9 12.6 10.5
----------
(1) Dividends are paid based on unconsolidated earnings. Net income per share
is calculated using the average number of common shares outstanding during
the year.
(2) Defined as total interest earned divided by average interest-earning
assets.
E.7. INTERBANK BORROWINGS
The following table sets forth interbank borrowings by the Bank for the
periods indicated:
AS OF DECEMBER 31,
------------------------------------------------------------------
2004 2005 2006
-------------------- --------------------- ---------------------
AMOUNT RATE(1) AMOUNT RATE(1) AMOUNT RATE(1)
----------- ------- ------------ ------- ------------ -------
(Ps million, except percentages)
End of period..................... Ps 246,282 2.77% Ps 1,705,468 3.02% Ps 1,066,845 9.35%
Weighted average during period.... 312,969 2.36% 1,349,987 4.05% 1,574,870 6.02%
Maximum amount of borrowing
at any month-end............... (2)417,187 (3)1,975,415 (4)2,111,978
Interest paid during the year..... 7,389 54,630 94,872
---------------
(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) January
(3) November
(4) February
ITEM 4A. UNRESOLVED STAFF COMMENTS
As of the date of the filing of this Annual Report, the Bank has not
received any written comments from the Securities and Exchange Commission staff
regarding the Bank's periodical reports required to be filed under the Exchange
Act.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. OPERATING RESULTS
For the fiscal year 2006, the Bank recorded net profits of Ps 749,529
million, a decrease of 20.8% as compared to the net profits of Ps 946,881
million for the fiscal year 2005. Such decrease was mainly driven by the decline
in prices of investments in debt securities that was experienced in most of the
emerging markets, due to the continuous Federal Reserve ("FED") funds interest
rate increases.
149
As a result of the Conavi/Corfinsura merger, the Bank changed its balance
sheet structure. As of December 31, 2006, the Bank's loan and net leasing
portfolios registered an increase of 32.9% as compared to December 31, 2005. The
investments portfolio decreased 32.9%, in 2006 representing only 16.5% of the
Bank's total assets as compared to 27.5% in 2005. The loan and financial
leasing, net portfolio represented 69.0% of total assets in 2006, as compared to
58.2% in 2005. Total assets of the Bank increased 12.0% during the year.
Similarly, the Conavi/Corfinsura merger had a favorable effect on the
overall performance of the Bank's liabilities. Non-interest-bearing deposits
increased 29.8%, mainly due to an increase of 30% in non-interest-bearing
checking accounts. Interest-bearing deposits increased 25.5%, mostly driven by
an increase of 33% in saving accounts. The cost of interest-bearing liabilities
slightly decreased from 5.4% to 5.3% between 2005 and 2006.
As of December 31, 2006 the Bank's total shareholders' equity increased
8.0% as compared to the previous year, mainly due to the results obtained in net
income, reaching a capital adequacy ratio that exceeded the minimum required by
205 basis points, of 11.05%.
The Bank's annual income was affected by the decrease of 13.8% in net
interest income due mainly to the performance of the investment portfolio.
Interest on the loan and leasing portfolios increased by 15.2% and net fees and
income from services increased by 12.9%. As a result, operating income only
decreased 4.3% but operating expenses increased 13.1%.
Net interest margin declined from 8.1% in 2005 to 6.2% in 2006. It is
important to note that the relative stability on the international financial
markets during the second half of 2006 allowed BC to recover part of the
interest income lost in the first half, otherwise, the net interest margin would
have been much lower. The increase in operating expenses relating to the
previously explained decrease in operating income resulted in an efficiency
ratio of 64.4%.
The Bank's average return on equity was 22.1% and its average return on
assets was 2.3%.
A.1. GENERAL DISCUSSION OF THE CHANGES IN RESULTS
Unless otherwise stated, average balance sheet numbers are used in this
section.
RESULTS FROM OPERATIONS
BC's net income as of December 31, 2006 totaled Ps 749,529 million, which
represents a 20.8% decrease as compared to Ps 946,881 million as of December 31,
2005. The decrease in interest income was a consequence of the decline in
emerging markets' debt securities prices, including Colombia during the second
quarter of 2006. BC's net income as of December 31, 2005 represented a 63.6%
increase as compared to Ps 578,678 million as of December 31, 2004. This result
reflected the effect of the Conavi/Corfinsura merger, the positive performance
of the Colombian economy and the actions and efforts that the Bank made during
that year in each of its banking segments. In particular, the improvement was
driven by a strengthening of its corporate banking segment, increased volume in
its credit and debit card businesses, and strong performance of its
bancassurance and mortgage businesses.
150
Balance Sheet Structure
The ratio of the average interest-earning assets over total
average assets remains at 88% for 2006 and 2005, and increased from 87% in 2004
to 88% in 2005. The ratio between average interest-earning assets over
interest-bearing liabilities increased from 120% recorded in 2005 to 121% in
2006, and decreased from 128% in 2004 to 120% in 2005.
The loan portfolio share of total interest-earning average assets
increased from 68% in 2005 to 75% in 2006, and from 65% in 2004 to 68% in 2005,
whereas the investment portfolio share continued on a downward trend, changing
from 30% in 2005 to 24% in 2006, and from 33% in 2004 to 30% in 2005. The
remaining portion of interest-earning average assets corresponds to overnight
funds, the average volume share of which declined from 1.9% in 2005 to 1.0% in
2006, and from 2.4% in 2004 to 1.9% in 2005.
For the total structure and composition of our liabilities and
shareholders' equity ("resources structure"), on average, the percentage of
liabilities remained at 89.5% between 2005 and 2006, and increased slightly from
88.7% in 2004 to 89.5% in 2005. Interest-bearing liabilities slightly decreased
from an average of 82% of total liabilities in 2005 to 81% in 2006 and increased
from an average of 77% in 2004 to 82% in 2005. Likewise, interest-bearing
liabilities slightly decreased from an average of 74% of total resources
structure in 2005 to 73% in 2006 and increased from an average of 68% in 2004 to
74% in 2005. Deposits, including non-interest bearing checking accounts,
increased from an average of 67% of total liabilities in 2005 to 68% in 2006,
and decreased from an average of 73% in 2004 to 67% in 2005. In 2006, and as a
share of said deposits, average checking accounts represented 22%, average time
deposits 36% and average savings accounts 43%, as compared to the 20%, 39%, and
41%, respectively, recorded in 2005; in 2004 average checking accounts
represented 30%, average time deposits 41% and average savings accounts 29% of
the deposits. The substantial percentage increase in savings accounts from 2004
to 2005 is mainly due to the volume that Conavi brought with it to the
Conavi/Corfinsura merger.
Finally, on average, shareholders' equity as a share of the total
resources structure remains in 10.5% between 2005 and 2006, and decreased from
11.3% in 2004 to 10.5% in 2005. Leverage ratio, calculated as the average total
assets over average shareholders' equity, increased from 955% in 2005 to 956% in
2006 and from 887% in 2004 to 955% in 2005. The capital adequacy ratio increased
from 10.93% in 2005 to 11.05% in 2006, 205 basis points higher than the minimum
ratio required by Colombian law. In 2004 the capital adequacy ratio reached
13.44%.
Balance Sheet Dynamics
Average total assets increased 13% in 2006 reaching Ps 32,437,287 million
compared to Ps 28,711,558 million in 2005, due mainly to the growth of the
average loan portfolio as a result of a high demand for credit in the Colombian
financial system, due to the performance of the Colombian economy. In 2005,
average total assets increased 79.8% from Ps 15,971,743 million in 2004 due to
the Conavi/Corfinsura merger, and the growth of the average loan portfolio.
The total loan portfolio average registered a 23.5% growth from an average
of Ps 17,277,717 million in 2005 to an average of Ps 21,338,881 million in 2006;
between 2004 and 2005 the loan portfolio registered a 92.6% growth from Ps
8,972,315 million in 2004. The average investment portfolio decreased 7.8%, from
an average of Ps 7,478,128 million in 2005 to an average of Ps 6,895,734 million
in 2006. The average investment portfolio recorded a 62.8% growth between 2004
and 2005, from Ps 4,592,112 million in 2004.
151
Total average liabilities increased 13%, totaling Ps 29,045,145 million in
2006 as compared to Ps 25,704,978 million recorded in 2005. Deposits increased
15.2%, from an average of Ps 17,126,370 million in 2005 to an average of Ps
19,734,042 million in 2006. For average deposits, it is important to note the
increase in low-cost deposits, such as average savings accounts, which increased
19.2% over the year, while average time deposits increased only 6.7%. Total
average liabilities increased 81.4%, totaling Ps 25,704,978 million in 2005 as
compared to Ps 14,171,468 million recorded in 2004. Deposits increased 64.9%,
from an average of Ps 10,385,554 million in 2004 to an average of Ps 17,126,370
million in 2005.
Balance Sheet Quality
As of December 31, 2006, the non-performing past due loans share of the
total loan portfolio slightly decreased to 1.4%, compared to 1.5% as of December
31,2005, likewise past due loans as a share of the total loan portfolio slightly
decreased from 2.4% to 2.3% in the same period. Non-performing loans plus net
foreclosed assets as a share of stockholders' equity increased from 9.1% in 2005
to 9.68% in 2006. As of December 31, 2005, the non-performing past due loans
share of the total loan portfolio increased to 1.5%, as compared to 0.9% at the
end of 2004, likewise past due loans as a share of the total loan portfolio
increased from 1.45% to 2.42% in this same period. Similarly, non-performing
loans plus net foreclosed assets as a share of stockholders' 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 decreased from 156.4% as of December 31, 2005, to
146.5% as of December 31, 2006. This indicator is consistent with BC's policies,
demonstrating an adequate credit risk coverage for this type of asset. This
ratio went from 299.0% as of December 31, 2004, to 156.4% as of December 31,
2005, due mainly to the volume of past due mortgage loans belonging to Conavi.
Income Statement Structure - Breakdown Analysis
Upon analyzing the composition of the net income obtained during 2006,
total operating income, excluding net provisions, recorded for the end of the
year reached Ps 2,906,597 million, decreasing 3.5% as compared to 2005. Of this
amount, net interest income, represented 61% (Ps 1,767,503 million), fees and
income from services net 30% (Ps 867,661 million), and other operating income
the remaining 9% (Ps 271,433 million). In 2005, total operating income,
excluding net provisions, recorded for the end of the year reached Ps 3,012,087
million, increasing 68.1% as compared to 2004. Net interest income represented
68% of total operating income, excluding net provisions, (Ps 2,049,810 million),
fees and income from services, net 26% (Ps 768,329 million), and other operating
income 6% (Ps 193,948 million). There was a similar composition in 2004 for
operating income, excluding net provisions, which recorded 68% for net interest
income, 23% for income from services, net, and 9% for other operating income,
respectively.
On the other hand, total net provisions increased from 4.4% of total
operating income in 2005 to 5.2% in 2006 and amounted to Ps 150,182 million.
Such provisions represented 3.7% of total operating income in 2004. Operating
expenses, including merger expenses and goodwill amortization, which in 2005
represented 55% of total operating income, increased to 64% in 2006. In 2004
operating expenses represented 51%.
As a result of the above, the net operating income after total operating
expenses and total net provisions, was 30% of total operating income in 2006 (Ps
885,415 million) as compared to 41% in 2005 and 45% in 2004.
152
Finally, income tax expense represented a net income deduction of 18.9% in
2006, compared to 22.7% in 2005 and 29.2% in 2004. The tax rate decline is due
to the usage of tax credits.
General Income Statement Dynamics
In 2006, net income decreased 20.8% as compared to 2005. This decrease was
a result of a decrease of 13.8% in net interest income, a growth of 12.9% in
fees and income from services net, and a 13.1% increase in operating expenses,
including merger expenses and goodwill amortization. In 2005, net income
increased 63.6% compared to 2004. This increase was due to an increase of 68.4%
in net interest income and a growth of 87.8% in fees and income from services,
net, compared to an 81.4% increase in operating expenses, including merger
expenses and goodwill amortization.
The 13.8% decrease in net interest income in 2006 was mainly due to the
result in interest on investments securities that totaled Ps 273,197 million in
2006, decreasing 66.9% as compared to interest on investments securities
obtained in 2005. The decrease in interest on investement securities was a
consequence of the decline in prices of emerging markets' debt securities,
including in Colombia, during the second quarter of 2006. On the other hand,
interest on loans and interest on leasing totaled Ps 2,696,672 million for 2006,
increasing 15.2% as compared to 2005. The increase in net interest income in
2005 was mainly driven by the result of interest on loans which amounted to Ps
2,341,746 million in 2005, increasing 89.6% as compared to interest on loans
obtained in 2004. Interest on investments securities totaled Ps 824,709 million
in 2005, representing an increase of 50.1% as compared to 2004. This increase is
due to the Conavi/Corfinsura merger and the favorable rates of return of
Colombian public debt securities (treasury bonds) in 2005.
Other net operating income increased 40% during 2006 as compared to 2005,
increasing from Ps 193,948 million in 2005 to Ps 271,433 million in 2006, mainly
due to the increase of 834.9% in gains on sales of investments on equity
securities for Ps 75,697 million and net foreign exchange gain of Ps 58,008
million in 2006. The increase in gains on sales of investments on equity
securities in 2006, is mainly due to the sale of Corfinversiones (now Compania
Suramericana de Inversiones S.A.) which the Bank acquired in 2005 as a result of
the spin-off of Corfinsura S.A. In 2005, other net operating income increased
17.3% as compared to 2004, increasing from Ps 165,395 million in 2004 to Ps
193,948 million in 2005. This increase was mainly due to gains from sales of
investments on equity securities, forward contracts in foreign currency and
dividend income.
Other sources of fee income continued their positive trend. Fees and other
service income for 2006 increased 15% over the period, from Ps 816,416 million
in 2005 to Ps 938,527 million in 2006. Fees and other service income also
increased 81.5% in 2005 as compared to Ps 449,773 million in 2004.
Operating expenses, including goodwill amortization and merger expenses,
amounted to Ps 1,871,000 million in 2006, representing an increase of 13.1% from
Ps 1,654,805 million in 2005. These costs increased 81.4% in 2005 mainly as a
result of the Conavi/Corfinsura merger.
153
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2005 2006
------------ ----------- --------------
(Ps million)
NET INCOME:
Net interest income ......................... Ps 1,217,365 Ps 2,049,810 Ps 1,767,503
Provision for loan and accrued interest
losses, net ................................ (110,455) (185,404) (266,107)
Recovery of charged-off loans ............... 49,032 61,829 70,746
Provision for foreclosed assets and other
assets ..................................... (33,127) (63,969) (44,353)
Recovery of provisions for foreclosed assets
and other assets .......................... 27,926 56,504 89,532
Total fees and income from services, net .... 409,058 768,329 867,661
Total other operating income ................ 165,395 193,948 271,433
Total operating expenses .................... (912,421) (1,654,805) (1,871,000)
Total non-operating income (expense) ........ 4,715 (1,846) 38,994
------------ ------------ ------------
Income before income taxes ................. 817,488 1,224,396 924,409
Income tax expense .......................... (238,810) (277,515) (174,880)
------------ ------------ ------------
NET INCOME ................................ Ps 578,678 Ps 946,881 Ps 749,529
============ ============ ============
INTEREST INCOME
Interest income for the year ended December 31, 2006, totaled Ps 3,013,732
million, representing a 5.8% decrease as compared to the Ps 3,200,084 million in
2005, which in turn was 77.5% higher than the figures in 2004.
The average volume of interest-earning assets increased 13%, from Ps
25,244,735 million in 2005 to Ps 28,532,355 million in 2006. This increase was
due to the dynamic of the loan portfolio, which recorded an average growth of
23.5%, increasing from Ps 17,277,717 million in 2005 to Ps 21,338,881 million in
2006 as a reflection of the expansion of and increased confidence in the
Colombian economy. The increase in the average volume of interest-earning assets
between 2004 and 2005 reached 81.6%, from Ps 13,905,061 million in 2004 to Ps
25,244,735 million in 2005, respectively. This increase was mainly due to the
Conavi/Corfinsura merger and to the results of the loan portfolio, which
recorded an average growth of 92.6%, from Ps 8,972,315 million in 2004.
Past due loans as of December 31, 2006 increased 26.1% as compared to
December 31, 2005, likewise non-performing loans increased 21.3% in the same
period, from 61.1% of the total past due portfolio at year end 2005 to 58.8% at
year end 2006. Past due loans as of December 31, 2005 increased by 210.7% as
compared to December 31, 2004 mainly due to the Conavi/Corfinsura merger and 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.
The average volume of the investment portfolio decreased 7.8% from Ps
7,478,128 million in 2005 to Ps 6,895,734 million in 2006. This was mainly due
to the decrease in the investment portfolio share of total interest-earning
average assets, decreasing from 30% in 2005 to 24% in 2006. The average volume
increased 62.8% in 2005, as compared to 2004.
The increase in volume of the loan portfolio (including financial leases)
drove, in turn, an increase of 15.2% in income of interest on loans and interest
on leasing, from Ps 2,341,746 million in 2005 to Ps 2,696,672 million in 2006.
Accordingly, in 2005, as compared to 2004, interest income increased 89.6%, from
Ps 1,235,405 million.
154
In 2006, financial leases had a positive trend for BC. As of December 31,
2006, interest on leasing totaled Ps 384,147 million, representing an increase
of 31.8% as compared to Ps 291,472 million as of December 31, 2005. These
results were due to the outperforming growth of the leasing business in
Colombia. BC's subsidiaries Bancolombia (Panama) S.A., Leasing Bancolombia,
Bancolombia Puerto Rico Internacional, Inc. and Suleasing Internacional provide
lease financing to commercial customers, while Sufinanciamiento provides lease
financing to individuals as well as commercial consumers. Income from interest
on leasing operations increased 209% in 2005, from Ps 94,450 million at December
31, 2004.
Income obtained on the investment securities decreased 66.9%, from Ps
824,709 million in 2005 to Ps 273,197 million in 2006. This decrease was driven
mainly by the decrease ofpublic debt bond prices in the first half of 2006 as a
result of the volatility of interest rates in public debt securities in the
emerging markets. Interest on investment securities increased 50.1%, from Ps
549,328 million in 2004 to Ps 824,709 million in 2005. This increase was driven
mainly by the increase in the volume of securities as well as the decrease in
interest rates of debt securities during the second half of the year. The
interest rates reached their lowest level in September of 2005.
INTEREST EXPENSE
Interest expense as of December 31, 2006 totaled Ps 1,246,229 million,
representing an increase of 8.3% as compared to Ps 1,150,274 million in 2005.
Interest expense as of December 31, 2005 totaled Ps 1,150,274 million,
representing an increase of 96.4% as compared to Ps 585,743 million in 2004, due
to the high deposit levels that resulted from the Conavi/Corfinsura merger.
In 2006, the average volume of interest-bearing liabilities increased
11.8%, from Ps 21,113,872 million in 2005 to Ps 23,595,043 million in 2006. The
average volume in checking accounts increased 14.7%, savings accounts 19.1%, and
time deposits 6.7%, amounting to Ps 1,233,851 million, Ps 8,388,593 million and
Ps 7,071,495 million, respectively, in 2006. In 2005, the average volume of
interest-bearing liabilities increased 94.3%, from Ps 10,866,494 million in 2004
to Ps 21,113,872 million. The average volume in checking accounts decreased
8.4%, while savings accounts increased 133.2% and time deposits increased 55.5%,
totaling Ps 1,076,175 million, Ps 7,041,334 million and Ps 6,629,996 million,
respectively, in 2005 mainly as a result of the Conavi/Corfinsura merger and the
Bank's operations.
In 2006, Leasing Bancolombia and Renting Colombia issued ordinary bonds in
a principal amount of aproximately Ps 180,200 million and Ps 60,000 million,
respectively, and Sufinanciamiento issued subordinated bonds in a principal
amount of Ps 23,500 million. In 2005, Sufinanciamiento issued subordinated bonds
in a principal amount of Ps 5,000 million. In 2004, BC issued bonds in a
principal amount of Ps 400,000 million for purposes of extending the duration of
its interest-bearing liabilities. Additionally, in 2004 Leasing Bancolombia
issued ordinary bonds in a principal amount of Ps 160,000 million and
Sufinanciamiento issued subordinated bonds in a principal amount of Ps 4,500
million.
With respect to interest accrued on interest-bearing liabilities, the
average volume of bonds decreased from Ps 1,812,802 million in 2005 to Ps
1,442,367 million in 2006, with the consequent decrease of 26.2% in accrued
interest, which decreased from Ps 153,658 million in 2005 to Ps 113,404 million
in 2006. 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 consolidated as a result of the Conavi/Corfinsura merger, with the
consequent increase of 272.6% in accrued interest, which increased from Ps
41,239 million in 2004 to Ps 153,658 million in 2005.
155
In 2006, interest paid out on savings accounts and time deposits
experienced an increase of 9.3% and 2.3%, respectively, as compared to 2005. As
in the case of interest-earning assets, such increase was mainly a result of
increased volume. The average nominal interest rate paid on savings accounts
decreased from 3.4% in 2005 to 3.2% in 2006, and the time deposit rate decreased
from 6.8% in 2005 to 6.5% in 2006. The 8.3% increase in interest expense
mentioned above for the period was mainly due to the growth in interest bearing
liabilities. The average interest rate decreased from 5.4% in 2005 to 5.3% in
2006. In 2005, interest paid out on savings accounts and time deposits
experienced an increase of 71.2% and 68%, respectively, as compared to 2004. As
in the case of interest-earning assets, such increase was mainly a result of the
increased volume. The average nominal interest rate paid on savings accounts
decreased 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
mentioned above for the period was mainly due to the increase in interest
bearing liabilities as a result of the Conavi/Corfinsura merger. The average
interest rate was stable at 5.4% during both 2004 and 2005.
NET INTEREST INCOME
As previously mentioned, net interest income decreased 13.8% from Ps
2,049,810 million as of December 31, 2005 to Ps 1,767,503 million as of December
31, 2006. This decrease, together with the variations in interest-earning
assets, led to a net interest margin result which, expressed as net interest
income over the average volume of interest-earning assets for 2005 and 2006,
shows a decrease from 8.1% to 6.2%. This decrese is mainly a result of a lower
interest rate on investments, which decreased from 11.0% in 2005 to 4.0% in
2006. BC's net interest income as of December 31, 2005 totaled Ps 2,049,810
million, an increase of 68.4% from Ps 1,217,365 million in 2004. Such increase
resulted in part from BC's efforts to improve the funding composition through an
increase in low-cost deposits and in interest-earnings assets.
In 2006, interest-earning assets and interest-bearing liabilities increased
13.0% and 11.8%, respectively, as compared to 2005, as explained in more detail
above in the respective breakdowns of interest income and expense.
Interest-earning assets as a share of total assets remained at 88% between 2005
and 2006, and as a share of interest-bearing liabilities increased from 120% to
121% in the same period. In 2005, interest-earning assets and interest-bearing
liabilities increased 82% and 94%, respectively, as compared to 2004.
Interest-earning assets as a share of total assets increased from 87% in 2004 to
88% in 2005 and as a share of interest-bearing liabilities decreased from 128%
to 120% in the same period.
The nominal average interest-earning asset rate was 10.5% for 2006, posting
a 210 basis points drop compared to the 12.6% posted in 2005. In 2004 this rate
was 12.9%. Nominal average interest-bearing liabilities rate was 5.3% in 2006, a
10 basis points decrease as compared to the 5.4% in 2005 and 2004, respectively.
As a result of such variations in volumes and rates, and as previously
explained in detail in the corresponding sections, net interest income decreased
13.8% from 2005 to 2006, as compared to an increase of 8.3% in interest expense
during the same period. The decrease in income is the result of the increase in
overall volume interest earning assets and was limited by the effect of the
decrease in the average nominal yield for the loan portfolio and the crisis in
investment portfolio during the first half of 2006.
156
AVERAGE NOMINAL INTEREST RATE AND
NET INTEREST MARTIN
1999-2006
(PERFORMANCE GRAPH)
1999 2000 2001 2002 2003 2004 2005 2006
---- ---- ---- ---- ---- ---- ---- ----
Interest earning assets 20.2% 14.2% 11.7% 8.0% 13.3% 12.9% 12.6% 10.5%
Interest bearing liabilities 13.2% 8.6% 8.2% 5.9% 9.1% 8.7% 8.1% 6.2%
Net Interest Margin 6.7% 6.5% 4.7% 3.0% 5.0% 5.4% 5.4% 5.3%
The following table sets forth components of the Bank's consolidated net
interest income before provisions for loans and accrued interest losses:
YEAR ENDED DECEMBER 31,
--------------------------------------
2004 2005 2006
------------ ------------ ------------
(Ps million, except percentages)
INTEREST INCOME:
Loans ................................................. Ps 1,140,955 Ps 2,050,274 Ps 2,312,525
Investment securities ................................. 549,328 824,709 273,197
Overnight funds ....................................... 18,375 33,629 43,863
Leasing ............................................... 94,450 291,472 384,147
------------ ------------ ------------
TOTAL INTEREST INCOME ............................. 1,803,108 3,200,084 3,013,732
------------ ------------ ------------
INTEREST EXPENSE:
Checking accounts ..................................... 13,505 20,311 32,676
Time deposits ......................................... 267,558 449,367 459,513
Savings deposits ...................................... 141,288 241,889 264,381
Interbank borrowings .................................. 7,389 54,630 94,872
Borrowings from domestic development banks ........... 73,549 156,509 180,507
Overnight funds ....................................... 41,215 73,910 100,876
Long-term debt ........................................ 41,239 153,658 113,404
------------ ------------ ------------
TOTAL INTEREST EXPENSE ............................ 585,743 1,150,274 1,246,229
------------ ------------ ------------
NET INTEREST INCOME ............................... Ps 1,217,365 Ps 2,049,810 Ps 1,767,503
============ ============ ============
Average nominal interest rates on loans ............... 13.8% 13.6% 12.6%
Average nominal interest rates on time deposits ....... 6.3% 6.8% 6.5%
Average nominal interest rates on savings deposits..... 4.7% 3.4% 3.2%
157
PROVISIONS FOR LOAN AND ACCRUED INTEREST LOSSES
The Colombian economy registered high growth rates in 2006, reflecting the
ability of Colombian companies to pay off their loans. This growth is also
reflected in the 32.9% increase in BC's loan portfolio as of December 31, 2006.
As a result of the loan portfolio increase, the total net provisions also
increased 14.6%, from Ps 131,040 million as of December 31, 2005 to Ps 150,182
million as of December 31, 2006. In 2005, such provisions increased 96.7%, from
Ps 66,624 million as of December 31, 2004 to Ps 131,040 million as of December
31, 2005, mainly due to the increased volume and diversification of loans and
investments that were included in the Bank's portfolio as a result of the
Conavi/Corfinsura merger. Since a large part of Conavi's mortgage loans had
relatively low levels of provisions, in order to comply with the Bank's policies
provisions, overall provisions had to be increased by quite a high percentage.
Another explanation for the increase in total net provisions during 2006
was the change in individual provisions policies that the Superintendency of
Finance introduced by means of External Circular 004, of 2005, increasing
provision percentages on loans classified as "A" and "B" rated loans from 0% and
1% to 1% and 3.2%, respectively. For more information, please see Note 2 to the
Bank's consolidated financial statements included in this Annual Report.
In 2004, the Bank amended its provision policy relating to consumer and
small business loans for the purpose of extending its risk coverage levels which
were determined when the credit risk management system SARC was implemented.
Allowances for loan portfolio losses increased from Ps 434,378 million in 2004
to Ps 705,882 million in 2005, representing a 62.5% increase. At December 31,
2006, the allowances for loan losses amounted to Ps 834,183 million,
representing an 18.2% increase as compared to Ps 705,882 million in 2005.
As of December 31, 2006, 58.8% of the Bank's past due loans were
non-performing as compared to 61.1% as of December 31, 2005 and 60.8% as of
December 31, 2004.
In 2006 past due loans coverage was 147% and non-performing loan coverage
was 249% as compared to 156% and 256%, respectively, in 2005. In 2004, past due
loans coverage and non-performing loan coverage were 299% and 491%,
respectively.
Provisions for loan and accrued interest losses also include recovered
charged-off loans, as well as the recovery and reversals of provisions on
foreclosed assets; property, plant and equipment, and other assets.
Allowances for loans, financial lease, accrued interest losses and other
receivables 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
Finance. Additionally, the 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 establishes
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, 2004, 2005 and 2006, the
allowances for loans, financial lease, accrued interest losses and other
receivables existing under Colombian GAAP were Ps 453,821 million, Ps 745,521
million and Ps 868,042, respectively, and the allowances that would have been
required under U.S. GAAP were Ps 407,852 million, Ps 581,645 million and Ps
507,641 million, respectively.
158
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.
As of December 31, 2006, fees and other service income increased 15.0%
totaling Ps 938,527 million in 2006 as compared to Ps 816,416 million in 2005.
Commissions from banking services increased 60.1% from Ps 101,355 million in
2005 to Ps 162,273 million in 2006.
Fees and other service income increased 81.5% totaling Ps 816,416 million
in 2005 as compared to Ps 449,773 million in 2004.
OTHER OPERATING INCOME
BC's other operating income consists mainly of gains on foreign exchange
transactions and forward contracts in foreign currencies, gains on sales of
investments on equity securities, gains on sale of mortgage loans, dividend
income, revenues from commercial subsidiaries and income from communication,
postage, rent and other sources.
Foreign exchange gains (including income from forward contracts in foreign
currency), increased 17.54% from Ps 87,694 million as of December 31, 2005 to Ps
103,081 million at December 31, 2006, whereas as of December 31, 2004 this same
figure was Ps 48,456 million.
On the other hand, in 2006, dividend income decreased 50.4% as a result of
the Conavi/Corfinsura merger, from Ps 42,731 million in 2005, which included
six-month dividends from Conavi declared in March 2005, to Ps 21,199 million in
20066. In 2005 dividend income increased 40%, from Ps 30,546 million in 2004 to
Ps 42,731 million in 2005, mainly due to the dividends that BC received from
profits earned in 2004 and, until July 2005, from Conavi and Corfinsura.
Additionally, this increase is due to the investment that BC still holds in
Proteccion S.A.
Commercial subsidiaries also provide revenue from the production and
commercialization of load transportation, and royalties stemming from mining
operations. As of December 31, 2006, income from subsidiaries pertaining to the
industrial sector decreased 10.4%, reaching Ps 40,323 million, as compared to Ps
45,020 million in 2005. Revenues from these operations decreased 43% in 2005 as
compared to 2004 when revenues totaled Ps 78,973 million.
The following table summarizes the components of the Bank's other operating
income for the last three fiscal years:
--------
(6) Bancolombia held a 28.5188% stake in Conavi before the Conavi/Corfinsura
merger.
159
YEAR ENDED DECEMBER 31,
-------------------------------------
2004 2005 2006
----------- --------- ---------
(Ps million)
OTHER OPERATING INCOME:
Foreign exchange gains (expenses)............................ Ps (100,925) Ps (53,361) Ps 58,008
Forward contracts in foreign currency........................ 149,381 141,055 45,073
Gains (losses) on sales of investments on equity
securities................................................. (27) 8,097 75,697
Gains on sale of mortgage loan............................... -- -- 14,371
Dividend income (1).......................................... 30,546 42,731 21,199
Revenues from commercial subsidiaries........................ 78,973 45,020 40,323
Communication, postage, rent and others...................... 7,447 10,406 16,762
----------- ----------- -----------
TOTAL OTHER OPERATING INCOME................... ....... Ps 165,395 Ps 193,948 Ps 271,433
=========== =========== ===========
------
(1) Income from dividends represents only the recognition of income from
unconsolidated subsidiaries under Colombian GAAP.
OPERATING EXPENSES
As of December 31, 2006, Bancolombia's operating expenses, including merger
expenses and goodwill amortization, increased 13% to Ps 1,871,000 million, as
compared to Ps 1,654,805 million in 2005. In 2005, this increase was 81.4%, from
Ps 912,421 million in 2004.
Wages/salaries and employee benefits amounted to Ps 690,117 million as of
December 31, 2006, as compared to Ps 615,121 million in 2005, representing an
increase of 12.2%. In 2005, there was a 69.2% increase as a result of the
Conavi/Corfinsura merger. The total number of employees increased from 8,609 in
2004 to 14,562 in 2005 and to 16,222 in 2006.
Administrative and other expenses totaled Ps 882,182 million as of December
31, 2006, representing an increase of 11.2% as compared to Ps 793,179 million as
of December 31, 2005. In 2005 there was a 101.5% increase as compared to Ps
393,592 million as of December 31, 2004, as a result of the Conavi/Corfinsura
merger.
The ratio between total operating expenses and total average assets,
including goodwill amortization and merger expenses, increased from 5.76% in
2005 to 5.77% in 2006, and the ratio between total operating expense and total
operating income increased from 54.9% in 2005 to 64.4% in 2006. Total fees and
income from services, net as a share of operating expenses declined from 46.43%
in 2005 to 46.37% in 2006. In 2004 these indicators were 5.71%, 50.9% and 44.8%,
respectively.
MERGER EXPENSES AND GOODWILL AMORTIZATION
BC completed its merger with Banco de Colombia S.A. on April 3, 1998. For
the fiscal year 2006, the amortization of goodwill recorded in connection with
the merger with Banco de Colombia S.A. totaled Ps 22,648 million and with the
acquisition of Factoring Bancolombia totaled Ps 3,166 million in 2006. As of
December 31, 2006, outstanding goodwill totaled Ps 40,164 million, which Ps
28,311 million corresponded to Banco de Colombia S.A.'s goodwill to be amortized
in the next 15 months and Ps 11,853 million corresponded to Factoring
Bancolombia's goodwill to be amortized in the next 29 months.
160
Additionally, with respect to the Conavi/Corfinsura merger, BC incurred
merger expenses in total amount of Ps 35,779 million for the period ended
December 31, 2006, associated mainly with financial advisory merger fees, new
brand advertisement and bonuses to specific personnel. In 2006, such expenses
decreased 21.7% as compared to Ps 45,703 million in 2005.
The following table summarizes the principal components of BC's operating
expenses for the last three fiscal years:
YEAR ENDED DECEMBER 31,
------------------------------------------
2004 2005 2006
------------- ------------ --------------
(Ps million)
OPERATING EXPENSES:
Salaries and employee benefits.................................... Ps 363,557 Ps 615,121 Ps 690,117
Bonus plan payments.............................................. 32,923 26,826 35,771
Compensation...................................................... 15,169 8,030 6,375
Administrative and other expenses................................. 393,592 793,179 882,182
Deposit security, net............................................. 22,945 55,050 67,813
Donation expenses................................................. 11,060 615 22,596
Depreciation ..................................................... 46,872 87,633 104,553
Merger expenses................................................... - 45,703 35,779
Goodwill amortization............................................. 26,303 22,648 25,814
----------- ------------ ------------
TOTAL OPERATING EXPENSES..................................... Ps 912,421 Ps 1,654,805 Ps 1,871,000
=========== ============ ============
NON-OPERATING INCOME (EXPENSES)
Non-operating income (expenses) includes gains/losses from the sale of
foreclosed assets, property, plant and equipment and other assets and income
(expense) from minority interests.
Net non-operating income at December 31, 2006 totaled Ps 38,994 million,
as compared to net non-operating expenses of Ps 1,846 million in 2005. This
result was due to the increase of 77.3% in other income and 42.0% in other
expenses. Other income increase was partially due to the recovery of differed
taxes provisions from the investment portfolio and from the derivatives
portfolio.
The following table summarizes the components of BC's non-operating income
and expenses for the last three fiscal years:
YEAR ENDED DECEMBER 31,
----------------------------------------
2004 2005 2006
----------- ------------ -------------
(Ps million)
NON-OPERATING INCOME (EXPENSES):
Other income(1)............................................. Ps 51,514 Ps 109,770 Ps 194,589
Minority interest........................................... (2,425) (6,496) (6,352)
Other expenses(2)........................................... (44,374) (105,120) (149,243)
----------- ----------- -----------
TOTAL NON-OPERATING INCOME (EXPENSES), NET........... Ps 4,715 Ps (1,846) Ps 38,994
=========== ============ ===========
---------------
(1) Other income include: recovery of deferred tax liability for Ps 98,788
million registered in 2005 by the Bank, gains from the sale of foreclosed
assets, property, plant and equipment and other assets.
(2) Other expenses include operational losses and losses from the sale of
foreclosed assets, property, plant and equipment and payments for fines,
sanctions, lawsuits and indemnities.
161
INCOME TAX EXPENSES
Income tax expense for the fiscal year 2006 amounted to Ps 174,880 million
as compared to Ps 277,515 million in the fiscal year 2005. In the fiscal year
2004, such income tax expense amounted to Ps 238,810 million. Income tax for
2006, as were the cases in 2005 and in 2004, was calculated based on net taxable
income.
Law 788 of 2002 established a surcharge tax that increased the income tax
rate for corporations from 35% to 38.5% until December 31, 2006. This surcharge
tax, however, did not apply to those corporations that had been accepted in the
stability regime established by the Colombian Law. Bancolombia (unconsolidated),
Leasing Bancolombia, Fiduciaria Bancolombia and Banca de Inversion Bancolombia
signed a contract with the Government in order to be covered by this tax
stability regime for ten years beginning on January 2001.
Pursuant to the tax stability regime, Bancolombia (unconsolidated),
Leasing Bancolombia, Fiduciaria Bancolombia and Banca de Inversion Bancolombia
agreed to be taxed at a total income tax rate of 37% beginning on January 1,
2001 (2% higher than the expected income tax rate at that time). For the fiscal
year 2007 the income tax rate will be 36% and beginning on January 1, 2008, the
tax rate will be 35%, in exchange for exemption from increases in the income tax
rate and from any other new taxes until December 31, 2010.
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 significant
adjustments required to calculate net income under U.S. GAAP, see Note 31 to
Bank's audited consolidated financial statements included in this Annual Report.
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 and
competition with other financial institutions.
GROWTH OF THE COLOMBIAN ECONOMY AND THE DYNAMICS OF THE FINANCIAL SECTOR
As of December 31, 2006, the Colombian economy expanded at a vigorous
rate, recording a growth of 6.8% as compared to the same period in 2005, a
dynamism which was transmitted to the financial system. The net interest income
increased 24.45% as of December 31, 2006, and total income on commissions and
other services increased 12.78%, respectively, as compared to 2005. At the end
of 2006 the Return On Equity ("ROE") was 19.05%, the efficiency ratio (operating
expenses/net operating income) was 60.42% and the quality of the loan portfolio
(past due loans/total loans) was 2.62% and profits on credit institutions
increased 5.33% as compared to the same period in 2005.
162
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 ECONOMY- UNFAVORABLE FACTORS FOR THE COLOMBIAN ECONOMY-
MID-TERM MID-TERM
------------------------------------------------------ ----------------------------------------------------------------------------
- Benefits derived from macroeconomic - General uncertainty with regard to exchange rate
stabilization policies
- Increased capital flows towards emerging - Inflationary pressures due to greater use
countries of installed capacity and accelerated growth of the domestic demand
- Increased levels of business and consumer - Possible political events that could deteriorate the confidence in
confidence in the economy public administration
- Improved political scenario as well as higher - Moderate increases in international interest rates and decline in
social indications foreign investment
- Public investment continues on a dynamic trend - Decrease in proven oil reserves
- Soft landing of the U.S. economy - Difficulties in commercial relations with Venezuela and Ecuador and
obstacles in approving the free trade agreement with the U.S.
- Greater perspectives of financial services - General uncertainty with pending economic reforms: transfer system,
levels growing as a percentage of GDP administrative and financial
- Improvements in the Colombian government balance - Possible escalation in activities of guerilla and drug cartels,
sheet (higher income from taxes and possible that could result in violence increase
benefits derived from reforms made to transfers)
- Slow decline in unemployment and greater household indebtedness
- Increased exports due to free trade agreement
with U.S., Chile an certain Central American - Decline in exchange terms
countries
In spite of the prevailing favorable conditions, there is no guarantee of
a sustained economic growth. New tax reforms may bring a decrease in demand,
increases in international interest rates may affect the inflow of capital, both
of which would slow the economic growth, affecting the Colombian financial
system in general and Bancolombia in particular.
INTEREST RATES
In 2006, the Reference Market Interest Rate (DTF - Colombia's average of
time deposits) reached minimum historic levels during the first half of the year
while slowly recovering during the second half of the year with an effective
annual rate average of 6.25%; on the other hand the real interest rate in 2006
reached 1.83% effective annual rate. These factors contributed to the growth of
the economy, as there was no monetary instability or inflationary concerns. For
2007, it is possible that the position taken by the Central Bank with monetary
policy could change in order to accommodate new pressures on the demand if there
are any increases in interest rates. This could affect Bancolombia's results
given increased funding costs.
163
DOMESTIC PRICE LEVELS
The inflation rate at the end of 2006 was 4.48%, the midpoint of the
target range defined by the Central Bank (4% - 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 increase in interest
rates, all of which could have a negative effect on BC's financial statements.
However, for 2007, the Central Bank expects inflation to remain low which could
represent an increase in economic activities and encourage good levels of
performance within the financial sector which would be beneficial for
Bancolombia.
EXCHANGE RATE
The real exchange rate index remained at competitive levels throughout
2006 (with an average of 122.4) which allowed Colombia to benefit from
unilateral agreements such as ATPDEA (Andean Trade Promotion and Drug
Eradication Law) and supports some advantages to be had with Colombia's
inclusion in the Free Trade Agreement with the U.S., Chile and certain Central
American countries (Guatemala, El Salvador and Honduras). 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 2006, represented 7.59%
of its total non consolidated assets.
See Item 3. Key Information - A. Selected Financial Data - Exchange Rates,
for an explanation on how the exchange rate is determined.
The Bank has a portfolio of assets and liabilities in foreign currency and
most of such portfolio is hedged against the effects of the fluctuation in the
exchange rate. The Bank uses derivatives instruments for the purpose of hedging
against exchange risks and exchange rate fluctuations protecting its
foreign-currency investment portfolio by increasing the predictability of the
Bank's yield on foreign-currency investments.
FISCAL POLICY
In spite of the fact that over the last year both the Government's deficit
and levels of public debt as a proportion of GDP effectively dropped, financing
the National budget continues to be a macroeconomic risk factor that must be
opportunely addressed.
164
In 2005 the deficit of the CPS (Consolidated Public Sector) represented 0%
of the country's GDP, for 2006 the deficit was 0.4% and for 2007 a deficit of
1.3% is expected. The Colombian Government, for its part, has been implementing
a policy aimed at substituting its foreign debt with domestic debt in order to
reduce the exchange rate risk and take advantage of the Colombian peso - dollar
revaluation. During the period 2005 - 2006, there was an increase in the amount
of TES1 issued on the markets abroad, which in addition to being consistent with
the aforementioned objectives it has also encouraged a far greater investor
diversification (from domestic to foreign). On a domestic level, pension and
severance funds as well as commercial banks are the main buyers of Colombian
Treasury Bonds. Bancolombia is one of the leading brokers of public debt in
Colombia and therefore there could be a certain amount of risk involved given
the significant exposure that exists when holding this type of security.
With regard to the non-financial public sector's deficit, the mid- to
long-term risks involved with the transitory nature of the income received by
the decentralized sector (greater oil income and local government surpluses)
have lead the Government to introduce reforms both for the expense (currently
being implemented to the transfer system) and income (a recently approved tax
reform) to correct imbalances in the national budget. Increases in taxes could
affect the growth dynamics of the Colombian economy and its financial sector,
given the adverse affects these taxes would have on the demand.
Since Bancolombia is protected by the tax stability regime until December
31, 2010 it is not subject to any national taxes created after 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
On December 8, 2006, the U.S. Congress approved the extension of customs
preferences to Colombia, Ecuador, Peru and Bolivia until June 30, 2007, pursuant
to the ATPDEA. With such approval, said preferences may be extended for another
six months to all those countries signing a Free Trade Agreement with the U.S.
at that time.
Foreign trade continues to be a source of opportunities for strengthening
the growth of the Colombian economy. Foreign trade could continue to grow due to
customs preferences including those pursuant to ATPDEA and the free trade
agreements with the U.S. (which is currently pending the approval on both the
U.S. and the Colombian Congresses), Chile (recently signed) and with certain
Central American countries such as Guatemala, El Salvador and Honduras
(currently being negotiated). Likewise, the support provided by multilateral
banks, the IMF (International Monetary Fund) and the IDB (Inter-American
Development Bank) and countries such as the US, has been and shall continue to
be of great importance. BC may benefit from these opportunities if it offers a
range of products that facilitate foreign trade.
On the other hand, the continuous increase in remittances (incoming
transfers of foreign currency from Colombians living abroad) has exceeded export
levels of traditional products such as coffee. According to the Central Bank,
remittances in 2005, totaled US$ 3,314 million in 2006 this same figure totaled
US$ 3,890 million.
----------
(7) The Global Treasury Bonds (TES) are securities issued by the Colombian
Government abroad. These are denominated in Colombian pesos but payable in
U.S. dollars.
165
COMPETITION FROM OTHER FINANCIAL INSTITUTIONS
Recently, a series of mergers and acquisitions between several entities
within the financial system has allowed for 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 a leader of most of the financial products offered in
Colombia, the dynamics of this ongoing merger/acquisition tendencies could
affect BC's 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, honor withdrawals of deposits, make payments upon
maturity of liabilities, and extend loans, the Bank maintains a proper balance
between maturity distribution and diversity of funding sources.
Interest rate volatility and political uncertainty in the Colombian
financial system had led investors to prefer short-term investments, making
medium and long-term financing harder to obtain. However, during the past years,
a longer interest yield curve for public debt has driven investors to longer
term investments. Despite this situation and the efforts made during 2006 to try
to get longer term based deposits, the Bank's deposit base is still short-term,
but its stable nature has enabled the Bank to offer longer-term loans with a
wider margin. The Bank believes that longer term funding will soon become more
available and will enable financial institutions to minimize liquidity risks.
The Bank also believes that the Bank's 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 in terms of maturities during
2006, 2005 and 2004. Checking and savings accounts and time deposits are the
Bank's most important sources of funding.
However, the Bank has 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 sets forth checking, time deposits and saving deposits
as a percentage of BC's overall deposits for the years, 2004, 2005 and 2006:
2004 2005 2006
------ ------ ------
Checking deposits 26.8% 16.7% 18.4%
Time deposits 30.7% 24.7% 25.3%
Saving deposits 24.9% 29.7% 34.4%
===== ===== =====
166
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
2006 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 15
years, in a fixed rate base and linked to CPI and DTF rates.
As a result of the strategy mentioned above, 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, including mortgages
loans, reducing reliance on short-term borrowings and thus reducing risk. The
Bank may 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, 2004, 2005 and 2006:
Ps million 2004 2005 2006
------------- -------------- ---------------
Operating Activities Ps (992,855) Ps (7,314,498) Ps (5,757,800)
Investing activities (549,178) (3,143,420) 2,651,998
Net cash provided by
financing activities 1,344,931 10,938,580 3,382,146
============ ============== =============
During the fiscal year 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 resulted from the Conavi/Corfinsura merger, which main
impact was that the loan portfolio increased. In relation to investing
activities, during the fiscal year 2004, there was an inclination to invest
excess cash in debt instruments and this was the more significant amount for
this activity. For fiscal 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.
As compared to previous years, during the fiscal year 2006 investment
activities were a great source of liquidity for Bancolombia due to an important
reduction of its investment portfolio. In spite of the decrease in items like
long term debt, borrowings from domestic development banks and interbank loans,
during the fiscal year 2006 financing activities remain the principal source of
cash for
167
BC, especially through deposits. Due to the increase of BC's loan portfolio
during the fiscal year 2006, operating activities depleted cash reserves but to
a lesser extent than they did in the fiscal year 2005.
AS OF DECEMBER 31,
------------------------------------------------------------------------------------------
% OF TOTAL % OF TOTAL % OF TOTAL
2004 FUNDING 2005 FUNDING 2006 FUNDING
-------------- ---------- ------------ ----------- ------------ -------------
(Ps million, except percentages)
CHECKING DEPOSITS
Peso-denominated................ Ps 2,699,776 19.1% Ps 3,449,321 13.6% Ps 4,473,717 15.3%
Dollar-denominated.............. 1,099,347 7.7% 790,270 3.1% 892,137 3.1%
-------------- ------ ------------ ----- ------------ -----
Total......................... 3,799,123 26.8% 4,239,591 16.7% 5,365,854 18.4%
-------------- ------ ------------ ----- ------------ -----
TIME DEPOSITS
Peso-denominated................ 2,871,531 20.2% 4,633,373 18.3% 5,513,961 18.9%
Dollar-denominated.............. 1,489,675 10.5% 1,626,427 6.4% 1,863,625 6.4%
-------------- ------ ------------ ----- ------------ -----
Total......................... 4,361,206 30.7% 6,259,800 24.7% 7,377,586 25.3%
-------------- ------ ------------ ----- ------------ -----
SAVINGS DEPOSITS
Peso-denominated................ 3,395,749 23.9% 7,396,501 29.2% 9,863,370 33.9%
Dollar-denominated.............. 138,864 1.0% 129,993 0.5% 150,514 0.5%
-------------- ------ ------------ ----- ------------ -----
Total......................... 3,534,613 24.9% 7,526,494 29.7% 10,013,884 34.4%
-------------- ------ ------------ ----- ------------ -----
OTHER DEPOSITS
Peso-denominated................ 84,220 0.6% 266,942 1.0% 369,567 1.3%
Dollar-denominated.............. 82,954 0.6% 92,155 0.4% 89,576 0.3%
-------------- ------ ------------ ----- ------------ -----
Total......................... 167,174 1.2% 359,097 1.4% 459,143 1.6%
-------------- ------ ------------ ----- ------------ -----
INTERBANK BORROWINGS
Peso-denominated................ - 0.0% - 0.0% - 0.0%
Dollar-denominated.............. 246,282 1.7% 1,705,468 6.8% 1,066,845 3.7%
-------------- ------ ------------ ----- ------------ -----
Total......................... 246,282 1.7% 1,705,468 6.8% 1,066,845 3.7%
-------------- ------ ------------ ----- ------------ -----
OVERNIGHT FUNDS
Peso-denominated................ 616,494 4.3% 915,378 3.6% 716,940 2.5%
Dollar-denominated.............. - 0.0% 414,535 1.6% 290,105 1.0%
-------------- ------ ------------ ----- ------------ -----
Total......................... 616,494 4.3% 1,329,913 5.2% 1,007,045 3.5%
-------------- ------ ------------ ----- ------------ -----
DOMESTIC DEVELOPMENT BANK
BORROWINGS
Peso-denominated................ 855,970 6.0% 2,015,968 8.0% 2,446,597 8.4%
Dollar-denominated.............. 1,949 0.0% 206,115 0.8% 2,984 0.0%
-------------- ------ ------------ ----- ------------ -----
Total......................... 857,919 6.0% 2,222,083 8.8% 2,449,581 8.4%
-------------- ------ ------------ ----- ------------ -----
BANK ACCEPTANCES OUTSTANDING
Peso-denominated................ 16,119 0.1% 14,996 0.0% 2,419 0.0%
Dollar-denominated.............. 50,474 0.4% 48,130 0.2% 61,611 0.2%
-------------- ------ ------------ ----- ------------ -----
Total......................... 66,593 0.5% 63,126 0.2% 64,030 0.2%
-------------- ------ ------------ ----- ------------ -----
LONG TERM DEBT
Peso-denominated................ 552,531 3.9% 1,648,312 6.5% 1,302,702 4.5%
Dollar-denominated.............. - 0.0% - 0.0% - 0.0%
-------------- ------ ------------ ----- ------------ -----
Total......................... 552,531 3.9% 1,648,312 6.5% 1,302,702 4.5%
-------------- ------ ------------ ----- ------------ -----
TOTAL FUNDING
Peso-denominated................ 11,092,390 78.1% 20,340,791 80.2% 24,689,273 84.8%
Dollar-denominated.............. 3,109,545 21.9% 5,013,093 19.8% 4,417,397 15.2%
-------------- ------ ------------ ----- ------------ -----
Total....................... Ps 14,201,935 100.0% 25,353,884 100.0% 29,106,670 100.0%
============== ====== ============ ===== ============ =====
B.2. FINANCIAL INSTRUMENTS AND TREASURY ACTIVITIES
The Bank's treasury division, through its currency desk, is able to
carried out all transactions in local or foreign currency legally authorized in
Colombia. These include derivative transactions, purchase and sale of fixed
income securities, and indexed securities, repurchase or resale transactions,
short sales, temporary securities transfers, simultaneous transactions, and
transactions on the foreign exchange market.
168
The instruments and products negotiated in the markets mentioned above are
regulated by specific policies regarding management of liquidity, market, legal,
credit and operational risks. Such policies are monitored by the Risk Management
Vicepresidency.
In order to be able to control market and liquidity risks the Bank set
limits in order to keep its exposure levels and losses within certain ranges as
determined by the Bank's board of directors. On July 18, 2005, the Board of
Directors approved the "treasury's manual" which establishes such limits.
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.
Before taking any additional positions, the Bank's treasury division also
verifies, with respect to investments in local and in foreign currencies, the
availability of funds for investment and each investment's compatibility with
the Bank's liquidity structure.
The market risk stated in the treasury book(8) will be measured using
methodologies of value at risk (VaR), and the positions limits will be subject
to the results that they show. Along with this methodology, and according to the
definitions of capital consumption for market risk, an additional methodology
for measuring maximum losses of the positions in determined periods of time is
also used by the Bank.
LIMIT CONCEPT VALUE
------------------------------- --------------------------------- -------------------------------------------------
Foreign currency position(1)
Position limits (US$ millions) Spot foreign currency position(2) -5% < or = - > or = 20% of Technical Capital
0 < or = - > or = 50% of Technical Capital
70% of the daily VaR in 12 months or its
Market risk limits Stop loss 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 Deceval, a local custody service provider. Foreign securities are kept in the
custody of Clearstream Banking International S.A.
The local currency portfolio is divided into public debt (including
primarily local treasury securities issued at a fixed rate or at a floating rate
indexed to inflation (TES UVR)), and private debt (including mainly securities
issued at a fixed rate or at a floating rate indexed to DTF or CPI).
----------
(8) Treasury Book is explained in Item 11. - Quantitative and Qualitative
Disclosure About Market Risk
169
The foreign currency portfolio comprises among others fixed rate bonds
issued by the Republic of Colombia and denominated in U.S. dollars and Euros. BC
is not exposed to fluctuations in the exchange rates of such currencies, as it
enters into forward sale agreements with terms of 180 and 360 days. Generally,
the maximum maturity term of such securities is 10 years, nevertheless there is
an assets duration close to 2 years.
Additionally, the Bank trades foreign exchange forward agreements with two
main purposes:
- To hedge its foreign exchange position (cash and investment
portfolio) against foreign exchange rate volatility; and
- 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. These investments are mainly comprised by
securities issued by Latin American entities 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 target duration for the entire portfolio instead.
The Bank's investment portfolio includes among its assets credit linked
notes (CLNs) which are bought to take advantage of market opportunities. Through
the use of these instruments, BC sells credit protection against Colombian
sovereign risk.
B.3. COMMITMENT FOR CAPITAL EXPENDITURES
See Item 4. Information on the Company - A. History and Development of the
Company - Capital Expenditures and Divestitures.
C. RESEARCH AND DEVELOPMENT, PATENTS AND LICENSES, ETC.
BC do not have any significant policies or projects relating to research
and development.
D. TREND INFORMATION
ECONOMIC TRENDS
The Central Bank has been very successful in controlling the increase of
inflation during the past 5 years. However, 2007 seems to be a year in which
inflation expectation pressures could reemerge. The discussion now in Colombia
is if the inflation pressures observed lately correspond to a demand side effect
or, instead, to a supply side effect. Indeed, with the pace of increase in
credits, private consumption, and GDP, part of the inflation comes from the
demand side. It is important to note that Bancolombia believes that those
pressures are still moderated.
170
In addition, some inflation pressures have added up from the supply side.
Due the climate impact of "El Nino" some food prices experienced an upward trend
at the end of 2006 and the beginning of 2007. This unexpected rise in prices
rapidly changed the inflation expectations of investors and analysts, who now
believe that the inflation target of 4% for 2007 will not be reached.
Bancolombia is expecting the inflation to be 4.74% in 2007, higher that the
Central Bank's inflation target which is in the range of 3.5% to 4.5%.
The strong appreciation of the Colombian peso during the first quarter of
2007 has raised some concerns about the future evolution of the exporting
sectors and, therefore, of the economy in general. Nearly 19% of the Colombian
GDP depends on the exports sector and a further drop in the exchange rate will
affect some sectors such as agriculture and mining. However, the Bank expects
the GDP growth to remain strong during 2007 and based in BC's estimations, the
economic expansion in 2007 should reach 5.7%.
At the beginning of March of 2007, the rating agency Standard & Poor's
increased the country's external sovereign credit rating to BB+, just one notch
from being considered an investment-grade credit. Bancolombia is expecting
Moody's to upgrade its credit rating during 2007.
Bancolombia is expecting an increase in internal interest rates, due to
the recent increase in the Central Bank's interest rate and the need of
financial institutions for liquidity in pesos. Therefore, Bancolombia is
expecting the interest rate (DTF) to be near 8.00%, while the Central Bank
interest rate is expected to be close to 8.50%. This might generate some risks
to the performance of the financial sector in Colombia since the cost of funding
will increase.
After a year of negotiations, the final text of the Free Trade Treaty
between Colombia and the U.S. is ready to be discussed in the congresses of both
countries. There are still concerns about the outcome and changes that the
democratic majority of the U.S. Congress will introduce and, also, if the
Colombian Congress will approve the current text of the Treaty. Despite those
concerns, Colombia has been preparing to open the economy to the new investments
in ports, roads and infrastructure that are expected to result from this treaty.
Pursuant to Law 1111 of 2006, the Colombian Taxation Reform eliminated the
system of integral adjustments by inflation in Colombia. This situation has tax
effects on the financial institutions' taxation income from fiscal year 2007.
Until December 31, 2006, the system of integral adjustments by inflation could
have a favorable or unfavorable effect in the tax income because it could
constitute a fiscal deduction or a taxable income for the tax payer until
December 31, 2006 for financial institutions. Beginning in 2007, Colombian
entities will not be able to take as fiscal deduction the adjustments by
inflation and therefore they will have to pay a greater income tax.
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.
Financial standby letters of credit include guarantees of payment of
credit facilities, promissory notes and trade acceptances.
171
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.
At December 31, 2004, 2005 and 2006, outstanding letters of credits and
bank guarantees issued by BC totaled Ps 559,018 million, Ps 838,675 million and
Ps 1,833,366 million, respectively.
The table below summarizes at December 31, 2005 and 2006 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
EXPIRE WITHIN ONE YEAR EXPIRE AFTER ONE YEAR TOTAL AMOUNT OUTSTANDING AMOUNT OF FUTURE PAYMENTS
-------------------------- ------------------------- --------------------------- -----------------------------
2005 2006 2005 2006 2005 2006 2005 2006
----------- ------------ ----------- ------------ ----------- ------------- ----------- --------------
Financial standby
letters of credit Ps 474,159 Ps 702,834 Ps 19,061 Ps 350,767 Ps 493,220 Ps 1,053,601 Ps 493,220 Ps 1,053,601
Bank guarantees 122,280 550,137 223,175 229,628 345,455 779,765 345,455 779,765
----------- ------------ ----------- ------------ ----------- ------------ ----------- ------------
TOTAL Ps 596,439 Ps 1,252,971 Ps 242,236 Ps 580,395 Ps 838,675 Ps 1,833,366 Ps 838,675 Ps 1,833,366
=========== ============ =========== ============ =========== ============ =========== ============
F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table shows BC's known contractual obligations as of
December 31, 2006:
LESS THAN 1 1-3 3-5 AFTER 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR YEARS YEARS YEARS
------------------------------------------ ------------- --------------- --------------- ------------ ---------------
(Ps millions)
Long-term debt obligations Ps 1,313,781 Ps 493,451 Ps 520,499 Ps 264,985 Ps 34,846
Time deposits 7,498,993 5,821,219 915,895 474,309 287,570
Commitments to originate loans 660,558 660,558 - - -
Commitments of repurchase of investments 909,746 909,746 - - -
Employee benefit plans 99,085 12,984 27,703 30,200 28,198
------------- ------------- ------------- ----------- ------------
TOTAL PS 10,482,163 Ps 7,897,958 Ps 1,464,097 Ps 769,494 Ps 350,614
============= ============= ============= =========== ============
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 Finance, which establish qualitative and quantitative
standards for assigning a risk category to individual assets.
172
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 the Bank's loan portfolio, (b) the methodology used in its
determination is based on the existence and magnitude of determined factors that
are not necessarily an indication of future losses and (c) the amount of the
provision 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.
CONTINGENT LIABILITIES: The Bank is subject to contingent liabilities,
including judicial, regulatory and arbitration proceedings and tax and other
claims arising from the conduct of the Bank's business activities. 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 the Bank will incur in future disbursements for events that
happened before the balance sheet date and the amounts may be reasonably
estimated. The Bank involves internal and external experts in assessing
probability and in estimating any amounts involved.
Throughout the life of a contingency, the Bank's internal experts may
learn of additional information that can affect the assessments about
probability or 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 the Bank's attorneys' judgment,
which will not necessarily coincide with the future outcome of the proceedings.
PENSION PLAN: The Bank and its subsidiary 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
non-contributory 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, which
will not necessarily coincide with the future outcome of such factors.
173
H. RECENT U.S. GAAP PRONOUNCEMENTS
In February 2006, the FASB issued Statement No. 155 ("SFAS 155")
"Accounting for Certain Hybrid Financial Instruments - an amendment of FASB
Statements No. 133 and 140". SFAS 155 amends SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities" and resolves issues addressed in SFAS 133 Implementation Issue
No. D1, "Application of Statement 133 to Beneficial Interests in Securitized
Financial Assets" as follows:
- Permits fair value remeasurement for any hybrid financial
instrument that contains an embedded derivative that otherwise
would require bifurcation;
- Clarifies which interest-only strips and principal-only strips
are not subject to the requirements of Statement 133;
- 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;
- Clarifies that concentrations of credit risk in the form of
subordination are not embedded derivatives; and
- Amends SFAS 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.
SFAS 155 is effective for all financial instruments acquired or issued
after the first fiscal year beginning after September 15, 2006.
In March 2006, the FASB issued Statement No. 156 ("SFAS 156") "Accounting
for Servicing of Financial Assets - an amendment of FASB Statement No. 140".
SFAS 156 amends SFAS 140, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities", with respect to the accounting for
separately recognised servicing assets and servicing liabilities. SFAS 156
requires a company to recognise a servicing asset or servicing liability each
time it undertakes an obligation to service a financial asset by entering into
a servicing contract principally in a transfer of the servicer's financial
assets that either meets the requirements for sale accounting, or is to a
qualifying special-purpose entity in a guaranteed mortgage securitisation in
which the transferor retains all of the resulting securities and classifies
them as either available-for-sale securities or trading securities in
accordance with SFAS 115, "Accounting for Certain Investments in Debt and
Equity Securities". SFAS 156 requires all separately recognised servicing
assets and servicing liabilities to be initially measured at fair value, if
practicable, and permits a company to choose to subsequently measure each
class of separately recognised servicing assets and servicing liabilities
using either a specified amortisation method or a specified fair value
measurement method. At its initial adoption, SFAS 156 permits a one-time
reclassification of available-for-sale securities to trading securities by
companies with recognised servicing rights, without calling into question the
treatment of other available-for-sale securities under SFAS 115, provided that
the available-for-sale securities are identified in some manner as offsetting
the company's exposure to changes in fair value of servicing assets or
servicing liabilities that a servicer elects to subsequently measure at fair
value. SFAS 156 is applicable to all transactions entered into in fiscal years
that begin after September 15, 2006. The Bank is currently evaluating the
impact that SFAS 156 will have on BC's Financial Statements.
174
In September 2006, the FASB issued Statement No. 157 ("SFAS 157") "Fair
Value Measurement". SFAS 157 provides a single definition of fair value,
together with a framework for measuring it, and requires additional disclosure
about the use of fair value to measure assets and liabilities. SFAS 157 also
emphasises that fair value is a market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy with the highest priority being
quoted prices in active markets. Under SFAS 157 fair value measurements are
disclosed by level within that hierarchy. While the Statement does not add any
new fair value measurements, it may change current practice. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Bank is currently evaluating the impact of SFAS 157 on
the Company's financial position and results of operations.
In February 2007, the FASB issued Statement No. 159 ("SFAS 159") "The Fair
Value Option for Financial Assets and Financial Liabilities". SFAS 159 creates a
fair value option under which an entity may irrevocably elect fair value as the
initial and subsequent measurement attribute for certain financial assets and
liabilities on a contract-by-contract basis, with changes in fair value
recognized in earnings as these changes occur. SFAS 159 is effective as of the
beginning of the first fiscal year beginning after November 15, 2007. The Bank
is currently analyzing the effect that SFAS 159 will have on BC's U.S.GAAP
disclosures.
In July 2006, the FASB issued interpretation No. 48 "Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No.109". FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
The evaluation of a tax position in accordance with this interpretation is
a two-step process. The first step is recognition: the enterprise determines
whether it is more likely than not that a tax position will be sustained upon
examination, including resolution of any related appeals or litigation
processes, based on the technical merits of the position. In evaluating whether
a tax position has met the more-likely-than-not recognition threshold, the
enterprise should presume that the position will be examined by the appropriate
taxing authority that has full knowledge of all relevant information. The second
step is measurement: a tax position that meets the more-likely-than-not
recognition threshold is measured to determine the amount of benefit to
recognise in the financial statements. The tax position is measured at the
largest amount of benefit that is greater than 50 percent likely of being
realised upon ultimate settlement. Differences between tax positions taken in a
tax return and amounts recognised in the financial statements will generally
result in one of the following: (a) an increase in a liability for income taxes
payable or a reduction of an income tax refund receivable; (b) a reduction in a
deferred tax asset or an increase in a deferred tax liability; or both (a) and
(b).
Tax positions that previously failed to meet the more-likely-than-not
recognition threshold should be recognised in the first subsequent financial
reporting period in which that threshold is met. Previously recognised tax
positions that no longer meet the more-likely-than-not recognition threshold
should be derecognised in the first subsequent financial reporting period in
which that threshold is no longer met. This interpretation is effective from
January 1, 2007 for the Bank. BC is currently evaluating the impact of the
requirements of FIN 48 on its financial position and results of operations.
175
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
As of December 31, 2006, the following persons acted as directors,
alternate directors and senior management of BC:
DIRECTORS
Juan Camilo Ochoa Restrepo was born in 1939. He was the President of
Suramericana de Inversiones S.A. from April 2004 to September 2006. He was also
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 an
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 or "ANDI") from 1966 to 1969.
Mr. Ochoa Restrepo worked as Design Engineer in the Engineering Department of
Integral Ltda. from 1963 to 1966.
Currently Mr. Ochoa Restrepo is also a member of the board of directors of
Inversura S.A., Inversiones Argos S.A., Grupo Nacional de Chocolates S.A,
Smurfit Kappa Carton de Colombia S.A., and Fundacion Bancolombia.
Jose Alberto Velez Cadavid was born in 1950. He has been the President of
Inversiones Argos S.A. since August 2003 and of Cementos Argos S.A. since
December 2005. He has held several management positions at Suramericana de
Seguros S.A., since 1984 including Vice President of Marketing and Sales, Vice
President of Investments, Vice President of Enterprise Development and President
of Inversura S.A. and Suramericana de Seguros S.A.
Currently Mr. Velez Cadavid is also a member of the board of directors of
Suramericana de Inversiones S.A., Grupo Nacional de Chocolates S.A., Calcetines
Crystal S.A. and Almacenes Exito S.A.
Carlos Enrique Piedrahita Arocha was born in 1954. He has been the
President of Compania Nacional de Chocolates S.A. since 2000 and President of
Grupo Nacional de Chocolates S.A. (formely Inversiones Nacional de Chocolates
S.A.) since 2003. He was President of Banco Corfinsura Internacional Inc.
(Puerto Rico) from 1998 to 2000, President of Corfinsura 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.
176
Mr. Piedrahita Arocha is a member of the board of directors of
Suramericana de Inversiones S.A., Inversiones Argos S.A., and Fogafin. He is
also a member of the boards of directors of the following non-for profit
organizations: Hospital San Vicente de Paul, Corporacion para Investigaciones
Biologicas CIB, and Proantioquia.
Gonzalo Alberto Perez Rojas was born in 1958. He is the President of
Inversura S.A. He held different management positions at Compania Suramericana
de Seguros since 1981, such as Vice President of Corporate Businesses and Vice
President of Insurance and Capitalization.
Mr. Perez Rojas is also a member of the board of directors of
Interoceanica de Seguros S.A. (Republic of Panama), Fasecolda (Federacion de
Aseguradores Colombianos), Cementos Argos S.A., Colombiana de Inversiones S.A.
and Fundacion Suramericana.
Ricardo Sierra Moreno was born in 1951. He has been the President of
Productora Distrihogar S.A. since 1989. He had previously held positions as
Chief Financial Officer of Suramericana de Seguros S.A. from 1982 to 1989 and
Regional Manager of Corporacion Financiera Suramericana S.A. Corfinsura from
1979 to 1982.
Mr. Sierra Moreno is also a member of the board of directors of
Conconcreto S.A., Carulla Vivero S.A., UNE EPM Telecomunicaciones S.A. and
Calcetines Crystal S.A. He is also a member of the ANDI's sectional board since
1992.
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 board 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. He is the author
of various articles and publications, and is a professor in different
universities.
Alejandro Gaviria Uribe was born in 1965. Since 2004, he has been a
Professor and Researcher at the Andes University (Bogota, Colombia) and a
columnist for the weekly publication "El Espectador". Previously, he was the
Sub-director of the National Planning Department from 2002 to 2004 and the
Sub-director of Fedesarrollo from 2000 to 2002. He was an associate researcher
for Fedesarrollo from 2000 to 2001, a researcher for the Inter-American
Development Bank - 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 Federacion Nacional de Cafeteros and civil engineer for
Suramericana de Seguros S.A. Currently, he is a member of the board of directors
of WWB Colombia and Isagen.
177
ALTERNATE DIRECTORS
David Emilio Bojanini Garcia was born in 1956. He has been the President
of Suramericana de Inversiones S.A. since September 2006 and was the President
of Proteccion S.A. from 1991 to September 2006. He also worked in Suramericana
de Seguros S.A. Currently, he is the President of the board of directors of
Bancolombia S.A. and is a member of the board of directors of Grupo Nacional de
Chocolates S.A., Inversiones Argos S.A. and Leasing Bancolombia S.A. Compania de
Financiamiento Comercial.
Carlos Raul Yepes Jimenez was born in 1964. He is the Legal Vice President
of Cementos Argos S.A. Previously he was 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 board of directors of CI Carbones del Caribe S.A.
Juan Sebastian Betancur Escobar was born in 1943. He is the President of
Fundacion para el Progreso de Antioquia or "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
designated as the representative of the President of Colombia on the board of
directors of Telecom and Colciencias. Currently, he is a member of the board of
directors of Cementos Argos S.A., Inversura S.A., Almacenes Exito S.A., Grupo
Nacional de Chocolates S.A., Tipiel S.A., Corporacion Programa Desarrollo para
la Paz PRODEPAZ, Fundacion Carolina Colombia, Corporacion Excelencia en la
Justicia, Corporacion Antioquia Presente, Centro de Ciencia y Tecnologia de
Antioquia, and Fundacion Ideas para la Paz.
Carlos Mario Giraldo Moreno 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 at the Economics Research Department of the ANDI,
such as General Manager for the Antioquia Region and Presidency and Legal Vice
Presidency Assistant. He was also a non-for profit controller and the Presidency
Assistant of the Antioquia Cattle Federation (Federacion Antioquena de
Ganaderos).
Mr. Giraldo Moreno is a member of the board of directors of Aerorepublica,
Fundacion Bancolombia, Inversura S.A., ANDI and Proantioquia. 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.
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 positions 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 of
the board of directors of Codiscos S.A. and JLT Re Corredores de Reaseguros
178
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 board of directors of Inversura
S.A., Calcetines Crystal S.A. and Fundacion Proninez. He is also a member of the
Financial Committee of ICETEX.
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.
On March 1, 2007, the shareholders of Bancolombia approved, at a general
shareholders' meeting an amendment to the by-laws of Bancolombia which increased
the number of directors from seven to nine and eliminated the provision for
alternate directors. At the same meeting, the shareholders appointed the
individuals to serve as members of the board of directors for the April 2007 -
March 2009 period. Therefore, Juan Camilo Ochoa Restrepo, Juan Sebastian
Betancur Escobar, Carlos Mario Giraldo Moreno, Luis Alberto Zuleta Jaramillo and
Maria Angelica Arbelaez Restrepo were removed, and David Emilio Bojanini Garcia,
Jose Alberto Velez Cadavid, Carlos Enrique Piedrahita Arocha, Gonzalo Alberto
Perez Rojas, Ricardo Sierra Moreno, Juan Camilo Restrepo Salazar, Alejandro
Gaviria Uribe, Francisco Jose Moncaleano Botero and Carlos Raul Yepes Jimenez,
were appointed as disclosed in Item 6 - Directors, Senior Management and
Employees, C - Board Practices.
For additional information regarding the Bank's board of directors and its
functions please see Item 10-Additional Information- B. Memorandum and Articles
of Association- Board of Directors.
SENIOR MANAGEMENT
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 Saldarriaga 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 Conavi/Corfinsura
merger that was completed on July 30, 2005. Previously, he had been President
(CEO) of Corfinsura since 2004 and held various managerial positions at
Corfinsura such as Vice President of Investment Banking from 1996 to 2004, Vice
President of Investment and International Affairs from 1993 to 1996, and before
that, Assistant to the CEO, Regional Manager, International Sub-manager and
Project Director.
179
Mr. Restrepo Isaza holds a B.A. degree from EAFIT University in Medellin
and an MBA degree from Stanford University.
Juan Carlos Mora Uribe was born in 1965. He has been the Risk Management
Vice President of Bancolombia since the Conavi/Corfinsura merger that was
completed 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 Uribe 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 Moreno 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 Botero 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 Conavi/Corfinsura
merger that was completed on July 30, 2005. She held the position of Secretary
General of Corfinsura S.A. since 1993, becoming an executive officer in 2002.
Mrs. Mesa 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 Conavi/Corfinsura merger that was
completed on July 30, 2005. Mr. Toro was the Vice President of Media and
Technology of Conavi from 2003 until the Conavi/Corfinsura 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.
180
Mr. Toro Villegas 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 Villegas holds a Civil Engineer degree from Medellin University
and a post graduate degree in Financial Institutions Management from
Northwestern University (USA).
On October 23, 2006, the board of directors of Bancolombia S.A. accepted
the resignation of Jorge Ivan Toro Villegas as Vice President of Technology. To
replace him, the board of directors appointed Olga Botero Pelaez, who took
office as Vice President of Technology on April 19, 2007 after being authorized
by the Superintendency of Finance of Colombia.
Olga Botero Pelaez was born in 1963. She is an engineer and has both a
bachelor degree and a masters degree in Computer Science from Iowa State
University. She has held different positions in companies including Hewlett
Packard, Suramericana de Seguros S.A., Mecosoft and Orbitel. During her 7 years
at Orbitel, she held several positions, including Marketing Operations Manager,
Customer Services Manager and National Sales Manager. She has also been a
professor at universities including Eafit, Universidad Javeriana and Universidad
de la Sabana.
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. Toro 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, Commercial Vice President and Executive Vice President.
Mr. Ochoa Barrera 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 Conavi/Corfinsura merger
that was completed on July 30, 2005. Previously, he had been the Vice President
of Internal Audit since 1998. Mr. Ramirez Giraldo 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 Giraldo 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. He is also a Certified
Internal Auditor (CIA) by the Institute of Internal Auditors (IIA).
181
Luis Fernando Montoya Cusso was born in 1954. He has been the Vice
President of Operations since 1998. Since 1983, he has occupied several
positions at Bancolombia, including Manager of Cucuta Region from 1983 to 1985,
Northern Region from 1986 to 1991, Bogota Region from 1991 to 1993, and
Operations Manager.
Mr. Montoya Cusso holds a B.A. degree from 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
from 1989 to 1990.
Mr. Burgos de la Espriella 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 Conavi/Corfinsura merger that was completed on
July 30, 2005. Before, Mr. Munoz Serna acted as CEO of Conavi since June 2005.
He joined Conavi in 1989 as Regional Manager for Bogota, holding various
positions at Conavi such as Vice President of Business Development and Vice
President of Corporate Banking since 1994. Previously, Mr. Munoz Serna worked as
Branch Manager for the main office of BIC in Bogota from 1983 to 1989 and Branch
Manager for the main office of Banco Real de Colombia in Bogota from April to
October 1989.
Mr. Munoz Serna 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 Londono 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.
182
B. COMPENSATION OF DIRECTORS AND OFFICERS
Bancolombia compensates each of its directors with Ps 1,300,000 per
meeting. The directors receive no other compensation or benefit. Consistent with
Colombian law, the Bank does not make public, information regarding the
compensation of the Bank's individual officers, BC's shareholders may request
that information during the period preceding the annual general shareholder's
meeting. 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, 2006 was Ps 32,033 million.
Pursuant the BC's by-laws and Corporate Governance Code, the shareholders
at the general shareholder's meeting establish the policies for the compensation
of directors, and the Bank's board of directors establishes the policies for the
compensation of officers and employees.
BC has established an incentive compensation plan that awards bonuses
bi-annually to its management employees. 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, 2006, based on internal analysis, there was a
provision maintained for future compensation payments in the amount of Ps 14,071
million.
The Bank paid a total of Ps 571,658 million for salaries of personnel
employed directly by the Bank and upper management of its affiliates. The sum of
Ps 16,791 million that was paid for the incentive compensation plan was included
in the total 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, 2006:
PRINCIPAL/ FIRST ELECTED TERM
NAME ALTERNATE TO THE BOARD 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
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
183
PRINCIPAL/ FIRST ELECTED TERM
NAME ALTERNATE TO THE BOARD EXPIRES
-------------------------------- --------- ------------- -------
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 Pestrepo had previously served as BC's Director
during the period 2004-2005.
On March 1, 2007 the shareholders approved, at the general shareholders'
meeting, an amendment to the by-laws of Bancolombia which increased the number
of directors from seven to nine and eliminated the provision for alternate
directors. On the same meeting, the shareholders appointed the following
individuals to serve as members of the Board of Directors of Bancolombia for the
April 2007 - March 2009 period:
FIRST ELECTED TERM
NAME TO THE BOARD EXPIRES
-------------------------------- ------------- -------
David Bojanini Garcia 2006 2009
Jose Alberto Velez Cadavid 1996 2009
Carlos Enrique Piedrahita Arocha 1994(1) 2009
Gonzalo Alberto Perez Rojas 2004(2) 2009
Ricardo Sierra Moreno 1996(3) 2009
Juan Camilo Restrepo Salazar 2006 2009
Alejandro Gaviria Uribe 2005 2009
Francisco Moncaleano Botero 2006 2009
Carlos Raul Yepes Jimenez 2006 2009
==== ====
----------
(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.
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. The members of senior management can be removed by the board of
director's decision.
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
Olga Botero Pelaez Since 2007
184
NAME PERIOD SERVED
------------------------------ -------------
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.
For further information about the Bank's corporate governance practices
please see Item 16.B-Corporate Governance and Code of Ethics.
AUDIT COMMITTEE
In accordance with the requirements of External Circular 007 of 2001,
issued by the Superintendency of Banking (now Superintendency of Finance) BC 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. As of December 31,
2006, the members were Luis Alberto Zuleta Jaramillo who was the financial
expert, Jose Alberto Velez Cadavid, Ricardo Sierra Moreno, Carlos Raul Yepes
Jimenez and Juan Sebastian Betancur Escobar. Following the election of new
directors at the general shareholders' meeting held on March 1, 2007, Mr. Zuleta
Jaramillo, Mr. Velez Cadavid, Mr. Sierra Moreno, Mr. Yepes Jimenez and Mr.
Betancur Escobar, will continue to serve on the audit committee, in compliance
with Colombian regulations, until the board of directors appoints new members.
Upon such appointment, the board intends to determine which director will serve
as the audit committee financial expert.
The audit committee may also designate independent advisors to support its
activity. During 2006, the audit committee designated Price WaterhouseCoopers as
an adviser in the application of U.S. GAAP.
As established by the Superintendency of Finance, the audit committee has
a charter approved by BC's board of directors which establishes its composition,
organization, objectives, duties, responsibilities and extension of its
activities. BC's board of directors also establishes the remuneration of the
members of the audit committee. The audit committee must meet at least quarterly
and must present a report of its activities at the general shareholders'
meeting.
BC currently complies with the requirements of the Sarbanes Oxley Act of
2002 and the rules promulgated thereunder, as applicable to foreign private
issuers with respect to the composition and functions of its audit committee.
REMUNERATION COMMITTEE
The board of directors of BC has established a remuneration committee
whose members are elected by the board of directors. There are not defined
expiration terms. As of December 31, 2006, the members of the remuneration
committee were Ricardo Sierra Moreno and Carlos Enrique Piedrahita Arocha.
Following the election of new directors at the general shareholders' meeting
held on March 1, 2007, Mr. Sierra Moreno and Mr. Piedrahita Arocha will continue
to serve on the remuneration committee, in compliance with Colombian
regulations, until the board of directors appoints new members.
185
The main function of this committee is to determine hiring, compensation
and development policies 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.
RISK COMMITTEE
The main function of this committee is to provide assistance in the
approval, follow-up and control of strategies and policies for risk management,
including the limits to act within different areas. In addition, it assists the
board of directors and the presidency of the Bank in the knowledge and
understanding of the risks assumed by the Bank and the capital required to
support them.
The board of directors appoints the members of this committee, which may
include certain of the members of the board of directors, as well as the
president, certain vicepresidents, and other officers of the Bank.
CREDIT COMMITTEE
The duties of this committee involve mainly decisions regarding the credit
approval process, the structure and composition of the receivables portfolio,
the methodologies and risk management tools concerning credit, as well as the
study of the operations approved at lower management levels.
In addition, this committee is responsible for approving the extraordinary
regime and defining the mechanisms for urgent operations, but it may delegate
attributions to other Committees.
The board of directors appoints the members of the credit committee, which
shall include the president of the Bank, the vicepresident of Risk Analysis who
chairs the Credit Committee, as well as several other vicepresidents and
officers of the Bank.
ASSETS AND LIABILITIES COMMITTEE
The purpose of this committee is to provide assistance to the board of
directors and the presidency of the Bank in the definition, follow-up and
control of the general policies, as well as in the assessment of assets and
liabilities management risks.
The board of directors appoints the members of such committee, which may
include the president and certain vicepresidents of the Bank.
CENTRAL COMMITTEE OF RECEIVABLES ASSESSMENT AND RATING
This Committee is mainly responsible for assessing and rating the Bank's
receivables.
The board of directors appoints the members of such committee,
which may include certain vicepresidents and other officers of the Bank.
186
D. EMPLOYEES
The following table sets forth the number of employees of BC for the last
three fiscal years:
TOTAL NUMBER OF EMPLOYEES EMPLOYED
BY BC AND ITS CONSOLIDATED NUMBER OF EMPLOYEES EMPLOYED
AS OF DECEMBER 31 SUBSIDIARIES BY BC DIRECTLY
----------------- ---------------------------------- ----------------------------
2004 8,609 7,027
2005 14,562 11,571
2006 16,222 12,520
====== ======
On December 31, 2006, Bancolombia and its consolidated Subsidiaries had
16,222 employees of which 12,520 were employed directly by the Bank. Of the
12,520 employees directly contracted by the Bank, 8,879 are operations personnel
and 3,641 are management employees. Of the 12,520 employees, approximately
26.03% are located in the Bogota Region, 13.50% in the South Region, 17.45% in
the Antioquia Region, 23.93% in the Medellin headquarters, 9.90% in the Central
Region, 9.05% in the North Region and 0.14% in the Miami Agency. During 2006,
the Bank contracted an average of 285 employees per month through temporary
personnel service companies. Of the employees, approximately 10.65% are part of
a labor union called Sintrabancol and 10.38% 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 applies to approximately 8,868 employees.
The Bank is satisfied with the existing collective bargaining agreement,
both as to labor costs and its implications, as well as for the relationship it
has helped to develop with the labor unions and BC employees.
E. SHARE OWNERSHIP
The following directors and managers owned common shares in BC as of March
31, 2007: Juan Camilo Ochoa Restrepo, Ricardo Sierra Moreno, Gonzalo Alberto
Perez Rojas, Juan Sebastian Betancur Escobar, Carlos Mario Giraldo Moreno, Jorge
Londono Saldarriaga, Sergio Restrepo Isaza, Olga Botero Pelaez and Gonzalo Toro
Bridge. None of their shareholdings, individually or in the aggregate, exceeded
1% of BC's outstanding common shares.
As of March 31, 2007, Juan Camilo Ochoa Restrepo is the only Director of
BC who owned preferred shares in BC. His shareholding did not exceed 1% of BC's
outstanding preferred shares.
As of March 31, 2007, Luis Santiago Perez Moreno is the only executive
officer of BC who owned preferred shares in BC. His shareholding did not exceed
1% of BC's outstanding preferred shares.
As of March 31, 2007, BC had no outstanding options to acquire any of its
outstanding common shares or preferred shares.
187
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 March 31, 2007. A beneficial
owner includes anyone who has the power to receive the economic benefit of
ownership of the securities.
% OWNERSHIP % OWNERSHIP % OWNERSHIP
COMMON PREFERRED OF COMMON OF PREFERRED OF TOTAL
NAME SHARES SHARES SHARES(1) SHARES(1) SHARES(1)
------------------------------------------------ ----------- ----------- ----------- ------------ -----------
Suramericana de Inversiones and Subsidiaries (2) 230,649,939 20,000 45.3% 0.0% 31.7%
Inversiones Argos S.A.(3) 72,386,256 7,727,568 14.2% 3.5% 11.0%
ADR Program -- 152,648,688 0% 70.0% 21.0%
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, Sociedad Inversionista Anonima
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.
As of March 31, 2007 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 20,735 shareholders. A total of 8,701,876 common shares, representing 1.7% of
outstanding common shares, were directly held by 37 record holders in the United
States, a total of 152,648,688 representing 70.0% of preferred shares were held
directly by 1 record holder in the United States (ADR Program), and a total of
885,649 representing 0.5% of outstanding preferred shares, were directly held by
22 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
2005 are partially a direct result of the Bank's merger with Conavi and
Corfinsura that was completed 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 Conavi/Corfinsura 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.
188
In accordance with the Merger Agreement, starting from the business day
following the Conavi/Corfinsura 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
Conavi/Corfinsura merger the number of outstanding common and preferred shares
of Bancolombia increased in 2005 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
Conavi/Corfinsura 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 Conavi/Corfinsura
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 Conavi/Corfinsura merger.
There has not been any other significant changes in the percentage
ownership held by any major shareholder during the last three years.
Major shareholders of the Bank do not have different voting rights. They
all vote according to their participation in the Bank's outstanding shares.
There are no arrangements known to the company whose operation may at a
subsequent date result in a change in control of the company.
To the extent known to the Bank, and in accordance with Colombian law, BC
is not directly or indirectly owned or controlled by any other entity or person.
B. RELATED PARTY TRANSACTIONS
Colombian law sets forth certain restrictions and limitations on
transactions carried out with related parties, these being understood as
principal shareholders, subsidiaries and management. Transactions that are
prohibited in the case of credit institutions are described in Decree 663 of
1993, specifically in Articles 119 and 122 thereof, as well as in the Code of
Commerce duly amended by Law 222 of 1995, when applicable. Credit and risk
concentration limits are regulated by Decree 2360 of 1993, including its
respective amendments and addendas.
189
Colombian laws contain the following main provisions governing
transactions with subsidiaries:
- subsidiaries must carry out their activities independently and with
administrative autonomy, so that they have enough decision-making
capacity in order to carry out the transactions that form part of
their business purpose.
- transactions between the parent company and its subsidiaries must be
of a real nature and cannot differ considerably from standard market
conditions, nor be in detriment to the Colombian Government,
shareholders or third parties.
- subsidiaries may not acquire any shares issued by their parent
company or its subsidiaries.
- subsidiaries dedicated to providing financial services may not
acquire or negotiate securities issued, endorsed, guaranteed or
accepted, or belonging to an issuance that is administered by the
parent company or its subsidiaries, except for the transactions
undertaken by broker dealers in the ordinary course of business.
- subsidiaries dedicated to providing financial services may not sell
assets to the Bank, nor may the latter purchase these from the
subsidiary, unless in the context of the liquidation of the
subsidiary.
- parent companies may not carry out active credit operations with a
subsidiary dedicated to providing financial services.
- parent companies may not grant over-drafts to a subsidiary for an
amount exceeding the deposits in its checking account, except when
the surplus corresponds to the value of checks that have been
deposited but have not been effectively cleared for subsequent
payment, the value of which shall be covered on the business day
following the date on which the overdraft is issued.
- no transaction may be carried out between parent companies and their
subsidiaries that implies conflicts of interest as determined by the
Superintendency of Finance.
According to the provisions of the Code of Commerce of Colombia, neither
the Bank's directors nor the management may directly or indirectly, purchase or
sell shares issued by the Bank while they remain in their offices, except when
said transactions are (i) carried out for reasons other than purely speculative
and with due authorization from the board of directors, which shall be granted
by the affirmative vote of two thirds of its members, excluding that of the
person requesting such authorization, or (ii) when the board of directors should
consider such transactions to be convenient and the shareholders shall have
authorized such transactions with the affirmative vote of its ordinary majority
as provided in the Bank's by-laws, excluding the vote of the person requesting
such authorization.
The Bank's Corporate Governance Code provides that in any event, any
negotiation of shares carried out by any official, director or manager, may not
be done for speculative purposes, which would be presumed for example in the
case of the following three conditions coinciding: i) suspiciously short lapses
of time existing between the purchase and the sale of shares; ii) situations
arising proving to be exceptionally favorable for the Bank, and iii) significant
profits being obtained from this transaction.
190
According to Article 122 of Decree 663 of 1993, transactions that should
be determined by the Colombian Government as carried out by credit institutions
with their shareholders holding 5% or more of the subscribed capital, with their
managers, as well as those carried out with spouses and relatives of
shareholders and managers with up to a second degree of consanguinity or
affinity, or of a single civil status, shall require the unanimous affirmative
vote on the part of the members of the board of directors attending the
corresponding meeting. In the minutes of this meeting no condition may be agreed
upon that is different from that otherwise used by the entity with regard to the
public, according to the type of transaction in question, except those
transactions that are carried out with managers to address health, education,
housing and transport issues according to the rules and regulations that the
board of directors should determine in a general fashion for such purpose. To
grant these type of credit, BC must verify that regulations concerning limits of
credit and concentration of risks are not violated.
The Bank's internal policies relating to this topic are included in its
Corporate Governance Code.
In disclosing transactions with related parties, the Bank shall apply the
rules and regulations defined by the Superintendency of Finance, as contained in
Circular 100 of 1995 and its respective amendments and addendas, and by that
provided in the Corporate Governance Code.
All economic relations that the Bank maintains with its directors, and
senior executives shall be conducted within the limitations and conditions
established by applicable legislation and regulations governing the prevention,
handling and resolution of conflicts of interest.
All relevant information with respect to economic relations existing
between the Bank and its directors, officers and senior executives shall be
disclosed to the market by means of reports corresponding to each fiscal period.
Furthermore, the list of main shareholders, these being understood as the real
beneficiaries of more than 5% of the Bank's shares outstanding, as well as all
changes occurring with the Bank's equity interest and control as well as any
relevant business conducted between the Bank and its main shareholders shall be
disclosed on the Bank's Virtual Branch.
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.
Other than as described above, during the last three fiscal years and
through the date of this annual report on Form 20-F, we have not been involved
in, and we do not currently anticipate becoming involved in, any transactions
that are material to us or any of our related parties and that are unusual in
their nature or conditions.
BC, in a non-consolidated basis, had a total amount of Ps 123,611 million
in loans outstanding to related parties as of March 31, 2007. This amount
includes the largest amount outstanding as of March 31, 2007 which is a working
capital loan to Metrotel Redes S.A. outstanding in the amount of Ps 32,854
million and accrued interest for Ps 134 million. As of March 31, 2007, the
average interest rate for this loan is 12.39%.
As of December 31, 2006, significant balances and transactions with
related parties were as follows:
191
2006
ENTERPRISES THAT DIRECTLY OR INDIRECTLY
THROUGH ONE OR MORE INTERMEDIARIES,
CONTROL
OR ARE CONTROLLED BY, OR ARE UNDER COMMON
CONTROL WITH, THE COMPANY AND ASSOCIATES KEY MANAGEMENT PERSONNEL
----------------------------------------- ------------------------
(Ps million)
BALANCE SHEET
Investment securities 822,737 --
Loans 101,393 36,231
Customers' acceptances
and derivatives 109,853 --
Accounts receivable 8,721 4,108
--------------- -------------
TOTAL Ps 1,042,704 Ps 40,339
=============== =============
Deposits 2,195,828 8,656
Overnight funds 448 --
Accounts payable 483 2,274
Bonds 725,227 --
--------------- -------------
TOTAL Ps 2,921,986 Ps 10,930
=============== =============
TRANSACTIONS INCOME
Dividends received 11,206 --
Interest and fees 30,538 3,339
Other 2 --
--------------- -------------
TOTAL Ps 41,746 Ps 3,339
=============== =============
EXPENSES
Interest 151,477 6,642
Fees -- 156
Other -- 18
--------------- -------------
TOTAL Ps 151,477 Ps 6,816
=============== =============
C. INTEREST OF EXPERTS AND COUNSEL
Not applicable.
ITEM 8. FINANCIAL INFORMATION.
A. CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
A.1. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to pages F- 1 through F - 133.
192
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, 2006 amounting to Ps 733,525 million. Currently,
there are thirty four (34) judicial proceedings against the Bank which
individual value exceeds Ps 4,500,000,000. Among these, only those which were
considered as "probable" received an accounting provision that corresponds to
50% of the value in dispute.
As of December 31, 2006, Ps 957 million of these liabilities are covered
in a guarantee contract entered into by Fogafin and private investors when the
former Banco de Colombia was privatized on 1994. This guarantee contract remains
in force in connection with litigation that was commenced before the
privatization of former 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 as of December 31, 2006 of Ps 18,889 million.
OTHER LEGAL PROCEEDINGS
The legal claims in which the Bank has been linked as defendant are duly
provisioned in the cases required, in accordance with Colombian regulations, as
shown in the notes to the financial statements. No event has occurred in those
legal proceedings that may significantly and negatively impact the regular
course of business of the Bank or its results.
The most significant proceedings are the ones related to the "Gilinski
Case". These are: (i) a criminal investigation that includes four civil claims;
(ii) an Arbitration Proceeding (the Bank Vs. Gilinski) (iii) a proceeding before
a New York Court, and (iv) an Arbitration Proceeding, (Gilinski Vs. The Bank).
Besides the proceedings related to the "Gilinski Case", there are two other
significant claims: (v) an Arbitration Proceeding, (Luis Alberto Duran Vs.
Bancolombia), and (vi) an action for the protection of collective rights
(Maximiliano Echeverri against Bancolombia and others).
Bancolombia has been the subject of negative publicity focusing on these
actions. However, this negative publicity has not negatively impacted its
solvency, its business and operations, or its obligations with its customers and
clients.
(i) CRIMINAL INVESTIGATION RELATED TO THE "GILINSKI CASE".
On December 26, 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 of Bancolombia, respectively 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 8, 2004.
193
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 obstructing
due process.
On 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 on March 7 2006, the Constitutional Court (Sala de
Revision) delivered an order to reopen the criminal investigation against some
officers of Bancolombia, in order to take into account the evidence gathered
abroad. The attorneys of the Bancolombia's officers requested the nullification
of this order before the Constitutional Court (Sala Plena) and as of April 30,
2007 a decision in this regard is still pending.
On January 4, 2007 the General Attorney's Office issued a resolution,
which authorized the prosecution of Mr. Jorge Londono Saldarriaga and Mr.
Federico Ochoa B., President and Executive and Services Vice President of
Bancolombia, respectively, and determined the house arrest of Bancolombia's
officers.
Both the affected officers of Bancolombia and the Prosecutor (Procuradoria
General de la Nacion) appealed the decision of the Attorney General's Office
(Fiscalia Octava Delegada).
On its appeal, the officers of Bancolombia argue the lack of evidence of
Attorney General's Office decision, implying that it goes against an order by
the Constitutional Court, violating due process and most importantly,
disregarding the principle of res judicata.
The Prosecutor's appeal also requests the nullity of the Attorney
General's Office decision.
As a consequence, while those appeals are pending, the Attorney General's
Office decision dated January 4, 2006 will be suspended.
On January 10, 2007, the Attorney General's Office decided to revoke the
order issued on January 4, 2007, determining the house arrest of Mr. Jorge
Londono Saldarriaga and Mr. Federico Ochoa Barrera.
194
(ii) ARBITRATION PROCEEDING: THE BANK VS. GILINSKI.
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.
On March 30, 2006, the arbitral tribunal issued an award ordering the
defendant to pay Bancolombia Ps 63,216 million, including inflation adjustments
and interest. The defendant filed an action for annulment, which has not yet
been considered.
(iii) ARBITRATION PROCEEDING: GILINSKI VS. THE BANK.
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 previously presented 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.
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 Ps 40,570 million to the plaintiffs with respect to
non-compliance with some secondary obligations in the capitalization process.
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.
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 annulment 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 annulment 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 annulment action is pending.
The contingency with regard to this process is considered probable
although the annulment action is supported by objective arguments. The Bank has
set up a provision of Ps 22,595 million.
195
(iv) ARBITRATION PROCEEDING: LUIS ALBERTO DURAN VS. BANCOLOMBIA.
On February 17, 2004, the Bank 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, 2006, the Bank had set up a provision of Ps 26,871 million
for this contingency until the Superior Tribunal of Bogota grants a final
decision in this regard.
(v) ACTION FOR THE PROTECTION OF COLLECTIVE RIGHTS: MAXIMILIANO ECHEVERRI VS.
THE BANK AND OTHERS.
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 Tribunal 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. The plaintiff requested the
nullity of the process before the Contentious Administrative Tribunal of
Cundinamarca.
(vi) PROCEEDING RELATED TO THE "GILINSKI CASE", BEFORE THE UNITED STATES COURT
FOR THE SOUTHERN DISTRICT OF NEW YORK.
On February 28, 2007, the United States Court for the Southern District of
New York (the "Court") dismissed the complaint of the sellers of the former
Banco de Colombia against Bancolombia, its President Jorge Londono Saldarriaga,
and some of the officers that were members of the board of directors of
Bancolombia at the time of the acquisition and merger.
The lawsuit, which had been initiated on March 24, 1999, was suspended by
the Court on September 28, 1999, while was pending the resolution of the case
before the arbitral tribunal in Colombia, according to the parties' agreement
under the Promise of Sale Agreement, dated August 24, 1997.
The Court based its ruling on the principle of res judicata. The Court
considered that the award of the Colombian arbitral tribunal, dated May 16,
2006, decided on the same claims filed before the Court in New York and,
therefore, put an end to the proceedings in New York.
The Court considered that the arbitral tribunal had decided on the merits
of all the claims, and rejected the liability of Bancolombia and its managers.
On March 23, 2007, the plaintiffs filed a notice of appeal of this decision. The
decision is still pending. If the arguments supporting the appeal are accepted,
the proceeding would be reinitiated on the evidentiary stage.
196
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.
A.3. DIVIDEND POLICY
The declaration, amount and payment of dividends is based on BC's
unconsolidated earnings. Dividends must be approved at the ordinary annual
shareholders' meeting upon the recommendation of the board of directors and the
President of BC. Under the Colombian Commerce Code, after payment of income
taxes and appropriation of legal and other reserves, and after setting off
losses from prior fiscal years, BC must distribute to its shareholders at least
50% of its annual net income, or 70% of its annual net income if the total
amount of reserves exceeds its outstanding capital. Such dividend distribution
must be made to all shareholders, in cash or in issued stock of Bancolombia, as
may be determined by the shareholders, and within a year from the date of the
ordinary annual shareholders' meeting in which the dividend was declared.
Pursuant to Colombia's Law 222 of 1995, the minimum dividend per share
requirement of 50% or 70%, as the case may be, may be waived by an affirmative
vote of the holders of 78% of the shares present at the shareholders' meeting.
Under Colombian law, the annual net profits of BC must be applied as
follows:
- first, an amount equal to 10% of BC's net profits to a legal
reserve until such reserve is equal to at least 50% of the
Bank's paid-in capital;
- second, to the payment of the minimum dividend on the
preferred shares (for more information, see Item 10.
Additional Information - B. Memorandum and Articles of
Association); and
- third, as may be determined in the ordinary annual
shareholders' meeting by the vote of the holders of a majority
of the shares entitled to vote, upon the recommendation of the
board of directors, and may, subject to further reserves
required by BC's by-laws, be distributed as a dividend.
The following table sets forth the annual cash dividends paid on each
common share and each preferred share during the periods indicated:
DIVIDENDS DECLARED WITH RESPECT TO NET CASH DIVIDENDS CASH DIVIDENDS
INCOME EARNED IN: PER SHARE(1)(2) PER SHARE(1)(3)
-------------------------------------- --------------- ---------------
(Ps) (U.S. DOLLARS)
2002.................................. 132 0.045
2003.................................. 272 0.101
2004.................................. 376 0.159
2005.................................. 508 0.222
2006.................................. 532 0.243
----------
(1) Includes common shares and preferred shares.
(2) Cash dividends for 2002, 2003 2004 and 2005 were paid in quarterly
installments and cash dividends for 2006 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).
197
B. SIGNIFICANT CHANGES
There has not been any significant changes since the date of the annual
financial statements included in this document.
ITEM 9. THE OFFER AND LISTING.
A. OFFER AND LISTING DETAILS
BC is a NYSE listed company and its ADSs are listed under the symbol
"CIB". Our ADSs have been listed on the NYSE since July, 1995. The BC preferred
shares are also listed in the Colombian Stock Exchange. The table below sets
forth, for the periods indicated, the reported high and low market prices and
share trading volume for the preferred shares on the Colombian Stock Exchange.
The table also sets forth the reported high and low market prices and the
trading volume of the 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, 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
December 31, 2006... 20,700 12,980 36.18 20.00 97,287,628
Source: NYSENet (Composite Index) and Colombia Stock Exchange.
COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
------------------------------- ---------------------------------
PS PER PREFERRED TRADING
SHARES VOLUME US$ PER ADS
---------------- (NUMBER OF ------------- TRADING VOLUME
HIGH LOW SHARES) HIGH LOW (NUMBER OF ADSs)
------ ------ ---------- ----- ----- ----------------
(in nominal pesos)
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 26,325,100
Second quarter............. 20,700 12,980 18,436,476 36.18 20.00 32,446,100
Third quarter.............. 17,740 14,040 7,074,255 30.70 22.32 19,498,600
Fourth quarter............. 18,520 16,600 15,619,867 32.25 28.24 19,017,828
2007
First quarter.............. 17,800 14,680 10,694,697 32.00 24.00 17,335,920
Source: NYSENet (Composite Index) and Colombia Stock Exchange.
198
COLOMBIA STOCK EXCHANGE NEW YORK STOCK EXCHANGE
----------------------- ----------------------------------
PS PER PREFERRED SHARE US$ PER ADS
----------------------- -------------- TRADING VOLUME
HIGH LOW HIGH LOW (NUMBER OF ADSs)
------ ------ ------ ----- ----------------
MONTH
November 2006.............. 18,200 16,600 32.25 28.24 6,129,200
December 2006.............. 17,780 16,900 31.68 29.22 5,122,300
January 2007............... 17,800 15,880 32.00 28.59 6,651,000
February 2007.............. 17,180 14,800 30.50 25.50 3,792,980
March 2007................. 15,880 14,680 28.35 24.00 6,891,940
April 2007................. 15,880 14,900 30.10 27.21 8,632,400
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 Conavi/Corfinsura 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
and common shares issued by the Bank 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, until 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 Conavi/Corfinsura merger and the
registration of additional ADSs described above.
199
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, 2006, the market capitalization for BC's preferred shares on the
Colombian Stock Exchange was Ps 3,878,216 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,
2006, was Ps 125,883,628 million (US$ 56.2 billion), with 108 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
Set forth below is certain information concerning our capital stock
and a brief summary of certain significant provisions of our by-laws and
Colombian corporate law. This description does not purport to be complete and is
qualified by reference to our by-laws (an English translation of which is
attached to this Annual Report as Exhibit 1) and to the Colombian corporate law.
BC is publicly held corporation with its principal place of business
in the city of Medellin, Colombia, governed mainly by our by-laws and by the
Colombian corporate law.
200
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 also authorized to participate in
the capital stock of other companies, subject to any restrictions imposed by
applicable law.
BOARD OF DIRECTORS
As of the date of filing of this Annual Report, Bancolombia's board
of directors is composed of nine (9) directors, each elected for a two-year term
on March 1, 2007, with no alternate directors being provided for. Please see
Item 6.A - Directors and Senior Management - Directors, for more information
regarding Bancolombia's current directors.
The directors of BC must abstain from participating, directly or
through an intermediary, on their own behalf or on behalf of a third party, in
activities that may compete against the Bank or in conflict-of-interest
transactions that may generate a conflict of interest situation, unless the
general shareholders meeting expressly authorizes such transactions. For such
purposes, the directors shall provide the shareholders meeting with all the
relevant information necessary for the shareholders to reach a decision. If the
director is a shareholder, his or her vote shall be excluded from the respective
decision process. In any case, the general shareholders meeting could only grant
its authorization if the act does not adversely affect BC's interests.
In the general annual shareholders meeting, the shareholders are
responsible for determining, the compensation of the members of the board of
directors.
Pursuant to the by-laws of 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.
The by-laws of BC do not provide for: (i) any age limit requirement
regarding retirement or non-retirement of directors or (ii) any number of shares
required for director's qualification.
DESCRIPTION OF SHARE RIGHTS, PREFERENCES AND RESTRICTIONS
Bancolombia's by-laws provide for an authorize capital stock of Ps
500,000,000,000 divided into 1,000,000,000 shares of a par value of Ps 500 each,
which may be of the following classes: (i) common shares, (ii) privileged
shares, and (iii) shares with preferred dividend and no voting rights
("preferred shares"). Pursuant to Article 6 of the by-laws, all shares issued
shall have the same nominal value.
As of December 31, 2006, Bancolombia had 509,704,584 common shares
and 218,122,421 preferred shares outstanding and a capital stock of Ps 430,684
million divided into 727,827,005 shares. No privileged shares have been issued
by Bancolombia.
201
VOTING RIGHTS
Common Shares
The holders of common shares are entitled to vote on the basis of
one vote per share on any matter subject to approval at a general shareholders'
meeting. These general meetings may be ordinary meetings or extraordinary
meetings. Ordinary general shareholder's meetings occur at least once a year but
no later than three months after the end of the prior fiscal year, for the
following purposes:
- to consider the approval of BC's annual report,
including the financial statements for the preceding
fiscal year;
- to review the annual report prepared by 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")(9);
- to elect directors, the client representative and the
external auditor (each for a two-year term); and
- to determine the dividend policy and the allocation of
profits, if any, of the preceding fiscal year, as well
as any retained earnings from previous fiscal years.
According to Decree 3923 of 2006, directors are elected in 2
separate ballots, one for independent(10) directors and one for the remaining
directors. Both elections are made 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
of 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;
----------
(9) 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.
(10) According to Law 964 of 2005, 25% of the members of the board of directors
shall be independent. A person who is "independent director" is understood
to mean a director who is NOT:
1. An employee or director of the issuer or any of its parent or
subsidiary companies, including all those persons acting in said
capacity during the year immediately preceding that in which they
were appointed, except in the case of an independent member of the
board of directors being re-elected.
2. Shareholders, who either directly or by virtue of an agreement
direct, guide or control the majority of the entity's voting rights
or who determine the majority composition of the administrative,
directing or controlling bodies of this same entity.
3. A partner or employee of any association or firm that provides
advisory or consultancy services to the issuer or to companies who
belong to the same economic group to which the issuer in question
belongs, in the event that income obtained from such services
represent for said association or firm twenty per cent (20%) or more
of its total operating income.
4. An employee or director of a foundation, association or institution
that receives significant donations from the issuer. The term
"significant donations" is quantified as being twenty per cent (20%)
or more of the total amount of donations received by the respective
institution.
5. An administrator of any entity on whose board of directors a legal
representative of the issuer participates.
6. Any person who receives from the issuer any kind of remuneration
different from fees as a member of the board of directors, of the
audit committee or any other committee set up by the board of
directors.
202
- 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 casted in the election is
divided by the number of directors to be elected. The
resulting quotient is the quota of votes necessary to
elect particular directors. For each time that the
number of votes cast for a group of nominees is
divisible by the quota of votes, one nominee from that
group is elected, in the order of the hierarchy of that
group; and
- 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 one or more holders of
shares entitled to vote at the relevant meeting constitutes a quorum, regardless
of the number of shares represented. General meetings (whether ordinary or
extraordinary) may be called by the board of directors, the President or the
external auditor of 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 shareholders' meeting. Notice of
extraordinary general meetings, listing the matters to be addressed at such a
meeting must be published in one newspaper of wide circulation at BC's principal
place of business at least five calendar days prior to an extraordinary general
meeting.
Except when Colombian law or BC's by-laws require a special
majority, action may be taken at a general shareholder's 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
common shares and 80% of the holders of subscribed
preferred shares to approve the payment of a stock
dividend; and
203
- 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 BC's by-laws. If the Superintendency of Finance determines
that any amendment to the by-laws fails to comply with Colombian law, it may
demand that the relevant provisions be modified accordingly. Under these
circumstances, 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 to or vote at any general shareholder's meeting of holders of common
shares except as described below.
The holders of preferred shares will be entitled to vote on the
basis of one vote per share at any shareholders' meeting, whenever a
shareholders vote is required on the following matters:
- 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's profits are
not enough to pay the minimum dividend and the
Superintendency of Finance, by its own decision or upon
petition of holders of at least ten percent (10%) of
preferred shares, determines that benefits were
concealed or shareholders were misled with regard to
benefits received from the Bank by the Bank's directors
or officers decreasing the profits to be distributed,
the Superintendency of Finance may resolve that holders
of preferred shares should participate with speaking and
voting rights at the general shareholders' meeting, in
the terms established by law.
- When the registration of shares at the Colombian Stock
Exchange or at the National Register of Securities and
Issuers which is a registry kept by the Superintendency
of Finance, is suspended or canceled. In this event,
voting rights shall be maintained until the
irregularities that resulted in such cancellation or
suspension are resolved.
BC must cause a notice of any meeting at which holders of preferred
shares are entitled to vote to be mailed to each record holder of preferred
shares. Each notice must include a statement stating:
204
- 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.
DIVIDENDS
Common Shares
Once the shareholders present at the relevant general shareholders
meeting have approved the financial statements, then they can determine the
allocation of distributable profits, if any, of 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 shareholder's meeting pursuant to the
recommendation of the board of directors and the President of BC.
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 the President and may, subject to
further reserves required by the by-laws, be distributed
as dividends.
Under Colombian law, the dividends payable to the holders of common
shares cannot exceed the dividends payable to holders of the preferred shares.
BC's by-laws requires to maintain a reserve fund equal to 50% of paid-in
capital. All common shares that are fully paid in and outstanding at the time a
dividend or other distribution is declared are entitled to share equally in that
dividend or other distribution. Common shares that are only partially-paid in
participate in a dividend or distribution in the same proportion than the shares
have been paid in at the time of the dividend or distribution.
The general shareholders' meeting may allocate a portion of the
profits to welfare, education or civic services, or to support economic
organizations of the Bank's employees.
205
Preferred Shares
Holders of preferred shares are entitled to receive dividends based
on the profits of the preceding fiscal year, after deducting losses affecting
the capital and once the amount that shall be legally set apart for the legal
reserve has been deducted, but before creating or accruing for any other
reserve, of a minimum preferred dividend equal to one per cent (1%) yearly of
the subscription price of the preferred share, provided this dividend is higher
than the dividend assigned to common shares, if this is not the case, the
dividend shall be increased to an amount that is equal to the per share dividend
on the common shares. The dividend received by holders of common shares may not
be higher than the dividend assigned to preferred shares.
Payment of the preferred dividend shall be made at the time and in
the manner established 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 -
The Bank's preferred shares Have Limited Voting Rights.
General aspects involving Dividends
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
only 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.
206
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.
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, 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 surplus assets 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 at the general shareholders'
meeting. The issuance of preferred shares must always be first approved at the
general shareholders' meeting, which shall determine the nature and extent of
any privileges, according to the by-laws and Colombian law.
At the time a Colombian company is formed, its outstanding capital
stock must represent at least 50% of the authorized capital. Any increases in
the authorized capital stock or decreases in the outstanding capital stock must
be approved by the majority of shareholders required to approve a general
amendment to the by-laws. Pursuant to Decree 663, the Superintendency of Finance
may order a commercial bank to increase its outstanding capital stock under
certain special circumstances.
207
The Bank's by-laws and Colombian law require that, whenever the Bank
issues new shares of any outstanding class, it must offer the holders of each
class of shares the right to purchase a number of shares of such class
sufficient to maintain their existing percentage ownership of the aggregate
capital stock of the Bank. These rights are called preemptive rights. See Item
3. Key Information - D. Risk Factors - Preemptive Rights May Not Be Available to
Holders of ADRs.
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.
Limits on Purchases and Sales of Capital Stock by Related Parties
Pursuant to the Colombian Commerce Code, the members of our board of
directors and certain of our principal executive officers may not, directly or
indirectly, buy or sell shares of our capital stock while they hold their
positions, unless they obtain the prior approval of the board of directors
passed with the vote of two-thirds of its members (excluding, in the case of
transactions by a director, such director's vote).
No Redemption
Colombian law prohibits BC from repurchasing shares of its capital
stock, including the preferred shares.
C. MATERIAL CONTRACTS
On December 30, 2005 Colcorp (Now Banca de Inversion Bancolombia
S.A. Corporacion Financiera) sold its position in Abonos Colombianos S.A. -
Abocol S.A, and subsidiaries to V. International Ventures Inc.
Additional information on the agreements and contracts signed during
2006 can be found in Item 4. Information on the Company - A. History and
Development of the Company.
208
D. EXCHANGE CONTROLS
The Central Bank has consistently made foreign currency available to
Colombian private sector entities to meet their foreign currency obligations.
Nevertheless, in the event of shortages of foreign currency, foreign currency
may not be available to private sector companies and foreign currency needed by
the Bank to service foreign currency obligations may not be purchased in the
open market without substantial additional cost.
The Foreign Exchange Statute is contained in Law 9 of 1991 and
External Resolution No. 8 of 2000, which were implemented by the External
Regulating Circular DCIN 83 of 2006 of the board of directors of the Central
Bank. 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 Fiduciaria Bancolombia, as custodian
of such deposit, to provide or cause to be provided certain information to
Fiduciaria Bancolombia, 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 Bank's by-laws, foreign investors
receive the same treatment as Colombian citizens with respect to the ownership
and the voting of ADSs and preferred shares. For a detailed discussion of
ownership restrictions see Item 4. Information on the Company - B. Business
Overview - B.7. Supervision and Regulation - Ownership Restrictions.
E. TAXATION
COLOMBIAN TAXATION
In Colombia, dividends received by foreign companies or other
foreign entities, non-resident individuals and successions of non-residents are
subject to income taxes.
209
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 the Bank to the holders of ADRs through the Depositary, all distributions by
the Bank made on account of preferred shares to holders of ADRs evidencing ADSs
who are not resident in Colombia, as defined below, will be exempt from
Colombian income, withholding and remittance taxes, except in the case of
distributions paid out of non-taxed earnings of the Bank (which would bear a 34%
tax for 2007 and a 33% tax for 2008 and thereafter).
Dividends paid to a holder of preferred shares (as distinguished
from the ADSs representing such preferred shares) who is not a resident of
Colombia, as defined below, and who holds the preferred shares in his own name,
rather than through another institutional or individual fund, will be subject to
income tax if such dividends do not correspond to the Bank's profits that have
been taxed at the corporated level. For these purposes, the applicable rate is
34% for 2007 and 33% for 2008 and thereafter.
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 not Colombian residents
are not required by law to file an income tax return in Colombia when dividends
that have not been taxed at the corporate level have been subject to withholding
taxes. Similarly, foreign institutional capital investment funds are not
required by law to file income tax returns in Colombia.
Pursuant to article 36-1 of the Fiscal Statute, earnings received by
a non-resident of Colombia derived from stock trading are not subject to income,
withholding, remittance or other taxes in Colombia when the stock is listed in
the Colombian Stock Exchange and the transaction does not involve the sale of
10% or more of the company's outstanding stock by the same beneficial owner in
the same taxable year.
In instances in which earnings derived from stock trading are
subject to income, the filing of an income tax return is required and the
applicable rate for income tax is currently 14%, unless the trading has been
done through Foreign institutional capital investments funds.
UNITED STATES FEDERAL INCOME TAXATION CONSIDERATIONS
IN GENERAL
This section describes the material United States federal income tax
consequences generally applicable to ownership by a U.S. holder (as defined
below) of preferred shares or ADSs. It applies to you only if you hold your
preferred shares or ADSs as capital assets for U.S. federal income tax purposes.
This section does not apply to you if you are a member of a special class of
holders subject to special rules, including:
210
- a dealer in securities;
- a trader in securities that elects to use a
mark-to-market method of accounting for securities
holdings;
- a tax-exempt organization;
- a life insurance company;
- a person liable for alternative minimum tax;
- a person that actually or constructively owns 10% or
more of the Bank's voting stock;
- a person that holds preferred shares or ADSs as part of
a straddle or a hedging or conversion transaction; or
- a person whose functional currency is not the U.S.
dollar.
This section is based on the Internal Revenue Code of 1986, as
amended, its legislative history, existing and proposed regulations, published
rulings and court decisions all as currently in effect. These laws are subject
to change, possibly on a retroactive basis. There is currently no comprehensive
income tax treaty between the United States and Colombia.
You are a U.S. holder if you are a beneficial owner of preferred
shares or ADSs and you are:
- a citizen or resident of the United States;
- a domestic corporation;
- an estate whose income is subject to United States
federal income tax regardless of its source; or
- a trust if a United States court can exercise primary
supervision over the trust's administration and one or
more United States persons are authorized to control all
substantial decisions of the trust.
If a partnership holds the preferred shares or ADSs, the United
States federal income tax treatment of a partner will generally depend on the
status of the partner and the tax treatment of the partnership. A partner in a
partnership holding the preferred shares or ADSs should consult its tax advisor
with regard to the United States federal income tax treatment of its investment
in the preferred shares or ADSs.
You should consult your own tax advisor regarding the United States
federal, state and local and the Colombian and other tax consequences of owning
and disposing of preferred shares and ADSs in your particular circumstances.
This discussion addresses only United States federal income
taxation.
211
TAXATION OF DIVIDENDS
Under the United States federal income tax laws, and subject to the
passive foreign investment company, or PFIC, rules discussed below, if you are a
U.S. holder, the gross amount of any dividend the Bank pays out of its current
or accumulated earnings and profits (as determined for United States federal
income tax purposes) is subject to United States federal income taxation. If you
are a noncorporate U.S. holder, dividends paid to you in taxable years beginning
before January 1, 2011 that constitute qualified dividend income will be taxable
to you at a maximum tax rate of 15% provided that you hold the preferred shares
or ADSs for more than 60 days during the 121-day period beginning 60 days before
the ex-dividend date or if the dividend is attributable to a period or periods
aggregating over 366 days, provided that you hold the preferred shares or ADSs
for more than 90 days during the 181-day period beginning 90 days before the
ex-dividend date and meet other holding period requirements. Dividends paid with
respect to the preferred shares or ADSs generally will be qualified dividend
income provided that, in the year that you receive the dividend, the preferred
shares or ADSs are readily tradable on an established securities market in the
United States. The Bank believes that its 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 the Bank's 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.
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.
212
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, 2011 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 the Bank's preferred shares and ADSs should not be
treated as stock of a PFIC for United States federal income tax purposes, but
this conclusion is a factual determination that is made annually and thus may be
subject to change.
In general, if you are a U.S. holder, the Bank will be a PFIC with
respect to you if for any taxable year in which you held the Bank's preferred
shares or ADSs:
- at least 75% of the Bank's gross income for the taxable
year is passive income; or
- at least 50% of the value, determined on the basis of a
quarterly average, of the Bank's assets is attributable
to assets that produce or are held for the production of
passive income.
Passive income generally includes dividends, interest, royalties,
rents (other than certain rents and royalties derived in the active conduct of a
trade or business), annuities and gains from assets that produce passive income.
If a foreign corporation owns at least 25% by value of the stock of another
corporation, the foreign corporation is treated for purposes of the PFIC tests
as owning its proportionate share of the assets of the other corporation, and as
receiving directly its proportionate share of the other corporation's income.
If the Bank is treated as a PFIC, and you are a U.S. holder that did
not make a mark-to-market election, as described below, you will be subject to
special rules with respect to:
- any gain you realize on the sale or other disposition of
your preferred shares or ADSs; and
- any excess distribution that the Bank makes to you
(generally, any distributions to you during a single
taxable year that are greater than 125% of the average
annual distributions received by you in respect of the
preferred shares or ADSs during the three preceding
taxable years or, if shorter, your holding period for
the preferred shares or ADSs).
Under these rules:
- the gain or excess distribution will be allocated
ratably over your holding period for the preferred
shares or ADSs,
213
- 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 the Bank is a PFIC either in the
taxable year of the distribution or the preceding taxable year. Moreover, your
preferred shares or ADSs will be treated as stock in a PFIC if the Bank was a
PFIC at any time during your holding period in your common shares, even if the
Bank is not currently a PFIC. For purposes of this rule, if you make a
mark-to-market election with respect to your preferred shares or ADSs, you will
be treated as having a new holding period in your preferred shares or ADSs
beginning on the first day of the first taxable year beginning after the last
taxable year for which the mark-to-market election applies. Dividends that you
receive that do not constitute qualified dividend income are not eligible for
taxation at the 15% maximum rate applicable to qualified dividend income.
Instead, you must include the gross amount of any such dividend paid by us out
of the Bank's accumulated earnings and profits (as determined for United States
federal income tax purposes) in your gross income, and it will be subject to tax
at rates applicable to ordinary income.
If you own preferred shares or ADSs during any year that the Bank is
a PFIC with respect to you, you must file Internal Revenue Service Form 8621.
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.
214
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 100 F Street N.E. Washington DC 20549. Some of the Bank's SEC filings are
also available to the public from the SEC's website at http://www.sec.gov.
I. SUBSIDIARY INFORMATION
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
The following section describes the market risks to which BC is
exposed and the tools and methodology used to measure these risks as of December
31, 2006.
Bancolombia's Integrated Risk Management strategy is based on
principles set by international and local rules and regulations as well as its
own corporate strategy. 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.
The main objective of risk management is to identify, measure,
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) reporting on the market under stress
situation and verifying the business, compliance with policies established by
senior management under this situation, c) designing the methodologies for
valuation of the market value of certain 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"), and f) proposing policies to the board of directors and to
Senior management that guarantee the maintenance of predetermined risk levels.
215
The Bank's assets include both trading and non-trading instruments.
Trading instruments are recorded in the Treasury Book and include primarily
fixed income securities. Non-trading instruments are recorded in the Bank book
which includes primarily loans, time deposits, checking accounts and savings
accounts.
The Bank uses a value at risk ("VaR") calculation to limit its
exposure to 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, foreign exchange
swaps 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 subdivision of the Bank involved is prepared to incorporate a new
product into their procedures, that every risk is considered before the product
is incorporated and that the board of directors approval is obtained before the
new product 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, as amended by External Circular 031 of 2004, each as issued by the
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 VaR changes from month to month depending on factors such as
volatility, duration and positions held with regard to the different instruments
that are subject to Market Risk.
In August 2006, the Superintendency of Finance issued the External
Circular 027 of 2006, which modified the External Circular 031 of 2004 and is an
approach to the model defined by Basel Committee for market risk. The new
Circular is effective from February 1st, 2007.
The relevant risk factors for which VaR is computed by BC according
to the External Circular 031 of 2004 are:
- 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.
In accordance with Chapter XXI of the Basic Accounting Circular
(Circular Externa 100 de 1995) issued by the Superintendency of Finance, all
Colombian financial organizations must calculate their total market risk without
separating the measure into instruments for trading purposes and instruments for
purposes other than trading, this measure is used to affect the solvency rate.
216
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
issued by the 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 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 elsewhere 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.
217
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
TOTAL MARKET RISK VAR
As defined by the Superintendency of Finance in Chapter XXI of the
Basic Accounting Circular, 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.
(MATHEMATICAL EQUATION)
218
The Superintendency of Finance requires Bancolombia
(unconsolidated), Banca de Inversion Bancolombia, Valores Bancolombia, Leasing
Bancolombia, Sufinanciamiento, Factoring Bancolombia and Fiduciaria Bancolombia,
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, Bancolombia Puerto Rico
Internacional, Inc., Bancolombia Panama and Bancolombia Cayman, is not required
by the Superintendency of Finance because those companies are not supervised by
this control entity.
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. The Bank 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 the Bank's
VaR models. A VaR model does not calculate the greatest possible loss. The
results of these models and analysis thereof are subject to the judgment of the
Bank's risk management personnel.
BC and its affiliates' 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.
219
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
AS OF DECEMBER 31, 2006
(PS MILLION)
NPV DUR Y (Delta)i VaR
---------- ----- -------- -------- ------
ASSETS
Overnight Funds................................................................ 299,337 0.10 7.62% 135 33
Trading securities issued by the Colombian Government - TES IPC rate........... 27,829 8.74 8.41% 150 300
Trading securities issued by the Colombian Government - TES fixed rate......... 324,462 39.65 8.35% 150 15,864
Other trading securities issued by the Colombian Government.................... 27,260 9.69 6.48% 30 66
Trading Securities Issued by financial institutions............................ 456,164 3.22 8.29% 30 364
Other marketable trading securities............................................ 151,761 17.59 8.98% 30 662
Held to maturity securities issued by the Colombian Government - TES
fixed rate................................................................... 64,990 18.50 7.10% 250 2,463
Held To Maturity Securities Issued by financial institutions................... 145,692 1.87 8.57% 126 283
Other held to maturity securities.............................................. 19,024 8.66 8.69% 126 171
Permanent Securities Available for sale issued by the Colombian
Government - TES fixed rate.................................................. 248,774 34.59 8.44% 250 17,605
Permanent Securities Available for sale issued by financial institutions...... 25,745 29.01 9.48% 126 774
Other Permanent Securities Available for sale.................................. 229,797 47.53 9.58% 126 11,314
Commercial loans - fixed rate.................................................. 1,130,378 2.92 14.66 126 3,405
Commercial loans - variable rate............................................... 11,476,906 5.04 13.02% 126 59,744
Mortgage loans in pesos........................................................ 51,739 41.18 13.02% 126 2,202
Consumer loans - fixed rate.................................................... 1,864,539 10.81 15.88% 222 36,535
Consumer loans - variable rate................................................. 965,335 2.76 13.02% 30 660
Small business loans - fixed rate.............................................. 21,477 9.15 14.11% 222 356
Small business loans - variable rate........................................... 87,274 1.84 13.02% 30 40
Customers' acceptances......................................................... 2,420 1.02 0.00% 126 3
Rights buyback trading securities issued by the Colombian Government -
TES fixed rate............................................................... 7,939 16.06 8.04% 150 157
Other rights buyback trading securities issued by the Colombian
Government..................................................................... 25,007 8.91 7.64% 30 55
Rights buyback trading securities issued by financial institutions............. 347,052 1.14 7.92% 30 98
Other rights buyback trading securities........................................ 2,991 6.27 8.80% 30 5
Rights buyback permanent securities available for sale issued by the
Colombian Government - TES fixed rate....................................... 285,208 30.85 8.42% 250 17,999
Rights buyback permanent securities available for sale issued by
financial institutions....................................................... 62,806 19.49 9.34% 126 1,268
Other rights buyback permanent securities available for sale................... 69,310 37.84 9.43% 126 2,717
LIABILITIES
Non-interest bearing checking accounts......................................... 4,107,963 12.23 0.00% 30 52,281
Interest bearing checking accounts............................................. 384,021 28.46 0.02% 30 11,394
Time deposits.................................................................. 3,125,964 10.13 6.72% 126 32,887
DAT............................................................................ 245,694 0.12 6.72% 126 31
Saving deposits................................................................ 9,716,838 8.31 0.04% 30 84,109
Overnight funds................................................................ 57,023 0.07 7.61% 135 4
Repurchase agreements.......................................................... 655,847 0.36 5.65% 250 484
220
Bank acceptances outstandings................................................ 2,420 1.02 0.00% 126 3
Interbank borrowings......................................................... 744,108 4.34 6.84% 126 3,354
Long term debt............................................................... 728,449 2.31 8.49% 126 1,747
INTEREST RATES DERIVATIVES
Interest rate SWAP - Variable part, long position............................ 590,878 3.52 6.89% 30 517
Interest rate SWAP - Fixed part, short position.............................. (94) 23.42 8.20% 30 (0.55)
Interest rate SWAP - Variable part, short position........................... (582,512) 3.24 6.70% 30 (469)
Forward contracts long position issued by the Colombian Government - TES
IPC Rate................................................................... 24,236 10.64 8.62% 150 318
Forward contracts long position issued by the Colombian Government - TES
fixed rate................................................................. 213,995 22.97 8.14% 150 6,063
Other forward contracts long position issued by the Colombian Government..... 52 9.57 7.65% 30 0.12
Forward contracts long position securities issued by financial
institutions............................................................... 157,918 11.28 8.77% 30 441
Forward contracts long position others securities............................ 141,982 13.52 9.19% 30 476
Forward contracts short position synthetic................................... (512,349) 0.63 7.25% 30 (80)
Forward contracts short position issued by the Colombian Government- TES
fixed rate................................................................. (85,881) 79.38 8.70% 150 (8,405)
Forward contracts long position others securities............................ 86,960 0.07 7.21% 30 2
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in local currency................... 4,452,658 6.78 7.95% 30 7,481
Foreign exchange contracts short position in local currency.................. (3,460,700) 6.61 7.97% 30 (5,672)
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 5.54 months compared to the average
duration of TES, which is 33.2 months, and the combined average duration of the
checking accounts and savings accounts, which is 9.99 months. The checking
accounts and savings accounts are principally responsible for the effect on the
DTF risk factor outcome.
AS OF DECEMBER 31, 2006
Ps million
------------------------------------------------
RISK FACTOR VaR
--------------------------- --------
DTF.................................. (99,280)
Repurchase Agreements' Rate.......... (484)
Interbank Rate....................... 29
Consumer Loan Rate................... 36,891
TES Rates............................ 52,365
========
In 2006, the average VaR for the TES factor was Ps 92,111 million
with a standard deviation of Ps 31,552 million. The DTF factor includes assets
such as commercial loans and investments other than TES. The DTF factor also
includes all liabilities in local currency except repos, overnight fund and
derivatives other than TES and forward contracts relating to foreign currency.
As a result, in 2006 the average VaR for the DTF factor was is Ps (139,987)
million with a standard deviation of Ps 34,645 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.
221
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 illustrates 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
AS OF DECEMBER 31, 2006
(U.S. DOLLARS)
NPV DUR Y (Delta)i VaR
------------- ----- -------- -------- -------
ASSETS
Overnight funds........................................................... 113,253,183 0.07 3.80% 12 790
Trading securities issued by the Colombian Government - U.S. dollar,
denominated TES......................................................... 22,618,942 29.46 5.94% 12 66,291
Trading securities issued by the Colombian Government - TES Yankees....... 44,287,612 49.65 5.92% 12 218,735
Other Trading Securities Issued by the Colombian Government............... 155,283 12.02 4.34% 12 186
Other marketable trading securities....................................... 96,950,689 3.82 7.58% 12 36,759
Held to maturity securities issued by the Colombian Government - TES
Yankees................................................................. 5,482,828 25.68 8.66% 41 47,900
Other held to maturity securities......................................... 9,510,125 8.34 4.93% 41 27,074
Permanent securitied available for sale issued by the Colombian
Government - TES yankees................................................ 105,899,023 16.68 6.11% 41 602,304
Permanent trading securities Available for sale issued by the Colombian
Government.............................................................. 15,567,114 12.02 4.34% 41 63,887
Other permanent securities available for sale............................. 5,524,025 7.67 5.61% 41 14,442
Commercial loans - fixed rate............................................. 82,086,628 21.56 7.86% 41 602,538
Commercial loans - variable rate.......................................... 697,693,713 3.74 7.22% 41 888,184
Consumer loans - fixed rate............................................... 21,920,924 3.56 15.39% 41 26,421
Consumer loans - variable rate............................................ 1,366,648 1.17 7.20% 7 91
Rights buyback permanent securities available for sale issued by the
Colombian government - TES yankees..................................... 33,076,120 33.77 5.75% 41 380,780
Other Rights buyback permanent securities available for sale.............. 14,014,600 8.43 5.53% 41 40,300
LIABILITIES
Non-interest bearing checking accounts.................................... 31,202,587 33.16 0.00% 12 103,416
Interest bearing checking accounts........................................ 127,069,928 16.95 1.75% 12 214,951
Time deposits............................................................. 220,641,465 10.97 5.29% 41 825,501
Saving deposits........................................................... 4,622,064 33.51 1.81% 12 15,455
Overnight funds........................................................... 18,005,546 0.07 5.78% 12 125
Repurchase agreements.................................................... 38,371,354 0.07 5.70% 12 267
Interbank borrowings...................................................... 456,973,114 3.37 5.60% 41 524,739
INTEREST RATES AND DERIVATIVES
Interest rate SWAP - Fixed part, long position............................ 93,769,738 42.45 5.95% 7 226,367
Interest rate SWAP - Variable part, long position......................... 149,696,889 4.15 5.54% 7 35,334
Interest rate SWAP - Fixed part, short position........................... (149,483,360) 33.83 5.59% 7 (287,698)
Interest rate SWAP - Variable part, short position........................ (93,531,311) 4.61 5.48% 7 (24,532)
Forward contracts long position issued by the Colombian government - TES
Yankees................................................................. 5,619,959 57.64 6.12% 12 32,217
Forward contracts short position synthetic................................ (5,841,063) 0.30 5.37% 12 (174)
Forward contracts short position issued by the Colombian government - TES
Yankees................................................................. (611,282) 51.46 5.96% 12 (3,129)
Forward contracts long position others securities......................... 625,395 0.28 5.37% 12 17
FOREIGN EXCHANGE FORWARDS
Foreign exchange contracts long position in forex......................... 1,701,667,589 2.45 4.49% 12 414,855
Foreign exchange contracts short position in forex........................ (2,114,672,030) 3.11 4.48% 12 (654,052)
222
The risk factors of the interest rate risk in foreign currency are
the LIBOR and the Money Market rates. In 2006, the average VaR for the LIBOR
factor was Ps 2,158 million with a standard deviation of Ps 912 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 2006 was
Ps 776 million with a standard deviation of Ps 1,371 million. The Money Market
factor affects Colombian short-term Treasury bonds, liabilities and foreign
exchange forward contracts.
AS OF DECEMBER 31, 2006
Ps million
-------------------------------------------
RISK FACTOR VaR
---------------- ------
LIBOR.............................. 2,895
Money Market US$................... (496)
=====
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
INTEREST RATE RISK IN UVR
AS OF DECEMBER 31, 2006
(UVR)
NPV DUR Y (Delta)i VaR
--------------- ----- ----- -------- -----------
ASSETS
Trading securities issued by the Colombian government - TES fixed
rate................................................................ 1,178,890,084 55.08 3.84% 12 6,682,625
Other trading securities issued by the Colombian government........... 472,409,189 52.89 0.14% 12 2,580,091
Trading securities issued by financial institutions................... 159,248,564 12.40 2.64% 12 203,475
Other marketable trading securities................................... 810,865,673 19.25 5.46% 12 1,603,505
Held to maturity securities issued by the Colombian government -
TES fixed rate...................................................... 105,555,222 6.90 4.12% 12 74,965
Other held to maturity securities issued by the Colombian
government.......................................................... 2,536,968,799 80.49 0.00% 12 21,088,748
Other held to maturity securities..................................... 2,901,042,195 21.08 4.68% 12 6,289,086
Permanent securities available for sale issued by the Colombian
Government - TES fixed rate......................................... 388,146,834 63.93 4.17% 12 2,554,092
Other permanent securities available for sale issued by the
Colombian Government................................................ 5,146,787 83.99 5.24% 12 44,454
Commercial loans...................................................... 3,681,392,804 18.71 8.65% 12 7,063,578
Mortgage loans in UVR................................................. 8,696,125,696 28.70 8.65% 12 25,598,853
Other right buyback trading securities................................ 23,252,625 26.37 4.61% 12 63,084
Rights buyback permanent securities available for sale issued by
the Colombian Government - TES DTF Rate............................. 197,353,200 52.47 4.05% 12 1,065,974
INTEREST RATES DERIVATIVES
Forward contracts Long position issued by the Colombian
government - TES fixed rate......................................... 1,225,108,954 17.61 2.91% 12 2,221,350
Forward contracts Long position issued by financial institutions...... 20,295,877 1.67 1.92% 12 3,495
Forward contracts Short position synthetic.......................... (1,249,663,266) 0.46 1.82% 12 (59,278)
Forward contracts Short position issued by the Colombian
government - TES fixed rate......................................... (257,209,833) 70.67 4.24% 12 (1,870,809)
Forward contracts Long position synthetic............................. 257,205,324 0.10 1.80% 12 2,652
223
The risk factor for all of BC's positions in UVR is the real
interest rate factor. In 2006, the average VaR for the real interest rate factor
was Ps 12,684 million with a standard deviation of Ps 724 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------------------
RISK FACTOR VaR
------------------ ------
Real interest rate......... 12,035
======
The table below provides information about BC's (unconsolidated) VaR
calculations for changes in the price of a currency other than the peso. It
illustrates 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
FOREIGN EXCHANGE RISK AND PRICE RISK
AS OF DECEMBER 31, 2006
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (Delta)e VaR
---------------- -------- ------------------ -------- ----------------
U.S. Dollars........................................ (77,546,299) 2,238.79 (173,609,879,499) 2.63% (4,565,939,831)
VALUE AT RISK....................................... (173,609,879,499) (4,565,939,831)
UVR................................................. 23,195,228,646 160.02 3,711,610,026,496 3.90% 144,752,791,033
Permanent Securities Available For Sale -
Tradable(1)....................................... 973,709,267,607 6.00% 58,422,556,056
Permanent Securities Available For Sale -
Nontradable - No Registered In Stock Exchange(2).. 113,368,204,861 9.00% 12,243,766,125
Investments in funds................................ 2,478,179,323 12.06% 298,868,426
VALUE AT RISK...................................... 215,717,981,641
TOTAL VALUE AT RISK................................ 211,152,041,810
----------
(1) 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, however, the intention is to maintain them at
least 1 year within portfolio.
(2) In "Available for sale investments - non tradable - not registered in
stock 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 factor regarding foreign exchange risk is the TRM (Tasa
Representativa del Mercado, the dollar Representative Market Rate ). The net
position could be negative if the short
224
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, the Bank
has 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. In 2006, the
average VaR for the UVR factor was Ps 150,858 million with a standard deviation
of Ps 8,334 million. In 2006, the av erage VaR for the IGBC factor was Ps 67,911
million with a standard deviation of Ps 3,217 million. The average VaR for the
TRM factor in 2006 was Ps 3,695 million with a standard deviation of Ps 8,200
million.
AS OF DECEMBER 31, 2006
Ps million
-------------------------
RISK FACTOR VaR
----------- --------
UVR............. 144,753
TRM............. (4,566)
IGBC............ 70,666
RFOND........... 299
=======
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, 2006 was equal to Ps 102,254 million of local currency. The Bank
follows the Superintendency of Finance regulations. After December 31, 2003, the
Bank (unconsolidated) had to include in the solvency rate formula 100% of the
aggregate market VaR.
SOLVENCY RATE FORMULA:
(Capital/Risk_Weighted_Assets+[Var*(100/9)] > or = 9%)
For 2006 the Bank's (unconsolidated) average Total Market Risk VaR
was Ps 119,340 million with a standard deviation of Ps 18,239 million. The
maximum value during 2006 was Ps 166,297 million in March, and the minimum value
was Ps 99,401 million in October. The increase in the Total Market Risk VaR
during March 2006 is related to a change in the composition of the Bank's
portfolio of securities issued by the Government, this change increased the
duration in the position of Trading Securities Issued by the Colombian
Government-TES Fixed Rate. Also an increase in the position related to the UVR
risk factor caused the increase in the total Market Risk VaR for this month.
As of December 31, 2006, the total market risk VaR decreased 13% as
compared to the same period of 2005. The risk factors that presented the
greatest variation were Repurchase Agreements' Rate, Consumer Loan Rate and
Money Market US$.
225
BANCA DE INVERSION BANCOLOMBIA
The table below provides information about the VaR calculations for
Banca de Inversion Bancolombia, a subsidiary of BC, for all balance sheet items
that are denominated in pesos. It illustrates 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
AS OF DECEMBER 31, 2006
(PS MILLION)
ASSETS NPV DUR Y (Delta)i VaR
---------------------------------------------------------------------- ------ ----- ----- -------- -----
Trading securities issued by the Colombian government - TES fixed rate...... 13,394 61.57 8.67% 150 1,017
Trading securities issued by financial institutions......................... 32,532 7.80 9.11% 30 63
Other marketable trading securities......................................... 48,608 7.97 9.06% 30 96
Other held to maturity securities issued by the Colombian Government........ 255 8.89 3.77% 126 2
Other held to maturity securities........................................... 1,637 1.23 5.11% 126 2
Permanent securities available for sale issued by the Colombian
Government - TES fixed rate............................................... 10,497 10.43 7.85% 250 224
Other permanent securities available for sale............................... 2,494 6.20 8.94% 126 16
Other assets................................................................ 780 10.44 11.22% 126 8
LIABILITIES
Time deposits............................................................... 71,981 1.80 7.89% 126 135
Banca de Inversion Bancolombia's main assets are Trading Securities
issued By Financial Institutions and Other Marketable Trading Securities and its
only liability is time deposits where the risk factor is the DTF. The average
VaR for the DTF factor for 2006 is Ps 53 million with a standard deviation of Ps
103 million of local currency. Although the DTF is the factor for the main
assets, the more representative VaR outcome is the TES Rate as a result of a
longer duration. In 2006, the average VaR for the TES Rate factor was Ps 1,292
million with a standard deviation of Ps 443 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------------
RISK FACTOR VaR
----------- -----
DTF.................... 53
TES Rate............... 1,241
=====
The table below provides information about Banca de Inversion
Bancolombia'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:
226
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
AS OF DECEMBER 31, 2006
(UVR)
ASSETS NPV DUR Y (Delta)i VaR
---------------------------------------------------------------------- ---------- ----- ----- -------- -------
Trading securities issued by the Colombian Government -
TES fixed rate........................................................ 32,544,402 18.62 3.94% 12 62,391
Trading securities issued by financial institutions.................... 6,935,736 13.95 2.07% 12 9,977
Other held to maturity securities issued by the Colombian
Government............................................................ 22,901,629 78.16 0.18% 12 184,841
The risk factor for all positions in UVR is the real interest rate
factor. The average VaR for the real interest rate factor in 2006 was Ps 57
million with a standard deviation of Ps 15 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------
RISK FACTOR VaR
----------- ---
Real Rate...... 41
===
The table below provides information about Banca de Inversion
Bancolombia'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
FOREIGN EXCHANGE RISK AND PRICE RISK
AS OF DECEMBER 31, 2006
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (Delta)e VaR
--------------- -------- -------------- -------- --------------
U.S. Dollars............................................ 99,990 2,238.79 223,856,612.10 2.63% 5,887,429
VALUE AT RISK........................................... 223,856,612 5,887,429
UVR..................................................... 62,374,870 160.02 9,980,983,435 3.90% 389,258,354
Permanent Securities Available for sale -
Non tradable - No registered in Stock Exchange......... 105,557,856,704 9.00% 11,400,248,524
Investments in funds................................... 126,806,079 12.06% 18,351,376
VALUE AT RISK.......................................... 11,807,858,254
TOTAL VALUE AT RISK................................... 11,813,745,683
227
The more representative VaR outcomes are the UVR and IGBC risk
factors. In 2006, the average VaR for the UVR factor was Ps 421 million with a
standard deviation of Ps 68 million. The average VaR for the IGBC factor in 2006
was Ps 11,706 million with a standard deviation of Ps 237 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------------
RISK FACTOR VaR
----------- ------
UVR......... 389
TRM......... 6
IGBC........ 11,400
RFOND....... 18
======
As of December 31, 2006, Banca de Inversion Bancolombia's Total
Market Risk VaR was Ps 10,292 million. Its average Total Market Risk VaR during
2006 was Ps 10,552 million, with a standard deviation of Ps 398 million. The
maximum value during 2006 was Ps 11,072 million in May and the minimum was Ps
9,832 million in March.
As of December 31, 2006, the Total Market Risk Value decreased 22%
as compared to the same period of 2005. The risk factors that present the
greatest variations were the DTF and the TRM, as a result of a less position in
USD and its investments related to the DTF factor. The positions that were
affected by the Money Market USD factor risk disappeared but appeared
investments related to the RFOND risk factor.
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).
As 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 2006 were
diversified on securities issued in Colombia, Mexico and Brazil.
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
228
(Delta)i: Maximum variation of the interest rate
(Delta)iFx: Maximum variation of the exchange rate
VaR: Value at risk for the group for changes in the interest rate
and foreign currency
PORTFOLIO OF INVESTMENTS
AS OF DECEMBER 31, 2006
(US$ thousands)
NPV DUR Y (Delta)i (Delta)i FX VAR
Available for sale securities issued by the Colombian
Government 215,887 43.6 5.70 6.34 4.04 1,774
Trading securities issued by the Colombian Government 51,427 19.2 7.73 6.89 674
Trading securities issued by Colombia Corporations 3,064 38.2 7.70 5.99 72
Available for sale securities issued by theColombian
Government in Euro 216 11.4 4.35 7.00 88.90 2
Available for sale securities issued by the Brazilian
Government 8,384 38.5 5.42 4.76 45
Trading securities issued by Brazilian financial
institutions 5,684 25.0 6.78 5.11 72
Available for sale securities issued by the Brazilian
Government in Euro 3,440 28.7 4.34 5.04 88.90 80
Trading securities issued by Mexican corporations 15,046 23.8 7.03 8.27 301
Trading securities issued by the Mexican Government 9,997 36.9 6.47 7.26 281
Available for sale sucurities issued by Mexican Corporations 2,072 8.1 3.70 7.94 2
AS OF DECEMBER 31, 2006
US$ thousands
--------------------------------------------
RISK FACTOR VAR
-------------------------------- --------
Republic of Colombia short-term 48
Republic of Colombia mid-term 639
Republic of Colombia long-term 1,772
Republic of Brazil short-term 0.30
Republic of Brazil mid-term 76
Republic of Brazil long-term 55
Republic of Mexico short-term 2
Republic of Mexico mid-term 171
Republic of Mexico long-term 411
EUR Currency 68
TRM Index 61
=======
As of December 31, 2006, the Total Market Risk VaR was US$
3,001,914. The average Total Market Risk VaR was US$ 8,311,778, with a standard
deviation of US$ 5,068,151. The maximum value was US$ 19,753,356 in June and the
minimum value was US$ 3,001,914 in December.
As of December 31, 2006, the Total Market Risk Value decreased 34%
as compared to the same period of 2005 which is explained by a decrease in the
volatility of each risk factor.
229
LEASING BANCOLOMBIA
The table below provides information about Leasing Bancolombia'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
AS OF DECEMBER 31, 2006
(PS MILLION)
NPV DUR Y (Delta)i VAR
ASSETS
Overnight Funds 22,035 0.09 7.67% 135 2
Trading Securities Issued By The Colombian Government-TES IPC Rate 1,331 10.82 8.65% 150 18
Trading Securities Issued By The Colombian Government-TES Fixed Rate 30,068 15.73 8.04% 150 583
Other Trading Securities Issued By The Colombian Government 601 8.87 7.64% 30 1
Trading Securities Issued By Financial Institutions 15,599 3.68 8.70% 30 14
Other Marketable Trading Securities 4,035 8.77 8.45% 30 9
Other Held To Maturity Securities Issued By The Colombian Government 187 8.78 4.36% 126 2
Permanent Securities Available for sale issued by the Colombian
Government - TES fixed rate 9,235 44.20 8.52% 250 835
Other Permanent Securities Available for sale 6,088 13.56 9.04% 126 86
Commercial Loans- Fixed Rate 7,791 19.11 13.59% 126 154
Real State Leasing - Fixed Rate 15,738 47.77 13.71% 126 777
Commercial Loans- Variable Rate 3,355,843 3.11 13.89% 126 10,784
Real State Leasing - Variable Rate 10,833 8.73 13.71% 126 98
Consumer Loans - Fixed Rate 233 12.66 13.59% 222 5
Consumer Loans - Variable Rate 44,557 2.65 117.12% 30 29
Accounts receivable 95,018 3.82 13.90% 126 374
Other Assets 2,811 32.76 10.96% 126 95
Asset Contingencies 271,741 2.92 13.90% 126 820
LIABILITIES
Time Deposits 1,371,935 2.50 6.83% 126 3,560
Interbank borrowings 1,834,221 1.57 9.46% 126 2,984
Long term debt 537,853 3.05 8.82% 126 1,698
Convertible Bonds 121,035 2.52 9.45% 126 316
FOREIGN EXCHANGE FORWARDS
Foreign Exchange Contracts Long position In Local Currency 11,354 0.07 7.63% 30 0.19
230
Leasing Bancolombia's main asset is Commercial Loans- Variable Rate,
where the risk factor is the DTF. Its main liabilities are Interbank borrowings
and Time Deposits, where the DTF is the risk factor. For 2006, the average VaR
for the DTF factor was Ps 3,758 million with a standard deviation of Ps 1,051
million of local currency. Other risk factor that applies for the table up is
the TES Rate and its average VaR in 2006 was Ps 1,290 million with a standard
deviation of Ps 335 million.
AS OF DECEMBER 31, 2006
Ps million
---------------------------------------------
RISK FACTOR VAR
----------------------------- --------
DTF 4,685
TES Rate 1,436
Interbank Rate 2
Consumer Loan Rate 5
=====
The table below provides information about Leasing Bancolombia'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
AS OF DECEMBER 31, 2006
(U.S. DOLLARS)
NPV DUR Y (Delta)i VAR
LIABILITIES
Interbank borrowings 266,042 12.45 21.03% 41 1,129
FOREIGN EXCHANGE FORWARDS
Foreign Exchange Contracts Short position In Forex (5,062,046) 1.58 5.78% 12 (793)
The VaR outcomes are the LIBOR and the Money Market risk factors. In
2006, the average VaR for the LIBOR factor was Ps (1.5) million with a standard
deviation of Ps 1.7 million. The average VaR for the Money Market factor for
2006 was Ps (0.79) million with a standard deviation of Ps 0.68 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------------------------
RISK FACTOR VAR
--------------------------- -------
LIBOR (3)
Money Market US$ (2)
=====
231
The table below provides information about Leasing Bancolombia'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
AS OF DECEMBER 31, 2006
(UVR)
NPV DUR Y (Delta)i VAR
ASSETS
Trading Securities Issued By The Colombian Government-TES Fixed
Rate 43,191,000 15.73 2.83% 12 69,967
Other Trading Securities Issued By The Colombian Government 108,187,256 70.96 2.54% 12 791,171
Trading Securities Issued By Financial Institutions 61,865,181 14.73 2.67% 12 93,912
Other Marketable Trading Securities 98,470,091 9.50 2.79% 12 96,355
Other Held To Maturity Securities Issued By The Colombian
Government 96,038,600 88.16 0.00% 12 874,447
The risk factor for all positions in UVR is the real interest rate
factor. In 2006, the average VaR for the real interest rate factor was Ps 349
million with a standard deviation of Ps 27 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------------------------
RISK FACTOR VAR
--------------------------- ------
Real Rate 308
===
The table below provides information about Leasing Bancolombia's VaR
calculations for changes in the price of a currency other than pesos. It
illustrates 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
232
FOREIGN EXCHANGE RISK AND PRICE RISK
AS OF DECEMBER 31, 2006
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (Delta)e VAR
U.S. Dollars 21,255 2,238.79 47,584,608 2.63% 1,251,475
VALUE AT RISK 47,584,608 1,251,475
UVR 407,752,128 160.02 65,246,905,289 3.90% 2,544,629,306
Permanent Securities Available for sale - tradable 12,344,620,981 6.00% 740,677,259
Permanent Securities Available for sale - Non tradable - No
registered in Stock Exchange 30,898,841,784 9.00% 3,337,074,913
Investments in Funds 242,320,883 12.06% 29,223,898
VALUE AT RISK 6,651,605,376
TOTAL VALUE AT RISK 6,652,856,851
The more representative VaR outcomes are the UVR and IGBC risk
factors. In 2006, the average VaR for the UVR factor was Ps 2,563 million with a
standard deviation of Ps 190 million. The average VaR for the IGBC factor in
2006 was Ps 3,883 million with a standard deviation of Ps 255 million.
AS OF DECEMBER 31, 2006
Ps million
-------------------------------------------
RISK FACTOR VAR
-------------------------- ---------
UVR 2,545
TRM 1.2
IGBC 4,078
RFOND 29
=======
As of December 31, 2006, Total Market Risk VaR was Ps 5,238 million.
The average Total Market Risk VaR during 2006 was Ps 4,519 million, with a
standard deviation of Ps 849 million. The maximum value during 2006 was Ps 5,776
million in October and a minimum value of Ps 2,832 million in February.
As of December 31, 2006, the Total Market Risk Value increased 87%
as compared to the same period of 2005, as a result of a significant increase in
Commercial Loans- Variable Rate. The risk factors that present the greatest
variations were the DTF, which is the risk factor associated to Commercial
Loans, also the TES Rate, Money Market US, the TRM and the RFOND.
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:
233
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
AS OF DECEMBER 31, 2006
(PS MILLION)
NPV DUR Y (Delta)i VAR
ASSETS
Commercial Loans- Fixed Rate 4,546 3.17 22.61% 126 15
Commercial Loans- Variable Rate 458,640 0.54 22.61% 126 254
Consumer Loans - Fixed Rate 15,837 3.18 22.61% 222 91
Consumer Loans - Variable Rate 839,053 0.52 22.61% 30 107
Other Assets 2,038 0.54 22.61% 126 1
LIABILITIES
Time deposits 1,045,219 2.87 8.25% 126 3,117
Interbank borrowings 75,216 7.16 10.02% 126 558
Long term debt 37,287 9.29 6.31% 126 360
Sufinanciamiento's main assets are loans, where the risk factor is
the DTF. Its main liability is time deposits, where the DTF is the risk factor.
In 2006, the average VaR for the DTF factor was Ps (2,766) million with a
standard deviation of Ps 308 million of local currency. Other risk factor that
applies for the table above is the Consumer Loans Rate and its average VaR in
2006 was Ps 91 million with a standard deviation of Ps 1.5 million.
AS OF DECEMBER 31, 2006
Ps million
------------------------------------------
RISK FACTOR VAR
--------------------------- ----------
DTF (3,654)
Consumer Loans Rate 91
----------
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
234
FOREIGN EXCHANGE RISK AND PRICE RISK
AS OF DECEMBER 31, 2006
FOREIGN CURRENCY
NET POSITION (Delta)e VAR
Investments in Funds 410,837,375 12.06% 49,546,987
Total Value at Risk 49,546,987
The VaR outcome is the RFOND risk factor. The average VaR for the
RFOND factor in 2006 was Ps 11 million with a standard deviation of Ps 21
million.
AS OF DECEMBER 31, 2006
Ps million
------------------------------
RISK FACTOR VAR
------------------------------
RFOND 50
==============================
As of December 31, 2006, the Total Market Risk VaR was Ps 3,524
million. During 2006, the average Total Market Risk VaR of Sufinanciamiento was
Ps 2,694 million, with a standard deviation of Ps 287 million. The maximum value
during 2006 was Ps 3,524 million in December and the minimum value was Ps 2,385
million in September.
As of December 31, 2006, the Total Market Risk VaR increased 29.8%
as compared to the same period of 2005, as a result of an increase in time
deposits. The risk factor that presented the greatest variation was the DTF
which is the risk factor that applies for time deposits.
FIDUCIARIA BANCOLOMBIA
The table below provides information about BC's Subsidiary
Fiduciaria Bancolombia's VaR calculations for all balance sheet items that are
in pesos. It illustrates 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
235
INTEREST RATE RISK IN LOCAL CURRENCY
AS OF DECEMBER 31, 2006
(PS MILLION)
NPV DUR Y (Delta)i VAR
ASSETS
Trading Securities Issued By The Colombian Government-TES IPC Rate 3,362 15.00 8.02% 150 62
Trading Securities Issued By The Colombian Government-TES Fixed Rate 17,474 18.49 8.17% 150 399
Other Trading Securities Issued By The Colombian Government 1,916 20.34 7.64% 30 10
Trading Securities Issued By Financial Institutions 24,028 17.35 8.33% 30 103
Other Marketable Trading Securities 4,543 34.69 8.58% 30 39
Held To Maturity Securities Issued By The Colombian Government-TES 8.66%
Fixed Rate 4,344 6.18 250 55
Permanent Securities Available for sale issued by the Colombian 7.96%
Government - TES fixed rate 13,483 12.66 250 349
Other Permanent Securities Available for sale 3,115 77.47 8.94% 126 250
Fiduciaria Bancolombia's main asset is Trading Securities Issued by
Financial Institutions, where the risk factor is the DTF. For 2006, the average
VaR for the DTF factor was Ps 157 million with a standard deviation of Ps 171
million of local currency. Other risk factor that applies for the table above is
the TES Rate and its average VaR in 2006 was Ps 946 million with a standard
deviation of Ps 180 million.
AS OF DECEMBER 31, 2006
PS MILLION
------------------------------
RISK FACTOR VAR
------------------------------
DTF 402
TES Rate 865
==============================
The table below provides information about Fiduciaria Bancolombia's
VaR calculations for all balance sheet items that are in UVR. It illustrates 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
236
INTEREST RATE RISK IN UVR
AS OF DECEMBER 31, 2006
(UVR)
NPV DUR Y (Delta)i VaR
ASSETS
Trading Securities Issued By The Colombian Government-TES Fixed
Rate 16,846,650 40.46 3.94% 12.4 70,164.04
Held To Maturity Securities Issued By Financial Institutions 16,813,050 13.65 4.85% 12.4 23,613.64
Permanent Securities Available for sale Issued By The Colombian 108,604,898 27.26% 3.35% 12.40 304,736.43
Government-TES Fixed Rate
The risk factor for all positions in UVR is the real interest rate
factor. In 2006, the average VaR for the real interest rate factor in 2006 was
Ps 74 million with a standard deviation of Ps 16 million.
AS OF DECEMBER 31, 2006
PS MILLION
----------------------------------
RISK FACTOR VAR
----------------------------------
Real interest rate 64
==================================
The table below provides information about Fiduciaria Bancolombia's
VaR calculations for changes in the price of a currency other than pesos. It
illustrates the following information for each group which represent a specific
currency:
NET POSITION: Net position for the currency presented in the original currency
PRICE: Price of the currency 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
AS OF DECEMBER 31, 2006
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (Delta)E VAR
UVR 142,263,640 160.02 22,764,472,856 3.90% 887,814,441
Trading Securities - Non tradable - No registered in
Stock Exchange 1,372,827,049 9.00% 148,265,321
TOTAL VALUE AT RISK
1,036,079,763
The VaR outcomes are the UVR and the IGBC risk factors. In 2006, the
average VaR for the UVR factor was Ps 1,030 million with a standard deviation of
Ps 228 million and the average VaR
237
for the IGBC factor for the same period was Ps 143 million with a standard
deviation of Ps 9 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------------
RISK FACTOR VAR
-----------------------------
UVR 888
IGBC 148
At December 31, 2006, the aggregate market VaR of Fiduciaria
Bancolombia wIas equal to Ps 1,831 million of local currency. The average Total
Market Risk VaR for 2006 was Ps 1,866 million with a standard deviation of Ps
258 million. The maximum value during 2006 was Ps 2,195 million in May and the
minimum value was Ps 1,590 million in August.
As of December 31, 2006, the total market risk VaR decreased 9.5% as
compared to the same period of 2005, as a result of a decrease in the Securities
issued by the Government. The risk factors that presented the greatest variation
were The Real rate, the LIBOR and The TES Rate which is the risk factor
associated to the Securities issued by the Government.
BANCOLOMBIA PUERTO RICO INTERNACIONAL, INC.
The table below provides information about BC's Subsidiary
Bancolombia Puerto Rico'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 AS OF DECEMBER 31, 2006 (U.S. DOLLARS)
NPV DUR Y (Delta)i VAR
ASSETS
Other Marketable Trading Securities 1,176,346 11.64 4.33% 12.00 1,364
Other Held To Maturity Securities 303,375 0.16 3.98% 41.18 17
Commercial Loans- Variable Rate 111,361,462 4.43 7.09% 41.18 168,050
LIABILITIES
Time deposits 18,864,136 2.24 4.37% 41.18 14,406
238
Bancolombia Puerto Rico's main asset is Commercial Loans, where the
risk factor is the LIBOR. In 2006, the average VaR for the LIBOR factor was Ps
289 million with a standard deviation of Ps 61 million. The average VaR for the
Money Market factor for 2006 was Ps 5 million with a standard deviation of Ps
0.94 million.
AS OF DECEMBER 31, 2006
Ps million
----------------------------------------------------
RISK FACTOR VAR
----------------------------------- ------------
LIBOR 344
Money Market US$ 3
===========
The table below provides information about Bancolombia Puerto Rico'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
AS OF DECEMBER 1, 2006
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (Delta)e VAR
---------------- ------------- -------------- ------------ -------------
U.S. Dollars 30,120,393 2,238.79 67,433,235,100 2.63% 1,773,494,083
European Currency Unit EUR 127,163 2,953.86 375,620,753 5.45% 20,471,331
TOTAL VALUE AT RISK 1,793,965,414
The VaR outcomes are the TRM and the EURO risk factors. In 2006, the
average VaR for the TRM factor was Ps 1,770 million with a standard deviation of
Ps 101 million and the average VaR for the EURO factor in 2006 was Ps 10 million
with a standard deviation of Ps 9 million.
AS OF DECEMBER 31, 2006
Ps million
--------------------------------------------
RISK FACTOR VAR
----------------------------- ---------
TRM 1,773
EURO 20
=========
239
At December 31, 2006, the aggregate market VaR of Bancolombia Puerto
Rico was equal to Ps 1,785 million of local currency. The average Total Market
Risk VaR for 2006 was Ps 1,771 million with a standard deviation of Ps 107
million. The maximum value during 2006 was Ps 1,936 million in June and the
minimum value was Ps 1,590 million in January.
As of December 31, 2006, the total market risk VaR increased 14% as
compared to the same period of 2005. The risk factors that presented the
greatest variation were EURO and LIBOR.
VALORES BANCOLOMBIA
Valores Bancolombia calculates the VaR in accordance with the
External Circular 007 of October 2003 issued by the Superintency of Finance.
The table below provides information about BC's Subsidiary Valores
Bancolombia's VaR calculations for portfolio of investments. It shows the
following information for each group of investments:
S NPV: Sum of the net present value
VaR: Value at risk for the group for changes in the interest
rate and foreign currency.
PORTFOLIO OF INVESTMENTS
AS OF DECEMBER 31, 2006
(PS MILLION)
S NPV VAR
----------- ---------
ASSETS
Trading securities issued by the Colombian Government - TES fixed rate 9,060 28
Trading securities issued by the Colombian Government - TES UVR rate 9,878 532
Other trading securities issued by the Colombian Government 147 0.27
Trading securities issued by financial institutions 3,596 1
Other marketable trading securities 36,431 188
Trading Securities - Tradable 2,035 121
Foreing exchange 9,896 265
Interest rates derivatives and others 22,198 0.001
Cash management operations 191,565 638
As of December 31, 2006, the Total Market Risk VaR was Ps 849
million. In 2006, the average Total Market Risk VaR was Ps 4,769 million with a
standard deviation of Ps 3,815 million. The maximum value during 2006 was Ps
13,135 million in June and the minimum value was Ps 765 million in October.
FACTORING BANCOLOMBIA
The table below provides information about BC's Subsidiary Factoring
Bancolombia'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:
240
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
AS OF DECEMBER 31, 2006
(PS MILLION)
NPV DUR Y (Delta)i VAR
---------- --------- --------- --------- --------
ASSETS
Other Held To Maturity Securities Issued By The Colombian Government 2,012 2.33 6.06% 126 5
Commercial Loans- Fixed Rate 169,208 3.19 15.07% 126 558
Commercial Loans- Variable Rate 11,152 2.80 15.13% 126 32
Consumer Loans - Fixed Rate 233 17.64 22.61% 222 7
Consumer Loans - Variable Rate 8,970 2.66 22.61% 30 6
Other Assets 245 25.27 9.00% 126 6
Other Rights Buyback Held To Maturity Securities Issued By The Colombian
Government 3,280 0.80 6.43% 126 3
LIABILITIES
Time deposits 158,265 3.15 5.03% 126 518
Overnight Funds 2,500 0.03 0.00% 135 0.09
Repurchase agreements 5,011 0.03 0.00% 250 0.34
Interbank borrowings 11,570 0.06 0.43% 126 0.68
Liabilities Contingencies 6,511 1.03 15.07% 126 7
Factoring Bancolombia's main asset are Commercial and Consumer
loans, where the risk factors are the DTF and Consumer Loan Rate. For 2006, the
average VaR for the DTF factor was Ps (17) million with a standard deviation of
Ps 59 million of local currency. The average VaR for Consumer Loan Rate factor
in 2006 was 10 Ps million with a standard deviation of Ps 2 million.
AS OF DECEMBER 31, 2006
Ps million
-----------------------------------------------------
RISK FACTOR VAR
----------------------------------------- --------
DTF 84
Repurchase Agreements' Rate (0.34)
Interbank Rate (0.09)
Consumer Loan Rate 7
========
The table below provides information about Factoring Bancolombia's
VaR calculations for changes in the price of a currency other than pesos. It
shows the following information for each group which represent a specific
currency:
NET POSITION: Net position for the currency presented in the original
currency
PRICE: Price of the currency in Ps on the day of calculation
241
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
AS OF DECEMBER 31, 2006
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (Delta)e VAR
--------------- ---------- --------------- ---------- -----------
UVR 28,511,400 160.02 4,562,283,034 390 177,929,038
Investments in Funds 4,043,004,444 1,206 487,586,336
TOTAL VALUE AT RISK 665,515,374
The VaR outcomes are the UVR and the RFOND risk factors. In 2006,
the average VaR for the UVR factor was Ps 249 million with a standard deviation
of Ps 23 million and the average VaR for the RFOND factor in 2006 was Ps 749
million with a standard deviation of Ps 629 million.
AS OF DECEMBER 31, 2006
Ps million
------------------------------------------------
RISK FACTOR VAR
----------------------------------- ---------
UVR 178
RFOND 488
=========
At December 31, 2006, the aggregate market VaR of Factoring
Bancolombia was equal to Ps 705 million of local currency. For 2006, the average
Total Market Risk VaR was Ps 938 million with a standard deviation of Ps 593
million. The maximum value during 2006 was Ps 2,381 million in January and the
minimum value was Ps 264 million in April. The variation of the VaR depends
mostly of the position in ordinary common funds.
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
(Delta)i: Maximum variation of the interest rate
VaR: Value at risk for the group for changes in the interest
rate
242
INTEREST RATE RISK IN LOCAL CURRENCY
AS OF DECEMBER 31, 2006
(PS MILLION)
NPV DUR Y (Delta)i VAR
-------- ------- ------- -------- -------
ASSETS
Other Assets 26 4.77 8.62% 126 0.13
The risk factor that applies for Other Assets is the DTF, and its
average VaR in 2006 was Ps 0.36 million with a standard deviation of Ps 0.09
million.
AS OF DECEMBER 31, 2006
Ps million
-------------------------------------
RISK FACTOR VAR
------------------------- --------
DTF 0.13
========
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
INTEREST RATE RISK IN FOREIGN CURRENCY
AS OF DECEMBER 31, 2006
(U.S. DOLLARS)
NPV DUR Y (Delta)i VAR
ASSETS
Commercial Loans-Fixed Rate 7,318,242 8.72 10.61% 41.18 21,671
Commercial Loans-Variable Rate 27,423,114 3.86 10.61% 41.18 35,911
Asset Contingencies 443,056 3.22 8.58% 41.18 485
LIABILITIES
Interbank borrowings 28,273,447 4.86 6.12% 41.18 46,802
Suleasing Internacional's main assets are loans, where the
risk factor is the LIBOR, which is also the main risk factor for the
liabilities. In 2006, the average VaR for the LIBOR factor was Ps 83 million
with a standard deviation of Ps 33 million.
243
AS OF DECEMBER 31, 2006
Ps million
----------------------------------------------------
RISK FACTOR VAR
-------------------------------------- ---------
LIBOR 25
=========
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
AS OF DECEMBER 31, 2006
FOREIGN CURRENCY
NET POSITION PRICE PESOS VALUE (Delta)e VAR
---------------- ------------ ---------------- --------- -----------
U.S. Dollars 10,277,187 2,238.79 23,005,381,225 2.63% 605,041,526
The VaR outcome is the TRM risk factor and its average VaR in 2006
was Ps 698 million with a standard deviation of Ps 116 million.
AS OF DECEMBER 31, 2006
Ps million
--------------------------------------------------------
RISK FACTOR VAR
--------------------------------------- ---------
TRM 605
=========
As of December 31, 2006, the Total Market Risk VaR was equal to Ps
603 million of local currency. In 2006, the average Total Market Risk VaR was Ps
695 million with a standard deviation of Ps 115 million. The maximum value
during 2006 was Ps 1,009 million in July and the minimum value was Ps 566
million in March.
As of December 31, 2006, the total market risk VaR decreased 7% as
compared to the same period of 2005.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not Applicable.
244
PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
There has not been a material default in the payment of dividends,
principal, interest, a sinking or purchase fund installment in BC operation or
any of its subsidiaries.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
None.
ITEM 15. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
The Bank carried out an evaluation under the supervision and with
the participation of our management, including the Chief Executive Officer and
Chief Financial Officer, of the effectiveness of our disclosure controls and
procedures. As a result, the Chief Executive Officer and Chief Financial Officer
have concluded that, as of the end of the period covered by this report, the
disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in the reports the Bank
files and submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and regulations of the
SEC and to provide reasonable assurance that such information is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, to allow timely decisions regarding disclosure.
There are inherent limitations to the effectiveness of any system of
disclosure controls and procedures, including the possibility of human error and
the circumvention or overriding of the controls and procedures. Accordingly,
even effective disclosure controls and procedures can only provide reasonable
assurance of achieving their control objectives.
Management's Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate
internal control over financial reporting. The Bank's internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted
accounting principles.
The Bank's internal control over financial reporting includes those
policies and procedures that:
- Pertain to the maintenance of records that in reasonable
detail accurately and fairly reflect the transactions and
dispositions of the assets of the Bank;
- Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and
that receipts and expenditures of the Bank are being made only
in accordance with authorizations of the Bank's management and
directors; and
245
- Provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of the
Bank's assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of internal control over
financial reporting as of December 31, 2006 based on criteria established in the
Internal Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. On this assessment, management
concluded that the Bank's internal control over financial reporting was
effective as of December 31, 2006. Management's assessment of the effectiveness
of the Bank's internal control over financial reporting as of December 31, 2006
has been audited by Deloitte & Touche Ltda., an independent registered public
accounting firm. The report of the independent registered public accounting firm
to the board of directors and shareholders of Bancolombia S.A. expresses
unqualified opinions on the management's assessment and on the effectiveness of
the Bank's internal control over financial reporting as of December 31, 2006.
Change in Internal Control over Financial Reporting
No change in the Bank's internal control over financial reporting occurred
during the period covered by this Annual Report that has materially affected, or
is reasonably likely to materially affect the Bank's internal control over
financial reporting.
ITEM 16. RESERVED
ITEM.16.A AUDIT COMMITTEE FINANCIAL EXPERT
In compliance with the requirements of the Sarbanes Oxley Act regarding
audit committee financial experts, Luis Alberto Zuleta Jaramillo served as the
board of directors' audit committee financial expert until March 1, 2007, when
he was removed from the board of directors at the general shareholders' meeting.
Following the election of new directors at the March 1, 2007 meeting, Mr. Zuleta
Jaramillo will continue to serve on the audit committee, in compliance with
Colombian regulations, until the board of directors appoints a new member to
fill his vacancy. Upon such appointment, the board intends to determine which
director will serve as the audit committee financial expert.
As of March 31, 2007, Mr. Zuleta Jaramillo did not own any shares of
Bancolombia and there is no business relationship between Mr. Zuleta Jaramillo
and the Bank, except for standard personal banking services. Further, there is
no fee arrangement between Mr. Zuleta Jaramillo and the Bank, except in
connection with his capacity as a member of the board (upon which he served
until March 1, 2007) and as a member of the audit committee. During his term on
the board, Mr. Zuleta Jaramillo was considered an independent director under
Colombian law and the Bank's Corporate Governance Code, as well as under NYSE's
director independence standards.
246
ITEM.16.B CORPORATE GOVERNANCE AND CODE OF ETHICS
Under the NYSE's Corporate Governance Standards, Bancolombia, as a listed
foreign private issuer, must disclose any significant ways in which its
corporate governance practices differ from those followed by U.S. companies
under NYSE listing standards.
Corporate Governance in Colombia. In Colombia, a series of laws and
regulations set forth corporate governance requirements. Among them, Resolution
275 of the Superintendency of Securities, now the Superintendency of Finance,
(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
whose securities are publicly traded in the Colombian market, and Decree 3139 of
2006 (issued on September 12, 2006) regulates the information system to the
securities market named SIMEV (Sistema Integral de Informacion del Mercado de
Valores). Bancolombia's corporate governance standards comply with these legal
requirements and follow regional recommendations, including the OECD's White
Paper on Corporate Governance for Latin America and the Andean Development
Corporation's (CAF) Corporate Governance Code.
Independence of Directors. Law 964 of 2005 requires the board of directors
to be composed of at least 25% of independent directors, and Decree 3923 of 2006
regulates their election. Additionally, Colombian law mandates that all
directors exercise independent judgment under all circumstances. Bancolombia's
Corporate Governance Code includes a provision stating that directors shall
exercise independent judgment and requires that Bancolombia's management
recommends to its shareholders to propose lists of directors of which at least
25% are independent directors.
Structure of the Board of Directors. Bancolombia's board of directors
includes nine (9) directors(11). 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, however 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.
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 their own charters which address various corporate
governance subjects, in accordance with NYSE Corporate Governance Standards.
Also, 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.grupobancolombia.com.co. The Spanish versions of
these codes will prevail for all legal purposes.
----------
(11) At the annual general shareholders' meeting of Bancolombia S.A. held on
March 1, 2007, Bancolombia shareholders approved an amendment, to the
by-laws, increasing the number of directors from seven to nine and
eliminating the provision for alternate directors.
247
On September 18, 2006, the board of directors of Bancolombia updated the
Code of Ethics, updating corporate values by including a new chapter on internal
controls and the prevention of improper conduct. The new chapter establishes the
obligations of Bancolombia's collaborators to adopt a risk prevention position
regarding the processes under their supervision and determines the
responsibilities in the investigation of improper conducts and the applicable
sanctions. Also, some additional minor changes were made.
Also, a phone line called "linea etica" was made available for anonymous
reporting of any evidence of improper conduct.
On April 23, 2007, the board of directors of Bancolombia updated the
Corporate Governance Code in order to reflect the changes adopted in the last
amendment of Bancolombia's by-laws.
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 4,134 million at December 31, 2005 and Ps
5,218 million at December 31, 2006.
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 committee's charters:
The Audit Committee will approve each year the work plan of the external
auditors, which will include all services that according to the applicable law
may be rendered by the external auditors.
For 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 approval is not 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 EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable
248
ITEM.16.E PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
Colombian law prohibits the repurchase of shares issued by entities
supervised by the Superintendency of Finance. Therefore, neither Bancolombia nor
any affiliated purchaser repurchase any shares during fiscal year 2006.
249
PART III
FINANCIAL STATEMENTS
ITEM 17. FINANCIAL STATEMENTS
Not applicable.
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F-1 through F-133.
ITEM 19. EXHIBITS
The following exhibits are filed as part of this Annual Report.
1. English Translation of Corporate by-laws (estatutos sociales) of the
registrant, as amended on March 1, 2007.
4.1. Master Stock Purchase Agreement among Bancolombia (Panama) S.A. and
the Majority Shareholders of Banagricola S.A. and first amendment.
4.2. Byssa Stock Purchase Agreement among Bancolombia (Panama) S.A. and
the Majority Shareholders of Bienes y Servicios S.A.
4.3. English Summary of the Stock Sale Agreement among Bancolombia S.A.
and Portal de Inversiones S.A.
4.4. English Summary of the Stock Purchase Agreement among Bancolombia
S.A. and Textiles Fabricato Tejicondor S.A.
7. Selected Ratios' Calculation.
8.1 List of Subsidiaries.
11. English translation of the Ethics Code of the registrant, as amended
on September 18, 2006.
12.1 CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated May 10, 2007.
12.2 CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002, dated May 10, 2007.
13.1 CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, dated May 10, 2007.
13.2 CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, dated May 10, 2007.
15(a) English Translation of Corporate Governance Code (Codigo de Buen
Gobierno) of the registrant, as amended on April 23, 2007.
250
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: May 10, 2007
BANCOLOMBIA S.A.
By: /s/ JAIME ALBERTO VELASQUEZ BOTERO
-----------------------------------------
Name: Jaime Alberto Velasquez Botero.
Title: Vice President, Finance.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM F-2
CONSOLIDATED BALANCE SHEETS
Year Ended December 31, 2005 and 2006 F-6
CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 2004, 2005 and 2006 F-8
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Year Ended December 31, 2004, 2005 and 2006 F-10
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 2004, 2005 and 2006 F-11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-13
(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, 2006 and 2005, and the related
consolidated statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 2006. 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. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bancolombia S.A. and subsidiaries
at December 31, 2006 and 2005, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2006, in
conformity with accounting principles generally accepted in Colombia and the
regulations of the Colombian Superintendency of Finance, collectively "Colombian
GAAP".
Colombian GAAP vary in certain significant respects from accounting principles
generally accepted in the United States of America ("U.S. GAAP"). Information
relating to the nature and effect of such differences is presented in Note 31 to
the consolidated financial statements.
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 2c. Such U.S. dollar amounts are
presented solely for the convenience of readers in the United States of America.
F-2
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Bank's
internal control over financial reporting as at 31 December 2006, based on the
criteria established in Internal Control -- Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Our report
dated May 7, 2007 expressed an unqualified opinion on management's assessment of
the effectiveness of the Bank's internal control over financial reporting and an
unqualified opinion on the effectiveness of the Bank's internal control over
financial reporting.
/s/ Deloitte & Touche Ltda.
Deloitte & Touche Ltda.
Medellin, Colombia
May 7, 2007
Auditoria. Impuestos. Consultoria. Finanzas Corporativas.
Una Firma miembro
de Deloitte &
Touche Tohmatsu
F-3
(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 management's assessment, included in the accompanying
Management's Report on Internal Control over Financial Reporting, that
Bancolombia S.A. and subsidiaries (the "Bank") maintained effective internal
control over financial reporting as of December 31, 2006, based on criteria
established in Internal Control -- Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. The Bank's management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Bank's internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed by,
or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
F-4
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Bank maintained effective
internal control over financial reporting as of December 31, 2006, is fairly
stated, in all material respects, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also, in our opinion, the Bank
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2006, based on the criteria established in Internal
Control -- Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission .
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2006 of the Bank and our
report dated May 7, 2007, expressed an unqualified opinion on those financial
statements and included explanatory paragraphs regarding to the nature and
effect of differences between accounting principles generally accepted in
Colombia and in the United States of America and that our audit also
comprehended the translation of Colombian Pesos amounts into U.S. dollars
amounts in accordance with note 2c. of such consolidated financial statements.
/s/ Deloitte & Touche Ltda.
Deloitte & Touche Ltda.
Medellin - Colombia
May 7, 2007
Auditoria. Impuestos. Consultoria. Finanzas Corporativas.
Una Firma miembro
de Deloitte &
Touche Tohmatsu
F-5
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2006
(Stated in millions of pesos and thousands of U.S. Dollars)
Notes 2005 2006 2006(1)
------ ------------- ------------- -------------
U.S. Dollar
ASSETS
Cash and cash equivalents:
Cash and due from banks 4 Ps 1,241,435 Ps 1,548,752 US$ 691,781
Overnight funds 488,587 457,614 204,402
------------- ------------- -------------
TOTAL CASH AND CASH EQUIVALENTS 1,730,022 2,006,366 896,183
------------- ------------- -------------
Investment securities: 5
Debt securities: 8,264,885 5,530,559 2,470,334
Trading securities 5,400,950 2,605,852 1,163,956
Available for sale 1,842,556 1,810,584 808,733
Held to maturity 1,021,379 1,114,123 497,645
Equity securities 268,286 224,787 100,406
Trading securities 50,805 61,640 27,533
Available for sale 217,481 163,147 72,873
Market value allowance (73,468) (77,585) (34,655)
------------- ------------- -------------
TOTAL INVESTMENT SECURITIES 8,459,703 5,677,761 2,536,085
------------- ------------- -------------
Loans and financial leases: 6
Commercial loans 11,949,501 16,028,505 7,159,449
Consumer loans 2,437,727 3,587,260 1,602,321
Small business loans 115,031 91,078 40,682
Mortgage loans 1,463,437 1,385,445 618,837
Financial leases 2,660,556 3,553,286 1,587,146
Allowance for loans and financial leases
losses 7 (705,882) (834,183) (372,604)
------------- ------------- -------------
LOANS AND FINANCIAL LEASES, NET 17,920,370 23,811,391 10,635,831
------------- ------------- -------------
Accrued interest receivable on loans and
financial leases:
Accrued interest receivable on loans and
financial leases 206,921 266,934 119,231
Allowance for accrued interest losses 7 (8,655) (11,644) (5,201)
------------- ------------- -------------
INTEREST ACCRUED, NET 198,266 255,290 114,030
------------- ------------- -------------
Customers' acceptances and derivatives 8 133,420 166,395 74,324
Accounts receivable, net 9 590,313 562,598 251,296
Premises and equipment, net 10 623,729 712,722 318,351
Operating leases, net 11 143,974 167,307 74,731
Foreclosed assets, net 15 31,360 18,611 8,313
Prepaid expenses and deferred charges 12 26,898 46,462 20,753
Goodwill 14 50,959 40,164 17,940
Other 13 563,588 675,265 301,620
Reappraisal of assets 16 330,915 348,364 155,604
------------- ------------- -------------
TOTAL ASSETS PS 30,803,517 PS 34,488,696 US$15,405,061
============= ============= =============
Memorandum accounts 25 PS138,595,535 PS153,080,705 US$68,376,536
============= ============= =============
F-6
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2005 and 2006
(Stated in millions of pesos and thousands of U.S. Dollars)
Notes 2005 2006 2006(1)
------ ------------- ------------- -------------
U.S. Dollar
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits
Non-interest bearing: Ps 3,530,279 Ps 4,580,649 US$ 2,046,038
Checking accounts 3,171,182 4,121,506 1,840,952
Other 359,097 459,143 205,086
Interest bearing: 14,854,703 18,635,818 8,324,058
Checking accounts 1,068,409 1,244,348 555,813
Time deposits 6,259,800 7,377,586 3,295,345
Savings deposits 7,526,494 10,013,884 4,472,900
------------- ------------- -------------
TOTAL DEPOSITS 18,384,982 23,216,467 10,370,096
------------- ------------- -------------
Overnight funds 1,329,913 1,007,045 449,817
Bank acceptances outstanding 63,126 64,030 28,600
Interbank borrowings 17 1,705,468 1,066,845 476,527
Borrowings from domestic development banks 18 2,222,083 2,449,581 1,094,154
Accounts payable 1,250,084 988,723 441,633
Accrued interest payable 182,292 190,121 84,921
Other liabilities 19 459,968 387,697 173,173
Long-term debt 20 1,648,312 1,302,702 581,878
Accrued expenses 21 130,859 119,984 53,593
Minority interest in consolidated subsidiaries 49,140 48,889 21,837
------------- ------------- -------------
TOTAL LIABILITIES 27,426,227 30,842,084 13,776,229
------------- ------------- -------------
Stockholders' equity (2) 22, 24
Subscribed and paid in capital: 430,684 430,684 192,374
Nonvoting preference shares 121,422 121,422 54,236
Common shares 309,262 309,262 138,138
Retained earnings: 2,712,879 3,063,136 1,368,211
Appropriated 23 1,765,998 2,313,607 1,033,419
Unappropriated 946,881 749,529 334,792
Reappraisal of assets 16 110,479 140,693 62,843
Gross unrealized net gain or loss on
investments 123,248 12,099 5,404
STOCKHOLDERS' EQUITY 3,377,290 3,646,612 1,628,832
------------- ------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY Ps 30,803,517 Ps 34,488,696 US$15,405,061
============= ============= =============
Memorandum accounts 25 Ps138,595,535 Ps153,080,705 US$68,376,536
============= ============= =============
----------
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
(1) See note 2 (z)
(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-7
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2004, 2005 and 2006
(Stated in millions of pesos and thousands of U.S. Dollars, except per share
data)
Note 2004 2005(2) 2006 2006 (1)
---- ----------- ----------- ----------- ------------
U.S. Dollar
Interest income and expenses:
Interest on loans Ps1,140,955 Ps2,050,274 Ps2,312,525 US$1,032,935
Interest on investment securities 549,328 824,709 273,197 122,029
Overnight funds 18,375 33,629 43,863 19,592
Leasing 94,450 291,472 384,147 171,587
----------- ----------- ----------- ------------
TOTAL INTEREST INCOME 1,803,108 3,200,084 3,013,732 1,346,143
----------- ----------- ----------- ------------
Interest expense
Checking accounts 13,505 20,311 32,676 14,595
Time deposits 267,558 449,367 459,513 205,251
Saving deposits 141,288 241,889 264,381 118,091
----------- ----------- ----------- ------------
TOTAL INTEREST ON DEPOSITS 422,351 711,567 756,570 337,937
----------- ----------- ----------- ------------
Interbank borrowings 7,389 54,630 94,872 42,376
Borrowings from domestic development banks 73,549 156,509 180,507 80,627
Overnight funds 41,215 73,910 100,876 45,058
Bonds 41,239 153,658 113,404 50,654
----------- ----------- ----------- ------------
TOTAL INTEREST EXPENSE 585,743 1,150,274 1,246,229 556,652
----------- ----------- ----------- ------------
NET INTEREST INCOME 1,217,365 2,049,810 1,767,503 789,491
----------- ----------- ----------- ------------
Provision for loan, accrued interest losses
and other receivables, net 7 (110,455) (185,404) (266,107) (118,862)
Recovery of charged-off loans 49,032 61,829 70,746 31,600
Provision for foreclosed assets and other
assets (33,127) (63,969) (44,353) (19,811)
Recovery of provisions for foreclosed assets
and other assets 27,926 56,504 89,532 39,991
----------- ----------- ----------- ------------
TOTAL NET PROVISIONS (66,624) (131,040) (150,182) (67,082)
----------- ----------- ----------- ------------
NET INTEREST INCOME AFTER PROVISION FOR
LOANS AND ACCRUED INTEREST LOSSES 1,150,741 1,918,770 1,617,321 722,409
----------- ----------- ----------- ------------
Commissions from banking services 53,082 101,355 162,273 72,482
Electronic services and ATMs fees 39,163 101,299 85,049 37,989
Branch network services 37,929 48,984 62,403 27,874
Collections and payments fees 38,654 56,670 74,708 33,370
Credit card merchant fees 8,251 10,076 8,150 3,640
Credit and debit card annual fees 80,290 205,606 238,898 106,709
Checking fees 49,391 54,846 60,083 26,837
Warehouse services 49,072 62,155 72,494 32,381
Fiduciary activities 50,425 60,131 62,114 27,744
Brokerage fees 8,669 68,231 67,034 29,942
Check remittance 10,850 10,579 11,040 4,931
International operations 23,997 36,484 34,281 15,312
----------- ----------- ----------- ------------
FEES AND OTHER SERVICE INCOME PS 449,773 PS 816,416 PS 938,527 US$ 419,211
F-8
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2004, 2005 and 2006
(Stated in millions of pesos and thousands of U.S. Dollars,
except per share data)
Note 2004 2005(2) 2006 2006 (1)
---- ----------- ----------- ----------- ------------
U.S. Dollar
FEES AND OTHER SERVICE EXPENSES (40,715) (48,087) (70,866) (31,654)
----------- ----------- ----------- ------------
TOTAL FEES AND INCOME FROM SERVICES, NET 409,058 768,329 867,661 387,557
----------- ----------- ----------- ------------
Other operating income:
Net foreign exchange gains (expenses) (100,925) (53,361) 58,008 25,910
Forward contracts in foreign currency 149,381 141,055 45,073 20,133
Gains (losses) on sales of investments on
equity securities (27) 8,097 75,697 33,812
Gain on sale of mortgage loan -- -- 14,371 6,419
Dividend income 30,546 42,731 21,199 9,469
Revenues from commercial subsidiaries 78,973 45,020 40,323 18,011
Communication, postage, rent and others 7,447 10,406 16,762 7,487
----------- ----------- ----------- ------------
TOTAL OTHER OPERATING INCOME 165,395 193,948 271,433 121,241
----------- ----------- ----------- ------------
TOTAL OPERATING INCOME 1,725,194 2,881,047 2,756,415 1,231,207
----------- ----------- ----------- ------------
Operating expenses
Salaries and employee benefits 363,557 615,121 690,117 308,254
Bonus plan payments 32,923 26,826 35,771 15,978
Compensation 15,169 8,030 6,375 2,848
Administrative and other expenses 27 393,592 793,179 882,182 394,044
Deposit security, net 22,945 55,050 67,813 30,290
Donation expenses 11,060 615 22,596 10,093
Depreciation 10 46,872 87,633 104,553 46,701
Merger expenses -- 45,703 35,779 15,981
Goodwill amortization 26,303 22,648 25,814 11,530
----------- ----------- ----------- ------------
TOTAL OPERATING EXPENSES 912,421 1,654,805 1,871,000 835,719
----------- ----------- ----------- ------------
NET OPERATING INCOME 812,773 1,226,242 885,415 395,488
----------- ----------- ----------- ------------
Non-operating income (expense)
Other income 51,514 109,770 194,589 86,917
Minority interest (2,425) (6,496) (6,352) (2,837)
Other expense (44,374) (105,120) (149,243) (66,662)
----------- ----------- ----------- ------------
TOTAL NON-OPERATING INCOME (EXPENSE) 28 4,715 (1,846) 38,994 17,418
----------- ----------- ---------- ------------
Income before income taxes 817,488 1,224,396 924,409 412,906
----------- ----------- ---------- ------------
Income tax expense 21 (238,810) (277,515) (174,880) (78,114)
----------- ----------- ---------- ------------
NET INCOME PS 578,678 PS 946,881 PS 749,529 US$ 334,792
----------- ----------- ---------- ------------
EARNINGS (LOSS) PER SHARE PS 1,003 PS 1,301 PS 1,030 US$ 0.46
=========== =========== =========== ============
----------
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
(1) See Note 2 (z).
(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.
F-9
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
Years ended December 31, 2004, 2005 and 2006
(Stated in millions of pesos and thousands of U.S. Dollars, except share data)
Non Voting
Preference Shares Voting Common Shares Retained Earnings
------------------------ ------------------------ -----------------------------
Number Par Value Number Par Value Appropriated Unappropriated
----------- ---------- ----------- ---------- ------------ --------------
BALANCE AT DECEMBER 31, 2003 178,435,787 101,579 398,259,608 253,540 740,354 469,384
Net income -- -- -- -- -- 578,678
Transfer to appropriated
retained earnings -- -- -- -- 469,384 (469,384)
Valuation of investment -- -- -- -- -- --
Dividends declared -- -- -- -- (156,861) --
Other -- -- -- -- (42,396) --
----------- ---------- ----------- ---------- ------------ -----------
BALANCE AT DECEMBER 31, 2004 178,435,787 Ps 101,579 398,259,608 Ps 253,540 Ps 1,010,481 Ps 578,678
Net income -- -- -- -- -- 946,881
Transfer to appropriated
retained earnings -- -- -- -- 578,678 (578,678)
Issuance of preference and
common shares 39,686,634 19,843 111,444,976 55,722 160,646 --
Valuation of investment -- -- -- -- -- --
Merger effect -- -- -- -- 193,673 --
Dividends declared -- -- -- -- (216,838) --
Other -- -- -- -- 39,358 --
----------- ---------- ----------- ---------- ------------ -----------
BALANCE AT DECEMBER 31, 2005 218,122,421 Ps 121,422 509,704,584 Ps 309,262 Ps 1,765,998 Ps 946,881
Net income -- 749,529
Transfer to appropriated
retained earnings 946,881 (946,881)
Valuation of investment
Dividends declared (369,736)
Other (29,536)
----------- ---------- ----------- ---------- ------------ -----------
BALANCE AT DECEMBER 31,2006 218,122,421 PS 121,422 509,704,584 PS 309,262 Ps 2,313,607 PS 749,529
=========== ========== =========== ========== ============ ===========
BALANCE AT DECEMBER 31,
2006(1) 218,122,421 US$ 54,236 509,704,584 US$138,138 US$1,033,418 US$ 334,792
=========== ========== =========== ========== ============ ===========
Surplus Total
------------------------------ --------------
Gross unrealized
gain or loss on
investments
Reappraisal available for Stockholders'
of assets sale equity
----------- ---------------- --------------
BALANCE AT DECEMBER 31, 2003 30,086 94,436 1,689,379
Net income -- -- 578,678
Transfer to appropriated
retained earnings -- -- --
Valuation of investment 12,151 9,772 21,923
Dividends declared -- -- (156,861)
Other -- -- (42,396)
----------- ---------- ------------
BALANCE AT DECEMBER 31, 2004 Ps 42,237 Ps 104,208 Ps 2,090,723
Net income -- -- 946,881
Transfer to appropriated
retained earnings -- -- --
Issuance of preference and
common shares -- -- 236,211
Valuation of investment (179,033) 31,690 (147,343)
Merger effect 247,275 (12,650) 428,298
Dividends declared -- -- (216,838)
Other -- -- 39,358
----------- ---------- ------------
BALANCE AT DECEMBER 31, 2005 Ps 110,479 Ps 123,248 Ps 3,377,290
Net income 749,529
Transfer to appropriated
retained earnings
Valuation of investment 30,214 (111,149) (80,935)
Dividends declared (369,736)
Other (29,536)
----------- ---------- ------------
BALANCE AT DECEMBER 31,2006 PS 140,693 PS 12,099 PS 3,646,612
=========== ========== ============
BALANCE AT DECEMBER 31,
2006(1) US$ 62,843 US 5,404 US$1,628,831
=========== ========== ============
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
(1) See note 2 (z)
F-10
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2005 and 2006
(Stated in millions of pesos and thousands of U.S. Dollars)
2004 2005(1) 2006 2006(2)
------------ ------------ ------------ -------------
Cash flows from operating activities:
Net income Ps 578,678 Ps 946,881 Ps 749,529 US$ 334,792
Adjustments to reconcile net income to net cash provided (used) by
operating activities:
Depreciation 46,872 87,633 104,553 46,701
Amortization 39,377 77,111 42,905 19,164
Minority interest 1,719 5,862 (251) (112)
Provision for loan, accrued interest and accounts receivable
losses 191,207 395,369 600,357 268,162
Provision for foreclosed assets 23,002 44,665 22,044 9,846
Provision for losses on investment securities and equity
investments 2,821 10,317 12,200 5,449
Provision for premises and equipment 2,223 302 830 371
Provision for other assets 4,953 1,825 1,600 714
Reversal of provision for investments (4,500) (5,330) (27,593) (12,325)
Reversal of provision for loans and accounts receivable (85,152) (220,224) (334,166) (149,262)
Reversal of provision for foreclosed assets (17,239) (45,445) (54,298) (24,253)
Reversal of provision for other assets (38) (3,943) (880) (393)
Reversal of provision for premises and equipment (6,149) (1,787) (6,761) (3,020)
Gain on sales of premises and equipment (839) -- -- --
Loss on sales on investments securities 27 -- -- --
Realized and unrealized (gain) loss on derivative financial
instruments (129,616) (67,180) 15,449 6,901
Loss on sales on foreclosed assets 3,433 -- -- --
Valuation gain on investment securities (266,428) (476,139) (159,249) (71,132)
Foreclosed assets donation 10,854 45 20,888 9,330
(Increase) in accounts receivable (28,454) (514,867) (38,311) (17,112)
Decrease (increase) in other assets (161,362) 92,256 (187,584) (83,788)
Increase (Decrease) in accounts payable 293,293 593,764 (253,531) (113,245)
Increase (Decrease) in other liabilities 58,614 227,036 (72,270) (32,281)
(Increase) in loans (1,565,627) (8,521,859) (6,182,386) (2,761,485)
Increase (Decrease) in other 15,476 59,210 (10,875) (4,857)
------------ ------------ ------------ -------------
Net cash used in operating activities (992,855) (7,314,498) (5,757,800) (2,571,835)
------------ ------------ ------------ -------------
Cash flows from investing activities:
Increase in customers' acceptances Ps 118,021 Ps (25,813) Ps (47,520) US$ (21,226)
Proceeds from sales of premises and equipment 48,454 92,815 53,217 23,771
Proceeds from sales of foreclosed assets 16,315 98,090 61,791 27,600
(Purchases) of premises and equipment (96,333) (589,212) (260,925) (116,548)
(Sales) purchases of investment securities (635,634) (2,719,300) 2,845,435 1,270,970
------------ ------------ ------------ -------------
Net cash (used in) provided by investing activities (549,178) (3,143,420) 2,651,998 1,184,567
------------ ------------ ------------ -------------
Cash flows from financing activities:
F-11
BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2005 and 2006
(Stated in millions of pesos and thousands of U.S. Dollars)
2004 2005(1) 2006 2006(2)
------------ ------------ ------------ -------------
Dividends declared (156,861) (216,838) (369,736) (165,150)
Increase in deposits 1,630,119 6,522,866 4,831,484 2,158,078
Increase (decrease) in long-term debt 480,713 1,095,781 (345,610) (154,374)
Increase (decrease) in overnight funds (501,645) 713,419 (322,868) (144,215)
Increase (decrease) in interbank borrowings and borrowings from
domestic development banks (107,395) 2,823,352 (411,124) (183,637)
------------ ------------ ------------ -------------
Net cash provided by financing activities 1,344,931 10,938,580 3,382,146 1,510,702
------------ ------------ ------------ -------------
Increase in cash and cash equivalents (197,101) 480,662 276,344 123,434
Cash and cash equivalents at beginning of year 1,446,461 1,249,360 1,730,022 772,749
------------ ------------ ------------ -------------
Cash and cash equivalents at end of year Ps 1,249,360 Ps 1,730,022 Ps 2,006,366 US$ 896,183
============ ============ ============ =============
Supplemental disclosure of cash flows information:
Cash paid during the year for:
Interest Ps 173,846 Ps 1,033,420 Ps 1,238,419 US$ 553,164
============ ============ ============ =============
Income taxes Ps 207,856 Ps 190,014 Ps 161,967 US$ 72,346
============ ============ ============ =============
----------
The accompanying notes, numbered 1 to 30, form an integral part of these
Consolidated Financial Statements
(1) The consolidated statements of cash flows for the year ended December 31,
2005, includes Conavi and Corfinsura's result since the beginning of the
year.
(2) See note 2 (z)
F-12
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 "Conavi/Corfinsura merger").
The Conavi/Corfinsura merger was approved at the Bank's ordinary shareholders'
meeting held on March 28, 2005 and was also duly approved at the annual
shareholder meetings of Conavi and Corfinsura, respectively. The Superintendency
of Finance approved the transaction on July 19, 2005. The Conavi/Corfinsura
merger was formalized and registered in the Commercial Registry of the Medellin
Chamber of Commerce on August 1, 2005. As a result of the Conavi/Corfinsura
merger, the Bank acquired the entire property, rights and obligations of Conavi
and Corfinsura, entities which were dissolved without being liquidated.
On April 18, 2006, the Bank amended its by-laws adapting them to
recent legal provisions relating to the public security market and providing for
more stringent internal corporate governance provisions.
The Bank's business purpose is to carry out all operations,
transactions, acts and services inherent to the banking business, through
banking establishments that carry its name and according to all applicable
legislation.
On June 30, 2006, the Bank completed the acquisition of 94.57% of
Comercia S.A. (now Factoring Bancolombia S.A.). This acquisition improved the
offer of credit and the financial services for the commercial clients of the
Bank.
On a non-consolidated basis, the Bank has 12,520 employees and
operates through 701 branches and 211 mobile branches ("Puntos de Atencion
Moviles") in Colombia. In the international arena, the Bank has an agency in
Miami, Florida, United States of America and a representation office in Madrid.
During the second half of 2006, the Bank also provided banking services through
Non-Banking Correspondent ("Corresponsales no Bancarios") arrangements, opening
two Points of Service, one in Chipata (Santander) and one in La Francia district
in Medellin.
In December 2006, the Bank announced its intention to purchase,
through its subsidiary Bancolombia Panama, a controlling stake in Banagricola
S.A. ("Banagricola"), holding company of the Conglomerado Financiero
Internacional Banagricola S.A., owner of Banco Agricola, S.A. and controlling
shareholder of other financial institutions in El Salvador and Panama.
F-13
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
On December 22, 2006, Bancolombia Panama, S.A., entered into a
Stock Purchase Agreement with a group of shareholders of Banagricola to acquire
a controlling stake of 52.9% and up to 100% of all issued and outstanding shares
of Banagricola for a total price of up to US $900,000. The planned acquisition
will be conducted through simultaneous tender offers on the Panamanian and the
Salvadorian stock exchanges.
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 Bank has the following
subsidiaries making up the Bancolombia Group, which is currently registered as a
corporate group:
PARTICIPATION PARTICIPATION
PERCENTAGE PERCENTAGE DATE OF
ENTITY LOCATION BUSINESS DEC-2005 DEC-2006 CREATION
---------------------------------- ---------------------- ------------------------- ------------- ------------- --------------
Leasing Bancolombia S.A. (formerly
Leasing Colombia S.A.) Colombia Leasing 100 100 December 1978
Fiduciaria Bancolombia S.A.
(formerly Fiducolombia S.A.) Colombia Trust 98.81 98.81 January 1992
Bancolombia Panama S.A. Panama Banking 100 100 January 1973
Bancolombia Cayman Cayman Islands Banking 100 100 August 1987
Sistema de Inversiones y Negocios
S.A. Panama Investments 100 100 September 1975
Sinesa Holding Company Ltd. British Virgin Islands Investments 100 100 June 1988
Future Net Inc. Panama E-commerce 99.58 100 November 2000
Banca de Inversion Bancolombia
S.A. (formerly Colcorp S.A.
Corporacion Financiera) Colombia Investment Banking 100 100 July 1994
Inversiones Valsimesa S.A.(1) Colombia Investments -- 71.75 December 2006
Inmobiliaria Bancol S.A. Colombia Real estate broker 99.09 99.09 June 1995
Fundicom S.A. Colombia Metals engineering 79.90 79.90 May 2000
Compania Metalurgica
Colombiana S.A. COMECOL(2) Colombia Metals engineering 40.51 -- December 1996
Valores Simesa S.A. Colombia Investments 71.75 71.75 December 2000
Todo UNO Colombia S.A. Colombia E-commerce 89.55 89.92 June 2001
Almacenes Generales de Deposito
Mercantil S.A. ALMACENAR Colombia Warehousing and logistics 98.25 98.31 February 1953
Unicargo de Colombia S.A. Colombia Freight service 98.35 98.41 August 1994
Ditransa S.A. Colombia Freight service 52.69 52.73 September 1994
Compania Suramericana de
Financiamiento Comercial S.A.
Sufinanciamiento Colombia Financial services 99.99 99.98 November 1971
Renting Colombia S.A. (formerly
Compania Suramericana de
Arrendamiento Operativo S.A.
Surenting) Colombia Operating leasing 75.50 75.50 October 1997
F-14
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-2005 DEC-2006 CREATION
------ ---------------------- ------------------------- ------------- ------------- --------------
Patrimonio Autonomo Localiza Colombia Car Rental -- 75.50 December 2006
Suleasing Internacional S.A. Panama Leasing 76 100 August 1993
Suleasing International USA, Inc. USA Leasing 76 100 July 2003
Suleasing Internacional do Brasil
Locacao de Bens S.A.(3) Brazil Leasing 100 100 December 2005
Inversiones CFNS Ltda. Colombia Investments 100 100 April 1998
Valores Bancolombia S.A. (formerly
Suvalor S.A.) Colombia Securities Brokerage 100 100 May 1991
Suvalor Panama S.A. Panama Securities Brokerage 100 100 April 2005
Bancolombia Puerto Rico
Internacional, Inc (formerly
Banco Corfinsura Internacional
Inc.) Puerto Rico Banking 100 100 December 1997
Multienlace S.A. Colombia Contact Center 98.20 98.20 March 1997
3001 S.A. (4) Colombia E-commerce 98.96 -- December 2000
Inversiones IVL S.A. (5) Colombia Investments -- 98.31 December 2006
Factoring Bancolombia S.A
(formerly Comercia S.A.) Colombia Financial Services -- 99.97 September 1980
Patrimonio Autonomo CV
Sufinanciamiento Colombia Loan Management -- 100 May 2006
(1) Entity resulting from the spin-off of Valores Simesa S.A. that ocurred on
December 21, 2006.
(2) It merged with Valores Simesa S.A., on December 21, 2006.
(3) It was pre-operational and therefore was not consolidated in 2005.
(4) Entity wound up in June 29, 2006.
(5) Entity resulting from the spin-off of Almacenar S.A. that took place on
December 13, 2006
(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 generally accepted accounting principles
in Colombia and the special regulations of the Superintendency of Finance,
collectivelly "Colombian GAAP".
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.
F-15
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank consolidates companies in which it holds, directly or
indirectly, 50% or more of outstanding voting shares. As described below, some
of the Bank's subsidiaries also consolidate their own subsidiaries. The Bank's
subsidiary Bancolombia Panama S.A. sub-consolidates Bancolombia Cayman, Sistema
de Inversiones y Negocios S.A., Sinesa Holding Company Ltd. and Future Net Inc.
The Bank's subsidiary Almacenar S.A. sub-consolidates Unicargo de Colombia S.A.
and Ditransa S.A. The Bank's subsidiary Banca de Inversion Bancolombia S.A.
sub-consolidates Inmobiliaria Bancol S.A., Inversiones Valsimesa S.A.,
Inversiones CFNS, Valores Simesa S.A., Fundicom S.A. and Todo Uno Colombia S.A.
The Bank's subsidiary Leasing Bancolombia S.A. sub-consolidates Renting Colombia
S.A., Suleasing Internacional S.A., Patrimonio Autonomo Localiza, Suleasing
Internacional do Brasil Locacao de Bens S.A. and Suleasing International USA,
Inc. The Bank's subsidiary Valores Bancolombia S.A. sub-consolidates Suvalor
Panama S.A. The remaining companies are consolidated directly by the Bank.
The consolidated financial statements are prepared for the
presentation to the stockholders, but are not taken as a basis for the
distribution of dividends or appropriation of profits.
Intercompany operations and balances are eliminated upon
consolidation.
(B) INFLATION ACCOUNTING
From January 1, 1992 to December 31, 2000, the consolidated financial
statements were adjusted for inflation based on the variation of the Indice de
Precios al Consumidor (The "Consumer Price Index" or "IPC"), certified by the
Departamento Administrativo Nacional de Estadistica (the "National
Administrative Department of Statistics" or "DANE") for middle-income earners.
The adjustment was applied monthly to non-monetary assets, equity (except for
the reappraisal of assets and exchange adjustment), contingent accounts and
memorandum accounts. No adjustment was made to income, costs or expenses, and
the financial statements for the preceding period did not have to be
re-expressed.
(C) CONVERSION OF FOREIGN CURRENCY TRANSACTIONS AND BALANCES
As an authorized exchange dealer, the Bank and its Colombian
Subsidiaries are authorized by the Superintendency of Finance to make direct
foreign exchange purchases and sales on the exchange market.
Operations in foreign currencies other than U.S. Dollars are
translated into U.S. Dollars using the exchange rate published by Reuters and
then re-expressed in Colombian Pesos at the Representative Market Rate (RMR)
calculated on the last business day of the month and certified by the
Superintendency of Finance. The RMR at December 31, 2005 and 2006 was Ps
2,284.22 and Ps 2,238.79, respectively.
F-16
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
Spot foreign currency position is the difference between assets and
liabilities, denominated in foreign currency, based on the unique chart of
accounts, including, investments available for sale in equity and debt
securities, held to maturity and capital contributions in foreign branches and
derivatives such as: next day operations, 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 other than
Pesos cannot exceed the equivalent in foreign currency of twenty percent (20%)
of the Bank's 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 Bank's technical capital and
cannot be negative.
The assets, liabilities and stockholders' equity in foreign currency
of the Subsidiaries outside Colombia included in the consolidated financial
statements were converted into Colombian Pesos using the RMR calculated the last
business day of the month.
The income accounts were converted at an average rate of Ps 2,320.77
and Ps 2,357.98 per U.S. Dollar for the years 2005 and 2006, respectively. These
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 statements of operations for the year ended December
31, 2004 include the financial information of the Bank and its Subsidiaries.
These however, do not include any effects of the Conavi/Corfinsura merger
completed on July 30, 2005. The consolidated statements of operations for the
year ended December 31, 2005 includes the financial information of the Bank and
its Subsidiaries, which includes all additional subsidiaries acquired as a
result of the Conavi/Corfinsura merger. For this reason, the consolidated
statements of operations for 2004 and 2005 should be read taking into account
the impacts of the Conavi/Corfinsura 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, 2006 and 2005. Overnight
funds sold with reselling agreements are considered to be cash equivalents for
the purposes of this statement.
F-17
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(F) USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with Colombian
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of financial statements
and the reported amounts of revenues and expenses during the reporting period.
The most significant estimates are allowance for loan losses, accrued interest
losses, allowance for foreclosed assets and valuation of investments and
derivatives. Actual results could differ from those estimates.
(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 (the "Real Value Unit" or "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, 2005 and December 31, 2006, were Ps 153.4858 and Ps
160.0161, respectively.
The UVR rate corresponds to the monthly variance of the IPC 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, 2005
and December 31, 2006 was 2.04% and 0.63%, 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 with collateral, not repaid within 30 days are classified
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 recorded as interest income on overnight funds statement of
operations.
(I) INVESTMENTS
This includes investments acquired by the Bank and its Subsidiaries to
maintain secondary liquidity, to acquire direct or indirect control in a
company, and if authorized by legislation, 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.
F-18
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank held shares in Suramericana de Inversiones S.A.
(Surainversiones) with authorization of the Superintendency of Finance, which
were sold in October 2006 for Ps 67,327, thereby complying with Sections 5 of
Article 71 and 2 of Article 337 of the Estatuto Organico Financiero (Financial
System's Organic Statute).
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 group
shall only include investments in debt securities.
Debt securities are those securities that make a holder the creditor
of the issuer, whereas equity investments are those that make a holder a
part-owner of the issuer.
TRADING SECURITIES
Trading investments are those acquired mainly for 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 counterparty for the operation is the Colombian
Central Bank, the General Treasury Direction of Colombia, institutions overseen
by the Superintendency of Finance or, in exceptional cases, as determined by the
Superintendency of Finance.
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 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 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.
F-19
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2. VALUATION
The purpose of valuation is to record the fair market value for a
given investment at 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 Finance.
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 based on
internal rate of return calculated on the purchase date.
On July 14, 2006, the Superintendency of Finance issued Resolution
01227, approving the margin adjustment methodology for the appraisal of
investments. Applying this methodology resulted in a devaluation of Ps 23,754,
which was calculated and recorded following the criteria established in Article
4 of the aforementioned Resolution; this devaluation was deferred in the form of
daily aliquots over a period of three months.
2.2 EQUITY SECURITIES
Equity investments are valued 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 from the valuation date, or more
recent statements, if available.
F-20
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2.3 SECURITIES DENOMINATED IN FOREIGN CURRENCY, IN UVR OR IN OTHER UNITS
The procedures are defined in 1995 External Circular 100, Chapter I,
numeral 6.1.1 and 6.1.2 issued by 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 authorized by the Superintendency
of Finance. The value thus obtained is multiplied by the RMR effective on the
valuation date and certified by the Superintendency of Finance or by the
effective unit for the same day, as the case may be.
Foreign exchange gains or losses resulting from investment securities
conversion are recorded as net foreign exchange in the consolidated statements
of operations.
3. RECORDING
3.1 TRADING INVESTMENTS
The difference between current and previous market value is adjusted
to the value of the investment and is recorded as interest income or interest
expense on investment securities, respectively.
3.2 INVESTMENTS HELD TO MATURITY
Investments held to maturity are accounted for at historical cost plus
accrued interest using the effective interest rate method. The effective
interest rate is the internal rate of return calculated at the time of purchase
of investment.
Interest accruals are recorded as interest income on investment
securities.
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 interest income on investment
securities. The present value is calculated 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 gross unrealized net gain or loss.
F-21
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
3.3.2 EQUITY INVESTMENTS
Changes to equity investments are recorded in accordance with 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 the market value allowance account or devaluation in
reappraisal of assets account until it runs out, and the excess is registered as
a surplus in reappraisal of assets in stockholders' equity against reappraisal
of 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 the surplus for valuation of the corresponding
investment until it runs out, and the excess is registered as devaluation of
said investment within reappraisal of assets in equity, against a devaluation in
the reappraisal of assets account.
When the dividends or profits are distributed in kind, including those
from capitalizing the equity revaluation account, the portion recorded as
valuation in reappraisal of assets must be recorded as dividend income, charged
against the equity security and the reappraisal of assets must be reversed. When
the dividends or profits are distributed in cash, the value recorded as
valuation in reappraisal of assets must be recorded as dividend income, the
valuation reversed and the excess amount of the dividends must be recorded as a
lesser equity investment value.
3.3.2.2 INVESTMENT IN SECURITIES WITH HIGH OR MEDIUM VOLUME
The update of the market value of these securities is recorded as
gross unrealized net gain or loss on investments, within the equity accounts,
crediting or debiting the investment securities.
Dividends or profits distributed in kind or in cash, including those
from capitalizing the equity revaluation account, must be recorded as dividend
income up to the amount corresponding to the investor over profits or equity
revaluation that the issuer has recorded since the investment acquisition date,
charged to accounts receivable.
4. ALLOWANCES 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 and 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") or issued by the Central Bank are not subject to this adjustment.
F-22
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 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 as of the valuation date:
LONG TERM MAX. AMOUNT
RANKING %
------------ -----------
BB+, BB, BB- Ninety (90)
B+, B, B- Seventy (70)
CCC Fifty (50)
DD, EE Zero (0)
SHORT TERM MAX. AMOUNT
RANKING %
---------- -----------
3 Ninety (90)
4 Fifty (50)
5 and 6 Zero (0)
Provisions for investments classified as held to maturity, 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, at which these investments are posted, according to
their category is:
MAX. REGISTERED
CATEGORY AMOUNT % (1) INVESTMENT CHARACTERISTICS
-------------------------------- ----------------- ----------------------------------------------------
A Normal One hundred (100) Present a fulfilling debt service and according the
issuer's financial statements have a healthy
financial situation.
B Acceptable risk, greater than Eighty (80) Present factors of uncertainty that could affect the
normal capacity to continue adequately fulfilling debt
service and weaknesses that could affect their
financial situation.
C Appreciable risk Sixty (60) Present medium-high probabilities of non-fulfillment
of timely payments of capital and interest in their
financial situation that may compromise the recovery
of the investment.
D Significant risk Forty (40) Present non-fulfillment of agreed terms of the
security and material deficiencies in their
financial situation, the probability of recovering
the investment is highly doubtful.
E Unrecoverable Zero (0) Recovery highly improbable.
----------
(1) On the net nominal amortization values as of the valuation date for debt
securities or the acquisition cost less allowances for equity securities.
F-23
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(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 Bank's 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, are not taken out or omitted
from the portfolio group. The profit in this business activity is recorded 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.
The institutions overseen by the Superintendency of Finance must have
a Credit Risk Administration System that sets forth 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 periodic portfolio classification.
For allowance for loans and financial leases losses, the Bank applies
the regulations of the Superintendency of Finance as described below. In
addition, the Bank calculates probable expected losses and tests estimating
provisions using this methodology.
The 1995 External Circular 100 Chapter II issued by the
Superintendency of Finance , sets forth guidelines for credit risk
administration. This Circular defines the basic elements of the system for the
management of credit risk ("SARC") and contains 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 development of the proposed schemes.
1. CLASSIFICATION
Loans and financial lease contracts are classified as follows:
F-24
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
MORTGAGE LOANS
These are loans, regardless of value, granted to individuals for the
purchase of new or used housing or to build a home, all in accordance with Law
546 of 1999. These loans include loans denominated in UVR or local currency,
that are guaranteed by a senior mortgage on the property and that are financed
with a total repayment term of 5 to 30 years.
CONSUMER LOANS
These are loans and financial leases, regardless of value, granted to
individuals for the purchase of consumer goods or to pay for non-commercial or
business services.
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 ("SMMLVs").
"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 (500) effective legal minimum monthly salaries ("SMMLVs").
COMMERCIAL LOANS
Commercial loans are loans and financial leases that are granted to
individuals or companies in order to carry out organized economic activities;
and not classified as small business loans.
Loan-related commissions and other receivables are classified within
the accounts for the type of loan to which they are related.
2. EVALUATION FREQUENCY
The Bank and its Subsidiaries make continuous evaluations of their
lending and financial lease operation risk, making all necessary modifications
to the respective classifications when there are new analyses or data to justify
such changes.
In addition the previous process, in the months of May and November,
the Bank and its Subsidiaries evaluate all loans and financial leases that are
past due after having been restructured and that at the time of the evaluation
exceed three-hundred (300) effective SMMLVs, as well as loans from debtors whose
debt from the different loan types exceeds this threshold.
F-25
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
3. EVALUATION CRITERIA
The Bank and its Subsidiaries evaluate loans and financial leases
using the criteria required by the Superintendency of Finance. In general, 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 minimum information required from the debtors are: the income and
outgoing cash flows; economic solvency; information on its current and past
compliance with its obligations, 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 that the customer may be impact by changes in the economy or the
industry.
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
RULES OF ALIGNMENT
A Bank and/or its subsidiaries would automatically classify all of
that debtor's accounts in the same category (B, C, D or E) for any loan or
financial lease, unless it can demonstrate to the Superintendency of Finance
that the Bank has sound reasons for another risk classification.
Under the terms of the Colombian Commercial Code, financial
institutions that are related parties will receive the same classification as
the parent company unless the Superintendency of Finance is shown that there are
good reasons for maintaining such entities in a lower risk category.
F-26
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 established that interest, UVR, lease
payments and other items of income cease to be accrued in the statement of
operations and begin to be recorded in memorandum accounts until effective
payment is collected, after a loan is in arrears for more than a certain time:
TYPE OF LOAN AND FINANCIAL LEASE ARREARS IN EXCESS OF:
-------------------------------- ---------------------
Mortgage 2 months
Consumer 2 months
Small business loans 1 month
Commercial 3 months
The Bank and its Subsidiaries adopted a policy, in 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.
Those loans that become past due and that at some point have stopped
accruing interest, UVR, lease 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. ALLOWANCE FOR LOANS AND LEASES LOSSES
The Bank records allowance for loans and financial leases losses for
each period as follows:
General Allowance:
The Bank and its subsidiaries set up a general provision corresponding
to one per cent (1%) of the total value of the gross loan portfolio.
F-27
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The general 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 Allowance:
In 2005 and 2006, the Bank set up individual provisions on its
loan portfolio, interest and other items, according to regulations issued by the
Superintendency of Finance. These provisions corresponded to percentages
calculated according to the different classifications applicable on the
outstanding balance due, net of guarantees. The actual methodology will be
applied until the reference models issued by the Superintendency of Finance for
calculating provisions are implemented, taking into account the estimated losses
in the case of default.
Considering the impact that will be caused by the change in
provisions once the Reference Model for Commercial Portfolio ("MRC") and the
Reference Model for Consumer Portfolio ("MRCO") become effective 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 issued External Circular 004, on December 30, 2005,
which increased its provision percentages on "A" and "B" rated loans to 1% and
3.2%, respectively.
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
Subsections 2.1.1 and 2.1.2 of Exhibit 1 of Chapter II of Circular 100 issued by
the Superintendency of Finance. The provision for "A" classified loans at
December 31, 2006 was 0.8%.
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
and the Bank's internal policies, the 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 1 1 1
B- Acceptable Risk, Above Normal 3.2 3.2 3.2 3.2 3.2 100
C- Appreciable Risk 20 100 50 100 60 100
D- Significant Risk 50 100 100 100 100 100
E- Risk of Unrecoverability 100 100 100 100 100 100
F-28
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
HOME MORTAGE %
CAPITAL
--------------------------
ON NON-
ON GUARANTEED GUARANTEED
PORTION PORTION INTEREST/OTHER
------------- ---------- --------------
A- Normal Risk 1 1 1
B- Acceptable Risk, Above Normal 3.2 100 100
C- Appreciable Risk 10 100 100
D- Significant Risk 20 100 100
E- Risk of Unrecoverability 30 100 100
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 is increased to 100%, unless there is any indication of a possible
recovery by actions previously taken by the Bank.
The provision corresponding to interest and other items, as
recorded in 2005 was:
COMMERCIAL % CONSUMER % SMALL BUSINESS LOANS %
CATEGORY INTEREST/OTHER INTEREST/OTHER INTEREST/OTHER
-------- -------------- -------------- ----------------------
A - Normal Risk -- -- --
B - Acceptable Risk, Above Normal 1 30 100
C - Appreciable Risk 100 100 100
D - Significant Risk 100 100 100
E - Risk of Unrecoverability 100 100 100
In addition, the Bank has also recorded additional provisions for
certain clients based on an individual analysis of loss and probabilities of
recovery.
7. THE EFFECT OF GUARANTEES ON ALLOWANCES
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. Commercial, consumer and small business categories are valued at no
more than 70% of their value. Nevertheless, depending on whether the security is
a mortgage or not and on the length of time the loan has been in arrears, the
Bank may only take into consideration the percentages of the total security
value indicated below:
F-29
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 --
-- Over 36 months Over 24 months
As required by External Circular 004 of December 2005, increases
in individual provisions for the "A" and "B"- rated portfolio, must be set up
without deducting the value of the corresponding guarantees.
The security is perfected 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 forth in External Circular 034 of 2001 issued by the
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 than housing, the market value shall be the appraisal
value of the property given over in guarantee when the loan was
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 main real estate which forms part and the
respective establishment or mortgages on property where the establishment
operates or functions, are not taken into account.
F-30
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank and its Subsidiaries do not base their 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 in order to recover the
loan. Considering that the Bank has made inroads on the Small and Medium
Entrerprises ("SME") segment, its policy is to obtain coverage with the the
Colombian National Guaranty Fund (Fondo Nacional de Garantias - 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 - FAG).
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 Deposito a Termino
Fijo rate (Colombia's average of term deposits rate or "DTF") and the Unidad de
Poder Adquisitivo Constante rate (the "Purchasing Power Unit Rate" or "UPAC"),
for the purpose of comparing how the UPAC rate is performing in comparison to
the UVR rate's performance, so that these might be accorded the same reduction
as that corresponding to the UPAC-linked credit. The Colombian government,
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).
Decree 712 of 2001, which amended Decree 2221 of 2000,
established grounds for returning the debt relief applied for credit
institutions, to the Republic of Colombia through the Ministry of Finance and
Public Credit, as follow:
Due to default on
a) 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,
according to the provisions of Law 546 of 1999.
Due to failure to pay an
b) 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.
c) Due to payment of mortgage credits for more than one
dwelling per person.
d) Due to waiving the amount reliefed to other loans
e) Due to amounts credited being higher than those due
F-31
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 an agreement exists and
whose purpose or effect is to modify some of the terms of the loan. 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 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 methods 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 in other
liabilities and they are amortized in proportion to the amounts actually
collected.
11. CHARGE-OFFS
In June and December, the Bank writes off debtors classified as
"unrecoverable", based on the following criteria:
- 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 charge-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.
The recovery of charged-off loans is accounted for as income in
the Consolidated Statements of Operations.
Charge-offs in Bancolombia Panama S.A.
Bancolombia Panama takes into account the regulation issued by
Republic of Panama Superintendency of Banking, which requires charges-off all
loans by the end of the fiscal period in which they were classified as
unrecoverable.
F-32
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
12. SECURITIZED LOANS
The Bank has securitized both performing housing loans indexed to
UVR's and at a fixed rate, as well as non-performing loans.
The non-performing mortgage loan portfolio was securitized by the
Bank in order to reduce the level of overdue loans, and as a result reduce the
systemic risk presented given the concentration of long-term assets as compared
to short-term liabilities, and to improve the Bank's financial indicators.
The securitization process carried out on the non-performing
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, pursuant
to Article 2 of Resolution 775 of 2001 issued by the Superintendency of Finance
by 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 these securities.
(K) ACCEPTANCES, NEXT DAY OPERATIONS 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 as Customer acceptances.
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.
F-33
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
NEXT DAY OPERATIONS
These include all agreements or contracts entered into by two
parties and to be fulfilled within two business days immediately following the
date on which the agreement or contract is entered into and must be valued
applying the methodology provided for by Chapter XVIII of 1995 External Circular
100.
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, which are recorded as
assets, presenting the obligations with opposite nature. 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 from forward contracts in foreign currency, as the case may
be.
FORWARD CONTRACTS
A forward contract is any agreement or contract that meets the
needs of two parties acting outside the market for the purpose of accepting or
delivering a specific quantity of a product or underlying asset with defined
specifications regarding price, date, place and means of delivery.
FUTURE CONTRACTS
These are standard contracts for future delivery, specifying due
date, quantities, amounts, qualities, etc. The valuation is calculated pursuant
to the stock market practices where the securities are traded.
Futures may be liquidated in cash, by a reciprocal operation
prior to the due date, by physical delivery of a product or by liquidating
against an index.
SWAP CONTRACTS OR FINANCIAL EXCHANGE CONTRACTS
A swap contract or financial exchange contract is a contract
between two parties that agree to exchange flows of money within the time set
forth in the obligations, which is financially similar to a series of Forward
Contracts whose objective is to reduce costs and risks due to variations in
exchange rates or in interest rates.
F-34
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 obligated 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
measures 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 assets received in
guarantee of credits unpaid using the following criteria:
- The initial value recorded is the value specified in the court
award or the one agreed upon by the debtors.
- If the proceeds of the sale are more than the settlement value
agreed upon with the debtor, that difference is recorded as
accounts 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 statement of
operations as a non-operating expense.
- 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 is recorded for the difference.
LEGAL TERM FOR THE SALE OF FORECLOSED ASSETS
Institutions must sell the foreclosed assets, in a period no later
than two years after the foreclosing date, except when upon the board of
directors' request, the Superintendency of Finance extends the term. However, in
any event the extension may not exceed an additional period of two years.
F-35
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
PROVISIONS FOR FORECLOSED ASSETS
With the issuance of the 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, through 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.
Until such model is presented and approved by the Superintendency
of Finance, provisions will be made following the parameters set forth below.
Real estate
The Superintendency of Finance requires a provision equal to 30%
of the value of the asset at the time of receipt must be made in proportional
monthly installments within the first year following receipt. This provision
will increase an additional 30% in proportional monthly installments within the
second year following receipt of the asset. Once the legal term for sale has
expired without authorization to extend, the provision must be 80% of the value
upon receipt. In case the term extension is granted, the remaining 20% of the
provision may be constituted within said term.
Moveable Assets
The Superintendency of Finance requires 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. This
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.
(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 have a useful life exceeding 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.
F-36
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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%
Monitors, laptops and CPU's 33%
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 of assets is recorded; otherwise, the difference is charged to
expenses as provision for other assets for the period. Valuations must be made
at least every three years.
At December 31, 2005 and 2006, the Bank had insurance coverage
for the acts of its employees which could affect the Bank as well as the
financial risks and civil liability coverage for risks inherent to its business.
Other policies protect assets against fire, earthquake, explosion, civil
disturbance, riot, terrorism, damage to computers and vehicles.
(O) 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,
based on the following factors:
Prepaid Expenses
Prepaid expenses include mainly the following monetary items:
interest, amortized monthly during the period prepaid; insurance, over the life
of the policy; rent, over the period prepaid; equipment maintenance, over the
life of the contract; and other prepaid expenses over the period in which
services are received or costs and expenses are incurred.
F-37
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 External Circular 034 issued in October 2006 by the
Superintendency of Finance modified the instructions contained in
Chapter XVII of the Basic Accounting Circular with regard to
goodwill pertaining to new acquisitions and establishes that the
value of the goodwill acquired shall be determined once the
purchasing entity effectively obtains control over the acquired
entity. This value must be distributed throughout each of the
business segments, which must be fully identified, even at the
book-keeping level. Acquired goodwill is not recorded in the case
of acquisitions between controlling and controlled or subordinate
entities, or between entities that have the same controller or
controllers pursuant to Articles 260 and 261 in the Code of
Commerce or between entities that make up a corporate group
pursuant to Article 28 onwards of Law 222 of 1995.
Acquired goodwill is recorded as a deferred charge and amortized
on a monthly basis on the administrative and other expenses
account over a term of twenty (20) years, unless the supervised
entity voluntarily selects a shorter period of amortization.
Annual amortization is determined on an exponential basis. The
different business lines is appraised on an annual basis using
technical value appraisal methods performed by an expert, whose
suitability and independence has been previously rated by the
Superintendency of Finance.
In the case of goodwill already acquired by the Bank and its
subordinates on the date when this regulation came into full
force and effect, the current amortization term was maintained.
With regard to the acquisition of equity securities, prior to the
accounting, the Bank carried out an independent appraisal of each
business, taking into account the period in which the investment
is recovered, the amount of goodwill involved, and the impact of
such goodwill on the income statement. Based on the
aforementioned evaluation, the amortization period was
determined, which does not in any case exceed the terms
stipulated in the applicable rules and regulations.
- Stationery is amortized as and when consumed.
- Bonuses under the voluntary retirement plan are amortized as
permitted by the Superintendency of Finance.
- 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 in
connection with these items is recorded directly on the statement of operations
as administrative and other expenses.
F-38
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(P) OPERATING LEASES
Subsidiaries Leasing Bancolombia S.A. and Renting Colombia S.A.
each posts all assets given over under operating leasing arrangements in its
financial statements.
Depreciation is applied over either the asset's useful life or
the term of the leasing agreement, whichever period is the shortest. The
methodology used is the financial depreciation method (deducting the residual
value) where depreciation on the leased assets bears an adequate relation to the
income generated thereon.
The assets are amortized upon to the amount of the estimated
residual value and upon to the total, when the entity does not have a third
party guaranteeing the residual value.
Likewise, a general provision of 1% shall continue to be set up
on the value of these assets, without the total value of the accumulated
depreciation and the general provision exceeding 100% of the value of the leased
asset.
Instructions contained in Chapter II of External Circular 100 of
1995 are followed when evaluating and rating the leased assets.
(Q) REAPPRAISALS
This account records reappraisals of property and equipment, real
state available for sale investments with low exchange volume or which are
unquoted.
Valuations are subject to the accounting policy for each type of
asset.
(R) INTERBANK FUNDS PURCHASED AND REPURCHASE AGREEMENTS
The Bank records funds obtained by the Bank from other financial
institutions to satisfy transient liquidity needs in overnight funds. 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 recorded as interest expenses on overnight fund in
statement of operations.
(S) DEFERRED INCOME
This account records deferred income and income received in
advance in the course of business. Amounts recorded in this account are
amortized over the period to which they relate or in which the services are
rendered.
F-39
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The capitalization of yields on restructured loans that have been
recorded in memorandum accounts or as charge - off loan balances are included in
this category as indicated in Note 2 (j).
(T) 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, 2006, the Bank has amortized
the total actuarial liability.
(U) ACCRUED EXPENSES
The Bank and its Subsidiaries record provisions to cover
estimated liabilities, such as fines, sanctions, litigations and lawsuits,
provided that:
- The Bank has acquired a right, and therefore has an obligation;
- Payment may be demanded or is probable; and
- The provision is justifiable, quantifiable and verifiable.
This account also records estimates for taxes.
(V) 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.
(W) CONTINGENT AND MEMORANDUM ACCOUNTS
Contingent 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. Memorandum accounts record third party operations whose nature does not
affect the financial situation of the Bank. Contingent and memorandum accounts
are included in the caption memorandum accounts of the balance sheet.
(X) NET INCOME PER SHARE
To determine net income per share, the Bank uses the weighted
average of the number of shares outstanding during the accounting period.
F-40
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(Y) LEGAL RESERVE
According to Colombian law, credit institutions must constitute a
legal reserve that amounts to at least fifty percent (50%) of the subscribed
capital, formed with ten percent (10%) of the net income of each period.
(Z) 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
2,238.79 per US$ 1, which is approximately the exchange rate, calculated on
December 29, 2006, the last business day of the year, by the Superintendency of
Finance. This translation may not be construed to represent that the Colombian
peso represents or has been, or could be converted into, U.S. Dollars at that or
any other rate.
(AA) INCOME TAX EXPENSES - CURRENT AND DEFERRED
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 exempted, are reduced returns, reductions and discounts to obtain net
income. As appropriate, realized costs that have a direct relation with income
are substracted 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 subsequent five years.
Deferred income taxes are generally recognized for timing
differences 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.
(BB) 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
F-41
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
The Conavi and Corfinsura acquisition was accounted for using the
pooling of interests method in accordance with the methodology suggested by the
Superintendency of Finance. The Sufinanciamiento and Comercia (now Factoring
Bancolombia) 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 for 2005 includes the difference
between the issuance of shares and the carrying amount of the net asset acquired
from Conavi and Corfinsura.
(3) TRANSACTIONS IN FOREIGN CURRENCY
The Superintendency of Finance defines limits on the amount of
foreign-currency assets and liabilities. As of December 31, 2005 and 2006, the
Bank was in compliance with these limits.
Substantially all foreign currency holdings are in U.S. Dollars.
The consolidated foreign currency assets and liabilities, converted to US$, of
the Bank and its Subsidiaries at December 31, 2005 and 2006 were as follows:
2005 2006
------------ ------------
ASSETS:
Cash and due from banks US$ 81,327 US$ 130,867
Overnight funds 213,897 55,090
Investment securities 786,733 621,604
Loans, net 1,734,049 1,636,001
Customers' acceptances (500,176) (339,803)
Accounts receivable 47,351 36,381
Premises and equipment, net 21,625 6,230
Other assets 40,933 94,918
------------ ------------
TOTAL FOREIGN CURRENCY ASSETS US$2,425,739 US$2,241,288
------------ ------------
LIABILITIES:
Deposits 1,155,250 1,338,157
Bank acceptances outstanding 21,071 27,520
Borrowings from domestic development banks 90,234 1,333
Interbank borrowings 746,630 476,527
F-42
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
------------ ------------
Other liabilities 243,266 186,175
------------ ------------
TOTAL FOREIGN CURRENCY LIABILITIES 2,256,451 2,029,712
------------ ------------
NET FOREIGN CURRENCY ASSET POSITION US$ 169,288 US$ 211,576
============ ============
At December 31, 2005 and 2006, the Bank's net foreign currency
consolidated asset position amounted to US$ 308,272 and US$ 176,451,
respectively; which meet the legal requirements.
At December 31, 2005 and 2006, the Subsidiaries Bancolombia
Panama S.A. and Bancolombia Cayman had foreign currencies which represent 51.09%
and 54.61%, respectively, of the consolidated assets in foreign currency and
48.15% and 51.30%, respectively, of the consolidated liabilities in foreign
currency.
(4) CASH AND DUE FROM BANKS
The balances of cash and due from banks consisted of the
following:
2005 2006
----------- -----------
COLOMBIAN PESO DENOMINATED:
Cash Ps 740,615 Ps1,148,238
Due from the Colombian Central Bank 279,909 75,025
Due from domestic banks 15,237 12,047
Remittances of domestic negotiated checks in transit 19,991 21,199
Provision (86) (741)
----------- -----------
TOTAL LOCAL CURRENCY 1,055,666 1,255,768
----------- -----------
FOREIGN CURRENCY:
Cash 20,999 15,634
Due from the Colombian Central Bank 5,379 2,962
Due from foreign banks 153,106 270,495
Remittances of foreign negotiated checks in transit 6,299 4,490
Provision (14) (597)
----------- -----------
TOTAL FOREIGN CURRENCY 185,769 292,984
----------- -----------
TOTAL CASH AND DUE FROM BANKS Ps1,241,435 Ps1,548,752
=========== ===========
Reserves required to certain transactions and Time Deposits with
the Colombian Central Bank amounted to Ps 1,098,712 and Ps 1,315,927 at December
31, 2005 and 2006, respectively. The required reserves, which are prescribed by
the Colombian Central Bank, are based on a percentage of deposits maintained at
the Bank by its customers.
F-43
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(5) INVESTMENT SECURITIES
Investment in trading securities consisted of the following:
2005 2006
----------- -----------
TRADING SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps3,305,131 Ps 814,338
Colombian Central Bank 15 11
Government entities 44,674 16,784
Financial institutions 1,044,838 1,004,563
Corporate bonds 64,228 28,929
Other marketable equity securities 192,535 207,203
----------- -----------
TOTAL LOCAL CURRENCY DENOMINATED 4,651,421 2,071,828
----------- -----------
FOREIGN CURRENCY DENOMINATED:
Colombian government 136,111 153,677
Financial institutions 664,223 438,506
Other marketable equity securities -- 3,481
----------- -----------
TOTAL FOREIGN CURRENCY DENOMINATED 800,334 595,664
----------- -----------
TOTAL TRADING SECURITIES 5,451,755 2,667,492
----------- -----------
Allowance for trading securities (1,100) (7,622)
----------- -----------
TRADING SECURITIES, NET Ps5,450,655 Ps2,659,870
=========== ===========
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 5.68% and 6.22% for 2005 and 2006,
respectively.
As of December 31, 2005 and 2006, the Bank had pledged
investments securities amounting to Ps 1,723,109 and Ps 1,147,942, respectively
as collateral to secure lines of credit at international banks, domestic
development banks and other financial institutions.
The Bank sold Ps 234,428,554 and Ps 218,569,232 of investment
securities during the years ended December 31, 2005 and 2006, respectively.
Investment in available for sale securities consisted of the
following:
2005 2006
----------- -----------
AVAILABLE FOR SALE
COLOMBIAN PESO DENOMINATED:
Colombian government Ps897,155 Ps 679,056
Financial institutions 27,655 67,823
Other marketable equity securities 3,434 313,424
--------- -----------
TOTAL LOCAL CURRENCY DENOMINATED 928,244 1,060,303
--------- -----------
F-44
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
----------- -----------
FOREIGN CURRENCY DENOMINATED:
Colombian government 496,726 674,437
Financial institutions 339,633 61,687
Other marketable equity securities 77,953 14,157
----------- -----------
TOTAL FOREIGN CURRENCY DENOMINATED 914,312 750,281
----------- -----------
TOTAL AVAILABLE FOR SALE - DEBT SECURITIES Ps1,842,556 Ps1,810,584
=========== ===========
PARTICIPATION PARTICIPATION
PERCENTAGE AT PERCENTAGE AT
DECEMBER 31, DECEMBER 31,
2005 2005 2006 2006
------------- --------- ------------- ---------
AVAILABLE FOR SALE - EQUITY SECURITIES
Todo Uno Services 38.86% Ps 49,849 46.51% Ps 53,335
Urbanizacion Chico Oriental No. 2 Ltda. 24.37% 7,848 24.37% 7,848
Carreteras Nacionales del Meta S.A. (1) 8.44% 5,509 -- --
Sociedad Administradora de Fondos de Pensiones y de Cesantias Proteccion S.A 23.44% 19,481 23.44% 19,481
Fideicomiso Devinorte (1) 10.31% 5,277 -- --
Concesiones CCFC S.A. 25.50% 4,358 25.50% 4,358
Banco Latinoamericano de exportaciones BLADEX S.A. 0.20% 2,131 0.22% 2,109
Deposito Centralizado de Valores de Colombia Deceval S.A. 11.38% 2,954 13.58% 3,735
Urbanizacion Sierras del Chico Ltda. 0.55% 203 0.55% 203
Concesiones Urbanas S.A. 33.32% 8,446 33.32% 8,446
Titularizadora Colombiana S.A. 21.25% 11,162 21.25% 14,765
Promotora la Alborada 25.81% 14,001 25.81% 14,001
Compania Suramericana de Inversiones S.A. Surainversiones (1) 0.73% 64,672 -- --
Redeban Red Multicolor 20.36% 4,396 20.36% 4,396
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 S.A. 49.00% 343 49.50% 1,535
Cadenalco S.A. Titularizacion 3.33% 2,490 3.33% 3,929
Bolsa de Valores de Colombia 8.54% 2,628 8.54% 5,509
Metrotel redes -- -- 28.42% 10,568
Other 7,101 4,297
--------- ---------
TOTAL EQUITY SECURITIES 217,481 163,147
Allowance for other-than-temporary impairment in value (67,532) (63,060)
--------- ---------
EQUITY SECURITIES, NET Ps149,949 Ps100,087
========= =========
(1) These securities were sold during 2006.
F-45
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Dividends received from equity investments amounted to Ps 30,546,
Ps 42,731 and Ps 21,199 for the years ended December 31, 2004, 2005 and 2006,
respectively.
The equity investments were classified as Category "A", except
for the following:
2005 2006
-------------------- --------------------
VALUATION VALUATION
CATEGORY ALLOWANCE CATEGORY ALLOWANCE
-------- --------- -------- ---------
Todo Uno Services D Ps45,872 D Ps44,218
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 2,578 -- --
Sociedad Portuaria San Andres E 3 E 3
Sociedad Promotora Siderurgica Colombiana E.U. E 534 E 297
Promotora La Alborada E 9,897 E 9,897
Oikos Titulos de Inversion en Circulacion -- -- E 287
Others 297 7
-------- --------
Ps67,532 Ps63,060
======== ========
Investment in held to maturity securities consisted of the
following:
2005 2006
----------- -----------
HELD TO MATURITY SECURITIES
COLOMBIAN PESO DENOMINATED:
Colombian government Ps 873,679 Ps 523,007
Government entities -- 5,106
Financial institutions 55,757 520,926
Other 16,147 30,712
----------- -----------
TOTAL HELD TO MATURITY SECURITIES 945,583 1,079,751
FOREIGN CURRENCY DENOMINATED:
Colombian government 34,876 12,394
Financial institutions 5,955 --
Other 34,965 21,978
----------- -----------
TOTAL FOREIGN CURRENCY DENOMINATED 75,796 34,372
----------- -----------
TOTAL HELD TO MATURITY SECURITIES 1,021,379 1,114,123
----------- -----------
Allowance for other-than-temporary impairment in value (4,836) (6,903)
----------- -----------
TOTAL HELD TO MATURITY SECURITIES, NET Ps1,016,543 Ps1,107,220
=========== ===========
F-46
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The maturity and yield of securities issued by Colombian
Government Peso-denominated, as of December 31, 2006, were as follow:
MATURITY BALANCE YIELD (1)
--------- ---------
One year or less 346,988 6.66%
After one year through five years 1,035,632 7.99%
After five years through ten years 608,358 8.07%
After ten years 25,446 8.79%
--------- ----
TOTAL 2,016,424 7.80%
========= ====
----------
(1) Calculated using internal return rate (IRR) as of December 31, 2006
(6) LOANS AND FINANCIAL LEASES
Loan portfolio and financial lease contracts were classified, in
accordance with the provisions of the Superintendency of Finance, as follow:
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
=========== ============ =========== ========= =========== ============
DECEMBER 31, 2006
FINANCIAL
CLASSIFICATION MORTGAGE COMMERCIAL CONSUMER SMALL LOAN LEASES TOTAL
-------------- ----------- ------------ ----------- ---------- ----------- ------------
"A" Normal Risk Ps1,288,334 Ps15,216,763 Ps3,327,404 Ps79,225 Ps3,398,819 Ps23,310,545
"B" Acceptable Risk 53,139 431,653 111,728 3,566 108,688 708,774
"C" Appreciable Risk 22,454 114,146 38,659 1,807 32,320 209,386
"D" Significant Risk 11,833 173,634 50,937 1,203 5,156 242,763
"E" Unrecoverable 9,685 92,309 58,532 5,277 8,303 174,106
----------- ------------ ----------- -------- ----------- ------------
TOTAL LOANS AND
FINANCIAL LEASES Ps1,385,445 Ps16,028,505 Ps3,587,260 Ps91,078 Ps3,553,286 Ps24,645,574
=========== ============ =========== ======== =========== ============
Promissory notes documenting loans amounting to Ps 1,352,071 and
Ps 707,546 at December 31, 2005 and 2006, respectively, have been duly endorsed
to domestic development banks, as required by applicable laws.
F-47
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following table represents a summary of restructured loans:
2005 2006
----------- -----------
Ordinary restructurings Ps 424,781 Ps 551,293
Extraordinary restructurings 8,526 1,265
Under law 550 74,558 90,500
Under law 617 184,317 166,198
Creditor agreement proceedings 12,472 5,582
Performance Agreement 2,844 2,133
Interest and other receivables items 8,726 9,415
----------- -----------
716,224 826,386
Allowances for loan losses (256,041) (176,110)
----------- -----------
NET OF RESTRUCTURED LOANS Ps 460,183 Ps 650,276
=========== ===========
(7) ALLOWANCE FOR LOANS, FINANCIAL LEASES AND ACCRUED INTEREST LOSSES
The following table sets forth an analysis of the activity in the
allowance for loans and financial leases losses:
2004 2005 2006
---------- ----------- -----------
Balance at beginning of year Ps 387,263 Ps 434,378 Ps 705,882
Balance at beginning of year (Factoring Bancolombia) -- -- 5,625
Balance at beginning of year (Conavi, Corfinsura and
subsidiaries) -- 236,013 --
Allowance for financial lease reclassification (1) 7,002 -- --
Provision 186,480 374,744 568,679
Charge-offs (55,032) (115,455) (136,789)
Effect of changes in exchange rate (12,751) (3,955) (1,210)
Decrease on allowance for securitization -- (11,947) --
Reversals of provisions (78,584) (207,896) (308,004)
---------- ----------- -----------
Balance at end of year Ps 434,378 Ps 705,882 Ps 834,183
========== =========== ===========
Ratio of charge-offs to average outstanding loans 0.62% 0.66% 0.63%
========== =========== ===========
----------
(1) The Superintendency of Finance through its External Circular 040, modified
the treatment of financial leases. Since January 1, 2004 financial leases
are accounted for as part of the loan portfolio.
The recoveries of charged-offs loans are recorded in the
consolidated statement of operations separated from provisions for loan losses.
F-48
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following table sets forth the activity in the allowance for
accrued interest losses:
2004 2005 2006
-------- --------- --------
Balance at beginning of year Ps 5,170 Ps 4,603 Ps 8,655
Balance at beginning of year (Factoring Bancolombia) -- -- 481
Balance at beginning of year (Conavi, Corfinsura and
subsidiaries) -- 9,609 --
Allowance for financial lease reclassification (1) 473 -- --
Provision 4,483 12,379 14,825
Charge-offs (2,072) (4,657) (4,126)
Reversals of provisions (3,332) (13,267) (8,159)
Effect of changes in exchange rate (119) (12) (32)
-------- --------- --------
Balance at end of year Ps 4,603 Ps 8,655 Ps11,644
======== ========= ========
----------
(1) The Superintendency of Finance through its External Circular 040 modified
the treatment of financial leases. Since January 1, 2004 financial leases
are accounted for as part of the loan portfolio.
(8) CUSTOMER ACCEPTANCES AND DERIVATIVES
The Bank's rights and commitments from derivatives operations
were as follows:
2005 2006
--------- ----------
CUSTOMER ACCEPTANCES
Current Ps 62,282 Ps 57,202
Overdue 704 6,828
--------- ----------
TOTAL 62,986 64,030
--------- ----------
DERIVATIVES
(Fair value of derivatives instruments)
NEXT DAY OPERATIONS
Foreign exchange rights contracts bought 296 245,494
Foreign exchange rights contracts sold 1,630 241,641
Investment securities rights bought (local currency) 14,805 50,242
Investment securities rights sold (local currency) 3,010 115,455
--------- ----------
Total rights 19,741 652,832
--------- ----------
Foreign exchange commitments contracts bought (295) (245,705)
Foreign exchange commitments contracts sold (1,614) (241,671)
Investment securities commitments bought (local currency) (14,756) (50,164)
Investment securities commitments sold (local currency) (3,006) (115,410)
--------- ----------
Total obligations (19,671) (652,950)
--------- ----------
TOTAL NEXT DAY OPERATIONS 70 (118)
--------- ----------
F-49
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
------------ ------------
FORWARD CONTRACTS
Foreign exchange rights contracts bought 2,284,278 3,257,790
Foreign exchange rights contracts sold 3,304,346 3,915,765
Investment securities rights bought (local currency) 956,244 1,042,606
Investment securities rights sold (local currency) 821,967 260,854
------------ ------------
Total rights 7,366,835 8,477,015
Foreign exchange commitments contracts bought (2,372,882) (3,369,751)
Foreign exchange commitments contracts sold (3,184,882) (3,757,637)
Investment securities commitments bought (local currency) (950,569) (1,031,758)
Investment securities commitments sold (local currency) (824,432) (271,562)
------------ ------------
Total obligations (7,332,765) (8,430,708)
------------ ------------
TOTAL(1) 34,070 46,307
------------ ------------
FUTURES CONTRACTS
Foreign exchange rights contracts bought Ps 14,860 Ps --
Foreign exchange rights contracts sold 9,151 43,973
Investment securities rights bought (local currency) 9,394 6
Investment securities rights sold (local currency) 9,412 6
------------ ------------
Total rights 42,817 43,985
------------ ------------
Foreign exchange commitments contracts bought (14,860) --
Foreign exchange commitments contracts sold (9,151) (43,973)
Investment securities commitments bought (local currency) (9,394) (6)
Investment securities commitments sold (local currency) (9,412) (6)
------------ ------------
Total obligations (42,817) (43,985)
------------ ------------
TOTAL FUTURE CONTRACTS -- --
------------ ------------
SWAPS
Foreign exchange right contracts 765,046 1,151,073
Interest rate rights contracts 33,248 121,547
Foreign exchange commitments contracts (729,238) (1,098,591)
Interest rate commitments contracts (32,633) (116,558)
------------ ------------
TOTAL SWAPS 36,423 57,471
------------ ------------
OPTIONS
Foreign exchange call options (18) 86
Foreign exchange put options (111) (1,381)
------------ ------------
TOTAL OPTIONS (129) (1,295)
------------ ------------
TOTAL CUSTOMER ACCEPTANCES AND DERIVATIVES Ps 133,420 Ps 166,395
============ ============
----------
(1) Includes forward contracts known in Colombia as "carrousel transactions",
or "operacion carrousel", which refer to a commitment between several
entities to buy and sell during consecutive periods of time and for fixed
prices and fixed rent title.
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's 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 credit limit granted to the Bank's clients,
there is a portion for derivatives operations. For this reason, the Bank never
carries out a derivatives transaction unless the client has the capacity to
obtain credit from the Bank.
Under the rules of the Superintendency of Finance, the Bank's
derivatives portfolio is marked to market daily. Unrealized gains and losses are
expressed in the statement of operations.
For forward contracts, the average cost of rights and commitments
relating to the purchase of financial instruments is 7.16% with a maturity of
seven days and the average yield from rights and commitments relating to the
sale of financial instruments is 6.67% with an average maturity of two days.
The average yield from rights and commitments relating to the
sale of foreign currency is 2.25% annually with an average maturity of 56 days.
The average yield from rights and commitments relating to the purchase of
foreign currency is 1.40% annually with an average maturity of 48 days.
The average value of hedging portfolio during the years 2005 and
2006 was US$ 3,578 and US$ 4,014 and the average yield was 1.03% and 0.35%,
respectively.
(9) ACCOUNTS RECEIVABLE
Accounts receivable consisted of the following:
2005 2006
--------- ---------
Credit card compensation Ps242,225 Ps210,056
Overnight funds sold 836 1,048
Commissions 17,561 34,843
Sierras del Chico y Chico Oriental 3,462 4,289
Receivables from Entities in intervention process 53,036 --
Sale of BC's Equity investments (1) 27,770 45,200
Renting 727 474
Advances to contractors and honoraries 81,064 124,353
Commitment seller 10,639 10,993
Warehousing services 8,134 10,292
Dividends 1,319 2,826
Treasury operations pending of paid by the customers 20,704 1,193
F-51
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
--------- ---------
Services and properties sells 58,250 27,759
Employee advances 267 367
Securities pending of paid by the issuer ("Bancoldex") 900 --
Deposit security receivable ("Fogafin") 26,167 26,540
Other receivables 68,236 84,580
--------- ---------
TOTAL ACCOUNTS RECEIVABLE 621,297 584,813
Allowance for accounts receivable losses (30,984) (22,215)
--------- ---------
ACCOUNTS RECEIVABLE Ps590,313 Ps562,598
========= =========
The changes in allowance for accounts receivable are as follows:
2004 2005 2006
-------- -------- ---------
Balance at beginning of year Ps15,367 Ps14,840 Ps 30,984
Provision for uncollectible amounts 6,923 25,121 17,621
Charge-offs (2,292) (7,851) (5,573)
Effect of exchange rate -- (163) 557
Reversal of provision (5,158) (963) (21,374)
-------- -------- ---------
Balance at end of year Ps14,840 Ps30,984 Ps 22,215
======== ======== =========
----------
(1) Includes sales of Lab Investment & Logistic and Abocol and affiliate.
(10) PREMISES AND EQUIPMENT
Premises and equipment consisted of the following:
2005 2006
----------- -----------
PREMISES AND EQUIPMENT
Land Ps 65,750 Ps 78,512
Buildings 305,895 321,055
Warehouses 18,352 7,116
Furniture, equipment and fixtures 191,189 212,874
Computer equipment 370,532 441,846
Vehicles 7,231 6,328
Construction in progress 54 18,221
Machinery and equipment 14,956 15,478
Equipment in - transit(1) 210,920 245,478
----------- -----------
TOTAL 1,184,879 1,346,908
Less accumulated depreciation (537,454) (617,947)
Allowance (23,696) (16,239)
----------- -----------
PREMISES AND EQUIPMENT, NET Ps 623,729 Ps 712,722
=========== ===========
----------
(1) Includes goods being imported to be allocated to leasing.
F-52
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Premises and equipment depreciation expense for the years ended
December 31, 2004, December 31, 2005 and December 31, 2006, amounted to Ps
42,832, Ps 79,293 and Ps 95,921 respectively.
(11) OPERATING LEASES
Operating leases consisted of the following:
2005 2006
--------- ---------
OPERATING LEASES
Machinery and equipment Ps 1,989 Ps 5,463
Vehicles 172,745 211,240
Furniture, equipment and fixtures 3,428 3,440
Computer equipment 27,550 24,186
Real goods 1,505 1,505
--------- ---------
TOTAL 207,217 245,834
Rents 4,229 7,459
Less accumulated depreciation (66,169) (84,687)
Allowance (1,303) (1,299)
--------- ---------
OPERATING LEASES, NET Ps143,974 Ps167,307
========= =========
Operating lease depreciation expense for the years ended December
31, 2004, 2005 and 2006, amounted to Ps 4,040, Ps 8,340 and Ps 8,632,
respectively.
(12) PREPAID EXPENSES AND DEFERRED CHARGES
Prepaid expenses and deferred charges consisted of the following:
F-53
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
-------- --------
PREPAID EXPENSES:
Insurance premiums Ps13,677 Ps12,417
Interest 30 11
Other 913 16,072
-------- --------
TOTAL PREPAID EXPENSES 14,620 28,500
-------- --------
DEFERRED CHARGES:
Studies and projects 1,669 1,887
Computer programs 5,971 8,450
Leasehold improvements 1,017 2,994
Deferred taxes non-banking entities 958 714
Stationery and supplies 424 233
Commissions from derivative products -- 744
Loss on valuation of debt securities -- 941
Other 2,239 1,999
-------- --------
TOTAL DEFERRED CHARGES Ps12,278 Ps17,962
-------- --------
TOTAL PREPAID EXPENSES AND DEFERRED CHARGES Ps26,898 Ps46,462
======== ========
(13) OTHER ASSETS
Other assets consisted of the following:
2005 2006
--------- ---------
OTHER ASSETS:
Value added tax deductible and withholding taxes Ps 37,708 Ps 39,426
Investment in Trust 70,764 16,129
Deposits 89,564 147,423
Assets to place in lease contracts 352,079 445,050
Inventory 5,295 5,543
Consortiums 4,727 9,808
Other 3,451 11,886
--------- ---------
TOTAL OTHER ASSETS Ps563,588 Ps675,265
========= =========
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 movements in goodwill are as follows:
2004 2005 2006
--------- --------- ---------
Balance at beginning of year Ps 99,910 Ps 73,607 Ps 50,959
Additions(1) -- -- 15,019
Amortization (26,303) (22,648) (25,814)
--------- --------- ---------
Balance at end of year Ps 73,607 Ps 50,959 Ps 40,164
========= ========= =========
----------
(1) Corresponds to goodwill derived from acquisition of Factoring Bancolombia
in May 2006.
(15) FORECLOSED ASSETS
Foreclosed assets consisted of the following:
2005 2006
---------- ----------
Equity securities Ps 52,273 Ps 54,202
Real estate 179,498 131,816
Other assets 4,765 6,986
---------- ----------
TOTAL 236,536 193,004
Allowance (205,176) (174,393)
---------- ----------
TOTAL FORECLOSED ASSETS, NET Ps 31,360 Ps 18,611
========== ==========
The following is a summary of equity securities classified as
foreclosed assets:
2005 2006
-------- --------
Urbanizacion Sierras del Chico Ltda Ps11,567 Ps11,703
Chico Oriental Numero 2 Ltda. 14,053 14,202
Pizano S.A. 3,663 3,663
Convertible Securities Pizano S.A. 3,221 3,221
Lineas Agromar trust 1,547 1,399
Emcocables 2 Santa Ana trust 1,752 --
Pagos Procampo trust 7,044 7,044
Textiles Fabricato 297 --
Conconcreto S.A. 2,622 2,622
Holguines Cali 1,485 1,485
Coltejer -- 2,674
Lote2C Chisa trust 961 3,511
Other 4,061 2,678
-------- ---------
TOTAL Ps52,273 Ps54,202
======== =========
F-55
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The changes in allowance for foreclosed assets are as follows:
2004 2005 2006
---------- --------- ---------
Balance at beginning of year Ps 135,090 Ps140,865 Ps205,176
Balance at beginning of the year (Factoring Bancolombia) -- -- 2,370
Balance at beginning of year (Conavi, Corfinsura and subsidiaries) --
-- 65,814
Provision 23,002 44,665 22,037
Charge-offs -- (772) (978)
Reversals of provisions (17,227) (45,445) (54,298)
Reclassifications -- 52 91
Effect of changes in exchange rates -- (3) (5)
---------- --------- ---------
Balance at the end of year Ps 140,865 Ps205,176 Ps174,393
========== ========= =========
(16) REAPPRAISAL OF ASSETS
The following table describes reappraisals of assets:
2005 2006
---------- ----------
Asset revaluations, net Ps 330,915 Ps 348,364
Less: proportional equity revaluations (196,159) (179,651)
Less: minority interests (24,277) (28,020)
---------- ----------
TOTAL EQUITY REVALUATIONS Ps 110,479 Ps 140,693
========== ==========
The proportional equity revaluations refer to the acquisition of
investment in Banca de Inversion S.A. (formerly Colcorp S.A), Almacenar S.A.,
Valores Bancolombia S.A. (formerly Suvalor S.A.), Leasing Bancolombia S.A.
(formerly Leasing Colombia), Fiduciaria Bancolombia S.A. (formerly Fiducolombia
S.A.), Sufinanciamiento S.A., Inversiones IVL S.A, Multienlace S.A., and some of
the affiliates of the entities mentioned above, calculated on the 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, are
summarized as follows:
2005 2006
----------- -----------
FOREIGN BANKS
Short-term Ps1,381,696 Ps 679,105
Long-term 323,772 387,740
----------- -----------
TOTAL Ps1,705,468 Ps1,066,845
=========== ===========
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 3.62% and 5.59% in 2005 and 2006, respectively.
For long-term interbank borrowings, the average interest rate was
3.70% and 5.76% in 2005 and 2006, respectively, and maturities at December 31,
2006 were as follows:
2006
-----------
2007 Ps 924,804
2008 82,881
2009 10,332
2010 11,394
2011 37,434
-----------
Ps1,066,845
===========
(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 these 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 on its normal credit criteria. If
the criteria are met, the Bank applies to the appropriate government agency for
funding. The government agency reviews the loan application to determine
compliance with the policy and 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 maturity as the borrowings from the agencies.
Borrowings from domestic development banks received from certain
Colombian government agencies consisted of the following:
2005 2006
----------- -----------
Fondo para el Financiamiento del Sector Agropecuario Ps 383,904 Ps 429,175
Banco de Comercio Exterior de Colombia ("Bancoldex") 957,511 732,617
Findeter 612,297 753,200
Other 268,371 534,589
----------- -----------
TOTAL Ps2,222,083 Ps2,449,581
=========== ===========
Interest rates on borrowings from domestic development banks
averaged 7.03% and 6.58% in 2005 and 2006, respectively, in local currency and
5.12% and 6.47% in 2005 and 2006, respectively, in foreign currency. Maturities
at December 31, 2006 were as follows:
2007 Ps 530,671
2008 432,245
2009 423,958
2010 376,902
2011 364,530
2012 and thereafter 321,275
-----------
TOTAL Ps2,449,581
===========
(19) OTHER LIABILITIES
Other liabilities consisted of the following:
2005 2006
--------- --------
Unearned income Ps 15,373 Ps20,579
Accrued severance Law 50, net of advances 14,453 17,269
Accrued severance pre-Law 50, net of advances to employees
of Ps 11,354 and Ps 11,360 in 2005 and 2006, respectively 13,259 13,553
Accrued payroll and other severance benefits 37,707 43,649
Accrued pension obligations net of deferred cost 88,682 99,085
Negative goodwill 9,959 7,137
Deferred interest on restructured loans 56,974 50,549
Deferred tax liability 100,353 40,683
F-58
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
--------- ---------
Advances 103,213 75,104
Other 19,995 20,089
--------- ---------
TOTAL Ps459,968 Ps387,697
========= =========
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 law give the right to each employee hired before
January 1, 1991 to a severance payment in an amount equal to such employee's
last monthly salary multiplied by the number of years of 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 that 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 the pension obligation for the majority of the Bank's employees.
Pension obligation
The following is an analysis of the Bank's pension obligations:
PROJECTED
PENSION
LIABILITY DEFERRED COST NET
--------- ------------- ---------
BALANCE AT DECEMBER 31, 2003 Ps 79,438 Ps (860) Ps 78,578
========= ========= =========
Adjustment per actuarial valuation 17,064 (17,064) --
Benefits paid (9,364) -- (9,364)
Pension expense -- 17,139 17,139
--------- --------- ---------
BALANCE AT DECEMBER 31, 2004 Ps 87,138 Ps (785) Ps 86,353
========= ========= =========
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
========= ========= =========
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
--------- ------------- ---------
Benefits paid (11,753) -- (11,753)
Pension expense 22,156 -- 22,156
--------- --- ---------
BALANCE AT DECEMBER 31, 2006 Ps 99,085 -- Ps 99,085
========= === =========
In compliance with Colombian law, the present value of the
obligation for pensions was determined on the basis of actuarial calculations.
The significant assumptions used in the actuarial calculations were the
following:
2004 2005 2006
----- ----- -----
Discount rate 21.23% 19.06% 16.53%
Future pension increases 13.72% 12.01% 10.55%
===== ===== =====
(20) LONG TERM-DEBT
Companies are authorized by the Superintendency of Finance to
issue or place ordinary bonds or general collateral bonds. Every time a new
issuance is planned, the Superintendency of Finance must be informed of the
total value, series, number of bonds, date of issuance, term and frequency of
payment, the corresponding return and the place and form of payment of said
return as duly provided for by applicable legislation.
The bonds issued are recorded in the National Register of
Securities for all legal purposes 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.
The scheduled maturities of long term-debt at December 31, 2006
were as follows:
2007 Ps 484,322
2008 260,428
2009 255,121
2010 108,995
2011 159,990
2012 and thereafter 33,846
-----------
Ps1,302,702
===========
F-60
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Long-term debt consists of bonds issued by Bancolombia
(unconsolidated), Leasing Colombia S.A., Fundicom S.A., Sufinanciamiento S.A.
and by Renting Colombia S.A. bearing interest at the following rates:
BANCOLOMBIA S.A.
----------------------------------
Issue Date Maturity Date Rate
---------- ------------- -----
1997(1) 03-Sep-07 11.48%
2000(1) 30-Nov-02 14.15%
2001(1) 04-Apr-07 8.41%
2001 20-Dec-10 9.24%
2002(1) 21-Jun-10 8.24%
2004 11-Feb-07 8.25%
2004 11-Feb-07 8.68%
2004 11-Feb-09 9.07%
2004 11-Feb-09 9.09%
(1) Each of these issuances has a different nominal rate; for this reason
annual rates showed above are calculated based on the interest accrued in
2006.
LEASING BANCOLOMBIA S.A.
------------------------------------------------------------------------------------
Issue Date Maturity Date Rate
---------- -------------------- ------------------------------------------------
2001 From 18 to 60 months Up to an annual rate of the DTF or IPC plus 3%
2002 From 60 to 72 months Up to an annual rate of the DTF or IPC plus 2.7%
2003 From 18 to 60 months Up to an annual rate of DTF or IPC plus 5.67%
2004 From 36 to 60 months Up to an annual rate of DTF or IPC plus 4.5%
2006 From 18 to 60 months Up to an annual rate of DTF or IPC plus 5.05%
FUNDICOM S.A.
---------------------------------
Issue Date Maturity Date Rate
---------- ------------- ----
10-Aug-03 10-Aug-15 IPC
SUFINANCIAMIENTO S.A.
------------------------------------
Issue Date Maturity Date Rate
---------- ------------- -------
11-Mar-04 11-Mar-14 IPC + 2%
06-Dec-05 06-Dec-15 IPC + 2%
30-Mar-06 30-Mar-16 IPC + 2%
08-Sep-06 08-Sep-16 IPC + 2%
05-Oct-06 05-Oct-16 IPC + 2%
07-Nov-06 07-Nov-16 IPC + 2%
21-Dec-06 21-Dec-16 IPC + 2%
F-61
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
RENTING COLOMBIA S.A.
----------------------------------------
Issue Date Maturity Date Rate
---------- ------------- -----------
30-Aug-00 30-Aug-07 IPC + 9.49%
27-Jan-03 27-Jan-07 DTF + 3%
27-Jan-03 28-Jan-08 IPC + 7.25%
27-Jan-03 27-Jan-09 IPC + 6.7%
21-Sep-06 21-Sep-09 DTF + 2.80%
21-Sep-06 21-Sep-11 IPC + 5.38%
----------
DTF: Average weekly rate of Time Deposits (issued by commercial and mortgage
banks and commercial finance companies) with a maturity of 90 days.
IPC: Consumer price index
(21) ACCRUED EXPENSES
Accrued expenses consisted of the following:
2005 2006
--------- ---------
Income tax payable Ps 41,125 Ps 8,077
Fines and sanctions (1) 65,594 86,764
Labor obligations 9,643 12,115
Other 14,497 13,028
--------- ---------
TOTAL Ps130,859 Ps119,984
========= =========
----------
(1) See Note 26(d).
For 2004, 2005 and 2006 the statutory income tax was 37% for the
Bank unconsolidated, Leasing Bancolombia S.A., Banca de Inversion S.A. and
Fiduciaria Bancolombia S.A. according to an agreement of tax stability and 38.5%
for the other Subsidiaries, respectively.
The following is a reconciliation of taxable income before income
taxes:
2004 2005 2006
---------- ----------- ----------
Income before income taxes Ps 817,488 Ps1,224,396 Ps 924,409
Adjustments for consolidation purposes, net 209,987 37,032 159,103
Difference between net operating loss
carry-forwards and presumed income (134,715) 8,149 20,879
Non-deductible provisions, costs and expenses 176,454 130,528 177,966
Non-taxable or exempt income (350,338) (364,663) (636,915)
Difference between monetary correction for
tax purposes and for financial reporting purposes (47,484) (38,028) (62,776)
Excess of accrued income over valuation income (20,905) (130,265) 6,652
Amortization of excess of presumed income over
ordinary income and amortization of
net operating loss carry forwards (9,242) (94,562) (102,352)
F-62
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005 2006
--------- ---------- ---------
Valuation derivatives effect (11,788) (100,495) (33,075)
Other -- (156,122) (87,535)
--------- ---------- ---------
Taxable income Ps629,457 Ps 515,970 Ps366,356
--------- ---------- ---------
Statutory tax rate 37.75% 34.69% 37.21%
--------- ---------- ---------
Estimated current income tax Ps237,620 Ps 178,992 Ps136,307
Deferred income tax expense 1,190 98,523 38,573
--------- ---------- ---------
TOTAL Ps238,810 Ps 277,515 Ps174,880
========= ========== =========
Income taxes for the years ended December 31, 2005 and 2006 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 tables present, for the fiscal years cited, the
estimated amortizations of losses that can be recorded and the excess of
presumed income over ordinary income:
FISCAL LOSSES TO AMORTIZE
TODO UNO
FUNDICOM S.A. COLOMBIA S.A. TOTAL
------------- ------------- -------
2007 Ps -- Ps -- Ps --
2008 1,565 -- 1,565
2009 -- 182 182
------- ----- -------
PS1,565 PS182 PS1,747
======= ===== =======
EXCESS OF PRESUMED INCOME OVER ORDINARY INCOME
BANCA DE INMOBILIARIA FUNDICOM ALMACENAR RENTING
INVERSION S.A. BANCOL S.A. S.A. S.A. COLOMBIA S.A TOTAL
-------------- ------------ -------- --------- ------------ --------
2007 Ps -- Ps -- Ps -- Ps -- Ps -- Ps --
2008 -- 65 934 -- -- 999
2009 4,436 104 559 -- 1,796 6,895
2010 5,286 106 -- 1,583 2,168 9,143
2011 7,837 -- -- 2,327 2,658 12,822
-------- ----- ------- ------- ------- --------
PS17,559 PS275 PS1,493 PS3,910 PS6,622 PS29,859
======== ===== ======= ======= ======= ========
F-63
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(22) SUBSCRIBED AND PAID-IN CAPITAL
Subscribed and paid-in capital consisted of the following:
2004 2005 2006
----------- ------------- -------------
AUTHORIZED SHARES 670,000,000 1,000,000,000 1,000,000,000
=========== ============= =============
ISSUED AND OUTSTANDING:
Common shares with a nominal value of 500 pesos 398,259,608 509,704,584 509,704,584
Preference shares with a nominal value of 500 pesos 178,435,787 218,122,421 218,122,421
=========== ============= =============
A partial amendment to the Bank's by-laws, which was recorded in
the Commercial Registry of the Medellin Chamber of Commerce on July 26, 2005,
increases the Bank's authorized capital from Ps 335,000 to Ps 500,000 divided
into 1,000,000,000 shares of a par value of 500 pesos each, which may be of the
following classes: (i) common shares, (ii) privileged shares, and (iii) shares
with preferred dividend and no voting rights ("preferred shares"). Pursuant to
Article 6 of the by-laws, all shares issued shall have the same nominal value.
As of December 31, 2006, Bancolombia had 509,704,584 common
shares and 218,122,421 preferred shares outstanding and a capital stock of Ps
430,684 divided into 727,827,005 shares. No privileged shares have been issued
by Bancolombia.
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 to compensate for any losses that affected its
capital.
- second, 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;
- third, payment of the minimum dividend on the preferred shares;
and
- fourth, 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
F-64
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
of directors and President and may, subject to further reserves
required by the by-laws, be distributed as dividends.
Preferred shares 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 share cannot be
less than the dividend per share paid on ordinary share (and will be increased
if a higher dividend on ordinary share is declared). The Bank does not recognize
accumulation of dividends to holders of preferred shares.
Preferred shares grant 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, 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 preferred shares are not entitled to vote for the
election of directors or to influence the Bank's management policies.
F-65
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
A foreign capital institutional investment fund in Colombia has
been formed 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.
Pursuant to Colombian law, 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, the calculation of capital adequacy
must incorporate market risk in addition to the credit risk. This risk for
capital adequacy requirement was covered 100% in 2005 and 2006. Calculations are
made each month on an unconsolidated basis and quarterly on consolidated
accounts which include the Bank's financial Subsidiaries in Colombia and abroad.
On December 2006, the issuance of Decree 4648 introduced
modifications to Decree 1720 of 2001 which established new rules for calculating
currency obligations in the additional equity of credit institutions.
The specific requirements relating to capital adequacy for the
Bank's subsidiaries, are as follows:
- Bancolombia Panama: Pursuant to the Acuerdo 6, 1998, as amended,
issued by the Superintendency of Banking of Panama, Bancolombia
Panama has to comply with the technical capital ratio required by
the Superintendency of Finance of Colombia to its parent company
in a consolidated way with financial subsidiaries (as set forth
in Decree 1720 of 2001, as amended) in the way describe above;
- Suleasing Internacional: This subsidiary has to comply with
capital adequacy requirements for Colombian financial
institutions (as set forth in Decree 1720 of 2001, as amended) in
the way describe above; and
- Bancolombia Puerto Rico Internacional, Inc.: According to
requirements established by the Oficina del Comisionado de
Instituciones Financieras ("OCIF") in Puerto Rico, total
shareholder's equity of Bancolombia Puerto Rico has to amount at
least 8% of total assets excluding demand deposits.
As of December 31, 2005 and 2006 the Bank's capital adequacy
ratio was 10.93% and 11.05%, respectively.
F-66
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(23) APPROPRIATED RETAINED EARNINGS
Pursuant to Colombian law, 10% of the net income of the Bank and
its Colombian subsidiaries in each year must be appropriated through a credit to
a "legal reserve fund" until its balance is equivalent to at least 50% of the
subscribed capital. This legal reserve may not be reduced to less than the
indicated percentage, except to cover losses in excess of undistributed
earnings.
Appropriated retained earnings consist of the following:
2004 2005 2006
----------- ----------- ------------
Legal reserve Ps 638,716 Ps 886,159 Ps 1,405,733
Additional paid - in capital 107,359 268,005 268,005
Other reserves 264,406 611,834 639,869
----------- ----------- ------------
TOTAL Ps1,010,481 Ps1,765,998 Ps2,313,607
=========== =========== ============
In addition, paid-in capital of Ps 107,359 at December 31, 2004,
Ps 268,005 at December 31, 2005 and Ps 268,005 at December 31, 2006 was recorded
as part of the legal reserve, as required by the Superintendency of Finance.
(24) DIVIDENDS DECLARED
The Bank's shareholders declares and pays common share dividends
based on the adjusted net income from previous year, The dividends were paid as
indicated below:
2005 2006 2007
------------------ ------------------- -------------------
Preceding year's
unconsolidated earnings Ps430,807 Ps737,389 Ps582,365
376 pesos per 508 pesos per 532 pesos per share
share paid in four share paid in four payable in four
quarterly quarterly quarterly
installments of 94 installments of 127 installments of 133
pesos per share pesos per share pesos per share
Dividends in cash from April 2005 on from April 2006 on from April 2007 on
398,259,608 and 509,704,584 and 509,704,584 and
178,435,787 218,122,421 218,122,421
common and common and common and
preferred shares, preferred shares, preferred shares,
respectively. respectively. respectively.
F-67
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006 2007
------------------ ------------------- -------------------
Total dividends declared Ps216,838 Ps369,736 Ps387,204
Dividends payable at
December 31 (1) Ps 73,478 Ps 98,340
========= =========
----------
(1) The amount of the dividends payable at December 31, is recorded as accounts
payable in the Consolidated Balance Sheets.
(25) MEMORANDUM ACCOUNTS
Memorandum accounts were composed of the following:
2005 2006
------------ ------------
TRUST:
Investment trusts Ps31,845,679 Ps34,886,946
COMMITMENTS:
Unused credit card limits 2,287,359 2,893,839
Civil demands against the Bank 2,148,018 858,644
Issued and confirmed letters of credit 493,220 1,053,601
Uncommitted lines of credit 549,161 751,304
Bank guarantees 347,556 780,280
Approved credits not disbursed 408,949 660,558
Nation account payable (546 law) 105,459 34,862
Other 12,201 194,684
------------ ------------
TOTAL Ps38,197,602 Ps42,114,718
============ ============
OTHER MEMORANDUM ACCOUNTS:
2005 2006
------------ ------------
MEMORANDUM ACCOUNTS RECEIVABLE:
Tax value of assets Ps25,950,846 29,028,917
Assets and securities given in custody 6,837,310 3,813,482
Assets and securities given as a collateral 2,209,380 2,163,335
Negotiable investments in debt securities 5,199,740 2,401,899
Written-off assets 935,438 1,023,745
Quotas of leasing to receive 3,030,656 4,219,686
Investments held to maturity 1,113,369 1,171,055
Adjustments for inflation of assets 181,512 166,941
Accounts to receive yields trading investments
in debt titles 214,358 139,763
Investments available for the sale in debt titles 1,587,299 1,641,970
Remittances sent for collection 28,869 24,632
Amortized debt securities investment 2,209,254 614,528
Other memorandum account receivable 2,998,143 4,134,808
------------ ------------
TOTAL Ps52,496,174 Ps50,544,761
------------ ------------
F-68
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
------------- ------------
MEMORANDUM ACCOUNTS PAYABLE:
Assets and securities received as collateral Ps 17,714,293 20,256,982
Qualification commercial loans 12,113,735 16,230,741
Assets and securities received in custody 1,867,850 6,030,005
Tax value of shareholders' equity 4,333,289 4,428,133
Qualification consumer loans 2,449,782 3,586,540
Adjustment for inflation of equity 897,280 912,418
Qualification small business loans 116,508 92,237
Merchandise in owned warehouses 61,545 85,402
Merchandise in third-party warehouses 48,048 22,376
Underwriting 25,000 25,000
Qualification financial leasing 2,684,627 3,593,083
Qualification operating leasing 145,277 168,606
Qualification mortgage loans 1,415,812 1,336,293
Other memorandum account payable 4,028,713 3,653,410
------------- -------------
TOTAL Ps 47,901,759 Ps 60,421,226
------------- -------------
TOTAL MEMORANDUM ACCOUNTS Ps138,595,535 Ps153,080,705
============= =============
(26) COMMITMENTS AND CONTINGENCIES
For the years ended December 31, 2005 and 2006, the Bank
registered allowances for probable contingencies of Ps 65,594 and Ps 86,764
respectively. The detail of the contingencies was as follows:
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, Fogafin
made a commitment to assume the cost of contingent liabilities resulting from
events that occurred before the date when the stock was sold, which should be
claimed within the five (5) subsequent years. Fogafin's guarantee covers eighty
percent (80%) of the first Ps 10,000, not considering 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 Fogafin all the rights that it then had in Sierras del
Chico Ltda. and Chico Oriental Numero Dos Ltda. for no less than their 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 issued.
F-69
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 and 2006, the civil contingencies covered by
the guarantee amounted to approximately Ps 11,167 and Ps 957, respectively, with
allowances at the same dates amounting to Ps 957. Labor contingencies amounted
to Ps 305 and Ps 345, and had allowances of Ps 153 and Ps 173, respectively.
B) LEGAL PROCESSES
At December 31, 2005 and 2006, other than the litigation
discussed under (a) above, there were labor-related claims against the Bank
amounting to approximately Ps 11,885 and Ps 14,506, respectively (the final
result of such litigations is not predictable due to the nature of the
obligations). The allowances for contingencies on those dates amounted to Ps
5,938 and Ps 7,479, respectively and were recorded as accrued expenses in the
consolidated balance sheets.
At December 31, 2005 and 2006, there were ordinary civil
lawsuits, group actions, and civil actions within criminal and executive
proceedings against the Bank with total claims for approximately Ps 369,452 and
Ps 733,525, respectively and with allowances on the same dates of Ps 16,729 and
Ps 18,889, respectively.
Allowances are recorded based on the likelihood of the losses and
when proceedings are ruled in the first instance against the Bank or based on
the opinion of management the proceedings are not likely to result in an
unfavorable ruling.
At December 31, 2006, the Superintendency of Finance has imposed
fines on the Bank amounting to Ps 1,474, for which complete allowances have been
recorded.
At December 31, 2006, Bancolombia (unconsolidated) contingencies
were:
ACTUAL
EXPOSURE AT
INITIAL DECEMBER 31,
PROCESS EXPOSURE 2006 ALLOWANCE LIKELIHOOD
------------------------------------------------------------------ ---------- ------------ --------- ----------
Arbitration process Jaime Gilinski and Others against
Bancolombia and some of its administrators US$675,000 Ps 45,192 Ps22,595 Probable
Civil Lawsuit from Jaime Gilinski and Others Ps 357,000 Ps357,000 -- Remote
Felix Gaitan Cendales and others. Civil Circuit Court
29 of Bogota 187,045 187,045 -- Remote
Inversiones C.B. S.A. 12,468 40,806 -- Remote
Class action Luis Alberto Duran (1) 421,080 26,871 26,871 Probable
Popular action Carlos Julio Aguilar and Other
Administrative Tribunal of Valle 25,232 25,232 958 Probable
Rodrigo Garavito and others against Bancolombia
Administrative Tribunal of Cundinamarca 20,000 20,000 -- Remote
Editorial Oveja Negra Ltda. and Jose Vicente Katerain Velez 10,240 9,635 -- Remote
Murgueitio and Santander 8,000 8,000 -- Remote
Invico Ltda. Processes. Civil Court 9 of Bogota 5,000 6,601 -- Remote
F-70
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
ACTUAL
EXPOSURE AT
INITIAL DECEMBER 31,
PROCESS EXPOSURE 2006 ALLOWANCE LIKELIHOOD
------------------------------------------------------------------ ---------- ------------ --------- ----------
Costrucc.Rojas Jimenez & CIA. S. EN C. 6,277 6,277 628 Probable
Ordinary process Gloria Amparo Zuluaga Arcila 1,400 5,784 -- Remote
Julio Enrique Olaya. Civil Circuit Court 14 of Bogota 1,523 5,594 5,594 Probable
Constructodo against Corvivienda. Civil Circuit Court 18 of Bogota 3,500 5,070 5,000 Probable
Others 86,069 23,614 Probable
--------- --------
TOTAL 835,176 85,260
----------
(1) The allowance correspond to principal and interest
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 asset; Contingency guarantee, former Banco de Colombia:
On March 30, 2006, the arbitration proceedings initiated by the
Bank 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 a favorable award. The Bank had pursued various claims in
these proceedings with a view to enforce a trust guarantee that was set up by
the sellers in order to cover any contingencies arising with the bank thus sold.
The value of this guarantee now totals US$ 30,000 (approximately Ps 67,164 at
December 31, 2006). The defendant was ordered to pay to the Bank Ps 63,216,
including monetary correction and interest.
Jaime Gilinski challenged this award, in an annulment action held
before the Superior Tribunal of Bogota. The possibilities of success with this
action have been determined to be remote, given its inherent technical
deficiencies and because the arguments on which the action is based do not
challenge the reasons on which the Arbitration Tribunal based its award. At
December 31, 2006, the Bank had not posted any income relating to this award on
its financial statements, nor had it received any payments with regard to such.
F-71
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Contingency liability; Criminal Investigation:
On December 26, 2003, the Special Unit Attorney General's Office
for Crime Against Public Administration formally rejected grounds for a criminal
investigation against Jorge Londono Saldarriaga and Federico Ochoa Barrera,
President and Vice-president of the Bank, 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 Attorney
General's Office Delegated Unit before the Supreme Court of Justice on July 8,
2004.
The Attorney General'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, the Gilinskis filed an action for the protection of
rights against the Attorney General's Office with the purpose of reopening the
criminal investigation based on the argument that the evidence gathered abroad
was not taken into account. This action was rejected on two occasions by the
Supreme Court of Justice and was subsequently selected for review by the
Constitutional Court, which ordered the investigation to be reopened so as to
analyze the evidence in question. This decision, made by the Constitutional
Court ("Sala de Revision"), is subject to an annulment action that is being
heard by the Constitutional Court ("Sala Plena").
Notwithstanding the fact that the evidence presented did not
produce any additional elements to be considered, the Attorney's Office in the
first instance, modified the initial particulars of the investigation issuing
the following:
- An order for a criminal judge to review the conduct of the Bank's
officers, Messrs. Londono Saldarriaga and Ochoa Barrera.
- An order for the house arrest of the aforementioned officers as a
preventive measure.
- An order for the embargo of all goods and property belonging to
the officers involved.
- An order for the Superintendency of Finance to dismiss these
officers from their positions at the Bank.
- An order for an investigation into the conduct of the members of
the board of directors of Banco Industrial Colombiano at that
time.
- An order for an investigation into the conduct of the officers of
the former Colombian Superintendencies of Banking and Securities
(now Superintendency of Finance) and also the Central Bank.
Since the officers of the Bank consider that this ruling contains
arguable statements and decisions, they filed an appeal, amongst other actions,
in order to challenge said ruling. As a result, the effects of this ruling still
remain suspended to date.
A few days after issuing this ruling, on January 10, 2007, the
Delegated Attorney's Office No. 8 officially revoked the house arrest ordered
with regard to Messrs. Londono and Ochoa.
The Bank's administration considered the contingency that this
process represents as remote, based on the following:
F-72
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
- The decision on the part of the Attorney's Office is not based on
evidence presented in the prior proceedings, and disregards the
Constitutional Court's order to grant the protection of rights,
violating due process and ignoring the principles of res
judicata.
- This decision does not affect the stability and solvency of the
Bank's equity and it is improbable that the Bank will incur any
financial responsibility.
- The Bank's conduct in the acquisition and merger process has been
thoroughly analyzed in different judicial and administrative
venues, including the Supreme Court of Justice, the Council of
State, the Contentious Administrative Tribunal of Cundinamarca,
the Superior Tribunal of Bogota, the Superior Tribunal of
Medellin and three Arbitration Tribunals, as well as the former
Superintendency of Banking and the Superintendency of Securities
(now known as the Colombian Superintendency of Finance) and was
absolved, mostly of the same charges that the Attorney's Office
recently formulated against the Bank's officers, in contradiction
of all those rulings granted in the Attorney's Office previous
first and second instances.
Arbitration
On May 16, 2006, an award was issued in the arbitration
proceedings filed by Jaime and Isaac Gilinski and certain foreign companies,
against the Bank, its board of directors in 1997, its President, Mr. Jorge
Londono Saldarriaga and its Vice-President of Finance, Mr. Jaime Velasquez
Botero, to resolve certain disputes relating to the acquisition of the former
Banco de Colombia on the part of BIC and the subsequent merger of these two
entities. The cause of action consist of the declaration of nullity (ineficacia)
of the BIC's acquisition of a majority share in the capital of the former Banco
de Colombia. This involved certain other additional claims, which together
amounted to US$ 675,000.
The Arbitration Tribunal, made up of Messrs. Jose Alejandro
Bonivento Fernandez, Cesar Hoyos Salazar and Jorge Santos Ballesteros ruled in
favor of the Bank with regard to the majority of the charges involved. However,
the Tribunal determined that the Bank had to pay an indemnification of Ps 15,360
that, together with damages for loss of profit, amounted to Ps 40,570, since it
ruled that the Bank had not complied with certain secondary obligations, with
regard to the development of the capitalization of 1998 derived from the
Purchase and Sale Commitment Agreement signed between the plaintiffs and the
former BIC on August 25, 1997.
The Arbitration Tribunal rejected all claims made against the
Bank's officers and exonerated them from all responsibility, ordering the
Gilinski family at the same time to pay the cost of these proceedings.
Against this award, the Bank filed an annulment action before the
Superior Tribunal of Bogota on June 7, 2006, which is currently being heard.
Although the annulment action is supported by objective arguments, the
contingency with regard to this process is considered probable. Consequently,
the Bank has set up a provision of Ps 22,595, while a definite decision is
given.
F-73
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
These arbitration proceedings came as a consequence of an order
given by the United States Court for the Southern District of New York where the
claim was filed against the Bank, its officers and some of its executives in
March 1999 and which was suspended while the arbitration proceedings agreed upon
by the parties were duly conducted in Colombia. The plaintiffs requested the
District Court to reopen the process, arguing that the Arbitration Tribunal in
Colombia did not rule on all the charges presented.
On February 28, 2007, the United States Court for the Southern
District of New York dismissed the complaint of the sellers of the former Banco
de Colombia and based its ruling on the principle of res judicata.
The District Court also determined that the arbitral tribunal had
ruled on the merits of all the claims, and rejected the liability of the Bank
and its managers. On March 23, 2007, the plaintiffs filed a notice of appeal of
this decision.
Class Action Luis Alberto Duran Valencia
As of December 31, 2006, the decision of the Superior Tribunal of
Bogota was still pending with respect to the special appeal for annulment filed
by the Bank. The appeal seeks to review the decision of the arbitration tribunal
previously convened by the class action filed by Luis Alberto Duran Valencia and
other shareholders of the former Banco de Colombia.
The appeal solely seeks to declare null and void the portion of
the award that is questioned, since the award carries a res judicata status with
respect to the rulings regarding the rest of the claims.
Although the Bank believes that charges proposed in support of
the appeal have a solid and objective basis, this contingency is considered to
be probable.
Accordingly, the Bank has set up a provision of Ps 26,871, while
a definite decision is given.
Popular Action Maximiliano Echeverri M
In 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 of Cundinamarca, a final ruling was
pronounced on August 10, 2005, rejecting the claims of the plaintiff.
The decision was upheld by the Third Section of the Council of
State on June 7, 2006 in its ruling on an appeal filed by the plaintiff. The
plaintiff filed an annulment action, which is still pending.
The contingency with regard to this action is considered remote.
F-74
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
D) NATIONAL TAX AND CUSTOMS AGENCY ("DIAN")
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 1996. The Medellin City
Council, by means of Settlement Review Note No. 586 dated May 22, 1998, modified
the 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 since it believed that the 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 359 was set up for this tax contingency, which is
considered probable.
Income and complementary taxes corresponding to 1996 - Conavi
On April 11, 1997, Conavi filed a tax return for the fiscal year
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 corresponding
articles set forth in the Tax Code. After a thorough discussion, the 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
before the Administrative Tribunal of Antioquia, which 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 probable.
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 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 Finance to the Medellin City
Council. The Municipal Tax Division notified Conavi of a special requirement,
which increased Conavi's tax base by Ps 233 corresponding to income from other
towns as well as Ps 45,981 corresponding to the value of nontaxable monetary
correction. Subsequently the Division accepted Conavi's explanations regarding
the increase in the tax base but maintained its position with regard to
tax-exempt monetary correction and issued a Settlement Review Note. Conavi filed
a motion to annul the decision. The Administrative Tribunal of Medellin
abstained from hearing the motion. Conavi then filed an appeal to be heard by
the Council of State. The Council of State, by its decision dated October 25,
2006, revoked the Tribunal's ruling and rejected Conavi's claims.
A provision of Ps 444 was set up for this tax contingency, which
is considered probable.
F-75
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
Currently, this case is in the discovery stage. A provision of Ps
99 was set up for this tax contingency, which is considered probable.
Financial Flows Tax (GMF)
At December 31, 2005, the Bank had received from the DIAN 39
special notifications formally advising of a tax due amounting to Ps 18,113 for
the same number of weeks in 2003. The DIAN requested a change in the Bank's
weekly tax returns corresponding to the Financial Flows Tax (4x1000) with regard
to repos, drafts and foreign exchange operations carried out by the Bank with
its customers. In 2006 new notifications and official settlement reviews were
issued for a total of Ps 124,082 which are still under discussion; this amount
includes Ps 47,724 corresponding to a higher tax value and Ps 76,358
corresponding to a fine for lack of precision in the information.
Based on the arguments presented in different stages of the
inspection process, the Colombian Tax Authorities issued decisions or extended
requirements recognizing the Bank's arguments with regard to repo and foreign
exchange reimbursement operations. The corresponding correction was ordered on
the tax returns for purchases of foreign exchange that were paid for in cash by
the Bank. Additionally, the fine for lack of precision in the information was
declared inappropriate.
The total amount paid for the aforementioned proceedings for 2006
amounted to Ps 14,842, with Ps 1,294 still pending. In order to provide for this
tax contingency a provision was set up on December 31, 2006 for Ps 1,294, this
being considered probable.
Taxes Collection DIAN & DDI
At December 31, 2005, the DIAN and the DDI (Direccion Distrital
de Impuestos de Bogota, District Tax Direction of Bogota) have imposed fines on
the Bank amounting to Ps 3,923 for tax collection. The Bank has filed the
pertinent appeals and legal actions and has made provisions in the amount of Ps
2,219 for such fines. This contingency is considered probable.
FIDUCIARIA BANCOLOMBIA S.A.
Executive proceedings have been filed against the Bank's Trust
subsidiary (Fiduciaria Bancolombia S.A.), which in the opinion of the management
are not likely to result in an unfavorable ruling or to negatively affect the
Trust Company.
A. 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
(now Fiduciaria Bancolombia S.A.) as trustee in the guarantee mercantile trust
agreement entered into on December 1, 1993, with Gallego Inmobiliaria S.A. and
the appraisal of the property made by Vector (appraisal company).
F-76
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Two of the aforementioned proceedings were terminated due to the
statue of limitations. However, on December 11, 2003, a new ordinary proceeding
was initiated against Fiducolombia (currently Fiduciaria Bancolombia S.A.),
following a legal action filed during the month of September 2003. The Circuit
Civil Court Nine ordered all of the proceedings to be consolidated into the
Tarazona Bermudez Proceeding, and a ruling in the first instance is currently
pending.
The plaintiffs claim amounts to approximately Ps 718.
Based on the facts established in the proceedings, management
believes that there will be no liability.
This proceeding 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., pursuant to protocol relationship
in Annex No. 1.
B. Invico Ltda. has a suit pending against the Bank and
Fiducolombia S.A. (currently Fiduciaria Bancolombia S.A.) in Civil Circuit Court
6 of Bogota. The plaintiff seeks a ruling declaring that the Bank and
Fiducolombia S.A. (now Fiduciaria Bancolombia S.A.) must exercise the alternate
right contained in Article 1948 of the Civil Code, in reference to the land lot
denominated "La Granjita", pursuant to the trust mandate. The claims amounted to
Ps 4,000. On January 17, 2002, the court issued a ruling dismissing an exception
that was filed and ordered the filing party to pay costs. At present, this case
is in the discovery stage and the Trust Company is waiting for the opinion of
the expert appointed.
C. With regard to the "Santa Maria de La Calera" Trust there are
7 ordinary proceedings initiated before different Courts in which the plaintiffs
are seeking the resolution of the real estate sales agreements and damages for
alleged defects in the property. The Trust Company, called in guarantee Destresa
S.A., the company responsible for managing and building the Real Estate Project,
and who complied with all the legal formalities and proceedings required by the
authorities in real estate projects. Currently, these proceedings are at a stage
where evidence is provided. The required conciliation sessions that took place
in the proceedings were declared fruitless since the parties failed to reach an
agreement.
D. With regard to the Fopep Consortium there are two labor
proceedings filed by John Freddy Bustos Lombana, who claims that he acted as
attorney and assistant manager in two different agreements and therefore demands
the payment of salary and other employment benefits. He is also claiming
indemnification alleging that his resignation was a consequence of an
insinuation made by the Manager of the Consortium. In one of the proceedings, a
ruling in the first instance was given in favor of the Trust Company. This was
subsequently appealed and a second instance ruling is pending. In the other
proceedings, first and second instance rulings were given in favor of the Trust
Company and these were subsequently appealed before the Supreme Court of Justice
by the plaintiff.
F-77
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Trust Company's administration considered the contingency
that these proceedings represent as remote.
E. With regard to the "Santa Sofia" Trust, there are two
different types of proceedings being conducted:
1. A class action filed by the co-owners of the Santa Sofia Housing
Estate against the Bogota Mayor's Office, Fiducolombia S.A. (now
Fiduciaria Bancolombia S.A.) and others, claiming that the
deterioration to the property was caused by flaws in the terrain, and
therefore no building permit should have been issued. A motion for
dismissal filed by the Trust Company's attorney is pending.
2. Criminal proceedings against the Trust Company's Legal Representative,
based on the action filed by the co-owners of the Santa Sofia Housing
Estate, claiming alleged Illegal Squatting and Fraud with regard to
the urban development of the real estate project. These proceedings
are at a pre-trial stage where evidence is collected.
The Trust Company's administration considered the contingency
that these proceedings represent as remote.
F. There are currently two executive proceedings that were filed
by Mr. Eugenio Segura Villarraga seeking payment of two checks that were
countermanded according to instructions given bythe Bank. Mr Segura Villarraga
claims that the checks were drawn as a result of an unlawful act. These
proceedings are currently suspended.
The Trust Company's management considered the contingency that
these proceedings represent as remote.
G. Gacen Ltda. filed an ordinary action against the Trust
Company, claiming that the trust agreement be declared terminated based on the
expiration of the agreement. On March 8, 2007, the plaintiff voluntarily
withdrew the complaint and the Court issued and order to that effect.
H. There is a criminal proceedings against one of the Trust
Company's legal representatives regarding the Chisa Lote 2C Trust filed by
Carmela Guardo and Joaquin Atencio Nino claiming misrepresentation of facts in a
public deed, procedural fraud, perturbation of ownership and fraud with regard
to a court ruling by virtue of a public deed establishing the boundaries of a
plot of land, signed by the Trust Company on behalf of the Trust. These
proceedings are at a pre-trial stage where evidence is collected.
The Trust Company's management considered the contingency that
this proceeding
F-78
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
represents as remote.
I. Ordinary proceedings were filed by Maria Rubby Mejia and
other, against the Trust Company, claiming that Fiducolombia S.A. (currently
Fiduciaria Bancolombia S.A.) failed to carry out as administrator of the
Titularizacion Ganadera Ganar 2000 A, certain contractual obligations such as
collecting pool contributions and therefore seeks the corresponding damages.
Currently, these proceedings are subject to exceptions filed by the defendant
being transferred to the plaintiffs.
J. Ms. Martha Cecilia Gaitan Cendales summoned the Trust Company
to an Arbitration Tribunal where she was claiming that the trust agreement be
declared as expired and the loan and restitution agreement with Fiducolombia
S.A. (now Fiduciaria Bancolombia S.A.) be terminated and that the Arbitration
Tribunal order the property placed in trust to be transferred to the grantor and
that the Trust Company be ordered to pay damages estimated at over Ps 500. The
allegations were that Fiduciaria Bancolombia S.A. did not terminate the Trust
Agreement within the term provided for such thereby causing damages to the
plaintiff. On March 5, 2007, the plaintiff voluntarily withdrew the complaint.
LEASING BANCOLOMBIA S.A.
There are contingencies against the company amounting to Ps
17,905 for 2006 and Ps 13,242 for 2005, which the attorneys believe do not
present contingency of loss that could affect the future results. Therefore,
provisions do not exist.
ALMACENAR S.A.
At December 31, 2006 and 2005, labor and civil proceedings
against Almacenar S.A. were in progress, which were considered probables.
At December 31, 2006 and 2005, there are allowances amounting to
Ps 1,260 and Ps 1,036, respectively, to cover any liability resulting from these
proceedings.
SUFINANCIAMIENTO COMPANIA SURAMERICANA DE FINANCIAMIENTO COMERCIAL S.A.
Actions filed against Sufinanciamiento total an estimated amount
of Ps 5,762. Only one of these actions represents a probable loss for the
company, and a provision has been recorded for Ps 8.
Sufinanciamiento also has a contingency for a proceeding filed by
a tax inspection entity which is considered remote.
VALORES BANCOLOMBIA S.A.
F-79
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Valores Bancolombia S.A. currently has two pending actions, one
civil and one labor.
The civil action corresponds to an ordinary proceeding filed in
Cali in which an unfavorable ruling was issued in the first instance and then
was subsequently appealed before the Superior Tribunal. The first instance
ruling could amount to approximately Ps 300. This contingency is considered
probable and therefore, a Ps 100 provision has been posted.
The labor action was given a favorable second instance ruling and
the only issue pending is to verify whether a high court appeal has been filed.
The value of this contingency could amount to approximately Ps 30.
FACTORING BANCOLOMBIA S.A.
Factoring Bancolombia S.A. is currently defending seven
proceedings that include claims totaling Ps 362 and others whose value has not
yet been established. These proceedings represent a remote loss for Factoring
Bancolombia S.A. and therefore no provision has been set up.
FUNDICOM S.A.
A labor action against Fundicom S.A. existed at December 31, 2006
and 2005, in which various ex-employees are claiming damages for wrongful
dismissal. These proceedings are being held before the Labor Court No. 11 and
are still in their initial stage. The estimated value of the contingency amounts
to Ps 441 and Ps 294 in 2006 and 2005 respectively, and is duly recorded in the
memorandum accounts.
DITRANSA S.A.
There are 5 administrative proceedings being heard by the
Administrative Law Courts in Cartagena, that have been filed by Ditransa S.A.
against the Colombian Tax Authorities (DIAN). The purpose of these proceedings
is to obtain a statement of annulment for the resolutions issued imposing fines
on Ditransa S.A. for alleged breaches of customs declarations; and should
Ditransa S.A. not receive a favorable ruling, it would be obliged to pay fines
totaling approximately Ps 175 with interest, four of which are worth Ps 25 each
and one Ps 75. It should be noted that all operations are guaranteed by
insurance policies. However, payment must be made by Ditransa S.A. since
counter-guarantees with regard to the insurance company apply. The contingency
is considered to be probable and the corresponding provision was posted for Ps
91.
The other subsidiaries have not reported any other contingencies
existing as of December 31, 2006. The Bank's and its subsidiaries provision were
recorded as accrued expenses in the consolidated Balance Sheet.
(27) ADMINISTRATIVE AND OTHER EXPENSES
Administrative and other expenses consisted of the following:
F-80
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005 2006
--------- --------- ---------
Public services Ps 28,558 Ps 47,175 Ps 53,512
Advertising 20,754 50,235 63,214
Industry and trade, property, vehicle and other taxes 55,145 121,699 129,141
Communication, postage and freight 39,564 48,254 52,403
Insurance 12,224 27,446 29,635
Security services 18,404 29,339 27,292
Amortization of deferred charges 20,029 48,310 40,692
Rental expenses 16,963 56,375 62,182
Maintenance and repairs 49,794 99,678 123,169
Contributions and membership fees 8,335 14,587 17,115
Temporary services 9,174 17,440 31,316
Travel expenses 10,690 17,799 22,840
Professional fees 29,167 56,004 59,506
Call center services 8,672 20,041 26,404
Information processes outsourcing 13,420 18,218 22,731
Warehouse expenses 10,651 11,398 11,777
Software 8,444 34,523 11,769
Operational expenses relationated with consortium 10,325 10,514 9,138
Electronic processing data 498 12,108 4,934
Public relation 1,539 2,586 2,052
Other 21,242 49,450 81,360
--------- --------- ---------
TOTAL Ps393,592 Ps793,179 Ps882,182
========= ========= =========
(28) NON-OPERATING INCOME (EXPENSES)
The following table summarizes the components of BC's
non-operating income and expenses for the last three fiscal years:
YEAR ENDED DECEMBER 31,
-----------------------------------
2004 2005 2006
--------- ---------- ----------
(Ps million)
NON-OPERATING INCOME (EXPENSES):
Other income(1) Ps 51,514 Ps 109,770 Ps 194,589
Minority interest (2,425) (6,496) (6,352)
Other expenses(2) (44,374) (105,120) (149,243)
--------- ---------- ----------
TOTAL NON-OPERATING INCOME (EXPENSES), NET Ps 4,715 Ps (1,846) Ps 38,994
========= ========== ==========
----------
(1) Other income include recovery of deferred tax liability for Ps 98,788
registered in 2005 by the Bank, gains from the sale of foreclosed assets,
property, plant and equipment and other assets.
(2) Other expenses include operational losses and losses from the sale of
foreclosed assets, property, plant and equipment and payments for fines,
sanctions, lawsuits and indemnities.
(29) RELATED PARTY TRANSACTIONS
F-81
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Significant balances and transactions with related parties were
as follows:
2004
------------------------------------------------------------------------------
SHAREHOLDERS WITH
PARTICIPATING STOCK
LOWER THAN 10% OF
SHAREHOLDERS WITH THE BANK'S CAPITAL
PARTICIPATING STOCK AND WITH
EQUAL TO OR HIGHER BANK'S OFFICERS OPERATIONS HIGHER
THAN 10% OF NON-CONSOLIDATED AND BOARD OF THAN 5% TECHNICAL
BANK'S CAPITAL INVESTMENTS DIRECTORS 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-- Ps36,563 Ps18,040 Ps --
==== ======== ======== =========
Deposits 6 32,349 812 222,226
Overnight funds -- 106 -- --
Accounts payable -- -- -- --
Bonds -- 10,000 -- 11,500
---- -------- -------- ---------
TOTAL Ps 6 Ps42,455 Ps 812 Ps233,726
==== ======== ======== =========
TRANSACTIONS INCOME
Dividends received -- 25,814 -- --
Interest and fees -- 2,693 1,626 153
Other -- 354 -- --
---- -------- -------- ---------
TOTAL Ps-- Ps28,861 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
==== ======== ======== =========
F-82
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 10% OF
SHAREHOLDERS WITH THE BANK'S CAPITAL
PARTICIPATING STOCK AND WITH
EQUAL TO OR HIGHER BANK'S OFFICERS OPERATIONS HIGHER
THAN 10% OF NON-CONSOLIDATED AND BOARD OF THAN 5% TECHNICAL
BANK'S CAPITAL INVESTMENTS DIRECTORS (1) 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 -- Ps486,109 Ps19,108 Ps293,460
===== ========= ======== =========
Deposits 157 96,664 996 393,088
Accounts payable -- 1,768 -- 198
Bonds -- 3,310 -- 18,960
TOTAL Ps157 Ps101,742 Ps 996 Ps412,246
----- --------- -------- ---------
===== ========= ======== =========
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-83
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2006
------------------------------------------------------------------------------
SHAREHOLDERS WITH
PARTICIPATING STOCK
LOWER THAN 10% OF
SHAREHOLDERS WITH THE BANK'S CAPITAL
PARTICIPATING STOCK AND WITH
EQUAL TO OR HIGHER BANK'S OFFICERS OPERATIONS HIGHER
THAN 10% OF NON-CONSOLIDATED AND BOARD OF THAN 5% TECHNICAL
BANK'S CAPITAL INVESTMENTS DIRECTORS (1) EQUITY
------------------- ---------------- --------------- -------------------
BALANCE SHEET
Investment securities -- 822,737 -- --
Loans 10,610 90,783 36,231 --
Customer's acceptances
and derivatives -- 2,213 -- 107,640
Accounts receivable 89 8,632 4,108 --
-------- ----------- -------- ---------
TOTAL Ps10,699 Ps 924,365 Ps40,339 Ps107,640
======== =========== ======== =========
Deposits 632 1,908,196 8,656 287,000
Overnight funds -- 448 -- --
Accounts payable 6 477 2,274 -
Bonds -- 689,927 - 35,300
-------- ----------- -------- ---------
TOTAL Ps 638 Ps2,599,048 Ps10,930 Ps322,300
======== =========== ======== =========
TRANSACTIONS INCOME
Dividends received -- 11,206 -- --
Interest and fees 899 29,639 3,339 --
Other -- 2 -- --
-------- ----------- -------- ---------
TOTAL Ps 899 Ps 40,847 Ps 3,339 --
======== =========== ======== =========
EXPENSES
Interest 49 129,028 6,642 22,400
Fees -- -- 156 --
Other - -- 18 --
-------- ----------- -------- ---------
TOTAL Ps 49 Ps 129,028 Ps 6,816 Ps 22,400
======== =========== ======== =========
F-84
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 February 26, 2007, in a transaction duly authorized by the
Superintendency of Finance, the Bank sold to Lab Investment & Logistics S.A. and
Portal de Inversiones S.A. 91.08% of its direct interest and 3.79% of its
indirect interest, held through Banca de Inversion Bancolombia S.A. Corporacion
Financiera, in Almacenar S.A. The transaction price amounted to Ps 11,200.
On April 30, 2007, in a transaction duly authorized by the
Superintendency of Finance, Bancolombia sold to LAB Investment & Logistics S.A.
and Portal de Inversiones S.A. 3.567% of its direct interest, in Almacenar S.A.
The transaction price amounted to approximately Ps 2,050.
On March 27, 2007, pursuant to resolution S.B.P. No. 33,
the Superintendency of Banking of Panama authorized Bancolombia Panama, to
acquire up to 100% of the outstanding shares of Banagricola.
On March 30, 2007, pursuant to resolution No. 004969, the
Superintendency of the Financial System of El Salvador authorized Bancolombia
Panama, to acquire indirectly, through the Panamanian corporation Banagricola
S.A., the Salvadorian corporations Inversiones Financieras Banco Agricola S.A.,
Banco Agricola S.A. and Aseguradora Suiza Salvadorena S.A.
Other related authorizations were previously granted by the
Salvadorian Antitrust Regulator ("Superintendencia de Competencia de El
Salvador") pursuant to Resolution SC-010-S/C/R-2007 dated March 29, 2007
pursuant to which it was approved the market concentration derived from the
acquisition of shares of Banagricola by Bancolombia Panama.
The Bank has obtained loans from foreign financial institutions
amounting to US$ 590,000 which will be used for the purchase of foreign currency
loans of Bancolombia Panama at market conditions and pursuant the corresponding
authorizations and applicable law. The proceeds of these transactions will be
used by Bancolombia Panama S.A. for the acquisition of Banagricola.
On April 2, 2007 Bancolombia Panama S.A. entered into Stock
Purchase Agreement with the majority shareholders of Bienes y Servicios, S.A.
("BYSSA") whereby it undertook to acquire a controlling stake in BYSSA, a
corporation organized and existing under the laws of the Republic of El
Salvador. The Stock Purchase Agreement provided that Bancolombia Panama S.A.
will launch a tender offer in El Salvador to acquire 50.8349% and up to 100% of
all the issued and outstanding shares of BYSSA. The maximum purchase price
payable in the BYSSA tender offer could amount to approximately US$ 75,000.
BYSSA has a significant number of shareholders in common with Banagricola. BYSSA
and its subsidiaries provide printing, outsourcing and other services to
different companies of the Conglomerado Financiero Banagricola. In addition,
BYSSA is the sole shareholder of Banagricola de El Salvador, Inc., a company
organized and existing under the laws of the State of California, which is
engaged in the money transmittal business in states such as California,
Maryland, District of Columbia, Nevada, New Jersey and Virginia. If the BYSSA
Stock Purchase Agreement is terminated, BYSSA is obliged to transfer to
Bancolombia Panama S.A., Banagricola de El Salvador, Inc. for US$ 6,000 and to
enter into a long-term service agreement with Banagricola and/or its
subsidiaries.
F-85
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
On April 9, 2007, after obtaining all the required
authorizations, Bancolombia Panama S.A. initiated a simultaneous public tender
offer in El Salvador and Panama, for the acquisition of not less than 53.089144%
and up to of 100% of the common shares of Banagricola S.A. The tender was
completed on May 8, 2007. As of May 9, 2007, the preliminary results indicate
that the total number of shares tendered represented approximately 89% of the
total issued and outstanding shares of Banagricola S.A. We currently expect the
tender offer to settle on May 16, 2007.
(31) DIFFERENCES BETWEEN COLOMBIAN ACCOUNTING PRINCIPLES FOR BANKS AND U.S. GAAP
The Bank's financial statements are prepared in accordance with
generally accepted accounting principles and practices prescribed by the
Superintendency of Finance and other legal provisions ("Colombian GAAP"). These
principles and regulations differ in certain significant respects from
accounting principles generally accepted in the United States of America ("U.S.
GAAP"), and therefore this note presents a reconciliation of net income and
stockholders' equity to U.S. GAAP. Certain items in the reconciliations were
reclassified to conform with current year presentation.
A) RECONCILIATION OF NET INCOME:
The following table 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, 2004, 2005 and 2006:
2004 2005 2006
--------- ---------- ----------
CONSOLIDATED NET INCOME UNDER COLOMBIAN GAAP Ps578,678 Ps 946,881 Ps 749,529
a) Deferred income taxes 49,073 121,025 (132,003)
b) Employee benefit plans 1,203 (1,733) 10,320
c) Inflation adjustment -- (4,423) (104)
d) Revaluation of assets -- -- --
e) Allowance for loans losses, financial leases losses,
foreclosed assets and other receivables (159) (108,886) 195,549
f) Loan origination fees and costs 7,100 3,277 16,798
g) Interest recognition on non-accrual loans 1,205 3,976 2,377
h) Deferred charges 9,422 (1,761) (3,130)
i) Investment securities & derivatives 1,111 27,159 (36,235)
j) Investments in unaffiliated companies (252) (4,085) (1,545)
k) Investments in affiliates (29,548) 18,277 6,598
l) Lessor accounting -- 1,931 (1,703)
m) Business combinations
m.i) Goodwill 22,152 31,394 22,642
m.ii) Intangible assets (156) (5,889) (88,248)
m.iii) Fair value adjustments to assets and liabilities (7,923) (140,102) 186,546
acquired
n) Securitization non-performing loans -- 5,851 4,717
o) Foreign currency translation adjustment 10,220 1,651 7,853
F-86
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005 2006
--------- ---------- ----------
p) Minority interest -- (3,422) 4,793
r) Guarantees -- -- (3,571)
--------- ---------- ----------
CONSOLIDATED NET INCOME UNDER U.S. GAAP Ps642,126 Ps 891,121 Ps 941,183
--------- ---------- ----------
NET INCOME FROM CONTINUING OPERATIONS Ps621,423 Ps 904,351 Ps 949,028
INCOME (LOSS) FROM OPERATIONS AND DISPOSAL OF DISCONTINUED
OPERATIONS Ps 20,703 Ps (13,230) Ps (7,845)
B) RECONCILIATION OF STOCKHOLDERS' EQUITY:
The following tables 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, 2005 and 2006:
2005 2006
----------- -----------
CONSOLIDATED STOCKHOLDERS' EQUITY UNDER COLOMBIAN GAAP Ps3,377,290 Ps3,646,612
a) Deferred income taxes 135,904 66,326
b) Employee benefit plans (70,738) 1,052
c) Inflation adjustment 38,793 38,689
d) Revaluation of assets (110,479) (140,693)
e) Allowance for loans losses, financial leases losses,
foreclosed assets and other receivables 217,664 416,142
f) Loan origination fees and costs 53,733 70,531
g) Interest recognition on non-accrual loans 6,008 8,385
h) Deferred charges (3,036) (6,166)
i) Investment securities & derivatives 14,936 (142,421)
j) Investments in unaffiliated companies (11,753) (13,298)
k) Investments in affiliates 30,577 37,175
l) Lessor accounting 1,931 228
m) Business combinations
m,i) Goodwill 527,754 543,164
m.ii) Intangible assets 223,080 142,100
m.iii) Fair value adjustments to assets and liabilities
acquired (308,097) (127,176)
n) Securitization of non performing loans 5,851 10,568
o) Foreign currency translation adjustment -- --
p) Minority interest (3,422) 1,371
r) Guarantees -- (3,571)
----------- -----------
748,706 902,406
----------- -----------
CONSOLIDATED STOCKHOLDERS' EQUITY UNDER U.S. GAAP Ps4,125,996 Ps4,549,018
=========== ===========
F-87
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
C) SUPPLEMENTAL CONSOLIDATED CONDENSED FINANCIAL STATEMENTS UNDER U.S.GAAP:
The presentation of balance sheet and income statemet under U.S.
GAAP differs from that from Colombian GAAP due to the acquisition of Conavi and
Corfinsura in 2005. As a result, we are presenting the summarized consolidated
financial statements under U.S.GAAP for years ended December 31, 2005 and 2006:
SUPPLEMENTAL CONSOLIDATED CONDENSED BALANCE SHEETS (1)
2005 2006
------------ ------------
ASSETS:
Cash and due from banks Ps 1,730,022 Ps 2,010,120
Trading account 5,521,088 2,926,959
Investment securities, net 2,904,612 2,912,524
Loans 15,953,367 21,358,135
Financial lease 2,662,487 3,553,514
Allowance for loans, financial leases losses
and other receivables (581,645) (507,641)
Premises and equipment, net 1,424,120 1,637,039
Other assets 1,956,467 1,552,684
------------ ------------
TOTAL ASSETS PS31,570,518 PS35,443,334
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Deposits 18,329,466 23,191,301
Short term debt 645,340 1,209,776
Long term debt 3,282,211 3,609,352
Other liabilities 5,134,943 2,836,369
Minority interest 52,562 47,518
Shareholders' equity 4,125,996 4,549,018
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY PS31,570,518 PS35,443,334
============ ============
----------
(1) The Bank has changed the presentation of the Supplemental Consolidated
Condensed Balance Sheet and as a consequence certain prior year amounts had
been reclassified to conform to current year presentation. The
reclassification did not have impact in the total of assets, liabilities
and shareholders equity.
F-88
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (1)
2004 2005 2006
----------- ------------ ------------
Total interest income Ps1,803,763 Ps 2,847,424 Ps 3,252,895
Total interest expense (577,442) (1,032,923) (1,272,893)
----------- ------------ ------------
Net interest income 1,226,321 1,814,501 1,980,002
Provision of loans, leases and other receivables (66,653) (230,015) (1,765)
----------- ------------ ------------
Net interest income after provision of loans,
leases and other receivables 1,159,668 1,584,486 1,978,237
Other income 633,681 939,938 1,150,089
Other expenses (979,270) (1,470,532) (1,976,549)
----------- ------------ ------------
Income before income taxes 814,079 1,053,892 1,151,777
Income tax expense (192,656) (149,541) (202,749)
----------- ------------ ------------
Net income from continued operations 621,423 904,351 949,028
DISCONTINUED OPERATIONS (2) 20,703 (13,230) (7,845)
----------- ------------ ------------
NET INCOME PS 642,126 PS 891,121 PS 941,183
=========== ============ ============
----------
(1) The amounts disclosed in the table for 2004 and 2005 differs from those
disclosed in the annual report of 2005, because they were reclassificated
for comparative effects with the presentation of the activity in the
allowance for loans and financial lease losses in 2006.
(2) Correspond to discontinued operations of Abocol, Almacenar and their
Subsidiaries.
SUPPLEMENTAL CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (1)
2004 2005 2006
------------ ------------- ------------
Net income (loss) Ps 642,126 Ps 891,121 Ps 941,183
Adjustments to reconcile net income to net cash
provided (used) by operating activities (608,738) (5,215,860) (9,485,717)
------------ ------------ ------------
Net cash provided by operating activities 33,388 (4,324,739) (8,544,534)
Net cash used in investing activities (1,575,420) (6,133,179) 5,411,530
Net cash provided by financing activities 1,344,931 10,938,580 3,413,102
------------ ------------ ------------
(Decrease) increase in cash and cash equivalents Ps (197,101) Ps 480,662 Ps 280,098
============ ============ ============
Cash and cash equivalents at beginning of year 1,446,461 1,249,360 1,730,022
------------ ------------ ------------
Cash and cash equivalents at end of year (2) PS 1,249,360 PS 1,730,022 PS 2,010,120
============ ============ ============
----------
(1) This consolidated statement of cash flow includes the following non cash
transactions: Ps 38,390 related to restructured loans that were transferred
to foreclosed assets and foreign exchange gain for Ps 65,861.
(2) Includes reserves against transactions and Time Deposits with the Central
Bank for Ps 516,648 in 2004, Ps 1,098,712 in 2005 and Ps 1,315,927 in 2006.
F-89
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
SUPPLEMENTAL CONSOLIDATED CONDENSED CHANGES IN STOCKHOLDERS' EQUITY
2004 2005 2006
----------- ----------- -----------
Balance at beginning of year Ps1,832,886 Ps2,267,286 Ps4,125,996
Shares issued at market value (1) -- 1,164,218 --
Net income 642,126 891,121 941,183
Dividends declared (156,861) (216,838) (369,736)
Other comprehensive income (loss) (8,469) (19,148) (116,229)
Other movements (42,396) 39,357 (32,196)
----------- ----------- -----------
Balance at end of year Ps2,267,286 Ps4,125,996 Ps4,549,018
=========== =========== ===========
----------
(1) The line shares issued for Ps 236,212 in the consolidated statement of
stockholder's equity under Colombian GAAP, reflect the par value of shares;
the line shares issued for Ps 1,164,218 in this table reflect the fair
market value of shares issued under U.S. GAAP.
SUPPLEMENTAL CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME (LOSS)
2004 2005 2006
--------- --------- ----------
Net Income Ps642,126 Ps891,121 Ps 941,183
OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Unrealized gain or (loss) on securities available for sale 7,716 2,106 (146,925)
Pension liability (5,965) (19,603) (2,217)
Foreign currency translation adjustments (10,220) (1,651) (7,853)
--------- --------- ----------
Other comprehensive loss (8,469) (19,148) (156,995)
--------- --------- ----------
Comprehensive income Ps633,657 Ps871,973 Ps 784,188
--------- --------- ----------
OTHER COMPREHENSIVE INCOME (LOSS)
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 liability (net actuarial loss) (9,477) 3,512 (5,965)
Foreign currency translation adjustment (10,220) -- (10,220)
--------- -------- ---------
Other comprehensive income (loss) Ps(10,947) Ps 2,478 Ps (8,469)
========= ======== =========
F-90
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 liability (net actuarial loss) (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)
========== ======== ==========
2006
BEFORE-TAX (TAX EXPENSE) NET-OF-TAX
AMOUNT OR BENEFIT AMOUNT
---------- ------------- ----------
Unrealized gain or (loss) on securities
available for sale Ps(232,271) Ps85,346 Ps(146,925)
Additional pension liability
Net transition loss (1,755) 650 (1,105)
Net actuarial (gain) loss (1,852) 685 (1,167)
Prior service cost 120 (65) 55
Foreign currency translation adjustment (7,853) -- (7,853)
---------- -------- ----------
Other comprehensive income (loss) Ps(243,611) Ps86,616 Ps(156,995)
========== ======== ==========
ACCUMULATED OTHER COMPREHENSIVE INCOME
UNREALIZED
GAINS (LOSSES) FOREIGN ACCUMULATED
ON PENSION CURRENCY OTHER
SECURITIES, NET LIABILITY, NET OF TRANSLATION COMPREHENSIVE
OF TAXES TAXES ADJUSTMENT INCOME
--------------- ----------------- ----------- -------------
Beginning balance for 2004 Ps 58,669 Ps (4,354) Ps 1,559 Ps 55,874
Current-period change 7,716 (5,965) (10,220) (8,469)
--------------- ----------------- ----------- -------------
Ending balance for 2004 66,385 (10,319) (8,661) 47,405
=============== ================= =========== =============
Beginning balance for 2005 66,385 (10,319) ( 8,661) 47,405
Current-period change 2,106 (19,603) (1,651) (19,148)
--------------- ----------------- ----------- -------------
Ending balance for 2005 68,491 (29,922) (10,312) 28,257
=============== ================= =========== =============
Beginning balance for 2006 68,491 (29,922) (10,312) 28,257
Current-period change (146,925) (2,217) (7,853) (156,995)
Effects of adoption FAS 158 -- 40,766 -- 40,766
=============== ================= =========== =============
Ending balance for 2006 Ps (78,434) Ps 8,627 Ps(18,165) Ps (87,972)
=============== ================= =========== =============
F-91
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, 2004, 2005 and
2006:
2004 2005 2006
--------- --------- ---------
Current income tax expense Ps237,620 Ps178,992 Ps136,307
Deferred income tax (benefit) expense (47,883) (22,502) 71,788
--------- --------- ---------
TOTAL Ps189,737 Ps156,490 Ps208,095
========= ========= =========
2004 2005 2006
--------- --------- ---------
Continuing operation income tax Ps192,656 Ps149,541 Ps202,749
Discontinued operation income tax (2,919) 6,949 5,346
--------- --------- ---------
INCOME TAX Ps189,737 Ps156,490 Ps208,095
========= ========= =========
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, 2005
and 2006 were as follows:
2005 2006
--------- ---------
DEFERRED TAX ASSETS AND LIABILITIES
DEFERRED TAX ASSETS:
Accrual of employee benefits Ps 26,194 Ps --
Allowance for loan losses 23,155 --
Fixed assets 138,213 169,674
Tax losses and excess of presumed income over ordinary income 43,496 11,129
Allowance for foreclosed assets 7,407 --
Fiduciary assets -- 202
Accrued expenses 15,336 34,760
F-92
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2005 2006
--------- ---------
Excess of accrued income over valuation income -- 4,418
Business combination 50,503 --
Unrealized gain on investment securities -- 43,504
Deferred interest on restructured loans -- 17,741
Other 29,462 15,634
--------- ---------
Total gross deferred tax assets 333,766 297,062
Less valuation allowance (4,440) (19,708)
--------- ---------
NET DEFERRED TAX ASSET Ps329,326 Ps277,354
--------- ---------
DEFERRED TAX LIABILITIES:
Accrual of employee benefits Ps -- Ps 381
Unrealized gain on investment securities 40,653 --
Allowance for loan losses -- 32,875
Allowance for foreclosed assets -- 4,829
Loan origination fees and cost 17,766 22,829
Forward, future and swaps effect 26,862 37,537
Intangible assets 80,382 50,762
Inflation adjustments 68,403 78,051
Business Combination -- 16,926
Excess of accrued income over valuation income 48,833 --
Fair value of financial instruments 5,674 --
Securitization 2,165 3,804
Other 2,079 3,003
--------- ---------
TOTAL DEFERRED LIABILITIES 292,817 250,997
--------- ---------
NET DEFERRED ASSET (LIABILITY) Ps 36,509 Ps 26,357
========= =========
The valuation allowance for deferred tax assets as of
December 31, 2005 and 2006 was Ps 4,440 and Ps 19,708, respectively. The
net change in the total valuation allowance for the year ended December 31,
2005 was a decrease of Ps 890 and for the year ended December 31, 2006 was
an increase of Ps 15,268. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those
temporary differences become deductible. Management considers the scheduled
reversal of deferred tax liabilities, projected future taxable income and
tax planning strategies in making this assessment. Based upon the level of
historical taxable income and projections for future taxable income over
the periods which the deferred tax assets are deductible, management
believes it is more likely than not the company will realize the benefits
of these deductible differences, net of the existing valuation allowances
at December 31, 2006. 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 2004, 2005 and
2006 differs from 22.80%, 14.94% and 16.67% effective tax rate for years
2004, 2005 and 2006, due to the following:
F-93
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005 2006
--------- ----------- -----------
Income before tax U.S. GAAP(1) Ps831,863 Ps1,047,611 Ps1,248,066
--------- ----------- -----------
37% tax 307,789 387,616 461,784
Non-deductible items / provisions 15,433 48,225 77,002
Non-taxable income (26,507) (164,457) (249,203)
Excess of accrued income over valuation
income (7,735) (52,793) 5,928
Amortization of excess of presumed
income over ordinary income (3,420) (30,393) (39,466)
Others (17,569) (30,818) (63,217)
Increase (decrease) valuation allowance (78,254) (890) 15,267
--------- ----------- -----------
Income tax Ps189,737 Ps 156,490 Ps 208,095
========= =========== ===========
(1) It represents continuing operation and discontinued operation
For years ended December 31, 2004, 2005 and 2006, non-taxable
income includes off shore subsidiaries' 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, 2006, the Bank intended to 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, Bancolombia Puerto Rico and Suleasing Internacional and its
subisidiaries. The undistributed profits in such Subsidiaries were Ps 431,679 at
December 31, 2006.
B) EMPLOYEE BENEFIT PLANS:
U.S. GAAP requires the recognition of pension costs based on
actuarial computations under a prescribed methodology which differs from that
used under Colombian GAAP. For purposes of 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.
There are not plan assets under the employee benefit plan.
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, continued participating in
the Bank's non-contributory unfunded defined benefit pension plan. Under this
plan, benefits are based on length of service and level of compensation. As of
December 31, 2006, there were nearly 1,000 participants covered by the Plan.
F-94
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The measurement for pension plan obligations differs from
Colombian GAAP to U.S. GAAP basically due to the fact that Colombia GAAP
requires calculation of the estimated liability using the 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.
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 which pension fund would manage the amount accrued
during the year of his/her severance pay. 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, 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, 2006 there were 1,777 participants remaining
in the original severance plan.
Until December 31, 2004, the pension plan and severance
obligation included employees from the Bank, Almacenar S.A. and Abocol S.A. As a
result of the sale of Abocol S.A., dated December 29, 2005, 55 of Abocol's
employees who participated in the pension plan and 3 employees who participated
in Severance plan were not included in the calculation. The Bank does not
maintain any pension or severance obligation with Abocol's employees after the
date of sale.
Upon the Conavi/Corfinsura merger did not have a defined benefit
plan for their employees and they were not entitled to join the Bank's defined
benefit plan.
DISCLOSURE AND CALCULATION OF DIFFERENCES UNDER U.S. GAAP
The economic assumptions used in the determination of pension
obligations under U.S. GAAP differ from those used under Colombian GAAP because
the latter are established annually by the Colombian regulations.
2004 2005 2006
-------- -------- --------
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost Ps 1,543 Ps 1,604 Ps 4,277
Interest cost 25,624 27,504 18,477
Expected Return on plan assets
F-95
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005 2006
-------- -------- --------
Amortization of prior service cost 143 143 135
Amortization of net transition obligation(Assets) 1,048 1,048 1,017
Amortization of net (gain) or loss 82 562 (401)
-------- -------- --------
Adjustment to be recognized
Net periodic pension cost under U.S. GAAP 28,440 30,861 23,505
Net periodic pension cost under Colombian GAAP 29,643 29,128 33,825
-------- -------- --------
Difference to be recognized under U.S. GAAP Ps 1,203 Ps(1,733) Ps10,320
======== ======== ========
The combined costs for the above mentioned benefit plans,
determined using U.S. GAAP, for the years ended December 31, 2005 and 2006, are
summarized below:
2005 2006
---------- ----------
CHANGE IN BENEFIT OBLIGATION
Unfunded benefit obligation at beginning of year Ps 127,629 Ps 133,498
Service cost 1,604 4,277
Interest cost 27,504 18,477
Actuarial (gain)/loss 4,028 (21,552)
Effect of curtailment /settlements(1) (4,545) --
Benefits paid (22,722) (23,113)
---------- ----------
Unfunded benefit obligation at end of year Ps 133,498 Ps 111,587
========== ==========
Accrued benefit cost under Colombian GAAP (101,941) (112,639)
---------- ----------
DIFFERENCE TO BE RECOGNIZED UNDER
U.S. GAAP STOCKHOLDERS' EQUITY Ps (70,738) Ps 1,052
========== ==========
----------
(1) The effect of curtailment/settlement is related to the sale of Abocol S.A.
Under U.S. GAAP, Bancolombia S.A. applies the provisions of SFAS
87, as amended by SFAS 132, "Employers' Disclosures about Pensions and Other
Post-retirement Benefits" and SFAS 132(R), "Employers' Disclosure about Pension
and Other Post-retirement Benefits, an amendment to FASB Statements No. 87, 88
and 106". Bancolombia adopted effective December 31, 2006 SFAS 158, in respect
of its defined benefits pension plans, detailed in Note 31 of the Consolidated
Financial Statements.
The incremental effect of applying SFAS 158 on individual line
items in the consolidated balance sheets was as follows:
BEFORE AFTER
APPLICATION OF APPLICATION OF
FAS 158 ADJUSTMENT FAS 158
-------------- ---------- --------------
Deferred tax asset Ps 64,328 Ps(24,191) Ps 40,137
TOTAL ASSETS 35,467,525 (24,191) 35,443,334
Retirement benefit obligations (176,544) 64,957 (111,587)
F-96
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
BEFORE AFTER
APPLICATION APPLICATION
OF FAS 158 ADJUSTMENT OF FAS 158
------------ ---------- ------------
TOTAL LIABILITIES 30,959,273 64,957 30,894,316
Accumulated other comprehensive income (204,595) 64,957 (139,638)
Deferred income taxes 75,857 (24,191) 51,666
TOTAL SHAREHOLDER'S EQUITY PS 4,508,252 PS 40,766 PS 4,549,018
============ ========= ============
2006
---------
NET AMOUNT RECOGNIZED IN THE CONSOLIDATED BALANCE
SHEET AT DECEMBER 31, 2006
Statement of Financial Position
Noncurrent Assets Ps (4,208)
Current Liabilities 11,987
Noncurrent Liabilities 103,808
---------
Amount Recognized in Financial Position Ps111,587
=========
Accumulated Other Comprehensive Income
Net Actuarial (Gain) Loss Ps 16,151
Net Prior Service Cost/(Credit) (424)
Net Transition Obligation (Asset) (3,368)
---------
Total at December 31, 2006 12,359
---------
Deferred income tax (3,732)
---------
Accumulated other comprehensive Income 8,627
=========
The Bank expects the following amounts in other comprehensive
income to be recognized as components of net periodic pension cost during 2007:
Net transition obligation/(asset) Ps 1,019
Net prior service cost 135
Net loss/(gain) (3,552)
--------
TOTAL PS(2,398)
========
The economic assumptions adopted are shown below in nominal
terms. Those assumptions used in determining the actuarial present value of
pension obligation and the projected pension obligations for the plan years were
as follows.
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 2006
----- ---- ----
Discount rate 13.40% 8.68% 8.68%
Rate of compensation increases 7.10% 6.33% 6.07%
Rate of pension increases 5% 4.50% 4.50%
Estimated Future Benefit Payments
The benefit payments, which reflect expected future service, as
appropriate, are expected to be paid as follows:
PENSION BENEFITS OTHER BENEFITS
---------------- --------------
2007 12,496 8,801
2008 11,679 6,813
2009 11,095 7,804
2010 11,066 7,454
2011 10,910 10,430
Years 2012 - 2016 53,956 71,846
C) INFLATION ADJUSTMENT
The consolidated financial statements were adjusted for inflation
based on the variation in the IPC for middle income-earners, from January 1,
1992, to December 31, 2000. The adjustment was applied monthly to non-monetary
assets, equity (except for the revaluation surplus and exchange adjustment),
contingent accounts and memorandum accounts.
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.
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 2006. Under U.S. GAAP, reappraisals of assets are not permitted.
F-98
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
E) ALLOWANCE FOR LOAN LOSSES, FINANCIAL LEASES, FORECLOSED ASSETS AND OTHER
RECEIVABLES
As established by the Superintendency of Finance, 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. 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 the
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 by a process that estimates the probable loss inherent in the
portfolio based upon various statistical analyses. This analyses considers
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, 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.
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
analyses. These include migration analysis, in which historical delinquency and
credit loss experience is applied to the current aging of the portfolio, and
analysis that reflects 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.
F-99
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, 2005 and 2006:
2005 2006
--------- -----------
ALLOWANCE FOR LOANS, FINANCIAL LEASE LOSSES AND
FORECLOSED ASSETS UNDER COLOMBIAN GAAP
Allowance for loans and financial lease losses Ps705,882 Ps 834,183
Allowance for accrued interest and other receivables 39,639 33,859
Allowance for foreclosed assets 205,182 174,393
--------- -----------
Ps950,703 Ps1,042,435
--------- -----------
ALLOWANCE FOR LOAN LOSSES UNDER U.S. GAAP
Allowance for loans, financial lease, accrued interest
losses and other related receivables 581,645 507,641
Allowance for foreclosed assets 151,394 118,652
--------- -----------
Ps733,039 Ps 626,293
DIFFERENCE TO BE RECOGNIZED AS AN ADJUSTMENT TO
COLOMBIAN GAAP STOCKHOLDERS' EQUITY Ps217,664 Ps 416,142
========= ===========
2004 2005 2006
-------- ---------- ---------
DIFFERENCE RECOGNIZED IN NET INCOME UNDER U.S.GAAP
Allowance for loans, financial lease losses and other
receivables Ps 2,602 Ps(106,440) Ps193,596
Allowance for foreclosed assets (2,761) (2,446) 1,953
-------- ---------- ---------
Ps (159) Ps(108,886) Ps195,549
======== ========== =========
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,
2005 and 2006 is as follows:
2004(1) 2005(1) 2006
------------ ------------ ------------
Provision at the beginning of the period Ps 364,433 Ps 407,852 Ps 581,645
Currency Translation and other adjustments (12,870) (4,130) (685)
Charge-offs (59,396) (104,543) (145,829)
Recoveries of charged-off loans 49,032 52,451 70,745
Charged to profit and loss account 66,653 230,015 1,765
------------ ------------ ------------
Provision at the end of the period Ps 407,852 Ps 581,645 Ps 507,641
============ ============ ============
Gross Loans and financial leases 10,035,239 18,626,252 24,645,574
F-100
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004(1) 2005(1) 2006
------- ------- ----
Closing customers provisions as a percentage of gross loans 4.06% 3.12% 2.06%
Customers charges against profits as percentage of gross loans 0.66% 1.23% 0.01%
(1) The amounts disclosed in the table for 2005 differs from those disclosed in
the annual report of 2005, because they were reclassificated for
comparative purposes with the presentation of the activity in the allowance
for loans and financial lease losses in 2006.
At December 31, 2005, and 2006, the carrying value of loans
considered to be impaired under SFAS No. 114 (not including restructured loans),
was approximately Ps 211,423 and Ps 348,626, respectively, and the related
allowance for loan losses on those impaired loans totaled Ps 92,611 and Ps
104,397, respectively.
For the years ended December 31, 2004, 2005 and 2006, the Bank
recognized interest income of approximately Ps 6,653, Ps 10,918 and Ps 14,133,
respectively, on such impaired loans.
The total amount of loans evaluated under a methodology different
than SFAS 114 and SFAS 15 methodology was Ps 23,854,886 at December 31, 2006.
Foreclosed assets
Under Colombian GAAP, the Bank must design and adopt its own
internal models for the calculation of provisions for foreclosed assets allowing
the Bank to estimate the expected loss for all types of assets. 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. 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
F-101
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 costs are deferred and
recognized over the life of the related loans as an adjustment of yield.
G) INTEREST RECOGNITION - NON-ACCRUAL LOANS
For Colombian GAAP purposes, 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 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 to 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 received should be applied to reduce the principal to
the extent necessary to remove such doubt.
For the years 2004, 2005 and 2006, 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 years 2005 and 2006, interest income on
past due mortgage loans between 61 and 90 days past due, was accounted as
accrued interest.
H) DEFERRED CHARGES
The Bank and its Subsidiaries have deferred certain pre-operating
expenses and other deferred charges, which are expensed as incurred under U.S.
GAAP.
F-102
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
I) INVESTMENT SECURITIES AND DERIVATIVES
Investment Securities:
The Superintendency of Finance requires the Bank to classify
investment securities to "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 are 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.
Under Colombian GAAP Bancolombia accounts for a portion of their
debt securities classified as trading and available for sale at their cost
basis. The difference between fair value and the cost basis of these securities
is Ps 11,969.
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, 2005 and 2006, the Bank's portfolio was
classified as "trading", "held to maturity" and "available for sale".
F-103
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The carrying amounts, gross unrealized gains and losses and
approximate fair value of debt securities classified as available for sale under
U.S. GAAP are shown below:
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
AVAILABLE FOR SALE - DEBT SECURITIES
DECEMBER 31, 2005
Securities issued or secured by Colombian government Ps1,393,881 Ps54,639 Ps 6,934 Ps1,346,176
Securities issued or secured by government entities 3,431 254 -- 3,177
Securities issued or secured by financial entities 106,242 758 2,747 108,231
Other investments 339,002 2,394 3,117 339,725
----------- ---------- ---------- -----------
Ps1,842,556 Ps58,045 Ps12,798 Ps1,797,309
=========== ======== ======== ===========
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
AVAILABLE FOR SALE - DEBT SECURITIES
DECEMBER 31, 2006
Securities issued or secured by Colombian government Ps1,889,064 Ps13,449 Ps136,532 Ps2,012,147
Securities issued or secured by government entities 10,388 42 81 10,427
Securities issued or secured by financial entities 835,210 5,218 8,165 838,157
Other investments 188,116 4,401 2,129 185,844
----------- -------- --------- -----------
Ps2,922,778 Ps23,110 Ps146,907 Ps3,046,575
=========== ======== ========= ===========
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-104
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, 2005
Compania Suramericana de Inversiones S.A. Surainversiones Ps64,672 Ps64,665 Ps-- Ps7
-------- -------- ---- ---
Ps64,672 Ps64,665 Ps-- Ps7
======== ======== ==== ===
GROSS GROSS
UNREALIZED UNREALIZED COST
FAIR VALUE GAINS LOSSES BASIS
----------- ---------- ---------- -----------
AVAILABLE FOR SALE - EQUITY SECURITIES
DECEMBER 31, 2006
Inmobiliaria Cadenalco Ps3,929 Ps1,438 Ps-- Ps2,491
------- ------- ---- -------
Ps3,929 Ps1,438 Ps-- Ps2,491
======= ======= ==== =======
The scheduled maturities of debt securities at December 31, 2006
were as follows:
AVAILABLE FOR SALE
-------------------------
AMORTIZED FAIR
COST VALUE
----------- -----------
Due in one year or less Ps 160,777 Ps 159,602
Due from one year to five years 1,574,199 1,555,115
Due from five years to ten years 1,196,864 1,092,879
Due more ten years 114,735 115,182
----------- -----------
TOTAL Ps3,046,575 Ps2,922,778
=========== ===========
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 or the 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-105
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In September 2006, the Colombian Government offered to the
holders of certain securities issued by the Colombian Government to swap short
term by long term securities, as a part of Government's plan to restructure the
maturity of its internal debt. The Bank swapped securities, previously
classified as held-to-maturity, in the amount of Ps 571,136, by securities with
a longer term at cost plus accrued and unpaid interest and classified them as
trading. The Bank did not intend to hold the new securities until the new
maturity date. Under US GAAP, the Bank reclassified the remaining securities
previously classified as held-to-maturity, in the amount of Ps 1,107,221, to
available-for-sale and recorded the difference between the carrying value and
the market value, in the amount of Ps 123,386, in other comprehensive income.
The swap of the securities was authorized by the Superintency of Finance and
there under Colombian GAAP, the Bank did not have to change the classification
as held-to-maturity of the remaining securities.
UNREALIZED LOSSES DISCLOSURE
Investments that have been in a continuous unrealized loss
position for less than 12 months are:
GROSS
AVAILABLE FOR SALE UNREALIZED COST
DECEMBER 31, 2006 FAIR VALUE LOSSES BASIS
---------- ---------- ---------
Securities issued or secured by Colombian government Ps277,061 Ps 8,433 Ps285,494
Securities issued or secured by financial entities 188,765 2,811 191,576
Other investments 18,780 481 19,261
--------- -------- ---------
TOTAL Ps484,606 Ps11,725 Ps496,331
========= ======== =========
Investments that have been in a continuous unrealized loss
position for 12 months or longer are:
GROSS
AVAILABLE FOR SALE UNREALIZED COST
DECEMBER 31, 2006 FAIR VALUE LOSSES BASIS
---------- ---------- ---------
Securities issued or secured by Colombian government Ps700,617 Ps128,180 Ps828,797
Securities issued or secured by financial entities 32,627 5,354 37,981
Other investments 61,978 1,648 63,626
--------- --------- ---------
TOTAL Ps795,222 Ps135,182 Ps930,404
========= ========= =========
F-106
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
As of December 31, 2006, 895 investment securities presented
gross unrealized losses.
Available for sale 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 2005 and 2006 was Ps 476,139 and Ps
74,184, 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 of the security has been less than cost;
(b) the financial condition and near-term prospects of the
issuer, including any specific events which may
influence the operations of the issuer (such as changes
in technology that may impair the earnings potential of
the investment, or the discontinuance of a segment of a
business that may affect the future earnings
potential); or
(c) the intent and ability of the Bank to retain its
investment in the issuer for a period of time that
allows for any anticipated recovery in market value.
The Bank also takes into account changes in global and regional
economic conditions and changes related to specific issuers or industries that
could adversely affect these values.
Derivatives:
U.S. GAAP requires that all derivative instruments be recorded on
the balance sheet at their fair value. Changes in the fair value of derivatives
are recorded each period in current earnings or other comprehensive income,
depending on whether a derivative is designated and effective as part of a hedge
transaction and, if it is, the type of hedge transaction. Under Colombian GAAP
Bancolombia accounts for a portion of their swaps contracts at their cost basis.
As of December 31, 2006, Bancolombia does not apply hedge accounting.
Balance sheet classification:
Under Colombian GAAP, the Bank's derivative instruments are
grouped and presented net as either an asset or a liability.
F-107
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 to setoff is
enforceable by law.
Consequently, the relevant assets and liabilities would be
increased in a U.S. GAAP balance sheet, with no effect on net income or
shareholders' equity.
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 an
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 valued by 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 on 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 is used when significant influence
cannot be exercised.
F-108
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, Renting Colombia S.A.,
Bancolombia Puerto Rico Internacional and Leasing Bancolombia 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 and their terms range between three and
five years.
Under Colombian GAAP, for financial entities, leases are
classified as either financial leases or operating leases. Goods provided
through a financial lease to third parties with a purchase option are recorded
in the loan portfolio. Goods provided through an 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.
Renting Colombia 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, 2005 and 2006:
2005 2006
----------- -----------
Total minimum lease payments to be received Ps3,033,438 Ps4,232,550
Estimated residual values of leased property 174,866 238,054
Less: Unearned income (721,848) (985,289)
----------- -----------
Net investment in direct financial leases Ps2,486,456 Ps3,485,315
=========== ===========
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.
YEAR ENDED DECEMBER 31,
2007 1,503,964
2008 1,091,489
2009 741,082
2010 416,361
F-109
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,
--------------------------
2011 219,861
Later years, through 2012 259,793
-----------
TOTAL MINIMUM FUTURE LEASE
PAYMENTS TO BE RECEIVED Ps4,232,550
===========
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,
--------------------------
2007 68,393
2008 51,962
2009 30,249
2010 16,257
2011 5,352
Later years, through 2012 89
---------
TOTAL MINIMUM FUTURE LEASE
PAYMENTS TO BE RECEIVED Ps172,302
=========
M) BUSINESS COMBINATIONS
Purchase method of accounting
In regard to a business combination, the purchase method of
accounting under U.S. GAAP requires that (i) the purchase price be allocated to
the identifiable acquired assets and liabilities on the basis of fair market
value, (ii) the statement of operations of the acquiring company for the period
in which a business combination occurs include the income of the acquired
company after the date of acquisition, 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.
In regard to a business combination, the purchase method of
accounting under Colombian GAAP requires that (i) the purchase price be
allocated to the acquired assets and liabilities on the basis of their book
value, (ii) the statement of income of the acquiring company for the period in
which a business combination occurs include the income of the acquired company
as if the acquisition had occurred on the first day of the reporting period and
(iii) the costs directly related to the purchase business combination not be
considered as a cost of the acquisition, but deferred and amortized over a
reasonable period as determined by management.
Conavi and Corfinsura acquisition and Factoring Bancolombia
acquisition were accounted for using the pooling of interest method under
Colombian GAAP, in accordance with the methodology suggested by the
Superintendency of Finance.
F-110
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Factoring Bancolombia acquisition
On May 8, 2006, BC acquired 9,803,685 shares of Comercia S.A.,
(now Factoring Bancolombia S.A. Compania de Financiamiento Comercial) 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.
On June 30, 2006, BC acquired 6,868,409 shares of Comercia S.A.
(now Factoring Bancolombia S.A. Compania de Financiamiento Comercial),
equivalent to 38.96% 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 17,241 million. Under U.S. GAAP,
the results of Comercia S.A.'s, (now Factoring Bancolombia S.A. Compania de
Financiamiento Comercial) operations have been included in the consolidated
financial statements since that date. For Colombian GAAP purposes the results of
operations of the acquired entity were included in the consolidated statements
of operations of the combined entity since January 1, 2006.
The acquisition of Factoring Bancolombia will allow the Bank and
its Subsidiaries to complement its portfolio of products improving commercial
financing activities.
The aggregate purchase price was Ps 37,101 paid in cash. The
excess of purchase price amounted to Ps 15,054 and Ps 7,267 was assigned to
customers relationships intangible asset (the triangular line), while the
remaining Ps 7,787 was assigned to goodwill. The resulting goodwill was
allocated to the retail segment.
The following tables summarize 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 COMERCIA AS OF
APRIL 30, 2006
-----------------------------
TOTAL PURCHASE PRICE, NET OF CASH ACQUIRED Ps 37,101
---------
Assets acquired 161,407
Premises and equipment, net 3,756
Liabilities assumed 143,116
---------
NET ASSETS ACQUIRED Ps 22,047
=========
Excess of cost over the fair value of
acquired net assets 15,054
Intangible Asset 7,267
---------
GOODWILL Ps 7,787
=========
Under Colombian GAAP, the Bank consolidated Factoring
Bancolombia's earnings since January 1, 2006, 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.
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 2005 and 2006
reflects the consolidated results of operations as if the acquisition of
Factoring Bancolombia 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.
2005
---------
U.S. GAAP Net income 896,691
Revenues 3,047,037
Earnings per share 1,728.66
2006
---------
U.S. GAAP Net income 940,738
Revenues 2,921,880
Earnings per share 1,617.99
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 Factoring Bancolombia'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
Conavi/Corfinsura merger, according to the Superintendency of Finance.
F-112
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 Conavi/Corfinsura 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 Ps 6,396 billion.
At the time of the Conavi/Corfinsura 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 Conavi/Corfinsura 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
Conavi/Corfinsura merger and Fiduciaria Corfinsura S.A., a fiduciary trust
company.
With this Conavi/Corfinsura 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
Conavi/Corfinsura 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 following tables summarize 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.
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
===========
F-113
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 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
===========
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 Conavi/Corfinsura merger
there are no specified contingent payments, options, or commitments.
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
===========
m.i) Goodwill
Under U.S. GAAP, from January 1, 2002, the Bank no longer
amortizes goodwill, but it is subject to an annual impairment test.
F-114
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Under Colombian GAAP, goodwill derived from business combinations
effective before October 2006, was amortized over a maximum period of ten years.
In business combinations that occurred after October 2006, the resulting
goodwill is recorded as a deferred charge and amortized on a monthly basis on
the administrative and other expenses account over a term of twenty (20) years,
unless the supervised entity voluntarily selects a shorter period of
amortization. Annual amortization is determined on an exponential basis. The
different business lines is appraised on an annual basis using technical value
appraisal methods performed by an expert, whose suitability and independence has
been previously rated by the Superintendency of Finance.
The Bank has performed the required impairment test of each
reporting segment'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 2006.
The activity of the goodwill and intangible assets during the
years ended December 31, 2004, 2005 and 2006 is as follows:
2004 2005 2006
--------- --------- ---------
GOODWILL U.S. GAAP
Balance at beginning of year Ps161,265 Ps161,265 Ps569,748
Additions -- 408,483 7,787
--------- --------- ---------
Balance at end of year Ps161,265 Ps569,748 Ps577,535
========= ========= =========
Goodwill under Colombian GAAP 73,388 41,994 34,371
--------- --------- ---------
Difference to be recognized under U.S. GAAP Ps 87,877 Ps527,754 Ps543,164
========= ========= =========
Goodwill by segments was as follows:
DECEMBER 31, DECEMBER 31, DECEMBER 31,
2004 2005 2006
------------ ------------ ------------
Commercial Banking Ps 33,114 Ps253,034 Ps253,034
Retail Banking 104,441 151,418 159,205
Small Business Banking 23,710 27,784 27,784
Leasing 54,238 54,238
Trust 2,493 2,493
Offshore Commercial Banking 31,534 31,534
Brokerage 43,722 43,722
Government Banking 1,199 1,199
Construction Banking 4,326 4,326
--------- --------- ---------
Total Goodwill Ps161,265 Ps569,748 Ps577,535
========= ========= =========
F-115
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
m.ii) Intangible Assets
Conavi and Corfinsura acquisition
Of the Ps 227,563 of acquired intangible assets, Ps 73,134 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:
CUSTOMER RELATIONSHIPS AND CONTRACTUAL AGREEMENTS
Customer relationships and contractual agreements intangibles are
obtained from the level of repeat clients, remaining with the Bank and providing
gains for a specific period of time.
BRAND
In November 2006, the Bank and its subsidiaries changed its
brands and corporate image, in the interest of establishing itself as a
customer-oriented financial group based on an universal banking model. This
decision result in the discontinuation of Conavi and Suvalor's brands. These
brands composed the brand intangible asset, acquired in the Conavi/Corfinsura
merger.
As a result of the decision presented previously, the fair value
of this intangible asset went to zero and consequently, the Bank recognized
impairment loss equivalent to the total carrying amount of the brand intangible
asset.
Factoring Bancolombia acquisition
The excess of purchase price amounted to Ps 15,054 and Ps 7,267
was assigned to customers relationships intangible asset (the triangular line),
while the remaining Ps 7,787 was assigned to goodwill. The resulting goodwill
was allocated to the retail segment.
F-116
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The activity of the intangible assets during the years ended
December 31, 2004, 2005 and 2006 is as follows:
2005 2006
--------- ---------
INTANGIBLE ASSETS
Balance at beginning of year Ps 1,406 Ps223,080
Additions 227,563 7,267
Amortization (5,889) (15,114)
Impairment -- (73,134)
--------- ---------
Balance at end of year Ps223,080 Ps142,099
========= =========
Intangible assets were as follows:
DECEMBER 31, 2005 DECEMBER 31, 2006
------------------------------------------ ------------------------------------------
GROSS CARRYING ACUMMULATED GROSS CARRYING ACUMMULATED
AMOUNT AMORTIZATION IMPAIRMENT AMOUNT AMORTIZATION IMPAIRMENT
-------------- ------------ ---------- -------------- ------------ ----------
Non-Amortizable
intangible assets Ps 73,134 -- -- Ps 73,134 Ps73,134
Amortizable
intangible assets Ps155,991 Ps6,045 -- Ps163,258 Ps21,159 --
========= ======= === ========= ======== ========
The following table shows the amortizable intangible assets gross
carrying amount, detailed with their respective useful lives:
ESTIMATED USEFUL LIFE
DECEMBER 31, 2006 (MONTHS)
----------------- ---------------------
Service asset Ps 6,206 169
Asset management 30,004 125
Loan 77,354 201
Deposits 20,027 166
Customer relationship Conavi and Corfinsura 22,400 105
Customer relationship Factoring Bancolombia 7,267 48
---------
TOTAL Ps163,258
=========
The Bank has performed the required impairment test of intangible
assets, concluding that except for brands, there was no impairment in the
remaining intangible assets.
F-117
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
m.iii) Fair value of assets and liabilities acquired
The condensed balance sheet allocate the fair value adjustments
to each of the respective assets and liabilities.
The following is a detail of the adjustments to the Stockholders'
Equity related to Conavi and Corfinsura and Factoring Bancolombia business
combination:
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.
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.
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
F-118
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 purposes, 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.
P) MINORITY INTEREST
The minority interest corresponds to the proportional adjustments
to the shareholders equity and net income originated by the subsidiaries where
the Bank holds less than 100% of participation.
Q) DISCONTINUED OPERATIONS
In 2005, the Bank 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%). On June 28, 2006, 3001 S.A. was wound up. These
businesses qualify as discontinued operations under U.S. GAAP. The results of
the discontinued operations under U.S. GAAP were as follows:
2004 2005 2006
-------- ---------- --------
Profit (losses) from discontinued
operations before income taxes Ps17,784
Ps (6,281) Ps(2,499)
Income taxes 2,919 (6,949) (5,346)
-------- ---------- --------
Profit (losses) from discontinued
operations Ps20,703 Ps(13,230) Ps(7,845)
======== ========== ========
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, 2005
and 2006, outstanding letters of credit and bank guarantees issued by the Bank
totaled Ps 838,675 and Ps 1,833,366, respectively.
The table below summarizes, at December 31, 2005 and 2006, all of
the Bank's guarantees where the Bank is the guarantor. The maximum potential
amount of future payments
F-119
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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
TOTAL AMOUNT AMOUNT OF FUTURE
EXPIRE WITHIN ONE YEAR EXPIRE AFTER ONE YEAR OUTSTANDING PAYMENTS
----------------------- --------------------- ----------------------- -----------------------
2005 2006 2005 2006 2005 2006 2005 2006
--------- ----------- --------- --------- --------- ----------- --------- -----------
Financial standby Ps474,159 Ps 702,834 Ps 19,061 Ps350,767 Ps493,220 Ps1,053,601 Ps493,220 Ps1,053,601
letters of credit
Bank guarantees 122,280 550,137 223,175 229,628 345,455 779,765 345,455 779,765
--------- ----------- --------- --------- --------- ----------- --------- -----------
TOTAL Ps596,439 Ps1,252,971 Ps242,236 Ps580,395 Ps838,675 Ps1,833,366 Ps838,675 Ps1,833,366
========= =========== ========= ========= ========= =========== ========= ===========
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.
Under U.S. GAAP the amount of the liability recorded by the bank
for guarantees is Ps 3,571. Under Colombian GAAP this amount is recorded as
commissions in the statement of operations.
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, 2005 and 2006 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.
F-120
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, 2005 DECEMBER 31, 2006
---------------------------- ---------------------------
COLOMBIAN COLOMBIAN
GAAP ESTIMATED GAAP ESTIMATED
AMOUNT FAIR VALUE AMOUNT FAIR VALUE
------------ ------------- ------------ ------------
FINANCIAL ASSETS
Cash and cash equivalents Ps 1,730,022 Ps 1,730,022 Ps 2,006,366 Ps 2,006,366
Investment securities 8,459,703 8,358,209 5,677,761 5,535,494
Loans and accrued interest
receivable on loans, net 18,118,636 17,965,219 24,066,681 24,427,082
Customers' acceptances 62,986 62,986 64,030 64,030
Derivatives 70,444 91,428 102,365 102,210
FINANCIAL LIABILITIES:
Deposits Ps18,491,798 Ps18,611,860 Ps23,337,874 Ps23,315,577
Overnight funds 1,331,109 1,331,109 1,009,098 1,009,098
Bank acceptances outstanding 63,126 63,126 64,030 64,030
Interbank borrowings 1,720,240 1,720,240 1,079,741 1,079,741
Borrowings from domestic
development banks 2,237,708 2,237,708 2,467,639 2,467,639
Long term debt 1,664,739 1,725,444 1,313,782 1,334,032
============ ============= ============ ============
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 using
one of three methods depending of the type of loan being analyzed. The estimated
fair value of the homogeneous loan portfolio, including consumer, mortgage and
small business loans, has been determined based upon
F-121
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
various statistical analyses. These include migration analysis, in which
historical delinquency and credit loss experience is applied to the current
aging of the portfolio, and with analysis that reflect current trends and
conditions. The estimated fair value of loans with collateral has been
calculated using the realizable value of collateral.
Derivatives
The Bank's derivatives are recorded at fair value on a daily
basis by class of instrument (as described below) as prescribed in the rules
issued by the Superintendency of Finance:
Foreign exchange forward contracts:
The purchase or sale value of the exchange rate is estimated to
obtain the net value in foreign currency at valuation day and calculate the net
gain or loss.
Financial instruments forward contracts:
The fair value without yields is estimated to value the agreed
amount to present value and calculate the net gain or loss.
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.
Long term debt
Long-term debt are bonds issued by the Bank, Leasing Bancolombia
S.A. (before Leasing Colombia S.A.), Fundicom S.A., Renting Colombia (before
Surenting S.A.) and
F-122
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Sufinanciamiento S.A.
The fair value of bonds issued by the Bank, Leasing Bancolombia
S.A. and Renting Colombia S.A. were estimated using quoted market prices. Bonds
issued by Fundicom S.A. and Sufinanciamiento S.A. are non marketable, and
therefore the carrying amounts were used 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) EARNINGS PER SHARE
Under Colombian GAAP, earnings per share ("EPS") are calculated
by dividing net income by the weighted average 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 calculation with the diluted EPS calculation. Basic EPS is calculated
by dividing net income available to common stockholders by the weighted average
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, 2004, 2005 and 2006, the Bank had a
simple capital structure. Therefore, there was no difference between basic or
diluted EPS for these years.
The following table summarizes information related to the
computation of basic EPS for the years ended December 31, 2004, 2005 and 2006
(in millions of pesos, except per share data):
2004 2005 2006
---------- ---------- ----------
U.S. GAAP consolidated net income Ps 642,126 Ps 891,121 Ps 941,183
Less preferred share dividends 67,092 110,806 116,041
---------- ---------- ----------
Income attributable to common stockholders 575,034 780,315 825,142
========== ========== ==========
Income from continuing operations attributable to common shareholders
554,331 793,545 832,987
Income (loss) from operations and disposal of discontinued operations 20,703 (13,230) (7,845)
---------- ---------- ----------
Income attributable to common shareholders 575,034 780,315 825,142
Weighted average number of common shares
outstanding used in basic EPS calculation (in millions) 398 455 510
F-123
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2004 2005 2006
---------- ---------- ----------
Basic and Diluted earnings per share (U.S. GAAP):
Income from continuing operations 1,392.79 1,744.05 1,634.25
Income (loss) from operations and disposal of discontinued operations
52.02 (29.08) (15.39)
---------- ---------- ----------
Income attributable to common shareholders Ps1,444.81 Ps1,714.97 Ps1,618.86
========== ========== ==========
V) SEGMENTS DISCLOSURE
Operating segments are defined as components of an enterprise
about which separate financial information is available that is regularly used
by the finance vice president (the chief operating decision maker) in deciding
how to allocate resources and assessing performance.
The Bank has strategically organized 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.
The Bank does not have any individual external customer which
represents 10% or more of the enterprise's revenues.
The following presents information on reported operating segment
profit or loss, and segment assets:
F-124
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 and expenses 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 Ps 88,265 Ps 7,842 Ps 42,285 Ps 90,355 Ps 605,010
Revenues and expenses 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) These costs are calculated based on the funds that segments use or provide
and do not have an impact in the final result.
F-125
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 CONSTRUCTION INSTITUTIONAL
Banking Banking Banking Banking(2) Banking
----------- ----------- ----------- ------------ -------------
Revenues from external customers Ps 474,916 Ps 32,652 Ps 50,724 Ps 1,104 Ps 15,092
Revenues and expenses from transactions
with other operating segments of the
same enterprise 76,998 145,022 161,358 3,118 27,850
Interest income 1,059,092 379,434 375,839 40,244 82,570
Interest expense 245,978 87,318 127,094 1,642 38,579
Net interest revenue 813,114 292,116 248,745 38,602 43,991
Depreciation and amortization expense -- -- -- -- --
Provision for loan losses 77,229 3,497 13,338 1,774 1,913
Administrative and other expense 697,565 76,472 85,086 4,763 36,397
Income tax expense or benefit -- -- -- -- --
Other income or expense, net 193 5 5 -- --
Segment profit before distribution of
income (expense) for treasury funds 590,427 389,826 362,408 36,287 48,623
Distribution of income (expense) for
treasury funds(1) 102,443 (84,480) (87,934) (20,556) 17,486
----------- ----------- ----------- --------- ---------
Segment profit Ps 692,870 Ps 305,346 Ps 274,474 Ps 15,731 Ps 66,109
=========== =========== =========== ========= =========
Segments assets Ps7,710,861 Ps3,757,603 Ps3,730,214 Ps328,150 Ps825,460
=========== =========== =========== ========= =========
Offshore
CORPORATE COMMERCIAL
Treasury Headquarters Banking Trust Leasing
----------- ------------ ----------- --------- -----------
Revenues from external customers Ps -- Ps 19,572 Ps 12,618 Ps 58,431 Ps 308,027
Revenues and expenses from transactions
with other operating segments of the
same enterprise -- (414,894) 10,604 753 6,654
Interest income 828,418 (3,320) 178,409 9,902 67,845
Interest expense 358,932 33,110 75,422 -- 210,411
Net interest revenue 469,486 (36,430) 102,987 9,902 (142,566)
Depreciation and amortization expense -- 2,103 706 1,280 11,871
Provision for loan losses 27,560 16,176 28,538 850 19,459
Administrative and other expense 10,895 418,951 8,952 30,427 57,950
Income tax expense or benefit -- 202,362 -- 13,351 32,389
Other income or expense, net -- (34,392) 12,346 904 6,546
Segment profit before distribution of
income (expense) for treasury funds 431,031 (1,105,736) 100,359 24,082 56,992
Distribution of income (expense) for
treasury funds(1) 73,041 -- -- -- --
----------- ------------ ----------- --------- -----------
Segment profit Ps 504,072 Ps(1,105,736) Ps 100,359 Ps 24,082 Ps 56,992
=========== ============ =========== ========= ===========
Segments assets Ps7,375,750 Ps 997,949 Ps4,166,424 Ps129,858 Ps3,452,069
=========== ============ =========== ========= ===========
ALL OTHER
Brokerage(3) Manufacturing Segments Total
------------ ------------- --------- ------------
Revenues from external customers Ps 67,346 Ps 3,461 Ps 83,161 Ps 1,127,104
Revenues and expenses from transactions
with other operating segments of the
same enterprise (2,547) (707) 22,823 37,032
Interest income 59,488 129 25,460 3,103,510
Interest expense 29,204 362 14,579 1,222,631
Net interest revenue 30,284 (233) 10,881 1,880,879
Depreciation and amortization expense 1,254 441 12,998 30,653
Provision for loan losses 11 12 1,765 192,122
Administrative and other expense 56,345 2,532 83,413 1,569,748
Income tax expense or benefit 19,047 622 9,742 277,513
Other income or expense, net 14,313 704 8,310 8,934
Segment profit before distribution of
income (expense) for treasury funds 32,739 (382) 17,257 983,913
Distribution of income (expense) for
treasury funds(1) -- -- -- --
---------- -------- --------- ------------
Segment profit Ps 32,739 Ps (382) Ps 17,257 Ps 983,913
========== ======== ========= ============
Segments assets Ps 421,797 Ps87,888 Ps538,059 Ps33,522,082
========== ======== ========= ============
(1) These costs are calculated based 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
Conavi/Corfinsira merger and targets the building construction industry.
(3) In the Annual Reports of 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 (now Valores Bancolombia) as a result of the
Conavi/Corfinsura 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 year 2004.
F-126
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2006
---------------------------------------------------
Small
Retail Commercial Business Construction
Banking Banking Banking Banking(2)
----------- ----------- ----------- ------------
Revenues from external customers Ps 428,531 Ps 134,992 Ps 117,282 Ps 2,341
Revenues and expenses from transactions
with other operating segments of the
same enterprise 69,727 297,645 92,006 2,967
Interest income 820,398 756,876 387,043 65,823
Interest expense 196,432 66,929 51,395 1,722
Net interest revenue 623,966 689,947 335,648 64,101
Depreciation and amortization expense 59,151 14,848 16,898 906
Provision for loan losses 86,327 (7,179) 37,829 1,456
Administrative and other expense 662,166 140,453 186,052 9,976
Income tax expense or benefit 19,275 25,807 18,319 3,041
Other income or expense, net (791) (116,209) 223 2,090
Segment profit before distribution of
income (expense) for treasury funds 294,514 832,446 286,061 56,120
Distribution of income (expense) for
treasury funds(1) 74,518 (304,177) (44,607) (28,346)
----------- ----------- ----------- ---------
Segment profit Ps 369,032 Ps 528,269 Ps 241,454 Ps 27,774
=========== =========== =========== =========
Segments assets Ps6,782,548 Ps8,852,141 Ps3,137,485 Ps685,334
=========== =========== =========== =========
2006
-----------------------------------------------------------------
Governmental
And Offshore
Institutional Corporate Commercial
Banking Treasury Headquarters Banking Trust
------------- ----------- ------------ ----------- ---------
Revenues from external customers Ps 36,377 -- Ps (1,012) Ps 130 Ps 64,550
Revenues and expenses from transactions
with other operating segments of the
same enterprise 54,498 -- (455,981) 12,493 1,112
Interest income 172,830 400,053 7,462 495,222 4,419
Interest expense 289,709 246,058 71,400 123,286 --
Net interest revenue (116,879) 153,995 (63,938) 371,936 4,419
Depreciation and amortization expense 6,699 4,867 3,433 988 808
Provision for loan losses (37,106) (30,134) 80,446 13,316 533
Administrative and other expense 73,754 53,590 338,938 9,099 32,917
Income tax expense or benefit 20,403 12,839 4,978 -- 13,127
Other income or expense, net -- -- 53,605 (223,056) 4,833
Segment profit before distribution of
income (expense) for treasury funds (89,754) 112,833 (895,121) 138,100 27,529
Distribution of income (expense) for
treasury funds(1) 310,701 (8,089) -- -- --
----------- ----------- ----------- ----------- ---------
Segment profit Ps 220,947 Ps 104,744 Ps (895,121) Ps 138,100 Ps 27,529
=========== =========== =========== =========== =========
Segments assets Ps2,228,962 Ps3,090,780 Ps3,667,365 Ps4,216,594 Ps140,376
=========== =========== =========== =========== =========
2006
--------------------------------------------------------------
All other
Leasing Brokerage Manufacturing Segments Total
----------- --------- ------------- --------- ------------
Revenues from external customers Ps 38,515 Ps 71,066 Ps 2,999 Ps 82,755 Ps 978,526
Revenues and expenses from transactions
with other operating segments of the
same enterprise 12,691 (850) (705) 73,500 159,103
Interest income 437,977 62,454 217 6,629 3,617,403
Interest expense 254,752 36,920 549 13,054 1,352,206
Net interest revenue 183,225 25,534 (332) (6,425) 2,265,197
Depreciation and amortization expense 10,237 946 217 13,919 133,917
Provision for loan losses 51,741 3,862 43 1,638 202,772
Administrative and other expense 68,689 62,311 2,284 99,267 1,739,496
Income tax expense or benefit 36,475 8,726 222 11,666 174,878
Other income or expense, net 12,138 3,276 (1,699) 22,459 (243,131)
Segment profit before distribution of
income (expense) for treasury funds 79,427 23,181 (2,503) 45,799 908,632
Distribution of income (expense) for
treasury funds(1) -- -- -- -- --
----------- --------- -------- --------- ------------
Segment profit Ps 79,427 Ps 23,181 Ps(2,503) Ps 45,799 Ps 908,632
=========== ========= ======== ========= ============
Segments assets Ps4,528,718 Ps295,329 Ps20,506 Ps609,892 Ps38,256,030
=========== ========= ======== ========= ============
(1) These costs are calculated based 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
Conavi/Corfinsura merger and it targets the building construction industry.
F-127
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 segment's
revenues, profit or loss and assets, to the Banks' consolidated totals:
2004 2005 2006
------------ ------------ -------------
REVENUES
Revenues for reportable segments(1) Ps 2,499,321 Ps 4,267,646 Ps 4,755,032
Non-operating income(2) (24,679) (20,166) (372,237)
Elimination of intersegment revenues (56,366) (37,032) (159,103)
------------ ------------ -------------
Total Revenues for reportable segments(3) Ps 2,418,276 Ps 4,210,448 Ps 4,223,692
============ ============ =============
PROFIT OR LOSS
Segment Profit 635,044 983,913 908,632
Elimination of inter-segment profits (56,366) (37,032) (159,103)
------------ ------------ -------------
NET INCOME Ps 578,678 Ps 946,881 Ps 749,529
============ ============ =============
ASSETS
Segment Assets 19,746,508 33,522,082 38,256,030
Elimination of inter-segment assets (2,267,379) (2,718,565) (3,767,334)
------------ ------------ -------------
CONSOLIDATED TOTAL Ps17,479,129 Ps30,803,517 Ps 34,488,696
============ ============ =============
----------
(1) Total revenues for reportable segments include Revenues from external
customers, Revenues and expenses from transaction with other operating
segments of the same enterprise and interest income.
(2) Non-operating income represent other income classified as revenues
for segment reporting purposes.
(3) 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:
2005 2006
---------------------------- ----------------------------
LONG LONG
GEOGRAPHIC INFORMATION REVENUES LIVED - ASSETS REVENUES LIVED - ASSETS
----------- -------------- ----------------------------
Republic of Colombia Ps3,990,600 Ps734,419 Ps3,801,365 Ps878,917
Republic of Panama and Cayman Islands 202,018 29,810 512,629 12,285
Puerto Rico 42,897 131 37,171 141
USA 11,965 326 31,630 928
----------- --------- ----------- ---------
Total 4,247,480 764,686 4,382,795 892,271
Eliminations (37,032) 7,144 (159,103) (13)
----------- --------- ----------- ---------
TOTAL, NET Ps4,210,448 Ps771,830 Ps4,223,692 Ps892,258
=========== ========= =========== =========
F-128
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The segments reported embrace the following activities:
RETAIL BANKING: The Bank's Retail Banking segment provides a wide
range of financial products and services to individuals and SMEs. This segment
is important for the Bank's funding and generation of revenues.
COMMERCIAL BANKING: The Commercial Banking Segment provides
commercial banking products and services to all sectors of the economy.
Corporate customers are segmented by their economic activity and 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 10,000, as well as individuals who work
independently in the retail, cattle-raising and agricultural sectors, among
others. In 2005, the structure of this segment changed aiming to enhance
competitiveness in the SMEs banking market and the corporate banking market.
CONSTRUCTION BANKING: The Construction Banking segment provides
services to the professional building construction industry. Construction
customers are segmented by the number of construction projects they own.
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, as well as electric and financial corporations. The
governmental customers include public sector entities.
TREASURY: The Bank's Treasury Division is responsible for the
management of the Bank's treasury products, its proprietary liquidity, and 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, and
Bancolombia Puerto Rico Internacional, Inc located in Puerto Rico provide a
complete line of banking services mainly to Colombian customers. These 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, the Bank also offers to its high net
worth customers and private banking customers investment opportunities in U.S.
Dollars, savings accounts and checking accounts, Time Deposits, and investment
funds.
TRUST: The Bank offers, through its Subsidiary Fiduciaria
Bancolombia S.A., five mutual funds and one voluntary retirement fund, all of
which are designed to provide customers with the opportunity to diversify their
investments.
F-129
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As of December 31, 2006, the Bank had Ps 2,603,347 in total
assets under management, decreasing 9.56% from Ps 2,878,543 in 2005, due to a
period of exceptional volatility which lasted from April 2006 to June 2006 and
negatively affected all funds valuation in the domestic market. Despite the Ps
275,196 decrease, the funds managed by the fiduciary increased their market
share 219 basic points.
LEASING: Leasing Bancolombia S.A. and its financial subsidiaries
(Suleasing Internacional S.A., Suleasing International USA, Inc. and Suleasing
Internacional do Brasil Locacao de Bens S.A.), Renting Colombia S.A. and
Sufinanciamiento S.A., as the Bank's Subsidiaries specialized in lease
activities, offer financial and operational leases. The main areas that require
lease financing are infrastructure, import of goods, international leases, real
estate, vehicles for executives, leasing for suppliers, and cattle raising.
Leasing Bancolombia 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. Renting Colombia S.A., a non-financial subsidiary of Leasing
Bancolombia, offers broad solutions for large companies' transport and vehicle
needs. Renting Colombia provides vehicle renting services and fleet management
services for individuals and entities.
BROKERAGE: As of December 31, 2006, Valores Bancolombia S.A
registered an accumulated income of approximately Ps 121,340. It also ranked as
one of the top firms of the sector on an accumulated net profits basis,
registering a total of approximately Ps 18,980.
Valores Bancolombia offers its customers investment alternatives
both in the Colombian and in the international markets.
In the domestic market, customers may access through Valores
Bancolombia investments in fixed income securities, equity securities and a wide
range of mutual funds, including a series of Renta Valores Bancolombia
investment funds (with different risk levels, minimum investment terms and
portfolio composition) and the Opcion Colombia and Capital investment funds,
which are distributed through Valores Bancolombia's own sales force as well as
through the Bank's banking network.
MANUFACTURING: The manufacturing segment of the Bank provides a
wide range of products to individuals and companies such as: 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:
- Almacenar S.A., a Subsidiary of the Bank, provides warehouse and
logistics services;
- Banca de Inversion S.A., a Subsidiary of the Bank, specializes in
providing investment banking services to a variety of the Bank's
customers.
F-130
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
W) RECENT U.S. GAAP PRONOUNCEMENTS
In February 2006, the FASB issued Statement No. 155 ("SFAS 155")
"Accounting for Certain Hybrid Financial Instruments - an amendment of FASB
Statements No. 133 and 140". SFAS 155 amends SFAS 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAS 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
and resolves issues addressed in SFAS 133 Implementation Issue No. D1,
"Application of Statement 133 to Beneficial Interests in Securitized Financial
Assets" as follows:
- Permits fair value remeasurement for any hybrid
financial instrument that contains an embedded
derivative that otherwise would require bifurcation;
- Clarifies which interest-only strips and principal-only
strips are not subject to the requirements of Statement
133;
- 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;
- Clarifies that concentrations of credit risk in the
form of subordination are not embedded derivatives; and
- Amends SFAS 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.
SFAS 155 is effective for all financial instruments acquired or
issued after the first fiscal year beginning after September 15, 2006.
F-131
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In March 2006, the FASB issued Statement No. 156 ("SFAS 156")
"Accounting for Servicing of Financial Assets - an amendment of FASB Statement
No. 140". SFAS 156 amends SFAS 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", with respect to the
accounting for separately recognised servicing assets and servicing liabilities.
SFAS 156 requires a company to recognise a servicing asset or servicing
liability each time it undertakes an obligation to service a financial asset by
entering into a servicing contract principally in a transfer of the servicer's
financial assets that either meets the requirements for sale accounting, or is
to a qualifying special-purpose entity in a guaranteed mortgage securitization
in which the transferor retains all of the resulting securities and classifies
them as either available-for-sale securities or trading securities in accordance
with SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities". SFAS 156 requires all separately recognised servicing assets and
servicing liabilities to be initially measured at fair value, if practicable,
and permits a company to choose to subsequently measure each class of separately
recognised servicing assets and servicing liabilities using either a specified
amortisation method or a specified fair value measurement method. At its initial
adoption, SFAS 156 permits a one-time reclassification of available-for-sale
securities to trading securities by companies with recognised servicing rights,
without calling into question the treatment of other available-for-sale
securities under SFAS 115, provided that the available-for-sale securities are
identified in some manner as offsetting the company's exposure to changes in
fair value of servicing assets or servicing liabilities that a servicer elects
to subsequently measure at fair value. SFAS 156 is applicable to all
transactions entered into in fiscal years that begin after September 15, 2006.
The Bank is currently evaluating the impact that SFAS 156 will have on BC's
Financial Statements.
In September 2006, the FASB issued Statement No. 157 ("SFAS 157")
"Fair Value Measurement". SFAS 157 provides a single definition of fair value,
together with a framework for measuring it, and requires additional disclosure
about the use of fair value to measure assets and liabilities. SFAS 157 also
emphasises that fair value is a market-based measurement, not an entity-specific
measurement, and sets out a fair value hierarchy with the highest priority being
quoted prices in active markets. Under SFAS 157 fair value measurements are
disclosed by level within that hierarchy. While the Statement does not add any
new fair value measurements, it may change current practice. SFAS 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007. The Bank is currently evaluating the impact of SFAS 157 on
the Company's financial position and results of operations.
In February 2007, the FASB issued Statement No. 159 ("SFAS 159")
"The Fair Value Option for Financial Assets and Financial Liabilities". SFAS 159
creates a fair value option under which an entity may irrevocably elect fair
value as the initial and subsequent measurement attribute for certain financial
assets and liabilities on a contract-by-contract basis, with changes in fair
value recognized in earnings as these changes occur. SFAS 159 is effective as of
the beginning of the first fiscal year beginning after November 15, 2007. The
Bank is currently analyzing the effect that SFAS 159 will have on BC's U.S.GAAP
disclosures.
F-132
BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In July 2006, the FASB issued interpretation No. 48 "Accounting
for Uncertainty in Income Taxes - an interpretation of FASB Statement No.109".
FIN 48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
The evaluation of a tax position in accordance with this
interpretation is a two-step process. The first step is recognition: the
enterprise determines whether it is more likely than not that a tax position
will be sustained upon examination, including resolution of any related appeals
or litigation processes, based on the technical merits of the position. In
evaluating whether a tax position has met the more-likely-than-not recognition
threshold, the enterprise should presume that the position will be examined by
the appropriate taxing authority that has full knowledge of all relevant
information. The second step is measurement: a tax position that meets the
more-likely-than-not recognition threshold is measured to determine the amount
of benefit to recognise in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent likely
of being realised upon ultimate settlement. Differences between tax positions
taken in a tax return and amounts recognised in the financial statements will
generally result in one of the following: (a) an increase in a liability for
income taxes payable or a reduction of an income tax refund receivable; (b) a
reduction in a deferred tax asset or an increase in a deferred tax liability; or
both (a) and (b).
Tax positions that previously failed to meet the
more-likely-than-not recognition threshold should be recognised in the first
subsequent financial reporting period in which that threshold is met. Previously
recognised tax positions that no longer meet the more-likely-than-not
recognition threshold should be derecognised in the first subsequent financial
reporting period in which that threshold is no longer met. This interpretation
is effective from January 1, 2007 for the Bank. We are currently evaluating the
impact of the requirements of FIN 48 on our financial position and results of
operations.
F-133