Form 20-F/A
Table of Contents

AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 23, 2009
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 
FORM 20-F/A
 
AMENDMENT NO 2
(Mark One)
     
o   REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
OR
     
o   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)
Avenida Los Industriales Carrera 48 No. 26-85
Medellin, Colombia
(Address of principal executive offices)
Juan Esteban Toro Valencia, Investor Relations Manager
Avenida Los Industriales Carrera 48 No. 26-85, Medellín, Colombia
Tel. +574 440 1837, Fax. + 574 404 5146, e-mail: juatoro@bancolombia.com
(Name, Telephone, E-Mail and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
     
Title of each Class   Name of each exchange on which registered
American Depositary Shares   New York Stock Exchange
Preferred Shares   New York Stock Exchange*
 
     
*  
Bancolombia’s preferred shares are not listed for trading directly, but only in connection with its American Depositary Shares, which are evidenced by American Depositary Receipts, each representing 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   278,122,419
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ     No o
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 o     No þ
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 þ     No o
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 þ   Accelerated filer o   Non-accelerated filer o
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
         
U.S. GAAP   International Financial Reporting Standards as issued by the International Accounting Standards Board   Other þ
If “Other” has been checked in response to the previous question indicate by check mark which financial statement item the registrant has elected to follow
Item 17 o     Item 18 þ
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 o     No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the precedent 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes o     No o
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS.)
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
Yes o     No o
 
 

 

 


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EXPLANATORY NOTE

This Amendment No. 2 on Form 20-F/A (this “Amendment No. 2”) amends the Bank’s annual report on Form 20-F for the year ended December 31, 2007, filed with the Securities and Exchange Commission (the “SEC”) on July 8, 2008 (the “original filing”). The Bank is filing this Amendment No. 2 to include under Item 18 the report relating to the financial statements of Banagrícola S.A. and its subsidiaries as of December 31, 2007 audited by PriceWaterhouseCoopers, S.A. The report of PriceWaterhouseCoopers, S.A. was included in the original filing but was inadvertently omitted from the Amendment No.1 on Form 20-F/A that was filed on June 29, 2009 (“Amendment No.1”).

Additionally, the Bank amends Item 19 of the original filing by including as exhibit 15.1 the consent by PriceWaterhouseCoopers, S.A. to the incorporation by reference of their report to the registration statement in Form F-3 No. 333-142898 and by adding updated CEO and CFO certifications as exhibits 12.1, 12.2, 13.1 and 13.2.

The revisions mentioned above appear on the following pages or exhibits:
ITEM 18. FINANCIAL STATEMENTS
     
 
  Page F-4 (Report of independent registered public accounting firm);

 

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ITEM 19. EXHIBITS
The following exhibits are filed as part of this Annual Report.
     
12.1
  CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
12.2
  CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
13.1
  CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
13.2
  CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
15.1
  Consent of PriceWaterhouseCoopers, S.A.
Except for the certifications, this Amendment No. 2 speaks as of the filing date of the original filing. Other than as set forth above, this Amendment No. 2 does not, and does not purport to, amend, update or restate any other information or disclosure included in the original filing or reflect any events that have occurred after the filing date of the original filing. This amendment should be read in conjunction with the Bank’s filings made with the SEC subsequent to the original filing, as information in such reports and documents may update or supersede certain information contained in this amendment. This amendment retains the page numbering of the original filing for ease of reference.

 

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PART III
FINANCIAL STATEMENTS
ITEM 18. FINANCIAL STATEMENTS
Reference is made to pages F — 1 through F — 149.
ITEM 19. EXHIBITS

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

     
1. (2)
  English Translation of Corporate by-laws (estatutos sociales) of the registrant, as amended on March 01, 2007.
2. (1)
  The Deposit Agreement entered into between Bancolombia and The Bank of New York, as amended.
4.1 (2)
  Master Stock Purchase Agreement among Bancolombia (Panama) S.A. and the Majority Shareholders of Banagrícola S.A. and first amendment.
4.2 (2)
  Byssa Stock Purchase Agreement among Bancolombia (Panama) S.A. and the Majority Shareholders Bienes y Servicios S.A.
4.3 (2)
  English Summary of the Stock Sale Agreement among Bancolombia S.A. and Portal de Inversiones S.A.
7. (3)
  Selected Ratios’ Calculation.
8.1 (3)
  List of Subsidiaries.
11. (3)
  English translation of the Ethics Code of the registrant, as amended on June 23, 2008.
12.1
  CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
12.2
  CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
13.1
  CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
13.2
  CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
15(a) (3)
  English Translation of Corporate Governance Code (Código de Buen Gobierno) of the registrant, as amended on June 23, 2008.
15.1
  Consent of PriceWaterhouseCoopers, S.A.

(1) Incorporated by reference to the Registration Statement in Form F-6, filed by Bancolombia on January 14, 2008.

(2) Incorporated by reference to the Bank’s Annual Report on Form 20-F for the year ended December 31, 2006 filed on May 10, 2007.

(3) Incorporated by reference to the Bank’s Annual Report on Form 20-F for the year ended December 31, 2007 filed on July 8, 2008.

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: July 23, 2009
         
  BANCOLOMBIA S.A.
 
 
  By:   /s/ JAIME ALBERTO VELÁSQUEZ BOTERO    
    Name:   Jaime Alberto Velásquez Botero.   
    Title:   Chief Financial Officer   

 

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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
         
    Page  
 
       
    F-2  
 
       
    F-7  
 
       
    F-9  
 
       
    F-11  
 
       
    F-12  
 
       
    F-14  
 
       
 Exhibit 12.1
 Exhibit 12.2
 Exhibit 13.1
 Exhibit 13.2
 Exhibit 15.1

 

 


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  Deloitte & Touche Ltda.
 
  Edificio Corficolombiana
 
  Calle 16 Sur No 43 A-49 Pisos 9 y 10
 
  A.A 404
 
  Nit 860.005.813-4
 
  Medellin
 
  Colombia
 
   
 
  Tel: 57(4) 313 56 54
 
  Fax: 57(4) 313 93 43
 
  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 of December 31, 2007 and 2006, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2007. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on the financial statements based on our audits. We did not audit the consolidated financial statements of Banagrícola, S.A. (a consolidated subsidiary acquired by the Bank on May 16, 2007) and its subsidiaries, which statements reflect total assets and income before taxes constituting 16.30% and 15.30%, respectively, of the related consolidated totals for the year ended December 31, 2007. Those statements, prepared in accordance with the accounting standards prescribed by the Superintendence of Financial System of EI Salvador, were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to the amounts included for Banagrícola, S.A. and its subsidiaries on such basis of accounting, is based solely on the report of the other auditors.
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 (including the Bank’s conversion of the amounts in the financial statements of Banagrícola S.A. and its subsidiaries, prepared in conformity with accounting standards prescribed by the Superintendence of Financial System of El Salvador, to amounts in conformity with accounting principles generally accepted in Colombia and the regulations of the Colombian Superintendency of Finance (collectively “Colombian GAAP”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”)). 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 and the report of the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, such consolidated financial statements present fairly, in all material respects, the financial position of Bancolombia S.A. and subsidiaries as of December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007, in conformity with Colombian GAAP.

 

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Colombian GAAP vary in certain significant respects from 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 2b. Such U.S. dollar amounts are presented solely for the convenience of readers in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bank’s internal control over financial reporting as of December 31, 2007, based on the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management excluded from its assessment the internal control over financial reporting of Banagrícola, S.A. and its subsidiaries which was acquired on May 16, 2007. Our report dated July 7, 2008, and June 25, 2009 as to the effects of the restatements discussed in Note 32, expressed an unqualified opinion on the Bank’s internal control over financial reporting excluding Banagrícola, S.A. and its subsidiaries.
As discussed in Note 32, the accompanying financial statements have been restated.
/s/ Deloitte & Touche Ltda.
Medellin, Colombia
July 7, 2008 (June 25, 2009 as to the effects of the restatements discussed in Note 32)

 

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PRICEWATERHOUSECOOPERS

Ave Samuel Lewis y

Calle 55 E

Apartado 0819-05710

El Dorado Panamá R. P.

Teléfono (507) 206-9200

Fax (507) 264-5527

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of Banagrícola, S.A.

We have audited the accompanying consolidated balance sheets of Banagrícola, S.A. and its subsidiaries as of December 31, 2007 and 2006, and the related consolidated statements of income, shareholder’s equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’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, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Banagrícola, S.A. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for the years then ended in conformity with accounting standards prescribed by the Superintendence of Financial System of El Salvador as described in Note 2.

As described in Note 2, the accompanying consolidated financial statements have been prepared in conformity with accounting standards for controlling entities issued by the Superintendence of Financial Systems of El Salvador, which is a comprehensive basis of accounting other than International Financial Reporting Standards.

/s/ PriceWaterhouseCoopers

June 28, 2008

Panama, Republic of Panama

 

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  Deloitte & Touche Ltda.
 
  Edificio Corficolombiana
 
  Calle 16 Sur No 43 A-49 Pisos 9 y 10
 
  A.A 404
 
  Nit 860.005.813-4
 
  Medellin
 
  Colombia
 
   
 
  Tel: 57(4) 313 56 54
 
  Fax: 57(4) 313 93 43
 
  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 internal control over financial reporting of Bancolombia S.A. and subsidiaries (the “Bank”) as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in the Management’s Report on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Banagrícola S.A. and its subsidiaries, which was acquired on May 16, 2007 and whose financial statements constitute 16.15% of total assets and 10.2% of income before taxes of the consolidated financial statement amounts as of and for the year ended December 31, 2007. Accordingly, our audit did not include the internal control over financial reporting at Banagrícola S.A. and its subsidiaries. The Company’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, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’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, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
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

 

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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.
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, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, 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, 2007 of the Bank and our report dated July 7, 2008 and June 25, 2009 as to the effects of the restatements discussed in Note 32, 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 2b. of such consolidated financial statements.
/s/ Deloitte & Touche Ltda.
Medellin, Colombia
July 7, 2008 (except for the effects of the restatement discussed in Note 32 to which the date is June 25, 2009)

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and 2007
(Stated in millions of pesos and thousands of U.S. Dollars)
                             
    Notes   2006     2007     2007(1)  
                        U.S. Dollar  
Assets
                           
 
                           
Cash and cash equivalents:
                           
Cash and due from banks
  4   Ps 1,548,752     Ps 3,618,619     US$ 1,796,055  
Overnight funds
        457,614       1,609,768       798,987  
 
                     
Total cash and cash equivalents
        2,006,366       5,228,387       2,595,042  
 
                     
 
                           
Investment securities:
  5                        
Debt securities:
        5,530,559       5,596,051       2,777,527  
Trading securities
        2,605,852       1,916,012       950,987  
Available for sale
        1,810,584       1,954,593       970,137  
Held to maturity
        1,114,123       1,725,446       856,403  
Equity securities
        224,787       253,747       125,944  
Trading securities
        61,640       93,125       46,221  
Available for sale
        163,147       160,622       79,723  
Market value allowance
        (77,585 )     (75,547 )     (37,496 )
 
                     
Total investment securities
        5,677,761       5,774,251       2,865,975  
 
                     
 
                           
Loans and financial leases:
  6                        
Commercial loans
        16,028,505       23,397,058       11,612,827  
Consumer loans
        3,587,260       6,593,211       3,272,455  
Small business loans
        91,078       129,900       64,474  
Mortgage loans
        1,385,445       2,883,628       1,431,251  
Financial leases
        3,553,286       4,698,827       2,332,202  
Allowance for loans and financial leases losses
  7     (834,183 )     (1,457,151 )     (723,238 )
 
                     
Loans and financial leases, net
        23,811,391       36,245,473       17,989,971  
 
                     
 
                           
Accrued interest receivable on loans and financial leases:
                           
Accrued interest receivable on loans and financial leases
        266,934       431,863       214,350  
Allowance for accrued interest losses
  7     (11,644 )     (33,303 )     (16,530 )
 
                     
Interest accrued, net
        255,290       398,560       197,820  
 
                     
 
                           
Customers’ acceptances and derivatives
  8     166,395       196,001       97,283  
Accounts receivable, net
  9     562,598       716,106       355,430  
Premises and equipment, net
  10     712,722       855,818       424,774  
Operating leases, net
  11     167,307       488,333       242,378  
Foreclosed assets, net
  15     18,611       32,294       16,029  
Prepaid expenses and deferred charges
  12     46,462       137,901       68,445  
Goodwill
  14     40,164       977,095       484,968  
Other
  13     675,265       580,642       288,194  
Reappraisal of assets
  16     348,364       520,788       258,486  
 
                     
Total assets
      Ps 34,488,696     Ps 52,151,649     US$ 25,884,795  
 
                     
 
                           
Memorandum accounts
  25   Ps  153,080,705     Ps  182,209,139     US$   90,437,143  
 
                     

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2006 and 2007
(Stated in millions of pesos and thousands of U.S. Dollars)
                             
    Notes   2006     2007     2007(1)  
                        U.S. Dollar  
Liabilities and Stockholders’ Equity
                           
Deposits
                           
Non-interest bearing:
      Ps 4,580,649     Ps 5,804,724     US$ 2,881,100  
Checking accounts
        4,121,506       5,300,864       2,631,015  
Other
        459,143       503,860       250,085  
Interest bearing:
        18,635,818       28,569,426       14,180,064  
Checking accounts
        1,244,348       1,567,411       777,964  
Time deposits
        7,377,586       14,304,727       7,099,966  
Savings deposits
        10,013,884       12,697,288       6,302,134  
 
                     
Total deposits
        23,216,467       34,374,150       17,061,164  
 
                     
 
                           
Overnight funds
        1,007,045       2,005,490       995,399  
Bank acceptances outstanding
        64,030       55,208       27,402  
Interbank borrowings
  17     1,066,845       1,506,611       747,787  
Borrowings from development and other domestic banks (3)
  18     2,449,581       3,344,635       1,660,066  
Accounts payable
        988,723       1,714,418       850,929  
Accrued interest payable
        190,121       286,627       142,264  
Other liabilities
  19     387,697       503,433       249,871  
Long-term debt
  20     1,302,702       2,850,730       1,414,923  
Accrued expenses
  21     119,984       218,860       108,628  
Minority interest in consolidated subsidiaries
        48,889       92,217       45,771  
 
                     
Total liabilities
        30,842,084       46,952,379       23,304,204  
 
                     
 
                           
Stockholders’ equity (2)
  22, 24                        
Subscribed and paid in capital:
        430,684       460,684       228,655  
Nonvoting preference shares
        121,422       151,422       75,157  
Common shares
        309,262       309,262       153,498  
Retained earnings:
        3,063,136       4,446,527       2,206,976  
Appropriated
  23     2,313,607       3,359,604       1,667,496  
Unappropriated
        749,529       1,086,923       539,480  
Reappraisal of assets
  16     140,693       319,646       158,652  
Gross unrealized net gain or loss on investments
        12,099       (27,587 )     (13,692 )
 
                     
Stockholders’ equity
        3,646,612       5,199,270       2,580,591  
 
                     
 
                           
Total liabilities and stockholders’ equity
      Ps 34,488,696     Ps 52,151,649     US$ 25,884,795  
 
                     
 
                           
Memorandum accounts
  25   Ps  153,080,705     Ps  182,209,139     US$   90,437,143  
 
                     
 
     
The accompanying notes, numbered 1 to 32, form an integral part of these Consolidated Financial Statements
 
(1)  
See note 2 (ff)
 
(2)  
A summary of significant adjustments to stockholders’ equity that would be required if U.S. GAAP had been applied is disclosed in Note 31.
 
(3)  
Included Domestic banks borrowings.

 

F-8


Table of Contents

BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2005, 2006 and 2007
(Stated in millions of pesos and thousands of U.S. Dollars, except per share data)
                                     
    Note   2005(2)     2006     2007     2007(1)  
                                U.S. Dollar  
 
                                   
Interest income:
                                   
Interest on loans
      Ps 2,050,274     Ps 2,312,525     Ps 3,707,751     US$ 1,840,294  
Interest on investment securities
        824,709       273,197       416,644       206,796  
Overnight funds
        33,629       43,863       115,324       57,240  
Leasing
        291,472       384,147       570,689       283,254  
 
                           
Total interest income
        3,200,084       3,013,732       4,810,408       2,387,584  
 
                           
 
                                   
Interest expense
                                   
Checking accounts
        20,311       32,676       39,076       19,396  
Time deposits
        449,367       459,513       816,688       405,352  
Saving deposits
        241,889       264,381       461,437       229,028  
 
                           
Total interest expense on deposits
        711,567       756,570       1,317,201       653,776  
 
                           
 
                                   
Interbank borrowings
        54,630       94,872       109,843       54,518  
Borrowings from development and other domestic banks
        156,509       180,507       274,484       136,237  
Overnight funds
        73,910       100,876       131,127       65,083  
Long-term debt
        153,658       113,404       169,435       84,097  
 
                           
Total interest expense
        1,150,274       1,246,229       2,002,090       993,711  
 
                           
 
                                   
Net interest income
        2,049,810       1,767,503       2,808,318       1,393,873  
 
                           
 
                                   
Provision for loan, accrued interest losses and other receivables, net
  7     (185,404 )     (266,107 )     (707,865 )     (351,340 )
Recovery of charged-off loans
        61,829       70,746       89,997       44,669  
Provision for foreclosed assets and other assets
        (63,969 )     (44,353 )     (60,531 )     (30,044 )
Recovery of provisions for foreclosed assets and other assets
        56,504       89,532       81,364       40,384  
 
                           
Total net allowances
        (131,040 )     (150,182 )     (597,035 )     (296,331 )
 
                           
Net interest income after provision for loans and accrued interest losses
        1,918,770       1,617,321       2,211,283       1,097,542  
 
                           
 
                                   
Commissions from banking services
        101,355       162,273       324,352       160,986  
Electronic services and ATMs fees
        101,299       85,049       80,711       40,060  
Branch network services
        48,984       62,403       104,601       51,917  
Collections and payments fees
        56,670       74,708       130,421       64,733  
Credit card merchant fees
        10,076       8,150       39,191       19,452  
Credit and debit card annual fees
        205,606       238,898       258,937       128,520  
Checking fees
        54,846       60,083       67,438       33,472  
Warehouse services
        62,155       72,494              
Fiduciary activities
        60,131       62,114       69,200       34,347  
Pension Plan Administration
                    82,453       40,925  
Brokerage fees
        68,231       67,034       62,493       31,018  
Check remittance
        10,579       11,040       22,762       11,298  
International operations
        36,484       34,281       43,643       21,662  

 

F-9


Table of Contents

BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 2005, 2006 and 2007
(Stated in millions of pesos and thousands of U.S. Dollars, except per share data)
                                     
    Note   2005(2)     2006     2007     2007(1)  
                                U.S. Dollar  
Fees and other service income
      Ps 816,416     Ps 938,527     Ps 1,286,202     US$ 638,390  
 
                           
 
                                   
Fees and other service expenses
        (48,087 )     (70,866 )     (116,453 )     (57,800 )
 
                           
Total fees and income from services, net
        768,329       867,661       1,169,749       580,590  
 
                           
Other operating income:
                                   
Net foreign exchange gains (expenses)
        (53,361 )     58,008       27,584       13,691  
Forward contracts in foreign currency
        141,055       45,073       141,930       70,445  
Gains (losses) on sales of investments on equity securities
        8,097       75,697       (15,034 )     (7,462 )
Gains on sale of mortgage loan
              14,371       7,304       3,625  
Dividend income
        42,731       21,199       18,968       9,415  
Revenues from commercial subsidiaries
        45,020       40,323       101,148       50,203  
Insurance income
                    8,013       3,977  
Communication, postage, rent and others
        10,406       16,762       17,572       8,722  
 
                           
Total other operating income
        193,948       271,433       307,485       152,616  
 
                           
Total operating income
        2,881,047       2,756,415       3,688,517       1,830,748  
 
                           
 
                                   
Operating expenses:
                                   
Salaries and employee benefits
        615,121       690,117       835,150       414,516  
Bonus plan payments
        26,826       35,771       84,226       41,804  
Compensation
        8,030       6,375       23,463       11,646  
Administrative and other expenses
  27     793,179       882,182       1,071,139       531,645  
Deposit security, net
        55,050       67,813       49,113       24,377  
Donation expenses
        615       22,596       15,375       7,631  
Depreciation
  10     87,633       104,553       122,835       60,968  
Merger expenses
        45,703       35,779              
Goodwill amortization
        22,648       25,814       70,411       34,948  
 
                           
Total operating expenses
        1,654,805       1,871,000       2,271,712       1,127,535  
 
                           
Net operating income
        1,226,242       885,415       1,416,805       703,213  
 
                           
 
                                   
Non-operating (expense) income:
                                   
Other income
        109,770       194,589       126,796       62,933  
Minority interest
        (6,496 )     (6,352 )     (13,246 )     (6,574 )
Other expense
        (105,120 )     (149,243 )     (81,549 )     (40,476 )
 
                           
Total non-operating (expense) income
  28     (1,846 )     38,994       32,001       15,883  
 
                           
 
                                   
Income before income taxes
        1,224,396       924,409       1,448,806       719,096  
 
                           
Income tax expense
  21     (277,515 )     (174,880 )     (361,883 )     (179,616 )
 
                           
Net income
      Ps 946,881     Ps 749,529     Ps 1,086,923     US$ 539,480  
 
                           
 
                                   
Earnings per share
      Ps 1,301     Ps 1,030     Ps 1,433     US$ 0.71  
 
                           
 
The accompanying notes, numbered 1 to 32, form an integral part of these Consolidated Financial Statements.
     
(1)  
See Note 2 (ff).
 
(2)  
The consolidated statement of operations for the year ended December 31, 2005 includes Conavi’s and Corfinsura’s results since the beginning of the year.

 

F-10


Table of Contents

BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity

Years ended December 31, 2005, 2006 and 2007
(Stated in millions of pesos and thousands of U.S. Dollars, except share data)
                                                                         
                                                    Surplus        
                                                            Gross unrealized        
                                    Retained Earnings             gain or loss on     Total  
    Non Voting Preference Shares     Voting Common Shares     Appro-     Unappro-     Reappraisal     investments     Stockholders’  
    Number     Par Value     Number     Par Value     priated     priated     of assets     available for sale     equity  
 
Balance at December 31, 2004
    178,435,787     Ps 101,579       398,259,608     Ps 253,540     Ps 1,010,481     Ps 578,678     Ps 42,237     Ps 104,208     Ps 2,090,723  
Net income
                                  946,881                   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                         236,211  
Valuation of investment
                                        (179,033 )     31,690       (147,343 )
Merger effect
                            193,673             247,275       (12,650 )     428,298  
Dividends declared
                            (216,838 )                       (216,838 )
Other
                            39,358                         39,358  
 
                                                     
Balance at December 31, 2005
    218,122,421     Ps 121,422       509,704,584     Ps 309,262     Ps 1,765,998     Ps 946,881     Ps 110,479     Ps 123,248     Ps 3,377,290  
Net income
                                  749,529                   749,529  
Transfer to appropriated retained earnings
                            946,881       (946,881 )                  
Valuation of investment
                                          30,214       (111,149 )     (80,935 )
Dividends declared
                            (369,736 )                       (369,736 )
Other
                            (29,536 )                       (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     Ps 140,693     Ps 12,099     Ps 3,646,612  
 
                                                     
Net income
                                  1,086,923                   1,086,923  
Transfer to appropriated retained earnings
                            749,529       (749,529 )                  
Issuance of preference and common shares
    59,999,998       30,000                   897,612                         927,612  
Valuation of investment
                                          178,953       (39,686 )     139,267  
Dividends declared
                            (403,164 )                       (403,164 )
Other
                            (197,980 )                       (197,980 )
 
                                                     
Balance at December 31,2007
    278,122,419       151,422       509,704,584       309,262       3,359,604       1,086,923       319,646       (27,587 )     5,199,270  
 
                                                     
 
                                                                       
Balance at December 31, 2007(1)
    278,122,419     US$ 75,157       509,704,584     US$ 153,498     US$ 1,667,496     US$ 539,480     US$ 158,652     US$ (13,692 )   US$ 2,580,591  
 
                                                     
The accompanying notes, numbered 1 to 32, form an integral part of these Consolidated Financial Statements.
 
     
(1)  
See note 2 (ff)
 
(2)  
The consolidated statement of operations for the year ended December 31, 2005, includes Conavi’s and Corfinsura’s results since the beginning of the year.

 

F-11


Table of Contents

BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2006 and 2007
(Stated in millions of pesos and thousands of U.S. Dollars)
                                 
    2005     2006     2007     2007(1)  
 
                               
Cash flows from operating activities:
                               
 
                               
Net income
  Ps 946,881     Ps 749,529     Ps 1,086,923     US$ 539,480  
 
                               
Adjustments to reconcile net income to net cash used by operating activities:
                               
Depreciation
    87,633       104,553       122,835       60,968  
Amortization
    77,111       42,905       110,076       54,635  
Minority interest
    5,862       (251 )     43,328       21,505  
Provision for loan, accrued interest and accounts receivable losses
    395,369       600,273       1,268,241       629,475  
Provision for foreclosed assets
    44,665       22,044       35,783       17,760  
Provision for losses on investment securities and equity investments
    10,317       12,200       7,313       3,630  
Provision for premises and equipment
    302       914       2,925       1,452  
Provision for other assets
    1,825       1,600       7,914       3,928  
Reversal of provision for investments
    (5,330 )     (27,593 )     (20,722 )     (10,285 )
Reversal of provision for loans and accounts receivable
    (220,224 )     (334,082 )     (560,241 )     (278,069 )
Reversal of provision for foreclosed assets
    (45,445 )     (54,298 )     (52,995 )     (26,304 )
Reversal of provision for other assets
    (3,943 )     (880 )     (244 )     (121 )
Reversal of provision for premises and equipment
    (1,787 )     (6,845 )     (7,537 )     (3,741 )
Realized and unrealized (gain) loss on derivative financial instruments
    (67,180 )     15,449       (117,653 )     (58,395 )
Valuation gain on investment securities
    (476,139 )     (159,249 )     (355,190 )     (176,294 )
Foreclosed assets donation
    45       20,888       10,708       5,315  
(Increase) in accounts receivable
    (514,867 )     (38,311 )     (344,052 )     (170,765 )
Decrease (increase) in other assets
    92,256       (187,584 )     (1,336,181 )     (663,196 )
Increase (Decrease) in accounts payable
    593,764       (253,531 )     822,201       408,088  
Increase (Decrease) in other liabilities
    227,036       (72,270 )     115,735       57,443  
(Increase) in loans
    (8,521,859 )     (6,182,386 )     (13,087,618 )     (6,495,869 )
Increase (Decrease) in estimated liabilities and allowances
    59,210       (10,875 )     98,876       49,076  
 
                       
 
                               
Net cash used in operating activities
    (7,314,498 )     (5,757,800 )     (12,149,575 )     (6,030,284 )
 
                       
Cash flows from investing activities:
                               
 
                               
(Increase) Decrease in customers’ acceptances
  Ps (25,813 )   Ps (47,520 )   Ps 79,225     Ps 39,322  
Proceeds from sales of premises and equipment
    92,815       23,284       15,280       7,584  
Proceeds from sales of foreclosed assets
    98,090       61,791       71,811       35,643  
Proceeds from sales of investments
          29,934       43,200       21,442  
(Purchases) of premises and equipment
    (589,212 )     (230,992 )     (590,568 )     (293,121 )
(Purchases) sales of investment securities
    (2,719,300 )     2,815,501       189,224       93,919  
 
                       
 
                               
Net cash (used in) provided by investing activities
    (3,143,420 )     2,651,998       (191,828 )     (95,211 )
 
                       

 

F-12


Table of Contents

BANCOLOMBIA S.A. AND SUBSIDIARIES
Consolidated Statements of Cash Flows

Years ended December 31, 2005, 2006 and 2007
(Stated in millions of pesos and thousands of U.S. Dollars)
                                 
    2005     2006     2007     2007(1)  
 
                               
Cash flows from financing activities:
                               
 
                               
Dividends declared
    (216,838 )     (369,736 )     (403,163 )     (200,105 )
Increase in deposits
    6,522,866       4,831,484       11,157,682       5,537,971  
Increase (decrease) in long-term debt
    1,095,781       (345,610 )     1,548,028       768,344  
Increase (decrease) in overnight funds
    713,419       (322,868 )     998,445       495,565  
Increase (decrease) in interbank borrowings and borrowings from development and other domestic banks
    2,823,352       (411,124 )     1,334,820       662,520  
Issuance of preference and commons shares
                30,000       14,890  
Retained earnings (additional paid-in capital)
                897,612       445,518  
 
                       
Net cash provided by financing activities
    10,938,580       3,382,146       15,563,424       7,724,703  
 
                       
 
                               
Increase in cash and cash equivalents
    480,662       276,344       3,222,021       1,599,208  
Cash and cash equivalents at beginning of year
    1,249,360       1,730,022       2,006,366       995,834  
 
                       
 
                               
Cash and cash equivalents at end of year
  Ps 1,730,022     Ps 2,006,366     Ps 5,228,387     US$ 2,595,042  
 
                       
 
                               
Supplemental disclosure of cash flows information:
                               
Cash paid during the year for:
                               
Interest
  Ps 1,033,420     Ps 1,238,419     Ps 1,905,585     US$ 945,812  
 
                       
Income taxes
  Ps 190,014     Ps 161,967     Ps 122,477     US$ 60,790  
 
                       
The accompanying notes, numbered 1 to 32, form an integral part of these Consolidated Financial Statements.
 
     
(1)  
See note 2 (ff).

 

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Table of Contents

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., 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 Bancolombia S.A. is in Medellín, Colombia. Bancolombia S.A. and its subsidiaries are defined as the Bank.
On July 30, 2005, Conavi Banco Comercial y de Ahorros S.A. (“Conavi”) and Corporación Financiera Nacional y Suramericana S.A. (post-spin off) (“Corfinsura”) were merged into Bancolombia S.A. (the “Conavi/Corfinsura merger”). The Conavi/Corfinsura merger was approved at Bancolombia S.A.’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 Medellín Chamber of Commerce on August 1, 2005. As a result of the Conavi/Corfinsura merger, Bancolombia S.A. acquired the entire property, rights and obligations of Conavi and Corfinsura, entities which were dissolved without being liquidated.
On March 1, 2007 Bancolombia S.A.’s shareholders approved an amendment to its bylaws, which extended the number of directors serving on Bancolombia’s Board of Directors to a total of nine (9) and eliminated substitute members.
Bancolombia S.A.’s business purpose is to carry out all operations, transactions, acts and services inherent to the banking business, through banking establishments that carry its name and according to all applicable legislation.
The Bank had 24,836 employees of which 12,906 were employed directly by Bancolombia S.A. and operates through 888 branches, 57 Non-Banking Correspondent (“Corresponsales no Bancarios”) and 240 mobile branches (“Puntos de Atención Móviles) in Colombia. Bancolombia S.A also has an agency in Miami, Florida, United States of America and a representation office in Madrid, Spain.
In May 2007, Bancolombia S.A. through its subsidiary Bancolombia Panamá S.A. acquired 89.15% of the Banagrícola S.A. (“Banagrícola”). Banagrícola’s shareholders agreed to sell 16,817,633 of the total 18,865,000 outstanding shares. The purchase price was US$47.044792 per share for a total of US$ 791,182. Simultaneously with the acquisition, the Bank had signed an agreement with Bienes y Servicios S.A (BYSSA), former major Banagrícola’s shareholder, which included a call and written put option. The options were exercised in December 2007 and as a consequence the Bank acquired the shares representing 9.59% of interest in Banagríola. Bancolombia Panamá S.A. has continued purchasing shares from Banagrícola’s minority shareholders and at December 31, 2007 held an interest of 98.90% of Banagrícola’s total shareholder’s equity.
Banagrícola is a holding company with several subsidiaries dedicated to banking, commercial and consumer activities, insurance, pension funds and brokerage, among which are Banco Agrícola S.A. in El Salvador and Banco Agrícola (Panamá) S.A. in Panama. The acquisition of Banagrícola intends to place the Bank as one of several key players in Central America boosting its income generation and also diversifying its loan portfolio mix, reducing risk and exposure concentration.

 

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Table of Contents

BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The consolidated financial statements includes the assets, liabilities, earnings, contingent accounts and memorandum accounts of the Bank in which they hold, directly or indirectly, 50% or more of the outstanding voting shares (the “Subsidiaries”). Bancolombia S.A. has the following subsidiaries making up the Bancolombia Group, which is currently registered as a corporate group:
                                         
                    Participation     Participation        
                    percentage     percentage     Date of  
Entity   Location     Business     Dec-2006     Dec-2007     creation  
Leasing Bancolombia S.A.
  Colombia   Leasing     100       100     December 1978
Fiduciaria Bancolombia S.A.
  Colombia   Trust     98.81       98.81     January 1992
Bancolombia Panamá S.A.
  Panama   Banking     100       100     January 1973
Bancolombia Caymán
  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     100       100     November 2000
Banca de Inversión Bancolombia S.A. Corporación Financiera
  Colombia   Investment banking     100       100     July 1994
Inversiones Valsimesa S.A.
  Colombia   Investments     71.75       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
Valores Simesa S.A.
  Colombia   Investments     71.75       71.75     December 2000
Todo UNO Colombia S.A.
  Colombia   E-commerce     89.92       89.92     June 2001
Almacenes Generales de Depósito Mercantil S.A. ALMACENAR (1)
  Colombia   Warehousing and logistics     98.31           February 1953
Unicargo de Colombia S.A. (2)
  Colombia   Freight service     98.41           August 1994
Ditransa S.A. (2)
  Colombia   Freight service     52.73           September 1994
Compañía de Financiamiento Comercial S.A. Sufinanciamiento
  Colombia   Financial services     99.98       99.99     November 1971
Renting Colombia S.A.
  Colombia   Operating leasing     75.50       90.30     October 1997
Patrimonio Autónomo Localiza (3)
  Colombia   Car rental     75.50           December 2006
Renting Perú S.A.C. (4)
  Peru   Operating leasing           90.39     January 2007
Tempo Rent a Car S.A. (4)
  Colombia   Car rental           90.80     June 2007
Patrimonio Autónomo Renting Colombia
  Colombia   Investments           100     December 2007
Suleasing Internacional S.A. (5)
  Panama   Leasing     100           August 1993
Suleasing International USA, Inc.
  USA   Leasing     100       100     July 2003
Suleasing Internacional do Brasil Locacao de Bens S.A.
  Brazil   Leasing     100       100     December 2005
Inversiones CFNS Ltda.
  Colombia   Investments     100       100     April 1998
Valores Bancolombia S.A.
  Colombia   Securities brokerage     100       100     May 1991
Suvalor Panamá S.A.
  Panama   Securities brokerage     100       100     April 2005
Bancolombia Puerto Rico Internacional, Inc
  Puerto Rico   Banking     100       100     December 1997
Multienlace S.A.
  Colombia   Contact center     98.20       98.20     March 1997
Inversiones IVL S.A.
  Colombia   Investments     98.31       98.25     December 2006

 

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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-2006     Dec-2007     creation  
Factoring Bancolombia S.A
  Colombia   Financial services     99.97       99.99     September 1980
Patrimonio Autónomo CV Sufinanciamiento
  Colombia   Loan management     100       100     May 2006
Banagrícola S.A. (6)
  Panama   Investments           98.90     March 2003
Banco Agrícola Panamá S.A. (7)
  Panama   Banking           98.90     March 2002
Inversiones Financieras Banco Agrícola S.A. (7)
  El Salvador   Investments           98.08     July 2001
Banco Agrícola S.A. (7)
  El Salvador   Banking           96.00     January 1955
Arrendadora Financiera S.A. (7)
  El Salvador   Leasing           96.02     November 2001
Credibac S.A. de CV (7)
  El Salvador   Credit card services           96.01     July 2006
Bursabac S.A. de CV (7)
  El Salvador   Securities brokerage           98.08     November 1994
AFP Crecer S.A. (7)
  El Salvador   Pension fund           98.32     March 1998
Aseguradora Suiza Salvadoreña S.A. (7)
  El Salvador   Insurance company           94.70     November 1969
Asesuisa Vida S.A. (7)
  El Salvador   Insurance company           94.70     December 2001
 
     
(1)  
It was divested in February 2007.
 
(2)  
Subsidiaries of Almacenar S.A. which ceased to be in turn subsidiaries of the Bancolombia when Almacenar S.A. was divested in February 2007.
 
(3)  
Trust liquidated in August 2007.
 
(4)  
Companies created by Renting Colombia S.A.
 
(5)  
Merged with Bancolombia Panamá S.A. in September 2007.
 
(6)  
Company acquired in May 2007.
 
(7)  
Companies acquired as a result of Banagrícola’s acquisition in May 2007.
(2) Main Accounting Policies
(a) Basic Accounting and Consolidation Policy
Accounting practices and the preparation of financial statements of the Bank follow generally accepted accounting principles in Colombia and the special regulations of the Superintendency of Finance, collectively “Colombian GAAP”.
For consolidated purposes, accounting policies relating to the application of adjustments for inflation were aligned with those established by the Superintendency of Finance for the Bank. By means of External Circular 014 issued April 17, 2001 by the Superintendency of Finance, the application of inflation adjustments was eliminated for accounting purposes as of January 1, 2001. This practice formed part of the generally-accepted accounting principles in Colombia until December 2006, when it was extended to all reporting entities with Decree 1536 issued May 7, 2007.
The financial statements of foreign subsidiaries were adjusted in order to adopt uniform accounting practices as required by Colombian GAAP. The major adjustments relates to investments, loans and leased assets.

 

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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 Panamá S.A. sub-consolidates Bancolombia Caymán, Sistema de Inversiones y Negocios S.A., Sinesa Holding Company Ltd., Future Net Inc., Suleasing Internacional USA Inc., Suleasing Internacional do Brasil Locacao de Bens S.A., Banagrícola S.A., Banco Agrícola Panamá S.A., Inversiones Financieras Banco Agrícola S.A., Banco Agrícola S.A., Arrendadora Financiera S.A., Credibac S.A. de CV, Bursabac S.A. de CV, AFP Crecer S.A., Aseguradora Suiza Salvadoreña S.A. and Asesuisa Vida S.A. The Bank’s subsidiary Leasing Bancolombia S.A. sub-consolidates Renting Colombia S.A., Renting Perú S.A.C. and Tempo Rent a Car S.A. The Bank’s subsidiary Banca de Inversión Bancolombia S.A. sub-consolidates Inmobiliaria Bancol S.A., Inversiones Valsimesa S.A., Inversiones CFNS Ltda., Valores Simesa S.A., Fundicom S.A., Todo Uno Colombia S.A. and Patrimonio Autónomo Renting Colombia. The Bank’s subsidiary Valores Bancolombia S.A. sub-consolidates Suvalor Panamá S.A. The remaining companies are consolidated directly by the Bank.
Under Col GAAP, the results of operations of Almacenar are excluded from the consolidated results of operation of the Bank in 2007.
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) 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, 2006 and 2007 was Ps 2,238.79 and Ps 2,014.76, respectively.
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, excluding, 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Gross leverage position consists of all rights and obligations contained in term and future contracts denominated in foreign currency; cash transactions in foreign currency carried out between one (t+l) and two banking days (t+2) and the exchange exposure relating to debit and credit contingencies acquired in negotiating exchange options and derivatives.
The arithmetic average of three (3) business days 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; and gross leverage position cannot exceed five hundred percent (500%) 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 2,357.98 and Ps 2,078.35 per U.S. Dollar for the years 2006 and 2007, respectively. These rates correspond to the average value of the representative market exchange rate on each business day in the period from January 1 to December 31 of each year.
(c) Comparability
The consolidated statements of operations for the year ended December 31, 2006 includes financial information of the Bancolombia S.A. and its subsidiaries. The consolidated statements of operations for the year ended December 31, 2007 also includes the operations of Banagrícola S.A. since June 1, 2007 and its subsidiaries since January 1, 2007. For this reason, the consolidated statements of operations for 2006 and 2007 should be read taking into account this impact.
(d) 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, 2007 and 2006. Overnight funds sold with reselling agreements are considered to be cash equivalents for the purposes of this statement.
(e)  Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with Colombian GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(f) 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, 2006 and 2007, were Ps 160.0161 and Ps 168.4997 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, 2006 and 2007 was 0.63% and 2.95%, respectively.
(g) Overnight Funds
This represents the funds directly placed by the Bank 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.
(h)  
Investment Securities
This includes investments acquired by the Bank 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.
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.

 

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Table of Contents

BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
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.
2.2 Equity Securities
Section 5 of Chapter 1 of External Circular 100 of 1995 issued by the Superintendency of Finance provides for investments to be appraised on a daily basis; however, in the case of equity investments with low volume, or unquoted, whose only source of appraisal are the financial statements of the corresponding company, the Bank conducts monthly appraisals of said investments, recording the appraised amounts also on a monthly basis.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Equity investments 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.
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
Investments are measured depends on the classification and must be recorded initially at their purchase cost. The subsequent measurement is recorded as follow:
3.1 Trading Investments
The difference between current and previous market value is adjusted to the value of the investment and is recorded as income or expense, 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 as income on income statement. 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.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
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. The securities are categorized as “A” except there is a risk associated to them (Category B to E). The maximum value, as defined by the Superintendency of Finance, at which these investments are posted, according to their category is:
         
Category   Max. Registered Amount %(1)   Investment Characteristics
B Acceptable risk, greater than normal
  Eighty (80)   Present factors of uncertainty that could affect the 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(i) Loans and Financial Lease
These accounts record loans and financial leases made by the Bank 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 Panamá 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 interest income received on the original loan portfolio and interest paid for the participated 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.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
1. Classification
Loans and financial lease contracts are classified as follows:
Mortgage Loans
These are loans, regardless of value, granted to individuals for the purchase of new or used housing or to build a home, all in accordance with Law 546 of 1999. These loans include loans denominated in UVR or local currency, that are guaranteed by a senior mortgage on the property and that are financed with a total repayment term of 5 to 30 years.
Consumer Loans
These are loans and financial leases, regardless of value, granted to individuals for the purchase of consumer goods or to pay for non-commercial or business services.
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.
For the purpose of consolidating of the financial statements in the year 2007, The Colombian Superintendency of Finance in a communication dated January 17, 2008 required the classification of the commercial loan portfolio for the debtors whose main economic activity is carried out outside Colombia, as is the case of debtors of Banco Agrícola S.A. in El Salvador, to be performed in accordance with rules substantially consistent with the rules applicable to Bancolombia in the year 2006.
2. Evaluation Frequency
The Bank makes 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In addition the previous process, in the months of May and November, the Bank evaluates 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.
3. Evaluation Criteria
The Bank evaluates 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 classifies loans and financial leases on the basis of the above criteria into the following credit risk categories:
In the year 2007:
         
Category   Consumer
“A” Normal Risk
  Current and up to 1 month past due
“B” Acceptable Risk, Above Normal
  1-2 months past due
“C” Appreciable Risk
  2-3 months past due
“D” Significant Risk
  3-6 months past due
“E” Risk of Unrecoverability
  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

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Commercial loans and financial leases were classified as follows in 2006:
         
Category   Commercial
“A” Normal Risk
  Current and up to 1 month past due
“B” Acceptable Risk, Above Normal
  1-3 months past due
“C” Appreciable Risk
  3-6 months past due
“D” Significant Risk
  6-12 months past due
“E” Risk of Unrec overability
  over 12 months past due
As of July 2007, given the introduction of the MRC the commercial category was classified as follows:
         
Category   Commercial
“AA”
  Current and up to 1 month past due
“A”
  1-2 months past due
“BB”
  2-3 months past due
“B”
  3-4 months past due
“CC”
  4-5 months past due
Risk of Unrecoverability
  over 5 months past due
Rules of Alignment
The Bank would automatically classify all of that debtor’s accounts in the maximum risk category, B, C, D or E, or BB, B, CC or Risk of Unrecoverability due the MRC application 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.
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 re-ranking 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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
Bancolombia 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 Financial Leases Losses
The Bank records allowance for loans and financial leases losses for each period as follows:
General Allowance:
The Bank sets up a general provision corresponding to one per cent (1%) of the total value of the gross loan portfolio, except on commercial loans. External Circular 039 of 2007 exempted the calculation of a general provision from the commercial classification. This rule also allowed for the general provision set up until that moment, to be used for part of the individual provisions required for the enforcement of the MRC.
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.
In the case of companies belonging to Banagrícola and its subsidiaries, the instructions prior to External Circular 039 of 2007 were applied, that is to say, a general provision was set up corresponding to a minimum of one per cent (1%) on the total amount of the gross loan portfolio.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Individual Allowance:
In compliance with instructions issued by the Superintendency of Finance, in External Circular 040 of 2007, for the consumer and small business classifications, the Bank must maintain at all times provisions corresponding to following minimum percentages, calculated on the outstanding balance.
                 
    Minimum provision percentage net        
Category   of guarantees     Minimum provision percentage  
A
    0 %     1 %
B
    1 %     2.20 %
“Minimum provision percentage net of guarantees” is the percentage of the provision that shall be applied on the outstanding balance, deducting the value of the appropriate guarantees. “Minimum provision percentage” is the percentage of the provision that shall be applied on the outstanding balance, without deducting the value of the appropriate guarantees.
In any case, the individual provision for each rating must correspond to the sum of the provisions that result from applying the minimum provision percentage net of guarantees and the minimum provision percentage.
External Circular 040 of 2007 required that as of July 1, 2007, and until June 30, 2008, the provision for consumer loans in Categories A and B be increased, calculating this on the outstanding balance without deducting the value of the appropriate guarantees according to the following percentages. As of December 31, 2007, Bancolombia S.A. recognized the total provision permitted by the Circular.
         
Category   Additional Provision  
A
    0.60 %
B
    1.80 %
Pursuant to Chapter II of the Basic Accounting Circular, companies may design and adopt their own internal models for estimating and/or measuring losses with regard to their commercial, consumer, housing and small business loans; or apply the reference models designed by the Superintendency of Finance for these same purposes. As of May 31, 2008, the Superintendency of Finance has issued reference models for commercial loans and consumer loans, the application of the first was mandatory in July 2007, and of the second one will be in July 2008.
The Bank adopted the Reference Model issued by the Superintendency of Finance in External Circular 035, 2006 for its commercial loans, whose application became mandatory as of July 2007, except for Banagrícola’s subsidiaries which adopted the guidance effective to December 31, 2006. This model allows for components of expected losses to be determined, according to the following parameters:

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
  1.  
Probability of Default (PD): This corresponds to the probability of the debtors within a specific portfolio of commercial loans defaulting on their obligations in a period of twelve (12) months (according to the cases described in subsection b of section 1.3.3.1 of Chapter II of the Basic Accounting Circular). The probability of default is defined according to matrixes issued by the Superintendency of Finance, which are updated every year in May and come into full force and effect as of the following July, based on the terms and conditions specified by the Superintendency.
For 2007, the matrixes governing individual provisions were as follows:
                                 
Matrix B   Non-fulfillment  
Commercial   Corporate     Small Business     Medium Business     Individuals  
AA
    2.19 %     7.52 %     4.19 %     8.22 %
A
    3.54 %     8.64 %     6.32 %     9.41 %
BB
    14.13 %     20.26 %     18.49 %     22.36 %
B
    15.22 %     24.15 %     21.45 %     25.81 %
CC
    23.35 %     33.57 %     26.70 %     37.01 %
Non-fulfillment
    100 %     100 %     100 %     100 %
  2.  
The loss given default (LGD): This is defined as the economic deterioration sustained by a company should any of the events of default, as referred to in subsection b of section 1.3.3.1 of Chapter II of the Basic Accounting Circular, arise. The LGD for debtors classified in the default category would suffer a gradual increase according to the amount of days lapsing after being classified in said category. The LGD per type of guarantee is as follows:
                                         
            Days after non-             Days after non-        
Type of Collateral   LGD     fulfillment     New LGD     fulfillment     New LGD  
Inadmissible guarantee
    55 %     270       70 %     540       100 %
Subordinate loans
    75 %     270       90 %     540       100 %
Admissible financial collateral
    0-12 %                        
Residential and commercial real estate
    40 %     540       70 %     1080       100 %
Leased real estate
    35 %     540       70 %     1080       100 %
Leased assets different from real estate
    45 %     360       80 %     720       100 %
Other collaterals
    50 %     360       80 %     720       100 %
Collection rights
    45 %     360       80 %     720       100 %
No guarantee
    55 %     210       80 %     420       100 %
According to Decree 2360 of 1993, admissible guarantee means any guarantee with respect to which the Bank would have preference over other creditors and the collateral for which complies with certain parameters and objectives of the Superintendency of Finance.
  3.  
Exposure at Default (EAD): Defined as the total balance outstanding, conformed by the principal, interests and any other conceept owed by the debtor.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Based on the regulations issued by the Superintendency of Finance, the minimum allowances for mortgage portfolio must correspond to the following percentages:
                         
Home Mortgage %  
    Capital        
    On     On Non-        
    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.
In addition, the Bank has also recorded additional provisions for certain clients based on an individual analysis of loss and probabilities of recovery.
In the case of loans pertaining to the commercial category of Banagrícola’s subsidiaries, minimum provisions were applied according to the following percentages:
                 
    Commercial %  
Category   Capital     Interest/Other  
A — Normal Risk
    1       1  
B — Acceptable Risk, Above Normal
    3.2       3.2  
C — Appreciable Risk
    20       100  
D — Significant Risk
    50       100  
E — Risk of Unrecoverability
    100       100  
For categories such as consumer, small business and mortgage, apply the guidelines set forth in External Circular 040 of 2007 issued by the Superintendency of Finance.
7. The Effect of Guarantees on Allowances
In the case of commercial loans in Colombia, the effect of guarantees on allowances is determined in accordance with the parameters set by the Reference Model (MRC) for the applicable LGD, as shown in the tables above, and the respective provisions are calculated taking into account 100% of the value of the guarantees. For consumer loans, small business loans and mortgage loans the respective provisions are calculated based on seventy per cent (70%) of the guarantee value, and, in these cases, the guarantee value will not exceed the principal amount of the loan.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In the case of Banagrícola’s portfolio for consumer loans, small business loan, commercial loans and mortgages, the respective provisions are calculated taking into account up to seventy per cent (70%) of the guarantee value, and the guarantee value will not exceed the principal amount of the loan.
For Bancolombia Panamá the respective provisions for commercial loans are calculated using 100% of the value of the related guarantees.
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:
                 
    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
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 at least on a quarterly basis, using 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, except in those cases where the financial institution shows that it is possible to split up the property of the establishment and that the market value of this property is not adversely affected by this division.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank does not 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 Enterprises (“SME”) segment, its policy is to obtain coverage with the Colombian National Guaranty Fund (Fondo Nacional de Garantías — FNG, a Government entity responsible for issuing guaranties to micro-small and medium-sized businesses), and the Colombian Agricultural Guaranty Fund (Fondo Agricola de Garantías — 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 Depósito a Término 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 follows:
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)  
Mortgage credits for more than one dwelling per person.
  d)  
Due to waiving the amount relieved to other loans
  e)  
Amounts credited are higher than those due

 

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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 the Bank is not relieved of its 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 Panamá S.A.
Bancolombia Panamá 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.

 

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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. The Bank is the guarantor of the notes issued by in the securitization of non-performing loans in Banagrícola.
(j) Customer’s Acceptances and Derivatives
Acceptances
The Bank issues local currency bank acceptances for up to 180 days for import or export operations or for local purchases of merchandise, pursuant to legal provisions.
They are treated as active loans and may not exceed the Bank’s paid in capital and legal reserve. The asset and liability are initially recorded at the same time 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.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Derivatives
The Bank records 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 daily 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.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
The Bank records 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.
   
When foreclosed assets are not in conditions to be immediately disposed of their cost increases with all those expenses required in order to get said assets ready for sale.
   
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 under letter (h) 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.
Provisions for Foreclosed Assets
With the issuance of the Superintendency of Finance External Circular 034 of August 2003, (effective 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 does 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
The value of moveable assets received in payment is calculated according to the criteria established by the Superintendency of Finance for appraising investments as set out in Chapter I of Circular 100 of 1995. Considering that said assets in the Bank’s possession are provisioned for 100% of its value, this appraisal process is not required.
Also, it is the Bank’s policy, in the case of foreclosed assets that remain for more than 5 years in the Bank’s possession as of the date when first recorded in the financial statements, for an adjustment to be applied to the provision, increasing the value up to 100% of its value in books. All property governed by a promissory bill of sale or an agreement is excluded from this practice.
(k) 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.
(l) Loan Fees
Loan origination and commitment fees, as well as direct loan origination and commitment costs, are recorded in the consolidated statement of operations as collected or incurred.
(m) 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.

 

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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, 2006 and 2007, 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.
Maintenance policy
There are corrective maintenance measures that consist of immediately repairing the parts, pieces or elements that could affect the property’s safety and proper working order. Preventive maintenance consists of periodically checking each one of the parts; electrical and premise checks are carried out twice a year, whereas maintenance on furniture, equipment and fixtures are carried out three or four times a year. The maintenance expenses are recorded as Administrative and other expenses in the statements of operations.
(n) Prepaid Expenses and Deferred Charges
Prepaid expenses are payments made by the Bank 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:

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
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 expensed when consumed.
   
Bonuses under the voluntary retirement plan are amortized as permitted by the Superintendency of Finance.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
   
The discount on the placement of investment securities is amortized over the term specified for the redemption of these same.
   
Contributions and affiliations are amortized over the period prepaid.
The Bank does not record deferred charges corresponding to 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.
(o) 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 financial depreciation system requires that every month or fraction of a month, the depreciation expense is recorded and therefore depreciation methods involving grace periods are not admissible in this case nor are those that use non-market-based discount rates to estimate the depreciation value.
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.
(p)  Trust
This corresponds to the rights arising from having entered into mercantile trust agreements which provide the Bank with the possibility of exercising such rights according to the specific agreement or the applicable law.
The transfer of one or more assets to a trust fund is carried out at its cost value, so that the actual handing over of the asset does not imply any profits for the party setting up the trust and these may only affect the results when the assets subject to the trust are transferred to third parties.
The rights in trusts are adjusted according to the nature of the assets being transferred, following the adjustment procedures for each one of these assets. According to the class of asset in question, an evaluation is carried out, provisions are set up, and legal limits are defined.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(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) Insurance reserves
The subsidiaries, Aseguradora Suiza Salvadoreña S.A. y Asesuisa Vida S.A, record the following insurance reserves on their financial statements:
Mathematical reserves
Mathematical reserves on long-term individual life insurance are calculated based on mortality tables, technical interest and actuarial formulas for each type of insurance. In calculating these reserves the mean reserve and deferred premiums are deducted. The total value of this reserve is certified by an authorized actuary.
Reserves for ongoing risk
In the case of short-duration contracts, a non-accrued premium reserve is calculated based on a percentage of the net retained premium for each type insurance contract. There is no reserve to the insurance contracts with monthly premiums (Debt and a portion of Fire and Foreseeable Lines) and which the premium does not cover any future risk.
Reserves to incurred but not reported claims
The reserve for incurred but not reported (“IBNR”) claims is calculated as the average value of the retained portion of the payments made over the last three (3) years on claims not reported for prior periods.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(t) Deferred Income
This account records deferred income and income received in advance in the course of business. Amounts recorded in this account are amortized over the period to which they relate or in which the services are rendered.
The capitalization of yields on restructured loans that have been recorded in memorandum accounts or as charge — off loan balances are included in this category as indicated in Note 2 (i) Loans and Financial Lease.
(u) Retirement Pensions
The Bank applies the provisions in Decree 1517 of 1998, which requires a distribution of charges to amortize the actuarial calculation by 2010. As of December 31, 2007, the Bank has amortized the total actuarial liability.
(v) Accrued Expenses
The Bank records provisions to cover estimated liabilities, such as fines, sanctions, litigations and lawsuits, provided that:
   
The Bank has acquired a right, and therefore has an obligation;
   
Payment may be demanded or is probable; and
   
The provision is justifiable, quantifiable and verifiable.
This account also records estimates for taxes.
(w) Additional Paid — in Capital
This corresponds to the greater value paid by shareholders over the nominal value of the share. With regard to the issuance of ADRs abroad, the discount granted to the underwriting firms was registered as a lower value of the amount paid by the new shareholders.
(x) 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(y) Contingent and Memorandum Accounts
Contingent accounts record operations in which the Bank acquires rights or assumes 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.
(z) 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.
(aa) Asset and liability management
The Bank evaluates its asset and liability management as well as its off-balance positions, estimating and controlling its degree of exposure to main risks prevalent on the market, this in order to protect these from eventual losses given fluctuations in their value (assets and liabilities).
(bb)  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.
(cc)  Recognition of Insurance Income and Related expenses
Premiums from individual and group life insurance policies, property and liability contracts are recognized as income over the period to which the premiums relate, in proportion to the amount of insurance protection provided.
Acquisition costs that are primarily related to the acquisition of new and renewal insurance business, including commissions, underwriting and agency expenses are accounted for as incurred.
(dd) Policies — Pension Fund Administrator
Each pension fund administrator must set up and maintain a Special Guarantee Contribution (AEG) for the purpose of protecting minimum returns for the fund being administered. This guarantee is calculated based on Executive Decree No. 13 — Rules and Regulations for Managing the Special Guarantee Contribution which stablishes a maximum 3% guarantee of the fund’s assets. Therefore, each pension fund administrator may set up, using its own funds, guarantees, sureties and other financial instruments that allow for the protection of the established percentage, with financial institutions having the minimum rating required for issues subject to being acquired by pension funds.

 

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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 and 2007 the AEG was calculated based on 0.25% of the Pension Fund assets and is guaranteed by an administrative surety.
(ee) Reserve for Country Risk
Banco Agrícola S.A., Aseguradora Suiza Salvadoreña S.A. and Asesuisa Vida S.A. record, in their financial statements, reserves for country risk.
Reserves for country risk are set up to cover the placement of funds abroad. For this purpose, permanent investments in subsidiaries abroad are not included. This risk is attributed to the place of domicile of the debtor or the party who is obliged to pay, from whom a return on the invested funds is to be obtained, except when the controlling company is jointly responsible and/or when the guarantor is domiciled in a country with an investment rating.
Institutions that place or commit funds in other countries use the sovereign risk ratings for the country in question in order to determine the country risk. Said ratings are issued by well-known international risk rating agencies for long-term obligations.
Any increase in these reserves gives rise to a debit to the inappropriate earnings account — profits from prior years — and a credit in the restricted equity account — profits from prior years. Drops in the reserves cause a reverse effect in the books.
(ff) Convenience Translation to U.S. Dollars
The Bank maintains its accounting records and prepares its financial statements in Colombian pesos. The U.S. Dollar amounts presented in the financial statements and accompanying notes have been converted from peso figures solely for the convenience of the reader at the exchange rate of Ps 2,014.76 per US$ 1, which is approximately the exchange rate, calculated on December 31, 2007, 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.
(gg) 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 subtracted 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
For our Subsidiaries domiciled in Panama (Bancolombia Panamá and Subsidiaries, Banagrícola S.A. and Banco Agrícola Panamá S.A.) income tax is governed by the Panamanian Tax Code. Consequently, profits from transactions conducted outside the Republic of Panama, are not subject to tax and therefore the profits obtained by these companies are not subject to income tax within the Republic of Panama.
Our Subsidiaries incorporated in El Salvador pay income tax on revenues obtained in that country, according to the Income Tax Law of El Salvador, contained in Legislative Decree No. Nº134 issued December 18, 1991, which became effective as of January 1, 1992.
(hh) Business Combination
Upon a business combination, the Colombian purchase method of accounting requires that (i) the purchase price be allocated to the acquired assets and liabilities on the basis of their book value, (ii) the statement of income of the acquiring company for the period in which a business combination occurs include the income of the acquired company as if the acquisition had occurred on the first day of the reporting period and (iii) the costs directly related to the purchase business combination not be considered as a cost of the acquisition, but deferred and amortized over a reasonable period as determined by management.
The pooling of interest method of accounting requires the aggregate of the shareholder’s equity of the entities included in the business.
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, Comercia (now Factoring Bancolombia), Sutecnología and Banagrícola 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 Colombian Superintendency of Finance defines limits on the amount of foreign-currency assets and liabilities. As of December 31, 2006 and 2007, the Bank was in compliance with these limits.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Substantially all foreign currency holdings are in U.S. Dollars. The consolidated foreign currency assets and liabilities, converted to US$, of the Bank at December 31, 2006 and 2007 were as follows:
                 
    2006     2007  
 
Assets:
               
Cash and due from banks
  US$ 130,867     US$ 709,099  
Overnight funds
    55,090       746,919  
Investment securities
    621,604       802,648  
Loans, net
    1,636,001       5,116,185  
Customers’ acceptances and derivatives
    (339,803 )     (659,910 )
Accounts receivable
    36,381       91,158  
Premises and equipment, net
    6,230       68,392  
Other assets
    94,918       667,486  
 
           
Total foreign currency assets
  US$ 2,241,288     US$ 7,541,977  
 
           
 
               
Liabilities:
               
Deposits
    1,338,157       4,823,721  
Bank acceptances outstanding
    27,520       20,971  
Borrowings from development and other domestic banks
    1,333       279,768  
Interbank borrowings
    476,527       747,787  
Other liabilities
    186,175       1,321,228  
 
           
Total foreign currency liabilities
    2,029,712       7,193,475  
 
           
Net foreign currency asset position
  US$ 211,576     US$ 348,502  
 
           
At December 31, 2006 and 2007, the Bank (unconsolidated) net foreign currency asset position amounted to US$ 176,451 and US$ 668,030, respectively; which meet the legal requirements.
At December 31, 2006 and 2007, the Subsidiaries Bancolombia Panamá S.A, Bancolombia Caymán, Sistema de Inversiones y Negocios S.A, Sinesa Holding Company Limited, Future Net S.A, Banagrícola S.A, Banco Agrícola Panamá S.A, Inversiones Financieras Banco Agrícola S.A, Banco Agrícola S.A, Arrendadora Financiera S.A, Credibac S.A, Bursabac S.A, Crecer S.A, Aseguradora Suiza Salvadoreña S.A, Asesuisa Vida S.A, Valores Bancolombia Panamá S.A, Bancolombia Puerto Rico, Renting Perú S.A.C, Suleasing Internacional USA Inc and Suleasing Internacional Do Brasil Locacao de Bens had foreign currencies which represent 54.61% and 82.63% respectively, of the consolidated assets in foreign currency and 51.30% and 80.45%, respectively, of the consolidated liabilities in foreign currency.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(4) Cash and Due From Banks
The balances of cash and due from banks consisted of the following:
                 
    2006     2007  
Colombian peso denominated:
               
Cash
  Ps 1,148,238     Ps 1,554,035  
Due from the Colombian Central Bank
    75,025       521,113  
Due from domestic banks
    12,047       96,016  
Remittances of domestic negotiated checks in transit
    21,199       19,019  
Provision
    (741 )     (229 )
 
           
Total local currency
    1,255,768       2,189,954  
 
           
 
               
Foreign currency:
               
Cash
    15,634       215,124  
Due from the Colombian and El Salvador Central Bank
    2,962       564,779  
Due from foreign banks
    270,495       546,012  
Remittances of foreign negotiated checks in transit
    4,490       102,750  
Provision
    (597 )      
 
           
Total foreign currency
    292,984       1,428,665  
 
           
Total cash and due from banks
  Ps 1,548,752     Ps 3,618,619  
 
           
Reserves required to certain transactions and time deposits with the Colombian and El Salvador Central Bank amounted to Ps 1,315,927 and Ps 2,634,108 at December 31, 2006 and 2007, respectively. The reserves, which are prescribed by the Colombian Central Bank, are based on a percentage of deposits maintained at the Bank by its customers.
(5) Investment Securities
Investment in trading securities consisted of the following:
                 
    2006     2007  
 
               
Trading Securities
               
 
               
Colombian peso denominated:
               
Colombian government
  Ps 814,342     Ps 938,768  
Colombian Central Bank
    55,559       19  
Government entities
    16,784       368,419  
Financial institutions
    1,014,276       338,693  
Corporate bonds
    140,151       67,814  
Equity securities
    30,716       69,718  
 
           
Total local currency denominated
    2,071,828       1,783,431  
 
           
 
               
Foreign currency denominated:
               
Colombian government
    153,677       125,868  
Foreign government
          6,087  
Government entities
    3,481       12,876  
Financial institutions
    407,582       49,442  
Corporate bonds
          8,026  
Equity securities
    30,924       23,407  
 
           
Total foreign currency denominated
    595,664       225,706  
 
           
Total trading securities
    2,667,492       2,009,137  
 
           
Allowance for trading securities
    (7,622 )     (8,023 )
 
           
Trading securities, net
  Ps 2,659,870     Ps 2,001,114  
 
           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 6.22% and 5.73% for 2006 and 2007, respectively.
As of December 31, 2006 and 2007, the Bank had pledged investments securities amounting to Ps 1,147,942 and Ps 1,277,453, respectively as collateral to secure lines of credit at international banks, domestic development banks and other financial institutions.
The Bank sold Ps 218,569,232 and Ps 218,683,534 of investment securities during the years ended December 31, 2006 and 2007, respectively.
Investment in available for sale securities consisted of the following:
                 
    2006     2007  
Available for sale
               
 
               
Colombian peso denominated:
               
Colombian government
  Ps 679,056     Ps 549,007  
Government entities
          29,729  
Financial institutions
    67,823       660,622  
Other
    313,424       26,185  
 
           
Total local currency denominated
    1,060,303       1,265,543  
 
           
 
               
Foreign currency denominated:
               
Colombian government
    674,437       82,408  
El Salvador Central Bank
          39,658  
Government entities
          156,364  
Foreign government
          379,467  
Financial institutions
    61,687       31,153  
Other
    14,157        
 
           
Total foreign currency denominated
    750,281       689,050  
 
           
Total Available for sale — Debt securities
  Ps 1,810,584     Ps 1,954,593  
 
           
                                 
    Participation             Participation        
    percentage at             percentage at        
    December 31, 2006     2006     December 31, 2007     2007  
 
Available for sale — equity securities
                               
 
                               
Todo Uno Services
    46.51 %   Ps 53,335       47.04 %   Ps 47,998  
Sociedad Administradora de Fondos de Pensiones y de Cesantías Protección S.A.
    23.44 %     19,481       23.44 %     19,481  
Titularizadora Colombiana S.A.
    21.25 %     14,765       21.25 %     17,308  
Promotora La Alborada
    25.81 %     14,001       25.81 %     14,001  
Metrotel Redes
    28.42 %     10,568       28.42 %     10,568  
Bolsa de Valores de Colombia
    8.54 %     5,509       5.87 %     8,578  
Concesiones Urbanas S.A.
    33.32 %     8,446       33.33 %     8,449  
Urbanización Chicó Oriental No. 2 Ltda.
    24.37 %     7,848       24.37 %     7,848  
Redeban Red Multicolor
    20.36 %     4,396       20.36 %     4,396  
Cadenalco S.A. Titularización
    3.33 %     3,929       3.33 %     4,378  
Concesiones CCFc S.A.
    25.50 %     4,358       25.50 %     4,358  

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
                                 
    Participation             Participation        
    percentage at             percentage at        
    December 31, 2006     2006     December 31, 2007     2007  
Depósito Centralizado de Valores de Colombia Deceval S.A.
    13.58 %     3,735       13.58 %     4,209  
Banco Latinoamericano de exportaciones BLADEX S.A.
    0.22 %     2,109       0.27 %     2,618  
Terminal Maritimo Muelles El Bosque (1)
    7.01 %     3,390              
Muelles El Bosque Operadores Portuarios (1)
    7.93 %     1,242              
Sutecnología S.A. (2)
    49.50 %     1,535              
ACH 4G S.A.
    20.00 %     1,225       20.00 %     1,225  
Urbanización Sierras del Chicó Ltda.
    0.55 %     203       0.55 %     203  
Serfinsa (3)
                31.11 %     1,314  
Other
            3,072               3,690  
 
                           
Total equity securities
            163,147               160,622  
 
                               
Allowance for other-than-temporary impairment in value
            (63,060 )             (53,717 )
 
                           
Equity securities, net
          Ps 100,087             Ps 106,905  
 
                           
 
     
(1)  
These securities were sold during 2007.
 
(2)  
In 2007, the bank acquired 50.50% of interest in Sutecnología which was subsequently merged with Leasing Bancolombia in December 2007.
 
(3)  
Investment derived from Banagrícola acquisition in May 2007.
Dividends received from equity investments amounted to Ps 42,731, Ps 21,199 and Ps 18,968 for the years ended December 31, 2005, 2006 and 2007, respectively.
The equity investments were classified as Category “A”, except for the following:
                                 
    2006     2007  
            Valuation             Valuation  
    Category     allowance     Category     allowance  
 
                               
Todo Uno Services
    D     Ps 44,218       D     Ps 34,849  
Urbanización Chicó Oriental No. 2 Ltda.
    E       7,848       E       7,848  
Urbanización Sierras del Chicó Ltda.
    E       203       E       203  
Industria Colombo Andina Inca S.A.
    E       300       E       300  
Sociedad Portuaria San Andrés
    E       3                
Sociedad Promotora Siderúrgica Colombiana E.U.
    E       297       D       427  
Promotora La Alborada
    E       9,897       E       9,897  
Oikos Títulos de Inversión en Circulación
    E       287       E       186  
Others
            7               7  
 
                           
 
          Ps 63,060             Ps 53,717  
 
                           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Investment in held to maturity securities consisted of the following:
                 
    2006     2007  
Held to Maturity Securities
               
 
Colombian peso denominated:
               
Colombian government
  Ps 523,007     Ps 525,368  
Colombian Central Bank
          145  
Government entities
    5,106       47,765  
Financial institutions
    520,926       423,056  
Corporate bonds
    30,712       41,710  
 
           
Total Held to maturity securities
    1,079,751       1,038,044  
 
               
Foreign currency denominated:
               
Colombian government
    12,394        
El Salvador Central Bank
          546,552  
Government entities
          853  
Foreign government
          64,929  
Financial institutions
          72,374  
Other
    21,978       2,694  
 
           
Total foreign currency denominated
    34,372       687,402  
 
           
Total Held to maturity securities
    1,114,123       1,725,446  
 
           
Allowance for other-than-temporary impairment in value
    (6,903 )     (13,807 )
 
           
Total Held to maturity securities, net
  Ps 1,107,220     Ps 1,711,639  
 
           
The maturity and yield of securities issued by Colombian Government Peso-denominated, as of December 31, 2007, were as follow:
                 
Maturity   Balance     Yield (1)  
One year or less
    334,500       9.22 %
After one year through five years
    1,013,792       9.39 %
After five years through ten years
    460,543       7.37 %
After ten years
    204,308       10.71 %
 
           
Total
    2,013,143       9.04 %
 
           
 
     
(1)  
Calculated using internal return rate (IRR) as of December 31, 2007

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(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, 2006  
                                    Financial        
Classification   Mortgage     Commercial     Consumer     Small loan     leases     Total  
“A” Normal Risk
  Ps 1,288,334     Ps 15,216,763     Ps 3,327,404     Ps 79,225     Ps 3,398,819     Ps 23,310,545  
“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
  Ps 1,385,445     Ps 16,028,505     Ps 3,587,260     Ps 91,078     Ps 3,553,286     Ps 24,645,574  
 
                                   
                                                 
December 31, 2007  
                                    Financial        
Classification   Mortgage     Commercial     Consumer     Small loan     leases     Total  
“A” Normal Risk
  Ps 2,729,470     Ps 22,060,695     Ps 6,056,276     Ps 114,274     Ps 4,436,788     Ps 35,397,503  
“B” Acceptable Risk
    78,228       677,279       225,934       4,065       149,516       1,135,022  
“C” Appreciable Risk
    35,067       157,559       81,695       2,047       23,717       300,085  
“D” Significant Risk
    13,793       380,711       123,025       1,328       85,177       604,034  
“E” Unrecoverable
    27,070       120,814       106,281       8,186       3,629       265,980  
 
                                   
Total loans and financial leases
  Ps 2,883,628     Ps 23,397,058     Ps 6,593,211     Ps 129,900     Ps 4,698,827     Ps 37,702,624  
 
                                   
Promissory notes documenting loans amounting to Ps 707,546 and Ps 1,601,926 at December 31, 2006 and 2007, respectively, have been duly endorsed to domestic development banks, as required by applicable laws.
The following table represents a summary of restructured loans:
                 
    2006     2007  
 
               
Ordinary restructurings
  Ps 551,293     Ps 849,522  
Extraordinary restructurings
    1,265       1,265  
Under law 550
    90,500       72,519  
Under law 617
    166,198       151,883  
Creditor agreement proceedings
    5,582       4,092  
Performance Agreement
    2,133       1,165  
Interest and other receivables items
    9,415       16,164  
 
           
 
    826,386       1,096,610  
 
Allowances for loan losses
    (176,110 )     (211,779 )
 
           
Net of restructured loans
  Ps 650,276     Ps 884,831  
 
           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(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:
                         
    2005     2006     2007  
 
Balance at beginning of year
  Ps 434,378     Ps 705,882     Ps 834,183  
Balance at beginning of period (Factoring Bancolombia)
          5,625        
Balance at beginning of period (Conavi, Corfinsura and subsidiaries)
    236,013              
Balace at beginning of period (Banagrícola’s subsidiaries) (1)
                147,357  
Provision for loan losses
    374,744       568,679       1,203,543  
Charge-offs
    (115,455 )     (136,789 )     (186,273 )
Effect of changes in exchange rate
    (3,955 )     (1,210 )     (25,441 )
Reclasification — Securitization
    (11,947 )            
Reversals of provisions
    (207,896 )     (308,004 )     (516,218 )
 
                 
Balance at end of year
  Ps 705,882     Ps 834,183     Ps 1,457,151  
 
                 
Ratio of charge-offs to average outstanding loans
    0.66 %     0.63 %     0.60 %
 
                 
 
     
(1)  
Includes allowance for loan losses of Banco Agrícola, Banco Agrícola (Panamá), Arrendadora Financiera, Credibac, Aseguradora Suiza Salvadoreña and Asesuisa Vida.
The recoveries of charged-offs loans are recorded in the consolidated statement of operations separated from provisions for loan losses.
The following table sets forth the activity in the allowance for accrued interest losses:
                         
    2005     2006     2007  
 
                       
Balance at beginning of year
  Ps 4,603     Ps 8,655     Ps 11,644  
Balance at beginning of period (Factoring Bancolombia)
          481        
Balance at beginning of period (Conavi, Corfinsura and subsidiaries)
    9,609              
Provision
    12,379       14,825       35,543  
Charge-offs
    (4,657 )     (4,126 )     (3,167 )
Recoveries
    (13,267 )     (8,159 )     (10,507 )
Effect of changes in exchange rate
    (12 )     (32 )     (210 )
 
                 
Balance at end of year
  Ps 8,655     Ps 11,644     Ps 33,303  
 
                 

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(8) Customer Acceptances and Derivatives
The Bank’s rights and commitments from derivatives operations were as follows:
                 
    2006     2007  
 
               
Customer Acceptances
               
Current
  Ps 57,202     Ps 53,889  
Overdue
    6,828       1,319  
 
           
Total
    64,030       55,208  
 
           
 
Derivatives
               
(Fair value of derivatives instruments)
               
 
               
Next Day Operations
               
Foreign exchange rights contracts bought
    245,494       15,527  
Foreign exchange rights contracts sold
    241,641       10,575  
Investment securities rights bought (local currency)
    50,242       78,381  
Investment securities rights sold (local currency)
    115,455       67,322  
 
           
Total rights
    652,832       171,805  
 
           
 
               
Foreign exchange commitments contracts bought
    (245,705 )     (15,433 )
Foreign exchange commitments contracts sold
    (241,671 )     (10,656 )
Investment securities commitments bought (local currency)
    (50,164 )     (77,898 )
Investment securities commitments sold (local currency)
    (115,410 )     (67,495 )
 
           
Total obligations
    (652,950 )     (171,482 )
 
           
Total Next Day Operations
    (118 )     323  
 
           
 
               
Forward Contracts
               
Foreign exchange rights contracts bought
    3,257,790       3,211,826  
Foreign exchange rights contracts sold
    3,915,765       4,462,834  
Investment securities rights bought (local currency)
    1,042,606       643,016  
Investment securities rights sold (local currency)
    260,854       275,637  
Other rights
          301  
 
           
Total rights
    8,477,015       8,593,614  
 
Foreign exchange commitments contracts bought
    (3,369,751 )     (3,243,867 )
Foreign exchange commitments contracts sold
    (3,757,637 )     (4,399,430 )
Investment securities commitments bought (local currency)
    (1,031,758 )     (643,308 )
Investment securities commitments sold (local currency)
    (271,562 )     (274,938 )
 
           
Total obligations
    (8,430,708 )     (8,561,543 )
 
           
Total (1)
    46,307       32,071  
 
           
 
               
Futures Contracts
               
Foreign exchange rights contracts bought
  Ps       30,117  
Foreign exchange rights contracts sold
    43,973       10,036  
Investment securities rights bought (local currency)
    6       863  
Investment securities rights sold (local currency)
    6       5,611  
Other rights
          599  
 
           
Total rights
    43,985       47,226  
 
           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
                 
    2006     2007  
 
Foreign exchange commitments contracts bought
          (30,117 )
Foreign exchange commitments contracts sold
    (43,973 )     (10,036 )
Investment securities commitments bought (local currency)
    (6 )     (863 )
Investment securities commitments sold (local currency)
    (6 )     (5,611 )
Other commitments
          (603 )
 
           
Total obligations
    (43,985 )     (47,230 )
 
           
Total Future Contracts
          (4 )
 
           
 
               
Swaps
               
Foreign exchange right contracts
    1,151,073       3,129,471  
Interest rate rights contracts
    121,547       155,589  
Foreign exchange commitments contracts
    (1,098,591 )     (3,024,895 )
Interest rate commitments contracts
    (116,558 )     (153,625 )
 
           
Total Swaps
    57,471       106,540  
 
           
 
               
Options
               
Foreign exchange call options
    86       (1,062 )
Foreign exchange put options
    (1,381 )     (141 )
Caps
          3,066  
 
           
Total Options
    (1,295 )     1,863  
 
           
 
               
Total customer acceptances and derivatives
  Ps 166,395     Ps 196,001  
 
           
 
     
(1)  
As of December 31, 2006 includes forward contracts known in Colombia as “operaciones carrusel”.
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 does not economically hedge the foreign exchange exposition of its investment in foreing subsidiaries, which is substantially U.S. Dollar.
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 and the fair value of the asset and liability legs of the derivatives are recorded as rights and commitments separatedly in the balance sheet. The changes in fair value are recorded in the statement of operations.
For forward contracts, the average cost of rights and commitments relating to the purchase of financial instruments is 9.66% with a maturity of eight days and the average yield from rights and commitments relating to the sale of investments securitites is 7.45% with a maturity of four days.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The average yield from rights and commitments relating to the sale of foreign currency is 3.80% annually with a maturity of 67 days. The average yield from rights and commitments relating to the purchase of foreign currency is 3.90% annually with an average maturity of 63 days.
The rates and maturity indicated for forward contracts are the same as the futures contracts.
The average value of hedging portfolio during the years 2007 was US$ 6,194 and the average yield was 5.27%.
(9) Accounts Receivable
Accounts receivable consisted of the following:
                 
    2006 (2)     2007 (2)  
 
               
Credit card compensation
  Ps 210,056     Ps 275,765  
Overnight funds sold
    1,048       2,394  
Commissions
    34,843       46,527  
Sierras del Chicó y Chicó Oriental
    4,289       4,467  
Sale of Bank’s equity investments (1)
    45,200       49,744  
Renting
    474       63  
Advances to contractors and honoraries
    124,353       149,438  
Commitment seller
    10,993       19,289  
Warehousing services
    10,292        
Dividends
    2,826       2,008  
Treasury operations pending of paid by the customers
    1,193       2,500  
Services and properties sells
    27,759       24,017  
Employee advances
    367       5,835  
Deposit security receivable (“Fogafin”)
    26,540       23,342  
Insurance premium receivables
          32,525  
Taxes
    7,538       10,447  
Other credit card receivable
    6,883       11,219  
International operations
    25,480       10,234  
Accounts receivables in branches
    7,680       25,846  
Other receivables
    36,999       54,850  
 
           
Total accounts receivable
    584,813       750,510  
Allowance for accounts receivable losses
    (22,215 )     (34,404 )
 
           
Accounts receivable
  Ps 562,598     Ps 716,106  
 
           

 

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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 accounts receivable are as follows:
                         
    2005     2006     2007  
Balance at beginning of year
  Ps 14,840     Ps 30,984     Ps 22,215  
Balance at beginning of period (Banagrícola’s subsidiaries) (3)
                2,787  
Provision for uncollectible amounts
    25,121       17,621       28,536  
Charge-offs
    (7,851 )     (5,573 )     (7,052 )
Effect of exchange rate
    (163 )     557       (459 )
Reversal of provision and recoveries
    (963 )     (21,374 )     (11,623 )
 
                 
Balance at end of year
  Ps 30,984     Ps 22,215     Ps 34,404  
 
                 
 
     
(1)  
Includes sales of Lab Investment & Logistic and Abocol and affiliate.
 
(2)  
Includes all accounts receivable except those originated for interest loans.
 
(3)  
Includes allowance for accounts receivable losses of Banco Agrícola, Aseguradora Suiza Salvadoreña and Asesuisa Vida.
(10) Premises and Equipment
Premises and equipment consisted of the following:
                 
    2006     2007  
 
               
Premises and equipment
               
Land
  Ps 78,512     Ps 136,369  
Buildings
    321,055       421,666  
Warehouses
    7,116        
Furniture, equipment and fixtures
    212,874       261,029  
Computer equipment
    441,846       543,041  
Vehicles
    6,328       13,034  
Construction in progress
    18,221       122,606  
Machinery and equipment
    15,478       17,293  
Equipment in — transit(1)
    245,478       157,341  
 
           
Total
    1,346,908       1,672,379  
Less accumulated depreciation
    (617,947 )     (806,567 )
Allowance
    (16,239 )     (9,994 )
 
           
Premises and equipment, net
  Ps 712,722     Ps 855,818  
 
           
 
     
(1)  
Includes goods being imported to be allocated to leasing.
Premises and equipment depreciation expense for the years ended December 31, 2005, December 31, 2006 and December 31, 2007, amounted to Ps 79,293, Ps 95,921 and Ps 104,442 respectively.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(11) Operating Leases
Operating leases consisted of the following:
                 
    2006     2007 (1)  
 
               
Operating Leases
               
Machinery and equipment
  Ps 5,463     Ps 5,650  
Vehicles
    211,240       482,440  
Furniture, equipment and fixtures
    3,440       15,271  
Computer equipment
    24,186       97,259  
Real goods
    1,505       1,711  
 
           
Total
    245,834       602,331  
Rents
    7,459       15,690  
Less accumulated depreciation
    (84,687 )     (126,080 )
Allowance
    (1,299 )     (3,608 )
 
           
Operating Leases, net
  Ps 167,307     Ps 488,333  
 
           
 
     
(1)  
As of December 31, 2007, includes Sutecnología operating leases since the beginning of the year. Sutecnología merged with Leasing Bancolombia, on December 2007.
Operating lease depreciation expense for the years ended December 31, 2005, 2006 and 2007, amounted to Ps 8,340, Ps 8,632 and Ps 18,393, respectively.
(12) Prepaid Expenses and Deferred Charges
Prepaid expenses and deferred charges consisted of the following:
                 
    2006     2007  
 
               
Prepaid expenses:
               
Insurance premiums
  Ps 12,417     Ps 11,636  
Interest
    11       10  
Other
    16,072       12,086  
 
           
Total prepaid expenses
    28,500       23,732  
 
           
 
               
Deferred charges:
               
Studies and projects
    1,887       10,058  
Computer programs
    8,450       25,329  
Leasehold improvements
    2,994       8,898  
Deferred taxes non-banking entities
    714       695  
Stationery and supplies
    233       1,618  
Discounts on issuance of long-term debt
          12,918  
Commissions from derivative products
    744       451  
Loss on valuation of debt securities
    941        
Banagrícola acquisition costs
          38,033  
Customer list
          8,082  
Commisions
          2,700  
Other
    1,999       5,387  
 
           
Total deferred charges
  Ps 17,962     Ps 114,169  
 
           
Total prepaid expenses and deferred charges
  Ps 46,462     Ps 137,901  
 
           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(13) Other Assets
Other assets consisted of the following:
                 
    2006     2007  
 
               
Other assets:
               
Value added tax deductible and withholding taxes
  Ps 39,426     Ps 14,486  
Investment in Trust
    16,129       10,978  
Deposits
    147,423       23,842  
Assets to place in lease contracts
    445,050       502,260  
Inventory
    5,543       7,906  
Consortiums
    9,808       8,329  
Other
    11,886       12,841  
 
           
Total other assets
  Ps 675,265     Ps 580,642  
 
           
(14) Goodwill
The movements in goodwill are as follows:
                         
    2005     2006     2007  
 
                       
Balance at beginning of year
  Ps 73,607     Ps 50,959     Ps 40,164  
Additions derived from the acquisition of Factoring Bancolombia by Bancolombia
          15,019        
Additions derived from the acquisition of Banagrícola by Bancolombia Panamá
                881,434  
Other Additions (1)
                132,154  
Amortization
    (22,648 )     (25,814 )     (70,411 )
Effect of change in exchange rate
                (6,246 )
 
                 
Balance at end of year
  Ps 50,959     Ps 40,164     Ps 977,095  
 
                 
 
     
(1)  
Corresponds to: a) The balance at beginning of year of the goodwill derived from the acquisition of Inversiones Financieras Banco Agrícola (IFBA) and Banco Agrícola by Banagrícola and the goodwill derived from the acquisition of Banco Agrícola by Inversiones Financieras Banco Agrícola in the total amount of Ps 74,521; b) the additions to the goodwill derived from the acquisition of IFBA and Banco Agrícola by Banagrícola in the amount of Ps 30,052 and the additions to the goodwill derived from the acquisition of Banco Agrícola by IFBA in the amount of Ps 24,436 during the year 2007 and c) the goodwill derived from the acquisition of Sutecnologia by Leasing Bancolombia in the amount of Ps 3,145.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(15) Foreclosed Assets
Foreclosed assets consisted of the following:
                 
    2006     2007  
 
               
Equity securities
  Ps 54,202     Ps 58,906  
Real estate
    131,816       166,992  
Other assets
    6,986       8,218  
 
           
Total
    193,004       234,116  
Allowance
    (174,393 )     (201,822 )
 
           
Total foreclosed assets, net
  Ps 18,611     Ps 32,294  
 
           
The following is a summary of equity securities classified as foreclosed assets:
                 
    2006     2007  
 
               
Chicó Oriental Número 2 Ltda.
  Ps 14,202     Ps 14,202  
Urbanización Sierras del Chicó Ltda.
    11,703       11,703  
Procampo trust
    7,044       7,044  
Enka de Colombia
          6,965  
Lote2C Chisa trust
    3,511       4,480  
Pizano S.A.
    3,663       3,663  
Convertible Securities Pizano S.A.
    3,221       3,221  
Derechos Fibra Tolima
          1,572  
Derechos Calima Resort
          1,485  
Derecho fiduciario ADM-Ceylán
          1,209  
BIMA trust
          675  
Líneas Agromar trust
    1,399       209  
Conconcreto S.A.
    2,622        
Holguines Cali
    1,485        
Coltejer
    2,674        
Other
    2,678       2,478  
 
           
Total
  Ps 54,202     Ps 58,906  
 
           
The changes in allowance for foreclosed assets are as follows:
                         
    2005     2006     2007  
 
                       
Balance at beginning of year
  Ps 140,865     Ps 205,176     Ps 174,393  
Balance at beginning of year 2007 (Aseguradora Suiza, Banco Agrícola)
                70,612  
Balance at beginning of the year (Factoring Bancolombia, Conavi, Corfinsura and subsidiaries)
    65,814       2,370        
Provision
    44,665       22,037       35,298  
Charge-offs
    (772 )     (978 )     (23,866 )
Reversal of provisions
    (45,445 )     (54,298 )     (52,995 )
Reclassifications
    52       91       5,244  
Effect of changes in exchange rates
    (3 )     (5 )     (6,864 )
 
                 
Balance at the end of year
  Ps 205,176     Ps 174,393     Ps 201,822  
 
                 

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(16) Reappraisal of Assets
The following table describes reappraisals of assets:
                 
    2006     2007  
 
               
Asset revaluations, net
  Ps 348,364     Ps 520,788  
Less: proportional equity revaluations
    (179,651 )     (167,069 )
Less: minority interests
    (28,020 )     (34,073 )
 
           
Total equity revaluations
  Ps 140,693     Ps 319,646  
 
           
The proportional equity revaluations refer to the acquisition of investment in Banca Inversión Bancolombia S.A., Almacenar S.A. (for 2006), Valores Bancolombia S.A., Leasing Bancolombia S.A., Fiduciaria Bancolombia S.A., Sufinanciamiento S.A., Factoring Bancolombia S.A. and Inversiones Financieras Banco Agrícola 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.
(17) Interbank Borrowings
Interbank borrowings, primarily denominated in U.S. Dollars, are summarized as follows:
                 
    2006     2007  
 
               
Foreign banks
               
Short-term
  Ps 679,105     Ps 454,878  
Long-term
    387,740       1,051,733  
 
           
Total
  Ps 1,066,845     Ps 1,506,611  
 
           
For the purposes of this classification, short-term interbank borrowings, obtained from other banks for liquidity purposes, are unsecured and generally have maturities ranging from 90 to 180 days.
As of December 2006 and 2007, interest rates on U.S. dollar denominated short-term borrowings from foreign banks averaged 5.59% and 5.28%, respectively.
For long-term interbank borrowings, the average interest rate was 5.76% and 5.86% in 2006 and 2007, respectively.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Maturities of interbank borrowings for the end of the year 2007 were as follows:
         
    2007  
 
       
2008
  Ps 1,112,032  
2009
    16,432  
2010
    70,408  
2011
    7,613  
2012 and thereafter
    300,126  
 
     
 
  Ps 1,506,611  
 
     
(18) Borrowings from Development and other domestic banks
The Colombia goverment 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 goverment 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 aplicant 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.
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 reminder 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 Development bank received from certain Colombian goverment agencies and other domestic banks consisted of the following:
                 
    2006     2007  
 
               
Banco de Comercio Exterior de Colombia (“Bancoldex”)
  Ps 732,617     Ps 1,190,028  
Fondo para el Financiamiento del Sector Agropecuario (“Finagro”)
    429,175       631,940  
Findeter
    753,200       1,035,910  
Other (1)
    534,589       486,757  
 
           
Total
  Ps 2,449,581     Ps 3,344,635  
 
           
     
(1)  
Includes borrowings from comercial banks and other non-financial entities

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Interest rates on borrowings from development and other domestic banks averaged 6.58% and 9.8% in 2006 and 2007, respectively, in local currency and 6.47% and 6.82% in 2006 and 2007, respectively, in foreign currency. Maturities at December 31, 2007 were as follows:
         
2007
  Ps 329  
2008
    740,971  
2009
    385,022  
2010
    839,417  
2011
    377,231  
2012
    565,364  
2013 and thereafter
    436,301  
 
     
Total
  Ps 3,344,635  
 
     
(19) Other Liabilities
Other liabilities consisted of the following:
                 
    2006     2007  
 
               
Unearned income
  Ps 20,579     Ps 33,779  
Accrued severance Law 50, net of advances
    17,269       21,028  
Accrued severance pre-Law 50, net of advances to employees of Ps 11,360 and Ps 10,160 in 2006 and 2007, respectively
    13,553       13,669  
Accrued payroll and other severance benefits
    43,649       48,308  
Accrued pension obligations net of deferred cost
    99,085       110,669  
Negative goodwill
    7,137       4,604  
Deferred interest on restructured loans
    50,549       45,956  
Deferred tax liability
    40,683       64,183  
Advances
    75,104       52,200  
Insurance reserves
          67,229  
Deferred profit on sales of assets
    11,039       12,787  
Deferred paid standby letters
    2,150       3,965  
Other
    6,900       25,056  
 
           
Total
  Ps 387,697     Ps 503,433  
 
           
Unearned income fundamentally 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. Furthermore, unearned income includes commissions paid by clients and other rents.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, 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  
 
                 
 
                       
Adjustment per actuarial valuation
    22,156       (22,156 )      
Benefits paid
    (11,753 )           (11,753 )
Pension expense
          22,156       22,156  
 
                 
 
                       
Balance at December 31, 2006
  Ps 99,085     Ps     Ps 99,085  
 
                 
 
                       
Adjustment per actuarial valuation
    25,736       (25,736 )      
Benefits paid
    (12,652 )           (12,652 )
Settlement due to sale of Almacenar
    (1,500 )           (1,500 )
Pension Expense
          25,736       25,736  
 
                 
 
                       
Balance at December 31, 2007
  Ps 110,669     Ps     Ps 110,669  
 
                 
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:
                         
    2005     2006     2007  
 
                       
Discount rate
    19.06 %     16.53 %     14.05 %
Future pension increases
    12.01 %     10.55 %     8.83 %

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(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, 2007 were as follows:
         
2008
    448,636  
2009
    696,144  
2010
    321,431  
2011
    206,770  
2012
    168,152  
2013 and thereafter
    1,009,597  
 
     
 
  Ps 2,850,730  
 
     
Long-term debt consists of bonds issued by Bancolombia (unconsolidated), Banco Agrícola S.A., Leasing Colombia S.A., Sufinanciamiento S.A., Renting Colombia S.A. and by Fundicom S.A. bearing interest at the following rates:
Bancolombia S.A.

Peso Denominated
                 
Issue Date   Maturity Date     Rate (1)  
2000
  30-Nov-02     14.15 %
2001
  20-Dec-10     11.90 %
2002
  21-Jun-10     9.88 %
2004
  11-Feb-09     11.34 %
2004
  11-Feb-09     10.10 %
2007
  26-Dec-12     11.58 %
Foreign Currency Denominated
                 
Issue Date   Maturity Date     Rate  
2007
  25-May-17     6.99 %
     
(1)  
Each of these issuances has a different nominal rate; for this reason the effective rate presented here corresponds to the estimate made with each one of the rate for each issuance in circulation.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
On May 14, 2007, Bancolombia issued US$ 400,000 of subordinated notes due 2017 (the “Notes”). The notes have a 10-year maturity term and a coupon of 6.99%, payable semi-annually on May 25 and November 25 of each year, beginning on November 25, 2007. The Notes were offered pursuant to an effective shelf registration statement filed with the SEC. The Notes offering settled on May 25, 2007.
On September 26, 2007, Bancolombia did a local public offering of the first issuance of Bancolombia’s Ordinary Notes (Bonos Ordinarios Bancolombia). Bancolombia successfully completed the issuance for an aggregate principal amount of Ps 400,000.
The principal conditions of this issuance are described as follows:
                     
Issue   Maturity date   Payment term   Yield   Amount  
1st
  March 26, 2009   Quarterly   DTF + 1.99     139,848  
2nd
  September 26, 2009   Quarterly   DTF + 2.2     91,000  
3rd
  September 26, 2012   Quarterly   DTF + 2.68     107,400  
3rd
  September 26, 2012   Biannually   DTF + 6.10     61,752  
Total amount
                400,000  
Banco Agrícola S.A.
                 
Issue Date   Maturity Date     Rate
2002
  2009     Up to an annual rate of 4.9%
2003
  2008     Up to an annual rate of 5.08%
2003
  2010     Up to an annual rate of 5.36%
2004
  2009     Up to an annual rate of 5.28%
2004
  2011     Up to an annual rate of 5.88%
2005
  2010     Up to an annual rate of 5.97%
2006
  2008     Up to an annual rate of 6%
2006
  2011     Up to an annual rate of 5.82%
2006
  2013     Up to an annual rate of 5.46%
2007
  2009     Up to an annual rate of 6.25%
2007
  2010     Up to an annual rate of 6.30%
2007
  2014     Up to an annual rate of 5.71%
Leasing Bancolombia S.A.
                 
Issue Date   Maturity Date   Rate
2002
  From 60 to 72 months   Up to an annual rate of the DTF or IPC plus 3.00%
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%

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Sufinanciamiento S.A.
                 
Issue Date   Maturity Date     Rate  
11-Mar-04
  11-Mar-14   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%
06-Dec-06
  06-Dec-16   IPC + 2%
21-Dec-06
  21-Dec-16   IPC + 2%
03-Jul-07
  03-Jul-17   IPC + 2%
28-Nov-07
  28-Nov-17   IPC + 2%
Renting Colombia S.A.
                 
Issue Date   Maturity Date     Rate  
28-Jan-03
  28-Jan-08   IPC 7.25% E.A.
28-Jan-03
  28-Jan-09   IPC 6.7% T.A.
21-Sep-06
  21-Sep-09   DTF 2.80% T.A.
21-Sep-06
  21-Sep-11   IPC 5.38% E.A.
21-Feb-07
  21-Sep-09   DTF 2.9% T.A.
26-Apr-07
  21-Sep-10   DTF 3.09% T.A.
Fundicom S.A.
                 
Issue Date   Maturity Date     Rate  
06-Aug-06
  05-Aug-15   IPC
07-Jun-07
  06-Jun-14   DTF
 
     
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:
                 
    2006     2007  
 
               
Income tax payable
  Ps 8,077     Ps 39,548  
Fines and sanctions (1)
    86,764       92,395  
Labor obligations
    12,115       24,303  
FICAFE contingency (2)
          48,772  
Other
    13,028       13,842  
 
           
Total
  Ps 119,984     Ps 218,860  
 
           
     
(1)  
See Note 26(d).
 
(2)  
As a result of Banagriícola’s acquisition, the Bank for the year ended December 31, 2007, has established an allowance available to absorb probable losses inherent in the FICAFE investment, booked through its subsidiary, Banco Agrícola S.A. FICAFE investment consists of fiduciary’s certifications, issued by the Found of Enviromental Preservation of Coffee-producing lands established by the Salvadorian government.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
For 2006 the statutory income tax was 37% for the Bank unconsolidated, Leasing Bancolombia S.A., Banca de Inversión S.A. and Fiduciaria Bancolombia S.A. according to an agreement of tax stability, for 2007 the statutory income tax for the Bank and those subsidiaries was 36%.
For 2007 the statutory income tax for subsidiaries of Banagrícola, a subsidiary of Bancolombia, was 25% according to Salvadorian tax regulation and 34% for the other subsidiaries not mentioned before.
The following is a reconciliation of taxable income before income taxes:
                         
    2005     2006     2007  
 
                       
Income before income taxes
  Ps 1,224,396     Ps 924,409     Ps 1,448,806  
Adjustments for consolidation purposes, net
    37,032       159,103       653,554  
Difference between net operating loss carry-forwards and presumed income
    8,149       20,879       91,947  
Non-deductible provisions, costs and expenses
    130,528       177,966       236,274  
Non-taxable or exempt income
    (364,663 )     (636,915 )     (1,064,598 )
Difference between monetary correction for tax purposes and for financial reporting purposes
    (38,028 )     (62,776 )      
Excess of accrued income over valuation income
    (130,265 )     6,652       (23,142 )
Amortization of excess of presumed income over ordinary income and amortization of net operating loss carry forwards
    (94,562 )     (102,352 )     (65,391 )
Valuation derivatives effect
    (100,495 )     (33,075 )     (35,380 )
Special tax deduction for Investment in Real Productive Assets
    (28,181 )     (21,254 )     (177,036 )
Other
    (127,941 )     (66,281 )     (57,360 )
 
                 
 
Taxable income
  Ps 515,970     Ps 366,356     Ps 1,007,674  
 
                 
Statutory tax rate
    34.69 %     37.21 %     33.58 %
 
                 
Estimated current income tax
  Ps 178,992     Ps 136,307     Ps 338,364  
Deferred income tax expense
    98,523       38,573       23,519  
 
                 
Total
  Ps 277,515     Ps 174,880     Ps 361,883  
 
                 
Income taxes for the years ended December 31, 2006 and 2007 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:

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Fiscal Losses to amortize
                                                         
    Renting     Inversiones     Tempo     Renting     Todo Uno              
    Perú     CFNS     Rent a car     Bancolombia     Colombia     Fundicom     Total  
2011
  Ps     Ps     Ps     Ps     Ps 26     Ps 1,962     Ps 1,988  
2012
                            117             117  
2013
                                  294       294  
With no maximum expiry date
    866       20       632       93,221                       94,739  
 
                                         
 
  Ps 866     Ps 20     Ps 632     Ps 93,221     Ps 143     Ps 2,256     Ps 97,138  
 
                                         
                                                         
    Inversiones     Renting     Inversiones             Banca de              
    CFNS     Bancolombia     Valsimesa     Fundicom     Inversión     Bancolombia     Total  
2008
  Ps     Ps     Ps     Ps 297     Ps     Ps 7,300     Ps 7,597  
2009
          1,718             634             39,507       41,859  
2010
          2,181             593                   2,774  
2011
          2,796             817       1,539             5,152  
2012
    91       1,564       5             4,988             6,648  
 
                                         
 
  Ps 91     Ps 8,259     Ps 5     Ps 2,341     Ps 6,527     Ps 46,807     Ps 64,030  
 
                                         
(22) Subscribed and Paid-in Capital
Subscribed and paid-in capital consisted of the following:
                         
    2005     2006     2007  
 
                       
Authorized shares
    1,000,000,000       1,000,000,000       1,000,000,000  
 
                 
Issued and outstanding:
                       
Common shares with a nominal value of Ps 500 (in pesos)
    509,704,584       509,704,584       509,704,584  
Preference shares with a nominal value of Ps 500 (in pesos)
    218,122,421       218,122,421       278,122,419  
In May and June of 2007, the Bank conducted public offerings of non-voting, preferential shares, which was initially offered to the Bancolombia S.A. shareholders holding preferred shares in Colombia, and then, as part of a second offering, was exclusively offered to investors outside Colombia, the form of American Depository Shares (ADSs).
Out of the entire 60 million preferential shares offered, 21,307,238 were offered in the first round at a price of Ps 15,205 (in pesos) each for an approximate total of Ps 323,976.
With regard to the offering conducted outside Colombia, a total of 8,411,470 ADSs were placed, corresponding to 33,645,880 preferential shares, each ADS for a price of US$ 33.25 (in US$ dollar). Additionally, international placement agents exercised an option granted by the Bank, consisting of acquiring another 1,261,720 ADRs corresponding to 5,046,880 preferential shares to cover excess demand for the offer. The net funds received by the Bank for this sale of ADSs amounted to US$ 314,000.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
As a result of these offerings, Bancolombia S.A. placed a total of 59,999,998 preferential shares, for which it received approximately Ps 927,612 (US$ 480,000), of which Ps 30,000 were applied to increase the Bank’s subscribed and paid-in capital and Ps 897,612 were recorded in the form of additional paid-in capital. See the Statement of Stockholders’ Equity.
A partial amendment to the Bancolombia’s by-laws, which was recorded in the Commercial Registry of the Medellin Chamber of Commerce on July 26, 2005, increases the Bancolombia’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, 2007, Bancolombia had 509,704,584 common shares and 278,122,419 preferred shares outstanding and a capital stock of Ps 460,684 divided into 787,827,003 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 Bancolombia’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 Bancolombia’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 of directors and President and may, subject to further reserves required by the by-laws, be distributed as dividends.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.

 

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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, pari passu with any of the other shares with similar ranking, 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 and subsequently the preferred shareholders’s participation in Bank’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 2006 and 2007. Calculations are made each month on an unconsolidated basis and in June and December on consolidated accounts which include the Bank’s financial Subsidiaries in Colombia and abroad.
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 Panamá S.A.: Pursuant to the Acuerdo 6, 1998, as amended, issued by the Superintendency of Banking of Panama, Bancolombia Panamá 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;
   
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.
   
Banco Agrícola: According to requirements established by the Banking System of El Salvador, specially in the Article 41 of the Bank’s Law (“Ley de Bancos”), Banco Agrícola’s capital adequacy is required to be not less than 12% of their total weighted assets according to the Bank’s Law; not less than 7% of their total liabilities and contingencies and not less than 100% of their paid-in capital as is explained in Article 36 of the Bank’s Law.
   
In El Salvador, Capital Adequacy is known as Fondo Patrimonial. It is composed by the primary capital and the secondary capital, less: the amount of the resources invested in operations defined in the Article 23 of the Bank’s Law, the amount of the equity investments in entities according with the Article 24 of this Law and the amount of other equity investments in other entities.

 

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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 and 2007 the Bank’s capital adequacy ratio was 11.05% and 12.67%, respectively.
(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:
                         
    2005     2006     2007  
 
                       
Legal reserve (1)
  Ps 886,159     Ps 1,405,733     Ps 1,172,799  
Additional paid-in capital
    268,005       268,005       1,165,617  
Other reserves
    611,834       639,869       1,021,188  
 
                 
Total
  Ps 1,765,998     Ps 2,313,607     Ps 3,359,604  
 
                 
     
(1)  
Includes legal reserve and net income from previous years.
In addition, paid-in capital of Ps 268,005, Ps 268,005 and Ps 1,165,617 at December 31, 2005, 2006 and 2007, respectively, were recorded as part of the legal reserve and presented within the retained earnings, as required by the Superintendency of Finance.
(24) Dividends Declared
The dividends are declared and paid to shareholders based on the adjusted net income from previous year. The dividends were paid as indicated below:
                         
    2006   2007   2008
 
                       
Preceding year’s unconsolidated earnings
  Ps 737,389   Ps 582,365   Ps 804,261
 
                       
Dividends in cash
  508 pesos per share
paid in four quarterly
installments of 127
pesos per share
from April 2006 on
509,704,584 and
218,122,421
common and
preferred shares,
respectively.
  532 pesos per share
payable in four quarterly
installments of 133
pesos per share
from April 2007 on
509,704,584 and
218,122,421
common and
preferred shares,
respectively.
Additionally 266
pesos per share on
59,999,998 payable
preferred shares
issued in June and
July 2007.
  568 pesos per share payable in four quarterly installments of 142 pesos per share from April 2008 on 509,704,584 and 278,122,419 common and preferred shares, respectively
 
                       
Total dividends declared
  Ps 369,736     Ps 403,164     Ps 447,486  
 
                       
Dividends payable at December 31 (1)
  Ps 98,340     Ps 111,842          
 
                 
 
     
(1)  
The amount of the dividends payable at December 31, is recorded as accounts payable in the Consolidated Balance Sheets.
 
(2)  
The amount disclosed as Total Dividends Declared in the table for 2007 differs from those disclosed in the annual report of 2006, because Bancolombia S.A. paid dividends on 59,999,998 preferred shares issued during 2007.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(25) Memorandum Accounts
Memorandum accounts were composed of the following:
                 
    2006     2007  
 
               
Trust:
               
Investment trusts
  Ps 34,886,946     Ps 39,609,384  
 
               
Commitments:
               
Unused credit card limits
    2,893,839       4,703,942  
Civil demands against the Bank
    858,644       874,107  
Issued and confirmed letters of credit
    1,053,601       1,354,921  
Uncommitted lines of credit
    751,304       865,706  
Bank guarantees
    780,280       1,258,448  
Approved credits not disbursed
    660,558       1,467,745  
Nation account payable (546 law)
    34,862       30,371  
Other
    194,684       124,195  
 
           
Total
  Ps 42,114,718     Ps 50,288,819  
 
           
Other memorandum accounts:
                 
    2006     2007  
 
               
Memorandum accounts receivable:
               
Tax value of assets
    29,028,917       30,481,070  
Assets and securities given in custody
    3,813,482       3,411,382  
Assets and securities given as a collateral
    2,163,335       3,300,348  
Trading investments in debt securities
    2,401,899       1,692,960  
Written-off assets
    1,023,745       1,439,114  
Quotas of leasing to receive
    4,219,686       5,977,221  
Investments held to maturity
    1,171,055       1,058,280  
Adjustments for inflation of assets
    166,941       162,724  
Accounts to receive yields trading investments in debt titles
    139,763       103,286  
Investments available for the sale in debt titles
    1,641,970       1,379,980  
Remittances sent for collection
    24,632       26,103  
Amortized debt securities investment
    614,528       788,610  
Other memorandum account receivable
    4,134,808       4,304,690  
 
           
Total
  Ps 50,544,761     Ps 54,125,768  
 
           
 
               
Memorandum accounts payable:
               
Assets and securities received as collateral
    20,256,982       25,815,805  
Qualification commercial loans
    16,230,741       23,711,631  
Assets and securities received in custody
    6,030,005       4,816,267  
Tax value of shareholders’ equity
    4,428,133       4,673,067  
Qualification consumer loans
    3,586,540       6,573,200  
Adjustment for inflation of equity
    912,418       892,909  
Qualification small business loans
    92,237       131,913  
Merchandise in owned warehouses
    85,402       65  
Merchandise in third-party warehouses
    22,376        
Underwriting
    25,000        
Qualification financial leasing
    3,593,083       4,749,309  
Qualification operating leasing
    168,606       491,941  
Qualification mortgage loans
    1,336,293       2,803,165  
Other memorandum account payable
    3,653,410       3,135,280  
 
           
Total
  Ps 60,421,226     Ps 77,794,552  
 
           
Total memorandum accounts
  Ps 153,080,705     Ps 182,209,139  
 
           

 

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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 in El Salvador has different rules for the memorandum accounts if compared to the Colombian. As a consequence, the memorandum accounts may not present the consolidated position of the Bank for certain accounts.
(26) Commitments and Contingencies
For the years ended December 31, 2006 and 2007, the Bank registered allowances for probable contingencies of Ps 86,764 and Ps 92,395 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.
At December 31, 2006 and 2007, the civil contingencies covered by the guarantee amounted to approximately Ps 957 and Ps 997, respectively, with allowances as of the same dates amounting to Ps 957 and Ps 166. At December 31, 2007 and 2006, labor contingencies amounted to Ps 345 and allowances amounted to Ps 173.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
b) Legal Processes
At December 31, 2006 and 2007, other than the litigation discussed under (a) above, there were labor-related claims against the Bank amounting to approximately Ps 14,506 and Ps 16,590, 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 7,479 and Ps 8,946, respectively and were recorded as accrued expenses in the consolidated balance sheets.
At December 31, 2006 and 2007, there were ordinary civil lawsuits, group actions, and civil actions within criminal and executive proceedings against the Bank with total claims for approximately Ps 733,525 and Ps 644,953, respectively and with allowances on the same dates of Ps 18,889 and Ps 30,456, 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 likely to result in an unfavorable ruling.
At December 31, 2007, the Superintendency of Finance has imposed fines on the Bank amounting to Ps 1,357, for which complete allowances have been recorded.
Contingencies against the Bank greater to Ps 5,000, as of December 31, 2007, are:
                                 
            Actual              
    Initial     Exposure at              
Process   Exposure     December 31, 2007     Allowance     Likelihood  
 
                               
Arbitration process Jaime Gilinski and Others against Bancolombia and some of its officers
  US$ 675,000     Ps 55,975     Ps 27,988     Probable
Civil Lawsuit from Jaime Gilinski and Others
  Ps 357,000     Ps 357,000           Remote
Almacenar S.A.
    92,048       47,000       20,000     Probable
Inversiones C.B. S.A.
    12,468       40,806           Remote
Class action Luis Alberto Duran (1)
    421,080       39,084       19,542     Probable
Popular action Carlos Julio Aguilar and Other
                               
   Administrative Tribunal of Valle
    25,232       30,210           Remote
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
Costrucc.Rojas Jimenez & CÍA. S. EN C.
    6,277       6,277             Remote
Ordinary process Gloria Amparo Zuluaga Arcila
    1,400       5,784           Remote
Constructodo against Corvivienda. Civil Circuit Court 18 of Bogota
    3,500       5,070       5,000     Probable
Arbitration process CAJANAL vs Bancolombia
    34,026       34,026           Remote
Parque Industrial y Comercial of Barranquilla VIA 40 and others
    5,000       5,000           Remote

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
  c)  
Contingencies Related to the Purchase of 51% of Former Banco de Colombia S.A. (“Banco de Colombia”) Stock and Later Merger with Banco Industrial Colombiano (“BIC”, now Bancolombia)
The Gilinski Case
Contingency 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 amounts to US$ 30,000, equivalent to Ps 60,443. The defendant was ordered to pay to the Bank Ps 63,216, including inflation adjustments and interest.
Jaime Gilinski challenged this award, in an annulment action held before the Superior Tribunal of Bogota. At December 31, 2007, 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.
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 Londoño 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 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 Revisión”), 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 on January 4, 2007 the following orders:
   
An order for a criminal judge to review the conduct of the Bank’s officers, Messrs. Londoño Saldarriaga and Ochoa Barrera.
   
An order for the house arrest of the aforementioned officers as a preventive measure.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
   
An order for the embargo of all goods and property belonging to the officers involved.
   
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.
A few days after issuing this ruling, on January 10, 2007, the Delegated Attorney’s Office No. 8 officially revoked the house arrest order with regard to Messrs. Londoño and Ochoa.
On September 25, 2007, the Attorney General’s Office (“Fiscal Delegado ante la Corte Suprema de Justicia”), in second instance, revoked the decision of first instance, dated January 4, 2007 and decided not to prosecute Bancolombia’s officers as it relates to the events occurred during the acquisition of Banco de Colombia by BIC and its subsequent merger in 1998, ordering the Attorney General of first instance to consider the documentary and testimonial evidence in order to comply with the decision of the Constitutional Court which was disobeyed by the Attorney General on first instance.
In addition, the Attorney General’s Office (“Fiscal Delegado ante la Corte Suprema de Justicia”) barred one of the financial crimes (unauthorized transactions with shareholders) for which Mr. Londoño and Mr. Ochoa were investigated, based on the lapse of the statute of limitations.
The Attorney General’s Office when remanding the proceeding to the first instance, ordered that the respective Attorney General must exclusively consider the documentary evidence and must incorporate two testimonial pieces of evidence that are still pending as it was ordered by the Constitutional Court.
The Bank’s administration considered the contingency remote, based on the following:
   
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.
   
During the acquisition process and the subsequent merger, the Bank and its officers acted with loyalty and transparency, and the transactions with the shareholders were in accordance with international customary standards and practices for this type of transactions, and in accordance with Colombian law.
   
The Bank’s conduct in the acquisition and merger process has been thoroughly analyzed in different judicial and administrative venues, including the Supreme Court, the Council of State, the Contentious Administrative Tribunal of Cundinamarca, the Superior Court, the Superior Tribunal of Medellin and three Arbitration Tribunals, as well as the former Superintendency of Banking and the Superintendency of Securities (now the 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.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Additionally, on September 12, 2007 the Attorney General’s Office No. 218 of the First Unit of Crimes against the Public Administration and Justice of Bogotá (“Fiscal Delegada 218 de la Unidad Primera de Delitos contra la Administración Pública y de Justicia de Bogotá”), revoked its July 31, 2006 decision which had precluded the investigation against the president of the Bank, Mr. Jorge Londoño Saldarriaga. These decisions were taken in the context of the preliminary investigation initiated against the officers of the former Superintendency of Banking and former Superintendency of Securities relating to the authorizations granted for the merger of Bancolombia and Banco de Colombia. The Attorney General’s Office No. 218 of the First Unit of Crimes against the Public Administration and Justice of Bogotá, in the September 12, 2007 decision initiated a formal investigation of Mr. Jorge Londoño Saldarriaga and the board of directors of the Central Bank and the former Banco Industrial Colombiano (BIC) that had authorized the acquisition of the former Banco de Colombia by BIC and their subsequent merger.
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 Londoño Saldarriaga and its Vice-President of Finance, Mr. Jaime Velásquez 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 consists 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, formed by Messrs. José Alejandro Bonivento Fernández, 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. 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.
Against this award, the Bank filed an annulment action before the Superior Court 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 27,988 while a definite decision is given.

 

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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 Court determined that the award of the Colombian arbitral tribunal, dated May 16, 2006, decided on the same grounds filed before the Court in New York and, therefore, put an end to the proceedings in New York.
The Court determined that the arbitral tribunal had decided on the merits of all the claims, and rejected the liability of the Bank and its managers.
The Court noted that the arbitral tribunal rejected the main three allegations of the plaintiffs. The arbitral tribunal found that (i) the Bank had not manipulated the price of ADRs on the New York Stock Exchange; (ii) the failure to raise US$ 150,000, was neither a breach of an express contractual obligation nor unlawful, fraudulent or willful misconduct; and (iii) neither the Bank nor its managers did engage in transactions or conduct in violation of Colombian law and sound banking practices. However, the arbitral tribunal found that the Bank had breached certain secondary duties of conduct.
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 Durán Valencia
As of December 31, 2007, 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 sought to review the decision of the arbitration tribunal previously convened by the class action filed by Luis Alberto Durán Valencia and other shareholders of the former Banco de Colombia.
The appeal solely sought 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.
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.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 before the Contentious Administrative Tribunal of Cundinamarca, and on January 24, 2007 the Contentious Administrative Tribunal of Cundinamarca solved unfavorable to the plaintiff’s interests. The contingency is considered remote.
Almacenar S.A
In December, 2006, the spin off process of Almacenar S.A., subsidiary of the Bank, was finalized. Due to the spin-off, two new non-financial companies were created named Inversiones Valores y Logística S.A. and LAB Investment & Logistics S.A. Subsequently, in 2007, the Bank sold to Portal de Inversiones S.A. its share holding in LAB Investment & Logistics S.A. and in Almacenar S.A. Pursuant to this transaction, the Bank acquired the commitment for the contingencies that would have being caused before this transaction; specifically for the possible losses that would suffer Almacenar relating to a fire that occurred in May 2005 in a warehouse located in Salomia, Cali.
As of December 31, 2007, Almacenar has received claims from the insurance entities of its customers for an amount of Ps 92,048, notwithstanding the good’s price amounted Ps 56,581, some of which Compañia Suramericana de Seguros S.A. will assume, pursuant the insurance policy, the amount of Ps 45,000. The Bank has a provision of Ps 20,000 for the estimated probable loss.
Sierras del Chicó Ltda and Chicó Oriental Nro. 2 Ltda.
Fondo Nacional de Garantias — FOGAFIN — initiated a process against Bancolombia on July 21, 2005 before the Administrative Court of Cundinamarca (“Tribunal Administrativo de Cundinamarca”), claiming the 100% of the Bank’s interest in Sierras del Chicó Ltda and Chicó Oriental Nro. 2 Ltda. on December 31, 1993.
This process was declared null on July 12, 2006. The plaintiffist appealed this decision, action which was rejected on July 26, 2007 definitively.
d) National Tax and Customs Agency (“DIAN”)
Special Requirement
On December 27, 2007, the Bank received a special request by the Tax Administration of Medellin (“Administracion de Impuestos de Medellin”) regarding the income tax (“impuesto de renta”) for the 2006 year, in which Ps 79,013 are disputed. The Bank and its tax advisors considered that the procedure of the income tax return of 2006 was in compliance with the applicable rules and regulations. Currently, the Bank and its advisors are analyzing the request.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
Industry and Commerce Tax corresponding to 2001 — Conavi
Currently, this case is in the initial stage, which is considered remote.
Fiduciaria Bancolombia S.A.
Executive proceedings have been filed against Fiduciaria Bancolombia S.A, the Bank’s subsidiary that provides fiduciary and trust services. Management considers that these proceedings are not likely to result in unfavorable rulings or to negatively affect the Fiduciaria Bancolombia S.A., otherwise mentioned further ahead
The following is a summary of the execuritive proceedings:
a. Silvania Trust — Seven proceedings are underway in the civil courts of the Bogota Circuit and in an Arbitration Tribunal which ruled in favor of Fiduciaria Bancolombia S.A. 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. The appraisal of the property was made by the entity Vector.
Two of the aforementioned proceedings were terminated. However, on December 11, 2003, a new ordinary proceeding was initiated against Fiducolombia (now Fiduciaria Bancolombia S.A.), following a legal action filed during the month of September 2003. The Ninth Court of the Civil Circuit of Bogotá (Juzgado Noveno Civil del Circuito de Bogota) ordered all of the proceedings to be consolidated into the Tarazona Bermúdez Proceeding, and a judgement in the first instance is currently pending.
b. Invico Ltda. has a lawsuit pending against the Bank and Fiducolombia S.A. (now Fiduciaria Bancolombia S.A.) in the Sixth Court of the Civil Circuit of Bogota (Juzgado Sexto Civil del Circuito de Bogota). The plaintiff seeks a ruling declaring that the Bank and Fiducolombia S.A. (now Fiduciaria Bancolombia S.A.) must exercise the 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 a defense presented by Fiduciaria Bancolombia S.A. and ordered it to pay the court fees. The discovery stage has finalized and Fiduciaria Bancolombia S.A. has presented its final legal conclusions on September 17, 2007. Since that date, the ruling is pending.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 termination of the real estate sales agreements and damages for alleged defects in the property. Fiduciaria Bancolombia S.A. presented a joinder request to 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, some of these proceedings are at a initial stage, some of the plaintiffs withdrew the evidence, in some the mandatory mediation hearings were unsuccessful as the parties failed to reach an agreement, others are pending for the final judgement, and one of them has final decision judgement in favor of Fiduciaria Bancolombia S.A. According to the legal counsel for Fiduciaria Bancolombia S.A. the sole process that has reached a final judgement was appealed by the plaintiff.
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 requests the payment of salaries and other employment benefits. He seeks to be compensated alleging that he did not freely resigned but that instead his resignation was a consequence of an insinuation made by the manager of the Fopep Consortium. In one of the proceedings, a judgement in the first instance was given in favor of Fiduciaria Bancolombia S.A. An appeal followed and a second instance judgement is pending. In the other proceedings, first and second instance judgments were given in favor of Fiduciaria Bancolombia S.A. and appeals before the Supreme Court of Justice were made by the plaintiff. Currently, these appeals are still pending.
Fiduciaria Bancolombia S.A. management considered probable that these proceedings may have an unfavorable outcome, due to different considerations or opinions of the administrators of justice. Fiduciaria Bancolombia S.A. has a provision of Ps 50 for the estimated probable loss.
e. With regard to the “Santa Sofía” Trust, there are three different types of proceedings that are taking place:
  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. In October 2007, a “Mediation hearing” was held, but the plaintiffs did not assist. Currently, the proceedings are at a discovery stage. The management of Fiduciaria Bancolombia S.A. considered that the probability of liability is low.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
  2.  
Criminal proceedings against Fiduciaria Bancolombia S.A. 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 discovery stage and Management based on initial assessment considered the loss low.
  3.  
Ordinary process of major quantity for tort liability. Plaintiff asserts the joint and several liability of Fiduciaria Bancolombia S.A. and other defendants and, consequently order for the payment of the price of the property, including its improvements. Fiduciaria Bancolombia S.A. answered the complaint and denying all liability. As of December 31, 2007, procedd has not been served to all defendants.
f. There are currently two executive proceedings that were filed by Mr. Eugenio Segura Villarraga seeking payment of three checks that were countermanded according to instructions given by the Bank. Mr Segura Villarraga claims that the checks were drawn as a result of an unlawful act. These proceedings are currently suspended.
g. Gacen Ltda. filed an ordinary action against Fiduciaria Bancolombia S.A., alleging 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 an order to that effect.
h. There is a criminal proceedings against one of Fiduciaria Bancolombia S.A.’s legal representatives regarding the Chisa Lote 2C Trust filed by Carmela Guardo and Joaquín Atencio Niño 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 Fiduciaria Bancolombia S.A. on behalf of the Chisa Lote 2C Trust. These proceedings are at a discovery stage.
Before the two actions were joined, the Attorney General’s Office No. 19 rejected the criminal investigation regarding the crimes of fraud to judicial award, invasion of lands and disturbance to the possession (Attorney General’s Office No. 19, Bogotá), and continued for the crimes of fraud in public document and procedural fraud (Attorney General’s Office No. 10, Bogotá).
The management of Fiduciarias Bancolombia S.A. considered that the probability of liability is low.
Likewise, there are two recovery processes (“procesos reivindicatorios”): Jose Fernando Ospino Barrios and Andrés Morales Díaz, in which the lawsuit was answered and presented the correspondent defense; and a process of acquisition by lapse of the statute of limitations (“proceso de prescripcion adquisitiva”) of Orlando Marrugo Robles. Process must be served to indeterminate persons.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Regarding Jose Fernando Ospino Barrios’s process, the parties are currently negotiating a settlement. If a settlement is achieved the process would be terminated. The contingency is considered as remote.
With regard to the processes of Andrés Morales Díaz and Orlando Marrugo Robles, it is to early to qualify the contingency because of their early stage.
i. Ordinary proceedings were filed by Maria Rubby Mejía and other, against Fiduciaria Bancolombia S.A., claiming that Fiducolombia S.A. (now Fiduciaria Bancolombia S.A.) failed to carry out as administrator of the Titularización Ganadera Ganar 2000 A, certain contractual obligations such as collecting contributions and therefore seeks to be compensated. The judge denied the request of joinder of an insurance company to the process (“litisconsorcio necesario”). Currently, the process is pending a judgement to decide a motion presented by the plaintiff’s attorney regarding the existence of an arbitration clause in the agreement.
The management of Fiduciaria Bancolombia S.A. considered that the probability of liability is extremely low.
j. Trustee “GROUP GRANCOLOMBIANO” (liquidated on June 29, 1990) managed by Banco de Colombia S.A, has contingencies, including some labor and/or pension contingencies, for which had constituted reserves by the Trust “Fund of Contingencies” managed by Fiduciaria Bancolombia S.A. Some of them are from the former trustee Grupo Grancolombiano, especially to cover such contingencies. Currently, there are no legal processes related to this trustee. Notwithstanding, this contingency is taken into account because there is no statute of limitation relating to claims for pensions.
The Administration of Fiduciaria Bancolombia S.A. and its legal advisers considered that this process will not generate additional liabilities that should be assessed or, if presented, it will affect directly the reserve fund foreseen by the trustee “Fund of Contingencies” and not Fiduciaria Bancolombia S.A.
k. Propiedad Horizontal Torres Claras filed an ordinary proceeding against Fiduciaria Bancolombia S.A. requesting the termination of the agreement between Fiduciaria Bancolombia S.A. and Mr. Carlos Cajiao and the payment of the compensation of alleged damages derived from the nonpayment of the correspondents quotas. The award was favorable to Fiduciaria Bancolombia S.A.’s interests in first instance. Currently, is pending an appeal action filed by the plaintiff.
Though the decision ruled in first instance was favorable for the interests of Fiduciaria Bancolombia S.A., this contingency represents no liability.
l. El Olimpo Propiedad Horizontal filed a lawsuit against the trust “Fideicomiso En Garantía Gabriela Upegui”, which is managed by Fiduciaria Bancolombia S.A., the trustor and the lessee. Fiduciaria Bancolombia S.A. and the lessee answered the complaint.
Considering that the claims are against the trust, there is no contingency for Fiduciaria Bancolombia S.A. in case the final decision is unfavorable to the interests of Fiduciaria Bancolombia S.A.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
m. Mr. Juan David, Angelica and Veronica Diez Herrera filed a complaint against Fiduciaria Bancolombia S.A. because the administration of three trustee orders opened in the Fondo Comun Especial SURENTABIC managed by SUFIBIC on behalf of them during the period that they under legal age. The plaintiffs request a declaration of breach of contract by the Trustee, and as a consequence the restitution of the funds (Ps 60) plus interest. Process was served to Fiduciaria Bancolombia S.A. in October 2007, and on November 8, 2007, answered the complaint.
The management of Fiduciaria Bancolombia S.A. considers that the performance of Fiduciaria Bancolombia S.A. has been in accordance with the law. Considering this contingency is remote.
n. The liquidation process of the trust agreement number 255 (Contrato de Encargo Fiduciario No. 255) entered into between Consortium “FISALUD” (to which Fiduciaria Bancolombia S.A., Fiduciaria La Previsora and Fiducafe S.A are parties) and the Colombian Ministry of Public Health (“Ministerio de Protección Social).
This is an agreement that had been completely performed. Nevertheless, there are some observations and discussions regarding some of the contractual commitments, to which the Consortium “FISALUD” has presented its defense with the purpose of prevail or clarify the discussed contractual matters.
Currently, the Ministerio de Protección Social is reviewing the arguments, but the legal criteria regarding the arguments alleged by the Consortium “FISALUD” are unknown, reason for which there are not foreseen losses. Once the legal criteria are known, this contingency will be reevaluated with the purpose of determine if this contingency is probable, remote or extremely low.
o. Contractual process by the Ministerio de Proteccion Social against the Consortium FIDUFOSYGA regarding four breaches. Fiduciaria Bancolombia S.A. and the Consortium FIDUFOSYGA’s attorney presented a motion requesting the dismissal of the judicial action as an arbitral tribunal would be the appropriate forum.
Taking into account that there is an arbitration clause in the agreement, this contingency is considered as remote.
Leasing Bancolombia S.A.
As of December 31, 2007, Leasing Bancolombia has an allowance of Ps 480 with respect to an award in first instance of San Mateo Apostol’s process, and on May 23, 2007 an appeal action has been admited. The grounds of the litigation arise in the seizure by Dirección de Impuestos y Aduanas Nacionales (the “Colombian Customs Authority”) of 12 buses that were imported by Leasing Patrimonio and leased to a third party. The Colombian Customs Authority claimed that there were irregularities in the importation process. In 1999, the lessee of the vehicles filed a complaint against Leasing Colombia as it had in turn purchased the assets and liabilities of Leasing Patrimonio which is currently liquidated. The claims amounted to Ps 4,712. Leasing Bancolombia S.A. has a provision of Ps 810 for the estimated probable loss.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Compañía de Financiamiento Comercial Sufinanciamiento S.A.
Actions filed against Sufinanciamiento total an estimated amount of Ps 5,074.4. Only one of these actions represents a probable loss for the company, and a provision has been recorded for Ps 108.
Valores Bancolombia S.A.
Legal Processes, Fines and Lawsuits
As of December 31, 2007, Valores Bancolombia S.A. is a party to a proceeding to be decided by the Second Civil Court of the circuit of Medellin (“Juzgado Civil del Circuito de Medellin”). The process is at the discovery stage since November 22, 2007. Plaintiff is requesting compensation for damages for Ps 439.30. However, the management and general counsel of Valores Bancolombia S.A. consider this contingency as remote and believe that if the final decision is unfavorable to the company, the judgement could order damages of approximately Ps 5.
Additionally, Valores Bancolombia S.A. has a fine imposed by the Superintendency of Finance regarding a case of Cementos Argos S.A. This fine has been appealed. The total amount of this fine could be approximately of Ps 200.
Factoring Bancolombia S.A.
Factoring Bancolombia S.A. is currently party in the following proceedings:
A. Three complaints filed by the Central Bank to all the financial entities as a consequence of the lawsuits of debtors of commitments agreed under the UPAC System. These cases are being decided by administrative tribunals of the departments of Nariño, Sucre and Cauca.
There should not be any contingency with regard to these processes because Factoring have not had credit transactions under the UPAC System.
B. Process (“proceso verbal de acción reivindicatoria”) by Mr. Jairo Buriticá Burbano against FES S.A, acting on behalf of the trustee Comoderna S.A, Banco Santander S.A, Corporación Financiera Colombiana S.A, Banco de Bogotá and Factoring Bancolombia S.A Compañía de Financiamiento Comercial.
Process was served to Factoring Bancolombia S.A. on December 5, 2007. This contingency is considered remote.
C. Labor process by Mr. Jorge Franco against Factoring Bancolombia S.A. Compania de Financiamiento Comercial before the Second Labor Court of Barranquilla (“Juzgado Segundo Laboral del Circuito de Barranquilla”). Plaintiff requests the payment of an amount of Ps 120 in legal fees. As of December 31, 2007, this process is in the stage of discovery. The fnal judgment was expected for March 11, 2008, but it has been postponed for June 10, 2008.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
AFP Crecer S.A
a. As of December 31, 2007, the entity has an administrative process PA-337-2004 for a supposed loss of US$ 33, regarding the liquidation of Eurobonds 2032. Legal defenses and evidence were presented before Superintendency of Pensions of El Salvador requesting the dismissal of the administrative processes as the transactions were done with the purpose of preserving the interests of customers. The Superintendence of Pensions of El Salvador issued resolution A-AF-DO-072-2005 imposing fine for US$ 1. On February 28, 2005 AFP Crecer S.A filed an appeal, which has been admitted and temporarily suspended the effects of fine, evidence has been presented, and a final decision is now expected. If the appeal is unsuccessful AFP Crecer S.A would probably argue that the statute of limitation has lapsed and/or try to use any other legal defenses. This would probably take approximately 2 additional years. Management believes the contingency is low.
b. According to resolution No. PA-016-2006 notified on February 13, 2006, the Superintendency of Pensions of El Salvador imposed a fine of US$ 28, to AFP Crecer S.A, for omitting to give information regarding some commitments in a term of 5 days. On February 16, 2006, AFP Crecer S.A filed an appeal before the Superintendency of Pensions of El Salvador arguing that the information required was in duly given. This appeal was admitted on February 17, 2006, temporarily suspending the effects of the abovementioned resolution, and consequently, opening to the evidence stage. On March 6, 2006 the Superintendency of Pensions of El Salvador denied the appeal and ordered AFP Crecer S.A to pay the correspondent fine in the term specified on the “Ley del Sistema de Ahorro para Pensiones”. On March 31, 2006 AFP Crecer S.A filed a motion before the Contentious Administrative Court (“Sala de lo Contencioso Administrativo”) of the Supreme Court of Justice of El Salvador against this decision, which was admitted on May 31, 2006. The appealed decisions, were temporarily suspended and the fine will only be effective once is a definitive decision by the Supreme Court of El Salvador.
The opinion of the Attorney’s General Office of the Republic of El Salvador is unfavorable. We expect the final decision in a period of one year approximately. Management believes the contingency is low.
c. According to resolution No. A-AF-DO-330-2004 issued on November 9, 2004, the Superintendency of Pensions of El Salvador ordered AFP Crecer S.A to calculate correctly the value of the complementary certificate of transfer, corresponding to the months of October and November of 2003, pursuant to the requirements of the above mentioned resolution, in order to compare the original value and establish the amount to return to the government of El Salvador and do the corresponding refund with its own funds, without affecting the Cuenta Individual de Ahorro para Pensiones of the pensioners.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
On September 27, 2007, AFP Crecer S.A requested the rectification of resolution No. A-AF-PE-195-2007 of the Superintendency of Pensions of El Salvador. AFP Crecer also requested that a procedure be followed, this procedure is known as the complementary payment for insufficiencies in the amount of the certificate of transfer and refund of payments in excess, established by the Reglamento para la Emision y Pago del Certificado de Traspaso. Pursuant to resolution A — AF — DO — 243 — 2007, of December 10, 2007, the Superintendency of Pensions of El Salvador found that the request of AFP Crecer S.A. was groundless. As of December 31, 2007, AFP Crecer S.A is analyzing the further steps to be taken.
Before initiating a judicial process, the administration is searching for a solution with the opposing party, according to the regulation that governs the emissions in excess, with the purpose of eliminating the administrative process. Management believes the contingency is low.
Banco Agrícola S.A
As of December 31, 2007 and 2006, Banagrícola has the following judicial or administrative litigations:
a. As of December 31, 2007, before the Fifth Mercantile Court of El Salvador (“Juzgado Quinto de lo Mercantil”) is a process for damages against BA for a supposed responsibility in the managing of an Executive Mercantile Judgment, filed in 1987 by Banagrícola against a customer, the process before the Fifth Mercantile Court of El Salvador is for an amount of Ps 443,247. As of December 31, 2007, Banagrícola has filed a constitutional action (“recurso de amparo”) before the Superior Civil Court of the Supreme Court of Justice (“Sala de lo Civil de la Corte Suprema de Justicia”). This action has been admitted, suspending the process until the constitutional action is decided. In opinion of Banagrícola’s legal advisers, there are sufficient arguments for the claim to dismissed without liability from Banagrícola, which classifies this contingency as remote.
b. As of December 31, 2007, BA has complaints filed against it by the Salvadorian Tax Authority (“Direccion General de Impuestos Internos”) before the Supreme Court of Justice, regarding a complementary determination of Tax to the Transfer of Personal property (“Impuesto a la Transferencia de Bienes Muebles”) and Tax of Services — VAT (“Prestacion de Servicios-IVA) related to the fiscal years of 2002 and 2003; and a process before the Court of Appeals of Internal Taxes and Customs against the Salvadorian Tax Authority, regarding the fiscal year 2002. The amounts of these processes amounted to US$ 4,261 and US$ 8,021, respectively. Management believes the contingency is probable however, the final resolution of these cases will not have significant effects in the financial situation or results of operations.
Fundicom S.A.
labor action against Fundicom S.A. existed at December 31, 2006 and 2007, in which various ex-employees are claiming damages for wrongful dismissal. This proceeding is being held before the Labor Court No. 11 of Bogota and is still in its initial stage. The estimated value of the contingency amounts to Ps 587 and Ps 441 in 2007 and 2006 respectively.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The other subsidiaries have not reported any other contingencies existing as of December 31, 2007. The Bank’s provisions were recorded as accrued expenses in the consolidated Balance Sheet.
(27) Administrative and Other Expenses
Administrative and other expenses consisted of the following:
                         
    2005     2006     2007  
 
                       
Public services
  Ps 47,175     Ps 53,512     Ps 69,857  
Advertising
    50,235       63,214       68,222  
Industry and trade, property, vehicle and other taxes
    121,699       129,141       147,684  
Communication, postage and freight
    48,254       52,403       85,042  
Insurance
    27,446       29,635       23,660  
Security services
    29,339       27,292       33,655  
Amortization of deferred charges
    48,310       40,692       61,143  
Rental expenses
    56,375       62,182       70,949  
Maintenance and repairs
    99,678       123,169       164,590  
Contributions and membership fees
    14,587       17,115       31,971  
Temporary services
    17,440       31,316       18,379  
Travel expenses
    17,799       22,840       21,999  
Professional fees
    56,004       59,506       79,599  
Call center services
    20,041       26,404       26,617  
Information processes outsourcing
    18,218       22,731       38,383  
Warehouse expenses
    11,398       11,777        
Software (1)
    34,523       24,041       32,175  
Alliance SUFI — Almacenes Exito S.A. Expense
    2,903       10,950       14,333  
Operational expenses related with consortium
    10,514       9,138       10,198  
Electronic processing data
    12,108       4,934       3,575  
Public relation
    2,586       2,052       2,799  
Other (1)
    46,547       58,138       66,309  
 
                 
Total
  Ps 793,179     Ps 882,182     Ps 1,071,139  
 
                 
     
(1)  
The amount disclosed in the table for 2006 differs from those disclosed in the annual report of 2006, because they were reclassificated for comparative purposes with the information of 2007.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(28)  
Non-Operating Income (Expenses)
The following table summarizes the components of the Bank’s non-operating income and expenses:
                         
    Year ended December 31,  
    2005     2006     2007  
    (Ps million)  
Non-operating income (expenses):
                       
Other income(1)
  Ps 109,770     Ps 194,589     Ps 126,796  
Minority interest
    (6,496 )     (6,352 )     (13,246 )
Other expenses(2)
    (105,120 )     (149,243 )     (81,549 )
 
                 
Total non-operating income (expenses), net
  Ps (1,846 )   Ps 38,994     Ps 32,001  
 
                 
 
     
(1)  
For 2007 includes gains on sale of foreclosed assets, property, plant and equipmet and other assets, securitization residual benefit, insurance contracts sells and rent. For 2006 includes recovery of deferred tax liability for Ps 98,788 registered in 2005 by the Bank.
 
(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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(29) Related Party Transactions
Significant balances and transactions with related parties were as follows:
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
                               
Loans
          149,889       18,802       3  
Customer’s acceptances and derivatives
                      175,095  
Accounts receivable
          43,147       306       118,362  
 
                       
Total (1)
  Ps     Ps 193,036     Ps 19,108     Ps 293,460  
 
                       
 
                               
Deposits (1)
    157       96,664       996       393,088  
Accounts payable
          1,768             198  
Bonds
          3,310             18,960  
 
                       
Total
  Ps 157     Ps 101,742     Ps 996     Ps 412,246  
 
                       
 
                               
Transactions
                               
Income
                               
Dividends received
          6,403              
Interest and fees
          19,965       1,963       64  
Other
          73       133        
 
                       
Total
  Ps     Ps 26,441     Ps 2,096     Ps 64  
 
                       
 
                               
Expenses
                               
Interest
    23       3,459       629       29,667  
Fees
                100        
Other
                3        
 
                       
Total
  Ps 23     Ps 3,459     Ps 732     Ps 29,667  
 
                       
     
(1)  
The data presented herein for 2005 exclude the transactions with the Qualifying Special Purpose Entity — QSPE of Titularizadora Colombiana S.A. and Deceval S.A. and therefore differ from corresponding data presented in previous years.

 

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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 (1)
          737              
Loans
    10,610       90,783       36,231        
Customer’s acceptances and derivatives
          2             107,640  
Accounts receivable
    89       8,632       4,108        
 
                       
TOtal
  Ps 10,699     Ps 100,154     Ps 40,339     Ps 107,640  
 
                       
 
                               
Deposits (1)
    632       107,389       8,656       287,000  
Overnight funds
          448              
Accounts payable
    6       477       2,274        
Bonds
          610             35,300  
 
                       
TOtal
  Ps 638     Ps 108,924     Ps 10,930     Ps 322,300  
 
                       
 
                               
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       6,703       6,642       22,400  
Fees
                156        
Other
                18        
 
                       
TOtal
  Ps 49     Ps 6,703     Ps 6,816     Ps 22,400  
 
                       
     
(1)  
The data presented herein for 2005 exclude the transactions with the Qualifying Special Purpose Entity — QSPE of Titularizadora Colombiana S.A. and Deceval S.A. and therefore differ from corresponding data presented in previous years.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2007
                                 
                            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
          75,546              
Loans
    390       80,231       40,393        
Customer’s acceptances and derivatives
    624       23,065             2,339  
Accounts receivable
    19       11,678       488        
 
                       
Total
  Ps 1,033     Ps 190,520     Ps 40,881     Ps 2,339  
 
                       
 
                               
Deposits
    789       184,127       2,164       480,095  
Bonds
          3,000             74,567  
 
                       
Total
  Ps 789     Ps 187,127     Ps 2,164     Ps 554,662  
 
                       
 
                               
Transactions
                               
Income
                               
Dividends received
          3,635              
Interest and fees
    53       234       61        
 
                       
Total
  Ps 53     Ps 3,869     Ps 61        
 
                       
 
                               
Expenses
                               
Interest
    345       8,881       521       35,424  
Fees
                439        
 
                       
Total
  Ps 345     Ps 8,881     Ps 960     Ps 35,424  
 
                       

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(30) Subsequent Events
Extraordinary annulment action challenging the May 16, 2006 ruling of the Arbitration Tribunal Arbitration Proceeding: Jaime Gilinski and others Vs. The Bank and others.
On May 16, 2006, the arbitration tribunal issued an award that ruled in favor of Bancolombia on the majority of the claims, regarding an arbitration process initiated by the Messrs. Jaime and Isaac Gilinski in conjunction with certain foreign entities against Bancolombia, its Board of Directors of 1997, its President, Mr. Jorge Londoño Saldarriaga, and its Vice President of Finance, Mr. Jaime Alberto Velasquez Botero, to solved some differences relating to the process of acquisition by BIC of a majority of the stock of the old Banco de Colombia and the subsequent merger of both entities.
The plaintiffs’ main claim sought a declaration nullifying the acquisition by BIC of a majority stake in Banco de Colombia. The petition also contained other secondary causes of action, all of which totaled a considerable sum. 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 management committed any fraudulent operations or fraudulent representations regarding the above-mentioned agreement, and denied any pain and suffering damages in favor of the plaintiffs.
However, the tribunal decided that the Bank should pay an indemnification for the amount of Ps 15,360 that, including, the loss of profits amounted to Ps 40,570, to the plaintiffs with respect to non-compliance with some secondary obligations in the capitalization process in 1998. The Bank filed an extraordinary annulment action before the Superior Tribunal of Bogota.
The Bank classified this contingency as probable because it is an action for which there is no appeal. Consequently, as of December 31, 2007, the Bank allocated a provision of Ps 27,704.
As of March 11, 2008, the paying amount by the Bank regarding this arbitration process is approximately Ps 61,753 including the interests liquidated until March 11, 2008.
Arbitration Proceeding: The Bank Vs. Gilinski.
On February 26, 2008, the Tribunal Superior de Bogota (the “Superior Court”) annulled arbitral tribunal the decision of March 30, 2006.
On March 5, 2008, the Bank filed a “demanda de tutela” — an action alleging a violation of constitutional rights — before the Colombian Supreme Court of Justice (the “Supreme Court”) seeking to have annulled the decision of February 26, 2008, of the Civil Chamber of the Superior Court of Bogota rendered against the Bank. In its action, the Bank asserts that the Superior Court violated Bancolombia’s constitutional rights when it annulled the arbitral award of 2006, in which Mr. Jaime Gilinski was found liable and obliged to compensate the Bank. This constitutional action is still pending.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
On March 28, 2008, the Civil Chamber of the Supreme Court temporarily suspended the decision of the Tribunal Superior de Bogota (the “Superior Court”) dated February 26, 2008, that annulled an award granted by an arbitral tribunal in March 30, 2006. This award was appealed by the counterparty, against the Labor Chamber of the Supreme Court of Justice (Sala Laboral de la Corte suprema de Justicia). Additionally, the Bank presented an appeal “recurso extraordinario de revision” before the Civil Chamber of the Colombian Supreme Court of Justice, which is still pending.
On May 15, 2008, the Labor Chamber of the Supreme Court of Justice (Sala Laboral de la Corte Suprema de Justicia) revoked the temporary order granted by the Civil Chamber of the Supreme Court of Justice on March 28, 2008, while the appeal (recurso extraordinario de revision) filed by Bancolombia S.A. remained pending. In its decision, the Labor Chamber also ruled that the guarantee (garantía fiduciaria) would remain in effect.
Arbitration Proceeding: Luis Alberto Durán Vs. Bancolombia.
On March 5, 2008, the Superior Court dismissed the extraordinary annulment action filed by the Bank on February 17, 2004. The court rejected BC’s claim for annulment. Under the arbitral award, shareholders of the former Banco de Colombia will be entitled to compensation if they: (i) fulfill the requirements established in articles 55 and 66 of Law 472 of 1998, (ii) fulfill the requirements established in the arbitral award, (iii) timely became parties to the class action or have timely accepted the outcome of the arbitral award, and (iv) have not elected to be excluded from the class action or its outcome.
April 8, 2008 the Bank sent to the Defensoría del Pueblo, entity in charge of paying to the beneficiaries of the case the amount ordered by the Court, which amounted to a total of Ps 3,335. This amount will cover the claims from the shareholders of the former Banco de Colombia that were timely asked through the Defensoría del Pueblo.
Proceeding related to the “Gilinski Case”, before the United States Court for the Southern District of New York.
In June 2, 2008, the United States Court of Appeals for the Second Circuit (the “Court of Appeals”) confirmed the decision of February 28, 2007 by the United States Court for the Southern District of New York (the “Court”).
The Court of Appeals held that the Tribunal had decided the merits of all claims, and confirmed particularly, that the Tribunal rejected the main three allegations of the complaint filed before the Court. The Tribunal found that (i) Bancolombia had not manipulated the price of ADRs on the New York Stock Exchange; (ii) the failure to raise US$ 150,000 was neither a breach of an express contractual obligation nor fraudulent or willful misconduct; and (iii) neither Bancolombia nor the remaining defendants engaged in transactions or conduct in violation of Colombian law and sound banking practices.
Announcement of Multienlace’s sale
On june 6, 2008, Bancolombia announced the execution of an agreement whereby it sold 100% of its direct and indirect interest in Multienlace S.A. to Stratton Spain S.L, equating to approximately 98% of Multienlace S.A. The purchase price was Ps 105,882.6 and the sale remains subject to customary closing conditions.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(31) Differences Between Colombian Accounting Principles for Banks and U.S. GAAP
The Bank’s financial statements are prepared in accordance with generally accepted accounting principles and practices prescribed by the Superintendency of Finance and other legal provisions (“Colombian GAAP”). 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, 2005, 2006 and 2007:
                         
    2005     2006     2007  
 
                       
Consolidated net income under Colombian GAAP
  Ps 946,881     Ps 749,529     Ps 1,086,923  
a) Deferred income taxes
    121,025       (132,003 )     (91,280 )
b) Employee benefit plans
    (1,733 )     10,320       18,127  
c) Inflation adjustment
    (4,423 )     (104 )     (151 )
e) Allowance for loans losses, financial leases losses, foreclosed assets and other receivables
    (108,886 )     195,549       (69,809 )
f) Loan origination fees and costs
    3,277       16,798       7,241  
g) Interest recognition on non-accrual loans
    3,976       2,377       6,832  
h) Deferred charges
    (1,761 )     (3,130 )     7,192  
i) Investment securities & derivatives
    27,159       (36,235 )     (9,190 )
j) Investments in unaffiliated companies
    (4,085 )     (1,545 )     (968 )
k) Investments in affiliates
    18,277       6,598       13,321  
l) Lessor accounting
    1,931       (1,703 )     709  
m) Business combinations
                       
m.i) Goodwill
    31,394       22,642       82,075
m.ii) Intangible assets
    (5,889 )     (88,248 )     (42,063 )
m.iii) Fair value adjustments to assets and liabilities acquired
    (140,102 )     186,546       (6,860 )
n) Securitization non-performing loans
    5,851       4,717       19,702  
o) Foreign currency translation adjustment
    1,651       7,853       13,115  
p) Minority interest
    (3,422 )     4,793       (7,965 )
r) Guarantees
          (3,571 )     (2,549 )
s) Insurance Contracts
                (4,945 )
u) Equity tax
                (3,813 )
 
                 
Consolidated net income under U.S. GAAP
  Ps 891,121     Ps 941,183     Ps 1,015,644  
 
                 
 
                       
Net income from continuing operations
  Ps 930,022     Ps 986,762     Ps 1,072,607  
Income (Loss) from operations and disposal of discontinued Operations
  Ps (38,901 )   Ps (45,579 )   Ps (56,963 )

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
b) Reconciliation of Stockholders’ Equity:
The following 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, 2006 and 2007:
                 
    2006     2007  
 
               
Consolidated stockholders’ equity under Colombian GAAP
  Ps 3,646,612     Ps 5,199,270  
a) Deferred income taxes
    66,326       (108,876 )
b) Employee benefit plans
    1,052       4,507  
c) Inflation adjustment
    38,689       38,538  
d) Revaluation of assets
    (140,693 )     (319,646 )
e) Allowance for loans losses, financial leases losses, foreclosed assets and other receivables
    416,142       561,442  
f) Loan origination fees and costs
    70,531       77,772  
g) Interest recognition on non-accrual loans
    8,385       15,217  
h) Deferred charges
    (6,166 )     (11,291 )
i) Investment securities & derivatives
    (142,421 )     (163,559 )
j) Investments in unaffiliated companies
    (13,298 )     (14,266 )
k) Investments in affiliates
    37,175       50,496  
l) Lessor accounting
    228       937  
m) Business combinations
               
m.i) Goodwill
    543,164       276,217  
m.ii) Intangible assets
    142,100       487,691  
m.iii) Fair value adjustments to assets and liabilities acquired
    (127,176 )     (171,222 )
n) Securitization of non performing loans
    10,568       30,270  
p) Minority interest
    1,371       (6,595 )
r) Guarantees
    (3,571 )     (6,120 )
s) Insurance contracts
          (3,228 )
 
           
 
    902,406       738,284  
 
           
Consolidated stockholders’ equity under U.S. GAAP
  Ps 4,549,018     Ps 5,937,554  
 
           

 

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Table of Contents

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 statement under U.S. GAAP differs from that from Colombian GAAP due to the acquisition of Conavi and Corfinsura in 2005 and Banagrícola in 2007. As a result, we are presenting the summarized consolidated financial statements under U.S.GAAP for years ended December 31, 2006 and 2007:
Supplemental Consolidated Condensed Balance Sheets
                 
    2006 (As restated, see     2007 (As restated, see  
    Note 32)     Note 32)  
 
               
Assets:
               
Cash and due from banks
  Ps 2,040,892     Ps 5,285,089  
Trading account
    2,926,959       2,287,673  
Investment securities, net
    2,203,154       2,361,663  
Loans
    22,456,573       35,340,990  
Financial lease
    3,553,514       4,699,764  
Allowance for loans, financial leases losses and other receivables
    (509,179 )     (1,072,307 )
Premises and equipment, net
    1,637,039       1,922,999  
Other assets
    1,566,111       3,054,437  
 
           
Total assets
  Ps 35,875,063     Ps 53,880,308  
 
           
 
               
Liabilities and Stockholders’ Equity:
               
Deposits
    23,191,301       34,356,264  
Short term debt
    1,209,776       1,195,849  
Long term debt
    4,031,736       7,330,902  
Other liabilities
    2,848,792       4,996,708  
Minority interest
    44,440       63,031  
Shareholders’ equity
    4,549,018       5,937,554  
 
           
Total Liabilities and Stockholders’ equity
  Ps 35,875,063     Ps 53,880,308  
 
           

 

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Table of Contents

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
                         
            2006(1)     2007(1)  
            (As restated, see     (As restated, see  
    2005(1)     Note 32)     Note 32)  
 
Total interest income
  Ps 2,847,397     Ps 3,261,057     Ps 4,763,632  
Total interest expense
    (1,032,576 )     (1,281,228 )     (1,987,244 )
 
                 
Net interest income
    1,814,821       1,979,829       2,776,388  
Provision of loans, leases and other receivables
    (230,015 )     (1,765 )     (678,962 )
 
                 
Net interest income after provision of loans, leases and other receivables
    1,584,806       1,978,064       2,097,426  
Other income
    938,250       1,154,306       1,614,446  
Other expenses
    (1,445,552 )     (1,945,737 )     (2,189,349 )
 
                 
Income before income taxes
    1,077,504       1,186,633       1,522,523  
Income tax expense
    (147,482 )     (199,871 )     (449,916 )
 
                 
Net income from continued operations
    930,022       986,762       1,072,607  
Discontinued Operations
    (38,901 )     (45,579 )     (56,963 )
 
                 
Net income
  Ps 891,121     Ps 941,183     Ps 1,015,644  
 
                 
 
     
(1)  
The amounts disclosed in the table for 2005 and 2006 differ from those disclosed in the annual report of 2006; these changes correspond to discontinued operations of Multienlace S.A.
Supplemental Consolidated Condensed Statements of Cash Flows (1)
                         
    2005     2006     2007  
    (As restated, see     (As restated, see Note     (As restated, see  
    Note 32)     32)     Note 32)  
 
                       
Net income
  Ps 891,121     Ps 941,183     Ps 1,015,644  
Adjustments to reconcile net income to net cash used by operating activities
    (3,059,351 )     2,811,272       2,058,680  
 
                 
Net cash provided by operating activities
    (2,168,230 )     3,752,455       3,074,324  
Net cash used in investing activities
    474,247       (7,121,607 )     (9,139,513 )
Net cash provided by financing activities
    2,174,645       3,677,955       9,566,743  
 
                 
Increase in cash and cash equivalents
  Ps 480,662     Ps 308,803     Ps 3,501,554  
 
                 
Effect of exchange rate on cash and cash equivalent
          2,067       (257,357 )
 
                 
Cash and cash equivalents at beginning of year
    1,249,360       1,730,022       2,040,892  
 
                 
Cash and cash equivalents at end of year
  Ps 1,730,022     Ps 2,040,892     Ps 5,285,089  
 
                 
 
     
(1)  
This consolidated statement of cash flow includes the following non cash transactions: Ps 80,894 related to restructured loans that were transferred to foreclosed assets and foreign exchange gain of Ps 40,699.

 

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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
                         
    2005     2006     2007  
 
                       
Balance at beginning of year
  Ps 2,267,286     Ps 4,125,996     Ps 4,549,018  
Shares issued at market value (1)
    1,164,218             927,612  
Net income
    891,121       941,183       1,015,644  
Dividends declared
    (216,838 )     (369,736 )     (403,164 )
Other comprehensive loss
    (19,148 )     (116,229 )     (113,681 )
Other movements
    39,357       (32,196 )     (37,875 )
 
                 
Balance at end of year
  Ps 4,125,996     Ps 4,549,018     Ps 5,937,554  
 
                 
     
(1)  
The line shares issued for Ps 236,212 in the consolidated statement of stockholder’s equity under Colombian GAAP for the year 2005, reflects the par value of shares; the line shares issued for Ps 1,164,218 in this table reflects the fair market value of shares issued under U.S. GAAP. In 2007 Bancolombia S.A. issued a total of 59,999,998 preferred shares.
Supplemental Consolidated Statement of Comprehensive Income
                         
    2005     2006     2007  
 
                       
Net Income
  Ps 891,121     Ps 941,183     Ps 1,015,644  
Other comprehensive income, net of tax:
                       
Unrealized gain or (loss) on securities available for sale
    2,106       (146,925 )     (34,731 )
Pension liability
    (19,603 )     (2,217 )     (10,130 )
Foreign currency translation adjustments
    (1,651 )     (7,853 )     (68,820 )
 
                 
Other comprehensive (loss) or gain
    (19,148 )     (156,995 )     (113,681 )
 
                 
Comprehensive income
  Ps 871,973     Ps 784,188     Ps 901,963  
 
                 
Other comprehensive income (loss)
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 )     13,273       (19,603 )
Foreign currency translation adjustment
    (1,651 )           (1,651 )
 
                 
Other comprehensive income (loss)
  Ps (27,711 )   Ps 8,563     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 )   Ps 85,346     Ps (146,925 )
Additional pension liability
    (3,487 )     1,270       (2,217 )
Foreign currency translation adjustment
    (7,853 )           (7,853 )
 
                 
Other comprehensive income (loss)
  Ps (243,611 )   Ps 86,616     Ps (156,995 )
 
                 

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
2007
                         
    Before-Tax     (Tax Expense)     Net-of-tax  
    Amount     or Benefit     Amount  
 
                       
Unrealized gain or (loss) on securities available for sale
  Ps (51,632 )   Ps 16,901     Ps (34,731 )
Additional pension liability
    (14,672 )     4,542       (10,130 )
Foreign currency translation adjustment
    (68,820 )           (68,820 )
 
                 
Other comprehensive income (loss)
  Ps (135,124 )   Ps 21,443     Ps (113,681 )
 
                 
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 2005
  Ps 66,385     Ps (10,319 )   Ps (8,661 )   Ps 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 )
 
                       
 
                               
Beginning balance for 2007
  Ps (78,434 )   Ps 8,627     Ps (18,165 )   Ps (87,972 )
Current-period change
    (34,731 )     (10,130 )     (68,820 )     (113,681 )
 
                       
Ending balance for 2007
  Ps (113,165 )   Ps (1,503 )   Ps (86,985 )   Ps (201,653 )
 
                       
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. During 2007, the Bank calculated deferred income taxes based on the tax benefits received upon the acquisition of certain property and equipment in accordance to EITF 98-11 — Accounting for Acquired Temporary Differences in Certain Purchase Transactions That Are Not Accounted for as Business Combinations.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Income tax expense under U.S. GAAP is comprised of the following components for the years ended at December 31, 2005, 2006 and 2007:
                         
    2005     2006     2007  
 
                       
Current income tax expense
  Ps 178,992     Ps 136,307     Ps 338,364  
Deferred income tax (benefit) expense
    (22,502 )     71,788       114,799  
 
                 
Total
  Ps 156,490     Ps 208,095     Ps 453,163  
 
                 
                         
    2005     2006     2007  
 
                       
Continuing operation income tax
  Ps 147,482     Ps 199,871     Ps 449,916  
Discontinued operation income tax
    9,008       8,224       3,247  
 
                 
Income tax
  Ps 156,490     Ps 208,095     Ps 453,163  
 
                 
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, 2006 and 2007 were as follows:
                 
    2006     2007  
Deferred tax assets and liabilities
               
 
               
Deferred tax assets:
               
Allowance for loan losses
  Ps     Ps 28,527  
Fixed assets
    169,674       135,192  
Tax losses and excess of presumed income over ordinary income
    11,129       23,465  
Allowance for foreclosed assets
          17,965  
Accrued expenses
    34,760       33,779  
Excess of accrued income over valuation income
    4,418       3,625  
Business combination
          21,971  
Unrealized gain on investment securities
    43,504       61,909  
Deferred interest on restructured loans
    17,741       20,421  
Other
    15,836       20,731  
 
           
Total gross deferred tax assets
    297,062       367,585  
Less valuation allowance
    (19,708 )     (9,491 )
 
           
Net deferred tax asset
  Ps 277,354     Ps 358,094  
 
           
 
               
Deferred tax liabilities:
               
Accrual of employee benefits
  Ps 381     Ps 1,577  
Fixed assets
          31,978  
Allowance for loan losses
    32,875       130,448  
Allowance for foreclosed assets
    4,829       26,308  
Loan origination fees and cost
    22,829       24,795  
Forward, future and swaps effect
    37,537       49,994  
Inflation adjustments
    78,051       76,090  
Business Combination
    16,926       24,842  
Intangible assets
    50,762       134,233  
Excess of accrued income over valuation income
          11,790  
Securitization
    3,804       10,595  
Other
    3,003       7,813  
 
           
Total deferred liabilities
    250,997       530,463  
 
           
 
               
Net deferred asset (liability)
  Ps 26,357     Ps (172,369 )
 
           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The valuation allowance for deferred tax assets as of December 31, 2006 and 2007 was Ps 19,708 and Ps 9,491, respectively. The net change in the total valuation allowance for the year ended December 31, 2006 was an increase of Ps 15,268 and for the year ended December 31, 2007 was a decrease of Ps 10,217. 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, 2007. 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 2005, 2006 and 36% for year 2007 differs from 14.94%, 18.12% and 30.85% effective tax rate for years 2005, 2006 and 2007, due to the following:
                         
    2005     2006     2007  
 
                       
Income before tax U.S. GAAP(1)
  Ps 1,047,611     Ps 1,149,278     Ps 1,468,807  
 
                 
Income tax as per statutory rate
    387,616       425,233       528,771  
Effect of foreign profit taxed other rate
                (43,757 )
Non-deductible items / provisions
    48,225       77,002       72,868  
Non-taxable income
    (136,513 )     (197,587 )     (139,882 )
Others
    (141,948 )     (111,820 )     45,380  
Increase (decrease) in tax valuation allowance
    (890 )     15,267       (10,217 )
 
                 
Income tax
  Ps 156,490     Ps 208,095     Ps 453,163  
 
                 
     
(1)  
It represents continuing operation and discontinued operation.
For years ended December 31, 2005, 2006 and 2007, 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, 2007, 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 Panamá and its subsidiaries, Bancolombia Puerto Rico and Suleasing Internacional and its subsidiaries. The undistributed profits in such Subsidiaries were Ps 356,666 at December 31, 2007.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
FIN 48
The Bank adopted the provisions of Interpretation 48 — Accounting for uncertainty in income taxes (“FIN 48”) in 2007. The interpretation clarifies the accounting and reporting for uncertainty in income taxes recognized by the Bank and prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
The Bank records interest and penalties, when necessary, related to the probable losses in Other expenses in the statements of operations.
The adoption of FIN 48 did not have impact on the Bank, and there are no unrecognized tax benefits. Furthermore, the Bank did not have interest and penalties recognized in the balance sheet as of December 31, 2007.
The Bank is not aware of positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will be significantly increased or decreased within 12 months of the reporting date.
The open tax years of the major companies of the Bancolombia Group are as follows:
     
Company   Open tax year
 
   
Bancolombia
  2006 – 2007
Fiduciaria Bancolombia
  2006 – 2007
Leasing Bancolombia
  2006 - 2007
Sufinanciamiento
  2006 – 2007
Valores Bancolombia
  2006 – 2007
Renting Colombia
  2005 – 2007
Factoring Bancolombia
  2005 – 2007
Banca de Inversión
  2007
Banco Agrícola
  2004 – 2007

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, 2007, there were nearly 950 participants covered by the Plan.
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, 2007 there were 1,753 participants remaining in the original severance plan.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Until December 31, 2006, the pension plan and severance obligation included employees from the Bank and Almacenar S.A. As a result of the sale of Almacenar S.A., dated February 2007, 16 of Almacenar’s employees who participated in the pension plan and 22 employees who participated in Severance plan were not included in the calculation. The Bank does not maintain any pension or severance obligation with Almacenar’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.
                         
    2005     2006     2007  
 
                       
Components of net periodic benefit cost
                       
Service cost
  Ps 1,604     Ps 4,277     Ps 3,447  
Interest cost
    27,504       18,477       16,950  
Amortization of prior service cost
    143       135       131  
Amortization of net transition obligation (Assets)
    1,048       1,017       978  
Amortization of net (gain) or loss
    562       (401 )     (3,470 )
 
                 
Adjustment to be recognized
                       
Net periodic pension cost under U.S. GAAP
    30,861       23,505       18,036  
Net periodic pension cost under Colombian GAAP
    29,128       33,825       36,163  
 
                 
Difference to be recognized under U.S. GAAP
  Ps (1,733 )   Ps 10,320     Ps 18,127  
 
                 
The combined costs for the above mentioned benefit plans, determined using U.S. GAAP, for the years ended December 31, 2006 and 2007, are summarized below:
                 
    2006     2007  
 
               
Change in project benefit obligation
               
Unfunded benefit obligation at beginning of year
  Ps 133,498     Ps 111,587  
Service cost
    4,277       3,447  
Interest cost
    18,477       16,950  
Actuarial (gain)/loss
    (21,552 )     (655 )
Effect of settlements(1)
          (1,741 )
Cost of plan amendment(2)
          13,056  
Benefits paid
    (23,113 )     (22,812 )
 
           
Unfunded benefit obligation at end of year
  Ps 111,587     Ps 119,832  
 
           
 
Accrued benefit cost under Colombian GAAP
    (112,639 )     (124,339 )
 
           
Difference to be recognized under U.S. GAAP Stockholders’ equity
  Ps 1,052     Ps 4,507  
 
           
 
     
(1)  
The effect of settlement is related to the sale of Almacenar S.A.
 
(2)  
Due to the retroactive effect of sentence 862/2006, Bancolombia was required to recognize pension benefit increases ranging from about 1% to more than 400% to approximately 123 retirees and beneficiaries. The increase in the Project Benefit Obligation as of 12/31/2007 due to this plan amendment is treated as prior service cost.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
                 
    2006     2007  
 
               
Net Amount Recognized in the Consolidated Balance Sheet at December 31.
               
 
Statement of Financial Position
               
Noncurrent Assets
  Ps (4,208 )   Ps (6,194 )
Current Liabilities
    11,987       13,441  
Noncurrent Liabilities
    103,808       112,585  
 
           
Amount Recognized in Financial Position
  Ps 111,587     Ps 119,832  
 
           
 
               
Accumulated Other Comprehensive Income
               
Net Actuarial Gain (Loss)
  Ps 16,151     Ps 12,452  
Net Prior Service (Cost)/Credit
    (424 )     (13,350 )
Net Transition (Obligation) Asset
    (3,368 )     (1,415 )
 
           
Total at December 31.
    12,359       (2,313 )
 
           
Deferred income tax
    (3,732 )     810  
 
           
Accumulated other comprehensive Income (Loss)
  Ps 8,627     Ps (1,503 )
 
           
The changes in the Accumulated other comprehensive Income are as follows:
         
    2007  
 
       
Increase or (decrease) in Accumulated other comprehensive Income
       
 
       
Recognized during year — Transition (Obligation)/Asset
  Ps 979  
Recognized during year — Prior Service (Cost)/Credit
    131  
Recognized during year — Net Actuarial (Losses)/Gains
    (3,381 )
Occurring during year — Prior service cost
    (13,056 )
Occurring during year — Net Actuarial Losses/(Gains)
    655  
 
     
Accumulated other comprehensive Income in current year
  Ps (14,672 )
 
     
The Bank expects the following amounts in other comprehensive income to be recognized as components of net periodic pension cost during 2008:
         
Net transition obligation/(asset)
  Ps 789  
Net prior service cost
    1,217  
Net loss/(gain)
    (3,435 )
 
     
Total
  Ps (1,429 )
 
     

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
                         
    2005     2006     2007  
 
                       
Discount rate
    8.68 %     8.68 %     9.25 %
Rate of compensation increases
    6.33 %     6.07 %     6.00 %
Rate of pension increases
    4.50 %     4.50 %     5.00 %
Estimated Future Benefit Payments
The benefit payments, which reflect expected future service, as appropriate, are expected to be paid as follows:
                 
    Pension     Other  
    Benefits     Benefits  
 
               
2008
    14,048       12,732  
2009
    12,727       7,948  
2010
    12,742       7,520  
2011
    12,346       10,592  
2012
    12,268       13,487  
Years 2013 - 2017
    62,134       79,411  
c) Inflation adjustment
The consolidated financial statements under COL GAAP 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 2007. Under U.S. GAAP, reappraisals of assets are not permitted.

 

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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 (i), 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.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following summarizes the allowance for loan and financial lease losses under Colombian GAAP and U.S. GAAP:
                 
    2006     2007  
 
               
Allowance for loans, financial lease losses and foreclosed assets under Colombian GAAP
               
Allowance for loans and financial lease losses
  Ps 834,183     Ps 1,457,151  
Allowance for accrued interest and other receivables
    33,859       67,707  
Allowance for foreclosed assets
    174,393       201,822  
 
           
 
  Ps 1,042,435     Ps 1,726,680  
 
           
Allowance for loan losses under U.S. GAAP
               
 
               
Allowance for loans, financial lease, accrued interest losses and other related receivables
    507,641       1,055,697  
Allowance for foreclosed assets
    118,652       109,541  
 
           
 
  Ps 626,293     Ps 1,165,238  
 
           
 
               
Difference to be recognized as an adjustment to Colombian GAAP stockholders’ equity
  Ps 416,142     Ps 561,442  
 
           
                         
    2005     2006     2007  
Difference recognized in net income under U.S.GAAP
                       
Allowance for loans, financial lease losses and other receivables
  Ps (106,440 )   Ps 193,596     Ps (45,780 )
Allowance for foreclosed assets
    (2,446 )     1,953       (24,029 )
 
                 
 
  Ps (108,886 )   Ps 195,549     Ps (69,809 )
 
                 
An analysis of the activity in the allowance for loans and financial lease losses under U.S. GAAP during the year ended December 31, 2005, 2006 and 2007 is as follows:
                         
    2005     2006     2007  
 
                       
Provision at the beginning of the period
  Ps 407,852     Ps 581,645     Ps 507,641  
Currency Translation and other adjustments
    (4,130 )     (685 )     (29,129 )
Charge-offs
    (104,543 )     (145,829 )     (191,779 )
Recoveries of charged-off loans
    52,451       70,745       89,997  
Charged to profit and loss account
    230,015       1,765       678,967  
 
                 
Provision at the end of the period
  Ps 581,645     Ps 507,641     Ps 1,055,697  
 
                 
 
                       
Gross Loans and financial leases
    18,626,252       24,645,574       37,702,624  
 
Closing customers provisions as a percentage of gross loans
    3.12 %     2.06 %     2.80 %
 
Customers charges against profits as percentage of gross loans
    1.23 %     0.01 %     1.79 %

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
At December 31, 2006, and 2007, the carrying value of loans considered to be impaired under SFAS No. 114 (not including restructured loans), was approximately Ps 348,626 and Ps 911,650, respectively, and the related allowance for loan losses on those impaired loans totaled Ps 104,397 and Ps 301,890, respectively.
For the years ended December 31, 2005, 2006 and 2007, the Bank recognized interest income of approximately Ps 10,918, Ps 14,133 and Ps 26,592, respectively, on such impaired loans.
The total amount of loans evaluated under a methodology different than SFAS 114 and SFAS 15 methodology was Ps 36,025,854 at December 31, 2007.
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 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
g) Interest recognition — non-accrual loans
For Colombian GAAP purposes, the Bank established that commercial, consumer and small business loans that are past due more than thirty days and mortgages that are past due more than 60 days will stop accruing interest in the statement of operations and their entries will be made in memorandum accounts until such time that the customer does proceed to cancel.
For U.S. GAAP purposes, interest income is not accrued 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 2005, 2006 and 2007, 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 2006 and 2007, interest income on past due mortgage loans between 61 and 90 days past due, was accounted as accrued interest.
h) Deferred charges
The Bank has deferred certain pre-operating expensed, and other charges, which are expenses as incurred under U.S. GAAP.
The cost of issuance of shares and bonds is recorded by the Bank as a deferred charge and amortized on a monthly basis over a term of three (3) years. Nevertheless, under U.S. GAAP, the cost of issuance of bonds must be amortized during the period of maturity of the issue, and the cost of issuance of shares must be recorded as less value of the additional paid in capital.
Under Colombian GAAP, the Bank accounted for improvements on leased property on the statement of operation as expenses. Under U.S. GAAP, leasehold improvements are recorded as a deferred charge and amortized on a monthly basis over the term of the contract.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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, available for sale and swaps at their cost basis. The difference between fair value and the cost basis of these securities is Ps 18,212.
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, 2006 and 2007, the Bank’s portfolio was classified as “trading”, “held to maturity” and “available for sale”.
The carrying amounts, gross unrealized gains and losses and approximate fair value of debt securities classified as 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, 2006
                               
Securities issued or secured by Colombian government
  Ps 1,889,064     Ps 13,449     Ps 136,532     Ps 2,012,147  
Securities issued or secured by government entities
    10,388       42       81       10,427  
Securities issued or secured by financial entities
    164,642       3,502       5,511       166,651  
Other investments
    188,116       4,401       2,129       185,844  
 
                       
 
  Ps 2,252,210     Ps 21,395     Ps 144,253     Ps 2,375,065  
 
                       

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
                                 
            Gross     Gross        
            unrealized     unrealized     Cost  
    Fair value     gains     losses     basis  
Available for sale — Debt securities
                               
December 31, 2007
                               
 
                               
Securities issued or secured by Colombian government
  Ps 1,035,891     Ps 2,216     Ps 158,816     Ps 1,192,491  
Securities issued by the Central Bank
    586,284       59       155       586,380  
Securities issued or secured by government entities
    232,841       389       5,444       237,895  
Securities issued or secured by financial entities
    166,920       2,991       728       164,657  
Securities issued by foreign governments
    444,405       3,200       1,593       442,798  
Other investments
    56,947       173       440       57,213  
 
                       
 
  Ps 2,523,288     Ps 9,028     Ps 167,176     Ps 2,681,434  
 
                       
                                 
            Gross     Gross        
            unrealized     unrealized     Cost  
    Fair value     gains     losses     basis  
Available for sale — Equity securities
                               
December 31, 2006
                               
 
                               
Inmobiliaria Cadenalco
  Ps 3,929     Ps 1,438     Ps     Ps 2,491  
 
                       
 
  Ps 3,929     Ps 1,438     Ps     Ps 2,491  
 
                       
                                 
            Gross     Gross        
            unrealized     unrealized     Cost  
    Fair value     gains     losses     basis  
Available for sale — Equity securities
                               
December 31, 2007
                               
Inmobiliaria Cadenalco
  Ps 4,377     Ps 1,886     Ps     Ps 2,491  
Bolsa de Valores de Colombia
    4,877       174             4,703  
 
                       
 
  Ps 9,254     Ps 2,060     Ps     Ps 7,194  
 
                       
The scheduled maturities of debt securities at December 31, 2007 were as follows:
                 
    Available for sale  
    Amortized     Fair  
    cost     value  
 
               
Due in one year or less
  Ps 1,116,331     Ps 1,115,234  
Due from one year to five years
    841,415       795,740  
Due from five years to ten years
    578,773       467,303  
Due more than ten years
    144,915       145,011  
 
           
Total
  Ps 2,681,434     Ps 2,523,288  
 
           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
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, 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, to available-for-sale and recorded the difference between the carrying value and the market value, in other comprehensive income. The swap of the securities was authorized by the Superintendency 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        
            unrealized     Cost  
    Fair value     losses     basis  
Available for Sale
                       
December 31, 2007
                       
 
                       
Securities issued or secured by Colombian government
  Ps 18,576     Ps 104     Ps 18,681  
Securities issued or secured by the Central Bank
    531,233       149       531,382  
Securities issued or secured by government entities
    20,107       450       20,557  
Securities issued or secured by other financial entities
    35,357       165       35,521  
Securities issued by foreign governments
    162,839       295       163,134  
 
                 
Total
  Ps 768,112     Ps 1,163     Ps 769,275  
 
                 

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Investments that have been in a continuous unrealized loss position for 12 months or longer are:
                         
            Gross        
            unrealized     Cost  
    Fair value     losses     basis  
Available for Sale
                       
December 31, 2007
                       
 
                       
Securities issued or secured by Colombian government
  Ps 997,515     Ps 158,712     Ps 1,156,226  
Securities issued or secured by the Central Bank
    20,003       6       20,010  
Securities issued or secured by government entities
    27,862       4,994       32,856  
Securities issued or secured by other financial entities
    12,916       562       13,479  
Securities issued by foreign governments
    20,466       1,298       21,764  
Other investments
    33,362       440       33,802  
 
                 
Total
  Ps 1,112,124     Ps 166,012     Ps 1,278,137  
 
                 
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, 2007, 935 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 2006 and 2007 was Ps 74,184 and Ps 229,725, 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 and the fair value of the asset and liability leg of the derivatives are recorded as rights and commitments separatedly in the balance sheet (see note 8). As of December 31, 2007, 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.
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 are increased in the U.S. GAAP condensed 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 devaluation 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.
l) Lessor accounting
Certain of the Bank’s Subsidiaries, lease assets to third parties under non-cancelable lease arrangements. These lease arrangements involve machinery and equipment, computer equipment, automobile and furniture and fixtures and their terms range between three and five years.
Under Colombian GAAP, for financial entities, leases are classified as either financial leases or operating leases. Goods provided through in 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.
In addition, certain of the Bank’s subsidiaries. Renting Colombia, Arrendadora Financiera and Leasing Bancolombia 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 are classified as financial leasing after applying the criteria established in SFAS 13.
The following lists the components of the net investment in direct financial leases as of December 31, 2006 and 2007:
                 
    2006     2007  
 
               
Total minimum lease payments to be received
  Ps 4,232,550     Ps 6,057,324  
Less: Allowance for uncollectibles
    (49,440 )     (95,047 )
 
           
Net minimum lease payments receivable
    4,183,110       5,962,277  
Estimated residual values of leased property
    238,054       369,183  
Less: Unearned income
    (985,289 )     (1,671,907 )
 
           
Net investment in direct financial leases
  Ps 3,435, 875     Ps 4,659,553  
 
           

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following schedule shows the future minimum lease payments to be received on direct financial leases and operating leases for each of the next five years and thereafter.
                 
Year Ended December 31,   Financial leases     Operating Leases  
2008
  Ps 312,678     Ps 142,999  
2009
    748,158       120,573  
2010
    1,205,664       101,379  
2011
    992,560       77,512  
2012
    1,346,859       37,373  
Later years, through 2013
    1,451,405       2,020  
 
           
 
Total minimum future lease payments to be received
  Ps 6,057,324     Ps 481,856  
 
           
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.
Each of the Banagrícola S.A., Conavi and Corfinsura and Factoring Bancolombia acquisitions were accounted for using the pooling of interest method under Colombian GAAP, in accordance with the methodology suggested by the Superintendency of Finance.
Banagrícola S.A.
In May 2007, Bancolombia Panamá S.A. acquired 89.15% of Banagrícola S.A. (“Banagricola”). Banagrícola’s shareholders agreed to sell 16,817,633 of the total 18,865,000 outstanding shares. The purchase price was US$0.04704479 per share for a total of US$ 791,182.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Simultaneously with the acquisition, the Bank had signed an agreement with Bienes y Servicios S.A (BYSSA), formerly Banagrícola major shareholder, which included a call and written put option. The options were exercised in December 2007 and as a consequence the Bank acquired the shares representing 9.59% of interest in Banagrícola for an aggregate purchase price of approximately US$ 87,700 (US$ 0.04845024 per share).
In connection with this transaction, BYSSA must also transfer 100% the shares of Banagrícola de El Salvador, Inc. (“BESI”) for approximately US$ 6,000. BESI is a California corporation that is licensed to engage in the money transmittal business in California, Maryland, Nevada, New Jersey, Texas, Virginia and the District of Columbia. This transaction will be consummated upon receipt of all necessary regulatory approvals, some of which are still pending.
Bancolombia Panamá S.A. continued purchasing shares from Banagrícola’s minority shareholders and at December 31, 2007 held an interest of 98.90% of Banagrícola’s total shareholder’s equity.
The consolidated statements of operations under U.S. GAAP for the year ended December 31, 2007 includes the operations of Banagrícola S.A. and its subsidiaries since June 1, 2007.
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 Banagrícola  
    during 2007  
Total Purchase Price
  Ps 1,745,393  
 
     
Assets acquired
    7,017,890  
Premises and equipment, net
    188,500  
Liabilities assumed
    6,457,732  
 
     
Net Assets Acquired
  Ps 748,658  
 
     
Excess of cost over the fair value of acquired net assets
    996,735  
 
Intangible Assets
    365,849  
 
     
Goodwill
  Ps 630,886  
 
     
         
    Fair value of assets acquired and liabilities  
    assumed under U.S. GAAP from Banagrícola  
    de El Salvador Inc. as of Dec 31, 2007  
Total Purchase Price
  Ps 11,401  
 
     
Assets acquired
    5,333  
Premises and equipment, net
    3,218  
Liabilities assumed
    2,449  
 
     
Net Assets Acquired
  Ps 6,102  
 
     
Excess of cost over the fair value of acquired net assets
    5,299  
 
Intangible Asset
     
 
     
Goodwill
  Ps 5,299  
 
     

 

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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 2006 and 2007 reflects the consolidated results of operations as if the acquisition of Banagrícola 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.
         
    2006  
U.S. GAAP Net income
  Ps 1,114,121  
Revenues
    2,918,628  
Earnings per share
  Ps 2,186  
         
    2007  
U.S. GAAP Net income
  Ps 1,147,510  
Revenues
    3,822,759  
Earnings per share
  Ps 2,251  
Factoring Bancolombia acquisition
On May 8, 2006, the Bank acquired 9,803,685 shares of Comercia S.A., (now Factoring Bancolombia S.A. Compañía de Financiamiento Comercial) equivalent to 55.61% of its outstanding shares, from Textiles Fabricato Tejicóndor S.A. by means of a transaction duly authorized by the Superintendency of Finance. The value paid by the Bank was Ps 24,610.
On June 30, 2006, the Bank acquired 6,868,409 shares of Comercia S.A. (now Factoring Bancolombia S.A. Compañía de Financiamiento Comercial), equivalent to 38.96% of its outstanding shares, from Textiles Fabricato Tejicóndor S.A. by means of a transaction duly authorized by the Superintendency of Finance. The value paid by the Bank was Ps 17,241. Under U.S. GAAP, the results of Comercia S.A.’s, (now Factoring Bancolombia S.A. Compañía 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 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.

 

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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 Comercia  
    as of April 30, 2006  
Total Purchase Price, Net of Cash
  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.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Conavi and Corfinsura acquisition
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.
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 structured products. As of December 31, 2004, Corfinsura’s consolidated total asset value amounted to Ps 6,396,000.
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
         
    Fair value of assets acquired and liabilities  
    assumed under U.S. GAAP from Conavi  
    as of July 31, 2005  
Total Purchase Price, Net of Cash Acquired
  Ps 316,864  
 
     
Assets acquired
    2,921,925  
Premises and equipment, net
    209,535  
Liabilities assumed
    3,006,974  
 
     
Net Assets Acquired
  Ps 124,486  
 
     
Excess of cost over the fair value of acquired net assets
    192,378  
 
Intangible Asset
    122,269  
 
     
Goodwill
  Ps 70,109  
 
     
         
    Fair value of assets acquired and liabilities  
    assumed under U.S. GAAP from Corfinsura  
    as of July 31, 2005  
Total Purchase Price, Net of Cash Acquired
  Ps 816,864  
 
     
Assets acquired
    4,969,839  
Premises and equipment, net
    142,872  
Liabilities assumed
    4,739,515  
 
     
Net Assets Acquired
  Ps 373,196  
 
     
Excess of cost over the fair value of acquired net assets
    443,668  
 
Intangible Asset
    105,294  
 
     
Goodwill
  Ps 338,374  
 
     
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  

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
         
    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.
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 are 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.
The activity of the goodwill and intangible assets during the years ended December 31, 2005, 2006 and 2007 is as follows:
                         
    2005     2006     2007  
 
                       
Goodwill U.S. GAAP
                       
Balance at beginning of year
  Ps 161,265     Ps 569,748     Ps 577,535  
Reclassifications
                132,243  
Additions
    408,483       7,787       636,186  
Foreign currency adjustment
                36,195  
 
                 
Balance at end of year
  Ps 569,748     Ps 577,535     Ps 1,382,159  
 
                 
Goodwill under Colombian GAAP
    41,994       34,371       973,699  
 
                 
Difference to be recognized under U.S. GAAP (1)
  Ps 527,754     Ps 543,164     Ps 408,460  
 
                 
     
(1)  
For 2007 this adjustment is reflected in the line goodwill of the reconciliation of stockholders equity for Ps 276,217 and as part of the line revaluation of assets for Ps 132,243.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Goodwill by segments was as follows:
                         
    December 31,     December 31,     December 31,  
    2005     2006     2007  
 
                       
Commercial Banking
  Ps 253,034     Ps 253,034     Ps 303,032  
Retail Banking
    151,418       159,205       629,712  
Small Business Banking
    27,784       27,784       27,784  
Leasing
    54,238       54,238       54,238  
Offshore Commercial Banking
    31,534       31,534       31,534  
Government Banking
    1,199       1,199       30,629  
Construction Banking
    4,326       4,326       4,326  
Treasury
                122,446  
All other segments
    46,215       46,215       178,458  
 
                 
Total Goodwill
  Ps 569,748     Ps 577,535     Ps 1,382,159  
 
                 
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
Banagrícola S.A
Of the Ps 365,849 of acquired intangible assets, Ps 15,092 was assigned to registered brands that are not subject to amortization and Ps 177,451 was assigned to brands, deposits, customers relationship and others. The acquired intangible assets subject to amortization have a weighted-average useful life of approximately 12 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Royalty savings method
The royalty savings method determines the brand value based on the savings a company generates as a result of not having to pay for a license to use such brand. The value of the asset is calculated based on the following assumptions:
   
The present value of the brand is determined based on its potential to generate future cash flow.
   
The royalty stream that the business would hypothetically earn from its brand can be reasonably estimated (it assumes that future royalties can in some way be predicted).
   
Cash flows are discounted in order to arrive to a present value.
   
Capital costs and rates of return can be properly estimated.
   
The royalty stream that the business would hypothetically earn during the final year of the period in question can be considered a perpetuity.
The value of the brand is equal to the sum of the net present value of the after-tax savings a company generates during the period in question as a result of not having to pay for a license to use such brand plus the net present value of the after-tax savings a company would generate in perpetuity after the last year of the period in question.
Core Deposit Intangibles (CDI)
Core Deposit Intangible (“CDI”) values were determined by using the alternative funding method, which estimates the net present value of the cost difference or “spread” between the cost of using the CDI and the cost of an alternative source of funding under current market conditions.
The deposits of Banco Agrícola S.A and Banco Agrícola Panamá S.A include the following categories of checking accounts, saving deposits and time deposits:
   
Retail banking
   
Commercial banking
   
Offshore commercial banking.
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 described 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Brand
In November 2006, the Bank 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.
The activity of the intangible assets during the years ended December 31, 2006 and 2007 is as follows:
                 
    2006     2007  
 
               
Intangible Assets
               
Balance at beginning of year
  Ps 223,080     Ps 142,099  
Additions
    7,267       365,849  
Amortization
    (15,114 )     (42,063 )
Impairment
    (73,134 )      
Foreign currency translation adjustment
          21,806  
 
           
Balance at end of year
  Ps 142,099     Ps 487,691  
 
           
Intangible assets were as follows:
                                                         
    December 31, 2006     December 31, 2007  
    Gross                             Gross              
    carrying     Acummulated                     carrying     Acummulated        
    amount     amortization     Impairment             amount     amortization     Impairment  
 
                                                       
Non-Amortizable intangible assets
  Ps 73,134           Ps 73,134             Ps 30,407              
Amortizable intangible assets
  Ps 163,258     Ps 21,159                   Ps 520,781     Ps 63,222        

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following table shows the intangible assets gross carrying amount, detailed with their respective useful lives:
                 
            Weight useful life  
    December 31, 2007     (months)  
 
               
Brand
  Ps 30,407          
Service asset
    6,206       169  
Asset management
    30,004       125  
Loan
    77,354       201  
Deposits
    123,801       151  
Customer relationship Conavi and Corfinsura
    22,400       105  
Customer relationship Factoring Bancolombia
    7,267       48  
Customer relationship Conglomerado Banagrícola
    178,824       159  
Value of business acquired
    71,944       120  
Others
    2,981       105  
 
             
TOTAL
  Ps 551,188          
 
             
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.
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 Banagrícola S.A., 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 and Banco Agrícola S.A., 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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.
Under US GAAP, the securitizations of non-performing loans do not comply with the conditions to qualify as a sale in accordance with SFAS No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities” (“SFAS 140”). As a consequence, the securitizations of non-performing loans are accounted for as a secured borrowing.
The securitizations of performing loans comply with the conditions for sale accounting under SFAS 140. However, the securitization vehicles do not meet the strict conditions in SFAS 140 to be considered a qualifying special purpose entity (“QSPE”) because their activities are not sufficiently restricted. Upon application of FIN 46R — Consolidation of Variable Interest Entities (Revised), the Bank consolidates these securitization vehicles.
o) Foreign currency translation adjustment
For Colombian GAAP purposes, the translation adjustments resulting in the conversion of foreign currency financial 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, Bancolombia sold its business Abocol. On November 22, 2005, the Bank entered into a preliminary agreement with Incorbank Banqueros de Inversión, Inversiones en Logística y Seguridad de Transporte Ltda. Inverloset, Equity Investment S.A, Rodríguez Azuero Asociados S.A. and other individuals to begin negotiations relating to a proposed purchase agreement, by which the Bank would sell all of the Almacenar S.A. shares it holds directly (94.33%) and through Colcorp S.A. (3.92%). Both businesses qualify as discontinued operations under U.S. GAAP.
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 Inversión Bancolombia S.A. Corporación Financiera, in Almacenar S.A. The transaction price amounted to approximately Ps 11,719.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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., 3.57% of its direct interest in Almacenar S.A. The transaction price amounted to approximately Ps 2,050. The Bank registered in 2007 a loss on sale of this investment for Ps 14,064.
On June 9, 2008, Bancolombia sold to Stratton Spain S.L 94.90% of its direct interest and 3.32% of its direct interest held through Banca de Inversión Bancolombia S.A. and Fiduciaria Bancolombia S.A. in Multienlace S.A. The transaction price amounted to Ps 105,882.
The results of the discontinued operations under U.S. GAAP were as follows:
                         
    2005     2006     2007  
Profit (losses) from discontinued operations before income taxes
  Ps (29,893 )   Ps (37,355 )   Ps (53,716 )
Income taxes (benefit) expense
    9,008       8,224       3,247  
 
                 
Profit (losses) from discontinued operations
  Ps (38,901 )   Ps (45,579 )   Ps (56,963 )
 
                 
The Bank registered in 2007 a loss on sale of Almacenar S.A. of Ps 14,064.
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, 2006 and 2007, outstanding letters of credit and bank guarantees issued by the Bank totaled Ps 1,833,366 and Ps 2,613,369, respectively.
The table below summarizes, at December 31, 2006 and 2007, all of the Bank’s guarantees where the Bank is the guarantor. The maximum potential amount of future payments represents the notional amounts that could be lost under the guarantees if there were a total default by the guaranteed parties, without consideration of possible recoveries under recourse provisions or from collateral held or pledged. Such amounts bear no relationship to the anticipated losses on these guarantees and greatly exceed anticipated losses.
                                                                 
                                                    Maximum potential amount  
    Expire within one year     Expire after one year     Total amount outstanding     of future payments  
    2006     2007     2006     2007     2006     2007     2006     2007  
Financial standby letters of credit
  Ps 702,834     Ps 1,007,038     Ps 350,767     Ps 347,883     Ps 1,053,601     Ps 1,354,921     Ps 1,053,601     Ps 1,354,921  
Bank guarantees
    550,137       992,467       229,628       265,981       779,765       1,258,448       779,765       1,258,448  
 
                                               
Total
  Ps 1,252,971     Ps 1,999,505     Ps 580,395     Ps 613,864     Ps 1,833,366     Ps 2,613,369     Ps 1,833,366     Ps 2,613,369  
 
                                               
Financial standby letters of credit include guarantees of payment of credit facilities, promissory notes and trade acceptances.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 12,736. Under Colombian GAAP this amount is recorded as commissions in the statement of operations.
As a result of the reconciliation, the net income decreased in Ps 2,549 for 2007 and decreased Ps 3,571 for 2006.
s) Insurance contracts
Under U.S. GAAP reserves for individual and group Life insurance are computed on the basis of interest rates, mortality tables, including a margin for adverse deviations. For the year 2007, reserve discount rate was 4.5%, based on the Bank’s own profitability experience.
Under Colombian GAAP, there are no reserves for adverse deviations.
t) 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, 2006 and 2007 are presented hereunder. The fair value of a financial instrument is defined as the amount at which the instruments could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.
For those financial instruments with no quoted market prices available, fair values have been estimated using present value or other valuation techniques. These techniques are inherently subjective and are significantly affected by the assumptions used, including the discount rates, estimates of future cash flows and prepayment assumptions.
In addition, the fair values presented below do not attempt to estimate the value of the Bank’s fee generating businesses and anticipated future business activities, that is, they do not represent the Bank’s value as a going concern.
                                 
    December 31, 2006     December 31, 2007  
    Colombian             Colombian        
    GAAP     Estimated     GAAP     Estimated  
    Amount     Fair Value     Amount     Fair Value  
Financial assets
                               
Cash and cash equivalents
  Ps 2,006,366     Ps 2,006,366     Ps 5,228,387     Ps 5,228,387  
Investment securities
    5,677,761       4,827,872       5,774,251       4,562,689  
Loans and accrued interest receivable on loans, net
    24,066,681       25,523,982       36,644,033       38,954,179  
Customers’ acceptances
    64,030       64,030       55,208       55,208  
Derivatives
    102,365       102,210       140,797       139,015  

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
                                 
    December 31, 2006     December 31, 2007  
    Colombian             Colombian        
    GAAP     Estimated     GAAP     Estimated  
    Amount     Fair Value     Amount     Fair Value  
Financial liabilities:
                               
Deposits
  Ps 23,337,874     Ps 23,315,577     Ps 34,558,995     Ps 34,654,832  
Overnight funds
    1,009,098       1,009,098       2,020,366       2,020,366  
Bank acceptances outstanding
    64,030       64,030       55,208       55,208  
Interbank borrowings
    1,079,741       1,079,741       1,525,894       1,525,894  
Borrowings from development and other domestic banks
    2,467,639       2,467,639       3,371,003       3,371,003  
Long term debt
    1,313,782       1,768,839       2,866,462       3,675,395  
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 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
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 development and other domestic banks
Short-term interbank borrowings and borrowings from domestic development banks have been valued at their carrying amounts because of their relatively short-term nature. Long-term and domestic development bank borrowings have also been valued at their carrying amount because they bear interest at variable rates.
Long term debt
Long-term debt are bonds issued by the Bank, Leasing Bancolombia S.A., Banco Agrícola S.A., Sufinanciamiento S.A., Renting Colombia, and Fundicom 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 Banco Agrícola S.A, Fundicom S.A. and Sufinanciamiento S.A. are non marketable, and therefore the carrying amounts were used to approximate fair value.

 

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Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
u) Equity tax
Pursuant the Law 1111 of 2006, for the years 2007 through 2010, companies and individuals, who as of January 1, 2007 possess liquidity equity over Ps 3,000, are subject to equity tax.
Under Colombian GAAP, equity tax is allowed to be recorded as a decrease of Appropriated retained earnings.
Under U.S. GAAP, equity tax is recorded directly on statements of operations.
v) Earnings per share
Under Colombian GAAP, earnings per share (“EPS”) are computed by dividing net income by the weighted average number of both common and preference shares outstanding for each period presented.
U.S. GAAP requires dual presentation of basic and diluted EPS for entities with complex capital structures, as well as a reconciliation of the basic EPS computation to the diluted EPS computation. Basic EPS is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted EPS assumes the issuance of common shares for all dilutive potential common shares outstanding during the reporting period. For the years ended December 31, 2005, 2006 and 2007, 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, 2005, 2006 and 2007 (in millions of pesos, except per share data):
                         
    2005     2006     2007  
 
                       
U.S. GAAP consolidated net income
  Ps 891,121     Ps 941,183     Ps 1,015,644  
 
                       
Less preferred share dividends
    110,806       116,041       157,974  
 
                 
Income attributable to common stockholders
    780,315       825,142       857,670  
 
                 
 
Income from continuing operations attributable to common shareholders
    819,216       870,721       914,633  
Income (loss) from operations and disposal of discontinued operations
    (38,901 )     (45,579 )     (56,963 )
 
                 
Income attributable to common shareholders
    780,315       825,142       857,670  
 
                       
Weighted average number of common shares outstanding used in basic EPS calculation (in millions)
    455       510       510  
Basic and Diluted earnings per share (U.S. GAAP):
                       
Income from continuing operations
    1,800.47       1,708.29       1,794.44  
Income (loss) from operations and disposal of discontinued operations
    (85.50 )     (89.42 )     (111.76 )
 
                 
Income attributable to common shareholders
  Ps 1,714.97     Ps 1,618.87     Ps 1,682.68  
 
                 

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
w) 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 eight 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.
For this Annual Report, the Bank performed a review of its business segments and has changed the presentation of segment information. The major changes correspond to the aggregation of construction banking, corporate headquarters, brokerage and manufacturing segments into a category called “All other Segments”. The information for 2006 and 2005 has been restated to reflect these changes.
Banagrícola and its subsidiaries were allocated to each segment based on market segmentation, customer’s meeds and trading partners. The segments retail banking, commercial banking and off-shore commercial banking include most of the operations of Banagrícola and its subsidiaries.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The following presents information on reported operating segment profit or loss, and segment assets:
                                                                         
    2005 (restated)  
                    Small     Governmental             Offshore                      
    Retail     Commercial     Business     And Institutional             Commercial             All other        
    Banking     Banking     Banking     Banking     Treasury     Banking     Leasing     Segments     Total  
 
                                                                       
Revenues from external customers
  Ps 474,916     Ps 32,652     Ps 50,724     Ps 15,092           Ps 12,618     Ps 308,027     Ps 233,075     Ps 1,127,104  
 
                                                                       
Revenues (expenses) from transactions with other operating segments of the Bank
    76,998       145,022       161,358       27,850             10,604       6,654       (391,454 )     37,032  
 
                                                                       
Interest income
    1,059,092       379,434       375,839       82,570       828,418       178,409       67,845       131,903       3,103,510  
 
                                                                       
Interest expense
    245,978       87,318       127,094       38,579       358,932       75,422       210,411       78,897       1,222,631  
 
                                                                       
Net interest revenue
    813,114       292,116       248,745       43,991       469,486       102,987       (142,566 )     53,006       1,880,879  
 
                                                                       
Depreciation and amortization expense (2)
                                  706       11,871       18,076       30,653  
 
                                                                       
Provision for loan losses
    77,229       3,497       13,338       1,913       27,560       28,538       19,459       20,588       192,122  
 
                                                                       
Administrative and other expense
    697,565       76,472       85,086       36,397       10,895       8,952       57,950       596,431       1,569,748  
 
                                                                       
Income tax expense or benefit (2)
                                        32,389       245,124       277,513  
 
                                                                       
Other income or expense, net
    193       5       5                   12,346       6,546       (10,161 )     8,934  
 
                                                                       
Segment profit before distribution of income (expense) for treasury funds
    590,427       389,826       362,408       48,623       431,031       100,359       56,992       (995,753 )     983,913  
 
                                                                       
Distribution of income (expense) for treasury funds(1)
    102,443       (84,480 )     (87,934 )     17,486       73,041                   (20,556 )      
 
                                                     
 
                                                                       
Segment profit
  Ps 692,870     Ps 305,346     Ps 274,474     Ps 66,109     Ps 504,072     Ps 100,359     Ps 56,992     Ps (1,016,309 )   Ps 983,913  
 
                                                     
 
                                                                       
Segments assets
  Ps 7,710,861     Ps 3,757,603     Ps 3,730,214     Ps 825,460     Ps 7,375,750     Ps 4,166,424     Ps 3,452,069     Ps 2,503,701     Ps 33,522,082  
 
                                                     
     
(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)  
It was not practical to quantify these items.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
                                                                         
    2006 (restated)  
                    Small     Governmental             Offshore                      
    Retail     Commercial     Business     And Institutional             Commercial             All other        
    Banking     Banking     Banking     Banking     Treasury     Banking     Leasing     Segments     Total  
 
                                                                       
Revenues from external customers
  Ps 428,531     Ps 134,992     Ps 117,282     Ps 36,377           Ps 130     Ps 38,515     Ps 222,699     Ps 978,526  
 
                                                                       
Revenues (expenses) from transactions with other operating segments of the Bank
    69,727       297,645       92,006       54,498             12,493       12,691       (379,957 )     159,103  
 
                                                                       
Interest income
    820,398       756,876       387,043       172,830       400,053       495,222       437,977       147,004       3,617,403  
 
                                                                       
Interest expense
    196,432       66,929       51,395       289,709       246,058       123,286       254,752       123,645       1,352,206  
 
                                                                       
Net interest revenue
    623,966       689,947       335,648       (116,879 )     153,995       371,936       183,225       23,359       2,265,197  
 
                                                                       
Depreciation and amortization expense
    59,151       14,848       16,898       6,699       4,867       988       10,237       20,229       133,917  
 
                                                                       
Provision for loan losses
    86,327       (7,179 )     37,829       (37,106 )     (30,134 )     13,316       51,741       87,978       202,772  
 
                                                                       
Administrative and other expense
    662,166       140,453       186,052       73,754       53,590       9,099       68,689       545,693       1,739,496  
 
                                                                       
Income tax expense or benefit
    19,275       25,807       18,319       20,403       12,839             36,475       41,760       174,878  
 
                                                                       
Other income or expense, net
    (791 )     (116,209 )     223                   (223,056 )     12,138       84,564       (243,131 )
 
                                                                       
Segment profit before distribution of income (expense) for treasury funds
    294,514       832,446       286,061       (89,754 )     112,833       138,100       79,427       (744,995 )     908,632  
 
                                                                       
Distribution of income (expense) for treasury funds(1)
    74,518       (304,177 )     (44,607 )     310,701       (8,089 )                 (28,346 )      
 
                                                     
 
                                                                       
Segment profit
  Ps 369,032     Ps 528,269     Ps 241,454     Ps 220,947     Ps 104,744     Ps 138,100     Ps 79,427     Ps (773,341 )   Ps 908,632  
 
                                                     
 
                                                                       
Segments assets
  Ps 6,782,548     Ps 8,852,141     Ps 3,137,485     Ps 2,228,962     Ps 3,090,780     Ps 4,216,594     Ps 4,528,718     Ps 5,418,802     Ps 38,256,030  
 
                                                     
     
(1)  
These costs are calculated based on the funds that segments use or provide. Those do not have an impact in the final result.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
                                                                         
    2007  
                    Small     Governmental             Offshore                      
    Retail     Commercial     Business     And Institutional             Commercial             All other        
    Banking     Banking     Banking     Banking     Treasury     Banking     Leasing     Segments     Total  
 
                                                                       
Revenues from external customers
  Ps 628,460     Ps 135,214     Ps 173,465     Ps 44,277       (2,302 )   Ps 11,858     Ps 84,086     Ps 261,691     Ps 1,336,749  
 
                                                                       
Revenues (expenses) from transactions with other operating segments of the Bank
    (10,844 )     25,309                   10,655       148,783       1,345       317,738       492,986  
 
                                                                       
Interest income
    1,412,878       1,200,566       606,788       235,607       578,651       299,067       624,606       303,279       5,261,442  
 
                                                                       
Interest expense
    440,436       191,654       70,316       559,077       241,551       205,806       392,740       43,167       2,144,747  
 
                                                                       
Net interest revenue
    972,442       1,008,912       536,472       (323,470 )     337,100       93,261       231,866       260,112       3,116,695  
 
                                                                       
Depreciation and amortization expense
    92,489       17,001       24,147       7,843       3,059       20,819       24,369       45,452       235,179  
 
                                                                       
Provision for loan losses
    267,022       164,440       154,554       23,326       (14,634 )     19,271       108,538       26,111       748,628  
 
                                                                       
Administrative and other expense
    1,021,239       187,669       248,945       79,346       32,092       10,786       77,778       441,147       2,099,002  
 
                                                                       
Income tax expense or benefit
    58,979       75,439       46,587       45,744       42,381             35,990       56,763       361,883  
 
                                                                       
Other income or expense, net
    43,472       14,313       138             21       18,067       61,258       (59,098 )     78,171  
 
                                                                       
Segment profit before distribution of income (expense) for treasury funds
    193,801       739,199       235,842       (435,452 )     282,576       221,093       131,880       210,970       1,579,909  
 
                                                                       
Distribution of income (expense) for treasury funds(1)
    (12,920 )     (416,221 )     (76,737 )     617,387       (40,942 )                 (70,567 )      
 
                                                     
 
                                                                       
Segment profit
  Ps 180,881     Ps 322,978     Ps 159,105     Ps 181,935     Ps 241,634     Ps 221,093     Ps 131,880     Ps 140,403     Ps 1,579,909  
 
                                                     
 
                                                                       
Segments assets
  Ps 12,520,097     Ps 13,863,491     Ps 5,613,853     Ps 2,868,259     Ps 2,586,235     Ps 6,847,345     Ps 5,898,303     Ps 8,965,226     Ps 59,162,809  
 
                                                     
     
(1)  
These costs are calculated based on the funds that segments use or provide. Those do not have an impact in the final result.

 

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The following is a reconciliation of reportable segment’s revenues, profit or loss and assets, to the Banks’ consolidated totals:
                         
    2005     2006     2007  
 
                       
Revenues
                       
Revenues for reportable segments (1)
  Ps 4,267,646     Ps 4,755,032     Ps 7,091,177  
Non-operating income (2)
    (20,166 )     (372,237 )     (194,096 )
Elimination of intersegment revenues
    (37,032 )     (159,103 )     (492,986 )
 
                 
Total revenues for reportable segments (3)
  Ps 4,210,448     Ps 4,223,692     Ps 6,404,095  
 
                 
 
                       
Profit or Loss
                       
Segment Profit
  Ps 983,913     Ps 908,632     Ps 1,579,909  
Elimination of inter-segment profits
    (37,032 )     (159,103 )     (492,986 )
 
                 
Net income
  Ps 946,881     Ps 749,529     Ps 1,086,923  
 
                 
 
                       
Assets
                       
Segment Assets
  Ps 33,522,082     Ps 38,256,030     Ps 59,162,809  
Elimination of inter-segment assets
    (2,718,565 )     (3,767,334 )     (7,011,160 )
 
                 
Consolidated total
  Ps 30,803,517     Ps 34,488,696     Ps 52,151,649  
 
                 
 
     
(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:
                                 
    2006     2007  
            Long             Long  
Geographic Information   Revenues     Lived - Assets(1)     Revenues     Lived - Assets(1)  
 
                               
Republic of Colombia
  Ps 3,801,365     Ps 878,917     Ps 5,507,174     Ps 1,202,108  
Republic of Panama and Cayman Islands
    512,629       12,285       515,749       10,242  
Puerto Rico
    37,171       141       51,765       164  
Perú
                357       6,706  
El Salvador
                774,026       143,658  
USA (1)
    31,630       928       48,010       115  
 
                       
 
                               
Total
    4,382,795       892,271       6,897,081       1,362,993  
Eliminations
    (159,103 )     (13 )     (492,986 )     11  
 
                       
Total, net
  Ps 4,223,692     Ps 892,258     Ps 6,404,095     Ps 1,363,004  
 
                       
 
     
(1)  
Included foreclosed assets, net, and property, plant and equipment, net.

 

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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.
Credibac S.A de C.V, offers products for individuals: fixed payment, classic, gold and platinum cards. In addition, it owns a co-branding card with Super Selectos, the largest retailer store in El Salvador. Also offers products for businesses: Assists businesses with working capital needs and corporate purchases, through a range of products. During 2007 Credibac, S.A. de C.V., launched the Visa Business Card, designed for SMEs.
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.
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 Panamá S.A. and Bancolombia Caymán, 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
Banco Agrícola (Panamá), S.A., offers savings accounts that are available to clients with interest capitalized quarterly. Savings accounts can be opened with a minimum of US$ 5,000 and offer an unlimited number of withdrawals. Also offers checking accounts that can be opened with a minimum of US$ 1,000 and checks are accepted at Banco Agrícola (Panamá), S.A. CD’s are available with terms of 30 to 360 days. Interest can be paid monthly or capitalized until maturity. Banco Agrícola (Panamá), S.A. also offers a certificate of deposit with a two year term and the rate paid is a spread above the 6 month LIBOR. This account can be opened with a minimum of US$ 10,000. In addition, Banco Agrícola (Panamá), S.A. offers commercial loans.
Leasing: Leasing Bancolombia S.A. and its subsidiaries, Renting Colombia S.A., Renting Perú S.A. and Tempo Rent a Car, also 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.
All other segments: Provide the following products and services:
   
Banca de Inversión Bancolombia S.A. 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.
   
   
Construction Banking, this segment provides services to the professional building construction industry. Construction customers are segmented by the number of construction projects they own.
   
   
Valores Bancolombia is a subsidiary of the Bank 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.
   
     
Valores Bancolombia offers its customers investment alternatives both domestically and internationally.
   
     
In El Salvador, Bursabac’s brokerage services provide access to securities that include notes issued by Banco Central de Reserva (El Salvador’s Central Bank), government bonds, Euro bonds, repurchase agreements, stocks, and bank and corporate debt securities known as Certificados de Inversion. Bursabac’s brokerage services also include the trading of foreign debt securities and international stocks listed in the Salvadorian Stock Exchange.
   
   
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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
   
Trust, Pension Fund and Insurance: The Bank offers, through 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.
   
     
Through its branch network, Banco Agrícola S.A. offers various insurance products (life insurance and educational) from Asesuisa a subsidiary of Banagrícola. Banco Agrícola S.A. was the first bank in El Salvador to enter the Bancassurance line of business.
   
     
Asesuisa offers protection through insurance products for individuals and corporations, covering a wide range of risks and exposures.
   
     
AFP Crecer is a pension fund that manages both voluntary and mandatory contributions through individual savings accounts for the elderly, common disability and surviving pensions, as established under the SAP. The SAP and other regulations issued by the Superintendency of Pensions of El Salvador regulate the products and services that AFP Crecer provides.
x) Recent U.S. GAAP Pronouncements
In February 2007, the Financial Accounting Standards Board (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. SFAS 159 have no impact on the Bank’s U.S.GAAP disclosures.
In December 2007, the FASB issued Statement No. 141 R (“SFAS 141 R”) “Business Combination” — Revised 2007 -.SFAS 141 R replaces FASB Statement No. 141, “Business Combinations”. SFAS 141 R retains the fundamental requirements in Statement 141 that the acquisition method of accounting (which Statement 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination.
SFAS 141 R retains the guidance in Statement 141 for identifying and recognizing intangible assets separately from goodwill and it requires an acquirer to recognize the assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the Statement.
SFAS 141 R also requires the acquirer in a business combination achieved in stages (sometimes referred to as a step acquisition) to recognize the identifiable assets and liabilities, as well as the non-controlling interest in the acquiree, at the full amounts of their fair values (or other amounts determined in accordance with this Statement).
SFAS 141 R applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The Bank is currently analyzing the effect that SFAS 141 R will have on its U.S.GAAP disclosures.
In December 2007, the FASB issued Statement No. 160 (“SFAS 160”) “Non-controlling Interests in Consolidated Financial Statements —an amendment of ARB No. 51”.SFAS 160 amends “Accounting Research Bulletin No. 51, Consolidated Financial Statements”.
SFAS 160 improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require:
   
The ownership interests in subsidiaries held by parties other than the parent be clearly identified, labeled, and presented in the consolidated statement of financial position within equity, but separate from the parent’s equity.
 
   
The amount of consolidated net income attributable to the parent and to the non-controlling interest be clearly identified and presented on the face of the consolidated statement of income. A non-controlling interest, sometimes called a minority interest, is the portion of equity in a subsidiary not attributable, directly or indirectly, to a parent.
 
   
Changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. A parent’s ownership interest in a subsidiary changes if the parent purchases additional ownership interests in its subsidiary or if the parent sells some of its ownership interests in its subsidiary. It also changes if the subsidiary reacquires some of its ownership interests or the subsidiary issues additional ownership interests. All of those transactions are economically similar, and this Statement requires that they be accounted for similarly, as equity transactions.
 
   
When a subsidiary is deconsolidated, any retained non-controlling equity investment in the former subsidiary be initially measured at fair value. The gain or loss on the deconsolidation of the subsidiary is measured using the fair value of any non-controlling equity investment rather than the carrying amount of that retained investment.
 
   
Entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the non-controlling owners.
SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008 (that is, January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The effective date of this Statement is the same as that of the related Statement 141(R).
The Bank is currently analyzing the effect that SFAS 160 will have on BC’s U.S.GAAP disclosures.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). The new standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements that are presented in conformity with U.S. GAAP for nongovernmental entities. SFAS 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board Auditing amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles”. Management does not expect that the adoption of SFAS 162 will have a material impact on U.S.GAAP disclosures.
In March 2008, the FASB issued Statement of Financial Accounting Standards No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of SFAS 133” (“SFAS 161”), which amends SFAS 133 and requires enhanced disclosures about derivative instruments and hedging activities. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. Management is currently evaluating the impact of the adoption of SFAS 161 on U.S. GAAP disclosures.
In November 2007, the SEC issued Staff Accounting Bulletin (SAB) No. 109 “Written loan commitments recorded at fair value through earnings” (“SAB 109”). SAB 109 clarifies that consistent with the guidance in SFAS 156 “Accounting for servicing of Financial Assets” and SFAS 159 “The Fair Value Option for Financial Assets and Liabilities”, the expected net future cash flows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that accounted for at fair value through earnings. SAB 109 is effective from January 1, 2008. Management does not expect that the adoption of SAB 109 will have a material impact on U.S.GAAP disclosures.
In July 2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting and reporting for income taxes where interpretation of the tax law may be uncertain. FIN 48 prescribes a comprehensive model for the financial statement recognition, measurement, presentation and disclosure of income tax uncertainties with respect to positions taken or expected to be taken in income tax returns. The Bank adopted FIN 48 on January 1, 2007. The effect of adopting FIN 48 is discussed in Note 31.
In March 2006, the FASB issued Statement of Financial Accounting Standards No.156, “Accounting for Servicing of Financial Assets-an amendment to FASB Statement No. 140” (“SFAS 156”), which permits but does not require, an entity to account for one or more classes of servicing rights at fair value, with changes in fair value recorded in the consolidated statement of income. The Bank adopted SFAS 156 on January 1, 2007. The adoption of SFAS 156 did not have a material impact impact on U.S.GAAP disclosures.
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 emphasizes 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.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
(32) Restatements
Securitization of performing loans
Subsequent to the issuance of the Bank’s financial statements for the year ended December 31, 2007, the Bank’s management reviewed certain of the Bank’s service agreements with vehicles used to securitize the Bank’s performing loans and reconsidered the analysis under SFAS 140 and concluded that such vehicles did not meet the definition of a qualified special-purpose entity under SFAS 140. As a result of this, the Bank has restated its Supplemental Consolidated Condensed Balance Sheets, its Supplemental Consolidated Condensed Statement of Operations (while the error has an impact on the individual financial statement line items within the Supplemental Consolidated Condensed Statement of Operations, it does not have an impact on the totals for income before income taxes, net income from continued operations, discontinued operations or net income), and the Supplemental Consolidated Condensed Statements of Cash Flows, prepared in accordance to U.S. GAAP and presented in Note 31, in order to consolidate the vehicles on which the Bank serves as the primary beneficiary under FIN 46R — Consolidation of Variable Interest Entities (Revised).
The impact on the balance sheets is:
Supplemental Consolidated Condensed Balance Sheets
                                 
    2006     2007  
    Previously             Previously        
    reported     Restated     reported     Restated  
 
                               
Assets
                               
Cash an due from banks:
  Ps 2,010,120     Ps 2,040,892     Ps 5,239,778     Ps 5,285,089  
Trading account
    2,926,959       2,926,959       2,287,673       2,287,673  
Investment securities,net
    2,912,524       2,203,154       3,414,275       2,361,663  
Loans
    21,358,135       22,456,573       33,482,038       35,340,990  
Financial lease
    3,553,514       3,553,514       4,699,764       4,699,764  
Allowance for loans and financial leases losses
    (507,641 )     (509,179 )     (1,055,697 )     (1,072,307 )
Premises and equipment, net
    1,637,039       1,637,039       1,922,999       1,922,999  
Other assets
    1,552,684       1,566,111       3,055,923       3,054,437  
 
                       
Total Assets
  Ps 35,443,334     Ps 35,875,063     Ps 53,046,753     Ps 53,880,308  
Liabilities and Stockholders’ Equity:
                               
Deposits
    23,191,301       23,191,301       34,356,264       34,356,264  
Short term debt
    1,209,776       1,209,776       1,195,849       1,195,849  
Long term debt
    3,609,352       4,031,736       6,506,127       7,330,902  
Other liabilities
    2,836,369       2,848,792       4,986,221       4,996,708  
Minority interest
    47,518       44,440       64,738       63,031  
Sharholders’ equity
    4,549,018       4,549,018       5,937,554       5,937,554  
 
                       
Total Liabilities and Shareholders’ equity
  Ps 35,443,334     Ps 35,875,063     Ps 53,046,753     Ps 53,880,308  
 
                       

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The impact on the consolidated statements of operation is:
Supplemental Consolidated Condensed Statements of Operations
                                 
    2006     2007  
    Previously             Previously        
    reported     Restated     reported     Restated  
Total interest income
  Ps 3,252,850     Ps 3,261,057     Ps 4,695,568     Ps 4,763,632  
 
                       
Total interest expense
    (1,272,358 )     (1,281,228 )     (1,914,902 )     (1,987,244 )
 
                       
Net interest income
    1,980,492       1,979,829       2,780,666       2,776,388  
 
                       
Provision of loans, leases and other receivables
    (1,765 )     (1,765 )     (678,962 )     (678,962 )
 
                       
Net interest income after provision of loans, leases and other receivables
    1,978,727       1,978,064       2,101,704       2,097,426  
 
                       
Other income
    1,153,643       1,154,306       1,610,168       1,614,446  
 
                       
Other expenses
    (1,945,737 )     (1,945,737 )     (2,189,349 )     (2,189,349 )
 
                       
Income before income taxes
    1,186,633       1,186,633       1,522,523       1,522,523  
 
                       
Income tax expense
    (199,871 )     (199,871 )     (449,916 )     (449,916 )
 
                       
Net income from continued operations
    986,762       986,762       1,072,607       1,072,607  
 
                       
Discontinued Operations
    (45,579 )     (45,579 )     (56,963 )     (56,963 )
 
                       
Net income
  Ps 941,183     Ps 941,183     Ps 1,015,644     Ps 1,015,644  
 
                       
Supplemental Consolidated Condensed Statement of Cash Flows
We also identified during the preparation of the 2008 financial statements that the Supplemental Consolidated Condensed Statements of Cash Flows, prepared in accordance to U.S. GAAP and presented in Note 31, included errors related to (i) for all years presented, the inappropriate classification of variations in the loan portfolio as operating activities, which has now been reclassified to investing activities, (ii) for all years presented, clerical errors in the elimination and reclassification of cash flows related to the different accounting treatment for business combinations under Colombian GAAP and US GAAP as described in note 31 (m) for the Conavi/Corfinsura merger during the year ended December 31, 2005 and the acquisition of Banagricola during the year ended December 31, 2007 and (iii) for the fiscal years ended on December 31, 2006 and 2007, the presentation of the effects of exchange rate changes on cash and cash equivalents. In addition, as noted above. the restatement relating to the treatment of vehicles used to securitize the Bank’s performing loan also affects the Supplemental Consolidated Condensed Statements of Cash Flows for the years ended on December 31. 2006 and 2007.

 

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BANCOLOMBIA S.A. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Stated in millions of pesos and thousands of U.S. dollars)
The impact on the consolidated statements of cash flows is:
Supplemental Consolidated Condensed Statements of Cash Flows
                                                 
    2005     2006     2007  
    Previously             Previously             Previously        
    reported     Restated     reported     Restated     reported     Restated  
 
                                               
Net income
  Ps 891,121     Ps 891,121     Ps 941,183     Ps 941,183     Ps 1,015,644     Ps 1,015,644  
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
    (5,215,860 )     (3,059,351 )     (9,485,717 )     2,811,272       (13,723,203 )     2,058,680  
 
                                   
 
                                               
Net cash (used in) provided by operating activities
    (4,324,739 )     (2,168,230 )     (8,544,534 )     3,752,455       (12,707,559 )     3,074,324  
Net cash (used in) provided by investing activities
    (6,133,179 )     474,247       5,411,530       (7,121,607 )     460,615       (9,139,513 )
Net cash provided by financing activities
    10,938,580       2,174,645       3,413,102       3,677,955       15,476,602       9,566,743  
 
                                   
Increase in cash and cash equivalents
  Ps 480,662     Ps 480,662     Ps 280,098     Ps 308,803     Ps 3,229,658     Ps 3,501,554  
 
                                   
Effect of exchange rate changes on cash and cash equivalents
                      2,067             (257,357 )
 
                                   
Cash and cash equivalents at beginning of year
    1,249,360       1,249,360       1,730,022       1,730,022       2,010,120       2,040,892  
 
                                   
Cash and cash equivalents at end of year
  Ps 1,730,022     Ps 1,730,022     Ps 2,010,120     Ps 2,040,892     Ps 5,239,778     Ps 5,285,089  
 
                                   

 

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EXHIBIT INDEX
         
  12.1    
CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
       
 
  12.2    
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
       
 
  13.1    
CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
       
 
  13.2    
CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, dated July 23, 2009.
       
 
  15.1    
Consent of PriceWaterhouseCoopers, S.A.