20-F 1 v405365_20f.htm FORM 20-F

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 20-F

 

 

 

¨ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended December 31, 2014

 

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

¨ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

Date of event requiring this shell company report……………………………

 

For the transition period from ______ to _______

 

Commission File Number 1-11414

 

BANCO LATINOAMERICANO DE COMERCIO EXTERIOR, S.A.

(Exact name of Registrant as specified in its charter)

 

FOREIGN TRADE BANK OF LATIN AMERICA, INC.

(Translation of Registrant’s name into English)

REPUBLIC OF PANAMA

(Jurisdiction of incorporation or organization)

 

 

 

Torre V, Business Park

Avenida La Rotonda, Urb. Costa del Este

P.O. Box 0819-08730

Panama City, Republic of Panama

(Address of principal executive offices)

 

 

Christopher Schech

Chief Financial Officer

+507 210-8500

Email address: cschech@bladex.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

Class E Common Stock

Name of each exchange on which registered

New York Stock Exchange

 

Securities registered or to be registered pursuant to Section 12(g) of the Act.

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

 

 

 

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.

  

6,342,189   Shares of Class A Common Stock
2,479,050   Shares of Class B Common Stock
29,956,100   Shares of Class E Common Stock
0   Shares of Class F Common Stock
38,777,339   Total Shares of Common Stock

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

x Yes                                                             ¨ No

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

¨ Yes                                                             x No

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

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.

x Yes                                                             ¨ No

 

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 preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes                                                             ¨ No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

  x   Large Accelerated Filer ¨   Accelerated Filer ¨   Non-accelerated Filer

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

x  U.S. GAAP ¨  International Financial Reporting Standards as issued ¨  Other
  by the International Accounting Standards Board  

 

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                                                             ¨ Item 18

 

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                                                             x No

 

 

 

 
 

 

BANCO LATINOAMERICANO DE COMERCIO EXTERIOR, S.A.

 

TABLE OF CONTENTS

 

    Page
     
PART I   5
     
Item 1. Identity of Directors, Senior Management and Advisers 5
     
Item 2. Offer Statistics and Expected Timetable 5
     
Item 3. Key Information 5
A. Selected Financial Data 5
B. Capitalization and Indebtedness 7
C. Reasons for the Offer and Use of Proceeds 7
D. Risk Factors 7
     
Item 4. Information on the Company 13
A. History and Development of the Company 13
B. Business Overview 14
C. Organizational Structure 33
D. Property, Plant and Equipment 34
     
Item 4A. Unresolved Staff Comments 34
     
Item 5. Operating and Financial Review and Prospects 34
A. Operating Results 34
B. Liquidity and Capital Resources 58
C. Research and Development, Patents and Licenses, etc. 68
D. Trend Information 68
E. Off-Balance Sheet Arrangements 70
F. Tabular Disclosure of Contractual Obligations 70
     
Item 6. Directors, Executive Officers and Employees 71
A. Directors and Executive Officers 71
B. Compensation 76
C. Board Practices 81
D. Employees 86
E. Share Ownership 86
     
Item 7. Major Stockholders and Related Party Transactions 86
A. Major Stockholders 86
B. Related Party Transactions 88
C. Interests of Experts and Counsel 89
     
Item 8. Financial Information 89
A. Consolidated Statements and Other Financial Information 89
B. Significant Changes 90
     
Item 9. The Offer and Listing 91
A. Offer and Listing Details 91
B. Plan of Distribution 91
C. Markets 91
D. Selling Shareholders 91
E. Dilution 91

 

 
 

 

F. Expenses of the Issue 91
       
Item 10. Additional Information 92
A. Share Capital 92
B. Memorandum and Articles of Association 92
C. Material Contracts 94
D. Exchange Controls 94
E. Taxation 94
F. Dividends and Paying Agents 99
G. Statement by Experts 99
H. Documents on Display 99
I. Subsidiary Information 99
       
Item 11. Quantitative and Qualitative Disclosure About Market Risk 100
       
Item 12. Description of Securities Other than Equity Securities 105
       
PART II   105
       
Item 13. Defaults, Dividend Arrearages and Delinquencies 105
       
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds 105
       
Item 15. Controls and Procedures 105
       
Item 16. [Reserved] 108
Item 16A. Audit and Compliance Committee Financial Expert 108
Item 16B. Code of Ethics 108
Item 16C. Principal Accountant Fees and Services 108
Item 16D. Exemptions from the Listing Standards for Audit Committees 109
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 109
Item 16F. Change in Registrant’s Certifying Accountant 109
Item 16G. Corporate Governance 109
Item 16H. Mine Safety Disclosure 109
       
PART III   110
       
Item 17. Financial Statements 110
       
Item 18. Financial Statements 110
       
Item 19. Exhibits 111

 

2
 

 

In this Annual Report on Form 20-F, or this Annual Report, references to the “Bank” or “Bladex” are to Banco Latinoamericano de Comercio Exterior, S.A., a specialized multinational bank incorporated under the laws of the Republic of Panama (“Panama”), and its consolidated subsidiaries. References to “Bladex Head Office” are to Banco Latinoamericano de Comercio Exterior, S.A. in its individual capacity. References to “U.S. dollars” or “$” are to United States (“U.S.”), dollars. References to the “Region” are to Latin America and the Caribbean. The Bank accepts deposits and raises funds principally in U.S. dollars, grants loans mostly in U.S. dollars and publishes its consolidated financial statements in U.S. dollars. The numbers and percentages set forth in this Annual Report have been rounded and, accordingly, may not total exactly.

 

Upon written or oral request, the Bank will provide without charge to each person to whom this Annual Report is delivered, a copy of any or all of the documents listed as exhibits to this Annual Report (other than exhibits to those documents, unless the exhibits are specifically incorporated by reference in the documents). Written requests for copies should be directed to the attention of Christopher Schech, Chief Financial Officer, Bladex, as follows: (1) if by regular mail, to P.O. Box 0819-08730, Panama City, Republic of Panama, and (2) if by courier, to Torre V, Business Park, Avenida La Rotonda, Urb. Costa del Este, Panama City, Republic of Panama. Telephone requests may be directed to Mr. Schech at +507 210-8630. Written requests may also be sent via e-mail to cschech@bladex.com.

 

Forward-Looking Statements

 

In addition to historical information, this Annual Report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements may appear throughout this Annual Report. The Bank uses words such as “believe,” “intend,” “expect,” “anticipate,” “plan,” “may,” “will,” “should,” “estimate,” “potential,” “project” and similar expressions to identify forward-looking statements. Such statements include, among others, those concerning the Bank’s expected financial performance and strategic and operational plans, as well as all assumptions, expectations, predictions, intentions or beliefs about future events. Forward-looking statements involve risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from these forward-looking statements include the risks described in the section titled “Risk Factors.” Forward-looking statements include statements regarding:

 

·the growth of the Bank’s credit portfolio, including its trade finance portfolio;
·the Bank’s ability to increase the number of its clients;
·the Bank’s ability to maintain its investment-grade credit ratings and preferred creditor status;
·the effects of changing interest rates, inflation, exchange rates and the macroeconomic environment in the Region on the Bank’s financial condition;
·the execution of the Bank’s strategies and initiatives, including its revenue diversification strategy;
·anticipated operating income and return on equity in future periods;
·the Bank’s level of capitalization and debt;
·the implied volatility of the Bank’s Treasury revenues;
·levels of defaults by borrowers and the adequacy of the Bank’s allowance and provisions for credit losses;
·the availability and mix of future sources of funding for the Bank’s lending operations;
·the adequacy of the Bank’s sources of liquidity to cover large deposit withdrawals;
·management’s expectations and estimates concerning the Bank’s future financial performance, financing, plans and programs, and the effects of competition;
·existing and future governmental banking and tax regulations, including Basel II and Basel III capital and leverage requirements and Basel Committee on Banking Supervision liquidity requirements as adopted in the countries in which the Bank does business, and the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) on the Bank’s business, business practices, and costs of operation as a foreign bank with offices in the United States of America (“United States” or “USA”);
·credit and other risks of lending and investment activities; and

 

3
 

 

·the Bank’s ability to sustain or improve its operating performance.

 

In addition, the statements included under the headings “Item 4.B. Business Overview—Strategies for 2015 and Subsequent Years” and “Item 5.D. Trend Information” are forward-looking statements. Given the risks and uncertainties surrounding forward-looking statements, undue reliance should not be placed on these statements. Many of these factors are beyond the Bank’s ability to control or predict. The Bank’s forward-looking statements speak only as of the date of this Annual Report. Other than as required by law, the Bank undertakes no obligation to update or revise forward-looking statements, whether as a result of new information, future events, or otherwise.

 

4
 

 

PART I

 

Item 1.Identity of Directors, Senior Management and Advisers

 

Not required in this Annual Report.

 

Item 2.Offer Statistics and Expected Timetable

 

Not required in this Annual Report.

 

Item 3.Key Information

 

A.Selected Financial Data

 

The following table presents selected consolidated financial data for the Bank. The financial data presented below are at and for the years ended December 31, 2014, 2013, 2012, 2011, and 2010, and are derived from the Bank’s consolidated financial statements for the years indicated, which were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and are stated in U.S. dollars. The consolidated financial statements for the years ended December 31, 2014, 2013, 2012, 2011, and 2010 were audited by the independent registered public accounting firm Deloitte, Inc. (“Deloitte”). The consolidated financial statements of the Bank for each of the three years in the period ended December 31, 2014 (the “Consolidated Financial Statements”) are included in this Annual Report, together with the report of the independent registered public accounting firm Deloitte. The information below is qualified in its entirety by the detailed information included elsewhere herein and should be read in conjunction with Item 4, “Information on the Company,” Item 5, “Operating and Financial Review and Prospects,” and the Consolidated Financial Statements and notes thereto included in this Annual Report.

 

Consolidated Selected Financial Information

 

   As of and for the Year Ended December 31, 
   2014   2013   2012   2011   2010 
   (in $ thousands, except per share data and ratios) 
Income Statement Data:                         
Interest income  $212,730   $205,303   $192,437   $157,427    119,478 
Interest expense   71,599    82,211    87,460    54,717    44,975 
Net interest income   141,131    123,092    104,977    102,710    74,503 
Reversal of provision (provision) for loan losses (1)   (6,895)   1,598    8,343    (8,841)   (9,091)
Net interest income, after reversal of provision (provision) for loan losses   134,236    124,690    113,320    93,869    65,412 
Reversal of provision (provision) for losses on off-balance sheet credit risk (1)   (1,627)   (381)   4,046    4,448    13,926 
Fees and commissions, net   17,502    13,669    10,021    10,619    9,811 
Derivative financial instruments and hedging   106    353    71    2,923    (1,446)
Recoveries, net of impairment of assets   7    108    0    (57)   233 
Net gain (loss) from investment fund trading   3,409    (6,702)   7,011    20,314    (7,995)
Net gain (loss) from trading securities   (393)   3,221    11,234    (6,494)   (3,603)
Net gain on sale of securities available-for-sale   1,871    1,522    6,030    3,413    2,346 
Net gain on sale of loans   2,546    588    1,147    64    201 
Net gain (loss) on foreign currency exchange   766    (3,834)   (10,525)   4,269    1,870 
Gain on sale of premises and equipment   0    0    5,626    0    0 
Other income, net   1,744    1,644    1,839    995    1,081 
Net other income   25,931    10,188    36,500    40,494    16,422 
Total operating expenses   53,702    54,306    55,814    50,087    42,218 
Net income from continuing operations   106,465    80,572    94,006    84,276    39,615 
Net income (loss) from discontinued operations (2)   0    (4)   (681)   (420)   206 
Net income   106,465    80,568    93,325    83,856    39,821 
Net income (loss) attributable to the redeemable noncontrolling interest   (475)   (4,185)   293    676    (2,423)
Net income attributable to Bladex stockholders  $106,940   $84,753   $93,032   $83,180   $42,244 
Balance Sheet Data:                         
Interest-bearing deposits in banks   775,530    837,557    700,312    830,670    431,144 

 

5
 

 

Consolidated Selected Financial Information

 

   As of and for the Year Ended December 31, 
   2014   2013   2012   2011   2010 
   (in $ thousands, except per share data and ratios) 
Trading assets   0    0    5,265    20,436    50,412 
Securities available-for-sale   338,973    334,368    183,017    416,300    353,250 
Securities held-to-maturity   54,180    33,759    34,113    26,536    33,181 
Investment funds   57,574    118,661    105,888    120,425    167,291 
Loans   6,686,244    6,148,298    5,715,556    4,959,573    4,064,332 
Allowance for loan losses   79,675    72,751    72,976    88,547    78,615 
Total assets   8,025,272    7,471,312    6,756,396    6,360,032    5,100,087 
Total deposits   2,506,694    2,361,336    2,317,260    2,303,506    1,820,925 
Trading liabilities   52    72    32,304    5,584    3,938 
Securities sold under repurchase agreements and short-term borrowings and debt   2,993,056    2,991,527    1,607,397    1,700,468    1,360,327 
Long-term borrowings and debt   1,405,519    1,153,871    1,905,540    1,487,548    1,075,140 
Total liabilities   7,114,209    6,563,461    5,926,537    5,595,203    4,384,087 
Common stock   279,980    279,980    279,980    279,980    279,980 
Total stockholders’ equity   911,063    857,952    826,475    759,282    697,050 
Weighted average basic shares   38,693    38,406    37,824    36,969    36,647 
Weighted average diluted shares   38,839    38,533    37,938    37,145    36,814 
Basic shares period end   38,777    38,573    38,145    37,132    36,711 
Per Common Share Data:                         
Basic earnings per share from continuing operations   2.76    2.21    2.48    2.26    1.15 
Basic earnings per share   2.76    2.21    2.46    2.25    1.15 
Diluted earnings per share   2.75    2.20    2.45    2.24    1.15 
Book value per share (period end)   23.49    22.24    21.67    20.45    18.99 
Regular cash dividends declared per share   1.435    1.25    1.10    0.85    0.67 
Special cash dividends declared per share   0.00    0.00    0.00    0.00    0.00 
Selected Financial Ratios:                         
Performance Ratios:                         
Return on average assets (3)   1.41%   1.20%   1.51%   1.46%   0.97%
Return on average stockholders’ equity (3)   11.95%   10.02%   11.57%   11.40%   6.21%
Net interest margin (4)   1.87%   1.75%   1.70%   1.81%   1.70%
Net interest spread (4)   1.71%   1.55%   1.44%   1.62%   1.43%
Total operating expenses to total average assets (3)   0.71%   0.77%   0.90%   0.88%   0.97%
Regular cash dividend payout ratio   51.92%   56.64%   44.72%   37.78%   58.12%
Special cash dividend payout ratio   0.00%   0.00%   0.00%   0.00%   0.00%
Liquidity Ratios:                         
Liquid assets (5) / total assets   9.24%   11.12%   10.21%   12.36%   8.25%
Liquid assets (5) / total deposits   29.57%   35.18%   29.78%   34.11%   23.10%
Asset Quality Ratios:                         
Non-accrual loans to total loans (6)   0.06%   0.05%   0.00%   0.65%   0.71%
Impaired loans to total loans (6)   0.06%   0.05%   0.00%   0.65%   0.71%
Charged-off loans to total loans, net of unearned income and deferred fees   0.00%   0.00%   0.13%   0.02%   0.13%
Allowance for loan losses to total loans, net of unearned income and deferred fees   1.19%   1.18%   1.28%   1.79%   1.94%
Allowance for losses on off-balance sheet credit risk to total contingencies   1.37%   1.08%   2.05%   2.45%   3.50%
Capital Ratios:                         
Stockholders’ equity to total assets   11.35%   11.48%   12.23%   11.94%   13.67%
Average stockholders’ equity to total average assets (3)   11.81%   12.01%   13.03%   12.83%   15.62%
Leverage ratio (7)   8.8x   8.7x   8.2x   8.4x   7.3x
Tier 1 capital to risk-weighted assets (8)   15.3%   15.9%   17.9%   18.6%   20.5%
Total capital to risk-weighted assets (9)   16.5%   17.1%   19.2%   19.9%   21.8%
Risk-weighted assets (8)  $6,027,352   $5,472,589   $4,609,221   $4,090,333   $3,416,782 

 

(1)For information regarding reversal of provision (provision) for credit losses, see Item 5, “Operating and Financial Review and Prospects—Operating Results.”
(2)On April 2, 2013 the Bank reached a final agreement to sell its Asset Management Unit to Alpha4X Asset Management, LLC and its related companies (“Alpha4X”). The Bank applied discontinued operations accounting to the operations of the Asset Management Unit in accordance with ASC Topic 205-20 – Presentation of Financial Statements – Discontinued Operations. On April 2014, the Bank redeemed $13.9 million of its investment in the Feeder (defined below), a variable interest entity, that had been consolidated until March 31, 2014, following the requirements of ASC 810-10- Consolidation, prior to the implementation of FAS 167 (FIN 46 (R) (ASU 2009-17 – Consolidation of Variable Interest Entities). After this redemption, the Bank ceased to be the primary beneficiary of that variable interest entity; and therefore ceased to consolidate its investment in the Feeder. See Item 4.B, “Business Overview-Overview”, for a discussion of the Asset Management Unit, and Item 18, “Financial Statements” Notes 3 and 6 to the Audited Financial Statements.
(3)Average assets and average stockholders’ equity are calculated on the basis of unaudited daily average balances.
(4)For information regarding calculation of the net interest margin and the net interest spread, see Item 5.A, “Operating and Financial Review and Prospects—Operating Results—Net Interest Income and Margins.”
(5)Liquid assets consist of investment-grade “A” securities, cash and due from banks, and interest-bearing deposits in banks, excluding margin calls and pledged regulatory deposits. See Item 5.B. “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Liquidity” and Item 18, “Financial Statements” Note 4 to the Audited Financial Statements.

 

6
 

 

(6)As of December 31, 2014 and 2013 the Bank had $4 million and $3 million in non-accrual status, respectively, all of which corresponded to impaired loans. As of December 31, 2012, the Bank did not have any loans in non-accrual status. As of December 31, 2011 and 2010 non-accrual loans amounted $32 million and $29 million, respectively, all of which corresponded to impaired loans. Impairment factors considered by the Bank’s management include collection status, collateral value, the probability of collecting scheduled principal and interest payments when due, and economic conditions in the borrower’s country of residence. Total loans is presented net of unearned income and deferred loan fees.
(7)Leverage ratio is the ratio of total assets to stockholders’ equity.
(8)Tier 1 capital is calculated according to Basel I capital adequacy guidelines, and is equivalent to stockholders’ equity, excluding the Other Comprehensive Income account effect of the available-for-sale portfolio. The Tier 1 capital ratio is calculated as a percentage of risk-weighted assets. Risk-weighted assets are, in turn, also calculated based on Basel I capital adequacy guidelines. The Bank’s Tier 1 capital ratio according to Basel III, which updated in 2013 the original guidance on a number of regulatory reforms to the regulatory capital framework in order to strengthen minimum capital requirements, was 15.6% as of December 31, 2014.
(9)Total capital refers to Tier 1 capital plus Tier 2 capital, based on Basel I capital adequacy guidelines. Total capital refers to the total capital ratio as a percentage of risk-weighted assets.

 

B.Capitalization and Indebtedness

 

Not required in this Annual Report.

 

C.Reasons for the Offer and Use of Proceeds

 

Not required in this Annual Report.

 

D.Risk Factors

 

Risks Relating to the Bank’s Business

 

Bladex faces liquidity risk, and its failure to adequately manage this risk could result in a liquidity shortage, which could adversely affect its financial condition, results of operations and cash flows.

 

Bladex, like all financial institutions, faces liquidity risk, being the risk of not being able to maintain adequate cash flow to repay its deposits and borrowings and fund its credit portfolio on a timely basis. Failure to adequately manage its liquidity risk could produce an available funds shortage as a result of which the Bank would not be able to repay its obligations as they become due.

 

As of December 31, 2014, 36% of the Bank’s funding represents short-term borrowings and debt from international private banks, which compete with the Bank in its credit extension activity. If these international banks cease to provide funding to the Bank, the Bank would have to seek funding from other sources, which may not be available, or if available, may be at a higher cost.

 

Financial turmoil in the international markets could negatively impact liquidity in the financial markets, reducing the Bank’s access to credit or increasing its cost of funding, which could lead to tighter lending standards. An example of this situation is the liquidity constraint experienced in the second half of 2007 in the international financial markets, which intensified during the third quarter of 2008, driven first by the subprime mortgage crisis in the United States and then followed by the credit crisis, and in the ongoing European sovereign debt crisis. The reoccurrence of such unfavorable market conditions could have a material adverse effect on the Bank’s liquidity.

 

As of December 31, 2014, approximately 75% of the Bank’s total deposits represented deposits from central and state-owned banks, and 16% of the Bank’s deposits represented deposits from private sector commercial banks and financial institutions.

 

As a U.S. dollar-based economy, Panama does not have a central bank, and there is no lender of last resort to the banking system in the country.

 

7
 

 

The credit ratings of Bladex are an important factor in maintaining the Bank’s liquidity. A reduction in the Bank’s credit rating could reduce the Bank’s access to debt markets or materially increase the cost of issuing debt, trigger additional collateral or funding requirements, and decrease the number of investors and counterparties willing or permitted, contractually or otherwise, to do business with or lend to the Bank. This in turn could reduce the Bank’s liquidity and negatively impact its operating results and financial position.

 

The Bank’s allowances for credit losses could be inadequate to cover credit losses related to its loans and contingencies.

 

The Bank determines the appropriate level of allowances for credit losses based on a process that estimates the probable loss inherent in its portfolio, which is the result of a statistical analysis supported by the Bank’s historical portfolio performance, external sources, and the judgment of the Bank’s management. The latter reflects assumptions and estimates made in the context of changing political and economic conditions in the Region. The Bank’s allowances could be inadequate to cover losses in its Commercial Portfolio due to exposure concentration or deterioration in certain sectors or countries, which in turn could have a material adverse effect on the Bank’s financial condition, results of operations and cash flows. As stated above, the Bank’s “Commercial Portfolio” includes the loan portfolio, selected deposits placed, customers’ liabilities under acceptances, and contingencies (including confirmed and stand-by letters of credit, guarantees covering commercial risk, and credit commitments).

 

The Bank’s businesses are subject to market risk.

 

Market risk generally represents the risk that values of assets and liabilities or revenues will be adversely affected by changes in market conditions. Market risk is inherent in the financial instruments associated with many of the Bank’s operations and activities, including loans, deposits, investment and trading securities, short- and long-term borrowings and debt, derivatives and trading positions. Among many other market conditions that may shift from time to time are fluctuations in interest rates and currency exchange rates, changes in the implied volatility of interest rates and changes in securities prices, due to changes in either market perception or actual credit quality of either the relevant issuer or its country of origin. Accordingly, depending on the instruments or activities impacted, market risks can have wide ranging, complex adverse effects on the Bank’s financial condition, results of operations, cash flows and business.

 

See Item 11, “Quantitative and Qualitative Disclosures About Market Risk.”

 

The Bank faces interest rate risk that is caused by the mismatch in maturities of interest-earning assets and interest-bearing liabilities.  If not properly managed, this mismatch can reduce net interest income as interest rates fluctuate.

 

As a bank, Bladex faces interest rate risk because interest-bearing liabilities generally reprice at a different pace than interest-earning assets. Bladex’s exposure to instruments whose values vary with the level or volatility of interest rates contributes to its interest rate risk. Failure to adequately manage eventual mismatches may reduce the Bank’s net interest income during periods of fluctuating interest rates.

 

The Bank’s credit portfolio may decrease or may not continue to grow at the present rate or at a similar rate. Additionally, growth in the Bank’s credit portfolio may expose the Bank to an increase in allowance for loan losses.

 

It is difficult to predict whether the Bank’s credit portfolio, including the Bank’s foreign trade portfolio, will continue to grow in the future at historical rates. A reversal in the growth rate of the Region’s economy and trade volumes could adversely affect the growth rate of the Bank’s credit portfolio. Additionally, the future expansion of Bladex’s credit portfolio may expose the Bank to higher levels of potential or actual losses and require an increase in credit risk reserves, which could negatively impact the Bank’s operating results and financial position. Non-performing or low credit quality loans can negatively impact the Bank’s results of operations. The Bank may not be able to effectively control the level of the impaired loans in its total loan portfolio. In particular, the amount of its reported non-performing and/or non-accruing loans may increase in the future as a result of growth in its loan portfolio, including loan portfolios that the Bank may acquire in the future, or factors beyond the Bank’s control, such as the impact of economies trends and political events affecting the Region, events affecting certain industries or events affecting financial markets and global economies.

 

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Increased competition and banking industry consolidation could limit the Bank’s ability to grow and may adversely affect results of operations.

 

Most of the competition the Bank faces in the trade finance business comes from domestic and international banks, the majority of which are European and North American institutions. Many of these banks have substantially greater resources than the Bank and enjoy access to less expensive funding than the Bank does. It is difficult to predict how increased competition will affect the Bank’s growth prospects and results of operations.

 

Over time, there has been substantial consolidation among companies in the financial services industry, and this trend continued accelerating in recent years as the credit crisis led to numerous mergers and asset acquisitions among industry participants and in certain cases reorganization, restructuring, or even bankruptcy. Merger activity in the financial services industry has produced companies that are capable of offering a wide array of financial products and services at competitive prices. In addition, whenever economic conditions and risk perception improve in the Region, competition from commercial banks, the securities markets and other new participants generally increases.

 

Globalization of the capital markets and financial services industries exposes the Bank to further competition.  To the extent the Bank expands into new business areas and new geographic regions, the Bank may face competitors with more experience and more established relationships with clients, regulators and industry participants in the relevant market, which could adversely affect the Bank’s ability to compete. The Bank’s ability to grow its business and therefore, its earnings, is affected by these competitive pressures.

 

The Bank’s businesses rely heavily on data collection, management and processing, and information systems, the failure of which could have a material adverse effect on the Bank, including the effectiveness of the Bank’s risk management and internal control systems.

 

All of the Bank’s principal businesses are highly dependent on the ability to timely collect and process a large amount of financial and other information across numerous and diverse markets, at a time when transaction processes have become increasingly complex with increasing volume. The proper functioning of financial control, accounting or other data collection and processing systems is critical to the Bank’s businesses and to its ability to compete effectively. A partial or complete failure of any of these primary systems could materially and adversely affect the Bank’s decision-making process, the Bank’s risk management and internal control systems, as well as the Bank’s ability to respond on a timely basis to changing market conditions. If the Bank cannot maintain an effective data collection, management and processing system, it may be materially and adversely affected.

 

The Bank is also dependent on information systems to operate its website, process transactions, respond to customer inquiries on a timely basis and maintain cost-efficient operations. The Bank may experience operational problems with its information systems as a result of system failures (including failure to update systems), viruses, computer “hackers” or other causes. The Bank’s ability to remain competitive depends in part on its ability to upgrade its information technology on a timely and cost-effective basis. The Bank continually makes investments and improvements in its information technology infrastructure in order to remain competitive. In the future, the Bank may not be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of its information technology infrastructure. Any failure to effectively improve or upgrade its information technology infrastructure and management information systems in a timely manner could have a material adverse effect on the Bank.

 

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Operational problems or errors can have a material adverse impact on the Bank’s business, financial condition, results of operations and cash flows.

 

Bladex, like all financial institutions, is exposed to operational risks, including the risk of fraud by employees and outsiders, failure to obtain proper internal authorizations, failure to properly document transactions, equipment failures, and errors by employees, and any failure, interruption or breach in the security or operation of the Bank’s information technology systems could result in interruptions in such activities. Operational problems or errors may occur, and their occurrence may have a material adverse impact on the Bank’s business, financial condition, results of operations and cash flows.

 

Any delays or failure to implement business initiatives that the Bank may undertake could prevent the Bank from realizing the anticipated revenues and benefits of the initiatives.

 

Part of the Bank’s strategy is to diversify income sources through business initiatives, including targeting new clients and developing new products and services. These initiatives may not be fully implemented within the time frame the Bank expects, or at all. In addition, even if such initiatives are fully implemented, they may not generate revenues as expected. Any delays in implementing these business initiatives could prevent the Bank from realizing the anticipated benefits of the initiatives, which could adversely affect the Bank’s business, results of operations and growth prospects.

 

Any failure to remain in compliance with applicable banking laws or other applicable regulations in the jurisdictions in which the Bank operates could harm its reputation and/or cause it to become subject to fines, sanctions or legal enforcement, which could have an adverse effect on the Bank’s business, financial condition and results of operations.

 

Bladex has adopted various policies and procedures to ensure compliance with applicable laws, including internal controls and “know-your-customer” procedures aimed at preventing money laundering and terrorism financing; however, participation of multiple parties in any given trade finance transaction can make the process of due diligence difficult. Further, because trade finance can be more document-based than other banking activities, it is susceptible to documentary fraud, which can be linked to money laundering, terrorism financing, illicit activities and/or the circumvention of sanctions or other restrictions (such as export prohibitions, licensing requirements, or other trade controls). While the Bank is alert to high-risk transactions, it is also aware that efforts, such as forgery, double invoicing, partial shipments of goods and use of fictitious goods, may be used to evade applicable laws and regulations. If the Bank’s policies and procedures are ineffective in preventing third parties from using it as a conduit for money laundering or terrorism financing without its knowledge, the Bank’s reputation could suffer and/or it could become subject to fines, sanctions or legal action (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with the Bank), which could have an adverse effect on the Bank’s business, financial condition and results of operations. In addition, amendments to applicable laws and regulations in Panama and other countries in which the Bank operates could impose additional compliance burdens on the Bank.

 

Panamanian laws and regulations, including future government restrictions on interest rates or changes in reserves and capitalization requirements, may have a material adverse effect on the Bank.

 

The Bank is subject to extensive laws and regulations regarding the Bank organization, operations, lending and funding activities, capitalization and other matters. In 2010, the Basel Committee on Banking Regulations and Supervisory Practices (the “Basel Committee”) proposed comprehensive changes to the liquidity coverage ratio and liquidity risk monitoring tools, known as Basel III. On December 16, 2010 and January 13, 2011, the Basel Committee issued its original guidance (which was updated in 2013) on a number of regulatory reforms to the regulatory capital framework in order to strengthen minimum capital requirements, including the phasing out of innovative Tier 1 and 2 Capital instruments with incentive-based redemption clauses and implementing a leverage ratio on institutions in addition to current risk-based regulatory requirements. The Superintendency of Banks of Panama (“Superintendencia de Bancos de Panamá” or the “Superintendency”) is authorized to increase the minimum capital requirement percentage in Panama in the event that generally accepted international capitalization standards (the standards set by the Basel Committee on Banking Supervision) become more stringent. Non-compliance with this legal lending limit could result in the assessment of administrative sanctions by the Superintendency for such violations, taking into consideration the magnitude of the offense and any prior occurrences, and the magnitude of damages and prejudice caused to third parties. The Bank has adopted Basel III criteria to determine capitalization levels, and determined the Bank’s Tier 1 Basel III capital ratio to be 15.6% as of December 31, 2014.

 

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Legislation regarding the financial services industry may subject the Bank to significant and extensive regulation, which may have an impact on the Bank’s operations.

 

On July 21, 2010, the Dodd-Frank Act was signed into law in the United States. The Dodd-Frank Act is intended primarily to overhaul the financial regulatory framework in the United States following the global financial crisis and may impact substantially all financial institutions including the Bank. The Dodd-Frank Act, among other things, imposes higher prudential standards, including more stringent risk-based capital, leverage, liquidity and risk-management requirements, establishes a Bureau of Consumer Financial Protection, establishes a systemic risk regulator, consolidates certain federal bank regulators, imposes additional requirements related to corporate governance and executive compensation and requires various U.S. federal agencies to adopt a broad range of new implementing rules and regulations, for which they are given broad discretion. The Bank is closely monitoring this rulemaking process, and analyzing, the impact of new rules on the Bank’s business.

 

On December 10, 2013, pursuant to the Dodd-Frank Act, federal banking and securities regulators issued final rules to implement Section 619 of the Dodd-Frank Act (the Volcker Rule). Generally, subject to a transition period and certain exceptions, the Volcker Rule restricts banks from: (i) short-term proprietary trading as principal in securities and other financial instruments, and (ii) sponsoring or acquiring or retaining an ownership interest in private equity and hedge funds. After the transition period, the Volcker Rule prohibitions and restrictions will apply to banking entities, including the Bank, unless an exception applies. Based on analysis of applicable regulations, the Bank has determined that its current investment activities are not subject to the Volcker Rule restrictions.

 

The Dodd-Frank Act also will have an impact on the Bladex’s derivatives activities if it enters into swaps or security-based swaps with U.S. persons. In particular, Bladex may be subject to mandatory trade execution, mandatory clearing and mandatory posting of margin in connection with its swaps and security-based swaps with U.S. persons.

 

On March 18, 2010, the Hiring Incentives to Restore Employment Act of 2010, Pub. L. 111-147 (H.R. 2847), added sections 1471 through 1474 (collectively, FATCA) to Subtitle A of the Internal Revenue Code of 1986, as amended (the Code). FATCA requires withholding agents, including foreign financial institutions (FFIs), to withhold thirty percent (30%) of certain payments to a FFI unless the FFI has entered into an agreement with the Internal Revenue Service (IRS) to, among other things, report certain information with respect to U.S. accounts. FATCA also imposes on withholding agents certain withholding, documentation, and reporting requirements with respect to certain payments made to certain non-financial foreign entities.

 

As of May 1, 2014, Panama has been treated by the U.S. Department of the Treasury as has having a Model 1 intergovernmental agreement ("Panama IGA") in effect with the U.S. for purposes of FATCA. Under the Panama IGA, most Panamanian financial institutions are required to register with the IRS and comply with the requirements of the Panama IGA, including with respect to due diligence, reporting, and withholding.

 

To this end, the Bank registered with the IRS on April 23, 2014 as a Registered Deemed-Compliant Financial Institution (including a Reporting Financial Institution under a Model 1 IGA) and is required under the Panama IGA to identify U.S. persons and report certain information required by the IRS, through the tax authorities in Panama.

 

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Risks Relating to the Region

 

The Bank’s credit portfolio is concentrated in the Region. The Bank also faces borrower concentration. Adverse economic changes in the Region or in the condition of the Bank’s largest borrowers could adversely affect the Bank’s growth, asset quality, prospects, profitability, financial condition and financial results.

 

The Bank’s credit activities are concentrated in the Region, which is a reflection of the Bank’s mission and strategy. Historically, economies of countries in the Region have occasionally experienced significant volatility characterized, in some cases, by political uncertainty, slow growth or recessions, declining investments, government and private sector debt defaults and restructurings, and significant inflation and/or currency devaluation.  Global economic changes, including fluctuations in oil prices, commodities prices, U.S. dollar interest rates and the U.S. dollar exchange rate, and slower economic growth in industrialized countries, could have a significant adverse effect on the economic condition of countries in the Region, including Panama and the other countries where the Bank operates. In turn, adverse changes affecting the economies of countries in the Region could have a significant adverse impact on the quality of the Bank’s credit portfolio, including increased loan loss provisions, debt restructuring, and loan losses. As a result, this could also have an adverse impact on the Bank’s asset growth, asset quality, prospects, profitability and financial condition.

 

The Bank’s credit activities are concentrated in a number of countries. Adverse changes affecting the economies in one or more of those countries could have an adverse impact on the Bank’s credit portfolio and, as a result, its financial condition, growth, prospects, results of operations and financial condition. As of December 31, 2014, 66% of the Bank’s credit portfolio was outstanding to borrowers in the following five countries: Brazil ($2,067 million, or 27%), Mexico ($1,030 million, or 14%), Colombia ($869 million, or 12%), Peru ($632 million, or 8%), and Panama ($387 million, or 5%).

 

In addition, as of December 31, 2014, of the Bank’s total credit portfolio balances, 7% were to five borrowers in Brazil, 5% were to five borrowers in Colombia, 4% were to five borrowers in Mexico, 4% were to five borrowers in Peru, and 3% were to five borrowers in Panama. A significant deterioration of the financial or economic condition of any of these countries or borrowers could have an adverse impact on the Bank’s credit portfolio, requiring the Bank to create additional allowances for credit losses, or suffer credit losses with the effect being accentuated because of this concentration.

 

See Item 4.B. “Information on the Company—Business Overview—Developments During 2014”.

 

Local country foreign exchange controls or currency devaluation may harm the Bank’s borrowers’ ability to pay U.S. dollar-denominated obligations.

 

The Bank makes mostly U.S. dollar-denominated loans and investments.  As a result, the Bank faces the risk that local country foreign exchange controls will restrict the ability of the Bank’s borrowers, even if they are exporters, to acquire dollars to repay loans on a timely basis, and/or that significant currency devaluation might occur, which could increase the cost, in local currency terms, to the Bank’s borrowers of acquiring dollars to repay loans.

 

Increased risk perception in countries in the Region where the Bank has large credit exposure could have an adverse impact on the Bank’s credit ratings, funding activities and funding costs.

 

Increased risk perception in any country in the Region where the Bank has large exposures could trigger downgrades to the Bank’s credit ratings.  A credit rating downgrade would likely increase the Bank’s funding costs, and reduce its deposit base and access to the debt capital markets.  In that case, the Bank’s ability to obtain the necessary funding to carry on its financing activities in the Region at meaningful levels could be affected in an important way.

 

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Item 4.Information on the Company

 

A.History and Development of the Company

 

The Bank, a corporation (sociedad anónima) organized under the laws of Panama and headquartered in Panama City, Panama, is a specialized multinational bank originally established by central banks of Latin American and Caribbean countries to promote trade finance in the Region.   

 

The Bank was established pursuant to a May 1975 proposal presented to the Assembly of Governors of Central Banks in the Region, which recommended the creation of a multinational organization to increase foreign trade financing capacity of the Region. The Bank was organized in 1977, incorporated in 1978 as a corporation pursuant to the laws of the Republic of Panama, and officially began operations on January 2, 1979. Panama was selected as the location of the Bank’s headquarters because of the country’s importance as a banking center in the Region, the benefits of a fully U.S. dollar-based economy, the absence of foreign exchange controls, its geographic location, and the quality of its communications facilities.  Under a contract-law signed in 1978 between the Republic of Panama and Bladex, the Bank was granted certain privileges by the Republic of Panama, including an exemption from payment of income taxes in Panama.

 

The Bank offers its services through its head office in Panama City, its agency in New York City (“the New York Agency”), its subsidiaries in Brazil and Mexico, and its representative offices in Buenos Aires, Argentina, Mexico City, D.F. and Monterrey, Mexico, Sao Paulo, Brazil, Lima, Peru and Bogotá, Colombia, as well as through a worldwide network of correspondent banks. The Bank’s international administrative office located in Miami, Florida (the “Florida Administrative Office”), ceased operations during the first quarter of 2015.

 

Bladex’s headquarters office is located at Torre V, Business Park, Avenida La Rotonda, Urb. Costa del Este, Panama City, Panama, and its telephone number is +507 210-8500. Bladex’s New York Agency is located at 370 Lexington Avenue, Suite 500, New York, NY 10017, and its telephone number is (212) 754-9191.

 

Bladex’s shares of Class E common stock are listed on the New York Stock Exchange Euronext (“NYSE”) under the symbol “BLX.”

  

The following is a description of the Bank’s subsidiaries:

 

·Bladex Holdings Inc. (“Bladex Holdings”) is a wholly owned subsidiary, incorporated under the laws of the State of Delaware, USA, on May 30, 2000. Bladex Holdings maintains ownership in two subsidiaries: Bladex Representação Ltda. and Bladex Investimentos Ltda.

 

oBladex Representação Ltda., incorporated under the laws of Brazil on January 7, 2000, acts as the Bank’s representative office in Brazil. Bladex Head Office owns 99.999% of Bladex Representação Ltda. and Bladex Holdings owns the remaining 0.001%.

 

oBladex Investimentos Ltda. was incorporated under the laws of Brazil on May 3, 2011. Bladex Head Office owns 99% of Bladex Investimentos Ltda. and Bladex Holdings owns the remaining 1%. Bladex Investimentos Ltda. has invested substantially all of its assets in an investment fund incorporated in Brazil (“the Brazilian Fund”), which is registered with the Brazilian Securities Commission, (Comissão de Valores Mobiliários (the “CVM”)). The Brazilian Fund is a non-consolidated variable interest entity (“VIE”). The objective of the Brazilian Fund is to achieve capital gains by dealing in the interest, currency, securities, commodities and debt markets, and by trading instruments available in the spot and derivative markets.

 

·Bladex Development Corp. (“Bladex Development”) was incorporated under the laws of the Republic of Panama on June 5, 2014.  Bladex Head Office owns 100% of Bladex Development.

 

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·BLX Soluciones, S.A. de C.V., SOFOM, E.N.R. (“BLX Solutions”) was incorporated under the laws of Mexico on June 13, 2014. Bladex Head Office owns 99.9% of BLX Solutions and Bladex Development owns the remaining 0.1%. BLX Solutions specializes in offering financial leasing and other products, such as loans and factoring.

 

Bladex Holdings had previously exercised control over Bladex Asset Management Inc. (“Bladex Asset Management”), incorporated on May 24, 2006 under the laws of the State of Delaware, USA, which, until its dissolution on September 18, 2013, provided investment management services to Bladex Offshore Feeder Fund and Bladex Capital Growth Fund, both incorporated under the laws of the Cayman Islands.

 

On April 2, 2013, Bladex reached a definitive agreement to sell its Asset Management Unit. The Asset Management Unit was sold to Alpha4X Asset Management, LLC (“Alpha4X”), a company majority-owned by former executives of the Asset Management Unit. The Bank has a commitment to remain an investor in these funds, net of annual contractual redemptions, until March 31, 2016. As part of the agreement, a subsidiary of XL Group plc will also become an anchor investor in the Bladex Capital Growth Fund under Alpha4X’s management. In connection with the sale: (i) Bladex Offshore Feeder Fund became Alpha4X Feeder Fund (the “Feeder”), (ii) Bladex Capital Growth Fund became Alpha4X Capital Growth Fund (the “Fund”), and (iii) Bladex Latam Fundo de Investimento Multimercado became Alpha4X Latam Fundo de Investimento Multimercado.

 

The sale agreement included, among other terms:

 

·the transfer of the Bank's participation in BLX Brazil Ltd., incorporated under the laws of the Cayman Islands on October 5, 2010, and Bladex Asset Management Brazil – Gestora de Recursos Ltda. (“BAM Brazil”), incorporated under the laws of Brazil on January 6, 2011;
·the sale of “Class C” shares of the Fund owned by BCG PA LLC (“BCG”), a company incorporated under the laws of the State of Delaware, USA and dissolved on August 14, 2013; and
·the termination of the investment advisory contracts among Bladex Asset Management, the Feeder and the Fund.

 

Bladex Head Office has a remaining participation of 49.61% in the Feeder, that invests substantially all its assets in the Fund. The Feeder is a VIE that was included in the consolidated financial statements of the Bank until March 31, 2014. Due to its drop in participation to less than 50%, the Bank ceased to be the primary beneficiary of the Feeder, and therefore ceased to consolidate its investment in the Feeder in its consolidated financial statements. Both the Feeder and the Fund are registered with the Cayman Island Monetary Authority (“CIMA”), under the Mutual Funds Law of the Cayman Islands. The objective of these Funds is to achieve capital appreciation by investing in Latin American debt securities, stock indexes, currencies, and trading derivative instruments.

 

The Bank’s financial statements are prepared in accordance with U.S. GAAP.

 

See Item 18. “Financial Statements,” notes 1, 2(a), 3 and 6.

 

B.Business Overview

 

Overview

 

The Bank’s mission is to provide financial solutions of excellence to financial institutions, companies and investors doing business in Latin America, supporting trade and regional integration across the Region. The Bank’s lending and investing activities are funded by interbank deposits, primarily from central banks and financial institutions in the Region, by borrowings from international commercial banks, and by sales of the Bank’s debt securities to financial institutions and investors in Asia, Europe, North America and the Region. The Bank does not provide retail banking services to the general public, such as retail savings accounts or checking accounts, and does not take retail deposits.

 

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Bladex participates in the financial and capital markets throughout the Region, through two business segments.

 

First, the Commercial Division is responsible for the Bank’s core business of financial intermediation and fee generation activities relating to the Commercial Portfolio. The Commercial Division’s portfolio includes the loan portfolio (bilateral and syndicated trade and non-trade finance lending, short and medium term loans), selected deposits placed, customers’ liabilities under acceptances (“acceptances”), and contingencies (including confirmed and stand-by letters of credit, guarantees covering commercial risk and credit commitments). The majority of the Bank’s loans are extended in connection with specifically identified foreign trade transactions. Through its revenue diversification strategy, the Bank’s Commercial Division has introduced a broader range of products, services and solutions associated with foreign trade, including co-financing arrangements, underwriting of syndicated credit facilities, structured trade financing (in the form of factoring and vendor financing), and financial leasing.

 

Second, the Treasury Division is responsible for the Bank’s funding and liquidity management, along with the management of its activities in investment securities, which comprise trading assets, securities available-for-sale, and securities held-to-maturity, as well as the management of the Bank’s interest rate, liquidity, price and currency risks. Following the sale of the Bladex Asset Management unit in April 2013, the Treasury Division also comprises the Bank’s remaining participation in the investment funds.

 

Historically, trade finance has been afforded favorable treatment under Latin American debt restructurings. This has been, in part, due to the perceived importance that governments and other borrowers in the Region have attributed to maintaining access to trade finance. The Bank believes that, in the past, the combination of its focus on trade finance and the composition of its Class A shareholders has been instrumental in obtaining some exceptions on U.S. dollar convertibility and transfer limitations imposed on the servicing of external obligations, or preferred creditor status. Although the Bank maintains its focus both on trade finance and its Class A shareholders, it cannot guarantee that such exceptions will be granted in all future debt restructurings.

 

As of December 31, 2014, the Bank had 64 employees, or 33% of its total employees, across its offices responsible for marketing the Bank’s financial products and services to existing and potential customers.

 

Developments During 2014

 

2014 was a challenging year for the global economy, which experienced overall heightened volatility resulting from a gradual decrease in the monetary stimulus of the U.S. Federal Reserve. World GDP growth in 2014 was similar to that of 2013, but growth performance differed among larger economies. The U.S. economy experienced an upturn, as did the eurozone. However, unlike the U.S. and parts of Europe, other larger global economies, such as Japan and China experienced a lower rate of growth in 2014.

 

The moderation of growth in the Chinese economy influenced other emerging economies, given the significance of Chinese demand in global commodity markets. The sustainability of growth in China continues to be of concern due to the negative impact lower growth rates could have on long-term trends in the raw materials markets and the negative impact that a general downturn in the Chinese economy could have on the global economy.

 

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Similarly, the pace of growth of external aggregate demand for the principal products produced in Latin America and the Caribbean has decreased. The Region saw a significant slowdown in its 2014 average GDP growth rate, impacted by stagnating growth in its largest economy, Brazil, which had GDP growth in 2014 of 0.1%. Generally, the Region experienced a downward trend in prices for raw materials. In 2014, the Region’s overall exports decreased year-on-year. However, the performance of countries in the Region was not uniform. Those economies more heavily engaged in trade with the U.S. benefitted more than those with a greater dependence on trade relations with other parts of the world.

 

Despite the challenging nature of the 2014 economic backdrop, the Bank’s year-end 2014 financial results show improved earnings and operating performance. The Bank achieved a number of financial milestones in 2014, including: surpassing $100 million in total net income; achieving deposits of over $3 billion on several dates during the year, which increased average deposit levels by more than 8%; significantly improving core efficiency levels while maintaining cost discipline; more than doubling income derived from structuring and distribution activities; and achieving 12% return on average stockholders’ equity, and 14% total shareholders return (dividends and annual stock price appreciation).

 

Net income attributable to Bladex amounted to $106.9 million in 2014, an increase of $22 million, or 26%, compared to $84.8 million in 2013. This increase was driven by the positive performance of the Bank’s core business activities, with growth in the Commercial Portfolio, net margins and revenue, and improved efficiency on lower expenses, while maintaining strong asset quality. These factors were complemented by a positive trend in non-core results from the Bank’s participation in investment funds.

 

Net interest income rose by $18.0 million, or 15%, to $141.1 million in 2014 from $123.1 million in 2013. This growth was driven by a $12.2 million overall increase in net interest income due to the higher average balances of the Bank’s interest-earning assets (+7%), which was partially offset by higher average balances on the Bank’s interest-bearing liabilities (+8%), and a $5.8 million overall increase in net interest income on lower average funding costs (-26 basis points) which more than offset the 10 basis point decrease in the average yield of interest-earning assets. Net interest margin stood at 1.87% for 2014, compared to 1.75% for 2013.

 

Fees and other income includes the fee income associated with letters of credit and other off-balance sheet assets, such as guarantees and credit commitments, as well as fee income derived from two business streams: loan structuring and syndication, and loan intermediation and distribution. Fees and other income amounted to $21.8 million in 2014, compared to $15.9 million in 2013. The $5.9 million or 37% increase resulted from higher loan structuring and syndication fees, as well as fees and net gains associated with loan intermediation and distribution, along with higher fees and commissions from letters of credit and guarantees. The average balance of the Bank’s off-balance sheet portfolio (acceptances and contingencies) amounted to $0.5 billion in 2014, compared to $0.4 billion in 2013, an increase of 25%.

 

See Item 5, “Operating and Financial Review and Prospects—Operating Results—Net Income Attributable to Bladex” and Item 18, “Financial Statements,” note 27.

 

Strategies for 2015 and Subsequent Years

 

Further extend the Bank’s business in politically and economically stable, high-growth markets

 

The Bank’s expertise in risk and capital management and extensive knowledge of the Region allows it to identify and strategically focus on stable and growth-oriented markets, including investment-grade countries in the Region. Bladex maintains strategically placed representative offices in order to provide focused products and services in markets that the Bank considers key to its continued growth.

 

Targeted growth in expanding and diversifying the Bank’s client base

 

The Bank’s strategy to participate in a broad range of activities and further diversify its client base includes targeting clients that offer the potential for longstanding relationships and a wider presence in the Region, such as financial institutions, corporations and middle-market companies. This may be achieved through the Bank’s participation in bilateral and co-financed transactions. The Bank intends to continue enhancing existing client relationships and establishing new ones through its Region-wide expertise, product knowledge, the quality of the Bank’s services and the Bank’s agile decision-making process.

 

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Enhance current products and services by providing relevant sector-specific solutions in the Region

 

The Bank intends to continue its focus on the development of expertise in the sectors in which the Bank currently operates, while strategically targeting industries with significant growth potential by offering sector-specific products and solutions to clients in these industries. These sectors include some of the most profitable industries in the Region, such as oil & gas, food processing, manufacturing and agribusiness commodities, as well as growth commercial flows such as Latin American intra-regional trade. Bladex also intends to continue exploring key regional and local partnerships to bolster its range of services and increase its presence in key economic sectors throughout the Region.

 

Increase the range of products and services that the Bank offers

 

Due to the Bank’s relationships throughout, and knowledge of, the Region, the Bank is strongly positioned to strategically identify key additional products and services to offer to clients. The Bank’s Articles of Incorporation permit a broad scope of potential activities, encompassing all types of banking, investment, and financial and other businesses that support foreign trade flows and the development of trade and integration in the Region. This supports the Bank’s ongoing strategy to develop and expand products and services, such as factoring and vendor finance, leasing, debt intermediation in primary and secondary markets, and structured financing, including export insurance programs, that complement the Bank’s expertise in foreign trade finance and risk management.

 

Lending Policies

 

The Bank extends credit directly to financial institutions, corporations and middle-market companies within the Region. The distinction between corporations and middle-market companies is based on the particular client’s volumes of annual sales, as well as country risk, and certain other criteria. The Bank finances import and export transactions for all types of goods and products, excepting restricted items such as weapons, ammunition, military equipment, and hallucinogenic drugs or narcotics not utilized for medical purposes. Imports and exports financed by the Bank are destined for buyers/sellers in countries both inside and outside the Region. The Bank analyzes credit requests from eligible borrowers applying its credit risk criteria, including economic and market conditions. The Bank maintains a consistent lending policy and applies the same credit criteria to all types of potential borrowers in evaluating creditworthiness.

 

Due to the nature of trade finance, the Bank’s loans are generally unsecured. However, in certain instances, based upon the Bank’s credit review of the borrower and the economic and political situation and trends in the borrower’s home country, the Bank may determine that the level of risk involved requires that a loan be secured by collateral.

 

Country Credit Limits

 

The Bank maintains a continual review of each country's risk profile evolution, supporting its analysis with various factors, both quantitative and qualitative, the main driving factors of which include: the evolution of macroeconomic policies (fiscal, monetary, and exchange rate policy), fiscal and external performance, price stability, level of liquidity in foreign currency, changes of legal and institutional framework, as well as material social and political events, among others, including industry analysis relevant to Bladex business activities.  

 

17
 

 

Bladex has a methodology for capital allocation by country and its risk weights for assets. The Risk Policy and Assessment Committee (the “CPER”) of the Bank’s Board of Directors (the “Board”) approves a level of “allocated capital” for each country, in addition to nominal exposure limits. These country capital limits are reviewed at least once a year by the CPER and more often if necessary. The methodology helps to establish the capital equivalent of each transaction, based on the internal numeric rating assigned to each country, which is approved by the CPER.

 

The amount of capital allocated to a transaction is based on customer type (sovereign, state-owned or private, middle-market companies, corporate or financial institution), the type of transaction (trade or non-trade), and the average remaining term of the transaction (from one to 180 days, 181 days to a year, between one and three years, or longer than three years). Capital utilizations by the business units cannot exceed the Bank’s reported stockholders’ equity.

 

Borrower Lending Limits

 

The Bank generally establishes lines of credit for each borrower according to the results of its risk analysis and potential business prospects; however, the Bank is not obligated to lend under these lines of credit. Once a line of credit has been established, credit generally is extended after receipt of a request from the borrower for financing, usually related to foreign trade, which accounted for 56% of such credit as of December 31, 2014. Loan pricing is determined in accordance with prevailing market conditions and the borrower’s creditworthiness.

 

For existing borrowers, the Bank’s management has authority to approve credit lines up to the legal lending limit prescribed by Panamanian law, provided that the credit lines comply fully with the country credit limits and conditions for the borrower’s country of domicile set by the Board. Approved borrower lending limits are reported to the CPER quarterly. Panamanian Law sets forth certain concentration limits, which are applicable and strictly adhered to by the Bank, including a 30% limit as a percentage of capital and reserves for any one borrower and borrower group, in the case of certain financial institutions, and a 25% limit as a percentage of capital and reserves for any one borrower and borrower group, in the case of corporate, sovereign and middle-market companies. As of December 31, 2014, the legal lending limit prescribed by Panamanian law for corporations, sovereign borrowers and middle-market companies amounted to $225.8 million, and for financial institutions and financial groups amounted to $270.9 million. Non-compliance with this legal lending limit could result in the assessment of administrative sanctions by the Superintendency for such violations, taking into consideration the magnitude of the offense and any prior occurrences, and the magnitude of damages and prejudice caused to third parties. On a quarterly basis, the CPER reviews the impaired portfolio, if any, along with certain non-impaired credits. As of December 31, 2014, the Bank was in compliance with regulatory legal lending limits.

 

See Item 4.B, “Information on the Company—Business Overview—Regulations—Panamanian Law.”

 

Credit Portfolio

 

The Bank’s credit portfolio, which consists of the Commercial Portfolio and investment securities portfolio, increased to $7,580 million as of December 31, 2014, from $6,998 million as of December 31, 2013, and from $6,170 million as of December 31, 2012. The $582 million, or 8%, credit portfolio increase during 2014 was largely attributable to increased business activity from the Bank’s established client base of corporations ($692 million, or 19%), along with stable credit balances from financial institutions, partially offset by decreased exposures to middle-market companies ($125 million, or 20%).

 

18
 

 

Commercial Portfolio

 

The Commercial Portfolio includes the loan portfolio, selected deposits placed, customers’ liabilities under acceptances, and contingencies (including confirmed and stand-by letters of credit, guarantees covering commercial risk, and credit commitments).

 

The Bank’s Commercial Portfolio increased to $7,187 million as of December 31, 2014, an 8% increase from $6,630 million as of December 31, 2013, and a 21% increase from $5,953 million as of December 31, 2012. The increase in 2014 was largely attributable to growing demand from the Bank’s established client base of corporations (which grew by $607 million, or 17%) and financial institutions (by $74 million, or 3%), which was partially offset by decreased activity in middle-market companies ($125 million, or 20%).

 

As of December 31, 2014, 56% of the Bank’s Commercial Portfolio consisted of trade-related credits, and the remaining balance consisted primarily of lending to financial institutions and corporations involved in foreign trade. 57% of the Bank’s Commercial Portfolio is represented by corporations, of which 60% is trade financing.

 

The following table sets forth the distribution of the Bank’s Commercial Portfolio, by product category, as of December 31 of each year:

 

   As of December 31, 
  

2014(1)

   %  

2013(2)

   %  

2012(3)

   %  

2011(4)

   %  

2010(5)

   % 
   (in $ million, except percentages) 
Loans  $6,686    93.0   $6,148    92.7   $5,716    96.0   $4,960    92.6   $4,064    91.4 
Selected deposits placed   0    0.0    0    0.0    0    0.0    30    0.6    0    0.0 
Contingencies and other assets   501    7.0    482    7.3    237    4.0    364    6.8    382    8.6 
Total  $7,187    100.0   $6,630    100.0   $5,953    100.0   $5,354    100.0   $4,446    100.0 

 

(1)Includes non-accrual loans for $4 million as of December 31, 2014.
(2)Includes non-accrual loans for $3 million as of December 31, 2013.
(3)There were zero non-accrual loans as of December 31, 2012.
(4)Includes non-accrual loans for $32 million as of December 31, 2011.
(5)Includes non-accrual loans for $29 million as of December 31, 2010.

 

Loan Portfolio

 

As of December 31, 2014, the Bank’s total loans amounted to $6,686 million, compared to $6,148 million as of December 31, 2013 and compared to $5,716 million as of December 31, 2012. As of December 31, 2014, 72% of the Bank’s loans were scheduled to mature within one year.

 

As of December 31, 2014, the Bank had non-accrual loans of $4 million (or 0.06% of the loan portfolio), compared to $3 million (or 0.05% of the loan portfolio) as of December 31, 2013, and compared to zero non-accrual loans as of December 31, 2012.

 

For more detailed information, see Item 5, “Operating and Financial Review and Prospects-Operating Results—Changes in Financial Condition” and “Operating and Financial Review and Prospects—Operating Results—Asset Quality and Allowance for Credit Losses,” and Item 18, “Financial Statements,” notes 2(n), 7 and 8.

 

For more information about non-accrual loans, see Item 18 “Financial Statements,” notes 2(l) and 7.

 

19
 

 

Loans by Country Risk

 

The following table sets forth the distribution of the Bank’s loans by country risk at the dates indicated:

 

   As of December 31, 
   2014   % of
Total
Loans
   2013   % of
Total
Loans
   2012   % of
Total
Loans
   2011   % of
Total
Loans
   2010   % of
Total
Loans
 
   (in $ million, except percentages) 
Argentina  $185    2.8   $190    3.1   $222    3.9   $390    7.9   $237    5.8 
Belgium   0    0.0    0    0.0    31    0.5    0    0.0    0    0.0 
Bolivia   10    0.1    0    0.0    0    0.0    0    0.0    0    0.0 
Brazil (1)   1,972    29.5    1,709    27.8    1,773    31.0    1,852    37.3    1,583    38.9 
Chile   157    2.4    491    8.0    310    5.4    376    7.6    328    8.1 
Colombia   726    10.9    702    11.4    450    7.9    734    14.8    585    14.4 
Costa Rica   321    4.8    410    6.7    197    3.4    109    2.2    88    2.2 
Dominican Republic   243    3.6    191    3.1    111    1.9    118    2.4    135    3.3 
Ecuador   120    1.8    126    2.0    174    3.0    22    0.4    18    0.4 
El Salvador   116    1.7    123    2.0    66    1.2    21    0.4    39    1.0 
France   6    0.1    101    1.6    60    1.0    0    0.0    0    0.0 
Germany   100    1.5    0    0.0    0    0.0    5    0.1    0    0.0 
Guatemala   263    3.9    200    3.3    273    4.8    161    3.2    92    2.3 
Honduras   93    1.4    74    1.2    71    1.2    46    0.9    38    0.9 
Jamaica   16    0.2    61    1.0    10    0.2    2    0.0    64    1.6 
Mexico (2)   868    13.0    517    8.4    496    8.7    416    8.4    404    9.9 
Netherlands   10    0.2    15    0.2    77    1.4    20    0.4    0    0.0 
Nicaragua   8    0.1    8    0.1    10    0.2    10    0.2    0    0.0 
Panama   321    4.8    224    3.6    277    4.8    119    2.4    47    1.2 
Paraguay   132    2.0    102    1.7    27    0.5    30    0.6    0    0.0 
Peru   590    8.8    581    9.4    841    14.7    342    6.9    343    8.4 
Spain   0    0.0    0    0.0    10    0.2    0    0.0    0    0.0 
Switzerland   50    0.7    0    0.0    0    0.0    0    0.0    0    0.0 
Trinidad & Tobago   165    2.5    143    2.3    119    2.1    76    1.5    63    1.6 
United States of America   55    0.8    28    0.5    3    0.1    0    0.0    0    0.0 
Uruguay   160    2.4    155    2.5    109    1.9    110    2.2    0    0.0 
Total  $6,686    100.0   $6,148    100.0   $5,716    100.0   $4,960    100.0   $4,064    100.0 

 

(1)Includes non-accrual loans in Brazil of $3 million in 2014 and 2013, respectively, and $1 million in 2010.
(2)Includes non-accrual loans in Mexico of $1 million in 2014, $32 million in 2011, and $28 million in 2010.

 

As of December 31, 2014, the Bank’s loans extended in European countries represented $166 million or 2.49% of the total loan portfolio, compared to $116 million or 1.88% as of December 31, 2013. These loans consisted primarily of loans extended to subsidiaries of multinational corporations established in Latin America, and typically include head-office loan guarantees.

 

Loans by Type of Borrower

 

The following table sets forth the amounts of the Bank’s loans by type of borrower at the dates indicated:

 

   As of December 31, 
   2014   % of
Total
Loans
   2013   % of
Total
Loans
   2012   % of
Total
Loans
   2011   % of
Total
Loans
   2010   % of
Total
Loans
 
   (in $ million, except percentages) 
Private sector commercial banks and financial institutions  $1,891    28.3   $1,786    29.0   $1,776    31.1   $1,716    34.6   $1,381    34.0 
State-owned commercial banks   445    6.7    449    7.3    416    7.3    448    9.0    320    7.9 
Central banks   35    0.5    25    0.4    0    0.0    0    0.0    0    0.0 
Sovereign debt   0    0.0    0    0.0    100    1.8    27    0.5    54    1.3 
State-owned organizations   712    10.6    939    15.3    539    9.4    233    4.7    312    7.7 
Private middle-market companies   483    7.2    574    9.3    682    11.9    446    9.0    225    5.5 
Private corporations   3,120    46.7    2,375    38.6    2,203    38.5    2,090    42.1    1,772    43.6 
Total (1)  $6,686    100.0   $6,148    100.0   $5,716    100.0   $4,960    100.0   $4,064    100.0 

 

(1)Includes $4 million, $3 million, $32 million, and $29 million in non-accrual loans in 2014, 2013, 2011 and 2010, respectively.

 

The Bank did not have any exposure to European sovereign debt as of December 31, 2014, 2013 and 2012.

 

20
 

 

As of December 31, 2014, the Bank’s loan portfolio amounted to $6,686 million, an increase of $538 million, or 9%, from $6,148 million, as of December 31, 2013. The increase resulted from a higher demand for the Bank’s lending products, as the Bank´s core competencies allowed it to compete effectively, despite less significant growth seen in the Region´s markets compared to previous years.

 

As of December 31, 2014, the Bank’s loan portfolio industry exposure mainly included: (i) 35% in the financial institutions sector; (ii) 20% in the industrial sector, comprised mainly of metal manufacturing, food and beverage, and other manufacturing industries; (iii) 17% in the agricultural sector, comprising grains and oilseeds, coffee and sugar, among others; and (iv) 15% in the oil and gas sector, which in turn was divided into downstream (7%), integrated (6%), and upstream (2%). No other industry sector exceeded 10% exposure of the loan portfolio.

 

Maturities and Sensitivities of the Loan Portfolio to Changes in Interest Rates

 

The following table sets forth the remaining term of the maturity profile of the Bank’s loan portfolio as of December 31, 2014, by type of rate and type of borrower:

 

   As of December 31, 2014 
   (in $ million) 
   Due in one year or
less
   Due after one year
through five years
   Due after five
years through
ten years
   Total 
FIXED RATE                    
Private sector commercial banks and financial institutions  $723   $11   $0   $734 
State-owned commercial banks   301    30    0    331 
State-owned organizations   461    0    0    461 
Private middle-market companies   255    19    0    274 
Private corporations   1,455    67    0    1,522 
Sub-total  $3,195   $127   $0   $3,323 
FLOATING RATE                    
Private sector commercial banks and financial institutions  $617   $538   $2   $1,157 
State-owned commercial banks   32    82    0    114 
Central banks   35    0    0    35 
State-owned organizations   220    31    0    251 
Private middle-market companies   100    109    0    209 
Private corporations   596    973    29    1,598 
Sub-total  $1,599   $1,733   $31   $3,363 
Total  $4,795   $1,860   $31   $6,686 

 

Contingencies and Other Assets

 

The Bank’s contingencies and other assets included in the Commercial Portfolio consist of selected financial instruments with off-balance sheet credit risk, such as letters of credit, credit commitments and guarantees covering commercial risk, customers’ liabilities under acceptances, and an equity investment.

 

The Bank, on behalf of its client base, advises and confirms letters of credit to facilitate foreign trade transactions.  The Bank also provides stand-by letters of credit, guarantees, and commitments to extend credit, which are binding legal agreements to lend to a customer, subject to the customers compliance with customary conditions precedent.

 

The Bank applies the same credit policies used in its lending process to its evaluation of these instruments, and, once issued, the commitment is irrevocable and remains valid until its expiration.

 

21
 

 

As of December 31, 2014, total contingencies and other assets in the Commercial Portfolio amounted to $501 million (7% of the total Commercial Portfolio), of which 61% corresponded to letters of credit.

 

As of December 31, 2013 and 2012, total contingencies and other assets in the Commercial Portfolio amounted to $482 million and $237 million, respectively (7% and 4%, respectively, of the total Commercial Portfolio), of which 64% and 56%, respectively, corresponded to letters of credit.

 

The following table presents the amount of contingencies and other assets, as of December 31 of each year:

 

   As of December 31, 
   2014   2013   2012 
   Amount   % of Total
Contingencies
and other assets
   Amount   % of Total
Contingencies
and other assets
   Amount   % of Total
Contingencies
and other assets
 
   (in $ million, except percentages) 
Customers’ liabilities under acceptances  $114    22.8   $1    0.2   $1    0.5 
Contingencies                              
Argentina   0    0.0    0    0.1    0    0.0 
Bolivia   0    0.0    0    0.0    1    0.3 
Brazil   20    3.9    23    4.7    24    10.0 
Chile   28    5.6    0    0.0    6    2.6 
Colombia   54    10.8    39    8.0    9    3.8 
Costa Rica   0    0.0    1    0.2    1    0.4 
Dominican Republic   15    3.0    0    0.0    2    0.6 
Ecuador   87    17.3    153    31.8    80    33.6 
El Salvador   0    0.0    0    0.0    1    0.3 
Guatemala   38    7.6    44    9.0    0    0.1 
Honduras   0    0.1    0    0.1    1    0.2 
Jamaica   0    0.1    0    0.1    0    0.0 
Mexico   65    13.0    21    4.5    28    11.9 
Netherlands   0    0.0    18    3.7    0    0.0 
Panama   21    4.1    97    20.1    58    24.6 
Paraguay   0    0.1    0    0.0    0    0.0 
Peru   16    3.2    41    8.5    3    1.2 
Switzerland   1    0.2    1    0.2    0    0.0 
Uruguay   41    8.2    41    8.5    0    0.0 
Venezuela   1    0.2    2    0.4    23    9.8 
Total Contingencies  $387    77.2   $481    99.8   $236    99.5 
Total Contingencies and Other Assets  $501    100.0   $482    100.0   $237    100.0 

 

See Item 18, “Financial Statements,” note 19.

 

Investment Securities Portfolio

 

The Bank’s investment securities portfolio consists of debt securities available-for-sale, securities held-to-maturity, and excludes the Bank’s investments in the investment funds.

 

In the normal course of business, the Bank utilizes interest rate swaps for hedging purposes with respect to its asset (mainly its investment securities) and liability management activities.

 

The following table sets forth information regarding the carrying value of the Bank’s investment securities portfolio at the dates indicated.

 

22
 

 

   As of December 31, 
   2014   2013   2012 
   (in $ millions) 
Securities available-for-sale  $339   $334   $183 
Securities held-to-maturity   54    34    34 
Total investment securities  $393   $368   $217 

 

The following tables set forth the distribution of the Bank’s investment securities portfolio (securities available-for-sale and securities held-to-maturity) by country risk, type of borrower and contractual maturity at the dates indicated:

 

   As of December 31, 
   2014   2013   2012 
   Amount   %   Amount   %   Amount   % 
   (in $ millions, except percentages) 
Brazil  $75    19.1   $74    20.0   $44    20.5 
Chile   23    5.9    41    11.2    3    1.4 
Colombia   89    22.8    98    26.6    29    13.5 
Costa Rica   0    0.0    2    0.5    0    0.0 
Mexico   97    24.6    33    9.0    22    10.3 
Panama   45    11.5    34    9.2    54    25.0 
Peru   26    6.6    40    11.0    1    0.3 
Trinidad and Tobago   10    2.4    5    1.2    0    0.0 
Multilateral Organizations   28    7.0    41    11.2    63    29.0 
Total  $393    100.0   $368    100.0   $217    100.0 

 

   As of December 31, 
   2014   2013   2012 
   Amount   %   Amount   %   Amount   % 
   (in $ millions, except percentages) 
Private sector commercial banks and financial institutions  $93    23.7   $139    37.7   $26    12.2 
State-owned commercial banks   18    4.6    18    4.9    4    1.9 
Sovereign debt   157    40.0    105    28.4    102    46.9 
State-owned organizations   105    26.6    99    27.0    81    37.4 
Private corporations   20    5.0    7    1.9    4    1.7 
Total  $393    100.0   $368    100.0   $217    100.0 

 

   As of December 31, 
   2014   2013   2012 
   Amount   %   Amount   %   Amount   % 
   (in $ millions, except percentages) 
In one year  $120    30.5   $45    12.2   $54    24.8 
After one year through five years   156    39.6    192    52.1    155    71.3 
After five years through ten years   118    29.9    131    35.7    9    3.9 
Total  $393    100.0   $368    100.0   $217    100.0 

 

As of December 31, 2014, 2013, and 2012, securities held by the Bank of no single issuer exceeded 10% of the Bank’s stockholders equity.

 

23
 

 

Securities available-for-sale

 

As of December 31, 2014, the Bank’s securities available-for-sale amounted to $339 million and consisted of investments in securities of issuers in the Region, of which 74% corresponded to multilateral, sovereign and state-owned issuers, and 26% corresponded to private corporations and banks. During the year ended December 31, 2014, the Bank purchased $322 million of investments and sold $223 million (generating gains of $1.9 million), and redeemed $63 million of investment securities available-for-sale. As of December 31, 2014, securities available-for-sale with a carrying value of $308 million were pledged to secure repurchase transactions accounted for as secured financings.

 

As of December 31, 2013, the Bank’s securities available-for-sale amounted to $334 million and consisted of investments with issuers in the Region, of which 61% corresponded to sovereign and state owned borrowers, and 39% corresponded to private corporations and banks. The $151 million increase in the securities available-for-sale portfolio as of December 31, 2013, compared to December 31, 2012, reflects the net effect of: (i) $313.0 million in investment securities acquired during 2013, (ii) the sale of securities with $105.9 million in book value ($102.5 million in nominal value) which generated gains of $1.5 million during 2013, (iii) the redemption of $34.3 million of investment securities, (iv) a negative $16.7 million variance of the fair market value of the available-for-sale securities portfolio, and (v) a $5.3 million decrease in amortization of premiums and discounts.

 

As of December 31, 2012, the Bank’s securities available-for-sale amounted to $183 million and consisted of investments with issuers in the Region, of which 47% corresponded to sovereign borrowers, and 14% corresponded to private corporations and banks. The $233 million decrease in the securities available-for-sale portfolio during 2012 compared to 2011 reflects the net effect of: (i) $40.0 million in investment securities acquired during 2012, (ii) the sale of securities with $254.8 million in book value ($239.6 million in nominal value) which generated gains of $6.0 million during 2012, (iii) redemption of $15.3 million of investment securities, (iv) a $0.3 million variance of fair value of the available for sale securities portfolio, and (v) a $3.0 million decrease in amortization of premiums and discounts.

 

See Item 18, “Financial Statements,” notes 2(i) and 5.

 

Securities held-to-maturity

 

The held-to-maturity portfolio amounted to $54 million as of December 31, 2014, compared to $34 million as of December 31, 2013, and compared to $34 million as of December 31, 2012. The $20 million increase in the securities held-to-maturity portfolio reflects the net effect of: (i) $22 million in investment securities acquired during 2014, (ii) the redemption of $20 million of matured investment securities, and (iii) the $18 million bond reclassification as held-to-maturity formerly held in the available-for-sale portfolio.

 

See Item 18, “Financial Statements,” notes 2(i) and 5.

 

Investment Funds

 

The Bank’s investment funds consist of its investment in the Feeder and the Brazilian Funds, which are managed by a third party, Alpha4x Asset Management LLC, following the sale of the Bladex Asset Management Unit which concluded in the second quarter of 2013.

 

The funds’ net assets are composed of cash, investments in equity, debt instruments, and derivative financial instruments, all of which are quoted and traded in active markets. The funds report trading gains and losses from negotiation of these instruments as realized and unrealized gains and losses on investments.

 

As of December 31, 2014, the investment funds’ net asset value totaled $58 million, compared to $119 million as of December 31, 2013, and compared to $106 million as of December 31, 2012, of which the redeemable noncontrolling interest in the investment funds amounted to zero, $50 million, and $3 million, respectively. The Bank’s participation in the “Feeder” was 49.61% as of December 31, 2014, compared to 55.87% as of December 31, 2013, and 98.06% as of December 31, 2012, with the remaining balances owned by third party investors. The redemptions from the investment in the funds amounted to $14 million in 2014, $36 million in 2013, and $15 million in 2012.

 

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See Item 4.A. – “Information on the Company – History and Development of the Company”, and Item 18, “Financial Statements,” notes 2(c), 2(d), 2(j), 3, 6, and 24.

 

Total Outstandings by Country

 

The following table sets forth the aggregate amount of the Bank’s cross-border outstandings, consisting of cash and due from banks, interest-bearing deposits in banks, investment securities, loans, and investment funds outstanding balances and accrued interest receivable, but not including contingencies as of December 31 of each year:

 

   As of December 31, 
   2014   2013   2012 
   Amount   % of Total
Outstandings
   Amount   % of Total
Outstandings
   Amount   % of Total
Outstandings
 
   (in $ million, except percentages) 
Argentina  $189    2.4   $192    2.6   $225    3.3 
Brazil   2,066    25.9    1,798    23.9    1,837    27.1 
Chile   181    2.3    534    7.1    313    4.6 
Colombia   820    10.3    804    10.7    482    7.1 
Costa Rica   323    4.1    414    5.5    199    2.9 
Dominican Republic   244    3.1    191    2.5    112    1.6 
Ecuador   120    1.5    126    1.7    174    2.6 
El Salvador   117    1.5    124    1.7    66    1.0 
France   10    0.1    102    1.4    60    0.9 
Germany   100    1.3    0    0.0    0    0.0 
Guatemala   264    3.3    201    2.7    274    4.0 
Honduras   94    1.2    74    1.0    71    1.0 
Mexico   980    12.3    557    7.4    523    7.7 
Netherlands   10    0.1    15    0.2    77    1.1 
Panama   368    4.6    259    3.4    333    4.9 
Paraguay   134    1.7    104    1.4    27    0.4 
Peru   620    7.8    626    8.3    846    12.5 
Trinidad & Tobago   176    2.2    148    2.0    120    1.8 
United States of America   779    9.8    801    10.7    681    10.0 
Uruguay   160    2.0    155    2.1    109    1.6 
Other countries (1)   152    1.9    172    2.3    146    2.1 
Sub-Total  $7,908    99.3   $7,397    98.4   $6,678    98.4 
Investment funds   58    0.7    119    1.6    111    1.6 
Total (2)  $7,965    100.0   $7,516    100.0   $6,789    100.0 

 

(1)“Other countries” consists of cross-border outstandings to countries in which cross-border outstandings did not exceed 1% for any of the periods indicated. “Other countries” in 2014 was comprised of $54 million in Switzerland, $48 million in Multilateral Organizations, $16 million in Jamaica, $12 million in the United Kingdom, $10 million in Bolivia, $8 million in Nicaragua and $5 million in Spain. Other countries in 2013 was comprised of $61 million in Jamaica, $60 million in Japan, $42 million in Multilateral Organizations, $8 million in Nicaragua and $2 million in United Kingdom. Other countries in 2012 was comprised of $64 million in Multilateral Organizations, $31 million in Belgium, $20 million in Japan, $10 million in Jamaica, $10 million in Nicaragua, $10 million in Spain and $2 million in United Kingdom.
(2)The outstandings by country does not include contingencies. See Item 4.B, “Business Overview—Contingencies and Other Assets.”

 

In allocating country risk limits, the Bank applies a portfolio management approach that takes into consideration several factors, including the Bank’s perception of country risk levels, business opportunities, and economic and political analysis.

 

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The composition of the outstandings per country portfolio has increased over the last three years. Some exposures in certain countries have been adjusted in accordance with the Bank’s risk perception.

 

Cross-border outstandings in countries outside the Region correspond principally to the Bank’s liquidity placements, and credits extended to subsidiaries of multinational corporations established in the Region, with the respective head office guarantee. See Item 5, “Operating and Financial Review and Prospects—Liquidity and Capital Resources—Liquidity.”

 

The following table sets forth the amount of the Bank’s cross-border outstandings by type of institution as of December 31 of each year:

 

   As of December 31, 
   2014   2013   2012 
       (in $ million)     
Private sector commercial banks and financial institutions  $2,141   $2,042   $1,828 
State-owned commercial banks and financial institutions   466    469    424 
Central banks   651    761    653 
Sovereign debt   159    106    203 
State-owned organizations   845    1,043    623 
Private middle-market companies   487    579    727 
Private corporations   3,159    2,397    2,218 
Sub-Total  $7,908   $7,397   $6,678 
Investment funds   58    119    111 
Total  $7,965   $7,516   $6,789 

 

Net Revenues Per Country

 

The following table sets forth information regarding the Bank’s net revenues by country at the dates indicated, with net revenues calculated as the sum of net interest income, net fees and commissions, derivative financial instruments and hedging, net gain (loss) from investment funds trading, net gain (loss) from trading securities, net gain (loss) on sale of securities available-for-sale, net gain on sale of loans, net gain (loss) on foreign currency exchange, and other income (expense):

 

   For the year ended December 31, 
   2014   2013   2012 
   (in $ million) 
Argentina  $10.7   $11.4   $10.3 
Brazil   47.5    40.3    40.5 
Chile   7.3    6.6    3.8 
Colombia   15.9    9.4    9.3 
Costa Rica   7.1    8.3    3.9 
Dominican Republic   1.9    2.9    2.5 
Ecuador   7.6    6.8    5.9 
El Salvador   2.6    1.6    0.6 
Guatemala   5.3    6.8    3.4 
Honduras   2.5    2.2    1.7 
Jamaica   1.6    1.1    1.3 
Mexico   20.0    15.1    16.6 
Panama   9.2    4.9    2.2 
Paraguay   3.2    1.8    0.8 
Peru   16.4    16.2    12.2 
Trinidad and Tobago   1.0    0.8    1.6 

 

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   For the year ended December 31, 
   2014   2013   2012 
   (in $ million) 
Uruguay   3.8    2.5    1.7 
Venezuela   0.6    0.4    1.5 
Other countries (1)   1.1    1.0    3.8 
Investment funds   3.4    (6.6)   8.3 
Total net revenues  $168.7   $133.6   $131.8 
Reversal of provision (provision) for credit losses   (8.5)   1.2    12.4 
Recoveries, net of impairment of assets   0.0    0.1    0.0 
Operating expenses   (53.7)   (54.3)   (55.8)
Net income – business segment  $106.5   $80.6   $88.4 
Net income (loss) attributable to the redeemable non-controlling interest   (0.5)   (4.2)   0.3 
Net income attributable to Bladex stockholders – business segment  $106.9   $84.8   $88.1 
Other income unallocated — Gain on sale of premises and equipment   0.0    0.0    5.6 
Net loss from discontinued operations   0.0    0.0    (0.7)
Net income attributable to Bladex stockholders  $106.9   $84.8   $93.0 

 

(1)Other countries consists of net revenues per country in which net revenues did not exceed $1 million for any of the periods indicated above.

 

The above table provides a reconciliation of net revenues (as previously defined) to the Bank’s net income. Net revenues do not include the effects of reversal of provision (provision) for credit losses, recoveries on assets, net of impairments, operating expenses, the income (loss) attributable to the redeemable non-controlling interest, other income not allocated to any business segment, a gain on sale of premises and equipment realized in 2012, and net income (loss) from discontinued operations. The purpose of the aforementioned table is to show net revenues before operating expenses generated from the Bank’s Commercial and Treasury Division, on a by-country basis. Given that the Bank’s business segments generate revenues not only from net interest income, but from other sources including fees and commissions, gains and losses on investments, gains on sale of loans and derivative financial instruments, which form part of other income rather than net interest income, the Bank adds those corresponding items to net interest income to show net revenues earned before operating expenses. Reversal of provision (provision) for credit losses, and recoveries, net of impairment of assets, are not included as part of net revenues, as the Bank believes such items, which are based on management estimates, may distort trend analysis. Thus, the Bank believes excluding such items from net revenues provides a more accurate indicator of the Bank’s performance within its two business segments for each country, and thus provides a better basis for analysis of the efficiency of the Bank. The Bank also believes the presentation of net revenues helps facilitate comparisons of performance between periods. However, net revenues should not be considered a substitute for, or superior to, financial measures calculated differently on a U.S. GAAP basis. Furthermore, net revenues may be calculated differently by other companies in the financial industry.

 

Competition

 

The Bank operates in a highly competitive environment in most of its markets, and faces competition principally from international banks, the majority of which are European or North American, as well as Latin American regional banks, in making loans and providing fee-generating services. The Bank competes in its lending and deposit-taking activities with other banks and international financial institutions, many of which have greater financial resources, enjoy access to less expensive funding and offer sophisticated banking services. Whenever economic conditions and risk perception improve in the Region, competition from commercial banks, the securities markets and other new participants generally increases. Competition may have the effect of reducing the spreads of the Bank’s lending rates over its funding costs and constraining the Bank’s profitability.

 

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Increased open account exports and new financing requirements from multinational corporations are changing the way banks intermediate foreign trade financing. Trade finance volumes are also dependent on global economic conditions.

 

The Bank also faces competition from investment banks and the local and international securities markets, which provide liquidity to the financial systems in certain countries in the Region, as well as non-bank specialized financial institutions. The Bank competes primarily on the basis of agility, pricing, and quality of service. See Item 3.D., “Key Information—Risk Factors.”

 

Regulations

 

General

 

The Superintendency regulates, supervises and examines the Bank on a consolidated basis. The New York Agency is regulated, supervised and examined by the New York State Department of Financial Services and the Board of Governors of the Federal Reserve System (the “U.S. Federal Reserve Board”). The Florida International Administrative Office was regulated, supervised and examined by the Florida Office of Financial Regulation and the U.S. Federal Reserve Board until the Bank´s decision to close that office in early 2015. The Bank’s direct and indirect nonbanking subsidiaries doing business in the United States are subject to regulation by the U.S. Federal Reserve Board. The Bank is subject to regulations in each jurisdiction in which the Bank has a physical presence. The regulation of the Bank by relevant Panamanian authorities differs from the regulation generally imposed on banks, including foreign banks, in the United States by U.S. federal and state regulatory authorities.

 

The Superintendency of Banks has signed and executed agreements or letters of understanding with 25 foreign supervisory authorities for the sharing of supervisory information under the principles of reciprocity, appropriateness, national agreement, and confidentiality. These 25 entities include the U.S. Federal Reserve Board, the Office of the Comptroller of Currency of the Treasury Department or the OCC, the Federal Deposit Insurance Corporation and the Office of the Thrift Supervision. In addition, the Statement of Cooperation between the United States and Panama promotes cooperation between U.S. and Panamanian banking regulators and demonstrates the commitment of the U.S. regulators and the Superintendency to the principles of comprehensive and consolidated supervision.

 

Panamanian Law

 

The Bank operates in Panama under a General Banking License issued by the National Banking Commission, predecessor of the Superintendency of Banks. Banks operating under a General Banking License (“General License Banks”), may engage in all aspects of the banking business in Panama, including taking local and foreign deposits, as well as making local and international loans.

 

All banking institutions in Panama are governed by Decree-Law 9 of February 26, 1998, as amended, and banking regulations issued by the Superintendency pursuant thereto (the “Banking Law”).

 

Under the Banking Law, a bank’s capital composition includes primary, secondary and tertiary capital. Primary capital is made up of ordinary capital and additional capital. Primary ordinary capital includes paid-in capital, paid-in capital surplus, declared reserves, retained earnings, accumulated other comprehensive income, minority interests in consolidating subsidiaries, and certain reserves and adjustments authorized by the Superintendency. Primary additional capital includes certain perpetual, subordinated instruments of debt and equity, paid-in surpluses on these instruments, certain instrument issued by consolidated subsidiaries, and certain adjustments authorized by the Superintendency. Secondary capital is made up of reserves to absorb future unforeseen losses, certain subordinated debt instruments, paid-in surpluses on these instruments, certain instruments issued by subsidiaries, and certain adjustments authorized by the Superintendency. Tertiary capital is made up of short-term subordinated debt incurred for the management of market risk. Under the Banking Law, the sum of secondary and tertiary capital cannot exceed primary capital.

 

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General License Banks must have paid-in capital of not less than $10 million. Additionally, they must maintain a minimum total capital of 8% of their total risk-weighted assets, and a primary ordinary capital equal to or greater than 4.5% of their risk-weighted assets. In addition, total primary capital may not be less than 6% of the bank’s risk-weighted assets. Some of these capital requirements will enter into effect on January 1, 2016 and minimum requirements set forth before will by fully in place by 2019. The Superintendency is authorized to take into account market risks, operational risks and country risks, among others, to evaluate capital adequacy. In addition, the Superintendency is authorized to increase the minimum capital requirement percentage in Panama in the event that generally accepted international capitalization standards (such as the standards set by the Basel Committee on Banking Supervision) become more stringent.

 

General License Banks are required to maintain 30% of their global deposits in liquid assets (which include short-term loans to other banks and other liquid assets) of the type prescribed by the Superintendency. Under the Banking Law, deposits from central banks and other similar depositories of the international reserves of sovereign states are immune from attachment or seizure proceedings.

 

Pursuant to the Banking Law, banks cannot grant loans or issue guarantees or any other obligation (“Credit Facilities”), to any one person or group of related persons in excess of 25% of the Bank’s total capital. This limitation also extends to Credit Facilities granted to parties related to the ultimate parent of the banking group. However, the Banking Law establishes that, in the case of Credit Facilities granted by mixed-capital banks with headquarters in Panama whose principal business is the granting of loans to other banks, the limit is 30% of the bank’s capital funds. As confirmed by the Superintendency, the Bank currently applies the limit of 30% of the Bank’s total capital with respect to the Bank’s Credit Facilities in favor of financial institutions and the limit of 25% of the Bank’s total capital with respect to the Bank’s Credit Facilities in favor of corporations, middle-market companies and sovereign borrowers.

 

Under the Banking Law, a bank and the ultimate parent of the banking group may not grant loans or issue guarantees or any other obligation to “related parties” that exceed (1) 5% of its total capital, in the case of unsecured transactions, and (2) 10% of its total capital, in the case of collateralized transactions (other than loans secured by deposits in the bank). For these purposes, a “related party” is (a) any one or more of the bank’s directors, (b) any stockholder of the bank who directly or indirectly owns 5% or more of the issued and outstanding capital stock of the bank, (c) any company of which one or more of the bank’s directors is a director or officer or where one or more of the bank’s directors is a guarantor of the loan or credit facility, (d) any company or entity in which the bank or any one of its directors or officers can exercise a controlling influence, (e) any company or entity in which the bank or any one of its directors or officers owns 20% or more of the issue and outstanding capital stock of the company or entity and (f) managers, officers and employees of the bank, or their respective spouses (other than home mortgage loans or guaranteed personal loans under general programs approved by the bank for employees). The Superintendency currently limits the total amount of secured and unsecured Credit Facilities (other than Credit Facilities secured by deposits in the bank) granted by a bank or the ultimate parent of a banking group to related parties to 25% of the total capital of the bank.

 

The Superintendency of Banks may authorize the total or partial exclusion of loans or credits from the computation of these limitations in cases of unsecured loans and other credits granted by mixed-capital banks with headquarters in Panama whose principal business is the granting of loans to other banks, which is the case of the Bank. This authorization is subject to the following conditions: (1) the ownership of shares in the debtor bank–directly or indirectly–by the shared director or shared officer, may not exceed 5% of the bank’s capital, or may not amount to any sum that would ensure his or her majority control over the decisions of the bank; (2) the ownership of shares in the creditor bank–directly or indirectly–by the debtor bank represented in any manner by the shared director or shared officer, may not exceed 5% of the shares outstanding of the creditor bank, or may not amount to any sum that would ensure his or her majority control over the decisions of the bank; (3) the shared director or shared officer must abstain from participating in the deliberations and in the voting sessions held by the creditor bank regarding the loan or credit request; and (4) the loan or credit must strictly comply with customary standards of discretion set by the grantor bank’s credit policy. The Superintendency will determine the amount of the exclusion in the case of each loan or credit submitted for its consideration.

 

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The Banking Law contains additional limitations and restrictions with respect to related party loans and Credit Facilities. For instance, under the Banking Law, banks may not grant Credit Facilities to any employee in an amount that exceeds the employee’s annual compensation package, and all Credit Facilities to managers, officers, employees or stockholders who are owners of 5% or more of the issued and outstanding capital stock of the lending bank or the ultimate parent of the banking group, will be made on terms and conditions similar to those given by the bank to its clients in arm’s-length transactions and which reflect market conditions for a similar type of operation. Shares of a bank cannot be pledged or offered as security for loans or Credit Facilities issued by the bank.

 

In addition to the foregoing requirements, there are certain other requirements applicable to General License Banks, including (1) a requirement that a bank must notify the Superintendency before opening or closing a branch or office in Panama and obtain approval from the Superintendency before opening or closing a branch or subsidiary outside Panama, (2) a requirement that a bank obtain approval from the Superintendency before it liquidates its operations, merges or consolidates with another bank or sells all or substantially all of its assets, (3) a requirement that a bank must designate the certified public accounting firm that it wishes to contract to carry out the duty of external auditing for the new fiscal term, within the first three months of each fiscal term, and notify the Superintendency within 7 days of such designation, (4) a requirement that a bank obtain prior approval from the Superintendency of the rating agency it wishes to hire to perform the risk rating of the bank, (5) a requirement that a bank must publish in a local newspaper the risk rating issued by the rating agency and any risk rating update, and (6) a requirement that a bank must provide written affirmation of the Bank’s audited financial statements signed by the Bank’s Chairman of the Board, the Chief Executive Officer and Chief Financial Officer. The subsidiaries of Panamanian banks established in foreign jurisdictions must observe the legal and regulatory provisions applicable in Panama regarding the sufficiency of capital, as prescribed under the Banking Law.

 

The Banking Law regulates banks and the entire “banking group” to which each bank belongs. Banking groups are defined as the holding company and all direct and indirect subsidiaries of the holding company, including the bank in question. Banking groups must comply with audit standards and various limitations set forth in the Banking Law, in addition to all compliance required of the bank in question. The Banking Law provides that banks and banking groups in Panama are subject to inspection by the Superintendency, which must take place at least once every two years. The Superintendency is empowered to request from any bank or any company that belongs to the economic group of which a bank in Panama is a member, the documents and reports pertaining to its operations and activities. Banks are required to file with the Superintendency weekly, monthly, quarterly and annual information, including financial statements, an analysis of their Credit Facilities and any other information requested by the Superintendency. In addition, banks are required to make available for inspection any reports or documents that are necessary for the Superintendency to ensure compliance with Panamanian banking laws and regulations. Banks subject to supervision may be fined by the Superintendency for violations of Panamanian banking laws and regulations.

 

Panamanian Anti-Money Laundering laws and regulations

 

In Panama, all banks and trust corporations must take necessary measures to prevent their operations and/or transactions from being used to commit the felony of money laundering, terrorism financing or any other illicit activity contemplated in the laws and regulations addressing this matter.

 

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United States Law

 

The Bank operates a New York state-licensed agency in New York, New York and maintains a direct wholly-owned non-banking subsidiary in Delaware, Bladex Holdings, which is not engaged in banking activities. On October 30, 2006, the Bank established the Florida International Administrative Office in Miami, Florida, which ceased operations during the first quarter of 2015. See Item 4.A “Information on the Company—History and Development of the Company.”

 

The U.S. banking industry is highly regulated under federal and state law. These regulations affect the operations of the Bank in the United States. Set forth below is a brief description of the bank regulatory framework that is or will be applicable to the New York Agency and was applicable to the Florida International Administrative Office prior to its closure in early 2015. This description is not intended to describe all laws and regulations applicable to the New York Agency and the Florida International Administrative Office. Banking statues, regulations and policies are continually under review by Congress and state legislatures and federal and state regulatory agencies, including changes in how they are interpreted or implemented, could have a material adverse impact on the New York Agency and its operations. In addition to laws and regulations, state and federal bank regulatory agencies (including the Federal Reserve Board, the FDIC and the OCC) may issue policy statements, interpretive letters and similar written guidance applicable to the New York Agency (including the Bank). These issuances also may affect the conduct of the New York Agency’s business or impose additional regulatory obligations. The brief description below is qualified in its entirety by reference to the full text of the statues, regulations, policies, interpretive letters and other written guidance that are described.

 

Federal Law

 

In addition to being subject to New York and Florida state laws and regulations, the New York Agency is, and the Florida International Administrative Office was, subject to federal regulations, primarily under the International Banking Act of 1978, as amended (“IBA”), and are subject to examination and supervision by the U.S. Federal Reserve Board. The IBA generally extends federal banking supervision and regulation to the U.S. offices of foreign banks and to the foreign bank itself. Under the IBA, the U.S. branches and agencies of foreign banks, including the New York Agency, are subject to reserve requirements on certain deposits. At present, the New York Agency has no deposits subject to such requirements. The New York Agency also is subject to reporting and examination requirements imposed by the U.S. Federal Reserve Board similar to those imposed on domestic banks that are members of the U.S. Federal Reserve System. The Foreign Bank Supervision Enhancement Act of 1991 (the “FBSEA”), amended the IBA to enhance the authority of the U.S. Federal Reserve Board to supervise the operations of foreign banks in the United States. In particular, the FBSEA expanded the U.S. Federal Reserve Board’s authority to regulate the entry of foreign banks into the United States, supervise their ongoing operations, conduct and coordinate examinations of their U.S. offices with state banking authorities, and terminate their activities in the United States for violations of law or for unsafe or unsound banking practices.

 

In addition, under the FBSEA, state-licensed branches and agencies of foreign banks may not engage in any activity that is not permissible for a “federal branch” (i.e., a branch of a foreign bank licensed by the federal government through the OCC, rather than by a state), unless the U.S. Federal Reserve Board has determined that such activity is consistent with sound banking practices.

 

The New York Agency does not engage in retail deposit-taking from persons in the United States. Under the FBSEA, the New York Agency may not obtain Federal Deposit Insurance Corporation (“FDIC”), insurance and generally may not accept deposits from persons in the United States, but may accept credit balances incidental to its lawful powers, from persons in the United States, and accept deposits from non-U.S. citizens who are non-U.S. residents, but must inform each customer that the deposits are not insured by the FDIC.

 

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The IBA also restricts the ability of a foreign bank with a branch or agency in the United States to engage in non-banking activities in the United States, to the same extent as a U.S. bank holding company. Bladex is subject to the provisions of the Federal Bank Holding Company Act of 1956 (the “BHCA”), because it maintains an agency in the United States. Generally, any nonbanking activity engaged in by Bladex directly or through a subsidiary in the United States is subject to certain limitations under the BHCA. Among other limitations, the provisions of the BHCA include the so-called "Volcker Rule," which may restrict proprietary trading activities conducted by Bladex and its affiliates with U.S. clients or counterparties, as well as certain private funds-related activities with US nexus. Under the Gramm-Leach-Bliley Financial Modernization Act of 1999 (the “GLB Act”), a foreign bank with a branch or agency in the United States may engage in a broader range of non-banking financial activities, provided it is qualified and has filed a declaration with the U.S. Federal Reserve Board to be a “financial holding company.” The application with the U.S. Federal Reserve Board to obtain financial holding company status, filed by the Bank on January 29, 2008, was withdrawn, effective March 2, 2012, as the Bank no longer considered the financial holding company status to be a necessary requirement in order to achieve its long-term strategic goals and objectives. At present, the Bank has subsidiaries in the United States, Bladex Holdings, a wholly-owned corporation incorporated under Delaware law that is not presently engaged in any activity, and which formerly owned Bladex Asset Management, a Delaware corporation and BCG, a fifty percent (50%) owned subsidiary incorporated under the laws of Delaware. Bladex Asset Management and BCG were dissolved on September 18, 2013, and August 14, 2013, respectively.

 

In addition, pursuant to the Financial Services Regulatory Relief Act of 2006, the SEC and the U.S. Federal Reserve Board finalized Regulation R. Regulation R defines the scope of exceptions provided for in the GLB Act for securities brokerage activities which banks may conduct without registering with the SEC as securities brokers or moving such activities to a broker-dealer affiliate. The “push out” rules exceptions contained in Regulation R enable banks, subject to certain conditions, to continue to conduct securities transactions for customers as part of the bank’s trust and fiduciary, custodial, and deposit “sweep” functions, and to refer customers to a securities broker-dealer pursuant to a networking arrangement with the broker-dealer. The New York Agency is subject to Regulation R with respect to its securities activities.

 

Finally, under the regulations of the Office of Foreign Asset Control (“OFAC”), the Bank is generally required to monitor and block or reject transactions with certain targeted foreign countries and “specially designated nationals” which OFAC has determined pose a risk to U.S. national security.

 

New York State Law

 

The New York Agency, established in 1989, is licensed by the Superintendent of Financial Services of the State of New York (the “Superintendent”), under the New York Banking Law. The New York Agency maintains an international banking facility that also is regulated by the Superintendent and the U.S. Federal Reserve Board. The New York Agency is examined by the Department of Financial Services and is subject to banking laws and regulations applicable to a foreign bank that operates a New York agency. New York agencies of foreign banks are regulated substantially the same as, and have similar powers to, New York state-chartered banks, except with respect to capital requirements and deposit-taking activities.

 

The Superintendent is empowered by law to require any branch or agency of a foreign bank to maintain in New York specified assets equal to a percentage of the branch’s or agency’s liabilities, as the Superintendent may designate. Under the current requirement, the New York Agency is required to maintain a pledge of a minimum of $2 million with respect to its total third-party liabilities and such pledge may be up to 1% of the agency’s third party liabilities, or upon meeting eligibility criteria, up to a maximum amount of $100 million. As of December 31, 2014, the New York Agency maintained a pledge deposit with a carrying value of $3.0 million with the New York State Department of Financial Services, complying with the minimum required amount.

 

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In addition, the Superintendent retains the authority to impose specific asset maintenance requirements upon individual agencies of foreign banks on a case-by-case basis. No special requirement has been prescribed for the New York Agency.

 

The New York Banking Law generally limits the amount of loans to any one person to 15 percent of the capital, surplus fund and undivided profits of a bank. For foreign bank agencies, the lending limits are based on the capital of the foreign bank and not that of the agency.

 

The Superintendent is authorized to take possession of the business and property of a New York agency of a foreign bank whenever an event occurs that would permit the Superintendent to take possession of the business and property of a state-chartered bank. These events include the violation of any law, unsafe business practices, an impairment of capital, and the suspension of payments of obligations. In liquidating or dealing with an agency’s business after taking possession of the agency, the New York Banking Law provides that the claims of creditors which arose out of transactions with the agency may be granted a priority with respect to the agency’s assets over other creditors of the foreign bank.

 

Florida Law

 

The Florida International Administrative Office, established in October 2006, ceased operations during the first quarter of 2015. Prior to that, the Florida Administrative Office was licensed and supervised by the Florida Office of Financial Regulation under the Florida Financial Institutions Codes. The activities of the Florida International Administrative Office were subject to the restrictions described below as well as to Florida banking laws and regulations that were applicable generally to foreign banks that operate offices in Florida. The Florida International Administrative Office was also subject to regulation by the U.S. Federal Reserve Board under the IBA.

 

Pursuant to Florida law, the Florida International Administrative Office was authorized to conduct certain “back office” functions on behalf of the Bank, including administration of the Bank’s personnel and operations, data processing and record keeping activities, and negotiating and servicing loans or extensions of credit and investments. Under the provisions of the Florida Financial Institutions Codes, as well as the IBA and the regulations of the U.S. Federal Reserve Board, the Florida International Administrative Office was also permitted to function as a representative office of the Bank.

 

Anti-Money Laundering Laws

 

U.S. anti-money laundering laws, as amended by the USA PATRIOT Act of 2001, impose significant compliance and due diligence obligations, on financial institutions doing business in the United States. Both the New York Agency is, and the Florida International Administrative Office were, “financial institutions” for these purposes. Failure of a financial institution to comply with the requirements of these laws and regulations could have serious legal and reputational consequences for an institution. The New York Agency and the Florida International Administrative Office have adopted comprehensive policies and procedures to address and comply with these requirements.

 

C.Organizational Structure

 

For information regarding the Bank’s organizational structure, see Item 18, “Financial Statements,” note 1.

 

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D.Property, Plant and Equipment

 

The Bank leases its headquarters, with 4,990 square meters of office space located at Business Park - Tower V, Costa del Este, Panama City, Panama. The Bank leases 11 square meters of computer equipment hosting, located at Gavilan Street Balboa, Panama City, Panama and 21 square meters of office space and internet access, as a contingency, located at 75E Street San Francisco, in Panama City, Panama. The Bank also leases, as contingency, 10 square meters of computer equipment hosting, located at Cable & Wireless Howard IDC, Brujas Street (Perimetral Oeste), behind the International Business Park, Arraijan, Panama.

 

In addition, the Bank leases office space for its representative offices in Mexico City and Monterrey, Mexico, Buenos Aires, Argentina, Lima, Peru, Bogotá, Colombia, São Paulo, Brazil, its New York Agency in New York City, New York, and in Miami, Florida in connection with the former Florida International Administrative Office.

 

See Item 18, “Financial Statements,” notes 2(p), 9 and 20.

 

Item 4A.Unresolved Staff Comments

 

None.

 

Item 5.Operating and Financial Review and Prospects

 

The following discussion should be read in conjunction with the Bank’s Consolidated Financial Statements and the notes thereto included elsewhere in this Annual Report. See Item 18, “Financial Statements.”

 

Nature of Earnings

 

The Bank derives income from net interest income, fees and commissions, derivative financial instruments and hedging, recoveries, net of impairment of assets, net gain (loss) from investment funds trading, net gain (loss) from trading securities, net gain on sale of securities available-for-sale, net gain on sale of loans, net gain (loss) on foreign currency exchange, and other income (net). Net interest income, or the difference between the interest income the Bank receives on its interest-earning assets and the interest it pays on interest-bearing liabilities, is generated principally by the Bank’s lending activities. The Bank generates fees and commissions mainly through the issuance, confirmation and negotiation of letters of credit and guarantees, and through loan intermediation, structuring and syndication activities, while other loan intermediation activities, such as sales in the secondary market and distribution in the primary market are registered as net gains on the sale of loans.

 

A.Operating Results

 

The following table summarizes changes in components of the Bank’s net income and performance for the periods indicated:

 

   For the Year Ended December 31, 
   2014   2013   2012 
   (in $ thousands, except per share amounts and percentages) 
Total interest income  $212,730   $205,303   $192,437 
Total interest expense   71,599    82,211    87,460 
Net interest income   141,131    123,092    104,977 
Reversal of provision (provision) for loan losses   (6,895)   1,598    8,343 
Net interest income, after reversal of provision (provision) for loan losses   134,236    124,690    113,320 
Other income (expense):               
Reversal of provision (provision) for losses on off-balance sheet credit risk   (1,627)   (381)   4,046 

 

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   For the Year Ended December 31, 
   2014   2013   2012 
   (in $ thousands, except per share amounts and percentages) 
Fees and commissions, net   17,502    13,669    10,021 
Derivative financial instruments and hedging   106    353    71 
Recoveries, net of impairment of assets   7    108    0 
Net gain (loss) from investment funds trading   3,409    (6,702)   7,011 
Net gain (loss) from trading securities   (393)   3,221    11,234 
Net gain on sale of securities available-for-sale   1,871    1,522    6,030 
Net gain on sale of loans   2,546    588    1,147 
Net gain (loss) on foreign currency exchange   766    (3,834)   (10,525)
Gain on sale of premises and equipment   0    0    5,626 
Other income, net   1,744    1,644    1,839 
Net other income   25,931    10,188    36,500 
Total operating expenses   (53,702)   (54,306)   (55,814)
Net income from continuing operations   106,465    80,572    94,006 
Net loss from discontinued operations (1)   0    (4)   (681)
Net income   106,465    80,568    93,325 
Net income (loss) attributable to the redeemable noncontrolling interest   (475)   (4,185)   293 
Net income attributable to Bladex stockholders  $106,940   $84,753   $93,032 
Net income from continuing operations   106,940    84,757    93,713 
Net loss from discontinued operations (1)   0    (4)   (681)
Basic earnings per share  $2.76   $2.21   $2.46 
Diluted earnings per share  $2.75   $2.20   $2.45 
Return on average assets (2)   1.41%   1.20%   1.51%
Return on average stockholders’ equity (3)   11.95%   10.02%   11.57%

 

(1)See Item 4 – “Information on the Company – History and Development of the Company”, and Item 18, “Financial Statements,” notes 2(c), 2(d), 2(j), 3, 6, and 24.
(2)Average assets calculated on the basis of unaudited daily average balances.
(3)Average stockholders’ equity calculated on the basis of unaudited daily average balances.

 

Business Segment Analysis

 

The Bank’s activities are operated and managed in two business segments: the Commercial Division and the Treasury Division.

 

The business segment results are determined based on the Bank’s managerial accounting process, which assigns consolidated balance sheets, revenue and expense items to each reportable segment on a systemic basis.

 

The Bank incorporates net operating income by business segment in order to disclose the revenue and expense items related to its normal course of business, segregating from net income the impact of provisions or reversals of provisions for loan losses and off-balance sheet credit risk, and recoveries, net of impairment of assets. In addition, the Bank’s net interest income represents the main driver of net operating income. The current interest expense allocation methodology reflects allocated funding on a matched-funded basis, net of risk adjusted capital allocated by business segment. The current operating expense allocation methodology assigns overhead expenses based on resource consumption by business segment. The following table summarizes net operating income of the Bank, both by business segment and on a consolidated basis for the periods indicated:

 

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   For the Year Ended December 31, 
   2014   2013   2012 
   (in $ thousands, except percentages) 
COMMERCIAL DIVISION:               
Net interest income  $122,234   $115,048   $109,967 
Non-interest operating income   21,068    15,338    12,216 
Operating expenses   (42,508)   (40,945)   (38,322)
Net operating income   100,794    89,441    83,861 
Reversal of provision (provision) for loan and off-balance sheet credit losses, net   (8,522)   1,217    12,389 
Recoveries, net of impairment of assets   7    108    0 
NET INCOME ATTRIBUTABLE TO BLADEX STOCKHOLDERS  $92,279   $90,766   $96,250 
                
TREASURY DIVISION:               
Net interest income  $18,897   $8,044   $(4,990)
Non-interest operating income (loss)   6,483    (4,877)   14,612 
Operating expenses   (11,194)   (13,361)   (17,492)
Net operating income (loss)   14,186    (10,194)   (7,870)
Net income (loss)   14,186    (10,194)   (7,870)
Net income (loss) attributable to the redeemable noncontrolling interest   (475)   (4,185)   293 
NET INCOME (LOSS) ATTRIBUTABLE TO BLADEX STOCKHOLDERS  $14,661   $(6,009)  $(8,163)
                
CONSOLIDATED:               
Net interest income  $141,131   $123,092   $104,977 
Non-interest operating income   27,551    10,461    26,828 
Operating expenses   (53,702)   (54,306)   (55,814)
Net operating income   114,980    79,247    75,991 
Reversal of provision (provision) for loan and off-balance sheet credit losses, net   (8,522)   1,217    12,389 
Recoveries, net of impairment of assets   7    108    0 
Net income – business segment   106,465    80,572    88,380 
Net income (loss) attributable to the redeemable non-controlling interest   (475)   (4,185)   293 
NET INCOME ATTRIBUTABLE TO BLADEX STOCKHOLDERS – BUSINESS SEGMENT   106,940    84,757    88,087 
Other income unallocated – Gain on sale of premises and equipment   0    0    5,626 
Net loss from discontinued operations.   0    (4)   (681)
NET INCOME ATTRIBUTABLE TO BLADEX STOCKHOLDERS  $106,940   $84,753   $93,032 

 

For further information on net income by business segment, see Item 18, “Financial Statements,” notes 3 and 27.

 

The Commercial Division

 

The Commercial Division is responsible for the Bank’s core business of financial intermediation and fee generation activities relating to the Bank’s Commercial Portfolio activities.  These activities include the origination of bilateral and syndicated credits, short- and medium-term loans, acceptances and contingent credits. See Item 4. “Information on the Company – Business Overview – Commercial Portfolio”. The Commercial Division’s net income includes net interest income from loans, fees and other income, allocated operating expenses, the provisions or the reversal of provisions for credit losses, and any recoveries, net of impairment of assets.

 

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Year 2014 vs. Year 2013

 

In 2014, the Commercial Division achieved a 13% increase in net operating income, driven primarily by (i) a $7.1 million, or 6% increase in net interest income primarily due to increased average loan portfolio balances of 9%, and (ii) a $5.8 million, or 38% increase in non-interest operating income primarily from higher fees from loan structuring and syndication activity (the Bank acted as mandated lead arranger and book-runner in 10 transactions out of a total of 14 structured transactions), along with an increase of $2.0 million in loan intermediation and distribution income, and higher commissions from letters of credit and guarantees. After credit provision charges of $8.5 million, mainly associated with an 8% end-of period Commercial Portfolio growth, while reaching a total portfolio credit provision coverage ratio of 1.20%, the Commercial Division’s net income reached $92.3 million in the year ended December 31, 2014, compared to $90.8 million in 2013, a $1.5 million or 2% year-on-year increase. The Commercial Division’s asset quality and portfolio risk profile remained solid, as evidenced by a 0.06% ratio of non-performing loans to total Commercial Portfolio as of December 31, 2014, compared to 0.05% as of December 31, 2013.

 

As of December 31, 2014, the Commercial Portfolio amounted to $7.2 billion, an increase of $0.6 billion, or 8% year-on-year compared to $6.6 billion as of December 31, 2013. Average Commercial Portfolio balances for 2014 and 2013 were $6.9 billion and $6.3 billion, respectively, resulting in a $0.6 billion, or 10% year-on-year increase.

 

As of December 31, 2014, the Commercial Portfolio continued to be short-term and trade-related in nature, with $5.2 billion, or 72% of the Commercial Portfolio scheduled to mature within one year. Trade financing operations represented 56% of the Commercial Portfolio, while the remaining balance consisted primarily of lending to financial institutions and corporations involved in foreign trade.

 

The loan portfolio represented 93% of the Commercial Portfolio as of December 31, 2014, totaling $6.7 billion, compared to $6.1 billion as of December 31, 2013, an increase of 9% year-on-year, or $0.5 billion. As of December 31, 2014, 72% of the total loan portfolio had a remaining term of one year or less.

 

Year 2013 vs. Year 2012

 

The Commercial Division’s net income amounted to $90.8 million for the year ended December 31, 2013, compared to $96.3 million for the year ended December 31, 2012. The decrease for the year was mainly the result of reversals of provisions for credit losses during 2012, mostly related to the resolution of a non-accruing loan exposure. Excluding the effect of reversals (provisions) for credit losses, the Commercial Division’s net operating income improved by 7% during 2013 to $89.5 million, compared to $83.9 million in 2012, reflecting increased core revenues from higher average portfolio balances and fee generating activities. Higher average loan balances (+17%) resulted in a $5.1 million, or 5%, increase in the Commercial Division’s net interest income, while increased letters of credit activity along with the growth of the Bank’s structuring and syndication platform resulted in a $3.6 million, or 36% increase in fee income, partially offset by a $2.6 million, or 7% increase in allocated operating expenses.

 

The Commercial Division’s portfolio balances totaled $6,630 million as of December 31, 2013, an 11% increase from $5,953 million as of December 31, 2012. The year-on-year increase was mainly attributable to growing demand in the Bank’s client base of corporations (+20%), and financial institutions (+9%). On an average annual basis, in 2013 the Commercial Portfolio reached $6,337 million, an increase of $926 million, or 17% compared to average balances of $5,411 million during 2012.

 

As of December 31, 2013, the Commercial Portfolio continued to be short-term and trade-related in nature, with $4,846 million, or 73%, of the Commercial Portfolio maturing within one year. Trade financing operations represented 58% of the portfolio, while the remaining balance consisted primarily of lending to banks and corporations involved in foreign trade.

 

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Credit disbursements in 2013 increased by 26% to $14,276 million, a record level for the Bank, compared to $11,338 million disbursed in 2012, as overall demand for credit strengthened. The non-accrual portfolio amounted to $3.1 million representing 0.05% of the loan portfolio as of December 31, 2013, compared to a balance of zero as of December 31, 2012.

 

The Treasury Division

 

The Treasury Division is responsible for the Bank’s funding and liquidity management, along with the management of its activities in investment securities, which comprise trading assets, securities available-for-sale and securities held-to-maturity, as well as the management of the Bank’s interest rate, liquidity, price and currency risks. Following the 2013 sale of the former Bladex Asset Management unit, the Treasury Division also continues to incorporate the Bank’s remaining participation in investment funds, which ceased to be consolidated in the Bank’s financial statements as of April 2014, as the Bank exercised its right to redeem, bringing its participation in the Feeder to below 50%.

 

The Treasury Division’s net income is presented net of allocated operating expenses, and includes net interest income from treasury activities, net of allocated cost of funds, as well as related net other income (expense), including net results from derivative financial instruments and hedging, net gain (loss) from investment funds, net gain (loss) from trading securities, net gain (loss) on sale of securities available-for-sale, and net gain (loss) on foreign currency exchange.

 

Year 2014 vs. Year 2013

 

Treasury Division reported net income of $14.6 million in 2014, compared to a net loss of $6.0 million in 2013, due to the combined effects of: (i) an $11.2 million increase in non-interest operating income, mainly driven by improved performance from its participation in investment funds, (ii) a $10.9 million increase in net interest income primarily attributable to the decrease in average funding costs to 1.07% from 1.33% , and (iii) a $2.2 million decrease in allocated operating expenses, mainly associated with expenses from the investment funds that ceased to be consolidated in the Bank’s financial statements as of April 2014.

 

Liquid assets stood at $0.7 billion as of December 31, 2014, compared to $0.8 billion as of December 31, 2013, as the Bank maintained its proactive liquidity management as a preventive measure in the face of heightened market volatility. The liquidity ratio (liquid assets to total assets) was 9.2% as of December 31, 2014, compared to 11.1% as of December 31, 2013.

 

The securities available-for-sale portfolio totaled $0.3 billion as of December 31, 2014. This was broadly unchanged from the same level as of December 31, 2013. The securities available-for-sale portfolio consisted of readily-quoted Latin American securities, 74% of which represented multilateral, sovereign or state-owned risk.

 

The Bank surpassed the $3 billion mark in deposits several times during 2014, before ending the year at $2,507 million in deposit balances as of December 31, 2014, an increase of 6% compared to $2,361 million as of December 31, 2013. Total deposits represented 35% of total financial liabilities as of December 31, 2014, compared to 36% as of December 31, 2013. Short-term borrowings and debt, including securities sold under repurchase agreements, (“repos”), totaled $3.0 billion as of December 31, 2014, nearly unchanged compared to $3.0 billion as of December 31, 2013, while long-term borrowings and debt totaled $1.4 billion as of December 31, 2014, an increase of 22% compared to $1.2 billion as of December 31, 2013.

 

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Year 2013 vs. Year 2012

 

For the year 2013 the Treasury Division reported a net loss of $6.0 million compared to a net loss of $8.2 million during 2012. The Treasury Division’s net loss during 2013 was attributable to a decrease of $19.4 million in non-interest operating income, mainly related to net losses from the remaining participation in investment funds and lower gains on the sale of securities available-for-sale, which was partially offset by the combined effects of: (i) a $13.0 million increase in net interest income, which resulted from an effective interest rate gap management, higher net interest income from increased average investment securities balances, and lower average cost of funds; (ii) a $4.1 million decrease in allocated operating expenses; and (iii) a $4.5 million positive variation in net income attributable to the redeemable non-controlling interest in the funds.

 

Liquid assets amounted to $831 million as of December 31, 2013, compared to $690 million as of December 31, 2012, as the Bank maintained its proactive approach to liquidity management, increasing its liquidity position as a response to heightened market volatility. Liquid assets as of December 31, 2013 represented 11.1% of total assets and 12.7% of total liabilities, compared to 10.2% and 11.6%, respectively, as of December 31, 2012.

 

Deposit balances increased $44 million, or 2%, to $2,361 million as of December 31, 2013, compared to $2,317 million as of December 31, 2012. Deposits represented 36% of total liabilities as of December 31, 2013, compared to 39% as of December 31, 2012. Short-term borrowings and debt, including repos, totaled $2,991 million as of December 31, 2013, an 86% year-on-year increase, while long-term borrowings and debt totaled $1,154 million, a 39% year-on-year decrease, as the Bank opted to pre-pay certain medium-term obligations with remaining tenors of less than a year, as part of its proactive funding and interest rate position management. Consequently, weighted average funding costs for the year ended December 31, 2013 reached 1.33%, a decrease of 30 basis points, or 18%, compared to 1.63% for the year ended December 31, 2012.

 

Net Income Attributable to Bladex

 

During 2014, the Bank experienced increased demand for its lending products, as the Bank’s core competencies allowed it to compete effectively within challenging market conditions, in which the prices of many commodities continued to decline, the growth rates of the Region’s domestic markets was lower than in previous years, and the significant reduction in oil prices added to global market volatility.

 

The Bank’s net income totaled $106.9 million in 2014, an increase of $22 million or 26% compared to $84.8 million in 2013. This increase was driven by the positive performance of the Bank’s core business activities, with growth in its Commercial Portfolio, net margins and revenue, and improved efficiency on lower expenses, all while maintaining strong asset quality. These factors were complemented by a positive trend in non-core results from its participation in investment funds.

 

The Bank’s net income reached $84.8 million in 2013, compared to $93.0 million in 2012. The 2013 results were negatively impacted by the remaining participation in investment funds pertaining to the Asset Management unit sold in 2013, offsetting improved performance from business activities: higher net interest income from robust average portfolio growth, improving net interest margin and fee income, strong portfolio quality and lower operating expenses.

 

Net Interest Income and Margins

 

The following table sets forth information regarding the Bank’s net interest income, net interest margin (net interest income divided by the average balance of interest-earning assets), and net interest spread (the average yield earned on interest-earning assets, less the average yield paid on interest-bearing liabilities) for the periods indicated:

 

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   For the Year Ended December 31, 
   2014   2013   2012 
   (in $ million, except percentages) 
Net interest income (loss)               
Commercial Division  $122.2   $115.1   $110.0 
Treasury Division   18.9    8.0    (5.0)
Total Net Interest Income  $141.1   $123.1   $105.0 
                
Net interest margin   1.87%   1.75%   1.70%
Net interest spread   1.71%   1.55%   1.44%

 

Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Differentials

 

The following table presents the distribution of consolidated average assets, liabilities and stockholders’ equity, as well as the total dollar amounts of interest income from average interest-earning assets and the resulting yields, the dollar amounts of interest expense and average interest-bearing liabilities, and corresponding information regarding rates. Average balances have been computed on the basis of consolidated daily average balances:

 

   For the Year ended December 31, 
   2014   2013   2012 
Description  Average
balance
   Interest   Average
yield/rate
   Average
balance
   Interest   Average
yield/rate
   Average
balance
   Interest   Average
yield/rate
 
   (in $ million, except percentages) 
Interest-Earning Assets                                             
Interest bearing  deposits with banks  $639   $1.5    0.24%  $635   $1.5    0.24%  $711   $1.9    0.26%
Loans, net of unearned income & deferred loan fees   6,437    201.9    3.09%   5,934    193.0    3.21%   5,064    181.1    3.52%
Non-accrual loans (1)   4    0.0    0.16%   0    0.0    n.m.(*)   23    2.1    9.17%
Trading assets   0    0.0    0.00%   2    0.0    0.00%   7    0.1    0.94%
Investment securities (2)   389    9.3    2.34%   346    8.5    2.43%   254    6.4    2.48%
Investment funds   75    0.0    0.03%   113    2.3    2.01%   117    0.9    0.74%
Total interest-earning assets  $7,544   $212.7    2.78%  $7,028   $205.3    2.88%  $6,177   $192.4    3.06%
Non-interest-earning assets   88              77              55           
Allowance for loan losses   (75)             (71)             (82)          
Other assets   16              13              20           
Total Assets  $7,573             $7,048             $6,169           
Interest-Bearing Liabilities                                             
Demand Deposits (3)  $89   $0.1    0.07%  $95   $0.2    0.19%  $137   $0.4    0.29%
Time Deposits (3)   2,634    11.1    0.42%   2,418    12.2    0.50%   2,121    12.5    0.58%
Deposits (3)   2,723    11.2    0.41%   2,513    12.4    0.49%   2,258    12.9    0.56%
Trading liabilities   0    0.0    0.00%   7    0.0    0.00%   10    0.0    0.00%
Investment funds   0    0.0    n.m.(*)   0    1.8    n.m. (*)   0    0.1    n.m. (*)
Securities sold under repurchase agreements   280    2.1    0.75%   227    1.3    0.56%   153    1.6    1.05%
Short-term borrowings and debt   2,191    21.8    0.98%   2,048    25.7    1.24%   973    19.0    1.92%
Long-term borrowings and debt   1,389    36.4    2.59%   1,318    41.0    3.07%   1,892    53.7    2.79%
Total interest-bearing liabilities  $6,583   $71.6    1.07%  $6,112   $82.2    1.33%  $5,285   $87.5    1.63%
Non-interest bearing liabilities and other liabilities  $79             $61             $76           
Total Liabilities  $6,663             $6,173             $5,361           
Redeemable noncontrolling interest   16              29              4           
Stockholders’ equity   895              846              804           
Total Liabilities and Stockholders’ Equity  $7,573             $7,048             $6,169           
Net interest spread             1.71%             1.55%             1.44%
Net interest income and net interest margin       $141.1    1.87%       $123.1    1.75%       $105.0    1.70%

 

 

(1)  Interest received on non-accrual loans is only recorded as earned when collected.

(2) The average yield of the investment securities portfolio (including securities available-for-sale and securities held to maturity) using cost-based average balances, would have been 2.46%, 2.55%, and 2.64%, for 2014, 2013 and 2012, respectively.

(3) The Bank obtains deposits in the form of demand deposits and time deposits from its central bank shareholders, commercial banks and corporations.

Note: Interest income and/or expense includes the effect of derivative financial instruments used for hedging.

(*) “n.m.” means not meaningful.

 

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Changes in Net Interest Income — Volume and Rate Analysis

 

Net interest income is affected by changes in volume and changes in interest rates. Volume changes are caused by differences in the level of interest-earning assets and interest-bearing liabilities. Rate changes result from differences in yields earned on interest-earning assets and rates accrued on interest-bearing liabilities. The following table sets forth a summary of the changes in net interest income of the Bank resulting from changes in average interest-earning asset and interest-bearing liability volume and changes in average interest rates for 2014 compared to 2013 and for 2013 compared to 2012. Volume and rate variances have been calculated based on daily movements in average balances over the period and changes in interest rates on average interest-earning assets and average interest-bearing liabilities.

 

   2014 vs. 2013   2013 vs. 2012 
  

Volume(*)

  

Rate(*)

   Net Change  

Volume(*)

  

Rate(*)

   Net Change 
   (in $ thousand) 
Increase (decrease) in interest income                              
Interest bearing deposits with banks  $10   $10   $20   $(186)  $(164)  $(350)
Accruing loans, net   15,802    (6,879)   8,923    28,021    (16,109)   11,912 
Non-accrual loans   6    0    6    (3)   (2,146)   (2,149)
Trading assets   0    0    0    (0)   (69)   (69)
Investment securities   1,044    (284)   760    2,247    (146)   2,101 
Investment funds   (10)   (2,271)   (2,281)   (86)   1,507    1,421 
Total increase (decrease)  $16,852   $(9,424)  $7,428   $29,993   $(17,127)  $12,866 
Increase (decrease) in interest expense                              
Deposits   (869)   2,004    1,135    (1,240)   1,803    563 
Investment funds   16    1,791    1,807    630    (2,365)   (1,735)
Securities sold under repurchase agreement and Short-term borrowings and debt   (1,902)   4,953    3,051    (13,577)   7,306    (6,271)
Long-term borrowings and debt   (1,850)   6,468    4,618    17,943    (5,251)   12,692 
Total increase (decrease)  $(4,605)  $15,216   $10,611   $3,756   $1,493   $5,249 
Increase (decrease) in net interest income  $12,247   $5,792   $18,039   $33,749   $(15,634)  $18,115 

 

(*) Volume variation effect in net interest income is calculated by multiplying the difference in average volumes by the current year’s average yield. Rate variation effect in net interest income is calculated by multiplying the difference in average yield by the prior year’s average volume.

 

Net Interest Income and Net Interest Margin Variation

 

2014 vs. 2013

 

For the year ended December 31, 2014, the Bank’s net interest income reached $141.1 million, compared to $123.1 million during the year ended December 31, 2013. The $18.0 million, or 15%, increase in net interest income was mainly driven by:

i.A $12.2 million overall increase in net interest income due to higher average balances of the Bank’s interest-earning assets, mainly from higher average loan portfolio balances (+9%) and investment securities balances (+12%), partially offset by higher average balances of the Bank’s interest-bearing liabilities (+8%).
ii.A $5.8 million overall increase in net interest income on lower average funding costs (-26 basis points), which more than offset the 10 basis point decrease in average interest-earning rates.

 

Net interest margin increased 12 basis points to 1.87% in the year ended December 31, 2014, compared to 1.75% in the year ended December 31, 2013, mainly attributable to lower funding costs (-26 basis points) and higher average loan portfolio balances (+9%).

 

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2013 vs. 2012

 

The Bank's net interest income for the year ended December 31, 2013 totaled $123.1 million, compared to $105.0 million for the year ended December 31, 2012. The $18.1 million, or 17% increase in net interest income for the year ended December 31, 2013 was primarily driven by:

i.A $33.7 million overall increase in net interest income, mainly driven by higher average interest-earning assets, mostly from higher average balances in the loan portfolio (+17%) and in investment securities (+33%), along with lower average long-term debt and borrowings (-30%), partially offset by higher short-term interest-bearing liabilities (deposits +11%, borrowings and repo’s +102%), as the Bank shifted its funding composition to shorter tenors.
ii.A $15.6 million overall decrease in net interest income as a result of lower average interest rates on the Bank’s assets (-18 basis points), partly offset by lower rates paid on the Bank’s liabilities (-30 basis points).

 

Net interest margin increased 5 basis points to 1.75% in 2013 compared to 1.70% in 2012, mainly as a result of lower cost of funds.

 

Reversal (Provision) for Loan Losses

 

   For the year ended December 31, 
   2014   2013   2012 
   (in $ million) 
Net Brazil specific reserve reversals (provisions)   (1.2)   (1.0)   0.0 
Net Mexico specific reserve reversals (provisions)   (0.2)   0.0    7.3 
Total specific reserve reversals (provisions)   (1.4)   (1.0)   7.3 
Generic reserve reversals (provisions) — due to changes in credit portfolio composition and risk levels and loan recoveries   (5.5)   2.6    1.0 
Total generic reserve reversals (provisions)   (5.5)   2.6    1.0 
Total reversals (provisions) of allowance for loan losses  $(6.9)  $1.6   $8.3 

 

As of December 31, 2014, the Bank had $4.0 million in non-accrual loans, compared to $3.1 million in non-accrual loans as of December 31, 2013, and compared to zero loans in non-accrual status as of December 31, 2012, all of which corresponded to impaired loans for which specific reserves of $2.4 million and $1.0 million were allocated in 2014 and 2013, respectively.

 

The $6.9 million provision for loan losses during the year ended December 31, 2014 was the result of a $5.5 million provision of generic reserves mainly attributable to the Bank’s loan portfolio growth during the year (+$538 million, or +9%), and an increase of $1.4 million related to the specific loan loss reserve, totaling $2.4 million at December 31, 2014, which was assigned to non-accruing loans for $4.0 million at the same date.

 

The $1.6 million reversal of provision for loan losses during the year ended December 31, 2013 was the result of a $2.6 million reversal of generic reserves mainly associated with the improved risk profile of the Bank’s loan portfolio (+$1.2 million), and recoveries from previous years charge-off loans (+$1.4 million), which was partially offset by a $1.0 million specific loan loss reserve assigned to a $3.1 million loan as of December 31, 2013.

 

During the year ended December 31, 2012, the Bank reversed $8.3 million in provisions for loan losses, as a result of the release of specific reserves associated with the exit of a non-accruing loan exposure, along with a reversal of generic reserves associated with the improved risk profile of the Bank’s loan portfolio.

 

The Bank’s loan loss reserve coverage was 1.19% as of December 31, 2014, an increase from 1.18% as of December 31, 2013, and a decrease from 1.28% as of December 31, 2012. The annual increase in the loan loss reserve coverage compared to 2013 reflects the impact of changes in the composition of the Bank’s loan portfolio as measured in the Bank’s reserve model.

 

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For more detailed information, see Item 5, “Operating and Financial Review and Prospects/Operating Results/Asset Quality and Allowance for Credit Losses,” and Item 18, “Financial Statements,” notes 2(n) and 8.

 

For more detailed information about Non-Accrual Loans, see Item 18 “Financial Statements,” notes 2(l) and 7.

 

Reversals (Provisions) for Losses on Off-Balance Sheet Credit Risk

 

The $1.6 million of provisions for losses on off-balance sheet credit risk in 2014 was the result of portfolio growth in the off-balance sheet exposures and higher risk coverage associated with the Bank’s portfolio composition.

 

During the year ended December 31, 2013, the Bank accrued $0.4 million on provision for losses on off-balance sheet credit risk mainly due to higher balances in the off-balance sheet exposures in the Commercial Portfolio, partially mitigated by an improvement of the risk profile of the Region.

 

The $4.0 million reversal of provision for losses on off-balance sheet credit risk in the year ended December 31, 2012 was primarily the result of lower balances in the off-balance sheet exposures in the Commercial Portfolio and improved risk profile of the Bank’s portfolio composition.

 

The off-balance sheet reserve coverage was 1.37% as of December 31, 2014, compared to 1.08% as of December 31, 2013, and compared to 2.05% as of December 31, 2012.

 

For more detailed information, see Item 5, “Operating and Financial Review and Prospects/Operating Results/Asset Quality and Allowance for Credit Losses,” and Item 18, “Financial Statements,” notes 2(n) and 8.

 

Fees and Commissions, net

 

The Bank generates fee and commission income primarily from letters of credit confirmations, the issuance of guarantees (including commercial risk coverage), and credit commitments, and loan origination, structuring and syndication activities. The following table shows the components of the Bank’s fees and commissions, net, for the periods indicated:

 

   For the Year Ended December 31, 
   2014   2013   2012 
   (in $ thousand) 
Letters of credit  $9,372   $9,244   $7,617 
Guarantees   1,065    142    184 
Loan Fees   7,209    4,220    2,153 
Other (1)   (144)   63    67 
Fees and commissions, net  $17,502   $13,669   $10,021 

 

(1) Net of commission expense.

 

During the year ended December 31, 2014, fees and commissions amounted to $17.5 million, compared to $13.7 million in the year ended December 31, 2013. The $3.8 million, or 28% increase was mostly driven by increased loan structuring and syndication activities, where the Bank acted as mandated lead arranger and book-runner in 10 transactions out of a total of 14 structured transactions, along with increased commissions from higher average letters of credit portfolio balances and guarantee issuances.

 

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Fees and commissions totaled $13.7 million for the year ended December 31, 2013, compared to $10.0 million for the year ended December 31, 2012. The $3.6 million, or 36% growth resulted from higher loan intermediation fees mainly from mandated transactions, reflecting the Bank’s progress in establishing a track record as lead arranger of syndications, and an increase in the activity of the letter of credit business.

 

For more information, see Item 18, “Financial Statements,” note 2(o).

 

Derivative Financial Instruments and Hedging

 

The Bank recorded net gains of $0.1 million, $0.4 million, and $0.1 million in 2014, 2013, and 2012, respectively, in derivative financial instruments and hedging.

 

For additional information, see Item 11, “Quantitative and Qualitative Disclosure about Market Risk,” and Item 18, “Financial Statements,” notes 2(t) and 21.

 

Net Gain (Loss) from Investment Funds Trading

 

Net gain from investment funds trading totaled $3.4 million in the year ended December 31, 2014, compared to a net loss of $6.7 million in the year ended December 31, 2013, and a net income of $7.0 million in the year ended December 31, 2012, related to the performance of trading activities from the Bank’s remaining participation in the investment funds.

 

For additional information, see Item 18, “Financial Statements,” notes 6 and 24.

 

Net Gain (Loss) from Trading Securities

 

During the year ended December 31, 2014, the Bank recorded a net loss from trading securities of $0.4 million, compared to net gains of $3.2 million, and $11.2 million, for the years ended December 31, 2013 and 2012, respectively.

 

The $0.4 million loss for the year ended December 31, 2014 and the $3.2 million gain for the year ended December 31, 2013 were mainly attributable to changes in valuations of derivative instruments used for risk management purposes that did not qualify for hedge accounting and/or in respect of which hedge accounting was discontinued.

 

The $11.2 million gain in the year ended December 31, 2012 was mainly due to valuations of financial derivative instruments for which hedge accounting was discontinued during the year ended December 31, 2012.

  

Net Gain on Sale of Securities Available-for-Sale

 

The Bank purchases debt instruments with the intention of selling them prior to maturity.  These debt instruments are classified as securities available-for-sale and are included as part of the Bank’s credit portfolio.

 

The Bank’s net gain on sale of securities available-for-sale for the year ended December 31, 2014 was $1.9 million, compared to $1.5 million for the year ended December 31, 2013, and compared to $6.0 million for the year ended December 31, 2012. Detail of the net gains is as follows:

 

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   For the year ended December 31, 
   2014   2013   2012 
   (in $ millions) 
Nominal amount  $218.1   $102.5   $239.6 
Amortized cost  $(228.2)  $(105.9)  $(254.8)
Proceeds   230.1    109.8    262.2 
Net effect of unwinding hedging derivatives of the available for-sale securities portfolio   0.0    (2.4)   (1.4)
Total net gain on sale of securities available-for-sale  $1.9   $1.5   $6.0 

 

For additional information, see Item 18, “Financial Statements,” note 5.

 

Net Gain on Sale of Loans

 

The net gain on sale of loans corresponds to income derived from the Bank’s business stream of loan intermediation and distribution activities in the primary and secondary markets.

 

During the years ended December 31, 2014, 2013 and 2012, the Bank sold loans on the secondary market with a book value of $515.6 million, $89.5 million and $146.2 million, respectively, generating net gains on sale of loans of $2.2 million, $0.4 million and $1.1 million, respectively.

 

During the year ended December 31, 2014, the Bank assigned $246 million of originated loans to the International Finance Corporation (“IFC”), which generated a net gain of $0.4 million, as part of a risk-sharing facility agreement with the IFC of up to $350 million, established to expand access to trade finance for agribusiness in Latin America and to contribute to regional food security.

 

Gain (Loss) on Foreign Currency Exchange

 

The Bank recorded a net gain of $0.8 million on foreign currency exchange during the year ended December 31, 2014, compared to net losses of $3.8 million and $10.5 million, in 2013 and 2012, respectively. The results reflect the effects of currency exchanges in assets and liabilities economically hedged with derivatives that do not qualify for hedge accounting, the impact of which is shown under Net Gain (Loss) from Trading Securities.

 

Operating Expenses

 

The following table shows a breakdown of the components of the Bank’s total operating expenses for the periods indicated:

 

   For the Year Ended December 31, 
   2014   2013   2012 
   (in $ thousand) 
Salaries and other employee expenses  $31,339   $31,702   $33,171 
Depreciation and amortization of equipment and leasehold improvements   2,487    2,747    2,269 
Professional services   5,177    4,010    4,053 
Maintenance and repairs   1,544    1,529    1,936 
Expenses from investment funds   416    2,589    2,953 
Other operating expenses   12,739    11,729    11,432 
Total operating expenses  $53,702   $54,306   $55,814 

 

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During the year ended December 31, 2014, the Bank’s operating expenses totaled $53.7 million, compared to $54.3 million in 2013. The $0.6 million, or 1% decrease in operating expenses over the year was primarily attributable to the deconsolidation of fund-related expenses, along with a reduction in salaries and other employee expenses related primarily to a decrease in the average number of full-time employees, which was partially offset by higher professional fees and other expenses mainly related to business projects.

 

During the year ended December 31, 2013, the Bank’s operating expenses totaled $54.3 million, compared to $55.8 million in 2012. The $1.5 million, or 3% year-on-year decrease in operating expenses was mainly attributable to lower salary and other employee expenses.

 

Changes in Financial Condition

 

The following table presents components of the Bank’s balance sheet at the dates indicated:

 

   As of December 31, 
   2014   2013   2012 
   (in $ thousand) 
Assets               
Cash and due from banks  $4,985   $2,161   $6,718 
Interest-bearing deposits in banks   775,530    837,557    700,312 
Trading assets   0    0    5,265 
Securities available-for-sale   338,973    334,368    183,017 
Securities held-to-maturity   54,180    33,759    34,113 
Investment funds   57,574    118,661    105,888 
Loans   6,686,244    6,148,298    5,715,556 
Less:               
Allowance for loan losses   79,675    72,751    72,976 
Unearned income and deferred fees   8,509    6,668    7,100 
Loans, net   6,598,060    6,068,879    5,635,480 
Customers’ liabilities under acceptances   114,018    1,128    1,157 
Accrued interest receivable   47,938    40,727    37,819 
Equipment and leasehold improvements, net   8,129    10,466    12,808 
Derivative financial instruments used for hedging — receivable   12,324    15,217    19,239 
Other assets   13,561    8,389    14,580 
Total Assets  $8,025,272   $7,471,312   $6,756,396 
Liabilities and Stockholders’ Equity               
Deposits  $2,506,694   $2,361,336   $2,317,260 
Trading liabilities   52    72    32,304 
Securities sold under repurchase agreement   300,519    286,162    158,374 
Short-term borrowings and debt   2,692,537    2,705,365    1,449,023 
Acceptances outstanding   114,018    1,128    1,157 
Accrued interest payable   14,855    13,786    17,943 
Long-term borrowings and debt   1,405,519    1,153,871    1,905,540 
Derivative financial instruments used for hedging - payable   40,287    8,572    11,747 
Reserve for losses on off-balance sheet credit risk   6,849    5,222    4,841 
Other liabilities   32,879    27,947    28,348 
Total Liabilities  $7,114,209   $6,563,461   $5,926,537 
Redeemable noncontrolling interest   0    49,899    3,384 
Stockholders’ Equity               
Common stock, no par value   279,980    279,980    279,980 
Additional paid-in capital in excess of assigned value of common stock   117,339    118,646    121,419 
Capital reserves   95,210    95,210    95,210 
Retained earnings   510,046    458,699    422,048 
Accumulated other comprehensive loss   (13,885)   (12,575)   (730)
Treasury stock   (77,627)   (82,008)   (91,452)
Total Stockholders’ Equity  $911,063   $857,952   $826,475 
Total Liabilities and Stockholders’ Equity  $8,025,272   $7,471,312   $6,756,396 

 

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2014 vs. 2013

 

The Bank’s total assets amounted to $8,025 million as of December 31, 2014, a $554 million, or 7% increase from $7,471 million as of December 31, 2013. This increase was primarily the result of a $538 million, or 9% increase in the Bank’s loan portfolio, and a $113 million increase in customers’ liabilities under acceptances, partially offset by lower interest-bearing deposits in banks (which decreased by $62 million) and the deconsolidation of the investment funds (which decreased by $61 million).

 

As of December 31, 2014, the Bank’s loan portfolio amounted to $6,686 million, with an average remaining maturity term of 317 days, as 72% of the loan portfolio was scheduled to mature within one year. Trade financing operations represented 56% of the loan portfolio, while the remaining balance consisted primarily of lending to financial institutions and corporations engaged in foreign trade.

 

As of December 31, 2014, the Bank’s liquidity amounted to $741 million, compared to $831 million as of December 31, 2013, in line with the Bank’s long-standing approach to prudent and proactive liquidity management, with requirements determined according to the Basel III Liquidity Coverage Ratio (“LCR”) methodology. As of December 31, 2014, $616 million, or 83%, of liquid assets were deposited at the Federal Reserve Bank of New York, while the remaining liquid assets consisted of short-term funds deposited with other banks.

 

The increase in assets during 2014 was accompanied by a $551 million increase in liabilities, mainly as a result of a $251 million, or 22%, increase in long-term borrowings and debt, a $146 million, or 6%, increase in total deposits, and a $113 million increase in acceptances outstanding.

 

2013 vs. 2012

 

The Bank’s total assets amounted to $7,471 million as of December 31, 2013, a $715 million, or 11% increase from $6,756 million as of December 31, 2012, mainly as a result of increased balances related to the loan portfolio (an increase of $432 million), securities available-for-sale (an increase of $151 million) and cash and due from banks (an increase of $133 million). As of December 31, 2013, the Bank’s loan portfolio amounted to $6,148 million, with an average remaining maturity term of 289 days, as 73% of the portfolio was scheduled to mature within one year. Trade financing operations represented 58% of the loan portfolio, while the remaining balance consisted primarily of lending to banks and corporations involved in foreign trade.

 

The Bank’s liquidity amounted to $831 million as of December 31, 2013, compared to $690 million as of December 31, 2012, as the Bank maintained its proactive approach to liquidity management.

 

The 2013 increase in assets resulted in a $637 million increase in liabilities, mainly in short-term borrowings and debt (which increased by $1,256 million, or 87%), and repos (which increased by $128 million, or 81%), partially offset by the decrease in long-term borrowings and debt (which decreased by $752 million, or 39%), as the Bank opted to pre-pay certain medium-term obligations with remaining tenors of less than a year, as part of its proactive funding and interest rate position management.

 

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Asset Quality

 

The Bank believes that its asset quality is a function of its strong client base, the importance that governments and borrowers alike attribute to maintaining continued access to trade financing, its preferred creditor status, and its strict adherence to commercial criteria in its credit activities. The Bank’s management and the CPER periodically review a report of all loan delinquencies. The Bank’s collection policies include rapid internal notification of any delinquency and prompt initiation of collection efforts, usually involving senior management.

 

The Bank maintains a system of internal credit quality indicators. These indicators are assigned depending on several factors which include: profitability, quality of assets, liquidity and cash flows, capitalization and indebtedness, economic environment and positioning, regulatory framework and/or industry, sensitivity scenarios and the quality of borrower’s management and shareholders. A description of these indicators is as follows:

 

Rating   Classification   Description
         
1 to 6   Normal   Clients with payment ability to satisfy their financial commitments.
         
7   Special Mention   Clients exposed to systemic risks specific to the country or the industry in which they are located, facing adverse situations in their operation or financial condition.  At this level, access to new funding is uncertain.
         
8   Substandard   Clients whose primary source of payment (operating cash flow) is inadequate and who show evidence of deterioration in their working capital that does not allow them to satisfy payments on the agreed terms, endangering recovery of unpaid balances.
         
9   Doubtful   Clients whose operating cash flow continuously shows insufficiency to service the debt on the originally agreed terms.  Due to the fact that the borrower presents an impaired financial and economic situation, the likelihood of recovery is low.
         
10   Unrecoverable   Clients with operating cash flow that does not cover their costs, are in suspension of payments, presumably they will also have difficulties to fulfill possible restructuring agreements, are in a state of insolvency, or have filed for bankruptcy, among others.

 

Impaired Assets and Contingencies

 

The Bank’s assets that are subject to impairment consist mainly of loans and securities. For more information on impaired loans, see Item 18, “Financial Statements”, Notes 2(l) and 7. For information on impaired securities, see Item 18, “Financial Statements,” notes 2(i) and 5. For more information on contingencies, see Item 18, “Financial Statements”, note 19, and see Item 5, “Operating and Financial Review and Prospects—Operating Results—Reversal (Provision) for Loan Losses.”

 

The Bank identifies loans as delinquent when no debt service and/or interest payment has been received for 30 days after such payments were due. The outstanding balance of a loan is considered past due when the total principal balance with one single balloon payment has not been received within 30 days after such payment was due, or when no agreed-upon periodic payment has been received for a period of 90 days after the agreed-upon date.

 

Loans are placed in a non-accrual status when interest or principal is overdue for 90 days or more, or before if the Bank’s management believes there is an uncertainty with respect to the ultimate collection of principal or interest. Any interest receivable on non-accruing loans is reversed and charged-off against earnings. Interest on these loans is only recorded as earned when collected. Non-accruing loans are returned to an accrual status when (1) all contractual principal and interest amounts are current; (2) there is a sustained period of repayment performance in accordance with the contractual terms of at least six months; and (3) if in the Bank management’s opinion the loan is fully collectible.

 

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A modified loan is considered a troubled debt restructuring when the borrower is experiencing financial difficulties and if the restructuring constitutes a concession to the borrower. A concession may include modification of terms such as an extension of maturity date, reduction in the stated interest rate, rescheduling of future cash flows, and reduction in the face amount of the debt or reduction of accrued interest, among others.

 

Marketable securities received in exchange for loans under troubled debt restructurings are initially recorded at fair value, with any gain or loss recorded as a recovery or charge to the allowance, and are subsequently accounted for as securities available-for-sale.

 

A loan is considered impaired, and also placed on a non-accrual basis, when based on current information and events, it is probable that the Bank will be unable to collect all amounts due according to original contractual terms of the loan agreement. Factors considered by the Bank’s management in determining impairment include collection status, collateral value, and economic conditions in the borrower’s country of residence. Impaired loans also include those modified loans considered troubled debt restructurings. When current events or available information confirm that specific impaired loans or portions thereof are uncollectible, such impaired loans are charged-off against the allowance for loan losses.

 

The reserve for losses on impaired loans is determined considering all available evidence, including the present value of expected future cash flows discounted at the loan's original contractual interest rate and/or the fair value of the collateral, if applicable. If the loan’s repayment is dependent on the sale of the collateral, the fair value considers costs to sell.

 

The following table sets forth information regarding the Bank’s impaired assets and contingencies at the dates indicated:

 

   As of December 31, 
   2014   2013   2012   2011   2010 
   (in $ million, except percentages) 
Impaired loans  $4   $3   $0   $32   $29 
Allocation from the allowance for loan losses   2    1    0    15    12 
Impaired loans as a percentage of total loans, net of unearned income and deferred commission   0.1%   0.1%   0.0%   0.6%   0.7%
Impaired contingencies  $0   $0   $0   $0   $0 
Allocation from the reserve for losses on off balance-sheet credit risks   0    0    0    0    0 
Impaired contingencies as a percentage of total contingencies   0.0%   0.0%   0.0%   0.0%   0.0%
Impaired securities (par value)  $0   $0   $0   $0   $0 
Estimated fair value adjustments on options and impaired securities (1)   0    0    0    0    0 
Estimated fair value of impaired securities  $0   $0   $0   $0   $0 
Impaired securities as a percentage of total securities (2)   0.0%   0.0%   0.0%   0.0%   0.0%
Impaired assets and contingencies as a percentage of total credit portfolio (3)   0.1%   0.0%   0.0%   0.6%   0.6%

 

(1)Includes impairment losses on securities, estimated unrealized gain (loss) on impaired securities, premiums and discounts.
(2)Total securities consist of investment securities considered part of the Bank’s credit portfolio.
(3)The total credit portfolio includes loans net of unearned income and deferred loan fees, selected commercial deposits placed, fair value of investment securities (including securities available-for-sale and securities held-to-maturity), customers’ liabilities under acceptances, and contingencies (including confirmed and stand-by letters of credit, guarantees covering commercial risk and credit commitments).

 

The Bank did not have impaired loans in its loan portfolio without related allowances as of December 31, 2014, 2013 or 2012.

 

As of December 31, 2014, the Bank had troubled debt restructuring loans of $1 million reported as impaired loans in non-accrual status. The Bank had no troubled debt restructurings for the years ended December 31, 2013 and 2012.

 

The following table sets forth the distribution of the Bank’s loans charged-off against the allowance for loan losses by country as of December 31 of each year:

 

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   As of December 31, 
   2014   %   2013   %   2012   %   2011   %   2010   % 
   (in $ million, except percentages) 
Brazil  $0    0.0   $0    0.0   $0    0.0   $1    100.0   $2    40.5 
Mexico   0    0.0    0    0.0    7    100.0    0    0.0    3    59.5 
Total  $0    0.0   $0    0.0   $7    100.0   $1    100.0   $5    100.0 

 

During the year ended December 31, 2014 and 2013, the Bank had no loans charged-off against the allowance for loan losses, compared to charge-offs totaling $7 million in 2012, representing 0.13% of total loan portfolio as of December 31, 2012.

 

In the five-year period ended December 31, 2014, the Bank had disbursed $57 billion in credits and had charged-off credits for $13 million, which represents 0.02% of total credits disbursed.

 

The following table summarizes information regarding loans in non-accrual status, and interest amounts on non-accrual loans:

 

   For the year ended December 31, 
   2014   2013   2012 
   (in $ thousands) 
Loans in non-accrual status:               
Private corporations  $3,125   $3,125   $0 
Private middle-market companies   909    0    0 
Total loans in non-accrual status  $4,034   $3,125   $0 
Interest which would have been recorded if the loans had not been  in a non-accrual status   191    67    0 
Interest income collected on non-accruing loans   6    0    2,288 

 

Allowance for Credit Losses

 

The allowance for credit losses, which includes the allowance for loan losses and the reserve for losses on off-balance sheet credit risk, covers the credit risk on loans and contingencies. The allowance for credit losses is provided for losses derived from the credit extension process, inherent in the loan portfolio and off-balance sheet financial instruments, using the reserve method of providing for credit losses. Additions to the allowance for credit losses are made by debiting earnings. Credit losses are deducted from the allowance, and subsequent recoveries are added. The allowance is also decreased by reversals of the allowance back to earnings. The allowance attributable to loans is reported as a deduction of loans and the allowance for off-balance sheet credit risk, such as, letters of credit and guarantees, is reported as a liability.

 

The allowance for credit losses includes an asset-specific component and a formula-based component. The asset-specific component, or specific allowance, relates to the provision for losses on credits considered impaired and measured individually case-by-case. A specific allowance is established when the discounted cash flows (or observable fair value of collateral) of the credit is lower than the carrying value of that credit. The formula-based component, or generic allowance, covers the Bank’s performing credit portfolio and is established based in a process that estimates the probable loss inherent in the portfolio, based on statistical analysis and management’s qualitative judgment.

 

The statistical calculation is a product of internal risk classifications, probabilities of default and loss given default. The probability of default is supported by Bladex’s historical portfolio performance, complemented by probabilities of default provided by external sources, in view of the greater robustness of this external data for some cases. The loss given default is based on Bladex’s historical losses experience and best practices.

 

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The reserve balances, for both on and off-balance sheet credit exposures, are calculated by applying the following formula:

 

Reserves = S(E x PD x LGD); where:

a)Exposure (E) = the total accounting balance (on- and off-balance sheet) at the end of the period under review.
b)Probabilities of Default (PD) = one-year probability of default applied to the portfolio. Default rates are based on the Bank’s historical portfolio performance per rating category, complemented by an international rating agency’s probabilities of default for categories 6, 7 and 8, in view of the greater robustness of data for such cases.
c)Loss Given Default (LGD) = a factor utilized, based on historical information, same as based on best practices in the banking industry. Management applies judgment and historical loss experience.

 

Management can also apply complementary judgment to capture elements of prospective nature or loss expectations based on risks identified in the environment that are not necessarily reflected in the historical data.

 

The allowance policy is applicable to all classes of loans and off-balance sheet financial instruments of the Bank.

 

For additional information regarding allowance for credit losses, see Item 18, “Financial Statements,” notes 2(n) and 8.

 

The following table sets forth information regarding the Bank’s allowance for credit losses with respect to the total Commercial Portfolio outstanding as of December 31 of each year:

 

   As of December 31, 
   2014   2013   2012   2011   2010 
   (in $ million, except percentages) 
Components of the allowance for credit losses                    
Allowance for loan losses:                         
Balance at beginning of the year  $72.8   $73.0   $88.5   $78.6   $73.8 
Provision (reversal)   6.9    (1.6)   (8.3)   8.8    9.1 
Recoveries   0.0    1.4    0.3    2.2    1.0 
Loans charged-off   0.0    0.0    (7.5)   (1.1)   (5.3)
Balance at the end of the year  $79.7   $72.8   $73.0    88.5    78.6 
Reserve for losses on off-balance sheet credit risk:                         
Balance at beginning of the year  $5.2   $4.8   $8.9   $13.3   $27.3 
Provision (reversal)   1.6    0.4    (4.0)   (4.4)   (13.9)
Balance at end of the year  $6.8   $5.2   $4.8   $8.9   $13.3 
Total allowance for credit losses  $86.5   $78.0   $77.8   $97.4   $92.0 
Allowance for credit losses to total Commercial Portfolio   1.20%   1.18%   1.31%   1.83%   2.07%
Net charge offs to average loans outstanding.   0.00%   0.00%   0.15%   0.02%   0.16%

 

The allowance for credit losses to total Commercial Portfolio amounted to 1.20% as of December 31, 2014, compared to 1.18% as of December 31, 2013, and 1.31% as of December 31, 2012. The year-on-year increase of 2 basis points in 2014 was mainly associated with the risk profile of the Bank’s portfolio composition.

 

The decrease of 13 basis points in 2013 compared to 2012 is mainly associated with an improved risk profile of the Bank’s portfolio composition in terms of client and country exposures.

 

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The annual variation in 2012 compared to 2011 in the allowance for credit losses to total Commercial Portfolio was primarily due to the release of specific reserves associated with the reduction in exposure from non-accruing loans, the reversal of provisions for losses on off-balance sheet credit risk as total contingencies declined during the year, and an improved risk profile in the composition of the Bank’s portfolio.

 

The following table sets forth information regarding the Bank’s allowance for credit losses allocated by country of exposure as of December 31 of each year:

 

   As of December 31, 
   2014   2013   2012 
   Total   %   Total   %   Total   % 
   (in $ million, except percentages) 
Allowance for loan losses
Argentina  $14.7    18.4   $5.8    8.0   $9.2    12.7 
Brazil   9.0    11.3    17.5    24.0    12.0    16.4 
Chile   0.6    0.8    7.6    10.4    1.2    1.6 
Colombia   6.4    8.0    4.7    6.5    5.2    7.2 
Costa Rica   11.5    14.5    8.5    11.7    5.3    7.2 
Dominican Republic   5.2    6.5    3.1    4.2    4.6    6.3 
Ecuador   3.7    4.6    2.4    3.3    8.3    11.4 
El Salvador   4.0    5.0    2.9    3.9    1.8    2.4 
Germany   3.1    3.9    0.0    0.0    0.0    0.0 
Guatemala   1.5    1.9    4.6    6.3    7.3    10.0 
Honduras   3.2    4.0    2.5    3.5    2.9    4.0 
Jamaica   0.2    0.3    1.0    1.3    0.3    0.5 
Mexico   7.9    9.9    4.5    6.2    3.9    5.3 
Nicaragua   0.3    0.3    0.3    0.4    1.3    1.7 
Panama   2.7    3.4    0.7    1.0    1.4    1.9 
Paraguay   2.3    2.9    2.4    3.3    0.7    1.0 
Peru   2.4    3.0    3.4    4.6    4.3    5.9 
Uruguay   0.5    0.6    0.6    0.8    2.9    4.0 
Other (1)   0.5    0.7    0.3    0.5    0.4    0.5 
Total Allowance for loan losses  $79.7    100.0   $72.8    100.0   $73.0    100.0 
 
Reserve for losses on off-balance sheet credit risk
Colombia  $1.0    14.0   $0.3    6.2   $0.0    1.0 
Dominican Republic   1.7    25.0    0.0    0.1    0.1    1.3 
Ecuador   2.6    38.3    2.1    39.7    2.8    57.2 
Guatemala   0.1    1.9    1.0    19.1    0.0    0.2 
Mexico   0.8    11.7    0.3    5.2    0.2    3.4 
Panama   0.1    1.0    0.5    9.8    0.4    8.6 
Venezuela   0.1    1.7    0.2    4.0    0.8    16.5 
Other (1)   0.4    6.4    0.8    15.9    0.5    11.8 
Total Reserve for losses on off-balance sheet credit risk  $6.8    100.0   $5.2    100.0   $4.8    100.0 
                               
Allowance for credit losses
Argentina  $14.7    17.0   $5.8    7.5   $9.2    11.9 
Brazil   9.1    10.6    17.9    22.9    12.3    15.9 
Chile   0.7    0.8    7.6    9.7    1.2    1.6 
Colombia   7.4    8.5    5.1    6.5    5.3    6.8 
Costa Rica   11.5    13.4    8.6    11.0    5.3    6.8 
Dominican Republic   6.9    8.0    3.1    3.9    4.6    6.0 
Ecuador   6.3    7.3    4.5    5.7    11.1    14.3 
El Salvador   4.0    4.6    2.9    3.7    1.8    2.3 

 

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   As of December 31, 
   2014   2013   2012 
   Total   %   Total   %   Total   % 
   (in $ million, except percentages) 
Germany   3.1    3.6    0.0    0.0    0.0    0.0 
Guatemala   1.6    1.9    5.6    7.2    7.3    9.4 
Honduras   3.2    3.7    2.6    3.3    2.9    3.8 
Jamaica   0.2    0.2    1.0    1.2    0.3    0.4 
Mexico   8.7    10.0    4.8    6.2    4.1    5.2 
Nicaragua   0.3    0.3    0.3    0.4    1.3    1.6 
Panama   2.8    3.2    1.2    1.6    1.8    2.3 
Paraguay   2.3    2.6    2.4    3.1    0.7    0.9 
Peru   2.4    2.8    3.6    4.6    4.4    5.6 
Uruguay   0.6    0.7    0.8    1.0    2.9    3.7 
Venezuela   0.1    0.1    0.2    0.3    0.8    1.0 
Other (1)   0.6    0.7    0.3    0.4    0.4    0.5 
Total Allowance for credit losses  $86.5    100.0   $78.0    100.0   $77.8    100.0 

 

(1)Other consists of allowances for credit losses allocated to countries in which allowances for credit losses outstanding did not exceed $1 million for any of the periods.

 

The following table sets forth information regarding the Bank’s allowance for loan losses by type of borrower as of December 31 of each year:

 

   As of December 31, 
   2014   2013   2012 
   Total   %   Total   %   Total   % 
   (in $ million, except percentages) 
Private sector commercial banks and Financial Institutions  $24    29.8   $25    34.4   $20    26.9 
State-owned commercial banks   7    8.2    5    7.2    9    12.6 
Central banks   1    1.5    1    0.8    0    0.0 
Sovereign debt   0    0.0    0    0.0    1    1.0 
State-owned organization   10    12.9    5    6.2    2    3.3 
Private middle - market companies   5    6.8    10    14.3    11    14.9 
Private corporations   33    40.8    27    37.2    30    41.2 
Total  $80    100.0   $73    100.0   $73    100.0 

 

Critical Accounting Policies

 

General

 

The Bank prepares its consolidated financial statements in conformity with U.S. GAAP. As a result, the Bank is required to make estimates, judgments and assumptions in applying its accounting policies that have a significant impact on the results it reports in its consolidated financial statements. Some of the Bank’s accounting policies require management to use subjective judgment, often as a result of the need to make estimates of matters that are inherently uncertain. The Bank’s Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances. Actual results may differ from the estimates.

 

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The Bank’s critical accounting estimates include assessments of allowances for fair value of certain financial instruments, credit losses, and impairment of securities available-for-sale and held-to-maturity. For information regarding the Bank’s significant accounting policies, see Item 18, “Financial Statements,” note 2.

 

Variable interest entities

 

VIEs are entities that have either a total equity investment that is insufficient to permit the entity to finance its activities without additional subordinated financial support, or whose equity investors lack the characteristics of a controlling financial interest.

 

Investors that finance the VIE through debt or equity interests or other counterparties that provide other forms of support, such as guarantees, or certain types of derivative contracts, are variable interest holders in the entity.

 

The variable interest holder, if any, that has a controlling financial interest in a VIE is deemed to be the primary beneficiary and must consolidate the VIE. The Bank would be deemed to have a controlling financial interest and be the primary beneficiary if it has both of the following characteristics:

 

− power to direct the activities of a VIE that most significantly impact the entity’s economic performance; and

 

− obligation to absorb losses of the entity that could potentially be significant to the VIE or right to receive benefits from the entity that could potentially be significant to the VIE.

 

See Item 18, “Financial Statements,” note 2(c).

 

Fair Value of Financial Instruments

 

The Bank determines the fair value of its financial instruments using the fair value hierarchy established in ASC Topic 820 – Fair Value Measurements and Disclosure, which requires the Bank to maximize the use of observable inputs (those that reflect the assumptions that market participants would use in pricing the asset or liability developed based on market information obtained from sources independent of the reporting entity) and to minimize the use of unobservable inputs (those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances) when measuring fair value. Fair value is used on a recurring basis to measure assets and liabilities in which fair value is the primary basis of accounting. Additionally, fair value is used on a non-recurring basis to evaluate assets and liabilities for impairment or for disclosure purposes. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Depending on the nature of the asset or liability, the Bank uses various valuation techniques and assumptions when estimating fair value.

 

The Bank applied the following fair value hierarchy:

 

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

 

Level 2 – Assets or liabilities valued based on observable market data for similar instruments, quoted prices in markets that are not act