(s) Deferred income

TABLE A1 of 2

Note 2012 2011ASSETSCash and due from banks 4 1,301,602,298 1,142,892,199 Cash 126,332,160 84,933,377 Demand deposists in BCCR 950,103,180 852,911,588 Demand deposits in local financial entities 26,831,002 9,163,065 Demand deposists in foreign financial entities 147,590,636 181,152,299 Other cash and due from banks 50,743,373 14,728,004 Accounts and accrued interest receivable 1,947 3,866 Investments in financial instruments 5 1,113,810,981 943,748,628

Available for sale 1,034,619,153 870,416,236 Held to maturity 66,161,361 62,575,503 Difference between positions in derivative financial instruments 66,535 17,588 Accounts and accrued interest receivable 14,177,525 11,969,611 (Allowance for impairment of investments in financial instruments) (1,213,593) (1,230,310)

Loan portfolio 6 5,054,551,145 4,520,432,827 Current 4,735,826,688 4,227,968,056 Past due 230,658,448 203,699,371 Legal collections 133,860,331 133,763,799 Accounts and accrued interest receivable 38,468,433 34,443,783 (Allowance for loan impairment) 6-f (84,262,755) (79,442,182)

Accounts and fees commissions receivable 7 4,959,125 1,798,999 Fees and commissions 225,096 283,398 Accounts receivable for operations with related parties 128,688 121,515 Deferred tax and income tax receivable 6,822,932 1,524,934 Other receivables 3,644,062 3,191,983 Accrued interest receivable 3,015 4,787 (Allowance for impairment of accounts and fees and commissions receivable) (5,864,668) (3,327,618)

Foreclosed assets 8 59,425,633 28,360,332 Assets and securities acquired in lieu of payment 144,292,083 97,587,644 Other foreclosed assets 3,499 5,292 (Allowance for impairment of foreclosed assets and per legal requirements) (84,869,949) (69,232,604)

Investments in other companies 9 130,551,666 119,083,666 Property and equipment 10 286,203,176 270,149,074 Other assets 11 38,098,999 25,782,163

Deferred charges 3,093,840 4,260,585 Intangible assets 6,298,104 1,676,250 Other assets 28,707,055 19,845,328

TOTAL ASSETS 7,989,203,023 7,052,247,888

The notes are an integral part of these unconsolidated financial statements. Continued…

BANCO NACIONAL DE COSTA RICA UNCONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2012(With corresponding figures for 2011)

(In colones)

TABLE A2 of 2

LIABILITIES AND EQUITY Note 2012 2011LIABILITIESObligations with the public 12 6,285,275,325 5,669,455,956

Deposits and other demand obligations 3,818,772,231 3,371,077,998 Deposits and other term obligations 2,423,592,102 2,272,830,929 Charges payable 42,910,992 25,547,029

Obligations with BCCR 13 451,395 20,304,927 Term obligations 450,340 20,296,623 Charges payable 1,055 8,304

Obligations with entities 14 523,959,650 349,839,742 Demand obligations 52,780,731 52,598,859 Term obligations 467,359,549 295,820,821 Charges payable - Financial and non-financial entities 3,819,370 1,420,062

Accounts payable and provisions 237,233,144 228,905,138 Deferred tax 15 24,675,524 23,019,599 Provisions 16 115,634,298 134,046,179 Other sundry accounts payable 17 96,923,322 71,839,360

Other liabilities 18 104,114,866 37,865,623 Deferred income 5,147,389 4,380,677 Allowance for stand-by credit losses 689,921 685,478 Other liabilities 98,277,556 32,799,468

TOTAL LIABILITIES 7,151,034,380 6,306,371,386

EQUITYShare capital 234,520,465 133,013,040

Paid-up capital 19-a 234,520,465 133,013,040 Equity adjustments 105,100,866 103,496,496

Surplus from revaluation of property and equipment 19-b 97,524,908 96,847,171 Adjustment for valuation of available-for-sale investments 19-c 928,557 (4,288,749) Adjustment for valuation of restricted financial instruments 19-c (4,620,375) 91,885 Surplus from revaluation of other assets 139,458 138,663 Adjustment for valuation of investments in other companies 19-d 9,530,992 9,373,364 Adjustment for conversion of financial statements 1,597,326 1,334,162

Equity reserves 1-t 339,398,774 307,253,316 Prior period retained earnings 53,858,311 138,728,207 Income for the year 87,918,905 50,368,502 Capital of the Development Financing Fund 43 17,371,322 13,016,941 TOTAL EQUITY 838,168,643 745,876,502 TOTAL LIABILITIES AND EQUITY 7,989,203,023 7,052,247,888

DEBIT CONTINGENT ACCOUNTS 20 836,068,095 647,180,952 TRUST ASSETS 21 1,736,827,957 1,633,826,220 TRUST LIABILITIES 173,197,156 179,847,013 TRUST EQUITY 1,563,630,801 1,453,979,207 TRUST MEMORANDA ACCOUNTS 83,885,388 77,579,767 OTHER DEBIT MEMORANDA ACCOUNTS 22 21,643,383,479 18,287,097,336

Own debit memoranda accounts 9,437,690,383 7,900,350,040 Third-party debit memoranda accounts 1,336,104,002 1,042,989,794 Own debit memoranda accounts for custodial activities 261,980,083 234,575,940 Third-party debit memoranda accounts for custodial activities 10,607,609,011 9,109,181,562

The notes are an integral part of these unconsolidated financial statements.

BANCO NACIONAL DE COSTA RICA UNCONSOLIDATED BALANCE SHEET

AS OF DECEMBER 31, 2012(With corresponding figures for 2011)

(In colones)

TABLE B1 of 2

Note 2012 2011

Finance incomeCash and due from banks 23 312,412 275,359 Investments in financial instruments 23 53,648,172 51,493,688 Loan portfolio 24 567,558,439 458,438,542 Gain on foreign exchange and development units, net 1-c 11,867,351 9,354,204 Gain on available-for-sale financial instruments 1,922,326 3,808,923 Gain on derivative financial instruments 434,436 154,849 Other finance income 25 7,007,026 6,540,548

Total finance income 642,750,162 530,066,113 Finance expenses

Obligations with the public 26 231,445,022 157,108,600 Obligations with BCCR 4,775 8,462 Obligations with financial entities 17,142,064 13,580,748 Loss on available-for-sale financial instruments 207,564 124 Loss on derivative financial instruments 391,900 182,675 Other finance expenses 1,955,085 498,606

Total finance expenses 251,146,410 171,379,215 Allowance for impairment of assets 27 90,711,731 92,764,755 Recovery of assets and decreases in allowances 28 31,623,766 22,527,874 GROSS FINANCE INCOME 332,515,787 288,450,017 Other operating income

Service fees and commissions 29 149,042,880 127,457,289 Foreclosed assets 33,225,170 28,404,723 Gains on investments in other companies 7,930,642 7,883,824 Gains on investments in SUGEVAL-regulated entities 2,923,807 3,435,604 Gains on investments in SUPEN-regulated entities 1,143,441 863,122 Gains on investments in SUGESE-regulated entities 465,865 501,903 Foreign currency exchange and arbitrage 37,690,835 34,774,922 Other income - related parties 796,967 1,147,168 Other operating income 30 14,542,868 22,842,826

Total other operating income 247,762,475 227,311,381

The notes are an integral part of these unconsolidated financial statements. Continued…

UNCONSOLIDATED INCOME STATEMENTBANCO NACIONAL DE COSTA RICA

FOR THE YEAR ENDED DECEMBER 31, 2012(With corresponding figures for 2011)

(In colones)

TABLE B2 of 2

Note 2012 2011Other operating expenses

Services fees and commissions 7,612,532 6,990,004 Foreclosed assets 31 59,747,762 84,311,475 Sundry assets 326,128 238,080 Provisions 32 38,760,937 16,702,387 Foreign currency exchange and arbitrage 4,214 7,463 Other expenses - related parties 90,049 345,381 Other operating expenses 33 73,982,745 57,512,849

Total other operating expenses 180,524,367 166,107,639 GROSS OPERATING INCOME 399,753,895 349,653,759 Administrative expenses

Personnel expenses 34 213,173,566 189,067,224 Other administrative expenses 35 101,205,727 95,447,812

Total administrative expenses 314,379,293 284,515,036 NET OPERATING INCOME BEFORE TAXES AND STATUTORY ALLOCATIONS 85,374,602 65,138,723

Income tax 15 9,582,895 7,154,527 Decrease in income tax 15 4,295,801 2,857,615 Decrease in prior-period income tax 15 24,294,141 190,182 Statutory allocations 36 18,491,111 12,126,082 Decrease in statutory allocations 36 2,028,367 1,462,591

INCOME FOR THE YEAR 87,918,905 50,368,502


(With corresponding figures for 2011)(In colones)

BANCO NACIONAL DE COSTA RICA UNCONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2012

TABLE C1 of 1

Note Share capital

Surplus from revaluation of property and

equipment

Adjustment for valuation of available-for-sale

investments and restricted financial instruments

Surplus from revaluation of other assets

Adjustment for valuation of

investments in other companies

Adjustment for conversion of

financial statements

Total equity adjustments Equity reserves

Opening retained earnings

Equity of the Development

Financing Fund TotalBalances at December 31, 2010 126,509,037 92,772,666 2,636,484 131,883 9,405,626 31,136,339 136,082,998 257,364,058 172,177,233 8,339,513 700,472,839 Adjustment for valuation of available-for-sale investments, net of deferred tax - - (7,060,778) - - - (7,060,778) - - - (7,060,778) Adjustment for valuation of restricted financial instruments, net of deferred tax - - 91,885 - - - 91,885 - - - 91,885 Income for the year - - - - - - - - 50,368,502 - 50,368,502 Legal reserve and other statutory reserves - - - - - - - 36,657,820 (36,657,820) - - Adjustment for valuation of investments in other companies - - - - (515,818) - (515,818) - - - (515,818) Adjustment for changes in equity of BN Vital - - - - - - - - 11,092 - 11,092 Statutory allocations - Mandatory pension funds, Employee Protection Law No. 7983 - - - - - - - - (553,754) - (553,754) Realization of surplus from revaluation of property and equipment, due to sale of property - (219,161) - - - - (219,161) - 219,161 - - Recognition of deferred tax due to sale of property 15 - (475,904) - - - - (475,904) - 475,904 - - Equity of the Development Financing Fund - - - - - - - - (4,248,682) 4,248,682 - Adjustment for conversion of financial statements 6,504,003 4,769,570 135,545 6,780 483,556 (29,802,177) (24,406,726) 13,231,438 7,305,073 428,746 3,062,534 Balances at December 31, 2011 19 133,013,040 96,847,171 (4,196,864) 138,663 9,373,364 1,334,162 103,496,496 307,253,316 189,096,709 13,016,941 745,876,502 Capitalization of retained earnings for capital increases 100,744,272 - - - - - - - (100,744,272) - - Adjustment for valuation of available-for-sale investments, net of deferred tax - - 5,149,500 - - - 5,149,500 - - - 5,149,500 Adjustment for valuation of restricted financial instruments, net of deferred tax - - (4,620,375) - - - (4,620,375) - - - (4,620,375) Income for the year - - - - - - - - 87,918,905 - 87,918,905 Legal reserve and other statutory reserves - - - - - - - 30,382,614 (30,382,614) - - Adjustment for valuation of investments in other companies - - - - 103,849 - 103,849 - - - 103,849 Adjustment for changes in equity of BN Vital - - - - - - - - 54,954 - 54,954 Statutory allocations - Mandatory pension funds, Employee Protection Law No. 7983 - - - - - - - - (462,555) - (462,555) Adjustment to deferred tax from surplus from revaluation of property and equipment - 122,083 - - - - 122,083 - - - 122,083 Equity of the Development Financing Fund - - - - - - - - (4,279,697) 4,279,697 - Adjustment for conversion of financial statements 763,153.00 555,654 (24,079) 795 53,779 263,164 849,313 1,762,844 575,786 74,684 4,025,780 Balances at December 31, 2012 19 234,520,465 97,524,908 (3,691,818) 139,458 9,530,992 1,597,326 105,100,866 339,398,774 141,777,216 17,371,322 838,168,643


Equity adjustments

BANCO NACIONAL DE COSTA RICAUNCONSOLIDATED STATEMENT OF CHANGES IN EQUITY


(In colones)

TABLE D1 of 1

Note 2012 2011Cash flows from operating activities Income for the year 87,918,905 50,368,502 Items not requiring cash Gain on sale of idle property and equipment (24,592) (9,310) Gain on foreign exchange and development units, net (14,981,340) (12,762,803) Loss on allowance for loan impairment 56,064,039 69,439,025 Income for reversal of allowance for impairment of investments (16,935) (398,240) Loss on allowances for foreclosed assets and other receivables 49,760,758 69,160,913 Expense for severance accrual, net of payments 1,630,075 6,570,456 Depreciation and amortization 23,724,963 22,014,693 Share in net profit of subsidiaries (4,533,113) (4,800,629) Share in net profit of foreign associate (7,930,642) (7,883,824) Statutory allocations 18,491,111 12,126,082 Deferred tax (663,322) 290,553 Current tax expense 15 9,582,895 7,154,527 Finance income on loan portfolio and investments (621,206,611) (509,932,230) Finance expense on term obligations with the public and financial entities 180,831,165 122,461,232

(221,352,644) (176,201,053) Net (increase) decrease in assets Credits and cash advances (553,860,866) (675,553,089) Foreclosed assets (77,148,891) (34,411,856) Accrued interest receivable on other receivables 1,804 10,655 Other assets (22,275,905) (10,770,958) Net increase (decrease) in liabilities Demand and term obligations 574,784,415 266,476,351 Other accounts payable and provisions (11,465,826) (22,245,724) Other liabilities 65,245,068 13,853,309

(246,072,845) (638,842,365) Interest received on loan portfolio and investments 609,284,650 499,499,363 Income tax paid (10,453,782) (8,801,034) Interest paid on term obligations with the public and financial entities (159,506,944) (117,059,460) Net cash from (used in) operating activities 193,251,079 (265,203,496)

Net cash flows from investing activities Increase in financial instruments (except trading) (19,187,559,929) (10,069,828,257) Decrease in financial instruments (except trading) 19,121,195,198 10,417,254,388 Acquisition of property and equipment (34,180,854) (19,590,756) Sale of property and equipment 303,842 216,737 Cash investments in other companies 1,348,745 2,954,426 Net cash (used in) from investing activities (98,892,998) 331,006,538

Net cash flows from financing activities Other new financial obligations 268,322,609 146,321,592 Settlement of obligations (119,298,204) (71,311,417) Net cash from financing activities 149,024,405 75,010,175

Net increase in cash and cash equivalents 243,382,486 140,813,217 Effects of exchange rate conversion on cash and cash equivalentes 10,099,914 6,641,180 Cash and cash equivalents at beginning of year 1,219,140,260 1,071,685,863 Cash and cash equivalents at end of year 4 1,472,622,660 1,219,140,260


BANCO NACIONAL DE COSTA RICA UNCONSOLIDATED STATEMENT OF CASH FLOWS


(In colones)

BANCO NACIONAL DE COSTA RICA

Notes to Unconsolidated Financial Statements

December 31. 2012

(With corresponding figures for 2011)

(Continued)

(1)

Summary of operations and significant accounting policies

(a)

Operations

Banco Nacional de Costa Rica (the Bank) is an autonomous, independently managed, public law institution. As a State-owned public bank, it is regulated by the Internal Regulations of the National Banking System (IRNBS), the Internal Regulations of the Central Bank of Costa Rica (BCCR), and the Political Constitution of the Republic of Costa Rica. It is also subject to oversight by the Superintendency General of Financial Entities (SUGEF) and the Comptroller General of the Republic (CGR). The Bank’s registered office is located in San José, Costa Rica.

In accordance with current regulations, the services offered by the Bank have been

divided into three departments: Commercial Banking, Mortgage Banking, and Rural Credit Banking.

Pursuant to IRNBS, if a bank divides its services into departments, its operations

should be conducted through those departments based on the nature of the operations, rather than as a single banking institution. The Bank’s three departments are independent from one another, except for administrative limitations established by the aforementioned regulations. Those regulations also prescribe that earnings should be calculated by combining the gains and losses of all departments and proportionally distributing the resulting net earnings to each department’s equity.

Currently, due to major innovations in information technology and

telecommunications, and especially because of the competition in the national and international financial sectors, the Bank has become a universal bank that offers services in all sectors of the Costa Rican market. Those sectors include: personal, business, corporate, and institutional banking, stock trading, pension fund management, investment funds, insurance brokerage, international banking services, and electronic banking services. The Bank aims to provide universal, standardized, and high-quality banking services that are secure and reliable.

As of December 31, 2012, the Bank has 171 offices (2011: 171), 461 automated

teller machines (2011: 452), and a total of 5,362 employees (2011: 5,325). The Bank’s website is www.bncr.fi.cr.

http://www.bncr.fi.cr/�

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(Continued)

The following subsidiaries are wholly owned by the Bank: BN Valores Puesto de Bolsa. S.A. (the Brokerage Firm) was organized as a

corporation in 1998 under the laws of the Republic of Costa Rica to operate as a brokerage firm and carry out the brokerage activities permitted under the Securities Market Regulatory Law and the general regulations and provisions issued by the Costa Rican National Securities Commission (SUGEVAL). Its main activity is executing securities transactions on the Costa Rican National Stock Exchange on behalf of third parties. Such transactions are regulated by the Costa Rican National Stock Exchange (Bolsa Nacional de Valores S.A.), the regulations and provisions issued by SUGEVAL, and the Securities Market Regulatory Law.

BN Sociedad Administradora de Fondos de Inversión. S.A. (the Investment Fund

Manager) was organized as a corporation on April 29, 1998 under the laws of the Republic of Costa Rica. Its main activity is managing investment funds on behalf of third parties and managing closed and open investment funds listed in the Costa Rican National Stock Exchange and SUGEVAL.

BN Vital Operadora de Planes de Pensiones Complementarias. S.A. (the Pension Fund

Manager) has been operating since January 1993 and was subordinate to the Bank until December 31, 1998. Its main activity is offering supplemental old-age and death benefit plans and promoting medium- and long-term planning and savings. Its activities are governed by Law No. 7523 of the Private Supplemental Pension Fund System and the amendments thereto, the Employee Protection Law (Law No. 7983), and the Regulations on Opening and Operating Regulated Entities and Operating Pension, Compulsory, and Voluntary Retirement Savings Funds as prescribed in the Employee Protection Law, Regulations on Regulated-Entity Investments, and the directives issued by the Pensions Superintendency (SUPEN).

BN Corredora de Seguros, S.A. (the Insurance Brokerage Firm) was organized as a

corporation on May 19, 2009 under the laws of the Republic of Costa Rica. Its main activity is insurance brokerage for policies issued by insurance companies authorized to operate in Costa Rica. Its activities are governed by the Insurance Market Regulatory Law (Law No. 8653) and the general regulations and provisions issued by the Superintendency General of Insurance (SUGESE). This entity began operations in March 2010.

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(Continued)

Titularizadora Latinoamericana. S.A. was dissolved in January 2011. The Bank holds a 49% ownership interest in the following associate: Banco Internacional de Costa Rica, S.A. and subsidiary (BICSA) was organized under

the laws of the Republic of Panama in 1976. It operates under a general license granted by the Superintendency of Banks of Panama to engage in banking operations in Panama or abroad. BICSA is located in Panama City, Republic of Panama, Calle Manuel María Icaza No. 25. BICSA has a branch in Miami, Florida, United States of America. The Bank holds a 49% ownership interest in BICSA. Banco de Costa Rica owns the remaining 51% of shares.

In 2011, the Bank held 50% ownership interest in BAN Procesa - TI, S.A., while

Banco de Costa Rica owned the remaining 50% of shares. In 2012, General Management dismissed the project and transferred its 50% ownership interest to Banco de Costa Rica without payment, as agreed at Board of Directors Meeting No. 11805 held on December 4, 2012 (see note 42).

(b)

Basis of preparation

• Statement of compliance

The unconsolidated financial statements have been prepared in accordance with the accounting regulations issued by the National Financial System Oversight Board (CONASSIF) and SUGEF.

•

Basis of measurement applied to assets and liabilities

The unconsolidated financial statements have been prepared on the fair value basis for available-for-sale assets and derivative instruments. Other financial assets and liabilities are stated at amortized cost. The accounting policies have been consistently applied.

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(Continued)

(c)

Foreign currency

i. Foreign currency transactions

Assets and liabilities held in foreign currency are translated to colones at the foreign exchange rate ruling at the balance sheet date, except for transactions that have a contractually agreed exchange rate. Transactions in foreign currency during the year are translated at exchange rates ruling at the dates of the transactions. Foreign currency gains and losses arising on translation are recognized in the foreign exchange gain, foreign exchange loss, and Development Unit (DU) accounts, as appropriate.

ii. Monetary unit and foreign exchange regulations

The financial statements and notes thereto are expressed in colones (¢), the monetary unit of the Republic of Costa Rica. On October 17, 2006, BCCR revised the country’s foreign exchange system, replacing mini-devaluations with an adjustable band. Under the new system, the Central Bank’s board agreed to establish a rate floor and ceiling, which will be adjusted based on the country’s financial and macroeconomic conditions. In accordance with the Chart of Accounts, assets and liabilities denominated in foreign currency should be expressed in colones using the reference buy rate published by the BCCR. As of December 31, 2012, the exchange rate was established at ¢502.07 and ¢514.32 (2011: ¢505.35 and ¢518.33) to US$1.00 for the purchase and sale of U.S. dollars, respectively. As of December 31, 2012, the exchange rate for the purchase and sale of euros was established at ¢650.07 and ¢679.92 (2011: ¢644.37 and ¢674.57) to €1.00, respectively.

iii. Valuation method for assets and liabilities denominated in foreign currency

As of December 31, 2012, assets and liabilities denominated in U.S. dollars were valued at the exchange rate of ¢502.07 to US$1.00 (2011: ¢505.35 to US$1.00), which is the reference buy rate published by BCCR for December 31, 2012.

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(Continued)

As of December 31, 2012, assets and liabilities denominated in euros were valued at the exchange rate of ¢663.28 to €1.00 (2011: ¢651.60 to €1.00). This exchange rate was calculated by multiplying the international exchange rate published by Reuters by the reference buy rate for U.S. dollars published by BCCR on the last business day in December 2012. As of December 31, 2012, assets and liabilities denominated in DU were valued at the exchange rate of ¢787.80 to DU1.00 (2011: ¢749.97 to DU1.00). This exchange rate is based on the DU value tables published by SUGEVAL. Valuation in colones of monetary assets and liabilities in foreign currency during the year ended December 31, 2012 gave rise to foreign exchange losses and gains of US$180,774,624 and US$192,641,975, respectively, for a net gain of US$11,867,351 (2011: losses and gains of US$240,327,831 and US$249,682,035, respectively, for a net gain of US$9,354,204). Additionally, valuation of other liabilities and other assets gave rise to losses and gains, respectively, which are booked in “Other operating expenses” and “Other operating income”, respectively. During the year ended December 31, 2012, valuation of other assets gave rise to gains of US$492,208 (2011: gains of US$660,849) (see note 30), and valuation of other liabilities gave rise to losses of US$1,418,609 (2011: losses of US$601,535) (see note 33).

(d)

Financial instruments

A financial instrument is any contract that gives rise to both a financial asset of one enterprise and a financial liability or equity instrument of another enterprise. Financial instruments include primary instruments, i.e. loan portfolio, investments in financial instruments, other accounts receivable, obligations with the public, financial obligations, and accounts payable.

i. Classification

Investments in financial instruments are recognized using settlement date accounting in accordance with the Accounting Regulations Applicable to Entities Regulated by SUGEF, SUGEVAL, SUPEN, and SUGESE and to Non-financial Issuers effective as of January 1, 2008. Those investments are classified as follows:

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(Continued)

Investments in financial instruments of regulated entities are to be

classified as available-for-sale. Own investments in open investment funds are to be classified as

trading financial assets.

Own investments in closed investment funds are to be classified as available-for-sale.

Entities regulated by SUGEVAL and SUGEF may classify other

investments in financial instruments as trading instruments, provided there is an express statement of intent to trade them within 90 days from the acquisition date.

Until December 31, 2007, SUGEF allowed investments in financial instruments to be classified as held-to-maturity. As of December 31, 2012, the Bank no longer classifies financial instruments as held-to-maturity, except for the securities denominated in DU received from the Central Government to capitalize the Bank. Those securities were authorized by the Executive Branch of the Costa Rican Government as a capital contribution and are funded under Law No. 8703 “Amendment to Law No. 8627 on the Ordinary and Extraordinary Budget of the Republic for Tax Year 2008.”

Trading securities

Trading securities are stated at fair value and have been acquired for the purpose of short-term profit-taking based on price variations. Variations in the fair value of these securities are recognized in net profit or loss for the year. Available-for-sale securities

Available-for-sale securities are financial assets that are not held for trading purposes or originated by the Bank. Available-for-sale instruments include money market placements and certain debt securities. Available-for-sale securities are stated at fair value, and interest earned and amortization of premiums and discounts are recognized as income or expense, as appropriate.

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(Continued)

Any changes in the fair value of available-for-sale securities are recognized directly in equity until the securities are sold or considered to be impaired, at which time the cumulative gain or loss previously recognized in equity is transferred to the income statement.

Derivative financial instruments

Derivative financial instruments are recognized initially at cost. Subsequent to initial recognition, derivative financial instruments are stated at fair value by the fair value method. The Bank does not hold derivative financial instruments for trading purposes. Derivative instruments accounted for by the fair value method hedge exposure to changes in the fair value of a financial liability recognized in the balance sheet. Any valuation gains or losses are recorded in the income statement. The valuation methodology applied to derivative financial instruments varies depending on the type of product to be valued. In the case of foreign exchange forward contracts (FX forwards), with short credit positions and maturities generally not exceeding one year, valuation involves comparing the present value of the negotiated forward exchange rate and the current foreign exchange rate. The present value of the negotiated forward exchange rate is calculated by using the difference between the zero coupon rates. In the case of swaps (FX swap or currency swap), the valuation involves two steps. In the first step, future cash flows are estimated based on current market prices. The estimation of fixed cash flows does not require assumptions but variable cash flows are estimated based on the rates in effect. Calculating the present value of each type of cash flows requires a valuation rate for each cash flow, which is equivalent to the base rate plus a credit spread. For fixed cash flows, the base rate is the zero coupon rate. For variable cash flows, the base rate is the benchmark rate plus the spread applicable to the term of the cash flow. The spread is applicable to the Bank’s cash flows receivable or payable and depends on the credit rating of the counterparty and the instruments’ maturity.

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(Continued)

Originated loans and other receivables

Originated loans and receivables are loans and receivables originated by the Bank providing money to a debtor other than those created with the intention of short-term profit taking. Originated loans and receivables comprise loans and advances to banks and customers other than loans and bonds purchased from the original issuer. The SUGEF Chart of Accounts for financial entities does not allow investments in financial instruments to be classified as held-to-maturity, except for the securities denominated in DU. (ii) Recognition The Bank recognizes available-for-sale assets using settlement date accounting. From this date, any gains or losses arising from changes in the fair value of the assets are recognized in equity, except for gains and losses arising from changes in the fair value of investments in open investment funds, which are recorded in profit or loss. Originated loans and other receivables are recognized on the date they are transferred to the Bank. (iii) Measurement Financial instruments are measured initially at fair value, including transaction costs. Subsequent to initial recognition, all trading and available-for-sale investments and derivative instruments are measured at fair value, except that any investment or instrument that does not have a quoted market price in an active market and whose fair value cannot be reliably measured is stated at cost, including transaction costs, less impairment losses, Starting September 2008, fair values are determined using a market price valuation method established by Proveedor Integral de Precios Centroamérica, S.A. (PIPCA). This method has been duly approved by SUGEVAL.

-9-



(Continued)

For securities issued by foreign entities and listed in open systems such as Bloomberg, the permanent quotes published in these primary sources should be used. Given that the information in open systems is obtained from financial systems all over the world, the last price listed is used as the price of the security. As an exception applicable to all currencies, when it is not possible to obtain a quote from open systems, the security is valued at an amount equivalent to its purchase price. Auction Rate Securities (ARSs) are valued using a valuation model developed by the Bank. ARSs are valued using discounted future cash-flow models considering the instrument’s options (given the assumption that auctions will continue to fail). Cash flow discounts are based on the yield curves of municipal bonds associated to the rating of each issue. The dynamics of those yield curves are not directly analyzed; instead, they are adjusted to LIBOR caps quoted in the market using the Hull-White stochastic interest rate model. Once the dynamic model for the rates is obtained, a trinomial tree is built for the variations in the rates using the standard Hull-White method. A term spread variable is added to this stochastic model based on a comparison of the forward LIBOR and municipal yield curves. This tree allows the instrument’s options to be evaluated based on the scenarios proposed therein. An additional element to be included is the benchmark interest rates for the instrument’s coupons. For such purposes, the benchmark forward rates are compared with the forward LIBOR rate. Spreads, which depend on the average interest rates on student loans, are approximated using a regression analysis to correlate student rates with the LIBOR rate. The approximations derived from that analysis are sufficient to perform the valuation of ARSs, which solely depend on a benchmark rate at a specific point in time. In the case of ARSs for which payment involves a moving average of the benchmark rate and coupons (such as the ARSs issued by the Pennsylvania Higher Education Authority, PHEA), nominal quotations are determined through simplification, which are higher and lower than the quotation. In the event that those nominal quotations match, with acceptable accuracy, that result is used as the instrument’s quote. The Bank’s management considers that the values obtained using this valuation method represent the best estimate of the fair value of ARSs.

-10-



(Continued)

Internal government debt securities received for the capitalization of State-owned banks are classified as held-to-maturity investments, as set forth in Law No. 8703 of December 23, 2008, which reads as follows: “These securities shall be delivered directly to State-owned banks and held to maturity and. Therefore, they are not available for sale. Accordingly, these securities shall not be subject to market price valuation”. Consequently, the classification applied to these securities is justified by the fact that it is prescribed by law. These securities are recognized at amortized cost and are zero-coupon securities. The effect of valuating trading investments at market price is booked directly in profit or loss. All non-trading financial assets and liabilities, originated loans and other receivables, and held-to-maturity investments are measured at amortized cost, including transaction costs, less impairment losses. Any premium or discount is included in the carrying amount of the underlying instrument and amortized to finance income or expense using the effective interest method. (iv) Fair value measurement principles The fair value of financial instruments is based on their quoted market price at the unconsolidated balance sheet date without any deduction for transaction costs. (v) Gains and losses on subsequent measurement Gains and losses arising from changes in the fair value of available-for-sale assets are recognized directly in equity until an investment is considered to be impaired, at which time the loss is recognized in the income statement. When the financial assets are sold, collected, or otherwise disposed of, the cumulative gain or loss recognized in equity is transferred to the income statement.

(vi) Derecognition A financial asset is derecognized when the Bank loses control over the contractual rights that comprise the asset. This occurs when the rights are realized, expire, or are surrendered to a third party.

-11-



(Continued)

Available-for-sale investments that are sold are derecognized and the corresponding account due from the purchaser is recognized on the date the Bank sells the assets. A financial liability is derecognized when the specific contractual obligation has been paid or settled, or when the obligation has expired. (vii) Offsetting

Financial assets and liabilities are offset and the net amount presented in the unconsolidated financial statements when the Bank has a legal right to set off the recognized amounts and it intends to settle on a net basis. (viii) Impairment of financial assets

The carrying amount of an asset is reviewed at each balance sheet date to determine whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in the income statement for assets carried at cost and treated as a decrease in unrealized gains for assets carried at fair value. The recoverable amount of an asset is equivalent to the greater of its net selling price and its value in use. The net selling price is equivalent to the value obtained in an arm’s length transaction. Value in use is the present value of future cash flows and disbursements expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be linked objectively to an event occurring after the write-down, the write-down is reversed through the income statement or the statement of changes in equity, as appropriate.

-12-



(Continued)

(ix) Specific instruments

Cash and cash equivalents

Cash and cash equivalents include cash on hand, cash deposited in BCCR, deposits in other banks, and highly liquid short-term investments with original maturities of two months or less.

Demand deposits – overnight

Demand deposits that are classified as overnight deposits at the end of the business day are included in the cash and due from banks account under the caption “Foreign financial entities.”

Investments in financial instruments

Investments in financial instruments are classified as available-for-sale instruments, which are valued at market prices using the price vector furnished by PIPCA. In accordance with accounting standards issued by CONASSIF, starting January 1, 2008, the Bank no longer classifies financial instruments as held-to-maturity investments. However, pursuant to Law No. 8703 “Amendment to Law No. 8627 on the Ordinary and Extraordinary Budget of the Republic for Tax Year 2008”, securities received to capitalize State-owned banks are to be classified as held-to-maturity and are not subject to market price valuation. Investments that the Bank holds for the purpose of short-term profit-taking are classified as trading instruments. Other investments are classified as available-for-sale assets. The effect of market price valuation of available-for-sale investments is included in the equity account under the caption “Adjustment for valuation of available-for-sale investments” until those investments are realized or sold. Regular purchases or sales of financial assets are recognized using settlement date accounting, i.e. on the date the financial asset is delivered in exchange for an asset.

-13-



(Continued)

Investments in repurchase agreements (term seller positions) and investment securities with original maturities of less than 180 days are not valued at market prices and are stated at the value of the original agreement. When a financial asset is acquired with accrued interest, such interest is booked in a separate account as accrued interest receivable. An allowance is established for the entire value of securities that may not be traded in an active financial or stock market due to the legal form of the issuer and the transfer method of the security and for which interest payable is past due.

Loans and advances to banks and customers

Loans originated by the Bank are classified as loan portfolio. Loans and advances are presented net of allowances to reflect their estimated recoverable amounts.

Securities sold under repurchase agreements

The Bank sells securities under agreements to repurchase them on a certain date in the future at a fixed price. The obligation to repurchase securities sold is reflected as a liability in the balance sheet and stated at the value of the original agreement. The underlying securities are booked in asset accounts. Interest is presented as finance expense in the income statement, and accrued interest payable is recognized in the balance sheet.

Securities purchased under reverse repurchase agreements

The Bank purchases securities under agreements to sell them on a certain date in the future at a fixed price. The obligation to sell securities purchased is reflected as an asset in the balance sheet and is stated at the value of the original agreement. The underlying securities are booked in asset accounts. Interest earned is presented as finance income in the income statement, and accrued interest receivable is recognized in the balance sheet.

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(Continued)

(e) Loan portfolio

SUGEF defines a credit operation as any operation related to any type of underlying

instrument or document, except investments in financial instruments, whereby credit risk is assumed either by providing or committing to provide funds or credit facilities, acquiring collection rights, or guaranteeing that obligations with third parties will be honored. Credit operations include loans, guarantees, letters of credit, pre-approved lines of credit, and loans pending disbursement.

The loan portfolio is presented at the amount of outstanding principal. Interest is

calculated based on the value of outstanding principal and the contractual interest rates, and is accounted for as income using the accrual method of accounting. The Bank follows the policy of suspending interest accruals on loans when principal or interest payments are more than 180 days past due. The recovery or collection of that interest is recognized as income when collected.

(f) Allowance for loan impairment

The allowance for loan impairment is based on a periodic assessment of the

collectibility of the loan portfolio that considers a number of factors, including current economic conditions, prior experience with the allowance, the portfolio structure, borrower liquidity, and loan guarantees.

Additionally, the collectibility of the loan portfolio is assessed in conformity with the

provisions of SUGEF Directive 1-05, “Regulations for Borrower Classification”, which was approved by CONASSIF on November 24, 2005, was published in Official Gazette No. 238 dated December 9, 2005, and is effective as of October 9, 2006. That assessment considers parameters including borrower payment history, ability to pay, the quality of guarantees, delinquency, etc.

SUGEF may require an allowance to be established for an amount greater than the

amount determined by the Bank. Management considers the allowance to be sufficient to absorb any potential losses

that may be incurred on recovery of the portfolio.

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(Continued)

As of December 31, 2012 and 2011, increases in the allowance for loan impairment

are included in the accounting records in accordance with article 10 of IRNBS. As of December 31, 2012 and 2011, the allowance for stand-by credit losses is

presented in the liability section of the balance sheet, in the “Other liabilities” account, and amounts to US$689,921 and US$685,478, respectively (see note 18).

(g) Allowance for impairment of derivative instruments other than hedges

The provisions of article 35 of SUGEF Directive 9-08 are to be applied in calculating

the allowance for clearing price risk in respect of each client or counterparty. For such purposes, the capital requirement for clearing price risk (as defined in article 28 of SUGEF Directive 3-06) must be multiplied by the respective allowance percentage corresponding to the borrower classification included in SUGEF Directive 1-05.

(h) Other receivables

The recoverability of these accounts is assessed by applying criteria similar to those

established by SUGEF Directive 1-05 for the loan portfolio. Notwithstanding, the results of the assessment, if an account is not recovered within 120 days from the due date, an allowance is established for an amount equivalent to 100% of the balance receivable. Accounts with no specified due date are considered payable immediately.

(i) Property and equipment

i. Own assets

Property and equipment is stated at cost, net of accumulated depreciation. Significant improvements are capitalized, while minor repairs and maintenance that do not extend the useful life or improve the asset are directly expensed when incurred.

Pursuant to requirements established by regulatory authorities, the Bank must have its real property appraised by an independent appraiser at least once every five years, in order to determine its net realizable value. If the realizable value is less than the carrying amount, the carrying amount must be adjusted to the appraisal value.

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(Continued)

For the years ended December 31, 2012 and 2011, no appraisals of the Bank’s real property were made by independent appraisers. Therefore, no effect derived therefrom was recognized in the “Surplus from revaluation of property and equipment” account. ii. Leased assets Leases in terms of which the Bank assumes substantially all the risks and rewards of ownership are classified as finance leases.

Property and equipment acquired under finance leases is measured at the lower of its fair value and the present value of minimum payments at the date of commencement of the lease, less accumulated depreciation and amortization and impairment losses.

iii. Subsequent expenditure

Expenditure incurred to replace a component of an item of property and equipment that is accounted for separately, including major inspection and renovation costs, is capitalized. Other subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property and equipment. All other expenditure is recognized in the income statement as an expense when incurred. iv. Depreciation and amortization

Depreciation and amortization are charged to the income statement on a straight-line basis over the estimated useful lives of the assets, as follows:

Type of asset Estimated useful life Buildings Based on appraisals Vehicles 10 years Furniture and equipment 10 years Computer hardware 5 years Portable computers 3 years Leasehold improvements To be determined or established in lease

terms

-17-



(Continued)

(j) Intangible assets

i. Other intangible assets

Other intangible assets acquired by the Bank are stated at cost less accumulated amortization and impairment losses.

ii. Subsequent expenditure

Subsequent expenditure is capitalized only when it increases the future economic benefits. All other expenditure is recognized in the income statement when incurred. iii. Amortization

Amortization is charged to profit or loss on a straight-line basis over the estimated useful lives of the assets. Computer software and software licenses have an estimated useful life of 3 years and 1 year, respectively.

(k) Lease operations

Finance lease receivables are presented net of unearned interest pending collection. Interest on finance leases is recognized as income over the term of the finance lease agreement using the effective interest method. The difference between lease payments receivable and the cost of the leased asset is recorded as unearned interest and amortized to income accounts over the term of the lease. As of December 31, 2012 and 2011, the Bank has no finance leases.

The Bank’s operating leases are mainly for vehicles and equipment and have terms of

between 12 and 48 months.

(l) Foreclosed assets Foreclosed assets are assets owned by the Bank for realization or sale, i.e. assets

acquired in lieu of payment, assets awarded in judicial auctions, assets purchased to be leased under finance and operating leases, goods produced for sale, idle property and equipment, and other foreclosed assets.

-18-



(Continued)

Foreclosed assets are valued at the lower of cost and fair value. If fair value is less

than the cost booked in the accounting record, an impairment allowance must be booked for the amount of the difference between both values. Cost is the historical acquisition or production value in local currency. These assets should not be revalued or depreciated for accounting purposes, and they are to be booked in local currency. The cost booked in the accounting records for a foreclosed asset may only be increased by the amount of improvements or additions, up to the amount by which they increase the asset’s realizable value. Other expenditures related to foreclosed assets are to be expensed in the period incurred.

The net realizable value of an asset should be used as its fair value. Net realizable

value is determined by applying strictly conservative criteria and is calculated by subtracting expenses to be incurred on the sale of the asset from its estimated selling price. The estimated selling price of the asset is determined by an appraiser based on current market conditions. Future expectations for market improvements are not considered and it is assumed that the assets must be sold in the shortest period of time possible to enable the Bank to recover the money invested and use it for its business activities. For all foreclosed assets, reports should be prepared by the appraisers who made the appraisals and those reports are to be updated at least annually.

If an asset booked in this group is used by the Bank, it should be reclassified to the

appropriate account in the corresponding group. SUGEF Directive 34-02 requires that the impairment allowance for foreclosed assets

acquired or produced after May 2010 be established gradually by booking one-twenty-fourth of the value of such assets each month during two years until the allowance is equivalent to 100% of the assets’ carrying amount.

For foreclosed assets acquired or produced prior to May 2010, the Bank’s management

follows the policy of booking an allowance equivalent to 100% of the value of foreclosed assets that have not been sold or leased within two years from the date of their acquisition or production.

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(Continued)

(m) Investments in other companies Investments in the share capital of entities over which the Bank exercises control or

significant influence are accounted for using the equity method. The following entities are wholly owned by the Bank and are measured by the equity method: BN Valores Puesto de Bolsa, S.A.; BN Vital Operadora de Planes de Pensiones Complementarias, S.A.; BN Sociedad Administradora de Fondos de Inversión, S.A.; and BN Corredora de Seguros, S.A. The Bank’s 49% ownership interest in BICSA is also measured by the equity method. Under the equity method, investments are initially recognized at acquisition cost. Subsequently, the carrying amounts of the investments are increased or decreased in order to recognize the Bank’s proportional share in the profits or losses of the issuer of the equity instruments.

The operations of subsidiaries that affect the Bank’s equity but have no effect on the

results of its operations are also included in the Bank’s accounting records. As of December 31, 2012 and 2011, the Bank has no total or partial interest or

influence over the management of other companies in accordance with article 73 of IRNBS and article 146 of the Internal Regulations of the Central Bank of Costa Rica.

(n) Impairment of non-financial assets

The carrying amount of an asset is reviewed at each balance sheet date to determine

whether there is any indication of impairment. If any such indication exists, then the asset’s recoverable amount is estimated. An impairment loss is recognized whenever the carrying amount of an asset exceeds its recoverable amount. Impairment losses are recognized in the income statement for assets carried at cost and treated as a revaluation decrease for assets carried at revalued amounts.

The recoverable amount of an asset is equivalent to the greater of its net selling price and its value in use. The net selling price is equivalent to the value obtained in an arm’s length transaction. Value in use is the present value of future cash flows and disbursements expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

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(Continued)

If, in a subsequent period, the amount of the impairment loss decreases and the

decrease can be linked objectively to an event occurring after the write-down, the write-down is reversed through the income statement or the statement of changes in equity, as appropriate.

(o) Provisions

A provision is recognized in the balance sheet if, as a result of a past event, the Bank

has a present legal or constructive obligation and it is probable that an outflow of economic benefits will be required to settle the obligation. The provision made approximates settlement value; however, final amounts may vary. The estimated value of provisions is adjusted at the balance sheet date, directly affecting the income statement.

The provision for legal risks is calculated using a mathematical-statistical model

developed by the Bank’s Corporate Risk Division based on data provided by the File Master system, which is used by the Bank’s Legal Department to manage legal actions as of a given date. This system is comprised of modules that provide data to construct statistical series and analyze the status of settled and in-process legal actions.

This system includes the legal proceedings initiated against the Bank in connection

with the Employee Protection and Retirement Fund and the Trust 897 arbitration case.

Administrative claims filed for phishing (a form of Internet fraud) are also included. The data obtained from the modules are reviewed on a monthly basis by the

Operational Risk Division in order to update the likelihood of favorable rulings and the percentages to be provisioned, and to adjust the provision amount projected by the model and the amounts booked each month until the proposed limit has been reached.

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(Continued)

(p) Severance benefits

Costa Rican legislation requires the payment of severance benefits to employees in the event of retirement, invalidity, death, or dismissal without just cause, equivalent to 20 days’ salary for each year of continuous service, up to a maximum of 8 years. In the specific case of the Bank, that limit is 17 years for employees with more than 25 years of service. The Bank follows the policy of booking a provision to cover future disbursements related therewith for employees with more than 20 years of service, in compliance with article 34 of the Collective Bargaining Agreement. As of December 31, 2012, a total of US$75,486,189 (2011: US$75,126,356) is booked in the “Provisions” account for severance benefits. That amount is sufficient to cover the provisions required by current legislation as of those dates (see note 16). The Employee Association of Banco Nacional de Costa Rica (ASEBANACIO) was created in 2012. Accordingly, the Bank currently follows the practice of making monthly transfers of severance benefits to the Employee Association, equivalent to 5.33% of member employees’ monthly salaries, for management and custody. Those funds are paid out to employees upon termination of employment. Severance payments are expensed when the funds are transferred.

In February 2000, the Employee Protection Law was enacted and published. Such law modifies the existing severance benefit system and establishes a mandatory supplemental pension plan, thereby amending several provisions of the Labor Code.

Pursuant to the Employee Protection Law, all public and private employers must contribute 3% of monthly employee salaries during the entire term of employment. Contributions are collected through the Costa Rican Social Security Administration (CCSS) and are then transferred to pension fund operators selected by employees.

(q) Employee benefits

Employee Protection and Retirement Fund

The Employee Protection and Retirement Fund of Banco Nacional de Costa Rica (the Fund) was created by Law No. 16 (Law of Banco Nacional de Costa Rica) of November 5, 1936, and has been amended on a number of occasions. The most recent amendment was included in Law No. 7107 (Law to Modernize the Financial System of the Republic) of October 26, 1988. Pursuant to Law No. 16, the Fund was established as a special employee benefit and retirement system for the Bank’s employees. The Fund is comprised of the following:

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(Continued)

• Items established by the laws and regulations related to the Fund.

• Contributions made by the Bank equivalent to 10% of total wages.

• Contributions made by employees equivalent to 5% of total wages to

strengthen the Fund.

• Income from investments made by the Fund and other potential income. For members of the Fund who terminate their services prior to being entitled to a

pension, the member’s accrued balance is paid in accordance with the conditions stipulated in the Fund’s Regulations on Retirement.

The governing body is responsible for the Fund’s internal management. The Fund’s

accounting records are kept by Bank employees selected based on their qualifications, in accordance with the provisions of the governing body and with the oversight of the Internal Audit Department. Those employees are independent from the Bank’s general accounting department and the Fund’s accounting records are kept separately. The Fund operates based on the principle of solidarity.

The Bank’s contributions to the Fund are considered to be defined contribution plans.

Consequently, the Bank has no additional obligations. Vacation, back-to-school bonus, and incentive plans The Bank books accruals for vacation, back-to-school bonus, and incentive plans.

Incentives to employees are calculated using the Incentives and Performance Assessment System (SEDI).

SEDI is an economic incentive that is granted provided that the following two

conditions are met:

• The Bank reports profits in its audited financial statements for the corresponding period.

• The employee eligible for the SEDI incentive has worked for at least 6 months for the Bank during the period and has obtained the required minimum score in the assessed areas (minimum score of 60% for group objectives and minimum score of 40% for individual objectives).

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(Continued)

The incentive aims to promote effective achievement of institutional objectives and

goals, which requires continuous efforts by the Bank to coordinate and consolidate its work force, increase its productivity, and ensure its compensation is market-competitive.

The method applied considers the above conditions, income after income tax, and

statutory allocations. The incentive to be granted to each employee is determined based on salaries earned during the year and the score obtained by the employee. Incentives are paid to employees in a lump sum. Expenses are taken against a provision on a monthly basis and. in the following year that account is cleared upon payment of incentives to employees that met the aforementioned conditions.

(r) Accounts payable and other liabilities Accounts payable and other liabilities are carried at cost. (s) Deferred income

Deferred income corresponds to income received in advance by the Bank that should not be recognized in profit or loss since it has not yet been accrued. Deferred income is recognized and credited to the corresponding income account as it accrues.

(t) Legal reserve

Pursuant to article 12 of IRNBS, the Bank appropriates 50% of each year’s earnings after income taxes and statutory allocations to a legal reserve. Such appropriation is performed pursuant to the Chart of Accounts for financial entities, group, and conglomerates. Accordingly, in the first and second halves of each year, income and expenses are offset and the sums of the results of each half year are transferred to opening retained earnings.

As of December 31, 2012, the legal reserve amounts to US$339,398,774 (2011: US$307,253,316).

(u) Revaluation surplus

Revaluation surplus included in equity may be transferred directly to retained earnings when the surplus is realized. Total surplus is realized on the retirement, disposal, or use of the asset. The transfer of revaluation surplus to retained earnings is not made through the income statement. The Bank follows the policy of capitalizing revaluation surplus directly to share capital as authorized by SUGEF.

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(Continued)

In prior periods, the Bank has capitalized surplus from revaluation of property and

equipment, in compliance with SUGEF regulations.

(v) Income tax Income tax is determined pursuant to the provisions of the Income Tax Law, which

require that the Bank file its income tax returns for the 12 months ending December 31 of each year. Any resulting tax is recognized in profit or loss and credited to a liability account in the balance sheet.

i. Current:

Current tax is the expected tax payable on taxable income for the year, using tax rates enacted at the balance sheet date, and any adjustment to tax payable in respect of previous years. As of December 31, 2012, the Bank incurred a tax liability based on the application of the AD-HOC BNCR methodology, which was also applied in the 2007, 2008, 2009, 2010, 2011 and 2012 periods. This methodology calculates the amount available for the investment portfolio based on the annual average balance of obligations with the public, less the annual average balances of cash and due from banks and the loan portfolio. The above calculation determined that taxable income exceeded deductible expenses, resulting in a tax liability for the current tax year. As of December 31, 2012, the Bank booked no current tax liability since estimated income taxes exceeded the tax payable determined using the AD-HOC methodology (see notes 15 and 17). As of December 31, 2011, the Bank booked a current tax liability in the amount of US$49,917, which was calculated using the aforementioned methodology (see notes 15 and 17). ii. Deferred:

Deferred tax is provided using the balance sheet liability method, providing for temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for taxation purposes. In, accordance with this method, temporary differences is identified as either taxable temporary differences (which result in future taxable amounts) or deductible temporary differences (which result in future deductible amounts). A deferred tax liability represents a taxable temporary difference, and a deferred tax asset represents a deductible temporary difference.

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(Continued)

A deferred tax asset is recognized only to the extent that there is a reasonable probability that it will be realized.

(w) Combination of financial statements of departments The financial statements of the Commercial Banking, Mortgage Banking, and Rural

Credit Banking departments were combined to determine the financial and economic position of the legal entity (the Bank), since those departments are dedicated to banking activities and are directly subordinate to the Bank’s General Board of Directors, which is responsible for making decisions related to those departments.

All inter-department assets, liabilities, income, and expenses have been eliminated in

the process of combining the financial statements. Pursuant to the provisions of IRNBS, the accounting records of each of the Bank’s

departments are kept separately. (x) Use of estimates

Management has made a number of estimates and assumptions relating to the

reporting of assets, liabilities, profit or loss, and the disclosure of contingent liabilities in preparing these unconsolidated financial statements. Actual results may differ from those estimates. Material estimates that are particularly susceptible to significant changes are related to the calculation of the allowance for loan impairment.

(y) Recognition of income and expenses

i. Finance income and expense

Finance income and expense are recognized in the income statement as they accrue. Finance income and expense include amortization of any premium or discount during the term of the instrument and until its maturity.

The Bank follows the policy of suspending interest accruals on loans when principal or interest payments are more than 180 days past due. Finance income on those loans is recognized when collected.

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(Continued)

DUs are valued using the rates provided by SUGEVAL for such purposes. The effect of valuation of assets and liabilities denominated in DU is directly booked in the corresponding foreign exchange gain and foreign exchange loss accounts in the income statement. ii. Fee and commission income

Fees and commissions on the loan portfolio are recognized directly in profit or loss provided they are related to costs incurred in loan portfolio activities, as stipulated in the current Chart of Accounts. Fee and commission income arises on services provided by the Bank. Fee and commission income is recognized when the service is provided, i.e. on an accrual basis. When fee and commission income is deferred, it is recognized over the term of the service. iii. Income from foreign currency exchange and arbitrage

Income from foreign currency exchange and arbitrage corresponds to foreign exchange gains arising from the purchase and sale of foreign currency. Cumulative foreign exchange gains arising from purchases and sales of foreign currency conducted during the month are recognized in the income statement on a monthly basis. iv. Operating lease expenses

Payments for operating lease agreements are recognized in the income statement over the life of the lease.

(z) Statutory allocations Under article 12 of IRNBS, the net earnings of commercial State-owned banks are

allocated as follows: 50% to a legal reserve; 10% to increase the capital of the National Institute for Cooperative Development (INFOCOOP); and the remainder to increase the Bank’s capital, pursuant to article 20 of Law No. 6074. In conformity with SUGEF’s Chart of Accounts, statutory allocations on the year’s net earnings payable to INFOCOOP, the National Emergency Commission (CNE), the Development Financing Fund (FINADE), and the National Commission for Educational Loans (CONAPE) are presented as expenses in the income statement.

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(Continued)

In accordance with article 46 of the “National Emergency and Risk Prevention Act”, all institutions of the central administration and decentralized public administration, as well as State-owned entities, must contribute three percent (3%) of their reported earnings before taxes and statutory allocations and of their accumulated budget surplus to CNE. Such funds are deposited in the National Emergency Fund to finance the National Risk Management System.

Transition provision III of Law No. 8634 “Development Banking System Act”,

published in the Official Gazette on May 7, 2008, establishes that for a five-year period starting in 2007, the contributions made to CONAPE by State-owned banks equivalent to 5% of their net earnings (prescribed by paragraph a) of article 20 of Law No. 6041 “Law to Create the National Commission for Educational Loans (CONAPE)”) will be allocated as follows: 2% to CONAPE and 3% to the capital of the Development Financing Fund (FINADE). Subsequently, starting in the sixth year and for four years thereafter, the contributions to FINADE and CONAPE will be gradually reduced and increased, respectively.

(aa) Development Financing Fund (FINADE) In accordance with article 32 of Law No. 8634 “Development Banking System Act”,

all State-owned banks, except Banco Hipotecario para la Vivienda (BANHVI), shall appropriate each year at least five percent (5%) of their net earnings after income taxes to create and strengthen their own development funds. The objective of that appropriation is to provide financing to individuals and legal entities that present viable and feasible projects in conformity with the provisions of the aforementioned law.

(2) Collateralized or restricted assets

As of December 31, collateralized or restricted assets are as follows:

Carrying amount

Restricted asset 2012 2011 Cause of restriction Cash and due from banks US$ 939,682,159 850,507,577 Minimum cash reserve Investments in financial

instruments US$ 249,143,644

93,668,302

Guarantee for obligations with foreign financial entities

Investments in financial

instruments US$ -

23,007,631

Interbank Electronic Payment System (SINPE) guarantee

Other assets (note 11) US$ 393,449 388,613 Guarantee deposits

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(Continued)

As of December 31, 2012 and 2011, the applicable percentage for the minimum cash

reserve is 15%. The corresponding amount must be deposited in cash in BCCR pursuant to current banking legislation. The reserve is calculated as a percentage of third-party deposits, which varies based on the term and form of deposit-taking used by the Bank, As of December 31, 2012, the Bank must maintain a minimum cash reserve of US$939,682,159 (2011: US$850,507,577).

As of December 31, collateralized or restricted assets are as follows:

2012 2011

Restricted asset Cause of restriction

Carrying amount

Carrying amount

External debt bond Credit Suisse guarantee - Foreign bonds US$ 145,485,786

-

External debt bond Barclays guarantee - U.S. Treasury Bonds US$ 103,657,858

93,668,302

External debt bond Interbank Electronic Payment System (SINPE) guarantee US$ -

666,888

Global certificates Interbank Electronic Payment System (SINPE) guarantee US$ -

22,340,743

Other assets Guarantee deposit US$ 393,449

388,613 Checking account –

colones Minimum cash

reserve US$ 617,711,608 537,207,810 Checking account –

euros Minimum cash

reserve € 8,848,750 11,727,100 Checking account –

U.S. dollars Minimum cash

reserve US$ 310,280,550 298,178,804

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(Continued)

(3) Balances and transactions with related parties

As of December 31, balances and transactions with related parties are as follows:

2012 2011 Assets: Checking accounts and demand deposits US$ 41,272,831

1,073,372

Accounts receivable 82,628

69,633 US$ 41,355,459

1,143,005

Liabilities: Demand deposits US$ 3,022,304

3,824,433 Term deposits and accrued interest

payable

7,576,258

15,478,824 US$ 10,598,562

19,303,257

Income: Finance US$ 24,293

11,092 Operating 1,035,090

1,417,868

US$ 1,059,383

1,428,960 Expenses:

Finance US$ 1,998,067

383,980 Operating 120,855

345,381

US$ 2,118,922

729,361

For the years ended December 31, compensation paid to key personnel is as follows: 2012 2011 Short-term benefits US$ 1,969,932 1,845,048 Other compensation 370,916 375,466 US$ 2,340,848 2,220,514

-30-



(Continued)

(4) Cash and due from banks

As of December 31, cash and due from banks is as follows for purposes of reconciliation with the statement of cash flows:

2012 2011 Cash and due from banks US$ 1,301,602,298

1,142,892,199

Investments with maturities of less than two months 171,020,362

76,248,061

Cash and due from banks and cash equivalents US$ 1,472,622,660 1,219,140,260

As of December 31, cash and due from banks is as follows:

2012 2011

Local currency: Cash US$ 82,962,856 46,797,482 Cash in transit 16,114,365 16,586,797 BCCR 627,283,408 534,366,306 Current accounts and demand deposits 26,806,652 9,163,065 Outstanding checks and other 32,487,596 11,324,660 Foreign currency: Cash 25,256,747 20,308,945 Cash in transit 1,998,192 1,240,153 BCCR 322,819,772 318,545,282 Checking accounts and demand deposits

in State-owned commercial banks and banks created under special laws

24,350 - Foreign correspondent banks 50,083,552 57,641,517 Checking accounts and demand deposits

in related parties

41,272,831 1,073,372 Overnight deposits in foreign financial

entities

56,234,253 122,437,410 Outstanding checks and other 18,255,777 3,403,344 Accrued interest receivable 1,947 3,866

US$ 1,301,602,298 1,142,892,199

-31-



(Continued)

Minimum cash reserve As of December 31, deposits in BCCR are restricted to cover minimum cash reserve

requirements, as follows (see note 2):

Currency 2012 2011 Local currency US$ 617,711,608

537,207,810

Foreign currency 321,970,551 313,299,767

US$ 939,682,159 850,507,577 The above figures correspond to the average amount for the second half of December

of each year. As of December 31, 2012 and 2011, deposits in BCCR amount to US$950,103,180

and US$852,911,588, respectively.

Estimated minimum cash reserve obligations are compared with the balance of deposits in BCCR with a 30 calendar-day delay. Consequently, for each year the average amount for the second half of December differs from the balance of deposits as of December 31.

(5) Investments in financial instruments and derivative financial instruments

(a) Investments in financial instruments As of December 31, investments in financial instruments are as follows:

2012

2011 Available-for-sale US$ 1,034,619,153 870,416,236 Held-to-maturity 66,161,361 62,575,503 Futures contracts to hedge interest rate risk

(1)

-

17,588 FX futures - Other than hedges (2) 66,535 - Accrued interest receivable 14,177,525 11,969,611 Allowance for impairment of investments

in financial instruments

(1,213,260) (1,230,310) Allowance for impairment of derivative

instruments other than hedges

(333)

- US$ 1,113,810,981 943,748,628

-32-



(Continued)

2012

2011

Available-for-sale: Local issuers: Costa Rican Government US$ 438,210,402 494,073,101 BCCR 86,343,524 60,171,201 State-owned banks 121,474,958 32,156,446 Private banks 19,885,969 6,673,329 Private issuers 40,658,726 8,288,143 Other 12,929,406 11,099,410 719,502,985 612,461,630 Foreign issuers: Governments

106,978,471

127,865,233

Private issuers 25,474,388 27,835,945 Private banks 182,663,309

102,253,428

315,116,168 257,954,606 1,034,619,153

870,416,236

Held-to-maturity:

Local issuers 66,161,361 62,575,503

66,161,361

62,575,503

Futures contracts to hedge interest rate risk

-

17,588

FX futures - Other than hedges

66,535

- Accrued interest receivable

14,177,525

11,969,611

Allowance for impairment of investments

(1,213,260) (1,230,310)

Allowance for impairment of derivative instruments other than hedges

(333)

-

US$ 1,113,810,981

943,748,628

-33-



(Continued)

As of December 31, movement in the allowance for impairment of investments in

financial instruments is as follows:

2012

2011 Opening balance US$ (1,230,310)

(1,629,280)

Allowance expense (note 27)

(336)

- Decrease in allowance against income

(note 28) 17,271

398,240 Foreign exchange differences (218)

730

Closing balance US$ (1,213,593)

(1,230,310)

As of December 31, 2012, the allowance for impairment of investments in financial instruments amounts to US$1,213,260 (2011: US$1,230,310). This allowance is booked for investments in ARSs (impairment of 6.82%) and Z Bonds related to the Mortgage Securitization Trust (impairment of 26%).

As of December 31, 2012, the allowance for impairment of derivative instruments

other than hedges amounts to US$333. This allowance is booked for a forward contract with Barclays Bank PLC London, which was assigned a risk rating of A1, requiring an allowance of 0.5% in accordance with the risk categories established in SUGEF Directive 1-05.

-34-



(Continued)

As of December 31, investments in financial instruments are as follows:

2012 2011

Available-for-sale: Securities issued by BCCR US$ 86,343,523 60,171,201 Securities issued by local non-financial

public sector 436,629,239 471,065,470 Securities issued by local financial entities 141,360,927 38,829,776 Securities issued by foreign financial

entities 794,831 46,225,131 Financial instruments issued by foreign

financial entities 66,758,856 90,225,227 Other investments in foreign securities - 27,835,946 Tri-party repurchase agreements – term

seller position 25,691,709 8,288,143 Liquidity market operations – own

resources 27,896,423 11,099,410 Other available-for-sale financial

instruments 249,143,645 93,668,302 Financial instruments restricted for credit

operations - 23,007,630

1,034,619,153 870,416,236

Held-to-maturity: Securities issued by local non-financial

public sector 66,161,361

62,575,503

66,161,361 62,575,503

Derivative financial instruments:

Futures contracts to hedge interest rate risk - 17,588 FX futures - Other than hedges 66,535 -

66,535 17,588

Accrued interest receivable 14,177,525 11,969,611 Allowance for impairment of investments

in financial instruments

(1,213,260)

(1,230,310) Allowance for impairment of derivative

instruments other than hedges

(333)

-

US$ 1,113,810,981 943,748,628

-35-



(Continued)

As of December 31, 2012, returns on investments in financial instruments range

between 5% and 12.91% per annum in colones (2011: between 6.67% and 12.20% per annum), between 0.25% and 8.05% per annum in U.S. dollars (2011: between 0.25% and 9.38% per annum), and between 0.25% and 5% per annum in euros (2011: between 0.25% and 5% per annum).

As of December 31, 2012, valuation of available-for-sale investments and restricted financial instruments gave rise to an unrealized loss, net of deferred tax, in the amount of US$529,125 (2011: unrealized loss of US$6,968,893). Accordingly, as of December 31, 2012, the cumulative balance of equity adjustments arising from valuation of these investments is an unrealized loss of US$3,691,818 (2011: unrealized loss of US$4,196,864).

(1) In 2011, the Bank acquired an interest rate hedge, which fair value amounted to US$17,588 as of December 31, 2011 (see note 5-b).

(2) In 2012, the Bank acquired a forward contract for investment purposes. As of

December 31, 2012, the fair value of such contract amounts to US$66,535 (see note 5-b).

(b) Derivative financial instruments In notice J.D. 5566/06/02 dated October 29, 2012, SUGEF authorized the Bank to

trade derivative financial instruments (see note 41). As of December 31, 2012 and 2011, the Bank holds the following types of derivative

financial instruments: Derivatives as risk hedging instruments:

Interest rate swaps:

On June 28, 2011, the Bank entered into an interest rate hedge in U.S. dollars called “Operations at notional amounts subject to an interest rate swap” with CitiBank NY. This swap matures on December 19, 2013 and was entered into with the purpose of exchanging the variable interest rate for a fixed interest rate on the liability with the China Development Bank in the amount of US$22,222,222. Accordingly, the interest rate will be fixed in the event of an increase in the floating rate and a fixed-rate financing program implemented, guaranteeing the financial margin.

-36-



(Continued)

As of December 31, 2012, this instrument is booked under other debit memoranda

accounts for a notional amount of US$8,888,888; (2011: notional amount of US$17,777,778) (see note 22).

The gains on valuation of derivative financial instruments are booked under assets, while losses on such valuation are booked under liabilities.

As of December 31, 2012, the Bank booked a decrease in the fair value of this hedge in the amount of US$4,495, under other sundry accounts payable (see note 17).

As of December 31, 2011, the Bank booked an increase in the fair value of this hedge in the amount of US$17,588, under investments in financial instruments (see note 5-a).

For the year ended December 31, 2012, income and expenses derived from the

difference between the positions in financial instruments amount to US$297,457 and US$322,103, respectively, giving rise to a net loss of US$24,646 (2011: income and expenses of US$156,182 and US$184,248, respectively, for a net loss of US$28,066).

Derivatives as investment instruments:

Forward contract:

On December 14, 2012, the Bank entered into a long forward contract with Barclays Bank PLC London, where the Bank is the counterparty to the contract and makes use of the market conditions to invoke arbitrage.

The Bank uses this instrument for investment purposes only since it does not hedge

any risk and is not used for speculative purposes. Since the forward position is closed through an investment, a risk-free profit is generated for the Bank.

As of December 31, 2012, this instrument is booked under contingent memoranda accounts for a notional amount of US$6,000,000, (see note 20). This Non-Deliverable Forward (NDF) matures on June 4, 2013 and the agreed forward exchange rate is ¢513.50.

As of December 31, 2012, the Bank booked an increase in the fair value of this forward contract in the amount of US$66,535 under investments (see note 5-a).

For the year ended December 31, 2012, income and expenses derived from the difference between the positions in financial instruments amount to US$136,979 and US$69,796, respectively, giving rise to a net gain of US$67,183.

-37-



(Continued)

(6) Loan portfolio

(a) Loan portfolio by sector As of December 31, the loan portfolio by sector is as follows:

2012 2011

Trade US$ 713,604,159 700,503,191 Services 1,040,401,080 836,772,770 Financial services 91,298,514 74,194,384 Mining 108,433 247,319 Manufacturing and quarrying 241,799,131 201,149,519 Construction 120,838,406 171,351,484 Agriculture and forestry 172,992,246 154,906,552 Livestock, hunting, and fishing 124,182,724 120,736,832 Electricity, water, sanitation. and other

related sectors

200,255,910

78,317,887 Transportation and telecommunications 46,289,879 35,793,782 Housing 1,718,206,017 1,613,469,481 Personal or consumer loans 425,787,526 364,365,562 Tourism 204,581,442 213,622,463 Total direct loans 5,100,345,467 4,565,431,226 Accrued interest receivable 38,468,433 34,443,783 Allowance for loan impairment (84,262,755) (79,442,182) Total loan portfolio US$ 5,054,551,145 4,520,432,827

As of December 31, 2012, interest rates range between 7.25% and 37.50% per annum

(average rate of 17.34% per annum) for loans in colones (2011: between 7.25% and 35% per annum, average rate of 15.24% per annum); between 2.57% and 26.88% per annum (average rate of 7.99% per annum) for loans in U.S. dollars (2011: between 3% and 26.88% per annum, average rate of 8.14% per annum); and between 3.85% and 10% per annum (average rate of 6.35% per annum) for loans in DU (2011: between 3.85% and 10% per annum. average rate of 6.26% per annum).

On August 22, 2006, the Bank established the housing mortgage securitization

structure for US$11.477.863 related to the BNCR$2006-1 Mortgage Securitization Trust, which is managed by Banco Improsa, S.A. The securitization structure was sold at par and gave rise to no gains or losses.

-38-



(Continued)

The Bank was the formal and final seller of the portfolio, which was duly assigned and

transferred in the Property Registry. The Bank has no further obligations in respect of the borrower payment behavior for loans sold and all of the related risks, including default, prepayment, and foreclosure of property, were assumed by the investors who purchased the bonds issued.

As of December 31, 2012, the balance of the securitized portfolio is US$7,277,041

(2011: US$7,693,964).

(b) Loan portfolio by arrears As of December 31, the loan portfolio by arrears is as follows:

2012 2011

Current US$ 4,737,097,610 4,229,391,471 1 to 30 days 98,964,878 91,217,190 31 to 60 days 91,155,686 79,409,553 61 to 90 days 44,478,660 35,892,527 91 to 120 days 17,758,803 18,802,997 121 to 180 days 23,294,692 22,959,542 More than 180 days 87,595,138 87,757,946 Total direct loans 5,100,345,467 4,565,431,226 Accrued interest receivable 38,468,433 34,443,783 Allowance for loan impairment (84,262,755) (79,442,182) Total loan portfolio US$ 5,054,551,145 4,520,432,827

(c) Loan portfolio by origin

As of December 31, the loan portfolio by origin is as follows: 2012 2011 Loans originated by the Bank US$ 5,099,892,696 4,564,188,613 Loans purchased by the Bank 452,771 1,242,613 Total direct loans 5,100,345,467 4,565,431,226 Accrued interest receivable 38,468,433 34,443,783 Allowance for loan impairment (84,262,755) (79,442,182) Total loan portfolio US$ 5,054,551,145 4,520,432,827

-39-



(Continued)

As of December 31, 2012, loans purchased by the Bank were purchased from BICSA.

(d) Past due loans As of December 31, past due loans, including loans in accrual status (for which

interest is recognized on a cash basis), and unearned interest on those loans, are as follows:

2012 2011 Past due loans in accrual status: 17,476

loans (2011: 15,902 loans) US$ 230,433,830

203,273,485 Loans in legal collections: 3,765 loans.

2.62% of portfolio (2011: 3,135 loans. 2.93% of portfolio) US$ 133,860,33

133,763,799 Total unearned interest in 2012 and

2011 US$ 1,653,381

(476,483) During the years ended December 31, 2012 and 2011, the Bank increased and

decreased the “Finance income on non-accrual loans” account by US$1,653,381 and US$476,483, respectively, as a result of the recovery of loans receivable over 180 days past due.

As of December 31, 2012, restructured loans amount to a total of US$90,779,754

(2011: US$83,417,793). The Bank classifies loans as past due when no principal or interest payments have

been made by one day after the due date.

(e) Accrued interest receivable on loan portfolio As of December 31, accrued interest receivable is as follows:

2012 2011 Current US$ 20,382,232 17,006,575 Past due 4,975,400 5,224,440 In legal collections 13,110,801 12,212,768

US$ 38,468,433 34,443,783

-40-



(Continued)

(f) Allowance for loan impairment

For the years ended December 31, movement in the allowance for loan impairment is

as follows: 2012 2011

Opening balance US$ 79,442,182

60,621,698 Expense for the year (note 27) 86,158,105

90,063,070

Settlements (81,586,064)

(71,535,148) Decrease in allowance against income

(note 28)

(186,052)

(90,589) Foreign exchange differences 434,584

383,151

Closing balance US$ 84,262,755

79,442,182

Management considers the allowance for loan impairment to be sufficient based on its assessment of the recoverability of the portfolio and existing guarantees.

(7) Other receivables

As of December 31, other receivables are as follows:

2012 2011

Fees and commissions US$ 225,096 283,398 Transactions with related parties 82,629 69,633 Transactions with related parties

(employees and related branches)

46,059 51,882 Deferred tax (note 15) 2,629,584 1,473,790 Income tax receivable 4,193,348 51,144 Other sundry accounts receivable 3,644,062 3,191,983 Accrued interest receivable on other

sundry accounts receivable

3,015 4,787 Allowance for impairment of other

accounts and fees and commissions receivable

(5,864,668) (3,327,618)

US$ 4,959,125 1,798,999

-41-



(Continued)

For the years ended December 31, movement in the allowance for impairment of other

accounts and fees and commissions receivable is as follows: 2012 2011

Opening balance US$ 3,327,618 2,939,567 Allowance expense (note 27) 4,553,290 2,700,017 Decrease in allowance against income

(note 28)

(1,512,092)

(1,503,922) Items settled against allowance (498,065) (816,660) Foreign exchange differences (6,083) 8,616 Closing balance US$ 5,864,668 3,327,618

(8) Foreclosed assets

As of December 31, foreclosed assets are presented net of the allowance for impairment and per legal requirements, as follows:

2012 2011

Assets acquired in lieu of payment US$ 144,292,083 97,587,644 Idle property and equipment 3,499 5,292 Allowance for impairment and per legal

requirements (84,869,949) (69,232,604)

US$ 59,425,633 28,360,332

For the years ended December 31, movement in the allowance for impairment and per

legal requirements is as follows:

2012

2011 Opening balance US$ 69,232,604

28,598,543

Allowance expense (note 31) 46,719,559

67,964,818 Sale of foreclosed assets (6,521)

-

Decrease in allowance against income (31,380,073)

(27,162,054) Foreign exchange differences 304,380 (168,703) Closing balance US$ 84,869,949

69,232,604

-42-



(Continued)

(9) Investments in other companies

As of December 31, investments in other companies are as follows:

2012 2011

Other local companies US$ 54,191,178 50,559,483 Other foreign companies 76,360,488 68,524,183

US$ 130,551,666 119,083,666

The Bank holds a 49% stake in BICSA, which is represented in 2012 by 5,525,142

ordinary shares (2011: 4,912,642 ordinary shares) of US$10 par value each. At a BICSA shareholders meeting held in February 2012, shareholders agreed to

capitalize US$12.5 million, which was booked in 2012 and included in BICSA’s financial statements. As a result of the capitalization, total share capital amounted to US$112.75 million, represented by 11,275,800 shares of US$10 par value each.

At a BICSA shareholders meeting held in March 2011, shareholders agreed to

capitalize US$11.2 million, which was booked in 2011 and included in BICSA’s financial statements. As a result of the capitalization, total share capital amounted to US$100.25 million, represented by 10,025,800 shares of US$10 par value each.

As of December 31, the Bank’s investments in other non-financial entities are as

follows: 2012 2011

Interclear Central de Valores. S.A. US$ 29,876

29,682 Depósito Libre Comercial de Golfito

(Golfito Duty Free Shopping Center) per article 24 of Law No. 7131

10,357

10,290 Other entities 843

838

US$ 41,076

40,810

As of December 31, 2012, the Bank has booked an investment in the Securities Depository Institution of the Costa Rican National Stock Exchange (CEVAL) for US$29,876 (2011: US$29,682) to operate as a custodian of electronic securities.

-43-



(Continued)

As of December 31, 2012, the Bank holds investments in other non-financial entities,

the most significant of which is the investment in the Golfito Duty Free Shopping Center for US$10,357 (2011; US$10,290). The remaining US$843 (2011: US$838) of the balance of investments in other non-financial entities booked as of those dates corresponds to investments in various cooperatives.

(10) Property and equipment

As of December 31, 2012, property and equipment is as follows:

Land Buildings

Furniture and

equipment Computer hardware Vehicles Total

Cost: Opening balance US$ 64,934,877 188,143,816 78,271,355 81,434,699 934,958 413,719,705 Additions - 7,064,871 14,308,313 12,972,723 - 34,345,907 Retirements - - (1,096,881) (4,273,190) (87,913) (5,457,984) Sales - - - - - - Adjustments - - (25,877) 10,853 - (15,024) Reclassifications - - 41,885 (41,885) - - Foreign exchange

differences

424,216 1,229,134 511,343 532,009 6,108 2,702,810 Closing balance 65,359,093 196,437,821 92,010,138 90,635,209 853,153 445,295,414 Accumulated depreciation: Opening balance - 42,483,755 36,258,535 64,454,361 373,980 143,570,631 Depreciation expense on

historical cost

- 2,205,426 6,950,116 8,325,013 70,161 17,550,716 Depreciation expense on

revaluation

- 2,376,133 - - - 2,376,133 Retirements - - (889,338) (4,224,245) (64,914) (5,178,497) Sales - - - - - - Adjustments - - (2,007) 29,693 (141) 27,545 Reclassifications - - 5,789 (5,789) - - Foreign exchange

differences

- 233,346 169,829 340,768 1,767 745,710 Closing balance - 47,298,660 42,492,924 68,919,801 380,853 159,092,238 Net closing balance US$ 65,359,093 149,139,161 49,517,214 21,715,408 472,300 286,203,176

-44-



(Continued)

As of December 31, 2011, property and equipment is as follows:

Land Buildings

Furniture and

equipment Computer hardware Vehicles Total

Cost: Opening balance US$ 63,906,258 186,113,933 68,056,206 79,363,012 688,115 398,127,524 Additions 712,470 1,132,439 10,601,356 6,107,015 243,438 18,796,718 Retirements - - (768,148) (1,462,300) - (2,230,448) Sales - - (13,824) (2,781,629) - (2,795,453) Adjustments - (23,274) (4,966) (119,960) - (148,200) Reclassifications - - 64,052 (64,052) - - Foreign exchange

differences

316,149 920,718 336,679 392,613 3,405 1,969,564 Closing balance 64,934,877 188,143,816 78,271,355 81,434,699 934,958 413,719,705 Accumulated depreciation:

Opening balance - 38,829,618 30,404,950 59,883,985 316,012 129,434,565 Depreciation expense on

historical cost

- 1,403,557 6,205,411 8,651,267 56,838 16,317,073 Depreciation expense on

revaluation

- 2,384,698 - - - 2,384,698 Retirements - - (583,174) (1,444,506) - (2,027,680) Sales - - (12,840) (2,777,883) - (2,790,723) Adjustments - (297,413) 40,055 11,905 - (245,453) Reclassifications - - 100,891 (100,891) - - Foreign exchange

differences

- 163,295 103,242 230,484 1,130 498,151 Closing balance - 42,483,755 36,258,535 64,454,361 373,980 143,570,631 Net closing balance US$ 64,934,877 145,660,061 42,012,820 16,980,338 560,978 270,149,074

-45-



(Continued)

(11) Other assets

As of December 31, other assets are as follows:

2012 2011

Deferred charges: Organization and installation US$ - 158 Leasehold improvements 2,889,034 3,994,630 Other deferred charges 204,806 265,797 Subtotal 3,093,840 4,260,585 Intangible assets:

Software (2) 6,298,104 1,676,250 Subtotal 6,298,104 1,676,250 Other assets:

Prepaid interest and fees and commissions 456,733 113,310 Prepaid insurance policy 369,392 355,036 Stationery, office supplies, and other materials 487,419 344,711 Leased assets 303,567 303,778 Library and artwork 554,741 270,048 Construction-in-progress 11,721,933 6,904,101 Rights in welfare and trade associations 698 693 Other sundry assets 2,307,337 2,128,471 Operations pending settlement 11,681,889 8,551,196 Other operations pending application 429,897 485,368 Balances due from other departments - 3 Guarantee deposits (1) 301,720 285,726 Legal and administrative deposits (1) 91,729 102,887 Subtotal 28,707,055 19,845,328 Total US$ 38,098,999 25,782,163 (1) As of December 31, 2012, guarantee deposits amount to US$393,449 (2011:

US$388,613) (see note 2).

-46-



(Continued)

(2) As of December 31, 2012, intangible assets, net are as follows:

Software

Other intangible

assets

Total Cost: Opening balance US$ 20,850,624 186,068 21,036,692 Additions 6,805,222 - 6,805,222 Reclassifications (9,411) - (9,411) Foreign exchange differences 136,216 1,216 137,432 Closing balance 27,782,651 187,284 27,969,935 Accumulated amortization: Opening balance 19,174,374 186,068 19,360,442 Expense for the year 2,215,177 - 2,215,177 Reclassifications (8,900) - (8,900) Foreign exchange differences 103,896 1,216 105,112 Closing balance 21,484,547 187,284 21,671,831 Net closing balance US$ 6,298,104 - 6,298,104

As of December 31, 2011, intangible assets, net are as follows:

Software

Other intangible

assets

Total Cost: Opening balance US$ 22,007,378 185,152 22,192,530 Additions 761,853 - 761,853 Retirements (2,016,812) - (2,016,812) Reclassifications (10,667) - (10,667) Foreign exchange differences 108,872 916 109,788 Closing balance 20,850,624 186,068 21,036,692 Accumulated amortization:

Opening balance 19,287,497 185,152 19,472,649 Expense for the year 1,832,873 - 1,832,873 Retirements (2,016,812) - (2,016,812) Reclassifications (10,667) - (10,667) Foreign exchange differences 81,483 916 82,399 Closing balance 19,174,374 186,068 19,360,442 Net closing balance US$ 1,676,250 - 1,676,250

-47-



(Continued)

(12) Obligations with the public

(a) By cumulative amount As of December 31, obligations with the public by cumulative amount are as follows: 2012 2011

Demand obligations: Checking accounts US$ 2,076,953,800 1,749,452,472 Certified checks 270,112 474,585 Savings deposits 1,619,016,372 1,483,923,730 Matured term deposits 54,736,116 80,989,058 Other demand deposits 48,516,412 33,965,688 Drafts and transfers 1,035,118 6,451,350 Cashier’s checks 7,099,212 9,898,162 Advance collections from customers for

credit cards

11,067,208 5,768,783 Obligations for trust funds 77,881 154,170 Subtotal 3,818,772,231 3,371,077,998 Term obligations: Deposits from the public 2,326,766,600 2,209,655,709 Other term obligations 96,825,502 63,175,220 Subtotal 2,423,592,102 2,272,830,929 Charges payable for obligations with the

public

42,910,992 25,547,029 Total US$ 6,285,275,325 5,669,455,956 As of December 31, 2012 and 2011 checking accounts in colones bear interest at a

maximum rate of 2.50% per annum on balances and at a minimum rate of 0.75% per annum on balances greater than or equal to US$996. Checking accounts in U.S. dollars bear interest at a maximum rate of 0.08% per annum on balances and at a minimum rate of 0.01% per annum on balances greater than or equal to US$1.000.

-48-



(Continued)

Term obligations correspond to term certificates of deposit in colones, U.S. dollars,

and euros. As of December 31, 2012, certificates in colones bear interest at rates ranging between 5% and 9.20% per annum (2011: between 4.75% and 7% per annum); certificates in U.S. dollars bear interest at rates ranging between 0.95% and 2.50% per annum (2011: between 0.45% and 1.80% per annum); and certificates in euros bear interest at rates ranging between 0.10% and 0.60% per annum (2011: between 0.10% and 0.60% per annum).

The Bank has term certificates of deposit that are restricted to secure certain loan

operations. As of December 31, 2012, those term certificates of deposit amount to US$23,293,429 (2011: US$3,444,780). As of that date, the Bank has no inactive deposits with State-owned entities or other banks.

(b) By number of customers As of December 31, obligations with the public by number of customers are as

follows: 2012 Demand Term Obligations with the public 1,666,522 65,497

2011 Demand Term Obligations with the public 1,612,624 61,824

As of December 31, demand and term deposits from customers by cumulative amount

are as follows:

2012 2011

Deposits from the public US$ 6,285,275,325 5,669,455,956 Deposits from State-owned entities 451,395 20,304,927 Obligations with entities:

Deposits from other banks 70,824,505 70,105,625 Deposits from other local entities 5,443,618 5,229,236 Deposits from other foreign entities 443,872,157 273,084,819 Charges due to other entities 3,819,370 1,420,062 Subtotal 523,959,650 349,839,742 Total US$ 6,809,686,370 6,039,600,625

-49-



(Continued)

(13) Obligations with BCCR

As of December 31, obligations with BCCR are as follows:

2012 2011

Financing for loans using internal funds US$ 6,120 19,794,706 Financing for loans using external funds 444,220 501,917 Interest payable on obligations 1,055 8,304 US$ 451,395 20,304,927

(14) Obligations with entities As of December 31, obligations with entities are as follows:

2012 2011

Demand:

Checking accounts of local financial

entities US$ 43,096,836 38,970,636 Savings deposits from local financial

entities 38,343 19,157 Outstanding checks 5,910,046 6,455,398 Other demand obligations with financial

entities 3,735,506 7,153,668 Subtotal 52,780,731 52,598,859 Term:

Term deposits from local financial entities 18,756,977 20,836,001

Loans from local financial entities 4,730,416 - Loans from foreign financial entities

(1)(2) 443,872,156 273,084,820 Liquidity market obligations - 1,900,000 Subtotal 467,359,549 295,820,821 Charges payable for obligations with

financial and non-financial entities (1) 3,819,370 1,420,062 Total US$ 523,959,650 349,839,742

-50-



(Continued)

(1) Loans from foreign financial entities are as follows:

Annual interest rate Maturity

Entity 2012 2011 2012 2011 2012 2011 Bank of New York 1.7784%

-

2013

- US$ 7,056,711 -

CABEI 2.5283%

to 8% 6.90%

to 8%

2013 to 2016

2015 to 2016

24,590,437 12,388,846

Barclays

6.20% to

6.65%

6.20% to

6.65%

2023 to 2029

2023 to 2025 125,651,489 125,606,566 Citibank 2.6197% 1.0952% 2013 2011 35,062,801 35,018,903 China Development Bank 2.9519%

2.9519%

2013

2013 8,892,076 17,783,751

Commerce. N.A. Miami

2.5185%

1.6278 to

2.2479%

2013

2011 33,359,246 33,272,962 Banco Comercio Exterior (Bogotá) 2.2703%

-

2013

-

4,001,514 - Banco Latinoamericano Exportaciones. S.A. (Bladex - Panama) 3.7899%

-

2013

-

9,559,007 - Bank of America 2.2200%

-

2013

-

14,145,903 -

Standard Chartered Bank 2.6284%

-

2013

-

9,107,764 -

Credit Suisse 3.9707% - 2017 -

106,632,950 -

Wells Fargo Bank

2.1744% to

3.1669%

3.063%

2013 to 2014

2014

69,604,132 50,433,854

US$ 447,664,030 274,504,882

(2) Guarantees backing the above loans are detailed in note 2.

-51-



(Continued)

Loans due to foreign financial entities bear interest at rates ranging between 1.7784%

and 8% per annum (2011: between 1.0952% and 8% per annum). Maturities of loans due to entities

As of December 31, loans due to entities mature as follows:

2012 Local Foreign Total

Less than 1 year US$ - 165,466,839 165,466,839 Between 1 and 2 years - 40,365,953 40,365,953 Between 3 and 5 years 4,952,931 116,179,750 121,132,681 More than 5 years 256,375 125,651,488 125,907,863 US$ 5,209,306 447,664,030 452,873,336

2011 Local Foreign Total

Less than 1 year US$ 21,713,045 68,291,870 90,004,915 Between 3 and 5 years 236,811 80,606,451 80,843,262 More than 5 years 255,071 125,606,561 125,861,632 US$ 22,204,927 274,504,882 296,709,809

As of December 31, 2012, loans due to local entities correspond to obligations with

Banco Crédito Agrícola de Cartago and BCCR (2011: obligations with BCCR). (15) Income tax

Pursuant to the Costa Rican Income Tax Law, the Bank is required to file annual

income tax returns for the twelve months ending December 31 of each year. For the years ended December 31, income tax expense is as follows: 2012 2011 Current US$ 9,582,895 7,154,527 Decrease in current tax (4,295,801) (3,047,797) US$ 5,287,094 4,106,730

-52-



(Continued)

For the years ended December 31, the difference between income tax expense and the

amount that would result from applying the corresponding tax rate to pre-tax income (30%) is reconciled as follows:

2012 2011 Accounting income US$ 25,963,935 19,541,617 Plus (less): Nondeductible expenses 2,889,722 4,858,550 Nontaxable income (5,500,364) (16,930,113) Deductible expenses (18,646,586) (3,637,731) Taxable income 580,386 438,683 Subtotal – Income tax payable US$ 5,287,093 4,271,006 Less: Estimated income taxes (5,236,091) (4,188,622) Foreign exchange differences (51,002) (32,467) Total income tax payable US$ - 49,917 As of December 31, 2012, income tax expense and estimated income tax amount to

US$5,236,091 and US$6,168,063, respectively, which gave rise to a tax credit of US$931,972.

For the year ended December 31, 2012, the decrease in income tax corresponding to

prior years in the amount of US$24,294,141 corresponds to the reversal of the income tax provision for the 2007 tax year established due to a difference in the calculation methodologies applied by the Bank and the Tax Administration. The statute of limitations for such provision in the amount of US$17,400,465 expired in 2012. Additionally, the decrease in income tax booked in that same period generating a tax credit of US$6,867,547 is a result of the amended income tax returns for the tax years running from 2009 through 2011. Also, a decrease in income tax was booked in 2012 for a total of US$26,129 as a result of the income tax expense booked in 2011 arising from the realization of the surplus from the revaluation of the buildings of the Alajuela and Santa Elena de Monteverde branches, which were sold in 2004 and 2008, respectively. The statute of limitations for those tax years had expired; accordingly, booking such expense in 2011 was not required.

-53-



(Continued)

For the year ended December 31, 2011, current income tax expense is lower than the

amount estimated for such purposes by US$164,276 as a result of the realization of the surplus from revaluation of the buildings of the Alajuela and Santa Elena de Monteverde branches, which were sold in 2004 and 2008, respectively. The surpluses were booked in the Bank’s subledgers, reversing the situation in December 2011. Accordingly, the Bank booked a decrease in the deferred tax liability in the amount of US$189,985 (income) and an increase in current tax in the amount of US$25,709 (expense) as a result of the taxable gain derived from the realization of such revaluation surplus.

As of December 31, deferred tax assets arise from temporary differences in the

following financial statement items: 2012 2011 Unrealized losses US$ 2,629,584 1,473,790 US$ 2,629,584 1,473,790 Movement in temporary differences that give rise to deferred tax assets during 2012 is

as follows:

December 31, 2011

Included in income

statement

Included in equity

Foreign exchange

differences

December 31, 2012

Unrealized losses US$ 1,473,790

-

1,146,165

9,629 2,629,584

US$ 1,473,790

-

1,146,165

9,629 2,629,584 Movement in temporary differences that give rise to deferred tax assets during 2011 is

as follows:

December 31, 2010

Included in income

statement

Included in equity

December 31, 2011

Unrealized losses US$ -

-

1,473,790

1,473,790 US$ -

-

1,473,790

1,473,790

-54-



(Continued)

As of December 31, deferred tax liabilities arise from temporary differences in the

following financial statement items: 2012 2011 Revaluation of assets US$ 21,525,842

21,507,815

Unrealized gains 3,149,682

1,511,784 US$ 24,675,524

23,019,599

Movement in temporary differences that give rise to deferred tax liabilities during

2012 is as follows:

December 31, 2011

Included in income

statement

Included in equity

Foreign exchange

differences

December 31, 2012

Revaluation of assets US$ 21,507,815

-

(122,482)

140,509 21,525,842

Unrealized gains

1,511,784

656,923

971,098

9,877 3,149,682

US$ 23,019,599

656,923

848,616

150,386 24,675,524 Movement in temporary differences that give rise to deferred tax liabilities during

2011 is as follows:

December 31, 2010

Included in income

statement

Included in equity

Foreign exchange

differences

December 31, 2011

Revaluation of assets US$

21,589,745

(188,736)

-

106,806 21,507,815

Unrealized gains

1,029,610

652,660

(175,579)

5,093 1,511,784

US$ 22,619,355

463,924

(175,579)

111,899 23,019,599 A deferred tax liability represents a taxable temporary difference and a deferred tax

asset represents a deductible temporary difference.

Tax returns filed by the Bank for the years ended December 31, 2009, 2010, 2011 and the tax return that will be filed for the year ended December 31, 2012 are open to review by Tax Authorities.

-55-



(Continued)

(16) Provisions

As of December 31, provisions are as follows: 2012 2011 Severance benefits US$ 75,486,189

75,126,356

Litigation 9,559,774

7,005,820 Income tax 12,994,287

30,030,705

Other 17,594,048

21,883,298 US$ 115,634,298

134,046,179

Movement in provisions is as follows:

Severance benefits

Litigation

Income tax

Other Total

At December 31, 2010 US$ 80,076,925 6,380,127 29,882,873 23,081,661 139,421,586

Provisioned

11,489,380 4,596,910 - 20,917,422 37,003,712 Used

(15,984,357) (3,704,324) - (21,619,104) (41,307,785)

Decrease in provisions against income (770,251) (265,529) - (455,314) (1,491,094)

Foreign exchange differences 314,659 (1,364) 147,832 (41,367) 419,760

At December 31, 2011 US$ 75,126,356 7,005,820 30,030,705 21,883,298 134,046,179

Provisioned

156,517,916 3,450,322 - 36,483,804 196,452,042 Used

(150,700,591) (891,220) - (40,460,028) (192,051,839)

Decrease in provisions against income

4,481,636 17,805 17,400,465 105,053 22,004,959

Foreign exchange differences (9,939,128) (22,953) (34,436,883) (418,079) (44,817,043)

At December 31, 2012 US$ 75,486,189 9,559,774 12,994,287 17,594,048 115,634,298

-56-



(Continued)

As of December 31, the provision for litigation is comprised as follows:

2012

2011

Ordinary suits US$ 5,986,567 3,438,286 Phishing

3,573,207 3,550,015

Trust division

- 17,519

US$ 9,559,774 7,005,820

As of December 31, 2012, the Bank is a defendant in litigation, and management

considers it probable that an outflow of economic benefits will be required to settle the corresponding obligations. The Bank has estimated future disbursements and made the following provisions:

• Ordinary suits filed against the Bank have been estimated at US$451,745,571 (2011: US$352,893,615). Management of the Bank has provisioned US$5,986,567 (2011: US$3,438,286) for ordinary and labor suits and judicial litigation.

• For criminal proceedings in which the Bank is the civil defendant, the total

potential liability has been estimated at US$50,956 (2011: US$25,776). The amount provisioned by the Bank in connection therewith is included in the provision for ordinary suits.

• Labor suits by nature are difficult to estimate. However, they have been

estimated at US$4,565,483 (2011: US$1,981,504). The amount provisioned by the Bank in connection therewith is included in the provision for ordinary suits.

• In order for the provision for phishing claims to cover all potential losses, as

recorded in article 15 of the minutes of meeting No. 11583 held on November 24, 2009, the Board of Directors agreed to increase the provision to US$3,573,207 by April 2010. Accordingly, a monthly provision was to be booked in the amount of US$199,175 from January to March 2010 and US$187,225 in April 2010 in order to reach the aforementioned amount. As of December 31, 2012, the accounting records include the entire provision agreed upon by the Board of Directors for US$3,573,207. As of December 31, 2012, the Bank faces 514 administrative actions related to Internet fraud (phishing) for a total of US$2,561,519 (2011: US$2,565,389).

-57-



(Continued)

• The Bank’s Trust Division has provisioned a total of US$0 (2011: US$17,518)

for a tax contingency related to the trusts managed by the Bank.

• As of December 31, 2012, the Bank’s income tax provision amounts to US$12,994,287 (2011: US$30,030,705), and corresponds to the income tax liability calculated for the 2008 tax year (2011: the 2008 and 2007 tax years) based on the Income Tax Law and the regulations thereto. This provision has been authorized by SUGEF under article 10 of IRNBS (Law No. 1644).

(17) Other sundry accounts payable

As of December 31, other sundry accounts payable are as follows: 2012 2011 Professional fees US$ 86,254 132,585 Creditors - goods and services (2) 9,109,294 6,480,105 Current tax (note 15) - 49,917 Income tax derived from sale of building

(note 15) - 25,709 Employer contributions (1) 14,735,982 11,385,961 Court-ordered withholdings 3,877,993 3,653,015 Tax withholdings 1,667,287 1,582,194 Employee withholdings 843,865 946,233 Other third-party withholdings 51,669 175,963 Compensation 11,302,050 - Statutory allocations (4) 16,396,775 10,582,428 Clearing house operations 920,682 2,118,906 Accrued vacation 10,642,173 10,379,620 Accrued statutory Christmas bonus 2,894,894 2,347,670 Foreclosed assets 1,191,716 316,244 Various creditors - local currency 14,059,502 14,225,198 Various creditors - foreign currency 9,138,691 7,437,612 Derivative financial instruments -

Position (3) 4,495 - US$ 96,923,322 71,839,360

-58-



(Continued)

(1) The “Employer contributions” line item mainly includes employer

contributions due to the CCSS, Banco Popular y de Desarrollo Comunal, National Learning Institute (INA), and Mixed Institute of Social Welfare (IMAS).

(2) As of December 31, 2012 and 2011, the “Creditors - goods and services” line

item includes US$1,236 million and US$1,015 million, respectively, for the operations of the Bank’s Electronic Means of Payment Division (Visa). The remaining amount corresponds to normal operations of other divisions.

(3) As of December 31. 2012, the Bank booked a decrease in the value of the

interest rate hedge in the amount of US$4,495, (see note 5-b). (4) In 2012, the effect of the amended income tax returns for the tax years running

from 2009 through 2011 gave rise to a tax credit in the amount of US$92,844, which had an impact on the statutory allocations related to CONAPE, FINADE, and the National Emergency Fund.

(18) Other liabilities

As of December 31, other liabilities are as follows: 2012 2011 Deferred income:

Deferred finance income US$ 5,122,812 4,353,760 Deferred fees and commissions for

trust management

24,558 26,908 Other 19 9 Subtotal 5,147,389 4,380,677 Allowance for stand-by credit losses

(1)

689,921 685,478 Operations pending application:

Operations pending settlement 83,992,151 27,203,935 Other 14,285,405 5,595,533 Subtotal 98,277,556 32,799,468 Total US$ 104,114,866 37,865,623

-59-



(Continued)

(1) For the years ended December 31, movements in the allowance for stand-by

credit losses are as follows:

2012 2011 Opening balance US$ 685,478

680,484

Allowance expense charged to profit or loss (note 27)

- 1,668

Foreign exchange differences 4,443 3,326 Closing balance US$ 689,921

685,478

(19) Equity

(a) Share capital The Bank’s share capital is as follows: 2012 2011 Capital under Law No. 1644 US$ 179,689,396 78,494,766 Bank capitalization bonds 54,831,069 54,518,274 US$ 234,520,465 133,013,040 On December 23, 2008, the Executive Branch of the Costa Rican Government

authorized a capital contribution funded under Law No. 8703 “Amendment to Law No. 8627 on the Ordinary and Extraordinary Budget of the Republic for Tax Year 2008”. Such law grants funds to capitalize three State-owned banks, including Banco Nacional de Costa Rica, in order to stimulate productive sectors, particularly small and medium-sized enterprises. For such purposes, the Bank received four securities for a total of US$50,000,000, wich are denominated in DU maturing in 2013, 2017, 2018, and 2019 (No. 4183, No. 4184, No. 4185, and No. 4190 for DU10,541,265.09 each, at a reference exchange rate of 655.021 to DU1.00). As of December 31, 2012 and based on the exchange rate as of that date, the balance of those investments is US$66,161,361 (2011: US$62,575,503) (see note 5).

As of December 31, 2012, the Bank has appropriated US$17,371,322 (2011:

US$13,016,941) from its earnings to form the equity of its Development Financing Fund.

(b) Revaluation surplus Revaluation surplus corresponds to the increase in fair value of property.

-60-



(Continued)

As of December 31, 2012 and 2011, revaluation surplus amounts to US$97,524,908

and US$96,847,171, respectively. (c) Adjustment for valuation of available-for-sale investments and restricted

financial instruments This item corresponds to variations in the fair value of available-for-sale investments

and restricted financial instruments. As of December 31, 2012 and 2011, the adjustment for valuation of available-for-sale

investments and restricted financial instruments amounts to US$3,691,818 (unrealized loss) and US$4,196,864 (unrealized loss), respectively.

(d) Adjustment for valuation of investments in other companies As of December 31, 2012 and 2011, the adjustment for valuation of investments in

foreign associates by the equity method amounts to US$9,530,992 and US$9,373,364, respectively. These investments correspond to the Bank’s 49% ownership interest in BICSA and subsidiary.

(20) Commitments and contingencies

The Bank has off-balance sheet commitments and contingencies that arise in the

normal course of business and involve elements of credit and liquidity risk, and the notional amounts of foreign exchange derivatives, as follows:

2012 2011 Performance bonds US$ 48,618,868 48,273,185 Bid bonds 4,776,282 3,866,053 Other guarantees 1,059,209 3,953,794 Letters of credit 84,377,212 36,906,028 Credits pending disbursement 769,618 1,249,897 Subtotal 139,601,189 94,248,957 Pre-approved lines of credit 239,897,014 200,900,948 Other contingencies – pending litigation

and lawsuits (note 40)

450,143,991

352,009,068 Other contingencies not related to

credits

425,901

21,979 Forward contracts (1) 6,000,000 - US$ 836,068,095 647,180,952

-61-



(Continued)

Letters of credit, guarantees, and sureties granted expose the Bank to credit loss in the

event of noncompliance by the customer. The Bank’s policies and procedures for approving credit commitments and financial guarantees are the same as those for granting loans booked. Guarantees and sureties granted have fixed maturity dates and. in most cases, no funds are disbursed on maturity, Therefore, they do not represent a significant exposure to liquidity risk. Most letters of credit are used and those used are generally available on demand, issued and confirmed by correspondent banks, and payable immediately.

These commitments and contingent liabilities expose the Bank to credit risk since fees

and commissions and losses are recognized in the balance sheet until the commitments are fulfilled or expire.

(1) As of December 31. 2012, contingent accounts include a forward contract (future

purchase) for U.S. dollars for a notional amount of US$6.000.000, (see note 5-b).

The Bank has off-balance sheet financial instruments (contingent and without prior

deposit) that arise in the normal course of business and involve elements of credit and liquidity risk. Those financial instruments include letters of credit, Guarantees, and sureties without prior deposit.

As of December 31, off-balance sheet financial instruments with risk (no prior deposit)

and without risk (prior deposit) are as follows:

2012 2011

Contingencies without prior deposit: Letters of credit US$ 47,545,011 10,974,438 Guarantees and sureties granted 49,145,284 51,468,215 Subtotal 96,690,295 62,442,653 Contingencies with prior deposit:

Letters of credit 36,832,201 25,931,590 Guarantees and sureties granted 5,309,075 4,624,817 Subtotal 42,141,276 30,556,407 Credits pending disbursement 769,618 1,249,897 Total US$ 139,601,189

94,248,957

-62-



(Continued)

(21) Trust assets

The Bank provides trust services whereby it manages assets at the direction of the customer. The Bank receives a fee for providing those services. The underlying assets, liabilities, and equity are not recognized in the Bank’s unconsolidated financial statements. The Bank is not exposed to any credit risk relating to such placements, as it does not guarantee these assets.

The types of trusts managed by the Bank are as follows:

• Management and investment trusts • Management trusts with a testamentary clause • Guaranty trusts • Housing trusts • Management and investment public trusts

-63-



(Continued)

As of December 31, 2012, trust capital is invested in the following assets:

Nature of trust

Guaranty and cash

management

Cash or property

management Securitization Portfolio

management Guaranty Testamentary

Custody of stock with testamentar

y clause

Custody and management

of stock

Pre-sales manageme

nt

Guaranty and

custody of stock

Management, custody, and

guaranty Total Trust assets Cash and due

from banks US$ - 327,171 18,598 18,386 630,010 217 15 - - 407 2,500 997,304 Investment

securities and term deposits 110,000 258,008,259 32,189,095 1,838,874 1,093,811,012 790,800 - 2,435 33,416 702 45,954 1,386,830,547

Loan portfolio - 1,741,074 1,456,661 3,660,236 131,627 100 - - - - - 6,989,698 Accounts and

accrued interest receivable - 14,203,823 80,608 5,727,805 5,608 - - - - - - 20,017,844

Foreclosed assets - - - 1,868 62,795 - - - - - - 64,663 Investments in

other companies - 102,843 - - 3,500,000 4,852 4,589 - - 3,600,000 - 7,212,284 Property and

equipment 3,075,350 7,784,384 160,012,100 313,281 136,026,539 - - - - - - 307,211,654 Other assets 218 171,087 428,240 31,257 6,871,779 1,382 - - - - - 7,503,963 Total US$ 3,185,568 282,338,641 194,185,302 11,591,707 1,241,039,370 797,351 4,604 2,435 33,416 3,306,109 48,454 1,736,827,957

-64-



(Continued)

As of December 31, 2011, trust capital is invested in the following assets:

Nature of trust

Guaranty and

cash management

Cash or property

management

Securitization

Portfolio management

Guaranty

Testamentary

Custody of stock with

testamentary clause

Custody and management

of stock

Pre-sales

management

Guaranty and custody

of stock

Management, custody, and

guaranty

Total Trust assets Cash and due from

banks US$ 196 490,151 60,381 101,723 132,097 227 15 - - 730 - 785,520 Investment

securities and term deposits 140,000 55,585,327 20,846,349 2,079,248 1,137,682,782 1,012,341 - 1,776 9,022 - 60,049 1,217,416,894

Loan portfolio - 6,267,079 1,955,799 2,440,850 163,667 - - - - - - 10,827,395 Accounts and

accrued interest receivable - 18,855,302 59,141 5,790,560 25,789 44 - - - - - 24,730,836

Foreclosed assets - - 2,880,173 - 27,862 - - - - - - 2,908,035 Investments in other

companies - 2,285,309 - - 7,000,159 13,843,617 689 - - 3,600,000 - 26,729,774 Property and

equipment 3,261,169 14,183,779 168,727,292 325,903 144,809,597 - - - - - - 331,307,740 Other assets - 209,925 857,052 19,743 18,031,932 1,374 - - - - - 19,120,026 Total US$ 3,401,365 97,876,872 195,386,187 10,758,027 1,307,873,885 14,857,603 704 1,776 9,022 3,600,730 60,049 1,633,826,220

-65-



(Continued)

The types of trusts managed by the Bank are as follows:

a) Housing mortgage

These trusts are exclusively dedicated to managing housing loan portfolios.

b) Cash or property management

These trusts are dedicated to managing cash or property for any of several

purposes, including investing the cash or property placed in the trust and making payments.

c) Securitization

These trusts are used to obtain funds from illiquid assets by issuing asset-backed

securities.

d) Portfolio management

These trusts are dedicated to managing portfolios of loans granted for housing, Agriculture, or reforestation projects or for any other activity aimed at promoting the country’s social and economic development.

e) Special accounts

These accounts are “special” funds (not trusts) managed by BN-Fiduciaria that are

created for different purposes in order to help facilitate the control, management, location, and future settlement of certain accounting items used to settle trust contingencies, the maturity of mortgage investment certificates (CIH), the management of fixed assets, etc.

f) Guaranty

These trusts hold trust property that is to be transferred as a guaranty for loan

operations at the direction of the trustor.

g) Testamentary

The purpose of these trusts is to meet the listed needs of individuals identified by trustors upon their death. Testamentary trusts include life insurance policies, wills, and inheritance trusts.

-66-



(Continued)

h) Custody of stock with testamentary clause

These trusts hold in custody capital stock, plus an added value based on the

testamentary trust agreement. The purpose of these trusts is to manage the assets represented by the aforementioned stock on behalf of third parties.

(22) Other debit memoranda accounts

As of December 31, other debit memoranda accounts are as follows:

2012 2011

Guarantees received in the Bank’s custody US$ 7,950,037,618

6,585,835,457

Unused. authorized lines of credit 627,358,409 664,677,428 Write-offs 275,527,497 214,521,225 Finance income on non-accrual

loans 10,370,472

8,660,512 Supporting documentation received

in the Bank’s custody 1

2 Nondeductible expenses 9,539,486 16,054,456 Nontaxable income 61,555,690 56,004,700 Other memoranda accounts 503,301,210 354,596,260 Subtotal 9,437,690,383 7,900,350,040 Third-party debit memoranda

accounts (1) 1,336,104,002

1,042,989,794 Own debit memoranda accounts for

custodial activities 261,980,083

234,575,940 Third-party debit memoranda

accounts for custodial activities 10,607,609,011

9,109,181,562 Total US$ 21,643,383,479 18,287,097,336 (1) According to SUGEVAL decision SGV-R-1706 of June 6. 2007, the Bank

is registered with the National Registry of Securities and Brokers as a class C custodian, in conformity with current regulations.

As of December 31, banking mandates are as follows: 2012 2011 Management of banking mandates US$ 1,336,099,302 1,042,985,124 Assets in custody on behalf of

third parties

4,700

4,670 US$ 1,336,104,002 1,042,989,794

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(Continued)

As of December 31, 2012, memoranda accounts also include an interest rate

hedge (“operations at notional amounts subject to an interest rate swap”) in U.S. dollars for a notional amount of US$8,888,888 (2011: US$17,777,778) (see note 5b).

(23) Finance income on cash and due from banks and financial instruments

For the years ended December 31, finance income on cash and due from banks

and financial instruments is as follows:

2012 2011

Cash and due from banks: Checking accounts and demand deposits in local entities US$ 31,286 135,967

Checking accounts and demand deposits in foreign entities 281,126 139,392

312,412 275,359 Financial instruments:

Investments in trading securities 141,686 29,036 Investments in available-for-sale

securities 52,467,616 50,655,778 Investments in held-to-maturity

securities and deposits - 10 Investments in committed securities

and deposits 1,038,870 808,864 53,648,172 51,493,688

US$ 53,960,584 51,769,047

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(Continued)

(24) Finance income on loan portfolio

For the years ended December 31, finance income on the loan portfolio is as follows:

2012 2011

Current loans:

Checking account overdrafts US$ 298,491 328,307

Loans granted with funds from BCCR 4,969,303 6,150,820

Loans granted with other funds 431,929,843 338,353,936 Credit cards 28,394,620 24,651,586 Issued letters of credit 1,410 748 Other loans 38,419 1,549,871 Subtotal 465,632,086 371,035,268 Past due loans and loans in legal

collections: Checking account overdrafts 3,985 8,389 Factoring - 8,467 Loans granted with funds from

BCCR 1,470,398 1,588,349 Loans granted with other funds 96,303,585 81,752,413 Credit cards 4,140,846 4,041,942 Issued letters of credit - 40 Other 7,539 3,674 Subtotal 101,926,353 87,403,274 Total US$ 567,558,439 458,438,542

(25) Other finance income

For the years ended December 31, other finance income is as follows:

2012 2011

Fees and commissions on letters of credit US$ 120,728 126,804

Fees and commissions on guarantees granted

1,016,375 724,094

Fees and commissions on lines of credit

410,630 491,790

Other sundry finance income 5,459,293 5,197,860 US$ 7,007,026 6,540,548

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(Continued)

(26) Expenses for obligations with the public

For the years ended December 31, expenses for obligations with the public are as

follows:

2012 2011

Demand deposits US$ 67,760,696 48,236,576 Term deposits 163,677,879 108,852,864 Other term obligations with the

public

6,447 19,160 US$ 231,445,022 157,108,600

(27) Expenses for allowances for impairment of assets

For the years ended December 31, expenses for the allowances for impairment of assets are as follows:

2012 2011

Allowance for loan impairment (note 6-f) US$ 86,158,105 90,063,070

Allowance for impairment of other accounts receivable (note 7) 4,553,290 2,700,017

Allowance for stand-by credit losses (note 18) - 1,668

Allowance for impairment of derivative instruments (note 5-a) 333 -

US$ 90,711,731 92,764,755

(28) Income from recovery of assets and decreases in allowances and provisions

For the years ended December 31, income from recovery of assets and decreases in allowances and provisions is as follows:

2012 2011

Recovery of loan write-offs US$ 29,896,186 20,531,043 Recovery of receivable write-offs 12,165 4,080 Decrease in allowance for loan

impairment (note 6-f) 186,052

90,589 Allowance for impairment of other

accounts receivable (note 7) 1,512,092 1,503,922 Decrease in allowance for

impairment of investments in financial instruments (note 5-a) 17,271 398,240

US$ 31,623,766 22,527,874

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(Continued)

(29) Operating income from service fees and commissions

For the years ended December 31, operating income from service fees and commissions is as follows:

2012 2011

Drafts and transfers US$ 12,736,486 11,249,072 Certified checks 44,441 29,914 Trusts 1,753,359 1,559,438 Custodial services 1,198,579 1,064,768 Banking mandates 1,222 1,393 Collections 87,377 92,272 Credit cards 57,099,993 46,807,819 Management services 4,449,486 4,350,141 Insurance underwriting 974,068 680,867 Transactions with related parties 238,123 270,700 Other 70,459,746 61,350,905

US$ 149,042,880 127,457,289

(30) Other operating income

For the years ended December 31, other operating income is as follows:

2012 2011

Leasing of assets US$ 8,557 44,948 Recovery of expenses 2,994,706 1,907,090 Net valuation of other assets (note

1-c-iii)

492,208 660,849 Other income from accounts

receivable

22,270 53,311 Sundry operating income 6,420,632 7,745,417 Decreases in provisions 4,604,495 12,431,211

US$ 14,542,868 22,842,826

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(Continued)

(31) Expenses for foreclosed assets

For the years ended December 31, expenses for foreclosed assets are as follows:

2012 2011

Property and other assets acquired in lieu of payment US$ 6,411,659 11,933,432

Management of assets acquired in lieu of payment 25,243

20,588

Management of assets awarded in judicial auctions 5,992,968

4,220,206

Loss on allowance for impairment and per legal requirements (note 8) 46,719,559 67,964,818

Other expenses for foreclosed assets 598,333 172,431

US$ 59,747,762 84,311,475

(32) Expenses for provisions

For the years ended December 31, expenses for provisions are as follows:

2012 2011

Severance benefits US$ 18,827,067 11,395,655 Pending litigation 3,387,527 2,868,503 Other provisions 16,546,343 2,438,229

US$ 38,760,937 16,702,387

(33) Other operating expenses

For the years ended December 31, other operating expenses are as follows:

2012 2011

Donations US$ - 3,019 Penalties for noncompliance with

regulatory provisions - 369 Net valuation of other liabilities

(note 1-c-iii) 1,418,609 601,535 Income tax (8%) on interest on

investments in financial instruments 3,055,032 2,623,279

Property tax 203,924 195,789 Licenses 1,132,744 1,991,347 Losses due to natural disasters 2,856 - Sundry operating expenses 68,169,580 52,097,511

US$ 73,982,745 57,512,849

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(Continued)

(34) Personnel expenses

For the years ended December 31, personnel expenses are as follows:

2012 2011

Salaries and bonuses. permanent staff US$ 97,228,598 86,774,108

Salaries and bonuses. contractors 2,349,738 1,750,735 Compensation for directors and

statutory examiners 200,155 188,805 Overtime 2,073,811 1,646,166 Per diem 1,860,244 1,614,057 Statutory Christmas bonus 11,999,598 10,345,695 Vacation 10,322,149 10,734,593 Incentives - 7,144,449 Other compensation 11,937,577 11,102,598 Employer social security taxes 56,144,487 39,804,622 Refreshments 1,162,809 1,323,652 Uniforms 36,004 559,042 Training 2,087,975 1,823,721 Employee insurance 347,218 414,770 Back-to-school bonus 10,915,082 9,955,569 Mandatory retirement savings

account 4,354,728 3,786,391 Other personnel expenses 153,393 98,251 US$ 213,173,566 189,067,224

(35) Other administrative expenses

For the years ended December 31, other administrative expenses are as follows:

2012 2011

Outsourcing US$ 19,732,617 18,203,454 Transportation and communications 7,478,172 6,655,435 Infrastructure 50,893,234 48,697,257 Overhead 23,101,704 21,891,666

US$ 101,205,727 95,447,812

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(Continued)

(36) Statutory allocations

For the years ended December 31, statutory allocations are as follows: 2012

2011

CONAPE (2%) US$ 2,010,875

1,479,453 CNE (3%)

2,914,219

2,105,066

FINADE (3%)

3,016,313

2,219,179 INFOCOOP (10%)

10,549,704

6,322,384

Subtotal

18,491,111

12,126,082 Decrease in statutory allocations

2,028,367

1,462,591

US$ 16,462,744

10,663,491

(37) Fair value of financial instruments

As of December 31, carrying amounts and fair values of all financial assets and

liabilities that are not carried at fair value are compared in the following table:

2012 Carrying amount Fair value Financial assets:

Cash and due from banks US$ 1,301,602,298 1,301,602,298 Investments in financial instruments 1,113,810,981 1,113,810,981 Loan portfolio 5,138,813,900 4,697,409,950 US$ 7,554,227,179 7,112,823,229 Financial liabilities: Demand deposits from the public

and financial entities US$ 3,895,184,535 3,895,184,535 Other demand obligations with the

public 19,279,419 19,279,418 Term deposits from the public and

financial entities 2,891,401,991 3,127,679,562 US$ 6,805,865,945 7,042,143,515

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(Continued)

2011 Carrying amount Fair value Financial assets:

Cash and due from banks US$ 1,142,892,199 1,142,892,199 Investments in financial instruments 943,748,628 943,748,628 Loan portfolio 4,599,875,009 4,251,334,826 US$ 6,686,515,836 6,337,975,653 Financial liabilities:

Demand deposits from the public and financial entities US$ 3,426,951,421 3,426,951,421

Other demand obligations with the public 22,272,465 22,272,465

Term deposits from the public and financial entities 2,590,376,739 2,645,842,229

US$ 6,039,600,625 6,095,066,115 Fair value estimates The following assumptions were used by management to estimate the fair value of

each class of financial instruments, both on and off the balance sheet:

a. Cash and due from banks, accrued interest receivable, other receivables, demand deposits from the public, accrued interest payable, and other liabilities

The carrying amounts approximate fair value because of the short-term nature of these instruments.

b. Investments in financial instruments

The fair values of available-for-sale investments in financial instruments are based on quoted market prices, except for Auction Rate Securities (ARS), which fair values are determined using the valuation method developed by the Bank.

c. Loan portfolio

The fair value of loans is calculated by discounting future cash flows expected for principal and interest. Loan payments are assumed to be made on the contractually agreed payment dates. Future expected cash flows for loans are discounted at the interest rates offered for similar loans to new borrowers as of December 31, 2012 and 2011.

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(Continued)

d. Term deposits

The fair value of term deposits is calculated by discounting cash flows at

the interest rates offered for term deposits with similar maturities as of December 31, 2012 and 2011.

e. Obligations with entities

The fair value of obligations with entities is calculated by discounting cash

flows at the interest rates in effect as of December 31, 2012 and 2011. Fair value estimates are made at a specific date, based on relevant market

information and information concerning the financial instruments. These estimates do not reflect any premium or discount that could result from offering for sale a particular financial instrument at a given point in time. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and. Therefore, cannot be determined with precision. Estimates could vary significantly if changes are made to those assumptions.

(38) Vehicle operating leases

Lessee As of December 31, non-cancellable vehicle operating leases are payable as

follows: 2012

2011

Less than 1 year US$ 461,302 155,948 Between 1 and 5 years

- 1,072,879

US$ 461,302 1,228,827

(39) Risk management The Bank has exposure to the following risks from financial instruments: • credit risk • liquidity risk • market risks

o interest rate risk o currency risk

• operational risk.

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(Continued)

The Corporate Risk Division is responsible for identifying and measuring credit,

Market, liquidity, and operational risks. For such purposes, all types of risks to which the Bank is exposed are monitored by that Division on an ongoing basis using a mapping procedure to classify risks based on their severity or impact and their frequency or probability of occurrence.

Policies and procedures for managing market and liquidity risks are also being

formalized in specific manuals for each type of risk that describe the methodologies used to manage those risks. This activity has been extended to the Bank’s subsidiaries, i.e. Brokerage Firm, Investment Fund Manager, and Pension Fund Manager.

The Bank manages the above risks as follows:

a) Credit risk

This is the risk that the borrower or issuer of a financial asset will fail to discharge

an obligation, fully and on time, in accordance with the terms and conditions agreed upon at the time the financial asset was acquired. Credit risk is mainly related to the loan portfolio and investments in financial instruments. The exposure to credit risk on those assets is represented by the carrying amount of the assets in the balance sheet. The Bank also has exposure to credit risk for off-balance sheet credits, such as commitments, letters of credit, sureties, and guarantees.

The Bank monitors credit risk on an ongoing basis through reports on portfolio

status and classification. Credit analyses include periodic assessments of the financial position of customers, an analysis of the country’s economic, Political, and financial environment, and the potential impact on each sector. For such purposes, a thorough understanding is obtained of customers on an individual basis and of their capacity to generate cash flows that enable them to honor their debt commitments.

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(Continued)

The Bank has established the following credit risk management procedures:

1. The Bank has defined procedures for loan follow-up and processing as well as for the application of loan controls.

The functions, tasks, and procedures performed by the National Credit Division in relation to follow-up have been documented with the support of the Quality Management Division. As a result, the Bank has been able to unify, standardize, and improve the efficiency of the process.

The Bank is in the process of formulating the administrative follow-up procedures for branches and regional offices.

2. The Bank is comprehensively evaluating the Institutional Center for

Credit Processing and Management (CIPAC), particularly in respect of follow-up, in order to define the responsibilities of each area (branch. regional office. and CIPAC) and standardize the framework.

The work plan for loan follow-up includes an evaluation of main borrowers (higher balances in the loan portfolio), which involves continuous monitoring and visits to regional offices.

At the balance sheet date, there are no significant concentrations of credit risk.

The maximum exposure to credit risk is represented by the carrying amount of each financial asset.

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(Continued)

The Bank’s financial instruments with credit risk exposure are as follows:

Direct

Contingencies

Note

2012 2011 Note 2012 2011 Loan portfolio

Principal 6-a US$ 5,100,345,467 4,565,431,226 20 139,601,189 94,248,957 Accounts and accrued interest

receivable

38,468,433 34,443,783 -

- Carrying amount. gross 5,138,813,900 4,599,875,009 139,601,189 94,248,957 Allowance for loan impairment

(accounting records)

(84,262,755) (79,442,182)

(689,921) (685,478) Carrying amount. net US$ 5,054,551,145 4,520,432,827 138,911,268 93,563,479

Loan portfolio Total balances: A1 US$ 3,868,899,630 3,475,117,215 127,111,937 89,741,724

A2 41,826,772 36,671,404 60,250 82,143 B1 557,430,354 435,557,717 10,465,192 3,369,133 B2 28,744,564 12,305,829 11,269 23,239 C1 133,521,714 143,198,692 72,673 856,940 C2 12,204,694 20,284,574 -

-

D 243,668,179 222,058,916 1,777,029 58,775 E 252,517,993 254,680,662 102,839 117,003 5,138,813,900 4,599,875,009 139,601,189 94,248,957 Structural allowance (subledger –

database)

(84,772,763) (75,859,671) (177,907) (139,113) Carrying amount. net US$ 5,054,041,137 4,524,015,338 139,423,282 94,109,844

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(Continued)

Direct

Contingencies

2012 2011

2012 2011 Individually assessed loans with

allowance:

A1 US$ 1,432,387,717 1,094,024,524 88,575,335 59,537,045 A2 10,681,334 11,133,682 31,934 72,553 B1 108,761,625 53,203,034 4,988,510 2,767,488 B2 3,467,880 2,511,558 -

23,239

C1 16,526,149 27,134,044 42,123 851,134 C2 4,317,118 2,492,775 -

-

D 89,244,550 68,141,079 472,984 - E 194,941,101 201,649,369 31,908 52,354 1,860,327,474 1,460,290,065 94,142,794 63,303,813 Structural allowance (subledger –

database)

(84.772.763) (75,859,671) (177,907) (139,113) Carrying amount. net US$ 1,775,554,711 1,384,430,394

93,964,887 63,164,700

Past due loans without allowance: A1 US$ 33,268,797 30,318,398 - 8,643 A2 3,718,538 2,944,740 - - B1 39,026,473 25,846,993 9,643 3,958 B2 8,770,570 8,379,723 11,269 - C1 21,329,415 15,506,071 - - C2 3,977,048 7,704,140 - - D 35,095,368 34,183,923 - - E 30,044,539 29,797,086 - - Carrying amount US$ 175,230,748 154,681,074 20,912 12,601

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(Continued)

Direct

Contingencies

2012 2011

2012 2011 Aging of loan portfolio

1 – 30 days

US$ 61,101,215 52,068,628 - 8.643 31 – 60 days

61,271,729 55,610,620 20,912 3.958

61 – 90 days

30,019,984 19,067,832 -

- 91 – 180 days

7,773,792 12,163,063 -

-

More than 180 days

15,064,028 15,770,931 -

- Carrying amount

US$ 175,230,748 154,681,074 20,912 12.601

Current loans without allowance:

A1

US$ 2,403,243,116 2,350,774,293 38,536,602 30,196,036

A2

27,426,900 22,592,982 28,316 9,590 B1

409,642,256 356,507,690 5,467,039 597,687

B2

16,506,114 1,414,548 -

- C1

95,666,150 100,558,577 30,549 5,806

C2

3,910,528 10,087,659 -

- D

119,328,261 119,733,914 1,304,045 58,775

E

27,532,353 23,234,207 70,930 64,649 Carrying amount

US$ 3,103,255,678 2,984,903,870 45,437,481 30,932,543

Carrying amount. gross

5,138,813,900 4,599,875,009 139,601,187 94,248,957 Allowance for loan impairment

(database)

(84,772,763) (75,859,671) (177,907) (139,113) (Excess) insufficiency of

allowance over structural allowance

510,008 (3,582,511) (512,014)

(546,365) Carrying amount. net 6-a US$ 5,054,551,145 4,520,432,827 138,911,266 93,563,479 Restructured loans 6-d US$ 90,779,754 83,417,793 8,007 -

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(Continued)

Set out below is an analysis of the gross and net (of allowance for loan

impairment) amounts of individually assessed loans with allowance by risk classification according to SUGEF Directive 1-05:

2012

Loans to customers

Gross

Net

A1 US$ 3,868,899,630 3,864,212,837 A2

41,826,772 41,716,583

B1

557,430,354 555,211,694 B2

28,744,564 28,601,307

C1

133,521,714 131,138,432 C2

12,204,694 11,181,108

D

243,668,179 230,620,334 E

252,517,993 191,868,850

US$ 5,138,813,900 5,054,551,145

2011

Loans to customers

Gross

Net

A1 US$ 3,475,117,215

3,467,567,895 A2

36,671,404

36,560,024

B1

435,557,717

434,129,076 B2

12,305,829

12,194,326

C1

143,198,692

140,769,554 C2

20,284,574

19,688,199

D

222,058,916

211,314,110 E

254,680,662

198,209,643

US$ 4,599,875,009

4,520,432,827

As shown above, as of December 31, 2012, the gross portfolio amounts to

US$5.138 billion. Of that amount, 87.50% is classified in risk categories “A and B” and 12.50% in risk categories “C, D, or E” (2011: US$4,628 billion, of which 86.08% is classified in risk categories “A and B” and 13.92% in risk categories “C, D, or E”).

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(Continued)

Individually assessed loans with allowance: Pursuant to SUGEF Directive 1-05, a risk classification is assigned to all

borrowers. Applicable allowance percentages are determined based on that risk classification. Individually assessed loans with allowance are loan operations that after considering the guarantee for the loan, there is still a balance to which the applicable allowance percentage will be applied.

Past due loans without allowance: Direct

Stand-by

2012 2011

2012 2011

More than 180 days US$ 15,064,029 15,770,931

-

-

Past due loans without allowance correspond to loan operations with a

guarantee for at least the outstanding balance due to the Bank. Accordingly, no allowance is established.

Restructured loans: Restructured loans are those for which the Bank has changed the original

contractual terms due to a deterioration in the borrower’s financial position and where the Bank has made concessions that it would not otherwise consider. Once the loan is restructured, it remains in this category regardless of improvement in the borrower’s position after restructuring. Following are the various types of restructured loans.

a. Extended loan: Loan operation in which at least one full or partial

payment of principal or interest due under the current contractual terms has been postponed.

b. Modified loan: Loan operation in which at least one of the current contractual repayment terms has been modified, excluding extensions, additional payments not included in the loan repayment schedule, additional payments to reduce the amount of installments, and a change in the currency used while respecting the original loan maturity date.

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(Continued)

c. Refinanced loan: Loan operation in which at least one payment of

principal or interest is made fully or partially with the proceeds of another loan operation extended to the borrower or to an individual from its economic interest group by the same financial intermediary or any other company of the same financial group or conglomerate. In the event of full settlement of the loan, the new loan operation is considered to be refinanced. In the event of partial settlement, both the new and existing loan operations are considered to be refinanced.

As of December 31, restructured loans are as follows:

Direct Stand-by 2012 2011 2012 2011

Restructured loans US$ 90,779,754 83,417,793 - -

Loan charge-off policy:

The Bank charges off a loan (and any allowance for loan impairment) when it determines the loan to be uncollectible based on an analysis of significant changes in the financial conditions of the borrower preventing compliance with the payment obligation, or when it determines that the guarantee is insufficient to cover the entire amount of the loan facility. For standard loans with smaller balances, charge-offs are generally based on the level of arrears of the loan granted.

Risk categories The loan portfolio by borrower classification is as follows:

Direct

Stand-by

Borrower classification 2012

2011

2012

2011

Group 1 US$ 2,711,748,440 2,320,452,886 125,476,872 78,353,844 Group 2 2,427,065,460 2,279,422,123 14,124,317 15,895,113 US$ 5,138,813,900 4,599,875,009 139,601,189 94,248,957

The Bank individually classifies its borrowers in one of eight risk categories, identified as A1, A2, B1, B2, C1, C2, D, and E, with category A1 as the lowest credit risk and category E as the highest credit risk.

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(Continued)

Borrower classification Analysis of creditworthiness

The Bank must define effective mechanisms to determine the creditworthiness

of borrowers in Group 1. Based on whether the borrowers are individuals or legal entities, those mechanisms should permit an assessment of the following aspects:

a. Financial position and expected cash flows: Analysis of the stability and

continuity of main sources of income. The effectiveness of the analysis depends on the quality and timeliness of information.

b. Experience in the line of business and quality of management: Analysis of

the capacity of management to lead the business with appropriate controls and adequate support from the owners.

c. Business environment: Analysis of the main sector variables that affect the

borrower’s ability to pay.

d. Vulnerability to changes in interest rates and foreign exchange rates: Analysis of the borrower’s ability to confront unexpected adverse changes in interest rates and foreign exchange rates.

e. Other factors: Analysis of other factors that affect the borrower’s

creditworthiness. In the case of legal entities, considerations include, but are not limited to, environmental issues, technological aspects, operating licenses and permits, representation of products or foreign offices, relationship with significant customers and suppliers, sales agreements, legal risks, and country risk (the latter for foreign-domiciled borrowers). In the case of individuals, the following borrower characteristics may be taken into consideration: marital status, age, level of education, profession, gender, etc.

When a borrower has been assigned a risk classification by a rating agency, that

classification should be an additional consideration when assessing the borrower’s creditworthiness.

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(Continued)

The Bank must classify the borrower’s creditworthiness into one of four levels:

level 1 - has the ability to pay; level 2 - has minor weaknesses in the ability to pay; level 3 - has serious weaknesses in the ability to pay; and level 4 - has no ability to pay. For purposes of this classification, the borrower and co-borrower(s) must be assessed jointly. Joint classification of creditworthiness may only be used to determine the allowance percentage for operations in which the parties are borrower and co-borrower.

Analysis of historical payment behavior The Bank must determine a borrower’s historical payment behavior based on

the level assigned to the borrower by SUGEF’s Credit Information Center (CIC).

The Bank must classify historical payment behavior into one of three levels:

level 1 - good historical payment behavior; level 2 - acceptable historical payment behavior; and level 3 - poor historical payment behavior.

Direct Stand-by

Risk category Arrears

2012

2011

2012

2011

A1 30 days or less US$ 3,868,899,630

3,475,117,215

127,111,937

89,741,724 A2 60 days or less 41,826,772

36,671,404

60,250

82,143

B1 60 days or less 557,430,354

435,557,717

10,465,192

3,369,133 B2 60 days or less 28,744,564

12,305,829

11,269

23,239

C1 90 days or less 133,521,714

143,198,692

72,673

856,940 C2 90 days or less 12,204,694

20,284,574

-

-

D 120 days or less 243,668,179

222,058,916

1,777,029

58,775

E More than 120 days or other factors 252,517,993

254,680,662

102,839

117,003

US$ 5,138,813,900

4,599,875,009

139,601,189

94,248,957

Pursuant to SUGEF Directive 1-05, borrowers are classified in two groups:

Group 1, borrowers whose total outstanding balance exceeds US$129,464; and Group 2, borrowers whose total outstanding balance is less than US$129,464.

Borrower classification

For purposes of borrower classification, pursuant to SUGEF Directive 1-05,

borrowers in Group 1 are to be classified based on arrears, historical payment behavior, and creditworthiness; whereas borrowers in Group 2 are to be classified based on arrears and historical payment behavior.

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(Continued)

In all cases, borrowers without valid authorization for a credit check through

SUGEF’s CIC cannot be classified in risk categories A1 to B2.

Likewise, borrowers with at least one loan operation purchased from a financial intermediary domiciled in Costa Rica and regulated by SUGEF must be classified for at least one month in the category of greatest risk between the classification assigned by the selling bank and the classification assigned by the buying bank at the time of the purchase.

Structural allowance

The structural allowance is equivalent to the total outstanding balance of each

loan operation less the adjusted weighted value of the corresponding guarantee, multiplying the resulting amount by the allowance percentage corresponding to the risk category of the borrower or co-borrower in the lowest risk category. If the result of this calculation is negative or zero, the allowance is zero. If the total outstanding balance includes a contingent principal balance, the credit equivalent indicated below should be used.

The adjusted value of the corresponding guarantee must be weighted with 100%

when the borrower or co-borrower with the lowest risk category is classified in risk category C2 or another lower-risk category, with 80% when classified in risk category D, and with 60% when classified in risk category E.

Risk

category Allowance percentage

Arrears

Historical payment behavior

Creditworthiness

A1 0.5% 30 days or less Level 1 Level 1 A2 2% 30 days or less Level 2 Level 1 B1 5% 60 days or less Level 1 Level 1 or Level 2 B2 10% 60 days or less Level 2 Level 1 or Level 2 C1 25% 90 days or less Level 1 Level 1, Level 2 or

Level 3 C2 50% 90 days or less Level 1 or Level 2 Level 1, Level 2, or

Level 3 D 75% 120 days or less Level 1 or Level 2 Level 1, Level 2,

Level 3 or Level 4

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(Continued)

Allowance percentages based on borrower risk category are as follows:

Risk category

Allowance percentage

A1 0.5% A2 2% B1 5% B2 10% C1 25% C2 50% D 75% E 100%

As an exception in the case of risk category E, the minimum allowance for

borrowers whose historical payment behavior is classified in level 3 should be calculated as follows:

Arrears Allowance percentage

0 to 30 days 20% 31 to 60 days 50%

More than 61 days 100%

The sum of individual allowances for each loan operation constitutes the structural allowance.

Pursuant to the provisions of SUGEF Directive 1-05, as of December 31, 2012,

the Bank must maintain a structural allowance in the amount of US$84,950,670 (US$84,772,763 and US$177,907 for direct and stand-by credits, respectively). As of that date, the allowance booked by the Bank amounts to US$84,952,676 (US$84,262,755 and US$689,921 for direct and stand-by credits. respectively). Consequently, the allowance booked by the Bank exceeds the minimum allowance required by current regulations by US$2,006 (0.0024%).

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(Continued)

SUGEF External Circular Letter 021-2009 dated May 30, 2009, indicates that

the expense for the allowance for loan impairment corresponds to the amount necessary to reach the required minimum allowance. Furthermore, there must be duly documented technical justification for any excess above the minimum required allowance, which is to be sent to SUGEF with the authorization request. The excess may not surpass 15% of the minimum required allowance for the loan portfolio. This notwithstanding, if any additional allowances are required above 15%, they must be taken from net earnings for the period pursuant to article 10 of IRNBS.

As of December 31, 2012, the balance of the Bank’s allowance for loan

impairment (direct and stand-by), accrued interest receivable, and other receivables amounts to US$90,817,344 (2011: US$83,455,278).

Credit equivalent

The following stand-by credit operations must be converted to credit

equivalents based on the credit risk they represent. The credit equivalent is obtained by multiplying the balance of the contingent principal by the corresponding credit equivalent conversion factor, as follows:

a. Bid bonds and export letters of credit without prior deposit: 0.05;

b. Other sureties and guarantees without prior deposit: 0.25; and

c. Pre-approved lines of credit: 0.50.

Allowance for other assets

Allowances should be established for the following assets: a. Accounts and accrued interest receivable unrelated to loan operations,

based on arrears calculated from the first day overdue or the date booked in the accounting records. as follows:

Arrears Allowance percentage

30 days or less 2% 60 days or less 10% 90 days or less 50% 120 days or less 75% More than 120 days 100%

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(Continued)

b. For foreclosed assets acquired prior to May 2010 that have not been sold

or leased within two years from the date of their acquisition, an allowance is required equivalent to 100% of their value. The booking of the allowance shall begin at month-end of the month in which the assets were i) acquired. ii) produced for sale or lease, or iii) retired from use. After May 2010, an allowance must be established gradually by booking one-twenty-fourth of the value of the assets each month until the allowance is equivalent to 100% of the assets’ carrying amount. The booking of the allowance shall begin at month-end of the month in which the assets were acquired.

As of December 31, 2012, the carrying amount of the allowance for impairment

of foreclosed assets and per legal requirements amounts to US$84,869,949 (2011: US$69,232,604).

As of December 31, the concentration of the loan portfolio by sector is as

follows:

Direct Stand-by Sector 2012 2011 2012 2011

Trade US$ 717,941,344 703,701,067 223,247 191,772 Energy 200,743,827 839,448,667 - 93,735,783 Financial services 91,635,617 74,425,936 -

-

Mining 108,433 247,319 -

- Industry 242,683,268 201,796,849 60,694 44,955 Construction 121,868,804 78,612,415 - - Agriculture and forestry 174,838,532 175,936,253 22,618 20,996 Livestock, hunting, and

fishing 126,016,604 155,952,880 3,984 3,958 Electricity, water, sanitation.

and other related sectors 1,044,205,465 121,878,865 139,048,553

- Transportation and

telecommunications 46,368,056 35,836,312 -

- Housing 1,736,374,414 1,629,236,754 22,194 18,167 Personal or consumer loans 429,984,413 367,780,987 - - Tourism 206,045,123 215,020,705 219,899 233,326

US$ 5,138,813,900 4,599,875,009 139,601,189 94,248,957

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(Continued)

As of December 31, the concentration of the loan portfolio by geographic area

is as follows:

Direct Stand-by

2012

2011

2012

2011

Central America US$ 5,138,813,900 4,599,875,009 139,601,189 94,248,957 As of December 31, the loan portfolio by type of guarantee is as follows:

Direct Stand-by Guarantee 2012 2011 2012 2011

Back-to-back US$ 22,489,166 13,389,224 613,750 - Mortgage bond 6,656,325 16,332,375 - - Assignment of loans 466,697,429 335,215,854 - 447,205 Mortgage 2,730,557,472 2,597,759,845 499,034 331,374 Surety 1,068,099,846 909,058,579 311,145 248,481 Trust 303,887,435 380,220,084 2,631,603 23,239 Securities 4,782,142 3,017,505 707

-

Chattel mortgage 99,837,612 45,580,865 -

- Other 435,806,473 299,300,678 135,544,950 93,198,658

US$ 5,138,813,900 4,599,875,009 139,601,189 94,248,957

Guarantees:

Collateral: The Bank accepts collateral guarantees —usually mortgages, chattel

mortgages, or securities— to secure its loans. The value of those guarantees is determined based on their fair value in the case of securities or, for mortgages and chattel mortgages, based on an appraisal made by an independent appraiser who determines the estimated fair value of land and buildings based on comparable market offerings and prior appraisals.

Personal: The Bank also accepts sureties from individuals or legal entities. The

Bank evaluates the guarantor’s ability to honor the debt obligations on the borrower’s behalf, as well as the integrity of the guarantor’s credit history.

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(Continued)

The Bank conducts strict credit analyses before granting loans and requires

guarantees from its borrowers before disbursing loans. As of December 31, 2012, 53.13% of the loan portfolio is secured by collateral guarantees (2011: 55.84%).

As of December 31, the concentration of the loan portfolio by individual

borrower or economic interest groups is as follows:

Direct Stand-by Loan portfolio concentration 2012 2011 2012 2011

US$1 to US$3,000,000 US$ 265,202,496 256,954,496 2,083959 2,100,601 US$3,000,001 to US$15,000,000 868,226,245 830,237,358 6,266,034 6,818,311 US$15,000,001 to US$30,000,000 698,139,226 666,607,612 4,629,250 5,600,995 US$30,000,001 to US$50,000,000 590,659,261 531,729,597 4,424,902 5,595,514 US$50,000,001 to US$75,000,000 373,355,325 327,274,321 3,865,905 3,920,127 US$75,000,001 to US$100,000,000 194,456,357 178,560,129 3,007,427 4,396,753 US$100,000,001 to US$200,000,000 353,983,299 336,614,239 10,110,847 9,614,874 More than US$200,000,000 1,794,791,691 1,471,897,257 105,212,865 56,201,782

US$ 5,138,813,900 4,599,875,009 139,601,189 94,248,957

As of December 31, 2012 and 2011, the portion of the loan portfolio (direct and

indirect loans) corresponding to economic interest groups amounts to US$358,503,453 and US$292,692,229, respectively.

For credit risk management purposes, the Bank applies an internal model to

estimate the loan portfolio’s Expected Losses (EL) and Value at Risk (VaR) over a one-year holding period using the “Monte Carlo simulations” approach. Loan portfolio risks are assessed, controlled, and monitored on a monthly basis based on one-year projections (maximum loss with a confidence level of 99% over one year).

This approach is applied using a computational system developed in “Matlab”

software. Also, the credit risk model takes into consideration the impact of changes in macroeconomic variables (endogenous and exogenous) on the loan portfolio when determining systemic factors. Results are compared with prior-month estimates and historical trends (for comparison purposes. loan portfolio information is available for 2003 and thereafter).

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(Continued)

The Bank’s loan portfolio is comprised of operations in various currencies, i.e.

the Costa Rican colon, the U.S. dollar, and DU. Consequently, the VaR analysis is performed separately for each currency. The data is then consolidated to determine a maximum loss for the entire portfolio expressed in colones. VaR is also calculated for each of the Bank’s 13 economic activities, its credit card accounts, and the BN-Desarrollo portfolio, as well as for each of the six regional banks and their respective branches. This practice is satisfactory since it enables the Bank to single out sources of risk.

Various technical approaches are used to provide other angles for the analysis.

Other types of estimates are made in addition to those obtained using the VaR methodology, such as the behavior of the portfolio in legal collections, concentration of the portfolio by economic activity, vintage analysis, stress testing, transition matrixes, and sensitivity analyses for new loans, and/or follow-up. Accordingly, the Bank has developed specialized internal methodologies to model credit risk that quantify risk indicators and potential impacts on institutional development.

The use of the above analyses has led to sound credit risk management practices

that, along with tight control over loan collection, have helped to substantially improve the level of arrears in the loan portfolio.

Accordingly, the VaR for the loan portfolio presents a year-on-year decrease of

0.18 pp. dropping from 1.98% in December 2011 to 1.80% in December 2012. The effect of such variation is mainly observed in the portfolio denominated in U.S. dollars, where VaR dropped from 3.66% in December 2011 to 2.41% in December 2012. In contrast, the VaR for the portfolio in colones grew by 0.19 pp. locating at 1.63% at the 2012 close, as a result of the increase in the level of arrears of loans in that currency.

Year-on-year VaR estimates increased for most economic activities. Agriculture

showed the highest increase (1.52 pp), locating at 2.90% in December 2012, due to the increase in arrears levels. Such growth in arrears also increased VaR for the Industry (0.91 pp). Livestock (1.21 pp), Tourism (0.35 pp), Trade (0.39 pp), and Services (0.09 pp) sectors.

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(Continued)

Conversely, the Construction, Transportation, and Mining sectors present

significant decreases of 7.98 pp. 1.11 pp. and 3.87 pp. respectively. For the first two sectors, the drop results from a decrease in arrears (an indicator that influences such behavior), while the decrease in the latter sector is due to the effect of portfolio concentration.

Finally, it should be noted that the portfolios that have the most significant share

in the Bank’s consolidated portfolio, such as Housing and Consumer loans, have remained stable with VaR estimates at December 2012 of 2.05% and 2.49%, respectively.

b) Liquidity risk Liquidity risk arises when the financial entity is unable to honor its

commitments or obligations with third parties due to insufficient cash flows, among other factors. It also represents the risk of potential losses due to forced sales of assets or forced acceptances of liabilities under unfavorable conditions.

To support liquidity risk management, the Market Risk Division monitors

indicators such as liability structure, daily changes and trends in demand and term account balances, volatility of deposit-taking from the public (degree of permanence by liability and currency). VaR of liquidity, comparisons of liquidity indicators, levels of concentration of the Bank’s funding sources, as well as variables with the greatest impact on SUGEF’s term matching indicators. All of this information is communicated to management in a monthly report that is reviewed by the Corporate Risk Committee.

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(Continued)

As of December 31, 2012, the terms of the Bank’s assets and liabilities denominated in local currency are matched as follows:

Days

Past due Demand 1 to 30 31 to 60 61 to 90 91 to 180 181 to 365 More than 365 Total Cash and due from banks US$ - 158,371,470 - - - - - - 158,371,470

Minimum cash reserve in BCCR - 627,283,408 - - - - - - 627,283,408

Investments - - 70,410,847 30,668,482 21,039,025 68,192,427 82,877,148 361,740,573 634,928,502 Loan portfolio 198,548,853 3,608,469 70,628,474 55,884,148 38,049,939 123,396,430 122,749,684 2,907,632,436 3,520,498,433 Total recovery of assets US$ 198,548,853 789,263,347 141,039,321 86,552,630 59,088,964 191,588,857 205,626,832 3,269,373,009 4,941,081,813

Obligations with the public US$ - 2,527,194,318 394,194,455 219,437,768 161,185,637 419,875,555 359,309,559 95,056,120 4,176,253,412

Obligations with BCCR - - - - - - - 450,340 450,340 Obligations with financial entities - 45,133,645 1,199,638 1,624,608 1,652,108 7,878,490 770,523 6,688,012 64,947,024

Charges payable - 13,200,829 12,424,860 4,686,119 2,499,087 3,479,184 1,404,161 117,480 37,811,720 Total maturity of liabilities US$ - 2,585,528,792 407,818,953 225,748,495 165,336,832 431,233,229 361,484,243 102,311,952 4,279,462,496

Difference US$ 198,548,853 (1,796,265,445) (266,779,632) (139,195,865) (106,247,868) (239,644,372) (155,857,411) 3,167,061,057 661,619,317

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(Continued)

As of December 31, 2012, the terms of the Bank’s assets and liabilities denominated in foreign currency, expressed in local currency,

are matched as follows:

Days





Obligations with financial entities - 7,647,085 57,196,709 15,000,000 167,998 64,411,392 31,287,116 279,482,956 455,193,256

Charges payable - 1,693,348 1,916,432 2,289,443 934,047 1,706,307 322,268 57,852 8,919,697 Total maturity of liabilities US$ - 1,300,918,345 279,731,072 142,562,316 127,357,763 264,977,403 118,232,231 296,444,744 2,530,223,874

Difference US$ 82,168,160 (777,674,486) (217,879,975) (87,831,139) (101,829,832) (115,535,136) (7,404,243) 1,310,121,736 84,135,085

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(Continued)

As of December 31, 2011, the terms of the Bank’s assets and liabilities denominated in local currency are matched as follows:

Days





Obligations with BCCR - - 19,788,266 - 17,755 - - 490,602 20,296,623 Obligations with financial entities - 45,759,227 6,680,320 2,939,142 335,481 1,806,957 4,478,017 79,750 62,078,894

Charges payable - 7,295,295 7,362,515 4,074,966 3,158,895 1,342,314 211,354 86,975 23,532,314 Total maturity of liabilities US$ - 2,116,351,626 281,938,220 203,210,868 218,172,903 554,321,905 260,505,920 56,346,420 3,690,847,862

Difference US$ 148,418,156 (1,490,408,317) (214,177,317) (160,384,740) (170,051,562) (380,258,008) (115,317,809) 3,019,219,502 637,039,905

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(Continued)

As of December 31, 2011, the terms of the Bank’s assets and liabilities denominated in foreign currency, expressed in local currency,

are matched as follows:

Days



Investments - - 1,894,194 50,856,558 16,186,980 46,896,804 82,948,173 335,120,692 533,903,401 Loan portfolio 112,307,691 16,562,576 30,212,485 23,428,606 21,085,227 85,198,685 53,275,028 959,230,792 1,301,301,090 Total recovery of assets US$ 112,307,691 541,216,464 32,106,679 74,285,164 37,272,207 132,095,489 136,223,201 1,294,351,484 2,359,858,379


Obligations with financial entities - 6,839,632 4,717,131 1,012,987 332,246 60,295,119 8,058,851 205,084,820 286,340,786

Charges payable - 855,845 527,392 229,467 190,374 1,000,595 607,600 31,808 3,443,081 Total maturity of liabilities US$ - 1,315,476,371 282,468,762 140,422,397 118,149,285 215,504,553 65,469,680 211,261,715 2,348,752,763

Difference US$ 112,307,691 (774,259,907) (250,362,083) (66,137,233) (80,877,078) (83,409,064) 70,753,521 1,083,089,769 11,105,616

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(Continued)

a) Market risks

To assess market risk, the Bank analyzes the probability that the value of the

investments held by the Bank will decrease as a result of changes in interest rates, foreign exchange rates, prices of instruments, and other economic and financial variables as well as the economic impact of those changes, which could expose the Bank to market risk. The objective of market risk management is to follow up on and control market risk exposures within acceptable parameters (risk limits approved by the Board of Directors), while optimizing the return.

The main indicator used is the VaR of the Bank’s investments, which is

determined for each currency in which the Bank holds positions. That indicator is complemented with the Risk-Adjusted Return on Capital (RAROC), which summarizes the Bank’s risk-return profile derived from holding an investment portfolio.

The Bank holds a special type of instrument in its investment portfolio called

Auction Rate Securities (ARS), which were typically traded through auctions. As a result of the global crisis, those securities have become substantially illiquid in the U.S. market, where they are principally traded. Consequently, and due to the lack of price formation, the Mathematical Modeling Division of the Corporate Risk Division developed an internal valuation method for these investments, which determined a weighted price of 98.40% at the December 2012 close. However, CONASSIF issued a notice on December 9, 2009 instructing entities to book those instruments at 93.18% of their face value based on the “principle of prudence”, thus dismissing a motion for reconsideration filed by the Bank to adopt the aforementioned method. As a result, since the December 2009 year-end, those instruments have been recognized at the price determined by CONASSIF based on their face value, which as of December 2012 amounted to US$16,000,000.

As of December 31, 2012 and 2011, investments in ARSs in the amount of

US$16,000,000 (2011: US$16,450,000) were valued at 93.18% of their face value (impairment of 6.82%). As of that same dates, Z Bonds related to the Mortgage Securitization Trust in the amount of US$417,000 were valued at 74% of their face value (impairment of 26%). As of December 31, 2012 and 2011, the allowance for impairment of investments in ARSs and Z Bonds amounts to US$1,213,260 and US$1.230.310, respectively.

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(Continued)

Interest rate risk

Interest rate risk is the risk of losses in the value of a financial asset or liability

arising from fluctuations in interest rates, when changes in interest rates for the asset and liability portfolios are mismatched and when the Bank does not have the necessary flexibility to make a timely adjustment.

The Bank is sensitive to this type of risk due to the mix of rates and terms for both

assets and liabilities. Therefore, the Market Risk Division monitors this risk regularly and reports monthly on its behavior to the Bank’s Corporate Risk Committee.

At the December 2012 close, the interest rate risk indicator in local and foreign

currency closed considerably below SUGEF’s regulatory maximum limit of 5%, at 0.46% (2011: 0.32%) and 0.03% (2011: 0.18%), respectively.

In 2011, the Bank acquired an interest rate hedge in U.S. dollars called

“Operations at notional amounts subject to an interest rate swap”. As of December 31, 2012, that instrument’s notional amount is equivalent to US$8,888,888 (2011: US$17,777,778). This hedge was acquired in order to exchange the variable interest rate for a fixed interest rate on the liability with the China Development Bank in the amount of US$22,222,222. Accordingly, the interest rate will be fixed in the event of an increase in the floating rate and a fixed-rate financing program implemented, guaranteeing the financial margin. The notional amount of this derivative instrument is amortized half-yearly through payments of US$4,444,444. As of December 31, 2012, the Bank booked a decrease in the fair value of this hedge against profit or loss in the amount of US$4,495. (2011: increase in fair value of US$17,588) (see note 5-b).

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(Continued)

As of December 31, 2012, the interest rate terms for the Bank’s assets and liabilities are matched as follows (differences

between the recovery of assets and the maturity of liabilities): Days Demand 1 to 30 31 to 90 91 to 180 181 to 360 361 to 720 More than 720 Total

Local currency (LC) Investments US$ - 70,410,848 51,707,506 68,125,892 66,336,807 80,085,957 232,033,596 568,700,606 Loan portfolio - 2,984,873,263 161,143,778 30,534,790 15,238,529 15,083,274 116,196,569 3,323,070,203 Total recovery of rate-sensitive

assets LC (A) US$ - 3,055,284,111 212,851,284 98,660,682 81,575,336 95,169,231 348,230,165 3,891,770,809 Obligations with the public US$ - 409,330,977 391,098,218 430,845,611 361,063,717 28,043,910 72,119,387 1,692,501,820 Obligations with BCCR - 1,115 21,582 122 21,958 44,564 362,053 451,394 Obligations with financial entities US$ - 109,900 168,401 256,645 618,198 1,125,842 2,478,926 4,757,912 Total maturity of rate-sensitive

liabilities LC (B) US$ - 409,441,992 391,288,201 431,102,378 361,703,873 29,214,316 74,960,366 1,697,711,126 LC difference. recovery of assets

less maturity of liabilities (A - B) US$ - 2,645,842,119 (178,436,917) (332,441,696) (280,128,537) 65,954,915 273,269,799 2,194,059,683 Foreign currency (FC) Investments US$ - 37,408,153 34,215,895 40,978,333 41,224,378 64,778,256 261,491,056 480,096,071 Loan portfolio - 1,343,311,631 92,722,854 4,776,563 13,064,063 6,760,100 75,270,971 1,535,906,182 Total recovery of rate-sensitive

assets FC (C) US$ - 1,380,719,784 126,938,749 45,754,896 54,288,441 71,538,356 336,762,027 2,016,002,253 Obligations with the public US$ - 224,608,789 253,895,615 199,985,621 87,586,561 9,103,184 8,233,573 783,413,343 Obligations with entities - 59,018,657 35,981,546 69,187,033 48,360,627 45,118,341 189,997,827 447,664,031 Total maturity of rate-sensitive

liabilities FC (D) US$ - 283,627,446 289,877,161 269,172,654 135,947,188 54,221,525 198,231,400 1,231,077,374 FC difference. recovery of assets

less maturity of liabilities (C - D) US$ - 1,097,092,338 (162,938,412) (223,417,758) (81,658,747) 17,316,831 138,530,627 784,924,879 Total recovery of rate-sensitive

assets 1/ (A + C) US$ - 4,436,003,895 339,790,033 144,415,578 135,863,777 166,707,587 684,992,192 5,907,773,062 Total maturity of rate-sensitive

liabilities 2/ (B + D) US$ - 693,069,438 681,165,362 700,275,032 497,651,061 83,435,841 273,191,766 2,928,788,500 LC + FC difference. recovery of

assets less maturity of liabilities (item 1 – item 2) US$ - 3,742,934,457 (341,375,329) (555,859,454) (361,787,284) 83,271,746 411,800,426 2,978,984,562

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(Continued)

As of December 31, 2011, the interest rate terms for the Bank’s assets and liabilities are matched as follows (differences

between the recovery of assets and the maturity of liabilities):

Days Demand 1 to 30 31 to 90 91 to 180 181 to 360 361 to 720 More than 720 Total

Local currency expressed in U.S. dollars Investments US$ - 12,047,876 17,460,059 58,689,794 25,238,122 100,219,478 134,827,114 348,482,443 Loan portfolio - 2,815,554,319 157,632,142 28,825,927 9,065,508 16,070,460 123,077,873 3,150,226,229 Total recovery of rate-sensitive assets LC

(A) US$ - 2,827,602,195 175,092,201 87,515,721 34,303,630 116,289,938 257,904,987 3,498,708,672 Obligations with the public US$ - 264,012,970 421,364,311 554,253,349 260,314,124 13,242,573 44,356,394 1,557,543,721 Obligations with BCCR - 19,794,924 40,939 90 21,836 44,304 402,833 20,304,926 Total maturity of rate-sensitive liabilities

LC (B) US$ - 283,807,894 421,405,250 554,253,439 260,335,960 13,286,877 44,759,227 1,577,848,647 LC difference. recovery of assets less

maturity of liabilities (A - B) US$ - 2,543,794,301 (246,313,049) (466,737,718) (226,032,330) 103,003,061 213,145,760 1,920,860,025 Foreign currency expressed in U.S. dollars Investments US$ - 1,110,314 67,285,581 47,270,727 83,116,089 84,330,362 250,790,330 533,903,403 Loan portfolio - 1,093,006,415 41,882,531 1,712,589 3,733,506 6,253,751 42,998,971 1,189,587,763 Total recovery of rate-sensitive assets FC

(C) US$ - 1,094,116,729 109,168,112 48,983,316 86,849,595 90,584,113 293,789,301 1,723,491,166 Obligations with the public US$ - 280,734,976 258,529,971 152,679,391 58,462,817 4,026,902 2,669,631 757,103,688 Obligations with entities - 2,164,772 542,774 65,991,848 24,491,268 22,267,705 160,946,516 276,404,883 Total maturity of rate-sensitive liabilities FC

(D) US$ - 282,899,748 259,072,745 218,671,239 82,954,085 26,294,607 163,616,147 1,033,508,571 FC difference. recovery of assets less

maturity of liabilities (C - D) US$ - 811,216,981 (149,904,633) (169,687,923) 3,895,510 64,289,506 130,173,154 689,982,595 Total recovery of rate-sensitive assets 1/ (A

+ C) US$ - 3,921,718,924 284,260,313 136,499,037 121,153,225 206,874,051 551,694,288 5,222,199,838 Total maturity of rate-sensitive liabilities 2/

(B + D) US$ - 566,707,642 680,477,995 772,924,678 343,290,045 39,581,484 208,375,374 2,611,357,218 LC + FC difference. recovery of assets less

maturity of liabilities (item 1 – item 2) US$ - 3,355,011,282 (396,217,682) (636,425,641) (222,136,820) 167,292,567 343,318,914 2,610,842,620 The value of financial assets and liabilities includes future interest to be earned in the corresponding time band

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(Continued)

Currency risk Pursuant to SUGEF Directive 24-00, an entity incurs currency risk when the value

of its assets and liabilities in foreign currency is affected by exchange rate variations and the amounts of the corresponding assets and liabilities are mismatched.

In October 2006, BCCR introduced an adjustable band foreign exchange system.

For several months thereafter, the exchange rate remained consistently at the floor of that band. However, when the band experienced significant adjustments starting in May 200, the Bank’s Asset and Liability Committee (which has since been replaced by the Bank’s Corporate Risk Committee) decided to take a neutral foreign currency position with the purpose of protecting the Bank from any changes in the exchange rate. The Bank’s foreign currency position is monitored daily by the Market Risk Division. Additionally, the Bank calculates the SUGEF currency risk indicator on a monthly basis. As of December 2012, that indicator was quantified at 0.69%, which is below the 0.89% calculated for December 2011 and considerably below the regulatory maximum limit of 5%.

The Bank is exposed to currency risk when the value of its assets and liabilities in

foreign currency is affected by variations in the exchange rate, which is recognized in the income statement.

Investments in Europe • The Bank’s Market Risk Division analyzes and monitors the investment

portfolio on an ongoing basis through the Comprehensive Risk Assessment Report, which results are reported to the Corporate Risk Committee and the Board of Directors.

• For the portfolios denominated in international dollars and euros, the Bank

periodically analyzes the portfolio’s balance performance by currency, composition by issuer, term and yield, VaR, stress scenarios related to shifts in yield curves (sovereign yield curve in the euro area, sovereign yield curve in the U.S., and yield curve for the 6-month LIBOR rate), and accrued market valuation.

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(Continued)

Investments in euros - Europe • The investment portfolio denominated in euros amounts to €37 million as of

December 2012 and represents 4.4% of the total portfolio, which is in line with the strategy for investment diversification (colones, euros, local dollars, international dollars, and DU) and portfolio currency matching, This portfolio shows a decrease of 21% in the past year mainly due to the sale of French securities.

• All issuers comprising this portfolio are sovereign issuers with very high

credit ratings.

• This portfolio shows the lowest VaR; however, it increased from 0.17% in December 2011 to 0.45% in December 2012 due to a longer maturity as a result of new investments in longer-term securities.

• The entire portfolio bears interest at a fixed rate. Of the total portfolio. 76%

matures between 6 months and 3 years, while 24% matures in more than 3 years.

• As a result of the ongoing monitoring performed by the Risk Division

regarding the economic situation in Europe, the strategy used to manage the portfolio is based on increased liquidity and reduced exposure of the most volatile instruments.

Investments in dollars - Europe • The portfolio denominated in international dollars includes a significant

component of European instruments. Of the total balance of $204 million as of December 2012, 65% ($131.8 million) is invested in Europe. However, excluding the note issued by Barclays with underlying bonds issued by the Government of Costa Rica, the share in the portfolio decreases to 39%.

• These investments are made in bonds issued by sovereign issuers that are

considered to have very high credit ratings, including Austria, Germany, The Netherlands, Sweden, Société Générale, European Investment Bank (EIB), and Barclays.

• Although a significant portion of these investments is concentrated in

Barclays (40%), the structured note is backed with bonds issued by the Government of Costa Rica and the other investments correspond to short-term certificates of deposit of up to 6-month terms.

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(Continued)

As of December 31, assets and liabilities denominated in foreign currency are as

follows:

U.S. dollars

2012 2011

Assets:

Cash and due from banks US$ 496,834,810 490,877,091

Investments in financial instruments 440,455,027 469,636,730

Loan portfolio 1,596,784,818 1,275,663,230 Accounts and accrued interest

receivable 190,793,434 251,029 Investments in other companies 76,356,150 68,524,183 Other assets 1,278,162 735,330 Total assets US$ 2,802,502,401 2,305,687,593

Liabilities: Obligations with the public US$ 2,008,992,335 1,961,660,120 Obligations with entities 455,702,394 287,661,370 Accounts payable and provisions 12,045,352 10,678,487 Other liabilities 39,755,168 12,959,205 Total liabilities US$ 2,516,495,249 2,272,959,182 Excess of assets over liabilities in

U.S. dollars US$ 286,007,152 32,728,411

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(Continued)

Euros

2012 2011

Assets:

Cash and due from banks € 14,885,082 26,195,679

Investments in financial instruments 39,531,551 48,888,008

Investments in other companies 3,284 - Other assets 882,418 - Total assets € 55,302,335 75,083,687

Liabilities:

Obligations with the public € 57,759,727 77,037,021

Obligations with entities 1,269,862 77,150 Accounts payable and

provisions 164,534 44,781 Other liabilities 199,950 3,000 Total liabilities € 59,394,073 77,161,952 Deficit of assets over liabilities

in euros € (4,091,738) (2,078,265)

Development Units (DU)

2012 2011

Assets:

Investments in financial

instruments DU 49,230,437 49,179,511 Loan portfolio 65,487,039 78,446,228 Total assets DU 114,717,476 127,625,739

Liabilities:

Obligations with the public DU - 12,218,606

Accounts payable and provisions 1,178,547 1,219,941 Other liabilities 10,956 12,253 Total liabilities DU 1,189,503 13,450,800 Excess of assets over liabilities in

DU DU 113,527,972 114,174,939 The Bank’s net position is not hedged. However, the Bank considers its position

to be acceptable and in compliance with the internal policy limits established by the Corporate Risk Committee.

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(Continued)

As of December 31, 2012 and 2011, the financial statements show a net foreign

exchange gain of US$11,867,351 and US$9,354,204, respectively. The value of financial assets and liabilities includes future interest to be earned in

the corresponding time band. b) Operational risk

Operational risk is the risk of losses resulting from inadequate or failed internal

processes, personnel, information systems, and internal controls or from external events. This definition includes legal risk but excludes strategic, business, or reputational risks.

The policy adopted by the Bank stipulates that all of the Bank’s employees are

inherently responsible for managing operational risk. The Bank’s employees are also required at all times to comply with the policies, regulations, procedures, and controls applicable to their positions and to ensure that the Bank’s institutional values and code of conduct and ethics are adopted across all levels of the organization.

That policy is implemented through a comprehensive model comprised of three

areas:

1- Business units, which are responsible for primary implementation and enforcement of the policy.

2- Support units, which are responsible for monitoring and controlling key indicators and for compliance with the policy.

3- Independent internal and external audits, which apply control and validation tests based on the guidelines established by upper management and applicable regulations.

One of the Bank’s fundamental operational risk management principles is

transparency, defined as the identification, documentation, and reporting of risk events in order to allow the Bank to adequately measure risk events and carry out any necessary corrective, preventive, and mitigation measures in a timely manner, including insurance where this is effective.

Also, the main activity in operational risk management is the assessment of risk in

institutional processes by applying a specific methodology that controls the frequency, impact, and quality of identified risk events. The diagram below shows how such methodology is applied to institutional processes:

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(Continued)

Upper management has defined operating risk limits that specifically measure the performance of risk management and total operating losses. These measurements are performed and reported to the upper levels on a monthly basis.

For legal risk, the Bank applies a model to estimate the EL and VaR on legal

actions, considering the subject matter of the cases when calculating the likelihood of loss, and a continuous model for the duration of the legal actions. Such model provides a direct estimate of the duration of each legal action in the corresponding court and the possible outcomes. The results thereof are used to address possible losses from unfavorable rulings.

For IT risk, the critical systems supporting the business are identified. System

availability is measured on a monthly basis, while risk maps are updated annually based on a methodology established for such purposes. Events affecting normal operations are identified, classified, and reported to the Bank’s upper management through a periodic information system that determines risk exposure.

•Expert users •Risk catalogue and

risk management template

Workshops

•Risk validation •Risk heat map

•Action plan Results

•Action plan •Internal control

•Revaluation and updating Follow-up

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(Continued)

Capital management Regulatory capital

The Bank’s capital must always comply with the capital adequacy indicators

established by SUGEF, which require that banks maintain a Capital Adequacy Ratio (CAR) of at least 10% at all times. That ratio is calculated by dividing the Bank’s base capital by total risk-weighted exposures.

Management periodically monitors these requirements and reports to the Board of

Directors on compliance. As of December 31, 2012 and 2011, the Bank is above the minimum level required by applicable regulations.

As of December 31, the Bank’s Tier I and Tier II capital (regulatory capital) is as

follows:

2012 2011 Tier I capital:

Ordinary paid-up capital US$ 234,520,465

133,013,040 Legal reserve

339,398,774

307,253,316

573,919,239

440,266,356 Tier II capital:

Adjustment for revaluation of property and equipment

73,143,681

72,635,378

Adjustment for valuation of available-for-sale investments

(4,620,375)

(4,288,749)

Adjustment for valuation of investments in other companies

9,530,992

9,373,364

Prior period retained earnings

53,858,311

138,728,207 Income for the year

87,918,905

50,368,502

Capital of the Development Financing Fund

17,371,322

13,016,941

237,202,836

279,833,643 Less: Deductions

(130,551,666)

(119,083,666)

Total regulatory capital US$ 680,570,409

601,016,333

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(Continued)

The Bank’s capital, including the capital of its statutorily-created departments,

may be increased by law or by capitalization of earnings. In the latter case, the capitalization must be approved by the Board of Directors of BCCR based on an opinion issued by SUGEF.

Financial entities regulated by SUGEF may increase their capital by amending

their articles of incorporation and paying such increases in full. Such entities may also decrease their capital, provided that it remains above the minimum required by law.

In accordance with article 135 of the Internal Regulations of the Central Bank of

Costa Rica, CONASSIF will establish limits for active operations, whether direct or stand-by, that financial entities regulated by SUGEF may enter into with individuals or legal entities under the modalities offered by regulated entities.

The maximum limit will be equivalent to twenty percent (20%) of the entity’s

subscribed and paid-up capital and its non-redeemable capital reserves. Regulated entities may internally define their own limits, provided that such limits adhere to the above parameters and do not exceed the maximum limits established by CONASSIF.

IAS 1 was amended as of January 1, 2007 in order to comply with the disclosure

of objectives, policies, and procedures for managing capital and of quantitative information. The Bank and its subsidiaries adhere to SUGEF’s Chart of Accounts, articles 10, 11, and 12 of IRNBS, Decision AGB 8-86 “Regulations for Authorizing the Organization, Opening, and Operation of Private Banks”, and SUGEF Circular Letter 043-2005.

The Bank’s own contributions to share capital and amounts capitalized from other

equity accounts are recognized in share capital (account No. 310) in accordance with article 11 of IRNBS. Debits or credits applied against that account must be generated by operations that comply with all legal requirements for modifying the entity’s capital and that have been approved by BCCR or CONASSIF, as appropriate.

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(Continued)

Article 11 of the aforementioned regulations establishes that banks must use the

calendar year as their financial year and that gains and losses at the close of the last business day of each half of the year must be liquidated. Such liquidations must be reported to SUGEF.

The main purpose of capital management is to maintain an appropriate CAR that

is above the current minimum level of 10% established in SUGEF Directive 3-06 “Regulations on Capital Adequacy of Financial Entities”.

Internally, as a prudential measure to protect capital, the General Board of

Directors adopted a policy establishing a floor of 10.50%, which exceeds the regulation’s requirements by 50 basis points. At the administrative level, in 2007 the floor and ceiling were set at 11.50% and 13.50%, respectively, to assess the actions of those with direct responsibility for monitoring the behavior of the Bank’s CAR for purposes of efficient capital management.

As part of the Bank’s approach to capital management, the Bank’s CAR is

monitored monthly and reported to the General Board of Directors in a detailed financial report that covers all main items of interest: balance sheet, profit or loss for the period, CAMELS indicators, budget execution, and capital adequacy.

In 2008, the Bank’s CAR was above the minimum level required by applicable

regulations, which indicates that capital levels were above the minimum required by laws and regulations.

Moreover, in applying Law No. 8627 published in the Official Gazette on

December 23. 2008, effective immediately, the Government of Costa Rica capitalized State-owned banks. As part of that capitalization, the Bank received bonds in DU for a total of DU42,165,060, equivalent to US$54,831,069 which was credited against the “Paid-up capital” account (account No. 311) (see note 19).

As of December 31, 2012 and 2011, the Bank’s CAR is above the minimum level

required by applicable regulations, which indicates that capital levels are above the minimum required by laws and regulations.

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(Continued)

(40) Contingencies

As of December 31, 2012, the Bank is a defendant and a claimant, respectively, in

246 and 67 ordinary, labor, and criminal lawsuits estimated at US$450.143.991 and US$30.225.752, as follows:

Number of cases

Phase

Total estimated amount

2012

2011

2012 2011

198 230 First instance US$ 447,728,635 351,290,699 25 25 Second instance

1,023,347 578,240

5 9 Appeal

1,392,009 140,129 228 264 Total (note 20) US$ 450,143,991 352,009,068

As of December 31, 2012 and 2011, the legal actions filed against the Bank are

booked in memoranda accounts under “Other contingencies - pending litigation and lawsuits”.

As of December 31, 2012 and 2011, the Bank is a claimant in ordinary, labor, and

criminal lawsuits, which outcome is uncertain and are not booked in the accounting records. A detail of those legal proceedings is as follows:

Number of cases

Phase

Total estimated amount

2012

2011

2012 2011

20 56 First instance US$ 22,659,432 23,263,238 - 2 Second instance

301,250 5,574

1 2 Appeal

7,265,070 72,543 21 60 Total US$ 30,225,752 23,341,355

(41) Significant events

a) Amended income tax returns for the tax years running from 2009 through 2011

The Bank holds a 49% share in BICSA’s profits, which should be accounted for

in the legal books by the equity method pursuant to article 7 of the Income Tax Law and article 11 of the Regulations thereto, and booked as nontaxable income in the income tax returns to be filed with the Ministry of Finance.

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(Continued)

Previously, such income was not considered to be nontaxable; accordingly, in

order to recognize the economic impact thereof in the tax returns filed, the Bank amended the 2009, 2010, and 2011 tax returns to present nontaxable income in the amounts of US$9,630,473, US$11,040,106, and US$1,734,575, respectively.

Such amendments gave rise to tax credits for 2009, 2010, and 2011 in favor of the

Bank for US$1,913,699, US$2,355,946, and US$2,531,653, respectively. At the December 2012 close, the Bank applied estimated income taxes in the

amount of US$1,867,096 corresponding to the second and third quarters against such tax credits. The remaining balance of US$3,067,106 in favor of the Bank is accounted for under accounts payable. These amendments were duly authorized by the Ministry of Finance.

b) Employee Association of Banco Nacional de Costa Rica (ASEBANACIO)

As recorded in article 14 of the minutes of meeting No. 11725 held on October

11, 2011, the Board of Directors agreed to create the Employee Association of Banco Nacional de Costa Rica (ASEBANACIO).

Pursuant to such agreement, ASEBANACIO is comprised of the following:

i. Employer contribution of 5.33% ii. Employee contribution of 5%

iii. Financial resources transferred from the Bank to ASEBANACIO equivalent to one-fifth (1/5) of the total amount corresponding to employees entitled to invoke the provisions of article 34 of the Collective Bargaining Agreement.

iv. Financial resources transferred from the Bank to ASEBANACIO equivalent to one-fifth (1/5) of the total amount corresponding to employees who are not entitled to invoke the provisions of article 34 of the Collective Bargaining Agreement.

v. Bank facilities during 6 months to locate the offices of ASEBANACIO and up to 6 Bank employees to work temporarily in ASEBANACIO.

As recorded in the minutes of meeting No. 11725, the funds transferred from the

Bank to ASEBANACIO are as follows:

a) Employees entitled to invoke the provisions of article 34 of the Collective Bargaining Agreement: of the total severance benefits in the amount of US$38,351,776, the amount corresponding to the first five-year period (US$7,670,355) is transferred in January 2012.

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(Continued)

b) Employees not entitled to invoke the provisions of article 34 of the

Collective Bargaining Agreement: of the total severance benefits in the amount of US$27,562,721, the amount corresponding to the first five-year period (US$5,512,544) is transferred in January 2012.

c) Derivative financial instruments

a) Authorization to trade foreign exchange derivatives

Pursuant to the provisions of SUGEF Directive 9-08 “Regulations to Authorize

and Execute Operations with Foreign Exchange Derivatives” approved by the Board of Directors of BCCR and as recorded in article 6 of the minutes of meeting No. 5566-2012 held on October 24, 2012, the Board of Directors of BCCR agreed to grant final authorization to the Bank to act as an intermediary in the Foreign Exchange Derivative Market and trade forwards. FX Swaps, and Currency Swaps.

(42) Other significant events

a- Increase in capitalization of the Bank Pursuant to agreement No. 10 of meeting No. 11772 held on June 19. 2012, the

Board of Directors agreed to increase the Bank’s share capital in the amount of US$101,507,425.

Such increase was authorized in SUGEF private letter ruling C.N.S 992/09/08 dated December 18, 2012 in the amount of US$100,744,275.

b- Dividends paid to the Bank

• BN Corredora de Seguros. S.A.

At a meeting held on May 8. 2012, the Board of Directors agreed to distribute

dividends amounting to US$355 thousands, which is equivalent to 75% of the profits at the 2011 year-end.

• Sociedad Administradora de Fondo de Inversión – BN SAFI. S.A.

Pursuant to agreement No. 2 of meeting No. 11784 held on August 14. 2012, the Board of Directors agreed to distribute dividends amounting to US$993 thousands, pursuant to an agreement thereof recorded in article 13 of meeting 219/10-2012 of July 16, 2012.

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(Continued)

c- Dissolution of Titularizadora Latinoamericana. S.A.

As recorded in article 2 of the minutes of shareholder’s meeting No. 11624 held on May 25, 2010, the shareholders of Titularizadora Latinoamericana, S.A. agreed to dissolve the entity.

On June 3, 2010, significant event No. 840/2010 was notified to the Costa Rican National Stock Exchange.

As of December 31, 2011, Titularizadora Latinoamericana S.A. was dissolved.

d- Increase in capitalization of BN Corredora de Seguros S.A.

Pursuant to agreement No. 2 of meeting No. 11616 held on May 18, 2010, the Board of Directors agreed to increase the share capital of BN Corredora de Seguros S.A. in the amount of US$592 thousands.

The contribution was made on May 31, 2010 through a deposit in a checking account. Such transaction increased the Bank’s ownership interest in the subsidiary and increased the subsidiary’s equity.

e- Transfer of 50% of BAN Procesa – TI, S.A. shares

In meeting No. 11805 held on December 4, 2012, the Bank’s Board of Directors, through an unanimous roll call vote, agreed to transfer the whole ownership interest held in BAN Procesa – TI, S.A. (equivalent to 50% of the entity’s shares) to Banco de Costa Rica without payment, since the capital contribution made to organize the entity was reversed in the accounting records, in accordance with clause 9 of the Articles of Incorporation.

(43) Statutory allocations made to the Development Financing Fund

In 2010, the Development Financing Fund was created in accordance with article 31 of Law No. 8634 “Development Banking System”, which stipulates that all State-owned banks, except BANHVI, shall create development financing funds. The objective of those funds is to provide financing to individuals and legal entities that present viable and feasible projects in conformity with the provisions of the aforementioned law and the regulations thereto.

The capital of the development financing funds is comprised. in accordance with article 32 of such law, of the following resources:

a. All State-owned banks, except BANHVI, must appropriate each year at least five percent (5%) of their net earnings after income taxes to create and strengthen its own development funds. This notwithstanding, the Board of Directors of each public bank may agree to make additional yearly contributions to those funds through a majority vote.

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(Continued)

b. Donations and bequests from individuals or public or private institutions,

both local and international. c. Profits obtained through transactions executed with the above funds. SUGEF Directive 31-04 requires that banks that manage development financing

funds include a balance sheet and income statement for such funds in the notes to their financial statements.

As of December 31, 2012, those financial statements are as follows:

Development Banking System Balance Sheet

December 31. 2012 (With corresponding figures for 2011)

Assets 2012 2011 Loan portfolio: US$ 19,036,308 13,369,352

Current 17,807,090 12,903,264 Past due 893,544 428,928 Legal collections 456,827 53,803 Accrued interest receivable 120,839 45,695 (Allowance for loan impairment) (241,992) (62,338) Other assets 269,885 941,386

Total assets US$ 19,306,193 14,310,738 Liabilities and equity Liabilities Accounts payable and provisions US$ 33,748 24,192 Other liabilities 54,534 - Total liabilities US$ 88,282 24,192 Equity Capital of the Development Financing

Fund US$ 17,371,322 13,016,941 Income for the year 1,807,281 1,246,885 Adjustment for conversion of financial

statements 39,308

22,720 Total equity US$ 19,217,911 14,286,546 Total liabilities and equity US$ 19,306,193 14,310,738 Other debit memoranda accounts US$ 435,563 258,081

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(Continued)

Development Banking System

Income Statement Year ended December 31. 2012 (With corresponding figures for 2011)

2012 2011

Finance income US$ 2,248,468 1,377,977 Income from recovery of assets and

decreases in allowances 2,531 60,743 Expenses for allowances for impairment of

assets (230,937) (83,557) Gross finance income 2,020,062 1,355,163 Other operating income 1,156 2,061 Other operating expenses (26,897) (11,654) Gross operating income 1,994,321 1,345,570 Administrative expenses (187,040) (98,685) Income for the year US$ 1,807,281 1,246,885 Assets corresponding to the Development Financing Fund are only booked in

local currency. As of December 31, the loan portfolio originated by the Development Financing

Fund, by sector, is as follows:

2012 2011

Trade US$ 7,617,162 5,552,087 Services

5,376,159 3,618,015

Manufacturing and quarrying

1,097,670 742,240 Agriculture and forestry

2,097,907 1,244,288

Livestock, hunting. and fishing

1,943,450 1,904,966 Transportation and telecommunications

636,613 -

Tourism

388,500 324,399 Total direct loans

19,157,461 13,385,995

Accrued interest receivable

120,839 45,695 Allowance for loan impairment

(241,992) (62,338)

Total US$ 19,036,308 13,369,352

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(Continued)

As of December 31, 2012, interest rates range between 8.50% and 18% per

annum (average rate of 13.15% per annum) for operations in colones (2011: between 9% and 15.50% per annum. average rate of 12.25% per annum).

As of December 31, 2012, the loan portfolio originated by the Development

Financing Fund, by arrears, is as follows:

2012 2011

Current US$ 17,807,090 12,903,264 1 to 30 days

341,032 144,479

31 to 60 days

450,758 256,140 61 to 90 days

307,851 33,033

91 to 120 days

91,676 11,764 121 to 180 days

44776 34,544

More than 180 days

114,278 2,771 Total US$ 19,157,461 13,385,995 Accrued interest receivable

120,839 45,695

Allowance for loan impairment

(241,992) (62,338) Total US$ 19,036,308 13,369,352

As of December 31, 2012, the loan portfolio originated by the Development

Financing Fund, by origin, is as follows:

2012 2011

Loans originated by the Bank US$ 19,157,461 13,385,995 Total direct loans US$ 19,157,461 13,385,995 Accrued interest receivable

120,839 45,695

Allowance for loan impairment

(241,992) (62,338) Total US$ 19,036,308 13,369,352

Past due loans, including loans in accrual status (for which interest is recognized

on a cash basis) and unearned interest on those loans, for the loan portfolio originated by the Development Financing Fund are as follows:

2012 2011 Past due loans in nonaccrual status: 0 loans (2011: 1 loan) US$ - 2,771 Past due loans in accrual status: 84 loans (2011: 39 loans) US$ 893,544 479,960 Loans in legal collections: 32 loans. 2.38% of portfolio (2011: 7 loans. 0.40% of portfolio) US$ 456,827 53,803 Total unearned interest US$ 2,903 9,633

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(Continued)

During the year ended December 31. 2012, the Bank increased the “Finance

income on non-accrual loans” account for the loan portfolio originated by the Development Financing Fund by US$2,903 (2011: US$9,633), as a result of an increase in loans receivable more than 180 days past due.

The Bank classifies loans as past due when no principal or interest payments have

been made by one day after the due date. As of December 31, the direct loan portfolio originated by the Development

Financing Fund, by type of guarantee, is as follows: Direct loans

Type of guarantee 2012 2011 Back-to-back US$ 38,445 25,826 Mortgage bond 5,260 - Assignment of loans 9,855 - Mortgage 12,330,371 9,540,234 Surety 5,910,353 3,666,119 Trust 261,924 70,031 Securities 67,655 37,189 Chattel mortgage 654,437 87,571 Other - 4,720

US$ 19,278,300 13,431,690

(44) Subsequent event

Since the financial statements of BICSA as of December 31, 2012 were modified

as a result of a number of adjustments requested by the external auditors (KPMG Panama) in their Independent Auditors’ Report dated March 20, 2013, the Bank’s management elected to recognize the effect of such adjustments in its unconsolidated financial statements as of December 31, 2012. The main effect of the adjustments is presented in the value of the Bank’s investment in BICSA. As a result, the Bank’s unconsolidated financial statements were reissued on March 25, 2013.

The main effects of the adjustments are a decrease in the Bank’s assets and

liabilities of US$6,965,338 and US$1,985,458, respectively, and a decrease in the Bank’s net profit in the amount of US$5,040,215.

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(Continued)

(45) Transition to International Financial Reporting Standards (IFRSs)

Through various resolutions, CONASSIF (the Board) agreed to partial adoption

starting January 1, 2004 of IFRSs promulgated by the International Accounting Standards Board (IASB). In order to regulate application of those Standards, the Board issued the Terms of the Accounting Regulations Applicable to Entities Regulated by SUGEF, SUGEVAL, SUPEN, and SUGESE and to Non-financial Issuers and approved a comprehensive revision of those Regulations on December 17, 2007.

On May 11, 2010, the Board issued private letter ruling C.N.S. 413-10 to revise

the Regulations, which mandate application by regulated entities of IFRSs and the corresponding Interpretations issued by the IASB in effect as of January 1, 2008, except for the special treatment indicated in Chapter II of the Regulations.

Pursuant to the Regulations and in applying IFRSs in effect as of January 1, 2008,

any new IFRSs or Interpretations issued by the IASB, as well as any other revisions of IFRSs adopted that will be applied by regulated entities, will require the prior authorization of the Board.

Following is a summary of some of the main differences between the accounting

standards issued by the Board and IFRSs, as well as the IFRSs or Interpretations of the International Financial Reporting Interpretations Committee (IFRICs) yet to be adopted:

a) IAS 1: Presentation of Financial Statements

The presentation of financial statements required by the Board differs in some

respects from presentation under this Standard. Following are some of the most significant differences:

SUGEF Standards do not allow certain transactions, such as clearing house

balances, gains or losses on the sale of financial instruments, income taxes, etc. to be presented on a net basis. Given their nature, IFRSs require those balances to be presented net to prevent assets and liabilities or profit or loss from being overstated.

Interest receivable and payable is presented in the main asset or liability account

rather than as other assets or other liabilities.

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(Continued)

b) Revised IAS 1: Presentation of Financial Statements

The revised Standard introduces the term total comprehensive income, which

represents changes in equity during a period other than those changes resulting from transactions with owners in their capacity as owners. Total comprehensive income may be presented in either a single statement of comprehensive income (effectively combining both the statement of operations and all non-owner changes in equity in a single statement) or in a statement of operations and a separate statement of comprehensive income. This revised Standard became mandatory for 2009 financial statements and has not been adopted by the Board.

c) IAS 7: Statement of Cash Flows

The Board has only authorized preparation of the cash flow statement using the

indirect method. The direct method is also acceptable under this Standard.

d) IAS 8: Accounting Policies. Changes in Accounting Estimates and Errors SUGEF has authorized the booking of notices of deficiency received from Tax

Authorities against prior period retained earnings under certain circumstances.

e) IAS 12: Income Taxes The Board has not included all deferred income tax items in SUGEF’s Chart of

Accounts. Consequently, entities have been required to recognize those items in accounts considered to be inappropriate under this Standard. For example, deferred tax income is not offset in the deferred tax expense account, but rather deferred tax income and expense are presented in separate accounts.

f) IAS 16: Property. Plant and Equipment

The Standard issued by the Board requires the revaluation of property through

appraisals made by independent appraisers at least once every five years, eliminating the option to carry these assets at cost or to revalue other types of assets.

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(Continued)

Additionally, SUGEF has allowed certain regulated entities to convert (capitalize)

revaluation surplus into share capital. This Standard only permits realization of revaluation surplus through the sale or depreciation of the asset. As a result of this treatment, regulated entities must recognize the effect of any impaired fixed assets in profit or loss, since the effect cannot be credited to equity. Under this Standard, impairment is charged to revaluation surplus, and any difference is recognized in profit or loss.

Moreover, under this Standard, depreciation continues on property, plant and

equipment, even if the asset is idle. The Standard issued by the Board allows entities to suspend the depreciation of idle assets and reclassify them as foreclosed assets.

g) IAS 18: Revenue The Board has allowed regulated financial entities to recognize loan fees and

commissions collected prior to January 1, 2003 as revenue. Additionally, the Board has permitted the deferral of 25%, 50%, and 100% of loan fees and commissions for transactions completed in 2003, 2004, and 2005, respectively. This Standard prescribes deferral of 100% of those fees and commissions over the loan term.

The Board has also allowed deferral of the net excess of loan fee income minus

expenses incurred for activities such as assessment of the borrower’s financial position, evaluation and recognition of guarantees, sureties, or other collateral instruments, negotiation of the terms of the instrument, preparation and processing of documents, and settlement of the operation. The Standard does not allow deferral on a net basis of such income. Instead, it prescribes deferral of 100% of loan fee income and permits the deferral of only certain incremental transaction costs, rather than all direct costs. Accordingly, when costs exceed income, loan fee income is not deferred, since the Board only allows the net excess of income over expenses to be deferred. This treatment does not conform to IAS 18 and IAS 39, which prescribe separate treatment for income and expenses (see comments on IAS 39).

h) IAS 21: The Effects of Changes in Foreign Exchange Rates

The Board requires that the financial statements of regulated entities be presented

in colones as the functional currency.

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(Continued)

i) IAS 27: Consolidated and Separate Financial Statements

The Board requires that the financial statements of a parent be presented

separately, measuring its investments by the equity method. Under this Standard, a parent is required to present consolidated financial statements. A parent need not present consolidated financial statements when the ultimate or any intermediate parent of the parent produces consolidated financial statements available for public use, provided certain other requirements are also met. However, in this case, this Standard requires that investments be accounted for at cost.

In the case of financial groups, the holding company must consolidate the

financial statements of all of the companies of the group in which it holds an ownership interest of twenty-five percent (25%) or more. irrespective of control. For such purposes, proportionate consolidation should not be used, except in the consolidation of investments in joint arrangements.

The amended Standard (2008) requires accounting for changes in ownership

interests in a subsidiary, while maintaining control, to be recognized as an equity transaction. When the Group loses control of a subsidiary, any ownership interest retained in the former subsidiary will be measured at fair value with the gain or loss recognized in profit or loss. The amendment to this Standard became mandatory for 2010 financial statements and has not been adopted by the Board.

j) IAS 28: Investments in Associates The Board requires consolidation of investments in companies in which an entity

holds twenty-five percent (25%) or more ownership interest. irrespective of any considerations of control. Such treatment does not conform to IAS 27 and IAS 28.

k) Revised IAS 32: Financial Instruments - Presentation The revised Standard provides new guidelines clarifying the classification of

financial instruments as liabilities or equity (e.g. preferred shares). SUGEVAL determines whether issues fulfill the requirements of share capital.

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(Continued)

l) Amendments to IAS 32: Financial Instruments - Presentation and IAS 1:

Presentation of Financial Statements - Puttable Financial Instruments and Obligations Arising on Liquidation

The amendments to the Standards require puttable instruments and instruments

that impose on the entity an obligation to deliver to another party a pro rata share of the net assets of the entity only on liquidation, to be classified as equity if certain conditions are met. These changes have not been adopted by the Board.

m) IAS 37: Provisions. Contingent Liabilities and Contingent Assets

SUGEF prescribes recognition of a provision for possible losses on contingent

assets. This type of provision is prohibited under this Standard. n) IAS 38: Intangible Assets

The commercial banks listed in article 1 of IRNBS (Law No. 1644) may present

organization and installation expenses as an asset in the balance sheet. However, those expenses must be fully amortized on the straight-line method over a maximum of five years. This is not in accordance with this Standard.

o) IAS 39: Financial Instruments - Recognition and Measurement The Board requires that the loan portfolio be classified pursuant to SUGEF

Directive 1-05 and that the allowance for loan losses be determined based on that classification. It also allows excess allowances to be booked. This Standard requires that the allowance for loan losses be determined based on a financial analysis of actual losses. This Standard also prohibits the booking of provisions for contingent accounts. Any excess allowances must be reversed in the income statement.

The revised Standard introduced changes with respect to classification of financial

instruments, which have not been adopted by the Board. Those changes include the following:

• The option of classifying loans and receivables as available-for-

sale was established.

• Securities quoted in an active market may be classified as available-for-sale, held-for-trading, or held-to-maturity.

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(Continued)

• The “fair value option” was established to designate any financial

instrument to be measured at fair value through profit or loss, provided a series of requirements are met (e.g. the instrument has been measured at fair value since the original acquisition date).

• The category of loans and receivables was expanded to include

purchased loans and receivables that are not quoted in an active market.

The Board has also allowed capitalization of direct costs incurred for assessment

of the borrower’s financial position, evaluation and recognition of guarantees, sureties, or other collateral instruments, negotiation of the terms of the instrument, and preparation and processing of documents, net of loan fee income. However, the Standard only permits capitalization of incremental transaction costs, which are to be presented as part of the financial instrument and may not be netted against loan fee income (see comments on IAS 18).

Regular purchases and sales of securities are to be recognized using settlement

date accounting only. Depending on the type of entity, financial assets are to be classified as follows: a) Pooled portfolios Investments in pooled investment funds, pension and mandatory

retirement saving funds, and similar trusts are to be classified as available for sale.

b) Own investments of regulated entities Investments in financial instruments of regulated entities are to be

classified as available for sale. Own investments in open investment funds are to be classified as held-for-trading

financial assets. Own investments in closed investment funds are to be classified as available for sale.

Entities regulated by SUGEVAL and SUGEF may classify other investments in

financial instruments as held-for-trading instruments, provided there is an express statement of intent to trade them within 90 days from the acquisition date.

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(Continued)

Banks regulated by SUGEF may not classify investments in financial instruments

as held to maturity. The above classifications do not necessarily adhere to IAS 39. The amendment to this Standard clarifies the existing principles that determine

whether specific risks or portions of cash flows are eligible for designation in a hedging relationship. The amendment became mandatory for 2010 financial statements with retrospective application required and has not been adopted by the Board.

p) IAS 40: Investment Property The Standard allows entities to choose between the fair value model and the cost

model to measure their investment property. The Standard issued by the Board only allows entities to use the fair value model to measure this type of assets, except in the cases for which no clear evidence is provided to determine their value.

q) Revised IFRS 3: Business Combinations The revised Standard (2008) incorporates the following changes: • The definition of a business has been broadened, which is likely to result in

more acquisitions being treated as business combinations.

• Contingent consideration will be measured at fair value, with subsequent changes therein recognized in profit or loss.

• Transaction costs, other than share and debt issue costs, will be expensed as

incurred.

• Any pre-existing ownership interest in an acquiree will be measured at fair value, with the gain or loss recognized in profit or loss.

• Any noncontrolling (minority) interest will be measured at either fair value or

at its proportionate interest in the identifiable assets and liabilities of the acquire, on a transaction-by-transaction basis.

The revised Standard became mandatory for 2010 financial statements with

prospective application and has not been adopted by the Board.

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(Continued)

r) IFRS 5: Non-current Assets Held for Sale and Discontinued Operations The Board requires booking an allowance of one-twenty-fourth of the value of

non-current assets classified as available for sale each month, so that if they are not sold within two years from acquisition, an allowance is recognized equivalent to 100% of the assets’ carrying amount. This Standard requires that these assets be recorded at the lower of the carrying amount or fair value less costs to sell, discounted to the present value of the assets that will be sold in periods greater than one year. Accordingly, assets could be understated, with excess allowances.

s) Amendments to IFRS 7: Financial Instruments - Disclosures In March 2009, the IASB issued certain amendments to this Standard, which

require enhanced disclosures about fair value measurements and liquidity risk in respect of financial instruments.

The amendments require that fair value measurement disclosures use a three-level

fair value hierarchy that reflects the significance of the inputs used in measuring fair values of financial instruments. Specific disclosures are required when fair value measurements are categorized as Level 3 (significant unobservable inputs) in the fair value hierarchy. The amendments require that any significant transfers between Level 1 and Level 2 of the fair value hierarchy be disclosed separately, distinguishing between transfers into and out of each level. Furthermore, changes in valuation techniques from one period to another, including the reasons therefor, are required to be disclosed for each class of financial instruments.

Further, the definition of liquidity risk has been amended and it is now defined as

the risk that an entity will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

The amendments require disclosure of a maturity analysis for non-derivative and

derivative financial liabilities, but contractual maturities are required to be disclosed for derivative financial liabilities only when contractual maturities are essential for an understanding of the timing of cash flows. For issued financial guarantee contracts, the amendments require the maximum amount of the guarantee to be disclosed in the earliest period in which the guarantee could be called. These amendments have not been adopted by the Board.

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(Continued)

t) IFRS 9: Financial Instruments This Standard deals with classification and measurement of financial assets. The

requirements of this Standard represent a significant change from the existing requirements in IAS 39 in respect of financial assets. The Standard contains two primary measurement categories for financial assets: amortized cost and fair value. The Standard eliminates the existing IAS 39 categories of held to maturity, available for sale, and loans and receivables. For an investment in an equity instrument which is not held for trading, the Standard permits an irrevocable election, at initial recognition, on an individual share-by-share basis, to present all fair value changes in other comprehensive income. No amount recognized in other comprehensive income would ever be reclassified to profit or loss at a later date.

The Standard requires that derivatives embedded in contracts with a host contract

that is a financial asset within the scope of the Standard not be separated; instead the hybrid financial instrument is assessed in its entirety as to whether it should be measured at amortized cost or fair value.

This Standard requires entities to determine whether presenting the effects of

changes in the credit risk of a liability designated at fair value through profit or loss would create an accounting mismatch based on facts and circumstances at the date on which the financial liability is initially recognized.

The Standard is effective for annual periods beginning on or after January 1.

2015. Early application is permitted. This Standard has not been adopted by the Board.

u) IFRS 10: Consolidated Financial Statements This Standard provides a revised control definition and application guidance

therefor. This Standard supersedes IAS 27 (2008) and SIC 12, Consolidation - Special Purpose Entities, and is applicable to all investees.

Early application is permitted. Entities that apply this Standard early must

disclose that fact and simultaneously apply IFRS 11 and IFRS 12 and IAS 27 and IAS 28 (as amended in 2011), and IAS 28 (both IAS. as amended in 2011).

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(Continued)

An entity is not required to make adjustments to the accounting for its

involvement with an investee when entities that were previously consolidated or unconsolidated in accordance with IAS 27 (2008), SIC 12, and this Standard, continue to be consolidated or continue not to be consolidated.

When application of this Standard results in an investor consolidating an investee

that is a business that was not previously consolidated, the investor must:

1) determine the date when the investor obtained control of that investee on the basis of the requirements of this Standard; and

2) measure the assets, liabilities, and noncontrolling interests as if acquisition accounting had been applied from that date.

If (2) is impracticable, then the deemed acquisition date must be the beginning of

the earliest period for which retroactive application is practicable, which may be the current period.

The Standard is effective for annual periods beginning on or after January 1,

2013. Early application is permitted. This Standard has not been adopted by the Board.

v) IFRS 11: Joint Arrangements This Standard was issued in May 2011 with an effective date of January 1, 2013.

The Standard addresses the inconsistencies in the accounting for joint arrangements and requires a single accounting treatment for interests in jointly controlled entities. This Standard has not been adopted by the Board.

w) IFRS 12: Disclosure of Interests in Other Entities This Standard was issued in May 2011 with an effective date of January 1, 2013.

This Standard requires an entity to disclose information that enables users of financial statements to evaluate the nature and financial effects of its ownership interests in other entities, including joint arrangements, Associates, structured entities, and “off-balance-sheet” activities. This Standard has not been adopted by the Board.

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(Continued)

x) IFRS 13: Fair Value Measurement This Standard was issued in May 2011 and clarifies the definition of fair value,

establishes a single procedure for measuring fair value, and defines the measurements and applications required or permitted by IFRSs. This Standard is effective for annual periods beginning on or after January 1, 2013. Early application is permitted. This Standard has not been adopted by the Board.

y) IFRIC 10: Interim Financial Reporting and Impairment

This Interpretation prohibits the reversal of an impairment loss recognized in a

previous interim period in respect of goodwill. an investment in an equity instrument, or a financial asset carried at cost. This Interpretation applies to goodwill, investments in equity instruments, and financial assets carried at cost from the date that the entity first applied the measurement criteria of IAS 36 and IAS 39 (i.e. January 1, 2004). The Board permits the reversal of allowances.

z) IFRIC 12: Service Concession Arrangements This Interpretation gives guidance on the accounting by operators for public-to-

private service concession arrangements. This Interpretation applies to both:

• infrastructure that the operator constructs or acquires from a third party for

the purpose of the service arrangement; and

• existing infrastructure to which the grantor gives the operator access for the purpose of the service arrangement.

This Interpretation became mandatory for annual periods beginning on or after

July 1. 2009 and has not been adopted by the Board.

aa) IFRIC 13: Customer Loyalty Programs This Interpretation gives guidance on the accounting by entities that grant loyalty

award credits to customers as part of a sales transaction which, subject to meeting any further qualifying conditions, the customers can redeem in the future for free or discounted goods or services. This Interpretation became mandatory for annual periods beginning on or after January 1, 2011 and has not been adopted by the Board.

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(Continued)

bb) IFRIC 14: IAS 19 - The Limit on a Defined Benefit Asset. Minimum

Funding Requirements and their Interaction This Interpretation applies to all post-employment defined benefits and other

long-term employee defined benefits. Also, it considers the minimum funding requirements to fund a post-employment or other long-term defined benefit plan. It also addresses when a minimum funding requirement might give rise to a liability. This Interpretation became mandatory for annual periods beginning on or after January 1, 2011 with retrospective application required and has not been adopted by the Board.

cc) IFRIC 16: Hedges of a Net Investment in a Foreign Operation

This Interpretation allows entities that use the step-by-step consolidation method

to choose an accounting policy that hedges currency risk to determine the amount of the cumulative foreign currency translation reserve that is reclassified to profit or loss on the disposal of a net investment in a foreign operation, which is equivalent to the amount that would have been reclassified had the entity used the direct method of consolidation. This Interpretation became mandatory for annual periods beginning on or after July 1, 2009 and has not been adopted by the Board.

dd) IFRIC 17: Distributions of Non-cash Assets to Owners This Interpretation gives guidance on the accounting of distributions of non-cash

assets to owners at the beginning and end of the reporting period. If, after the end of a reporting period but before the financial statements are

authorized for issue, an entity declares a dividend to distribute a non-cash asset, it must disclose:

a) the nature of the asset to be distributed;

b) the carrying amount of the asset to be distributed as of the end of the

reporting period; and

c) whether fair values are determined, in whole or in part, directly by reference to published price quotations in an active market or are estimated using a valuation technique, and the method used to determine fair value and. when a valuation technique is used. the assumptions applied

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This Interpretation became mandatory for annual periods beginning on or after

July 1, 2009 and has not been adopted by the Board.

ee) IFRIC 18: Transfers of Assets from Customers This Interpretation gives guidance on the accounting of transfers of items of

property, plant and equipment by entities that receive such transfers from their customers. This Interpretation also applies to agreements in which an entity receives cash when that amount of cash must be used only to construct or acquire an item of property, plant and equipment, and the entity must then use the item either to connect the customer to a network or to provide the customer with ongoing access to a supply of goods or services, or to both. This Interpretation became mandatory for annual periods beginning on or after July 1, 2009 and has not been adopted by the Board.

ff) IFRIC 19: Extinguishing Financial Liabilities with Equity Instruments This Interpretation gives guidance on the accounting by an entity when the terms of a financial liability are renegotiated and result in the entity issuing equity instruments to a creditor of the entity to extinguish all or part of the financial liability. This Interpretation became mandatory for annual periods beginning on or after July 1, 2010 and has not been adopted by the Board

(46) Disclosure of economic impact of departure from IFRSs

Since the basis of accounting used by the Bank’s management described in note

1-b differs from IFRSs, discrepancies may arise related to the balances of certain accounts.

The Bank’s management has chosen not to determine the economic impact of

those differences since they consider such determination impractical. (47) Notes required by Regulations on the Financial Reporting of Financial Entities.

Groups. and Conglomerates Pursuant to the Regulations on the Financial Reporting of Financial Entities,

Groups, and Conglomerates, the following disclosures do not apply to the Bank:

• Risk indicators • Other concentrations of assets and liabilities.

Documents

(s) Deferred income