North American Development Bank 2010 Annual Report

North American Development Bank

Annual Report 2010

ontentsC

Message from Management

Loan Program

2010 Financing Activity

2010 Project Results

Financial Summary 2010-2006

Technical Assistance & Training

Funding Resources

Mandate & Governance

Administration & Finances

Risk Management

Financial Operations

Domestic Programs

Consolidated Financial Statements and Supplemental Information

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3

4

6

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9Grant Programs

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18

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essage from ManagementM

Alex Hinojosa & Gerónimo Gutiérrez

April 2011

2010 was a year of transition and of firsts for the North American Development Bank (NADB). The changes over the last year are no more obvious to anyone than us, having recently assumed the responsibilities of Managing Director and Deputy Managing Director. We are honored to join NADB’s thriving team and to have the opportunity to put our combined expertise to work in fulfilling NADB’s mission of financing infrastructure that promotes a clean, healthy environment for the citizens of the U.S.-Mexico border region.

NADB began the year by obtaining its first-ever credit ratings: Aaa from Moody’s Investor Service and AA+ from Standard & Poor’s. These credit ratings were followed by NADB’s first-ever public debt issuance, a US$250 million bond issuance made on February 11th.

Last year saw the Bank transition a significant number of its projects from the development stage into construction and completion. A total of US$196.3 million in funding was disbursed to 41 projects in 2010, of which US$171.8 million was in loans and US$24.5 million in grants. This amount represents a record level of disbursements for any single year in the Bank’s history. Furthermore, ten new projects began construction in 2010, and 18 projects were completed.

In terms of new project development, funding was contracted for 16 projects last year, and as the pressing environmental concerns in the border region have evolved, so has NADB’s portfolio. Of the US$165.3 million in new financing contracted in 2010, US$92.1 million, or 71 percent, went to projects to improve air quality, a sector in which NADB has become increasingly involved, helping border communities make substantial strides in reducing emissions through improved thoroughfares and reducing particulate matter through the first-time paving of streets. In November 2010 a major project in this sector financed by NADB was completed in Tijuana, Baja California. The project is expected not only to ease traffic congestion, but also to diminish the need for constant pothole repair, reduce urban temperatures, and increase the efficiency of street lighting as a result of the paving technology used.

At the conclusion of 2010, NADB had financed 146 environmentally beneficial infrastructure projects in the U.S.-Mexico border region since its establishment. Of that number, 99 projects have been fully implemented with the support of approximately US$738.1 million in loans and grants, and are benefiting an estimated 7.27 million residents.

On November 11th, NADB was acknowledged by the San Antonio-Mexico Friendship Council (SAMFCO) with its highest honor, the Amistad Award. This was a special distinction for the Bank, as it was the first time an institution was honored by SAMFCO, as opposed to an individual. The recognition of the Bank’s work is accepted graciously, even as we strive to achieve greater results. NADB is a unique institution that over the past 16 years has substantially improved the quality of life for the residents of the U.S.-Mexico border region. However, we are reminded every day in the course of our work of the challenges that remain before us.

In accepting any recognition on behalf of the Bank, we must acknowledge the hard work and notable accomplishments of our immediate predecessors, Jorge C. Garcés, who served as Deputy Managing Director from 2000 to 2005, and as Managing

2 North American Development Bank

Director from 2005 until October 2010; and Hector Camacho, who served as Deputy Managing Director from May 2007 to October 2010. We have Jorge and Hector to thank, not only for an outstanding 2010 in terms of the Bank’s performance, but also for their leadership throughout their respective tenures as the NADB grew its lending program.

Looking toward the future, as grant funding for projects becomes increasingly scarce, it is imperative that we focus on promoting environmental infrastructure development through debt financing. A key element of our strategic vision for NADB includes garnering further efficiencies in the way we work with our sister institution, the Border Environment Cooperation Commission (BECC), in identifying, developing, certifying and financing environmental infrastructure projects, to the ultimate benefit of our project sponsor clients and the citizens of the region. As of the date of publication of this report, a team of NADB and BECC staff, under the leadership of the Deputy Managing Director and Deputy General Manager of the respective institutions, is working to finalize a five-year strategic plan to guide the institutions during the tenures of their current leadership. This plan will focus on operational efficiencies, bolstering our outreach and marketing efforts throughout our jurisdiction, continually seeking to lower the cost of financing, and continuing to help border communities prepare their projects for implementation.

Finally, as always we thank our Board of Directors and all those who contribute to the success of NADB, including the entire NADB staff, the management and staff at BECC, our project sponsors, and all the rest of our partners at the various local, state and federal stakeholder agencies without whose cooperation on a daily basis we could not fulfill our mission.

We proudly present to you the 2010 North American Development Annual Report.

Alex Hinojosa Deputy Managing Director

Gerónimo GutiérrezManaging Director

2010 2009 2008 2007 2006Operational HighlightsLoan commitments signed $ 129,014 $ 211,900 $ 72,084 $ 53,903 $ 36,145 Loan disbursements 171,796 134,824 49,126 74,753 26,310 Loan repayments 12,141 10,678 9,978 6,876 7,196 Undisbursed portion of committed loans 44,903 102,923 27,031 4,935 26,117

NADB-funded grant disbursements2 1,417 3,875 2,077 1,940 8,148 Disbursements for technical assistance & training 703 1,821 1,645 3,475 2,720

Balance Sheet DataCash and cash equivalents $ 38,403 $ 34,283 $ 64,176 $ 53,077 $ 36,080 Investments 236,040 135,912 193,343 184,631 231,128 Loans outstanding, net3 457,314 282,501 149,264 144,677 77,233 Total assets 754,399 490,616 465,666 386,315 347,623 Borrowings outstanding, net 256,424 - - - - Total liabilities 261,421 1,130 900 1,325 2,381 Total equity 492,978 489,486 464,766 384,984 345,242

Income Statement DataLoan income $ 20,512 $ 11,384 $ 8,361 $ 5,241 $ 3,458 Investment income 11,400 11,883 10,448 11,835 11,538 Operating expenses 8,733 7,844 6,415 7,167 8,042 Interest expense 4,095 - - - - Operating income, before grant program activity 19,613 16,024 13,209 9,951 7,115 Net income (loss) 17,492 10,326 9,488 4,536 (3,754)

Ratios (%)Operating income/adjusted shareholders' equity4 4.6 3.8 3.4 3.2 2.6 Operating income/average assets 3.2 3.4 3.1 2.7 N/A Liquid assets/total assets 36.4 34.7 55.3 61.5 76.9 Gross debt/adjusted shareholders' equity 0.6 - - - -

1- Excludes the U.S. Domestic Program. 2- Includes grant financing through the Solid Waste Environmental Program (SWEP) and the Water Conservation Investment Fund (WCIF), but excludes the Border Environment Infrastrucutre Fund (BEIF), which is fully funded by the U.S. Environmental Protection Agency (EPA).3- After allowance for loan losses and effect of foreign exchange adjustments and swaps. 4- Adjusted shareholders' equity is defined as the sum of undesignated paid-in capital, undesignated retained earnings, the Special Reserve, and accumulated other comprehensive income.

inancial Summary 2010-20061F

To serve as a binational partner and catalyst in communities along the U.S.-Mexico border in order to enhance the affordability, financing, long-term development and effective operation of infrastructure that promotes a clean, healthy environment for the citizens of the region.

Mission

(US$ Thousands)

37,940,000 gallons a dayThe combined capacity of the 11 wastewater treatment plants built or expanded to serve nine communities on both sides of the border

Referencing the United Nations World Water Development Report, which assumes 1 liter of wastewater pollutes

8 liters of fresh water, these plants will prevent the contamination of approximately 303,550,850 gallons a day of water in rivers and watersheds shared by both countries.

14 wastewater collection systems

Installation of more than 925,000 feet of wastewater collection lines and 51,000 residential sewer hookups

First-time sewer services were provided to hundreds of residents in nine Mexican communities in Baja California, Chihuahua, Coahuila, Sonora, and Tamaulipas, as well as in two U.S. communities in Texas,

including the Kickapoo Nation in Maverick County.

010 Project Results2

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7 water distribution systemsInstallation of more than 430,000 feet of waterlines, as well as 28,900 residential water hookups

First-time water services were provided to residents in three Mexican communities in Chihuahua, Sonora, and Tamaulipas, as well as in two U.S. communities in Texas.

79 miles of rehabilitated roadways

Rehabilitation of 17 primary avenues and roadways in Tijuana, Baja California, aimed at improving urban mobility, as well as air quality in the bi-national air basin shared with San Diego County, California

It is estimated that, by reducing the amount of fossil fuel consumed by vehicles as a result of better traffic flows, the project could potentially prevent the emission of 192 metric

tons/year of volatile organic compounds (VOC), 965 metric tons/year of carbon monoxide (CO) and 185 metric tons/year of nitrogen oxide (NOx), a reduction of 10%, 5% and 7%, respectively, compared to baseline conditions. In addition, the paving technology used is expected to generate additional environmental benefits by reducing maintenance requirements, increasing the efficiency of nighttime lighting, and mitigating the “heat island” effect.

The environmental benefits for residents of the border region generated as a result of the development and implementation of infrastructure projects certified by BECC and financed by NADB are the mainstay of the shared mission of the two institutions. During 2010, construction was completed on 18 projects: 16 were water-related, aimed at providing safe and reliable drinking water services and/or collecting and properly treating wastewater, while two targeted better air quality through paving and roadway improvements.

An estimated 2.35 million border residents are benefitting directly or indirectly from these projects. Even though the majority of the projects built in 2010 are located in Mexico, neighboring communities in the U.S. are also breathing cleaner air and drawing drinking water from cleaner rivers and aquifers.

For more detailed information about these and other projects financed by NADB, visit our website at www.nadb.org.

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010 Financing Activity2LOAN PROGRAM2010 saw continued impressive growth in the Bank’s loan portfolio. Five new loans and two loan extensions totaling US$283.4 million were approved, and all but one of these loan commitments was contracted by year end. Altogether, the Bank contracted just over US$129 million in loans over the course of the year, its second best year after 2009 (US$211.9 million). Moreover, all but one of those loans was partially or fully disbursed by year end for a total of US$95.3 million, representing almost 74% of the funds contracted in 2010. Table 1 provides details on the loans contracted during the year.

TABLE 1NADB Lending Activity in 2010(US$ Millions)

Community Benefitted Project Type

Loan Amount Borrower Signing

DateLoan Closings

1 Tijuana, B.C. (Cemex)1** AQ $ 47.3 Public 22-Mar-102 Ciudad Juárez, CHIH (Degremont) WW 7.4 Private 29-Mar-103 Tijuana, B.C. (Cemex)2* AQ 17.5 Public 20-Jul-104 El Paso, TX** W 15.0 Public 12-Aug-105 Nogales, SON** WW 3.2 Public 12-Oct-106 Nogales, SON3** AQ 6.6 Public 12-Oct-107 State of Nuevo León* AQ/W/WW 32.0 Public 8-Dec-10

Total contracted: $ 129.0

* Partially disbursed during 2010 ** Fully disbursed during 2010 1- 1st loan extension bringing the total NADB loan for this project up to US$92.3 million.2- 2nd loan extension bringing the total NADB loan for this project up to US$109.8 million.3- 2nd loan for this paving project certifed in 2004, bringing total NADB loan funding to US$15.5 million.

AQ = Air quality; W = Water; WW = Wastewater

US$129 millionin new loan commitments in 2010

Paisano Valley Water Project, El Paso, TX

Road Rehabilitation Project, Tijuana, BC


All the borrowers were local governments or public utilities, except in the case of the wastewater treatment project in Ciudad Juárez, where the loan was contracted with a private concessionaire under a public-private partnership with the local utility. It should also be noted that the two loan extensions for the roadway rehabilitation project in Tijuana, Baja California, were contracted under a public-private financing structure with the city and the contractor.

Half of the new loans in 2010 were contracted for water-related projects and the other half for air quality improvement projects. In terms of dollar value, approximately 71% (US$92.1 million) of the loan funds went to support air quality paving projects in Mexican border states, and the remaining 29% (US$36.9 million) to water and wastewater projects in both countries. Among those projects, it is worth highlighting the Basic Environmental Infrastructure Program for Substandard Urban Developments sponsored by the State of Nuevo León, which encompasses more than one environmental sector. Under this program, the state government is taking a comprehensive approach to providing basic

infrastructure and services to inadequately d e v e l o p e d communities in the metropolitan area of Monterrey, including water supply and wastewater services, storm drainage, street paving, public lighting and electricity. NADB is looking to support similar sustainable urban development projects in the future.

Loan disbursements in 2010 totaled a record high of US$171.8 million, representing 88% of total disbursements for the year and a 27% increase

over the US$134.8 million disbursed in 2009. As a result of this activity, an estimated US$45 million in contracted loans were pending disbursement at year end. During the same period, the Bank received approximately US$12.1 million in principal payments, including the final payment of the

second loan contracted with the water utility in Tijuana, Baja California in June 2002, for the expansion and rehabilitation of the San Antonio de Los Buenos Sewage Treatment Plant. The table on page 3 provides a five-year summary of NADB lending activity.

Air Quality Paving Project, Nogales, SON

- 25,000 50,000 75,000

100,000 125,000 150,000 175,000 200,000 225,000

2006 2007 2008 2009 2010

Annual Growth in Lending Activity(US$ Thousands)

Commitments Disbursements

US$172 millionRecord loan disbursementsin 2010


California 0.1%

Texas 19.7%

Baja California 34.8%

Chihuahua 0.4% Coahuila

2.2%

Nuevo León 8.8%

Sonora 11.0%

Tamaulipas 23.2%

Oustanding Loan Portfolio

The Bank has maintained a strong and steady rate of growth, as evidenced by its loan portfolio. As of December 31, 2010, the Bank’s outstanding loan balance, without taking into account allowances for loan losses and the effect of foreign currency exchange rate adjustments, came to US$470.2 million, a 51% increase over 2009 (US$310.6 million) and a 492% increase from four years ago. This represents an average annual growth rate of 56% for the period from December 31, 2006 to December 31, 2010.

Between 2009 and 2010, the largest increase in the Bank’s portfolio came from loans for air quality improvement, which more than doubled in value from US$96.6 million to US$235.4 million during that 12-month period. While water and wastewater loans continue to outnumber air quality loans in the Bank’s loan portfolio at a ratio of three to one, the dollar amount of those loans tends to be smaller than that of loans aimed at reducing air pollution. Consequently, at the close of 2010, air quality projects constituted half of the Bank’s outstanding loan portfolio at 50% (US$235.4 million) followed by water and wastewater projects at 33% (US$153.4 million) and storm drainage projects at 16% (US$75.1 million). The remaining 1.4% was almost evenly divided between solid waste projects and renewable energy projects. In 2011, management is exploring projects in the clean and renewable energy sector, which can further diversify the Bank’s loan portfolio.

With respect to borrowers, the balance of outstanding loans held by governmental borrowers in 2010 remained relatively constant at 96%, compared to 94% in 2009. The value of loans held by U.S. borrowers increased from US$79.3 million in 2009 to US$92.8 million in 2010, as a result of the full disbursement of the water loan to El Paso, Texas. Nevertheless, because of the strong demand for loans in Mexico, the percentage of outstanding loans held by U.S. borrowers decreased from 25.5% in 2009 to 19.7% in 2010. Management expects loans to both U.S. borrowers and the private sector to increase in 2011, as more local governments and utilities turn to public-private partnerships to provide public services, and as the Bank moves forward in the renewable energy sector.

As a development bank, NADB offers below-market interest rate lending on a limited basis for municipal projects in the water and solid waste sectors, through its Low Interest Rate Lending Facility (LIRF). Given record low market conditions over the past couple of years, however, no new LIRF loans were made in 2009 and 2010. As of December 31, 2010, 86% of the Bank’s outstanding loans had been made at market rates, compared to just under 80% at the end of 2009.

2010 Outstanding Loan Portfolio DistributionUS$470.2 million

51% growth in outstanding loans over 2009

Water / Wastewater

32.6%

Air Quality 50.1%

Solid Waste 0.8%

Storm Water 16.0%

Clean Energy 0.6%

By Sector By State


GRANT PROGRAMS In addition to its loan program, NADB also provides and administers grant financing to help make municipal infrastructure projects more affordable for border communities. The largest and most successful program, the Border Environment Infrastructure Fund (BEIF), is fully funded by the U.S. Environmental Protection Agency (EPA) for the implementation of high-priority municipal drinking water and wastewater infrastructure projects. The Bank also established two grant programs funded from its retained earnings upon approval of its Board: the Solid Waste Environmental Program (SWEP) and the Water Conservation Investment Fund (WCIF). Since WCIF funding was fully committed in 2009, only the SWEP was active in 2010.

During 2010, NADB contracted US$36.3 million in grants. All of the grants were funded through

the EPA BEIF program, except for one SWEP grant for US$1 million. Although the total dollar amount contracted in 2010 is almost six times higher than in 2009 (US$6.4 million), more than half of the 2010 grants were actually approved in prior years (US$24.6 million). In 2010, five new grants totaling US$11.75 million were approved through the EPA-funded BEIF program. No new grants were approved through the SWEP. Table 2 provides details on the new grants approved and/or contracted during the past year.

Grant disbursements totaled US$24.5 million in 2010, representing 12% of total disbursements for the year. The majority of the grants disbursed in 2010 came from the EPA-funded BEIF (US$23.1 million), while the remainder was divided between the SWEP (US$0.67 million) and the WCIF (US$0.74 million).

South Wastewater Treatment Plant, Ciudad Juárez, CHIH

US$36.3 millionin new grant commitments in 2010


TABLE 2Grant Financing Activity in 2010(US$ Millions)

Community Benefitted Project Type Amount Date Approved* Date Contracted

EPA-Funded BEIF Grants1 Clint, TX WW $ 2.30 10-Dec-09 25-Feb-102 Playas de Rosarito, B.C. WW 2.20 21-Jul-09 23-Mar-103 Sonoyta, SON WW 0.81 16-Dec-08 12-Apr-104 Ciudad Juárez, CHIH1 WW 8.00 10-Dec-09 22-Apr-105 Ciudad Juárez, CHIH2 WW 8.00 10-Dec-09 26-Apr-106 Yuma County, AZ WW 2.25 10-Dec-09 26-Apr-107 El Millón, CHIH WW 0.44 4-May-10 24-Sep-108 Jesús Carranza, CHIH WW 0.44 4-May-10 24-Sep-109 Tres Jacales, CHIH WW 0.17 4-May-10 24-Sep-10

10 San Luis Río Colorado, SON WW 2.70 14-Apr-10 30-Sep-1011 Nogales, SON WW 8.00 1-Oct-10 23-Nov-10

Total BEIF: $ 35.31NADB-Funded SWEP Grants

1 Nogales, SON SW $ 1.00 18-Dec-09 28-May-10 Total SWEP: $ 1.00

Total Grants: $ 36.31

*All projects were certified on the same date on which the respective grant was approved.1- Construction of the South-South Wastewater Treatment Plant.2- Expansion of the South Wastewater Treatment Plant.

SW = Solid waste; WW = Wastewater

It is worth noting that at the end of the year a proposal to create a new grant program that would support projects sponsored by public entities in all environmental sectors eligible for NADB financing had been submitted to the Board for consideration. The proposal also calls for consolidating the Bank’s grant financing activity funded from its retained earnings under a single program and rolling any uncommitted SWEP funds into the new program.

Detailed information about each of the Bank's current grant programs is provided in the following section.

Sewage System, Yuma County, AZ


Los Alisos Wastewater Treatment Plant, Nogales, SON

Border Environment Infrastructure Fund

BEIF grants, which are fully funded by EPA, target municipal drinking water and wastewater infrastructure projects within 100 km of both

sides of the U.S.-Mexico border. In the case of Mexican projects, it should be noted that BEIF

funding is matched by Mexican grants, mainly through the federal water agency, Comisión Nacional del Agua (CONAGUA), which also plays an important role in the authorization of the projects in Mexico.

In 2010, US$35.3 million in new grants were contracted to support 11 wastewater collection and/or treatment projects, including the five grants

approved during the year. NADB is also providing loans totaling an estimated US$12.8 million as part of the financing package for three of those projects. Upon completion, these projects will increase wastewater treatment capacity by more than 41.4 million gallons a day (mgd) in Mexico.

At the close of 2010, 100% of all approved BEIF grants were contracted with the respective project sponsors, and 93% of the grant proceeds had been disbursed, leaving a balance of approximately US$41.4 million in contracted BEIF grants pending disbursement. Of the 89 projects funded by BEIF to date, 68 had been completed, including 15 that finished construction during 2010. Table 3 provides a summary of annual and cumulative BEIF activity since program inception.

86% of NADB grant financing to date has come from EPA

41.4 mgd in new wastewater treatment capacity in Mexico financed in 2010


Solid Waste Environmental Program

SWEP grants support the construction and equipment components of municipal solid waste projects, as well as the proper closure of dumpsites. Since its inception in 1999, the Board of Directors has allocated a total of US$13.5 million to this program from the Bank’s retained earnings. At the close of 2010, there was a balance of US$3.7 million in uncommitted funds.

In 2010, a US$1.0 million grant approved in December 2009 was contracted for the construction of a new transfer station and expansion of the sanitary landfill in Nogales, Sonora. This project is the second phase of a previous solid waste equipment project funded in 2007 with a US$2.4 million loan from NADB.

At the close of 2010, 100% of all approved SWEP grants were contracted for a total of US$9.8 million, and 86% of the grant proceeds totaling US$8.4 million had been disbursed for project implementation, leaving a balance of approximately US$1.4 million in contracted SWEP grants pending disbursement. Of the 16 projects funded with SWEP grants to date, 12 had been completed by year end.

14% of grant financing to date has come from NADB retained earnings

Solid Waste Transfer Station in Nogales, SON

TABLE 3Annual and Cumulative BEIF Activity(US$ Millions)

2010 Cumulative

EPA funding allocations* $ 13.84 $ 631.21

Approvals $ 11.75 $ 564.65 Signings $ 35.31 $ 564.65 Disbursements $ 23.09 $ 523.29 Cancellations** $ (3.34)

Contracted grants, not yet disbursed $ 41.35 Additional approvals, not yet contracted $ - Funding available for future projects $ 66.57

* Since program inception in 1997, EPA has allocated a total of US$657.2 million to this fund, including a nominal amount in interest earnings. Of that amount, approximately US$26 million has been set aside to cover NADB administrative expenses, leaving a balance of US$631.2 million for projects.

** Unused funds deobligated from five completed projects and returned to the BEIF program for future projects.


Water Conservation Investment Fund

This program, which was also funded out of the Bank’s retained earnings, was created by the Board of Directors in August 2002 to address an urgent need for water conservation financing in the border region. The Board made a one-time allocation of US$80 million for that purpose, with US$40 million specifically reserved for use in each country.

All of the funds allocated to this program had been fully committed by the close of 2009 to support 23 water conservation projects, and 92% of the funds (US$74.0 million) had been disbursed, leaving a balance of approximately US$6.0 million in contracted WCIF grants pending disbursement. Of those projects, 16 have been fully implemented and are in operation. As a result of all the projects funded under this program, more than 371,600 acre-feet of water is expected to be saved annually in the agriculture sector.

TECHNICAL ASSISTANCE & TRAININGIn addition to direct project financing, NADB also uses a small portion of its retained earnings to provide technical assistance and training to project

sponsors for the purpose of strengthening their financial performance and ensuring the long-term sustainability of their infrastructure. This assistance is provided through two programs: the Technical Assistance Program (TAP) and the Utility Management Institute (UMI).

Through the TAP, NADB provides grants to help finance studies related to the planning and design of environmental infrastructure works, as well as for capacity-building measures aimed at achieving the effective and efficient operation of public services. During 2010, five studies were completed, including the preliminary design work for the expansion of the water and sewer systems and the rehabilitation of Water Treatment Plant No. 2 in Matamoros, Tamaulipas. In addition, technical assistance totaling US$218,000 was approved for two studies, including additional funding for a study on transferring water usage rights from clean water to treated wastewater in the Juarez Valley. At the close of the year, technical assistance grants totaling US$2.9 million were committed to the development of 12 studies currently in process.

Through the UMI, NADB offers an annual series of seminars aimed at providing practical instruction in

Seminar on Environmental Solutions for Paving, Tijuana, BC

US$26.4 million Total expended for technical assistance & training since inception


the financial administration and planning of water utilities, both at its headquarters in San Antonio, Texas, as well as on site to regional groups. For utility professionals who complete the basic program, UMI offers opportunities for ongoing education through specialized graduate sessions.

In 2010, UMI concluded its 11th year of seminars, training a total of 72 water utility professionals, representing 40 border communities, through its basic management program. These sessions included three on-site training programs presented to regional groups in Yuma, Arizona; El

Paso, Texas and Hermosillo, Sonora. One intensive seminar covering the basic elements for planning and managing infrastructure projects was also presented in San Antonio, Texas, to 18 utility professionals, representing nine Mexican communities.

Under the auspices of UMI, NADB has also been promoting other types of environmental infrastructure projects with state and local officials through one-day seminars focused on developing and financing projects in areas such as energy efficiency in public lighting and air quality improvement through street paving. In 2010, NADB organized two one-day seminars to provide information on practical and proven financing structures for air quality paving projects involving state and local governments, the private sector and local residents. A total of 38 officials from 15 different communities attended the first seminar held in May in Monterrey, Nuevo León. The second, held in September in Tijuana, Baja California, welcomed 44 officials from nine communities.

As part of its technical assistance and training programs, NADB develops and publishes informational manuals, including a series of applied research documents designed to strengthen the management practices of public utilities. In August 2010, NADB issued its eighth study on water utility management entitled "Principios Gerenciales y Eficiencia Operativa de los Servicios del Agua: Los Casos de Saltillo, Tijuana y Monterrey” (Management Principles and Operational Efficiency in Water Services: Case Studies of Saltillo, Tijuana and Monterrey). Developed by the Mexican research facility, Colegio de la Frontera Norte (COLEF) and published only in Spanish, the study identifies the management models used by three successful water utilities in Mexico, analyzes their organizational principles and values, and proposes a series of recommendations for creating a successful organizational model that can be used by other utilities to help improve daily performance. This and all previous studies are available on the Bank’s website.

For more information about the Bank’s financing and technical assistance programs, as well as the 2011 schedule of UMI seminars, visit our website at www.nadb.org.

234 individuals received training through UMI in 2010

Principios Gerenciales y Eficiencia Operativa de los Servicios del Agua: Los casos de Saltillo, Tijuana y Monterrey

dministration and FinancesAMANDATE & GOVERNANCENADB is a binational financial institution established by the governments of the United States and Mexico for the purpose of financing the development and implementation of infrastructure projects that enhance environmental conditions, promote sustainable development and improve the quality of life of people living in the border region between the two countries. The scope of the Bank’s mandate—including the geographic jurisdiction and environmental sectors in which it may operate—as well as its functions and limitations are defined in an agreement between the two governments (the “Charter”).

Under the Charter, NADB is charged with providing financing to public and private entities for projects certified by its sister organization, BECC. Pursuant to this mandate, the two institutions work closely with local entities and other border stakeholders to develop, finance and build affordable and self-sustaining projects with broad community support.

NADB is governed by a ten-member Board of Directors comprised of three representatives from each federal government, a representative of a border state from each country, and a representative of the general public who resides in the border region from each country. The chairmanship alternates between the U.S. and Mexico each year. All powers of NADB are vested in the Board of Directors, which determines policy within the framework of the Charter and approves all its operations and programs, including financing proposals with NADB funds.

Geographic JurisdictionEligible projects must be located:

ꕻ Within 100 km (about 62 miles) north of the international boundary in the four U.S. states of Arizona, California, New Mexico, and Texas; or

ꕻ Within 300 km (about 186 miles) south of the border in the six Mexican states of Baja California, Chihuahua, Coahuila, Nuevo León, Sonora, and Tamaulipas.

Projects beyond these areas may be eligible if they remedy a transboundary environmental or health problem.

Water: Potable water supply, wastewater treatment & reuse, water conservation, storm drainage

Waste management: Sanitary landfills, collection & disposal equipment, dumpsite closure, recycling

Air quality: Street paving & bypasses, ports of entry, public transportation, methane capture, industrial emissions

Cleaner/renewable energy:

Solar, wind, biogas, biofuels, hydroelectric, geothermal

Energy efficiency: Industrial equipment retrofits, public lighting & building upgrades

Industrial/hazardous waste: Treatment & disposal facilities, industrial site remediation

Eligible Environmental Sectors


Board of Directors in 2010United States Mexico

Secretary of the Treasury*Timothy F. Geithner

Secretary of Finance and Public CreditErnesto Javier Cordero Arroyo

Secretary of StateHillary Rodham Clinton

Secretary of Foreign RelationsPatricia Espinosa Cantellano

Administrator of the Environmental Protection Agency

Lisa Jackson

Secretary of the Environment andNatural Resources

Juan Rafael Elvira Quesada

U.S. Border State RepresentativeLorenzo A. Larrañaga

Mexican Border State RepresentativeGovernor José Guadalupe Osuna Millán

U.S. Border Resident RepresentativeVacant

Mexican Border Resident RepresentativeRoberto Zambrano Villarreal

* Board chair, 2010

Under the direction of the Board, the business of the Bank is conducted by the Managing Director and Deputy Managing Director, who oversee its daily operations, as well as develop its current and long-range objectives, policies and procedures. In carrying out these functions, they are assisted by a staff of about 50 employees.

The offices of Managing Director and Deputy Managing Director alternate between nationals of the two member countries every five years, with each office represented by a different country at all times. In October 2010, Jorge C. Garcés, a U.S. citizen, concluded his five-year term as Managing Director, and the Board of Directors appointed Gerónimo Gutiérrez, a Mexican national, to succeed him. At the same time, Héctor Camacho, who had served as Deputy Managing Director since May 2007, resigned to accept the position of Chief Financial Officer. In December 2010, the Board named Alex Hinojosa, a U.S. citizen, as the new Deputy Managing Director, effective as of January 1, 2011.

NADB’s headquarters are located in San Antonio, Texas. In addition, it has established a non-regulated, multi-purpose financial institution in Mexico—known by its acronym as COFIDAN—to channel its loans to state and local public entities in that country.

NADB ManagementGerónimo Gutiérrez

Managing Director and Chief Executive Officer

NADB Directors

Oscar Cabra, Jr., P.E. Director of Technical Services

Héctor Camacho Chief Financial Officer

Lisa A. Roberts General Counsel

José Ruiz Director of Project Development

Henry E. Sauvignet Director of Administration

Juan Antonio Flores Associate Director of Public Affairs


FUNDING RESOURCESCapital Resources

The total authorized capital of NADB is US$3 billion with equal commitments from its two member countries, the United States and Mexico. Each government authorized the subscription of 150,000 shares of the Bank’s capital stock with a par value of US$10,000 per share. As of May 2009, each government had completed its subscription of authorized capital stock of the Bank: US$225 million in paid-in capital and US$1.275 billion in callable capital.

Fifteen percent of NADB’s authorized capital is in the form of paid-in capital, with the remaining eighty-five percent being callable capital. Paid-in capital (US$450 million) consists of cash funds contributed to NADB by the two governments. Callable capital (US$2.55 billion) is composed of funds that must be provided to NADB by the two governments if required to meet its outstanding debt obligations or guaranties on project loans. Callable capital may not be used to make loans and constitutes, in effect, backing for the Bank’s outstanding indebtedness and guaranties.

As set forth in its Charter at inception, 90% of NADB’s authorized capital is used to finance environmental infrastructure projects in the border region (the “environmental program”), and 10% of the capital subscribed by each country went to finance community adjustment and investment throughout the United States and Mexico in support of the purposes of the North American Free Trade Agreement (NAFTA) (the “domestic programs”). Therefore, of US$450 million in paid-in capital, US$405 million relates to NADB's environmental financing program and US$45 million to the domestic programs for community adjustment and investment.

The paid-in capital for the domestic programs was divided equally between the two countries with each receiving US$22.5 million for its respective program. The balance of paid-in capital and related earnings for the Mexican domestic program was subsequently transferred to the Mexican federal government as of June 1999. In the case of the U.S. domestic program, NADB continues to hold

and administer the balance of its paid-in capital, related earnings and grant appropriations as instructed by its Finance Committee; therefore, its accounts are reported and included with those of NADB’s environmental program. Nevertheless, the U.S. domestic program’s operations and allocated capital funding are completely independent of the Bank’s environmental program, and any net income earned by the program and its profits, losses, expenses and disbursements do not affect the Bank’s retained earnings or paid-in capital nor would any of the domestic program’s net income be available to support the Bank’s obligations, including those under any of the Bank’s debt securities or other borrowings. For more information about the U.S. Domestic Program, see “Domestic Programs” at the end of this section.

Reserves

The Bank maintains general and special reserves to cover operating expenses and offset any unexpected losses on outstanding loans or pay expenses relating to the enforcement of the Bank’s rights under outstanding loan and guaranty agreements. The General Reserve is funded in an amount equal to the net income of NADB, after any required deposit to the Special Reserve, plus transfers from paid-in capital for the U.S. domestic program. As of December 31, 2010 and 2009, the General Reserve balance was US$79.63 million and US$68.83 million, respectively, with approximately US$71.24 million and US$57.96 million, respectively, relating to the Bank’s environmental program, while the remaining balances of US$8.39 million and US$10.86 million, respectively, represented the allocated paid-in capital and retained earnings of the U.S. domestic program.

The Special Reserve is available to offset losses on any loan or guaranty and to pay expenses relating to the enforcement of the Bank's rights under outstanding loans and guaranty agreements. As of December 31, 2010 and 2009, the special reserve balance was US$14.67 million and US$10.47 million, respectively, with approximately US$14.56 million and US$10.35 million, respectively, relating to the Bank’s environmental program. Special reserves allocated to the U.S. domestic program were US$0.11 million as of December 31, 2010 and US$0.12 million as of December 31, 2009.


These reserves are distinct from the Bank’s allowance for expected loan losses, which as of December 31, 2010 and 2009 totaled US$5.76 million and US$4.86 million, respectively. Of those amounts, US$0.04 million was allocated to the U.S. domestic program at those dates; while the remaining balances of US$5.72 million and US$4.82 million, respectively, were available to offset any potential losses on loans made by the Bank under the environmental program.

NADB also maintains a portfolio of liquid investments to ensure that it can meet its obligations to disburse loans, satisfy its operating liabilities at all times and has sufficient cash flows to cover its operational needs. NADB’s liquid asset portfolio totaled US$203.77 million as of December 31, 2010. Based on a 12-month projection of debt service, operating expenses and loan disbursements, the Bank has established a minimum liquidity balance of US$50 million for the 2011 fiscal year.

Borrowings

In February 2010, the Bank placed its first debt issuance—10-year non-amortizing notes in the amount of US$250 million, due February 11, 2020. The proceeds from the debt are being used to fund the Bank’s lending activities under its environmental program. The notes bear interest at the rate of 4.375% per annum, payable semiannually. A portion of this fixed-rate debt was hedged through an interest rate swap that effectively changed it to a floating rate. For the year ended December 31, 2010, the Bank paid interest expenses of US$5.47 million on its outstanding debt. As of the same date, the Bank had US$256.42 million in outstanding indebtedness on its balance sheet, net of discount and fair value of the hedged item.

FINANCIAL OPERATIONSResults of Operations

NADB's administrative operations are financed with income from lending operations and earnings on investments from paid-in capital, while NADB-funded grant activities are financed from designated retained earnings accumulated in past years. Income from the environmental program before grant disbursements for the financial years ended December 31, 2010 and 2009 was US$19.61 million and US$16.02 million, respectively. Net income for the same periods after all operating, interest and grant program expenses was US$17.49 million and US$10.33 million, respectively.


Program Expenditures

NADB uses a portion of its retained earnings to finance its grant and technical assistance programs. These funds are designated by the Board as needed and subject to availability. For fiscal years 2010 and 2009, US$0.45 million and US$2.26 million, respectively, from retained earnings were allocated to the technical assistance and training program. No new funding was allocated for grant financing during those same years. Grant disbursements for studies, training and project implementation for the years ended December 31, 2010 and 2009 came to US$2.12 million and US$5.70 million, respectively. A breakdown of grant disbursements by program is shown in Table 5.

TABLE 5Grant Disbursements under the Environmental Program(US$)

For the Years Ended12/31/2010 12/31/2009

Expense CategoryPersonnel $ 4,697,500 $ 4,430,887 Administration 1,137,572 1,017,348 Consultants and contractual services 866,835 1,056,797

Total $ 6,701,907 $ 6,505,032 * These figures are prepared in accordance with budgetary accounting of expenditures.

The main source of income for the Bank is interest earnings on its outstanding loan portfolio and investment holdings. For the year ended December 31, 2010, total interest income under the environmental program, was US$26.39 million as compared to US$19.71 million for the year ended December 31, 2009, representing an increase of 33.8% for the 12-month period. This increase is mainly attributable to the strong growth of the Bank’s loan portfolio in 2010, which is expected to continue as the Bank expands into the renewable energy sector.

Retained earnings under the environmental program totaled US$57.96 million as of December 31, 2009, and 32.4% of this amount (US$18.80 million) was designated to specific grant programs. During 2010 retained earnings grew by almost 22.9%, to a total of US$71.25 million, with 23.9% (US$17.02 million) designated to specific grant programs at year end.

Operational Expenditures

The annual operating budget for the environmental program is developed by Bank staff and reviewed and approved by the Board of Directors. For fiscal year 2010, the Board authorized an operating budget of US$7.13 million. Despite the significant growth of its loan portfolio, actual operating expenditures for the year ended December 31, 2010, totaled US$6.70 million, a savings of 6% under the approved budget and just 3% over the amount expended the previous year. A breakdown of operational expenses by category is shown in Table 4.

TABLE 4Operational Expenditures for the Environmental Program*(US$)

For the Years Ended12/31/2010 12/31/2009

Program Technical Assistance Program $ 360,331 $ 1,456,637 Utility Management Institute 343,123 364,194 Solid Waste Environmental Program 673,248 3,119,687 Water Conservation Investment Fund 744,025 757,108

Total $ 2,120,727 $ 5,697,626


RISK MANAGEMENTIn general, NADB manages the risks inherent in its lending activities by ensuring that the projects it finances meet certain economic and feasibility criteria and by requiring some form of credit support, in many cases, in the form of governmental revenue. NADB’s commercial risk is limited by its liquidity and investment policies. To mitigate its exchange rate risk, the Bank hedges its exposure through cross-currency interest rate swaps with respect to its peso-denominated loans. The Bank uses derivatives for the sole purpose of managing and protecting its assets and liabilities, and does not engage in any use of derivatives for speculative purposes.

In 2010, NADB was assigned a credit rating of Aaa by Moody’s Investor Service and AA+ by Standard & Poor’s.

DOMESTIC PROGRAMSAs outlined in the Charter, ten percent of NADB’s capital was designated for community adjustment and investment programs in the two countries. Each country has independently developed a domestic program within this framework to address its specific needs. Unlike the environmental program, the projects funded under these programs are not limited to communities located within the border zone and do not require BECC certification.

United States

The U.S. domestic program, which is entitled Community Adjustment and Investment Program (USCAIP), is designed to assist communities and the private sector in creating new jobs and preserving existing jobs in areas adjusting to changes in their economies as a result of NAFTA. USCAIP operates under the direction of a Finance Committee that is comprised of representatives of the U.S. Departments of the Treasury, Agriculture (USDA), and Housing and Urban Development (HUD), and the U.S. Small Business Administration (SBA), along with other agencies selected by the Department of the Treasury, which serves as Finance Committee chair.

NADB invests and disburses USCAIP funds under the direction of the Finance Committee, which is responsible for endorsing all financing decisions under USCAIP. In addition to making direct loans from its capital, the U.S. government expanded the program in October 1998 to include grants funded with congressional appropriations totaling US$13.43 million, all of which were fully allocated to projects in 1999 and 2000.

In January 2009, the Finance Committee determined that the best way to use the remaining USCAIP capital and have the greatest possible impact on USCAIP eligible communities would be principally through a Targeted Grant Program. Targeted grants may be awarded to entities with a proven capacity to manage grant funds, projects ready to be implemented, and the ability to create or preserve additional private sector jobs in designated eligible areas.

In 2010, four grants totaling US$1.45 million were awarded under the USCAIP Targeted Grant Program. A summary of these grant awards is provided in Table 6.

Rio Grande Valley Microloan Initiative headquarters for ACCION Texas, Inc.; a USCAIP grant recipient


TABLE 62010 Grant Awards under the USCAIP Targeted Grant Program

Grant Recipient Amount (US$)

Projected Job Creation

CDC Small Business FinanceSan Diego, CaliforniaTo establish a revolving loan program to provide low-interest, working capital loans for business creation and expansion in the DEA of San Diego, Imperial, Riverside, Maricopa, Pima, Pinal and Yuma Counties

$500,000 75 full-time, private-sector jobs

Desert Alliance for Community Empowerment Coachella, CaliforniaTo develop a multi-purpose commercial space in the DEA of Riverside County, CA


Western Upper Peninsula Planning and Development Region Houghton, MichiganTo conduct an energy alternative scoping study for a local business in the DEA of Gogebic County, MI


Western Upper Peninsula Planning and Development RegionHoughton, MichiganTo develop a business plan and create a crop supply for a local business in the DEA of Gogebic and Ontonagon Counties, MI


* DEA = Designated Eligible Area(s)

Since its inception, US$8.31 million in loans and US$18.85 million in grants have been authorized under USCAIP for 60 projects in over 41 communities in 19 states. Of those funds, all of the loans and US$15.67 million of the grants have been disbursed to project sponsors. As of December 31, 2010, USCAIP had an outstanding loan balance of US$3.82 million.

USCAIP also supports qualifying loans and loan guarantees provided by the SBA and USDA for businesses in USCAIP-eligible communities. Through these agency programs, USCAIP has helped support more than US$500 million in loan transactions, which are contributing to the creation or preservation of more than 15,000 jobs.

Expenditures directly related to the operation of the Los Angeles and San Antonio offices of the U.S. domestic program are paid out of its capital funds. Actual expenditures for the fiscal years ended December 31, 2010 and 2009 totaled US$416,844 and US$441,912, respectively.

For more information on USCAIP projects and funding, visit www.nadbank-caip.org.

Mexico

The Mexican domestic program, which is entitled Programa Complementario de Apoyo a Comunidades y Empresas (Mexican CAIP), is designed to support basic infrastructure development throughout Mexico, as well as to help communities and businesses benefit from NAFTA. In June 1996, the Mexican federal government, through the Ministry of Finance and Public Credit (SHCP), entered into a mandate agreement with the Mexican federal development bank, Banco Nacional de Obras y Servicios Públicos, S.N.C. (Banobras) to operate the program and administer its funds. Consequently, NADB does not track or report on Mexican CAIP activities. For more information about the Mexican CAIP program, contact Banobras directly.

Consolidated Financial Statements and Supplemental Information

North American Development BankYears Ended December 31, 2010 and 2009With Report of Independent Auditors

eport of Independent AuditorsR

The Board of DirectorsNorth American Development Bank:

We have audited the accompanying consolidated balance sheets of North American Development Bank (the Bank) as of December 31, 2010 and 2009, and the related consolidated statements of income, changes in equity, and cash flows for the years then ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Bank’s internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Bank’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of North American Development Bank at December 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for the years then ended in conformity with U.S. generally accepted accounting principles.

Our audits were conducted for the purpose of forming an opinion on the financial statements taken as a whole. The supplemental information is presented for purposes of additional analysis and is not a required part of the financial statements. Such information has been subjected to the auditing procedures applied in our audits of the financial statements and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as whole.

Ernst & Young LLP

March 31, 2011


December 312010 2009

AssetsCash and cash equivalents:

Held at other financial institutions in demand deposit accounts $ 215,717 $ 62,343 Held at other financial institutions in interest bearing accounts 39,940,587 38,202,868Repurchase agreements 3,000,000 3,200,000

43,156,304 41,465,211

Held-to-maturity investment securities, at amortized cost 53,523,294 3,653,538 Available-for-sale investment securities, at fair value 182,516,403 132,258,881

Loans outstanding: 474,034,861 314,545,485 Allowance for loan losses (5,759,639) (4,859,638) Foreign currency exchange rate adjustment and fair value of hedged items (7,183,183) (23,241,182)

Net loans outstanding 461,092,039 286,444,665

Interest receivable 7,107,253 3,154,537 Grant and other receivable 329,414 1,419,471 Furniture, equipment, and leasehold improvements, net 148,197 182,339 Other assets 15,051,451 33,139,327 Total assets $ 762,924,355 $ 501,717,969

Liabilities and equityLiabilities:

Accounts payable $ 246,520 $ 536,331 Accrued liabilities 251,393 608,395 Accrued interest payable 4,519,377 – Undisbursed grant funds 1,270 105,248

Notes payable, net of discount and fair value of hedged item 256,424,301 –Total liabilities 261,442,861 1,249,974

Equity:Paid-in capital 405,000,000 405,000,000 General Reserve:

Allocated paid-in capital 8,695,322 10,935,510 Retained earnings:

Designated 16,715,971 18,726,950 Undesignated 54,222,885 39,162,713

Special Reserve 14,670,080 10,465,593 Accumulated other comprehensive income 2,171,068 16,171,175 Minority interest 6,168 6,054

Total equity 501,481,494 500,467,995 Total liabilities and equity $ 762,924,355 $ 501,717,969

The accompanying notes are an integral part of these consolidated financial statements.

onsolidated Balance SheetsC


onsolidated Statements of IncomeCYears Ended December 31

2010 2009Income:

Interest:Investment income $ 5,888,012 $ 8,361,254 Loan income 20,689,910 11,566,496

Gains on sales of available-for-sale investment securities, net 5,513,905 3,557,090

Fee income 20,661 12,537

Other 508,003 590,064

Total revenues 32,620,491 24,087,441

Operating expenses:

Personnel 4,697,500 4,430,887

Consultants 986,835 1,191,797

General and administrative 774,009 668,685

Operational travel 236,247 210,728

Depreciation and amortization 55,455 53,580 Provision for loan losses 900,000 800,000

Relocation 73,086 15,206

Other 1,011,308 475,017

U.S. Domestic Program 416,844 441,912

Total operating expenses 9,151,284 8,287,812

Interest expense 4,094,686 –

Income before program activities 19,374,521 15,799,629

Program activities:

U.S. Environmental Protection Agency (EPA) grant income 1,758,468 1,755,135

EPA grant administration expense (1,758,468) (1,755,135)

Technical Assistance Program expense (703,454) (1,820,831)

Solid Waste Environmental Program expense (673,248) (3,119,687)

Water Conservation Investment Fund expense (744,025) (757,108)

Net program expenses (2,120,727) (5,697,626)

Income before minority interest 17,253,794 10,102,003

Net income attributable to minority interest 114 58

Net income attributable to NADB $ 17,253,680 $ 10,101,945



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onsolidated Statements of Cash FlowsCYears Ended December 31

2010 2009

Cash flows from operating activities:

Net income $ 17,253,680 $ 10,101,945

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 55,455 53,580

Amortization of net premium (discount) on investments 360,000 160,515

Change in fair value of swaps 1,070,234 446,842

Minority interest 114 58

Gain on sales of available-for-sale investment securities, net (5,513,905) (3,557,090)

Provision for loan losses 900,000 800,000

Change in other assets and liabilities:

Increase in interest receivable (3,952,716) (435,158)

Increase in receivable and other assets (382,465) (140,987)

Increase (decrease) in accounts payable (289,811) 207,724

Increase (decrease) in accrued liabilities (357,002) 22,393

Increase in interest payable 4,519,377 –

Net cash provided by operating activities 13,662,961 7,659,822

Cash flows from lending, investing, and development activities:Capital expenditures (23,410) (47,830)Loan principal repayments 12,783,553 11,249,971 Loan disbursements (172,272,929) (135,527,266)Purchase of held-to-maturity investments (55,887,371) (2,130,000)Purchase of available-for-sale investments (430,630,650) (32,904,397)Proceeds from maturities of held-to-maturity investments 6,036,000 1,603,000 Proceeds from sales and maturities of available-for-sale investments 381,019,605 95,162,825 Net cash used in lending, investing, and development activities (258,975,202) (62,593,697)

Cash flows from financing activities:Proceeds from note issuance 249,347,500 – Capital contributions – 27,996,786 Grant funds from the Environmental Protection Agency (EPA) 25,738,814 48,978,457 Grant disbursements – EPA (25,742,547) (48,974,964)Grant activity – U.S. Domestic Program (2,340,433) (575,498)Net cash provided by financing activities 247,003,334 27,424,781

Net increase (decrease) in cash and cash equivalents 1,691,093 (27,509,094)Cash and cash equivalents at January 1, 2010 and 2009 41,465,211 68,974,305 Cash and cash equivalents at December 31, 2010 and 2009 $ 43,156,304 $ 41,465,211

Supplemental cash information:Cash paid during the year for interest $ 5,468,750 $ –

Significant noncash transactions:Foreign currency translation adjustment $ 16,391,288 $ 9,891,313 Change in fair value of cross-currency interest rate swaps $ (25,881,374) $ (21,924,930)Change in fair value of available-for-sale investments $ (4,489,044) $ (1,485,839)



1. Organization and Purpose

The North American Development Bank (the Bank) was established by an agreement between the governments of the United States of America (the United States or U.S.) and the United Mexican States (Mexico) that was signed by their respective Presidents on November 16 and 18, 1993 (the Charter). The Bank was created to finance environmental infrastructure projects in the U.S.-Mexico border region (the International Program) and community adjustment and investment projects throughout the U.S. and Mexico in support of the purposes of the North American Free Trade Agreement (NAFTA) (the Domestic Programs). On March 16, 1994, the President of the United States issued an Executive Order designating the Bank an International Organization under the International Organization Immunities Act.

The Bank began its operations on November 10, 1994, with initial capital subscriptions by the United States and Mexico. The Bank is governed by a Board of Directors appointed by the two countries. The Bank’s operations are subject to certain limitations outlined in the Charter, as amended on August 6, 2004. The amended charter includes expanding the geographic jurisdiction of the International Program from 100 to 300 kilometers in Mexico, as well as allowing the Bank to provide a limited amount of grants from its paid-in capital.

Under its International Program, the Bank provides loan and grant financing and technical assistance for environmental infrastructure projects certified by the Border Environment Cooperation Commission (BECC), as appropriate, and administers grant funding provided by other entities. Under the Domestic Programs, the Bank contributed funds from its equity to establish the program of each country, and it continues to administer the funds of the U.S. Domestic Program (see Note 8).

On June 2, 1998, the Bank’s Board of Directors adopted a resolution authorizing the Bank to establish a Sociedad Financiera de Objeto Limitado (SOFOL) for the purpose of facilitating Bank lending to the Mexican public sector. In January 1999, the Corporación Financiera de América del Norte, S.A. de C.V. SOFOL (COFIDAN) began operations in Mexico City, and in October 2006, COFIDAN was converted

from a SOFOL to a non-regulated, multipurpose financial institution (SOFOM, E.N.R.), and its name was modified to Corporación Financiera de América del Norte, S.A. de C.V. SOFOM E.N.R. As of December 31, 2010, COFIDAN is 99.88% owned by the Bank and 0.12% owned by the Mexican government. The accounts of COFIDAN are consolidated with the Bank, and all material intercompany accounts and transactions are eliminated in the consolidation. The minority interest reflected in the consolidated balance sheets and consolidated income statements represents the ownership of the Mexican government through the Ministry of Finance and Public Credit (SHCP).

The Bank is located in San Antonio, Texas. An additional office has been established in Los Angeles, California, to assist the United States in administering the U.S. Domestic Program.

2. Summary of Significant Accounting Policies

Basis of Presentation and Use of Estimates in Financial Statements

The financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (GAAP). The financial statements are presented in a manner consistent with that of an international organization. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. These estimates include investments, allowance for loan loss, the fair value of derivative instruments included in other assets, and notes payable. Actual results could differ from those estimates.

Principles of Consolidation

The consolidated financial statements include the accounts of the Bank and its subsidiary (COFIDAN). All significant intercompany accounts and transactions have been eliminated.

December 31, 2010 and 2009otes to Consolidated Financial StatementsN


2. Summary of Significant Accounting Policies (continued)

Cash and Cash Equivalents

For purposes of the statement of cash flows, all highly liquid investments with an original maturity of three months or less are considered to be cash equivalents.

Repurchase Agreements

The Bank has entered into agreements with two major financial institutions to purchase various U.S. government and federally sponsored agency securities under an agreement to resell. The purchase and resale of these securities occur daily, and the obligation to repurchase is backed by the assets of the related financial institutions. The underlying securities related to the repurchase transaction are held in the possession of the respective financial institutions.

Investment Securities

The Bank’s investments are classified into the following categories:

Held-to-maturity – This category is composed of those debt securities for which the Bank has the positive intent and ability to hold to maturity. These securities are carried at amortized cost.

Trading – This category is composed of debt securities that are bought and held for resale in the near term. These securities are carried at fair value, and changes in market value are recognized in the income statement.

Available-for-sale – This category is composed of debt securities that are not classified as either trading or held-to-maturity securities. These securities are carried at fair value, with unrealized holding gains and losses excluded from earnings and reported as a net amount in a separate component of comprehensive income or loss until realized.

The accretion of discounts and the amortization of premiums are computed using the interest method. Realized gains and losses are determined using the specific identification method. Investments in a loss position are reviewed in order to determine whether the unrealized loss, which is considered an impairment, is temporary or other-than-temporary. In the event of other-than-temporary impairment, the cost basis of the investment would be written down to its fair value, and the credit component of the loss would be included in current earnings. The Bank had no securities classified as other-than-temporarily impaired as of December 31, 2010 and 2009.

Taxation

As an international organization, the Bank is exempt from all federal, state, and local taxation to the extent implemented by law under the U.S. International Organizational Immunities Act of 1945.

Furniture, Equipment, and Leasehold Improvements

Furniture and equipment are recorded at cost and depreciated over their estimated useful lives using the straight-line method. The estimated useful life is three years for computers and five years for furniture and equipment. Leasehold improvements are recorded at cost and amortized over five years or the life of the lease, whichever is less.

otes to Consolidated Financial StatementsN



General Reserve

The Board of Directors of the Bank defines the general reserve as retained earnings plus allocated paid-in capital for the Domestic Programs, as described in Note 8.

Special Reserve

The Board of Directors defines the special reserve in the equity section to be 3% of the balance of disbursed loans, 1% of the undisbursed loan commitments, and 3% of the balance of guaranties, if any. The special reserve is established by transfers in from retained earnings. Amounts in the special reserve are to be used to pay costs associated with the enforcement of the Bank’s rights under its loan and guaranty agreements, and to offset losses on any loan or guaranty.

Loans and Allowance for Loan Losses

Loans are reported at the principal amount, net of allowance for loan losses. Interest income on loans and commitment fees are recognized in the period earned.

Loans that are past due 90 days or more as to principal or interest, or where reasonable doubts exist as to timely collection, including loans that are individually identified as being impaired, are generally classified as nonperforming loans unless well secured and in the process of collection.

Loans are generally placed in nonaccrual status when principal or interest is delinquent for 180 days (unless adequately secured and in the process of collection) or circumstances indicate that the full collection of principal and interest is in doubt. When a loan is placed in nonaccrual status, accrued interest deemed uncollectible is either reversed (if current-year interest) or charged against current-year interest (if prior-year interest).

Payments received on nonaccrual loans are generally applied to the recorded investment in the loan asset. If collection of the recorded investment in the

loan is fully expected and the loan does not have a remaining unrecovered prior charge-off associated with it, payments are recognized as interest income. Nonaccrual loans may be returned to accrual status when contractual principal and interest are current, prior charge-offs have been recovered, the ability of the borrower to fulfill the contractual repayment terms is fully expected, and the loan is not classified as“doubtful” or “loss.” If previously unrecognized interest income exists upon reinstatement of a nonaccrual loan to accrual status, interest income will only be recognized upon receipt of cash payments applied to the loan.

In cases whereby a borrower experiences financial difficulties and the Bank makes certain monetary concessions to the borrower through modifications of the contractual terms of the loan, the loan is classified as a restructured troubled loan. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan is classified as a nonaccrual loan.

The allowance for loan losses is a valuation account used to reasonably estimate loan losses incurred as of the financial statement date. Determining the appropriate allowance for loan losses involves significant judgment about when a loss has been incurred and the amount of that loss. The determination of the allowance for loan losses is based on management’s current judgments about the credit quality of its loan portfolio. A specific allowance may be established for impaired loans. Impairment of these loans is measured based on the present value of expected future cash flows, discounted at the loan’s effective interest rate, or fair value of the collateral if the loan is collateral-dependent.

The allowance for loan losses is maintained at a level considered adequate by management to provide for probable and estimable losses inherent in the loan portfolio. The allowance is increased through provisions for loan losses and is decreased through reversals of provision for loan losses and loan charge-offs.

Program Activities

Program income represents reimbursed administrative expenses associated with the U.S. Environmental Protection




Agency (EPA) grant activities. Such amounts are earned and recognized as program income in the accompanying consolidated statements of income as the associated expenses are incurred.

Program expenses include grant disbursements made by the Bank and administrative costs associated with EPA grant activities. Grants are recognized at the date the Bank becomes obligated under the terms of the grant agreements and associated costs are recognized as incurred. EPA and U.S. Domestic Program grant receipts and disbursements reflected in the consolidated statements of cash flows are not reflected in the accompanying consolidated statements of income, as these grants are approved and funded by the respective entities noted above. The Bank’s role is to administer these funds.

Foreign Currency

COFIDAN is located in Mexico and operates primarily using the local functional currency. Accordingly, all assets and liabilities of COFIDAN are translated using the exchange rate in effect at the end of the period, and revenues and costs are translated using average exchange rates for the period. The resulting cumulative translation adjustment is included in accumulated other comprehensive income (loss).

The Bank’s lending activities include making loans that are denominated in Mexican pesos. For such loans, the Bank enters into cross-currency interest rate swaps (swaps) that mitigate its exposure to fluctuations in foreign currency exchange rates and interest rates. Since October 1996, the swap counterparty has been Fondo de Apoyo a Estados y Municipios (FOAEM), a fund owned by the government of Mexico and administered by the federally run development bank, Banco Nacional de Obras y Servicios Publicos, S.N.C (Banobras). In July 2009, the Bank entered into a direct relationship with Banobras to serve as the swap counterparty, outside the FOAEM arrangement. In July 2010, the Bank entered into a direct relationship with another financial institution as the swap counterparty. The foreign currency translation adjustment on loans denominated in Mexican pesos as of December 31, 2010 and 2009, was ($6,849,894) and ($23,241,182), respectively.

All swaps relating to the Bank’s lending activities have been designated as cash flow or fair value hedges and recognized in the accompanying consolidated balance sheets at their fair value. Changes in the fair value of the cash flow hedges are reported in other comprehensive income, and are reclassified to earnings at the time of the hedged loan repayment. Changes in the fair value of the fair value hedges are reported in other expenses. At December 31, 2010 and 2009, the fair value of these hedges was reported as other assets of $6,560,128 and $33,139,327, respectively, in the accompanying consolidated balance sheets.

The Bank discontinues hedge accounting prospectively if it determines that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of the hedged item, or if it is no longer probable that the hedged loan repayment will occur. If hedge accounting is discontinued because the hedge ceases to be effective, the Bank will continue to record the swap at fair value with changes in value reflected in earnings, and any fair value adjustments included in other comprehensive income will be recognized in the income statement over the remaining life of the loan. If it is probable that the hedged loan repayments will not occur, gains and losses accumulated in other comprehensive income (loss) are recognized immediately in earnings.

Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.




The Bank carries cross-currency interest rate swaps, interest rate swaps, and available-for-sale debt securities at fair value. The Bank determines the fair market values of its financial instruments based on the fair value hierarchy, which requires an entity to maximize the use of observable inputs based on market data obtained from sources independent of the reporting entity and minimize the use of unobservable inputs based on the reporting entity’s own assumptions about market participant assumptions developed on the best information available in the circumstances. The three levels of inputs that may be used to measure fair value are:

Level 1 – Quoted prices in active markets for identical assets or liabilities, which the reporting entity has the ability to access at the measurement date. This category generally includes U.S. government securities.

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. This category generally includes agency securities, corporate debt securities, other fixed income securities, United Mexican States (UMS) securities, and mortgage-backed debt securities.

Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant in determining the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes cross-currency interest rate swaps and interest rate swaps where independent pricing information is not available for a significant portion of the underlying assets.

Additional information on the fair value of the Bank’s financial instruments is provided in Note 12.

Other Comprehensive Income

The components of comprehensive income have been reported in the accompanying consolidated statement of changes in equity for all periods presented and in Note 7.

Reclassifications

Certain amounts in the prior-year consolidated financial statements have been reclassified to conform to the current-year consolidated financial statement presentation.



3. Investments

All investments held by the Bank are classified as either held-to-maturity or available-for-sale securities. The following schedule summarizes investments as of December 31, 2010 and 2009.

Amortized Cost

Gross Unrealized FairValueGains Losses

December 31, 2009Held-to-maturity:

U.S. government and agency securities $ 3,653,538 $ – $ (177) $ 3,653,361Total held-to-maturity investment securities 3,653,538 – (177) 3,653,361

Available-for-sale:U.S. government and agency securities 43,360,730 2,666,068 – 46,026,798Corporate debt securities 34,650,311 1,676,332 (113,114) 36,213,529Other fixed income securities 9,166,582 422,449 (1,026) 9,588,005Mexican government securities (UMS) 21,327,490 1,501,744 (9,234) 22,820,000Mortgage-backed securities 16,866,220 744,329 – 17,610,549

Total available-for-sale investment securities 125,371,333 7,010,922 (123,374) 132,258,881Total investment securities $ 129,024,871 $ 7,010,922 $ (123,551) $ 135,912,242

Amortized Cost

Gross Unrealized FairValueGains Losses

December 31, 2010Held-to-maturity:

U.S. government and agency securities $ 3,743,399 $ – $ (33,443) $ 3,709,956Mexican government securities (UMS) 49,779,895 2,345,105 – 52,125,000

Total held-to-maturity investment securities 53,523,294 2,345,105 (33,443) 55,834,956

Available-for-sale:U.S. government and agency securities 88,706,126 519,038 (1,309) 89,223,855Corporate debt securities 53,276,576 1,205,891 – 54,482,467Other fixed income securities 12,837,161 258,360 (3,468) 13,092,053Mexican government securities (UMS) 10,057,947 179,733 (22,680) 10,215,000Mortgage-backed securities 15,240,088 306,156 (43,216) 15,503,028

Total available-for-sale investment securities 180,117,898 2,469,178 (70,673) 182,516,403Total investment securities $ 233,641,192 $ 4,814,283 $ (104,116) $ 238,351,359



3. Investments (continued)

The following schedule summarizes unrealized losses and fair value of investments, aggregated by category and length of individual securities that have been in a continuous unrealized loss position, as of December 31, 2010.

Less Than 12 Months 12 Months or More TotalFair

ValueUnrealized

LossesFair

ValueUnrealized

LossesFair

ValueUnrealized

Losses

U.S. government and agency securities $ 2,497,375 $ 1,309 $ – $ – $ 2,497,375 $ 1,309Corporate debt securities – – – – – –Other fixed income securities 8,833,693 3,468 – – 8,833,693 3,468Mexican government securities (UMS) 8,000,000 22,680 – – 8,000,000 22,680Mortgaged-backed securities 9,755,015 43,216 – – 9,755,015 43,216Total temporarily impaired securities $ 29,086,083 $ 70,673 $ – $ – $ 29,086,083 $ 70,673

None of the unrealized losses identified above are considered to be other-than-temporary since, as of December 31, 2010, the Bank did not have the intent to sell any of the securities in the table above and believed that it was more likely than not that the Bank would not be required to sell any such securities before a recovery of cost.

Contractual maturities of U.S. government and agency securities, corporate debt securities, and other fixed income debt securities as of December 31, 2010, are as follows:

Held-To-Maturity Securities Available-For-Sale SecuritiesFair

ValueAmortized

CostFair

ValueAmortized

Cost

Less than 1 year $ – $ – $ 82,800,636 $ 82,759,0771–5 years 3,709,956 3,743,399 80,798,679 79,122,2995–10 years 52,125,000 49,779,895 3,414,060 2,996,434More than 10 years – – – –Mortgage-backed securities – – 15,503,028 15,240,088

$ 55,834,956 $ 53,523,294 $ 182,516,403 $ 180,117,898

Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.



3. Investments (continued)

The following summarizes sale, call, and maturity activity of investment securities for the years ended December 31, 2010 and 2009:

Years Ended December 31,2010 2009

Held-to-maturity investment securities:Proceeds from maturities $ 6,036,000 $ 1,603,000

Available-for-sale investment securities:Proceeds from sales and maturities 381,019,605 95,162,825Gross realized gains 5,650,827 3,865,533Gross realized losses 136,922 308,443

The following table sets forth the unrealized gains (losses) on securities available-for-sale and the reclassification adjustments required for the years ended December 31, 2010 and 2009:


Unrealized gains on investment securities available-for-sale, beginning of year $ 6,887,549 $ 8,373,388Unrealized gains on investment securities available-for-sale arising during the year 1,024,861 2,071,251

Reclassification adjustments for gains on investment securities available-for-sale included in net income (5,513,905) (3,557,090)

Unrealized gains on investment securities available-for-sale, end of year $ 2,398,505 $ 6,887,549

4. Loans

The following schedule summarizes loans outstanding as of December 31, 2010 and 2009.

LoanBalance

Allowances for Loan

Loss

Foreign Currency

Exchange Rate Adjustment

Fair Value of Hedged Items

Net LoanBalance

December 31, 2010International Program $ 470,214,056 $ (5,716,672) $ (6,849,894) $ (333,289) $ 457,314,201U.S. Domestic Program 3,820,805 (42,967) – – 3,777,838

$ 474,034,861 $ (5,759,639) $ (6 ,849,894) $ (333,289) $ 461,092,039

December 31, 2009International Program $ 310,558,890 $ (4,816,672) $ (23,241,182) $ – $ 282,501,036U.S. Domestic Program 3,986,596 (42,967) – – 3,943,629

$ 314,545,486 $ (4,859,639) $ (23,241,182) $ – $ 286,444,665



4. Loans (continued)

At December 31, 2010, the Bank has outstanding loan commitments on signed loan agreements totaling $44,903,471 and $-0-, for the International Program and U.S. Domestic Program, respectively. The Board has also approved an additional $221,719,939 in loans for the International Program, for which loan agreements are in development.

Consistent with its development nature, the Bank under certain circumstances offers below-market-rate loans. As of December 31, 2010 and 2009, the Bank had below-market-rate loans outstanding for the International Program of $65,354,821 and $68,707,909, respectively, and for the U.S. Domestic Program of $1,933,067 and $2,106,181, respectively.

At December 31, 2010 and 2009, the International Program had two nonaccrual loans with an outstanding balance of $10,210,410. The average impaired loan balance for the years ended December 31, 2010 and 2009 totaled $8,363,541. Interest income of $-0- and $218,310 was recognized on these impaired loans for the years ended December 31, 2010 and 2009, respectively. During November 2007, the U.S. Domestic Program foreclosed on the collateral of one loan in the amount of $836,870. During November 2009, this collateral, which was reported in other assets for $836,870, was sold for $792,348 in cash.

The following schedule summarizes the allowance for loan losses as of December 31, 2010 and 2009.

December 31,2010 2009

Beginning balance $ 4,859,639 $ 4,104,161Provision for loan losses 900,000 800,000Loan charge-offs (recoveries) – (44,522)Ending balance $ 5,759,639 $ 4,859,639

5. Furniture, Equipment, and Leasehold Improvements

Furniture, equipment, and leasehold improvement balances consist of the following:

December 31, 2010 2009

Furniture and equipment $ 595,471 $ 591,920Computers 868,606 850,845Leasehold improvements 413,022 413,022

1,877,099 1,855,787Less accumulated depreciation and amortization (1,728,902) (1,673,448)

$ 148,197 $ 182,339

6. Notes Payable

In February 2010, the Bank issued $250,000,000 nonamortizing notes due February 11, 2020. The notes bear interest at the rate of 4.375% per annum, payable semiannually on each February 11 and August 11, commencing



6. Notes Payable (continued)

on August 11, 2010 until February 11, 2020. The notes are unsecured and rank equally with all other unsecured indebtedness. The notes cannot be redeemed prior to their maturity on February 11, 2020, at which time they will be redeemed at 100% of their principal amount. Unamortized debt issuance costs related to these notes, which are included in other assets, totaled $1,472,521 and $-0- at December 31, 2010 and 2009, respectively.

The fair value of the hedges relating to interest rate swaps on a portion of the Bank’s notes payable, which are included in other assets, totaled $7,018,801 and $-0- as of December 31, 2010 and 2009, respectively.

The notes payable at December 31, 2010 and 2009, is comprised of the following:

December 31,2010 2009

Notes payable $ 250,000,000 $ –Discount on notes payable (594,500) –Fair value of hedged item 7,018,801 –Notes payable, net $ 256,424,301 $ –

See Notes 12 and 13 for additional information on the fair value of financial instruments and derivatives.

7. Equity

Subscribed Capital

At December 31, 2010 and 2009, the Bank had authorized and subscribed 300,000 shares of capital stock, with a par value of $10,000 per share. As defined in the Charter, capital is classified as callable or paid-in at December 31, 2010 and 2009 as follows:

Mexico United Stares TotalShares Dollars Shares Dollars Shares Dollars

Subscribed capital 150,000 $ 1,500,000,000 150,000 $ 1,500,000,000 300,000 $ 3,000,000,000Less callable subscribed capital (127,500) (1,275,000,000) (127,500) (1,275,000,000) (255,000) (2,550,000,000)Paid-in capital 22,500 225,000,000 22,500 225,000,000 45,000 450,000,000Less transfer to general reserve for Domestic Programs – (22,500,000) – (22,500,000) – (45,000,000)Total funded paid-in capital 22,500 $ 202,500,000 22,500 $ 202,500,000 45,000 $ 405,000,000

In May 2009, Mexico and the United States each made a final contribution of unqualified paid-in capital of $13,998,393, or 1,399.8393 shares, to complete their initial subscription of $450,000,000. The callable portion of the subscription for



7. Equity (continued)

capital shares of the Bank will be subject to call only when required to meet obligations, as outlined in Article II, Section 3(d), of Chapter II of the Charter.

On June 21, 2006, the Board of Directors authorized the development of a program to use up to $50,000,000 of the Bank’s paid-in capital for stand-alone grants and for grants that subsidize interest rates on loans. Therefore, net funded paid-in capital is further classified as follows:

December 31,2010 2009

Designated for grant program $ 50,000,000 $ 50,000,000Undesignated 355,000,000 355,000,000Total net funded paid-in capital $ 405,000,000 $ 405,000,000

There are currently no grants under consideration that would be funded from paid-in capital.

Retained Earnings

Retained earnings are classified as designated by program or undesignated, as follows:

December 31,2010 2009

Designated retained earningsInternational Program:

Water Conservation Investment Fund (WCIF): United States $ 6,018,407 $ 6,762,432

Mexico 9,593 9,593Total WCIF 6,028,000 6,772,025Water Conservation Technical Assistance (WCTA) 13,821 13,821Technical Assistance Program (TAP) 5,913,193 6,273,524Solid Waste Environmental Program (SWEP) 5,067,244 5,740,492

Total International Program 17,022,258 18,799,862U.S. Domestic Program (306,287) (72,912)Total designated retained earnings 16,715,971 18,726,950

Undesignated retained earningsInternational Program 54,222,885 39,162,713Total undesignated retained earnings 54,222,885 39,162,713Total retained earnings $ 70,938,856 $ 57,889,663

Additional information regarding each program listed above is provided in Note 9.



7. Equity (continued)

Accumulated Other Comprehensive Income

As of December 31, 2010 and 2009, accumulated other comprehensive income is comprised of the following:

December 31,2010 2009

Net unrealized gain on available-for-sale investment securities $ 2,398,504 $ 6,887,548Foreign currency translation adjustment 37,096 58,073

Unrealized gain (loss) on hedging activities:Foreign currency translation adjustment (6,849,894) (23,241,182)Fair value of cross-currency interest rate swaps 6,585,362 32,466,736

Net unrealized gain (loss) on hedging activities (264,532) 9,225,554Total accumulated other comprehensive income $ 2,171,068 $ 16,171,175

8. Domestic Programs

As specified in the Charter, 10% of each country’s paid-in capital is to be set aside to finance community adjustment and investment programs in support of the purposes of NAFTA. In accordance with the Charter, the Board of Directors approved transfers in the prior years of $45,000,000, equal to 10% of paid-in capital of $450,000,000, to the general reserve to support these programs. To further clarify operations related to these programs, the Bank entered into a Memorandum of Understanding (MOU) with each country. In accordance with the MOUs, the U.S. and Mexican programs are administered independently.

Mexico

The MOU with Mexico indicates that 10% of paid-in capital from Mexico and the related earnings be set aside for the community adjustment and investment program endorsed by Mexico. The Mexican federal government instituted its domestic program, titled Programa Complementario de Apoyo a Comunidades y Empresas (Mexican Domestic Program), through the offices of the SHCP. In June 1996, the SHCP entered into a mandate agreement with Banobras to receive and administer the Bank’s funds allocated for this program. The Mexican Domestic Program funds were fully transferred to Mexico as of June 1999. Accordingly, the activities of the Mexican Domestic Program are not reflected as operations of the Bank, because they are administered and accounted for by Banobras.

United States

The MOU with the U.S. government specifies that 10% of the paid-in capital from the United States and the related earnings be set aside for the U.S. Community Adjustment and Investment Program (U.S. Domestic Program). Additionally, the MOU specified that the Los Angeles office of the Bank be formed to administer the U.S. Domestic Program. The Bank provides financing endorsed by the Finance Committee appointed by the U.S. government for that purpose. Upon written endorsement from the U.S. government, U.S. Domestic Program funds can be transferred to the U.S. government. Returns of capital to the U.S. government are reported as a deduction from allocated paid-in capital. During the years ended December 31, 2010 and 2009, no funds were transferred to the U.S. Treasury for U.S. Domestic Program activities.



8. Domestic Programs (continued)

In accordance with the Charter and MOU with the United States, net assets of the Bank in the amounts of $8,503,659 and $10,982,196 were designated for the U.S. Domestic Program at December 31, 2010 and 2009, respectively. The revenues related to these amounts for the years ended December 31, 2010 and 2009 were $180,095 and $218,999, respectively. Additionally, expenses directly related to the U.S. Domestic Program operation incurred by the Los Angeles and San Antonio offices of the Bank of $416,844 and $441,912 are included in the Bank’s operations for the years ended December 31, 2010 and 2009, respectively. All expenses and disbursements are paid out of the U.S. Domestic Program funds. Retained earnings on the U.S. Domestic Program capital funds as of December 31, 2010 and 2009, were ($306,287) and ($72,912), respectively. Under the U.S. Domestic Program, $4,753,576 in cash and cash equivalents was available for disbursement as of December 31, 2010.

In January 2009, the Finance Committee approved a Targeted Grant Program (TGP) to be funded with the remaining balance of the U.S. Domestic Program’s allocated paid-in capital. As of December 31, 2010 and 2009, the U.S. Domestic Program’s allocated paid-in capital totaled $8,695,322 and $10,935,510, respectively. For the years ended December 31, 2010 and 2009, $2,240,188 and $-0- were disbursed through the TGP. These disbursements were reported as a deduction from allocated paid-in capital.

9. Program Activities

Program activities are comprised of the following:


Program incomeEPA grant $ 1,758,468 $ 1,755,135Total program income 1,758,468 1,755,135

Program expensesEPA grant administration (1,758,468) (1,755,135)Technical Assistance Program (703,454) (1,820,831)Solid Waste Environmental Program (673,248) (3,119,687)Water Conservation Investment Fund (744,025) (757,108)Total program expenses (3,879,195) (7,452,761)Net program expenses $ (2,120,727) $ (5,697,626)

EPA Grants

The Bank administers grant funds from the EPA through the Border Environment Infrastructure Fund (BEIF). EPA grant awards since the initial grant made in April 1997 to December 31, 2010, total $656,832,668. Under the terms of the grants, the Bank reviews and submits prospective projects to EPA, which approves the projects. EPA then disburses funds to the Bank, which directs the grant monies to the specified project. The Bank also oversees progress and compliance

requirements for EPA and receives an allocation of the EPA grant funds for administrative expenses incurred.

As of December 31, 2010, EPA has approved project funding proposed by the Bank totaling $564,645,630, of which $523,294,308 has been disbursed through the Bank. The Bank recognized $1,758,468 and $1,755,135 as reimbursement of expenses incurred for the years ended December 31, 2010 and 2009, respectively. These funds have been recorded as program revenues and expenses in the consolidated statements of income.



9. Program Activities (continued)

U.S. Domestic Program – Grant Program

During June 1999, the U.S. government authorized the U.S. Department of the Treasury to transfer all or part of a $10,000,000 appropriation to the Bank, and also authorized the U.S. Treasury department to transfer to the Bank other monies from time to time to fund the U.S. Domestic Program’s grant activities. Since its inception to December 31, 2010, the Bank has received a total of $13,430,402 from the U.S. Department of the Treasury and disbursed a total of $13,430,402, yielding undisbursed grant funds of $-0- at that date. Direct grant receipts and disbursements are not reflected in the statement of income, because the Bank serves in a fiduciary capacity and acts at the direction of the U.S. Treasury. The U.S. Domestic Program’s grant program is operated out of the Bank’s San Antonio office.

Technical Assistance Program (TAP)

The Bank uses a portion of its retained earnings to offer technical assistance and training to project sponsors for the purpose of strengthening their financial performance and ensuring the long-term sustainability of their infrastructure. In 1997, the Bank established the Institutional Development Cooperation Program (IDP), which was specifically designed to provide assistance for institutional strengthening studies aimed at improving the financial performance and managerial efficiency of public utilities. In 2002, the Bank created a separate program, the Project Development Program (PDP), in order to assist sponsors in the planning and design of infrastructure projects that would be submitted for BECC certification and NADB financing. In April 2009, these two programs were merged into a single program, the Technical Assistance Program (TAP). Under the merged program, assistance is provided for studies related to the design and implementation of environmental infrastructure projects, as well as for capacity-building measures aimed at achieving the effective and efficient operation of public services.

In March 1998, the Utility Management Institute (UMI) was created as an extension of the IDP to provide water utility managers and their staff with an opportunity for ongoing professional development aimed at enhancing their managerial and financial skills. The program continues to operate as part of TAP.

In August 2002, the Bank’s Board of Directors designated $5,000,000 of the Bank’s undesignated retained earnings to be used as grants to finance water conservation technical assistance (WCTA) projects in Mexico through the TAP. These technical assistance funds do not require BECC certification. As of December 31, 2010, $4,986,179 of the WCTA-designated retained earnings have been transferred for use through TAP.

Disbursements related to technical assistance and training operations have been previously designated from retained earnings and have been reported as a program expense. Disbursements for the years ended December 31, 2010 and 2009 were as follows:


Technical Assistance Program $ 360,331 $ 1,456,637Utility Management Institute 343,123 364,194

$ 703,454 $ 1,820,831



9. Program Activities (continued)

Solid Waste Environmental Program (SWEP)

In October 1999, the Bank’s Board of Directors approved a $5,000,000 pilot program for municipal solid waste financing funded by a portion of the Bank’s net earnings. Under this pilot program, projects eligible to receive SWEP assistance must involve a public entity and have been certified by the BECC. In June 2006, the Board agreed to keep SWEP as a permanent program. Since the initial funding, the Bank’s Board of Directors has designated an additional $8,500,000 for the SWEP program. For the years ended December 31, 2010 and 2009, $673,248 and $3,119,687, respectively, were disbursed under this program. As of December 31, 2010, cumulative SWEP disbursements total $8,432,756. These disbursements have been previously designated from retained earnings and have been reported as a program expense.

Water Conservation Investment Fund (WCIF)

In August 2002, the Bank’s Board of Directors established the WCIF program to finance water conservation projects in the U.S.-Mexico border region and designated $80,000,000 of the Bank’s undesignated retained earnings to the WCIF. Of that amount, $40,000,000 is reserved exclusively for water conservation projects in each country. Under this fund, projects eligible to receive WCIF assistance must be certified by the BECC. For the years ended December 31, 2010 and 2009, $744,025 and $757,108, respectively, have been disbursed under this fund. As of December 31, 2010, cumulative disbursements total $33,981,593 for the United States and $39,990,407 for Mexico. These disbursements have been previously designated from retained earnings and have been reported as a program expense.

10. 401(a) Retirement Plan

The Bank has a 401(a) Retirement Plan (the Plan) for its employees. The Plan provides for employee and nondiscretionary employer contributions. For the years ended December 31, 2010 and 2009, the Bank expended $548,052 and $539,849, respectively, relating to the Plan.

11. Commitments

In the normal course of business, the Bank has various outstanding commitments including loan commitments, which are disclosed in Note 4. Under agreements with consultants and contractors in effect at December 31, 2010, the Bank has obligations to pay amounts equal to $282,434 over the next year. These payments are contingent upon the future performance of the consultants and contractors under the terms of their respective contracts and, therefore, are not recorded in the financial statements.

12. Fair Value of Financial Instruments

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Additional information on how the Bank measures fair value is provided in Note 2.

Cash and Cash Equivalents

The carrying amounts for cash and cash equivalents approximate their fair value.

Securities Available-for-Sale

Securities classified as available-for-sale are reported at fair value using Level 1 and Level 2 observable inputs. For these securities, the Bank obtains fair value measurements from an independent pricing service, which, in its understanding, are based on prices quoted for the exact or like-kind instrument.

Loans Receivable and Accrued Interest Receivable

The fair value of loans is estimated based on discounted cash flow analyses, using interest rates currently being offered for loans made by the Bank with similar terms to borrowers of similar credit quality, net of allowance for loan loss. The fair value of nonaccrual loans is estimated to equal the aggregate net realizable value of the underlying collateral and guaranties. The carrying amount of accrued interest approximates its fair value. This valuation does not



12. Fair Value of Financial Instruments (continued)

consider liquidity discounts currently being used by certain market participants, since measuring their impact would not be cost-beneficial for the Bank, given the nature of its loan portfolio.

Cross-Currency Interest Rate Swaps

The fair value of cross-currency interest rate swaps is estimated based on discounting procedures whereby each cash flow stream is discounted using the yield curve of that currency, and the net present value is converted at the spot exchange rate.

Interest Rate Swaps

The fair value of interest rate swaps is estimated based on discounting procedures whereby each cash flow stream is discounted using stated and projected interest rates.

Notes Payable and Accrued Interest Payable

The fair value of the notes payable is estimated based on discounted cash flow analyses. The carrying amount of accrued interest payable approximates its fair value.

The carrying amounts and fair value of the Bank’s financial instruments are as follows:

December 31, 2010 December 31, 2009

CarryingAmount

EstimatedFair Value

CarryingAmount

EstimatedFair Value

AssetsCash and cash equivalents $ 43,156,304 $ 43,156,304 $ 41,465,211 $ 41,465,211Held-to-maturity securities 53,523,294 55,834,956 3,653,538 3,653,361Available-for-sale securities 182,516,403 182,516,403 132,258,881 132,258,881Loans, net 461,092,039 469,012,958 286,444,665 285,198,884Accrued interest receivable 7,107,253 7,107,253 3,154,537 3,154,537Cross-currency interest rate swaps 6,560,128 6,560,128 33,139,327 33,139,327Interest rate swaps 7,018,801 7,018,801 – –

LiabilitiesAccrued interest payable 4,519,377 4,519,377 – –Notes payable, net 256,424,301 256,424,301 – –




The Bank’s financial assets, measured at fair value on a recurring basis as of December 31, 2010, are summarized in the following table by the valuation level of the inputs used to measure fair value.

December 31, 2010Fair Value Measurements Using Assets

at Fair ValueLevel 1 Level 2 Level 3Available-for-sale (AFS) securities:

U.S. government and agency securities $ 66,549,870 $ 22,673,985 $ – $ 89,223,855Corporate debt securities – 54,482,467 – 54,482,467Other fixed income securities – 13,092,053 – 13,092,053Mexican government securities (UMS) – 10,215,000 – 10,215,000Mortgage-backed securities – 15,503,028 – 15,503,028

Total AFS securities 66,549,870 115,966,533 – 182,516,403Interest rate swaps – – 7,018,801 7,018,801Cross-currency interest rate swaps – – 6,560,128 6,560,128Total assets at fair value $ 66,549,870 $ 115,966,533 $ 13,578,929 $ 196,095,332

The following table summarizes the changes to the financial assets measured at fair value on a recurring basis using unobservable inputs (Level 3) during the years ended December 31, 2010 and 2009.

2010 2009Cross-Currency Interest Rate

SwapsInterest Rate

Swaps

Cross-Currency Interest Rate

SwapsInterest Rate

Swaps

Fair Value of Level 3 InstrumentsBeginning balance, January 1 $ 33,139,327 $ – $ 55,539,274 $ –Total realized and unrealized gains (losses):

Included in earnings (expenses) (697,825) 7,018,801 (475,017) –Included in other comprehensive income (loss) (25,881,374) – (21,924,930) –Purchases and settlements – – – –Transfers in/out of Level 3 – – – –

Ending balance, December 31 $ 6,560,128 $ 7,018,801 $ 33,139,327 $ –




The Bank entered into 16 cross-currency interest rate swaps and four interest rate swaps during the year ended December 31, 2010. Upon issuance, the fair value of the swaps is $-0- and therefore is not portrayed in the purchases and settlements line item above. The change in fair value of these instruments is included within the total gains (losses) line item above.

Impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. The impaired loans are reported at fair value through a specific valuation allowance allocation of the allowance for loan losses. Collateral values are estimated using Level 3 inputs based on customized valuation procedures. During 2010, an impaired loan with a carrying value of $6,516,672 was reduced by specific valuation allowance allocations totaling $5,716,672 to a total reported fair value of $800,000, based on collateral valuations using Level 3 inputs.

The Bank has no nonfinancial assets or liabilities measured at fair value on a recurring basis. Certain nonfinancial assets and liabilities measured at fair value on a nonrecurring basis include foreclosed assets (upon initial recognition or subsequent impairment) and other nonfinancial long-lived assets measured at fair value for impairment assessment.

For the year ended December 31, 2010, the Bank did not foreclose on any loans or remeasure any existing real estate owned, and did not record any impairment on long-lived assets.

13. Derivative Financial Instruments

The Bank utilizes cross-currency interest rate swaps to mitigate exposure to fluctuations in foreign currency exchange rates and interest rate swaps to mitigate exposure to fluctuations in interest rates. The fair value of the swaps outstanding as of each reporting period end is included in other assets or other liabilities, depending on whether the Bank is in a favorable or unfavorable position as of the reporting period date.

The Bank enters into cross-currency interest rate swaps that are matched to specific fixed, variable, or adjustable rate loans denominated in Mexican pesos that the Bank has entered into directly with the borrower or with COFIDAN. If the swap is with COFIDAN, it then enters into loans denominated in Mexican pesos under the exact same terms with its borrowers. The swaps have been designated as hedging instruments because they hedge the risk of fluctuations in cash flows due to changes in foreign currency exchange rates. The swaps are structured so that the notional amounts decrease over time to match the expected amortization of the underlying loan. Neither the Bank nor the counterparty is required to post collateral to support the outstanding fair value of the swaps under its arrangement with FOAEM. Beginning in July 2009, under direct counterparty relationships with other financial institutions, collateral may be required to be posted by either the Bank or the direct counterparty. No collateral was exchanged by the Bank or the direct counterparties as of December 31, 2010.

The Bank enters into interest rate swaps that are matched to the terms of a portion of the Bank’s notes payable. The swaps have been designated as hedging instruments because they hedge the risk of changes in fair value of the fixed-rate notes payable due to changes in the designated benchmark interest rate. The Bank designated the LIBOR swap rate as the benchmark interest rate. The swaps are structured so that the notional amounts mature to match the expected maturity of the Bank’s notes payable. Collateral may be required to be posted by either the Bank or the counterparty. No collateral was exchanged by the Bank or the counterparty as of December 31, 2010.



13. Derivative Financial Instruments (continued)

The notional amounts and estimated fair values of the swaps outstanding at December 31, 2010 and 2009, are presented in the following table. The fair value of these swaps is estimated using internal valuation models with observable market data inputs.

December 31, 2010 December 31, 2009Notional Amount

Estimated Fair Value

Notional Amount

Estimated Fair Value

Cross-currency interest rate swaps $ 370,895,519 $ 6,560,128 $ 224,701,802 $ 32,466,736Interest rate swaps 197,000,000 7,018,801 – –

The weighted-average exchange rate received for the cross-currency interest rate swaps outstanding at December 31, 2010, was 8.13%.

One swap that is no longer deemed effective because of borrower default on the hedged loan is not included in the table above. The fair value of the swap was $283,756 and $672,591 as of December 31, 2010 and 2009, respectively. The change in the fair value of the swap for the years ended on those dates was a decrease of $388,835 and $475,017, respectively, which is recognized in the consolidated statements of income.

Gains, Losses, and Derivative Cash Flows

Cross-Currency Interest Rate Swaps

The effective portion of the gain or loss due to changes in the fair value of the cross-currency interest rate swaps is included in other comprehensive income, while the ineffective portion is included in other income or expenses. The accumulated gain (loss) related to the swaps included in accumulated other comprehensive income totaled ($264,532) and $9,225,554 at December 31, 2010 and 2009, respectively. The accumulated gain (loss) is reclassified into earnings as the hedged cash flows are received to offset the foreign currency gains (losses) that would have been recognized in earnings if the Bank had not been a party to the swaps.

Interest Rate Swaps

With regard to the interest rate swaps on the outstanding notes payable, the changes in the fair value of the swaps exactly offset the changes in the fair value of the debt due to changes in the LIBOR swap rate; therefore, there is no impact to the consolidated statement of income for the period. At December 31, 2010 and 2009, the fair value of the interest rate swaps was reported as other assets of $7,018,801 and $-0-, respectively, in the accompanying consolidated balance sheets.

14. Credit Risk Associated with Financial Instruments

The Bank is subject to certain credit risk. Financial instruments that potentially subject the Bank to significant concentrations of credit risk consist principally of cash, investments, and loans receivable. The Bank maintains cash and cash equivalents, investments, and certain other financial instruments with various major financial institutions. The Bank performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution. The Bank evaluates the creditworthiness of each customer on a case-by-case basis and continually monitors the financial stability of each borrower.



15. New Accounting Principles

ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) – Improving Disclosures About Fair Value Measurements. ASU 2010-06 requires expanded disclosures related to fair value measurements including (i) the amounts of significant transfers of assets or liabilities between Levels 1 and 2 of the fair value hierarchy and the reasons for the transfers, (ii) the reasons for transfers of assets or liabilities in or out of Level 3 of the fair value hierarchy, with significant transfers disclosed separately, (iii) the policy for determining when transfers between levels of the fair value hierarchy are recognized and (iv) for recurring fair value measurements of assets and liabilities in Level 3 of the fair value hierarchy, a gross presentation of information about purchases, sales, issuances and settlements. ASU 2010-06 further clarifies that (i) fair value measurement disclosures should be provided for each class of assets and liabilities (rather than major category), which would generally be a subset of assets or liabilities within a line item in the statement of financial position and (ii) the Bank should provide disclosures about the valuation techniques and inputs used to measure fair value for both recurring and nonrecurring fair value measurements for each class of assets and liabilities included in Levels 2 and 3 of the fair value hierarchy. The disclosures related to the gross presentation of purchases, sales, issuances and settlements of assets and liabilities included in Level 3 of the fair value hierarchy will be required for the Bank beginning January 1, 2011. The remaining disclosure requirements and clarifications made by ASU 2010-06 became effective for the Bank on January 1, 2010, and the required disclosures are reported within.

ASU No. 2010-20, Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. ASU 2010-20 requires entities to provide disclosures designed to facilitate financial statement users’ evaluation of (i) the nature of credit risk inherent in the entity’s portfolio of financing receivables, (ii) how that risk is analyzed and assessed in arriving at the allowance for credit losses and (iii) the changes and reasons for those changes in the allowance for credit losses. Disclosures must be disaggregated by portfolio segment, the level at which an entity develops and documents a systematic method for determining its allowance for credit losses, and class of financing receivable, which is generally a disaggregation of portfolio segment. The required disclosures include, among other things, a rollforward of the allowance for credit losses as well as information about modified, impaired, non-accrual and past-due loans and credit quality indicators. ASU 2010-20 became effective for the Bank’s financial statements as of December 31, 2010, as it relates to disclosures required as of the end of a reporting period. Disclosures that relate to activity during a reporting period will be required for the Bank’s financial statements that include periods beginning on or after January 1, 2011. ASU 2011-01, Receivables (Topic 310) – Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20, temporarily deferred the effective date for disclosures related to troubled debt restructurings to coincide with the effective date of a proposed accounting standards update related to troubled debt restructurings, which is currently expected to be effective for periods ending after June 15, 2011.

16. Subsequent Event

On February 8, 2011, the Board of Directors approved a new grant program called the Community Assistance Program (CAP) to supersede and replace the Solid Waste Environmental Program (SWEP) and the Capital Resource Grant Program (CRGP). CAP grants will be funded solely from the Bank’s undesignated retained earnings subject to the authorization of the Board of Directors, and the Bank’s paid-in capital previously made available for the CRGP shall no longer be available for the purpose of making any grant under any Bank program unless authorized by the Board of Directors. In the same action the Board approved the CAP’s initial funding at $4 million from the Bank’s retained earnings.


upplemental InformationS


ombining Balance Sheet by ProgramCInternational

ProgramU.S. Domestic Program (A) Eliminations Total

AssetsCash and cash equivalents:

Held at other financial institutions in demand deposit accounts $ 206,933 $ 8,784 $ – $ 215,717 Held at other financial institutions in interest bearing accounts 35,295,795 4,644,792 – 39,940,587 Repurchase agreements 2,900,000 100,000 – 3,000,000

38,402,728 4,753,576 – 43,156,304

Held-to-maturity investment securities, at amortized cost 53,523,294 – – 53,523,294 Available-for-sale investment securities, at fair value 182,516,403 – – 182,516,403

Loans outstanding: 470,214,056 3,820,805 – 474,034,861 Allowance for loan losses (5,716,672) (42,967) – (5,759,639)Foreign currency exchange rate adjustment and fair value of hedged items (7,183,183) – – (7,183,183)

Net loans outstanding 457,314,201 3,777,838 – 461,092,039

Interest receivable 7,086,316 20,937 – 7,107,253 Grant and other receivable 329,414 – – 329,414 Due from International Program 28,013 – (28,013) – Furniture, equipment, and leasehold improvements, net 146,730 1,467 – 148,197 Other assets 15,051,451 – – 15,051,451 Total assets $ 754,398,550 $ 8,553,818 $ (28,013) $ 762,924,355

Liabilities and equityLiabilities:

Accounts payable $ 246,520 $ – $ – $ 246,520 Accrued liabilities 229,247 22,146 – 251,393 Due to U.S. Domestic Program – 28,013 (28,013) – Accrued interest payable 4,519,377 – – 4,519,377 Undisbursed grant funds 1,270 – – 1,270 Notes payable, net of discount and fair value of hedged item 256,424,301 – – 256,424,301

Total liabilities 261,420,715 50,159 (28,013) 261,442,861

Equity:Paid-in capital 405,000,000 – – 405,000,000 General Reserve:

Allocated paid-in capital – 8,695,322 – 8,695,322 Retained earnings:

Designated 17,022,258 (306,287) – 16,715,971 Undesignated 54,222,885 – – 54,222,885

Special Reserve 14,555,456 114,624 – 14,670,080 Accumulated other comprehensive income 2,171,068 – – 2,171,068 Minority interest 6,168 – – 6,168

Total equity 492,977,835 8,503,659 – 501,481,494 Total liabilities and equity $ 754,398,550 $ 8,553,818 $ (28,013) $ 762,924,355

Note A – The Mexican Domestic Program funds were fully transferred to Mexico as of June 1999.

December 31, 2010


ombining Statement of Income by ProgramC Year Ended December 31, 2010

International Program

U.S. Domestic Program (A) Total

Income:Interest:

Investment income $ 5,886,268 $ 1,744 $ 5,888,012 Loan income 20,511,559 178,351 20,689,910

Gains on sales of available-for-sale investment securities, net 5,513,905 – 5,513,905 Fee income 20,661 – 20,661 Other 508,003 – 508,003

Total revenues 32,440,396 180,095 32,620,491

Operating expenses:Personnel 4,697,500 – 4,697,500 Consultants 986,835 – 986,835 General and administrative 774,009 – 774,009 Operational travel 236,247 – 236,247 Depreciation and amortization 53,855 1,600 55,455 Provision for loan losses 900,000 – 900,000 Relocation 73,086 – 73,086 Other 1,011,308 – 1,011,308 U.S. Domestic Program – 416,844 416,844

Total operating expenses 8,732,840 418,444 9,151,284

Interest expense 4,094,686 – 4,094,686

Income (loss) before program activities 19,612,870 (238,349) 19,374,521

Program activities:U.S. Environmental Protection Agency grant income 1,758,468 – 1,758,468 U.S. Environmental Protection Agency grant administration (1,758,468) – (1,758,468)TAP (703,454) – (703,454)SWEP (673,248) – (673,248)WCIF (744,025) – (744,025)

Net program expenses (2,120,727) – (2,120,727)

Income (loss) before minority interest 17,492,143 (238,349) 17,253,794 Net income attributable to minority interest 114 – 114 Net income (loss) $ 17,492,029 $ (238,349) $ 17,253,680

General Reserve, January 1, 2010Allocated paid-in capital $ – $ 10,935,510 $ 10,935,510 Retained earnings 57,962,575 (72,912) 57,889,663

Current period activity:Net income (loss) 17,492,029 (238,349) 17,253,680 TGP disbursements of the U.S. Domestic Program – (2,240,188) (2,240,188)Transfer from retained earnings to Special Reserve (4,209,461) 4,974 (4,204,487)

General Reserve, December 31, 2010Allocated paid-in capital – 8,695,322 8,695,322 Retained earnings 71,245,143 (306,287) 70,938,856

$ 71,245,143 $ 8,389,035 $ 79,634,178



ombining Statement of Cash Flows by ProgramC Year Ended December 31, 2010

International Program

U.S. Domestic Program (A) Total

Cash flows from operating activities

Net income (loss) $ 17,492,029 $ (238,349) $ 17,253,680

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

Depreciation and amortization 53,855 1,600 55,455

Amortization of net premium (discount) on investments 360,000 – 360,000

Change in fair value of swaps 1,070,234 – 1,070,234

Minority interest 114 – 114

Gain on sales of available-for-sale investment securities, net (5,513,905) – (5,513,905)

Provision for loan losses 900,000 – 900,000

Change in other assets and liabilities:

(Increase) decrease in interest receivable (3,954,236) 1,520 (3,952,716)

Increase in receivable and other assets (382,465) – (382,465)

Decrease (increase) in due from U.S. Domestic Program due to International Program 20,944 (20,944) –

Decrease in accounts payable (289,811) – (289,811)

Increase (decrease) in accrued liabilities (359,134) 2,132 (357,002)

Increase in accrued interest payable 4,519,377 – 4,519,377

Net cash provided by (used in) operating activities 13,917,002 (254,041) 13,662,961

Cash flows from lending, investing, and development activities

Capital expenditures (23,410) – (23,410)

Loan principal repayments 12,141,263 642,290 12,783,553

Loan disbursements (171,796,429) (476,500) (172,272,929)

Purchase of held-to-maturity investments (55,887,371) – (55,887,371)

Purchase of available-for-sale investments (430,630,650) – (430,630,650)

Proceeds from maturities of held-to-maturity investments 6,036,000 – 6,036,000

Proceeds from sales and maturities of available-for-sale investments 381,019,605 – 381,019,605

Net cash (used in) provided by lending, investing, and development activities (259,140,992) 165,790 (258,975,202)

Cash flows from financing activities

Proceeds from notes issuance 249,347,500 – 249,347,500

Grant funds – EPA 25,738,814 – 25,738,814

Grant disbursements – EPA (25,742,547) – (25,742,547)

Grant activity – U.S. Domestic Program – (2,340,433) (2,340,433)

Net cash provided by (used in) financing activities 249,343,767 (2,340,433) 247,003,334

Net increase (decrease) in cash and cash equivalents 4,119,777 (2,428,684) 1,691,093

Cash and cash equivalents at January 1, 2010 34,282,951 7,182,260 41,465,211

Cash and cash equivalents at December 31, 2010 $ 38,402,728 $ 4,753,576 $ 43,156,304



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0


order Environmental Infrastructure Fund (BEIF)BAs of and for the Year Ended December 31, 2010

BALANCE SHEET

Region 6 Region 9 TotalAssetsCash $ 501 $ 769 $ 1,270 Total assets $ 501 $ 769 $ 1,270

LiabilitiesUndisbursed grant funds $ 501 $ 769 $ 1,270 Total liabilities $ 501 $ 769 $ 1,270

STATEMENT OF INCOME

Region 6 Region 9 TotalIncome:

U.S. Environmental Protection Agency grant income $ 972,961 $ 785,507 $ 1,758,468 Total income 972,961 785,507 1,758,468

BEIF operating expenses:Personnel 599,799 428,270 1,028,069 Consultants 265,975 265,799 531,774 General and administrative 67,638 45,092 112,730 Operational travel 33,458 40,539 73,997 Relocation 6,091 5,807 11,898

Total BEIF operating expenses 972,961 785,507 1,758,468 Net income $ – $ – $ –

STATEMENT OF CASH FLOWS

Region 6 Region 9 TotalCash flows from operating activitiesNet income $ – $ – $ – Net cash provided by operating activities – – –

Cash flows from financing activitiesGrant funds – EPA 20,907,311 4,831,503 25,738,814 Grant disbursements – EPA (20,911,309) (4,831,238) (25,742,547)Net cash (used in) provided by financing activities (3,998) 265 (3,733)

Net increase (decrease) in cash and cash equivalents (3,998) 265 (3,733)Cash and cash equivalents at January 1, 2010 4,499 504 5,003 Cash and cash equivalents at December 31, 2010 $ 501 $ 769 $ 1,270

Region 6: EPA Regional Office located in Dallas, Texas

Region 9: EPA Regional Office located in San Francisco, California

reditsC

Design

Ildeliza Antonares

Cover, and pages 5 (right) & 6 (left) - Courtesy of the City of Tijuana, B.C.

Photography

Pages 1, 16 & 18 - Bob Wickley

Page 4 (left) - Courtesy of Jorge D. Hinojos, Brown & Caldwell

Pages 6 (right), 13, 15 (third, fourth and fifth from top), 23 (far right), 49 (far left and far right) - NADB

Pages 7 & 12 - Courtesy of the City of Nogales, SON

Page 10 - Courtesy of Yuma County, AZ

Page 15 (first, second & last from top) & back cover - Alicia Calzada

Printing

Quadrangle Press

Pages 5 (left), 9 & 49 (middle right) - Courtesy of the state water agency, Junta Central de Agua y Saneamiento del Estado de Chihuahua

Page 20 - Courtesy of ACCION Texas, Inc.

Page 23 (far left) - Courtesy of the state development agency, Agencia Ambiental para el Desarrollo Sustentable de Tamaulipas

Page 49 (middle left) - Courtesy of the City of Clint, TX

Translation

Katrina Kargl

Page 11 - Courtesy of the water utility, Organismo Operador Municipal de Agua Potable, Alcantarillado y Saneamiento de Nogales, SON

Page 23 (middle left) - Courtesy of the water utility, Comisión Municipal de Agua y Alcantarillado de Miguel Alemán, TAMPS

Page 23 (middle right) - Courtesy of the Government of the State of Chihuahua

Page 4 (right) - Courtesy of the water utility, Sistema Municipal de Aguas y Saneamiento de Piedras Negras, COAH

2010 Annual Report

Office Responsible for Publication

Public Affairs

203 South St. Mary's, Suite 300, San Antonio, TX 78205

ph: 210-231-8000 / fx: 210-231-6232 / www.nadb.org

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North American Development Bank 2010 Annual Report

Documents