Mercantil, C.A. Banco Universal and its Subsidiaries Universal and its Subsidiaries ... Deposits and...

Mercantil, C.A.Banco Universal and its Subsidiaries(Subsidiary of Mercantil Servicios Financieros, C.A.)

Report of Independent Accountantsand Consolidated Financial StatementsDecember 31, 2009 and 2008

Mercantil, C.A. Banco Universal and its SubsidiariesIndex to the consolidated financial statementsDecember 31, 2009 and 2008

Pages

I - Report of independent accountants 1-2

II - Consolidated financial statements 1-5

III - Notes to the consolidated financial statements1 - Operations and regulatory environment 6-72 - Basis of preparation 7-183 - Cash and due from banks 184 - Investment securities 18-275 - Loan portfolio 27-326 - Investments in affiliates 32-347 - Available-for-sale assets 34-358 - Property and equipment 35-369 - Other assets 36-38

10 - Deposits 38-3911 - Deposits and liabilities with Banco Nacional de Vivienda y Hábitat

(BANAVIH) 3912 - Borrowings 39-4013 - Other liabilities from financial intermediation 4014 - Accruals and other liabilities 40-4115 - Taxes 42-4416 - Employee benefit plans 44-4717 - General and administrative expenses 4718 - Other operating income 4819 - Other operating expenses 4820 - Extraordinary expenses 4821 - Equity 48-5022 - Financial assets and liabilities in foreign currency 50-5123 - Memorandum accounts 52-5824 - Balances and transactions with related companies 58-6325 - Fundación Mercantil 6326 - Maturity of financial assets and liabilities 6427 - Fair value of financial instruments 64-6628 - Money laundering prevention 6629 - Supplementary information - Consolidated financial statements adjusted for

the effects of inflation 67-74

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Mercantil, C.A. Banco Universal and its Subsidiaries(Subsidiary of Mercantil Servicios Financieros, C.A.)Consolidated balance sheetDecember 31, 2009 and 2008

(Thousands of bolivars) 2009 2008

AssetsCash and due from banks (Note 3) 9,143,190 7,390,079

Cash 793,527 683,375Central Bank of Venezuela (BCV) 7,673,509 6,112,483Venezuelan banks and other financial institutions 300 584Foreign and correspondent banks 265,497 251,576Pending cash items 410,357 342,069(Provision for cash and due from banks) - (8)

Investment securities (Note 4) 5,956,675 6,220,556

Deposits with the Central Bank of Venezuela (BCV) and overnight deposits 2,375,653 5,292,706Investments in available-for-sale securities 3,182,041 700,075Investments in held-to-maturity securities 311,115 151,283Restricted investments 87,866 76,765(Provision for investment securities) - (273)

Loan portfolio (Note 5) 20,287,426 15,338,403

Current 20,738,903 15,628,946Rescheduled 82,414 41,439Overdue 183,300 124,048In litigation 8,098 6,259(Allowance for losses on loan portfolio) (725,289) (462,289)

Interest and commissions receivable 236,048 243,124

Interest receivable on cash and due from banks - 2Interest receivable on investment securities 29,877 74,795Interest receivable on loan portfolio 198,435 160,301Commissions receivable 23,023 20,186Interest and commissions receivable on other accounts receivable 20 27(Allowance for interest receivable and other) (15,307) (12,187)

Investments in affiliates (Note 6) 294,574 214,162

Available-for-sale assets (Note 7) 23,762 40

Property and equipment (Note 8) 206,944 221,264

Other assets (Note 9) 461,172 553,851

Total assets 36,609,791 30,181,479

Memorandum accounts (Note 23)Contingent debtor accounts 3,146,120 3,262,824Assets received in trust 8,739,157 7,563,325Other special trust services 21,334 23,263Other debtor memorandum accounts 55,387,233 37,704,264Other debtor control accounts 5,146 27,303

67,298,990 48,580,979

The accompanying notes are an integral part of the consolidated financial statements

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Mercantil, C.A. Banco Universal and its Subsidiaries(Subsidiary of Mercantil Servicios Financieros, C.A.)Consolidated balance sheetDecember 31, 2009 and 2008


Liabilities and EquityDeposits (Note 10) 32,013,443 24,804,865

Demand deposits 17,598,014 13,047,702

Non-interest-bearing checking accounts 8,863,574 6,390,805Interest-bearing checking accounts 8,734,440 6,656,897

Other demand deposits 2,359,102 654,667Savings deposits 10,650,173 8,584,905Time deposits 750,027 852,697Securities issued by the Bank 26 53Restricted deposits 425,150 269,703Rights and participation in investment securities 230,951 1,395,138

Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (Note 11) 39 2,312

Borrowings (Note 12) 137,252 100,511

Venezuelan financial institutions, up to one year 134,444 94,563Foreign financial institutions, up to one year 697 3,097Borrowings, more than one year 2,111 2,851

Other liabilities from financial intermediation (Note 13) 19,494 71,463

Interest and commissions payable 12,732 19,363

Expenses payable on deposits 12,477 19,076Expenses payable on borrowings 255 287

Accruals and other liabilities (Note 14) 1,127,314 2,474,088

Total liabilities 33,310,274 27,472,602

Equity (Note 21)Capital stock 268,060 268,060Contributions pending capitalization 36 36Capital reserves 268,060 247,356Retained earnings 2,735,053 2,232,087Unrealized gain (loss) on available-for-sale investments (Note 4) 28,308 (38,662)

Total equity 3,299,517 2,708,877

Total liabilities and equity 36,609,791 30,181,479


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Mercantil, C.A. Banco Universal and its SubsidiariesConsolidated income statementYears ended December 31, 2009 and 2008

(Thousands of bolivars, exceptnet income per share) 2009 2008

Interest income (Note 2) 4,184,610 3,679,378

Income from cash and due from banks 890 10,556Income from investment securities 703,835 469,954Income from loan portfolio (Note 5) 3,243,306 3,050,370Income from other accounts receivable 40,064 46,526Other interest income (Note 23) 196,515 101,972

Interest expense (Note 2) (1,710,190) (1,440,323)

Expenses from deposits (1,510,570) (1,286,276)Expenses from liabilities with Banco Nacional de Vivienda y Hábitat - (463)Expenses from borrowings (438) (2,085)Expenses from other liabilities from financial intermediation (Note 23) (109,538) (76,069)Other interest expense (89,644) (75,430)

Gross financial margin 2,474,420 2,239,055

Income from financial assets recovered (Note 5) 103,243 42,956

Expenses from uncollectible accounts and write-down of financial assets (Notes 2 and 5) (476,728) (312,542)

Uncollectible loans and other accounts receivable (476,728) (312,095)Provision for cash and due from banks and adjustments - (447)

Net financial margin 2,100,935 1,969,469

Other operating income (Note 18) 750,731 666,708Other operating expenses (Note 19) (170,194) (161,752)

Financial intermediation margin 2,681,472 2,474,425

Operating expenses (1,840,595) (1,587,038)

Salaries and employee benefits (982,649) (803,308)General and administrative expenses (Note 17) (694,387) (652,809)Fees paid to the Deposit Guarantee and Bank Protection Fund (126,834) (101,378)Fees paid to the Superintendency of Banks and Other Financial Institutions (36,725) (29,543)

Gross operating margin 840,877 887,387

Income from available-for-sale assets (Note 7) 11,653 8,465Sundry operating income 86,920 133,383Expenses from available-for-sale assets (Note 7) (8,444) (2,059)Sundry operating expenses (Note 9) (66,228) (98,104)

Net operating margin 864,778 929,072

Extraordinary expenses (Note 20) (66,426) (61,144)

Gross income before tax 798,352 867,928

Income tax (Note 15) (76,317) (46,972)

Net income 722,035 820,956

Appropriation of net incomeLegal reserve 20,704 82,095Retained earnings 701,331 738,861

722,035 820,956

Net income per common share (in bolivars) (Note 2) 2,694 3,063


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Mercantil, C.A. Banco Universal and its SubsidiariesConsolidated statement of changes in equityYears ended December 31, 2009 and 2008

Unrealizedgain (loss) on

Contributions Retained earnings available-Capital pending Capital Restricted Unappropriated for-sale Total

(Thousands of bolivars) stock capitalization reserves surplus surplus investments equity

Balances at December 31, 2007 268,060 36 165,261 887,215 777,569 (6,869) 2,091,272

Net income - - - - 820,956 - 820,956Appropriation to legal reserve (Note 21) - - 82,095 - (82,095) - -Cash dividends (Note 21) - - - - (171,558) - (171,558)Adjustment of available-for-sale

investments to market value (Note 4) - - - - - (31,793) (31,793)Release of restricted surplus (Note 6) - - - (35,613) 35,613 - -Restricted surplus from participation in

the results of subsidiaries and equityin affiliates (Note 21) - - - 29,680 (29,680) - -

Reclassification of 50% of netincome for the year to restrictedsurplus (Note 21) - - - 354,591 (354,591) - -

Balances at December 31, 2008 268,060 36 247,356 1,235,873 996,214 (38,662) 2,708,877

Net income - - - - 722,035 - 722,035Appropriation to legal reserve (Note 21) - - 20,704 - (20,704) - -Cash dividends (Note 21) - - - - (198,365) - (198,365)Adjustment of available-for-sale

investments to market value (Note 4) - - - - - 66,970 66,970Release of restricted surplus (Note 6) - - - (45,404) 45,404 - -Restricted surplus from participation in

the results of subsidiaries and equityin affiliates (Note 21) - - - 64,288 (64,288) - -

Reclassification of 50% of netincome for the year to restrictedsurplus (Note 21) - - - 318,522 (318,522) - -

Balances at December 31, 2009 268,060 36 268,060 1,573,279 1,161,774 28,308 3,299,517


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Mercantil, C.A. Banco Universal and its SubsidiariesConsolidated cash flow statementYears ended December 31, 2009 and 2008


Cash flows from operating activitiesNet income 722,035 820,956Adjustments to reconcile net income to net cash provided by

(used in) operating activitiesEquity in affiliates (43,858) (32,937)Allowance for losses on loan portfolio 475,835 307,902Allowance for interest receivable and other - 3,036Provision for contingent loans - 290Provision for cash and due from banks - 447Provision for other accounts receivable 893 867Provision for investments in affiliates 18 -Write-off of uncollectible accounts (206,728) (111,859)Provision for other assets 3,549 11,353Write-offs against the provision for other assets (2,729) (7,092)Deferred income tax (11,866) (61,153)Other provisions 191,317 187,629Depreciation 40,388 45,990Amortization of deferred expenses and goodwill 55,239 44,760Amortization of available-for-sale assets 8,444 2,058Accrual for employee termination benefits 123,932 86,965Payment of employee termination benefits (121,502) (85,898)Net change in

Deposits with the Central Bank of Venezuela (BCV) and overnight deposits 2,917,053 (3,356,913)Interest and commissions receivable 7,076 (82,569)Other assets 47,593 (136,508)Interest and commissions payable (6,631) 1,400Accruals and other liabilities (1,540,794) 1,455,935

Net cash provided by (used in) operating activities 2,659,264 (905,341)

Cash flows from financing activitiesNet change in

Deposits 7,208,578 5,047,555Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (2,273) 329Borrowings 36,741 (99,492)Other liabilities from financial intermediation (51,969) (28,376)

Dividends paid (198,365) (171,558)

Net cash provided by financing activities 6,992,712 4,748,458

Cash flows from investing activitiesLoans granted during the year (24,388,169) (23,429,854)Loans collected during the year 19,170,039 20,327,928Net change in

Trading securities - 23,547Available-for-sale investments (2,414,996) 78,947Held-to-maturity investments (159,832) 592,115Restricted investments (11,101) 18,151Investments in affiliates (36,572) (96,786)Available-for-sale assets (32,166) (2,080)Property and equipment (26,068) (54,120)

Net cash used in investing activities (7,898,865) (2,542,152)

Cash and due from banksNet change 1,753,111 1,300,965

At the beginning of the year 7,390,079 6,089,114

At the end of the year 9,143,190 7,390,079

Supplementary information on non-cash activitiesAdjustment of available-for-sale investments to market value 66,970 (31,793)

Taxes paid 108,425 120,853

Interest paid 1,716,821 1,438,923

Gain on transactions with derivative instruments 1,158 34,478

Reclassification ofAllowance for losses on loan portfolio to allowance for interest receivable and other (Note 5) 3,300 3,800

Provision for contingent loans to allowance for losses on loan portfolio (Note 5) - 1,470

Mercantil, C.A. Banco Universal and its SubsidiariesNotes to the consolidated financial statementsDecember 31, 2009 and 2008

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1. Operations and regulatory environment

Reporting entityMercantil, C.A. Banco Universal (the Bank), founded in 1925 in the Bolivarian Republic of Venezuela(Venezuela), and its subsidiaries operate in the financial services sector in Venezuela and abroad. TheBank’s primary activities consist in providing financial intermediation services to individuals andcorporations through its main office in Caracas, agencies throughout the country, its agency in theUnited States of America (Coral Gables, FL), and its branch in Curacao.

The Bank owns the subsidiaries Inversiones y Valores Mercantil V, C.A. and Mercantil Promotora deValores 2005 V, C.A., which are engaged in financial investing.

The Bank belongs to the MERCANTIL Financial Group.

Most of the Bank’s assets are located in Venezuela. At December 31, 2009, the Bank, its agency,branch and subsidiaries have 7,430 employees.

The Bank’s primary financial statements at December 31, 2009 and 2008 were approved for issue bythe Board of Directors on January 12, 2010 and January 12, 2009, respectively.

Regulatory environmentThe Bank’s activities are regulated by the Reform of the General Law of Banks and Other FinancialInstitutions (General Law of Banks) and the accounting rules and instructions of the Superintendencyof Banks and Other Financial Institutions (Superintendency of Banks), the Central Bank of Venezuela(Banco Central de Venezuela - BCV) and the Deposit Guarantee and Bank Protection Fund(FOGADE).

The General Bank Law was amended in December 2009 which among other things requiresauthorization from the Superintendency of Banks for purchasing bank stock, either directly orindirectly, to modify the percentage of total customer deposits that commercial and universal banksmust contribute to the Deposit Guarantee and Bank Protection Fund (FOGADE), and to increases thedeposit guarantee to Bs 30,000 per depositor. In January 2010, FOGADE contributions were fixed at0.75% of total customer deposits at prior six-month end. This contribution will be 0.5% for the firstsix-month period of 2010 (0.25% until December 31, 2009).

The Bank’s branch and agency abroad, which have not been incorporated separately from the Bank,are subject to specific requirements of regulatory agencies in the countries where they operateregarding prior consultation for certain transactions, quality of assets, and capital and liquidity levels,as explained below:

Mercantil, C.A. Banco Universal - Curacao BranchThis branch operates in the Netherland Antilles. It is supervised and controlled by the Central Bank ofthe Netherland Antilles and the Superintendency of Banks in Venezuela.


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Mercantil, C.A. Banco Universal - Coral Gables, FL agency (United States of America)This agency is subject to banking regulations in the State of Florida. In addition, it is supervised andregulated by the Federal Reserve Bank and the Superintendency of Banks in Venezuela.

Regulations require the Bank to earmark a minimum nominal percentage of 47% of its gross loanportfolio at December 31, 2009 and 2008 to finance loans for agriculture, mortgages, tourism,manufacturing and small businesses.

Deposit and lending rates are regulated by BCV. BCV sets maximum and minimum interest rates fordeposits and credit operations based on reference rates. In this regard, the annual interest rate forlending operations may not exceed 24% (26% from April 1 to June 4, 2009 and 28% at December 31,2008) and 29% for credit card operations (31% from April 1 to June 4, 2009 and 33% at December 31,2008). Financial institutions may only charge an additional 3% per annum on amounts overdue fromclients. The maximum interest rates for directed loan portfolios at December 31, 2009 and 2008 are asfollows: agriculture 13%, small businesses 24% (28% at December 31, 2008), tourism 15% to 16%(16% to 17% at December 31, 2008), mortgage 4.66% to 14.39% (10.11% at December 31, 2008), andmanufacturing 19% (Note 5). Annual interest rates for savings deposits may not fall below 12.5%calculated on daily balances (14% from April 1 to June 4, 2009 and 15% at December 31, 2008).Annual interest rates on time deposits may not fall below 14.5% (16% from April 1 to June 4, 2009and 17% at December 31, 2008).

As from June 5, 2009, the annual interest rate to be charged by BCV on discount, rediscount andadvance operations, except as regards those conducted under special regimes, was set at 29.5% (31.5%until June 4, 2009 and 33.5% until March 31, 2009).

BCV has regulated service fees charged by banks to customers in respect of savings and currentaccounts, and leasing, international, and credit and debit card transactions.

In February 2009, the Superintendency of Banks issued regulations on the method for calculatingcredit card interest. Under this method, credit card purchases will only begin to bear interest chargesone month after purchases are billed.

2. Basis of preparation

The accompanying consolidated financial statements include the accounts of the Bank and itssubsidiaries and have been prepared based on the Accounting Manual for Banks, Other FinancialInstitutions and Savings and Loan Entities (Accounting Manual) and the accounting rules andinstructions of the Superintendency of Banks, which differ in certain respects from accountingprinciples generally accepted in Venezuela (VEN NIF). In April 2008, the Venezuelan Federation ofPublic Accountants (FCCPV) approved the adoption of VEN NIF as the accounting principles ofmandatory application in Venezuela as from January 1, 2008. These standards are mainly based onInternational Financial Reporting Standards issued by the International Accounting Standards Board,except for certain criteria concerning adjustments for inflation, among others. In October 2008, theSuperintendency of Banks established that consolidated or combined financial statements preparedunder VEN NIF as supplementary information will be mandatory as from the six-month period endingJune 30, 2010. Financial statements for six-month periods ending prior to this date should bepresented in conformity with accounting principles generally accepted in Venezuela in effect atDecember 31, 2007. Accordingly, in order to prepare the consolidated financial statements and for


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comparison purposes only, the amounts for the six-month period ending December 31, 2009 must beadjusted in conformity with VEN NIF.

The Bank’s accompanying consolidated financial statements have been prepared based on theAccounting Manual and the accounting rules and instructions of the Superintendency of Banks. Theserules differ in certain respects from VEN NIF, mainly as follows:

Accounting treatmentRules of the

Superintendencyof Banks VEN NIF

Consolidation Subsidiaries over 50% owned are consolidated. Subsidiaries over 50% owned andspecific-purpose entities controlled bythe Bank or of whose income theBank is considered the mainbeneficiary are consolidated.

Inflation-adjusted financial statements Shown as supplementary information based on theCPI.

The effects of inflation are recognizedin the financial statements providedthat inflation for the year exceeds onedigit, based on the NCPI.

Investments assigned through liquid asset accountsand certificates of participation

A portion is shown as a decrease in the balance ofinvestment securities. In addition, a portion ofinterest on liquid asset accounts and certificatesof participation is shown as a reduction of incomefrom investment securities.

Must be shown as a liability. Intereston investments assigned is shown asinterest expense.

Transactions with derivative instruments Shown under memorandum accounts. Gainsresulting from changes in the market value ofderivative instruments arising from contracts withrelated companies are recorded under otherdeferred income until collected (Notes 9 and 14).

Must be shown in the balance sheet.Gains from changes in the marketvalue of derivative instruments areshown in the income statement.

Allowance for losses on loan portfolio Determined based on a collectibility assessmentfor individual loans, a global risk assessment forloans not assessed individually, and a generalprovision of 1% over loan balances at month end,except for small businesses, which are subject toa general provision of 2%.

The Bank first assesses whetherobjective evidence of impairmentexists individually for loans that areindividually significant, orcollectively for loans that are notindividually significant. Thisallowance is also determined based onasset recoverability, considering thefair value of guarantees. VEN NIF donot provide for a general provision,which would have to be accounted foras a reduction of retained earnings inequity.

Property and equipment These assets are initially recorded at acquisition orconstruction cost, as applicable.

Property and equipment may berevalued, and any increase in value iscredited to equity under revaluationsurplus.

Assets received as payment for uncollectible loansand idle assets no longer used in operations

Assets received as payment must be recorded atthe lower of assigned value, book value, marketvalue or appraisal value not older than one year,and are amortized using the straight-line methodover one to three years. Assets idle for more than24 months are written out of asset accounts.

Must be recorded at the lower of costand market value and are classified asproperty and equipment or available-for-sale assets depending on their use.


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Investments in trading and available-for-sale securities Investments in trading securities may remain inthis category for only 90 days from the date theywere classified as held for trading. Investments inavailable-for-sale securities must be reclassifiedaccording to the terms established bythe Superintendency of Banks, as follows:(a) investments held before April 1, 2008 mayremain in this category until December 31, 2008;(b) investments acquired between April 1, 2008and March 31, 2009 may remain in this categoryfor 18 months from the date they were classifiedas available-for-sale; and (c) investmentsacquired after April 1, 2009 may not remain inthis category for more than one year as from thedate they were classified as available-for-sale,except for securities issued and guaranteed by theVenezuelan government and investments inshares of mutual guarantee companies.

May remain in these categoriesindefinitely.

Commissions collected on loans granted Shown as income when collected. Shown as income over the term of theloan.

Deferred income tax Recognized for temporary differences between thetax and the book balance sheets, except forprovisions for losses on other than high risk orunrecoverable loans. A deferred income tax assetis not recognized for any amount exceeding futuretaxable income.

A deferred tax asset is recognized fortemporary differences between the taxand book balance sheets provided thatthere is a reasonable expectation ofrecovery.

Maturity of investment securities Investment securities or related interest notcollected within 30 days of maturity are fullyprovided for.

Recorded based on collectibility.

Expenses incurred during the currencyredenomination process

These expenses were deferred and are beingamortized according to their nature using thestraight-line method over one to six years.

Must be recorded during the period inwhich they are incurred.

Leasehold improvements Recorded as amortizable expenses and includedunder other assets.

Recorded within property andequipment.

Employee stock option plan The Bank has a long-term stock optionplan allowing certain key officers topurchase MERCANTIL shares (Note 16).The Bank makes contributions toFundación BMA to purchase shares andrecords them in the results for the year in whichthey are made.

The related expense is recorded at thefair value of options granted toemployees and amortized over thevesting period. The effect of sharespurchased for the stock option plan onthe financial statements is alsorecognized.

Goodwill Amortized using the straight-line method over 10to 20 years. As per instructions of theSuperintendency of Banks, as from April 2008goodwill must be amortized over no more thanfive years (Note 9).

Should not be amortized but tested forimpairment annually or wheneverevents or circumstances indicate thatthe value of the respective reportingunit may be impaired. Impairment isdetermined by comparing the bookvalue of the cash generating unit to itsrecoverable value, and if the carryingamount exceeds the recoverableamount, an impairment loss isrecognized in the income statement.


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Interest income Interest on loans, investments and accountsreceivable is recorded as income when earned,except: a) interest receivable on loans more than30 days overdue; b) interest on overdue or in-litigation loans, or other loans classified as realrisk, high risk or unrecoverable; c) interest oncurrent and rescheduled loans expected to becollected in six months or more; and d) overdueinterest, all of which are recorded as income whencollected. Interest accrued but not collected inrespect of overdue loans is fully provided for.Interest on loan installments are fully provided forif repayment is more than 30 days past due.

Interest is recorded as income whenearned until the loan is considereduncollectible. It is provided for basedon collectibility.

Cash flows Cash and due from banks are considered cashequivalents.

Investments and deposits maturingwithin 90 days are considered cashequivalents.

Discounts or premiums on held-to-maturityinvestments

Amortized over the term of the security with adebit or credit to gain or loss on investmentsecurities under other operating income or otheroperating expenses, respectively.

Must be accounted for as part of thesecurity’s yield and, therefore, must berecognized under interest income.

Provisions The Accounting Manual establishes timeframes torecord provisions for bank reconciling items,pending items and accounts receivable formingpart of other assets, interest receivable anddisposal of certain assets, among others.

Provisions are recorded based on theprobability of collection or recovery.No timeframes are established forcreating provisions for these items.

Rescheduled loans Loans whose original payment schedule, term orother conditions have been modified at therequest of the debtor must be reclassified withinrescheduled loans.

Provide no specific guidance. However,they do state that impairment losses onfinancial assets carried at amortizedcost shall be charged to the results forthe year in which they are incurred.

Overdue and in-litigation loans Loans classified as overdue must be written offwithin 24 months after inclusion in this category.Loans in litigation must be fully provided for after24 months in the in-litigation category. Inaddition, overdue monthly loan installments thathave been repaid must be reclassified to thecategory to which they pertained before beingclassified as overdue. Likewise, when a debtorrepays pending loan installments of a loan inlitigation, thereby terminating the lawsuit, theloan must be reclassified to the category to whichit pertained before being classified as in litigationor overdue.

Recorded based on collectibility.

Permanent losses on held-to-maturity securities When permanent losses arising from impairmentin the fair value of investment securities arerecorded, any subsequent recovery in fair valuedoes not affect the new cost basis.

For debt securities, any recovery ofpreviously expensed impairment lossesmay be credited to income.


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Reclassification of available-for-sale securities toheld-to-maturity securities

Available-for-sale assets reclassified to the held-to-maturity category are recorded at their fair valueat the reclassification date. Unrealized gains orlosses are maintained separately in equity and areamortized over the investment’s remaining life asan adjustment to yield.

The fair value of the investment at thereclassification date becomes the newamortized cost basis, and any gain orloss previously recognized in equity isaccounted for as follows: a) gains orlosses on fixed maturity investments,as well as any difference between thenew amortized cost and value atmaturity, are taken to profit and lossand amortized over the investment’sremaining life; b) gains or losses onnon-maturing investments will remainin equity until the asset is sold orotherwise disposed of, when it shallbe recognized in profit or loss.

Reclassification of held-to-maturity securities toavailable-for-sale securities

Reclassifications of held-to-maturity securitiesmust be previously approved by theSuperintendency of Banks.

When reclassifications are forsignificant amounts and are due to achange in the investment’s intendeduse not qualified as an isolated,external, nonrecurring or unusualevent affecting the Bank, allinvestments in this category must bereclassified to available-for-salesecurities.

Foreign currency Foreign currency transactions, mainly in U.S.dollars (US$), are shown at the official exchangerate in effect at the transaction date. Foreigncurrency balances at December 31, 2009 and2008 are shown at the current official exchangerate of Bs 2.1446/US$1, as established in thecurrent Exchange Agreements described inNote 22. Exchange gains and losses are includedin the consolidated income statement.

Net monetary liability positions inforeign currency which are notreasonably expected to be settled withforeign currency purchased from theVenezuelan government at the officialexchange rate shall be measured onthe basis of best estimates of futurecash flows in bolivars expected to berequired to settle these liabilities atthe transaction or balance sheet date,using the exchange or settlementmechanisms permitted underVenezuelan law.

Below is a summary of the accounting principles in use that do not differ from accounting principlesgenerally accepted in Venezuela (VEN NIF):

a) ConsolidationThe consolidated financial statements include the accounts of the Bank, its Curacao branch and theagency in Coral Gables, FL, as well as the wholly owned subsidiaries Inversiones y Valores MercantilV, C.A. and its subsidiaries, and Mercantil Promotora de Valores 2005 V, C.A., all domiciled inVenezuela.

The Bank’s agency, branch and subsidiaries are regulated by different accounting rules. The agency isregulated by accounting principles generally accepted in the United States of America and the branchby International Financial Reporting Standards. They also follow bank practices generally used in thecountries where they operate. Subsidiaries are mainly regulated by accounting principles generallyaccepted in Venezuela. However, necessary adjustments and groupings have been made to present theconsolidated financial statements in accordance with the rules of the Superintendency of Banks.


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b) Use of estimatesThe preparation of consolidated financial statements requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities and the disclosure of contingentassets and liabilities at the date of the consolidated financial statements and the amounts of incomeand expenses during the reporting periods. Actual results may differ from those estimates. Below is asummary of the main bases used in the preparation of the consolidated financial statements:

Contingent debtor accountsThe provision for contingent loans is determined based on a collectibility assessment aimed atquantifying the specific allowance for possible losses on each loan considering, among other things,economic conditions, client credit risk, credit history and the fair value of guarantees received. TheBank’s review is performed on a quarterly basis in accordance with Superintendency of Banksregulations.

Loans of similar nature are assessed as a whole to determine any applicable allowances.

Other assetsThe Bank assesses the collectibility of items recorded under other assets using the same criteria, whereapplicable, as those applied to the loan portfolio. Furthermore, the Bank sets aside provisions forthose items that require them due to their nature or aging, or following requirements from theSuperintendency of Banks.

Provision for legal and tax claimsThe Bank sets aside a provision for legal and tax contingencies considered probable and reasonablyquantifiable based on the opinion of its legal advisors and facts known at the assessment date. Theoutcome of these processes could differ from that expected (Notes 14 and 15).

c) Translation of the financial statements of the branch and agency abroadThe asset, liability and equity accounts of the branch and agency abroad are translated at the currentofficial exchange rate (Note 22). Income accounts are translated at the average exchange rate for theyear. The effect from translation is included in the consolidated results for the year.

d) Investment securitiesInvestment securities are classified upon acquisition, based on their nature and intended use, asdeposits with the Central Bank of Venezuela (BCV) and overnight deposits, investments in tradingsecurities, investments in available-for-sale securities, investments in held-to-maturity securities,investments in other securities and restricted investments. They are accounted for as described below:

Deposits with the Central Bank of Venezuela (BCV) and overnight depositsExcess liquidity deposited at the Central Bank of Venezuela (BCV), overnight deposits and debtsecurities issued by Venezuelan financial institutions are included in this category. These investmentsare recorded at realizable value, representing cost or par value.

Investment securities purchased from BCV with the firm contractual commitment to resell them at anagreed time and price are recorded at an agreed value to be maintained during the contract term.


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Investments in trading securitiesInvestments in trading securities are recorded at fair value and comprise investments in debt andequity securities. Unrealized gains or losses resulting from differences in fair values are included inthe consolidated income statement.

Investments in available-for-sale securitiesInvestments in available-for-sale debt and equity securities are recorded at fair value. Unrealizedgains or losses, net of tax, resulting from differences in fair values are included in equity underunrealized gain (loss) on available-for-sale investments until they are sold or reclassified toinvestments in trading securities. Investments in debt securities not listed on stock exchanges arerecorded at fair value based principally on the present value of future cash flows of the securities.

Investments in held-to-maturity securitiesInvestments in debt securities that the Bank has the firm intention and ability to hold until maturity arerecorded at cost, which should not differ significantly from fair value at purchase, and aresubsequently adjusted for amortization of premiums or discounts. Discounts or premiums areamortized over the term of the securities as a credit or debit to income from investment securities. Thebook value of the investments in respect of instruments denominated in foreign currency is adjusted atthe exchange rate in effect at year end.

The Bank assesses at each balance sheet date, or sooner if circumstances require it, whether there isobjective evidence that a financial asset is impaired. An impairment in the fair value of held-to-maturity and available-for-sale securities is charged to the results for the year when managementconsiders that it is other than temporary. Certain factors identified as indicators of impairment are,among others: 1) a prolonged period where fair value remains substantially below cost, 2) the financialcondition and liquidity of the issuer, 3) a fall in the issuer’s credit rating, 4) the disappearance of anactive market for the security, and 5) the Bank’s inability to hold the investment long enough to allowfor recovery of fair value. For the years ended December 31, 2009 and 2008, the Bank has identifiedno impairments considered other than temporary in the value of its investments.

Restricted investmentsRestricted investments originating from other investment categories are valued using the same criteriaused to record those investments from which they are derived. Investments which the Bank iscommitted to reselling through BCV are valued using the same criteria as for investments in tradingsecurities.

Investments in other securitiesInvestments in other securities include investment trusts, as well as investments not classified underany other category.

The Bank uses the specific identification method to determine the cost of securities and this samebasis to calculate realized gains or losses on the sale of trading or available-for-sale securities.

e) Loan portfolioAs required by the Superintendency of Banks, commercial loans and term, mortgage and credit cardloan installments are classified as overdue if repayment is more than 30 days past due. As fromOctober 9, 2007, advances on negotiated letters of credit are classified as overdue if not repaid within270 days after their due date for letters of credit for import purposes for which the customer has


14

consigned documents for Authorizations for Currency Liquidation with the Commission for theAdministration of Foreign Currency (CADIVI) and funds in bolivars are available at the Bank forforeign currency purchases. Furthermore, the entire principal balance of term mortgage or credit cardloans is classified as overdue if repayment of any installment is more than 90 days late. In addition,the entire balance of loans granted to small businesses is considered past due if repayment of at leastone monthly installment is 60 days overdue or one weekly installment is 14 days overdue.

Loans in litigation are those in the legal collection process.

f) Investments in affiliatesThe Bank uses the equity method to account for investments in 20% to 50%-owned affiliates.

Investments in companies less than 20% owned that the Bank has the intention of holding, and overwhose administration it has significant influence, are recorded under the equity method or at cost.

g) Property and equipmentProperty and equipment is shown net of accumulated depreciation. Depreciation is calculated using thestraight-line method over the estimated useful lives of the assets. Gains or losses on the sale ofpersonal and real property are shown in the consolidated income statement.

The Bank assesses possible impairment in the value of its long-lived assets when events or changes incircumstances indicate that their carrying value may not be recoverable. An impairment loss isrecognized against income for the amount by which the asset’s carrying amount exceeds fair value.

h) Available-for-sale assetsAvailable-for-sale assets other than personal and real property received as payment are recorded at thelower of cost and market value. Gains or losses from the realization of available-for-sale assets areincluded in the consolidated income statement.

i) Deferred expensesDeferred expenses are mainly in respect of office setup, office improvement and software expenses.These expenses are recorded at cost, net of accumulated amortization. Amortization is calculatedusing the straight-line method over four years.

j) Income taxThe Bank’s tax year ends on December 31. The Bank records a deferred tax asset when, in theopinion of management, there is reasonable expectation that future tax results will allow its realization(Note 15).

k) Employee benefitsThe Bank accrues for its liability in respect of employee termination benefits, which are a vested rightof employees, based on the provisions of the Venezuelan Labor Law and the prevailing collectivelabor agreement, and deposits amounts accrued monthly in a trust fund on behalf of each employee.Under certain circumstances, the Law provides for an additional indemnity for unjustified dismissals.Based on experience, the Bank has set aside an additional provision to cover this contingent liability.


15

Profit-sharing bonus and vacation leaveAs established in its collective labor agreement, the Bank grants profit-sharing bonuses and vacationleave to its employees that match or exceed minimum requirements set out by law, and accrues therelated liabilities as incurred (Note 14).

l) Employee benefit plansRetirement pension planThe Bank has a long-term defined benefit plan covering all eligible employees which is managed byFundación BMA. Related costs and liabilities are calculated using actuarial methods and are recordedin the consolidated results for the year. The net costs of the pension plan are based on actuarialassumptions that are revised annually, such as the discount rate of the obligation, the inflation rate andsalary increases, and include service costs, interest expense and returns on plan assets, as well asdeferral and amortization of certain components. Changes in assumptions may affect the amount offuture contributions.

The Bank uses the projected unit credit method to calculate the present value of the Defined BenefitObligation (DBO). The Bank makes annual contributions to the plan, except when the DBO is alreadycovered by plan assets.

Defined contribution schemeThe Bank maintains a defined contribution scheme called the MERCANTIL Supplementary SavingsPlan to replace the Supplementary Retirement Pension Plan. Contributions to the plan are recorded inthe results for the year in which they are made. This Plan is a voluntary programmed savings schemein the form of individual capitalization accounts that is administered by the Savings and Credit Fundof Mercantil Servicios Financieros, C.A. employees. Under the Supplementary Savings Plan,employees contribute between 1% and 5% of their basic monthly salary and MERCANTIL doublesthe employee’s contribution up to a maximum of 10% of said salary.

Post-retirement benefitsThe Supplementary Retirement Pension Plan and the Supplementary Savings Plan include certainpost-retirement benefits to employees of the Bank and its subsidiaries in Venezuela, mainly medicalinsurance. The related costs and liabilities are determined based on actuarial methods and their effectis expensed over 10 years.

m)Investment securities acquired under resale agreementsInvestments in securities acquired under resale agreements are recorded as restricted investments forthe amount of funds transacted. Differences between resale and book value are recorded under interestincome as earned (Note 4).

n) Direct financial assets and liabilitiesThese are short sale agreements in which the Bank is the lender and the client is the borrower. Theunderlying asset is included in the loan portfolio (Note 5). When the Bank is the borrower, theliability is shown under accruals and other liabilities (Note 14). Direct financial assets and liabilitiesare recorded at the market value of the underlying asset or liability, including any interest receivable orpayable on these assets or liabilities. Gains or losses from adjustments to market value are included inthe results for the year.


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o) Recognition of revenue and expensesIncome, costs and expenses are recorded as earned or incurred. Interest collected in advance isincluded under accruals and other liabilities as deferred income and recorded as income when earned(Note 14).

Interest on deposits, liabilities and borrowings is recorded as interest expense when incurred.

Income from financial lease contracts and amortization costs of leased property are shown in theconsolidated income statement under income from loan portfolio.

p) Net income per shareNet income per share has been determined by dividing net income for the year by the number ofoutstanding shares.

q) DividendsCash dividends are recorded as liabilities when approved at a Shareholders’ Meeting.

r) Assets received in trustAssets received in trust, shown under memorandum accounts, are valued using the same parametersused by the Bank to value its own assets, except investment securities which are valued as describedbelow:

Investments in debt securities are recorded at cost, which should not differ significantly from fairvalue at purchase. Discounts or premiums are amortized over the term of the securities as a credit ordebit to interest income, resulting in a lower or greater effective yield of investments. Debt securitiesin foreign currency are adjusted to the exchange rate in effect. Investments in equity securities inbolivars and foreign currency are recorded at cost. In accordance with certain trust agreements,investments in debt or equity securities included in these trusts are maintained at cost or marketvalues.

As of May 2009, investment portfolios in foreign currency, comprising directed trusts maintainedthrough a related company abroad, are recorded at their acquisition or amortized cost.

s) Segment reportingA business segment is a separate group of assets and operations engaged in providing products orservices that are subject to risks and returns that are different from those of other business segments.Most of the Bank’s operations are conducted in Venezuela.

t) Risk managementThe Bank is mainly exposed to credit, market and operational risks. Below is the risk policy used bythe Bank for each type of risk:

Credit riskThe Bank considers exposure to credit risk when one of the parties is unable to pay off its debts atmaturity.


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The Bank monitors credit risk exposure by regularly analyzing the payment capabilities of itsborrowers. The Bank structures the level of credit risk by establishing limits for individual or groupborrowers.

In certain cases, the Bank requests fiduciary or mortgage guarantees, collateral, or certificates ofdeposit after assessing specific borrower characteristics.

Market riskFinancial institutions encounter market risks when market conditions show adverse changes that affectthe liquidity and value of financial instruments included in investment portfolios or contingentpositions and result in a loss for these financial institutions. Market risk mainly comprises two typesof risk: price and liquidity. Price risk includes interest rate, exchange rate and share price risks.

Interest rate risk arises from temporary differences between assets and liabilities shown in the balancesheet. Differences resulting from adverse changes in interest rates have a potential impact on financialmargins of institutions.

Exchange rate risk arises from fluctuations in the value of financial instruments due to changes inforeign currency exchange rates. The Bank’s transactions are mainly in bolivars. However, when theTreasury identifies short or medium-term market opportunities, investments might be deposited inforeign currency instruments, mainly in U.S. dollars, in accordance with regulations set out by theexchange control regime.

The Bank measures on a daily basis each market factor and its impact on the Bank’s risk profile toenhance its business strength in current and potential financial markets. The Bank uses differentmethodologies to measure market risks.

The Bank’s investment strategy is aimed at guaranteeing adequate liquidity levels. A significantportion of cash is invested in short-term instruments such as certificates of deposit with BCV. Inaddition, a large portion of the investment portfolio includes securities issued by the BolivarianRepublic of Venezuela and other highly liquid financial obligations.

Operational riskThe Bank considers operational risk as the possibility of incurring direct or indirect losses as a resultof inadequate or defective internal processes, deficient internal controls, human error, system failuresor external events. The operational risk management structure established by the Bank enables it toconduct internal processes for identification, assessment, quantification, follow-up and mitigation ofoperational risks throughout the organization. This structure also provides management with theinformation required to set priorities and aid the decision-making process.

Operational risk management at MERCANTIL is a dynamic process conducted from a qualitativestandpoint-by identifying risks and analyzing trigger factors-and from a quantitative standpoint–byidentifying events, measuring their impact, monitoring the behavior of key risk indicators andanalyzing scenarios. The information gathered from these processes serves as the basis to define andimplement actions aimed at controlling and mitigating operational risks within the organization.


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Fiduciary activitiesThe Bank acts as custodian, administrator and manager of third-party investments. Trust fund assetsare not included in the Bank’s assets. At December 31, 2009 and 2008, trust fund assets amount toBs 8,739,157,000 and Bs 7,563,325,000, respectively, and are shown under memorandum accounts(Note 23).

3. Cash and due from banks

Below are the balances with BCV included in cash and due from banks at December 31:


Legal reserve in bolivars 6,544,358 6,012,930Legal reserve in U.S. dollars 3,368 9,815Demand deposits 1,125,783 89,738

7,673,509 6,112,483

Pending cash items are mainly in respect of clearinghouse operations by BCV and other banks.

The Bank is required to maintain a minimum reserve deposit with BCV equivalent to 17% of theBank’s total deposits and borrowings, including deposits classified as investments assigned (Notes 4and 10) but excluding liabilities to BCV, FOGADE and other financial institutions. The legal reservefor deposits and borrowings in local and foreign currency should be made in bolivars. The legalreserve for deposits and borrowings in foreign currency should be made in U.S. dollars until January2008. Marginal increases in deposits as from July 2006 were subject to a legal reserve of 30% untilJanuary 30, 2009, when the rate was changed to 27%. As of March 2009, marginal increases indeposits were subject to a legal reserve of 25% until November 2009, when the rate was changed to23%. Legal reserve funds do not earn interest for the Bank.

4. Investment securities

Investment securities at December 31 comprise the following:


InvestmentsDeposits with the Central Bank of Venezuela (BCV) and

overnight deposits 3,078,826 6,141,320Investments in available-for-sale securities 3,182,041 700,075Investments in held-to-maturity securities 319,839 546,235

6,580,706 7,387,630

LessInvestments assigned through liquid asset accounts and

certificates of participation (711,897) (1,243,566)

5,868,809 6,144,604

Restricted investments 87,866 76,765

Provision for investment securities - (273)

5,956,675 6,220,556


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a) Deposits with the Central Bank of Venezuela (BCV) and overnight depositsDeposits with Central Bank of Venezuela (BCV) and overnight deposits at December 31 comprise thefollowing:

Book value(Thousands of bolivars) 2009 2008

Deposits with BCV, maturing in January 2010 (maturingbetween January and February 2009 in 2008) 1,831,000 (1) 6,030,000 (1)

Investment securities acquired under resale agreements with BCV,maturing in January 2010 1,226,000 (1) -

Overnight deposits in local currency, maturing in January2010 (maturing in January 2009 in 2008) 3,000 (1) 7,000 (1)

Overnight deposits in foreign currency, maturing in January2010 (maturing in January 2009 in 2008) 18,826 (1) 29,320 (1)

Time deposits with Venezuelan financial institutions, maturing inJanuary 2009 - 75,000 (1)

3,078,826 6,141,320LessInvestments assigned through liquid asset accounts and

certificates of participation (703,173) (848,614)

2,375,653 5,292,706

(1) Shown at par value, which is considered as fair value.

Deposits with BCV and overnight deposits at December 31 earn the following annual interest:

2009 2008Minimum Maximum Minimum Maximum

rate rate rate rate% % % %

Deposits with BCV 6.00 7.00 13.00 14.00Investments in securities under repurchase agreements 6.00 6.00 - -Overnight deposits in local currency 2.00 2.00 13.00 15.00Overnight deposits in foreign currency 0.04 0.25 0.25 1.80Time deposits with Venezuelan financial institutions - - 15.00 15.00

Investments assigned at December 31 bear the following annual interest:



Investments assignedLiquid asset accounts 12.50 12.50 17.00 17.00Certificates of participation 1.50 14.50 0.25 15.00


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b) Investments in available-for-sale securitiesInvestments in available-for-sale securities at December 31 comprise the following:

2009 2008Book value Book value(equivalent (equivalent

Acquisition Unrealized Unrealized to market Acquisition Unrealized Unrealized to market(Thousands of bolivars) cost gain loss value) cost gain loss value)

Securities issued or guaranteed by theVenezuelan governmentFixed-interest securities issued by the Bolivarian

Republic of Venezuela, maturing betweenMay 2010 and November 2015, with a parvalue of Bs 838,677,183 (maturing in December2012, with a par value of Bs 100,000 in 2008) 841,744 1,725 (1,649) 841,820 (1) 100 - (9) 91 (1)

Treasury Notes issued by the Bolivarian Republicof Venezuela, maturing between January andNovember 2010, with a par value of Bs 765,375,458(maturing between January and March 2009, witha par value of Bs 47,963,687 in 2008) 747,303 4,817 (960) 751,160 (1) 47,122 493 (1) 47,614 (1)

National Public Debt Bonds of the BolivarianRepublic of Venezuela (Agricultural Bonds),maturing between September 2012 and March2014, with a par value of Bs 424,467,000 424,525 2,368 - 426,893 (1) - - - -

Principal and Interest Covered Bonds (TICC),maturing between November 2013 and March2019, with a reference par value ofUS$139,977,116, payable in bolivars at the officialexchange rate (with a reference par value ofUS$77,307,400 in 2008) 284,478 6,267 (2,913) 287,832 (1) 159,420 5,978 (7) 165,391 (1)

National Public Debt Bonds of the BolivarianRepublic of Venezuela, maturing betweenJanuary 2010 and September 2014, with a parvalue of Bs 261,958,036 (maturing betweenJune 2009 and November 2015, with a parvalue of Bs 181,147,722 in 2008) 259,516 446 (5,880) 254,082 (1) 182,637 295 (6,537) 176,395 (1)

Petrobonos 2011, maturing in July 2011,with a par value of US$50,000,000 (Note 22) 193,035 43,568 - 236,603 (2) - - - -

National Public Debt Bonds of the BolivarianRepublic of Venezuela in foreign currency,maturing between April 2011 and 2025, with apar value of US$39,503,000 (maturing betweenAugust 2010 and April 2025, with a par value ofUS$112,627,000 in 2008) 81,673 - (17,470) 64,203 (1) 228,952 - (62,012) 166,940 (1)

Sovereign Bonds in foreign currency, maturingbetween October 2019 and 2024, with a parvalue of US$12,000,000 17,444 - (834) 16,610 (1) - - - -

Petrobonos 2014, 2015 and 2016, maturing betweenOctober 2014 and 2016, with a par value ofUS$5,100,000 6,122 - (203) 5,919 (1) - - - -

2,855,840 59,191 (29,909) 2,885,122 618,231 6,766 (68,566) 556,431

Debt securities issued by foreign banks andother financial institutionsDebt securities issued by Bank of America Corporation,

maturing in June 2012, with a par value ofUS$5,975,000 12,828 57 - 12,885 (1) - - - -

Debt securities issued by Lloyds Bank, maturing inApril 2012, with a par value of US$5,000,000 10,723 233 - 10,956 (1) - - - -

Debt securities issued by Sovereign Bancorporation,maturing in June 2012, with a par value ofUS$4,100,000 8,911 67 - 8,978 (1) - - - -

32,462 357 - 32,819 - - - -

Investments in financial private-sector companiesBanco Provincial, C.A. (Banco Universal), 20,000,000

preferred shares with a par value of Bs 0.1 each,equivalent to 0.23% of its capital stock - - - - 2,000 - - 2,000 (3)

Other - - - - 196 585 - 781

- - - - 2,196 585 - 2,781


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Acquisition Unrealized Unrealized to market Acquisition Unrealized Unrealized to market(Thousands of bolivars) cost gain loss value) cost gain loss value)

Investments in non-financial private-sector companiesMasterCard, 1,930 shares with a par value of US$0.0001

each, equivalent to 0.00148% of its capital stock - - - - 127 1,147 - 1,274 (3)Caja Venezolana de Valores, C.A., 21,616 common

shares with a par value of Bs 66.46 each,equivalent to 18.01% of its capital stock - - - - 128 520 - 648 (4)

Other 1 - - 1 21 - - 21

1 - - 1 276 1,667 - 1,943

Debt securities issued by foreign public andprivate-sector companiesDebt securities issued and guaranteed by government

agencies of the United States of America,maturing between July 2018 and February 2044,with a par value of US$101,435,238(maturing between September 2027 andSeptember 2038, with a par value ofUS$39,080,703 at December 31, 2008) 229,628 2,167 (92) 231,703 (3) 85,033 707 (243) 85,497 (3)

Debenture bonds issued by Corporación Andinade Fomento (CAF), maturing between Februaryand March 2012, with a par value of Bs 25,250,000 26,102 - (1,647) 24,455 (1) 26,102 - (2,080) 24,022 (1)

Debt securities with Burlington Resources, maturingin December 2011, with a par value ofUS$2,000,000 4,609 85 - 4,694 (1) - - - -

Debt securities with the Netherlands Government,maturing in January 2010, with a par value of€1,051,394 3,248 - (1) 3,247 (1) - - - -

Debt securities issued and guaranteed by governmentagencies of other countries, maturing in January 2009,with a par value of US$2,056,082 - - - - 4,805 - (7) 4,798 (1)

263,587 2,252 (1,740) 264,099 115,940 707 (2,330) 114,317

Debt securities issued by Venezuelan private-sectorcompaniesDebt securities issued by Venezuelan private-sector

companies, maturing in January 2009, with a parvalue of Bs 25,000,000 - - - - 22,613 1,990 - 24,603 (3)

3,151,890 61,800 (31,649) 3,182,041 759,256 11,715 (70,896) 700,075

(1) Based on the present value of estimated future cash flows.

(2) Corresponds to the national market value in bolivars.

(3) Market value based on prices listed on the stock exchange.

(4) Equivalent to book value.

Petrobonos 2011 are traded on the national and international markets. At December 31, 2009, thesesecurities are measured based on the national market value, which represents the estimated cash flowsin bolivars expected to be received at the realization date, based on their intended use.

At December 31, 2009, the market value of securities of the Bolivarian Republic of Venezuela is lowerthan cost by Bs 29,909,000 (Bs 68,566,000 at December 31, 2008). This loss is included in equity asan unrealized gain (loss) on available-for-sale investments. The Bank considers that this difference istemporary since it is related to, among other things, the current state of world financial markets and therecent high volatility of international oil prices which, in the opinion of management, do notsignificantly affect payment capabilities of the issuer. Therefore, this difference has not beenrecognized in the consolidated income statement. In addition, the Bank has the ability to hold thesesecurities for a sufficient period of time to recover unrealized losses. At February 25, 2010, the cost ofthese securities exceeds its market value by Bs 32,593,000.


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In addition to securities of the Bolivarian Republic of Venezuela, at December 31, 2009, the Bank hasother securities with values lower than cost by Bs 1,740,000 (Bs 2,330,000 in 2008). The Bankbelieves that these losses arise from normal stock market fluctuations and, consequently, aretemporary. Management does not expect to realize these securities at a price below their book value.

Investments in available-for-sale securities at December 31 earn the following annual interest:



Fixed-interest securities 9.25 13.88 9.38 9.88Treasury Notes (effective yield) 0.93 10.84 2.06 13.14National Public Debt Bonds in local currency (Agricultural Bonds) 9.10 9.10 - -Principal and Interest Covered Bonds (TICC) 5.25 8.63 5.25 7.13National Public Debt Bonds in local currency 11.50 12.28 13.36 14.97Petrobonos 4.90 5.13 - -National Public Debt Bonds in foreign currency 1.28 8.25 3.79 7.65Debt securities issued by foreign banks and other financial institutions 0.45 2.50 - -Debt securities issued and guaranteed by government agencies

of the United States of America 1.30 10.50 2.88 7.00Debt securities issued by foreign private-sector companies 3.00 10.26 12.16 12.97Debt securities issued and guaranteed by government agencies

of other countries - - 3.50 3.50

Below is the classification of the weighted average maturity of investments in available-for-salesecurities at December 31:

2009 2008

Fixed-interest securities 13 months 48 monthsTreasury Notes 2 months 7 monthsNational Public Debt Bonds in local currency (Agricultural Bonds) 42 months -Principal and Interest Covered Bonds (TICC) 68 months 71 monthsNational Public Debt Bonds in local currency 25 months 21 monthsPetrobonos 20 months -National Public Debt Bonds in foreign currency 21 months 28 monthsDebt securities issued by foreign banks and other financial institutions 29 months -Debt securities issued and guaranteed by government agencies of the

United States of America 293 months 330 monthsDebt securities issued by foreign private-sector companies 23 months 42 monthsDebt securities issued and guaranteed by government agencies of other countries - 1 month


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Below is the classification of investments in available-for-sale securities at December 31 according tomaturity:

2009 2008Book value Book value(equivalent (equivalentto market to market

(Thousands of bolivars) Cost value) Cost value)

Up to 6 months 970,984 972,906 135,860 133,6936 months to 1 year 354,300 355,272 37,289 36,7991 to 5 years 1,311,242 1,346,426 345,360 304,8845 to 10 years 304,632 295,445 148,409 129,584Over 10 years 210,732 211,992 92,338 95,115

3,151,890 3,182,041 759,256 700,075

The equity account unrealized gain (loss) on available-for-sale investments at December 31 comprisesthe following:


Investments in available-for-sale securities 30,152 (59,181)Investments in held-to-maturity securities, reclassified

from investments in available-for-sale securities (3,900) (5,401)Restricted investments 836 24,911Available-for-sale investments in affiliates 1,220 1,009

28,308 (38,662)

During the year ended December 31, 2009, the Bank and its subsidiaries recorded gains and losses ofBs 127,959,000 and Bs 44,691,000, respectively, on the sale of available-for-sale securities(Bs 94,459,000 and Bs 60,890,000, respectively, during the year ended December 31, 2008, whichinclude the gain on sale of Visa and MasterCard shares), which are shown under other operatingincome and other operating expenses, respectively (Notes 18 and 19). The Bank received cashpayments for the aforementioned sales of Bs 49,880,705,000 (Bs 11,494,000,000 during the yearended December 31, 2008).

In March 2008, Visa Inc. made a public offer of shares, assigning to the Bank 623,163 Class “C”Series I shares, of which 273,035 shares were accounted for by the subsidiary Inversiones y ValoresMercantil V, C.A. as investment securities, resulting in an unrealized equity gain of Bs 25 million. InJuly 2009, these shares were sold by the subsidiary to a third party for US$16,558,000 (equivalent toBs 35,511,000) at a gain of Bs 10,467,000.

During the year ended December 31, 2009, the Bank recorded a gain of US$267,919, equivalent toBs 575,000, on the sale of 1,930 Class “B” MasterCard shares (US$6,456,000, equivalent toBs 13,846,000, in 2008), included under other operating income (Note 18).

During the year ended December 31, 2007, the Bank transferred investment securities at their fairvalue of Bs 749,155,000 from the available-for-sale investment portfolio to the held-to-maturityinvestment portfolio. The unrealized net loss of Bs 9,573,000 associated with these investments,recorded in equity at the date of their respective transfers, will be amortized until the maturity date of


24

these securities as a yield adjustment. At December 31, 2009 and 2008, Bs 1,501,000 andBs 3,016,000, respectively, have been amortized and recorded in this connection under other operatingexpenses.

c) Investments in held-to-maturity securitiesInvestments in held-to-maturity securities at December 31 comprise the following:

2009 2008Fair Fair

Amortized market Amortized market(Thousands of bolivars) Cost cost value Cost cost value

Securities issued or guaranteed by the VenezuelangovernmentPrincipal and Interest Covered Bonds (TICC),

maturing between April 2017 and March 2019,with a reference par value of US$76,641,296,payable in bolivars at the official exchange rate 158,353 159,406 163,802 (1) 158,353 158,755 158,562 (1)

National Public Debt Bonds of the Bolivarian Republicof Venezuela, maturing between January andApril 2010, with a par value of Bs 157,419,057(maturing between January 2009 and April 2010,with a par value of Bs 376,746,377 in 2008) 165,793 158,462 158,224 (2) 395,364 385,319 372,792 (2)

324,146 317,868 322,026 553,717 544,074 531,354

Time deposits with foreign financial institutionsMercantil Bank (Panama), S.A., with a par value of

US$919,000, maturing in January 2010 (with a parvalue of US$1,007,000, maturing in February 2009in 2008) 1,971 1,971 1,971 (3) 2,161 2,161 2,161 (3)

326,117 319,839 323,997 555,878 546,235 533,515

LessInvestments assigned through liquid asset accounts and

certificates of participation (8,724) (8,724) (8,724) (394,952) (394,952) (394,952)

317,393 311,115 315,273 160,926 151,283 138,563

(1) Market value is determined from trading operations on the secondary market.



During the year ended December 31, 2008, the Bank transferred investment securities at theiramortized cost of Bs 228,952,000 from the held-to-maturity securities portfolio to the available-for-sale securities portfolio, resulting in a loss from valuation of Bs 63,596,000, recorded in equity underunrealized gain (loss) on available-for-sale investments. This transfer was approved by theSuperintendency of Banks.

Investments in held-to-maturity securities and investments assigned at December 31 earn the followingannual interest:



National Public Debt Bonds in local currency 11.98 12.24 13.36 15.25Principal and Interest Covered Bonds (TICC) 5.25 6.25 5.25 6.25Time deposits with foreign financial institutions 0.25 0.25 0.90 0.90Investments assigned 1.50 14.50 0.25 17.00


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Below is the classification of the weighted average maturity of investments in held-to-maturitysecurities at December 31:

2009 2008

National Public Debt Bonds in local currency 4 months 11 monthsPrincipal and Interest Covered Bonds (TICC) 92 months 104 monthsTime deposits with foreign financial institutions 15 days 57 days

Below is the classification of investments in held-to-maturity securities at December 31 according tomaturity:

2009 2008Fair Fair

Amortized market Amortized market(Thousands of bolivars) cost value cost value

Under 1 year 160,433 160,195 225,317 219,9701 to 5 years - - 162,163 154,9825 to 10 years 159,406 163,802 133,560 133,164Over 10 years - - 25,195 25,399

319,839 323,997 546,235 533,515

d) Restricted investmentsRestricted investments at December 31 comprise the following:


Amortized to market Amortized to market(Thousands of bolivars) cost value) cost value)

As guaranteeTreasury Notes issued by the Bolivarian Republic of Venezuela,

maturing in February 2010, with a par value of Bs 56,173,314(maturing in March 2009, with a par value of Bs 5,000,000 in 2008) 55,754 55,827 (1) 4,881 4,891 (1)

Debt securities issued and guaranteed by government agencies of theUnited States of America, maturing between February 2029 and December2037, with a par value of US$12,897,880 (maturing in February 2029,with a par value of US$340,701 in 2008) 29,088 29,851 (1) 738 712 (1)

Cash in trust fund (Note 14) 1,806 1,806 (2) 3,032 3,032 (2)Investment trust with Banco Nacional de México, S.A. 328 328 (3) 310 310 (3)Certificates of deposit issued by Mercantil Commercebank, N.A.,

maturing in August 2010, with a par value of US$25,000(maturing in February 2009 in 2008) 54 54 (2) 54 54 (2)

National Public Debt Bonds of the Bolivarian Republic of Venezuela,maturing between July and September 2009, with a par value ofBs 32,995,287 - - 32,789 32,672 (1)

Debt securities issued by foreign private-sector companies, maturing inJanuary 2009, with a par value of US$3,000,000 - - 6,433 6,433 (1)

Investment securities acquired under resale agreements with BCV - - 3,617 3,617 (1)

87,030 87,866 51,854 51,721

Investments in non-financial private-sector companiesVisa Inc., 273,035 shares with a par value of US$43 each,

equivalent to 0.0178% of its capital stock - - - 25,044 (4)

87,030 87,866 51,854 76,765



(3) Contribution from the trust fund for acquisition of Bank representation office premises.

(4) Equivalent to book value.


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Restricted investments at December 31 earn the following annual interest:



Treasury Notes (effective yield) 2.82 3.14 8.73 8.73Debt securities issued and guaranteed by the government of the

United States of America 0.83 7.00 1.56 1.56Certificates of deposit 1.98 1.98 1.39 1.39National Public Debt Bonds - - 14.16 14.72Investments in securities under repurchase agreements - - 15.00 15.00

Below is the classification of the weighted average maturity of restricted investments at December 31:

2009 2008

Treasury Notes 1 month 2 monthsDebt securities issued and guaranteed by the government of the

United States of America 336 months 245 monthsCertificates of deposit 8 months 1 monthNational Public Debt Bonds - 7 monthsInvestments in securities under repurchase agreements - 5 months

Below is the classification of restricted investments at December 31 according to maturity:

2009 2008Amortized Book Amortized Book

(Thousands of bolivars) cost value cost value

Up to 6 months 57,560 57,633 18,017 18,0276 months to 1 year 54 54 32,789 32,672Over 10 years 29,416 30,179 1,048 26,066

87,030 87,866 51,854 76,765

The Bank has trademark license agreements for use of Visa, MasterCard and Diners Club Internationalcredit cards. Visa and MasterCard agreements require the Bank to deposit collateral in foreignfinancial institutions. At December 31, 2009 and 2008, the Bank has collateral deposits of US$25,000with Mercantil Commercebank, N.A., shown as restricted investments. In addition, at December 31,2009, stand-by letters of credit were pledged for MasterCard International and Visa Internationaltransactions amounting to US$24,901,000 and US$13,275,000, respectively (US$24,401,000 andUS$12,375,000, respectively, in 2008) recorded under other debtor control accounts (Note 23).

At December 31, 2009 and 2008, restricted investments include securities of the Coral Gables agencywith a market value of US$13,919,202 and US$3,331,000, respectively, pledged to regulating agenciesin compliance with U.S. state laws.

Securities assigned through liquid asset accounts and certificates of participation are in custody atBCV, Caja Venezolana de Valores, C.A. and Clearstream Banking. Of the total balance at December31, 2009, Bs 7,617,000 is in respect of assignments with government entities (Bs 4,940,000 in 2008).


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Interest borne by securities assigned through certificates of participation amounts to Bs 58,431,000 forthe year ended December 31, 2009 (Bs 149,358,000 for the year ended December 31, 2008), of whichBs 2,495,000 is in respect of interest borne by investments assigned to government agencies(Bs 2,795,000 for the year ended December 31, 2008), shown net of income from investmentsecurities.

In June 2006, the Superintendency of Banks instructed financial institutions with rights andparticipations in investment securities assigned to the public to proportionally transfer balances ofthese rights and participations to deposits on a quarterly basis within 20 quarters. In May 2007, theSuperintendency of Banks instructed financial institutions to transfer the balance of investmentsassigned at May 31, 2007 on a monthly basis within 47 months beginning June 2007. At December31, 2009 and 2008, deposits include Bs 230,951,000 and Bs 1,395,138,000, respectively, in thisconnection.

For the year ended December 31, 2009, the Bank recorded other operating expenses for Bs 27,557,000under permanent write-down of investment securities, mainly due to the difference between the costrepresented by the national market value at purchase date and the international market value ofsecurities denominated in foreign currency acquired in October 2009 (Note 19).

The control environment of the Bank and its consolidated subsidiaries includes policies andprocedures to determine investment risks by entity and economic sector. At December 31, 2009, theBank and its consolidated subsidiaries have investment securities issued and guaranteed by theVenezuelan government, deposits with BCV and bonds issued by the government of the United Statesof America and government agencies representing 48.87%, 45.84% and 3.92%, respectively, of itsinvestment securities portfolio (15.25%, 80.84% and 1.15%, respectively, in 2008).

5. Loan portfolio

The loan portfolio at December 31 is classified as follows:

2009 2008(Thousands of bolivars) Current % Rescheduled % Overdue % In litigation % Total % Total %

Economic activityCommercial 6,163,205 30 53,561 65 23,496 13 4,471 55 6,244,733 30 3,694,267 23Agriculture 2,851,614 14 26,556 32 59,632 32 1,789 22 2,939,591 14 2,357,623 15Credit cards 3,218,927 16 - - 1,855 1 - - 3,220,782 15 1,945,043 13Construction 1,605,457 8 - - 984 1 - - 1,606,441 8 2,031,447 12Industrial 2,301,884 11 70 - 11,168 6 303 4 2,313,425 11 1,537,660 11Car loans 1,201,135 6 - - 16,037 9 - - 1,217,172 6 1,769,624 10Home purchases 1,698,205 8 1,351 2 16,954 9 1,158 14 1,717,668 8 1,062,119 7Services 634,397 3 - - 2,462 1 325 4 637,184 3 436,463 3Foreign trade 37,192 - - - 30,910 17 - - 68,102 - 246,211 1Other 1,026,887 4 876 1 19,802 11 52 1 1,047,617 5 720,235 5

20,738,903 100 82,414 100 183,300 100 8,098 100 21,012,715 100 15,800,692 100

GuaranteeUnsecured 13,386,047 65 32,428 39 73,485 40 - - 13,491,960 64 6,565,467 42Debenture 2,796,440 13 34,311 42 60,245 33 6,194 76 2,897,190 14 5,065,094 32Mortgage 4,066,012 20 14,461 18 45,100 25 1,904 24 4,127,477 20 3,232,143 20Pledge 490,404 2 1,214 1 4,470 2 - - 496,088 2 937,988 6

20,738,903 100 82,414 100 183,300 100 8,098 100 21,012,715 100 15,800,692 100


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2009 2008(Thousands of bolivars) Current % Rescheduled % Overdue % In litigation % Total % Total %

MaturityUp to 3 months 11,840,133 57 4,965 6 176,446 97 8,098 100 12,029,642 57 8,545,665 543 to 6 months 1,429,143 7 - - 347 - - - 1,429,490 7 852,234 56 months to 1 year 951,853 4 6,549 8 1,381 1 - - 959,783 4 548,964 41 to 2 years 1,422,322 7 3,673 5 2,182 1 - - 1,428,177 7 1,419,718 92 to 3 years 1,602,899 8 25,106 30 2,089 1 - - 1,630,094 8 1,511,821 103 to 4 years 858,100 4 984 1 474 - - - 859,558 4 1,137,725 74 to 5 years 388,466 2 2,315 3 99 - - - 390,880 2 460,019 3Over 5 years 2,245,987 11 38,822 47 282 - - - 2,285,091 11 1,324,546 8

20,738,903 100 82,414 100 183,300 100 8,098 100 21,012,715 100 15,800,692 100

LoansPromissory notes 11,860,644 57 80,186 97 93,250 51 6,887 85 12,040,967 58 8,445,056 54Credit cards 5,085,876 25 - - 29,189 16 - - 5,115,065 25 4,532,955 29Installment loans 3,408,303 17 2,228 3 17,949 10 1,211 15 3,429,691 16 2,267,800 14Letters of credit 37,192 - - - 30,910 17 - - 68,102 - 197,913 1Financial lease contracts 40,790 - - - 2,591 1 - - 43,381 - 56,216 -Factoring and discounts 80,212 - - - - - - - 80,212 - 87,220 1Checking account credits 12,834 - - - 3,485 2 - - 16,319 - 16,864 -Other 213,052 1 - - 5,926 3 - - 218,978 1 196,668 1

20,738,903 100 82,414 100 183,300 100 8,098 100 21,012,715 100 15,800,692 100

Geographic locationVenezuela 20,736,222 100 82,414 100 183,300 100 8,098 100 21,010,034 100 15,586,947 99Mexico 2,681 - - - - - - - 2,681 - 47,181 -Chile - - - - - - - - - - 16,085 -Brazil - - - - - - - - - - 39,461 -Honduras - - - - - - - - - - 10,723 -United States of America - - - - - - - - - - 10,723 -Peru - - - - - - - - - - 55,259 1Cayman Islands - - - - - - - - - - 30,024 -Guatemala - - - - - - - - - - 4,289 -

20,738,903 100 82,414 100 183,300 100 8,098 100 21,012,715 100 15,800,692 100

Below is the classification at December 31 of the consolidated loan portfolio by type of risk inaccordance with parameters set by the Superintendency of Banks:

2009 2008(Thousands of bolivars) Total % Total %

RiskNormal 20,282,924 97 15,288,754 97Potential 228,586 1 142,979 1Real 350,652 2 307,092 2High 131,173 - 42,311 -Unrecoverable 19,380 - 19,556 -

21,012,715 100 15,800,692 100

In 2001, a group of debtors with indexed mortgage loans and credits used for car purchases filed alawsuit in respect of calculation of interest on these loans. In 2002, a ruling was issued in favor of thedebtors, resulting in adjustments to the loan portfolio of Bs 14,562,000 and Bs 17,278,000 in 2002 and2003, respectively. The Venezuelan Supreme Tribunal of Justice and other government entities issuednew rulings in 2004 to reduce interest and increase the list of debtors whose debts were to be adjusted.As a result, Bs 9,878,000 was debited from the allowance for losses on the loan portfolio, andBs 12,000,000 and Bs 17,000,000 were charged to income for 2004 and 2005, respectively. AtDecember 31, 2009 and 2008, no refinanced interest is included in the results for the year, nor is thereany restricted surplus in respect of mortgage loans or car loan balances.


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At December 31, 2009, the loan portfolio balance includes securities loan agreements (Note 2)represented by Treasury Notes of the Bolivarian Republic of Venezuela with yield at between 5% and13% (Treasury Notes and National Public Debt Bonds of the Bolivarian Republic of Venezuela withyield at between 1% and 5% in 2008), comprising the following:


Par to market Par to market(Thousands of bolivars) value value) value value)

Direct financial assets and securities loan agreementsOther corporations 155,194 154,237 150,520 148,749Financial entities 94,100 93,520 - -

249,294 247,757 150,520 148,749

The maturities of securities loan agreements at December 31 are shown below:


Up to 30 days 247,757 121,65031 to 60 days - 27,099

247,757 148,749

At February 25, 2010, the Bank has no securities loan agreements.

At December 31, 2009 and 2008, regulations require commercial and universal banks to earmark aminimum nominal percentage of 47% of their gross loan portfolio to finance loans for agriculture,tourism, mortgages, manufacturing and small businesses as follows:

AgricultureAt December 31, 2009 and 2008, 21% is the minimum financing required for agriculture based on theaverage gross loan portfolio balances for the end of the prior two years. At December 31, 2009, theBank has earmarked Bs 2,939,591,000, equivalent to 20.95% of the required base (Bs 2,357,623,000in 2008, equivalent to 22.38% of the required base).

In April 2009, the Venezuelan government approved the issue of National Public Debt Bonds tofinance the Integral Agricultural Development Plan for 2009-2010 (Agricultural Bonds). These bondsmay be imputed to the mandatory agricultural portfolio for an amount of up to 15% of the total loanportfolio. At December 31, 2009, the Bank maintains Bs 426,893,000 in these bonds (Note 4),representing 14.52% of the portfolio required at December 31, 2009, which together with agriculturalloans granted amounts to 23.99% of the required base.

At least 70% of the total agricultural loan portfolio must be used to finance production activities ofpriority agricultural products, for which percentages compliance by activity were established, and 30%to finance non-priority products. In addition, the number of new borrowers of the agricultural loanportfolio each month should increase by 20% with respect to total borrowers of the agricultural loanportfolio at prior year end, of which 50% must be individual borrowers. Furthermore, commercial anduniversal banks must place at least 10% of the total agricultural loan portfolio in medium-term


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(between 3 and 5 years) and long-term loans. At December 31, 2009, the Bank has Bs 1,098,651,000in medium and long-term agricultural loans, representing 37.37% of the total agricultural loanportfolio.

At December 31, 2009, the Bank has earmarked 88.44% of its agricultural loan portfolio for priorityagricultural products and 11.56% for non-priority agricultural products (98.6% and 1.4%, respectively,in 2008). In addition, at December 31, 2009, the Bank has a total of 2,169 debtors in the agriculturalloan portfolio (2,283 debtors in 2008), of which 588 are new borrowers for the year (767 loans in2008). Of the total amount of new borrowers, 455 are individuals (613 individuals in 2008).

Small businessesAt December 31, 2009, 3% is the minimum financing required for small businesses (companies withno more than 10 employees or annual sales of up to 9,000 tax units) based on the total loan portfolio atJune 30, 2009. At December 31, 2009, Bs 542,757,000 has been earmarked in this connection,equivalent to 3.37% of the gross loan portfolio at June 30, 2009 (Bs 628,536,000, equivalent to 4.40%of the gross loan portfolio at June 30, 2008 in 2008). At December 31, 2009, the small business loanportfolio comprises 12,840 debtors (13,008 debtors in 2008). At December 31, 2009, 13,951 loanshave been granted (14,913 loans in 2008).

MortgageAt December 31, 2009, 4% and 6% were the minimum percentages to be earmarked for short-termmortgage loans effectively granted and long-term mortgage loans that have been officially recordedand granted, respectively, for the acquisition, construction and subcontracted construction of primaryresidences, based on the gross loan portfolio for the previous year, which will be applied according tothe borrower’s household monthly income. In April 2009, a maximum interest rate of between 4.66%and 14.39% was set for these loans. At December 31, 2009, Bs 732,745,000 in short-term loans andBs 1,494,843,000 in long-term loans were granted, equivalent to 4.70% and 9.59%, respectively, of theestablished base (Bs 625,875,000 and Bs 804,371,000, equivalent to 5.01% and 6.45%, respectively,in 2008).

At December 31, 2009, the Bank’s mortgage loan portfolio amounted to Bs 2,227,588,000 (Bs 1,430million in 2008), comprising 11,941 debtors (2,819 debtors in 2008) and 11,991 loans (2,859 loans in2008).

TourismIn September 2009, the People’s Power Ministry for Tourism set at 3% the minimum percentage to beearmarked by commercial and universal banks for tourism loans, calculated based on the gross loanportfolio at December 31, 2008. At December 31, 2008, the minimum percentage to be earmarked forthese loans was 3% of the gross loan portfolio at December 31, 2007.

At December 31, 2009, Bs 495,215,000 was earmarked for these loans, representing 3.18% of thegross loan portfolio at December 31, 2008 (Bs 386,538,000 in 2008, equivalent to 3.10% of the grossloan portfolio at December 31, 2007). At December 31, 2009, the tourism loan portfolio comprises 36debtors (31 debtors in 2008) and 113 loans (85 loans in 2008).

In August 2009, the Tourism Law established, among other things, that the loan portfolio was to bedistributed in segments according to the borrower’s total billings for the year, as follows: 40% for


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segment A (up to 20,000 tax units), 35% for segment B (between 20,000 and 100,000 tax units) and25% for segment C (over 100,000 tax units). At December 31, 2009, the Bank’s loan portfoliodistribution is 0.45%, 4.71% and 94.84% for segments A, B and C, respectively.

ManufacturingIn April 2009, BCV issued a resolution requiring banks not only to maintain the percentage of theirgross loan portfolio earmarked at March 31, 2009 to finance manufacturing activities, but to increase itto at least 10% by December 31, 2009 and 2008. BCV established a maximum interest rate of 19% forthese types of loans. At March 31, 2009, the percentage for financing manufacturing activities was8.9%. At December 31, 2009, the manufacturing loan portfolio amounts to Bs 2,313,425,000(Bs 1,399,022,000 in 2008), representing 16.23% of the gross loan portfolio at March 31, 2009(11.21% in 2008 of the gross loan portfolio at December 31, 2007).

At December 31, 2009, the manufacturing loan portfolio comprises 1,374 debtors and 3,253 loans.

The Bank has allowances for losses on the loan portfolio exceeding the minimum requirements set bythe Superintendency of Banks. Below is the movement of the allowance for losses on the loanportfolio at December 31:


Balance at the beginning of the year 462,289 270,503Provided in the year, including the branch and agencies abroad 475,835 307,902Decrease in branch allowance (2,807) (1,927)Write-off of uncollectible accounts (206,728) (111,859)Reclassification to allowance for interest receivable (3,300) (3,800)Reclassification from provision for contingent loans - 1,470

Balance at the end of the year 725,289 462,289

At December 31, 2009, the inactive loan portfolio (overdue and in litigation), which has ceased to bearinterest, amounts to Bs 191,398,000 (Bs 130,307,000 in 2008), of which Bs 30,910,000 is in respect ofoverdue letters of credit (Bs 22,318,000 in 2008). During the year ended December 31, 2009, interestaccrued but not recorded in respect of this inactive loan portfolio amounted to Bs 405,514,000(Bs 164,608,000 during the year ended December 31, 2008). In addition, interest income for the yearended December 31, 2009 includes Bs 399,683,000 (Bs 124,560,000 during the year ended December31, 2008) for interest collected on this portfolio that had been deferred in previous years.

During the year ended December 31, 2009, the Bank wrote off unrecoverable loans of Bs 206,728,000(Bs 111,859,000 during the year ended December 31, 2008), against the allowance for losses on theloan portfolio. The Bank also collected Bs 100,436,000 (Bs 40,618,000 during the year endedDecember 31, 2008), included in the consolidated income statement under income from financialassets recovered. This account also includes Bs 2,807,000 in respect of the decrease in the allowancefor losses on loan portfolio of the Curacao branch (Bs 1,927,000 for the year ended December 31,2008).

The control environment of the Bank and its consolidated subsidiaries includes policies andprocedures to determine credit risks by client and economic sector. Concentration of risk is limitedsince loans are granted to a variety of economic sectors and a large number of clients. At December


32

31, 2009 and 2008, the loan portfolio of the Bank and its consolidated subsidiaries does not havesignificant risk concentrations in terms of individual clients, groups of related companies andeconomic sectors.

6. Investments in affiliates

a) Investments in unconsolidated affiliates at December 31 comprise the following:


Investments in Venezuelan non-financial institutionsInversiones y Valores Mercantil VI, C.A., 33,139 fully paid common shares

with a par value of Bs 100 each, equivalent to 19.5% of its capital stock 118,933 86,794Servicio Panamericano de Protección, C.A., 16,730,462 fully paid common shares

with a par value of Bs 133 each, equivalent to 19.49% of its capital stock 98,456 98,456Inversiones Platco, C.A., 30,000 fully paid common shares with a par value of

Bs 100 each, equivalent to 50% of its capital stock 48,676 3,510Mercantil Merinvest, C.A., 3,997,500 fully paid common shares with a par

value of Bs 1 each, equivalent to 19.5% of its capital stock 23,137 23,169Proyecto Conexus, C.A., 343,334 fully paid common shares with a par

value of Bs 0,1 each, equivalent to 33.33% of its capital stock 2,979 2,169Inmobiliaria Asociación Bancaria, C.A., 28,862 fully paid common shares

with a par value of Bs 1 each, equivalent to 7.4% of its capital stock 167 -Other 2,244 64Provision for investments in affiliates (18) -

294,574 214,162

During the year ended December 31, 2009, the Bank and its subsidiary Inversiones y ValoresMercantil V, C.A. made cash contributions for future capitalizations and contributed National PublicDebt Bonds in foreign currency to its subsidiary Promotora de Valores Mercantil 2009 VII, C.A. ofBs 148,300,000 (US$69,051,350). This capitalization covered the risk derived from Total ReturnSwaps of Bs 112,702,000 (US$52,551,440) assigned to this subsidiary on that same date (Note 23).Promotora de Valores Mercantil 2009 VII, C.A. was subsequently sold in bolivars to MercantilInversiones y Valores, C.A. (subsidiary of Mercantil Servicios Financieros, C.A.) at its equity value, atno gain or loss.

In December 2009, the Bank made a cash contribution of Bs 195,000 to its affiliate MercantilMerinvest, C.A. During 2009, the Bank contributed Bs 37,889,000 to the capital stock of its affiliateInversiones Platco, C.A. by assigning points of sale (POS) at their estimated market value, andrecorded deferred income of Bs 21,922,000 arising from the difference between the book value and theestimated market value of the POS. This difference is being amortized over the useful lives of thePOS since the equity recorded in respect of this affiliate includes the depreciation expense of thegreater amount. During 2009, the Bank made cash contributions of Bs 13,302,500.

During the year ended December 31, 2009, the Bank sold a building in New York to a relatedcompany at market value of US$20,000,000, equivalent to Bs 42,892,000, determined by anindependent appraiser. The net book value at the transaction date was Bs 1,630,000, and deferredincome amounted to Bs 41,262,000 (Notes 12 and 14).


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During the year ended December 31, 2009, the affiliates Inversiones y Valores Mercantil VI, C.A. andMercantil Merinvest, C.A. reduced contributions for future capitalizations by Bs 5,557,000 andBs 3,900,000 respectively. In addition, in February and May 2009, the Bank received cash dividendsfrom the subsidiaries and affiliates (Note 21).

During the year ended December 31, 2008, the Bank made cash contributions for future capitalincreases of its affiliate Inversiones y Valores Mercantil VI, C.A. for Bs 234,000. In addition, in June2008, the Bank received Bs 2,313,000 related to cash dividends paid by the subsidiary MercantilMerinvest, C.A. (Note 21).

During the year ended December 31, 2008, the subsidiary Inversiones y Valores Mercantil V, C.A.acquired the 19.49% shareholding held by Mercantil Inversiones y Valores, C.A. in ServicioPanamericano de Protección, C.A. (SERPAPROCA) at market value of Bs 98,456,000 calculated byan independent appraiser. In 2009, Bank management adjusted this market value without identifyingfair value impairment.

During the year ended December 31, 2008, the subsidiary Inversiones y Valores Mercantil V, C.A.directly swapped with third parties debt securities issued by the Bolivarian Republic of Venezueladenominated in foreign currency for debt securities issued by the Bolivarian Republic of Venezueladenominated in bolivars, which were subsequently sold at a gain of Bs 148,000, included under gainon sale of investment securities (Note 18).

In July 2006, the Bank was notified of an unfavorable ruling in connection with a claim filed by aclient. The Bank has been ordered to pay approximately Bs 36,978,000 for general damages and lossof profits, plus monetary indexation. In November 2006, the Bank’s legal advisors filed for annulmentof the ruling, which includes allegations for nonfeasance and law infringement. In March 2009, theSupreme Tribunal of Justice ruled in favor of the annulment appeal filed by the Bank against theMarch 2006 sentence and ordered that a new ruling be issued. In the opinion of Bank managementand its legal advisors, the new ruling will be favorable to the Bank.


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b) For information purposes, below is a summary of the combined financial statements of the Bank’sbranch in Curacao and the Coral Gables, FL agency at December 31, denominated in U.S. dollars:

Balance sheet

(Thousands of U.S. dollars) 2009. 2008.

AssetsCash and due from banks 3,878 2,819Investment securities 149,744 59,107Loan portfolio 986 101,027Interest and commissions receivable 662 1,187Property and equipment 1 1Other assets 404 9,469

Total assets 155,675 173,610

Liabilities and EquityDeposits 48,458 72,922Borrowings 265 50Interest and commissions payable 24 162Other liabilities 1,010 1,266

Total liabilities 49,757 74,400

Equity 105,918 99,210

Total liabilities and equity 155,675 173,610

Income statement

Years endedDecember 31,

(Thousands of U.S. dollars) 2009 2008

Gross financial margin 6,918 5,752Operating expenses, net (680) (73)Total expenses (860) (1,561)

Net income 5,378 4,118

7. Available-for-sale assets

Available-for-sale assets at December 31 comprise the following:

2009 2008Accumulated Accumulated

(Thousands of bolivars) Cost amortization Net Cost amortization Net

Idle assets 31,480 (7,718) 23,762 61 (21) 40


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During the year ended December 31, 2009, the Bank sold fully amortized assets received as paymentthat had been recorded under memorandum accounts at a gain of Bs 4,465,000 (Bs 8,180,000 duringthe year ended December 31, 2008) and Bs 7,188,000 from the sale of idle assets (Bs 285,000 duringthe year ended December 31, 2008). Gains are shown in the consolidated income statement underincome from available-for-sale assets.

During the year ended December 31, 2009, the Bank reclassified Bs 31,326,000 to idle assets, ofwhich Bs 13,455,000 is in respect of furniture and constructions for the Bank’s offices at the SambilLa Candelaria shopping mall (Note 9).

During the year ended December 31, 2009, the Bank recorded amortization expense in respect of idleassets of Bs 8,444,000 (amortization expense in respect of available-for-sale assets and idle assets ofBs 19,000 and Bs 2,039,000, respectively, during the year ended December 31, 2008), included in theconsolidated income statement under expenses from available-for-sale assets.

Fully amortized available-for-sale assets are recorded under memorandum accounts (Note 23).

8. Property and equipment

Property and equipment at December 31 comprises the following:

2009 2008Accumulated Book Accumulated Book

(Thousands of bolivars) Cost depreciation value Cost depreciation value

Furniture and equipment 247,682 (162,244) 85,438 275,287 (175,300) 99,987Buildings and facilities 101,296 (18,305) 82,991 95,692 (16,876) 78,816Work in progress 24,479 - 24,479 30,063 - 30,063Land 1,750 - 1,750 1,382 - 1,382Other assets 13,329 (1,043) 12,286 11,974 (958) 11,016

388,536 (181,592) 206,944 414,398 (193,134) 221,264

During the year ended December 31, 2009, the Bank recorded depreciation expense of Bs 40,388,000(Bs 45,990,000 during the year ended December 31, 2008), included in the consolidated incomestatement under general and administrative expenses (Note 17).

At December 31, 2009, property and equipment comprising buildings, facilities and land ofBs 84,741,000 has an estimated market value of Bs 1,720,146,000, based on valuations performed byindependent appraisers between April and June 2009.

Work in progress is mainly in respect of construction or remodeling of Bank offices; other assets aremainly in respect of works of art.


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Below are the original useful lives and average remaining useful lives by type of asset at December 31,2009:

AverageOriginal remaining

useful life useful life(Years) (%)

Buildings 40 33.32Main office 40 22.04Furniture 10 2.51Computer hardware 4 1.20Currency redenomination equipment 5 3.24Other equipment 8 4.16Vehicles 5 0.09

9. Other assets

Other assets at December 31 comprise the following:


Goodwill on acquisition of shareholding in Interbank, C.A. (Banco Universal), net ofaccumulated amortization of Bs 59,050,000 (Bs 52,489,000 in 2008) (Note 2) 72,172 78,733

Goodwill on acquisition of shareholding in Valores Mercantil VI, C.A.,net of accumulated amortization of Bs 9,438,000 (Bs 7,217,000 in 2008) (Note 2) 12,768 14,989

Goodwill on acquisition of shareholding in Mercantil Merinvest, C.A., net ofaccumulated amortization of Bs 2,123,000 (Bs 1,623,000 in 2008) (Note 2) 2,872 3,371

Deferred expenses, net of accumulated amortization of Bs 100,796,000(Bs 75,092,000 in 2008) (Note 2) 115,358 108,758

Software, net of accumulated amortization of Bs 92,475,000(Bs 76,511,000 in 2008) 33,564 25,398

Expenses from currency redenomination, net of accumulated amortizationof Bs 8,791,000 (Bs 5,322,000 in 2008) (Note 1) 4,810 7,970

Deferred income tax (Note 15) 83,436 71,570Other accounts receivable 31,093 30,802Advances to suppliers 18,931 18,741Prepaid taxes 18,858 64,594Stationery and office supplies 18,407 11,938Insurance and other prepaid expenses 16,494 14,683Sambil La Candelaria shopping mall rights (Note 14) 13,429 13,429Advances and guarantee deposits 13,383 10,698Pending items and main office, branches and agencies 13,325 28,857Prepaid advertising 10,741 24,521Accounts receivable from other credit card issuing institutions 6,509 7,942Transactions with derivative instruments (Note 14) 1,158 34,478Other 946 943Provision for other assets (27,082) (18,564)

461,172 553,851

In 2000 the Bank acquired a majority shareholding in Interbank, C.A. (Banco Universal), giving rise togoodwill of Bs 131,223,000. The Bank and Interbank, C.A. (Banco Universal) were later merged andformer shareholders have provided guarantees covering a 5 to 10-year period for asset recovery andresolution of certain contingencies.


37

In 2005 the Bank acquired a 19.5% shareholding in Inversiones y Valores Mercantil VI, C.A. andMercantil Merinvest, C.A. and recorded goodwill of Bs 22,206,000 and Bs 4,994,000, respectively,related to the excess cost over book value of shares acquired, calculated in accordance with criteria setby the Superintendency of Banks. The purchase price was determined based on valuations byindependent appraisers. Goodwill is amortized using the straight-line method over 10 years (Note 2).

The Bank assesses recoverability of deferred tax assets using a model which considers the historicfinancial performance, taxable income projections and the future realization of existing temporarydifferences, among others. This assessment is based on approved business plans, among others, andincludes management judgment on assumptions used, which may vary from one six-month period tothe next. At December 31, 2009, the Bank, based on its assessment, estimates that the net deferred taxasset of Bs 83,437,000 is realizable.

Sambil La Candelaria shopping mall rights were mainly acquired to set up the Bank’s main office andfor other purposes. At December 31, 2009, the Bank’s consolidated financial statements include Bs 16million (Bs 19 million in 2008) for the aforementioned rights, as well as idle assets (Note 7). InJanuary 2010, the Venezuelan National Assembly declared this property of public and social interest,and urged the Capital District government to proceed with its expropriation, which was effected onFebruary 24, 2010. To date, the expropriation terms are unknown. Based on an independent appraisalconducted in February 2010, the fair value of these assets is considered to exceed their book value.

The balance of pending items and main office, branches and agencies mainly comprises operationsthat, due to their nature, cannot be immediately imputed to a definitive account, as well as lendingoperations between Bank offices, which are pending identification and final recording at monthlycutoff. Most of these operations clear during the first few days of the following month. Balances ofthese accounts are provided for in accordance with aging criteria set by the Superintendency of Banks.Deposits with these characteristics are included under accruals and other liabilities (Note 14).

At December 31, 2009, pending items and main office, branches and agencies mainly comprise spottransactions not yet cleared and payroll account payments to third parties not yet cleared forBs 5,933,000 and Bs 2,090,000, respectively (in-transit operations related to electronic clearing forBs 19,755,000 in 2008).

Prepaid taxes mainly include payment of income tax, tax withholdings and municipal taxes.

Other accounts receivable mainly include accounts receivable in respect of transfer claims anddisbursements recoverable from customers.

The balance of deferred expenses mainly includes expenses for office setup, leasehold improvementsand projects to be capitalized, which include technology updates, equipment and software.

The balance of advances to suppliers mainly includes advances paid to technology and construction inprogress suppliers.


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At December 31, 2009, expenses incurred during the currency redenomination process ofBs 4,810,000 (Bs 7,970,000 during the year ended December 31, 2008) in respect of disbursementsmade by the Bank to acquire, adapt or improve hardware or for advisory, training, travel and otherpersonnel expenses, publicity, software and security were deferred and will be amortized ordepreciated over two to six years. At December 31, 2009, the Bank recorded amortization expenses inthis connection of Bs 3,469,000 (Bs 2,519,000 during the year ended December 31, 2008), shown inthe consolidated income statement under general and administrative expenses (Note 17).

During the year ended December 31, 2009, the Bank recorded expenses from the provision for otherassets of Bs 3,549,000 (Bs 11,353,000 during the year ended December 31, 2008), shown in theconsolidated income statement under sundry operating expenses.

Amortization of deferred expenses and goodwill during the year ended December 31, 2009 amountedto Bs 55,239,000 (Bs 44,760,000 during the year ended December 31, 2008) and is shown undergeneral and administrative expenses (Note 17).

10. Deposits

Deposits at December 31 comprise the following:


Demand deposits 17,598,014 13,047,702Savings deposits 10,650,173 8,584,905Time deposits 750,027 852,697

Deposits at December 31 bear interest at the rates shown below:

2009 2008Deposits Deposits Deposits Deposits

in bolivars in U.S. dollars in bolivars in U.S. dollarsMinimum Maximum Minimum Maximum Minimum Maximum Minimum Maximum

rate rate Rate rate rate rate rate rate% % % % % % % %

Type of depositInterest-bearing checking accounts 0.50 3.00 0.03 0.35 0.50 8.00 0.05 0.35Savings deposits 12.50 12.50 0.03 0.45 15.00 15.00 0.10 0.45Time deposits 14.50 17.00 0.10 1.79 11.00 17.00 0.17 2.69Restricted deposits 0.50 14.50 0.03 3.00 0.50 17.00 - 5.10Rights and participation in

investment securities 1.50 14.50 - - 0.25 17.00 - -

Below is the classification of time deposits by maturity at December 31:

2009 2008Thousands of Thousands of

bolivars % bolivars %

Up to 30 days 258,311 34 389,896 4631 to 60 days 237,197 32 267,301 3161 to 90 days 71,953 10 178,610 2191 to 180 days 180,924 24 16,665 2181 to 360 days 1,642 - 225 -

750,027 100 852,697 100


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At December 31, 2009, deposits include Bs 957,342,000 (Bs 969,436,000 in 2008) from theVenezuelan government and other government agencies, equivalent to 2.99% of total deposits (3.91%in 2008).

At December 31, 2009, restricted deposits relate to guarantee time deposits and dormant savings andchecking accounts amounting to Bs 425,150,000 (Bs 269,703,000 in 2008).

11. Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (BANAVIH)

Deposits and liabilities with BANAVIH at December 31 comprise the following:


Interest-free demand deposits with BANAVIH 29 2,312Other accounts payable to BANAVIH 10 -

39 2,312

Other accounts payable to BANAVIH are in respect of funds received to subsidize the initialinstallment of loans granted. Demand deposits are in respect of funds received to be assigned byBANAVIH (Note 23).

12. Borrowings

Borrowings at December 31 comprise the following:2009 2008

Original Up to More than Original Up to More than(Thousands of bolivars) term one year one year Total term one year one year Total

Borrowings with Venezuelanfinancial institutionsCredit balances with

correspondent banks 120,309 - 120,309 87,502 - 87,502Demand deposits 14,135 - 14,135 7,061 - 7,061

134,444 - 134,444 94,563 - 94,563

Borrowings with foreignfinancial institutionsCredit balances with

correspondent banks 447 - 447 2,611 - 2,611Demand deposits 250 - 250 486 - 486

697 - 697 3,097 - 3,097

BorrowingsFunds received for special

financing programs, Between Novemberwith annual interest at Between November 1992 and Junebetween 18% and 22.29% 1992 and 2003 2,057 54 2,111 2004 - 2,851 2,851

137,198 54 137,252 97,660 2,851 100,511

Maturities of borrowings, up to one year, at December 31 are as follows:


Up to six months 136,890 97,660Six months to one year 308 -

137,198 97,660


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Maturities of borrowings, more than one year, at December 31 are as follows:


Year2009 - 2,1252010 - 6722011 47 472012 and beyond 7 7

54 2,851

13. Other liabilities from financial intermediation

Other liabilities from financial intermediation at December 31 comprise the following:


Letters of credit issued and confirmed 18,210 53,568Credit card transactions 1,048 653Futures operations (Note 23) 177 17,152Other 59 90

19,494 71,463

14. Accruals and other liabilities

Accruals and other liabilities at December 31 comprise the following:


Direct financial liabilities (securities loan agreements) 363,011 1,704,803Suppliers and other accounts payable 170,805 162,756Provision for contingencies and other (Notes 15 and 23) 114,454 127,756Employee profit sharing, vacation and bonuses 82,529 74,033Deferred income

Deferred interest 75,226 74,063Deferred gain on rights and sale of property and other 72,800 13,643Deferred income from loan portfolio 27,297 14,457Other deferred income (Note 9) - 2,984

Collected and withheld taxes 56,732 95,681Provision for operating risks 24,939 49,940Pending items and main office, branches and agencies (Note 9) 22,745 13,768Law on Narcotic and Psychotropic Substances (Note 28) 14,365 8,957Labor contributions 10,902 18,941Provision for Supplementary Savings Plan (Note 16) 3,572 4,124Taxes (Note 15) 87,937 108,182

1,127,314 2,474,088

At December 31, 2009, the Bank has securities loan agreements represented by Treasury Notes of theBolivarian Republic of Venezuela for Bs 363,012,000, with a par value of Bs 365,255,000 and annualyield at 0.5%, maturing in January 2010 (Bs 1,704,803,000, with a par value of Bs 1,725,183,000,maturing between January and February 2009 in 2008). At February 25, 2010, the Bank has nosecurities loan agreements.


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At December 31, 2009 and 2008, the Bank maintains provisions for operating risks of Bs 24,939,000and Bs 49,940,000, respectively, determined on the basis of methodologies for risk managementassessment, measurement and control. Provisions for contingencies and other operating risks arerecorded in the consolidated income statement under sundry operating expenses.

At December 31, 2009 and 2008, the Bank has invested in technology and innovation projects to coverthe 0.5% contribution of territorial gross income during the prior year required by the Law for theAdvancement of Science, Technology and Innovation.

At a Special Shareholders’ Meeting of the subsidiary Holding de Inversión Mercantil de Colombia,S.A. held in December 2006, approval was granted to liquidate this subsidiary and distribute theremainder among shareholders. The amount to cover certain administrative and labor contingencies,as well as undetermined contingencies and liquidator fees, was calculated at Bs 3,463,000 to bemanaged under a trust fund agreement. At December 31, 2009, the balance of this trust fund isBs 1,806,000 (Bs 3,032,000 in 2008) (Note 4).

Deferred income mainly consists of interest collected in advance on the loan portfolio, commissionsand transactions with derivative financial instruments.

New labor-related laws and their regulations that have financial effects have recently been introducedin Venezuela, such as the Workplace Hazard Prevention, Safety and Health Law, the Housing LoanLaw, the Employee Benefit Law, the Reform of Venezuelan Labor Law Regulations and the FamilyProtection Law. Bank management and its legal advisors have assessed and interpreted these laws,setting aside the required provisions.

In June 2008, the Bank was notified by Banco Nacional de Vivienda y Hábitat (BANAVIH), ascribedto the People’s Power Ministry for Housing, of an assessment of Bs 25,364,000 in respect of allegeddifferences in the contributions made under the Housing Loan Law. The Bank appealed thisassessment in July 2008. In August 2008, BANAVIH ruled partially in favor of the Bank and reducedthe assessment to Bs 11,647,218. However, in September 2008, the Bank appealed this decision.Simultaneously, since BANAVIH arrived at the ruling following procedures established in the Law onAdministrative Proceedings instead of applying the procedures set out in the Master Tax Code, asrequired by the Instance Courts and the Supreme Tribunal of Justice, the Bank filed for and wasawarded constitutional protection in December 2008 and February 2009, respectively. BANAVIHwas ordered to follow the Master Tax Code to rule on the appeal filed by the Bank in September 2008,according to which the effects of the tax assessment were suspended. In the opinion of Bankmanagement and its legal advisors, there are legal grounds to uphold the inadmissibility of theassessment.


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15. Taxes

The tax expense at December 31 comprises the following:


Income taxCurrent

In Venezuela 87,935 107,867Abroad 248 258

DeferredIn Venezuela (11,866) (61,153)

76,317 46,972

The components of the deferred income tax asset at December 31 are as follows:


Property and equipment, organization and facility expenses and other 65,538 58,063Other provisions 8,412 8,893Income collected in advance 6,258 -Allowances for losses on loan portfolio and interest receivable and other 2,250 1,866Labor-related provisions 979 2,748

Deferred income tax 83,437 71,570

a) Venezuelan Income Tax LawThis Law contemplates, among other things, regulations concerning a proportional tax on dividends,the annual inflation adjustment, worldwide income taxation, international fiscal transparencyregulations and transfer pricing.

The Bank’s tax year ends on December 31. For the year ended December 31, 2009, the maindifferences between estimated book income and taxable income arise from the net effect of the annualinflation adjustment, shareholdings, provisions and accruals that are normally tax deductible insubsequent periods, nontaxable income and tax-exempt income from National Public Debt Bonds andother securities issued by the Bolivarian Republic of Venezuela. For the year ended December 31,2009, the Bank estimated income tax expense of Bs 62,064,000.


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The following is a reconciliation between book income and taxable income for the year endedDecember 31, 2009:

Statutory tax rate 34%

(Thousands of bolivars)

Notional tax expense based on book income in Venezuela computed at the effective tax rate 263,272Difference between notional tax expense and actual tax expense

Net effect of shareholdings (18,827)Effect of the annual inflation adjustment (221,942)Net effect of exemption for securities issued or guaranteed by the Venezuelan government (74,466)Nondeductible provisions

Loan portfolio, net 91,272Other provisions (12,580)Other effects, net 21,537

Effect of applying tax rate to taxable income in Venezuela 48,266

Effect of applying tax rate to foreign-earned taxable income 13,798

Effect of applying tax rate to net taxable income in Venezuela, plusforeign-earned taxable income 62,064

At December 31, 2009, the Bank’s subsidiaries have estimated tax loss carryforwards of Bs 10 million,of which Bs 1 million relates to the inflation adjustment and may be used until 2010; Bs 6.3 millionand Bs 2 million relate to tax losses in Venezuela and may be used until 2010 and 2011, respectively;and Bs 690,000 and Bs 13,000 relate to extraterritorial losses and may be used until 2010 and 2011,respectively.

b) Transfer pricingVenezuelan Income Tax Law establishes transfer-pricing regulations. According to these regulations,taxpayers that conduct transactions with related parties abroad are required to calculate income, costsand deductions applying certain methodologies set out in the Law, report results obtained through aspecial return, and keep supporting documentation and information related to transfer pricingcalculation for these transactions. The Bank filed transfer-pricing returns for information purposes.

c) Tax on financial transactionsIn October 2007, the Venezuelan government enacted by Decree-Law the tax on financial transactionsfor incorporated and unincorporated entities. This tax is levied upon debits or withdrawals made fromcurrent and savings accounts, custody deposits or any other type of demand deposits, liquid assetfunds, trust funds and other financial market funds or financial instruments transacted by incorporatedand unincorporated entities with Venezuelan banks and other financial institutions. The tax rate wasset at 1.5% as from November 1, 2007 and the tax was repealed in June 2008. The Bank is thecustomers’ collection agent with the National Treasury. During the year ended December 31, 2008,the Bank and its subsidiaries incurred a tax expense of Bs 25,317,000, included under general andadministrative expenses (Note 17).

d) ContingenciesIn the normal course of business, the Bank is defendant in various legal proceedings. Other than thetax assessments mentioned below, the Bank is not aware of any other pending legal proceedings whichcould have a significant effect on its financial position or the results of its operations.


44

The Bank and its merged financial institutions have received additional income tax assessments fromthe Tax Authorities amounting to Bs 21,771,000, mostly resulting from disallowance of certain incomeclaimed as nontaxable, expenses related to tax-exempt income, expenses for unpaid or late payment ofwithholdings, nondeductible expenses for uncollectible accounts and rejection of tax losscarryforwards. The Bank also received additional tax assessments of Bs 3,341,000 in respect ofunwithheld and late payments of value added tax (VAT). The Bank appealed alleging most of theseassessments are not well grounded in law. The tax courts have not ruled on some of theseassessments; those that went in favor of the Bank were appealed by the National Treasury and rulingsare pending.

The Bank also received additional bank debit tax assessments amounting to Bs 23,508,000, whichwere appealed. In the opinion of Bank management and its legal advisors, these assessments are notwell grounded in law. Bank management identified a maximum risk of Bs 22,292,000 in connectionwith the aforementioned assessments based on inadmissibility of monetary restatement and interestcharges; hence a provision has been set aside to cover this amount (Note 14).

In April 2008, the Bank was subject to a tax assessment of Bs 62,679,000 in respect of theproportional tax on dividends. In June 2008, the Bank filed a discharge claim with the Tax Authoritiesstating its legal arguments against this assessment. In December 2008, SENIAT confirmed this taxassessment and in January 2009 the Bank filed an appeal against the payment forms issued. In theopinion of Bank management and its legal advisors, this assessment is not well grounded in law.

In February 2009, the Bank was notified of a tax assessment of Bs 1,408,000 in respect of income taxfor 2007. The assessment is based on the taxability of interest on the overdue or in-litigation loanportfolio. In April 2009, the Bank filed a discharge claim in this connection. In the opinion ofmanagement and its legal advisors, this assessment is not well grounded in law.

16. Employee benefit plan

a) Supplementary Savings PlanMERCANTIL maintains a plan for its employees and those of its Venezuelan subsidiariescorresponding to a defined contribution plan entitled “Plan de Ahorro Previsional ComplementarioMercantil” (Supplementary Savings Plan) which replaced the defined benefit plan entitled “PlanComplementario de Pensiones de Jubilación” (Supplementary Retirement Pension Plan). Activeemployees have the option of subscribing to the new plan or remaining in the existing defined benefitplan.

Expenses in connection with this plan for the Bank and its subsidiaries for the year ended December31, 2009 amount to Bs 29,496,000 (Bs 26,163,000 for the year ended December 31, 2008).

b) Supplementary Retirement Pension PlanThis Plan is based on a minimum 10-year length-of-service period and a minimum retirement age. Theretirement pension is based on the employee’s average salary over the last three years of employmentpreceding retirement and is payable at a maximum of 60% of this average salary.

c) Post-retirement benefitsThe Supplementary Retirement Pension Plan and the Supplementary Savings Plan include certainadditional post-retirement benefits for employees of the Bank and its subsidiaries in Venezuela


45

meeting certain conditions in respect of age and years of service, mainly health insurance, with costsand obligations determined based on actuarial methods. These benefits are recorded in theconsolidated income statement for the year.

Expenses in connection with the Supplementary Retirement Pension Plan and post-retirement benefitsamounted to Bs 15,576,000 (Bs 27,970,000 for the year ended December 31, 2008).

At December 31, the assets, obligations and results of the Supplementary Retirement Pension Plan andPost-retirement Benefits for both plans, as well as the long-term assumptions used, are as follows:

SupplementaryRetirement Post-retirement

Pension Plan Benefits(Thousands of bolivars) 2009 2008 2009 2008

Variation of projected benefit obligationBenefit obligation 34,454 31,750 31,577 24,754Service cost 109 314 2,536 1,649Interest expense 5,388 3,739 6,113 2,991Actuarial (gain) loss 1,934 (4,484) (12,087) 4,095Benefits paid (5,866) (4,377) (2,498) (1,912)Plan modification 3,703 7,512 - -

Projected benefit obligation 39,722 34,454 25,641 31,577

Variation in restricted Plan assetsOpening fair value of assets 34,454 27,455 15,536 10,381Yield on assets 1,249 1,780 154 1,050Contribution 4,725 9,919 1,450 4,127Transfer of obligations (706) (323) 1,321 (22)Benefits paid - (4,377) - -

Closing fair value of assets 39,722 34,454 18,461 15,536

Financial position at year endPresent value of obligations (DBO) (39,722) (34,454) (25,641) (31,577)Assets of external fund supporting the Plan 39,722 34,454 18,461 15,536

Deficit of assets over projected obligation - - (7,180) (16,041)

Unrecognized past service cost - - 6,328 7,182Unrecognized actuarial (gain) loss - - (4,187) 8,443

- - (5,039) (416)

Components of net benefit costService cost 109 314 2,536 1,649Interest expense 5,388 3,739 6,113 2,991Expected yield from Plan assets (1,249) (1,780) (154) (1,050)Amortization of unrecognized past service cost - - 854 428Amortization of actuarial gain (1,509) (9,272) (629) 197

Net benefit cost for the year 2,739 (6,999) 8,720 4,215


46

The following are the assumptions used to determine benefit obligations at December 31:

SupplementaryRetirement Post- retirement

Pension Plan Benefits2009 2008 2009 2008

% % % %

Discount rate 24.00 20.00 24.00 20.00Salary increase 24.00 20.60 24.00 20.60Yield on assets

Bolivars 20.00 18.00 20.00 18.00U.S. dollars 6.00 7.00 6.00 7.00

Increase in medical expenses 27.00 22.00 27.00 22.00

Plan costs for 2010 are estimated at Bs 4,786,000.

d) Long-term stock option planMERCANTIL and certain subsidiaries offer a long-term stock option plan to eligible officers approvedby the Board of Directors’ Compensation Committee. These shares are allotted over three-yearperiods and awarded annually. Fundación BMA manages the plan and sets up trust funds with theshares on behalf of members once these shares have been assigned and subsequently awarded toeligible officers based on individual allotments approved in accordance with plan regulations. Duringeach administrative phase and until the shares are actually acquired by officers, cash dividendsdeclared in respect of these shares are received by Fundación BMA and stock dividends by theparticipants. According to the long-term incentive nature of the plan, officers must be activeemployees of the Bank in order to exercise their purchase options within the time periods established.Otherwise, or if the allotted shares are not purchased within the established time periods, theentitlements are cancelled. At December 31, 2009, 168 employees are participating in this plan.

Below is a breakdown of shares included in the plan at December 31, 2009, which are deposited in theMercantil Seguros, C.A. trust fund:

DeadlineApproval Number of shares Option price for exercising

Phase date Class “A” Class “B” Class “A” Class “B” option

(In bolivars)

IV 2004 588,469 (1) 490,252 (1) 25.00 25.00 2010V 2007 308,825 (2) 540,834 (2) 47.65 47.65Shares available 764,346 287,656

Total shares in trust funds 1,661,640 (3) 1,318,742 (3)

(1) Shares in individual trust funds on behalf of participants.

(2) Phase approved by the Board of Directors’ Compensation Committee in January 2007 (under development).

(3) Includes stock dividends.

Phase IV was announced to employees in March 2007. This phase offers two groups of options foreligible employees. Vesting of the 354,053 Class “A” shares and 295,147 Class “B” shares granted inrespect of the first group is subject to a minimum nine-month employment period. Vesting of the77,931 Class “A” and 64,969 Class “B” shares granted in respect of the second group is subject to a


47

minimum one year and nine-month employment period. Once exercised, 50% of these options maynot be sold while the employees are working at the Bank. During the year ended December 31, 2009,the term for exercising certain options awarded in previous periods was extended.

Below is the movement of shares awarded in Phase IV:

Shares awardedClass “A” Class “B” Total

Balances at December 31, 2007 1,029,743 859,150 1,888,893

Options exercised (228,767) (192,839) (421,606)Options recovered (4,279) (3,568) (7,847)

Balances at December 31, 2008 796,697 662,743 1,459,440

Options exercised (204,806) (169,637) (374,443)Options recovered (3,422) (2,854) (6,276)

Balances at December 31, 2009 588,469 490,252 1,078,721

Of the options outstanding at December 31, 2009, 1,078,721 options were exercisable (1,179,236options in 2008).

The market value of each option is estimated at award date based on the Black-Scholes valuationmodel using the following premises:

Share Risk-free Optionvolatility rate Time value

% % (Years) (In bolivars)

Phase IV 31.4 8.3 2.4 30.95

17. General and administrative expenses

General and administrative expenses for the years ended December 31 comprise the following:


Transportation of valuables and communications 94,884 85,957External services, fees and other 93,635 79,808Taxes and contributions (Note 15) 84,056 87,615Maintenance of property and equipment 74,460 56,452Services and supplies 58,596 45,981Sundry general expenses 54,120 55,254Amortization of deferred expenses (Note 9) 45,958 35,479Depreciation of property and equipment (Note 8) 40,388 45,990Transportation and surveillance 38,367 29,123Advertising 29,293 68,466Leases 27,825 19,520Software licenses 27,807 18,928Amortization of goodwill (Note 9) 9,281 9,281Other 15,717 14,955

694,387 652,809


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18. Other operating income

Other operating income for the years ended December 31 comprises the following:


Commissions on services (Note 23) 508,841 470,897Gain on sale of investment securities (Notes 4 and 19) 127,959 94,459Income from equity in affiliates 50,774 38,422Commissions on trust funds (Note 24) 45,283 39,926Exchange gain (Note 22) 17,109 16,207Discount obtained from investment securities 749 6,752Exchange and currency arbitration gains (Note 22) 16 45

750,731 666,708

19. Other operating expenses

Other operating expenses for the years ended December 31 comprise the following:


Commissions on services 65,934 56,305Loss on sale of investment securities (Notes 4 and 18) 44,691 60,890Permanent write-down of investment securities (Note 4) 27,557 -Exchange loss (Note 22) 16,526 20,202Amortization of premium on investment securities 8,570 18,870Loss from equity in affiliates 6,916 5,485

170,194 161,752

20. Extraordinary expenses

Extraordinary expenses for the years ended December 31 comprise the following:


Loss from theft, robbery and fraud 57,939 52,844Donations made by the Bank (Note 25) 6,764 6,986Loss from sundry claims 722 622Other 1,001 692

66,426 61,144

21. Equity

a) Capital stockAt December 31, 2009 and 2008, the Bank’s paid-in capital amounts to Bs 268,060,233 and isrepresented by 146,198,516 Class “A” common shares and 121,861,717 Class “B” common shareswith limited voting rights, with a par value of Bs 1 each. Mercantil Servicios Financieros, C.A. has146,076,891 Class “A” common shares and 121,792,180 Class “B” common shares, representing99.93% of the Bank’s capital stock.


49

At December 31, 2009 and 2008, the Bank complies with minimum paid-in capital requirements foruniversal banks of Bs 170,000,000 and Bs 40,000,000, respectively.

b) Retained earnings and dividendsBelow is a summary of cash dividends declared and paid on common shares for the years reported:

AmountDate of approval by per share Frequency or

Type of dividend Board of Directors Bs payment date

Ordinary March 2008 0.19 March 2008Ordinary July 2008 0.19 July 2008Ordinary October 2008 0.26 November 2008Ordinary February 2009 0.74 April 2009

Contributions pending capitalization mainly include share premiums. This amount may not bedistributed to the shareholders as cash dividends and may only be used for stock dividends.

In 1999 the Superintendency of Banks established a requirement to set aside an equity reserve of 50%of income for each period to restricted surplus, exclusively for capital increase purposes. AtDecember 31, 2009, the Bank recorded Bs 318,522,000 (Bs 354,591,000 during the year endedDecember 31, 2008), equivalent to 50% of the net result at that date, under restricted surplus.

At December 31, 2009, restricted surplus of Bs 1,573,279,000 (Bs 1,235,873,000 in 2008) includesBs 128,196,000 (Bs 109,312,000 in 2008) in respect of income from affiliates, which will only beavailable when these affiliates declare and distribute the related dividends or the investment is sold.

During the years ended December 31, 2009 and 2008, the Bank reclassified from restricted surpluscash dividends received from subsidiaries and affiliates.

c) Appropriation to legal reserveIn accordance with its bylaws and the General Law of Banks, the Bank records biannually anappropriation to legal reserve equivalent to 20% of net income for the six-month period until thereserve reaches 50% of its capital stock. When the legal reserve has reached this amount, the Bank’sappropriation to legal reserve will be 10% of net income for each six-month period until the reservereaches 100% of its capital stock.

d) Risk-based capital ratiosRatios required and maintained by the Bank, calculated based on its published financial statements inaccordance with the rules of the Superintendency of Banks at December 31, are shown below:

2009 2008Maintained Maintained Required

% % %

Equity to risk-weighted assets andcontingent operations 17.0 15.2 12

Equity to total assets 10.2 9.1 8


50

In July 2009, the Superintendency of Banks eliminated the requirement to deduct goodwill fromequity. Also, among the changes to risk-based capital ratios are: a) contributions pendingcapitalization and treasury stock are considered primary equity (Level 1); b) goodwill and investmentsin Venezuelan financial subsidiaries or affiliates should be deducted from primary equity (Level 1)and; c) the weighting applicable to mandatory loan portfolios for agriculture, mortgage, smallbusinesses, tourism and manufacturing is 50%.

22. Financial assets and liabilities in foreign currency

The Venezuelan government established an exchange control regime in February 2003, coordinated,administered and controlled by the Commission for the Administration of Foreign Currency(CADIVI). In July 2003, Exchange Agreement No. 4 was published regulating purchases in bolivarsof securities in foreign currency issued by the Venezuelan government for which trading had beensuspended until then. This regulation lays down: a) the exchange rate applicable to the purchase inbolivars of these securities on the primary market, as established in a previous regulation (ExchangeAgreement No. 2), and b) that secondary trading of these securities in bolivars is not permitted untilBCV establishes the related regulations.

On March 2, 2005, the Ministry of Finance and BCV changed the official exchange rates, effective asfrom that date, from Bs 1.915/US$1 to Bs 2.1446/US$1 (purchase) and from Bs 1.92/US$1 toBs 2.15/US$1 (sale).

The Bank’s consolidated balance sheet at December 31 includes the following balances of financialassets and liabilities in foreign currency, denominated mainly in U.S. dollars, stated at the exchangerates described in Note 2:

2009 2008Equivalent Equivalent

(In millions) in bolivars US$ in bolivars US$

AssetsCash and due from banks 279 130 266 124Investment securities, net 390 182 339 158Loan portfolio 73 35 304 142Interest and commissions receivable 3 1 13 6Other assets 17 8 32 15

Total assets 762 356 954 445

LiabilitiesDeposits 104 48 156 73Borrowings - - 2 1Other liabilities from financial intermediation 18 8 52 24Accruals and other liabilities 36 17 32 15

Total liabilities 158 73 242 113

The estimated effect of every Bs 0.1/US$1 increase in the exchange rate of Bs 2.1446/US$1 atDecember 31, 2009 would be an increase in assets and equity of Bs 35,531,000 and Bs 28,164,000,respectively.

At December 31, 2009, memorandum accounts include foreign currency sales commitments ofUS$54,823,000 (foreign currency sales commitments of US$26,951,000 and Total Return Swaps withan economic value of US$38,091,000 in 2008).


51

During the year ended December 31, 2009, net exchange gains from revaluation of foreign currencyposition amounted to Bs 583,000 (net loss of Bs 3,995,000 during the year ended December 31, 2008)(Notes 18 and 19).

BCV excludes from its net foreign currency position a portion of the capital and income of the branchand agency abroad for US$61,838,978 and securities issued by Petróleos de Venezuela, S.A.(Petrobonos 2011, 2014, 2015 and 2016) for US$113,084,646 and by the Bolivarian Republic ofVenezuela (Global Bonds 2019 and 2024) for US$7,745,280. Principal and Interest Covered Bonds(TICC) issued by the Bolivarian Republic of Venezuela, with a reference value in foreign currency andpayable in bolivars at the official exchange rate, for Bs 447,238,000 (Bs 324,146,000 in 2008) are alsoexcluded.

Subsequent eventOn January 8, 2010, the Venezuelan government and the Central Bank of Venezuela (BCV) enactedExchange Agreement No. 14 to introduce a two-tiered exchange rate of Bs 2.5935/US$1 orBs 4.2893/US$1 (purchase) and Bs 2.60/US$1 or Bs 4.30/US$1 (sale), thereby modifying the officialexchange rates that had remained in effect since March 2005. The rate applicable to imports forpriority sectors such as food, health, education, machinery and equipment, and science and technology,as well as for external public debt servicing, among others, is Bs 2.60/US$1; whereas Bs 4.30/US$1shall apply to imports for all other sectors.

Foreign currency requests for trade transactions submitted to BCV before the Agreement becameeffective shall be liquidated at Bs 2.15/US$1. In addition, the Bs 2.60/US$1 rate shall apply topayments within the non-oil public sector, including external debt servicing.

BCV established that foreign currency assets and liabilities held by banks, exchange offices and otherfinancial institutions, whether public or private, regulated by the General Law of Banks, the CapitalMarkets Law, the Law of Insurers and Reinsurers, and other special laws shall be measured andrecorded at Bs 2.60/US$1 and public-sector securities at Bs 4.30/US$1, except for Principal andInterest Covered Bonds (TICC), which shall be measured at Bs 2.60/US$1.

The Superintendency of Banks established that net gains derived by financial institutions from changesin the official exchange rate should be recorded in equity, and may only be used to offset losses,increase capital stock, set aside provisions for assets and offset deferred expenses, including goodwill.

The accounting effect for the Bank of measuring and recording foreign currency balances at January11, 2010 at the exchange rate of Bs 2.60/US$1, including public-sector securities in foreign currencyof US$45,542,000, was an increase in assets, liabilities and equity of Bs 260,542,000, Bs 10,357,000and Bs 250,185,000, respectively, which were recorded in the consolidated financial statements atJanuary 31, 2010. Management is currently analyzing these effects.


52

23. Memorandum accounts

Memorandum accounts at December 31 comprise the following:


Contingent debtor accountsLetters of credit 171,489 335,094Guarantees granted 333,312 338,889Transactions with derivative instruments 613,301 1,905,836Tourism loan commitments 25,059 37,045Other contingencies 776,959 642,343Investment in securities under repurchase agreement 1,226,000 3,617

3,146,120 3,262,824

Assets received in trust 8,739,157 7,563,325

Other special trust services 21,334 23,263

Other debtor memorandum accountsGuarantees received 34,173,361 21,954,192Unused lines of credit 4,920,479 5,389,420Valuables received in custody 6,531,568 2,158,664Collections 82,744 124,234Other control accounts (Note 4) 9,679,081 8,077,754

55,387,233 37,704,264

Other debtor control accounts 5,146 27,303

a) Contingent debtor accounts and unused lines of creditCredit-related financial instrumentsThe Bank has significant outstanding commitments related to letters of credit, guarantees granted,lines of credit and credit card limits to meet the needs of its customers and to manage its own riskresulting from interest rate variations. Since many of its credit limits may expire without being used,aggregate liabilities do not necessarily represent future cash requirements. Commitments to extendcredit, letters of credit and guarantees granted by the Bank are recorded under memorandum accounts.

Guarantees grantedAfter conducting a credit risk analysis, the Bank provides guarantees to certain customers according totheir line of credit. These guarantees are issued to a beneficiary who may execute the guarantee if thecustomer fails to comply with the terms of the agreement. These guarantees mature within a year andearn annual commissions between 0.25% and 3% of their value. Commissions are recorded monthlywhile the guarantees are in force.

Letters of creditLetters of credit usually mature within 90 days and are renewable. They are generally issued tofinance a trade agreement for the shipment of goods from a seller to a buyer. The Bank charges a feeof 0.50% of the amount of the letter of credit and records the latter under assets once it is used by thecustomer. Unused letters of credit and other similar liabilities are included under memorandumaccounts.


53

Transactions with derivative instrumentsThe Bank enters into non-hedging futures contracts for the purchase and sale of securities at a fixedprice based on interest rates. Gains and losses resulting from these contracts during the year endedDecember 31, 2009 amounted to Bs 133,677,000 and Bs 80,905,000, respectively (Bs 73,126,000 andBs 64,922,000, respectively, during the year ended December 31, 2008), recorded in the consolidatedincome statement under other interest income and other liabilities from financial intermediation,respectively.

The Bank entered into swap agreements with Mercantil Servicios Financieros, C.A. in respect of thetotal economic value of cash flows generated by securities (Total Return Swaps). The Bankundertakes to transfer the net economic value represented by bonds in U.S. dollars issued by theBolivarian Republic of Venezuela to Mercantil Servicios Financieros, C.A. and will receive theeconomic value of bonds in bolivars issued by the Bolivarian Republic of Venezuela. According tothis agreement, net cash flows will be swapped on the date interest or principal is paid by the issuer ofthe securities traded. During the year ended December 31, 2009, the difference between the economicvalues of both securities, including related interest, resulted in a gain and loss for the Bank ofBs 34,919,000 and Bs 24,354,000, respectively, recorded under other interest income and expensesfrom other liabilities from financial intermediation, respectively (Bs 24,448,000 and Bs 8,471,000during the year ended December 31, 2008). In September 2009, these agreements were assigned to asubsidiary at their net market value of Bs 112,702,000 (US$52,551,000) (Note 6).

The status of open transactions with derivative instruments at December 31 is the following:

2009 2008Thousands Thousandsof bolivars Maturity of bolivars Maturity

Non-hedging futuresContracts

SecuritiesPurchases 363,765 January 2010 1,672,748 January and February 2009Sales 249,536 January 2010 151,397 January and February 2009

613,301 1,824,145

Total Return Swap - 81,691 November 2009 and May 2010

613,301 1,905,836

Below is the concentration of purchases and sales of futures by type of economic activity at December31:

2009 2008Thousands of Thousands of

bolivars % bolivars %

Services 519,699 85 1,776,079 97Financial entities 93,602 15 48,066 3

613,301 100 1,824,145 100


54

The risk to which the Bank is exposed relates to noncompliance by third parties with the terms laiddown in the contracts, as well as variations in the price of securities and interest rates. The Bank has acontrol environment that includes policies and procedures for rating exchange and interest rate risksand monitoring derivative financial instruments, as well as assessing credit risks related to otherparties.

Lines of creditThe Bank grants lines of credit to customers subject to prior credit risk assessment and obtention ofany guarantees required by the Bank. These agreements are for a specific period, provided that theclients do not fail to comply with the terms set forth therein. However, the Bank may exercise itsoption to cancel a credit commitment with a particular customer at any time.

Credit cards are issued for three years and are renewable. However, the Bank reserves the right tocancel a credit commitment with a particular customer at any time. Nominal credit card interest ratesare variable and for the years ended December 31, 2009 and 2008 were 29% and 33% per annum,respectively (Note 1).

The Bank’s exposure to credit loss in the event of noncompliance by customers with terms for creditextension, letters of credit and guarantees is represented by the notional contractual amounts of thesecredit-related instruments.

Credit policies applied by the Bank for credit commitment obligations are the same as for grantingloans.

The Bank evaluates customer eligibility before granting credit. The amount of collateral provided, ifrequired by the Bank, is based on customer credit assessment. The type of collateral varies, but mayinclude accounts receivable, inventories, property and equipment, and investment securities.

At December 31, 2009 and 2008, in accordance with the Accounting Manual, the Bank has set asidegeneral and specific provisions for contingent debtor accounts of Bs 4,897,000 (Note 14).

b) Assets received in trustTrust fund accounts at December 31 include the following balances, according to the combinedfinancial statements:


AssetsCash and due from banks (Note 10) 286,323 237,828Investment securities 4,720,761 4,103,322Loan portfolio 3,247,598 2,746,943Interest and commissions receivable 52,979 54,753Assets received for administration 5,115 5,127Other assets 426,381 415,352

Total assets 8,739,157 7,563,325

LiabilitiesFees and other accounts payable 24,258 20,540Other liabilities 1,229 804


Equity 8,713,670 7,541,981



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Trust fund equity at December 31 is classified as follows:


Trust fundEmployee termination benefits 5,705,788 4,742,367Administration 2,060,996 1,868,797Investment 295,681 313,321Guarantee and custody 393,137 395,327Savings fund 258,068 222,169

8,713,670 7,541,981

Trust fundPrivate sector 5,147,727 4,305,423Public sector 3,565,943 3,236,558

8,713,670 7,541,981

At December 31, 2009 and 2008, trust funds do not exceed five times the Bank’s equity, in accordancewith the General Law of Banks.

Investment securities included in trust fund accounts at December 31 comprise the following:2009 2008

Book Fair Book Fair(Thousands of bolivars) value value value value

1) Debt securities issued by foreign private-sector companiesDebt securities issued by foreign private-sector companies, with annual yield at between

2.90% and 10%, maturing between August 2010 and June 2012, and with a par value ofUS$3,245,000 (annual yield at between 1.10% and 3.21%, maturing between Januaryand February 2009, and with a par value of US$12,805,000 in 2008) 7,286 7,326 (1) 27,432 27,446 (1)

2) Debt securities issued by Venezuelan private-sector companiesDebt securities issued by Venezuelan private-sector companies, with annual yield at between

9.85% and 19.5%, maturing between February 2010 and December 2012, and with a par value ofBs 503,022,485 (annual yield at between 10% and 24%, maturing between January 2009and December 2012, and with a par value of Bs 986,730,000 in 2008) 497,937 490,165 (2) 966,760 974,001 (2)

3) Securities issued or guaranteed by the Venezuelan governmentNational Public Debt Bonds, with annual interest at between 9.25% and 13.88%, maturing between

January 2010 and October 2020, and with a par value of Bs 2,547,356,911 (annual interest atbetween 12.06% and 17.56%, maturing between February 2009 and October 2020,and with a par value of Bs 1,676,292,000 in 2008) 2,501,808 2,448,257 (2) 1,623,363 1,608,981 (2)

Principal and Interest Covered Bonds (TICC), with annual interest at between 5.25% and 6.25%,maturing between April 2017 and March 2019, and a reference par value of US$122,830,500,payable in bolivars at the official exchange rate (reference par value of US$124,993,000payable in bolivars at the official exchange rate in 2008) 299,282 262,636 (2) 310,307 252,880 (2)

National Public Debt Bonds in foreign currency, with annual interest at between 1.28% and 10.75%,maturing between August 2010 and September 2027, and with a par value of US$246,703,000(annual interest at between 5.06% and 9.25%, maturing between August 2010 and March 2028,and a par value of US$135,702,000 in 2008) 364,013 411,679 (2) 273,105 173,699 (2)

Venezuelan Securities (TCC) in foreign currency issued by the Central Bank of Venezuela,with 4% annual interest, maturing in December 2010, and with a par value of US$319,419(maturing between December 2009 and 2010, and with a par value of US$639,000 in 2008) 685 669 (3) 1,370 1,346 (3)

3,165,788 3,123,241 2,208,145 2,036,906

4) Debt securities issued by foreign public-sector agenciesDebt securities issued and guaranteed by government agencies of the United States of America,

with annual interest at between 0.14% and 0.16%, maturing between January and November 2010,and with a par value of US$7,833,620 (annual interest at between 1.15% and 1.88%, maturing betweenJanuary and October 2009, and with a par value of US$12,780,000 in 2008) 16,790 16,790 (1) 27,308 27,372 (2)

Bonds issued by foreign public-sector agencies (governments of Mexico and Argentina), with annualinterest at between 0.94% and 7%, maturing between August 2012 and October 2015,and with a par value of US$1,810,938 (governments in Europe, Latin America and Canada, withannual interest at between 6.88% and 7%, maturing between April 2009 and October 2015, and apar value of US$766,950 in 2008) 4,132 4,305 (1) 1,656 1,840 (2)

20,922 21,095 28,964 29,212

5) Investments issued by Venezuelan non-financial private-sector companiesInversora Previcrédito, C.A., 22,150 common shares with a par value of Bs 0.06 each 9 9 (4) - -Other 19 134 36 81,812

28 143 36 81,812


56

2009 2008Book Fair Book Fair

(Thousands of bolivars) value value value value

6) Mutual fund investments - - 8 8 (3)

7) Investments in Venezuelan banks and other financial institutionsTime deposits, with annual interest at between 14.5% and 16.5%, maturing between January and

March 2010 (annual interest at between 10% and 12%, maturing between July andSeptember 2009 in 2008) 537,719 537,719 (4) 373,149 373,149 (4)

Other 1,888 2,063 22,661 67,600

539,607 539,782 395,810 440,749

8) Investments in foreign banks and other financial institutionsTime deposits, with annual interest at between 0.26% and 10.26%, maturing between January

and March 2010, and with a par value of US$228,103,000 (annual interest at between 1.10%and 3.15%, maturing in January 2009, and with a par value of US$108,028,000 in 2008) 489,190 489,190 (3) 476,163 476,163 (3)

9) Other investments 3 1 4 48

4,720,761 4,670,943 4,103,322 4,066,345


(2) Market value based on confirmation from custodian.

(3) Shown at par value.

(4) Market value based on prices listed on the Caracas Stock Exchange.

At December 31, 2009, the market value of securities of the Bolivarian Republic of Venezuela is lowerthan amortized cost by Bs 95,406,000 (Bs 99,406,000 in 2008). The trust fund considers that thisdifference is temporary since it is related to, among other things, the current state of world financialmarkets and the recent high volatility of international oil prices which, in the opinion of management,do not significantly affect payment capabilities of the issuer. Therefore, this difference has not beenrecognized in the consolidated income statement. In addition, the trust fund has the ability to holdthese securities for a sufficient period of time to recover unrealized losses. At February 25, 2010, thebook value of the aforementioned securities exceeds its market value by Bs 96,253,000.

Investments classified by maturity at December 31 are as follows:



Up to six months 1,390,297 1,390,026 1,473,554 1,470,476Six months to one year 172,843 172,245 394,663 373,532One to five years 2,703,316 2,675,208 1,680,660 1,684,034Over five years 452,386 431,256 550,699 452,775No fixed maturity 1,919 2,208 3,746 85,528

4,720,761 4,670,943 4,103,322 4,066,345

Investment securities at December 31 comprise the following:


Non-directed 3,344,207 2,969,329Directed 1,376,554 1,133,993

4,720,761 4,103,322


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Trust fund-related resources at December 31 comprise the following:

2009 2008(Thousands of bolivars) Directed Non-directed Directed Non-directed

Debt securities issued by foreign public andand private-sector companies 12,057 16,154 30,571 28,236

Deposits with other Venezuelan financial institutions 376,092 - 337,815 35,334Securities issued or guaranteed by the Venezuelan government 337,538 2,828,249 276,662 1,931,483Investments in foreign private-sector companies 50 499,804 87,318 968,627Deposits with other foreign banks 489,190 -Investments in Venezuelan public-sector entities 161,627 - 401,627 5,649

1,376,554 3,344,207 1,133,993 2,969,329

Based on internal procedures of the Central Bank of Venezuela (BCV), and since the trust fund has nolegal identity, the Bank purchases securities from BCV in primary auctions for the trust fund and othercustomers. The Bank does not make any charges to the trust fund in this connection.

The trust fund loan portfolio at December 31 comprises the following:


Loans to beneficiaries of employee termination benefits 3,104,786 2,642,135Mortgage loans 136,440 92,748Loans to government agencies 5,402 1,089Company loans 970 10,970

3,247,598 2,746,942

Loans to beneficiaries mainly consist of loans granted to trustors whose employee termination benefitsare deposited in a trust fund as collateral. These interest-free loans are in respect of employeetermination benefit trust fund plans of public and private-sector companies and have no fixed maturity.

At December 31, 2009, loans to beneficiaries of employee termination benefit trust funds includeBs 344,637,000 and Bs 13,391,000, in respect of loans granted to the Bank and Mercantil Seguros,C.A. employees, respectively, on employee termination benefit balances (Bs 261,625,000 andBs 9,185,000, respectively, in 2008).

At December 31, 2009, mortgage loans include Bs 17,541,000 (Bs 19,158,000 in 2008), in respect ofguaranteed loans granted in accordance with administration trust funds using resources from publicentities, mainly the National Urban Development Fund (FONDUR) and the National Housing Institute(INAVI). In addition, this account includes Bs 118,900,000 (Bs 53,920,000 in 2008) in respect ofmortgage loans to beneficiaries of employee termination benefits.

In 2008, company loans included Bs 10,000,000 in respect of loans granted by the trust fund usingresources from public-sector trust funds maturing in 180 days with 25% annual interest, collectedduring the year ended December 31, 2009.

Other assets received in trust mainly comprise guarantees received for administration, withdrawal ofprepaid benefits, accounts receivable from government entities and other accounts receivable.


58

The trust fund acts as trustee for termination benefit contracts of employees of the Bank and MercantilSeguros, C.A. amounting to Bs 423,269,000 and Bs 24,139,000, respectively, at December 31, 2009(Bs 322,369,000 and Bs 16,569,000, respectively, in 2008).

Trust fund-related resources used to grant loans to companies (loan portfolio) are directed trusts,recorded and valued as specified by the Superintendency of Banks.

c) Debtor accounts from other special trust services (Housing Mutual Fund)The Venezuelan Housing Policy Law appointed Banco Nacional de Vivienda y Hábitat (BANAVIH)as the sole administrator of public and private funds to finance housing. Therefore, the financialinstitutions regulated by the General Law of Banks and Other Financial Institutions shall only act asfinancial operators, that is, they shall collect contributions made to the Mandatory Housing SavingsFund and pay them to the sole administrator, and grant loans after the required financial resourceshave been approved. The Superintendency of Banks instructed financial institutions to write out of itsmemorandum accounts as from April 1, 2008 assets, liabilities and results associated with resources ofthe Mandatory Housing Savings Fund.

The Venezuelan Housing Law became effective in May 2005. As a result, BANAVIH was created toassume, according to the Venezuelan Social Security Law, Banco Nacional de Ahorro y Préstamo(BANAP) activities and responsibilities. On June 1, 2005, BANAVIH transferred approximatelyBs 98,956,000 from the Bank’s individual account in the Mandatory Housing Savings Fund to theFund’s global account. As from that date, the Bank receives all monthly contributions from employersand employees for transfer to BANAVIH’s global account. During the year ended December 31,2009, the Bank recorded income from financial transactions of Bs 25,559,000, shown under interestincome (Bs 20,906,000 during the year ended December 31, 2008).

d) Other debtor accountsOther control accounts are mainly in respect of returned checks and guarantees pending release. AtDecember 31, 2009, these accounts also include US$89,897,000, equivalent to Bs 192,793,000(US$105,114,100, equivalent to Bs 225,428,000, in 2008), of which US$34,864,528 is prior toDecember 31, 2008 and relates to the balance receivable from CADIVI for payments in foreigncurrency made by the Bank on behalf of customers for credit card use abroad.

24. Balances and transactions with related companies

In the normal course of business, the Bank conducts commercial transactions with its shareholder,affiliates and related companies, the effects of which are included in the consolidated financialstatements. Because of those relationships, these transactions may have taken place on terms otherthan those that would characterize transactions between unrelated companies.


59

Below is a breakdown of the Bank’s balances with related companies at December 31:

a) Balance sheet


Cash and due from banks 113,654 179,317

Mercantil Commercebank, N.A. 113,500 178,710Mercantil Bank (Panamá), S.A. 107 561Mercantil Bank (Schweiz) A.G. 47 46

Investment securities 294,373 215,859

Short-term investments (Note 4)Mercantil Bank (Panamá), S.A. 1,971 1,707Mercantil Commercebank, N.A. 54 54

Investments in shares (Note 6)Inversiones y Valores Mercantil VI, C.A. 118,933 86,794Servicio Panamericano de Protección, C.A. 98,456 98,456Inversiones Platco, C.A. 48,676 3,510Mercantil Merinvest, C.A. 23,137 23,169Proyectos Conexus, C.A. 2,979 2,169Inmobiliaria Asociación Bancaria, C.A. 167 -

Other assets 23,302 52,366

Fideicomiso Mercantil, C.A. Banco Universal 22,640 19,827Cestaticket Accor Services, C.A. 375 -Mercantil Commercebank, N.A. 207 208Todo 1 Services Inc. 79 66Mercantil Bank (Panamá), S.A. 1 2Mercantil Servicios Financieros, C.A. (Note 9) (valuation of derivatives, Note 14) - 32,262Mercantil Seguros, C.A. - 1

Total assets 431,329 447,542


60


Deposits 398,811 404,130

Checking accounts 293,287 313,781

Non-interest bearing checking accounts 40,386 56,218

Mercantil Seguros, C.A. 26,938 16,431Mercantil Financiadora de Primas, C.A. 5,392 5,105Servicio Panamericano de Protección, C.A. 2,866 16,341Cestaticket Accor Services, C.A. 2,371 10,604Innovex, C.A. 1,010 932Fundación BMA 542 93Servibien, C.A. 256 61Inversiones Platco, C.A. 155 -Mercantil Inversiones y Valores, C.A. 119 683Mercantil Servicios Financieros, C.A. 91 131Fundación Mercantil 78 2,379Mercantil Sociedad Administradora de Entidades de Inversión Colectiva, C.A. 72 1,412Mercantil Merinvest, C.A. 31 362Mercantil Servicios de Inversión, C.A. 31 131Inversiones y Valores Mercantil VI, C.A. 13 208Mercantil Merinvest Casa de Bolsa, C.A. - 405Other 421 940

Interest-bearing checking accounts 252,901 257,563

Fideicomiso Mercantil, C.A. Banco Universal 252,783 257,499Fundación BMA 118 64

Savings accounts 21,284 20,664

Fundación BMA 20,105 19,045Fundación Mercantil 1,179 1,619

Time deposits 84,240 69,685

Mercantil Seguros, C.A. 45,000 9,000Inversiones y Valores Mercantil VI, C.A. 25,708 -Mercantil Promotora de Valores 2005 IV, C.A. 5,595 40,050Mercantil Servicios Financieros, C.A. 4,000 6,500Fundación BMA 2,670 2,170Mercantil Inversiones y Valores, C.A. 785 2,645Servicio Panamericano de Protección, C.A. - 9,000Servibien, C.A. - 100Other 482 220

Borrowings

Mercantil Commercebank, N.A. - 8,108

Other liabilities from financial intermediation

Mercantil Servicios Financieros, C.A. - 2,223

Other liabilities 402,746 458,571

Cestaticket Accor Services, C.A. 338,559 425,283Mercantil Inversiones y Valores, C.A. 41,262 -Inversiones Platco, C.A. 22,391 -Fundación BMA 337 61Mercantil Seguros, C.A. 160 44Fundación Mercantil 34 134Mercantil Servicios Financieros, C.A. (valuation of derivatives, Note 9) (Note 14) - 33,047Other 3 2



61

b) Income statement

Years endedDecember 31,


Interest income 35,631 14,894

Income from cash and due from banks 69 1,287

Mercantil Commercebank, N.A. 59 1,203Mercantil Bank (Panamá), S.A. 10 84

Other interest income 35,562 13,607

Mercantil Servicios Financieros, C.A. 34,919 12,964Mercantil Commercebank, N.A. 643 643

Interest expense 39,744 28,402

Mercantil Servicios Financieros, C.A. 26,263 25,437Inversiones Platco, C.A. 7,158 -Fundación BMA 4,825 560Fundación Mercantil 868 235Mercantil Inversiones y Valores, C.A. 472 453Mercantil Promotora de Valores 2005 IV, C.A. 152 1,159Holding Mercantil Internacional, C.A. 3 5Mercantil Bank Curacao, N.V. 2 529Mercantil Merinvest, C.A. 1 24

Operating income 128,154 166,467

Fideicomiso Mercantil, C.A. Banco Universal 45,282 39,926Inversiones y Valores Mercantil VI, C.A. 39,261 25,132Mercantil Seguros, C.A. 22,505 11,318Mercantil Merinvest, C.A. 9,632 7,455Mercantil Financiadora de Primas, C.A. 5,771 1,692Inversiones Platco, C.A. 4,543 -Proyecto Conexus, C.A. 881 405Mercantil Inversiones y Valores, C.A. 209 22,666Todo 1 Service, Inc. 69 161Fundación Mercantil 1 -Mercantil Servicios Financieros, C.A. - 57,712

Operating expenses 11,981 10,070

Inversiones Platco, C.A. 6,915 -Mercantil Commercebank, N.A. 2,245 2,576Mercantil Inversiones y Valores, C.A. 1,498 3,130Mercantil Bank Curacao, N.V. 967 982Mercantil Services Corporation 356 521Mercantil Bank (Panamá), S.A. - 2,790Todo 1 Service, Inc. - 71

Extraordinary expenses

Fundación Mercantil (Note 25) 6,759 6,985

c) Memorandum accounts


Memorandum accounts 402,747 507,204

Transactions with derivative instrumentsCestaticket Accor Services, C.A. 402,747 425,513Mercantil Servicios Financieros, C.A. - 81,691


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d) Trust fund


Cash and due from banks 253,363 237,445

Mercantil, C.A. Banco Universal 252,783 237,434Mercantil Commercebank, N.A. 573 -Mercantil Bank & Trust Limited 7 11

Investment securities 4 2,156

Mercantil Commercebank, N.A. - 2,152Mercantil Servicios Financieros, C.A. 4 4

Total assets 253,367 239,601

Fees payableMercantil, C.A. Banco Universal 22,640 19,827


e) TransactionsThe Bank’s significant balances and transactions with related companies are described below:

Cash and due from banks, deposits and other liabilities from financial intermediation are mainly inrespect of debit or credit balances of checking accounts at the Bank’s agencies or related banksabroad.

Expenses payable to Mercantil Commercebank, N.A. and Mercantil Services Corporation are mainlyin respect of data processing, personnel administration and consulting services, and were incurred bythe Bank’s offices abroad.

At December 31, 2009 and 2008, the Curacao branch had US$1 million and US$63 million,respectively, in participations in loans acquired from the agency and related banks. At December 31,2008, the branch assigned US$1 million in participations in loans sold to related banks. Purchase andsale transactions with related banks of participations in loans were conducted with unrelatedborrowers under the same terms used by the branch for granting loans.

Mercantil Merinvest Casa de Bolsa, C.A. (Merinvest), subsidiary of Mercantil Servicios Financieros,C.A., as security broker, provides services to the trust fund by transacting purchases and sales ofsecurities with different customers. These transactions are in cash at market prices. During the yearended December 31, 2009, the trust fund conducted purchases and sales of securities throughMerinvest, resulting in a loss of Bs 7,039,000 (gain of Bs 5,717,000 during the year ended December31, 2008).

Mercantil Servicios de Inversión, C.A. (MSI), subsidiary of Mercantil Servicios Financieros, C.A., isauthorized by the Venezuelan Securities and Exchange Commission (CNV) to provide investmentservices and manage investment portfolios. The trust fund has engaged MSI as a specialist to optimizeyields on investments of trustors. For the provision of this service, the trust fund (principal), grantsMSI (agent) Special Powers for Portfolio Management and Disposition. Trustee responsibility is not


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delegated as part of the service for which MSI charges an annual commission on the portfoliocollections. During the year ended December 31, 2009, the Bank paid MSI Bs 5,857,000 in thisconnection (Bs 3,594,000 during the year ended December 31, 2008).

At December 31, 2009 and 2008, the trust fund has investments of Bs 4,000 and Bs 19,000,respectively, related to directed trust funds in Mercantil Servicios Financieros, C.A. (US$1,003,541,equivalent to Bs 2,152,00, in Mercantil Commercebank, N.A. in 2008).

At December 31, 2009 and 2008, fees payable include commissions payable to the Bank as set out intrust fund agreements signed by trustors and the trust fund. The commission is calculated on fundsdeposited in fiduciary funds and is deducted from each trustor’s individual investment; therefore, it isshown net of interest income. During the year ended December 31, 2009, the Bank recorded incomeof Bs 42,171,000 and has Bs 22,640,000 receivable in respect of these commissions (Bs 39,946,000and Bs 19,827,000, respectively, at December 31, 2008).

During the year ended December 31, 2009, other operating income includes Bs 8,561,000 in respect ofthe Customer Service Call Center (CAM) provided to Mercantil Seguros, C.A. (Bs 4,877,000 duringthe year ended December 31, 2008). In addition, other operating income includes Bs 13,944,000 inrespect of commissions from the sale of Mercantil Seguros, C.A. (Bs 6,441,000 during the year endedDecember 31, 2008).

At December 31, 2009, the trust fund maintains investment portfolios in foreign currency at MercantilBank & Trust Limited (Cayman) of Bs 795,734,000 (Bs 694,981,000 in 2008).

During the year ended December 31, 2009, the Bank traded investment securities, mainly NationalPublic Debt Bonds held as available-for-sale investments, in cash at market values with relatedcompanies for Bs 2,365,333,000 and Bs 2,452,713,000, respectively (Bs 828,027,000 andBs 571,286,000, respectively, during the year ended December 31, 2008), resulting in net losses ofBs 3,627,000 (Bs 5,086,000 during the year ended December 31, 2008), included under otheroperating expenses (Note 19).

The trust fund has been engaged as auxiliary trustee for trust funds at Mercantil Seguros, C.A.according to the terms of the respective agreement. During the year ended December 31, 2009, thetrust fund recorded income from trust fund management services of Bs 135,000.

25. Fundación Mercantil

The Bank sponsors “Fundación Mercantil” founded in December 1988 to promote educational,cultural, artistic, social, religious and scientific programs, either directly or through donations andcontributions to third parties. The Bank made contributions during the year ended December 31, 2009of Bs 6,759,000 (Bs 6,974,000 during the year ended December 31, 2008), shown under extraordinaryexpenses.


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26. Maturity of financial assets and liabilities

At December 31, 2009, financial assets and liabilities are classified according to maturity as follows:

June 30, December 31, June 30, December 31, June 30, December 31, June 30, December 31, Beyond(Thousands of bolivars) 2010 2010 2011 2011 2012 2012 2013 2013 2014 Total

AssetsCash and due from banks 9,143,190 - - - - - - - - 9,143,190Investment securities

net of investmentsassigned 3,557,900 355,326 260,912 349,837 129,063 155,027 157,697 70,393 920,520 5,956,675

Loan portfolio 13,459,132 959,783 547,477 880,700 556,424 1,073,670 420,153 439,405 2,675,971 21,012,715Interest and commissions

receivable 251,355 - - - - - - - - 251,355

Total financialassets 26,411,577 1,315,109 808,389 1,230,537 685,487 1,228,697 577,850 509,798 3,596,491 36,363,935

LiabilitiesDeposits 32,009,239 4,204 - - - - - - - 32,013,443Liabilities to BANAVIH 39 - - - - - - - - 39Borrowings 136,890 308 - 47 7 - - - - 137,252Other liabilities from

financial intermediation 19,494 - - - - - - - - 19,494Interest and commissions

payable 12,732 - - - - - - - - 12,732

Total financialliabilities 32,178,394 4,512 - 47 7 - - - - 32,182,960

27. Fair value of financial instruments

Below are the book and fair values of financial instruments maintained by the Bank at December 31:



AssetsCash and due from banks 9,143,190 9,143,190 7,390,079 7,390,079Investment securities, net of provision 5,956,675 5,960,833 6,220,556 6,207,836Loan portfolio, net of allowance 20,287,426 20,287,426 15,338,403 15,338,403Interest and commissions receivable, net of allowance 236,048 236,048 243,124 243,124

35,623,339 35,627,497 29,192,162 29,179,442

LiabilitiesDeposits 32,013,443 32,013,443 24,804,865 24,804,865Deposits and liabilities with BANAVIH 39 39 2,312 2,312Borrowings 137,252 137,252 100,511 100,511Other liabilities from financial intermediation 19,494 19,494 71,463 71,463Interest and commissions payable 12,732 12,732 19,363 19,363

32,182,960 32,182,960 24,998,514 24,998,514

Memorandum accountsContingent debtor accounts 3,146,120 3,146,120 3,262,824 3,262,824


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In the normal course of operations, the Bank maintains financial instruments with off-balance sheetrisks to meet the financial needs of its customers. At December 31, the Bank’s maximum exposure isrepresented by the following commitments:


Unused lines of credit 4,920,479 5,389,420Guarantees granted 333,312 338,889Letters of credit issued but not negotiated (standby) 164,702 310,303Letters of credit confirmed but not negotiated 6,787 24,790Other contingencies 776,959 642,343

6,202,239 6,705,745

The fair value of a financial instrument is defined as the amount for which it could be exchangedbetween two knowledgeable, willing parties, other than in a forced transaction, involuntary liquidationor distress sale. Fair values for financial instruments with no available quoted market prices have beenestimated using the present value of future cash flows of these financial instruments, based on theofficial exchange rate, or other valuation techniques and assumptions. These techniques aresignificantly affected by the assumptions used, including the discount rates, estimates of future cashflows, and the expectation of payments in advance. In addition, fair values presented do not purport toestimate the value of other income-generating activities or future business activities; that is, they donot represent the Bank’s value as a going concern.

Below is a summary of the most significant methods and assumptions used in estimating the fairvalues of financial instruments:

Short-term financial instrumentsFinancial instruments, including derivatives, are recorded in the consolidated balance sheet underassets or liabilities at their respective market value.

Short-term financial instruments, both assets and liabilities, are shown in the balance sheet at bookvalue, which does not significantly differ from fair market value due to their short-term maturity.These instruments include cash and due from banks, deposits with no fixed maturity and short-termmaturity, other liabilities from financial intermediation with short-term maturity, and commissions andinterest receivable and payable.

Investment securitiesThe fair value of investment securities was determined using the present value of future cash flows ofinvestment securities, quoted market prices, reference prices determined from trading operations onthe secondary market and quoted market prices of financial instruments with similar characteristics.

Loan portfolioMost of the Bank’s loan portfolio earns interest at variable rates that are revised frequently, generallybetween 30 and 90 days for most of the short-term portfolio. Allowances are made for loans withsome risk of recovery. Therefore, in management’s opinion, the net book value of this loan portfolioapproximates its fair value.


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Deposits and long-term liabilitiesDeposits and long-term liabilities earn interest at variable rates. Therefore, Bank managementconsiders fair value to be equivalent to book value.

28. Money laundering prevention

The Law on Narcotic and Psychotropic Substances and its Regulation requires the Bank to set aside1% of its annual net income subject to income tax for the purpose of preparing employee-orientedprograms for the prevention of drug abuse and traffic (Note 16). In addition, in compliance withresolutions of the Superintendency of Banks, the Bank has a Money Laundering Prevention Unit andhas appointed a Money Laundering Prevention Enforcement Officer. This Unit is responsible foranalyzing, monitoring and informing the Committee for the Prevention of Money Launderingappointed by the Executive Committee of any possible money laundering activities. Furthermore, theBank has also appointed compliance officials for the different areas of the Bank exposed to risk whoare responsible for enforcing and supervising money laundering prevention and monitoringregulations.


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29. Supplementary information - Consolidated financial statements adjusted for the effects ofinflation

The consolidated financial statements of Mercantil, C.A. Banco Universal expressed in constantbolivars are shown below as supplementary information:

Supplementary consolidated balance sheetDecember 31, 2009 and 2008

(Thousands of constant bolivarsat December 31, 2009) 2009 2008

AssetsCash and due from banks 9,143,190 9,379,626Investment securities 5,956,928 7,900,659Loan portfolio 20,287,426 19,467,786Interest and commissions receivable 236,048 308,577Investments in affiliates 359,574 335,610Available-for-sale assets 35,071 1,209Property and equipment 939,737 926,427Other assets 892,108 1,147,404

Total assets 37,850,082 39,467,298

Liabilities and EquityDeposits 32,013,443 31,482,795Deposits and liabilities with Banco Nacional de Vivienda y Hábitat 39 2,935Borrowings 137,252 127,570Other liabilities from financial intermediation 19,494 90,702Interest and commissions payable 12,732 24,576Accruals and other liabilities 1,103,085 3,134,660

Total liabilities 33,286,045 34,863,238

EquityCapital stock 268,060 268,060Capital inflation adjustment 3,110,750 3,110,750Contributions pending capitalization 208,030 208,030Capital reserves 1,400,962 1,385,856Retained earnings 1,411,109 1,546,543Unrealized gain (loss) on available-for-sale investments 28,308 (51,997)Initial cumulative result from exposure to inflation (1,863,182) (1,863,182)

Total equity 4,564,037 4,604,060



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Supplementary consolidated income statementYears ended December 31, 2009 and 2008


Interest income 4,683,873 5,239,456

Interest expense (1,924,880) (2,035,209)

Gross financial margin 2,758,993 3,204,247

Income from financial assets recovered 111,319 60,408Expenses from uncollectible accounts and write-down of financial assets (528,769) (433,868)

Net financial margin 2,341,543 2,830,787

Other operating income 798,598 999,486Other operating expenses (215,389) (278,017)

Financial intermediation margin 2,924,752 3,552,256

Operating expenses (2,209,979) (2,430,263)

Gross operating margin 714,773 1,121,993

Income from available-for-sale assets 13,066 11,848Sundry operating income 234,987 193,944Expenses from available-for-sale assets (14,383) (5,204)Sundry operating expenses (74,122) (146,570)

Net operating margin 874,321 1,176,011

Extraordinary expenses (73,380) (86,151)

Gross income before tax and loss from netmonetary position 800,941 1,089,860

Income tax (80,253) (74,312)Loss from net monetary position (598,614) (750,084)

Net income 122,074 265,464

Appropriation of net income 122,074 265,464

Legal reserve 15,106 111,623Retained earnings 106,968 153,841


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Supplementary consolidated statement of changes in equityYears ended December 31, 2009 and 2008

Unrealized Initialgain (loss) on cumulative

Capital Contributions Retained earnings_ available- result from(Thousands of constant bolivars Capital inflation pending Capital Restricted Unappropriated for-sale exposure to Totalat December 31, 2009) stock adjustment capitalization reserves surplus surplus investments inflation equity

Balances at December 31, 2007 268,060 3,110,750 208,030 1,274,233 1,288,159 345,060 (13,316) (1,863,182) 4,617,794

Net income - - - - - 265,464 - - 265,464Cash dividends - - - - (240,517) - - (240,517)Appropriation to legal reserve - - - 111,623 - (111,623) - - -Adjustment of available-for-sale investments - -

to market value - - - - - (45,288) - (45,288)Restricted surplus from participation in

the results of subsidiaries and equityin affiliates - - - - 10,214 (10,214) - - -

Reclassification of 50% of net income forthe year to restricted surplus - - - - (71,813) 71,813 - - -

Release of restricted surplus - - - - (3,329) 3,329 - - -Unrealized monetary gain - - - - - - 6,607 - 6,607

Balances at December 31, 2008 268,060 3,110,750 208,030 1,385,856 1,223,231 323,312 (51,997) (1,863,182) 4,604,060

Net income - - - - - 122,074 - - 122,074Cash dividends - - - - - (242,402) - - (242,402)Appropriation to legal reserve - - - 15,106 - (15,106) - - -Adjustment of available-for-sale investments to

market value - - - - - - 76,142 - 76,142Restricted surplus from participation in

the results of subsidiaries and equityin affiliates - - - - (455) 455 - - -

Reclassification of 50% of net income forthe year to restricted surplus - - - - 53,257 (53,257) - - -

Release of restricted surplus - - - - (47,206) 47,206 - - -Unrealized monetary gain - - - - - - 4,163 - 4,163

Balances at December 31, 2009 268,060 3,110,750 208,030 1,400,962 1,228,827 182,282 28,308 (1,863,182) 4,564,037


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Supplementary consolidated cash flow statementYears ended December 31, 2009 and 2008


Cash flows from operating activitiesNet income 122,074 265,464Adjustments to reconcile net income to net cash provided by

(used in) operating activitiesEquity in affiliates 455 (10,214)Allowance for losses on loan portfolio and provision for contingent loans 528,036 427,301Write-off of uncollectible accounts (206,728) (141,973)Allowance for interest receivable - 4,126Provision for investment securities (6,374) (99)Provision for cash and due from banks - 818Provision for other accounts receivable 733 1,199Provision for other assets 4,142 17,388Write-offs against the provision for other assets (2,729) (9,423)Provision for investments in affiliates 6,050 -Deferred income tax (10,936) (85,199)Other provisions 206,839 273,173Depreciation 124,647 142,857Amortization of deferred expenses and goodwill 127,056 135,085Amortization of available-for-sale assets 14,384 5,204Accrual for employee termination benefits 139,328 126,005Payment of employee termination benefits (138,492) (127,943)Net change in

Deposits with the Central Bank of Venezuela (BCV) and overnight deposits 4,341,947 (3,606,759)Interest and commissions receivable 72,529 (38,844)Other assets 137,030 (89,736)Interest and commissions payable (11,844) (5,494)Accruals and other liabilities (2,239,250) 1,487,990

Net cash provided by (used in) operating activities 3,208,897 (1,229,074)

Cash flows from financing activitiesNet change in

Deposits 530,648 (1,462,093)Deposits and liabilities with Banco Nacional de Vivienda y Hábitat (2,896) (386)Borrowings 9,682 (207,244)Other liabilities from financial intermediation (71,208) (76,432)

Dividends paid (242,402) (240,517)

Net cash provided by (used in) financing activities 223,824 (1,986,672)

Cash flows from investing activitiesLoans granted during the year (24,388,169) (29,737,607)Loans collected during the year 23,247,221 30,797,107Net change in

Investments in trading securities - 39,420Available-for-sale investments (2,201,996) 428,027Held-to-maturity investments (119,106) 1,052,473Restricted investments 9,565 61,463Investments in affiliates (30,469) (157,286)Available-for-sale assets (48,246) (6,370)Property and equipment (137,957) (75,313)

Net cash (used in) provided by investing activities (3,669,157) 2,401,914

Cash and cash equivalentsNet change (236,436) (813,832)

At the beginning of the year 9,379,626 10,193,458

At the end of the year 9,143,190 9,379,626

Adjustment of available-for-sale investments to market value 80,305 (38,681)

Taxes paid 140,545 124,631

Interest paid 1,936,721 2,931,724

Gain on transactions with derivative instruments 1,158 43,760

Reclassification ofAllowance for losses on loan portfolio to allowance for interest receivable and other 3,000 4,823

Provision for contingent loans to allowance for losses on loan portfolio - 2,116


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In April 2008, the FCCPV approved the adoption of VEN NIF as the accounting principles ofmandatory application in Venezuela as from January 1, 2008. These standards are mainly based onInternational Financial Reporting Standards and their interpretations issued by the InternationalAccounting Standards Board, except for certain criteria concerning adjustments for inflation, amongothers.

Supplementary financial statements adjusted for the effects of inflation using the General Price Level(GPL) method have been provided in order to present the consolidated financial statements, preparedin conformity with the rules and instructions of the Superintendency of Banks, in currency of uniformpurchasing power to take account of changes in the Consumer Price Index (CPI) for the MetropolitanArea of Caracas published by BCV. Consequently, the accompanying supplementary consolidatedfinancial statements do not purport to reflect market or realizable values of nonmonetary assets, whichwill normally differ from amounts adjusted on the basis of the CPI.

Below is a summary of the main bases used in the preparation of the consolidated inflation-adjustedfinancial statements:

Inflation rateThe inflation rate for the year ended December 31, 2009 was 26.91% (31.9% at December 31, 2008).

Monetary assets and liabilities and result from monetary positionMonetary assets and liabilities at December 31, 2009, including amounts in foreign currency are, bytheir nature, shown in terms of purchasing power at that date. For comparative purposes, monetaryassets and liabilities at December 31, 2008 have been adjusted for the effects of inflation and areexpressed in terms of purchasing power at December 31, 2009. The result from monetary positionreflects the loss or gain obtained from maintaining a net monetary asset or net monetary liabilityposition during an inflationary period and is shown in the consolidated income statement under lossfrom net monetary position.


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Analysis of consolidated monetary resultAn analysis of the consolidated monetary result for the year is provided below:

Years ended(Thousands of constant bolivars December 31,at December 31, 2009) 2009 2008

Net monetary asset position at the beginning of the year 2,632,139 2,598,429

Transactions that increased net monetary asset positionIncome 5,841,843 6,505,142Unrealized gain on available-for-sale investments 80,305 -Net change in securities 16,193 18,521Realization of deferred credits 15,089 2,848Deferred income tax 10,936 85,199

Subtotal 5,964,366 6,611,710

Transactions that decreased net monetary asset positionExpenses (4,934,635) (5,217,296)Cash dividends (242,402) (240,517)Additions to property and equipment, net (137,957) (75,313)Additions to available-for-sale assets, net (48,246) (6,370)Net change in other assets (38,384) (82,239)Net change in investments in affiliates (23,964) (167,500)Unrealized loss on available-for-sale investments - (38,681)

Subtotal (5,425,588) (5,827,916)

Estimated net monetary asset position 3,170,917 3,382,223

Net monetary asset position at the end of the year (2,572,303) (2,632,139)

Loss from net monetary position 598,614 750,084

Available-for-sale assets and property and equipmentAvailable-for-sale assets are recorded at restated cost less accumulated amortization. Property andequipment is expressed in constant currency at December 31, 2009, based on the CPI at their dates oforigin.

Income taxThe Bank records a deferred income tax asset when, in the opinion of management, there is reasonableexpectation that future tax results will allow its realization.

EquityAll equity accounts are shown in constant currency at December 31, 2009. Dividends are stated inconstant currency based on the date they were paid.

Income statementOperating income and expenses have been restated based on the dates on which they were earned orincurred. Costs and expenses related to nonmonetary items have been adjusted in terms of thepreviously restated nonmonetary items to which they relate.

Gains or losses on the sale of shares, investments in personal and real property and other nonmonetaryitems are determined based on the sale price and restated book value.


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Below is a breakdown of items containing nonmonetary balances:

a) Investment securities

December 31,2009 2008

Book value Book valueNet (equivalent (equivalent

(Thousands of constant bolivars unrealized to market Unrealized to marketat December 31, 2009) Cost gain value) Cost gain (loss) value)

Investments in available-for-salesecuritiesSecurities issued or guaranteed by the Venezuelan

government, investments in foreign banks andother financial institutions, and debt securitiesissued by foreign public and private-sectorcompanies 3,151,889 30,151 3,182,040 966,913 (80,751) 886,162

Investments in non-financial companiesMasterCard - - - 678 1,456 2,134Superoctanos, C.A. - - - 6,007 - 6,007Caja Venezolana de Valores, C.A. - - - 3,738 660 4,398Other 254 - 254 551 741 1,292

254 - 254 10,974 2,857 13,831

3,152,143 30,151 3,182,294 977,887 (77,894) 899,993

December 31,2009 2008

(Thousands of constant bolivars Book Bookat December 31, 2009) Cost value Cost value

Deposits with the Central Bank of Venezuela and overnight deposits 2,375,653 2,375,653 6,717,600 6,717,600

Investments in held-to-maturity securities 317,393 311,115 204,238 192,009

Restricted investments 87,030 87,866 65,814 97,431

Provision for investment securities - - (6,374) (6,374)

b) Property and equipment

(Thousands of constant bolivars December 31,at December 31, 2009) 2009 2008

Buildings and facilities 1,303,083 1,185,812Furniture and equipment 826,045 959,312Work in progress 26,737 51,841Land 86,759 13,492Other assets 94,268 58,097Accumulated depreciation (1,397,155) (1,342,127)

939,737 926,427

The net restated value of property and equipment at December 31, 2009 includes Bs 697,876,005(Bs 641,921,000 at December 31, 2008) in respect of real property used as Bank premises. The nethistoric cost of this property is Bs 84,741,000 (Bs 101,789,000 at December 31, 2008), while themarket value is Bs 1,720,146,000, based on valuations made by independent appraisers betweenApril and June 2009.


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c) Other assets


Goodwill on acquisition in shareholding of Interbank, C.A. (Banco Universal),net of accumulated amortization of Bs 398,154,000 (Bs 333,821,000 in 2008) 428,852 468,952

Goodwill on acquisition of shareholding in Inversiones y Valores Mercantil VI, C.A.,net of accumulated amortization of Bs 19,311,000 (Bs 13,890,000 in 2008) 27,390 32,811

Goodwill on acquisition of shareholding in Mercantil Merinvest, C.A., net of accumulatedamortization of Bs 4,654,000 (Bs 3,494,000 in 2008) 7,402 8,562

Deferred expenses, net of accumulated amortization of Bs 324,816,000(Bs 280,684,000 in 2008) 139,301 163,251

Software, net of accumulated amortization of Bs 387,181,000(Bs 360,931,000 in 2008) 47,631 50,408

Currency redenomination expenses, net of accumulated amortization of Bs 12,909,000(Bs 7,893,000 in 2008) 7,469 12,107

Deferred income tax 83,437 90,838Other accounts receivable 31,798 39,096Rights on shopping mall premises 28,035 28,036Advances to suppliers 18,931 23,786Prepaid taxes 18,858 81,984Stationery and office supplies 18,122 15,842Insurance and other prepaid expenses 16,102 18,733Advances and guarantee deposits 13,385 13,579Pending items and main office, branches and agencies 13,325 36,622Prepaid advertising 10,540 31,320Accounts receivable from other credit card-issuing institutions 6,509 10,081Other items from transactions with derivative instruments 1,158 43,760Other 944 1,198Provision for other assets (27,081) (23,562)

892,108 1,147,404

d) Accruals and other liabilities


Direct financial liabilities 363,012 2,163,768Suppliers and other accounts payable 170,971 206,763Deferred income

Deferred interest 76,581 95,563Deferred income from rights, asset’s sales and other 42,198 7,680Deferred income from loan portfolio 32,315 20,924Other deferred income - 3,788

Provisions for contingencies and other 114,453 162,150Taxes 87,937 137,306Collected and withheld taxes 56,732 121,440Employee profit sharing and bonuses 82,363 93,775Provision operating risks 24,939 63,385Pending items and main office, branches and agencies 22,745 17,475Law on Narcotic and Psychotropic Substances 14,365 11,368Labor contributions 10,902 24,040Provision for Supplementary Savings Plan 3,572 5,235

1,103,085 3,134,660

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