June - Mercantil Servicios Financieros

Transcription

Mercantil Servicios Financieros,
C.A. and its Subsidiaries
Report of Independent Accountants and Consolidated
Financial Statements
June 30, 2014 and December 31, 2013
Mercantil Servicios Financieros, C.A. and its Subsidiaries
Consolidated balance sheet
June 30,
2014
December 31,
2013
(Thousands of bolivars)
Assets
Cash and due from banks (Note 3)
Cash
Central Bank of Venezuela
Venezuelan banks and other financial institutions
Foreign banks and other financial institutions
Pending cash items
2,776,144
43,118,285
517,485
1,562,580
4,019,839
3,809,871
37,599,293
919,471
1,580,688
2,461,748
51,994,333
46,371,071
66,784
37,899,125
21,164,297
301,850
9,333,638
900,545
70,999
34,967,914
16,798,928
236,078
11,137,596
435,473
69,666,239
63,646,988
160,524,257
540,771
588,802
28,105
124,758,531
545,128
539,970
94,446
161,681,935
125,938,075
(4,841,632)
(4,119,499)
156,840,303
121,818,576
2,078,490
1,681,142
168,807
242,007
Available-for-sale assets (Note 8)
42,503
78,098
Property and equipment (Note 9)
1,291,680
1,116,611
Other assets (Note 10)
5,434,708
4,358,639
287,517,063
239,313,132
384,775,134
304,715,515
Investment portfolio (Note 4)
Investments in trading securities
Investments in available-for-sale securities
Investments in held-to-maturity securities
Share trading portfolio
Investments in time deposits and placements
Restricted investments and repurchase agreements
Loan portfolio (Note 5)
Current
Rescheduled
Overdue
In litigation
Allowance for losses on loan portfolio
Interest and commissions receivable (Note 6)
Long-term investments (Note 7)
Total assets
Memorandum accounts (Note 23)
The accompanying notes are an integral part of the consolidated financial statements
1
Consolidated balance sheet
June 30,
2014
December 31,
2013
Liabilities and Equity
Liabilities
Deposits (Note 11)
Non-interest bearing checking accounts
Interest-bearing checking accounts
Savings deposits
Time deposits
Debt authorized by the SNV (Note 12)
Publicly traded debt securities issued by MERCANTIL
Financial liabilities (Note 13)
Liabilities to Venezuelan banks and savings and loan institutions, up to one year
Liabilities to foreign banks and savings and loan institutions, up to one year
Liabilities to foreign banks and savings and loan institutions, more than one year
Liabilities under repurchase agreements
Other liabilities, up to one year
Interest and commissions payable
Other liabilities (Note 14)
Subordinated debt (Note 15)
Total liabilities
Minority interests in consolidated subsidiaries
Equity (Note 20)
Capital stock
Capital inflation adjustment
Share premium
Capital reserves
Translation adjustment of net assets of subsidiaries abroad
Retained earnings
Repurchased shares held by subsidiaries
Repurchased shares reserved for employee stock option plan
Pension plan remeasurement (Note 2-n)
Unrealized gain from adjustment of investments to market value
Total equity
Total liabilities and equity
73,747,401
84,327,523
70,921,341
7,084,710
58,309,779
68,533,113
62,315,596
6,758,347
236,080,975
195,916,835
166,240
198,080
695,127
2,859,311
1,522,347
628,420
112,837
430,127
974,051
1,528,632
628,420
19,927
5,818,042
3,581,157
63,632
54,236
17,877,043
14,198,060
696,058
696,144
260,701,990
214,644,512
12,171
11,114
664,397
191,709
166,715
3,005,619
21,145,563
(15,149)
(48,608)
(69,185)
1,761,841
153,322
191,709
203,546
166,715
3,005,730
18,505,241
(10,850)
(48,608)
2,490,701
26,802,902
24,657,506
287,517,063
239,313,132
2
Consolidated income statement
Six-month periods ended June 30, 2014 and December 31, 2013
June 30,
2014
December 31,
2013
(Thousands of bolivars, except
net income per share)
Interest income (Note 2)
Income from cash and due from banks
Income from investment portfolio (Note 4)
Income from loan portfolio (Note 5)
Total interest income
Interest expense (Note 2)
Interest on demand and savings deposits
Interest on time deposits
Interest on securities issued by MERCANTIL
Interest on other financial liabilities
Total interest expense
Gross financial margin
26,066
2,513,251
9,871,519
15,918
2,248,182
8,212,612
12,410,836
10,476,712
(3,634,021)
(60,899)
(7,696)
(106,829)
(2,710,882)
(61,938)
(6,470)
(85,294)
(3,809,445)
(2,864,584)
8,601,391
7,612,128
(934,950)
(1,198,459)
Net financial margin
7,666,441
6,413,669
Commissions and other income
Trust fund operations
Foreign currency operations (Notes 4 and 22)
Commissions on customer account transactions
Commissions on letters of credit and guarantees granted
Equity in long-term investments (Note 7)
Exchange gain (Note 22)
Gain on sale of investment securities (Note 4)
Other income (Note 18)
60,458
3,988
563,738
11,266
69,232
122,339
269,533
2,217,001
58,516
(8,996)
525,575
14,871
96,604
71,904
367,786
2,229,430
Total commissions and other income
3,317,555
3,355,690
5,642,528
(4,716,228)
4,792,898
(4,002,379)
926,300
790,519
11,910,296
10,559,878
(2,781,564)
(2,323,119)
(683,612)
(1,448,810)
(2,848,922)
(603,509)
(986,740)
(2,785,878)
(7,762,908)
(6,699,246)
4,147,388
3,860,632
(151,335)
(20,244)
(20,829)
(58,791)
(171,579)
(79,620)
3,975,809
3,781,012
(1,869)
(2,049)
3,973,940
3,778,963
40,08
40,08
99,153,501
99,153,501
38,11
38,11
99,155,684
99,155,684
Allowance for losses on loan portfolio and provision for commissions receivable (Notes 2 and 5)
Insurance premiums, net of claims (Notes 1 and 2)
Premiums
Claims
Total insurance premiums, net of claims
Income from financial operations
Operating expenses
Salaries and employee benefits
Depreciation, property and equipment expenses, amortization of
intangibles and other (Notes 9 and 10)
Fees paid to regulatory agencies
Other operating expenses (Note 19)
Total operating expenses
Operating income before tax and minority interests
Income tax (Note 16)
Current
Deferred
Total tax
Net income before minority interests
Minority interests
Net income
Net income per share (Note 21)
Basic
Diluted
Weighted average of outstanding common shares
Weighted average of outstanding diluted common shares
3
Consolidated statement of changes in equity
Capital
stock
Capital
inflation
adjustment
(Note 2)
Share
premium
Capital
reserves
Translation
adjustment
of net
assets of
subsidiaries
abroad
(Note 2)
Repurchased
shares
held by
subsidiaries
(Note 20)
Retained
earnings
Repurchased
shares
reserved
for employee
stock option
plan
Pension
plan
remeasurement
(Note 2-n)
Unrealized
gain (loss)
from
adjustment of
investments
to market
value
(Note 2)
Total
equity
Balances at June 30, 2013
Net income
Cash dividends paid to subsidiaries
Repurchased shares
Redemption of shares
Unrealized gain on investments
Translation adjustment of
net assets of subsidiaries
abroad (Note 22)
153,418
191,709
203,546
166,715
2,992,875
14,725,519
(6,961)
(48,608)
-
1,301,179
19,679,392
(96)
-
-
-
-
-
3,778,963
3,058
(2,299)
-
(6,284)
2,395
-
-
-
1,189,522
3,778,963
3,058
(6,284)
1,189,522
-
-
-
-
12,855
-
-
-
-
-
12,855
Balances at December 31, 2013
153,322
191,709
203,546
166,715
3,005,730
18,505,241
(10,850)
(48,608)
-
2,490,701
24,657,506
Net income
Capital increase (Note 20)
Dividends declared, net of
cash dividends paid to
subsidiaries
Repurchased shares
Unrealized loss on investments
Pension plan remeasurement
Translation adjustment of
net assets of subsidiaries
abroad (Note 22)
511,075
-
(203,546)
-
-
3,973,940
(307,529)
-
-
-
-
3,973,940
-
-
-
-
-
-
(1,095,274)
69,185
(4,299)
-
-
(69,185)
(728,860)
-
(1,095,274)
(4,299)
(728,860)
-
-
-
-
-
(111)
-
-
-
-
-
(111)
Balances at June 30, 2014
664,397
191,709
-
166,715
3,005,619
21,145,563
(15,149)
(48.608)
(69,185)
1,761,841
26,802,902
4
Consolidated cash flow statement
June 30,
2014
December 31,
2013
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities
Decrease in allowance for losses on loan portfolio
Depreciation and amortization
Amortization of available-for-sale assets
Provision for interest receivable and other assets
Gain on equity in long-term investments, net
Deferred income tax
Minority interest expenses
Accrual for length-of-service benefits
Payment of length-of-service benefits
Net change in operating accounts
Interest and commissions receivable
Available-for-sale and other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Net change in investment portfolio
Net change in long-term investments
Loans granted
Loans collected
Net additions to property and equipment
Net cash used in investing activities
Cash flows from financing activities
Net change in
Deposits
Short-term financial liabilities
Debt securities issued by MERCANTIL
Subordinated debt
Long-term financial liabilities obtained
Long-term financial liabilities repaid
Cash dividends
Repurchased shares
Net cash provided by financing activities
3,973,940
3,778,963
934,833
199,528
3,096
14,815
(69,232)
20,244
1,869
608,672
(466,431)
1,198,259
184,026
13,834
10,826
(96,604)
58,791
2,049
406,428
(420,067)
(397,348)
9,396
(1,151,631)
3,377,573
(446,017)
12,623
(955,100)
2,657,284
7,059,324
6,405,295
(7,483,827)
142,320
(65,358,906)
29,402,347
(301,595)
(8,584,319)
12,782
(51,657,051)
27,762,182
(136,685)
(43,599,661)
(32,603,091)
40,164,140
2,243,170
(31,840)
(86)
4,134
(10,419)
(936,917)
(4,299)
46,850,840
(1,488,962)
80,043
(5,033)
227,212
(980)
(99,930)
(6,284)
41,427,883
45,556,906
Cash and cash equivalents
Net change for the period
4,887,546
19,359,110
At the beginning of the period
53,199,806
33,840,696
At the end of the period
58,087,352
53,199,806
31,057
198,109
3,693,219
2,766,667
(111)
12,855
(728,860)
1,189,522
Supplementary information
Taxes paid
Interest paid
Unrealized gain (loss) from adjustment of investments to market value
5
Notes to the consolidated financial statements
1.
Reporting entity and regulatory environment
Mercantil Servicios Financieros, C.A. (MERCANTIL) was incorporated in the Bolivarian Republic of
Venezuela in 1997 and its shares are listed on the Caracas Stock Exchange. In addition, MERCANTIL
has an American Depository Receipts (ADR) program, Level 1, which is listed on the Over the Counter
(OTC) market in the United States of America with Classes “A” and “B” shares as underlying assets.
MERCANTIL is regulated by the Venezuelan Stock Market Law and the Venezuelan Securities
Superintendency (SNV) and, therefore, must present its legal and statutory financial statements in
accordance with the rules for the preparation of financial statements of entities regulated by the SNV.
MERCANTIL and its subsidiaries provide financial and general banking services to corporate, middle
market and retail customers. Third-party asset management services are provided both in Venezuela
and the United States of America, as well as insurance services in Venezuela and Panama.
The main subsidiaries of MERCANTIL are Mercantil, C.A. Banco Universal in Venezuela (99.94%
owned); Mercantil Commercebank Holding Corporation (wholly owned), which is the final beneficial
owner of Mercantil Commercebank, N.A., a U.S.-based commercial bank; the Venezuela-based
insurance company Mercantil Seguros, C.A. (wholly owned through Avila Investment, Inc.) and;
Mercantil Merinvest, C.A. and its subsidiaries, all wholly owned.
Other consolidated financial subsidiaries wholly owned by MERCANTIL through several subholdings
include Mercantil Bank Curacao, N.V. (an off-shore bank domiciled in the Netherland Antilles);
Mercantil Bank (Panama), S.A.; Mercantil Seguros Panamá, S.A.; Mercantil Bank (Schweiz) AG
(domiciled in Switzerland) and its subsidiary Mercantil Bank & Trust Limited (Cayman Islands)
(domiciled in Grand Cayman, B.W.I.) and; Mercantil Inversiones y Valores, C.A.
MERCANTIL’s statutory financial statements at June 30, 2014 and December 31, 2013 were approved
by the Board of Directors on July 11 and January 10, 2014, respectively.
Regulatory environment
Law of the National Financial System
This Law aims to supervise and coordinate the National Financial System, which is formed by the
group of public, private and communal financial institutions and any other form of organization
operating in the banking sector, the insurance sector, the stock market and any other sector or group
of financial institutions that the policy-making body deems should form part of the system in order to
ensure that financial resources are used and invested for the public interest and for economic and
social development.
The Law prohibits institutions belonging to the National Financial System from forming financial groups
with each other or with companies from other sectors of the national economy or to associate with
international financial groups for purposes other than those defined in the Law.
Stock Market Law
This Law, among other things, establishes the powers of the SNV, and enables the Venezuelan
President to suspend market operations and prohibits securities dealers from brokering public-sector
securities. In addition, the Law defines rules for companies associated with entities regulated by this
Law and rules that disregard the legal personality benefit. The Law also establishes that arbitration
shall be the only dispute resolution mechanism among issuers, investors and brokers. Further, it
prohibits individuals with over 3% equity in entities of the financial system from becoming members of
stock exchanges. An intervention system for companies regulated by this Law, including issuers, is
also established. The Law creates the investors council as a mechanism for citizen participation and
defense, among others.
6
Law on Banking Sector Institutions
This Law, among other things, considers banking as a public service; defines financial intermediation
as fundraising for investment in loan portfolios and securities issued or guaranteed by the Venezuelan
government or government agencies; establishes disqualification instances to act as directors; requires
boards of directors to approve transactions exceeding 2% of equity; establishes a social contribution of
5% of pre-tax income for the fulfillment of social responsibilities to finance projects developed by
communal councils or other forms of social organization; limits consumer credits to 20% of the bank’s
loan portfolio, the bank’s assets to 15% of total banking sector assets, transactions with a single debtor
to 10% of equity and to 20% with bank or other appropriate guarantees and; defines “debtor” in relation
to this limitation. The Law prohibits trading of assets or liabilities with foreign companies without
authorization from the Superintendency of Banking Sector Institutions (SUDEBAN) and investing in
companies regulated by the Stock Market Law and the Insurance Activity Law.
Regarding the investment portfolio, SUDEBAN interpreted that, in addition to securities issued and
guaranteed by the Venezuelan government or government agencies, the Law allows other investments
in public or private entities of up to 5% of the issuer’s capital stock or voting rights. In addition,
management is awaiting definition of certain matters contained in this Law and rulings by: a) the
Supreme Tribunal of Justice on Article No. 76 of the Law regarding fiduciary limitations; b) the Higher
Authority of the National Financial System on Article No. 15 regarding non-banking institutions that also
belong to the banking sector, Article No. 38 prohibiting anyone with 5% or more equity or voting rights
in an institution belonging to the National Financial System from having shareholdings in banks,
Article No. 96 prohibiting transactions exceeding the established limits with the same individual,
Article No. 97 regarding the definition of related debtors, and Article No. 99, numerals 1, 4, 14, 16 and
17 regarding general operating, financial, preventive and managerial prohibitions.
Although no pronouncements on the foregoing matters have been issued, MERCANTIL has
established a trust fund in respect of Mercantil Seguros, C.A., of which it is the beneficiary and which
has been set up with the shares of a company that indirectly owns almost all of the shares of Mercantil
Seguros, C.A.
The following table includes the main items of Mercantil Seguros, C.A. that are consolidated in
MERCANTIL’s financial statements:
Balances at
June 30,
2014
Main
items
Balances at
December 31,
2013
Main
items
(Millions of bolivars)
Assets
Investment securities
Property and equipment
Other assets - insurance premiums receivable
Other
12,414
10,727
7,483
257
1,858
2,816
Liabilities
Other liabilities - reserves
Other items
8,661
Equity
3,753
Income
Income from investments
Insurance premiums, net of claims
Other
1,389
6,247
259
1,594
2,627
7,022
6,208
2,453
5,163
1,859
3,705
1,673
329
926
134
Expenses
Operating
Other
(1,095)
334
791
548
(889)
(1,035)
(60)
Net income
294
7
(843)
(46)
784
Insurance Activity Law
This Law establishes obligations regarding social health service plans, service delivery methods,
creation of new reserves, as well as insurance companies’ contributions to the Insurance
Superintendency. The scope of this Law extends to other sectors of the Venezuelan economy, e.g.,
prepaid medicine companies (fund administrators covering health expenses), insurance premium
financing companies and insurance cooperatives.
Sports and Physical Education Law
Companies subject to this Law must contribute 1% of their net income to the activities contemplated
therein. This Law seeks to regulate physical education and the sponsorship, organization and
management of sporting activities as public services.
New Labor Law (LOTTT)
The new Labor Law extends job security, establishes the retrospective accrual of length-of-service
benefits, and improves the indemnity for termination of employment. Based on actuarial studies, the
impact of these changes has been estimated and recorded (Note 17).
In addition, the LOTTT regulates certain legal benefits such as working hours, rest days, holidays,
vacation, profit sharing, absences and leave. The collective labor agreement of MERCANTIL’s
subsidiaries in Venezuela also establishes the legal benefits that match or exceed benefits established
in the Law.
Laws applicable to the main subsidiaries
a) Mercantil, C.A. Banco Universal
Mercantil, C.A. Banco Universal (the Bank) is incorporated and domiciled in Venezuela and its
activities are regulated by the Law on Banking Sector Institutions and the rules and instructions of
SUDEBAN, the Central Bank of Venezuela (BCV) and the Social Bank Deposit Protection (FOGADE).
Regulations require the subsidiary Mercantil, C.A. Banco Universal to earmark a minimum nominal
percentage of 28% of its gross loan portfolio at June 30, 2014 to finance loans for agriculture, tourism
and small businesses (59% at December 31, 2013 for agriculture, tourism, manufacturing, mortgages
and small businesses). At June 30, 2014 and December 31, 2013, the gross loan portfolio earmarked
for these sectors is Bs 39,269,370,000 and Bs 32,576,104,000, respectively.
Deposit and lending rates are regulated by the BCV. The BCV sets maximum and minimum interest
rates for deposits and credit operations based on reference rates. In June 2014 and December 2013,
the annual interest rate for lending operations may not exceed 24% and 29% for credit card
transactions. Financial institutions may only charge an additional 3% per annum on amounts overdue
from clients. The maximum interest rates for directed loan portfolios at June 30, 2014 and December
31, 2013 are as follows: agriculture 13%, microcredits 24%, tourism 6.84% or 9.84% (7.02% or 10.02%
at December 31, 2013), mortgages 4.66% to 10.66%, and manufacturing: i) 18% as the maximum
interest rate for credit operations for this sector and ii) an annual interest rate not greater than 16.20%
of the previous rate for loans earmarked for small and medium industries, state-owned industries,
community industries, as well as joint ventures for manufacturing. The annual interest rates on savings
deposits may not fall below 16% calculated on daily balances up to Bs 20,000 and 12.50% on daily
balances greater than Bs 20,000. Annual interest rates on time deposits may not fall below 14.50%.
The annual interest rate to be charged by the BCV on discount, rediscount and advance operations,
except as regards operations conducted under special regimes, was set at 29.50%.
The BCV has regulated service fees charged by banks to customers in respect of savings and current
accounts, and leasing, international, and credit and debit card transactions.
8
b) Mercantil Commercebank, N.A.
This subsidiary, incorporated, domiciled and regulated in accordance with the laws of the United States
of America, is supervised and regulated by the Office of the Comptroller of the Currency (OCC).
c) Mercantil Bank (Schweiz) AG
This bank, incorporated and domiciled in Switzerland, is regulated by the laws of Switzerland and
supervised by the Swiss Federal Banking Commission and the Swiss National Bank.
d) Mercantil Bank (Panama), S.A.
This bank, incorporated and domiciled in accordance with the laws of Panama, is supervised by the
Superintendency of Banks of Panama.
e) Mercantil Seguros, C.A.
This company, incorporated in Venezuela, is regulated by the Insurance Activity Law and its
regulations, and by the accounting rules and instructions of the Insurance Superintendency.
f) Mercantil Merinvest, C.A.
This subsidiary is a holding company for subsidiaries in Venezuela and Panama engaged in securities
brokerage and mutual fund management. The subsidiaries are regulated by the SNV, the Stock
Market Law in Venezuela and the Stock Market Superintendency in Panama.
2.
Basis of preparation
The Venezuelan Federation of Public Accountants (FCCPV) approved the adoption of accounting
principles generally accepted in Venezuela (VEN NIF) as the accounting principles of mandatory
application in Venezuela as from January 1, 2008. These standards are mainly based on International
Financial Reporting Standards (IFRS) and their interpretations issued by the International Accounting
Standards Board (IASB), except for certain criteria concerning adjustments for inflation and the
valuation of foreign currency transactions and balances, among others. In January 2009, the SNV
established that, as from 2011, publicly traded companies must present their financial statements in
accordance with International Accounting Standards (IAS) and IFRS. However, MERCANTIL, as an
entity regulated by the SNV, for being an issuer of commercial paper, debenture bonds and publicly
traded shares must continue to present its financial information in conformity with the SNV’s
Accounting Manual and Plan of Accounts.
The accompanying consolidated financial statements have been prepared following the rules and
instructions of the SNV, which differ in certain respects from VEN NIF. When the rules of the SNV
contain no specific guidance, MERCANTIL follows VEN NIF. The main differences that affect
MERCANTIL are the following:
1) Consolidated financial statements adjusted for the effects of inflation
VEN NIF require that the effects of inflation on the financial statements be recognized, provided that
inflation for the year exceeds one digit. In accordance with SNV instructions, as from 1999
MERCANTIL should not recognize the effects of inflation on its financial statements. The SNV has
ruled that the methodology to be followed by MERCANTIL for preparing and presenting its nominal
financial statements is that set out in IAS 29. According to this standard, when an economy is no
longer hyperinflationary and an entity ceases to prepare and present inflation-adjusted financial
statements, it should use the amounts expressed in terms of purchasing power at the end of the
previous reporting period as the basis for presenting financial statements expressed in nominal
bolivars. Therefore, MERCANTIL considered the amounts expressed in terms of purchasing power at
December 31, 1999 as the basis for presenting its financial statements expressed in nominal bolivars
for subsequent periods (Note 33).
9
2) Foreign currency
Foreign currency transactions, mainly in U.S. dollars, are recorded at the official exchange rate in
effect at the transaction date and adjusted to the official rate prevailing at period end. Foreign currency
balances at June 30, 2014 and December 31, 2013 are shown at the official exchange rate (Note 22).
Net exchange gains and losses are included in the results for the period, except for those resulting
from investments in available-for-sale debt securities and investments in publicly traded shares
denominated in foreign currency, which are recorded in equity. The assets and liabilities of
subsidiaries abroad are translated at the period-end official exchange rate, equity accounts at the
historic exchange rate, and income accounts at the average official exchange rate for the period
(Note 22). Translation adjustments are recorded in equity. VEN NIF establish two options for
measuring transactions and balances in foreign currency: a) at the official exchange rates established
in the exchange agreements issued by the BCV or b) on the basis of best estimates of future cash
flows in bolivars expected to be obtained using the exchange or settlement mechanisms permitted
under Venezuelan law. In addition, VEN NIF establish that exchange gains on available-for-sale or
held-to-maturity securities must be included in the income statement.
3) Investments in trading and available-for-sale securities
Trading and available-for-sale securities may remain in these categories for a maximum and minimum
of 90 days as from the date they were classified in these categories. Under VEN NIF, they may remain
in these categories indefinitely.
4) Transfer between investment portfolios
According to VEN NIF, when held-to-maturity securities for significant amounts are reclassified to
available-for-sale securities and such transfer is due to a change in their original intended use not
qualified as an isolated, external, nonrecurring or unusual event affecting MERCANTIL, all investments
remaining in this category should be reclassified to available-for-sale securities. According to SNV
rules, reclassifications of held-to-maturity securities to any other category must be approved by the
SNV.
5) Permanent losses on investment securities
When permanent losses resulting from a fair value impairment of investment securities are recorded,
any subsequent recovery in fair value does not affect the new cost basis. VEN NIF allow any recovery
of impairment losses on debt securities previously expensed to be recorded as income.
6) Rescheduled loans
For the subsidiary Mercantil, C.A. Banco Universal, the Accounting Manual for Banks, Other Financial
Institutions and Savings and Loan Institutions issued by SUDEBAN establishes that loans whose
original repayment schedule, term or other conditions have been modified by the creditor at the request
of the debtor must be reclassified within rescheduled loans. VEN NIF provide no specific guidance;
however, they do state that impairment losses on financial assets carried at amortized cost shall be
recognized in the results for the period in which they are incurred.
7) Overdue and in-litigation loans
Loans classified as overdue must be written off within 24 months after inclusion in this category. Loans
in litigation must be fully provided for after 24 months in the in-litigation category. In addition, overdue
monthly loan installments that have been repaid must be reclassified to the category to which they
pertained before being classified as overdue. Likewise, when an individual repays pending loan
installments of a loan in litigation, thereby terminating the lawsuit, MERCANTIL must reclassify the loan
to the category to which it pertained before being classified as in litigation or overdue. In-litigation
loans are those in the legal collection process. Under VEN NIF, these loans are recorded based on
collectibility.
10
8) Allowance for losses on loan portfolio
Allowances for losses on the loan portfolio are determined based on a collectibility assessment for
individual loans and, in the case of the subsidiary Mercantil, C.A., Banco Universal, on a global risk
percentage for loans not assessed individually and a general allowance of 1% over loan balances at
month end, except for microcredits, which are subject to a general 2% allowance. In addition to
minimum general and specific allowances for losses on loan portfolio, SUDEBAN established a general
countercyclical allowance equivalent to 0.75% of the gross loan portfolio balance to be set aside as
follows: 0.25% at April 30, 2014; 0.50% at August 31, 2014 and 0.75% at December 31, 2014.
VEN NIF require the allowance for losses on the loan portfolio to be determined based on asset
recoverability, considering the fair value of guarantees, and do not provide for a general allowance.
9) Assets received as payment and idle assets
Assets received as payment are recorded at the lower of assigned value, book value, market value or
appraisal value not older than one year. In accordance with VEN NIF, assets received as payment are
recorded at the lower of cost and market value and are classified as property and equipment or
available-for-sale assets depending on their use.
10) Property and equipment
Until December 31, 1999, property and equipment was recorded at restated cost, net of accumulated
depreciation. From 2000 new additions are recorded at cost. VEN NIF allow the revaluation of
property and equipment, and any increase in value is recognized in equity within revaluation surplus.
MERCANTIL assesses possible impairment in the value of its long-lived assets when events or
changes in circumstances indicate that their carrying amount may not be recoverable. An impairment
loss is recognized in the results for the period for the amount by which the asset’s carrying amount
exceeds fair value. According to VEN NIF, the recoverable amount of an asset or group of assets to
be held and used is the higher of fair value less costs to sell and value in use (value in use is the
present value of estimated future cash flows to be obtained from an asset or cash generating unit
(CGU)).
The CGU represents the lowest level within the entity it generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets.
11) Goodwill
MERCANTIL amortizes goodwill using the straight-line method over 20 years. According to VEN NIF,
goodwill is not amortized but tested for impairment annually or whenever events or circumstances
indicate that the value of the respective reporting unit may be impaired. Impairment is determined
comparing the book value to the recoverable amount of the CGU, and if the carrying amount exceeds
the recoverable amount, an impairment loss is recognized in the income statement.
12) Deferred tax
MERCANTIL computes a deferred tax asset or liability in respect of temporary differences between
income and expenses arising in different periods for accounting and tax purposes, provided that there
is a reasonable expectation of realization or recovery over time. In addition, the amount by which the
deferred tax asset exceeds tax expense for the year is not recognized. In accordance with VEN NIF, a
deferred tax asset or liability is calculated in respect of all temporary differences between the tax
balance sheet and the accounting balance sheet.
13) Commissions charged
Commissions charged on loans granted are recorded as income when collected, whereas under
VEN NIF they should be deferred and recorded as income over the loan term.
11
14) Transactions with derivative instruments
Contracted amounts in transactions with derivative instruments, mainly for futures trading, are shown
under memorandum accounts instead of in the consolidated balance sheet as required by VEN NIF
(Note 23).
Below is a summary of the SNV accounting principles that do not differ from VEN NIF:
a) Consolidation
The consolidated financial statements include the accounts of MERCANTIL and its more than
50%-owned subsidiaries. All significant intercompany transactions and balances have been eliminated
in consolidation. MERCANTIL’s accounting year end is December 31, except for certain non-banking
subsidiaries whose accounting year ends on November 30. Subsidiaries whose accounting year ends
on November 30 are consolidated with the financial statements of MERCANTIL at December 31.
The accounting policies applied by subsidiaries have been amended to ensure consistency with the
accounting policies adopted by MERCANTIL, when necessary.
Special purpose entities controlled by MERCANTIL or of which MERCANTIL is considered the final
beneficial owner or the main beneficiary are included in the consolidated financial statements.
b) Cash equivalents
Cash equivalents comprise balances due from banks and the portion of investments in time deposits
and placements maturing within 90 days.
c) Investment portfolio
Investments are classified upon acquisition, based on their nature and intended use, into one of the
following categories:
Trading securities
These investments are recorded at fair value and comprise investments in debt securities acquired for
short-term trading. Unrealized gains or losses resulting from fair value changes are included in the
results for the period.
Available-for-sale securities
Available-for-sale debt securities are recorded at fair value. Unrealized gains or losses arising from
differences in market values are included in equity as an unrealized gain or loss on adjustment of
investments to market value until they are sold or reclassified to investments in trading securities.
If these investments are reclassified to the held-to-maturity category, the unrealized gain or loss on
available-for-sale securities will be maintained separately in equity and will be amortized during the
investment’s remaining life as an adjustment to yield.
The fair value of investments in trading or available-for-sale debt securities not listed on stock
exchanges is determined according to the present value of future cash flows of the securities, trading
operations on the secondary market, or specific market prices of financial instruments with similar
characteristics.
Held-to-maturity securities
These are investments in debt securities that MERCANTIL has the firm intention and ability to hold
until maturity. They are recorded at cost, adjusted for amortization of premiums or discounts.
Discounts or premiums on acquisition are recorded in the income statement over the term of the
security.
12
Impairment testing
MERCANTIL assesses at each balance sheet date, or sooner if circumstances require it, whether there
is objective 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 period when
management considers that it is other than temporary. Indicators of impairment are: 1) a prolonged
period where fair value remains substantially below cost, 2) the financial condition and liquidity of the
issuer, 3) a fall in the issuer’s credit rating, 4) the disappearance of an active market for the security,
and 5) MERCANTIL’s inability to hold the investment long enough to allow for recovery of fair value,
among others.
This portfolio includes investments in shares to be publicly traded.
Time deposits and placements
These investments are funds deposited with banks and are recorded at cost, which is equivalent to
nominal value.
Restricted investments include repurchase operations and other investments whose ownership rights
are restricted or pledged as loan guarantees. They are valued using the same criteria as for the
investments from which they are derived.
Long-term investments
Investments in 20% to 50%-owned affiliates are recorded under the equity method (Note 7).
d) Investment securities acquired under resale agreements
Investment securities acquired under resale agreements are recorded as restricted investments for the
amount of funds transacted. The difference with respect to the resale price is recorded within interest
income on the accrual basis (Note 4).
e) Loan portfolio
Rescheduled loans are those whose original repayment schedule, term or other conditions have been
modified at the request of the debtor or according to certain other conditions.
Loans are classified as overdue 30 days after maturity. Individual loan installments are shown as
overdue if repayment is more than 30 days past due. When any installment is more than 90 days past
due, the entire loan balance is classified as overdue.
Loans for minor amounts and of similar nature are assessed as a whole to determine applicable
allowances.
f) Property and equipment
Property and equipment is shown net of accumulated depreciation. Property and equipment is
depreciated using the straight-line method over the estimated useful lives of the assets. Gains or
losses on the sale of personal and real property are shown in income accounts.
g) Available-for-sale and other assets
Available-for-sale assets other than personal and real property received as payment are recorded at
the lower of cost and market value. Gains or losses from the realization of available-for-sale assets
are included in income accounts.
MERCANTIL assesses the collectability of items within other assets using the same criteria, where
applicable, as for the loan portfolio. Provisions are set aside for items that require them due to their
nature or aging.
13
h) Deferred and systems development expenses
Deferred expenses are mainly in respect of office setup, office improvement and software. These
expenses, as well as those incurred for systems development, are recorded at cost, net of
accumulated amortization.
Amortization is calculated using the straight-line method over 4 years.
i) Use of estimates in the preparation of consolidated financial statements
The preparation of consolidated financial statements and their notes requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the amounts of
gains and losses recorded during the period, and the disclosure of contingent assets and liabilities at
the date of the consolidated financial statements. Actual results may differ from those estimates.
The areas involving a higher degree of judgment or complexity, or areas where management’s
assumptions or estimates are significant to the consolidated financial statements are the allowance for
losses on the loan portfolio (Note 5), the income tax provision (Note 16), reserves for insurance
operations, and the determination of fair values.
Provision for legal and tax claims
MERCANTIL sets aside a provision for legal and tax contingencies considered probable and
reasonably quantifiable based on the opinion of its legal advisors and facts known at the assessment
date. The final outcome of these processes could differ from that expected (Note 31).
j) Liabilities under repurchase agreements
Repurchase agreements are treated as financing operations and recorded as liabilities for the amount
of the funds obtained from these transactions. The difference with respect to the repurchase price is
recorded as interest expense over the term of the liability.
k) Income from insurance premiums and reserves for insurance operations
Reserves for insurance claims include the estimated cost of claims reported and related expenses in
addition to the estimated provisions for claims incurred but not yet reported.
Since reserves are based on estimates, the actual amounts may be greater or smaller than those
reserves. The effects of changes in estimated reserves are included in the results for the period in
which they occur. Reserves for insurance operations are shown within other liabilities (Note 14).
Insurance premiums collected are recorded as income when earned. Insurance managed by
MERCANTIL, including equity, accident and health insurance policies, qualify as short-term insurance
agreements.
l) Income tax
Income tax is calculated based on the legal rate applicable to the related fiscal jurisdiction and is
recognized as an expense for the period. The tax provision is based on management’s projection of
tax results. MERCANTIL records a deferred tax asset when, in the opinion of management, there is
reasonable expectation that future tax results will allow its realization. Deferred tax asset (liability)
must always be recognized (Note 16).
m) Employee benefits
Based on the provisions of the LOTTT and the collective labor agreement of MERCANTIL’s
subsidiaries in Venezuela, length-of-service benefits are a vested right of employees. Under the
LOTTT, MERCANTIL transfers guaranteed length-of-service benefits quarterly and annually to a trust
fund on behalf of each employee. In addition, the LOTTT establishes that length-of-service benefits will
be calculated retrospectively upon termination of employment considering the last salary earned by the
14
employee and length of service. The LOTTT requires the payment to employees at employment
termination of the higher of retrospective length-of-service benefits and total amounts accrued in the
employee’s trust fund.
Due to the uncertainty involved in estimating an employee’s last salary, termination date and total
amounts to be accrued in the employee’s trust fund at period end, the Company uses actuarial
methods to measure and record its obligation for length-of-service benefits based on assumptions that
include discount rates, salary increase rates and employee turnover rates. These assumptions are
reviewed annually and changes may affect the amount of the obligation.
Indemnity
Under the LOTTT, if an employee protected by the dismissal ban is terminated for reasons other than
justified dismissal, the employee will be entitled to receive an additional indemnity equal to his or her
accrued length-of-service benefits. This amount is recorded within salaries and employee benefits
upon termination of employment.
Profit-sharing bonus and vacation leave
As established in its collective labor agreement, MERCANTIL grants profit-sharing bonuses and
vacation leave to its employees that match or exceed the legal minimums, and accrues the related
liabilities as incurred.
n) Employee benefit plans
Retirement pension plan
MERCANTIL has a long-term defined benefit plan covering all eligible employees which is managed by
Fundación BMA. Related costs and liabilities are calculated using actuarial methods and are recorded
in the results for the period. The net costs of the pension plan are based on actuarial assumptions that
are revised annually, such as the discount rate of the obligation, the inflation rate and salary increases,
and include service costs, interest expense and returns on plan assets, as well as deferral and
amortization of certain components. Changes in assumptions may affect the amount of future
contributions.
MERCANTIL uses the projected unit credit method to calculate the present value of the Defined
Benefit Obligation (DBO). MERCANTIL makes biannual or annual contributions to the plan, except
when the DBO is already covered by plan assets. Plan assets are carried at fair value.
Post-retirement benefits
The Supplementary Retirement Pension Plan and the Supplementary Savings Plan include certain
post-retirement benefits for personnel of MERCANTIL and its Venezuelan subsidiaries, mainly medical
insurance. The related costs and liabilities are determined based on actuarial methods.
IAS 19R, “Employee Benefits,” became effective in January 2014. IAS 19R establishes that the effect
due to experience and changes in actuarial assumptions of the retirement and post-retirement benefit
plans must be recorded in equity. At June 30, 2014, MERCANTIL recorded Bs 69,185,000 in this
connection. Past service costs of the pension plan are recorded in the consolidated income statement
in the period in which the change occurs.
Defined contribution scheme
MERCANTIL maintains a defined contribution scheme called the Mercantil Supplementary Savings
Plan. Contributions to the plan are recorded in the results for the period in which they are made. This
Plan is a voluntary programmed savings scheme in the form of individual capitalization accounts that is
managed by the Savings and Loan Fund of MERCANTIL employees. Under the Supplementary
Savings Plan, employees contribute between 1% and 5% of their basic monthly salary and
MERCANTIL doubles the employee’s contribution up to a maximum of 10% of said salary.
15
In addition, Mercantil Commercebank, N.A. has a 401K benefit plan to which MERCANTIL contributes
a fixed percentage of participating employees’ salaries. During the six-month periods ended June 30,
2014 and December 31, 2013, Mercantil Commercebank, N.A. contributed Bs 8,352,000 and
Bs 7,462,000, respectively, to the plan.
o) MERCANTIL stock option plan
MERCANTIL has a long-term stock option plan for certain key officers. Stock options are recorded as
equity. MERCANTIL determines the fair value of these options and amortizes the related expense over
the vesting period. The fair value of each option is determined at the option grant date using the BlackScholes-Merton valuation model and does not take into consideration cash dividends that will not be
received by the participants.
p) Recognition of revenue, costs and expenses
Income, costs and expenses are recorded as earned or incurred. Interest collected in advance is
included as deferred income within Other liabilities and is recorded as income when earned (Note 14).
Interest on customer deposits, liabilities and borrowings is recorded as interest expense when incurred.
Income from financial leases and amortization costs of leased property are shown as net interest
income.
q) Fair value of financial instruments
MERCANTIL recognizes transactions with financial instruments at their transaction date. Financial
instruments are recorded in the consolidated balance sheet as either assets or liabilities at their
respective fair values. The carrying amount of cash and due from banks, the investment portfolio and
interest and commissions receivable approximates their fair value due to the short-term maturities of
these instruments. Since most of MERCANTIL’s loans, commercial paper and other financial liabilities
bear interest at variable market rates, management considers their carrying amounts to approximate
fair value.
r) Memorandum accounts
MERCANTIL records under memorandum accounts assets received in trust, commercial paper and
debenture bonds that have been authorized for issue by the SNV but have not been placed at period
closing, lines of credit and special trust services (Note 23).
s) Assets received in trust
MERCANTIL acts as custodian, administrator and manager of third-party investments. MERCANTIL
values assets received in trust, shown under memorandum accounts, using the same parameters as
for its own assets, except investment securities, which are measured as described below:
Investments in debt securities are recorded at cost, which should not differ significantly from fair value
at purchase. Discounts or premiums are amortized over the term of the securities as a credit or debit
to interest income, resulting in a lower or greater effective yield on investments. Debt securities in
foreign currency are adjusted to the prevailing official exchange rate. Investments in equity securities
in bolivars and foreign currency are recorded at cost.
t) Dividends
Cash dividends are recorded as liabilities when approved at a Shareholders’ Meeting (Note 14).
u) Net income per share
Basic net income per share is determined by dividing net income for the period by the weighted
average of outstanding shares, excluding repurchased shares and those reserved for the employee
stock option plan. Diluted net income per share is determined by applying the Treasury Stock Method,
16
by which the net income per share is determined as if employee stock options had been exercised and
funds from exercised options had been used to acquire MERCANTIL shares (Note 21).
3.
Cash and due from banks
The main banking subsidiaries must maintain minimum balances of cash and due from banks in local
and foreign currencies as required by regulatory agencies. These balances are determined based on
deposits and other borrowings by subsidiaries.
Below are the balances with the BCV included in cash and due from banks:
June 30,
2014
December 31,
2013
Legal reserve
Demand deposits
37,118,867
5,999,418
26,048,415
11,550,878
43,118,285
37,599,293
At June 30, 2014, the legal reserve for banking sector institutions that participated in the social
program Venezuela’s Great Housing Mission, developed by the Venezuelan government, was 18.50%
of all deposits (17.50% at December 31, 2013). As from October 2013, the legal reserve was 19%
until November 2013, 27% until March 2014 and 28% as from that date for marginal increases in
deposits. In May 2012 and 2013, the BCV reduced the legal reserve by an amount equivalent to the
investment made by the institutions in housing securities (Note 4-g). The legal reserve for deposits in
local and foreign currency must be made in bolivars. Legal reserve funds do not earn interest for
MERCANTIL and are not available for use. Demand deposits relate to recent high liquidity levels of
the Venezuelan financial system and internal risk limits, and earn no interest.
Pending cash items relate mainly to clearinghouse operations conducted by the BCV and other banks.
4.
Investment portfolio
The investment portfolio comprises the following:
June 30, 2014
Cost
Book value
(equivalent
to market
value)
December 31,2013
Cost
Book value
(equivalent
to market
value)
a) Investments in trading securities
Investment securities issued by Venezuelan entities
Securities issued or guaranteed by the Bolivarian
Republic of Venezuela in foreign currency
Investment securities issued by entities in other countries
Other investments
17
66,113
66,113
70,927
70,927
671
671
72
72
66,784
66,784
70,999
70,999
June 30, 2014
Cost
_ December 31, 2013
Book value
(equivalent
Unrealized Unrealized to market
gain
loss
value)
Cost
__
Book value
(equivalent
gain
loss
value)
b) Investments in available-for-sale
securities
Investment securities issued by
Venezuelan entities
Securities issued or guaranteed
by the Bolivarian Republic of
Venezuela
In local currency (1)
In foreign currency
Other investments
In local currency
In foreign currency
Investment securities issued by
entities in the United States of
America
Securities issued or guaranteed by
the government of the United
States of America (2)
Debt in companies sponsored and
supervised by the government of
the United States of America (3)
Securities issued by the National
Treasury of the United States of
America
Other investments
Investments in other countries
21,054,055
1,332,844
2,073,420
100,440
(371,228)
(157,407)
22,756,247
1,275,877
19,491,404
1,166,630
2,815,478
2,655
(182,648)
(137,049)
22,124,234
1,032,236
22,386,899
2,173,860
(528,635)
24,032,124
20,658,034
2,818,133
(319,697)
23,156,470
38,750
17,617
12,465
(1,107)
(133)
37,643
29,949
190,934
29,998
28
-
(466)
(727)
190,496
29,271
56,367
12,465
(1,240)
67,592
220,932
28
(1,193)
219,767
22,443,266
2,186,325
(529,875)
24,099,716
20,878,966
2,818,161
(320,890)
23,376,237
6,555,299
78,119
(22,286)
6,611,132
6,257,223
72,729
(35,568)
6,294,384
3,478,944
48,808
(27,626)
3,500,126
3,470,727
40,010
(58,410)
3,452,327
130,863
2,844,913
141
17,460
(7)
(34,868)
130,997
2,827,505
109,982
1,239,173
291
7,269
(8)
(9,720)
110,265
1,236,722
13,010,019
144,528
(84,787)
13,069,760
11,077,105
120,299
(103,706)
11,093,698
723,487
11,709
(5,547)
729,649
503,818
3,005
(8,844)
497,979
36,176,772
2,342,562
(620,209)
37,899,125
32,459,889
2,941,465
(433,440)
34,967,914
(1) These investments include Principal and Interest Covered Bonds (TICC) with a reference par value of US$126,039,000 at June 30, 2014
(US$126,028,000 at December 31, 2013), payable in bolivars at the official exchange rate (Note 22). In addition, at June 30, 2014 and
December 31, 2013, they also include Agriculture Bonds issued by Petróleos de Venezuela, S.A. for Bs 473,137,000 (Bs 153,417,000 at
December 31, 2013 issued by the People’s Power Ministry for Finance) (Note 4-g).
(2) These investments include securities of the Government National Mortgage Association and the Small Business Administration.
(3) These investments include shares of the Federal National Mortgage Association and the Federal Home Loan Mortgage Corporation.
At June 30, 2014, certain investments in available-for-sale securities with a market value of US$690
million were pledged to guarantee deposits and investments sold under repurchase agreements
(US$403 million at December 31, 2013).
The unrealized gain included in equity comprises the following:
June 30,
2014
December 31,
2013
Type of portfolio
Investments in held-to-maturity securities reclassified from
investments in available-for-sale securities
Restricted investments
Affiliates shown under the equity method
18
1,722,353
2,508,025
(30,202)
70,543
(570)
(283)
(38,125)
20,636
39
126
1,761,841
2,490,701
At June 30, 2014, the market value of securities owned by MERCANTIL is lower than cost by
Bs 620,209,000 (Bs 433,440,000 at December 31, 2013). This loss is included in equity as an
unrealized gain (loss) on investments in available-for-sale securities. MERCANTIL believes that these
losses arise from normal stock market fluctuations and, consequently, are temporary. MERCANTIL
does not expect to realize these securities at a price below their book value. MERCANTIL has the
ability to hold these securities for a sufficient period of time to recover unrealized losses.
June 30, 2014
December 31, 2013
Amortized
Amortized
Cost
cost
Cost
cost
c) Investments in held-to-maturity securities
Securities issued or guaranteed by the Bolivarian
Republic of Venezuela
In local currency (1)
In foreign currency
Investment securities issued by public companies and
decentralized entities
In local currency (Note 4-g)
Investment securities issued by entities in the
United States of America in U.S. dollars
Securities issued by the National
Treasury of the United States of
America
Other investments
477,503
29,031
475,682
29,031
472,069
26,885
474,737
28,752
506,534
504,713
498,954
503,489
20,263,387
20,235,340
15,925,953
15,911,462
604
60,588
604
60,588
36,113
35,929
61,192
61,192
36,113
35,929
363,386
363,052
358,185
348,048
21,194,499
21,164,297
16,819,205
16,798,928
(1) These investments include Principal and Interest Covered Bonds (TICC) with a reference par value of US$76,641,000 at June 30,
2014 and December 31, 2013, payable in bolivars at the official exchange rate (Nota 22).
_ June 30, 2014
Cost
Book value
(equivalent
gain
loss
value)
______ December 31, 2013
Book value
(equivalent
Cost
gain
loss
value)
d) Share trading portfolio
Shares issued by companies of Venezuela
and the United States of America (Note 4-g) 231,307
70,895
(352)
301,850
__
215,442
20,874
June 30, 2014
_
Market
Cost
value
(238)
236,078
__December 31, 2013 __
Market
Cost
value
e) Investments in time deposits and placements
Time deposits with
The Central Bank of Venezuela (BCV)
Financial institutions
6,954,905
2,363,743
6,954,905
2,363,743
9,672,785
1,374,845
9,672,785
1,374,845
9,318,648
9,318,648
11,047,630
11,047,630
25,763
Investment securities issued by financial institutions in the
United States of America
Time deposits
628
628
25,763
Investment securities issued by entities in other countries
14,362
14,362
64,203
64,203
9,333,638
9,333,638
11,137,596
11,137,596
19
At June 30, 2014, time deposits and placements include investments for Bs 6,093,019,000, maturing
within 90 days (Bs 6,828,735,000 at December 31, 2013).
June 30, 2014
Market
Cost
value
December 31, 2013
Market
Cost
value
f) Restricted investments and repurchase agreements
Securities issued by the Bolivarian Republic of Venezuela
In local currency
In foreign currency
Securities issued or guaranteed by the government of the United
States of America
Other investments
460,771
173
460,819
187
97,920
141
98,037
141
460,944
461,006
98,061
98,178
399,324
398,692
324,579
324,179
40,847
40,847
12,794
13,116
901,115
900,545
435,434
435,473
At June 30, 2014, restricted investments include securities of the Coral Gables agency of the
subsidiary Mercantil, C.A. Banco Universal with a market value of US$7,711,105 (US$5,910,414 at
December 31, 2013), pledged to regulatory agencies in compliance with state requirements in the
United States of America.
Below is the classification of investments by maturity at June 30, 2014:
Available-for-sale investments
Book value
(equivalent
to market
Yield
Cost
value)
% (1)
Held-to-maturity investments
Amortized
Yield
Cost
cost
% (1)
In bolivars
Less than 1 year
From 1 to 5 years
Over 5 years
1,826,444
6,427,496
12,838,865
1,859,938
6,843,385
14,090,566
8.75
12.89
13.68
1,199,118
5,907,478
13,634,295
1,195,616
5,881,113
13,634,293
4.49
4.81
4.54
In U.S. dollars
Less than 1 year
From 1 to 5 years
Over 5 years
629,711
1,825,840
12,628,420
638,711
1,846,719
12,619,806
6.86
4.79
4.62
120,503
299,086
34,019
120,408
298,755
34,112
4.10
2.73
2.65
36,176,776
37,899,125
21,194,499
21,164,297
(1) The yield of securities is based on amortized cost at period end. Yield is calculated by dividing income from securities (including
amortization of premiums or discounts) by amortized cost. The effect of changes in fair value is not recognized.
20
g) Investments required
As required by the Venezuelan government at June 30, 2014 and December 31, 2013, MERCANTIL
has investment securities issued by the Bolivarian Republic of Venezuela, public companies and
decentralized entities to finance social projects for agricultural development and housing construction,
as follows:
Issuer
Available-for-sale
investments (Note 4-b)
Petróleos de Venezuela, S.A. (PDVSA)
People’s Power Ministry for Finance
Guarantee
Maturity
Yield
%
June 30, 2014
Weighted
average
Book
maturity
value
(months)
December 31, 2013
Weighted
average
Book
maturity
value
(months)
Characteristics
Debenture bonds
2015-2017
9.10
473,137
27
473,137
33
(1)
Imputable to agricultural
loan portfolio compliance
(Notes 4-b and 5)
Bolivarian
Republic of
Venezuela
2014
9.10
-
-
153,417
3
(1)
Total available-for-sale investments
473,137
626,554
Held-to-maturity investments
(Note 4-c)
Fondo Simón Bolívar para
para la Reconstrucción, S.A.
Bolivarian
Republic of
Venezuela
2020-2022
4.66
2017
Banco de Desarrollo
Económico y Social
de Venezuela (BANDES)
Fondo Simón Bolívar para
la Reconstrucción, S.A.
Fondo de Desarrollo
Nacional FONDEN, S.A.
Banco Nacional de Vivienda
y Hábitat (BANAVIH)
90
8,376,099
88
1,315,669
36
-
-
(2, 3)
Imputable to mortgage
portfolio compliance
(Note 5)
Reduces the legal
reserve (Note 3)
PDVSA
2014
3.75
-
-
1,315,669
6
(3)
Reduces the legal
reserve (Note 3)
Bolivarian
Republic of
Venezuela
2015-2016
3.75
4,171,422
20
4,171,422
26
(3)
Reduces the legal
reserve (Note 3)
Debenture bonds
2015-2017
9.10
1,113,955
25
1,120,512
31
(3)
(Notes 4-b and 5)
BANAVIH’s
current loan
portfolio
2021
2.00
869,775
90
927,760
96
(3)
Imputable to mortgage
portfolio compliance
for 2011 (Note 5)
(4)
Imputable to
tourism loan
portfolio
compliance
Total held-to-maturity investments
(Note 4-d)
Sociedad de Garantías Recíprocas
para la Pequeña y Mediana Empresa
del Sector Turismo, S.A. (SOGATUR)
12,764,518
20,235,339
People’s
Power
Ministry for
Tourism
-
-
Total share trading portfolio investments
Total investments required
15,911,462
207,025
207,025
207,025
207,025
20,915,501
16,745,041
-
(1)
These securities may be traded on the Bicentennial Public Stock Exchange at market value. These securities are available for sale and are recorded at the price quoted on the Bicentennial Public Stock
Exchange.
(2)
At June 30, 2014, the subsidiary Mercantil, C.A. Banco Universal maintains Bs 12,764,518 in Bolivarian Housing Securities issued by the Fondo Simón Bolívar para la Reconstrucción, S.A., of which
Bs 2,658,217,934 is imputable to the mortgage portfolio for 2014 acquired in 2014 to finance Venezuela’s Great Housing Mission (Bs 5,995,856,000 at December 31, 2013 imputable to the mortgage
portfolio for 2013 and Bs 1,730,201,000 for commitments to purchase these securities in January and February 2014 (Note 23)).
(3)
These securities may be traded with the BCV at 100% of their par value for purposes of liquidity injection and credit assistance. MERCANTIL has the intention to hold them until maturity. These
securities are recorded at cost. These securities are not currently traded on the Stock Exchange.
(4)
At June 30, 2014 and December 31, 2013, the subsidiary Mercantil, C.A. Banco Universal maintains Bs 207,025,000 in Class “B” shares of SOGATUR imputable to tourism loan portfolio compliance.
During the six-month period ended June 30, 2014, a net gain of Bs 269,533,000 (Bs 367,786,000
during the six-month period ended December 31, 2013) was recorded on the sale of securities,
included under gain on sale of investment securities.
MERCANTIL’s control environment includes policies and procedures to determine investment risks by
entity and economic sector. At June 30, 2014, MERCANTIL has investment securities issued or
guaranteed by the Venezuelan government and investment securities with the BCV, which represent
64.7% and 10.6%, respectively, of its investment securities portfolio (62.9% and 15.3%, respectively, at
December 31, 2013). Furthermore, MERCANTIL has investments in bonds issued by the government
and other government agencies of the United States of America representing 16% of its investment
portfolio (17% at December 31, 2013).
21
5.
Loan Portfolio
The loan portfolio is classified as follows:
Current
Rescheduled
June 30, 2014
Overdue
In litigation
Total
%
December 31, 2013
Total
%
Economic activity
Commercial
Credit cards
Agriculture
Industrial
Services
Home purchase
Foreign trade
Construction
Car loans
Other
71,143,331
23,999,527
20,044,369
13,879,019
9,537,146
5,749,083
5,166,552
2,541,791
1,962,471
6,500,968
111,143
188,358
37,602
8,683
802
194,183
221,045
3,872
96,583
25,752
25,979
79,839
15,691
20,642
7,352
92,047
28,035
70
-
71,503,554
24,003,399
20,329,310
13,942,373
9,571,808
5,829,794
5,182,243
2,562,433
1,969,823
6,787,198
44
15
13
9
6
3
3
2
1
4
55,981,209
17,513,227
14,285,672
9,033,110
8,197,679
5,300,378
5,228,436
2,289,036
2,368,248
5,741,080
44
14
11
7
7
4
4
2
2
5
160,524,257
540,771
588,802
28,105
161,681,935
100
125,938,075
100
Below is a breakdown of the loan portfolio by geographic location:
June 30, 2014
Thousands
of bolivars
%
Geographic location of the debtor
Venezuela
Peru
Brazil
Mexico
Colombia
Switzerland
Panama
Other countries
December 31, 2013
Thousands
of bolivars
%
128,587,871
20,919,403
1,846,583
1,674,232
1,308,870
869,949
981,273
612,659
4,881,095
80
13
1
1
1
1
1
2
94,280,942
19,482,102
1,468,594
1,513,627
1,343,144
921,565
953,010
644,310
5,330,781
75
15
1
1
1
1
1
1
4
161,681,935
100
125,938,075
100
Below is the movement in the consolidated allowance for losses on the loan portfolio:
Six-month periods ended
June 30,
December 31,
2014
2013
Balance at the beginning of the period
Provided in the period
Portfolio recovery
Transfers to other reserves
Effect of translating allowances in foreign currency
Decrease in allowance
Write-off of uncollectible loans
4,119,499
934,833
28,245
7,867
(37)
(16,599)
(232,176)
3,193,076
1,198,259
9,080
3,785
1,045
(285,746)
Balance at the end of the period
4,841,632
4,119,499
At June 30, 2014, the loan portfolio no longer earning interest amounts to Bs 616,907,000 and includes
US$24,575,000 (Bs 634,416,000, including US$46,394,000 at December 31, 2013).
During the six-month period ended June 30, 2014, interest accrued but not recorded as income on
loans overdue and in litigation amounts to Bs 1,225,516,000 and includes US$5,000,000
(Bs 1,597,333,000, including US$2,700,000 during the six-month period ended December 31, 2013).
Interest on the loan portfolio for the six-month period ended June 30, 2014 includes Bs 1,110,619,000
22
(Bs 1,530,936,000 during the six-month period ended December 31, 2013) for interest collected on
loans overdue and in litigation deferred in previous six-month periods.
During the six-month period ended June 30, 2014, uncollectible loans written off in previous six-month
periods for Bs 144,676,000 (Bs 104,551,000 during the six-month period ended December 31, 2013),
were collected and are included in the consolidated income statement under Other income (Note 18).
MERCANTIL’s control environment includes policies and procedures to determine credit risks by client
and economic sector. Concentration of risk is limited since loans are granted to a variety of economic
sectors and a large number of clients. At June 30, 2014 and December 31, 2013, MERCANTIL does
not have significant risk concentrations in its consolidated loan portfolio.
6.
Interest and commissions receivable comprise the following:
June 30,
2014
December 31,
2013
Interest on
Loan portfolio
Investment securities and cash and due from banks
Commissions receivable
Provision for contingent losses
7.
1,045,884
969,400
923,130
697,315
2,015,284
1,620,445
85,086
(21,880)
84,007
(23,310)
2,078,490
1,681,142
Long-term investments in shares recorded by the equity method comprise the following:
June 30, 2014
Par
value
Bs
Cestaticket Accor Services, C.A.
Inversiones Platco, C.A.
Proyectos Conexus, C.A.
Other
1.0
100.0
0.1
Number of
shares
Equity
%
2,580,000
573,985
500,000
43
50
33
Book value
in thousands
of bolivars
86,875
74,644
6,667
621
168,807
December 31, 2013
Book value
Number of
Equity
in thousands
shares
%
of bolivars
2,580,000
573,985
500,000
43
50
33
159,857
74,905
4,902
2,343
242,007
During the six-month period ended June 30, 2014, MERCANTIL recorded income from equity
participation of Bs 69,232,000 (Bs 96,604,000 during the six-month period ended December 31, 2013),
which includes a gain of Bs 68,918,000 from Cestaticket Accor Services, C.A., gain of Bs 575,000 from
Proyecto Conexus, C.A. and a loss of Bs 261,000 from Inversiones Platco, C.A. (a gain of
Bs 93,305,000 from Cestaticket Accor Services, C.A., Bs 1,630,000 from Inversiones Platco, C.A.
during the six-month period ended December 31, 2013). During the six-month period ended June 30,
2014, MERCANTIL received a dividend of Bs 141,900,000 from the affiliate Cestaticket Accor
Services, C.A.
23
8.
Available-for-sale assets
Available-for-sale assets comprise the following:
December 31,
2013
Additions
Disposals
Sales
June 30,
2014
Real property received as payment
Idle assets
Other available-for-sale assets
Accumulated amortization
94,174
4,055
1,457
(21,588)
4,017
90,405
(13,728)
(60,485)
(914)
22,690
(77,580)
-
33,689
7,158
14,282
(12,626)
78,098
80,694
(38,709)
(77,580)
42,503
During the six-month period ended June 30, 2014, MERCANTIL recorded amortization expenses and
provision for available-for-sale assets of Bs 13,728,000 (Bs 13,834,000 during the six-month period
ended December 31, 2013). Fully depreciated personal and real property are shown under
memorandum accounts (Note 23).
During the six-month period ended June 30, 2014, MERCANTIL sold assets received as payment and
idle assets at a gain of Bs 44,138,000 (Bs 20,301,000 during the six-month period ended
December 31, 2013), shown in the consolidated income statement under Other income, respectively
(Note 18).
9.
Property and equipment comprises the following:
Balances at
December 31,
2013
Additions
Disposals
Fully depreciated
assets
written off
Other
Translation
adjustment
Balances at
June 30,
2014
Costs
Buildings and facilities
Furniture and equipment
Equipment for Chip project
Vehicles
Land
Construction in progress
Other assets
Total
Accumulated depreciation
Equipment for Chip project
Vehicles
Other assets
Total
Net
613,105
1,264,849
14,157
16,240
33,493
20,757
144,662
86,751
178,359
805
90,354
22
(4,333)
(372)
(202)
(26,064)
-
(1,472)
(2,177)
-
(286)
41
(9)
-
8
-
699,570
1,437,452
14,157
14,487
33,291
85,047
144,684
2,107,263
356,291
(30,971)
(3,649)
(254)
8
2,428,688
(200,555)
(697,213)
(13,435)
(7,623)
(71,826)
(17,676)
(100,999)
(405)
(1,348)
(6,098)
2,214
372
-
1,472
2,177
-
(9,477)
(16,538)
(71)
29
(8)
-
(227,708)
(811,072)
(13,840)
(6,493)
(77,895)
(990,652)
(126,526)
2,586
3,649
(26,057)
(8)
(1,137,008)
1,116,611
229,765
(28,385)
-
(26,311)
-
1,291,680
During the six-month period ended June 30, 2014, MERCANTIL recorded depreciation expense of
Bs 126,526,000 (Bs 113,921,000 during the six-month period ended December 31, 2013), shown in
the consolidated income statement under operating expenses.
At June 30, 2014 and December 31, 2013, construction in progress is mainly in respect of the
construction or remodeling of offices to be used by MERCANTIL.
24
Below is a summary of the useful lives assigned to property and equipment:
Useful
life
Remaining
useful life
(Years)
Office furniture and equipment
Other property
10.
40
4-10
10
22
2
4
Other assets
Other assets comprise the following:
June 30,
2014
December 31,
2013
Insurance premiums receivable (Note 1)
Deferred expenses, net of accumulated amortization of
Bs 207,036,000 (Bs 186,362,000 at December 31, 2013)
Pending items
Prepaid taxes, insurance and other prepaid expenses
Prepaid expenses
Guarantee deposits to reinsurers
Sale of securities pending collection
Systems development, net of accumulated amortization of Bs 131,822,000
(Bs 116,679,000 at December 31, 2013)
Stationery and office supplies
Goodwill
Accounts receivable from other credit card companies
Other taxes and contributions
Guarantee deposits and advances for acquisition of personal and real property
Deferred income tax (Note 16)
Shopping mall rights
Adjustment of spot and forward contracts to market value (Note 23)
Prepaid advertising
Other
Provision for estimated losses on other assets
1,858,065
1,593,919
646,818
448,309
443,903
371,788
355,983
173,060
530,474
203,165
360,377
189,557
261,081
98,044
155,630
136,328
131,026
121,580
100,273
89,592
59,495
39,191
22,553
12,096
300,314
111,738
72,846
137,951
80,205
4,463
76,877
92,817
39,191
96,577
4,599
431,550
5,466,004
4,385,431
(31,296)
(26,792)
5,434,708
4,358,639
In 2000, 2001 and 2006, MERCANTIL acquired a majority shareholding in a commercial bank in
Venezuela (Interbank, C.A.), an insurance company in Venezuela (C.A. Seguros Orinoco) and a bank
in Florida, U.S.A. (Florida Savings Bank), which gave rise to goodwill of Bs 131,222,000,
Bs 19,602,000 and US$19,193,000, respectively. These three companies were later merged with
Mercantil, C.A. Banco Universal, Mercantil Seguros, C.A. and Mercantil Commercebank, N.A.,
respectively.
25
Below is the movement in goodwill:
Balances at
December 31,
2013
Additions
Balances at
June 30,
2014
Cost
Interbank, C.A.
Florida Savings Bank
C.A. Seguros Orinoco
Mercantil Seguros, C.A.
Todo 1 Services, Inc.
Interbank, C.A.
Todo 1 Services, Inc.
Net balances
131,222
129,589
19,602
3,989
3,291
-
131,222
129,589
19,602
3,989
3,291
287,693
-
287,693
(85,295)
(45,733)
(12,730)
(2,693)
(3,291)
(3,280)
(3,015)
(531)
(99)
-
(88,575)
(48,748)
(13,261)
(2,792)
(3,291)
(149,742)
(6,925)
(156,667)
137,951
(6,925)
131,026
The balance of deferred expenses mainly includes expenses for office setup, leasehold improvements
and projects to be capitalized, which include technology upgrades, equipment and software.
The balance of pending items mainly comprises operations that, due to their nature, cannot be
immediately imputed to a definitive account, as well as operations conducted in the ordinary course of
business during the last days of the month that are being identified and have not yet been definitively
recorded. Most of these operations clear during the first few days of the following month. Debit
transactions with these same characteristics are included under other liabilities (Note 14).
During the six-month period ended June 30, 2014, MERCANTIL recorded amortization expense of
Bs 73,002,000 (Bs 70,104,000 during the six-month period ended December 31, 2013), shown in the
consolidated income statement under Depreciation, property and equipment expenses, amortization of
intangibles and other.
11.
Deposits
Deposits comprise the following:
Type of deposit
June 30, 2014
Thousands
of bolivars
%
Non-interest-bearing checking accounts
Savings deposits
Time deposits
26
December 31, 2013
Thousands
of bolivars
%
73,747,401
84,327,523
70,921,341
7,084,710
31
36
30
3
58,309,779
68,533,113
62,315,596
6,758,347
30
35
32
3
236,080,975
100
195,916,835
100
Time deposits by maturity
June 30, 2014
Thousands
of bolivars
%
Up to 30 days
31 to 60 days
61 to 90 days
91 to 180 days
181 to 360 days
Over 360 days
December 31, 2013
Thousands
of bolivars
%
1,870,920
656,108
600,966
1,288,631
1,441,503
1,226,582
27
9
9
18
20
17
1,840,049
743,058
694,986
1,305,878
1,291,864
882,512
28
11
10
19
19
13
7,084,710
100
6,758,347
100
Deposits bear interest at the rates shown below:
June 30, 2014
Deposits in
bolivars
Minimum Maximum
rate
rate
%
%
Savings deposits
Time deposits
0.05
12.50
14.50
2.00
16.00
14.50
December 31, 2013
Deposits in
U.S. dollars
Minimum Maximum
rate
rate
%
%
0.01
0.01
0.03
0.20
0.80
5.70
Deposits in
Deposits in
bolivars
U.S. dollars
Minimum Maximum Minimum Maximum
rate
rate
rate
rate
%
%
%
%
0.50
12.50
14.50
2.00
16.00
14.50
0.01
0.01
0.01
0.20
0.80
5.70
At June 30, 2014, deposits include Bs 3,108,673,000 (Bs 1,869,932,000 at December 31, 2013) from
the Venezuelan government and other government agencies, equivalent to 1.3% of total deposits
(1.0% at December 31, 2013).
12.
Debt authorized by the SNV
At June 30, 2014, MERCANTIL has issued by public offering debenture bonds and commercial paper
with the following characteristics:
a) Debenture bonds
Amount
authorized
Amount
issued and
placed
Issue
date
Maturity
(Years)
Annual
interest
rate
July 2012
July 2012
August 2012
2
2
3
70% of TAM (*)
70% of TAM (*)
12.5% the first year, and the remaining 70% of TAM (*)
April 2013
3
68% of TAM (*)
March 2014
May 2014
3
3
10.5 the first year, and the remaining 62% of TAM (*)
11% the first year, and the remaining 65% of TAM (*)
Issue 2010-I
Series 2
Series 3
Series 4
Issue 2012-I
Series 1
Issue 2013-I
Series 1
Series 2
Bonds acquired by
subsidiaries
20,000
20,000
30,000
20,000
20,000
30,000
70,000
70,000
20,000
20,000
20,000
20,000
30,000
30,000
30,000
30,000
60,000
60,000
2
70% of TAM (*)
150,000
150,000
3
12.5% the first year, and the remaining 70% of TAM (*)
(13,760)
136,240
(*) The market lending rate (TAM) is the weighted average annual interest rate for lending operations agreed by the six main commercial and
universal banks in Venezuela according to information published by the BCV.
27
MERCANTIL reserves the right to fully or partially redeem these bonds at par value after one year of
the issue date of each series and on the date coupons are paid. One or several series issued may be
redeemed.
b) Commercial paper
Amount
authorized
Amount
issued and
placed
Amount
authorized
pending
issuance
Issue
date
Maturity
Annual
interest
rate
(%)
1 year
5.50
Issue 2013-I
Series 1
Pending issuance (Note 23)
30,000
270,000
30,000
-
270,000
300,000
30,000
270,000
March 2014
13. Financial liabilities
Financial liabilities are classified by type and maturity as follows :
Up to
one year
June 30, 2014
More than
one year
Total
December 31, 2013
Up to
More than
Total
one year
one year
Liabilities with Venezuelan banks and savings
and loan institutions
Credit balances with correspondent banks
Loans granted by Venezuelan financial institutions, with
18% annual interest (17% at December 31, 2013)
Liabilities with foreign banks and savings
and loan institutions
Federal Home Loan Bank, with a par value of
US$692,250,000 and annual interest at between 0.2% and
5.9% (US$358,250,000 and annual interest at between
0.2% and 5.4% at December 31, 2013)
Credit balances with foreign correspondent banks
127
-
127
127
-
127
695,000
-
695,000
430,000
-
430,000
695,127
-
695,127
430,127
-
430,127
2,827,890
31,421
1,522,347
-
4,350,237
31,421
816,946
157,105
1,528,632
-
2,345,578
157,105
2,859,311
1,522,347
4,381,658
974,051
1,528,632
2,502,683
-
628,420
628,420
-
628,420
628,420
209
111,949
679
-
209
111,949
679
2,442
17,437
48
-
2,442
17,437
48
Liabilities under repurchase agreements, with a par value of
US$100,000,000 and annual interest at between
3.8% and 5.4% at June 30, 2014 and
December 31, 2013
Other liabilities
Liabilities with credit card merchants
Liabilities in respect of letters of credit
Other
112,837
-
112,837
19,927
-
19,927
3,667,275
2,150,767
5,818,042
1,424,105
2,157,052
3,581,157
Maturities of financial liabilities are as follows:
Up to one year
June 30, 2014
Thousands
of bolivars
%
Up to 30 days
Between 31 and 60 days
Total
28
December 31, 2013
Thousands
of bolivars
%
1,304,589
1,458,294
558,761
345,631
36
40
15
9
475,590
470,631
195,000
282,884
33
33
14
20
3,667,275
100
1,424,105
100
More than one year
June 30, 2014
Thousands
of bolivars
%
2015
2016
2017
2018 and beyond
Total
December 31, 2013
Thousands
of bolivars
%
251,368
196,381
314,210
1,388,808
12
9
15
64
251,368
196,381
314,210
1,395,093
11
9
15
65
2,150,767
100
2,157,052
100
Below is a summary of liabilities under repurchase agreements:
June 30,
2014
December 31,
2013
Balance at period end
Fair value of financial instruments (1)
Total maximum balance outstanding at the end of any month of the period
Average balance for the period
628,420
628,420
628,420
628,420
628,420
628,420
974,051
780,088
June 30,
2014
%
December 31,
2013
%
4.60
4.76
4.60
4.84
(1) Based on the present value of estimated future cash flows.
Weighted average interest rate
For the period
In foreign currency
Interest rate at period end
In foreign currency
Liabilities under repurchase agreements are in respect of investments assigned by MERCANTIL in the
ordinary course of business.
14. Other liabilities
Other liabilities comprise the following :
June 30,
2014
December 31,
2013
Unearned insurance premiums collected in advance (Note 2-k)
Cashier’s checks issued to clients
Claims pending collection (Note 2-k)
Provision for contingencies and other (Notes 16 and 31)
Other demand liabilities
Employee profit sharing and bonuses
Accrued expenses
Deferred income and interest (Note 2-p)
Accounts payable to suppliers
Deferred income tax (Note 16)
Taxes collected and withheld
Pending items
Provisions for taxes payable (Note 16)
Dividends payable (Note 2-t)
Labor contributions
Antidrug Law
Provision for operating risks
Supplementary Savings Plan (Note 17-b)
Other
29
4,078,480
2,931,662
2,090,352
1,746,862
1,357,662
1,255,617
921,776
794,237
679,265
336,788
289,846
288,570
172,516
164,408
61,674
36,626
11,927
2,368
656,407
3,515,729
1,953,990
1,646,983
1,632,685
1,369,046
800,440
657,852
542,094
525,424
317,000
212,026
253,577
52,239
6,051
38,286
67,459
11,989
1,831
593,359
17,877,043
14,198,060
At June 30, 2014 and December 31, 2013, pending items mainly include commitments acquired by
Mercantil Commercebank, N.A. in respect of securities transactions pending settlement at period end,
which clear during the first days of July and January 2014, respectively.
15.
Subordinated debt
The subsidiary Commercebank Holding Corporation has issued the following 30-year mandatorily
redeemable subordinated debt:
Issue date
Maturity date
June 1998
September 2000
March 2001
December 2002
April 2003
March 2004
September 2006
December 2006
June 2028
September 2030
June 2031
January 2033
April 2033
April 2034
September 2038
December 2036
Annual
rate
Original
amount
in millions
of US$
8.90
10.6
10.18
LIBOR + 4.48
LIBOR + 4.28
LIBOR + 3.98
LIBOR + 2.38
LIBOR + 2.41
Balances at
June 30, 2014
Balances at
December 31, 2013
Amount
in millions
of US$
Equivalent
in thousands
of bolivars
Amount
in millions
of US$
Equivalent
in thousands
of bolivars
24
15
10
9
8
5
25
15
24
15
10
9
8
5
25
15
147,762
94,263
62,842
58,129
50,274
31,421
157,105
94,262
24
15
10
9
8
5
25
15
147,848
94,263
62,842
58,129
50,274
31,421
157,105
94,262
111
111
696.058
111
696,144
Mercantil Commercebank Holding Corporation has the option of deferring interest payment on these
liabilities for up to 10 six-month periods.
16.
Taxes
a) Tax expense
The tax expense comprises the following:
June 30, December 31,
2014
2013
Taxes
Current
In Venezuela
Abroad
Deferred
In Venezuela
Abroad
132,753
18,582
8,547
12,282
151,335
20,829
21,004
(760)
56,721
2,070
20,244
58,791
Taxes in Venezuela
Venezuelan Income Tax Law
This Law establishes, among other things, regulations concerning a proportional tax on dividends, the
annual inflation adjustment, worldwide income taxation, international fiscal transparency regulations
and transfer pricing.
MERCANTIL’s tax year ends on December 31. The main differences between MERCANTIL’s book
income and taxable income arise from the net effect of the annual inflation adjustment, shareholdings,
provisions and accruals, nontaxable income and the net effect of tax-exempt income from National
Public Debt Bonds and other securities issued by the Bolivarian Republic of Venezuela.
30
At June 30, 2014, MERCANTIL has tax loss carryforwards of Bs 1,404,042,000 with the following
sources and maturities:
Territorial
Total
global
Extraterritorial
Tax losses
1,254,282
149,760
1,404,042
Maturities
2014
2015
2016
1,162,066
67,851
24,365
38,036
51,039
60,685
1,200,102
118,890
85,050
The aforementioned amount mainly comprises tax loss carryforwards of Mercantil, C.A. Banco
Universal (Bs 1,098,068,000), Mercantil Financiadora de Primas, C.A. (Bs 144,433,000), Mercantil
Servicios Financieros, C.A. (Bs 60,559,000), Inversiones y Valores Mercantil VI, C.A. (Bs 37,330,000)
and Mercantil Arte y Cultura, A.C. (Bs 19,944,000).
For the six-month period ended June 30, 2014, the subsidiary Mercantil, C.A. Banco Universal has
estimated an income tax expense of Bs 121,109,000. At December 31, 2013, the Bank has tax loss
carryforwards to offset taxable income in future periods of Bs 1,098,068,000, of which Bs 949,500,000
corresponds to a loss arising from the inflation adjustment and may be used until December 31, 2014
and Bs 148,568,000 corresponds to extraterritorial tax losses, of which Bs 37,817,000 may be used
until December 31, 2014, Bs 50,676,000 until December 31, 2015 and Bs 60,075,000 until December
31, 2016.
Transfer pricing
Income tax regulations in Venezuela and the United States of America set out transfer-pricing rules.
According to these rules, taxpayers that conduct transactions with related parties abroad are required
to calculate income, costs and deductions applying the methodologies set out in each country’s
regulations and to report results obtained through a special return. MERCANTIL filed transfer-pricing
returns for information purposes within the established deadlines.
Taxes in the United States of America
Federal taxes
Federal tax legislation in the United States of America establishes, among other things, a tax on
dividends, worldwide income taxation and transfer pricing.
State taxes
Companies in the United States of America must pay taxes in the state where they operate and tax
computation depends on laws in each state. Payments of state tax are considered credits against
federal tax.
31
b) Deferred income tax
The deferred income tax comprises the following:
June 30,
2014
December 31,
2013
Unrealized loss on valuation of available-for-sale investments
Provision for operating and labor expenses
Property and equipment, office setup expenses and other
Deferred tax asset (Note 10)
Investments in subsidiaries
Deferred tax liability (Note 14)
(38,089)
38,194
60,172
(782)
(8,425)
42,832
60,172
(1,762)
59,495
92,817
336,788
317,000
336,788
317,000
MERCANTIL assesses the recoverability of deferred tax assets using a model which considers the
historic financial performance, taxable income projections and the future realization of existing
temporary differences, among others. This assessment is based on approved business plans, among
others, and includes management’s judgment on the assumptions used, which may vary from one
six-month period to the next. MERCANTIL, based on its assessment, estimates that the net deferred
tax asset at June 30, 2014 is realizable.
17. Employee benefits and employee benefit plan
a) Length-of-service benefits
In accordance with the LOTTT, MERCANTIL calculates length-of-service benefits based on the last
salary earned by the employee upon employment termination using actuarial calculations.
Obligations of MERCANTIL and its subsidiaries in connection with length-of-service benefits at June
30, 2014 amount to Bs 219,522,000 (Bs 187,568,000 at December 31, 2013) (Note 2).
At December 31, 2013, date of the last actuarial study, the long-term assumptions used to determine
the length-of-service benefit obligations are as follows:
Financial
Discount rate
Inflation rate
Salary increase rate
26.00%
25.00%
21.00%
Demographic
Mortality table for active employees
Disability table
GAM (1971)
PDT (1985)
The net cost of the retrospective length-of-service benefits for the second semester of 2014 is
Bs 31,954,000.
b) Supplementary savings plan
Since 2006, MERCANTIL maintains a plan for its employees and those of its Venezuelan subsidiaries
entitled “Plan de Ahorro Previsional Complementario Mercantil” (Supplementary Savings Plan), which
replaced the defined benefit plan entitled “Plan Complementario de Pensiones de Jubilación”
(Supplementary Defined Benefit Plan). Only active employees have the option of subscribing to the
new plan or remaining in the Supplementary Defined Benefit Plan.
Expenses in connection with this plan for MERCANTIL and its subsidiaries for the six-month period
ended June 30, 2014 amount to Bs 37,270,000 (Bs 31,321,000 for six-month period ended December
31, 2013).
32
c) Supplementary Defined Benefit Plan
The Supplementary Defined Benefit Plan and other benefits for eligible employees are based on a
minimum 10-year length-of-service period and a minimum retirement age. The retirement pension is
based on the employee’s average annual salary over the last 3 years of employment preceding
retirement and is payable at a maximum of 60% of this average salary.
d) Post-retirement benefits
The Supplementary Defined Plan and the Supplementary Savings Plan include certain additional postretirement benefits for employees meeting certain conditions in respect of age and length of service,
mainly health insurance, with costs and obligations determined based on actuarial methods.
For the six-month period ended June 30, 2014, MERCANTIL and its subsidiaries recorded an expense
of Bs 14,000,000 in connection with the Supplementary Defined Benefit Plan and post-retirement
benefits (Bs 23,184,000 for six-month period ended December 31, 2013).
At December 31, 2013, date of the last actuarial study, the assets, obligations and results of
MERCANTIL related to the Supplementary Defined Benefit Plan and post-retirement benefits for both
plans are as follows:
Supplementary
Defined Benefit
Plan
Postretirement
benefits
Variation in projected benefit obligation
Benefit obligation
Service cost
Interest cost
Remeasurement
Benefits paid
Net variation in liabilities
138,162
60
14,561
5,940
(18,100)
7,795
77,038
5,225
17,687
37,339
(15,800)
-
Projected benefit obligation
148,418
121,489
Variation in restricted plan assets
Opening fair value of assets
Yield on assets, net of remeasurement
MERCANTIL contribution
Benefits paid
Transfer between plans
138,162
34,001
(18,100)
(5,645)
41,613
8,044
33,000
(15,800)
5,645
Closing fair value of assets
148,418
72,502
Components of net benefit cost for the year
Service cost
Interest cost
Yield from plan assets
60
14,561
(34,001)
5,225
17,687
(8,044)
Net benefit cost
(19,380)
14,868
5,940
37,339
Components in equity for the year
Remeasurement of actuarial loss
33
Financial position balances at December 31 are shown below:
Supplementary Defined Benefit Plan
2012
2011
2010
2013
2009
Financial position at year end
Present value of obligations (DBO)
Assets of external fund supporting the plan
(148,418) (138,162)
148,418 138,162
Excess (deficit) of assets over projected obligation
-
(94,072)
94,072
(72,318)
72,318
(41,380)
41,380
-
-
-
-
2012
2011
2010
2013
2009
Financial position at year end
Present value of obligations (DBO)
Assets of external fund supporting the plan
Excess (deficit) of assets over projected obligation
(121,489)
72,502
(77,038)
41,613
(55,862)
34,795
(36,223)
20,000
(26,529)
19,101
(48,987)
(35,425)
(21,067)
(16,223)
(7,428)
The following are the long-term assumptions used to determine benefit obligations at December 31,
2013:
Supplementary
Defined Benefit
Plan
%
Post-retirement
benefits
%
26.00
21.00
-
26.00
21.00
30.50
Discount rate
Salary increase rate
Increase in medical expenses
A hypothetical increase or decrease of 10% in the main actuarial assumptions would impact the value
of the projected obligations of the plans as follows:
Supplementary
Defined Benefit Plan
Increase
Decrease
Post-retirement
Benefits
Increase
Decrease
Discount rate
Increase in medical expenses
43,403
-
202,812
-
140,654
1,628,331
2,676,995
102,141
Assets supporting plans at December 31, 2013 comprise the following:
(Thousands
of bolivars)
Investments in available-for-sale securities (1)
Interest receivable
Other assets
86,191
130,952
3,737
41
Total assets
220,921
(1) Securities quoted in an active market.
MERCANTIL and its subsidiaries, through their employee benefit plans, are exposed to a variety of
risks (market, credit and operational risks), which are minimized by applying risk management policies
and procedures (Note 29).
34
The policy of MERCANTIL and its subsidiaries to determine investment assets includes regular
consultation with their internal advisors. The expected long-term rate of return on plan assets is
updated periodically, taking into consideration asset allocations, historic returns and current economic
conditions. The fair value of plan assets is affected by general market conditions. If actual returns on
plan assets differ from expected returns, actual results may differ from initial estimates.
The estimated cost of the Supplementary Defined Benefit Plan and post-retirement benefits for the
second semester of 2014 is Bs 21,422,000.
The average length of the Supplementary Defined Benefit Plan and post-retirement benefits is 3.7 and
31 years, respectively.
The projection of future undiscounted payments of the post-retirement benefit plans are as follows:
Less than
1 year
1 to 2
years
2 to 5
years
Over 5
years
Total
Supplementary Defined Benefit Plan
Total
-
2,492
228
32,235
19,370
236,039,627
19,598
236,074,354
-
2,492
32,463
236,058,997
236,093,952
e) Long-term stock option plan
MERCANTIL and certain subsidiaries in Venezuela and abroad offer a long-term stock option plan to
eligible officers approved by the Board of Directors’ Compensation Committee. These shares are
allotted over three-year periods and awarded annually. Fundación BMA manages the plan and sets up
trust funds with the shares on behalf of members once these shares have been assigned and
subsequently awarded to eligible officers based on individual allotments approved in accordance with
plan regulations. During each administrative phase and until the shares are actually acquired by
officers, cash dividends declared in respect of these shares are received by Fundación BMA and stock
dividends by the participants. According to the long-term nature of the plan, officers must be active
employees of MERCANTIL or its subsidiaries 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, the entitlements are cancelled.
At June 30, 2014, all program shares are available and deposited in the trust fund with Mercantil
Seguros, C.A. that Fundación BMA created for such purpose. A breakdown of these shares is shown
below:
Class “A”
Trust fund
1,671,954
35
Number of shares
Class “B”
Total
1,248,154
2,920,108
18.
Other income
Other income comprises the following:
June 30,
December 31,
2014
2013
Credit card commissions
Interest on insurance policies financed
Decrease in allowances
Recovery of loans recorded as uncollectible (Note 5)
Commissions on banking services
Income from other accounts receivable
Commission for foreign currency administration
Gain on sale of available-for-sale assets (Note 8)
Commissions on drafts and transfers
Commissions for advisory services
Commissions on sale of securities
Commissions for administration of housing savings funds
Income from repurchase agreements
Gain on sale of property and equipment (Note 9)
Other
Total
19.
1,183,381
226,563
217,169
144,676
141,914
59,090
51,984
44,138
32,285
23,245
1,772
9,943
1,793
763
78,285
1,044,236
187,539
400,708
104,551
143,964
72,810
69,042
20,301
35,944
23,786
17,686
9,814
13,510
2,795
82,744
2,217,001
2,229,430
Other operating expenses
Other operating expenses comprise the following:
June 30,
December 31,
2014
2013
Commissions from use of point-of-sale and ATM networks
Provision for operating risks and other contingencies (Note 14)
Taxes and contributions (Note 16)
Professional fees and other external services
Social contribution to the National Communal Council Fund (Note 1)
Communications
Office supplies
Transportation and security
Provision under the Law for the Advancement of Science, Technology and Innovation
Donations
Credit card franchises
Advertising and marketing
Provisions for available-for-sale and other assets
Insurance expenses
Other
Total
20.
778,193
382,906
373,226
284,400
209,008
143,419
126,969
120,593
76,619
46,916
42,497
41,008
17,912
13,534
191,722
714,514
587,736
311,550
269,694
124,917
118,391
74,997
105,197
48,603
29,673
44,314
63,674
25,918
15,898
250,802
2,848,922
2,785,878
Equity
a) Capital stock and authorized capital
At a Special Shareholders’ Meeting of MERCANTIL in March 2014, it was resolved to increase
MERCANTIL’s capital stock by increasing the par value of shares from Bs 1.50 to Bs 6.50 for all
102,214,961 shares of capital stock. The increase of Bs 511,074,805 was fully paid out of share
premium and retained earnings.
36
At June 30, 2014, MERCANTIL’s subscribed and paid-in capital amounts to Bs 664,397,246.50
(Bs 153,322,441.50 at December 31, 2013), represented by 102,214,961 shares divided into
59,401,343 Class “A” common shares and 42,813,618 Class “B” common shares at June 30, 2014 and
December 31, 2013, with a par value of Bs 6.50 each at June 30, 2014 (Bs 1.50 at December 31,
2013). Class “B” common shares have limited voting rights regarding approval of financial statements
and appointment of statutory auditors. At June 30, 2014 and December 31, 2013, there are
102,214,961 outstanding shares, divided into 59,401,343 Class “A” common shares and 42,813,618
Class “B” common shares.
MERCANTIL’s authorized capital stock at June 30, 2014 is Bs 1,328,794,493 (Bs 306,644,883 at
December 31, 2013).
b) Stock repurchase program
In May 2000, a repurchase program of MERCANTIL shares was approved within the limits set out by
the Stock Market Law (up to 15% of the subscribed capital and with a maximum redemption term of 2
years after acquisition).
The repurchase program has been implemented in 29 six-month phases. From the twenty-fifth phase
to the twenty-ninth phase (ongoing), no shares were purchased.
At June 30, 2014 and December 31, 2013, 82,489,459 shares for Bs 241,265,000 have been
redeemed. They were acquired up to the twenty-fourth phase of the aforementioned repurchase
program and were held as treasury stock in conformity with the Stock Market Law.
c) Cash dividends declared
Type of dividend
Ordinary
Special
Ordinary
Date of approval at
Shareholders’ Meeting
Amount per share
Bs
Payment date
March 2014
March 2014
March 2014
1.50
8.00
1.50
April 2014
May 2014
October 2014
In accordance with the Venezuelan Stock Market Law, MERCANTIL’s bylaws establish that dividend
distribution will depend on annual results at December 31, as well as compliance with applicable
regulatory equity indices, and investment and development needs estimated by MERCANTIL. At
June 30, 2014, consolidated retained earnings include Bs 18,513,013,000 in restricted earnings from
subsidiaries.
d) Trust agreement on shares of Mercantil Commercebank
At a Shareholders’ Meeting of MERCANTIL on September 19, 2008, it was resolved to adopt a new
corporate scheme aimed at improving U.S.-based Mercantil Commercebank, N.A.’s ability to access
international markets. This scheme, which was previously submitted to the SNV and the Federal
Reserve of the United States of America for consideration, contemplates establishing a trust
agreement between MERCANTIL, its subsidiary Mercantil Commercebank Holding Corporation and
nine trustees in the State of Florida, U.S.A. The trustees were designated by MERCANTIL’s Board of
Directors and ratified by the Board of Directors of Mercantil Commercebank Holding Corporation.
In accordance with the trust agreement, on October 14, 2008, Mercantil Commercebank Holding
Corporation transferred shares of Mercantil Commercebank, N.A. to the trust fund. Subsequently, the
trustees incorporated a new company, called Mercantil Commercebank Florida Bancorp in the State of
Florida, U.S.A., to which Mercantil Commercebank, N.A. shares were transferred. In return, trustees
received shares of the new corporation abroad. The trust issued voting certificates in favor of Mercantil
Commercebank Holding Corporation in the same proportion to and with the same rights as transferred
shares of Mercantil Commercebank, N.A., thereby maintaining Mercantil Commercebank Holding
37
Corporation as the final beneficial owner of Mercantil Commercebank, N.A. The trust may be early
terminated by the Board of Directors of Mercantil Commercebank Holding Corporation, the Board of
Directors of MERCANTIL or the trustees.
Like Mercantil Commercebank Holding Corporation, both Mercantil Commercebank Florida Bancorp
and the trust fund, as bank shareholding companies, are subject to Federal Reserve supervision.
In conformity with the terms of the trust agreement, the trustees may, at any time deemed convenient,
transfer shares of Mercantil Commercebank Florida Bancorp to MERCANTIL shareholders in the same
proportion to the number and class of shares held by each shareholder, thereby voiding the previously
issued voting certificates. Upon transfer, MERCANTIL and its subsidiary Mercantil Commercebank
Holding Corporation shall cease to be considered the trust’s final beneficial owners and, consequently,
shall record the related financial effect.
At June 30, 2014 and December 31, 2013, MERCANTIL is the final beneficial owner of the trust and
will absorb its expected losses and benefits. Accordingly, the trust’s balance sheet and income
statement at those dates are included in the accompanying consolidated financial statements of
MERCANTIL.
e) Other
MERCANTIL’s bylaws include a shareholders’ rights plan, which stipulates that, under certain
circumstances, shareholders holding shares for more than 180 days are entitled to subscribe shares at
par value (Bs 6.50 per share). This measure follows the defensive corporate best practices in use by
companies in industrialized nations to maximize the value available to shareholders in the event of a
non-negotiated takeover and thus strengthen their negotiating position in such an event.
In addition, as part of these corporate best practices, the shareholders resolved to hold elections of
members of the Board of Directors in phases and establish a qualified voting system for certain matters
at Shareholders’ Meetings.
A Foundation was incorporated abroad in 1986 with MERCANTIL and its shareholders as
beneficiaries. The Foundation’s Board of Directors decides, at it deems appropriate, whether to
transfer all or part of the Foundation’s equity to MERCANTIL or its shareholders. At June 30, 2014, the
Foundation has net equity of US$542,877 (US$587,657 at December 31, 2013), represented by
securities at market value (Note 4).
21.
Income per share
Calculation of net income per common share and net income per diluted common share is shown
below (Note 2-u):
June 30,
2014
December 31,
2013
(Thousands of bolivars, except
for number of shares and
net income per share)
Net income per common share
Net income
Common shares issued
Basic net income per share
Net income per diluted common share
Net income
Total weighted average of outstanding diluted common shares
Diluted net income per share
38
3,973,940
102,214,961
99,153,501
40.08
3,778,963
102,214,961
99,155,684
38.11
3,973,940
99,153,501
99,153,501
40.08
3,778,963
99,155,684
99,155,684
38.11
22.
Assets and liabilities in foreign currency
a) Exchange control regime
Since February 2003, the Venezuelan government established an exchange control regime managed
by the Commission for the Administration of Foreign Currency (CADIVI).
Purchases in bolivars of securities in foreign currency issued by the Bolivarian Republic of Venezuela,
whose trading had been suspended, were regulated in July 2003.
In June 2010, it was resolved that trading in bolivars of the aforementioned securities may only be
conducted through the System for Transactions with Securities in Foreign Currency (SITME), a
mechanism administered by the BCV that was suspended in February 2013.
In March 2013, the BCV established the Supplementary Foreign Currency Administration System
(SICAD), a new foreign currency auction system through which individuals and companies may offer
and purchase foreign currency when convened by the BCV, taking into consideration the nation’s
objectives and economic needs.
In December 2013, the BCV published the official SICAD exchange rate, which serves as a reference
rate to submit bids for the purchase or sale of foreign currency through this system and to establish the
currency trading price for individuals not residing in Venezuela, Petróleos de Venezuela S.A. and other
oil-sector companies.
In January 2014, the Venezuelan government created the National Foreign Trade Center (CENCOEX)
to replace CADIVI.
In March 2014, the BCV created the Alternative Currency Exchange System (SICAD II), a new system
in which individuals and private companies may trade foreign currency in cash, as well as securities
denominated in foreign currency issued by the Bolivarian Republic of Venezuela, its decentralized
agencies or any other issuer, whether public or private, foreign or local, registered and quoted on the
international markets.
b) Applicable exchange rates
January 2011: Bs 4.2893/US$1 (purchase) and Bs 4.30/US$1 (sale) for all transactions.
October 2011: Bs 4.2893/US$1 (purchase) and Bs 4.30/US$1 (sale), for all transactions, except
securities issued by the Bolivarian Republic of Venezuela or state-owned companies, whose exchange
rate will be the average exchange rate of securities traded through SITME on the last day of each
month.
February 2013: Bs 6.2842/US$1 (purchase) and Bs 6.30/US$1 (sale), for all transactions.
January 2014: Bs 6.2842/US$1 (purchase) and Bs 6.30/US$1 (sale), for all transactions except for
purchases of currency for travelling abroad, remittances to relatives residing abroad and insurance
sector operations, among others, administered by CADIVI, that will be calculated at the exchange rate
resulting from the most recent SICAD auction. At June 30, 2014 and December 31, 2013, the
exchange rate resulting from the last SICAD auction was Bs 10.60/US$1 and Bs 11.30/US$1,
respectively.
June 2014: Bs 49.9785/US$1 resulting from the last SICAD II auction, reduced by 0.25% for purchases
made by individuals using debit and credit cards with a charge to accounts or lines of credit in foreign
currency, as well as cash advance transactions charged to said cards.
39
c) Measurement and recording of foreign currency assets and liabilities
For the six-month period ended June 30, 2014, the effect of measuring foreign currency balances of
MERCANTIL and its subsidiaries resulted in:
-
Exchange gains, net of Bs 122,339,000 included in the consolidated income statement.
-
Decrease by Bs 111,000 of net assets of subsidiaries abroad from translation adjustment, shown in
equity.
MERCANTIL is awaiting a pronouncement from the regulator in connection with the possible future
application of the SICAD exchange rate to measure and record its foreign currency assets and
liabilities.
d) Net global position in foreign currency
MERCANTIL’s consolidated balance sheet includes the following balances of financial assets and
liabilities in foreign currency, denominated mainly in U.S. dollars, stated at the exchange rates
described in b) in this Note:
June 30,
2014
December 31,
2013
(Thousands of
U.S. dollars)
Assets
Loan portfolio
Other assets
Liabilities
Deposits
Financial liabilities
Other liabilities
Subordinated debt
273,453
2,568,698
5,420,151
134,021
272,497
2,161,310
5,175,121
103,609
8,396,323
7,712,537
6,182,678
815,165
33,183
110,763
5,932,661
501,025
26,378
110,777
7,141,789
6,570,841
The estimated effect of every Bs 0.1/US$1 increase in the exchange rate of Bs 6.2893/US$1 at June
30, 2014 would be an increase in assets of Bs 839,632,000 and an increase in equity of
Bs 125,453,000, of which Bs 22,836,000 would be recorded in the results for the period.
23.
Memorandum accounts
Memorandum accounts comprise the following:
June 30,
2014
December 31,
2013
Contingent debtor accounts
Transactions with derivative instruments (Note 18)
Lines of credit (Note 24)
Investment securities under resale agreements
Letters of credit
Guarantees granted
Tourism loan commitments
Other contingencies
40
4,205,787
3,888,232
442,917
741,504
500,439
77,827
449,483
5,960,488
3,978,352
80,900
684,393
573,062
27,338
616,251
10,306,189
11,920,784
June 30,
2014
December 31,
2013
Assets received in trust
Special trust services
Other debtor memorandum accounts
Guarantees received
Valuables received in custody
Unused lines of credit
Collections
Commercial paper and debenture bonds not yet issued
Publicly traded shares
Other control accounts
20,952,093
18,668,082
7,757,130
7,879,722
143,074,236
27,888,752
24,734,713
563,656
270,000
664,397
148,563,968
108,218,274
23,603,885
16,998,859
391,639
478,000
153,322
116,402,948
345,759,722
266,246,927
384,775,134
304,715,515
a) Assets received in trust
Trust fund accounts at December 31 include the following balances according to the combined
financial statements of the trust:
June 30,
2014
December 31,
2013
Assets
Loan portfolio
Assets received for administration
Other assets
Total assets
Liabilities
Remunerations and other accounts payable
Other liabilities
Total liabilities
Equity
1,373,141
11,359,946
8,041,185
121,206
7,500
49,115
1,395,767
10,080,471
7,017,863
116,592
7,500
49,889
20,952,093
18,668,082
55,483
147
58,085
2,695
55,630
60,780
20,896,463
18,607,302
20,952,093
18,668,082
b) Securities under spot contracts
MERCANTIL purchases and sells securities under spot contracts at an established price. During the
six-month period ended June 30, 2014, MERCANTIL recorded net losses from market value
adjustments of Bs 3,934,000 (Bs 1,674,000 during the six-month period ended December 31, 2013).
Spot transactions were settled within seven business days of the date of origin (Note 10). Securities
under spot contracts comprise the following:
June 30,
2014
December 31,
2013
Securities
Purchase rights
Sale rights
41
3,950,768
24,240
4,018,688
29,024
3,975,008
4,047,712
c) Transactions with derivative instruments
MERCANTIL enters into hedging futures contracts for the purchase and sale of securities at a fixed
price. Net loss resulting from these contracts for the six-month period ended June 30, 2014 was
Bs 73,389,000 (gain of Bs 57,951,000 at December 31, 2013), shown under Other income and other
operating expenses (Notes 18 and 19).
MERCANTIL also enters into futures contracts to purchase currency at a fixed price.
The status of open transactions with negotiable instruments is as follows:
June 30, 2014
Futures contracts
Exchange rates (currency)
Purchases
24.
Thousands
of bolivars
230,177
Maturity
July 2014 - June 2015
December 31, 2013
Thousands
of bolivars
Maturity
182,575
January - October 2014
Credit-related commitments
MERCANTIL has significant outstanding commitments related to letters of credit, guarantees granted,
lines of credit and credit card limits to meet the needs of its clients and to manage its own risk resulting
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 extend credit, letters
of credit and guarantees granted by MERCANTIL are recorded under memorandum accounts.
Guarantees granted
After conducting a credit risk analysis, MERCANTIL provides guarantees to certain customers within
their line of credit. These guarantees are issued to a beneficiary and may be executed if the customer
fails to comply with the terms of the agreement. These guarantees earn annual commissions at
between 1% and 2% at June 30, 2014 and December 31, 2013, respectively, of their value.
Commissions are recorded monthly while the guarantees are in force.
Letters of credit
Letters of credit mature within 90 days and are renewable. They are generally issued to finance a
trade agreement for the shipment of goods from a seller to a buyer. MERCANTIL charges a fee of
between 0.125% and 2% at June 30, 2014 and December 31, 2013 of the amount of the letter of credit
and records the latter under assets once it is used by the customer. Unused letters of credit and other
similar liabilities are included under memorandum accounts.
Lines of credit
MERCANTIL grants lines of credit to clients subject to prior credit risk assessment and obtention of any
guarantees required by MERCANTIL. These agreements are for a specific period, provided that clients
do not default on the terms set forth therein. However, MERCANTIL may exercise its option to cancel
a credit commitment with a particular client at any time.
MERCANTIL issues renewable credit cards with limits for up to three years. However, it may exercise
its option to cancel a credit commitment with a particular client at any time. Nominal credit card
interest rates are variable for transactions in Venezuela and fixed for transactions in the United States
of America.
MERCANTIL’s exposure to credit loss in the event of noncompliance by clients with terms for credit
extension, letters of credit and guarantees is represented by the notional contractual amounts of these
credit-related instruments. Credit policies applied by MERCANTIL for these commitments are the
same as those for granting loans.
42
MERCANTIL assesses individual customer eligibility before granting credit. The amount of collateral
provided, if required by MERCANTIL, is based on customer credit assessment. The type of collateral
varies, but may include accounts receivable, inventories, property and equipment, and investment
securities.
25.
Maturity of financial assets and liabilities
Financial assets and liabilities at June 30, 2014 are classified according to maturity as follows:
Maturity
30 days
60 days
90 days
180 days
360 days
Over
360 days
Total
Assets
Loan portfolio
Total financial assets
Liabilities
Deposits
Subordinated debt
Total financial liabilities
26.
51,994,333
4,694,563
26,681,986
2,078,490
-
2,403,175
6,556,369
-
544,388
5,999,792
-
2,650,013
15,462,624
-
3,692,734
22,656,699
-
55,681,366
84,324,465
168,807
51,994,333
69,666,239
161,681,935
2,078,490
168,807
85,449,372
8,959,544
6,544,180
18,112,637
26,349,433
140,174,638
285,589,804
230,867,184
65,036
1,304,589
63,632
-
656,108
1,458,294
-
600,966
558,761
-
1,288,631
157,105
-
1,441,503
188,526
-
1,226,583
101,204
2,150,767
696,058
236,080,975
166,240
5,818,042
63,632
696,058
232,300,441
2,114,402
1,159,727
1,445,736
1,630,029
4,174,612
242,824,947
Fair value of financial instruments
Below are the book and fair values of financial instruments maintained by MERCANTIL:
June 30, 2014
Book
Fair
value
value
December 31, 2013
Book
Fair
value
Value
Assets
Loan portfolio, net of allowance
Interest and commissions receivable, net of provision
Liabilities
Deposits
Subordinated debt
Memorandum accounts
Contingent debtor accounts
51,994,333
69,666,239
156,840,303
2,078,490
51,994,333
69,680,457
156,840,303
2,078,490
46,371,071
63,646,988
121,818,576
1,681,142
46,371,071
63,647,732
121,818,576
1,681,142
280,579,365
280,593,583
233,517,777
233,518,521
236,080,975
166,240
5,818,042
696,058
63,632
236,080,975
166,240
5,818,042
696,058
63,632
195,916,835
198,080
3,581,157
696,144
54,236
195,916,835
198,080
3,581,157
696,144
54,236
242,824,947
242,824,947
200,446,452
200,446,452
10,306,189
10,306,189
11,920,784
11,920,784
The fair value of a financial instrument is defined as the amount at which the instrument could be
exchanged between two knowledgeable, willing parties, other than in a forced transaction, involuntary
liquidation or distress sale. Fair values for financial instruments with no available quoted market prices
have been estimated using the present value of future cash flows of these financial instruments or
other valuation techniques and assumptions. These techniques are significantly affected by the
assumptions used, including the discount rates, estimates of future cash flows, and the expectation of
payments in advance. In addition, fair values presented do not purport to reflect the value of other
43
income-generating activities or future business activities; that is, they do not represent the value of
MERCANTIL as a going concern.
Below is a summary of the most significant methods and assumptions used in estimating the fair
values of financial instruments:
Short-term financial instruments
Short-term financial instruments, both assets and liabilities, are shown in the consolidated balance
sheet at book value, which does not significantly differ from fair value given their short-term maturity.
These instruments include cash equivalents, interest-bearing deposits with other banks and
commissions, interest receivable and payable, short-term interest-bearing demand deposits and shortterm financial liabilities.
The fair value of these financial instruments was determined using either quoted market prices,
reference prices determined from trading operations on the secondary market, quoted market prices of
financial instruments with similar characteristics or the estimated future cash flows from these
securities. The equivalent in bolivars of the fair value of securities denominated in foreign currency was
determined using the official exchange rate (Note 2).
Loan portfolio
Most of the loan portfolio earns interest at variable rates that are revised regularly, generally between
30 and 90 days for most of the short-term portfolio. In addition, allowances are made for loans with
some risk of recovery. Therefore, in management’s opinion, the net book value of this loan portfolio
approximates its fair value.
Deposits
The fair value of customer deposits with no fixed maturity, such as interest-bearing deposits and
savings accounts, is represented by the amount payable or due at the reporting date. Certain time
deposits and other interest-bearing accounts, particularly variable-rate deposits, have also been
measured at their carrying amounts due to their short-term maturity. Other fixed-rate deposits were not
considered significant. The value of long-term relationships with depositors is not taken into account
when estimating the fair values disclosed.
Short-term financial liabilities are shown at book value since they relate to funds obtained from other
banks to increase liquidity. They are unsecured, generally mature between 90 and 180 days, and bear
interest at variable rates. Long-term financial liabilities are shown at book value since most of them
bear interest at variable rates.
Risk-based financial instruments recorded in memorandum accounts
The fair value of derivatives was calculated using their specific market prices, based on trading
operations on the secondary market.
44
27.
Geographic segment information
MERCANTIL’s operations are distributed geographically as follows:
June 30,
December 31,
2014
2013
Venezuela
Other
8,082,284
452,925
66,182
7,098,974
461,561
51,593
Total
8,601,391
7,612,128
10,307,840
575,158
100,998
9,184,717
594,916
(10,274)
10,983,996
9,769,359
4,115,252
92,525
(60,389)
3,935,140
102,070
(176,578)
4,147,388
3,860,632
Net financial margin, commissions and other income
Venezuela
Other
Total
Operating income before tax and
minority interests
Venezuela
Other
Total
June 30, 2014
Thousands
of bolivars%
December 31, 2013
Thousands
of bolivars
%
Assets
Venezuela
Other
235,595,813
46,959,869
4,961,381
82
16
2
192,061,442
42,866,830
4,384,860
80
18
2
Total
287,517,063
100
239,313,132
100
215,504,968
41,801,231
3,407,962
83
16
1
173,278,699
38,039,391
3,337,536
80
18
2
260,714,161
100
214,655,626
100
Liabilities and minority interests
Venezuela
Other
Total
45
28.
Financial information by subsidiary
Below is a summary of the financial information by subsidiary at June 30, 2014. This information
includes the effect of eliminations normally made during consolidation:
Mercantil
Inversiones
y Valores,
C.A.
Mercantil, C.A.
Banco
Universal
Mercantil
Commercebank
Holding
Corporation (1)
Other
foreign
banks
223,820,631
46,862,781
123,279,963
46,691,768
13,205,465
31,554,331
4,468,876
1,956,867
2,006,009
11,968,423
7,344,128
-
204,799
159,708
-
362,566
137,290
-
287,517,063
69,666,239
156,840,303
205,860,605
197,310,533
7,795,284
41,735,801
35,538,796
449,716
3,383,610
3,231,646
58,655
8,660,724
293,165
31,663
5,704
1,041,758
(1,133)
260,714,161
236,080,975
8,601,391
3,779,037
3,657,835
7,267
96,535
75,358
827
(58,041)
(54,593)
109
436,703
435,487
1,601
30,230
18,586
46
(138,945)
(158,733)
24
4,145,519
3,973,940
9,874
Mercantil
Seguros, C.A.
Mercantil
Merinvest,
C.A.
and other
Consolidated
total
Total assets
Loan portfolio, net
Total liabilities and
minority interests
Deposits
Gross income
before tax
Net income
Number of employees
(1) Final beneficial owner of Mercantil Commercebank, N.A.
29.
Risk management
MERCANTIL is mainly exposed to credit, market and operational risks. Below is the risk policy used
by MERCANTIL for each type of risk:
Credit risk
Credit risk is the risk that a counterparty will default on its debts at maturity. MERCANTIL monitors
credit risk exposure by regularly analyzing the payment capabilities of its borrowers and structures the
level of credit risk by establishing limits for single or group borrowers. MERCANTIL classifies risk
exposure by risk category into direct, contingent and issuer risks.
Market risk
Financial institutions encounter market risks when market conditions show adverse changes that affect
the liquidity and value of financial instruments included in investment portfolios or contingent positions
and result in a loss for these financial institutions. Market risks mainly comprise two types of risk: price
risk (which includes interest rate, foreign exchange and share price risks) and liquidity risk.
a) Price risk
Price risks include interest rate, foreign exchange and share price risks.
Interest rate risk is represented by changes in market and interest rates with a potential impact on
MERCANTIL’s financial margin or equity.
To measure interest rate risk, MERCANTIL monitors the variables affecting interest rate movements
and financial assets and liabilities. MERCANTIL regularly controls and mitigates existing exposure to
risks.
Foreign exchange risk arises from fluctuations in the interest rates of international financial markets
and variations in the exchange rates of other currencies with respect to the Venezuelan bolivar.
MERCANTIL sets limits on its individual currency and overall foreign exchange exposure, and on
maximum and minimum positions.
46
b) Liquidity risk
Liquidity risk is the risk that MERCANTIL may not be able to meet its obligations with clients and
financial market counterparties at any time or in any place or currency. To avoid this risk, MERCANTIL
conducts a daily review of its available resources.
To mitigate liquidity risk, MERCANTIL sets limits as to the minimum funds that must be maintained in
highly liquid instruments and interbank and loan facilities.
MERCANTIL also conducts stress simulation tests to assess the behavior of assets and liabilities
under different scenarios.
MERCANTIL’s investment strategy is aimed at guaranteeing adequate liquidity levels. A significant
portion of cash is invested in short-term instruments such as certificates of deposit with the BCV, debt
securities issued by the Bolivarian Republic of Venezuela and other highly liquid financial obligations,
within regulatory limitations.
Operational risk
MERCANTIL considers operational risk as the possibility of incurring direct or indirect losses as a
result of inadequate or defective internal processes, deficient internal controls, human error, system
failures or external events. The operational risk management structure established by MERCANTIL
enables it to conduct internal processes for identification, assessment, quantification, monitoring and
mitigation of operational risks across the organization. This structure also provides management with
the information required to set priorities and aid the decision-making process.
Operational risk management at MERCANTIL is a dynamic process conducted from a qualitative
standpoint by identifying risks and analyzing trigger factors and from a quantitative standpoint by
identifying events, measuring their impact, monitoring the behavior of key risk indicators and analyzing
scenarios. The information gathered from these processes serves as the basis to define and
implement actions aimed at controlling and mitigating operational risks within the organization.
Insurance activity risk
The subsidiary Mercantil Seguros, C.A. is exposed to credit, market and operational risks, as well as
underwriting risk, which it manages through policies aligned with the objective of diversifying its
portfolio, based on previous analyses of portfolio and exposure profiles. Underwriting, market and
credit risks should be adequately understood, analyzed, measured and managed so that insurance
companies may face possible deviations from their liabilities, mainly their reserves for pending claims
and insufficiency of premium reserves.
47
30.
Regulatory capital requirements
MERCANTIL and certain subsidiaries are subject to various regulatory minimum capital requirements
imposed by their supervisors (Note 1). Failure to meet capital requirements can initiate certain actions
by regulators that, if undertaken, could have a material effect on MERCANTIL’s financial statements.
Under capital adequacy guidelines, MERCANTIL and its subsidiaries must meet specific capital
guidelines that involve quantitative measurements of assets, liabilities, and certain off-consolidatedbalance-sheet items as calculated under regulatory accounting practices.
Below are the regulatory capital requirements of MERCANTIL and its main banking subsidiaries:
31.
Minimum
required
%
June 30,
2014
%
December 31,
2013
%
Equity to risk-weighted assets and contingent operations
Mercantil Servicios Financieros, C.A. and its subsidiaries (consolidated)
Mercantil, C.A. Banco Universal and branches abroad
Mercantil Commercebank, N.A.
8.00
12.00
8.00
15.91
16.20
14.76
18.41
18.96
16.24
Tier 1 equity to risk-weighted assets and contingent operations
Mercantil Servicios Financieros, C.A. and its subsidiaries (consolidated)
4.00
4.00
15.32
15.00
17.75
15.00
Equity to total assets
Mercantil, C.A. Banco Universal and branches abroad
9.00
4.00
9.63
13.66
10.88
10.32
Contingencies
In the ordinary course of business, certain MERCANTIL subsidiaries are defendants in various legal
proceedings. MERCANTIL is not aware of any other pending legal proceedings that could have a
significant effect on its financial position or the results of its operations.
Various subsidiaries of MERCANTIL in Venezuela and their merged institutions have received
additional income tax assessments from the Tax Authorities amounting to Bs 21,771,000, mainly due
to disallowance of certain income considered nontaxable, expenses related to tax-exempt income,
expenses for unpaid or late payment of withholdings, nondeductible expenses for uncollectible
accounts and rejection of tax loss carryforwards. Additionally, the subsidiary Mercantil, C.A. Banco
Universal was subject to assessments of Bs 3,341,000 in respect of unwithheld and late payment of
value added tax (VAT). The Bank appealed alleging no grounds for disallowance. To date, the tax
courts have not ruled on some of these assessments; those that went in favor of MERCANTIL
subsidiaries were appealed by the National Treasury and rulings are pending.
In addition, the subsidiary Mercantil, C.A. Banco Universal received and appealed additional bank debit
tax assessments amounting to Bs 23,508,000. In the opinion of the Bank’s legal advisors, these
assessments are not well grounded in law.
In April 2008, the subsidiary Mercantil, C.A. Banco Universal was subject to a tax assessment of
Bs 62,679,000 in respect of the proportional tax on dividends. In June 2008, the Bank filed a discharge
claim with the Tax Authorities stating its legal arguments against this assessment. In December 2008,
the National Integrated Customs and Tax Administration Service (SENIAT) confirmed this tax
assessment and in January 2009 the Bank filed an appeal against the payment forms issued. In June
2011, SENIAT confirmed this tax assessment, which was appealed by the Bank in July 2011. In the
opinion of Bank management and its legal advisors, there are legal grounds to uphold the
inadmissibility of the assessment.
48
Bank management identified a maximum risk of Bs 47,073,241 in connection with the aforementioned
assessments based on inadmissibility of monetary restatement and compensatory interest; hence, a
provision has been set aside to cover this amount.
In July 2006, the subsidiary Mercantil, C.A. Banco Universal was notified in connection with a claim
filed by a client. The Bank has been ordered to pay approximately Bs 36,978,000 for general damages
and loss of profits, plus monetary indexation. In November 2006, the Bank’s legal advisors filed for
annulment of the ruling. In March 2009, the Supreme Tribunal of Justice ruled in favor of the annulment
appeal filed by the subsidiary against the July 2006 ruling and ordered that a new ruling be issued. In
May 2014, the trial was terminated through a transaction with the plaintiff whereby the Bank made a
single payment of Bs 51,000,000 .
In June 2008, the subsidiary Mercantil, C.A. Banco Universal was notified by Banco Nacional de la
Vivienda y Hábitat (BANAVIH), ascribed to the People’s Power Ministry for Housing, of an assessment
of Bs 25,364,000, in respect of alleged differences in the contributions made under the Housing Loan
Law. The Bank appealed this assessment in July 2008. In August 2008, BANAVIH ruled partially in
favor of the Bank and reduced the assessment to Bs 11,647,000. However, in September 2008, the
subsidiary appealed this decision. Simultaneously, since BANAVIH arrived at the ruling following
procedures established in the Law on Administrative Proceedings instead of applying the procedures
set out in the Master Tax Code, as required by the Instance Courts and the Supreme Tribunal of
Justice, the Bank filed for and was awarded constitutional protection in December 2008 and February
2009, respectively. BANAVIH was ordered to follow the Master Tax Code to rule on the appeal filed by
the subsidiary in September 2008, according to which the effects of the tax assessment were
suspended. In the opinion of Bank management and its legal advisors, there are legal grounds to
uphold the inadmissibility of the assessment.
In October 2012, the subsidiary Mercantil, C.A. Banco Universal was notified of a ruling ordering it to
return an asset valued at Bs 8,436,600. The Bank is taking the corresponding actions against this
ruling. In the opinion of Bank management and its legal advisors, there are legal grounds to uphold the
inapplicability of the ruling.
In December 2012, the Bank was notified of two proceedings as joint guarantor filed in October 2011.
In March 2013, the Supreme Tribunal of Justice annulled one of the proceedings for Bs 13,919,000.
The Bank has sufficient collateral over the second proceeding for Bs 3,338,000. In the opinion of Bank
management and its legal advisors, the ruling on the latter proceeding should be favorable to the Bank.
Management and the legal advisors of MERCANTIL and its subsidiaries believe that there are
favorable expectations about the future resolution of these contingencies, which they believe will not
significantly change next year.
49
32.
Financial statements of Mercantil Servicios Financieros, C.A. (Holding)
Below are the individual financial statements of Mercantil Servicios Financieros, C.A. (Holding) under
the equity method:
June 30,
2014
December 31,
2013
Assets
Mercantil, C.A. Banco Universal
Mercantil Commercebank Holding Corporation
Avila Investment, Inc.
Alvina Corporation, N.V.
Mercantil Bank (Schweiz), A.G.
Mercantil Merinvest, C.A.
Mercantil Arte y Cultura A.C.
Cestaticket Accor Services, C.A.
Servibien, C.A.
Mercantil Inversiones y Valores, C.A.
Epica Investment, Inc.
Other
Other assets
Total assets
Liabilities
Debenture bonds and commercial paper
Other liabilities
Total liabilities
Equity
Income
Interest income
Equity in subsidiaries, affiliates and other
Expenses
Operating
Financial
Operating income, net
48,220
16,970
18,122,826
4,077,741
3,753,252
1,002,093
397,509
227,553
131,227
86,875
37,004
18,360
264,765
(49,507)
16,347,622
3,948,490
2,223,132
444,425
389,176
161,892
128,034
159,857
12,665
1,482,088
305,872
(65,055)
28,117,918
25,555,168
180,000
1,135,016
212,000
685,662
1,315,016
897,662
26,802,902
24,657,506
28,117,918
25,555,168
7,252
4,058,567
15,919
3,875,794
(64,395)
(7,696)
(66,897)
(6,470)
3,993,728
3,818,346
Deferred income tax
(19,788)
(39,383)
Net income
3,973,940
3,778,963
50
33.
Supplementary information - Consolidated financial statements adjusted for the effects of
inflation
SNV rules stipulate that inflation-adjusted financial statements must be presented as supplementary
information.
Below are the consolidated financial statements of Mercantil Servicios Financieros, C.A. and its
subsidiaries expressed in constant bolivars at June 30, 2014:
Supplementary consolidated balance sheet
June 30,
2014
December 31,
2013
(Thousands of constant
bolivars at June 30, 2014)
Assets
Cash
Central Bank of Venezuela
Venezuelan banks and other financial institutions
Foreign banks and other financial institutions
Pending cash items
Investments in trading securities
Investments in held-to-maturity securities
Investments in time deposits and placements
Loan portfolio
Current
Rescheduled
Overdue
In litigation
2,776,144
43,118,285
517,485
1,562,580
4,019,839
4,945,594
48,807,643
1,193,565
2,051,891
3,195,595
51,994,333
60,194,288
66,784
37,899,125
21,164,297
462,231
9,333,638
900,545
92,164
45,391,849
21,806,688
402,292
14,457,713
565,288
69,826,620
82,715,994
160,524,257
540,771
588,802
28,105
161,949,049
707,631
700,935
122,600
161,681,935
163,480,215
(4,841,632)
(5,347,522)
156,840,303
158,132,693
2,078,490
2,182,290
266,632
400,966
Available-for-sale assets
67,364
124,283
4,931,261
4,939,796
Other assets
7,009,891
7,219,926
293,014,894
315,910,236
384,775,134
395,551,210
Total assets
Memorandum accounts
51
Supplementary consolidated balance sheet
June 30,
2014
December 31,
2013
Liabilities and Equity
Liabilities
Deposits
Non-interest bearing checking accounts
Savings deposits
Time deposits
Publicly traded debt securities issued by MERCANTIL
Liabilities to Venezuelan banks and savings and loan institutions, up to one year
Liabilities to foreign banks and savings and loan institutions, up to one year
Liabilities to foreign banks and savings and loan institutions, more than one year
Other liabilities, up to one year
Other liabilities
Subordinated debt
Total liabilities
Minority interests in consolidated subsidiaries
Equity
Capital stock
Capital inflation adjustment
Share premium
Capital reserves
Retained earnings
Repurchased shares held by subsidiaries
Pension plan remeasurement
Total equity
52
73,747,401
84,327,523
70,921,341
7,084,710
75,691,924
88,962,834
80,891,875
8,773,010
236,080,975
254,319,643
166,240
257,128
695,127
2,859,311
1,522,347
628,420
112,837
558,348
1,264,416
1,984,317
815,752
25,867
5,818,042
4,648,700
63,632
70,404
18,024,824
18,580,145
696,058
903,665
260,849,771
278,779,685
15,107
19,721
664,397
14,587,765
4,378,891
(7,085,091)
18,095,953
(111,208)
(73,347)
(69,185)
1,761,841
153,322
7,471,538
2,779,450
4,378,891
(5,559,549)
24,834,255
(106,909)
(73,347)
3,233,179
32,150,016
37,110,830
293,014,894
315,910,236
Supplementary consolidated income statement
June 30,
2014
December 31,
2013
Interest income
Income from cash and due from banks
Income from investment portfolio
Income from loan portfolio
28,533
2,759,888
11,084,942
22,465
3,145,478
11,627,261
Total interest income
13,873,363
14,795,204
(4,116,991)
(65,864)
(8,714)
(113,511)
(3,849,154)
(85,325)
(9,224)
(114,100)
Interest expense
Interest on demand and savings deposits
Interest on time deposits
Interest on securities issued by MERCANTIL
Interest on other financial liabilities
Total interest expense
Allowance for losses on loan portfolio and provision for commissions receivable
(4,305,080)
(4,057,803)
9,568,283
10,737,401
(1,013,691)
(1,656,647)
Net financial margin
8,554,592
9,080,754
Commissions and other income
Trust fund operations
Foreign currency operations
Commissions on customer account transactions
Commissions on letters of credit and guarantees granted
Equity in long-term investments
Exchange gain
Gain on sale of investment securities
Other income
69,120
3,988
634,459
12,472
252,912
162,644
245,242
2,469,548
82,840
(11,678)
739,168
21,141
86,829
550,666
506,953
3,715,745
Total commissions and other income
3,850,385
5,691,664
6,386,167
(5,319,524)
6,801,961
(5,665,535)
1,066,643
1,136,426
13,471,620
15,908,844
(3,107,141)
(1,125,316)
(1,638,986)
(3,255,198)
(3,258,531)
(1,140,332)
(1,408,078)
(3,934,923)
Total operating expenses
(9,126,641)
(9,741,864)
Loss from net monetary position
(4,836,523)
(5,065,282)
Operating income before tax and minority interests
(491,544)
1,101,698
Income tax
Current
Deferred
(151,335)
(20,244)
(6,201)
(100,251)
Total tax
(171,579)
(106,452)
Net income before minority interests
(663,123)
995,246
(398)
(286)
(663,521)
994,960
Insurance premiums, net of claims
Premiums
Claims
Total insurance premiums, net of claims
Income from financial operations
Operating expenses
Salaries and employee benefits
Depreciation, property and equipment expenses, amortization of intangibles and other
Fees paid to regulatory agencies
Other operating expenses
Minority interests
Net income
53
Supplementary consolidated statement of changes in equity
Capital
stock
Capital
inflation
adjustment
Share
premium
Translation
adjustment
of net
assets of
subsidiaries
abroad
Capital
reserves
Repurchased
shares
held by
subsidiaries
Retained
earnings
Repurchased
shares
reserved
for employees
stock option
plan
Unrealized
gain from
adjustment of
investments
Pension plan
to market
remeasurement
value
Total
equity
(Thousands of constant bolivars at June 30, 2014)
Balances at June
30, 2013
Net income
Repurchased shares
Redemption of shares
Cash dividends
paid to subsidiaries
Unrealized gain
on investments
Translation adjustment
of net assets of
subsidiaries abroad
Balances at December
31, 2013
Net income
Capital stock increase
Dividends declared, net of
cash dividends paid to
subsidiaries
Repurchased shares
Unrealized loss
on investments
Pension plan
remeasurement
Translation adjustment
of net assets of
subsidiaries abroad
Balances at June
30, 2014
153,418
7,471,538
2,779,450
4,378,891
(4,017,452)
23,836,947
(100,498)
(73,347)
-
2,109,806
(96)
-
-
-
-
994,960
(1,622)
(8,157)
1,746
-
-
-
-
-
-
-
-
3,970
-
-
-
-
3,970
-
-
-
-
-
-
-
-
-
1,123,373
1,123,373
-
-
-
-
(1,542,097)
-
-
-
-
-
(1,542,097)
153,322
7,471,538
2,779,450
4,378,891
(5,559,549)
24,834,255
(106,909)
(73,347)
-
3,233,179
37,110,830
511,075
7,116,227
(2,779,450)
-
-
(663,521)
(4,847,852)
-
-
-
-
(663,521)
-
-
-
-
-
-
(1,296,114)
-
(4,299)
-
-
-
(1,296,114)
(4,299)
-
-
-
-
-
-
-
-
-
(1,471,338)
(1,471,338)
-
-
-
-
-
69,185
-
-
(69,185)
-
-
-
-
-
-
(1,525,542)
-
-
-
-
-
(1,525,542)
664,397
14,587,765
-
4,378,891
(7,085,091)
18,095,953
(111,208)
(73,347)
(69,185)
1,761,841
32,150,016
54
36,538,753
994,960
(8,157)
28
Supplementary consolidated cash flow statement
June 30,
2014
December 31,
2013
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by
operating activities
Depreciation and amortization
Decrease in allowance for losses on loan portfolio
Amortization of available-for-sale assets
Provision for interest receivable and other assets
Gain on equity in long-term investments, net
Deferred income tax
Minority interest expenses
Payment of length-of-service benefits
Net change in operating accounts
Available-for-sale and other assets
Other liabilities
Net cash provided by operating activities
Cash flows from investing activities
Net change in investment portfolio and long-term investments
Loans granted
Loans collected
Net additions to property and equipment
Net cash provided by investing activities
Cash flows from financing activities
Net change in
Deposits
Short-term financial liabilities
Debt securities issued by MERCANTIL
Subordinated debt
Long-term financial liabilities obtained
Long-term financial liabilities paid
Cash dividends
Repurchased shares
Net cash provided by (used in) financing activities
Cash and cash equivalents
Decrease (increase) for the period
(663,521)
994,960
609,176
1,013,559
(536)
6,774
16,535
(252,912)
20,244
398
683,857
(688,261)
537,115
1,656,647
24,206
14,313
(86,829)
100,251
286
572,757
(577,534)
103,800
(6,772)
15,067
(823,714)
(179,588)
2,930
(108,907)
(408,517)
33,694
2,542,090
7,508,383
(29,122,980)
29,402,347
(392,309)
2,098,166
(35,105,453)
36,038,088
(481,017)
7,395,441
2,549,784
(18,238,668)
1,818,646
(90,888)
(207,607)
(638,883)
(10,419)
(1,028,336)
(4,298)
-
12,615,584
(2,874,781)
65,736
(233,263)
(329,399)
(1,272)
(138,875)
(8,157)
-
(18,400,453)
9,095,573
(10,971,318)
14,187,447
At the beginning of the period
69,058,670
54,871,223
At the end of the period
58,087,352
69,058,670
49
122
4,185
4,011
(1,525,542)
(1,542,097)
(1,471,338)
1,123,373
Supplementary information
Taxes paid
Interest paid
55
In April 2008, the FCCPV approved the adoption of VEN NIF as the accounting principles of mandatory
application in Venezuela as from January 1, 2008. These standards are mainly based on International
Financial Reporting Standards (IFRS) and their interpretations issued by the International Accounting
Standards Board (IASB), with the exception of certain criteria concerning adjustments for inflation,
among others.
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, prepared
in conformity with the rules and instructions of the SNV, in currency of uniform purchasing power to
take account of changes in the National Consumer Price Index (NCPI) for the Metropolitan Area of
Caracas published by the BCV. Consequently, the accompanying supplementary consolidated
financial statements do not purport to reflect market or realizable values of nonmonetary assets, which
will normally differ from amounts adjusted on the basis of the NCPI.
Below is a summary of the main bases used in the preparation of the consolidated inflation-adjusted
financial statements:
Inflation indices and rates
The NCPI and inflation rates for the six-month periods ended June 30, 2014 and December 31, 2013,
according to information published by the BCV, are as follows:
June 2014 (•)
December 2013
Base NCPI for 2007=100
Inflation rate
646.30
497.90
29.81
24.91
(•) The NCPI at June 30, 2014 has been estimated by MERCANTIL, since at the date of this report it had not been published by
the BCV.
Monetary assets and liabilities and result from monetary position
Monetary assets and liabilities at June 30, 2014, including amounts in foreign currency are, by their
nature, shown in terms of purchasing power at that date. For comparative purposes, monetary assets
and liabilities at December 31, 2013 have been restated to express them in terms of purchasing power
at June 30, 2014.
The result from monetary position reflects the loss or gain obtained from maintaining a net monetary
asset or net monetary liability position during an inflationary period and is shown in the consolidated
income statement as a loss from net monetary position.
56
An analysis of the consolidated monetary result for the period is provided below:
June 30,
December 31,
2014
2013
Net monetary position at the beginning of the year
30,612,712
30,375,537
18,790,391
119,371
-
21,623,294
1,123,373
177,954
71,842
23,564
3,970
18,909,762
23,023,997
(14,115,155)
(3,989,806)
(1,525,542)
(1,471,338)
(1,296,114)
(689,214)
(438,662)
(69,025)
(20,572)
(4,299)
-
(14,980,670)
(1,542,097)
(729,920)
(274,582)
(8,157)
(100,251)
(85,863)
(23,619,727)
(17,721,540)
Transactions that increased net monetary position
Income
Net change in subsidiaries and affiliates
Unrealized gain in affiliates
Net change in other assets
Net change in available-for-sale assets
Net change in other liabilities
Subtotal
Transactions that decreased net monetary position
Expenses
Net change in other assets
Translation adjustment of subsidiaries abroad
Unrealized loss in affiliates
Net change in other liabilities
Net change in property and equipment
Net change in securities
Net change in available-for-sale assets
Repurchased shares
Deferred income tax
Net change in subsidiaries and affiliates
Subtotal
Estimated net monetary asset position
Historic net monetary position
Loss from net monetary position
25,902,747
35,677,994
(21,066,224)
(30,612,712)
4,836,523
5,065,282
Nonmonetary assets
Property and equipment, available-for-sale assets and deferred charges are expressed in constant
currency at June 30, 2014, based on the NCPI at their dates of origin.
Shares held in unconsolidated affiliates are reported under the equity method, based on the inflationadjusted financial statements of those affiliates.
Other investment securities are recorded based on their intended use as investments in trading
securities, investments in available-for-sale securities, investments in held-to-maturity securities, share
trading portfolio, investment deposits, time deposits and restricted investments.
Equity
All equity accounts are shown in constant currency at June 30, 2014. Dividends are stated in constant
currency based on the date they were declared.
57
Income statement
Operating income and expenses have been adjusted based on their dates of origin, except for costs
and expenses related to nonmonetary items, which have been adjusted based on the previously
restated nonmonetary items to which they relate.
Gains or losses on the sale of shares, investments in personal and real property, and other
nonmonetary items are determined based on the sale price and restated book value.
A breakdown of the items with significant differences with respect to the primary financial statements,
as detailed in Notes 3 to 32, is shown below:
a) Property and equipment
June 30,
2014
December 31,
2013
Land
Construction in progress
Chip project
Vehicles
Other assets
Accumulated depreciation
6,461,645
5,658,297
709,788
88,993
54,110
43,748
236,956
6,369,102
5,451,250
723,442
32,205
54,110
53,713
274,456
13,253,537
12,958,278
(8,322,276)
(8,018,482)
4,931,261
4,939,796
June 30,
2014
December 31,
2013
b) Other assets
Insurance premiums receivable
Goodwill
Deferred expenses, net of accumulated amortization
Prepaid taxes, insurance and other prepaid expenses
Prepaid expenses
Guarantee deposits to reinsurers
Systems development, net of accumulated amortization
Sales of securities in process of collection
Stationery and office supplies
Accounts receivable from other credit card companies
Shopping mall rights
Other taxes and contributions
Pending items
Guarantee deposits and advances for acquisition of personal and real property
Deferred income tax
Adjustment of spot and forward contracts to market value
Prepaid advertising
Other
Provision for estimated losses from other assets
58
1,858,065
1,285,703
887,785
443,903
371,788
355,983
230,616
173,060
152,579
121,580
105,488
100,273
92,326
89,592
59,495
22,553
13,203
677,195
2,072,961
1,407,190
868,348
467,805
246,064
338,909
201,551
127,271
98,979
104,114
136,934
5,793
263,728
99,794
120,486
125,367
5,970
563,441
7,041,187
7,254,705
(31,296)
(34,779)
7,009,891
7,219,926
Below is the movement of goodwill at June 30, 2014:
Balances at
December 31,
2013
Additions
Translation
adjustment
Balances at
June 30,
2014
Cost
Interbank, C.A.
Todo 1 Service, Inc.
Interbank, C.A.
Todo 1 Service, Inc.
Net balances
59
3,193,221
330,138
168,219
98,313
30,041
-
(38,630)
-
3,193,221
330,138
129,589
98,313
30,041
3,819,932
-
(38,630)
3,781,302
(2,075,594)
(181,372)
(59,366)
(66,369)
(30,041)
(79,831)
(11,160)
(3,015)
(2,471)
-
13,620
-
(2,155,425)
(192,532)
(48,761)
(68,840)
(30,041)
(2,412,742)
(96,477)
13,620
(2,495,599)
1,407,190
(96,477)
(25,010)
1,285,703

June - Mercantil Servicios Financieros

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