Mercantil Servicios Financieros, C · 2020. 8. 24. · Mercantil Servicios Financieros, C.A. and...

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Mercantil Servicios Financieros, C.A. and its Subsidiaries

Report of Independent Accountants and Consolidated Financial Statements December 31, 2016 and 2015


Mercantil Servicios Financieros, C.A. and its Subsidiaries Index to the consolidated financial statements December 31, 2016 and 2015

Pages

I Report of independent accountants 1 - 2

II Consolidated financial statements 1 - 5 III Notes to the consolidated financial statements 1 Reporting entity and regulatory environment 6 - 8 2 Basis of preparation 8 - 16 3 Cash and due from banks 16 4 Investment portfolio 17 - 21 5 Loan portfolio 21 - 22 6 Interest and commissions receivable 23 7 Long-term investments 23 8 Available-for-sale assets 24 9 Property and equipment 24 - 25 10 Other assets 25 - 26 11 Deposits 26 - 27 12 Debt authorized by the SNV 27 - 28 13 Financial liabilities 29 - 29 14 Other liabilities 29 15 Subordinated debt 30 16 Taxes 30 - 31 17 Employee benefits and employee benefit plans 32 - 35 18 Other income 35 19 Other operating expenses 36 20 Equity 36 - 38 21 Income per share 38 22 Financial assets and liabilities in foreign currency 38 - 40 23 Memorandum accounts 40 - 41 24 Credit-related commitments 41 - 42 25 Maturity of financial assets and liabilities 42 26 Fair value of financial instruments 42 - 44 27 Geographic segment information 44 28 Financial information by subsidiary 45 29 Risk management 45 - 46 30 Regulatory capital requirements 46 31 Contingencies 47 - 48 32 Financial statements of Mercantil Servicios Financieros, C.A. (Holding) 48 33 Supplementary information - Consolidated financial statements adjusted for 49 - 53 the effects of inflation

The accompanying notes are an integral part of the consolidated financial statements 1


Mercantil Servicios Financieros, C.A. and its Subsidiaries Consolidated balance sheet December 31, 2016 and 2015

2016 2015

(Thousands of bolivars)

Assets Cash and due from banks (Note 3) Cash 24,816,727 8,541,437 Central Bank of Venezuela 523,287,181 137,641,397 Venezuelan banks and other financial institutions 4,647,978 287,861 Foreign banks and other financial institutions 2,684,915 1,663,855 Pending cash items 19,953,194 7,525,966

575,389,995 155,660,516

Investment portfolio (Note 4) Investments in trading securities 552,122 6,554 Investments in available-for-sale securities 76,664,631 38,773,837 Investments in held-to-maturity securities 72,043,579 47,804,801 Share trading portfolio 1,013,393 386,732 Investments in time deposits and placements 26,749,129 7,396,830 Restricted investments and repurchase agreements 3,187,552 1,651,470

180,210,406 96,020,224

Loan portfolio (Note 5) Current 672,166,533 353,346,672 Rescheduled 1,034,017 510,653 Overdue 2,581,779 777,495 In litigation 103,252 50,640

675,885,581 354,685,460

Allowance for losses on loan portfolio (20,523,470) (10,544,876)

655,362,111 344,140,584

Interest and commissions receivable (Note 6) 8,464,501 5,053,051

Long-term investments (Note 7) 4,841,675 1,613,928

Available-for-sale assets (Note 8) 1,979,868 377,827

Property and equipment (Note 9) 8,481,814 5,348,577

Other assets (Note 10) 50,001,247 26,109,903

Total assets 1,484,731,617 634,324,610 Memorandum accounts (Note 23) 1,608,628,431 865,149,850



Mercantil Servicios Financieros, C.A. and its Subsidiaries Consolidated balance sheet December 31, 2016 and 2015

2016 2015


Liabilities and Equity Liabilities Deposits (Note 11) Non-interest bearing checking accounts 765,770,652 190,706,706 Interest-bearing checking accounts 190,561,241 177,429,396 Savings deposits 303,597,483 155,482,821 Time deposits 21,717,580 11,284,243

1,281,646,956 534,903,166

Debt authorized by the SNV (Note 12) Publicly traded debt securities issued by MERCANTIL 701,037 887,621

Financial liabilities (Note 13) Liabilities to Venezuelan banks and savings and loan institutions, up to one year 4,439,100 3,357,500 Liabilities to foreign banks and savings and loan institutions, up to one year 4,538,625 2,490,114 Liabilities to foreign banks and savings and loan institutions, more than one year 4,748,100 2,048,649 Liabilities under repurchase agreements 498,750 439,894 Other liabilities, up to one year 14,951 42,042

14,239,526 8,378,199

Interest and commissions payable 114,903 154,268

Other liabilities (Note 14) 111,461,809 44,737,862

Subordinated debt (Note 15) 1,127,215 706,169

Total liabilities 1,409,291,446 589,767,285

Minority interests in consolidated subsidiaries 35,780 23,722

Equity (Note 20) Capital stock 680,946 664,397 Capital inflation adjustment 191,709 191,709 Share premium 12,713,451 - Capital reserves 166,715 166,715 Translation adjustment of net assets of subsidiaries abroad 6,377,026 2,983,244 Retained earnings 56,038,556 39,914,413 Repurchased shares held by subsidiaries (615,633) (234,638) Employee benefit plan remeasurement (Note 2-m) (1,877,630) (504,556) Unrealized gain from adjustment of investments to market value 1,729,251 1,352,319

Total equity 75,404,391 44,533,603

Total liabilities and equity 1,484,731,617 634,324,610



Mercantil Servicios Financieros, C.A. and its Subsidiaries Consolidated income statement Years ended December 31, 2016 and 2015 2016 2015

(Thousands of bolivars, except net income per share) Interest income (Note 2) Income from cash and due from banks 1,371,921 463,712 Income from investment portfolio (Note 4) 8,891,293 5,417,729 Income from loan portfolio (Note 5) 108,102,085 52,962,731

Total interest income 118,365,299 58,844,172

Interest expense (Note 2) Interest on demand and savings deposits (27,362,124) (16,453,734) Interest on time deposits (259,689) (145,524) Interest on securities issued by MERCANTIL (119,838) (54,939) Interest on other financial liabilities (1,268,027) (532,248)

Total interest expense (29,009,678) (17,186,445)

Gross financial margin 89,355,621 41,657,727

Allowance for losses on loan portfolio and provision for commissions receivable (Notes 2, 5 and 6) (12,671,036) (4,924,512)

Net financial margin 76,684,585 36,733,215

Commissions and other income Trust fund operations 514,305 251,036 Foreign currency operations (Note 22) 99,332 30,594 Customer account transactions 10,702,207 3,347,452 Commissions on letters of credit and guarantees granted 22,358 24,309 Equity in long-term investments (Note 7) 616,262 329,040 Exchange gain (Note 22) 112,137 270,899 Gain on sale of investment securities (Note 4) 632,683 916,886 Other income (Note 18) 25,188,886 10,253,797

Total commissions and other income 37,888,170 15,424,013

Insurance premiums, net of claims (Notes 1 and 2) Premiums 63,344,695 27,856,851 Claims (51,316,251) (23,368,580)

Total insurance premiums, net of claims 12,028,444 4,488,271

Income from financial operations 126,601,199 56,645,499

Operating expenses Salaries and employee benefits (24,691,335) (10,052,560) Depreciation, property and equipment expenses, amortization of intangibles and other (Notes 8, 9 and 10) (13,895,142) (4,715,174) Fees paid to regulatory agencies (11,417,688) (5,842,759) Other operating expenses (Note 19) (46,780,133) (14,939,935)

Total operating expenses (96,784,298) (35,550,428)

Operating income before tax and minority interests 29,816,901 21,095,071

Income tax (Note 16) Current (9,135,398) (7,437,214) Deferred (2,634,841) 441,521

Total tax (11,770,239) (6,995,693)

Net income before minority interests 18,046,662 14,099,378

Minority interests (10,922) (7,615)

Net income 18,035,740 14,091,763 Net income per share (Note 21) Basic 178.07 141.74 Diluted 178.07 141.74 Weighted average of outstanding common shares 101,285,190 99,416,137 Weighted average of outstanding diluted common shares 101,285,190 99,416,137



Mercantil Servicios Financieros, C.A. and its Subsidiaries Consolidated statement of changes in equity Years ended December 31, 2016 and 2015

Unrealized

Translation gain (loss) adjustment from

of net Repurchased Employee adjustment of Capital assets of shares benefit investments

inflation subsidiaries held by plan to market Capital adjustment Share Capital abroad Retained subsidiaries remeasurement value Total

stock (Note 2-1) premium reserves (Note 2) earnings (Note 20) (Note 2-m) (Note 4) equity


Balances at December 31, 2014 664,397 191,709 - 166,715 2,982,241 27,054,686 (91,626) (93,223) 1,679,066 32,553,965

Net income - - - - - 14,091,763 - - - 14,091,763 Shares repurchased by subsidiaries - - - - - - (143,012) - - (143,012) Dividends declared, net of cash dividends paid to subsidiaries (Note 20) - - - - - (1,643,369) - - - (1,643,369) Unrealized loss on investments - - - - - - - - (326,747) (326,747) Employee benefit plan remeasurement (Note 2) - - - - - 411,333 - (411,333) - - Translation adjustment of net assets of subsidiaries abroad (Note 22) - - - - 1,003 - - - - 1,003

Balances at December 31, 2015 664,397 191,709 - 166,715 2,983,244 39,914,413 (234,638) (504,556) 1,352,319 44,533,603

Net income - - - - - 18,035,740 - - - 18,035,740 Capital increase (Note 20) 16,549 - 12,713,451 - - - - - - 12,730,000 Shares repurchased by subsidiaries - - - - - - (380,995) - - (380,995) Dividends declared, net of cash dividends paid, to subsidiaries (Note 20) - - - - - (1,911,597) - - - (1,911,597) Unrealized gain on investments - - - - - - - - 376,932 376,932 Employee benefit plan remeasurement (Note 2) - - - - - - - (1,373,074) - (1,373,074) Translation adjustment of net assets of subsidiaries abroad (Note 22) - - - - 3,393,782 - - - - 3,393,782

Balances at December 31, 2016 680,946 191,709 12,713,451 166,715 6,377,026 56,038,556 (615,633) (1,877,630) 1,729,251 75,404,391



Mercantil Servicios Financieros, C.A. and its Subsidiaries Consolidated cash flow statement Years ended December 31, 2016 and 2015 2016 2015


Cash flows from operating activities Net income 18,035,740 14,091,763 Adjustments to reconcile net income to net cash provided by operating activities Allowance for losses on loan portfolio (Note 5) 12,665,057 4,923,022 Exchange gain, net (859,959) - Depreciation and amortization (Notes 9 and 10) 2,790,377 1,057,244 Employee benefit plan remeasurement (1,373,074) Amortization of available-for-sale assets (Note 8) 6,916 352 Provision for interest receivable and other assets 596,671 271,888 Gain on equity in long-term investments, net (616,262) (329,040) Deferred income tax 2,634,841 (441,521) Minority interest expenses 10,922 7,615 Accrual for length-of-service benefits 2,865,977 1,945,835 Payment of length-of-service benefits (3,155,263) (1,511,822) Net change in operating accounts Interest and commissions receivable (3,281,823) (2,571,937) Interest and commissions payable (58,259) 60,764 Available-for-sale and other assets (29,339,665) (19,221,707) Other liabilities 66,680,225 22,722,912

Net cash provided by operating activities 67,602,421 21,005,368

Cash flows from investing activities Net change in investment portfolio (54,931,619) (24,896,258) Net change in long-term investments (2,629,629) (945,088) Loans granted (698,153,068) (297,674,378) Loans collected 395,937,356 145,993,059 Net additions to property and equipment (4,392,994) (3,953,314)

Net cash used in investing activities (364,169,954) (181,475,979)

Cash flows from financing activities Net change in Deposits 720,857,754 240,228,496 Short-term financial liabilities 1,998,209 2,966,963 Debt securities issued by MERCANTIL (186,584) 268,114 Subordinated debt - 9,831 Long-term financial liabilities obtained 902,925 117,572 Long-term financial liabilities repaid 786 257 Cash dividends (1,900,482) (1,635,468) Capital increase 16,549 - Share premium 12,713,451 - Repurchased shares (380,995) (143,012)

Net cash provided by financing activities 734,021,613 241,812,753

Cash and cash equivalents Net increase for the year 437,454,080 81,342,142

Income from effect of exchange differences on cash 1,486,981 -

At the beginning of the year 163,056,718 81,714,576

At the end of the year 601,997,779 163,056,718 Supplementary information Taxes paid 7,628,159 109,152

Interest paid 27,781,015 16,593,430

Translation adjustment of net assets of subsidiaries abroad 3,393,782 1,003

Unrealized gain (loss) from adjustment of investments to market value 376,932 (326,747)

Mercantil Servicios Financieros, C.A. and its Subsidiaries Notes to the consolidated financial statements December 31, 2016 and 2015

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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 Bolsa de Valores de Caracas, C.A. (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 and securities brokerage services are provided in Venezuela and other jurisdictions, as well as insurance services in Venezuela and Panama. The main subsidiaries of MERCANTIL are:

Company name Location

Mercantil, C.A. Banco Universal Venezuela Mercantil Bank, N.A. (formerly Mercantil Commercebank, N.A.) United States of America Mercantil Seguros, C.A. Venezuela Mercantil Bank (Panamá), S.A. Panama Mercantil Seguros Panamá, S.A. Panama Mercantil Bank (Schweiz) AG Switzerland Mercantil Bank & Trust Limited (Cayman) Cayman Islands Mercantil Bank Curacao, N.V. Curacao Mercantil Capital Markets (Panamá), S.A. Panama Mercantil Merinvest, C.A. Venezuela

MERCANTIL, seeking to consolidate its trademark and the corporate culture, has decided to change the name of the subsidiaries Mercantil Commercebank, N.A., Mercantil Commercebank Investment Services and Mercantil Commercebank Trust Company to the following names: Mercantil Bank, N.A., Mercantil Investment Services and Mercantil Trust Company. Likewise, other subsidiaries located in Panama, Curacao, Cayman Islands and Switzerland have planned to change their business name, which is awaiting approval from the relevant authorities. Other 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. MERCANTIL’s statutory consolidated financial statements at December 31, 2016 and 2015 were approved by the Board of Directors on January 12, 2017 and 2016, respectively, and approved for issue by the Audit Committee on February 14, 2017 and February 16, 2016, 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. This 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.


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Stock Market Law The new Stock Market Law was published in December 2015. This Law eliminates authorized securities dealers and replaces them with securities brokers and brokerage firms; establishes a new classification for brokerage firms as limited and universal; states that brokerage firms must have at least three shareholders and no less than 25% of their capital stock must be owned by a securities broker. Likewise, it introduces the definition of obligations and asset-backed securities and the figure of securitization companies; expressly establishes public accountant firms authorized by the SNV as taxpayers, and specifies that the SNV must expressly authorize the sale or transfer of shares, the change of business objective and the transformation or merge. In addition, it includes the definitions of Risk Management System, System for the Prevention and Control of Money Laundering and Terrorism Financing, and Proliferation of Weapons of Mass Destruction, which will be governed by SNV rules. Income Tax Law Venezuelan Income Tax Law requires, among other things, a 40% proportional income tax for institutions engaged in banking, financial, insurance and reinsurance activities; these institutions and special taxpayers are excluded from the inflation adjustment for tax purposes set forth in this Law. The Law establishes that net operating losses may be carried forward for three years and offset up to a maximum of 25% of annual income (Note 16). Law on Tax on Large Financial Transactions In December 2015 the Venezuelan government enacted the Decree Law on Tax on Large Financial Transactions applicable to incorporated and unincorporated entities qualified by the Tax Administration as special taxpayers. The tax rate is equivalent to 0.75% applicable to debits made from bank accounts and operations without the mediation of financial institutions. This Decree became effective as from February 1, 2016. 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 the Superintendency of Banking Sector Institutions (SUDEBAN), the Central Bank of Venezuela (BCV) and the Social Bank Deposit Protection Fund (FOGADE). b) Mercantil Bank, 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).


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c) 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. d) Mercantil Bank (Panamá), 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 Panamá, S.A. This company, incorporated and domiciled in accordance with the laws of Panama, is supervised by the Insurance and Reinsurance Superintendency of Panama. f) 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. g) Mercantil Bank & Trust Limited (Cayman) This bank, incorporated and domiciled in accordance with the laws of Cayman Islands, is supervised by the Cayman Islands Monetary Authority (CIMA). h) Mercantil Bank Curacao, N.V. This bank, incorporated and domiciled in accordance with the laws of Curacao, is supervised by the Central Bank of Curacao (De Centrale Bank van Curacao en Sint Maarten). i) Mercantil Capital Markets (Panamá), S.A. This company, incorporated and domiciled in accordance with the laws of Panama, is supervised by the Stock Market Superintendency of Panama. j) 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. Mercantil Holding Financiero Internacional was incorporated in 2015 and began operations in October 2016; subsequently, was made up of the subsidiaries: Mercantil Bank (Panamá), S.A., Mercantil Bank & Trust Limited (Cayman) and Mercantil Bank Curacao, N.V. As from 2016, this holding is supervised by the Superintendency of Banks of 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 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.


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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 SNV rules 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 consolidated financial statements be recognized, provided that inflation for the year exceeds one digit. In accordance with SNV instructions, as from 1999 MERCANTIL has not recognized the effects of inflation on its consolidated financial statements. The SNV has ruled that the methodology to be followed by MERCANTIL for preparing and presenting its nominal consolidated financial statements is that set out in IAS 29 “Financial reporting in hyperinflationary economies” for an economy that is no longer hyperinflationary. According to this standard, when an entity ceases to prepare and present inflation-adjusted consolidated 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 consolidated 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 consolidated financial statements expressed in nominal bolivars for subsequent periods. The SNV established that inflation-adjusted consolidated financial statements using the last rate published by the BCV should be included as supplementary information. 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 year end (Note 22). Net exchange gains and losses are included in the results for the year, 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 year-end official exchange rate, equity accounts at the historic official exchange rate, and income accounts at the average official exchange rate for the year (Note 22). Translation adjustments are recorded in equity. VEN NIF establish two options for measuring foreign currency transactions and balances: 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 and losses 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.


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6) Rescheduled loans For the subsidiary Mercantil, C.A. Banco Universal, the Accounting Manual for Banking 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 year 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. 8) Allowance for losses on loan portfolio Allowances for losses on the loan portfolio are determined based on a collectability 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. 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 SNV rules establish that property and equipment is initially recorded at acquisition or construction cost, as applicable. Until 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 year 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 that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.


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11) Goodwill MERCANTIL amortizes goodwill using the straight-line method over 20 years (Note 10). 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 consolidated 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 years 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. Deferred tax asset is recognized provided that there is reasonable expectation of recovery and deferred tax liability must always be recognized. 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.

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 For purposes of the consolidated cash flow statement, MERCANTIL considers cash and due from banks as cash equivalents 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 year.


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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 consolidated income statement over the term of the security. 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 year 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. For the years ended December 31, 2016 and 2015, MERCANTIL has identified no other-than-temporary impairments in the value of its investments. Share trading portfolio This portfolio includes investments in shares to be publicly traded. These investments are presented at fair value, except for investments in shares not publicly traded, issued by companies regulated by the Law on Banking Sector Institutions and the Stock Market Law and similar institutions abroad, which must be presented at cost. Time deposits and placements These investments are funds deposited with banks and are recorded at cost, which is equivalent to nominal value. Restricted investments and repurchase agreements 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.


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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 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. 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 year, and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements. 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 (Note 26). 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 (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 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 year in which they occur. Reserves for insurance operations are shown within other liabilities (Note 14).


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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 year. 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 Accrual for length-of-service 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 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 year end, the Company uses actuarial methods to measure and record its additional 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.

Retirement pension plan MERCANTIL has a long-term defined benefit plan covering all eligible employees which is managed by Fundación BMA. Fundación BMA has assets and liabilities representing this benefit. Related costs and liabilities are calculated using actuarial methods and are recorded in the results for the year. 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. 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.


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Post-retirement benefits The Supplementary Retirement Pension Plan and the Supplementary Savings Plan include certain additional post-retirement benefits for personnel of MERCANTIL and its Venezuelan subsidiaries meeting certain conditions in respect of age and length of service, mainly medical insurance. The related costs and liabilities are determined based on actuarial methods. Past service costs of the pension plan are recorded in the consolidated income statement in the year 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 year 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. In addition, Mercantil Bank, N.A. has a 401K benefit plan to which MERCANTIL contributes a fixed percentage of participating employees’ salaries. During the years ended December 31, 2016 and 2015, Mercantil Bank, N.A. contributed Bs 33,849,000 and Bs 20,506,000, respectively, to the plan. Life insurance The subsidiary Mercantil Bank, N.A. has a life insurance for certain employees in which the subsidiary is the beneficiary, which is recorded at the cash surrender value at the consolidated balance sheet date within other assets. Changes are recorded as other income in the consolidated income statement. n) 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 Black-Scholes-Merton valuation model and does not take into consideration cash dividends that will not be received by the participants. o) 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. p) 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 (Note 26). q) 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 year closing, lines of credit and special trust services (Note 23).


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r) 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 that 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. In accordance with certain trust agreements, investments in debt or equity securities included in these trusts are maintained at cost or market values. s) Dividends Cash dividends are recorded as liabilities when approved at a Shareholders’ Meeting (Notes 14 and 20-c). t) Net income per share Basic net income per share is determined by dividing net income for the year by the weighted average of outstanding common shares, excluding repurchased shares (Notes 20-b and 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 at December 31 with the BCV included in cash and due from banks: 2016 2015

(Thousands of bolivars) Legal reserve 238,770,064 113,169,364 Demand deposits 284,517,117 24,472,033

523,287,181 137,641,397

At December 31, 2015 and 2014, the legal reserve is 18.5% of all deposits. The legal reserve for marginal increases in deposits is 28% as from March 2014. Legal reserve funds do not earn interest for MERCANTIL and are not available for use. Demand deposits with the BCV relate to internal liquidity risk limits, and earn no interest. At December 31, 2016, this balance includes the effect of recent high liquidity levels of the Venezuelan financial system. Pending cash items relate mainly to clearinghouse operations.


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4. Investment portfolio The investment portfolio at December 31 comprises the following:

2016 2015 Book value Book value (equivalent (equivalent to market to market Cost value) Cost value)

(Thousands of bolivars) a) Investments in trading securities Investment securities issued by Venezuelan entities Securities issued or guaranteed by the Bolivarian Republic of Venezuela In foreign currency 367,863 367,863 6,488 6,488 Securities issued by the National Treasury of the United States of America 112,663 112,663 - - Investment securities issued by entities in other countries Other investments 71,596 71,596 66 66

552,122 552,122 6,554 6,554 2016 2015

Book value Book value (equivalent (equivalent

Unrealized Unrealized to market Unrealized Unrealized to market Cost gain loss value) Cost 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) 20,308,173 1,844,797 (64,368) 22,088,602 21,737,722 2,275,721 (510,897) 23,502,546 In foreign currency 527,660 2,205 (100,395) 429,470 1,544,620 39,667 (418,133) 1,166,154

20,835,833 1,847,002 (164,763) 22,518,072 23,282,342 2,315,388 (929,030) 24,668,700

Other investments In local currency 459,820 1,588 (5,890) 455,518 220,194 663 (8,973) 211,884 In foreign currency 135 8 (133) 10 24,554 - (12,195) 12,359

459,955 1,596 (6,023) 455,528 244,748 663 (21,168) 224,243

Investment securities issued by public companies and decentralized entities In foreign currency 31,019,390 - - 31,019,390 314 - (170) 144

52,315,178 1,848,598 (170,786) 53,992,990 23,527,404 2,316,051 (950,368) 24,893,087

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) 5,564,053 26,320 (66,820) 5,523,553 4,809,775 37,053 (46,016) 4,800,812 Debt in companies sponsored and supervised by the government of the United States of America (3) 9,703,093 47,876 (163,422) 9,587,547 3,136,778 33,681 (27,442) 3,143,017 Securities issued by the National Treasury of the United States of America 6,115,932 134,249 (84,991) 6,165,190 168,684 82 (1,266) 167,500 Other investments 122,282 96 (67) 122,311 4,985,684 45,320 (86,593) 4,944,411

21,505,360 208,541 (315,300) 21,398,601 13,100,921 116,136 (161,317) 13,055,740

Investments in other countries 1,265,913 13,250 (6,123) 1,273,040 830,268 7,097 (12,355) 825,010

75,086,451 2,070,389 (492,209) 76,664,631 37,458,593 2,439,284 (1,124,040) 38,773,837 (1) These investments include Principal and Interest Covered Bonds (TICC) with a reference par value of US$116,394,000 at December 31, 2016 (US$122,384,000 at

December 31, 2015), payable in bolivars at the official exchange rate (Note 22). In addition, at December 31, 2016, they include Agriculture Bonds issued by Petróleos de Venezuela, S.A. for Bs 189,144,000 (Bs 373,060,000 at December 31, 2015) (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.


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At December 31, 2016, certain investments in available-for-sale securities with a market value of US$371 million were pledged to guarantee deposits and investments sold under repurchase agreements (US$593 million at December 31, 2015). The unrealized gain included in equity at December 31 comprises the following: 2016 2015

(Thousands of bolivars) Type of portfolio Investments in available-for-sale securities 1,578,180 1,315,244 Investments in held-to-maturity securities reclassified from investments in available-for-sale securities (12,096) (8,118) Share trading portfolio 150,016 46,188 Restricted investments 13,724 (581) Affiliates shown under the equity method (573) (414)

1,729,251 1,352,319

At December 31, 2016, the market value of securities owned by MERCANTIL is lower than cost by Bs 492,209,000 (Bs 1,124,040,000 at December 31, 2015). 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. 2016 2015 Amortized Amortized Cost cost Cost cost

(Thousands of bolivars) c) Investments in held-to-maturity securities Investment securities issued by Venezuelan entities Securities issued or guaranteed by the Bolivarian Republic of Venezuela In local currency (1) 10,467,079 10,456,352 886,732 886,573 In foreign currency - - 19,485 19,485

10,467,079 10,456,352 906,217 906,058

Investment securities issued by public companies and decentralized entities In local currency (Note 4-g) 61,156,174 61,154,805 46,665,659 46,657,825

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 163,690 163,690 53,738 53,738 Other investments 74,746 74,746 23,923 23,923

238,436 238,436 77,661 77,661

Investments in other countries 193,986 193,986 163,381 163,257

72,055,675 72,043,579 47,812,918 47,804,801


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Below is the classification of investments by maturity at December 31, 2016: Available-for-sale investments Held-to-maturity investments Book value

(equivalent Average Average to market yield Amortized yield

Cost value) % (1) Cost cost % (1)

(Thousands of bolivars) In bolivars Less than 1 year 3,871,330 4,009,510 1.64 1,753,900 1,752,533 0.60 From 1 to 5 years 3,752,829 4,078,997 2.38 10,079,194 10,075,143 1.59 Over 5 years 12,684,014 14,000,112 8.58 59,790,157 59,783,479 10.53

In U.S. dollars Less than 1 year 31,290,545 31,397,716 0.32 61,031 61,031 0.09 From 1 to 5 years 4,094,124 4,101,102 1.11 319,692 319,692 2.03 Over 5 years 19,393,609 19,077,194 3.90 51,701 51,701 0.38

75,086,451 76,664,631 72,055,675 72,043,579

(1) The average yield of securities is based on amortized cost at year end. Average 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.

Below is the classification of investments by maturity at December 31, 2015: Available-for-sale investments Held-to-maturity investments Book value (equivalent Average Average to market yield Amortized yield

Cost value) % (1) Cost cost % (1)

(Thousands of bolivars) In bolivars Less than 1 year 5,651,837 5,773,324 9.03 3,634,169 3,632,295 4.27 From 1 to 5 years 4,172,041 4,520,882 12.40 4,144,454 4,138,334 4.98 Over 5 years 12,134,037 13,420,224 12.80 39,773,769 39,773,769 5.81

In U.S. dollars Less than 1 year 371,984 399,913 3.02 97,950 97,950 3.23 From 1 to 5 years 3,119,716 3,035,726 2.66 143,912 143,789 3.57 Over 5 years 12,008,978 11,623,768 3.64 18,664 18,664 7.94

37,458,593 38,773,837 47,812,918 47,804,801

(1) The average yield of securities is based on amortized cost at year end. Average 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.

2016 2015 Book value Book value

(equivalent (equivalent Unrealized Unrealized to market Unrealized Unrealized to market Cost gain loss value) Cost gain loss value)

(Thousands of bolivars) d) Share trading portfolio Shares issued by companies of Venezuela and the United States of America 863,377 158,036 (8,020) 1,013,393 340,545 46,872 (685) 386,732

2016 2015

Market Market Cost value Cost value

(Thousands of bolivars) e) Investments in time deposits and placements Investment securities issued by Venezuelan entities Time deposits with The Central Bank of Venezuela (BCV) 15,906,271 15,906,271 2,100,000 2,100,000 Financial institutions 10,800,726 10,800,726 5,205,976 5,205,976

26,706,997 26,706,997 7,305,976 7,305,976

Investment securities issued by financial institutions in the United States of America Time deposits - - 628 628

Investment securities issued by entities in other countries 42,132 42,132 90,226 90,226

26,749,129 26,749,129 7,396,830 7,396,830


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At December 31, 2016, time deposits and placements include investments for Bs 26,607,784,000, maturing within 90 days (Bs 7,396,202,000 at December 31, 2015). 2016 2015 Market Market

Cost value Cost value

(Thousands of bolivars) f) Restricted investments and repurchase agreements Securities issued by the Bolivarian Republic of Venezuela In local currency 723,391 737,120 609,460 609,397 In foreign currency 243 243 144 144

723,634 737,363 609,604 609,541

Securities issued or guaranteed by the government of the United States of America 10,800 10,800 1,042,447 1,041,929

Investments in other countries Other investments 2,439,393 2,439,389 - -

3,173,827 3,187,552 1,652,051 1,651,470

g) Investments required As required by the Venezuelan government at December 31, 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:

2016 2015 Weighted Weighted average average Yield Book maturity Book maturity

Issuer Guarantee Maturity % value (months) value (months) Characteristics

(Thousands of bolivars) Imputable to agricultural loan portfolio Available-for-sale investments compliance Petróleos de Venezuela, S.A. (PDVSA) Debenture bonds 2017 9.10 189,144 7 378,230 15 (1, 3) (Notes 4-b and 5)

Banco de Desarrollo Económico y Social Reduces the legal de Venezuela (BANDES) BANDES 2017 4.00 31,019,390 9 - (6) (a) reserve (Note 3)

Total available-for-sale investments 31,208,534 378,230

Held-to-maturity investments (Note 4-c) Fondo Simón Bolívar para Bolivarian Imputable to mortgage la Reconstrucción, S.A. Republic of portfolio compliance

Venezuela 2020-2028 4.66-6.48 37,580,812 85 33,242,489 78 (2, 3, 5) (Note 5)

Reduces the legal 2023-2024 4.66-6.48 21,241,567 87 10,524,702 11 (5) reserve (Note 3) Reduces the legal

2017 4.66 1,315,669 6 1,315,669 18 (5) reserve (Note 3)

Imputable to agricultural Fondo de Desarrollo Nacional loan portfolio compliance FONDEN, S.A. Debenture bonds 2016-2017 9.10 436,907 4 879,145 10 (3) (Notes 4-b and 5)

BANAVIH’s Imputable to mortgage Banco Nacional de Vivienda current loan portfolio compliance y Hábitat (BANAVIH) portfolio 2021 2.00 579,850 59 695,820 73 (3) (a) for 2011 (Note 5)

Total held-to-maturity investments 61,154,805 46,657,825

Share trading portfolio People’s Imputable to Sociedad de Garantías Recíprocas Power tourism loan para la Pequeña y Mediana Empresa Ministry for portfolio del Sector Turismo, S.A. (SOGATUR) Tourism - - 207,025 - 207,025 - (4) (b) compliance

Total share trading portfolio investments 207,025 207,025

Total investments required 92,570,364 47,243,080

(1) These securities may be traded on the Bicentennial Public Stock Exchange at market value. They are recorded at the price quoted on the Bicentennial Public Stock Exchange.

(2) At December 31, 2016, the subsidiary Mercantil, C.A. Banco Universal maintains Bs 37,580,812,000 in Bolivarian Housing Securities issued by Fondo Simón Bolívar para la Reconstrucción, S.A., which is fully imputable to the mortgage portfolio from previous years (Bs 15,161,535,000 at December 31, 2015 is imputable to the mortgage portfolio for 2015}.

(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 Caracas Stock Exchange.

(4) At December 31, 2016 and 2015, the subsidiary Mercantil, C.A. Banco Universal maintains Bs 207,025,000 in Class “B” shares of SOGATUR imputable to tourism loan portfolio compliance.

(5) At December 31, 2016, reduces the legal reserve by 3% and Bs 21,241,567,000 (3% and Bs 10,524,703,000 at December 31, 2015).

(6) During the year ended December 31, 2016, the subsidiary Mercantil, C.A. Banco Universal purchased certificates of participation for Bs 31,019,390,00 issued by Banco de Desarrollo Económico y Social de Venezuela (BANDES) to grant national agricultural loans. This amount reduces the legal reserve up to the working day previous to these certificates’ maturity date.

Custodians of investments (a) Central Bank of Venezuela.

(b) Sociedad de Garantías Recíprocas para la Pequeña y Mediana Empresa del Sector Turismo, S.A. (SOGATUR)


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During the year ended December 31, 2016, a net gain of Bs 632,683,000 (Bs 916,886,000 during the year ended December 31, 2015) 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 December 31, 2016, MERCANTIL has investment securities issued or guaranteed by the Venezuelan government and investment securities with the BCV, which represent 69.8% and 8.81%, respectively, of its investment securities portfolio (75.4% and 2.2%, respectively, at December 31, 2015). Furthermore, MERCANTIL has investments in bonds issued by the government and other government agencies of the United States of America representing 13.31% of its investment portfolio (11% at December 31, 2015).

5. Loan Portfolio

The loan portfolio at December 31 is classified as follows:

2016 2015 Current Rescheduled Overdue In litigation Total % Total %


Economic activity Commercial 290,815,460 673,534 798,253 99,487 292,386,734 43 154,827,287 44 Credit cards 143,669,470 - 44,537 - 143,714,007 21 71,467,209 20 Agriculture 101,412,656 56,532 13,538 - 101,482,726 15 48,962,441 14 Services 39,256,292 3,775 52,959 438 39,313,464 6 18,638,615 5 Industrial 32,124,753 13,987 69,830 3,318 32,211,888 5 19,206,387 5 Car loans 13,960,792 - 135,847 - 14,096,639 2 3,253,291 1 Home purchase 13,517,155 321 116,430 9 13,633,915 2 9,829,549 3 Construction 7,510,722 - 94,422 - 7,605,144 1 4,505,520 1 Foreign trade 2,083,845 - 210,390 - 2,294,235 - 2,759,513 1 Other 27,815,388 285,868 1,045,573 - 29,146,829 5 21,235,648 6

672,166,533 1,034,017 2,581,779 103,252 675,885,581 100 354,685,460 100

Below is a breakdown of the loan portfolio at December 31 by geographic location:

2016 2015

Thousands of bolivars %

Thousands of bolivars %

Geographic location of the debtor Venezuela 617,601,923 92 319,085,721 90 United States of America 48,861,290 7 26,888,288 8 Colombia 1,305,345 - 957,770 - Brazil 1,064,098 - 962,959 - Switzerland 999,711 - 658,976 - Peru 620,680 - 617,867 - Panama 402,530 - 540,684 - México 291,488 - 820,545 - Other countries 4,738,516 1 4,152,650 2

675,885,581 100 354,685,460 100

Regulations require the subsidiary Mercantil, C.A. Banco Universal to earmark a minimum nominal percentage of 64.25% of its gross loan portfolio at December 31, 2016 to finance loans for agriculture, tourism, mortgages, manufacturing and small businesses (62.25% at December 31, 2015). At December 31, 2016 and 2015, directed loan portfolios amount to Bs 173,493,205,000 and Bs 95,373,129,000, respectively.


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The maximum interest rates for directed loan portfolios at December 31 are: 2016 2015

Agriculture 13% 13%

Microcredits 24% 24%

Tourism 8.62% or 11.62% 7.82% or 10.82%

Mortgages 4.66% to 10.66% 4.66% to 10.66%

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.

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 BCV set at 29.50% the annual interest rate to be charged on discount, rediscount and advance operations, except as regards operations conducted under special regimes. Below is the movement in the consolidated allowance for losses on the loan portfolio at December 31:

2016 2015

(Thousands of bolivars) Balance at the beginning of the year 10,544,876 6,400,735

Provided in the year 12,665,057 4,923,022 Portfolio recovery 364,501 (4,038) Transfers to other reserves 6,646 17,168 Effect of translating allowances in foreign currency (960,938) (12) Decrease in allowance (Note 18) 53,610 (354) Write-off of uncollectible loans (2,150,282) (791,645)

Balance at the end of the year 20,523,470 10,544,876

Below is a breakdown of certain balances and transactions of the overdue and in-litigation loan portfolio at December 31: 2016 2015

(Thousands of bolivars) No earning interest (1) 4,381,750 828,135 Interest accrued but not recorded as income (2) 2,939,172 1,260,955 Uncollectible loans written off in previous years (Note 18) 821,214 518,488

(1) At December 31, 2016, includes US$64,864,000 (US$23,875,000 at December 31, 2015).

(2) At December 31, 2016, includes US$5,028,387 million (US$5.97 million at December 31, 2015).

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 December 31, 2016 and 2015, MERCANTIL does not have significant risk concentrations in its consolidated loan portfolio.


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6. Interest and commissions receivable Interest and commissions receivable at December 31 comprise the following:

2016 2015

(Thousands of bolivars) Interest on Loan portfolio 4,798,256 2,938,707 Investment securities and cash and due from banks 2,132,733 1,287,047

6,930,989 4,225,754

Commissions receivable 1,578,053 865,960 Provision for contingent losses (44,541) (38,663)

8,464,501 5,053,051

7. Long-term investments

Long-term investments recorded by the equity method at December 31 comprise the following: 2016 2015 Par Book value Book value value Number of Equity in thousands Number of Equity in thousands Bs shares % of bolivars shares % of bolivars Inversiones Platco, C.A. 100 573,985 50 4,129,545 573,985 50 1,193,571 Cestaticket Accor Services, C.A. 1 2,580,000 43 708,023 2,580,000 43 416,683 Proyectos Conexus, C.A. 1 500,000 33 1,182 500,000 33 3,059 Other 2,925 615

4,841,675 1,613,928

During the year ended December 31, 2016, MERCANTIL recorded net income from equity participation of Bs 616,262,000 (Bs 329,040,000 at December 31, 2015), which includes a gain of Bs 698,981,000 from Cestaticket Accor Services, C.A., a loss of Bs 540,000 from Proyectos Conexus, C.A. and a loss of Bs 82,452,000 from Inversiones Platco, C.A. (a gain of Bs 391,321,000 from Cestaticket Accor Services, C.A., a loss of Bs 1,983,000 from Proyectos Conexus, C.A. and a loss of Bs 60,298,000 from Inversiones Platco, C.A. during the year ended December 31, 2015). During the year ended December 31, 2016, MERCANTIL received a dividend of Bs 407,640,000 from the affiliate Cestaticket Accor Services, C.A. (Bs 213,495,000 during the year ended December 31, 2015). During the year ended December 31, 2016, MERCANTIL made cash contributions for future capital increases of Bs 3,018,426,000 to its affiliate Inversiones Platco, C.A. for the acquisition of new equipment and spare parts (Bs 2,839,467,000 during the year ended December 31, 2015). During the year ended December 31, 2015, MERCANTIL made a contribution for future capital increases of Bs 216,135,000 to its affiliate Inversiones Platco, C.A. by assigning points of sale (POS) at their book value of Bs 497,634,000, which generated goodwill of Bs 281,499,000 (Note 10). In addition, MERCANTIL made a cash contribution of Bs 945,164,000.


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

2015 Additions Disposals Other 2016

(Thousands of bolivars) Other available-for-sale assets 374,028 1,559,834 - - 1,933,862 Real property received as payment 2,672 10,278 (11,209) 4,603 6,344 Idle assets 1,635 45,532 (556) - 46,611 Accumulated amortization (508) (6,916) 361 114 (6,949)

377,827 1,608,728 (11,404) 4,717 1,979,868

During the year ended December 31, 2016, MERCANTIL recorded amortization expenses from available-for-sale assets of Bs 6,916,000 (Bs 352,000 during the year ended December 31, 2015). Fully depreciated personal and real property are shown under memorandum accounts (Note 23). During the year ended December 31, 2016, MERCANTIL sold assets received as payment and idle assets at a gain of Bs 1,090,304,000 and a loss of Bs 367,000 (a gain of Bs 234,135,000 and a loss of Bs 492,000 during the year ended December 31, 2015), shown in the consolidated income statement under other income and other operating expenses, respectively (Notes 18 and 19).

9. Property and equipment Property and equipment at December 31 comprises the following: Translation

2015 Additions Disposals Other adjustment 2016

(Thousands of bolivars) Costs Office furniture and equipment 5,126,491 3,764,017 (55,342) 2,018 186,884 9,024,068 Buildings and facilities 1,797,837 23,261 (32,175) (65,019) 426,983 2,150,887 Vehicles 147,227 254,384 (489) - 72,753 473,875 Land 111,709 1,898 (4,082) (12,844) 73,926 170,607 Construction in progress 101,411 21,886 (64,687) 1,900 32,716 93,226 Other assets 30,664 4,020 (5) (3,727) 2,574 33,526

Total 7,315,339 4,069,466 (156,780) (77,672) 795,836 11,946,189

Accumulated depreciation Office furniture and equipment (1,579,935) (1,133,957) 36,804 (2,077) (162,189) (2,841,354) Buildings and facilities (279,988) (61,745) 13,697 2,441 (67,598) (393,193) Vehicles (106,839) (64,055) 335 (2,509) (56,760) (229,828)

Total (1,966,762) (1,259,757) 50,836 (2,145) (286,547) (3,464,375)

Net 5,348,577 2,809,709 (105,944) (79,817) 509,289 8,481,814

During the year ended December 31, 2016, MERCANTIL recorded depreciation expense of Bs 1,259,757 (Bs 649,421,000 during the year ended December 31, 2015), shown in the consolidated income statement under operating expenses. At December 31, 2016 and 2015, construction in progress is mainly in respect of the construction or remodeling of offices to be used by MERCANTIL.


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Below is a summary of the useful lives assigned to property and equipment:

Average Useful remaining life useful life

(Years)

Buildings and facilities 40 26 Office furniture and equipment 4-10 4 Other property 10 5

10. Other assets

Other assets at December 31 comprise the following:

2016 2015

(Thousands of bolivars) Insurance premiums receivable (Notes 1 and 2) 15,863,565 8,805,517 Deferred expenses, net of accumulated amortization of Bs 1,560,012,000 (Bs 527,029,000 at December 31, 2015) 8,475,073 3,312,950 Prepaid expenses 4,870,728 6,114,752 Prepaid taxes, insurance and other prepaid expenses 4,102,709 670,347 Accounts receivable from other credit card companies for consumer transactions by cardholders 2,821,763 681,771 Stationery and office supplies 2,614,798 1,121,694 Pending items 2,353,028 1,479,692 Systems development, net of accumulated amortization of Bs 628,361,000 (Bs 226,368,000 at December 31, 2015) 1,950,765 352,351 Other taxes and contributions 1,894,804 791,478 Guarantee deposits to reinsurers 1,234,507 597,047 Deferred income tax (Note 16) 555,680 572,124 Goodwill 341,453 372,981 Guarantee deposits and advances for acquisition of personal and real property (Note 9) 149,393 98,459 Adjustment of spot and forward contracts to market value (Note 23) 63,955 6,775 Sale of securities pending collection 55,736 27,049 Prepaid advertising 31,931 21,689 Other 3,267,517 1,361,259

50,647,405 26,387,935

Provision for estimated losses on other assets (646,158) (278,032)

50,001,247 26,109,903

Below is the movement in goodwill at December 31:

Translation 2015 Additions adjustment 2016

(Thousands of bolivars) Cost Interbank, C.A. 131,222 - - 131,222 Inversiones Platco, C.A. 281,499 - - 281,499 Florida Savings Bank and other (equivalent to US$20,621,000) 129,589 - 76,110 205,699 C.A. Seguros Orinoco 19,602 - - 19,602 Mercantil Seguros, C.A. 3,989 - - 3,989

565,901 - 76,110 642,011

Accumulated amortization Interbank, C.A. (98,417) (6,560) - (104,977) Inversiones Platco, C.A. (18,765) (56,301) - (75,066) Florida Savings Bank and other (57,795) (8,983) (34,533) (101,311) C.A. Seguros Orinoco (14,850) (1,063) - (15,913) Mercantil Seguros, C.A. (3,093) (198) - (3,291)

(192,920) (73,105) (34,533) (300,558)

Net balances 372,981 (73,105) 41,577 341,453


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During the year ended December 31, 2016, MERCANTIL recorded amortization expense of Bs 1,530,620 (Bs 407,827,000 during the year ended December 31, 2015), shown in the consolidated income statement under depreciation, property and equipment expenses, amortization of intangibles and other. 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).

11. Deposits Deposits at December 31 comprise the following: Type of deposit 2016 2015 Thousands Thousands of bolivars % of bolivars % Non-interest-bearing checking accounts 765,770,652 59 190,706,706 36 Savings deposits 303,597,483 24 155,482,821 29 Interest-bearing checking accounts 190,561,241 15 177,429,396 33 Time deposits 21,717,580 2 11,284,243 2

1,281,646,956 100 534,903,166 100

Time deposits by maturity 2016 2015 Thousands Thousands of bolivars % of bolivars % Up to 30 days 2,406,309 11 1,648,738 15 31 to 60 days 1,169,747 5 598,119 5 61 to 90 days 1,686,923 8 924,841 8 91 to 180 days 3,604,716 17 1,666,890 15 181 to 360 days 5,419,363 25 3,195,596 28 Over 360 days 7,430,522 34 3,250,059 29

21,717,580 100 11,284,243 100

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

2016 2015 Deposits in Deposits in Deposits in Deposits in bolivars US$ bolivars US$

Minimum Maximum Minimum Maximum Minimum Maximum Minimum Maximum rate rate rate rate rate rate rate rate % % % % % % % % Interest-bearing checking accounts 0.01 1.00 0.00 0.02 0.05 2.00 0.00 0.02 Savings deposits 12.50 16.00 0.00 0.00 12.50 16.00 0.00 0.03 Time deposits 14.50 14.50 0.00 0.15 14.50 14.50 0.00 0.77

In Venezuela 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 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.


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At December 31, 2016, deposits include Bs 23,747,475,000 (Bs 6,437,814,000 at December 31, 2015) from the Venezuelan government and other government agencies, equivalent to 1.9% of total deposits (1.2% at December 31, 2015).

12. Debt authorized by the SNV At December 31, 2016, MERCANTIL has issued by public offering debenture bonds and commercial paper with the following characteristics: a) Debenture bonds

Amount Amount

authorized

Amount issued and pending Issue Maturity

authorized placed issue date (Years) Annual interest rate (%)

(Thousands of bolivars) Issue 2013-I Series 1 30,000 30,000 - March 2014 3 62% of TAM (*) Series 2 30,000 30,000 - May 2014 3 65% of TAM (*)

60,000 60,000 -

Issue 2014-I

Series 1 20,000 20,000 - November 2014 3 68% of TAM (*)

Series 2 20,000 20,000 - November 2014 3 68% of TAM (*)

40,000 40,000 -

Issue 2014-II Series 1 50,000 50,000 - March 2015 3 12.5% fixed rate Series 2 50,000 50,000 - March 2015 3 12.5% fixed rate

100,000 100,000 -

Issue 2015-I Series 1 50,000 50,000 - March 2016 3 15.5% fixed rate the first semester, and the remaining

at 70% of TAM (*) 15.5% fixed rate the first semester, and the remaining Series 2 50,000 50,000 - March 2016 3 at 70% of TAM (*)

100,000 100,000 -

Issue 2016-I Pending issue 400,000 - 400,000 700,000 300,000 400,000 Bonds acquired by subsidiaries (94,078)

205,922

(*) 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.

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

Annual Amount Amount authorized interest

Amount issued and pending issue Issue Maturity rate authorized placed (Note 15) date (days) (%)

(Thousands of bolivars) Issue 2015-II Series 2 60,000 60,000 - February 2016 356 17 Series 5 100,000 100,000 - March 2016 329 17 Series 6 340,000 340,000 - October 2016 120 14 Pending issue 100,000 - 100,000 Pending issue 1,300,000 - 1,300,000 Pending issue 1,000,000 - 1,000,000

2,900,000 500,000 2,400,000

Paper acquired by subsidiaries (4,885)

495,115


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At December 31, 2015, debenture bonds and commercial paper amounting to Bs 149,632,000 and Bs 737,989,000, respectively, have been issued and placed through public offering.

13. Financial liabilities Financial liabilities at December 31 are classified by type and maturity as follows: 2016 2015

Up to More than Up to More than one year one year Total one year one year Total

(Thousands of bolivars) Liabilities with Venezuelan banks and savings and loan institutions Loans granted by Venezuelan financial institutions, with 20.78% annual interest (19.86% at December 31, 2015) 4,439,100 - 4,439,100 3,357,500 - 3,357,500

Liabilities with foreign banks and savings and loan institutions Federal Home Loan Bank, with a par value of US$666,000,000 and annual interest at between 0.58% and 3.86% (US$712,250,000 and annual interest at between 0.34% and 5.84% at December 31, 2015) 1,895,250 4,748,100 6,643,350 2,427,272 2,048,649 4,475,921 Other 2,643,375 - 2,643,375 62,842 - 62,842

4,538,625 4,748,100 9,286,725 2,490,114 2,048,649 4,538,763

Liabilities under repurchase agreements Liabilities under repurchase agreements, with a par value of US$50,000,000 and annual interest at between 4.88% and 5.2% (US$70,000,000 and annual interest at between 4.6% and 5.4% at December 31, 2015) 498,750 - 498,750 125,684 314,210 439,894

Other liabilities Liabilities with credit card merchants 3,484 - 3,484 4,089 - 4,089 Liabilities in respect of letters of credit 314 - 314 34,010 - 34,010 Other 11,153 - 11,153 3,943 - 3,943

14,951 - 14,951 42,042 - 42,042

9,491,426 4,748,100 14,239,526 6,015,340 2,362,859 8,378,199

Maturities of financial liabilities at December 31 are as follows: Up to one year 2016 2015 Thousands Thousands of bolivars % of bolivars % Up to 30 days 2,418,085 25 2,125,223 35 Between 31 and 60 days 1,521,295 16 856,342 14 Between 61 and 90 days 1,551,525 16 539,291 9 Between 91 and 360 days 4,000,521 43 2,494,484 42

Total 9,491,426 100 6,015,340 100

More than one year 2016 2015 Thousands Thousands of bolivars % of bolivars % 2017 - - 471,315 20 2018 648,375 14 408,473 17 2019 1,296,750 27 439,894 19 2020 1,805,475 38 760,388 32 2021 and beyond 997,500 21 282,789 12

Total 4,748,100 100 2,362,859 100


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Liabilities under repurchase agreements Below is a summary of liabilities under repurchase agreements at December 31: 2016 2015

(Thousands of bolivars) Balance at year end 498,750 439,894 Fair value of financial instruments (1) 498,750 439,894 Total maximum balance outstanding at the end of any month of the year 498,750 439,894 Average balance for the year 552,977 439,894 (1) Based on the present value of estimated future cash flows. 2016 2015 % % Weighted average interest rate For the year In foreign currency 5.04 5.04 Interest rate at year end In foreign currency 5.03 5.04

Liabilities under repurchase agreements are in respect of investments assigned by MERCANTIL in the ordinary course of business.

14. Other liabilities

Other liabilities at December 31 comprise the following: 2016 2015

(Thousands of bolivars) Unearned insurance premiums collected in advance (Note 2-k) 29.368.608 14.091.647 Accrued expenses 20.808.872 2.891.973 Provision for contingencies and other (Notes 16 and 31) 9.845.762 3.898.040 Provisions for taxes payable (Note 16) 8.898.162 7.390.923 Claims pending collection (Note 2-k) 8.118.425 4.551.897 Other demand liabilities 7.633.510 1.199.839 Deferred income and interest (Note 2-p) 5.442.522 2.447.363 Cashier’s checks issued to clients 5.121.396 3.169.402 Accounts payable to suppliers 4.662.390 1.410.859 Employee profit sharing, vacation and bonuses 3.343.726 1.653.103 Taxes collected and withheld 2.411.581 863.691 Deferred income tax liability 1.919.469 - Employee benefit plans 388.795 242.085 Antidrug Law 285.795 201.099 Pending items 213.080 113.078 Labor contributions 166.163 109.331 Dividends payable (Notes 2-t) 31.316 18.906 Provision for operating risks 11.851 11.854 Supplementary Savings Plan (Note 17-b) 10.587 4.712 Other 2.779.799 468.060

111.461.809 44.737.862

At December 31, 2016 and 2015, the provision for contingencies and other mainly includes accrued expenses from unbilled services received and other accruals for human resources.


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15. Subordinated debt At December 31, the subsidiary Mercantil Bank Holding Corporation has issued the following 30-year mandatorily redeemable subordinated debt:

Original 2016 2015 amount Equivalent Equivalent Equivalent Equivalent

in millions in millions in thousands in millions in thousands Issue date Maturity date Annual rate of US$ of US$ of bolivars of US$ of bolivars

June 1998 June 2028 8.90 26 26 256,896 26 157,872 September 2000 September 2030 10.6 15 15 149,625 15 94,263 March 2001 June 2031 10.18 10 10 99,750 10 62,842 December 2002 January 2033 LIBOR + 3.35 9 9 92,269 9 58,129 April 2003 April 2033 LIBOR + 3.25 8 8 79,800 8 50,274 March 2004 April 2034 LIBOR + 2.85 5 5 49,875 5 31,421 September 2006 September 2038 LIBOR + 1.75 25 25 249,375 25 157,105 December 2006 December 2036 LIBOR + 1.78 15 15 149,625 15 94,263

113 113 1,127,215 113 706,169

Mercantil Bank Holding Corporation has the option of deferring interest payment on these liabilities for up to ten six-month periods.

16. Taxes

a) Tax expense At December 31, the tax expense comprises the following:

2016 2015


Taxes Current In Venezuela 8,968,000 7,365,431 Abroad 167,398 71,783

9,135,398 7,437,214

Deferred In Venezuela 1,184,801 (417,579) Abroad 1,450,040 (23,942)

2,634,841 (441,521)

Taxes in Venezuela Venezuelan Income Tax Law This Law establishes, among other things, regulations concerning a proportional tax on dividends, worldwide income taxation, international fiscal transparency regulations and transfer pricing.

MERCANTIL’s tax year ends on December 31. The main differences between income/loss recognized for accounting and tax purposes arise from the net effect of the annual inflation adjustment (for companies whose accounting year is November 2016), unrealized exchange difference, shareholdings, provisions and accruals and the net effect of tax-exempt income from National Public Debt Bonds and other securities issued by the Bolivarian Republic of Venezuela.

At December 31, 2016, MERCANTIL and its subsidiaries have territorial and extraterritorial tax loss carryforwards of Bs 5,701,941,000 and Bs 175,447,000 with the following origin and maturities:

Total Territorial Extraterritorial global

(Thousands of bolivars) Tax losses 5,701,941 175,447 5,877,388

Maturities 2017 697 77,216 77,913 2018 382,142 82,538 464,680 2019 5,319,102 15,693 5,334,795


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The aforementioned amount is mainly comprised of tax loss carryforwards of Mercantil Servicios Financieros, C.A. (Bs 308,677,000), Mercantil, C.A. Banco Universal (Bs 160,265,000), Mercantil Financiadora de Primas, C.A. (Bs 98,754,000) and Mercantil Arte y Cultura, A.C. (Bs 42,596,000). At December 31, 2016, the subsidiary Mercantil, C.A. Banco Universal has estimated an income tax expense of Bs 6,933 million and an extraterritorial tax loss of Bs 160,265,000, of which Bs 60,075,000 may be carried forward until December 31, 2016; Bs 75,982,000 until December 31, 2017 and Bs 24,208,000 until December 31, 2018. 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 and its subsidiaries 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. b) Deferred income tax At December 31, the deferred income tax comprises the following: 2016 2015


Allowance for losses on loan portfolio 90,088 94,783 Provision for operating and labor expenses 289,405 444,386 Exchange gain 80,206 - Tax loss carryforwards 11,492 3,101 Property and equipment, office setup expenses and other (30,775) 3,704 Unrealized gain on valuation of available-for-sale investments 115,264 26,150

Deferred tax asset (Note 10) 555,680 572,124 Allowance for losses on loan portfolio (399,963) - Provision for operating and labor expenses 968,605 - Property and equipment, office setup expenses and other 71,827 - Unrealized gain (loss) on valuation of available-for-sale investments 1,279,000 -

Deferred tax liability (Note 14) 1,919,469 -

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 year to the next. MERCANTIL, based on its assessment, believes that the net deferred tax asset at December 31, 2016 is realizable.


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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 (Note 2). At December 31, the actual assumptions used to determine the length-of-service benefit obligation are as follows: 2016 2015 Financial Discount rate (%) 7 7 Salary increase rate (%) - - Demographic Mortality table for active employees GAM (1971) GAM (1971) Disability table PDT (1985) PDT (1985)

Below is the movement in the additional obligation from length-of-service benefits at December 31:

2016 2015


Opening balance 255,748 295,695 Service cost 17,847 21,758 Interest cost 335,670 89,727 Benefits paid (457,284) (42,516) Remeasurement 1,596,186 (108,916)

Closing balance 1,748,167 255,748

The estimated net cost of the retrospective length-of-service benefits for 2017 is Bs 9,019,564,000. 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 year ended December 31, 2016 amount to Bs 297,685,000 (Bs 143,322,000 for the year ended December 31, 2015); each subsidiary recognizes its share in this obligation.

c) Supplementary Defined Benefit Plan and post-retirement benefits The Supplementary Defined Benefit Plan and other post-retirement 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 three years of employment preceding retirement and is payable at a maximum of 60% of this average salary. Expenses in connection with this plan for MERCANTIL and its subsidiaries for the year ended December 31, 2016 amount to Bs 135,000,000 (Bs 45,600,000 at December 31, 2015). Each subsidiary recognizes its share in this obligation.


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At December 31, the assets, obligations and results of the Supplementary Defined Benefit Plan and post-retirement benefits for both plans are as follows: Supplementary Post-retirement Defined Benefit Plan benefits 2016 2015 2016 2015

(Thousands of bolivars) Annual variation in projected benefit obligation (1) Benefit obligation 447,009 94,100 543,525 133,377 Service cost 976 69 33,258 8,689 Interest cost 649,714 28,251 836,508 42,620 Remeasurement (93,260) 357,971 553,073 380,454 Benefits paid (115,119) (33,382) (105,097) (21,615)

Projected benefit obligation 889,320 447,009 1,861,267 543,525 Annual variation in restricted plan assets (1) Opening fair value of assets 88,081 134,951 100,000 70,000 Yield from plan assets 161,969 11,484 145,030 21,000 Remeasurement of assets (317,848) (132,647) 84,786 137,423 MERCANTIL contribution - 868 135,000 - Benefits paid (115,119) (33,383) (105,097) (21,615) Transfer between plans 331,431 106,808 (331,431) (106,808)

Closing fair value of assets 148,514 88,081 28,288 100,000 Components of net benefit cost for the year Service cost 976 69 33,258 8,689 Interest cost 649,714 28,251 836,508 42,620 Yield from plan assets (161,969) (115,737) (145,030) (21,000)

Net benefit cost 488,721 (87,417) 724,736 30,309 Components in equity for the year Remeasurement of actuarial loss 224,588 357,971 468,287 380,454 (1) The breakdown of plan assets is shown according to the accounting bases described in Note 2.

Financial position balances at December 31 are shown below:

Supplementary Defined Benefit Plan 2016 2015 2014 2013 2012


Financial position at year end Present value of obligations (DBO) (889,320) (447,009) (94,100) (70,125) (138,162)

Assets of external fund supporting the plan 148,514 88,081 134,951 147,900 138,162

(Projected obligation) /excess of assets (740,806) (358,928) 40,851 77,775 -

Post-retirement benefits 2016 2015 2014 2013 2012


Financial position at year end Present value of obligations (DBO) (1,861,267) (543,525) (133,377) (121,489) (77,038)

Assets of external fund supporting the plan 28,288 100,000 70,000 72,502 41,613

(Projected obligation) /excess of assets (1,832,979) (443,525) (63,377) (48,987) (35,425)


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At December 31, the actual assumptions used to determine benefit obligations are as follows: Supplementary Post-retirement Defined Benefit Plan benefits 2016 2015 2016 2015 Discount rate (%) 7 7 7 7 Salary increase (%) - - - - Increase in medical expenses (1) (%) - - 10 10

(1) This assumption only applies to the post-retirement benefit plan.

At December 31, 2016, a hypothetical increase or decrease of 1% in the main actuarial assumptions would impact the value of the projected obligations of the plans as follows:

Supplementary Post-retirement Defined Benefit Plan benefits Increase Decrease Increase Decrease


Discount rate 63,439 78,679 415,681 578,925 Increase in medical expenses - - 535,152 397,879

Below is a breakdown of the assets supporting the plans of MERCANTIL and its subsidiaries at December 31, shown in conformity with the accounting bases described in Note 2: 2016 2015

(Thousands of bolivars) Cash and due from banks 2,781 44,417 Investments in available-for-sale securities (1) 171,387 140,791 Interest receivable 1,689 2,414 Other assets 945 459

Total assets 176,802 188,081

(1) Securities quoted in an active market.

At December 31, 2016, the fair value of these assets, in conformity with accounting standards applicable to Fundación BMA (VEN-NIF), is Bs 4,641,684,000 (Bs 1,430,174,000 at December 31, 2005); these assets may be used for both plans and may only be distributed among their beneficiaries. 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). 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 average length of the Supplementary Defined Benefit Plan and post-retirement benefits is 5.9 and 32.9 years, respectively.


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The projection of future undiscounted payments of the post-retirement benefit plans are as follows:

d) Long-term stock option plan MERCANTIL and certain subsidiaries offer a long-term stock option plan to eligible officers approved by the Board of Directors’ Compensation Committee. Fundación BMA manages the plan and contributes the shares 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 for shares to be awarded to them. At December 31, 2016 and 2015, the plan has no current phases. Plan restructuring is currently being analyzed for continuity purposes. The Special Plan of Extraordinary Stock Recognition for MERCANTIL Employees was designed in 2015 and allocated 318,677 Class “A” common shares and 237,013 Class “B” common shares, which are partially restricted for sale for four years and employees may annually dispose of 25%. At December 31, 2016, all program shares are available and deposited in the trust fund with Mercantil Seguros, C.A. that Fundación BMA set up for such purpose. A breakdown of these shares is shown below: Number of shares Class “A” Class “B” Total

Trust fund 1,408,000 1,055,249 2,463,249

18. Other income

Other income at December 31 comprises the following: 2016 2015

(Thousands of bolivars) Credit card commissions 14,508,469 6,586,774

Interest on insurance policies financed 2,442,698 1,139,393

Decrease in allowances 1,755,092 237,747

Commissions on banking services 1,573,425 452,629

Gain on sale of available-for-sale assets (Note 8) 1,090,304 234,135

Income from other accounts receivable 1,023,492 140,207

Recovery of loans recorded as uncollectible (Note 5) 821,214 518,488

Income from transactions with derivative instruments (Note 23) 311,970 76,169

Commissions on sale of securities 202,865 130,232

Commissions on drafts and transfers 162,448 81,076

Commission for foreign currency administration 155,416 43,068

Commissions for advisory services 101,830 41,088

Commissions for administration of housing savings funds 26,684 25,606

Other 1,012,979 547,185

Total 25,188,886 10,253,797

2 to 5 Over 5 1 year years years Total

(Thousands of bolivars) Supplementary Defined Benefit Plan 94,080 363,130 1,033,466 1,490,676 Post-retirement benefits 1,123,899 6,858,009 827,350,022 835,331,930

Total 1,217,979 7,221,139 828,383,488 836,822,606


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19. Other operating expenses Other operating expenses at December 31 comprise the following:

2016 2015

(Thousands of bolivars) Commissions from use of point-of-sale and ATM networks 10,825,533 4,297,607 Professional fees and other external services 6,225,579 2,225,392 Taxes and contributions (Note 16) 6,428,613 1,928,695 Provision for operating risks and other contingencies 6,713,943 1,172,596 Transportation and security values 4,278,758 984,780 Social contribution to the National Communal Council Fund (Note 1) 1,084,758 700,294 Office supplies 1,712,576 601,375 Communications 1,694,698 512,531 Advertising and marketing 512,661 322,310 Provision under the Law for the Advancement of Science, Technology and Innovation 566,812 279,864 Provisions for available-for-sale and other assets 603,917 272,730 Donations 201,371 92,078 Credit card franchises 1,708,329 53,374 Insurance expenses 140,635 45,299 Loss on sale of property and equipment (Note 8) 367 492 Other 4,081,583 1,450,518

Total 46,780,133 14,939,935

20. Equity

a) Capital stock and authorized capital At December 31, 2016, MERCANTIL’s subscribed and paid-in capital amounts to Bs 680,946,246.50, represented by 104,760,961 shares divided into 60,880,929, Class “A” common shares and 43,880,032 Class “B” common shares, with a par value of Bs 6.50 each. Class “B” common shares have limited voting rights regarding approval of financial statements and appointment of statutory auditors.

At a General Shareholders’ Meeting held in September 2015, it was resolved to increase subscribed and paid-in capital to up to Bs 16,549,000 through the issue of a maximum of 1,479,586 Class “A” non-convertible common shares and 1,066,414 Class “B” non-convertible common shares with a par value of Bs 6.50 each to be offered to shareholders and the general public through a public offer approved by the SNV in January 2016.

During 2016, the offer was fully placed among shareholders and, as a result of such placement, the subscribed and paid-in capital increased by Bs 16,549,000 (from Bs 664,397,246 to Bs 680,946,246). In addition, a share premium of Bs 12,713,451,000 was recorded as follows: Bs 7,388,312,691 on Class “A” common shares, and Bs 5,325,138,309 on Class “B” common shares.

At a Special Shareholders’ Meeting held in September 2016, it was resolved to increase subscribed and paid-in capital stock through the capitalization of a share premium of Bs 12,414,173,879 (from Bs 680,946,246 to Bs 13,095,120,125). In addition, the par value per share would increase from Bs 6.50 to Bs 125; this capitalization is awaiting approval from the SNV. 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 two years after acquisition).

The repurchase program has been implemented in 33 six-month phases. From the twenty-fifth phase to the thirty-second phase (ongoing) no shares were purchased.


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At December 31, 2016 and 2015, 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 Date of approval at Amount per share Type of dividend Shareholders’ Meeting in bolivars Payment date Ordinary March 2016 2.25 April 2016 Special March 2016 13.50 May 2016 Ordinary March 2016 3.00 October 2016 Ordinary March 2015 2.00 April 2015 Special March 2015 12.50 May 2015 Ordinary March 2015 2.00 October 2015

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 December 31, 2016, consolidated retained earnings include Bs 53,936,100,000 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 Bank, 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 Bank 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 Bank Holding Corporation. In accordance with the trust agreement, on October 14, 2008, Mercantil Bank Holding Corporation transferred shares of Mercantil Bank, N.A. to the trust fund. Subsequently, the trustees incorporated a new company, called Mercantil Florida Bancorp in the State of Florida, U.S.A., to which Mercantil Bank, N.A. shares were transferred. In return, trustees received shares of the new corporation abroad. The trust issued voting certificates in favor of Mercantil Bank Holding Corporation in the same proportion to and with the same rights as transferred shares of Mercantil Bank, N.A., thereby maintaining Mercantil Bank Holding Corporation as the final beneficial owner of Mercantil Bank, N.A. The trust may be early terminated by the Board of Directors of Mercantil Bank Holding Corporation, the Board of Directors of MERCANTIL or the trustees. Like Mercantil Bank Holding Corporation, both Mercantil 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 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 Bank Holding Corporation shall cease to be considered the trust’s final beneficial owners and, consequently, shall record the related financial effect. At December 31, 2016 and 2015, 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.


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e) Trust agreement on shares of Mercantil Seguros, C.A. 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. f) 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 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 to establish a qualified voting system for certain matters at Shareholders’ Meetings.

21. Income per share Calculation of net income per common share and net income per diluted common share is shown below for the years ended December 31 (Note 2-s):

2016 2015

(Thousands of bolivars, except for number of shares and

net income per share)

Net income per share Net income 18,035,740 14,091,763 Common shares issued 104,760,961 102,214,961 Weighted average of outstanding common shares 101,285,190 99,416,137 Basic net income per share 178.07 141.74

Net income per diluted share Net income 18,035,740 14,091,763 Weighted average of outstanding common shares 101,285,190 99,416,137 Total weighted average of outstanding diluted common shares 101,285,190 99,416,137 Diluted income per share 178.07 141.74

22. Financial 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), currently National Foreign Trade Center (CENCOEX). In March 2013, the Venezuelan government established the Supplementary Foreign Currency Administration System (SICAD), a 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 March 2014, the Venezuelan government created the Alternative Currency Exchange System (SICAD II), a system that allowed the trade of foreign currency both in cash and securities. SICAD II was eliminated in February 2015. A new exchange system, called the Marginal Foreign Exchange System (SIMADI), was established in which universal banks and exchange offices may trade


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foreign currency in cash. Purchase and sale exchange rates of foreign currency on this market will be freely agreed upon by the parties, prior authorization of the exchange rate and the client. A new protected exchange rate (DIPRO) for the food, health, sports, culture and academic sectors, among others, and a supplementary floating exchange rate (DICOM) for other areas of the economy, were established in March 2016. Furthermore, it was resolved that SIMADI would continue to operate until it is substituted by a new system to process transactions at the DICOM exchange rate. The BCV shall establish the operating conditions for DICOM. b) Applicable exchange rates The prevailing exchange rate since February 2013 is Bs 6.2842/US$1 (purchase) and Bs 6.30/US$1 (sale). In April 2016, the BCV established that as from the March 2016 period end, the financial statements and the recording of foreign currency assets and liabilities of entities belonging to the banking, insurance and securities sectors will be measured at the DIPRO exchange rate of Bs 9.9750/US$1 (purchase) and Bs 10/US$1 (sale). At December 31, 2016 and 2015, the exchange rate resulting from the last SICAD auction was Bs 13.50/US$1. At December 31, 2016, the daily variable average exchange rate based on supply and demand in SIMADI was Bs 672.0772/US$1 (Bs 198.2018/US$1 in 2015). c) Measurement and recording of foreign currency assets and liabilities For the year ended December 31, 2016, the effect of measuring foreign currency balances of MERCANTIL and its subsidiaries resulted in: - Exchange gain, net of Bs 112,137,000 (Bs 270,899,000 at December 31, 2015), included in the

consolidated income statement.

- Increase by Bs 3,393,782,000 of net assets of subsidiaries abroad from translation adjustment (increase of Bs 1,003,000 at December 31, 2016), shown in equity.

d) Net global position in foreign currency At December 31, 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: 2016 2015

(Thousands of U.S. dollars) Assets Cash and due from banks 288,631 328,875 Investment portfolio 2,750,321 2,536,601 Loan portfolio 6,044,685 5,852,431 Other assets 227,312 161,780

9,310,949 8,879,687 Liabilities Deposits 7,033,612 6,873,193 Financial liabilities 984,162 802,995 Other liabilities 18,421 14,368 Subordinated debt 114,080 114,080

8,150,275 7,804,636


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The estimated effect of every Bs 1/US$1 increase in the exchange rate of Bs 9.975/US$1 at December 31, 2016 would be an increase in assets of Bs 9,310,949,000 and an increase in equity of Bs 1,160,675,000, of which Bs 474,067,000 would be recorded in the results for the year.

23. Memorandum accounts Memorandum accounts at December 31 comprise the following: 2016 2015

(Thousands of bolivars) Contingent debtor accounts Transactions with derivative instruments (Note 18) 14,273,618 6,417,165 Lines of credit 9,150,969 5,662,374 Tourism loan commitments 887,911 764,823 Guarantees granted 874,445 599,467 Letters of credit 659,551 634,980 Investment securities under resale agreements (Note 4) 10,800 - Other contingencies 1,229,376 1,078,516

27,086,670 15,157,325

Assets received in trust 49,594,274 32,117,678

Special trust services 133,969,833 46,788,109

Other debtor memorandum accounts Guarantees received 727,759,971 370,103,134 Unused lines of credit (Note 24) 90,173,305 48,062,491 Valuables received in custody 40,023,682 30,503,605 Commercial paper and authorized debenture bonds to be issued 2,800,000 - Collections 258,253 305,722 Other control accounts 536,962,443 322,111,786

1,397,977,654 771,086,738

1,608,628,431 865,149,850

a) Assets received in trust Trust fund accounts at December 31 include the following balances according to the combined financial statements of the trust: 2016 2015

(Thousands of bolivars) Assets Cash and due from banks 7,834,693 1,623,939 Investment portfolio 19,032,911 16,545,377 Loan portfolio 22,444,167 13,681,104 Interest and commissions receivable 198,945 157,512 Assets received for administration 7,234 7,234 Other assets 76,324 102,512

Total assets 49,594,274 32,117,678 Liabilities Remunerations and other accounts payable 216,921 118,414 Other liabilities 183 473

Total liabilities 217,104 118,887

Equity 49,377,170 31,998,791

Total liabilities and equity 49,594,274 32,117,678


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b) Transactions with derivative instruments MERCANTIL purchases and sells securities under spot contracts at an established price. During the year ended December 31, 2016, MERCANTIL recorded net losses from market value adjustments of Bs 28,351,000 (Bs 10,900,000 during the year ended December 31, 2015). Spot transactions were settled within 7 business days of the date of origin (Note 10). At December 31, securities under spot contracts comprise the following:

2016 2015


Securities Purchase rights 13,947,923 6,114,143 Sale rights 257,643 2,541

14,205,566 6,116,684

MERCANTIL enters into hedging futures contracts for the purchase and sale of securities at a fixed price. Net gain resulting from these contracts for the year ended December 31, 2016 was Bs 311,970,000 (Bs 76,169,000 at December 31, 2015), shown under other income (Note 18). MERCANTIL also enters into futures contracts to purchase currency at a fixed price. The status of open transactions with negotiable instruments at December 31 is as follows:

2016 2015 Thousands Thousands

Futures contracts of bolivars Maturity of bolivars Maturity Exchange rates (currency) Purchases 568,878 April 2017 292,127 May 2016

24. 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 December 31, 2016 and 2015, 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 0.20% and 0.125% at December 31, 2016 and 2015, respectively, 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


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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 3 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. 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. Unused lines of credit are shown under memorandum accounts (Note 23).

25. Maturity of financial assets and liabilities Financial assets and liabilities at December 31, 2016 are classified according to maturity as follows: Over

30 days 60 days 90 days 180 days 360 days 360 days Total


Assets Cash and due from banks 575,389,995 - - - - - 575,389,995 Investment portfolio 24,813,559 6,156,953 497,471 3,115,412 32,846,146 112,780,865 180,210,406 Loan portfolio 120,156,849 23,806,718 27,729,243 92,503,042 167,355,784 244,333,945 675,885,581 Interest and commissions receivable 8,464,501 - - - - - 8,464,501

Total financial assets 728,824,904 29,963,671 28,226,714 95,618,454 200,201,930 357,114,810 1,439,950,483 Liabilities Deposits 1,262,335,685 1,169,747 1,686,923 3,604,716 5,419,363 7,430,522 1,281,646,956 Debt authorized by the SNV 70,460 396,036 30,000 11,436 40,000 153,105 701,037 Financial liabilities 2,418,086 1,521,295 1,551,525 1,605,138 2,395,382 4,748,100 14,239,526 Interest and commissions payable 114,903 - - - - - 114,903

Total financial liabilities 1,264,939,134 3,087,078 3,268,448 5,221,290 7,854,745 12,331,727 1,296,702,422

26. Fair value of financial instruments

Below are the book and fair values of financial instruments at December 31 maintained by MERCANTIL: 2016 2015 Book Fair Book Fair value value value value

(Thousands of bolivars) Assets

Cash and due from banks 575,389,995 575,389,995 155,660,516 155,660,516 Investment portfolio 180,210,406 180,226,672 96,020,224 96,189,033

Loan portfolio, net of allowance 655,362,111 655,362,111 344,140,584 344,140,584 Interest and commissions receivable, net of provision 8,464,501 8,464,501 5,053,051 5,053,051

1,419,427,013 1,419,443,279 600,874,375 601,043,184


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2016 2015 Book Fair Book Fair value value value value

(Thousands of bolivars) Liabilities Deposits 1,281,646,956 1,281,646,956 534,903,166 534,903,166 Debt authorized by the SNV 701,037 701,037 887,621 887,621 Financial liabilities 14,239,526 14,239,526 8,378,199 8,378,199 Subordinated debt 1,127,215 1,127,215 706,169 706,169 Interest and commissions payable 114,903 114,903 154,268 154,268

1,297,829,637 1,297,829,637 545,029,423 545,029,423 Memorandum accounts Contingent debtor accounts 17,935,701 17,935,701 9,494,951 9,494,951

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 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 short-term financial liabilities. Investment portfolio 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 of Bs 9.975/US$1 (Note 22).

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.


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Financial liabilities 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.

27. Geographic segment information MERCANTIL’s operations are distributed geographically at December 31 as follows: 2016 2015

(Thousands of bolivars) Gross financial margin Venezuela 87,294,764 40,334,477 United States of America 1,800,378 1,092,575 Other 260,479 230,675

Total 89,355,621 41,657,727 Net financial margin, commissions and other income Venezuela 119,533,813 50,543,993 United States of America 2,139,030 1,366,000 Other (7,100,088) 247,235

Total 114,572,755 52,157,228 Operating income before tax and minority interests Venezuela 37,010,171 21,041,424 United States of America 284,371 154,363 Other (7,477,641) (100,716)

Total 29,816,901 21,095,071

2016 2015 Thousands Thousands of bolivars % of bolivars % Assets Venezuela 1,394,120,509 93 577,961,815 91 United States of America 83,748,915 6 51,081,906 8 Other 6,862,193 1 5,280,889 1

Total 1,484,731,617 100 634,324,610 100 Liabilities and minority interests Venezuela 1,329,207,194 94 540,343,181 92 United States of America 75,617,543 6 46,183,235 7 Other 4,502,489 - 3,264,591 1

Total 1,409,327,226 100 589,791,007 100


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28. Financial information by subsidiary

Below is a summary of the financial information by subsidiary at December 31, 2016. This information includes the effect of eliminations normally made during consolidation:

Mercantil Mercantil Inversiones Mercantil, C.A. Commercebank Other Mercantil y Valores,

Banco Holding foreign Mercantil Merinvest, C.A. Consolidated

Universal Corporation (1) banks Seguros, C.A. C.A. and other total


Total assets 1,334,458,409 83,711,299 8,111,070 56,204,778 235,124 2,010,937 1,484,731,617 Investment portfolio 131,854,115 23,489,514 3,168,657 21,116,863 363,198 218,059 180,210,406 Loan portfolio, net 595,301,691 56,646,691 3,413,729 - - - 655,362,111 Total liabilities and minority interests 1,271,307,586 76,314,856 5,693,224 50,359,225 98,950 5,553,385 1,409,327,226 Deposits 1,211,637,887 64,716,020 5,293,049 - - - 1,281,646,956 Gross financial margin 85,363,224 1,800,711 244,724 2,079,047 12,344 (144,429) 89,355,621 Gross income before tax 28,001,050 317,105 (511,712) 1,978,440 214,358 (193,262) 29,805,979 Net income 18,697,432 179,466 (541,782) 1,734,648 150,924 (2,184,948) 18,035,740 Number of employees 6,196 944 123 1,035 38 34 8,370

(1) Final beneficial owner of Mercantil Bank, 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 risks: 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, including transactions with derivative instruments, 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. 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.


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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 and authorizations. 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.

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 consolidated financial statements. Under capital adequacy guidelines, MERCANTIL must meet specific capital guidelines that involve quantitative measurements of assets, liabilities, and certain off-consolidated-balance-sheet items as calculated under regulatory accounting practices.

Below are the regulatory capital requirements of MERCANTIL and its main banking subsidiaries at December 31:

Minimum 2016 2015 required Maintained Maintained % % %

Equity to risk-weighted assets and contingent operations Mercantil Servicios Financieros, C.A. and its subsidiaries (consolidated) 8.00 10.07 11.39 Mercantil, C.A. Banco Universal and branches abroad 12.00 13.08 12.69 Mercantil Bank, N.A. 8.00 12.40 12.30

Tier 1 equity to risk-weighted assets and contingent operations Mercantil Servicios Financieros, C.A. and its subsidiaries (consolidated) 4.00 9.88 11.20 Mercantil Bank, N.A. 6.00 11.25 11.16

Equity to total assets Mercantil, C.A. Banco Universal and branches abroad 9.00 11.15 9.96 Mercantil Bank, N.A. 4.00 9.16 9.36


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31. Contingencies In the ordinary course of business, the subsidiary Mercantil, C.A. Banco Universal is defendant 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. The subsidiary Mercantil, C.A. Banco Universal and its merged financial institutions have received additional income tax assessments from the Tax Authorities amounting to Bs 21,957,000, 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, rejection of tax loss carryforwards and the calculation of inflation adjustment for tax purposes. 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 the subsidiary 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 Bank management and its 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. Bank management identified a maximum risk of Bs 50,503,000 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 of a claim filed by a client. The Bank has been ordered to pay approximately Bs 37,000,000 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


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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 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. MERCANTIL management and its legal advisors believe that there are favorable expectations about the future resolution of these contingencies, which they believe will not significantly change next year.

32. Financial statements of Mercantil Servicios Financieros, C.A. (Holding) Below are the individual balance sheet and the income statement of Mercantil Servicios Financieros, C.A. (Holding) at December 31 under the equity method: 2016 2015

(Thousands of bolivars) Assets Cash and due from banks 808,205 491,265 Investment portfolio Mercantil, C.A. Banco Universal 58,301,489 36,073,868 Auyantepuy Holding Limited 9,941,742 6,143,121 Mercantil Bank Holding Corporation 6,701,682 4,114,173 Alvina Corporation, N.V. 2,218,590 1,362,495 Cestaticket Accor Services, C.A. 708,024 416,683 Mercantil Bank (Schweiz), A.G. 577,541 357,286 Mercantil Inversiones y Valores, C.A. 514,913 344,634 Mercantil Servicios de Inversión, C.A. 391,269 - Mercantil Merinvest, C.A. 319,909 351,082 Mercantil Arte y Cultura A.C. 220,917 138,033 Mercantil Overseas Aruba, A.V.V. 63,874 11,917 Servibien, C.A. 24,145 10,039 Other 121,525 101,558 Other assets 535,209 (20,944)

Total assets 81,449,034 49,895,210 Liabilities Debenture bonds and commercial paper 800,000 995,000 Other liabilities 5,244,643 4,366,607

Total liabilities 6,044,643 5,361,607

Equity 75,404,391 44,533,603

Total liabilities and equity 81,499,034 49,895,210 Income Interest income 287,954 35,420 Equity in subsidiaries, affiliates, net and other 20,544,337 14,455,651

Expenses Operating (1,317,242) (334,619) Financial (200,309) (64,689)

Operating income, net 19,314,740 14,091,763

Deferred income tax (1,279,000) -

Net income 18,035,740 14,091,763


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33. Supplementary information - Consolidated financial statements adjusted for the effects of inflation

SNV rules stipulate that inflation-adjusted consolidated financial statements must be presented as supplementary information, based on the last inflation rate published by the BCV. Below are the consolidated financial statements of MERCANTIL expressed in constant bolivars at December 31, 2016: Supplementary consolidated balance sheet December 31, 2016 and 2015 2016 2015

(Thousands of constant bolivars at December 31, 2016)

Assets Cash and due from banks Cash 24,816,727 8,541,437 Central Bank of Venezuela 523,287,181 137,641,397 Venezuelan banks and other financial institutions 4,647,978 287,861

Foreign banks and other financial institutions 2,684,915 1,663,855

Pending cash items 19,953,194 7,525,966

575,389,995 155,660,516

Investment portfolio Investments in trading securities 552,122 6,554 Investments in available-for-sale securities 76,664,631 38,773,837 Investments in held-to-maturity securities 72,043,579 47,804,801 Share trading portfolio 2,399,389 1,772,728 Investments in time deposits and placements 26,749,129 7,396,830 Restricted investments and repurchase agreements 3,187,552 1,651,470

181,596,402 97,406,220

Loan portfolio Current 672,166,533 353,346,672 Rescheduled 1,034,017 510,653 Overdue 2,581,779 777,495 In litigation 103,252 50,640

675,885,581 354,685,460

Allowance for losses on loan portfolio (20,523,470) (10,544,876)

655,362,111 344,140,584

Interest and commissions receivable 8,464,501 5,053,051

Long-term investments 5,150,126 1,922,379

Available-for-sale assets 2,086,563 503,062

Property and equipment 22,109,188 21,316,761

Other assets 54,792,153 32,497,951

Total assets 1,504,951,039 658,500,524 Memorandum accounts 1,608,628,431 865,814,247


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Supplementary consolidated balance sheet December 31, 2016 and 2015 2016 2015


Liabilities and Equity Liabilities Deposits Non-interest bearing checking accounts 765,770,652 190,706,706 Interest-bearing checking accounts 190,561,241 177,429,396 Savings deposits 303,597,483 155,482,821 Time deposits 21,717,580 11,284,243

1,281,646,956 534,903,166

Debt authorized by the SNV Publicly traded debt securities issued by MERCANTIL 701,037 887,621

Financial liabilities Liabilities to Venezuelan banks and savings and loan institutions, up to one year 4,439,100 3,357,500 Liabilities to foreign banks and savings and loan institutions, up to one year 4,538,625 2,490,114 Liabilities to foreign banks and savings and loan institutions, more than one year 4,748,100 2,048,649 Liabilities under repurchase agreements 498,750 439,894 Other liabilities, up to one year 14,951 42,042

14,239,526 8,378,199

Interest and commissions payable 114,903 154,268

Other liabilities 112,133,629 45,409,682

Subordinated debt 1,127,215 706,169

Total liabilities 1,409,963,266 590,439,105

Minority interests in consolidated subsidiaries 51,445 39,387

Equity Capital stock 680,946 664,397 Capital inflation adjustment 54,980,624 54,980,624 Share premium 12,713,451 - Capital reserves 15,975,667 15,975,667 Translation adjustment of net assets of subsidiaries abroad (39,764,139) (43,157,921) Retained earnings 51,817,645 39,649,994 Repurchased shares held by subsidiaries (1,319,487) (938,492) Employee benefit plan remeasurement (1,877,630) (504,556) Unrealized gain from adjustment of investments to market value 1,729,251 1,352,319

Total equity 94,936,328 68,022,032

Total liabilities and equity 1,504,951,039 658,500,524


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Supplementary consolidated income statement Years ended December 31, 2016 and 2015 2016 2015


Interest income Income from cash and due from banks 1,371,921 672,379 Income from investment portfolio 8,891,293 8,905,428 Income from loan portfolio 108,102,085 85,251,298

Total interest income 118,365,299 94,829,105

Interest expense Interest on demand and savings deposits (27,362,124) (26,436,665) Interest on time deposits (259,689) (231,312) Interest on securities issued by MERCANTIL (119,838) (92,164) Interest on other financial liabilities (1,268,027) (727,231)

Total interest expense (29,009,678) (27,487,372)

Gross financial margin 89,355,621 67,341,733

Allowance for losses on loan portfolio and provision for commissions receivable (12,671,036) (7,499,569)

Net financial margin 76,684,585 59,842,164

Commissions and other income Trust fund operations 514,305 402,041 Foreign currency operations 99,332 33,763 Customer account transactions 10,702,207 5,169,332 Commissions on letters of credit and guarantees granted 22,358 42,456 Equity in long-term investments 616,262 (141,744) Exchange gain 112,137 1,538,460 Gain on sale of investment securities 632,683 1,361,905 Other income 25,188,886 16,302,698

Total commissions and other income 37,888,170 24,708,911

Insurance premiums, net of claims

Premiums 63,344,695 45,092,214 Claims (51,316,251) (37,862,220)

Total insurance premiums, net of claims 12,028,444 7,229,994

Income from financial operations 126,601,199 91,781,069

Operating expenses Salaries and employee benefits (24,691,335) (16,806,292) Depreciation, property and equipment expenses, amortization of intangibles and other (17,851,634) (10,476,983) Fees paid to regulatory agencies (11,417,688) (9,681,346) Other operating expenses (46,780,133) (23,890,351)

Total operating expenses (100,740,790) (60,854,972)

Loss from net monetary position - (47,031,422)

Operating income (loss) before tax and minority interests 25,860,409 (16,105,325)

Income tax Current (9,135,398) (10,305,485) Deferred (2,634,841) 658,894

Total tax (11,770,239) (9,646,591)

Net income (loss) before minority interests 14,090,170 (25,751,916)

Minority interests (10,922) 15,154

Net income (loss) 14,079,248 (25,736,762)


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Supplementary consolidated statement of changes in equity Years ended December 31, 2016 and 2015

Unrealized Translation gain (loss) adjustment from of net Repurchased Employee adjustment of Capital assets of shares benefit investments to Capital inflation Share Capital subsidiaries Retained held by plan market Total stock adjustment premium reserves abroad earnings subsidiaries remeasurement value equity


Balances at December 31, 2014 664,397 54,980,624 - 15,975,667 (32,485,865) 68,705,168 (752,224) (263,937) 4,753,839 111,577,669

Net loss - - - - - (25,736,762) - - - (25,736,762) Dividends declared, net of cash dividends paid to subsidiaries - - - - - (3,653,843) - - - (3,653,843) Shares repurchased by subsidiaries - - - - - - (186,268) - - (186,268) Unrealized loss on investments - - - - - - - - (3,401,520) (3,401,520) Employee benefit plan remeasurement - - - - - 335,431 - (240,619) - 94,812 Translation adjustment of net assets of subsidiaries abroad - - - - (10,672,056) - - - - (10,672,056)

Balances at December 31, 2015 664,397 54,980,624 - 15,975,667 (43,157,921) 39,649,994 (938,492) (504,556) 1,352,319 68,022,032

Net income - - - - - 14,079,248 - - - 14,079,248 Capital increase 16,549 - 12,713,451 - - - - - - 12,730,000 Cash dividends paid to subsidiaries - - - - - (1,911,597) - - - (1,911,597) Shares repurchased by subsidiaries - - - - - - (380,995) - - (380,995) Unrealized gain on investments - - - - - - - - 376,932 376,932 Employee benefit plan remeasurement - - - - - - - (1,373,074) - (1,373,074) Translation adjustment of net assets of subsidiaries abroad - - - - 3,393,782 - - - - 3,393,782

Balances at December 31, 2016 680,946 54,980,624 12,713,451 15,975,667 (39,764,139) 51,817,645 (1,319,487) (1,877,630) 1,729,251 94,936,328


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In April 2008, the FCCPV approved the adoption of VEN NIF as the accounting principles of mandatory application in Venezuela as from January 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, 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). 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 methodology used for the adjustment of these consolidated financial statements adjusted for the effects of inflation as required by the SNV: Inflation indices and rates The inflation rates for the years ended December 31, 2016 and 2015, used in the preparation of the consolidated financial statements, are as follows: Year ended Base NCPI 2007=100 Inflation rate (%) December 2016 (•) 2,357.90 1.00 December 2015 (•) 2,357.90 183.13 (•) The NCPI corresponds to the last index published by the BCV as per instructions of the SNV.

Monetary assets and liabilities and result from monetary position Monetary assets and liabilities at December 31, 2016, 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, 2015 have been restated to express them in terms of purchasing power at December 31, 2016, following instructions from the SNV. 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. Nonmonetary assets Property and equipment, available-for-sale assets and deferred charges are expressed in constant currency at December 31, 2016, based on the NCPI at their dates of origin. Shares held in unconsolidated affiliates are reported under the equity method, based on the inflation-adjusted 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, investments in time deposits and placements, and restricted investments.

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