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Transcript
This report contains statements concerning expectations, planned synergies, growth estimates, forecasts and future strategies related to Banco do Brasil and its subsidiaries, associated companies and affiliates. Although these statements reflect management's current beliefs, they involve imprecisions and risks that are difficult to predict, and actual results and events may differ from those anticipated and discussed herein. These expectations depend materially on market conditions, Brazil’s economic performance and developments in the banking industry and international markets. Banco do Brasil does not assume any responsibility to update the estimates contained in this report. This report contains tables and charts that present financial figures rounded to the nearest million of Brazilian real. The rounding method used complies with Regulation 886/66 issued by Fundação IBGE: if the last digit is equal to or greater than 5, the last remaining digit is increased by one unit; and if the last digit is less than 5, it is discarded and the digit before it is maintained. Variations, in both nominal and percentage terms, were calculated using numbers in units. Summary Summary ............................................................................................................................................. 2 Index of Tables .................................................................................................................................... 4 Index of Figures................................................................................................................................... 7 Presentation ........................................................................................................................................ 9 Summary of Results .......................................................................................................................... 10 1 - Economic Environment ............................................................................................................... 23 2 - BB Securities............................................................................................................................... 29 2.1 Shares...................................................................................................................................... 29 2.2 Warrants .................................................................................................................................. 34 2.3 Stock Performance .................................................................................................................. 35 3 - Corporate Governance ............................................................................................................... 39 4 - Key Statistics............................................................................................................................... 43 5 - Summarized Financial Statements ............................................................................................. 45 5.1 Summarized Balance Sheet .................................................................................................... 45 5.2 Summarized Income Statement – BR GAAP .......................................................................... 47 5.3 Income Statement with Reallocations ..................................................................................... 48 5.3.1 Details of Reallocations ....................................................................................................49 6 - Balance Sheet Analysis .............................................................................................................. 53 6.1 Breakdown ............................................................................................................................... 53 6.2 Analysis of Assets.................................................................................................................... 54 6.3 Securities Portfolio................................................................................................................... 55 6.4 Tax Credits .............................................................................................................................. 56 6.5 Loan Portfolio........................................................................................................................... 57 6.5.1 Individual Customer Loan Portfolio ...................................................................................59 6.5.2 Business Loan Portfolio ....................................................................................................61 6.5.3 Agribusiness Loan Portfolio ..............................................................................................64 6.6 Analysis of Liabilities................................................................................................................ 75 6.7 Liquidity Analysis ..................................................................................................................... 77 6.8 Deposits and Money Market Funding...................................................................................... 78 6.8.1 Foreign Borrowing ............................................................................................................79 7 - Analysis of Results...................................................................................................................... 80 7.1 Net Interest Income ................................................................................................................. 80 7.2 Analysis of Investments ........................................................................................................... 84 7.3 Analysis of Funding ................................................................................................................. 88 7.4 Analysis of Volume and Spread .............................................................................................. 90 7.5 Provision for Credit Risk .......................................................................................................... 92 7.5.1 Retail Loan Portfolio ..........................................................................................................96 7.5.2 SMEs Loan Portfolio .......................................................................................................100 7.5.3 Commercial Loan Portfolio ..............................................................................................101 7.5.4 Agribusiness Loan Portfolio ............................................................................................102 7.5.5 Foreign Trade Loan Portfolio ..........................................................................................106 7.5.6 Foreign Loan Portfolio and Others ..................................................................................107 7.6 Fee Income............................................................................................................................ 108 7.6.1 Revenues from Checking Account Fees .........................................................................109 7.6.2 Asset Management .........................................................................................................110 7.6.3 Cards...............................................................................................................................112 7.6.4 Collection ........................................................................................................................114 7.7 Administrative Expenses ...................................................................................................... .115 7.7.1 Personnel Expenses .......................................................................................................116 7.7.2 Other Administrative Expenses .......................................................................................117 7.7.3 Distribution Network ........................................................................................................118 7.7.4 Automated Channels.......................................................................................................121 7.7.5 Productivity – Coverage Ratios……………………………………………………………….123 7.7.6 Operating Income……………………………………………………………………………… 126 7.8 Net Value Added.................................................................................................................... 129 8 - Risk Management ..................................................................................................................... 130 8.1 Risk Management.................................................................................................................. 130 8.1.1 Market Risk .....................................................................................................................130 8.1.2 Liquidity Risk ...................................................................................................................140 8.1.3 Credit Risk .......................................................................................................................142 8.1.4 Operating Risk ................................................................................................................146 8.2 Capital Structure .................................................................................................................... 148 8.2.1 Shareholders’ Equity .......................................................................................................148 8.2.2 Regulatory Capital ...........................................................................................................149 8.2.3 Economic Capital ............................................................................................................154 9 - Social and Environmental Performance ................................................................................... 156 9.1 Employee Relations............................................................................................................... 157 9.2 Eco-efficiency ........................................................................................................................ 161 9.3 Social Environmental focused Business................................................................................ 164 9.4 Investor Market Recognition .................................................................................................. 168 10 - Strategic Investments ............................................................................................................... 169 10.1 Information ..................................................................................................................... 169 10.2 Income from Insurance, Pension and Savings Bonds ................................................... 170 10.3 Strategic Development................................................................................................... 178 10.3.1 Banco Votorantim ......................................................................................................178 10.3.2 Performance in the State of São Paulo .....................................................................184 10.3.3 Internationalization………………………………………………………………………....186 10.3.4 Business in Progress .................................................................................................188 11 - Financial Statements ................................................................................................................ 190 11.1 Summarized Balance Sheet .......................................................................................... 190 11.2 Summarized Income Statement..................................................................................... 192 11.3 Income Statement with Reallocations............................................................................ 193 Index of Tables Table 1. Main Equity Items ........................................................................................................................11 Table 2. Loan portfolio (Conglomerate).....................................................................................................11 Table 3. Income statement with reallocations – Main lines.......................................................................13 Table 4. Main Indicators of Income/Expenses ..........................................................................................13 Table 5. NII by business line .....................................................................................................................14 Table 6. Net Interest Margin......................................................................................................................15 Table 7. Loan Portfolio Quality Indicators .................................................................................................16 Table 8. Expenses with Allowance for Loan Losses vs Portfolio ..............................................................16 Table 9. Insurance, Pension Plans and Savings Bonds Income...............................................................17 Table 10. Administrative expenses – Pro forma Comparison ...................................................................18 Table 11. One-off items .............................................................................................................................20 Table 12. Guidance 2010 ..........................................................................................................................22 Table 13. Main Macroeconomic Indicators................................................................................................28 Table 14. Shareholders quantity after and before the Public Offering .....................................................30 Table 15. Ownership Structure.................................................................................................................31 Table 16. Distribution of Dividends/Interest on Own Capital.....................................................................31 Table 17. Shareholders by Range of Shares Owned................................................................................32 Table 18. Breakdown of the Warrant Holders ...........................................................................................34 Table 19. Series "C" Warrants...................................................................................................................34 Table 20. Expected Dilution of Capital ......................................................................................................34 Table 21. Key Statistics .............................................................................................................................43 Table 22. Summarized Balance Sheet – Assets .......................................................................................45 Table 23. Summarized Balance Sheet – Liabilities ...................................................................................46 Table 24. Summarized Income Statement – BR GAAP............................................................................47 Table 25. Income Statement with Reallocations .......................................................................................48 Table 26. Reallocations - Other Operating Income/Expenses ..................................................................50 Table 27. Previ – adjustments ...................................................................................................................51 Table 28. Tax Effects and Statutory Profit Sharing on One-off Items .......................................................52 Table 29. Breakdown of Assets.................................................................................................................54 Table 30. Securities Portfolio by Category ................................................................................................55 Table 31. Securities Portfolio by Maturities – Market Value......................................................................55 Table 32. Breakdown of Tax Credits .........................................................................................................56 Table 33. Acquired Portfolios and Interbank Deposits with Credit Guarantee..........................................57 Table 34. Loan Portfolio ............................................................................................................................58 Table 35. Individuals’ Loan Portfolio .........................................................................................................60 Table 36. Business Loan Portfolio.............................................................................................................61 Table 37. Private Securities – Business....................................................................................................62 Table 38. ACC/ACE Average Volume per Contract..................................................................................62 Table 39. SME Credit Products.................................................................................................................63 Table 40. Exports ......................................................................................................................................65 Table 41. Brazil’s Participation in World Agribusiness ..............................................................................65 Table 42. Agribusiness Loan Portfolio by Region .....................................................................................66 Table 43. Agribusiness Loan Portfolio by Purpose ...................................................................................67 Table 44. Agribusiness Loan Portfolio by Product ....................................................................................68 Table 45. Agribusiness Loan Portfolio by Financed Item..........................................................................68 Table 46. Funds Released for the 09/10 Crop by Customer Size ............................................................68 Table 47. Agribusiness Portfolio by Size...................................................................................................69 Table 48. Equalizable Funds from Agribusiness Portfolio.........................................................................71 Table 49. 2009/2010 Crop Plan ................................................................................................................73 Table 50. Defrayal – Transaction Profile ...................................................................................................73 Table 51. Liabilities....................................................................................................................................75 Table 52. Sources and Uses .....................................................................................................................76 Table 53. Liquidity Balance .......................................................................................................................77 Table 54. Deposits and Money Market Funding .......................................................................................78 Table 55. Foreign Borrowing .....................................................................................................................79 Table 56. Overseas Issues........................................................................................................................79 Table 57. Net Interest Income ...................................................................................................................80 Table 58. Analysis of Volume (Earning Assets) and Quarterly Spread – 1Q10 and 2Q10.......................81 Table 59. Margin, Net of Interest and Profit Margin ..................................................................................83 Table 60. Revenues from Loans Net of Exchange Impact (Res. 2,770)...................................................84 Table 61. NIM ............................................................................................................................................85 Table 62. Securities Income......................................................................................................................86 Table 63. Avg Balance of the BS accounts and onfo. on interest rates – Earning assets (quarterly) ......87 Table 64. Avg Balance of the BS accounts and info. on interest rates – Earning Assets (half-yearly) ....87 Table 65. Avg. Balances of the BS accounts and info. on int. rates – Int. Bearing Liabilities (quarterly) .88 Table 66. Avg. Bal of the BS accounts and info. on int. rates – Int. Bearing Liabilities (half-yearly) ........89 Table 67. Int. increase and decrease (Inc. and Exp.) due to changes in Vol and Rates (quarterly).........90 Table 68. Int. increase and decrease (Inc. and Exp.) due to changes in Vol and Rates (half-yearly) ......91 Table 69. Net Financial Margin .................................................................................................................92 Table 70. Allowance for Loan Losses Expenses over Portfolio ................................................................92 Table 71. Loan Portfolio by Level of Risk..................................................................................................94 Table 72. Delinquency Ratio .....................................................................................................................94 Table 73. Average Portfolio Risk...............................................................................................................95 Table 74. Retail Loan Portfolio by Level of Risk .......................................................................................96 Table 75. Changes in the Allowance – Retail ...........................................................................................97 Table 76. Small and Micro Enterprise Loan Portfolio..............................................................................100 Table 77. Changes in the Allowance – SMEs .........................................................................................100 Table 78. Commercial Loan Portfolio by Level of Risk ...........................................................................101 Table 79. Changes in the Allowance - Commercial ................................................................................101 Table 80. Agribusiness Loan Portfolio by Level of Risk ..........................................................................102 Table 81. Changes in the Allowance – Agribusiness ..............................................................................102 Table 82. Portfolio with and without Roll Over – Agribusiness................................................................103 Table 83. Agribusiness Portfolio Rates ...................................................................................................104 Table 84. Foreign Trade Loan Portfolio by Level Risk ............................................................................106 Table 85. Changes in Allowance – Foreign Trade ..................................................................................106 Table 86. Foreign Loan Portfolio by Risk Level ......................................................................................107 Table 87. Other Transactions Portfolio – Banco Nossa Caixa and Banco Votorantim (50%) ................107 Table 88. Fee Income..............................................................................................................................108 Table 89. Investment Funds and Managed Portfolios by Customer .......................................................111 Table 90. Investment Funds and Managed Portfolios by Type...............................................................111 Table 91. Global Card Revenue..............................................................................................................113 Table 92. Commercial Income ................................................................................................................115 Table 93. Personnel Expenses ...............................................................................................................116 Table 94. Other Administrative Expenses ...............................................................................................117 Table 95. Distribution Network ................................................................................................................118 Table 96. Wholesale Pillar Branches ......................................................................................................119 Table 97. Distribution Network Abroad....................................................................................................120 Table 98. Coverage Ratios – without extraordinary items ......................................................................123 Table 99. Cost Income Ratio – without extraordinary items....................................................................124 Table 100. Operating Income..................................................................................................................126 Table 101. Accumulated Amortization.....................................................................................................127 Table 102. Intangible ...............................................................................................................................128 Table 103. Net Value Added ...................................................................................................................129 Table 104. Balance in Foreign Currency.................................................................................................132 Table 105. Consolidated BB VaR............................................................................................................135 Table 106. Foreign Network’s VaR .........................................................................................................136 Table 107. International Trading Portfolio’s VaR ....................................................................................137 Table 108. Domestic Trading Portfolio’s VaR .........................................................................................138 Table 109. Repricing Profile of Interest Rates – 06/30/2010 ..................................................................139 Table 110. Extended Loan Portfolio ........................................................................................................144 Table 111. Concentration of the Loan Portfolio of the 100 Largest Borrowers .......................................144 Table 112. Concentration of the Loan Portfolio of the 100 Largest Borrowers % in relation to RE ........145 Table 113. Concentration of the Loan Portfolio by Macrossector ...........................................................145 Table 114. Monitoring Operational Losses..............................................................................................147 Table 115. Shareholders’ Equity .............................................................................................................148 Table 116. BIS Ratio – Economic-Financial Conglomerate ....................................................................150 Table 117. Main accounts of the PEPR quota (Economic-Financial Conglomerate)..............................151 Table 118. RRE for Market Risk by Risk Factor .....................................................................................151 Table 119. Allocated Capital for Operational Risk by Line of Business ..................................................151 Table 120. Changes in Composition of BIS Ratio ...................................................................................152 Table 121. Fixed Asset Ratio ..................................................................................................................153 Table 122. Economic Capital ..................................................................................................................154 Table 123. Distribution of Economic Capital in the Loan Portfolio ..........................................................154 Table 124. VaR by Risk Factor ...............................................................................................................155 Table 125. Distribution of Economic Capital for Operating Risk, by Loss Event Category.....................155 Table 126. Scholarships Granted............................................................................................................158 Table 127. Employees Training – Annual Flow.......................................................................................159 Table 128. Quarterly Average Expenses per Employee (Income Statement with Reallocations) ..........160 Table 129. Expenses with Statutory Profit Sharing.................................................................................160 Table 130. Employee Turnover ...............................................................................................................160 Table 131. Use of Water..........................................................................................................................161 Table 132. Use of Paper..........................................................................................................................161 Table 133. Sustainable Regional Development (DRS) ...........................................................................164 Table 134. Microcredit Operations ..........................................................................................................165 Table 135. RSA Loans - Other Programs ...............................................................................................166 Table 136. Investment Funds with RSA criteria ......................................................................................166 Table 137. Complaints Registered in the Central Bank of Brazil ............................................................167 Table 138. Interests in the Capital of Companies ...................................................................................169 Table 139. Insurance, Pension Plans and Savings Bondsans................................................................171 Table 140. Insurance Income Statement by Line of Business ................................................................172 Table 141. Consolidated Insurance Ratio ...............................................................................................174 Table 142. Insurance Ratio by Segment .................................................................................................175 Table 143. Operating Highlights of the Insurance Group........................................................................177 Table 144. Banco Votorantim – Income Statement with Reallocations Highlights .................................179 Table 145. Banco Votorantim – Reallocations (Fee Income)..................................................................180 Table 146. Banco Votorantim – Reallocations (Mark-to-Market - MKT) .................................................180 Table 147. Banco Votorantim – Reallocations (Currencies Fluctuation) ................................................180 Table 148. Banco Votorantim – Equity Highlights ...................................................................................182 Table 149. Banco Votorantim – Loan Portfolio by Level of Risk .............................................................182 Table 150. Banco Votorantim – Delinquency Ratios...............................................................................183 Table 151. Banco Votorantim – Vehicle Loan Portfolio...........................................................................183 Table 152. Banco Votorantim – Operating and Structural Highlights .....................................................183 Table 153. Banco Votorantim – Ratios Highlights...................................................................................183 Table 154. Deposits in the State of São Paulo .......................................................................................184 Table 155. Loan Operations in the State of São Paulo...........................................................................185 Table 156. Banco Patagonia – Income of Statement Highlights.............................................................187 Table 157. Banco Patagonia – Equity Highlights ....................................................................................187 Table 158. Banco Patagonia – Operating and Structural Highlights.......................................................187 Table 159. Banco Patagonia – Returns, Capital and Loan Ratios..........................................................187 Table 160. Review of the Corporate Structure ........................................................................................189 Table 161. Balance Sheet – Assets ........................................................................................................190 Table 162. Balance Sheet – Liabilities ....................................................................................................191 Table 163. Summarized Corporate Law Income Statement ...................................................................192 Table 164. Income Statement with Reallocation .....................................................................................193 Index of Figures Figure 1. Income (R$ million) and ROE (%)..............................................................................................10 Figure 2. BIS Ratio ....................................................................................................................................19 Figure 3. Dollar/Euro Ratio ........................................................................................................................23 Figure 4. Brazil Risk and Exchange Rate..................................................................................................24 Figure 5. Industrial Production Index.........................................................................................................24 Figure 6. Installed Capacity Usage Index – NUCI.....................................................................................25 Figure 7. Unemployment Rate (% of the Economically Active Population) ..............................................25 Figure 8. Brazilian Economy Volume of Credit Growth.............................................................................26 Figure 9. Price Index - IPCA......................................................................................................................27 Figure 10. Selic Evolution..........................................................................................................................27 Figure 11. Public Offering Breakdown.......................................................................................................29 Figure 12. Geographic localization of Institutional Investors.....................................................................30 Figure 13. Total Free Float Breakdown.....................................................................................................32 Figure 14. Equity Held by Foreign Investors .............................................................................................33 Figure 15. BB Shares vs. Ibovespa...........................................................................................................35 Figure 16. BBAS3 Stock in Ibovespa ........................................................................................................36 Figure 17. Average daily financial trading volume – BBAS3.....................................................................36 Figure 18. Average daily trading volume – BBAS3 ...................................................................................37 Figure 19. Market Ratios ...........................................................................................................................38 Figure 20. Committees, Subcommittees and Commissions - Strategic Level ..........................................40 Figure 21. Earning Assets vs. Interest Bearing Liabilities .........................................................................53 Figure 22. Breakdown of Assets ...............................................................................................................54 Figure 23. Agribusiness Participation in the GDP and in the Labor Market..............................................64 Figure 24. Trade Balance (FOB) ...............................................................................................................65 Figure 25. Production vs. Planted Area.....................................................................................................66 Figure 26. Agribusiness Loan Portfolio by Customer................................................................................69 Figure 27. Agribusiness Loan Portfolio by Funding Sources ....................................................................70 Figure 28. Equalization Revenues and Weighting Factor .........................................................................71 Figure 29. Agricultural Insurance and Proagro .........................................................................................72 Figure 30. Evolution of Operations Contracted with Risk Mitigators .........................................................73 Figure 31. Ratio Price/Cost of Soybean and Maize ..................................................................................74 Figure 32. Liquidity Balance ......................................................................................................................77 Figure 33. Market Share of BB Funding....................................................................................................78 Figure 34. NIM Evolution ...........................................................................................................................82 Figure 35. Securities Portfolio by Index (Multiple Bank) ...........................................................................86 Figure 36. Allowances Breakdown ............................................................................................................93 Figure 37. Overdue above 15 and 90 days ...............................................................................................95 Figure 38. Allowance/Past Due Loans + 90 days – BB x BI (%)...............................................................95 Figure 39. Quarterly Vintage .....................................................................................................................98 Figure 40. Annual Vintage .........................................................................................................................98 Figure 41. Annual Vintage – Vehicle Loan Portfolio – Arena I ..................................................................99 Figure 42. Annual Vintage – Vehicle Loan Portfolio – Arena II .................................................................99 Figure 43. Stratified Agribusiness Portfolio .............................................................................................105 Figure 44. Checking Account Base .........................................................................................................109 Figure 45. Asset Management ................................................................................................................110 Figure 46. Credit and Debit Cards...........................................................................................................112 Figure 47. Card Revenue ........................................................................................................................113 Figure 48. BB Billings Volume.................................................................................................................114 Figure 49. Business vs. Expenses ..........................................................................................................115 Figure 50. Changes in Workforce............................................................................................................116 Figure 51. Total Distribution Network ......................................................................................................119 Figure 52. Automated Teller Machines ...................................................................................................121 Figure 53. Customer Access Options – % ..............................................................................................122 Figure 54. Coverage Rations – whitout extraordinary items – % ............................................................123 Figure 55. Cost Income Ratio – without extraordinary items ..................................................................124 Figure 56. Other Productivity Ratios .......................................................................................................125 Figure 57. Changes in Foreign Exchange Exposure ..............................................................................133 Figure 58. Composition of Banco do Brasil’s assets and liabilities in the country. .................................133 Figure 59. Net Position ............................................................................................................................134 Figure 60. Consolidated BB VaR ............................................................................................................134 Figure 61. Consolidated of the Foreign Network’s VaR ..........................................................................135 Figure 62. VaR of the International Trading Portfolio..............................................................................137 Figure 63. VaR of the Domestic Trading Portfolio...................................................................................138 Figure 64. Reserve Liquidity – National Treasury ...................................................................................140 Figure 65. Reserve Liquidity – Foreign Currency....................................................................................141 Figure 66. DRL Index ..............................................................................................................................141 Figure 67. Measuring and management instruments..............................................................................142 Figure 68. BIS Ratio – Economic-Financial Conglomerate.....................................................................152 Figure 69. Employees Age ......................................................................................................................157 Figure 70. Employees by Length of Service............................................................................................157 Figure 71. Level of Education..................................................................................................................159 Figure 72. Transactions without Use of Paper ........................................................................................162 Figure 73. Toner Consumption – in units ................................................................................................163 Figure 74. PRONAF Portfolio/Proger Rural (R$ million) .........................................................................165 Figure 75. Share of BBAS3 in ISE, ITAG, and IGC ................................................................................168 Figure 76. Change of the Insurance Ratio ..............................................................................................174 Figure 77. Combined Ratio .....................................................................................................................176 Presentation This Management Discussion and Analysis (MD&A) presents the economic and financial situation of Banco do Brasil (BB). Geared towards market analysts, stockholders and investors, this quarterly report addresses topics such as the economic environment and BB's stock performance, corporate governance practices and risk management. The capital structure and results are analyzed separately. Moreover, in conformity with the "Triple Bottom Line" concept, the report also presents the Social and Environmental Performance indicators of Banco do Brasil (Chapter 9) in order to demonstrate the value these initiatives generate for our shareholders and other stakeholders. Readers will also find eight tables presenting the historical data series for the period from the Summarized Balance Sheet, Summarized Corporate Law Income Statement, Income Statement with Reallocations, Analytical Spread, and other information on profitability, productivity, loan portfolio quality, capital structure, capital markets and structural data. According to Paragraph 55 of CVM Resolution 371/2000, Banco do Brasil has decided to adopt, as of year-end 2009 and on, in consistent and recurring basis, a faster recognition of the actuarial gains and losses related to Previ Benefit Plan I (Plan I of Previ). Henceforth, PREVI income will be regarded as recurring and the income arising from surpluses will be recognized on a quarterly basis. In order to allow comparability of results in the first quarter of 2010 with previous fiscal years, PREVI income will be segregated in a specific line of the Statement of Income with Reallocations. Considering the strategic transactions relevance announced as of the second half of 2008 (acquisitions, mergers and partnerships), main information details related to the companies associated with business in course and to transactions already executed is presented in this report, evidencing the transactions impact on BB's results and producing a (pro forma) simulation of how the Bank's main indicators would be like if all the companies were consolidated. Note also that as of 1Q09, all financial statements and management analyses developed are based on an "Economic Financial Consolidation" view, which provides for the consolidation of all the companies belonging to the economic group. Prior to this period, the MD&A report featured the consolidation of financial companies only. For comparability, we inform that the 2008 results presented were prepared using the same method. At the end of the report we present the Financial Statements and accompanying notes for the quarter under analysis. ON-LINE ACCESS This Management Discussion and Analysis is also available on Banco do Brasil’s Investor Relations website. More information about the Bank can also be accessed there, such as: corporate governance, news, frequently asked questions, a download center with versions of this report for Adobe® Reader® software. The website also makes available general information, balance sheet analyses, complete financial statements, and historical data series in Excel, presentations to the market, the Social and Environment Responsibility Report, the Social Balance Sheet and transcripts of the quarterly earnings conference calls. LINKS Banco do Brasil S.A. Investor Relations 9 - Banco do Brasil – MD&A 2Q10 bb.com.br bb.com.br/ri Summary of Results Net Income surpasses R$ 5 billion in the first half Banco do Brasil reported a net income of R$ 5,076 million in the first half, up 26.5% from the same period of 2009. The result represents annualized return on average equity of 28.7%. Excluding one-off items, recurring net income was R$ 4,383 million, up 34.9% from the amount recorded in 1H09, and corresponding to a recurring return on equity of 24.6%. Considering only the second quarter, the net income was R$ 2,725 million, presenting growth of 15.9% from 1Q10 and 16.1% from the same prior-year period. The ROE of the quarter was 31.5%. On recurring basis, net income of the period was R$ 2,327 million, a growth of 13.2% from the previous quarter and 34.8% in relation to 2Q09. The annualized return on equity was 26.5%. 56.8 33.2 23.8 28.7 28.0 26.2 31.5 27.4 24.6 26.5 23.7 21.6 23.1 22.5 24.2 22.0 4,014 4,383 4,155 1,5231,665 1Q09 2,348 1,7641,979 1,819 1,727 2Q09 3Q09 Recurring Net Income 4Q09 Net Income 5,076 2,0562,351 1Q10 2,725 3,250 2,327 2Q10 ROAE - % 1H09 1H10 Recurring ROAE - % Figure 1. Income (R$ million) and ROE (%) Banco do Brasil kept its payout policy of paying 40% of its net income to shareholders. In the quarter, BB allocated R$565 million to dividends and R$ 525 million to interest on own capital. 10 - Banco do Brasil – MD&A 2Q10 ♦ BB consolidates leadership in the financial system with R$ 756 billion in assets Banco do Brasil reached R$ 755,706 million in total assets at the end of June, growth of 26.2% in relation to June 2009 and 4.3% in relation to the previous quarter. The growth of loans and of the securities portfolio deserves special emphasis in the quarter. Table 1. Main Equity Items Chg. % R$ million Jun/09 M ar /10 Jun/10 On Jun/09 On M ar /10 Total A ssets 598,839 724,881 755,706 26.2 Loan Portf olio 252,485 305,551 326,522 29.3 6.9 Securities 109,564 119,364 132,249 20.7 10.8 Short-term Interbank Operations 132,438 152,595 132,543 0.1 (13.1) Deposits 310,846 342,624 343,961 10.7 0.4 Demand Deposits 49,075 54,973 59,025 20.3 7.4 Savings Deposits 69,011 78,719 81,541 18.2 3.6 Interbank Deposits 7,459 10,749 10,436 39.9 (2.9) 185,072 197,934 192,715 4.1 (2.6) 101,508 32,360 157,866 37,646 166,603 39,332 64.1 21.5 5.5 4.5 Time Deposits Money Market Borrow ing Shareholder’s Equity 4.3 ♦ Loan Portfolio reaches R$ 350 billion The loan portfolio, based on an amplified concept that includes the guarantees given and private securities in the portfolio, attained R$ 349,761 million, growth of 6.8% in the quarter and 41.1% in the year. The classified loan portfolio (in accordance with CMN Resolution 2682) reached R$ 326,522 million, recording growth of 29.3% in 12 months and 6.9% in the quarter. The domestic loan portfolio grew 28.2% in the year and 6.6% from 1Q10. Banco do Brasil’s share of the domestic market began to rise again and reached 20.1%. The growth in 12 months was benefited by the proportionate consolidation of Banco Votorantim loans, since 3Q09. However, even using a pro forma comparison basis that simulates the consolidation of BV as of June, the domestic loan portfolio would record growth of 18.8% in twelve months. All the portfolios exhibit growth in line with the projections provided by BB to the market. Table 2. Loan portfolio (Conglomerate) Chg. % R$ million Loan Por tfolio Br azil Individuals Payroll Loan A uto Loans Businesses Jun/09 M ar /10 Jun/10 On Jun/09 On M ar /10 252,485 305,551 326,522 29.3 239,418 288,044 307,018 28.2 68,467 95,092 101,122 47.7 6.3 29,533 38,550 40,476 37.1 5.0 6.9 6.6 8,180 21,037 22,774 178.4 8.3 103,351 128,080 135,575 31.2 5.9 SME 39,493 45,215 47,382 20.0 4.8 Other 63,858 82,865 88,193 38.1 6.4 67,600 13,068 64,872 17,507 70,321 19,504 4.0 8.4 49.3 11.4 A gribusiness Abroad 11 - Banco do Brasil – MD&A 2Q10 ♦ Consumer credit surpasses R$ 100 billion At the end of 2Q10, loans to individuals amounted to R$ 101,122 million, an increase of 47.7% in the year and of 6.3% in the quarter. Among the most relevant lines of credit, special emphasis is placed on the growth of payroll loans and of vehicle financing operations, which continue to exhibit expressive expansion, both in the quarterly comparison and in twelve months. Consumer credit maintained its relative share at 31% of the total portfolio. The business portfolio, which represents 41.5% of BB's total portfolio, amounted to R$ 135,575 million in June 2010, recording growth of 31.2% in the last twelve months and of 5.9% over the previous quarter. Both in the quarterly comparison and in twelve months, growth was concentrated in operations with medium and large companies (middle and corporate segments). The greater growth among loan portfolios in the quarter was observed in the agribusiness and foreign portfolios, which grew respectively 8.4% and 11.4%. The agribusiness loans performance was leveraged mainly by the "Trading and Processing of Agricultural and Stockbreeding Products" operations, which recorded growth of 44.5%, and "BNDES/Finame Rural", with expansion of 17.5%. In twelve months, the agribusiness portfolio recorded a growth of 4%. 12 - Banco do Brasil – MD&A 2Q10 ♦ Recurring income reflects improvement in the operating efficiency Recurring income in 1H10 registered growth of 34.9% from the same period of 2009, with an emphasis on the net interest income, which presented expansion of 21.6%. In 2Q10 the recurring income presented growth of 13.2% from the previous quarter and of 34.8% in relation to that observed in the same period of 2009. During the quarter, special emphasis is placed on the growth of service fees and on the control of administrative expenses, which were accompanied by a decrease in expenses with allowance for loan losses (reflecting an improvement in the quality of the portfolio and reduction of delinquency rates). The net interest income continues growing, although at a slower pace than that observed in the previous quarters. The table below, extracted from the income statement with reallocations, presents the main highlights of the period. The breakdown of reallocations can be seen in Section 5.3.1 of this Management Discussion & Analysis. Table 3. Income statement with reallocations – Main lines Quarterly Flow R$ million Financial Interm ediation Incom e Loan operations + Leasing Securities Financial Interm ediation Expenses Net Interest Incom e 2Q09 1Q10 Chg. % 2Q10 Half-yearly Flow On 2Q09 On 1Q10 1H09 1H10 Chg. % On 1H09 16,037 18,562 19,512 21.7 5.1 31,297 38,075 21.7 10,281 12,721 13,195 28.3 3.7 19,370 25,916 33.8 5,644 5,195 (0.4) (7.9) 10,945 10,839 (1.0) (9,205) (10,052) 33.1 9.2 (15,825) (19,257) 21.7 21.6 5,215 (7,550) 8,487 9,357 9,461 11.5 1.1 15,472 18,817 (3,172) (3,026) (2,871) (9.5) (5.1) (5,663) (5,897) 4.1 5,316 6,331 6,590 24.0 4.1 9,809 12,920 31.7 3,436 Income f/ Insurance, Pension Plans and Savings Bonds 471 Contribution Margin 8,417 3,634 3,954 15.1 8.8 6,379 7,588 19.0 440 468 (0.6) 6.3 775 909 17.3 9,567 10,103 20.0 5.6 15,539 19,670 26.6 Allow ance for Loan Losses Net Financial Margin Fee income Administrative expenses (4,892) (5,300) (5,471) 11.8 3.2 (8,823) (10,771) 22.1 Personnel Expenses (2,613) (2,851) (2,937) 12.4 3.0 (4,742) (5,788) 22.0 Other Administrative Expenses (2,279) (2,449) (2,534) 11.2 3.5 (4,080) (4,983) 22.1 3,518 4,241 4,598 30.7 8.4 6,667 8,839 32.6 (152) (238) 35 - - (247) (203) (18.0) 107 (212) (274) - 29.4 5 (485) - (740) (379) (491) (33.6) 29.6 (1,294) (870) (32.8) 41.5 Com m ercial Incom e Legal Claims Labor Law suits OtherOperating Income Incom e Before Taxes 2,744 3,415 3,884 41.6 13.7 5,157 7,299 Income and Social Contribution Taxes (771) (1,053) (1,194) 54.9 13.4 (1,459) (2,247) 54.0 Corporate Profit Sharing (220) 1,727 (307) 2,056 (363) 2,327 64.7 34.8 18.2 13.2 (423) 3,250 (670) 4,383 58.4 34.9 Recurring Net Incom e Table 4. Main Indicators of Income/Expenses Indicator s - % 2Q09 1Q10 2Q10 Global Spread¹ 7.3 6.5 Ex pens es w ith A llow anc e f or Loan Los ses ov er Portf olio² 4.2 4.5 4.1 Ef f iciency Ratio³ 42.3 44.3 42.7 Rec urring Return on Equity ¹ 23.7 30.6 24.2 33.9 26.5 33.9 Ef f ectiv e Rate of Tax 6.5 (1) Annualized Indicators. (2) Expenses with Allowance for Loan Losses in the last 12 months divided by the average portfolio in the same period. (3) Extraordinary effects excluded. 13 - Banco do Brasil – MD&A 2Q10 ♦ Net Interest Income continues expanding The net interest income of Banco do Brasil reached R$ 18,817 million in the first half, which represents an increase of 21.6% from 1H09. The performance reflects the growth of assets, especially of the loan portfolio, in addition to Nossa Caixa (BNC) and Votorantim (BV) acquisition. In 2Q10 the NII recorded growth of 1.1% over the previous quarter and of 11.5% over the same period of 2009. The change over the previous quarter results from business expansion, especially the loan portfolio. However, this growth was limited by the behavior of the net interest margin, as will be detailed further on. The table below presents the breakdown of the net interest income. The contribution of the loan portfolio in its main lines is highlighted, and it also segregates the amounts corresponding to income from the written-offs recovery and those related to remunerated compulsory deposits. The “Other” item, comprised mainly of treasury income resulting from transactions with securities, derivatives and foreign exchange, completes the composition of the NII. The changes promoted by the Central Bank in the compulsory deposit rules produced two different impacts on the financial statements of BB for 2Q10. On one hand there was decrease of liquidity, as a result of the rise in rates, which reduces the resources available for more profitable investments. On the other hand, there was a change in the form of collection, which implied migration of resources from the securities portfolio to compulsory deposits. These movements explain the growth observed on the "Remunerated Compulsory" line of the table below, and are better detailed in chapter 7.1 of the MD&A. Table 5. NII by business line Quarterly Flow R$ million 2Q09 1Q10 Chg. % 2Q10 On 2Q09 On 1Q10 Half-yearly Flow Chg. % 1H09 On 1H09 1H10 Net Interest Incom e 8,487 9,357 9,461 11.5 1.1 15,472 18,817 21.6 Loan Operations 5,826 6,924 6,904 18.5 (0.3) 10,744 13,829 28.7 Individuals 3,097 3,926 3,967 28.1 1.0 5,412 7,893 45.8 Businesses 1,827 2,052 1,927 5.5 (6.1) 3,514 3,979 13.2 902 946 1,010 12.1 6.8 1,818 1,957 7.6 2,662 2,432 2,556 (4.0) 5.1 4,728 4,989 5.5 213 274 917 330.5 234.7 389 1,192 206.6 531 1,918 631 1,528 757 882 42.7 (54.0) 20.1 (42.3) 887 3,452 1,388 2,410 56.4 (30.2) Agribusiness Other Remunerated Compulsory Recovery of Write-offs Other The net interest margin (NIM) was 6.4% in the first half, a 50 basis points decrease in relation to the same period of previous year. In the quarter, the net interest margin was 6.5%, keeping the same level observed in the previous quarter and a decrease of 80 basis points in relation to 2Q09. The behavior of the NIM in 2Q10 is direct associated to the decrease in the spread on loans operations, which was of 9.7%, recording decrease of 20 basis points in comparison with the 1Q10 and of 70 basis points from the same period of 2009. In the quarter, the 80 basis points downslide in spread on loans contracted by individuals and 50 basis points in the business portfolio occurred due to mix changes, increasing the relative share of operations with lower risk and therefore lower spread. In the individuals portfolio, there was an increased share of payroll loans in the total portfolio. In the business portfolio, there was a faster growing in the operations with medium and large companies. Furthermore, a larger share of loans for micro and small companies have been contracted with the guarantee of the FGO. The perception that the NIM oscillation is caused by mix changes in the portfolios, with greater shares of lower risk transactions, is supported by the indicator " Risk Adjusted NIM ", calculated based on the ratio of net financial margin and earning assets. Besides the net interest income, the risk-adjusted NIM 14 - Banco do Brasil – MD&A 2Q10 considers allowance for loan losses expenses. The indicator ended the 2Q10 in 4.5%, the same level observed in 2Q09 and a 10 basis points increase over the previous quarter. Table 6. Net Interest Margin % 2Q09 L o an Op e r atio n s Indiv iduals 1Q10 2Q10 1H09 1H10 10.4 9.9 9.7 10.0 9.7 21.2 18.2 17.4 20.4 17.4 Bus ines s es 7.5 6.7 6.2 7.3 6.4 A gribus ines s 5.5 5.6 6.0 5.6 5.8 Oth e r Ne t In te r e s t M ar g in (NIM ) Ris k A d ju s te d NIM 15 - Banco do Brasil – MD&A 2Q10 4.4 3.3 3.4 3.0 3.3 7.3 4.5 6.5 4.4 6.5 4.5 6.9 4.4 6.4 4.4 ♦ Loan default decrease sharply and approaches the pre-crisis level Default intensified the downtrend during the quarter and approached the levels observed in 2008. All the main delay ratios presented significant improvement. The ratio between operations past due 90 days and the loan portfolio ended the quarter at 2.7%, down 40 basis points in the quarter and 60 basis points in relation to June 2009. This is the lowest level of the historical series since December 2008. Transactions past due 60 days represent 3.1% of the portfolio at the end of June. This percentage is 50 basis points lower than that recorded in March and 70 basis points below that verified in June 2009. Table 7. Loan Portfolio Quality Indicators % Jun/09 M ar /10 Jun/10 A llow ance/Loan Portf olio 7.0 6.0 5.5 Past due loans + 60 days /Total Portf olio (% ) 3.8 3.6 3.1 Past due loans + 90 days /Total Portf olio (% ) 3.3 3.1 2.7 A llow ance/Pas t Due Loans + 60 day s 187.2 167.4 176.1 A llow ance/Pas t Due Loans + 90 day s 214.0 5.9 194.7 5.1 203.9 5.0 7.2 4.4 6.7 4.0 6.2 3.7 A verage Risk BB A verage Risk – Banking Industry Trans ac tions ov erdue + 90 day s/Total Portf olio – Banking Industry In line with the improvement observed in the portfolio quality, there was a decrease in expenses with allowance for loan losses. Expenses reached R$ 2,871 million in the quarter, which represents a downslide of 5.1% in comparison to the previous quarter and of 9.5% against expenses observed in 2Q09. The indicator that measures the ratio between expenses with allowance for loan losses cumulative in twelve months and the average loan portfolio of the same period ended 2Q10 at 4.1%, against 4.5% in the previous quarter and 4.2% in 2Q09. Table 8. Expenses with Allowance for Loan Losses vs Portfolio R$ million 2Q09 1Q10 2Q10 (A ) A llow ance f or Loan Losses - Quarterly (3,172) (3,026) (2,871) (B) A llow ance f or Loan Losses - 12 Months (9,241) (12,164) (11,864) (C) Loan Portf olio 252,485 305,551 326,522 (E) A verage Portf olio – 3 Months 246,363 219,071 304,936 269,466 316,005 287,413 1.3 4.2 1.0 4.5 0.9 4.1 (E) A verage Portf olio – 12 Months Expenses over Portf olio (A /D) - % Expenses over Portf olio (B/E) - % In spite of the improvement in the default ratios and the noticeable improvement in the economic and business environment, Banco do Brasil kept its policy of prudence regarding the allowance for loan losses and the percentage of portfolio coverage. The balance of allowance for loan losses ended the quarter at R$ 18,088 million, which provides coverage of 204% of operations past due 90 days. In the quarter, there was reduction of R$ 833 million in the balance of additional allowance for loan losses. The change in the period is due to the following factors: • Reversion of nearly R$ 332 million in addition allowance for Rural operations. This accounting was treated as an one-off item in the recurring net income for the quarter. Additional details can be seen in chapter 7.5 of this MD&A. 16 - Banco do Brasil – MD&A 2Q10 • The remaining changes are merely related to additional allowance balance reclassification to required allowances and are not considered as reversion of provisioned amounts. For further details see chapter 7.5. ♦ Fee Income presents robust growth Fee income totaled R$ 7,588 million in 1H10, an increase of 19.0% from 1H09. Considering only 2Q10, these revenues reached R$ 3,954 million, up 8.8% over the previous quarter and 15.1% versus the same period of 2009. Comparing with the 1H09, the performance was benefited from the consolidation of incomes of Banco Votorantim (BV), which acquisition of interest was completed at the end of September 2009, and by the incomes provided by Banco Nossa, which were accounted for 2009 results only since April. However, even using a pro forma basis of comparison, which considers the consolidation of BV and BNC throughout the 2009 year, the fee income of the conglomerate would have recorded expansion of 12.3% comparing 2Q10 and 2Q09 and 10.8% comparing 1H10 and 1H09. The performance of the first half is higher than the fee income Guidance growth provided by BB to the market (7% to 10%). The loan and checking account fees grew respectively 34.3% and 12.6% over 1Q10. There was no repricing or creation of new fees in the period. This good performance was possible due to business expansion and adoption of measures with the purpose of improving the receivable fees management, enhancing charging effectiveness. Insurance, pension and savings bonds business were the highlight among fee income and recorded growth of 79.2% in the quarter and 62.2% in comparison with 2Q09. Besides fee incomes, insurance operations also generated net income of R$ 468 million in the quarter, 0.6% lower than in the same quarter of 2009 but 6.3% higher than that recorded in 1Q10. In the first half, the net income from insurance operations reached R$ 909 million, growth of 17.3% over that observed in the same prior-year period. Table 9. Insurance, Pension Plans and Savings Bonds Income Quarterly Flow R$ million Fee Incom e 2Q09 1Q10 Chg. % 2Q10 On 2Q09 On 1Q10 Half-yearly Flow Chg. % 1H09 On 1H09 1H10 3,436 3,634 3,954 15.1 8.8 6,379 7,588 19.0 Account Fees 863 875 985 14.1 12.6 1,587 1,861 17.2 Credit / Debit Cards 571 712 727 27.3 2.1 1,140 1,439 26.2 Investment Fund Management Fees 506 537 575 13.5 7.1 952 1,112 16.8 Loan Fees 344 307 413 19.8 34.3 654 720 10.0 Collections 284 288 302 6.5 4.9 541 591 9.2 Insurance, Pension Plans and Savings Bonds 117 106 190 62.2 79.2 187 296 58.3 Billings 120 143 141 18.0 (1.1) 230 284 23.2 Interbank 122 130 137 12.1 5.2 241 267 10.5 Capital Market Fees 138 106 98 (28.5) (7.1) 180 204 13.8 371 Insurance, Pension Plans and Savings Bonds Incom 471 e 430 440 386 468 4.0 (0.6) (10.4) 6.3 667 775 816 909 22.3 17.3 Other 17 - Banco do Brasil – MD&A 2Q10 ♦ Expenses control surpasses estimates: administrative expenses below the Guidance Administrative Expenses, which include personnel expenses and other administrative expenses, amounted to R$ 10,771 million in the 1H10, an increase of 22.1% over the same prior-year period. In 2Q10 administrative expenses reached R$ 5,471 million, 3.2% higher than that observed in the previous quarter, with growth of 3.0% in personnel expenses and 3.5% in other administrative expenses. As is the case of fee income, the comparison with 1H09 and 2Q09 is impaired by the consolidation of Nossa Caixa (since 2Q09) and Votorantim (since 4Q09). The table below was prepared for this reason and contains a pro forma basis of comparison for the periods of 2009, simulating the consolidation of the banks acquired throughout the whole year. The table also segregates expenses incurred by BB + BNC, from those incurred by the other associated and subsidiary companies, which present differentiated growth dynamics. In the pro forma comparison, also used for the 2010 Guidance monitoring, BB's expenses in 1H10 presented growth of 9.1% over the same period of 2009, percentage below the estimates range that appears in projections provided to the market. Considering only BB + BNC (Multiple Bank) expenses, administrative expenses of the first half are up 8.2% from 1H09. In the quarterly comparison the expenses expansion was 1.6% from 1Q10 and 6.2% from 2Q09. • The performance, both in the quarterly and half-yearly comparison, resulted of an intense effort to control expenses. This is proven by the Multiple Bank other administrative expenses performance that grew only 6.1% in the comparison between 1H10 and 1H09. This percentage is low, given the effect of inflation on service agreements and the organic growth of operations. Once the other conglomerate companies operate in segments with a fast pace of growth, or in sectors in which BB is structuring/restructuring its activities, they exhibited slightly stronger growth in their expenses. Table 10. Administrative expenses – Pro forma Comparison Quar te r ly Flow Chg. % R$ million 2Q09 1Q10 2Q10 BB + BNC ¹ Personnel Ex pens es (4,650) (2,529) (4,859) (2,688) (4,937) (2,751) Other A dministrative Expenses (2,120) (2,171) (2,186) (444) (441) (534) Personnel Ex pens es (159) (163) (186) Other A dministrative Expenses (285) (278) (348) (5,094) (2,688) (2,405) (5,300) (2,851) (2,449) (5,471) (2,937) (2,534) Othe r Affiliate d Com panie s ² BB Cons olidate d Personnel Ex pens es Other A dministrative Expenses (1) (2) Half-ye ar ly Flow On 2Q09 On 1Q10 Chg. % 1H09 1H10 1.6 2.4 (9,051) (4,944) (9,796) (5,439) 3.1 0.7 (4,107) (4,357) 6.1 20.4 21.1 (826) (976) 18.1 16.8 14.1 (295) (349) 18.1 22.4 25.3 (531) (627) 18.1 7.4 9.2 5.4 3.2 3.0 3.5 (9,877) (5,239) (4,638) (10,771) (5,788) (4,983) 9.1 10.5 7.5 6.2 8.8 On 1H09 8.2 10.0 "BB + BNC" line includes branches in the country and abroad, BESC BI, BBDTVM, BB Leasing, Banco Popular and the foreign subsidiaries. "Other Companies" line includes non-financial associated/subsidiary companies and Banco Votorantim. 18 - Banco do Brasil – MD&A 2Q10 ♦ BIS ratio supports expansion of operations Banco do Brasil's capital ratio (K) ended June 2010 at 12.8, a 90 basis points decrease over March 2010. The BIS ratio presented indicates an excess of reference equity of R$ 8,685 millions, allowing for an increase of up to R$ 79 billion in credit assets, considering a 100% weighting. The ratio decrease in the quarter is explained by the expansion of the loan portfolio, and mainly by the exclusion of additional allowance for loan losses from the reference equity. The end of the prerogative of inclusion of additional allowance for loan losses in the reference equity was already expected and resulted in a decrease of approximately 60 basis points in the capital ratio. The current BIS ratio does not yet contemplate the capital raise of R$ 7.05 billion that was performed in July 2010. Pro forma simulations indicate that the admission of these resources would have brought the June ratio up to approximately 14.3. 15.0 15.3 4.6 4.5 13.7 13.7 3.9 4.0 4.3 13.0 10.4 10.8 9.1 9.7 9.5 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Tier I Figure 2. BIS Ratio 19 - Banco do Brasil – MD&A 2Q10 Tier II 12.8 4.1 8.8 Jun/10 ♦ One-off items The one-off items added R$ 310 million to BB's net income in the 2Q10 and R$ 694 million in the first half. These impacts are already net of taxes and statutory profit sharing. Extraordinary items and their amounts before taxes are detailed below. 2Q10 • Reversal of additional allowance for loan losses amounting R$ 332 million due to improvements in the risk profile of the agribusiness portfolio. • Expenses with civil claims regarding economic plans totaling R$ 140 million. • Capital gain of R$ 114 million, as a result of Brasilprev corporate restructuring. Banco do Brasil increased its share in the total capital of that company from 50% to 75%. • Reversal of civil claim and labor lawsuit in the amount of R$ 250 million due to the completion of the registration of proceedings from BESC in the systems and methodologies of BB. Further information on this item is available in chapter 5.1 of the Management Discussion & Analysis. 1Q10 • Expenses with civil claims regarding economic plans totaling R$ 85 million. • Reversal of provisions for labor lawsuits, in the amount of R$ 568 million. The amount involves claims that were previously accounted at BNC and which were migrated to Banco do Brasil' systems and methodologies. • Partial disposal of investments represented by shares held by the conglomerate corresponding to 0.156% of the capital of Visa Inc., generating an extraordinary gain of R$ 214 million in the quarter. Banco do Brasil still holds, jointly with BB BI, shares representing 0.159% of the capital of Visa Inc. In addition to one-off items, there was the recognition of gains and losses on employee benefit plans, in the quarter. There was a gain resulted from the evaluation of actuarial assets and liabilities of PREVI, amounting R$ 389.2 million, and losses due to actuarial assessment of the benefit plan with exclusive responsibility of BB, amounting R$ 71.7 million, both before taxes. These bookings are part of the recurring result of BB in the first half of 2010 and 50% of the amounts (as well as effects on taxes and profit sharing) earned in 2Q10 were reallocated to compose the recurring income and the Income Statement with reallocations of 1Q10. This adjustment is necessary for comparison purposes, besides the fact that actuarial studies have evaluated the changes in assets and liabilities of the plan throughout the first half. Table 11. One-off items R$ m illion Re curr ing Ne t Incom e 1T10 2Q10 2,056 2,327 (+) Extr aordinar y Effe cts of the Pe riod 384 310 Sale of Interest in V ISA Internacional 214 - Economic Plans (85) (140) Contingent Liabilities (BESC) - 250 A dditional A llow ance f or Loan Losses - 332 Reversal of Labor Liabilities Capital Gain - BB Seguros Participações Tax Impacts and PLR on Extraordinary Items PREV I A ctuarial A ssets - A djustments Ne t Incom e 20 - Banco do Brasil – MD&A 2Q10 568 - - 114 (313) (246) (88) 2,351 88 2,725 ♦ Quarterly Performance in line with Guidance 2010 The performance of Banco do Brasil in the first half was in line with the estimates disclosed to the market upon the announcement of the result of 4Q09. The reasons for the figures that presented differences in the quarter from disclosed estimates and actually achieved results are clarified below: Recurring Return on Equity - The ratio slightly surpassed the guidance in the half-year monitoring. However, the indicator is expected to end the year within estimates due to the expected increase of shareholders' equity, which will be sensitized by the admission of funds from the public offering of shares held by BB in June, and that was settled in July 2010. Net Interest Margin - The performance of 2T10 was atypical due to changes in portfolio mix, which led to a reduction in the spread of the loans operations. There was an increase in the relative share of operations with lower risk and therefore lower NIM (such as payroll loans and loans to medium and large companies). In the second half, it is expected that loans to individuals gain more representation in the loan portfolio, allowing a net interest margin recovery. Total deposits - The Bank expects a robust growth of the deposit base in the second half, helped by an expansion of liquidity in the economy. Corporate Loan Portfolio - Performance slightly above the upper range of the Guidance, influenced by the pace of operations with medium and large companies. For the second half is expected a slow down on this movement, which would bring the growth rate into the estimates range. Fee Income - The improvements applied in the charges management should bring perennial benefits to BB. However, the greatest impact occurred in the moment that these measures were adopted, providing a better performance than that estimated, especially in 2Q10. Administrative Expenses - Even with lower growth than the Guidance range, BB maintains estimates for administrative expenses. BB consider that the second half brings seasonal events that require larger volume of expenses (greater economic activity, wage agreement and marketing actions to commemorative times). In addition, we emphasize that the Guidance was prepared considering BB’s budget and expectations for the entire year of 2010. Banco do Brasil Guidance is provided on a yearly basis, with quarterly monitoring. Although the Bank expects that the figures close the year within the estimates, the evolution of the numbers does not occur on a straight-line basis. The comparison with the same period in the previous year is used for illustration only. Estimates Changes The guidance for expenses with allowance for loan losses was structured in parallel to the preparation of the Bank budget. The information available at that time included uncertainties in relation to the pace of the economic activity recovery and of the ratios that measure the default of the loan portfolio. As an act of prudency, the range of estimates established considered the risks of a slower recovery in the quality of the portfolio. As all the indicators mentioned reacted positively, the ratio between expenses with allowance for loan losses and the average loan portfolio in twelve months remained below the minimum point of the projected range. Banco do Brasil is reviewing its estimates in view of the new scenario, projecting that the indicator will end the year between 4.0% and 4.4%. 21 - Banco do Brasil – MD&A 2Q10 Table 12. Guidance 2010 Ite m s Pe rform ance 1H10 2010 Guidance - BB Cons olidate d Recurring Return on Equity¹ 24.6% 21% - 24% Net Interes t Margin ¹ 6.4% 6,5% - 7,0% Total Deposits² 6.6% 12% - 16% Domes tic Loan Portf olio² 18.8% 18% - 23% Individuals² 27.6% 27% - 32% Bus ines ses² 21.5% 16% - 21% 4.0% 4% - 9% A llow ance f or Loan Losses ³ A gribus ines s² 4.1% 4,0% - 4,4% Fee Income² 10.8% 7% - 10% A dministrative Expenses² 9.1% 10% - 12% Tax Rate 33.9% 31% - 34% (1) Annualized Indicator. (2) BB's balance sheet items had not been affected by the consolidation of Banco Votorantim (BV) in 2Q09, and the income accounts had not been affected by the consolidation either of BV or Nossa Caixa in that quarter. Therefore, for comparability purposes, a pro forma basis was established for 2Q09, which simulates the consolidation of those banks into BB conglomerate. (3) Cumulative expenses with Allowance for loan losses for the 12-month period divided by the average portfolio in the same period. ♦ Assumptions used to project 2010 Guidance Assumptions influenced by management: Increase in the profitability of customer base in order to leverage revenues; Alignment of the cost structure to the business volume growth; Contractual adjustments and collective bargaining agreement; Sales force growth adequate to the strategy of increasing customer base profitability; Current business model, without considering further purchases and/or strategic partnerships that may be signed to act in specific segments; Recognition of actuarial gains and losses for Previ's Benefit Plan I in accordance with Paragraph 55 of CVM Instruction 371/2000. Assumptions beyond management's control Gradual recovery in Brazilian and world economic growth in 2010; Increased resistance but not immunity, of the Brazilian economy to external shocks; Improvement in conditions for the additional financing of domestic credit; A political environment without institutional rupture; Maintenance of the current domestic macroeconomic policy structure: floating exchange rate, inflation targets (nominal anchor) and fiscal discipline, entailing a gradual and consistent reduction of the relationship between Public Sector Net Debt (PSND) and the Gross Domestic Product (GDP); An advancement of the regulatory mark / microeconomic agenda with stimulus to public and private investment; A gradual increase in the Brazilian economy's potential for growth (potential GDP); Maintenance of the investment grade status awarded to Brazil; 2009/2010 Harvest Plan; Regulatory stability, including tax rates on the Bank’s activities and labor and social security laws; Evolution of interest rates, inflation rate and GDP in line with market consensus. 22 - Banco do Brasil – MD&A 2Q10 1 - Economic Environment In the second quarter of the year, the international economic environment was characterized by uncertainties regarding the turn of events of the fiscal crisis in some European countries. Despite the approval of the financial aid fund in the amount of € 750 billion for countries in difficulties in the Euro Area, the uneasiness with the possibility of the potential impacts of a banking crisis on public finances of countries in the region have grown. Consequently, there was a generalized increase in risk perception, which in fact lead to a significant devaluation of the euro against the dollar. 1.80 1.70 1.60 US$/Euro 1.50 1.40 1.30 1.22 1.20 1.10 1.00 0.90 0.80 jun/00 jun/01 jun/02 jun/03 jun/04 jun/05 jun/06 jun/07 jun/08 jun/09 jun/10 Exchange rate (US$/Euro) Source: Bloomberg Figure 3. Dollar/Euro Ratio Uncertainties regarding fiscal sustainability in some European economies and the slow pace of the recovery on the expansion of economic activity in other advanced economies adversely affected investor confidence in a faster retrieval of the global economic growth. The latest macroeconomic indicators have been revealing that mature economies still present high rates of unemployment and marginal advance in industrial production indicators, indicating that the recovery process should continue moving at a moderate and non-homogeneous pace. In turn, the main emerging economies continued recording greater dynamism. This, however, was not sufficient to guarantee positive evolution in the prices of the main assets in the global financial market, especially stock exchanges and commodities. In comparison with the closing figure of the previous quarter, the Commodity Research Bureau (CRB) index presented a downslide of around 3.0%, dragged down mainly by metals, with a downslide of 15%. The exception was food prices, which rose approximately 1.5% in the period. As of other countries, the Brazilian economy experienced a period of increased volatility of risk indicators and foreign exchange rate. Nevertheless, Brazil's country risk premium (EMBI) remained far below the mean values of emerging nations, and the volatility did not produce relevant impacts on inflation prospects or the growth rates of the country. 23 - Banco do Brasil – MD&A 2Q10 400 1,95 375 1,90 1,85 325 1,80 300 1,75 275 1,70 250 1,65 225 1,60 200 1,55 175 150 set/09 Exchange rate (R$/US$) EMBI + (Basis Points) 350 out/09 nov/09 dez/09 EMBI + Brazi jan/10 fev/10 mar/10 EMBI + Emerging abr/10 mai/10 1,50 jun/10 Exchange rate (R$/US$) Sources: BCB and Bloomberg Figure 4. Brazil Risk and Exchange Rate Seasonally adjusted index On the other hand, it is necessary to emphasize that, when announced, the GDP data for the second quarter should have recorded important accommodation in the growth rate of the Brazilian economy in comparison with the vigorous growth exhibited in the first quarter of the year. This perspective is corroborated by the behavior of some production level indicators already known. Manufacturing activity, for example, after the sharply increase observed in this first quarter (5.9%), it was registered a decrease of 2.0% in the second quarter (seasonally adjusted data). This movement was already expected, due to the reduction of fiscal stimuli (reversal of tax reliefs), as well as the start of the effects of a tighter monetary policy. jun/08 aug/08 oct/08 dec/08 feb/09 apr/09 jun/09 aug/09 oct/09 dec/09 feb/10 abr/10 jun/10 Source: IBGE Industrial Production Figure 5. Industrial Production Index 24 - Banco do Brasil – MD&A 2Q10 Average jul/08 to sep/08 The downturn of industrial activity is corroborated by the course of the usage level of the installed capacity (NUCI). According to Industrial Indicators of Confederação Nacional da Indústria – CNI (organization that represents the industry in Brazil), the NUCI of June reached 82.5%. Even if this represents a slight increase in relation to that observed at the end of the previous quarter (82.1%), there was a downslide of 0.5 p.p. in relation to the value of April. Installed Capacity Usage Index - Seasonally Adjusted Source: CNI Figure 6. Installed Capacity Usage Index – NUCI Agent Population The accommodation of the industry did not impact the labor market indicators. The unemployment rate, calculated by the Brazilian Institute of Geography and Statistics (IBGE) reached 7.0% of the PEA (economically active population) in June. This percentage was below the rate recorded in March/10 (7.6%), and was the lowest level for 2010. Likewise, the CAGED (index of the Ministry of Labor which represents a general register of employed and unemployed) data showed that the country accumulated the historic milestone of 1.47 million new official jobs in the first half of the year. This value is already far higher than the total amount of jobs created throughout the full year 2009 (995 thousand). Unemployment rate Annual average Source: IBGE Figure 7. Unemployment Rate (% of the Economically Active Population) 25 - Banco do Brasil – MD&A 2Q10 This labor market conditions evolution has been benefiting the credit market. According to data from Brazilian Central Bank (BCB), the credit total volume of the financial system reached R$ 1,529 billion. With this result, the economy total credit balance started to represent 45.7% of the GDP, as opposed to 44.6% in March of this year and 41.8% in Jun/09. Credit expansion continued to occur more intensely in the segment of earmarked resources. In June, the total volume of these loans reached 15.3% of the GDP, against 14.8% at the end of the first quarter and significantly above the 12.5% observed in Jun/09. Loans / GDP (%) Operations performed with free resources totaled R$ 1,017 billion in June or 66.5% of the total portfolio. Among the lines that obtained more expressive growth, those that remained in the spotlight were personal loans and vehicle financing, in the case of individuals, and funds intended for working capital, in the case of businesses. Total Loans / GDP Free Resources / GDP Earmarked resources / GDP Source: BCB Figure 8. Brazilian Economy Volume of Credit Growth The good performance of the Brazilian economy has been increasing the demand for imported goods and services, putting pressure on the trade balance. However, the exports growth in the second quarter was sufficient to bring the trade balance up to the surplus of US$ 7.0 billion against only US$ 0.9 billion accumulated in the first three months of the year. The decrease in the dynamism of the domestic economic activity, which the strong recovery at the beginning of the year had put excessive pressure on the price level of the economy, and the dissipation of some seasonal pressures, contributed toward the prices slowdown in the second quarter. The inflation rate measured by the IPCA, accumulated variation of 1.00% in the period, against 2.1% recorded in the first quarter. Considering the last twelve months, the IPCA variation accumulated 4.84% until June, and therefore, still above the central inflation target (4.50%). 26 - Banco do Brasil – MD&A 2Q10 20.0 4.0 18.0 3.5 16.0 In 12 months (%) 2.5 12.0 10.0 2.0 8.0 1.5 In the quarter ended at (%) 3.0 14.0 6.0 1.0 4.0 0.5 2.0 0.0 jun/00 0.0 jun/01 jun/02 jun/03 jun/04 jun/05 jun/06 IPCA in the quarter ended at (Right Axis) jun/07 jun/08 jun/09 jun/10 IPCA in 12 months (Left Axis) Source: IBGE. Figure 9. Price Index - IPCA In this context, the Central Bank of Brazil, aiming to redirect inflation to the path of targets and to anchor the inflation expectations of the market, started an adjustment cycle of the basic interest rate, pushing the Selic rate target up from 8.75% p.y. to 9.50% p.y., in May and 10.25% p.y., in June. In the Copom Minutes (Brazilian Central Bank Monetary Policy Committee) and in the following Inflation Report, the Monetary Authority expressed concern over the potential impacts on the economy price level resulting from the combination between virtual depletion of the economy idle capacity and the mismatching between the domestic absorption growth and the expansion capacity of the aggregate supply. 30 28 26 24 22 %p.a. 20 18 16 14 12 10,25 10 8 6 jun/01 jun/02 jun/03 jun/04 jun/05 jun/06 Selic rate Source:BCB. Figure 10. Selic Evolution 27 - Banco do Brasil – MD&A 2Q10 jun/07 jun/08 jun/09 jun/10 Table 13. Main Macroeconomic Indicators 2Q09 1Q10 2Q10 Economic Activity GDP (% YTD in 12 months) 1.0 2.4 Family Consumption 4.4 6.0 - Government Consumption 2.9 3.1 - Gross Fixed Capital Formation (2.4) (1.5) - Exports (7.6) (4.2) - Imports (0.9) (0.4) - 79.4 79.7 82.8 Agent Population (% YTD in 12 months) 0.7 1.8 2.5 Unemployment Rate (% YTD in 12 months) 8.1 7.8 7.5 Formal employment – net creation in the quarter (thousand jobs) 357.3 657.3 816.1 Formal employment – net creation (% YTD in 12 months) (79.3) 103.6 455.7 (6.5) (0.3) 6.5 (1.3) (1.8) (2.1) 7.3 5.6 6.5 International Reserves (US$ billion – year accumulated) 208.4 244.0 253.1 Sovereign Risk (base points – EOP) 281.0 183.0 251.0 Use of Installed Capacity (%) Industrial Production (% YTD in 12 months) External Sector Current Transactions (% YTD in 12 months) Direct Foreign Investment (US$ billion) Trade Balance (US$ billion – year accumulated) 13.9 0.9 7.9 Exports (US$ billion – year accumulated) 70.0 39.2 89.2 Imports (US$ billion – year accumulated) 81.3 56.0 38.3 Ptax Dollar Sale (EOP) 1.95 1.78 1.80 Ptax Dollar Sale (% YTD in 12 months) 22.6 (22.5) (7.7) Monetary Ratios IGP-DI FGV (% YTD in 12 months) 0.7 3.7 1.1 IGP-M FGV (% YTD in 12 months) 1.5 2.0 5.2 IPCA – IBGE (% YTD in 12 months) 4.8 5.2 4.8 Selic (EOP %) 9.3 8.8 10.3 Accumulated Selic (% YTD in 12 months) 12.4 9.4 8.8 Accumulated TR (exBTN) (% YTD in 12 months) 1.7 0.4 0.4 TJLP - IBGE (EOP %) 6.3 6.0 6.0 Libor (EOP %) 1.2 0.3 0.3 Public Finance Primary Surplus (% GDP 12 months accumulated) 2.0 1.9 2.1 PSGD (% GDP) 60.9 59.9 60.1 PSND (% GDP) - Without Petrobras 41.2 42.0 41.4 43.9 45.0 45.7 4.3 4.0 3.7 8.6 7.0 6.6 Credit Ratios Credit/GDP (% YTD in 12 months) Total Default (% past due loans over 90 days) Individuals Businesses 3.4 3.6 3.6 36.6 34.2 34.6 Individuals 45.6 41.0 40.4 Businesses 27.4 26.3 27.3 27.2 24.1 23.5 Individuals 35.8 29.7 28.6 Businesses 18.2 17.1 16.9 15.9 8.9 17.5 9.6 17.6 12.7 Total Investment Rate (%) Total Spread (%) Average Term (%) Individuals Businesses 28 - Banco do Brasil – MD&A 2Q10 2 - BB Securities 2.1 Shares At the end of the second quarter of 2010, Banco do Brasil’s capital was R$ R$ 26,027,932 thousand composed of 2,569,869,551 common and dematerialized shares without par value. These figures still do not consider the outcome of the public offering held in June 2010. Public Offering On 7.1.2010, the Central Bank ratified the capital increase in the amount of R$ 7.0 billion resulting from a public offering for primary distribution of 286 million new common shares and from the secondary distribution of 70.1 million shares. In addition, the over-allotment option, also known as green shoe, comprised of 39.1 million shares was exercised, totaling 396 million shares and R$ 9.8 billion negociated. With the end of the bookbuilding process on June 30,2010 BB stocks were priced at R$ 24,65 by BB’s Board of Directors. The funds raised with the offer will strengthen the Bank capital structure, enable its expansion strategy, increase the liquidity of the shares in the secondary market and will allow the reach of the minimum 25% of free float required by the Novo Mercado rules, anticipating the deadline established by BM&FBovespa for June, 2011. Institutional investors held 48.3% of the total offered and retail investors held 21.4%. The remaining shares (30.3%) were allocated to the holders of preemptive rights. 30.3% 11.4% 21.4% 48.3% 2.5% 5.2% 2.4% Institutional Investors First Refusal Customers Employees Investments Funds Other funds Figure 11. Public Offering Breakdown 29 - Banco do Brasil – MD&A 2Q10 Foreign investors, mainly consisting of institutional investors, participated with 39.0% of the total offered (R$ 3,803 million). The following figure shows the result of the public offering, considering the institutional investors segregated by country/continent. 2.8% 18.7% 42.9% 35.6% US Brazil Europe ROW Figure 12. Geographic localization of Institutional Investors With the offer, more than 78 thousand new shareholders were set up. The participation of companies in the total shareholder basis of the Bank reached 4.0% after the offering against 3.1% prior to the offer, an increase of 6,400 shareholders companies. Table 14. Shareholders quantity after and before the Public Offering Shareholders 06.31.10 A 07.31.10 B A-B A/B Individuals 330,974 402,787 71,813 21.7% Companies 10,466 1,076 16,870 1,289 6,404 213 61.2% 19.8% Foreign Capital The largest BB’ shareholder is the Brazilian Federal Government which after the public offer reduced its share from 65.3% to 59.2% of the total capital. The second largest share is from the Caixa de Previdência dos Funcionários do Banco do Brasil (Previ) which kept its 10.4% of participation on BB’s total capital. 30 - Banco do Brasil – MD&A 2Q10 Table 15. Ownership Structure % Shareholders Federal Governm ent Jun/09 Mar/10 Jun/10 Jul/10 * 65.5 65.3 65.3 59.2 54.3 51.9 57.7 51.9 Fundo de Garantia a Exportação 8.9 8.9 5.4 4.9 Fundo Garantidor PPP 2.3 2.3 - - Fundo de Inv. Caixa FGHAB - 0.1 0.1 - Fundo de Garantia para Construção Naval - 1.8 1.8 - Fundo Garantidor para Investimentos - 0.3 0.3 0.3 Fundo Fiscal de Inv e Estabilização - - - 2.2 Caixa FI Garantia Construção Naval - - - - 10.2 10.4 10.4 10.4 BNDESPar 2.5 2.4 2.4 0.0 Treasury Shares 0.0 0.0 0.0 0.0 21.8 21.9 21.9 30.4 Individuals 5.6 5.3 5.0 6.3 Companies 5.1 4.8 3.9 7.6 11.1 - 11.7 0.1 13.0 - 16.5 - 100.0 100.0 100.0 100.0 Finance Ministry Previ Free Fl oat Foreign Capital Treasury Shares Total * Position at 07.30.10 after the Stock Public Offering. The remuneration policy for shareholders defined by the Board of Directors for the year 2010 established payout of 40% of net income. The periodicity for payment of dividends and/or interest on own capital is quarterly, according to Art. 43 of the Bank's By-laws. Thus, in the second quarter of this year, the Bank distributed the amount of R$ 1,090 million to its shareholders, with R$ 525 million as interest on own capital (R$ 0.20453 per share in the period) and R$ 565 million as dividends (R$ 0.21987 per share). Table 16. Distribution of Dividends/Interest on Own Capital 2Q09 National Treasury R$ million 2Q10 1Q10 616.4 628.4 711.9 PREV I 95.4 99.9 113.1 BNDES 23.4 23.4 26.5 Individuals 52.5 51.0 54.7 Foreign Capital 47.3 104.1 46.2 112.9 42.5 141.5 Total* 939.2 962.3 1,090.2 Companies * In 1Q10, includes R$ 0.6 million referring to the merger of shares of Banco Nossa Caixa. BB's shareholder base is characterized by the great number of shareholders with a small share in the capital. As can be seen from the table below, 321,854 shareholders (94.0%) account for 1.3% of the capital, while 20,594 shareholders (6.0%) hold 98.7% of the total of the shares. These figures do not consider the public offering results. 31 - Banco do Brasil – MD&A 2Q10 Table 17. Shareholders by Range of Shares Owned Range of s har e s ow ne d No. Shar e holde r s % Shar e holde r s Qty. Shar e s % Qty. Shar e s Fre e Float 342,445 100.0 562,444,707 21.9 1 to 10 shares 112,333 32.8 587,938 0.0 11 to 50 shares 90,258 26.4 2,293,379 0.1 51 to 100 shares 36,083 10.5 2,677,927 0.1 101 to 1,000 shares 83,180 24.3 28,715,359 1.1 Over 1,000 shares 20,591 3 6.0 0.0 528,170,104 2,007,415,406 20.6 78.1 342,448 100.0 2,569,869,551 100.0 s har e s ) Total With regard to the total of the Bank’s shares that are available for trading in the normal course (30.4%), that is, the free float, the predominance of foreign capital can be seen (54.2%), followed by Companies (25.1%) and Individuals (20.7%), percentages on 07.30.2010, after the financial settlement of the Public Offering. The following figures show the evolution of the free float between individuals, companies and foreign capital. Jun/09 Mar/10 23.2% 22.0% 53.7% 51.1% 25.7% 24.3% Jul/10 * Jun/10 59.3% 25.1% 17.8% 22.9% 54.2% 20.7% Individuals * Position of July 30, already considering the stock public offering. Figure 13. Total Free Float Breakdown 32 - Banco do Brasil – MD&A 2Q10 Corporate Foreign Capital Equity Held by Foreign Investors Since 2002, a noteworthy increase has been noted in the holdings of foreign investors in the Bank's capital. With the Bank’s Public Offerings in 2006 and 2007 and the last performed on June/2010, in addition to the "B" and "C" bonus subscription, the stake held by foreign shareholders’ in the Bank’s capital increased significantly, from 0.9% in 2002 to 13.0% in June 2010. The public offering of shares held in June 2010 further accentuated the foreign interest in the capital of BB, which reached 16.2% of the total. As disclosed on September 17, 2009, through a Material Fact, the limit for equity held by foreign investors in the total capital of the Bank was increased from 12.5% to 20.0%. On that occasion, another executive decree authorized the issue of American Depositary Receipts (ADR) backed by common shares of BB. On December 2, 2009, Banco do Brasil launched its level 1 ADR program in New York, the issue was also disclosed through Material Fact. On 07.30.2010, BB had 7.5 million of outstanding ADRs. 16.5 13.0 11.3 11.8 9.9 7.2 2.8 0.9 2002 3.4 1.6 2003 2004 2005 2006 2007 2008 2009 * Position of July 30 for monitoring of the ownership structure considering the primary offering of shares. Figure 14. Equity Held by Foreign Investors 33 - Banco do Brasil – MD&A 2Q10 Jun/10 Jul/10 * 2.2 Warrants In 1996, on the occasion of a BB's capital increase, three series of warrants were issued: A, B, and C, maturing in 2001, 2006, and 2011, respectively. The exercise price for these warrants was established at R$ 8.50, with “adjusted pro rata temporis” by the IGP-DI price index. In this quarter, with the execution of a new primary offering of shares, there was the exercising of 1,551,727 C bonuses (BBAS13), with 4,328,704 remained assets. The distribution and some characteristics of the "C" Warrants are presented in the following tables: Table 18. Breakdown of the Warrant Holders Jun/09 % Jun/10 Individuals 74.3 87.6 Companies 19.7 6.0 10.7 1.7 100.0 100.0 Foreign Capital Total Table 19. Series "C" Warrants War r ant Code Exe r cis e Date Series “C” BBA S 13 03.31 to 06.30.2011 Num be r Exe r cis e Pr ice R$ 4,328,704 27.59 Quote in R$ 47.01 In a simulation, considering a total of 2,569.9 million shares, the potential dilution in the Bank's capital is 0.5%, based on the assumption that until 2011 there will be no additional capital increases and that all the C warrants will be exercised on maturity (March 31 to June 30, 2011). Conversion: 1 Warrant = 3.131799 shares Total Shares= 2,569,869,551 Table 20. Expected Dilution of Capital War r ants Se r ie s “C” 34 - Banco do Brasil – MD&A 2Q10 Qty. War r ants 4,328,704 Qty. Shar e s 13,556,631 Dilution of Capital - % 0.5 2.3 Stock Performance Market In the international financial environment, uncertainties regarding the turn of events of the crisis of the public debt in Europe, and in general, in developed countries, remained. On the short term, besides doubts regarding the resolution of the public indebtedness of some economies from the euro area, the possibility of systemic banking crisis in that region increased. In spite of this, macroeconomic indicators continue to indicate that the recovery process of the activity level remains consistent, but at a moderate and non-homogeneous pace in the euro area. In turn, the main emerging economies continued to record greater dynamism. This, however, was not sufficient to guarantee a positive evolution in the prices of the main assets in the global financial market, especially stock exchanges and commodities. A slowdown of the inflationary environment was observed in the Brazilian domestic environment, influenced particularly by the reduction of food prices. In minute published in June, the Central Bank declared that "the set of information available evidences continuity in the deterioration of the inflationary dynamics in the margin, although at a slower pace". However, the tighten monetary policy is still expected to continue, yet the cycle of interest rate hikes may be shorter. In relation to the GDP of the first quarter released by IBGE (Brazilian Institute of Geography and Statistics), it was observed, along general lines, that the economy continues with robust growth. Furthermore, the numbers showed a favorable composition for the future behavior of inflation, combining de-acceleration of the consumption of families and expressive expansion of investments BB shares As a result of the factors described above, particularly in the international environment, the prices of the main shares of the Brazilian financial market underwent adjustments. BBAS3 shares ended the semester quoted at R$ 24.65, appreciation of 23.7% (adjusted by earnings) in twelve months, against appreciation of 18.4% in the benchmark Bovespa index (Ibovespa). 23.7% 18.4% jun/09 jul/09 ago/09 set/09 out/09 BB Source: Economática Figure 15. BB Shares vs. Ibovespa 35 - Banco do Brasil – MD&A 2Q10 nov/09 dez/09 jan/10 fev/10 Ibovespa mar/10 abr/10 mai/10 jun/10 Share in Ibovespa The Bovespa Index (Ibovespa) is an index adjusted every four months that represents the Brazilian stock market, that is composed of the stocks traded in at least 80% of the trading sessions in the period. A Liquidity Index is calculated based on the trading volume and financial volume of each stock which determines the stock market share and the 80% with the highest Liquidity Index become components of the Ibovespa index. The evolution of the Bank's weighting in the Ibovespa portfolio is shown in the following chart. Banco do th Brasil ranks 13 in the Ibovespa portfolio valid for the next four months (May/10 to Aug/10). The Public Offering carried out in 2006 and 2007 and the stock split in 2008, in the proportion of 1:3, boosted BB's liquidity in the market, improving access by small investors to its stock. With the increase of 78 thousand new investors and rise in the free float to 30.4% (position of 7.30.2010), as a result of the public offering held in Jun/10, an improvement is also expected in the liquidity of BB's shares in the market. 12.479 12.162 11.613 11.307 11.992 11.831 10.710 2.379 2.443 May/08 Aug/08 Sep/08 Dec/08 2.404 2.337 Jan/09 Apr/09 May/09 Aug/09 1.893 Jan/08 Apr/08 BBAS3 2.124 Sep/09 Dec/09 10.554 2.328 2.177 Jan/10 Apr/10 May/10 Aug/10 Banking Industry Source: Bovespa Figure 16. BBAS3 Stock in Ibovespa The average quantity of negotiations in 2Q10 (5,652) surpassed the levels observed in the same period of 2009 (4,726), and the one observed in the the prior quarter (5,248). The average volume traded reached R$ 100.7 billion in 2Q10 as compared with R$ 76.6 billion in 2Q09 and R$ 90.7 billion in 1Q10. 120 R$ million 100 80 60 40 20 3Q08 4Q08 1Q09 2Q09 3Q09 Source: Economática Figure 17. Average daily financial trading volume – BBAS3 36 - Banco do Brasil – MD&A 2Q10 4Q09 1Q10 2Q10 6.0 5.0 thousand 4.0 3.0 2.0 1.0 0.0 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Source: Economática Figure 18. Average daily trading volume – BBAS3 Market Ratios The P/E ratio, which indicates a time estimate in years for investors to recover the capital invested in the purchase of shares assuming the full distribution of company profits; stood at 5.65x last June, compared with 6.16x in the same period of 2009. The EPS reached R$ 1.06 in 2Q10, against R$ 0.91 in 2Q09. The P/B ratio of 1.61x in June 2010 denotes that the Bank's shares are traded more than the book value, that is, the Bank market price is worth 161% of the Shareholders´ Equity. Market capitalization reached R$ 63,319 million at the end of June 2010, against R$ 54,394 million in the same period of the previous year, an increase of 16.4%. The free float capitalization recorded R$ 13,864 million, higher than R$ 11,807 million recorded in June 2009. In 2Q10, the Bank disbursed R$1,090 million to its shareholders, of which R$ 525 million was interest on own capital (R$ 0.20453 per share in the period) and R$ 565 million was dividends (R$ 0.21987 per share in the period). The Dividend Yield in the quarter, which is calculated by dividing the dividends distributed in the period by the Bank’s market capitalization was 1.7%. The following charts show the performance of Banco do Brasil's main key multiples in recent quarters. 37 - Banco do Brasil – MD&A 2Q10 Price / Earnings (LTM) Earnings per Share (R$) 8.97 8.25 7.52 7.08 6.16 1.62 5.65 5.34 1.15 4.28 0.91 0.73 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 3Q08 0.65 4Q08 Price / Book Value 2.38 2.11 Sep/08 Dec/08 Jun/09 11.66 12.02 Sep/09 Dec/09 Mar/10 Jun/10 Sep/08 Dec/08 Mar/09 Market Capitalization (R$ million) 80,204 1Q10 12.60 13.11 Jun/09 Sep/09 14.06 14.66 76,291 Dec/09 Mar/10 17,420 76,676 15.31 Jun/10 16,658 16,789 13,864 12,550 54,394 11,807 43,325 9,404 37,701 Dec/08 2Q10 Free Float Capitalization (R$ million) 63,319 58,360 Sep/08 4Q09 1.61 1.40 Mar/09 3Q09 2.04 1.68 1.26 2Q09 1.06 Book Value per Share (R$) 10.87 2.09 1Q09 0.92 0.77 8,103 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Sep/08 Net Income (R$ million) Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Dividends and Interest on Own Capital (R$ million) 4,155 1,662 2,944 2,725 2,348 3Q08 2,351 1,178 1,090 1,979 1,867 939 1,665 4Q08 1Q09 747 2Q09 3Q09 4Q09 1Q10 2Q10 3Q08 666 4Q08 1Q09 Dividend Yield (%) 940 791 2Q09 3Q09 4Q09 1Q10 2Q10 Payout (%) 40.0 40.0 40.0 40.0 40.0 40.0 40.0 40.0 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3.1 2.2 1.5 1.3 1.7 1.7 1.2 1.0 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 Figure 19. Market Ratios 38 - Banco do Brasil – MD&A 2Q10 1Q10 2Q10 3 - Corporate Governance Banco do Brasil has achieved a prominent position due to practices that guarantee the balance of rights among shareholders and by the accountability to its investors and to the community, as well as the business sustainability and ethics in the relationship with its stakeholders’. Proof of this is BB's membership in Bovespa's Novo Mercado, which is a special listing segment that ghaters the institutions with the most stringent Corporate Governance practices, and its shares listing in the ITAG and IGC indexes, which respectively group companies with differentiated tag along, and those with the best corporate governance practices. In July 2010, Banco do Brasil accomplished the last of its commitments assumed with BM&FBOVESPA for adhesion to the Novo Mercado. Listed in that important trading segment since 2006, BB had negotiated a term with the Stock Exchange of up to June 2011 to attain the minimum percentage of 25% of free-float. With the stock offering settlement in July, BB anticipated the negotiated deadline, and began to fulfill all the conditions imposed by BM&FBOVESPA, which reflect the best corporate governance practices observed in the Brazilian market. BB's management has been based not only on assuring compliance with governing law, but also by providing the market with as many details as possible on its activities, always focusing on the quality of the information provided. In addition to the wide range of reports and information made available at the Securities and Exchange Commission of Brazil (CVM) and on its investor relations website, as well as through meetings organized by the Capital Market Professionals and Investors Association (Apimec) and other events with shareholders, Banco do Brasil has been inviting the market to attend conferences whenever management finds it necessary to clarify specific topics concerning the company. The attitude adopted by BB in view of its new strategy to expand through acquisitions reinforces the Bank's commitment to transparency: to reduce information asymmetry as much as possible, and, in the best interests of its minority shareholders, BB disclosed to the market the valuation reports of the companies involved in its acquisitions, mergers and strategic partnerships. Management BB's management bodies are the Board of Directors, which is advised by the Audit Committee, and the Executive Board of Officers, which is formed by the officers (chief executive officer and nine vicepresidents) and by 27 statutory directors. The Bank also has a permanent Board of Auditors. Decisions are taken collectively at all levels of the Bank. With the purpose of involving all executives in the definition of strategies and approval of proposals for BB's different businesses, Management is supported by committees, subcommittees and commissions at the strategic level, which guarantees agility and security in the decision making process. 39 - Banco do Brasil – MD&A 2Q10 Board of Auditors Management of Assets & Liabilities and Liquidity Global Risk Management Board Market & Liquidity Risk Board of Directors Credit Risk Management of Assets & Liabilities and Liquidity Superior Inquiry Operational Risk Prevention of Financial & Exchange Fraud Information Security Credit Limit Operations Resources Operations Operational Administrative Information Technology Business and Communication Employee Assignment Channels Working Agreement Committee Subcommittee Cost Management and Operational Efficiency Commission Figure 20. Committees, Subcommittees and Commissions - Strategic Level The sophisticated governance structure developed by the Bank is reflected in the daily business management, the assumptions of which include a rigid structure of levels of decision-making authority and the segregation of duties. Loans, for example, are analyzed independently by the business areas, which evaluate the characteristics and the attractiveness of each operation, and by the Loan Directorate, which defines the maximum exposure by client, and sets individualized limits by business category. In this regard, the development of new products is submitted to all the intervening Senior Managements and Units, which analyze in a separate manner all the aspects involved in the deal, like its structure, pricing and risks involved. Highlights in period Public Offering of Shares Banco do Brasil held a public offering of 356.8 million common shares of its issue in June 2010. The shares were traded at R$ 24.65 after the bookbuilding process concluded on 6.30.2010. The operation consisted of: Primary offering of 286 million shares, totaling R$ 7.05 billion, a sum that will be used to reinforce the capital base of the institution, and to sustain its future growth; Secondary offering of 70.8 million shares, previously belonging to BNDES and to the Federal Government In addition, the over-allotment option, also known as green shoe, comprised of 39.1 million shares was exercised. These shares were held by BNDES and the Federal Union, besides treasury shares. In addition to BB’s capital raise due to the primary offering and ratified by the Central Bank on 7.1.2010, the stock offering will result in an increase of the percentage of free float shares to 30.4%, against a percentage of 21.9% observed at the end of June 2010 (before the liquidation of the stock offering). New Head of Investor Relations On 7.7.2010, Banco do Brasil announced the nomination of Mr. Gilberto Lourenço Aparecida to fill the position of Head of Investor Relations. 40 - Banco do Brasil – MD&A 2Q10 Gilberto Lourenço is 48 years old, a BB employee for 23 years and lately acted as Executive Manager of Investor Relations. He has been working for more than 10 years in BB’s Investor Relations, acting directly on the relationship with the market in Brazil and abroad. He coordinated a project dedicated to the preparation of Banco do Brasil’s Public Offering during the first half of 2010. He holds a bachelor degree in Accounting and a MBA in General Accounting at Universidade de São Paulo - USP, along with postgraduate courses in Business Administration and Auditing. Corporate Reorganization – Insurance Continuing the process of the insurance corporate reorganization of Banco do Brasil Conglomerate, in the second quarter of 2010 strategic moves were made involving the segment companies - Brasilsaúde, Brasilprev and Brasilveículos - and their negotiating partners - Mapfre, Principal Financial Group and Sul América. See additional information on Chapter 10.3.4 of this report. Financial Holding Company Banco do Brasil was given the status of "Financial Holding Company" by the Board of Governors of the Federal Reserve System (“Fed”). The Bank was accorded this status after an accurate analysis of major factors determined by U.S. banking law, which includes the Bank's capitalization level and the quality of its management. This status will allow Banco do Brasil, whether in its interest, to perform banking activities in the US territory, either by itself or through its subsidiaries, under the same conditions as U.S. banks. In the same line, the American regulatory agency FINRA - Financial Industry Regulatory Authority authorized Banco do Brasil Securities LLC, a Banco do Brasil S.A. subsidiary in the United States, to pursue activities related to underwriting. This authorization will allow the full performance of the subsidiary in the main activities related to the distribution of capital market offerings and to brokerage services in the United States. Partnership between Banco do Brasil, Bradesco and Caixa Econômica Federal in the card sector On April 27, 2010, Banco do Brasil S.A. and Banco Bradesco S.A. signed a Memorandum of Understanding, with no binding effect, to create a new business model in order to integrate part their card operations and, concomitantly, launch a Brazilian brand of credit, debit and pre-paid cards for account holders and non-account holders. Subsequently, a new Memorandum of Understanding signed on 08.09.2010, communicated to the market the intention of integrating Caixa Econômica Federal to the initiative. If concluded the operation, the aforementioned companies intend to establish a holding company which will integrate and manage the businesses. Increase in equity interest - Cielo and CBSS On April 23, 2010, Banco do Brasil, together with its fully-owned subsidiary BB Banco de Investimento S.A. submitted proposals to Grupo Santander Espanha referring to the acquisition of a part of the shares held by this group in Companhia Brasileira de Soluções e Serviços (“CBSS”), representing 4.655% of the compay's capital; and in Cielo S.A. ("Cielo"), representing 5.11% of this company' social capital. The operation, which had its conclusion announced to the market on 7.13.2010, resulted in the interest increase of BB-BI in Cielo from 23.54% to 28.65% and in CBSS from 40.35% to 45.0%, reinforcing the equity interest of the Banco do Brasil conglomerate in the capital of these companies that operate in the market of cards. Banco Patagonia On 04.21.2010, Banco do Brasil and the controllers of Banco Patagonia S.A., entered into a Stock Purchase Agreement for acquisition, by Banco do Brasil, of Banco Patagonia's shareholding control. 41 - Banco do Brasil – MD&A 2Q10 The transaction is dependent on the approval of the regulatory agencies in Brazil and Argentina, as well as of the Shareholders' Meetings of Banco do Brasil. For additional information, please see chapter 10.3.3. Merger of Banco Nossa Caixa On 4.1.2010, the Central Bank of Brazil (Bacen) approved the takeover of Banco Nossa Caixa by Banco do Brasil, through the transfer of all its equity and consequent extinction, with BB succeeding this company in all rights and obligations. 42 - Banco do Brasil – MD&A 2Q10 4 - Key Statistics Table 21. Key Statistics 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Balance Sheet Items – R$ billion Assets 458.2 521.3 591.9 598.8 685.7 708.5 724.9 27.9 29.9 30.9 32.4 33.7 36.1 37.6 39.3 Credit Portfolio 202.2 224.8 241.9 252.5 285.5 300.8 305.6 326.5 Deposits Shareholders’ Equity 755.7 229.8 270.8 305.0 310.8 327.0 337.6 342.6 344.0 Demand Deposits 43.0 51.9 47.3 49.1 50.1 56.5 55.0 59.0 Saving Deposits 52.7 55.0 70.6 69.0 72.2 75.7 78.7 81.5 127.6 149.6 178.5 185.1 194.7 193.5 197.9 192.7 1.06 Time Deposits Profitability Net Income per Share - R$ ** 0.73 1.15 0.65 0.91 0.77 1.62 0.92 Recurring Income per Share – R$ 0.79 0.63 0.59 0.67 0.69 0.71 0.80 0.91 ROE - Annual Basis % 30.5 47.4 23.8 33.2 26.2 56.8 28.0 31.5 Recurring ROE - Annual Basis % 33.6 24.5 21.6 23.7 23.1 22.5 24.2 26.5 ROE - Annual Basis % 26.1 30.4 28.9 30.1 29.0 30.7 31.6 31.3 ROA - Annual Basis % 1.7 2.4 1.2 1.6 1.2 2.4 1.3 1.5 NII / Earning Assets - Annual Basis 7.0 7.2 6.6 7.3 6.7 6.7 6.5 6.5 45.7 45.7 42.0 42.3 44.6 44.4 44.3 42.7 123.4 125.8 93.4 137.1 121.2 110.3 120.3 127.3 Productivity Cost/Income ratio (ex nonrecurring items) - % Fee Income / Personnel Expenses - % Fee Income / Adm. Expenses - % Personnel Expenses per Employee - R$ 66.0 66.3 50.4 63.9 64.0 57.0 57.7 64.4 25,033 25,071 31,900 22,100 25,422 28,719 26,510 26,681 Employees / (Branches + PAA + PAB) 17.3 16.4 16.8 16.6 16.7 16.8 16.7 17.0 Checking Accounts per Collaborator 317.2 313.4 309.4 306.4 304.8 307.2 309.2 300.1 Assets per Employee – R$ thousand 4,834 5,377 5,990 5,281 5,992 6,221 6,362 6,494 13.1 14.1 14.1 14.7 15.4 16.8 16.9 17.9 Loan Portfolio / Points of Service – R$ million Loan Portfolio Quality Allowance / Loan Portfolio - % Allowance / (E + F + G + H) - % Portfolio Net of Allowance / Total Portfolio - % 5.5 6.1 6.4 7.0 6.7 6.2 6.0 5.5 105.4 107.5 106.0 114.2 114.0 114.5 114.9 114.1 94.5 93.9 93.6 93.0 93.3 93.8 94.0 94.5 Capital Structure Leverage (times) 16.4 17.4 19.2 18.5 20.4 19.6 19.3 19.2 BIS Ratio - % 13.0 15.2 15.0 15.3 13.0 13.7 13.7 12.8 2,565.3 2,568.2 2,568.2 2,568.2 2,568.2 2,568.7 2,568.7 2,568.7 Price / Earnings 12 months ** 8.25 4.28 5.34 6.16 8.98 7.52 7.08 5.65 Price / Book Value ** 2.09 1.26 1.40 1.68 2.38 2.11 2.04 1.61 58,360 37,701 43,325 54,394 80,204 76,291 76,676 63,319 Total Quantity of Shares - thousand Capital M arket M arket Capitalization - R$ million Book Value per Share - R$ ** 10.87 11.66 12.02 12.60 13.11 14.06 14.66 15.31 Price of Share - R$ ** 22.75 14.68 16.87 21.18 31.23 29.70 29.85 24.65 Structural Information Total Service Points 15,438 15,964 16,207 17,210 17,234 17,929 18,030 18,284 Total Customers - thousand 47,492 48,022 53,890 53,530 54,236 52,695 53,535 53,349 Total Checking Accounts - thousand Individuals - thousand Businesses - thousand Total Savings Accounts - thousand Staff Employees Interns 43 - Banco do Brasil – MD&A 2Q10 30,117 30,378 30,574 34,747 34,875 34,988 35,234 34,920 28,173 28,494 28,701 32,555 32,657 32,781 32,910 32,695 1,944 1,884 1,874 2,192 2,218 2,207 2,324 2,225 18,002 18,459 19,432 19,389 19,429 23,371 23,655 23,970 94,935 96,938 98,825 113,401 114,432 113,888 113,942 116,370 85,392 88,972 89,534 103,458 104,139 103,971 103,923 106,241 9,543 7,966 9,291 9,943 10,293 9,917 10,019 10,129 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1T10 2Q10 Glo ba l R a t ings Fitch Ratings Individual C/D C/D C/D C/D C/D C/D C/D Sho rt-Term - Lo cal Currency F3 F3 F3 F3 F3 F3 F3 C/D F3 Long-Term - Local Currency B BB - B BB - B BB - BB B- BB B- BB B- BB B- B BB - Sho rt-Term - Fo reign Currency F3 F3 F3 F3 F3 F3 F3 F3 Long-Term - Fo reign Currency B BB - B BB - B BB - BB B- BB B- BB B- BB B- B BB - M oo dy's Financial Strength Sho rt-Term - Lo cal Currency Sho rt-Term - Fo reign Currency Long-Term Deposits - Fo reign Currency Long-Term Depo sits - Local Currency C C C C C C+ C+ C+ P -1 P-1 P-1 P-1 P-1 P-1 P -1 P -1 NP NP NP NP NP NP P -3 P -3 B aa3 B aa3 B aa3 B aa3 Baa2 Baa2 Baa2 Baa2 A1 A1 A1 A1 A1 A2 A2 A2 Ba2 Ba2 Ba2 B a2 Baa3 Baa3 Baa3 Baa3 Long-Term - Local Currency B BB - B BB - B BB - BB B- BB B- BB B- BB B- B BB - Long-Term - Fo reign Currency B BB - B BB - B BB - BB B- BB B- BB B- BB B- B BB - Long-Term Debt- Fo reign Currency Standard & Po or's N a tio na l R at ings Fitch Ratings Sho rt-Term F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) F1+(bra) Long-Term A A+(bra) A A+(bra) A A+(bra) AA +(bra) AA +(bra) AA +(bra) AA +(bra) AA +(bra) M oo dy's Sho rt-Term BR-1 B R-1 B R-1 B R-1 B R-1 BR-1 BR-1 BR-1 Long-Term A aa.br Aaa.br Aaa.br Aaa.br Aaa.br Aaa.br A aa.br A aa.br 45% 42% 42% 42% 42% 42% 42% 42% 8% 5% 5% 5% 5% 5% 8% 8% 25% 30% 30% 30% 30% 30% 30% 30% C o mpulso ry/ R e se rve R e quire me nt s Demand Depo sits Rate Additio nal (1) Reserve Requirements* Reserve Requirements (micro finance) Unmarked 2% 2% 2% 2% 2% 2% 2% 2% 20% 21% 21% 21% 21% 21% 18% 18% Savings Depo sits Rate 20% 15% 15% 15% 15% 15% 15% 15% Additio nal 10% 10% 10% 10% 10% 10% 10% 10% Reserve Requirements* 65% 70% 70% 70% 70% 70% 70% 70% 5% 5% 5% 5% 5% 5% 5% 5% 15% 15% 15% 15% 15% 14% 14% 15% 8% 5% 5% 4% 4% 4% 8% 8% 77% 80% 80% 81% 81% 83% 79% 77% Unmarked Time Depo sits Rate Additio nal (2) Unmarked Judicial Deposits Rate Unmarked 0% 0% 0% 0% 0% 0% 0% 0% 100% 100% 100% 100% 100% 100% 100% 100% *Reserve Requirements at BB are directed to Rural Credit. The following subtitles refer to the rates due to 3Q09. (1) 5% rate until the calculation period from 01/03/2010 to 05/03/2010. From this period on, the rate was changed to 8%. (2) 4% rate until the calculation period from 01/03/2010 to 05/03/2010. From this period on, the rate was changed to 8%. 44 - Banco do Brasil – MD&A 2Q10 5 - Summarized Financial Statements 5.1 Summarized Balance Sheet Table 22. Summarized Balance Sheet – Assets R$ million ASSETS Cur re nt and Long-te r m As s e ts A vailable Funds Short-term Interbank Investments Securities and Financial Derivatives Securities A vailable f or Trading Securities A vailable f or Sale Securities Held to Maturity Financial Derivatives Interbank A ccounts Deposits w ith the Central Bank Compulsory Deposits on Demand Deposits and Float Compulsory Deposits on Savings Deposits Other Intrabank A ccounts Loans Public Sector Private Sector ( A llow ance f or Loan Losses) Leasing Leasing and Subleasing Receivables (Unearned Lease Income) (A llow ance f or Lease Losses) Other Receivables Receivable on Guarantees Honored Foreign Exchange Portf olio Income Receivable Trading and Brokerage of Securities Specif ic Credits Specif ic Operations Credits f rom Insurance, Pension and Capitalization Op. Tax Credits A ctuarial A ssets Warrants Deposits Receivable Other Credits (Provision or Doubtf ul Receivables) (With Loan Characteristics) (Without Loan Characteristics) Other A ssets Interest in Companies Other A ssets (Provision f or Possible Losses) Prepaid Expenses Pe r m ane nt As s e ts Investments Property and Equipment Leasing A ssets Intangible Def erred Charges 45 - Banco do Brasil – MD&A 2Q10 Jun/09 598,839 584,287 6,212 132,438 109,564 31,661 46,645 30,477 781 29,127 24,507 11,188 13,319 4,620 102 214,906 2,816 228,995 (16,904) 3,253 3,406 (153) 87,034 78 13,957 502 1,763 888 0 702 21,053 8,410 20,489 20,916 (1,725) (702) (1,023) 1,652 0 352 (187) 1,487 14,551 5,184 3,663 2 5,128 574 Balance M ar /10 724,881 706,102 7,364 152,595 119,364 38,183 62,950 17,070 1,162 53,144 47,244 14,472 32,773 5,900 99 267,317 5,668 279,054 (17,405) 4,593 4,826 (233) 99,430 89 11,808 588 400 954 850 22,000 13,374 21,764 29,226 (1,625) (678) (947) 2,196 384 (176) 1,988 18,780 6,869 4,230 1 7,267 413 Chg. % Jun/10 On Jun/09 On M ar /10 755,706 26.2 4.3 737,151 26.2 4.4 9,535 53.5 29.5 132,543 0.1 (13.1) 132,249 20.7 10.8 44,830 41.6 17.4 67,153 44.0 6.7 19,049 (37.5) 11.6 1,217 55.9 4.8 64,857 122.7 22.0 59,374 142.3 25.7 15,833 41.5 9.4 43,541 226.9 32.9 5,483 18.7 (7.1) 110 7.6 10.6 289,075 34.5 8.1 6,145 118.2 8.4 300,028 31.0 7.5 (17,097) 1.1 (1.8) 4,394 35.1 (4.3) 4,641 36.3 (3.8) (246) 60.9 5.9 101,887 17.1 2.5 73 (5.7) (17.9) 12,258 (12.2) 3.8 678 35.1 15.2 409 (76.8) 2.4 978 10.1 2.5 816 16.1 (4.1) 22,431 6.5 2.0 14,510 72.5 8.5 22,380 9.2 2.8 28,988 38.6 (0.8) (1,633) (5.3) 0.5 (744) 6.0 9.7 (890) (13.1) (6.1) 2,501 51.4 13.9 394 12.0 2.7 (171) (8.4) (2.9) 2,278 53.2 14.6 18,555 27.5 (1.2) 6,866 32.4 (0.0) 4,259 16.3 0.7 1 (62.2) (17.1) 7,052 37.5 (3.0) 377 (34.3) (8.6) Table 23. Summarized Balance Sheet – Liabilities R$ million LIABILITIES AND SHAREHOLDER’S EQUITY Cur re nt and Long-te r m Liabilitie s Depos its Demand Deposits Savings Deposits Interbank Deposits Time Deposits Inves tment Deposits Money Market Borrow ing Funds f rom A cceptances and Securities Placed Foreign Securities Interbank A c counts Intrabank A c counts Borrow ing Foreign Borrow ing Domestic Onlending – Of f icial Ins titutions National Treasury BNDES CEF Finame Other Institutions Foreign Onlending Financial Derivativ es Other A ccounts Payable Collection of Taxes and Contributions Foreign Ex change Portf olio Shareholder and Statutory Distributions Taxes and Social Security Trading and Brokerage of Securities Technical Prov. Insurance, Pension and Capitalization Op. Financial and Development Funds Perpetual Sec urities Special Operations Obligations f or Lotto Operations FCO (Subordinated Debt) A ctuarial Liabilities Other Liabilities Une ar ne d Incom e Cor por ate Profit Shar ing Share holde r s ’ Equity Capital (Unpaid Capital) Capital Reserves Revaluation Reserves Revenue Reserves Mark-to-Market – Securities and Derivatives Retained Earnings (A ccumulated los ses) (Treasury Shares) Corporate Prof it Sharing Income A c counts 46 - Banco do Brasil – MD&A 2Q10 Jun/09 598,839 565,692 310,846 49,075 69,011 7,459 185,072 228 101,508 2,673 2,337 2,677 2,045 8,536 8,536 22,626 3,574 11,118 159 7,009 765 107 2,580 112,094 2,853 16,339 1,502 20,141 450 15,017 4,076 990 2,140 14,689 6,179 27,719 787 32,360 18,549 5 7 13,614 216 (31) - Balance M ar /10 724,881 687,235 342,624 54,973 78,719 10,749 197,934 249 157,866 11,656 8,617 2,341 2,503 7,884 7,884 32,995 2,065 20,264 139 9,708 818 99 4,085 125,184 3,295 12,609 1,355 21,796 1,071 18,356 3,685 3,659 206 20,792 5,738 32,621 37,646 18,567 5 6 16,857 405 4 (31) 0 1,833 Chg. % Jun/10 On Jun/09 On M ar /10 755,706 26.2 4.3 716,374 26.6 4.2 343,961 10.7 0.4 59,025 20.3 7.4 81,541 18.2 3.6 10,436 39.9 (2.9) 192,715 4.1 (2.6) 243 6.6 (2.4) 166,603 64.1 5.5 12,232 357.6 4.9 9,631 312.1 11.8 3,034 13.3 29.6 1,783 (12.8) (28.7) 52.4 12,016 40.8 12,016 40.8 52.4 36,308 60.5 10.0 2,074 (42.0) 0.4 22,250 100.1 9.8 142 (11.0) 1.7 11,373 62.3 17.1 471 (38.4) (42.4) 104 (3.0) 4.4 3,238 25.5 (20.7) 137,096 22.3 9.5 2,896 1.5 (12.1) 16,321 (0.1) 29.4 1,885 25.5 39.0 24,308 20.7 11.5 1,247 177.0 16.4 26,921 79.3 46.7 3,729 (8.5) 1.2 3,643 267.9 (0.4) 206 (90.4) (0.0) 21,340 45.3 2.6 6,758 9.4 17.8 27,842 0.4 (14.6) 39,332 21.5 4.5 33,078 78.3 78.2 (7,050) 6 (8.3) (0.4) 12,917 (5.1) (23.4) 411 90.2 1.7 (31) (0.0) 0 (65.6) - 5.2 Summarized Income Statement – BR GAAP Table 24. Summarized Income Statement – BR GAAP R$ million Financial Inte r m e diation Incom e Loans Leasing Securities Financial Derivativ es Foreign Exchange Portf olio Compulsory Inv estments Financial Inc. f rom Insur., Pension & Capit. Operations Financial Inte r m e diation Expe ns e s Money Market Funds Borrow ing, A s signments and Onlending A llow ance f or Loan Losses Gr os s Incom e fr om Financial Inte r m e diation Othe r Ope r ating Incom e (Expe ns e s ) Fee Income Banking Fees Inc ome Personnel Ex pens es Other A dministrative Expenses Tax es Equity Interest in the Res ults of Subsidiaries, and A f f iliates Income f / Insurance, Pension & Capitalization Operations Other Operating Revenues Other Operating Expenses Ope r ating Incom e Non-operating Income Incom e Be for e Taxe s Income and Social Contribution Taxes Statutory Prof it Sharing Corporate Prof it Sharing Ne t Incom e 47 - Banco do Brasil – MD&A 2Q10 Quar te r ly Flow 2Q09 1Q10 2Q10 15,365 9,963 148 5,215 (451) 131 213 146 (11,415) (7,067) (483) (3,865) 3,950 (1,167) 2,557 879 (2,506) (2,871) (860) (576) 471 4,957 (3,217) 2,782 1,426 4,208 (1,559) (300) (1) 2,348 17,981 11,953 240 5,644 (232) (18) 274 120 (12,356) (8,493) (903) (2,959) 5,625 (1,896) 2,747 887 (3,021) (3,277) (864) 50 440 3,110 (1,969) 3,730 217 3,946 (1,242) (353) 2,351 18,848 12,364 204 5,195 (29) 71 917 125 (12,577) (9,055) (997) (2,525) 6,271 (1,789) 2,853 1,101 (3,105) (3,039) (944) 29 468 3,020 (2,173) 4,483 129 4,612 (1,473) (414) 2,725 Chg. % On 2Q09 On 1Q10 22.7 24.1 38.2 (0.4) (93.5) (45.5) 330.5 (14.3) 10.2 28.1 106.5 (34.7) 58.8 53.2 11.6 25.3 23.9 5.8 9.7 (0.6) (39.1) (32.5) 61.1 (90.9) 9.6 (5.6) 38.0 16.1 4.8 3.4 (15.0) (7.9) (87.3) 234.7 4.3 1.8 6.6 10.3 (14.7) 11.5 (5.6) 3.8 24.2 2.8 (7.3) 9.3 (41.5) 6.3 (2.9) 10.3 20.2 (40.3) 16.9 18.6 17.1 15.9 Half-Ye ar ly Flow 1H09 1H10 29,854 18,465 286 10,945 (512) 15 389 267 (22,546) (14,828) (1,199) (6,519) 7,308 (3,832) 4,811 1,568 (5,659) (5,562) (1,528) (666) 775 7,018 (4,588) 3,477 1,442 4,919 (378) (527) (1) 4,014 36,829 24,317 445 10,839 (262) 53 1,192 245 (24,932) (17,548) (1,900) (5,484) 11,896 (3,684) 5,600 1,988 (6,125) (6,315) (1,808) 79 909 6,130 (4,142) 8,212 346 8,558 (2,715) (767) 5,076 Chg. % On 1H09 23.4 31.7 55.5 (1.0) (49.0) 257.7 206.6 (8.3) 10.6 18.3 58.5 (15.9) 62.8 (3.8) 16.4 26.8 8.2 13.5 18.3 17.3 (12.6) (9.7) 136.2 (76.0) 74.0 618.5 45.6 26.5 5.3 Income Statement with Reallocations Table 25. Income Statement with Reallocations Quarte r ly Flow Chg. % R$ million 2Q09 1Q10 2Q10 On 2Q09 On 1Q10 Financial Inte r m e diation Incom e 16,037 18,562 19,512 21.7 5.1 Loan Operations (4) (14) 10,133 12,480 12,991 28.2 4.1 Lease Operations 148 240 204 38.2 (15.0) Securities 5,215 5,644 5,195 (0.4) (7.9) Financial Deriv atives (451) (232) (29) (93.5) (87.3) Foreign Exchange Portf olio 131 (18) 71 (45.5) Compulsory Investments 213 274 917 330.5 234.7 Financial Inc ome f rom Insurance, Pension and Capitaliz . Operatrions 146 120 125 (14.3) 4.3 FX Gain (Loss) on Foreign Investments (1) (592) 18 (5) (99.2) Other Op. Inc. of a Fin. Intermed. Nature (2) 1,533 28 57 (96.3) 105.4 Hedge Fis cal (5) (439) 8 (15) (96.6) Financial Inte r m e diation Expe ns e s (7,550) (9,205) (10,052) 33.1 9.2 Money Market Funds (3) (7,067) (8,302) (9,055) 28.1 9.1 Borrow ing, A ssignments and Onlending (483) (903) (997) 106.5 10.3 Ne t Inte r e s t Incom e 8,487 9,357 9,461 11.5 1.1 A llow ance f or Loan Los ses (6) (15) (3,172) (3,026) (2,871) (9.5) (5.1) Ne t Financial M argin 5,316 6,331 6,590 24.0 4.1 Fee Income 3,436 3,634 3,954 15.1 8.8 Serv ices Income 2,557 2,747 2,853 11.6 3.8 Banking Fee Income 879 887 1,101 25.3 24.2 Insurance, Pension Plan and Capitalization Income 471 440 468 (0.6) 6.3 Tax es on Revenues (5) (7) (806) (839) (909) 12.8 8.4 Contribution M ar gin 8,417 9,567 10,103 20.0 5.6 A dministrativ e Expenses (4,892) (5,300) (5,471) 11.8 3.2 Personnel Expenses (8) (2,613) (2,851) (2,937) 12.4 3.0 Other A dministrativ e Expenses (8) (9) (2,279) (2,449) (2,534) 11.2 3.5 Other Tax Expenses (7) (7) (26) (34) 378.7 28.6 Com m e r cial Incom e 3,518 4,241 4,598 30.7 8.4 Legal Risk (45) (450) (239) 427.8 (46.9) Legal Claims (8) (13) (16) (20) (152) (238) 35 Labor Law s uits (8) (16) (19) (20) 107 (212) (274) 29.4 Other Operating Income (740) (379) (491) (33.6) 29.6 Eq. Int. in Results of Subs. A nd A f f il. (1) 15 32 34 123.1 6.2 FX Other Operating Income / Expens es (755) (411) (525) (30.5) 27.7 Other Operating Income (2) (3) (4) (10) (11) 838 1,112 1,180 40.8 6.1 PREV I (10) (11) 298 913 913 206.2 0.0 Other Operating Expenses (2) (6) (9) (13) (1,891) (2,437) (2,618) 38.4 7.4 Ope r ating Incom e 2,733 3,412 3,869 41.5 13.4 Non-operating Income (12) (21) 11 3 15 44.4 406.8 Incom e Be for e Taxe s 2,744 3,415 3,884 41.6 13.7 Income and Social Contrib. Taxes (5) (10) (17) (18) (771) (1,053) (1,194) 54.9 13.4 Interest on Ow n Capital Tax Benef it 182 207 210 15.2 1.4 Statutory Prof it Sharing (10) (220) (307) (363) 64.7 18.2 Corporate Prof it Sharing (26) Re cur ring Incom e 1,727 2,056 2,327 34.8 13.2 Extraordinary Items 455 384 310 (31.9) (19.3) Sale of Share in V ISA Internacional (12) 214 Ec onomic Plans (13) (193) (85) (140) (27.5) 65.3 Credit A s signment (14) 271 Contingent Liabilities – BESC (20) 250 A dditional Provision f or Loan Losses (15) (676) 332 Provision f or Labor, Civil and Tax Claims (16) Tax Credits – dif f erential of CSLL rate (17) Disposal of Investments – V isanet Brasil (18) 1,415 Reversal of Labor Liabilities (19) 568 Capital Gain - BB Seguros Participaç ões (21) 114 Tax FX and Statutory Prof its over Extraord. Items (22) (362) (313) (246) (31.9) (21.5) 166 (88) 88 (46.8) A ctuarial A ssets - A djustments (10) 2,348 2,351 2,725 16.1 15.9 Ne t Incom e 48 - Banco do Brasil – MD&A 2Q10 Half-Ye ar ly Flow Chg. % 1H09 1H10 On 1H09 31,297 38,075 21.7 19,084 25,471 33.5 286 445 55.5 10,945 10,839 (1.0) (512) (262) (49.0) 15 53 257.7 389 1,192 206.6 267 245 (8.3) (677) 13 2,003 85 (95.7) (503) (6) (98.7) (15,825) (19,257) 21.7 (14,626) (17,357) 18.7 (1,199) (1,900) 58.5 15,472 18,817 21.6 (5,663) (5,897) 4.1 9,809 12,920 31.7 6,379 7,588 19.0 4,811 5,600 16.4 1,568 1,988 26.8 775 909 17.3 (1,424) (1,747) 22.7 15,539 19,670 26.6 (8,823) (10,771) 22.1 (4,742) (5,788) 22.0 (4,080) (4,983) 22.1 (50) (60) 20.2 6,667 8,839 32.6 (242) (688) 183.8 (247) (203) (18.0) 5 (485) (1,294) (870) (32.8) 10 66 541.0 (1,304) (936) (28.3) 1,633 2,292 40.3 597 1,827 206.2 (3,534) (5,055) 43.0 5,130 7,281 41.9 27 18 (32.2) 5,157 7,299 41.5 (1,459) (2,247) 54.0 362 417 15.5 (423) (670) 58.4 (26) 3,250 4,383 34.9 764 694 (9.2) 214 (288) (225) (21.8) 271 250 (676) 332 (1,367) 1,213 1,415 568 114 196 (560) 4,014 5,076 26.5 5.3.1 Details of Reallocations In this chapter the adjustments made to the Summarized Income Statement to obtain the Income Statement with Reallocations are detailed. These adjustments aim to: a) Segregate the One-Off Items and present the recurring income in the period; b) Change the way that income and expenses are reported, in order to provide a better understanding of the business and the company's performance; c) Allow the Net Interest Income (NII) recorded in the period to effectively reflect the income from all earning assets, seeking to inform the market the spread achieved from the division of this margin by the assets, excluding permanent assets. To achieve this, it was necessary to: • • • Include in NII the income recorded under Other Operating Income that had financial intermediation characteristics and which was derived from earning assets recorded in the Balance Sheet under Other Receivables; Identify, in an specific item inside the NII, the FX Gain (Loss) over the Financial Assets and Liabilities Abroad, in the period; Maintain under NII the amounts related to Negative Foreign Exchange Adjustments that were recorded under Other Operating Income and Expenses to avoid inverting the balance of accounts of a financial intermediation nature; d) Detect and cancel the effects of Tax Hedge transactions entered into as of 4Q08, on the Effective Tax Rate and Financial Margin. Regarding these transactions, it should be noted that: • • • • The exchange variation on foreign investments impacts Banco do Brasil's income through the equity income account. To reduce the effects of exchange fluctuations on income, the Bank seeks to align its foreign exchange positions with transactions in the financial market or through commercial positions assumed with customers; In accordance with tax law equity income from overseas investments does not affect the tax calculation bases (IRPJ, CSLL, PIS/PASEP, and COFINS), in contrast to income from foreign exchange hedge transactions which generated gains of R$ 183 million during the third quarter of 2008, and may create losses in subsequent periods if the Brazilian real begins to appreciate consistently again; In order to reduce fluctuations in its profit figures, the Bank decided to assume a foreign currency short position, considering the amount required for effective protection, including tax effects pursuant to article 4 in Circular 3389 dated June 25, 2008; This short position is assumed by entering into a hedge transaction in excess of the assets being protected, by means of a transaction known as a Tax Hedge, or overhedge. The Tax Hedge's value is specified in such a way that the outcome of the hedge transactions, net of their effects on taxes, will be equal to the impact of the exchange fluctuation on the income, which enhances protection and reduces the income's volatility; Reallocations under net interest income (1) The FX Gain (Loss) on Foreign Investments is reallocated from equity income in the results of subsidiaries and affiliates for inclusion under NII. This adjustment is required to maintain the balance and coherence of the spread analysis, since assets and liabilities previously included in permanent assets are included in other balance sheet items after consolidation. Without the reallocation, the spread would be calculated incorrectly. The amounts of these reallocations were R$ 18 million in 1Q10 and (R$ 5 million) in 2Q10. 49 - Banco do Brasil – MD&A 2Q10 (2)The reallocations from Other Operating Income/Expenses to Other Operating Income of a Financial Intermediation Nature are detailed below: Table 26. Reallocations - Other Operating Income/Expenses Quar te rly Flow R$ million 2Q09 1Q10 Chg. % 2Q10 Half-Ye arly Flow On 2Q09 On 1Q10 1H09 1H10 Chg. % On 1H09 Income f rom Special Operations 12 10 20 71.2 105.4 24 29 21.9 Income f rom specif ic credits 22 22 46 108.2 106.6 44 69 55.9 1,499 (4) (9) - 111.7 1,935 (13) - 3,047 (1,548) 0 (4) (9) (99.4) 111.7 3,627 (1,692) 0 (13) (100.0) (99.3) 1,533 28 57 (96.3) 105.4 2,003 85 (95.7) FX Readjustment FX Readjustment Income FX Readjustment Expense Total (3) Reallocation from Other Operating Income to Money Market Fundings. It refers to the reversal of charges with the restatement of savings deposits recorded upon the closing of the semesters. In the months after the closing of the Balance Sheets, this reallocation is necessary order to correctly state the NII. This reallocation is only performed in the first and third quarters of the year. In 1Q09 the charges were R$ 202 million and R$ 191 million in 1Q10. (4) Reallocation from Other Operating Income to Loan Operations corresponding to the equalization revenues of charges over loan operations. Since January 2008 these revenues are accounted for under Other Operating Income, and had to be reallocated to the group of Loan Operations for purposes of comparability. Equalization revenues amounted to R$ 527 million in 1Q10 and R$ 626 million in 2Q10. (5) Reallocations were performed in order to cancel the effects from Tax Hedge transations. In the second quarter of 2010, in view of the appreciation in the Brazilian real against the U.S. dollar, the Tax Hedge adversely impacted the NII by R$ 14.8 million, an amount that we reallocated to replace the negative impact on Taxes on Revenues (of R$ 1.6 million) and on Income and Social Contribution Taxes (of R$ 13.2 million). Reallocations under Net Financial Margin (6) The expense with Allowance for Loan Losses includes credits without characteristics of financial intermediation, therefore this part of the allowance is reallocated to Other Operating Expenses. In 1Q10, this reallocation was of R$ 67 million and in 2Q10 was R$ 14 million. Reallocations under Contribution Margin (7) Considering the model used for Income Statement, tax expenses on revenues are reallocated and included in the Contribution Margin. In 1Q10, this reallocation was of R$ 837 million and in 2Q10, R$ 910 million. Reallocations under operating income (8) The expenses with Legal Claims and Labor Lawsuits were segregated on the Income Statement with Reallocations, into a group called Legal Risk. In order to provide a better analysis of the Administrative Expenses and greater transparency for this type of risk. Amounts reallocated in 1Q10 and 2Q10 were, respectively: - Labor claims: (R$ 212 million) and (R$ 274 million). - Civil claims: (R$ 238 million) and R$ 35 million. 50 - Banco do Brasil – MD&A 2Q10 (9) As of 1Q09, in compliance with the resolution issued by the Central Bank of Brazil, part of the premiums paid to customers began to be recorded under "Other Administrative Expenses". Aiming to maintain the comparability and considering the nature of the amounts disbursed, we reallocated the entire sum to "Other Operating Expenses", as recorded until December 2008. The amounts reallocated to 1Q10 and 2Q10 were R$ 503 million and R$ 504 million, respectively. (10) Regarding the recognition of revenues originating from the review of actuarial assets and liabilities (PREVI and benefits of sole responsibility of Banco do Brasil, as can be seen in the notes to financial statements), pursuant to CVM Resolution 371/00. Aiming to keep the comparability and evidence the recurring income of each period, the gross amount of R$ 159 million (being R$ 195 million of income regarding PREVI Plano 1, deducted from losses of R$ 36 million regarding the benefits of sole responsibility) was reallocated from the 2Q10 to 1Q10, as well as the effects on taxes of (R$ 59 million) and on statutory profit sharing of (R$ 11 million). As the actuarial analysis evaluated the movement of assets and liabilities during the halfyear, 50% of the gains and losses were reallocated to the previous quarter. The table below details the impact of the adjusts on each line of the 1Q10 income statement with reallocations, where can be observed an increase in the recurring income of R$ 88 million. In order to avoid changes in the net income registered in the corporate law income statement, the line “Actuarial Assets – Adjustments” was also included after the recurring income, with the amount of (R$ 88 million) in 1Q10 and R$ 88 million in 2Q10. Table 27. Previ – adjustments R$ million Gain / Loss Plan 1 - Previ (a) Benefit plan w ith exclusive responsability of BB (b) (a) + (b) 195 (36) 159 Profit Incom e Tax Net Am ount Sharing (72) (14) 108 13 3 (20) (59) (11) 88 nd (11) Since the 2 quarter of 2009, the historical series for the Statement of Income with Reallocations was restated in a manner that the revenues arising from the surplus of PREVI started to be evidenced in a separate line of the statement. The amounts were reallocated from “Other Operating Income” to “PREVI”. This reallocation does not interfere with the PREVI amounts recorded as extraordinary effects. One-off Items (12) Sale of part of the stake held by the BB group (Multiple Bank, CIELO and VisaVale) in Visa Inc., generating positive extraordinary income of R$ 214 million in 1Q10. (13) Civil claims of Economic Plans generating extraordinary expenses in the amount of R$ 85 million in 1Q10 and R$ 140 million in 2Q10. On a semi-annual basis, the amounts were of R$ 288 million in 1H09 and R$ 225 million in 1H10. (14) Assignment of credits written-off to Ativos S.A., generating extraordinary income in the amount of R$ 271 million in 2Q09. (15) Extraordinary expense incurred in 2Q09 for Additional Allowance for Loan Losses in the amount of R$ 676 million. The Additional Allowance for Loan Losses was a result of adjustments to the Bank's statistical models and also due to external macroeconomic scenario. In the 2Q10, there was a reversal of $ 332 million of the Additional Allowance for Loan Losses due to the improvement in the risk profile of the Agribusiness Loan Portfolio. (16) In the 1Q09, as a result of the process of periodic reevaluations of the equity impacts originating from the lawsuits in which Banco do Brasil figures as complainant, plaintiff or stakeholder, an expense of R$ 1,367 million, before taxes, was realized that refers to the supplementation of provision to cover labor, civil and fiscal claims. (17) In the 1Q09, also on account of the reevaluation of the expected impacts of lawsuits, income of R$ 1,213 million was realized relating to the recognition of tax credits originating from the alteration of the 51 - Banco do Brasil – MD&A 2Q10 rate of Social Contribution on Net Income – CSLL from 9% to 15%. The recognition of this tax credit results from the reassesment of the prospect of success of the Direct Unconstitutionality Action (ADIN), number 4101/DF, against the raise of the rate of CSLL of the financial sector. (18) Disposal of 8.1% of the capital stock of CIELO (former VISANET – Companhia Brasileira de Meios de Pagamento), an affiliate of BB Banco de Investimento S/A – BB-BI, a wholly-owned subsidiary of Banco do Brasil, generating extraordinary positive income of R$ 1,415 million in 2Q09 and R$ 209 million in 3Q09 (due to greenshoe exercise, that was only accounted for in 3Q09). Banco do Brasil remains as one of the main shareholders of this company, and currently holds 23.61% of its shares. (19) Reversal of allowances for labor lawsuits, generating extraordinary income in the amount of R$ 568 million in 1Q10, since as from the 4Q09 the balance of allowances was calculated so as to cover the average of the amounts effectively disbursed by BB in judicial lawsuits of the same nature (up to that date the allowance was determined based on the amount claimed by the claimant). The amount recorded as extraordinary in 1Q10 resulted from the migration of the base of labor claims recorded in the controls of Banco Nossa Caixa to the methods and systems of Banco do Brasil. (20) Extraordinary income, in the amount of R$ 250 million, due to the reversal of allowance for labor, civil and tax lawsuits arising from Banco do Estado de Santa Catarina (BESC). In 3Q08, BB recorded an expense of R$ 360 million because it was necessary to increase the allowances to cover the lawsuits of that bank. Since the corporate merger, BB has been registering these lawsuits in order to the allowance to be calculated in accordance with the systems and methodologies in force at BB. The registration of the lawsuits was completed in 2Q10 and the amount calculated for the reserves was lower than that accounted in 3Q08. (21) Extraordinary income of R$ 114 million, in the second quarter of 2010, due to the increase in the Bank's participation in the company Brasilprev. The participation increased from 50% to 75%. (22) As of 4Q08 the Statement of Income with Reallocations started to segregate the effects of extraordinary items of the period on the payment of Statutory Profit Sharing (PLR), and to unify the effects of these items on Taxes (Income and Social Contribution Taxes). The table below shows the effect of each extraordinary item on Taxes and on PLR. Table 28. Tax Effects and Statutory Profit Sharing on One-off Items Quar te rly Flow R$ million Sale of Shares in V ISA International Economic Plans Credit A ssignment Contingent Liabilities (BESC) A dditional Provision f or Loan Losses Provision f or labor, civil and tax claims Dispos al of Investments – V isanet Brasil Reversal of Labor Liabilities Capital Gain - BB Seguros Participações Total 52 - Banco do Brasil – MD&A 2Q10 2Q09 1Q10 Chg. % 2Q10 Half-Ye arly Flow On 2Q09 On 1Q10 1H09 Chg. % 1H10 On 1H09 - (96) - - - - (96.1) - 86 38 62 (27.5) 62.7 121.7 100.2 (17.6) (120) - - - - (120.1) - - - - (111) - - - (110.8) - 299 - (147) - - 299.3 (146.9) - - - - - - 521.1 - - (627) - - - - (626.5) - - - (256) - (50) - - - (255.6) (50.5) - (362) (313) (246) (31.9) (21.5) 196 (560) - 6 - Balance Sheet Analysis 6.1 Breakdown Banco do Brasil is the largest financial institution in Brazil, with total assets of R$ 755,706 million. The assets recorded an expansion of 26.2% in 12 months and 4.3% in the quarter. These figures already consider consolidation of all the interests in financial and non-financial companies, in addition to mergers (Banco Nossa Caixa, BESC, and BEP), and a 50% interest in the capital of Banco Votorantim (BV). The earning assets recorded a change of 4.5% in the quarter and 26.5% in 12 months. The figure below shows that these assets accounted for 81.6% of total assets at the end of June, as compared with 81.0% in March 2010 and 81.4% in June 2009. Analyzing the mix of liabilities, interest-bearing liabilities increased by 2.8% in the quarter and by 29.3% in 12 months. Interest-bearing liabilities accounted for 71.2% of total liabilities at the end of June, a reduction in comparison to the 71.9% of the previous quarter, but an increase as compared with the threshold observed in the same quarter of the previous year (69.5%). Earning Assets¹ vs. Interest Bearing Liabilities² (%) 19.6 29.5 31.3 17.4 18.6 19.4 19.6 31.8 80.4 68.7 80.6 70.5 80.4 68.2 17.3 28.1 30.5 81.4 69.5 82.6 82.7 71.9 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 18.4 19.0 28.0 28.1 81.0 72.0 Dec/09 Earning Assets Other Assets Interest Bearing Liabilities Other Liabilities 28.8 81.6 71.9 Mar/10 71.2 Jun/10 Figure 21. Earning Assets vs. Interest Bearing Liabilities 1 Cash and cash equivalents in foreign currency, marketable securities, financial investments, loan operations Leasing, Remunerated Compulsory Deposits and Other Earning Assets. 2 Savings Accounts, Interbank Deposits, Time Deposits, Money Market Borrowings, Foreign Borrowings, Onlendings, Financial and Development Funds, Subordinated Debts, Hybrid Capital and Debt Instruments, and Foreign Securities Issued Abroad. 53 - Banco do Brasil – MD&A 2Q10 6.2 Analysis of Assets In the analysis of the mix of assets, we highlight the increase in the share of the category "Loan and Leasing operations", which reached 38.8% in June 2010, the highest threshold of the historical series since September 2008. In March 2010 and June 2009, these transactions accounted for 37.5% and 36.4% of total assets, respectively. Liquidity Assets excluding Securities, continued to present a reduction in its share of the Bank's Assets, reaching 18.8% in June 2010, as compared with 22.1% in March 2010 and 23.2% in June 2009. On the other hand, during the quarter, there was a growth in the percentage allocated to Marketable Securities transactions and Other Assets. The fluctuation in the line "Other Assets" basically arises from the balance of compulsory deposits performance at the Central Bank of Brazil (BACEN). These deposits totaled R$ 59,374 million in June, with a growth of 25.7% in the quarter and of 142.3% in twelve months. 22.1 3.3 38.8 19.1 18.6 17.0 16.9 3.2 3.4 3.5 3.2 3.1 37.2 35.2 36.4 36.6 37.6 16.7 18.7 18.3 18.9 24.0 23.5 23.2 24.2 19.0 17.5 Sep/08 Dec/08 Mar/09 Jun/09 Liquidity Assets except Securities Loans and Leasing Other Assets 24.9 Sep/09 Dec/09 Securities Tax Credits 21.9 3.0 3.0 37.5 38.8 16.5 18.8 17.0 20.9 17.5 22.1 18.8 Mar/10 Jun/10 Figure 22. Breakdown of Assets Table 29. Breakdown of Assets R$ million Total As s e ts Se p/08 De c/08 M ar /09 Jun/09 Se p/09 De c/09 M ar /10 Jun/10 458,237 521,273 591,925 598,839 685,684 708,549 724,881 Liquidity A ssets except Securities 77,938 124,953 139,312 138,650 165,881 176,241 159,958 142,078 Securities 85,954 86,909 110,594 109,564 129,818 124,337 119,364 132,249 Loans and Leasing 177,866 193,849 208,622 218,159 250,853 266,484 271,910 293,470 Tax Credits 14,994 101,485 16,499 99,062 20,413 112,984 21,053 111,413 22,261 116,872 21,910 119,578 22,000 151,648 22,431 165,477 Other A ssets 54 - Banco do Brasil – MD&A 2Q10 755,706 6.3 Securities Portfolio The securities portfolio showed an increase of 10.8% in relation to 1Q10 and of 20.7% in relation to the final balance of June 2009. Table 30. Securities Portfolio by Category Balance R$ million Se p/08 Se curitie s De c/08 Shar e % M ar /09 Jun/09 Se p/09 De c/09 M ar/10 Jun/10 Jun/09 Jun/10 85,954 86,909 110,594 109,564 129,818 124,337 119,364 132,249 100.0 100.0 A vailable f or Trading 26,475 26,136 32,475 31,661 44,590 38,274 38,183 44,830 28.9 33.9 A vailable f or Sale 37,777 38,374 45,269 46,645 52,750 62,161 62,950 67,153 42.6 50.8 Held to Maturity 20,443 1,258 20,123 2,276 31,433 1,417 30,477 781 30,773 1,706 22,439 1,463 17,070 1,162 19,049 1,217 27.8 0.7 14.4 0.9 Financial Derivatives As to the composition of the securities portfolio by maturity in the quarter showed a higher concentration of securities with terms over 1 year. Securities with terms between 1 to 5 years accounted for 60.9% of total portfolio, while securities with terms above 10 years represented 6.8%. Table 31. Securities Portfolio by Maturities – Market Value Up to 1 ye ar R$ million Balance 1 to 5 ye ar s Shar e % Balance 5 to 10 ye ars Shar e % Balance Ove r 10 ye ar s Share % Balance Share % Total Sep/08 27,206 32.1 40,609 47.9 11,594 13.7 5,286 6.2 Dec /08 27,232 32.2 39,465 46.6 12,543 14.8 5,373 6.3 84,612 Mar/09 35,555 32.5 55,949 51.1 12,295 11.2 5,631 5.1 109,430 Jun/09 31,277 28.7 64,016 58.7 7,301 6.7 6,445 5.9 109,040 Sep/09 35,354 27.6 72,607 56.6 14,683 11.4 5,653 4.4 128,298 Dec /09 29,640 24.2 70,531 57.5 15,720 12.8 6,823 5.6 122,715 Mar/10 28,025 31,311 23.7 23.9 68,319 79,737 57.9 60.9 14,581 10,925 12.4 8.3 7,132 8,929 6.0 6.8 118,057 130,902 Jun/10 55 - Banco do Brasil – MD&A 2Q10 84,695 6.4 Tax Credits In 1998, BB filed a lawsuit claiming the full carry forward of accrued income tax losses and the negative bases of social contribution tax. Since then, Banco do Brasil has offset these tax losses in full against income tax and social contribution taxable income and has made judicial deposits of the taxes otherwise due (on 70% of the amount offset). In May 2007, the tax credits that had been written off since the beginning of the lawsuit were reactivated in the sum amount of R$ 4,913.2 million, and allocated to a contra account for the rebuilding of provision relating to the portion of 70% of Income Tax and Social Contribution, for which judicial deposits were formed. The Tax Credit balance, including BNC's and BV's consolidated figures, reached R$ 22,431 million in June 2010, 2.0% higher than the balance in March 2010. In the comparison of 12-month periods the stock of tax credits grew 6.5%. Tax credits originating from temporary differences represent 80.6% of the stock. The time differences tax credits result from the fact that the tax legislation does not allow the inclusion of certain expenses in the calculation base of taxes at the time they occur (accrual basis accounting), but rather at the time they are financially settled (cash basis accounting). Table 32. Breakdown of Tax Credits R$ million M ar /09 Jun/09 Time Dif f erenc es 15,428 16,433 Soc ial c ontribution on net inc ome (18% acc ording to 3,579 MP 2158/2001) 3,363 Tax Los s / Negativ e Base Ex c es s Deprec iation Total Tax Cre dit Inc ome Tax / Pre-tax Inc ome - % Se p/09 De c/09 M ar/10 Jun/10 17,644 17,244 17,514 18,076 3,247 3,188 3,097 2,967 1,217 189 1,009 248 937 433 949 529 1,014 375 990 399 20,413 21,053 22,261 21,910 22,000 22,431 31.1 30.6 29.2 31.9 33.9 33.9 The table above presents a breakdown of the stock of tax credits by type. The ratio of income tax to pretax earnings ended the second quarter at 33.9%, in line with Mar/2010, and higher than the 30.6% recorded at the end of Jun/09. When commenting on tax aspects, it is important to emphasize that Tax Hedge operations began to be contracted as of 4Q08. Banco do Brasil contracted hedge operations in an amount that exceeded the amount of investments maintained abroad (over hedge) with the objective of canceling the effects of exchange variation on net income, given the fiscal impacts of these operations. Further details on tax hedging and the reasons that led Banco do Brasil to contract them can be found in Chapter 5.3.1 (Details on Reallocations). During 1H10, Banco do Brasil realized tax credits amounting to R$ 3,273 million, corresponding to 90.9% of the projected use of tax credits in 2010 that was reported in the technical study dated December 31, 2009 (R$ 3,599 million). 56 - Banco do Brasil – MD&A 2Q10 6.5 Loan Portfolio Providing continuity to integration process of loan portfolios of Banco do Brasil and Banco Nossa Caixa, the Business portfolio was incorporated in the BB systems in this quarter. However, the remaining balance of the Individual portfolio is still presented in a segregated line in the tables of this chapter. The loan portfolio of the National Banking Industry ended Jun/10 with a balance of R$ 1,529.0 billion, considering free and specific funds, up 19.7% from June 2009 and 5.3% in relation to March 2010. The Loan/GDP ratio estimated by the Central Bank of Brazil stood at 45.7% in this quarter, in line with the figure observed in the previous quarter (45.2%) and higher than the one recorded in Jun/09 (41.8%). Loans to companies increased by 20.3% in 12 months and by 6.0% in the quarterly comparison, while for individuals it grew by 19.1% in 12 months and 4.5% from March 2010 with the respective balances of R$ 836.4 billion and R$ 692.6 billion. BB's domestic loan portfolio expanded by 6.6% in the quarter and by 28.2% in the 12 months. There is still no impact in the portfolio results of the partnership with BV in June 2009. In the latter half of 2008, the process of acquiring the loan portfolios of other financial institutions, particularly payroll and auto loans, began to intensify at BB. The table below shows the balances of the portfolios acquired and the interbank deposits guaranteed by the loan portfolios of other institutions, which are recorded under Interbank Investments. Table 33. Acquired Portfolios and Interbank Deposits with Credit Guarantee R$ million Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Payroll loans 3,110 2,935 2,741 2,655 3,003 2,616 3,552 Vehicle financing Interbank w ith Loan Guarantee 744 5,970 737 9,644 1,580 5,133 1,850 3,968 2,668 4,056 2,476 4,062 3,956 3,148 Total 9,825 13,317 9,454 8,473 9,728 9,155 10,656 Loans to Individuals reached R$ 101,122 million in June 2010, an increase of 6.3% in the quarter and of 47.7% in the 12-month period, higher than that recorded in the Banking Industry. The results include the acquisitions (BNC) and partnerships (BV). Meanwhile, loans to companies closed the first half with a balance of R$ 135,575 billion, up 31.2% from the same period of 2009 and of 5.9% in relation to March 2010, also considering the balances of acquisitions and partnerships. The growth recorded in the Companies Portfolio was also higher than that recorded in the Banking Industry. The Agribusiness Loan Portfolio decreased by 8.4% from the previous quarter and by 4.0% in 12 months, to end 2Q10 with a balance of R$ 70,321 million. BB's foreign portfolio ended June 2010 with a balance of R$19,504 million, a growth of 49.3% in the 12 months and 11.4% in the quarterly comparison. Note that in these periods there was foreign exchange devaluation (Ptax Dollar Sell) of 7.7% and appreciation of 1.2%, respectively. 57 - Banco do Brasil – MD&A 2Q10 Table 34. Loan Portfolio Balance R$ million Br azil Se p/08 De c/08 M ar/09 Jun/09 Chg. % Se p/09 De c/09 M ar /10 Jun/10 On Jun/09 On M ar /10 189,301 209,693 227,201 239,418 270,748 283,560 288,044 307,018 28.2 6.6 . Individuals 43,435 48,811 61,138 68,467 85,717 91,791 95,092 101,122 47.7 6.3 . Businesses 85,343 97,192 101,776 103,351 116,994 125,336 128,080 135,575 31.2 5.9 32,027 34,900 37,403 39,493 41,159 44,920 45,215 47,382 20.0 4.8 - MSE - Other . A gribusiness 53,315 62,292 64,373 63,858 75,834 80,416 82,865 88,193 38.1 6.4 60,524 63,690 64,287 67,600 68,038 66,434 64,872 70,321 4.0 8.4 - Individual 42,630 45,202 46,252 47,381 47,574 47,265 47,663 47,839 1.0 0.4 - Companies 17,894 18,487 18,035 20,219 20,464 19,169 17,210 22,482 11.2 30.6 For e ign Total 12,900 15,115 14,726 13,068 14,769 17,268 17,507 19,504 49.3 11.4 202,201 224,808 241,926 252,485 285,517 300,829 305,551 326,522 29.3 6.9 58 - Banco do Brasil – MD&A 2Q10 6.5.1 Individual Customer Loan Portfolio The individuals’ loan portfolio reached R$ 101,122 billion, expansion of 47.7% in the 12 months and of 6.3% in relation to March 2010. During this quarter, the Individual loan portfolio was better evidenced. A significant portion of the consumer finance loan balance was relocated to consumer loan backed by direct position. Therefore, table 33 has been restated with the new segmentation. Series was redone since Mar/09. Payroll loans continued to be the most relevant product, with a balance of R$ 40,476 million in 2Q10, 40.0% of BB’s total individual loan portfolio. This amount represents 32.8% of all loans granted in Brazil’s Banking Industry (R$ 123,438 million). In 2Q10, there were 1,393.1 thousand payroll loans operations, with an average term of 44 months and an average monthly interest rate of 2.18%. In the same period of 2009, 762.9 thousand payroll loans were granted with an average term of 40 months and an average interest rate of 2.32%. Note that in 2Q10, BB acquired approximately R$ 1 billion in payroll loans, fact that explains the growth observed in contracting of operations of 82.6% in twelve months, and of 86.2% in relation to the previous quarter. Loans granted to civil servants still represent the highest share of BB's payroll loan portfolio, accounting for 84.8% of all loans. The remaining portion of loans was granted retirees and pensioners (8.1%) in the INSS social security system and to employees in the private sector (7.2%). In the vehicle segment, the balance of loan operations reached R$ 10,050 million (not including the BV balance), an increase of 22.9% in 12 months and 13.5% over March 2010. During the quarter, there was an increase of R$ 1,480 million in the vehicle financing acquisition balance totalizing R$ 3,956 million, a balance 59.8% higher than the one recorded in March 2010. Considering the BV balance, the total amount reached R$ 22,774 million, a growth of 8.3% from the prior quarter. BB’s share of vehicle acquisition operations in the banking industry (R$ 167,299 million) reached 13.6%. In 2Q10, BB's vehicle financing operations presented an average term of 46.8 months, average value per contract of R$ 22,082 and average monthly rate of 1.55%. Meanwhile, leasing transactions in the same period registered an average term of around 49.8 months and an average value per agreement of R$ 28,800 and a 1.6% average rate. Around 12.4% of BB's vehicle portfolio balance consists of leasing operations. Note that this information does not consider the balances of BV. Although incipient and in view of the growth promoted by the strategy adopted by BB, the balance of Real Estate Financing operations amounted to R$ 1,197 million in 2Q10, up from R$ 350 million in the prior-year period. The average term of these operations is 240 months, with an average ticket of R$ 135 thousand. Combined with the amount of R$ 908 million accounted at BNC, these transactions reached R$ 2,105 million. In view of the real estate financing using funds from the Government Severance Indemnity Fund for Employees (FGTS) under the rules of the government housing program "My Home, My Life", the Bank expects to grant financing to 44.5 thousand families to acquire low-income housing units. Note that BB has adopted an innovative sales strategy in this segment that uses alternative sales channels, real estate correspondents and companies specializing in the origination of real estate business to individuals. Also under the scope of the "My Home, My Life" program, but using funds allocated to finance production in the real estate portfolio, Banco do Brasil prospected 40 operations with 3 operations recorded so far. The table below presents the main products in the loan portfolio aimed at the individual clients of BB, BNC and BV. We point out that for Votorantim the amount presented refers to 50% of that portfolio and part of BNC's portfolio has already been incorporated into BB’s products lines. 59 - Banco do Brasil – MD&A 2Q10 Table 35. Individuals’ Loan Portfolio Balance R$ million Direc t Cons umer Credit (CDC) M ar /09 Jun/09 Se p/09 Chg. % De c/09 M ar /10 Jun/10 On Jun/09On M ar/10 28,138 31,809 34,609 37,153 47,468 51,196 60.9 7.9 18,411 20,000 21,612 23,516 31,164 33,921 69.6 8.8 Consumer Financ e¹ 3,924 4,018 4,133 4,460 5,127 5,628 40.1 9.8 Consumer Loan Bac ked by Direct Deposits¹ 6,744 7,791 8,865 9,177 11,177 11,647 49.5 4.2 167 350 471 676 1,029 1,197 242.3 16.3 V ehic les Loan¹² 7,005 8,180 8,638 9,425 8,857 10,050 22.9 13.5 Credit Card 7,493 7,830 8,007 9,336 8,889 9,327 19.1 4.9 Ov erdraf t A c counts 2,822 2,906 2,870 2,434 2,735 3,199 10.1 17.0 20.3 Pay roll Loan Mortgage Mic rocredits 548 519 549 674 870 1,046 101.5 Other 4,031 3,650 3,604 3,887 3,706 4,436 21.6 19.7 BNC³ 9,991 13,224 14,524 15,080 6,926 5,569 (57.9) (19.6) (15.2) Pay roll Loan 6,433 9,534 10,672 11,324 5,093 4,318 (54.7) Consumer Financ e 1,835 1,845 1,933 1,905 49 - - - Mortgage 771 789 819 854 884 908 15.1 2.7 Others 953 1,056 1,100 997 900 344 (67.5) (61.8) - - 12,446 13,126 14,611 15,101 - 3.4 Pay roll Loan - - 1,689 1,674 2,293 2,237 - (2.4) V ehic les Loan - - 8,947 9,339 10,057 10,539 - 4.8 Leasing - - 1,671 139 1,974 139 2,123 138 2,184 140 - 2.9 1.4 61,138 68,467 85,717 91,791 95,092 101,122 47.7 6.3 BV * Others Total (1) As of March 2010, owing to the partial integration of the BNC portfolio and the BB’ systems, this line contains the partial balance of this bank. (2) The Jun/10 figures include the balances of Finame Pro-Caminhoneiro PF (R$ 167.1 million) and leasing operations (R$ 1,263.9 million) (3) In Mar/10 due to the partial integration of the BNC portfolio and the BB’ systems, lines in this table already include partial balances. (4) Amount equivalent to 50% of the BV's loan portfolio 60 - Banco do Brasil – MD&A 2Q10 6.5.2 Business Loan Portfolio In the business segment, BB ended June 2010 with a balance of R$ 135,575 million, up 31.2%% in the 12 months and 5.9% in relation to the prior quarter. This figure represents 41.5% of BB's total portfolio. Nossa Caixa portfolio was totally integrated to BB systems during this quarter During this quarter an improvement was made in the evidencing of Business loan portfolio, so that, part of the working capital balance was reclassified to receivable lines. The table below shows a series recomposed since March 2009. Regarding BV, the product with the highest share in the portfolio was Working Capital (33.0% of the total) followed by the BNDES and FINAME investment lines (30.7%). Further information can be obtained from the chapter 10 of this report. Table 36. Business Loan Portfolio Balance R$ million M ar/09 Jun/09 Se p/09 Chg. % De c/09 M ar /10 Jun/10 On Jun/09 On M ar /10 Working Capital¹ 45,699 47,614 51,847 56,947 60,772 67,499 41.8 Investment 19,415 19,934 20,671 22,704 23,834 26,146 31.2 9.7 Receivables¹ 12,213 12,342 12,191 14,586 13,775 14,403 16.7 4.6 Pré-A pproved Credit 11.1 2,565 2,568 2,713 2,877 2,647 3,548 38.2 34.0 11,807 10,711 8,945 7,923 7,971 7,097 (33.7) (11.0) BNDES Exim 4,105 3,988 4,692 4,464 3,934 3,521 (11.7) (10.5) Credit Cards 902 1,196 1,639 2,024 2,187 2,603 117.6 19.0 Overdraf t A cc ount 155 177 161 141 154 253 42.7 64.7 Other 1,679 1,819 2,098 1,672 1,936 2,256 24.0 16.6 BNC² 3,038 3,001 3,984 3,904 2,842 - - - - - 8,052 8,096 8,028 8,249 - 2.8 Working Capital - - 2,383 2,654 2,501 2,722 - 8.8 BNDES/FINA ME - - 2,258 2,459 2,415 2,532 - 4.9 Ex port Letter of Credit - - 1,427 1,350 1,426 1,430 - 0.3 Joint Lending - - 681 1,304 618 1,016 585 1,100 509 1,055 - (13.1) (4.1) 101,776 103,351 116,994 125,336 128,080 135,575 31.2 5.9 A CC/A CE BV * Other Total (1) Series remade since Mar/09 for methodology improval. Part of the Working Capital balance moved to receivables. (2) Since Mar/10, due to BNC portfolio integration to BB’s systems, part of the balances are already added to the other lines of this table. * Amount equivalent to 50% of BV's loan portfolio The working capital and investments lines continue presenting a good performance in this quarter, leveraged by the domestic economy upturn. These lines grew 11.1% and 9.7%, respectively in the quarterly comparison and 41.8% and 31.2% in 12 months. Together, these two credit lines represented 69.1% of the total business portfolio. BB remained as the leading bank in overall onlending of the BNDES/Finame system, with disbursements of R$ 8,489.1 million and 107,193 thousand operations in June 2010. Private Securities – Banco do Brasil, operates in the capital markets, as an alternative to traditional credit lines, thorough debentures issues, promissory notes and letter of credit. The balances of these Certificates are presented in the following table: 61 - Banco do Brasil – MD&A 2Q10 Table 37. Private Securities – Business Chg. % R$ million Jun/09 Corpor ate Se curitie s * Banco do Brasil BV Se p/09 De c/09 M ar /10 Jun/10 On Jun/09 On M ar/10 2,436 4,936 8,688 9,695 11,274 362.9 16.3 2,436 - 4,936 - 5,782 2,906 6,620 3,075 8,568 2,706 251.7 - 29.4 (12.0) * Securities issued in the country registered in compliance with Central Bank Circular 3068 as “available for sale”. Foreign Trade Loans – The Pre-Shipment/Post-Shipment Export Financing (ACC/ACE) ended the quarter at R$ 7,097 million, lower than the balance recorded in the previous quarter (R$ 7,971 million) and that recorded in June 2009 (R$ 10,711 million). This credit facility is strongly influenced by the behavior of the foreign exchange rate (US dollar) that, in the quarter, appreciated 1.2% in comparison with mar/10, although a devaluation of 7.7% in twelve months. The performance observed basically results from the strong base of comparison and credit migration from ACC/ACE to other lines, especially prepayment operations. The contracted volume decreased 11.4% compared to the immediately prior quarter and 8.2% in 12 months. Despite this performance, Banco do Brasil maintained its leadership of the export and import exchange market in the 2Q10, with volumes of US$ 14.2 and US$ 10.4 billion, respectively. Market share in such lines reached 31.9% for imports and 24,9% in export lines. Table 38. ACC/ACE Average Volume per Contract Chg. % ACC/ACE 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 On 2Q09 On 1Q10 Contracted V olume (US$ million) 2,325 3,182 2,653 2,722 3,296 2,920 (8.2) (11.4) Quantity of Contracts 3,768 617 4,021 791 4,332 612 4,473 609 4,263 773 4,682 624 16.4 (21.2) 9.8 (19.3) A verage V olume per Contract (US$ thousand) Loans to SMEs - In the delivery of services to micro and small companies, Banco do Brasil continued to act as the principal partner of the segment. At the end of the second quarter of 2010, BB had 2.2 million checking accounts, with 1.97 million micro and small business clients. Around 587 thousand received service rendered by specialized relationship managers. BB has also been consolidating its share in the group credit segment, delivering products and services tailored to the needs of this market. The products include the Compe/SPB Integration Service, whereby credit cooperatives and its cooperative members have access to the System for the Clearing of Checks and Other Instruments and to the Payment Settlement and Transfer System (SPB). This service allowed banking products to be made available to around 369 thousand cooperative members, associated with 331 credit cooperatives, contributing with innovation in the supply of solutions in products and sale formats, essential functions for the growth of BB's competitiveness and maintenance of partnerships. In June 2010, BB supported 187 Local Productive Arrangements (APL), delivering services to 18.5 thousand ventures. A sum of R$ 1.7 billion was made available that contributed toward the sustainable growth of the locations where the APLs are included, with R$ 1.05 billion in loans for working capital and R$ 292.6 million to finance the investments, R$ 146.5 million in funds for foreign trade, with R$ 177 million earmarked for operations geared toward agribusiness. The balance of transactions in favor of SMEs in June 2010 was of R$ 47.4 billion, a 20.0% increase as compared to the same period in 2009. Considering working capital and investment loans, R$ 11 billion was allocated to manufacturing industries (23.4%), R$ 22.9 billion to trade (48.9%) and R$ 13 billion to service provision (27.7%). 62 - Banco do Brasil – MD&A 2Q10 Table 39. SME Credit Products Balance R$ million Working Capital M ar /09 Jun/09 Se p/09 Chg. % De c/09 M ar /10 Jun/10 On Jun/09 On M ar /10 25,159 26,575 28,151 31,250 31,001 34,920 31.4 12.6 Investment 9,652 10,188 10,840 11,466 12,254 11,967 17.5 (2.3) Foreign Trade* BNC 1,143 1,450 1,310 1,420 667 1,501 596 1,608 481 1,479 495 - (62.2) - 2.9 - Total 37,403 39,493 41,159 44,920 45,215 47,382 20.0 4.8 * Since 3Q09 the classification methodology was revaluated in this credit line. In the end of June 2010, R$ 34,920 million were set aside to working capital, an increase of 31.4% in relation to the same period in 2009. Among the working capital lines, the following should be highlighted: a) BB Giro Rápido aims to satisfy the need for working capital of the segment of micro and small businesses, without requiring tangible collateral. In 2Q10, this line of credit reached a balance of R$ 6.2 billion, representing 17.9% of the working capital block; b) the "BB Giro Empresa Flex", whose purpose is supplying working capital and financing for acquisition of goods and services. In this credit line, the customer can determine the form of loan repayment in accordance with the company's cash flow. This credit line has reached the balance of R$9.1 billion, which represents growth of 28.3% in relation to 2Q09. Financing investments to micro and small businesses reached R$ 11.9 billion in the 2Q10, an increase of 17.5% in relation to the same period of 2009. These also deserve highlighting: a) at the end of June, the BNDES card, a product in which BB is a leader (in terms of amounts disbursed, number of cards and transactions), reached R$ 3.6 billion of disbursements accumulated since the beginning of its commercialization, representing an increase of R$ 2.3 billion in the last 12 months, with 67% of cards issued in the market. b) the Proger Urbano Empresarial program, the key credit facility for investments by SMEs, which showed a record balance of R$ 4.9 billion; c) FINAME operations with micro and small businesses reached a balance of R$ 2.09 billion in June 2010. The Operation Guarantor Fund (FGO) is a system which supplements, by up to 80%, the guarantees required from legal entities for loans and financing, and expands credit supply to companies, particularly micro and small-sized companies, with yet more competitive rates. In the end of the first half of this year, 212 thousand operations amounting to R$ 5.1 billion were with the FGO. The operations backed by this Fund represent approximately 36.4% of the expenses observed in the lines that permit the link with this collateral. 63 - Banco do Brasil – MD&A 2Q10 6.5.3 Agribusiness Loan Portfolio Agribusiness is one of the main sectors of the Brazilian economy, of fundamental importance to the growth of the Country. In its role as an agent of public policies, Banco do Brasil represents a link between the government and the rural producer, acting as the largest financier of Brazilian agribusiness in all its segments and in all stages of the productive chain, from the small farmer to the large agroindustrial companies. The figure below shows both the importance of the share of agribusiness in the Brazilian GDP and the share of jobs generated by agribusiness in the Brazilian job market. 73.6% 26.4% 67.0% 28.9% 71.1% % GDP - Other Activities Cattle %GDP - Agribusiness Agriculture Other Jobs 33.0% Agriculture Jobs Source: MAPA Strategic Plan (2008 data) Figure 23. Agribusiness Participation in the GDP and in the Labor Market Agribusiness surplus closed 1H10 with a balance of US$ 28,892 million, 7.2% higher than the one shown in the same period of 2009. On the other hand, the Brazilian trade balance showed an opposed performance in relation to agribusiness, having its surplus balance decreased by 43.6% in comparison to 1H09, with a balance of US$ 7,899 million in 1H10. For 2010, the outlook for Brazilian agribusiness is better than in 2009, due to the following assumptions: lower prices for inputs; availability of funding for the coming harvest; a recovery in the price of grains, and; an improved market for meat (chicken, pork, and beef). 64 - Banco do Brasil – MD&A 2Q10 The illustration below shows the increase of the Brazilian Trade Balance. US$ billion 60.0 54.9 49.7 44.8 42.7 46.1 40.0 38.4 28.9 24.7 24.6 7.9 2005 2006 2007 2008 Agribusiness 2009 1H10 Brazil Source: MAPA – Ministério da Agricultura, Pecuária e Abastecimento. Figure 24. Trade Balance (FOB) The tables below reflect the flow of exports broken down by key products and Brazil's share in international agribusiness. Table 40. Exports US$ million 2006 2007 2008 2009 1H10 Soybeans and Related Products 9,308 11,381 17,980 17,240 Meat 8,641 11,295 14,545 11,787 6,467 Leather, Hides and Shoes 3,471 3,554 3,140 2,041 1,364 Sugar 7,772 6,578 7,873 9,716 5,201 Forest Products 7,881 8,819 9,326 7,223 4,532 Cof f ee, Mate and Spices 3,535 4,093 4,971 4,470 2,350 Fruit Juice 1,570 2,374 2,152 1,752 799 Tobacco 1,752 5,495 2,262 8,059 2,752 9,066 3,046 7,480 1,170 3,533 49,424 58,416 71,806 64,756 34,973 Other Products Total 9,557 Source: MAPA – Ministério da Agricultura, Pecuária e Abastecimento. Table 41. Brazil’s Participation in World Agribusiness Pr oduction Export % World Tr ade Cof f ee 1º 1º 35.0 Orange Juice 1º 1º 86.2 Cattle 2º 1º 25.1 Sugar Cane 1º 1º 53.0 Soy beans 2º 2º 33.0 Poultry 3º 1º 40.9 Corn 3º 3º 9.4 Cotton 5º 4º 4.0 Source: USDA – PSD online 65 - Banco do Brasil – MD&A 2Q10 The sector’s performance in the last few years is due to the permanent quest for new technologies and for valuing the services provided by the professionals from this area, always aiming at improving profitability and continuity in the enterprises. In the following chart, the increased productivity per planted area, as a result of gains in productivity, can be visualized. 180 350 300 140 250 120 100 200 80 150 60 Yield (ton / ha) Production / Area (million) 160 100 40 50 20 0 0 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 05/06 06/07 07/08 08/09 09/10 Production (million ton.) Area (million ha) Yield (ton / ha) Figure 25. Production vs. Planted Area Agribusiness at BB In relation to the distribution of agribusiness operations by region of the country, continuity was verified in the distribution among Brazilian regions, with the South and Southeast regions appearing as most relevant, while the North and Northeast continue being the least relevant regions. Table 42. Agribusiness Loan Portfolio by Region Re gion North Northeast Share - % 2.6 5.9 Midw est 20.0 Southeast 38.7 32.7 South Rural credit finances the costs of producing and marketing of agricultural products, stimulates rural investments, including warehousing, processing and the industrial transformation of agricultural products. Furthermore, it encourages the introduction of rational methods in the productive system. Agricultural and cattle breeding activity follows the agricultural calendar, known as the harvest-year, which begins in July of each year and ends in June of the following year. Hence, the current 2010/2011 harvest began in jul/2010 and will end in jun/11. In the first quarter of the crop year, funds will required for planting (funding) the summer crop. Also during this period there is a concentration of payments of the costing loans for the summer harvest in the preceding harvest-year. From October to December, the demand for costing funds continues, however, at a lower volume than in the first quarter of the crop. During the harvest's third quarter (January to March) demand begins for the winter harvest's costing loans, and for the summer harvest in the northern and northeastern regions. 66 - Banco do Brasil – MD&A 2Q10 And demand grows during the harvest-year's last quarter for working capital to fund sales, as this is a harvesting period. The rural portfolio of Brazilian Banking Industry attained R$ 116,140 million in Jun/10, an increase of 8.9% in twelve months and of 0.8% in relation to Mar/10. At BB, the balance of the agribusiness portfolio attained R$ 70,321 million, increase of 8.4% over Mar/10 and 4% in twelve months. The rural portfolio represented 21.5% of BB's total portfolio as opposed to 26.8% in Jun/2009. As to the quarterly comparison, commercialization lines showed a stronger growth (36.8%), own seasonality of agribusiness operations explaining such performance. The table below shows a breakdown of BB's agribusiness portfolio, divided into funding for costing, investments, and sales. Table 43. Agribusiness Loan Portfolio by Purpose Balance R$ million M ar/09 Jun/09 Se p/09 Chg. % De c/09 M ar /10 Jun/10 On Jun/09 On M ar /10 Costs 24,389 24,667 24,484 27,478 26,769 27,057 9.7 1.1 Investment 20,587 21,497 22,098 21,965 22,768 23,945 11.4 5.2 Marketing Other* 16,629 2,682 18,738 2,699 18,802 2,655 14,403 2,589 12,704 2,632 17,376 1,943 (7.3) (28.0) 36.8 (26.2) Total 64,287 67,600 68,038 66,434 64,872 70,321 4.0 8.4 * Since Mar/09 BNC portfolio was included. Proger Rural is a product that offers fixed loans for agricultural and cattle breeding funding, besides financial support for fixed and semi-fixed investments. Another important credit line is the National Family Agriculture Empowerment Program – Pronaf aimed at the financing of agricultural activity funding. These two products added up to R$ 19,998 million in June 2010, growing 20.5% in relation to the same period of the previous year and of 5.9% in relation to the previous quarter. FCO Rural offers a financial supplement for working capital and costs for the rural producer of the Midwest region of Brazil. The operations of this product fell 4.9% in 12 months, and practically stable (0.1%) compared to Mar/10, totaling a balance of R$ 5,498 million in June/10. The BNDES/Finame Rural products have the objective of financing investments in the modernization of machines and equipment intended for rural production. Transactions with these products totaled R$ 7,846 million, with positive variations of 78.4% in 12 months and 17.5% in relation to Mar/10. BNDES Procer line financing working capital for agribusiness was responsible for such performance. Financial support to agribusiness involved in selling and processing agricultural and livestock goods are emphasized in Sales and Processing of Agricultural Goods, that ended Jun/10 with a balance of R$ 15,684 million. In the 4Q09, part of the balance was reclassified to the BNDES line, which also changed the line of BNDES/Finame Rural operations. Balances of the remaining products are consolidated into the line Others that, during the period Mar/09Mar/10, includes the amount of BNC portfolio, and as of June/10 balances from BNC already compose the segmentation shown in the following table. 67 - Banco do Brasil – MD&A 2Q10 Table 44. Agribusiness Loan Portfolio by Product Balance R$ million M ar /09 Jun/09 Se p/09 Chg. % De c/09 M ar /10 Jun/10 On Jun/09 On M ar /10 A gricultural and Livestock Costs 17,898 18,139 17,670 17,737 17,391 16,637 (8.3) (4.3) Loans to Companies 14,112 16,245 16,334 12,333 10,855 15,684 (3.5) 44.5 Pronaf / Proger Rural 15,545 16,597 17,645 18,279 18,880 19,998 20.5 5.9 FCO Rural 5,810 5,784 5,617 5,390 5,490 5,498 (4.9) 0.1 BNDES / Finame Rural¹ Other² 4,441 6,481 4,398 6,438 4,378 6,394 6,706 5,989 6,676 5,580 7,846 4,657 78.4 (27.7) 17.5 (16.5) Total 64,287 67,600 68,038 66,434 64,872 70,321 4.0 8.4 (1) Includes amounts from the BB Investimento Agropecuário (Agricultural and Livestock Investment) line (2) BNC portfolio was included as of Mar/09. The following table shows the balance of the loan transactions intended for agribusiness by item financed: Table 45. Agribusiness Loan Portfolio by Financed Item R$ million Ite m Finance d Chg. % Jun/09 Shar e % M ar /10 Share % Jun/10 Shar e % On Jun/09 On M ar /10 Livestock 9,708 14.4 10,932 16.9 11,790 16.8 21.4 7.9 Soybeans 4,906 7.3 5,863 9.0 4,835 6.9 (1.5) (17.5) Corn 3,434 5.1 2,871 4.4 2,676 3.8 (22.1) (6.8) Cof f ee 2,247 3.3 2,304 3.6 2,379 3.4 5.9 3.3 Sugar Cane 3,602 5.3 2,187 3.4 2,258 3.2 (37.3) 3.2 Machinery and Equipment 1,368 2.0 1,652 2.5 1,813 2.6 32.6 9.7 Poultry 1,564 2.3 1,523 2.3 1,523 2.2 (2.6) - Rice 1,636 2.4 1,455 2.2 1,717 2.4 4.9 18.0 Pork 630 0.9 735 1.1 716 1.0 13.7 (2.6) Cotton 677 1.0 672 1.0 688 1.0 1.6 2.4 Manioc 531 0.8 521 0.8 525 0.7 (1.1) 0.9 Other* 270 37,026 0.4 54.8 248 33,910 0.4 52.3 231 39,170 0.3 55.7 (14.5) 5.8 (6.7) 15.5 Total 67,600 100.0 64,872 100.0 70,321 100.0 4.0 8.4 Fertilizers * Since Set/09 BNC portfolio was included. In its work of financing Brazilian agribusiness, Banco do Brasil reaches all the segments, from the small producer to the large agro-industrial companies. The table below reveals this work, showing that while financing mini and small producers accounts for 84.9% of the total of contracts (22.3% of the amount contracted), the transactions with the other agents show a 77.7% share of the amount contracted. The information in the following table includes sums loaned during the current harvest but not actually disbursed, which information is explained in this chapter. Table 46. Funds Released for the 09/10 Crop by Customer Size R$ million Qty. Contracts Qty. Contr acts - % Am ount Contr acte d Am ount Contr acte d % Mini 449,848 38.6 2,749,772,632 5.9 Small 541,005 46.4 7,565,981,511 16.3 Medium and Large Sized 175,336 667 15.0 0.1 33,276,777,165 2,701,395,516 71.9 5.8 1,166,856 100.0 46,293,926,824 100.0 Cooperatives Total 68 - Banco do Brasil – MD&A 2Q10 The table below shows the view by size of customer in relation to the total balance of the agribusiness loan portfolio. Table 47. Agribusiness Portfolio by Size Segment M ar /09 Jun/09 Se p/09 De c/09 R$ million Jun/10 M ar /10 Micro 11,008 11,351 11,083 11,262 11,329 12,008 Small 9,239 10,003 10,243 10,675 11,050 12,043 41,297 43,543 43,152 40,952 38,996 42,730 2,743 - 2,703 - 2,759 800 2,763 783 2,738 759 3,540 - 64,287 67,600 68,038 66,434 64,872 70,321 Medium and Large Cooperatives BNC Total In the figure below we present the distribution of the balance of the Agribusiness Loan Portfolio by type of client. R$ billion 20.5 19.2 17.2 46.2 47.4 47.6 47.3 47.7 47.8 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 18.1 42.6 45.2 Sep/08 Dec/08 17.9 22.5 20.2 18.5 Individuals Figure 26. Agribusiness Loan Portfolio by Customer 69 - Banco do Brasil – MD&A 2Q10 Businesses Next, the Agribusiness Loan Portfolio by Funding Sources is shown. Demand Deposits Jun/09 36.0 Sep/09 FCO Dec/09 Mar/10 BNDES/Finame 5.9 4.1 4.4 5.7 5.4 5.8 5.7 5.8 3.6 3.6 7.7 7.6 7.6 FAT 7.4 7.6 5.3 5.8 7.2 5.6 30.8 31.8 30.6 Savings 6.7 10.9 9.6 12.9 12.4 11.8 31.7 R$ billion Other Jun/10 Figure 27. Agribusiness Loan Portfolio by Funding Sources The main source of funds for the agribusiness portfolio continued to be savings which in Jun/10 reached the sum of R$ 36.0 billion, as opposed to R$ 30.8 in the same period of 2009. These resources account for 51.3% of the total. During this quarter, part of the agribusiness loan operations was contracted through non-equalizable saving funds. BB uses funding from Poupança Ouro (savings) and Demand Deposits, Fund for Worker Assistance FAT, the Federal Treasury, Fund for Worker Assistance - Funcafé, and Constitutional Fund for the Financing of the Midwest - FCO, for low-rate agricultural loans. In order to make this intermediation feasible, the National Treasury or Fundo Constitutional pays the Bank an equalization fee which is the difference between the sum charged to the borrower and the funding costs, credit risk and administrative costs and taxes. Moreover, weighting factors are set for financing obtained with funds from demand and savings deposits. The weighting factor is a multiplier that helps to fulfill liabilities and raise revenues upon the release of funds in the Bank's cash for investments. The following figure shows a history of the revenues received by way of interest rate equalization and weighting factor. 70 - Banco do Brasil – MD&A 2Q10 R$ million 626 527 494 488 449 441 395 296 60 3Q08 38 4Q08 32 1Q09 21 2Q09 Equalization Revenues 15 3Q09 10 11 4Q09 15 1Q10 2Q10 Weighting Factors Figure 28. Equalization Revenues and Weighting Factor In this quarter the balance of equalization revenues, including weighting factor, grew 19.1% in comparison with the preceding quarter and 38.9% in 12 months, following increase of 9.0% (in the quarter) and 23.9% (in 12 months) in the balance of equalizable resources in the same period. With respect to non-equalizable funds, the agroindustrial credit again explains an 8.1% growth during the quarter, since approximately 30% of such funds refers to agroindustrial operations having obtained a good performance during the quarter. The table below evidences the distribution of equalizable funds from BB's Agribusiness portfolio. Table 48. Equalizable Funds from Agribusiness Portfolio R$ million Chg. % M ar /09 Equalizable Resources Jun/09 Se p/09 De c/09 M ar /10 Jun/10 On Jun/09 On M ar /10 22,209 21,244 20,065 22,249 24,162 26,328 23.9 9.0 14,493 13,693 12,235 13,284 14,392 15,440 12.8 7.3 6,596 7,015 7,249 7,897 8,594 9,259 32.0 7.7 Non-Equalizationable Resources 1,120 42,078 535 46,356 582 47,972 1,068 44,185 1,177 40,710 1,629 43,992 204.3 (5.1) 38.4 8.1 Total Loan Por tfolio 64,287 67,600 68,038 66,434 64,872 70,321 4.0 8.4 Costs Investments Marketing BB has mechanisms for mitigating risks from agriculture loan portfolio. The 2009/2010 harvest closed with 60.7% of costing operations (R$ 9,028 million) having been contracted by using mitigators. Of this amount, R$ 4,493 million were guaranteed by Proagro and R$ 4,535 million at the company Aliança do Brasil and at the reinsurance companies indicated below. 71 - Banco do Brasil – MD&A 2Q10 The following chart shows the increase in percentage in the use of Agriculture Insurance and Proagro. R$ 46,8 bi R$ 14,9 bi R$ 3,4 bi 26.1% 22.8% 0.9% 9.4% 31.8% 5.0% 77.2% 13.7% 84.7% 12.8% 15.6% Corporate Agricultural Costs Agricultural Costs = R$ 14.9 bi Family Agricultural Costs Working Capital = R$ 6 bi With Proagro and PGPAF With Proagro With PGPAF Without Mitigation Investment = R$ 7.3 bi Marketing = R$ 6.4 bi Agroindustrial Credit = R$ 12.2 bi R$ 11,5 bi Re ins urance 14.8% 43.2% 42.0% IRB 24.0 Partner RE 15.0 Sw iss RE 15.0 Scor RE 15.0 Münchener Rück do Bras il 10.0 Mapf re RE 4.0 Catlin RE 3.0 Hannover RE 3.0 Everest RE With Insurance/Proagro Companies Risk/Cooperatives Without Insurance/Proagro Amounts in R$ billion Figure 29. Agricultural Insurance and Proagro 72 - Banco do Brasil – MD&A 2Q10 % TOTAL 1.0 90.0 The figure below evidences the growth of agricultural funding transactions operations contracted with risk mitigators since the harvest of 2007/08. Crop 2007/2008 50% Crop 2008/2009 Crop 2009/2010 39% 38% 50% 62% Agricultural Costs w ith Mitigation 61% Agricultural Costs w ithout Mitigation Figure 30. Evolution of Operations Contracted with Risk Mitigators The table below shows a comparison between 09/10 and 08/09 harvests, detailing the purpose of the loan and destination thereof. We point out that there was a growth of 14.2% in total funds released in 09/10 harvest, in comparison to previous harvest. Table 49. 2009/2010 Crop Plan R$ million Familiar Costs Investment Corporate Costs Investment Marketing Crop 08/09 (A) 7.099 4.272 2.827 23.282 15.815 2.431 5.036 Crop 09/10 (B) 8.714 4.518 4.196 25.982 17.102 3.126 5.755 Chs. (%) (B/A) 22,7 5,8 48,4 11,6 8,1 28,6 14,3 30.381 34.696 14,2 Total We detail below the four key crops subject to agricultural funding, with the percentage share of funding for the 2009/2010 harvest and the concentration per state regarding each of these crops. Table 50. Defrayal – Transaction Profile Soybe ans Cor n Rice 19.7% 8.8% 4.5% Cotton 0.9% PR 29.91% PR 20.46% RS 78.23% MT 38.37% RS 18.99% RS 19.60% SC 12.10% BA 20.90% GO 15.93% MG 18.19% MS 1.65% GO 14.65% MS 9.63% SC 17.62% PR 1.61% MS 12.24% 73 - Banco do Brasil – MD&A 2Q10 We show below a breakdown of price and cost of the corn and soybean crops for the 2009/2010 harvests. The margin is represented by the percentage of revenues net of the costs involved in each crop, i.e., the part designed for the producer. The figures regarding the plantations' price and costs are referenced based on the state of Paraná, with the key municipalities serving to find a proportional average. Evolution Price and Cost - Soybean Margin - Soybean 80.0 60.0 % 51.9 47.1 40.0 32.8 R$/kg 65.0 50.0 30.0 0.76 0.74 70.0 35.8 0.49 0.54 0.50 0.43 0.40 0.33 0.28 34.8 0.35 0.26 0.24 20.0 10.0 0.0 04/05 05/06 06/07 07/08 Crops 08/09 04/05 09/10 05/06 07/08 08/09 09/10 Crops Price Cost Evolution Price and Cost - Soybean Margin - Corn 80 06/07 70 0.34 % 50 52.8 45.6 40 30 R$/kg 60 0.24 0.16 0.19 0.16 33.4 20 24.0 22.4 08/09 09/10 0.27 0.25 0.21 0.13 0.23 0.18 0.16 16.8 10 0 04/05 05/06 06/07 07/08 Crops Figure 31. Ratio Price/Cost of Soybean and Maize 74 - Banco do Brasil – MD&A 2Q10 04/05 05/06 06/07 Crops Price 07/08 08/09 Cost 09/10 6.6 Analysis of Liabilities The volume of deposits taken by Banco do Brasil ended the quarter at R$ 343,961 million, growth of 0.4% in the quarter and of 10.7% in twelve months. The highlight was the funding through demand deposits, which increased 7.4% in the quarter, amounting to R$ 59,025 million. Banco do Brasil is the leader of funding through demand deposits, which contributes to the reduction of its funding cost in comparison to the other financial institutions. Foreign borrowings and money market funding also increased in the quarter, recording a growth of 24.1% and 5.5%, respectively. In the twelve-month comparison, the mix of liabilities changed mainly as a result of money market funding, which reached to account for 22.0% of total liabilities, as compared with 17% in June 2009, and foreign borrowings increased from 1.9% to 3.2% of the total liabilities. On the other hand, there was a decrease in the share of total deposits, which started to account for 45.5% of liabilities, as compared with 51.9% in the same period of the previous year. Table 51. Liabilities R$ million Deposits Se p/08 De c/08 M ar/09 Jun/09 Se p/09 De c/09 M ar /10 Jun/10 229,810 270,841 305,002 310,846 326,958 337,564 342,624 343,961 Demand Deposits 42,955 51,949 47,276 49,075 50,107 56,459 54,973 59,025 Savings Deposits 52,693 54,965 70,567 69,011 72,233 75,742 78,719 81,541 Interbank Deposits 6,309 14,065 8,406 7,459 9,627 11,619 10,749 10,436 127,582 149,618 178,487 185,072 194,707 193,516 197,934 192,715 Time Deposits Investment Deposits 270 243 266 228 284 229 249 243 Money Market Funding 85,339 91,130 106,452 101,508 153,603 160,821 157,866 166,603 Foreign Borrow ing 7,672 11,106 13,065 11,209 15,086 13,733 19,539 24,248 Domestic Onlending 19,640 22,436 22,220 22,626 26,761 31,390 32,995 36,308 Other Liabilities 87,887 27,889 95,822 29,937 114,327 30,859 120,290 32,360 129,615 33,661 128,922 36,119 134,212 37,646 145,254 39,332 458,237 521,273 591,925 598,839 685,684 708,549 724,881 755,706 Shareholders’ Equity Total Liabilitie s 75 - Banco do Brasil – MD&A 2Q10 The indicators of the following table show the relationship between funding sources and investments in Banco do Brasil. Both in the quarterly and in the twelve-month comparison, we can note that the increase in the Net Loan Portfolio outpaces that of total funding, which explains the reduction in cash and cash equivalents and the increase in the ratio between loans and total funding. In addition, the recent amendments to the rules for compulsory deposits by the Brazilian Central Bank had material impacts on funding both in March and June 2010. Even when we take into consideration the impacts mentioned in the previous paragraph, BB continues to present cash and cash equivalents exceeding 17% of the total funding and the Net Loan Portfolio continues to account for less than 83% of funding. Table 52. Sources and Uses Balance R$ million Jun/09 M ar/10 Chg. % Jun/10 On Jun/09 On M ar/10 Funding Total 339,699 373,110 371,358 9.3 Total Funding 310,846 342,624 343,961 10.7 0.4 22,626 32,995 36,308 60.5 10.0 1.2 Domestic Onlending Financial and Dev elopment Funds (0.5) 4,076 3,685 3,729 (8.5) FCO (Subordinated Debt) 14,689 20,792 21,340 45.3 2.6 Foreign Borrow ing* 11,970 20,259 25,394 112.1 25.3 (24,507) (47,244) (59,374) 142.3 25.7 233,703 286,289 307,545 31.6 7.4 Loan Portf olio 252,485 305,551 326,522 29.3 6.9 A llow ance f or Loan Los s es (18,782) (19,263) (18,977) 1.0 (1.5) 105,996 86,822 63,813 (39.8) (26.5) Net Loan Portf olio / Total Deposits 75.2 83.6 89.4 Net Loan Portf olio / Total Funding 68.8 31.2 76.7 23.3 82.8 17.2 Compuls ory Depos its Ne t Loan Por tfolio Available Funds Indicator s - % A v ailable Funds / Total Funding *Includes Foreign Borrowings, Obligations for Securities Abroad, Obligations for Foreign Onlendings and Hybrid Capital and Debt Instruments. 76 - Banco do Brasil – MD&A 2Q10 6.7 Liquidity Analysis The liquidity of Banco do Brasil, determined by the difference between Liquidity Assets and Liabilities, attained R$ 97,288 million at the end of June 2010, reduction of 12.1% in the quarter and 21.1% in twelve months. R$ million 132,469 119,662 123,254 128,138 110,708 97,288 92,660 61,914 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Figure 32. Liquidity Balance In the quarter, the reduction in the liquidity balance is basically explained by the 13.1% decrease in the balance of interbank investments. In the twelve-month comparison, the main reason for the decreased liquidity was the 64.1% increase in the balance of money market funding. It should be highlighted that BB's liquidity position presented a strong growth as from September 2008, mainly as a result of the flow of deposits to lower-risk financial institutions due to the financial crisis (flight to quality), in addition to the acquisition of Banco Nossa Caixa, which had a high volume of deposits and low leverage. At the time, these funds were allocated to interbank investments and Marketable Securities, as well as to the loan portfolio. As BB manages to allocate these funds to more profitable investments, such as loan operations, the trend is that the liquidity balance begins to fall and return to thresholds which are closer to the ones observed in the past. Furthermore, as already mentioned, there is the effect of the increase in the payment of compulsory deposits as a result of the amendment of the rules by the Brazilian Central Bank. Further information on the management of BB's liquidity position can be obtained on chapter 8.1. Table 53. Liquidity Balance R$ million Se p/08 Liquidity As s e ts (A) De c/08 M ar /09 Jun/09 Se p/09 De c/09 M ar /10 Jun/10 153,563 197,855 234,520 232,221 295,699 300,578 279,323 6,847 5,545 7,516 6,212 8,340 7,843 7,364 9,535 Interbank Investments 71,092 119,408 131,796 132,438 157,541 168,398 152,595 132,543 Securities (ex cept linked to Bacen) 75,624 72,902 95,208 93,571 129,818 124,337 119,364 132,249 Liquidity Liabilitie s (B) 91,649 105,195 114,858 108,967 163,230 172,440 168,615 177,039 Interbank Depos its Money Market Borrow ing 6,309 85,339 14,065 91,130 8,406 106,452 7,459 101,508 9,627 153,603 11,619 160,821 10,749 157,866 10,436 166,603 Liquidity Balance (A - B) 61,914 92,660 119,662 123,254 132,469 128,138 110,708 97,288 A v ailable Funds 77 - Banco do Brasil – MD&A 2Q10 274,327 6.8 Deposits and Money Market Funding Banco do Brasil's Market Funding reached R$ 510,563 million at the end of March 2010, a growth of 2.0% in the quarter leveraged by the increase in the volume obtained in demand deposits and money market borrowing. In the twelve-month comparison, market funding increased by 23.8%, mainly as a result of the money market borrowing, as well as of demand and interbank deposits. Table 54. Deposits and Money Market Funding R$ million Se p/08 De c/08 M ar/09 Jun/09 Se p/09 De c/09 M ar/10 Jun/10 Demand Deposits 42,955 51,949 47,276 49,075 50,107 56,459 54,973 Sav ing Depos its 52,693 54,965 70,567 69,011 72,233 75,742 78,719 81,541 6,309 14,065 8,406 7,459 9,627 11,619 10,749 10,436 Money Market Borrow ing 127,852 85,339 149,862 91,130 178,753 106,452 185,300 101,508 194,991 153,603 193,745 160,821 198,183 157,866 192,958 166,603 TOTAL 315,149 361,971 411,455 412,353 480,561 498,385 500,490 510,563 Interbank Depos its Time and Inv estment Depos its 59,025 We present below the market shares of Banco do Brasil in the deposits and money market funding of the National Financial System* R$ million Time Deposits 81,541 75,742 26.2 25.7 23.9 21.7 Dec/08 Mar/09 Jun/09 Total Funding Sep/09 510,563 Sep/08 Jun/10 500,490 Jun/10 Mar/10 498,385 Mar/10 Dec/09 24.0 Market Share - % 480,561 Dec/09 19.8 23.7 78,719 Sep/09 25.8 24.1 Market Share - % 24.1 72,233 69,011 Jun/09 412,353 Sep/09 Mar/09 26.3 361,971 Jun/09 25.8 24.8 315,149 Mar/09 Dec/08 Savings Deposits 192,715 Dec/08 185,072 149,618 127,582 Sep/08 178,487 19.6 18.0 Sep/08 Market Share - % 197,934 24.2 Jun/10 193,516 23.4 Mar/10 194,707 Demand Deposits Dec/09 24.4 20.3 70,567 Sep/09 20.4 411,455 Jun/09 54,973 50,107 Mar/09 56,459 49,075 Dec/08 47,276 51,949 42,955 Sep/08 25.4 33.1 54,965 32.8 52,693 33.2 30.8 59,025 33.5 32.8 33.4 Dec/09 Mar/10 Jun/10 Market Share - % *Information about participation in the Financial System comes from the top 50 banks of the Central Bank site. The latest available position at the time of publishing this report was in Mar/2010. Figure 33. Market Share of BB Funding 78 - Banco do Brasil – MD&A 2Q10 6.8.1 Foreign Borrowing Funds taken abroad by Banco do Brasil amounted to US$ 23,637 million at the end of June, growth of 56.2% in relation to the balance observed at the end of 2Q09 and slight downslide of 1.9% in the comparison with 1Q10. In the comparison with the same prior-year period, special emphasis is placed on the interbank market fundings and for issues in the international capital market, which recorded growth in the balance of 75.7% and 228.3%, and increased their relative share in the mix of foreign fundings. Methodology adjustments were made in the quarter to optimize the survey of values, which resulted in a review of the historical series. Table 55. Foreign Borrowing Pr odutos Se p/08 De c/08 M ar /09 Jun/09 Se p/09 De c/09 US$ million Jun/10 M ar /10 Interbanking 3,019 3,270 3,618 4,084 5,123 6,195 7,087 7,176 Repo 3,086 3,356 2,722 1,588 2,354 2,609 2,294 2,266 Bus ines ses 3,967 5,736 6,613 5,415 5,528 6,161 6,187 5,176 835 1,018 1 - - 155 44 182 Is sues 2,053 2,056 2,024 2,227 1,943 2,097 1,939 2,103 1,966 2,500 1,976 4,592 1,931 6,545 1,932 6,905 TOTAL 15,016 17,631 16,994 15,129 17,471 21,688 24,088 23,637 Special Individuals In April 2010, BB issued securities under its "GMTN" program in the amount of US$ 450 million. Issued with a 5-year term and coupon of 4.5% p.y., the securities were traded at 100.68% of their face value and the spread on the American government bonds came to 180 basis points, the lowest among the pending issues performed by BB. The conditions of the operation reflect the market's interest in securities issued by Banco do Brasil and the solidity of its economic and financial grounds. The issue cannot be qualified as subordinated debt for purposes of calculation of the BIS Ratio, and was made to back up loan operations for foreign trade. Table 56. Overseas Issues Half-Yearly Volume in US$ million 07.10.2003 178 07.10.2003 Term in years Issue price Return for Premium Investor over (%) Treasury Cupom (%) Interest Interval 8 5,911 Quarterly 100.00 5.911 350 A-/A2 Visanet 45 8 4,777 Quarterly 95.00 5.565 350 A-/A2 Visanet 12.19.2003 250 10 6,550 Quarterly 100.00 6.550 292 A-/A2 09.20.2004 300 10 8,500 Half-Yearly 99.17 8.625 447 A2 Stand Alone 01.23.2006 500 - 7,95 Quarterly 100.00 7.950 0 Baa3 Stand Alone 07.18.2007 187 10 9,75 Half-Yearly 100.00 9.750 0 Baa3 GMTN ** 03.06.2008 250 6 L3M+0,55 Quarterly 100.00 L3M+0,55 04.29.2008 150 10 5,25 Quarterly 100.00 5.250 Rating 0 AAA/Aa2 0 A-/A2 Program MT 100 MT 100 MT 100 09.05.2008 200 7 L3M+1,2 Quarterly 100.00 L3M+1,2 0 A-/A2 07.02.2009 100 5 L6M+2,55 Half-Yearly 98.25 L6M+2,55 0 Baa3 GMTN 10.20.2009 1,500 - 8,500 Half-Yearly 100.00 8.500 0 Baa2 Stand Alone 01.22.2010 500 5 4,500 Half-Yearly 99.33 4.651 220 Baa2 GMTN 99.45 6.074 237.5 Baa2 GMTN 100.68 4.337 180 Baa2 GMTN 01.22.2010 500 10 6,000 Half-Yearly 04.29.2010 450 5 4,500 Half-Yearly 79 - Banco do Brasil – MD&A 2Q10 MT 100 7 - Analysis of Results 7.1 Net Interest Income Table 57. Net Interest Income Quar te rly Flow Chg. % R$ million 2Q09 1Q10 2Q10 Financial Inte r m e diation Incom e 16,037 18,562 19,512 21.7 10,133 12,480 12,991 28.2 148 240 204 Securities 5,215 5,644 Financial Derivatives Loans Leasing Half-Ye ar ly Flow On 2Q09 On 1Q10 Chg. % 1H09 1H10 On 1H09 5.1 31,297 38,075 21.7 4.1 19,084 25,471 33.5 38.2 (15.0) 286 445 55.5 5,195 (0.4) (7.9) 10,945 10,839 (1.0) (451) (232) (29) (93.5) (87.3) (512) (262) (49.0) Foreign Exchange Portf olio 131 (18) 71 (45.5) - 15 53 257.7 Compulsory Investments 213 274 917 330.5 234.7 389 1,192 206.6 Financial Income f rom Insur., Pension and Savings Bonds Op. 146 120 125 (14.3) 4.3 267 245 (8.3) FX Gain (Loss) on Foreign Investments (592) 18 (5) (99.2) - (677) 13 - Other Op, Inc, of a Fin, Intermed, Nature 1,533 28 57 (96.3) 105.4 2,003 85 (95.7) 8 Over Hedge Financial Inte r m e diation Expe ns e s Money Market Borrow ing Borrow ing, A ssignments and Onlending Ne t Inte re s t Incom e (15) (96.6) - (503) (6) (98.7) (7,550) (439) (9,205) (10,052) 33.1 9.2 (15,825) (19,257) 21.7 (7,067) (483) (8,302) (903) (9,055) (997) 28.1 106.5 9.1 10.3 (14,626) (1,199) (17,357) (1,900) 18.7 58.5 8,487 9,357 9,461 11.5 1.1 15,472 18,817 21.6 Net Interest Income (NII) – which is the income from financial intermediation before provisions for credit risk – totaled R$ 9,461 million in 2Q10, an increase of 1.1% from the previous quarter, and of 11.5% from 2Q09. NII totaled R$ 18,817 million in the semester, 21.6% higher than the same period of 2009. To enable a better understanding of the information, considering that 2009 was impacted by the acquisitions of a controlling interest in Nossa Caixa and of 50.0% of the total capital of Banco Votorantim, we present below a list of the impacts of these corporate transactions on BB's Financial Margin: • Nossa Caixa (BNC) – BNC balance sheet items began to integrate Banco do Brasil's in March 2009, but the income accounts only impacted BB's as from the 2Q09, period when all the accounts of BNC started to compose the financial statements of BB and to integrate the ratios and calculations determined in chapters 7.1 to 7.4 of the present report. There is no further distortion in the quarterly comparisons, since BNC is already included in the comparison base. In order to avoid distortions in the half-yearly NIM follow-up, the equity consolidation impact was segregated in March 2009, since income started being consolidated only as of April. • Banco Votorantim (BV) – BV's balance sheet items began to integrate Banco do Brasil’s in September 2009, while the income accounts recorded since 4Q09. In order to prevent distortions in the NIM determination, the effect of the asset consolidation in September was segregated, since the consolidation of results began only in October. An item that merits special emphasis in the quarter is the revenues from loan operations, which recorded an expansion of 4.1% in relation to the previous quarter and 28.2% in relation to the same prior-year period of 2009. This behavior is aligned to the BB's loan portfolio expansion and interest rate increase (which effect upon margin is gradual due to prefixed operations representativeness in loan portfolio). Comparing with previous quarter, there was also a significant growth in income from compulsory investments, which recorded a percentage variation of 234.7% and absolute variation of R$ 643 million. Although not having had an expressive oscillation in the U.S. dollar quotation (main currency among those comprising BB's foreign currency assets and liabilities), a 6.9% yen oscillation in the quarter has helped to bring volatility to the lines comprising NII. BB has a significant amount of funding in that 80 - Banco do Brasil – MD&A 2Q10 currency obtained from its branches in Japan. In spite of exchange variation having increased funding expenses, it is worth to stress the limitantion of analyzing the lines that compose the margin in a separate manner, because exchange rate fluctuations affect both financial intermediation income and expenses, besides the existence of financial derivative instruments that minimize the effect on BB's income and on NII determined in the Income Statement with Reallocations. The following table presents the formation of Net Interest Income with change in spread and the growth of earning assets volume. Table 58. Analysis of Volume (Earning Assets) and Quarterly Spread – 1Q10 and 2Q10 R$ million V olume: A ss ets – Earning A s sets¹ Net Interes t Inc ome Spread - %² 1Q10 2Q10 Abs . Chg. 590,315 600,580 10,265 9,357 1.5851 9,461 1.5752 104 (0.0098) Gain/(loss) w ith volume 9,520 163 Gain/(loss) w ith spread 9,299 (58) (1) Gain/(loss) w ith volume and spread (1) Average Balances (2) Net Interest Income / Earning Assets Spread Based on annualized rates, the NIM (Net Interest Income over average Earning Assets) ended 2Q10 at 6.5%, keeping the same level observed in the previous quarter and a decrease of 80 basis points as opposed to 7.3% recorded in the same quarter of 2009. In the first half, the rate was 6.4%, against 6.9% in the same prior-year period. NIM oscillation in comparison between 2Q10 and 2Q09 is mainly explained by the following factors: Positive • Solid spread recovery of the agribusiness portfolio; • Increase of the relative share of loans and leasing in earning assets. The average balance of these operations represented 47.3% of average earning assets in 2Q09, increasing to 48.0% in 1Q10 and reaching 49.2% in 2Q10. Negative • Slightly decrease in the contracted loans spread, mainly due to Individual and Business portfolio behavior, as further detailed below; • Decrease of 6.9% in the Average Selic Rate (TMS); • Changes in the rules about compulsory deposits (BCB instructions 3485 and 3486, of 02.24.2010). These changes had two different impacts in BB’s financial statements; • Liquidity reduction, due to time deposits incidental rate that changed from 13.5% to 15.0%; raise of the additional reserve requirements over time deposits from 4% to 8%, and over demand deposits from 5% to 8%; in addition to collection deduction suppression that existed for institutions with Referential Equity Tier I over than R$ 5 billion. Besides all additional collected balance being paid by TMS, BB ceases to apply resources in more profitable operations; • Changes in reserve requirements fulfillment, raising the compulsory deposits collected in cash and reducing those fulfilled by linking part of the portfolio to the Brazilian Central Bank. This change did not cause effects in BB profitability due to resources allocation in less profitable operations and resulted some changes in the asset accounts, reducing the securities portfolio (share previously linked to BCB) and raising the amounts allocated in “Interbank relations / Deposits in the Central Bank” account. • By the consolidation of Banco Votorantim (BV) accounting information, that has a NIM lower than BB’s. BV acts on lending to specific segments, such as wholesale (middle market and corporate) and payroll vehicle loans for individual customers. These segments show lower risk and, therefore, lower NIM. Besides, besides BV does not have a low cost retail funding, it helped to the funding average cost raise in the consolidated financial statements. 81 - Banco do Brasil – MD&A 2Q10 In the comparison between 2Q10 and 1Q10, there was a 1.1% growth in the net interest income, basically explained by business expansion and, in lower grade, for the base interest rate raise. However, the margin growth was limited to the spread behaviour, which did not register recoveries due to the following factors: • • • 20 basis point fall in loan operations spread, basically due to change in portfolios mix, as further detailed below; Securities income reduction, influenced, among other factors, for lower income from interbank investments, due to resources migration to other compulsory deposits. The performance of these lines is mainly explained for the change in the compulsory deposits form of collection, which stopped being made in the form of titles and began being collected in cash, resulting in interbank investments reduction. There was also a reduction in negotiations and mark-to-market results for the accounting effect of interest rates (SELIC) increase over prefixed securities available for trading. The negative impact of mark-to-market occurs immediately in case of securities available for trading, but the positive effect of the interest rate raise over the securities linked to SELIC (postfixed) is attenuated in long term; Changes in rates and collecting forms of compulsory deposits, detailed in the comparison between 2Q10 and 2Q09. One of the main reasons for the falling trend shown by Net Interest Margin – NIM follows from the credit portfolio mix change, with greater representativeness of the lower risk operations. This perception is confirmed by “Risk Adjusted NIM” indicator, calculated from the relation between the net interest income after provisions and the earning assets. Besides the net interest income, the Risk Adjusted NIM takes in consideration the allowance for loan losses provisions. The indicator ends 2Q10 in 4.5%, same baseline observed in 2Q09 and raising 10 basis points against the previous quarter. 7.0 7.3 7.2 6.7 6.6 6.7 6.5 6.5 5.4 4.9 4.5 4.0 3Q08 4Q08 1Q09 2Q09 4.2 3Q09 4.5 4Q09 4.4 4.5 1Q10 2Q10 NII / (Earning Assets) - Annualized Spread (Net Financial Margin) / (Earning Assets) - Annualized Spread Figure 34. NIM Evolution 82 - Banco do Brasil – MD&A 2Q10 Table 59. Margin, Net of Interest and Profit Margin R$ millio n 2Q09 1Q10 2Q10 1H09 1H10 A v erage Earning A ss ets (A EA ) 478,047 590,315 600,580 455,814 595,448 A v erage Interest Bearing Liabilities (A IBL) 415,776 519,987 522,946 395,309 521,467 Net Interest Gain (1) 7,734 8,925 8,596 14,190 17,521 Interes t Income 15,204 18,038 18,555 29,860 36,594 Interes t Expense (7,470) (9,113) (9,960) (15,670) (19,072) Net Interest Income Other Items (2) NII 753 431 865 1,282 1,296 8,487 9,357 9,461 15,472 18,817 A IBL / A EA – % 87.0 88.1 87.1 86.7 87.6 Interes t Rate on A EA (3) (7)- % 13.3 12.8 12.9 13.5 12.7 Interes t Rate on A IBL (4) (7)- % 7.4 7.2 7.8 8.1 7.4 Net Interest Rate (5) - % 6.0 5.6 5.1 5.4 5.2 A djusted NIM (6) (7) - % 6.6 7.3 6.2 6.5 5.8 6.5 6.3 6.9 6.0 6.4 NIM (7) – % (1) Defined as interest income less interest expenses. (2) Contains derivatives, debt assumption contracts, foreign exchange portfolio, recovery of write-offs, gold loans, credit guarantor fund, foreign exchange gain/loss abroad and other income of a financial intermediation nature (3) Total interest income divided by the average balance of assets generating income. (4) Total interest expenses divided by the average balance of liabilities generating expenses. (5) Difference between the average rate of assets generating assets and the average rate of liabilities generating expenses. (6) Income net of interest divided by the average balance of assets generating income. (7) Rates are annualized 83 - Banco do Brasil – MD&A 2Q10 7.2 Analysis of Investments Loan Operations Loan and Lease Operation Revenues, excluding the recovery of write-offs, reached R$ 12,438 million in 2Q10, for growth of 2.9% in the quarter and 27.6% from 2Q09. Excluding the effects of exchange variation on operations under the terms of CMN Resolution 2770, this income amounted to R$ 12,448 million, for growth of 3.3% over 1Q10 and of 23.7% over the same prior-year quarter. Table 60. Revenues from Loans Net of Exchange Impact (Res. 2,770) Quar te r ly Flow R$ million Loans and Le as ing Re ve nue s – Ave r age Balance * Chg. % 2Q09 1Q10 2Q10 Half-Ye ar ly Flow On 2Q09 On 1Q10 1H09 1H10 Chg. % On 1H09 225,998 283,551 295,757 30.9 4.3 215,658 289,654 34.3 Loans and Leasing Revenues 9,751 12,090 12,438 27.6 2.9 18,483 24,528 32.7 FX Impact in Loan Portf olio (Res. 2,770) (309) 43 (10) (96.7) - (717) 33 - 10,060 19.0 12,047 18.1 12,448 17.9 23.7 - 3.3 - 19,200 18.6 24,495 17.6 27.6 - Loans and Leasing Rev. bef ore FX Impact (Res. 2,770) A nnualized Interest Rate *It does not consider recovery of write-offs Spread by Portfolio The spread of loans reached 9.7% in 2Q10, down 20 basis points from the spread recorded in 1Q10 and 70 basis points decrease in relation to 2Q09. In the quarter it was recorded a 80 basis points decrease at individuals credit portfolio spread and 50 basis points at businesses credit portfolio, mainly explained for: • • • Raise in the relative share in payroll loan on Individuals portfolio average balance; From the fact that the Businesses portfolio has presented a higher growth in the contracted operations among middle and corporate segments; From BB strategy on raising the FGO use as a guarantee instrument for the contracted operations from small and medium companies. In the quarter the contracted volume in FGC guaranteed operations were 23.5% higher than the previous quarter. The total contracted by BB reached R$ 7.3 billion, in 244 thousand operations. The changes in the mix resulted in a slight spread reduction, but are important improvement vectors of BB credit portfolio quality, helping the default and allowance for loan losses reduction. Besides mix changes, it is important to highlight that the NIM presented in the table below is calculated based on management information. The portfolios Net Interest Income is calculated from the financial income, deducted from the financial expenses and opportunity costs. The NII is divided for the daily average balance of the portfolios. The fall of the Individuals and Businesses portfolio in the quarter is partially due to the fact that the major opportunity cost of the lines be the average selic rate (TMS), which presented almost a 9.7% growth comparing to the previous quarter. The costs increase represented by TMS expansion is gradually passed by BB to credit lines rates. However, considering the representativeness of the credit portfolio fixed share, until this portion is priced there is a fall in the NIM, due to the immediate increase in the opportunity cost. As detailed in section 8, BB has more active positions than passive in CDI/TMS and, thus benefits from higher interest rates. However, the changes in the interest rates can bring slight distortions in calculating the NIM, besides effects over securities fixed share, as further detailed. About NIM on agribusiness operations, there was a 40 basis points raise over the previous quarter and 50 basis points over 2Q09. Both on quarterly bases as compared to the same period in the previous year, the NIM advance is due to the representativeness raise of the portfolio share contracted with equalized resources. 84 - Banco do Brasil – MD&A 2Q10 Table 61. NIM % 2Q09 Loan Operations 1Q10 2Q10 1H09 1H10 10,4 9,9 9,7 10,0 9,7 Individuals 21,2 18,2 17,4 20,4 17,4 Businesses 7,5 6,7 6,2 7,3 6,4 Agribusiness 5,5 5,6 6,0 5,6 5,8 4,4 7,3 3,3 6,5 3,4 6,5 3,0 6,9 3,3 6,4 Other Global Spread 85 - Banco do Brasil – MD&A 2Q10 Securities Income Income from securities and interbank investments reached R$ 5,195 million in 2Q10, a 7.9% fall over the last quarter and 0.4% over the same period of 2009. Comparing to the last quarter, the results decrease is associated mainly to the interbank investments average balance reduction, due to the migration of the resources to the compulsory deposits earning share. The changes in the compulsory deposits rules are detailed at chapter 7.1, in the NIM section. There was also a result reduction from negotiations and marking to market, in relation to the values observed in 1Q10. Comparing with the same period of 2009, there was a slight reduction of 0.4% in securities revenues, also influenced by a lower interbank investments revenues. Accordind to that period, there was a 6.9 decrease in average SELIC (TMS), which influenced directly this line performance. It is worth to show that the figure below does not represent BB treasury results. It is disclosed only the results of operations classified by the Central Bank as securities / interbank investments. The results are disclosed for all the conglomerate (including non financial companies, BB Investment Bank, Banco Votorantim, subsidiaries and foreign branches). Table 62. Securities Income Quar te r ly Flow R$ m illion 2Q09 1Q10 Chg. % 2Q10 Half-Ye ar ly Flow On 2Q09On 1Q10 1H09 1H10 Chg. % On 1H09 Se cur itie s Incom e 5,215 5,644 5,195 (0.4) (7.9) 10,945 10,839 (1.0) Fixed Income Securities 5,208 5,598 5,144 (1.2) (8.1) 10,931 10,742 (1.7) Rev aluation – Curve 2,349 2,249 2,362 0.6 5.1 4,407 4,611 4.6 149 79 (12) - - 172 67 (61.2) Inc ome/Loss f rom Negotiation Mark to Market (202) 12 (75) (63.0) - 60 (62) - Interbank A c counts 2,911 3,107 2,733 (6.1) (12.0) 6,292 5,839 (7.2) 0 8 151 46 136 51 571.1 (9.9) 11.2 0 14 288 97 612.3 Foreign Income Others The figure below presents the classification of BB's portfolio of securities by type of index. The classification below includes the portfolio of securities of Banco Nossa Caixa, but does not include the information of Banco Votorantim. 16.4% 1.1% 82.4% CDI / Average Selic Rate Fixed Figure 35. Securities Portfolio by Index (Multiple Bank) 86 - Banco do Brasil – MD&A 2Q10 TR IPCA Table 63. Avg Balance of the BS accounts and onfo. on interest rates – Earning assets (quarterly) 1Q10 R$ million Ave r age Balance 2Q10 Inte re s t Annualize d Rate (%) Ave r age Balance Annualize d Rate (%) Inte r e s t Ear ning As s e ts A vailable Funds in Foreign Currenc y 476 30 27.8 1,142 5 Sec urities + Interbank Investments on Hedge 286,845 5,644 8.1 261,053 5,195 8.2 Loans + Leas ing 283,551 12,090 18.2 295,757 12,438 17.9 Remunerated Compulsory Depos its Total 1.7 19,443 274 5.8 42,628 917 8.9 590,315 18,038 12.8 600,580 18,555 12.9 Non Ear ning As s e ts Tax Credits 22,097 22,454 Other A s sets 84,884 91,912 Total 26,967 133,947 26,949 141,315 TOTAL ASSETS 724,263 741,895 Permanent A ss ets Table 64. Avg Balance of the BS accounts and info. on interest rates – Earning Assets (half-yearly) 1H09 R$ million Ave r age Balance 1H10 Inte re s t Annualize d Rate (%) Ave r age Balance Inte r e s t Annualize d Rate (%) Ear ning As s e ts A vailable Funds in Foreign Currenc y 523 43 17.2 809 35 Sec urities + Interbank Investments on Hedge 227,958 10,945 9.8 273,949 10,839 8.1 Loans + Leas ing 215,658 18,483 17.9 289,654 24,528 17.7 Remunerated Compulsory Depos its Total 11,675 389 6.8 31,035 1,192 7.8 455,814 29,860 13.5 595,448 36,594 12.7 Non Ear ning As s e ts Tax Credits 19,172 22,276 Other A s sets 73,917 88,398 Total 17,375 110,464 26,958 137,631 TOTAL ASSETS 566,278 733,079 Permanent A ss ets 87 - Banco do Brasil – MD&A 2Q10 8.8 7.3 Analysis of Funding The Interest Bearing Liabilities average balance rose R$ 522,946 million in the 2Q10, growth of 0.6% in relation to the previous quarter and 25.8% in 2Q09. Average funding costs totaled 7.8% in the quarter, higher then the 7.2% recorded in 1Q10 and 7.4% in 2Q09. Increase in rate was a determinant factor for a growth of 9.3% in interest expenses in the period. For its turn, the average rate has been influenced by TMS behavior, showing a 9.7% increase upon 1Q10 and having an impact on the cost of time deposits and on money market borrowing. Besides, foreign obligations (loans and securities) have also experienced an exchange impact because of currency oscillation, such as it occurred with the yen. As already explained, despite of the exchange effect having an influence on financial intermediation income and expenses, it does not bring relevant variations to the NII. Table 65. Avg. Balances of the BS accounts and info. on int. rates – Int. Bearing Liabilities (quarterly) 1Q10 R$ million Ave r age Balance Inte re s t 2Q10 Annualize d Rate (%) Ave r age Balance Inte r e s t Annualize d Rate (%) Inte r e s t Be ar ing Liabilitie s Saving Deposits 78,009 (1,216) 6.4 80,535 (1,303) 6.6 Interbank Deposits 11,635 (130) 4.6 10,641 (119) 4.6 Time Deposits 197,373 (3,485) 7.3 193,115 (3,706) 7.9 Money Market Borrow ing 156,724 (3,173) 8.3 155,972 (3,566) 9.5 7,752 (191) 10.2 9,630 (311) 13.5 Onlending 32,898 (638) 8.0 34,719 (623) 7.4 Financial and Development Funds + Subordinated Debt 24,032 (155) 2.6 24,825 (128) 2.1 Foreign Securities Borrow ing 10,307 (108) 4.3 12,443 (161) 5.3 1,258 (18) 5.7 1,066 (43) 17.0 519,987 (9,113) 7.2 522,946 (9,960) 7.8 Foreign Borrow ing Mortgage-backed Security Total Othe r Liabilitie s Demand Deposits 53,302 56,290 Other Liabilities 113,799 123,878 Shareholder’s Equity Total 37,175 204,275 38,781 218,949 TOTAL LIABILITIES 724,263 741,895 88 - Banco do Brasil – MD&A 2Q10 Table 66. Avg. Bal of the BS accounts and info. on int. rates – Int. Bearing Liabilities (half-yearly) 1H09 R$ million Ave r age Balance Inte re s t 1H10 Annualize d Rate (%) Ave r age Balance Inte r e s t Annualize d Rate (%) Inte r e s t Be ar ing Liabilitie s Saving Deposits 64,013 (2,135) 6.8 79,272 (2,519) 6.5 Interbank Deposits 10,320 (445) 8.8 11,138 (250) 4.5 Time Deposits 168,805 (6,715) 8.1 195,244 (7,191) 7.5 Money Market Borrow ing 100,409 (5,129) 10.5 156,348 (6,739) 8.8 Foreign Borrow ing 5,068 (90) 3.6 8,691 (501) 11.9 Onlending 26,661 (822) 6.3 33,808 (1,261) 7.6 Financial and Development Funds + Subordinated Debt 16,871 (287) 3.4 24,429 (282) 2.3 2,874 (47) 3.3 11,375 (269) 4.8 289 (0) 0.0 1,162 (60) 10.6 395,309 (15,670) 8.1 521,467 (19,072) 7.4 Foreign Securities Borrow ing Mortgage-backed Security Total Othe r Liabilitie s Demand Deposits 45,601 54,796 Other Liabilities 94,193 118,839 Total 31,175 170,969 37,978 211,612 TOTAL LIABILITIES 566,278 733,079 Shareholder’s Equity 89 - Banco do Brasil – MD&A 2Q10 7.4 Analysis of Volume and Spread The table below shows the appropriation of changes in interest income and expenses due to the change in the average volume of earning assets and interest bearing liabilities and the change in the average interest rate on such assets and liabilities, in the periods under analysis. The changes in volume and interest rate were calculated based on changes in average balances in the period and the changes in the average interest rates on earning assets and interest bearing liabilities. The Average Rate variation was calculated by the variation in the interest rate in the period multiplied by the average quantity of earning assets or average quantity of interest bearing liabilities in the first period. The Net Variation is the difference between the interest income of the present period and that of the previous period. The variation by Average Volume is the difference between the Net Variation and that resulting from the Average Rate. Comparing with the previous quarter, we observe that both points of view of profitable assets as well as onerous liabilities, there was a growth in the average rate and volumes, contributing for increase in financial intermediation revenues and expenses. In the comparison with the same prior-year period, the analysis of the volume and rate allows a good understanding BB’s global spread changes. Revenues from earning assets grow in a higher pace than the expenses associated to onerous liabilities. Increase in financial revenues was a result of the expansion of the average profitable asset volume, followed by reduction in the average rate incurring upon them. From the interest bearing liabilities point of view, the expenses raise was due not only to volume increase, but also to the behavior of the average rate on these liabilities. Table 67. Int. increase and decrease (Inc. and Exp.) due to changes in Vol and Rates (quarterly) 2Q10/1Q10 R$ million Ave rage V olum e (1) Ave r age Rate (2) 2Q10/2Q09 Ne t Change (3) Ave r age V olum e (1) Ave rage Rate (2) Ne t Change (3) Ear ning As s e ts A vailable Funds in Foreign Currency Securities + Interbank Investments on Hedge Loans + Leasing Remunerated Compulsory Deposits Total 3 (513) (28) (25) 3 (23) 65 (449) 453 (473) 2,934 (246) 513 (165) 348 499 144 643 632 317 200 517 3,786 72 (434) (20) (20) 2,687 704 3,352 Inte r e s t Be aring Liabilitie s Saving Deposits (41) (46) (87) (170) (23) Interbank Deposits 11 (0) 11 (12) 81 Time Deposits 82 (303) (221) (227) Money Market Borrow ing (171) 69 (398) 17 (411) (394) (1,237) Foreign Borrow ing (61) (59) (120) (154) (118) (273) Onlending (33) 47 15 (145) (162) (307) (4) 31 27 (33) 33 (28) (25) (52) (126) (23) Financial and Development Funds + Subord. Debt Foreign Securities Borrow ing Mortgage-backed Security Total 8 (56) (1,197) 0 (150) (33) (25) (30) (12) (43) (791) (847) (2,041) (448) (2,489) (1) Net Change - Average Rate (2) (Interest Current Period / Balance Current Period) x Balance Previous Period) - (Interest Previous Period) (3) Current Interest - Interest for Previous Period 90 - Banco do Brasil – MD&A 2Q10 40 (193) Table 68. Int. increase and decrease (Inc. and Exp.) due to changes in Vol and Rates (half-yearly) 1H10/1H09 R$ million Ave rage V olum e (1) Ave r age Rate (2) Ne t Change (3) Ear ning As s e ts A vailable Funds in Foreign Currency 12 (21) (8) Securities + Interbank Inv estments on Hedge 1,820 (1,926) (106) Loans + Leasing 6,266 (221) Remunerated Compulsory Deposits Total 743 8,581 60 (1,848) 6,045 803 6,734 Inte r e s t Be ar ing Liabilitie s Saving Depos its Interbank Depos its Time Depos its Money Market Borrow ing (485) 101 (384) (18) 214 195 (974) 498 (476) (2,411) 801 (1,610) Foreign Borrow ing (209) (203) (412) Onlending (267) (173) (439) Financial and Dev elopment Funds + Subord. Debt Foreign Sec urities Borrow ing Mortgage-bac ked Security Total (87) (201) (45) (4,614) 92 (21) (15) 1,212 5 (222) (60) (3,402) (1) Net Change - Average Rate (2) (Interest Current Period / Balance Current Period) x Balance Previous Period) - (Interest Previous Period) (3) Current Interest - Interest for Previous Period 91 - Banco do Brasil – MD&A 2Q10 7.5 Provision for Credit Risk The analysis of the provision for losses included in this chapter already takes into account the figures of Banco Votorantim. Table 69. Net Financial Margin Quar te r ly Flow R$ million 2Q09 Ne t Inte re s t Incom e A llow ance f or Loan Losses Ne t Financial M ar gin 1Q10 Chg. % 2Q10 Half-Ye ar ly Flow On 2Q09 On 1Q10 1H09 1H10 Chg. % On 1H09 8,487 9,357 9,461 11.5 1.1 15,472 18,817 21.6 (3,172) 5,316 (3,026) 6,331 (2,871) 6,590 (9.5) 24.0 (5.1) 4.1 (5,663) 9,809 (5,897) 12,920 4.1 31.7 The net financial margin is obtained by deducting expenses with allowances for loan losses from the net interest income. In 2Q10, a 4.1% growth was observed in the net financial margin when compared to the previous quarter and 24.0% when measured against the same period in 2009. Expenses related to the allowance for loan losses had decreased R$ 155 million in relation to that recorded in 1Q10, a 5.1% drop. BV contributed with R$ 233 million of the total amount of R$ 2,871 million in the 2Q10. In this half of the year there was an increase of R$ 234 million in expenses related to the allowance for loan losses, with its amount reached R$ 5,897 million, out of which R$ 435 million refers to Banco Votorantim. There is no impact in the partnership with BV in 1H09. The behavior of expenses related to the allowance for loan losses arises from the improvement in BB default levels which showed the worse rates in 3Q09 and gradually improved since then. It should be noted that although the loan portfolio had vigorous growths of 29.3% over 12 months and 6.9% over the quarter, expenses related to the allowance for loan losses grew only 4.1% when 1H10 is compared to 1H09. It is important to highlight that in 2Q10 an additional allowance was reversed, a fact which is explained below in this chapter. The ratio between expenses of provisions and the average total portfolio – both accumulated in 12 months – went from 4.2% in 2Q09 to 4.1% in 2Q10, but with an increase of 10 basis points in the period. There was an improvement of 40 basis points compared to the immediately prior quarter. Table 70. Allowance for Loan Losses Expenses over Portfolio R$ million 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 (A ) A llow anc e f or Loan Losses - Quarterly (1,338) (2,240) (2,491) (3,172) (3,017) (2,950) (3,026) (2,871) (B) A llow anc e f or Loan Losses - 12 Months (6,056) (6,800) (7,757) (9,241) (10,919) (11,629) (12,164) (11,864) (C) Loan Portf olio 202,201 224,808 228,101 252,485 265,019 300,829 305,551 326,522 (D) A verage Portf olio – 3 Months 195,431 174,161 218,626 189,144 225,528 203,591 246,363 219,071 257,948 234,430 282,405 250,888 304,936 269,466 316,005 287,413 0.7 3.5 1.0 3.6 1.1 3.8 1.3 4.2 1.2 4.7 1.0 4.6 1.0 4.5 0.9 4.1 (E) A verage Portf olio – 12 Months Expenses ov er Portf olio (A /D) - % Expenses ov er Portf olio (B/E) - % 92 - Banco do Brasil – MD&A 2Q10 2Q10 Considering that the agribusiness default indicators behavior improve, there was a reverse in the additional provision from the rural operations for around R$ 332 million, treated as extraordinary item for finding BB’s recurring result. Such additional provision was created in Jun/09 and supported by CMN th Resolution No. 3,499, of September 27 , 2007, when the risks of customers that have renegotiated operations in agribusiness activity were reviewed, with normal credit limit and operations, being the correspondent amount prudentially allocated as additional provision in order to keep up with the performance evolution of this portfolio, that was so far reverted. Provisions arising from methodology differences for risk rating between BB and BNC were prudentially formed by applying the increased risk assigned to the common customers credit portfolio to both banks (cross-drag), and recorded as additional allowance for loan losses at the beginning of BNC incorporation, in order to provide resources for the necessary adjustments in the regulatory provision in accordance rd with Article 3 of Resolution no. 2,682. With the migration process evolution of the BNC’s portfolios to BB systems over the second quarter, there was an adaption of such operations levels of risk, a fact that encouraged the migration of additional provision (R$ 220 million) in order to regulate it. Moreover, there was a R$ 280 million migration for additional regulatory allowance for loan losses. This balance is basically due to customers transactions that have a indebtedness less than R$ 50 thousand. st CMN Resolution no. 2,682, of 21 December, 1999, allows the classification of this type of risk A operations. However, for prudence, BB fit into the risk levels set by their credit scoring systems, which leads to higher regulatory provisions. Until 1Q10 that difference was accounted for as additional provision. The figure below details the allowance for loan losses, segregating the minimum provisions required by CMN Resolution No. 2,682/99 from the total booked. A 1.8% growth is noted in the total allowance as compared to March 2010 and a 1.2% decrease over the 12-month period. The 9.4% growth in the required allowance is in line with the loan portfolio performance and with the migrations made between the allowance for loan losses required and the additional allowance. R$ million 17,759 13,673 11,187 1,594 14,674 19,070 2,903 2,867 18,617 18,316 18,088 2,782 2,624 1,791 15,691 16,296 1,640 719 10,468 Sep/08 12,079 Dec/08 13,034 Mar/09 Required Provision 14,892 16,167 15,835 Jun/09 Sep/09 Dec/09 Additional Provision Mar/10 Jun/10 Total Provision Figure 36. Allowances Breakdown The transactions rated at risk levels AA-C in this quarter (92.5%) showed improvement in relation to Mar/10 (91.9%) and Jun/09 (90.6%). BB presented, in this same classification, improved levels compared to the Banking Industry (91.8%). 93 - Banco do Brasil – MD&A 2Q10 Table 71. Loan Portfolio by Level of Risk R$ million Jun/09 M ar /10¹ Balance Pr ovis ion Shar e % Jun/10¹ Balance Pr ovis ion Shar e % Balance Pr ovis ion Shar e % BI² AA 61,760 - 24.5 78,451 - 25.7 86,326 - 26.4 21.0 A 71,638 358 28.4 91,647 458 30.0 68,141 341 20.9 41.7 19.4 B 69,629 696 27.6 81,058 811 26.5 109,308 1,093 33.5 C 25,651 770 10.2 29,732 892 9.7 38,280 1,148 11.7 9.6 D 8,263 826 3.3 8,722 872 2.9 8,610 861 2.6 2.5 E 2,664 799 1.1 2,883 865 0.9 2,462 739 0.8 1.0 F 1,696 848 0.7 1,651 826 0.5 1,600 800 0.5 0.8 G 1,970 9,216 1,379 9,216 0.8 3.6 1,463 9,944 1,024 9,944 0.5 3.3 1,598 10,196 1,118 10,196 0.5 3.1 0.6 3.3 Total 252,485 14,892 100.0 305,551 15,691 100.0 326,522 16,296 100.0 100.0 A A -C 228,678 23,808 1,824 13,068 90.6 9.4 280,888 24,663 2,161 13,531 91.9 8.1 302,056 24,466 2,582 13,714 92.5 7.5 91.8 8.2 H D-H (1) Includes Banco Nossa Caixa and Banco Votorantim (2) Previous data of March/2010. The average loan portfolio risk, considering only the required provisions, was of 5.0% in June 2010, 10 basis points below that witnessed in March 2010 (5.1%), and 90 basis points lower than that observed in Jun/09 (5.9%). The volume overdue above 15 days of the portfolio amounted to R$ 14,875 million, reaching 4.6% of the loan portfolio in June 2010, which is about the same default level observed before the worsening of the world economic crisis. The rate overdue above 60 days reached 3.1%, 50 basis points below that observed in 1Q10. The rate overdue above 90 days reached 2.7%, below the 3.1% recorded in 1Q10; in the Banking Industry that indicator closed June 2010 at 3.7%, a default level that was higher than that observed in BB. Table 72. Delinquency Ratio R$ million 3Q08 4Q08 1Q09 2Q09 3Q09¹ 4Q09³ 1Q10 2Q10 Loan Portfolio 202,201 224,808 228,101 252,485 285,517 300,829 305,551 326,522 7,376 8,951 10,692 13,204 16,571 15,457 15,576 14,875 3.6 4.0 4.7 5.2 5.8 5.1 5.1 4.6 5,234 6,267 7,450 9,485 11,838 11,192 10,941 10,268 2.6 2.8 3.3 3.8 4.1 3.7 3.6 3.1 4,471 5,305 6,197 8,299 10,399 9,783 9,408 8,871 2.2 2.4 2.7 3.3 3.6 3.3 3.1 2.7 Write-of f 1,342 1,229 1,606 1,888 2,377 3,402 3,298 2,800 Recov ery of Write-of f s² (400) (467) (357) (802) (686) (847) (631) (757) Ne t Los s 941 763 1,250 1,086 1,691 2,555 2,668 2,043 Net Loss/Loan Portf olio - % annualized 1.9 1.4 2.2 1.7 2.4 3.4 3.5 2.5 11,187 13,673 14,674 17,759 19,070 18,617 18,316 18,088 5.5 6.1 6.4 7.0 6.7 6.2 6.0 5.5 A llow ance/Past Due Loans + 15 days - % 151.7 152.8 137.2 134.5 115.1 120.4 117.6 121.6 A llow ance/Past Due Loans + 60 days - % 213.8 250.2 218.2 257.7 197.0 236.8 187.2 214.0 161.1 183.4 166.3 190.3 167.4 194.7 176.1 203.9 Pas t Due Loans + 15 days Pas t Due Loans + 15 days/Loan Portf olio Pas t Due Loans + 60 days Pas t Due Loans + 60 days/Loan Portf olio Pas t Due Loans + 90 days Pas t Due Loans + 90 days/Loan Portf olio Allow ance A llow ance/Loan Portf olio-% A llow ance/Past Due Loans + 90 days - % (1) As of 2Q09, Banco Nossa Caixa was included (2) Includes R$ 271 million in assigned loans in 2Q2, R$ 119 million in 3Q09, R$ 242 million in 4Q09 and R$ 9.3 million in 1Q10. (3) As of 3Q09, Banco Votorantim was included The following graph shows the monthly behavior of default rates in Banco do Brasil's domestic portfolio, excluding BV's portfolio and the remaining balance of BNC, for loans in arrears from 15 to 90 days. The behavior of those indexes is evidence of improvements in the economy's conditions. The graph shows that the peak of default in 2009 occurred in August, presenting inflection of the trend as from that month. 94 - Banco do Brasil – MD&A 2Q10 NPL-15 4.6 3.2 3.1 2.9 n/ 1 0 0 3.2 4.8 ju 3.4 5.0 m ay /1 3.5 5.1 r/1 0 n/ 1 9 c/ 0 5.4 0 3.5 de no v/ 0 /0 9 9 3.6 ja 3.9 oc t /0 9 3.9 se p 09 au g/ l/0 9 3.6 ju n/ 0 9 9 ju m ay /0 r/0 9 3.6 3.5 3.2 4.0 5.4 ap 5.5 /1 0 5.9 m ar 5.9 5.1 ap m ar /0 9 3.1 6.2 6.0 5.9 10 5.3 fe b/ 6.3 5.6 NPL-90 Figure 37. Overdue above 15 and 90 days The graph below shows the ratio between the provision required to the provision for transactions overdue above 90 days from BB and the Banking Industry. It can be observed that BB has a level of required provision that is more than enough to cover transactions overdue above 90 days. Considering the entire provision (required + additional), the provision's coverage rate on loans overdue over 90 days at BB ended Jun/10 at 203.9%. 234.1 227.7 170.0 Sep/08 210.3 186.1 179.4 175.8 Dec/08 Mar/09 183.7 163.5 155.5 162.2 161.9 156.1 166.8 166.7 Jun/09 Sep/09 90 Days BB Dec/09 Mar/10 169.1 Jun/10 90 Days Banking Industry Figure 38. Allowance/Past Due Loans + 90 days – BB x BI (%) With the improved cyclical indicators for the Brazilian economy, the decline tendency in average risk was maintained. At BB the average risk decreased 10 basis points in the quarterly comparison and 90 basis points when comparing with June 2009; In the Banking Industry it was observed decreases of 50 and 100 basis points, respectively, as shown below: Table 73. Average Portfolio Risk Se p/08 A verage Risk BB A verage Risk BI De c/08 5.2 5.1 95 - Banco do Brasil – MD&A 2Q10 5.4 5.3 M ar /09 5.7 6.6 Jun/09 5.9 7.2 Se p/09 5.7 7.2 De c/09 5.3 6.9 M ar /10 5.1 6.7 Jun/10 5.0 6.2 7.5.1 Retail Loan Portfolio Since 4Q09, the retail loan portfolio was reorganized. The small and medium entity portfolio (SMEs) was spared from retail business and shown separately in a specific chapter (chap. 7.5.2). Hence, the retail portfolio now consists essentially of individuals business, without taking into consideration the transactions of the partnership with BV. Regarding BNC operations, some remaining balances still remain in the loan portfolio, and they are being distributed in the "other" segments as described in chapter 7.5.6 herein. In June 2010, the Retail Loan Portfolio grew 48.5% in relation to the same prior-year period and 9.8 % in relation to March 2010. The performance is influenced by the comparison basis effect, since the migration from BNC portfolio to BB was made mostly in 1Q10. A volume of R$ 5.6 billion still remains to be migrated to BB from loan operations originated in BNC. Table 74. Retail Loan Portfolio by Level of Risk Jun/09 R$ million AA Balance M ar /10 Pr ovis ion Shar e Balance Jun/10* Pr ovis ion Shar e Balance Pr ovis ion Shar e 100 - 0.2 192 - 0.3 249 - 0.3 A 20,689 103 38.5 26,909 135 37.0 10,885 54 13.6 B 17,916 179 33.3 25,335 253 34.8 39,111 391 49.0 C 10,121 304 18.8 14,652 440 20.2 23,648 709 29.6 D 1,488 149 2.8 1,839 184 2.5 2,069 207 2.6 E 444 133 0.8 479 144 0.7 424 127 0.5 F 464 232 0.9 387 194 0.5 469 234 0.6 G 415 2,121 290 2,121 0.8 3.9 339 2,577 237 2,577 0.5 3.5 389 2,587 272 2,587 0.5 3.2 Total 53,756 3,511 100.0 72,709 4,163 100.0 79,832 4,582 100.0 A A -C 48,825 4,931 586 2,925 90.8 9.2 67,088 5,621 827 3,335 92.3 7.7 73,894 5,938 1,155 3,428 92.6 7.4 H D-H * Includes Banco Nossa Caixa's operations migrated to BB. Excludes Banco Votorantim's operations. The retail loan portfolio average risk remained steady in relation to March 2010 and closed June 2010 at 5.7%, a drop of 80 basis points in relation to June 2009 levels. The following table shows the changes in the Retail Portfolio allowance for loan losses. The large variation in the number of new contracts, in the Mar-June 2010 period, is due to BNC loan portfolio migration to BB, of approximately R$650 million in March 2010. The flow of provision on the portfolio totaled 1.5% in Jun/10. 96 - Banco do Brasil – MD&A 2Q10 The Allowance for Loan Losses movement of the retail portfolio is detailed in the table below: Table 75. Changes in the Allowance – Retail R$ million Re tail Loan Por tfolio¹ 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 49,864 53,756 57,737 62,700 72,709 79,832 3,733 3,885 3,511 3,544 3,732 4,163 751 1,109 394 485 312 438 a) Risk Deterioration 1,153 1,292 1,240 1,292 1,165 1,396 b) Risk Improv ement (402) (183) (845) (807) (853) (958) 2 – New Trans actions 561 (624) 533 (754) 245 (883) 259 (799) 793 (960) 380 (806) Initial Allow ance 1 - Risk Migration 3 – Write-of f s Total (1 + 2 + 3): 688 888 (244) (55) 145 12 Other Impacts² (536) (1,262) 277 242 287 407 Final Allow ance 3,885 3,511 3,544 3,732 4,163 4,582 A llow ance Required by CMN Resolution 2,682 3,885 3,511 3,544 3,732 4,163 4,582 152 (374) 33 987 1,391 1,226 a) A dded Provision - - - - - - b) Prov ision Expenses - - - 987 1,391 1,226 Provision Flow - R$ million Provision / Portf olio - % 7.8 6.5 6.1 6.0 5.7 5.7 Provision Flow / Portf olio - % 0.3 (0.7) 0.1 1.6 1.9 1.5 (1) As of the 1Q10, includes part of the operations of Banco Nossa Caixa which migrated to BB's systems. Excludes Banco Votorantim's portfolio. (2) Amortization, settlement, release of installments and charge debt Vintage We present the vintage of the individual loan portfolio in the graphs below. This methodology, known abroad as Vintage, affords greater detailing and closer to the portfolio than traditional indicators. Vintage makes possible to monitor how the default of the set of operations contracted in a particular period behaves over time. In the first graph, for example, the vintage is performed in the quarterly view. The lines show how the default of operations contracted in each quarter behaved in the following periods. The longer lines, therefore, refer to the oldest vintage period. In the case of the graphs below, we consider operations overdue above 90 days at default, and for determination of the Loan portfolio for individual customers, the overdraft accounts, credit card operations and vehicle loans do not appear in these graphs. The vintage shows how the operations contracted most recently present a more favorable default curve than those contracted at the beginning of the vintage. This result reflects the constant optimization in the credit analysis, concession and vintage models. 97 - Banco do Brasil – MD&A 2Q10 Figure 39. Quarterly Vintage The second graph contains the vintage with annual periodicity, helping the viewing and interpretation of data. The inflections presented in the previous figure curves refer to loan assignments. Figure 40. Annual Vintage In the graphs below, we added detailing of the vehicle loan portfolio, segmented by the operation contracting origin: Arena I - operations contracted in BB’s branches; Arena II - operations contracted in associated vehicle dealerships. In the graph below we emphasize the vehicle financing portfolio contracted by the BB's branches: 98 - Banco do Brasil – MD&A 2Q10 Figure 41. Annual Vintage – Vehicle Loan Portfolio – Arena I In this figure we emphasize the vehicle financing portfolio contracted by automobile dealing companies: Figure 42. Annual Vintage – Vehicle Loan Portfolio – Arena II 99 - Banco do Brasil – MD&A 2Q10 7.5.2 SMEs Loan Portfolio As of 4Q09, we prepared a loan portfolio for small and medium entities (SMEs). Until 3Q09, this portfolio appeared within the Retail Portfolio. Foreign trade transactions by SMEs are not included in this portfolio. SME loan portfolio rose 35.1% over the last 12 months and 10.9% compared to Mar /10. This increase is mainly due to the working capital products performance: BB Giro Empresa Flex which amounted R$ 9.1 billion, a 28.3% growth in relation to Jun/09. It is important to emphasize that in this quarter BNC transactions with businesses were integrated into BB systems. At the end of June 2010, operations classified at risk levels AA to C exhibited an improvement of 80 basis points compared to March 2010, representing 91.2% of the total portfolio. Table 76. Small and Micro Enterprise Loan Portfolio Jun/09 R$ million Balance AA M ar /10 Pr ovis ion Shar e Balance Jun/10 Pr ovis ion Shar e Balance Pr ovis ion Shar e 4,986 - 15.0 8,355 - 20.6 11,130 - 24.8 A 13,390 67 40.2 15,577 78 38.4 13,823 69 30.7 B 10,739 107 32.3 11,578 116 28.6 14,869 149 33.1 C 733 22 2.2 1,146 34 2.8 1,177 35 2.6 D 822 82 2.5 1,225 122 3.0 996 100 2.2 E 439 132 1.3 482 144 1.2 490 147 1.1 F 359 179 1.1 271 135 0.7 311 155 0.7 G 356 1,470 249 1,470 1.1 4.4 255 1,661 178 1,661 0.6 4.1 311 1,859 218 1,859 0.7 4.1 Total 33,294 2,309 100.0 40,548 2,470 100.0 44,966 2,732 100.0 A A -C 29,849 3,446 196 2,113 89.7 10.3 36,656 3,892 228 2,241 90.4 9.6 41,000 3,966 253 2,479 91.2 8.8 H D-H *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. The following table details the changes in Allowance for Loan Losses for the Micro and small businesses Portfolio: Table 77. Changes in the Allowance – SMEs R$ million Re tail Loan Por tfolio 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 31,637 33,294 35,311 39,478 40,548 44,966 1,484 1,792 2,309 2,625 2,595 2,470 1 - Risk Migration 366 580 387 65 (2) 198 a) Risk Deterioration 765 1,017 951 899 907 977 b) Risk Improv ement (399) (437) (565) (833) (909) (778) 2 – New Trans actions 137 (394) 213 (412) 200 (531) 183 (815) 143 (895) 311 (694) Initial Allow ance 3 – Write-of f s Total (1 + 2 + 3): 109 381 56 (567) (755) (185) Other Impacts* 198 137 260 537 629 448 Final Allow ance ** 1,792 2,309 2,625 2,595 2,470 2,732 A llow ance Required by CMN Resolution 2,682 1,792 2,309 2,625 2,595 2,470 2,732 308 518 316 (30) (126) 262 a) A dded Provision - - - - - - b) Prov ision Expenses - - - - - - Provision / Portf olio - % 5.7 6.9 7.4 6.6 6.1 6.1 Provision Flow / Portf olio - % 1.0 1.6 0.9 (0.1) (0.3) 0.6 Provision Flow - R$ million (1) Amortization, settlement, release of installments and charge debt (2) Additional Provision allocated to the Commercial Loan Portfolio *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. 100 - Banco do Brasil – MD&A 2Q10 7.5.3 Commercial Loan Portfolio The commercial portfolio grew 31.9% in June 2010 as compared to June 2009, whereas allowances grew 14.6% over the same comparison period. The commercial loan portfolio is strongly influenced by the entering into and settlement of operations in material amounts with large customers. At the end of June 2010 the transactions classified into risk level AA to C remained almost unchanged in relation to those observed in March 2010, but improved 40 basis points when compared to June 2009. Table 78. Commercial Loan Portfolio by Level of Risk Jun/09 R$ million Balance AA M ar /10 Pr ovis ion Shar e Balance Jun/10 Pr ovis ion Shar e Balance Pr ovis ion Shar e 25,970 - 52.1 35,198 - 58.9 37,578 - 57.1 A 9,359 47 18.8 8,819 44 14.7 11,538 58 17.5 B 11,152 112 22.4 11,834 118 19.8 13,303 133 20.2 C 1,869 56 3.7 2,258 68 3.8 1,617 48 2.5 D 691 69 1.4 871 87 1.5 943 94 1.4 E 262 79 0.5 252 76 0.4 178 53 0.3 F 106 53 0.2 92 46 0.2 108 54 0.2 G 190 290 133 290 0.4 0.6 47 429 33 429 0.1 0.7 71 470 50 470 0.1 0.7 Total 49,889 838 100.0 59,799 901 100.0 65,805 960 100.0 A A -C 48,350 1,539 214 623 96.9 3.1 58,108 1,691 230 671 97.2 2.8 64,035 1,769 239 721 97.3 2.7 H D-H *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. The following table details the changes in Allowance for Loan Losses for the Commercial Portfolio. Table 79. Changes in the Allowance - Commercial R$ million Com m e r cial Loan Por tfolio Initial Allow ance 1 - Risk Migration 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 48,367 49,889 52,573 57,189 59,799 65,805 492 599 838 1,005 1,085 901 27 278 215 78 (142) 22 a) Risk Deterioration 225 330 348 373 193 299 b) Risk Improv ement (198) (53) (133) (295) (335) (277) 86 (60) 178 (74) 109 (75) 233 (180) 111 (259) 151 (163) 10 2 – New Trans actions 3 – Write-of f s Total (1 + 2 + 3): 52 382 249 132 (290) Other Impacts¹ 54 (143) (82) (51) 106 49 599 838 1,005 1,085 901 960 Final Allow ance A llow ance Required by CMN Resolution 2,682 599 838 1,005 1,085 901 960 Changes in the Prov ision - in R$ million 167 312 242 260 75 223 - - - - - - 167 312 242 260 75 223 Provision / Portf olio - % 1.2 1.7 1.9 1.9 1.5 1.5 Changes in the Prov ision - % of Portf olio 0.3 0.6 0.5 0.5 0.1 0.3 a) A dditional Prov ision² b) Provision Expense (1) Amortization, settlement, release of installments and charge debt (2) Additional Provision allocated to the Commercial Loan Portfolio *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. 101 - Banco do Brasil – MD&A 2Q10 7.5.4 Agribusiness Loan Portfolio In June 2010 the agribusiness portfolio grew 5.3% in twelve months and 9.7% over March 2010, mostly due to the seasonality in the period, as detailed in chapter 6.5.3 herein. In June 2010 the loans classified at risk levels AA-C accounted for 89.5% of the portfolio, 240 basis points higher than the number presented in June 2009 and 190 basis points over Mar/10. The porfolio growth was influenced by lowrisk agroindustrial loan contracts. The relationship between the provisions required (CMN Resolution 2,682/99) and the balance of operations went from 7.6% in 2Q09 to 6.2% in 2Q10, improvement of 140 basis points in the period. Table 80. Agribusiness Loan Portfolio by Level of Risk Jun/09 R$ million Balance M ar /10 Pr ovis ion Shar e Balance Jun/10 Pr ovis ion Shar e Balance Pr ovis ion Shar e AA 13,673 - 20.5 10,534 - 16.4 13,310 - 18.9 A 17,754 89 26.6 18,058 90 28.2 10,003 50 14.2 B 18,234 182 27.3 19,012 190 29.7 30,590 306 43.5 C 8,527 256 12.8 8,565 257 13.4 9,050 272 12.9 D 3,319 332 5.0 3,252 325 5.1 3,239 324 4.6 E 1,008 302 1.5 876 263 1.4 674 202 1.0 F 356 178 0.5 449 225 0.7 312 156 0.4 G 670 3,234 469 3,234 1.0 4.8 402 2,965 281 2,965 0.6 4.6 355 2,788 248 2,788 0.5 4.0 Total 66,775 5,042 100.0 64,113 4,597 100.0 70,321 4,346 100.0 A A -C 58,188 8,587 527 4,515 87.1 12.9 56,169 7,945 537 4,059 87.6 12.4 62,953 7,367 627 3,718 89.5 10.5 H D-H *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. The following table details the changes in Allowance for Loan Losses for the Portfolio Agribusiness. Table 81. Changes in the Allowance – Agribusiness R$ million 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 63,492 66,775 67,237 65,651 64,113 70,321 4,784 5,087 5,042 4,950 4,611 4,597 1 - Risk Migration 647 144 (142) (315) (45) (364) a) Risk Deterioration 873 774 922 899 786 739 b) Risk Improv ement (226) (631) (1,064) (1,214) (831) (1,103) 2 – New Trans actions 3 – Write-of f s 974 (357) 1,301 (288) 865 (527) 564 (944) 379 (605) 560 (621) Total (1 + 2 + 3): 1,264 1,156 196 (695) (271) (425) Other Impacts¹ (961) (1,201) (288) 356 257 174 Final Allow ance 5,087 5,042 4,950 4,611 4,597 4,346 A llow ance Required by CMN Resolution 2,682 5,087 5,042 4,950 4,611 4,597 4,346 660 244 435 605 591 370 - (332) - - - 332 b) Prov ision Expense 660 576 435 605 591 38 Provision / Portf olio - % 8.0 7.6 7.4 7.0 7.2 6.2 Changes in the Prov ision - % of Portf olio 1.0 0.9 0.6 0.9 0.9 0.5 Agr ibus ine s s Loan Por tfolio Initial Allow ance Changes in the Prov ision - in R$ million a) A dditional Provis ion² (1)Amortization, settlement, release of installments and charge debt (2) Additional Provision allocated to the agribusiness loan portfolio *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. 102 - Banco do Brasil – MD&A 2Q10 The average risk of the portfolio is strongly influenced by the operations from 2005 to 2007 harvests extended with total balance of R$ 10,308 million. In the following table, the Agribusiness Loan Portfolio is divided in extended and unextended operations. Table 82. Portfolio with and without Roll Over – Agribusiness Por tfolio Without Rollove r Balance Ris k Allow ance for Loan Los s e s Pas t Due _90 437¹ Por tfolio w ith Rollove r Pas t Due 90/ Ballance ² Balance Allow ance for Loan Los s e s Pas t Due _90 28¹ Pas t Due 90/ Ballance ² AA 12,331 - - 979 - A 9,582 48 (0) - 421 2 (0) - B 28,102 281 - - 2,488 25 - - C 6,646 199 14 - 2,404 72 1 - D 1,761 176 39 - 1,477 148 4 - E 221 66 49 - 453 136 27 - F 141 71 44 - 171 85 32 - G 206 144 70 - 149 105 45 - H 1,023 1,023 445 Total 60,013 2,008 660 1.1% 1,765 1,765 403 10,308 2,338 512 5.0% (1) Overdue operations at level AA refer to credit with third party risk (2) The delay resulting from overdue operations with third party risk was not included in the calculation of the rate According to the table above, transactions overdue above 90 days represent 1.1% of the unextended total portfolio. If we compare this indicator to the extended operations, there is a gap of only 390 basis points. In the table below we present the balances, rate of default 90 days and average risk of the agribusiness portfolio segmented in total portfolio, extended and not extended. 103 - Banco do Brasil – MD&A 2Q10 Table 83. Agribusiness Portfolio Rates R$ million 2Q09 3Q09 4Q09 1Q10 2Q10 Lo a n P o rtfo lio 66,775 67,237 65,651 64,113 70,321 P ro v isio n 5,042 4,950 4,611 4,597 4,346 P a st D ue Lo a ns + 90 days 1,786 2,588 2,146 2,050 1,638 Past Due Loans + 90 days/Loan Po rtfolio - % 2.7 3.8 3.3 3.2 2.3 Allo wance/Lo an Po rtfolio - % 7.6 7.4 7.0 7.2 6.2 288 527 944 605 621 14,648 14,278 11,743 11,439 10,308 2,711 2,939 2,635 2,542 2,338 738 1,401 1,076 904 540 5.0 9.8 9.2 7.9 5.2 18.5 20.6 22.4 22.2 22.7 127 371 733 450 419 Write-Off Ext ende d Ope ra tio ns – B B R isk + T hird P a rt ies Pro visio n Past Due Loans + 90 days Transactions overdue + 90 days/To tal Po rtfolio (%) Pro visio n/Extended Operations - % Write-Off Une xtended Ope ra tio ns – B B R isk + T hird P a rt ie s 52,127 52,959 53,908 52,674 60,013 Pro visio n 2,331 2,011 1,976 2,055 2,008 Past Due Loans + 90 days 1,047 1,187 1,070 1,146 1,098 Transactions overdue + 90 days/Unextended o perations - % 2.0 2.2 2.0 2.2 1.8 Pro visio n/Unextended Operations - % 4.5 3.8 3.7 3.9 3.3 162 156 211 154 202 13,431 13,077 10,951 10,691 9,599 2,711 2,939 2,635 2,542 2,337 738 1,401 1,076 872 512 5.5 10.7 9.8 8.2 5.3 20.2 22.5 24.1 23.8 24.4 127 371 733 450 419 Write-Off Ext ende d Ope ra tio ns – B B R isk Pro visio n Past Due Loans + 90 days Transactions overdue + 90 days/Unextended o perations - % Pro visio n/Unextended Operations - % Write-Off Une xtended Ope ra tio ns – B B R isk 49,315 50,321 52,078 50,910 58,289 Pro visio n 2,331 2,011 1,976 2,055 2,008 Past Due Loans + 90 days 1,047 1,187 1,070 1,146 1,098 Transactions overdue + 90 days/Unextended o perations - % 2.1 2.4 2.1 2.3 1.9 Pro visio n/Unextended Operations - % 4.7 4.0 3.8 4.0 3.4 162 156 211 154 202 52,127 52,959 53,908 52,674 60,013 1,243 1,209 1,219 1,232 1,120 2.4 2.3 2.3 2.3 1.9 49,315 50,321 52,078 50,910 58,289 1,243 2.5 1,209 2.4 1,219 2.3 1,232 2.4 1,120 1.9 Write-Off Simulat io n Operat io ns no t Exte nde d wit ho ut dra g e ff ec t o f Exte nde d Operatio ns a- BB Risk + Third Parties b- Pro visio n Average Risk (b/a) c- BB Risk d- Pro visio n Average Risk (d/c) The delay resulting from overdue operations with third party risk was included in the calculation of the rate. Does not consider operations of Banco Nossa Caixa and Banco Votorantim. The average risk of BB Risk extended operations in 2Q10, presented a 60 basis points improvement in relation to 1Q10 totaling 24.4% in the 2Q10. CMN Resolution No. 2,682/99, which provides risk ratings and the creation of allowance for loan losses, requires maintenance of risk with renegotiated loans at the risk level found at the time of renegotiation. Owing to these rule, renegotiated transactions increase the loan portfolio's average risk. A simulation performed with unextended BB risk transactions, after removing the drag effect caused by extended loans, shows that there would be a 3.4% to 1.9% decline in average risk in 2Q10. 104 - Banco do Brasil – MD&A 2Q10 In the figure below the agribusiness portfolio is segregated in extended and non-extended operations, by appropriation and respective shares. 2Q10* 14.1% Costs 48.7% Inves tment 33.8% Ref inancing 17.6% R$ 9.6 billion Ave r age Ris k : 24.4% Costs 65.8% Inves tment 30.7% R$ 58.3 billion 3.4% Ave r age Ris k : 3.4% Marketing 85.9% Rollove r : Without Roll Ove r : -w /o Rollove r Effe ct: 1.9% Portfolio w ithout rollover Portfolio w ith rollover * Agribusiness portfolio, excluding third-party risk operations Figure 43. Stratified Agribusiness Portfolio 105 - Banco do Brasil – MD&A 2Q10 7.5.5 Foreign Trade Loan Portfolio The foreign trade finance portfolio recorded a decrease of 26.0% (Jun/10 – Jun/09). Loans rated at levels of risk AA to C ended Jun/10 with participation of 95.2% of total, and those rated as D-H, 4.8% in Mar/10. Table 84. Foreign Trade Loan Portfolio by Level Risk Jun/09 R$ million Balance M ar /10 Pr ovis ion Shar e Balance Jun/10 Pr ovis ion Shar e Balance Pr ovis ion Shar e AA 6,768 - 43.0 5,779 - 44.9 4,596 - 39.5 A 3,029 15 19.3 1,769 9 13.7 1,537 8 13.2 B 4,166 42 26.5 3,303 33 25.7 3,372 34 29.0 C 1,329 40 8.4 1,482 44 11.5 1,578 47 13.6 D 195 19 1.2 254 25 2.0 249 25 2.1 E 14 4 0.1 61 18 0.5 36 11 0.3 F 36 18 0.2 15 7 0.1 30 15 0.3 G 54 141 38 141 0.3 0.9 27 181 19 181 0.2 1.4 46 202 32 202 0.4 1.7 Total 15,732 317 100.0 12,871 338 100.0 11,645 374 100.0 A A -C 15,292 440 97 221 97.2 2.8 12,333 538 86 251 95.8 4.2 11,082 562 89 285 95.2 4.8 H D-H *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. The table below shows the effects of the global risk of the Foreign Trade Loan Portfolio on provisions, which provision vs. portfolio ratio of was pushed 60 basis points in relation to the 2Q10 and 120 basis points against 2Q09. That behavior is explained by term extensions in export-related exchange transactions as allowed by CMN Resolutions No. 3,675 and 3,826, which allow term extensions for export-related exchange transactions contracted before January 29, 2009. The extensions' deadline is th December 30 , 2010. When extending a transaction, the provisions are stated as per the poorest risk transaction. Table 85. Changes in Allowance – Foreign Trade R$ million Fore ign Tr ade Loan Por tfolio 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 17,384 15,732 14,522 13,361 12,871 11,645 Initial Allow ance 153 294 317 335 357 338 1 - Risk Migration 15 71 6 (62) (16) 24 a) Risk Deterioration 87 84 66 96 52 86 b) Risk Improvement (72) (13) (60) (157) (68) (63) 88 (2) 89 (54) 89 (30) 161 (70) 68 (36) 72 (31) 2 – New Transactions 3 – Write-of f s Total (1 + 2 + 3): 101 106 65 29 16 65 40 (83) (48) (7) (36) (29) Final Allow ance 294 317 335 357 338 374 A llow ance Required by CMN Resolution 2,682 294 317 335 357 338 374 Changes in the Provision - in R$ million 143 77 47 93 16 67 - - - - - - 143 77 47 93 16 67 Provision / Portf olio - % 1.7 2.0 2.3 2.7 2.6 3.2 Changes in the Provision - % of Portf olio 0.8 0.5 0.3 0.7 0.1 0.6 Other Impacts¹ a) A dditional Provision² b) Provision Expense (1) Amortization, settlement, release of installments and charge debt (2) Additional Provision allocated to the loan portfolio Foreign Trade *As of 2Q10, it includes Banco Nossa Caixa's operations migrated to BB. Does not consider operations of Banco Votorantim. 106 - Banco do Brasil – MD&A 2Q10 7.5.6 Foreign Loan Portfolio and Others The table below shows the risk profile of BB’s foreign loan portfolio. In June 2010 the loans ranked at risk levels AA-C accounted for 97.7% of the total, an increase of 20 basis points in relation to Mar/10. Table 86. Foreign Loan Portfolio by Risk Level Jun/09 R$ million Balance M ar /10 Pr ovis ion Shar e Balance Jun/10 Provis ion Share Balance Provis ion Share AA 7,767 - 59.4 11,747 - 67.1 13,367 - 68.5 A 2,692 13 20.6 2,656 13 15.2 4,110 21 21.1 B 994 10 7.6 2,439 24 13.9 1,325 13 6.8 C 1,306 39 10.0 228 7 1.3 246 7 1.3 D 173 17 1.3 218 22 1.2 271 27 1.4 E 0 0 0.0 103 31 0.6 68 20 0.3 F 0 0 0.0 0 0 0.0 0 0 0.0 G 10 126 7 126 0.1 1.0 0 116 0 116 0.0 0.7 0 118 0 118 0.0 0.6 Total 13,068 213 100.0 17,507 214 100.0 19,504 206 100.0 A A -C 12,759 309 63 150 97.6 2.4 17,070 437 45 169 97.5 2.5 19,048 456 41 165 97.7 2.3 H D-H Does not consider operations of Banco Nossa Caixa and Banco Votorantim. The table below exhibits the rating by risk of the other loans not classified in the Retail, SME, Commercial, Agribusiness, Foreign Trade and Abroad portfolios, plus the loan portfolios of Banco Nossa Caixa (remaining balance not migrated to BB's systems) and Banco Votorantim. Table 87. Other Transactions Portfolio – Banco Nossa Caixa and Banco Votorantim (50%) Jun/09 R$ million Balance M ar /10 Pr ovis ion Share Balance Jun/10 Provis ion Share Balance Pr ovis ion Shar e AA 2,496 - 12.5 6,647 - 17.5 6,096 - 17.7 A 4,725 24 23.7 17,859 89 47.0 16,245 81 47.2 B 6,428 64 32.2 7,558 76 19.9 6,739 67 19.6 C 1,766 53 8.8 1,401 42 3.7 964 29 2.8 D 1,575 158 7.9 1,064 106 2.8 844 84 2.5 E 497 149 2.5 631 189 1.7 593 178 1.7 F 375 188 1.9 437 218 1.1 371 185 1.1 G 275 1,833 193 1,833 1.4 9.2 393 2,014 275 2,014 1.0 5.3 425 2,172 298 2,172 1.2 6.3 Total 19,972 2,661 100.0 38,004 3,010 100.0 34,450 3,096 100.0 A A -C 15,416 4,556 141 2,520 77.2 22.8 33,465 4,538 207 2,803 88.1 11.9 30,044 4,407 178 2,918 87.2 12.8 H D-H 107 - Banco do Brasil – MD&A 2Q10 7.6 Fee Income Fee income (RPS), which include revenues from services provided and bank fee income (classification defined by BCB in 2008), amounted R$ 3,954 million in 2Q10, an increase of 8.8% in the previous quarter and of 15.1% in relation to 2Q09. In the semester, Fee Income reached R$ 7,588 million, increase of 19.0% in relation to the same period of previous year. It is worth reminding that 1H09 revenues had not yet consider Banco Votorantim (BV)'s consolidation, having started considering Banco Nossa Caixa (BNC)'s acquisition only as of the second quarter. In order to improve comparison, including for purposes of 2010 Guidance, a proforma base was prepared for 1Q09, simulating BV and BNC revenue consolidation during the entire period. Even using such proforma comparison base, fee income of Banco do Brasil conglomerate would show an increase of 10.8% in 1H10. This performance is slightly above the range of growth estimates for the growth for the Income from Services Provided disclosed in the 2010 Guidance, which estimates a growth from 7% to 10%. Bank fee income, characterized as such fees indicated by the Central Bank in Circular Letter 3371 and detailed in the accompanying note Other operating income/expenses", totalized R$ 1,101 million, showing an increase of 24.2% upon previous quarter and 25.3% in relation to the amount recorded in 2Q09. In the semester, these revenues reached R$ 1,988 million, a growth of 26.8% in relation to the same period in 2009. In relation to the details of fees income mentioned in the table below, it is worth mentioning that the historical series has been revised during the quarter, due to improvement in determination of the "capital market earnings" line which started considering including revenues earned by BB subsidiaries in Brazil and abroad. Table 88. Fee Income Quar te r ly Flow R$ million Fe e Incom e 2Q09 1Q10 Chg. % 2Q10 Half-Ye arly Flow On 2Q09 On 1Q10 1H09 1H10 Chg. % On 1H09 3,436 3,634 3,954 15.1 8.8 6,379 7,588 19.0 A ccount Fees 863 875 985 14.1 12.6 1,587 1,861 17.2 Credit / Debit Cards 571 712 727 27.3 2.1 1,140 1,439 26.2 Investment Fund Management Fees 506 537 575 13.5 7.1 952 1,112 16.8 Loan Fees 344 307 413 19.8 34.3 654 720 10.0 Collections 284 288 302 6.5 4.9 541 591 9.2 Insurance, Pension and Savings Bonds 117 106 190 62.2 79.2 187 296 58.3 Billings 120 143 141 18.0 (1.1) 230 284 23.2 Interbank 122 130 137 12.1 5.2 241 267 10.5 Capital Market Fees 138 371 106 430 98 386 (28.5) 4.0 (7.1) (10.4) 180 667 204 816 13.8 22.3 Other 108 - Banco do Brasil – MD&A 2Q10 7.6.1 Revenues from Checking Account Fees Checking account fees amounted R$ 985 million in 2Q10, which represents a 12.6% growth over 1Q10 and 14.1% over 2Q09. In the semester these revenues reached R$ 1,861 million, a 17.2% expansion over the same period in the previous year. Good performance of checking account fees arises, besides business expansion, from adopting many measures with the purpose of improving the intelligence of receivable fees management, enhancing collection effectiveness. Such measures allow revenues to increase even without creating new fees or increasing prices during the period. BB's checking account base reached 34,920 thousand in June 2010, being 32,695 thousand related to individual accounts, and 2,225 thousand to businesses. During this quarter, Banco Popular (BPB) has been merged into BB, causing deactivation of accounts being operated in that institution. There has also been a reduction in checking accounts due to shadowing arisen from the continuity of the BNC customer base integration process. Thus, individual checking accounts have been reduced by 0.7% when comparing June/10-Mar/10, but have increased by 0.4% in relation to June/10-June/09. Similar behavior occurred in corporate accounts: reduction by 4.3% upon Mar/10 and increase by 1.5% in relation to June/09. From a broader perspective, which considers not only current accounts, but all the customers that have some active business with the Banco do Brasil’s Conglomerate, such as INSS beneficiaries, savings account holders and customers of other products (including those sold to non-account holders through partnerships entered into with retail networks), the total base reaches about 53.3 million customers. in thousand 28,173 28,494 32,555 32,657 32,781 32,910 32,695 28,701 1,944 1,884 1,874 2,192 2,218 2,207 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Individuals Figure 44. Checking Account Base 109 - Banco do Brasil – MD&A 2Q10 Businesses 2,324 Mar/10 2,225 Jun/10 7.6.2 Asset Management In 2Q10, Banco do Brasil recorded R$ 575 million in income from asset management fees, which represents a 7.1% growth over the preceding quarter, and of 13.5% as compared to the same period in 2009. In the semester, these revenues reached R$ 1,112 million, a growth of 16.8% in relation to 1H09. The sum of funds managed attained R$ 344.9 billion at the end of the quarter, an increase of 4.5% as compared with the previous quarter and 17.3% over 2Q09. BB Administração de Ativos - Distribuidora de Títulos e Valores Mobiliários (BB DTVM), a full-owned subsidiary of Banco do Brasil, ended 2Q10 as leader in the balance of Assets under Management, according to the Anbima ranking. At the end of the quarter, BB held a 22.3% market share in fund management against a 20.3% in June 2009. It is important to highlight that these figures still do not include funds managed by Banco Votorantim, that attained R$ 19.0 billion in June 2010. If 50.0% of the balance managed by BV were consolidated, percentage equal to BB's interest in the latter's total equity capital, Banco do Brasil's market share would rise to 23.5%. R$ billion 22.3 21.7 20.7 20.9 21.1 20.3 21.7 19.8 241.5 246.3 Sep/08 Dec/08 293.9 302.6 306.7 Jun/09 Sep/09 Dec/09 330.1 344.9 259.3 Mar/09 Asset Management Mar/10 Jun/10 Market Share - % Figure 45. Asset Management The classification of managed funds by segment of customers, as shown in the table below, includes BNC's funds as from September 2009. With respect to previous quarter, the major absolute growth occurred in funds destined to institutional investors, showing an expansion of R$ 6.8 billion, and the major percentage variation occurred in funds destined to businesses, with an increase of 9.0%. In comparison to June 2009, the highest percentage increases have been observed in funds destined to governmental and foreign investor clients, thus contributing for the relative participation of funds destined to institutional investors to show a reduction in twelve months from 39.9% to 37.4%. 110 - Banco do Brasil – MD&A 2Q10 Table 89. Investment Funds and Managed Portfolios by Customer Chg. % R$ million Institutional Investors Jun/09 Shar e % M ar /10 Shar e % Jun/10 Shar e % On Jun/09 On M ar /10 105,602 39.9 122,236 37.0 129,075 37.4 22.2 5.6 Individuals 60,860 23.0 77,105 23.4 76,952 22.3 26.4 (0.2) Government 62,293 23.5 84,773 25.7 89,183 25.9 43.2 5.2 Businesses 24,173 12,017 9.1 4.5 30,311 15,677 9.2 4.7 33,041 16,635 9.6 4.8 36.7 38.4 9.0 6.1 264,944 100.0 330,101 100.0 344,886 100.0 30.2 4.5 Foreign Investors Total In comparison to June 2009, an analysis of resource distribution by type of funds and portfolios shows a growth in the relative participation of fixed income funds. This movement is consistent with the growth observed in the funds managed for government clients, which are conservative in the management of their funds. In comparison with previous quarter, there was not a significant alteration in distribution of funds and portfolios by type, with emphasis only to the growth in the relative participation of fixed rate managed portfolios. Table 90. Investment Funds and Managed Portfolios by Type Chg. % R$ million Inve s tm e nt Fund Jun/09 Shar e % M ar /10 Shar e % Jun/10 Shar e % On Jun/09 On M ar /10 252,555 95.3 317,723 96.3 329,924 95.7 30.6 3.8 132,442 50.0 178,870 54.2 186,545 54.1 40.9 4.3 V ariable 43,484 16.4 50,203 15.2 50,298 14.6 15.7 0.2 Multimarket 42,453 16.0 47,146 14.3 50,348 14.6 18.6 6.8 Others 34,177 12.9 41,505 12.6 42,733 12.4 25.0 3.0 12,389 4.7 12,378 3.7 14,962 4.3 20.8 20.9 8,144 4,245 3.1 1.6 10,376 2,002 3.1 0.6 14,171 791 4.1 0.2 74.0 (81.4) 36.6 (60.5) 264,944 100.0 330,101 100.0 344,886 100.0 30.2 4.5 Fixed M anage d Por tfolios Fixed V ariable TOTAL 111 - Banco do Brasil – MD&A 2Q10 7.6.3 Cards Fee income in connection with the card business totaled R$ 727 million in the 2Q10, which is 27.3% higher than the amount recorded in the same period of the prior year and 2.1% higher when compared to the 1Q10. In the semester, these revenues reached R$ 1,439 million, a 26.2% growth in relation to 1H09. The significant evolution compared to the 1H09 results from the significant increase of the card base and billing (detailed below), as well as from the fact that Nossa Caixa's income started to be accounted for in the 2Q09. Besides, the fact that fee income from Visa Vale (Companhia Brasileira de Soluções e Serviços - CBSS) started to be included in the card income line as of 1Q10 also impairs the semestral comparison. Formerly, such income was included in "other income from operations", and the purpose of this change is to adjust the methodology to what had already been practiced for Cielo's income. The total card base, including credit and debit cards and those issued through partnerships and for nonaccount holders, reached 86.2 million plastic cards, practically steady in relation to the previous quarter. In 12 months, there was a 2.5% growth. Credit Cards (million) Debit Cards (million) 25.0 25.4 25.2 27.2 27.5 28.0 28.0 28.8 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 52.0 52.7 53.0 Sep/08 Dec/08 Mar/09 57.0 57.6 59.3 58.4 57.5 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Figure 46. Credit and Debit Cards The billings by cards rose to R$ 25.5 billion in the quarter, a 19.9% expansion as compared to 2Q09 and 6.2% over 1Q10. BB's market share measured by Abecs based on sector billing (Associação Brasileira das Empresas de Cartões de Crédito e Serviços), was 20.3% in 2Q10 compared to 20.4% in previous quarter, and 20.2% in 2Q09. 112 - Banco do Brasil – MD&A 2Q10 R$ billion 25.8 25.5 24.0 23.7 21.2 19.4 18.0 17.0 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Figure 47. Card Revenue The historical series of global card revenues was reviewed as of the disclosure of results for 1Q10, aiming to highlight card revenues earned by Visanet and Visa Vale. For this reason, equivalence revenues will no longer be shown as of 1Q10, exactly because the affiliates' income is already consolidated in the Banco do Brasil conglomerate. Global card revenue totaled R$ 1,348 million in the 2Q10, which is 0.3% higher than the amount recorded in the previous quarter and 13.0% higher when compared to 2Q09. In the semester, these revenues reached R$ 2,691 million, a 22.2% growth in relation to 1H09. Table 91. Global Card Revenue Quar te r ly Flow R$ million 2Q09 1Q10 Chg. % 2Q10 Half-Ye ar ly Flow On 2Q09 On 1Q10 1H09 1H10 Chg. % On 1H09 Fee Income - Cards 604 712 727 20.3 2.1 1,050 1,439 37.0 Financing Income 540 574 552 2.1 (3.9) 1,052 1,126 7.0 9 39 58 69 77.7 19.1 10 90 127 41.1 1,192 1,344 1,348 13.0 0.3 2,202 2,691 22.2 Equity Income - V isanet Other Income and Other Services Total Re ve nue s * *Since 4Q09 it is included BNC card revenue. 113 - Banco do Brasil – MD&A 2Q10 7.6.4 Collection Revenues from collections reached R$ 302 million in 2Q10, an increase of 4.9% in relation to the previous quarter and of 6.5% in relation to the same period of 2009. In the semester, these revenues reached R$ 591 million, a growth of 9.2% in relation to 1H09. A total of 145.9 million bank payment slips were issued in 2Q10, an amount 8.4% higher than 1Q10 and 14.4% above the same period of 2009. This variation is due mainly to the incorporation of bank payment slips issued by BNC in this quarter. In relation to the volume obtained, it was also observed a growth of 6.0% compared to 1Q10 and 17.7% in twelve months. 3Q08 4Q08 1Q09 Figure 48. BB Billings Volume 114 - Banco do Brasil – MD&A 2Q10 2Q09 3Q09 4Q09 1Q10 155,953 147,095 152,645 145,513 132,457 125,562 140,065 134,621 R$ million 2Q10 7.7 Administrative Expenses The Commercial Income, which expresses BB’s business earnings after deducting administrative and tax expenses, reached R$ 4,598 million in 2Q10, an increase of 8.4% in relation to the previous quarter and of 30.7% in relation to the same period of 2009. Commercial income totaled R$ 8,839 million in the semester, 32.6% higher than that recorded in the same period of 2009. Table 92. Commercial Income Quar te rly Flow R$ million 2Q09 Contribution M ar gin 1Q10 Chg. % 2Q10 Half-Ye ar ly Flow On 2Q09 On 1Q10 1H09 1H10 Chg. % On 1H09 8,417 9,567 10,103 20.0 5.6 15,539 19,670 26.6 (4,892) (5,300) (5,471) 11.8 3.2 (8,823) (10,771) 22.1 Personnel Expenses (2,613) (2,851) (2,937) 12.4 3.0 (4,742) (5,788) 22.0 Other A dministrative Expenses (2,279) (2,449) (2,534) 11.2 3.5 (4,080) (4,983) 22.1 (7) 3,518 (26) 4,241 (34) 4,598 378.7 30.7 28.6 8.4 (50) 6,667 (60) 8,839 20.2 32.6 A dministrative Expenses Other Tax Expenses Com m e r cial Incom e Administrative expenses, which include personnel expenses and other administrative expenses, amounted to R$ 5,471 billion in 2Q10, recording a growth of 3.2% over the previous quarter and 11.8% in 2Q09. These expenses attained R$ 10,771 million in the semester, an amount 22.1% higher than that recorded in 1H09. It is worth emphasizing that the expenses for 1H10 already consider Banco Nossa Caixa (BNC) and Votorantim (BV) acquisitions, making the comparison with 1H09 even more complex. BNC has sensitized expenses as of 2Q09, and BV only as of 4Q09. In order to make such comparison easier, and also for following the 2010 Guidance, BB has prepared a proforma base for 2Q09 and 1H09, simulating how would expenses be in that period if the banks acquired were already a part of the conglomerate. Using such proforma comparison base, administrative expenses would show a 7.4% growth comparing 2Q10 and 2Q09 and of 9.1% in comparing the first semester of each year. Variation in the semester is lower than the range that Guidance 2010's estimates, which provides for a growth between 10% and 12% in the year. The figure below shows the progress of the main items that comprise the commercial income. Figure 49. Business vs. Expenses 33,060 24,515 20,807 19,185 18,107 13,448 13,020 9,902 8,888 15,358 11,811 18,817 13,511 10,771 7,588 2006 2007 Fee Income 115 - Banco do Brasil – MD&A 2Q10 2008 Net Interest Income 2009 1H10 Administrative Expenses 7.7.1 Personnel Expenses Personnel expenses reached R$ 2,937 million in 2Q10, 3.0% growth comparing with the previous quarter and 12.4% over the same period of 2009. Personnel expenses attained R$ 5,788 million in the semester, an amount 22.0% higher than that recorded in 1H09. Considering only BB Multiple Bank (that includes BNC, already merged), the personnel expenses registered a slight growth of 2.4% over the previous quarter. The 3.0% growth shown in the consolidated view is influenced by the colligated and controlled performances. These companies are in an accelerated expansion rhythm and, therefore, show a higher growth both revenues as expenses. Personnel expenses have been influenced, besides from the 2009 salary raise agreement (6.0% average readjustment) and the increase in staff (detailed below), by BV and BNC acquisitions. Using the same proforma comparison base presented in the prior chapter, personnel expenses for 2Q10 would have shown a growth of 9.2% upon 2Q09. In the half-yearly view, the growth would have been of 10.5%. Table 93. Personnel Expenses Quar te r ly Flow R$ million 2Q09 Pe r s onne l Expe ns e s 1Q10 Chg. % 2Q10 Half-Ye arly Flow Chg. % On 2Q09 On 1Q10 1H09 1H10 On 1H09 (2,613) (2,851) (2,937) 12.4 3.0 (4,742) (5,788) 22.0 Salaries (1,409) (1,306) (1,587) 12.7 21.5 (2,442) (2,893) 18.5 Benef its (373) (426) (433) 16.1 1.8 (681) (859) 26.1 Social Charges (475) (483) (537) 13.0 11.2 (832) (1,020) 22.6 Training (16) (13) (19) 13.9 37.5 (26) (32) 24.5 Pension Fund (45) (52) (49) 8.8 (6.3) (74) (101) 36.2 (12) (283) (14) (557) (15) (298) 18.7 5.3 7.1 (46.6) (21) (667) (28) (855) 31.2 28.1 Remuneration f or Counselors and Directors A dministrative Personnel Provisions The figure below shows the growth of the total staff at BB. At the end of June 2010, Banco do Brasil had 116,370 employees, which is 2.6% higher compared to the same month in 2009 and 2.1% higher in relation to the prior quarter. Sep/08 Dec/08 Total Figure 50. Changes in Workforce 116 - Banco do Brasil – MD&A 2Q10 Jun/09 Sep/09 Employees Dec/09 Mar/10 Interns 106,241 10,129 116,370 103,923 10,019 113,942 9,917 103,971 113,888 10,293 104,139 114,432 9,943 113,401 Mar/09 103,458 89,534 7,966 9,291 98,825 88,972 96,938 9,543 85,392 94,935 The staff shall keep on increasing in the next quarter as a result of project BB 2.0. This project aims at improving relationship with clients, particularly in retail. Among the several measures is the adaptation of service model to client's needs, with a better allocation of employees directly involved with service in the branches, in order to allow new businesses. Jun/10 7.7.2 Other Administrative Expenses Other Administrative Expenses amounted to R$ 2,534 million in 2Q10, a 3.5% growth in relation to the previous quarter and 11.2% in relation to the same period of 2009. Other administrative expenses attained R$ 4,983 million in the semester, 22.1% higher than 1H09. Comparing with the previous quarter, which is not prejudiced by societary issues (BNC and BV were already in the consolidated financial demonstrations), the other administrative expenses from BB Multiple Bank (that includes BNC, already merged) recorded only a 0.7% growth. The consolidated numbers show a higher growth (3.5%) in order of the paid expenses for the colligated and controlled. Increase in expenses is aligned to contractual readjustments made during 2009 and in first quarter (basically inflation), as well as to the organic operations increase and, mainly, BV and BNC acquisitions (when comparing with 2Q09 and 1H09). On the other hand, such factors have been partially compensated by expense control actions being adopted by BB. Using proforma comparison base shown in chapter 7.7, other administrative expenses of 2Q10 would show an increase of 5.4% upon 2Q09. In the half-yearly view, the growth would have been of 7.5%. Table 94. Other Administrative Expenses Quar te r ly Flow Chg. % Half-Ye arly Flow Chg. % R$ million 2Q09 1Q10 2Q10 1H09 1H10 Othe r Adm inis tr ative Expe ns e s (2,279) (2,449) (2,534) 11.2 3.5 (4,080) (4,983) Telecommunications and Data Processing (511) (638) (570) 11.6 (10.6) (945) (1,208) 27.9 A mortization and Depreciation (258) (273) (306) 18.7 12.1 (476) (580) 21.8 12.2 On 2Q09 On 1Q10 On 1H09 22.1 Security. Guard and Transport Services (312) (329) (337) 8.1 2.5 (594) (667) Expenses w ith Premises and Equipment (304) (330) (352) 15.8 6.7 (551) (682) 23.6 Marketing and Public Relations (107) (129) (155) 44.1 20.1 (221) (284) 28.2 Expenses w ith Outsourced Services (352) (434) (418) (332) (438) (375) 24.4 (13.6) 4.8 13.1 (619) (674) (857) (707) 38.4 4.8 Other A dministrative Expenses The table above sets forth the major lines composing Other Administrative Expenses and its not based on the pro-forma simulation described in the prior paragraph. Therefore, 2Q09 does not bring Banco Votorantim consolidation and 1H09 does not bring BNC results consolidation in the three first months of the year. Comparing 2Q10 and 1Q10, it is important to highlight the communication and data processing expenses, registering a 10.6% downslide. 117 - Banco do Brasil – MD&A 2Q10 7.7.3 Distribution Network With national coverage and present in 3,558 Brazilian municipalities (64% of the total), besides overseas branches located in 23 countries, BB has the largest network of branches in Brazil. At the end of Jun/10, BB’s own service network consisted of 18,286 points and in considering the shared network the total comes to 36,223 points. The background performance of the BB conglomerate's distribution network included BNC outlets since June 2009 (in December Nossa Caixa added 1,542 points of service, 566 of which are branches). Until September 2009 BNC received information from that Bank, and as of the takeover information was processed in the BB corporate systems. The difference in concepts adopted in Banco do Brasil and in Banco Nossa Caixa led to an increase in the SAA and PAE network, as found in the table below. In addition to its own distribution network, BB also has partnerships for the sharing of automated tellermachines and to use the chain of lottery kiosks that performs withdrawals, deposits, payments and other services. Besides reducing costs with new investments and with terminal maintenance, these partnerships consolidate the dispersed and national customer service of Banco do Brasil. Table 95. Distribution Network Se p/08 De c/08 M ar /09 Jun/09 Se p/09 De c/09 M ar /10 Jun/10 Dis tr ibution Channe l Branches 4,077 4,342 4,354 4,928 4,958 4,897 4,960 4,984 PA A 184 187 182 182 179 178 178 179 PA B 1,225 1,389 1,360 1,734 1,729 1,697 1,677 1,687 PA E 5,969 6,055 6,061 6,102 6,094 6,529 6,566 6,774 SA A 3,980 3,987 4,248 4,262 4,272 4,626 4,647 4,660 PA P 3 4 2 2 2 2 2 2 15,438 Shar e d Dis tr ibution Channe ls 15,964 16,207 17,210 17,234 17,929 18,030 18,286 Subtotal CEF - lottery stores 10,091 10,182 9,723 9,723 9,838 9,838 10,887 10,579 Banco 24h 4,378 14,469 4,732 14,914 5,068 14,791 5,558 15,281 5,980 15,818 6,486 16,324 6,912 17,799 7,358 17,937 29,907 30,878 30,998 32,491 33,052 34,253 35,829 36,223 Subtotal Total The Bank's distribution network is divided into 5 types of points of service, besides the branches: PAA – Advanced Service Post: is a point of service intended for towns lacking banking services. They have a small staff and electronic services; PAB – Banking Service Post: this type of unit is located inside the premises of companies or government offices. This service structure requires one employee and electronic services; PAE – Electronic Service Post: the structure of services is exclusively electronic; SAA – Self-Service Room: exclusively electronic structure of services, installed in the main areas of the branches; and PAP – Payment and collection post: points of service comprised by employees and automated teller machines located mainly in government offices (town halls); 118 - Banco do Brasil – MD&A 2Q10 North Retail 249 Wholesale 2 Government 7 High Income 2 5.2% 21.4% Northeast Retail 1,018 Wholesale 7 Government 9 High Income 12 8.4% Midwest Retail 402 Wholesale 5 Government 5 High Income 10 43.9% South Retail 1,004 Wholesale 23 Government 3 High Income 10 Southeast Retail 2,089 Wholesale 48 Government 6 High Income 73 21.1% Figure 51. Total Distribution Network To render an excellent service and improve the level of satisfaction of clients, Banco do Brasil segments its customer base according to each profile and relationship, developing adequate strategies for each segment. The Retail distribution network, main element responsible for the relationship with Individual clients and Small and Medium Enterprises (SMEs), ended the quarter with 4,762 branches, 44% of this total located in the southeast region. Moreover, in the delivery of services to individuals, BB makes available its network of bank correspondents that serve the clients of BB without using its infrastructure, freeing the network of branches to concentrate its business focus. At the end of 2Q10, Banco do Brasil relied on a total of 9,810 correspondents, including 3,347 correspondents from Banco Popular, incorporated institution by BB this quarter. In relation to the Wholesale market, the service network is comprised by 85 branches, segmented by annual billings, and that served 42.3 thousand customers in this quarter, figure 3.5% higher than that attended in the same quarter of 2009. Most of the network is located in the Southeast (56%) and South (27%) regions of Brazil, regions with the largest concentration of large companies. Table 96. Wholesale Pillar Branches Indus tr y Com m e r ce Corporate Ov er R$ 90 million Over R$ 150 million Se r vice s Over R$ 150 million Business From R$ 10 to R$ 90 million From R$ 15 to R$ 150 million From R$ 15 to R$ 150 million The Government, comprised by direct administration, federal entities, foundations and public companies, was comprised by 30 agencies, whose business focus is the relationship with the Federal Government and the State and Municipal spheres, encompassing the Executive, Legislative, and Judicial Authorities. The strategy of working in this market has ensured appropriate solutions for the specific aspects of each one of the niches of its segment, by means of an innovative approach, materialized in the proposal of new products and services, such as the exclusive electronic bidding service. 119 - Banco do Brasil – MD&A 2Q10 The overseas network is comprised by 45 facilities located in 23 countries (13 branches, 8 sub-branches, 11 representation offices, 7 subsidiaries, 4 associated subsidiaries, 1 shared service unit and 1 business unit). In order to supplement this structure, Banco do Brasil has an agreement with other foreign financial institutions to serve its clients: at the end of last December, there were 1,332 banks acting as BB's correspondent banks in 146 countries. Table 97. Distribution Network Abroad Branche s Sub-br anche s Re pr e s e ntative Subs idiar ie s and Br anch Office s Office s A ssuncion Cidade do Leste Caracas Buenos A ires Gif u Mexico City Frankf urt Gunma Dubai Grand Cayman Hamamatsu Hong Kong La Paz Ibaraki Lima Banco do Brasil Securities LLC BB Leasing Company Ltd. BA MB Brazilian A merican Merchant Bank BB Securities Ltd. Londres London Nagano Luanda BB USA Holding Company Madrid Nagóia Montevideo Miami Santa Cruz de La Sierra Panama Milan Seoul New Y ork Washington Paris Shanghai Santiago Tokyo 120 - Banco do Brasil – MD&A 2Q10 Banco do Brasil A G BB Money Transf ers, Inc. Banco do Brasil A G Branch Of f ice in Portugal Cascais Banco do Brasil A G Branch Of f ice in Portugal Marquês de Pombal Banco do Brasil A G Branch Of f ice in Portugal Parque das Nações Banco do Brasil A G Branch Of f ice in Portugal Porto Shar e d Se r vice s Units BB USA Servicing Center Bus ine s s Units Rome 7.7.4 Automated Channels Banco do Brasil’s self-service network represents a strategic differential, offering an extensive range of services to BB client, besides supporting the cost control strategy of the institution. The graph below contains an itemized description of BB's own machines network as well as the machines originating from strategic partnerships, such as the external terminals of Caixa Economica Federal (CEF), Banco Regional de Brasília (BRB) and the service network of Banco 24h. In June 2010, BB had a network of 43,942 automated teller machines (ATMs). The terminals originating from the acquisition of Nossa Caixa were very old and required renovation, and were thus deactivated, which explains the decrease in the number of ATMs comparing Mar10 to Jun/10. The expressive variation of machines in the period of Jun/09-Mar/09 is also a result of the acquisition of BNC, besides the takeover of the BESC system. Moreover, there are 10,195 ATMs from partnerships (Banco 24h, CEF and BRB). 7,300 8,379 45,817 Mar/09 1,816 7,863 45,442 Dec/08 6,764 1,419 43,772 Sep/08 6,239 1,297 43,976 4,850 40,543 1,277 5,679 39,714 864 5,306 39,918 862 1,297 Jun/09 Sep/09 Dec/09 Mar/10 Automated Teller Machines ATM: Banco 24h 43,942 1,297 Jun/10 ATM: BRB + CEF Figure 52. Automated Teller Machines The ATM's are responsible for the processing of an expressive portion of the total banking operations performed by Banco do Brasil. In 2Q10, 95.5% of the cash withdrawals, 79.1% of the checkbooks delivered, 72.8% of the deposits and 67.5% of the receipts of bills and contractual payments passed through the ATM network, these amounts do not include the transactions undertaken in the environment of the partnerships with other institutions. Besides the cashiers at the branches and the ATMs, Banco do Brasil offers several other options for access to banking services, such as: The Internet, Financial Manager (and Internet banking tool for businesses), POS equipment (credit and debit card machines at the commercial establishments), telephone, fax, and mobile banking (WAP). At the end of June, BB had approximately 10.2 million clients capable of using the internet banking services, responsible for 307.2 million transactions in the quarter, and 693.7 thousand customers capable of using the mobile banking channel. The figure below presents the percentage of transactions processed by each one of the main customer service channels made available by Banco do Brasil. In 2Q10, the automated channels were accountable for 91.9% of the total transactions. 121 - Banco do Brasil – MD&A 2Q10 91.9 91.1 92.2 92.0 91.4 6.3 8.9 9.1 5.9 8.8 8.9 6.4 11.2 8.0 6.0 9.4 8.6 19.3 19.1 18.6 5.9 8.8 7.8 18.6 19.3 19.4 5.8 10.0 8.1 17.1 14.9 14.3 16.6 19.1 21.1 15.4 18.0 20.1 40.6 40.6 40.0 38.7 37.8 39.6 38.7 38.9 90.1 91.1 90.9 5.8 8.7 9.9 6.1 10.9 8.9 20.2 3Q08 4Q08 1Q09 ATM Cash Automated Transactions Figure 53. Customer Access Options – % 122 - Banco do Brasil – MD&A 2Q10 2Q09 3Q09 Internet Individuals POS 4Q09 1Q10 2Q10 Internet Businesses COBAN and Other 7.7.5 Productivity – Coverage Ratios The productivity ratios usually adopted in the analysis of financial institutions are shown below. On comparing with the preceding quarter, the favorable performance of banking service fees and control of administrative expenses led to an improvement in the ratio that measures personnel expenses coverage as well as that which measures administrative expenses coverage. The efficiency rate rose to 42.7% in 2Q10, an expressive 220 basis points drop as compared to the previous quarter and 40 basis points above that for 2Q09. The rate is close to the levels seen prior to the acquisition of Banco Nossa Caixa, which at that time reflected on this indicator for not having a revenues and expenses structure as favorable as that in BB. Table 98. Coverage Ratios – without extraordinary items R$ million 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Fee Income 2,933 3,058 2,943 3,436 3,526 3,606 3,634 3,954 A dministrative Expenses 3,972 2,178 4,571 2,430 4,128 2,231 4,937 2,506 5,153 2,909 5,469 2,894 5,749 3,062 5,710 3,211 134.6 73.8 125.8 66.9 131.9 71.3 137.1 69.6 121.2 68.4 124.6 65.9 118.7 63.2 123.2 69.2 Personnel Expenses Fe e Incom e / Pe r s onne l Exp.¹ Fe e Incom e / Adm inis t. Exp.² (1) In the calculation of this ratio Labor Claims are included, (2) In the calculation of this ratio Legal Risk is included (Legal Claims and Labor Lawsuits). Fee Income / Personnel Expenses 134.6 3Q08 125.8 4Q08 131.9 1Q09 137.1 2Q09 121.2 124.6 3Q09 4Q09 118.7 123.2 1Q10 2Q10 Fee Income / Administrative Expenses 73.8 3Q08 66.9 71.3 69.6 68.4 65.9 63.2 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 Figure 54. Coverage Rations – whitout extraordinary items – % 123 - Banco do Brasil – MD&A 2Q10 69.2 2Q10 Table 99. Cost Income Ratio – without extraordinary items R$ million 3Q08 Ope rating Incom e (A) 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 8,686 10,003 9,839 11,673 11,558 12,315 12,969 13,378 Gross Income f rom Financial Intermediation 3,667 1,932 3,294 3,240 4,460 5,829 5,634 6,256 A llow ance f or Loan Loss es 1,367 3,892 2,654 3,865 2,928 2,950 2,959 2,525 Fee Inc ome 2,933 3,058 2,943 3,436 3,526 3,606 3,634 3,954 496 Income f / Insurance, Pension & Sav ings Bonds Op.218 707 (90) (576) (275) (49) 50 29 353 303 471 392 408 440 468 Equity Int. in the Results of Subs . and A f f il. Other Operating Rev enues 1,401 1,764 2,359 4,659 3,162 2,298 2,759 2,786 Other Operating Expenses (1,396) (1,702) (1,625) (3,422) (2,635) (2,726) (2,508) (2,641) Adm inis tr ative Expe ns e s (B) Personnel Expenses 3,972 4,571 4,128 4,937 5,153 5,469 5,749 5,710 2,178 2,430 2,231 2,506 2,909 2,894 3,062 3,211 Other A dministrative Expenses 1,793 45.7 2,140 45.7 1,897 42.0 2,431 42.3 2,244 44.6 2,575 44.4 2,687 44.3 2,499 42.7 Cos t Incom e Ratio (B/A) - % Cost Income Ratio - % 45.7 45.7 3Q08 4Q08 42.0 42.3 1Q09 2Q09 44.6 44.4 44.3 42.7 3Q09 4Q09 1Q10 2Q10 Figure 55. Cost Income Ratio – without extraordinary items 124 - Banco do Brasil – MD&A 2Q10 Business growth and the customer base led to a constant growth in the "assets per employee" ratio, which retreated only at the time of acquisition of Banco Nossa Caixa. As for the ratios "bank accounts per employee" and "employees per branch office", a decline is expected in the former and an increase in the latter owing to the "BB 2.0" project, which provides for more staff members in the branch network, reducing the number of customers handled by each manager (portfolio resizing) and increasing the number of transactions pert customer. Assets per Employee - R$ thousand 5,990 5,377 5,992 6,221 Checking Accounts per Employee 6,362 6,494 5,281 4,827 317 313 309 306 307 305 309 300 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Employees/(Branches+PAA+PAB) 17.3 16.8 16.6 17.0 16.8 16.7 Dec/09 Mar/10 16.7 16.4 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Jun/10 Fee Income/Points of Service Credit Portfolio/Points of Service 17.9 16.8 13.1 14.1 14.1 14.7 190.0 17.9 17.2 15.4 16.0 16.9 15.4 18.0 191.5 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Loan Portfolio / Points of Service - R$ million Sep/08 Dec/08 Mar/09 Points of Service Sep/08 Dec/08 25.3 25.9 27.4 27.4 27.6 23.8 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Figure 56. Other Productivity Ratios 125 - Banco do Brasil – MD&A 2Q10 17.2 17.2 216.2 201.1 201.6 17.9 18.0 18.3 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 Fee Income/Points of Serv ice - R$ thousand Checking Accounts/(Branches+PAA+PAB) 5,490 25.9 204.6 16.2 16.0 15.4 Personnel Expenses per Employee - R$ thousand 23.7 199.6 18.3 17.2 16.2 Sep/08 Dec/08 Mar/09 Points of Service 181.6 Sep/08 5,133 5,186 5,077 5,079 5,166 5,170 5,098 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Jun/10 7.7.6 Operating Income Table 100. Operating Income Quarterly Flow R$ million Com m ercial Incom e Legal Risk Legal Claims Labor Law suits Other Operating Income Eq Int. in Results of Subs. and Af fil. 2Q09 1Q10 Chg. % 2Q10 On 2Q09 Half-Yearly Flow On 1Q10 1H09 1H10 Chg. % On 1H09 3,518 4,241 4,598 30.7 8.4 6,667 8,839 32.6 (45) (450) (239) 427.8 (46.9) (242) (688) 183.8 (18.0) (152) (238) 35 - - (247) (203) 107 (212) (274) - 29.4 5 (485) - (740) (379) (491) (33.6) 29.6 (1,294) (870) (32.8) 15 32 34 123.1 6.2 10 66 541.0 (755) (411) (525) (30.5) 27.7 (1,304) (936) (28.3) Other operating income 838 1,112 1,180 40.8 6.1 1,633 2,292 40.3 PREVI 298 913 913 206.2 0.0 597 1,827 206.2 (1,891) 2,733 (2,437) 3,412 (2,618) 3,869 38.4 41.5 7.4 13.4 (3,534) 5,130 (5,055) 7,281 43.0 41.9 Other Operating Income / Expenses Other operating expenses Operating Incom e Banco do Brasil's Operating Income closed 2Q10 as R$ 3,869 million, an increase by 13.4% upon the previous quarter and 41.5% upon the same period of 2009. Income for the semester rose to R$ 7,281 million, 41.9% increase over 1H09. The operating income is determined with a basis on the Commercial Income, plus the results of two major lines: Legal Risk and Other Operating Income/Expenses. Legal risk dropped by 46.9% over the previous quarter, yet rose by 427.8% over the same period in 2009. The performance of such line was impacted by a series of factors since 2Q09, which are detailed below: Banco Nossa Caixa (BNC) Acquisition. On one hand, led to a rise in monthly expenses incurred with claims and economic plans, for having an ample customer base, and savings accounts and judicial deposits. On the other, led to volatility in finding these expenses, as it reinforced and reversed provisions inasmuch as its extensive lawsuit base was gradually recorded in the BB systems and methodologies. In 4Q09 there was a review of the methodology adopted by BB for calculation of provisions required to face labor claims and civil claims. As from that quarter, BB obtained approval from Central Bank and started to use a methodology near to those used by some of its pairs. Such systematic consists in applying upon the number of shares the maximum percentage of success of plaintiffs (percentage of shares that historically BB has lost in court) and the average value of disbursement in shares of the same nature (also determined based on historical). In 1Q10, there were two distinct impacts on provision. In one side, the BNC proceedings migration to BB's system (fit for the new methodology) generated release of provisions in the amount of R$ 568 million which, as acknowledged in the Income Statement with Reallocations, was considered as an extraordinary item. On the other side, there was a refining of system's parameters, which was among the factors that collaborated for a growth in expenses with provisions considered recurrent in the period. During 2Q10, the overall sum of expenses due to claims returned to the closest level recorded in the past in the Income Statement with Reallocations (BB past history plus sums from banks acquired / taken over). However, there was still volatility between the lines of civil and labor suits owing to the refinements that were gradually implemented under the new lawsuit methodology, that were still monitored under the previous model. Recording all of these suits under the new methodology has not been concluded yet and may cause some volatility over the coming quarters. The Other Operating Income/Expenses line is subdivided into Equity in the earnings/loss of subsidiary and associated companies, and Income from Other Operating Revenues and Expenses. Equity in the earnings of subsidiary and associated companies showed an increase both in comparison with previous quarter and in relation to the same period of 2009. On the other side, the performance of Other Operating Revenues and Expenses was basically influenced by the factors listed below: 126 - Banco do Brasil – MD&A 2Q10 • • Increase in accounting of recurring revenues derived from Previ surplus. Such revenues summed up R$ 949 million (before income taxes and deduction of impact upon statutory profit sharing) in relation to R$ 877 million in the previous quarter and R$ 298 million in the 2Q09. These sums already consider the adjustment made at the Income Statement with Reallocations, which carried to 1Q10 half of the income found from the reassessment during the semester of actuarial assets and liabilities. The sum reallocated was of R$ 158.8 million, in addition to R$ 59 million in effects on taxes and R$ 11.3 million in effects on profit sharing. The gross sum refers to 50% of the gains in the reassessment of Previ actuarial assets of R$ 389.2 million, and 50% of the actuarial losses arising from the benefit plan under the BB’s sole responsibility, of R$ 71.7 million. Comparing with 2Q09 and 1H09, there was a significant impact referring to the acquisition of Banco Votorantim, having a considerable amount of other operating expenses (account sensitized in the payment of commissions to credit vendor agents) and which income accounts have only started being consolidated to those of BB as from 4Q09. The BNC income figures also show a distortion as compared to 1H09, as they were not consolidated in 1Q09. Goodwill amortization arising from the acquisition of equity holdings and from amortizing intangible assets also influences other operating revenues and expenses, and is detailed in the tables below. The remaining fluctuations in revenues and expenses will be found in the explanatory note "Other Operating Revenues / Expenses." Table 101. Accumulated Amortization R$ million 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Banco Noss a Caixa Balance Accumulated amortization 3,540 3,659 4,957 4,961 4,961 4,961 - (40) (81) (61) (99) (136) 3,540 3,619 4,876 4,900 4,862 4,825 - (40) (40) 21 (38) (38) Balance - - 444 444 436 426 Accumulated amortization - - - (4) (9) (19) Balance w ithout amortization Amortization expenses for the period Banco Votorantim Balance w ithout amortization - - 444 440 427 407 Amortization expenses for the period - - - (4) (5) (10) Other expenses of the Conglom erate Balance 557 510 487 487 487 487 Accumulated amortization (24) (71) (95) (95) (95) (95) Balance w ithout amortization 533 - 439 (47) 392 (23) 392 - 392 - 392 - Amortization expenses for the period 127 - Banco do Brasil – MD&A 2Q10 Table 102. Intangible R$ million 2Q09 3Q09 4Q09 1Q10 2Q10 Rights due to payroll acquisition Initial Balance 6,032 4,896 4,785 5,305 6,826 Amortization expenses for the period (371) (380) (403) (503) (504) Other (1) (891) 9 (10) - (0) 125 260 933 2,024 251 4,896 4,785 5,305 6,826 6,574 155 (10) 232 (12) 297 (15) 372 (18) 441 (23) Acquisitions 88 73 90 87 56 Other (1) (1) 4 0 - (0) 232 297 372 441 474 Acquisitions Final Balance (a) Acquisition/development of software Initial Balance Amortization expenses for the period Final Balance (b) Other Intangible Assets Acquisitions Final Balance (c) Balance ( a+ b + c) - - - - 4 5,128 5,082 5,677 7,267 4 7,052 (1) Among other items, this account is composed basically of amounts derived by the consolidation of banks acquired, in proportion to the participation of Banco do Brasil. 128 - Banco do Brasil – MD&A 2Q10 7.8 Net Value Added The table Net Value Added shows how Banco do Brasil’s income is made up of the generation of value from each of the Bank’s businesses, and then shows a breakdown of the distribution of these proceeds. The point of view used is the gross financial margin, which includes financial intermediation income and expenses, without allowance for loan losses. Table 103. Net Value Added Quar te r ly Flow R$ million 2Q09 1Q10 Chg. % 2Q10 On 2Q09 Half-Ye ar ly Flow On 1Q10 1H09 1H10 Chg. % On 1H09 Net interest income 8,487 9,357 9,461 11.5 1.1 15,472 18,817 21.6 Income f rom Non-Financial Products 2,734 2,916 3,196 16.9 9.6 5,196 6,111 17.6 Fee Income 863 875 985 14.1 12.6 1,587 1,861 17.2 Investment Fund Management Fees 506 537 575 13.5 7.1 952 1,112 16.8 Loans 344 307 413 19.8 34.3 654 720 10.0 Billings 284 288 302 6.5 4.9 541 591 9.2 Collections 120 143 141 18.0 (1.1) 230 284 23.2 Credit Cards Fees 571 712 727 27.3 2.1 1,140 1,439 26.2 45 53 52 15.7 (2.0) 92 106 15.4 2,310 3,220 3,369 45.9 4.6 4,199 6,589 56.9 57 73 75 32.6 3.0 117 149 27.1 Insurance – Results 187 218 212 13.7 (2.4) 344 430 25.2 Others Fee Income 645 645 683 5.8 5.8 1,066 1,328 24.6 (198) Res. f rom Insurance, Pension Plan and Savings Bonds Operations 471 (186) (179) (9.6) (3.8) (359) (364) 1.4 440 468 (0.6) 6.3 775 909 17.3 Other Operational Revenues 1,136 1,112 1,180 3.8 6.1 2,230 2,292 2.8 - 913 913 - 0.0 - 1,827 - 11 3 15 44.4 406.8 27 18 (32.2) Insurance Others Insurance – Brokerage Equity Interest in Results of Subs.and A f f iliates PREV I Non Operation Income V alue Adde d 13,531 15,492 16,025 18.4 3.4 24,867 31,517 26.7 (11,183) (13,141) (13,300) 18.9 1.2 (20,854) (26,441) 26.8 (5,063) (5,463) (5,489) 8.4 0.5 (9,197) (10,952) 19.1 A llow ance f or Loan Losses (3,172) (3,026) (2,871) (9.5) (5.1) (5,663) (5,897) 4.1 Other Operational Income (1,891) (2,437) (2,618) 38.4 7.4 (3,535) (5,055) 43.0 (2,727) (3,369) (3,574) 31.1 6.1 (5,160) (6,943) 34.5 (2,506) (3,062) (3,211) 28.1 4.8 (4,737) (6,273) 32.4 (220) (307) (363) 64.7 18.2 (423) (670) 58.4 A dministrative Expenses (2,431) (2,687) (2,499) 2.8 (7.0) (4,328) (5,186) 19.8 Tax Expenses (1,584) (1,917) (2,136) 34.9 11.4 (2,932) (4,054) 38.3 (806) (839) (909) 12.8 8.4 (1,424) (1,747) 22.7 (7) (26) (34) 378.7 28.6 (50) (60) 20.2 (771) (1,053) (1,194) 54.9 13.4 (1,459) (2,247) 54.0 455 166 384 (88) 310 88 (31.9) (46.8) (19.3) - 764 - 694 - (9.2) - Dis tr ibution of V alue Adde d (Exce pt Shar e holde r s ) Operational Revenues Personnel Expenses Personnel Expenses Statutory Prof its Sharing Tax es on Sale Other Tax Expenses Income and Social Contribution Taxes Extraordinary Items PREV I A ctuarial A ssets - A djustments 129 - Banco do Brasil – MD&A 2Q10 8 - Risk Management 8.1 Risk Management The tables and graphs presented on this chapter are not impacted by the accounting figures of Banco Votorantim (BV), unless stated otherwise. Accordingly, the term BB Consolidated is defined as Banco do Brasil in Brazil and abroad, including Banco Nossa Caixa (BNC) and excluding BV. 8.1.1 Market Risk Introduction BB uses statistical and simulation methods to measure the market risks of its positions. The metrics resulting from the use of these methods, include: • Sensitivity; • Value at Risk (VaR) and • Stress. By using sensitivity metrics, simulations are made of the effects in the exposure values arising from changes in the market risk factor levels. VaR is a measurement employed to estimate the maximum expected loss under routine market conditions, that is expressed in monetary values on a daily basis and considering a certain confidence interval and time horizon. To measure VaR, Banco do Brasil adopts a Background Simulation system and the following parameters: • • • 99% of one-tailed confidence interval; 252 retrospective scenarios of daily shock factors and 10-day time horizon. It is emphasized that, during the second quarter, BB started calculating VaR over 10-day time horizon and there was improvements of the corporate curves models of fixed interest rates. The risk factors employed to measure VaR for market exposure risks are rated in the following classes: • • • • interest rates, exchange rates, share prices and goods (commodity) prices. The performance of VaR metrics is assessed every month by applying a backtesting procedure. This assessment is separated from the VaR metric development and use procedures. Lastly, BB uses the Stress metrics arising from simulations of its exposure subject to market risks under extreme conditions, such as financial crises and economic upheavals. Stress Tests are intended to size plausible impacts or events, but unlikely to occur, in the regulatory and economic capital requirements. Stress Tests cover exposure simulations, retrospective and based on historical data series of shocks in market risk factors, as well as those of a forward-looking nature, based on projections of economic and financial scenarios. 130 - Banco do Brasil – MD&A 2Q10 Politics Policy on Market and Liquidity Risk and the Policy on the Use of Derivative Financial Instruments, approved by the Board of Directors, are part of the strategic documentation regarding the BB's market and liquidity risk management. These documents are intended to establish guidelines to be complied with in the Company's business decisions. They involve market and liquidity risk assessment, dealing with quantitative aspects, such as metrics used, and also qualitative aspects such as the hedging policy, scope of management, and segregation of functions. Structure th In accordance with CMN Resolution No. 3,464, of June 26 , 2007, financial institutions should implement a structure for market risk management apart from the business units and from the unit conducting the internal audit, and compatible with the nature of transactions, the complexity of products and the degree of exposure to market risk of the institution. The Bank has a market risk management structure represented by the Risk Management Directorate (Diris), that is compatible with the nature of the Bank’s transactions, and completely segregated from the business units and the Internal Audit unit. One of the main responsibilities of Diris in market and liquidity risk management is: the proposition to policies, guidelines, methodologies and limits of market risk, as well as the identification, assessment, monitoring and control of the market and liquidity risk of the Financial Conglomerate. Foreign Exchange Exposure Banco do Brasil adopts a policy of managing its exchange risk so as to reduce its effects on the consolidated economic and financial result. Following, a statement of assets, liabilities and derivatives of BB Consolidated is presented, increased by the exposure associated to the BB participation in the Banco Votorantim, referenced to foreign currencies. The net exchange position on June 30, 2010 is a liability in the amount of US$ 1,111.80 million, which reflects the tax hedge strategy adopted by the Bank. The purpose of tax hedging is to reduce the volatility of the result, after the tax effects, since exchange gains on investments abroad are not subject to taxation and likewise losses do not generate deduction in the tax basis. 131 - Banco do Brasil – MD&A 2Q10 Table 104. Balance in Foreign Currency R$ million 06/30/2010 CURRENCY BALANCE SHEET ASSETS U.S. Dollar Euro Pound Sterling LIABILITIES 63,856 76,036 7,427 4,968 126 155 2,339 1,770 Sw iss Franc 76 18 Gold 12 - Ohter 161 126 Total 73,997 83,074 Y en Ne t Pos ition - Equity (9,077) CURRENCY BALANCE SHEET LONG U.S. Dollar Euro Pound Sterling Y en Sw iss Franc Gold Total Ne t Pos ition - De r ivative SHORT 34,141 23,221 4,755 7,886 72 120 2,235 2,827 - 70 169 173 41,370 34,297 7,074 Total Ne t Pos ition (2,003) Total Ne t Pos ition - in U.S. Dollar (1,112) BB Consolidated foreign exchange exposure, plus the exposure associated to the BB participation in the th Banco Votorantim, was calculated according to Bacen Circular 3,389, of June 25 , 2008, was R$ 1,497 th million at June 30 , 2010. The following chart shows the quarterly behavior of BB Consolidated’s foreign exchange exposure in relation to the Referential Equity (RE) since June/2008. 132 - Banco do Brasil – MD&A 2Q10 Changes in Foreign Exchange Exposure in % of PR 5.00% 4.00% 3.30% 3.00% 0.71% 0.08% 2.01% 0.22% 2.00% 0.28% 0.20% 2.00% 1.00% 0.09% 2.40% 0.14% 0.69% 0.11% 0.09% Exposure % Other Currencies Mar/10 Sep/09 Jun/09 Mar/09 Dec/08 Sep/08 Jun/08 Exposure % Currency Basket 0.47% 0.69% Jun/10 0.77% 0.69% 0.00% 0.08% 1.06% 1.21% Dec/09 1.77% “G” Portion Figure 57. Changes in Foreign Exchange Exposure Balance Sheet by Index We present below the composition of assets and liabilities, including derivatives, of BB Consolidated, broken down by index: R$ billion – 06.30.10 Assets 325.5 190.1 149.9 Fixed CDI/TMS/FACP IRP/TBF/TR Liabilities 173.9 146.7 58.8 Price Index TJLP US$/Gold W/O Index 19.0 Assets: Tax Credits; Permanent Liabilities: PL; Adm. Prov.; Float. 102.6 6.4 25.2 25.4 104.0 13.8 24.9 41.5 80.1 Total R$ 743.9 bi Figure 58. Composition of Banco do Brasil’s assets and liabilities in the country. The chart below shows BB Consolidated’s net mismatches, by index, in BB Consolidated: 133 - Banco do Brasil – MD&A 2Q10 R$ billion – 06.30.10 18.20% 135.4 3.23% 1.69% 24.0 12.6 0.03% 0.1 -1.5 -0.18% -27.7 -55.2 -3.72% -87.9 -7.42% Fixed CDI/TMS/FACP Price Index -11.82% TJLP US$/Gold W/O Index PL/others IRP/TBF/TR Figure 59. Net Position Value at Risk The illustration below uses a Box-Plot analysis of the BB Consolidated Value at Risk (VaR) since the third quarter of 2008. 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 3Q 2008 4Q 2008 1Q 2009 Figure 60. Consolidated BB VaR 134 - Banco do Brasil – MD&A 2Q10 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 It is worth mentioning that the VaR metrics value of BB Consolidated, for the second quarter, add effects: a) from the methodologies improve from corporate curves of fixed interest rates and b) from time horizon change from 1 work day to 10 work days. The following table describes the Banco do Brasil minimum, average, and maximum VaR observed on the following periods: Table 105. Consolidated BB VaR R$ thous and Pe r iod M inim um Ave r age M axim um Jul to Dec /2008 125,903 288,699 652,740 Jan to Dec /2009 389,597 451,129 647,895 628,155 1,301,299 734,288 Jan to Jun/2010 The figure below shows a Box-Plot analysis of the Consolidated Abroad Network's VaR since the third quarter of 2008: 600,000 US$ thousand 500,000 400,000 300,000 200,000 100,000 0 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 Figure 61. Consolidated of the Foreign Network’s VaR It is worth mentioning that the VaR metrics value of BB Consolidated Foreign Network, for the second quarter, incorporate effects from time horizon change from 1 work day to 10 work days. 135 - Banco do Brasil – MD&A 2Q10 The following table describes the Abroad Network's minimum, average, and maximum observed on the following periods: Table 106. Foreign Network’s VaR US$ thous and Pe r iod M inim um Ave r age M axim um Jul to Dec /2008 14,439 18,634 27,711 Jan to Dec /2009 9,049 48,339 59,429 188,953 101,679 481,797 Jan to Jun/2010 136 - Banco do Brasil – MD&A 2Q10 BB Grupo Trading For management purposes, Banco do Brasil puts trading operations apart from the others, establishing its own strategies and limits. The groups shown below, International and Domestic Trading, are subdivisions of the Trading Portfolio (Bacen Circular 3,354). The figure below shows a Box-Plot analysis of the International Trading portfolio's VaR since the third quarter of 2008. 1,200 US$ thousand 1,000 800 600 400 200 0 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 Figure 62. VaR of the International Trading Portfolio It is worth mentioning that the VaR metrics value of BB Trading International Group, for the second quarter, incorporate effects from time horizon change from 1 work day to 10 work days. The table below sets out the average, minimum and maximum VaR of the international trading portfolio observed in the periods shown: Table 107. International Trading Portfolio’s VaR US$ thous and Pe r iod M inim um Ave r age M axim um Jul to Dec /2008 218 428 683 Jan to Dec /2009 220 112 338 442 495 1,136 Jan to Jun/2010 137 - Banco do Brasil – MD&A 2Q10 The figure below shows a Box-Plot analysis of the Domestic Trading Portfolio's VaR since the third quarter of 2008. 6,000 R$ thousand 5,000 4,000 3,000 2,000 1,000 0 3Q 2008 4Q 2008 1Q 2009 2Q 2009 3Q 2009 4Q 2009 1Q 2010 2Q 2010 Figure 63. VaR of the Domestic Trading Portfolio It is worth mentioning that the VaR metrics value of BB Consolidated, for the second quarter, add effects: a) from the methodologies improve from corporate curves of fixed interest rates and b) from time horizon change from 1 work day to 10 work days. The following table describes the Domestic Trading minimum, average, and maximum VaR observed on the following periods: Table 108. Domestic Trading Portfolio’s VaR R$ thousand Pe r iod M inim um Jul to Dec/2008 Jan to Dec/2009 Jan to Jun/2010 138 - Banco do Brasil – MD&A 2Q10 Ave r age M axim um - 957 3,792 19 2,012 1,551 5,280 5,483 Statement of Repricing Profile of Interest Rates We present below a table containing the inventory of operations sensitive to the variations in the interest rates, allocated by risk factor and by interest rate indexation period, of BB Consolidated: Table 109. Repricing Profile of Interest Rates – 06/30/2010 R$ million < 1 Mo 1 > 3 Mo Assets Fixed 151.582 CDI/TMS 3 > 6 Mo 19.588 6 > 12 Mo 31.343 1 > 3 Yrs > 3 Yrs 173.929 - - TR/TBF/IRP - 58.792 - - - - 58.792 Price Index - 18.962 - - - - 18.962 TJLP 64.140 - 33.155 - 0 25.684 - 325.492 173.929 2.053 23.347 - - - - 25.400 10.836 30.543 15.293 8.583 10.661 26.561 102.477 338.400 151.232 46.636 34.267 74.801 59.716 705.052 Fixed (109.865) (18.623) (9.966) CDI/TMS (149.894) (10.648) - (26.669) - (14.368) - (149.894) Foreign Currencies/Gold Total - Earning Assets Liabilities - - (190.139) TR/TBF/IRP - (146.711) - - - - Price Index - (6.393) - - - - (6.393) (23.806) - - - - (25.202) TJLP Foreign Currencies/Gold Total - Interest Bearing Liabilities (1.396) (146.711) (7.120) (9.921) (8.984) (13.727) (18.298) (45.924) (103.974) (268.275) (205.454) (18.950) (24.375) (44.967) (60.292) (622.313) Gap 70.125 (54.222) 27.686 9.892 29.834 Cum ulative Gap Cum ulative Gap as % Assets (Earning Assets) 70.125 15.903 43.589 53.481 83.315 20,7% 139 - Banco do Brasil – MD&A 2Q10 -35,9% 59,4% 28,9% 39,9% (576) 82.739 82.739 -1,0% 11,7% 8.1.2 Liquidity Risk Banco do Brasil maintains liquidity level that are adequate for the institution's commitments assumed in Brazil and abroad, resulting from its broad and diversified depositor base and the quality of its assets, the extensive reach of its network of overseas branches and of access to the international capital markets. Stringent control over liquidity risk is based on the Market and Liquidity Risk Policy established for the Conglomerate, fulfilling the requirements of national banking supervision and of the other countries where BB operates. The liquidity risk management of Banco do Brasil separates liquidity in Reais from liquidity in Foreign Currencies. For this purpose, it uses the following tools: • • • • • • Maps of Mismatching of Terms, Short, Medium and Long-term Liquidity Projections, Stress test, Liquidity Risk Limits, Liquidity Contingency Plan and Test of Potential of Liquidity Contingency Measures. Liquidity risk management tools are periodically monitored and reported to the Strategic Committees of the institution. The Maps of Mismatching of Terms demonstrate the expectation regarding payments and receipts contracted, distributed in previously defined intervals of time, and presented both under the joint perspective or detailed by index of the operations. The analysis of the Maps of Mismatching of Terms aims to determine the contractual cash flow of the institution on a given date. Short, Medium and Long-term Liquidity Forecasts permit the evaluation of the effect of mismatching between funding and investments, with the objective of identifying situations that could compromise the institution's liquidity, taking into consideration the budget planning of the institution, as well as market conditions. Stress Tests are performed periodically, when the Short-term Liquidity Projections are evaluated in alternative and stress scenarios, aiming to verify the institution's liquidity recovery capacity under adverse conditions and to list corrective measures, if necessary. Regarding, liquidity risk limits, the Liquidity Reserve is used for the short term liquidity management, ensuring that the minimum level of assets of high liquidity to be maintained by the Bank, compatible with the exposure to risk resulting from the characteristic of its operations and from the market conditions. The methodology of the Liquidity Reserve was approved by the Global Risk Committee (CRG), is used as a parameter to identify a liquidity contingency and involvement of the Liquidity Contingency Plan, with monitoring on a daily basis. Jun/09 Jul/09 Aug/09 Sep/09 Oct/09 Nov/09 Average Liquidity Figure 64. Reserve Liquidity – National Treasury 140 - Banco do Brasil – MD&A 2Q10 Dec/09 Jan/10 Feb/10 Mar/10 Apr/10 Liquidity Reserve May/10 Jun/10 The figure below presents the monitoring of the Liquidity Reserve in Foreign Currency of the Bank, which in April 2010, in conformity with the decision of the Subcommittee of Market and Liquidity Risk, substituted the monitoring of the Liquidity Reserve of the Foreign Network. Jun/09 Jul/09 Aug/09 Sep/09 Oct/09 Nov/09 Dec/09 Jan/10 Average Liquidity Feb/10 Mar/10 Apr/10 May/10 Jun/10 Liquidity Reserve Figure 65. Reserve Liquidity – Foreign Currency Still regarding liquidity risk limits BB utilizes, in the planning and execution of its annual budget, the indicator of Availability of Free Funds (DRL), which aims to guarantee a balance between funding and application of resources from the commercial portfolio and to ensure the financing of liquidity with structural resources. A DRL limit is defined annually by the Global Risk Committee (CRG), and monitored on a monthly basis, employed to guide the budget's planning in accordance with the targets for funding and commercial loans. Jun/09 Jul/09 Aug/09 Sep/09 Oct/09 Nov/09 Monthly DRL Dec/09 Jan/10 Feb/10 Mar/10 Apr/10 May/10 Jun/10 Annual Limit Figure 66. DRL Index The favorable conditions in the Liquidity Reserve (operating liquidity) and the DRL (structural liquidity) in Brazilian reais have allowed the Global Risk Committee to reduce the indicator's annual limit of the DRL for 2010 and to maintain the company's strategic planning for its business. The numbers for the second quarter of 2010, presented in figures 8 and 9, confirm the favorable situation of the Bank's liquidity in Reais. The Liquidity Contingency Plan, in turn, establishes a set of procedures and responsibilities to be adopted in liquidity contingency situations. In case of liquidity contingency, one or more contingency measures may be adopted with the intention of protecting the institution's payment capacity. The liquidity contingency measures are measured with monthly periodicity. Moreover, as an additional control mechanism, the liquidity generation capacity of the Liquidity Contingency Measures, provided for in the Liquidity Contingency Plan, is tested monthly through the Test of Potential of Contingency Measures, in light of the effects of different scenarios on the liquidity of the Institution and its ability to generate net resources. 141 - Banco do Brasil – MD&A 2Q10 8.1.3 Credit Risk Structure In Banco do Brasil, the credit risk management structure is composed of a Risk Management Director, a Credit Director, and an Operating Assets Restructuring Director, and the Risk Management Director, by appointment of the Board of Directors, is in charge of the Bank's credit risk management. This structure is in accordance with CMN Resolution 3721 dated April 30, 2009. The investor relations pages in BB's website provides detailed information on the management structure and the credit risk management process. Credit Risk Management To comply with the requirements of Basel II and aligned with best risk management practices, BB has developed its own methodology for determining of risk components: Expected Default Frequency (FEI), Loss Given Default (LGD), exposure to credit risk, which are inputs for the measurement of Economic Capital (EC) and of Expected Loss (EL). The internal model for measuring the VaR of credit has its theoretical groundings based on an actuarial approach, used in the banking industry. The VaR of the loan portfolio is associated with a distribution of added loss for a given level of confidence. The mean value of this distribution is the Expected Loss, which represents how much the Bank expects to lose on average in a given period of time, the protection of which is performed by means of provision. Now the Economic Capital, which is associated with Unexpected Loss, is determined by the difference between VaR and EL. For this portion the Bank protects itself through the allocation of capital required for risk coverage. Frequency % Reliance Level(%) EL Economic Capital VaR Figure 67. Measuring and management instruments 142 - Banco do Brasil – MD&A 2Q10 Losses - $ The distribution of aggregate loss is obtained using the following risk components as data input: FEI, LGD and exposure subject to credit risk. The measurement of the VaR of Credit supports the appraisal of risk and return of the Bank's loan portfolio, and for the process establishing limits for the loan portfolio. Its evaluation has supported the decision-making process of the Bank, bringing historical information and allowing permitting an analysis of the risk behavior trend. Furthermore, its use has proved extremely valuable in the dissemination of the credit risk management culture at the Bank. With regard to the valuation of return, the values of EL and EC serve as inputs for calculating the RiskAdjusted Return on Capital (RAROC). The use of RAROC is intended to subsidize important decisionmaking processes at the Bank. Its tracking in the historical perspective for the portfolios analyzed has allowed the assessment of risk and return to be present in the decisions of the Institution. In addition to the use of techniques for identifying and measuring risks, BB monitors and controls the credit risk concentration in terms of risk exposure and commitment of the Referential Equity (RE). BB developed a credit risk concentration control method, that analyzes the interrelation among the various economic sectors comprising the business loan portfolio. This model evaluates the credit risk concentration of the borrowers. BB also has other management tools of credit risk appraisal, with an emphasis on: • • • • • Macro-sector limits for the Business segment; Portfolio Quality Index (PQI) – qualitative and quantitative indicator of the portfolio. The default concept follows the precepts defined by CMN Resolution 2682/99; Delinquency Rates of 15 and 90 days – correspond to the division of the balance overdue for more than 15 and 90 days, respectively, by the balance of the portfolio; Credit Risk Budget – consists of projections for allowance for loan losses used to form BB’s annual budget; Risk Management Reports - systematic monitoring and projections for the loan portfolio using different viewpoints. In the regulatory sphere, special emphasis is placed on the publication of Resolution nº 3721 on 4/30/2009, which establishes guidelines for implementation of the credit risk management structure at Financial Institutions and other institutions licensed to operate by Bacen and Release nº 18365, of 4/22/2009, which presents the preliminary criteria for use of the approaches based on internal models, topics that already comprise the Bank's process of preparation for the new guidelines established in the scope of Basel II. 143 - Banco do Brasil – MD&A 2Q10 Concentration BB's extended Loan Portfolio, composed by foreign and domestic loan portfolio, guarantees granted and Private Securities, besides the portfolios of BNC and BV, totaled R$ 349,761 million in June 2010, 6.8% growth in the quarter and 41.1% in 12 months. Table 110. Extended Loan Portfolio R$ million Pe r iod Por tfolio Colate r al Se cur itie s Total Sep/08 202,201 7,132 4,284 213,617 Dec/08 224,808 8,220 4,175 237,203 Mar/09 228,101 7,899 4,662 240,662 Jun/09 235,400 8,600 3,900 247,900 Sep/09 245,712 10,155 5,748 261,615 Dec/09 300,829 9,875 9,992 320,696 Mar/10 305,551 326,522 10,550 11,168 11,252 12,071 327,353 349,761 Jun/10 In the extended concentration analysis for the loan portfolio, there was a 23.5% growth in exposure to the 100 largest borrowers in March 2010 to 23.9% at the end of June 2010. It is worth to emphasize, however that information on portfolio concentration does not include a part of BNC (still not integrated by systems), and the BV portfolio. Table 111. Concentration of the Loan Portfolio of the 100 Largest Borrowers R$ million Pe r iod 1s t Cus tom e r Balance 2nd to 20th Balance 21s t to 100th Balance 100th lar ge s t Balance Sep/08 2.3 4,811 10.5 22,505 9.9 21,113 22.7 48,429 Dec/08 2.4 5,576 11.2 26,644 10.3 24,454 23.9 56,675 Mar/09 2.6 6,204 10.9 26,190 10.7 25,800 24.2 58,194 Jun/09 2.5 6,201 10.9 26,950 10.0 24,681 23.3 57,832 Sep/09 2.7 6,951 11.4 29,927 10.0 26,078 24.1 62,956 Dec/09 2.5 8,070 10.8 34,776 10.6 34,137 24.0 76,983 Mar/10 2.3 2.8 7,478 9,707 10.9 10.9 35,745 38,209 10.3 10.2 33,575 35,587 23.5 23.9 76,797 83,503 Jun/10 144 - Banco do Brasil – MD&A 2Q10 The exposure of the 100 largest borrowing customers as compared to the Referential Equity also reflects a growth in the quarter, reaching 137.7% in June 2010 as opposed to 124.6% at the end of March 2010. The ratio between the exposure of the largest borrower and the Referential Equity Amount ended June 2010 in 16.0%, an increase of 390 bps in relation to the exposure recorded at the end of March 2010. Table 112. Concentration of the Loan Portfolio of the 100 Largest Borrowers % in relation to RE R$ million Pe r iod 1s t Cus tom e r (%) 2nd to 20th (%) Balance Balance 21s t to 100th (%) Balance 100th lar ge s t (%) Balance Sep/08 13.4 4,811 62.5 22,505 58.7 21,113 134.6 48,429 Dec/08 12.6 5,576 60.4 26,644 55.4 24,454 128.5 56,675 Mar/09 13.0 6,204 55.0 26,190 54.2 25,800 122.1 58,194 Jun/09 12.4 6,201 53.8 26,950 49.3 24,681 115.5 57,832 Sep/09 13.5 6,951 58.2 29,927 50.7 26,078 122.3 62,956 Dec/09 13.9 8,070 59.7 34,776 58.6 34,137 132.1 76,983 Mar/10 12.1 16.0 7,478 9,707 58.0 63.0 35,745 38,209 54.5 58.7 33,575 35,587 124.6 137.7 76,797 83,503 Jun/10 BB's amplified Business Loan Portfolio, disregarding loan portfolios of BNC and BV, totaled R$ 192,037 million in June 2010, 10.7% growth in the quarter and 32.0% in 12 months. The greatest concentration is in transactions contracted with companies from the Oil macro sector that corresponds to 11.3% of the amplified business portfolio, recording growth of 3.3% in June 2009 and 10.7% in March 2010. Table 113. Concentration of the Loan Portfolio by Macrossector R$ million M acr o-s e ctor Oli Chg. % Jun/09 Shar e % M ar /10 Shar e % Jun/10 Shar e % On Jun/09 On M ar /10 4,790 3.3 18,540 10.7 21,707 11.3 353.2 17.1 Metalw orking and Steel 14,577 10.0 15,967 9.2 20,767 10.8 42.5 30.1 Foodstuf f s of V egetable Origin 10,386 7.1 15,463 8.9 17,795 9.3 71.3 15.1 Building 1,087 0.7 12,198 7.0 14,730 7.7 1,255.1 20.8 Services 8,373 5.8 13,298 7.7 14,372 7.5 71.6 8.1 Electricity 4,016 2.8 10,113 5.8 11,348 5.9 182.6 12.2 A utomotive 2,568 1.8 9,821 5.7 11,120 5.8 333.0 13.2 Transport 5,943 4.1 10,008 5.8 10,629 5.5 78.8 6.2 Foodstuf f s of A nimal Origin 7,440 5.1 9,728 5.6 9,685 5.0 30.2 (0.4) 14.7 Retail Trade 7,524 5.2 7,479 4.3 8,580 4.5 14.0 15,052 10.3 6,251 3.6 6,815 3.5 (54.7) 9.0 Pulp and Paper 1,749 1.2 6,738 3.9 6,316 3.3 261.2 (6.3) Electrical and Eletronic Goods 5,369 3.7 5,583 3.2 5,731 3.0 6.7 Telecommunications 5,125 3.5 6,714 3.9 5,256 2.7 2.6 Textile and Garments A gricultural Consumables 2.6 (21.7) 14,764 10.2 4,995 2.9 5,198 2.7 (64.8) 4.1 Chemicals 3,819 2.6 4,396 2.5 4,468 2.3 17.0 1.6 Other A ctivities 2,912 2.0 4,192 2.4 4,214 2.2 44.7 0.5 11,178 7.7 3,841 2.2 4,084 2.1 (63.5) 6.3 Timber and Furniture 6,565 4.5 3,261 1.9 3,726 1.9 (43.2) 14.2 Wholesale Trade and Sundry Ind. 5,863 6,347 4.0 4.4 3,184 1,753 1.8 1.0 3,525 1,971 1.8 1.0 (39.9) 10.7 (68.9) 12.4 Total 145,447 100.0 173,524 100.0 192,037 100.0 32.0 10.7 Internal Loan Portf olio 120,576 134,137 149,336 A broad Loan Portf olio 13,198 17,585 19,462 8,335 3,339 10,550 11,252 11,168 12,071 145,447 173,524 192,037 Beverages Leather and Shoes Garantees Securities Total Does not consider operations of Banco Nossa Caixa and Banco Votorantim. 145 - Banco do Brasil – MD&A 2Q10 8.1.4 Operating Risk Introduction The structure of Banco do Brasil's operating risk management is composed of a Risk Management Directorate, Internal Controls Directorate and Security Management Directorate, pursuant to CMN Resolution No. 3,380, which provides on the implementation of an operating risk management structure. Information about the Management Structure and Operational Risk Management Process can be found in more detail on BB's Internet page, Investor Relations Website. In order to meet the Basel II implementation schedule, pursuant to Release 19,028 of the Central Bank th of Brazil (BACEN), of October 29 , 2009, which provides for the use of advanced models as from 2013, as well as the guidance defined by the Central Bank of Brazil in Release 19,217, regarding determination of Required Referential Equity (RRE), the Bank has been carrying out actions aimed at the adoption of an internal operating risk model which enables more accurate management and fulfills the requirements established by the Regulator. In order to manage operational risk, Banco do Brasil, following the best market practices, monitors operating risks through key risk indicators, operational loss exposure limits and a systematized internal database. Special emphasis is placed on the implementation of specific limits for operating losses related to "Labor Issues", "Business Failures", "Failures in Processes" and "Fraud and External Theft", with the objective of enhancing agility in the proposition of mitigation actions. Key Risk Indicators (KRI's) ICR is a tool that supports operational risk management. It is comprised of one or more combined and interrelated variables that are an integral part of an operating process, with expected behavior according to predefined rules, and whose variation indicates greater or lesser exposure to the operational risk. At BB they are used with the objective of identifying weak points associated with the critical operating processes and to assist in the proposition of operating loss mitigation actions. Operating Loss Exposure Limits In order to ensure an effective management of operating risks, Banco do Brasil employs operating loss exposure limits, which are intended to establish the acceptable limits to the Bank for operating losses, which are remitted for verification every month by the Operating Risk Sub-Committee and Global Risk Committee (GRC). Regard this subject, BB created the Operating Loss Global Limit and Specific Limits in order to allow operating loss management based on statistically pre-established tolerance levels, and to allow the detection of weaknesses associated with processes likely to cause significant losses. The following table present the progress of BB's operating losses, according to loss event classes and in percentages. It can be noticed, however, that since the 2º quarter 2010, BB started to consider the constitution/reversal of provisions in the total account of operational losses for the labor claims and business failures. 146 - Banco do Brasil – MD&A 2Q10 Table 114. Monitoring Operational Losses Los s Eve nt Cate gor y 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 Labor Is sues 41.9% 45.2% 39.1% 39.5% 32.1% 42.0% Busines s Failures 14.5% 16.3% 22.1% 35.1% 40.7% 20.9% External Fraud and Thef t 18.2% 16.6% 18.0% 13.3% 16.0% 19.5% Proces s Failures 19.8% 12.9% 11.8% 10.3% 9.2% 12.1% Phy sic al A s sets Damage 4.6% 5.3% 4.1% 0.4% 0.7% 0.5% Internal Frauds 0.9% 3.5% 4.8% 1.3% 1.0% 4.9% System Failures 0.1% 0.0% 0.2% 0.0% 0.2% 0.0% 0.1% 0.0% 0.3% 0.0% 0.1% 0.0% A c tiv ities Interruption 147 - Banco do Brasil – MD&A 2Q10 8.2 Capital Structure 8.2.1 Shareholders’ Equity The Shareholders' Equity of Banco do Brasil attained R$ 39,332 million at the end of June 2010, a growth of 4.5% in the quarter, corresponding to an equity value of R$15.31 per share, mainly due to the incorporation of result in the period. Table 115. Shareholders’ Equity R$ million Shar e holde r s ’ Equity Se p/08 De c/08 M ar/09 Jun/09 Se p/09 De c/09 M ar /10 Jun/10 27,889 29,937 30,859 32,360 33,661 36,119 37,646 39,332 Capital 13,699 13,780 13,780 18,549 18,549 18,567 18,567 26,028 Reserves 12,762 15,990 15,771 13,626 13,311 17,313 16,869 12,924 (33) 199 124 216 324 270 405 411 (Shares in Treasury) - (31) (31) - - - 4 - Retained earnings (accumulated losses) - - - (31) (31) (31) (31) (31) Corporate Prof it Sharing - - - - - - 0 1,833 0 - MTM – Securities and Derivatives P&L A ccounts 148 - Banco do Brasil – MD&A 2Q10 8.2.2 Regulatory Capital The implementation of Basel II rules in Brazil, especially in relation to the capital requirement, produced several modifications in the method of measuring capital to bear the risks inherent to banking activities. The implementation schedule of Basel II in Brazil was officialized by the Central Bank of Brazil - Bacen by means of Communication 12,746, of 12.9.2004, and subsequently adjusted by Communication 6137, of 9.27.2007. This agenda was built in phases, initially establishing, as regards capital requirement, the use of a standardized approach (defined by Bacen), and at the end, the use of advanced models. On TH October 29 , 2009, Bacen, through Release 19.028, adjusted the schedules previously disclosed, with a view to supplementing the measures and procedures required for proper implementation of Basel II in Brazil. To regulate the transition from Basel I to Basel II (standardized approach), Bacen published several rules about capital requirement (Pillar I), process of supervision and transparency of information (Pillars II and III). Referential Equity Amount (RE) On 2.28.2007, CMN approved changes in the rules for definition of the RE (Referential Equity Amount) of financial institutions by means of Resolution no. 3,444, revoking CMN Resolution 2,837, of 5.30.2001. On the same date, Bacen published Circular 3343/2007, which refers to the procedures to be adopted in the request for categorization of borrowing instruments at Level I and Level II of RE. 1 2 The RE is formed by the sum of the Tier I portions and Level II , , being deducted the asset balances represented by the following funding instruments issued by the financial institution: stock, hybrid capital and debt instruments, subordinated debt instruments and other financial instruments described in Bacen Resolution no. 3,444/2007, art. 12 and art. 13, § 3. According to CMN Resolution no. 3,444/2007, for purposes of PR composition, the value of preferred shares issued with a redemption clause having an original term of less than ten years, increased by the value of subordinated debt instruments (DS), is limited to 50% of RE Tier I (art. 14, clause III). On the other hand, the amount of hybrid capital and debt instruments (IHCD) is limited to the PR Tier I value, being deducted the existing DS amount and its remaining issue margin (art. 14, clause I). Required Referential Equity (RRE) CMN Resolution 3,490, of 8.29.2007, established the Required Referential Equity (RRE) concept to substitute the Required Shareholders' Equity (RSE) concept, revoking exhibit IV of CMN Resolution 2099/1994, and other rules concerning the topic. The RRE was henceforth comprised of the following six portions: RRE = PEPR + PCAM + PJUR + PCOM + PACS + POPR Where: PEPR - portion referring to the exposures weighted by the FPR assigned thereto; PCAM - portion referring to the risk of exposures in gold, in foreign currency and in operations subject to exchange variance; PJUR - portion referring to the risk of operations subject to the variation of interest rates and classified in the trading book, as provided for by Resolution 3,464, of 6.27.2007, where n = number of the different 1 Level I – it is determined by the sum of the values corresponding to the net equity, to the credit income accounts balances and to a blocked account deposit to cure capital deficiency, excluded the items mentioned in Bacen Resolution 3444/2007, art. 1, § 1, clause I to VI. 2 Level II – it comprises the sum of the values corresponding to revaluation reserves, contingency reserves and special profit reserves related to non-distributed statutory dividends, increased by values corresponding to hybrid capital and debt instruments, subordinated debt instruments and other items described in Bacen Resolution 3.444/2007, art. 1, § 2, clauses I and II 149 - Banco do Brasil – MD&A 2Q10 portions relating to the risk of operations subject to the Variation of interest rates and classified in the trading book; PCOM - portion referring to the risk of operations subject to the variation of the price of commodities; PACS - portion referring to the risk of operations subject to the Variation of the price of shares and classified in the trading book, as provided for in Resolution 3,464, of 6.27.2007; POPR - portion referring to the operational risk. The reviews in the Referential Equity (RE) were incorporated by BB in July 2007. As regards the Required Referential Shareholders' Equity (RRE), the rule started to be required as of 7.1.2008. The following information is in compliance with the regulation in effect. Performance Banco do Brasil closed the second quarter of 2010 with referential shareholders’ equity 21.1% higher than that seen in June 2009, reaching R$ 60,655 million. Table 116. BIS Ratio – Economic-Financial Conglomerate R$ million Re fe r e nce Equity (RE) Se p/08 De c/08 M ar /09 Jun/09 Se p/09 De c/09 M ar /10 Jun/10 35,271 43,391 47,644 50,087 51,456 58,264 61,654 60,655 23,954 31,201 32,915 35,218 36,121 41,068 42,489 41,476 13,699 13,780 13,780 18,549 18,549 18,567 18,567 26,028 Capital Increase - - - - - - - - Retained earnings (losses) 0 - - - - - - - Tie r I Capital Capital reserves Revenue reserves Reavaluation reserves - - - - - - - - 12,762 15,990 15,771 13,626 13,311 17,313 16,869 12,924 (7) (7) (15) (14) (7) (7) (6) (6) (33) 199 124 216 324 270 405 411 Treasury shares - (31) (31) - - - 4 - A ccumulated Earnings or Losses - - - (31) (31) (31) (31) (31) 0 Mark-to-Market – Securit. A nd Derivatives Corporate Prof it Sharing - (0) 834 787 21 0 - 1,461 - 1,215 - 1,509 - 1,833 - (3,702) (22) (22) (22) (22) (22) (22) (22) (352) (513) (562) (638) (291) (242) (186) (293) 126 (29) (97) (121) (144) (85) (148) (145) A dditional Provision - 1,835 1,918 2,867 2,903 2,782 2,624 - Hybrid Capital and Debt Instruments - Tier I - - - - - 2,524 2,581 2,611 11,317 12,190 14,729 14,869 15,335 17,196 19,165 19,178 11,209 11,729 14,342 14,653 15,230 17,078 18,970 19,376 938 1,145 1,134 956 871 853 872 882 Inst of Cap. Issued by IF w ith FPR of 100% - - - - - - - - Revaluation reserves 7 7 15 14 7 7 6 6 Income accounts Tax Credit excl. RE's Tier I – Res.3059 Def erred A ssets Mark-to-market Tie r II Subordinated debt Hybrid Capital and Debt Instruments Mark-to-market (126) 29 97 121 144 85 148 145 Financial Instruments Excluded f rom RE (711) (720) (859) (875) (917) (827) (832) (1,232) RSE/RRE 29,813 31,500 34,879 35,957 43,647 46,758 49,377 51,970 Credit Risk(1) 29,310 30,980 33,554 34,574 40,487 43,557 45,350 48,248 Market risk(2) 102 119 170 228 631 674 775 470 401 5,458 401 11,891 1,155 12,765 1,155 14,131 2,528 7,809 2,528 11,506 3,252 12,277 3,252 8,685 13.0 15.2 15.0 15.3 13.0 13.7 13.7 12.8 Operating Risk(3) Sur plus /(ins ufficie ncy) of RE K Coe fficie nt % (1) Referring to the PEPR portion pursuant to circular 3,360 of 9/12/2007. (2) Referring to the PCAM, PJUR, PCOM and PACS portions, Circulars 3361 to 3364/2007, 3366/2007, 3368/2007 and 3389/2008. (3)Referring to the POPR portion, pursuant to circular 3,383, of 4/30/2008. 150 - Banco do Brasil – MD&A 2Q10 BB's RRE reached R$ 51,970 million in June, increasing 44.5% in relation to June 2010 and 5.3% in relation to March 2010. The main part of the requirement was caused by the credit risk portion (PEPR), which reflects mainly the growth of loan operations. The following table presents the main changes in the PEPR quota accounts in the second quarter of 2010, in relation to the same 2009 period, considering the Economic-Financial Consolidated: Table 117. Main accounts of the PEPR quota (Economic-Financial Conglomerate) R$ million Loan Operations Jun/09 Jun/10 Chg % 38.6 19,256 26,689 5,098 6,774 32.9 Securities 844 2,720 222.3 Loans to releas e 713 1,494 109.5 961 7,702 1,903 8,668 98.0 12.5 34,574 48,248 39.5 Ohter Credits (gold, adv anc es to FGPC, other adv anc es Guarantees giv en Other TOTAL Regarding the market risk, we present in the following table the Required Referential Equity in June 2010, by risk factor. Table 118. RRE for Market Risk by Risk Factor R$ million Jun/10 Ris k Factor s PRE FX - PRE Interest Rate 456.5 PRE Commodities 3.4 10.1 PRE Shares PRE M ark e t Ris k ¹ 470.0 (1) Includes positions of BNC and BB's interest in BV's positions (R$ 425 million) BB has chosen for the utilization of the Alternate Standardized Approach, which requires 100% of the value determined, according to Circular no. 3,383. The total calculated of R$ 3,252 million (base date December 2009) considers the amounts of Banco Nossa Caixa and Banco Votorantim. The allocated capital amount, by line of business, corresponds to: Table 119. Allocated Capital for Operational Risk by Line of Business Bus ine s s Line A sset Management Commercial Am ount (R$ m illion) 94 794 Retail 386 Corporate Finance (1) 505 Trading and Sales Payments and Settlements Financial A gent Services Retail Brokerage TOTAL 1,002 400 67 4 3,252 (1) Amount includes R$ 316 million regarding Banco Votorantim; Banco do Brasil's capital ratio (K) ended June 2010 at 12.8, level lower than that obtained in March 2010. The Basel ratio shown allows the Bank to expand its loan portfolio by R$ 78,953 million in credit assets, considering a 100% weighting. 151 - Banco do Brasil – MD&A 2Q10 15.2 15.3 15.0 13.7 13.7 3.9 4.0 4.3 13.0 13.0 4.3 12.8 4.5 4.6 4.2 8.8 10.9 10.4 10.8 9.1 9.7 9.5 Sep/08 Dec/08 Mar/09 Jun/09 Sep/09 Dec/09 Mar/10 Tier I 4.1 8.8 Jun/10 Tier II Figure 68. BIS Ratio – Economic-Financial Conglomerate The reduction in the Basel ratio during the quarter is explained by the growth of the loan portfolio, and basically due to the removal of additional credit risk provisions (PCLD) of Referential Equity. The end of the prerrogative of including the additional PCLD in the reference assets was already expected and led to a 0.6 percentage point decline in the ratio. It should be recalled that the BIS ratio for June 2010 does not include the R$ 7.05 billion capital increase in June 2010. Pro forma simulations reflect that these incoming funds would raise the June ratio to about 14.3%. Table 120. Changes in Composition of BIS Ratio R$ million Net Income less Interest on Capital Increase of Subordinated Debt Other Changes in Ref erenc e Equity Re quir e d Re fe r e nce Equity Re fe r e nce Equity Effe ct on Bas e l Ratio Effe ct on Le ve r age 1,635 - 0.3 406 - 0.1 14,866 3,691 (3,080) - (0.7) (28,004) Tax Credit excluding RE's Tier I – Res.3059 - - - - Hybrid Capital and Debt Instruments - Tier I 30 - 0.0 270 Hybrid Capital and Debt Instruments - Tier II 10 - 0.0 91 Increase of Market Risk Requirement - (305) 0.1 2,774 Increase of Credit Risk Requirement - 2,898 0 (0.8) (0.0) (26,342) (0) (999) 2,593 (0.9) (32,654) 61,654 60,655 49,377 51,970 13.7 12.8 111,607 78,953 (999) 2,593 (0.9) (32,654) Increase of Operational Risk Requirement Change s in the Quar te r Balance at Mar/10 Balance at Jun/10 Quar te r ly Ne t V ar iation 152 - Banco do Brasil – MD&A 2Q10 Fixed Asset Ratio In the last quarter, the Fixed Asset Ratio went up from 14.2% to 15.8%. With the current fixed asset level, BB was able to increase its fixed assets by R$ 20.7 billion, without leading to be out of the maximum 50% limit of the Referential Equity. Table 121. Fixed Asset Ratio R$ million Se p/08 De c/08 M ar /09 Jun/09 Se p/09 De c/09 M ar /10 Jun/10 Shareholders ' Equity 27,889 29,937 30,859 32,360 33,661 36,119 37,646 39,332 Subordinated debts eligible as Capital 11,209 11,729 14,342 14,653 15,230 17,078 18,970 19,376 938 1,145 1,134 956 871 853 872 882 (4,765) 580 1,308 2,118 1,693 4,214 4,166 1,064 35,270 43,391 47,643 50,087 51,455 58,264 61,654 60,655 8,217 13,606 19,421 19,779 23,729 25,178 27,112 26,864 V ariable Income Securities 38 28 26 31 204 308 398 668 Stock Exchange and Cetip Clearing (1) (0) (0) (0) (1) (0) (0) (0) (2,877) (4,078) (4,836) (5,221) (7,759) (8,166) (8,301) (8,280) Hybrid Capital and Debt Instruments Other Adjus te d Re fe r e ntial Equity Am ount (A) Permanent A ssets Leased assets Los ses w ith Leasing to be A mortized Def erred A ssets (Resolution CMN 3,444) V es ted Rights Payroll up to 06/30/09 (Res. 3642 Bacen) Equity Int. in the Results of Subs and A f f il. Total Fixe d As s e ts (B) Fixe d As s e t Ratio (B/A) - % M ar gin (Sur plus ) - % 153 - Banco do Brasil – MD&A 2Q10 (62) (55) (48) (42) (39) (35) (32) (30) (352) (513) (562) (638) (291) (242) (186) (293) - (3,921) (6,284) (4,894) (4,782) (5,305) (4,937) (4,094) - - - (3,619) (5,028) (5,115) (5,289) (5,231) 4,964 5,067 7,716 5,396 6,035 6,623 8,764 9,604 14.1 12,671 11.7 16,628 16.2 16,105 10.8 19,648 11.7 19,693 11.4 22,509 14.2 22,063 15.8 20,724 8.2.3 Economic Capital Banco do Brasil uses the concept of economic capital in its internal processes of risk management. The tables below show the total capital calculation and by economy sector (disregarding BV). Table 122. Economic Capital Econom ic Capital Credit Ris k Requirement (1) Inte r nal M ode l 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 4,809 5,150 5,737 7,397 8,060 7,913 Market Ris k Requirement (2) 414 338 170 176 104 166 8,204 108 Operating Ris k Requirement 1,335 1,513 1,674 1,967 2,250 2,100 2,109 TOTAL 6,558 7,001 7,581 9,540 10,414 10,179 10,421 (1) For loan operations and collateral operations (2) Capital Consumption for Trading Book (Bacen Circ. 3,354), Foreign Exchange, Commodities We present below the economic capital calculation over the Credit Risk detailed by macro-sectors and individuals/businesses, disregarding BNC's and BV's information. Table 123. Distribution of Economic Capital in the Loan Portfolio R$ million Jun/09 Shar e Jun/10 Shar e INDIV IDUALS 3,619 63.1% 5,354 68.3% COM PANIES 2,117 36.9% 2,481 31.7% A gribusiness of A nimal Origin 261 4.6% 173 2.2% A gribusiness of V egetable Origin 370 6.5% 361 4.6% A utomotive 128 2.2% 120 1.5% Beverages 13 0.2% 13 0.2% Wholesale Trade and Sundry Ind. 52 0.9% 48 0.6% Retail Trade 96 1.7% 120 1.5% 105 1.8% 163 2.1% 37 0.6% 46 0.6% Building Leather and Shoes Electrical and Eletronic Goods 73 1.3% 89 1.1% Electricity 50 0.9% 49 0.6% A gric ultural Consumables 40 0.7% 50 0.6% Timber and Furniture 51 0.9% 63 0.8% 106 1.8% 216 2.8% 86 1.5% 40 0.5% Metalw orking and Steel Pulp and Paper Oil 86 1.5% 132 1.7% Chemicals 54 0.9% 59 0.8% Servic es 240 4.2% 357 4.6% 20 0.3% 13 0.2% Telec omunications Textiles and Garments 100 1.7% 121 1.5% Transport 138 2.4% 200 2.6% Other A ctivities TOTAL 154 - Banco do Brasil – MD&A 2Q10 11 0.2% 46 0.6% 5,736 100.0% 7,835 100.0% We show below the value at risk (VaR) measurement for market risk, per risk factor, for BB Consolidated. Table 124. VaR by Risk Factor R$ million Ris k Factors Jun/10 Pre-Fixed Interest Rate 53.5 Foreign Currency Coupom 13.6 Price Index Coupon 2.6 Exchange V ariation 31.0 Commodities 5.1 A ções 2.2 PRE M ar k e t Ris k * 108.0 *Trading Book + Exchange Variation + Commodities Please note that the BB Consolidated VaR for 2Q10 includes the effects of improved methodologies for the corporate curves regarding pre-fixed interest rates, and changes in the time horizon from one to ten business days. Lastly, we show the economic capital for operating risks, according to class of operating loss events and taking into account Banco Nossa Caixa values. This calculation includes data associated with the severity of the loss events recorded in the internal database. Please note that this figure does not include use of the External Database, Internal Control Scenario and Factors Analysis, and the Business Environment. Table 125. Distribution of Economic Capital for Operating Risk, by Loss Event Category Los s Eve nt Cate gor ie s Faults in Businesses Damage to the Physical Property Faults in Systems R$ m illion 900 8 5 Faults in Processes 205 External Fraud and Thef t 293 Internal Fraud 65 Labor Issues 633 TOTAL *Trading Book + Exchange Variation + Commodities 155 - Banco do Brasil – MD&A 2Q10 2,109 9 - Social and Environmental Performance Since 4Q08, Banco do Brasil has maintained the pioneer initiative among Brazilian banks of disclosing information about its socio-environmental performance together with the financial result of the company. In this initiative, the Bank presents historical data and analyses that allow the reader to understand the advances and efforts undertaken in the quest to make sustainability increasingly present in the company's strategies and policies. The decision about the quarterly disclosure of this information is based on the commitment to the creation of social and environmental values, materialized in Agenda 21, and from the understanding that this data is as important to the company's sustainability as the economic and financial information, deserving a treatment similar to that is already given to it. In addition, the Bank seeks to stimulate the investor market to consider socio-environmental aspects in its decision making more and more often, contributing to the appreciation of companies committed to their social and environmental responsibility. Social and Environmental Responsibility – RSA practices selected to form a part of the Performance Analysis Report were picked out based on their relevance to the Company's business, on the tangible return to shareholders, and on market research with pension funds and specialists on the subject. The selection of which data justifies the quarterly monitoring of its development (the other indicators are traditionally reported in the Annual Report) was also used as a criterion in the structuring of this report. Like the rest of the report, this set of information is constantly reviewed and monitored with a view to better adapting its reporting to the needs of analysts and shareholders, target audience of this publication. This chapter is divided into four major blocks, grouping the new RSA indicators and information that the Bank had already been disclosing, per related topics: employee relations, Ecoefficiency, Business with Socio-environmental Emphasis and Recognition of the Investor Market. It is worth emphasizing that the numbers related to Banco Nossa Caixa's (BNC) takeover started being included as of 4Q09. Tables and figures of this chapter show comparisons with the same period of prior year (2Q09), that is, not including BNC yet. 156 - Banco do Brasil – MD&A 2Q10 9.1 Employee Relations This section contains the main actions regarding business sustainability, in connection with investments in staff by Banco do Brasil. Characteristics of Workforce Banco do Brasil invests in the creation and strengthening of bonds with its collaborators, so that its professionals feel encouraged to build a career at the institution. People that join the staff tend to spend most of their professional lives at the Bank, which contributes to the low turnover and causes the stratification of the staff by age and length of service to evolve in a relatively linear manner, without abrupt oscillations. 2Q10 presented few fluctuations in the stratification of the staff by age. There was an increase in the percentage of employees between 26 and 35 years of age, besides a small reduction in the 36 to 45 year age range. 2Q09 1Q10 2Q10 7.4% 7.6% 8.3% 27.1% 29.5% 29.2% 35.2% 35.7% 35.1% 29.5% 27.9% Up to 25 years old from 26 to 35 years old 27.5% from 36 to 45 years old Over 45 years old Figure 69. Employees Age The service length breakdown at the Bank faced significant changes in the 4Q09 due to the joining of BNC’s staff, which explains the change seen in the 2Q10, mainly in the “up to 5 years” range, in relation to the same prior-year period. On the date Banco Nossa Caixa was incorporated by Banco do Brasil, all of its employees became BB’s, and as of 4Q09 they were included in this analysis. In relation to the previous quarter, except for the range related to employees with 11 to 15 years of service in the Bank, which went from 2.2% to 5.9%, no significant change was noted in the quarter. 2Q09 1Q10 2Q10 14.6% 16.4% 41.2% 14.1% 11.3% 11.6% 46.8% 14.3% 3.9% 2.2% 3.3% 2.5% 20.8% 22.2% 46.5% 3.9% 2.3% 21.9% Up to 5 years From 6 to 10 years From 11 to 15 years From 16 to 20 years From 21 to 25 years Over 25 years Figure 70. Employees by Length of Service 157 - Banco do Brasil – MD&A 2Q10 Education and Professional Development Banco do Brasil develops countless education and professional development actions. These actions include onsite courses, the establishment of partnerships to provide distance learning solutions and the concession of scholarships (academic and of languages), besides the incentive to studies by means of the internal career planning system. The total number of scholarships granted in 2Q10 was 9,282, which corresponds to 8.7% of the staff. This percentage is slightly lower than the 9.5% observed in 1Q10, yet higher than the 8.3% observed in 2Q09. The drop in the percentage is a result of the increase in the Bank's employee base, going from 103,923 in 1Q10 to 106,241 in the 2Q10. In comparison with the same prior-year period, there was an increase in the absolute number of scholarships granted, which increased from 7,374 in 2Q09 to 9,282 in 2Q10. Universidade Corporativa do Banco do Brasil (Corporate University of Banco do Brasil) began the selective process for the granting of scholarships in the categories of Undergraduate Studies and NonDegree Specialization, estimating a total 1,000 scholarships for the first and 500 for the second category. The Program, launched in 1997, has been successful in encouraging and enabling the participation of employees in undergraduate and specialization courses. Since then, it has been offering higher education and specialization opportunities to around 26 thousand employees. Table 126. Scholarships Granted 2Q09 Undergraduate Scholars hips 1Q10 2Q10 6,529 4,417 3,759 MBA s, Masters ' and Doctors' Sc holarships 586 5,253 5,307 Language Scholarships 259 197 216 7,374 9,867 9,282 Total Sc holars hips Granted Number of Employ ees in Period 89,194 103,923 106,241 Unde r gr aduate Scholar s hips pe r Em ploye e 7.3% 4.3% 3.5% M BAs , M as te r s ' and Doctor s ' Scholar s hips pe r Em ploye e 0.7% 5.1% 5.0% Language Scholar s hips pe r Em ploye e 0.3% 8.3% 0.2% 9.5% 0.2% 8.7% Total Scholar s hips pe r Em ploye e *As from the 4Q09 employees from BNC were included. The composition of the staff by level of education remained stable in relation to the previous quarter, with a slightly higher variation in comparison to 2Q09. Once again, this fact is due to the incorporation of the employees of Banco Nossa Caixa, which added a greater percentage of employees with "Higher Education" to the staff profile. Due to the countless incentives offered for the specialization of its staff, the percentage of employees with higher education and specialization, masters and doctoral degrees presented positive variation in relation to the previous quarter, surpassing 48.3% in the case of higher education and 21.8% in the case of employees with specialization, masters and doctoral degrees, against 48.9% and 21.6% in 1Q10. 158 - Banco do Brasil – MD&A 2Q10 2Q09 1Q10 30.5% 2Q10 29.3% 28.8% 48.9% 46.3% 0.5% 0.6% Elementary School 0.6% 21.6% 22.6% High School 48.3% 21.8% Bachelor's Degree Specialization, Master's or Doctorate Figure 71. Level of Education Besides the formal education of employees, Banco do Brasil invests in other types of training, providing presence and distance learning courses to its staff. A significant number of these courses is developed by the Corporate University of Banco do Brasil, which identifies knowledge and competences that the employees need to obtain to perform their duties at the bank. Other courses also provided are those related to the personal growth, social and environmental awareness, and incentives to voluntary work, among other theme areas considered important to the personal and professional experience of its collaborators. The total hours of training exhibited growth in 2Q10 in relation to the previous quarter, but is still slightly lower than the number presented in the same period of 2009. It is worth emphasizing the increase in the average number of employees, which went from 96,769 in 1Q10 to 101,031 in the current quarter, besides an increase in the average number of hours of training by employees. The increase in rates in relation to the previous quarter is due to the gradual growth of the involvement of the employees of Banco Nossa Caixa in the training programs and courses offered by the Bank. Table 127. Employees Training – Annual Flow 2Q09 Hours of Training**² 12,447,694 1Q10 2Q10 10,736,733 11,482,480 Total employees *¹ 87,545 96,769 101,031 Hours of training by employees**² 142.19 110.95 113.65 Employ ees w ith A nbid Certif ic ation – CPA 10 37,876 7,620 44,080 8,158 46,641 11,074 Employ ees w ith A nbid Certif ic ation – CPA 20 (1) As from the 4Q09 employees from BNC were included. (2) Indicator calculated based on data accrued over 12 months. Another highlight is the number of employees with Anbid certification, which exhibited growth in the two categories: CPA 10 and CPA 20. Banco do Brasil is the institution with the highest quantity of employees certified by ANBIMA. Since the start of the program, 57,715 employees have been certified, of which 46,641 under the basic mode and 11,074 under the advanced mode. Value Added to Employees Personnel Expenses in their diverse aspects comprise an important index of value added by the Bank to staff members. The table below shows the progress of these expenses in absolute terms and in average sums per employee. Not considering the consolidation of Banco Votorantim, personnel expenses rose to R$ 2,849 million in 2Q10. The average quarterly expense per employee increased 0.7% in relation to the 1Q10 and increased 6.2% in relation to the 2Q09 (when BNC's employees started to comprise the BB's staff). The 159 - Banco do Brasil – MD&A 2Q10 growth of personnel expenses in relation to the 2Q09 is due, basically, to the salary adjustment upon the collective bargaining and the increase in the number of employees of the Bank. Table 128. Quarterly Average Expenses per Employee (Income Statement with Reallocations) 2Q09 Personnel expenses (reallocated) – R$ Number of employees in the period Quarte rly Ave rage Expe ns e pe r Em ploye e – R$ 1Q10 2Q10 2,612,943,274.52 103,458 2,768,501,282.16 103,923 2,849,054,211.25 106,241 25,256.08 26,639.93 26,816.90 *The number of employees does not include interns. As of 1Q09, the number of employees of banks BESC and BEP was included. In the 2Q09, BNC's employees were included. As a manner of providing improved financial returns to collaborators and at the same time strengthening the commitment by everybody in the organization with the generation of consistent profits, Banco do Brasil has made efforts to constantly enhance its Statutory Profit Sharing - PLR. During 2Q10 the average sum provisioned for paying out to each employee reached R$ 3,275.67, decreasing 2.6% in relation to 2Q09. Table 129. Expenses with Statutory Profit Sharing 2Q09 Profit Distribution provisioned in the quarter – R$ Number of employees in the period Average PLR per Em ployee – R$ 1Q10 2Q10 299.823.039,70 89.194 307.567.037,30 103.923 348.010.517,34 106.241 3.361,47 2.959,57 3.275,67 (1) Accrued statutory profit sharing considered only for BB Multiple Bank Turnover of Staff Members The turnover rate, which measures the proportion of dismissals in relation to the mean headcount in the period, presented a slight decrease in relation to the previous quarter, yet continues slightly high in relation to the historical data. The rise of the rate is basically due to the corporate merger of Banco Nossa Caixa in the 2nd quarter of 2009. Many employees adhered to the Voluntary Resignation Plan, and these adhesions have been consummated in the last quarter, which contributed to the growth of the number of dismissals and resignations, hiking the turnover rate. With the finalization of the takeover process of Nossa Caixa, and consequent stabilization in the staff, it is expected that the rate will present gradual reduction up to the year end. Table 130. Employee Turnover 2Q09 Employee Turnover Rate¹ 1Q10 2Q10 1.05 1.29 1.20 No. Employees in Prior Quarter³ 89,534 103,971 103,923 No. Employees in Quarter³ 89,194 942 103,923 1,342 106,241 1,258 Terminations in Period² (1) Proportion of dismissals as compared to the average number of employees in the period (2) The concept of dismissals includes discharges, retirements, early retirements, deaths and leaves at the request of the employee (3) In 1Q09, the number of employees of the recent corporate merger of banks BESC and BEP and in 4Q09 of BNC. 160 - Banco do Brasil – MD&A 2Q10 9.2 Eco-efficiency The purpose of eco-efficiency is to produce more with less, using fewer natural resources and less energy in the productive process, reducing waste and operational costs. In publishing information on eco-efficiency, Banco do Brasil demonstrates the effort undertaken in the increasingly efficient use of natural resources and of energy, reflected not only in the environment, but also in the control of administrative expenses and in risk mitigation. To structure the indicators, we sought to relate the items that are being evidenced (i.e.: consumption of water and paper) with denominators that influence in a more direct way its fluctuation. For example, the use of water in Banco do Brasil's main buildings is intended mainly to meet the needs of its staff members, and hence we relate its use to the average number of employees per period. Under the same reasoning, the use of paper relates to the base of checking accounts. Annual Use of Water in the Main Buildings The ratio below refers to the use of water in Banco do Brasil's head office buildings. Head Office Buildings I, II, and III located in Brasilia concentrate a major part of Banco do Brasil's executive officers, in addition to support bodies. Water consumption observed in the head office buildings presented a slight increase in relation to the previous quarter. However, in relation to the same period of 2009, the figures presented were lower. Water consumption by employee presented a significant reduction, reaching the value of 18.8m³ in 2Q10, as opposed to 23.6m³ in 2Q09. In spite of increase in the number of employees in the Head Office Buildings, water consumption has been kept stable during the quarter. Table 131. Use of Water 2Q09 Use of Water in the Main Building (m³) Employees in Main Buildings I, II, and III (average) Us e of Wate r (m ³) / Em ploye e s * 1Q10 2Q10 127,530 5,407 124,025 6,111 124,459 6,633 23.6 20.3 18.8 *Calculated based on data accrued over 12 months. White Paper – Annual Use Banco do Brasil has also implemented several measures to reduce the use of paper. Corporate systems were adapted to print preferably double-sided, there were employee awareness campaigns, and customers are encouraged more and more to make use of automated channels which do not involve the use of paper. Paper consumption exhibited a small increase in 2Q10 in relation to the previous quarter due to seasonal factors and also the Public Offering process held by BB. However, in comparison with the same period of 2009, the absolute consumption and the consumption by client are lower, showing an advance of efficiency in the use of the resource. Table 132. Use of Paper 2Q09 Paper Consumption (tons) Checking A ccount Base (average) Cons um ption pe r Cus tom e r (gr)¹ (1) Calculated base on data accrued over 12 months Automated Transactions without the Use of Paper 161 - Banco do Brasil – MD&A 2Q10 1Q10 2Q10 3,380 30,594,788 3,276 31,653,435 3,328 31,767,855 110.5 103.5 104.8 As informed in the preceding item, Banco do Brasil has invested in new channels for processing transactions and for doing business with its customers. There is growing trend to employ channels that do not involve printing and, therefore, do not consume paper. Among such channels, we may point out the Internet, Customer Assistance, and Mobile Banking. There was a slightly reduction in the use of these channels in the quarter, attaining 41.8%, against 42.4% in 1Q10. It is worth emphasizing the consolidation of the initiative DDA - Authorized Direct Debit, an option that allows the client to register as an electronic payer, avoiding the need for issuance of paper bank payment slips. BB is a leader in the DDA service, and reached this position because it started providing this service for customers even before it was launched by the Brazilian Bank Federation (Febraban). 39.8% 3Q08 38.6% 4Q08 40.0% 1Q09 42.6% 2Q09 44.6% 40.1% 3Q09 4Q09 Automated Transactions w ithout use of paper Figure 72. Transactions without Use of Paper 162 - Banco do Brasil – MD&A 2Q10 42.4% 1Q10 41.8% 2Q10 Use of Toner The use of toner is another potential creator of residues related to printing documents. Banco do Brasil already uses 100% of reconditioned cartridges, and has concentrated efforts to reduce the use of this kind of material. The consumption of toner exhibited an increase of 6.0% in comparison with the previous quarter. This increase originates from seasonal factors, but also from the Public Offering process held by the Bank. Due to the Offering, the distribution network had a greater volume of contracts to be printed for adhesion by shareholders, contributing to the increase in the consumption of toner and of white paper. Another specific factor, which tends to gradually impact toner consumption, is the corporate merger of the distribution network of Banco Nossa Caixa. The effects have already begun to be felt in 2Q10, and may cause an increase in consumption for the coming quarters. Strategic measures to optimize the consumption of these resources have been gradually implemented. Customers’ accession to DDA (Authorized Direct Charge) will gradually lead to a decline in the use of paper and toner, as there will be an increased use of this service by customers and the printing of bank collection vouchers will be reduced. 26,378 24,549 23,096 3Q08 22,398 4Q08 24,856 23,449 22,857 21,653 1Q09 2Q09 3Q09 Toner Consumption Figure 73. Toner Consumption – in units 163 - Banco do Brasil – MD&A 2Q10 4Q09 1Q10 2Q10 9.3 Social Environmental focused Business Banco do Brasil, with its concern for contributing to the improvement in the quality of life of the society and preserve the environment, carries out businesses that support the sustainable development of the country. Accordingly, the Bank offers environmentally and socially responsible products and services and designs business approaches intended to foster the sustainable development of the Brazilian regions in which BB operates. Expanding business performance in activities and projects with positive socio-environmental impact, including those that favor low carbon economy, is one of the corporate drivers of BB that guides its strategic actions. Reconciling business goals with concerns relating to environmental preservation, to respect for diversity and the reduction of social inequalities, Banco do Brasil is striving to become a reference in sustainable businesses. Sustainable Regional Development - DRS Sustainable Regional Development (DRS) is a business strategy through which Banco do Brasil seeks to drive sustainable development, by mobilizing the agents of economic, social, and political activities in order to support productive activities that are economically feasible, socially fair, and environmentally correct. In order to implement DRS, Banco do Brasil's traditional credit facilities are extended, such as microcredit loans, on-lending (such as Proger), or other facilities with unrestricted funds intended for individuals and businesses. DRS creates returns for the Bank, from a social as well as an economic viewpoint: it provides the opening of new checking accounts and the expansion of the loan portfolio, besides allowing the loyalty enhancement of a customer base that tends to have growing business potential. The concept of "Beneficiaries - DRS" underwent a reformulation in 1Q10, substituting the previous term "DRS - Covered Families". Accordingly, the result of 1Q10 underwent a reduction of around 9.7% in relation to 4Q09. For 2Q10, it is possible to observe an increase of 6.2% in the number of beneficiaries served, with maintenance of growth expected in the next few quarters. It is also worth emphasizing the financial volume of business, which presented growth of 19.0% in relation to the prior quarter. The innovative character in sustainable finance and the social-environmental extent of the initiative were attested by the United Nations University, which stated the following in its report: "In our knowledge, the Sustainable Regional Development strategy is the first initiative promoted by a financial institution that includes sustainable development principles as the basis of its methodology and practice of implementation, and follows them systematically." (...) BB proved that combining legitimate economic profitability with a high level of social responsibility represents a new, solid and definitively necessary method of doing business. (...) The Program deserves to be continued and reinforced, and in our opinion, contains elements and acquired experience that could be applied successfully in other countries". Table 133. Sustainable Regional Development (DRS) 2Q09 1Q10 2Q10 DRS - Transactions Concluded (R$ millions) 5,858 7,049 8,388 DRS - Scheduled Loans (R$ million) 5,355 4,852 4,904 Business Plans in implementation 4,612 3,630 3,664 1,188,749 140,522 901,778 156,199 957,388 189,093 DRS Benef iciaries ¹ Bank A ccounts opened in DRS assisted communities ² 1 As from the 1Q10, the concept of “Covered Families” was replaced by “Beneficiaries – DRS” 2 Accrued Position. Monitoring begun as of 2008 164 - Banco do Brasil – MD&A 2Q10 Microcredit Microcredit consists in low volume loan transactions, normally aimed at low-income groups that do not have access to conventional credit facilities. Law 10,735/03 regulates the concession of loans to the low income population and refers to the allocation of funds corresponding to 2% of the demand deposits obtained by the financial institutions for microcredit operations, at a rate of up to 2% per month. Banco do Brasil is one of the major players in the market agents in micro-finance. The distribution channels of the loan lines are the branches of Banco do Brasil and the banking correspondents network (of BB itself and those previously related to Banco Popular do Brasil). The micro-credit loan portfolio ended 2Q10 with R$ 1.1 billion, an increase of 20.3% over the preceding quarter, and of 101.5% as compared to the same period in 2009. This growth is explained by the review of BB operation model in this segment, as well as the review of lendings and management methodologies. Table 134. Microcredit Operations 2Q09 Microcredit - Portf olio (R$ thousands) Loans in Period - (R$ thousand) Number of A greements in Portf olio 1Q10 2Q10 519,335 870,155 1,046,420 153,059 1,166,198 363,504 1,212,670 350,689 1,274,796 Family Agriculture - Pronaf Banco do Brasil is the country's largest lender to family-run Agriculture. Besides performing the social role of supporting small producers and the generation of income in the rural zone, PRONAF enables the Bank to prospect new customers, generate new income and seek new business based on the increase in the loyalty of these customers. The PRONAF portfolio ended 2Q10 at R$ 19,998 million, reflecting a growth of 5.9% in the quarter and of 20.5% as compared to the same period in the previous year. 19,998 18,880 18,279 17,645 16,597 15,088 15,545 13,955 Sep/08 Dec/08 Mar/09 Jun/09 Figure 74. PRONAF Portfolio/Proger Rural (R$ million) 165 - Banco do Brasil – MD&A 2Q10 Sep/09 Dec/09 Mar/10 Jun/10 RSA Loans – Other Programs In addition to the programs already described, Banco do Brasil supports the organic foodstuffs activity (BB Produção Orgânica) and forest production (BB Florestal). The total amount invested in these two lines was R$ 605.9 million at the end of the quarter, representing an increase of 4.7% as compared to the previous quarter and of 19.7% over 2Q09. Table 135. RSA Loans - Other Programs R$ million BB Florestal 2Q09 1Q10 2Q10 BB Produção Orgânica 492.3 13.8 621.1 14.4 591.5 14.3 TOTAL 506.2 635.5 605.9 In the concession of loans to companies there is compliance with the criteria and rules defined by the Bank and by the financial authorities, as well as the fulfillment of social and environmental requirements such as those contained in the Equator Principles and in the Global Pact, rules to which the Bank voluntarily adhered. BB also verifies whether the loan proponents are included in the list of the Department of Labor and Employment which identifies companies that submit their employees to degrading forms of labor or slave labor. Other Business with Social and Environmental Attributes Banco do Brasil offers its customers two alternatives of investment funds that adopt RSA criteria. The BB Ações ISE portfolio is comprised of companies that form the theoretical portfolio of the Business Sustainability Index - ISE. BB Referenciado DI Social 50 allocates 50% of its management fees, via Fundação Banco do Brasil, to social programs. The equity of the two funds reached R$ 77.6 million in the 2Q10, an increase of 1.7% in the quarter, and of 48.1% over 2Q10. Table 136. Investment Funds with RSA criteria R$ million BB A ções ISE 2Q09 1Q10 2Q10 BB DI Social 50 20.5 31.9 27.0 49.3 23.0 54.6 Total 52.4 76.3 77.6 166 - Banco do Brasil – MD&A 2Q10 Long-Term Relationship – Quality in Customer Service The table below shows the share of complaints registered by Banco do Brasil’s customers at the Central Bank of Brazil - Bacen, as compared to total complaints in the Financial System. These data refer to banks with over one million customers in their portfolios. The ratio which measure valid complaints recorded by BB customers with the BACEN increased in the quarter. This up trend can be explained by the absorption of the customers basis of Nossa Caixa and the expansion of Banco do Brasil’s own base, which contains more than 50 million clients. Another point that contributed to the increase in this ratio is the fact that the judgment of proceedings by BACEN does not occur in an exactly linear manner, which means that in a few months time there is concentration of the judgment of suits of a given Bank, as occurred in 2Q09. Despite understanding that certain factors contribute to the fluctuation in indicators, Banco do Brasil continues to work toward improving the quality of service, assessing the need for a revision of the organizational and business model and taking one-off measures with respect to branches where there have been sharp drops in the indexes that measure the service quality. Furthermore, in the first half the Bank deployed the programs Atendimento de Excelência (Customers Assistance of Excellence) and BB 2.0, increasing the number of employees per branch and improving the profile of jobs and salaries for its employees. As a result, it is expected that the rate of claims at BACEN will record reductions in the coming quarters. Table 137. Complaints Registered in the Central Bank of Brazil 4Q08 Complaints of BB registered at Central Bank Total complaints regis tered at Central Bank Customer Base (million)¹ Complaints / Customer Bas e² Complaints BB / Total Central Bank 1Q09 2Q09 3Q09 1Q10 2Q10 498 1,137 327 442 450 794 8,173 7,829 4,020 1,771 1,455 1,392 1,990 47.0 47.2 53.5 54.2 52.7 53.5 53.3 1.5 8.9% 1.1 6.4% 2.1 28.3% 0.6 18.5% 0.8 30.4% 0.8 32.3% 1.5 39.9% (1) Since 1Q09 the table includes BESC and BEP customers. BNC customers were included in 2Q09 (2) ((Number of Complaints) / (Number of Customers)) x 100.000 167 - Banco do Brasil – MD&A 2Q10 4Q09 724 9.4 Investor Market Recognition Besides having a representative share in the Ibovespa, BB participates in the following indexes in the São Paulo Stock Exchange: Differentiated Tag Along Share Index - ITAG; Differentiated Corporate Governance Share Index - IGC; and Corporate Sustainability Index - ISE. The objective of ITAG is to measure the performance of the companies that offer better terms to minority shareholders, in the case of sale of control. The portfolio is composed of shares that grant tag along rights in excess of 80% to minority common shareholders. The Bank, as a participant of the Novo Mercado (New Market) of BOVESPA, highest degree of Corporate Governance level of the exchange, grants 100% of tag along to minority shareholders. IGC's purpose is to measure the behavior of shares of companies with good levels of corporate governance and those listed in the Novo Mercado or in Corporate Governance levels 1 and 2 in BM&FBOVESPA. ISE comprises the companies with best corporate governance and socio-environmental responsibility practices of BM&FBOVESPA, which is renewed annually by the application of questionnaires and evaluation of documents. Banco do Brasil has been part of the Index since its creation, in the year 2005. In July 2010, Banco do Brasil was selected to compose the Emerging Markets Global Fund portfolio of the British F&C asset management company. The fund is constituted by shares from companies which contribute to sustainable development in emerging markets, demonstrate the adoption of good practices and standards, corporate governance and manage impacts generated by their operations as regards social and environmental aspects. 3.8 3.2 3.1 3.1 3.1 3.2 3.4 3.6 3.0 2.2 1.2 1 2 ISE 3 ITAG IGC For ITAG/IGC: 1 – Jan to Apr/09; 2 – May to Aug/09; 3 – Sep to Dec/09; 4 – Jan to Apr/10 For ISE: 1 – Dec06 to Nov07; 2 – Dec07 to Nov08; 3 – Dec08 to Nov09; 4 – Dec09 to Nov10 Source: Bovespa Figure 75. Share of BBAS3 in ISE, ITAG, and IGC 168 - Banco do Brasil – MD&A 2Q10 4 3.2 10 - Strategic Investments 10.1 Information Since 1Q08, the non-financial companies of the insurance, pension plan and savings bonds segment and other activities began to be included in the consolidated statements of Banco do Brasil. Table 138. Interests in the Capital of Companies R$ thous and Book V alue 06.30.09 Book V alue 06.30.10 Equivale nce Re s ults 1H10 Activity Share 06.30.10 A ss et Management 100% 130,143 129,829 217,955 Inv es tment Bank 100% 1,896,769 732,911 469,592 Financial Activity - Countr y BB Gestão de Recursos - Dis trib de Tít. e V al. Mobiliários S.A . BB Banc o de Investimento S.A . BB Banc o Popular do Brasil S.A . Banking - 17,803 - 1,768 BB Leasing S.A . - A rrendamento Mercantil Leasing 100% 30,087 35,861 10,019 BESC Distribuidora de Títulos e V alores Mobiliários S.A . A ss et Management 99.62% 7,916 9,921 181 BESC Financ eira S.A . - Crédito, Financ iamento e Investimentos Credit and Financ ing 99.58% 18,761 - 414 141 BESC Leas ing S.A . – A rrendamento Mercantil Leasing 99% Banco Noss a Caixa S.A . Multiple Bank - Banco V otorantim S.A . Multiple Bank 50% 19,367 - 5,557,589 - - - 4,318,866 181,206 Financial Activity – Abr oad Banco do Brasil – A g. V iena Banking 100% 240,938 199,224 BB Leasing Company Ltd. Leasing 100% 82,773 78,080 (21,489) 3,299 BB Securities LLc . A ss et Management 100% 10,534 21,701 4,473 BB Securities Ltd. A ss et Management 100% 82,773 78,080 708 Bras ilian A meric an Merchant Bank – BA MB Banking 100% 1,023,696 1,005,156 30,721 BB USA Holding Company, Inc Holding 100% 3,834 2,757 Ins uranc e Company 100% Ins ur ance , Pe ns ion and Savings Bonds BB Seguros Participações S.A . BB A lianç a Partic ipaç ões Ins uranc e Company 100% Seguradora Bras ileira de Crédito à Exportaç ão – SBCE Ins uranc e Company 12.09% Nos sa Caix a Capitalização S.A . Ins uranc e Company Mapf re Noss a Caixa V ida e Previdênc ia S.A . (775) - - - - 603,735 184,670 - 1,051,146 225,138 2,222 2,430 221 100% - 5,574 98 Ins uranc e Company 49% - 76,164 32,285 - - - A tiv os S.A . Credit A c quis ition 100% 59,681 575,089 44,512 BB A dminis tradora de Cartões de Crédito S.A . Serv ic e Rendering 4,610 Othe r Activitie s 100% 25,079 25,848 100% - 10,615 251 100% 16,920 16,920 26,835 Brokerage 100% 78,526 91,197 57,649 IT 99.39% 2,840 8,283 (36,461) Nos sa Caix a S.A . - A dministradora de Cartões de Crédito BB A dminis tradora de Consórcios S.A . BB Corretora de Seguros e A dministradora de Bens S.A . Cobra Tec nologia S.A . Cons ortiums Cia. Brasileira de Soluç ões e Serviços CBSS – V is av ale Serv ic e Rendering 40.35% 39,755 66,031 17,452 Cielo S.A Serv ic e Rendering 23.61% 128,762 270,830 211,531 Kepler Weber S.A . Indus try 17.57% 29,178 30,347 Neoenergia S.A . Energy 11.99% 1,028,441 1,166,455 Cadam S.A . (39) 71,467 Mining 21.64% 46,903 44,888 Sanitation 16.19% 2,077 2,159 Cia. Catarinense de A s sess oria e Serviços - CCA Serv ic e Rendering 48.13% 227 228 Companhia Bras ileira de Sec uritização – Cibras ec Credit A c quis ition 3.03% - 2,158 Tec nologia Bancária S.A . – Tecban Serv ic e Rendering 4.51% - 7,614 448 Holding 50% - 45,632 15,965 Serv ic e Rendering 100% 2,836 3,104 Cia. Hidromineral Piratuba BV Participações S.A . BB Money Transf ers, Inc 169 - Banco do Brasil – MD&A 2Q10 (1,443) 72 (19) (400) 10.2 Income from Insurance, Pension and Savings Bonds The insurance income statement is also disclosed in Explanatory Notes (NE) for this quarter, NE 21. There a few differences between these figures and those shown in this chapter, as explained below. The information contained in the mentioned NE was prepared in accordance to the guidance found in CVM Resolution # 582/2009 (CPC 22), based on the requirement of individualized financial information. The amounts were calculated considering the book balances of Aliança do Brasil; Brasilveículos; Brasilprev; Brasilcap; Brasilsaúde; SBCE - Seguradora Brasileira de Crédito à Exportação; BB Corretora; BB Seguros Participações; BB Aliança Participações and Nossa Caixa Capitalização. The insurance ratio shown in this chapter includes the performance added by five companies in the Conglomerate active in strategic retirement plan segments. Aliança do Brasil; Brasilveículos; Brasilprev; Brasilcap and Brasilsaúde. The net profits of these companies (in proportion to BB's interests in the capital of each) are added to the net brokerage revenues earned by BB Corretora and to the net fees earned from insurance business of BB Banco Múltiplo. The restructuring process for the insurance area, under implementation by Banco do Brasil, is focused on re-designing the corporate structures of the companies in which the Bank has participation, by means of its wholly-owned subsidiaries BB Seguros Participações and BB Aliança Participações. This process is intended to strengthen Banco do Brasil's activities in the sector and to optimize the contribution of the Insurance Income in the Conglomerate's Income Statement. On April, BB Seguros and the Principal Financial Group of Brazil reviewed their strategic partnership in developing and commercialization of private pension plans in Brazil. Due to this agreement, Principal acquired a 4% shareholding participation in Brasilprev held by Serviço Brasileiro de Apoio às Micro e Pequenas Empresas - SEBRAE. In addition, Brasilprev retained its exclusiveness to commercialize its private pension services in the current BB distribution channels until October 2032. On the other hand, BB Seguros will hold 74.995% of Brasilprev's total equity capital, in accordance with the following breakdown of equity interests. Under this partnership, BB expects to consolidate an association between BB Seguros, a wholly-owned subsidiary of BB that owns the country's largest number of points of service, and Principal, the owner of a vast experience in the international market and with 18.9 million customers by means of offices in Asia, Australia, Europe, Latin America, besides the United States. In May of 2010, BB Seguros and Sul América signed a Purchase and Sale Agreement to acquire all the shares of Sul América (60% of common registered shares) in Brasilveículos by BB Seguros. The price stipulated for the business is R$ 340 million. The transaction is subject to analysis and approval of respective regulatory, overseeing and inspecting agencies, in accordance with the applicable legislation. Lastly, the Contract of Purchase and Sale for the sale of all the shares held by BB Seguros was established (49.92% of the total capital) in Brasilsaúde Companhia de Seguros to Sul América Seguro Saúde S.A. The transaction's final price on July 8, 2010 when the agreement was settled, was of R$ 29.2 million. The table below details the holdings in the total capital and business line of each of these companies as of June 2010. 170 - Banco do Brasil – MD&A 2Q10 Table 139. Insurance, Pension Plans and Savings Bondsans Com pany Cia. De Seguros A liança do Brasil S.A . Shar e % Bus ine s s 100.00 Health and Other A ctivities Par tne r s hip - Brasilprev 74.99 Pension Principal Financial Group BrasilV eículos Cia de Seguros 70.00 V ehicle Sul A mérica Seguros Brasilcap 49.99 Savings Bonds Icatu Hartf ord, Sul A mérica e A liança da Bahia Brasilsaúde 49.92 Health Sul A mérica Seguros Performance and Market During the 1st quarter of 2010, the insurance market kept pace well with the Brazilian economy and grew by 16.7% as compared to the same period in 2009, according to data from SUSEP. Total volume of premiums raised to the R$ 40.9 billion. Another positive aspect was the decline in the average incident rate from 53% to 51%, with retained claims adding up to R$ 11.2 billion. In the private pension market, excluding the VGBL line, total contributions dropped by 14.8%. Total provisions by companies in the business rose by 12.5% and totaled R$ 83.7 billion. The VGBL line is stated by SUSEP in the insurance market data. The total number of participants in this industry rose to 17.2 million, including here the VGBL line. PGBL and VGBL plans currently account for roughly 50% of participants. The remainder continues under the traditional plans. Savings bonds on the other hand, accounted for R$ 5.7 billion in premiums, a 21.9% increase as compared to 1H09. Provisions rose to R$ 16.0 billion, a 14.8% increase. Consolidated The consolidated income of the BB insurance companies totaled R$ 430.1 million, a 25.3% rise as compared to the same period of last year. It may be seen in the following table that the insurance area (Automobile, Health, Life and Casualty) accounted for 55% of the total, while Pension Plans contributed with 32.1% and Savings bonds with 12.9%. 171 - Banco do Brasil – MD&A 2Q10 Table 140. Insurance Income Statement by Line of Business 1H10 R$ thousand Ins ur ance Auto He alth Re v. fr om Ins ur ance Pe ns ion Plans and Savings Bonds 779,970 Life and Othe r Pe ns ion Plans Total Chg. % Savings Bonds Cons olidate d On 1H09 105,534 1,068,945 1,954,449 3,983,283 1,311,517 7,249,249 37.7 Retained Insurance Premiums 779,970 105,534 1,068,945 1,954,449 - - 1,954,449 27.4 Revenues f rom Pension Plans - - - - 3,983,283 - 3,983,283 50.6 Revenues f rom Savings Bonds - - - - - 1,311,517 1,311,517 20.9 (1,137,531) (5,070,706) 42.9 Change s in Te chnical Pr ovis ions Insurance Pension Plans (68,436) (142) (10,654) (79,231) (68,436) (142) (10,654) (79,231) - - - - Savings Bonds - - - - Be ne fits and Re de m ption Expe ns e s - - - - Capitalization Bonds Pr e s cr iption Ear ne d Pr e m ium s Re taine d Claim s M ar k e ting Expe ns e s Insurances Pension Plans Savings Bonds Othe r Ope r ating Incom e (Expe ns e s ) (3,853,944) (3,853,944) (109,832) - (79,231) 30.6 - (3,853,944) 52.2 (1,137,531) - (1,137,531) 19.1 (109,832) 17.9 - - - - - 1,319 1,319 711,534 105,391 1,058,292 1,875,217 - - 1,875,217 (490,216) (90,158) - - (308,309) (888,683) (82,539) (7,308) (283,723) (373,569) (82,539) (7,308) (283,723) (373,569) - - - - - - - - (53,280) (53,280) (100,040) - - (100,040) (888,683) 29.0 27.3 23.6 (526,889) 20.3 (373,569) 16.8 (53,280) 38.4 (100,040) 25.6 (41,874) (6,744) (124,632) (173,250) 216,531 (14,132) 29,149 96,906 1,181 341,627 439,714 182,759 61,133 683,607 31.9 Adm inis tr ative Expe ns e s (87,959) (8,305) (51,901) (148,165) (104,560) (29,129) (281,854) 17.1 Tax Expe ns e s (17,130) (86) 13.5 Bus ine s s Re s ult Financial Incom e Financial Revenues Financial Expenses Ope r ating Incom e (36,030) (53,247) (8,520) (61,766) 36,252 3,062 43,011 82,325 154,735 68,566 305,627 (6.3) 43,340 3,498 100,924 147,763 1,139,432 213,092 1,500,286 (4.0) (144,525) (1,194,659) (7,087) 28,070 (436) (4,148) (57,914) (65,437) (984,696) 296,707 320,628 232,935 Equity Account Adjus t 18 - 1,546 1,564 Non-ope r ating Incom e (31) - 73 42 Incom e be for e Taxe s Income and Social Contribution Taxes Prof it Sharing Ne t Incom e (Los s ) Ave r age Shar e holde r 's Equity ROE (Annual) - (44.2) (55) (3.4) 92,050 645,613 17.6 - 1,564 (21.5) 122 108 (93.3) 28,057 (4,148) 298,326 322,234 232,879 92,172 647,286 (10,779) 1,242 (72,148) (81,685) (91,295) (36,667) (209,647) 3.7 (2,510) 659 (2,208) (4,059) (3,469) (7,527) 5.4 - 14,768 (2,247) 223,969 236,491 138,116 55,505 430,111 326,571 45,661 564,076 936,308 428,586 142,512 1,507,405 95.2 56.9 74.8 93.1 65.2 9.2 (9.6) 17.1 25.3 Company’s Performance Except for specific terms, the present analysis refers to the performance in the second quarter of 2010 versus the first quarter of this year. Aliança do Brasil Aliança do Brasil ended the semester with 3.6 million insurance policies issued, a 53.4% increase and a 2 p.p. gain in market share. This increment is explained by the increased marketing of “Seguro Prestamista” and “BB Seguro Vida”, the latter directed at the lower income public. This strategy has allowed the company to rise to third place in the SUSEP ranking of policies issued. Despite the delay in disbursing farming subsidies by the government, the company kept its leading position in agricultural insurance with a 39.8% share. Moreover, the coming of the winter harvest has increased the need for correlated insurance, boosting the sale of these services. A conjunction of the above factors gave rise to a 25.2% growth in retained premiums. The low incident rate in the Company's portfolio jointly with a good operating and financial management, gave rise to net income of R$ 224.0 million, a 53.9% increase. 172 - Banco do Brasil – MD&A 2Q10 Brasilcap Brasilcap was 15 years old in July and leads the SUSEP rankings, in billings as well as in provisions. It currently has a portfolio with 11 kinds of plans, subdivided into seven with monthly payments (PM) and four with one sole payment (PU). The effort to keep ahead of the competition led the company to exceed its billing record on two occasions: In March (R$ 237.4 million) and in May (R$ 239.0 million), rising to a total of R$ 1.3 billion, a 20.9% increase. Technical reserves with an 18.0% increase, rose beyond R$ 3.8 billion or equal to 3 p.p. above the market's growth. Owing to this performance the Company made R$ 55.5 million in Net Income, or an 8.0% growth. Brasilprev In the wake of the performance of the VGBL line, Brasilprev's revenues rose to R$ 3.98 billion, a 50.6% increase. This took the company to 2nd place in Fenaprevi's ranking of total revenues. The company's strategy for retaining customers continues successful: the rate of redemptions retreated by 0.3 p.p. and the company's is the lowest rate among the industry's large businesses. The managed portfolio increased 32.3%, totaling R$ 30.8 billion. Brasilprev continues to hold 3rd place in reserves. The expanded portfolio jointly with the company's financial management, led to a 7.7% rise in financial income. The good operational and financial results have had direct impact on net income, increasing by 19.5%. According to agreement entered into with Principal Finance Group - PFG, on 04/30/2010, Brasilprev increased its capital, which was fully paid-up by the members, in a proportion equivalent to their interests, in the amount of R$ 118.0 million. At the beginning of July, 50.0% was fully paid-up, BB Seguros having disbursed R$ 44.2 million, and PFG R$ 14.8 million. The remaining payment shall occur no later than within 12 months. Upon the company's corporate restructuring, Banco do Brasil's interest increased from 49.9892% to 74.995%, generating an additional gain in equity accounting of R$ 10.5 million (+15.2%). Brasilsaúde Supported by independent brokers in sales strategy, Brasilsaúde had an increase of 67.8% in the number of customers of the odonthology portfolio. With respect to billing, the Company exceeded the mark of R$ 105 million in retained premiums, representing a growth of 6.9%. In view of the well succeeded vaccination campaign against H1N1 influenza, the influenza epidemic scenario having occurred in 2009 winter has not repeated itself this winter. However, respiratory diseases, typical of this season, have sensitized the company's causality, causing the company to record a combined index of 100.4%. The good financial and administrative management was not sufficient to revert the loss shown by Brasilsaúde, accounting for a negative income of R$ 2.2 million. Brasilveículos Brasilveículos ended the semester with a retained fleet of 1.1 million vehicles, a growth of 8.7%. The performance of the auto portfolio caused the company to reach a retained premium of R$ 780.0 million (+34.1%), placing the company among the five largest vehicle insurers of the country, according to SUSEP ranking. In the first six months of the year, the loss ratio impact of 5.8 percent higher resulted in a growth of 37.3% of retained claims, totalizing R$ 490.2 million. Therefore, the combined index increased to 95.3%, causing net income of the company to decrease by 57.5%, to R$ 14.8 million. 173 - Banco do Brasil – MD&A 2Q10 Insurance Ratio The Insurance ratio reflects the participation of insurance business in the result of Banco do Brasil, insurance, social security and savings bonds companies, that is, how much these segments added to the Conglomerate's final income. Table 141. Consolidated Insurance Ratio R$ million 1Q09 Insurance Result 2Q09 3Q09 4Q09 1Q10 2Q10 217.2 282.0 252.6 240.4 298.5 297.7 Brokerage Net Revenue 60.1 56.9 63.2 60.9 73.3 75.5 Service Fee Net Income 46.5 45.3 48.7 48.2 53.5 52.4 110.6 179.8 140.6 131.3 171.8 169.8 1,523.1 1,726.7 1,763.9 1,819.0 2,055.6 2,327.1 14.3 16.3 14.3 13.2 14.5 12.8 Equity In The Earnings (Loss) BB Recurring Income Insurance Ratio (%) Insurance Ratio (%) 16.3 14.3 13.2 14.5 12.8 171.8 169.8 53.5 52.4 60.9 73.3 75.5 4Q09 1Q10 2Q10 179.8 140.6 131.3 45.3 48.7 48.2 56.9 63.2 2Q09 3Q09 Brokerage Net Revenue R$ million Service Fee Net Income R$ million Equity In The Earnings (Loss) R$ million Insurance Ratio (%) Figure 76. Change of the Insurance Ratio 174 - Banco do Brasil – MD&A 2Q10 Table 142. Insurance Ratio by Segment R$ thousand Life and P&C 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 120,043 163,163 140,730 151,977 182,292 181,297 Brokerage net rev enue 39,427 37,838 40,515 40,845 48,900 49,241 Serv ic e Fee net inc ome 21,709 19,298 21,242 21,341 21,794 18,516 Equity in the earnings (los s ) 58,906 106,028 78,973 89,792 111,598 113,540 Social Se cur ity Re s ult 36,965 54,836 61,216 45,372 55,965 60,148 Brokerage net rev enue 2,632 2,570 5,289 2,648 3,825 3,824 Serv ic e Fee net inc ome 9,843 11,561 13,126 14,377 14,576 14,303 24,489 40,705 42,802 28,347 37,564 42,021 20,559 31,159 22,554 18,993 21,033 22,399 Brokerage net rev enue 13,905 12,810 13,995 14,446 16,032 17,168 Serv ic e Fee net inc ome - - - - - - 6,654 18,349 8,559 4,547 5,001 5,231 Equity in the earnings (los s ) Auto Re s ult Equity in the earnings (los s ) He alth Re s ult 284 (698) (322) 466 947 (1,054) Brokerage net rev enue 465 422 398 356 420 625 Serv ic e Fee net inc ome - - - - - - (181) (1,120) (719) 110 528 (1,679) Savings Bonds Re s ult 39,366 33,589 28,382 23,564 38,301 34,875 Brokerage net rev enue 3,667 3,275 3,035 2,595 4,106 4,637 Serv ic e Fee net inc ome 14,933 14,432 14,370 12,478 17,108 19,600 Equity in the earnings (los s ) Equity in the earnings (los s ) 20,767 15,881 10,977 8,490 17,088 10,638 Total Ins ur ance Re s ult (A) 217,217 1,523,105 282,049 1,726,689 252,561 1,763,909 240,371 1,819,008 298,538 2,055,631 297,665 2,327,118 14.3 16.3 14.3 13.2 14.5 12.8 BB Re cur r e nt Re s ult (B) Total Ins ur ance Ratio % (A/B) 175 - Banco do Brasil – MD&A 2Q10 Combined Ratio The combined ratio, which expresses the percentage of earned premiums that is consumed by operating expenses in the insurance business (retained claims, marketing expenses, and administrative expenses), closed the second quarter at 73.3%. In the following graphs, we can notice index evolution during the quarters: Consolidated 77.7 78.3 77.6 Health 75.2 73.3 105.6 106.0 97.3 92.1 265.6 232.5 248.4 256.5 266.8 382.6 388.6 759.4 806.0 845.0 2Q09 3Q09 4Q09 357.7 426.7 920.3 90.5 90.8 7.2 7.3 7.2 46.0 44.3 42.1 42.3 47.8 49.7 52.8 53.7 52.1 53.3 2Q09 3Q09 4Q09 1Q10 2Q10 61.1 60.6 171.4 164.2 149.0 159.3 426.7 931.9 1Q10 2Q10 93.8 96.7 Life and P&C 66.6 67.9 66.9 100.7 87.0 73.4 82.3 94.6 158.9 164.9 135.8 148.6 149.9 152.4 235.3 8.4 6.6 Vehicle 90.0 95.0 254.9 189.7 196.6 452.7 533.8 343.7 367.8 524.4 320.8 470.5 300.6 432.8 277.0 2Q09 3Q09 4Q09 1Q10 2Q10 2Q09 3Q09 4Q09 1Q10 2Q10 175.9 Earned Premiums Administrative Expenses / Marketing Figure 77. Combined Ratio 176 - Banco do Brasil – MD&A 2Q10 Claims Combined Ratio Table 143. Operating Highlights of the Insurance Group Chg. % Jun/09 Mar/10 Jun/10 On Jun/09 On Mar/10 Aliança do Brasil Lives Insured – thousand 2,373 2,226 3,640 53.4 Volume of Managed Portfolio 1,270 1,488 1,464 15.3 (1.6) Technical Reserves 1,009 1,122 1,108 9.8 49.9% 23.3% 39.8% -10.1 p.p. (1.2) 16.5 p.p. 1.7 p.p. Market share - rural line - % Market share - life line - % 9.1% 10.6% 10.8% Rural line position 1º 1º 1º Life line position 4º 3º 3º 63.5 0.2 p.p. Brasilcap Quantity of Bonds – thousand 3,009 3,168 3,267 8.6 3.1 Volume of Managed Portfolio 3,488 3,899 4,085 17.1 4.8 Quantity of Prize-w inning Bonds Sum of Prizes Distributed Technical Reserves - R$ million 7,543 6,191 5,644 (25.2) (8.8) 14,482 24,708 20,135 39.0 (18.5) 3,296 3,729 3,888 18.0 Market share - collection - % 23.0% 22.5% 23.0% 0.0 p.p. 4.3 0.5 p.p. Market share - reserves - % 23.4% 22.9% 24.2% 0.8 p.p. 1.3 p.p. Brasilprev Rate of Redemptions - % 7.3% 7.0% 7.0% -0.3 p.p. 0.0 p.p. Active agreements - thousands 2,886 3,406 3,524 22.1 3.5 Volume of the Managed Portfolio - R$ million 23,284 28,982 30,805 32.3 6.3 Technical Reserves - R$ million 22,838 28,618 30,427 33.2 Market share - collection - % 15.8% 20.6% 20.1% 4.3 p.p. 6.3 -0.5 p.p. Market share - reserves - % 1.1 p.p. 0.10 p.p. 14.5% 15.5% 15.6% Collection Ranking 3º 3º 2º Reserves Ranking 3° 3° Lives Insured 114,237 101,108 101,356 (11.3) 0.2 Help Insured 105,458 86,484 86,628 (17.9) 0.2 8,779 14,624 14,728 67.8 0.7 Volume of the Managed Portfolio - R$ million 57 58 55 (3.5) (5.2) Technical Reserves - R$ million 37 35 41 10.8 17.1 Fleet – thousand 971 1,021 1,055 8.7 3.3 Volume of the Managed Portfolio - R$ million 665 683 666 0.0 (2.6) Technical Reserves - R$ million 961 1,032 1,071 11.5 3.8 -2.50 p.p. 0.4 p.p. 3° Brasilsaúde Dental Insured Brasilveículos Rate of Portfolio Retention - % Market share - % Ranking 177 - Banco do Brasil – MD&A 2Q10 80.3% 85.2% 82.7% 2.4 p.p. 7.5% 5º 7.7% 6º 8.1% 5º 0.6 p.p. 10.3 Strategic Development This chapter presents Banco do Brasil’s transaction highlights as of the first quarter of 2010, as well as those that are in progress, in conformity with public announcements to the market. 10.3.1 Banco Votorantim The announced strategic partnership between Banco Votorantim (BV) and Banco do Brasil (BB) was concluded on September 28, 2009, as per the public announcement to the market on the same date. The operation involves the acquisition, by BB, of 33,356,791,198 common shares of BV for the price of R$ 3 billion, paid directly to Votorantim Finanças, besides the subscription, also by BB, of new preferred shares issued by Banco Votorantim in the amount of R$ 1.2 billion. Shares acquired by BB correspond to 50% of the total capital and approximately 50% of the voting capital of Banco Votorantim. The business model and the team of employees were maintained, and the board of directors is on the same level, with the appointment of three members by every partner, and the chairmanship of the board of directors alternated between the two partners. All strategic decisions are made jointly. For further details on the payment terms, please refer to the Material Fact disclosed at the portal www.bb.com.br/ri The consolidation of the financial statements, risk management and operating limits will be proportional to BB's ownership interest in the total capital of BV. The Assets and Liabilities started to be consolidated in the financial statements as of 3Q09 and the income statement accounts since the 4Q09. The partnership presents strong strategic rationale, since it will allow Banco do Brasil to: ► increase the asset origination capacity in the competitive consumption financing industry; ► gain access to well developed alternative distribution channels – (BV Financeira dealerships, partners and stores); ► adopt the successful model for promoting sales nationwide in the vehicle financing market; ► Strengthen BB’s activities in the capital markets (Votorantim Corretora) and in the Corporate segment. The tables below present the highlights of the BV operation. Regarding the income statement, the reallocations carried out are detailed below and may differ from those made in the financial statements of BB. Therefore, for a better understanding of BV's net income, the income statement with reallocations was maintained, despite the fact that the net income of BV is already consolidated in the financial statements of the BB conglomerate. Further information can be obtained from the website of Banco Votorantim. To improve the analysis, Banco Votorantim has made changes in reallocations, including rebuilding the series of 2009 values. Among such changes, we highlight Credit Assignments, which are no longer segregated under nonrecurring items. The decision to not allocate such events among nonrecurring effects was due to the fact of such operations having been recurrent during the last quarters, although not in a completely linear fashion. 178 - Banco do Brasil – MD&A 2Q10 Table 144. Banco Votorantim – Income Statement with Reallocations Highlights Chg. % Quar te r ly Flow R$ million Financial Inte r m e diation Incom e Loan operations (1) (2) (5) (6) (7) (9) (10) (15) Lease operations (1) (5) (6) (9) (15) Securities Income (6) (7) (11) Income f rom Financial Derivatives (3) (4) (6) (7) (8) (16) Compulsory Investments Incom e fr om Financial Inte r m e diation Market Borrow ing (6) (7) (8) Borrow ings, A ssignments and Onlendings (7) Ne t Inte r e s t Incom e A llow ance f or loan losses (2) (10) Ne t Financial M ar gin Bank f ee income Fee income (5) Bank Fee Income (5) 2Q09 1Q10 2Q10 On 2Q09 On 1Q10 2,843 2,969 3,165 11.4 6.6 1,996 1,920 2,249 12.7 17.1 (3.7) 83 165 159 91.3 989 947 985 (0.4) (225) (66) (315) 39.7 375.3 - 2,201.3 - 4 87 4.1 (1,614) (1,601) (1,760) 9.1 9.9 (1,517) (1,482) (1,656) 9.2 11.7 7.3 (13.0) (97) 1,229 (119) 1,368 (104) 1,405 (481) 14.4 2.7 (0.3) 17.9 (483) (408) 746 960 924 23.9 (3.7) 46 89 103 124.5 14.8 46 68 57 24.9 0 22 46 31,256.7 110.9 (16.0) 15.7 Taxes on Revenues (2) (4) (90) (103) (119) 32.8 Contr ibution M ar gin 702 946 908 29.3 (4.1) (280) (378) (434) 54.6 14.6 A dministrative expenses Personnel Expenses (13) (130) (164) (176) 35.4 6.9 Other A dministrative Expenses (12) (13) (14) (15) (16) (150) (210) (257) 71.1 22.4 (1) 97.0 (75.3) Com m e r cial Incom e Other Tax Expenses (14) 422 568 474 12.4 (16.5) Legal Risk (26) (45) (37) 40.4 (18.5) Legal Claims (12) (2) (18) (16) 562.3 (9.4) Labor Law suits (13) (6) (7) (2) (67.4) (72.1) Fiscal Law suits (14) (18) (21) (19) Other Components of the Result (1) 24 (4) 8 11 4.8 (51.5) (8.9) 41.2 Other Operating Income (Expenses) 24 8 11 (51.5) 41.2 Other Operating Income (3) (9) (10) (14) 42 12 18 (57.4) 48.0 (6) (64.9) Other operating expenses (1) (2) (3) (9) (10) (12) (13) (14) Ope r ating Re s ult (18) 419 (4) 531 448 7.0 62.0 (15.5) Non-operating Income (17) (34) (20) (23) (32.5) 13.2 Pr ofit be fore taxation and pr ofit s har ing 385 510 426 10.5 (16.6) Income and Social Contribution Taxes (2) (4) (11) (79) (171) (107) 34.8 (37.5) Prof it Sharing (2) (75) (81) (103) 37.5 28.4 Pr ofit be fore m inor ity inte r e s t 231 259 215 (6.6) (16.9) Minority interest Non-Re cur r ing Ite m s Extraordinary Items FINOR (17) Ne t Incom e (1) (0) 0 - 230 259 215 (6.3) - - 3 - - - 3 - 230 259 218 (5.0) (16.9) (15.7) (1) Reallocation from Other Operating Expenses to Loan and Lease Operations corresponding to the amount of expenses with discounts granted on loan operations, with the reallocation required for comparability purposes. The expenses with discounts granted totaled (R$ 86.6 million) in 2Q09, (R$ 47.4 million) in 1Q10 and (R$ 70.2 million) in 2Q10. (2) The effects arising from the assignment of a loan portfolio to Credit Rights Investment Funds (FIDCs) recorded under Tax Expenses, Other Operating Expenses and Income and Social Contribution Taxes were reallocated to the result of Loan Operations, in the amount of (R$ 6.3 million) in 2Q09, (R$ 0.0 million) in 1Q10 (R$ 0 million) in 2Q10. (3) The FX Gain (Loss) on Foreign Investments is reallocated from Other Operating Income/Expenses to Income from Financial Derivatives for inclusion in the Net Interest Income. This adjustment is necessary to maintain the balance and consistency of spread analysis. In 2Q09, this reallocation was of (R$ 187.5 million), R$ 15.9 million in the 1Q10 and in 2Q10, R$ 8.2 million. 179 - Banco do Brasil – MD&A 2Q10 (4) Reallocations were performed in order to cancel the Tax Hedge's effects. In 2Q09, the amount reallocated to the result of Derivative Financial Instruments arising from Tax Expenses on Revenues was (R$ 13.9 million) and that from Income and Social Contribution Taxes (IR and CSLL) was (R$ 113.9 million), in 2Q10, the amount reallocated from Tax Expenses on Revenues was (R$ 0.9 million) and that from IR and CSLL was (R$ 7.2 million) and in 1Q10, the amount reallocated from Tax Expenses on Revenues was (R$ 0.1 million) and that from IR and CSLL was R$ (0.4 million). (5) Fee Income arising from Loan Operations recorded under Revenues from Services Provided were reallocated to the income statement from Loan Operations in the amount of R$ 124.7 million in 2Q09, R$ 180.6 million in the 1Q10 and R$ 188.1 million in the 2Q10. Table 145. Banco Votorantim – Reallocations (Fee Income) R$ million 2Q09 1Q10 Fee Income (TC /TLA / TAC) (5) 2Q10 (97.6) (131.4) (2.7) (5.4) (6.3) Guarantees Income (5) (24.4) (43.8) (37.5) Allocation on Loan Operations + Leasing (5) 124.7 180.6 188.1 Credit Card Fees (5) (144.3) (6) All mark-to-market effects were reallocated as a result of the hedge on the result of derivative financial instruments, as follows: Table 146. Banco Votorantim – Reallocations (Mark-to-Market - MKT) R$ million MKT Loan Operations (BV Financeira) (6) MKT Loans Operations (BV ) (6) MKT Leasing (6) MKT Securities (6) MLT Funding (6) A loc ation of MKT in Derivatives (6) 2Q09 1Q10 176.8 2Q10 (117.7) 21.9 64.6 36.9 (47.9) 1.8 (39.0) 10.9 64.9 (28.9) 104.3 5.1 12.9 (270.5) 135.8 1.5 (133.4) (7) All the effects of fluctuations in foreign currencies, such as the US dollar, yen, Turkish lira, euro etc., were reallocated as a result of the hedge on the result of derivative financial instruments, as follows: Table 147. Banco Votorantim – Reallocations (Currencies Fluctuation) R$ million 2Q09 1Q10 2Q10 V CR Loans Operations (7) 737.2 (85.6) V CR Sec urities (7) 364.9 (11.4) (4.8) V CR Fundings (7) (534.0) 21.0 52.4 V CR Loans and On Lending (7) (686.1) 12.2 18.8 118.0 63.8 (45.7) A loc ation of V CR on Derivatives (7) (20.7) (8) Reallocation of the Options BOX, accounted in Derivative Financial Insturments, to Money Market Funding was carried out in the amount (R$ 68.7 million) in 2Q09, (R$ 124.3 million) in 1Q10 and (R$ 132.9 million) in 2Q10. (9) The Operating Income and Expenses directly associated with the Loan Operations were reallocated from Other Operating Income/Expenses to the Loan Operations in the amount of (R$ 235.9 million) in 2Q09, (R$ 95.1 million) in 1Q10 and (R$ 203.9 million) in 2Q10. 180 - Banco do Brasil – MD&A 2Q10 (10) The Allowance for Loan Losses expenses arising from the Assignments made with Co-obligations recorded under Other Operating Expenses and, as of 2010, under Loan Operations, were reallocated to the Allowance for Loan Losses expenses caption in the amount of (R$ 32.5 million) in 2Q09, R$ (3.1 million) in 1Q10 and (R$ 15.7 million) in 2Q10. (11) The effect of the tax benefit generated by the tax-free interest of securities issued abroad was reallocated from the Income Tax and Social Contribution caption to Securities Income in the amount of R$ 25.7 million in 2Q09, R$ 15.8 million in the 1Q10 and R$ 26.0 million in 2Q10. The expenses with Labor, Civil and Tax Claims were separated into a group called Legal Risk, in order to facilitate the analysis of the other operating expenses and to increase the transparency of this type of risk. The reallocated amounts were as follows: (12) Civil Claims: (R$ 2.4 million) in 2Q09, (R$ 17.8 million) in 1Q10 and (R$ 16.1 million) in 2Q10. (13) Labor Lawsuits: (R$ 5.7 million) in 2Q09, (R$ 6.7 million) in 1Q10 and (R$ 1.9 million) in 2Q10. (14) Tax Claims: (R$ 18.2 million) in 2Q09, (R$ 20.9 million) in 1Q10 and (R$ 19.1 million) in 2Q10. (15) Other Administrative Expenses directly related to Loan Operations were reallocated from Other Administrative Expenses to the Loan and Lease Operations line, totaling (R$ 80.2 million) for 2Q09, (R$ 84.3 million) for 1Q10, and (R$ 124.8 million) for 2Q10. (16) Other Administrative Expenses directly related to derivative transactions were reallocated from Other Administrative Expenses to the Income from Financial Derivatives line, totaling (R$ 0 million) for 2Q09, (R$ 4.8 million) for 1Q10, and (R$ 8.6 million) for 2Q10. (17) The result obtained from operation and valuation of the Northeast Investment Fund (FINOR) in the amount of R$ 0 million in 2Q09, R$ 0 million in 1Q10, and R$ 3 million in 2Q10 was reallocated from line Non-Operating Income to the line Extraordinary Items. 181 - Banco do Brasil – MD&A 2Q10 Table 148. Banco Votorantim – Equity Highlights Quar te r ly Flow R$ million Jun/09 M ar/10 Chg. % Jun/10 On Jun/09 On M ar /10 As s e ts 88,845 94,773 99,416 11.9 4.9 Securities 20,099 29,339 28,188 40.2 (3.9) Loan Portf olio 38,087 45,277 46,699 22.6 3.1 Individuals 21,549 29,221 30,201 40.2 3.4 Payroll Loan V ehicles Loan Leasing and Subleasing Receivables Other Businesses 2,358 4,585 4,474 89.8 (2.4) 16,403 20,114 21,078 28.5 4.8 2,518 4,246 4,369 73.5 2.9 271 276 280 3.3 1.4 16,538 16,055 16,497 (0.2) 2.8 Working Capital 5,110 5,002 5,445 6.5 8.8 BNDES/Finame 4,022 4,829 5,065 25.9 4.9 Export Letter of Credit 3,277 2,853 2,860 (12.7) 0.3 Other 4,128 3,371 3,127 (24.3) (7.2) 18.6 Permanent A ssets Deposits¹ Demand Deposits Saving Deposits Time Deposits Judicial Others Money Market Borrow ing Shar e holde r s ’ Equity 96 162 192 100.2 23,826 23,074 24,239 1.7 5.0 110 220 285 158.5 29.4 - - - - - 19,826 22,035 23,202 17.0 5.3 0 0 0 0.4 0.3 19,826 22,035 23,201 17.0 5.3 33,290 30,417 31,787 (4.5) 4.5 6,464 7,978 8,039 24.4 0.8 ¹ Except other deposits Table 149. Banco Votorantim – Loan Portfolio by Level of Risk Jun/09 R$ million AA Balance M ar/10 Pr ovis ion Shar e Balance Jun/10 Pr ovis ion Shar e Balance Pr ovis ion Share 8,191 - 21.5 7,849 - 17.3 8,188 - 17.5 A 22,020 110 57.8 28,691 143 63.4 29,806 149 63.8 B 4,725 47 12.4 5,596 56 12.4 5,426 54 11.6 C 1,290 39 3.4 1,017 31 2.2 1,064 32 2.3 D 588 59 1.5 521 52 1.2 495 49 1.1 E 232 70 0.6 280 84 0.6 382 115 0.8 F 358 179 0.9 243 121 0.5 208 104 0.4 G 148 104 0.4 366 256 0.8 343 240 0.7 H 535 535 1.4 714 714 1.6 789 789 1.7 38,087 1,142 100.0 45,277 1,458 100.0 46,699 1,532 100.0 Total A dd. A llow . Total Allow . A A -C D-H 11 - - 1,153 1,458 1,532 36,226 196 95.1 43,153 230 95.3 44,483 235 95.3 1,861 946 4.9 2,124 1,228 4.7 2,216 1,297 4.7 182 - Banco do Brasil – MD&A 2Q10 Table 150. Banco Votorantim – Delinquency Ratios R$ million Jun/09 M ar /10 Jun/10 Loan Por tfolio 38,087 45,277 46,699 Past Due Loans 4,345 5,033 4,747 Past Due Loans/Loan Portf olio 11.4% 11.1% 10.2% Past Due Loans + 90 days 1,187 1,522 1,399 Past Due Loans + 90 days /Loan Portf olio 3.1% 3.4% 3.0% 391 Write-of f 191 309 Rec ov ery of Write-of f s (45) (30) (41) Net Loss 146 279 350 Saldo da Perda / Carteira de Crédito 1.5% 2.5% 3.0% Pr ovis ion 1,153 A llow ance/Loan Portf olio A llow ance/Past Due Loans + 90 days - % 1,458 1,532 3.0% 3.2% 3.3% 97.1% 95.8% 109.5% 3.0% 3.2% 3.3% A llow ance Ex pens es / Loan Portf olio (12 months average) Table 151. Banco Votorantim – Vehicle Loan Portfolio Jun/09 A v erage rate per crop (p.m.) M ar /10 Jun/10 1.82 1.67 A v erage term per crop 46 50 50 Duration 18 21 20 A v erage Portf olio Term (p.y.) 27.4 24.4 24.9 Used V ehicles / V ehic les Portf olio - % 83.5 77.1 77.2 6.1 5.9 5.8 69.3 73.7 73.8 A v erage V ehicle A ge (years ) Financed V alue / A s set V alue – average % 1.66 Table 152. Banco Votorantim – Operating and Structural Highlights M ar/10 Customers A ssets Under Management - R$ million Employees* Jun/10 4,169,395 4,429,234 24,095 25,322 6,583 7,269 316 318 Number of Branch Of f ices *Employees and Interns are included. Table 153. Banco Votorantim – Ratios Highlights Indicator s - % 2Q09 1Q10 2Q10 Total Spread 6.2 6.6 Ex pens es w ith A llow anc e f or Loan Loss es over Portf olio 3.0 3.2 3.3 Cost Income Ratio¹ 27.5 31.1 36.0 Recurring Return on Equity ² 14.9 25.6 14.4 39.7 11.4 33.1 Ef f ectiv e Rate of Tax 6.3 ¹ Efficiency Ratio calculated by Banco Votorantim: (Sum of Personnel Expenses and Other Administrative Expenses) ÷ (Sum of Net income from financial intermediation, of expenses with Allowance for Loan Losses (PCLD), Service Revenues and Result of Other Operating Income and Expenses). 2 Recurring Net Income divided by Average Net Equity. 183 - Banco do Brasil – MD&A 2Q10 10.3.2 Performance in the State of São Paulo With the purpose of expanding business in São Paulo, Banco do Brasil acquired Banco Nossa Caixa shareholding control and create a statutory board for managing business strategies related to that state. These two events point to a new stage in Banco do Brasil's activities in São Paulo. BB became the leader in branch offices in the state, in addition to gaining expressive market shares in a number of lines of business. São Paulo Distribution Directorship is focused in Individuals, Legal Entities and Government segments, attended by Retail Branches, High Income, and Government in São Paulo. This new structure aims to integrate the management and operation of BB in the state, according to the specificity and relevance of São Paulo’s market. In the case of Nossa Caixa, Banco do Brasil is working to capture important synergies by integrating operations. Customers from that institution will have access to a broader portfolio of services and to a relationship model. The BB’s new assistance model in São Paulo includes, for example, hiring 1,150 new employees to work in the State. The number of managers in each branch rose from 1,244 in Nov/09 to 1,991 in past July. The number of cash attendants rose from 1,530 to 2,465 in the same period. Furthermore, 748 employees from BNC migrated from internal departments to the branch network. In the business area, it was allowed to BNC customers hiring loan operations, including payroll loans, in alternative channels as ATM, Internet and Mobile Banking. The Small and Medium Enterprises (SME) had only 8 kinds of loans operations before the corporate merger of BNC; nowadays them number rose to 27. Besides that, there was the replacement of the individuals cards for chip cards (Ourocard Nossa Caixa) and deployment of syllabic code, reducing by 90% losses due to frauds, the total integration of systems with regard to Investment Funds, Time and Court Deposits, Money Transfers, Foreign Exchange, Payments and Loans and Financing, and migration of all the branches to the BB platform. We show below BB's evolution in the state of São Paulo, regarding the businesses generated by the São Paulo Distribution Directorship. It is worth mentioning that it does not include Banco Votorantim credit portfolio. Table 154. Deposits in the State of São Paulo R$ million Jun/09 M ar /10 Jun/10 Chg. % On Jun/09 On M ar /10 De pos its 49,570 98,626 99,305 100.3 0.7 Demand 7,341 12,523 13,245 80.4 5.8 Savings 10,458 24,818 25,797 146.7 3.9 Time 23,579 32,578 30,732 30.3 (5.7) 7,965 228 28,366 341 29,218 314 266.8 38.1 3.0 (7.7) Judic ial Other 184 - Banco do Brasil – MD&A 2Q10 It’s not included the partnership with BV in the tables below. Table 155. Loan Operations in the State of São Paulo R$ million Jun/09 Individuals Payroll Loan Consumer Finance M ar /10 Chg. % On Jun/09 On M ar /10 Jun/10 20,860 23,800 23,682 13.5 (0.5) 11,849 14,607 14,084 18.9 (3.6) (0.2) 2,397 1,147 1,145 (52.2) Consumer Loan Backed by Direct Deposits 634 1,480 1,619 155.5 9.4 Mortgage 877 1,107 1,220 39.2 10.3 (6.2) V ehicles Loan¹ Credit Card 104 102 95 (8.2) 1,203 1,369 1,449 20.5 5.8 540 489 940 74.0 92.1 (10.6) Overdraf t A ccounts Other 3,257 3,499 3,129 (3.9) 37,465 41,297 41,649 11.2 0.9 14,132 18,125 18,940 34.0 4.5 Investment 5,171 6,135 6,310 22.0 2.9 Receivables 6,143 6,739 7,526 22.5 11.7 (19.3) Bus ine s s e s Working Capital Pre-A pproved Credit 2,726 2,672 2,157 (20.9) A CC/A CE 5,239 3,609 3,455 (34.1) (4.3) BNDES Exim 2,001 1,867 1,641 (18.0) (12.1) Credit Cards 323 583 682 110.9 17.1 45 1,685 42 1,524 138 800 208.1 (52.5) 225.7 (47.5) Overdraf t A ccount Other R$ million Jun/09 M ar /10 Jun/10 Chg. % On Jun/09 On M ar /10 Agr ibus ine s s 13,979 14,169 17,437 24.7 23.1 Individuals Companies 4,227 9,752 4,319 14,169 4,503 12,934 6.5 32.6 4.3 (8.7) 185 - Banco do Brasil – MD&A 2Q10 10.3.3 Internationalization In November 2007, Banco do Brasil was licensed by the Central Bank of Brazil to open three new companies in the United States: one for money transfers (BB Money Transfer), a retail bank (Banco do Brasil Federal Savings Bank), and a holding company (BB USA Holding Company), intended to provide basic financial services to Brazilians living in the US, such as: transfers, deposits, investments, credit cards, among others. 2009 reflected an intensified trend to internationalize BB's business. On January 15, 2009 the first international unit for administrative services was opened, the BB USA Servicing Center located in Florida, USA, with the aim of centralizing and rationalizing back-office services in the units located in the United States. BB Money Transfers began operating in June of 2009 by providing money transfer services to Brazil, focused on assisting Brazilian immigrants in that country. BB Money Transfers operates by means of accredited agents and has currently 69 points of assistance in five US states. In August 2009 the Bank inaugurated its representation office in Montevideo, Uruguay, one of the key objectives being to provide service and financial intermediation solutions, to increase two-way trade between Brazil and Uruguay, and to provide consultancy to Brazilian companies in Uruguay and to Uruguayan companies that do business with Brazil. On April 13, 2010 the North-American Central Bank - FED (“The Board of Governors of the Federal Reserve System”) granted Banco do Brasil the status of "Financial Holding Company". The Bank was accorded this status after a minute analysis of major factors determined by the US banking legislation, among which is the Bank's savings bonds level and the quality of its management, besides considering quality of bank supervision, performed in the Brazilian Central Bank. This qualification will make it possible for Banco do Brasil, if it is in its interest, to perform banking activities in the US territory, either by itself or through its subsidiaries, under the same conditions as US banks. Strategy BB's Board of Directors approved among other corporate directives that the Bank should increase its international business and support Brazilian international companies. In this regard, the Bank's strategic overseas positioning was aimed at wholesale and retail activities in favor of Brazilian immigrant communities, in funding Brazilian companies with businesses involving foreign trade and acting in the capital market. The conglomerate's actions are aimed at intensifying relations with international financial institutions, economic agents, and government, in support of implementing transnational and binational projects. Simultaneously with strategic guidelines, the Bank has focused efforts in continuing to be Brazil's overseas partner with capillarity to assist its customers everywhere, with the purpose of being the first bank for Brazilians at home and overseas. Banco Patagonia On April 21, 2010 Banco do Brasil announced the Share Purchase and Sale Agreement (the "Agreement") to acquire equity control of Banco Patagonia, whereby the current shareholders agree to sell 51% of outstanding shares, with voting rights in that bank. The transaction includes, among other provisions: (i) disposal of Banco Patagonia's equity control represented by 366,825,016 shares in favor of Banco do Brasil; (ii) maintenance of a 10.58% equity holding with voting rights in possession of the current shareholders (76,117,564 shares). (iii) Share Acquisition Public Offering for Shares ("Mandatory PO") owned by other Banco Patagonia shareholders, at the same price paid per share in the acquisition of control (100% tag along). The acquisition price for the 366,825,016 shares was specified at US$ 479,660,391, and the payment terms are detailed in the above-mentioned relevant event. 186 - Banco do Brasil – MD&A 2Q10 We list below a selection of economic and structural indicators for Banco Patagonia, and income figures. Table 156. Banco Patagonia – Income of Statement Highlights Chg. % R$ million 2Q09 Net Interest Income A llow ance f or Loan Losses 1Q10 2Q10 On 2Q09 On 1Q10 190 111 109 (42.5) 20 3 7 (66.1) (1.8) 126.0 Fee income 43 45 46 7.4 1.8 A dministrative Expenses 92 87 94 3.1 8.5 Others 2 4 119 (2) 68 58 (51.6) (15.1) Taxes 57 23 19 (66.8) (17.7) Net Income 62 45 39 (37.7) (13.9) Income Bef ore Taxes - 94.7 Table 157. Banco Patagonia – Equity Highlights Chg. % R$ million Jun/09 M ar/10 Jun/10 On Jun/09 On M ar/10 A ssets 4,365 4,557 4,666 6.9 2.4 Loan Operations 1,924 2,030 2,366 22.9 16.5 (33.1) Exposure to Public Sector Deposits Shareholders' Equity 6 50 33 491.3 2,818 3,068 3,330 18.2 8.6 817 896 831 1.6 (7.3) Table 158. Banco Patagonia – Operating and Structural Highlights Chg. % Jun/09 Clients Bank Branches Branches in Buenos A ires Service Points Employees M ar/10 Jun/10 On Jun/09 On M ar/10 751,623 777,947 782,119 4.1 137 138 138 0.7 0.5 - - 75 75 - - 154 159 159 3.2 - 2,690 2,718 2,811 4.5 3.4 Table 159. Banco Patagonia – Returns, Capital and Loan Ratios Jun/09 M ar /10 Jun/10 Return on Equity 22.6% 20.8% 19.9% Capital A dequacy Ratio (Basel) 34.0% 38.3% 31.2% 143.9% 132.1% 137.0% 2.5% 2.3% 1.9% Prov isions / Pas t Due Loans (+90 days ) Pas t Due Loans (+90 days ) / Loan Portf olio 187 - Banco do Brasil – MD&A 2Q10 10.3.4 Business in Progress The Mapfre Partnership On May 5, 2010, by means of its wholly-owned subsidiary BB Seguros Participações S.A., Banco do Brasil and the insurance group Mapfre entered into a partnership agreement to form a strategic alliance in the field of personal insurance, casualties, and vehicles effective over 20 years. Pursuant to this agreement, two privately owned holding companies will be organized, under the Mapfre group's control of the voting shares and jointly managed. In order to equalize the intended shareholding in both holding companies that will be organized, BB Seguros will pay in a sum of R$ 295 million. The group Mapfre is the largest insurance group in Spain and operates in 43 countries, mainly in the insurance, reinsurance and assistance markets of Latin America, where it ranks first in equity insurance. The Mapfre group has 122 own branches and over 10 thousand active brokers, 18 territorial senior managements, and 15 million customers throughout the world. In 2009 it profited R$ 364,4 million, and had R$ 4.4 billion in revenues in Brazil. Ownership interest in IRB-Brasil Re When an insurance company enters into an insurance agreement in excess of its financial capacity, it has to transfer this risk, or a portion of it, to a reinsurance company. Reinsurance is a common practice all over the world as a means to mitigate risk, safeguarding the stability of insurance companies and ensuring the payment of the claim to the insured party. IRB-Brasil Re (IRB) is the largest reinsurance group in Latin America, with assets of R$ 10.4 billion, issued premiums of R$ 2.9 billion and retained premiums of R$ 1.6 million as of 2009. The Federal Government holds 100% of the common shares of IRB and 50% of total capital. In order to supplement the operations of its insurance companies and to proceed with the restructuring of the sector, BB proposed to start negotiations with no binding effect, which was accepted by the Federal Government through the Ministry of Finance, for the acquisition of an ownership interest, in compliance with the regulations in effect and the terms and conditions inherent to transactions of this nature, namely the obtaining of all the previous authorizations required. On May 20, 2010 Banco do Brasil published in the Diário Oficial da União call notice to hire specialized technical services for economic and financial evaluation and conducting due diligence of the IRB. The period for receipt of proposals is closed and, at the time, BB is in final review of proposals received. Strategic Alliance with the Icatu Group In order to form a strategic alliance to develop and sell savings bonds businesses in the Brazilian market, a Memorandum of Understanding was signed between BB and the Icatu Group on January 6, 2010. The businesses between the two institutions will be integrated in order to eliminate competition between the partners. Accordingly, the corporate structure will be revised, as shown in the table below: 188 - Banco do Brasil – MD&A 2Q10 Table 160. Review of the Corporate Structure Cur r e nt Futur e % - Com m on % - Com m on % - Total Capital % - Pr e fe r r e d BB Seguros 49.99 49.99 100.00 74.995 Icatu SulA mérica 16.67 50.01 - 25.005 16.67 - - A lianç a da Bahia 15.80 - - 0.87 - - Minoritários The Icatu Group is a leader among the companies not related to retail banks in the savings bonds market and serves over 3.2 million people in various business lines. The information on the security businesses were addressed in Material Event Notices disclosed to the market on October 6, 15 and 27, 2009 and January 6, 2010. Partnership between BB, Bradesco and CEF - Cards Aiming at developing a new business model in the Brazilian credit/debit cards’ market, on April 27, 2010, Banco do Brasil and Banco Bradesco started negotiations on building up a partnership. On August 9, 2010, the intention of integrating the Caixa Econômica Federal - CEF and Caixa Participações S.A. was added to the memorandum of understanding. The Banks also inform their intention to consider the possibility of expanding the shareholding of Caixa Econômica Federal in Cielo S.A. and continuing negotiations about the joining of Caixa Econômica in the ATM sharing project. The partnership goal is to integrate some of the banks cards operations and to initiate a Brazilian credit, debit and prepaid cards brand to be directed to account holders and non-account holders, and to develop new business for private label cards (the offering of cards to non-account holders via retail partners). A new holding company will be created, which will be called Elo and will integrate and manage the partnership businesses. Therefore, three drivers are predicted: (i) the creation of the Elo Banco, which will hold the banking responsibilities (credit and debit cards) and future agreements with retail partners to issue private label cards; (ii) the Elo Vale and Elo Promotora formation, which will be responsible for prepaid cards business and brand promotion, respectively; (iii) and third pillar which the consolidation of is the banks’ holdings in Cielo. Strategic Partnership with Bradesco and BES Banco do Brasil S.A., Banco Bradesco S.A. and Banco Espírito Santo S.A. (BES) (“Banks”) started negotiations to establish a strategic partnership aiming at operating in the African continent. Banco Espírito Santo S.A., headquartered in Lisboa, is the second largest Portuguese commercial bank and is present in 18 countries and 4 continents. The Banks intention is to take part in a financial holding company which would consolidate, in Africa, current operations of BES. Besides that, the holding would coordinate future investments involving the acquisition of shareholdings in other banks as well as establishing its own operations in the African continent. The three financial institutions consider that the partnership is important to support the internationalization of Brazilian and Portuguese companies and to assist the growing foreign trade with that continent. The closing of the deal is subject to technical, legal and financials studies, satisfactory negotiation of definitive documents, and the compliance with applicable regulatory and legal procedures in both countries. Any decision will be timely released to the market according to the evolution of the negotiations. 189 - Banco do Brasil – MD&A 2Q10 11 - Financial Statements 11.1 Summarized Balance Sheet Table 161. Balance Sheet – Assets R$ million ASSETS Current and long-term assets Available funds Short-term interbank investments Open market investments Interbank deposits Marketable securities Securities for trading Securities available for sale Securities held to maturity Financial derivatives Interbank accounts Central Bank deposits Compuls. dep, on demand, Dep & float Compulsory dep, on savings dep, Others Interdepartmental accounts Loans Public sector Private sector (Allow ance for loan losses) Leasing Leasing and sub-leasing receivables Public sector Private sector (Unearned lease income) (Allow ance for lease losses) Other receivables Receivable on guarantees honored Foreign exchange portfolio Income receivable Trading and brokerage of securities Specific credits Special operations Credits from Insurance, Pension and Savings Bonds Tax credits Atuarial Assets Warrants Deposits Receivable Other credits (Provision for doubtful receivables) (With loan characteristics) (Without loan characteristics) Other assets Statutory profit sharing Others (Provision for possible losses) Prepaid expenses Perm anent assets Investments Investm, in assoc. and subsidiary co, Other investments (Provision for losses) Property and equipment Land and buildings in use Land and buildings in use reavaliation Other property and equipment in use (Accumulated depreciation) Leased assets Leases assets (Accumulated depreciation) Intangible Intangible Assets (Accumulated amortization) Deferred charges Organization and expansion costs (Accumulated amortization) 190 - Banco do Brasil – MD&A 2Q10 Sep/08 458,237 449,235 6,847 71,092 61,637 9,454 85,954 26,475 37,777 20,443 1,258 38,238 35,564 12,220 23,344 2,675 138 175,599 3,038 183,345 (10,783) 2,267 2,310 48 2,262 (44) 68,375 51 17,053 402 287 821 0 396 14,994 2,003 17,481 16,008 (1,121) (360) (760) 726 0 304 (165) 586 9,002 1,589 763 893 (66) 3,082 2,692 5,278 (4,887) 5 10 (5) 3,674 3,674 652 1,835 (1,183) Dec/08 521,273 511,761 5,545 119,408 95,160 24,249 86,909 26,136 38,374 20,123 2,276 21,287 20,882 12,439 8,443 405 228 190,882 4,040 200,020 (13,179) 2,968 3,039 55 2,984 (71) 83,279 71 20,914 413 347 846 0 441 16,499 7,794 18,007 19,325 (1,377) (579) (798) 1,256 0 308 (170) 1,118 9,512 1,524 721 871 (68) 3,339 2,668 5,610 (4,940) 4 8 (4) 4,041 4,043 (2) 604 1,846 (1,241) Mar/09 591,925 577,351 7,516 131,796 103,356 28,440 110,594 32,475 45,269 31,433 1,417 30,925 25,543 12,381 13,162 5,382 99 205,376 3,767 216,684 (15,075) 3,246 3,352 53 3,299 (106) 86,156 81 19,041 513 150 868 0 586 20,413 7,794 20,024 18,363 (1,676) (649) (1,027) 1,642 0 356 (183) 1,469 14,574 961 188 869 (96) 3,588 2,825 152 6,018 (5,407) 3 429 (426) 9,391 10,544 (1,154) 632 2,226 (1,594) Jun/09 598,839 584,287 6,212 132,438 111,171 21,267 109,564 31,661 46,645 30,477 781 29,127 24,507 11,188 13,319 4,620 102 214,906 2,816 228,995 (16,904) 3,253 3,406 60 3,346 (153) 87,034 78 13,957 502 1,763 888 0 702 21,053 8,410 20,489 20,916 (1,725) (702) (1,023) 1,652 0 352 (187) 1,487 14,551 5,184 4,369 901 (87) 3,663 2,970 150 6,021 (5,478) 2 6 (4) 5,128 6,657 (1,529) 574 2,195 (1,621) Sep/09 685,684 669,719 8,340 157,541 134,045 23,495 129,818 44,590 52,750 30,773 1,706 31,252 26,468 12,398 14,069 4,784 161 246,217 4,975 259,359 (18,118) 4,636 4,861 60 4,801 (225) 89,641 76 12,066 542 522 910 0 815 22,261 8,709 20,888 24,523 (1,671) (728) (943) 2,114 385 (191) 1,920 15,965 6,625 5,698 1,007 (80) 3,741 3,061 150 6,184 (5,654) 2 4 (2) 5,082 6,998 (1,916) 515 2,237 (1,722) Dec/09 708,549 691,539 7,843 168,398 144,174 24,224 124,337 38,274 62,161 22,439 1,463 26,592 24,280 11,919 12,361 2,312 295 261,783 6,388 273,080 (17,685) 4,701 4,932 63 4,869 (231) 95,233 91 8,671 563 436 932 0 908 21,910 12,655 21,209 29,539 (1,682) (702) (980) 2,358 364 (176) 2,170 17,010 6,645 5,776 947 (78) 4,214 3,336 6,632 (5,753) 1 4 (2) 5,677 7,659 (1,982) 472 2,247 (1,775) Mar/10 724,881 706,102 7,364 152,595 125,683 26,911 119,364 38,183 62,950 17,070 1,162 53,144 47,244 14,472 32,773 5,900 99 267,317 5,668 279,054 (17,405) 4,593 4,826 59 4,767 (233) 99,430 89 11,808 588 400 954 850 22,000 13,374 21,764 29,226 (1,625) (678) (947) 2,196 384 (176) 1,988 18,780 6,869 5,964 986 (82) 4,230 3,256 6,759 (5,785) 1 2 (1) 7,267 9,670 (2,403) 413 2,201 (1,788) Jun/10 755,706 737,151 9,535 132,543 107,838 24,704 132,249 44,830 67,153 19,049 1,217 64,857 59,374 15,833 43,541 5,483 110 289,075 6,145 300,028 (17,097) 4,394 4,641 53 4,588 (246) 101,887 73 12,258 678 409 978 816 22,431 14,510 22,380 28,988 (1,633) (744) (890) 2,501 394 (171) 2,278 18,555 6,866 5,910 1,023 (68) 4,259 3,392 6,969 (6,102) 1 2 (1) 7,052 9,872 (2,820) 377 2,041 (1,664) Table 162. Balance Sheet – Liabilities R$ million LIABILITIES AND SHAREHOLDERS' EQUITY Cur r e nt and long-te r m as s e ts Deposits Demand deposits Sav ings deposits Interbank deposits Time deposits Investment depos its Money market borrow ing Ow n portf olio Third-party portf olio Others Funds f rom acceptances and securities placed Foreign securities Interbank acc ounts Rec eipts and payments pending s ettlement Correspondent banks Interdepartmental acc ounts Third-party f unds in transit Internal trans f ers of f unds Borrow ing Foreign borrow ing Domes tic onlending – of f icial institutions Federal Treasury National Development Bank (BNDES) Caixa Econômic a Federal (CEF) Fed. Prog. f or Cap. Equip. Finan. (FINA ME) Other ins titutions Foreign onlending Financial deriv ativ es Other ac counts pay able Collec tion of taxes and c ontributions Foreign ex change portf olio Stoc kholders and s tatutory distributions Taxes and social security Trading and brokerage of securities Technical Prov . Insuranc e, Pension & Capitaliz ation. Op. Financ ial and Dev elopment Funds Perpetual Securities Special operations Obligations f or Lotto Operations Subordinated Debt (FCO) A ctuarial liabilities Other liabilities Def erred inc ome Corporate Prof it Sharing Shar e holde r s ’ e quity Capital (Unpaid Capital) Capital res erves Rev aluation res erves Rev enue reserv es Mark-to-market – s ec urities and derivatives Retained earnings (acc umulated loss es ) (Treas ury shares ) Corporate Prof it Sharing Income ac counts 191 - Banco do Brasil – MD&A 2Q10 Se p/08 458,237 430,348 229,810 42,955 52,693 6,309 127,582 270 85,339 28,632 56,707 2,664 2,465 2,438 2,423 14 1,315 1,268 46 5,008 5,008 19,640 3,276 9,380 6,085 898 0 1,367 82,767 2,770 15,761 1,549 14,540 382 12,075 2,277 971 2 11,232 4,285 16,924 27,889 13,699 5 7 12,750 (33) 1,461 De c/08 521,273 491,336 270,841 51,949 54,965 14,065 149,618 243 91,130 21,927 69,203 3,479 3,210 21 1 20 2,496 2,495 0 7,627 7,627 22,436 3,485 11,168 6,585 1,199 98 3,895 89,312 252 15,964 1,838 17,570 401 12,675 2,458 1,185 2 11,772 5,662 19,531 (0) 29,937 13,780 5 7 15,977 199 (31) - M ar /09 591,925 560,232 305,002 47,276 70,567 8,406 178,487 266 106,452 31,133 75,319 3,074 2,762 1,940 1,924 16 1,862 1,808 53 9,991 9,991 22,220 3,532 10,753 165 6,826 945 104 3,164 106,422 3,156 15,380 985 17,686 145 13,771 3,741 1,174 2,136 9 14,371 5,738 28,130 834 30,859 13,780 5 7 15,759 124 (31) 1,215 Jun/09 598,839 565,692 310,846 49,075 69,011 7,459 185,072 228 101,508 28,755 72,553 200 2,673 2,337 2,677 2,657 20 2,045 2,007 37 8,536 8,536 22,626 3,574 11,118 159 7,009 765 107 2,580 112,094 2,853 16,339 1,502 20,141 450 15,017 4,076 990 2,140 14,689 6,179 27,719 787 32,360 18,549 5 7 13,614 216 (31) - Se p/09 685,684 652,002 326,958 50,107 72,233 9,627 194,707 284 153,603 45,543 106,568 1,491 6,231 3,383 2,792 2,769 23 1,859 1,840 19 8,855 8,855 26,761 2,826 14,968 153 7,780 1,034 104 6,098 118,742 2,629 15,466 1,608 22,224 378 16,081 4,052 901 2,346 16,409 5,871 30,775 21 33,661 18,549 5 7 13,299 324 (31) 1,509 De c/09 708,549 672,429 337,564 56,459 75,742 11,619 193,516 229 160,821 31,902 128,745 174 7,362 4,597 21 1 21 3,229 3,215 14 6,370 6,370 31,390 2,101 19,630 146 8,381 1,133 99 4,724 120,848 377 12,174 2,625 24,297 528 17,339 4,135 3,516 206 18,553 6,374 30,725 0 36,119 18,567 5 7 17,301 270 (31) - M ar /10 724,881 687,235 342,624 54,973 78,719 10,749 197,934 249 157,866 45,011 112,281 574 11,656 8,617 2,341 2,320 21 2,503 2,414 88 7,884 7,884 32,995 2,065 20,264 139 9,708 818 99 4,085 125,184 3,295 12,609 1,355 21,796 1,071 18,356 3,685 3,659 206 20,792 5,738 32,621 37,646 18,567 5 6 16,857 405 4 (31) 0 1,833 Jun/10 755,706 716,374 343,961 59,025 81,541 10,436 192,715 243 166,603 63,630 102,923 50 12,232 9,631 3,034 3,023 11 1,783 1,768 15 12,016 12,016 36,308 2,074 22,250 142 11,373 471 104 3,238 137,096 2,896 16,321 1,885 24,308 1,247 26,921 3,729 3,643 206 21,340 6,758 27,842 39,332 33,078 (7,050) 6 12,917 411 (31) 0 - 11.2 Summarized Income Statement Table 163. Summarized Corporate Law Income Statement R$ million 3Q08 Financial Inte r m e diation Incom e 15,076 Loans 8,697 Leas ing 58 Sec urities 5,771 Financ ial Derivatives (85) Foreign Ex c hange Portf olio (50) Compulsory Investments 590 Financ ial Inc. f rom Ins ur., Pension & Sav ings Bonds 94 Financial Inte r m e diation Expe ns e s (11,409) Money Market Funds (7,068) Borrow ing. A ss ignments and Onlending (2,973) A llow ance f or Loan Los ses (1,367) Gr os s Incom e fr om Financial Inte r m e diation 3,667 Othe r Ope r ating Incom e (Expe ns e s ) (1,449) Fee Inc ome 2,259 Banking Fees Revenues 673 Personnel Expenses (2,377) Other A dminis trativ e Ex pens es (2,069) Taxes (577) Equity Int. in the Res ults of Subs. and A f f il. 496 Income f / Ins ur., Pens ion & Sav ings Bonds 218 Other Operating Revenues 1,322 Other Operating Ex pens es (1,396) Ope r ating Incom e 2,219 Non-operating Income 105 Incom e Be for e Taxe s 2,324 Income and Soc ial Contribution Taxes (216) Statutory Prof it Sharing (241) Corporate Prof it Sharing 1,867 Ne t Incom e 192 - Banco do Brasil – MD&A 2Q10 4Q08 18,824 10,613 147 8,097 (1,053) 503 424 93 (17,226) (8,432) (4,903) (3,892) 1,597 2,744 2,338 720 (2,430) (2,185) (887) 707 353 7,090 (2,962) 4,342 5 4,347 (1,022) (380) 2,944 1Q09 14,489 8,502 138 5,730 (62) (116) 176 121 (11,131) (7,761) (716) (2,654) 3,359 (2,664) 2,255 688 (3,152) (2,691) (667) (90) 303 2,061 (1,371) 694 16 711 1,182 (227) 0 1,665 2Q09 15,365 9,963 148 5,215 (451) 131 213 146 (11,415) (7,067) (483) (3,865) 3,950 (1,167) 2,557 879 (2,506) (2,871) (860) (576) 471 4,957 (3,217) 2,782 1,426 4,208 (1,559) (300) (1) 2,348 3Q09 15,637 10,333 147 5,083 (664) 406 213 117 (10,841) (7,320) (593) (2,928) 4,795 (1,875) 2,647 879 (2,909) (2,596) (807) (275) 392 3,162 (2,367) 2,921 379 3,300 (1,062) (258) (1) 1,979 4Q09 17,794 11,717 213 5,321 (47) 265 214 109 (11,665) (7,997) (718) (2,950) 6,129 1,065 2,714 892 (3,271) (3,054) (998) (49) 408 6,794 (2,371) 7,194 22 7,217 (2,463) (599) 1 4,155 1Q10 17,981 11,953 240 5,644 (232) (18) 274 120 (12,356) (8,493) (903) (2,959) 5,625 (1,896) 2,747 887 (3,021) (3,277) (864) 50 440 3,110 (1,969) 3,730 217 3,946 (1,242) (353) 2,351 2Q10 18,848 12,364 204 5,195 (29) 71 917 125 (12,577) (9,055) (997) (2,525) 6,271 (1,789) 2,853 1,101 (3,105) (3,039) (944) 29 468 3,020 (2,173) 4,483 129 4,612 (1,473) (414) 2,725 11.3 Income Statement with Reallocations Table 164. Income Statement with Reallocation R$ million 3Q08 Financial Interm ediation Incom e 15,894 Loans 8,993 Leasing 58 Securities 5,771 Financial Derivatives (85) Foreign Exchange Portf olio (50) Compulsory Investments 590 Financial Income from Insur., Pension & Capitalization Op. 94 FX Gain (Loss) on Foreign Investments 496 Other Op. Inc. of a Fin. Intermed. Nature 27 Tax Hedge Financial Interm ediation Expenses (9,862) Money Market Funds (6,889) Borrow ing .Assignments and Onlending (2,973) Net Interest Incom e 6,032 Allow ance f or Loan Losses (1,338) Net Financial Margin 4,694 Fee Income 2,933 Fee Income 2,259 Banking Fee Income 673 Res. From Insurance, Pension Plan and Savings Bonds 218 Taxes on Revenues (541) Contribution Margin 7,303 Administrative Expenses (3,817) Personnel Expenses (2,020) Other Administrative Expenses (1,797) Other Tax Expenses (35) Com m ercial Incom e 3,451 Legal Risk (155) Legal Claims 4 Labor Law suits (159) Other Operating Income (Expenses) (525) Eq.Interest in Resul. Subs. and Af fil. 0 Other Operating Income/Expenses (526) Other Operating Income 889 PREVI Other Operating Expenses (1,415) Operating Incom e 2,771 Non-Operating Income 105 Income Before Taxes 2,876 Income and Social Contribution Taxes (598) Interest on Ow n Capital Tax Benef it 138 Interest on Ow n Capital Tax Benefit (241) Statutory Prof it Sharing Recurring Incom e 2,037 Extraordinary Items (170) Sale of Interest in VISA Internacional Economic Plans (192) Credit Assignment Contingent Liabilities (BESC) (360) Tax Credit (BESC) 194 Previ – Unrecognized Actuarial Gains Cassi – Unrecognized Actuarial Losses Additional Provision f or Loan Losses Provision f or labor, civil and tax claims Tax credits – diff irential of CSLL rate Disposal of Investments (Visanet Brasil) Voluntary Resignation Program - BNC Reversal of Labor Liabilities Capital Gain - BB Seguros Participações Tax Ef f ects and Statutory Prof it Sharing on Nonrecurring Items 188 PREVI Actuarial Assets - Adjustments 1,867 Net Incom e 193 - Banco do Brasil – MD&A 2Q10 4Q08 20,412 11,106 147 8,097 (1,053) 503 424 93 711 50 334 (13,335) (8,432) (4,903) 7,077 (2,240) 4,837 3,058 2,338 720 353 (715) 7,534 (4,344) (2,301) (2,043) (45) 3,144 (226) (97) (129) (542) (3) (539) 1,230 (1,769) 2,375 5 2,380 (557) 140 (198) 1,626 1,318 (44) 5,326 (1,259) (1,594) (1,110) - 1Q09 15,259 8,951 138 5,730 (62) (116) 176 121 (85) 470 (64) (8,275) (7,558) (716) 6,985 (2,491) 4,493 2,943 2,255 688 303 (618) 7,122 (3,931) (2,129) (1,801) (43) 3,148 (197) (95) (102) (554) (5) (549) 795 298 (1,643) 2,397 16 2,413 (688) 179 (203) 0 1,523 309 (95) (1,367) 1,213 557 (166) 2Q09 16,037 10,133 148 5,215 (451) 131 213 146 (592) 1,533 (439) (7,550) (7,067) (483) 8,487 (3,172) 5,316 3,436 2,557 879 471 (806) 8,417 (4,892) (2,613) (2,279) (7) 3,518 (45) (152) 107 (740) 15 (755) 838 298 (1,891) 2,733 11 2,744 (771) 182 (220) (26) 1,727 455 (193) 271 (676) 1,415 (362) 166 3Q09 16,048 10,609 147 5,083 (664) 406 213 117 (292) 643 (216) (7,729) (7,136) (593) 8,320 (3,017) 5,303 3,526 2,647 879 392 (760) 8,461 (4,897) (2,693) (2,203) (23) 3,540 (256) (40) (216) (590) 17 (607) 1,015 298 (1,920) 2,694 29 2,723 (727) 190 (230) (1) 1,764 215 141 (84) 119 209 (171) - 4Q09 17,984 11,963 213 5,321 (47) 265 214 109 (74) 75 (58) (8,715) (7,997) (718) 9,268 (2,946) 6,322 3,606 2,714 892 408 (965) 9,371 (5,465) (2,844) (2,621) (27) 3,880 (4) 46 (49) (964) 24 (989) 1,165 298 (2,452) 2,912 22 2,934 (853) 191 (262) 1 1,819 2,336 530 242 3,030 (215) 644 (1,895) - 1Q10 18,562 12,480 240 5,644 (232) (18) 274 120 18 28 8 (9,205) (8,302) (903) 9,357 (3,026) 6,331 3,634 2,747 887 440 (839) 9,567 (5,300) (2,851) (2,449) (26) 4,241 (450) (238) (212) (379) 32 (411) 1,112 913 (2,437) 3,412 3 3,415 (1,053) 207 (307) 2,056 384 214 (85) 568 (313) (88) 2Q10 19,512 12,991 204 5,195 (29) 71 917 125 (5) 57 (15) (10,052) (9,055) (997) 9,461 (2,871) 6,590 3,954 2,853 1,101 468 (909) 10,103 (5,471) (2,937) (2,534) (34) 4,598 (239) 35 (274) (491) 34 (525) 1,180 913 (2,618) 3,869 15 3,884 (1,194) 210 (363) 2,327 310 (140) 250 332 114 (246) 88 2,944 1,665 2,348 1,979 4,155 2,351 2,725 Vice-Presidency of Finance, Capital Markets and Investor Relations Vice-President Ivan de Souza Monteiro Investor Relations Manager Gilberto Lourenço da Aparecida Executive Manager Gisele Campana Rodrigues Divisional Managers Joaquim Camilo de Castro Eduardo Amaral Pilenghi Analysts Bruno Santos Garcia Daniel Henrique Sousa Diniz Domingos Pereira dos Santos Neto Glauco Ribeiro Barbirato Tavares Hilzenar Souza Alves da Cunha Janaína Marques Storti Joabel Martins de Oliveira Leonardo Resende Nader Marcelo de Campos e Silva Marcone Edson de Vasconcelos Formiga Filho Mariana Reschke da Cunha Rafael Augusto Sperendio 194 - Banco do Brasil – MD&A 2Q10 FINANCIAL STATEMENTS 2Q10 RESULTS Todo seu Management Report 1H10 Dear Shareholders, We present the Management Report and the Financial Statements of Banco do Brasil for the first half of 2010, in conformity with the requirements of the Brazilian Corporate Law, the National Monetary Council (CMN), the Brazilian Central Bank, the Brazilian Securities Commission (CVM) and Banco do Brasil's Bylaws. Macroeconomic Environment In the international environment, the first half of 2010 was marked by uncertainties regarding fiscal sustainability of some European countries, especially Portugal, Ireland, Italy, Greece and Spain. Those concerns led the European Union and the International Monetary Fund to jointly announce a package of financial aid to the countries in difficulty for the total amount of € 860 billion, of which € 110 billion were for Greece alone. Facing the difficulties of implementing the required adjustments in public accounts, and the questions regarding the potential impacts of those measures on European economic activity during this and the forthcoming years, the strength of the euro against the US dollar was put in test. Between the end of December 2009 and June 2010, the euro recorded a devaluation of about 16% against the US dollar, and reached its lowest daily quotation since the first quarter of 2006. In spite of the potential impacts of the adverse external environment, the Brazilian economy hardly resented the fiscal crisis in Europe. Some volatility was felt in the foreign exchange and in the stock market, but no damage was caused to the growth prospects of the domestic economic activity. In fact, a marked expansion of domestic activity was observed, anchored in the significant dynamism of the labor market, industrial production (led by the capital goods and durable consumer goods sectors), retail sales and credit market, which reached a level that exceeds 45% of the Gross Domestic Product (GDP). The GDP for the first quarter recorded a 9% growth compared to the same period in 2009 and 2.7% compared to the preceding quarter (seasonally adjusted). The quarterly GDP expansion was equivalent to annualized growth of 11%. This growth was led by internal demand, with private consumption and investment growing in annualized rates between 6% and 33%, respectively, comparing with 2009 last quarter. In the first half of the year, the Expanded Consumer Price Index (IPCA), for instance, showed its highest variation observed in the same period since 2003, compromising about 68% of the core inflation target (4.5%) for this year. In view of that scenario, in April 2010 the Central Bank of Brazil started a new cycle of increases for the basic interest rate, which was raised from 8.75% p.y. to 9.50% p.y., and reached 10.25% p.y. in June 2010. Highlights of the period As the Latin America's largest bank in assets, with R$ 755.7 billion, Banco do Brasil recorded a net income of R$ 5.1 billion in the first half of 2010. From this total, R$ 2.1 million were distributed to its shareholders. The achieved performance is the result of the adopted negotiation strategies, including the recent acquisitions and established strategic partnerships. The loan portfolio ended the first half of the year 2010 with a R$ 326.5 billion balance, up 29.3% from 1H09. The loan portfolio expansion is due to the strong growth credit loans to individuals, specially payroll loans and vehicle finance, and to companies highlighted to investments and working capital operations. With this performance, BB keeps its leadership in the Banking Industry, with a 20.1% market share, without comprising the credit risk (overdue 90 days), which decreased from 3.6% in 1H09 to 2.7% at the end of the first half of 2010. Specifically this first half of the year, Banco do Brasil disclosed to the market an agreement for the acquisition of the stake control of Banco Patagonia. The closing of the deal will still depend on the approval by Brazilian and Argentine governmental bodies. Also concerning the recent mergers, BB's deal with Bescleasing and Bescredi was approved on April 13, 2010 by BB's Extraordinary General Meeting. Providing continuity to the restructuring process in the insurance, pension and savings bonds segment, the Bank disclosed: (i) review of the partnership with the Principal Financial Group in BrasilPrev; (ii) an agreement to form a strategic alliance with the Mapfre group; and (iii) corporate restructuring in BrasilVeículos and BrasilSaúde. For that, BB faced the need for approval and statement by the regulators / supervisors, whose authorization was given only in the first movement, Brasilprev, where 1 Management Report 1H10 the participation of BB Seguros happened on 4/30/2010, from 49.9892 % to 74.995%, generating an increase in 2Q10, 11% in the equity in income of related compared with 1T10. In the card business, the Bank increased its interest in Cielo and Companhia Brasileira de Soluções e Serviços – CBSS companies by acquiring the ownership interest held by Santander bank in both companies. In that segment, BB also signed a memorandum of understanding with Bradesco bank, aiming: (i) to integrate a part of their card operations; (ii) launching the Brazilian ELO card brand; (iii) formatting new businesses for private label cards; (iv) creating a company for card sales to noncustomers; and (v) creating a company formed by ownership interest in CBSS S.A. held by both institutions or by their subsidiaries. In 1H10, BB's investments amounted to R$ 514.8 million, up 27.9% from 1H09. It is worth to highlight the investments of R$ 191.7 million in properties (constructions and reforms), equipment (R$ 22.2 million), and information technology (R$ 300.8 million). In addition, in the first half of 2010 a primary and secondary public offering of BB shares was made, in order to strength its capital base, meet its organic and inorganic expansion strategy, increase the liquidity of its shares in the secondary market. Additionally, this offer reached a 30.4% free float, which exceeds the mandatory minimum of 25% required by Novo Mercado Regulation of BM&FBovespa, where BB is listed since 2006. BB’s stockes were priced at R$ 24.65 at the end of the bookbuilding process. Outlook Committed to remaining among the leading financial groups from Latin America, Banco do Brasil outlined the following as strategies and goals for 2010-2014: • become a reference in performance and sustainable business; • expand loans market share; • increase share in the capital market; • expand product and service distribution capacity; • refine the customers management and service delivery channels; • strengthen its activity in value chains, cooperativism and associativism; • increase the international activities and the use of strategic, business and operational strategies in the country and abroad; • develop and refine the management of knowledge and of competencies of employees; • participate in the Dow Jones Sustainability Index; • broaden and strengthen its activities of insurance, pension plan, savings bonds, purchasing pools and cards; • become a reference in risk management, security and control; • expanding and strengthening its negotiation performance as a development agent in Brazil. ECONOMIC-FINANCIAL PERFORMANCE Banco do Brasil recorded net income of R$ 5.1 billion in the first half of 2010, 26.5% higher than the same period in 2009, with an annualized return on equity of 28.7%. Net income per share was R$ 1.98 in the last six months. Assets totaled R$ 755.7 billion, up 26.2% in 12 months, with a return on assets of 1.4% in 1H10, same in 1H09, a performance that confirms the Bank's leadership in assets in the Banking Industry – SFN. Shareholders' equity reached R$ 39.3 billion, an increase of 21.5% in 12 months. 2 Management Report 1H10 R$ million Highlights Results 1H10¹ Net Income 5,076 Income (without extraordinary impacts) 4,383 Net income from financial intermediation 11,896 Revenue from loans 24,317 Fee Income 7,588 Insurance Income 596.2 Administrative expenses² (12,411) Net Income per Share 1.98 Return on Assets 1.4 Return on Equity 28.7% Equity Jun/10 Assets 755.7 Loan portfolio 326.5 Funding 510.6 Assets under Management 344.9 ¹ Items based on Consolidated Statements. ² Refers to the addition of Personnel Expenses and Other Administrative Expenses. 1H09 4,014 3,250 7,308 18,465 6,379 499.3 (11,221) 1.56 1.4 27.4% Jun/09 598.8 252.5 412.4 264.9 ∆ 1H09 (%) 26.5 34.9 62.8 31.7 19.0 19.4 10.9 26.9 1.3 p.p. ∆ Jun/09 (%) 26.2 29.3 23.8 30.2 The administrative expenses, which comprise personnel expenses and other administrative expenses, totaled R$ 12.4 billion, growth of 10.9% in 12 months, reflected in the productivity ratios shown in the table below: Productivity Ratios 1H10 1H09 Service Revenues/Personnel Expenses 123.9 112.7 Service Revenues/Administrative Expenses 61.0 56.9 Cost/Income Ratio - % 44.5 49.3 Income fees and financial margin growth in addition to the control of administrative expenditure helped to improve the cost/income ratio of the period. See further information about the economic-financial performance of BB in the Management Discussion and Analysis at BB's Website (www.bb.com.br/ri). SHARE PERFORMANCE Banco do Brasil's shares (BBAS3) closed the first half of 2010 priced at R$ 24.65, up 23.7% from the last 12 months, against appreciation of 18.4% of Ibovespa. BBAS3 was traded in all BM&FBovespa's sessions, in the daily average amount of R$ 94.9 million in the first half of 2010, as opposed to R$ 66.4 million in the same half of the previous year, and continued to be listed in the theoretical portfolios of the major Stock Exchange indexes: Ibovespa, Ibrx50, IGC, ISE and Itag. Banco do Brasil's stocks have also been traded in the US market by means of American Depositary nd th Receipts - ADR since December 2 , 2009. On June 30 , 2010, there were 5.6 million outstanding ADRs. Banco do Brasil has a 40% payout policy, which is taken in the form of dividends and interest on own capital, at quarterly intervals. The amount of R$ 2.1 billion was allocated to shareholders in the first half of the year, being R$ 1 billion as dividends and R$ 1.1 billion as interest on own capital. The remaining 60% of the profit was allocated to legal and statutory reserves and to business expansion (a policy of reinvesting the profits and paying dividends). With its stack public offering, Banco do Brasil achieved a free float of 30.4%, raising the number of shareholders from 355.5 thousand in the first half of 2009 to 417.9 thousand in the same period of 2010. 3 Management Report 1H10 BUSINESS PERFORMANCE BB closed the first half of 2010 with a base of 53.3 million customers and 34.9 million checking accounts (32.7 million individual checking accounts and 2.2 million business checking accounts), a growth 0.5% growth in 12 months. BB has a segmented model to meet the needs of its non-corporate customers. For Private Banking business, some platforms were installed in the cities of Campo Grande, Manaus, Santo André, Maceió and Natal. That expansion allowed a 16.6% increase in the customer based served by BB Private, a 24.2% increase in the volume of assets under management and a 37.2% higher contribution margin for the segment. BB makes available to its customers an access for making business by physical networks (branches, service centers and correspondents) and virtual networks (call center, internet and mobile). In its physical network, BB has Brazil's largest branch network, with 4,984 units, and has 9.8 thousand correspondent banks, over 18.2 thousand service centers, and Latin America's largest ATM set, with 43.9 own machines. In 1H10 the migration process for Nossa Caixa service centers to the BB model was completed. In ATM, about 38.9% of all BB banking transactions are performed. In order to provide more comfort and convenience, in 1H10 the bank started an equipment modernization involving a migration to the Linux operating system, which will provide a faster service and new functionalities. In addition, the use of terminals contributes to develop the potential of more distant regions, such as the country's borders. BB also has terminals that are shared with Caixa Econômica Federal and Banco de Brasília and its own network abroad, comprised of 45 service centers in 23 countries, in addition to 1,332 foreign correspondent banks. By means of its virtual network, BB provides additional channels for access to banking services, such as the Call Center, the internet access (both for individuals and corporations), the mobile banking and SMS. BB's internet self-service closed the first half of the year with the historical mark of over 93.2 million effective transactions per month and over 10.2 million customers using that channel, that attends to 37.2% of the total transactions. The Short Message Service – SMS has over 829.8 thousand enrolled customers, and 58 million messages had been transmitted by end of the first half of 2010. In that period, BB launched the "Saque Sem" service, a transaction mode that allows withdrawals in ATM without using a card. That is a new and innovating service, providing both convenience and security. Fundings In the first half of 2010, Banco do Brasil recorded R$ 510.6 billion in funding, a 23.8% growth over the same period of 2009, which reflects the customers reliance in BB, even in adverse environment. 1 Demand deposits, that grew 20.3%, deserve special emphasis, allowing BB to reach a 25.7% market share in 1H10. Regarding foreign fundings, it is important to highlight the funding accomplished in January 2010, when stocks were issued under the Global Medium Term Notes - GMTN program, in the amount of US$ 1 billion, comprising two series of US$ 500 million, one for a 5-year term and the other for a 10-year term. At the end of the half, the balance of foreign funding recorded US$ 23.6 billion, change of US$ 8.5 billion or 56.2% in relation to the same prior-year period. Funding management and government programs In the 1H10, BB loaned R$ 1.7 billion in 29.6 thousand transactions with resources from Fundo Constitucional do Centro-Oeste (FCO). The performance is equivalent to 65.1% of the budget program for the period, being 50.6% of that amount have benefited micro, mini and small-sized borrowers. Such financings created / maintained 75.8 thousand direct and 125.8 thousand indirect jobs. Funds invested grew 4.8% in relation to the same period of previous year and the balance of the portfolio attained R$ 11.5 billion. 1 BB’s total funding, as for June 2010, were compared with the Banking Industry provided by the Central Bank of Brazil, position March 2010. 4 Management Report 1H10 In working capital lending to micro and small-sized companies, Banco do Brasil made full use of the Transaction Guarantee Fund – FGO to mitigate credit risk in the transactions and expand portfolio volume. In 1H10, contracted operations amounted to R$ 4.4 billion, of which R$ 3.4 billion were guaranteed by FGO. Out of 5 projects analyzed by BB, all were authorized to support the construction capacity increase by shipbuilding industry, expand port infrastructure through Fundo de Marinha Mercante – FMM, totaling R$ 92.8 million in outlays. Thereby, the FMM portfolio reached the mark of R$ 795 million in June 2010, a 23.9% evolution from the same period in the previous year. Services BB Consórcios ended the first half of 2010 with 161.8 thousand active shares, a 33.3% increase in 12 months. 122.8 thousand consortium members in this total refer to vehicles and 9.6 thousand to housing segment. In tax collection, BB accounts for 23% of the market at federal level and 40% at state level, corresponding to R$ 93.3 billion and R$ 56.8 billion collected, respectively. R$ 7.4 billion were collected in the municipal level. By means of the bank charge services, deposit forms and standing orders, Banco do Brasil provides services for more than 590 thousand companies that brought in R$ 334 billion in the 1H10. These services added R$ 901 million in revenue, growth of 15% comparing to 1H09. The new electronic payment charge solution, called Authorized Direct Debit, had 1.2 million electronic drawees and 29.2% market share, and over 38.5 million bank payment forms were electronically processed. That new service avoids payment form printing, a measure that contributes to reduce paper use, and thus benefits the environment. In the half of 2010, 49.1 thousand payrolls were processed, considering business clients and public sector in the half. Overall, BB provided these services to a total of 18.4 million people, involving civil servants and employees from private enterprises. In addition, services were provided to 48 Social Security programs, such as advisory services in the financial, accounting and actuarial areas, benefit analysis and technical support, in addition to processing of retiree and pensioner payrolls, involving 210 thousand insureds. Asset Management In the first half of 2010, BB Gestão de Recursos (BB DTVM), Brazil's largest asset manager, reached R$ 344.9 billion in managed assets, comprising its investment funds and managed portfolios, and achieved the historical mark of 22.3% of market share. This volume represented an increase of 12.5% in the period, according to Associação Brasileira das Entidades dos Mercados Financeiros e de Capitais – Anbima. Considering fund management, BB DTVM is responsible for R$ 330 billion, which represents 22.7% market share, consolidating its position as also Brazil's largest assets monitor, according to Anbima. BB DTVM expanded its international performance by creating BB Asset Management Ireland, in Dublin, to meet the needs of foreign investors, especially those in Europe and Asia. Capital Market and Treasury Banco do Brasil operates in the domestic capital market through BB Banco de Investimento S.A. – BBBI. In 1H10, 20 issues of fixed-income securities were made, adding up to R$ 5.5 billion, placing the Bank on position number 1 in Anbima ranking, with 20.8% of market share. In the securitization segment, the Bank issued two receivables-backed investment funds (FIDC) and mortgage-backed securities (CRI) funds and one real state fund, amounting to R$ 397 million. In the market of variable-income issuance, BB-BI coordinated share offerings adding up to R$ 327 mllion, which placed it in position number 10 in Anbima ranking, with 2.4% of market share. 5 Management Report 1H10 In the custody of assets in the domestic market, BB occupies the position number 2 in Anbima ranking, with R$ 487 billion under its custody, representing 25.8% of market share. In the private equity industry, BB-BI has been operating since 2004 as a shareholder in eight FIPs (Investment Participation Fund) / FMIEEs, and more recently, has been providing economic and financial advisory services to four FIPs, being three of them in the investment period and one in the stage of obtaining funding from institutional investors, with a total capital commitment of R$ 1.85 billion. In the international capital market, through its external brokers BB Securities Ltd (London) and Banco do Brasil Securities LLC (New York), the Bank had a participation in 15 of 32 Brazilian issuances of fixed-income securities in the first half of the year, being 9 as lead-manager and 6 as co-manager, of which Braskem, CSN, Magnesita, Marfrig, Minerva, Banco Votorantim, BNDES, Fibria, Votorantim BESI and STN, besides BB, totaling over US$ 9 billion from the total of around US$ 15 billion issued in the period. BB's ownership interest in affiliated companies and subsidiaries contributed to the Bank R$ 1.4 million in equity in subsidiaries, an increase of 39.7% in relation to the same period in the previous year. The Bank participates as a shareholder in companies that have affinity with its businesses, and adopts the best corporate governance practices in the market. Loan portfolio BB's loan portflio reached R$ 326.5 billion, an increase of 29.3% compared to the first half of 2009. In the amplified portfolio criteria, where guarantees granted and private securities are included, BB's loan portfolion attained R$ 349.8 billion. This progress was driven by the growth of individuals transactions, that represented 31% of the total portfolio, as against 27.1% in the end of June 2009. Also worth highlighting is the 315% increase in the volume of transactions contracted by states and municipalities, compared to the same period in 2009. R$ million Loan portfolio 1H10 1H09 ∆ (%) Country 307,018 239,418 28.2 Individuals 101,122 68,467 47.7 Businesses 135,575 103,351 31.2 - SMEs 47,382 39,493 20.0 - Other 88,193 63,858 38.1 Agribusiness 70,321 67,600 4.0 Abroad 19,504 13,068 49.3 Total 326,522 252,485 29.3 Regarding the foreign loan portfolio, a 49.3% change was noted in relation to the same period in the previous year, achieving a total balance of R$ 19,5 billion at the end of 1H10, with a special highlight for pre-payment transactions, whose balance improved 60% when compared to 1H09. One of the reflexes in the financial crisis that began in 2008 was the rise in default in the Banking Industry – SFN. In BB, the delay index for receivables past due 90 days reached 3.7% at end of the first half of 2010, compared to 4.4% recorded in the same period of the previous year, and remained below market levels throughout the period. The transactions rated at risk levels AA, A, B and C accounted for 92.5% of portfolio, against the 91.8% verified in the SFN. Another positive factor was the volume of recovered credits. In the first half of 2010, R$ 1.4 billion of credits written off as losses were recovered, an amount 56.4% higher as compared to the first half of 2009. In the 1H10, Banco do Brasil also consolidated its leading position in the transfer of BNDES funds, with 21.1% of market share and a total of R$ 8.5 billion intended for investments in the wholesale market. 6 Management Report 1H10 BB was also the leader in terms of number of transactions contracted under the BNDES System, with 107.2 thousand transactions accumulated during the first half of the year. Among micro, small and middle-size undertakings, one out of three transactions was carried out by BB, which shows the wider and more dispersed access to investment credit. Cards The card business added R$ 1.4 billion to the Bank, among revenues from financing and services, with an expansion of 37% in relation to the same prior-year period. With a base of 86.2 million cards issued, BB obtained R$ 49.5 billion revenues in 1H10, growth of 26.2% in relation to 1H09. This performance enabled BB to advance in its market share from 20.2% to 20.3%, keeping the billing leadership in the debit and Visa cards in Brazilian market. Insurance, Private Pension Fund, and Savings Bonds The insurance, private pension fund and savings bonds business added, in the first half of 2010, R$ 596.2 million to the Bank's income, considering earning/loss equity fee income, which represented an increase of 19.4% compared to 1H09. This result may be expressed by the insurance ratio, which represents the insurance share Banco do Brasil's recurring net income, reaching 13.6% in the 1H10. Also in this semester, Banco do Brasil, through its whole-owned subsidiary BB Seguros, signed a Purchase and Sale Agreement with Sul América Seguros for the acquisition of the total shares of Brasilveículos in the amount of R$ 340 million and the sale of the total shares of Brasilsaúde in the total amount of R$ 28.4 million, thus proceeding with the restructuring in the insurance area. Foreign Trade In the foreign trade, the Bank maintained its leadership of the export and import exchange market, with volumes of US$ 25.6 billion and US$ 19.5 billion, respectively, and market shares of 30.6% and 24.8%, respectively. As regards foreign trade financing, noteworthy are the Pre-Shipment/PostShipment Export Financing operations, which reimbursements reached US$ 6.2 billion and regarding the Export Financing Program (Proex), which leveraged exports of approximately US$ 1.2 billion. Exchange and foreign trade online services continue to post records: 65.5% of such export exchange contracts and 42.8% of import contracts were agreed on through the Internet, and 47.7% used digital signatures. Currently, 92.3% of the dossiers of operations carried out at the Bank are scanned and 71% of clients forward documents to BB also by digital means. CORPORATE GOVERNANCE Banco do Brasil's corporate governance structure is comprised by: the Board of Directors, advised by the Audit Committee and Internal Audit, and the Executive Board, made up of the Management Board (president and nine vice-presidents) and by 27 statutory directors. The Bank also has a permanent Board of Auditors. Decisions are taken collectively at all levels of the Bank. With the purpose of involving the executives in the definition of strategies and approval of proposals for BB's different businesses, the management uses committees, subcommittees and commissions at a strategic level, which ensure the agility and security for the decision making. Among the instruments used to assure good governance, it is also worth highlighting the Corporate Governance Code and the Code of Ethics. As a good initiative of corporate governance, the Bank has introduced tools to evaluate the performance of the Board of Directors, Audit Committee and Executive Board, in order to support the preparation of internal diagnoses and the identification of measures to improve performance. Banco do Brasil is signatory of the Anbima Code of Regulation and Best Practices for the Private Banking Activity in the Domestic Market, ensuring high ethical standards, maximum transparency, qualification of professionals and commitment in the quality of the recommendation of products and services. 7 Management Report 1H10 Moreover, Banco do Brasil, its Shareholders, the Officers, and the members of the Audit Committee undertake to resolve all and any dispute or controversy related with the New Market Listing Regulation by means of the Arbitration Chamber of the Bovespa Market, in conformity with a commitment clause contained in the By-laws of Banco do Brasil. In relation to investee companies, BB has searched to improve the governance of these companies. For example, improvements have been implemented in the governance of Banco Votorantim: restructuring of the Board of Auditors, the Audit Committee, and Board of Directors, in addition to the implementation of three assistance committees to the Board of Directors (Finance, Human Resources and Products and Marketing). Market relations In the first half of the current year, BB took part in 34 meetings with domestic investors and analysts, 5 conferences and promoted 4 teleconferences with analysts and investors, and more that 300 telephone assistances. In view of the public offer of the Bank's shares, road shows in Asia, Europe and South and North Americas were intensified. BB provides up-to-date information to the market at the Investor Relations site (bb.com.br/ri). Highlights of the period Jan - Announcement of strategic partnership between BB Seguros and Grupo Icatu, focused on savings bonds businesses; Feb - Registering the Memorandum of Understanding between Banco do Brasil and Caixa Econômica Federal and Caixa Participações, with the purpose of carrying out studies on the operating or corporate feasibility in Cobra Tecnologia S.A. Mar The table below highlights several events that occurred in BB's business over the course in the first half of 2010: - Filing, with the Brazilian Exchange Securities Commission (CVM), of notice calls for Annual and Extraordinary Shareholders' Meetings for the merger, by Banco do Brasil, of Bescleasing and Bescredi. - Granting of the "Financial Holding Company" status by the US Central Bank; - Granting of a license for BB USA Servicing to carry out activities and provide fully supporting services to all Bank units in the USA; Apr - Executing a purchase and sale agreement for acquisition of the ownership control of Banco Patagonia by Banco do Brasil; - Registering a partnership between Banco do Brasil and Banco Bradesco for launching the Brazilian brand ELO and integrating part of its card operations; - Announcing the renewal of the strategic partnership between BB Seguros and Principal Financial Group – PFG do Brasil Ltda., aimed at private pension plan and savings bonds business; - Announcing the acquisition of part of the shares held by the Santander S.A. Group in Cielo S.A. and in CBSS, through its wholly-owned subsidiary BB Banco do Investimento S.A. 8 Management Report 1H10 May - Announce of the strategic partnership between BB Seguros and the Mapfre insurance group, aimed at the individual life, real estate, agriculture, vehicle and all insurance risks lines; - Approval, at the Banco do Brasil's Meeting, the corporate merger of wholly-owned subsidiary Banco Popular do Brasil; - Filling of the Protocol with the Brazilian Association of Financial and Capital Market Entities (Anbima) – request for previous analysis of the registering of the Public Offer of Primary and Secondary Distribution of Common Shares; Jun - Authorization granted to BB Securities by Financial Industry Regulatory Authority – FINRA to operate with underwriting, registered offerings and dealings. - Approval, at the Banco do Brasil's Meeting, the acquisition of the ownership control of Banco Patagonia, still pending homologation by the regulatory bodies of Brazil and Argentina. Legal Information In compliance with CVM Instruction No. 381, Banco do Brasil reports that KPMG Auditores Independentes has not provided, to BB and subsidiaries, any services that could affect its independence in relation to audit work in the first half of 2010. In the engagement of services not related to external audits, Banco do Brasil adopts procedures based on the applicable legislation and on internationally accepted principles that preserve the independence of the auditor. These principles consist of: (i) the auditor should not audit his own work and (ii) the auditor should not act managerially before his client nor promote the interests of his client. In compliance with article 8 of BACEN Circular 3068/01, Banco do Brasil confirms that it has the intention and financial capacity to hold until maturity the securities classified in the "Securities Held to Maturity" category. The financial capacity is backed by a cash flow forecast that does not take into consideration the possibility of selling these securities. In compliance with CVM Instruction no. 319/99, art. 14, BB informs that by the end of the first half of 2010, the process of integrating the agencies' BB-BNC Network was completed, which now serve customers within the applications and systems of the Banco do Brasil. Banco Nossa Caixa incorporation was part of the process of expanding the business of BB in the state of São Paulo, along with the creation of a statutory board to manage the negotiation strategies relating to that state. In compliance with Article 243 of Law 6404/76, BB reports that investments in subsidiary and associated companies totaled R$ 13 billion as of June 30, 2010. In accordance with criteria defined by the Brazilian Statute of Micro and Small Businesses (General Law of Micro and Small Businesses), 93.4% of BB's business clients are classified as micro and small businesses. The volume of funds used by SMEs reached R$ 47.4 billion in the 1H10, representing a 24.5% increase as compared to the previous half. The balance of working capital operations contracted by micro companies totaled R$ 4.3 billion, and for small companies totaled R$ 20.5 billion. Investment operations aimed at very small companies reached R$ 2.2 billion; for small companies, investments reached R$ 6.8 billion. See further information about BB strategic investiments in the Performance Analysis Report at BB's Website (www.bb.com.br/ri). INTERNAL PROCEDURES Risk Management In the first half of 2010, in spite of the uncertainties of the global economic scenario, specially regarding the tax sustainability of some countries in the Euro Zone, BB reaffirmed its management strategy, based on a solid risk governance. 9 Management Report 1H10 At Banco do Brasil, risk management is carried out on a joint and segregated basis from its business units. Risk and concentration policies are specified by the Bank's Board of Directors. These policies are expressed by global risk exposure limits, which are defined by the Global Risk Committee (CRG), which is a forum composed of its president and vice-presidents. The measures for implementing and monitoring the guidelines issued by the CRG are carried out by the Credit Risk, Marked and Liquidity and Operating Subcommittees. With the purpose of improving the risk governance, the Board of Directors approved a set of quantitative indicators to monitor the Banco do Brasil's risk appetite and tolerance. Under the scope of the market risk, there was a review on the global and specific limit structure and the Program of Stress Testing on the Required Capital for Market Risks, both in conformity with the provisions set forth by the Central Bank of Brazil (BACEN) Circular No. 3,478, which addresses internal market risks models. In connection with liquidity risks, the Bank's exposure is minimum as it is the owner of an expressive position in highly liquid public federal bonds. In relation to credit risk, Banco do Brasil adopts its own methodologies to rate customer credit risks. Developed concurrently with best market practices and the concepts introduced by the Basel Accord, these statistical models consider customer past performance (credit score), their credit performance (behavior score) with the Bank and the market, and the use of bank products. The credit methodologies developed and implemented in the Bank include customer risk analysis in every corporate and individual customer segment, in addition to financial institutions and countries. These methodologies have permitted the improvement of the credit process, by virtue of a more precise assessment of customer risk profile and contributes to the increase of credit, at levels above the competitors, with quality and security, even in adverse scenarios. The default on loans at Banco do Brasil, in the last 24 months, has remained at lower levels than that of the Banking Industry. The provisioning level is in line with its key competitors, while the coverage ratio, the relation between provision and late payments, is above that of other banks. In order to manage operational risk, Banco do Brasil, following the best market practices, monitors operational loss through a systemized internal database, exposure limits and key risk indicators, besides risk matrices to assess relevant outsourced services. Aiming at the ongoing improvement of the operating risk management, in the first half of 2010 BB implemented specific limits to operating losses related to "Labor Issues", "Faults in Businesses", "Faults in Processes" and "External Fraud and Theft", with the purpose of providing more expeditious proposals for mitigating measures. Noteworthy are the work for adequacy to the guidelines issued by BACEN at its Communication No. 19,217, of December 24, 2009, involving the use of four basic elements in the internal model for measuring operating risk: Internal Data Base, External Database, Scenario Analysis and Internal Control Factors and Business Environment. Finally, is recorded that BB continued with the consolidation of the simplified standardized approach of Basel II, and with the preparation process for adoption of advanced models. To find out more on Banco do Brasil's risk management policies, visit bb.com.br/ri. Internal Controls Since the first half of 2010, new practices to evaluate the efficiency of BB Internal Controls were incorporated, based on material relevance criteria, both in terms of impact on the financial statements and in relation to the operating risk items. With the purpose of strengthening the processes that fed the information disclosure to the market and the information generation for preparing the financial statements, in conformity with the provisions set forth in CVM Instruction No. 480, of December 7, 2009, some mechanisms were developed to ensure control efficiency. Taking into account the possible proposal of own models, either advanced or internal, of Market and Liquidity Risk, BB has also made strong efforts towards the segregated validation procedures of said models. 10 Management Report 1H10 Preventing and Combating Money Laundering For Banco do Brasil, preventing and fighting against money laundering is a legal obligation and a commitment to the Country. In its internet website, the Bank discloses the policies adopted to prevent and avoid money laundering, and provides suggestions to customers on how to avoid being used by criminals in money-laundering schemes. Moreover, the Bank permanently invests in the education of its employees. On-site training and internal certification in the Bank's Prevention and Avoidance of Money Laundering are certified with Seal by Enccla - National Strategy for the Avoidance of Corruption and Money Laundering. The Enccla seal is granted by the Ministry of Justice to courses which should meet the requisites as defined in Programa Nacional de Capacitação e Treinamento para o Combate à Lavagem de Dinheiro – PNLD (National Program of Education and Training for the Avoidance of Money Laundering). Additionally, from 2009 on, BB has addressed this issue in its external hiring selections. HUMAN RESOURCES BB ended the first half of 2010 with 106,241 employees, in view of 89,194 in 1H09. Inside this staff, there are 1,955 new employees hired as a result of the increase in funds, thus reinforcing the Bank's commitment with its employees (improved organizational climate), with its customers (improved customer service) and the country's development (generation of jobs). In 1H10, BB had 9,066 scholarship employees, as graduation and post-gradution students. Regarding training in general, BB recorded 2,078 thousand training hours in the first half of 2010. The remuneration and the benefits granted to the employees were distributed according to the table below: R$ million 1H10 1H09 ∆ (%) Payroll¹ 5,627 4,621 21.8 Supplementary Pension Plans – Previ² 100.6 73.8 36.2 Health Care Plans – Cassi² 439.8 422.1 4.2 Profit-Sharing Plan³ 767.2 526.9 45.6 50 43 16.2 Training ¹ Expenses with salaries, benefits, social charges and personnel provisions. ² Funding of supplementary pension and health care plans, pursuant to Explanatory Note 28. ³ Amount set aside for Profit and Gain Sharing, as Statement of income for the first half of the year. In its structure, the Bank has a Quality of Life Area - Vitae, which develops and manages a number of programs intended to improve its employees' quality of life, such as PCMSO (Program for Occupational Health Medical Control), Sesmt (Specialized Services in BB's Safety Engineering and Occupational Medicine), TABAS (Tobacco Control Program), and PAVAS (Assistance Program for Victims of Hold-Ups and Kidnappings). By means of the Traveling Ombudsman Project, in 1H10, Banco do Brasil's Internal Ombudsman held training and awareness events for employees. In its relations with trade unions, BB has adopted a system of permanent discussions. Moreover, a "Collective Bargaining" website was made available in the quest for improving the internal communications process, in order to consolidate and cultivate the practice of dialogue with union officials. SUSTAINABILITY In a world scenario in which the concern with the Earth sustainability is outstanding, Banco do Brasil has publicly embraced the cause for water. As an initiative towards the defense of this precious natural resource, BB signed a Protocol of Intentions for developing the Água Brasil (Water Brazil) 11 Management Report 1H10 Program, with the National Water Agency – ANA, WWF Brazil and Fundação Banco do Brasil – FBB, on March 22, 2010, the World Water Day. BB and FBB will invest, in a five-year period, approximately R$ 60 million in social and environmental projects for improvement of water quality and offer and improvement of the forest coverage in 14 major micro basins located in the Brazilian biomass: Cerrado/Pantanal, Atlantic Rainforest, Amazon, Caatinga and Pampa regions. Another purpose of the Program is to promote changes in behavior and values concerning the production, destination and treatment of urban solid waste, by implementing major projects in five cities. The Program will be coordinated by BB. FBB will follow up and evaluate the social and environmental projects, in addition to working out social players and partners, together with ANA and WWF Brazil, which will be responsible for the strategic assistance, preparation and carrying out of projects. Regarding the portfolio of sustainability actions, noteworthy is the business strategy of the Regional Sustainable Development (DRS), which operates to support urban and rural production activities, by aligning economic return, social justice and environment preservation, and respecting the local culture of the communities involved. The DRS methodology enables the catalization of a number of actions with local, regional and institutional partners in order to change the reality surrounding the supported activities, acting as a significant sustainable development tool in the several regions of the country, as a result of the widespread diversification of Banco do Brasil branches and its vocation for fostering actions. DRS serves approximately one million beneficiaries deployed in 3,827 municipalities, with 3,664 business plans and over R$ 5 billion in credits with BB. Additionally, Fundação Banco do Brasil social investments reached R$ 30.7 million in terms of initiatives, programs and structured actions in education, generation of jobs and income, and application of social technologies, with priority to communities of family farmers, agriculture workers, settlers, inhabitants of "quilombos" (encampment communities founded by escaped or freed African slaves), indigenous people and collectors of recycled materials all around the country, particularly in regions with low human development indices, and communities with high risk of suffering social exclusion. Also worth mentioning in the first half of 2010 were the awards granted to Banco do Brasil in three, out of six, categories of the GRI Readers´Choice Awards, at the Global Amsterdam Conference on Sustainability and Transparence. BB's 2008 Annual Report has been awarded in the Engagement, Investor Prize and General Winner categories. These awards achieved by BB provide international value to the brand and place the practice of sustainability and transparence reporting in the public relations as a benchmark for the market. This award was the result of the joint work from several areas of the Bank, which have made efforts to provide accurate, transparent and timely information, on a bold and innovative manner, aimed at strengthening relations with its investors and other interested publics. For further information, see the 2009 Annual Report at bb.com.br/ri and the Fundação Banco do Brasil website: www.fbb.org.br. MAIN AWARDS RECEIVED IN THE PERIOD • GRI Readers´Choice Awards winner in three categories – Engage Award, Investor Award and GRI Readers’ Choice Award: Best Overall • Deutsche Bank’s Straight Through Processing (STB) Excellence Award • 35 cases awarded in 12 categories of the E-finance Award: Storage, Corporative Architecture, Technical Architecture, ATMs, Collaboration, Asset Management, Professional Inclusion, Telecommunications Infrastructure, Technology Integration, New Technologies, Image Processing and Virtualization. 12 Management Report 1H10 • BB won the Impar Award 2010 (Preferred Brands and Regional Affinity) from Ibope and RIC Recorde (Santa Catarina) ACKNOWLEDGMENTS We thank the dedication and diligence of our employees and collaborators, who are Banco do Brasil's greatest treasury, as well as the trust of shareholders and clients, which are the reason for our existence. Further information: Investor Relations Website (bb.com.br/ri). 13 INDEX MANAGEMENT REPORT FINANCIAL STATEMENTS Balance Sheet Income Statement Statement of Changes in Stockholder’s Equity Cash Flow Statement Added Value Statement EXPLANATORY NOTES NOTE 1 – The Bank and its Operations NOTE 2 – Company Restructuring NOTE 3 – Presentation of the Financial Statements NOTE 4 – Summary of main accounting practices NOTE 5 – Information by segment NOTE 6 – Cash and cash equivalents NOTE 7 – Interbank Investments NOTE 8 – Securities and Derivative Financial Instruments NOTE 9 – Interbank NOTE 10 – Loans NOTE 11 – Other Receivables NOTE 12 – Foreign Exchange Portfolio NOTE 13 – Other Assets NOTE 14 – Investments NOTE 15 – Premises and equipment and leased assets NOTE 16 – Intangible NOTE 17 – Deposits and Money Market Borrowing NOTE 18 – Borrowings NOTE 19 – Resources from securities issues NOTE 20 – Other liabilities NOTE 21 – Insurance, pension and capitalization operations NOTE 22 – Other Income / Expenses NOTE 23 – Non operating income NOTE 24 – Stockholder’s Equity NOTE 25 – Income and Social Contribution Taxes NOTE 26 – Tax credits NOTE 27 – Related-party Transactions NOTE 28 – Employee Benefits NOTE 29 – Commitments, Responsibilities and Contingencies NOTE 30 – Risk Management and Regulatory Capital NOTE 31 – Subsequent Events NOTE 32 – Other Information INDEPENDENT AUDITORS REPORT SUMMARY OF THE AUDIT COMMITTEE REPORT Management Report st 1 Half 2010 Todo seu Investor Relations Unit Banco do Brasil S.A. Financial Statements In thousands of reais BALANCE Semester ended 06.30.2010 SHEET Banco do Brasil 12.31.2009 06.30.2009 06.30.2010 Current Assets 399.702.520 380.900.268 312.455.431 443.264.254 414.966.454 Available Funds (Note 6) Short-term interbank investments Money market Interbank deposits (Note 7a) Securities and derivative financial instruments Internal portfolio Repurchase agreements Deposits with the Brazilian Central Bank Pledged in guarantee Subject to repurchase agreements within free movement Derivative financial instruments (Note 8) Interbank Accounts Payments and receipts pending settlement Restricted deposits Brazilian Central Bank deposits National Treasury - rural credits receivable National Housing Financing System (SFH) Interbank onlendings Correspondent banks (Note 9) (Note 9) Interdepartmental accounts Third-party funds in transit Internal transfers of funds Loan operations Public sector Private sector (Allowance for loan losses) (Note 10) Lease operations Public sector Private sector (Allowance for lease losses) (Note 10) Other receivables Receivables on guarantees honored Foreign exchange portfolio Income receivable Negotiation and intermediation of securities Special operations Insurance, pension plan and capitalization Sundry (Provision for other losses) Other assets Other assets (Provision for devaluations) Prepaid expenses (Note 12a) (Note 21a) (Note 11b) (Note 13) 9.240.098 7.596.546 5.648.842 06.30.2010 BB-Consolidated 12.31.2009 06.30.2009 ASSETS 9.535.060 346.512.326 7.842.770 6.212.045 137.902.326 166.919.021 131.712.334 131.212.743 166.070.192 101.867.415 134.937.621 104.178.979 107.838.360 144.173.860 36.034.911 31.981.400 27.533.355 23.374.383 21.896.332 124.924.973 111.171.285 13.753.688 37.282.901 10.638.385 23.062.864 16 3.263.578 -318.058 39.370.590 29.778.301 5.239.743 3.713.112 19.300 -620.134 30.432.092 20.181.482 5.892.859 3.094.191 366.454 200.002 697.104 69.296.901 36.236.785 26.472.598 16 5.519.814 -1.067.688 59.297.166 47.295.209 5.956.127 3.817.049 1.147.243 -1.081.538 53.631.234 37.724.309 11.550.028 3.094.191 366.454 200.002 696.250 62.670.068 3.343.306 59.018.578 57.243.465 104.641 1.670.472 1.211 306.973 26.421.167 153.232 25.950.674 24.167.099 148.158 1.635.417 1.254 316.007 23.391.793 2.570.046 20.690.380 20.605.544 24.636 60.200 1.287 130.080 64.830.856 3.343.625 61.148.827 59.373.714 104.641 1.670.472 27.860 310.544 26.574.438 153.258 26.063.340 24.279.765 148.158 1.635.417 7.746 350.094 29.121.620 2.722.492 26.125.223 24.507.300 24.636 1.593.287 1.287 272.618 109.576 13 109.563 293.950 330 293.620 99.283 -99.283 109.576 13 109.563 295.152 330 294.822 101.835 43 101.792 84.815.312 119.710.412 110.606.691 1.149.858 2.554.574 2.794.701 90.793.972 124.777.622 115.763.862 (7.128.518) (7.621.784) (7.951.872) 91.861.442 1.381.556 97.922.401 (7.442.515) 110.748.552 102.016.228 2.335.290 2.432.592 115.571.236 107.102.607 (7.157.974) (7.518.971) 51.359 51.359 --- 23.195 23.195 --- 55.940 55.940 --- 1.771.865 19.132 1.882.592 (129.859) 1.858.258 23.883 1.951.468 (117.093) 1.424.725 31.270 1.464.237 (70.782) 40.356.253 73.125 11.271.514 1.322.145 77.607 --28.344.083 (732.221) 36.984.668 36.938 8.480.791 1.464.119 16.017 28 -27.747.561 (760.786) 35.581.053 28.716 13.861.743 1.857.099 44.211 28 -20.594.037 (804.781) 45.406.025 73.125 12.257.825 648.367 406.482 -794.598 32.026.002 (800.374) 40.891.329 39.588 8.671.052 533.393 435.578 28 885.945 31.167.511 (841.766) 38.223.056 28.716 13.957.465 471.047 1.697.288 28 681.429 22.234.250 (847.167) 1.341.387 304.066 (163.096) 1.200.417 1.274.903 290.210 (166.105) 1.150.798 718.782 272.260 (152.513) 599.035 1.390.816 394.205 (171.142) 1.167.753 1.530.458 363.989 (175.968) 1.342.437 1.011.396 352.002 (186.923) 846.317 1 Banco do Brasil 12.31.2009 06.30.2009 06.30.2010 BB-Consolidated 12.31.2009 06.30.2009 ASSETS 06.30.2010 NON CURRENT ASSETS 292.885.246 279.708.708 219.245.281 312.441.375 293.582.389 252.326.261 LONG-TERM RECEIVABLES 268.468.924 257.489.129 202.842.288 293.886.554 276.572.786 237.775.040 Interbank Investments Interbank deposits (Note 7a) 4.336.471 4.336.471 7.248.277 7.248.277 6.998.165 6.998.165 1.329.922 1.329.922 2.327.768 2.327.768 7.512.928 7.512.928 Securities and derivative financial instruments Internal portfolio Subject to repurchase agreements Deposits with the Brazilian Central Bank Pledged in guarantee Derivative financial instruments (Note 8) 52.512.401 23.304.824 18.358.670 58 10.726.247 122.602 57.501.256 21.131.525 20.584.267 14.527.621 1.110.340 147.503 38.081.592 7.322.693 16.682.912 12.385.809 1.604.153 86.025 62.952.551 31.835.646 19.689.260 58 11.278.208 149.379 65.039.715 27.638.367 20.929.518 14.590.558 1.499.726 381.546 55.932.343 22.900.041 18.427.334 12.897.964 1.622.670 84.334 25.892 25.892 17.071 17.071 5.517 5.517 25.892 25.892 17.071 17.071 5.517 5.517 157.376.724 140.826.236 113.473.058 169.364.706 151.176.406 3.661.142 3.801.538 1.625.281 3.590.270 3.593.364 162.837.614 146.444.106 120.303.877 175.250.068 157.315.829 (9.122.032) (9.419.408) (8.456.100) (9.475.632) (9.732.787) 123.044.807 1.428.371 131.077.999 (9.461.563) Interbank transactions Interbank transfers Loan operations Public sector Private sector (Allowance for loan losses) (Note 10) Lease operations Public sector Private sector (Unearned income from lease operation) (Allowance for lease losses) (Note 10) Other receivables Receivables on guarantees honored Income receivable Negotiation and intermediation of securities Specific credits Insurance, pension plan and capitalization Sundry (Provision for other losses) Other assets Prepaid expenses (Note 11a) (Note 21a) (Note 11b) (Note 13) PERMANENT ASSETS Investments Investments in subsidiary and associated companies Domestic Foreign Other investments (Provision for losses) (Note 14a) (Note 14b) Land and buildings in use Land and buildings in use Other property and equipment in use (Accumulated depreciation) (Note 15) Applications in fixed assets for leasing Leased assets (Accumulated depreciation) (Note 15) Intangible Intangible Assets (Accumulated amortization) (Note 16) Deferred charges Organization and expansion costs (Accumulated amortization) Total ------ 37.580 37.580 ---- 2.920 2.920 ---- 2.622.540 34.012 2.705.104 -(116.576) 2.842.305 38.967 2.917.455 -(114.117) 1.828.108 28.865 1.881.618 -(82.375) 53.321.792 -30.634 -978.009 -53.136.975 (823.826) 51.223.436 51.384 31.069 -931.845 -51.031.510 (822.372) 43.918.489 48.797 31.503 -888.137 -43.753.000 (802.948) 56.481.058 -29.182 2.958 978.009 21.120 56.282.761 (832.972) 54.341.849 51.384 30.051 427 931.845 22.265 54.145.893 (840.016) 48.810.609 48.797 30.484 65.676 888.137 20.973 48.634.343 (877.801) 895.644 895.644 635.273 635.273 362.547 362.547 1.109.885 1.109.885 827.672 827.672 640.728 640.728 24.416.322 22.219.579 16.402.993 18.554.821 17.009.603 14.551.221 13.085.225 13.049.309 12.044.153 1.005.156 87.233 (51.317) 12.182.867 12.143.602 11.177.506 966.096 109.093 (69.828) 8.901.673 8.871.162 7.847.466 1.023.696 82.986 (52.475) 6.865.521 5.909.879 5.909.879 -1.023.321 (67.679) 6.645.339 5.775.953 5.775.953 -947.225 (77.839) 5.183.844 4.368.888 4.368.888 -901.475 (86.519) 4.040.260 3.375.105 6.505.246 (5.840.091) 4.006.745 3.167.766 6.232.263 (5.393.284) 3.248.276 2.715.179 5.296.674 (4.763.577) 4.259.386 3.392.468 6.969.318 (6.102.400) 4.214.484 3.335.698 6.631.918 (5.753.132) 3.663.320 3.120.630 6.020.842 (5.478.152) 895 1.689 -794 1.223 3.640 (2.417) 2.371 5.996 (3.625) ---- ---- ---- 6.965.830 9.757.675 (2.791.845) 5.625.845 7.607.239 (1.981.394) 3.808.425 4.335.280 (526.855) 7.051.600 9.871.520 (2.819.920) 5.676.879 7.659.321 (1.982.442) 5.127.647 6.656.968 (1.529.321) 325.007 1.928.080 (1.603.073) 404.122 2.083.036 (1.678.914) 444.619 1.652.816 (1.208.197) 377.419 2.041.268 (1.663.849) 471.678 2.246.822 (1.775.144) 574.039 2.195.299 (1.621.260) 692.587.766 660.608.976 531.700.712 755.705.629 708.548.843 598.838.587 2 Banco do Brasil 12.31.2009 06.30.2009 06.30.2010 BB-Consolidated 12.31.2009 06.30.2009 L I A B I L I T I E S / S T O C K H O L D E R S' E Q U I T Y 06.30.2010 CURRENT LIABILITIES 494.284.796 478.981.403 393.784.039 518.782.738 503.739.681 440.186.213 250.628.839 49.074.636 69.011.330 708.579 131.606.412 227.882 Deposits Demand deposits Savings deposits Interbank deposits Time deposits Sundry (Note 17a) 254.863.139 252.490.505 220.497.064 261.485.318 258.676.108 58.796.157 56.211.678 45.395.707 59.025.332 56.458.787 81.540.814 75.741.590 57.601.744 81.540.812 75.741.590 11.603.876 13.543.548 8.358.269 8.820.484 10.437.440 102.680.757 106.765.221 108.916.751 111.855.739 115.808.988 241.535 228.468 224.593 242.951 229.303 Deposits received under security repurchase agreements Internal portfolio Third-party portfolio Subject to repurchase agreements within free movement (Note 17c) 145.494.688 142.412.717 50.309.560 24.462.905 95.185.128 117.949.812 --- Funds from acceptance and issue of securities Mortgage Notes Foreign securities (Note 19) Interbank accounts Receipts and payments pending settlement Correspondent banks (Note 9a) Interdepartmental accounts Third-party funds in transit Internal transfers of funds 84.832.507 157.393.100 153.699.462 21.180.401 59.178.358 30.819.656 63.460.106 98.213.637 122.719.587 192.000 1.105 160.219 96.864.212 27.641.894 69.030.318 192.000 1.722.859 30.222 1.692.637 758.810 -758.810 86.562 -86.562 2.031.371 352.338 1.679.033 1.406.912 407.929 998.983 445.948 314.816 131.132 3.029.471 3.018.839 10.632 21.332 602 20.730 2.403.937 2.386.514 17.423 3.033.762 3.023.130 10.632 21.350 615 20.735 2.677.099 2.656.863 20.236 1.757.030 1.742.171 14.859 3.209.295 3.197.791 11.504 1.814.307 1.777.713 36.594 1.783.214 1.768.333 14.881 3.229.088 3.214.643 14.445 2.044.600 2.007.108 37.492 Borrowings Domestic borrowings - Official institutions Domestic borrowings - Other institutions Foreign borrowings (Note 18a) 13.816.700 --13.816.700 6.274.611 --6.274.611 10.111.206 3.832.296 -6.278.910 9.826.474 -127.781 9.698.693 4.810.915 70.976 86.221 4.653.718 7.170.898 3.832.296 104.073 3.234.529 Local onlendings - official institutions National Treasury National Bank for Economic and Social Development (BNDES) Federal Bank (CEF) National Industrial Financing Authority (FINAME) Other institutions (Note 18b) 11.377.281 2.073.619 5.568.650 29.516 3.234.424 471.072 11.472.080 2.100.693 6.078.474 21.935 2.138.406 1.132.572 13.682.710 3.574.417 6.429.351 -2.914.050 764.892 12.167.790 2.073.619 6.034.523 29.516 3.559.060 471.072 12.405.660 2.100.693 6.731.990 21.935 2.418.470 1.132.572 13.750.611 3.574.417 6.437.826 25.308 2.947.967 765.093 317.009 317.009 868 868 2.099 2.099 12.787 12.787 576 576 95 95 1.049.096 1.049.096 1.996.875 1.996.875 2.048.898 2.048.898 2.384.698 2.384.698 2.617.011 2.617.011 2.046.430 2.046.430 60.857.523 2.846.543 15.342.817 1.760.573 15.527.514 18.391 -1.441.501 204.007 -23.716.177 60.344.310 335.641 12.106.915 2.470.489 16.568.631 95.006 -2.050.776 204.007 13.260 26.499.585 58.304.749 2.596.602 16.249.954 1.485.485 14.474.786 128.342 -829.726 2.137.443 14.863 20.387.548 68.664.224 2.895.613 16.321.036 1.884.735 17.288.548 1.167.653 4.379.174 1.441.501 204.007 -23.081.957 66.872.599 376.523 12.173.988 2.625.183 18.315.213 526.029 4.123.164 2.050.776 204.007 13.260 26.464.456 64.557.481 2.853.288 16.338.591 1.502.172 16.030.541 450.187 3.567.359 829.726 2.137.443 14.863 20.833.311 Foreign onlendings Foreign onlendings Derivative financial instruments Derivative financial instruments Other liabilities Collection and payment of taxes and social contributions Foreign exchange portfolio Social and statutory Taxes and social security contributions Negotiation and intermediation of securities Technical provisions - insurance, pension plan and capitalization Financial and development funds Special operations Hybrid capital and debt instruments Sundry (Note 8d) (Note 12a) (Note 20b) (Note 21b) (Note 20a) (Note 20c) (Note 20e) (Note 20f) 3 Banco do Brasil 12.31.2009 06.30.2009 06.30.2010 BB-Consolidated 12.31.2009 06.30.2009 L I A B I L I T I E S / S T O C K H O L D E R S' E Q U I T Y 06.30.2010 NON CURRENT LIABILITIES 158.916.059 145.508.308 105.556.508 197.591.009 168.689.756 125.505.608 LONG-TERM LIABILITIES 158.706.119 145.259.396 105.359.236 197.591.009 168.689.756 125.505.608 Deposits Interbank deposits Time deposits (Note 17a) 81.042.233 2.500.207 78.542.026 77.614.251 2.012.595 75.601.656 54.637.261 1.171.328 53.465.933 82.475.508 1.615.779 80.859.729 78.887.719 1.181.133 77.706.586 60.216.746 6.750.813 53.465.933 Deposits received under security repurchase agreements Internal portfolio Third-party portfolio Subject to repurchase agreements within free movement (Note 17c) 6.864.228 2.155.092 4.709.136 -- 7.108.094 1.082.487 6.025.607 -- 4.643.807 1.113.202 3.522.605 8.000 9.209.469 4.451.894 4.709.136 48.439 7.121.725 1.082.045 6.025.607 14.073 4.643.382 1.112.777 3.522.605 8.000 Funds from acceptance and issue of securities Features letters Real estate, mortgage, credit and similar Debentures Foreign Securities (Note 19) 5.285.026 --5.285.026 1.812.687 --1.812.687 694.308 --694.308 10.200.792 581.603 1.666.979 7.952.210 5.955.407 860.822 1.496.353 3.598.232 2.227.066 210 21.067 2.205.789 Borrowings Domestic borrowings - Official institutions Foreign borrowings (Note 18a) 3.830.983 -3.830.983 4.776.034 -4.776.034 4.893.444 -4.893.444 2.189.337 9.282 2.180.055 1.559.348 93.859 1.465.489 1.365.529 141 1.365.388 Local onlendings - official institutions National Bank for Economic and Social Development (BNDES) Federal Bank (CEF) National Industrial Financing Authority (FINAME) (Note 18b) 22.367.301 15.055.980 112.119 7.199.202 17.422.445 11.799.391 124.297 5.498.757 8.679.901 4.655.737 -4.024.164 24.140.611 16.214.993 112.119 7.813.499 18.984.508 12.897.512 124.297 5.962.699 8.875.306 4.680.122 133.880 4.061.304 437.304 437.304 1.457.949 1.457.949 1.905.222 1.905.222 90.754 90.754 98.555 98.555 106.681 106.681 148.804 148.804 187.908 187.908 533.952 533.952 853.205 853.205 2.107.025 2.107.025 533.952 533.952 38.730.240 4.904.665 1.410.211 -2.287.315 2.258 18.411.878 3.643.393 8.070.520 34.880.028 4.123.099 1.320.070 -2.083.838 2.278 16.387.569 3.503.525 7.459.649 29.371.341 2.571.225 1.448.118 -2.119.045 2.314 14.689.140 975.400 7.566.099 68.431.333 7.019.531 79.511 22.541.624 2.287.315 2.258 21.339.629 3.643.049 11.518.416 53.975.469 5.981.486 2.197 13.216.012 2.083.838 2.278 18.553.240 3.502.544 10.633.874 47.536.946 4.110.284 -11.449.367 3.245.782 2.314 14.689.140 975.400 13.064.659 209.940 248.912 197.272 39.386.911 36.119.265 32.360.165 39.331.882 36.119.406 33.146.766 26.028.096 27.427.230 5.650.766 -7.049.900 18.566.919 17.236.823 1.330.096 -- 18.548.611 17.227.447 1.321.164 -- 26.027.932 27.427.066 5.650.766 -7.049.900 18.566.919 17.236.823 1.330.096 -- 18.548.611 17.227.447 1.321.164 -- 5.188 5.188 5.188 5.188 6.372 6.746 6.948 6.372 6.746 6.948 12.972.258 17.301.439 13.614.362 12.917.350 17.301.439 13.614.362 411.376 270.164 216.247 411.376 270.164 216.247 -31.191 -31.191 -31.191 -31.191 -31.191 -31.191 43 141 786.601 692.587.766 660.608.976 531.700.712 755.705.629 708.548.843 598.838.587 Foreign onlendings Foreign onlendings Derivative financial instruments Derivative financial instruments Other liabilities Taxes and social security Negotiation and intermediation of securities Technical provisions - insurance, pension plan and capitalization Financial and development funds Special operations Subordinated debt Hybrid capital and debt instruments Sundry (Note 8d) (Note 20b) (Note 21b) (Note 20a) (Note 20c) (Note 20d) (Note 20e) (Note 20f) DEFERRED INCOME STOCKHOLDERS' EQUITY (Note 24) Capital Domestic Foreign (Capital to be held) Capital reserves -- Revaluation Reserves Profits Reserves Assets Valuation Adjustments (Treasury Shares) MINORITY INTEREST IN SUBSIDIARIES Total (Note 8f) -- -- -- -- -- -- -- The accompanying notes are an integral part of these financial statements 4 Banco do Brasil S.A Financial Statements In thousands of reais Semester ended 06.30.2010 Statement of Income Banco do Brasil 1S2010 INCOME FROM FINANCIAL INTERMEDIATION Loans Leases Securities Derivative financial instruments Net foreign exchange Compulsory deposits Insurance, pension plans and capitalization EXPENSES FROM FINANCIAL INTERMEDIATION Deposits and funds obtained in the money market Borrowings and onlendings Leases Resultado de operações de câmbio Insurance, pension plans and capitalization Allowance for loan losses BB-Consolidated 1S2009 1S2010 1S2009 33.774.129 27.603.148 38.565.365 31.014.073 (Note 10.b) 22.295.406 17.247.157 24.316.980 18.465.063 (Note 10.i) 21.877 25.521 1.591.280 988.396 (Note 8.b) 10.185.396 10.497.869 10.839.056 10.944.973 (Note 8.e) 125.575 -510.238 -261.540 -512.499 18.653 53.242 (Note 12.b) (Note 9.c) (Note 21.e) -1.145.875 -- 324.186 -- 14.884 1.191.565 388.666 834.782 724.590 -22.937.377 -21.420.395 -26.668.888 -23.705.625 (Note 17.d) -16.029.568 -14.065.383 -17.548.179 -14.828.169 (Note 18.c) -1.911.907 -1.168.241 -1.900.093 -1.198.852 (Note 10.i) -18.937 -22.327 -1.146.529 -702.292 (Note 12.b) -2.179 (Note 21.e) (Notes 10.f and 10.g) -- --- -- -- -589.881 -457.393 -4.974.786 -6.164.444 -5.484.206 -6.518.919 GROSS FINANCIAL INTERMEDIATION INCOME 10.836.752 6.182.753 11.896.477 7.308.448 OTHER OPERATING INCOME/EXPENSES Banking service fees (Note 22.a) Banking Fees (Note 22.b) Personnel expenses (Note 22.c) Other administrative expenses (Note 22.d) Tax Expenses (Note 22.e) Equity in the (earnings)/loss of subsidiary and associated companies (Note 14) Insurance, pension plan and capitalization (Note 21.e) Other operating income (Note 22.f) Other operating expenses (Note 22.g) -3.152.652 -2.372.481 -3.684.312 -3.831.756 3.996.415 3.481.882 5.599.996 4.811.322 1.816.009 1.403.898 1.988.158 1.567.833 -5.727.624 -5.071.104 -6.125.473 -5.658.641 -5.644.767 -4.758.583 -6.315.076 -5.562.265 -1.403.541 -1.192.645 -1.807.732 -1.527.899 1.422.095 1.018.234 78.709 -664.956 OPERATING INCOME NON-OPERATING INCOME Income Expenses (Note 23) PROFIT BEFORE TAXATION AND PROFIT SHARING INCOME TAX AND SOCIAL CONTRIBUTION ON NET INCOME Income tax Social contribution on net income Deferred tax credits (Note 25) PROFIT SHARING NET INCOME Profit attributable to parent MINORITY INTEREST Number of shares (Treasury Shares) Total shares used in calculation of earnings per share Net income per share (Note 24.f) -- -- 908.865 774.558 5.288.189 6.626.205 6.130.278 7.016.551 -2.899.428 -3.880.368 -4.142.037 -4.588.259 7.684.100 3.810.272 8.212.165 3.476.692 172.609 28.106 346.024 1.442.244 214.943 63.756 426.300 1.489.264 -42.334 -35.650 -80.276 -47.020 7.856.709 3.838.378 8.558.189 4.918.936 -2.069.947 687.858 -2.714.779 -377.844 -1.824.934 -1.731.353 -2.546.511 -2.618.517 -1.091.701 -1.049.619 -1.406.265 -1.483.386 846.688 3.468.830 1.237.997 3.724.059 -655.578 -512.673 -767.154 -526.916 5.131.184 4.013.563 5.076.256 4.014.176 5.131.184 4.013.563 5.076.276 4.013.563 -20 613 2.568.186.485 -- -- 2.569.869.551 2.568.186.485 2.569.869.551 -1.159.815 -1.150.336 -1.159.815 -1.150.336 2.568.709.736 2.567.036.149 2.568.709.736 2.567.036.149 2,00 1,56 1,98 1,56 The accompanying notes are an integral part of these financial statements 14 Banco do Brasil S.A Financial Statements In thousands of Reais Semester ended 06.30.2010 STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY Capital Reserves Banco do Brasil Capital Realized EVENTS Tax Incentives Balances at 12.31.2008 Capital increase - the capitalization of reserves Assets Valuation Adjustments (Note 8.f) Net Income Appropriantions: - Reserves Revenue Reserves Revaluation Reserves in Subsidiary and Associated Companies Assets Valuation Adjustments Legal Reserves 13.779.905 5.188 7.286 4.768.706 1.788.916 Statutory Reserves Expansion Reserves Retained earnings (31.191) -- -- -- -- -- -- -- -- -- -- -- -- -- 48.482 (30.964) -- -- -- -- -- -- -- -- -- -- -- 4.013.563 -- -- -- -- -- -- -- (2.624.209) (4.768.706) Total 29.937.250 -17.518 4.013.563 -- - Dividends (Note 24.e) -- -- -- -- -- -- -- -- (483.097) (701.571) - Interest on own capital (Note 24.e) -- -- -- -- -- -- -- -- -- (903.854) (903.854) -- -- -- -- -- -- -- -- -- (2.741) (2.741) -- -- (338) -- -- -- -- -- -- -- 17.060 199.187 (31.191) -- 32.360.165 48.482 (30.964) -- -- 2.422.915 -- (36.885) 307.049 (31.191) -- 36.119.265 -- -- -- -- -- Prior year adjustments in associated companies - adequacy Law 11.638/2007 Realization of revaluation reserves in subsidiary and associated companies (Note 24.c) Balances at 06.30.2009 18.548.611 5.188 Changes in the period 4.768.706 -- 18.566.919 5.188 6.746 -- -- -- Balances at 12.31.2009 6.948 (338) (218.474) (31.422) Treasury shares -- 2.423.651 4.768.706 Subsidiary and associated companies 230.151 -- 200.558 9.419.711 Bank 1.989.474 11.624.888 200.558 2.205.177 2.296.291 15.005.148 -- Capital increase - incorporation of subsidiaries and affiliates (Note 24.b) 274 Capital increase - the capitalization of reserves (Note 24.b) 7.418.087 (5.188) -- -- -- -- -- -- -- -- Capital increase - subscription bonus of "C" (Note 24.b) 42.816 -- -- -- -- -- -- -- -- -- 42.816 -- -- -- -- -- -- 18.910 -- -- -- -- -- -- -- Assets Valuation Adjustments (Note 8.f) Net Income Appropriantions: - Reserves -- -- -- (Note 24.e) -- -- -- -- - Interest on own capital (Note 24.e) -- -- -- -- -- -- -- -- Realization of revaluation reserves in subsidiary and associated companies (Note 24.c) Others (Note 24.e) Realization of revaluation reserves in subsidiary and associated companies (Note 24.c) Acquisition of subsidiary (1.043.527) -- -- -- -- -- -- -- -- 371 -- -- -- -- 10.419.407 -- (17.975) 429.351 (31.191) -- 39.386.911 (4.585.741) -- 18.910 122.302 -- -- 3.267.646 Retained earnings Minority interest in Subsidiaries 6.372 (374) 2.552.851 256.560 Legal Reserves -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 1.788.916 -200.558 -- 9.419.711 -2.423.651 (218.474) Total 4.768.706 (31.422) (31.191) -- -- (4.768.706) -- -- -- -- -- -- 48.482 (30.964) -- -- -- 17.518 -- 230.151 613 29.937.250 -- -- -- -- 4.013.563 -- -- -- -- (2.624.209) -- 4.014.176 -- -- -- -- (483.097) -- (701.571) -- -- -- -- -- -- -- -- -- -- (903.854) -- (903.854) -- -- -- -- -- -- -- -- -- (2.741) -- (2.741) -- -- (338) -- -- -- -- -- -- 338 -- -- -- -- -- -- -- -- -- -- 6.948 5.188 -- Balances at 12.31.2009 18.566.919 5.188 Capital increase - incorporation of subsidiaries and affiliates (Note 24.b) 274 Capital increase - the capitalization of reserves (Note 24.b) 7.418.087 Capital increase - subscription bonus of "C" (Note 24.b) (338) 6.746 1.989.474 11.624.888 200.558 2.205.177 2.296.291 15.005.148 -- -(4.768.706) -- -- 786.601 -- -- 786.601 3.209.516 (36.885) 307.049 (31.191) -- 141 36.119.406 -- --- 42.816 -- -- -- -- -- -- -- -- -- -- -- -- 18.910 -- -- -- -- -- -- 274 -- -- -- -- -- -- -- -- -- -- -- 42.816 -- -- -- 141.212 122.302 Net Income -- -- -- -- -- -- -- -- -- 5.076.276 -- -- -- -- (54.908) -- -- -- -- 54.908 Appropriantions: -- -- -- -- -- -- -- (3.527.879) (20) 5.076.256 -- -- -- -- - Dividends (Note 24.e) -- -- -- -- -- -- -- -- (564.785) -- (1.008.946) - Interest on own capital (Note 24.e) -- -- -- -- -- -- -- -- -- (1.043.527) -- (1.043.527) -- -- -- -- -- -- -- -- -- 4.636 -- (Note 24.c) -- -- (371) -- -- -- -- -- -- 371 -- -- (164) -- -- -- -- -- -- -- -- -- -- (164) Prescribed interest on own capital and dividends Realization of revaluation reserves in subsidiaries / affiliates -- -- Balances at 06.30.2010 26.027.932 -- Changes in the period 7.461.013 (5.188) (3) 6.372 (374) -2.552.851 256.560 (444.161) 33.146.766 (31.191) (30.964) -- 3.271.319 785.988 199.187 -- 256.560 -- 785.988 17.060 (5.188) (7.412.899) -- 48.482 Results not achieved Others (3) Subsidiary and associated companies Bank 4.768.706 -- Treasury shares Expansion Reserves 7.286 4.768.706 Participation in subsidiaries -- Assets Valuation Adjustments Statutory Reserves 5.188 18.548.611 - Reserves 4.636 Revenue Reserves Revaluation Reserves in Subsidiary and Associated Companies 13.779.905 -- 4.636 -- -- Balances at 06.30.2009 (Note 8.f) (1.008.946) (1.043.527) -- Changes in the period Assets Valuation Adjustments (564.785) -- -- Tax Incentives - Interest on own capital -- -- -- EVENTS Prior year adjustments in associated companies - adequacy Law 11.638/2007 -- -- -- -- Capital Realized (Note 24.e) -- -- -- (3) Capital Reserves - Dividends -- -- -- BB-Consolidated - Reserves -- (371) (5.188) Net Income (3.527.879) 141.212 5.131.184 -- 7.461.177 (Note 8.f) -5.131.184 -- Changes in the period Assets Valuation Adjustments --- -- -- Capital increase - the capitalization of reserves (444.161) -- -26.028.096 Balances at 12.31.2008 3.271.319 122.302 274 -- Balances at 06.30.2010 Appropriantions: (7.412.899) - Dividends Prescribed interest on own capital and dividends 256.560 -- (4.768.706) 338 -- -- 4.636 -- -- -- -- (78) 10.364.499 -- (17.975) 429.351 (31.191) -- 43 39.331.882 (81) (4.640.649) -- 18.910 122.302 -- -- (98) 3.212.476 6 The accompanying notes are an integral part of these financial statements 6 Banco do Brasil S.A. Financial Statements In thousands of Reais Semester ended 06.30.2010 STATEMENT OF CASH FLOW Banco do Brasil 1S2010 CASH FLOWS FROM OPERATING ACTIVITIES Net Income before taxes Adjustments to Net Income: Provision for credit, leasing operations and other receivables Depreciation and amortization Result of the assessment of the recoverable value of assets BB-Consolidated 1S2009 1S2010 1S2009 7.856.709 3.693.835 4.974.786 1.558.880 338 (1.422.095) (32.170) 3.568 (2.599) 1.669 90.413 97.389 -(1.581.252) 4.908 3.838.378 6.807.877 6.164.444 946.886 703 (1.018.234) (8.338) 2.684 (496.281) (452) 87.553 1.718.160 -(586.507) (2.741) 8.558.189 9.254.232 5.484.206 1.585.731 1.395 (78.709) (3.083) (94.559) (4.802) 1.718 90.413 236.092 3.612.338 (1.581.252) 4.744 4.918.936 11.232.241 6.518.919 1.100.686 703 664.956 (11.401) 2.136 (676.520) (520) 87.553 2.020.662 2.119.282 (586.507) (7.708) 22.509.201 498.615 (34.488.379) (29.825.396) 9.416 (3.354.012) (296.073) (2.916.635) 5.829.408 2.838.105 4.436.388 10.742.591 1.405.264 (38.972) -11.099.935 425.567 836.398 (360.269) (14.460.843) 2.418 6.138.072 (18.408) (2.780.972) (1.308.075) (2.603.341) (419.657) (1.090.759) 3.956.087 (24.250) -1.061.777 32.785.008 (7.795.630) (36.513.124) (32.253.375) 205.192 (7.510.915) (141.206) (3.952.776) 6.396.999 5.781.382 4.869.844 10.568.191 12.403.700 -2.655.711 (12.842.082) (1.120.854) 312.182 (17.524.861) (374.546) 1.979.685 (135.187) (4.101.903) 3.339.510 2.175.564 (808.983) 806.851 6.158.661 --5.984.786 486.839 5.232.593 1.161.284 (461.315) (419.230) (2.388.924) 1.114.510 398.720 834.207 (386.169) (63.749) (317.348) (4.851.464) 3.389.603 -(486.827) (135.160) (2.425.336) (2.040.236) 1.800.013 -(403.347) 445.016 (327.517) -3.611.247 (1.258.491) 321.680 --4.509.184 4.267.966 3.741.895 CASH FLOWS FROM FINANCING ACTIVITIES Change in minority interest Subordinated debt Hybrid capital instruments and debt Capital increase - Exercise of bonuses subscription Dividends and Interest on own capital paid CASH PROVIDED/(USED IN) FINANCING ACTIVITIES -2.024.309 126.608 42.815 (2.480.792) -287.060 -2.916.963 (195.894) -(1.843.925) 877.144 (182) 2.786.389 127.246 42.815 (2.480.792) 475.476 785.988 2.916.963 (195.016) -(1.843.925) 1.664.010 Net Cash Variation At the beginning of the period At the end of the period -7.775.748 49.702.511 41.926.763 137.047 67.739.366 67.876.413 -1.377.997 37.874.982 36.496.985 -578.881 68.012.137 67.433.256 -7.775.748 137.047 -1.377.997 -578.881 Result of participation in affiliates and subsidiaries (Profit)/ loss on the sale of assets (Gain)/Loss on Capital Changes in foreign exchange Provision/(reversal) for devaluation of other assets Amortization of goodwill on investments Provision with civil, labor and tax provisions Changes in provision for Insurance, Pension Plans and Capitalization Actuarial Assets/Liabilities Other adjustments Changes Short-term interbank investments Securities and derivative financial instruments Interbank and interdepartmental accounts Loan operations Lease operations Other claims net of deferred tax Other assets Income tax and social contribution Deposits Money Market Repurchase agreements Borrowing and onlendings Other liabilities Change Deferred Income CASH PROVIDED/(USED IN) OPERATIONS CASH FLOWS INVESTING ACTIVITIES Securities and Derivatives availlable for sale Securities and Derivatives held to maturity Dividends receivable from subsidiary/associated companies (Acquisition) / disposal of fixed assets in use (Acquisition) / Disposal of investment (Acquisition) of intangible Cash and Cash Equivalents Assets and Liabilities arising from the merger of Banco Nossa Caixa (Note 5.a.) CASH PROVIDED/(USED IN) INVESTING ACTIVITIES Increase (decrease) in cash and cash equivalents The accompanying notes are an integral part of these financial statements 8 Banco do Brasil S.A. Financial Statement In Thousand of Reais Semester ended 06.30.2010 STATEMENT OF ADDED VALUE Banco do Brasil 1S2010 Balance Income BB Consolidated 1S2009 % Balance 1S2010 % Balance 1S2009 % Balance 36.669.005 28.079.046 43.302.963 34.434.073 Financial Intermediation Income Banking and service fees Allowance for loans losses Other income/expenses Financial Intermediation Expense 33.774.129 5.812.424 (4.974.786) 2.057.238 -17.962.591 27.603.148 4.885.780 (6.164.444) 1.754.562 -15.255.951 38.565.365 7.588.154 (5.484.206) 2.633.650 -21.184.682 31.014.073 6.379.155 (6.518.919) 3.559.764 -17.186.706 Third party materials and services -3.321.565 -2.604.743 -3.809.859 -3.147.723 Materials, energy and other Services provided Others (224.827) (515.399) -2.581.339 (194.761) (364.639) -2.045.343 (232.142) (589.258) -2.988.459 (206.118) (452.700) -2.488.905 Communications Data processing Transportation Security and surveillance services Services of the financial system Advertising and publicity Other Added Value (598.527) (534.730) (321.058) (325.961) (266.887) (132.176) (402.000) 15.384.849 (481.672) (353.931) (274.102) (285.179) (213.762) (96.393) (340.304) 10.218.352 (642.942) (565.466) (338.668) (327.947) (304.847) (188.310) (620.279) 18.308.422 (520.055) (424.537) (288.280) (305.718) (337.923) (139.923) (472.469) 14.099.644 Amortization / depreciation Net Value Added Produced by Entity (1.558.880) 13.825.969 (946.886) 9.271.466 (1.585.731) 16.722.691 (1.100.686) 12.998.958 1.422.095 1.018.234 78.709 -664.956 Added Value Received in the Transfer Equity in the (earning)/loss of subsidiary and associated companies Added Value to distribute 1.422.095 15.248.064 Distributed of Added Value 15.248.064 100,00 5.642.143 Personnel Salaries and fees Profit sharing Benefits and training FGTS Others Income Taxes and Social Contribution 3.594.905 655.578 831.224 224.136 336.300 4.214.563 Federal State Municipal Remuneration of Third Party Capital 3.945.016 556 268.991 260.174 Rentals Remuneration of Equity Interest on capital of the Union Interest on equity to other stockholders Dividends - main shareholder Dividends - other shareholder Retained earnings Minority interests in retained earnings 260.174 5.131.184 681.423 362.104 658.841 350.105 3.078.711 -- 100,00 1.018.234 10.289.700 100,00 10.289.700 100,00 37,00 5.022.201 27,64 3.267.780 512.673 620.520 183.120 438.108 1.066.745 1,71 835.614 474 230.657 187.191 33,65 187.191 4.013.563 592.928 310.926 460.231 241.340 2.408.138 -- 78.709 16.801.400 100,00 16.801.400 100,00 48,80 6.091.571 10,37 3.843.837 767.154 890.784 246.478 343.318 5.323.583 1,82 4.962.918 567 360.098 309.990 39,01 309.990 5.076.256 681.423 362.104 658.841 350.105 3.023.803 (20) (664.956) 12.334.002 % 100,00 12.334.002 100,00 36,26 5.543.434 44,94 31,68 3.635.860 526.916 706.530 210.613 463.515 2.548.246 20,66 1,85 2.233.011 491 314.744 228.146 1,85 30,21 228.146 4.014.176 32,55 592.928 310.926 460.231 241.340 2.408.138 613 The accompanying notes are an integral part of these financial statements 9 Notes to Financial Statements Notes to Financial Statements 1 – The Bank and its Operations 2 – Company Restructuring 3 – Presentation of the Financial Statements 4 – Summary of main accounting practices 5 – Information by segment 6 – Cash and cash equivalents 7 – Interbank Investments 8 – Securities and Derivative Financial Instruments 9 – Interbank 10 – Loans 11 – Other Receivables 12 – Foreign exchange portfolio 13 – Other Assets 14 – Investments 15 – Premises and equipment and leased assets 16 – Intangible 17 – Deposits and Money Market Borrowing 18 – Borrowings 19 – Resources from securities issues 20 – Other liabilities 21 – Insurance, pension and capitalization operations 22 – Other Income / Expenses 23 – Non operating income 24 – Stockholder’s Equity 25 – Income and Social Contribution Taxes 26 – Tax credits 27 – Related-party Transactions 28 – Employee Benefits 29 – Commitments, Responsibilities and Contingencies 30 – Risk Management and Regulatory Capital 31 - Subsequent Events 32 – Other Information 1 Notes to Financial Statements 1 – The Bank and its Operations Banco do Brasil S.A. is a publicly listed company established under private law with both public and private stockholders. It is subject to the requirements of Brazilian corporate legislation. Its purpose is to carry out all asset, liability and accessory banking operations, to provide banking services, to intermediate and originate financial transactions in various forms, including foreign exchange transactions and supplementary activities, with an emphasis on insurance, private pension, capitalization, securities brokerage, administration of credit/debit cards, consortiums, investment funds and management portfolios, and to practice any activities permitted for the institutions that are part of the National Finance System. It is also the main financial agent of the Brazilian Federal Government and is therefore required to carry out the functions attributed to it by law, specifically those of Article 19 of Law 4595/1964. 2 – Company Restructuring a) Mergers Besc S.A. Arrendamento Mercantil e Besc Financeira S.A. – Crédito, Financiamento e Investimento On April 13, 2010, as approved by the Extraordinary General Meeting held on the same date, Banco do Brasil S.A. merged the subsidiaries Besc S.A. Arrendamento Mercantil (Bescleasing) and Besc Financeira S.A. - Crédito, Financiamento e Investimento (Bescredi). The justifications for the mergers are principally based on cost reduction by capturing operating synergies and consolidating the competitive advantages to be achieved due to the magnitude of Bank's network of branches. The required valuations were performed; that of the Bank by the quotation of its shares in the securities market and those of Bescleasing and Bescredi by their book values. Based on those valuations, the Bank's capital, was increased by R$ 274 thousand, due to the issue of 9,039 registered common shares without par value, arising from the transfer of 1% of the assets of Bescleasing and 0.41639% of the assets of Bescredi approved by the Bank at 05.28.2010. Of that share issue, 6,452 shares were assigned to Besc Distribuidora de Títulos e Valores Mobiliários S.A. Bescval, controlled by Banco do Brazil and minority shareholder of Bescleasing, resulting in a reciprocal shareholding expected to be eliminated within 1 year. Banco do Brasil took on the capacity of successor of Bescleasing and Bescredi, as regards all their assets, rights and obligations. As a natural outcome, both merged companies had their separate legal identities terminated. Banco Popular do Brasil S.A. On May 31, 2010, as approved by the Extraordinary General Meeting held on the same date, Banco do Brasil merged its wholly-owned subsidiary Banco Popular do Brasil S.A. under the terms of the Agreement and Plan of Merger, by transferring the net equity of the subsidiary into the parent company. The merger is justified as the most adequate and efficient to integrate the activities and simplify the operating structure, with the resulting reduction in operating costs, in addition to allowing the expansion of the offer of products and services to the customers and the public connected to Banco Popular do Brasil. The net equity of Banco Popular do Brasil was valuated based on the book value as of December 31, 2009, with the addition of the equity variations between the date of the determination of book value and the merger date, as authorized by the Brazilian Securities Commission (CVM). As a natural outcome, Banco Popular do Brasil was extinguished pleno jure as a legal entity, and Banco do Brasil became the universal successor of Banco do Brasil's rights and obligations. 2 Notes to Financial Statements Shown below are the asset and liability balances of Banco Popular do Brasil S.A., Besc S.A. Arrendamento Mercantil, and Besc Financeira S.A. - Crédito, Financiamento e Investimento, merged into Banco do Brasil: R$ Thousand Saldos incorporados: - Assets - Liabilities - Equity Net income to date of incorporation Banco Popular Bescleasing Bescredi 194,820 171,265 23,555 20,500 780 19,720 21,107 1,860 19,247 1,768 142 373 Banco Nossa Caixa On April 1, 2010, the Central Bank of Brazil (BACEN) approved the merger of Banco Nossa Caixa and cancelled the operating permit. The book balances were absorbed by Banco do Brasil on November 30, 2009. In connection with the Justification and Incorporation Protocol published on 10.29.2009, the shares of Banco Nossa Caixa have been converted in shares of Banco do Brasil on 04.09.2010. b) Acquisitions Banco Patagonia S.A. On 04.21.2010, Banco do Brasil and the controllers of Banco Patagonia S.A., entered into a Stock Purchase and Sale Agreement for acquisition, by Banco do Brasil, of Banco Patagonia's shareholding control. The price stipulated for the acquisition of the 366,825,016 shares (51% of the share capital and voting capital) is of US$ 479,660 thousand, resulting in a value of US$ 1.3076 per share. The transaction was approved by the Extraordinary General Meeting of Shareholders on 06.16.2010, in the terms of article 256, of the Corporation Law, and is subject to approval of the regulatory bodies in Brazil and Argentina. Cielo e Visavale - Increase of the participation On April 23, 2010, Banco do Brasil, together with its fully-owned subsidiary com sua subsidiária integral BB Banco de Investimento S.A. submitted proposals to Grupo Santander Espanha referring to the acquisition of a portion of the shares held by this group in Companhia Brasileira de Soluções e Serviços – CBSS (Visa Vale) and in Cielo S.A. ("Cielo"). On 07.13.2010, the negotiation was completed and submitted to the competent authorities. The new involvement of BB Banco de Investimentos in the companies is shown in the table below: Participation Value of Acquisition Cielo S.A. Companhia Brasileira de Soluções e Serviços - Visa Vale 1,058,988 61,916 -- Previous Current 23.61% 28.65% 40.35% 45% 3 Notes to Financial Statements c) Corporate Reorganizations in the area of Insurance, Pension, Capitalization and Reinsurance IRB - Instituto de Resseguros do Brasil - Negotiations for Acquisition of Equity Interest On 10.15.2009, the Bank communicated the start of negotiations without binding effect, aiming at the acquisition of equity interest in IRB–Brasil Re S.A., in compliance with the current regulations and the terms inherent to operations of this nature, notably the obtainment of the necessary prior authorizations. Brasilcap Capitalizações S.A. On January 6, 2010, the Bank announced that its wholly-owned subsidiary BB Seguros Participações S.A. (BB Seguros) and Grupo Icatu (Icatu), entered into a Memorandum of Understanding with a view to forming a strategic alliance in the Brazilian market to develop and sell capitalization products. Brasilprev Seguros e Previdência S.A. On 04.30.2010, the Bank announced that BB Seguros Participações S.A. (“BB Seguros”) and PFG do Brasil Ltda., member of the Principal Financial Group (“Principal”), reviewed their strategic partnership in developing and marketing open-ended private pension plans in Brazil. Principal acquired a 4% shareholding in Brasilprev Seguros e Previdência S.A. (“Brasilprev”) held by Serviço Brasileiro de Apoio às Micro e Pequenas Empresas - SEBRAE. The BB Seguros holds 74.995% of Brasilprev's total equity capital, in accordance with the following breakdown of equity interests: Ações Ordinárias Principal BB Seguros Total Ações Preferenciais Total % N.º de Ações % N.º de Ações % N.º de Ações 50.01 49.99 100.00 572,634 572,406 1,145,040 -100.00 100.00 -1,145,040 1,145,040 25.005 74.995 100.00 572,634 1,717,446 2,290,080 The Mapfre Partnership On 05.05.2010, Banco do Brasil announced that BB Seguros and the insurance group Mapfre (“Grupo Mapfre”) entered into a partnership agreement (“Agreement”) to form a strategic alliance in the field of personal insurance, casualties, and vehicles effective for 20 years. Pursuant to this Agreement, two privately owned holding companies will be organized, under the Mapfre group's control of the voting shares and jointly managed. In order to equalize the intended shareholding in both holding companies that will be organized, BB Seguros will pay in a sum of R$ 295 million. Brasilveículos Companhia de Seguros On 05.05.2010, the BB Seguros and Sul América Companhia Nacional de Seguros (Sul América) entered into a Purchase and Sale Agreement to acquire all the shares of Sul América (60% of common registered shares) in Brasilveículos by BB Seguros. The price set for this operation was R$ 340 million. That transaction is subject to analysis and approval of respective regulatory, overseeing and inspecting agencies, in accordance with the applicable legislation. 4 Notes to Financial Statements Hence, Brasilveículos will have the following shareholders: Atual BB Seguros Sul América Futura Ações ON Ações PN Ações ON Ações PN 40% 60% 100% -- 100% -- 100% -- Capital Total 100% -- Brasilsaúde Companhia de Seguros On 05.20.2010, BB Seguros and Sul América Seguro Saúde SA (SAS Saúde) signed an Agreement of Purchase and Sale for the acquisition by SAS Saúde of all shares held by BB Seguros (49.92% of total capital) in Brasilsaúde Companhia de Seguros. The sale price set is R$28.4 million. That transaction is subject to analysis and approval of respective regulatory, overseeing and inspecting agencies, in accordance with the applicable legislation. d) Other Partners Partnership of Banco do Brasil and Bradesco in the card segment On 27.04.2010, the Bank of Brazil SA and Banco Bradesco SA signed a memorandum of understanding, without binding effect, for the preparation of a business model to integrate a portion of their card operations and, concomitantly, launch a Brazilian flag Elo of credit, debit and prepaid cards for account holders and non-account holders. If the operation is concluded, the above mentioned companies intend to create a new "holding" which will integrate and manage the businesses. Memorandum of understanding Bradesco CEF On 08.09.2010, the Banco do Brasil, Banco Bradesco SA and Caixa Economica Federal signed a memorandum of understanding, without binding effect for development of business model in order (I) to integrate the CEF for the release of all of the Brazilian flag Elo credit cards, debit and prepaid to customers account holders and non-account holders of their banks and (ii) to evaluate the possibility to develop jointly, new business for prepaid cards through creation of enterprise payment methods or incorporation of existing businesses and aligned to this type of business. The consummation of the transaction is subject to technical studies, legal, financial, to a satisfactory negotiation of definitive documents and completion of legal formalities and regulatory requirements. Strategic Partnership with Bradesco and BES On 08.09.2010, the Banco do Brasil has signed with Banco Bradesco SA and Banco Espirito Santo SA (BES), memorandum of understandings, without binding effect, in order to initiate dealings to establish strategic partnership (financial holding) in order to performance in Africa. If successful, the partnership would consolidate current operations in Africa BES. The Holding also coordinates future investments involving the acquisition of shareholdings in other banks as well as establishing its own operations on the African continent. The three financial institutions consider the potential partnership an important means to support the movement towards the internationalization of Brazilian and Portuguese companies and to assist the growing trade with that continent. The consummation of the transaction is subject to completion of technical studies, legal, financial, to satisfactory negotiation of definitive documents and completion of legal formalities and regulatory requirements in each country. 5 Notes to Financial Statements 3 – Presentation of the Financial Statements The Financial Statements have been prepared in accordance with the accounting guidelines derived from Brazilian corporation law, the rules and instructions issued by the Conselho Monetário Nacional (CMN), Brazilian Central Bank (BACEN), the Brazilian Securities Commission (CVM), the National Council of Private Insurance (CNSP), the Superintendence of Private Insurance (SUSEP), and the National Health Agency (ANS). According to Brazilian practices some estimates require that Management use its judgment in determining and recording accounting estimates, when applicable. Significant assets and liabilities subject to these estimates and assumptions include the residual value of property, plant and equipment, the allowance for doubtful loans and deferred income tax recorded in assets, some contingencies and issues discussed at judicial level were booked, the appreciation of derivative financial instruments, and the assets and liabilities relating to benefits for employees. The final amounts for transactions involving these estimates are only known upon their settlement. They include operations of Banco do Brasil S.A. in Brazil and abroad (Banco do Brasil), and financial and nonfinancial subsidiaries in Brazil and abroad, special purpose entities, including the Investment Funds in which the Bank controls directly or indirectly, and investments in subsidiaries and associated companies, in accordance with Central Bank requirements (BB-Consolidated). In the preparation of those financial statements, amounts resulting from transactions between consolidated companies, including the ownership interest held by one in another, balances of balance sheet accounts, revenues, expenses, reciprocal shareholding, and unrealized profits, net of tax effects, were eliminated. Minority interest in net equity and income was separately disclosed in the financial statements. The balances of balance sheet and income accounts of ownership interest where control is shared with other shareholders were consolidated proportionally to the ownership held in the investee's capital. Leasing operations were considered from the funding method's standpoint, and the amounts were reclassified from the heading of leased assets to the heading of leasing operations, after deduction of residual amounts received in advance. Since 2008, the Accounting Pronouncements Committee (CPC), issued accounting standards and interpretations aligned to the international accounting standards approved by the Securities Commission. Currently, the Bank has applied the pronouncements heretofore listed: CPC n.º Subject 01 03 05 25 Reduction to the recoverable value of assets Cash Flow Statement Related party disclosure Provisions, Contingent Liabilities and Contingent Assets CVM Deliberation n.º CMN Resolution n.º Exercise for First-time adoption 527/2007 547/2008 560/2008 594/2009 3,566/2008 3,604/2008 3,750/2009 3,823/2009 2008 2008 2009 2010 The application and impact of other accounting rules issued by the Bank are being evaluated in the context of the preparation of consolidated financial statements in accordance with international accounting standards (IFRS) from fiscal year 2010, as determined by CMN Resolution No. 3.786/2009 and Central Bank Circular No. 3.472/2009.The Bank will complete this process within the statutory deadlines set. For purposes of comparison of the financial statements, the following reclassification was made to the NonCurrent Liabilities - Minority Interests in Subsidiaries to Shareholders' Equity - Minority Interests in Controlled Companies, on 06.30.2009 and 12.31.2009, in the value of R$ 786,601 thousand and R$ 141 thousand, respectively. The authorization for conclusion of such financial statements was given by the Executive Board of Directors, on 08.10.2010. 6 Notes to Financial Statements We have listed the shareholding interest included in the consolidated financial statements, segregated by business segments, according to exhibit in Note 5 - Information by Segment: Total Share 06.30.2010 Banking Segment BB Leasing S.A. – Arrendamento Mercantil Besc Distribuidora de Títulos e Valores Mobiliários S.A. BB Banco Popular do Brasil S.A. Besc Financeira S.A. – Crédito, Financiamento e Investimentos Besc Leasing S.A. – Arrendamento Mercantil Banco Nossa Caixa S.A. Banco Votorantim S.A. Banco do Brasil – AG. Viena BB Leasing Company Ltd. BB Securities LLC. BB Securities Ltd. Brazilian American Merchant Bank – BAMB BB USA Holding Company, Inc Investment Segment BB Banco de Investimento S.A. Kepler Weber S.A. Neoenergia S.A. Companhia Brasileira de Securitização – Cibrasec Segment of Fund management BB Gestão de Recursos–Distribuidora de Títulos e Valores Mobiliários S.A. Segment of Insurance, Private Pension Fund, and Capitalization BB Seguros Participações S.A. (1) (1) (2) (2) (2) (2) (3) (1) (1) (1) (1) (1) (1) (8) (8) (8) (8) (8) (8) (8) Activity Leasing Asset Management Banking Loans and Financing Leasing Banking Banking Banking Leasing Broker Broker Banking Holding (1) (6) (6) (5) (8) (9) (8) (9) Investment Bank Industry Energy Credit Acquisition (1) (8) Asset Management (8) (8) 12.31.2009 06.30.2009 100% 99.62% ----50% 100% 100% 100% 100% 100% 100% 100% 99.62% 100% 99.58% 99% -50% 100% 100% 100% 100% 100% 100% 100% 99.62% 100% 99.58% 99% 71.25% -100% 100% 100% 100% 100% 100% 100% 17.57% 11.99% 12.12% 100% 17.65% 11.99% 9.09% 100% 17.67% 11.99% 9.09% 100% 100% 100% -- (4) (8) Holding 100% 100% BB Aliança Participações S.A. (4) (8) Holding 100% 100% -- BB Corretora de Seguros e Administradora de Bens S.A. Cia. de Seguros Aliança do Brasil Nossa Caixa Capitalização S.A. Brasilveículos Companhia de Seguros Brasilcap Capitalizações S.A. Brasilprev Seguros e Previdência S.A. Brasilsaúde Companhia de Seguros Seguradora Brasileira de Crédito à Exportação – SBCE Segment of payment methods BB Administradora de Cartões de Crédito S.A. Nossa Caixa S.A. – Administradora de Cartões de Crédito Cia. Brasileira de Soluções e Serviços CBSS – Visavale Cielo S.A. Tecnologia Bancária S.A. – Tecban Other segments Ativos S.A. BB Administradora de Consórcios S.A. BB Tur Viagens e Turismo Ltda. BB Money Transfers, Inc Cobra Tecnologia S.A. BV Participações S.A. (4) (4) (4) (5) (5) (5) (5) (5) (8) (8) (8) (8) (8) (8) (8) (8) Broker Insurance company Capitalization Insurance company Capitalization Insurance Company/Pension Insurance Company/Health Insurance company 100% 100% 100% 70% 49.99% 75% 49.92% 12.09% 100% 100% 100% 70% 49.99% 49.99% 49.92% 12.09% 100% 100% 71.25% 70% 49.99% 49.99% 49.92% 12.09% (4) (4) (5) (6) (5) (8) (8) (9) (8) (8) Service Rendering Service Rendering Service Rendering Service Rendering Service Rendering 100% 100% 40.35% 23.61% 13.53% 100% 100% 40.35% 23.60% 9.02% 100% 71.25% 40.35% 24.58% 8.96% (4) (4) (4) (4) (4) (7) (8) (8) (9) (8) (9) (8) Credit Acquisition Consortiums Tourism Service Rendering IT Holding 100% 100% 100% 100% 99.94% 50% 100% 100% 100% 100% 99.94% 50% 100% 100% 100% 100% 99.39% -- (1) (2) (3) (4) (5) (6) (7) (8) (9) Financial subsidiary companies. Financial institutions incorporated (Note 2a). Financial company, with joint control with Votorantim Finanças S.A., included proportionately in the consolidation. Non-financial subsidiary companies. Non financial associated companies, included on pro rata basis in consolidation, as recommended by Bacen, according to the provisions of paragraph 2, Article 22 of Law 5,385/1975, amended by Law 9,447/1997, with working of Decree 3,995/2001. Non financial companies, jointly controlled, included on pro rata basis in consolidation, as recommended by Bacen, according to the provisions of 2nd paragraph of the Article 22, of Law 5,385/1975, amended by Law 9,447/1997, with working of Decree 3,995/2001. Non financial company , with joint control with Votorantim Finanças S.A., included proportionately in the consolidation. Financial Statements for consolidation in June/2010. Financial Statements for consolidation in May/2010. The following investment funds were also consolidated: BV Financeira FIDC I, BV Financeira FIDC II, BV Financeira FIDC III and Votorantim G&K Fundo de Investimento em Participações, as well as specific-purpose entity located abroad Dollar Diversifield Payment Rights Finance Company, entities that are directly or indirectly controlled by the Bank. 7 Notes to Financial Statements 4 – Summary of main accounting practices a) Statements of income Revenue and expenses are recorded under the accrual basis. Operations formalized post-fixed financial charges are recorded at present value by the criterion pro rata die, based on changes in their indexers agreed, and operations with fixed financial charges are recorded at redemption value, rectified on account of unearned income or expenses to be recognized relating to future periods. Operations indexed to foreign currencies are adjusted through the balance sheet date at the discretion of the current rates. b) Cash and cash equivalents Cash and cash equivalents are represented by available funds in local currency, foreign currency, investments in gold, short-term investments with high liquidity and insignificant risk of change in value and limits, with maturity equal to or less than 90 days and do not include short-term interbank investments – financed position (Note 6). c) Short-term interbank investments Short-term interbank investments are recorded at their investment or acquisition amount, plus income accrued up to the balance sheet date and adjustment to allowance for losses when applied. d) Securities The securities purchased for the Bank's portfolio are recorded at the actual amount paid, including brokerage charges and fees, and are classified in three separate categories according to management’s intentions, According to Bacen 3.068/2001: Trading Securities: these are securities purchased to be actively and frequently traded. They are adjusted monthly to market value. The increases and decreases in their value are recorded, respectively, in income and expense accounts for the period; Securities available for sale: these are securities that may be traded at any time, but are not acquired to be actively and frequently traded. They are adjusted monthly to market value and their increases and decreases in their value are recorded, net of tax effects, in a separate stockholders' equity account. Securities held to maturity: these are securities that the Bank intends and has the financial ability to hold to maturity. These securities are not adjusted to market value but are held at cost plus accumulated interest. The financial capacity is supported by a cash flow projection that does not consider the possibility of sale of these securities. The mark-to-market methodology used for securities was established following consistent, verifiable criteria, which consider the average price of trading on the day of calculation or, if not available, the daily adjustment of future market transactions reported by Anbima, BM&FBovespa or the net expected realizable value obtained through the use of future interest rate curves, foreign exchange rates, and price and currency index charged in the settlement. Income accrued on the securities, irrespective of the category in which they are classified, is appropriated on a daily pro-rata basis on the accrual basis of accounting until the date of maturity or final sale, according to the exponential or straight-line method, based on the contractual remuneration and purchase price, and recorded directly in the statement of income for the period. 8 Notes to Financial Statements Losses with securities classified as available for sale and held to maturity, if considered not to be temporary, are recorded directly in expenses for the period and a new cost basis for the asset is determined. Upon sale, the difference between the sale amount and the cost of acquisition plus accrued income is recorded as a gain or loss on securities on the date of the transaction. e) Derivative Financial Instruments Derivative financial instruments are recorded at market value at each monthly trial balance and balance sheet date. Increases or decreases in value are recorded in income or expense accounts of the respective financial instruments. The mark-to-market methodology used for derivative financial instruments was established following consistent, verifiable criteria, which consider the average price of trading on the date of calculation or, if not available, pricing models that estimate the expected net realizable value, according to the characteristics of the derivatives. Derivative financial instruments used to offset, in whole or in part, the risks arising from exposure to variations in market values of financial assets or liabilities or future cash flows are considered hedge instruments and are classified according to their nature: Market Risk Hedge - the increases or decreases in the value of the derivative financial instruments, as well as of the hedged item, are recorded in income accounts in the statement of income for the period; Cash Flow Hedge - the effective portion of the increases or decreases in the value of the derivative financial instruments classified in this category are recorded, net of tax effects, in a separate Stockholders' Equity account. The effective portion is that where the variation in the hedged item, directly related to the corresponding risk, is offset by the variation in the derivative financial instrument used as the hedge, considering the accumulated effect of the transaction. Other variations in these instruments are recorded directly in income for the period. f) Loans, lease operations, advances on foreign exchange contracts, other receivables with loan characteristics and allowance for loan losses Loans, leases, advances on foreign exchange contracts and other receivables with loan characteristics are classified according to Management's judgment with respect to the level of risk, taking into consideration market conditions, past experience and specific risks in relation to the operation, to borrowers and guarantors, observing the parameters established by CMN Resolution 2682/1999, which requires periodic analyses of the portfolio and its classification into nine levels, ranging from AA (minimum risk) to H (maximum risk), as well as the classification of operations more than 15 days overdue as non-performing. Income from loans overdue for more than 60 days, regardless of their risk level, will only be recognized as income when effectively received. Operations classified at level H, which remain in this classification for 180 days, are written off against the existing provision and monitored for five years in memorandum accounts, but do not appear in the balance sheet. Renegotiated operations are maintained, at a minimum, at the same level at which they were rated. The renegotiations of loans already written off against the allowance are rated as H and any gains from renegotiation are recognized as income when effectively received. 9 Notes to Financial Statements The allowance for loan losses is considered sufficient by management which satisfies the minimum requirements established by CMN Resolution 2682/1999 (Note 10.f). g) Income and Social Contribution Taxes Income tax is calculated at the basic rate of 15% plus a surcharge of 10%. As of May 1, 2008, Social Contribution is being calculated at the rate of 15% for financial and insurance companies and 9% for other companies. Tax credits are recorded by applying the current tax rates to the difference between their respective fiscal and accounting bases. The Bank follows the criteria for recording, maintaining, and writing off the tax credits as established by CMN Resolution 3059/2002, and amended by CMN Resolution 3355/2006, and they are supported by a study of their capacity for realization. The deferred tax liabilities are made by applying the current rates of taxes on their respective bases. h) Prepaid Expenses Refer to the application of funds in payments made in advance, and the benefits will be felt or the services will be rendered in subsequent periods. i) Permanent assets Investments – The investments in subsidiaries and associated companies with significant influence or with participation of 20% or more voting shares in other companies and which are part of a group or are under common control are evaluated by the equity method based on the value of the equity related or controlled in accordance with the instructions and rules of the Central Bank and the CVM. The statements of the branches and subsidiaries abroad are adapted to the prevailing accounting criteria in Brazil and translated into Brazilian Reais using current exchange rates, in conformity with BACEN Circulars 2397/93 and 2571/95, and their impacts are recorded in the statement of income for the period. Other permanent investments are stated at cost, restated for inflation up to December 31, 1995, and, if necessary, are adjusted to market value through the formation of a provision, according to the current rules. Property and equipment – Property and equipment are stated at cost less depreciation, calculated using the straight-line method at the following annual rates: buildings and improvements - 4%; vehicles - 20%; data processing system – 20% to 50% and others - 10% (Note 15). Deferred – Deferred assets are recorded at cost of acquisition or formation, net of accrued amortizations. They are composed mainly of expenditures with restructuring and leasehold improvements as a result of opening branches, which are amortized according to rates based on rental terms, as well as expenditures on the acquisition and development of information systems, which are amortized at 20% p.a. Intangible – Intangible Assets consist of rights that have as their object intangible assets intended for the maintenance of the company or that are exercised for that purpose, including goodwill acquired. An asset meets the criteria for identification as an intangible asset, in accordance with CMN Resolution 3642/2008, when it is inseparable, i.e. it can be separated from the entity and sold, transferred or licensed, rented or exchanged, individually or jointly with a contract, related assets or liabilities, regardless of the intention for use by the entity; or results from contractual rights or other legal rights, regardless of whether these rights are transferable or separable from the entity or other rights and obligations. 10 Notes to Financial Statements Intangible assets have a defined useful life and refer to disbursements for acquisition of the right to provide bank services (payroll acquisitions), and are amortized over contracted periods, and acquisition/development of software, amortized on the straight-line basis at the rate of 20% per year starting from the date of availability for use, and adjusted by reducing them to their recoverable amounts (impairment), when applicable (Note 16). The amortization of intangible assets is recorded in "Other Administrative Expenses". j) Decrease in the recoverable value of non-financial assets – impairment A loss through impairment is recognized if the carrying value of an asset or its cash-generating unit exceeds its recoverable value. A cash-generating unit is the smallest identifiable group of assets that generates cash entries, which are largely independent of the cash entries from other assets or groups of assets. Losses through impairment are recognized in income for the period. From 2008, the values of non-financial assets, excluding tax credits and other assets are reviewed at least annually to determine whether there is any indication of loss through impairment. Taking into account the materiality and relevance of the involved amounts, the main assets that have their recoverable amounts tested are: Buildings, Data processing systems (property, plant and equipment) and Rights due to payroll acquisition (intangible assets) and Goodwill for expected future earnings generated in the purchasing entities The calculation of the recoverable amounts of the tested items employs the following assumptions: (1) for the calculation of the recoverable amounts of buildings, appraisal reports (for properties of significant value) and estimates (for the other properties) are. (2) For information technology equipment (mainframes and automatic teller machines), both the market value and the amount recoverable over time by use in the entity's transactions were considered. The methods applied consider the cash flow projections of the economic benefits arising from the use of each asset over its useful life, discounted to present value. (3) The model for evaluating losses arising from the devaluation of the Negotiation Relationship Allowance (for rights resulting from payroll acquisition) is based on monitoring contract performance. That model was prepared starting from the contribution margins of relationships with individuals linked to each contract. k) Benefits for employees Short-term benefits for current employees are recognized on the accrual basis as the services are provided. Post-employment benefits, comprising supplementary retirement benefits, medical assistance and other benefits for which the Bank is responsible, were accounted at June 30, 2010 in accordance with criteria established by CVM Resolution 371/2000 and succeeded by CVM Resolution n.° 600/2009 (Note 28). As of 06.30.2010, periodicity of the evaluations became biannual, annual and no longer as occurred until 12.31.2009. The actuarial asset recognized in the balance sheet (Note 28) refers to the Actuarial gains and its implementation must occur by the end of the plan. There may be partial completion of actuarial, conditioned upon satisfying the requirements of the Supplementary Law No 109/2001 and Resolution CGPC No 26/2008. 11 Notes to Financial Statements l) Operations related to insurance, pension and capitalization activities Statement of income Insurance premiums and selling expenses are recorded upon the issuing of policies or upon billing and are recognized in the statement of income, according to the elapsed period of coverage. Revenues from premiums and the corresponding selling expenses, related to present risks without the issuing of respective policies are recognized in the statement of income at the beginning of the coverage, based on estimates. Income from insurance premiums covering future risks is deferred over the period of validity of the insurance policies, through the recording of provision for unearned premiums, based on the net withholding of earned premiums issued. Accepted coinsurance, retrocession and DPVAT (Personal injuries caused by motor vehicles) convention operations are recorded based on information received from similar companies, IRB Brasil Resseguros S.A. and the Seguradora Lider - DPVAT, respectively. The revenue from pension plans, life insurance plans with living benefits and capitalization plans are recognized in the statement of income when effectively received, as a contra-entry to the recognition of technical provisions, except the revenue to cover risks in cases of combined pension plans, which must be recognized by the duration of the risk, regardless of your receipt. The selling costs are deferred on the issuing of the contract or policy and allocated to results on a straight-line basis, over the average estimated period for their recovery, except the ones related to capitalization. Other income and expenses are determined according to the accrual basis of accounting. Technical Provisions Rules and procedures for the formation of technical provisions are regulated by Resolutions 162/2006, 181/2007, 195/2008 and 204/2009 of the National Council of Private Insurance (CNSP) and Regulatory Resolution 75/2004 and 160/2007of the National Health Agency (ANS), and calculated in accordance with the specific actuarial technical notes approved by the Superintendence of Private Insurance (SUSEP) and the National Health Agency (ANS). Insurance The Provision for Unearned Premiums represents the portions of premiums that will be allocated to income over the course of the insurance policies, as calculated on a daily pro rata basis. The Provision for Unearned Premiums for Present Risks But Not Yet Issued represents the adjustment for the Provision for Unearned Premiums given the existence of risks assumed by the insurance company where the policy covering the risk has not yet been formally issued, except for health plan insurance. The Provision for Premium Deficiency represents the need for coverage of possible deficiencies of the Provision for Unearned Premiums due to the expectations of payment and re-assessment of claims incurred. The Provision for Unsettled Loss Claims represents the forecast of probable indemnifications, judicial or otherwise, net of recoveries, determined based on notices received up to the balance sheet date, adjusted by the estimate for Claims Incurred But Not Enough Reported (IBNER). The Provision for Claims Incurred but not Reported [IBNR - Incurred But Not Reported and Provision for Events Occurred but not Reported - PEONA (of the health insurance segment)] represents the amount expected of claims incurred but not reported until the base date of the financial statements. The Premium Complementary Provision (PCP), recorded in "Other Provisions", has as object to maintain the company protected in monthly transactions, keeping the amount of the technical premium provisions (PPNG and PPNG-RVNE) higher or equal to the daily average of the month of calculation. 12 Notes to Financial Statements Pension plan The mathematical reserves related to pension plans represent the current value of the liabilities in the form of a living income, pension and savings, determined through actuarial calculations and assumptions in the financial regimes of capitalization, allocation of hedge capital and simple allocation, respectively. Particularly for the pension and insurance plans of the PGBL and VGBL type, the Mathematical Provision for Future Benefit Payments represents the sum of the premiums and contributions transferred by the participants, net of the loading rate, plus the financial income earned from the investments of the resources. This provision refers to participants whose perception of the benefits has not yet started and Mathematics Provision of Benefits refers to those already in enjoyment of benefits. The Provisions for a Deficiency in Contributions and in Premiums are formed to meet the possible adverse changes in the technical risks made in the mathematical provisions of benefits to be granted, resulting from the trend for a higher survival rate of participants and the calculation is made using the Mitigated AT 2000 Male/Female mortality table and related assumptions, considering all the plans sold. The Provision for Financial Fluctuation is formed to account for the potential impacts of unfavorable variations in future rates of funds earmarked for the payment of benefits and redemptions to participants, considering the minimum remuneration guaranteed in existing contracts. Capitalization The Mathematical Reserve for Redemption is calculated on the face value of the notes, restated based on actuarial technical notes approved by Susep. The Provisions for Redemption of Overdue and Prepaid Notes are recorded at the values of the notes with finalized and rescinded capitalization periods, restated in the period between the date of the right to redemption and effective settlement. The amounts earmarked for the formation of the Provision for Unrealized Draws for Prizes are calculated on the face value of the notes, based on actuarial technical notes approved by Susep, and the write-off of the provision for unrealized draws for prizes is recorded at the amount equivalent to the lapsed risk, i.e., the balance of the provision for unrealized draws for prizes represents the deferred amounts of draws for prizes not yet made. The Provision for Draws for Prizes Payable is formed at the amounts of the notes payable from draws for prizes, restated for the period between the date of the draw and the effective payment. m) Contingent Assets and Liabilities and Legal Obligations The recognition and disclosure of contingent assets and liabilities and legal obligations are made in accordance with the criteria defined in CVM Resolution 3823/2009 (Note 29). Contingent assets are only recognized in the financial statements upon the existence of evidence guaranteeing their realization usually represented by the final judgment of the lawsuit and by the confirmation of the capacity for its recovery by receipt or offsetting by another receivable. Contingent liabilities are recognized in the financial statements when, based on the opinion of legal advisor and Management, the risk of loss of legal or administrative proceedings is considered probable, with a probable outflow of financial resource for the settlement of obligation and when the amounts involved are measurable with sufficient assurance, and judicial figures when reporting monthly and revised as follows: Aggregated – cases that are similar and recurring in nature and whose values are not considered relevant. Provisions are based on statistical data for groups of cases, type of judicial body (Special Civil Court or Common Court) and plaintiff. For labor claims and civil claims related to economic plans, provisions are 13 Notes to Financial Statements based on the average payments for cases closed in the last 24 and 12 months respectively, for calculating the value of the obligations; and Individual – cases considered unusual or whose value is considered relevant by our legal counsel. Provisions are based on: the amount claimed; probability of an unfavorable decision; evidence presented; evaluation of legal precedents; other facts raised during the process; judicial decisions made during the course of the case; and the classification and the risk of loss of legal actions. Contingent liabilities considered as possible losses are not recognized in the balance sheet and only need to be disclosed in the notes to the financial statements, while those classified as remote do not require provisioning or disclosure. Legal obligations (tax and social security) originate from tax obligations established in the legislation, and, regardless of the probability of success of lawsuits in progress, the amounts are recognized in full in the financial statements. 5 – Information by segment The information by segment was compiled with a basis on the reports used by Management in the appraisal of the segment's performance, decision making regarding the allocation of funds for investment and other purposes, considering the regulatory environment and the similarities between goods and services. The operations of Banco do Brasil are basically divided into five segments: banking, investments, fund management, insurance (insurance, pension and capitalization) and payment methods. In addition, the Banco do Brasil participates in other economic activities, such as leasing and Operating Support, that were aggregated in "Other". Intersegment transactions are conducted under normal market conditions, substantially under the terms and conditions for comparable transactions, including interest rates and collateral. These transactions do not involve abnormal payment risks. a) Banking Segment Responsible for the most significant portion of the Bank, preponderantly obtained in Brazil, involves a large diversity of products and services, such as deposits, loans and services that are made available to clients by means of a wide variety of distribution channels, located in the country and abroad. The operations of the banking segment include business with the retail, wholesale and government markets, carried out by Banco do Brasil by means of a network and customer service teams, and business with microentrepreneurs and the informal sector, performed through banking correspondents. b) Investment Segment Deals are performed in this segment in the domestic capital market, with activity in the intermediation and distribution of debts in the primary and secondary markets, besides equity interest and the rendering of financial services. The operations income of the segment is obtained by means of revenues accrued in investments in securities minus expenses with funding to third parties. The existing equity interests are concentrated at our associated and subsidiary companies. Financial service fee income results from economic/financial advisory services, underwriting, fixed and variable income, and the rendering of services to associated companies. 14 Notes to Financial Statements c) Segment of Fund management Responsible for operations inherent to the purchase, sale and custody of securities, portfolio management, institution, organization and management of investment funds and clubs being their revenues mainly derived from commissions and management fees charged to investors for services rendered. d) Segment of Insurance, Private Pension Fund, and Capitalization In said segment a products and services are offered, related to life, health, property and automobile insurance, complementary private pension plans and capitalization plans. Income comes mainly from revenues from insurance premiums issued, contributions for private pension plans, capitalization bonds and investments in securities, being deducted commercialization expenses, technical provisions and expenses related to benefits and redemptions. e) Segment of payment methods Such segment is mainly responsible for funding, transmission, processing services and financial settlement of operations in electronic means (credit and debit cards), among others. Revenues thereof are originated mainly from commissions and management fees charged to commercial and banking establishments for the services rendered described in previous paragraph, besides income from rent, installation and maintenance of electronic terminals. f) Other segments They comprise the operational support and consortium segments, which have not been aggregated by not being individually representative. Their revenues are originated mainly from provision of services not covered in previous segments, such as: credit recovery, consortium administration, development, manufacture, commercialization, rent and integration of digital electronic systems and equipment, peripherals, programs, inputs and computing supplies, besides intermediation of air tickets, lodging and organization of events. 15 Notes to Financial Statements R$ Thousand 1S2010 BB-Consolidated Banking Fund Investments Management Insurance and Related Payment Methods Other Segments Intersegment transactions Total Income 50,539,220 774,662 451,985 2,086,150 709,309 555,325 (1,418,980) 53,697,671 Income from loans and leases (1) Income from operations with securities and derivative financial instruments Income from foreign exchange operations and Compulsory Financial results from insurance operations, pension and capitalization 26,004,236 -- -- -- -- -- (95,976) 25,908,260 10,577,392 41,272 21,966 13,303 51,262 6,554 (134,233) 10,577,516 1,244,801 -- -- -- (5) -- 11 1,244,807 -- -- -- 810,772 -- -- 24,010 834,782 Income from service fees 4,135,020 207,464 429,776 220,172 496,426 368,477 (257,339) 5,599,996 Income from Banking Fees 1,988,158 -- -- -- -- -- -- 1,988,158 542,758 307,376 (2,075) -- -- -- (769,350) 78,709 -- -- -- 908,865 -- -- -- 908,865 6,046,855 218,550 2,318 133,038 161,626 180,294 (186,103) 6,556,578 Expenses (43,215,281) (222,914) (83,815) (1,388,021) (348,794) (434,311) 553,654 (45,139,482) Market funding (17,556,412) (90,714) -- -- -- (22,622) 121,569 (17,548,179) (3,046,543) -- -- -- (28) (51) -- (3,046,622) (5,484,895) (12) (76) -- -- 777 -- (5,484,206) -- -- -- (589,881) -- -- -- (589,881) Personnel expenses (5,911,281) (15,260) (23,734) (88,489) (28,612) (60,570) 2,473 (6,125,473) Other administrative expenses (4,449,784) (27,823) (10,292) (382,143) (70,865) (103,941) 315,503 (4,729,345) (431,551) (144) -- (2,383) (3,686) (3,563) -- (441,327) (88,878) -- -- (6,550) (1,000) (1,457) -- (97,885) Amortization of intangible assets (1,046,419) -- -- (49) -- (51) -- (1,046,519) Other expenses (5,199,518) (88,961) (49,713) (318,526) (244,603) (242,833) 114,109 (6,030,045) 7,323,939 551,748 368,170 698,129 360,515 121,014 (865,326) 8,558,189 (2,714,779) Equity in subsidiaries Income from insurance pension and capitalization operations, Others Income Loans, leases assignments, transfers and Allowance for loan losses Restatement and interest on technical provisions Depreciation Amortization of deferred Profit before tax and participations Income and social contribution on net income (2) (2,132,762) (82,059) (149,974) (223,306) (124,708) (43,038) 41,068 Profit sharing (747,539) (97) (241) (6,323) -- (12,954) -- (767,154) Net Income (3) 4,443,638 469,592 217,955 468,500 235,807 65,022 (824,258) 5,076,256 -- -- -- -- -- (20) -- (20) 721,817,858 4,929,528 804,966 32,239,898 1,716,612 4,440,865 7,414,210 2,193,020 20,826 1,820,310 -- -- 683,293,813 2,979,504 675,138 28,972,167 1,308,471 2,574,212 Minority interests Balance Sheets Assets Investment in subsidiaries Liabilities (10,244,098) 755,705,629 (5,538,487) 5,909,879 (3,429,558) 716,373,747 (1) Includes intersegment transactions in the amount of R$ 95,976 thousand on the disposal of unrealized results on BB-Consolidated, arising from the assignment of the Banco do Brasil to Ativos SA. (2) Were activated in a BB-Consolidated amount of R$ 41,068 thousand (outstanding on intersegment transactions) relating to tax credits applied to the result is not achieved (previous item). (3) Includes intersegment transactions in the amount of R$ 54,908 thousand, relating to income not paid, net of tax (Note 24.f). 16 Notes to Financial Statements R$ Thousand 1S2009 BB-Consolidated Banking Income Fund Investments Management Insurance and Related Payment Methods Other Segments Intersegment transactions Total 41,615,417 2,321,195 390,829 1,632,861 723,328 330,107 (1,005,092) 46,008,645 19,454,080 -- -- -- -- 79 (700) 19,453,459 10,413,222 47,325 25,377 9,284 52,906 6,090 (121,730) 10,432,474 403,427 -- -- -- 92 -- 31 403,550 -- -- -- 703,845 -- -- 20,745 724,590 Income from service fees 3,638,746 205,217 364,239 103,796 495,047 253,146 (248,869) 4,811,322 Income from Banking Fees 1,567,833 -- -- -- -- -- -- 1,567,833 Equity in subsidiaries (608,429) 533,502 (672) -- -- -- (589,357) (664,956) (1) Income from loans and leases Income from operations with securities and derivative financial instruments Income from foreign exchange operations and Compulsory Financial results from insurance operations, pension and capitalization Income from insurance pension and capitalization operations, -- -- -- 774,558 -- -- -- 774,558 6,746,538 1,535,151 1,885 41,378 175,283 70,792 (65,212) 8,505,815 Expenses (39,348,520) (318,145) (77,951) (1,106,018) (370,460) (284,350) 415,735 (41,089,709) Market funding (14,834,688) (74,354) -- -- -- -- 80,873 (14,828,169) (1,901,099) (10) (40) -- (27) -- 32 (1,901,144) (6,519,387) (8) (57) -- (23) 556 -- (6,518,919) Others Income Loans, leases assignments, transfers and Allowance for loan losses Restatement and interest on technical provisions -- -- -- (457,393) -- -- -- (457,393) Personnel expenses (5,482,366) (13,112) (22,329) (75,616) (29,345) (36,791) 918 (5,658,641) Other administrative expenses (4,085,233) (108,098) (9,255) (335,173) (66,301) (83,047) 225,528 (4,461,579) Depreciation (323,499) (107) -- (3,512) (2,357) (2,744) -- (332,219) Amortization of deferred (122,623) -- -- (4,470) (507) (589) -- (128,189) Amortization of intangible assets (640,278) -- -- -- -- -- -- (640,278) (5,439,347) (122,456) (46,270) (229,854) (271,900) (161,735) 108,384 (6,163,178) 2,266,897 2,003,050 312,878 526,843 352,868 45,757 (589,357) 4,918,936 642,276 (568,073) (126,125) (183,376) (122,598) (19,948) -- (377,844) Other expenses Profit before tax and participations Income and social contribution on net income (2) Profit sharing (512,673) -- (4,030) (10,161) -- (52) -- (526,916) Net Income (3) 2,396,500 1,434,977 182,723 333,306 230,270 25,757 (589,357) 4,014,176 638 -- -- -- -- (25) -- 613 575,011,253 7,171,001 701,119 17,671,154 1,271,978 808,896 3,873,447 2,965,587 19,390 11,385 12,031 -- 545,435,281 2,849,198 391,610 16,536,509 1,014,265 770,226 Minority interests Balance Sheets Assets Investment in subsidiaries Liabilities (3,796,814) 598,838,587 (2,512,952) 4,368,888 (1,305,268) 565,691,821 17 Notes to Financial Statements 6 – Cash and cash equivalents R$ Thousand Banco do Brasil Total Cash Local currency Foreign currency Investments in Gold Interbank investments (1) Subject to repurchase agreements Interbank deposits Investments in foreign currency Total cash and cash equivalents BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 9,240,098 7,596,546 5,648,842 9,535,060 7,842,770 6,212,045 7,038,718 6,676,414 5,346,503 7,295,099 6,799,390 5,894,250 2,201,380 920,132 302,339 2,227,792 1,033,480 308,773 -- -- -- 12,169 9,900 9,022 32,686,665 42,105,965 62,227,571 26,961,925 30,032,212 61,221,211 4,588,167 14,362,844 39,638,779 7,275,120 18,186,491 41,060,915 27,995,264 24,039,500 19,318,498 19,554,359 8,053,192 16,873,612 103,234 3,703,621 3,270,294 132,446 3,792,529 3,286,684 41,926,763 49,702,511 67,876,413 36,496,985 37,874,982 67,433,256 (1) Refer to investments whose maturity is less than or equal to 90 days. 18 Notes to Financial Statements 7 – Interbank Investments a) Breakdown R$ Thousand Banco do Brasil BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Money market Sales pending settlement - held position Financial Treasury Bills National Treasury Bills National Treasury Notes Others securities - Foreign Sales pending settlement - financed position Financial Treasury Bills National Treasury Bills National Treasury Notes Others securities – Foreign Sales pending settlement - sold position Federal securities – Treasury Interbank deposits Investments in local currency Investments in foreign currency Total 101,867,415 4,588,167 --4,368,750 219,417 97,279,248 88,405,746 4,806,805 3,934,436 132,261 --40,371,382 39,604,702 766,680 142,238,797 134,937,621 14,362,844 1,772,231 804,732 11,785,881 -120,574,777 111,804,532 8,303,407 466,608 230 --39,229,677 33,845,063 5,384,614 174,167,298 104,178,979 39,638,779 37,985,635 1,653,144 --64,540,200 52,485,723 2,303,914 9,750,563 ---34,531,520 31,109,603 3,421,917 138,710,499 107,838,360 7,112,106 552,603 418,411 5,797,888 343,204 100,726,254 88,405,746 7,694,073 4,494,174 132,261 --24,704,305 23,908,415 795,890 132,542,665 144,173,860 18,220,295 1,878,624 2,189,355 14,118,511 33,805 125,793,918 112,554,529 9,851,852 3,387,307 230 159,647 159,647 24,224,100 18,750,578 5,473,522 168,397,960 111,171,285 41,060,915 38,089,548 2,083,144 888,223 -70,110,370 54,494,120 2,303,914 13,312,336 ---21,266,616 17,828,309 3,438,307 132,437,901 Current Assets Non Current Assets 137,902,326 4,336,471 166,919,021 7,248,277 131,712,334 6,998,165 131,212,743 1,329,922 166,070,192 2,327,768 124,924,973 7,512,928 b) Income from short-term interbank deposits R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 Q 1S2009 5,337,080 599,177 5,758,178 1,877,510 5,601,177 646,300 5,861,962 1,961,847 Income from interbank deposits(1) 4,737,903 -593,356 3,880,668 -791,128 4,942,953 11,924 249,885 3,900,115 -429,728 Total 5,930,436 6,549,306 5,851,062 6,291,690 Income from Money Market Held position Financed position Sold position (1) Refers to income on interbank deposits in local currency. Rents on interbank deposits in foreign currency totaled R$ 313,028 thousand in 1S2010 (R$ 42,367 thousand in the 1st half of 2009) which are recorded under Income from Operations Securities. 19 Notes to Financial Statements 8 – Securities and Derivative Financial Instruments a) Securities R$ Thousand Banco do Brasil 06.30.2010 12.31.2009 Market Value Maturity in days With no maturity 0-30 31-180 Total 181-360 over 360 Cost Value 06.30.2009 Total Market Market to Market Value Cost Value Total Market Value Market to Market Cost Value Market Market to Market Value 1 – Trading securities -- 924,904 2,398,049 803,577 14,370,571 18,500,483 18,497,101 (3,382) 19,606,486 19,655,622 49,136 16,138,841 16,429,463 290,622 Government bonds -- 924,904 2,398,049 782,927 14,256,097 18,364,377 18,361,977 (2,400) 19,466,189 19,511,891 45,702 16,006,874 16,299,496 292,622 Financial Treasury Bills -- -- 1,084,081 307,890 9,786,499 11,178,532 11,178,470 (62) 12,710,659 12,710,711 52 6,552,908 6,552,143 (765) National Treasury Bills -- 669,184 1,313,968 298,004 2,888,339 5,191,052 5,169,495 (21,557) 4,052,388 4,052,631 243 5,109,357 5,175,116 65,759 National Treasury Notes -- 255,720 -- 177,033 1,581,259 1,994,793 2,014,012 19,219 2,703,142 2,748,549 45,407 4,344,609 4,572,237 227,628 -- -- -- 20,650 114,474 136,106 135,124 (982) 140,297 143,731 3,434 131,967 129,967 (2,000) Debentures -- -- -- 20,650 114,474 136,106 135,124 (982) 135,918 134,043 (1,875) 82,114 80,134 (1,980) Promissory notes -- -- -- -- -- -- -- -- -- -- -- 46,853 46,833 (20) Shares -- -- -- -- -- -- -- -- 4,379 9,688 5,309 2,000 2,000 -- Others -- -- -- -- -- -- -- -- -- -- -- 1,000 1,000 -- Corporate bonds 2 - Securities available for sale Government bonds 62,812 891,955 3,116,429 11,174,929 42,484,775 57,444,996 57,730,900 285,904 57,880,134 58,089,353 209,219 35,579,829 35,793,125 213,296 -- 843,612 1,664,539 10,223,933 33,114,485 45,553,230 45,846,569 293,339 48,280,005 48,597,974 317,969 32,549,891 32,759,332 209,441 (2,480) Financial Treasury Bills -- 1,055 579,480 8,151,949 27,200,612 35,937,091 35,933,096 (3,995) 35,459,266 35,457,957 (1,309) 23,341,605 23,339,125 National Treasury Bills -- 311,915 1,070,640 999,409 953,671 3,343,983 3,335,635 (8,348) 4,502,914 4,544,639 41,725 3,258,509 3,261,489 2,980 National Treasury Notes -- 530,523 12,235 1,072,099 2,089,077 3,711,553 3,703,934 (7,619) 5,017,154 5,070,229 53,075 2,937,795 2,981,516 43,721 Agricultural debt securities -- 119 1,250 476 8,811 12,170 10,656 (1,514) 11,572 10,912 (660) 12,211 10,735 (1,476) Brazilian foreign debt securities -- -- -- -- 2,823,521 2,511,445 2,823,521 312,076 2,484,527 2,730,340 245,813 2,174,184 2,355,030 180,846 Foreign government bonds -- -- 934 -- -- 945 934 (11) 592,647 593,549 902 738,030 736,169 (1,861) Others -- -- -- -- 38,793 36,043 38,793 2,750 211,925 190,348 (21,577) 87,557 75,268 (12,289) 62,812 48,343 1,451,890 950,996 9,370,290 11,891,766 11,884,331 (7,435) 9,600,129 9,491,379 (108,750) 3,029,938 3,033,793 3,855 -- -- 16,176 864,796 8,842,544 9,736,721 9,723,516 (13,205) 7,424,945 7,302,808 (122,137) 1,739,521 1,734,618 (4,903) -- -- 1,015,500 -- -- 1,015,541 1,015,500 (41) 1,339,479 1,342,153 2,674 752,526 755,581 3,055 -- -- -- -- 24,682 25,354 24,682 (672) 30,385 29,674 (711) 30,426 29,829 (597) 25,575 -- 2,181 -- 220,593 244,058 248,349 4,291 48,969 42,450 (6,519) 2,491 1,138 (1,353) Corporate bonds Debentures Promissory notes Credit Notes Quotas in investment funds Shares 37,237 -- -- -- -- 9,182 37,237 28,055 33,122 56,504 23,382 8,732 15,614 6,882 Rural Product Bills -Commodities -- 47,625 324,775 86,200 463 462,413 459,063 (3,350) 508,429 510,370 1,941 494,259 494,203 (56) Certificate of Deposits -- -- 89,536 -- -- 89,269 89,536 267 83,419 83,722 303 -- -- -- -- 718 3,722 -- 282,008 309,228 286,448 (22,780) 131,381 123,698 (7,683) 1,983 2,810 827 Others 20 Notes to Financial Statements R$ Thousand Banco do Brasil 06.30.2010 Market Value Maturity in days With no maturity 0-30 31-180 Total 181-360 over 360 Market Market to Market Value Cost Value Cost Value 12.31.2009 06.30.2009 Total Total Market Market to Market Value Market Market to Market Value Cost Value 3 - Securities held to maturity -- 1,942 3,219,145 526 9,735,008 13,126,641 12,956,621 (170,020) 18,359,234 18,184,196 (175,038) 15,507,967 15,523,322 15,355 Government bonds -- 1,942 3,219,145 526 9,643,490 12,855,030 12,865,103 10,073 18,081,948 18,098,851 16,903 15,507,967 15,523,322 15,355 Financial Treasury Bills -- 1,942 3,219,145 526 9,481,140 12,702,737 12,702,753 16 12,331,114 12,331,193 79 15,343,706 15,344,409 703 National Treasury Notes -- -- -- -- 20,172 22,729 20,172 (2,557) 829,207 826,400 (2,807) 21,352 17,829 (3,523) National Treasury Bills -- -- -- -- -- -- -- -- 4,795,191 4,795,871 680 -- -- -- Brazilian foreign debt securities -- -- -- -- 142,178 129,564 142,178 12,614 126,436 145,387 18,951 142,909 161,084 18,175 Foreign government bonds -- -- -- -- -- -- -- -- -- -- -- -- -- -- Corporate bonds -- -- -- -- 91,518 271,611 91,518 (180,093) 277,286 85,345 (191,941) -- -- -- Others -- -- -- -- 91,518 271,611 91,518 (180,093) 277,286 85,345 (191,941) -- -- -- 62,812 1,818,801 8,733,623 11,979,032 66,590,354 89,072,120 89,184,622 112,502 95,845,854 95,929,171 83,317 67,226,637 67,745,910 519,273 Total R$ Thousand 06.30.2010 12.31.2009 Market Value Maturity in days With no maturity 0-30 31-180 Total 181-360 over 360 Total Market Market to Market Value Cost Value 06.30.2009 Cost Value Total Market Value Market to Market Market Market to Market Value Cost Value Total by portfolio 62,812 1,818,801 8,733,623 11,979,032 66,590,354 89,072,120 89,184,622 112,502 95,845,854 95,929,171 83,317 67,226,637 67,745,910 519,273 Own portfolio 62,812 1,816,858 1,554,492 3,438,220 27,944,675 34,893,612 34,817,057 (76,555) 50,796,768 50,732,531 (64,237) 27,029,323 27,515,821 486,498 Subject to repurchase agreements -- -- 7,175,079 8,511,337 37,115,277 52,611,924 52,801,693 189,769 25,678,841 25,826,500 147,659 22,541,419 22,578,318 36,899 Deposits with the Brazilian Central Bank -- -- 16 -- 43,019 43,087 43,035 (52) 18,239,914 18,240,500 586 15,484,976 15,481,162 (3,814) Pledged in guarantee -- 1,943 4,036 29,475 1,487,383 1,523,497 1,522,837 (660) 1,130,331 1,129,640 (691) 1,971,112 1,970,607 (505) Titles object operations with free movement -- -- -- -- -- -- -- -- -- -- -- 199,807 200,002 195 R$ Thousand 06.30.2010 12.31.2009 Market Value Maturity in years Total by portfolio 1 - Trading securities 2 - Securities available for sale 3 - Securities held to maturity With no maturity Due in up to one year Due from 1 to 5 years Total Due from 5 to 10 years Due after 10 years Cost Value 06.30.2009 Total Market to Market Cost Value Total Market to Market Cost Value Market to Market 62,812 22,531,456 57,359,954 6,722,284 2,508,116 89,072,120 89,184,622 95,845,854 95,929,171 67,226,637 67,745,910 -- 4,126,530 12,183,196 2,109,174 78,201 18,500,483 18,497,101 19,606,486 19,655,622 16,138,841 16,429,463 62,812 15,183,313 35,533,268 4,594,617 2,356,890 57,444,996 57,730,900 57,880,134 58,089,353 35,579,829 35,793,125 -- 3,221,613 9,643,490 18,493 73,025 13,126,641 12,956,621 18,359,234 18,184,196 15,507,967 15,523,322 21 Notes to Financial Statements R$ Thousand Current 06.30.2010 12.31.2009 06.30.2009 Book Value Book Value Book Value Non Current Total Total by portfolio 36,964,843 52,389,799 89,354,642 38,750,456 57,353,753 96,104,209 29,734,988 Own portfolio 10,638,385 23,304,824 33,943,209 29,778,301 21,131,525 50,909,826 20,181,482 7,322,693 27,504,175 Subject to repurchase agreements 23,062,864 18,358,670 41,421,534 5,239,743 20,584,267 25,824,010 5,892,859 16,682,912 22,575,771 Deposits with the Brazilian Central Bank Pledged in guarantee Titles object operations with free movement Non Current Total Current Current Non Current Total 37,995,567 67,730,555 16 58 74 3,713,112 14,527,621 18,240,733 3,094,191 12,385,809 15,480,000 3,263,578 10,726,247 13,989,825 19,300 1,110,340 1,129,640 366,454 1,604,153 1,970,607 -- -- -- -- -- -- 200,002 -- 200,002 R$ Thousand 06.30.2010 12.31.2009 06.30.2009 Total by category Trading Securities 18,497,101 21% 19,655,622 21% 16,429,463 24% Securities available for sale 57,730,900 64% 58,089,353 60% 35,793,125 53% Securities held to maturity 13,126,641 15% 18,359,234 19% 15,507,967 23% Carrying value of portfolio 89,354,642 100% 96,104,209 100% 67,730,555 100% Mark-to-market - Category 3 Market value of portfolio (170,020) (175,038) 15,355 89,184,622 95,929,171 67,745,910 22 Notes to Financial Statements R$ Thousand BB–Consolidated 06.30.2010 12.31.2009 Market Value Maturity in days 1 - Trading securities With no maturity 0-30 31-180 Total 181-360 over 360 06.30.2009 Total Cost Value Market Value Market to Market Total Cost Value Market Value Market to Market Cost Value Market Value Market to Market 2,019,293 2,816,614 3,590,174 3,039,346 33,364,287 44,852,491 44,829,714 (22,777) 38,110,829 38,274,200 163,371 31,254,705 31,661,006 406,301 15,743 2,542,311 3,270,494 2,760,920 27,333,430 35,817,066 35,922,898 105,832 32,516,057 32,682,427 166,370 27,921,288 28,342,182 420,894 10,785 19,713 1,095,791 382,227 14,381,432 15,891,861 15,889,948 (1,913) 16,132,667 16,131,253 (1,414) 13,386,992 13,384,537 (2,455) National Treasury Bills -- 739,279 1,712,995 1,537,296 3,846,167 7,867,031 7,835,737 (31,294) 7,085,711 7,093,374 7,663 6,411,480 6,503,172 91,692 National Treasury Notes -- 565,313 32,380 603,791 8,174,786 9,242,572 9,376,270 133,698 7,533,019 7,663,677 130,658 7,550,179 7,882,635 332,456 Agricultural debt securities -- 307 6,711 9,849 18,578 33,181 35,445 2,264 47,492 50,374 2,882 -- -- -- Federal Government securities -- -- -- -- -- -- -- -- -- -- -- 518,323 518,323 -- Brazilian foreign debt securities -- 130,824 15,322 7,234 69,633 219,862 223,013 3,151 211,419 214,513 3,094 51,963 51,165 (798) Foreign government bonds -- 126,620 404,857 220,495 711,427 1,463,008 1,463,399 391 626,320 624,925 (1,395) 2,351 2,350 (1) 4,958 960,255 2,438 28 131,407 1,099,551 1,099,086 (465) 879,429 904,311 24,882 -- -- -- 2,003,550 274,303 319,680 278,426 6,030,857 9,035,425 8,906,816 (128,609) 5,594,772 5,591,773 (2,999) 3,333,417 3,318,824 (14,593) 6,342 27,450 55,312 80,080 2,435,123 2,590,898 2,604,307 13,409 1,369,764 1,376,790 7,026 831,651 813,100 (18,551) -- -- 143,095 -- -- 142,356 143,095 739 319,116 320,106 990 93,863 93,843 (20) 1,145,128 -- -- 33,384 107,230 1,307,428 1,285,742 (21,686) 582,190 696,545 114,355 347,054 358,976 11,922 -- Government bonds Financial Treasury Bills Others Corporate bonds Debentures Promissory Notes Shares Quotas in investment funds 741,781 9,487 -- -- 54,137 805,372 805,405 33 550,141 550,141 -- 375,316 375,316 Rural Product Bills - Commodities 87,293 14,868 11,716 10,640 54,385 177,981 178,902 921 192,056 193,094 1,038 -- -- -- Certificate of deposit 22,328 206,695 15,905 128,820 2,732,829 3,106,503 3,106,577 74 1,788,467 1,783,862 (4,605) 1,471,597 1,463,285 (8,312) Eurobonds Others -- -- 1,654 1,984 15,368 18,867 19,006 139 13,317 13,424 107 15,959 16,242 283 678 15,803 91,998 23,518 631,785 886,020 763,782 (122,238) 779,721 657,811 (121,910) 197,977 198,062 85 23 Notes to Financial Statements R$ Thousand BB–Consolidated 06.30.2010 12.31.2009 Market Value Maturity in days With no maturity Total Cost Value Market Value Cost Value Total Market Value Market to Market Cost Value Market Value Market to Market 0-30 31-180 908,615 3,188,397 11,290,112 51,080,203 66,827,610 67,153,469 325,858 62,035,094 62,160,792 125,698 46,395,725 46,645,476 249,751 41,114 860,311 1,677,743 10,230,365 39,322,852 51,787,164 52,132,385 345,221 49,758,712 50,087,641 328,929 42,349,532 42,634,986 285,454 Financial Treasury Bills -- 3,769 586,807 8,158,381 27,541,773 36,294,794 36,290,730 (4,064) 35,858,772 35,857,280 (1,492) 31,885,529 31,883,349 (2,180) National Treasury Bills -- 311,915 1,070,640 999,409 4,811,310 7,213,732 7,193,274 (20,458) 4,528,295 4,569,977 41,682 3,266,603 3,269,584 2,981 National Treasury Notes -- 544,508 16,233 1,072,099 3,761,526 5,394,256 5,394,366 110 5,987,334 6,002,387 15,053 4,066,726 4,162,190 95,464 Agricultural debt securities -- 119 1,250 476 8,811 12,170 10,656 (1,514) 11,572 10,912 (660) 12,211 10,735 (1,476) Brazilian foreign debt securities -- -- 1,879 -- 2,918,558 2,575,026 2,920,437 345,411 2,545,937 2,822,402 276,465 2,293,609 2,502,722 209,113 Government bonds Foreign government bonds Others Corporate bonds over 360 Total Market to Market 686,142 2 - Securities available for sale 181-360 06.30.2009 -- -- 934 -- 669 1,620 1,603 (17) 593,433 594,363 930 738,873 737,038 (1,835) 41,114 -- -- -- 280,205 295,566 321,319 25,753 233,369 230,320 (3,049) 85,981 69,368 (16,613) 645,028 48,304 1,510,654 1,059,747 11,757,351 15,040,446 15,021,084 (19,363) 12,276,382 12,073,151 (203,231) 4,046,193 4,010,490 (35,703) Debentures -- -- 26,274 910,232 9,920,823 10,883,119 10,857,329 (25,790) 8,674,870 8,534,065 (140,805) 2,347,431 2,321,258 (26,173) Promissory Notes -- -- 1,015,500 -- -- 1,015,541 1,015,500 (41) 1,364,005 1,366,850 2,845 752,526 755,581 3,055 Credit Notes -- -- -- -- 24,682 25,354 24,682 (672) 30,385 29,674 (711) 30,426 29,829 (597) 38,697 -- 2,826 5,369 961,805 998,316 1,008,697 10,380 381,049 376,254 (4,795) 177,012 168,729 (8,283) 8,431 Quotes of investment funds Shares 603,767 -- -- -- -- 598,230 603,767 5,537 206,924 212,718 5,794 14,562 22,993 Rural Product Bills - Commodities -- 47,625 324,775 86,200 463 462,413 459,063 (3,350) 508,429 510,370 1,941 494,259 494,203 (56) Certificate of deposit -- 985 129,197 7,236 53,706 190,878 191,124 246 127,827 124,936 (2,891) 87,230 87,012 (218) Eurobonds -- -- -- -- -- -- -- -- 38,955 38,955 -- -- -- -- 2,564 (306) 12,082 50,710 795,872 866,595 860,922 (5,673) 943,938 879,329 (64,609) 142,747 130,885 (11,862) 3 - Held to Maturity -- 85,491 3,382,957 303,993 15,146,523 19,049,202 18,918,964 (130,238) 22,438,805 22,279,681 (159,124) 30,476,511 30,733,021 256,510 Government bonds -- 85,491 3,382,957 303,993 15,055,005 18,777,591 18,827,446 49,855 22,161,519 22,194,336 32,817 29,719,106 29,968,651 249,545 Financial Treasury Bills -- 1,942 3,219,200 1,708 9,481,326 12,704,160 12,704,176 16 12,361,163 12,361,239 76 15,411,728 15,412,465 737 National Treasury Notes -- 23,584 124,813 254,964 5,324,282 5,725,368 5,727,643 2,275 4,670,990 4,682,819 11,829 6,471,370 6,532,607 61,237 169,879 Others National Treasury Bills -- 59,965 38,932 47,321 107,193 218,461 253,411 34,950 5,002,907 5,004,868 1,961 7,592,147 7,762,026 Agricultural debt securities -- -- 12 -- 26 38 38 -- 23 23 -- -- -- -- Brazilian foreign debt securities -- -- -- -- 142,178 129,564 142,178 12,614 126,436 145,387 18,951 142,909 161,084 18,175 Others -- -- -- -- -- -- -- -- -- -- -- 100,952 100,469 (483) -- -- -- -- 91,518 271,611 91,518 (180,093) 277,286 85,345 (191,941) 757,405 764,370 6,965 Debentures -- -- -- -- -- -- -- -- -- -- -- 190,402 197,656 7,254 Certificate of deposit -- -- -- -- -- -- -- -- -- -- -- 119,682 119,682 -- Others -- -- -- -- 91,518 271,611 91,518 (180,093) 277,286 85,345 (191,941) 447,321 447,032 (289) 2,705,435 3,810,720 10,161,528 14,633,451 99,591,013 130,729,303 130,902,147 172,843 122,584,728 122,714,673 129,945 108,126,941 109,039,503 912,562 Corporate bonds Total 24 Notes to Financial Statements R$ Thousand 06.30.2010 12.31.2009 Market Value Maturity in days With no maturity Total Cost Value 0-30 31-180 181-360 over 360 06.30.2009 Total Market Value Market to Market Cost Value Total Market Value Market to Market Cost Value Market Value Market to Market Total by portfolio 2,705,435 3,810,720 10,161,528 14,633,451 99,591,013 130,729,303 130,902,147 172,843 122,584,728 122,714,673 129,945 108,126,941 109,039,503 912,562 Own portfolio 2,699,093 3,677,433 2,582,614 5,656,508 54,370,413 69,023,207 68,986,061 (37,146) 74,768,787 74,772,199 3,412 59,993,023 60,872,632 879,609 6,342 131,344 7,180,707 8,722,977 41,500,647 57,330,804 57,542,017 211,212 26,734,553 26,888,135 153,582 29,932,795 29,969,844 37,049 -- -- 16 -- 43,019 43,087 43,035 (52) 18,413,608 18,407,373 (6,235) 15,997,118 15,993,318 (3,800) Pledged in guarantee -- 1,943 398,191 253,966 3,676,934 4,332,205 4,331,034 (1,171) 2,667,780 2,646,966 (20,814) 2,004,198 2,003,707 (491) Titles object operations with free movement -- -- -- -- -- -- -- -- -- -- -- 199,807 200,002 195 Subject to repurchase agreements Deposits with the Brazilian Central Bank R$ Thousand 06.30.2010 12.31.2009 Market Value Maturity in years With no maturity Due in up to one year Due from 1 to 5 years Total Due from 5 to 10 years Due after 10 years Cost Value 06.30.2009 Total Market Value Cost Value Total Market Value Cost Value Market Value Total by category 2,705,435 28,605,699 79,737,361 10,924,745 8,928,907 130,729,303 130,902,147 122,584,728 122,714,673 108,126,941 109,039,503 1 - Trading securities 2,019,293 9,446,134 27,861,073 3,836,713 1,666,501 44,852,491 44,829,714 38,110,829 38,274,200 31,254,705 31,661,006 686,142 15,387,123 41,360,882 6,764,799 2,954,523 66,827,610 67,153,469 62,035,094 62,160,792 46,395,725 46,645,476 -- 3,772,442 10,515,406 323,233 4,307,883 19,049,202 18,918,964 22,438,805 22,279,681 30,476,511 30,733,021 2 - Securities available for sale 3 - Securities held to maturity 25 Notes to Financial Statements R$ Thousand Current 06.30.2010 12.31.2009 06.30.2009 Book value Book value Book value Total Current By Portfolio 68,229,213 62,803,172 131,032,385 58,215,628 64,658,169 122,873,797 52,934,984 55,848,009 108,782,993 Own portfolio 36,236,785 31,835,646 68,072,431 47,295,209 27,638,367 74,933,576 37,724,309 22,900,041 60,624,350 Subject to repurchase agreements 26,472,598 19,689,260 46,161,858 5,956,127 20,929,518 26,885,645 11,550,028 18,427,334 29,977,362 16 58 74 3,817,049 14,590,558 18,407,607 3,094,191 12,897,964 15,992,155 5,519,814 11,278,208 16,798,022 1,147,243 1,499,726 2,646,969 366,454 1,622,670 1,989,124 -- -- -- -- -- -- 200,002 -- 200,002 Deposits with the Brazilian Central Bank Pledged in guarantee Non Current Titles object operations with free movement Non Current Total Current Non Current Total R$ Thousand 06.30.2010 12.31.2009 06.30.2009 Total by category Trading Securities 44,829,714 34% 38,274,200 31% 31,661,006 29% Securities available for sale 67,153,469 51% 62,160,792 51% 46,645,476 43% Securities held to maturity 19,049,202 15% 22,438,805 18% 30,476,511 28% Carrying value of portfolio 131,032,385 100% 122,873,797 100% 108,782,993 100% Mark-to-market - Category 3 Market value of portfolio (130,238) (159,124) 256,510 130,902,147 122,714,673 109,039,503 b) Results from securities R$ Thousand Banco do Brasil Applications of Interbank Liquidity (note 7b) Fixed income securities Variable income securities Total BB-Consolidated 1S2010 1S2009 1S2010 1S2009 5,930,436 6,549,306 5,851,062 6,291,690 3,976,125 3,948,676 4,692,637 4,653,925 278,835 (113) 295,357 (642) 10,185,396 10,497,869 10,839,056 10,944,973 c) Reclassification of Securities In the first half of 2010, there has been no reclassification to marketable securities. d) Derivative financial instruments The Bank uses derivative financial instruments to manage, at the consolidated level, its positions and to meet clients' needs, classifying its own positions as both Hedge (market risk and risk of cash flow) and trading, with both limits and heave at the Bank. The hedging strategy of equity positions is in line with the macroeconomic analysis and is approved by the Board. In the options market, asset or long positions have the Bank as holder, while liability or short positions have the Bank as writer. The models used to manage risks with derivatives are reviewed periodically and decisions are made in accordance with the best risk/return ratio, estimating possible losses based on the analysis of macroeconomic scenarios. The Bank uses appropriate tools and systems to manage the derivatives. Trading in new derivatives, whether standardized or not, is subject to a formal risk analysis prior to any transaction. 26 Notes to Financial Statements Risk analysis of the subsidiaries is undertaken on an individual basis and its management is undertaken at the consolidated level. The Bank uses statistical methods and simulations to measure the risks of its positions, including derivatives, using value at risk, sensitivity and stress analysis models. Risks The main risks inherent to derivative financial instruments resulting from the business dealings of the bank and its subsidiaries are credit, market and operating risks. Credit risk is reflected by the exposure to losses in the event of default by a counterparty to fulfill its part in the operation. Exposure to credit risk in futures contracts is minimized due to daily settlement in cash. The swap contracts, recorded in Cetip are subject to credit risk if the counterparty is not able or willing to perform its contractual obligations, while the swap contracts registered in the BM&FBovespa are not subject to the same risk, given that the Bank operations in Brazil that have the same stock market as guarantor. Total credit exposure in swaps is R$ 973,844 thousand at June 30, 2010 (R$ 1,664,115 thousand at December 31, 2009 and R$ 1,020,724 at June 30, 2009). Market risk is the possibility of losses caused by changes in the behavior of interest rates and exchange rates, stock prices and commodities. Market liquidity risk is the possibility of loss resulting from the inability to perform a transaction within a reasonable time and without significant loss of value due to the size of the transaction in the volume usually negotiated. The operating risk is the probability of financial losses resulting from failures or inadequacy of people, processes and / or systems, or factors such as catastrophes or criminal activities. 27 Notes to Financial Statements Breakdown of the Portfolio of Derivatives for Trading by Index R$ Thousand Banco do Brasil By Index 06.30.2010 Counter party Notional value BB-Consolidated 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value 06.30.2010 Cost Value Market Value Notional value Cost Value 12.31.2009 Market Value Notional value Cost Value 06.30.2009 Market Value Notional Cost Value value Market Value Exchange trading Futures contracts Purchase commitments Interbank deposit 12,645,950 932,021 932,021 9,455,522 (361,209) (361,209) 4,717,430 (9,266) (9,266) 17,861,752 932,021 932,021 14,730,585 (361,209) (361,209) 4,717,430 (9,266) (9,266) B 2,264,745 10,268 10,268 266,247 (5,548) (5,548) 671,151 135,760 135,760 6,860,689 10,268 10,268 2,180,381 (5,548) (5,548) 671,151 135,760 135,760 (221,341) Currencies B 2,175,890 916,722 916,722 3,050,767 (363,111) (363,111) 3,435,152 (221,341) (221,341) 2,722,321 916,722 916,722 4,206,988 (363,111) (363,111) 3,435,152 (221,341) T-Note B -- -- -- -- -- -- -- -- -- 221 -- -- 197,354 -- -- -- -- -- Index B 1,846 85 85 -- (314) (314) -- (126) (126) 75,051 85 85 18,832 (314) (314) -- (126) (126) Foreign exchange coupon B 102,948 2,684 2,684 167,933 (35,537) (35,537) -- (2,442) (2,442) 102,948 2,684 2,684 1,299,024 (35,537) (35,537) -- (2,442) (2,442) Libor IF 8,098,363 2,124 2,124 5,858,885 -- -- 610,942 15,745 15,745 8,098,364 2,124 2,124 5,858,885 -- -- 610,942 15,745 15,745 Commodities B 2,158 1,045 1,045 -- (238) (238) 185 (163) (163) 2,158 1,045 1,045 -- (238) (238) 185 (163) (163) B -- (907) (907) 111,690 43,539 43,539 -- 63,301 63,301 -- (907) (907) 969,121 43,539 43,539 -- 63,301 63,301 SCC (1 ) Sales commitments 12,849,590 (865,194) (865,194) 9,787,449 10,748 10,748 8,462,659 (451,363) (451,363) 34,008,764 (865,194) (865,194) 33,571,644 -- -- 8,462,659 (451,363) (451,363) Interbank deposit B 3,628,398 (26,522) (26,522) 2,271,052 8,518 8,518 6,787,506 (342,966) (342,966) 24,137,376 (26,522) (26,522) 20,956,312 -- -- 6,787,506 (342,966) (342,966) Currencies B 511,809 (804,900) (804,900) 231,663 (37,847) (37,847) 80,689 (59,761) (59,761) 1,110,368 (804,900) (804,900) 938,605 -- -- 80,689 (59,761) (59,761) BGI B -- -- -- -- -- -- -- -- -- 70 -- -- 37 -- -- -- -- -- Index B -- (202) (202) -- (142) (142) -- (320) (320) -- (202) (202) -- -- -- -- (320) (320) Foreign exchange coupon B 522,179 (4,675) (4,675) 709,139 69,039 69,039 610,124 122,576 122,576 522,179 (4,675) (4,675) 3,892,713 -- -- 610,124 122,576 122,576 Libor IF 8,160,855 (28,344) (28,344) 6,571,602 -- -- 983,236 (5,390) (5,390) 8,205,957 (28,344) (28,344) 6,571,602 -- -- 983,236 (5,390) (5,390) Commodities B 26,349 (1,103) (1,103) 3,993 448 448 1,104 (97) (97) 32,814 (1,103) (1,103) 344,699 -- -- 1,104 (97) (97) SCC B -- 552 552 -- (29,268) (29,268) -- (165,405) (165,405) -- 552 552 867,676 -- -- -- (165,405) (165,405) 129,786 Forward operations Asset position 2,451,598 86,809 65,689 3,288,699 185,408 130,195 1,734,859 140,964 129,786 2,485,280 86,985 65,865 3,340,965 185,805 130,591 1,734,859 140,964 Term bonds B -- -- -- 37,760 37,760 37,760 -- -- -- -- -- -- 37,760 37,760 37,760 -- -- -- Currencies C 2,451,598 86,809 65,689 3,250,939 147,648 92,435 1,734,859 140,964 129,786 2,451,598 86,809 65,689 3,250,939 147,648 92,434 1,734,859 140,964 129,786 Currencies IF -- -- -- -- -- -- -- -- -- 33,682 176 176 52,266 397 397 -- -- -- (169,270) Liability position 4,128,635 (279,092) (110,503) 3,454,614 (365,811) (237,453) 2,776,473 (321,938) (169,270) 4,162,317 (283,843) (115,254) 3,506,880 (366,030) (237,673) 2,776,473 (321,938) Term bonds B -- -- -- (37,762) (37,762) (37,762) -- -- -- -- -- -- (37,762) (37,762) (37,762) -- -- -- Term bonds C -- -- -- -- -- -- 2,776,473 (321,938) (169,270) -- -- -- -- -- -- 2,776,473 (321,938) (169,270) Currencies C 4,128,635 (279,092) (110,503) 3,492,376 (328,049) (199,691) -- -- -- 4,128,635 (279,092) (110,503) 3,492,376 (328,049) (199,692) -- -- -- Currencies IF -- -- -- -- -- -- -- -- -- 33,682 (4,751) (4,751) 52,266 (219) (219) -- -- -- 28 Notes to Financial Statements R$ Thousand Banco do Brasil By Index 06.30.2010 Counter party Notional value BB-Consolidated 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value 06.30.2010 Cost Value Market Value Notional value 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value Cost Value Market Value Options market Long position 3,260 72 4 348 4 5 3,335 317 427 157,456,731 364,025 342,237 8,471,551 222,805 194,375 4,564 398 Flexible Currency Options B -- -- -- -- -- -- -- -- -- 8,153,107 289,856 276,802 5,197,702 157,327 126,083 -- -- -- Flexible Currency Options C -- -- -- 348 4 5 3,335 317 427 -- -- -- 348 4 5 3,335 317 427 Index B -- -- -- -- -- -- -- -- -- 149,138,408 58,210 51,466 2,998,750 33,415 34,156 -- -- -- Commodities B -- -- -- -- -- -- -- -- -- 128,553 9,877 7,897 238,589 21,096 24,442 Other financial assets B 3,260 72 4 -- -- -- -- -- -- 36,663 6,082 6,072 36,162 10,963 9,689 -- -- -- Other financial assets C -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 1,229 81 145 652,442 (459,861) (498,683) (1,346,844) (1,287,324) (1,357,383) (1,448,557) (1,426,790) (1,456,797) 195,952,490 (1,889,674) (1,900,548) 14,612,454 (3,077,020) (3,118,028) 1,449,786 (1,426,871) (1,456,942) Flexible Currency Options B 182,863 (3,052) (991) (39,246) (1,056) (695) (20,912) (368) (231) 10,179,122 (141,740) (85,670) 6,897,303 (114,192) (81,892) 20,912 (368) (231) Flexible Currency Options C 469,579 (456,809) (497,692) (1,307,598) (1,286,268) (1,356,688) (1,427,645) (1,426,422) (1,456,566) 469,579 (456,809) (497,692) 2,152,406 (589,620) (660,039) 1,427,645 (1,426,422) (1,456,566) Índices B -- -- -- -- -- -- -- -- -- 183,951,258 (60,155) (56,095) 3,073,527 (36,781) (39,670) -- -- -- Prefixed B -- -- -- -- -- -- -- -- -- 1,352,531 (1,230,970) (1,261,091) 2,489,218 (2,336,427) (2,336,427) -- -- -- Other financial assets IF -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- 1,229 (81) (145) 547,132 Sales options 572 Over-the-counter trading Swap contracts Asset position 9,033,169 186,896 234,190 5,789,647 495,928 493,185 5,733,231 544,367 549,692 15,007,353 581,161 584,822 10,490,970 776,937 880,677 5,395,532 542,978 Interbank deposit C 4,384,155 53,381 92,198 1,966,082 105,134 104,885 1,542,148 127,090 124,761 4,600,974 159,725 203,276 2,481,497 182,948 178,016 1,542,148 127,090 124,761 Interbank deposit IF 1,557,928 111,757 113,882 2,276,302 360,965 351,317 1,421,803 259,214 224,213 2,562,698 174,413 50,682 3,026,790 415,493 401,377 1,421,803 259,214 224,213 Foreign currency C 171,495 207 2,174 131,561 3,007 4,072 496,255 30,760 44,217 325,694 4,949 15,086 286,634 2,274 7,639 496,255 30,760 44,217 Foreign currency IF 1,582,496 14,450 16,918 759,687 22,960 27,356 1,608,820 124,560 148,624 3,507,647 14,310 55,856 862,666 25,303 30,210 1,608,820 124,560 148,624 Prefixed C 414,013 4,494 1,977 639,565 2,804 3,350 646,438 1,966 6,398 1,156,786 58,020 68,667 2,342,053 18,305 75,888 326,506 1,354 5,317 Prefixed IF 902,000 730 4,154 -- -- -- -- -- -- 1,323,550 5,381 18,745 698,947 55,338 87,041 -- -- -- IPCA C 21,082 1,877 2,887 16,450 1,058 2,205 17,767 777 1,479 9,535 809 1,758 9,842 347 1,375 -- -- -- IPCA IF -- -- -- -- -- -- -- -- -- 867,933 87,077 83,746 501,862 10,150 20,556 -- -- -- IGPM C -- -- -- -- -- -- -- -- -- 12,437 22,517 26,875 17,004 26,847 31,350 -- -- -- IGPM IF -- -- -- -- -- -- -- -- -- 626,497 50,047 56,218 240,104 30,070 37,363 -- -- -- Commodities C -- -- -- -- -- -- -- -- -- 13,602 3,913 3,913 23,571 9,862 9,862 -- -- -- 29 Notes to Financial Statements R$ Thousand Banco do Brasil By Index 06.30.2010 Counter party Liability position Notional value BB-Consolidated 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value 06.30.2010 Cost Value Market Value Notional value 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value Cost Value Market Value 10,112,535 (238,862) (308,841) 8,422,593 (486,871) (501,249) 12,555,964 (784,833) (767,299) 17,443,465 (869,771) (941,393) 14,218,331 (1,031,067) (1,108,800) 12,555,964 (783,017) (765,483) Interbank deposit C 471,743 (8,990) (9,486) 1,729,248 (70,099) (69,776) 2,683,845 (153,992) (150,791) 487,183 (12,160) (12,253) 1,699,597 (12,705) (12,803) 2,683,845 (153,993) (150,792) Interbank deposit IF 3,252,263 (111,699) (123,178) 2,738,406 (297,057) (292,126) 2,530,159 (350,242) (319,087) 6,103,063 (258,847) (167,042) 4,423,418 (378,626) (420,064) 2,530,159 (350,242) (319,087) Foreign currency C 467,426 (19,213) (17,957) 543,643 (33,544) (33,722) 1,328,091 (148,545) (149,662) 738,685 (27,111) (24,769) 734,496 (59,626) (60,036) 1,328,091 (148,545) (149,662) Foreign currency IF 1,572,088 34,748 (28,626) 1,184,106 9,070 (21,787) 1,355,587 (45,486) (61,664) 4,712,418 (435,744) (600,314) 2,908,508 (457,795) (488,041) 1,355,587 (45,486) (61,664) Prefixed C 3,828,850 (124,658) (119,550) 1,411,272 (78,305) (65,734) 185,300 (7,835) (5,566) 4,508,278 (124,190) (122,332) 2,189,594 (84,298) (74,850) 185,300 (7,835) (5,566) Prefixed IF -- -- -- -- -- -- -- -- -- 71,227 132 (40) 410,370 (4,340) (24,466) -- -- -- TMS C 286,971 (1,328) (2,322) 390,462 (5,253) (6,421) 3,793,450 (67,189) (68,985) 286,971 (1,328) (2,322) 390,462 (5,253) (6,421) 3,793,450 (67,189) (68,985) (9,727) Referential rate C 233,194 (7,722) (7,722) 425,456 (11,683) (11,683) 679,532 (11,544) (11,544) 233,194 (7,722) (7,722) 425,456 (11,683) (11,683) 679,532 (9,727) IGPM IF -- -- -- -- -- -- -- -- -- -- -- -- 566,200 (15,738) (7,707) -- -- -- IGPM C -- -- -- -- -- -- -- -- -- 268,000 (982) (2,491) -- -- -- -- -- -- IPCA IF -- -- -- -- -- -- -- -- -- 25,000 185 (77) 462,500 1,121 (516) -- -- -- C -- -- -- -- -- -- -- -- -- 9,446 (2,004) (2,031) 7,730 (2,124) (2,213) -- -- -- Commodities Others Securities Asset position 6,376,549 136,849 140,777 8,089,892 150,715 144,252 1,999,233 95,891 103,224 7,124,652 136,165 224,143 9,053,091 245,071 238,952 1,908,574 1,304,849 103,094 Foreign currency IF 6,376,549 136,849 140,777 8,089,892 150,715 144,252 1,999,233 95,891 103,224 6,260,489 136,165 139,962 7,909,507 149,892 143,773 1,908,574 1,304,849 103,094 Foreign currency C -- -- -- -- -- -- -- -- -- 864,163 -- 84,181 1,143,584 95,179 95,179 -- -- -- Liability position 10,525,315 (219,466) (223,723) 7,297,615 (47,316) (47,921) 3,748,219 (118,849) (130,208) 10,663,191 (219,414) (224,558) 8,496,336 (105,199) (105,832) 3,734,393 (118,035) (129,410) Foreign currency IF 10,525,315 (219,466) (223,723) 7,210,342 (47,016) (47,621) 3,748,219 (118,849) (130,208) 10,521,704 (219,414) (224,558) 7,215,124 (48,237) (48,869) 3,734,393 (118,035) (129,410) Foreign currency C -- -- -- -- -- -- -- -- -- 141,487 -- -- 1,193,939 (56,662) (56,663) -- -- -- Others IF -- -- -- 87,273 (300) (300) -- -- -- -- -- -- 87,273 (300) (300) -- -- -- Counterpart: (B) Stock Exchange, (IF) Financial Institution, (C) Client. 30 Notes to Financial Statements Breakdown of the portfolio of derivative by maturity R$ Thousand BB-Banco Múltiplo By Maturity 06.30.2010 Notional value BB-Consolidated 12.31.2009 Cost value Market value Notional value Cost value 06.30.2009 Market value Notional value Cost value 06.30.2010 Market value Notional value Cost value 12.31.2009 Market value Notional value Cost value 06.30.2009 Market value Notional value Cost value Market value Futures contracts Purchase commitments 12,645,950 2,124 2,124 9,455,522 -- -- 4,717,430 15,745 15,745 17,861,752 2,124 2,124 9,455,522 -- -- 4,717,430 15,745 15,745 Up to 30 days 102,131 -- -- 99,062 -- -- 653,944 -- -- 2,216,414 -- -- 99,062 -- -- 653,944 -- -- 31 to 60 days 1,946,181 -- -- 2,825,276 -- -- 3,010,267 -- -- 2,394,725 -- -- 2,825,276 -- -- 3,010,267 -- -- 61 to 90 days 3,583,650 (698) (698) 2,333,681 -- -- 91,039 377 377 3,619,518 (698) (698) 2,333,681 -- -- 91,039 377 377 91 to 180 days 1,934,547 (669) (669) 2,370,039 -- -- 95,018 166 166 3,438,595 (669) (669) 2,370,039 -- -- 95,018 166 166 181 to 360 days 2,604,172 (144) (144) 889,013 -- -- 49,922 1,603 1,603 3,103,686 (144) (144) 889,013 -- -- 49,922 1,603 1,603 1 to 5 years 2,475,269 3,635 3,635 938,451 -- -- 511,769 5,726 5,726 2,185,735 3,635 3,635 938,451 -- -- 511,769 5,726 5,726 -- -- -- -- -- -- 305,471 7,873 7,873 903,079 -- -- -- -- -- 305,471 7,873 7,873 (5,390) More than 5 years 12,849,590 (28,344) (28,344) 9,787,449 -- -- 8,462,659 (5,390) (5,390) 34,008,764 (28,344) (28,344) 33,571,644 -- -- 8,462,659 (5,390) Up to 30 days Sales commitments 426,667 -- -- 1,192,776 -- -- 61,286 -- -- 1,760,851 -- -- 2,549,090 -- -- 61,286 -- -- 31 to 60 days -- -- -- -- -- -- 183,486 -- -- 857,696 -- -- 1,973,867 -- -- 183,486 -- -- 61 to 90 days 1,398,902 (2,135) (2,135) 778,310 -- -- 125,539 15 15 4,138,899 (2,135) (2,135) 1,885,364 -- -- 125,539 15 15 91 to 180 days 2,050,292 (1,151) (1,151) 782,712 -- -- 1,698,769 719 719 6,307,107 (1,151) (1,151) 2,818,236 -- -- 1,698,769 719 719 181 to 360 days 2,704,632 (9,494) (9,494) 1,693,423 -- -- 2,633,009 (896) (896) 7,790,301 (9,494) (9,494) 5,556,727 -- -- 2,633,009 (896) (896) 1 to 5 years 6,044,381 18 18 5,248,320 -- -- 3,741,831 (5,938) (5,938) 11,928,558 18 18 17,863,013 -- -- 3,741,831 (5,938) (5,938) 224,716 (15,582) (15,582) 91,908 -- -- 18,739 710 710 1,225,352 (15,582) (15,582) 925,347 -- -- 18,739 710 710 Asset position -- -- -- 37,760 37,760 37,760 -- -- -- -- -- -- 90,026 38,158 38,158 -- -- -- Up to 30 days -- -- -- 37,760 37,760 37,760 -- -- -- -- -- -- 37,760 37,760 37,760 -- -- -- 31 to 60 days -- -- -- -- -- -- -- -- -- -- -- -- 52,266 397 397 -- -- -- Liability position -- -- -- (37,762) (37,762) (37,762) -- -- -- -- -- -- 14,504 (37,981) (37,981) -- -- -- Up to 30 days -- -- -- (37,762) (37,762) (37,762) -- -- -- -- -- -- (37,762) (37,762) (37,762) -- -- -- 31 to 60 days -- -- -- -- -- -- -- -- -- -- -- -- 52,266 (219) (219) -- -- -- More than 5 years Operations Term Term bonds 31 Notes to Financial Statements R$ Thousand Banco do Brasil By Maturity 06.30.2010 Counter party Notional value BB-Consolidated 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value 06.30.2010 Cost Value Market Value Notional value 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value Cost Value Market Value Currency futures Asset position 2,451,598 86,809 65,689 3,250,939 147,648 92,435 1,734,859 140,964 129,786 2,485,280 86,985 65,865 3,250,939 147,647 92,433 1,734,859 140,964 129,786 Up to 30 days 1,214,491 27,414 29,118 563,903 49,089 46,656 470,292 24,586 20,429 1,214,491 27,414 29,118 563,903 49,088 46,654 470,292 24,586 20,429 31 to 60 days 436,759 12,478 11,604 416,544 25,073 18,425 265,099 19,260 17,726 436,759 12,478 11,604 416,544 25,073 18,425 265,099 19,260 17,726 61 to 90 days 243,606 8,499 7,029 390,667 11,020 4,469 387,354 38,874 31,250 243,606 8,499 7,029 390,667 11,020 4,469 387,354 38,874 31,250 91 to 180 days 289,785 15,415 9,237 697,857 29,848 13,879 472,561 35,849 30,370 289,785 15,415 9,237 697,857 29,848 13,879 472,561 35,849 30,370 181 to 360 days 223,653 15,798 4,701 592,319 25,943 8,493 138,663 22,073 21,464 232,485 15,844 4,747 592,319 25,943 8,493 138,663 22,073 21,464 43,304 7,205 4,000 589,649 6,675 513 890 322 8,547 68,154 7,335 4,130 589,649 6,675 513 890 322 8,547 Liability position 4,128,635 (279,092) (110,503) 3,492,376 (328,049) (199,691) 2,776,473 (321,938) (169,270) 4,162,317 (283,843) (115,254) 3,492,376 (328,049) (199,692) 2,776,473 (321,938) (169,270) Up to 30 days 1,146,050 (24,063) (24,465) 1,035,288 (39,904) (38,867) 320,367 (29,698) (26,969) 1,146,050 (24,063) (24,465) 1,035,288 (39,904) (38,868) 320,367 (29,698) (26,969) 31 to 60 days 337,335 (10,648) (9,747) 792,696 (37,568) (34,437) 355,116 (22,714) (19,352) 337,335 (10,648) (9,747) 792,696 (37,568) (34,437) 355,116 (22,714) (19,352) 61 to 90 days 361,905 (13,993) (11,259) 449,921 (25,577) (19,608) 366,869 (22,733) (15,830) 363,398 (14,207) (11,473) 449,921 (25,577) (19,608) 366,869 (22,733) (15,830) 91 to 180 days 710,291 (46,751) (30,406) 789,453 (65,491) (50,478) 596,594 (47,080) (38,541) 710,291 (46,751) (30,406) 789,453 (65,491) (50,478) 596,594 (47,080) (38,541) 181 to 360 days 834,987 (61,602) (18,939) 356,863 (67,160) (36,365) 537,219 (54,511) (30,793) 864,561 (65,774) (23,111) 356,863 (67,160) (36,365) 537,219 (54,511) (30,793) 1 to 5 years 738,067 (122,035) (15,687) 68,155 (92,349) (19,936) 600,308 (145,202) (37,785) 740,682 (122,400) (16,052) 68,155 (92,349) (19,936) 600,308 (145,202) (37,785) 1 to 5 years Options market Sold position 3,260 72 4 348 4 5 3,335 317 427 157,456,731 364,025 342,237 8,471,551 222,805 194,375 4,564 398 572 Up to 30 days 3,260 72 4 174 2 2 -- 211 165 17,516,499 223,561 215,562 2,959,069 47,923 19,453 -- 211 164 31 to 60 days -- -- -- 174 2 3 1,634 47 167 799,746 15,699 11,213 418,816 12,736 5,770 2,863 128 313 61 to 90 days -- -- -- -- -- -- -- -- -- 563,185 9,677 7,054 38,717 2,649 1,862 -- -- -- 91 to 180 days -- -- -- -- -- -- 1,701 59 95 82,015,672 32,383 26,753 922,601 31,566 25,479 1,701 59 95 181 to 360 days -- -- -- -- -- -- -- -- -- 56,398,375 78,698 77,433 992,784 88,973 90,283 -- -- -- 1 to 5 years -- -- -- -- -- -- -- -- -- 163,254 4,007 4,222 3,139,564 38,958 51,528 -- -- -- (1,456,942) 652,442 (459,861) (498,683) 1,346,844 (1,287,324) (1,357,383) 1,448,557 (1,426,790) (1,456,797) 192,556,542 (1,889,674) (1,900,548) 14,612,454 (3,077,020) (3,118,028) 1,447,328 (1,426,871) Up to 30 days For sale position 42,498 (31,105) (31,190) 187,614 (169,306) (176,673) 364,289 (364,628) (370,429) 24,005,635 (267,826) (241,824) 3,974,802 (209,574) (190,403) 364,289 (364,628) (370,428) 31 to 60 days 174,883 (121,912) (131,592) 202,190 (200,699) (209,968) 286,569 (274,695) (280,635) 868,092 (135,881) (139,906) 693,525 (205,018) (212,523) 285,340 (274,776) (280,781) 61 to 90 days 365,362 (246,925) (272,055) 395,547 (370,200) (390,442) 79,463 (72,129) (72,241) 261,880 (253,340) (276,124) 465,958 (370,976) (390,884) 79,463 (72,129) (72,241) 91 to 180 days 58,327 (52,750) (54,524) 185,246 (173,850) (185,940) 1,082 (67) (18) 103,692,839 (92,202) (86,382) 1,719,300 (475,673) (486,597) 1,082 (67) (18) 181 to 360 days 11,372 (7,169) (9,322) 368,828 (366,226) (385,434) 465,797 (463,914) (476,950) 62,196,778 (839,091) (869,279) 1,541,899 (452,624) (463,897) 465,797 (463,914) (476,950) -- -- -- 7,419 (7,043) (8,926) 251,357 (251,357) (256,524) 1,531,318 (301,334) (287,033) 6,216,970 (1,363,155) (1,373,724) 251,357 (251,357) (256,524) 1 to 5 years 32 Notes to Financial Statements R$ Thousand Banco do Brasil By Maturity 06.30.2010 Notional value BB-Consolidated 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value 06.30.2010 Cost Value Market Value Notional value 12.31.2009 Cost Value Market Value Notional value 06.30.2009 Cost Value Market Value Notional value Cost Value Market Value Swap contracts Assets 9,033,169 186,896 234,190 5,789,647 495,928 493,185 5,733,231 544,367 549,692 15,007,353 581,161 584,822 10,490,970 776,937 880,677 5,395,532 542,978 547,132 Up to 30 days 602,081 15,094 16,357 816,923 214,905 214,444 1,433,307 165,475 176,605 1,239,651 55,287 56,636 964,466 244,138 243,669 1,152,307 165,456 176,555 31 to 60 days 506,490 8,279 9,495 215,593 7,779 7,516 162,924 21,871 19,716 1,654,837 51,487 58,965 464,018 19,492 25,478 130,607 21,281 18,915 61 to 90 days 362,407 14,183 15,543 558,971 27,267 27,584 263,943 10,104 12,228 481,078 17,488 18,967 646,323 29,286 30,674 263,943 10,104 12,228 1,057,677 27,100 28,353 663,783 78,798 78,396 902,774 75,261 76,040 2,132,406 156,011 192,559 1,191,456 125,483 141,899 902,774 75,261 76,040 91 to 180 days 181 to 360 days 1,299,789 46,644 49,765 1,245,192 27,944 26,921 1,496,452 213,387 199,476 1,515,319 113,478 120,593 2,918,254 125,691 181,151 1,495,985 213,362 199,458 1 to 5 years 5,182,725 75,596 113,980 2,071,635 137,884 132,812 1,229,981 53,926 57,732 7,816,738 170,862 126,187 3,666,093 206,277 226,939 1,206,066 53,171 56,041 22,000 -- 697 217,550 1,351 5,512 243,850 4,343 7,895 167,324 16,548 10,915 640,360 26,570 30,867 243,850 4,343 7,895 10,112,535 (238,862) (308,841) 8,422,593 (486,871) (501,249) 12,555,964 (784,833) (767,299) 17,443,465 (869,771) (941,393) 14,218,331 (1,031,067) (1,108,800) 12,555,964 (783,017) (765,483) 1,620,228 (77,948) (79,287) 1,440,843 (203,263) (203,127) 1,336,518 (154,196) (147,813) 2,422,709 (106,074) (107,610) 1,657,482 (167,572) (174,522) 1,336,518 (152,380) (145,997) (123,287) 5 to 10 years Liabilities Up to 30 days 31 to 60 days 1,102,345 (31,983) (35,223) 573,491 (42,821) (41,817) 1,001,769 (131,209) (123,287) 1,863,083 (78,440) (80,822) 942,997 (55,939) (56,458) 1,001,769 (131,209) 61 to 90 days 1,210,482 (24,750) (27,752) 343,006 (15,017) (13,925) 1,303,571 (70,728) (67,300) 1,332,717 (29,026) (32,287) 662,929 (19,996) (19,477) 1,303,571 (70,728) (67,300) 91 to 180 days 2,297,387 (54,679) (63,012) 1,282,452 (54,090) (50,605) 3,720,219 (143,486) (141,868) 2,898,612 (190,630) (199,333) 1,619,461 (93,790) (90,800) 3,720,219 (143,486) (141,868) 181 to 360 days 1,535,061 (48,885) (41,577) 2,649,000 (82,720) (82,039) 1,971,503 (121,154) (118,016) 2,922,681 (22,571) (42,349) 3,748,092 (181,053) (185,531) 1,971,503 (121,154) (118,016) 1 to 5 years 2,256,997 (61) (60,739) 2,003,271 (89,325) (105,868) 3,076,074 (162,990) (162,589) 5,719,539 (435,347) (466,849) 5,233,890 (506,755) (556,297) 3,076,074 (162,990) (162,589) 90,035 (556) (1,251) 130,530 365 (3,868) 146,310 (1,070) (6,426) 284,124 (7,683) (12,143) 353,480 (5,962) (25,715) 146,310 (1,070) (6,426) 5 to 10 years Others Securities Assets 6,376,549 136,849 140,777 8,089,892 150,715 144,252 1,999,233 95,891 103,224 7,124,652 136,165 224,143 9,053,091 245,071 238,952 1,908,574 1,304,849 103,094 Up to 30 days 2,713,573 60,058 62,155 2,258,411 28,867 25,878 385,168 11,136 11,389 2,601,188 59,410 61,403 2,483,818 37,581 34,936 296,676 296,452 11,300 31 to 60 days 1,115,540 27,506 29,339 951,439 25,822 24,574 182,083 17,915 18,202 1,976,028 27,470 70,875 1,410,188 56,634 55,386 179,916 179,857 18,161 61 to 90 days 405,537 4,853 4,934 3,309,171 54,985 53,900 265,259 15,616 17,288 405,537 4,853 47,516 3,316,649 55,792 54,707 265,259 265,259 17,288 1,060,632 32,509 32,746 570,194 29,634 28,650 605,250 19,837 22,029 1,060,632 32,509 32,746 655,529 31,990 31,006 605,250 19,837 22,029 983,240 7,998 7,678 390,176 2,741 2,584 475,136 19,536 22,465 983,240 7,998 7,678 451,178 4,466 4,309 475,136 475,136 22,465 1 to 5 years 85,551 3,907 3,907 540,683 8,387 8,387 67,598 11,141 11,141 85,551 3,907 3,907 665,911 58,329 58,329 67,598 67,598 11,141 5 to 10 years 12,476 18 18 69,818 279 279 18,739 710 710 12,476 18 18 69,818 279 279 18,739 710 710 91 to 180 days 181 to 360 days Liabilities 10,525,315 (219,466) (223,723) 7,297,615 (47,316) (47,921) 3,748,219 (118,849) (130,208) 10,663,191 (219,414) (224,558) 8,496,336 (105,199) (105,832) 3,734,393 (118,035) (129,410) Up to 30 days 1,698,228 (21,972) (21,597) 951,444 (4,142) (4,258) 450,681 (9,779) (14,071) 1,697,688 (21,970) (22,497) 1,515,405 (11,490) (11,632) 450,681 (9,779) (14,086) 31 to 60 days 287,595 (23,915) (24,257) 49,361 (1,878) (1,802) 936,053 (51,030) (51,707) 426,011 (23,865) (24,191) 134,164 (3,888) (3,812) 936,053 (51,030) (51,707) 61 to 90 days 3,597,600 (52,587) (54,201) 842,354 (5,341) (5,235) 1,060,706 (16,317) (18,151) 3,597,600 (52,587) (54,201) 1,030,640 (24,986) (24,880) 1,060,706 (16,317) (18,151) 91 to 180 days 2,269,812 (97,707) (99,818) 1,534,281 (8,189) (8,202) 639,817 (27,619) (29,802) 2,269,812 (97,707) (99,818) 1,651,684 (17,047) (17,061) 639,233 (27,600) (29,783) 181 to 360 days 1 to 5 years 553,501 (8,387) (8,873) 1,281,570 (19,334) (19,891) 291,733 (2,752) (5,125) 553,501 (8,387) (8,873) 1,457,563 (34,732) (35,290) 278,491 (1,957) (4,331) 2,118,579 (14,898) (14,977) 2,638,605 (8,432) (8,533) 369,229 (11,352) (11,352) 2,118,579 (14,898) (14,978) 2,706,880 (13,056) (13,157) 369,229 (11,352) (11,352) 33 Notes to Financial Statements The portfolio of credit derivatives is composed exclusively of purchases and sales carried out by Banco Votorantim. Currently consists of customers whose risk is rated as investment grade and, as a counterpart, contains the main leaders of international market for this product. For the sale of protection is approved credit limit, for both the client and for the counterparty risk, according to the heave of the committees and forums of credit. Allocates to limit credit risk to the client by the reference value (notional) of derivatives, considering the amounts deposited as collateral. To purchase protection, operates in portfolio trading with client sovereign risk, especially Brazil. In this case, we consider the potential future exposure to allocate out of the counterparty. On 06.30.2010, the portfolio of credit derivatives reflected in the increase of R$ 79,850 thousand in PEPR - Portion related exposures weighted by risk factor for calculating the Basel index. During the period, there was no occurrence of credit event relating to taxable events under the contract. Breakdown of the credit derivatives portfolio R$ Thousand Banco do Brasil 06.30.2010 Notional value BB-Consolidated 12.31.2009 Market value Notional value 06.30.2009 Notional value Market value 06.30.2010 Market value Notional value 12.31.2009 Market value Notional value 06.30.2009 Market value Notional value Market value Asset position - Transferred risk -- -- -- -- -- -- 1,582,618 21,290 4,460,954 18,489 -- -- Credit swaps - Derivatives with Banks -- -- -- -- -- -- 1,582,618 21,290 4,460,954 18,489 -- -- Liability position - Received risk -- -- -- -- -- -- 4,229,514 (7,308) 4,775,870 (112,926) -- -- Credit swaps - Derivatives with Banks -- -- -- -- -- -- 4,229,514 (7,308) 4,775,870 (112,926) -- -- Breakdown of margin given as guarantee for transactions with derivative financial instruments R$ Thousand Banco do Brasil BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 896,344 589,281 1,296,063 ---- ---- ---- -896,344 -589,281 -1,296,063 06.30.2010 12.31.2009 06.30.2009 940,777 594,669 1,296,063 704,478 413,796 1,180,416 755,078 203,261 544,018 ---- 465,074 3,704,541 4,410 2,101,436 -1,296,063 Government bonds LFT NTN LTN Foreign Government bonds Others Total 34 Notes to Financial Statements The Bank, in order to hedge against possible fluctuations in interest and exchange rates issued securities on the international capitals market in the amount R$ 350 million, contracted derivative operations in the form off currency and interest rate swaps (Cross Currency Interest Rate Swaps), with the same volume, term and interest rates. The hedge was assessed as effective, in accordance with the provisions of Central Bank Circular 3082/2002, which require evidence of hedge effectiveness between 80% and 125%: Breakdown of the portfolio of derivatives designated as market risk hedge R$ Thousand Banco do Brasil By Index 06.30.2010 Counterparty Notional value Cost value BB-Consolidated 12.31.2009 06.30.2009 Market value Notional value Cost value Market value Notional value 06.30.2010 Cost value Market value Notional value Cost value 12.31.2009 06.30.2009 Market value Notional value Cost value Market value Notional value Cost value Market value Over-the-counter trading Swap contracts Liability position Foreign currency and interest IF 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) Counterparty: (IF) Financial Institution. R$ Thousand Banco do Brasil By Index 06.30.2010 Counterparty Notional value Cost value BB-Consolidated 12.31.2009 Market value Notional value Cost value 06.30.2009 Market value Notional value 06.30.2010 Cost value Market value Notional value Cost value 12.31.2009 06.30.2009 Market value Notional value Cost value Market value Notional value Cost value Market value Swap contracts Liabilities 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) 5 to 10 years 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) 350,000 16,593 (56,150) 350,000 28,441 (40,777) 350,000 (12,249) (59,276) 35 Notes to Financial Statements Derivative financial instruments divided into current and long-term R$ Thousand Banco do Brasil 06.30.2010 BB-Consolidated 12.31.2009 06.30.2009 06.30.2010 Current Non-Current Current Non-Current Current Non-Current Current 12.31.2009 Non-Current Current 06.30.2009 Non-Current Current Non-Current 8,547 ASSETS Forward operations 61,689 4,000 129,682 513 121,239 8,547 61,735 4,130 130,078 513 121,239 Options market 4 -- 5 -- 427 -- 338,015 4,222 142,847 51,528 572 -- Swap contracts 119,513 114,677 354,861 138,324 484,065 65,627 447,720 137,102 622,871 257,806 483,196 63,936 Others 136,852 3,925 135,586 8,666 91,373 11,851 220,218 3,925 180,344 58,608 91,243 11,851 -- -- -- -- -- -- -- -- 5,398 13,091 -- -- 318,058 122,602 620,134 147,503 697,104 86,025 1,067,688 149,379 1,081,538 381,546 696,250 84,334 Credit swaps Total LIABILITIES Forward operations (94,816) (15,687) (217,517) (19,936) (131,485) (37,785) (99,202) (16,052) (217,737) (19,936) (131,485) (37,785) Options market (498,683) -- (1,348,457) (8,926) (1,200,273) (256,524) (1,613,515) (287,033) (1,744,304) (1,373,724) (1,200,418) (256,524) Swap contracts (246,851) (61,990) (391,513) (109,736) (598,284) (169,015) (462,401) (478,992) (526,788) (582,012) (596,469) (169,015) Others (208,746) (14,977) (39,388) (8,533) (118,856) (11,352) (209,580) (14,978) (92,675) (13,157) (118,058) (11,352) Credit swaps -- -- -- -- -- -- -- -- (35,507) (77,419) -- -- Hedge Derivatives -- (56,150) -- (40,777) -- (59,276) -- (56,150) -- (40,777) -- (59,276) (1,049,096) (148,804) (1,996,875) (187,908) (2,048,898) (533,952) (2,384,698) (853,205) (2,617,011) (2,107,025) (2,046,430) (533,952) Total 36 Notes to Financial Statements e) Results from Derivatives R$ Thousand Banco do Brasil BB-Consolidated 1S2010 Swap Forward Options 1S2009 1S2010 1S2009 466,359 78,346 468,688 32,130 (975) (404) (7,356) (404) (32,357) (76,834) (19,223) (76,834) 135,803 (449,979) Future Derivatives Others (449,979) (119,065) -- -- 8,370 -- (55,242) (451,709) (156,396) (451,641) Total 125,575 (510,238) (261,540) (512,499) f) Equity Valuation Adjustment – Securities and Derivatives recognized in the Stockholders’ equity R$ Thousand 1S2010 12.31.2009 Balance Net change in the quarter 1S2009 06.30.2010 Balance 12.31.2008 Balance Net change in the quarter 06.30.2009 Balance Securities available for sale Bank (57,901) 27,317 (30,584) (49,854) 81,234 31,380 Affiliates and subsidiaries Tax effects Total 306,258 164,856 471,114 217,466 (36,937) 180,529 21,807 (50,961) (29,154) 31,117 (26,779) 4,338 270,164 141,212 411,376 198,729 17,518 216,247 37 Notes to Financial Statements 9 – Interbank a) Payments and Receipts Settlement R$ Thousand Banco do Brasil BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Assets Rights with participants of securities settlement systems Checks and other papers Documents submitted by other Total 1,130,086 2,213,220 153,227 5 1,122,226 1,447,820 1,130,110 2,213,515 153,227 31 1,223,076 1,499,416 3,343,306 153,232 2,570,046 3,343,625 153,258 2,722,492 Current assets 3,343,306 153,232 2,570,046 3,343,625 153,258 2,722,492 Checks and other papers Receipts remitted Other receipts Total 1,194,115 1,816,857 7,867 63 132 407 1,076,380 1,306,469 3,665 1,194,146 1,821,117 7,867 63 144 408 1,228,298 1,424,580 3,985 3,018,839 602 2,386,514 3,023,130 615 2,656,863 Current liabilities 3,018,839 602 2,386,514 3,023,130 615 2,656,863 Liabilities Obligations with participants of securities settlement systems b) Credit Linked R$ Thousand Banco do Brasil BB-Consolidated 30.06.2010 31.12.2009 30.06.2009 30.06.2010 31.12.2009 30.06.2009 57,243,465 24,167,099 20,605,544 59,373,714 24,279,765 24,507,300 20,130,663 -- -- 20,130,663 -- -- Demand deposits 13,702,568 11,878,269 9,644,890 15,832,817 11,919,021 11,152,657 Savings deposits 12,881,379 11,941,111 8,712,011 12,881,379 11,941,111 11,000,662 (2) 10,136,543 -- -- 10,136,543 -- -- Resources on rural credit 208,902 204,008 2,137,443 208,902 204,008 2,147,268 Resources on microfinance 183,410 143,711 111,200 183,410 215,625 171,316 -- -- -- -- -- 35,397 1,670,472 1,635,417 60,200 1,670,472 1,635,417 1,593,287 1,798,209 1,757,711 72,744 1,798,209 1,757,711 1,710,249 11,955 17,083 2,011 11,955 17,083 22,575 (139,692) (139,377) (14,555) (139,692) (139,377) (139,537) Compulsory Deposits at the Central Bank of Brazil Additional - Central Bank Circular No. 3.144/2002 Term deposits Other Housing Finance System Fund for compensation of wage changes Other Provision for losses on loans tied National Treasury - Rural Credit (1) 104,641 148,158 24,636 104,641 148,158 24,636 Total 59,018,578 25,950,674 20,690,380 61,148,827 26,063,340 26,125,223 Current assets 59,018,578 25,950,674 20,690,380 61,148,827 26,063,340 26,125,223 (1) As Bacen Circular 3486/2010, was amended in order to comply with the requirement for additional in-kind due to additional federal government securities. (2) According to Central Bank Circular No. 3.485/2010, has changed the form of performance requirements over the long term deposits. 38 Notes to Financial Statements c) Income on Compulsory Deposits R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 362,046 1,083,175 322,826 1,128,865 Additional requirement Circular Letter No. 3144/2002 491,767 -- 512,134 -- Savings Bank Circular No. 3093/2002 402,801 298,278 402,801 337,498 Resource requirements over the long term 188,607 -- 213,930 -- -- 24,548 -- 24,548 25,285 Income Credit Linked to Central Bank Additional requirement CMN Resolution No. 3607/2008 Income Credit Linked to SFH 50,373 25 50,373 Income Credit Linked to Rural Credit 12,327 1,335 12,327 1,335 1,145,875 324,186 1,191,565 388,666 Total 10 – Loans Comprises the Loan Portfolio, Leasing and Loans Classified as "Other Receivables". a) Portfolio by modality R$ Thousand Bando do Brasil BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Loans Loans and bills discounted 284,405,282 259,780,843 213,872,988 306,172,534 279,467,756 231,810,327 131,988,352 124,255,540 138,460,097 129,828,585 106,446,214 91,008,396 Financing 78,679,717 67,023,572 55,626,560 93,646,288 80,858,134 56,497,258 Rural and agribusiness financing 71,374,708 66,887,223 66,842,918 71,703,644 67,166,529 67,668,044 2,361,215 1,610,578 395,114 2,361,215 1,610,578 1,192,098 Financing of Infrastructure and development 1,290 3,930 -- 1,290 3,930 6,713 Other receivables with loan characteristics 15,325,015 16,051,948 17,167,127 15,708,807 16,429,275 17,269,164 Advances on foreign exchange contracts 7,168,030 7,967,810 10,750,691 7,381,114 8,192,660 10,834,835 Credit card operations 7,838,306 7,747,968 6,039,170 7,838,306 7,747,968 6,039,170 73,125 88,322 77,513 73,125 90,972 77,513 245,554 247,848 299,753 416,262 397,675 317,646 51,359 60,775 58,860 4,640,840 4,931,773 3,405,990 Real estate financing Guarantees honored Sundry Lease operations Total Loan Portfolio 299,781,656 275,893,566 231,098,975 326,522,181 300,828,804 252,485,481 Provision for Loan Losses (17,005,165) (17,611,907) (16,252,779) (18,087,552) (18,617,380) (17,759,015) (Allowance for loan losses) (16,280,006) (16,938,379) (15,584,618) (17,097,416) (17,684,659) (16,904,078) (Provision for other losses) (Allowance for lease losses) Total Loan Portfolio Net of Provisions (725,159) (673,528) (668,161) (743,701) (701,511) (701,780) -- -- -- (246,435) (231,210) (153,157) 282,776,491 258,281,659 214,846,196 308,434,629 282,211,424 234,726,466 39 Notes to Financial Statements b) Loan operations income R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 Loan operations income 22,295,406 17,247,157 24,316,980 18,465,063 Loans and bills discounted 14,111,638 10,226,276 14,676,983 11,360,793 Financing 3,838,155 3,094,922 5,214,533 3,099,687 Rural and agribusiness financing 2,364,185 2,284,684 2,376,454 2,298,465 Recovery of loans and lowered injury (Note 10.k) 1,443,410 1,132,859 1,387,616 1,158,486 138,777 176,200 257,749 176,200 4,919 4,691 4,934 4,691 394,322 327,525 398,711 366,741 Advances on foreign exchange contracts Guarantees honored Other Lease Operations Income (Note 10.i) Total 21,877 25,521 1,591,280 988,396 22,317,283 17,272,678 25,908,260 19,453,459 c) Breakdown of the Loan Portfolio by Sector R$ Thousand Banco do Brasil BB-Consolidated 06.30.2010 % 12.31.2009 % 06.30.2009 % 06.30.2010 % 12.31.2009 % 06.30.2009 % PUBLIC SECTOR 5,996,432 2.0 6,234,130 2.3 2,775,139 1.2 6,144,844 1.8 6,388,065 2.1 2,809,927 1.1 Government 2,586,293 0.9 2,716,210 1.0 2,230,416 0.9 2,586,293 0.8 2,716,210 0.9 2,238,706 0.9 Direct administration 2,332,426 0.8 2,556,027 0.9 2,174,163 0.9 2,332,426 0.6 2,556,027 0.8 2,182,431 0.9 253,867 0.1 160,183 0.1 56,253 -- 253,867 0.1 160,183 0.1 56,275 -- 3,410,139 1.1 3,517,920 1.3 544,723 0.3 3,558,551 1.0 3,671,855 1.2 571,221 0.2 Indirect administration Business entities BB Group Industry Commerce Financial services Other services Housing Companies PRIVATE SECTOR 3,184 -- 4,405 -- 6,015 -- -- -- -- -- -- -- 1,838,697 0.6 2,046,213 0.7 367,153 0.2 1,919,394 0.5 2,126,049 0.6 458,951 0.2 1,483 -- 185 -- 7,482 -- 1,483 -- 185 -- 7,482 -- 113,791 -- 151,226 0.1 159,984 0.1 113,944 -- 151,288 0.1 100,694 -- 1,451,694 0.5 1,313,488 0.5 4,089 -- 1,522,440 0.5 1,391,930 0.5 4,094 -- 1,290 -- 2,403 -- -- -- 1,290 -- 2,403 -- -- -- 293,785,224 98.0 269,659,436 97.7 228,323,836 98.8 320,377,337 98.2 294,440,739 97.9 249,675,554 98.9 Rural 55,073,039 18.4 54,489,403 19.8 53,252,653 23.0 55,401,976 17.1 54,768,700 18.3 54,077,779 21.3 Industry 90,264,274 30.1 79,466,709 28.8 71,561,590 31.0 95,610,954 29.3 84,798,895 28.2 73,567,760 29.1 Commerce 35,523,931 11.9 30,881,818 11.2 25,886,717 11.2 37,096,572 11.4 32,175,132 10.7 27,412,706 10.9 Financial services 1,405,056 0.5 1,044,364 0.4 385,177 0.2 1,416,186 0.4 1,010,506 0.3 393,383 0.2 Private Individuals 72,938,830 24.2 66,367,114 24.0 46,050,779 19.9 89,248,734 27.3 81,295,241 27.0 60,295,188 23.9 Housing Other services Total 2,083,340 0.7 1,456,778 0.5 395,114 0.2 2,083,340 0.6 1,456,778 0.5 1,184,174 0.5 36,496,754 12.2 35,953,250 13.0 30,791,806 13.3 39,519,575 12.1 38,935,487 12.9 32,744,564 13.0 299,781,656 100.0 275,893,566 100.0 231,098,975 100.0 326,522,181 100.0 300,828,804 100.0 252,485,481 100.0 40 Notes to Financial Statements d) Loan portfolio by risk level and maturity R$ Thousand Banco do Brasil Performing loans 06.30.2010 12.31.2009 06.30.2009 AA A B C D E F G H Total portfolio Total portfolio Total portfolio Installments falling due 01 to 30 5,233,288 6,156,701 7,183,846 2,618,222 685,293 83,348 27,899 24,803 173,793 22,187,193 22,146,248 20,223,977 31 to 60 5,449,798 4,845,693 4,623,781 1,729,754 329,402 62,681 21,103 15,021 122,380 17,199,613 16,170,441 13,146,276 61 to 90 3,878,900 2,924,604 4,687,723 1,696,933 328,682 41,772 16,840 15,307 105,271 13,696,032 13,319,159 12,604,445 91 to 180 7,770,935 6,518,380 12,271,454 4,515,746 724,557 111,037 53,328 40,106 356,236 32,361,779 32,052,930 28,872,599 181 to 360 13,579,775 7,610,666 18,767,864 6,501,911 932,130 261,072 72,522 43,051 302,704 48,071,695 46,627,198 43,694,745 Over 360 43,029,198 24,694,891 56,531,657 18,913,497 3,884,702 738,978 391,022 276,812 2,489,334 150,950,091 129,267,314 95,291,744 87,163 44,674 107,191 65,577 35,615 15,242 8,969 8,311 32,920 405,662 577,848 647,621 2,673,326 -- -- -- -- -- -- -- -- 2,673,326 2,643,182 3,946,557 81,702,383 52,795,609 104,173,516 36,041,640 6,920,381 1,314,130 591,683 423,411 3,582,638 Installments overdue Up to 14 days Others (1) Subtotal 287,545,391 262,804,320 218,427,964 R$ Thousand Non-performing loans AA A B C D E F G H 06.30.2010 12.31.2009 06.30.2009 Total portfolio Total portfolio Total portfolio Installments falling due 01 to 30 -- -- 120,991 224,944 179,022 123,504 138,168 128,980 780,350 1,695,959 1,770,496 1,910,536 31 to 60 -- -- 40,878 51,400 32,262 24,567 21,765 23,772 187,065 381,709 351,919 391,921 61 to 90 -- -- 31,833 49,279 34,606 25,550 26,056 25,347 137,543 330,214 290,999 328,291 91 to 180 -- -- 71,818 128,989 92,632 75,444 74,308 69,125 389,861 902,177 871,115 848,927 181 to 360 -- -- 132,228 243,377 181,660 125,974 119,966 118,989 662,840 1,585,034 1,662,274 1,520,522 Over 360 -- -- 293,698 599,464 451,471 310,474 275,104 275,144 1,429,366 3,634,721 3,752,986 3,775,121 01 to 14 -- -- 11,081 17,188 14,639 11,478 9,292 16,978 54,703 135,359 115,147 128,080 15 to 30 -- -- 85,841 66,226 59,086 26,512 22,609 27,302 147,617 435,193 422,474 465,536 31 to 60 -- -- 4,945 94,264 62,134 39,296 30,596 42,554 169,557 443,346 536,958 761,552 61 to 90 -- -- 6 5,484 87,253 42,673 40,531 50,857 203,326 430,130 465,093 434,782 91 to 180 -- -- 72 3,246 14,229 71,046 112,382 194,867 649,901 1,045,743 1,245,803 1,126,156 181 to 360 -- -- 45 107 -- 8,177 12,633 13,847 1,082,756 1,117,565 1,588,510 958,528 Over 360 -- -- 43 2 -- -- -- -- 99,070 99,115 15,472 21,059 Subtotal -- -- 793,479 1,483,970 1,208,994 884,695 883,410 987,762 5,993,955 12,236,265 13,089,246 12,671,011 81,702,383 52,795,609 104,966,995 37,525,610 8,129,375 2,198,825 1,475,093 1,411,173 9,576,593 299,781,656 Installments overdue Total 275,893,566 231,098,975 41 Notes to Financial Statements R$ Thousand BB-Consolidated Performing loans AA A B C D 01 to 30 5,423,111 6,999,675 7,459,975 2,643,703 702,449 31 to 60 5,732,287 5,376,836 4,813,798 1,752,935 337,644 61 to 90 3,994,189 3,450,636 4,881,549 1,709,298 91 to 180 8,082,475 8,176,207 12,832,768 181 to 360 14,189,764 10,307,024 Over 360 46,144,077 E 06.30.2010 12.31.2009 06.30.2009 Total portfolio Total portfolio Total portfolio F G H 86,680 28,318 40,651 175,387 23,559,949 23,486,901 21,671,689 65,105 21,504 16,913 123,822 18,240,844 17,225,210 14,061,977 336,581 44,100 17,247 15,586 106,708 14,555,894 14,184,551 13,448,982 4,552,160 745,725 118,672 54,465 41,176 360,252 34,963,900 34,364,270 31,204,494 19,483,418 6,605,616 985,987 275,897 74,487 46,014 310,151 52,278,358 50,595,870 46,302,682 33,771,471 58,295,435 19,037,363 4,019,584 836,280 395,967 321,856 2,610,372 165,432,405 142,504,044 107,041,836 87,170 59,154 110,478 65,816 36,035 15,307 9,013 8,334 33,083 424,390 587,182 762,602 Other (¹) 2,673,326 -- -- -- -- -- -- -- -- 2,673,326 2,643,182 3,946,557 Subtotal 86,326,399 68,141,003 107,877,421 36,366,891 7,164,005 1,442,041 601,001 490,530 3,719,775 312,129,066 285,591,210 238,440,819 Installments falling due Installments overdue Up to 14 days (1) Operations with third party risk tied to Government Funds and Programs, mainly Pronaf, Procera, FAT, BNDES and FCO. They include the amount of overdue installments in the total amount of R$ 153 million, which comply with rules defined in each program for reimbursement with the managers and do not imply a credit risk for the Bank. R$ Thousand Non-performing loans 06.30.2010 12.31.2009 06.30.2009 AA A B C D E F G H Total portfolio Total portfolio Total portfolio Installments falling due 01 to 30 -- -- 149,410 243,429 188,090 128,368 142,098 132,260 795,550 1,779,205 1,889,122 1,954,257 31 to 60 -- -- 68,060 68,114 40,601 28,906 25,464 26,688 201,005 458,838 434,455 420,876 61 to 90 -- -- 58,076 65,427 42,630 29,818 29,559 28,209 150,985 404,704 364,029 355,994 91 to 180 -- -- 145,717 175,235 115,728 87,656 84,234 77,228 427,621 1,113,419 1,082,286 926,129 181 to 360 -- -- 258,361 322,802 221,041 147,119 137,327 132,825 726,734 1,946,209 2,014,513 1,639,411 Over 360 -- -- 609,695 804,034 565,761 372,581 326,232 312,271 1,575,549 4,566,123 4,632,154 4,119,433 01 to 14 -- -- 14,800 25,929 18,709 13,407 10,794 18,206 60,770 162,615 140,088 130,666 15 to 30 -- -- 112,657 75,312 63,665 29,132 24,903 33,633 156,410 495,712 489,028 572,887 31 to 60 -- -- 13,574 116,743 71,092 43,872 34,438 45,765 184,313 509,797 609,217 843,980 61 to 90 -- -- 12 11,130 97,980 47,835 44,561 54,172 218,809 474,499 513,310 511,871 91 to 180 -- -- 72 5,278 21,165 80,154 122,524 214,701 701,599 1,145,493 1,336,198 1,324,077 181 to 360 -- -- 45 107 -- 11,238 16,988 26,378 1,169,803 1,224,559 1,703,448 1,215,098 Over 360 -- -- 43 2 -- -- -- 4,739 107,158 111,942 29,746 29,983 Subtotal -- -- 1,430,522 1,913,542 1,446,462 1,020,086 999,122 1,107,075 6,476,306 14,393,115 15,237,594 14,044,662 86,326,399 68,141,003 109,307,943 38,280,433 8,610,467 2,462,127 1,600,123 1,597,605 10,196,081 326,522,181 300,828,804 252,485,481 Installments overdue Total 42 Notes to Financial Statements e) Allowance for loan losses by risk level R$ Thousand Banco do Brasil 06.30.2010 Level of Risk % Provision Value of loans Value of allowance 12.31.2009 Additional Existent allowance(1) Allowance Value of loans 06.30.2009 Value of allowance Value of loans Value of allowance AA 0 81,702,383 -- -- -- 71,237,973 -- 58,309,481 -- A 0,5 52,795,609 263,978 3,177 267,155 80,417,215 402,086 65,873,104 329,366 B 1 104,966,995 1,049,670 24,326 1,073,996 76,040,439 760,404 61,721,098 617,211 C 3 37,525,610 1,125,768 153,048 1,278,816 24,434,854 733,046 24,141,532 724,246 D 10 8,129,375 812,938 250,916 1,063,854 8,578,979 857,898 6,918,922 691,892 E 30 2,198,825 659,648 798,303 1,457,951 2,735,148 820,544 2,434,335 730,301 F 50 1,475,093 737,547 450,855 1,188,402 1,597,386 798,693 1,504,151 752,075 G 70 1,411,173 987,820 110,578 1,098,398 1,295,454 906,818 1,806,731 1,264,712 H 100 Subtotal Additional allowance Total 9,576,593 9,576,593 -- 9,576,593 9,556,118 9,556,118 8,389,621 8,389,621 299,781,656 15,213,962 1,791,203 17,005,165 275,893,566 14,835,607 231,098,975 13,499,424 -- -- -- -- -- 2,776,300 -- 2,753,355 299,781,656 15,213,962 1,791,203 17,005,165 275,893,566 17,611,907 231,098,975 16,252,779 R$ Thousand BB-Consolidated 06.30.2010 Level of Risk % Provision Value of allowance 12.31.2009 Additional allowance(1) Existent Allowance Value of loans 06.30.2009 Value of allowance Value of loans Value of allowance AA 0 86,326,399 -- -- -- 75,507,847 -- 61,760,344 -- A 0,5 68,141,003 340,705 3,177 343,882 95,114,890 475,574 71,638,022 358,190 B 1 109,307,943 1,093,079 24,326 1,117,405 79,428,413 794,284 69,628,835 696,288 C 3 38,280,433 1,148,413 153,048 1,301,461 25,448,587 763,458 25,650,521 769,516 D 10 8,610,467 861,047 250,916 1,111,963 9,072,785 907,279 8,262,920 826,292 E 30 2,462,127 738,638 798,303 1,536,941 2,943,151 882,945 2,663,742 799,123 F 50 1,600,123 800,062 450,855 1,250,917 1,714,522 857,261 1,695,961 847,981 G 70 1,597,605 1,118,324 110,578 1,228,902 1,480,320 1,036,225 1,969,512 1,378,659 H 100 10,196,081 10,196,081 -- 10,196,081 10,118,289 10,118,289 9,215,624 9,215,624 326,522,181 16,296,349 1,791,203 18,087,552 300,828,804 15,835,315 252,485,481 14,891,673 Subtotal Additional allowance Total Value of loans -- -- -- -- -- 2,782,065 -- 2,867,342 326,522,181 16,296,349 1,791,203 18,087,552 300,828,804 18,617,380 252,485,481 17,759,015 (1) Refers to the additional provision to the minimum required by CMN Resolution No. 2682/1999, up from the experience of management, by simulation on the loan portfolio, considering the history of default of operations in accordance with the good banking practice. 43 Notes to Financial Statements f) Changes in allowance for doubtful accounts Includes the loans, leases and other receivables with characteristics of credit. R$ Thousand Banco do Brasil 1S2010 1S2009 Amount Allowance Additional Provision Existent Allowance Amount Allowance Additional Provision Existent Allowance Opening balance 14,835,607 2,776,300 17,611,907 11,879,197 1,736,618 13,615,815 Provision/(reversal) 6,040,773 (985,097) 5,055,676 4,975,330 1,016,737 5,992,067 2,325 -- 2,325 (18,165) -- (18,165) Compensation as losses (5,664,743) -- (5,664,743) (3,336,938) -- (3,336,938) Closing balance 15,213,962 1,791,203 17,005,165 13,499,424 2,753,355 16,252,779 Exchange variation on allowances - foreign R$ Thousand BB-Consolidated 1S2010 1S2009 Amount Allowance Additional Provision Existent Allowance Amount Allowance Additional Provision Existent Allowance Opening balance 15,835,315 2,782,065 18,617,380 12,082,262 1,746,797 13,829,059 Provision/(reversal) 6,556,129 (990,862) 5,565,267 5,331,487 1,012,906 6,344,393 3,299 -- 3,299 (38,100) -- (38,100) (6,098,394) -- (6,098,394) (3,494,205) -- (3,494,205) -- -- -- 1,010,229 107,639 1,117,868 16,296,349 1,791,203 18,087,552 14,891,673 2,867,342 17,759,015 Exchange variation on allowances - foreign Compensation as losses Added Values (1) Closing balance (1) Refers to balances arising from the acquisition of Banco Nossa Caixa acquired in March 2009 and incorporated in November 2009. g) Changes in allowance for other doubtful accounts Includes provisions for other receivables without characteristics of credit. R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 Opening balance 909,630 Provision/(reversal) (80,890) Exchange variation on allowances - foreign Compensation as losses / Other settings (1) Added values Closing balance 1S2010 1S2009 769,197 980,272 797,869 172,377 (81,061) 174,526 (150) (805) (150) (806) 2,298 (1,201) (9,416) (11,232) -- -- -- 62,831 830,888 939,568 889,645 1,023,188 (1) Refers to balances arising from the acquisition of Banco Nossa Caixa acquired in March 2009 and incorporated in November 2009. 44 Notes to Financial Statements h) Leasing portfolio by maturity R$ Thousand Banco do Brasil BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 (1) 51,359 23,195 55,940 1,901,724 1,975,351 1,495,507 1 to 5 Years -- 37,580 2,920 2,726,201 2,939,741 1,891,177 Over 5 years -- -- -- 12,915 16,681 19,306 51,359 60,775 58,860 4,640,840 4,931,773 3,405,990 Up 1 year Total Present Value (1) Includes amounts related to installments overdue. i) Income from Leasing Operations R$ Thousand Banco do Brasil Lease revenue Leasing Operating leases Lease expenses Leasing BB-Consolidated 1S2010 1S2009 1S2010 1S2009 21,877 25,521 1,591,280 988,396 21,877 25,521 1,591,136 987,338 -- -- 144 1,058 (18,937) (22,327) (1,146,529) (702,292) (692,794) (18,937) (22,327) (1,143,416) Operating leases -- -- (57) (609) Loss on disposal of leased assets -- -- (2,741) (8,577) Other costs of leases Total -- -- (315) (312) 2,940 3,194 444,751 286,104 j) Concentration of credit R$ Thousand Banco do Brasil 06.30.2010 % 12.31.2009 % 06.30.2009 % 10 largest debtors 27,297,746 9.1 25,658,711 9.3 22,758,026 9.8 60 largest debtors 57,129,832 19.1 51,769,632 18.8 45,587,100 19.7 160 largest debtors 76,355,006 25.5 69,560,136 25.2 59,781,095 25.9 k) Supplementary information R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 11,947,151 9,395,005 13,801,428 9,417,226 1,443,410 1,132,859 1,387,616 1,158,486 -- -- 1,251,357 -- Book value -- -- 1,131,506 -- Gain before taxes -- -- 119,851 -- 06.30.2010 06.30.2009 06.30.2010 06.30.2009 85,254,240 40,018,198 82,827,590 45,273,500 7,584,142 7,172,372 12,122,866 7,042,218 Confirmed export credits 625,047 110,666 655,511 110,666 Credit opened for import 722,032 431,048 737,700 445,840 Renegotiated loans Recovery of loans written off as loss Amount of credits assigned to other financial institutions Credits contracted to release Guarantees given Revenue from the recovery of loans written off are recorded in income from loans (Note 10.b), according to CMN Resolution No. 2836/2001. Of that amount, in the 1st half of 2010, R$ 13,607 thousand (book value R$ 15,405 thousand) refer to the assignment of receivables written off. In the 1st half of 2009, these amounts totaled R$ 26,113 thousand (book value R$10,229 thousand). 45 Notes to Financial Statements 11 – Other Receivables a) Specific credits These are credits from the Federal Treasury of R$ 978,009 thousand (R$ 931,845 thousand at 12.31.2009 and R$ 888,137 thousand at 06.30.2009), for the extension of terms of rural financing as determined by Law 9138/1995. b) Sundry R$ Thousand Banco do Brasil 06.30.2010 12.31.2009 BB-Consolidated 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Tax credit (note 26.a) 20,364,000 20,206,935 18,665,193 22,431,474 21,909,801 Actuarial Assets (Note 28.d) 14,509,718 12,655,346 8,410,423 14,509,718 12,655,346 8,410,423 Sundry debtors from escrow deposits – lawsuit (Note 25.c) 12,082,682 11,752,804 11,409,884 12,082,682 11,752,804 11,409,884 Sundry debtors from escrow deposits – contingencies (Note 29.d) 9,024,454 8,266,094 6,227,163 10,141,040 9,392,161 8,913,088 Notes and credits receivable - other 5,251,856 4,413,235 2,697,832 7,863,862 7,084,658 3,832,696 Income tax and social contribution on net income to offset 5,038,692 6,802,424 4,755,813 5,607,772 7,407,346 5,106,635 Notes and credits receivable - credit card operations Installments for purchases with credit cards, divided by the shopkeepers 5,454,133 4,513,110 3,479,319 5,454,133 4,513,110 3,479,319 3,263,580 3,398,166 2,651,583 3,263,580 3,398,166 2,651,583 Sundry debtors - Brazil 2,073,812 2,342,653 1,393,919 2,399,988 2,722,568 1,172,866 Parity Fund Assets (Note 28a) 1,860,574 1,778,366 2,299,864 1,860,574 1,778,366 2,299,864 Notes and credits receivable Federal Treasury 875,779 793,727 430,859 875,779 793,727 430,859 Advances to Credit Guarantee or Fund (FGC) 833,689 955,693 954,929 833,689 955,693 1,077,696 Sundry debtors from escrow deposits Others 21,053,094 53,589 58,084 165,660 155,815 64,375 165,674 Purchase of assets receivable 202,869 223,576 263,917 202,869 223,577 271,537 Advances on and prepayment of salaries 175,188 222,970 177,390 188,583 229,878 185,230 34,265 30,938 40,026 34,982 32,383 41,462 Other 382,178 364,950 323,263 402,223 399,445 366,683 Total 81,481,058 78,779,071 64,347,037 88,308,763 85,313,404 70,868,593 Current Assets 28,344,083 27,747,561 20,594,037 32,026,002 31,167,511 22,234,250 Non Current Assets 53,136,975 51,031,510 43,753,000 56,282,761 54,145,893 48,634,343 Sundry debtors foreign 46 Notes to Financial Statements 12 – Foreign exchange portfolio a) Breakdown R$ Thousand Banco do Brasil 06.30.2010 BB-Consolidated 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 13,957,465 Assets Other Receivables 11,271,514 8,480,791 13,861,743 12,257,825 8,671,052 Receivables from sales of foreign exchange 13,030,336 12,353,989 14,345,396 13,557,336 12,379,924 14,362,661 (11,572,262) (12,034,235) (13,226,583) (11,708,801) (12,046,972) (13,243,851) 9,596,006 7,911,582 12,406,026 10,181,756 8,077,670 12,497,868 138,814 164,068 242,987 148,914 175,043 246,870 73,464 79,758 87,763 73,464 79,758 87,763 5,156 5,629 6,154 5,156 5,629 6,154 11,271,514 8,480,791 13,861,743 12,257,825 8,671,052 13,957,465 Other liabilities 15,342,817 12,106,915 16,249,954 16,321,036 12,173,988 16,338,591 Forward foreign exchange sales pending settlement 12,970,205 11,372,666 13,564,223 13,495,981 11,398,606 13,579,544 (15,556) (11,026) (24,362) (15,556) (23,585) (24,362) 9,626,919 8,465,559 13,077,430 10,221,084 8,658,303 13,161,578 (7,253,490) (7,737,233) (10,382,341) (7,456,474) (7,938,549) (10,466,485) 10,880 11,025 12,081 72,142 73,289 85,393 3,859 5,924 2,923 3,859 5,924 2,923 Current Liabilities 15,342,817 12,106,915 16,249,954 16,321,036 12,173,988 16,338,591 Foreign exchange portfolio, net (4,071,303) (3,626,124) (2,388,211) (4,063,211) (3,502,936) (2,381,126) 1,317,268 1,513,521 582,858 1,338,391 1,524,184 597,650 625,047 351,645 110,666 655,511 353,947 110,666 (Advances received in local currency) Forward foreign exchange purchases pending settlement Income receivable on advances granted imports and financed Bills of exchange and time drafts in foreign currency Foreign currency receivables Current Assets Liabilities Financed imports - contracted exchange Foreign exchange purchase liabilities (Advances on foreign exchange contracts) Foreign currency payables Unearned income on advances granted Memorandum accounts Credit opened for imports Confirmed export credit b) Foreign exchange results R$ Thousand Banco do Brasil Foreign exchange income Foreign exchange expenses Foreign exchange results BB-Consolidated 1S2010 3,031,502 (3,033,681) 1S2009 4,719,567 (4,700,914) 1S2010 3,529,650 (3,476,408) 1S2009 4,737,730 (4,722,846) (2,179) 18,653 53,242 14,884 47 Notes to Financial Statements 13 – Other Assets R$ Thousand Banco do Brasil Assets not for own use BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 288,725 270,993 249,041 360,868 323,284 298,985 159,002 160,705 156,410 159,088 160,998 165,850 Buildings 79,464 80,073 76,474 81,026 80,507 80,026 Vehicles 516 612 651 70,131 51,281 18,516 Machinery and Equipment 28,416 7,400 11,632 29,186 8,174 13,226 Property 18,787 18,787 472 18,787 18,787 17,833 2,540 3,416 3,402 2,650 3,537 3,534 15,341 19,217 23,219 33,337 40,705 53,017 304,066 290,210 272,260 394,205 363,989 352,002 (Provision for devaluations) (163,096) (166,105) (152,513) (171,142) (175,968) (186,923) Prepaid Expenses 2,096,061 1,786,071 961,582 2,277,638 2,170,109 1,487,045 Premiums for purchased credits payroll (1) 1,119,555 794,091 453,183 863,921 658,283 453,183 801,298 707,743 338,433 801,297 750,879 542,194 -- -- -- 241,040 307,048 207,407 Commissions for credit intermediation financing of vehicles 39,755 52,893 42,175 149,152 175,296 42,175 Personnel expenses - Workers’ Meal Program 74,054 72,911 82,781 74,054 72,911 82,781 Others 61,399 158,433 45,010 148,174 205,692 159,305 Total Other Assets 2,237,031 1,910,176 1,081,329 2,500,701 2,358,130 1,652,124 Current Assets 1,341,387 1,274,903 718,782 1,390,816 1,530,458 1,011,396 895,644 635,273 362,547 1,109,885 827,672 640,728 Assets in special regime Others Material in stock Subtotal Other Assets Contracts for providing banking services Insurance selling expenses Non Current Assets (1) Were eliminated in the BB-Consolidated premiums paid for the acquisition of Banco Votorantim's claims, because it is unrealized, R$ 255,634 thousand (R$ 135,808 thousand on 12.31.2009). 48 Notes to Financial Statements 14 – Investments a) Changes in subsidiaries R$ thousand Banco do Brasil Book Value Movements Investments 06.30.2009 12.31.2009 Others Events (1) Dividends BB - Consolidated Income of Equity Book Value Income of Equity 1S2010 06.30.2010 1S2009 Book Value 06.30.2009 Income of Equity Movements 12.31.2009 Others Events (1) Dividends 1S2010 Book Value 06.30.2010 Income of Equity 1S2009 Brazil 7.847.466 11.177.506 (866.508) 341.781 1.391.374 12.044.153 1.644.642 4.368.888 5.775.953 (2.636) 79.099 83.539 5.909.879 11.607 Banco Nossa Caixa S.A .(2) 5.557.589 4.900.236 -- (75.632) -- 4.824.604 1.573 3.619.148 4.900.236 -- (75.632) -- 4.824.604 -- BB Administradora de Cartões de Crédito S.A. 25.079 21.325 -- (87) 4.610 25.848 3.653 -- -- -- -- -- -- -- BB Administradora de Consórcios S.A. 16.920 16.920 (26.835) -- 26.835 16.920 20.434 -- -- -- -- -- -- -- 78.526 33.578 -- (30) 57.649 91.197 44.948 -- -- -- -- -- -- -- 126.602 130.143 (218.293) 24 217.955 129.829 182.723 -- -- -- -- -- -- -- 1.896.769 396.509 (142.746) 9.556 469.592 732.911 1.434.977 -- -- -- -- -- -- -- 30.087 25.842 -- -- 10.019 35.861 (13.202) -- -- -- -- -- -- -- (4) 17.803 18.519 -- (20.287) 1.768 -- (13.150) -- -- -- -- -- -- -- BESC Financeira S.A.- Bescredi (4) 18.761 18.795 -- (19.209) 414 -- 379 -- -- -- -- -- -- -- 7.916 9.810 (172) 102 181 9.921 85 -- -- -- -- -- -- -- 19.367 19.382 -- (19.523) 141 -- 132 -- -- -- -- -- -- -- -- 5.476 -- -- 98 5.574 -- -- -- -- -- -- -- -- -- 10.364 -- -- 251 10.615 -- -- -- -- -- -- -- -- 2.840 44.744 -- -- (36.461) 8.283 (12.370) -- -- -- -- -- -- -- BB Seguros Participações S.A. -- 594.604 (175.436) (103) 184.670 603.735 -- -- -- -- -- -- -- -- BB Aliança Participações S.A. -- 1.031.928 (205.454) (466) 225.138 1.051.146 -- -- -- -- -- -- -- -- -- 3.774.777 (95.210) 458.093 181.206 4.318.866 -- -- 214.571 -- 152.414 39.685 406.670 -- -- 32.029 (2.362) -- 15.965 45.632 -- -- (8.127) -- -- -- (8.127) -- 46.903 46.331 -- -- (1.443) 44.888 (6.279) 46.903 46.331 -- -- (1.443) 44.888 (6.279) 2.077 2.087 -- -- 72 2.159 102 2.077 2.087 -- -- 72 2.159 102 227 228 -- -- -- 228 -- 227 228 -- -- -- 228 -- -- 43.879 -- -- 32.285 76.164 -- 45.008 43.879 -- -- 32.285 76.164 10.342 Companhia Brasileira de Securitização – Cibrasec -- -- -- 2.177 (19) 2.158 -- -- -- -- -- -- -- -- Tecnologia Bancária S.A. – Tecban -- -- -- 7.166 448 7.614 -- -- -- -- -- -- -- -- -- -- -- -- -- -- 508.634 485.095 -- (2.722) -- 482.373 -- -- -- -- -- -- -- -- 52.640 54.621 -- (8.752) 12.415 58.284 9.671 Estruturadora Brasileira de Projetos - EBP -- -- -- -- -- -- -- 1.240 1.784 -- 753 (687) 1.850 (275) Pronor (5) -- -- -- -- -- -- -- 19.353 25.498 (2.636) -- (2.076) 20.786 (671) -- -- -- -- -- -- 637 73.658 9.750 -- 13.038 3.288 -- (1.283) BB Corretora de Seguros e Administradora de Bens S.A. BB Gestão de Recursos - Distribuidora de Títulos e Valores Mobiliários S.A. BB Banco de Investimento S.A. (3) BB Leasing S.A. - Arrendamento Mercantil BB Banco Popular do Brasil S.A. BESC Distribuidora de Títulos e Valores Mobiliários S.A. - Bescval BESC S.A. Arrendamento Mercantil - Besc Leasing (4) Nossa Caixa Capitalização S.A. Nossa Caixa S.A. - Administradora de Cartões de Crédito Cobra Tecnologia S.A . (5) Banco Votorantim S.A. (6) BV Participações S.A. (7) Cadam S.A. (5) Cia. Hidromineral Piratuba Cia. Catarinense de Assessoria e Serviços - CCA (8) Mapfre Nossa Caixa Vida e Previdência S.A. (5) Goodwill / negative goodwill on acquisition of investments Itapebi (5) Other Participations (10) (9) 49 Notes to Financial Statements R$ thousand Banco do Brasil Book Value Income of Equity Movements Investments 06.30.2009 Abroad 12.31.2009 Others Events (1) Dividends BB - Consolidated 1S2010 Book Value 06.30.2010 Income of Equity 1S2009 Book Value 06.30.2009 Movements 12.31.2009 Others Events (1) Dividends Income of Equity Book Value Income of Equity 1S2010 06.30.2010 1S2009 1.023.696 966.096 -- 5.713 33.348 1.005.156 (130.122) -- -- -- -- -- -- -- BAMB-Brasilian American Merchant Bank 689.451 656.043 -- 3.043 47.065 706.151 (90.838) -- -- -- -- -- -- -- Banco do Brasil AG. Viena (Áustria) 240.938 218.620 -- 2.093 (21.489) 199.224 (31.983) -- -- -- -- -- -- -- BB Leasing Company Ltd. 82.773 74.781 -- -- 3.299 78.080 (15.230) -- -- -- -- -- -- -- BB Securities LLC 10.534 16.652 -- 577 4.473 21.701 7.929 -- -- -- -- -- -- -- Profit / (loss) in the agencies -- -- -- -- (2.599) -- (496.281) -- -- -- -- (2.599) -- (496.281) Profit / (loss) of subsidiaries -- -- -- -- -- -- -- -- -- -- -- (2.203) -- (180.239) Increase / decrease in equity resulting from handling -- -- -- -- (28) -- (5) -- -- -- -- (28) -- (43) 8.871.162 12.143.602 1.422.095 13.049.309 1.018.234 4.368.888 5.775.953 78.709 5.909.879 (664.956) Total Investments in Subsidiaries and Affiliates (1) This refers primarily to amortization of goodwill and adjustments of securities available for sale of subsidiaries and affiliates. At Banco Votorantim also derives from the capital increase R$ 450,000 thousand. (2) Goodwill on acquisition of Banco Nossa Caixa, built on 11.30.2009. (3) On 09.30.2009, the capital of BB Investment Bank has been reduced from R$ 1,542,944 thousand, due to spin off its holdings in Alliance in Brazil, Brasilcap Brasilprev, and Brasilveículos Brasilsaúde to BB and Insurance BB Alliance. (4) Companies incorporated by the Bank of Brazil in 1st half/2010 (Note 2a). (5) The information relates to the period of December/2009 to May/2010. (6) Includes in the book value of 06.30.2010, the amount of R$ 406,670 thousand (R$ 214,571 thousand at 12.31.2009) relating to goodwill in the acquisition of Banco Votorantim. It includes, as a result of equivalence of the 1st half/2010, the amount of R$ 39,685 thousand, relating to the recognition of unrealized income in prior periods (7) Includes, in the book value, R$ 8,127 thousand, relating to negative goodwill on the acquisition. (8) Company in liquidation court, not assessed by MEP. (9) It is the goodwill for the acquisition of the Alliance of Brazil, R$ 486,767 thousand and discount on investments in Brasilprev, R$ 1,561thousand and Brasilsaúde, R$ 111 thousand. (10) Refer to the holdings of non-financial related companies. 50 Notes to Financial Statements R$ Thousand Capital Held Net Income (Loss) for the period Net Equity Numbers of Shares (in thousands) Common Participation % Preferred No País BB Administradora de Cartões de Crédito S.A. 9,300 25,848 4,610 398,158 -- 100.00 BB Administradora de Consórcios S.A. 14,100 16,920 26,835 14 -- 100.00 BB Corretora de Seguros e Administradora de Bens S.A. 26,918 91,197 57,649 1,000 -- 100.00 BB Gestão de Recursos - Distribuidora de Títulos e Valores Mobiliários S.A. 103,142 129,829 217,955 100,000 -- 100.00 BB Banco de Investimento S.A. 361,153 732,911 469,592 3,249 -- 100.00 61,860 35,861 10,019 3,000 -- 100.00 BESC Distribuidora de Títulos e Valores Mobiliários S.A. Bescval 5,857 9,959 182 10,168,625 -- 99.62 Nossa Caixa Capitalização S.A. 5,400 5,574 98 5,400 -- 100.00 100.00 BB Leasing S.A. – Arrendamento Mercantil Nossa Caixa S.A. - Administradora de Cartões de Crédito 10,000 10,615 251 10,000 -- Cobra Tecnologia S.A . 107,267 8,786 (37,239) 22,654 22,680 99.94 BB Seguros Participações S.A. 592,251 603,735 184,670 53,221 -- 100.00 100.00 BB Aliança Participações S.A. 964,493 1,051,146 225,138 102,513 -- 3,994,920 8,151,807 477,512 33,356,791 7,412,620 50.00 60,423 107,518 31,931 15,105 15,106 50.00 183,904 207,431 (17,351) -- 4,762 21.64 2,047 13,335 334 63,931 -- 16.19 780 474 -- 260 520 48.13 Mapfre Nossa Caixa Vida e Previdência S.A. 50,000 155,437 65,888 20,000 -- 49.00 Companhia Brasileira de Securitização – Cibrasec 68,475 71,240 (613) 2 -- 3.03 158,378 168,822 9,919 169,395 -- 4.51 105,000 306,759 53,108 19,950 -- 19.00 Banco Votorantim S.A. BV Participações S.A. Cadam S.A. Cia. Hidromineral Piratuba Cia. Catarinense de Assessoria e Serviços - CCA Tecnologia Bancária S.A. – Tecban Itapebi (1) Estruturadora Brasileira de Projetos - EBP (1) Pronor (2) 27,750 16,648 (6,185) 2,330 -- 11.11 154,686 185,332 (5,216) 5,542 -- 12.02 434,010 706,151 26,036 241,023 -- 100.00 41,456 199,224 4,334 188 -- 100.00 -- 78,080 708 1,000 -- 100.00 9,004 21,701 4,473 5,000 -- 100.00 Abroad BAMB-Brasilian American Merchant Bank Banco do Brasil AG. Viena (Áustria) BB Leasing Company Ltd. BB Securities LLC (1) Participations of BB Banco de Investimento S.A. (2) Participations of BB Gestão de Recursos – Distribuidora de Títulos e Valores Mobiliários S. A b) Others Investments R$ Thousand Banco do Brasil 06.30.2010 12.31.2009 BB-Consolidated 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Investment tax incentives Equity securities Stocks and shares 18,810 58 52,434 18,742 58 57,962 17,800 58 51,552 68,007 146 55,948 59,081 146 61,868 32,371 58 61,720 Other investments (1) Other investments abroad 3,281 12,650 87,233 21,895 10,436 109,093 3,048 10,528 82,986 885,769 13,451 1,023,321 814,893 11,237 947,225 795,997 11,329 901,475 Total (1) Refers to BB-Consolidated, mainly to other investments related Neoenergia, R$ 816,201 thousand (R$ 732,687 thousand on 12.31.2009 and R$ 763,309 thousand on 06.30.2009). 51 Notes to Financial Statements c) Expected Goodwill Amortization The expected amortization of goodwill generated by acquisitions of equity backs on projections of results that supported the business, prepared by specialized firms contemplating the timing of the estimates and discount rates used in calculating the net present value of expected cash flows . The amounts written off in 1st half of 2010 totaled R$ 75,632 thousand and R$ 14,781 thousand relating to goodwill for the acquisitions of Banco Nossa Caixa and Banco Votorantim, respectively. R$ Thousand Banco do Brasil BB-Consolidated Banco Nossa Caixa Banco Votorantim Total Gross Total net of tax effects (1) Aliança do Brasil (2) Total Gross Total net of tax effects (1) 2nd half/2010 In 2011 In 2012 75,579 232,491 473,923 20,726 45,883 49,191 96,305 278,374 523,114 57,783 167,024 313,868 142,068 184,247 160,452 238,373 462,621 683,566 151,548 288,627 419,767 In 2013 In 2014 In 2015 617,846 709,394 807,756 54,570 56,722 57,981 672,416 766,116 865,737 403,450 459,670 519,442 - 672,416 766,116 865,737 403,450 459,670 519,442 In 2016 In 2017 Total 900,156 1,007,459 4,824,604 60,466 61,131 406,670 960,622 1,068,590 5,231,274 576,373 641,154 3,138,764 486,767 960,622 1,068,590 5,718,041 576,373 641,154 3,460,031 (1) Amount of depreciation to be held in the period, net of tax (25% of income tax and social contribution of 15%). (2) The premium for the acquisition of the Alliance of Brazil is registered with controlled non-financial BB-Alliance Holdings SA. 15 – Premises and equipment and leased assets a) Changes and Breakdown of Fixed Assets R$ Thousand Bando do Brasil 12.31.2009 1S2010 06.30.2010 Book Value Movements Depreciation Impairment Cost Value Premises and equipment 4,006,745 461,315 Buildings 1,433,714 218,713 (427,800) -- (92,872) -- Data processing systems 1,245,543 345,147 (234,211) 444,028 87,325 (47,191) Land 231,970 (19,188) Facilities 189,907 11,435 Furniture and equipment in stock 151,004 (134,051) -- -- Communication systems 109,626 8,579 (22,072) -- Fixed assets under construction 102,706 (53,919) -- -- 98,118 (2,726) (12,023) -- 129 -- (44) -- 4,006,745 461,315 (427,800) -- Furniture and equipment for use Security systems Transport systems Total 06.30.2009 Accumulated Depreciation Accumulated impairment 9,884,849 (5,840,091) (4,498) 4,040,260 3,248,276 3,165,427 (1,602,768) (3,104) 1,559,555 1,256,659 -- 3,719,602 (2,361,729) (1,394) 1,356,479 990,907 -- 1,302,432 (818,270) -- 484,162 395,561 -- -- 212,782 -- -- 212,782 160,847 (19,387) -- 905,682 (723,727) -- 181,955 177,066 16,953 -- -- 16,953 14,673 259,707 (163,574) -- 96,133 91,961 48,787 -- -- 48,787 73,688 251,634 (168,265) -- 83,369 86,727 1,843 (1,758) -- 85 187 9,884,849 (5,840,091) (4,498) 4,040,260 3,248,276 (1) Book Value 52 Book Value Notes to Financial Statements R$ Thousand BB-Consolidated 12.31.2009 1S2010 06.30.2010 Book Value Movements Depreciation Premises and equipment 4,214,484 487,154 (441,327) Buildings 1,474,422 187,018 (93,102) Data processing systems 1,303,799 376,444 Impairment 06.30.2009 Cost Value Accumulated Depreciation Accumulated impairment (925) 10,367,882 (6,102,400) (6,096) 4,259,386 3,663,320 -- 3,179,578 (1,608,136) (3,104) 1,568,338 1,330,666 (238,208) -- 3,873,019 (2,429,590) (1,394) 1,442,035 1,123,705 484,546 (1) Book Value Book Value Furniture and equipment for use 533,309 98,328 (55,553) (925) 1,572,208 (995,451) (1,598) 575,159 Land 235,120 (19,125) -- -- 215,995 -- -- 215,995 240,226 Facilities 194,464 17,787 (19,753) -- 922,235 (729,737) -- 192,498 186,800 Furniture and equipment in stock 151,004 (134,051) -- -- 16,953 -- -- 16,953 15,377 Communication systems 113,971 9,113 (22,462) -- 267,335 (166,713) -- 100,622 96,899 Fixed assets under construction 107,096 (46,779) -- -- 60,317 -- -- 60,317 85,768 98,678 (2,346) (12,079) -- 253,085 (168,832) -- 84,253 97,783 Transport systems 2,621 765 (170) -- 7,157 (3,941) -- 3,216 1,550 Leased fixed assets 1,223 -- (328) -- 1,689 (794) -- 895 2,371 4,215,707 487,154 (441,655) (925) 10,369,571 (6,103,194) (6,096) 4,260,281 3,665,691 Security systems Total (1) Recorded in Other Expenses. 16 – Intangible a) Changes and Breakdown of Intangible Assets R$ Thousand Banco do Brasil 12.31.2009 Rights due to payroll acquisition Acquisition/development of software Total 1S2010 06.30.2010 Impairment Accumulated Depreciation Accumulated impairment Book Value Acquisition Amortization 5,305,198 2,275,070 (1,006,197) (338) 9,323,175 (2,707,255) 320,647 110,870 (39,420) -- 476,687 5,625,845 2,385,940 (1,045,617) (338) 9,799,862 (1) 06.30.2009 Cost Value Book Value Book Value (42,187) 6,573,733 3,621,740 (84,590) -- 392,097 186,685 (2,791,845) (42,187) 6,965,830 3,808,425 R$ Thousand BB-Consolidated 12.31.2009 Rights due to payroll acquisition Acquisition/development of software Other Intangible assets Total 1S2010 06.30.2010 Book Value Acquisition Amortizati on 5,305,198 2,275,070 (1,006,197) 371,681 142,688 -- 3,952 5,676,879 2,421,710 Impairment 06.30.2009 Book Value Book Value (42,187) 6,573,733 4,895,556 (112,665) (132) 473,915 232,091 -- -- 3,952 -- (2,819,920) (42,139) 7,051,600 5,127,647 Cost Value Accumulated Depreciation Accumulated impairment (338) 9,323,175 (2,707,255) (40,322) (132) 586,712 -- -- 3,952 (1,046,519) (470) 9,913,839 (1) (1) Recorded in Other Expenses. 53 Notes to Financial Statements b) Estimate for Amortization of Intangible Assets R$ Thousand Banco do Brasil For the year ending: Amounts to be amortized 2010 2011 2012 2013 2014 2015 Total 925,082 1,836,548 1,778,538 1,491,206 836,282 98,174 6,965,830 R$ Thousand BB-Consolidated For the year ending: Amounts to be amortized 2010 2011 2012 2013 2014 2015 Total 933,659 1,853,702 1,795,692 1,508,361 853,436 106,750 7,051,600 17 – Deposits and Money Market Borrowing a) Deposits R$ Thousand Banco do Brasil Demand deposits Individuals Corporate entities Restricted Government In foreign currencies Special from Federal Treasury Related companies Institutions of the financial system Domiciled abroad Others Savings deposits Individuals Corporate entities Related companies Institutions of the financial system Interbank deposits Time deposits Local currency Remunerated deposits in court Funds and programs – FAT (Note 17e) Obligations for special– Poupex/Funprogrer Foreign currency Others Deposits for investments Total Current Liabilities Non Current Liabilities BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 58,796,157 56,211,678 45,395,707 59,025,332 56,458,787 49,074,636 23,701,296 22,455,365 17,369,548 23,733,899 22,499,124 19,324,576 20,974,474 22,351,731 17,130,066 21,183,500 22,563,646 18,276,684 7,281,814 5,213,954 5,850,927 7,281,814 5,214,026 5,939,906 3,258,674 3,858,059 2,773,098 3,258,674 3,858,059 3,367,637 1,932,088 442,299 557,419 1,932,088 442,299 559,717 696,831 567,598 568,784 696,831 567,598 568,784 466,025 505,424 562,205 466,985 505,424 562,775 346,285 378,812 453,130 332,969 370,394 344,224 15,047 19,811 18,424 14,949 19,591 18,227 123,623 418,625 112,106 123,623 418,626 112,106 81,540,814 75,741,590 57,601,744 81,540,812 75,741,590 69,011,330 76,219,779 71,159,163 53,225,819 76,219,778 71,159,163 64,405,504 5,044,999 4,318,971 4,074,836 5,044,998 4,318,971 4,268,339 265,941 255,963 295,487 265,941 255,963 330,672 10,095 7,493 5,602 10,095 7,493 6,815 14,104,083 15,556,143 9,529,597 10,436,263 11,618,573 7,459,392 181,222,783 182,366,877 162,382,684 192,715,468 193,515,574 185,072,345 108,368,338 111,039,706 110,326,494 119,860,780 122,188,161 114,191,893 60,253,643 57,479,585 36,991,078 60,253,886 57,479,827 55,801,677 11,383,299 12,667,714 13,917,369 11,383,299 12,667,714 13,917,369 593,479 510,834 602,393 593,479 510,834 602,393 550,490 594,890 475,093 550,490 594,890 475,093 73,534 74,148 70,257 73,534 74,148 83,920 241,535 228,468 224,593 242,951 229,303 227,882 335,905,372 330,104,756 275,134,325 343,960,826 337,563,827 310,845,585 254,863,139 252,490,505 220,497,064 261,485,318 258,676,108 250,628,839 81,042,233 77,614,251 54,637,261 82,475,508 78,887,719 60,216,746 54 Notes to Financial Statements b) Segregation of Deposits by deadline Chargeability R$ Thousand Banco do Brasil (1) Time deposits Savings deposits Demand deposits Interbank deposits Investment deposits Total No expiration Up to 3 months 3 to 12 1 to 3 years 3 to 5 years months Over 5 years Total 06.30.2010 Total 12.31.2009 Total 06.30.2009 74,337,521 13,764,633 14,578,603 25,679,960 52,859,693 81,540,814 -- -- -- -- -- 81,540,814 75,741,590 57,601,744 58,796,157 -- -- -- -- -- 58,796,157 56,211,678 45,395,707 -- 8,138,480 3,465,396 2,420,665 70,951 8,591 14,104,083 15,556,143 9,529,597 241,535 -- -- -- -- -- 241,535 228,468 224,593 214,916,027 21,903,113 18,043,999 28,100,625 52,930,644 2,373 181,222,783 182,366,877 162,382,684 10,964 335,905,372 330,104,756 275,134,325 R$ Thousand BB-Consolidated (1) Time deposits Savings deposits Demand deposits Interbank deposits Investment deposits Total No expiration Up to 3 months 3 to 12 1 to 3 years 3 to 5 years months Over 5 years Total 06.30.2010 Total 12.31.2009 Total 06.30.2009 74,337,521 17,728,700 19,789,518 27,949,285 52,902,084 81,540,812 -- -- -- -- -- 81,540,812 75,741,590 69,011,330 59,025,332 -- -- -- -- -- 59,025,332 56,458,787 49,074,636 -- 5,258,379 3,562,105 1,526,060 80,193 9,526 10,436,263 11,618,573 7,459,392 242,951 -- -- -- -- -- 242,951 229,303 227,882 215,146,616 22,987,079 23,351,623 29,475,345 52,982,277 8,360 192,715,468 193,515,574 185,072,345 17,886 343,960,826 337,563,827 310,845,585 (1) It includes the amount of R$ 71,153,586 thousand (R$ 46,002,413 thousand on June 30, 2009 and R$ 41,102,468 thousand on December 31, 2009) at Banco do Brasil and R$ 77,178,586 thousand (R$ 49,913,785 thousand on June 30, 2009 and R$ 51,946,695 thousand on December 31, 2009) at BB Consolidated, related to term deposits with clause of anticipated repurchase (liquidity commitment), considering the terms established in funding. c) Money market repurchases commitments R$ Thousand Banco do Brasil BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Own Portfolio 52,464,652 25,545,392 22,293,603 63,630,252 31,901,701 28,754,671 Financial Treasury Bills 44,768,586 23,503,150 21,426,176 43,726,705 22,467,046 27,887,244 -- 858,162 -- 8,345,014 7,946,156 -- National Treasury Bills 5,664,902 -- -- 7,908,841 22,897 -- Securities abroad 1,381,562 1,184,080 678,555 1,590,571 1,304,041 678,555 649,602 -- 188,872 1,492,771 147,744 188,872 -- -- -- 566,350 13,817 -- Third-party portfolio 99,894,264 123,975,419 66,982,711 102,922,773 128,745,194 72,552,923 Financial Treasury Bills 88,405,801 111,805,277 52,486,545 88,405,801 112,555,277 54,494,983 National Treasury Bills 4,809,403 8,305,309 2,302,821 7,328,724 9,469,372 2,302,821 National Treasury Notes 3,932,631 466,563 9,738,465 4,441,819 3,322,275 13,300,239 Securities abroad 2,746,429 3,398,270 2,454,880 2,746,429 3,398,270 2,454,880 -- -- 200,000 49,544 174,292 200,000 Total 152,358,916 149,520,811 89,476,314 166,602,569 160,821,187 101,507,594 Current Liabilities 145,494,688 142,412,717 84,832,507 157,393,100 153,699,462 96,864,212 6,864,228 7,108,094 4,643,807 9,209,469 7,121,725 4,643,382 Private equity National Treasury Notes Other Free movement Portfolio Non Current Liabilities 55 Notes to Financial Statements d) Expenses with money market repurchase commitments R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 Expenses borrowings with deposits (9,909,772) (9,094,422) (10,809,132) (9,699,025) Time deposits (4,783,764) (5,099,028) (5,339,813) (5,190,705) Savings deposits (2,709,778) (2,150,745) (2,709,778) (2,337,564) Demand deposits (1,851,293) (1,233,935) (1,851,293) (1,524,256) Interbank deposits (244,264) (442,402) (249,618) (445,065) Others (320,673) (168,312) (658,630) (201,435) Expenses with money market repurchase commitments (6,119,796) (4,970,961) (6,739,047) (5,129,144) Third-party portfolio (4,783,382) (3,947,236) (4,986,462) (3,966,672) Own portfolio (1,333,787) (1,007,590) (1,733,489) (1,146,337) (2,627) (16,135) (19,096) (16,135) (16,029,568) (14,065,383) (17,548,179) (14,828,169) Subject to repurchase agreements with free movement Expenses with money market 56 Notes to Financial Statements e) Fund for Workers’ Assistance (FAT) and Guarantee Fund for Generation of Employment and Earnings (FUNPROGER) Shown below are the deposits of the Fund for workers assistance (FAT) in Banco do Brasil: R$ Thousand Return of FAT funds Resolution / TADE Program 06.30.2010 Type Opening Closing Date Date (1) 12.31.2009 06.30.2009 Available TMS (2) Invested TJLP (3) Total Available TMS (2) Invested TJLP (3) Total Available TMS (2) Invested TJLP (3) Total 6.934.034 100.996 4.993.546 5.094.542 254.282 5.603.916 5.858.198 124.233 6.809.801 Pronaf Custeio 04/2005 RA 11/2005 --- 20.586 136.570 157.156 148.895 186.654 335.549 91.022 471.412 562.434 Pronaf Investimento 05/2005 RA 11/2005 --- -- 2.923.451 2.923.451 -- 3.205.371 3.205.371 -- 3.512.971 3.512.971 Giro Rural – Aquisição de Títulos 03/2005 SD 01/2008 01/2014 -- 1.196.665 1.196.665 -- 1.241.887 1.241.887 -- 1.572.218 1.572.218 Giro Rural Fornecedores 14/2006 RA 08/2006 --- 33.401 433.515 466.916 35.856 520.301 556.157 -- 609.666 609.666 Rural Custeio 02/2006 RA 11/2005 --- 7.661 19.169 26.830 21.387 43.317 64.704 7.291 158.621 165.912 Rural Investimento 13/2005 RA 11/2005 --- 39.348 284.176 323.524 48.144 406.386 454.530 25.920 484.913 510.833 169.103 5.633.479 5.802.582 82.925 6.120.472 6.203.397 9.812 6.218.558 6.228.370 Proger Rural e Pronaf Proger Urbano Urbano Investimento 18/2005 RA 11/2005 --- 160.000 5.020.812 5.180.812 74.258 5.434.647 5.508.905 -- 5.452.739 5.452.739 Urbano Capital de Giro 15/2005 RA 11/2005 --- -- 575.101 575.101 -- 630.527 630.527 -- 691.039 691.039 Empreendedor Popular 01/2006 RA 11/2005 --- 9.103 37.566 46.669 8.667 55.298 63.965 9.812 74.780 84.592 191.192 294.983 486.175 282.976 323.143 606.119 222.622 532.343 754.965 3.501 Others Exportação 27/2005 RA 11/2005 --- 479 1.877 2.356 89 2.647 2.736 819 2.682 Integrar Área Rural 26/2005 RA 11/2005 --- 9 32 41 40 38 78 1.309 48 1.357 Integrar Área Urbana 25/2005 RA 11/2005 --- 81 9.329 9.410 20 10.299 10.319 2 11.309 11.311 Inclusão Digital 09/2005 RA 11/2005 --- -- 11 11 15 23 38 114 136 250 FAT Giro Setorial Micro e Pequenas Empresas 08/2006 RA 09/2007 --- 797 650 1.447 14.755 6.959 21.714 34.480 77.121 111.601 FAT Giro Setorial Médias e Grandes Empresas 09/2006 RA 09/2007 --- -- -- -- 30.654 5.627 36.281 65.054 146.081 211.135 FAT Giro Setorial Veículos MGE 09/2006 RA 02/2009 --- 1.605 8.611 10.216 -- 11.217 11.217 70.068 10.000 80.068 FAT Giro Setorial Veículos MPE 08/2006 RA 02/2009 --- 18.725 89.523 108.248 80.358 97.160 177.518 46.072 74.500 120.572 FAT Giro Cooperativo Agropecuário 10/2006 RA 07/2006 --- -- -- -- 11 73 84 621 154 775 FAT Fomentar Empresas Micro 11/2006 RA 08/2006 --- 1.521 14.570 16.091 1.114 16.632 17.746 739 18.748 19.487 FAT Fomentar Empresas Médias 12/2006 RA 07/2006 --- -- 103.218 103.218 -- 113.165 113.165 -- 124.025 124.025 02/2009 RA 09/2009 --- 164.831 14.891 179.722 150.000 -- 150.000 -- -- -- --- --- --- 3.144 52.271 55.415 5.920 59.303 65.223 3.344 67.539 70.883 461.291 10.922.008 11.383.299 620.183 12.047.531 12.667.714 356.667 13.560.702 13.917.369 FAT Taxista FAT Encargos a capitalizar e Pequenas e Grandes --- Total (1) RA - Auto Return (monthly, 2% on the balance) and SD - Available Balance. (2) Funds remunerated by the Average Selic Rate (TMS). (3) Funds remunerated by the long-term interest rate (TJLP). 57 Notes to Financial Statements FAT is a special accounting and financial fund, established by Law 7998/1990, attached to the Ministry of Labor and Employment (MTE) and managed by the Executive Council of the Workers’ Assistance Fund (Codefat), CODEFAT is a collective, tripartite, equal level organization, composed of representatives of workers, employers and government, which acts as the manager of FAT. The main actions to promote employment using FAT funds are structured around the Programs for the Generating Employment and Earnings (PROGER), whose resources are allocated through special deposits, established by Law 8352/1991, in official federal financial institutions (including, among others, PROGER in the urban program- Investment and Working Capital - and rural program, the National Program for Strengthening Family Farming - Pronaf, the program that allocates resources for the purchase of construction materials - FAT Housing, in addition to the special lines such as FAT Rural and Urban Integration, FAT Giro Setorial - Micro and Small-Sized Companies, FAT Giro Setorial - Medium and LargeSized Companies, FAT Fomentar - Micro and Small-Sized Companies, FAT Fomentar - Medium and LargeSized Companies, FAT Giro Agropecuário, FAT Digital Inclusion and FAT Taxi). The FAT special deposits, allocated with Banco do Brasil, while available, incur interest on a daily pro rata basis using the Average Selic Rate (TMS), As they are applied on loans, the interest rate is changed to the Long-term Interest Rate (TJLP) during the effective period of the loans, The earnings on the Bank’s funds are paid to FAT on a monthly basis, as established in CODEFAT Resolutions 439/2005 and 489/2006. The Guarantee Fund for Generation of Employment and Earnings (Funproger) is a special accounting fund established on November 23, 1999 by Law 9872/1999, amended by Law 10360/2001 and by Law 11110/2005 and regulated by Codefat Resolution 409/2004, It is managed by Banco do Brasil under the supervision of Codefat/MTE, and the balance is R$ 143,979 thousand (R$ 335,131 thousand on June 30, 2009 and R$ 225,565 thousand on December 31, 2009). The purpose of FUNPROGER is provide guarantees to entrepreneurs who do not have the necessary guarantees of their own to contract PROGER Urbano and PNMPO financing, through payment of a fee, The net assets of FUNPROGER are accumulated through funds arising from the difference between the average SELIC Rate (TMS) and the Long-Term Interest Rate (TJLP) in respect of the remuneration of the special deposit balances available in FAT. Other sources of funds are the earnings from its operations and the income on its cash resources paid to Banco do Brasil, the Fund manager. 58 Notes to Financial Statements 18 – Borrowings a) Borrowings R$ Thousand Banco do Brasil up to 90 days from 91 to 360 days from 1 to 3 years from 3 to 5 years Total from 5 to 15 years 06.30.2010 Total 12.31.2009 Total 06.30.2009 In Brazil Exports -- -- -- -- -- -- -- 3,832,295 Borrowings by bankers abroad 3,853,857 Borrowings from BB Group abroad 1,494,266 4,107,845 310,366 7,204 -- 8,279,272 3,660,559 2,851,370 3,915,410 2,442,040 -- -- 7,851,716 5,783,779 6,407,951 -- 232,310 433,014 433,014 -- 1,098,338 1,176,000 1,445,949 Imports 107,078 66,890 114,864 67,561 22,920 379,313 402,961 442,489 Exports 18,027 21,017 -- -- -- 39,044 27,346 24,596 5,473,228 8,343,472 3,300,284 507,779 22,920 17,647,683 11,050,645 15,004,650 13,816,700 6,274,611 10,111,206 3,830,983 4,776,034 4,893,444 Abroad Public sector repass borrowing Total Current Liabilities Non Current Liabilities R$ Thousand BB-Consolidated up to 90 days In Brazil Borrowing by non financial companies from 91 to 360 days from 1 to 3 years from 3 to 5 years Total from 5 to 15 years 06.30.2010 Total 12.31.2009 Total 06.30.2009 116,063 -- 3,633 -- -- 119,696 157,761 104,215 -- -- -- -- -- -- 70,976 3,832,295 6,069 5,649 5,649 -- -- 17,367 22,319 -- Borrowings by bankers abroad 4,138,388 5,016,885 1,184,034 10,176 -- 10,349,483 4,507,182 2,851,479 Public sector repass borrowing -- 232,310 433,014 433,014 -- 1,098,338 1,176,000 1,445,949 Imports 90,310 49,434 65,275 41,675 12,867 259,561 248,659 285,055 Exports 61,858 109,508 -- -- -- 171,366 187,366 17,434 4,412,688 5,413,786 1,691,605 484,865 12,867 12,015,811 6,370,263 8,536,427 Current Liabilities 9,826,474 4,810,915 7,170,898 Non Current Liabilities 2,189,337 1,559,348 1,365,529 Exports Others Abroad Total 59 Notes to Financial Statements b) Repass Borrowings from official institutions – In Brazil R$ Thousand Banco do Brasil Programs BB-Consolidated Financial Charges 06.30.2010 12.31.2009 National Treasury - Rural credit 06.30.2009 06.30.2010 12.31.2009 06.30.2009 2,073,619 2,100,693 3,574,417 2,073,619 2,100,693 3,574,417 Pronaf TMS (Available) or 0,5% p,a, a 5,5% p,a, (Allocated) 1,835,010 1,840,672 3,304,992 1,835,010 1,840,672 3,304,992 Recoop 5,75% p,a, to 7,25% p,a, 128,149 150,041 160,580 128,149 150,041 160,580 TJLP + 0,6% p,a, or 6,35% p,a, 68,053 67,668 66,613 68,053 67,668 66,613 Farming/livestock breeding TR or 3% p,a, 41,052 40,957 40,877 41,052 40,957 40,877 Others -- 1,355 1,355 1,355 1,355 1,355 1,355 20,624,630 17,877,865 11,085,088 22,249,516 19,629,502 11,117,948 20,624,630 17,877,865 11,085,088 20,624,630 17,877,865 11,117,948 Cocoa BNDES Banco do Brasil Banco Votorantim 0,6305%p,a, to 15,35%p,a, or TJLP/fx, variation+0,50%p,a to 8,55%p,a, 1,50%p,a, to 16,60%p,a or TJLP/ fx, variation +1,30%p,a, to 11,50%p,a, CEF -- FINAME Banco do Brasil Banco Votorantim 1,00%p,a to 11,00%p,a or TJLP/fx, variation +0,5%p,a to 5,50%p,a, -- -- -- 1,624,886 1,751,637 -- 141,635 146,232 -- 141,635 146,232 159,188 10,433,626 7,637,163 6,938,214 11,372,559 8,381,169 7,009,271 10,433,626 7,637,163 6,938,214 10,449,626 7,656,392 7,009,271 0,30%a,a to 11,00%a,a or TJLP/ fx, variation +6,50%p,a to 11,50%p,a, -- -- -- 922,933 724,777 -- -- 471,072 1,132,572 764,892 471,072 1,132,572 765,093 TMS (available) or 6,75%p,a, 470,934 1,132,409 764,576 470,934 1,132,409 764,576 138 163 316 138 163 517 Total 33,744,582 28,894,525 22,362,611 36,308,401 31,390,168 22,625,917 Current Liabilities 11,377,281 11,472,080 13,682,710 12,167,790 12,405,660 13,750,611 Non Current Liabilities 22,367,301 17,422,445 8,679,901 24,140,611 18,984,508 8,875,306 Other Funcafé Other -- c) Expense of Borrowings and Transfers (official institutions) R$ Thousand Banco do Brasil 1S2010 Cost of Borrowings Expenses Onlendings BB-Consolidated 1S2009 1S2010 1S2009 (380,471) (90,146) (269,198) (89,313) (1,123,824) (817,910) (1,210,364) (821,739) BNDES (652,864) (447,598) (717,353) (447,949) Finame (277,558) (244,451) (302,394) (246,250) Foreign (99,355) -- (96,570) -- Treasury (65,709) (90,902) (65,709) (90,902) CEF (2,478) (10) (2,478) (1,681) (25,860) (34,949) (25,860) (34,957) Expenses for Financial and Development liabilities (282,242) (260,185) (282,242) (287,210) Expenditure obligations with foreign banks (125,370) -- (138,289) (590) (1,911,907) (1,168,241) (1,900,093) (1,198,852) Others Total 60 Notes to Financial Statements 19 – Resources from securities issues R$ Thousand Amount Issued Resources Remuneration (p.a.) Data Capture Maturity 06.30.2010 12.31.2009 06.30.2009 Banco do Brasil Global Medium - Term Note Program R$ 350,000 9,75% 07/2007 07/2017 332,008 316,244 319,375 US$ 100,000 Libor 6m+2,55% 07/2009 07/2014 167,844 171,160 -- US$ 950,000 4,50% 01/2010 01/2015 1,749,665 -- -- US$ 500,000 6,0% 01/2010 01/2020 924,030 -- -- 2,138,881 1,324,360 389,943 US$ 199,889 3,88% 06/2009 06/2012 359,940 347,886 389,943 US$ 98,105 3,08% 07/2009 07/2012 176,658 170,742 -- US$ 4,908 2,92% 07/2009 06/2012 8,838 8,542 -- US$ 98,101 3,00% 08/2009 08/2012 176,650 170,734 -- US$ 9,920 3,46% 08/2009 08/2016 17,863 17,265 -- US$ 98,127 2,85% 09/2009 08/2012 176,697 170,780 -- US$ 99,941 3,36% 10/2009 10/2012 179,965 173,938 -- US$ 146,961 2,53% 10/2009 10/2012 264,631 255,771 -- US$ 4,000 3,80% 11/2009 12/2012 7,203 6,962 -- US$ 1,000 3,67% 12/2009 12/2012 1,801 1,740 -- US$ 99,000 3,03% 01/2010 01/2013 178,269 -- -- US$ 100,000 2,88% 01/2010 01/2013 180,070 -- -- US$ 195,854 2,12% 03/2010 03/2013 352,674 -- -- US$ 2,000 3,19% 05/2010 05/2013 3,601 -- -- US$ 30,000 1,82% 05/2010 05/2011 54,021 -- -- 759,733 71,552 R$ -- -- -- -- -- -- 1,945 US$ -- -- -- -- 1,665,235 754,754 58,749 EUR -- -- -- -- -- 4,979 10,858 R$ -- -- -- -- 30,222 -- -- 7,007,885 2,571,497 780,870 Certificates of deposits - Long Term Certificates of deposits - Short Term (1) Resources Letters of Credit - Agribusiness (2) Total Banco do Brasil Special purpose entities - EPE Abroad (3) Securitization of future flow of payment orders from abroad US$ 300,000 Libor 3m+0,60% 07/2002 06/2009 -- -- -- US$ 40,000 7,890% 09/2002 09/2009 -- -- 3,807 US$ 120,000 7,26% 03/2003 03/2010 -- 12,362 40,843 US$ 250,000 6,55% 12/2003 12/2013 251,299 273,289 338,334 US$ 250,000 Libor 3m+0,55% 03/2008 03/2014 448,780 435,265 488,468 US$ 200,000 Libor 3m+1,20% 09/2008 09/2015 360,418 348,319 391,254 US$ 150,000 5,25% 04/2008 06/2018 270,735 261,707 293,345 1,331,232 1,330,942 1,556,051 Total Special purpose entities - EPE Abroad Banco Votorantim Debentures 1,535,787 1,475,559 -- Foreign Exchange R$ -- PTAX+12,0436% 12/2006 12/2011 849,778 818,833 -- Pós-fixFloating rated R$ -- DI + 0,35% 07/2007 07/2012 686,009 656,726 -- R$ -- -- 02/2009 01/2012 13,185 53,156 -- R$ -- -- 07/2007 03/2020 883,799 909,132 -- 1,327,213 694,931 -- US$ -- -- -- -- 297,581 219,177 -- R$ 111,000 16,2% 11/2005 11/2010 40,502 37,548 -- R$ 200,000 9,25% 12/2005 12/2012 84,090 79,806 -- R$ 200,000 10,625% 04/2007 04/2014 103,534 89,888 -- US$ 100,000 Libor 3m+2,0% 08/2005 08/2010 76,527 75,767 -- US$ 200,000 6,875% 10/2005 10/2015 112,716 1,858 -- US$ 200,000 6,75% 09/2006 09/2016 86,687 84,007 -- US$ 500,000 4,25% 02/2010 02/2013 457,766 -- -- Resources letters of credit real estate (4) Resources letters of credit agribusiness (4) Liabilities for securities abroad - Program Global Medium - Term Notes Short Term Long Term (5) 61 Notes to Financial Statements Amount Issued Resources Remuneration (p.a.) Data Capture Maturity 06.30.2010 12.31.2009 06.30.2009 USD 75,000 4,25% 04/2010 02/2013 67,810 -- -- US$ 23,070 4,184% 02/2008 01/2010 -- 1,338 -- US$ 9,990 4,0% 07/2008 07/2010(6) -- 379 -- US$ 4,000 3,98% 07/2009 04/2012(6) -- 21 -- US$ 15,500 3,9088% 07/2009 04/2012(6) -- 76 -- US$ 1,500 4,0538% 07/2009 05/2012(6) -- 9 -- US$ 5,000 8,9% 07/2009 07/2014(6) -- 134 -- US$ 120,000 5,1% 06/2008 06/2015(6) -- 104,679 -- EUR 250 1,0% 08/2009 12/2011(6) -- 135 -- 05/2007 03/2012 (6) -- 5 -- 05/2012 (6) -- 55 -- 05/2012 (6) -- 49 -- 3,759,984 3,132,778 -- EUR EUR EUR 1,000 10,000 9,000 5,2648% 4,0538% 4,0538% 07/2009 07/2009 Total Banco Votorantim Non-Financial Corporations Real Estate Receivables Certificates Debentures R$ -- -- -- -- 6,734 306,463 315,026 R$ -- TJLP+3,8% 09/2007 09/2020 131,193 20,794 21,067 137,927 327,257 336,093 (4,865) (155) -- Total - BB Consolidated 12,232,163 7,362,319 2,673,014 Current Liabilities Non Current Liabilities 2,031,371 1,406,912 445,948 10,200,792 5,955,407 2,227,066 (7) Total Non-Financial Corporations Eliminated amount on consolidation (8) (1) Securities maturing in less than 360 days and interest rates of the certificate issued in U.S. dollars (US$ 906,128 thousand) between 0.23% and 2.30% p.a. (2) Title of agribusiness credit, with maturity of less than 360 days, with a refresh rate equal to 90% of DI p.a. pro rata to maturity. (3) The Special Purpose Entity - EPE "Dollar Diversified Payment Rights Finance Company" was organized under the laws of the Cayman Islands for the following purposes: (a) the issuance and sale of securities in the international market, (b) use of resources obtained by issuing securities to pay for the purchase, with the BB, the rights to payment orders issued by banking correspondents located in the U.S. and by the agency of BB New York in U.S. dollars, for an agency for BB Brazil ( "Rights on Consignment") and (c) making payments of principal and interest on securities and other payments payable on the issuance of these securities. EPE did not claim to have no assets or liabilities other than the relevant rights and obligations from the contracts issue of securities. The BB has no control, is not a shareholder, it owns and participates in either the results of EPE. The obligations of the securities issued by EPE are paid with funds accumulated in your account. (4) Refresh rates are substantially to 90% of DI. (5) Securities with a maturity of less than 360 days and interest rates between 0.85% and 1.30% p.a. (6) Transactions settled in advance during the 1st half/2010. (7) Debt with the average maturity of 128 months, average effective rate of 9.7% p.a., with the indices Reference Rate - TR General Price Index-Market IGP-M Index and Consumer Price Index - IPCA. (8) Refers to securities issued by Banco do Brasil S.A., in possession of controlled company abroad. 62 Notes to Financial Statements 20 – Other liabilities a) Financial and development funds R$ Thousand Banco do Brasil PIS/Pasep BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 2,107,678 1,916,461 1,903,778 2,107,678 1,916,461 1,903,778 Merchant Navy 855,733 750,151 648,310 855,733 750,151 648,310 Funds from the State Government of Sao Paulo 485,826 475,925 -- 485,826 475,925 470,840 Special Lending Program for Agrarian Reform - Procera 177,717 181,594 204,365 177,717 181,594 204,365 47,417 4,049 263 47,417 4,049 263 Combating Rural Poverty/Our First Plot of Land (CPR/NPT) 6,617 1,674 9,230 6,617 1,674 9,230 Land and Agrarian Reform - BB Banco da Terra 2,316 2,218 3,244 2,316 2,218 3,244 -- 755,281 -- -- 755,281 655,818 Consolidation of Family Farming (CAF) Judicial Deposit Reserve Fund (1) Other 45,512 47,261 179,581 45,512 47,261 179,660 Total 3,728,816 4,134,614 2,948,771 3,728,816 4,134,614 4,075,508 Current Liabilities 1,441,501 2,050,776 829,726 1,441,501 2,050,776 829,726 Non Current Liabilities 2,287,315 2,083,838 2,119,045 2,287,315 2,083,838 3,245,782 (1) It refers to funds specific for guarantee of judicial deposits transferred to the State Treasury of São Paulo and to the City Councils of such State. b) Taxes and social security R$ Thousand Banco do Brasil Provision for legal litigation (Note 29.e) BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 11,502,534 11,245,230 10,981,334 11,502,534 11,245,230 10,981,334 Provision for deferred taxes and contributions (Note 26.c) 5,357,346 4,576,390 3,000,592 6,443,413 5,429,405 3,466,981 Provision for taxes and contributions on profits 2,054,256 64,335 2,348,065 2,828,331 653,257 3,362,327 Taxes payable 1,016,991 661,898 518,573 1,258,712 1,500,829 784,438 198,895 174,696 188,098 1,221,967 1,138,706 1,424,844 120,901 Provision for tax litigation (Note 29.b) Taxes and contributions on net income payable 5,942 3,677,933 9,349 153,232 4,038,001 296,215 291,248 -- 899,890 291,271 -- Total 20,432,179 20,691,730 17,046,011 24,308,079 24,296,699 20,140,825 Current Liabilities 15,527,514 16,568,631 14,474,786 17,288,548 18,315,213 16,030,541 4,904,665 4,123,099 2,571,225 7,019,531 5,981,486 4,110,284 Others Non Current Liabilities c) Special Operations R$ Thousand Banco do Brasil BB-Consolidated 03.31.2010 12.31.2009 03.31.2009 03.31.2010 12.31.2009 03.31.2009 204,007 204,007 2,137,443 204,007 204,007 2,137,443 2,113 2,138 2,174 2,113 2,138 2,174 145 140 140 145 140 140 Total 206,265 206,285 2,139,757 206,265 206,285 2,139,757 Current liabilities 204,007 204,007 2,137,443 204,007 204,007 2,137,443 2,258 2,278 2,314 2,258 2,278 2,314 Government, Special procurement Investment fund sector Other special operations Long Term Liabilities (1) (1) Refers to the transfer of funds, according to Resolution No. 3.607/2008 Bank, for use in rural credit. 63 Notes to Financial Statements d) Subordinated debt R$ Thousand Resources Amount Issued Remuneration p.a. Date Capture Maturity 06.30.2010 12.31.2009 06.30.2009 Banco do Brasil FCO - Recursos do Fundo Constitucional do Centro-Oeste -- -- -- -- 13,239,454 12,422,046 11,788,116 Funds applied (1) R$ -- -- -- -- 11,360,015 10,755,066 10,919,721 Resources available (2) R$ -- -- -- -- 1,630,023 1,446,763 627,238 Charges to capitalize R$ -- -- -- -- 249,416 220,217 241,157 3,596,792 3,432,246 2,304,076 R$ 900,000 113,8% do CDI 03/2009 09/2014 1,021,732 974,137 928,380 R$ 1,335,000 115% do CDI 03/2009 03/2015 1,515,558 1,444,230 1,375,696 R$ 1,000,000 105% do CDI 11/2009 11/2015 1,059,502 1,013,879 -- 300,000 8,5% 09/2004 09/2014 551,208 533,277 596,948 1,000,000 108,5% do CDI 03/2010 03/2016 1,024,424 -- -- Subordinated CDB issued in the country Subordinated debt Abroad US$ Subordinate Financing Bills R$ Total Subordinated debt Banco do Brasil 18,411,878 16,387,569 14,689,140 Banco Votorantim Subordinated CDB issued in the country 1,539,508 1,463,908 -- R$ 312,500 CDI+ 0,491417% 11/2007 11/2012 411,584 393,716 -- R$ 8,500 CDI+ 0,491417% 12/2007 12/2012 11,175 10,690 -- R$ 200,000 CDI+0,540556% 12/2007 12/2012 263,285 251,792 -- R$ 32,500 IGPM+7,219701% 12/2007 12/2012 45,212 41,352 -- R$ 57,500 IPCA+7,934241% 03/2008 03/2013 77,392 72,052 -- R$ 7,500 IPCA+7,855736% 08/2009 08/2014 8,389 7,814 -- R$ 5,250 IPCA+7,924428% 08/2009 08/2014 5,876 5,471 -- R$ 19,500 IPCA+8,002932% 08/2009 08/2014 21,838 20,326 -- R$ 2,500 IPCA+7,953867% 08/2009 08/2014 2,798 2,605 -- R$ 260,000 CDI+1,670229% 08/2009 08/2014 284,529 270,586 -- R$ 250,000 CDI+1,635268% 12/2009 12/2014 264,593 251,670 -- R$ 135,000 CDI+1,674668% 12/2009 12/2014 142,837 135,834 -- Subordinated Note US$ 375,000 Pré+7,38% 01/2010 01/2020 700,558 -- -- Debentures R$ 693,575 CDI+0,5% a, a, 04/2006 04/2016 687,685 703,621 -- 2,927,751 2,167,529 -- -- (1,858) -- Total Subordinated debt Banco Votorantim Subordinated debt issued by the Banco do Brasil, in the possession of controlled Abroad, eliminated in the BB-Consolidated Total Subordinated debt BB Consolidated (3) 21,339,629 18,553,240 14,689,140 (1) Contracted charges are paid by borrowers with less the del credere financial institution, according to article 9 of Law No. 7.827/1989. (2) Remunerated based on extra-rate announced by the Central Bank of Brazil, pursuant to Article 9 of Law No. 7.827/1989. (3) The amount of R$ 19,376,109 thousand (R$ 17,078,207 thousand on 12.31.2009 and R$ 14,653,089 thousand on 06.30.2009) make up the Capital (PR), level II, in accordance with Resolution CMN n º 3.444 / 2007, 02.28.2007 (Note 30f). 64 Notes to Financial Statements e) Hybrid capital and debt instruments R$/US$ Thousand Banco do Brasil e BB-Consolidated Funding Issued value Remuneration (p.a.) Date of funding 06.30.2010 R$ thous 12.31.2009 R$ thous 06.30.2009 R$ thous US$ 500,000 7.95% 01/2006 US$ 1,500,000 8.50% 10/2009 985,628 883,194 990,263 2,657,765 2,633,591 3,643,393 -- 3,516,785 990,263 Perpetual Bonuses Total BB-Banco do Brasil Values eliminated in the BB-Consolidated Total BB-Consolidated Current Liabilities Long term Liabilities 2,000,000 (344) (981) -- 3,643,049 3,515,804 990,263 -- 13,260 14,863 3,643,049 3,502,544 975,400 The amount of R$ 2,611,015 thousand of the perpetual bonuses comprise the Referential Shareholders' Equity (PR), level II, in conformity with CMN Resolution 3444/2007 (Note 30f). The amount of R$ 882,343 thousand of the perpetual bonuses comprise the Referential Shareholders' Equity (PR), level II, in conformity with CMN Resolution 3444/2007(Note 30f). The operation of US$ 500,000 thousand, issued in January 2006, has a redemption option by initiative of the Bank as from 2011 or in each subsequent quarterly payment of interest, providing it is authorized beforehand by the Central Banco do Brasil. The terms of these Perpetual Bonuses allow the Bank to suspend quarterly payments of interest and/or accessory payments on the aforesaid securities issued (which will neither be due or accumulated) if: (i) the Bank determines that it is incapable or the payment of these charges does not allow the Bank to be in conformity with the capital adequacy levels then required by the Central Banco do Brasil or its financial indicators are below the minimum level required by the regulations applicable to Brazilian banks; (ii) the Central Banco do Brasil or the Regulatory Authorities determine the suspension of payments of the aforesaid charges; (iii) some insolvency or bankruptcy event occurs; (iv) some default occurs; or (v) the Bank decides to suspend these payments for any other reason. If the Bank decides to suspend the payment of interest and accessories due to the Perpetual Bonuses on account of the contents of item (v) above, the terms of the Perpetual Bonuses provide that, until such payments have been resumed for a period equivalent to 12 months, the Bank (a) cannot recommend to its stockholders and, and as established by the applicable legislation, will act in order to avoid the statement, payment or distribution of dividends or interest on own capital on its common stock and (b) will suffer restrictions on its capacity to redeem or otherwise acquire its common stock. The transaction of US$ 1,500,000 thousand, issued in October 2009, has the option of redemption at the initiative of the Bank from 2020 and on each monthly payment of interest thereafter, provided that prior authorization by the Banco Central do Brasil. If the Bank does not exercise the option to redeem in October 2020, interest on the bonds will be corrected by this date and every 10 years, taking into account the trading price of the Treasury of the U.S. 10 years. The terms of Perpetual determine that the Bank has suspended payments of monthly interest and / or accessories on those securities issued (which shall not be paid or accrued) if: (i) the Bank is not framed or such charges do not allow the Bank is in accordance with the levels of capital adequacy, operational limits or its financial indicators are below the minimum level required by the rules applicable to Brazilian banks, (ii ) The Banco Central do Brasil or the Regulatory Authorities to determine the suspension of payments of these costs, (iii) any event of insolvency occurs, (iv) any default occurs, or (v) the Bank has not distributed dividend payments or interest on equity to common shareholders for the period corresponding to the period of calculation of such interest and / or accessories. 65 Notes to Financial Statements f) Sundry R$ Thousand BB-Consolidated Banco do Brasil 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Credit card operations (1) 7,770,628 7,982,813 5,546,077 7,770,628 7,982,813 5,546,077 Actuarial Liability (Note 28.c). 6,758,094 6,373,767 5,796,001 6,758,094 6,373,767 6,179,027 Provisions for payments 3,001,009 3,028,675 3,152,207 3,482,382 3,452,755 3,707,718 Sundry creditors - Brazil 2,036,985 1,878,724 410,089 3,437,127 3,093,899 1,799,420 Provisions for civil claims (Note 29.b) 3,204,045 3,036,381 2,472,361 3,353,840 3,131,472 3,806,430 Provisions for labor grievances (Note 29.b) 2,736,323 3,242,208 3,054,039 2,804,314 3,300,748 4,079,426 Obligations for premiums granted by the customer loyalty 2,231,921 1,170,060 674,333 2,231,921 1,170,060 674,333 708,044 627,782 608,290 1,150,086 1,056,660 1,077,954 Obligations for the acquisition of Banco Nossa Caixa 957,302 3,674,324 4,457,724 957,302 3,674,324 4,457,724 Accounts payable for payment services provided 757,342 280,874 574,529 757,342 280,874 576,877 Liabilities for official agreements 696,483 1,191,354 789,222 696,483 1,191,354 994,559 Provision for losses with FCVS 279,357 269,309 -- 279,357 269,309 277,649 Liabilities for purchase of goods and rights 243,056 855,655 144,614 244,986 855,987 144,614 Provisions for guarantees provided 75,600 70,191 63,773 78,927 70,204 63,793 Assumption of obligations - Securitization (Note 20.g) 76,455 109,288 161,055 76,455 109,288 161,055 58,327 61,661 40,785 64,257 70,098 46,880 195,726 106,168 8,548 456,872 1,014,718 304,434 Funds subject to loans Sundry creditors - abroad Other Total 31,786,697 33,959,234 27,953,647 34,600,373 37,098,330 33,897,970 Current Liabilities 23,716,177 26,499,585 20,387,548 23,081,957 26,464,456 20,833,311 Long term Liabilities 8,070,520 7,459,649 7,566,099 11,518,416 10,633,874 13,064,659 (1) Includes the value of the installments of shopping with credit cards by retailers installments in the amount of R$ 3,263,580 thousand (R$ 3,398,166 thousand at 12.31.2009 and R$ 2,651,583 thousand on 06.30.2009). g) Securitization R$/US$ Thousand Banco do Brasil e BB-Consolidated Funding Issued value Remuneration (p.a.) Date of funding Maturity 06.30.2010 R$ thous 12.31.2009 R$ thous 06.30.2009 R$ thous US$ 178,474 5.911% 07/2003 06/2011 61,394 88,418 129,178 US$ 44,618 4.777% 07/2003 06/2011 15,061 20,870 31,877 76,455 109,288 161,055 Future flow of credit card invoice receivables Total 223,092 The Special Purpose Company - SPC "Brazilian Merchant Voucher Receivables" was created under the laws of the Cayman Islands with the following purposes: (a) issue and sell securities in the international market; (b) to use funds raised with the issue of securities to pay for the purchase of current and future rights of Cielo S.A. (Visanet) against Visa International Service Association over the Receivables arising from: (i) credit or charge purchases made in Brazilian territory, in any currency processed by Visanet, with Visa cards issued by financial institutions located outside of Brazil, or (ii) credit or charge purchases processed by Cielo in foreign currency and made with Visa cards issued by financial institutions located in Brazil; and (c) to make payments of principal and interest with regard to securities and other payments provided in the agreements covering the issue of such securities. BB is the beneficiary of 44.618488% of the funds, calculated based on the equity interest held in Cielo, on the issuing date, and the remaining funds made available to the other Brazilian financial institution which holds an interest in Cielo. The SPE declares that it has no relevant asset or liability other than the rights and duties originating from the contracts for issue of securities. BB does not hold the control, is not a shareholder, the owner, or is a beneficiary of any of the results of operations of the SPE. The liabilities arising from the issued securities are paid by the SPC using the funds accumulated in its account. 66 Notes to Financial Statements 21 – Insurance, pension and capitalization operations a) Claims Operations R$ Thousand BB-Consolidated 06.30.2010 12.31.2009 06.30.2009 Direct insurance premiums receivable Credit insurance business with insurers Credit insurance transactions with reinsurers Total 658,122 7,426 150,170 815,718 612,282 9,447 286,481 908,210 458,890 7,078 236,434 702,402 Current assets Non current assets 794,598 21,120 885,945 22,265 681,429 20,973 67 Notes to Financial Statements b) Technical Provisions R$ Thousand 06.30.2010 12.31.2009 06.30.2009 BB–Consolidated Mathematical provision for future benefits Mathematical provision for vested benefits Mathematical provision for redemptions Mathematical premiums provision for unearned Insurance Pension Capitalization Total 4.932 21.228.842 -- 232 578.057 -- 578.289 222 358.872 -- 36.762 1.865.673 1.902.435 -- 14.862 21.233.774 Insurance Pension Capitalization 8.984 12.271.198 -- Total Insurance Pension Capitalization -- Total 12.280.182 4.809 10.459.169 10.463.978 -- 359.094 241 335.793 -- 336.034 1.743.419 1.758.281 -- 1.884 1.587.691 1.589.575 957.443 -- -- 957.443 1.041.045 -- -- 1.041.045 811.352 -- -- 811.352 Provision for unsettled claims 852.464 -- -- 852.464 858.902 -- -- 858.902 850.350 -- -- 850.350 Provision for financial surplus -- 391.842 -- 391.842 -- 255.445 -- 255.445 -- 283.127 -- 283.127 Provision for insufficiency of contributions -- 248.815 -- 248.815 -- 154.005 -- 154.005 -- 148.330 -- 148.330 Provision for financial fluctuation -- 241.609 -- 241.609 -- 151.937 -- 151.937 -- 142.440 -- 142.440 Provision for IBNR 187.274 5.770 -- 193.044 232.495 3.441 -- 235.936 183.577 2.509 -- 186.086 Provision for premiums deficiency Provision for draws for prizes redemptions Other provisions 115.149 50.068 -- 165.217 92.689 26.777 -- 119.466 76.248 20.536 -- 96.784 -- -- 60.559 60.559 -- -- 56.430 56.430 -- -- 54.879 54.879 41.734 36.600 16.973 95.307 33.913 24.669 9.871 68.453 26.057 22.740 4.994 53.791 Total 2.159.228 22.818.365 1.943.205 26.920.798 2.268.250 13.261.206 1.809.720 17.339.176 1.952.634 11.416.528 1.647.564 15.016.726 Current 1.828.134 607.835 1.943.205 4.379.174 1.940.475 372.969 1.809.720 4.123.164 1.576.059 343.736 1.647.564 3.567.359 331.094 22.210.530 -- 22.541.624 327.775 12.888.237 -- 13.216.012 376.575 11.072.792 -- 11.449.367 Non-Current and 68 Notes to Financial Statements c) Technical Provisions by product R$ Thousand 06.30.2010 12.31.2009 06.30.2009 BB–Consolidated Insurance Pension Capitalization Automotive 707.921 -- -- 707.921 654.000 -- -- 654.000 548.243 -- -- 548.243 Life 795.641 -- -- 795.641 755.536 -- -- 755.536 694.458 -- -- 694.458 Property/casualty 541.374 -- -- 541.374 781.925 -- -- 781.925 632.734 -- -- 632.734 Dpvat 93.963 -- -- 93.963 59.879 -- -- 59.879 58.908 -- -- 58.908 Health 20.329 -- -- 20.329 16.910 -- -- 16.910 18.291 -- -- 18.291 Capitalization -- -- 1.943.205 1.943.205 -- -- 1.809.720 1.809.720 -- -- 1.647.564 1.647.564 PGBL Free benefit generating plan -- 8.771.577 -- 8.771.577 -- 5.391.560 -- 5.391.560 -- 4.494.488 -- 4.494.488 VGBL Living benefits life insurance -- 9.698.318 -- 9.698.318 -- 5.091.497 -- 5.091.497 -- 3.896.748 -- 3.896.748 Traditional plans -- 4.348.470 -- 4.348.470 -- 2.778.149 -- 2.778.149 -- 3.025.292 -- 3.025.292 2.159.228 22.818.365 1.943.205 26.920.798 2.268.250 13.261.206 1.809.720 17.339.176 1.952.634 11.416.528 1.647.564 15.016.726 Total Total Insurance Pension Capitalization Total Insurance Pension Capitalization Total d) Guarantee of Technical Provisions R$ Thousand 06.30.2010 12.31.2009 06.30.2009 BB–Consolidated Insurance Pension Capitalization Shares in Investment Funds (VGBL and PGBL) -- 18.206.105 -- 18.206.105 -- 10.331.995 -- 10.331.995 -- 8.274.343 -- 8.274.343 Shares in Investment Funds (except VGBL and PGBL) 852.105 3.144.448 1.253.336 5.249.889 886.671 2.021.878 1.250.781 4.159.330 907.507 2.194.729 1.095.336 4.197.572 Government bonds 726.743 1.710.783 326.151 2.763.677 665.987 1.087.281 241.904 1.995.172 628.714 1.140.976 316.779 2.086.469 Corporate bonds 196.459 41.081 462.845 700.385 197.670 33.337 410.494 641.501 150.382 29.857 331.678 511.917 Credit rights 420.144 -- -- 420.144 364.346 -- -- 364.346 280.323 -- -- 280.323 1.266 -- -- 1.266 1.338 -- -- 1.338 1.409 -- -- 1.409 Real estate properties Deposits held at IRB and deposits in court Total Total Insurance Pension Capitalization Total Insurance Pension Capitalization Total 432 -- -- 432 416 -- -- 416 513 -- -- 513 2.197.149 23.102.417 2.042.332 27.341.898 2.116.428 13.474.491 1.903.179 17.494.098 1.968.848 11.639.905 1.743.793 15.352.546 69 Notes to Financial Statements e) Results of Insurance, Pension Plan and Capitalization Operations R$ Thousand 1S2010 BB–Consolidated Insurance Pension 113,279 Financial results 1S2009 Capitalization Total 615,176 106,327 834,782 Insurance 129,685 Pension Capitalization Total 458,869 136,036 724,590 Financial income 133,076 854,516 106,741 1,094,333 169,629 698,590 137,726 1,005,945 Financial expenses (19,797) (239,340) (414) (259,551) (39,944) (239,721) (1,690) (281,355) Restatement and interest on technical reserves (33,593) (498,961) (57,327) (589,881) (15,872) (377,256) (64,265) (457,393) Operating results 873,838 (10,175) 45,202 908,865 752,662 (5,336) 27,232 774,558 1,677,113 2,987,263 655,627 5,320,003 1,540,197 1,595,018 634,514 3,769,729 Retained premiums and contribution (Note 21.f) (58,075) (2,954,081) (10,301) (3,022,457) (78,414) (1,577,593) (5,882) (1,661,889) Retained claims (700,492) -- -- (700,492) (646,780) -- -- (646,780) Selling expenses (44,708) (24,804) (41,773) (111,285) (62,341) (15,750) (47,427) (125,518) Expenses with draws for prize & redemptions of capitalization certificates -- -- (558,351) (558,351) -- -- (553,973) (553,973) Expenses with redemptions -- (18,553) -- (18,553) -- (7,011) -- (7,011) 953,524 106,040 94,202 1,153,766 866,475 76,277 99,003 1,041,755 Change in technical provisions pension plans benefits and Total f) Retained insurance premiums, pension plan contributions and capitalization certificates R$ Thousand 1S2010 BB–Consolidated Insurance Premiums issued (VGBL retirement) Supplementary pension VGBL risk portion) contributions (includes Pension 1S2009 Insurance Pension 1,766,295 2,305,727 Capitalization -- 4,072,022 Total 1,702,012 1,019,244 Capitalization -- 2,721,256 Total -- 698,249 -- 698,249 -- 582,910 -- 582,910 -- -- 655,627 655,627 -- -- 634,514 634,514 Coinsurance premiums ceded (8,018) -- -- (8,018) (10,223) -- -- (10,223) Reimbursed premiums (return of VGBL contribution) (4,754) (16,713) -- (21,467) (10,122) (7,136) -- (17,258) 1,753,523 2,987,263 655,627 5,396,413 1,681,667 1,595,018 634,514 3,911,199 (76,410) -- -- (76,410) (141,470) -- -- (141,470) 1,677,113 2,987,263 655,627 5,320,003 1,540,197 1,595,018 634,514 3,769,729 Revenues from capitalization certificates Premiums issued net (premium issued - premium reimbursed) Reinsurance premiums ceded, consortiums and funds Retained insurance premiums, pension plans and capitalization 70 Notes to Financial Statements 22 – Other Income / Expenses a) Service fees income R$ Thousand Banco do Brasil Income from cards (1) BB-Consolidated 1S2010 1S2009 1S2010 1S2009 988,861 760,785 1,438,761 1,139,688 673,198 588,761 411,123 565,287 528,528 369,451 1,111,745 590,805 412,058 951,926 540,783 370,340 -- -- 338,909 256,401 Insurance, pension and capitalization Collection Interbank 130,522 283,806 266,692 90,647 230,336 241,250 295,611 283,806 266,692 186,778 230,336 241,250 Brokerage and custody Loans and guarantees provided National Treasury and Management of official Funds 9,259 139,406 112,138 9,428 302,968 145,828 204,387 180,086 112,138 179,606 303,240 145,828 Provided to the related Consortium administration fees Other services Total 189,890 -202,759 142,023 -95,351 83,655 50,046 231,297 40,595 38,290 186,261 3,996,415 3,481,882 5,599,996 4,811,322 Fund Management Collections Current Account Services provided by non-financial associated companies (1) Includes in the BB-Consolidated, the revenue service of Cielo SA for R$ 356,367 thousand in the 1st half of 2010 (R$ 378,903 thousand in the 1st half of 2009) and Visavale, the value of R$ 93,533 thousand on the first half/2010, proportional to the participation of BB Banco de Investimento. b) Bank fees income R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 Service package Loans and registration file 1,211,354 404,441 926,874 316,821 1,247,872 539,712 1,045,235 351,076 Deposit account Transfer of funds 131,768 68,446 1,816,009 106,841 53,362 1,403,898 131,935 68,639 1,988,158 114,112 57,410 1,567,833 Total c) Personnel expenses R$ Thousand Banco do Brasil Salaries Payroll charges Benefits Personnel administrative provisions Provision for labor grievances (1) Supplementary welfare Training Directors’ and officers’ honoraries Total BB-Consolidated 1S2010 1S2009 1S2010 1S2009 (2,662,356) (933,648) (2,161,683) (715,060) (2,893,146) (1,019,968) (2,441,577) (831,715) (802,959) (854,881) (337,912) (598,988) (634,310) (872,720) (858,747) (854,881) (337,912) (680,796) (667,255) (916,236) (97,546) (28,265) (10,057) (57,050) (21,532) (9,761) (100,583) (32,037) (28,199) (73,841) (25,734) (21,487) (5,727,624) (5,071,104) (6,125,473) (5,658,641) 71 Notes to Financial Statements d) Other Administrative Expenses R$ Thousand Banco do Brasil Amortization BB-Consolidated 1S2010 1S2009 1S2010 1S2009 (1,131,080) (637,695) (1,144,404) (768,467) Communications Third party services Data processing (598,527) (515,399) (534,730) (481,672) (364,639) (353,931) (642,942) (589,257) (565,466) (520,055) (452,700) (424,537) Depreciation Transport Security services (427,800) (321,058) (325,961) (309,191) (274,102) (285,179) (441,327) (338,668) (327,947) (332,219) (288,280) (305,718) Litigation Rent Financial system services (325,396) (260,174) (266,887) (857,141) (187,191) (213,762) (325,396) (309,990) (304,847) (857,141) (228,146) (337,923) Specialized technical services Advertising and publicity Maintenance and upkeep (88,879) (132,176) (171,624) (68,277) (96,393) (146,453) (267,271) (188,310) (182,179) (166,016) (139,923) (165,515) Water, electricity and gas Advertising and public relations Domestic travel (168,063) (79,138) (62,378) (145,169) (72,468) (53,487) (172,009) (95,536) (75,310) (152,401) (81,516) (59,805) (56,763) (178,734) (5,644,767) (49,592) (162,241) (4,758,583) (60,133) (284,084) (6,315,076) (53,717) (228,186) (5,562,265) Materials Other Total e) Tax Expenses R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 (975,479) (827,109) (1,240,642) (1,039,687) ISSQN (233,304) (202,798) (301,026) (265,602) PIS/Pasep (158,515) (134,405) (206,032) (172,506) Other (36,243) (28,333) (60,032) (50,104) Total (1,403,541) (1,192,645) (1,807,732) (1,527,899) Cofins 72 Notes to Financial Statements f) Other Operating Income R$ Thousand Banco do Brasil Previ – Adjustment Equalization of rates - Law 8427/1992 Recovery of charges and expenses Labor, civil and tax claims - Reversal of provisions Income from guarantee deposits Previ – Parity agreement contributions Credit card transactions Administrative expenses - Reversal of provisions Dividends received Personnel expenses - Reversal of provisions Foreign exchange gains (1) Revenue Receive Credit - Securitization (Ativos S.A.) Equipment Rental - POS (Cielo) Commission income (Visavale) Others Total BB-Consolidated 1S2010 1S2009 1S2010 1S2009 1,826,515 1,153,880 604,568 568,609 547,358 109,954 109,275 83,008 31,407 5,728 ----247,887 5,288,189 596,572 890,322 515,822 30,600 559,227 124,168 75,345 78,763 21,053 2,435 3,608,141 ---123,757 6,626,205 1,826,515 1,153,880 879,644 568,609 547,358 109,954 109,275 83,008 31,407 5,728 -150,706 140,867 -523,327 6,130,278 596,572 890,322 428,503 30,600 559,227 124,168 75,345 78,763 21,053 2,435 3,608,141 64,026 149,789 46,570 341,037 7,016,551 (1) Refers to the revenue obtained with the liabilities in foreign currencies, due to the appreciation of the Real in the period, which offset the costs generated by assets in foreign currencies, mainly, the group highlighted in other operating expenses – Negative foreign exchange adjustment (Note 22.g) and exchange variation on investments abroad (Note 14.a). g) Other operating expenses R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 (658,056) (398,935) (658,056) (398,935) -- -- (570,670) (451,513) (16,120) (24,110) (561,689) (24,110) (441,119) (332,851) (441,119) (332,851) Premiums paid to clients - Loyalty Program (267,430) (199,831) (267,430) (199,831) Restatement of guarantee deposits (257,304) (288,738) (257,304) (288,738) Payroll guaranteed loans acquired (172,574) (104,455) (172,574) (104,455) Hybrid capital and debt instruments (157,481) (39,325) (157,481) (39,325) Discounts granted on renegotiations (84,659) (49,319) (143,416) (51,285) (115,093) (125,922) (115,093) (125,922) Actuarial liabilities Other operating expenses from non-financial associated companies Business partners Credit card transactions Failures / frauds and other losses Amortization of goodwill (90,413) (40,256) (90,413) (40,256) Updating the acquisition of investment (66,676) (141,380) (66,676) (141,380) Autoatendimento (62,612) (36,691) (62,612) (36,691) Update interest own capital / Dividends (25,361) (23,694) (25,361) (23,694) Law 9138/95 - Restatement of funds to be returned to the Federal Treasury (19,575) (22,820) (19,575) (22,820) Previ - Adjustment (16,225) (22,169) (16,225) (22,169) Readjustment negative exchange / Reclassification of balances (12,551) (1,690,126) (12,551) (1,690,126) INSS (12,491) (13,567) (12,491) (13,567) (7,783) (7,094) (7,783) (7,094) (22,622) (36,121) -- -- (393,283) (282,964) (483,518) (573,497) (2,899,428) (3,880,368) (4,142,037) (4,588,259) Fees for the use of Sisbacen – Banco Central do Brasil System Securitization SWIFT MT100 - liabilities with the SPE (1) Others Total (1) In BB-Consolidated, these expenses are classified as "Cost of Liabilities for securities abroad" because of the consolidation of Special Purpose Entity Abroad (EPE). 73 Notes to Financial Statements 23 – Non operating income R$ Thousand Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 Non-operating income 214,943 63,756 426,300 1,489,264 Profit on the sale of investments 116,350 -- 213,716 1,415,122 116,350 -- 213,716 -- -- -- -- 1,415,122 Visa Inc. Cielo (Visanet) Capital gains 7,469 6,445 106,323 7,225 Profit on the sale of assets 34,390 9,568 36,473 13,563 Reversal of provision for devaluation of other assets 25,537 22,861 25,665 23,196 Sale of real estate 16,936 12,632 16,936 12,632 6,010 7,550 6,135 7,976 -- 2,692 -- 2,693 8,251 2,008 21,052 6,857 (42,334) (35,650) (80,276) (47,020) Rental income Provision for/(reversal of) loss with shares and quotas Other non-operating income Non-operating expenses Devaluation of other assets (2,220) (1,230) (33,390) (2,162) Loss on sale of assets (27,206) (22,409) (27,383) (22,676) Capital losses (11,037) (9,129) (11,764) (9,361) (1,871) (2,882) (7,739) (12,821) 172,609 28,106 346,024 1,442,244 Other non-operating expenses Total 24 – Stockholder’s Equity a) Book value and market value per common share 06.30.2010 12.31.2009 06.30.2009 Equity Bando do Brasil (R$ thousand) Book value per share (R$) Market value per common share (R$) 39,386,911 15,33 24,65 36,119,265 14,05 29,70 32,360,165 12,60 21,18 Equity BB-Consolidated (R$ thousand) 39,331,882 36,119,406 33,146,766 Book value per share is calculated based on the equity of Banco do Brasil. The reconciliation with the equity of BB-Consolidated is shown in Note 24.f. b) Capital The capital of R$ 26,028,096 thousand (R$ 18,566,919 thousand on 12.31.2009 and R$ 18,548,611 thousand at 06.30.2009) of Banco do Brasil is divided into 2,569,869,551 common shares represented in book entry form no par value. The Federal Government is the largest shareholder, holding the control. The capital increase in the first half of 2010, in the amount of R$ 7,461,177 thousand, was due to the capitalization of Revenue Reserves (Statutory Reserve Operating Margin) of R$ 7,412,899 thousand and Capital valued at R$ 5,188 thousand, the subscription of 4,859,696 common shares from the exercise of subscription bonuses "C" of R$ 42,816 thousand, and the issuance of 9,039 shares, no par value, from the incorporation of companies Besc Leasing SA - Leasing and Finance SA Besc - Credit, Financing and Investment of R$ 274 thousand (Note 2.a). 74 Notes to Financial Statements The Bank may, even without amending its by-laws, if approved by a General Meeting, and in the conditions established therein, increase its capital up to the limit of R$ 50 billion Brazilian reais, by issuing common shares, granting shareholders preference for subscribing the capital increase proportionally to the number of held shares, while maintaining the rights of subscription bonus holders. c) Revaluation reserves The revaluation reserves, totaling R$ 6,372 thousand (R$ 6,746 thousand in 12.31.2009 and R$ 6,948 thousand in 06.30.2009), refer to revaluations of assets made by the companies Kepler Weber S.A., Pronor, and Cobra Tecnologia S.A. The realizations of the reserves in the period, totaling R$ 371 thousand (R$ 338 thousand in the first half of 2009), were transferred to "Retained earnings (accumulated losses)". The remaining balance will be held until to the date of its effective realization, in conformity with CMN Resolution 3565/2008. d) Capital and profit reserves R$ Thousand 06.30.2010 Capital reserves Profit reserves Legal Reserve Statutory Reserves Operating margin Equalization of dividends 12.31.2009 06.30.2009 -- 5,188 5,188 12,972,258 2,552,851 10,419,407 17,301,439 2,296,291 15,005,148 13,614,362 1,989,474 11,624,888 7,512,570 2,906,837 12,308,413 2,696,735 9,351,819 2,273,069 The capital reserve arising from the tax incentive related recording of a balance from a non-financial affiliated company was capitalized on April, 2010, as decided by the Bank's Extraordinary General Meeting held on April 13, 2010. The capital reserve Operating Margin has the purpose is to guarantee an operating margin compatible with the development of the company's transactions. It is formed by up to 100% of the balance of net income after legal distributions, including dividends, up to the limit of 80% of the capital. The capital reserve Equalization of dividends Guarantees financial resources for the payment of dividends and is formed by up to 50% of the balance of net income after legal distributions, including dividends, up to the limit of 20% of the capital. e) Interest on own capital / Dividends Value (R$ Thous) Value per share Data Base Date of payment Payment 444,161 518,155 0.173 0.202 05.21.2010 03.24.2010 05.31.2010 05.31.2010 Dividends Interest on own capital Total allocated to stockholders (item 1 + item 2) 564,785 525,372 2,052,473 0.220 0.205 0.800 08.16.2010 05.24.2010 08.26.2010 08.26.2010 1- Dividends 2- Interest on own capital Net income for the period 1,008,946 1,043,527 5,131,184 0.393 0.407 -- ---- ---- 1st quarter/2010 Dividends Interest on own capital 2nd quarter/2010 75 Notes to Financial Statements Value (R$ Thous) Value per share Data Base Date of payment Payment Dividends 218,474 0.085 05.14.2009 05.27.2009 Interest on own capital 2nd quarter/2009 447,717 0.174 03.23.2009 05.27.2009 Dividends 483,097 0.188 08.13.2009 08.27.2009 0.178 0.625 0.273 06.22.2009 08.27.2009 1- Dividends 456,137 1,605,425 701,571 -- -- 2- Interest on own capital (1) Net income for the period 903,854 4,013,563 0.352 -- --- --- 1st quarter/2009 Interest on own capital Total allocated to stockholders (item 1 + item 2) (1) Amounts subject to the rate of 15% Income Tax Withholding. In accordance with Laws 9249/1995 and 9430/1996 and the Bank's Bylaws, Management decided on the payment of Interest on Own Capital to its stockholders, imputed to the value of the dividends, plus additional dividends, equivalent to 40% of net income. Interest on capital is calculated based on adjusted net equity accounts and is limited on a pro rata basis to the variation of long-term interest rate, as long as there is profit computed before its deduction or retained earnings and profit reserves at least twice its amount. To comply with the Income Tax legislation, the amount of interest on capital was recorded as corresponding entries against "Financial expenses" and, for purposes of disclosure of the financial statements, reclassified to "Retained earnings". The total interest on capital during the semester provided a reduction in spending on tax charges totaling R$ 417,411 thousand. f) Reconciliation of Net Income and Shareholders' Equity Net Income Banco do Brasil Results not achieved Reciprocal participation in subsidiaries Minority interests in subsidiaries BB-Consolidated Shareholders' Equity 1S2010 1S2009 06.30.2010 06.30.2009 5,131,184 (54,908) 4,013,563 -- 32,360,165 -786,601 33,146,766 -- -- 39,386,911 (54,908) (164) (20) 5,076,256 613 4,014,176 43 39,331,882 -- 76 Notes to Financial Statements g) Stockholdings (Number of shares) Evolution of the quantity of shares issued by the Bank's shareholders hold, directly or indirectly, of more than 5% of the shares and the directors and members of the Fiscal Council and Audit Committee: 06.30.2010 Stockholders 12.31.2009 06.30.2009 Shares % Total Shares % Total Shares % Total Federal Government 1,677,309,063 65.3 1,677,309,058 65.3 1,684,809,058 65.6 Ministério da Fazenda 1,483,734,063 57.7 1,378,734,058 53.7 1,393,734,058 54.3 139,400,000 5.4 229,400,000 8.9 229,400,000 8.9 -- -- 60,000,000 2.3 60,000,000 2.3 Fundo Garantidor de Habitação Popular – FGHab 1,675,000 0.1 1,675,000 0,1 1,675,000 0.1 Fundo Garantidor para Investimentos 7,500,000 0.3 7,500,000 0,3 -- -- 45,000,000 1.8 -- -- -- -- 266,546,187 10.4 266,446,187 10.4 260,779,183 10.2 62,409,779 2.4 62,409,779 2.4 64,005,679 2.5 Fundo de Garantia a Exportação Fundo Garantidor de Parcerias Público-Privadas – FGP (1) Fundo Garantidor para Construção Naval Banco do Brasil Employees Retirement Fund (PREVI) BNDES Participações S.A. – BNDESPar (2) Treasury Stock Other shareholders Total 1,159,815 0.00 1,150,369 0.0 1,150,336 0.0 562,444,707 21.9 562,545,119 21.9 557,442,229 21.7 2,569,869,551 100.0 2,569,860,512 100.0 2,568,186,485 100.0 (1) Shares transferred by the Union to pay up the capital of FGP, as authorized by Ordinance No. 413/2005 of the Ministry of Finance. (2) Connected to the Controller. Shares ON (1) 06.30.2010 Board of Directors(Except for the shares of the President that are included in the Board of Directors) 12.31.2009 06.30.2009 15 14 28 Steering committee 8,372 7,665 7,668 Executive Committee 9,689 9,686 21,650 -- -- 150 823 823 1,729 Fiscal Council Audit Committee (1) The shareholding interest of the Board of Directors, Steering Committee, Executive Committee, Fiscal Council and Audit Committee represents approximately 0.001% of the Bank's capital stock. h) Number of Shares being Traded on the Market / Free Float 06.30.2010 12.31.2009 06.30.2009 BB Shares Quantity Being traded Total issued (1) % Quantity % Quantity % 562,426,631 21.9 562,527,754 21.9 557,412,883 21.7 2,569,869,551 100.0 2,569,860,512 100.0 2,568,186,485 100.0 (1) As Law No. 6.404/1976 and regulation of Bovespa's New Market. Does the shares held by the Board of Directors, Board and Executive Board. If the capital increase on the public offering of common shares had occurred on 06.30.2010, the percentage of shares outstanding would increase from 21.9% to 30.4% (Note 31). 77 Notes to Financial Statements i) “C” subscription bonuses The Extraordinary General Meeting of 05.19.2010, which approved the capital increase of the Bank, provided the anticipation of the exercise of the subscription of shares arising from bonus "C" during the period 06.21.2010 to 06.23.2010. Were exercised 1,551,727 bonuses "C" and the remaining balance, 4,328,704 bonuses "C", assures the holder of the document the right to subscribe for shares in the capital until the deadlines originally – 03.31.2011 to 06.30.2011. The market value of these warrants was R$ 47.01 on 06.30.2010 (R$ 58.50 on 12.31.2009 and 06.30.2009 in R$ 28.57). 25 – Income and Social Contribution Taxes a) Breakdown of income tax and social contribution expenses R$ Thousand Banco do Brasil 1S2010 BB-Consolidated 1S2009 1S2010 1S2009 Present values (2,071,689) (2,382,834) (2,899,248) (3,550,656) Income and social contribution taxes in Brazil (2,053,571) (2,374,696) (2,877,576) (3,540,743) (18,118) (8,138) (21,672) (9,913) (844,946) (398,138) (1,053,528) (551,247) (807) -- (82,549) (135,286) Income tax abroad Deferred tax liabilities Leasing Operations – Portfolio adjustment and accelerated depreciation 13,970 (35,019) (131,644) (48,980) Actuarial gains (696,633) (227,533) (696,633) (227,533) Restatement of litigation deposits (134,781) (122,322) (134,781) (122,322) (26,706) (13,195) (26,706) (13,195) 11 (69) 11 (3,931) -- -- 18,774 -- (2,916,635) (2,780,972) (3,952,776) (4,101,903) Income tax (1,824,934) (1,731,353) (2,546,511) (2,618,517) Social Contribution (1,091,701) (1,049,619) (1,406,265) (1,483,386) Deferred tax credits 846,688 3,468,830 1,237,997 3,724,059 878,769 3,358,561 1,208,576 3,502,017 41,364 -- 103,656 112,919 MTM losses (44,378) 125,814 (45,168) 124,669 Transactions Carried out on the Futures Market (29,067) (15,545) (29,067) (15,546) (2,069,947) 687,858 (2,714,779) (377,844) MTM gains Income abroad Transactions carried out on the futures market Time investments disposal Provision Temporary differences Income tax and social contribution losses Total Income Tax and Social Contribution 78 Notes to Financial Statements b) Reconciliation of income tax and social contribution expense R$ Thousand Banco do Brasil 1S2010 Earnings before taxation and profit sharing BB-Consolidated 1S2009 1S2010 1S2009 7,856,709 3,838,378 8,558,189 4,918,936 (1,967,574) (3,142,684) (1,535,351) (3,423,276) Interest on Own Capital 417,411 361,542 417,411 361,542 Equity in subsidiaries and associated 568,838 407,294 29,986 (266,519) Profit sharing 262,231 205,069 306,862 -- 1,213,177 (175,743) 36,127 (45,762) 70,764 (2,069,947) 687,858 (2,714,779) (377,844) Total charges of IR (25%) and CSLL (15%) Activation of Tax Credits (CSLL previous years) Other amounts Social contribution expense 210,766 1,213,177 c) Lawsuit: Interest on Own Capital Tax Benefit c.1) In February 1998, the Bank filed a request for full offsetting of accumulated income tax loss carry forwards and negative basis of social contribution against taxable income. Since then, the Bank has been fully offsetting tax loss carry forwards and negative basis of social contribution against income tax and social contribution and has made judicial deposits in the full amount due (70% of the amount offset). These deposits prompted the Federal District 16th Court to issue an order recognizing the suspension of chargeability of these taxes until final judgment of the Bank's request, based on article 151, item II, of the Tax Code. Since 10.1.2002, the proceedings have been awaiting hearing of an extraordinary appeal by the Federal Supreme Court. c.2) The offsetting of tax loss carry forward and recoverable CSLL has resulted in the write-off of deferred tax credits, observing the limitation of 30%. c.3) In compliance with the prohibition contained in CMN Resolution 3535/2008, succeeded by Resolution CMN n.º 3.823/2009, judicial deposits of the amount of R$ 12,082,682 thousand (principal plus interest) were not deducted from the corresponding provisions, with a negative impact on the Basel Index. c.4) Deferred taxes (including corporate income tax (IRPJ) and social contribution on net income (CSLL)) on the restatement of judicial deposits are being offset with the tax credits resulting from the provision related to that judicial deposit, in conformity with paragraph 1, item II, article 1 of CMN Resolution 3059/2002, with no impact on income. c.5) The hypothesis of a successful outcome to its lawsuit, we verified that in September 2005 and January 2009 the Bank would have consumed the entire stock of tax loss carry forward and recoverable social contribution, respectively, Therefore, since the accrual period of October 2005 and February 2009, the amount of Income Tax and Social Contribution are being paid in full. Additionally, there would be the transfer of funds from the account used to record judicial deposits to cash and cash equivalents, The tax credits related to judicial deposits (principal) would be written off against the provision for IRPJ and CSLL and the provision for tax risks related to the restatement of deposits, in the amount of R$ 3,671,306 thousand. c.6) If the Bank were unsuccessful in its lawsuit the amounts deposited judicially would be converted into income in favor of the National Treasury. The portions of IRPJ tax credits on tax loss carry forward that could be used since the accrual period of October 2005 and February 2009, observing the limitation of 30%, would be reclassified to the account representing "recoverable IRPJ" and “recoverable CSLL” assets. The recoverable IRPJ and CSLL that would result from the adjustments to the Economic-Tax Information Returns for Corporate Entities, corresponds to R$ 3,283,247 thousand as of June 2010 and its restatement using the Selic rate corresponds to R$ 416,257 thousand. This sum adjusts the provision for tax risks with respect to the updating of court deposits so that it will be sufficient to fully cancel the risk of a likely loss. 79 Notes to Financial Statements c.7) The amounts related to this matter are as follows: R$ Thousand 06.30.2010 12.31.2009 06.30.2009 12,082,682 11,752,804 11,409,884 7,817,011 7,817,011 6,557,456 4,265,671 3,935,793 4,852,428 6,585,045 6,585,045 6,585,045 3,002,033 3,002,033 3,002,033 3,583,012 3,583,012 3,583,012 Judicial Deposits Amount realized Restatement 70% thereof Income tax losses Negative basis of CSLL / Recoverable CSLL d) Judicial Proceeding: PIS/PASEP and COFINS Banco do Brasil and BB Corretora (wholly-owned subsidiary) filed a writ of mandamus in order to guarantee the right to collect the PIS/PASEP and COFINS according to the calculation basis provided for in Complementary Laws no. 7, of September 07, 1970, and no. 70, of December 30, 1991. The application thereof, as from March 2010, resulted in a reduction of disbursement of such taxes in the amount of R$ 515,533 thousand, being such amount provided for according to CVM Resolution no. 489, of October 03, 2005, item 10, and use of tax credits in order to cancel the tax effects upon corporate income. 26 – Tax credits a) Tax credits recorded as assets R$ Thousand Banco do Brasil 12.31.2009 1S2010 Balance Temporary differences Entries 06.30.2010 Write-offs Balance 06.30.2009 Book Value 16,246,460 1,428,405 (801,827) 16,873,038 14,315,722 Provision for doubtful accounts 7,357,817 268,733 (541,053) 7,085,497 6,842,911 Passive reserves 6,192,259 549,938 (118,860) 6,623,337 5,615,741 209,519 13,715 (140,225) 83,009 162,498 2,486,865 596,019 (1,689) 3,081,195 1,694,572 3,188,190 -- (221,146) 2,967,044 3,362,660 772,285 80,821 (329,188) 523,918 986,810 -- -- -- -- -- 20,206,935 1,509,226 (1,352,161) 20,364,000 18,665,192 10,886,269 923,527 (821,533) 10,988,263 9,931,428 9,298,545 584,106 (515,775) 9,366,876 8,716,859 Pasep 3,092 223 (2,076) 1,239 2,363 Cofins 19,029 1,370 (12,777) 7,622 14,542 Mark-to-market Other provisions CSLL Escriturada a 18% (MP 2.158/2001) Fiscal losses/ negative bases Excess Depreciation Total tax credits recorded Income Tax Social Contribution 80 Notes to Financial Statements R$ Thousand BB-Consolidated 12.31.2009 1S2010 Balance Temporary differences 06.30.2010 Entries 06.30.2009 Write-offs Balance Book Value 17,244,001 1,660,803 (828,698) 18,076,106 16,433,201 Provision for doubtful accounts 7,812,377 382,763 (554,782) 7,640,358 7,512,029 Passive reserves 6,341,708 561,815 (119,724) 6,783,799 6,901,674 254,607 14,105 (152,494) 116,218 185,961 2,835,309 702,120 (1,698) 3,535,731 1,833,537 Mark-to-market Other provisions CSLL Escriturada a 18% (MP 2.158/2001) 3,188,190 -- (221,146) 2,967,044 3,362,660 Fiscal losses/ negative bases 948,834 373,947 (333,131) 989,650 1,009,288 Excess Depreciation 528,776 55,711 (185,813) 398,674 247,945 21,909,801 2,090,461 (1,568,788) 22,431,474 21,053,094 12,127,634 1,278,742 (954,192) 12,452,184 11,562,112 9,755,169 810,075 (598,444) 9,966,800 9,471,370 Pasep 3,475 230 (1,959) 1,746 2,742 Cofins 23,523 1,414 (14,193) 10,744 16,870 Total tax credits recorded Income Tax Social Contribution Considering that some financial institutions have been going to court with individual lawsuits challenging the increase of the rate of CSLL and that the National Confederation of the Financial System - Consif filed a Direct Unconstitutionality Lawsuit - ADIN, the Banco do Brasil has been recognizing tax credits in a sum sufficient to annul, exclusively, the impact on income resulting from the increase of the rate (6%) on the CSLL tax liabilities (current and deferred).Banco do Brasil performed an assessment of the arguments employed by ADIN, concluding on the remote likelihood of success by Consif, for which reason the Bank posted an additional sum of CSLL tax credits in order to complete the increased 15% tax rate, totaling R$ 1,213,177 thousand. b) Tax credits not recorded R$ Thousand Banco do Brasil 06.30.2010 Tax credit abroad BB-Consolidated 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 216,598 108,345 120,272 216,598 108,345 120,272 Temporary differences -- -- -- 48,629 19,782 32,209 Fiscal losses/ negative bases -- -- -- -- 60,302 64,305 Mark-to-market losses -- -- -- -- -- 99 216,598 108,345 120,272 265,227 188,429 216,885 135,374 67,716 75,170 165,767 117,768 135,547 81,224 40,629 45,102 99,460 70,661 81,328 Pasep -- -- -- -- -- 1 Cofins -- -- -- -- -- 9 Total tax credits and the Pasep Cofins not Activated Income Tax Social Contribution 81 Notes to Financial Statements c) Deferred tax liabilities R$ Thousand Banco do Brasil 06.30.2010 Arising from unrecognized actuarial gains (1) BB-Consolidated 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 4,904,664 4,123,099 2,571,226 4,904,664 4,123,099 2,571,225 808 -- -- 826,196 635,040 305,727 Arising from restatement of judicial deposits 295,574 156,508 167,946 295,574 156,508 240,821 Arising from mark-to-market adjustments 126,034 179,243 242,081 144,394 191,916 260,965 26,706 -- 13,195 26,706 -- 13,195 3,530 3,827 6,053 4,243 3,834 13,256 30 113,702 91 30 113,950 628 -- 11 -- 241,606 205,058 61,164 Arising from leasing portfolio adjustments Arising from foreign profits Foreign branches Arising from futures market transactions Others Total deferred tax liabilities 5,357,346 4,576,390 3,000,592 6,443,413 5,429,405 3,466,981 Income Tax 2,872,197 2,497,476 1,579,488 3,534,005 2,972,537 1,981,199 Social Contribution 1,729,917 1,428,023 947,413 2,127,001 1,783,521 999,510 Pasep 105,570 90,985 66,215 109,369 94,124 67,973 Cofins 649,662 559,906 407,476 673,038 579,223 418,299 (1) The realization of deferred tax liabilities on actuarial gains is related to the achievement of the values of actuarial (Note 28). d) Estimates for the realization of tax credits recorded The value indicated below on the expectation of implementation of tax credits is based on technical study was prepared in 06.30.2010, and the present value determined based on the average rate of funding of Banco do Brasil. R$ Thousand In 2010 In 2011 In 2012 In 2013 In 2014 From 2015 Total tax credits Banco do Brasil Face Value Present Value 2,977,000 2,854,000 5,010,000 4,625,000 5,115,000 4,499,000 2,413,000 2,034,000 1,163,000 939,000 3,686,000 2,761,000 20,364,000 17,712,000 BB-Consolidated Face Value Present Value 3,227,243 3,093,856 5,369,316 4,955,892 5,591,117 4,914,557 2,618,530 2,202,319 1,266,007 1,017,658 4,359,261 3,260,443 22,431,474 19,444,725 During the first half of 2010, the realization of tax credits in Banco do Brasil was observed in the amount of R$ 3,272,701 thousand, corresponding to 90.93% of the forecast for use in 2010, reported in a technical study prepared as of 12.31.2009 (R$ 3,599,072 thousand). 82 Notes to Financial Statements e) Realization of Face Values of Credits The realization of face values of recorded tax credits, considering the re-composition of those written off over the course of the lawsuit (70%), based on a technical study carried out by the Banco do Brasil (as of 12.31.2009), is projected for 5,5 years, in the following proportions: R$ Thousand Banco do Brasil Tax loss /CSLL Intertemporal recoverable (1) Differences (2) In 2010 In 2011 In 2012 In 2013 In 2014 From 2015 23% 19% 22% 24% 12% -- 13% 26% 26% 9% 5% 21% BB-Consolidated Tax loss /CSLL Intertemporal recoverable (1) Differences (2) 23% 19% 22% 24% 12% -- 13% 26% 26% 9% 5% 21% (1) Projection of consumption associated with the capacity to generate taxable bases of IRPJ and CSLL in subsequent periods. (2) The consumption capacity results from the changes in the provisions (expectation of reversals, write-offs and uses). 27 – Related-party Transactions The costs of salaries and other benefits granted to key management personnel of the Banco do Brasil Group (Board of Directors, Executive Directors, Audit Committee and Fiscal Council) are listed as follows: R$ Thousand Short-term benefits Fees Executive Board Audit Committee Board of Directors Council Tax Profit sharing Other Benefits for termination of employment Total 1S2010 13,783 8,473 1S2009 11,106 7,581 7,542 700 126 6,842 528 115 105 3,718 1,592 96 3,280 245 -13,783 5,549 16,655 Banco do Brasil has no variable remuneration based on shares and other long-term benefits and does not offer post-employment benefits to its key management personnel except those that are part of the staff of the Bank, participating in the Pension Plan for Employees of the Banco do Brasil - Previ. Since January 2007, due to the accumulated surplus in the Plan of those officials, the Bank does not provide this benefit expenses (Note 28). The Bank does not grant loans to its officers or members of its Board of Directors, Audit Committee and Fiscal Council, because this practice is prohibited in all the financial institutions regulated by Banco Central do Brasil. The balances referring to transactions between the consolidated companies of Banco do Brasil are eliminated in the Consolidated Financial Statements. With respect to the majority shareholder, transactions with the National Treasury and with the agencies of the direct administration of the Federal government that maintain banking operations with the Bank, are included. 83 Notes to Financial Statements The Bank has only normal banking transactions with these related parties, such as interest bearing and noninterest bearing deposits, loans, and sale and repurchases transactions. There are also service provision and guarantee agreements. These transactions are conducted under normal market conditions, mainly under the terms and conditions for comparable transactions with unrelated parties, including interest rates and collateral. These transactions do not involve payment risks. The funds invested in government securities and federal funds for transfers and programs from the Official Institutions are listed as notes 8 and 18 respectively. The Bank sponsors the Bando do Brasil Foundation whose goals are the promotion, support, encouragement and sponsorship of actions at the educational, cultural, social, philanthropic, recreational / sports and promote research activities - scientific and technological assistance to urban communities - rural areas. In the 1st half of 2010, the Bank has made contributions to the Banco do Brasil Foundation in the amount of R$ 15,840 thousand (R$ 27,885 thousand in 1st half 2009). The information related to onlending and other transactions with other entities assisted are disclosed in Note 28. In the 1st half of 2010, the Bank of Brazil acquired portfolios of credit operations of Banco Votorantim, transferred joint obligations, totaling R$ 3,045,401 thousand. On 06.30.2010, the results were not made of transactions from R$ 194,470 thousand, net of tax effects. Summary of transactions with related parties The balances of the assets and liabilities of Banco do Brasil from transactions with related on 06.30.2010 and 06.30.2009 and their results in the first half of 2010 and 1st half of 2009 are as follows: R$ Thousand 06.30.2010 Controller (1) Subsidiaries (2) Jointly controlled subsidiaries (3) -- 16,953,980 152,717 -- -- 78,917 17,185,614 -1,138,644 --1,138,644 5,599 52,982 23,027 575,236 17,610,824 72,328 66,717 -84,303 376,065 41,166 --16,964 58,130 ------ -363,435 --442,352 119,093 1,621,778 23,027 676,503 19,626,015 722,460 --- 21,044 -4,183,748 2,402 -721,491 25,614 -112,829 778 1,019 5,152 767,939 -3,891,826 1,540,237 1,019 8,915,046 -- 885,027 1,291,999 51,288 -- 236,665 2,464,979 -- -- -- -- -- 20,624,630 20,624,630 -- -- -- -- -- 10,433,626 10,433,626 Borrowings 2,073,619 8,679,242 -- -- -- 612,707 11,365,568 Other Liabilities Total 2,796,079 1,346,459 15,115,520 46,553 2,062,445 -189,731 -6,949 18,039 36,585,432 1,411,051 56,756,156 86,227 1,519,107 Affiliates (4) Key management Personnel (5) Other Related Parties (6) Total Assets Interbank deposits Securities Loans Receivables Other Assets Total Liabilities Demand deposits Saving deposits Remunerated time deposits Obligations related to Committed Operations Borrowings and transfers - BNDES Borrowings and transfers FINAME STATEMENT OF INCOME Income from interest and services Expenses from raising funds Total Net 49,629 798,582 488,953 95,716 -- (65,709) (16,080) (275,383) 523,199 (147,342) 341,611 (4,310) 91,406 (641) (641) (1,060,373) (1,553,758) (974,146) (34,651) 84 Notes to Financial Statements R$ Thousand 06.30.2009 Controller (1) Subsidiaries (2) Jointly controlled subsidiaries (3) -- 14,661,153 -- -- -- 7 14,661,160 -1,498,539 --1,498,539 2,697 123,801 22,105 2,155,178 16,964,934 ---86,857 86,857 ---61,049 61,049 ------ -254,706 --254,713 2,697 1,877,046 22,105 2,207,788 18,770,796 572,699 -- 134,863 -- 676 -- 9,509 -- 1,171 1,575 1,103,926 -- 1,818,172 1,575 -- 2,417,841 78,485 209,530 5,221 4,599,567 7,126,704 -- 903,328 -- -- -- 4,606,173 5,509,501 -- -- -- -- -- 11,085,088 11,085,088 -- -- -- -- -- 6,938,214 6,938,214 3,574,418 -4,147,117 8,388,128 1,599,259 13,443,419 --79,161 --219,039 --7,967 764,892 19,248 29,117,108 12,727,438 1,618,507 46,825,199 64,768 664,053 135,426 73,885 -- 102,423 882,657 (90,902) (26,134) (135,521) 528,532 (8,384) 127,042 (11,186) 62,699 (728) (728) (1,033,982) (931,559) (1,267,637) (384,980) Affiliates (4) Key management (5) Personnel Other Related (6) Parties Total Assets Interbank deposits Securities Loans Receivables Other Assets Total Liabilities Demand deposits Saving deposits Remunerated time deposits Obligations related to Committed Operations Borrowings and transfers BNDES Borrowings and transfers FINAME Borrowings Other Liabilities Total STATEMENT OF INCOME Income from interest and services Expenses from raising funds Total Net (1) National Treasury and agencies of the direct administration of the Federal Government. (2) They include related companies Note 3 as identified in item (1) ,(2) and (4). (3) They include related companies Note 3 as identified in item (3), (6) and (7). (4) They include related companies Note 3 as identified in item (5). (5) Key Personnel Administration - Audit Committee, Audit Committee, Board of Directors, Executive Directors and Auditor General. (6) They include private and public companies controlled by the Federal Government, entities linked to employees (Caixa de Previdência dos Funcionários do Banco do Brasil - Previ, Fundação Codesc de Seguridade Social - Fusesc, Caixa de Assistência dos Funcionários do Banco do Brasil) and Fundação Banco do Brasil - FBB. 85 Notes to Financial Statements 28 – Employee Benefits Banco do Brasil sponsors the following private pension and complementary health plan entities that provide for complementation of retirement and healthcare benefits for its employees: Sponsored entities Plans Benefits Previ Futuro PREVI - Caixa de Previdência dos Funcionários do Banco do Brasil CASSI - Caixa de Assistência dos Funcionários do Banco do Brasil ECONOMUS – Instituto de Seguridade Social Retirement and Pension Benefit Plan 1 Retirement and Pension Informal Plan Retirement and Pension Plan of Members Health Care Prevmais Retirement and Pension General Regulation Retirement and Pension Supplementary Regulations 1 Retirement and Pension Unified Health Plan – PLUS Health Care Unified Health Plan – PLUS II Health Care Supplementary Health Care Plan Health Care PAMC FUSESC - Fundação Codesc de Seguridade Social Multifuturo I Retirement and Pension Benefit Plan 1 Retirement and Pension SIM - A fund for assistance for BESC, Codesc, Badesc and Fusesc Health Care Plan employees Health Care PREVBEP – Caixa de Previdência Social Retirement and Pension Plano BEP We demonstrate below the number of participants covered by benefit plans sponsored by the Bank: 06.30.2010 Plans 12.31.2009 Number of Participants 06.30.2009 Number of Participants Number of Participants Actives Retirees Total Actives Retirees Total Actives Retirees Total Retirement and Pension Plans 101,667 103,382 205,049 100,447 100,508 200,955 98,424 100,738 199,162 Plan participants Plano 1 33,182 82,281 115,463 33,814 82,536 116,350 34,320 82,774 117,094 Plan participants Previ Futuro 55,563 325 55,888 51,923 73 51,996 49,519 -- 49,519 Other Plans 12,922 20,776 33,698 14,710 17,899 32,609 14,585 17,964 32,549 Medical Plans 103,782 81,731 185,513 98,262 81,359 179,621 97,157 81,253 178,410 Cassi Plani 94,867 81,731 176,598 91,364 81,359 172,723 90,273 81,253 171,526 Other Plans 8,915 -- 8,915 6,898 -- 6,898 6,884 -- 6,884 The bank's contributions to benefit plans during the period were as follows: Sponsors’ contributions Retirement and Pension Plans Plan participants 1 Plan participants Previ Futuro Other Plans Plano Informal Medical Plans Cassi Plani Other Plans Total 1S2010 1S2009 252,130 -- 240,841 -- 78,144 141,556 32,430 63,351 141,202 36,288 355,627 339,015 16,612 330,829 318,112 12,717 607,757 571,670 86 Notes to Financial Statements The Bank's contributions to benefit plans during the second half of 2010 are estimated at R$ 576,216 thousand. The values recognized in earnings during the period were as follows: R$ Thousand Specification 1S2010 1S2009 1,365,801 1,826,515 (69,405) 371,718 596,572 (56,906) Plano Informal Other Plans Medical Plans (350,763) (40,546) (456,421) (127,951) (39,997) (466,847) Plan Cassi Other Plans Total (439,809) (16,612) 909,380 (422,143) (44,704) (95,129) Retirement and Pension Plans Benefit Plan 1 (PREVI) Previ Future Plan a) Supplementary retirement and pension plans Previ Futuro (Previ) - defined contribution plan. Participate in this plan the Bank's employees hired as from December 24, 1997. The active participants contribute to PREVI an amount between 7% and 17% of their contribution salary, which varies based on time of service and the amount of the contribution salary. There is no contribution for retired participants. The sponsor contributes an amount equal to the contributions of the participants, limited to 14% of the total contribution payroll of these participants. The retirement benefit for this group is characterized as a defined contribution. Previ Benefit Plan "I" – defined benefit plan. The participants of that plan are the Bank employees who enrolled in it up to December 23, 1997. Plan closed for new applicants. Due to the establishment of parity between Bank's and participants' contributions, in December 2000, a parity fund was set up, and its resources are being used for the purpose of offsetting contributions to the plan. The Bank had, recorded in Assets, the amount of R$ 1,860,574 thousand on June 30, 2010 (R$ 1,778,366 thousand on December 31, 2009 and R$ 2,299,864 thousand on June 30, 2009) related to that fund. Besides, due to the accumulated surplus, the contributions of participants, beneficiaries (retirees and pensioners) and of the sponsor (Banco do Brasil) were suspended, retroactive to January 2007. This measure will be evaluated every twelve months, with its maintenance bound to the existence of the Special Reserve of Benefit Plan. The suspension will continue maintained up to December 2010. Informal Plan (Previ) - defined benefit plan. The sole responsibility of the Bank of Brazil whose contractual obligations include (a) retirement pensions to founder participants and pension payments to survivors of participants deceased up to April 14, 1967; (b) payment of retirement supplements to the other participants employed by Banco do Brasil who retired up to April 14, 1967 or who, on that date, would have the right through length of service to retire and who had at least 20 years of effective service with the Bank; and (c) increase in the amount of retirement benefits and of pensions in addition to that provided for in the Benefit Plan of Previ, resulting from judicial decisions and from administrative decisions on account of restructuring of the job and salary plan and of incentives created by the Bank. Prevmais (Economus) – defined contribution plan. The participants of that plan are the employees from Banco Nossa Caixa (merged into Banco do Brasil on November 30, 2009) enrolled after August 1, 2006, and the participants previously linked to the General Regulation Benefit Plan who opted for the distribution of their vested account balances. The funding for income benefits is equally provided by employees and employer, not exceeding 8% of the participants' salary. The plan also provides risk benefits, such as complementation of sickness aid, workers' compensation, disability benefits and death pension. General Regulation (Economus) – defined benefit plan. The participants of that plan are the employees from Banco Nossa Caixa enrolled in it up to July 31, 2006. Plan closed for new applicants. Employees and the sponsor contribute equally, in average, with 12.11% of participation salary. 87 Notes to Financial Statements Supplementary Regulation 1 (Economus) - also for officials coming from Banco Nossa Caixa. Offers the benefits of supplemental sickness benefit and annuity for death and disability. The cost of the plan is the responsibility of the sponsor, participants and assisted. The sponsor's contribution focuses on real salary to participate in equal numbers with participants. Multifuturo I (Fusesc) – defined contribution plan. The participants of that plan are the employees from Banco do Estado de Santa Catarina - BESC (merged into Banco do Brasil on September 9, 2008) enrolled after January 12, 2003 and the employees previously linked to Fusesc's Benefit Plan 1 who opted for this benefit plan. Employees and sponsor equally contribute from 2.33% to 7% of participation salary to that plan, as determined by each participant. Benefit Plan 1 (Fusesc) – defined benefit plan. The participants of that plan are the employees from BESC enrolled up to January 11, 2003. Plan closed for new applicants. Employees and the sponsor contribute equally, in average, with 9.89% of participation salary. Plano BEP (Prevbep) – defined benefit plan. Other participants of that plan are the employees from Banco do Estado de Piauí - BEP (merged in to Banco do Brasil on November 30, 2008). Employees and the sponsor contribute equally, with 3.58% in average of participation salary. In defined-contribution plans, the actuarial risk and the investment risk are borne by the plan participants. Accordingly, cost accounting is based on each period's contribution amount representing the sponsor's obligation. Consequently, no actuarial calculation is required when measuring the obligation or expense, and there are neither actuarial gains nor losses. In defined benefit plans, the actuarial risk and the investment risk the actuarial risk and the investment risk fall either partially or fully on the sponsoring entity. Accordingly, cost accounting requires the measurement of plan obligations and expenses, with a possibility of actuarial gains and losses. b) Medical Assistance Plans Plan Associates (Cassi) - the Bank is the sponsor of a Health Plan managed by CASSI that the main objective is to provide coverage for expenses related to the promotion, protection, recovery and rehabilitation of a member's health and of his/her enrolled beneficiaries. Each month the Bank contributed a sum equivalent to 4.5p.p. of the total payroll or of the total retirement or pension plan benefit. Monthly contributions from members and pension beneficiaries amount to 3% of the total payroll or the total retirement or pension plan benefits. Plano Unificado de Saúde - PLUS (Economus) - the participants of this plan are the employees from Banco Nossa Caixa. Participation in this plan takes place by means of a 1.5% (one and one-half percent) contribution of gross salary, without limitation, covering the owner and his/her preferred dependants, deducted from the owner's payroll and 10% (ten percent) as a co-participation in the price of each medical visit and low-cost exams, made by the owner and his/her dependants (preferred and non-preferred). Plano Unificado de Saúde - PLUS II (Economus) - also for employees from Banco Nossa Caixa. Participation in this plan takes place by means of a 1.5% (one and one-half percent) contribution of gross salary, without limitation, covering the owner and his/her preferred dependants, deducted from the owner's payroll and 10% (ten percent) as a co-participation in the price of each medical visit and low-cost exams, made by the owner and his/her preferred dependants and children of age. The plan does not provide for non-preferred dependants. Supplementary Health Care Plan – PAMC (Economus): for employees from Banco Nossa Caixa stationed in the State of São Paulo. Plan owners are those employees retired due to disability in Groups "B" and "C", and their dependants, who participate in costs inasmuch as they use it, and according to the salary range progressive table. 88 Notes to Financial Statements SIM Health Plan - the participants of this plan are the employees from Banco do Estado de Santa Catarina. Monthly contributions from members amount to 3% of the total payroll. Since the contributions to be paid by the Bank in some cases will endure after the employee's retirement, the Bank's obligations related to retired employees are evaluated by the present actuarial value of the contributions to be paid over the expected period when plan participants and beneficiaries will be linked to the plan. In addition, the Bank is also responsible for maintaining the financial balance of the plan for certain groups of participants. Said obligations are evaluated and recognized under the same criteria used for defined benefit plans. c) Policy for the recognition of actuarial gains and losses The actuarial gains or losses recognized balance sheet of the as income or expenses in a defined benefit plan are the amount of unrecognized gains and losses that exceed, in each period, the higher of the following limits: (1) 10% of the present value of the total actuarial liability of the defined benefit; or (2) 10% of the fair value of the plan’s assets. Each plan's actuarial gains and losses are recognized over the average remaining working time estimated for participating employees. The Bank, as permitted by CVM No. 371/2000, subsequently succeeded by CVM No. 600/2009, adopted the a fastest procedure of recognizing the gains / actuarial losses in the very year in which the actuarial valuation was carried out . By recognizing actuarial gains, the bank checks for unrecognized actuarial losses, up the aisle, in other post-employment plans. There are no such losses, the amount to be amortized in the outcome of the Bank shall be the greater of a) the amount of unrecognized actuarial losses above the corridor to the value of actuarial gain recognized on another plane and b) the actuarial loss in accordance with established described in previous sections. d) Actuarial evaluation Shown below are the reconciliations of opening and closing balances of defined benefit obligations and fair value of the corresponding assets of retirement and healthcare plans, based on actuarial valuations conducted on June 30, 2010, December 31, 2009 and December 31, 2008, as well as the effect of actuarial assets and liabilities on the balance sheets and other relevant information. From 06.30.2010, the periodicity of the evaluations became semiannual, and no longer annual as occurred until 12.31.2009. 89 Notes to Financial Statements Changes in present value of defined benefit obligations are as follows: R$ Thousand Plan Associates (Cassi) Plan 1 (Previ) Present value of actuarial liabilities Others Plans 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 (80,270,786) (76,109,636) (70,572,791) (4,943,220) (4,677,766) (4,547,868) (6,139,359) (5,140,992) (5,342,840) (4,123,612) (8,076,071) (7,420,834) (275,676) (541,968) (482,259) (319,531) (592,164) (575,483) Current service cost (222,587) (409,344) (335,702) (33,269) (61,463) (37,667) (20,334) (36,321) (84,418) Benefits paid net contributions retirees 3,159,981 7,166,391 7,561,454 167,780 351,951 334,413 313,958 576,550 485,530 -- 35,831 33,221 -- -- -- -- -- -- (1,548,440) (2,877,957) (5,374,984) 34,900 (13,974) 55,615 (408,731) (956,165) 258,210 Closing Balance (83,005,444) (80,270,786) (76,109,636) (5,049,485) (4,943,220) (4,677,766) (6,573,997) (6,149,092) (5,259,001) Present value of actuarial liabilities to cover (83,005,444) (80,270,786) (76,109,636) -- -- -- (4,058,870) (3,866,688) (3,717,835) -- -- -- (5,049,485) (4,943,220) (4,677,766) (2,515,127) (2,282,404) (1,541,166) Opening Balance Interest cost Administrative Expenses paid by plan Actuarial gain / (loss) on actuarial obligation Present value of actuarial liabilities The changes in fair value of plan assets are as follows: R$ Thousand Plan Associates (Cassi) Plan 1 (Previ) Fair value of the plan’s assets Opening Balance Estimated yield on plan assets Contributions received Benefits paid net contributions retirees Administrative Expenses paid by plan Others Plans 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 137,814,150 104,778,828 128,884,712 -- -- -- 3,852,533 3,619,708 3,486,025 7,220,769 10,871,704 13,841,349 -- -- -- 285,277 529,979 569,163 27,857 638,380 (269,749) 339,015 351,951 334,413 174,433 364,384 408,626 (3,159,981) (7,166,392) (7,561,453) (339,015) (351,951) (334,413) (294,487) (533,162) (487,307) -- (35,831) (33,222) -- -- -- -- -- -- Gain / (loss) on actuarial plan assets (11,739,294) 28,727,461 (30,082,809) -- -- -- 41,114 (114,221) (258,672) Closing Balance 130,163,501 137,814,150 104,778,828 -- -- -- 4,058,870 3,866,688 3,717,835 90 Notes to Financial Statements The amounts recognized in the balance sheet are as follows: R$ Thousand Plan Associates (Cassi) Plan 1 (Previ) Amounts recognized in the Balance Sheet 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 Others Plans 06.30.2009 06.30.2010 12.31.2009 06.30.2009 1) Fair value of the plan’s assets 130,163,501 137,814,150 104,778,828 -- -- -- 4,058,870 3,866,688 3,717,835 2) Present value of actuarial liabilities (83,005,444) (80,270,786) (76,109,636) (5,049,485) (4,943,220) (4,677,766) (6,573,997) (6,149,092) (5,259,001) 47,158,057 57,543,364 28,669,192 (5,049,485) (4,943,220) (4,677,766) (2,515,127) (2,282,404) (1,541,166) 9,069,311 16,116,336 5,924,173 (545,909) (481,750) (330,307) (247,253) (196,063) 72,766 -- -- -- -- (104,015) (104,015) -- -- -- 6) Amount not recognized as assets / (liabilities) 23,579,028 28,771,682 14,334,596 -- -- -- (13,357) (70,029) 321,652 7) Net actuarial (liability) / asset (3-4-5-6) 14,509,718 12,655,346 8,410,423 (4,503,576) (4,357,455) (4,243,444) (2,254,518) (2,016,312) (1,935,583) 3) Surplus / (deficit) (1+2) 4) Unrecognized actuarial gains or (losses) 5) Service cost not recognized The actuarial assets recorded in other receivables (Note 11.b) must be realized before the end of the plan. The end of the plan is understood as the date in which the last commitment will be paid. Partial realizations of that actuarial asset may occur, as long as compliant with the requirements in Complementary Law 109/2001 and Resolution 26/2008 issued by the Complementary Pension Management Council (CGPC). The amounts recognized in income are as follows: R$ Thousand Plan Associates (Cassi) Plan 1 (Previ) Effects on the results for the period Others Plans 1S2010 1S2009 1S2010 1S2009 1S2010 1S2009 (111,293) (102,336) (33,269) (30,732) (9,793) (15,262) -- -- -- -- 15,462 12,834 (2,061,806) (2,019,018) (275,676) (270,984) (220,899) (288,274) 3,610,384 2,717,926 -- -- 108,226 242,503 389,230 -- -- -- (306,175) (31,497) 6) Unrecognized past service cost -- -- (4,956) (4,956) (863) -- 7) Expense with active employees -- -- -- (100,107) -- -- 8) Expenses with extraordinary contribution -- -- -- (27,520) -- -- 9) Effect of passive asset not recognized 10) (Expense)/income recognized in Income -- -- -- -- (15,460) (95,255) 1,826,515 596,572 (313,901) (434,299) (429,502) (174,951) 1) Cost of current service 2) Contributions from participants 3) Interest cost 4) Expected earnings on the plan’s assets 5) Amortization of gains or (losses) actuarial Statement of 91 Notes to Financial Statements Provided below is the composition of the plans' assets, shown as a percentage of the total: Plan Associates (Cassi) Plan 1 (Previ) Breakdown of Assets Others Plans 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Fixed Rate 32.8% 30.7% 37.0% -- -- -- 91.6% 83.0% 87.8% Floating Rate 61.2% 63.8% 57.4% -- -- -- 4.6% 10.0% 5.2% Real estate investments 3.2% 2.8% 2.8% -- -- -- 1.2% 1.7% 1.7% Loans and financing 2.8% 2.6% 2.7% -- -- -- 1.3% 2.1% 2.3% -- 0.1% 0.1% -- -- -- 1.3% 3.2% 3.0% In their own financial instruments of the entity 5.4% 6.8% 6.8% -- -- -- -- -- -- In properties or other assets used by the entity 0.1% 0.1% 0.1% -- -- -- 0.1% 0.1% 0.1% Other Amounts listed in fair value of plan assets Provided below is a comparative table showing expected and actual return from plan assets: Plan Associates (Cassi) Plan 1 (Previ) Specification 06.30.2010 Real expected yield on plan assets Real expected yield on assets for the year Effective yield 12.31.2009 06.30.2009 06.30.2010 12.31.2009 Others Plans 06.30.2009 06.30.2010 12.31.2009 06.30.2009 5.2% 10.8% 11.2% - - - 7.1% 14.6% 16.3% 7,220,769 10,871,704 13,841,349 -- -- -- 278,305 523,007 562,182 (4,518,525) 39,599,165 (16,241,461) -- -- -- 315,321 394,377 267,396 The main actuarial assumptions in the final period of the report: Plan Associates (Cassi) Plan 1 (Previ) Actuarial assumptions 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 Others Plans 06.30.2009 06.30.2010 12.31.2009 06.30.2009 Inflation rate 4.20% 4.20% 4.59% 4.20% 4.20% 4.59% 4.88% 4.90% 5.76% Discount rate 10.76% 10.76% 11.18% 10.76% 10.76% 11.18% 12.92% 13.08% 13.21% Return rate of investments 10.76% 10.76% 11.18% 10.76% 10.76% 11.18% 7.49% 14.63% 16.35% Rate of future salary growth 1.26% 1.26% 1.26% 1.26% 1.26% 1.26% 2.74% 2.75% 3.44% 3.79 4.04 5.85 12.42 14.14 14.22 2.70 3.16 3.20 Average remaining work period (years) Survival table Capitalization regime AT-83 AT-83 Crédito Unitário Projetado Crédito Unitário Projetado (2) AT-83 Crédito Unitário Projetado (1) Grouped actuarial assumptions are expressed as weighted averages. 92 Notes to Financial Statements (2) To the actuarial calculations of the Informal Plan at 12.31.2009 and 12.31.2008 a transitory table between GAM-71 modified and GAM-83 is used for the Informal Plan. The plans managed by FUSESC PREVBEP use the AT-2000 table in actuarial valuations. 93 Notes to Financial Statements The Bank, to define the values for the defined benefit plans, uses methods and assumptions different from those submitted by entities sponsored. The most significant differences are concentrated on the definition of the figures relating to plans administered by Previ, as follows: Assumptions / method PREVI Bank Discount rate 5.5% p.a. 6.3% p.a. Lists of survival AT-2000 AT-83 Discounted cash flow conservative scenario Aggregate Method Market value or discounted cash flow - the base scenario Projected credit unit Evaluation of Assets - Funds exclusive Capitalization Regime The actuarial values for the current period and previous four periods are as follows: R$ Thousand Specification 2010 Plan 1 (Previ) - Surplus (deficit) 2009 2008 2007 2006 49,393,498 57,543,364 28,669,191 64,229,505 37,481,696 Defined benefit obligation (84,315,887) (80,270,786) (76,109,637) (70,572,791) (65,870,816) Plan assets 103,352,512 133,709,385 137,814,150 104,778,828 134,802,296 Adjustment of experience on the plan liabilities (1.9%) (3.6%) (7.1%) (3.2%) (9.7%) Adjustment experience on plan assets (9.0%) 20.8% (28.7%) (18.7%) (17.3%) Plan Associates (Cassi) - Surplus (deficit) Defined benefit obligation (5,190,326) (4,943,220) (4,677,766) (4,547,868) (3,562,867) (5,190,326) (4,943,220) (4,677,766) (4,547,868) (3,562,867) -- -- -- -- -- 0.7% (0.3%) 0.1% 8.8% 0.0% Plan assets Adjustment of experience on the plan liabilities Adjustment experience on plan assets Other Plans - Surplus (deficit) Defined benefit obligation Plan assets Adjustment of experience on the plan liabilities Adjustment experience on plan assets -- -- -- -- -- (2,601,037) (2,286,826) (1,683,141) (1,666,065) (1,633,840) (6,994,220) (6,349,717) (2,127,402) (1,666,065) (1,633,840) 4,393,183 4,062,891 444,261 -- -- (5.5%) (14.0%) (9.3%) (9.6%) (12.1%) 4.0% (2.4%) -- -- -- Overview of asset / liability actuarial recorded in the Bank: R$ Thousand Actuarial Assets Actuarial Liability Specification 06.30.2010 12.31.2009 06.30.2009 Plan 1 (Previ) 14,509,718 12,655,346 8,410,423 -- -- -- -- -- -- (1,778,254) (1,569,047) (1,552,557) Plan Associates (Cassi) -- -- -- (4,503,576) (4,357,455) (4,243,444) Supplementary Regulation 1 (Economus) -- -- -- (218,691) (204,320) (185,240) PLUS I and II (Economus) -- -- -- (257,573) (242,945) (197,786) 14,509,718 12,655,346 8,410,423 (6,758,094) (6,373,767) (6,179,027) Informal Plan (Previ) Total 06.30.2010 12.31.2009 06.30.2009 e) Contributive Proportion - sponsors' right - CGPC Resolution no. 26/2008 Resolution CVM 600/2009, determines the recording of a liability when the sum of obligations exceeds the amount of assets from the benefit plan, and of an asset, when the sum of assets exceeds the amount of obligations of the plan. In the latter circumstance, the asset should only be recorded when there is evidence that it may effectively reduce the sponsor's contributions or that it will be reimbursable in the future, as established in aforesaid Resolution. Resolution CGPC 26/2008 served to throw light on issues related to the interpretation of the right of sponsors and of participants to the surplus resources originating from the contributions (and their yields) of both parties. According to that Resolution, the surplus should be assigned to the sponsors and participants in proportion to the contributions made. 94 Notes to Financial Statements Certain trade associations and other associations filed lawsuits challenging the legality of CGCP Resolution 26/2008, Bank management, based on the opinion of its legal advisors, understands that CGCP Resolution 26/2008 is of a legitimate nature, and that the Judiciary will conciliate the understanding with respect to the right and form of division of the surplus as defined in the abovementioned resolution. In view of the various lawsuits filed in relation to CGPC Resolution 26/2008, Banco do Brasil understands that although this norm has thrown light on some issues previously under discussion, especially as regards the amounts to be assigned to the sponsors and participants in the event of existence of a surplus in the supplementary pension entities, this Resolution does not change the definitions existing in the current regulations and, therefore, does not have effects on the need for records of the actuarial assets and liabilities required by public institutions. As regards the actuarial losses of the Health Care Plan, these are part of the sum that the Bank is required to record in its liabilities, corresponding to the future contributions of all the employees according to the stage of their retirement. The accrual basis requires that these expenses are recorded while the employees are still active, even if the payments are made monthly, in the future. The Bank has already been appropriating these losses since 2001, according to the CVM No. 371/2000, subsequently succeeded by Resolution No 600/2009. Since the aforementioned Resolution enables quicker recognition of these losses, the Bank opted to do it in this manner. 29 – Commitments, Responsibilities and Contingencies a) Contingent tax assets The Bank is an active part in proceedings to restore indebts tax and prevent the launch of tax credits by tax authorities, recognized in the financial statements only on the assumption favorable to the Bank (not counted), according Resolution CVM 3823/2009, It is the actions of most relevance: - Unconstitutionality of Income Tax on Net Income paid in 1989 and in the 1st semester of 1992, in the amount of R$ 13,274 thousand (R$ 13,101 thousand on 12.31.2009 and R$ 12,816 thousand on 06.30.2009); - Tax on Financial Transactions (IOF) - Law 8033/1990 (Price-level restatement), in the amount of R$ 206,101 thousand (R$ 203,470 thousand on 12.31.2009 and R$ 199,131 thousand on 06.30.2009). b) Contingent liabilities Labor Lawsuits The Bank is a party to labor lawsuits mainly filed by former employees or trade unions of the banking industry. The provisions for probable losses account for various applications demanded as compensation, overtime, mischaracterization of the working day, additional function and representation and others. Tax Lawsuits The Bank is subject to a number of challenges by the tax authorities with respect to taxes, which can give rise to assessments regarding the jurisdiction where taxes are incurred or the sum of taxable income or deductible expenses, Most of the lawsuits originating from tax assessment notices are related to ISSQN (service tax), CPMF, CSLL, IRPJ and IOF, and, some are guaranteed by cash or real estate properties. Civil Lawsuits The most significant lawsuits classified as probable losses are those aimed at the collection of the difference between the actual rates of inflation suffered and the rate used for inflation correction of financial investments during the period of the various economic Plans (Collor Plan, Bresser Plan and Summer Plan). 95 Notes to Financial Statements With the proximity of the prescriptive periods for bringing actions seeking the recovery of values based on inflation rates away by these economic plans, there was an increase in the volume of lawsuits filed. Actions whose success by adverse parties are considered probable are properly provisioned. The indices are expected questioned by law that regulated the time the Federal Government's economic policy. With the prescription that occurred, there is potential liability to be considered representative. In this regard, there is action pending trial in the Supreme Court (STF) - ADPF/165: complaint of breach of fundamental precept - authored by the National Confederation of Financial System (Consif), with the aim of declaring the constitutionality of legislation that established the economic plans. The changes in the provision for civil, tax and labor claims classified as probable were as follows: Banco do Brasil BB-Consolidated 1S2010 1S2009 1S2010 1S2009 Labor claims Opening balance Formation Reversal of the provision Monetary restatement Write off due payment (1) Amount added / embedded Closing balance 3,242,208 412,657 (739,824) 94,208 (273,314) 388 2,736,323 2,456,461 1,085,663 (342,965) 105,536 (250,656) -3,054,039 3,300,748 424,404 (742,089) 94,568 (273,317) -2,804,314 2,475,231 1,151,644 (363,696) 105,558 (262,898) 973,587 4,079,426 Tax demands Opening balance Formation Reversal of the provision Monetary restatement Written off due payment (1) Amount added / embedded Closing balance 174,696 27,935 (9,076) 5,784 (444) -198,895 122,456 76,281 (9,339) (1,187) (113) -188,098 -- 1,138,706 71,868 (9,571) 22,863 (1,899) -1,221,967 1,004,031 163,641 (36,302) 9,259 (285) 284,500 1,424,844 -- 3,036,381 571,088 (387,356) 121,973 (139,840) 1,799 3,204,045 1,719,947 853,098 (28,322) (20,605) (51,757) -2,472,361 3,131,472 660,600 (410,884) 124,333 (151,681) -3,353,840 1,760,175 1,083,309 (76,033) (16,718) (80,375) 1,136,072 3,806,430 6,139,263 5,714,498 7,380,121 9,310,700 Civil claims Opening balance Formation Reversal of the provision Monetary restatement Write off due payment Amount added / embedded Closing balance (1) Total Labor Demand, Taxation and Civil (1) Refers to the balance of the Banco Popular do Brasil , Bescleasing and Bescredi, incorporated in 2010, and Banco Nossa Caixa, acquired in March 2009 and incorporated in November 2009. c) Contingent liabilities – Possible Labor Lawsuits The lawsuits risk classified "possible" are exempted from any provisions on the Resolution CVM No. 3823/2009, representing various applications demanded as compensation for overtime, distortion of the working day , Additional Function and Representation, and others. 96 Notes to Financial Statements Tax Lawsuits The tax lawsuits considered as possible risk are exempt from the formation of provisions and represent a number of claims made such as: ISSQN (service tax), collection and other tax obligations originating from the Federal Revenue Department and Institute of Social Security. The main contingencies originate from: - Notices of labor infraction drawn by the National Institute of Social Security (INSS), aiming at the payment of contributions applicable on year-end bonuses paid in the collective agreements in the period from 1995 to 2006, in the amount of R$ 1,069,992 thousand, public transport pay and use of private car by employees of Banco do Brasil, in the amount of R$ 147,358 thousand, conversions into cash, for the period from January 1993 to April 2001, in the amount of R$ 110,481 thousand and employee profit sharing corresponding to the period from April 2001 to October 2003, in the amount of R$ 24,526 thousand. - Notices of tax assessment drawn by the Treasuries of the Municipalities, aiming at the collection of ISSQN, which amounts R$ 192,789 thousand. Civil Lawsuits In civil lawsuits there are actions that seek to recover the difference between inflation and the index used to restate financial investments during the period of economic plans (Collor Plan, Bresser Plan and Summer Plan). The balances of contingent liabilities classified as possible were as follows: R$ Thousand Banco do Brasil 06.30.2010 BB-Consolidated 06.30.2009 06.30.2010 06.30.2009 73,295 243,324 75,632 324,053 Tax Claims 2,022,057 2,082,196 2,631,124 2,188,368 Civil Claim Total 2,452,110 3,377,509 2,504,772 3,493,841 4,547,462 5,703,029 5,211,528 6,006,262 Labor claims d) Deposits in Guarantee of Funds The balances of deposits in guarantee recorded for probable, possible and / or remote contingencies are as follows: R$ Thousand Banco do Brasil BB-Consolidated 06.30.2010 06.30.2009 06.30.2010 06.30.2009 Labor claims 2,406,001 1,711,929 2,423,641 2,213,792 Tax Claims 4,081,010 3,164,686 5,135,663 4,470,459 Civil Claim Total 2,537,443 1,350,548 2,581,736 2,228,837 9,024,454 6,227,163 10,141,040 8,913,088 e) Legal Obligations The Bank has recorded in Other Liabilities - Tax and Social Security, the following provisions: - Provision for legal proceedings to full compensation of tax losses and income tax bases of negative social contribution (Note 25.c), whose liability for the tax credit is suspended by the court deposits since the beginning of action, in the amount of R$ 11,502,534 thousand (R$ 11,245,230 thousand on 12.31. 2009 and R$ 10,981,334 thousand at 06.30.2009). - Provision for legal proceedings arising from an injunction by which it is intended to recognize the right of the Bando do Brasil and BB Seguros collect the PIS / PASEP COFINS and according to the bases of calculation 97 Notes to Financial Statements provided in Complementary Law No. 7 of September 7, 1970 and No. 70 dated December 30, 1991 (Note 25.d), amounting to R$ 515,533 thousand. 30 – Risk Management and Regulatory Capital a) Risk Management Process Banco do Brasil considers the management of risks and of capital the main vectors for the decision-making process. In the Banco do Brasil, collegiate risk management is performed completely apart from the business units. Risk and concentration policies are specified by the Bank's Board of Directors and by the Global Risk Committee (CRG), which is a discussion group composed by the President and by Vice-Presidents. Actions for implementing and monitoring guidelines issued by the CRG are directed at specific sub-committees (Credit, Market, and Operations), which are groups formed by Directors. To find out more about the risk management process at Banco do Brasil, access the website bb.com.br/ri. b) Credit Risk Credit Risk is associated with the possibility of loss resulting from uncertainty regarding the receipt of amounts agreed on with borrowers, counterparts of contracts or issues of securities. For alignment with the best practices of credit risk management and to increase efficiency in the management of its economic capital, Banco do Brasil uses risk and return metrics as instruments for dissemination of the culture at the Institution, present throughout its loan process. c) Market Risk Market Risk reflects the possibility of loss that can be caused by changes in the behavior of interest and exchange rates and of prices of shares and commodities. 98 Notes to Financial Statements Financial Instruments – Market Value The table below presents the financial instruments recorded in assets, compared to fair value: R$ Thousand BB-Consolidated 06.30.2010 Book value 12.31.2009 Book value Fair Value 06.30.2009 Book value Fair Value Unrealized gain/loss, net of tax effects On Income On Stockholders´ Equity Fair Value 06.30.2010 12.31.2009 06.30.2009 06.30.2010 12.31.2009 06.30.2009 ASSETS Short-term interbank deposits 132,542,665 132,686,485 168,397,960 168,377,532 132,437,901 132,392,752 143,820 (20,428) (45,149) 143,820 (20,428) (45,149) Securities 131,032,385 130,902,147 122,873,797 122,714,673 108,782,993 109,039,503 195,620 (33,426) 506,261 (130,238) (159,124) 256,510 Adjustment of securities available for sale (Note 8.a) -- -- -- -- -- -- 325,858 125,698 249,751 -- -- -- Adjustment of securities held to maturity (Note 8.a) -- -- -- -- -- -- (130,238) (159,124) 256,510 (130,238) (159,124) 256,510 Derivative financial instruments Loan operations 1,217,067 1,217,067 1,463,084 1,463,084 780,584 780,584 -- -- -- -- -- -- 289,075,118 289,042,251 261,783,097 262,062,450 214,906,249 214,902,802 (32,867) 279,353 (3,447) (32,867) 279,353 (3,447) LIABILITIES Interbank deposits 10,436,263 10,520,311 11,618,573 11,631,606 7,459,392 7,459,914 (84,048) (13,033) (522) (84,048) (13,033) (522) Time deposits 192,715,468 192,757,526 193,515,574 193,575,751 185,072,345 185,112,170 (42,058) (60,177) (39,825) (42,058) (60,177) (39,825) Obligations related to Committed Operations 166,602,569 166,506,148 160,821,187 160,648,661 101,507,594 101,510,228 96,421 172,526 (2,634) 96,421 172,526 (2,634) 48,427,753 48,470,009 37,859,562 37,925,250 31,269,120 31,285,514 (42,256) (65,688) (16,394) (42,256) (65,688) (16,394) Borrowings and onlendings Derivative financial instruments Other liabilities Unrealized gain/loss, net of tax effects 3,237,903 3,237,903 4,724,036 4,724,036 2,580,382 2,580,382 -- -- -- -- -- -- 137,095,557 137,055,598 120,848,069 120,655,895 112,094,427 112,131,278 39,959 192,174 (36,851) 39,959 192,174 (36,851) 274,591 451,301 361,439 (51,267) 325,603 111,688 99 Notes to Financial Statements Determination of Fair Value of Financial Instruments Short-term interbank investments: The market value was obtained by future cash flows discount, adopting interest rates exercised by the market in similar operations in the balance sheet date. Securities: Securities and derivative financial instruments are accounted for by the market value, as provided for in BACEN Circular 3068 of 11.08.2001, excluding from such criterion, securities held to maturity. Determination of securities' market value, including those held to maturity, is obtained according to rates collected at the market. Loan operations: Operations remunerated at fixed rates have been estimated through future cash flow discount, adopting for such, interest rates utilized by the Bank for contracting of similar operations in the balance sheet date. For operations of such group remunerated at variable rates, it was considered as market value the book value itself due to equivalence among them. Interbank deposits: The market value has been calculated through discount of the difference between future cash flows and rates currently applicable in the fixed operations market. In case of variable operations which maturities did not exceed 30 days, the book value was deemed to be approximately equivalent to the market value. Time deposits: The same criteria adopted for interbank deposits are utilized in the determination of the market value. Deposits received under security repurchase agreements: For operations at fixed rates, the market value was determined calculating the discount of the estimated cash flows adopting a discount rate equivalent to the rates applicable in contracting of similar operations in the last market day. For variable operations, book values have been deemed approximately equivalent to market value. Borrowing and onlendings: Said operations are exclusive to the Bank, without similarity in the market. In face of their specific characteristics, exclusive rates for each fund entered, inexistence of an active market and similar instrument, the market values of such operations are equivalent to the book value. Other liabilities: Market values have been determined by means of the discounted cash flow, which takes into account interest rates offered in the market for obligations which maturities, risks and terms are similar. Other financial instruments: Included or not in the balance sheet, book values are approximately equivalent to their correspondent market value. Derivatives: According to BACEN Circular 3082, of 1.30.2002, derivatives are recorded at market value. Determination of derivatives' market value is estimated in accordance with an internal pricing model, with the use of the rates disclosed for transactions with similar terms and indices on the fiscal years' last business day. Sensitivity Analysis (CVM Instruction no. 475/2008) In line with best market practices, Banco do Brasil manages its risks in a dynamic manner, seeking to detect, assess, monitor, and control market risk exposures in its own positions. To this end, the Bank takes into account the risk limits defined by the Strategic Committees and likely scenarios, to act in a timely manner in reversing any occasional adverse results. In accordance with CMN Resolution no 3464/2007 and with Bacen Circular no. 3354/2007, in an effort to manage more efficiently its transactions exposed to market risks, Banco do Brasil separates its transactions as follows: 100 Notes to Financial Statements 1) Trading Book: consisting in all the transactions in its own position undertaken as business deals or intended as a hedge for its trading portfolio, for which there is an intention of trading prior to their contractual expiry, subject to normal market conditions and that do not have a non-trading clause. 2) Banking Book: consisting in transactions not classified in the Trading Book and the key feature of which is the intention of keeping these transactions until expiry. The sensitivity analysis for all the operations with assets and liabilities of the balance sheet, in compliance with CVM Instruction n.º 475/2008, of 12.17.2008, does not adequately reflect the management of market risks adopted by the Institution, and does not represent the Bank’s accounting practices. In order to determine the sensitivity of the Bank's capital to the reflexes of market trends, simulations were performed with three likely scenarios, two of which with an ensuing adverse outcome for the Bank. The scenarios employed are seen as follows: Scenario I: Likely situation, which reflects the perception of senior management of the Bank, the scenario most likely to occur for a 3-month horizon, considering macroeconomic factors and market information (BM & F Bovespa, Andima, etc.). Assumptions used: real exchange rate / dollar rate of R$ 1.80 and raising the Selic rate to 11.50% per annum based on market conditions observed on 06.30.2010. Scenario II: Situation possible. Assumptions used: parallel shock of 25% in the risk variables, based on market conditions observed on 06.30.20010 and is considered the worst losses by risk factor and, therefore, neglecting the dynamics of macroeconomic factors. Scenario III: Situation possible. Assumptions used: parallel shock of 50% in the risk variables, based on market conditions observed on 06.30.2010 and is considered the worst losses by risk factor and, therefore, neglecting the dynamics of macroeconomic factors.. In the table below may be seen a summary of the Trading Portfolio profit figures (Trading), which included public and private securities, derivatives financial instrument and funding based on transactions subject to repurchase agreements showing the values observed in 06.30.2010 and 06.30.2009: R$ Thousand Scenario I 06.30.2010 Risk Factor Prefixed rate Foreign currency coupons Exchange variation Price Indexes TR/TBF Concept Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of price index coupons Risk of variation of TR and TBF coupon Rate Variation Increase Increase Decrease Increase -- 06.30.2009 Income Rate Variation Income (4,946) -(59) (1,378) -- Decrease Increase Increase Increase Decrease 21,337 (274) 648 9,179 2,037 101 Notes to Financial Statements R$ Thousand Scenario II 06.30.2010 Risk Factor Prefixed rate Foreign currency coupons Exchange variation Price Indexes TR/TBF Concept Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of price index coupons Risk of variation of TR and TBF coupon 06.30.2009 Rate Variation Income Rate Variation Income Increase Decrease Decrease Increase -- (10,541) -(17,603) (1,790) -- Increase Increase Decrease Increase Increase (83,762) (35) (31,567) (25,693) (5,163) R$ Thousand Scenario III 06.30.2010 Risk Factor Concept Rate Variation Prefixed rate Foreign currency coupons Exchange variation Price Indexes TR/TBF Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of price index coupons Risk of variation of TR and TBF coupon Increase Decrease Decrease Increase -- 06.30.2009 Income Rate Variation Income (22,818) -(35,206) (3,482) -- Increase Increase Decrease Increase Increase (160,405) (69) (63,134) (49,806) (19,208) In the case of transactions classified in the Banking Book, appreciations or depreciations resulting from changes in interest rates practiced in the market do not imply in a significant financial and bookkeeping impact on the Bank's income. This is so because this portfolio is composed chiefly of loan operations (consumer credit, agribusiness, working capital, etc.); retail funding (demand, time, and savings deposits), and securities, which are recorded in the books according to the agreed on rates when contracting these operations. In addition, it should be pointed out that these portfolios have as their key feature the intention of helding the respective positions to maturity, and hence they are not subject to the effects of fluctuating interest rates, or the fact that such transactions are naturally related to other transactions (natural hedge), hence minimizing the reflexes of a stress scenario. In the tables below may be seen a summary of the Trading Portfolio (Trading) and Non Trading (Banking), except from Banco Votorantim, with values observed in 06.30.2010 and 06.30.2009: R$ Thousand Scenario I 06.30.2010 Risk Factor Concept Rate Variation Prefixed rate Foreign currency coupons Exchange variation(1) TJLP TR/TBF Price Indexes Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of long-term interest rate (TJLP) coupon Risk of variation of TR and TBF coupon Risk of variation of price index coupons Increase Increase Decrease Increase Increase Increase 06.30.2009 Income Rate Variation Income (2,392,340) (36,115) (405) 127,596 1,655,303 (405,550) Decrease Increase Increase Decrease Decrease Increase 442,323 (13,784) 3,740 (34,833) (53,805) (162,457) (1) Net tax purpose. 102 Notes to Financial Statements R$ Thousand Scenario II 06.30.2010 Risk Factor Prefixed rate Foreign currency coupons (1) Exchange variation TJLP TR/TBF Price Indexes Concept Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of long-term interest rate (TJLP) coupon Risk of variation of TR and TBF coupon Risk of variation of price index coupons 06.30.2009 Rate Variation Income Rate Variation Income Increase Increase Decrease Decrease Decrease Increase (5,294,655) (83,175) (121,516) (272,593) (3,948,404) (466,875) Increase Increase Decrease Decrease Decrease Increase (2,130,701) (19,447) (182,305) (283,868) (1,545,076) (774,410) (1) Net tax purpose. R$ Thousand Scenario III 06.30.2010 Risk Factor Prefixed rate Foreign currency coupons Exchange variation(1) TJLP TR/TBF Price Indexes Concept Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of long-term interest rate (TJLP) coupon Risk of variation of TR and TBF coupon Risk of variation of price index coupons Rate Variation Increase Increase Decrease Decrease Decrease Increase 06.30.2009 Income (10,150,330 (164,797)) (243,032) (311,629) (8,168,385) (910,149) Rate Variation Income Increase Increase Decrease Decrease Decrease Increase (4,121,028) (38,612) (364,610) (586,031) (3,204,134) (1,465,474) (1) Net tax purpose. The scenarios used for preparing the framework of sensitivity analysis must necessarily use situations of deterioration of at least 25% and 50% for variable risk for isolation, as determined by CVM Instruction No. 475/2008. Therefore, the analysis of the results is impaired. For example, simultaneous shocks of increase in the rate of advance and reduction in interest coupon of TR are not consistent from a macroeconomic. The derivative transactions found in the Banking Book, in particular, not represent a relevant market risk to Banco do Brasil, as these positions originated mainly to fulfill the following situations: - Change of the indexation of funding and lending transactions performed to meet customer needs; - Market risk hedge with purpose and efficacy as described in Note 8.d. Also in this transaction, the interest and exchange rate variations have no effects on the Bank's income. The Banco do Brasil did not enter into any transaction likely to be classified as an exotic derivative, as described in CVM Instruction no. 475 - Attachment II. Participation in Banco Votorantim In order to determine the sensitivity of the Bank's participation in Banco Votorantim, simulations were performed with three likely scenarios, two of which with an ensuing adverse outcome. The scenarios employed are seen as follows: Scenario I: Situation likely, which reflects the perception of top management of Banco Votorantim in the scenario most likely to occur. Assumptions used: real exchange rate / dollar from R$ 1.80 and the Selic rate of interest 11.75% per year, to the end of 2010. 103 Notes to Financial Statements Scenario II: Assumptions used: parallel shock of 25.0% in the risk variables, based on market conditions observed on 06.30.2010 and is considered the worst losses by risk factor and thus ignoring the dynamics of macroeconomic factors. Scenario III: Assumptions used: parallel shock of 50.0% in the risk variables, based on market conditions observed on 06.30.2010 and is considered the worst losses by risk factor and, therefore, neglecting the dynamics of macroeconomic factors. In the tables below are the results for the positions of the Bank for its participation in Banco Votorantim, with values from 06.30.2010 and 12.31.2009: R$ Thousand Scenario I 06.30.2010 Risk Factor Prefixed rate Foreign currency coupons Exchange variation Price Indexes Interest Rates Others Concept Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of price index coupons Risk of change coupon interest rate Risk of variation of others coupons Rate Variation Increase Increase Decrease Decrease Increase Increase 12.31.2009 Income Rate Variation Income (69,082) -6,752 17,286 (530) (33,067) Increase Increase Increase Increase Increase Increase (142,478) -(65,497) (46,908) (9,781) 3,136 R$ Thousand Scenario II 06.30.2010 Risk Factor Prefixed rate Foreign currency coupons Exchange variation Price Indexes Interest Rates Others Concept Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of price index coupons Risk of change coupon interest rate Risk of variation of others coupons Rate Variation Increase Increase Increase Increase Increase Decrease 12.31.2009 Income Rate Variation Income (81.359) -(122.315) (20.004) (659) -- Increase Increase Increase Increase Increase Decrease (324,976) -(236,751) (96,030) (15,820) (1,809) R$ Thousand Scenario III 06.30.2010 Risk Factor Prefixed rate Foreign currency coupons Exchange variation Price Indexes Interest Rates Others Concept Risk of variation of prefixed interest rates Risk of variation of foreign exchange coupon Risk of variation of exchange rates Risk of variation of price index coupons Risk of change coupon interest rate Risk of variation of others coupons Rate Variation Increase Increase Increase Increase Increase Decrease 12.31.2009 Income Rate Variation Income (94,275) -(322,441) (23,808) (785) (48,073) Increase Increase Increase Increase Increase Decrease (479,181) -(398,723) (139,799) (21,165) (9,299) d) Liquidity Risk - this type of risk takes two forms: market liquidity risk and cash flow liquidity risk (funding). The first is the possibility of loss resulting from the incapacity to perform a transaction in a reasonable period of time and without significant loss of value. The second is associated with the possibility of a shortage of funds to honor commitments assumed on account of the mismatching between assets and liabilities. 104 Notes to Financial Statements e) Operating Risk - reflects the possibility of loss resulting from faults, deficiencies, or the inadequacy of internal processes, personnel and systems, or external events. This concept includes legal risks. f) Regulatory Capital - The BIS ratio of 03.31.2009 was determined according to the criteria established by CMN Resolutions 3444/2007 and 3490/2007, which address the calculation of Referential Equity Amount (RE) and of Required Referential Equity Amount (RRE), respectively. We present below the calculation of the BIS ratio, pursuant to regulations in force and applicability as of July/2008: R$ Thousand 06.30.2010 EconomicFinancial RE - REFERENTIAL EQUITY AMOUNT Level I Shareholders' equity 12.31.2009 Financial Financial 58,264,435 59,092,639 50,087,419 50,839,770 41,068,472 41,068,446 35,218,091 35,217,621 39,386,785 36,119,407 36,119,381 33,146,766 33,142,649 (6,373) (6,373) (6,746) (6,746) (13,905) (13,888) Deferred Assets (292,619) (292,619) (242,296) (242,296) (638,323) (634,693) Mark-to-market (145,060) (145,060) (85,061) (85,061) (121,312) (121,312) (22,477) (22,477) (22,477) (22,477) (22,477) (22,477) 2,867,342 Tax credits excluded from Level I of RE Additional provision to the minimum required by resolution CMN 2682/1999 Hybrid Capital and Debt Instruments - Level I Level II Mark-to-market 60,654,717 61,939,495 41,476,368 41,531,271 39,331,882 06.30.2009 EconomicFinancial Revaluation reserves Financial EconomicFinancial -- -- 2,782,065 2,782,065 2,867,342 2,611,015 2,611,015 2,523,580 2,523,580 -- -- 20,409,885 20,409,885 18,022,810 18,025,986 15,744,198 15,744,181 145,060 145,060 85,061 85,061 121,312 121,312 Subordinated Debt Qualifying as Capital 19,376,109 19,376,109 17,078,207 17,081,383 14,653,089 14,653,089 Funds obtained from the FCO 13,239,454 13,239,454 12,422,046 12,422,046 11,788,115 11,788,115 414,193 414,193 400,323 400,323 560,898 560,898 Funds obtained from the CDB 3,997,481 3,997,481 4,115,114 4,115,114 2,304,076 Funds raised in Financial Letters Funds obtained abroad 1,024,423 1,024,423 -- -- -- 2,304,076 -- Funds raised in Subordinated Notes 700,558 700,558 -- -- -- -- Funds obtained from the debentures -- -- 140,724 143,900 -- -- 882,343 882,343 852,796 852,796 955,892 955,892 Hybrid Capital and Debt Instruments – Level II Revaluation reserves 6,373 6,373 6,746 6,746 13,905 13,888 Deduction from the PR (1,231,536) (1,661) (826,847) (1,793) (874,870) (122,032) Financial instruments excluded from the PR (1,231,536) (1,661) (826,847) (1,793) (874,870) (122,032) RRE - Required Referential Equity Amount 51,969,919 51,281,125 46,758,968 46,288,519 35,956,789 35,597,599 Credit Risk 48,247,880 47,559,086 43,556,535 43,086,086 34,574,149 34,214,959 469,692 469,692 673,909 673,909 227,759 227,759 Operating Risk 3,252,347 3,252,347 2,528,524 2,528,524 1,154,881 1,154,881 Surplus of stockholders' equity: RE – RRE 8,684,798 10,658,370 11,505,467 12,804,120 14,130,630 15,242,171 12.84 13.29 13.71 14.04 15.32 15.71 Market Risk BIS Ratio: (RE x 100)/ (RRE / 0.11) (1) Resolution CMN 3.825/2009 revoked with effect from 04/01/2010, the CMN Resolution No. 3.674/2008 allowing Level I add the value of additional provision to the minimum percentage required by CMN Resolution No. 2682/1999. If the capital increase (Note 31) had occurred on 06.30.2010, the equity of the bank would spend from R$ 39,331,882 thousand to R$ 46,381,782 thousand, positively impacting the Basel Index of EconomicFinancial Consolidated at 1.49 pp (from 12.84% to 14.33%). In the event of successful legal action for compensation in full of accumulated tax losses of income tax and negative basis of social contribution (Note 25.c), there would be a positive effect on the BIS ratio Financial 1.07 percentage points (from 13.29% to 14.36%) and from the economic financial consolidated from 1.04 p.p. (from 12.84% to 13.88%). 105 Notes to Financial Statements g) Fixed asset index The fixed asset index in relation to RE - Referential Equity is 18.58% (14.55% on 12.31.2009 and 13.54 on 06.30.2009) to the Consolidated Financial and 15.83% (11.37% on 12.31.2009 and 10.77% on 06.30.2009) to the Economic-Financial Consolidated pursuant to CMN Resolution No. 2669/1999. The difference between the Fixed Assets of Consolidated Financial and Economic-Financial results from the inclusion of subsidiaries / affiliates have no financial, high liquidity and low level of restraint, with consequent reduction in Fixed Assets index of Consolidated Financial and Economic. 31 - Subsequent Events Public Offering of Shares In the process of primary and secondary public issue of shares of Banco do Brasil, 396 million registered common shares without par value were traded, at R$ 24.65 per share, a price established after the bookbuilding process completed on June 30, 2010. The operation consisted of: • • • Primary offering of 286 million shares, totaling R$ 7,049,900 thousand, a sum that will be used to reinforce the capital base of the institution, and to sustain its future growth; Secondary offering of 70.8 million shares, previously belonging to BNDES and to the Federal Government; A secondary offering of a supplementary lot of 39.2 million shares owned by the Brazilian Development Bank (BNDES) and the Federal Government, in addition to treasury shares. On July 1, 2010, the Brazilian Securities Commission (CVM) granted public distribution registrations for the primary and secondary public offering of Banco do Brasil shares. On the same date, the Central Bank of Brazil approved the capital increase arising from the primary public offering. On August 5, 2010, the Extraordinary General Meeting approved the Bank's capital increase of R$ 42,815 thousand, corresponding to 4,859,696 subscription receipts, including the fractions, arising from the advance exercising of 1,551,727 series "C" bonds. In the same EGM the shareholders also approved the capital change to R$ 33,077,996 thousand (R$ 26,028,096 thousand on June 30, 2010), represented by 2,860,729,247 common book shares without par value (2,569,869,551 registered common shares on June 30, 2010), thus completing the capital increase process. On 06.08.2010, the Central Bank of Brazil approved the capital increase. Thus, the public offering resulted in an increase in the percentage of free float shares to 30.4%, compared to 21.9% observed at end of June 2010 (before the share offering was carried out). Due to this, Banco do Brasil honors the commitment undertaken in the adhesion to the New Market of BM&FBOVESPA of attaining a free float of 25% by 2011. Multiple Bank Ownership Structure Free-float shares Common Shares (BBAS3) 06.30.2010 Quantity Public Offering % Primary 08.05.2010 Quantity % 562,426,631 21.9 -- 870,926,522 30.4 2,569,869,551 100.0 290,859,696 2,860,729,247 100.0 If the capital increase had occurred on June 30, 2010, Banco do Brasil's shareholders' equity would have been increased from R$ 39,331,882 thousand to R$ 46,381,782, positively impacting the BIS Ration of EconomicFinancial Consolidated (Note 30.f) by 1.49 p.p. (from 12.84% to 14.33%). 106 Notes to Financial Statements 32 – Other Information a) New Market At 5.31.2006, Banco do Brasil signed a contract with the São Paulo Stock Exchange for adhesion to the New Market segment of Bovespa, which assembles a group of companies with the best corporate governance practices in Brazil. Moreover, Banco do Brasil, its Shareholders, the Officers, and the members of the Audit Committee undertake to resolve all and any dispute or controversy related to the New Market Listing Regulations through the Arbitration Chamber of the BM&FBovespa Market, in conformity with an arbitration clause included in the By-laws of Banco do Brasil. b) Distribution of Dividends and/or Interest on Own Capital During a meeting held on 2.24.2010, the Board of Directors approved the setting, for the year 2010, of the payout rate equivalent to the minimum percentage of 40% of net income, fulfilling the policy for payment of dividends and/or interest on own capital on a quarterly basis, pursuant to article 43 of the Bank's By-Laws. c) Financial Holding Company On 04.13.2010, the North-American Central Bank - FED (Federal Reserve System) granted Banco do Brasil the status of "Financial Holding Company". The Bank was accorded this status after a minute analysis of major factors determined by the US banking legislation, among which is the Bank's capitalization level and the quality of its management. This qualification will make it possible for Banco do Brasil, if it is in its interest, to perform banking activities in the US territory, either by itself or through its subsidiaries, under the same conditions as US banks. d) Investment Funds Administration At June 30, 2010, BB Gestão de Recursos - Distribuidora de Títulos e Valores Mobiliários S.A - wholly owned subsidiary of the Banco do Brasil, exhibited a managed portfolio of R$ 344.9 billion, of which R$ 331.7 billion in investment funds (456 funds investments) and $ 13.2 billion in managed portfolios (19 portfolios managed).At December 31, 2009, managed portfolio was R$ 306.7 billion, distributed among 444 funds and 20 managed portfolios. At June 30, 2009, managed portfolio was R$ 264.9 billion, distributed among 400 investment funds and 18 portfolios managed. e) Funds and Programs The Bank is the operator of the Investment Fund Sector (Fiset), with assets of R$ 2,113 thousand (R$ 2,138 thousand on 12.31.2009 and R$ 2,174 thousand on 06.30.2009) and administrator of the Training Programme Heritage Server Public - Pasep with assets of R$ 2,107,678 thousand (R$ 1,916,461 thousand on 12.31.2009 and R$ 1,903,778 thousand at 06.30.2009), guaranteeing the latter a minimum return equivalent to TJLP. 107 Notes to Financial Statements f) Details of Branches and Subsidiaries Abroad R$ Thousand Branches Abroad BB-Consolidated Abroad 06.30.2010 12.31.2009 (1) 06.30.2009 06.30.2010 12.31.2009 (1) Assets - BB Group - Third parties Total Assets 19,188,451 42,389,390 61,577,841 18,229,330 32,507,723 50,737,053 15,778,695 26,047,066 41,825,761 15,768,597 43,600,059 59,368,656 13,975,507 33,751,943 47,727,450 14,307,620 27,359,584 41,667,204 Liabilities - BB Group - Third parties Stockholders’ Equity Total Liabilities 15,464,286 43,497,754 2,615,801 61,577,841 9,112,535 39,066,043 2,558,475 50,737,053 7,542,586 31,449,439 2,833,736 41,825,761 11,361,964 44,407,437 3,599,255 59,368,656 4,146,629 40,072,902 3,507,919 47,727,450 5,261,854 32,558,452 3,846,898 41,667,204 (7,219) (76,678) (17,980) 23,859 (53,432) 24,246 Income (Loss) for the period 06.30.2009 (1) Result of the 2nd semester. g) Consortium funds R$ Thousand 06.30.2010 Forecast of funds receivable from consortium members 12.31.2009 06.30.2009 56,109 45,856 39,440 Obligations of the group for contributions Consortium - goods to granted 3,352,521 3,115,953 2,383,273 2,177,640 1,731,004 1,572,667 (In Units) Number of groups managed Number of active consortium members 239 161,801 316 140,860 336 121,366 16,722 22,123 21,450 31,164 19,839 16,905 Number of goods delivered to consortium winners Number of goods in the period h) Overseas Funding In the 1st half of 2010, the Banco do Brasil raised US$ 1,450 million through securities issued abroad, with US$ 950 million in securities maturing within five years and coupons of 4.5% per year and another US$ 500 million in securities maturing in ten years and coupons of 6.0% pa The Bando do Brasil has earmarked resources for lending, priority given to finance foreign trade operations. 108 Notes to Financial Statements i) Assignment of Employees to Outside Agencies Federal government assignments are regulated by Law No. 10.470/2002 and Decree No. 4.050/2001. 1S2010 Employees assigned (1) 1S2009 Cost for the period(thousand) Employees assigned (2) Cost for the period(thousand) With costs for the Bank Federal Government Labor unions Other agencies/entities: 10 229 1,258 11,477 12 160 1,290 7,364 4 770 3 584 Without cost to the Bank Federal, state and municipal governments Outside agencies (Cassi, FBB, Previ) Employee entities Subsidiaries and associated companies 310 756 76 ---- 292 718 58 ---- 311 -- 312 -- 1,696 13,505 1,555 9,238 Total (1) Balance at 06.30.2010. j) Remuneration of Employees and Management The values of monthly wages paid to employees and Directors of the Bank of Brazil, are presented below: R$ Thousand 06.30.2010 12.31.2009 06.30.2009 Lowest salary Highest salary Average salary 1,416,00 25,247,10 4,121,45 1,416,00 25,247,10 4,567,70 1,296,75 23,817,90 4,675,41 Management President Vice-President 44,505,00 40,197,00 41,592,00 37,566,00 41,592,00 37,566,00 34,380,00 32,130,00 32,130,00 3,606,85 3,370,80 3,370,80 3,606,85 30,942,00 27,847,80 3,370,80 28,917,00 26,025,30 3,370,80 25,704,00 15,422,40 Director Directors Council Tax Board of Directors Audit Committee - Proprietor Audit Committee - Alternate 109 Notes to Financial Statements k) Insurance Policy of Assets Despite the low degree of risk to which their assets are subject, the bank hires for its values and assets, insurance considered adequate to cover potential claims. Insurance contracted by the Bank in force on 06.30.2010 have value coverage R$ 6,622,235 thousand and mainly cover the following risks: R$ Thousand Risks Covered Property insurance for the assets themselves relevant Life insurance and personal accident for the collective Board Property risks to the corporate network which owns and Cielo SA Others Covered Securities Value Award 6,488,429 700 2,810 191 116,680 16,426 836 216 110 KPMG Auditores Independentes Financial Services R. Dr. Renato Paes de Barros, 33 04530-904 - São Paulo, SP - Brasil Caixa Postal 2467 01060-970 - São Paulo, SP - Brasil Central Tel Fax Nacional Internacional Internet 55 (11) 2183-3000 55 (11) 2183-3001 55 (11) 2183-3034 www.kpmg.com.br Independent auditors’ opinion To The Board of Directors, Stockholders and Management Banco do Brasil S.A. Brasília - DF 1. We have examined the balance sheets of Banco do Brasil S.A. (Banco do Brasil) and the consolidated balance sheets of Banco do Brasil S.A. and its subsidiaries (BB - Consolidated) as of June 30, 2010 and 2009 and the related statements of income, changes in stockholders’ equity, and changes in cash flows and in added value for the semesters then ended, which are the responsibility of its management. Our responsibility is to express an opinion on these financial statements. The financial statements of the indirect investments, Brasilcap Capitalização S.A., Brasilsaúde Companhia de Seguros, Brasilveículos Companhia de Seguros, Brasilprev Seguros e Previdência S.A., Cielo S.A., Neoenergia S.A. and Itapebi Geração de Energia S.A. (Notes 3 and 14), were examined or reviewed by other independent auditors. Thus, our opinion on the balances of the investments aforementioned and of the respective income arising from the application of the equity pick-up method, which totaled R$2,193 million (R$1,800 million as of June 30, 2009) and R$539 in the first semester of 2010 (R$437 million in the first semester of 2009), respectively, are based, exclusively, on the reports issued by those independent auditors. Additionally, the net assets used in the calculation of the surplus on Retirement and Pension Plan (Note 28), were examined by other independent auditors and our evaluation, with respect to these net assets, is based on the report issued by those independent auditors. 2. Our examination was conducted in accordance with auditing standards generally accepted in Brazil and included: (a) planning of the audit work, considering the materiality of the balances, the volume of transactions and the accounting systems and internal accounting controls of the Bank and its subsidiaries; (b) verification, on a test basis, of the evidence and records which support the amounts and accounting information disclosed; and (c) evaluation of the most significant accounting policies and estimates adopted by Management of the Bank and its subsidiaries, as well as the presentation of the financial statements taken as a whole. 3. In our opinion, based on our examination and on the reports of other independent auditors, pursuant to the aforementioned in paragraph one, the financial statements aforementioned represent fairly, in all material respects, the financial position of Banco do Brasil S.A. (Banco do Brasil) and Banco do Brasil S.A. and its subsidiaries (BB-Consolidated) as of June 30, 2010 and 2009, and the results of their operations, changes in stockholders’ equity and changes in cash flows and the added value in their operations for the semester then ended, in conformity with accounting practices adopted in Brazil, applicable to institutions authorized to operate by the Brazilian Central Bank. KPMG Auditores Independentes, uma sociedade simples brasileira e firma-membro da rede KPMG de firmas-membro independentes e afiliadas à KPMG International Cooperative (“KPMG International”), uma entidade suíça. KPMG Auditores Independentes, a Brazilian entity and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. ABCD 4. The Bank has recorded in its assets, as of June 30, 2010, the amount of R$14,510 million (R$8,410 million as of June 30, 2009) corresponding to the surplus of PREVI – Employee Benefits (Note 28), which was determined based on criteria established by the Bank’s Management, which we considered adequate in the circumstance. These criteria incorporate long-term estimates and assumptions of actuarial and financial nature, as well as the fulfillment of the requirements established in the regulations in force. Therefore, the inaccuracies inherent to the process of using estimates and assumptions may result in differences between the amount recorded and the amount effectively realized. 5. The balance sheets, individual and consolidated, as of December 31, 2009, jointly presented with the financial statements mentioned in paragraph One, were examined by us, as part of the financial statements for the year ended December 31, 2009, on which we issued an unqualified opinion dated February 24, 2010, including emphasis paragraph on the same matter described herein in paragraph Four. Brasília, 13 August 2010 KPMG Auditores Independentes CRC SP-014428/O-6 F-DF The original version in Portuguese was signed by Francesco Luigi Celso Accountant CRC SP-175348/O-5 S-DF José Claudio Costa Accountant CRC SP-167720/O-1 S-DF SUMMARY OF THE AUDIT COMMITTEE REPORT Introduction The audit committee of the Bank of Brazil (BB) is the statutory body advising the Board of Directors whose mains functions are: evaluate the effectiveness of the system of internal controls and internal and external audits, and review prior to publication, all the statements. The activities of the BB Audit Committee are governed by the Bank’s bylaws and these are available at www.bb.com.br in the Investor Relations section of the Bank’s web page. The action universe of the Committee comprises BB Multiple Bank and the following fully owned subsidiaries: BB Banco de Investimento S.A., BB Leasing S.A. – Arrendamento Mercantil, BB DTVM Gestão de Recursos – Distribuidora de Títulos e Valores Mobiliários S.A., BB Administradora de Cartões S.a. e BB Administradora de Consórcios S.A. Banco Popular do Brasil S.A. is not part of the Audit Committee, in order to have been incorporated by Banco do Brasil on May 31st, 2010. BB management and its subsidiaries’ management are responsible for preparing and assuring the integrity of the financial statements, for managing risks, for maintaining an effective, consistent internal control system and for monitoring compliance with applicable legal and regulatory standards. The Internal Audit is responsible for periodically and independently performing its activities including internal controls reviews in order to evaluate whether they are adequate and effective, as well as to evaluate whether risk management procedures are adequately performed. KPMG Auditors Independents is responsible for auditing the Bank’s financial statements and for issuing an opinion on whether the financial position is presented fairly, in all material respects, and on whether its internal controls are in conformity with accounting practices adopted in Brazil. Evaluates, also, the quality and adequacy of internal controls system, including the system of electronic data processing and risk management, and compliance with legal and regulatory provisions. Activities In compliance with its tasks and in line with the Bank’s Annual Work Plan, approved by the Board on at a meeting held on December 14th, 2010, the Audit Committee has held, among other activities, a total number of 90 meetings with the board of directors, the internal and independent auditors, the Central Bank of Brazil auditors, and those ones responsible for the business, internal controls, legal, technology, risk management and security strategic areas in the semester ended June 30th, 2010. During these meetings, it was approached, particularly, issues related to enhancements of the internal controls mechanisms, compliance with laws and standards, risk management, new capital agreement (Basel II), procedures for preventing and combating money laundering, security information, technology solutions, employee benefits (health and pension), ombudsman, legal contingencies and internal and external audits and external bodies bodies/agencies of supervision and control recommendations. At the meetings with the internal and independent audits, we assessed their plans, verified the work performed for the period and the main findings and recommendations. It noticed the ongoing actions for adopting the new accounting practices for preparation of financial statements in IFRS. It also monitored the process used for preparing the financial statements, examined the accounting practices adopted, the criteria used to establish provisions, the most significant variations in account balances and the extraordinary events that occurred during the period. In the situations in which suggestions for improvement were given, the Committee suggested improvements to the Executive Board of Directors and other areas of the Institution. Conclusions Based on the activities undertaken during the period, observation on the system and internal controlenvironment, interviews with Management, assessment of activities performed by internal control and risk/security management, the internal and external audit reports and their conclusions, and taking into consideration the responsibilities of the Committee and the limitations inherent to the scope of its activities, the Committee concluded that: a) the internal control system has been the object of permanent attention by senior management and it is considered adequate for the size and complexity of the business. Moreover, it has been constantly improved; b) the Group adopts a conservative posture in the assumption of risks and has appropriate instruments In place for risk management and mitigation of risks; c) the internal auditors’ duties have been assessed as effective and independent, as well as adequately reported at the Committee’s request; d) the external auditors work has been carried out effectively and nothing was noted that would indicate noncompliance with applicable independence rules and regulations; and e) the financial statements for the semester ended June 30th, 2010 were prepared in compliance with legal standards and accounting practices adopted in Brazil, and present fairly, in all material respects, the financial situation of the Group for the period then ended. Brasília-DF, August 13th, 2010. José Danúbio Rozo (Coordinator) Celene Carvalho de Jesus José Gilberto Jaloretto EXECUTIVE BOARD CEO Aldemir Bendine BOARD OF OFFICERS Alexandre Corrêa Abreu Allan Simões Toledo Danilo Angst Geraldo Afonso Dezena da Silva Ivan de Souza Monteiro Luís Carlos Guedes Pinto Paulo Rogério Caffarelli Ricardo Antônio de Oliveira Robson Rocha MANAGING DIRECTORS Adilson do Nascimento Anísio Admilson Monteiro Garcia Amauri Sebastião Niehues Armando Medeiros de Faria Ary Joel de Abreu Lanzarin Carlos Eduardo Leal Neri Clenio Severino Teribele Dan Antônio Marinho Conrado Denilson Gonçalves Molina Edson de Araújo Lôbo Gueitiro Matsuo Genso Janio Carlos Endo Macedo José Carlos Vaz José Mauricio Pereira Coelho Luiz Henrique Guimarães de Freitas Márcio Hamilton Ferreira Marco Antonio Ascoli Mastroeni Marco Antônio da Silva Barros Nilo José Panazzolo Nilson Martiniano Moreira Orival Grahl Paulo Roberto Evangelista de Lima Renato Donatello Ribeiro Sandro José Franco Sandro Kohler Marcondes Sérgio Ricardo Miranda Nazaré Walter Malieni Júnior ACCOUNTING Eduardo Cesar Pasa Contador Geral Contador CRC-DF 017601/O-5 CPF 541.035.920-87 Daniel André Stieler Contador CRC-DF 013931/O-2 CPF 391.145.110-53 BOARD OF DIRECTORS Nelson Henrique Barbosa Filho (Presidente) Aldemir Bendine (Vice-Presidente) Henrique Jäger Sérgio Eduardo Arbulu Mendonça Bernardo Gouthier Macedo Adriana Queiroz de Carvalho Francisco Gaetani BOARD OF AUDITORS Daniel Sigelmann (Presidente) Ênio Alexandre Gomes Bezerra da Silva Clóvis Ailton Madeira Marcos Machado Guimarães Pedro Carvalho de Mello AUDIT COMMITTEE José Danúbio Rozo (Coordenador) Celene Carvalho de Jesus José Gilberto Jaloretto