BANCA POPOLARE DI INTRA Banca Popolare di Intra Banking Group Reports and Financial Statements 2005
BANCA POPOLARE DI INTRA Ordinary and Extraordinary Shareholders’ Meeting
Cooperative Joint-Stock Company founded in 1873 Registered under no. 00118720036 of the Register of Companies of Verbania Head Office in Verbania Intra Piazza Aldo Moro, 8 Internet site: www.bpintra.it Banca Popolare di Intra Banking Group
1 GENERAL INDEX
Company Officers 4
Notice of Call 6
FINANCIAL STATEMENTS 2005 OF BANCA POPOLARE DI INTRA AND RELATED REPORTS 8
• Directors’ Report on Operations 9 • Report on Corporate Governance of Banca Popolare di Intra 84 • Report of the Board of Statutory Auditors pursuant to Art. 153 of Legislative Decree 58/98 107 • Balance Sheet 114 • Income Statement 116 • Statement of Changes in Shareholders’ Equity 117 • Cash Flow Statement 119 • Introduction to the IAS/IFRS accounting standards 121 • Notes to the Financial Statements 141 • Report of the Independent Auditing Firm
CONSOLIDATED FINANCIAL STATEMENTS 2005 OF BANCA POPOLARE DI INTRA BANKING GROUP AND RELATED REPORTS 310
• Directors’ Report on Consolidated Operations 311 • Report of the Board of Statutory Auditors on the Consolidated Financial Statements 333 • Consolidated Balance Sheet 336 • Consolidated Income Statement 338 • Statement of Changes in the Consolidated Shareholders’ Equity 339 • Consolidated Cash Flow Statement 341 • Introduction to the IAS/IFRS accounting standards 343 - Report of the Independent Auditing Firm on the IFRS reconciliation tables with illustration of the effects of transition to the International Financial Reporting Standards (IFRS) 366 • Notes to the Consolidated Financial Statements 367
2 • Report of the Independent Auditing Firm on the Consolidated Financial Statements
EXTRAORDINARY PART
DIRECTORS’ REPORT TO THE EXTRAORDINARY SHAREHOLDERS’ MEETING 532
STATUTORY AUDITORS’ REPORT TO THE EXTRAORDINARY SHAREHOLDERS’ MEETING 540
3 COMPANY OFFICES (AS AT 29 MARCH 2006)
BOARD OF DIRECTORS
Chairman (*) CESARE PONTI (from 1 September 2005) SANDRO SAINI (until 31 August 2005)
Deputy Chairman (*) ERNESTO PAOLILLO (from 12 October 2005)
Directors MAURO ALBONICO (until 1 March 2006) MICHELE ALESSI ANGHINI FRANCESCO AMENDOLA (from 13 January 2006) (*) PAOLA BALZARINI LUIGI ENRICO BONOMI LUCIANO BROGONZOLI (until 12 October 2005; Deputy Chairman until 31 August 2005) RAFFAELE BRUNI (from 3 November 2005) (*) ANGELO ALESSANDRO COMPOSTELLA LINO DE VECCHI (until 13 January 2006) MARCO FORTIS (from 22 December 2005) VITALIANO MORONI (until 12 October 2005; Deputy Chairman until 31 August 2005) GIORGIO PELLICELLI CLAUDIO CARLO VIGANO’ (*) LANFRANCO VIVARELLI (from 26 January 2005) ANTONIO ZACCHERA (from 16 March 2006) Secretary of the Board PAOLA BALZARIN (*) members of the Executive Committee
BOARD OF STATUTORY AUDITORS Chairman FERRUCCIO BATTAINI (from 14 January 2006) ROBERTO SCRUZZI (until 13 January 2006)
Standing Auditors ROBERTO BUSSI MARTA LODARI (from 14 January 2006) FERRUCCIO BATTAINI (until 13 January 2006)
Alternate Auditors MARIO CIANA MARTA LODARI (until 13 January 2006)
4
BOARD OF ARBITRATORS Standing GIUSEPPE UGLIETTI ANTONIO PINOLINI MARCO UBERTINI Alternate PAOLO BORTOLOSO SERGIO NAPOLETANO
GENERAL MANAGEMENT General Manager CLAUDIO FERRARI Deputy General Managers GIANNI MEZZETTI CARLO ALBERTO CANOSSA (until 1 March 2006)
INDEPENDENT AUDITING FIRM RECONTA ERNST & YOUNG SPA
5 NOTICE OF CALL
The Board of Directors, pursuant to Article 15 and thereafter of the Articles of Association, calls the Ordinary and Extraordinary Shareholders’ Meeting of the Bank for Saturday 29 April 2006 at 9.30 a.m. in Verbania Intra. The meeting will be held at the “PalaBpi” pavilion in Via Rome, on the corner of Piazza F.lli Baniera, and also through video-conference link at the Palezzetto dello Sport, Via Brigata Cesare Battisti, 33, to which the Shareholders are invited to converge in the event of the Pala Bpi being filled to capacity, with the following
AGENDA
Ordinary Part 1. Directors’ and Statutory Auditors’ Reports on the financial year ending as at 31 December 2005; presentation of the separate and consolidated financial statements and consequent resolutions; 2. Derivative action against the former General Manager, Mr. Giovanni Brumana; 3. Determination of the Statutory Auditors’ fees, pursuant to Article 32 of the Articles of Association; 4. Appointment of Directors; 5. Appointment of the Board of Statutory Auditors; 6. Appointment of a Standing Arbitrator and an Alternate Arbitrator. Extraordinary Part 1. Motion to approve a free share capital increase with utilisation of the revaluation reserves pursuant to Law 266 of 23 December 2005 and Law 413 of 30 December 1991, of the reserve pursuant to Article 13 of Legislative Decree 124/93 and with partial utilisation of the available reserve, through increase of the par value per share of the ordinary shares from € 3.00 to € 3.40 for a total of € 19,385,758.80. Consequent amendment of Article 5 of the Articles of Association. Consequent resolutions and assignment of powers.
Should the Shareholders’ Meeting of Saturday 29 April 2006 fail to reach the quorum set forth in Article 16 of the Articles of Association, it is hereby convened in second call for
SUNDAY 30 APRIL 2006 at 9.30 a.m. in the same venue and with the same agenda. Notice is drawn to the fact that, pursuant to Law (Articles 2370 and 2538 of the Italian Civil Code) and to the Articles of Association, the Meeting may be attended and voting rights may be exercised by those Shareholders who have been enrolled in the Shareholders’ Register for at least ninety days and have requested the authorised intermediaries to issue notice of attendance, which must reach the Company at least two business days prior to the date set for the meeting in first call.
6 In compliance with Article 19 of the Articles of Association, each Shareholder is entitled to one vote only, irrespective of the number of shares held. The Shareholders may elect to be represented by written proxy, issued to another Shareholder entitled to attend and to vote in the Meeting, provided that he/she is not a Director, Statutory Auditor or Employee of the Bank or of its subsidiaries (Article 2372 of the Italian Civil Code). The signature on the proxy must be certified by a Public Notary or by the Bank’s Executives or by 3rd or 4th level Managers, or by Branch Managers. Each Shareholder may represent no more than two other Shareholders by proxy. In compliance with the provisions of Article 33 of the Articles of Association, notice is given that, for the purposes of appointment of the Board of Statutory Auditors, any lists must be submitted in accordance with the terms and procedures set forth in the aforesaid Article 33. In particular, pursuant to the Articles of Association, each list submitted must be signed by at least 381 Shareholders enrolled in the Shareholders’ Register as at 29 January 2006, and holding a total of 484,644 shares of a total par value of € 1,453,932.00. In the fifteen days prior to the Meeting the following documents must be filed at the registered office of Banca Popolare di Intra, in Verbania Intra, Piazza Aldo Moro, 8 and at Borsa Italiana SpA, Piazza Affari, 6, Milan: the documentation required under Article 2429, sub-section 3, of the Italian Civil Code; the consolidated financial statements complete with all the relevant reports; and, pursuant to the provisions of CONSOB Resolution no. 11971 of 14 May 1999, the Directors’ report on the business to be discussed in the Extraordinary Shareholders’ Meeting. The Shareholders’ are entitled to request copy thereof.
Verbania Intra, 16 March 2006.
on behalf of the Board of Directors The Chairman Cesare Ponti
(The notice of call was published, pursuant to law, in Official Gazette no. 72 of 27 March 2006)
7
FINANCIAL STATEMENTS 2005 OF THE BANCA POPOLARE DI INTRA AND RELATED REPORTS
8
DIRECTORS’ REPORT ON OPERATIONS
9 To the Shareholders,
Before we discuss company performance and report the relative operating results, we would like to mention briefly the economic backdrop that has characterised the past year and quote some figures and comments from official sources.
REFERENCE ECONOMIC SCENARIO
International Economy
In 2005 world growth continued at slightly lower rates than in 2004, following the slowdown in the US economic cycle and those of some world economic areas (South America and smaller Asian countries). Although these countries experienced growth rates that were almost 3 percentage points lower than the previous year, they still contributed to an increase in world Gross Domestic Product in excess of 4% (nearly 5% in 2004). On one hand, world growth prospects have been adversely affected by high oil prices, which should by now have reached their peak, and by the considerable increases in the prices of raw materials and gold, and on the other by the growth trends forecasted in China and India which show no signs of slowing down. With regard to the economy of individual areas, in the United States the positive trends in domestic demand, sustained by the growth in household consumption and investments, has caused the Gross Domestic Product to rise by approximately 3.2% (over 4% in 2004), despite the negative contribution of net real exports. This rise in household borrowings, which is due to the purchase of property, and the consequent increase in property prices, is however creating concern with the Monetary Authorities who fear the creation of a speculative “bubble”. For this reason the Fed took the decision to increase the cost of money by 75 basis points between December and March 2006, bringing the discount rate to 4.75% with the aim of keeping inflation and the high public deficit under control. Following the increase in the cost of money, the dollar recovered part of the depreciation against the euro recorded in 2005, climbing back, albeit briefly, to above the 1.20 mark. In Japan the high growth rates in GDP and domestic demand that were recorded at the beginning of 2005 as the country came out of the 2004 recession have progressively weakened, bringing the total GDP for 2005 to around + 2.5%. As far as the outlook is concerned, while there are still some positive elements to sustain growth (favourable trends in the employment market, improvement in company balance sheets and profits), these are coupled with the some structural difficulties that have yet to be fully resolved, which means that recovery in the medium period is still shaky.
10 While the US economy has experienced a slowdown, though it still continues to grow, and the Japanese economy has remained stable, 2005 has seen weak growth in the European economy (GDP of the Euro Area +1.7%). Even though actual figures have yet to show enduring signs of recovery, the European Central Bank deemed it necessary to raise the interest rate by 0.5% (to 2.5%) between the end of 2005 and the beginning of 2006, also in order to withstand risks of a possible rise in inflation due to the increase in the price of oil and energy supplies. A glance at the major EU countries shows that the industrial transformations implemented in Germany have brought about a strong recovery of exports and, in the last quarter, of investments, despite stagnation in household income and in consumer demand. GDP rose by 1.6% compared to the previous year. In the third quarter 2005 France experienced accelerated growth in Gross Domestic Product attributable to both consumer and investment recovery and to the improvement in the balance of trade due to the positive increase in net exports which will see GDP increase by more than 1.2% in 2005. The Spanish economy shows no signs of slowing its growth rate and the Gross Domestic Product for 2005 once again exceeds 3%, thanks to increased exports and to domestic demand which remains steady, despite the loss of purchase power caused by high inflation.
Italian Economy
After the recession experienced between late 2004 and early 2005, the Italian economy has shown some slight signs of recovery (even if more modest than that of the other European countries). The 0.6% increase in GDP recorded in the second quarter was followed by a 0.3% rise in the third quarter and by zero growth in the fourth quarter, leading to 0.1% growth in 2005 (lower than the 1.1% recorded in 2004). The greatest contribution to GDP growth came from domestic final demand, sustained by growth in collective consumption (+1.4%) and by private consumption (+0.2%), while the contribution from net foreign demand was inexistent, due to a balance of exports and imports. The contribution from investments proved negative (gross fixed investments -0.1%), with particular regard for the machinery and means of transport component (-2.9%). In 2005 industrial production fell by 1.8%, despite the December recovery (+3.5% correct figure for the different number of working days) sustained by the boom in car sales. The prospects of recovery improved the climate of confidence in companies as there appears to be grounds for an imminent acceleration of investment decisions and for a recovery of employment levels. As far as public finance is concerned, there is still an excessive deficit which at year end stood at approximately 4.1% of GDP (3.4% in 2004), with debt accounting for
11 106.4% of GDP. The worsening of the budget deficit is common among the majority of the EMU countries and the average indebtedness of these countries reached 3% (2.7% at year end 2004). Despite the rise in the price of oil and raw materials recorded during the summer months, inflation appears to be under control as at year end 2005 it fell to 2% (from 2.2% in 2004). As the tax pressure subsided so the household purchasing power increased leading to a greater inclination to save on one hand and to the afore- mentioned recovery of consumption on the other. With regard to employment figures, in the 4th quarter 2005 the labour supply recorded substantial stability (+0.1 on a year-on-year basis), with the number of employed rising by 0.2% (this figure has however been partly affected by the regularisation of foreign citizens). The unemployment rate stood at 8% (8.2% in the 4th quarter 2004), while net of the seasonal effects it has increased by one tenth of a point. The outlook for the Italian economy should see an economic trend that more closely resembles the European average and which in 2006 will lead to a 1% improvement in GDP, while trends in household expenditure in real terms are expected to be more stable.
Local Economy
At local level the signals emerging from the economic scenario of the provinces of VCO and Novara (in which we have 51 branches), Varese (12 branches), Milan and Como (9 branches in all), depict a situation of fragility, with some initial signs of recovery. The survey of economic trends performed by the Chamber of Commerce of Verbania, relating to the 3rd quarter 2005, highlights a 5% year-on-year increase in industrial production in the province of VCO (-3.6% compared to the previous quarter, with the fall attributable to the seasonal aspect of the summer quarter). This increase is the result of the rise in production volumes in the chemical sector (+13%) and of the activity of medium-sized enterprises. Percentage plant utilisation stands at 69%, which is slightly down on the 2nd quarter 2005 (71%). Total sales, after the positive increase recorded in the first quarter and the stationary nature of the second, posted a 1% year-on-year increase, even if in terms of economic trends a 4% increase on the previous quarter has been recorded in foreign sales, which is exclusively due to the contribution of the metal and mechanical segment (+23%). Trends in new orders acquired by companies shows signs of difficulty, as they have in fact fallen in both the foreign component (-7%) and the domestic component (- 4.5%). At year end 2005 the VCO province’s entrepreneurial system presents a positive balance between companies that have enrolled and companies that have closed down (55) with total companies registered rising to 14,274 (the figure has been affected by the official cancellation, on the part of the Chamber of Commerce, of
12 companies that no longer prove to be in business). The growth rate of companies is 0.4% compared to the 0.9% average for the Piedmont region. In their forecasts entrepreneurs shows caution in expected increases in production, employment and orders over the next months. According to the figures of the Excelsior 2005 survey processed by the Chamber of Commerce, the estimates at year end 2005 concerning the employment requirements of the companies of Verbano Cusio Ossola have risen by 1.2%, remaining above both the Piedmont (+0.1%) and the Italian (+0.9%) average. The figures released by the regional employment market observatory highlight a 7.1% year-on-year decrease in total employed persons in 2005 (equal to a decrease of 1.027 persons compared to 2004). At the same time there has been greater recourse to redundancy payments (+12.6%), with significant increase in the ordinary component (+41.9%) and a decrease in the extraordinary component (-29.5%). The provisional figures of the provincial tourism observatory highlight substantial stability in the tourist/hotel activities compared to 2004, with a slight fall in arrivals (- 0.8%) and a slight rise in presences (+0.4%), relating to both Italian and foreign tourism. The foreign component continues to account for a high percentage (70.5% and 77.4% respectively). In the province of Novara, according to the survey of economic trends in the 3rd quarter 2005 performed by the local Chamber of Commerce in association with the Piedmont Union of Chambers of Commerce, out of a sample of 130 manufacturing companies, industrial production has undergone a 3.4% year-on-year decline. Those experiencing greatest difficulty are the medium-sized businesses (from 50 to 249 employees) and the large enterprises (over 250 employees), with a fall of 7.2% and 2% respectively. In terms of sectors, the fashion industry (textile/clothing) has been most affected by the crisis with a year-on-year decrease in production of 6.2% (-22.5% compared to the previous quarter), followed by the chemical/rubber industry (-5.3%) and by the metal and mechanical industry (-3.3%), within which the taps and fittings segment has experienced slight recovery (+0.4%). The food industry is moving against the market trend and recorded an increase of 1.2% and a more encouraging 8.2% on the 2nd quarter 2005. Use of the production capacity has improved slightly rising from the 71.4% of the 2nd quarter to 72.1%, even though levels remain lower than at year end 2004 (73.5%). Large enterprises feature a higher utilisation rate (76.5%). Sales record a slight year-on-year decrease (-0.8%), affected by the negative performance of larger sized companies as a whole. The fashion industry has fallen by 9.1%, the food industry by 2.6%, while metal and mechanical is essentially stable (+0.4%) and chemical/rubber features a 4.5% rise. Foreign sales figures show positive signs and have risen by a total of 2% compared to the previous quarter. The increase has been driven by the chemical (+7.8%) and metal and mechanical (+1.1%) industries, while textile/clothing (-3.3%) and food (- 2.1%) appear to be struggling.
13 New orders on the domestic market have experienced a 4.1% decrease compared to the previous quarter, with the greatest reductions being recorded in the textile/clothing (- 22.3%), metal and mechanical (-2.6%) and chemical (-1.2%) industries, while the food industry has posted a slight increase (+0.8%). New foreign orders are more or less stable (-0.5% which has been affected by the very bad performance of textile/clothing). The findings of the Research Office of Movimprese-InfoCamere highlight the constant expansion of Novara’s entrepreneurial fabric (+2.2% compared to the 1.6% of 2004), with a positive balance between new enrolments and closedowns equal to 676 units (as at 31 December 2005 32,077 companies were registered), sustained by expansion in the services sector. The entrepreneurial system is continuing to grow stronger thanks to the substantial growth in joint-stock companies (+5%), favoured over partnerships and proprietorships which have grown by little more than 1.5%. Labour market signals are less comforting. According to figures released by the Social Security Institute the recourse to temporary unemployment compensation in the first nine months of the year has recorded a year-on-year increase of 42.5%, due exclusively to the extraordinary component (+221.8%), while the ordinary component remains stable (+0.4%). The six-month forecasts provided by the entrepreneurs interviewed show low confidence in the recovery of production, employment and domestic demand, which was particularly marked among those operating in the fashion industry, while the outlook for foreign demand remains stable. The survey of economic trends in Varese’s manufacturing firms (approximately 200), referring to the 3rd quarter 2005, shows that the province’s economy is still struggling, even if production activity is diminishing at a lesser rate. Industrial production has delivered a year-on-year decrease of 0.9%, while the short- term figure records a downturn of 5.8%. The plant utilisation rate stands at 71% of production capacity. Sales have fallen, especially compared to the previous quarter. In terms of demand the volume of orders acquired in the quarter has decreased on both the domestic (- 5.9%) and foreign front (-4.7%). Tourist flow figures for the third quarter 2005 are also not positive as a year-on-year fall has been recorded: arrivals have dropped by 7.3% and presences by 10.3%. On the basis of figures provided by Movimprese in 2005, the number of companies operating in the province of Varese has grown (+1.7% on a year-on-year basis for a total of 62,319 units sustained by expansion in the services/commercial sector +1.9% with 36,324 companies), while the number of closedowns has remained more or less stationary, posting an increase which is above both the national average (+1.1%), and the Lombardy average (+1.6%). More enterprises continue to be established under corporate form, while a slight decrease is apparent in proprietorships, which continue to represent 54.4% of the total. In practical terms, the number of joint-stock companies has risen to 11,714 posting a 5.1% increase and these now account for 18.8% of total companies.
14 According to entrepreneurs the outlook for the coming months shows encouraging signs, in that the downward trend of the 3rd quarter is being considered a temporary event and growth in production, domestic and foreign demand is forecast.
Monetary Policy, Financial Market and Credit System
In 2005 Board of Directors of the ECB left the minimum offering rate on main refinancing transactions at 2% until 1 December, when a quarter of a point increase was decided. The increase, which was the first in five years, was implemented with the aim of contrasting the potential inflationary pressures exercised by the high oil prices, which so far have chiefly affected economic growth in the euro area.
After nine months characterised by a drop in long-term interest rates (September marked the low for ten-year securities, 3.2%), in October-November the European financial market witnessed an upward trend in interest rates with increases of approximately three tenths of a point, in the presence of more favourable indications on the expected development of economic trends and of fears of an increase in inflationary pressures. In the second quarter of 2005 the widening of the long-term interest differential with yields in dollars contributed to the weakening of the euro exchange rate. The euro recorded modest fluctuations from the summer until mid-October when it once again began to depreciate against the dollar. On the whole, from the beginning of the year to mid-November the euro depreciated by 7.4% in effective nominal terms, as a result of a loss in value against both the dollar (14.1%) and, to a lesser extent, the other major currencies.
From spring onwards share prices rose in the euro area and in Italy, reflecting both the improvement in current profits of listed companies and the further drop in real interest rates. In Italy total trading on the electronic system of shares, etf and securitised derivatives exceeded, according to the first actual figures processed by Borsa Italiana, one thousand billion euro in countervalue, against the 754 billion recorded in 2004, for a total of 53 million contracts (39.9 last year). Average daily trading was equal to 208,000 contracts (+ 35.6% on 2004) and to 4 billion euro in countervalue (+ 35.5%), figures which represent an all-time record for the Italian market. Particularly strong growth was recorded by share trading with the daily average rising from 2.9 to 3.8 billion (+ 31.1%). Average daily contracts reached 185,330, recording an increase of more than 38% compared to the previous year. The MOT (bonds and government stocks market) recorded a decrease in trading of government bonds, which recorded a total of 108.7 billion euro (133.8 in 2004), with a daily average of 426.2 million euro (-21.4% on 2004). Trading of bonds rose, reaching 11 billion euro (7.3 in 2004). The indices again delivered positive performances in 2005: at the end of December the Mib reached 26,244 (+14.6% compared to year end 2004) and the other indices
15 also rose: Mibtel +14.4%, S&P/Mib +16.4%, All Stars +33%, Star +31.2%, TechStar +46.7%. Lastly the overall capitalisation of Borsa Italiana rose, reaching 681 billion euro (581 at the end of the previous year), equal to 49.4% of GDP, against 282 listed companies (+4 compared to the previous year). With regard to the principal changes in legislation affecting the banking system, we mention the following: • Legislative Decree no. 38 of 28 February 2005 “exercise of the options provided by Article 5 of (EC) Regulations 1606/2002 concerning international accounting standards” which governs the timing and procedures of entry into force of the ISA/IFRS standards to the Italian order; • Law no. 62 of 18 April 2005 (Community Law 2005), which assimilating the European directive on market abuse, introduced amendments to the Finance Consolidation Act (Legislative Decree 58/1998) and to the Law on the administrative liability of entities (Law 231/2001). This order, aimed at guaranteeing market integrity, established new means of preventing and repressing insider trading and market manipulation, introducing numerous obligations to be fulfilled by intermediaries as well as tough sanctions, including sanctions of a penal nature. It also extended the cases, envisaged by Legislative Decree 231/2001, in which entities can be held liable and established a double track framework: liability for the offence itself and liability for unlawful administration committed by subjects fulfilling top functions and by subjects under their supervision or management; • Reform of the bankruptcy law and of bankruptcy procedures (Law no. 80 of 14 May 2005 and Legislative Decree no. 5 of 9 January 2006), which has a considerable effect, among other things, on both the system of claw-back actions, by halving the terms of the questionable period, reviewing the system of exemptions and limiting the claw-back to the amount of the actual return of the creditor bank, and on the procedure for composition with creditors; • Law no. 266 of 22 December 2005 (so-called “Finance Bill 2006”) which among other things has introduced important amendments to the rules governing the “participation exemption”, re-opening the possibility of effecting revaluations on corporate assets and on shareholdings and establishing definitively that amortisation of goodwill may be subject to tax deduction for a period of 18 years; • Law on savings (Law no. 262 of 28 December 2005), which has a considerable effect on numerous aspects of importance to banks, considered as companies, as issuers of financial instruments, as intermediaries and as regulated subjects; • Law Decree no. 7 of 31 January 2005 and Ministerial Decree of 25 May 2005 on Stamp Duty, which introduced changes to the procedures by which to calculate the payments of statements of current account, securities deposit and treasury accounts and GESPAT statements. The scope of application also includes contracts, surveys, receipts and revenue stamps. The Ministerial Decree ratified exemption from duties for guarantee contracts; • Law Decree no. 84/2005 on the Taxation of income from savings in the form of payment of interest – Order of the Inland Revenue of 8 July 2005, which establishes that notice of interest paid to a subject resident in another EU State,
16 must be provided to the State in which the subject is resident, through automatic exchange of information between financial intermediaries and the tax authorities and, thereafter, between the tax authorities of the countries involved; • Legislation on banking assessments for tax purposes: Law 311/04 (Finance Bill 2005) – Law Decree no. 203 of 30 September 2005 converted into Law no. 248 of 2 December 2005. This law introduces the obligation to identify all customers, including occasional customers, who perform, at the bank, transactions of any amount, that have considerable impact on the operating network. The activation of a CEM (Certified Electronic Mail) system is required for the transmission/receipt of notices with the Tax Authorities, with considerable reduction of the terms within which replies must be provided. With regard to legislation/interpretations issued by Bank of Italy, attention is drawn to the following: • Regulations concerning collective asset management (14 April 2005) which reformed the entire governing rules and completed assimilation of EC directives on the matter; • Circular no. 977125 of 14 October 2005 (Issues and offerings in Italy of securities) which, among other things, raised the minimum amount (from € 50 million to € 2 billion) under which the prior authorisation of the Regulatory Authority is not required for issue of standard bonds, and also expanded the types thereof; • Circulars no. 49 and 115 concerning the introduction to the central record of accounts, for both separate and consolidated notices, of new items on credit anomalies, in line with the new definition of default provided by Basel II; • provisions regulating accounts matrix – IAS/IFRS, issued in May 2005 for the banks which exercise the right provided by IAS Decree” and effect first time application of the international accounting standards to the financial statements for the year 2005; • order of the Director General of the Bank of Italy of 22 December 2005 which provides that the financial statements of banks be drawn up in compliance with the international accounting standards and according to circular no. 262 “The financial statements of banks: layouts and rules for preparation”, attached to the order. Furthermore, in March 2005, the Bank of Italy informed the banking system of the launch of works for assimilation within the scope of national legislation of the new capital accord defined by the Basel Committee and the subject of draft community directives. The legislative activity of CONSOB proved to be of considerable significance, both in terms of the quantity and the range of orders. • Amendments to Issuers Regulations (IR): Resolution no. 14990 of 14 April 2005 and resolution no. 15232 of 29 November 2005 The second of the two resolutions governs new fact situations which are now envisaged by the Finance Consolidation Act - Information on material events and circumstances (Article 65 bis and thereafter). The amendments introduce, on the basis of the newly drafted Article 114 of the Finance Consolidation Act, significant changes aimed at
17 guaranteeing adequate quality of disclosure. The innovations specifically include the obligation to update published information, the use of internet on the part issuers for further disclosure of information, the ban on using the notice due pursuant to the Finance Consolidation Act for marketing purposes, and the need to guarantee confidentiality of information in the event of delay in its circulation. - Purchase of treasury shares (Article 144-bis). In order to ensure the fair treatment provided in general by the new Article 132 of the Finance Consolidation Act, it was deemed necessary to prescribe specific conditions referring to three aspects of the shares repurchase programme concerning, respectively, the phase in which the purchase is authorised by shareholders’ meeting, the types of transactions permitted and transparency for the market. - Purchase and sales transactions effected by managers (internal dealing). The changes – introduced in implementation of the provisions of Article 144, sub- section 7 of the Finance Consolidation Act – concern the transparency of the transactions effected by the subjects who are more likely to have access to privileged information, namely the shareholding managers of the company, with reference to both the scope of application and the forms and time-scales of disclosures to be provided to CONSOB and to the public. - Derogations to the ban on abuse of privileged information and manipulation (safe harbour). The derogations are provided by Article 8 of the directive and establish that transactions to stabilise a financial instrument subject to pressure and treasury share purchase transactions effected in compliance with the conditions established by relevant community provisions are not considered cases of abuse. - Correctness and transparency in research. This matter is regulated by the IR in Articles 69 – 69-novies which, in short, define and govern: the identity of the subjects who produce the “recommendations”; the general provisions relating to the correct presentation of studies and research and notices to the public of interests and conflicts of interests; distribution to the public of recommendations produced by third parties and any procedures for publication of information pertaining to the recommendations; the publication of research. - Registers of person having access to privileged information. The directive introduced a significant change as it requires issuers and the subjects acting in their name or on their behalf (namely law firms, professional advisors and intermediaries) to set up and regularly update a register of persons having access to privileged information relating to the issuer. The new provisions came into force on 1 January 2006 with the exception of some amendments which will come into force on 1 April 2006 and namely, the regulations pertaining to: correctness and transparency in research; treasury share transactions; registers of persons having access to privileged information and internal dealing transactions. • Amendments to market regulations (MR) resolutions no. 14955 of 23 March 2005 and no. 15233 of 29 November 2005.
18 The most significant changes introduced by resolution no. 14955 include simplification of the regime of transparency of transactions on listed bonds effected over-the-counter (Article 11) and exercise of the right to participate in shareholders’ meetings with distinction between “certification” and “notice of participation in shareholders’ meeting”: Resolution no. 15233 introduced important changes concerning: - specification of the elements and circumstances to be assessed in order to identify market manipulation; - accepted market practices; - reporting of questionable transactions.
Banking Intermediation
In 2005 the credit disbursed by the banks in the euro area recorded an acceleration, due to the strong demand for funding to companies, chiefly associated with business combination deals, and to further growth in loans to households. The offering conditions became progressively more expansive and interest rates were cut further. Italy experienced very intense credit acceleration which was concentrated on the corporate component. Financing granted in the form of syndicated loans to some groups within the scope of corporate reorganisation processes accounted for a considerable portion. Bank loans to smaller companies (proprietorships and partnerships with less than 20 employees) also accelerated. Continuing a trend that began at the end of the last decade, the increase in company loans was concentrated in the medium/long-term component. Loans to consumer households rose by 15% in the twelve months to September, which is almost twice the average of the euro area. As far as credit risk is concerned, the main risk indicators have returned to minimum levels. The growth rate of gross bad debt has in fact been steadily lower than + 5% and was practically set to zero in the month of October. In relation to total loans the aggregate value accounts for approximately 4.5%, in line with the 2002-2003 two- year period. Trends in net bad debt are even more favourable as these have continued to decrease over the year and accounted for less than 2% of loans, with a reduction of the indicator of approximately 4 tenths of a point compared to the end of 2004. The year-on-year growth in internal bank deposits was steadily higher than 7%, with peaks of 9% in the June-July period. Strong expansion was recorded in repurchase agreements, and from July onwards growth rates constantly exceeded the 10% mark. Trends in other technical forms instead remained essentially stable. Current account deposits recorded growth trends in the region of 7%, while trends in savings deposits remained more moderate (between + 2% and + 4%). Although deposits in bonds slowed down in the second half of the year, they continued to expand, recording a 9% growth trend at year end.
19 Trends in indirect deposits of the banking system were once again notably lower than trends in the direct component, despite some signs of recovery following a particularly weak two years. The tendential increase recorded in October (+2.2%) was the highest figure of the last three years and the flow of new deposits in the first ten months rose from the € 19 billion of the same period of 2004 to € 28 billion.
As far as interest rates are concerned, within a substantially stationary context, the expected rise in official rates, which occurred in December, led to an increase in the cost of new loans which was between one and three tenths of a point, while on the deposits front only the yield of repurchase agreements showed any sign of reaction. With regard to existing transactions, the further filing down of the loan rate and the minimum increase in the overall cost of deposits led to a new reduction of banking spread by fifteen basis points, bringing the value to under 3%.
20 THE BANK’S PERFORMANCE1
The financial statements 2005 are the first to be drawn up according to the new IAS/IFRS international accounting standards. Hence before proceeding to comment on the Bank’s performance it is necessary to state that the figures reported as at 31 December 2005 are only partially comparable with those reported as at 31 December 2004 as the latter have been reclassified in accordance with the said standards, but with the exclusion of IAS 32 and 39 concerning financial instruments. In 2005, although trends in ordinary operations continued to be positive, the Bank’s economic/financial results were heavily affected by the deterioration of some significant credit positions, for the most part attributable to the position of the Fin.Part Group and related majority shareholders, as already highlighted in the Consolidated Half Year Report as at 30 June 2005 and as will be described in greater detail in the section on “deteriorated credits”. On 31 August 2005, the Bank issued a Profit Warning relating to the extraordinary provisions made to the loans portfolio as a result of the ongoing corporate difficulties experienced by some customers with considerable debt exposure, amongst which the Fin.Part Group. At the same time the Bank also disclosed notice of the decision taken by the Board of Directors, following investigation into loans management, to propose to the Shareholders’ Meeting, that legal action be taken against the former General Manager, Mr. Giovanni Brumana. Moreover, following the outcome of the inspections performed by Bank of Italy from 16 May to 2 September 2005 and further to the company Fin.Part being declared bankrupt by the Court of Milan on 25 October 2005, the Bank passed a resolution to make further significant provisions to the positions pertaining to and associated with the Fin.Part Group, so as to ensure more than adequate coverage of the risks. The sum total of the substantial value adjustments recorded during the year on problem loans - which, as stated above, are chiefly attributable to the deterioration ensuing from the bankruptcy of the company Fin.Part (with consequent repercussions on current shareholders) as well as to the legal dispute (of which greater details are provided below) that arose during the year with the former majority shareholder of Fin.Part, Mr. Facchini, and also to the Board of Directors’ decision to implement an extremely strict regime by which to ensure the Bank’s rapid return to profitability – rendered fruitless the good performance posted in the services margin, with strong growth in net fees, and the positive results of the trading and hedging activity. From early September, in order to mitigate the effects of the aforesaid provisions, a series of extraordinary transactions were launched with the aim of protecting corporate capital, sustaining capital ratios and preserving technical balances.
1 Given that in the report (text and tables) most amounts have been rounded off to the million or to the thousand, the percentage values specified may differ slightly from those that would emerge from comparison of the amounts expressed in units of a different size.
21 These transactions included the assignment without recourse to the Pirelli RE Group of a portfolio of bad debts consisting of mortgages and loans which had been subject to considerable write-down, with the aim of containing the overall risk profile of assets as well as the asset quality profiles. At the same time the Bank also began the sale of non-strategic assets – minority shareholdings and non-capital properties -, which was practically completed during the year. As far as the routine loans and deposits activity was concerned, 2005 was characterised by a strong commitment to enhancing the “Popolare di Intra”’s role as local retail bank and to satisfying the needs and expectations of its own customers and shareholders. This was achieved through a greater fractioning of credit facilities, with preference being given to retail customers and local small-to-medium sized businesses, with the introduction of some products and services specifically tailored to the needs of these customers and to our own shareholders. Shareholders also benefited from special rates and additional services. Following the afore-mentioned events, an in-depth review of corporate governance was launched in September. The Board of Directors was strengthened with appropriate professional expertise in various areas (banking, financial/welfare, economic/entrepreneurial) and corrective measures were taken to amend the Bank’s organisational structure, especially with a view to improving the internal control system. New rules governing the loan segments and the internal audit and risk management activities were drawn up. The actions described above will be followed by the further measures contained in the 2006-2008 Three-Year Strategic Plan shortly to be approved and will concern, amongst other aspects, the strengthening of the Bank’s capital ratios, also in relation to the risks assumed, the re-balancing of profit trends, the reorganisation of operational structures and of the internal control system and the redefining of the governance model. With regard to the issue of Fin.Part and related positions, notice is given that on 27 July and 2 August 2005 the following writs of summons were served: - before the Court of Milan, hearing of the forthcoming 29 November, statement by which, in the interest of Mr. Gianluigi Facchini, it is requested that the Bank is sentenced to provide “compensation for the economic and non-economic damages suffered and to be suffered, as a result of the conduct described in the statements submitted; damages which are specified as totalling no less than € 150,000,000.00, or as any other, higher or lower sum that may be ascertained in the course of proceedings”; - before the Court of Milan, hearing of the forthcoming 29 November, statement by which, in the interest of Mrs. Paola Del Curto, it is requested that the “Banca Popolare di Intra is sentenced to provide compensation for the economic and non- economic damages suffered and to be suffered, as a result of the conduct described in the statements submitted; damages which are specified, given the risk to her health suffered, as no less than € 10,000,000.00, or as any other, higher or lower sum that may be ascertained in the course of proceedings”;
22 - before the Court of Verbania, hearing of the forthcoming 24 November, statement by which, in the interest of Messrs. Franco Facchini and Alessio Virginia, it is requested that “the Banca Popolare di Intra is sentenced to provide compensation for the economic and non-economic damages suffered and to be suffered, as a result of the conduct described in the statements submitted; damages which are specified as totalling no less than € 2,000,000.00, or as any other, higher or lower sum that may be ascertained in the course of proceedings”; - before the Court of Verbania, hearing of the forthcoming 24 November, statement by which, in the interest of Mrs. Paola Del Curto - in her capacity as holder, through a trust contract, of approximately 60% of the company “Immobiliare del Grifo” -, it is requested that: 1) the Court ascertains and declares that the contract of 30.09.2003 of Notary Public Giuseppe Gasparrini for the opening of credit secured by mortgage is completely invalidated, void and ineffective as it was not signed by the representative of Immobiliare Del Grifo holding the appropriate powers and the relative loan was not disbursed; 2) consequently, having ascertained the above, the Court declares the invalidity and the radical ineffectiveness for all intents and purposes of the disputed document and of the contractual terms vis-à-vis Immobiliare Del Grifo and any third parties. Alternatively 3) Subject to declaration of ineffectiveness of the contract of 30.09.2003 entered into by the parties the Court sentences Banca Popolare di Intra to provide compensation for all the consequent damages as they will be proved in the course of proceedings”. With regard to the state of the aforementioned proceedings, the following is notified: - FACCHINI GIANLUIGI, the Court of Milan has upheld the request advanced by the Bank’s defence counsel to extend the proceedings to include VELA FINANCIAL HOLDING LTD and Mr. Giovanni Brumana; with regard to the latter party, the writs have already been served and the hearing has been set for 11 July 2006; - DEL CURTO PAOLA, the Court of Milan upheld the request advanced by the Bank’s defence counsel of invalidity of the writ of summons, remitting the discussion of the case to 4 July 2006; - FACCHINI FRANCO and ALESSIO VIRGINIA, the Court of Verbania adjourned the case to the hearing of 14 March 2006, in order to attempt settlement. At the aforesaid hearing the Court assigned the terms by which to present statements under Article 183, last sub-section of the Italian Code of Civil Procedure and adjourned discussion of the case to the hearing of 26 April 2006. - DEL CURTO PAOLA / IMM.RE DEL GRIFO, before the Court of Verbania, the opposing party submitted request for due process of the two trust companies holding the shares of Immobiliare del Grifo, and of the drafting notary public; the
23 Court lifted the reservation adopted and dismissed the plaintiff’s motion and then adjourned the case to the hearing of 12 April 2006. As it is the Bank’s belief, and one which is also backed by the legal opinions received, that these lawsuits and claims are groundless, it has not deemed it necessary to set aside any specific provisions. For the purposes of providing full information, notice is given that some legal action – which has nothing to do with the Fin.Part matter – has been taken against the Bank by some members of the Lazzari family on their own behalf or on that of the companies controlled thereby. The Bank has taken legal steps to protect its interests and its image, believing the lawsuits and the claims brought by said debtors to be completely groundless. Towards the end of the year the Tax Police of Milan and Verbania seized some documents of the Bank and its subsidiary Intra Private Bank, within the scope of investigations brought by the Public Prosecutor’s Office against the former General Manager, Mr. Giovanni Brumana. Lastly notice is given that during the year CONSOB forwarded a request to the Bank for further information on news which appeared in the financial newspapers concerning the extent of the Bank’s problem loans, the exposure of the positions of the Fin.Part Group and associated companies and the outcome of the Regulatory Authority’s inspections. The Bank provided punctual reply to said requests and issued special press releases to the market, where so requested. Moreover, considering the repeated publication of clearly disparaging articles which had obvious repercussions on the share performance, the Bank deemed it necessary to forward, from November 2005, a series of formal complaints to CONSOB concerning breach of the rules to prevent “market abuse” (Law 62/2005).
24 Commercial Operations
Loans
At the end of 2005, customer loans, net of value adjustments, record a 5.8% fall compared to year end 2004 (from € 3,377.8 million to € 3,181 million). The downturn is due to both the material adjustments made with regard to the deterioration of important credit positions, and to the greater selectivity applied in granting loans.
Andamento degli impieghi
3.500,0 3.400,0 3.300,0 3.200,0 3.100,0 3.000,0 2.900,0 2.800,0 2.700,0 2.600,0 31.12.2002 31.12.2003 31.12.2004 31.12.2005 Andamento degli 2.866,8 3.262,1 3.377,8 3.181,0 impieghi
Trend in loans Composition of cash loans 31.12.2005 % 31.12.2004 % (in millions of euro) composition (excluding variation IAS 39) Portfolio discounting risk 31.3 1.0 34.5 (9.3) Active current accounts and other subsidies 1,568.5 49.3 1,854.0 (15.4) Mortgage loans 1,222.3 38.4 1,139.7 7.2 Foreign transactions 225.0 7.1 247.7 (9.2) Other loans 17.8 0.5 20.2 (11.9) Non-performing loans 149.0 4.7 100.2 48.7 Total 3,213.9 101.0 3,396.3 (5.4) Net of: - Collective write-downs to problem loans (*) 0 (1.8) (100.0) - Collective write-downs to performing (32.9) 1.0 (16.7) 97.0 loans Total write-downs distributed across individual technical forms (32.9) 1.0 (18.5) 77.8 Loans to Customers 3,181.0 100.0 3,377.8 (5.8) (*) from 2005 these are divided by technical form
25
Breakdown of cash loans as at 31 December 2005
Crediti in Altri crediti sofferenza 17,8 149 Rischio di portafoglio-sconto Operazioni 31,3 riflettenti rapporti con l'estero 225
C/c attivi e Mutui sovvenzioni, 1222,3 1568,5
Mortgage loans 1222,3; Foreign transactions 225; Other loans 17,8; Non-performing loans 149, portfolio discounting risk 31,3; Active current accounts and other subsidies 1568,5. At aggregate level, and in net value terms, the medium/long term credit segment continues its growth trend, with particular expansion in mortgage loans which have risen to € 1,222.3 million, compared to the € 1,139.7 million recorded as at 31 December 2004 (+ 7.2%). By contrast, active current accounts and other subsidies have fallen by 15.4% (from € 1,854 million to € 1,568.5 million). Other loans, which have dropped from € 20.2 million to € 17.8 million, include caution money for derivative transactions and some assignments of credit. The table below provides a breakdown of the medium/long terms loans granted during 2005 according to type of transaction.
Medium/long term loans (in millions of euro) Type granted in 2005 borrower Mortgage loan number amount Secured 142 47.2 business Construction 160 71.6 Unsecured 1,243 61.0 (a) total business 1,545 179,8 Secured 1,395 155.6 private Construction 181 18.1 Unsecured 1,957 25.2 (b) total private 3,533 198,9 grand total (a) + (b) 5,078 378,7
26 The aggregate figures clearly show that in terms of both number and amount the private mortgage loans component prevails. In this category the average amount disbursed in 2005 for secured/construction mortgage loans was equal to € 110 thousand, while for personal loans it was equal to approximately €13 thousand. On the whole, mortgage-backed transactions represent 37% (43.1% in 2004) of the total of new mortgage loans and 77.2% (78.3% in the previous year) of disbursed capital. In 2005 the wide range of financing forms and services provided to customers continued to be implemented with the collaboration of external companies and mutual guarantee associations. In 2005 the mutual guarantee associations with which the Bank operates were involved in 813 transactions (708 in 2004) for a total of € 51.1 million (€ 44.2 million in 2004). These break down into 377 short-term transactions (354) to the order of € 28.8 million (€ 29.3 million) and 436 medium term transactions (354) to the order of € 22.3 million (€ 14.9 million). A 14.8% increase was recorded in terms of numbers and a 15.6% increase in terms of amounts. Relations with the Piedmont Regional Finance Agency Finpiemonte, with regard to the regional incentives that always prove popular with the local small businesses, continued in a fruitful and satisfactory manner, as did those with Artigiancassa and MCC (Mediocredito Centrale) in the area of state subsidised loans to businesses in which the Bank is directly operative (Law 949/1952 Section VI “Artigiancassa”, law 1329/65 “Sabatini” and Law 598/1994 regarding the “Technological Innovation” and Environmental Protection” sectors). Meanwhile the leasing sector recorded a further reduction in volumes. In 2005 the total value of assets leased through the subsidiary Monza e Brianza Leasing, the external partner SG Leasing (formerly Franfinance Leasing Italia) and the leading broker CIBIK Broker House Leasing, stood at € 89.4 million, down by 15.7% on 2004 (€ 106.1 million). In terms of types of financing, a total of 59 transactions were concluded in real estate for € 47.8 million, 323 in motor vehicles for € 10.1 million and 291 in capital goods for € 31.5 million. During the year the Bank’s branches made greater use of the Group’s leasing company (Monza e Brianza Leasing), for which intermediated volumes rose by 9.7%, reaching € 23.8 million, with the number of transactions (493) increasing by 10.8%. Lastly, the alliance with Factorit (which in the meantime has joined the Banca Italease Group) led to a turnover of € 14.7 million in factored credits being managed, with eighteen active customers, of which five new. With regard to the securitisation transaction effected in 2002 involving 5,784 mortgage loans (which then dropped to 5,701 as reported in the relative section of the Notes to the Financial Statements) for an original value of € 445 million, the Bank continued to perform the activities entrusted thereto including the administration, management, collection and recovery of assigned credits, pursuant to the servicing agreement entered into with the vehicle company Intra Mortgage Finance 1. The
27 number of securitised loans in place as at 31 December 2005 has fallen to 4,510 for a total residual capital of € 279.8 million, including defaulted loans. In 2005 453 loans were paid off, of which 176 had reached their natural maturity and a further 277 were paid off in advance for € 14.8 million. Foreign transactions fell by 9.2% and at the end of December 2005 stood at € 225 million, compared to the € 247.7 million recorded as at 31 December 2004. “Foreign” loans accounted for 7.1% of total loans (7.3% in 2004). Endorsements provided to customers fell to € 308.5 million, from the € 310.7 million recorded in December 2004 (- 0.7%)
Loans to the economy 31.12.2005 31.12.2004 % (in millions of euro) (excluding IAS39) variation Cash loans 3,181.0 3,377.8 (5.8) Endorsement loans 308.5 310.7 (0.7) Total loans 3,489.5 3,688.5 (5.4)
The “loans net of write-downs/global direct deposits” ratio stands at 90.5% against the 91.8% of 2004. Information on the geographical and activity sector spread of customer loans can be found in the relevant section of the Notes to the Financial Statements “Part D – sector information” drawn up pursuant to international accounting standards no. 14. With regard to the degree of concentration of the risks of the Bank’s loans portfolio, the total sum of credit lines granted to the top ten beneficiaries represent 11.5% of total cash loans, while the top twenty represent 15.6%. More detailed information on the distribution of customer loans can be found in Part B, Section 7, of the Notes to the Financial Statements. The method used for valuation of loans, which is described in detail in the chapter on “accounting standards”, complies with the provisions of IAS 19. Specifically, in accordance the new IAS/IFRS standards, customer loans have been divided into “deteriorated loans” and “performing loans”. The first not only include non-performing loans, problem loans and restructured loans, but also loans which have expired or overrun by more than 180 days.
Deteriorated Loans
Firstly, it is advisable to provide a report on the circumstances associated with the bankruptcy of the Fin.Part Group and the repercussions that this has had on the Bank’s Financial Statements 2005. The Fin.Part Group not only owned some of the most renowned names in the textile/clothing industry (Frette, Cerruti 1881, Moncler, Marina Yachting, Boggi Maska), but also held considerable investments in the hotel sector. As such it enjoyed wide credit from the entire banking system, which duly provided the necessary support at the time of placement of the Itl. 111.4 billion Fin.Part P.O. 1998-
28 2005 and the € 2000 million Cerruti Bond. These transactions allowed the Group to acquire the “Frette” and “Cerruti” brands. On 31 July 2002 total exposure towards the Fin.Part operating group and the relations referring to Mr. Facchini amounted to approximately € 113 million. A series of initiatives taken by the then General Manager Mr. Brumana contributed to raising the exposure to € 180 million in February 2003. The actions of said General Manager were characterised by blatant breach of delegated powers, with the result that his conduct caused the Bank to be exposed to risk levels that were beyond the principles of sound and prudent management, considering its capital ratios. The essence of these initiatives, which are currently under Court investigation and part of which form the subject of the derivative action against the former General Manager, lies in the subscription in October 2002 to the subsequent Fin.Part capital increase, concluded in December of the same year, for a share of € 41 million by executing a firm underwriting commitment towards the guarantee consortium led by Interbanca. The aforesaid capital increase transaction for a maximum amount of € 100 million, as can be inferred from page 80 of the prospectus dated 23 October 2002, was destined to “strengthen the Company’s assets and financial position, to reduce overall indebtedness and support the development strategies of Fin.Part”, in compliance with the positive valuations of operators and in the interest of the Bucherer Group as well as of Lafico. During the first quarter of 2003, in response to the growing financial requirements of both the majority shareholder (Facchini) and of other subjects close to him, as well as of third parties, further loans are requested and duly granted by the same General Manager. Hence the overall risks to which the Bank has been exposed due to the General Manager’s actions amount to approximately € 258 million, of which € 48 million, secured by pledge on Fin.Part and Frette shares (valuation as at March 2003), relate only to the loans provided to Fin.Part and/or Facchini or parties close to the same. In the second half of 2003, after the office of General Manager was subject to rotation, part of the afore-mentioned “blank” exposure was secured by mortgage for a total of € 44 million. In October 2003 the banking system still confirmed its support to the Group’s production activity approving a € 20 million operation, in the form of advance on contracts acquired from Pepper SpA (wholly owned by Fin.Part). The Bank’s share in this transaction was regularly returned in March 2004. As at 31 March 2005, taken as reference date during the inspections carried out by Bank of Italy, the utilisation of the aforesaid loans reached € 311 million which, net of the capitalisation for the period March 2003 – March 2005, of the agreed reductions, in addition to the subsequent enforcement of movable guarantees (June 2005), bring utilisation to approximately € 240 million, of which € 47 million secured by valid mortgage and approximately € 12 million secured by Frette shares, against the € 258 million of March 2003 made up of “blank” loans for € 210 million and €48 million secured by Fin.Part/Frette shares. However, setting aside the arbitrary aspects which characterised the former General Manager’s actions and which led to assumption of the risk, the initiatives which were implemented, once the Bank was fully aware of the situation, with a view to best managing the position, show that during the period the total exposure was reduced
29 from € 258 to € 240 million while the “blank” component underwent a more considerable reduction, falling from € 210 to € 180 million. The plan of action implemented by the Fin.Part management to restructure its finances also contributed significantly to the achievement of said results and was decisive in the Bank’s assessment of the decisions to be taken. This restructuring included default of the Cerruti and Fin.Part bonds (07/04) and the various contracts between the banking ranks and the financial advisors (ABN AMBRO) which together drew up a recovery plan in December 2004. It must be remembered that following the difficulties experienced by the group, as at 31 December 2004 the Bank took steps to record the aforesaid group under problem loans and to make specific provisions equal to € 25 million. In January 2005 the banking system, called in to execute the plan, decided to entrust verification thereof to the law firm Bonelli, Erede e Pappalardo. This led to the questioning of the recovery plan drawn up ABN AMBRO and the banking system, which included the extension of new financing (€ 80 million). In turn this inevitably caused extension of the time scale as a new recovery plan had to be drawn up which, among other things, relinquished the granting of further financing against the writing off of a portion of the amount due to banks. In the meantime, the bankruptcy court, before which two petitions for bankruptcy were pending, decided that the conditions for exercising legal prerogatives were not present. During the numerous meetings with the banks, none of the participants opted for the inevitability of bankruptcy or insolvency proceedings. A similar approach was adopted, in different circumstances, by the representative of the holders of Fin.Part and Cerruti bonds. It must be remembered that the aforesaid law firm provided the system with timely report on the progress of negotiations for the sale or rent of the subsidiaries Pepper, Frette, Cerruti and Star, which formed the backbone of the restructuring project. The bankruptcy proceedings, which in the meantime had begun, backed most of the old plan authorising the sale (to the counterparties that has previously shown their interest) of Frette and Pepper at much the same conditions established in said plan. After the Court of Milan declared Fin.Part SpA bankrupt on 25 October 2005 and following the outcome of the inspections carried out by the Regulatory Authority, the Bank deemed it necessary to assume an extremely strict approach to credit exposure and to ensure that loans are brought back to levels of extreme prudence and, consequently, to make substantial provisions to cover the related risks.
(figures in millions of euro) 31.12.2003 31.12.2004 31.12.2005 Total adjustments to bad debt 28,384 63,694 253,044
In order to mitigate the impact of these decisions on the quality profiles of the entire loans portfolio, in the second half, the Bank completed a series of extraordinary actions, amongst which the assignment without recourse of non-performing loans to the Pirelli RE group, which concerned:
30 À a portfolio of ordinary loans which had already been subjected to considerable percentage write-downs as at 31 December 2004, and namely, 852 positions for a total gross value of € 50,988,375.01; À a portfolio of mortgage loans existing as at 30 June 2006, and namely, 288 mortgage loan contracts, distributed over 248 non-performing positions for a total gross value of € 37,367,529.34. The price of the assignment was established as € 25,900,000.00, with a negative impact on the income statement of approximately € 1.9 million.
The transaction led to an initial reduction in the Bank’s non-performing loans and in the risk weighted assets, the trends of which are shown in the table below.
Loans 31.12.2004 (excluding IAS 39) 30.6.2004 31.12.2005 (in millions of euro) Gross Total value Net Gross Total value Net Gross Total value Net exposure adjustments exposure exposure adjustments exposure exposure adjustments exposure A. Deteriorated loans 441.9 159.1 282.8 787.4 397.1 390.3 764.2 401.5 362.7 A.1 non-performing 212.4 112.2 100.2 318.9 209.3 109.6 466.7 317.7 149.0 loans 214.6 45.5 169.1 350.2 186.0 164.2 210.7 82.2 128.5 A.2 problem loans 14.9 1.4 13.5 14.9 1.4 13.5 3.8 0.4 3.4 A.3 rescheduled loans n.a. n.a. n.a. 103.4 0.4 103.0 83.0 1.2 81.8 A.4 past dues
B. Performing loans 3,111.7 16.7 3,095.0 2,808.1 30.3 2,777.8 2,851.2 32.9 2,818.3 Total 3,553.6 175.8 3,377.8 3,595.5 427.4 3,168.1 3,615.4 434.4 3,181.0
Net deteriorated loans, which in the Half-Year Report 2005 were equal to € 390.3 million, have fallen, as at 31 December 2005, to € 362.7 million. In order to gain meaningful comparison with the year end 2004 figure of € 282.8 million, it is necessary to consider that without the “past dues”2 figure the sum total of deteriorated loans is reduced to € 287.3 million in June 2005 and to € 280.9 million in December. A breakdown shows that net non-performing loans (€ 109.6 million as at June 2005) rose to € 149 million, from the € 100.2 million recorded in December 2004, problems loans (€ 164.2 million in June) stood at € 128.5 million, rescheduled loans fell to € 3.4 million (13.5 million in June 2005 and December 2004), and past dues (introduced with the application of the new IAS/IFRS standards) were equal to € 81.8 million (€ 103 million in June 2005). The net NPL/net loans ratio rose to 4.7% from the 3.5% of June 2005 and the 3% of December 2004, but the related cumulated value adjustments guarantee 68.1% coverage (65.6% in June and 52.8% in December 2004). The net problem loans/net loans ratio stands at 4% (from the 5.2% of June 2005 and the 5% of year end 2004) and the value adjustments guarantee 39% coverage (53.1% in June and 21.2% at year end 2004). On the basis of total provisions effected during the year, deteriorated loans were written down by an average of 52.5% (50.4% in June 2005 and 36% at year end 2004).
2 “past dues”: exposures that have expired or have overrun by more than 180 days which following introduction of the new IAS standards, from 2005, are included under deteriorated loans
31
Asset quality profiles 31.12.04 30.6.05 31.12.05 31.12.05 excluding “past dues” Gross deteriorated loans/gross loans (*) 12.4 21.9 21.1 18.8 Net deteriorated loans/net loans (*) 8.4 12.3 11.4 8.8 Gross non-performing loans/gross loans 6.0 8.9 12.9 Net non-performing loans/net loans 3.0 3.5 4.7 Gross problem loans/gross loans 6.0 9.7 5.8 Net problem loans/net loans 5.0 5.2 4.0 Degree of coverage of non-performing 52.8 65.6 68.1 loans Degree of coverage of problem loans 21.2 53.1 39.0 Degree of coverage of deteriorated loans 36.0 50.4 52.5 58.7 (*) (*) further to introduction of the IAS standards, the figures of the year 2005 include the so-called “past dues”, that is, exposures which have expired or have overrun by more than 180 days
32 Deposits
As at 31 December 2005 the Bank’s total deposits stood at € 6,796.6 million, against the € 6,942.4 million of December 2004, posting a – 2.1% decrease due to the reduction recorded in direct deposits which stood at € 3,514.8 million, down from the € 3,818.1 million of the previous year end (- 7.9%). This fall was chiefly the result of the policy to reduce the bonds placed on the market. By contrast, indirect deposits posted a 5% increase, rising to € 3,281.8 million from the € 3,124.3 million of 31 December 2004.
Total deposits 31.12.2005 % 31.12.2004 % (figures in millions of euro) composition (excluding IAS varia.n 39) Direct deposits 3,514.8 51.7 3,818.1 (7.9) Indirect deposits 3,281.8 48.3 3,124.3 5.0 Total deposits 6,796.6 100.0 6,942.4 (2.1)
A breakdown by product type shows that current account deposits have fallen to € 1,296.4 million, from € 1,373.1 million at year end 2004 (-5.6%), while savings deposits have recorded a decrease which, although not significant in absolute terms, stands at 8.5% (from € 67.1 million to € 61.4 million). Repurchase agreements, a form of deposit that is subject to oscillation and is used by private and corporate customers for temporary allocation of liquid funds, rose to € 122.7 million (€ 95.7 million as at 31 December 2004; + 28.9%). Deposits in currency, which at year end stood at € 16.2 million, fell by 3%. As far as bond issues are concerned, redemptions to the order of € 661.8 million and new issues for € 426.4 million were effected. As mentioned above, in 2005 the bond issues previously placed with institutional investors (for a total of € 220.5 million) were not fully substituted, in line with the objective of reducing the cost of deposits and giving preference to the placement of bonds with retail customers. Bonds issues in 2005: Amounts (in millions of euro) Two-year floating rate 33.6 Three-year floating rate 152.7 Five-year zero coupon 26.6 Six-year zero coupon 12.5 Five-year Absolute Value 10.0 Three-year Italian Basket Equity 10.0 Three-year Step Up Bond 25.0 Four-year Step Up Bond 5.0 Six-year Step Up Bond 51.0 Eight-year Tarn Bond 20.0 Six-year Twister 60.0 Six-year Range Accrual 20.0 Total 426.4
33
Direct deposits 31.12.2005 % 31.12.2004 % (figures in millions of euro) composition (excluding IAS varia.n 39) Savings deposits 61.4 1.7 67.1 (8.5) Euro current accounts 1,296.4 36.9 1,373.1 (5.6) Outgoing foreign currency accounts 16.2 0.4 16.7 (3.0) Repurchase agreements 122.7 3.5 95.7 28.2 Total 1,496.7 42.5 1,552.6 (3.6) Outstanding securities 1,581.4 45.1 1,867.9 (15.3) Financial liabilities valued at fair value option 436.7 12.4 397.6 9.8 Total 2,018.1 57.5 2,265.5 (10.9) Total direct deposits 3,514.8 100.0 3,818.1 (7.9)
Breakdown of direct deposits as at 31 December 2005
Passività finanziarie Depositi a risparmio 436,7 61,4
C/c euro 1.296,40
C/c valuta 16,2
Titoli in circolazione 1581,4 Op.di pronti c.termine 122,7
Outstanding securities 1581,4; Financial liabilities 436,7; Savings deposits 61,4; Euro current accounts 1.296,40; Foreign currency current accounts 16,2; Repurchase agreements 122,7. The fact that households are less inclined to hold liquid funds, due to the low interest rates and to the recovery phase of the financial markets, has fostered strong growth in managed savings and in indirect deposits in general, accentuated by the initiatives implemented by the Bank to encourage recovery of managed assets and the placement of the new Sistema Fondi Intra.
34
Indirect deposits 31.12.2005 % 31.12.2004 % (figures in millions of euro) composition (excluding varia.n IAS 39) Managed assets (*) 940.8 28.7 783.5 20.1 Assets from mutual funds 1,501.9 45.8 1,167.6 28.6 Less: managed assets in funds (803.7) (24.5) (645.0) 24.6 Managed savings 1,639.0 50.0 1,306.1 25.5 Administered deposits (indirect) 1,642.8 50.0 1,818.2 (9.6) Total indirect deposits 3,281.8 100.0 3,124.3 5.0 (*) plus temporary liquidity equal to 28.2 0.9 22.5 25.3 Total managed savings 1,667.2 50.9 1,328.6 25.5
The above table clearly shows that, as at 31 December 2005, the Bank has succeeded in the strategic objective of achieving an even balance between administered savings and managed savings thanks to the strong growth in the latter (+ 25.5%; from € 1,328.6 million in December 2004 to € 1,667.2 million), which account for 50.8% of total indirect deposits, against the 42.5% of year end 2004. In the bancassurance sector, the index-linked policies issued in association with Cattolica Assicurazioni and the unit-linked policies issued with Ergo Italia continued to be popular with customers and total volumes in written premiums, although down by 11.8% compared to year end 2004, still remain high (€ 89.4 million, against € 101.4 million).
Andamento della raccolta diretta, indiretta, complessiva
8.000,0
6.000,0
4.000,0
2.000,0
0,0 31.12.2003 31.12.2004 31.12.2005
Raccolta diretta 3.509,5 3.818,1 3.514,8 Raccolta indiretta 2.794,2 3.124,3 3.281,8 Raccolta complessiva 6.303,7 6.942,4 6.796,6
Trends in direct, indirect and total deposits
35
Financial Services and Treasury Management
Once again in 2005 customers showed greater orientation towards forms of professional investment, be it through asset management lines or through use of UCI. Compared to 2004, the asset management lines showed an increase of over € 155 million, equal to approximately 20%, while investment in mutual funds rose by over 33.6%, reaching just under € 700 million. Investors also showed particular interest in the so-called “absolute return” instruments which induced the Bank to widen the range of products offered in this segment. Hence reallocation of the total customer portfolio continued, as customers not only turned to managed savings instruments, but also followed the most up-to-date indications from the market. Within this context, together with the widening of the product range, the informative role of the Sistema Fondi Intra–linked strategic asset allocation proved useful as it allowed a more appropriate customer positioning on the pertinent risk/yield curve. The application of this policy led not only to reduction in the risk linked to individual securities, but also to stabilisation of the non-financial economic return. Throughout 2005 management of the Bank’s treasury and financial investments was focused on prudence. The progressive increase in short-term rates, especially in the second half of the year following the European Central Bank’s base rate hike, had repercussions on market performance. Towards the end of the year, in order to improve the interest income/financing cost ratio, the Bank introduced to the financial investment position securities with high coupon rate for the first period and option for the subsequent periods linked to the stiffening of the interest rate curve, the levels of which are currently approaching all- time lows. With regard to the Banca Popolare di Intra shares, these have been particularly affected by the profit warning of 31 August and the subsequent intervention of the rating agencies, which brought the credit rating to BBB-.
36
Changes in Banca Popolare di Intra rating in 2005 Fitch Ratings Standard & Poor’s 27.7.2005 1.9.2005 1.9.2005 30.9.2005 Long-term BBB+ BBB+ BBB BBB- Short-term F2 F2 A2 A3 Individual C C = = Support 3 3 = = Outlook stable negative negative negative Credit Watch = = negative negative
After these events we witnessed an upturn in the average spread of our bonds on the secondary market, which coincided with the development of tension on the interbank market. Despite the decision to limit the substitution of the bond issues targeted at institutional investors, which expired during the year for € 542.5 million (€ 221 million were issued), the policy to expand the operative treasury lines allowed the Bank to resort to short-term indebtedness only, thus containing the rise in the effective cost on short-term rates and with marginal use of the investment portfolio.
37 As at 31 December 2005 the Bank’s treasury portfolio breaks down as follows: Portfolio as at 31/12/2005
PORTAFOGLIO AL 31/12/2005
500
450
00 4
350
300
250
00 2
Controvalore1 M) (/ 0 15
100
50
0 Titoli di Stato, Azioni e fondi Fondi ritorno Derivati Partecipazioni obbl. e fondi obbl. azionari assoluto
importi in milioni 453 37 50 9 88
Tipologia titoli
Government bonds, Bonds and bond funds; Shares and stock funds; Absolute return funds; Derivatives; Shareholdings.
In first part of 2005, treasury requirements increased due to the fact that ordinary loans naturally tend to anticipate account deposits. The reduction in the treasury portfolio’s exposure to credit risk was largely the result of the positive developments in the dispute with Bank of America, which began in February 2005 and related to a series of complex credit linked notes originally purchased between 2000 and 2001. The dispute was settled at the London High Court of Justice and generated extraordinary income to the order of € 15.5 million for the Bank. This, together with a management policy aimed at maintaining an operating margin appropriate to the scheduled expansion, forms the basis for a probable return to greater use of bonds issues which is expected to characterise 2006.
38 Maturities of liabilities
With regard to the structure of the securities’ portfolio in accordance with the new international accounting standards, the rules for assigning each instrument to the relative portfolio were defined, that is, the financial instruments that can be inserted in the various portfolios were redefined in IAS terms and each individual financial instrument was assigned to the relative operating portfolios. Furthermore, in relation to the new accounting standards, the methods for calculating the fair value of financial instruments were also defined. This was performed with considerable rapidity due to the fact that the financial management and control methods requested had been in use since 2003 and that the system used already contained the financial forms required for development of the IAS.
The table below illustrates the Bank’s portfolio as at 31 December 2005, restated according to the new accounting standards figures in millions of euro Ctv to the market LOANS AND RECEIVABLES - HELD TO MATURITY - HELD FOR TRADING 411.32 AVAILABLE FOR SALE 137.03 SUBSIDIARIES 87.78 LIABILITIES (nominal) - Total 636.13 Government bonds, bonds and bond funds 452.83 Shares and stock funds 36.78 Absolute return funds 49.58 Derivatives 9.16 Shareholdings 87.78 Total 636.13
39
Company Shares, Stock Grant
In compliance with CONSOB provisions on stock option plans, we hereby provide a report on the stock options allocated during the last year, pursuant to the resolution passed by Shareholders’ Meeting on 18 April 2004. Readers are reminded that the Shareholders’ Meeting had granted the Board of Directors the power to increase, within a maximum period of five years, in one or more tranches, pursuant to Articles 2443 and 2349 of the Italian Civil Code, the share capital up to a maximum par value of € 1,350,000.00, through bonus issue to company employees of a maximum of 450,000 ordinary shares, in accordance with specific regulations. This being said, in 2005, a bonus issue of 130,619 ordinary shares of a par value of € 3.00 each, with payment date 1 January 2005, were assigned to the employees on the payroll as at 31 December 2004 and still in service at the assignment date. Shares were allocated in accordance with specially drawn up regulations which were also partly based on an agreement with the Trade Unions.
During the year 820,349 ordinary shares were issued in order to meet conversion requirements for 745,772 bonds of the “Banca Popolare di Intra 3% 2001-2006 convertible subordinated” loan, for a total countervalue of € 2.4 million. By virtue of the aforesaid issues, greater details of which are provided in the section on equity, the number of outstanding shares as at 31 December 2005 has risen to 48,464,397, from 47,513,429 at year end 2004. The Bank’s share price, listed on the Star segment of Borsa Italiana, experienced marked acceleration in volatility in the second half of the year. After verging on a record high in May (€ 13.892, official recording of 12 May), it posted the low of the last 3 months in October (€ 10.147, official recording of 28 October), coming to stand, at year end, at € 11.845 (official recording of 30 December). The annual performance was – 2.45%.
40
Banca Popolare di Intra share performance
The strong price volatility was accompanied by a high increase in volumes traded, with peaks verging on one million shares in more than one stock exchange session (1,223,276 on 14 December). This caused a remarkable increase in average daily trading, which rose from approximately 134,000 shares in the first half to 203,000 in the second. The increase in volumes and in volatility often coincided with the publication of articles concerning our Bank in the local and national press. This led the Bank to take appropriate steps to protect the stability of the shares, in the interest of the shareholders, investors, customers and employees, as disclosed in the press release issued on 19 September 2005. As already stated in the Half-Year Report, Banca Popolare di Intra and Group companies did not intervene in the market to uphold the share and carried out strictly immaterial transactions involving the purchase of treasury shares.
41
Market transactions on Banca Popolare di Intra shares, subdivided by type of operator
CUSTOMER PENSION FUND TREASURY
PURCHASES SALES IMBALANCE PURCHASES SALES IMBALANCE PURCHASES SALES IMBALANCE
2000 3,419,270 2,681,833 737,437 123,000 213,000 -90,000 2,610,000 2,695,126 -85,126 2001 2,105,151 1,339,288 765,863 114,950 4,750 110,200 1,595,876 1,579,135 16,741 2002 5,312,798 1,332,404 3,980,394 141,350 80,000 61,350 871,469 1,399,528 -528,059 2003 2,049,612 5,315,389 -3,265,777 12,071 165,276 -153,205 203,608 248,396 -44,788 2004 1,589,494 2,138,626 -549,132 23,118 262,353 -239,235 532,167 555,941 -23,774 2005 1,313,382 6,007,358 -4,693,976 0 243,235 -243,235 605,543 605,543 0
TOTAL 15,789,707 18,814,898 -3,025,191 414,489 968,614 -554,125 6,418,663 7,083,669 -665,006
As at 31 December 2005 no treasury shares are held in the portfolio, while the shares purchased in 2005 amounted to 605,543, equal to the number of shares sold. The transactions were executed in compliance with civil legislation, by virtue of special power of attorney, granted to the Board of Directors by the Shareholders’ Meeting, concerning the “Reserve for the purchase of treasury shares”.
The table below illustrates the shareholdings exceeding 2% of our share capital as at 31 December 2005:
no. shares % shareholding Banca Popolare di Vicenza 2,368,000 4.8861 Banca Popolare dell’Emilia Romagna 972,500 2.0066
In compliance with CONSOB provisions (Article 79 of resolution no. 11971 of 14 May 1999 and subsequent amendments), we hereby provide a statement summarising the shareholdings held in the Bank and its subsidiaries by directors, statutory auditors and the general manager, including those held by their spouses, provided they are not legally separated, and their under-age children.
42 Shareholdings held in Banca Popolare di Intra and in its Subsidiaries by the Directors, Statutory Auditors and by the General Manager, including those held by respective spouses and under-age children.
Surname Investee Shares/convertible bonds held Shares/convertible bonds Shares/convertible bonds Shares/convertible bonds held as Name company as at 31.12.2004 purchased, or shares deriving sold and/or converted at 31.12.2005 from bond conversions SAINI SANDRO Banca 19,633 Shares == == 19.633 Shares (Chairman of the Board Popolare di of Directors up to Intra 31.8.2005) PONTI CESARE Banca 21,744 Shares 3,000 Shares == 24,744 Shares (Director up to 31.8.2005, Popolare di Par value € 42,072 BPI 3% 2001- == == Par value € 42,072 BPI 3% 2001- Chairman of the Board of Intra 2006 sub.convert. bonds 2006 sub.convert. bonds Directors from 1.9.2005) BROGONZOLI Banca 1,384 Shares 169 Shares == 1,553 Shares Popolare di Par value € 1,848 BPI 3% 2001- == Par value € 1,848 BPI 3% == LUCIANO Intra 2006 sub.convert. bonds 2001-2006 sub.convert. bonds (Deputy Chairman of the Board of Directors up to 31.8.2005; Director up to 12.10.2005) MORONI Banca 4,895 Shares 500 Shares == 5,395 Shares Popolare di Par value € 9,576 BPI 3% 2001- == == Par value € 9,576 BPI 3% 2001-2006 VITALIANO Intra 2006 sub.convert. bonds sub.convert. bonds (Deputy Chairman of the Board of Directors up to 31.8.2005; Director up to 12.10.2005) PAOLILLO Banca == 1,000 Shares == 1,000 Shares Popolare di ERNESTO Intra Deputy Chairman from 12.10.2005) ALBONICO Banca 169 Shares 331 Shares == 500 Shares Popolare di Par value € 600 BPI 3% 2001- == Par value € 600 BPI 3% 2001- == MAURO Intra 2006 sub.convert. bonds 2006 sub.convert. bonds (Director) ALESSI ANGHINI Banca 25,411 Shares == == 25,411 Shares
43 Surname Investee Shares/convertible bonds held Shares/convertible bonds Shares/convertible bonds Shares/convertible bonds held as Name company as at 31.12.2004 purchased, or shares deriving sold and/or converted at 31.12.2005 from bond conversions Par value € 51,564 BPI 3% 2001- == == Par value € 51,564 BPI 3% 2001- 2006 sub.convert. bonds 2006 sub.convert. bonds BALZARINI PAOLA Banca 3,000 Shares == == 3,000 shares (Director) Popolare di Intra BONOMI LUIGI Banca 1,090 Shares == == 1,090 shares (Director) Popolare di Intra BRUNI RAFFAELE Banca == 70 Shares == 70 shares (Director from 3.11.2005) Popolare di Intra COMPOSTELLA Banca 214,000 Shares == == 214,000 Shares Popolare di ANGELO Intra ALESSANDRO (Director) DE VECCHI LINO Banca 12,097 Shares == == 12,097 Shares (Director up to 13.1.2006) Popolare di Par value € 29,160 BPI 3% 2001- == Par value € 29,160 BPI 3% 2001- Intra 2006 sub.convert. bonds 2006 sub.convert. bonds
FORTIS MARCO Banca == 100 Shares == 100 shares (Director from Popolare di 22.12.2005) Intra PELLICELLI Banca 17,540 Shares 6,380 Shares == 23,920 Shares Popolare di GIORGIO Intra (Director)
VIGANO’ CLAUDIO Banca 368 Shares == 368 Shares == Popolare di Par value € 52,344 BPI 3% 2001- == Par value € 52,344 BPI 3% == CARLO Intra 2006 sub.convert. bonds 2001-2006 sub.convert. bonds (Director) Banca 568 Shares == == 568 Shares Popolare di Monza e Brianza
44 Surname Investee Shares/convertible bonds held Shares/convertible bonds Shares/convertible bonds Shares/convertible bonds held as Name company as at 31.12.2004 purchased, or shares deriving sold and/or converted at 31.12.2005 from bond conversions VIVARELLI Banca 500 Shares 500 Shares == 1,000 Shares Popolare di LANFRANCO Intra (Director)
SCRUZZI Banca 8,637 Shares == == 8,637 Shares Popolare di Par value € 20,316 BPI 3% 2001- == == Par value € 20,316 BPI 3% 2001- ROBERTO Intra 2006 sub.convert. bonds 2006 sub.convert. bonds (Chairman of the Board of Statutory Auditors up to 13.1.2006) BATTAINI Banca 144,220 Shares 2,000 Shares == 146,220 Shares Popolare di Par value € 289,392 BPI 3% == == Par value € 289,392 BPI 3% 2001- FERRUCCIO Intra 2001-2006 sub.convert. bonds 2006 sub.convert. bonds (Statutory Auditor up to 13.1.2006; Chairman of the Board of Statutory Auditors from 14.1.2006) BUSSI ROBERTO Banca 7,100 Shares 7,970 Shares 6,900 Shares 8,170 Shares (Standing Auditor) Popolare di Intra LODARI MARTA Banca 133 Shares == == 133 Shares (Alternate Auditor up to Popolare di Par value € 1,344 BPI 3% 2001- == == Par value € 1,344 BPI 3% 2001-2006 13.1.2006; Standing Intra 2006 sub.convert. bonds sub.convert. bonds Auditor from 14.1.2006) CIANA MARIO Banca 5,789 Shares == 2,000 Shares 3,789 Shares (Alternate Auditor) Popolare di Intra FERRARI Banca 15,665 Shares 154 Shares == 15,819 Shares Popolare di Par value € 21,972 BPI 3% 2001- == == Par value € 21,972 BPI 3% 2001- CLAUDIO Intra 2006 sub.convert. bonds 2006 sub.convert. bonds (General Manager)
45
46 Shareholdings
Following introduction of the IAS/IFRS, the item “Shareholdings” now only includes shareholdings in subsidiaries (IAS 27), in jointly-controlled enterprises (IAS 35) and in enterprises subject to significant influence (IAS 28). Other investments have been classified under the item “Financial assets available for sale”.
Shareholdings in subsidiaries of the Banking Group During 2005 some transactions involving the purchase of shares in Subsidiaries were implemented, with a view to increasing the Parent Bank’s controlling stake in accordance with recently adopted strategic objectives. Further transactions forming part of agreements previously undersigned with minority shareholders and employees of some Group companies were also effected: • Banca Popolare di Monza e Brianza S.p.A.- Monza: purchase in small lots of 51,762 shares from minority shareholdings, involving a total outlay for the Bank of € 287 thousand, with consequent increase in the controlling interest from 81.57% to 82.28% and the recording of a loss of € 16 thousand. • Intra Private Bank S.p.A - Verbania: assignment of 499,308 shares to the subsidiary’s employees and financial advisors, with a reduction in the book value of the investment by € 452 thousand, following the exercise on the part of said employees and advisors of the options assigned thereto in the 2001-2003 three- year period upon achievement of the targets set for volumes and income. Within the scope of these agreements in 2005 the Bank also purchased 88,018 shares for a countervalue of € 83 thousand. Upon completion of said transactions, the controlling interest held in Intra Private Bank dropped from 82.70% to 81.90% and a loss of € 129 thousand was recorded. • Monza e Brianza Leasing S.p.A. - Cesano Maderno: purchase of the shares held by the minority shareholders Arcoleasing S.p.A. (6,000 shares equal to 15%, for a countervalue of € 335 thousand) and Brianfin S.p.A. (529 shares equal to 7.5%, for a countervalue of € 29 thousand) at a value slightly higher than the par value, with a total outlay of € 364 thousand. Further to said transactions the share capital of Monza and Brianza Leasing is now wholly owned by the Parent Bank (89.12%) and by the subsidiary Banca Popolare di Monza e Brianza (10.88%). • Intrafid S.r.l. - Verbania: in accordance with specific agreements previously signed for the development of the company, 10,000 shares, equal to 10% of the capital, at a countervalue of € 17 thousand, corresponding to the relative book value, were sold to the subsidiary’s Managing Directors. Hence the Bank’s controlling stake in Intrafid has decreased from 99% to 89%, in addition to the 1% held through the subsidiary Intra Private Bank.
47 It is specified that with the introduction of the new international accounting standards the controlling interests held in Group companies have been maintained at the relative cost value, equal to a total of € 87.8 million, even though the fair values are higher for all subsidiary companies, hence confirming the presence of considerable latent capital gains compared to said book values.
Other significant equity holdings (former shareholdings) included under “Financial assets available for sale” During 2005, after the material transactions recorded in the previous year, further significant measures were taken to reduce the extent of investment in minority interests, with a view to achieving a higher degree of rationalisation of the portfolio through disposal of assets considered to be non-strategic to development of the Group’s core business.
These measures included disposals of minority shareholdings implemented during the year with total revenues of € 12.3 million, generating capital gains totalling € 7.9 million, through the following transactions:
• Girmi S.p.A.: full disposal of our 14.96% quota of share capital, for a total countervalue of € 300 thousand, equal to the relative book value as at 31 December 2004, within the scope of agreements undersigned with the Bialetti Group. • Sec Solutions S.p.A.: full disposal of our 5.60% quota of share capital, for a total countervalue of € 14 thousand, equal to the relative book value, within the scope of the relative reorganisation of shareholdings. • Banca Mediocredito S.p.A.: full disposal of our 0.04% quota of share capital, for a total countervalue of € 147,866, equal to the book value as at 31 December 2004. • Factorit S.p.A., Banca Italease S.p.A.: in May 2005 the merger by incorporation of Factorit into Banca Italease was carried out, with subsequent separation of the leasing and factoring corporate divisions and creation of a banking and operational holding, which centralised the governance functions and holds interests in the individual companies specialised in terms of product. As a result of the merger and on the basis of the share swap ratio, the interest held in Banca Italease increased from 1.35% to 1.39% of the share capital, made up of 846,401 post merger shares. Subsequently, at the time of the listing of Banca Italease, the Bank granted the “greenshoe” a 0.63% quota of the share capital, which was then sold in June. Lastly, in the third quarter the remaining 464,190 shares were sold on the market. The total revenues generated by the disposal transactions described above are equal to € 10.8 million, with capital gains exceeding the book value by € 7,190 thousand.
48 • Polis Fondi SGR S.p.A.: full disposal of the 7% interest in share capital as part of the more wide-reaching reorganisation of shareholdings agreed with the shareholding banks, for an amount equal to € 1,092 thousand, generating capital gains of € 730 thousand.
During the year the Bank was also involved in some equity consolidation, deliberated by some investee companies that are considered strategic on account of the services provided to the Group:
• SEC Servizi: participation, in May 2005, in the increase in share capital from € 14 million to € 25 million, through subscription of 1,180,564 shares for a countervalue of € 1,181 thousand. Following the capital increase, our Bank’s direct interest rose from 10.628% to 10.890% and those of Intra Private Bank and Banca Popolare di Monza e Brianza went from 0.27% to 0.159%; • IGM SIM S.p.A.: participation, in April 2005, in the increase in share capital, aimed at sustaining growth, through subscription of 1,837 shares for a total price of € 12 thousand ( of which € 10 thousand as premium); • SWIFT S.c.r.l.: participation, in June, in the bonus issue, through which the number of shares held by our Bank has risen from 1 to 2.
Lastly, during 2005 some value adjustments were made to the book value of minority shareholdings following extraordinary events or impairments which emerged in the light of the relative company performance:
• Euros Consulting S.p.A. in liquidazione: in May 2005 the Extraordinary Shareholders’ Meeting passed a resolution to reduce the share capital for losses from €11.2 million to € 2 million, which led to a reduction in the number of shares held by shareholders, while the par value of the same remained unchanged (€ 0.52). Our Bank, which holds 1% of the share capital, consisting of 216,719 shares recorded in the Balance Sheet for € 20,200, recorded a loss of € 4,480, with the number of shares falling to 38,846; • E-Dexter S.r.l.: during the year our 5% interest in the company’s share capital was written down from € 180 thousand to € 1, on the basis of the financial and economic performance delivered the company, for which bankruptcy proceedings began on 21 July 2005; • Associazione Nazionale per l’Enciclopedia della Banca e della Borsa: this is the former Istituto per l’Enciclopedia della Banca e della Borsa S.p.A. which in April 2005 changed its corporate configuration. Following the reduction in share capital due to losses, the value of our interest fell from € 3,585 to € 925, with the percentage and the number of shares held remaining unvaried. The shareholding was cancelled at the time the financial statements were being drawn up.
49 • Distretto Turistico dei Laghi: as part of the reduction for losses and reconstitution of the share capital, the Bank paid in € 4 thousand maintaining a 3.14% stake in the share capital.
Lastly, during the year the 1.23% stake held in EC BIC Piemonte S.p.A. (carried at € 1) was written off following conclusion of the relative winding-up procedure.
The classification of these investments under assets available for sale involves fair value valuation as a balancing entry to a shareholders’ equity reserve. Only in the case of disposal or impairment are the profits or losses ascribed to the income statement. As no listed shares are involved, the fair value of the more material investments is established by traditional market DCF (discounted cash flow) methods, while the fair value of those of lesser importance is taken to be equal to the adjusted shareholders’ equity or equal to cost.
Further details on the “Financial assets available for sale” can be found in Part B – Section 4 of the Notes to the Financial Statements.
50
Pursuant to CONSOB Resolution no. 11971 of 14 April 1999, Article 126, on the issue of “material shareholdings”, the table below provides the figures for equity holdings exceeding 10% of the share capital held by Banca Popolare di Intra in companies with unlisted shares or in limited companies as at 31 December 2005 .
Statement of material equity holdings in companies that are unlisted or limited pursuant to Article 120 of Legislative Decree no. 58 of 24.2.1998 and Article 126 of CONSOB Resolution no. 11971 /1999 Entity no. shares/ Par value in % ownership quotas Euro Direct Indirect
Monza e Brianza Leasing SpA, 35,647 1,841,167.55 89.12% 8.95% Cesano Maderno Intrafid Srl, Verbania 89,000 89,000.00 89.00% 0.819% Banca Popolare di Monza e Brianza 5,966,571 30,787,506.36 82.28% SpA, Monza Intra Private Bank SpA, Verbania 42,135,662 14,326,125.08 81.90% Intrabroker Srl, Verbania 15,200 7,752.00 19.00% Consulting SpA, Sondrio 22,500 22,500.00 15.00% SEC Servizi, Padova 2,723,385 2,723,385.00 10.89% 0.261% SAIA SpA, Verbania 6000 309,900.00 10.08% LMF Servizi Finanziari 500 321,522.73* 10.00% 8.190%
* The par value was converted at the Euro/CHF exchange rate at 31.12.2005 (1.5551).
Related party and intra-group transactions
Transactions with related parties performed by companies that make use of venture capital are governed by the Italian Civil Code and by special CONSOB regulations which aim to guarantee utmost transparency and substantive and procedural fairness. With resolution 14990 of 14 April 2005, CONSOB specifically assimilated the definition of “related parties” as set forth in the international accounting standards (IAS 24) regarding financial reporting of transactions with said parties. In essentially confirming the definition of related party already introduced by CONSOB, IAS 24 has extended it to include: - parties that jointly control the entity (meaning the party drawing up the financial statements); - joint ventures in which the entity has an interest; - pension funds benefiting employees of the entity or of any other entity related thereto.
51 Hence, with regard to 2005, the Directors, the Statutory Auditors, the General Manager and the Deputy General Manager with vicarious functions, their immediate families or subjects over which they exert control or significant influence, companies of the group and the pension fund for Banca Popolare di Intra employees are considered to be related parties. In this respect, we declare that during the year no atypical or unusual transactions were carried out with said parties, by which we mean no transactions other than those that are part of the normal company operations and no transactions having a significant impact on the economic, equity and financial position of the Bank and of Group companies. Regarding the economic impact of transactions with company representatives and/or their associates during 2005, interest totalling € 136.9 thousand and professional fees of € 4.5 thousand plus VAT were disbursed, and interest income and fees of € 267.6 thousand were received, in addition to rent on owned properties for € 6.5 thousand. Transactions between the Bank and the Supplementary Pension Fund for Banca Popolare di Intra Employees – set up as unincorporated association vested with subjective and financial autonomy, with its own administrative, control and executive bodies – are governed by special agreements. The Bank provides the Fund with support in various sectors of activity (Finance, Organisation, Technical, Systems, Legal, Risk Management, Audit and Control) with a view to favouring cost synergies where appropriate. Pursuant to Article 38 of the Pension Fund’s By-Laws, the Bank bears the Fund’s general management and ordinary administration expenses with the exclusion of tax charges and regulatory contributions. In accordance with the agreements signed, no consideration is due to the Bank for the professional services provided to the Fund.
• Management and Coordination of Companies: Relations with Group Companies
The Bank is Parent Bank of the Banca Popolare di Intra Banking Group and performs the activity of management and coordination of the Subsidiary Companies, belonging to said Group. Transactions with Group companies are also governed by special intra-group agreements, drawn up in accordance with the principles of fairness, transparency and consistency. Following the progressive centralisation of functions and processes developed over the last two years, in 2005 no important changes were made to the activities and services performed by the Parent Bank in favour of the Subsidiaries.
52 The costs referred to intra-group services, which chiefly pertain to administrative activities, HR training and management, treasury services and financial intermediation, asset management, foreign transaction management, legal and tax advice and risk management, are distributed exclusively on the basis of the costs effectively incurred by the Parent Bank. The Bank, in its capacity as Parent Bank, performs on a centralised basis, the internal audit activities for the subsidiaries Banca Popolare di Monza e Brianza and Monza e Brianza Leasing and risk management activities for two other Group banks (Intra Private Bank e Banca Popolare di Monza e Brianza). The table below provides a summary of relations with Group Companies during 2005:
Counterparty Type Balances Costs Revenues Credits Debits Interest Other Interest Other Banca Popolare di Monza Bank c/a and e Brianza SpA related services 5,459.1 3,376.1 5.3 104.4 Banca Popolare di Monza Securities 8,352.4 32.0 369.9 e Brianza SpA Banca Popolare di Monza Directors’ e Brianza SpA remuneration 35.1 Banca Popolare di Monza Services 14.4 704.6 e Brianza SpA rendered Banca Popolare di Monza Fees 18.4 e Brianza SpA Banca Popolare di Monza Income/charges 600.6 323.3 e Brianza SpA on derivatives
Intra Private Bank SpA Bank c/a and related services 0.2 11,471.3 346.0 Intra Private Bank SpA Securities 9,719.8 219.6 Intra Private Bank SpA Directors’ remuneration 1.0 Intra Private Bank SpA Services 190.5 rendered Intra Private Bank SpA Fees 10,144.6
Monza e Brianza Leasing Bank c/a and SpA related services 39,777.8 2.8 620.2 Monza e Brianza Leasing Payables for SpA leasing contracts 38.6 1.0 Monza e Brianza Leasing Directors’ SpA remuneration 0.7 Monza e Brianza Leasing Services 57.8 26.4 SpA rendered Monza e Brianza Leasing Fees 251.3 SpA
Intrafid Srl Bank c/a and 46.2 3.2 6 1.0 related services Intrafid Srl Rentals 0.6 Intrafid Srl Directors’ remuneration 0.7
In order to provide a full summary, the Bank granted the following endorsement loans to its Subsidiaries:
53 À Guarantee of € 845 thousand in favour of Banca Popolare di Monza e Brianza which provided a guarantee of € 490 thousand in favour of the Parent Bank; À Guarantee of € 118.7 thousand in favour of Intra Private Bank; À Guarantee and letter of patronage for € 13,854 thousand in favour of Monza e Brianza Leasing.
All transactions were executed at arm’s length conditions. During the year the Bank received dividends from the Subsidiaries Banca Popolare di Monza e Brianza for € 890.5 thousand and Intrafid for € 53 thousand.
Principles adopted in corporate management in order to achieve mutualistic goals
Pursuant to Article 2545 of the Italian Civil Code we hereby provide a report on the initiatives aimed at achieving mutualistic goals implemented in the past year. The Bank is aware of its role as a cooperative bank providing services to the reference territory. Hence in managing and developing its activities it strives to place the emphasis on values and aspects of a social nature. The Shareholders category represents the cornerstone of the process by which the Bank established its presence in the territory and as such the Bank has always dedicated particular commitment to this category. Once again in 2005, in keeping with this approach, the Bank continued to afford considerable attention to the shareholding customers, by expanding the line of products and services reserved thereto ranging from those associated with current accounts and loans to those relating to investments, bancassurance and information. Shareholders holding at least 200 shares with the Bank are offered a package of products and services which include: • 30% discount on the monthly price of the “Flat-fee current account lines”; • facilitated conditions on Prima Casa (first home) mortgages (purchase, construction, restructuring); • prime rate and investigation expenses cut by 50% on PrestoCredito loans (personal loan which finances the purchase of goods and services, medical expenses and other personal necessities) • exclusive “Fai bella la tua casa” (home improvement) loans (loan for external maintenance and restoration of the façade) and PrestoScuola (zero-rate loans for the purchase of school text books and the payment of school fees/taxes); • free custody of Banca Popolare di Intra shares and bonds; • “Bpi floating rate 02.01.2006-2009” reserved Bond Issue, with prime rate, guarantee of capital, facilitated liquidability and six monthly detachment of the coupon; • “Socio Cliente Plus” insurance policy, multi-risk coverage against damage caused involuntarily to third parties or arising from theft, fire, bag-snatching, robbery or
54 fortuitous events, withdrawal of licence – which may be customised in accordance with the customer’s requirements and is particularly advantageous; • Free home delivery of “Valore”, the Bpi Banking Group magazine, in addition to access to an area dedicated to Shareholders on the bank website www.bpintra.it. The Bank’s attention to the needs of the local territory, the associative and no profit system and the various areas of social voluntary services is particularly apparent in the disbursement of charitable contributions ( in 2005 equal to approximately € 281 thousand), almost exclusively reserved to entities and associations working within our zone, with particular commitment to the province of VCO. 31.12.2005 % V.C.O. 206,284 73.7 Novara 45,730 16.3 Varese 17,670 6.3 Milan 3,260 1.1 Como 400 0.1 Other (Unicef) 6,953 2.5 Incoming Shareholders 280,297 100.0
A number of charitable initiatives were supported during last year, and in particular ones pertaining to social services (centres for the elderly, Caritas, youth clubs, parishes) and culture (primary and secondary schools, professional training centres, scholarships). Substantial charitable contributions were also disbursed in favour of entities and associations set up to preserve traditions, promote the territory and develop tourism. 31.12.2005 % Social activities 142,413 50.8 Cultural activities 57,993 20.7 Heritage conservation 13,920 5.0 Other 65,971 23.5 Total 280,297 100.0
Furthermore, in 2005 the Bank not only sponsored scholarships of public and private entities, but also directly assigned six Scholarships of € 5,000 each set up in memory of Giovanni Falcioni (Chairman of the Bank from 1976 to 1986 and from 1996 to 1998, figure of significant political and professional standing in the provinces of Novara and VCO) awarded for the best degree or doctoral research theses of the shareholding students or children of shareholders of the Bank. However the Bank is also interested in what is happening beyond its own territorial boundaries. This is apparent in the charitable initiatives to support international humanitarian projects such as those undertaken in association with Unicef, relating to adhesion to the “Libretto Risparmio Felice” product (for each new bank book opened with the Bank and the subsidiary Popolare di Monza e Brianza a contribution of € 11 is made to the project “Eritrea- education for the children”), and the fund-
55 raising initiative for the populations of South East Asia hit by the tsunami in 2004, through “Valore Onlus. One territory calls, another responds”. Upon completion of the Valore Onlus funding raising initiative € 150,000 were donated to the Suratthani Catholic Foundation (Thailand), of which € 81,000 came from donations from customers of the whole Banking Group, € 12,500 from a specific collection made by the Municipality of Baveno and approximately € 56,500 donated by the Bank. The funds are destined to five projects to be undertaken in southern Thailand and in particular the Ta Kua Pa district in the province of Phang-Nga. The projects involve the reconstruction of houses and schools, land reclaiming works, purchase of small boats and fishing equipment, reconstruction of small businesses for the manufacture and sale of souvenirs, setting up of scholarships to encourage the children’s attendance at school.
Shareholders The success of the mutualistic activity implemented by our Bank is also apparent in the constant increase in the number of Shareholders, even though 2005 was characterised by a physiological slowdown compared to the previous two-year period. As at 31 December 2005 there are 38,088 shareholders in the Shareholders’ Register (of which 917 are employees of the Bank); + 1.7% on 2004, with 934 new shareholders, of which 64 employees of the Bank. The breakdown of the shareholding structure provided below indicates a high level of loyalty and shows 88.4% of Shareholders to have been present for over 3 years.
56
31.12.2003 % 31.12.2004 % 31.12.2005 % Shareholders 2,497 6.9 1,285 3.4 652 1.7 for under 1 yr. Shareholders 4,610 12.8 5,535 14.8 3,782 9.9 for 1 to 3 yrs. Shareholders 29,044 80.3 30,616 81.8 33,654 88.4 for over 3 yrs. Total 36,151 100.0 37,436 100.0 38,088 100.0
The gradual increase in the number of Shareholders (more than 98% of which are also depositors at the Bank’s braches) is chiefly concentrated in the traditional areas (over 75%), but there is also progress in the provinces in which the Bank has recently set up branches (218 new shareholders).
31.12.2003 % 31.12.2004 % 31.12.2005 % V.C.O. 1,058 40.1 571 37.4 381 40.8 Novara 815 31.0 493 32.3 321 34.4 Varese 370 14.0 289 18.9 140 15.0 Milan 306 11.6 142 9.3 62 6.6 Como 69 2.6 22 1.4 16 1.7 Others 19 0.7 10 0.7 14 1.5 Incoming Shareholder s 2,637 100.01,527 100.0 934 100.0
A breakdown by age group further confirms the Bank’s traditional focus, with almost 45% of Shareholders between 30 and 50 years and 42% over 50. There is however evidence of a gradual increase in younger Shareholders, to which the Bank has afforded greater attention over the last few years, by expanding the range of products offered to this customer category with the issue of the rechargeable prepaid card Valore Card and by promoting the 18-26 current account reserved for young people through sponsorship of events and shows targeting this age group.
31.12.2003 % 31.12.2004 % 31.12.2005 % Up to 30 4,396 12.3 4,642 12.5 4,852 12.9 From 30 to 50 15,953 44.5 16,618 44.8 16,923 44.8 Over 50 15,481 43.2 15,845 42.7 15,961 42.3 Total Individual Shareholders 35,830 100.0 37,105 100.0 37,736 100.0
A breakdown of Shareholders by economic category reflects the strong link between the Bank and the territory’s productive fabric: 42% is represented by subordinate employees belonging to the largest sector of households, which is the nucleus upon which the local economic contest is based.
57 31.12.2003 % 31.12.2004 % 31.12.2005 % Self-employed 2,475 6.9 2,552 6.8 2,602 6.8 Entrepreneurs 1,624 4.5 1,678 4.5 1,701 4.5 Traders 1,925 5.32,061 5.5 2,130 5.6 Subordinate 15,241 42.1 15,902 42.5 16,101 42.3 employees Farmers and 3,495 9.7 3,614 9.6 3,668 9.6 Craftsmen Retired 7,935 21.98,043 21.5 8,145 21.4 Others 3,135 8.73,255 8.7 3,389 8.9 Companies 321 0.9331 0.9 352 0.9 Total 36,151 100.0 37,436 100.0 38,088 100.0 shareholders
In compliance with the provisions of Article 2528, last sub-section, of the Italian Civil Code, we hereby report that in assessing the applications of prospective shareholders we always acted in the interest of the Bank, in accordance with the spirit of cooperatives and taking into account the provisions of the by-laws. This year we did not reject any application to become shareholder. However in 2005, we passed a resolution, pursuant to the provisions of Article 9 of our Articles of Association, to exclude 8 shareholders and to effect set off of our credit with the shares held thereby, and, pursuant to Article 11 of the Articles of Association, to exclude 1 shareholder.
Commercial Activities, Research and Development of Products and Services
In 2005 the Bank focused its commercial strategy on renewing and enriching its range of products and services, not only for Shareholders as described above, but also for all the other customer categories. As far as deposits were concerned, the Bank drew up a new savings allocation formula characterised by good yield, guaranteed investment and flexibility. The product, named “2 percent”, consists of two elements: a personal savings book which guarantees 2% gross interest until December 2007, full availability of the sums deposited and no management fees; a financial capitalisation contract with Cattolica Assicurazioni which offers guarantee of the invested capital and a sure minimum annual yield of 2%. The product, characterised by considerably flexible management, allows the investor to distribute his investment according to the need for liquidity or yield. This formula which was launched in December 2005 has already proved popular with customers. The Bank also decided to enhance the value of the set of products consisting of the five new flat-fee current accounts, launched last year and aimed at retail clients: current accounts with a fixed monthly fee that include free services like direct debit, credit card or ATM card, insurance policies and internet banking.
58 As already mentioned, the Bank has also endeavoured to develop the managed savings sector, with expansion of the range of investment products, Sistema Fondi Intra, devised in association with Vegagest Sgr. In addition to the five funds already included in the offer, “Intra Assoluto”, a flexible fund suitable for short to medium-term investments and aimed at investors with diversified portfolios and a high risk-return profile, was also introduced. Furthermore, the Capital Accumulation Plan was expanded and developed. This is an investment formula suited to all types of investors that allows simple and easy investment of both large and small sums of money, thus allowing the investor to gradually build up capital through deposits spread over time. In the bancassurance sector, the partnership with Ergo Previdenza led to the launch of two new products: “Maia”, whole life insurance policy with death benefit and with revaluation of capital and annual coupon, and “In Equilibrio”, life insurance policy which can invest in three types of funds depending on the customer profile and requirements. Both these products have met with the approval of our customers. With regard to payment means, worthy of note is the constant growth in the spread of credit cards, many of which are already equipped with microprocessors, capable of eliminating the risk of “cloning”. During 2006 the ATM cards Bancomat/PagoBancomat operating on the domestic circuit will be progressively replaced by others containing chips and the ATM and POS equipment will also be adjusted. The importance of the money segment is apparent in the volumes generated during 2005: - 3,770,000 transactions performed with electronic cards held by customers, for a value of approximately € 366 million; - 3,800,000 transactions made through POS and credited to traders/customers, for over € 276 million. Within the scope of the “Patti Chiari” project – launched by the Italian Banking Association with the aim of guaranteeing the quality of services offered by the banks subscribing to the project - the Bank obtained quality certification for the “F.A.R.O., Funzionamento ATM rilevato on line” (on line service pinpointing working ATMs) and “Obbligazioni bancarie strutturate” (structured bank bonds) initiatives. The virtual banking activity also continues its positive trend, with constant expansion of the services offered over the internet. The number of private customers using an internet banking service has risen to 8,625 (+ 23.6% compared to the previous year) and the total number of transactions performed rose to 36,188 (+ 56.5% on 2004), for a total countervalue of € 82 million (+ 46.4%). The companies using the Global Banking Web now number 2,272, against the 1,878 of 2004 (+ 20.9%); the total number of orders issued rose to 549,470 (+ 57.7%), for a total countervalue which went from € 814.5 million to € 1,292.7 million (+ 58.7%). All the new facilities offered by the online bank services (private and corporate) are also available through the subsidiary Banca Popolare di Monza e Brianza.
59 In 2005 new web sites for Banca Popolare di Intra and for Banca Popolare di Monza e Brianza were created in compliance with international standards of W3C accessibility and certified on the basis of said standards. New facilities were introduced to the Private and Corporate Internet Banking services, a new online collection system was developed for credit card transactions through internet and a system for paying the TV licence through the Home Banking services was released. Numbers visiting our websites rose from 654,500 in 2004 to 810,600.
IT Projects
In the previous paragraphs mention has already been given to various interventions of an IT/procedural nature, performed within the scope of the activities of the consortium Sec Servizi, and aimed at providing back up and improvement of corporate operations, with particular regard to the credit area and the control system. However worthy of particular note are the procedural measures taken to complete the process of transition to the new IAS/IFRS accounting standards and to allow these to be adopted, as from 2005, in both the separate and consolidated financial statements as well as in the interim reports. Mention must also be given to the system adjustments requested by Bank of Italy with regard to reports to the Central Credit Register and in order to comply with the obligations required by rules governing transparency, as well as to the groundwork to the “Business Continuity Management” project setting forth the procedures to deal with emergencies and structural interventions, which will be completed in 2006. The finance division was also affected by procedural measures aimed at improving operational access to the markets, risk monitoring and valuation of treasury stock.
Investor Relations Activity
In 2005 the Bank worked in two directions. On the one hand it strove to improve the structure of the investor relations activity, by planning more frequent contacts and encounters with analysts and institutional investors, especially to coincide with the announcement of the quarterly interim results. On the other hand it endeavoured to upgrade the communication tools adopted, by updating the information contained in the Investor Relations section of the website and using the Borsa Italiana communications platform “Information Exchange”. As in previous years, the Bank attended the STAR event organised by Borsa Italiana in Milan on 2 and 3 March 2005, dedicated to the presentation of the 4th Quarter 2004 results to analysts and institutional investors. The STAR event 2005 proved to be of even greater interest than in previous years as in addition to the STAR companies, those of the TechSTAR sector also attended, thus providing the international financial community with the full spectrum of the seventy listed small and medium cap companies.
60 The expansion of the investor relations activity contributed to providing greater opportunity for institutional investors to study the Bank’s performance and to allowing more constant coverage on the part of financial analysts.
Branch Network and Properties
As at 31 December 2005 the Bank’s branch network, which has remained the same as 2004, consists of 72 branches, of which 51 cover the territory traditionally linked to the Bank’s origins (provinces of Novara and VCO), 25 operate in the adjacent province of Varese, 7 in the province of Milan and 2 in the province of Como. During the year the Cermenate, Cannerao and Prato Sesia branches relocated to premises more suited to the operating levels reached, while the work to extend the Gallarate premises, which contain the Bank’s Mortgage Centre, was completed. As far as the project for reorganisation of the non-capital properties is concerned, notice is given that a total of 44 properties were sold (of which 3 former bank branches, 10 offices and 31 rented apartments), for a total countervalue of € 6.6 million and generating capital gains, recorded in the 2005 balance sheet, equal to € 4.3 million. 39 property units remain, for 12 of which sales negotiations are well underway.
Corporate objectives and policies concerning the assumption, management and coverage of financial risks – Interventions to the Organisational Structure
As indicated in the Directors’ Report to the Financial Statements 2003, the Bank had already observed the need to reorganise the entire internal control system and had launched a specific project. To this end the Bank sought external collaboration to provide assistance in defining an optimal organisation model, which was subsequently approved in 2004, as well as in drawing up a plan of action. In 2005 the activities scheduled in the plan of action were carried out and these involved implementing corporate governance, redefining responsibilities for control within key processes, accurately mapping the operating processes and identifying the relative line controls. The Interfunctional Risk and Control Observatory (a board set up to oversee policies, controls and reports on the Internal Control System of the Bank and of the Group) monitored the state of progress of the projects and the following in particular: the adoption of the IAS standards with reference to the auditing of the administration division; the drawing up of Credit, Internal Audit and Risk Management Regulations; the adoption of new IT procedures for line and distance controls; the mapping of operating processes; the procedures for drawing up directors’ reports; the performance of control activities in branches and at head office with regard to Credit,
61 Finance/Security trading; the activity and functioning of the new Credit Control Service within the Internal Audit Division; the state of progress of the Basel II project. The Internal Control Committee, as far as its authority permitted, carried out an intense schedule of inspections on the effectiveness of the procedural structure of the new control system currently being created. However, the process of revision of the entire control system has not yet been completed and further measures still prove necessary. In implementing these, the observations made by Bank of Italy after the inspections carried out in 2005 will also be taken into consideration. Last year some structural changes were made, by which the activity of monitoring and controlling credit risks and rating performing customers was entrusted to the Credit Control Service, a division of the Internal Audit. At the same time the Problematic Credit Management Office, part of the Credit Division, was entrusted with managing positions under observation, under control, in arrears and problem loans. In both segments the methods used were redefined, with particular regard to the risk prevention measures to be implemented at all times. To support the control and monitoring activities special Sec Servizi procedures are used such as TCQ (Total Credit Quality), CRK+ and specific queries through which customers are segmented into groups on the basis of risk and amount. These procedures prove useful to allowing early identification of the positions in which the risk profile show signs of deterioration. Specifically, the programme by which the TCQ classification is assigned records both the punctual rating and the performance rating, by comparing approximately 400 variables referring to each individual customer. The next step named “SGR”, which is currently at an advanced stage of testing, will show the basis upon which the classification is established. This will allow the operating network to pinpoint any anomalies at an early stage, the Credit Control Service to memorise the results and will also allow the appropriate measures to be taken in the data classification of each individual relation. The procedures used by the Mortgage Centre, which has been active since the second half of 2003, were also amended at time the Credit Control Service commenced its activities, in order to improve the ways by which observance of the amortisation schedule is verified. With regard to the identification and development of the procedural oversight of risk controls, the Risk Management function is responsible for performing second level integrated controls on risk management. For each type of risk an analysis of the current situation and outlook is provided below.
62 Credit risk In 2005 the activities prescribed by the Basel II Project continued with regard to compliance of the Bank’s credit risk measurement and control systems with the minimum requirements set forth by the New Capital Accord, issued in June 2004. As far as the rating system linked to the TCQ project is concerned, after the functioning of the forms relating to disbursement of credit to private and business customers was perfected, in 2005 the “performance” form which assigns a rating to all customers was also brought into operation. The results obtained through the TCQ are already being used, for management purposes, for the granting of credit lines, for the control and segmentation of customers and for the development of ad hoc commercial policies. As part of the activities of the Risk Management function, these results are examined and processed on a monthly basis, in order to obtain the key figures which define the aggregate situation of the loans portfolio of the whole bank. For the IAS Financial Statements the Risk Management function also calculated the LGD (Loss Given Default) by analysing the final outcome of the non-performing loans closed in the last 5 years. The next objective will be to use the figures obtained for regulatory purposes (Basel II), to determined the capital absorption relating to the credit risk. Lastly, the Bank further streamlined the procedure, based on the statistical method of decision trees, acquired at the end of 2004, which analyses and processes the information acquired from the R.C. (expanded to include the entire loans portfolio) and provides reliable measurement of expected and unexpected loss and capital absorption as regards customer loans. The immediate objective is to determine each customer’s P.D. (probability of default), for the purposes of drawing up the IAS Financial Statements, as well as deciding on the Basel II approach which proves more consistent with the characteristics and strategies of our Bank.
Market risk With regard to the control and management of these risks, which affect the treasury shares portfolio, considering that the middle office of the finance division is in charge of the first level controls and the risk management function is in charge of the second level controls, the following is reported: ¾ Control of limits and counterparty risk The IT procedures used allow real time monitoring of the limits prescribed by the Board of Directors for the Investment, Negotiation and Trading portfolios (position, concentration, duration, country and rating limits). With regard to the operating limits (based on the counterparty rating, duration and type of transaction) and to the counterparty risk, the development of an automatic system of daily reporting allows overruns to be chronicled so as to create a user- friendly archive and report system.
63 ¾ Control of trading activity The positions taken by traders and the stop-losses established by the Board of Directors are subject to real time monitoring. ¾ Value at risk The algorithms for calculating the VAR of the Bank’s own financial instruments have been mapped out in a more streamline way, following the RISKMETRICS approach. Backtesting is performed on a daily basis in order to verify the validity of the results obtained by the procedure and to identify/rectify any anomalies. Hence it is possible to determine, with a concise measurement, the level of market risk assumed by the Bank and to predict, with “what if” analyses, the consequences of changes in market scenarios in real time. The measurement and management of market risk is extended to include the subsidiaries.
Operating risk In 2005 the specific measures developed during the previous year on the subsidiaries Intra Private Bank and Banca Popolare di Monza e Brianza were repeated and streamlined. On the basis the “events” suggested by the Basel II Accord, all those in charge of (central and peripheral) operating functions were interviewed, in order to calculate the probability and the economic impact of each risk event, and hence, the relative expected losses. The data obtained through this self-assessment activity was processed along with the accounting data, using the most up-to-date and sophisticated statistical methods (Monte Carlo processing and Bayesian calculation) to calculate the “historical”, “expected” and “Bayesian” VAR (Value at Risk). The final objective is to determine the capital absorption necessary to withstand the operating risk, in accordance with the First Pillar of the New Basel Accord. Over the next months the conclusions reached will be further improved and circulated within the Bank. Further information on this matter can be found in Part E of the Notes to the Financial Statements.
Human Resources and Training
As at 31 December 2005 headcount totalled 979 employees, of which 946 employed with an open-term contract and 33 with a fixed-term contract, compared to the 973 of year end 2004, of which 950 on an open-term contract and 23 on a fixed-term contract.
64 The figures show that compared to year end 2004 the number of staff employed on an open-term basis has decreased by 4 units. The increase in staff employed on a fixed-term basis is chiefly due to the increase in staff members on maternity leave. The number of the Bank’s resources on secondment to Group companies has remained the same as in 2004 (6 people). The percentage of total employed resources allocated to central services stands at 37%, which is much the same as the figure recorded as at 31 December 2004. The average age of employees as at 31 December 2005 is 39, while the average length of service is approximately 12 years. For several years the Bank has performed diligent training activity aimed not only at newly-hired employees but also at its more experienced collaborators. During the year attention focused on the credit and finance divisions. Many of the training initiatives, for which qualified external teachers are being more frequently called in, were based on the in-depth study of and compliance with the regulations governing the various “credit interactions”, without neglecting the fundamental commercial aspect. A number of encounters in fact concerned the presentation of new products, especially financial products, proposed through innovative sales techniques, organisation of customer portfolios and organised management of branch activity, which has also been implemented in order to encourage the achievement of the commercial targets set for the operating network. The Bank also decided to offer a training programme to those providing head office services, in order to identify the areas to be improved, with the final aim of providing the commercial network with a first-rate “service coverage”. This training course was based on the double monitoring effected by the commercial network, placing the emphasis on the quality of the services that the “head office supplier” is capable of producing. In addition to the initiatives described above, the Bank has provided its collaborators with a full catalogue of courses on various issues, all aimed at promoting personal professional growth. In 2005 a new edition of the course for newly-hired employees was held, with the aim of providing information on corporate organisation and on issues of central importance to the banking world. A very hands-on approach was adopted and the issue of safety in the work place and health protection was also discussed. Personnel training also took the form of in-house internships, with exchanges between the commercial network and head office. The table below illustrates the growth trend in the Bank’s commitment to training, in terms of both the numbers of staff involved and the numbers of initiatives completed.
65
2002 2003 2004 2005 INITIATIVES COMPLETED 370 338 401 553 STAFF INVOLVED 854 735 775 907 MEN/DAYS 4124 4202 4488 4657
As it has done for a number of years, our Bank also provided internships of various duration for students, to the satisfaction of both sides involved.
Interbank Deposit Protection Fund Readers are reminded that in compliance with Legislative Decree 659 of 4 December 1996 requiring banks to adhere to a system for guaranteeing deposits, our Bank is a member of the Interbank Deposit Protection Fund. During 2005 we were not required to make any payments to cover charges. As at 31 December 2005 our total commitment – as recorded in the commitment and risk account – is equal to € 4.043 million.
Security Policy Document Pursuant to Article 34 of Legislative Decree 196 of 30 June 2003 “Data Protection Code” and of point 19, sub-sections 1-8 of the Technical Regulations governing minimum security measures attached to said decree, by 31 March of each year, the Holder of sensitive and/or legal data, processed using electronic equipment must draw up/update the Security Policy Document. It is hereby stated that as our Bank processes sensitive date relating to employees and customers, it effected the 2005 update of the Document pursuant to the decree. In order to fully satisfy the obligations of the law in question and to ensure effective and exhaustive update of the Policy Document, a general survey was carried out of all the data processing activities, including both those performed in-house and those outsourced. On the basis of the results of the analyses performed the Security Policy Document was updated and was divided into two parts. The first refers to the processing performed by the outsourcer to which the Bank entrusted management of the company’s IT system, while the second refers to the processing performed directly by the Bank’s own employees and systems. The information on security measures contained in the Document refer to: ¾ the list of the processing operations performed; ¾ analysis of the risks to which the data is exposed; ¾ distribution of duties and responsibilities within the company;
66 ¾ logical, physical and IT measures adopted to ensure data integrity, including the protection of the areas where data is stored; ¾ criteria for restoring data availability in the event of destruction or damage; ¾ processing performed using non-electronic equipment and relative security measures adopted; ¾ provision of training to data processors; ¾ verification of the security measures.
67
Income Statement
The statement below and the accompanying notes examine the results of the income statement as at 31 December 2005, drawn up, for the first time, in accordance with the IAS/IFRS accounting principles, comparing said results with those of the same period of last year, recalculated according to the IAS/IFRS, excluding IAS 39.
(figures in millions of euro) 31.12.2005 31.12.2004 Absolute % exclud. IAS 39 varia.n varia.n
Interest margin 109,423 124,804 (15,381) (12.3) Net fees 51,905 48,166 3,739 7.8 Dividends and similar income 1,632 4,139 (2,507) (60.6) Net income from trading hft-cfv 1,741 (2,858) 4,599 n.a. Net income from hedging activities 212 75 137 182.7 Net profit/loss from disposal or repurchase of loans and financial liabilities 5,568 22,932 (17,364) (75.7) Net income from financial assets/liabilities at fair value 2,425 0 2,425 n.a. Net interest and other banking income 172,906 197,258 (24,352) (12.3) Net value adjustments for deterioration of loans and financial assets (253,044) (63,694) (189,350) 297.2 Net income from financial management (80,138) 133,564 (213,702) n.a. Administrative expenses (106,180) (101,585) (4,595) 4.5 Net allocations to provisions for risks and (7,412) (3,472) (3,940) 113.5 charges Net value adjustments to tangible and intangible assets (5,275) (5,462) 187 (3.4) Other operating charges/income 18,024 7,669 10,355 135.1 Operating costs (100,843) (102,850) 2,007 (2.0) Profit (loss) from shareholdings (145) 0 (145) n.a. Profit (loss) from the sale of investments 4,335 74 4,261 n.a. Net income from current operations before taxes (176,791) 30,788 (207,579) n.a. Income taxes for current operations 51,395 (6,701) 58,096 n.a. Profit (loss) for the year (125,396) 24,087 (149,483) n.a.
The interest margin – which is provided by the difference between interest and similar income, which has fallen from the € 208.6 million of December 2004 to € 194.7 million, and interest and similar expense, which has risen from € 83.8 million to € 85.3 million – is particularly affected by the strong increase in disputed positions, for which the corresponding interest income has not been received, and by the new accounting technique for recording convertible bonds introduced by the IAS/IFRS, which has penalised interest expense. As at 31 December 2005, this margin stands at € 109.4 million, against the € 124.8 million of December 2004 ( - 12.3%).
68 Net interest and other banking income, which stands at € 172.9 million, against the € 197.3 million of 2004, benefits from the 7.8% increase in net fees, which have risen from the € 48.2 million of year end 2004 to € 51.9 million, thanks in particular to the contribution from fees for management and intermediation services, up by 14.3% (from € 26.4 million to € 30.1 million). Total dividends and similar income has instead fallen from the € 4.1 million of December 2004 to € 1.6 million, as this no longer includes the contribution from Futuro SpA, which was sold in December 2004, while financial operations have once again delivered a net profit of € 4 million, against the net loss of € 2.8 million recorded in December 2004.
The recording of value adjustments for deterioration of loans to the order of € 251.7 million (€ 57.9 million the corresponding figure for December 2004) contributes to producing a net loss from financial management of € 80.1 million, which compares to the € 133.6 million profit posted in the same period of the previous year. The cost/income ratio3 has risen to 58.3% (from the 52.1% of 2004) due not only to the reduction in net interest and other banking income, but also to the rise in administrative expenses (€ 106.2 million, against the € 101.6 million of December 2004; + 4.5%), chiefly attributable to the increase in other administrative expenses (€ 46.2 million, against € 41.4 million; + 11.6%) for the most part due to the expenses associated with the extraordinary transactions and the greater legal costs incurred for the disputes which continued in 2005 also to protect the Bank’s image. The recording of net allocations to the provisions for risks and charges, which refer to current disputes in which there is a high possibility of outlay, and net value adjustments on tangible and intangible assets for a total of € 12.7 million (€ 8.9 million as at December 2004), as well as other operating charges and income for € 18 million (€ 7.7 million a year end 2004) – which have been affected by the extraordinary income ensuing from the settlement with Bank of America – led to a loss from current operations before taxes of € 176.8 million (compared to the € 30.8 million profit as at 31 December 2004). Hence, as at 31 December 2005, the income statement closes with a net loss of € 125.4 million, after the recording of the sum of current and deferred taxes equal to € 51.4 million, compared to a proforma IAS profit, as at December 2004, of € 24.1 million. Notice is given that upon First Time Adoption of the IAS/IFRS standards capital properties were valued with the deemed cost method. The use of this method led to the emergence of gross capital gains of € 19.995 million, as at the reporting date of 1 January 2004, which, subject to deferred taxes of € 7.5 million, in turn led to the recording of a revaluation reserve of approximately € 12.490 million. With regard to the capital properties recorded in the balance sheet as at 31 December 2004 which were appropriately adjusted by the variations occurring in the year 2005, the tax values were realigned taking advantage of the option provided by sub-section 469
3 Calculated as the ratio between operating costs and net interest and other banking income
69 and thereafter of Article 1 of Law 266 of 23 December 2005 (Finance Bill 2006), which allows, be it only from 2008, the greater value attributed to the assets – equal to € 19,356 thousand – to be recognised also for tax purposes, with the payment of a 12% substitute tax equal, in our case, to € 2.3 million. The exercise of this option on the part of Banca Popolare di Intra “freed” the € 4.9 million surplus of the aforementioned deferred taxation which was attributed to item 130 “valuation reserve” of the shareholders’ equity. The positive balance of item “260 Income taxes for the year” is provided by the sum of: - current taxes for € - 22.1 million; - variation in prepaid taxes for € 68.4 million; - variation in deferred taxes for € 5.1 million. The prepaid taxes essentially arise from negative income components recorded on an accruals basis, and for which deductibility will be possible in future years. The total sum of said taxes, equal to approximately € 120 million, was recorded under tax assets after valuation, on the basis of the draft of the 2006-2008 Strategic Plan and of other projections up to the year 2010, of the probability of their recovery. The deferred taxes essentially arise from taxable revenues recorded on an accruals basis, with deferred payment of the tax due.
70 Overview of Shareholders’ Equity
The Bank’s shareholders’ equity, including the loss for the year, amounts to € 264,843 million. The table below provides a breakdown of shareholders’ equity with comparison of the figures as at 31 December 2004 reclassified in accordance with the new accounting standards. Shareholders’ equity 31.12.2005 31.12.2004 % variation (figures in millions of euro) exclud. IAS 39 Valuation reserves 20.8 14.1 47.5 Capital instruments 7.0 7.6 (7.9) Reserves 57.8 86.0 (32.8) Share premiums 159.3 151.1 5.4 Capital 145.4 142.5 2.0 Treasury shares (-) 0.0 0.0 0.0 Profit (loss) for the year (125.4) 24.1 n.a. Total Shareholders’ equity 264.9 425.4 (37.7)
The revaluation reserves, as at 31 December 2005, refer: • for € 1,706 thousand to the pre-existing revaluation reserve pursuant to Law 413 of 30 December 1991; • for € 17,034 thousand to the newly set-up revaluation reserve pursuant to Law 266 of 23 December 2005; • for € 40.8 thousand to the F.T.A. reserves relating to the properties for which it was not possible to apply the above-mentioned Law 266/2005; • for € 1,990.4 thousand to reserves recorded as balancing entry to the fair value valuation of securities classified as available for sale.
The capital instruments represent the derivative component of the 2001-2006 convertible subordinated loan.
The reserves break down as follows: • ordinary reserve € 23,641.5 thous. • extraordinary reserve € 31,770.9 thous. • available reserve € 35,898.0 thous. • reserve for purchase of treasury shares € 7.746.9 thous. • reserve pursuant to Lgs. Decr. 124/1993 € 163.8 thous. • reserve for future issues of share capital in favour of employees € 936.0 thous. • FTA reserve for fair value valuation of securities and currencies € 805.6 thous. • FTA reserve for elision of treasury bonds held in the portfolio € 133.6 thous.
71 • FTA reserve for valuation of own issue bonds € (217.2 thous.) • FTA reserve for a government bond considered AFS and related hedging € (76.8 thous.) • FTA reserve for write-downs of customer loan € (42,187.3 thous.) • FTA reserve for adjustment of recording, classification and valuation on tangible and intangible assets € 954.6 thous. • FTA reserve for other items (staff sev. ind., stock grant, passive litigation) € (1,765 thous.) € 57,804.6 thous.
During the year the composition of shareholders’ equity varied on account of the share issues mentioned above, of which the following details are provided: - 130,619 new ordinary shares, with a par value of € 3.00 each, payment 1 January 2005, assigned as bonus issue to the Bank’s employees, with withdrawal from the “reserve for future issues of share capital to employees” and related increase of share capital for a total of € 391,857.00; - 820,349 ordinary shares with a par value of € 3.00 each, as part of the conversion of 745,722 bonds of the “Banca Popolare di Intra 3% 1998-2003 convertible subordinated” loan, which occurred between July and November and relative share capital increase for € 2,461,047.00. Hence, on the whole, the share capital of the Bank rose to € 145,393,191.00 and is divided into 48,464,397 shares of a par value of € 3.00 each. At year end 2005 the individual equity calculated for regulatory purposes according to Legislative Decree 87/92, amounts to € 346.4 million, against weighted assets of € 3,808.4 million. The total capital ratio is equal to 9.1% (12.04% at December 2004), of which 6.8% (9.7%) is tier 1. In order to improve the asset base and the regulatory ratios of the Bank and the Group, notice is given that in the 2006/2008 Three Year Strategic Plan (of which the guidelines were submitted to the Regulatory Authority in January 2006) a precise capital strengthening programme will be drawn up which will allow recovery of appropriate levels by as early as 2006.
72
Significant events occurring after year end
• Renewal of corporate governance
The programme for the renewal of corporate governance continued after year end with the co-optation of Francesco Amendola on 13 January 2006 and of Antonio Zacchera on 1 March 2006. Mr. Amendola, who was appointed Chairman of the Internal Control Committee and entrusted with the task of reviewing the organisation model of the Bank and of the Group in terms of adequacy to the Internal Control System, replaced Mr. Lino De Vecchi, while Mr. Zacchera, who accepted the appointment on 16 March, replaced Mr. Mauro Albonico. Notice is also given that on 1 March 2006 the Deputy General Manager, Mr. Alberto Canossa, tendered his resignation.
• Shared Autonomy Project
In order to further strength the resolution to safeguard its autonomy, in January 2006, the Bank decided, as disclosed to the market through special press releases, to launch a “shared autonomy” project aimed at setting up forms of strategic and operating alliances with a bank or banking group to be selected from those of similar or comparable size to its own. The project, which aims to ensure appropriate development of the banking establishments involved and creation of significant economic and product synergies with a view to safeguarding autonomy, to the benefit of the respective reference territories, not only in the short term, but also in medium and long term, was well received by the banking system and the following banks responded to Intra’s invitation: Banca Popolare dell’Alto Adige, Banca Popolare dell’Emilia Romagna, Banca Popolare dell’Etruria e del Lazio, Banca Popolare di Milano, Banca Popolare di Vicenza, Credito Valtellinese, Gruppo Banco Popolare di Verona e Novara, Gruppo Banche Popolari Unite and Veneto Banca. With a view to guaranteeing maximum transparency as well as compliance with prevailing market laws, the Bank appointed Mediobanca as Advisor to assist in identifying the project that was best suited to the Bank’s requirements. Hence Mediobanca was entrusted with assessing the proposals received to establish how best to favour the strengthening and development of Banca Popolare di Intra and of its subsidiaries, and in particular Banca Popolare di Monza e Brianza and Intra Private Bank, while bearing in mind four fundamental objectives: the protection of shareholders, employment, the territory and the mutualistic spirit. On 29 March the Board of Directors received the outcome of the Advisor’s assessments which led to it to identify the four best projects as those submitted by
73 Banca Popolare di Vicenza, Banco Popolare di Verona e Novara, Credito Valtellinese and Veneto Banca.
• 2006/2008 Three-Year Strategic Plan
In the last quarter 2005, in collaboration with its Advisor Mediobanca, the Bank began to draw up the 2006-2008 Three-Year Strategic Plan. Although the plan has been formulated on the basis of stand-alone expansion in the short and medium term, it should also provide support to the subsequent shared autonomy project. The Plan’s Guidelines, which will approved in April, were already approved by the Board of Directors in January 2006 and submitted to the Regulatory Authority and to the market. The Plan will firstly involve valuation of the current and future capital requirements, also on the basis of the growth targets for the Group’s operating volumes (for which CAGR is expected to reach 7.6% for loans and 6.2% for deposits in the three-year period) and of the transactions that have already been implemented in 2006 to improve capital ratios: • release of a new lower tier II Banca Popolare di Intra 2006/2016 non convertible subordinated bond issue of a par value of € 40 million – fully placed with domestic professional investors -, for which Bank of Italy has authorised computation as tier II capital; • bonus issue of € 19.4 million which will be submitted to the approval of Shareholders at the next Meeting. The Plan will also provide for continuation of the review of corporate governance and the organisational structures. In this respect, the amendments to the central function chart and to the network organisation model have been defined and this will lead to simplification of the structure of the geographical areas and to more effective market orientation through the creation of new specialist figures. The activities scheduled in the Plan over the next few months include completion of the revision of the processes for selection and disbursement of credit and of the relative monitoring and control methods and implementation of the transaction involving the assignment without recourse of a further portfolio of non-performing loans, chiefly consisting of mortgages, for a net book value as at 31 December 2005 of over € 40 million, for a gross value exceeding € 60 million. In terms of profitability, the new Strategic Plan will confirm the forecasts that the Bank and the Group will recover profitability trends consistent with the objectives set prior to the extraordinary events which occurred during 2005.
74 • Other events
Among the significant events occurring after year end, notice is given that the Board of Directors, in the meeting of the 13 February 2006, examined the outcome of the analysis commissioned to PricewaterhouseCoopers Spa to verify any differences in classification and/or valuation of customer loans compared to the findings of the Bank of Italy Inspectors during their inspections in 2005. The Board of Directors, pursuing a policy of extreme prudence and maximum rigour approved, with reference to 31 December 2005, variations to classifications and further provisions to customer loans. The Board also decided to entrust the aforesaid company with a further assignment to examine the Bank’s performing loans portfolio as at 31 December 2005. The results of this analysis were reviewed by the Board of Directors in the meeting of 16 March 2006, during which a resolution was passed to increase the collective write- down as at 31 December 2005, to cover positions for which there may be an incurred loss of approximately € 4.5 million. Following the further provisions made in the 4th Quarter 2005, in February 2006, the rating agency Standard & Poor placed the Bank’s long and short term ratings on the credit watch with implication of change, while Fitch lowered the long term rating to “BBB-“ and the individual to “D”, with negative credit watch. The Bank’s share performance continued to fluctuate heavily in the second half 2005, standing at around +20%, with a further increase in volumes traded. The average daily trading rose from approximately 203,000 shares in the second half 2005 to approximately 356,000 shares, with peaks exceeding one million trades. Hence notice is given that, following year end, within the scope of disposals of minority shareholdings of lesser strategic importance, almost the entire stake held in SI’ HOLDING S.p.A. (0.15% of share capital, recorded in the balance sheet for € 32 thousand), was transferred, as part of the changes to the shareholding structure, generating revenue of € 224 thousand and capital gains of € 192 thousand. In the early months of 2006, the first steps were taken towards identifying counterparties interested in buying off the Group’s minority interest in HIG S.p.A. and in LMF Servizi Finanziari S.A.. During this period the law firm which assisted the Bank in the dispute with Bank of America was also entrusted with a mandate to file writ of summons on Barclays Bank Plc, once again concerning transactions relating to credit derivatives effected in 2000. Within the scope of the Investor Relations activity, the Bank participated in the presentation of the 4th Quarter Results of companies listed on the STAR and TechSTAR segment organised by Borsa Italiana on 1/2 March 2006. The Bank provided details of the economic and financial performance as at year end 2005 and illustrated the guidelines of the strategic policies adopted.
75 Lastly, mention is given to the initiatives launched with regard to the laws governing market abuse assimilated with Law 62/2005 (so-called community law) and implemented with amendments to the Issuer Regulations (no. 11971/1999) and Market Regulations (no. 11768/1998). In compliance with the new legislation, the Bank passed a resolution to adopt, with effect from 1 April 2006, a “Code of Conduct for providing public notice with regard to material events and circumstances and internal dealing”, governing the management and processing of privileged information, as well as reporting to CONSOB and to the market on transactions effected in securities issued by the Bank by significant persons, meaning directors, statutory auditors, general management and some of the Bank’s executives. On 1 April 2006 the “Register of persons with access to privileged information” as prescribed by the legislation, will also come into effect.
76 Management Outlook
The three-year policy document submitted to the examination of the Regulatory Authority in view of the forthcoming approval of the Three-Year Strategic Plan, not only prescribes specific measures to strengthen corporate governance and reorganise operating assets and internal control systems, but also further actions aimed at improving asset quality and reviving the local retail bank activity. Considering the need to counteract the decrease in interest-bearing assets which occurred in 2005, from as early as the first half of 2006 the Bank established some targets for re-launching loans chiefly aimed at SME and private customers as well as some funding targets through identification of financial sources capable of sustaining disbursement. Achievement of these growth objectives will however be accompanied by constant attention to the profitability and quality credit levels guaranteed by (procedural/organisational) systems implemented during the year. With regard to deposits, the Bank is expected to continue to pursue the policy aimed at redressing the balance of funding forms, moving away from more burdensome forms (bond issues and repurchase agreements) towards the more traditional forms and towards managed savings. More qualified resources will be dedicated to commercial growth and the acquisition of new customers, and this activity will be supported by the preparation of new competitive products and by increased specialisation of the sales network. During 2006 trends in bank rates are expect to undergo a slight increase at system level, which will be implemented from as early as the first quarter. This increase should lead to a slight rise in the customer margin considering that on the credit side the expected growth in loans should counteract the growth in the cost of deposits, which will be affected by the increase in interest rates on renewals of the bond issues. The interest margin is expected to essentially confirm the levels posted in 2005, considering the expected reduction in the securities portfolio and the deterioration of the interbank positions, which will lead to an increase in the negative balance of the related interests. Trends in revenues from services are expected to see further growth in fees income, chiefly attributable to expansion in the managed savings component. By contrast a reduction in the contribution from dividends and in the total profitability of the financial segment is forecast given that the income generated in 2005 from the disposal of non-strategic minority interests will not be present. The decrease in net interest and other banking income, due to the one-off nature of said income, is expected to be in the region of 6-7%. With net adjustments to loans returning to normal levels, it is expected that the net result from financial management will once again deliver a profit, following the € 80
77 million loss recorded in 2005, as a result of provisions and value adjustments totalling € 253 million. It is expected that by keeping operating costs consistent with 2005 levels, despite the costs required to relaunch the Bank (advisory fees, costs for corporate consultations, upgrading of communications, etc.) and by using the first benefits deriving from deferred taxation, the Bank will succeed in returning, from as early as 2006, to the profitability levels recorded prior to the extraordinary events of 2005, and will also reinstate the payout to shareholders.
78
To the Shareholders,
Before we conclude our report and submit the proposals to be included on the agenda of the Shareholders’ Meeting, it is customary for us to remember and thank all those who believe in and contribute to the success and expansion of Banca Popolare di Intra. This year in particular we must express our heartfelt thanks to the Shareholders, Customers and local Representatives who have supported us, even by giving constructive criticism, and have shown, in their different ways, to recognise “Intra” as their own bank, the territory’s bank and to strongly wish it to remain so. We also express our appreciation of the commitment and determination shown by all our staff members. Particular thanks is also extended to the Chairman, Sandro Saini, the Deputy Chairmen, Luciano Brogonzoli and Vitaliano Moroni, the Directors Mauro Albonico and Lino De Vecchi and the Chairman of the Board of Statutory Auditors Roberto Scruzzi who, in order to favour the process of renewal of corporate governance, took the decision to leave office.
Special appreciation and thanks is also extended to the Regulatory Authorities, both central and peripheral and, in particular, to the Headquarters of the Novara Office and of the Milan Office of Bank of Italy, to CONSOB and to Borsa Italiana S.p.A. for the close interest that they have shown in the evolution of our Bank and for the help provided.
Lastly, we must express our appreciation to the trade associations and entities, to the Italian and foreign banks through which we operate and to all those who have worked with us.
79 PROPOSAL FOR APPROVAL OF THE FINANCIAL STATEMENTS AND CONSEQUENT RESOLUTIONS
To the Shareholders,
We hereby submit to your approval the Financial Statements as at 31 December 2005 – consisting of the Balance Sheet, the Income Statement, the Statement of Changes in Shareholders’ Equity, the Cash Flow Statement and the Notes to the Financial Statements and accompanied by the Directors’ Report on operations -, which have been audited by the auditing firm Reconta Ernst & Young SpA and close with a loss for the year equal to € 125,396,014. Hence we submit the following proposals to your approval: • carrying forward of the loss for the year recorded in 2005 of € 125,396,014; • pursuant to Legislative Decree 38 of 28 February 2005, second sub-section, constitution of an unavailable reserve of € 4,440,939.54 drawing from the available reserve against the capital gains recorded in the income statement, net of the relative tax charge, which arise from application of the fair value principle. Should these proposals be accepted, shareholders’ equity would break down as follows: • share capital (48,464,397 shares) € 145,393,191 • issue premiums € 159,256,226 • reserves € 53,363,641 • unavailable reserve pursuant to Lgs,D. 38/2005 € 4,440,940 • valuation reserves € 20,771,476 • capital instruments € 7,013,552 • loss carried forward € (125,396,014) € 264,843,012
80 DERIVATIVE ACTION AGAINST THE FORMER GENERAL MANAGER MR. GIOVANNI BRUMANA
The derivative action against the former General Manager Brumana has been motivated by the fact that the latter acted in beach of the powers delegated thereto and, as bore out by the inquiry underway and by the news appearing in the press, illegitimately granted to third parties credit of sums of the Bank’s money. The former General Manager, after having committed the Bank, in the autumn of 2002, to the guarantee consortium for the Fin.Part share capital increase with a risk quota of € 41,045,000.00 without having the power to do so, subsequently granted loans, some of which in breach of the limits of the power of attorney assigned thereto and without even bothering to obtain the guarantees which were initially offered by the party requesting the credit.
In spite of the measures that were later taken to reduce exposure, these transactions produced damages of € 68,576,809, subject to reservation to perform further verification.
81
RENEWAL OF COMPANY OFFICES
To the Shareholders,
The term of office of the following Directors has terminated: • Angelo Alessandro Compostella • Giorgio Pellicelli • Claudio Carlo Viganò as has that of the following gentlemen: • Francesco Amendola • Raffaele Bruni • Marco Fortis • Ernesto Paolillo • Antonio Zacchera who were co-opted by the Board of Directors to replace the Directors who resigned after last year’s Shareholders’ Meeting.
Pursuant to Article 20 of the Articles of Association, the aforesaid Directors qualify for re-election for a period of three years.
The term of office of the standing members of the Board of Statutory Auditors has also terminated, namely Ferruccio Battaini – appointed Chairman to replace Roberto Scruzzi, who resigned on 13 January 2006 -, Roberto Bussi and Marta Lodari (alternate auditor who entered the Board following Roberto Scruzzi’s departure), and the alternate auditor, Mario Ciana.
With regard to the requirements to be met by corporate representatives, reference is made to the following: - Articles 13 “Causes of ineligibility and forfeiture”, 20 “Board of Directors”, 32 “Board of Statutory Auditors”, of our current Articles of Association; - Articles 2387 “Requirements of integrity, professionalism and independence” and 2399 “Causes of ineligibility and forfeiture” of the Italian Civil Code; - Article 26 of the Banking Consolidation Act (Legislative Decree 385 of 1 September 1993), the Regulations of the Treasury Ministry, of the Budget and of the Economic Planning 161 of 18 March 1998 and the Code of Conduct for Listed Companies. In relation to the requisite of independence, attention is drawn to the fact that all the outgoing Directors, excepting Francesco Amendola and Antonio Zacchera declared their independence.
82 Lastly notice is given that the Standing Arbitrator Giuseppe Uglietti and the Alternate Arbitrator Sergio Napoletano have also reached the end of their term of office and they also qualify for re-election. Hence the Shareholders’ Meeting must appoint eight Directors, the Board of Statutory Auditors, one Standing Arbitrator and one Alternate Arbitrator.
Verbania Intra, 29 March 2006
THE BOARD OF DIRECTORS
In compliance with the new instructions issued by Bank of Italy for the benefit of the banking system and received by our Bank on 10 April 2006, concerning the procedures by which to report in the financial statements as at 31 December 2005 the reduction in the fiscal burden following revaluation of real estate pursuant to Law no. 266 of 23 December 2005 (the so-called “Finance Bill 2006”), notice is given that on 13 April 2006 the Board of Directors of Banca Popolare di Intra passed a resolution to amend the separate and consolidated draft financial statements approved on 29 March 2006 in order to assimilate the specifications of the Regulatory Body. The amendments made involve charging directly to equity a positive non-recurring component relating to the tax benefit arising from the aforesaid revaluation law, equal to € 4.9 million, previously carried in the income statement and ascribed to the revaluation reserve of the regulatory capital, which does not however present any variation compared to that which was approved earlier. Due to this different reporting procedure the income taxes for the year on current operations were re-determined, as was the separate and consolidated net profit (loss).
This document, comprising the report on operations, the financial statements and the notes to the financial statements, both separate and consolidated, assimilates the amendments passed on 13 April 2006.
Verbania Intra, 13 April 2006
THE BOARD OF DIRECTORS
83
Report on Corporate Governance 2005 of Banca Popolare Di Intra
84 REPORT ON CORPORATE GOVERNANCE OF BANCA POPOLARE DI INTRA
In compliance with the provisions of Borsa Italiana SpA, we hereby provide the prescribed report on the Bank’s Corporate Governance system and on application of the Code of Conduct for Listed Companies. Since 2000 Banca Popolare di Intra has assimilated the recommendations contained in the Code drawn up in October 1999 by the Corporate Governance Committee of Listed Companies, adapting it to suit its status as cooperative bank and its size. The Code adopted by the Bank and currently in force has been revised to reflect the amendments proposed by the Corporate Governance Committee in July 2002. This Report, which aims to provide information on the implementation of the provisions of Code and a general description of the governance structure, has been drawn up in accordance with the recommendations contained in the “Guidelines for the drawing up of the annual report on corporate governance” issued by Borsa Italiana SpA in February 2003 and those contained in the “Guide to the drafting of the report on corporate governance” drawn up by Assonime ed Emittenti Titoli in February 2004.
Composition and Role of the Board of Directors The Board of Directors of Banca Popolare di Intra is composed of thirteen members elected by Shareholders’ Meeting from amongst shareholders possessing the requisites of integrity, professionalism and independence established by the law and by regulators. The majority of directors (eight members) are independent, that is, they do not have, direct or indirect, significant economic relations with the Bank or with its subsidiaries, nor do they provide professional services on an ongoing basis, nor are they direct or indirect holders of majority shareholdings of the Bank or of its subsidiaries. The Board of Directors assesses directors’ independence on a regular basis, by reviewing the information provided by the parties concerned. The outcome of the review is then disclosed to the market. No director has been vested with executive powers, hence there are no executive directors as defined in Article 2.1. of the Code of Conduct. Directors are elected for a three-year term of office. The appointment is to be accepted if they believe they can dedicate sufficient time to the diligent performance of their duties, taking into account the number of offices as director or statutory auditor which they also hold in other companies listed in regulated markets, in financial, banking and insurance companies or in large companies.
85 Each director brings his own specific expertise to the board’s discussions and in this way contributes to the making of decisions consistent with corporate interest. Directors act and pass resolutions autonomously and with full knowledge of the facts, pursuing the objective of creating value for Shareholders, without however neglecting the links with the territory and the members, as befitting a cooperative bank. In performing their duties the directors carry out the necessary measures to ensure: - protection of the strategic interests of Banca Popolare di Intra and of the Group which it heads by defining organisational structures that are appropriate to the reference context and to the objectives pursued and by identifying the areas of competence and the responsibilities of each operating and control sector, ensuring the necessary mechanisms of coordination within the Group; - adequacy of the control structures and procedures aimed at constant monitoring and prevention of credit, financial and operating risks for the Bank and the Group, in compliance with the fundamental principles of separateness of those who “originate” and those who “control” the risk, of responsibilisation of the functions entrusted with business oversight and in accordance with the exposure limits established both internally and by regulatory provisions. Article 23 of the Articles of Association provides express specification of the duties of the Board of Directors and the issues reserved to its competence. The Code of Conduct and the Code of Ethics adopted by the Bank complete the description of its tasks, emphasising its governance role and related functions. In specific terms, the Board of Directors is responsible not only for all the duties that cannot be delegated by law, but also for all the decisions of a strategic nature for both the Bank and the Group. The Board of Directors also oversees the general operating trends, affording particular attention to the situations where conflict of interests may arise, and establishes the risk management policies; it promotes a corporate culture which valorises the control function; it verifies the adequacy of the general organisational and administrative order of the Bank and of the Group, approving the Bank and Group organisation structure; it reports to the Shareholders’ Meeting. The Board of Directors is also vested with the power to issue bonds, including convertible bonds, and to increase share capital, in accordance with the procedures, limits and terms set forth in Articles 2420-ter and 2443 of the Italian Civil Code, in compliance with the principles established by Shareholders’ Meeting. Pursuant to the provisions of Article 24 of the Articles of Association, the Board of Directors may purchase or redeem the company’s shares pursuant to Article 2529 of the Italian Civil Code (former 2522). In compliance with the recommendations contained in the Code of Conduct for Listed Companies a list of the Directors is provided below with specification of the offices held in the Banca Popolare di Intra Group and in other listed companies or in banking, financial, insurance or large-sized companies.
86
Cesare Ponti (in office until approval of the financial statements 2007) Member of the Board of Banca Popolare di Intra until 31 August 2005; Chairman since 1 September 2005; member of the Executive Committee, the Remuneration Committee and the Loans Committee. Member of the Board of Ponti SpA, Ghemme.
Sandro Saini (resigned on 31 August 2005) Chairman of Banca Popolare di Intra until 31 August 2005, member of the Executive Committee, the Remuneration Committee and the Loans Committee. Chairman of Molini e Saini SpA, Borgomanero.
Ernesto Paolillo (*) (in office from 12 October 2005 until approval of the financial statements 2005) Deputy Chairman of Banca Popolare di Intra, member of the Executive Committee, the Remuneration Committee and the Loans Committee. Chairman of S.E.I. Servizi all’Industria, Padua. Deputy Chairman of Banca Akros, Milan. Member of the Board of Istituto Centrale Banche Popolari Italiane SpA, Milan; Dexia Crediop, Rome; Fiera di Milano Spa, Milan; SEA, Milan; SEA Handing, Somma Lombardo; Interconfidi Nordest, Padua.
Luciano Brogonzoli (*) (resigned on 12 October 2005) Deputy Chairman of Banca Popolare di Intra, member of the Executive Committee, the Remuneration Committee and the Loans Committee until 31 August 2005; Director until 12 October 2005. Chairman of Intrafid Srl. Chairman of the Board of Statutory Auditors of the Pension Fund for the Employees of Banca Popolare di Intra.
Vitaliano Moroni (resigned on 12 October 2005) Deputy Chairman of Banca Popolare di Intra, member of the Executive Committee, the Remuneration Committee and the Loans Committee until 31 August 2005; Director until 12 October 2005. Honorary Chairman and Member of the Board of Lagostina SpA, Omegna. Managing Director of Delca Finanziaria Srl, Novara.
Mauro Albonico (*) (resigned on 1 March 2006) Member of the Board of Banca Popolare di Intra, member of the Internal Control Committee and the Loans Committee until 1 March 2006. Member of the Board of Banca Popolare di Monza e Brianza (in office until approval of the financial statements 2005).
Michele Alessi Anghini (in office until approval of the financial statements 2007)
87 Member of the Board of Banca Popolare di Intra, member of the Remuneration Committee and the Loans Committee until 12 October 2005. Managing Director of Alessi SpA, Crusinallo.
Amendola Francesco (in office from 13 January 2006, until approval of the financial statements 2005) Member of the Board of Banca Popolare di Intra, Chairman of the Internal Control Committee. Member of the Board of Hypo Alpe Adria Bank SpA, Udine e Omnia Sim SpA, Milan.
Paola Balzarini (*) (in office until approval of the financial statements 2007) Member of the Board of Banca Popolare di Intra, member of the Executive Committee, the Remuneration Committee and the Loans Committee. Chairman of the Association of Chartered Accountants of Verbania; Supervisory Board of ABIIS. Chairman of Board of Statutory Auditors of ABIS Sgr, Milan; SPV Srl, Servizi Pubblici Verbanesi; Pigoli Consulenza SpA, Milan.
Luigi Enrico Bonomi (*) (in office until approval of the financial statements 2006) Member of the Board of Banca Popolare di Intra and member of the Loans Committee. Member of the Board of Intesa Casse del Centro SpA, Spoleto.
Raffaele Bruni (*) (in office from 3 November 2005 until approval of the financial statements 2005). Member of the Board of Banca Popolare di Intra, member of the Internal Control Committee since 1 March 2006. Chairman of Bruni, Marino & C Srl, Milan. Member of the Board of Fondo Pensione Telemaco.
Angelo Alessandro Compostella (*) (in office until approval of the financial statements 2005) Member of the Board of Banca Popolare di Intra, member of the Executive Committee since 13 May 2005. Member of the Board of Intra Private Bank (in office until approval of the financial statements 2006). Chairman of Shine SIM SpA, Milan.
Lino De Vecchi (resigned on 13 January 2006) Member of the Board of Banca Popolare di Intra and Chairman of the Internal Control Committee until 13 January 2006. Member of the Board of Publitalia '80 SpA, Milan. Chairman of the Board of Statutory Auditors of Syndial Milan; Polimeri Europa Srl, Milan; Quadrivio Sgr, Milan.
88 Statutory Auditor of Auchan Italia SpA, Rozzano Milanofiori; Accord Italia S.p.A, Milan.
Marco Fortis (*) (in office from 22 December 2005 until approval of the financial statements 2005) Member of the Board of Banca Popolare di Intra. Deputy Chairman of Fondazione Edison, Milan. Member of the Board of Fondazione Donegani.
Giorgio Pellicelli (*) (in office until approval of the financial statements 2005) Member of the Board of Banca Popolare di Intra, member of the Internal Control Committee and the Remuneration Committee. Member of the Board of Fiat France S.A. and Fiat Credit Bank A.G., Turin.
Claudio Carlo Viganò (*) (in office until approval of the financial statements 2005) Member of the Board of Banca Popolare di Intra. Chairman of Banca Popolare di Monza e Brianza (in office until approval of the financial statements 2005). Chairman of Videoplastic SpA, Gorlago; SIAS Autodromo Nazionale, Monza. Member of the Board of ACM, Milan; Immobiliare ACM SpA, Milan; Mabrun SpA, Bassano del Grappa; Immobiliare Oliveto Srl, Perledo. Sole Director of Immobiliare 20 Srl, Monza; Pantalonificio d’Abruzzo Srl, Gissi. Chairman of the Board of Statutory Auditors of Tessuti Elastici Besana SpA, Besana B.za; Eggea Srl, Monaca; Tecnocalor SpA, Monza; Immobiliare Sporting Club Monza SpA, Monza. Statutory Auditor of Autostrada Pedemontana Lombarda SpA.
Lanfranco Vivarelli (in office until approval of the financial statements 2007) Member of the Board of Banca Popolare di Intra, member of the Executive Committee since 12 October 2005 Chairman and Managing Director of Intra Private Bank (in office until approval of the financial statements 2005)
Antonio Zacchera (in office from 16 March 2006, until approval of the financial statements 2005) Member of the Board of Banca Popolare di Intra, member of the Loans Committee since 16 March 2006. Chairman of AIA Anonima Italiana Alberghi SpA, Alberghi Zacchera SpA. Member of the Board of Distretto Turistico dei Laghi Scrl. Managing Director of SAB Alberghi di baveno SpA, Fonti Minerali e Termali di Baveno Srl. Sole Director of Suisse Srl.
(*) independent directors pursuant to Article 3 of the Code of Conduct
89 Chairman of the Board of Directors The Chairman of the Board of Directors, or whoever takes his place, is vested with legal representation of the Company before third parties and in court. He is also vested with the powers of signature and the authority to bring actions to recover debt, as set forth in Article 28 of the Articles of Association. In urgent circumstances, the Chairman, or whoever takes his place, is vested with the power to oppose and to bring actions and proceedings before all judicial and tax authorities, and to represent the Company in proceedings brought by and against it, with the obligation of informing the Board in the next meeting to be held. The Chairman calls the Board meetings and takes steps to ensure that, at a reasonable time prior to the date of the meeting (barring cases of necessity and urgency), the Board members are provided with the documentation and information necessary to allow them to express an informed opinion on the material issues submitted to their examination and approval. In order to meet this obligation it is also possible that resolutions concerning material issues may be passed in a meeting subsequent the one in which the matters were presented/discussed. The Chairman coordinates the activities of the Board of Directors and oversees the course of its meetings.
Committees Pursuant to Articles 25 and 26 of the Articles of Association the Board of Directors sets up the Committees specified below, and establishes the composition thereof on an annual basis. All the committees set up by the Board and by General Management report at least once a month to the Board of Directors on the decisions taken within the scope of the powers assigned thereto, as well as on those resting with the persons in charge of central or network divisions/services.
Executive Committee With a view to improving governance of the Bank and the Group, the Board of Directors set up, with effect from 1 January 2003, the Executive Committee, entrusting it with preventive examination and analysis of problem issues within its competence and vesting it with authority in matters pertaining to receivables and non- performing loans, finance and human resources (excluding executives) as well as Group coordination and management. The Executive Committee is also entrusted with the task of overseeing disclosures to the market and to the institutional investors, in order to ensure unitary management thereof, without prejudice to urgent circumstances for which said authority is delegated to the Bank’s General Management, which will then inform the Executive Committee in the next meeting to be held.
90 In 2005 the Executive Committee was composed of the Board Members Sandro Saini, Luciano Brogonzoli and Vitaliano Moroni until 31 August 2005, Cesare Ponti, Paola Balzarini and Angelo Alessandro Compostella for the full year and Ernesto Paolillo and Lanfranco Vivarelli from 12 October 2005.
Meetings of the Board of Directors and of the Executive Committee The Board of Directors meets in ordinary session at least one a month and in extraordinary session each time the Chairman or three Board Members or the Board of Statutory Auditors request a meeting. The Meeting is deemed valid if at least seven members are present. Resolutions are passed by absolute majority vote and in the case of votes being equal the Chairman has the casting vote. As a general rule the Executive Committee meets on a fortnightly basis. The meetings are deemed valid if the majority of its members, including one presiding member, are present. Resolutions are passed in accordance with the same procedures prescribed for the Board of Directors. The Bank’s General Manager attends the meetings of the Board of Directors and of the Committees, excepting where these are declared secret. He ensures that members of the Board are duly informed of major legislative and regulatory changes affecting the Company and the Company Offices. In 2005, given the exceptional corporate circumstances which required the persistent attention and determination of the entire Board of Directors, 29 Board meetings were held and 9 Executive Committee meetings.
Internal Control Committee The Internal Control Committee was set up in 2002 further to adoption of the Code of Conduct and operates in accordance with the Rules approved by the Board of Directors. It is composed of three non-executive directors, the majority of which are independent. Its main duty is to assist the Board of Directors in performing oversight of both the Bank and the Group, by examining and assessing the adequacy of the internal control system and its revision process. Article 10.1 of the Code of Conduct adopted by the Bank specifically indicates that the Internal Control Committee must assess: adequacy of the internal control system; the work schedule prepared by those in charge of internal control and receive regular reports from the same; the proposals submitted by independent auditing firms wishing to be entrusted with the audit, as well as the audit schedule and the results stated in the report and in the letter of recommendations.
91 The Committee reports to the Board of Directors at least twice a year, at the time of approval of the financial statements and of the half-year report, on the activity performed and on the adequacy of the internal control system. The Internal Control Committee, together with the Internal Audit Division, has been entrusted with the role of Supervisory Board, responsible for overseeing effectiveness of and compliance with the Organisational Model adopted pursuant to Legislative Decree 231/2001. The Committee meets at least three times a year. The Chairman of the Board of Statutory Auditors may attend the Committee’s meetings. Other members of the Board of Directors, the General Manager, the Head of Internal Auditing and the external Auditors may also be invited to attend. In 2005 the Committee met 18 times; the Chairman of the Board of Statutory Auditors attended 13 meetings and in a further 2 meetings the Standing Auditors attended in his place. In 2005 the Internal Control Committee was composed of the Board Members Lino De Vecchi (Chairman of the Committee, replaced on 13 January 2006 by Francesco Amendola), Mauro Albonico (replaced on 1 March 2006 by Raffaele Bruni) and Giorgio Pellicelli.
Loans Committee The Loans Committee, set up by the Board of Directors pursuant to Article 26 of the Articles of Association, is vested with the power to pass resolutions concerning credit disbursement within the limits established by the Board. Meetings of the Loans Committee are deemed valid if three of the six members annually appointed by the Board are present. In 2005 the Loans Committee was composed of the Board Members Sandro Saini, Luciano Brogonzoli and Vitaliano Moroni until 31 August 2005, Cesare Ponti, Ernesto Paolillo and Enrico Bonomi from 12 October 2005, Mauro Albonico (replaced on 16 March 2006 by Antonio Zacchera), Michele Alessi Anghini until 12 October 2005 and Paola Balzarini for the full year.
Remuneration Committee As recommended in the Code of Conduct for Listed Companies, the Board of Directors set up, with effect from 1 January 2003, the Remuneration Committee. The purpose of the Committee is to submit to the Board proposals for remuneration of those directors fulfilling particular roles – with the relative decision on said proposals being taken by the Board in the absence of the parties directly concerned – and proposals for determination of the criteria by which the Bank’s top management is to be remunerated. To this end the Committee may be assisted by external consultants at the company’s expense.
92 The remuneration of the Bank’s Top Management (General Manager and Deputy General Managers) is established by the Board of Directors and a significant portion is linked to achievement of set corporate and group results. In 2005 the Remuneration Committee was composed of the Board Members Sandro Saini, Luciano Brogonzoli and Vitaliano Moroni until 31 August 2005, Cesare Ponti from 1 September 2005, Ernesto Paolillo from 12 October 2005, Michele Alessi Anghini, Paola Balzarini and Giorgio Pellicelli for the full year.
Appointment of Directors and Top Management Directors are appointed by Shareholders’ Meeting, through a secret ballot and using ballot papers, and in accordance with the terms and procedures established in the Shareholders’ Meeting Regulations, which may be downloaded from the Investor Relations section of the Bank’s website: www.bpintra.it. The Board of Directors submits to the Shareholders’ Meeting the candidates for the post of Director. Other Shareholders may put forward their candidature to corporate offices provided they declare that they hold the requisites established by legislation in force and they comply with the procedures for candidature provided by the aforesaid Regulations. Pursuant to the Code of Conduct adopted by the Bank, the proposals for appointment of the new Directors must be accompanied by a comprehensive résumé of the candidates’ personal and professional details, with specification of whether or not they qualify as “independent” and must be filed at the company’s registered office at the time the lists are filed. The Board of Directors did not deem it necessary to set up a special Committee for the appointment of Directors of the Bank, believing that it was preferable for all the Directors to play a part in choosing and identifying possible candidates. However it did entrust the Executive Committee with the appointment of candidates to sit on the Board of Directors of the subsidiary companies. The appointment of the General Manager and of the Deputy General Managers is reserved to the Board of Directors which deliberates in the presence of at least nine members.
The Internal Control System The internal control system consists of all the processes aimed at monitoring the efficiency of corporate operations, the reliability of financial information, compliance with laws and regulations and protection of corporate assets. The Code of Conduct, in keeping with the by-laws and prevailing legislation attributes responsibility for the internal control system to the Board of Directors, which must establish guidelines and regularly verify the adequacy and effectiveness thereof, ensuring that the main corporate risks are identified and appropriately managed.
93 The General Manager is entrusted with the task of identifying the main corporate risks, submitting these to the examination of the Board of Directors and implementing the guidelines established by the Board through planning, management and monitoring of the internal control system. He must also appoint one or more overseers, equipping these with appropriate means. The persons in charge of internal control are not subordinate in terms of corporate hierarchy to any of the heads of the operating divisions. They report on their activities to the General Manager, the Internal Control Committee and the Statutory Auditors. The Bank’s internal control system provides for: line controls, aimed at ensuring correct execution of company operations; risk management controls, entrusted to structures other than operating structures. These aim to contribute to definition of the methods for measuring risks, verifying observance of the limits assigned to the various operating functions and controlling that the operations performed by each production area are consistent with the risk/yield targets assigned; internal audit activity, aimed at identifying abnormal performance, breach of procedures and rules, as well as assessing the effectiveness of the entire internal control system. The person in charge of the Bank’s internal control system is the head of the internal audit division and is appointed by the Board of Directors, upon proposal of the General Manager, to whom he reports directly and is subordinate in terms of corporate hierarchy. The Head of Internal Audit reports on the activity performed to the General Manager, the Internal Control Committee, the Board of Statutory Auditors and the Board of Directors and provides regular accounts (usually on a four-monthly basis, in addition to annual reports on inspections on the subsidiaries). He also has contact with the independent auditing firm. Within the Bank’s Finance Audit Service, the Financial Compliance section provides advice on financial matters, while the Risk Management function, referring to the General Manager, is responsible for performing second level controls on risk management, on which it provides systematic reports to the General Manager, the Executive Committee and the Board of Directors. The assessment and verification of the effectiveness of the internal control system of the individual Group companies is entrusted to the Group Audit Service which is in any case subordinate to the Bank’s Internal Audit Division. As from 2004 a further new corporate board named the “Interfunctional Risk and Control Observatory” has been in operation (chaired by a Deputy General Manager and counting those in charge of the Internal Audit, Risk Management, Strategic Planning and Group Coordination, Finance, Technical Resources and Business
94 functions as members). It is responsible for providing guidelines, monitoring and reporting on the Bank and the Group’s internal control system. Oversight of the IT systems is instead entrusted to an ad-hoc Auditing Committee set up at the Centro Consortile Sec Servizi. The person in charge of internal control represents the Bank on this committee. The Bank is aware of the need to improve its control system, also in view of the observations raised during the Bank of Italy inspections. Hence in early 2006 it entrusted the newly appointed board member Francesco Amendola, who is widely experienced in organisation and control issues, with the task of reviewing the Bank and the Group’s organisational model in terms of adequacy to the Internal Control System.
Transactions of significant economic importance and with related parties The Bank’s Board of Directors has established precise rules to comply with the provisions of laws in force on the matter of “related parties” also assimilating, during the year, the changes introduced by the international accounting standard (IAS 24). The Bank’s IT system has adopted a recognition flag which automatically signals operating activity with a related party (the Bank’s Directors, Statutory Auditors, General Manager, their immediate family or parties over which they exercise control or considerable influence, Group companies, Pension Fund for the Banca Popolare di Intra employees). Each corporate representative involved is obliged to inform the Bank of all the (direct and indirect) relations existing with the Parent Bank and with the Group companies and must provide notice of any changes which may occur. Any transaction performed by the Company with a related part falls within the competence of the Board. In the event that the party in question is a Director, Statutory Auditor or the General Manager of the Company, the decision-making body will request said party to provide detailed information on his/her interest, be it even potential, in the transaction. When the resolution is being passed, the party concerned must leave the meeting. The Board also established that depending on the nature or on other characteristics of the transaction to be performed with a related party and in order to avoid execution at unfair conditions, the assistance of independent experts is to be requested to assess the assets and provide financial, legal or technical advice. The Board of Directors, in assimilating the specifications of Article 71 bis of the Issuers Regulations concerning the obligations by which listed companies must disclose to the market the essential elements of the transactions which “in terms of subject matter, consideration, execution procedures or times may affect the protection of corporate assets or the completeness or correctness of information…”, established that transactions of this type are those which exceed the limits delegated to the Executive Committee and fall within the exclusive competence of the board.
95 Handling of Confidential Information The Board of Directors has approved specific Regulations for the handling of so- called “price sensitive” information, setting forth responsibilities in handling, internal procedures for external disclosure of said information and the relative sanctionary system. The Regulations specifically establish that: ⇒ the Bank’s Executive Committee will oversee the activity of reporting to the financial community and the market, in order to guarantee unitary management of reporting and of the Group’s image, without prejudice to the cases of urgency for which said authority will be delegated to the Bank’s General Management, with the obligation to inform the Executive Meeting in the next meeting to be held; ⇒ in handling material information the following criteria must be observed: - the responsibility for managing disclosures previously approved by the Executive Committee or by the Board of Directors, according to competence, lies with the General Manager; - the General Manager, assisted by the dedicated structures (Investor Relations and General Secretary’s Office), is responsible for managing disclosures to the public. In the case of urgency and in the presence of circumstances of particular importance the matter is submitted to the Chairman prior to disclosure to the public; - the Directors, Statutory Auditors, General Management, staff of the structures dedicated to the handling of confidential information and all the employees in general are obliged to keep strictly confidential all information and especially the price sensitive information acquired in the performance of their duties, observing the corporate procedures established for external disclosure of said information and of any documents; - statements concerning material information and circumstances regarding the Bank may only be issued by the Chairman or the General Manager, and also by the Investor Relator or other executives of the Bank, provided they have been subject to the prior approval of said General Manager; - interviews with press bodies and radio or television, and the promotion of or participation in encounters with the latter, may be given by the Chairman and the General Manager, and also by the Investor Relator, the Head of the Finance Division, the Head of Marketing or other executives of the Bank, provided they have been subject to the prior approval of said General Manager; - publication of forecast figures relating to the Bank’s equity, economic and financial situation may be authorised by the Chairman and the General Manager, with the assistance of the competent functions, and namely the
96 Administration Division, the Strategic Planning and Group Control Division, the Finance Division and the Risk Management Service; - assessment of the need or the advisability of informing the public on the soundness of “material news of public domain” not directly disclosed to the market by the Bank lies with the General Manager who, if appropriate, will consult the Chairman; - management of material disclosures pertaining to other Group companies is the responsibility of the Chairman and of the General Manager, or, where present, of the Managing Director, of each company. Disclosures must be subject to the prior approval of the Parent Bank through the Strategic Planning and Group Coordination Division which, if appropriate, will submit it to the General Manager who in turn may submit it to the Executive Committee. In December 2002, the Board of Directors also passed a resolution to adopt the “Code of Conduct on Internal Dealing”, in compliance with the provisions of the Regulations for Markets Organised and Managed by Borsa Italiana SpA. The “Code” – published in the Investor Relations section of the Bank’s website, www.bpintra.it, in which greater details can be found – establishes the reporting obligations for transactions performed on company shares by Directors, Statutory Auditors, members of General Management and by the Head of Finance, identified as significant parties for the purposes of the specific stock exchange regulations.
Investor Relations Function Relations with analysts, institutional investors and all those who require information in compliance with the regulations on corporate reporting are entrusted to the Investor Relator, a role assigned by the Board of Directors to the Head of the Bank’s Strategic Planning and Group Coordination Division. The Bank’s website now has a special Investor Relations section which contains extensive information on the Bank and allows anyone to contact the Investor Relator directly via email.
Shareholders’ Meeting The Shareholders’ Meeting is an important event in the corporate calendar and provides an opportunity for dialogue and discussion between the Company and its Shareholders. The course of the meeting and the discussion of business is governed by the Shareholders’ Meeting Regulations (which may be downloaded from the Bank’s website, Investor Relations section) adopted for the first time in 1989 further to resolution of the extraordinary Meeting and subsequently amended by the extraordinary Meetings of 1 May 1991, 22 January 2000 and 1 May 2005.
97 Statutory Auditors Pursuant to the Articles of Association, the Shareholders’ Meeting appoints the Board of Statutory Auditors, composed of three Standing Auditors and two Alternate Auditors holding the requisites of professionalism, integrity and independence prescribed by applicable legislation in force. In addition to the provisions of law, pursuant to Article 32 of the Articles of Association, the office of Statutory Auditor may not be fulfilled by those who already hold the office of Standing Auditor in more than five listed companies, or their parent and/or subsidiary companies, or who are members of the administrative or control bodies of other credit institutions, excepting in the case of centralised cooperative banking structure or investee company. Statutory Auditors remain in office for three financial years. Minority shareholders are entitled to elect one Standing Auditor and one Alternate Auditor. Article 33 of the Articles of Association sets forth the procedures for appointment of the Control Board, specifying use of the “list vote” system. The lists must be presented by those Shareholders who, duly enrolled in the Shareholders’ Register, represent at least 1% of those entitled to vote and 1% of share capital (said limits being established with reference to share capital and shareholders as at ninety days prior to the date set for the Meeting in first call and disclosed in the notice of call) and must be filed at the registered office at least ten days prior to the date set for the Meeting in first call and published in no less than two newspapers (of which one with nationwide circulation). Within the terms provided for presentation of the lists, the candidates must file statements declaring that they accept the nomination and that there are no grounds for ineligibility or incompatibility, and that they hold the requisites prescribed by laws in force and by the Bank’s Articles of Association for fulfilment of the office of Statutory Auditor, accompanied by their curriculum vitae. In the event that no lists are presented, the provisions of the Italian Civil Code and the voting procedures set forth in the Shareholders’ Meeting Regulations will be applied. The Shareholders’ Meeting which appoints the members of the Board of Statutory Auditors will also determine their remuneration for the full term of office. The Board of Statutory Auditors currently in office was appointed, without presentation of lists on the part of Shareholders, by the Ordinary Shareholders’ Meeting of 6 April 2003 and expires with approval of the financial statements as at 31 December 2005. The composition of the Board of Statutory Auditors is provided below with specification, for each member, of the offices held in Group companies. None of the Auditors holds offices in other listed companies.
Roberto Scruzzi
98 Chairman of the Board of Statutory Auditors of Banca Popolare di Intra (resigned on 13 January 2006). Chairman of the Board of Statutory Auditors of Banca Popolare di Monza e Brianza. Chairman of the Board of Statutory Auditors of Intra Private Bank. Chairman of the Board of Statutory Auditors of Monza e Brianza Leasing.
Ferruccio Battaini Standing Auditor of Banca Popolare di Intra (Chairman of the Board of Statutory Auditors since 13 January 2006). Standing Auditor of Banca Popolare di Monza e Brianza.
Roberto Bussi Standing Auditor of Banca Popolare di Intra. Standing Auditor of Intra Private Bank. Alternate Auditor of Banca Popolare di Monza e Brianza.
Marta Lodari Alternate Auditor of Banca Popolare di Intra (Standing Auditor since 13 January 2006).
Mauro Ciana Alternate Auditor of Banca Popolare di Intra. Alternate Auditor of Intra Private Bank.
The Board of Statutory Auditors in office regularly attends the meetings of the Board of Directors and hence is constantly informed of the activity performed by the Administrative Body.
Audit
The Bank’s audit is performed by an independent auditing firm enrolled in the registered of auditors. The appointment is assigned by the Ordinary Shareholders’ Meeting, after consultation with the Board of Statutory Auditors, for a term of three financial years, with expiry on the date of the Shareholders’ Meeting called for approval of the financial statements relating to the third financial year. The Shareholders’ Meeting which approves the appointment also establishes the remuneration for the full duration thereof. The Ordinary Shareholders’ Meeting of 18 April 2004 assigned the audit, for the three-year period 2004-2006, to the independent auditing firm Reconta Ernst & Young SpA. The independent auditing firm performs the functions set forth in Articles 2409 ter of the Italian Civil Code and 155 and thereafter of the Finance Consolidation Act.
99 Code of Ethics In view of the company’s corporate liability, the Bank’s Board of Directors passed a resolution, in 2003, for a “Code of Ethics” to be adopted by all Group companies. This Code sets forth the principles of correctness, fairness, integrity, loyalty and professional rigour which must characterise the transactions and the actions performed both within the Group and with external subjects, as well as those of transparency and clarity in the execution of activities, in reporting to the public and in the conduct of directors and statutory auditors.
Verbania Intra, 29 March 2006
THE BOARD OF DIRECTORS
100 TABLE 1: STRUCTURE OF THE BOARD OF DIRECTORS AND OF THE COMMITTEES – FINANCIAL YEAR 2005 Internal Remuneration Executive Board of Directors Control Committee Committee Committee Number of Non- Office Members Executive Independent **** other offices *** **** *** **** *** **** executive **
Chairman SAINI X 100.0% 1 X 100.0% X 100.0% until 31.8.2005 SANDRO
Director until 31.8.2005 PONTI CESARE X 100.0% 1 X X 100.0% Chairman from 1.9.2005 Deputy Chairman until 31.8.2005 BROGONZOLI X X 95.0% 0 X 100.0% X 85.7% Director until LUCIANO 12.10.2005 Deputy Chairman until 31.8.2005 MORONI X 100.0% 2 X 100.0% X 71.4% Director until VITALIANO 12.10.2005
Deputy Chairman PAOLILLO X X 88.9% 8 X X 100.0% from 12.10.2005 ERNESTO
ALBONICO 100.0% 100.0% Director MAURO X X 1 X
Director ALESSI ANGHINI X 86.2% 2 X 100.0% MICHELE
101 Internal Remuneration Executive Board of Directors Control Committee Committee Committee Number of Non- Office Members Executive Independent **** other offices *** **** *** **** *** **** executive ** BALZARINI 100.0% 100.0% 100.0% Director PAOLA X X 5 X X
BONOMI LUIGI 93.1% Director ENRICO X X 1
Director from BRUNI X X 100.0% 2 3.11.2005 RAFFAELE
COMPOSTELLA 93.1% 100.0% Director ANGELO A. X X 2 X
DE VECCHI 89.7% 94.5% Director LINO X 7 X
Director from FORTIS MARCO X X 100.0% 2 22.12.2005
PELLICELLI 93.1% 100.0% 100.0% Director GIORGIO X X 2 X X
VIGANO’ 82.8% Director CLAUDIO CARLO X X 14
VIVARELLI 96.4% 100.0% Director LANFRANCO X 1 X ◊ Given the moderate size of the company, the Board of Directors did feel it necessary to set up a special committee for the appointment of directors of the Bank, believing that the Board itself could perform this function directly. However it did delegate to the Executive Committee the appointment of candidates to sit on the Boards of Directors of the subsidiaries.
102 Internal Remuneration Executive Board of Directors Control Committee Committee Committee Number of Non- Office Members Executive Independent **** other offices *** **** *** **** *** **** executive ** Number of meetings held during the Internal Control Remuneration Board of Directors:29 Executive Committee: 9 reference year Committee: 18 Committee: 1
N.B. *An asterisk indicates Directors appointed through lists presented by minority shareholders. **This column indicates the number of posts as director or auditor held by the party concerned in other companies listed on regulated market, including foreign markets, in financial, banking and insurance or large-sized companies. The Report on Corporate Governance provides full details of these posts. ***In this column an “X” indicates that the board member is part of the Committee. **** This column indicates the percentage attendance of directors in the meetings of the BoD and of the Committees respectively. The percentage attendance is calculated on the total meetings held in the period in which the director held office.
103
TABLE 2: BOARD OF STATUTORY AUDITORS – FINANCIAL YEAR 2005
Percentage attendance in the Number of other offices** Office Members Board’s meetings Chairman (resigned on 13.1.2006) ROBERTO SCRUZZI 100.0% 0 Standing Auditor (Chairman from 14.1.2006) FERRUCCIO BATTAINI 98.5% 0 Standing Auditor ROBERTO BUSSI 96.9% 0 Alternate Auditor MARIO CIANA Alternate Auditor (Standing Auditor from 14.1.2006) MARTA LODARI Number of meetings held during the reference year: 66 Specify the quorum required for presentation of the lists on the part of minority shareholders for election of one or more standing members (pursuant to Article 148 of the Finance Consolidation Act): Lists may be presented by those shareholders who, duly enrolled in the Shareholders’ Register, represent at least 1% of those entitled to vote and 1% of share capital. The aforesaid limits are established with reference to the capital and to the shareholders existing as at three months prior to the date set for the Shareholders’ Meeting in first call and will be stated in the notice of call.
NOTE * An asterisk indicates statutory auditors appointed through lists presented by minority shareholders. ** This column indicates the number of posts as director or auditor held by the party concerned in other companies listed on Italian regulated market. The Report on Corporate Governance provides full details of these posts.
104 TABLE 3: OTHER PROVISIONS OF THE CODE OF CONDUCT
Summary of reasons for any deviation from Code YES NO recommendations
Power of attorney system and related party transactions Has the BoD assigned powers defining: a) limits X b) procedures for exercise X c) and frequency of reports? X Has the BoD reserved the right to examine and approve transactions of particular economic, equity and financial importance (including those with related parties)? X Has the BoD established guidelines and criteria for identifying “significant” transactions? X Are the aforesaid guidelines and criteria described in the report? X Has the BoD established special procedures for examining and approving related party transactions? X Are the procedures for approval of related party transactions described in the report? X
Procedures for the most recent appointment of directors and auditors Were nominations to the office of director filed at least ten days beforehand? X Were nominations to the office of director accompanied by exhaustive information? X Were nominations to the office of director accompanied by specification of suitability to qualify as independent? X Were nominations to the office of auditor filed at least ten days
105 beforehand? X Were nominations to the office of auditor accompanied by exhaustive information? X Shareholders’ Meeting Has the company approved Shareholders’ Meeting Regulations? X Are the Regulations attached to the report (or does it specify where they X can be obtained/downloaded)?
Internal control Has the company appointed internal control officers? X Are the officers independent in terms of hierarchy from the heads of the operating divisions? X Organisational unit in charge of internal control (pursuant to article 9.3 Internal Audit Division of the Code)
Investor relations Has the company appointed a head of investor relations? x Organisational unit and contacts (address/telephone/fax/email) of the Strategic Planning and Group Coordination Division head of investor relations Piazza Aldo Moro, 8 –28921 Verbania Intra – tel. N. 0323/543617 – fax n. 0323/543618 e-mail: [email protected]
106
Report of the Board of Statutory Auditors pursuant to Article 153 of Legislative Decree 58/98
107
To our Shareholders, During the year ending 31 December 2005, we based our activity on the Code of Conduct for Boards of Statutory Auditors recommended by the National Institute of Chartered Accountants. We monitored the observance of law provisions, the articles of association and compliance with correct administration principles. The Board of Statutory auditors based its activities on compliance with articles 149 and following of Legislative Decree 58/98, limited to the duties contained therein, as well as in compliance with that set forth by Consob communications in effect regarding company auditing and the instructions from the Bank of Italy. We attended a shareholders’ meeting, 29 meetings of the Board of Directors and nine meetings of the Executive Committee, held in compliance with the articles of association, laws and regulations governing their operations. During meetings we obtained from Directors information on general operating trends and on likely future trends, as well as on the most significant transactions, in terms of size and characteristics, performed by the Bank and its subsidiaries. We can be reasonable certain, as far as we are aware, that the actions decided upon conform to law provisions and to the articles of association, and are not unduly imprudent, reckless, in potential conflict of interest, against the resolutions taken by the shareholders’ meeting or such as to endanger the integrity of the company’s assets. During the year, the Board of Statutory Auditors held sixty-five meetings (forty-six in 2004). We also verified the situation of the individual regulatory capital. As a result of, and keeping in mind the negative economic results set forth in the financial statements as at 31 December 2005, we note that on the same date, the prudential ratios were as follows: - Tier 1 capital/risk-weighted assets (Tier 1 capital ratio) 6.79 % - Regulatory capital/risk-weighted assets (Total capital ratio) 9.09 %.
The most significant transactions performed during the year include: - On 31 August 2005, the Bank issued a profit warning regarding the allocations made from the loans portfolio in relation to the ongoing company difficulties with customers with significant debt exposure, including the Fin Part Group. On 25 October 2005, the Court of Milan declared the company Fin Part S.p.A. bankrupt. In order to fulfil information obligations, it is noted that the bodies in charge of the proceeding recognised conduct by the Bank such as to request compensation equal to the bankruptcy claim, as well as the
108 possibility for action for avoidance. Both the Bank’s legal department and the external lawyers assigned to the case confirmed that under current conditions, no elements exist which require the allocation of specific provisions. As well, the receivership of the bankruptcy, SPAIC, sought action for avoidance against the Bank. Both the Bank’s legal department and the external lawyers assigned to the case confirmed that under current conditions, no elements exist which require the allocation of specific provisions. The auditing firm, when questioned, agreed with said valuations. - The Bank of Italy performed inspections from 16 May to 2 September 2005. Said inspections uncovered serious irregularities carried out by the former managing director Mr. Giovanni Brumana from September 2002 to February 2003. Following further investigations, pursuant to the amended article 2393 of the Italian Civil Code, the Board of Statutory Auditors unanimously resolved to bring a stockholders’ suit against Mr. Brumana, and requested that the assigned bodies of the Bank initiate such process. - During the year, numerous members of the Board of Directors resigned, thus leading to a profound renewal of the governance of the Bank. The Shareholders’ Meeting is requested to appoint the co-opted directors as well as those ending their term. In addition, the Chairman of the Board of Statutory Auditors, Mr. Roberto Scruzzi presented his resignation on 13 January 2006. - The three-year 2006-2008 strategic plan was prepared with the advice of Mediobanca, and was approved by the Bank’s Board of Directors on 5 April 2006. This plan involves strengthening the Bank’s capital structure as well as returning to profitability starting from the current financial year. This forecast and the positive outlook for the two-year period 2009-2010 justify the recording of deferred tax assets in the balance sheet, for the purposes set forth. This plan assumes the “total”, stand alone autonomy of the Bank. - Regarding the recommendations from the Bank of Italy, the Board of Directors also resolved on a "shared autonomy” project, assigning Mediobanca to select the potential partners which meet the preset objectives. This procedure is currently underway. - The dispute initiated on 14 February 2005 against Banc of America Securities Limited concluded with a transaction favourable to the Bank. - Mr. Gianluigi Facchini, Ms. Paola Del Curto, Mr. Franco Facchini and Ms. Alessia Virginia, all members of the Fin Part business group, took legal action against the Bank, seeking significant amounts as compensation for damages. The Bank considers these charges and claims to be unfounded, and, therefore, did not allocate any specific provisions in this regard. The external lawyers of the Bank confirmed this assumption.
109 - In relation to the repeated publication of articles in the media considered “destabilising”, the Bank also filed formal petitions regarding the violation of regulations against market abuse, Law 62/2005. - A portfolio of non-performing loans consisting in mortgages and loans subject to significant write-downs was transferred without recourse to Pirelli RE.
We verified the adequacy of instructions provided to subsidiaries, pursuant to article 114, paragraph 2 of Legislative Decree 58/98. The shareholdings included in the banking group are detailed in the explanatory notes. In compliance with the new IAS/IFRS provisions, minority shareholdings are reported under the item “Securities available for sale.” We held meetings with the auditing firm appointed to audit the company’s accounts, in which no significant data or information was discovered such as to merit attention in this report. The supervisory report by the Bank of Italy pointed out defects in the Bank’s organisational structure. We believe that these critical issues must be resolved in the shortest time possible. The regulatory measures affecting the banking system have been applied, specifically those carried out by the Bank of Italy and Consob. The audits performed did not reveal any atypical or unusual transactions, either intragroup of with related parties. The supply of intragroup services basically corresponds to cost reversals, which are regulated by specific contracts drafted based on criteria of consistency, transparency and homogeneity. As regards related parties, based on the information in our possession, we can reasonably state that no transactions were carried out which were capable of having a significant bearing on the balance-sheet situation, economic performance or financial position of the Bank. These were ordinary, and not atypical or unusual transactions, which are based on economic appraisals where no privileges are granted. With regard to transactions in potential conflict of interest, we can reasonably state that the Board of Directors has always conformed to the provisions of articles 2391 and 2381-bis of the Italian Civil Code, and article 136 of Legislative Decree 385/1993. In relations with company executives and their associates, the Bank paid out interest totalling € 136,900, professional fees totalling € 4,500 plus VAT, and received interest and commissions of € 266,600, in addition to rents of € 6,500 on owned property. We assessed and monitored the adequacy of the administrative and accounting system, and the latter's reliability in correctly representing operating events by obtaining information from department heads, from the auditors assigned accounting control Reconta Ernst & Young, from the inspection reports from the Bank of Italy, as well as the company
110 PricewaterhouseCoopers, which is assigned the ranking and valuation of loans as at 31 December 2005. In this regard, also in this case, we believe that there are critical issues that must be resolved in the shortest time possible. The information system outsourced to Consorzio SEC of Padua must be significantly implemented in such a way as to avoid “manual” operations, and thus improve remote operations. During 2005, the auditing firm Reconta Ernst & Young S.p.A. and the companies in the Ernst & Young network received the following additional assignments, in addition to auditing: from Banca Popolare di Intra S.c.p.a.a r.l a) To Ernst Young Financial Business Advisor Spa, for accounting assistance with the completion of the IAS project, consideration and expenses – including VAT - € 36,288.00 b) To Studio Legale Tributario Tax Advisory, for tax assistance, consideration and expenses - including VAT - € 3,276.00 c) To Reconta Ernst & Young Spa for subscription of tax forms, consideration and expenses – including VAT - € 6,290.88 and for auditing regarding the first time adoption of the international accounting principles, consideration and expenses – including VAT - € 141,574.80 from Banca Popolare di Monza e Brianza S.p.A.: a) To Reconta Ernst & Young Spa, for accounting assistance with the completion of the IFRS project, consideration and expenses – including VAT - € 40,032.00 b) To Studio Legale Tributario Tax Advisory, for tax assistance, consideration and expenses - including VAT - € 3,276.00 from Intra Private Bank S.p.A.: a) To Studio Legale Tributario Tax Advisory, for tax assistance, consideration and expenses - including VAT - € 3,276.00 b) To Reconta Ernst & Young Spa, for accounting assistance with the completion of the IFRS project, consideration and expenses – including VAT - € 30,398.40, and for tax assistance, consideration and expenses – including VAT - € 4,475.40 from Monza e Brianza Leasing S.p.A. a) To Reconta Ernst & Young Spa, for tax assistance, consideration and expenses - including VAT - € 3,024.48
In 2005, the Board of Statutory Auditors received three complaints, one of which can certainly be linked to the provision set forth in article 2408 of the Italian Civil Code. The responses provided by the Board of Statutory Auditors following the two complaints which are not related to the aforementioned article 2408 received no reply, and thus are considered resolved. The content of the complaint pursuant to article 2408 seems to be a detailed replication of complaints previously made by the same
111 shareholder and his family members, who are shareholders, to which the Board of Statutory Auditors previously provided an adequate response. However, the Board of Statutory Auditors, with the help of the Internal Audit Department and the Supervisory Department, is carrying out the required investigations. The complexity of the issues, referring to the periods January 2001 and September 2002, as well as the difficulty in locating the documents cited in the complaint, result in time frames which do not depend on the will of the Board of Statutory Auditors. As regards the other issues set forth in the complaint, the Board of Statutory Auditors, assured by the Bank’s supervisory bodies as well as the auditing firm, consider the Bank’s conduct to be without reproach. For the purposes of providing further information, it is noted that the contents of the complaint are being investigated by the Magistracy. During 2005, the Board of Statutory Auditors was not requested to issue opinions provided by law. In accordance with the provisions of existing legislation, the Bank updated the Policy Document on Security (PDS) pursuant to Legislative Decree no. 196 of 30 June 2003. During the course of the supervisory activity, no additional significant facts emerged such as to merit mention in this report. Having examined the financial statements for the year ended 31 December 2005, we wish to make the following remarks. The Board of Directors approved the draft financial statements on 29 March 2006, and, thus, within the terms provided by the Italian Civil Code. The Bank of Italy, Novara Branch, sent a notification to the Bank on 10 April 2006, to specify that the lesser tax charges to be paid on the revaluation of property performed in the first 2005 financial statements in the IAS/IFRS-compliant version are to be charged to shareholders’ equity, and not to the income statement. This notification was sent to all credit institutions. On the contrary, the banking system usually placed this lesser tax charge in the income statement; this choice was agreed upon with the auditing firm. In compliance with the contents of said notification, the Board of Directors of the Bank adjusted the financial statements to said provision on 13 April 2006. The Board of Statutory Auditors approved this action, waiving the acceleration clause as per article 2429 of the Italian Civil Code. The financial statements were prepared correctly, based on the new IAS/IFRS accounting principles, and in compliance with the provisions of the IASB. As well, the opening Balance Sheets as at 1 January 2004 and at 1 January 2005 (FTA) were prepared, with the methods and terms indicated in the explanatory notes.
112 We agreed with this layout. For more information, and considering the heavy write-downs of loans set forth in the income statement, it is noted that the company Pricewaterhouse Coopers, the specially assigned company, agreed with such classification and write-down. As we are not responsible for the analytical verification of the contents of the financial statements, we monitored the general set-up of the statements and general compliance with law provisions in terms of their formation and structure. We also verified the observance of law provisions concerning the Report on Operations and the other documents accompanying the financial statements. In this respect, we have no particular remarks to make. We checked that the financial statements conform to the facts and information at our disposal in the performance of our duties, and have no particular remarks to make. Also considering the results of the activities performed by the accounting control body and the results contained in the report accompanying the financial statements, pursuant to article 156 and article 165 of Legislative Decree no. 58 of 24 February 1998, we propose that the Shareholders' Meeting approve the financial statements drawn up by the Directors for the period ending 31 December 2005, together with the proposed allocation of the loss and the creation of unavailable reserves. Lastly, we point out that with the approval of the financial statements for the period ending 31 December 2005, the three-year term of office of the Board of Statutory Auditors comes to an end.
Verbania, 14 April 2006 The Board of Statutory Auditors Ferruccio Battaini Roberto Bussi Marta Lodari
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BALANCE SHEET FOR PARENT BANK BANCA POPOLARE DI INTRA (amounts in euro) Assets 31.12.2005 31.12.2004 (excluding IAS 39) 10. Cash and cash equivalents 22,715,415 20,723,839 20. Financial assets held for trading 411,324,297 446,146,365 40. Financial assets available for sale 137,028,171 129,440,575 60. Due from banks 83,224,771 222,220,990 70. Loans to customers 3,180,956,796 3,377,818,326 80. Hedging derivatives 12,892,530 7,795,743 100. Shareholdings 87,782,303 87,516,551 110. Tangible assets 66,582,122 70,915,274 120. Intangible assets 1,275,161 1,248,680 130. Tax assets 156,663,278 58,739,556 a) Current 36,230,278 33,219,556 b) Prepaid 120,433,000 25,520,000 150. Other assets 72,839,802 67,450,160
Total assets 4,233,284,646 4,490,016,059
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Liabilities and shareholders’ equity 31.12.2005 31.12.2004 (excluding IAS 39) 10. Due to banks 270,816,250 111,120,288 20. Due to customers 1,496,720,054 1,552,637,341 30. Outstanding securities 1,581,385,441 1,867,860,421 40. Financial trading liabilities 11,995,909 2,142,411 50. Financial liabilities at fair value 436,652,802 397,612,218 60. Hedging derivatives 12,723,090 2,639,049 80. Tax liabilities 41,554,127 35,410,727 a) current 37,210,127 24,795,727 b) deferred 4,344,000 10,615,000 100. Other liabilities 91,120,677 71,057,305 110. Employee severance indemnity 16,698,876 15,427,323 120. Provisions for risks and charges: 8,774,408 8,710,322 b) other provisions 8,774,408 8,710,322 130. Valuation reserves 20,771,476 14,068,565
150. Capital instruments 7,013,552 7,619,850 160. Group 57,804,581 86,017,480 170. Share premiums 159,256,226 151,065,596
180. Capital 145,393,191 142,540,287
200. Profit (loss) for the year (+/-) (125,396,014) 24,086,876 Total liabilities and shareholders’ equity 4,233,284,646 4,490,016,059
115 INCOME STATEMENT OF PARENT BANK BANCA POPOLARE DI INTRA (amounts in euro) Items 31.12.2005 31.12.2004 (excluding IAS 39) 10. Interest and similar income 194,729,744 208,563,696 20. Interest and similar expenses (85,306,890) (83,759,522) 30. Interest margin 109,422,854 124,804,174 40. Fee income 66,393,967 61,273,557 50. Fee expense (14,488,605) (13,107,648) 60. Net fees 51,905,362 48,165,909 70. Dividends and similar income 1,632,228 4,138,606 80. Net income from trading 1,741,144 (2,858,016) 90. Net income from hedging activities 212,390 75,266 100. Profit/loss from disposal or repurchase of: 5,567,223 22,932,110 a) loans and receivables (1,962,197) 0 b) financial assets available for sale -afs 7,909,748 22,932,110 d) financial liabilities (380,328) 0 110. Net income from financial assets/liabilities at fair value 2,425,460 0 120. Net interest and other banking income 172,906,661 197,258,049 130. Net value adjustments for deterioration of: (253,044,163) (63,693,556) a) loans and receivables (251,742,919) (57,917,093) b) financial assets available for sale (181,134) (1,756,753) d) other financial transactions (1,120,110) (4,019,710) 140. Net income from financial management (80,137,502) 133,564,493 150. Administrative expenses: (106,180,755) (101,584,593) a) personnel costs (59,946,274) (60,149,798) b) other administrative expenses (46,234,481) (41,434,795) 160. Net allocations to provisions for risks and charges (7,412,391) (3,471,983) 170. Net value adjustments to tangible assets (4,625,564) (4,976,793) 180. Net value adjustments to intangible assets (648,599) (485,347) 190. Other operating income/costs 18,022,826 7,667,734 200. Operating costs (100,844,483) (102,850,982) 210. Profit (loss) from shareholdings (144,831) 0 240. Profit (loss) from the sale of investments 4,335,469 74,401 250. Profit (loss) from current operations before taxes (176,791,347) 30,787,912 260. Income tax for the year for current operations 51,395,333 (6,701,036) 270. Profit (loss) from current operations after taxes (125,396,014) 24,086,876 290. Profit (loss) for the year (125,396,014) 24,086,876
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STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY OF BANCA POPOLARE DI INTRA at 31.12.2005 Variations during the year
Allocation of previous year’s results
Transactions on shareholders’ equity
(amounts in thousands of
at
euro)
balances (IAS 39) 31.12.2005 Variations Variations in reserves Stock capital Change in opening options Profit (Loss) Issue of Shareholders’ equity Shareholders’ Reserves Balances at 31.12.04 Balances at 31.12.04 Balances at 01.01.05 dividends and other and other Dividends allocations new shares instruments Purchase of of Purchase Variation in (FTA excluding IAS 39) excluding IAS (FTA Extraordinary distribution of of distribution Derivatives on Derivatives treasury shares treasury shares
Capital: a) Ordinary shares 142,540,287 0 142,540,287 2,852,904 0 145,393,191 b) Other shares 0 0 0 0 0 0
Share premiums 151,065,596 151,065,596 8,190,630 0 159,256,226
Reserves: 57,804,581 a) profits 87,665,998 87,665,998 13,329,164 0 0 0 100,995,162 0 b) others (1,648,518) (43,190,581) 0 0 0 000 (43,190,581) (41,542,063)
20,771,476 Valuation reserves: a) available for sale 0 5,339,453 5,339,453 (3,349,035) 1,990,418 b) cash flow hedges 0 0 0 0 0 c) other (to detail): 0 0 0 - Property revaluations 1,930,264 0 1,930,264 16,809,963 18,740,227 - Property deemed cost 12,138,301 0 12,138,301 (12,097,470) 40,831
Capital instruments 7,619,850 0 7,619,850 (606,298) 7,013,552
Treasury shares 0 0 0 8,036,829 (8,036,829) 0 Profit (Loss) for the year 24,086,876 0 24,086,876 (13,329,164) (10,757,712) (125,396,014) (125,396,014) Shareholders’ equity 425,398,654 0 389,196,044 0 (10,757,712) 1,363,458 19,080,363 (8,036,829) 0 (606,298) 0 0 (125,396,014) 264,843,012
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STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY OF BANCA POPOLARE DI INTRA at 31.12 2004
Variations during the year Allocation of previous
year’s results Transactions on shareholders’ equity
(amounts in thousands of
at
39) n euro)
di balances
31.12.2004 Balances at s 31.12.0.2003 31.12.0.2003 ary n of n of s on Variations Variations in reserves Stock shares shares Change in opening options Profit (Loss) xtraor Issue of treasury treasury (FTA excluding IAS excluding IAS (FTA Shareholders’ equity Shareholders’ Reserves Purchase in capital Variation Variation Balances at 01.01.04 dividends and other and other Dividends distributio Derivative E instrument of treasury treasury of allocations new shares
Capital: a) Ordinary shares 141,897,555 141,897,555 642,732 0 142,540,287 b) Other shares 0 0 0 0
Share premiums 150,441,833 150,441,833 0 623,763 151,065,596
Reserves: 87,665,998 a) profits 75,239,588 1,135,244 76,374,832 11,699,036 (407,870) 0 0 0 (1,648,518) b) others 0 (1,648,518) (1,648,518) 0 0 00
Valuation reserves: 14,068,565 a) available for sale 0 0 0 0 0 b) cash flow hedges 0 0 0 0 0 c) other (to detail): 0 0 - Property revaluations 1,930,264 1,951,054 0 1,951,054 (20,790) - Property deemed cost 12,138,301 12,138,301 12,138,301
Capital instruments 0 0 7,619,850 7,619,850
Treasury shares (303,065) (303,065) 6,676,305 (6,373,240) 0 Profit (Loss) for the year 22,349,453 0 22,349,453 (11,699,036) (10,650,417) 24,086,876 24,086,876 Shareholders’ equity 391,576,418 403,201,445 (10,650,417) (20,790) 7,534,930 (6,373,240) 0 7,619,850 0 0 24,086,876 425,398,654
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CASH FLOW STATEMENT PARENT BANK BANCA POPOLARE DI INTRA (amounts in thousands of euro)
OPERATING ACTIVITIES 31.12.2005 31.12.2004 excluding IAS 39
1. Management 131,016 93,388 - interest income collected (+) 187,219 208,564 - interest expense paid (-) (61,660) (83,760) - dividends and similar income 260 812 - net fees (+/-) 51,320 48,166 - personnel costs (59,946) (60,150) - other costs (-) (46,055) (44,293) - other income (+) 39,812 30,750 - taxes and duties (-) 20,066 (6,701) 2. Cash flow generated by reduction in financial assets 202,609 62,042 - financial assets held for trading 54,495 4,119 - financial assets at fair value 0 0 - financial assets available for sale 9,147 0 - due from banks 138,967 57,923 - due from customers 0 0 - other assets 0 0 3. Cash flow used by increase in financial assets (173,613 (228,367) - financial assets held for trading 0 0 - financial assets at fair value 0 0 - financial assets available for sale 0 (41,357) - due from banks 0 0 - due from customers (117,361) (177,639) - other assets (56,252) (9,371) 4. Cash flow generated by increase in financial liabilities 216,623 399,754 - due to banks 159,276 0 - due to customers 0 0 - outstanding securities 0 0 - financial trading liabilities 0 2,142 - financial liabilities at fair value 33,201 397,612 - other liabilities 24,146 0 5. Cash flow used by redemption/repurchase of financial liabilities (364,120) (339,278) - due to banks 0 (124,150) - due to customers (56,160) (7,859) - outstanding securities (300,523) (175,924) - financial trading liabilities (7,437) 0 - financial liabilities at fair value 0 0 - other liabilities 0 (31,345) Net cash flow generated/used by operations 12,515 (12,461)
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INVESTMENT ACTIVITIES
1. Cash flow generated 4,186 13,957 - sale of shareholdings 536 9,843 - dividends collected from shareholdings 1,373 3,327 - sale of financial assets held to maturity 0 0 - sale of tangible assets 2,277 787 - sale of intangible assets 0 0 - sale of subsidiaries and other lines of business 0 0 2. Cash flow used (4,135) (6,656) - purchase of shareholdings (802) (2,452) - purchase of financial assets held to maturity 0 0 - purchase of tangible assets (2,613) (1,493) - purchase of intangible assets (720) (2,711) - purchase of subsidiaries and other lines of business 0 0 Net cash flow generated/used by investments 51 7,301
FUNDING - issue/purchase of treasury shares 0 717 - issue/purchase of capital instruments 184 7,620 - distribution of dividends and other activities (10,767) (10,650) Net cash flow generated/used by funding (10,583) (2,313) NET CASH FLOW GENERATED/USED DURING THE YEAR 1,983 (7,473) RECONCILIATION
Financial statement items 31.12.2005 31.12.2004 excluding IAS 39
Cash and cash equivalents at the beginning of the year 20,724 28,196 Total net cash flow generated/used during the year 1,982 (7,472) Cash and cash equivalents effects of changes in foreign exchange rates 9 0 Cash and cash equivalents at the end of the year 22,715 20,724
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INTRODUCTION TO IAS/IFRS ACCOUNTING PRINCIPLES
A description of the main changes introduced by the new standards is provided below, with particular focus on those that have an impact on the representation of results by the Banca Popolare di Intra Group.
New classification criteria
The IAS/IFRS accounting principles include several important changes to the criteria for recognition of assets and liabilities, mainly due to application of the general principle of prevalence of economic substance over legal form. The international principles allow a balance sheet item to be recognised or written off only if there is a real transfer of the risks and benefits related to the asset being transferred. As opposed to the national principles, according to which transfer of ownership is a sufficient condition to allow recording of the item transferred in the balance sheet of the purchaser (in an amount equal to the write-off in the balance sheet of the seller), the IAS/IFRS principles also require the actual transfer of risk and benefits related to the asset, taken to be the right to receive cash flows related to the asset sold. Consequently, goods involved in transactions that do not respect the established requirements for elimination from the books must continue to be recorded in the financial statements of the seller, despite ownership having been transferred. Application of these regulations is particularly significant when accounting for financial leasing transactions, for which it is necessary to apply the finance method, where a loan is recorded in the balance sheet of the lessor and the leased asset and corresponding debt are recorded in the balance sheet of the lessee, for asset securitisation transactions and for factoring transactions, where it is necessary to carefully determine whether the underlying risks of the assets sold have been transferred as well.
Other innovative aspects regard the initial recording of financial instruments. The initial value recorded for a financial asset or liability must normally be based on its fair value4 increased or decreased by costs and income directly related to the transaction, which are thus capitalised and recorded in the income statement throughout the duration of the transaction at the effective rate of return (the “amortised cost”). Should the price paid in a transaction not correspond to the market value, the difference between the two values upon initial recording must be entered in the income statement. Regarding complex financial instruments, which consist of a primary host contract and an embedded derivative contract, IAS/IFRS principles require the latter to be recorded separately from the host contract if the overall contract is not valued at fair
4 Fair value is the consideration at which an asset may be exchanged or a liability settled in an arm’s length transaction between knowledgeable and independent parties.
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value or if the economic characteristics and risks of the implicit derivative contract are not strictly correlated to those of the primary contract.
Changes in the recording criteria also involve certain types of intangible fixed assets and the allocation of provisions for risks and charges. Regarding the former, the international principles prohibit capitalisation of internally generated costs for research, advertising, training, restructuring, trademarks and rights. In terms of the provisions for risks and charges, allocations can be made only when the enterprise has an obligation, when it is likely that the use of resources will be required to fulfil it and when a reliable estimate of liabilities can be made. The estimate must also take into account the expected disbursement times.
Significant innovations are also present in the recording of what are known as “share- based payments” (usually remuneration for employees or directors of the company via assignment of options to purchase shares of the company itself). As opposed to the accounting criteria adopted in the past, which did not involve accounting for charges in the income statement but solely recorded an increase in the company’s capital upon exercise of the options, the international standards require the options assigned to be valued at fair value and the corresponding amount to be recorded in the income statement under labour costs.
As far as the classification of assets/liabilities is concerned, the changes regarding financial instruments are particularly significant. The IAS/IFRS principles require that loans and receivables, payables, securities and derivative contracts no longer be accounted for according to type but based on the purposes for which these instruments are held by the company. The classification of financial instruments must take place upon initial recognition in the financial statements and can subsequently be modified only in limited circumstances. IAS 39 defines four standard categories for financial instruments: assets and liabilities at fair value through profit and loss (essentially assets and liabilities held for the purposes of trading and assets that the company decides to value at fair value, regardless of the purpose for which they are held), assets available for sale, assets held to maturity and loans/receivables and financial liabilities not held for trading5. The classification of financial instruments is important also for the purposes of defining the valuation criteria to be applied, as the
5 Categories of financial instruments provided by IAS 39: trading assets, include assets acquired to be sold in the short term or as part of portfolios held for the sole purpose of generating profits in the short term, as well as assets held at fair value by the company, with fair value changes recorded in the income statement; assets held to maturity, non-derivative assets with fixed maturity and fixed or determinable payments for which there exists an actual intention and capacity to hold until maturity; loans and receivables, non-derivative assets with fixed or determinable payments, not listed in an active market; assets available for sale, specifically designated as such or, in any case, the remaining assets not falling into the above categories.
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first two categories must be valued at fair value, while the other two are valued at cost or amortised cost6. Another important innovation in financial statement classification regards equity investments. The international standards provide for classification of shareholdings only for investments in companies that are subsidiaries, associates or subject to joint control. All other equities must be classified either under assets at fair value through profit and loss or assets available for sale.
New valuation criteria In terms of valuation criteria, the main changes regard financial instruments, tangible and intangible assets and pension funds. As regards financial instruments, it has already been stated that they must be valued at fair value, if trading instruments, derivatives contracts or assets available for sale are involved and at cost or amortised cost if dealing with assets held to maturity or loans/receivables and payables. The results of the valuation of trading instruments must be recorded in the income statement, while those related to assets available for sale are posted to a shareholders’ equity reserve until realisation.
According to the previous principles, non-hedging derivative instruments were valued at fair value and the result was posted to the income statement only if negative; the essential difference now regards extension of the fair value criterion to all derivative instruments. The market value for derivative instruments not listed in organised markets is determined by using internal valuation models that incorporate parameters measured on the market.
For financial instruments not classified under assets and liabilities at fair value through profit and loss, the IAS/IFRS principles require systematic verification that nothing may prevent full recovery of the book value of the asset. Said verification must be carried out analytically for each asset or collectively for groups of assets that are homogeneous in terms of risk. Contrary to what normally occurred based on the Italian principles, value adjustments must also take into account the time necessary for collection of the amounts considered recoverable.
The issue of valuation criteria for financial instruments also impacts the accounting treatment of derivative contracts to hedge against financial risks and the relative assets and liabilities hedged. The international standards distinguish between three different types: a fair value hedge of a financial asset or liability, which involves recording any changes in the fair value of the hedged instrument and of the derivative hedging contract in the income statement; hedging of variable cash flows exposed to a specific risk; hedging of an investment in foreign operations expressed in foreign currency, which involves recognition of a shareholders’ equity reserve for
6 The amortised cost differs from the cost in that it includes the progressive amortisation of the difference between book value and nominal value of an asset or liability on the basis of the effective rate of return.
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changes in the fair value of the derivative hedging contract only (while the hedged asset or liability continues to be recorded at cost or amortised cost). This criterion stems from the necessity to value all derivative contracts at fair value (including hedging contracts). According to the national principles, derivative hedging contracts were normally valued at cost, as per the criterion applied to hedged items.
As far as tangible fixed assets are concerned, the IAS/IFRS principles require them to be recorded at cost, with separation - as regards property - of building and underlying land, based on the assumption that land has an unlimited useful life and cannot, therefore, be depreciated. For subsequent valuations, it is possible to choose one of the following: - Valuation at cost: with this method, the assets continue to be recorded at cost, net of depreciation and any impairments/value restatements; - Valuation at fair value: with this method, the goods must be valued at fair value. The revaluation of property is recorded under shareholders’ equity for capital assets and to the income statement for non-capital assets. In the case of write- downs, the offsetting entry is always made to the income statement. As part of first-time adoption for property, plants and machinery, an assumed cost (known as the “deemed cost”), equal to the fair value at the date of first-time adoption, may be used as the opening book value, instead of the historical cost. For tangible fixed assets, the IAS/IFRS principles require depreciation based on useful life. For intangible assets with an indefinite life (for example, goodwill), periodic amortisation is replaced by the impairment test, which verifies that the asset has not undergone a reduction in value. Pension funds and, in general, all benefits provided to employees subsequent to termination of the employment contract are subdivided by the international principles into two categories: defined contribution plans, for which only the contributions payable by the company are recorded, and defined benefit plans, for which measurement of the provision occurs by estimating, using actuarial methods, the amount that will have to be paid upon termination of the employment contract.
Methods for first-time adoption of the international accounting standards
Since transition to the international standards involves a large number of companies, the IASB has prepared a specific accounting standard named IFRS 1, to regulate, in a homogeneous and coordinated manner, this phase of change in the rules for financial statement preparation. The document requires: - preparation of an opening balance sheet at the date of transition, prepared in accordance with the IAS/IFRS principles; - application of the accounting standards set forth by the IAS/IFRS in the first set of financial statements prepared in compliance with the new standards and in all periods of comparison (with the exclusion of certain obligatory exceptions, and several exemptions, which are optional, as set forth expressly by IFRS 1);
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- preparation of a report on the effects resulting from the transition to the international standards. The new standards must thus be applied retroactively with respect to the transition date of 1 January 2004, and at least one comparative set of financial statements must be prepared for 2004, in accordance with the same IAS/IFRS principles effective from 1 January 2005. IFRS 1 allows an optional derogation from this principle of retroactive application with reference to IAS 32 and 39 regarding financial instruments and IFRS 4 regarding insurance contracts. As previously stated, since these standards were approved by the IASB and validated by the European Commission during 2004, their application from 1 January 2004 is not obligatory. Companies exercising this faculty must convert the accounting balances with respect to said standards at 1 January 2005 and, consequently, 2004 financial statement values may not be comparable.
The opening balance sheet at 1 January 2004, and at 1 January 2005 as regards financial instruments and insurance contracts must be disclosed in compliance with the IAS/IFRS, as follows: - recognition of all assets and liabilities required by the international standards (including those not required by national standards); - write-off of assets and liabilities recognised according to national standards but which do not possess the requirements for recognition pursuant to the IAS/IFRS standards; - reclassification of the assets and liabilities recorded in the financial statements based on the new provisions; - application of the IAS/IFRS valuation criteria to the assets and liabilities. The effects of the adjustments in accounting balances resulting from this reclassification must be recognised directly in shareholders’ equity at the date of first-time adoption of the new standards.
• First-time adoption of the IAS/IFRS by the Banca Popolare di Intra Group
First-time adoption of the new accounting standards requires certain choices to be made with respect to the new classifications of financial instruments, to the adoption of certain optional valuation criteria and to the possible application of several exemptions (optional) in retroactive application of the new principles, as set forth by IFRS1.
In addition, the Banca Popolare di Intra Group has exercised the faculty provided by IFRS 1 to apply IAS 32 and 39 regarding financial instruments from 1 January 2005. Consequently, data for the year 2004 and at 30 June 2004 are not comparable in terms of financial instrument valuation.
Financial instruments (represented by securities, loans and receivables, payables, derivative contracts and shareholdings) have been reclassified into the new
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categories provided by the IAS/IFRS, under a specific provision set forth by IFRS 1. Said provision allows for use of the categories during transition to the IAS/IFRS principles, as derogation to the general rule that allows use of these items only at the moment of purchase of the financial instrument. As regards the fair value option, which is the possibility to value any asset or liability at fair value regardless of its intended use, an amendment to IAS 39 was approved by the IASB in June 2005, allowing fair value valuation of structured financial instruments when the valuation of the embedded derivative is either too complex or leads to unreliable results. Said amendment was implemented by the European Commission on 15.11.2005. The Bank has decided to exercise the aforementioned option only with respect to structured bonds issued by Banks of the Group, in order to eliminate accounting inconsistencies and significantly improve financial statement disclosure.
Securities have been prevalently classified under assets held for trading; the framework deliberations of Group companies with regard to management of the investment securities category (now called “Financial assets held to maturity”) have been revised, leading to the elimination, for the moment, of this category.7 Securities that do not possess the characteristics for classification under one of the aforementioned items have been classified under “Financial assets available for sale”.
Loans to customers and banks have maintained said classification in the case of both loans originating from the Group as well as those acquired from third parties. Repurchase agreements, trade receivables and receivables originating from financial leasing transactions have also maintained this classification (for the latter, the financial method was already used in the past for consolidated financial statements). For tangible fixed assets, the Bank has made the following choices: - capital properties have been recorded at deemed cost, in order to represent them in a manner consistent with the current market values of buildings not intended to be sold; in addition, considering the continued thorough level of maintenance, the depreciation rate has been reduced from 3% to 2%; - investment properties have been maintained at cost, and a 2% depreciation cycle has begun, as per the capital properties; - values of the underlying land have been separated from the buildings only in the case of fully-owned buildings and recorded consistently with the relevant building; these values are not depreciable; - property, plant and equipment have been recorded at cost and depreciated according to rates that represent their residual useful life.
7 The only security present in the category “investment securities” has been reclassified to the category “available for sale” since, being the hedging subject of a fair value hedge, it was decided that the valuation of the bond should be consistent with that of the derivative.
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A complete illustration of the new accounting standards adopted is provided in Section A2.
• IAS/IFRS reconciliation statements and explanatory notes ? The statements below illustrate the reconciliation of shareholders’ equity with reference to the IAS/IFRS transition dates (1 January 2004) as well as reconciliation of the economic results and the entire year 2004.
The reconciliation statements provided have been prepared in accordance with the provisions of IFRS 1.
The reconciliations of shareholders’ equity and of the economic result at 1 January 2004, 31 December 2004 and 1 January 2005 have been subjected to auditing by the independent auditing firm, with regard to the Consolidated Financial Statements. The related report is provided at the end of this section.
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RECONCILIATION STATEMENT BETWEEN SHAREHOLDERS’ EQUITIES OF BANCA POPOLARE DI INTRA AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS (amounts in thousands of euro) 1-Jan-04 31-Dec-04 1-Jan-05 Effect of Effect of Effect of transition transition transition to IAS/IFRS to IAS/IFRS to IAS/IFRS excluding IAS excluding IAS 39 including IAS 39 39 SHAREHOLDERS’ EQUITY AS PER 391,880 406,451 406,451 LEGISLATIVE DECREE 87/92 Reserves 18,252 26,756 (29,834) Loans to customers * analytical valuation of deteriorated loans (50,047) * collective valuation of deteriorated loans (12,918) Financial assets held for trading
* valuation of trading securities and of the related derivative contracts at fair value 1,943 * valuation of derivative contracts for trading at fair value (1,561) Financial assets available for sale * valuation at fair value 5,216 Derivative hedging contracts * fair value hedge: valuation of derivative hedging contracts and the hedged instruments at fair value (60) Tangible and intangible fixed assets * valuation of capital property at "deemed 19,995 19,986 19,986 cost" * change in the depreciation/amortisation method for capital and investment 0 (367) (367) property * reversal of depreciation on land 1,816 1,934 1,934 * intangible fixed assets not recorded under equity (3,988) (1,973) (1,973) * leasehold assets: transition from operating lease to finance lease 811 1,369 1,369 Financial liabilities at fair value * valuation of structured bonds issued using fair value option 622 Provisions for liabilities * discounting of allocations 18 19 19 * actuarial valuation of employee (97) (165) (165) severance indemnity
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Other notes * implicit option in convertible bond 7,620 7,620 * write-off of treasury shares held (303) * write-off of treasury bonds held 215 * accounting for stock grants (1,667) (1,667) Tax effect (6,931) (7,808) 12,579 Total effect of first-time adoption of 11,321 18,948 (17,255) IAS/IFRS principles IAS/IFRS SHAREHOLDERS’ EQUITY 403,201 425,399 389,196
The statement above illustrates the effects of adoption of the international accounting standards on shareholders’ equity. For the most part, the adjustments do not envisage reclassification to the income statement in the years subsequent to first- time adoption. If the IAS/IFRS had been adopted previously, these value adjustments would have produced positive or negative effects on the income statement. However, it is important to note that many of the adjustments made to shareholders’ equity have been determined from the moment of occurrence of the cash flows (known as the “time value”) and, therefore, should generate positive income effects in future years. Adjustments related to financial assets available for sale, implicit options in convertible bonds and write-off of treasury shares are expected to change over time, due to recognition of the valuation effects of assets and liabilities recorded in the financial statements, and they will be recorded in the income statement only upon realisation.
The statement below outlines the effects that adoption of the new accounting standards would have had on the economic result. RECONCILIATION STATEMENT BETWEEN ECONOMIC RESULTS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS: AT 31 DECEMBER 2004 OF BANCA POPOLARE DI INTRA (amounts in thousands of euro) 31-Dec-04 effect of transition Items to IAS/IFRS excluding IAS 39
Net income as per Legislative Decree 87/92 24,384
* Net interest (171)
* Other operating income (charges) 756
* Operating costs 2
* Value adjustments and allocations 2
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* Taxes and other items (886)
Total effect of adoption of IAS/IFRS principles (297)
Net IAS/IFRS income 24,087
Loans to banks and to customers
Analytical valuation of deteriorated loans
The IAS/IFRS principles require valuation of financial assets recorded at amortised cost to be carried out based on the present value of the expected cash flows. Deteriorated loans, which show signs indicating that their value may not be fully recoverable, must be valued analytically, also taking into account the recovery times for credit exposures. Contrary to what occurred up to the 2004 financial statements, this involves calculating the present value of expected recoveries. The recovery expectations for non-performing loans have been discounted in order to take into account estimated recovery times for the amounts, using the average rates effective at the moment of transfer to non-performing status, when the original rates for the individual positions are no longer available. Distribution of the recovery flows over time has been envisaged analytically for the most significant positions and statistically for the remaining positions. In addition, an estimate of the future legal expenses to be sustained in order to achieve recovery of the position has been recorded. An analytical valuation was carried out for problem loans exceeding € 100,000 (which constitute, in terms of amount, over 95% of total problem loans). The estimated realisable value was discounted, for positions with expected recovery times of over 12 months or with a high degree of probability of becoming non-performing, using the effective rates of the individual positions. For problem loans under € 100,000, a collective valuation was carried out, using the methods described below for performing loans, with the difference in this case being that the PD “probability of default” represents the probability – calculated on historical series – that a client classified as problem moves to non-performing status within a year. For positions that have expired or that have been past due over 180 days, in the absence of appropriate historical series, a current collective valuation has been carried out, equal to that of the worst class of performing loans increased by 50%, considered suitable to represent the higher degree of risk inherent in these cases. Starting from 2005, the income statement will include, under write-backs, the positive effect of recovery of the “time value” on deteriorated loans from previous periods, while value adjustments will include the effect of discounting of incoming problem or non-performing loans during the year in question.
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Collective valuation of performing loans8
Loans that do not show signs of anomalies must be valued “collectively”, dividing them into homogeneous risk categories and determining value reductions for each of them estimated on the basis of historical loss experiences. Loan segmentation has been carried out based on the technical form of disbursement. The allocations for performing loans were determined by identifying the greatest possible synergies (to the extent allowed by the various regulations) with the approach set forth for supervisory purposes by provisions of the Basel II New Capital Accord. In particular, the parameters of the calculation model set forth by the new supervisory provisions, represented by the PD (Probability of Default9) and the LGD (Loss Given Default10), were used – where already available – also for financial statement valuation purposes. The one-year time span used for determining probabilities of default is believed to approximate the notion of incurred loss, which is the loss based on events that are current but not yet acquired by the company in reviewing the level of risk of the specific client, required by international principles.
Other effects of loans valuation
Other effects of loans valuation include discounting of particular loans with returns not aligned with market rates and write-downs of interest on arrears. According to the international standards, revenues may be recognised only when it is probable that the economic benefits will be received by the company. Consequently, with adoption of the new standards, interest on arrears is recognised only when its recoverability is certain (cash basis).
Financial assets held for trading
Valuation of trading securities and related derivative contracts at fair value
Securities classified under financial assets held for trading must be valued at fair value. Application of this valuation criterion even for unlisted securities, contrary to what occurred in the past, involves the recognition of surplus values. Therefore, the fair value of unlisted securities included in the above-mentioned categories has been determined through valuations carried out by specialised, independent companies or by using internal valuation models. In addition, conformity
8 With reference to a homogeneous group of financial assets with regular performance, collective valuation defines the measure of credit risk potentially inherent in the same, even though reclassification to a specific position is not yet possible. 9 PD-Probability of Default, represents the probability that the debtor will go into default in a time span of one year 10 LGD-Loss Given Default, represents the estimated loss rate in case of debtor default.
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of valuation with respect to IAS/IFRS provisions has been verified for securities previously valued at fair value.
Valuation of derivative trading contracts at fair value
The IAS/IFRS principles require valuation of derivative contracts at fair value. This value must be determined by taking into account, in the case of internal valuation models, all significant risk factors and using parameters that can be measured on the markets. Valuation of these contracts at fair value also includes the valuation of derivatives correlated to investments classified, in accordance with the IAS/IFRS principles, among assets available for sale, also valued at fair value.
Valuation at fair value of derivative contracts implicit in bonds issued
International principles require derivatives contracts to be recorded separately in the financial statements, even if they are incorporated into other financial instruments (structured financial instruments) if these are not valued at fair value. In 2001, the Bank issued the “Banca Popolare di Intra 3% 2001/2006 subordinated convertible” bond, which incorporated a call option sold to the bondholder. Based on the above-mentioned principle, this option was separated from the bond and recorded under “Capital instruments” in shareholders’ equity. Derivatives implicit in structured bonds issued were not separated, since the fair value option was exercised for this category of bond.
Derivative hedging contracts
Application of fair value in the valuation of derivatives contracts also regards contracts stipulated for the purposes of hedging financial risks. In the case of a hedge against the risk of changes in the market value of another financial instrument (fair value hedge11), the same valuation criterion must be applied to the hedged item as well, in order to achieve the required valuation consistency. This principle of consistency can be maintained only with effective hedging contracts, meaning those in which variations in the fair value offset, within well-defined limits, the opposite variations in value of the hedged instrument.
11 Fair Value Hedge is a hedge of exposure to the variation in fair value of a financial statement item attributable to a particular risk.
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In the case of hedging of future cash flows (cash flow hedge12), however, IAS 39 requires valuation at fair value (with recording of the effect to a shareholders’ equity reserve) of the derivative hedging contract only. Furthermore, derivative contracts stipulated between companies of the Group can no longer maintain accounting materiality in the consolidated financial statements. These new rules have led to a revision of the accounting and valuation criteria for hedging transactions. In application of said principles, the hedging derivatives implemented by the Bank are exclusively of the “fair value hedge” type. The Group has not carried out any “cash flow hedges”.
Fair value hedge: valuation of derivative hedging contracts and the hedged instruments at fair value
For the reasons indicated, as part of first-time adoption of the IAS/IFRS principles, balance sheet items whose market values are hedged and their related derivative hedging contracts have been valued at fair value. These items were previously maintained at cost.
Measures to make hedging transactions compliant with IAS 39
The new and more stringent accounting rules for hedging transactions have led to a review of said transactions. Several derivative contracts with counterparts external to the Bank, considered hedges as per the aforementioned regulatory provisions, have been reclassified to the trading segment as they are not compliant with the requirements of IAS 39 as regards accounting for hedging transactions. As specified previously, the fair value option has been exercised for structured bonds issued that had previously hedged the aforementioned derivatives.
Tangible and intangible fixed assets
Recognition of properties
As already mentioned, capital property has been valued using the deemed cost method, calculating a capital gain of € 19,995 thousand at 1.1.2004, before taxes, and recorded in a specific reserve. Investment property 13 was maintained at “adjusted cost”14.
12 Cash flow hedge is a hedge of exposure to the variability of cash flows attributable to a particular risk. 13 IAS 40 defines investment property as property held for the purpose of earning rentals or appreciation of the capital invested or both, rather than: - for use in production or supply of goods and services or for administrative purposes - for sale in the ordinary course of business.
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As far as the determination of values to assign to the capital property and verification of the appropriateness of the value of investment property is concerned, an official assessment by an independent technician has been commissioned. The combined effect of the change in depreciation rate (from 3% to 2%) and the increase in value of capital goods has led to a negative algebraic result of € 269 thousand on reclassified 2004 income statement, while the beginning of depreciation on investment property has generated a negative effect of € 98 thousand.
Reversal of depreciation on land
International principles require depreciation of assets to be calculated as a function of the useful life of the same or of the individual components if these have a different useful life. In the case of property, this approach requires separation of the value of the underlying land from the book value of the buildings – based on the assumption that land is not subject to deterioration – with a consequent reversal of previous depreciation amounts related to this value. Therefore, separate accounting has been carried out for the value of the buildings and the amount attributed to the underlying land for fully-owned buildings, resulting in a reversal of the accumulated deprecation amount related to the land, equal to € 1,816 thousand at 1.1.2004. The reclassified income statement benefits from elimination of the value adjustment amount related to depreciation of land (+ € 118 thousand).
Intangible fixed assets not recorded under equity
The new principles allow intangible assets to be recorded under equity only if it is likely that these assets will generate future economic benefits and if the cost can be reliably measured. As application of the aforementioned criterion, intangible assets that cannot be recorded under equity were reversed.
Liabilities valued at fair value
Structured bonds issued by the Bank were valued at fair value, exercising the option provided by IASB in the amendment to IAS 39, approved in June 2005. This choice was made in order to render valuation of the derivative (obligatory at fair value) homogeneous with that of the related liability.
Collective valuation of guarantees issued
In fact, it is the “non-capital property” category under the Italian principles. 14 “Adjusted cost” is the original cost net of depreciation and any impairment (and gross of any revaluations).
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The same processes already illustrated, adopted for the valuation of loans to customers and banks, were also applied to commitments. The effect of first-time adoption of the IAS/IFRS is due to the valuation of guarantees with respect to clients in good standing.
Other liabilities
Provisions for unrecognised risks and charges and discounting of allocations
The international principles allow for allocations in the financial statements only for outstanding obligations for which the company expects to require economic resources and is able to make a reliable estimate. The previously allocated funds have been deemed compatible with the most stringent rules of the international principles. Regarding the provisions for risks and charges, if the present value of money is a material aspect, the IAS/IFRS require that the amount of the allocation be represented by the present value of the cost estimated to be necessary to settle the obligation. Among the funds present in the financial statements, the timing factor was considered relevant only for those established as a result of disputes with an expected duration of over 12 months. These allocations, therefore, have been adjusted to take into account their present value.
Actuarial valuation of employee severance indemnity and pension funds
The international principles require defined-benefit pension plans to be valued on the basis of an actuarial estimate of the amount the company will have to pay the employee upon termination of the employment contract. The employee severance indemnity has been considered similar to a defined- benefits obligation and thus reclassified according to actuarial values and no longer as required by the specific Italian regulations.
Treasury shares
Shareholders’ equity was reduced by the amount of treasury shares, in compliance with the provisions of international principles, since these can no longer be accounted for as assets.
Financial assets available for sale
The IAS/IFRS principles require financial instruments classified in the category of financial assets available for sale to be valued at fair value. The effect of this valuation must be recorded directly to a shareholders’ equity reserve until recognition.
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Valuation of debt securities at fair value
During first-time adoption of the aforementioned principles, certain debt securities not held for trading activities and which do not present characteristics making them classifiable among assets held to maturity or among loans have been classified under “Financial assets available for sale”. The effect of the transition is linked to the valuation at fair value of the unlisted securities previously valued at the lesser of purchase cost and market value.
Valuation of equities at fair value
As part of first-time adoption, equity investments considered to be long-term and not qualified as controlling, associated or joint control stakes have been classified as “financial assets available for sale”. These shareholdings, previously valued at cost net of any impairment, have been valued at fair value, calculated by using methods recognised by market practices (stock market listings, comparable transactions, stock market multiples or asset-based, financial and income-based valuation models).
Share-based payments
Contrary to the national standards, IAS/IFRS principles require the current value of share-based payments (the “stock grants” and “stock options”) to be recorded in the income statement at the moment in which they are assigned, with a balancing entry recorded in a shareholders’ equity reserve. The provisions set forth by IFRS2 must be applied for plans assigned after 7 November 2002. As regards the Bank, the “stock grant” plan was provided for by the Supplementary Company Contract for the company bonus for the years 2001-2002-2003 and involved the assignment of a specific number of shares if the Gross Operating Income for the period exceeded a certain threshold. Regarding the company bonus for the 2004 period, following: • expiry of the National Collective Labour Agreement and, consequently, of the Supplementary Company Contract; • an agreement reached as part of the National Collective Labour Agreement, allowing the parties to reach individual agreements for the definition of 2004 company bonuses; • an agreement signed between the Parent Bank and the Trade Unions, before approval of the 2004 Financial Statements; the decision was made to distribute the company bonus with the same rules effective before the current Supplementary Company Contract. As a result, a total of 130,619 shares were assigned to employees regarding the 2004 period. As part of reclassification of the income statement for this period, for the purposes of IAS/IFRS, the fair value of the shares assigned was recorded among personnel costs, with a balancing entry in a shareholders’ equity reserve for € 1,666 thousand.
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Tax effect
The impact of first-time adoption of the IAS/IFRS on shareholders’ equity was calculated net of the relative tax effect, determined according to the legislation in force (including Legislative Decree no. 38/2005); in particular: -IRES (Corporate Tax) was calculated at a rate of 33%; -for the purposes of IRAP (Regional Business Tax) equity allocations were considered extraordinary income and charges and, therefore, in principle, fiscally immaterial, except in cases of correlation with material income and charges for the purposes of taxation in previous or subsequent periods; in these cases, a rate of 4.50% was applied (the average rate, taking into account the regional surtaxes). In addition, liabilities for deferred taxes related to deferred tax provisions were not recorded in the financial statements, since the amount of available reserves already subject to taxation leads to the reasonable opinion that further taxable transactions will not be carried out.
Summary
In conclusion, transactions carried out to increase/decrease capital during first-time adoption of the IAS/IFRS accounting standards resulted in a reduction in capital as at 1 January 2005 from € 406.4 million to € 389.2 million (- € 17.2 million), following gross decreases of € 29.8 million and net of the tax effect of € 12.6 million.
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RECONCILIATION STATEMENT BETWEEN INCOME STATEMENTS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS: AT 31 DECEMBER 2004 FOR PARENT BANK BANCA POPOLARE DI INTRA
(amounts in thousands of euro) 31-Dec- Effect of 31-Dec- 04 04 Legislative transition IAS/IFRS Decree 87/92 ITEMS to IAS/IFRS excluding IAS 39 excluding IAS 39 (A) (B) (A) + (B) Net interest 124,945 (171) 124,774 Dividends and profits on shareholdings under 4,139 0 4,139 shareholders’ equity Interest margin 129,084 (171) 128,913 Net fees 39,573 0 39,573 Profits (Losses) from financial transactions (2,454) 0 (2,454) Other net operating income 17,477 756 18,233 Net interest and other banking income 183,680 585 184,265 Personnel costs (55,147) (1,735) (56,882) Other administrative expenses (41,973) 0 (41,973) Value adjustments to tangible and intangible (7,199) 1,737 (5,462) fixed assets Operating costs (104,319) 2 (104,317) Operating income 79,361 587 79,948 Allocations to provisions for risks and charges (7,398) 2 (7,396) Value adjustments to loans and allocations to provisions for risks and charges (57,865) 0 (57,865) Net value adjustments to financial fixed assets (1,757) 0 (1,757) Profit (loss) from ordinary activities 12,341 589 12,930 Extraordinary profit (loss) 17,973 (9) 17,964 Income taxes for the period (5,930) (877) (6,807) Net profit 24,384 (297) 24,087
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RECONCILIATION STATEMENT BETWEEN INCOME STATEMENTS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS AT 1 JANUARY 2004 OF BANCA POPOLARE DI INTRA
(amounts in thousands of euro) 31-Dec-03 Effect of 1-Jan-04 transition IAS/IFRS ASSETS to IAS/IFRS excluding IAS 39 excluding IAS 39 (A) (B) (A) + (B) 1. Cash and deposits with central banks and post offices 28,196 0 28,196 2. Loans: 3,542,260 0 3,542,260 * due from customers 3,262,116 0 3,262,116 * due from banks 280,144 0 280,144 3. Trading securities 424,215 99,697 523,912 of which treasury shares 303 (303) 0 4. Fixed assets: 259,793 (76,414) 183,379 * Investment securities 100,000 (100,000) 0 * Shareholdings 111,101 0 111,101 * Tangible and intangible assets 48,692 23,586 72,278 5. Other assets 124,913 1,634 126,547 Total assets 4,379,377 24,917 4,404,294
31-Dec-03 Effect of 1-Jan-04 transition IAS/IFRS Liabilities to IAS/IFRS excluding IAS 39 excluding IAS 39 (A) (B) (A) + (B) 1. Payables: 3,739,757 5,020 3,744,777 * due to customers 1,560,497 0 1,560,497 * securities 1,949,010 0 1,949,010 * due to banks 230,250 5,020 235,270 2. Provisions for specific purposes 51,379 8,562 59,941 3. Other liabilities 100,755 14 100,769 4. Subordinated liabilities 95,606 0 95,606 5. Shareholders’ equity: 391,880 11,321 403,201 * capital, reserves 369,531 11,321 380,852 * net profit 22,349 0 22,349 Total liabilities and shareholders’ 4,379,377 24,917 4,404,294 equity
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RECONCILIATION STATEMENT BETWEEN INCOME STATEMENTS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS AT 31 DECEMBER 2004 OF BANCA POPOLARE DI INTRA (amounts in thousands of 31-Dec-04 Effect of 31-Dec-04 Effect of 1-Jan-05 euro) transition IAS/IFRS transition IAS/IFRS ASSETS to IAS/IFRS excluding IAS 39 to IAS/IFRS with IAS 39 excluding IAS 39 including IAS 39 (A) (B) (A) + (B) (B) (A) + (B) 1. Cash and deposits with central banks and 20,724 0 20,724 0 20,724 post offices 2. Loans: 3,598,519 1,520 3,600,039 (62,965) 3,537,074 * due from customers 3,376,378 1,440 3,377,818 (62,965) 3,314,853 * due from banks 222,141 80 222,221 0 222,221 3. Trading securities 466,854 108,733 575,587 19,912 595,499 of which treasury shares 0 0 0 0 0 4. Fixed assets: 244,137 (84,456) 159,681 0 159,681 * Investment securities 100,000 (100,000) 0 0 0 * Shareholdings 98,325 (10,808) 87,517 0 87,517 * Tangible and intangible 45,812 26,352 72,164 0 72,164 assets 5. Other assets 157,219 (23,234) 133,985 30,926 164,911 Total assets 4,487,453 2,563 4,490,016 (12,127) 4,477,889
31-Dec-04 Effect of 31-Dec-04 Effect of 1-Jan-05 transition IAS/IFRS transition IAS/IFRS Liabilities to IAS/IFRS excluding IAS 39 to IAS/IFRS with IAS 39 excluding IAS 39 including IAS 39 (A) (B) (A) + (B) (B) (A) + (B) 1. Payables: 3,783,199 148,174 3,931,373 8,027 3,939,400 * due to customers 1,552,432 206 1,552,638 0 1,552,638 * securities 2,125,191 142,424 2,267,615 8,027 2,275,642 * due to banks 105,576 5,544 111,120 0 111,120 2. Provisions for specific 51,844 7,704 59,548 5,962 65,510 purposes 3. Other liabilities 101,185 (27,489) 73,696 10,087 83,783 4. Subordinated liabilities 144,774 (144,774) 0 0 0 5. Shareholders’ equity: 406,451 18,948 425,399 (36,203) 389,196 * capital, reserves 382,067 19,245 401,312 (36,203) 365,109 * net profit 24,384 (297) 24,087 0 24,087 Total liabilities and 4,487,453 2,563 4,490,016 (12,127) 4,477,889 shareholders’ equity
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EXPLANATORY NOTES
Part A – Accounting policies
Part B – Information on the balance sheet
Part C – Information on the income statement
Part D – Segment reporting
Part E – Information on risks and related hedging policies
Part F – Information on the equity
Part G – Business combination transactions regarding business or company branches
Part H – Transactions with related parties
Part I – Payment agreements based on own equity instruments
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Part A – ACCOUNTING POLICIES
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A.1 - GENERAL
Section 1 – Declaration of compliance with international accounting principles
EC Regulation no. 1606/02, issued on 19 July 2002 by the European Commission, introduced the requirement for European listed companies to prepare their consolidated financial statements in accordance with the IAS/IFRS15 international accounting principles starting from 1 January 2005. This measure is a result of the evident need to standardise the accounting criteria used to prepare the financial statements of companies operating within the European Community, following the continuous and rapid development of financial markets and the globalisation underway in the economy. The complex validation process for the new accounting standards, established by the same Regulation, was completed by the European Commission in December 2004, while implementation of the new principles in Italy was approved through Legislative Decree no. 38 of 28 February 2005 which, among other things, extended the scope of application of the IAS/IFRS principles to the individual financial statements (optional for 2005 and obligatory from 2006) of listed companies, banks and other regulated financial institutions. Taking into consideration the recommendation of the CESR (Committee of European Securities Regulators) with respect to transition to the new accounting standards and the provisional measures issued by CONSOB with respect to interim reporting, the Banca Popolare di Intra has decided to adopt the new standards starting from the consolidated interim report at 30 June 2005.16 Therefore, the company’s financial statements are drafted in compliance with the international accounting principles, and respect the layout and rules of preparation set forth in circular no. 262, issued with Provision of the General Manager of the Bank of Italy dated 22 December 2005. The Financial Statements consist in the Balance Sheet, the Income Statement, the Statement of Changes in Shareholders’ Equity, the Cash Flow Statement and the Explanatory Notes, along with the Consolidated Report on Operations. As required by paragraph 14 of IAS 1, the company confirms explicitly and without reservation that the Financial Statements comply with the IAS/IFRS principles.
15 The IAS (International Accounting Standards) are internationally recognised accounting standards issued by the International Accounting Standards Board (IASB). Starting from 1 April 2001, the new standards are identified by the abbreviation IFRS (International Financial Reporting Standards). For the purposes of these financial statements, reference is made to the IAS/IFRS validated by the European Commission pursuant to art. 6 of EC Regulation no. 1606/2002, provided in the annex. 16 The Parent Bank and the banking subsidiaries have exercised the right to adopt the IAS/IFRS principles for the individual financial statements from the 2005 period, while the other subsidiaries will adopt said standards from 1.1.2006. The non-banking subsidiaries have provided the Parent Bank with the data required (the IAS package) to prepare the consolidated statements in IAS/IFRS format.
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It is also important to note that application of the new accounting standards has resulted in significant variations in the representation of transactions, in the valuation of assets and liabilities and in the actual structure of the financial statements. The standards regulating first-time adoption of the IAS/IFRS require preparation of at least one period of comparison, using the same principles. However, the delay in approval of accounting standard IAS 39 – the most significant one in terms of the banking sector – has resulted in European lawmakers not enforcing compliance with IAS 39 for 2004 comparative information. Consequently, the data relative to the period 2004 are not comparable in terms of valuation of financial instruments. The Financial Statements were subjected to an audit by the independent auditing firm Reconta Ernst & Young S.p.A.
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A.2 GENERAL DRAFTING CRITERIA
The Financial Statements consist in the Balance Sheet, the Income Statement, the Statement of Changes in Shareholders’ Equity, the Cash Flow Statement and the Explanatory Notes. In addition, the company Financial Statements are accompanied by the Report on Operations and the Bank. The amounts in these Explanatory Notes are in thousands of euro.
No derogations from the application of IAS/IFRS principles have been made. With reference to the presentation of comparative data, based on the provisions of IFRS 1, data from the previous year regarding financial instruments (IAS 32 and IAS 39) were not reclassified.
Contents of accounting statements
Balance sheet and Income Statement
The statements of the balance sheet and income statement are composed of items, sub-items and further details (the “of which” following items and sub-items) which constitute the financial statement accounts. In compliance with the provision of the Bank of Italy, accounts which showed no amounts for the year of the financial statements and the previous year were not presented in the statements.
Statement of changes in shareholders’ equity
This statement has been drafted in compliance with that set forth in Bank of Italy circular no. 262. This represents the breakdown and movements in shareholders' equity accounts during the year of reference and the previous year.
Cash flow statement
The statement of cash flow during the year of reference and the previous year has been prepared using the direct method.
Cash flows are divided into those deriving from operations, those generated by investment activities and those produced by the creation of funding.
Section 3 – Events subsequent to the reference data of the financial statements
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This section is prepared in order to comply with the disclosure requirements of IAS regarding events occurring after the balance sheet date (31.12.2005) understood as favourable or unfavourable events which occur between the balance sheet date and the date in which publication of the financial statements is authorised. The definitions contained in IAS 10 indicate that two types of facts may be identified: a) those providing evidence regarding situations existing at the balance sheet date (adjusting events after the balance sheet date) and b) those indicating situations arising after the balance sheet date (non-adjusting events after the balance sheet date)
Among the non-adjusting events after the balance sheet date, during the first quarter of 2006, an Action Plan was approved which contains the guidelines for the 2006- 2008 Strategic Plan. The definitive Strategic Plan, containing accurate budget forecasts for 2006-2008, extended to the two year period 2009-2010 through suitable simulations, will be approved in the next few days.
In the meantime, the Bank has resolved to start a project of "shared autonomy", aimed at various types of strategic partnership with a bank or banking group to be chosen from the cooperative banks of similar or comparable size.
It is most likely due to this initiative that during the first quarter 2006, share prices underwent strong fluctuations, with overall growth in value of about 20%.
In light of that set forth above, it can be affirmed that the financial statements have been prepared according to the assumption of company continuity.
Pursuant to paragraph 17 of IAS 10, it is hereby declared that the publication of the financial statements was authorised by resolution of the Board of Directors on 29 March 2006, which approved them.
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Section 4 – Other aspects
Estimate procedure
IAS 1, paragraph 116 specifies that the entity must provide disclosure regarding the fundamental assumptions for the future, and other causes of uncertainty in the estimates at the balance sheet date, which could lead to material rectifications to the accounting values in assets and liabilities within the following financial year.
For this purpose, it is important to note that allocation to tax provision was calculated based on the current laws in force, according to the prudence criteria, supported by a circular issued by the Italian Banking Association illustrating several reflections on the taxability of companies following the adoption of IAS/IFRS principles.
At the moment of approval of the Financial Statements by the Board of Directors, there are no interpretations by the Revenues Office regarding transition to IAS/IFRS and regarding currency revaluation.
Accounting policies, changes in estimates and errors
In compliance with IAS 8, there have been no variations in accounting principles or accounting estimates regarding the "pro forma" reconstruction of the statements presented with reference to First Time Adoption as at 1 January 2005.
In the accounting situation of the balance sheet at 31.12.2004 with application of IAS different to 32 and 39, with regard to that presented in the half-year report and subsequent quarterly reports, following clarifications, a part of the valuation reserves were included among other reserves.
National tax consolidation option
Starting from 2004, Banca Popolare di Intra and Intra Private Bank adopted the “national tax consolidation” option, set forth in articles 117-129 of the T.U.I.R. (Italian Income Tax Code). Starting from financial year 2005, this option was also extended to Banca Popolare di Monza e Brianza. Based on such regulations, the total net income or fiscal loss of each subsidiary company participating in tax consolidation – together with withholdings paid, deductions and tax credits – are transferred to the subsidiary company, for which a single reportable taxable income or single reportable fiscal loss is determined (resulting from the algebraic sum of the company’s income/loss and that of its participating subsidiaries and, consequently, a single tax debit/credit).
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A.3 – SECTION REGARDING THE MAIN FINANCIAL STATEMENT ITEMS
1 - Financial assets held for trading a) Recognition criteria Initial recognition of the financial assets occurs at the settlement date for debt and equity securities and at the subscription date for derivative contracts. Financial assets held for trading are initially recorded at cost, taken to be the fair value of the instrument, including transaction costs or revenues directly attributable to the instrument itself. b) Classification criteria This category exclusively includes debt and equity securities, complex financial instruments and the positive value of derivative contracts held for trading purposes. c) Valuation criteria Subsequent to initial recognition, financial assets held for trading are measured at fair value. To calculate the fair value of financial instruments listed in a regulated market17, market prices (official and benchmark) are used. In the absence of a regulated market, estimation methods and valuation models are used which take into account all the risk factors related to the instruments and are based on recordable market data, such as: methods based on the valuation of listed instruments with similar characteristics, calculation of discounted cash flows, option price determination models and values recorded in recent comparable transactions. d) Write-off criteria Financial assets are written off when the contractual rights on the cash flows generated by the assets expire or when the financial asset is sold, essentially transferring all related risks/benefits.
2 - Financial assets available for sale
17 A financial instrument is considered to be quoted on a regulated market if its prices, which reflect normal market transactions, are readily and regularly available from Stock Exchanges, Brokers, Intermediaries, companies of the sector, listing services or authorised entities, and if said prices represent actual and ordinary market transactions occurring during a normal reference period.
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a) Recognition criteria Initial recognition of the financial asset occurs at the settlement date for debt or equity securities. The assets are initially recorded at cost, taken to be the fair value of the instrument, including transaction costs or revenues directly attributable to the instrument itself. If recognition occurs following a reclassification from Assets held to maturity, the value recorded is equal to the fair value at the moment of transfer. b) Classification criteria This category includes non-derivative financial assets not otherwise classified under Loans and receivables, Assets held for trading or Assets held to maturity. In particular, this category also includes equity investments not managed for trading purposes and not qualified as controlling, associated or joint control, as well as the junior portion of the securitisation transaction carried out in 2002 held by the Bank. c) Valuation criteria Following initial recognition, assets available for sale continue to be measured at fair value, with the value corresponding to amortised cost recorded in the income statement, while profits or losses generated by fluctuations in fair value are recorded in a specific Shareholders’ equity reserve named “130 Valuation reserve” until the financial asset is written off or an impairment is recorded. Upon disposal or impairment, the cumulative profit or loss is transferred into the income statement. Equity securities for which it is not possible to determine the fair value in a reliable manner according to the aforementioned guidelines are held at cost. Verification of the existence of objective signs of impairment is carried out upon closure of the financial statements or interim report. Should the reasons behind an impairment cease to exist following an event occurring subsequent to its realisation, a write-back is recorded and posted to the income statement for debt securities and to shareholders’ equity for equity securities. However, the total write-back cannot exceed the amortised cost that the instrument would have had in the absence of prior adjustments. d) Write-off criteria Financial assets are written off when the contractual rights on the cash flows generated by the assets expire or when the financial asset is sold, essentially transferring all the risks and benefits related to it.
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3 - Financial assets held to maturity The Bank does not hold financial assets of this type.
4 – Loans a) Recognition criteria Initial recognition of a loan occurs at the date of disbursement, based on the fair value, equal to the amount disbursed, including income/charges directly attributable to the individual loan and definable from the beginning of the transaction, even if paid at a later date. Charges having the above characteristics but which are the subject of reimbursement by the debtor counterpart or are classifiable under normal internal administrative costs are excluded. Repurchase agreements with the obligation to repurchase or resell at maturity are recorded in the financial statements as deposits or loans. In particular, spot sale and forward repurchase transactions are recorded in the financial statements as debts for the spot amount, while spot purchase and forward resale transactions are recorded as loans for the spot amount. b) Classification criteria This category includes loans to customers and banks, provided both directly as well as acquired from third parties, which involve fixed or definable payments, are not listed in a regulated market and were not originally classified under financial assets available for sale. Loans and receivables also comprise trade receivables, repurchase agreements, receivables originating from financial leasing transactions and portfolio advances. For receivables acquired without recourse, these were included under loans and receivables, upon verification that no contractual clauses significantly alter the transferee company’s exposure to risk. c) Valuation criteria After initial recognition, loans are valued at amortised cost, equal to the originally recorded value decreased/increased by capital repayments, value adjustments and write-backs and amortisation – calculated with the effective interest rate method – of the difference between amount disbursed and the amount repayable upon maturity, typically attributable to the income/charges directly related to the individual loan. The effective interest rate is calculated as the rate that equates the present value of future cash flows generated by the loan, in terms of capital and interest, to the amount disbursed, including income/charges attributed to the loan. This accounting method, which uses financial logic, distributes the
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economic effect of the income/charges throughout the expected residual life of the loan. The amortised cost method is not used for loans whose short duration makes the effect of the discounting principle negligible. Said loans are valued at historical cost and the income/charges attributable to the same are recorded in the income statement throughout the useful life of the loan. A similar valuation criterion is adopted for loans without a definite maturity or valid until cancelled. At the end of every year and interim period, recognition of loans is carried out, in order to identify those that show objective signs of possible impairment, following events that occurred after they were recorded. Included in this scenario are loans classified as non-performing, doubtful, restructured, or unsecured to residents in high-risk countries, in accordance with current provisions by the Bank of Italy, consistent with IAS regulations. In addition, in compliance with the provisions of the Regulatory Authority, expired or past due loans of over 180 consecutive days were also included under deteriorated loans. Said deteriorated loans undergo an analytical valuation process, and the value adjustment for each loan is equal to the difference between the book value of the same at the moment of valuation (amortised cost) and the present value of expected future cash flows, calculated by applying the contractually agreed interest rate. This rate remains unvaried over time, even if there has been a restructuring of the relationship, leading to a change in contractual rate, and even if the loan becomes, in practice, non-interest bearing in terms of contractual interest. The expected cash flows take into account the expected recovery times, the estimated realisable value of any guarantees and the costs that will likely be sustained for recovery of the credit exposure. Cash flows related to loans expected to be recovered in the short term are not discounted. The value adjustment is recorded in the income statement. The original value of the loans is restored in subsequent years to the extent to which the reasons that led to their adjustment no longer exist, as long as this valuation is objectively supported by an event that occurred subsequently to the actual adjustment. The write-back is recorded in the income statement and may in no case exceed the amortised cost of the loan had there been no prior adjustments. Loans for which no objective signs of impairment have been identified, which are normally performing loans, as well as problem loans of an amount less than € 100,000 (as these amounts are not very significant overall), are subjected to a valuation of collective impairment. Said valuation occurs by categories of homogeneous loans in terms of credit
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risk, and the relative loss percentages are estimated by taking into consideration historical series, based on observable elements on the date of valuation, allowing an estimate of the latent impairment for each category of loans. Collectively determined value adjustments are recorded in the income statement. At the end of each year and interim period, any additional adjustments or write-backs are recalculated differently with reference to the entire loans portfolio measured collectively at the same date. d) Write-off criteria Loans and receivables sold are eliminated from the assets in the financial statements only if the sale involved the transfer of all the relative risks and benefits. Conversely, if the risks and benefits related to the loans and receivables sold have been maintained, these continue to be recorded among the assets in the financial statements, even if legal ownership has effectively been transferred. If it is not possible to verify the actual transfer of risks and benefits, the loans and receivables are eliminated from the financial statements if no type of control has been maintained over them. On the other hand, if even partial control is maintained, these items remain in the financial statements in an amount equal to the residual involvement, measured by the exposure to changes in value of the loans and receivables sold and to variations in the cash flows of the same. Finally, loans and receivables sold are eliminated from the financial statements if the contractual right to receive the relative cash flows has been retained, with the simultaneous assumption of an obligation to pay said flows, and only said flows, to third parties.
5 - Financial assets at fair value The Bank does not hold financial assets of this type.
6 - Hedging transactions a) Recognition criteria Derivative hedging financial instruments are initially recorded at fair value and classified in the assets item “80 hedging derivatives” and the liabilities item “60 hedging derivatives”. b) Classification criteria Risk hedging transactions are aimed at offsetting potential losses from a specific item or group of items, attributable to a specific risk, via
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profits from another item or group of items should that particular risk actually occur. Fair value hedging is used in the Bank, with the objective of hedging exposure to variations in fair value of a balance sheet item attributable to a specific risk. c) Valuation criteria Hedging derivatives are valued at fair value; in particular, in the case of fair value hedges, the variation in fair value of the hedged item is offset by the variation in fair value of the hedging instrument. This offsetting is recognised by recording the variations in value in the income statement, for both the hedged item (as regards variations produced by the underlying risk factor) as well as the hedging instrument. Any resulting differences, which represent the partial ineffectiveness of the hedge, constitute the net economic result. The derivative instrument is designated as a hedging instrument if there is official documentation of the relationship between the hedged instrument and the hedging instrument, and if it is effective at the moment in which the hedging begins and throughout the life of the same. Hedging effectiveness depends on the degree to which fair value variations of the hedged instrument or of the relative expected cash flows are offset by those of the hedging instrument. Consequently, effectiveness is increased by a comparison of the aforementioned variations, taking into account the intended goal of the company at the moment in which the hedge was established. A hedge is considered effective (within the established range of 80- 125%) when changes in fair value of the financial hedging instrument almost entirely offset variations in the hedged instrument resulting from the specific risk being hedged. Valuation of the effectiveness is carried out at the end of every year or upon preparation of interim reports, using: À prospective tests, which justify application of hedge accounting, demonstrating its expected effectiveness; À retrospective tests, which highlight the degree of hedging effectiveness achieved during the period in question. In other words, they measure the extent to which expected results have deviated from perfect hedging. d) Write-off criteria Recording of hedging operations is interrupted: À if the hedging carried out through the derivatives ceases or is no longer effective, according to the tests set forth above;
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À if the derivative expires, is sold, cancelled or exercised; À the hedged item is sold, expires, or is repaid; À if the hedge characteristic is revoked. With the obvious exception of the second case, if the recording of a hedging transaction is interrupted, the derivative is reclassified among financial instruments for trading.
7 - Shareholdings a) Recognition criteria Shareholdings are recorded at cost including accessory costs and/or income. b) Classification criteria This item includes, in the accounting situation, controlling interests of the Bank. There are no shareholdings in associates or cases of joint control. c) Valuation criteria Shareholdings are held at cost, as the impairment test has not identified any impairment. d) Write-off criteria Financial assets are written off when the contractual rights on the cash flows generated by the assets expire or when the financial asset is sold, essentially transferring all the risks and benefits related to it.
8 - Tangible assets a) Recognition criteria Tangible fixed assets are initially recognised at cost, which includes, in addition to the purchase price, all accessory charges directly attributable to the purchase and to the set-up of the asset; for capital property present at the date of first-time adoption, the cost has been determined to be the deemed cost. Costs for extraordinary maintenance which lead to an increase in future economic benefits, are added to the value of the assets, while ordinary maintenance costs are recorded directly in the income statement. b) Classification criteria Tangible assets include land, capital property, real estate investments, technical plants, furniture and fittings, as well as restructuring and adaptation costs for third-party real estate for capital use. These are tangible assets that are held for use in production or in the provision of
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goods or services, for rental to third parties or for administrative purposes, and which are expected to be used for more than one period. Renovation costs for buildings which are not owned are capitalised, in view of the fact that for the duration of the lease contract, the utilising company has control of the assets and may draw future economic benefits from them. This item also includes assets used within the scope of financial leasing contracts, even though the legal ownership of said assets remains with the lessor company. c) Valuation criteria Fixed assets are systematically depreciated throughout their useful life, using the straight-line method, with the exception of land, whether acquired separately or as part of the value of the building, as it is considered to have an indefinite useful life. Where its value is incorporated into the value of the building, it is considered to be an asset which can be separated from the building. The subdivision of the value of the land and value of the building is calculated on the basis of assessments by independent experts for fully-owned buildings. For buildings which, during the financial year, lose the characteristic of being “fully-owned”, following the sale of part of the building, the corresponding fraction of land is reincorporated to the remaining property owned. Restructuring costs for leased buildings are amortised over a period not exceeding the duration of the lease contract. At the end of every year or interim period, where there is evidence to suggest that the asset may have suffered an impairment, a comparison is made between the book value of the asset and its recoverable value, equal to the lesser of fair value, less any sales costs, and the relative useful value of the asset, taken to be the present value of future cash flows generated by the asset. Any adjustments are recorded in the income statement. Should the reasons giving rise to the impairment cease to exist, the asset is written-up to a value that may not exceed the value it would have had in the absence of the impairment, net of depreciation. d) Write-off criteria Tangible fixed assets are written off the balance sheet either upon disposal or when permanently retired from use and when no future economic benefits are expected from their disposal.
9 - Intangible assets a) Recognition criteria
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Intangible assets are recorded as such if and only if: À it is likely that the company will receive future economic benefits attributable to the asset; À the asset can be clearly identified and can be controlled by the company; À the cost of the asset can be reliably measured. Intangible assets are recorded at cost, adjusted by any accessory charges. An intangible asset may be recorded as goodwill when the positive difference between the fair value of the equity items acquired and the purchase cost of the shareholding(inclusive of accessory costs) is indicative of the future income capacity of the shareholding (goodwill). If this difference proves to be negative (badwill) or in the event that the goodwill is not justified by the future income capacity of the equity investment, the difference is recorded directly to the income statement. b) Classification criteria Intangible assets include goodwill, multi-year software applications and other assets in compliance with the requirements of IAS 38. Goodwill represents the positive difference between the purchase cost and the fair value of the assets and liabilities acquired. Intangible assets are recorded as such if they are identifiable and arise from legal or contractual rights. c) Valuation criteria Verification of the adequacy of the goodwill value is carried out on an annual basis (or each time there is evidence to suggest impairment). This involves identifying the units generating the cash flows to which goodwill is attributed. The extent of any impairment is determined on the basis of the difference between the carrying value of goodwill and its recoverable value, if less. Said recoverable value is equal to the lesser of fair value of the units generating the cash flows, less any sales costs, and the relative utilisation value. Subsequent value adjustments are recorded in the income statement. The cost of intangible fixed assets is amortised on a straight-line basis over the relative useful life of the assets. If their useful life is indefinite, intangible assets are not subjected to amortisation but only to periodic verification of the adequacy of their carrying value. At the end of each year or interim period, if there is evidence to suggest impairment, an appraisal of the asset’s recoverable value is performed. The amount of the impairment, recorded in the income statement, is equal to the difference between the book value of the asset and its recoverable value.
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d) Write-off criteria Intangible fixed assets are written off the balance sheet upon disposal and when no future economic benefits are expected.
10 – Non-current assets and assets being disposed The Bank does not hold assets of this type.
11 – Current and deferred taxation (a) Recognition criteria Taxation is recorded using accrual basis criteria, applying the national laws in force. Income taxes are recorded in the income statement, except for those related to items charged or credited directly to shareholders’ equity upon First Time Adoption.
(b) Classification criteria Current tax assets include respectively advances paid, withholdings and other tax credit of the Bank in relation to Inland Revenue; current tax liabilities include payables to Inland Revenue for direct taxes, IRAP (Regional Business Tax) and indirect taxes. In particular, prepaid and deferred taxes are calculated on the basis of temporary differences – without time limits – between the value attributed to an asset or a liability according to statutory criteria and the corresponding values adopted for tax purposes. Prepaid tax assets are recorded in the balance sheet to the extent that their recovery is likely, assessed on the basis of the capacity of the Group, as a result of exercising the tax consolidation option, to continuously generate positive taxable income. Deferred tax liabilities are recorded in the balance sheet, with the sole exceptions of the greater asset values subject to tax deferral in the form of shareholdings and deferred tax provisions, since the amount of available reserves already subject to taxation leads to the reasonable opinion that further taxable transactions will not be carried out. Prepaid and deferred taxes are used at the equity level with open balances and without offsetting entries, recording the former under “Tax assets” and the latter under “Tax liabilities”.
(c) Valuation criteria
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Assets and liabilities recorded as prepaid and deferred taxes are regularly assessed in order to take into account any amendments in regulations or rates, as well as any different subjective situations of the Bank. The size of the provision for taxes is also adjusted in order to handle any charges arising from tax assessments that have already been notified or from litigation underway with the tax authorities.
(d) Write-off criteria Current tax assets and liabilities are cancelled when, respectively, they are recovered or paid. Prepaid and deferred tax assets and liabilities are cancelled in line with the decrease in the reason for the temporary difference between the statutory values and fiscal values of the items which generated them.
12 - Provisions for risks and charges a) Recognition criteria Provisions for risks and charges are recorded for the amount of expected disbursement, with allocation to the income statement. Where the time factor is significant, the allocations are discounted using current market rates. b) Classification criteria Provisions for risks and charges may include, in addition to other funds, pensions and similar liabilities, which are not present in the Bank’s financial statements as the retirement benefit fund for personnel is an external entity with legal autonomy. The item “Other provisions for risks and charges” receives allocations related to current obligations originating from a past event for which the disbursement of economic resources will likely be required in order to settle the obligation, assuming a reliable estimate of the amount can be made. c) Valuation criteria Other provisions for risks and charges are valued based on the best estimate of the likely disbursement required to settle the obligation existing at the balance sheet date. As previously mentioned, when the time frame required to settle the obligation is expected to be considerable, the amount of the allocation is represented by the current value of the expenses to be incurred.
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d) Write-off criteria An allocation is extinguished either through total payment of the debt, or the elimination of the same.
13 - Payables and outstanding securities - Recognition criteria Initial recognition is carried out on the basis of the fair value of the liabilities, normally equal to the amount collected or the issue price, increased by any additional income/charges directly attributable to the individual funding or issue transaction and not refunded by the counter- creditor. Internal administration costs are not included. The fair value of any financial liabilities issued at conditions lower than market is subject to specific appraisal, and the difference compared to market value is recorded directly in the income statement. - Classification criteria Payables due to banks, Payables due to customers and Outstanding securities include the various forms of funding activities between banks and with customers and deposits from certificates of deposit and bonds issued, less any amounts repurchased. They also include debts recorded by the lessor within the scope of financial leasing transactions. - Valuation criteria After initial recording, financial liabilities are valued at amortised cost with the effective interest rate method. An exception is made for short-term liabilities, where the time factor proves negligible, and which continue to be recorded at collected value. Any costs attributable thereto are recorded in the income statement on a straight-line basis over the contractual duration of the liability. - Write-off criteria Financial liabilities are written off the balance sheet when they have expired or have been discharged. Write-off also occurs when previously issued securities are repurchased. The difference between the book value of the liability and the amount paid to purchase it is recorded in the income statement. Treasury shares placed on the market after their repurchase are considered a new issue and recorded at the new placement price, without any impact on the income statement.
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14 - Trading liabilities a) Recognition criteria Financial trading liabilities are recognised at cost, determined by their fair value. (e) Classification criteria This item includes the negative value of derivative trading contracts valued at fair value and the liabilities, also valued at fair value, arising from technical overdrafts generated by securities trading. (c) Valuation criteria Financial liabilities are valued at fair value. (d) Write-off criteria Trading liabilities are cancelled when the contractual rights on the financial cash flows deriving therefrom expire, or when said liabilities are settled or cancelled.
15 - Liabilities at fair value
a) Recognition criteria Liabilities valued at fair value are recognised at their fair value. b) Classification criteria This item includes structured bonds issued by Banks of the Group at fair value, with the valuation results recorded in the income statement based on the “fair value option”. c) Valuation criteria Financial liabilities are valued at fair value. d) Write-off criteria Trading liabilities are cancelled when the contractual rights on the financial cash flows deriving therefrom expire, or when said liabilities are settled or cancelled.
16 - Foreign currency transactions
(a) Recognition criteria
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Foreign currency transactions are recorded, at the time of initial recognition, in the account currency, applying the exchange rate in force at the transaction date to the foreign currency amount. (b) Classification criteria Assets and liabilities in foreign currency are divided into “monetary” items (classified among current items) and “non-monetary” items (classified among non-current items). Monetary items consist in cash and assets and liabilities to be received or paid in fixed or determinable amounts of money. Non-monetary items, instead, are characterised by the absence of a right/obligation to receive/deliver a fixed or determined amount of money (goodwill, assets, etc.) (c) Valuation criteria At the end of every year or interim period, the balance sheet items in foreign currency are valued as follows: À monetary items are converted at the period-end exchange rate; À non-monetary items valued at fair value are converted using the exchange rates in force at the end of the period. Exchange rate differences deriving from the settlement of monetary items or from the conversion of monetary items at rates differing from those of initial conversion or of previous balance sheet conversion, are recognised in the income statement of the period in which they arise. When a profit or loss relating to a non-monetary item is recorded in shareholders’ equity, the exchange rate difference relating to said item is also recorded under equity. Conversely, when a profit or loss is recorded in the income statement, the relative exchange rate difference is recorded in the income statement as well. (d) Write-off criteria Write-off criteria for assets and liabilities in foreign currency are the typical criteria for similar assets or liabilities in euro.
17 – Other information
Employee severance indemnity The employee severance indemnity is recorded on the basis of its actuarial value, as required by IAS 19.
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For the purposes of discounting, the projected unit credit method (PUCM) is used. This method involves the projection of future outlays on the basis of historical, statistical and probalistic analyses, as well as the adoption of specific demographic techniques; furthermore, financial discounting of the flows is carried out using a market interest rate. Contributions paid during each period are considered as separate units and recognised and valued individually in order to determine the final liability. The rate used for discounting is determined from the spot rate curve defined according to the domestic market conditions of government securities and the average residual duration in service of employees of the company. Plan costs are recorded among personnel costs as the net sum of contributions paid, contributions pertaining to previous periods still to be recorded, accrued interest, and actuarial profits/losses. The latter are calculated, using the corridor method, as the surplus of cumulated actuarial profits/losses, as per the end of the previous period, compared to 10% of the present value of benefits generated by the plan. Moreover, this surplus is correlated to the expected average working life of those participating in the plan. Since the employee severance indemnity is an unfunded plan, without assets specifically designated to its hedging, there are no accounting entries for said components (fair value of assets, returns on investments, etc.).
Treasury shares Any treasury shares held reduce shareholders’ equity. Similarly, the original cost of the same and the profits and losses resulting from their subsequent sale are recorded as shareholders’ equity transactions.
Recognition of income Income is recognised when it is received or, in any case, when it is likely that future benefits will be received and said benefits may be reliably quantified. In particular: - interest on arrears, for which there may be a contractual provision, is only recorded in the statement of income when it is actually collected; - dividends are recorded in the income statement when they are collected.
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Part B – INFORMATION ON THE BALANCE SHEET
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Assets
Section 1 – Cash and cash equivalents – Item 10
1.1 Cash and cash equivalents: composition
Total Total 31.12.2005 31.12.2004 excluding IAS 39 a) Cash 22,715 20,724 b) Demand deposits at Central Banks 00 Total 22,715 20,724
Section 2 - Financial assets held for trading – Item 20
2.1 - Financial assets held for trading: breakdown by product
Total Total 31.12.2004 Items/Values 31.12.2005 excluding IAS 39 Listed Unlisted Listed Unlisted A. Cash assets 1. Debt securities 115,686 76,385 140,313 132,367 1.1 Structured securities 47,141 36,645 4,622 37,075 1.2 Other debt securities 68,545 39,740 135,691 95,292 2. Equity securities 0 0 3,980 0 3. Quotas of OICR 88,024 0 68,485 0 4. Loans 00 0 0 4.1 Repurchase agreements 00 0 0 4.2 Other 00 0 0 5. Deteriorated assets 00 0 0 6. Transferred assets not written off 99,147 22,917 83,181 12,458 Total A 302,857 99,302 295,959 144,825 B. Derivative instruments 1. Financial derivatives: 39 9,126 0 5,362 1.1 trading 39 2,567 0 5,362 1.2. linked to fair value option 0 6,559 0 0 1.3 other 00 0 0 2. Credit derivatives 00 0 0 2.1 trading 00 0 0 2.2. linked to fair value option 00 0 0 2.3 other 00 0 0 Total B 39 9,126 0 5,362 Total (A+B) 302,896 108,428 295,959 150,187
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Quotas of OICR are composed of:
- Hedge funds 37,479 - Share funds 19,739 - Bond funds 24,581 - Flexible funds 4,197 - Balanced funds 1,015 - ETFs on share indices 511 - Property fund 502 88,024
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2.2 Financial assets held for trading: breakdown by debtor/issuer
Total Total 31.12.2005 31.12.2004 Items/Values excluding IAS 39 A. CASH ASSETS 1. Debt securities 192,071 272,680 a) Governments and Central Banks 57,372 56,906 b) Other public entities 33,867 0 c) Banks 92,249 178,923 d) Other issuers 8,583 36,851 2. Equity securities 0 3,980 a) Banks 0 610 d) Other issuers 0 3,370 - insurance companies 0 167 - financial companies 0 0 - non-financial companies 0 0 - other 0 3,203 3. Quotas of OICR 88,024 68,485 4. Loans 0 0 a) Governments and Central Banks 0 0 b) Other public entities 0 0 c) Banks 0 0 d) Other entities 0 0 5. Deteriorated assets 0 0 a) Governments and Central Banks 0 0 b) Other public entities 0 0 c) Banks 0 0 d) Other entities 0 0 6. Transferred assets not written off 122,064 95,639 a) Governments and Central Banks 48,094 83,142 b) Other public entities 10,187 0 c) Banks 63,783 12,497 d) Other issuers 0 0 Total A 402,159 440,784 B. DERIVATIVE INSTRUMENTS a) Banks 8,654 3,104 b) Customers 511 2,258 Total B 9,165 5,362 Total (A+B) 411,324 446,146
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2.3 Financial assets held for trading: derivative instruments
Currenc Equity Interest Loans Other Total Total y and securiti Type of derivative/underlying rates 31.12.05 31.12.04 gold es excludin
g IAS 39
A) Listed derivatives 1) Financial derivatives: 1 0 37 0 0 38 0 * with exchange of capital 0 0 0 0 0 0 0 - options acquired 0 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 0 * without exchange of capital 1 0 37 0 0 38 0 - options acquired 0 0 0 0 0 0 0 - other derivatives 1 0 37 0 0 38 0 2) Credit derivatives: 0 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 0 Total A 1 0 37 0 0 38 0 B) Unlisted derivatives 1) Financial derivatives: 4,519 1,599 0 0 3,009 9,127 5,362 * with exchange of capital 0 1,321 0 0 0 1,321 2,812 - options acquired 0 0 0 0 0 0 0 - other derivatives 0 1,321 0 0 0 1,321 2,812 * without exchange of capital 4,519 278 0 0 3,009 7,806 2,550 - options acquired 0 278 0 0 0 278 0 - other derivatives 4,519 0 0 0 3,009 7,528 2,550 2) Credit derivatives: 0 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 0 Total B 4,519 1,599 0 0 3,009 9,127 5,362 Total (A + B) 4,520 1,599 37 0 3,009 9,165 5,362
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Section 4 - Financial assets held for trading – Item 40
4.1 Financial assets available for sale: breakdown by product
Total Total 31.12.2004 Items/Values 31.12.2005 excluding IAS 39 Listed Unlisted Listed Unlisted 1. Debt securities 111,995 13,000 102,065 13,667 1.1 Structured securities 000 0 1.2 Other debt securities 111,995 13,000 102,065 13,667 2. Equity securities 0 12,033 0 13,709 2.1 Valued at fair value 0 8,769 0 0 2.2 Valued at cost 0 3,264 0 13,709 3. Quotas of OICR 000 0 4. Loans 000 0 5. Deteriorated assets 000 0 6. Transferred assets not written 000 0 off Total 111,995 25,033 102,065 27,376
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4.2 Financial assets available for sale: breakdown by debtor/issuer
Total Total 31.12.2004 Items/Values 31.12.2005 excluding IAS 39 1. Debt securities 124,995 115,731 a) Governments and Central Banks 111,995 102,065 b) Other public entities 00 c) Banks 00 d) Other issuers 13,000 13,666 2. Equity securities 12,033 13,710 a) Banks 3,453 4,650 b) Other issuers 8,580 9,060 - insurance companies 00 - financial companies 5,329 5,771 - non-financial companies 00 - other 3,251 3,289 3. Quotas of OICR 00 4. Loans 0 0 a) Governments and Central Banks 0 0 b) Other public entities 0 0 c) Banks 0 0 d) Other entities 0 0 5. Deteriorated assets 0 0 a) Governments and Central Banks 0 0 b) Other public entities 0 0 c) Banks 0 0 d) Other entities 0 0 6. Transferred assets not written off 0 0 a) Governments and Central Banks 0 0 b) Other public entities 0 0 c) Banks 0 0 d) Other entities 0 0 Total 137,028 129,441
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4.3 Financial assets available for sale: hedged assets
Hedged assets Total Total Asset/Type of hedge 31.12.2005 31.12.2004 excluding IAS 39 Fair value Cash flow Fair value Cash flow 1. Debt securities 111,995 0 102,065 0 2. Equity securities 0 0 0 0 3. Quotas of OICR 0 0 0 0 4. Loans 0 0 0 0 5. Portfolio 0 0 0 0 Total 111,995 0 102,065 0
4.4 Financial assets available for sale: assets subject to specific hedging
Total Total 31.12.2005 31.12.2004 Items/Values excluding IAS 39 1. Financial assets subject to specific hedging at fair value: 111,995 102,065 a) interest rate risk 111,995 102,065 b) price risk 0 0 c) exchange rate risk 0 0 d) credit risk 0 0 e) several risks 0 0 2. Financial assets subject to specific cash flow hedging: 0 0 a) interest rate risk 0 0 c) exchange rate risk 0 0 c) other 0 0 Total 111,995 102,065
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Section 6 – Due from banks – Item 60
6.1 Due from banks: breakdown by product
Total Total Transaction type/Values 31.12.2004 31.12.2005 excluding IAS 39 A. Due from Central Banks 19,171 32,032 1. Time deposits 00 2. Obligatory reserves 19,171 32,032 3. Repurchase agreements 00 4. Other 00 B. Due from banks 64,054 190,189 1. Current accounts and demand deposits 58,610 134,178 2. Time deposits 5,444 56,011 3. Other loans: 00 3.1 Repurchase agreements 00 3.2 Financial leasing 00 3.3 Other 00 4. Debt securities 00 4.1 Structured securities 00 4.2 Other debt securities 00 5. Deteriorated assets 00 6. Transferred assets not written off 00 Total (book value) 83,225 222,221 Total (fair value) 83,225 X
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Section 7 – Due from banks – Item 70
7.1 Loans to customers: breakdown by product
Total Total Transaction type/Values 31.12.2005 31.12.2004 excluding IAS 39 1. Current accounts 1,235,007 1,593,432 2. Repurchase agreements 0 0 1,127,150 1,072,175 3. Mortgage loans 4. Credit cards, personal loans and 27,672 23,356 assignment of one-fifth of salary 0 0 5. Financial leasing 0 0 6. Factoring 428,463 406,065 0 0 7. Other transactions 0 0 8. Debt securities 0 0 8.1 Structured 362,665 282,790 8.2 Other debt securities 0 0 9. Deteriorated assets 10. Transferred assets not written off Total (book value) 3,180,957 3,377,818 Total (fair value) 3,184,331 X
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7.2 Loans to customers: breakdown by debtor/issuer
Total Total 31.12.2004 Transaction type/Values 31.12.2005 excluding IAS 39 1. Debt securities issued by: 00 a) Governments 00 b) Other public entities 00 c) Other issuers 0 0 - non-financial companies 0 0 - financial companies 0 0 - insurance companies 0 0 - other 0 0 2. Loans to: 2,818,292 3,095,028 a) Governments 582 1,113 b) Other public entities 1,967 2,902 c) Other entities 2,815,743 3,091,013 - non-financial companies 1,740,597 1,966,372 - financial companies 243,315 300,952 - insurance companies 159 0 - other 831,672 823,689 3. Deteriorated assets: 362,665 282,790 a) Governments 00 b) Other public entities 00 c) Other issuers 362,665 282,790 - non-financial companies 252,003 196,511 - financial companies 18,608 14,507 - insurance companies 0 0 - other 92,054 71,772 4. Transferred assets not written off: 0 0 a) Governments 0 0 b) Other public entities 0 0 c) Other entities 0 0 - non-financial companies 0 0 - financial companies 0 0 - insurance companies 0 0 - other 0 0 Totale 3,180,957 3,377,818
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Section 8 – Hedging derivatives – Item 80
8.1 Hedging derivatives: breakdown by type of contract and underlying
Type of derivative/underlying Currenc Equity Interest y and securiti Loans Other Total rates gold es A) Listed derivatives 1) Financial derivatives: 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 - options acquired 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 - options acquired 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 2) Credit derivatives: 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 Total A 0000 0 0 B) Unlisted derivatives 1) Financial derivatives: 12,712 181 0 0 0 12,893 * with exchange of capital 0 0 0 0 0 0 - options acquired 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 * without exchange of capital 12,712 181 0 0 0 12,893 - options acquired 0 0 0 0 0 0 - other derivatives 12,712 181 0 0 0 12,893 2) Credit derivatives: 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 Total B 12,712 181 0 0 0 12,893 Total (A + B) at 31.12.2005 12,712 181 0 0 0 12,893 Total (A + B) at 31.12.04 7,779 17 0 0 0 7,796
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8.2 Hedging derivatives: breakdown by portfolios hedged and by type of hedging
Fair value Cash flow
Specific
Interest - Credit Price Sever Asset/Type of hedge rate risk Exchan risk risk al ge rate risks Generic Generic risk Specific 1. Financial assets available for sale 00000 X 0 X 2. Loans 000X 0 X 0 X 3. Financial assets held to maturity X 00X 0 X 0 X 4. Portfolio X X X X X 0 X 0 Total assets 0 0 0 0 0 0 0 0 1. Financial liabilities 12,712 181 0 X 0 X X 2. Portfolio X X X X X 0 X 0 Total liabilities 12,712 181 0 0 0 0 0 0
Section 10 – Tax liabilities – Item 100
10.1 Shareholdings in wholly-controlled enterprises, jointly-controlled enterprises or enterprises subject to significant influence: information on investment relationships
% Available Designations HQ % Quota held votes
A. Wholly-controlled enterprises 1. Banca Popolare di Monza e Brianza SpA Monza 82.28 82.28 2. Intrafid Srl Verbania 89.00 89.00 3. Intra Private Bank SpA Verbania 81.90 81.90 4. Monza e Brianza Leasing SpA Monza 89.12 89.12 B. Jointly-controlled enterprises = = = C. Enterprises subject to significant influence = = =
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10.2 Shareholdings in wholly-controlled enterprises, jointly-controlled enterprises or enterprises subject to significant influence: accounting information
Total Total Profit Shareholders’ Fair Designations Book value assets income (Loss) equity value A. Wholly-controlled enterprises 1. Banca Popolare di Monza e 321,589 18,818 1,329 48,098 47,583 X Brianza SpA 2. Intrafid Srl 424 473 69 254 152 X 3. Intra Private Bank SpA 78,678 38,777 1,547 15,804 38,179 X
4. Monza e Brianza Leasing SpA 70,081 22,044 300 1,798 1,868 X
B. Jointly-controlled enterprises ======Enterprises subject to significant influence ======Total 470,772 80,112 3,245 65,954 87,782
10.3 Shareholdings: changes over the year
Total Total 31.12.2005 31.12.2004 excluding IAS 39 A. Opening balance 87,517 94,908 B. Increases 802 20,121 B.1 Purchases 802 2,452 B.2 Write-backs 0 0 B.3 Revaluations 0 0 B.4 Other variations 0 17,669 C. Decreases 537 27,512 C.1 Sales 392 27,509 C.2 Value adjustments 0 0 C.4 Other variations 145 3 D. Closing balance 87,782 87,517 E. Total revaluations 00 F. Total value adjustments 8,299 8,299
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Section 11 – Tangible assets – Item 110
11.1 - Tangible assets: breakdown of assets valued at cost
Assets/Values Total Total 31.12.2004 31.12.2005 excluding IAS 39 A. Assets for functional use 1.1 owned a) land 3,761 4,749 b) buildings 41,820 42,407 c) furniture 3,395 4,102 d) electronic systems 555 399 e) other 7,278 8,195 1.2 assets under financial lease a) land 00 b) buildings 7,314 6,553 c) furniture 210 253 d) electronic systems 00 e) other 81 50 Total A 64,414 66,708 B. Assets held for investment 2.1 owned a) land 10 293 b) buildings 2,158 3,914 2.2 assets under financial lease a) land 00 b) buildings 00 Total B 2,168 4,207 Total (A + B) 66,582 70,915
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The depreciation rates adopted during the year for the various categories of tangible assets, including those under financial leasing, connected to the period of participation in the production process, are the following:
Rates
Properties for company use 2 % Counters and reinforced glass 20 % Office furniture 12 % Furnishings 15 % Electronic machines 40 % Office machines 12 % Safes 7.5% Telephone and electric systems, and other systems in general 7.5% Electronic telephone systems 40 % Air conditioning systems 15 % Miscellaneous machines and equipment 15 % Alarm, television and photography systems 30 % Internal warning systems 25 % Automobiles 50 % Internal means of transport 20 %
Improvements in assets under leasing have been depreciated over the duration of the relative rental contract. In compliance with the provisions set forth in art. 10 of law no. 72 of 19 March 1983, the attachments provide indications of the assets which are under equity, and those which have undergone monetary revaluation in the past. It is noted that properties held for investment have been depreciated at a rate of 2%.
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11.3 Tangible assets for functional use: changes over the year
Furnitu Electronic Land Buildings Other Total re systems A. Gross opening balance 4,749 74,092 15,172 5,313 25,026 124,352 A.1 Total net value reductions 0 25,132 10,810 4,765 16,937 57,644 A.2 Net opening balance 4,749 48,960 4,362 548 8,089 66,708 B. Increases: 0 2,382 598 775 953 4,708 B.1 Purchases 0 1,021 419 394 735 2,569 B.2. Expenses for capitalised improvements 0000 0 0 B.3 Write-backs 0000 00 B.4. Positive changes in fair value charged to: a) shareholders’ equity 0000 00 b) income statement 0000 00 B.5 Positive exchange differences 0000 00 B.6 Transfer of properties held for investment 03200 0 32 B.7 Other variations 0 1,329 179 381 218 2,107 C. Decreases: 988 2,208 1,355 768 1,683 7,002 C.1 Sales 0 249 192 384 218 1,043 C.2 Depreciation 0 1,505 1,163 384 1,465 4,517 C.3 Value adjustments charged to: a) shareholders’ equity 0000 00 b) income statement 0000 00 C.4. Negative changes in fair value charged to: a) shareholders’ equity 0000 00 b) income statement 0000 00 C.5 Negative exchange differences 0000 00 C.6 Transfers to: a) tangible assets held for investment 0000 0 0 b) assets being disposed 0000 00 C.7 Other variations 988 454 0 0 0 1,442 D. Net closing balance 3,761 49,134 3,605 555 7,359 64,414 D.1 Total net value reductions 0 26,295 11,794 4,768 18,184 61,041 D.2 Total gross closing balance 3,761 75,429 15,399 5,323 25,543 125,455 E. Valuation at cost 3,761 49,134 3,605 555 7,359 64,414
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11.4 Tangible assets held for investment: changes over the year
Total Land Buildings A. Opening balance 293 3,914 B. Increases 0 1,117 B.1 Purchases 0 0 B.2. Expenses for capitalised improvements 0 0 B.3. Net positive changes in fair value 0 0 B.4 Write-backs B.5 Positive exchange differences 0 0 B.6 Transfer of properties for functional use 0 211 B.7 Other variations 0 906 C. Decreases 283 2,873 C.1 Sales 142 2,739 C.2 Depreciation 0 108 C.3. Net negative changes in fair value 0 0 C.4 Value adjustments 0 0 C.5 Negative exchange differences 0 0 C.6 Transfer to other asset portfolios 0 0 a) property for functional use 5 26 b) non-current assets and assets being disposed 0 0 C.7 Other variations 136 0 D. Closing balance 10 2,158 E. Valuation at fair value 36 6,038
11.5 Commitments for purchase of tangible assets As at 31 December 2005, commitments for financial leasing operations on property amount to a total of € 3,767 thousand, including VAT. The agreements stipulated are standard and do not include unusual clauses.
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Section 12 - Intangible assets: breakdown by type of asset
12.1 Intangible assets: breakdown by type of asset
Total Total 31.12.2004 31.12.2005 Assets/Values excluding IAS 39 Limited Unlimited Limited Unlimited duration duration duration duration A.1 Goodwill X X A.2 Other intangible assets 1,275 1,249 A.2.1 Assets valued at cost: 1,275 1,249 a) Internally generated intangible assets 0 0 b) Other assets 1,275 1,249 A.2.2 Assets at fair value: 0 0 a) Internally generated intangible assets 0 0 b) Other assets 0 0 Total 1,275 1,249
Intangible assets are amortised based on their expected useful life (3 or 5 years).
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12.2 Intangible assets: changes over the year
Other intangible Other assets: intangible Total internally assets: other
Goodwill generated Lim. Unlim. Lim. Unlim. A. Opening balance 0 0 0 2,056 0 2,056 A.1 Total net value reductions 0 0 0 807 0 807 A.2 Net opening balance 0 0 0 1,249 0 1,249 B. Increases 0 0 0 675 0 675 B.1 Purchases 0 0 0 675 0 675 B.2 Increases in internal intangible assets 0 0 0 0 0 0 B.3 Write-backs 0 0 0 0 0 0 B.4. Positive changes in fair value 0 0 0 0 0 0 - in shareholders’ equity 0 0 0 0 0 0 - in income statement 0 0 0 0 0 0 B.5 Positive exchange differences 0 0 0 0 0 0 B.6 Other variations 0 0 0 0 0 0 C. Decreases 0 0 0 649 0 649 C.1 Sales 0 0 0 0 0 0 C.2 Value adjustments 0 0 0 649 0 649 - Amortisations 0 0 0 649 0 649 - Write-downs 0 0 0 0 0 0 + Shareholders’ equity 0 0 0 0 0 0 + Income statement 0 0 0 0 0 0 C.3. Negative changes in fair value 0 0 0 0 0 0 - in shareholders’ equity 0 0 0 0 0 0 - in income statement 0 0 0 0 0 0 C.4 Transfers to non-current assets and assets being disposed 0 0 0 0 0 0 C.5 Negative exchange differences 0 0 0 0 0 0 C.6 Other variations 0 0 0 0 0 0 D. Net closing balance 0 0 0 1,275 0 1,275 D.1 Total net value reductions 0 0 0 1,064 0 1,064 E. Total gross closing balance 0 0 0 2,339 0 2,339 F. Valuation at cost 0 0 0 2,339 0 2,339 Key: Lim: limited duration; Unlim: unlimited duration
12.3 Other information
There are no commitments to purchase intangible assets.
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Section 13 – Tax assets and liabilities – Item 130 under assets and Item 80 under liabilities
13.1 Prepaid tax assets: composition
Taxable positions for prepaid taxes with a definable time-frame
Tax Description Taxable Tax amount amount IRES/IR Financial statement auditing charges 38 14 AP IRES/IR Write-downs of Ex-Banca Pop. Ticino loans 433 162 AP (sevenths) IRES/IR Write-downs of loans from 2004 to 2005 47,512 17,818 AP (ninths) IRES/IR Entertainment expenses incurred from 2002 to AP 2005 85 32 IRES/IR Write-downs of equities 2004 907 340 AP IRES/IR Amortisations 2,713 1,017 AP IRES/IR Costs capitalised for tax purposes 1,006 377 AP IRES/IR Gains to shareholders’ equity debt securities AP available for sale 287 108 IRES Delta employee sev. indemn. for actuarial 165 54 calculation IRES Expenses relating to personnel costs 3,270 1,079 IRES Allocations for litigation defence 8,038 2,653 IRES Write-downs of loans for 2005 (ninths) 290,227 95,775 IRES Losses on shareholdings (fifths) 3,042 1,004 Total 357,723 120,433
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13.2 Deferred tax liabilities: composition
Taxable positions for deferred tax liabilities with probable or certain inversion
Description IRES taxable IRAP IRES IRAP amount taxable amount Capital gains in instalments 5,352 1,619 1,765 73 Property deemed cost 639 639 211 29 FTA – reversal of land depreciation 1,816 1,816 599 82 Improvement on third party assets 901 901 297 41 Property leasing 2,190 2,190 723 99 Allocation to ongoing disputes 12 0 4 0 2004 advance amortisation and 616 616 203 28 depreciation 2005 advance amortisation and 505 505 167 23 depreciation Total 12,031 8,286 3,969 375
13.3 Variations in prepaid taxes (with a balancing entry in the income statement)
Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Opening balance 24,325 10,970 2. Increases 105,984 16,653 2.1 Prepaid taxes recorded during the year 79,164 16,503 a) regarding previous years 0 0 b) due to changes in accounting criteria 0 0 c) write-backs 0 0 d) other 79,164 16,503 2.2 New taxes or increases in tax rates 0 0 2.3 Other increases 26,820 150 3. Decreases 10,734 3,298 3.1 Prepaid taxes cancelled during the year 10,734 3,254 a) reversals 10,734 3,254 b) write-downs for unrecoverability 0 0 c) changes in accounting criteria 0 0 3.2 Reductions in tax rates 0 0 3.3 Other decreases 0 44 4. Closing balance 119,575 24,325
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The following table illustrates the changes regarding points 2.1 d) and 3.1.
Accrued Cancelled during the during the year year Recovery of ninths on write-downs of loans (IRES/IRAP) 0 2,587 Fifths of write-downs of shareholdings 0 736 Auditing expenses 26 32 Losses on shares 0 9 Amortisations and depreciations 513 386 Gains to shareholders’ equity debt securities available for sale 108 0 Sums made available to personnel 1,079 1,282 Allocation to ongoing disputes 2,442 33 FTA 1.1.2005 valuation of financial instruments 0 5,669 2005 loan write-downs to deduct in ninths (IRES only) 74,996 0 Total 79,164 10,734
13.4 Variations in deferred taxes (a balancing entry to the income statement)
Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Opening balance 1,612 2,483 2. Increases 7,990 302 2.1 Deferred taxes recorded during the year 1,928 297 a) regarding previous years 0 0 b) due to changes in accounting criteria 0 0 c) other 1,928 297 2.2 New taxes or increases in tax rates 0 0 2.3 Other increases 6,062 5 3. Decreases 7,034 1,173 3.1 Deferred taxes cancelled during the year 7,034 1,173 a) reversals 7,034 1,173 b) changes in accounting criteria 0 0 c) other 0 0 3.2 Reductions in tax rates 0 0 3.3 Other decreases 0 0 4. Closing balance 2,568 1,612
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The following table illustrates the changes regarding points 2.1 and 3.1. Arisen during Cancelled the year during the year Capital gains from sale of tangible assets 1,419 922 Amortisations and depreciations 190 0 Derivatives on shares 10 50 Delta leasing instalments 309 0 Taxation arising in FTA on financial instruments 0 6,059 Other 0 4 Total 1,928 7,034
13.5 Variations in prepaid taxes (a balancing entry to the balance sheet) Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Initial balance 1,195 0 2. Increases 26,483 1,195 2.1 Prepaid taxes recorded during the year 26,483 1,195 a) regarding previous years 0 0 b) due to changes in accounting criteria 26,483 1,195 c) other 0 0 2.2 New taxes or increases in tax rates 0 0 2.3 Other increases 0 0 3. Decreases 26,820 0 3.1 Prepaid taxes cancelled during the year 0 0 a) reversals 0 0 b) write-downs for unrecoverability c) changes in accounting criteria 0 0 3.2 Reductions in tax rates 0 0 0 0 3.3 Other decreases 26,820 0 4. Closing balance 858 1,195
The following table illustrates the changes regarding points 2.1 d) and 3.1. Arisen during Cancelled the year during the year FTA - valuation of financial instruments 5,704 0 FTA – write-downs of loans 20,779 0 Total 26,483 0
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13.6 Variations in deferred taxes (a balancing entry to the shareholders’ equity)
Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Initial balance 9,003 0 2. Increases 6,095 9,003 2.1 Deferred taxes recorded during the year 6,095 9,003 a) regarding previous years 0 0 b) due to changes in accounting criteria 6,095 9,003 c) write-backs 0 0 d) other 0 0 2.2 New taxes or increases in tax rates 0 0 2.3 Other increases 0 0 3. Decreases 13,322 0 3.1 Deferred taxes cancelled during the year 4,936 0 a) reversals 4,936 0 b) write-downs for unrecoverability c) changes in accounting criteria 0 0 3.2 Reductions in tax rates 0 0 3.3 Other decreases 0 0 8,386 0 4. Closing balance 1,776 9,003
The following table illustrates the changes regarding points 2.1 and 3. Arisen during Cancelled the year during the year Taxation arising in FTA on financial instruments 6,095 6,059 Taxation arising in FTA on property deemed cost used for revaluation - in current taxes 0 2,323 - in revaluation reserves 0 4,936 Improvement on third party assets 0 1 Allocation to ongoing disputes 0 3 Total 6,095 13,322
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13.7 Other information
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Advances paid to Inland Revenue 35,103 32,202 Tax credits and related interest 658 578 Withholdings for adjustment in relation to submission of tax return 338 314 - Advance c/a withholdings 2 5 Requests for reimbursement to be issued by the Financial Administration 129 120 36,230 33,219
As regards the prepaid and deferred taxes, their movement was significantly influenced by the first adoption of the IAS/IFRS, which determined, on the adjustments provided by the new accounting principles recorded as a balancing entry to the shareholders’ equity, the recording of the related deferred taxes, calculated based on the different between the IAS/IFRS book value and the tax value, which also found a balancing entry in the shareholders’ equity
In particular, the following were reversed: • Prepaid taxes mainly regarding the write-downs deriving from loan discounting, the write-down of securities and derivatives contracts, and the write-off of some long-term charges for which tax amortisation continues off the record; • deferred taxes mainly regarding the revaluation of property, securities and derivatives contracts.
The reversal of the use of prepaid and deferred taxes allocated in the process of FTA found a balancing entry in the income statement, with the exception of taxes regarding assets available for sale, treasury shares and the revaluation of property, whose variations regard the shareholders’ equity.
Specifically regarding property and land, it is noted that the Bank recalculated the value of the same upon FTA, adopting IAS 16 and IFRS 1 (deemed cost), among the various options provided.
Following the issue of the Finance Act 2006 (Law no. 266 of 23 December 2005), for property in the financial statements as at 31.12.2005, the Bank decided to use the option of recognition of the highest statutory values for tax purposes, through the payment of substitute tax.
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This option led to a positive difference, due to the lower rate of the substitute tax as compared to the ordinary rate applied in determining deferred taxes upon FTA.
As per provisions of the Bank of Italy of 6 April 2006, the aforementioned difference was charged to the valuation reserves in compliance with the principle IAS 12 (income taxes), paragraph 6.1, which governs accounting for current and deferred taxes.
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Section 15 – Other assets – Item 160
15.1 Other assets: composition
Total Total 31.12.200 31.12.2004 5 excluding IAS 39 Tax stamps and various 11 13 Caution money 225 224 Fees receivable 5,050 4,601 Invoices and credit notes to be collected 1,209 988 Other suppliers: advance payment of amounts to be charged to income statement of following year 564 543 Third party protested cheques 183 233 Securities trading: expired securities and coupons 1,227 1,018 to be collected Transactions on interbank networks to finalise 21,311 24,047 Revaluation of “off-balance sheet transactions” 0 98 Items in transit with branches 1,383 2,556 Currency differences on portfolio transactions 811 683 Securitisation 9,940 9,940 Securitisation swaps 1,525 2,090 1% Payment regarding Leg. Decree no. 341 of 0 15,666 10/12/03 Others accrued liabilities and deferred income 949 476 Amounts receivable for transfer of non-performing 23,310 0 loans Other items 5,143 4,274 Total 72,841 67,450
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Liabilities
Section 1 – Due from banks – Item 10
1.1 Due to banks: breakdown by product
Transaction type/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Due to central banks 00 2. Due to banks 270,816 111,120 2.1 Current accounts and demand deposits 26,055 36,080 2.2 Time deposits 189,184 69,570 2.3 Loans 55,577 5,470 2.3.1 Financial leasing 5,565 5,470 2.3.2 Others 50,012 0 2.4 Debt for commitments to repurchase own equity instruments 0 0 2.5 Liabilities for transferred assets not written off 2.5.1 Repurchase agreements 0 0 2.5.2 Others 0 0 0 0 2.6 Other debts 00 Total 270,816 111,120 Fair value 270,816 X
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1.5 Due to banks: payables for financial leasing
Assets Book value Remaining debt
Varese - property 4,802 2,923 Varese – furniture, furnishings, etc. 133 30 Gravellona Toce – property 883 621 Gravellona Toce – furniture, furnishings, etc. 148 50 Garbagnate Milanese – property 1,192 1,012 Garbagnate Milanese – furniture, furnishings, etc. 123 70 Cannero Riviera – property 909 859 Total 8,190 5,565
Temporal distribution of remaining debt due to leasing companies
1. Residual life 1. Amount 1. Up to one year 2. 934 1. From over 1 year to 5 years 3. 3,630 1. Over 5 years 4. 1,001 1. Total 5. 5,565
The current agreements are all at indexed rates.
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Section 2 – Due to customers – Item 20
2.1 Due to customers: breakdown by product
Transaction type/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Current accounts and demand deposits 1,374,023 1,456,947 2. Time deposits 00 3. Third party assets under administration 00 4. Loans 39 0 4.1 Financial leasing 39 0 4.2 Other 0 0 5. Payables for commitments to repurchase own equity instruments 0 0 6. Liabilities for transferred assets not written off 6.1 Repurchase agreements 122,658 95,690 6.2 Other 122,658 95,690 0 0 7. Other payables 00 Total 1,496,720 1,552,637 Fair value 1,496,720 X
2.5 Payables for financial leasing
1. Assets 1. Book 1. Remain value ing debt 1. Automobiles 2. 45 2. 39
Temporal distribution of remaining debt due to leasing companies
1. Residual life 1. Amount 1. Up to one year 2. 0 1. From over 1 year to 5 years 3. 39 1. Over 5 years 4. 0 1. Total 5. 39
The current agreements are all at indexed rates.
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Section 3 – Outstanding securities – Item 30
3.1 Outstanding securities: breakdown by product
Total Security Total 31.12.2004 31.12.2005 type/Value excluding IAS 39 Book value Fair value Book value Fair value A. Listed securities 85,051 87,945 87,154 X 1. bonds 85,051 87,945 87,154 X - structured 85,051 87,945 87,154 X - other 00 0X 2. other securities 00 0X - structured 00 0X - other 00 0X B) Unlisted derivatives 1,496,334 1,506,979 1,780,706 X 1. bonds 1,458,752 1,469,397 1,739,743 X - structured 00 00 - other 1,458,752 1,469,397 1,739,743 X 2. other securities 37,582 37,582 40,963 X - structured 00 00 - other 37,582 37,582 40,963 X Total 1,581,385 1,594,924 1,867,860 X
The following table provides the breakdown of outstanding securities:
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Fixed rate 207,580 237,063 Variable rate 772,310 1,061,760 Zero coupon bond 243,044 233,490 Linked bond 0 5,073 Constant maturity swap 0 48,684 Step up 181,123 99,566 Zero coupon USD 3,700 3,607 Subordinated 50,990 50,495 Convertible 85,051 87,154 Bonds matured and not reimbursed 5 5 Certificates of deposit 37,582 40,963 Total 1,581,385 1,867,860
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3.2 Details of item 30 “Outstanding securities”: titoli subordinati
The following subordinated securities are included in outstanding securities.
Description Nominal Book value Fair value value Banca Popolare di Intra 3% 2001-2006 c.v. 85,825 85,051 87,995 Banca Popolare di Intra mixed rate 2004-2014 50,000 50,990 51,102 Total 135,825 136,041 139,097
3.3 Outstanding securities: securities subject to specific hedging
Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Securities subject to specific hedging at fair value: 359,448 294,489 a) interest rate risk 355,748 290,882 c) exchange rate risk 0 0 c) several risks 3,700 3,607 2. Securities subject to specific cash flow hedging 0 0 a) interest rate risk 0 0 c) exchange rate risk 0 0 c) other 0 0
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Section 4 – Financial trading liabilities – Item 40
4.1 Financial trading liabilities: breakdown by product
Total Total 31.12.2004 31.12.2005 excluding IAS 39 FV FV Transaction type/Values NV L UL FV* NV L UL FV* A. Cash assets 1. Due to banks 00000 0 00 2. Due to customers 00000 0 00 3. Debt securities 00000 0 00 3.1 Bonds 00000 0 00 3.1.1 Structured 00000 0 00 3.1.2 Other bonds 00000 0 00 3.2 Other securities 00000 0 00 3.2.1 Structured 00000 0 00 3.2.2 Other 00000 0 00 Total A 00000 0 00 B. Derivative instruments 1. Financial derivatives 0 112 11,884 11,996 0 0 2,142 X 1.1 Trading X 112 4,337 4,449 X 0 2,077 X 1.2. Linked to fair value option X 0 7,472 7,472 X 0 0 0 1.3 Other X 0 75 75 X 0 65 X 2. Credit derivatives 000 0 00 2.1 Trading X 0 0 0 X 0 0 0 2.2. Linked to fair value option X 000X 0 0 0 2.3 Other 00000 0 00 Total B 0 112 11,884 11,996 0 0 2,142 X Total (A+B) 0 112 11,884 11,996 0 0 2,142 X Key: FV = fair value FV* = fair value calculated excluding changes in value due to changes in creditworthiness of the issuer from the issue date. NV = nominal or par value L = listed UL = unlisted
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4.4. Financial liabilities for trading: derivative instruments
Curren Equity Interest Loans Other Total Total cy and securitie rates 31.12.05 31.12.04 Type of derivative/Underlying gold s excludin
g IAS 39
A) Listed derivatives 1) Financial derivatives: 12 0 100 0 0 112 0 * with exchange of capital 0 0 0 0 0 0 0 - options issued 0 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 0 * without exchange of capital 12 0 100 0 0 112 0 - options issued 0 0 0 0 0 0 0 - other derivatives 12 0 100 0 0 112 0 2) Credit derivatives: 0 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 0 Total A 12 0 100 0 0 112 0 B) Unlisted derivatives 1) Financial derivatives: 8,423 1,815 75 0 1,571 11,884 2,142 * with exchange of capital 0 1,241 0 0 0 1,241 1,026 - options issued 0 0 0 0 0 0 0 - other derivatives 0 1,241 0 0 0 1,241 1,026 * without exchange of capital 8,423 574 75 0 1,571 10,643 1,116 - options issued 30 574 0 0 0 604 71 - other derivatives 8,393 0 75 0 1,571 10,039 1,045 2) Credit derivatives: 0 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 0 Total B 8,423 1,815 75 0 1,571 11,884 2,142 Total (A+B) 8,435 1,815 175 0 1,571 11,996 2,142
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Section 5 - Financial liabilities at fair value – Item 50
5.1 - Financial liabilities at fair value: breakdown by product
Total Total 31.12.2004 31.12.2005 excluding IAS 39 Transaction FV FV type/Values NV L UL FV* NV L UL FV* A. Cash assets 1. Due to banks 1.1. Structured 00 00 0 00 1.2 Other 00 00 0 00 2. Due to customers 2.1. Structured 00 00 0 00 2.2 Other 00 00 0 00 3. Debt securities 3.1. Structured 132,145 0 132,419 0 110,134 0 111,091 0 3.2 Other 303,411 0 304,234 0 281,602 0 286,521 0 Total 435,556 0 436,653 0 391,736 0 397,612 0 Key: FV = fair value FV* = fair value calculated excluding changes in value due to changes in creditworthiness of the issuer from the issue date. NV = nominal value L = listed UL = unlisted
The fair value option for financial liabilities issued has been used in order to allow for better representation, as well as for a coherent criterion of valuation of liability items (natural hedging) linked to derivatives valued at fair value.
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The following table provides the details of item 50 “Financial liabilities at fair value”: Bonds
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Inflation 92,714 136,726 Cliquet 5,435 1,496 Basket 12,390 12,153 Ratchet 59,738 59,827 Mix Coupon Bonds 19,788 19,930 Euro Stoxx 4,749 6,131 Look Back Coupons 63,712 75,990 Absolute Value 24,787 15,114 Coupon Look Bonds 19,187 19,769 Double Income Bonds 25,207 25,341 Multifunds 14,239 15,093 Spec Bond CMS 9,373 10,042 Twister 48,826 0 Tarn 16,096 0 Range Accrual 20,412 0 Total 436,653 397,612
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Section 6 – Hedging derivatives – Item 60
6.1 Hedging derivatives: breakdown by type of contract and underlying
Curren Interest Equity Type of derivative/Underlying cy and Loans Other Total rates securities gold A) Listed derivatives 1) Financial derivatives: 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 - options issued 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 - options issued 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 2) Credit derivatives: 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 Total A 0 0 0 0 0 0 B) Unlisted derivatives 1) Financial derivatives: 12,723 0 0 0 0 12,723 * with exchange of capital 0 0 0 0 0 0 - options issued 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 * without exchange of capital 12,723 0 0 0 0 12,723 - options issued 0 0 0 0 0 0 - other derivatives 12,723 0 0 0 0 12,723 2) Credit derivatives: 0 0 0 0 0 0 * with exchange of capital 0 0 0 0 0 0 * without exchange of capital 0 0 0 0 0 0 Total B 12,723 0 0 0 0 12,723 Total (A+B) 31.12.2005 12,723 0 0 0 0 12,723 Total (A+B) 31.12.04 2,639 0 0 0 0 2,639
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6.2 Hedging derivatives: breakdown by portfolios hedged and by type of hedging
Fair value Cash flows
Specific
Asset/Type of hedge interes exchan sever credit price t rate ge rate al risk risk Generic Generic risk risk risks Specific 1. Financial assets available for sale 10,809 0 0 0 0 X 0 X 2. Loans 000X 0 X 0 X 3. Financial assets held to maturity X 00X 0 X 0 X 4. Portfolio X X X X X X X 0 Total assets 10,809 0 0 0 0 0 0 0 1. Financial liabilities 1,914 0 0 0 0 X 0X 2. Portfolio X X X X X 0 X 0 Total liabilities 1,914 0 0 0 0 0 0 0
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Section 8 – Tax liabilities – Item 80 Item 80 -Current tax liabilities are outlined in the table below: Total 31.12.05 Withholdings to be paid: substitute tax as per Leg. Decree 461/97 305 Interest on substitute tax withholdings 3,486 substitute tax for collateral securities as per Leg. Decree 11 323/96 468 substitute tax single account as per Law 239/96 1,750 6,020 other withholdings Monthly VAT payment 650 Provisions for indirect taxes stamp duties 5,439 stock market contracts 121 substitute tax 515 6,075 Provisions for direct taxes and duties IRES 14,941 IRAP 7,201 Property revaluation substitute tax 2,323 24,465 Total 37,210
As regards deferred taxes, refer to Section 13 under assets.
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Section 10 – Other liabilities – Item 100
10.1 Other liabilities: composition
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Payables to Inland Revenue for amounts owed 13 15 Amounts to be paid to Inland Revenue on behalf 2,037 4,881 of customers Due to Social Security 1,992 1,991 Sums to be transferred to suppliers of goods and 2,339 1,972 services Suppliers: invoices to be received 1,557 1,309 Transactions on interbank networks to finalise 16,934 2,523 Fees payable 93 184 Amounts payable to employees for income and holidays 5,644 2,311 Coupons to be paid on our convertible subordinated bond and our bonds 0 0 Currency differences on portfolio transactions 39,595 37,208 Items in transit with branches 17 0 Provisions for write-downs of guarantees 2,564 1,444 Foreign bank transfers awaiting customer 808 2,018 instructions Other creditors under consolidated taxation 1,221 0 Others accrued liabilities and deferred income 662 622 Other miscellaneous 15,645 14,581 Total 91,121 71,059
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Section 11 – Employee severance indemnity – Item 110
11.1 Employee severance indemnity: changes over the year
Total Total 31.12.2005 31.12.2004 excluding IAS 39 A. Opening balance 15,427 15,061 B. Increases 3,870 2,943 B.1 Allocations during the year 3,191 2,847 B.2 Other increases 679 96 C. Decreases 2,598 2,577 C.1 Payments made 1,037 1,331 C.2 Other decreases 1,561 1,246 D. Closing balance 16,699 15,427
11. 2 Other information
At 31.12.2005, employees’ severance indemnity, calculating using the criteria set forth in art. 2120 of the Italian Civil Code, amounts to € 15,950 thousand, compared to € 15,262 thousand at 31.12.2004
Section 12 – Provisions for risks and charges – Item 120
12.1 Provisions for risks and charges: composition
Total Total Items/Values 31.12.2005 31.12.2004 excluding IAS 39 1. Company pension funds 00 2. Other provisions for risks and charges 8,774 8,710 2.1 legal disputes 7,680 3,212 2.2 personnel costs 100 3,888 2.3 other 994 1,610 Charity fund 213 243 Funding made available to personnel 221 165 Provisions pursuant to art. 3 Law 787/78 482 482 Other 78 720 Total 8,774 8,710
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12.2 Provisions for risks and charges: changes over the year
Company Other Total pension provision
funds s
A. Opening balance 0 8,710 8,710 B. Increases 0 8,596 8,596 B.1 Allocations during the year 0 7,979 7,979 B.2 Variations due to the passage of time 0 10 10
B.3 Variations due to changes in discount rate 0 0 0 B.4 Other increases 0 607 607 C. Decreases 0 8,532 8,532 C.1 Use during the year 0 6,671 6,671
C.2 Variations due to changes in discount rate 0 2 2 C.3 Other decreases 0 1,859 1,859 D. Closing balance 0 8,774 8,774
12.4 Provisions for risks and charges – other provisions
As regards legal disputes, they are comprised as follows: • fraudulent conveyances and litigation defence € 1,295 thousand • incurred loss on disposal of a loan whose payment is linked to a turnover target € 6,190 thousand • claims from customers likely to be disbursed € 195 thousand Claims presented by customers are managed by the Claims Department, under the General Secretariat of the Bank, involving the related units. Claims can be divided into two general categories: 1. ordinary: regarding any issue deriving from relationships with the Institution (including claims regarding cross-border transfers), excluding financial claims; 2. securities: exclusively relating to financial issues The Internal Audit Department records the latter in a specific electronic register and, within 60 days from the end of each quarter, sends a specific report to CONSOB, pursuant to art. 59, paragraph 4, of CONSOB Regulation no. 11522/98, governing the provision of investment services, and pursuant to CONSOB Resolution no. 14015/03. Ordinary claims are examined and managed based on the background documentation and information received from the interested services and/or
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branches. For each case, the solution considered to be the most correct and/or suitable is identified. Claims regarding financial matters are evaluated by examining both the formal and underlying aspects; intended as: • form requirements: verification of the correct finalisation of the transaction, and the presence of the necessary documentation, duly subscribed (agreements, order forms, possible telephonic registration, financial sheets, risk documents, etc.); • substance requirements: examination of the customer’s tendency towards risk, the breakdown of his securities portfolio, the type of investments made, his financial competence, the consistency between the risk and the size of the investment, asset allocation, and possible conflict of interest. Only once the claim in question is found to be lacking in its form or substance, the competent bodies (General Management, Executive Committee, Board of Directors, based on the limits resolved) evaluate the opportunity/need to come to an agreement. In the last two years, the cases linked to the “Argentina”, "Cirio” and “Parmalat” bonds and the uproar that these events have caused on the financial markets have resulted in a consistent increase in “securities claims” (93 in 2004 and 81 in 2005), several of which, due to irregularities in form or substance, were concluded through a transaction with the customer. However, following evaluation of the correctness of the underlying operation, most claims were declined, refusing the related requests for reimbursement.
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Section 14 – Shareholders’ equity – Items 130, 150, 160, 170, 180, 190, and 200
14.1 Company shareholders’ equity: composition
Amount Amount 31.12.2005 31.12.2004 Items/Values excluding IAS 39 1. Capital 145,393 142,540 2. Share premiums 159,256 151,066 3. Reserves 57,805 86,017 4. (Treasury shares) 00 5. Valuation reserves 20,771 14,069 6. Capital instruments 7,014 7,620 7. Profit (loss) for the period (125,396) 24,087 Total 264,843 425,399
14.2 “Capital” and “Treasury shares”: composition
As at 31 December 2005, the share capital is composed of 48,464,397 ordinary shares with a nominal value of € 3.00 each, entirely paid up.
Its can be broken down as follows: subscriptions € 81,707 thousand use of revaluation reserves € 17,299 thousand use of capital reserves € 17,299 thousand use of profit reserves € 2,613 thousand € 145,393 thousand
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14.3 Capital – Number of shares: variazioni
Items/Types Ordinary Other A. Shares existing at the beginning of the 47,513,429 0 period - fully paid up 47,513,429 0 - not fully paid up 0 A.1 Treasury shares (-) 0 B.2 Outstanding shares: initial balance 47,513,429 0 B. Increases 1,571,349 0 B.1 New issues 950,968 0 - for pay: 745,774 0 - business combination transactions 0 0 - bond conversions 745,772 0 - exercise of warrants 0 0 - other 2 - without payment: 205,194 0 - to employees 130,619 0 - to directors 0 0 - other 74,575 0 B.2 Sale of treasury shares 620,381 0 B.3 Other variations 0 0 C. Decreases 620,381 0 C.1 Cancellations 0 0 C.2 Purchase of treasury shares 620,381 0 C.3 Business transfer transactions 0 0 C.4 Other variations 0 0 D. Outstanding shares: closing balance 48,464,397 0 D.1 Treasury shares (+) 0 0 D.2 Shares existing at the end of the period 48,464,397 0 - fully paid up 48,464,397 0 - not fully paid up 0 0
14.4 Capital: other information
As at 31 December 2005, there were 7,152,082 convertible bonds in circulation from the convertible subordinated bond 3% 2001/2006 CV which, if entirely converted at the current ratio of 1.1 share for each bond, would lead to the issuing of 7,867,290 new shares with a nominal unit value of € 3.00 and, thus, overall, capital would increase by € 23,601,870.
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14.5 Profit reserves: other information
Reserves (item 3 of table 14.1) can be broken down as follows:
Items/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Legal reserves 23,641 21,203 2. Extraordinary reserves 31,771 28,583 3. Available reserves 35,899 27,676 4. Reserves for treasury shares 7,747 7,747 5. Reserves as per art. 22 of Legislative Decree 153/99 0 222 6. Reserves for future increases in capital for employees 936 936 7. Special reserves pursuant to art. 13 of Legislative 164 164 Decree 124/93 8. Profit reserves for First Time Adoption 838 1,135 9. Other reserves from First Time Adoption (43,191) (1,649) Total 57,805 86,017
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Availability and distributability of share capital Quota Available for Amount Unavailable Available Distribution to Other shareholders users
Profit reserves
Undistributable 0 0 0 0 0 Legal reserves 23,641 23,641 0 00 (have not yet reached one-fifth of capital) Subject to specific statutory or legal constraints 0 0 0 0 0 Extraordinary reserves 31,771 7,105 24,666 24,666 24,666 (the unavailable quota corresponds to the fair value gains (art. 6 of Legislative Decree 38/05) recorded in the income statement Reserves for treasury shares 7,747 0 7,747 7,747 7,747 Available Available reserves 35,899 0 35,899 35,899 35,899 Reserves for future increases in capital for employees 936 0 936 936 936 FTA profit reserves 931 0 931 931 931 Other FTA reserves (43,284) 0 0 0 0 Special reserves pursuant to art. 13 of Legislative Decree 164 0 164 164 164 124/93
There are no constraints for use deriving from statutory provisions.
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14.6 Capital instruments: composition and changes over the year
This item includes the amount of call options incorporated into the convertible subordinated bond “Banca Popolare di Intra 3% 2001-2005 CV”.
Upon its issue, the equity component of the convertible subordinated bond (the premium received from conversion options) is separated from the bond, and recorded under shareholders’ equity.
The movements in the component of shareholders’ equity are as follows:
A. Opening balance 7,620 B. Increases 533 B.1 Issues 349 B.2 Write-backs 0 B.3 Transfers 0 B.4 Other variations 184 C. Decreases 1,139 C.1 Redemptions 1,139 C.2 Value adjustments 0 C.3 Transfers 0 C.4 Other variations 0 D. Closing balance 7,014
14.7 Valuation reserves: composition
Total Total 31.12.2005 31.12.2004 Items/Components excluding IAS 39 1. Financial assets available for sale 1,990 0 2. Tangible assets 41 12,138 3. Intangible assets 00 4. Hedging of foreign investments 00 5. Cash flow hedging 00 6. Exchange rate differences 00 7. Non-current assets being disposed 00 8. Special revaluation laws 18,740 1,930 Total 20,771 14,068
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14.8 Valuation reserves: changes over the year
Financial Hedging of Exchange Non- Special assets Tangible Intangible foreign Cash flow rate current revaluati available assets assets investment hedging differences assets on laws for sale s being disposed A. Opening balance 0 12,138 0 0 0 0 0 1,930 B. Increases 5,959 0 0 0 0 0 0 17,034 B.1 Increases in fair value 5,959 0 0 0 0 0 0 0 B.2 Other variations 0 0 0 0 0 0 0 17,034 C. Decreases 3,969 12,097 0 0 0 0 0 224 C.1 Increases in fair 3,969 0 0 0 0 0 0 0 value C.2 Other variations 0 12,097 0 0 0 0 0 224 D. Closing balance 1,990 41 0 0 0 0 0 18,740
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14.9 Valuation reserves of financial assets available for sale: composition
Total Total 31.12.2004 31.12.2005 Assets/Values excluding IAS 39 Positive Negative Positive Negative reserves reserves reserves reserves 1. Debt securities 287 0 0 0 2. Equity securities 2,141 438 0 0 3. Quotas of OICR 000 0 4. Loans 000 0 Total 2,428 438 0 0
14.10 Valuation reserves of financial assets available for sale: changes over the year
Debt Equity Quotas of Loans securities securities OICR 1. Initial balance 000 0 2. Increases 287 5,672 0 0 2.1 Increases in fair value 287 332 0 0 2.2 Reversal of negative reserves to income statement 0 1 - from deterioration 0 1 0 0 - from realisation 0 0 0 0 0 0 2.3 Other variations 0 5,339 0 0 3. Decreases 0 3,969 0 0 3.1 Decreases in fair value 0 720 0 0 3.2 Reversal of positive reserves 0 0 to income statement from 0 3,243 realisation 3.3 Other variations 060 0 4. Closing balance 287 1,703 0 0
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Other information
1. Guarantees issued and commitments
Transactions Amount Amount 31.12.2005 31.12.2004 excluding IAS 39 1) Financial guarantees issued 190,062 146,685 a) Banks 0 0 b) Customers 190,062 146,685
2) Commercial guarantees issued 118,418 164,053 a) Banks 1,035 4,275 b) Customers 117,383 159,778
3) Irrevocable commitments to grant finance 14,223 16,291 a) Banks 11,701 6,606 i) for certain use 11,701 6,606 ii) for uncertain use 0 0 b) Customers 2,522 9,685 i) for certain use 2,522 183 ii) for uncertain use 0 9,502
4) Commitments underlying credit derivatives default swaps 0 0
5) Assets lodged as security for minority obligations 0 0
6) Other commitments 4,044 4,046 Total 326,747 331,075
2. Assets lodged as security for own liabilities and commitments
Portfolios Amount Amount 31.12.2005 31.12.2004 excluding IAS 39 1. Financial assets held for trading 55,100 30,100 2. Financial assets at fair value 00 3. Financial assets available for sale 100,000 100,000 4. Financial assets held to maturity 00 5. Due from banks 00 6. Loans to customers 00 7. Tangible assets 00
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4. Management and brokerage on behalf of third parties:
Type of services Amount 1. Trading of financial instruments on behalf of third parties a) purchases 191,481 1. settled 186,606 2. not settled 4,875 b) sales 158,125 1. settled 153,582 2. not settled 4,543 2. Asset management a) individual 843,165 b) collective 0 3. Securities custody and administration a) connected to the duties of custodian bank (excluding assets under management) 0 1. securities issued by the bank which prepares the financial 0 statements 0 2. other securities 2,782,071 b) third party assets under custody (excluding assets under 1,241,645 management): other 1,540,426 1. securities issued by the bank which prepares the financial 3,128,850 statements 543,673 2. other securities 1,016,680 c) third party assets deposited with third parties d) own securities deposited with third parties 4. Other transactions
The category "other transactions" corresponds to stakes in OICR placed by the Bank with its own customers, in custody or administration at the end of year.
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Part C – INFORMATION ON THE INCOME STATEMENT
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Section 1 – Interest – Items 10 and 20
1.1 Interest and similar income: composition
Items/Type Performing financial Deteriorate Other Total Total assets d assets assets 31.12.05 31.12.04 Debt excludin securities Loans g IAS 39 1. Financial assets held for trading 7,666 0 0 4,459 12,125 8,657 2. Financial assets available for sale 5,615 0 0 0 5,615 5,574 3. Financial assets held to maturity 0 0 0 0 0 0 4. Due from banks 0 0 0 2,240 2,240 4,061 5. Loans to customers 0 136,983 34,071 0 171,054 180,423 6. Financial assets at fair value 0 0 0 0 0 0 7. Hedging derivatives X X X 1,029 1,029 6,728 8. Transferred assets not removed 2,504 0 0 0 2,504 2,884 9. Other assets X X X 163 163 237
Total 15,785 136,983 34,071 7,891 194,730 208,564
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1.2 Interest and similar income: differences regarding hedging transactions
Items/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 A. Positive differences from transactions of: A.1 Specific fair value hedging of assets 0 0 A.2 Specific fair value hedging of liabilities 3,916 9,876 A.3 Generic hedging of interest rate risk 0 0 A.4 Specific cash flow hedging of assets 0 0 A.5 Specific cash flow hedging of liabilities 0 0 A.6 Generic cash flow hedging 0 0 Total positive differences (A) 3,916 9,876 B. Negative differences from transactions of: B.1 Specific fair value hedging of assets 2,818 2,820 B.2 Specific fair value hedging of liabilities 69 328 B.3 Generic hedging of interest rate risk 0 0 B.4 Specific cash flow hedging of assets 0 0 B.5 Specific cash flow hedging of liabilities 0 0 B.6 Generic cash flow hedging 0 0 Total negative differences (B) 2,887 3,148 C. Balance (A - B) 1,029 6,728
1.3 Interest and similar income: other information
1.3.1 Interest income on financial assets in foreign currency
Items/Type Total Total 31.12.2005 31.12.2004 excluding IAS 39 On assets in foreign currency, consisting in: - due from banks 94 62 - due from customers 2,197 1,523 - debt securities 5 3 Total 2,296 1,588
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1.4 Interest and similar expenses: composition (IAS 30/10, 16, 17; IAS 32/94.h.i; ED 7/21.a.i.v,b,c; regulations in force)
Items/Type Payabl Securiti Other Total Total es es liabilities 31.12.2005 31.12.2004 excluding IAS 39 1. Due to banks 2,812 X 0 2,812 1,544 2. Due to customers 12,379 X 0 12,379 12,791 3. Outstanding securities X 55,508 0 55,508 66,922 4. Financial liabilities for trading 00 0 0 0 5. Financial liabilities at fair value 0 12,432 0 12,432 0 6. Liabilities for transferred assets not written off 1,977 0 0 1,977 2,332 7. Other liabilities and provisions X X 199 199 171 8. Hedging derivatives X X 00 0 Total 17,168 67,940 199 85,307 83,760
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1.6 Interest and similar expenses: other information -Interest and similar expenses in foreign currency
1.6.1. Interest expenses on financial liabilities in foreign currency
Items/Type Total Total 31.12.2005 31.12.2004 excluding IAS 39 On liabilities in foreign currency, consisting in: - due to banks 1,068 452 - due to customers 224 99 - debt securities 71 46 Total 1,363 597
1.6.2 Interest expense on financial leasing transactions
Interest expense for the year on financial leasing operations amounted to € 199 thousand.
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Section 2 – Fees – Items 40 and 50
2.1 Fee income: composition
Security type/Value Total Total 31.12.2005 31.12.2004 excluding IAS 39 a) guarantees issued 2,105 1,603 b) credit derivatives 0 0 c) management, brokerage and consulting services: 30,127 26,366 1. trading of financial instruments 734 799 2. trading of foreign currencies 1,621 1,715 3. assets under management 8,750 6,684 3.1. individual 8,750 6,684 3.2. collective 0 0 4. securities custody and administration 1,024 856 5. custodian bank 0 0 6. placement of securities 11,279 8,653 7. orders collection 2,532 2,082 8. consulting activities 0 0 9. distribution of third-party services 4,187 5,577 9.1. assets under management 0 0 9.1.1. individual 0 0 9.1.2. collective 0 0 9.2. insurance products 4,187 5,577 9.3. other products 0 0 d) collection and payment services 13,232 13,335 e) servicing for securitisation transactions f) services for factoring transactions 340 297 g) tax collection services 0 0 h) other services 0 0 20,590 19,673 Total 66,394 61,274
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2.2 Fee income: distribution channels for products and services:
Channels/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 a) through own branches: 12,562 10,741 1. assets under management 2,092 552 2. placement of securities 6,354 4,721 3. third party services and products 4,116 5,468 b) out-of-branch offer: 11,654 10,173 1. assets under management 6,658 6,132 2. placement of securities 4,925 3,932 3. third party services and products 71 109 c) other distribution channels: 0 0 1. assets under management 0 0 2. placement of securities 0 0 3. third party services and products 0 0
2.3 Fee expense: composition
Services/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 a) guarantees received 0 0 b) credit derivatives 0 0 c) management and brokerage services: 11,490 9,934 1. trading of financial instruments 759 562 2. trading of foreign currencies 73 44 3. assets under management: 0 0 3.1 treasury portfolio 0 0 3.2 third party portfolio 0 0 4. securities custody and administration 258 259 5. placement of financial instruments 0 0 6. out-of-branch offer of financial instruments, products and services 10,400 9,069 d) collection and payment services 2,660 2,820 e) other services 339 354 Total 14,489 13,108
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Section 3 – Dividends and similar income – Item 70
3.1 Dividends and similar income: composition
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Items/Income Dividends Income Income from from Quotas of Quotas of OICR Dividends OICR
A. Financial assets held for trading 220 40 790 22 B. Financial assets available for sale 429 0 519 0 C. Financial assets at fair value 0 0 0 0 D. Shareholdings 943 X 2.808 X Total 1,592 40 4,117 22
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Section 4 - Net income from trading - Item 80
4.1 Net income from trading: composition
Gains Profits from Losses Losses from Net profit Transaction/Income (A) trading (C) trading (loss) component (B) (D) [(A+B) − (C+D)] 1. Financial assets for trading 4,572 4,709 4,034 1,601 3,646 1.1 Debt securities 924 1,179 3,970 802 (2,669) 1.2 Equity securities 0 1,912 0 798 1,114 1.3 Quotas of OICR 3,648 1,365 64 1 4,948 1.4 Loans 00 00 0 1.5 Other 0 253 0 0 253 2. Financial liabilities for trading 00 00 0 2.1 Debt securities 00 00 0 2.2 Other 00 00 0 3. Other financial assets and liabilities: exchange rate X X X X 515 differences 4. Derivative instruments 6,841 5,673 8,784 6,698 (2,420) 4.1 Financial derivatives: - On debt securities 6,804 4,550 8,684 3,484 (814) and interest rates - On equity securities 37 1,123 100 3,089 (2,029) and share indices X X X X 548 - On currency and gold 0 0 0 125 (125) - Other 4.2 Derivati su crediti 0 0 00 0 Total 11,413 10,382 12,818 8,299 1,741
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Section 5 - Net income from hedging - Item 90
5.1 Net income from hedging activities: composition
Total Total 31.12.2005 31.12.2004 Income component/Values excluding IAS 39
A. Income from: 751 0 A.1 Fair value hedging derivatives 126 0 A.2 Financial assets hedged at fair value 4,143 0 A.3 Financial liabilities hedged at fair value
A.4 Financial derivatives for cash flow hedging 0 0 A.5 Assets and liabilities in foreign currency 0 0 Net income from hedging activities (A) 5,020 0 B. Charges from: B.1 Fair value hedging derivatives 4,087 75 B.2 Financial assets hedged at fair value 0 0 B.3 Financial liabilities hedged at fair value 172 0 B.4 Financial derivatives for cash flow hedging 0 0 B.5 Assets and liabilities in foreign currency 549 0 Net charges from hedging activities (B) 4,808 75 C. Net results from hedging activities (A—B) 212 (75)
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Section 6 - Profit (Loss) from disposal/repurchase - Item 100
6.1 Profit (loss) from disposal/repurchase: composition
Items/Income components Total Total 31.12.2005 31.12.2004 excluding IAS 39 Loss Net profit Profit Net profit Profit Loss (loss) (loss) Financial assets 1. Due from banks 00 00 0 0 2. Loans to customers 0 (1,962 (1,962) 0 0 0 ) 3. Financial assets available for sale 7,910 0 7,910 22,946 14 22,932 3.1 Debt securities 0 3.2 Equity securities 7,910 0 7,910 22,946 14 22,932 3.3 Quotas of OICR 00 00 00 3.4 Loans 00 00 00 4. Financial assets held to maturity 00 00 0 0 Total assets 7,910 (1,962) 5,948 22,946 14 22,932 Financial liabilities 1. Due to banks 00 00 00 2. Due to customers 00 00 00 3. Outstanding securities 0 (380) (380) 0 0 0 Total liabilities 0 (380) (380) 0 0 0
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Section 7 - Net income from financial assets/liabilities at fair value – Item 110
7.1 Net variation in financial assets/liabilities at fair value: composition
Gains Profit from Losses Losses Net profit (A) realisation (C) from (loss) Transaction/Income (B) realisati [(A+B) − component on (C+D)] (D) 1. Financial assets 0 00 00 1.1 Debt securities 00 0 00 1.2 Equity securities 00 0 00 1.3 Quotas of OICR 00 0 00 1.4 Loans 00 0 00 2. Financial liabilities 7,105 1,060 5,578 162 2,425 2.1 Outstanding securities 7,105 1,060 5,578 162 2,425 2.2 Due to banks 0 00 00 2.3 Due to customers: 0 00 00 Financial assets and liabilities in foreign currency exchange rate X differences X X X 0 4. Derivative instruments 0 0 0 0 0 4.1. Financial derivatives 0 0 0 0 0 - On debt securities and interest rates 0 0 0 0 0 - On equity securities and share indices 0 0 0 0 0 - On currency and gold X X X X 0 - other 0 0 0 0 0 4.2. Credit derivatives 0 0 0 0 0 Total derivatives 7,105 1,060 5,578 162 2,425 Total 7,105 1,060 5,578 162 2,425
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Section 8 – Net value adjustments/write-backs for deterioration – Item 130
8.1 Net value adjustments for deterioration of loans: composition
Value adjustments Write-backs (1) (2) Specific Specific Portfolio Total Total Portfoli 31.12.05 31.12.04 Transaction/Income o excluding component Write IAS 39 Other A B A B -offs
A. Due from banks 0 0 0 0 0 0 0 0 0 359 256,194 18,752 0 23,511 0 51 (251,743) (57,917) B. Loans to customers C. Total 359 256,194 18,752 0 23,511 0 51 (251,743) (57,917)
8.2 Net value adjustments for deterioration of financial assets available for sale: composition
Value adjustments Write-backs Total Total (1) (2) 31.12.05 31.12.04 excluding Specific Specific IAS 39 Transaction/Income component Write-offs Other A B.
A. Debt securities 0 0 0 0 0 0 B. Equity securities 1 180 X X (181) (1.757) C. Stakes in OICR 0 0 X 0 0 0 D. Loans to banks 0 0 0 0 0 E. Customer loans 0 0 0 0 0 F. Total 1 180 0 0 (181) (1,757) Key: A = from interest B = other write-backs
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8.4 Net value adjustments for deterioration of other financial transactions: composition
Value adjustments Write-backs (1) (2) Portfolio Portfolio Transaction/Income Specific Specific Total Total component 31.12.05 31.12.04 write- excludin other A B A B offs g IAS 39
A. Guarantees issued 0 994 325 0 199 0 0 (1,120) (4,020) B. Credit derivatives 0 0 0 0 0 0 0 0 0 C. Commitments to grant 0 0 0 0 0 0 0 0 0 finance 0 0 0 0 0 0 0 0 0 D. Other transactions E. Total 0 994 325 0 199 0 0 (1,120) (4,020) Key: A = from interest B = other write-backs
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Section 9 – Administrative expenses – Item 160 9.1 Personnel costs: composition
Total Total 31.12.2005 31.12.2004 Expense type/Values excluding IAS 39 1) Employees a) wages and salaries 40,844 40,568 b) social security costs 10,883 10,749 c) employee severance indemnity 0 0 d) pension costs 0 0 e) allocations to employee severance indemnity 3,787 3,094 f) pension costs and similar liabilities: - defined contribution plans - defined benefit plans 0 0 0 0 g) payments to external complementary pension funds: - defined contribution plans 1,057 1,027 - defined benefit plans 0 0 h) costs deriving from payment agreements based on own equity instruments 0 1,667 i) other employee benefits 2,612 2,515 2) Other personnel 504 337 3) Directors 259 193 Total 59,946 60,150
9.2 Average number of employees by category
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Employees: a) executives 24 26 b) total managers 290 286 - of which 3rd and 4th level 126 126 c) remaining personnel 656 653 Other personnel 65 Total 976 970
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9.5 Other administrative expenses: composition
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Indirect taxes and duties 7,284 5,951 Professional fees 5,832 4,655 Insurance premiums 550 461 Rental instalments for locations for office and other 3,505 3,326 uses Leasing instalments for machinery and software 1,647 1,678 Advertising and entertainment 1,103 1,115 Other utilities (electricity, heating and water) 1,049 925 telephone 953 977 data transmission fees 681 834 telephone order registration 14 14 security, guards and armoured escort 1,833 2,002 cleaning services 1,040 1,021 external data processing 499 566 office supplies 585 739 postage 1,890 1,797 transport costs 121 127 subscriptions and publications 117 122 purchase of other, non-professional services 2,138 1,661 electronic processing carried out at third parties 9,325 7,325 telecommunications networks 1,928 2,016 maintenance of property, furniture, systems, machinery 2,529 2,476 and software other expenses 1,611 1,647 Total 46,234 41,435
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Section 10 - Net allocations to provisions for risks and charges – Item 160
10.1 Net allocations to provisions for risks and charges: composition
Allocations Reallocations Total Total 31.12.2005 31.12.2004 excluding IAS 39 Provisions for litigation defence costs 7,361 67 (7,294) (403) Allocations to provisions for personnel charges 618 500 (118) (3,069) Total 7,979 567 (7,412) (3,472)
Section 11 – Net value adjustments/write-backs of tangible assets – Item 170
11.1. Net value adjustments to tangible assets: composition
Value Write- Net profit Asset/Income component Depreciation (a) adjustments for backs (loss) deterioration (c) (a + b – c) A. Tangible assets A.1 Owned - For functional use 3,829 0 0 3,829 - For investment 591 0 0 591 A.2 Assets under financial lease - For functional use 206 0 0 206 - For investment 0 0 0 0 Total 4,626 0 0 4,626
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Section 12 – Net value adjustments/write-backs of intangible assets – Item 180
12.1 Net value adjustments to intangible assets: composition
Value Write- Net profit adjustments for Asset/Income component Amortisation (a) backs (loss) deterioration ( c ) (a + b – c) (b) A. Intangible assets A.1 Owned - Internally generated by the company 0 0 0 0 - Other 649 0 0 649 A.2 Assets under financial lease 0 0 0 0 Total 649 0 0 649
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Section 13 – Other operating income/costs – Item 190
13.1 Other operating charges composition
Total Total 31.12.2005 31.12.2004 excluding IAS 39 Charges relating to leasing agreements 197 41 Software purchase and implementation 228 154 Maintenance of own property 25 58 Other operating charges 7,320 1,386 Total 7,770 1,639
Maintenance on own property refers exclusively to leased units.
13.2 Other operating income: composition
Total Total 31.12.2005 31.12.2004 excluding IAS 39 rent income 279 291 recovery of facilities management 14 27 recovery of indirect taxes 6,545 5,175 recovery of expenses from customers 2,880 2,695 subsidiaries expense recovery 62 85 revaluation of employees severance indemnity 16 19 tax credit tax bonus on hirings 73 75 Bank of America transaction 15,451 other IAS operating income 473 941 Total 25,793 9,308
Rent income refers to property for investments, for a total of € 168 thousand.
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Section 14 - Profit (Loss) from shareholdings - Item 210
14.1 Profit (loss) from shareholdings: composition
Income component/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 A. Income 0 0 1. Revaluations 0 0 2. Profit from sale 0 0 3. Write-backs 0 0 4. Other increases 0 0 B. Charges (145) 0 1. Write-downs 0 0 2. Value adjustments for deterioration 0 0 3. Loss from sale (145) 0 4. Other decreases 0 0 Net profit (loss) (145) 0
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Section 17 - Profit (Loss) from the sale of investments - Item 240
17.1 Profit (loss) from the sale of investments: composition
Total Total Income component/Values 31.12.2004 31.12.2005 excluding IAS 39 A. Property - Profit from sale 4,306 49 - Loss from sale 0 0
B. Other assets - Profit from sale 41 44 - Loss from sale (12) (19) Net profit (loss) 4,335 74
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Section 18 - Income tax for the year for current operations – Item 260
18.1 Income tax for the year for current operations: composition
Components/Values Total Total 31.12.200 31.12.2004 5 excluding IAS 39 1. Current taxes (-) (22,141) (20,055) 2. Variations in current taxes from previous years (+/-) 0 0 3. Reduction in current taxes for the period (+) 0 0 4. Variation in prepaid taxes (+/-) 68,430 12,991 5. Variation in deferred taxes (+/-) 5,106 363 6. Taxes for the period (-) (-1+/-2+3+/-4+/-5) 51,395 (6,701)
18.2 Reconciliation of theoretical tax charges and effective financial statement tax charges
Total 31.12.20 05 Item Income from current operations before taxes (176,791) 250 Inc. (equal to the theoretical taxable loss) Stateme nt
IRES Theoretical tax charges (33%) 58,341 Effect of income that is exempt or taxes at facilitate rates 3,753 Effect of charges which cannot be deducted partially or (2,993) entirely Effect of other changes (278) IRES – Effective tax charges 58,823
IRAP Theoretical tax charges (4.61%) 8,150 Effects of income/charges not contributing to the taxable (15,482) base Effect of other changes (96) IRAP – Effective tax charges (7,428)
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Section 20 – Other information
Data for contribution to the National Guarantee Fund
As set forth in Ministerial Decree of 30 June 1998, regarding the determination of the variable contribution to be paid to the National Guarantee Fund, created by art. 15 of Law no. 1 of 2 January 1991, for the protection of loans from customers to companies and the other entities authorised to carry out investment services, the following indicators are set forth below:
Volumes Gross income Investment service brokered a) trading on own behalf - Shares 1,592,540 - Bonds 402,572 - Government bonds 479,851 b) trading on behalf of third parties: - Shares 138,797 410 - Bonds 201,184 481 - Government bonds 24,433 44 c1) Placement with advance subscription or spot purchase, or assumption of guarantees in relation to the issuer 0 c2) placement with advance subscription or spot purchase, without assumption of guarantees in relation to the issuer 6,941 d) individual investment portfolio management on behalf of third parties 2,937 e) reception and transmission of orders and brokerage 2,757
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Part D – SEGMENT REPORTING
Bank results by geographical area
International accounting standard no. 14 requires financial statement reporting by segment , breaking down results by line of business (the primary segment) and geographical area (secondary segment). In this first phase of application of the new accounting standards, and taking into account the fact that the Bank is mainly a retail bank, it is considered useful to provide an initial reporting by segment with respect to the geographical areas of business of the Group (Piedmont and Lombardy).
Piedmont is considered as representing the "historical" area of the Parent Bank, which operates in the provinces of Verbano, Cusio, Ossola and Novara, with a total of 51 branches (out of a total of 72). The remaining 21 branches are located in the Lombardy provinces of Varese, Milan and Como, which represent areas where the Bank has more recently expanded.
FINANCIAL DATA – DISTRIBUTION BY GEOGRAPHICAL AREA (amounts in millions of PIEDMONT LOMBARDY OTHER TOTAL euro) 31.12.0 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 31.12. 5 04 05 04 05 04 05 04
Loans to customers 1,819.8 2,016. 1,355. 1,354. 6.1 6.7 3,181. 3,377. 6 1 5 0 8
Direct deposits 1,820.6 1,966. 769.7 805.6 924.4 1046.2 3,514. 3,818. 3 7 1
Regarding the geographical distribution of assets managed, the table above shows that against a decrease of 5.8% in commitments, the Bank has consolidated its position in more recent areas compared to the traditional provinces. The decrease in deposits (-7.9%) seems to be more generalised, with a greater effect on the “other” sector, due to securities placed with institutional investors.
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INCOME STATEMENT – DISTRIBUTION BY GEOGRAPHICAL AREA
Items PIEDMONT LOMBARDY OTHER TOTAL 31-Dec- 31-Dec- 05 04 31-Dec-05 31-Dec-04 31-Dec-05 31-Dec-04 31-Dec-05 31-Dec-04
Interest margin 73.1 79.5 34.9 38.8 1.4 6.6 109.4 124.9
Fee income 39.6 36.7 15.7 13.9 10.9 10.8 66.2 61.4 Fee expense -8.7 -7.8 -3.4 -3.0 -2.4 -2.3 -14.5 -13.1
Net fees 30.9 28.9 12.3 10.9 8.5 8.5 51.7 48.3
Dividends and similar income 1.6 4.1 1.6 4.1
Profit/loss balance from financial transactions 9.9 20.2 9.9 20.2
Net interest and other banking income 104.0 108.4 47.2 49.7 21.4 39.4 172.6 197.5
Net value adjustments for deterioration of loans and other financial transactions -164.9 -29.9 -84.5 -26.8 -3.6 -7.0 -253.0 -63.7
Net income from financial management -60.9 78.5 -37.3 22.9 17.8 32.4 -80.4 133.8
Administrative expenses and net value adjustments to tangible and intangible assets -59.0 -59.3 -25.2 -24.3 -27.3 -23.4 -111.5 -107.0
Net allocations to provisions for risks and charges -1.2 -2.1 -6.2 -0.8 0.0 -0.6 -7.4 -3.5
Other net operating income and charges 1.5 4.6 0.6 1.7 15.9 1.3 18.0 7.6
Profit (loss) from the sale of investments and/or shareholdings 0.0 0.0 0.0 0.0 4.2 0.1 4.2 0.1
Profit (loss) from current operations before taxes -119.6 21.7 -68.1 -0.5 10.6 9.8 -177.1 31.0
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The table above shows that: - the Piedmont region provides about 66% of the total interest margin, with 71% of total branches, compared to about 32% from the Lombardy regions, in which 29% of branches are located; - in terms of net interest and other banking income, this percentage drops to 60% for Piedmont and about 27% for Lombardy; - the percentage of net adjustments to loans is, respectively, 65.2% and 33.4%, with the remainder being of a lump-sum nature; - after the allocation of expenses (53% to Piedmont, 22.6% to Lombardy), losses before taxes, at 31.12.2005, of € 176.8 million, is attributable to Piedmont for € 119.5 million (equal to 67.6%) and to Lombardy for € 68 million (38.4%).
Piedmont accounts for 57.2% of total loans and Lombardy 42.7%. As far as direct deposits are concerned, although the same ratio is maintained, the amounts drop to 51.8% and 21.9%, respectively, with the segment “Other” accounting for 26.3%, attributable to bonds issued to institutional customers.
Moving on to the secondary segment, the criterion was adopted of dividing the assets managed by segment, according to allocation between privates, businesses and others (not notified and problem customers). This segmentation shows that 23.5% of loans are granted to individuals, and a share of 73.1% to businesses (the remainder is allocated as other), while regarding direct deposits, about 50.1% is deposited by individuals and 22.1% by businesses, and the rest is in the hands of institutional customers.
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Part E - INFORMATION ON RISKS AND RELATED HEDGING POLICIES
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SECTION 1 – BANK RISK
1. CREDIT RISK
Qualitative information
1. General aspects.
A fundamental objective of the credit activities of our bank is to carry out an accurate, in- depth analysis of creditworthiness, both regarding existing loans, and regarding loans relating to the policy of commercial development, all in order to allow for the timely achievement of the company targets. During 2005, in order to improve the qualitative standing of credit activities, also in line with that set forth in the Basel 2 Accord, our Bank significantly developed its use of credit scoring systems (such as SEAC, TCQ and SGR, which are explained in detail below), which are able to provide a more exact and timely valuation of credit risk. In this view, the Bank continued the restructuring of the “credit control” department, located within the Internal Audit Department, as well as the strengthening of the organisation within the Loans Department, with the creation of the Doubtful Loans Department. In order to improve control of credit risk, the policy was pursued of settling the most critical deteriorated positions, by carrying out further allocations, where necessary, together with the transfer without recourse of some non-performing items. The policy for commercial development of credit primarily concentrated on the more traditional sectors present in the areas where the Institute operates, with specific attention to SMEs and the retail sector, favouring local customers on the whole. As well, the development of the individual mortgage sector continued, with the issuing of new products which were favourably received by the specific segment, with the conclusion of about 1,600 transactions characterised by greater distribution. Also in this area, there was particular focus on the performance rating systems, which, aside from improved analysis, segmentation and control of customers, also allow for “focused” commercial loan policies.
2. Credit risk management policies
2.1 Organisational aspects.
The term credit risk indicates the possibility that an unexpected change in creditworthiness of a counterpart, with respect to which there exists an exposure, generates a corresponding unexpected variation in the market value of the credit position. Credit risk is determined by both macroeconomic and microeconomic factors. The following are at the macroeconomic level: worsening of the national and international economic trend, aggressive and unexpected forms of competition, entrance and exit barriers, international political/military conflicts, variations in interest rates or in inflation. In the case of our Bank, particular relevance can be taken on by local and/or sector factors which can significantly affect the creditworthiness of recipients of loans.
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On the microeconomic level, with specific reference to the single borrower, credit risk may manifest itself in: risk of default, liquidity risk, and concentration risk, all factors which can lead to deterioration in creditworthiness. The organisational department entrusted with credit risk management has been expanded and refined during this year. In summary, it can be confirmed that credit risk management is implemented on two levels: at the branch network level and at Central Management level. The Branch Network is divided into various Geographical Areas. Inside each area, various roles are assigned, while in the area of the various duties performed, direct management of the single positions: Parent Bank Managers, Area Managers, Sales Managers, Branch Managers and Sales Assistants. At the level of Central Management level, in particular, we highlight the activities carried out by the Mortgages Department as regards private mortgages, and the Doubtful Loans Department Both of these departments, though with the contribution of the performance rating and credit scoring systems, collaborate with the branches in analysing the individual positions and in preparing the most suitable initiatives for credit control. Moreover, the Mortgages Department performs an assessment of the properties subject to mortgage guarantees. It is also important to point out, as well at the Central Management level, the duties carried out by the Risk Management Department. In order to ensure the constant measurement of the Institution's exposure to credit risk, this department autonomously performs a periodic analysis of the loans portfolio, examining the trends in the various geographical areas, by segment, by sector/group, and by rating class, as well as analysing the concentration of loans.
2.2 Management, measurement and control systems
Within the activities required in order to reach credit risk management, measurement and control conditions that are in line with the Basel II Accord, increasingly refined operating methods have been developed over the last few years. In particular, in terms of management, a method for scoring customers has been implemented, which sets a series of objectives: ratings for debtor customers, for adopting validatable IRB approaches, in perspective; customer segmentation models; pricing methods which reflect the customer's level of risk; and control systems (i.e.: SGR) closely linked to the performance rating. The final objective, in brief, is to improve the management, and therefore the quality of credit, together with a more selective allocation of capital, with a direct, positive impact on the general level of risk, and thus, on the economic results of our Institute. Back-testing procedures have been adopted, and stress-testing methods are under development. In further detail, the following points are set out for specific credit risk:
1) In terms of individual risk, our Bank uses two systems as additional support for the traditional credit line procedure: SEAC (Customer Performance Expert System) and TCQ (Total Quality Credit). The first, which has been in force for years, automatically highlights anomalies in single credit line relationships.
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The second, on the contrary, assigns a score to the credit line relationship under examination. The implementation of this system began during 2005, and will be fully operational in 2006. TCQ is a product created by Uniteam (Unicredito Group) and was adopted within the SEC Consortium, to which our Bank belongs, for specific use for risk evaluation as well as (in the near future with suitable implementation) for Basel 2. The product is divided into modules: - TCQ private disbursements (in use); - TCQ business disbursements (in use); - TCQ performance (in use); - SGR risk management system (currently in test phase, and being implemented in operations of the Branch Network). The first two modules provide a point rating regarding the request for credit under examination. On the contrary, the third examines the entire operating performance of the relationship over time (six months). The last module, after implementing the previous ones, will automatically provide the ranking of the relationships in terms of risk, dividing them into homogeneous classes (performing, under observation, high risk), by assigning a point score.
2) Currently, we are not equipped with a risk management and control system at the portfolio level. Instead, this information is presented to the Board of Directors on a quarterly basis, based on data from the Risk Department.
As regards the exposure limits and their concentration in terms of customer legal/economic group, the rules established in the supervisory regulations of the Bank of Italy are applied.
2.3 Techniques for mitigating credit risk
The main type of real security adopted by our Bank can be broken down as follows:
- Mortgages: in almost all cases, these are first mortgages, with an adequate deviation with respect to the facility guaranteed, and, in any event, within the limits of the funding of the transaction (maximum of 80% of the value financed). Since the second half of 2003, the assessments supporting these guarantees have been carried out by the Mortgages Department, using specialised collaborators and/or external professionals, with whom specific agreements are made. Requests supported solely by the applicant’s assessment are only considered after evaluation by one of the departments indicated above. Within the current year, the Mortgages Department will check and verify all at-risk positions in this category, with assessment from the applicant, originating prior to the second half of 2003, in order to ensure conformity of the entire category, with the support of internal valuations which are pertinent and exact with relation to market values.
- Liens: the New Loans Regulations, approved by the Board of Directors in June 2005, set out specific rules for assumption, control, type of guarantees which can be acquired, and deviations to be applied for the entire category;
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- Sureties from Banks and Associations (Credit Guarantee Consortia, Guarantee Cooperatives):
This category, for a banking linked to the local territory such as ours, it is of great importance to create agreements with local associations in order to obtain guarantees from them to mitigate loans granted to their single members. Bank guarantees are limited in number and amount.
Lastly, as regards personal guarantees, these are evaluated on a case-by-case basis, together with the related suitable documentation, and, for the most part, regard personal sureties granted by the businessman and/or related third parties (family members, financers, holding companies) to support the loans granted to the company.
In terms of the concentration of guarantees issued, the following percentages regard the amount of cash loans different to non-performing loans, self-liquidating risks and loans to subsidiaries:
- Mortgage-backed loans: 46.3% - Loans secured by personal guarantees from third parties: 13.3% - Loans secured by lien: 4.8% - Loans guaranteed by credit institutions 64.6%
2.4 Deteriorated financial assets
This sector has been specifically focused on, in order to improve control and adjustment to that set forth in the various international regulations currently being implemented (IAS, BASEL 2). During 2005, the "loan control” function was relocated from the Loans Department to the Internal Audit Department, resulting in the former being responsible solely for managing doubtful loans. For this specific preventative management, which obviously cannot and must not be compared to the management of “normal” (or performing) risks, in 2003 a specific breakdown of risks into two classes of creditworthiness was introduced. These categories do not yet present the characteristics of problem positions, but are worth specific attention: - under observation: this class includes the relationships which, while demonstrating various types of irregularities, possess characteristics which lead to the assumption of settlement within a short time, both as a result of guaranties acquired and due to the economic potential. For these relationships, normal operations are allowed. - under surveillance: this class includes all relationships involving more significant issues, such as registration of judicial mortgages, attachments or property executions, decree orders, notifications of “non-performance” by other Banks. This also includes relationships demonstrating the following critical issues: persistent and/or unauthorised overdrafts, outstanding cheques lacking adequate coverage, a high percentage of unpaid returns, failed collection of advances on invoices, consolidation of exposure through the acquisition of mortgages, loans with more than three overdue, unpaid instalments, ex-problem loans under settlement through authorised recovery plans and regularly paid, positions under observation which are not settled. Operations within these accounts must primarily regard recovery, without the right to authorise any overdrafts.
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Current operations within this sector, identified as Doubtful Loans, are based on notifications from various functions (Network, Credit Control Service, Ordinary Loans Service) and periodic deadlines regarding the single positions, in order to correctly enter/cancel/amend their classification. In the near future, the existing classifications will combine into SGR (see above), with automatic monthly notification of all counterparties demonstrating critical positions. A further decrease in the risk quality, to below class D (see the table below for internal ratings classes), leads to the classification of the position in question as problem, following the indications provided by the Regulatory Authority (temporary difficulty). As well, the operational management of this sector falls under the Loans Department, which monitors it with particular care, based on exact deadlines for each single customer, in order to surpass the critical state. The maximum time frame for inclusion in this class, except for unusual cases, must not exceed two years. If the position fails to be resolved positively, the position is then placed in default, and included in the non-performing category, with the consequent transfer of its management to the Litigation Department. All cases under dispute are evaluated at least four times per year (after presenting the Board of Directors with the relative recovery forecast within a month from recording under non-performing status). Moreover, on a daily basis, operators in the Litigation Department shall identify, together with the manager, the best applicable strategy, case by case, in no way losing sight of the aspect regarding "expected losses” in each case, in light of the information taken directly from external lawyers, bankruptcy receivers, inspectors, branches, and “informers”. In addition, with adjustment to the IAS principles, each case is evaluated in terms of time and percentage of recovery when it is sent to the Litigation Department, as well as following any events of significant importance. That being said, the following sets forth the criteria used to determine the "fair value” of non-performing loans. Firstly, it is noted that the analysis of recovery time and methods (essential elements – together with the rate, which will be discussed later – for the determination of IAS allocations) is performed in the month in which the loan becomes non-performing. Usually: ¾ for positions under € 5,000, a pre-set template is used which provides for recovery within 2 years in a single payment; ¾ unsecured exposure: if there is a recovery plan agreed with the counterpart, it is followed. In case it is necessary to begin a legal procedure for recovery, the expected recovery time is based on 3-4 years depending on the actions to be taken, and whether it regards securities or property; ¾ privileged exposure: If a recovery plan has been prepared, it is followed. In case it is necessary to begin a legal procedure for recovery, the expected recovery time is based on 4 years, the average time needed to complete an enforceable proceeding on property; ¾ exposure regarding positions subject to bankruptcy proceedings: on average, these procedures can last for at least 5 years; ¾ as regards the rate to be used for discounting, for 2005, lacking exact rates on the individual positions for the previous years, two rates per year have been set: one for exposures which began as unsecured, and one for exposures which began as privileged. For the years 1996 to 2004, the average ten-day rates taken from the
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reports provided by the Regulatory Authority were used, while for the preceding years, as internal notifications were not available, the system figure was used, provided by the Bank of Italy statistical report “Tabella TDFE0082”; As regards recovery times, when recovery is attempted through judicial channels or is subject to times regarding bankruptcy proceedings, payment is provided in a single instalment at the end of the period.
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QUANTITATIVE INFORMATION
A. CREDIT QUALITY
A.1 DETERIORATED AND PERFORMING EXPOSURE: SIZE, VALUE ADJUSTMENTS, TREND, ECONOMIC AND TERRITORIAL DISTRIBUTION
A.1.1 Distribution of financial assets by portfolio and credit quality (book value)
Non- Problem Restructured Expired Country Other Portfolio/quality performing loans exposure exposure Risk assets Total loans 1. Financial assets held for trading 0 0 0 0 0 411,324 411,324 2. Financial assets available for sale 0 0 0 0 0 137,028 137,028 3. Financial assets held to maturity 0 0 0 0 0 0 0 4. Due from banks 0 0 0 0 0 83,225 83,225 5. Loans to customers 148,987 128,481 3,426 81,768 3 2,818,292 3,180,957 6. Financial assets at fair value 7. Financial assets being 0 0 0 0 0 0 0 disposed 8. Hedging derivatives 0 0 0 0 0 0 0 0 0 0 0 0 12,893 12,893 Total 31.12.2005 148,987 128,481 3,426 81,768 3 3,462,762 3,825,427 Total 31.12.04 100,240 169,064 13,486 0 1 3,900,631 4,183,422
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A.1.2 Distribution of financial assets by portfolio and credit quality (gross and net values)
Deteriorated assets Other assets Total (net Gross Specific Portfolio Net Gross Portfolio Net exposure) Portfolio/quality exposure adjustment adjustment exposure exposure adjustment exposure s s s
1. Financial assets held 0 0 0 0 X X X 411,324 for trading
2. Financial assets
available for sale 0 0 0 0 137,028 0 137,028 137,028 3. Financial assets held
to maturity
4. Due from banks 0 0 0 0 0 0 0 0 5. Loans to customers 0 0 0 0 83,225 0 83,225 83,225 6. Financial assets at fair 764,211 (398,807) (2,739) 362,665 2,851,203 (32,911) 2,818,292 3,180,957 value
7. Financial assets being 0 0 0 0 X X X 0 disposed
8. Hedging derivatives 0 0 0 0 0 0 0 0 0 0 0 0 X X X 12,893 Total 31.12.2005 764,211 (398,807) (2,739) 362,665 3,071,456 (32,911) 3,038,545 3,825,427 Total 31.12.2004 441,899 (157,262) (1,846) 282,791 3,917,347 (16,716) 3,900,631 4,183,422
A.1.3 Exposure for cash and off-balance sheet loans to banks: gross and net values
Gross Specific Portfolio Net Exposure type/value exposure value value exposure adjustment adjustment s s A. Cash exposure a) Non-performing loans 00 00 b) Problem loans 00 00 c) Restructured exposure 00 00 d) Expired exposure 00 00 e) Country Risk 0X 00 f) Other assets 83,225 X 0 83,225 TOTAL A 83,225 0 0 83,225 B. Off-balance sheet exposure a) Deteriorated 00 00 b) Other 12,736 X 0 12,736 TOTAL B 12,736 0 0 12,736
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A1.6 Exposure for cash and off-balance sheet loans to customers:: gross and net values
Specific Portfolio Gross value value Net Exposure type/value Exposure adjustme adjustment exposure nts s A. Cash exposure a) Non-performing loans 466,710 (317,723) 0 148,987 b) Problem loans 210,707 (80,690) (1,536) 128,481 c) Restructured exposure 3,820 (394) 0 3,426 d) Expired exposure 82,969 0 (1,201) 81,768 e) Country Risk 4X (1) 3 f) Other assets 2,851,203 X (32,911) 2,818,292 TOTAL A 3,615,413 (398,807) (35,649) 3,180,957 B. Off-balance sheet exposure a) Deteriorated 12,779 (1,392) 0 11,387 b) Other 297,189 X (1,173) 296,016 TOTAL B 309,968 (1,392) (1,173) 307,403
A.1.7 Loans to customers: trend in gross deteriorated exposure and exposure subject to “country risk”
Non- Problem Restructure Expired Country Description/Category performing loans d exposure exposure Risk loans A. Opening gross exposure 212,400 214,618 14,879 0 1 - of which: transferred exposure not written off 0 0 0 0 0 B. Increases 357,273 332,882 3,878 82,969 4 B.1 transfers from performing loans 46,987 313,557 3,820 82,969 0 B.2 transfers from other categories of deteriorated exposure 310,286 0 0 0 0 B.3 other increases 0 19,325 58 0 4 C. Decreases 102,963 336,793 14,937 0 1 C.1 expenses for performing loans 0 3,096 0 0 0 C.2 write-offs 41,294 557 0 0 0 C.3 collection 43,332 0 0 0 0 C.4 sale proceeds 14,033 0 0 0 0 C.5 transfers from other categories of deteriorated exposure 0 295,349 14,937 0 0 C.6 other decreases 4,304 37,791 0 0 1 D. Closing gross exposure 466,710 210,707 3,820 82,969 4 - of which: transferred exposure not written off 0 0 0 0 0
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A.1.8 Loans to customers: trend in total value adjustments
Non- Problem Restructured Expired Country Description/Category performing loans exposure exposure Risk loans A. Total initial adjustments - of which: transferred 112,160 45,554 1,394 0 0 exposure not written off 0 0 0 0 0 B. Increases 278,744 110,515 394 1,201 1 B.1 value adjustments 183,814 79,824 394 985 1 B.2 transfers from other categories of deteriorated exposure 72,845 0 0 0 0 B.3 other increases 22,085 30,691 0 216 0 C. Decreases 73,181 73,843 1,394 0 0 C.1 write-backs from valuation C.2 write-backs from collection 19,395 2,013 0 0 0 C.3 write-offs C.4 transfers to other 3,867 56 0 0 0 categories of deteriorated 49,919 150 0 0 0 exposure C.5 other decreases 0 71,452 1,394 0 0
0 172 0 0 0 D. Total closing adjustments - of which: transferred 317,723 82,226 394 1,201 1 exposure not written off 0 0 0 0 0
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A.2 CLASSIFICATION OF EXPOSURE BASED ON EXTERNAL AND INTERNAL RATINGS
A.2.1 Distribution of cash and off-balance sheet exposure by external ratings classes.
Considering the type of customers of the Bank, which are typically retail customers, there are no persons belonging to the category of ordinary customers who have loans of significant amounts with “external ratings”. Instead, most of the loans to banks are granted external ratings, but their amount is modest (about 3%) if compared to the global total of cash exposure.
A.2.1 Distribution of cash and off-balance sheet exposure by internal ratings classes.
Instead, as regards ordinary customers, an internal rating system linked to the TCQ product is in the advanced testing stage. By way of example, the table below breaks down the average global uses as at 31.12.2005 by rating class, net of problem loans, specifying that our internal system indicates classes AAA to C (partial) as performing, classes C (partial) to DDD as under observation and classes DD to D as at risk:
AAA 430,854,706 12.28% AA 391,986,913 11.18% A 443,589,947 12.65% BBB 500,244,033 14.26% BB 345,761,723 9.86% B 448,585,287 12.79% CCC 260,769,627 7.43% CC 242,334,336 6.91% C 101,370,236 2.89% DDD 127,971,246 3.65% DD 157,304,769 4.48% D 56,731,068 1.62%
3,507,503,891 100.00%
For credit institutions, external ratings are used: only in rare cases of relations with banks that lack ratings, an internal inspection is carried out.
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A.3 DISTRIBUTION OF SECURED EXPOSURE BY TYPE OF SECURITY
A.3.1 Cash loans to banks and secured customers
Personal security Real security (2) (1) Credit derivatives Credit commitments Value of Total exposure (1) + (2) Other Other Securit Other State Other Other Property public Banks States public Banks ies assets s entities entities entities entities
1. Completely or partially guaranteed exposure to 0 0000000 00000 banks 2. Completely or partially guaranteed exposure to 2,024,386 1,206,556 40,707 90,944 0 0 0 0 0 162 5,408 654,530 1,998,307 customers
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CREDIT DISTRIBUTION AND CONCENTRATION
B.1 Distribution by sector of cash and off-balance sheet loans to customers
Governments and Central Banks Other public entities Financial companies
Exposure/Counterparty Portfolio Specific Portfolio Gross Gross Net Gross Specific value value Net value value exposure Specific value Portfolio value Net exposure exposure exposure adjustments adjustment exposure adjustments adjustments adjustments adjustments exposure s A. Cash exposure A.1 Non-performing loans 0 0 0 0 0 0 0 0 86,167 (70,389) 0 15,778 A.2 Problem loans 0 0 0 0 0 0 0 0 15,121 (12,312) (4) 2,805 A.3 Restructured exposure 0 0 0 0 0 0 0 0 0 0 0 0 A.4 Expired exposures 0 0 0 0 0 0 0 0 25 0 0 25 A.5 Other exposure 582 X 0 582 1,990 X (23) 1,967 246,157 X (2,841) 243,316 TOTAL 582 0 0 582 1,990 (23) 1,967 347,470 (82,701) (2,845) 261,924 B. “Off-balance sheet” exposure B.1 Non-performing loans 0 0 0 0 0 0 0 0 634 (257) 0 377 B.2 Problem loans 0 0 0 0 0 0 0 0 0 0 0 0 B.3 Other deteriorated assets 0 0 0 0 0 0 0 0 0 0 0 0 B.4 Other exposure 0 X 0 0 136 X (1) 135 15,305 X (56) 15,249 TOTAL 0 0 0 0 136 0 (1) 135 15,939 (257) (56) 15,626 TOTAL 31.12.2005 582 0 0 582 2,126 0 (24) 2,102 363,409 (82,958) (2,901) 277,550
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Insurance company Non-financial companies Other entities
Exposure/Counterparty Specific Specific Portfolio Portfolio Portfolio Specific Gross value Net Gross value Net Gross value Net value value value exposure adjustment exposure exposure adjustment exposure exposure adjustment exposure adjustments adjustments adjustments s s s A. Cash exposure A.1 Non-performing loans 0 0 0 0 288,989 (185,087) 0 103,882 91,574 (62,247) 0 29,327 A.2 Problem loans 0 0 0 0 169,478 (66,594) (685) 102,199 26,108 (1,784) (847) 23,477 A.3 Restructured exposure 0 (394) 0 (394) 3,820 0 0 3,820 0 0 0 0 A.4 Expired exposures 0 00 0 43,121 0 (625) 42,496 39,823 0 (576) 39,247 A.5 Other exposure 161 0 (2) 159 1,760,926 X (20,329) 1,740,597 841,392 X (9,717) 831,675 TOTAL 161 (394) (2) (235) 2,266,334 (251,681) (21,639) 1,992,994 998,897 (64,031) (11,140) 923,726 B. “Off-balance sheet” exposure B.1 Non-performing loans 0 0 0 0 2,126 (862) 0 1,264 674 (273) 0 401 B.2 Problem loans 0 0 0 0 9,217 0 0 9,217 129 0 0 129 B.3 Other deteriorated assets 0 0 0 0 00 0 0 0 0 0 0 B.4 Other exposure 165 X (1) 164 258,678 X (1,029) 257,649 22,076 X (86) 21,990 TOTAL 165 0 (1) 164 270,021 (862) (1,029) 268,130 22,879 (273) (86) 22,520 TOTAL 31.12.2005 326 (394) (3) (71) 2,536,355 (252,543) (22,668) 2,261,124 1,021,776 (64,304) (11,226) 946,246
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B.2 Distribution of loans to resident non-financial companies
1. 1. Total 2. 31.12.2005 1. a) other services for sale 3. 486, 1. 25.4 103 7% 1. b) construction and public works 4. 276, 2. 14.5 775 0% 1. c) business services 5. 273, 3. 14.3 836 5% 1. d) textiles 6. 121, 4. 6.39 916 % 1. e) metal products excluding machines 7. 118, 5. 6.21 465 % 1. f) other groups 8. 631, 6. 33.0 466 8% 1. Total 9. 1,90 7. 100. 8,56 00% 1
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B.3 Distribution by sector of cash and off-balance sheet loans to customers OTHER EUROPEAN REST OF ITALY AMERICA ASIA COUNTRIES THE WORLD Exposure/Area Gross Net Gross Net Gross Net Gross Net Gross Net exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure
A. Cash exposure A.1 Non-performing loans 381,244 132,799 45,207 14,624 40,259 1,564 0 0 0 0 A.2 Problem loans 192,582 123,028 18,125 5,453 0 0 0 0 0 0 A.3 Restructured exposure 3,820 3,426 0 0 0 0 0 0 0 0 A.4 Expired exposures 82,942 81,742 26 25 1 1 0 0 0 0 A.5 Other exposure 2,763,684 2,731,786 87,436 86,429 87 80 0 0 0 0 TOTAL 3,424,272 3,072,781 150,794 106,531 40,347 1,645 0 0 0 0 B. “Off-balance sheet” exposure 3,433 2,042 0 0 0 0 0 0 0 0 B.1 Non-performing loans 9,346 9,346 0 0 0 0 0 0 0 0 B.2 Problem loans 0 0 0 0 0 0 0 0 0 0 B.3 Other deteriorated assets 295,206 294,041 1,982 1,974 0 0 0 0 0 0 B.4 Other exposure TOTAL 307,985 305,429 1,982 1,974 0 0 0 0 0 0 TOTAL 31.12.2005 3,732,257 3,378,210 152,776 108,505 40,347 1,645 0 0 0 0
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B.4 Territorial distribution of cash and off-balance sheet loans to banks OTHER EUROPEAN REST OF ITALY AMERICA ASIA COUNTRIES THE WORLD Exposure/Area Gross Net Gross Net Gross Net Gross Net Gross Net exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure A. Cash exposure A.1 Non-performing loans 0 0 0 0 0 0 0 0 0 0 A.2 Problem loans 0 0 0 0 0 0 0 0 0 0 A.3 Restructured exposure 0 0 0 0 0 0 0 0 0 0 A.4 Expired exposures 0 0 0 0 0 0 0 0 0 0 A.5 Other exposure 64,637 64,637 10,001 10,001 913 913 6,713 6,713 961 961 TOTAL 64,637 64,637 10,001 10,001 913 913 6,713 6,713 961 961 B. “Off-balance sheet” exposure 0 0 0 0 0 0 0 0 0 0 B.1 Non-performing loans 0 0 0 0 0 0 0 0 0 0 B.2 Problem loans 0 0 0 0 0 0 0 0 0 0 B.3 Other deteriorated assets 12,664 0 60 0 0 0 12 0 0 0 B.4 Other exposure TOTAL 12,664 0 60 0 0 0 12 0 0 0 TOTAL 31.12.2005 77,301 64,637 10,061 10,001 913 913 6,725 6,713 961 961
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B.5 Large risks (according to supervisory regulation Legislative Decree 87/92))
a) Amount 366,625 b) Number 7
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C. ASSET SECURITISATION AND DISPOSAL
C.1 Securitisation transactions
Qualitative information
In December 2002, the Bank finalised (with effective date 1 November 2002) a securitisation transaction involving 5,784 real estate performing mortgage loans and non-real estate liens granted by the Parent Bank to its customers for residual capital debt, at the moment of disposal, equal to € 445,084,608, of which € 326,795,438 to individuals, and € 118,829,170 to businesses. This transaction, assisted by the Advisor Credit Suisse First Boston, was inserted within a more complex programme of strategic activities carried out at the end of 2002 and in the first few months of 2003, aimed, among other things, at strengthening equity and improving the liquidity profiles of the Parent Bank and the Group. The disposal was carried out in compliance with Law 130 of 30 April 1999, to the special purpose vehicle Intra Mortgage Finance 1 S.r.l, 95% owned by the Dutch Foundation Stiching Lago Maggiore, and 5% owned by Consulting S.p.A. of Sondrio (in which the Bank holds a 15% investment). As a result of acquisition of the mortgages, in December 2002 the special purpose vehicle Intra Mortgage Finance 1 S.r.l. issued securities divided into four tranches, for a total amount of € 458 million.
nominal Issue Rate Expiry Rating Rating value Euro Price Moody's Standard & Poor’s and Fitch Ratings class A 413,500,000 100 Euribor 3 m + 0.45% 30-Oct-28 Aaa AAA class B 17,500,000 100 Euribor 3 m + 0.85% 30-Oct-28 A2 A+ class C 14,000,000 100 Euribor 3 m + 1.80% 30-Oct-28 Baa2 BBB class D 13,000,000 100 Euribor 3 m + 2.20% 30-Oct-28 - -
Senior and mezzanine securities are listed on the Luxembourg Stock Exchange. As at 31 December 2005, the Bank holds a junior tranche (class D) classified under the item “assets available for sale”. As a result of the regular finalisation of the operation and the protection inherent in the same (priority order of payments and the presence of cash collateral) no value adjustments were made to the securities in the portfolio. It is noted that during 2004, it was ascertained that 83 mortgages which had been transferred at a price of about € 5,759 thousand, the object of a complex legal dispute described in the 2004 financial statements, did not satisfy point (xii) of the criteria set forth in the Attachment to the Disposal Agreement and, as such, the termination clause of the agreement was activated. The Special Purpose Vehicle and the Bank then agreed that these 261 receivables should be considered as never transferred, and thus, the receivables were restated in the assets of the Bank through the reversal of all of the accounting effects fro the disposal date to the date of reinstatement. For this transaction, the Bank paid the Special Purpose Vehicle € 5,864.5 thousand. The transaction was publicised through an announcement in the Official Gazette. As at 31.12.05, the remaining debt of the securitised mortgages (including the expired and unpaid instalments) amounts to € 272,453,668.08 for 4,434 loans, broken down as follows: - 4,403 mortgages classified as performing for a total of € 270,045,926.19; - 31 defaulted mortgages, that is, insolvent due to a high number of unpaid instalments, equal to € 2,407,741.89. For these mortgages, a pre-dispute procedure has been initiated (analogous to the procedure for "objective NPLs" set forth in the supervisory regulations); - 71 mortgages classified as non-performing for € 7,400,850.24, in addition to € 253,621.86 for capitalised interest. This amount represents the cash exposure in relation to the persons failing to pay the amortisation instalments, for which actions for recovery, not necessary legal actions, have already been initiated. Such actions are aimed at recovery of the credit, which, if followed through the legal process, should be performed within a period of two to three years. Late and default interest to be collected amounts to € 795,061.34. At the time, the transfer of the entire packet of mortgages led to a deferred price of € 16,353 thousand as the value of the excess spread, net of relative transaction costs at each payment date, the risk of the transferred loans and the possible early redemptions of the mortgages by customers, which was back discounted using market rates existing as at 31 December 2002, based on the duration of the operation. Based on the contractual provisions, and the order of priorities defined for the transaction, the deferred price is to be paid pro-rata at each payment date. During the previous years, the deferred price was depreciated to € 5,400 thousand, based on the updated calculation parameters, above all following the volume of early redemptions, and the existence of several insolvencies. The deferred price is recorded among the assets as at 31.12.2005, for a total of € 9,940 thousand, which is considered adequate. This transaction is completed by a basis swap agreement between the special purpose vehicle and Credit Suisse First Boston International London in order to cover the interest rate risk deriving from the different indexing and frequency of interest on the securitised mortgages and the interest paid on bonds issued. This agreement specifies that the counterparties must regulate, on a quarterly basis, the differential in the rates as set forth above, calculated on the nominal amount of the remaining capital of the mortgages at the start of each period of reference, adjusted based on a performance ratio (determined based on the ratio between the interest instalments collected and the number of interest instalments to be collected during the quarterly period). A similar, offsetting agreement was subscribed between C.S.F.B. and Banca Popolare di Intra. 262
This hedging operation produced a negative effect of € 283 thousand on the income statement of the Bank, given by the algebraic sum of the differentials collected with the valuation of the swap itself. Servicing activities, consisting in the coordination and supervision of management, administration and collection of securitised mortgages, as well as administrative servicing were assigned to Banca Popolare di Intra. As the Servicer, Banca Popolare di Intra earned the amount of € 340 thousand in fees during 2005, relating to management of the credit portfolio, and in addition to € 17 thousand in income from the provision of administrative services. Considering that the main risks linked to the mortgage securitisation transaction are represented by debtor insolvency and change in the composition of the guarantees, the following is pointed out as regards internal systems for measuring and controlling such risks:
• Measurement and control of unpaid instalments
GENERAL MANAGEMENT
4th level CREDIT DEPARTMENT
3rd level SPECIAL CREDIT SERVICES
2nd level DOUBTFUL LOANS INDIVIDUAL DEPARTMENT MORTGAGE (corporate mortgages) 1st level BRANCH
The control organisation is substantially structured on four levels, each of which verifies and takes action on insolvent positions with an increasingly global view, passing from a detailed analysis of the insolvent debtor to an examination of the entire phenomenon. • 1st level (branch) → manages the relationship and has direct contact with the mortgage-holder, deals with instalment payments and keeps the entire debt position under control, collects information on individual positions and manages any recovery actions. Reports to a higher level depending on the type of customer (private or corporate). • 2nd level (Central Management) → controls and verifies the work of the branches, plays a role of catalyst in recovery actions, setting out the initiatives considered most suitable based on the characteristics of the 263
individual position, until the position defaults or becomes non- performing. This level includes: ¾ Doubtful Loans Department (of Ordinary Credit Services), which manages corporate mortgages ¾ Individual Mortgages Department (of Mortgages Department), which manages individual mortgages • 3rd level (Central Management) → Special Credit Services, as the manager of IT programmes which administer all mortgage transactions (Mortgage Procedures), is the main provider of data regarding the securitised mortgages, through its specific Securitisation Department. Due to its specific position, it provides all the information and tools required by other Departments involved in order to carry out their activities. Moreover, it also supervises the overall status of the securitised portfolio, providing statistical and up to the moment data (periodically or upon request) both to the 2nd and 4th level offices. • 4th level (Central Management and Top Management) → They decide on action strategies, both on individual transactions (when under their responsibility) and on the portfolio as a whole or in its homogeneous parts; verify respect of objectives and establish any corrective measures to be taken.
Risk measurement is carried out through reports provided by Special Credit Services - Securitisation Department, with differing deadlines and purposes: ¾ daily → print-outs of expiring instalments at the reference date (an any previously unpaid instalments), used by the branches for verifying payments, ¾ every ten days → print-outs summarising all unpaid instalments, used by the branches for intervention and solicitation of payment from debtors, ¾ monthly: → summary print-outs of unpaid instalments for 1st level use, → statistical processing of the status of mortgages with unpaid instalments, for 2nd and 4th level use → analytical processing by single mortgage of the amount unpaid, → processing by homogeneous mortgage category (corporate/individual) for 2nd level and Internal Audit Department use. ¾ quarterly: → statistical report on the status of the entire securitised portfolio, indicating the size of mortgages, broken down by status (performing, delinquent or default), and the performance of the entire portfolio, through suitable indices, and the volumes of mortgages in default, → analytical report on the status of individual mortgages, → statistical report on risk concentration based on the range of remaining debit and the status of the mortgage, for 4th level use, 264
→ statistical report on the amount of unpaid instalments based on the range of delays in payment, for 4th level use.
Risk management includes interventions differentiated based on the status of the mortgage, which involve various Departments, according to the following table
DEFAULT DEFAULT Mortgage (non- PERFORMING DELINQUENT (unpaid status performing instalments) ) Branches Branch and Branch and Legal and Doubtful Loans Doubtful Loans Litigation Departments Department or Department or Department involved Mortgages Mortgages Department Department Monitor regular Supervise the Establish Take legal payment of insolvency actions to be action and instalments situation and taken against conclude agree upon debtors and agreed or Actions taken stronger actions look after forced for recovery results recovery from the debtor
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Amendment of guarantees
The organisation that supervises, examines and, if necessary, authorises amendments to guarantees is set forth below:
LOANS DEPARTMENT
4th level
SPECIAL CREDIT SERVICES SECURITISATION rd 3 level DEPARTMENT
nd MORTGAGES 2 level DEPARTMENT TECHNICAL
1st level BRANCH
Within this organisation, the branch, upon request from the customer, initiates a procedure to submit the amendment to the mortgage guarantee to the superior levels, in quantitative terms. The proposal must be accompanied by a specific Mortgage Release Report, prepared by the Technical Department, indicating the values and amounts of both the property to be released, and that which will remain under guarantee. Special Credit Services: ¾ verifies respect of the requirements of Securitisation; ¾ subjects the results of its verification to the Loans Department for the related decisions; ¾ In case of positive results, prepares the draft notary act of mortgage lien and manages its finalisation.
Should the request for release involve any lien or guarantee which can accompany the mortgage guarantee, the chart above, though maintaining its validity, does not require the involvement of the 2nd level.
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Control of erosion of the securitised portfolio
In addition to the planned reduction in the securitised portfolio, as a result of gradual repayment as established in contracts, supervision is also carried out over the phenomenon of advance capital repayments, both partial and total. This control involves interaction between the 3rd and 4th levels. The trend in advance repayments is observed through the creation of two reports, on a weekly basis, for use by the 4th level: → cumulative overview and analysis of early redemptions; → cumulative overview and analysis of advance repayments.
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QUANTITATIVE INFORMATION
C.1.1 Exposure deriving from securitisation transactions divided by quality of underlying
Cash exposure Guarantees issued Credit lines
Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior Quality of underlying
asset/Exposure Net Net Net Net Net Net Net Net Net Gross Gross Gross Gross Gross Gross Gross Gross Gross exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure
A. With own underlying: a) Deteriorated b) Other 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 13,000 13.00 0 0 0 0 0 0 0 0 0 0 0 B. With third party 0 underlying: a) Deteriorated 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 b) Other 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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C.1.2 Exposure deriving from main “own” securitisation transactions, divided by type of asset securitised and by type of exposure Cash exposure Guarantees issued Credit lines Type of asset Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior securitised/Exposure
Net Net Net Net Net Net backs backs backs backs backs backs backs backs backs s/write- s/write- s/write- s/write- s/write- s/write- s/write- s/write- s/write- exposure exposure exposure exposure exposure exposure Book value Book value Book value Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment Adjustment
A. Entirely written off from the financial statements A.1 Intra Mortgage Finance 1 Srl − Mortgages 0 0 0 0 13,000 0 0 0 0 0 0 0 0 0 0 0 0 0
B. Subject to partial write-off from the financial 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 statements 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 C. Not written-off
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C.1.4 Exposure for securitisation divided by portfolio and type
Exposure/ Total Financial Financial Financial portfolio Financial 31.12.04 assets assets assets Total assets at Loans excludi held for available held to 31.12.05 fair value ng IAS trading for sale maturity 39 1. Cash exposure - Senior 0 0 0 0 0 0 0 - Mezzanine 0 0 0 0 0 0 0 - Junior 0 0 13,000 0 0 13,000 13,000 2. “Off-balance sheet” exposure - Senior 0 0 0 0 0 0 0 - Mezzanine 0 0 0 0 0 0 0 - Junior 0 0 0 0 0 0 0
C.1.5 Total amount of securitised assets underlying junior securities or other forms of credit support
Assets/Values Traditional Synthetic securitisation securitisation A. Own underlying assets: A.1 Entirely written off 1. Non-performing loans 0 X 2. Problem loans 0 X 3. Restructured exposure 0 X 4. Expired exposure 0 X 5. Other assets 12,339 X A.1 Partially written off 1. Non-performing loans 0 X 2. Problem loans 0 X 3. Restructured exposure 0 X 4. Expired exposure 0 0 5. Other assets 0 0 A.3 Not written off 1. Non-performing loans 0 0 2. Problem loans 0 0 3. Restructured exposure 0 0 4. Expired exposure 0 0 5. Other assets 0 0 B. Third party underlying: 0 0 B.1 Non-performing loans 0 0 B.2 Problem loans 0 0 B.3 Restructured exposure 0 0 B.4 Expired exposures 0 0 B.5 Other assets
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C.1.6 Interests in special purpose vehicles (regulations in force)
The Bank does not hold interests in special purpose vehicles.
C.1.7 Servicer activities – collection of securitised credits and reimbursement of securities issued by special purpose vehicle
Securitised assets Percentage share of securities reimbursed (end of period figure) Credits collected during the year (end of period figure)
Special purpose Senior Mezzanine Junior vehicle Deteriorated Deteriorated Performin Performi Deteriorated Perfor Deterior Perfor Deterior Perfor g ng assets ming ated ming ated ming assets assets assets assets assets
IMF1 0 280,434 0 61,949 0 39.6 0 0 0 0
C.2 TRANSFER TRANSACTIONS
C.2.1 TRANSFERRED FINANCIAL ASSETS NOT WRITTEN OFF
Financial Financial Financial Loans to Financial assets assets assets Due from assets at customer Total Type/portfolio held for trading available held to banks fair value s for sale maturity A B C A B C A B C A B C A B C A B C 31.12.05 31.12.04 excluding IAS 39 A. Cash assets 1. Debt securities 122,064 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 122,064 95,639 2. Equity securities 0 0 0 0 0 0 0 0 0 X X X X X X X X X 0 0 3. OICR 0 0 0 0 0 0 0 0 0 X X X X X X X X X 0 0 4. Loans 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5. Deteriorated 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 assets B. Derivative 0 0 0 XXXXX XXX XXX X X X X 0 0 instruments Total 31.12.2005 122,064 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 122,064 0 Totale 31.12.2004 95,639 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 95,639 Key: A: transferred financial assets recorded for entire amount (book value) B: transferred financial assets recorded for partial amount (book value) C: transferred financial assets recorded for partial amount (entire value)
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C.2.2 FINANCIAL LIABILITIES FROM TRANSFERRED FINANCIAL ASSETS NOT WRITTEN OFF
Financial Financial Financial Financial assets assets Due from Loans to assets held for assets at Total Liabilities available held to banks customers trading fair value Asset portfolio for sale maturity 1. Due to customers a) from assets recorded entirely 122,6580000 0 122,658 a) from assets recorded 00000 00 partially 2. Due to banks a) from assets recorded entirely 00000 0 0 a) from assets recorded partially 00000 0 0 Total 31.12.2005 122,6580000 0122,658 Total 31.12.2004 95,6900000 095,690
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D. CREDIT RISK MEASUREMENT MODELS
No internal portfolio models are used for measuring exposure to credit risk such to allow for reliable forecasting of loss.
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SECTION 2 MARKET RISK
2.1 INTEREST RATE RISK – REGULATORY TRADING PORTFOLIO
QUANTITATIVE INFORMATION
A. General aspects
The Bank primarily operates on its own behalf, through the following bodies: Finance Committee, Finance Department and Financial Services. The Trading Department, within the Finance Department, manages the ORGANISED EXCHANGE SYSTEM (SSO) on bonds issued by the Bank. The main sources of risk regarding interest rates comprise fix rate bonds (which are found in the portfolio for limited amounts) and structured variable rate bonds linked to differential movements between interest rate curves of varying duration. Operating policy is primarily focused on maintaining a low level of interest rate risk, with high concentrate of variable rate financial instruments and, for bond issues, IRS operations which transform income flows into variable rates. The general objective is to correlate the duration of the assets in portfolio with those of liabilities issued. Portfolio management is governed by specific operating mandates, which limit the share of the portfolio invested in financial instruments with more than three years' duration to 25%. Derivative instruments are used both in the Trading Book, through the purchase and sale of listed products, for hedging assets, on the OTC market. There were no specific changes in operating policy over the year, except for the purchase of securities indexed at curve differentials, for a countervalue of approximately € 90 million at end 2005. For financial instruments held or issued which are equipped with adequate pricing models, a sensitivity analysis is carried out (duration, basis point value, potential loss 95% - 1 day).
B. Interest rate risk management and measurement
The internal audit process is organised as follows: position keeping IT system, real time, pricing, valuation and calculation of risk coefficients. The operating limits approved on an annual basis by the Board of Directors are entered in the system, based on market countervalues by type of financial instrument, issuer ratings assigned by the leading international agencies, and term. For Trading in the strictest sense, stop loss limits are provided (maximum acceptable loss). The Middle Office manages the financial parameters of the position keeping system, and the first level of control over the assets in individual
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management portfolios, and respect of the limits contained in the operating mandates set by the Board of Directors. There are also maximum limits of concentration for individual securities, in relation to the outstanding total of the same. The use of new, synthetic risk parameters is currently in the test phase. This new system, prepared by the Risk Management Department, considers three parameters: a) liquidity of the security; b) volatility; c) difficulty in calculating pricing and determining relative risk indices. The Risk Management Department, an autonomous role in the General Manager’s Staff, is responsible for the second level of control over total portfolio management, analysis of valuation methods and correct entering of parameters in the front office system. The project of tactical and strategic ALM is currently in the start up phase. On a monthly basis, the Finance Committee defines the guidelines in relation to the market forecast and verifies existing positions. It periodically informs the Board of Directors regarding the evolution and positioning of portfolios.
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QUANTITATIVE INFORMATION 1. Regulatory trading portfolio: breakdown by remaining life (repricing date) of financial assets and liabilities for cash and financial derivatives Denominated in euro Type/Remaining duration On Up to 3 From over From over From Over 10 Unlimited life deman months 3 months 1 year to 5 over 5 years d to 6 years years to months 10 years 1. Cash assets 1.1 Debt securities 0 32,548 176,264 77,836 27,302 185 0 − with option of early redemption 0 0 0 0 0 0 0 − other 0 32,548 176,264 77,836 27,302 185 0 1.2 Other assets 0 0 0 0 0 0 0 2. Cash loans 2.1 Repurchase agreements 0 121,810 847 0 0 0 0 2.2 Other liabilities 0 0 0 0 0 0 0 3. Financial derivatives 3.1 With underlying security 0 (17,250) 0 0 0 0 0 - Options 0 (7) 0 0 0 0 0 + Long positions 0 0 0 0 0 0 0 + Short positions 0 7 0 0 0 0 0 - Other derivatives 0 (18,243) 0 0 0 0 0 + Long positions 0 2,500 0 0 0 0 0 + Short positions 0 19,743 0 0 0 0 0 3.2 Without underlying security 0 (63,956) 17,732 46,147 0 0 0 - Options 0 77 (154) 0 0 0 0 + Long positions 0 240 30 0 0 0 0 + Short positions 0 163 184 0 0 0 0 - Other derivatives 0 (64,033) 17,886 46,147 0 0 0 + Long positions 0 94,722 409,672 77,547 5,000 586,119 0 + Short positions 0 158,755 391,786 31,400 5,000 586,119 0
As regards the total portfolio of financial instruments, the Basis Point Value of Banca Popolare di Intra is equal to about - € 106,000: an increase of 1% (100bp) in market rates would thus result in a decrease of about € 10,600,000 in the market value.
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2.2 INTEREST RATE RISK – BANKING PORTFOLIO
QUANTITATIVE INFORMATION
A. General aspects, interest rate management and measurement The main sources of interest rate risk on banking portfolios are a) as regards assets, mortgages to customers above all, at fixed or mixed rates, which are present in the balance sheet only in limited amounts (about 68 million euro, with average duration of 1.7 years and shock rate of + 1%, which leads to a decrease in the current value of 1,300,000 euro); as regards liabilities, fixed rate bonds, generally issued for amount in line with the quantity and duration of fixed rate assets or hedged through swaps. Nonetheless, there are currently 377 million euro in fixed-rate convertible subordinated bonds issued a few years ago, which have not been swapped, with average maturity in December 2008, duration of 2.6 years, and a shock rate of +1%. This rate has a positive effect on the current value of the debt, equal to 10,000,000 euro. Operating policy is primarily aimed at maintaining a low interest rate risk profile, which, for non “demand” financial instruments, is expressed with the exact alignment of characteristics and duration of assets and liabilities in the financial statements. In short, no directional positions are taken on, but there is the constraint regarding substantial balance of positions in the opposite direction. There were no specific changes in operating policy over the year, also in light of the considerations set forth above: the Bank has maintained a highly prudent interest rate risk profile over time. The bodies entrusted with defining these guidelines are the Board of Directors and the Finance Committee, which, through the Planning and Control, Sales, Finance and Risk Management departments, manage and control activities linked to interest rate risk. The financial positions with the most direction relationship with the market – bond issues in particular – are monitored and appraised in real time. The Risk Management Department, an autonomous role in the General Manager’s Staff, is responsible for the second level of control over total portfolio management, analysis of valuation methods and correct entering of parameters in the front office system. B. Fair value hedging activities When issued, fixed rate bonds are normally hedged for interest rate risk through specific IRS OTC transactions. C. Financial derivatives for cash flow hedging At the moment, the Bank does not perform any cash flow hedging.
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QUANTITATIVE INFORMATION
1. Banking portfolio: breakdown by remaining life (repricing date) of financial assets and liabilities Denominated in euro Type/Remaining duration On Up to 3 From over 3 From over 1 From over Over 10 Unlimited life demand months months to 6 year to 5 5 years to years months years 10 years 1. Cash assets 1.1 Debt securities 0 13,000 0 0 111,995 0 0 1.2 Loans to banks 58,614 5,440 0 0 0 0 19,171 1.3 Customer loans - c/a 638,169 640,533 110,181 0 0 0 0 - other loans 0 1,254,705 150,228 53,622 9,393 0 324,126 - with option of early redemption 0 0 0 0 0 0 0 - other 0 1,254,705 150,228 53,622 9,393 0 324,126 2. Cash loans 2.1 Due to customers: - c/a 1,312,635 0 16 0 0 0 0 - other payables 61,373 39 0 0 0 0 0 - with option of early redemption 0 0 0 0 0 0 0 - other 61,373 39 0 0 0 0 0 2.2 Due to banks - c/a 16,056 0 0 0 0 0 0 - other payables 10,000 244,760 0 0 0 0 0 2.3 Debt securities - with option of early redemption 0 0 0 0 0 0 0 - other 0 697,348 718,113 426,325 178,752 0 1,300 2.4 Other liabilities - with option of early redemption 0 0 0 0 0 0 0 - other 0 0 0 0 0 0 0 3. Financial derivatives 3.1 With underlying security 0 0 0 0 0 0 0 - Options 0 0 0 0 0 0 0 + Long positions 0 0 0 0 0 0 0 + Short positions 0 0 0 0 0 0 0 - Other derivatives 0 0 0 0 0 0 0 + Long positions 0 0 0 0 0 0 0 + Short positions 0 0 0 0 0 0 0 3.2 Without underlying security 0 (6,432) (162,261) 210,222 (36,505) 0 0 - Options 0 0 0 0 0 0 0 + Long positions 0 0 0 0 0 0 0 + Short positions 0 0 0 0 0 0 0 - Other derivatives 0 (6,432) (162,261) 210,222 (36,505) 0 0 + Long positions 0 108,961 24,500 210,222 63,495 586,119 0 + Short positions 0 115,393 186,761 0 100,000 586,119 0
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2.3 PRICE RISK – REGULATORY TRADING PORTFOLIO
QUANTITATIVE INFORMATION
A. General aspects
As regards the regulatory trading portfolio, the Bank primarily operates on its own behalf through the following bodies: Finance Committee, Finance Department and Financial Services. Securities issued by the Bank - shares and convertible bonds – are listed on the Milan Stock Exchange, and therefore, the SSO (Organised Exchange System) is not carried out. The main sources of price risk derive from investments in OICR, in shares, and in derivative instruments on indices and equity. Operating policy is primarily aimed at maintaining a low price risk profile, therefore directed towards commitments in OICR, Portfolio asset allocation is regulated by specific operating mandates, which limit the share of the portfolio invested in capital instruments or representing such risk to 10%, and a further 10% for investments in alternative financial instruments. For financial instruments held, a volatility analysis is carried out (potential loss 95% - 1 day).
B. Price risk management and measurement
The internal audit process is organised as follows: position keeping IT system, real time, pricing, valuation and calculation of risk coefficients. The operating limits annually approved by the Board of Directors on the basis of quantitative information (market benchmarks) are entered into the system. The Middle Office manages the financial parameters of the position keeping system, and the first level of control over the assets in individual management portfolios, and respect of the limits contained in the operating mandates. The Risk Management Department, an autonomous role in the General Manager’s Staff, is responsible for the second level of control over total portfolio management, analysis of valuation methods and correct entering of parameters in the front office system. On a monthly basis, the Finance Committee defines the guidelines in relation to the market forecast and verifies existing positions. It periodically informs the Board of Directors regarding the evolution and positioning of portfolios.
QUANTITATIVE INFORMATION
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2. Regulatory trading portfolio: cash exposure for equity securities and OICR
Exposure type/Value Book value
Listed Unlisted A. Equity securities A.1 Shares 00 A.2 Innovative equity instruments 0 0 A.3 Other equity securities 0 0 B. OICR B.1 Italian - harmonised open-ended 20,026 0 - non-harmonised open-ended 30,751 0 - closed-ended 502 0 - reserved 0 0 - speculative 0 0 B.2. Other EU States - harmonised 32,123 0 - non-harmonised open-ended 4,623 0 - non-harmonised closed- 0 0 ended B.3 Non-EU States - open-ended 0 0 - closed-ended 0 0 Total 88,025 0
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2. Regulatory trading portfolio: breakdown of exposure in equity securities and share indices for principal countries of listing
Transaction type/ Listed Unlisted Share index Italy Germany U.S.A. A. Equity securities − long positions 0 00 0 − short positions 000 0 B. Trading of equity securities to be settled − long positions 2,194 00 0 − short positions 398 00 0 C. Other derivatives on equity securities − long positions 000 0 − short positions 000 0 D. Derivatives on share indices − long positions 002,813 0 − short positions 1,074 2,991 0 0
There are no exposures towards other countries.
3. Regulatory trading portfolio: internal models and other methods for sensitivity analysis
Given the slight significance of the amounts concerned, at the moment there are no internal models for sensitivity analysis.
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2.4 PRICE RISK - BANKING PORTFOLIO
QUANTITATIVE INFORMATION
A. General aspects, price risk management and measurement B. Price risk hedging activities
There are no significant positions from the point of view of price risk. Issues of structured bonds on shares, indices or baskets are always, and completely hedged through OTC swaps.
QUANTITATIVE INFORMATION
3. Banking portfolio: cash exposure for equity securities and OICR Exposure type/Value Book value
Listed Unlisted
A. Equity securities A.1 Shares 0 12,033 A.2 Innovative equity instruments 0 0 A.3 Other equity securities 0 0 B. OICR B.1 Italian − harmonised open-ended 0 0 − non-harmonised open-ended 0 0 − closed-ended 0 0 − reserved 0 0 − speculative 0 0 B.2. Other EU States − harmonised 0 0 − non-harmonised open-ended 0 0 − non-harmonised closed-ended 0 0 B.3 Non-EU States − open-ended 0 0 − closed-ended 0 0 Total 0 12,033
2. Banking portfolio: internal models and other methods for sensitivity analysis
Given the slight significance of the amounts concerned, at the moment there are no internal models for sensitivity analysis.
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2.5 EXCHANGE RATE RISK
QUANTITATIVE INFORMATION Exchange rate exposure is very low and limited to temporary deviations of positions in the opposite direction.
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Qualitative information
4. Breakdown of assets and liabilities and derivatives by currency
Currency
Items Other US Canadian Swiss English curren dollars Yen dollars francs pound cies A. Financial assets 33,396 4,780 16,777 25 37,581 2,586 A.1 Debt securities 53 0 0 0 0 0 A.2 Equity securities 0 0 0 0 1,024 0 A.3 Loans to banks 5,074 4,428 6,175 25 4,461 1,617 A.4 Customer loans 28,269 352 10,062 0 32,096 969 A.5 Other financial assets 000 0 0 0 B. Other assets 372 93 23 18 690 45 C. Financial liabilities 42,427 4,258 14,474 16 30,443 1,080 C.1 Due to banks 28,318 10 14,414 0 28,926 1,075 C.2 Due to customers 10,409 4,248 60 16 1,517 5 C.3 Debt securities 3,700 0 0 0 0 0 D. Other liabilities 000 0 0 0 E. Financial derivatives - Options + Long positions 239 24 7 0 0 9 + Short positions 247 24 186 0 0 117 - Other derivatives + Long positions 37,918 19,487 11,974 1,168 64 875 + Short positions 35,625 19,488 11,972 1,168 6,501 1,076 Total assets 33,768 4,873 16,800 43 38,271 2,631 Total liabilities 42,427 4,258 14,474 16 30,443 1,080 Imbalance (+/-) (8,659) 615 2,326 27 7,828 1,551
2. internal models and other methods for sensitivity analysis
Given the slight significance of the amounts concerned, at the moment there are no internal models for sensitivity analysis.
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2.6 FINANCIAL DERIVATIVES
A. FINANCIAL DERIVATIVES A.1 Regulatory trading portfolio: par values end of period Debt securities and Equity securities and Exchange rates and Other values Total 31.12.2005 Total 31.12.2004 Transaction type/Underlying interest rates share indices gold Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted 1. Forward rate agreement 0 0000 000 00 2. Interest rate swaps 0 69,184 0 0 0 0 0 0 0 69,184 0 58,384 3. Domestic currency swaps 0 0 0 0 0 0 0 0 0 0 0 0 4. Currency interest rate swaps 0 0 0 0 0 0 0 0 0 0 0 0 5. Basis swaps 0 788,394 0 0 0 0 0 0 0 788,394 0 453,378 6. Equity index swaps 0 0 0 0 0 0 0 0 0 0 0 0 7. Equity index swaps 0 0 0 0 0 0 0 0 0 0 0 0 8. Futures 22,243 0 6,877 0 0 0 0 0 29,120 0 68,561 0 9. Cap options − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 10. Floor options − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 11. Other options − Purchased 0 0 0 0 0 0 0 0 000 − Plain vanilla 0 0 0 0 0 2,967 0 0 0 2,967 0 3,573 − Exotic 0 0 0 0 0 9,327 0 0 0 9,327 0 4,999 - Issued 0 0 0 0 0 0 0 0 0 000 - Plain vanilla 0 20,000 0 0 0 2,967 0 0 0 22,967 0 6,751 - Exotic 0 0 0 0 0 21,892 0 0 0 21,892 0 10,859 12. Futures contracts - Purchases 0 0 0 0 0 87,444 0 0 0 87,444 0 53,964 - Sales 0 0 0 0 0 94,223 0 0 0 94,223 0 50,808 - Cross trades 0 0 0 0 0 20,857 0 0 0 20,857 0 34,486 13. Other derivative contracts 0 0 0 3,549 0 0 0 0 0 0022,077 Total 22,243 877,578 6,877 3,549 0 239,677 0 0 29,120 1,117,255 68,561 699,279
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A.2 Banking portfolio: par values end of period A.2.1 Hedging Debt securities and Equity securities and Exchange rates and Other values Total 31.12.2005 Total 31.12.2004 Transaction interest rates share indices gold type/Underlying Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted 1. Forward rate agreement 0 0 0 0 0 0 0 0 0 000 2. Interest rate swaps 0 439,942 0 0 0 0 0 0 0 439.942 0 402.806 3. Domestic currency swaps 0 0 0 0 0 0 0 0 0 0 0 0 4. Currency interest rate 0 0 0 0 0 0 0 0 0 0 0 0 swaps 5. Basis swaps 0 0 0 0 0 0 0 0 0 0 0 0 6. Equity index swaps 0 0 0 0 0 0 0 0 0 0 0 0 7. Real index swaps 0 0 0 0 0 0 0 0 0 0 0 0 8. Futures 0 0 0 0 0 0 0 0 0 0 0 0 9. Cap options 0 0 0 0 0 0 0 0 0 0 0 0 − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 10. Floor options 0 0 0 0 0 0 0 0 0 0 0 0 − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 11. Other options 0 0 0 0 0 0 0 0 0 0 0 0 - Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Plain vanilla 0 0 0 0 0 0 0 0 0 0 0 0 − Exotic 0 0 0 0 0 0 0 0 0 0 0 0 - Issued 0 0 0 0 0 0 0 0 0 0 0 0 - Plain vanilla 0 0 0 0 0 0 0 0 0 0 0 0 - Exotic 0 0 0 0 0 0 0 0 0 0 0 0 12. Futures contracts 0 0 0 0 0 0 0 0 0 0 0 0 - Purchases 0 0 0 0 0 4,111 0 0 0 4,111 0 3,561 - Sales 0 0 0 0 0 0 0 0 0 0 0 0 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 13. Other derivative 0 0 0 0 0 0 0 0 0 0 0 0 contracts Total 0 439,942 0 0 0 4,111 0 0 0 444,053 0 406,367
A.2.2 Other derivatives
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There are no "other derivatives" in the Banking Portfolio.
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A.3 Financial derivatives: purchase and sale of underlyings Debt securities and Equity securities and Exchange rates and Total 31.12.2004 Other values Total 31.12.2005 Transaction type/Underlying interest rates share indices gold Excluding IAS 39 Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted A. Regulatory trading portfolio: 1. Transactions with exchange of capital - Purchases 000 0 0 0 0 0 0 0 0 712 - Sales 0 20,000 0 0 0 0 0 0 0 20,000 0 1,670 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 2. Transactions without exchange of capital - Purchases 2,500 305,698 2,813 0 0 0 0 0 5,313 305,698 1,500 20,822 - Sales 19,743 27,962 4,065 0 0 0 0 0 23,808 27,962 67,061 22,562 - Cross trades 0 0 0 0 0 37,153 0 0 0 37,153 0 25,224 B. Banking portfolio: B.1 Hedging 1. Transactions with exchange of capital - Purchases 0 0 0 0 0 4,111 0 0 0 4,111 0 3,561 - Sales 0 0 0 0 0 0 0 0 0 0 0 0 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 2. Transactions without exchange of capital - Purchases 0 100,000 0 0 0 0 0 0 0 100,000 0 100,000 - Sales 0 339,942 0 0 0 0 0 0 0 339,942 0 302,806 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 B2. Other derivatives 1. Transactions with exchange of capital - Purchases 0 0 0 0 0 88,267 0 0 0 88,267 0 53,964 - Sales 0 0 0 0 0 95,045 0 0 0 95,045 0 50,808 - Cross trades 0 0 0 0 0 20,857 0 0 0 20,857 0 34,486 2. Transactions without exchange of capital - Purchases 0 0 0 0 0 0 0 0 0 0 0 0 - Sales 0 0 0 0 0 0 0 0 0 0 0 0 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0
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A.4 Over the counter financial derivatives: positive fair value - counterparty risk Debt securities and Equity securities and share Exchange rates and gold Other values interest rates indices
Gross Gross Gross Gross counterparty/underlying Gross Future Gross Gross Future Gross uncom uncom Future uncom uncom Future compe exposu compe compe exposu compens pensat pensat exposure pensat pensat exposure nsated re nsated nsated re ated ed ed ed ed
A. Regulatory trading portfolio A.1 Governments and Central Banks 000 0 0 0 0 0 0 0 0 0 A.2 public entities 000 0 0 0 0 0 0 0 0 0 A.3 banks 0 7,427 1,498 0 0 0 0 69 921 0 0 0 A.4 financial companies 0 0 0 0 0 0 0 0 195 0 0 0 A.5 insurance companies 0 0 0 0 0 0 0 0 00 0 0 A.6 non-financial companies 0 101 30 0 0 0 0 239 240 0 0 0 A.7 other entities 0 0000 0 0 7590 0 0 Total 31.12.2005 0 7,528 1,528 0 0 0 0 315 1,415 0 0 0 Total 31.12.2004 0 0 0 0 0 0 0 0 0 0 0 0 B. Banking portfolio B.1 Governments and Central Banks 0 0 0 0 0 0 0 0 0 0 0 0 B.2 public entities 0 0 0 0 0 0 0 0 0 0 0 0 B.3 banks 0 12,711 1,600 0 0 0 0 181 41 0 0 0 B.4 financial companies 0 0 0 0 0 0 0 0 0 0 0 0 B.5 insurance companies 0 0 0 0 0 0 0 0 0 0 0 0 B.6 non-financial companies 0 0000 0 0 000 0 0 B.7 other entities 0 0000 0 0 000 0 0 Total 31.12.2005 X 12,711 1,600 X 0 0 X 181 41 X 0 0 Total 31.12.2004 X 0 0 X 0 0 X 0 82 X 0 0
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A5 Over the counter financial derivatives: negative fair value – financial risk
Counterparty/underlying Debt securities Equity securities Exchange rates and gold Other values Other and Interest rates and share indices underlyings Gross Gross Future Gross Gross Future Gross Gross Future Gross Gross Future Compe Future uncom compe exposu uncompe compens exposure uncompe compens exposu uncom compe exposu nsated exposu pensat nsated re nsated ated nsated ated re pensat nsated re re ed ed
A. Regulatory trading portfolio
A.1 Governments and Central 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Banks A.2 public entities A.3 banks 0 9,988 6,562 0 0 0 0 586 716 0 0 0 0 0 A.4 financial companies 0 0 0 0 0 0 0 0 148 0 0 0 0 0 A.5 insurance companies 0 0 0 0 0 0 0 0 0 0 0 0 0 A.6 non-financial companies 0 7220 0 0 0 24 531 0 0 0 0 0 A.7 other entities 0 00 0 0 0 0 0920 0 0 0 0 Total 31.12.2005 0 9,995 6,584 0 0 0 0 610 1,487 0 0 0 0 0 Total 31.12.2004 0 0 507 0 0 0 0 0 3,494 0 0 0 0 0 B. Banking portfolio B.1 Governments and Central 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Banks B.2 public entities B.3 banks 0 12,723 2,063 0 0 0 0 0 0 0 0 0 0 0 B.4 financial companies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 B.5 insurance companies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 B.6 non-financial companies 0 00 0 0 0 0 0 0 0 0 0 0 0 B.7 other entities 0 00 0 0 0 0 0 0 0 0 0 0 0 Total 31.12.2005 0 12,723 2,063 0 0 0 0 0 0 0 0 0 0 0 Total 31.12.2004 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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A.6 Residual life of over the counter financial derivatives: par values
Underlying/Residual life Up to From Over 5 Total one year over 1 years year to 5 years A. Regulatory trading portfolio 72,942 453,958 389,476 916,376 A.1 Financial derivatives on debt securities and interest rates 34,144 453,958 389,476 877,578 A.2 Financial derivatives on equity securities and share 0 0 0 0 indices 38,798 0 0 38,798 A.3 Financial derivatives on exchanges rates and gold 0 0 0 0 A.4 Financial derivatives on other values 38,274 242,284 163,495 444,053 B. Banking portfolio: 34,163 242,284 163,495 439,942 B.1 Financial derivatives on debt securities and interest rates 0 0 0 0 B.2 Financial derivatives on equity securities and share 4,111 0 0 4,111 indices 0 0 0 0 B.3 Financial derivatives on exchanges rates and gold B.4 Financial derivatives on other values Total 31.12.2005 111,216 696,242 552,971 1,360,429
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2.6 FINANCIAL DERIVATIVES
B. CREDIT DERIVATIVES
The Bank does not operate in credit derivatives.
3. LIQUIDITY RISK
QUALITATIVE INFORMATION
Management of the Bank’s liquidity is the responsibility of the Finance Committee, which, through the Finance Department and Financial Services, processes the data regarding market positioning and related requirements. In relation to the analyses carried out by the Finance Committee, following the integration of the data from the Banking Book (c/a, savings deposits and mortgages), the Institution’s orientations are defined. The information regarding flows of bonds issued, broken down by maturity date, is processed by the front office system of the Middle Office, in the Finance Department; short term liquidity is controlled by the Monetary Market Department – Treasury Sector. Currently, a new treasury management procedure connected to the financial system is in the start up phase. This procedure allows for analysing the Bank’s various financial flows in real time, and will lead to complete monitoring of financial flows and existing time gaps, in order to both improve operations and reduce the gaps and thus decrease interest rate risk.
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QUANTITATIVE INFORMATION 5. Breakdown of remaining contract duration of financial assets and liabilities – Denominated in: euro Over 3 From over 1 Up to 3 Items/Time frames On demand months to 12 year to 5 Over 5 years Unlimited life months months years Cash assets 824,474 535,555 351,019 781,009 1,018,974 280,306 A.1 Government bonds 0 152 37,723 67,591 111,995 0 A.2 Listed debt securities 0 0 18 16,191 93,159 0 A.3 Other debt securities 152 296 1,652 52,927 57,275 0 A.4 Stakes in OICR 0 0 0 0 0 88,025 A.5 Loans 824,322 535,107 311,626 644,300 756,545 192,281 - Banks 58,614 5,440 0 0 0 19,171 - Customers 765,708 529,667 311,626 644,300 756,545 173,110 Cash loans 1,401,363 471,683 426,772 1,190,774 298,781 0 B.1 Deposits 1,400,063 361,005 1,798 3,669 1,001 0 - Banks 26,056 239,195 934 3,630 1,001 0 - Customers 1,374,007 121,810 864 39 0 0 B.2 Outstanding debt securities 1,300 110,678 424,974 1,187,105 297,780 0 B.3 Other liabilities 0 0 0 0 0 0 “Off-balance sheet” operations 2 (7,341) 6,105 998 236 0 C.1 Financial derivatives with exchange of capital 0 0 0 0 0 0 - Long positions 0 112,406 37,215 5,856 0 0 - Short positions 0 112,406 37,215 5,856 0 0 C.2 Deposits and loans receivable 0 0 0 0 0 0 - Long positions 0 1,090 0 0 0 0 - Short positions 0 1,090 0 0 0 0 C.3 Irrevocable commitments to grant 2 (7,341) 6,105 998 236 0 finance 2 536 6,105 998 236 295 - Long positions 0 7,877 0 0 0 295 - Short positions
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2. Distribution by sector of financial liabilities
Governments Other public Financial Insurance Non-financial Exposure/Counterparty and Central Other entities entities companies company companies Banks 1. Due to customers 0 3,873 70,876 22,535 379,050 1,020,386 2. Outstanding securities 0096,836 0 0 1,484,549 3. Financial liabilities for trading 0011,282 0 537 177 4. Financial liabilities at fair value 000 0 0 436,653 TOTAL 31.12.2005 0 3,873 178,994 22,535 379,587 2,941,765
3. Geographical distribution of financial liabilities
OTHER REST OF THE Exposure/Counterparty ITALY EUROPEAN AMERICA ASIA WORLD COUNTRIES 1. Due to customers 1,485,748 8,423 1,691 630 228 2. Due to banks 214,890 45,921 10,006 0 0 3. Outstanding securities 1,484,549 96,836 0 0 0 4. Financial liabilities for trading 816 10,399 781 0 0 5. Financial liabilities at fair value 436,653 0 0 0 0 TOTAL 31.12.2005 3,622,656 161,579 12,478 630 228
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SECTION 4. OPERATIONAL RISK QUANTITATIVE INFORMATION
A. General aspects, operational risk management and measurement
Definition The term operational risk expresses the risk of losses resulting from errors or inadequacies of internal processes, of human resources and of the organisational systems or resulting from external events. The Risk Management service is currently developing the project for control and management of operational risk, according to the guidelines below, taken from the departmental regulations: monitoring, management of exceptions, reporting.
• Monitoring Ensures the monthly measurement of exposure to the main operational risks. In particular, analyses company risk profiles relating to different types of operating risk. Carries out simulations of qualitative-quantitative stress on a monthly basis, aimed at verifying likely effects of events.
• Management of exceptions Upon the discovery of exceptions and/or anomalies, notifications are made to the competent offices and bodies of the Bank, as established in the reference manual.
• Reporting The Risk Manager produces summary reports for General Management and the administrative and control bodies of the Bank. These reports document the activities carried out in order to verify the correctness of the studies and entries performed.
The legal actions involving the Bank are monitored on a quarterly basis, providing updates as regards potential liabilities and, consequently, allocations to provisions.
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QUANTITATIVE INFORMATION
The type of legal actions as at 31/12/2005 can be broken down as follows:
amount expected existing cases as at Type of action requested payout 31/12/2005 anatocism 471.00 151.50 7 generic 24,443.00 0.00 8 against recording as NPLs 755.00 0.00 2 claims for damages 165,922.00 0.00 10 securities trading 1,377.00 143.00 9 bankruptcy action for 16 avoidance 27,624.00 842.00 Total 220,592.00 1,136.50 52
As for their duration, it is not possible to forecast from the beginning, as it is not possible to know how the actions will evolve regarding the various stages of the legal proceedings which will be necessary to face. Currently, only 6 of the 52 ongoing legal actions are at the “appeal” stage.
The following table sets forth the time frames for expected payouts:
expected payout time frame expected payout (in months)
23.00 3 30.00 6 428.00 84 100.00 20 15.00 21 11.00 26 400.00 27 28.00 30 101.50 36 1,136.50
Also as at 31.12.2005, there are risks regarding 7 possible legal actions, summarised below:
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amount expected existing cases as at Type of action requested payout 31/12/2005 bankruptcy action for avoidance 733.00 212.00 6 fines 400.00 0.00 1
Total 1,133.00 212.00
The expected payout time frame, if exceeding one year, has been discounted using the Euribor 6 month rate recorded at the balance sheet date.
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Part F – INFORMATION ON EQUITY
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Section 1 – Shareholders’ equity
A. Qualitative information
The Bank has always paid maximum attention to the means of equity in relation to the expected development and evolution of risk. Over the years, and in the recent past, the Bank has used capital increases and the issue of convertible and/or subordinated bonds in order to support this fundamental requirement. The relatively low level of individual equity at the moment is the obvious consequence of the loss recorded during the year. The moment the amount of such loss was revealed, countermeasures were taken to dampen its effects, such as the transfer of non-strategic shareholdings, the sale of several properties held for investment, and an initial transfer of non-performing loans. In February 2006, a subordinated loan was issued for 40 million euro, placed with institutional investors. The accounting of this loan under supplementary regulatory capital was authorised by the Bank of Italy with letter dated 15 March 2006. As well, the free share capital increase which will be proposed to the Extraordinary Shareholders’ Meeting is aimed at increasing the basic regulatory capital with respect to supplementary equity.
B. Qualitative information
See table 14 of part B Liabilities in these Explanatory Notes.
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Section 2 – Equity and banking regulatory ratios
2.1 Regulatory capital
The regulatory capital is the basic parameter upon which prudential supervision is founded. It is the point of reference for the prudential credit risk ratios, the requirements for market risk, the rules regarding “transformation of maturities” and the concentration of risk (the "large risks" regulations).
Individual regulatory capital as at 31.12.2005 is calculated according to the current regulations in force, based on data conforming to Legislative Decree 87/92.
A. Qualitative information
1. Tier 1 capital
The positive elements of tier 1 capital comprise capital, share premiums and reserves. Instead, negative elements comprise the loss for the year and intangible fixed assets. It is noted that the Bank did not issue any innovative equity instruments.
2. Supplementary equity
The positive elements of supplementary equity comprise the revaluation reserves and the calculatable share of the subordinated loans.
3. Tier 3 equity
There are no items to be calculated in Tier 3 equity.
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B. Qualitative information
Total Total 31.12.2005 31.12.2004 excluding IAS 39 A. Tier 1 capital before application of prudential filters 258,508 386,190 Prudential filters on Tier 1 capital: - positive IAS/IFRS prudential filters - Negative IAS/IFRS prudential filters A. Tier 1 capital after application of prudential filters 258,508 386,190 C. Supplementary equity before application of prudential filters 87,861 90,155 Prudential filters on supplementary equity: - positive IAS/IFRS prudential filters - Negative IAS/IFRS prudential filters D. Supplementary equity after application of prudential filters 87,861 90,155 E. Total Tier 1 capital and supplementary equity after application of prudential filters 346,369 476,345 Elements to be deducted from total Tier 1 capital and supplementary equity F. Regulatory capital 346,369 476,345
2.2 Capital adequacy
A. Qualitative information
The table below sets out the Bank’s position in terms of compliance with the capital adequacy regulations. Banks are required to have a regulatory capital/risk-weighted asset ratio equal to at least seven percent.
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B. Qualitative information Categories/Values Unweighted amounts Weighted amounts/requisites 31.12.2005 31.12.2004 31.12.2005 31.12.2004 A. RISK ASSETS A.1 CREDIT RISK 4,094,946 4,323,960 3,515,794 3,626,046 STANDARD METHOD CASH ASSETS 3,827,162 4,079,113 3,293,164 3,413,085 1. Exposures (different to equity securities and other 3,287,197 3,531,190 2,967,380 3,062,550 subordinated assets) towards (or guaranteed by): 1.1 Governments and Central Banks 290,743 318,382 0 0 1.2 Public entities 2,343 5,319 469 1,064 1.3 Banks 34,000 182,504 6,800 36,501 1.4 Other entities (different to mortgage loans on 2,960,111 3,024,985 2,960,111 3,024,985 residential and non-residential property) 2. Mortgage loans on residential property 316,264 333,369 158,132 166,684 3. Mortgage loans on non-residential property 0 0 0 0 4. Shares, shareholdings and subordinated assets 95,170 98,325 96,296 99,638 5. Other cash assets 128,531 116,229 71,356 84,213 OFF-BALANCE SHEET ASSETS 267,784 244,847 222,630 212,961 1. Guarantees and commitments towards (or guaranteed by): 256,942 234,556 220,417 210,517 1.1 Governments and Central Banks 0 0 0 0 1.2 Public entities 101 168 20 34 1.3 Banks 917 1,722 183 344 1.4 Other entities 255,924 232,666 220,214 210,139 2. Derivatives contracts towards (or guaranteed by): 10,842 10,291 2,213 2,444 2.1 Governments and Central Banks 0 0 0 0 2.2 Public entities 0 0 0 0 2.3 Banks 10,842 10,291 2,213 2,444 2.4 Other entities 0 0 0 0 B. MINIMUM REQUIREMENTS FOR REGULATORY PURPOSES 237,003 246,779 B.1 CREDIT RISK X X 16,583 17,245 B.2 MARKET RISK 1. STANDARD METHOD of which: X X 7,969 9,995 + position risk on debt securities X X 8,242 6,762 + position risk on equity securities X X 0 0 + exchange rate risk X X 372 488 + other risks 2. INTERNAL MODELS of which: X X + position risk on debt securities X X + position risk on equity securities X X + exchange rate risk X X 13,000 13,000 B.3 OTHER MINIMUM REQUIREMENTS X X 266,586 277,024 B.4 TOTAL REGULATORY REQUIREMENTS (B1+B2+B3) X X C. RISK ASSETS AND ADEQUACY RATIOS X X 3,808,371 3,957,486 C.1 Risk-weighted assets C.2 Tier 1 capital/Risk-weighted assets (Tier 1 capital ratio) X X 6.79% 9.76% C.3 Regulatory capital/Risk-weighted assets (Total capital ratio) X X 9.09% 12.04%
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Part G – BUSINESS COMBINATION TRANSACTIONS REGARDING BUSINESS OR COMPANY BRANCHES
During the year, no operations of this type were carried out.
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Part H – TRANSACTIONS WITH RELATED PARTIES
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1. Information on directors and managers’ fees
Fees paid to Bank Officers include the following fees resolved by the Shareholders’ Meeting and/or the Board of Directors (as regards the Secretary of the Board): a) Directors • Attendance fees and Secretary’s fees € 171 thousand b) Statutory auditors • Fees € 131 thousand • Attendance fees € 101 thousand
It is pointed out that the Income Statement 2005 also contains charges of: - € 86 thousand for VAT and social security contributions for 2004 profit distribution - approximately € 23 thousand for travel expense reimbursement for Directors and Auditors.
The following table, prepared in compliance with CONSOB Deliberation no. 11971/99, art. 78, breaks down the fees paid to Directors, Statutory Auditors and the General Manager in 2005.
FEES PAID TO DIRECTORS, STATUTORY AUDITORS AND GENERAL MANAGER (art. 78 CONSOB Deliberation no. 11971 of 14 May 1999 – Annex 3C, table 1)
PERSON ROLE FEES Surname and name Role Term Fees Non- Bonuses Other covered of office for office monetary and compensa benefits other tion incentives
Saini Sandro Chairman of the Board 243 days 6 Ponti Cesare Director 243 days 10 2 Chairman of the Board 122 days Brogonzoli Luciano Vice Chairman of the Board 243 days 9 1 Director 22 days Moroni Vitaliano Vice Chairman of the Board 243 days 7 Director 22 days Paolillo Ernesto Vice Chairman of the Board 80 days 3 Albonico Mauro Director 365 days 15 5 Alessi Anghini Michele Director 365 days 7 Balzarini Paola Director - Secretary of the Board 365 days 45 Bonomi Luigi Director 365 days 8 Bruni Raffaele Director 59 days 2 Compostella Angelo Director 365 days 9 3 Alessandro De Vecchi Lino Director 365 days 11 Fortis Marco Director 10 days 1 Pellicelli Giorgio Director 365 days 11 Viganò Claudio Carlo Director 365 days 6 5
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Vivarelli Lanfranco Director 340 days 7 3 Scruzzi Roberto Chairman of the Board of Statutory 365 days 80 69 Auditors Bussi Roberto Statutory Auditor 365 days 57 18 Battaini Ferruccio Statutory Auditor 365 days 56 41 Ferrari Claudio General Manager 365 days 490 10 1
The fees paid to directors comprise the attendance fees paid during 2005, regarding the 2005 meetings. “Other compensation” included fees and expense reimbursement for offices in subsidiaries, as well as expense reimbursement for the Parent Bank.
2. Information on transactions with related parties
As set forth in IAS 24, the Directors, Auditors, General Manager and Deputy General Manager with substitute functions, their immediate families or subjects upon which they exert control or significant influence, companies of the group and the pension fund for Banca Popolare di Intra employees are considered to be related parties. Relations with subsidiaries and the pension fund for the personnel of Banca Popolare di Intra in 2005 are described in the relevant paragraph in the Report on Operations.
Relations held with the Directors, Auditors, General Manager and Deputy General Manager with substitute functions, their immediate families or subjects upon which they exert control or significant influence are summarised in the following tables:
Loans and guarantees issued Agreed Used a) Directors directly: - cash loans 682 36 - credit commitments 0 0 Indirectly: - cash loans 27,010 7,475 - credit commitments 1,164 1,164 b) Statutory auditors directly: - cash loans 566 218 - credit commitments 0 0 Indirectly: - cash loans 2,462 1,083 - credit commitments b) General Management directly: - cash loans 42 34 - credit commitments 0 0 Indirectly: - cash loans 0 0 - credit commitments 0 0
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All credit lines were resolved in compliance with art. 136 of Legislative Decree no. 385 of 1 September 1993 and at market conditions.
1. Professional roles entrusted to Directors and 1. Amount Auditors 1. a) Directors 2. 1. - directly 3. 0 1. - indirectly 4. 4 1. b) Statutory Auditors 5. 1. - directly 6. 0 1. - indirectly 7. 0
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Documents annexed to the Explanatory Notes Annex 1
ANALYTICAL BREAKDOWN OF BONDS CONVERTIBLE INTO SHARES (amounts in thousands of euro) Situation at 31.12.2005 Variations during the year
profit/loss closing nominal and/or nominal value price book value value book value minus/plus
FILMECO 8% 23/10/2001-2006 233 100,00 233 0 KPNQ 7.125% 70 - - 5 - -
BANCA IFIS 4.375% 2009 122 103,95 127 (2,228) (2,484) 170
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Documents annexed to the Explanatory Notes Annex 2
LIST OF REAL ESTATE AND REVALUATIONS (amounts in thousands of euro)
Investment Revaluations Revaluations Book Accumulated Net Law no. 576 Law no. 266 value Depreciation value of 2/12/75 of 23.12.05 (gross) Law no. 72 of 19/03/83 Law no. 413 of 30.12.91
REAL ESTATE WHOLLY OR IN PART DESTINED FOR CAPITAL USE
Intra - Piazza Aldo Moro 1,2,3 1,426 357 664 2,446 815 1,631 Intra - Piazza Aldo Moro 1,2,3-Land 305 305 305 Intra - Piazza Aldo Moro, 8 2,179 2,642 1,952 6,773 3,231 3,542 Intra - Piazza Aldo Moro, 8-Land 673 673 673 Intra - Piazza Aldo Moro, 8-Car Park 287 287 287 Intra - Corso Cobianchi, 32 1,957 2,678 1,780 6,415 3,523 2,892 Intra - Corso Cobianchi, 32-Land 787 787 787 Intra - Corso Cobianchi, 36 1,552 217 1,769 310 1,459 Intra - Via XXV Aprile 331 239 570 151 419 Intra - Via XXV Aprile-Land 110 110 110 Intra - Corso Garibaldi corner of Piazza Don Minzoni 332 383 163 878 470 408 Intra - Piazza Martiri di Trarego 282 40 222 544 173 371 Pallanza - Piazza Pedroni 722 -7 715 61 654 Trobaso - Via De Notaris, 42 744 319 1,063 377 686 Suna - Via Troubetzkoy, 122 297 84 381 101 280 Arona - Via Gramsci 1,038 984 1,110 3,132 1,360 1,772 Arsago Seprio - Via Silvio Pellico, 14 370 134 504 134 370 Arsago Seprio - Via Silvio Pellico, 14 -Land 110 110 110 Baveno - Corso Garibaldi, 5 765 466 543 1,774 717 1,057 Borgomanero - Corso Roma , 51 778 1,284 1,094 3,156 1,578 1,578 Borgomanero - Corso Roma , 51-Land 802 802 802 Cannobio - Via Umberto I°, 41 1,297 367 747 2,411 1,227 1,184 Cardano al Campo - Via Roma, 50 507 64 571 134 437 Castano Primo - Piazza Garibaldi, 16 719 -113 606 88 518 Crusinallo - Via IV Novembre, 220 156 246 172 574 267 307 Domodossola - Piazza Dell'Oro, 1 1,590 1,088 1,294 3,972 2,242 1,730 Domodossola - Piazza Dell'Oro, 1-Land 360 360 360 Dormelletto - Corso Cavour, 114 552 232 319 1,103 454 649 Dormelletto - Corso Cavour, 114-Land 43 43 43 Fontaneto d'Agogna - Piazza San Rocco 482 187 669 217 452 Gallarate - Via Marsala, 40 1,464 1,448 2,912 597 2,315 Gallarate - Via Marsala, 40 Mortgages Department archives 113 0 113 2 111 Gallarate - Via Vittorio Veneto, 8 2,105 1,057 3,162 553 2,609 Gattico - Piazza Leonardi, 4 239 49 151 439 156 283 Gravellona Toce - Via Marconi, 24 525 306 417 1,248 648 600 Legnano - Via Gigante/Corner of Via De Gasperi 2,611 553 3,164 554 2,610 Lonate Pozzolo - Via Garibaldi, 9 464 78 542 111 431 Malesco - Via Circonvallazione, 1 bis 106 201 161 468 213 255
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Malesco - Via Circonvallazione, 1 bis-Land 69 69 69 Malesco - Via Circonvallazione, 1 bis-Car Park 17 17 17 Malesco - Via Circonvallazione, 1 bis-Yard area 25 25 25 Novara - Piazza Martiri della Libertà, 6/7 4,046 1,456 2,899 8,401 2,577 5,824 Oleggio - Via Don Minzoni 478 46 524 139 385 Omegna - Via Cavallotti, 32 851 1,497 758 3,106 1,401 1,705 Ornavasso - Via A. Di Dio, 50/a 116 641 92 849 439 410 Ornavasso - Via A. Di Dio, 50/a-Land 173 173 173 San Maurizio d'Opaglio - Via Roma, 70 481 67 231 779 266 513 Tradate - Via Zucchi, 8 639 64 703 122 581 Villadossola - Corso Italia, 46 210 269 192 671 387 284 Marano Ticino - Via Sempione, 60 637 -99 538 30 508
TOTAL REAL ESTATE FOR CAPITAL USE 36,922 15,253 19,232 71,406 25,825 45,581
REAL ESTATE FOR INVESTMENT
Intra - Corso Cobianchi 19/21 142 322 464 57 407 Intra - Piazza San Vittore, 5 255 255 20 235 Intra - Via Restellini, 10/22 199 199 60 139 Baveno - Corso Garibaldi, 5 453 453 95 358 Borgomanero - Via Tornielli, 48 (archives) 22 22 1 21 Borgomanero - Via S.Giovanni, 10/22 107 107 23 84 Borgomanero - Via S.Giovanni, 10/22 22 135 157 6 151 Cannero Riviera - Via Dante, 7 79 213 113 405 238 167 Cannero Riviera - Via Dante, 7 (garage) 36 0 12 48 14 34 Crusinallo - Via IV Novembre, 220 22 42 64 3 61 Fontaneto d'Agogna - Piazza San Rocco 52 0 52 15 37 Malesco - Via Circonvallazione, 1 bis 7 34 41 15 26 Malesco - Via Circonvallazione, 1 bis-Land 10 10 10 Ornavasso - Via A. Di Dio, 50/a-apt 148 255 403 16 387 Gravellona Toce - Via Marconi, 24 19 34 53 2 51
TOTAL REAL ESTATE FOR INVESTMENT 1,573 1,035 125 2,733 565 2,168
GRAND TOTAL 38,495 16,288 19,357 74,139 26,390 47,749
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CONSOLIDATED FINANCIAL STATEMENTS 2005 OF THE BANCA POPOLARE DI INTRA BANKING GROUP AND RELATED REPORTS
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DIRECTORS’ REPORT ON CONSOLIDATED OPERATIONS
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BANCA POPOLARE DI INTRA BANKING GROUP AS AT 31 DECEMBER 2005
81.90% 82.28% Intra Banca Banca Private Popolare di Popolare Bank di Monza Intra e
89.12% 1% 89% 10.88% Monza e Intrafid Brianza Intra Leasing Mortgage Finance 1
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SCOPE OF CONSOLIDATION
The consolidated financial statements as at 31 December 2005 assimilate the Balance Sheet and Income Statement items of the Parent Bank Banca Popolare di Intra and, using the line-by-line consolidation method, the accounting statements of the following subsidiaries: • Banca Popolare di Monza e Brianza (82.28% owned by the Parent Bank); • Intra Private Bank (81.90% owned by the Parent Bank); • Intrafid (89% owned by the Parent Bank and 1% owned by Intra Private Bank); • Monza e Brianza Leasing (89.12% owned by the Parent Bank and 10.88% owned by Banca Popolare di Monza e Brianza); They also assimilate the “above the line” accounting statement of the vehicle company Intra Mortgage Finance1 Srl (Special Purpose Vehicle), which although not directly owned has been included in consolidation as it is the vehicle company through which the Parent Bank implemented a securitisation transaction in December 2002.
Changes within the scope of consolidation compared to the situation as at 31 December 2004 are the result of the following transactions implemented by the Parent Bank Banca Popolare di Intra: - purchase and sale from minority shareholders of shares in Banca Popolare di Monza e Brianza which produced a positive balance of 51,762 shares held in the subsidiary, causing the investment to rise from 81.57% to 82.28%; - reduction in the stake held in Intra Private Bank from 82.70% to 81.73% as a result of the exercise, on the part of the Company’s employees and promoters, of pre-emption rights on 499,308 shares for a countervalue of € 320,000 and subsequent increase to 81.90% with the purchase and sale of shares which produced a positive balance of 88,018 shares; - purchase from minority shareholders of 6,529 shares in Monza e Brianza Leasing, producing charges of € 364 thousand and increasing the investment held from 72.80% to 89.12%. As Banca Popolare di Monza e Brianza holds the remaining 10.88% of share capital, the leasing company is now wholly owned by the Group; - assignment to the Managing Directors of Intrafid Srl of a total of 10,000 shares, equal to 10% of the share capital, for a countervalue of € 17 thousand, with consequent reduction in the investment held in the subsidiary from 99% to 89%.
The consolidated financial statements have been submitted for audit to Reconta Ernst & Young SpA, pursuant to Article 155 letter b) of Legislative Decree no. 58 of 24 February 1998.
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REPORT ON CONSOLIDATED OPERATIONS18
Group operational coordination
During 2005 activities continued to focus on more effective strategic, management and operational coordination of the Group companies, and a further phase in the development of inter-company revenue and cost synergies was launched. In line with strategic guidelines, the first step was to centralise all the processes by which the strategic objectives and budgets of the subsidiaries are defined and to provide effective planning at Group level of commercial initiatives and product policies. With the aim of achieving greater coordination of the governance activities, in 2005, following completion in the previous year of the review of performance measurement systems and management reports, standard methods of management and monitoring of credit, operating and market risks were developed between the Group banks, in view of the forthcoming entry into force of the Basel 2 Accord. At the same time some operating and support area services continued to be progressively centralised under the Parent Bank, in order to further improve efficiency by eliminating duplications and to align the operating procedures of the subsidiaries with those used by the Parent Bank. Within the administration/accounting area in particular the necessary procedural and organisational measures were implemented to ensure alignment of each subsidiary, as scheduled in the general Group project for conversion to the new international accounting standards, with the exception of Monza e Brianza Leasing, which will apply the IAS at the beginning of 2006. During 2005 the first steps were taken to apply the new Control Model to Group companies. This followed the global redefinition of the Internal Control Systems Organisational Model deliberated by the Parent Bank and aimed at achieving improved control of critical processes and the mapping of operating processes and of first, second and third level controls. A number of specific activities were also performed on individual Group companies. At the beginning of the year a partial review of the Banca Popolare di Monza’s Function Chart and the operating Processes within the credit and credit control departments was carried out (this function is now established as a staff unit reporting to the company’s top management ). New Group Credit Regulations redefining operating principles and procedures for activities pertaining to customer selection, extension and disbursement of credit and management of the related risks and
18 Given that in the report (text and tables) most amounts have been rounded off to the nearest million or thousand, the percentage values specified may differ slightly from those that would emerge from comparison of the amounts expressed in units of a different size.
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reviewing the roles and responsibilities of the individual functions dedicated to the entire credit process were also introduced. At organisational level, the Headquarters and the Monza Branch were relocated to the premises in Via Manzoni which provided a more visible and central location within the town. A reanalysis of all the new accounting processes was also launched in order to deal with the increased centralisation of the accounting operations under the Parent Bank. Lastly, in the second half of the year the new procedures for measuring network results and providing management control reports came into effect. An accurate mapping of the subsidiary’s operating risks was performed in order to verify the impact of asset absorption as envisaged by the Basel 2 provisions and to test the procedures and the non standard method used with a view to extension to the other Group companies. The subsidiary Monza e Brianza Leasing also benefited from the strengthening of the commercial synergies with the Group banks’ territorial networks. The infra-group agreements were extended to the Intra Private Bank’s network of Financial Consultants, while the platform of products was expanded to include retail property leasing. Like Banca Popolare di Monza, at the beginning of 2006 the subsidiary’s headquarters and operating offices were moved to a more central location in Monza with the aim of increasing company visibility at local level and fully exploiting the organisation and cost synergies with Banca Popolare di Monza. With a view to connecting the operating systems used by the company to those of the Parent Bank, in the early months of 2006 the systems were migrated to a new IT system which may be reconnected in a SEC environment. If the subsidiary continues to achieve significant growth targets in 2006, its enrolment in the Special List of Financial Intermediaries referred to in Article 107 of the Banking Law will be scheduled.
Infra-group transactions and transactions with related parties
All sectors of activity have adopted the procedures prescribed to ensure the necessary coordination between Parent Bank and subsidiaries. Said procedures are aimed at guaranteeing effective exercise on the part of the Parent Bank of the powers of management, coordination and control over the Group companies, even where decisional processes are concerned. In 2005 the services outsourced by the Parent Bank to the subsidiaries were performed at full capacity. These services pertain to the following areas: accounting and financial statements, human resources training and management, administrative obligations, asset management, treasury and financial intermediation, litigation, legal and tax advice, risk management. Attention is also drawn to the fact that the Parent Bank performs centralised internal audit activities on behalf of Banca Popolare di Monza e Brianza and of Monza e
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Brianza Leasing and centralised risk management activity in favour of Intra Private Bank and Banca Popolare di Monza e Brianza. In addition to the agreements for the supply of outsourced services and infra-group consultancy services, some new infra-group agreements were stipulated within the commercial area during 2005 and these chiefly concerned the sector dealing with mortgages and home loans to private customers and real estate leasing. With regard to the economic aspects of the infra-group agreements, the operative services provided are priced exclusively on the basis of the costs actually incurred by the Parent Bank, while products and services placed with customers are priced at markets rates. Regarding the economic effects of transactions with company representatives and/or their associates, during 2005, the Group disbursed interest to the order of € 189 thousand and paid commissions and considerations for € 262.5 thousand plus VAT, while it received interest income and fees for € 675 thousand, in addition to rent on owned buildings for € 6 thousand.
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FINANCIAL DATA
Loans
As at 31 December 2005 Group loans, which have been affected by the decisions implemented in the Parent Bank’s segment, stand at € 3,492.4 million, compared to the € 3,673.6 million of year end 2004, recording a downturn of 4.9%. Trends in consolidated loans
Andamento degli impieghi consolidati
3.800,0
3.600,0
3.400,0 3.200,0
3.000,0
2.800,0 31.12.2002 31.12.2003 31.12.2004 31.12.2005
Andamento degli 3.208,0 3.702,6 3.673,6 3.492,4 impieghi consolidati
Guarantees issued in favour of customers amount to € 327 million, compared to the € 322.73 million recorded at the end of the previous year (+ 1.3%).
An analysis of the various technical forms of loans confirms the growth in mortgage loans (€ 1,361.3 million, against € 1,261.8 million; + 7.9%) and the sound expansion in leasing transactions (€ 64.7 million, against the € 46.9 million of year end 2004; + 38%).
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Composition of cash loans 31.12.2005 % 31.12.2004 % (in millions of euro) Composition (excluding Variation IAS 39) Portfolio discounting risk 32.0 0.9 34.6 (7.5) Active current accounts and other subsidies 1,654.8 47.4 1,960.8 (15.6) Mortgage loans 1,361.3 39.0 1,261.8 7.9 Foreign transactions 240.9 6.9 260.3 (7.5) Other loans 82.2 2.3 67.4 22.0 Non-performing loans 156.7 4.5 107.9 45.2 Total 3,527.9 101.0 3,692.8 (4.5) Net of: - Collective write-downs to problem loans (*) 0 0 (1.8) (100.0) - Collective write-downs to performing (35.5) (1.0) (17.3) 105.2 loans Total write-downs distributed across individual technical forms (35.5) (1.0) (19.1) 85.9 Loans to Customers 3,492.4 100.0 3,673.6 (4.9) (*) from 2005 these are divided by technical form
With regard to consolidated deteriorated loans, as at 31 December 2005, which have been strongly affected by the decisions implemented by the Parent Bank as described in the relevant comment to which reference is made, the following is highlighted: - Group net non-performing loans amount to € 156.7 million, compared to the € 116.6 million of June 2005 and to the € 108 million of the previous year end. The net NPL/net loans ratio has risen to 4.5%, from the 3.3% of June 2005 and the 2.9% of December 2004, but the relative cumulated value adjustments guarantee 67.7% coverage (65.2% in June 2005 and 52.6% in December 2004); - problems loans have fallen to € 131.7 million, from the € 167.4 million of June 2005 and the € 172.7 million of December 2004. The net problem loans/net loans ratio stands at 3.8%, down from the 4.7% of December 2004 (4.8% in the Half-Year Report 2005), but the level of coverage of problems loans has risen from 21% to 38.6% (52.7% in June).
The table below provides an illustration of the trends described above.
Loans 31.12.2004 (excluding IAS 39) 30.6.2004 31.12.2005 (in millions of euro) Gross Total value Net Gross Total value Net Gross Total value Net exposure adjustments exposure exposure adjustments exposure exposure adjustments exposure A. Deteriorated loans 461.4 167.2 294.2 807.8 407.3 400.5 787.0 412.2 374.8 A.1 non-performing loans 227.8 119.8 108.0 335.5 218.9 116.6 484.6 327.9 156.7 A.2 problem loans 218.7 46.0 172.7 354.0 186.6 167.4 214.4 82.7 131.7 A.3 rescheduled loans 14.9 1.4 13.5 14.9 1.4 13.5 3.8 0.4 3.4 A.4 expired exposures n.a. n.a. n.a. 103.4 0.4 103.0 84.2 1.2 83.0
B. Performing loans 3,396.4 17.0 3,379.4 3,112.6 32.5 3,080.1 3,152.9 35.3 3,117.6 Total 3,857.8 184.2 3,673.6 3,920.4 439.8 3,480.6 3,939.9 447.5 3,492.4
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Asset quality profiles 31.12.04 30.6.05 31.12.05 31.12.05 excluding “past due” Gross deteriorated loans/gross loans (*) 12.0% 20.6% 20.0% 17.8% Net deteriorated loans/net loans (*) 8.0% 11.5% 10.7% 8.3% Gross non-performing loans/gross loans 5.9% 8.6% 12.3% Net non-performing loans/net loans 2.9% 3.3% 4.5% Gross problem loans/gross loans 5.7% 9.0% 5.4% Net problem loans/net loans 4.7% 4.8% 3.8% Degree of coverage of non-performing 52.6% 65.2% 67.7% loans Degree of coverage of problem loans 21.0% 52.7% 38.6% Degree of coverage of deteriorated loans 36.2% 50.4% 52.4% 58.5% (*)
Deposits
Direct deposits from customers, which stand at € 3,792.9 million, compared to the € 4,058.3 million of December 2004 (- 6.5%), have been affected by the reduction in the bond component (-8.9%) which has been chiefly determined by the Parent Bank’s strategic decision to progressively reduce the use of financial debt instruments.
The table below provides a breakdown of the aggregate figures and shows trends similar to those recorded by the Parent Bank.
Consolidated direct deposits 31.12.2005 % 31.12.2004 % (figures in millions of euro) Composition (excluding IAS Variation 39) Savings deposits 69.5 1.8 77.7 (10.6) Euro current accounts 1,447.1 38.2 1,517.0 (4.6) Outgoing foreign currency accounts 18.7 0.5 18.2 2.7 Repurchase agreements 138.2 3.6 113.3 22.1 Financing received 0 0 5.5 (100.0) Total 1,673.5 44.1 1,731.7 (3.4) Outstanding securities 1,661.9 43.8 1,943.5 (14.5) Financial liabilities valued at fair value option 457.4 12.1 383.1 19.4 Total 2,119.3 55.9 2,326.6 (8.9) Total direct deposits 3,792.8 100.0 4,058.3 (6.5)
Indirect deposits, driven by the considerable growth in managed savings which reached € 1,797 million at the end of December 2005 (+ 26.4% on 2004), instead maintain a positive development trend, standing at € 3,763.6 million at year end 2005, compared to the € 3,601 million recorded in December 2004 (+ 4.5%).
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Even at consolidated level the administered component and the managed component are almost evenly balanced.
Consolidated indirect deposits 31.12.2005 % 31.12.2004 % (figures in millions of euro) Composition (excluding IAS Variation 39) Managed assets (*) 940.8 25.2 783.5 20.1 Assets from mutual funds 1,631.7 43.6 1,260.0 29.5 Less: managed assets in funds (803.7) (21.5) (645.0) 24.6 Managed savings 1,768.8 47.3 1,398.5 26.5 Administered deposits (indirect) 1,969.6 52.7 2,202.5 (10.6) Total indirect deposits 3,738.4 100.0 3,601.0 3.8 (*) plus temporary liquidity equal to 28.2 0.8 22.5 25.3 Total managed savings 1,797.0 48.1 1,421.0 26.5
As far as the bancassurance segment is concerned, the total volumes of written premiums remain high: € 133.4 million, compared to the € 135.4 million of December 2004.
At year end 2005, total deposits from customers stand at € 7,531.3 million, compared to the € 7,659.3 million recorded at 31 December 2004. Trends in consolidated deposits
Andamento della raccolta consolidata
10.000,0 8.000,0 6.000,0 4.000,0 2.000,0 0,0 31.12.2003 31.12.2004 31.12.2005
Raccolta diretta 3.745,7 4.058,3 3.792,9 Raccolta indiretta 3.227,4 3.601,0 3.738,4 Raccolta 6.973,1 7.659,3 7.531,3 complessiva
Direct deposits, Indirect deposits, Total deposits.
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Securities portfolio The table below provides a breakdown of the Group portfolio, which is specified in accordance with the new IAS accounting standards and on the basis of the book values for the current year, and taking into account the following classification: • Loans and receivables, includes unlisted debt securities created by the company; • Held to maturity, refers to debt securities intended to be held until their natural maturity; • Held for trading, includes financial assets traded over the short term and debt securities and equities classified as trading, as well as the positive value of derivatives contracts established for trading purposes; • Available for sale, comprises financial assets other than those held for trading, investments held until maturity and loans and receivables of the company; • Liabilities: includes securities issued by Group companies.
(figures in millions of euro) 31.12.2005 31.12.2004 % Variation Loans and receivables 0 0 0 Held to maturity 0 0 0 Held for trading 441.9 452 (2.2) Available for sale 138.1 130.7 5.7 Liabilities (outstanding securities and at FVO) 2,119.3 2,326.6 (8.9)
Expansion in the managed assets segment, in both movables and funds, also continued at consolidated level. Total assets managed by the Group rose by more than 20% in the twelve months under review, from the € 783.5 million recorded at year end 2004, to the € 941 million of 31 December 2005. The base of customers opting for this form of asset allocation has grown considerably, reaching a total of 7,932 relations at year end. This is for the most part due to the contribution of Intra Private Bank, whose customers rose to 5,782 (5,349 at year end 2004). This above-average growth has led to an improvement in the ratio between investment in managed asset forms and indirect deposits of the whole Group, which has risen from 38.8% at year end 2004 to 47.8% as at 31December 2005.
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• Consolidated shareholders’ equity
As at 31 December 2005, consolidated shareholders’ equity amounts to € 244.6 million and includes positive valuation reserves for a total of € 20.8 million.
Consolidated shareholders’ equity 31.12.2005 31.12.2004 % (excluding IAS 39) Variation Valuation reserves 20.8 14.5 43.4 Capital instruments 7.0 7.6 (7.9) Reserves 35.5 63.0 (43.7) Share premiums 159.3 151.1 5.4 Capital 145.4 142.5 2.0 Treasury shares (-) 0 0.0 0 Profit (loss) for the year (123.4) 27.1 n.a. Total shareholders’ equity 244.6 405.8 (39.7) Minority interest 11.3 11.7 (3.4) Total equity 255.9 417.5 (38.7)
At year end 2005, the consolidated Tier 1 capital stood at 5.38% and the Total Tier at 7.64%, with both figures being affected by application of the new IAS standard to the calculation of the regulatory capital. However the measures launched by the Parent Bank in the first six months of 2006, for the purposes of strengthening the Bank and the Group in terms of capital, should lead to an improvement in prudential ratios in the short-term.
Personnel Human resources employed by the Group at the end of 2005 amounted to a total of 1,106 units (1,097 units at 31 December 2004), and break down as follows: • Parent Bank Banca Popolare di Intra: 979 units (973 in December 2004), of which 6 on secondment to Group companies; • Banca Popolare di Monza e Brianza: 78 (76 in December 2004); • Intra Private Bank: 37 (unchanged compared to December 2004), in addition to 121 financial advisors (115 as at 31 December 2004); • Monza e Brianza Leasing: 10 (9 in December 2004); • Intrafid: 2 (unchanged).
On the whole personnel employed by the Group companies has increased by 9 units, but the effective increase of staff on the payroll is limited to only 3 units, employed by Banca Popolare di Monza e Brianza.
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Network The Group network, which is unchanged compared to the previous year, consists of 80 branches (72 branches of the Parent Bank Banca Popolare di Intra, 7 of Banca Popolare di Monza e Brianza and 1 of Intra Private Bank) as well as the network of financial advisors of Intra Private Bank consisting of 22 administrative offices.
Economic Data
The statement below and the accompanying notes examine the results of the consolidated income statement as at 31 December 2005 – which has also been drafted for the first time in accordance with the IAS/IFRS accounting principles – comparing said results with those of the same period of last year, recalculated according to the IAS/IFRS, excluding IAS 39.
(figures in thousands of euro) 31.12.2005 31.12.2004 Absolute % excluding IAS variation varia.n 39
Interest margin 122,093 138,898 (16,805) (12.1) Net fees 62,351 56,530 5,821 10.3 Dividends and similar income 689 4,051 (3,362) (83.0) Net income from trading activities 1,719 (2,741) 4,460 n.a. Net income from hedging activities 187 75 112 149.3 Net profit/loss from disposal or repurchase of loans and financial liabilities 5,654 23,011 (17,357) (75.4) Net income from financial assets/liabilities at fair value 2,511 0 2,511 n.a. Net interest and other banking income 195,204 219,824 (24,620) (11.2) Net value adjustments for deterioration of loans and financial assets (253,864) (65,912) (187,952) 285.2 Net income from financial management (58,660) 153,912 (212,572) n.a. Administrative expenses (123,765) (116,403) (7,362) 6.3 Net allocations to provisions for risks and (8,011) (3,907) (4,104) 105.0 charges Net value adjustments to tangible and intangible assets (6,250) (6,158) (92) 1.5 Other operating charges/income 20,963 8,405 12,558 149.4 Operating costs (117,063) (118,063) 1,000 (0.8) Profit (loss) from shareholdings 46 0 46 n.a. Profit (loss) from the sale of investments 4,355 65 4,290 n.a. Net income from current operations before taxes (171,322) 35,914 (207,236) n.a. Income taxes for current operations 48,466 (8,208) 56,674 n.a. Profit (loss) for the year (122,856) 27,706 (150,562) n.a. Minority profit (loss) for the year (528) (645) 117 (18.1) Parent Bank profit (loss) for the year (123,384) 27,061 (150,445) n.a.
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The interest margin stands at € 122.1 million, compared to the € 138.9 million of the same period of last year, recording a 12.1% decrease. This figure emerges from the difference between interest income from customers, which has fallen from € 225.2 million to € 211.8 million (- 6%) and interest expense on provision which has risen from € 86.3 million to € 89.7 million (+ 3.9). Net interest and other banking income stands at € 195.2 million, compared to the figure of € 219.8 million posted as at 31 December 2004, which however included the profit from the sale of the former subsidiary Futuro SpA for more than € 17 million. The services margin appears to be experiencing a positive trend as, boosted by the growth in net commissions, which have risen from € 56.5 million in 2004 to € 62.4 million, it has experienced a growth rate in excess of 19.4%: from the € 53.9 million of 31 December 2004 to € 64.3 million. Net income from trading, equal to € 1.7 million (- € 2.7 million in December 2004) and net income from financial assets/liabilities at fair value, (determined by the valuation of bonds issued by the Group banks at the so- called “fair value option”, not comparable with the same period of the previous year) of € 2.5 million, also provide a positive contribution to net interest and other banking income, which has also been affected by the lower dividends received during the year (€ 0.7 million, against the € 4.1 million of 2004). The recording of net value adjustments for the deterioration of loans and financial assets to the order of € 253.9 million (€ 65.9 million in December 2004), has led to a net loss from financial management of € 58.7 million (as at December 2004 net income of € 153.9 million was recorded). Administrative expenses total € 123.8 million (€ 116.4 million in the same period of the previous year), posting a 6.3% increase which is chiefly attributable to the greater costs incurred by the Parent Bank for the legal disputes underway and the extraordinary transactions implemented, and to costs incurred by the banking subsidiaries for expansion of activities. After recording of taxes, which were positive by € 48.5 million, thanks also to the reporting of prepaid deferred taxation, the consolidated income statement closes, as at 31 December 2005, with a loss of € 123.4 million, compared to a profit of € 27.1 million recorded at the end of the same period of last year.
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PERFORMANCE OF GROUP COMPANIES
The financial and economic performance of the individual companies included in consolidation and which were members of the Banking Group in the year 2005 is illustrated below. The banking subsidiaries, Banca Popolare di Monza e Brianza and Intra Private Bank, applied the new international accounting standards from 1 January 2005 and the figures as at 31 December 2005 have been compared with those of 2004 reclassified according to the new IAS/IFRS standards (excluding IAS39).
Banca Popolare di Monza e Brianza S.p.A.
(figures in thousands of euro)
Financial data 31.12.2005 31.12.2004 % (excluding IAS Variation 39) Loans to customers 286,439 269,211 6.4 Financial assets held for trading 11,214 13,956 (19.6) Financial assets available for sale 50 47 6.4 Direct deposits 257,870 229,295 12.5 Indirect deposits 99,348 90,972 9.2 Total assets 321,589 304,394 5.6 Net interbank position 3,669 (4,724) n.a. Shareholders’ equity (including profit) 48,098 50,349 (4.5)
Earnings data 31.12.2005 31.12.2004 % (excluding IAS Variation 39) Interest margin 10,246 11,716 (12.5) Net fees 2,755 2,410 14.3 Net interest and other banking income 12,986 14,126 (8.1) Value adjustments for deterioration of loans and other assets (821) (2,097) (60.8) Net income from financial management 12,165 12,029 1.1 Administrative expenses (9,204) (7,858) 17.1 Operating costs (9,179) (8,071) 13.7 Income taxes (1,657) (1,609) 3.0 Net profit (loss) for the year 1,329 2,338 (43.2)
Other data 31.12.2005 31.12.2004 % Variation Number of employees 78 76 2.6 Number of branches 7 7 =
In 2005 Banca Popolare di Monza e Brianza continued to pursue a strategy focused on deposits and on the greater fractioning of loans in favour of retail customers.
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Direct deposits reached € 257.9 million (+12.4% year-on-year), sustained by the strong growth in bonds (€ 137.9 million; +25.2%), while indirect deposits rose from € 91 million to € 99.3 million (+9.2%) on the strength of the considerable rise in managed savings to € 60 million (+37%), to which must be added managed assets of the Parent Bank placed with the subsidiary’s customers for € 6.1 million.
As at 31 December 2005, loans rose to € 286.4 million (+6.4% year-on-year), with a positive increase achieved in the last months of the year and an improvement in the net NPL/net loans ratio (2.6%) compared to year end 2004 (3%).
At economic level net interest and other banking income stands at € 13 million (14.1 million as at 31 December 2004, -8.1%), and has been affected by a 12.5% decrease in the interest margin due to a reduction in market spread and to an improved loans composition strategy, also benefiting from the progress obtained in the expansion of the services margin (+13.7% to € 2.7 million), sustained by the considerable increase in fees income.
With value adjustments for deterioration of loans equal to € 0.8 million, the net income from financial management stands at € 12.2 million, up by 1.1% compared to year end 2004.
The growth in investments and costs to support development have however caused operating costs to rise to € 9.2 million (+13.7%) – inclusive of the non-recurring charges sustained following relocation of the Headquarters and of the Monza Branch in the 2nd quarter – which led to a profit from current operations of € 3 million (€ 3.9 million at year end 2004).
Net profit as at 31 December 2005, after taxes to the order of € 1.7 million, stands at € 1.3 million compared to the € 2.3 million pro-forma IAS as at 31 December 2004 (€ 1.7 million at year end 2004 according to the previous accounting standards).
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Intra Private Bank SpA
(figures in thousands of euro)
Financial data 31.12.2005 31.12.2004 % Variation (exclud. IAS 39) Financial assets held for trading 56,615 41,084 37.8 Financial assets available for sale 1,066 1,197 (10.9) Direct deposits 56,954 54,434 4.6 Assets under management 1,068,145 939,613 13.7 Total assets 78,678 72,830 8.0 Net interbank position 15,701 25,912 (39.4) Shareholders’ equity 15,804 14,326 10.3
Earnings data 31.12.2005 31.12.2004 % Variation (exclud. IAS 39) Interest margin 1,339 1,382 (3.1) Net fees 7,399 5,684 30.2 Net interest and other banking income 8,713 7,412 17.6 Operating costs 6,132 6,362 (3.6) Income taxes (1,053) 181 n.a. Net profit/(loss) for the year 1,547 1,233 25.5
Other data 31.12.2005 31.12.2004 % Variation Number of employees 37 37 0,0 Number of branches 1 1 0,0 Number of administrative offices 21 22 (4.5) Number of advisors 121 115 5.2
In 2005 Intra Private Bank achieved outstanding results, sustained by the insertion of new financial advisors (whose numbers rose to 121 at year end), and consolidated the improvement in profitability obtained in the previous two-year period in line with objectives.
Net deposits continued to be positive throughout the whole year, reaching € 78.2 million and bringing the total assets under management to € 1.068 billion, recording a 13.7% increase on year end 2004 and a higher incidence of the managed component (65.7% of the total).
The further growth in assets led to a strong improvement in net fees (€ 7.4 million, +30.2%), pushing net interest and other banking income to € 8.7 million (+17.6%). Despite the presence of increased administration expenses to support expansion (€ 7 million, +12.9%), pre-tax profit from current operations reached € 2.6 million, posting an increase of 147.1% compared to year end 2004 (€ 1.1 million).
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Net profit, after recording of taxes for € 1.1 million, stands at € 1.5 million, recording a year-on-year increase of 25.5% and a ROE approaching 10%.
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Monza e Brianza Leasing Spa
(figures in thousands of euro) 31.12.2005 31.12.2004 % Variation 31.12.05/31.12.04
Financial data Total assets 70,080 52,930 32.4 Capital and reserves 1,497 1,552 (3.5) Profit/(Loss) for the year 300 (54) n.a.
Earnings data Total revenues 22,044 15,646 40.9 Total costs (21,744) (15,700) 38.5. Net profit/(loss) 300 (54) n.a.
Other data Number of employees 10 9 11.1
In 2005 Monza e Brianza Leasing achieved a further increase in the volumes of car and equipment leasing and also launched the canalisation of retail property leasing transactions on the part of Group branches. During the year the contracts portfolio rose to € 89.9 million (+44.1% compared to 2004), with an annual production of € 32.6 million, up by 5.7%, and with the contracts originating with Group Banks accounting for 78% of the total.
The positive trend in volumes has led to a considerable increase in the economic results. The interest margin has reached € 1.3 million (+64.6% year-on-year), pushing the net interest and other banking income to € 1.5 million (+56.2%). Despite the rise in operating costs associated with the increase in volumes (€ 1.3 million, +28.1%), the gross operating profit stands at € 229 thousand (- € 36 thousand in 2004), leading to a net profit of € 300 thousand, hence delivering considerable improvement on year end 2004 (- € 54 thousand).
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Intrafid Srl
(figures in thousand of euro) 31.12.2005 31.12.2004 % Variation 31.12.05/31.12.04
Financial data Total assets 316 293 7.8 Capital and reserves 179 176 1.7 Profit/(Loss) for the year 69 56 23.2
Earnings data Value of production 472 455 3.7 Cost of production (339) (341) (0.6) Net profit/(loss) 69 56 23.2
Other data Number of employees 2 2 0.0
The Group’s trustee bank, Infrafid, closed the year with a slight decrease in total contracts (401; -4.1%) and in assets under management, which were equal to € 181.7 million (-10% compared to 2004). The increase in fees collected (+3.8%, to € 472 thousand) and the maintaining of operating costs at 2004 levels (€ 339 thousand, -0.5%) have led to a net profit of € 69 thousand (+23.2%).
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KEY FIGURES
The table below provides some key figures as at 31 December 2005, with comparison between consolidated values and those of the Parent Bank.
(figures in millions of euro) Consolidated Parent Bank
Balance Sheet Total Assets 4,528.0 4,233.3 Ordinary customer deposits 3,792.7 3,514.8 Customer loans 3,492.3 3,181.0 Minority interests 11.3 = Shareholders’ equity: capital and reserves 244.6 264.8 Of which: Profit (loss) for the year (123.4) (125.4)
Income Statement Interest margin 122.1 109.4 Net interest and other banking income 195.2 172.9 Net income from financial management (58.7) (80.1) Profit (loss) from current operations before taxes (171.3) (176.8) Profit (loss) for the year (123.4) (125.4)
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SIGNIFICANT EVENTS AFTER BALANCE SHEET DATE AND OUTLOOK FOR CONSOLIDATED OPERATIONS.
Please refer to the comments made in the corresponding section of the Report on Operations of the Parent Bank.
Verbania Intra, 29 March 2006
THE BOARD OF DIRECTORS
In compliance with the new instructions issued by Bank of Italy for the benefit of the banking system and received by the Parent Bank on 10 April 2006, concerning the procedures by which to report in the financial statements as at 31 December 2005 the reduction in the fiscal burden following revaluation of real estate pursuant to Law no. 266 of 23 December 2005 (the so-called “Finance Bill 2006”), notice is given that on 13 April 2006 the Board of Directors of Banca Popolare di Intra passed a resolution to amend the individual and consolidated draft financial statements approved on 29 March 2006 in order to assimilate the specifications of the Regulatory Body. The amendments made involve charging directly to equity a positive non-recurring component relating to the tax benefit arising from the aforesaid revaluation law, equal to € 4.9 million, previously carried in the income statement and ascribed to the revaluation reserve of the regulatory capital, which does not however present any variation compared to that which was approved earlier. Due to this different reporting procedure the income taxes for the year on current operations were re-determined, as was the individual and consolidated net profit (loss).
This document, comprising the report on operations, the financial statements and the notes to the financial statements, both individual and consolidated, assimilates the amendments passed on 13 April 2006.
Verbania Intra, 13 April 2006
THE BOARD OF DIRECTORS
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REPORT OF THE BOARD OF STATUTORY AUDITORS ON THE CONSOLIDATED FINANCIAL STATEMENTS
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REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE SHAREHOLDERS’ MEETING ON THE CONSOLIDATED FINANCIAL STATEMENTS AS AT 31 DECEMBER 2005
Dear Shareholders, We have examined the consolidated financial statements as at 31 December 2005 with regard to which we provide the following report. As it is not our duty to perform the required analytical audit of the content of the consolidated financial statements, we have monitored their general layout, their compliance with the law concerning preparation using the line-by-line consolidation method and, in this respect we have no particular observations to report, other than indicating the shareholdings as at 31 December 2005 of the investee companies included in consolidation: - Banca Popolare di Monza e Brianza S.p.A. 82.28% - Intra Private Bank S.p.A. 81.90% - Monza e Brianza Leasing S.p.A. 89.12% + 10.88% held through Banca Popolare di Monza e Brianza S.p.A. - Intrafid Srl 89.00% + 1.00% held through Intra Private Bank S.p.A. It is specified, for consolidation purposes, that in accordance with the provisions of the IAS/IFRS standards, the special purpose vehicle Intra Mortgage Finance 1 Srl has been included in consolidation, even though it is not directly held. We have verified compliance with the regulations pertaining to the structure of consolidated financial statements and of directors’ report on consolidated operations, as well as of the other documents prescribed. We have no particular observations to report with regard to the consistency of the consolidated financial statements with the facts and information of which we acquired knowledge further to performance of our duties, with the exception of the fact that, as described in detail by the directors, the Bank applied the IAS/IFRS accounting standards as prescribed by regulations in force. The consolidated financial statements have been submitted to audit by Reconta Ernst & Young Spa pursuant to Article 155 of Legislative Decree no. 58/98. The financial statements of the subsidiary companies, approved by their respective Boards of Directors, have been examined by said company, with the exception of Intrafid Srl which is not subject to obligatory audit. One or two Statutory Auditors of the Parent Bank are members of the control bodies of the three subsidiaries Banca Popolare di Monza e Brianza S.p.A., Intra Private Bank S.p.A. and Monza e Brianza Leasing S.p.A.. No material data or information worthy of mention in this report has emerged from the meetings of the Statutory Auditors. As far as we are aware, in drawing up the consolidated financial statements the Directors have not deviated from legal provisions. Mutual transactions have been subject to netting in accordance with regulations in force by which cross shareholdings are excluded from the consolidation base.
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No significant transactions involving provision of services or purchase and sale of securities have been implemented with group companies and related parties other than those effected in previous years. Hence there have been no atypical and/or unusual intra-group or related party transactions. The provision of intra-group services essentially corresponds to the reversal of costs and said services are governed by special intra-group contracts drawn up in accordance with the concepts of fairness, transparency and uniformity. The Directors’ report on consolidated operations contains information on the strategic planning and managerial coordination of the group and on the performance of the group and of the individual companies. With regard to equity and banking regulatory ratios it is specified that, taking into account the economic result reflected in the financial statements as at 31 December 2005, the regulatory ratios at said date were as follows: - Tier 1 capital/risk weighted assets (tier 1 capital ratio) 5.38% - Regulatory capital/risk weighted assets (total capital ratio) 7.64% Attention is drawn to the fact that banking groups are required to maintain a total capital ratio equal to at least 8%. The combined effect of the issue of the subordinated loan and the capital increase that will be proposed to the extraordinary shareholders’ meeting will raise, without prejudice to the rest, the tier 1 capital ratio and the total capital ratio level to 5.86% and 8.67% respectively. Hence the extraordinary shareholders’ meeting is invited to approve the motion proposed by the Board of Directors on the agenda. Also considering the results of the activity performed by the accounting control body, contained in the special report accompanying the financial statements drawn up pursuant to Article 156 and Article 155 of Legislative Decree, we recommend that the shareholders’ meeting approve the consolidated financial statements as at 31 December 2005 as drawn up by the directors.
Verbania, 14 April 2006 the Board of Statutory Auditors Ferruccio Battaini Roberto Bussi Marta Lodari
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CONSOLIDATED BALANCE SHEET (amounts in thousands of euro)
Assets 31.12.2005 31.12.2004 (excluding IAS 39)
10. Cash and cash equivalents 23,855 21,582
20. Financial assets held for trading 441,916 452,028
40. Financial assets available for sale 138,145 130,686
60. Loans to banks: 87,118 218,310
70. Loans to customers 3,492,360 3,673,621
80. Hedging derivatives 13,198 7,796
120. Tangible assets 70,530 73,181
130. Intangible assets 20,044 20,104 of which: - goodwill 18,624 18,504
140. Tax assets 163,130 60,383 a) current 40,025 34,235 b) prepaid 123,105 26,148
160 Other assets 77,704 75,544
Total assets 4,528,000 4,733,235
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Liabilities and shareholders’ equity 31.12.2005 31.12.2004 (excluding IAS 39)
10. Due to banks: 277,531 106,409
20. Due to customers 1,673,501 1,731,661
30. Outstanding securities 1,661,852 1,943,486
40. Financial trading liabilities 11,762 1,516
50. Financial liabilities at fair value 457,408 383,121
60. Hedging derivatives 12,723 2,639
80. Tax liabilities 45,872 38,675 a) current 40,945 27,605 b) deferred 4,927 11,070
100. Other liabilities 103,909 82,458
110. Employee severance indemnity 17,534 16,101
120. Provisions for risks and charges 10,037 9,645 a) pensions and similar obligations 00 b) other provisions 10,037 9,645
140. Valuation reserves 20,771 14,548
160. Capital instruments 7,014 7,620
170. Reserves 35,564 62,955
180. Share premiums 159,256 151,066
190. Capital 145,393 142,550
210. Minority interests (+/-) 11,257 11,724
220. Profit (loss) for the year (+/-) (123,384) 27,061
Total liabilities and shareholders’ equity 4,528,000 4,733,235
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CONSOLIDATED INCOME STATEMENT (amounts in thousands of euro) Items 31.12.2005 31.12.2004 (excluding IAS 39) 10. Interest and similar income 211,781 225,208 20. Interest and similar expenses (89,688) (86,310) 30. Interest margin 122,093 138,898 40. Fee income 76,285 69,410 50. Fee expense (13,934) (12,880) 60. Net fees 62,351 56,530 70. Dividends and similar income 689 4,051 80. Net income from trading 1,719 (2,741) 90. Net income from hedging activities 187 75 100. Profit/loss from disposal or repurchase of : 5,654 23,011 a) loans and receivables (1,962) 0 b) financial assets available for sale 7,910 22,932 d) financial liabilities (294) 79 110. Net income from financial assets/liabilities at fair 2,511 0 value 120. Net interest and other banking income 195,204 219,824 130. Net value adjustments for deterioration of: (253,864) (65,912) a) loans and receivables (252,558) (60,005) b) financial assets available for sale (181) (1,757) d) other financial transactions (1,125) (4,150) 140. Net income from financial management (58,660) 153,912 170. Net income from financial management and (58,660) 153,912 insurance 180. Administrative expenses: (123,765) (116,403) a) personnel costs (68,683) (67,651) b) other administrative expenses (55,082) (48,752) 190. Net allocations to provisions for risks and charges (8,011) (3,907) 200. Net value adjustments to tangible assets (5,349) (5,473) 210. Net value adjustments to tangible assets (901) (685) 220. Other operating income/costs 20,963 8,405 230. Operating costs (117,063) (118,063) 240. Profit (loss) from shareholdings 46 0 270. Profit (loss) from the sale of investments 4,355 65 280. Profit (loss) from current operations before taxes (171,322) 35,914 290. Income tax for the year for current operations 48,466 (8,208) 300. Profit (loss) from current operations after taxes (122,856) 27,706 320. Profit (loss) for the year (122,856) 27,706 330. Minority profit (loss) for the year (528) (645) 340. Parent Bank profit (loss) for the year (123,384) 27,061
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STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY at 31.12.05 (amounts in thousands of euro) Variations during the year Allocation of previous year’s results Transactions on shareholders’ equity
Group Group
Third parties Third parties (+/-) shares Group income: reserves Balances at 31.12.04 Balances at 01.01.05 Balances at 01.01.05 Reserves Balances at 31.12..04 dividends own shares 31.12.2005 31.12.2005 for the year instruments Variations in Group shares Stock options Extraordinary distribution of Issuing of new Issuing of new Minority interest Minority Profit Change in opening balances minority shares treasury shares minority interests (Loss) for the year Purchase of Group Purchase of Group Variation in capital Derivatives on own Group Profit (Loss) Variations in Group Dividends and other Group shareholders’ Group shareholders’ equity at 31.12.2005 equity at 31.12.2005
Capital: a) Ordinary shares 142,540 10,304 142,540 10,304 2,853 (456) 145,393 9,848 b) other shares 0 0 0 0
Share premiums 151,066 0 151,066 8,190 159,256 0
62,965 775 19,321 455 0 0 110 0 0 35,564 881 Reserves: (44,120) 316 16,243 0 0 0 0 0 87,666 801 87,666 455 110 103,909 1,366 a) profits 801 16,243 0 (24,701 (26) (68,345) 0 (485) b) others (44,120) (485) (68,345) )
20,771 0
1,990 0 Valuation reserves: 14,548 0 4,859 19,407 0 1,364 0 0 a) available for sale 0 0 5,339 5,339 (3,349) 0 0 b) cash flow hedges 0 0 0 41 0 c) other (to detail): 0 0 0 18,740 0 deemed cost 12,618 0 (480) 12,138 (12,097) 0 0 property revaluations 1,930 0 1,930 16,810 other 0 0 0 0
Capital instruments 7,620 0 7,620 (606) 7,014 0
Treasury shares 0 0 0 8,037 (8,037) 0 0
Profit (Loss) for the year 27,061 645 27,061 645 (16,243) (455) (11,008) (123,384) 528 (123,384) 528
Shareholders’ equity 405,800 11,724 367,015 11,265 1,364 0 19,080 0 (8,037) (346) 0 (606) 0 0 (123,384) 528 244,614 11,257
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STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS’ EQUITY at 31.12.04 (amounts in thousands of euro) Variations during the year Allocation of previous year’s results Transactions on shareholders’ equity
y Group Group
it ) - Third parties Third parties / + nor ( Group proprie income: reserves Balances at 31.12.03 Balances at 01.01.04 Balances at 01.01.04 31.12.04 Mi Reserves Reserves dividends Balances at 31.12.0.03 own shares instruments at 31.12.04 Variations in Group shares Stock options Extraordinary distribution of Issuing of new Issuing of new Minority Profit Change in opening balances minority shares treasury shares Minority interest minority interests (Loss) for the year equity at 31.12.04 Purchase of Group Variation in capital Derivatives on own Group Profit (Loss) Variations in Group Dividends and other shareholders’ equity Group shareholders’ for the year 31.12.04 Purchase of minority
Capital: a) Ordinary shares 141,898 12,043 141,898 12,043 642 (1,739) 142,540 10,304 b) other shares 0 0
Share premiums 150,442 150,442 624 151,066 0
Reserves: 57,831 934 (619) 57,212 908 6,167 0 (414) 0 0 (133) 0 0 0 0 0 0 62,965 775 a) profits 75,240 934 1,135 76,375 934 11,705 (414) (133) 87,666 801 b) others (17,409) (1,754) (19,163) (26) (5,538) (24,701) (26)
1,951 0 12,138 14,089 0 459 14,548 0
Valuation reserves: a) available for sale 0 0 b) cash flow hedges 0 0 c) other (to detail): deemed cost 0 0 property revaluations 12,138 12,138 12,138 0 other 1,951 1,951 (21) 1,930 0 0 480 480 0
Capital instruments 7,620 7,620 0
Treasury shares (303) (303) 6,676 (6,373) 0 0
Profit (Loss) for the year 16,435 (33) 16,435 (33) (6,133) 33 (10,302) 27,061 645 27,061 645
0 Shareholders’ equity 368,254 12,944 379,773 12,918 (10,302) 459 0 7,528 0 (6,373) (1,872) 0 7,620 0 27,061 645 405,800 11,724
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CONSOLIDATED CASH FLOW STATEMENT
Direct method (amounts in thousands of euro)
OPERATING ACTIVITIES 31.12.05 31.12.04 excluding
IAS 39 1. Management 135,555 130,547 - interest income collected (+) 204,997 228,569 - interest expense paid (-) (65,816) (84,252) - dividends and similar income (+) 260 0 - net fees (+/-) 61,851 56,530 - personnel costs (-) (68,683) (67,651) - other costs (-) (54,856) (44,675) - other income (+) 43,414 50,234 - taxes and duties (-) 14,388 (8,208) 2. Cash flow generated by reduction in financial assets 238,042 38,666 - financial assets held for trading 57,106 35,856 - financial assets at fair value 00 - financial assets available for sale 9,147 0 - due from banks 149,740 2,810 - due from customers 21,262 0 - other assets 787 0 3. Cash flow used by increase in financial assets (246,979) (156,722) - financial assets held for trading (15,531) 0 - financial assets at fair value 00 - financial assets available for sale (3) (51,860) - due from customers (310) 0 - due from banks (174,280) (35,587) - other assets (56,855) (69,275) 4. Cash flow generated by increase in financial liabilities 265,825 383,094 - due to banks 173,816 0 - due to customers 3,011 0 - outstanding securities 0 0 - financial trading liabilities 335 1,595 - financial liabilities at fair value 61,276 381,499 - other liabilities 27,387 0 5. Cash flow used by redemption/repurchase of financial liabilities (375,988) (412,178) - due to banks (11,470) (233,365) - due to customers (56,160) (12,196) - outstanding securities (300,913) (146,276) - financial trading liabilities (7,437) 0 - financial liabilities at fair value 00 - other liabilities (8) (20,341) Net cash flow generated/used by operations 16,455 (16,593)
B. INVESTMENT ACTIVITIES
1. Cash flow generated 4,188 14,191 - sale of shareholdings 537 9,994
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- dividends collected from shareholdings 1,374 4,050 - sale/reimbursement of financial assets held to maturity 00 - sale of tangible assets 2,277 147 - sale of intangible assets 00 - sale of subsidiaries and other lines of business 00 2. Cash flow used (6,636) 5,176 - purchase of shareholdings (802) 657 - purchase of financial assets held to maturity 00 - purchase of tangible assets (5,052) 1,775 - purchase of intangible assets (782) 2,744 - purchase of subsidiaries and other lines of business 00 Net cash flow generated/used by investment activities (2,448) 19,367
C. FUNDING
- issue/purchase of treasury shares 0 727 - issue/purchase of capital instruments 184 (492) - distribution of dividends and other activities (11,927) (10,650) Net cash flow generated/used by funding (11,743) (10,415)
NET CASH FLOW GENERATED/USED DURING THE YEAR 2,264 (7,641) Key: (+) generated (-) used RECONCILIATION
Financial statement items 31.12.05 31.12.04
Cash and cash equivalents at the beginning of the year 21,582 29,223 Total net cash flow generated/used during the year 2,264 (7,641) Cash and cash equivalents: effects of changes in foreign exchange rates 90 Cash and cash equivalents at the end of the year 23,855 21,582
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• Illustration of the main changes introduced by the IAS/IFRS
A description of the main changes introduced by the new standards is provided below, with particular focus on those that have an impact on the representation of results by the Banca Popolare di Intra Group.
New classification criteria
The IAS/IFRS accounting principles include several important changes to the criteria for recognition of assets and liabilities, mainly due to application of the general principle of prevalence of economic substance over legal form. The international principles allow a balance sheet item to be recognised or written off only if there is a real transfer of the risks and benefits related to the asset being transferred. As opposed to the national principles, according to which transfer of ownership is a sufficient condition to allow recording of the item transferred in the balance sheet of the purchaser (in an amount equal to the write-off in the balance sheet of the seller), the IAS/IFRS principles also require the actual transfer of risk and benefits related to the asset, taken to be the right to receive cash flows related to the asset sold. Consequently, goods involved in transactions that do not respect the established requirements for elimination from the books must continue to be recorded in the financial statements of the seller, despite ownership having been transferred. Application of these regulations is particularly significant when accounting for financial leasing transactions, for which it is necessary to apply the finance method, where a loan is recorded in the balance sheet of the lessor and the leased asset and corresponding debt are recorded in the balance sheet of the lessee, for asset securitisation transactions and for factoring transactions, where it is necessary to carefully determine whether the underlying risks of the assets sold have been transferred as well.
Other innovative aspects regard the initial recording of financial instruments. The initial value recorded for a financial asset or liability must normally be based on its fair value19 increased or decreased by costs and income directly related to the transaction, which are thus capitalised and recorded in the income statement throughout the duration of the transaction at the effective rate of return (the “amortised cost”). Should the price paid in a transaction not correspond to the market value, the difference between the two values upon initial recording must be entered in the income statement. Regarding complex financial instruments, which consist of a primary host contract and an embedded derivative contract, IAS/IFRS principles require the latter to be recorded separately from the host contract if the overall contract is not valued at fair
19 Fair value is the consideration at which an asset may be exchanged or a liability settled in an arm’s length transaction between knowledgeable and independent parties.
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value or if the economic characteristics and risks of the implicit derivative contract are not strictly correlated to those of the primary contract.
Changes in the recording criteria also involve certain types of intangible fixed assets and the allocation of provisions for risks and charges. Regarding the former, the international principles prohibit capitalisation of internally generated costs for research, advertising, training, restructuring, trademarks and rights. In terms of the provisions for risks and charges, allocations can be made only when the enterprise has an obligation, when it is likely that the use of resources will be required to fulfil it and when a reliable estimate of liabilities can be made. The estimate must also take into account the expected disbursement times.
Significant innovations are also present in the recording of what are known as “share- based payments” (usually remuneration for employees or directors of the company via assignment of options to purchase shares of the company itself). As opposed to the accounting criteria adopted in the past, which did not involve accounting for charges in the income statement but solely recorded an increase in the company’s capital upon exercising of the options, the international standards require the options assigned to be valued at fair value and the corresponding amount to be recorded in the income statement under labour costs.
As far as the classification of assets/liabilities is concerned, the changes regarding financial instruments are particularly significant. The IAS/IFRS principles require that loans and receivables, payables, securities and derivative contracts no longer be accounted for according to type but based on the purposes for which these instruments are held by the company. The classification of financial instruments must take place upon initial recognition in the financial statements and can subsequently be modified only in limited circumstances. IAS 39 defines four standard categories for financial instruments: assets and liabilities at fair value through profit and loss (essentially assets and liabilities held for the purposes of trading and assets that the company decides to value at fair value, regardless of the purpose for which they are held), assets available for sale, assets held to maturity and loans/receivables and financial liabilities not held for trading20. The classification of financial instruments is important also for the purposes of defining the valuation criteria to be applied, as the
20 Categories of financial instruments provided by IAS 39: trading assets, include assets acquired to be sold in the short term or as part of portfolios held for the sole purpose of generating profits in the short term, as well as assets held at fair value by the company, with fair value changes recorded in the income statement; assets held to maturity, non-derivative assets with fixed maturity and fixed or determinable payments for which there exists an actual intention and capacity to hold until maturity; loans and receivables, non-derivative assets with fixed or determinable payments, not listed in an active market; assets available for sale, specifically designated as such or, in any case, the remaining assets not falling into the above categories.
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first two categories must be valued at fair value, while the other two are valued at cost or amortised cost21. Another important innovation in financial statement classification regards shareholdings. The international standards provide for classification of shareholdings only for investments in companies that are subsidiaries, associates or subject to joint control. All other equities must be classified either under assets at fair value through profit and loss or assets available for sale.
New valuation criteria
In terms of valuation criteria, the main changes regard financial instruments, tangible and intangible assets and pension funds. As regards financial instruments, it has already been stated that they must be valued at fair value, if trading instruments, derivatives contracts or assets available for sale are involved and at cost or amortised cost if dealing with assets held to maturity or loans/receivables and payables. The results of the valuation of trading instruments must be recorded in the income statement, while those related to assets available for sale are posted to a shareholders’ equity reserve until realisation.
According to the previous principles, non-hedging derivative instruments were valued at fair value and the result was posted to the income statement only if negative; the essential difference now regards extension of the fair value criterion to all derivative instruments. The market value for derivative instruments not listed in organised markets is determined by using internal valuation models that incorporate parameters measured on the market.
For financial instruments not classified under assets and liabilities at fair value through profit and loss, the IAS/IFRS principles require systematic verification that nothing may prevent full recovery of the book value of the asset. Said verification must be carried out analytically for each asset or collectively for groups of assets that are homogeneous in terms of risk. Contrary to what normally occurred based on the Italian principles, value adjustments must also take into account the time necessary for collection of the amounts considered recoverable.
The issue of valuation criteria for financial instruments also impacts the accounting treatment of derivative contracts to hedge against financial risks and the relative assets and liabilities hedged. The international standards distinguish between three different types: a fair value hedge of a financial asset or liability, which involves recording any changes in the fair value of the hedged instrument and of the derivative hedging contract in the income statement; hedging of variable cash flows exposed to a specific risk; hedging of an investment in foreign operations expressed
21 The amortised cost differs from the cost in that it includes the progressive amortisation of the difference between book value and nominal value of an asset or liability on the basis of the effective rate of return.
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in foreign currency, which involves recognition of a shareholders’ equity reserve for changes in the fair value of the derivative hedging contract only (while the hedged asset or liability continues to be recorded at cost or amortised cost). This criterion stems from the necessity to value all derivative contracts at fair value (including hedging contracts). According to the national principles, derivative hedging contracts were normally valued at cost, as per the criterion applied to hedged items.
As far as tangible fixed assets are concerned, the IAS/IFRS principles require them to be recorded at cost, with separation - as regards property - of building and underlying land, based on the assumption that land has an unlimited useful life and cannot, therefore, be depreciated. For subsequent valuations, it is possible to choose one of the following: - Valuation at cost: with this method, the goods continue to be recorded at cost, net of depreciation and any impairments/value restatements; - Valuation at fair value: with this method, the goods must be valued at fair value. The revaluation of property is recorded under shareholders’ equity for capital assets and to the income statement for non-capital assets. In the case of write- downs, the offsetting entry is always made to the income statement. As part of first-time adoption for property, plant and equipment, an assumed cost (known as the “deemed cost”), equal to the fair value at the date of first-time adoption, may be used as the opening book value, instead of the historical cost. For tangible fixed assets, the IAS/IFRS principles require depreciation based on useful life. For intangible assets with an indefinite life (for example, goodwill), periodic amortisation is replaced by the impairment test, which verifies that the asset has not undergone a reduction in value. Pension funds and, in general, all benefits provided to employees subsequent to termination of the employment contract are subdivided by the international principles into two categories: defined contribution plans, for which only the contributions payable by the company are recorded, and defined benefit plans, for which measurement of the provision occurs by estimating, using actuarial methods, the amount that will have to be paid upon termination of the employment contract.
Methods for first-time adoption of the international accounting standards
Since transition to the international standards involves a large number of companies, the IASB has prepared a specific accounting standard named IFRS 1, to regulate, in a homogeneous and coordinated manner, this phase of change in the rules for financial statement preparation. The document requires: - preparation of an opening balance sheet at the date of transition, prepared in accordance with the IAS/IFRS principles; - application of the accounting standards set forth by the IAS/IFRS in the first set of financial statements prepared in compliance with the new standards and in all periods of comparison (with the exclusion of certain obligatory exceptions, and several exemptions, which are optional, as set forth expressly by IFRS 1);
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- preparation of a report on the effects resulting from the transition to the international standards. The new standards must thus be applied retroactively with respect to the transition date of 1 January 2004, and at least one comparative set of financial statements must be prepared for 2004, in accordance with the same IAS/IFRS principles effective from 1 January 2005. IFRS 1 allows an optional derogation from this principle of retroactive application with reference to IAS 32 and 39 regarding financial instruments and IFRS 4 regarding insurance contracts. As previously stated, since these standards were approved by the IASB and validated by the European Commission during 2004, their application from 1 January 2004 is not obligatory. Companies exercising this faculty must carry out the conversion of the accounting balances with respect to said standards at 1 January 2005 and, consequently, 2004 financial statement values may not be comparable.
The opening balance sheet at 1 January 2004, and at 1 January 2005 as regards financial instruments and insurance contracts must be disclosed in compliance with the IAS/IFRS, as follows: - recognition of all assets and liabilities required by the international standards (including those not required by national standards); - write-off of assets and liabilities recognised according to national standards but which do not possess the requirements for recognition pursuant to the IAS/IFRS standards; - reclassification of the assets and liabilities recorded in the financial statements based on the new provisions; - application of the IAS/IFRS valuation criteria to the assets and liabilities. The effects of the adjustments in accounting balances resulting from this reclassification must be recognised directly in shareholders’ equity at the date of first- time adoption of the new standards.
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• First-time adoption of the IAS/IFRS by the Banca Popolare di Intra Group
First-time adoption of the new accounting standards requires certain choices to be made with respect to the new classifications of financial instruments, to the adoption of certain optional valuation criteria and to the possible application of several exemptions (optional) in retroactive application of the new principles, as set forth by IFRS1.
In addition, the Banca Popolare di Intra Group has exercised the faculty provided by IFRS 1 to apply IAS 32 and 39 regarding financial instruments from 1 January 2005. Consequently, data for the 2004 period and at 30 June 2004 are not comparable in terms of financial instrument valuation.
Financial instruments (represented by securities, loans and receivables, payables, derivative contracts and shareholdings) have been reclassified into the new categories provided by the IAS/IFRS, under a specific provision set forth by IFRS 1. Said provision allows for use of the categories during transition to the IAS/IFRS principles, as derogation to the general rule that allows use of these items only at the moment of purchase of the financial instrument. As regards the fair value option, which is the possibility to value any asset or liability at fair value regardless of its intended use, an amendment was approved by the Board in June 2005, allowing fair value valuation of structured financial instruments when the valuation of the embedded derivative is either too complex or leads to unreliable results. Said amendment was validated by the European Commission on 15.11.2005 with Regulation 1864/2005The Banca Popolare di Intra Group has decided to exercise the aforementioned option only with respect to structured bonds issued by Banks of the Group, in order to eliminate accounting inconsistencies and significantly improve financial statement disclosure.
Securities have been prevalently classified under assets held for trading; the framework deliberations of Group companies with regard to management of the investment securities category (now called “Financial assets held to maturity”) have been revised, leading to the elimination, for the moment, of this category.22 Securities that do not possess the characteristics for classification under one of the aforementioned items have been classified under “Financial assets available for sale”.
Loans to customers and banks have maintained said classification in the case of both loans originating from the Group as well as those acquired from third parties. Repurchase agreements, trade receivables and receivables originating from financial
22 The only security present in the category “investment securities” has been reclassified to the category “available for sale” since, being the hedging subject of a fair value hedge, it was decided that the valuation of the bond should be consistent with that of the derivative.
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leasing transactions have also maintained this classification (for the latter, the financial method was already used in the past for consolidated financial statements). For tangible fixed assets, the Banca Popolare di Intra Group has made the following choices: - capital properties have been recorded at deemed cost, in order to represent them in a manner consistent with the current market values of buildings not intended to be sold; in addition, considering the continued thorough level of maintenance, the depreciation rate has been reduced from 3% to 2%; - investment properties have been maintained at cost, and a 2% depreciation cycle has begun, as per the capital properties; - values of the underlying land have been separated from the buildings only in the case of fully-owned buildings and recorded consistently with the relevant building; these values are not depreciable; - property, plant and equipment have been recorded at cost and depreciated according to rates that represent their residual useful life.
A complete illustration of the new accounting standards adopted is provided in Section A2.
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• IAS/IFRS reconciliation statements and explanatory notes
The statements below illustrate the reconciliation of shareholders’ equity with reference to the IAS/IFRS transition dates (1 January 2004) and at 30 June 2004, as well as reconciliation of the economic results and the entire 2004 period.
The reconciliation statements provided have been prepared in accordance with the provisions of the IFRS.
The reconciliations of shareholders’ equity and of the economic result at 1 January 2004, 31 December 2004 and 1 January 2005 have been subjected to auditing by the independent auditing firm. The related report is provided at the end of this section.
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RECONCILIATION STATEMENT BETWEEN CONSOLIDATED SHAREHOLDERS’ EQUITIES AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS (amounts in thousands of Euro) 1-Jan-04 1-Jan-04 1-Jan-04 Effect of Effect of Effect of transition transition transition to IAS/IFRS to IAS/IFRS to IAS/IFRS excluding IAS 39 excluding IAS 39 including IAS 39
CONSOLIDATED SHAREHOLDERS’ 352,122 359,086 359,086 EQUITY AS PER LEGISLATIVE DECREE 87/92 (*)
FTA Reserves 18,055 36,188 (24,146)
Loans to customers * analytical valuation of deteriorated (51,497) loans * collective valuation of deteriorated (1,171) loans * collective valuation of performing loans (13,987) * amortised cost of loans for leasing (55) (55) (55) transactions Financial assets held for trading
* valuation of trading securities and of the related derivative contracts at fair 2,135 value * valuation of derivative contracts for trading at fair value (1,998) Financial assets available for sale * valuation at fair value 4,989 Derivative hedging contracts * fair value hedge: valuation of derivative hedging contracts and the hedged instruments at fair value (60) Tangible and intangible fixed assets * valuation of capital property at "deemed cost" 19,991 19,982 19,982 * change in the depreciation/amortisation method for capital and investment 0 (362) (362) property * reversal of depreciation on land 1,816 1,934 1,934 * intangible fixed assets not recorded under equity (4,346) (2,371) (2,371)
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* reversal of amortisation on goodwill 1,780 1,780 * reversal of amortisation on positive consolidation differences 7,269 7,269 * leasehold assets: transition from operating lease to finance lease 811 1,369 1,369 Financial liabilities at fair value * valuation of structured bonds issued using fair value option 1,040 Provisions for liabilities * discounting of allocations 37 48 48 * actuarial valuation of employee 129 111 111 severance indemnity Other effects * implicit option in convertible bond 7,620 7,620 * write-off of treasury shares held (303) * write-off of treasury bonds held 492 707 * accounting for stock options (25) (40) (40) * accounting for stock grants (1,667) (1,667) * other 78 78 Tax effect (6,865) (8,188) 13,354 Minority share of IAS/IFRS effects 26 (210) 266 Total effect of first-time adoption of IAS/IFRS principles 11,216 27,790 (10,526)
IAS/IFRS CONSOLIDATED 363,338 386,876 348,560 SHAREHOLDERS’ EQUITY (*) after deconsolidation of former subsidiary Futuro The statement above illustrates the effects of adoption of the international accounting standards on shareholders’ equity. For the most part, the adjustments do not envisage reclassification to the income statement in the years subsequent to first- time adoption. If the IAS/IFRS had already been adopted previously, these value adjustments would have produced positive or negative effects on the income statement. However, it is important to note that many of the adjustments made to shareholders’ equity have been determined from the moment of occurrence of the cash flows (known as the “time value”) and, therefore, should generate positive income effects in future periods. Adjustments related to financial assets available for sale, implicit options in convertible bonds and write-off of treasury shares are expected to change over time, due to recognition of the valuation effects of assets and liabilities recorded in the financial statements, and they will be recorded in the income statement only upon realisation.
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The statement below outlines the effects that adoption of the new accounting standards would have had on the economic result. RECONCILIATION STATEMENT BETWEEN CONSOLIDATED ECONOMIC RESULTS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS: AT 31 DECEMBER 2004 (amounts in thousands of Euro) 31-Dec-04 effect of transition Items to IAS/IFRS excluding IAS 39 (*)
Net income as per Legislative Decree 87/92 18,925
* Net interest (177)
* Other operating income (charges) 756
* Operating costs 2 ,082
* Value adjustments on positive consolidation 7,268 differences
* Value adjustments and allocations 18
* Taxes and other items (1,575)
* Minority profit (loss) (236)
Total effect of adoption of IAS/IFRS principles 8,136
Net IAS/IFRS income 27,061 (*) Result after deconsolidation of former subsidiary Futuro
Loans to banks and to customers
Analytical valuation of deteriorated loans
The IAS/IFRS principles require valuation of financial assets recorded at amortised cost to be carried out based on the present value of the expected cash flows. Deteriorated loans, which show signs indicating that their value may not be fully recoverable, must be valued analytically, also taking into account the recovery times for credit exposures. Contrary to what occurred up to the 2004 financial statements, this involves calculating the present value of expected recoveries.
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The recovery expectations for non-performing loans have been discounted in order to take into account estimated recovery times for the amounts, using the average rates effective at the moment of transfer to non-performing status, when the original rates for the individual positions are no longer available. Distribution of the recovery flows over time has been envisaged analytically for the most significant positions and statistically for the remaining positions. In addition, an estimate of the future legal expenses to be sustained in order to achieve recovery of the position has been recorded. An analytical valuation was carried out for problem loans exceeding € 100,000 (which constitute, in terms of amount, over 95% of total problem loans). The estimated realisable value was discounted, for positions with expected recovery times of over 12 months or with a high degree of probability of becoming non-performing, using the effective rates of the individual positions. For problem loans under € 100,000, a collective valuation was carried out, using the methods described below for performing loans, with the difference in this case being that the PD “probability of default” represents the probability – calculated on historical series – that a client classified as problem moves to non-performing status within a year. For positions that have expired or that have been past due over 180 days, in the absence of appropriate historical series, a current collective valuation has been carried out, equal to that of the worst class of performing loans increased by 50%, considered suitable to represent the higher degree of risk inherent in these cases. Starting from 2005, the income statement will include, under interest, the positive effect of recovery of the “time value” on deteriorated loans from previous periods, while value adjustments will include the effect of discounting of incoming problem or non-performing loans during the reference period in question.
Collective valuation of performing loans23
Loans that do not show signs of anomalies must be valued “collectively”, dividing them into homogeneous risk categories and determining value reductions for each of them estimated on the basis of historical loss experiences. Loan segmentation has been carried out based on the technical form of disbursement. The allocations for performing loans were determined by identifying the greatest possible synergies (to the extent allowed by the various regulations) with the approach set forth for supervisory purposes by provisions of the Basel II New Capital Accord. In particular, the parameters of the calculation model set forth by the new supervisory provisions, represented by the PD (Probability of Default24) and the LGD
23 With reference to a homogeneous group of financial assets with regular performance, collective valuation defines the measure of credit risk potentially inherent in the same, even though reclassification to a specific position is not yet possible. 24 PD-Probability of Default, represents the probability that the debtor will go into default in a time span of one year
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(Loss Given Default25), were used – where already available – also for financial statement valuation purposes. The one-year time span used for determining probabilities of default is believed to approximate the notion of incurred loss, which is the loss based on events that are current but not yet acquired by the company in reviewing the level of risk of the specific client, required by international principles.
Other effects of loans valuation
Other effects of loans valuation include discounting of particular loans with returns not aligned with market rates and write-downs of interest on arrears. According to the international standards, revenues may be recognised only when it is probable that the economic benefits will be received by the company. Consequently, with adoption of the new standards, interest on arrears is recognised only when its recoverability is certain (cash basis).
Financial assets held for trading
Valuation of trading securities and related derivative contracts at fair value
Securities classified under financial assets held for trading must be valued at fair value. Application of this valuation criterion even for unlisted securities, contrary to what occurred in the past, involves the recognition of surplus values. Therefore, the fair value of unlisted securities included in the above-mentioned categories has been determined through valuations carried out by specialised, independent companies or by using internal valuation models. In addition, conformity of valuation with respect to IAS/IFRS provisions has been verified for securities previously valued at fair value.
Valuation of derivative trading contracts at fair value
The IAS/IFRS principles require valuation of derivative contracts at fair value. This value must be determined by taking into account, in the case of internal valuation models, all significant risk factors and using parameters that can be measured on the markets. Valuation of these contracts at fair value also includes the valuation of derivatives correlated to investments classified, in accordance with the IAS/IFRS principles, among assets available for sale, also valued at fair value.
25 LGD-Loss Given Default, represents the estimated loss rate in case of debtor default.
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Valuation at fair value of derivative contracts implicit in bonds issued
International principles require derivatives contracts to be recorded separately in the financial statements, even if they are incorporated into other financial instruments (structured financial instruments) if these are not valued at fair value. In 2001, the Parent Bank issued the “Banca Popolare di Intra 3% 2001/2006 subordinated convertible” bond, which incorporated a call option sold to the bondholder. Based on the above-mentioned principle, this option was separated from the bond and recorded under “Capital instruments” in shareholders’ equity. Derivatives implicit in structured bonds issued were not separated, since the fair value option was exercised for this category of bond.
Derivative hedging contracts
Application of fair value in the valuation of derivatives contracts also regards contracts stipulated for the purposes of hedging financial risks. In the case of a hedge against the risk of changes in the market value of another financial instrument (fair value hedge26), the same valuation criterion must be applied to the hedged item as well, in order to achieve the required valuation consistency. This principle of consistency can be maintained only with effective hedging contracts, meaning those in which variations in the fair value offset, within well-defined limits, the opposite variations in value of the hedged instrument. In the case of hedging of future cash flows (cash flow hedge27), however, IAS 39 requires valuation at fair value (with recording of the effect to a shareholders’ equity reserve) of the derivative hedging contract only. Furthermore, derivative contracts stipulated between companies of the Group can no longer maintain accounting materiality in the consolidated financial statements. These new rules have led to a revision of the accounting and valuation criteria for hedging transactions. In application of said principles, the hedging derivatives implemented by the Banca Popolare di Intra Group are exclusively of the “fair value hedge” type. The Group has not carried out any “cash flow hedges”.
Fair value hedge: valuation of derivative hedging contracts and the hedged instruments at fair value
For the reasons indicated, as part of first-time adoption of the IAS/IFRS principles, balance sheet items whose market values are hedged and their related derivative
26 Fair Value Hedge is a hedge of exposure to the variation in fair value of a financial statement item attributable to a particular risk. 27 Cash flow hedge is a hedge of exposure to the variability of cash flows attributable to a particular risk.
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hedging contracts have been valued at fair value. These items were previously maintained at cost.
Measures to make hedging transactions compliant with IAS 39
The new and more stringent accounting rules for hedging transactions have led to a review of said transactions. Several derivative contracts with counterparts external to the Group, considered hedges as per the aforementioned regulatory provisions, have been reclassified to the trading segment as they are not compliant with the requirements of IAS 39 as regards accounting for hedging transactions. As specified previously, the fair value option has been exercised for structured bonds issued that had previously hedged the aforementioned derivatives.
Tangible and intangible fixed assets
Recognition of properties
As already mentioned, capital property has been valued using the deemed cost method, calculating a capital gain of € 19,995 thousand at 1.1.2004, before taxes, and recorded in a specific reserve. Investment property 28 was maintained at “adjusted cost”29. As far as the determination of values to assign to the capital property and verification of the appropriateness of the value of investment property is concerned, an official assessment by an independent technician has been commissioned. The combined effect of the change in depreciation rate (from 3% to 2%) and the increase in value of capital goods has led to a negative algebraic result of € 269 thousand on reclassified 2004 income statement, while the beginning of depreciation on investment property has generated a negative effect of € 98 thousand.
Reversal of depreciation on land
International principles require depreciation of assets to be calculated as a function of the useful life of the same or of the individual components if these have a different useful life. In the case of property, this approach requires separation of the value of the underlying land from the book value of the buildings – based on the assumption
28 IAS 40 defines investment property as property held for the purpose of earning rentals or appreciation of the capital invested or both, rather than: - for use in production or supply of goods and services or for administrative purposes - for sale in the ordinary course of business. In fact, it is the “non-capital property” category under the Italian principles. 29 “Adjusted cost” is the original cost net of depreciation and any impairment (and gross of any revaluations).
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that land is not subject to deterioration – with a consequent reversal of previous depreciation amounts related to this value. Therefore, separate accounting has been carried out for the value of the buildings and the amount attributed to the underlying land for fully-owned buildings, resulting in a reversal of the accumulated deprecation amount related to the land, equal to € 1,816 thousand at 1.1.2004. The reclassified income statement benefits from elimination of the value adjustment amount related to depreciation of land (+ € 118 thousand).
Intangible fixed assets not recorded under equity
The new principles allow intangible assets to be recorded under equity only if it is likely that these assets will generate future economic benefits and if the cost can be reliably measured. As application of the aforementioned criterion, intangible assets that cannot be recorded under equity were reversed.
Impairment of goodwill
IAS/IFRS principles do not allow for amortisation/depreciation of goods with an indefinite useful life, such as goodwill. This asset must now be valued systematically at least once a month, based on its recovery value, which is determined through what is known as the impairment test. As a result of applying this principle, goodwill recorded in the financial statements according to the previous accounting standards has been attributed to the corresponding revenue-generating units and recalculated according the recoverable value attributed to it. Goodwill consists of: - positive consolidation differences; - goodwill recorded by Intra Private Bank for acquisition of the “financial advisors” division from the Parent Bank; - goodwill recorded by Banca Popolare di Monza e Brianza for acquisition of the company division consisting of the branch network of Banca Popolare di Sesto S. Giovanni (now liquidated); - goodwill recorded by Monza e Brianza Leasing for acquisition of the Brianleasing company division. According to the analyses carried out, all amortisation has passed the impairment test and, consequently, no adjustments have been made, interrupting the amortisation procedure.
Liabilities valued at fair value
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Structured bonds issued by Banks of the Group, economically hedged by “basis swap”30 derivatives, were valued at fair value, exercising the option provided by IASB in the amendment to IAS 39, approved in June 2005. This choice was made in order to render valuation of the derivative (obligatory at fair value) homogeneous with that of the related liability.
Collective valuation of guarantees issued
The same processes already illustrated, adopted for the valuation of cash loans to customers and banks, were also applied to commitments. The effect of first-time adoption of the IAS/IFRS is due to the valuation of guarantees with respect to clients in good standing.
Other liabilities
Provisions for unrecognised risks and charges and discounting of allocations
The international principles allow for allocations in the financial statements only for outstanding obligations for which the company expects to require economic resources and is able to make a reliable estimate. The previously allocated funds have been deemed compatible with the most stringent rules of the international principles. Regarding the provisions for risks and charges, if the present value of money is a material aspect, the IAS/IFRS require that the amount of the allocation be represented by the present value of the cost estimated to be necessary to settle the obligation. Among the funds present in the financial statements, the timing factor was considered relevant only for those established as a result of disputes with an expected duration of over 12 months. These allocations, therefore, have been adjusted to take into account their present value.
Actuarial valuation of employee severance indemnity and pension funds
The international principles require defined-benefit pension plans to be valued on the basis of an actuarial estimate of the amount the company will have to pay the employee upon termination of the employment contract. The employee severance indemnity has been considered similar to a defined- benefits obligation and thus reclassified according to actuarial values and no longer as required by the specific Italian regulations.
30 A “basis swap” is a derivative contract involving the exchange of two indexed rates
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Treasury shares
Shareholders’ equity was reduced by the amount of treasury shares, in compliance with the provisions of international principles, since these can no longer be accounted for as assets.
Financial assets available for sale
The IAS/IFRS principles require financial instruments classified in the category of financial assets available for sale to be valued at fair value. The effect of this valuation must be recorded directly to a shareholders’ equity reserve until recognition.
Valuation of debt securities at fair value
During first-time adoption of the aforementioned principles, certain debt securities not held for trading activities and which do not present characteristics making them classifiable among assets held to maturity or among loans have been classified under “Financial assets available for sale”. The effect of the transition is linked to the valuation at fair value of the unlisted securities previously valued at the lesser of purchase cost and market value.
Valuation of equities at fair value
As part of first-time adoption, shareholdings considered to be long-term and not qualified as controlling, associated or joint control stakes have been classified as “financial assets available for sale”. These shareholdings, previously valued at cost net of any impairment, have been valued at fair value, calculated by using methods recognised by market practices (stock market listings, comparable transactions, stock market multiples or asset-based, financial and income-based valuation models).
Share-based payments
Contrary to the national standards, IAS/IFRS principles require the current value of share-based payments (the “stock grants” and “stock options”) to be recorded in the income statement at the moment in which they are assigned, with a balancing entry recorded in a shareholders’ equity reserve. The provisions set forth by IFRS2 must be applied for plans assigned after 7 November 2002. As regards the Parent Bank, the “stock grant” plan was provided for by the Supplementary Company Contract for the company bonus for the years 2001-2002- 2003 and involved the assignment of a specific number of shares if the Gross Operating Income for the period exceeded a certain threshold. Regarding the company bonus for the 2004 period, following:
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• expiry of the National Collective Labour Agreement and, consequently, of the Supplementary Company Contract; • an agreement reached as part of the National Collective Labour Agreement, allowing the parties to reach individual agreements for the definition of 2004 company bonuses; • an agreement signed between the Parent Bank and the Trade Unions, before approval of the 2004 Financial Statements; the decision was made to distribute the company bonus with the same rules effective before the current Supplementary Company Contract. As a result, a total of 130,619 shares were assigned to employees regarding the 2004 period. As part of reclassification of the income statement for this period, for the purposes of IAS/IFRS, the fair value of the shares assigned was recorded among personnel costs, with a balancing entry in a shareholders’ equity reserve for € 1,666 thousand. As far as Intra Private Bank is concerned, there is an incentive plan underway for personnel and advisors, promoted by the Parent Bank via stock options on Intra Private shares in the Popolare Intra portfolio. In consideration of the fact that the usefulness of options is directly related to the subsidiary, a negative shareholders’ equity reserve was recorded with respect to the subsidiary, equal to the fair value of the options assigned in 2003, for € 25 thousand and, during reclassification of the 2004 income statement, relevant costs of € 40 thousand were recorded.
Tax effect
The impact of first-time adoption of the IAS/IFRS on shareholders’ equity was calculated net of the relative tax effect, determined according to the legislation in force (including Legislative Decree no. 38/2005); in particular: -IRES (Corporate Tax) was calculated at a rate of 33%; -for the purposes of IRAP (Regional Business Tax) equity allocations were considered extraordinary income and charges and, therefore, in principle, fiscally immaterial, except in cases of correlation with material income and charges for the purposes of taxation in previous or subsequent periods; in these cases, a rate of 4.50% was applied (the average rate, taking into account the regional surtaxes). In addition, liabilities for deferred taxes related to deferred tax provisions were not recorded in the financial statements, since the amount of available reserves already subject to taxation leads to the reasonable opinion that further taxable transactions will not be carried out.
Summary
In conclusion, transactions carried out to increase/decrease capital during first-time adoption of the IAS/IFRS accounting standards resulted in a reduction in capital as at 1 January 2005 from € 359.1 million to € 348.6 million (- € 10.5 million), following gross decreases of € 24.1 million and net of the tax effect of € 13.3 million, in addition to attribution to minority equity for € 0.3 million.
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RECONCILIATION STATEMENT BETWEEN CONSOLIDATED INCOME STATEMENTS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS: AT 31 DECEMBER 2004
(amounts in thousands of Euro) 31-Dec-04 Effect of 1-Dec-04 Legislative transition IAS/IFRS Decree 87/92 Items (*) to IAS/IFRS excluding IAS 39 excluding IAS 39 (A) (B) (A) + (B) Net interest 139,049 (177) 138,872 Dividends and profits on shareholdings under 4,051 4,051 shareholders’ equity Interest margin 143,100 (177) 142,923 Net fees 47,310 47,310 Profits (Losses) from financial transactions (2,323) (2,323) Other net operating income 17,503 756 18,259 Net interest and other banking income 205,590 579 206,169 Personnel costs (61,441) (1,725) (63,166) Other administrative expenses (49,363) (49,363) Value adjustments to tangible and intangible fixed assets (17,354) 3,807 (13,547) Operating costs (128,158) 2,082 (126,076) Operating income 77,432 2,661 80,093 Value adjustments to positive consolidation 0 7,268 7,268 differences Allocations to provisions for risks and charges (7,909) 18 (7,891) Value adjustments to loans and allocations to provisions for risks and charges (59,953) (59,953) Net value adjustments to financial fixed assets (1,757) (1,757) Profit (loss) from ordinary activities 7,813 9,947 17,760 Extraordinary profit (loss) 18,977 70 19,047 Income taxes for the period (7,457) (1,645) (9,102) Minority profit (loss) for the period (408) (236) (644) Net profit 18,925 8,136 27,061 (*) Result after deconsolidation of former subsidiary Futuro
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RECONCILIATION STATEMENT BETWEEN CONSOLIDATED BALANCE SHEETS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS: AT 1 JANUARY 2004
(amounts in thousands of Euro) 31-Dec-03 Effect of 1-Jan-04 transition IAS/IFRS ASSETS to IAS/IFRS excluding IAS 39 excluding IAS 39 (A) (B) (A) + (B) 1. Cash and deposits with central banks and post offices 29,177 0 29,177 2. Loans: 3,774,478 (55) 3,774,423 * due from customers 3,553,335 (55) 3,553,280 * due from banks 221,143 0 221,143 3. Trading securities 464,676 99,697 564,373 of which treasury shares 303 (303) 0 4. Fixed assets: 186,266 (76,775) 109,491 * Investment securities 100,000 (100,000) 0 * Shareholdings 27,395 0 27,395 * Tangible and intangible assets 58,871 23,225 82,096 5. Positive consolidation differences 11,983 0 11,983 6. Other assets 132,743 1,793 134,536 Total assets 4,599,323 24,660 4,623,983
31-Dec-03 Effect of 1-Jan-04 transition IAS/IFRS Liabilities to IAS/IFRS excluding IAS 39 excluding IAS 39 (A) (B) (A) + (B) 1. Payables: 3,956,030 5,020 3,961,050 * due to customers 1,738,889 0 1,738,889 * securities 1,998,575 0 1,998,575 * due to banks 218,566 5,020 223,586 2. Provisions for specific purposes 54,119 6,874 60,993 3. Other liabilities 112,034 1,576 113,610 4. Subordinated liabilities 95,606 0 95,606 5. Minority interests 12,977 (26) 12,951 6. Shareholders’ equity: 368,557 11,216 379,773 * capital, reserves 352,122 11,216 363,338 * net profit 16,435 0 16,435 Total liabilities and shareholders’ equity 4,599,323 24,660 4,623,983
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RECONCILIATION STATEMENT BETWEEN CONSOLIDATED BALANCE SHEETS AS PER LEGISLATIVE DECREE 87/92 AND IAS/IFRS: AT 31 DECEMBER 2004
(amounts in thousands of Euro) 1-Dec-04 Effect of 31-Dec-04 Effect of 1-Jan-05 transition IAS/IFRS transition IAS/IFRS ASSETS to IAS/IFRS excluding IAS 39 to IAS/IFRS with IAS 39 excluding IAS 39 with IAS 39 (A) (B) (A) + (B) ( c ) (A) + (B) + (c) 1. Cash and deposits with central banks and post 21,582 0 21,582 0 21,582 offices 2. Loans: 3,886,450 5,480 3,891,930 (66,655) 3,825,275 * due from customers 3,668,225 5,396 3,673,621 (66,655) 3,606,966 * due from banks 218,225 84 218,309 0 218,309 3. Trading securities 473,125 109,589 582,714 32,546 615,260 of which treasury shares 0 00 0 0 4. Fixed assets: 170,138 (76,853) 93,285 0 93,285 * Investment securities 100,000 (100,000) 0 0 0 * Shareholdings 12,051 (12,051) 0 0 0 * Tangible and intangible 58,087 35,198 93,285 0 93,285 assets 5. Positive consolidation differences 0000 0 6. Other assets 168,496 (24,772) 143,724 19,780 163,504 Total assets 4,719,791 13,444 4,733,235 (14,329) 4,718,906
31-Dec- Effect of 31-Dec-04 Effect of 1-Jan-05 04 transition IAS/IFRS transition IAS/IFRS Liabilities to IAS/IFRS excluding IAS 39 to IAS/IFRS with IAS 39 excluding IAS 39 with IAS 39 (A) (B) (A) + (B) ( c ) (A) + (B) + (c) 1. Payables: 4,018,329 147,864 4,166,193 21,066 4,187,259 * due to customers 1,725,951 5,710 1,731,661 0 1,731,661 * securities 2,186,042 142,081 2,328,123 21,066 2,349,189 * due to banks 106,336 73 106,409 0 106,409 2. Provisions for specific 56,424 (30,633) 25,791 (136) 25,655 purposes 3. Other liabilities 110,739 12,987 123,726 3,533 127,259 4. Subordinated liabilities 144,774 (144,774) 0 0 0 5. Minority interests 11,514 210 11,724 (476) 11,248
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6. Shareholders’ equity: 378,011 27,790 405,801 (38,316) 367,485 * capital, reserves 359,086 19,654 378,740 (38,316) 340,424 * net profit 18,925 8,136 27,061 0 27,061 Total liabilities and 4,719,791 13,444 4,733,235 (14,329) 4,718,906 shareholders’ equity
The tables above illustrate the effects application of the IAS/IFRS would have had on the balance sheet at 1 January 2004, 31 December 2004 and 1 January 2005 according to the financial statement standards effective at that time.
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REPORT BY THE INDEPENDENT AUDITING FIRM ON FIRST-TIME ADOPTION OF THE IAS/IFRS ACCOUNTING PRINCIPLES
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CONSOLIDATED SUPPLEMENTARY NOTES
Part A – Accounting policies
Part B – Information on the consolidated balance sheet
Part C – Information on the consolidated income statement
Part D – Segment reporting
Part E – Information on risks and related hedging policies
Part F – Information on the consolidated equity
Part G – Business combination transactions regarding business or company branches
Part H – Transactions with related parties
Part I – Payment agreements based on own equity instruments
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Part A – ACCOUNTING POLICIES
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A.1 - GENERAL
Section 1 – Declaration of compliance with international accounting principles
EC Regulation no. 1606/02, issued on 19 July 2002 by the European Commission, introduced the requirement for European listed companies to prepare their consolidated financial statements in accordance with the IAS/IFRS31 international accounting principles starting from 1 January 2005. This measure is a result of the evident need to standardise the accounting criteria used to prepare the financial statements of companies operating within the European Community, following the continuous and rapid development of financial markets and the globalisation underway in the economy. The complex validation process for the new accounting standards, established by the same Regulation, was completed by the European Commission in December 2004, while implementation of the new principles in Italy was approved through Legislative Decree no. 38 of 28 February 2005 which, among other things, extended the scope of application of the IAS/IFRS principles to the individual financial statements (optional for 2005 and obligatory from 2006) of listed companies, banks and other regulated financial institutions. Taking into consideration the recommendation of the CESR (Committee of European Securities Regulators) with respect to transition to the new accounting standards and the provisional measures issued by CONSOB with respect to interim reporting, the Banca Popolare di Intra Group has decided to adopt the new standards starting from the consolidated interim report at 30 June 2005.32 Therefore, the company’s financial statements are drafted in compliance with the international accounting principles, and respect the layout and rules of preparation set forth in circular no. 262, issued with Provision of the General Manager of the Bank of Italy dated 22 December 2005. The Financial Statements consist in the Balance Sheet, the Income Statement, the Statement of Changes in Shareholders’ Equity, the Cash Flow Statement and the Explanatory Notes, along with the Consolidated Report on Operations. As required by paragraph 14 of IAS 1, the Parent Bank Banca Popolare di Intra confirms explicitly and without reservation that the Consolidated Financial Statements comply with the IAS/IFRS principles.
31 The IAS (International Accounting Standards) are internationally recognised accounting standards issued by the International Accounting Standards Board (IASB). Starting from 1 April 2001, the new standards are identified by the abbreviation IFRS (International Financial Reporting Standards). For the purposes of these financial statements, reference is made to the IAS/IFRS validated by the European Commission pursuant to art. 6 of EC Regulation no. 1606/2002, provided in the annex. 32 The Parent Bank and the banking subsidiaries have exercised the right to adopt the IAS/IFRS principles for the individual financial statements from the 2005 period, while the other subsidiaries will adopt said standards from 1.1.2006. The non-banking subsidiaries have provided the Parent Bank with the data required (the IAS package) to prepare the consolidated statements in IAS/IFRS format.
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It is also important to note that application of the new accounting standards has resulted in significant variations in the representation of transactions, in the valuation of assets and liabilities and in the actual structure of the financial statements. The standards regulating first-time adoption of the IAS/IFRS require preparation of at least one period of comparison, using the same principles. However, the delay in approval of accounting standard IAS 39 – the most significant one in terms of the banking sector – has resulted in European lawmakers not enforcing compliance with IAS 39 for 2004 comparative information. Consequently, the data relative to the period 2004 are not comparable in terms of valuation of financial instruments. The Consolidated Financial Statements were subjected to an audit by the independent auditing firm Reconta Ernst & Young S.p.A.
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Section 2 – General drafting criteria
The Financial Statements for the year consist in the Consolidated Balance Sheet, the Consolidated Income Statement, the Statement of Changes in Consolidated Shareholders’ Equity, the Consolidated Cash Flow Statement and the Explanatory Notes. In addition, the Consolidated Financial Statements are accompanied by the Consolidated Report on Operations and Group Companies. The amounts in these Explanatory Notes are in thousands of Euro.
No derogations from the application of IAS/IFRS principles have been made. With reference to the presentation of comparative data, based on the provisions of IFRS 1, data from the previous period regarding financial instruments (IAS 32 and IAS 39) were not reclassified.
Contents of accounting statements
Balance sheet and Income Statement
The statements of the balance sheet and income statement are composed of items, sub-items and further details (the “of which” following items and sub-items) which constitute the financial statement accounts. In compliance with the provision of the Bank of Italy, accounts which showed no amounts for the year of the financial statements and the previous year were not presented in the statements.
Statement of changes in shareholders’ equity
This statement has been drafted in compliance with that set forth in Bank of Italy circular no. 262. This represents the breakdown and movements in shareholders' equity accounts during the year of reference and the previous year.
Cash flow statement
The statement of cash flow during the year of reference and the previous year has been prepared using the direct method.
Cash flows are divided into those deriving from operations, those generated by investment activities and those produced by the creation of funding.
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Section 3 – Scope and methods of consolidation
1. Investments in subsidiaries, exclusive and joint (consolidated proportionally)
Company name HQ Type of Quota held % Available votes quota (2) (1) Investee company Quota % A. Companies A.1 Fully consolidated
1 Banca Popolare di Monza e Brianza SpA 2 Intra Private Bank SpA Monza 1 Banca Popolare di Intra 82.28% 82.28% 3 Intrafid Srl Verbania 1 Banca Popolare di Intra 81.90% 81.90% Verbania 1 Banca Popolare di Intra 89.00% 89.00% 4 Monza e Brianza Intra Private Bank 1.00% 1.00% Leasing SpA Monza 1 Banca Popolare di Intra 89.12% 89.12% Banca Popolare di A.2 Proportionally Monza e Brianza 10.88% 10.88% consolidated ======
Key: (1) Type of relationship 1 = majority of voting rights in ordinary shareholders’ meeting 2 = dominant influence in ordinary shareholders’ meeting 3 = agreements with other shareholders 4 = other forms of control 5 = unified management pursuant to art. 26, paragraph 1, of Legislative Decree 87/92” 6 = unified management pursuant to art. 26, paragraph 2, of Legislative Decree 87/92” 7 = joint control
(2) Availability of votes in ordinary shareholders’ meeting, distinguishing between effective and potential.
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Section 4 – Events occurring after the balance sheet date
This section is prepared in order to comply with the disclosure requirements of IAS regarding events occurring after the balance sheet date (31.12.2005) understood as favourable or unfavourable events which occur between the balance sheet date and the date in which publication of the financial statements is authorised. The definitions contained in IAS 10 indicate that two types of facts may be identified: c) those providing evidence regarding situations existing at the balance sheet date (adjusting events after the balance sheet date) and d) those indicating situations arising after the balance sheet date (non-adjusting events after the balance sheet date)
Among the non-adjusting events after the balance sheet date, during the first quarter of 2006, an Action Plan was approved which contains the guidelines for the 2006- 2008 Strategic Plan. The definitive Strategic Plan, containing accurate budget forecasts for 2006-2008, extended to the two year period 2009-2010 through suitable simulations, will be approved in the next few days.
In the meantime, the Parent Bank has resolved to start a project of "shared autonomy", aimed at various types of strategic partnership with a bank or banking group to be chosen from the cooperative banks of similar or comparable size.
In light of that set forth above, it can be affirmed that the consolidated financial statements have been prepared according to the assumption of company continuity.
Pursuant to paragraph 17 of IAS 10, it is hereby declared that the publication of the consolidated financial statements was authorised by resolution of the Board of Directors of the Parent Bank on 29 March 2006, which approved them.
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Section 5 – Other aspects
Estimate procedure
IAS 1, paragraph 116 specifies that the entity must provide disclosure regarding the fundamental assumptions for the future, and other causes of uncertainty in the estimates at the balance sheet date, which could lead to material rectifications to the accounting values in assets and liabilities within the following financial year.
For this purpose, it is important to note that allocation to tax provision was calculated based on the current laws in force, according to the prudence criteria, supported by a circular issued by the Italian Banking Association illustrating several reflections on the taxability of companies following the adoption of IAS/IFRS principles.
At the moment of approval of the Financial Statements by the Board of Directors, there are no interpretations by the Revenues Office regarding transition to IAS/IFRS and regarding currency revaluation.
Accounting policies, changes in estimates and errors
In compliance with IAS 8, there have been no variations in accounting principles or accounting estimates regarding the "pro forma" reconstruction of the statements presented with reference to First Time Adoption as at 1 January 2005.
In the accounting situation of the consolidated balance sheet at 31.12.2004 with application of IAS different to 32 and 39, with regard to that presented in the half-year report and subsequent quarterly reports, following clarifications, a part of the valuation reserves were included among other reserves.
National tax consolidation option
Starting from 2004, the Parent Bank Banca Popolare di Intra and Intra Private Bank adopted the “national tax consolidation” option, set forth in articles 117-129 of the T.U.I.R. (Italian Income Tax Code). Starting from financial year 2005, this option was also extended to Banca Popolare di Monza e Brianza.
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A.2 – SECTION REGARDING THE MAIN FINANCIAL STATEMENT ITEMS
1 - Financial assets held for trading a) Recognition criteria Initial recognition of the financial assets occurs at the settlement date for debt and equity securities and at the subscription date for derivative contracts. Financial assets held for trading are initially recorded at cost, taken to be the fair value of the instrument, including transaction costs or revenues directly attributable to the instrument itself. b) Classification criteria This category exclusively includes debt and equity securities, complex financial instruments and the positive value of derivative contracts held for trading purposes. c) Valuation criteria Subsequent to initial recognition, financial assets held for trading are measured at fair value. To calculate the fair value of financial instruments listed in a regulated market33, market prices (official and benchmark) are used. In the absence of an active market, estimation methods and valuation models are used which take into account all the risk factors related to the instruments and are based on recordable market data, such as: methods based on the valuation of listed instruments with similar characteristics, calculation of discounted cash flows, option price determination models and values recorded in recent comparable transactions. d) Write-off criteria Financial assets are written off when the contractual rights on the cash flows generated by the assets expire or when the financial asset is sold, essentially transferring all related risks/benefits.
2 - Financial assets available for sale a) Recognition criteria Initial recognition of the financial asset occurs at the settlement date for debt or equity securities. The assets are initially recorded at cost, taken to be the fair value of the instrument, including transaction costs or revenues directly attributable to the instrument itself. If recognition occurs following a reclassification from Assets
33 A financial instrument is considered to be quoted on a regulated market if its prices, which reflect normal market transactions, are readily and regularly available from Stock Exchanges, Brokers, Intermediaries, companies of the sector, listing services or authorised entities, and if said prices represent actual and ordinary market transactions occurring during a normal reference period.
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held to maturity, the value recorded is equal to the fair value at the moment of transfer. b) Classification criteria This category includes non-derivative financial assets not otherwise classified under Loans and receivables, Assets held for trading or Assets held to maturity. In particular, this category also includes shareholdings not managed for trading purposes and not qualified as controlling, associated or joint control, as well as the junior portion of the securitisation transaction carried out in 2002 by the Parent Bank. c) Valuation criteria Following initial recognition, assets available for sale continue to be measured at fair value, with the value corresponding to amortised cost recorded in the income statement, while profits or losses generated by fluctuations in fair value are recorded in a specific Shareholders’ equity reserve named “130 Valuation reserve” until the financial asset is written off or an impairment is recorded. Upon disposal or impairment, the cumulative profit or loss is transferred into the income statement. Equity securities for which it is not possible to determine the fair value in a reliable manner according to the aforementioned guidelines are held at cost. Verification of the existence of objective signs of impairment is carried out upon closure of the financial statements or interim report. Should the reasons behind an impairment cease to exist following an event occurring subsequent to its realisation, a write-back is recorded and posted to the income statement for debt securities and to shareholders’ equity for equity securities. However, the total write-back cannot exceed the amortised cost that the instrument would have had in the absence of prior adjustments. d) Write-off criteria Financial assets are written off when the contractual rights on the cash flows generated by the assets expire or when the financial asset is sold, essentially transferring all the risks and benefits related to it.
3 - Financial assets held to maturity The Group does not hold financial assets of this type.
4 – Loans and receivables a) Recognition criteria Initial recognition of a loan occurs at the date of disbursement, based on the fair value, equal to the amount disbursed, including income/charges directly attributable to the individual loan and definable from the beginning of the transaction, even if paid at a later date. Charges having the above characteristics
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but which are the subject of reimbursement by the debtor counterpart or are classifiable under normal internal administrative costs are excluded. Repurchase agreements with the obligation to repurchase or resell at maturity are recognised in the financial statements as deposits or loans. In particular, spot sale and forward repurchase transactions are recorded in the financial statements as debts for the spot amount, while spot purchase and forward resale transactions are recorded as loans for the spot amount. b) Classification criteria This category includes loans to customers and banks, provided both directly as well as acquired from third parties, which involve fixed or definable payments, are not listed in a regulated market and were not originally classified under financial assets available for sale. Loans and receivables also comprise trade receivables, repurchase agreements, receivables originating from financial leasing transactions and portfolio advances. For receivables acquired without recourse, these were included under loans and receivables, upon verification that no contractual clauses significantly alter the transferee company’s exposure to risk. c) Valuation criteria After initial recognition, loans are valued at amortised cost, equal to the originally recorded value decreased/increased by capital repayments, value adjustments and write-backs and amortisation – calculated with the effective interest rate method – of the difference between amount disbursed and the amount repayable upon maturity, typically attributable to the income/charges directly related to the individual loan. The effective interest rate is calculated as the rate that equates the present value of future cash flows generated by the loan, in terms of capital and interest, to the amount disbursed, including income/charges attributed to the loan. This accounting method, which uses financial logic, distributes the economic effect of the income/charges throughout the expected residual life of the loan. The amortised cost method is not used for loans whose short duration makes the effect of the discounting principle negligible. Said loans are valued at historical cost and the income/charges attributable to the same are recorded in the income statement throughout the useful life of the loan. A similar valuation criterion is adopted for loans without a definite maturity or valid until cancelled. At the end of every year and interim period, recognition of loans is carried out, in order to identify those that show objective signs of possible impairment, following events that occurred after they were recorded. Included in this scenario are loans classified as non-performing, doubtful, restructured, or unsecured to residents in high-risk countries, in accordance with current provisions by the Bank of Italy, consistent with IAS regulations. In addition, in compliance with the provisions of the Regulatory Authority, expired or past due loans of over 180 consecutive days were also included under deteriorated loans.
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Said deteriorated loans undergo an analytical valuation process, and the value adjustment for each loan is equal to the difference between the book value of the same at the moment of valuation (amortised cost) and the present value of expected future cash flows, calculated by applying the contractually agreed interest rate. This rate remains unvaried over time, even if there has been a restructuring of the relationship, leading to a change in contractual rate, and even if the loan becomes, in practice, non-interest bearing in terms of contractual interest. The expected cash flows take into account the expected recovery times, the estimated realisable value of any guarantees and the costs that will likely be sustained for recovery of the credit exposure. Cash flows related to loans expected to be recovered in the short term are not discounted. The value adjustment is recorded in the income statement. The original value of the loans is restored in subsequent periods to the extent to which the reasons that led to their adjustment no longer exist, as long as this valuation is objectively supported by an event that occurred subsequently to the actual adjustment. The write-back is recognised in the income statement and may in no case exceed the amortised cost of the loan had there been no prior adjustments. Loans for which no objective signs of impairment have been identified, which are normally performing loans, as well as problem loans of an amount less than € 100,000 (as these amounts are not very significant overall), are subjected to a valuation of collective impairment. Said valuation occurs by categories of homogeneous loans in terms of credit risk, and the relative loss percentages are estimated by taking into consideration historical series, based on observable elements on the date of valuation, allowing an estimate of the latent impairment for each category of loans. Collectively determined value adjustments are recorded in the income statement. At the end of each year and interim period, any additional adjustments or write- backs are recalculated differently with reference to the entire loans portfolio measured collectively at the same date. d) Write-off criteria Loans and receivables sold are eliminated from the assets in the financial statements only if the sale involved the transfer of all the relative risks and benefits. Conversely, if the risks and benefits related to the loans and receivables sold have been maintained, these continue to be recognised among the assets in the financial statements, even if legal ownership has effectively been transferred. If it is not possible to verify the actual transfer of risks and benefits, the loans and receivables are eliminated from the financial statements if no type of control has been maintained over them. On the other hand, if even partial control is maintained, these items remain in the financial statements in an amount equal to the residual involvement, measured by the exposure to changes in value of the loans and receivables sold and to variations in the cash flows of the same.
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Finally, loans and receivables sold are eliminated from the financial statements if the contractual right to receive the relative cash flows has been retained, with the simultaneous assumption of an obligation to pay said flows, and only said flows, to third parties.
5 - Financial assets at fair value The Group does not hold financial assets of this type.
6 - Hedging transactions a) Recognition criteria Derivative hedging financial instruments are initially recognised at fair value and classified in the assets item “80 hedging derivatives” and the liabilities item “60 hedging derivatives”. b) Classification criteria Risk hedging transactions are aimed at offsetting potential losses from a specific item or group of items, attributable to a specific risk, via profits from another item or group of items should that particular risk actually occur. Fair value hedging is used in the Group, with the objective of hedging exposure to variations in fair value of a balance sheet item attributable to a specific risk. c) Valuation criteria Hedging derivatives are valued at fair value; in particular, in the case of fair value hedges, the variation in fair value of the hedged item is offset by the variation in fair value of the hedging instrument. This offsetting is recognised by recording the variations in value in the income statement, for both the hedged item (as regards variations produced by the underlying risk factor) as well as the hedging instrument. Any resulting differences, which represent the partial ineffectiveness of the hedge, constitute the net economic result. The derivative instrument is designated as a hedging instrument if there is official documentation of the relationship between the hedged instrument and the hedging instrument, and if it is effective at the moment in which the hedging begins and throughout the life of the same. Hedging effectiveness depends on the degree to which fair value variations of the hedged instrument or of the relative expected cash flows are offset by those of the hedging instrument. Consequently, effectiveness is increased by a comparison of the aforementioned variations, taking into account the intended goal of the company at the moment in which the hedge was established. A hedge is considered effective (within the established range of 80-125%) when changes in fair value of the financial hedging instrument almost entirely offset variations in the hedged instrument resulting from the specific risk being hedged.
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Valuation of the effectiveness is carried out at the end of every year or upon preparation of interim reports, using: À prospective tests, which justify application of hedge accounting, demonstrating its expected effectiveness; À retrospective tests, which highlight the degree of hedging effectiveness achieved during the period in question. In other words, they measure the extent to which expected results have deviated from perfect hedging. d) Write-off criteria Recording of hedging operations is interrupted: À if the hedging carried out through the derivatives ceases or is no longer effective, according to the tests set forth above; À if the derivative expires, is sold, cancelled or exercised; À the hedged item is sold, expires, or is repaid; À If the hedge characteristic is revoked. With the obvious exception of the second case, if the recording of a hedging transaction is interrupted, the derivative is reclassified among financial instruments for trading.
7 - Shareholdings a) Recognition criteria Shareholdings are recognised at cost including accessory costs and/or income. b) Classification criteria This item includes, in the accounting situation, controlling interests of the Parent Bank. There are no shareholdings in associates or cases of joint control. c) Valuation criteria Shareholdings are held at cost, as the impairment test has not identified any impairment. d) Write-off criteria Financial assets are written off when the contractual rights on the cash flows generated by the assets expire or when the financial asset is sold, essentially transferring all the risks and benefits related to it.
8 - Tangible assets a) Recognition criteria Tangible fixed assets are initially recognised at cost, which includes, in addition to the purchase price, all accessory charges directly attributable to the purchase and to the set-up of the asset; for capital property present at the date of first-time adoption, the cost has been determined to be the deemed cost.
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Costs for extraordinary maintenance which lead to an increase in future economic benefits, are added to the value of the assets, while ordinary maintenance costs are recorded directly in the income statement. b) Classification criteria Tangible assets include land, capital property, real estate investments, technical plants, furniture and fittings, as well as restructuring and adaptation costs for third- party real estate for capital use. These are tangible assets that are held for use in production or in the provision of goods or services, for rental to third parties or for administrative purposes, and which are expected to be used for more than one period. Renovation costs for buildings which are not owned are capitalised, in view of the fact that for the duration of the lease contract, the utilising company has control of the assets and may draw future economic benefits from them. This item also includes assets used within the scope of financial leasing contracts, even though the legal ownership of said assets remains with the lessor company. c) Valuation criteria Fixed assets are systematically depreciated throughout their useful life, using the straight-line method, with the exception of land, whether acquired separately or as part of the value of the building, as it is considered to have an indefinite useful life. Where its value is incorporated into the value of the building, it is considered to be an asset which can be separated from the building. The subdivision of the value of the land and value of the building is calculated on the basis of assessments by independent experts for fully-owned buildings. For buildings which, during the financial year, lose the characteristic of being “fully- owned”, following the sale of part of the building, the corresponding fraction of land is reincorporated to the remaining property owned. Restructuring costs for leased buildings are amortised over a period not exceeding the duration of the lease contract. At the end of every year or interim period, where there is evidence to suggest that the asset may have suffered an impairment, a comparison is made between the book value of the asset and its recoverable value, equal to the lesser of fair value, less any sales costs, and the relative useful value of the asset, taken to be the present value of future cash flows generated by the asset. Any adjustments are recorded in the income statement. Should the reasons giving rise to the impairment cease to exist, the asset is written-up to a value that may not exceed the value it would have had in the absence of the impairment, net of depreciation. d) Write-off criteria Tangible fixed assets are written off the balance sheet either upon disposal or when permanently retired from use and when no future economic benefits are expected from their disposal.
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9 - Intangible assets a) Recognition criteria Intangible assets are recorded as such if and only if: À it is likely that the company will receive future economic benefits attributable to the asset; À the asset can be clearly identified and can be controlled by the company; À the cost of the asset can be reliably measured. Intangible assets are recognised at cost, adjusted by any accessory charges. An intangible asset may be recognised as goodwill when the positive difference between the fair value of the equity items acquired and the purchase cost of the shareholdings (inclusive of accessory costs) is indicative of the future income capacity of the shareholdings (goodwill). If this difference proves to be negative (badwill) or in the event that the goodwill is not justified by the future income capacity of the shareholdings, the difference is recorded directly to the income statement. b) Classification criteria Intangible assets include goodwill, multi-year software applications and other assets in compliance with the requirements of IAS 38. Goodwill represents the positive difference between the purchase cost and the fair value of the assets and liabilities acquired. Intangible assets are recorded as such if they are identifiable and arise from legal or contractual rights. c) Valuation criteria Verification of the adequacy of the goodwill value is carried out on an annual basis (or each time there is evidence to suggest impairment). This involves identifying the units generating the cash flows to which goodwill is attributed. The extent of any impairment is determined on the basis of the difference between the carrying value of goodwill and its recoverable value, if less. Said recoverable value is equal to the lesser of fair value of the units generating the cash flows, less any sales costs, and the relative utilisation value. Subsequent value adjustments are recorded in the income statement. The cost of intangible fixed assets is amortised on a straight-line basis over the relative useful life of the assets. If their useful life is indefinite, intangible assets are not subjected to amortisation but only to periodic verification of the adequacy of their carrying value. At the end of each year or interim period, if there is evidence to suggest impairment, an appraisal of the asset’s recoverable value is performed. The amount of the impairment, recorded in the income statement, is equal to the difference between the book value of the asset and its recoverable value. d) Write-off criteria
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Intangible fixed assets are written off the balance sheet upon disposal and when no future economic benefits are expected.
10 – Non-current assets and assets being disposed The Group does not hold assets of this type.
11 – Current and deferred taxation (f) Recognition criteria Taxation is recorded using accrual basis criteria, applying the national laws in force. Income taxes are recorded in the income statement, except for those related to items charged or credited directly to shareholders’ equity upon First Time Adoption.
(g) Classification criteria Current tax assets include respectively prepaid taxes, withholdings and other tax credits of the Group in relation to Inland Revenue; current tax liabilities include payables to Inland Revenue for direct taxes, IRAP (Regional Business Tax) and indirect taxes. In particular, prepaid and deferred taxes are calculated on the basis of temporary differences – without time limits – between the value attributed to an asset or a liability according to statutory criteria and the corresponding values adopted for tax purposes. Prepaid tax assets are recorded in the balance sheet to the extent that their recovery is likely, assessed on the basis of the capacity of the Group, as a result of exercising the tax consolidation option, to continuously generate positive taxable income. Deferred tax liabilities are recorded in the balance sheet, with the sole exceptions of the greater asset values subject to tax deferral in the form of shareholdings and deferred tax provisions, since the amount of available reserves already subject to taxation leads to the reasonable opinion that further taxable transactions will not be carried out. Prepaid and deferred taxes are used at the equity level with open balances and without offsetting entries, recording the former under “Tax assets” and the latter under “Tax liabilities”.
(h) Valuation criteria
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Assets and liabilities recorded as prepaid and deferred taxes are regularly assessed in order to take into account any amendments in regulations or rates, as well as any different subjective situations of the Group. The size of the provision for taxes is also adjusted in order to handle any charges arising from tax assessments that have already been notified or from litigation underway with the tax authorities.
(i) Write-off criteria Current tax assets and liabilities are cancelled when, respectively, they are recovered or paid. Prepaid and deferred tax assets and liabilities are cancelled in line with the decrease in the reason for the temporary difference between the statutory values and fiscal values of the items which generated them.
12 - Provisions for risks and charges e) Recognition criteria Provisions for risks and charges are recorded for the amount of expected disbursement, with allocation to the income statement. Where the time factor is significant, the allocations are discounted using current market rates. f) Classification criteria Provisions for risks and charges may include, in addition to other funds, pensions and similar liabilities, which are not present in the Group’s financial statements as the retirement benefit fund for personnel is an external entity with legal autonomy. The item “Other provisions for risks and charges” receives allocations related to current obligations originating from a past event for which the disbursement of economic resources will likely be required in order to settle the obligation, assuming a reliable estimate of the amount can be made. g) Valuation criteria Other provisions for risks and charges are valued based on the best estimate of the likely disbursement required to settle the obligation existing at the balance sheet date. As previously mentioned, when the time frame required to settle the obligation is expected to be considerable, the amount of the allocation is represented by the current value of the expenses to be incurred. h) Write-off criteria An allocation is extinguished either through total payment of the debt, or the elimination of the same.
13 - Payables and outstanding securities
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- Recognition criteria Initial recognition is carried out on the basis of the fair value of the liabilities, normally equal to the amount collected or the issue price, increased by any additional income/charges directly attributable to the individual funding or issue transaction and not refunded by the counter-creditor. Internal administration costs are not included. The fair value of any financial liabilities issued at conditions lower than market is subject to specific appraisal, and the difference compared to market value is recorded directly in the income statement. - Classification criteria Payables due to banks, Payables due to customers and Outstanding securities include the various forms of funding activities between banks and with customers and deposits from certificates of deposit and bonds issued, less any amounts repurchased. They also include debts recorded by the lessor within the scope of financial leasing transactions. - Valuation criteria After initial recording, financial liabilities are valued at amortised cost with the effective interest rate method. An exception is made for short-term liabilities, where the time factor proves negligible, and which continue to be recorded at collected value. Any costs attributable thereto are recorded in the income statement on a straight-line basis over the contractual duration of the liability. - Write-off criteria Financial liabilities are written off the balance sheet when they have expired or have been discharged. Write-off also occurs when previously issued securities are repurchased. The difference between the book value of the liability and the amount paid to purchase it is recorded in the income statement. Treasury shares placed on the market after their repurchase are considered a new issue and recorded at the new placement price, without any impact on the income statement.
14 - Financial trading liabilities b) Recognition criteria Financial trading liabilities are recognised as cost, determined by their fair value.
(j) Classification criteria
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This item includes the negative value of derivative trading contracts valued at fair value and the liabilities, also valued at fair value, arising from technical overdrafts generated by securities trading. (e) Valuation criteria Financial trading liabilities are valued at fair value. (f) Write-off criteria Trading liabilities are cancelled when the contractual rights on the financial cash flows deriving therefrom expire, or when said liabilities are settled or cancelled.
15 - Financial liabilities at fair value
a) Recognition criteria Liabilities valued at fair value are recognised at their fair value. b) Classification criteria This item includes structured bonds issued by Banks of the Group at fair value, with the valuation results recorded in the income statement based on the “fair value option”. c) Valuation criteria Financial liabilities are valued at fair value. d) Write-off criteria Trading liabilities are cancelled when the contractual rights on the financial cash flows deriving therefrom expire, or when said liabilities are settled or cancelled.
16 - Foreign currency transactions
(e) Recognition criteria Foreign currency transactions are recorded, at the time of initial recognition, in the account currency, applying the exchange rate in force at the transaction date to the foreign currency amount. (f) Classification criteria Assets and liabilities in foreign currency are divided into “monetary” items (classified among current items) and “non-monetary” items (classified among non- current items). Monetary items consist in cash and assets and liabilities to be received or paid in fixed or determinable amounts of money.
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Non-monetary items, instead, are characterised by the absence of a right/obligation to receive/deliver a fixed or determined amount of money (goodwill, assets, etc.) (g) Valuation criteria At the end of every year or interim period, the balance sheet items in foreign currency are valued as follows: À monetary items are converted at the period-end exchange rate; À non-monetary items valued at fair value are converted using the exchange rates in force at the end of the period. Exchange rate differences deriving from the settlement of monetary items or from the conversion of monetary items at rates differing from those of initial conversion or of previous balance sheet conversion, are recognised in the income statement of the period in which they arise. When a profit or loss relating to a non-monetary item is recorded in shareholders’ equity, the exchange rate difference relating to said item is also recorded under equity. Conversely, when a profit or loss is recorded in the income statement, the relative exchange rate difference is recorded in the income statement as well. (h) Write-off criteria Write-off criteria for assets and liabilities in foreign currency are the typical criteria for similar assets or liabilities in euro.
17 – Other information
Employee severance indemnity The employee severance indemnity is recorded on the basis of its actuarial value, as required by IAS 19. For the purposes of discounting, the projected unit credit method (PUCM) is used. This method involves the projection of future outlays on the basis of historical, statistical and probalistic analyses, as well as the adoption of specific demographic techniques; furthermore, financial discounting of the flows is carried out using a market interest rate. Contributions paid during each year are considered as separate units and recognised and valued individually in order to determine the final liability. The rate used for discounting is determined from the spot rate curve defined according to the domestic market conditions of government securities and the average residual duration in service of employees of the company. Plan costs are recorded among personnel costs as the net sum of contributions paid, contributions pertaining to previous periods still to be recorded, accrued interest, and actuarial profits/losses. The latter are calculated, using the corridor method, as the surplus of cumulated actuarial profits/losses, as per the end of the
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previous year, compared to 10% of the present value of benefits generated by the plan. Moreover, this surplus is correlated to the expected average working life of those participating in the plan. Since the employee severance indemnity is an unfunded plan, without assets specifically designated to its hedging, there are no accounting entries for said components (fair value of assets, returns on investments, etc.).
Treasury shares Any treasury shares held reduce shareholders’ equity. Similarly, the original cost of the same and the profits and losses resulting from their subsequent sale are recorded as shareholders’ equity transactions.
Recognition of income Income is recognised when it is received or, in any case, when it is likely that future benefits will be received and said benefits may be reliably quantified. In particular: - interest on arrears, for which there may be a contractual provision, is only recorded in the statement of income when it is actually collected; - dividends are recorded in the income statement when they are collected.
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Part B – INFORMATION ON THE CONSOLIDATED BALANCE SHEET
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ASSETS
Section 1 – Cash and cash equivalents – Item 10
1.1 Cash and cash equivalents composition
Banking Insurance Other Total Total group company compani 31.12.2005 31.12.2004 es excluding IAS 39 a) Cash 23,855 0 0 23,855 21,582 b) Demand deposits at Central Banks 0000 0 Total 23,855 0 0 23,855 21,582
Section 2 - Financial assets held for trading – Item 20
2.1 - Financial assets held for trading: Breakdown by product
Insurance Other companies Total Banking group company Total 31.12.04 Items/Values Listed Unlisted Listed Unlisted Listed Unlisted 31.12.05 excludin g IAS 39 A. Cash assets 1. Debt securities 92,285 113,935 0 0 0 0 206,220 0 1.1 Structured securities 47,141 36,645 0 0 0 0 83,786 0 1.2 Other debt securities 45,144 77,290 0 0 0 0 122,434 0 2. Equity securities 0 0 0 0 0 0 0 0 3. Quotas of OICR 93,025 0 0 0 0 0 93,025 0 4. Loans 0 0 0 0 0 0 0 0 4.1 Repurchase agreements 0 0 0 0 0 0 0 0 4.2 Other 0 0 0 0 0 0 0 0 5. Deteriorated assets 0 0 0 0 0 0 0 0 6. Transferred assets not written 106,442 27,725 0 0 0 0 134,167 0 off Total A 291,752 141,660 0 0 0 0 433,412 0 B. Derivative instruments 1. Financial derivatives 39 8,465 0 0 0 0 8,504 0 1.1 trading 39 2,298 0 0 0 0 2,337 0 1.2 linked to 0 6,135 0 0 0 0 6,135 0 fair value option 1.3 other 0 32 0 0 0 0 32 0 2. Financial derivatives 0 0 0 0 0 0 0 0 2.1 trading 0 0 0 0 0 0 0 0 2.2. linked to fair value option 0 0 0 0 0 0 0 0 2.3 other 0 0 0 0 0 0 0 0 Total B 39 8,465 0 0 0 0 8,504 0 Total (A+B) 291,791 150,125 0 0 0 0 441,916 452,028
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Quotas of OICR are composed of:
- Hedge funds 37,479 - Share funds 19,739 - Bond funds 29,582 - Flexible funds 4,197 - Balanced funds 1,015 - ETFs on share indices 511 - Property fund 502 93,025
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2.4 Financial assets held for trading: breakdown by debtor/issuer
Insurance Other Total Total Banking group Items/Values company companies 31.12.2005 31.12.2004 excluding IAS 39 A. Cash assets 1. Debt securities 206,220 0 0 206,220 0 a) Governments and Central 61,602 0 0 61,602 0 Banks b) Other public entities 33,867 0 0 33,867 0 c) Banks 102,168 0 0 102,168 0 d) Other issuers 8,583 0 0 8,583 0 2. Equity securities 000 0 0 a) Banks 000 0 0 d) Other issuers 000 0 0 - insurance companies 0 0 0 0 0 - financial companies 0 0 0 0 0 - non-financial companies 0 0 0 0 0 - other 0 0 0 0 0 3. Quotas of OICR 93,025 0 0 93,025 0 4. Loans 0 0 0 0 0 e) Governments and Central 0 0 0 0 0 Banks 0 0 0 0 0 0 0 0 0 f) Other public entities 0 0 0 0 0 g) Banks 0 h) Other entities 5. Deteriorated assets 0 0 0 0 0 a) Governments and Central 0 0 0 0 0 Banks 0 0 0 0 0 0 0 0 0 b) Other public entities 0 0 0 0 0 c) Banks 0 d) Other entities 6. Transferred assets not written off 134,167 0 0 134,167 0 a) Governments and Central 52,844 0 0 52,844 0 Banks b) Other public entities 10,187 0 0 10,187 0 c) Banks 71,136 0 0 71,136 0 d) Other issuers 0 0 0 0 0 Total A 433,412 0 0 433,412 0 B. Derivative instruments 8,504 0 0 8,504 0 a) Banks 7,961 0 0 7,961 0 b) Customers 543 0 0 543 0 Total B 8,504 0 0 8,504 0 Total (A + B) 441,916 0 0 441,916 452,028
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2.3 Financial assets held for trading: trading derivatives 2.3.1 of the banking group Type of derivative/underlying Interest Curren Equity Loans Other Total rates cy and securiti 31.12.05 gold es C) Listed derivatives 1 0 38 0 0 39 1) Financial derivatives 1 0 38 0 0 39 • with exchange of 0 0 0 0 0 0 capital 0 0 0 0 0 0 − options acquired 1 0 38 0 0 39 − other derivatives • without exchange of 0 0 0 0 0 0 0 0 0 0 0 0 capital 0 0 0 0 0 0 − options acquired − other derivatives 2) Credit derivatives 0 0 0 0 0 0 • with exchange of capital 0 0 0 0 0 0 • without exchange of capital Total A 1 0 38 0 0 39 D) Unlisted derivatives 1) Financial derivatives 3,825 0 1,631 0 3,009 8,465 3,825 0 1,353 0 3,009 8,187 • with exchange of capital − options acquired 0 0 0 0 0 0 − other derivatives 3,825 0 1,353 0 3,009 8,187 • without exchange of capital 0 0 278 0 0 278 − options acquired 0 0 278 0 0 278 0 0 0 0 0 0 − other derivatives 2) Credit derivatives • with exchange of capital 0 0 0 0 0 0 • without exchange of capital 0 0 0 0 0 0 Total B 3,825 0 1,631 0 3,009 8,465 Total (A+B) 3,826 0 1,669 0 3,009 8,504
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Section 4 - Financial assets held for trading – Item 40
4.1 Financial assets available for sale: breakdown by product
Banking group Insurance Other Total Total company companies 31.12.2005 31.12.2004 Items/Values excluding IAS 39 Listed Unliste Listed Unliste Listed Unliste Listed Unliste Listed Unliste d d d d d 1. Debt securities 111,995 13,000 0 0 0 0 111,995 13,000 102,065 13,666 1.1 Structured 0 000000 0 00 securities 1.2 Other debt 111,995 13,000 0 0 0 0 111,995 13,000 102,065 13,666 securities 2. Equity securities 2 13,148 0 0 0 0 2 13,148 0 14,955 2.1 Valued at fair value 2 9,795 0 0 0 0 2 9,795 0 0 2.2 Valued at cost 0 3,353 0 0 0 0 0 3,353 0 14,955 3. Quotas of OICR 0 000000 0 00 7. Loans 0 0 0 0 0 0 0 0 0 0 8. Deteriorated assets 0 0 0 0 0 0 0 0 0 0 9. Transferred assets not written off 0 0 0 0 0 0 0 0 0 0 Total 111,997 26,148 0 0 0 0 111,997 26,148 102,065 28,621
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4.2 Financial assets available for sale: breakdown by debtor/issuer
Banking group Insurance Other Total Total company companies 31.12.2005 31.12.2004 Items/Values excluding IAS 39 1. Debt securities 124,995 0 0 124,995 0 a) Governments and Central 111,995 0 0 111,995 0 Banks b) Other public entities 0 00 0 0 c) Banks 0 00 0 0 d) Other issuers 13,000 0 0 13,000 0 2. Equity securities 13,150 0 0 13,150 0 a) Banks 3,461 0 0 3,461 0 d) Other issuers 9,689 0 0 9,689 0 - insurance companies 000 0 0 - financial companies 6,353 0 0 6,353 0 - non-financial companies 45 0 0 45 0 - other 3,291 0 0 3,291 0 3. Quotas of OICR 000 0 0 4. Loans 0 0 0 0 0 e) Governments and Central Banks 0 0 0 0 0 f) Other public entities 0 0 0 0 0 g) Banks 0 0 0 0 0 h) Other entities 0 0 0 0 0 5. Deteriorated assets 000 0 0 a) Governments and Central 000 0 0 Banks b) Other public entities 000 0 0 c) Banks 000 0 0 d) Other entities 000 0 0 6. Transferred assets not written off 0 0 0 0 0 e) Governments and Central Banks 0 0 0 0 0 f) Other public entities 0 0 0 0 0 g) Banks 0 0 0 0 0 h) Other entities 0 0 0 0 0 Total 138,145 0 0 138,145 130,686
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4.3 Financial assets available for sale: hedged assets
4.3.1 Of the banking group
Hedged assets Total Total 31.12.2004 Asset/Type of hedge 31.12.2005 excluding IAS 39 Fair Fair Cash flow Cash flow value value 1. Debt securities 111,995 0 102,065 0 2. Equity securities 0 00 0 3. Quotas of OICR 0000 4. Loans 0000 5. Portfolio 0000 Total 111,995 0 102,065 0
4.4 Financial assets available for sale: assets subject to specific hedging
Total Other Banking Insurance Total 31.12.04 Items/Values compani group company 31.12.05 excludin es g IAS 39 1. Financial assets subject to specific hedging at fair 111,995 0 0 111,995102,065 value a) interest rate risk 111,995 0 0 111,995102,065 b) price risk 00 0 00 c) exchange rate risk 00 0 00 d) credit risk 00 0 00 e) several risks 00 0 00
2. Financial assets subject to specific cash flow hedging a) interest rate risk 0 0 0 0 0 b) exchange rate risk 0 0 0 0 0 c) other 0 0 0 0 0
Total 111,995 0 0 111,995102,065
398
Section 6 – Due from banks – Item 60
6.1 Due from banks: breakdown by product 6.1.1. Of the banking group
Total Total Transaction type/Values 31.12.2004 31.12.2005 excluding IAS 39 A. Due from Central Banks 19,171 1. Time deposits 0 2. Obligatory reserves 19,171 3. Repurchase agreements 0 4. Other 0 B. Due from banks 67,944 1. Current accounts and demand 64,546 deposits 2. Time deposits 2,810 3. Other loans: 588 3.1 Repurchase agreements 0 3.2 Financial leasing 0 3.3 Other 588 4. Debt securities 0 4.1 Structured securities 0 4.2 Other debt securities 0 5. Deteriorated assets 0 6. Transferred assets not written off 0 Total (book value) 87,115 218,310 Total (fair value) 87,115 X
6.1.3 Of other companies
Total Transaction type/Values 31.12.2005 B. Due from banks 3 3. Other loans: 3 3.1 Repurchase agreements 0 3.2 Financial leasing 0 3.3 Other 3 Total (book value) 3 Total (fair value) 3
399
Section 7 – Due from banks – Item 70
Loans to customers: breakdown by product
7.1.1. Of the banking group
Total Total Transaction type/Values 31.12.2005 31.12.2004 excluding IAS 39 11. Current accounts 1,317,901 12. Repurchase agreements 0 13. Mortgage loans 14. Credit cards, personal loans and 1,278,383 assignment of one-fifth of salary 15. Financial leasing 27,672 16. Factoring 17. Other transactions 57,894 18. Debt securities 0 18.1 Structured securities 18.2 Other debt securities 436,003 19. Deteriorated assets 0 20. Transferred assets not written off 0 0 374,507 0 Total (book value) 3,492,360 3,673,621 Total (fair value) 3,495,775 X
400
7.2 Loans to customers: breakdown by debtor/issuer
7.2.1. Of the banking group
Total Total Transaction type/Values 31.12.2004 31.12.2005 excluding IAS 39 1. Debt securities 0 a) Governments 0 b) Other public entities 0 c) Other issuers 0 - non-financial companies 0 - financial companies 0 - Insurance companies 0 - other 0 2. Loans to: 3,117,853 d) Governments 591 e) Other public entities 1,967 f) Other entities - non-financial companies 3,115,295 - financial companies 1,981,390 - insurance companies 205,772 - other 159 927,974 3. Deteriorated assets: 374,507 a) Governments 0 b) Other public entities 0 c) Other entities 374,507 - non-financial companies 260,578 - financial companies 21,875 - insurance companies 0 - other 92,054 4. Transferred assets not written off: 0 a) Governments 0 b) Other public entities 0 c) Other issuers 0 - non-financial companies 0 - financial companies 0 - insurance companies 0 - other 0 Total 3,492,360 3,673,621
401
7.4 Financial leasing
Remaining loans implicit in financial leasing: by type.
Transaction type Amount a) automobile 25,572 b) capital goods 29,427 c) property 2,895 Total 57,894
Breakdown of remaining loans based on the amount of residual life.
Residual life Amount Up to 3 months 3,877 From over 3 months to 1 year 13,974 From over 1 year to 5 years 36,159 Over 5 years 3,580 Unlimited life 304 Total 57,894
402
Section 8 – Hedging derivatives – Item 80 8.1 Hedging derivatives: breakdown by type of contract and underlying 8.1.1. Of the banking group
Type of derivative/underlying Interest Curren Equity Loans Other Total rates cy and securities gold A) Listed 1) Financial derivatives: • with exchange of capital 0 0 0 0 0 0 − options acquired 0 0 0 0 0 0 − other derivatives 0 0 0 0 0 0 • without exchange of capital 0 0 0 0 0 0 - options acquired 0 0 0 0 0 0 - other derivatives 0 0 0 0 0 0 2) Credit derivatives
• with exchange of 0 0 0 0 0 0 capital • without exchange 0 0 0 0 0 0 of capital Total A 00 00 00 B) Unlisted 1) Financial 13,017 181 0 0 0 13,19 derivatives: 8 0 0 0 • with exchange of 36 0 0 0 0 capital 0 0 0 0 0 36 − options acquired 36 0 0 − other derivatives 0 0 0 • without exchange of 12,981 181 0 0 0 36 capital 0 0 0 - options acquired 0 0 - other derivatives 12,981 181 13,16 2) Credit derivatives: 0 0 0 2 • with exchange of 0 capital 0 0 0 0 0 13,16 • without exchange of 2 capital 0 0
0
0 Total B 13,017 181 0 0 0 13,198
403
Total (A + B) 31.12.2005 13,017 181 0 0 0 13,198 Total (A + B) 00 00 07,796 31.12.2004excluding IAS 39
404
8.2 Hedging derivatives: breakdown by portfolios hedged and by type of hedging (book value)
8.2.1. Of the banking group
Fair value Cash flow
Specific hedge Interes - credit price Sever Asset/Type of hedge t rate exchan risk risk al risk ge rate risks Generic Generic risk Specific
1. Financial assets available for sale 0 0 0 0 0 X 0 X 2. Loans 0 0 0 X 0 X 0 X 3. Financial assets held to maturity X 0 0 X 0 X 0 X 4. Portfolio X X X X X 0 X 0 Total assets 0 0 0 0 0 0 0 0 1. Financial liabilities 12,981 217 0 X X X 2. Portfolio X X X X X 0 X 0 Total liabilities 12,981 217 0 0 0 0 0 0
405
Section 12 – Tangible assets – Item 120
12.1 - Tangible assets: breakdown of assets valued at cost
Categories/Values Banking Insurance Other Total Total group company companie 31.12.2004 31.12.2005 s A. Assets for functional use 1.1 owned 60,757 0 0 60,757 0 a) land 3,761 0 0 3,761 0 b) buildings 42,259 0 0 42,259 0 c) furniture 4,441 0 0 4,441 0 d) electronic systems 646 0 0 646 0 e) other 9,650 0 0 9,650 0 1.2 assets under financial lease 7,605 0 0 7,605 0 a) land 000 00 b) buildings 7,314 0 0 7,314 0 c) furniture 210 0 0 210 0 d) electronic systems 000 00 e) other 81 0 0 81 0 Total A 68,362 0 0 68,362 0 B. Assets held for investment 2,168 0 0 2,168 0 2.1 owned 2,168 0 0 2,168 0 a) land 10 0 0 10 0 b) buildings 2,158 0 0 2,158 0 2.2 assets under financial lease 000 0 0 a) land 000 00 b) buildings 000 00 Total B 2,168 0 0 2,168 0 Total (A + B) 70,530 0 0 70,530 73,181
The depreciation rates adopted during the year for the various categories of tangible assets, including those under financial leasing, connected to the period of participation in the production process, are the following:
Rates
Properties for company use 2 % Counters and reinforced glass 20 % Office furniture 12 % Furnishings 15 % Electronic machines 40 %
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Office machines 12 % Safes 7.5% Telephone and electric systems, and other systems in general 7.5% Electronic telephone systems 40 % Air conditioning systems 15 % Miscellaneous machines and equipment 15 % Alarm, television and photography systems 30 % Internal warning systems 25 % Automobiles 50 % Internal means of transport 20 %
Improvements in assets under leasing have been depreciated over the duration of the relative rental contract. In compliance with the provisions set forth in art. 10 of law no. 72 of 19 March 1983, the attachments provide indications of the assets which are under equity, and those which have undergone monetary revaluation in the past. It is noted that properties held for investment have been depreciated at a rate of 2%.
407
12.3. Tangible assets for functional use: changes over the year
12.3.1 Of the banking group Electronic Land Buildings Furniture Other Total systems A. Gross opening balance 4,749 74,592 17,007 6,031 27,189 129,568 A.1 Total net value reductions 0 25,184 11,789 5,323 18,289 60,585 A.2 Net opening balance 4,749 49,408 5,218 708 8,900 68,983 B. Increases: 0 2,386 1,069 917 2,868 7,240 B.1 Purchases 0 1,021 890 463 2,602 4,976 B.2. Expenses for capitalised 0000 00 improvements B.3 Write-backs 0000 00 B.4. Positive changes in fair value added to: A) shareholders’ equity 0000 00 b) income statement 0000 00 B.5 Positive exchange differences 0000 00 B.6 Transfer of properties held for investment 0320 0 0 32 B.7 Other variations 0 1,333 179 454 266 2,232 C. Decreases: 988 2,221 1,636 979 2,037 7,861 C.1 Sales 0 249 192 458 275 1,174 C.2 Depreciation 0 1,515 1,444 521 1,762 5,242 C.3 Value adjustments charged to: a) shareholders’ equity 0000 00 b) income statement 0000 00 C.4. Negative changes in fair value charged to: a) shareholders’ equity 0000 00 b) income statement 0000 00 C.5 Negative exchange differences 0000 00 C.6 Transfers to: a) tangible assets held for investment 0 0 0 0 0 0 b) assets being disposed 0 0 0 0 0 0 C.7 Other variations 988 457 0 0 0 1,445 D. Closing balance 3,761 49,573 4,651 646 9,731 68,362 D.1 Total net value reductions 0 26,357 13,053 5,370 19,777 64,557 D.2 Total gross closing balance 3,761 75,926 17,704 6,016 29,508 132,919 E. Valuation at cost 3,761 49,573 4,651 646 9,731 68,362
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12.4 Tangible assets held for investment: changes over the year
Insurance Banking group Other companies Total company Land Buildings Lan Buildings Land Buildings Land Buildings d
A. Opening balance 293 3,914 0 0 0 0 293 3,914 B. Increases 0 1,117 0 0 0 0 0 1,117 B.1 Purchases 00000 000 B.2. Expenses for capitalised 00000 000 improvements B.3. Positive changes in fair value 0 0 0 0 0 0 0 0 B.4 Write-backs 0 0 0 0 0 0 0 0 B.5 Positive exchange differences 00000 000 B.6 Transfer of properties for functional 211 use 0 211 0 0 0 0 0 B.7 Other variations 0 906 0 0 0 0 0 906 C. Decreases 283 2,873 0 0 0 0 283 2,873 C.1 Sales 142 2,739 0 0 0 0 142 2,739 C.2 Depreciation 0 108 0 0 0 0 0 108 C.3. Negative changes in fair value 0 0 0 0 0 0 0 0 C.4 Value adjustments 0 0 0 0 0 0 0 0 C.5 Negative exchange differences 00000 000 C.6 Transfer to other asset portfolios 526000 0 5 26 a) property for functional use 526000 0526 b) non-current assets and assets being disposed 00000 0 0 0 C.7 Other variations 136 0 0 0 0 0 136 0 D. Closing balance 10 2,158 0 0 0 0 10 2,158 E. Valuation at fair value 36 6,038 0 0 0 0 36 6,038
12.5 12.5 Commitments for purchase of tangible assets
As at 31 December 2005, commitments for financial leasing operations on property amount to a total of € 3,767 thousand, including VAT. The agreements stipulated are standard and do not include unusual clauses.
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Section 13 – Intangible assets – Item 130
13.1 Intangible assets: breakdown by type of asset
Banking group Insurance Other Total Total company companies 31.12.2004 31.12.2005 excluding IAS 39 Unli Categories/Values Limit Limit Unlimit Limited Unlimite mite Limited Unlimite ed ed ed Limited Unlimited duratio d d duratio d durat durat duratio duration duration n duration durat n duration ion ion n ion A.1 Goodwill: X 18,624 X 0 X 0 X 18,624 X 0 A.1.1. Of the group X X 0X 0X X 0 16,287 16,287 A.1.2 of minority interests X 2,337 X 0 X 0 X 2,337 X 0 A.2 Other intangible assets 00000 0 0 0 1,420 1,420 A.2.1 Assets valued at cost: 0 0 0 0 0 1,420 0 0 0 1,420 a) internally generated intangible assets 0 00000 0 0 0 0 b) Other assets 1,420 00000 1,420 0 0 0 A.2.2 Assets at fair value:
a) internally generated intangible assets 0 00000 0 0 0 0 b) Other assets 0 0 0 0 0 0 0 0 0 0 Total 1,420 18,624 0 0 0 0 1,420 18,624 1,918 18,186
Intangible assets are amortised based on their expected useful life (3 or 5 years).
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13.2 Intangible assets: changes over the year
13.2.1 Of the banking group
Other intangible Goodwill assets: internally Other generated intangible Total assets: other Lim. Unlim. Lim. Unlim. A. Initial balance 39,411 0 0 3,251 0 42,662 A.1 Total net value reductions 20,907 0 0 1,651 0 22,558 A.2 Net opening balance 18,504 0 0 1,600 0 20,104 B. Increases 120 0 0 726 0 846 B.1 Purchases 120 0 0 726 0 846 B.2 Increases in internal intangible assets X 0 0 0 0 0 B.3 Write-backs 0 0 0 0 0 0 B.4. Positive changes in fair value X 0 0 0 0 0 - in shareholders’ equity 0 0 0 0 0 0 - in income statement X 0 0 0 0 0 B.5 Positive exchange differences X 0 0 0 0 0 B.6 Other variations 0 0 0 0 0 0 C. Decreases 0 0 0 906 0 906 C.1 Sales 0 0 0 0 0 0 C.2 Value adjustments 0 0 0 901 0 901 - Amortisations X 0 0 901 0 901 - Write-downs 0 0 0 0 0 0 + Shareholders’ equity X 0 0 0 0 0 + Income statement 0 0 0 901 0 901 C.3. Negative changes in fair value 0 0 0 0 0 - in shareholders’ equity X 0 0 0 0 0 - in income statement X 0 0 0 0 0 C.4 Transfers to non-current assets and assets being disposed 0 0 0 0 0 0 C.5 Negative exchange differences 0 0 0 0 0 0 C.6 Other variations 0 0 0 5 0 5 D. Net closing balance 18,624 0 0 1,420 0 20,044 D.1 Total net value reductions 20,907 0 0 1,318 0 22,225 E. Gross closing balance 39,531 0 0 2,738 0 42,269 F. Valuation at cost 18,624 0 0 1,420 0 20,044 Key: Lim. limited duration Unlim. unlimited duration
13.3 Other information
There are no commitments to purchase intangible assets.
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Section 14 – Tax assets and liabilities – Item 140 under assets and Item 80 under liabilities
14.1 Prepaid tax assets: composition
Banking group Tax Description Tax amount IRES/IRAP Financial statement auditing charges 14 IRES/IRAP Write-downs of Ex-Banca Pop. loans Ticino 162 (sevenths) IRES/IRAP Write-downs of loans from 2000 to 2005 114,810 (ninths) IRES/IRAP Entertainment expenses incurred from 2002 to 2005 33 IRES/IRAP Write-downs of equities 2004 340 IRES/IRAP 1,017 IRES/IRAP Costs capitalised for tax purposes 445 IRES/IRAP Gains to shareholders’ equity debt securities available for sale 108 IRES Delta employee sev. indemn. for actuarial 66 calculation IRES Expenses relating to personnel costs 1,079 IRES Provisions for litigation defence costs 2,821 IRES/IRAP Goodwill 268 IRES/IRAP Tax recovery from previous years’ fiscal losses 753 IRES Losses on shareholdings (fifths) 1,004 IRES/IRAP Other 183 Total 123,103
14.2 Deferred tax liabilities: composition Description Tax amount Capital gains in instalments 1,838 Property deemed cost 240 FTA – reversal of land depreciation 681 Improvement on third party assets 372 Property leasing 822 Allocation to ongoing disputes 10 Goodwill 226 Advance amortisation and depreciation 421
412
Tax recovery from previous years’ fiscal losses 5 Other 312 Total 4,927
14.3 Variations in prepaid taxes (a balancing entry to the income statement) Total Total 31.12.04 31.12.2005 excluding IAS 39
Opening balance 25,028 11,006 Increases 107,060 17,722 2.1 Prepaid taxes recorded during the 79,995 17,572 year 753 882 e) regarding previous years 12 0 f) due to changes in accounting criteria 0 0 g) write-backs 79,230 16,690 h) other 67 0 26,998 2.2 New taxes or increases in tax rates 150 2.3 Other increases Decreases 11,062 3,700 3.1 Prepaid taxes cancelled during the 11,062 3,621 year 11,062 3,254 d) reversals e) write-downs for unrecoverability 0 0 f) changes in accounting criteria 0 367 0 0 3.2 Reductions in tax rates 0 79 3.3 Other decreases Closing balance 121,026 25,028
413
14.4 Variations in deferred taxes (a balancing entry to the income statement)
Total Total 31.12.04 31.12.05 excluding IAS 39 1. Opening balance 1,886 2,483 2. Increases 8,085 603 2.4 Deferred taxes recorded during the 1,944 598 year 0 0 d) regarding previous years e) due to changes in accounting 0 274 criteria 0 0 f) write-backs 1,944 324 g) other 2.5 New taxes or increases in tax rates 0 0 2.6 Other increases 6,141 5 3. Decreases 7,121 1,200 3.1 Deferred taxes cancelled during the year 7,091 1,179 d) reversals 7,091 1,179 e) write-downs for unrecoverability f) changes in accounting criteria 0 0 3.2 Reductions in tax rates 0 0 3.3 Other decreases 0 0 30 21 4. Closing balance 2,850 1,886
414
14.5 Variations in prepaid taxes (a balancing entry to the shareholders’ equity)
Total Total 31.12.04 31.12.05 excluding IAS 39 1. Opening balance 2,486 68 2. Increases 26,720 2,418 2.1 Prepaid taxes recorded during 26,683 2,418 the year 0 0 d) regarding previous years e) due to changes in accounting criteria 26,683 2,418 f) other 0 0
2.2 New taxes or increases in tax 0 0 rates 37 0 2.3 Other increases 3. Decreases 27,129 0 3.1 Prepaid taxes cancelled during the year 0 0 d) reversals 0 0 e) write-downs for unrecoverability f) due to changes in accounting 0 0 criteria 3.2 Reductions in tax rates 0 0 26,820 0 3.3 Other decreases 309 0 4. Closing balance 2,077 2,486
415
14.6 Variations in deferred taxes (a balancing entry to the shareholders’ equity)
Total Total 31.12.04 31.12.2005 excluding IAS 39 1. Opening balance 9,266 84 2. Increases 6,133 9,266 2.1 Deferred taxes recorded during the 6,133 9,266 year 0 0 a) regarding previous years b) due to changes in accounting 6,133 9,266 criteria 0 0 c) other 2.2 New taxes or increases in tax rates 0 0 2.3 Other increases 0 0 3. Decreases 13,322 84 3.1 Deferred taxes cancelled during the year 4,936 0 a) reversals 4,936 0 b) due to changes in accounting criteria 0 0 c) other 0 0 3.2 Reductions in tax rates 0 0 3.3 Other decreases 8,386 84 4. Closing balance 2,077 9,266
416
Section 16 – Other assets – Item 160
16.1 Other assets: composition
Of the banking group
Total 31.12.2005 Tax stamps and various 11 Caution money 225 Fees receivable 1,913 Invoices and credit notes to be collected 1,262 Other suppliers: Advance payment of amounts to be 1,351 charged to income statement of following year Third party protested cheques 183 Securities trading: expired securities and coupons to 1,227 be collected Transactions on interbank networks to finalise 23,163 Items in transit with branches 1,383 Currency differences on portfolio transactions 811 Securitisation 9,940 Securitisation swaps 1,525 Others accrued liabilities and deferred income 949 Amounts receivable for transfer of non-performing 23,310 loans Other items 10,433 Total at 31.12.2005 77,686 Total at 31.12.2004 excluding IAS 39 75,544
Other Group companies
Total 31.12.2005 Other items 18 Total at 31.12.2005 18 Total at 31.12.2004 excluding IAS 39 0
417
LIABILITIES
Section 1 – Due from banks – Item 10
1.2 Due to banks: breakdown by product
Transaction type/Group Banking Insurance Other Total Total components group company compani 31.12.05 31.12.04 es excludin g IAS 39 1. Due to central banks 0 0 0 0 2. Due to banks 277,531 0 0 277,531 2.1 Current accounts and demand 12,236 0 0 12,236 deposits 189,184 0 0 189,184 2.2 Time deposits 76,111 0 0 76,111 2.3 Loans 5,565 0 0 5,565 2.3.1 financial leasing 70,546 0 0 70,546 2.3.2 others 0 0 2.4 Payables for commitments to 0 0 repurchase own equity 0 0 instruments 0 0 2.5 Liabilities for transferred assets 0 0 0 0 not written off 0 0 0 0 2.5.1. repurchase agreements 0 0 2.5.2. other 2.6) Other payables Total 277,531 0 0 277,531 106,409 Fair value 277,531 0 0 277,531 X
1.5 Payables for financial leasing
Residual life Amount Up to one year 934 From over 1 year to 5 years 3,630 Over 5 years 1,001 Total 5,565
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Section 2 – Due to customers – Item 20
2.1 Due to customers: breakdown by product
Transaction type/Group Banking Insurance Other Total Total components group companies compani 31.12.05 31.12.04 es excluding IAS 39 1. Current accounts and demand 1,535,289 0 0 1,535,289 deposits 0 0 0 0 2. Time deposits 0 0 0 0 3. Third party assets under 0 0 0 0 administration 0 0 0 0 4. Loans 0 0 0 0 4.1 financial leasing 4.2 other 0 0 0 0 5. Payables for commitments to repurchase own equity instruments 138,212 0 0 138,212 6. Liabilities for transferred assets 138,212 0 0 138,212 not written off 0 0 0 0 6.1 repurchase agreements 0 0 00 0 6.2 other 7. Other payables Total 1,673,501 0 0 1,673,501 Fair value 1,673,501 0 0 1,673,501 1,731,661
419
Section 3 – Outstanding securities – Item 30
3.1 Outstanding securities breakdown by product
Total Securities Insurance Other Total 31.12.2004 Banking group type/Group company companies 31.12.2005 excluding IAS components 39 BV FV BV FV BV FV BV FV BV FV A. Listed 0 0 0 0 0 0 securities 85,051 87,945 85,051 87,945 1. Bonds 85,051 87,945 0 0 0 0 85,051 87,945 0 0 1.1 0 0 0 0 0 0 structured 85,051 87,945 85,051 87,945 1.2 other 0 0 0 0 0 0 0 0 0 0 2. Other 0 0 0 0 0 0 0 0 0 0 securities 2.1 0 0 0 0 0 0 0 0 0 0 structured 2.2 other 0 0 0 0 0 0 0 0 0 0 B. Unlisted securities 1,576,801 1,617,084 0 0 0 0 1,576,801 1,617,084 0 0 1. Bonds 1,539,219 1,579,502 0 0 0 0 1,539,219 1,579,502 0 0 1.1 0 0 0 0 0 0 0 0 structured 1.2 other 1,539,219 1,579,502 0 0 0 0 1,539,219 1,579,502 0 0 2. Other 0 0 0 0 0 0 securities 37,582 37,582 37,582 37,582 2.1 0 0 0 0 0 0 0 0 structured 2.2 other 37,582 37,582 0 0 0 0 37,582 37,582 0 0 Total 1,661,852 1,705,029 0 0 0 0 1,661,852 1,705,029 1,943,486 0 Key: BV = book value FV = fair value
3.2 Details of item 30 “Outstanding securities”: subordinated securities
The following subordinated securities are included in outstanding securities
Description Nominal Book value Fair value value Banca Popolare di Intra 3% 2001-2006 c.v. 85,825 85,051 87,995 Banca Popolare di Intra mixed rate 2004-2014 50,000 50,990 51,102 Total 135,825 136,041 139,097
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3.3 Details of item 30 “Outstanding securities”: securities subject to specific hedging
Transaction type/Values Total 31.12.05 1. Securities subject to specific hedging at fair value a) interest rate risk 372,111 c) exchange rate risk 0 c) several risks 4,542 2. Securities subject to specific cash flow hedging: a) interest rate risk 0 c) exchange rate risk 0 c) other 0 Total 376,653
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Section 4 – Financial trading liabilities – Item 40
4.1 Financial trading liabilities: breakdown by product
Securities type/Group components Banking group Insurance company Other companies Total 31.12.05 Total 31.12.04 excluding IAS 39 NV FV FV* NV FV FV* NV FV FV* NV FV FV* NV FV FV* L UL L UL L UL L UL L UL A. Cash loans 1. Due to banks 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 2. Due to customers 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3. Debt securities 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3.1 Bonds 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3.1.1 Structured 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 3.1.2 Other bonds 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 3.2 Other securities 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3.2.1 Structured 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 3.2.2 Other 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X Total A 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 B. Derivative instruments 1. Financial derivatives X 112 11,650 X X 0 0 X X 0 0 X X 112 11,650 X X 0 0 X 1.1 trading X 112 4,104 X X 0 0 X X 0 0 X X 112 4,104 X X 0 0 X 1.2. Linked to fair value option X 0 7,471 X X 0 0 X X 0 0 X X 0 7,471 X X 0 0 X 1.3 Other X 0 75 X X 0 0 X X 0 0 X X 0 75 X X 0 0 X 2. Credit derivatives X 0 0 X X 0 0 X X 0 0 X X 0 0 X X 0 0 X 2.1 Trading X 0 0 X X 0 0 X X 0 0 X X 0 0 X X 0 0 X 2.2. Linked to fair value option X 0 0 X X 0 0 X X 0 0 X X 0 0 X X 0 0 X 2.3 Other X 0 0 X X 0 0 X X 0 0 X X 0 0 X X 0 0 X Total B 0 112 11,650 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total (A+B) 0 112 11,650 0 0 0 0 0 0 0 0 0 0 112 11,650 0 0 0 1,516 0
FV = fair value FV* = fair value calculated excluding changes in value due to changes in creditworthiness of the issuer from the issue date. NV = nominal or par value L = listed UL = unlisted
422
4.4 Financial trading liabilities: derivative instruments
4.4.1 of the banking group
Total Curren Equity Interest Total 31.12.04 Type of derivative/underlying cy and securitie Loans Other rates 31.12.05 excludin gold s g IAS 39 A) Listed derivatives 1) Financial derivatives: 12 0 100 0 0 112 12 0 100 0 0 112 • with exchange of capital 0 0 0 0 0 0 − options issued 0 0 0 0 0 0 − other derivatives 0 0 0 0 0 0 • without exchange of 0 0 0 0 0 0 capital 0 0 0 0 0 0 - options issued - other derivatives 0 0 0 0 0 0 2) Credit derivatives: 0 0 0 0 0 0 • with exchange of capital • without exchange of capital Total A 12 0 100 0 0 112 B) Unlisted derivatives 1) Financial derivatives: 8,154 1,850 75 0 1,571 11,650 • with exchange of capital 0 1,276 0 0 0 1,276 − options issued 0 0 0 0 0 0 − other derivatives 0 1,276 0 0 0 1,276 • without exchange of 8,154 574 75 0 1,571 10,374 capital 30 574 0 0 0 604 - options issued 8,124 0 75 0 1,571 9,770 - other derivatives 2) Credit derivatives: 0 0 0 0 0 0 • with exchange of 0 0 0 0 0 0 capital • without exchange of capital Total B 8,154 1,850 75 0 1,571 11,650 1,516
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Section 5 - Financial liabilities at fair value – Item 50
5.1 - Financial liabilities at fair value: breakdown by product
Total Insurance Total 31.12.2004 Banking group company Other companies 31.12.2005 excluding IAS 39 Transaction type/Values FV FV FV FV FV FV N U FV N U FV NV L UL * V L L * V L L * NV L UL FV* NV L UL FV* 1. Due to banks 1.1 Structured 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 1.2 Other 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 2. Due to customers 2.1 Structured 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 2.2 Other 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 0 0 0 X 3. Debt securities 0 0 0 0 0 0 0 0 0 2.1 Structured 132,145 132,419 X X X 132,145 132,419 X 0 0 X 0 0 0 0 0 0 0 0 0 2.2 Other 324,495 324,989 X X X 324,495 324,989 X 0 0 X Total 456,640 0 457,408 0 0 0 0 0 0 0 0 0 456,640 0 457,408 0 383,121 0 383,121 0 Key: FV = fair value FV* = fair value calculated excluding changes in value due to changes in creditworthiness of the issuer from the issue date. NV = nominal value L = listed UL = unlisted
The fair value option for financial liabilities issued has been used in order to allow for better representation, as well as for a coherent criterion of valuation of liability items (natural hedging) linked to derivatives valued at fair value.
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Section 6 – Hedging derivatives – Item 60 6.2 Hedging derivatives: breakdown by type of contract and underlying 6.1.1 Of the banking group Curren Equity Interest Total Type of derivative/underlying cy and securiti Loans Other rates gold es A) Listed 1) Financial derivatives: • with exchange of capital 0 0 0 0 0 0 − options issued 0 0 0 0 0 0 0 0 0 0 0 0 − other derivatives
• without exchange of 0 0 0 0 0 0 capital 0 0 0 0 0 0 - options issued 0 0 0 0 0 0 - other derivatives
2) Credit derivatives:
• with exchange of 0 0 0 0 0 0 capital • without exchange 0 0 0 0 0 0 of capital Total A 0000 0 0 B) Unlisted 1) Financial derivatives: • with exchange of capital 0 0 0 0 0 0 − options issued 0 0 0 0 0 0 − other derivatives 0 0 0 0 0 0 • without exchange of capital 12,723 0 0 0 0 12,723 - options issued 0 0 0 0 0 0 - other derivatives 12,723 0 0 0 0 12,723 2) Credit derivatives:
• with exchange of 0 0 0 0 0 0 capital • without exchange 0 0 0 0 0 0 of capital Total B 12,723000 0 12,723 Total (A + B) 31.12.2005 12,723000 0 12,723 Total (A + B) 2,639000 0 2,639 31.12.2004excluding IAS 39
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6.2 Hedging derivatives: breakdown by portfolios hedged and by type of hedging
6.2.1. of the banking group
Cash flow Fair value hedge: hedge Specific Asset/Type of hedge - Interes sever exchan credit price Generic Specific Generic t rate al ge rate risk risk risk risks risk 1. Financial assets available for sale 10,809 0 0 0 0 X 0 X 2. Loans 0 0 0 X 0 X 0 X 3. Financial assets held to maturity X 0 0 X 0 X 0 X 4. Portfolio X X X X X 0 X 0 Total assets 10,809 0 0 0 0 0 0 0 1. Financial liabilities 1,914 0 0 0 0 X 0 X 2. Portfolio X X X X X 0 X 0 Total liabilities 1,914 0 0 0 0 0 0 0
Section 8 – Tax liabilities – Item 80 See section 14 of Assets
426
Section 10 – Other liabilities – Item 100
10.1 Other liabilities: composition
Of the banking group
Total 31.12.2005 Stock options 75 Due to Social Security 4,888 Sums to be transferred to suppliers of goods and 4,230 services Suppliers: Invoices to be received 4,915 Transactions on interbank networks to finalise 19,587 Fees payable 158 Amounts payable to employees for income and holidays 5,927 Currency differences on portfolio transactions 40,906 Provisions for write-downs of guarantees 2,564 Others accrued liabilities and deferred income 5,005 Other miscellaneous 15,654 Total at 31.12.2005 103,909 Total at 31.12.04 82,458
Other Group companies
Total 31.12.2005 Due to Social Security 13 Suppliers: Invoices to be received 18 Other miscellaneous 1 Total at 31.12.2005 32 Total at 31.12.04 0
427
Section 11 – Employee severance indemnity – Item 110 11.1 Employee severance indemnity: changes over the year
Banking Insurance Other Total
group company companies A. Opening balance 16,101 0 0 16,101 B. Increases 4,288 0 0 4,288
B.1 Allocations during the year 3,569 0 0 3,569 B.2 Other increases 719 0 0 719 C. Decreases 2,855 0 0 2,855 C.1 Payments made 1,105 0 0 1,105
C.2 Other decreases 1,750 0 0 1,750 D. Closing balance 17,534 0 0 17,534
Section 12 – Provisions for risks and charges – Item 120
12.1 Provisions for risks and charges: composition
Banking Insurance Other Total Total group company compani 31.12.05 31.12.04 Items/Values es excludin g IAS 39 1. Company pension funds 0 0 0 0 2. Provisions for risks and 10,037 0 0 10,037 charges 2.1 legal disputes 8,716 0 0 8,716 2.2 personnel costs 100 0 0 100 2.3 other 1,221 0 0 1,221 Total 10,037 0 0 10,037 9,645
428
12.2 Provisions for risks and charges: changes over the year Banking group Insurance company Other companies Total Company Other Other Company Other Company Other Items/Values Company pension provisio provisi pension provi pension provisi pension funds funds ns ons funds sions funds ons A. Opening balance 0 9,645 0 0 0 0 0 9,645 B. Increases 0 9,249 0 0 0 0 0 9,249 B.1 Allocations during the year 0 8,622 0 0 0 0 0 8,622 B.2 Variations due to the passage of time 0 16 0 0 0 0 0 16 B.3 Variations due to changes in discount rate 0 0 0 0 0 0 0 0 B.4 Other variations 0 611 0 0 0 0 0 611 C. Decreases 0 8,857 0 0 0 0 0 8,857 C.1 Use during the year 0 6,847 0 0 0 0 0 6,847 C.2 Variations due to changes in discount rate 0 3 0 0 0 0 0 3 C.3 Other variations 0 2,007 0 0 0 0 0 2,007 D. Closing balance 0 10,037 0 0 0 0 0 10,037
429
Section 15 – Group shareholders’ equity – Items 140, 160, 170, 180, 190, 200 and 220
15.1 Group shareholders’ equity: composition
Amount Amount 31.12.2005 31.12.2004 Items/Values excluding IAS 39 1. Capital 145,393 142,550 2. Share premiums 159,256 151,066 3. Reserves 35,564 62,955 4. (Treasury shares) 0 0 a) parent bank 0 0 b) subsidiaries 0 0 5. Valuation reserves 20,771 14,548 6. Capital instruments 7,014 7,620 7. Parent Bank profit (loss) for the year (123,384) 27,061 Total 244,614 405,800
15.2 “Capital” and “Treasury shares”: composition
As at 31 December 2005, the share capital of the Parent Bank is composed of 48,464,287 ordinary shares with a nominal value of € 3.00 each, entirely paid up.
Its can be broken down as follows: subscriptions € 81,707,000 use of revaluation reserves € 17,299,000 use of capital reserves € 17,299,000 use of profit reserves € 2,613,000 € 145,393,000
430
15.3 Capital – Number of shares held by Parent Bank: changes over the year Items/Values Ordinary Other A. Shares existing at the beginning of the year 47,513,429 0 - fully paid up 47,513,429 0 - not fully paid up 0 A.1 Treasury shares (-) 0 B.2 Outstanding shares: initial balance 47,513,429 0 B. Increases 1,571,349 0 B.1 New issues 950,968 0 - for pay 745,774 0 - business combination transactions 0 0 - bond conversions 745,772 0 - exercise of warrants 0 0 - other 2 - without payment: 205,194 0 - to employees 130,619 0 - to directors 0 0 - other 74,575 0 B.2 Sale of treasury shares 620,381 0 B.3 Other variations 0 0 C. Decreases 620,381 0 C.1 Cancellation 0 0 C.2 Purchase of treasury shares 620,381 0 C.3 Business transfer transactions 0 0 C.4 Other variations 0 0 D. Outstanding shares: closing balance 48,464,397 0 D.1 Treasury shares (+) 0 0 D.2 Shares existing at the end of the year 48,464,397 0 - fully paid up 48,464,397 0 - not fully paid up 0 0
15.4 Capital: other information
As at 31 December 2005, there were 7,152,082 convertible bonds in circulation from the convertible subordinated bond Banca Popolare di Intra 3% 2001/2006 CV which, if entirely converted at the current ratio of 1.1 share for each bond, would lead to the issuing of 7,867,290 new shares with a nominal unit value of € 3.00 and, thus, overall, capital would increase by € 23,601,870.
431
15.5 Profit reserves: other information
Reserves (item 3 of table 14.1) can be broken down as follows:
Items/Values Total Total 31.12.2005 31.12.2004 excluding IAS 39 1. Legal reserves 23,641 21,203 2. Extraordinary reserves 31,771 28,583 3. Available reserves 35,898 27,676 4. Reserves for treasury shares 7,747 7,747 5. Reserves as per art. 22 of Legislative Decree 153/99 0 222 6. Reserves for future increases in capital for employees 936 936 7. Special reserves pursuant to art. 13 of Legislative 164 164 Decree 124/93 8. Profit reserves from First Time Adoption 838 1,135 9. Other reserves from First Time Adoption (43,191) (1,649) 10. Consolidation reserve (22,240) (23,062) Total 35,564 62,955
15.6 Valuation reserves: composition
Items/components Banking Insurance Other Total Total group company compani 31.12.05 31.12.04 es excluding IAS 39 1. Financial assets available for sale 1,990 0 0 1,990 0 2. Tangible assets 41 0 0 41 12,618 3. Intangible assets 0 0 0 0 0 4. Hedging of foreign investments 000 0 0 5. Cash flow hedging 000 0 0 6. Exchange rate differences 0 0 0 0 0 7. Non-current assets being disposed 000 0 0 8. Special revaluation laws 18,740 0 0 18,740 1,930 Total 20,771 0 0 20,771 14,548
432
433
15.7 Valuation reserves: changes over the year
15.7.1 Of the banking group
Non-current Special Financial Hedging of Exchange assets being revaluation assets Tangible Intangible Cash flow foreign rate disposed laws available assets assets hedging investments difference for sale s A. Opening balance 0 12,618 0 0 0 0 0 1,930 B. Increases 5,959 0 0 0 0 0 0 17,034 B.1 Increases in fair value 5,959 0 0 0 0 0 0 0 B.2 Other variations 0 0 0 0 0 0 0 17,034 C. Decreases 3,969 12,577 0 0 0 0 0 224 C.1 Increases in fair value 3,969 0 0 0 0 0 0 0 C.2 Other variations 0 12,577 0 0 0 0 0 224 D. Closing balance 1,990 41 0 0 0 0 0 18,740
434
15.8 Valuation reserves of financial assets available for sale: composition Banking Insurance Other Total Total group company companies 31.12.2005 31.12.2004 excluding IAS 39 Items/components Positi Negat Positi Negati Positi Negat Positi Negat Positi Negati ve ive ve ve ve ive ve ive ve ve reser reser reser reserve reser reser reser reser reser reserv ves ves ves s ves ves ves ves ves es 1. Debt securities 287 0 287 0
2. Equity securities 2,141 438 2,141 438
3. Quota OICR 0 0 0 0
4. Loans 0 0 0 0 Total 2,428 438 2,428 438
15.9 Valuation reserves of financial assets available for sale: changes over the year
15.9.1 of the banking group
Debt Equity Quotas of Loans securities securities OICR 1. Initial balance 000 0 2. Increases 287 5,672 0 0 2.1 Increases in fair value 287 332 0 0 2.2 Reversal of negative reserves to income statement 010 0 - from deterioration 010 0 - from realisation 000 0 2.3 Other variations 0 5339 0 0 3. Decreases 0 3,969 0 0 3.1 Decreases in fair value 0 720 0 0 3.2 - from deterioration 000 0 3.3 Reversal of positive reserves to income statement: from 0 3,243 0 0 realisation 3.4 Other variations 060 0 4. Closing balance 287 1,703 0 0
435
Section 16 – Minority interests – Item 210
16. 1 Minority interests: composition
Items/Values Total Banking Insurance Other Total 31.12.2004 group company companies 31.12.2005 (excluding IAS 39) 1. Capital 9,848 0 0 9,848 10,304 2. Share premiums 0000 0 3. Reserves 881 0 0 881 775 4. (Treasury shares) 0000 0 5. Valuation reserves 0000 0 6. Capital instruments 0000 0 7. Minority profit (loss) for the year 528 00528 645 Total 11,257 0 0 11,257 11,724
436
OTHER INFORMATION
1 Guarantees issued and commitments
Transactions Banking Insurance Other Amount Amount group company companies 31.12.2005 31.12.2004 (excluding IAS 39) 7) Financial guarantees issued 185,459 0 0 185,459 0 a) Banks 0 0 0 0 0 b) Customers 185,459 0 0 185,459 0
8) Commercial guarantees issued 141,507 0 0 141,507 0 a) Banks b) Customers 71 0 0 71 0 141,436 0 0 141,436 0 9) Irrevocable commitments to grant finance 16,969 0 0 16,969 0 a) Banks 11,701 0 0 11,701 0 i) for certain use 11,701 0 0 11,701 0 ii) for uncertain use 0 0 0 0 0 b) Customers 5,268 0 0 5,268 0 i) for certain use 4,993 0 0 4,993 0 ii) for uncertain use 275 0 0 275 0
10) Commitments underlying credit 0 0 0 0 0 derivatives default swaps
11) Assets lodged as security for minority 0 0 0 0 0 obligations
4,044 0 0 4,044 0 12) Other commitments Total 347,979 0 0 347,979 345,326
2. Assets lodged as security for own liabilities and commitments
Portfolios Amount Amount31.12.200 31.12.2005 4 (excluding IAS 39) 1. Financial assets held for trading 55,100 30,100 2. Financial assets at fair value 0 0 3. Financial assets available for sale 100,000 100,000 4. Financial assets held to maturity 0 0 5. Due from banks 0 0 6. Loans to customers 0 0 7. Tangible assets 0 0
437
5. Management and brokerage on behalf of third parties: banking group
Type of services Amounts 1. Trading of financial instruments on behalf of third parties b) Purchases 191,480 3. settled 186,605 4. not settled 4,875 c) sales 158,125 3. settled 153,582 4. not settled 4,543 2. Assets under management a) individual 843,165 b) collective 0 3. Securities custody and administration c) third party assets under custody: connected to the duties of 0 custodian bank (excluding assets under management) 3. securities issued by companies included in the scope 0 of consolidation 0 4. other securities d) third party assets under custody (excluding assets under 1,300,800 management): other 1,933,343 3. securities issued by companies included in the scope of 3,578,551 consolidation 1,121,556 4. other securities 1,146,729 e) third party assets deposited with third parties f) Own securities deposited with third parties 4. Other transactions
The category "other transactions" corresponds to stakes in OICR placed by the Parent Bank with its own customers, in custody or administration at the end of year.
438
Part C – INFORMATION ON THE CONSOLIDATED INCOME STATEMENT
439
Section 1 – Interest – Items 10 and 20
1.1 Interest and similar income: composition 1.1.1 Of the banking group
Items/Technical form Performing financial Deteriorate Other Total Total assets 31.12.2005 31.12.2004 d assets assets Debt Loans excluding securitie IAS 39 s
10. Financial assets held for 8,182 0 0 4,459 12,641 trading
11. Financial assets at fair value 0 0 0 0 0 12. Financial assets available for
sale 5,615 0 0 0 5,615 13. Financial assets held to
maturity 0 0 0 0 0 14. Due from banks 0 102 0 1,799 1,901 15. Loans to customers 0 150,877 34,071 2,356 187,304 16. Hedging derivatives X X X 1,306 1,306 17. Transferred financial assets not
written off 2,504 0 0 0 2,504 18. Other assets X X X 510 510 Total 16,301 150,979 34,071 10,430 211,781 225,208
440
1.2 Interest and similar income: differences regarding hedging transactions
Items/Sectors Total Total Other Banking Insurance 31.12.05 31.12.04 compani group companies excluding es IAS 39 A. Positive differences from transactions of: A.1 Specific fair value hedging of assets 0 0 0 0 0 A.2 Specific fair value hedging of liabilities 4,225 0 0 4,225 0 A.3 Generic hedging of interest rate risk 0 0 0 0 0 A.4 Specific cash flow hedging of assets 0 0 0 0 0 A.5 Specific cash flow hedging of liabilities 0 0 0 0 0 A.6 Generic cash flow hedging 0 0 0 0 0 Total positive differences (A) 4,225 0 0 4,225 0 B. Negative differences from transactions of: 0 0 0 0 B.1 Specific fair value hedging of assets 2,818 0 0 2,818 0 B.2 Specific fair value hedging of liabilities 101 0 0 101 0 B.3 Generic hedging of interest rate risk 0 0 0 0 0 B.4 Specific cash flow hedging of assets 0 0 0 0 0 B.5 Specific cash flow hedging of liabilities 0 0 0 0 0 B.6 Generic cash flow hedging 0 0 0 0 0 Total negative differences (B) 2,919 0 0 2,919 0 C. Balance (A - B) 1,306 0 0 1,306 6,314
1.3 Interest and similar income: other information
1.3.1 Interest income on financial assets in foreign currency
Interest on assets in foreign currency can be broken down as follows:
Type Total Total 31.12.05 31.12.04 excluding IAS 39 d) On due from banks 70 40 e) On loans to customers 2,838 1,579 f) On financial trading assets 5 3
TOTAL 2,913 1,622
1.3.2 Interest income on financial leasing transactions
Interest on financial leasing instalments amounted to € 2,277 thousand.
441
1.4 Interest and similar expenses composition
1.4.1 Of the banking group
Items/Technical form Payables Securitie Other Total Total s liabilities 31.12.05 31.12.04 excluding IAS 39 1. Due to banks 3,125 X 299 3,424 2. Due to customers 13,851 X 0 13,851 3. Outstanding securities X 54,420 0 54,420 4. Financial trading liabilities 0 3,385 0 3,385 5. Financial liabilities at fair value 0 12,432 0 12,432 6. Liabilities for transferred assets not written off 1,977 0 0 1,977 7. Other liabilities X X 199 199 8. Hedging derivatives X X 00 Total 18,953 70,237 498 89,688 86,310
1.6 Interest and similar expenses other information
1.6.1 Interest and similar expenses in foreign currency
Interest on liabilities in foreign currency can be broken down as follows:
Type Total Total 31.12.05 31.12.04 g) On due from banks 1,117 440 h) On loans to customers 241 116 On debt securities 71 46 TOTAL 1,429 602
1.6.2 Interest expense on financial leasing transactions
Interest expense on financial leasing instalments amounted to € 198 thousand.
442
Section 2 – Fees – Items 40 and 50
2.1 Fee income: composition 2.1.1 of the banking group Type of services/Sectors Total 31.12.05 Total 31.12.04 excluding IAS 39 i) guarantees issued 2,410 j) credit derivatives 0 k) management, brokerage and consulting 37,279 services: 1. trading of financial instruments 734 2. trading of foreign currencies 1,832 3. assets under management 8,750 3.1. individual 8,750 3.2. collective 0 4. securities custody and administration 1,325 5. custodian bank 0 6. placement of securities 12,593 7. orders collection 3,947 8. consulting activities 0 9. distribution of third-party services 8,098 9.1. assets under management 186 9.1.1. individual 186 9.1.2. collective 0 9.2. insurance products 7,912 9.3. other products 0 i) collection and payment services 13,982 j) servicing for securitisation transactions 340 k) services for factoring transactions l) tax collection services 0 m) other services 0 22,274 Total 76,285 69,410
443
2.2 Fee income: distribution channels for products and services (regulations in force): banking group
Items/Sectors Total 31.12.05 Total 31.12.04 excluding IAS 39 b) through own branches: 15,309 11,102 4. assets under 2,092 552 management 6,987 5,043 5. placement of securities 6,230 5,507 6. third party services and 14,132 13,352 products 6,658 6,132 d) out-of-branch offer: 5,606 4,392 4. assets under 1,868 2,828 management 0 0 5. placement of securities 0 0 6. third party services and 0 0 products 0 0 e) other distribution channels: 4. assets under management 5. placement of securities 6. third party services and products
2.3 Fee expense: composition 2.3.1 Of the banking group Items/Sectors Total Total 31.12.2005 31.12.2004 excluding IAS f) guarantees received 0 g) credit derivatives 0 h) management and brokerage services: 10,651 7. trading of financial instruments 749 8. trading of foreign currencies 81 9. assets under management: 0 3.1 treasury portfolio 3.2 third party portfolio 10.securities custody and administration 268 11.placement of financial instruments 12. out-of-branch offer of financial instruments, 9,553 products and services i) collection and payment services 2,866 j) other services 417 Total 13,934 12,880
444
Section 3 – Dividends and similar income – Item 70 3.1 Dividends and similar income: composition Banking group Insurance companies Other companies Total Total 31.12.2005 31.12.2004 excluding IAS 39 Items/Income Dividends Income from Dividends Income from Dividends Income from Dividends Income quotas of quota of OICR quotas of from OICR OICR quotas of OICR
E. Financial assets held 40 0 0 0 0 40 for trading 220 220 F. Financial assets 0 0 0 0 0 0 available for sale 0 0 G. Financial assets at fair 0 0 0 0 0 0 value 429 429 X 0 0 0 0 0 H. Shareholdings 0 0 X 0 X X 0 Total 649 40 0 0 0 0 649 40 4,051
445
Section 4 - Net income from trading - Item 80
4.1 Net income from trading: composition
4.1.1 Of the banking group Gains Profits from Losses Losses from Net (A) trading (C) trading profit Transaction/Income (B) (D) (loss) component [(A+B) − (C+D)] 1. Financial assets for trading 4,596 4,852 4,248 1,615 3,585 1.6 Debt securities 947 1,293 4,184 813 (2,757) 1.7 Equity securities 0 1,912 0 798 1,114 1.8 Quotas of OICR 3,649 1,365 64 1 4,949 1.9 Loans 0 1.10 Other 0 282 0 3 279 2. Financial liabilities for trading 00 0 0 0 2.1 Debt securities 00 0 00 2.2 Payables 00 0 00 2.3 Other 00 0 00 3. Other financial assets and liabilities: exchange rate X X X X 521 differences 4. Derivative instruments 6,858 5,673 8,768 6,698 (2,387) 4.1 Financial derivatives: 6,858 5,673 8,768 6,698 (2,387) - On debt securities and interest rates 6,821 4,550 8,668 3,484 (781) - On equity securities and share indices 37 1,123 100 3,089 (2,029) - On currency and gold X X X X 548 - Other 0 0 0 125 (125) 4.2 Credit derivatives 00 0 00 Total 11,454 10,525 13,016 8,313 1,719
446
Section 5 - Net income from hedging activities - Item 90
5.1 Net income from hedging activities: composition
Banking Insurance Other Total Total group companies compani 31.12.05 31.12.04 Income component/Values es excluding IAS 39 Income from: B.1 Fair value hedging derivatives 751 0 0 751 A.2 Financial assets hedged at fair value 126 0 0 126 A.3 Financial liabilities hedged at fair value 4,135 0 0 4,135 A.4 Financial derivatives for cash flow hedging 0 0 0 0 A.5 Assets and liabilities in foreign currency 0 0 0 0 Net income from hedging activities (A) 5,012 0 0 5,012 C. Charges from: C.1 Fair value hedging derivatives 4,087 0 0 4,087 B.2 Financial assets hedged at fair value 0 0 0 0 B.3 Financial liabilities hedged at fair value 189 0 0 189 B.4 Financial derivatives for cash flow hedging 0 0 0 0 B.5 Assets and liabilities in foreign currency 549 0 0 549 Net charges from hedging activities (B) 4,825 0 0 4,825 D. Net results from hedging activities (A—B) 187 0 0 187 75
447
Section 6 - Profit (Loss) from disposal/repurchase - Item 100
6.1 Profit (loss) from disposal/repurchase: composition
Items/Income Banking group Insurance company Other companies Total Total components 31.12.2005 31.12.2004 excluding IAS 39 Net profit Net profit Profit Loss Net profit Net profit Net profit Profit Loss Profit Loss Profit Loss Profit Loss (loss) (loss) (loss) (loss) (loss) Financial assets 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5. Due from banks 0 0 0 0 0 0 0 0 0 0 0 6. Loans to customers 0 1,962 (1,962) 1,962 (1,962)
7. Financial assets
available for sale 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3.1 Debt securities 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3.2 Equity securities 7,910 0 7,910 0 0 0 0 0 0 7,910 0 7,910 0 0 0 3.3 Quotas of OICR 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 3.4 Loans 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
8. Financial assets held to
maturity 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Total assets 7,910 1,962 5,948 0 0 0 0 0 0 7,910 1,962 5,948 0 0 0 Financial liabilities 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 4. Due to banks 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5. Due to customers 0 0 0 0 0 0 0 0 0 0 0 6. Outstanding securities 0 294 (294) 294 (294) Total liabilities 0 294 (294) 0 0 0 0 0 0 0 294 (294) 0 0 0
448
Section 7 - Net income from financial assets/liabilities at fair value – Item 110
7.2 Net variation in financial assets/liabilities at fair value: composition
7.2.1 Of the banking group
Gains Profit from Losses Losses from Net profit Transaction/Income (A) realisation (C) realisation (loss) component (B) (D) [(A+B) − (C+D)] 1. Financial assets 1.1 Debt securities 0000 0 1.2 Equity securities 0000 0 1.3 Quotas of OICR 0000 0 1.4 Loans 0000 0 Total assets 0000 0 2. Financial liabilities 2.1 Debt securities 7,193 1,078 5,677 83 2,511 2.2 Due to banks 0000 0 2.3 Due to customers: 0000 0 Total liabilities 7,193 1,078 5,677 83 2,511 3. Financial assets and liabilities in foreign currency exchange rate X X X X 0 differences 4. Derivative instruments 4.1 Financial derivatives: - On debt securities and interest rates - On equity securities 0 0 0 0 0 and share indices 0 0 0 0 0 - On currency and gold X X X X X - other 0 0 0 0 0 4.2 derivati su crediti 0 0 0 0 0 Total derivatives 0 0 0 0 0 Total 7,193 1,078 5,677 83 2,511
449
Section 8 – Net value adjustments/write-backs for deterioration – Item 130
8.2 Net value adjustments for deterioration of loans: composition
8.1.1. Of the banking group
Value adjustments Write-backs (1) (2) Specifiche Di portafoglio Specifiche Di Total Total portafoglio 31.12.05 31.12.04 Transaction/Income (3) = excludi component (1) – (2) ng IAS Cancell Altre A B A B 39 azioni (3) = (1) – (2) D. Due from banks 0 0 0 0 0 0 0 0 0 0 368 257,902 18,887 0 21 24,283 0 295 252,558 60,005 E. Loans to customers F. Total 368 257,902 18,887 0 21 24,283 0 295 252,558 60,005 Key: A = from interest B = other write-backs
450
8.3 Net value adjustments for deterioration of financial assets available for sale: composition
8.3.1 Of the banking group
Value adjustments Write-backs Total (1) (2) 31.12.05 Transaction/Income Specific (3) = (1) – (2) component Specific Write-offs Other A B
G. Debt securities 0 0 0 0 H. Equity securities 1 180 X X (181) I. Quotas of OICR 0 0 X 0 0 J. Loans to banks 0 0 0 0 0 K. Customer loans 0 0 0 0 0 L. Total 1 180 0 0 (181) Key: A = from interest B = other write-backs
8.4 Net value adjustments for deterioration of other financial transactions: composition
8.4.1. Of the banking group
Value adjustments Write-backs (1) (2) Specific Portfolio Portfolio Specific Transaction/Income Total Total component 31.12.05 31.12.04 write- (excludi other A B A B offs ng IAS 39)
A. Guarantees issued 0 994 338 0 207 0 0 (1,125) B. Credit derivatives 0 0 0 0 0 0 0 0 C. Commitments to grant 0 0 0 0 0 0 0 0 finance 0 0 0 0 0 0 0 0 D. Other transactions E. Total 0 994 338 0 207 0 0 (1,125) (4,150) Key: A = from interest B = other write-backs
451
Section 11 – Administrative expenses – Item 180 11.1 Personnel costs: composition
Banking Insurance Other Total Total group companies companies 31.12.05 31.12.04 Type of costs/Sectors excluding IAS 39 1) Employees 67,598 0 0 67,598 0 j) wages and salaries 46,823 0 0 46,823 0 k) social security costs 12,422 0 0 12,422 0 l) employee severance indemnity 000 0 0 m) pension costs 000 0 0 n) allocations to employee severance 0 0 0 indemnity 4,277 4,277 o) - allocations to pension costs and similar 0 0 0 liabilities 0 0 - defined contribution plans 0 0 - defined benefit plans 0 0 p) payments to external complementary 0 0 0 pension funds: 1,142 1,142 - defined contribution plans 1,142 1,142 - defined benefit plans 0 0 q) costs deriving from payment agreements 0 0 0 based on own equity instruments 8 8 r) other employee benefits 2,926 0 0 2,926 0 2) Other personnel 584 0 0 584 0 3) Directors 501 0 0 501 0 Total 68,683 0 0 68,683 67,651
11.2 Average number of employees by category: banking group
Total 31.12.2005 Employees: a) executives 28 b) total managers 326 - of which 3rd and 4th level 145 c) remaining personnel 743 Other personnel 6 Total 1,103
452
11.5 Other administrative expenses: composition
Total Total 31.12.2005 31.12.2004 excluding IAS 39 indirect taxes and duties 8,408 professional fees 6,852 insurance premiums 858 rental instalments for locations for office and other 5,246 uses leasing instalments for machinery and software 2,011 advertising and entertainment 1,332 other utilities (electricity, heating and water) 1,399 telephone 1,072 data transmission fees 885 security, guards and armoured escort 1,898 cleaning services 1,207 external data processing 562 office supplies 736 postage 2,198 transport costs 210 subscriptions and publications 135 purchase of other, non-professional services 2,183 electronic processing carried out at third parties 10,391 telecommunications networks 2,216 maintenance of property, furniture, systems, machinery 2,915 and software other expenses 2,368 Total 55,082 48,752
453
Section 12 - Net allocations to provisions for risks and charges – Item 190
12. 1 Net allocations to provisions for risks and charges: composition
Allocations Reallocations Total Total 31.12.2005 31.12.2004 excluding IAS 39 Adjustment of provisions for legal disputes 8,014 121 (7,893) Allocations to provisions for personnel charges 618 500 (118) Total 8,632 621 (8,011) (3,907)
454
Section 13 – Net value adjustments/write-backs of tangible assets – Item 200
13.1 Net value adjustments to tangible assets composition
13.1.1 Of the banking group
Value Net profit Asset/Income component Depreciation (a) adjustments for Write-backs (c) (loss)
deterioration (a + b –c) B. Tangible assets 5,349 0 0 5,349 A.1 Owned 5,143 0 0 5,143 - For functional use 4,552 0 0 4,552 - For investment 591 0 0 591 A.2 Assets under financial lease - For functional use 206 0 0 206 - For investment 206 0 0 206 0 0 0 0 Total 5,349 0 0 5,349
Section 14 – Net value adjustments/write-backs of intangible assets – Item 210
14.1 Net value adjustments to intangible assets: composition
14.1.1 Of the banking group
Value Write- Net profit Asset/Income component adjustments for Amortisation (a) backs (loss) deterioration ( c ) (a + b –c) (b) A. Intangible assets 901 0 0 901 A.1 Owned 901 0 0 901 - Internally generated by the 0 0 0 0 company 901 0 0 901 - Other 0 0 0 0 A.2 Assets under financial lease Total 901 0 0 901
455
Section 15 – Other operating income/charges – Item 220
15.1 Other operating charges composition
Total 31.12.2005 Charges relating to leasing agreements 469 Software purchase and implementation 228 Maintenance of own property 25 Other operating charges 8,021 Total 8,743
Maintenance on own property refers exclusively to leased units.
15.2 Other operating income: composition Total 31.12.2005 rent income 300 reimbursement of indirect taxes 7,360 recovery of expenses from customers 3,082 Bank of America transaction 15,451 other operating income 3,513 Total 29,706 Rent income refers to property for investments, for a total of € 168 thousand.
456
Section 19 - Profit (Loss) from the sale of investments - Item 270
19.1 Profit (loss) from the sale of investments: composition
Total Banking Insurance Other Total 31.12.2004 Income component/Sectors group companies companies 31.12.2005 excluding IAS 39 A. Property 4,306 0 0 4,306 - Profit from sale 4,306 0 0 4,306 - Loss from sale 0 0 0 0 B. Other assets 49 0 0 49 - Profit from sale 61 0 0 61 - Loss from sale 12 0 0 12 Net profit (loss) 4,355 0 0 4,355 65
Section 20 - Income tax for the year for current operations – Item 290
20.1 Income tax for the year for current operations: composition
Income component/Sectors Banking Insurance Other Total Total group companies compan 31.12.05 31.12.04 ies 7. Current taxes (-) (24,827) 0 0 (24,827) 8. Variations in current taxes from previous years (+/-) 0 0 0 0 9. Reduction in current taxes for the year (+) 10. Variation in prepaid taxes (+/-) 0 0 0 0 11. Variation in deferred taxes (+/-) 68,106 0 0 68,106 5,187 0 0 5,187 12. Taxes for the year (-) (-1+/-2+3+/-4+/-5)
48,466 0 0 48,466 (8,208)
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Section 22 - Minority profit (loss) for the year – Item 330
22.1 Details of item 330 “Minority profit (loss) for the year”
Minority profit for the year amounts to € 528 thousand. The largest figures include € 236 thousand from Banca Popolare di Monza e Brianza and € 280 thousand from Intra Private Bank.
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Section 23 – Other information
Directors and statutory auditors
23.1 Fees for directors and auditors of Group companies
Total 31.12.2005 Directors 504 Statutory auditors 127 Total 631
23.2 Fees for directors and auditors of the Parent Bank
Total 31.12.2005 Directors 259 Statutory auditors 255 Total 514
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Part D – SEGMENT REPORTING
Consolidated results by geographical area
International accounting standard no. 14 requires financial statement reporting by segment, breaking down results by line of business (the primary segment) and geographical area (secondary segment). In this first phase of application of the new accounting standards, and taking into account the fact that the Parent Bank, whose results account for a predominant portion of Group results, is mainly a retail bank, it is considered useful to provide an initial reporting by segment with respect to the geographical areas of business of the Group (Piedmont and Lombardy).
Piedmont is considered as representing the "historical" area of the Parent Bank, which operates in the provinces of Verbano, Cusio, Ossola and Novara, with a total of 51 branches (out of a total of 72). The remaining 21 branches are located in the Lombardy provinces of Varese, Milan and Como, which represent areas where the Bank has more recently expanded.
As regards the other banks in the Group, Banca Popolare di Monza has 7 branches, all located in Lombardy, while Intra Private Bank operates through a network of 121 financial advisors, primarily located in the Centre-North of Italy. In order to break down the economic results of Intra Private Bank by geographical area, a criterion was adopted by which economic items are divided based on the proportion of volumes administrated by financial advisors in the two regions.
Lastly, the equity and economic data of subsidiary Monza e Brianza Leasing have been attributed to the Lombardy region, where the Registered Office of the company is located, in addition to most of its operations.
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FINANCIAL DATA – DISTRIBUTION BY GEOGRAPHICAL AREA (amounts in millions of PIEDMONT LOMBARDY OTHER TOTAL Euro) 31.12.05 31.12.04 31.12.05 31.12.04 31.12.05 31.12.04 31.12.05 31.12.04
Loans to customers 1,819.8 2,016.6 1,666.6 1,603.4 6.0 53.7 3,492.4 3,673.7
Direct deposits 1,819.8 1,976.2 1,025.2 1,069.9 938.5 1,012.2 3,792.8 4,058.3
Regarding the geographical distribution of assets managed, the table above shows that against a decrease of 4.9% in commitments, the Group has consolidated its position in more recent areas compared to the traditional provinces. The decrease in deposits (-6.5%) seems to be more generalised.
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INCOME STATEMENT – DISTRIBUTION BY GEOGRAPHICAL AREA Items PIEDMONT LOMBARDY OTHER TOTAL 31-Dec- 31-Dec- 05 04 31-Dec-05 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04 31-Dec-04
Interest margin 73.3 79.7 47.1 52.1 1.7 7.1 122.1 138.9
Fee income 40.6 37.4 23.0 19.8 12.6 12.2 76.2 69.4 Fee expense -8.5 -7.8 -3.2 -3.0 -2.2 -2.1 -13.9 -12.9
Net fees 32.1 29.6 19.8 16.8 10.4 10.1 62.3 56.5
Dividends and similar income 0.7 4.1 0.7 4.1
Profit/loss balance from financial transactions 10.1 20.2 10.1 20.2
Net interest and other banking income 105.4 109.3 66.9 68.9 22.9 41.5 195.2 219.7
Net value adjustments for deterioration of loans and other financial transactions -164.9 -29.9 -85.4 -28.9 -3.6 -7.1 -253.9 -65.9
Net income from financial management -59.5 79.4 -18.5 40.0 19.3 34.4 -58.7 153.8
Administrative expenses and net value adjustments to tangible and intangible assets -60.1 -60.1 -40.5 -37.7 -29.5 -24.7 -130.1 -122.5
Net allocations to provisions for risks -1.3 -2.1 -6.6 -1.2 -0.1 -0.6 -8.0 -3.9
Other net operating income and charges 1.8 4.6 2.6 3.1 16.6 0.7 21.0 8.4
Profit (loss) from the sale of investments and/or shareholdings 0.0 0.0 0.2 0.0 4.2 0.1 4.4 0.1
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Profit (loss) from current operations before taxes -119.1 21.8 -62.8 4.2 10.5 9.9 -171.4 35.9
The table above shows that: - the Piedmont region provides about 60 % of the total interest margin, with 64% of total branches, compared to about 38.5 % from the Lombardy regions, in which 36% of branches are located; - in terms of net interest and other banking income, this percentage drops to 54% for Piedmont and about 34.2% for Lombardy; - the percentage of net adjustments to loans is, respectively, 65% and 33%, with the remainder being of a lump- sum nature; - after the allocation of expenses (46.2% to Piedmont, 31.1% to Lombardy), losses before taxes, at 31.12.05, of € 171.4 million, is attributable to Piedmont for € 119.1 million (equal to 69.5%) and to Lombardy for € 62.8 million (36.3%).
Piedmont accounts for 52.1% of total loans and Lombardy 47.7%. As far as direct deposits are concerned, although the same ratio is maintained, the amounts drop to 48.2% and 27%, respectively, with the segment “Other” accounting for 24.8%, attributable to bonds issued to institutional clients.
Moving on to the secondary segment, the criterion was adopted of dividing the assets managed by segment, according to allocation between individuals, businesses and others (not notified and problem customers). This segmentation shows that 24.2% of loans are granted to individuals, and a share of 72.2% to businesses (the remainder is allocated as other), while regarding direct deposits, about 50.1% is deposited by individuals and 22.1% by businesses, and the rest is in the hands of institutional clients.
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Part E - INFORMATION ON RISKS AND RELATED HEDGING POLICIES
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SECTION 1 – BANKING GROUP RISK
1.1 CREDIT RISK
Qualitative information
1. General aspects.
A fundamental objective of the credit activities of the Banca Popolare di Intra Group is to carry out an accurate, in-depth analysis of creditworthiness, both regarding existing loans, and regarding loans relating to the policy of commercial development, all in order to allow for the timely achievement of the company targets. During 2005, in order to improve the qualitative standing of credit activities, also in line with that set forth in the Basel 2 Accord, the Parent Bank significantly developed its use of credit scoring systems (such as SEAC, TCQ and SGR, which are explained in detail below), which are able to provide a more exact and timely valuation of credit risk. In this view, the Parent Bank continued the restructuring of the “credit control” department, located within the Internal Audit Department, as well as the strengthening of the organisation within the Loans Department, with the creation of the Doubtful Loans Department. In order to improve control of credit risk, the policy was pursued of settling the most critical deteriorated positions, by carrying out further allocations, where necessary, together with the transfer without recourse of some non- performing items. The policy for commercial development of credit primarily concentrated on the more traditional sectors present in the areas where the Institute operates, with specific attention to SMEs and the retail sector, favouring local customers on the whole. As well, the development of the individual mortgage sector continued, with the issuing of new products which were favourably received by the specific segment, with the conclusion of about 1,600 transactions characterised by greater distribution. Also in this area, there was particular focus on the performance rating systems, which, aside from improved analysis, segmentation and control of customers, also allow for “focused” commercial loan policies.
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2. Credit risk management policies
2.1 Organisational aspects.
The term credit risk indicates the possibility that an unexpected change in creditworthiness of a counterpart, with respect to which there exists an exposure, generates a corresponding unexpected variation in the market value of the credit position. Credit risk is determined by both macroeconomic and microeconomic factors. The following are at the macroeconomic level: Worsening of the national and international economic trend, aggressive and unexpected forms of competition, entrance and exit barriers, international political/military conflicts, variations in interest rates or in inflation. In the case of our Banking Group, particular relevance can be taken on by local and/or sector factors which can significantly affect the creditworthiness of recipients of loans. On the microeconomic level, with specific reference to the single borrower, credit risk may manifest itself in: risk of default, liquidity risk, and concentration risk, all factors which can lead to deterioration in creditworthiness. The organisational department of the Parent Bank entrusted with credit risk management has been expanded and refined during this year. In summary, it can be confirmed that credit risk management is implemented on two levels: at the branch network level and at Central Management level. The Branch Network is divided into various Geographical Areas. Inside each area, various roles are assigned, with direct management of the single positions in the area of the various duties performed: Parent Bank Managers, Area Managers, Sales Managers, Branch Managers and Sales Assistants. At the level of Central Management level, in particular, we highlight the activities carried out by the Mortgages Department as regards private mortgages, and the Doubtful Loans Department Both of these departments, though with the contribution of the performance rating and credit scoring systems, collaborate with the branches in analysing the individual positions and in preparing the most suitable initiatives for credit control. Moreover, the Mortgages Department performs an assessment of the properties subject to mortgage guarantees. It is also important to point out, as well at the Central Management level, the duties carried out by the Risk Management Department. In order to ensure the constant measurement of the Institution's exposure to credit risk, this department autonomously performs a periodic analysis of the loans portfolio, examining the trends in the various geographical areas, by segment, by
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sector/group, and by rating class, as well as analysing the concentration of loans.
2.2 Management, measurement and control systems
Within the activities required in order to reach credit risk management, measurement and control conditions that are in line with the Basel II Accord, increasingly refined operating methods have been developed over the last few years. In particular, in terms of management, a method for scoring customers has been implemented, which sets out a series of objectives: ratings for debtor customers, for adopting validatable IRB approaches, in perspective; customer segmentation models; pricing methods which reflect the customer's level of risk; and control systems (i.e.: SGR) closely linked to the performance rating. The final objective, in brief, is to improve the management, and therefore the quality of credit, together with a more selective allocation of capital, with a direct, positive impact on the general level of risk, and thus, on the economic results of our Institute. Back-testing procedures have been adopted, and stress-testing methods are under development. In further detail, the following points are set out for specific credit risk:
1) In terms of individual risk, the Parent Bank uses two systems as additional support for the traditional credit line procedure: SEAC (Customer Performance Expert System) and TCQ (Total Quality Credit). The first, which has been in force for years, automatically highlights anomalies in single credit line relationships. The second, on the contrary, assigns a score to the credit line relationship under examination. The implementation of this system began during 2005, and will be completely operational in 2006. TCQ is a product created by Uniteam (Unicredito Group) and was adopted within the SEC Consortium, to which the Parent Bank belongs, for specific use for risk evaluation as well as (in the near future with suitable implementation) for Basel 2. The product is divided into modules: - TCQ private disbursements (in use); - TCQ business disbursements (in use); - TCQ performance (in use); - SGR risk management system (currently in test phase, and being implemented in operations of the Branch Network).
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The first two modules provide a point rating regarding the request for credit under examination. On the contrary, the third examines the entire operating performance of the relationship over time (six months). The last module, after implementing the previous ones, will automatically provide the ranking of the relationships in terms of risk, dividing them into homogeneous classes (performing, under observation, high risk), by assigning a point score.
2) Currently, we are not equipped with a risk management and control system at the portfolio level. Instead, this information is presented to the Board of Directors on a quarterly basis, based on data from the Risk Department.
As regards the exposure limits and their concentration in terms of customer legal/economic group, the rules established in the supervisory regulations of the Bank of Italy are applied.
2.3 Techniques for mitigating credit risk
The main types of real security adopted by the Parent Bank can be broken down as follows:
- Mortgages: in almost all cases, these are first mortgages, with an adequate deviation with respect to the facility guaranteed, and, in any event, within the limits of the funding of the transaction (maximum of 80% of the value financed). Since the second half of 2003, the assessments supporting these guarantees have been carried out by the Mortgages Department of the Parent Bank, using specialised collaborators and/or external professionals, with whom specific agreements are made. Requests supported solely by the applicant’s assessment are only considered after evaluation by one of the departments indicated above. Within the current year, the Mortgages Department will check and verify all at-risk positions in this category, with assessment from the applicant, originating prior to the second half of 2003, in order to ensure conformity of the entire category, with the support of internal valuations which are pertinent and exact with relation to market values.
- Liens: the New Loans Regulations, approved by the Board of Directors in June 2005, set out specific rules for assumption, control, type of guarantees which can be acquired, and deviations to be applied for the entire category;
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- Sureties from Banks and Associations (Credit Guarantee Consortia, Guarantee Cooperatives):
This category, for a banking group linked to the local territory such as ours, it is of great importance to create agreements with local associations in order to obtain guarantees from them to mitigate loans granted to their single members. Bank guarantees are limited in number and amount.
Lastly, as regards personal guarantees, these are evaluated on a case-by- case basis, together with the related suitable documentation, and, for the most part, regard personal sureties granted by the businessman and/or related third parties (family members, financers, holding companies) to support the loans granted to the company.
In terms of the concentration of guarantees issued, the following percentages regard the amount of cash loans different to non-performing loans, self- liquidating risks and loans to subsidiaries:
- Mortgage-backed loans: 46.3% - Loans secured by personal guarantees from third parties: 13.3% - Loans secured by lien: 4.8% - Loans guaranteed by credit institutions 64.6%
2.4 Deteriorated financial assets
This sector has been specifically focused on, in order to improve control and adjustment to that set forth in the various international regulations currently being implemented (IAS, BASEL 2). During 2005, the "loan control” function of the Parent Bank was relocated from the Loans Department to the Internal Audit Department, resulting in the former being responsible solely for managing doubtful loans. For this specific preventative management, which obviously cannot and must not be compared to the management of “normal” (or performing) risks, in 2003 a specific breakdown of risks into two classes of creditworthiness was introduced. These categories do not yet present the characteristics of problem positions, but are worth specific attention: - under observation: this class includes the relationships which, while demonstrating various types of irregularities, possess characteristics which lead to the assumption of settlement within a short time, both as a result of guaranties acquired and due to the economic potential. For these relationships, normal operations are allowed.
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- under surveillance: this class includes all relationships involving more significant issues, such as: registration of judicial mortgages, attachments or property executions, decree orders, notifications of “non-performance” by other Banks. This also includes relationships demonstrating the following critical issues: persistent and/or unauthorised overdrafts, outstanding cheques lacking adequate coverage, a high percentage of unpaid returns, failed collection of advances on invoices, consolidation of exposure through the acquisition of mortgages, loans with more than three overdue, unpaid instalments, ex-problem loans under settlement through authorised recovery plans and regularly paid, positions under observation which are not settled. Operations within these accounts must primarily regard recovery, without the right to authorise any overdrafts.
Current operations within this sector, identified as Doubtful Loans, are based on notifications from various functions (Network, Credit Control Service, Ordinary Loans Service) and periodic deadlines regarding the single positions, in order to correctly enter/cancel/amend their classification. In the near future, the existing classifications will combine into SGR (see above), with automatic monthly notification of all counterparties demonstrating critical positions. A further decrease in the risk quality, to below class D (see the table below for internal ratings classes), leads to the classification of the position in question as problem, following the indications provided by the Regulatory Authority (temporary difficulty). As well, the operational management of this sector falls under the Loans Department of the Parent Bank, which monitors it with particular care, based on exact deadlines for each single customer, in order to surpass the critical state. The maximum time frame for inclusion in this class, except for unusual cases, must not exceed two years. If the position fails to be resolved positively, the position is then placed in default, and included in the non-performing category, with the consequent transfer of its management to the Litigation Department of the Parent Bank. All cases under dispute are evaluated at least four times per year (after presenting the Board of Directors with the relative recovery forecast within a month from recording under non-performing status). Moreover, on a daily basis, operators in the Litigation Department shall identify, together with the manager, the best applicable strategy, case by case, in no way losing sight of the aspect regarding "expected losses” in each case, in light of the information received directly from external lawyers, bankruptcy receivers, inspectors, branches, and “informers”.
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In addition, with adjustment to the IAS principles, each case is evaluated in terms of time and percentage of recovery when it is sent to the Litigation Department, as well as following any events of significant importance. That being said, the following sets forth the criteria used to determine the "fair value” of non-performing loans. Firstly, it is noted that the analysis of recovery time and methods (essential elements – together with the rate, which will be discussed later – for the determination of IAS allocations) is performed in the month in which the loan becomes non-performing. Usually: ¾ for positions under € 5,000, a pre-set template is used which provides for recovery within 2 years in a single payment; ¾ unsecured exposure: if there is a recovery plan agreed with the counterpart, it is followed. In case it is necessary to begin a legal procedure for recovery, the expected recovery time is based on 3-4 years depending on the actions to be taken, and whether it regards securities or property; ¾ privileged exposure: If a recovery plan has been prepared, it is followed. In case it is necessary to begin a legal procedure for recovery, the expected recovery time is based on 4 years, the average time needed to complete an enforceable proceeding on property; ¾ exposure regarding positions subject to bankruptcy proceedings: on average, these procedures can last for at least 5 years; ¾ as regards the rate to be used for discounting, for 2005, lacking exact rates on the individual positions for the previous years, two rates per year have been set: one for exposures which began as unsecured, and one for exposures which began as privileged. For the years 1996 to 2004, the average ten-day rates taken from the reports provided by the Regulatory Authority were used, while for the preceding years, as internal notifications were not available, the system figure was used, provided by the Bank of Italy statistical report “Tabella TDFE0082”; As regards recovery times, when recovery is attempted through judicial channels or is subject to times regarding bankruptcy proceedings, payment is provided in a single instalment at the end of the period.
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QUANTITATIVE INFORMATION
CREDIT QUALITY
A.1 DETERIORATED AND PERFORMING EXPOSURE: SIZE, VALUE ADJUSTMENTS, TREND, ECONOMIC AND TERRITORIAL DISTRIBUTION
A.1.1 Distribution of financial assets by portfolio and credit quality (book value)
Portfolio/quality Banking group Non-performing Problem Restructured Expired Country Other Total loans loans exposure exposure Risk assets 9. Financial assets held for trading 10. Financial assets available for sale 0 0 0 0 0 441,916 441,916 11. Financial assets held to maturity 0 0 0 0 0 138,145 138,145 12. Due from banks 13. Loans to customers 0 0 0 0 0 0 0 14. Financial assets at fair value 0 0 0 0 0 87,118 87,118 15. Financial assets being disposed 156,393 131,722 3,426 82,963 3 3,117,853 3,492,360 16. Hedging derivatives 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 13,198 13,198 Total 31.12.05 156,393 131,722 3,426 82,963 3 3,798,230 4,172,737 Total 31.12.04 7,681 3,693 0 0 0 284,324 295,698
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A.1.2 Distribution of financial assets by portfolio and credit quality (gross and net values)
Deteriorated assets Other assets Total Portfolio/quality Gross Specific Portfolio Net exposure Gross exposure Specific Net exposure (net exposure) exposure adjustments adjustments adjustments A. Banking group 9. Financial assets held for trading 0 0 0 0 X X 441,916 441,916 10. Financial assets available for sale 0 0 0 0 138,145 0 138,145 138,145 11. Financial assets held to maturity 0 0 0 0 0 0 0 0 12. Due from banks 0 0 0 0 87,115 0 87,115 87,115 13. Loans to customers 786,668 409,257 2,904 374,507 3,153,198 35,345 3,117,853 3,492,360 14. Financial assets at fair value 15. Financial assets being 0 0 0 0 X X 0 0 disposed 16. Hedging derivatives 0 0 0 0 0 0 0 0 0 0 0 0 X X 13,198 13,198 Total A 786,668 409,257 2,904 374,507 3,378,458 35,345 3,798,227 4,172,734 B. Other companies included in scope of consolidation 1. Financial assets held for X trading 0000X 0 0 2. Financial assets available for sale 0000 00 00 3. Financial assets held to maturity 0000 00 00 4. Due from banks 0000 00 33 5. Loans to customers 0000 00 00 6. Financial assets at fair value X 0000X 0 0 7. Financial assets being disposed 0000 00 00 8. Hedging derivatives 0000X X 00 Total B 0000 00 33 Total 31.12.05 786,668 409,257 2,904 374,507 3,378,458 35,345 3,798,230 4,172,737
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A1.3 Exposure for cash and off-balance sheet loans to banks: gross and net values
Gross Specific Portfolio Net exposure value value Exposure Exposure type/value adjustment adjustment s s B. CASH EXPOSURE A.1 Banking group g) Non-performing loans 000 0 h) Problem loans 000 0 i) Restructured exposure 000 0 j) Expired exposure 000 0 k) Country Risk 0X 0 0 l) Other assets 87,115 X 0 87,115 TOTAL A.1 87,115 0 0 87,115 A.2 Other companies a) Deteriorated 000 0 b) Other 3X 0 3 TOTAL A.2 300 3 TOTAL A 87,118 0 0 87,118 B. OFF-BALANCE SHEET EXPOSURE B.1 Banking group c) Deteriorated 000 0 d) Other 12,736 X 0 12,736 TOTAL B.1 12,736 0 12,736 B.2 Other companies a) Deteriorated 000 0 b) Other 0X 0 0 TOTAL B.2 000 0 TOTAL B 12,736 0 0 12,736
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A1.6 Exposure for cash and off-balance sheet loans to customers:: gross and net values
Specific Portfolio Gross Net Exposure type/value value value Exposure Exposure adjustments adjustments B. CASH EXPOSURE A.1 Banking group g) Non-performing loans 484,599 327,883 0 156,716 h) Problem loans 214,384 80,980 1,682 131,722 i) Restructured exposure 3,820 394 0 3,426 j) Expired exposure 84,183 0 1,220 82,963 k) Country Risk 4X 1 3 l) Other assets 3,152,875 X 35,345 3,117,530 TOTAL A.1 3,939,865 409,257 38,248 3,492,360 A.2 Other companies a) Deteriorated 000 0 b) Other 0X 0 0 TOTAL A.2 000 0 TOTAL A 3,939,865 409,257 38,248 3,492,360 B. OFF-BALANCE SHEET EXPOSURE B.1 Banking group c) Deteriorated 52 52 0 0 d) Other 33,253 X 83 33,170 TOTAL B.1 33,305 52 83 33,170 B.2 Other companies a) Deteriorated 000 0 b) Other 0X 0 0 TOTAL B.2 000 0 TOTAL B 33,305 52 83 33,170
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A.1.7 Cash loans to customers: trend in gross deteriorated exposure and exposure subject to “country risk”
Non- Problem Restructured Expired Description/Category performing Country Risk loans exposure exposure loans B. Beginning gross exposure 227,836 218,721 14,879 0 1 - of which: transferred exposure not written off 0 0 0 0 0 B. Increases 360,606 339,023 3,878 84,183 4 B.1 transfers from performing loans 47,515 319,096 3,820 84,183 0 B.2 transfers from other categories of deteriorated exposure 312,710 0 0 0 0 B.3 other increases 381 19,927 58 0 4 C. Decreases 103,843 343,360 14,937 0 1 C.1 expenses for performing loans 0 4,995 0 0 0 C.2 write-offs 41,496 557 0 0 0 C.3 collections 43,994 2,230 0 0 0 C.4 sale proceeds 14,033 0 0 0 0 C.5 transfers from other categories of deteriorated exposure 0 297,773 14,937 0 0 C.6 other decreases 4,320 37,805 0 0 1 E. Final gross exposure 484,599 214,384 3,820 84,183 4 - of which: transferred exposure not written off 0 0 0 0 0
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A.1.8 Cash loans to customers: trend in total value adjustments
Non- Problem Restructured Expired Description/Category performing Country Risk loans exposure exposure loans B. Total initial adjustments - of which: transferred 119,807 45,964 1,394 0 0 exposure not written off 0 0 0 0 0 B. Increases 281,900 110,744 394 1,220 1 B.1 value adjustments 185,456 79,824 394 987 1 B.2 transfers from other categories of deteriorated exposure 72,845 0 0 0 0 B.3 other increases 23,599 30,920 0 233 0
C. Decreases 73,824 2,594 0 0 0 C.1 write-backs from valuation 19,423 2,216 0 0 0 C.2 write-backs from collection 3,935 56 0 0 0 C.3 write-offs 50,122 150 0 0 0 C.4 transfers to other categories of deteriorated exposure 0 0 0 0 0 C.5 other decreases 344 172 0 0 0 E. Total final adjustments 327,883 154,114 1,788 1,220 1 - of which: transferred exposure not written off 0 0 0 0 0
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A2 CLASSIFICATION OF EXPOSURE BASED ON EXTERNAL AND INTERNAL RATINGS
A.2.1 Distribution of cash and off-balance sheet exposure by external ratings classes.
Considering the type of customers of the Parent Bank, which are typically retail customers, there are no persons belonging to the category of ordinary customers who have loans of significant amounts with “external ratings”. Instead, most of the loans to banks are granted external ratings, but their amount is modest (about 3%) if compared to the global total of cash exposure.
A.2.1 Distribution of cash and off-balance sheet exposure by internal ratings classes.
Instead, as regards ordinary customers, an internal rating system linked to the TCQ product is in the advanced testing stage. By way of example, the table below breaks down the average global uses as at 31.12.2005 by rating class, net of problem loans, specifying that our internal system indicates classes AAA to C (partial) as performing, classes C (partial) to DDD as under observation and classes DD to D as at risk:
AAA 430,854,706 12.28% AA 391,986,913 11.18% A 443,589,947 12.65% BBB 500,244,033 14.26% BB 345,761,723 9.86% B 448,585,287 12.79% CCC 260,769,627 7.43% CC 242,334,336 6.91% C 101,370,236 2.89% DDD 127,971,246 3.65% DD 157,304,769 4.48% D 56,731,068 1.62% 3,507,503,891 100.00%
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For credit institutions, external ratings are used: only in rare cases of relations with banks that lack ratings, an internal inspection is carried out.
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A.3 DISTRIBUTION OF SECURED EXPOSURE BY TYPE OF SECURITY A.3.1 Cash loans to banks and secured customers Value of Real security (1) Personal security (2) Total (1) + exposure Credit derivatives Credit commitments (2) Property Securiti Other States Other Banks Other States Other Banks Other es assets public entities public entities bodies bodies 1. Loans to: secured banks 0 0 0 0 0 0 0 0 0 0 0 0 0 2, Loans to: secured customers 2,229,231 1,206,556 40,707 236,889 0 0 0 0 0 162 6,655 710,309 2,201,278
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B. CREDIT DISTRIBUTION AND CONCENTRATION
B1 Distribution by sector of cash and off-balance sheet loans to customers
Governments and Central Banks Other public entities Financial companies
Exposure/Counterparty Portfolio Specific Portfolio Gross Gross Net Gross Specific value value Net value value exposure Specific value Portfolio value Net exposure Exposure exposure adjustments adjustment Exposure adjustments adjustments adjustments adjustments Exposure s A. Cash exposure A.1 Non-performing loans 0 0 0 0 0 0 0 0 86,167 (70,389) 0 15,778 A.2 Problem loans 0 0 0 0 0 0 0 0 15,121 (12,312) (4) 2,805 A.3 Restructured exposure 0 0 0 0 0 0 0 0 0 0 0 0 A.4 Expired exposures 0 0 0 0 0 0 0 0 25 0 0 25 A.5 Other exposure (39,227) X 0 (39,227) 1,999 X (23) 1,976 248,422 X (2,860) 245,562 TOTAL (39,227) 0 0 (39,227) 1,999 (23) 1,976 349,735 (82,701) (2,864) 264,170 B. “Off-balance sheet” exposure B.1 Non-performing loans 0 0 0 0 0 0 0 0 634 (257) 0 377 B.2 Problem loans 0 0 0 0 0 0 0 0 0 0 0 0 B.3 Other deteriorated assets 0 0 0 0 0 0 0 0 0 0 0 0 B.5 Other exposure 0 X 0 0 136 X (1) 135 15,305 X (56) 15,249 TOTAL 0 0 0 0 136 0 (1) 135 15,939 (257) (56) 15,626 TOTAL 31.12.05 (39,227) 0 0 (39,227) 2,135 0 (24) 2,111 365,674 (82,958) (2,920) 279,796
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Insurance company Non-financial companies Other entities
Exposure/Counterparty Specific Specific Portfolio Portfolio Portfolio Specific Gross value Net Gross value Net Gross value Net value value value exposure adjustment Exposure exposure adjustment Exposure exposure adjustment Exposure adjustments adjustments adjustments s s s A. Cash exposure A.1 Non-performing loans 0 305,071 (194,630) 0110,441 93,342 (62,864) 30,478 A.2 Problem loans 0 172,585 (66,854) (809)104,922 26,678 (1,814) (869) 23,995 A.3 Restructured exposure 0 (394) (394) 3,820 0 0 3,820 0 A.4 Expired exposures 0 44,335 0 (644)43,691 39,823 (576) 39,247 A.5 Other exposure 161 X (2) 159 1,936,909 X (21,876) 1,915,033 1,004,634 X (10,585) 994,049 TOTAL 161 (394) (2) (235) 2,462,720 (261,484) (23,329) 2,177,907 1,164,477 (64,678) (12,030) 1,087,769 B. “Off-balance sheet” exposure B.1 Non-performing loans 2,126 (862) 1,264674 (273) 401 B.2 Problem loans 9,217 0 9,217129 129 B.3 Other deteriorated assets 00 00 B.4 Other exposure 165 X (1) 164 258,678 X (1,029) 257,649 22,076 X (86) 21,990 TOTAL 165 (1) 164 270,021 (862) (1,029)268,130 22,879 (273) (86) 22,520 TOTAL 31.12.05 326 (394) (3) (71) 2,732,741 (262,346) (24,358) 2,446,037 1,187,356 (64,951) (12,116) 1,110,289
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B.2 Distribution of loans to resident non-financial companies
2005 a) other services for sale 486,103 23.19% b) construction and public works 343,513 16.39% c) business services 297,741 14.21% d) textiles 131,710 6.28% e) metal products excluding machines 118,465 5.65% f) other groups 718,541 34.28% Total 2,096,073 100.00%
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B.3 Territorial distribution of cash and off-balance sheet loans to customers (book value)
OTHER EUROPEAN REST OF ITALY AMERICA ASIA COUNTRIES THE WORLD Exposure/Area Gross Net Gross Net Gross Net Gross Net Gross Net exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure
A. Cash exposure A.1 Non-performing loans 399,114 140,509 45,207 14,624 40,259 1,564 0 0 0 0 A.2 Problem loans 196,259 126,269 18,125 5,453 0 0 0 0 0 0 A.3 Restructured exposure 3,820 3,426 0 0 0 0 0 0 0 0 A.4 Expired exposures 84,156 82,937 26 25 1 1 0 0 0 0 A.5 Other exposure 3,063,395 3,029,160 89,336 88,312 87 80 0 0 0 0 TOTAL 3,746,744 3,382,301 152,694 108,414 40,347 1,645 0 0 0 0 B. “Off-balance sheet” exposure 3,433 2,042 0 0 0 0 0 0 0 0 B.1 Non-performing loans 9,346 9,346 0 0 0 0 0 0 0 0 B.2 Problem loans 0 0 0 0 0 0 0 0 0 0 B.3 Other deteriorated assets 295,206 294,041 1,982 1,974 0 0 0 0 0 0 B.5 Other exposure TOTAL 307,985 305,429 1,982 1,974000 000 TOTAL 31.12.05 4,054,729 3,687,730 154,676 110,388 40,347 1,645 0 0 0 0
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B.4 Territorial distribution of cash and off-balance sheet loans to banks OTHER EUROPEAN REST OF ITALY AMERICA ASIA COUNTRIES THE WORLD Exposure/Area Gross Net Gross Net Gross Net Gross Net Gross Net exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure A. Cash exposure A.1 Non-performing loans 0 0 0 0 0 0 0 0 0 0 A.2 Problem loans 0 0 0 0 0 0 0 0 0 0 A.3 Restructured exposure 0 0 0 0 0 0 0 0 0 0 A.4 Expired exposures 0 0 0 0 0 0 0 0 0 0 A.5 Other exposure 52,826 68,530 10,001 10,001 913 913 6,713 6,713 961 961 TOTAL 52,826 68,530 10,001 10,001 913 913 6,713 6,713 961 961 B. “Off-balance sheet” exposure 0 0 0 0 0 0 0 0 0 0 B.1 Non-performing loans 0 0 0 0 0 0 0 0 0 0 B.2 Problem loans 0 0 0 0 0 0 0 0 0 0 B.3 Other deteriorated assets 12,664 0 60 0 0 0 12 0 0 0 B.4 Other exposure TOTAL 12,664 0 6000012000 TOTAL 31.12.05 65,490 68,530 10,061 10,001 913 913 6,725 6,713 961 961
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B.5 Large risks (according to supervisory regulations) a) Amount € 395,601 b) Number 8
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C. ASSET SECURITISATION AND DISPOSAL
C.1 Securitisation transactions
Qualitative information
In December 2002, the Parent Bank finalised (with effective date 1 November 2002) a securitisation transaction involving 5,784 real estate performing mortgage loans and non-real estate liens granted by the Parent Bank to its customers for residual capital debt, at the moment of disposal, equal to € 445,084,608, of which € 326,795,438 to individuals, and € 118,829,170 to businesses. This transaction, assisted by the Advisor Credit Suisse First Boston, was inserted within a more complex programme of strategic activities carried out at the end of 2002 and in the first few months of 2003, aimed, among other things, at strengthening equity and improving the liquidity profiles of the Parent Bank and the Group. The disposal was carried out in compliance with Law 130 of 30 April 1999, to the special purpose vehicle Intra Mortgage Finance 1 S.r.l, 95% owned by the Dutch Foundation Stiching Lago Maggiore, and 5% owned by Consulting S.p.A. of Sondrio (in which the Parent Bank holds a 15% investment). As a result of acquisition of the mortgages, in December 2002 the special purpose vehicle Intra Mortgage Finance 1 S.r.l. issued securities divided into four tranches, for a total amount of € 458 million.
Nominal Issue Rate Expiry Rating Rating value Euro Price Moody's Standard & Poor's and Fitch Ratings
Class A 413,500,000 100 Euribor 3 m + 0,45% 30-Oct-28 Aaa AAA class B 17,500,000 100 Euribor 3 m + 0,85% 30-Oct-28 A2 A+ class C 14,000,000 100 Euribor 3 m + 1,80% 30-Oct-28 Baa2 BBB class D 13,000,000 100 Euribor 3 m + 2,20% 30-Oct-28 - -
Senior and mezzanine securities are listed on the Luxembourg Stock Exchange. As at 31 December 2005, the Parent Bank holds a junior tranche (class D) classified under the item “assets available for sale”.
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As a result of the regular finalisation of the operation and the protection inherent in the same (priority order of payments and the presence of cash collateral) no value adjustments were made to the securities in the portfolio. It is noted that during 2004, it was ascertained that 83 mortgages which had been transferred at a price of about € 5,759 thousand, the object of a complex legal dispute described in the 2004 financial statements, did not satisfy point (xii) of the criteria set forth in the Attachment to the Disposal Agreement and, as such, the termination clause of the agreement was activated. The Special Purpose Vehicle of the Parent Bank then agreed that these receivables should be considered as never transferred, and thus, the receivables were restated in the assets of the Parent Bank through the reversal of all of the accounting effects fro the disposal date to the date of reinstatement. For this transaction, the Parent Bank paid the Special Purpose Vehicle € 5,864.5 thousand. The transaction was publicised through an announcement in the Official Gazette. As at 31 December 2005, the remaining debt of the securitised mortgages (including the expired and unpaid instalments) amounts to € 272,453,668.08 for 4,434 loans, broken down as follows: - 4,403 mortgages classified as performing for a total of € 270,045,926.19; - 31 defaulted mortgages, that is, insolvent due to a high number of unpaid instalments, equal to € 2,407,741.89. For these mortgages, a pre-dispute procedure has been initiated (analogous to the procedure for "objective NPLs" set forth in the supervisory regulations); - 71 mortgages classified as non-performing for € 7,400,850.24, in addition to € 253,621.86 for capitalised interest. This amount represents the cash exposure in relation to the persons failing to pay the amortisation instalments, for which actions for recovery, not necessary legal actions, have already been initiated. Such actions are aimed at recovery of the credit, which, if following the process, should be performed within a period of two to three years. Late and default interest to be collected amounts to € 795,061.34. At the time, the transfer of the entire packet of mortgages led to a deferred price of € 16,353 thousand as the value of the excess spread, net of relative transaction costs at each payment date, the risk of the transferred loans and the possible early redemption of the mortgages by customers, which was back discounted using market rates existing as at 31 December 2002, based on the duration of the operation.
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Based on the contractual provisions, and the order of priorities defined for the transaction, the deferred price is to be paid pro-rata at each payment date. During the previous years, the deferred price was depreciated to € 5,400 thousand, based on the updated calculation parameters, above all following the volume of early redemptions, and the existence of several insolvencies. The deferred price is recorded among the assets as at 31.12.2005, for a total of € 9,940 thousand, which is considered adequate. This transaction is completed by a basis swap agreement between the special purpose vehicle and Credit Suisse First Boston International London in order to cover the interest rate risk deriving from the different indexing and frequency of interest on the securitised mortgages and the interest paid on bonds issued. This agreement specifies that the counterparties must regulate, on a quarterly basis, the differential in the rates as set forth above, calculated on the nominal amount of the remaining capital of the mortgages at the start of each period of reference, adjusted based on a performance ratio (determined based on the ratio between the interest instalments collected and the number of interest instalments to be collected during the quarterly period). A similar, offsetting agreement was subscribed between C.S.F.B. and Banca Popolare di Intra. This hedging operation produced a negative effect of € 283 thousand on the income statement of the Parent Bank, given by the algebraic sum of the differentials collected with the valuation of the swap itself. Servicing activities, consisting in the coordination and supervision of management, administration and collection of securitised mortgages, as well as administrative servicing were assigned to Banca Popolare di Intra. As the Servicer, Banca Popolare di Intra earned the amount of € 340 thousand in fees during 2005, relating to management of the credit portfolio, and in addition to € 17 thousand in income from the provision of administrative services. Considering that the main risks linked to the mortgage securitisation transaction are represented by debtor insolvency and change in the composition of the guarantees, the following is pointed out as regards internal systems for measuring and controlling such risks:
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• Measurement and control of unpaid instalments
GENERAL MANAGEMENT
4th level CREDIT DEPARTMENT
3rd level SPECIAL CREDIT SERVICES
2nd level DOUBTFUL LOANS INDIVIDUAL DEPARTMENT MORTGAGE (corporate mortgages) 1st level BRANCH
The control organisation is substantially structured on four levels, each of which verifies and takes action on insolvent positions with an increasingly global view, passing from a detailed analysis of the insolvent debtor to an examination of the entire phenomenon. • 1st level (branch) → manages the relationship and has direct contact with the mortgage-holder, deals with instalment payments and keeps the entire debt position under control, collects information on individual positions and manages any recovery actions. Reports to a higher level depending on the type of customer (private or corporate). • 2nd level (Central Management) → controls and verifies the work of the branches, plays a role of catalyst in recovery actions, setting out the initiatives considered most suitable based on the characteristics of the individual position, until the position defaults or becomes non-performing. This level includes: ¾ Doubtful Loans Department (of Ordinary Credit Services), which manages corporate mortgages ¾ Individual Mortgages Department (of Mortgages Department), which manages individual mortgages • 3rd level (Central Management) → Special Credit Services, as the manager of IT programmes which administer all
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mortgage transactions (Mortgage Procedures), is the main provider of data regarding the securitised mortgages, through its specific Securitisation Department. Due to its specific position, it provides all the information and tools required by other Departments involved in order to carry out their specific duties.. Moreover, it also supervises the overall status of the securitised portfolio, providing statistical and up to the moment data (periodically or upon request) both to the 2nd and 4th level offices. • 4th level (Central Management and Top Management) → They decide on action strategies, both on individual transactions (when under their responsibility) and on the portfolio as a whole or in its homogeneous parts; verify respect of objectives and establish any corrective measures to be taken.
Risk measurement is carried out through reports provided by Special Credit Services - Securitisation Department, with differing deadlines and purposes: ¾ daily → print-outs of expiring instalments at the reference date (an any previously unpaid instalments), used by the branches for verifying payments, ¾ every ten days → print-outs summarising all unpaid instalments, used by the branches for intervention and solicitation of payment from debtors, ¾ monthly: → summary print-outs of unpaid instalments for 1st level use, → statistical processing of the status of mortgages with unpaid instalments, for 2nd and 4th level use, → analytical processing by single mortgage of the amount unpaid, → processing by homogeneous mortgage category (corporate/individual) for 2nd level and Internal Audit Department use. ¾ quarterly: → statistical report on the status of the entire securitised portfolio, indicating the size of mortgages, broken down by status (performing, delinquent or default), and the performance of the entire portfolio, through suitable indices, and the volumes of mortgages in default,
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→ analytical report on the status of individual mortgages, → statistical report on risk concentration based on the range of remaining debit and the status of the mortgage, for 4th level use, → statistical report on the amount of unpaid instalments based on the range of delays in payment, for 4th level use.
Risk management includes interventions differentiated based on the status of the mortgage, which involve various Departments, according to the following table
DEFAULT DEFAULT Mortgage PERFORMIN (non- DELINQUENT (unpaid status G performing instalments) ) Branch Branch and Branch and Legal and Doubtful Loans Doubtful Loans Litigation Departments Department or Department or Department involved Mortgages Mortgages Department Department Monitor Supervise the Establish Take legal regular insolvency actions to be action and payment of situation and taken against conclude instalments agree upon debtors and agreed or Actions taken stronger look after forced actions for results recovery recovery from the debtor
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Amendment of guarantees
The organisation that supervises, examines and, if necessary, authorises amendments to guarantees is set forth below:
LOANS DEPARTMENT
4th level
SPECIAL CREDIT SERVICES SECURITISATION rd 3 level DEPARTMENT
nd MORTGAGES 2 level DEPARTMENT TECHNICAL
1st level BRANCH
Within this organisation, the branch, upon request from the customer, initiates a procedure to submit the amendment to the mortgage guarantee to the superior levels, in quantitative terms. The proposal must be accompanied by a specific Mortgage Release Report, prepared by the Technical Department, indicating the values and amounts of both the property to be released, and that which will remain under guarantee. Special Credit Services: ¾ verifies respect of the requirements of Securitisation; ¾ subjects the results of its verification to the Loans Department for the related decisions; ¾ In case of positive results, prepares the draft notary deed of mortgage and manages its finalisation.
Should the request for release involve any lien or guarantee which can accompany the mortgage guarantee, the chart above, though maintaining its validity, does not require the involvement of the 2nd level.
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Control of erosion of the securitised portfolio
In addition to the planned reduction in the securitised portfolio, as a result of gradual repayment as established in contracts, supervision is also carried out over the phenomenon of advance capital repayments, both partial and total. This control involves interaction between the 3rd and 4th levels. The trend in advance repayments is observed through the creation of two reports, on a weekly basis, for use by the 4th level: → cumulative overview and analysis of early redemptions; → cumulative overview and analysis of advance repayments.
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Qualitative information C.1.1 Exposure deriving from securitisation transactions divided by quality of underlying
Cash exposure Guarantees issued Credit lines
Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior Quality of underlying
asset/Exposure
Net Net Net Net Net Net Net Net Net Gross Gross Gross Gross Gross Gross Gross Gross Gross exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure exposure
B. With own underlying: c) Deteriorated 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 d) Other 0 0 0 0 13,000 13,000 0 0 0 0 0 0 0 0 0 0 0 0
B. With third party underlying: c) Deteriorated 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 d) Other 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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C.1.2 Exposure deriving from main “own” securitisation transactions, divided by type of asset securitised and by type of exposure Cash exposure Guarantees issued Credit lines Type of asset Senior Mezzanine Junior Senior Mezzanine Junior Senior Mezzanine Junior securitised/Exposure
Book value Book value Book value write-backs write-backs write-backs write-backs write-backs write-backs write-backs write-backs write-backs Adjustments/ Adjustments/ Adjustments/ Adjustments/ Adjustments/ Adjustments/ Adjustments/ Adjustments/ Adjustments/ Net exposure Net exposure Net exposure Net exposure Net exposure Net exposure B. Entirely written off from the financial statements A.1 Intra Mortgage Finance 1 Srl − Mortgages 0 0 0 0 13,000 0 0 0 0 0 0 0 0 0 0 0 0 0
D. Subject to partial write-off from the financial statements 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
E. Not written-off 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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C.1.4 Exposure for securitisation broken down by portfolio and type
Exposure/ Financial Total Financial Financial Financial portfolio assets Total 31.12.04 assets held for assets at fair assets held Loans available for 31.12.05 excluding trading value to maturity sale IAS 39 1. Cash exposure - Senior 0 0 0 0 0 0 0 - Mezzanine 00 00 0 00 - Junior 0 0 13,000 0 0 13,000 13,000 2. “Off-balance sheet” exposure - Senior 00 00 0 00 - Mezzanine 00 00 0 00 - Junior 00 00 0 00
C.1.5 Total amount of securitised assets underlying junior securities or other forms of credit support
Assets/Values Traditional Synthetic securitisation securitisation A. Own underlying assets: A.1 Entirely written off X 6. Non-performing loans 0 X 7. Problem loans 0 X 8. Restructured exposure 0 X 9. Expired exposure 0 X 10. Other assets 12,339 X A.1 Partially written off X 6. Non-performing loans 0 X 7. Problem loans 0 X 8. Restructured exposure 0 X 9. Expired exposure 0 0 10. Other assets 0 0 A.3 Not written off 6. Non-performing loans 0 0 7. Problem loans 0 0 8. Restructured exposure 0 0 9. Expired exposure 0 0 10. Other assets 0 0 B. Third party underlying: B.1 Non-performing loans 0 0 B.2 Problem loans 0 0 B.3 Restructured exposure 0 0 B.4 Expired exposures 0 0 B.5 Other assets 0 0
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C.1.6 Interests in special purpose vehicles (regulations in force) The Parent Bank does not hold interests in special purpose vehicles.
C.1.7 Servicer activities – collection of securitised credits and reimbursement of securities issued by special purpose vehicle
Securitised assets Percentage share of securities reimbursed (end of period figure) Credits collected during the year (end of period figure)
Special purpose Senior Mezzanine Junior vehicle Deteriorated Deteriorated Performin Performi Deteriorated Perfor Deterior Perfor Deterior Perfor g ng assets ming ated ming ated ming assets assets assets assets assets
IMF1 0 280,434 0 61,949 0 39.6 0 0 0 0
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C.2 TRANSFER TRANSACTIONS C.2.1 TRANSFERRED FINANCIAL ASSETS NOT WRITTEN OFF
Financial Financial Financial Financial assets assets assets Due from Loans to assets at Total Type/portfolio held for trading available for held to banks customers fair value sale maturity A B C A B C A B C A B C A B C A B C 31.12.05 A. Cash assets 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 1. Debt securities 134,167 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 134,167 2. Equity securities 0 0 0 0 0 0 0 0 0 X X X X X X X X X 0 3. OICR 0 0 0 0 0 0 0 0 0 X X X X X X X X X 0 4. Loans 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 5. Deteriorated 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 assets B. Derivative 0 0 0 X X X X X X X X X X X X X X X 0 instruments Total 31.12.05 134,167 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 134,167 Key: A: transferred financial assets recorded for entire amount (book value) B: transferred financial assets recorded for partial amount (book value) C: transferred financial assets recorded for partial amount (entire value)
C.2.2 FINANCIAL LIABILITIES FROM TRANSFERRED FINANCIAL ASSETS NOT WRITTEN OFF
Financial Financial Financial Financial assets assets Due from Loans to assets held for assets at Total Liabilities available held to banks customers trading fair value Asset portfolio for sale maturity 1. Due to customers a) from assets recorded entirely 138,2120000 0 138,212 a) from assets recorded 00000 00 partially 2. Due to banks a) from assets recorded entirely 00000 0 0 a) from assets recorded partially 00000 0 0 Total 31.12.05 138,2120000 0138,212
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E. CREDIT RISK MEASUREMENT MODELS
No internal portfolio models are used for measuring exposure to credit risk such to allow for reliable forecasting of loss.
500
1.2 MARKET RISK
1.2.1 INTEREST RATE RISK – REGULATORY TRADING PORTFOLIO
QUANTITATIVE INFORMATION
A. General aspects
The Parent Bank primarily operates on its own behalf, through the following bodies: Finance Committee, Finance Department and Financial Services. The Trading Department, within the Finance Department, manages the ORGANISED EXCHANGE SYSTEM (SSO) on bonds issued by the Parent Bank. The main sources of risk regarding interest rates comprise fixed rate bonds (which are found in the portfolio for limited amounts) and structured variable rate bonds linked to differential movements between interest rate curves of varying duration. Operating policy is primarily focused on maintaining a low level of interest rate risk, with high concentrate of variable rate financial instruments and, for bond issues, IRS operations which transform income flows into variable rates. The general objective is to correlate the duration of the assets in portfolio with those of liabilities issued. Portfolio management is governed by specific operating mandates, which limit the share of the portfolio invested in financial instruments with more than three years' duration to 25%. Derivative instruments are used both in the Trading Book, through the purchase and sale of listed products, for hedging assets, on the OTC market. There were no specific changes in operating policy over the year, except for the purchase of securities indexed at curve differentials, for a countervalue of approximately € 90 million at end 2005. For financial instruments held or issued which are equipped with adequate pricing models, a sensitivity analysis is carried out (duration, basis point value, potential loss 95% - 1 day).
B Risk management and measurement
The internal audit process is organised as follows: position keeping IT system, real time, pricing, valuation and calculation of risk coefficients. The operating limits approved on an annual basis by the Board of Directors are entered in the system, based on market countervalues by type of financial instrument, issuer ratings assigned by the leading international
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agencies, and term. For Trading in the strictest sense, stop loss limits are provided (maximum acceptable loss). The Middle Office manages the financial parameters of the position keeping system, and the first level of control over the assets in individual management portfolios, and respect of the limits contained in the operating mandates set by the Board of Directors. There are also maximum limits of concentration for individual securities, in relation to the outstanding total of the same. The use of new, synthetic risk parameters is currently in the test phase. This new system, prepared by the Risk Management Department, considers three parameters: a) liquidity of the security; b) volatility; c) difficulty in calculating pricing and determining relative risk indices. The Risk Management Department, an autonomous role in the General Manager’s Staff, is responsible for the second level of control over total portfolio management, analysis of valuation methods and correct entering of parameters in the front office system. On a monthly basis, the Finance Committee defines the guidelines in relation to the market forecast and verifies existing positions. It periodically informs the Board of Directors regarding the evolution and positioning of portfolios.
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QUANTITATIVE INFORMATION 6. Regulatory trading portfolio: breakdown by remaining life (repricing date) of financial assets and liabilities for cash and financial derivatives Denominated in euro Type/Remaining life On Up to 3 From From From Over 10 Unlimit deman months over 3 over 1 over 5 years ed life d months year to 5 years to 1 year years to 10 years 1. Cash assets 1.1 Debt securities 38,134 196,412 78,390 27,302 198 − with option of early redemption 0 0 0 0 0 − other 38,134 196,412 78,390 27,302 198 1.3 Other assets 0 0 0 0 0 2. Cash loans 2.3 Repurchase agreements 133,010 847 0 0 0 2.4 Other liabilities 0 0 0 0 0
3. Financial derivatives 3.1 With underlying security 17,250 0 0 0 0 - Options + Long positions 0 0 0 0 0 + Short positions 7 0 0 0 0 - Other + Long positions 2,500 0 0 0 0 + Short positions 19,743 0 0 0 0 3.2 Without underlying security 63,956 17,732 46,147 0 0 - Options + Long positions 240 30 0 0 0 + Short positions 163 184 0 0 0 - Other + Long positions 94,722 409,672 77,547 5,000 586,119 + Short positions 158,755 391,786 31,400 5,000 586,119
As regards the total portfolio of financial instruments, the Basis Point Value of Banca Popolare di Intra is equal to about - € 106,000: an increase of 1% (100bp) in market rates would thus result in a decrease of about € 10,600,000 in the market value.
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1.2.2 INTEREST RATE RISK – BANKING PORTFOLIO
Qualitative information
A. General aspects, interest rate management and measurement The main sources of interest rate risk on banking portfolios are a) as regards assets, mortgages to customers above all, at fixed or mixed rates, which are present in the balance sheet only in limited amounts (about € 68 million, with average duration of 1.7 years and shock rate of + 1%, which leads to a decrease in the current value of € 1,300,000); as regards liabilities, fixed rate bonds, generally issued for amount in line with the quantity and duration of fixed rate assets or hedged through swaps. Nonetheless, there are currently 377 million euro in fixed-rate convertible subordinated bonds issued a few years ago, which have not been swapped, with average maturity in December 2008, duration of 2.6 years, and a shock rate of +1%. This rate has a positive effect on the current value of the debt, equal to 10,000,000 euro. Operating policy is primarily aimed at maintaining a low interest rate risk profile, which, for non “demand” financial instruments, is expressed with the exact alignment of characteristics and duration of assets and liabilities in the financial statements. In short, no directional positions are taken on, but there is the constraint regarding substantial balance of positions in the opposite direction. There were no specific changes in operating policy over the year, also in light of the considerations set forth above: Banca Popolare di Intra has maintained a highly prudent interest rate risk profile over time. The bodies entrusted with defining these guidelines are the Board of Directors and the Finance Committee, which, through the Planning and Control, Sales, Finance and Risk Management departments, manage and control activities linked to interest rate risk. The financial positions with the most direction relationship with the market – bond issues in particular – are monitored and appraised in real time. The Risk Management Department, an autonomous role in the General Manager’s Staff, is responsible for the second level of control over total portfolio management, analysis of valuation methods and correct entering of parameters in the front office system.
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B. Fair value hedging derivatives When issued, fixed rate bonds are normally hedged for interest rate risk through specific IRS OTC transactions. C. Financial derivatives for cash flow hedging At the moment, the Parent Bank does not perform any cash flow hedging.
505
QUANTITATIVE INFORMATION
1. Banking portfolio: breakdown by remaining life (repricing date) of financial assets and liabilities
Denominated in euro
From From From over 3 over 5 Type/Remaining duration On Up to 3 over 1 Over 10 Unlimite months years to demand months year to years d life to 1 10 5 years year years 1. Cash assets 1.1 Debt securities 0 13,000 0 0 111,995 0 0 1.2 Loans to banks 67,178 5,440 0 0 0 0 19,940 1.3 Customer loans - c/a 670,456 665,810 137,597 0 0 0 0 - other loans 66,763 1,401,984 154,535 61,660 9,429 0 324,126 - with option of early redemption 0 0 0 0 0 0 0 - other 66,763 1,401,984 154,535 61,660 9,429 36 324,126 2. Cash loans 2.1 Due to customers: - c/a 1,465,780 0 16 0 0 0 0 - other payables 69,455 4,393 0 0 0 0 0 - with option of early reimbursement 0 0 0 0 0 0 0 - other 69,455 4,393 0 0 0 0 0 2.2 Due to banks - c/a 62,519 3 0 0 0 0 0 - other payables 10,000 205,009 0 0 0 0 0 2.3 Debt securities - with option of early reimbursement 0 0 0 0 0 0 0 - other 0 781,499 745,049 400,545 190,015 5076 1,300 2.4 Other liabilities: - with option of early reimbursement 0 0 0 0 0 0 0 - other 0 35 0 0 0 0 0 3. Financial derivatives 3.1 With underlying security - Options + long positions 0 0 0 0 0 0 0 + short positions 0 0 0 0 0 0 0 - Other + long positions 0 0 0 0 0 0 0 + short positions 0 0 0 0 0 0 0 3.2 Without underlying security 0 6,432 162,261 210,222 36,505 0 0 - Options + long positions 0 0 0 0 0 0 0 + short positions 0 0 0 0 0 0 0 - Other + long positions 0 108,961 24,500 210,222 63,495 0 0 + short positions 0 115,393 186,761 0 100,000 0 0
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1.2.1 PRICE RISK – REGULATORY TRADING PORTFOLIO
QUANTITATIVE INFORMATION
A. General aspects
As regards the regulatory trading portfolio, the Parent Bank primarily operates on its own behalf through the following bodies: Finance Committee, Finance Department and Financial Services. Securities issued by the Parent Bank - shares and convertible bonds – are listed on the Milan Stock Exchange, and therefore, the SSO (Organised Exchange System) is not carried out. The main sources of price risk derive from investments in OICR, in shares, and in derivative instruments on indices and equity. Operating policy is primarily aimed at maintaining a low price risk profile, therefore oriented towards OICR quotas, Portfolio asset allocation is regulated by specific operating mandates, which limit the share of the portfolio invested in capital instruments or representing such risk to 10%, and a further 10% for investments in alternative financial instruments. For financial instruments held, a volatility analysis is carried out (potential loss 95% - 1 day).
B. Price risk management and measurement
The internal audit process is organised as follows: position keeping IT system, real time, pricing, valuation and calculation of risk coefficients. The operating limits annually approved by the Board of Directors on the basis of quantitative information (market benchmarks) are entered into the system. The Middle Office manages the financial parameters of the position keeping system, and the first level of control over the assets in individual management portfolios, and respect of the limits contained in the operating mandates. The Risk Management Department, an autonomous role in the General Manager’s Staff, is responsible for the second level of control over total portfolio management, analysis of valuation methods and correct entering of parameters in the front office system. On a monthly basis, the Finance Committee defines the guidelines in relation to the market forecast and verifies existing positions. It periodically informs the Board of Directors regarding the evolution and positioning of portfolios.
QUANTITATIVE INFORMATION
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1. Regulatory trading portfolio: cash exposure for equity securities and OICR
Exposure type/value Book value
Listed Unlisted A. Equity securities 0 0
A.1 Shares 0 0 A.2 Innovative equity instruments 0 0 A.3 Other equity securities 0 0 B. OICR 93,025 0 B.1 Italian 56,279 0 - harmonised open-ended 25,027 0 - non-harmonised open-ended 30,751 0 - closed-ended 501 0 - reserved 0 0 - speculative 0 0 B.2. Other EU States 36,746 0 - harmonised 32,123 0 - non-harmonised open-ended 4,623 0 - non-harmonised closed- 0 0 ended B.3 Non-EU States 0 0 - open-ended 0 0 - closed-ended 0 0 Total 93,025 0
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2. Regulatory trading portfolio: breakdown of exposure in equity securities and share indices for principal countries of listing
Transaction type/ Listed Unlisted Share index Italy Germany U.S.A. E. Equity securities 0 00 0 − long positions 0 00 0 − short positions 000 0 F. Trading of equity securities to be settled 2,592 0 0 0 − long positions 2,194 00 0 − short positions 398 00 0 G. Other derivatives on equity 0 00 0 securities − long positions 000 0 − short positions 000 0 H. Derivatives on share indices 1,074 2,991 2,813 0 − long positions 002,813 0 − short positions 1,074 2,991 0 0
3. Regulatory trading portfolio: internal models and other methods for sensitivity analysis
Given the slight significance of the amounts concerned, at the moment there are no internal models for sensitivity analysis.
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1.2.4 PRICE RISK - BANKING PORTFOLIO
QUANTITATIVE INFORMATION
A. General aspects, price risk management and measurement Price risk hedging policies
There are no significant positions from the point of view of price risk. Issues of structured bonds on shares, indices or baskets are always, and completely hedged through OTC swaps.
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Qualitative information
1. Banking portfolio: cash exposure for equity securities and OICR Exposure type/Value Book value
Listed Unlisted
A. Equity securities 2 12,036 A.1 Shares 2 12,036 A.2 Innovative equity instruments 0 0 A.3 Other equity securities 0 0 B. OICR 0 1,112 B.1 Italian 0 0 − harmonised open-ended 0 0 − non-harmonised open-ended 0 0 − closed-ended 0 0 − reserved 0 0 − speculative 0 0 B.2. Other EU States 0 0 − harmonised 0 0 − non-harmonised open-ended 0 0 − non-harmonised closed-ended 0 0 B.3 Non-EU States 0 1,112 − open-ended 0 1,064 − closed-ended 0 48 Total 2 13,148
2. Banking portfolio: internal models and other methods for sensitivity analysis Given the slight significance of the amounts concerned, at the moment there are no internal models for sensitivity analysis.
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1.2.5 EXCHANGE RATE RISK
QUANTITATIVE INFORMATION Exchange rate exposure is very low and limited to temporary deviations of positions in the opposite direction.
QUANTITATIVE INFORMATION
1. Breakdown of assets and liabilities and derivatives by currency
Currency
Items Other US Canadian Swiss English curren dollars Yen dollars francs pounds cies A. Financial assets 35,821 4,790 16,777 25 38,605 2,615 A.1 Debt securities 53 0 0 0 0 0 A.2 Equity securities 0 0 0 0 2,048 0 A.3 Loans to banks 7,499 4,438 6,715 25 4,461 1,646 A.4 Customer loans 28,269 352 10,062 0 32,096 969 A.5 Other financial assets 000 0 0 0 D. Other assets 372 93 23 18 690 45 E. Financial liabilities 45,676 4,268 14,474 16 30,445 1,081 C.1 Due to banks 28,318 10 14,414 0 28,928 1,076 C.2 Due to customers 12,816 4,258 60 16 1,517 5 C.3 Debt securities 4,542 0 0 0 0 0 C.4 Other financial liabilities 000 0 0 0 D. Financial derivatives - Options + Long positions 239 24 7 0 0 9 + Short positions 247 24 186 0 0 117 - Other derivatives + Long positions 37,954 19,487 11,974 1,168 64 875 + Short positions 35,625 19,488 11,972 1,168 6,501 1,076 Total assets 36,193 4,883 16,800 43 39,295 2,660 Total liabilities 45,676 4,268 14,474 16 30,445 1,081 Imbalance (+/-) (9,483) 615 2,326 27 8,850 1,579
512
2. Internal models and other methods for sensitivity analysis
Given the slight significance of the amounts concerned, at the moment there are no internal models for sensitivity analysis.
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1.2.6 FINANCIAL DERIVATIVES C. FINANCIAL DERIVATIVES A.1 Regulatory trading portfolio: (par values end of period) Debt securities and Equity securities and Exchange rates and Total 31.12.04 Other values Total 31.12.05 Transaction type/Underlying interest rates share indices gold excluding IAS 39 Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted 1. Forward rate agreements 000000 000000 2. Interest rate swaps 0 97,684 0 0 0 0 0 0 0 97,684 0 58,384 3. Domestic currency swaps 0 0 0 0 0 0 0 0 0 0 0 0 4. Currency interest rate swaps 0 0 0 0 0 0 0 0 0 0 0 0 5. Basis swaps 0 788,394 0 0 0 0 0 0 0 788,394 0 453,378 6. Equity index swaps 0 0 0 0 0 0 0 0 0 0 0 0 7. Real index swaps 0 0 0 0 0 0 0 0 0 0 0 0 8. Futures 22,243 0 6,877 0 0 0 0 0 29,120 0 68,561 0 9. Cap options 00 0000 00000 − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 10. Floor options 00000 0 000 0 0 − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 11. Other options 0 20,000 00037,153 00057,153 0 26,182 − Purchased 0 0 0 0 0 12,294 0 0 0 12,294 0 8,572 − Plain vanilla 0 0 0 0 0 2,967 0 0 0 2,967 0 3,573 − Exotic 0 0 0 0 0 9,327 0 0 0 9,327 0 4,999 - Issued 0 20,000 0 0 0 24,859 0 0 0 44,859 0 17,610 - Plain vanilla 0 20,000 0 0 0 2,967 0 0 0 22,967 0 6,751 - Exotic 0 0 0 0 0 21,892 0 0 0 21,892 0 10,859 12. Futures contracts 00000202,524 000202,524 0 139,258 - Purchases 0 0 0 0 0 87,444 0 0 0 87,444 0 53,964 - Sales 0 0 0 0 0 94,223 0 0 0 94,223 0 50,808 - Cross trades 0 0 0 0 0 20,857 0 0 0 20,857 0 34,486 13. Other derivative contracts 0 0 0 000 0 0 0 0022,077 Total 22,243 906,078 6,877 0 0 239,677 0 0 29,120 1,145,755 68,561 699,279
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A.2 Banking portfolio: par values end of period A.2.1 Hedging Debt securities and Equity securities and Exchange rates and Total 31.12.04 Other values Total 31.12.05 Transaction interest rates share indices gold excluding IAS 39 type/Underlying Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted 1. Forward rate agreements 0000 0 0 0 0 0 000 2. Interest rate swaps 0 455,942 0 0 0 822 0 0 0 456,764 0 402,806 3. Domestic currency swaps 0 0 0 0 0 0 0 0 0 0 0 0 4. Currency interest rate 0 0 0 0 0 0 0 0 0 0 0 0 swaps 5. Basis swaps 0 0 0 0 0 0 0 0 0 0 0 0 6. Equity index swaps 0 0 0 0 0 0 0 0 0 0 0 0 7. Real index swaps 0 0 0 0 0 0 0 0 0 0 0 0 8. Futures 0 0 0 0 0 0 0 0 0 0 0 0 9. Cap options 0 0 0 0 0 0 0 0 0 0 0 0 − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 10. Floor options 0 0 0 0 0 0 0 0 0 0 0 0 − Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Issued 0 0 0 0 0 0 0 0 0 0 0 0 11. Other options 0 0 0 0 0 0 0 0 0 0 0 0 Purchased 0 0 0 0 0 0 0 0 0 0 0 0 − Plain vanilla 0 0 0 0 0 0 0 0 0 0 0 0 − Exotic 0 0 0 0 0 0 0 0 0 0 0 0 - Issued 0 0 0 0 0 0 0 0 0 0 0 0 - Plain vanilla 0 0 0 0 0 0 0 0 0 0 0 0 - Exotic 0 0 0 0 0 0 0 0 0 0 0 0 12. Futures contracts 0 0 0 0 0 4,111 0 0 0 4,111 0 3,561 - Purchased 0 0 0 0 0 4,111 0 0 0 4,111 0 3,561 - Sales 0 0 0 0 0 0 0 0 0 0 0 0 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 13. Other derivative 0 0 0 0 0 0 0 0 0 0 0 0 contracts Total 0 455,942 0 0 0 4,933 0 0 0 460,875 0 406,367
A.2.2 Other derivatives There are no "other derivatives" in the Banking Portfolio.
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A.3 Financial derivatives: purchase and sale of underlyings
Debt securities and Equity securities and Exchange rates and Total 31.12.04 Other values Total 31.12.05 Transaction type/Underlying interest rates share indices gold excluding IAS 39 Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted Listed Unlisted A. Regulatory trading portfolio: 1. Transactions with exchange of capital 0 20,000 0 0 0 0 0 0 0 20,000 0 2,382 - Purchases 000 0 0 0 0 0 0 0 0 712 - Sales 0 20,000 0 0 0 0 0 0 0 20,000 0 1,670 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 2. Transactions without exchange of capital 22,243 333,660 6,878 0 0 37,153 0 0 29,121 370,813 68,561 68,608
- Purchases 2,500 305,698 2,813 0 0 0 0 0 5,313 305,698 1,500 20,822 - Sales 19,743 27,962 4,065 0 0 0 0 0 23,808 27,962 67,061 22,562 - Cross trades 0 0 0 0 0 37,153 0 0 0 37,153 0 25,224 B. Banking portfolio: B.1 Hedging 0 455,942 0 0 0 4,933 0 0 0 460,875 0 405,806 1. Transactions with exchange of capital 000 0 0 0 0 0 0 4,933 0 0 - Purchases 0 0 0 0 0 4,111 0 0 0 4,111 0 0 - Sales 0 0 0 0 0 822 0 0 0 822 0 0 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 2. Transactions without exchange of capital 0 455,942 0 0 0 0 0 0 0 455,942 0 402,806 - Purchases 0 100,000 0 0 0 0 0 0 0 100,000 0 100,000 - Sales 0 355,942 0 0 0 0 0 0 0 355,942 0 302,806 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0 B2. Other derivatives 0 0 0 0 0 204,169 0 0 0 204,169 0 139,258 1. Transactions with exchange of capital 00000204,169 0 0 0 204,169 0 139,258 - Purchases 0 0 0 0 0 88,267 0 0 0 88,267 0 53,964 - Sales 0 0 0 0 0 95,045 0 0 0 95,045 0 50,808 - Cross trades 0 0 0 0 0 20,857 0 0 0 20,857 0 34,486 2. Transactions without exchange of capital 000000 000000 - Purchases 0 0 0 0 0 0 0 0 0 0 0 0 - Sales 0 0 0 0 0 0 0 0 0 0 0 0 - Cross trades 0 0 0 0 0 0 0 0 0 0 0 0
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A.4 Over the counter financial derivatives: positive fair value - counterparty risk
Debt securities and Equity securities and Exchange rates and gold Other values interest rates share indices Gross Gross Gross counterparty/underlying Gross Future Gross Future Gross Gross Gross uncom uncom uncom Future Future compe exposu compe exposu compe uncompe compens pensat pensat pensat exposure exposure nsated re nsated re nsated nsated ated ed ed ed
A. Regulatory trading portfolio A.1 Governments and Central Banks 000 0 0 0 0 0 0 0 0 0 A.2 public entities 000 0 0 0 0 0 0 0 0 0 A.3 banks 0 7,455 1,506 0 0 0 0 69 921 0 0 0 A.4 financial companies 0 0 0 0 0 0 0 0 195 0 0 0 A.5 insurance companies 0 0 0 0 0 0 0 0 000 0 A.6 non-financial companies 0 101 30 0 0 0 0 239 240 0 0 0 A.7 other entities 0 0000 0 0 7590 0 0 Total 31.12.2005 0 7,546 1,536 0 0 0 0 315 1,415 0 0 0 B. Banking portfolio B.1 Governments and Central Banks 0 0 0 0 0 0 0 0 0 0 0 0 B.2 public entities 0 0 0 0 0 0 0 0 0 0 0 0 B.3 banks 0 12,962 1,730 0 0 0 0 217 49 0 0 0 B.4 financial companies 0 0 0 0 0 0 0 0 0 0 0 0 B.5 insurance companies 0 0 0 0 0 0 0 0 0 0 0 0 B.6 non-financial companies 0 0000 0 0 0000 0 B.7 other entities 0 0000 0 0 0000 0 Total 31.12.2005 X 12,962 1,730 X 0 0 X 217 49 X 0 0
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A5 Over the counter financial derivatives: Negative fair value – financial risk
Counterparty/underlying Debt securities Equity securities Exchange rates and gold Other values Other and Interest rates and share indices underlyings Gross Gross Future Gross Gross Future Gross Gross Future Gross Gross Future Compe Future uncom compe exposu uncompe compens exposure uncompe compens exposu uncom compe exposu nsated exposu pensat nsated re nsated ated nsated ated re pensat nsated re re ed ed A. Regulatory trading portfolio A.1 Governments and Central 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Banks A.2 public entities A.3 banks 0 10,412 6,697 0 0 0 0 586 716 0 0 0 0 0 A.4 financial companies 0 0 0 0 0 0 0 0 148 0 0 0 0 0 A.5 insurance companies 0 0 0 0 0 0 0 0 000 0 0 0 A.6 non-financial companies 0 7220 0 0 0 24 531 0 0 0 0 0 A.7 other entities 0 00 0 0 0 0 0 91,292 0 0 0 0 0 Total 31.12.2005 0 10,419 6,719 0 0 0 0 610 92,687 0 0 0 0 0 B. Banking portfolio B.1 Governments and Central 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Banks B.2 public entities B.3 banks 0 12,723 2,063 0 0 0 0 0 0 0 0 0 0 0 B.4 financial companies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 B.5 insurance companies 0 0 0 0 0 0 0 0 0 0 0 0 0 0 B.6 non-financial companies 0 00 0 0 0 0 0 0 0 0 0 0 0 B.7 other entities 0 00 0 0 0 0 0 0 0 0 0 0 0 Total 31.12.2005 0 12,723 2,063 0 0 0 0 0 0 0 0 0 0 0
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A.6 Residual life of over the counter financial derivatives: par values
Underlying/Residual life Up to From Over 5 Total one year over 1 years year to 5 years A. Regulatory trading portfolio 72,942 482,458 389,476 944,876 A.1 Financial derivatives on debt securities and interest rates 34,144 482,458 389,476 906,078 A.2 Financial derivatives on equity securities and share 0 0 0 0 indices 38,798 0 0 38,798 A.3 Financial derivatives on exchanges rates and gold 0 0 0 0 A.4 Financial derivatives on other values 39,918 253,284 168,495 461,697 B. Banking portfolio: 34,985 253,284 168,495 456,764 B.1 Financial derivatives on debt securities and interest rates 0 0 0 0 B.2 Financial derivatives on equity securities and share 4,933 0 0 4,933 indices 0 0 0 0 B.3 Financial derivatives on exchanges rates and gold B.4 Financial derivatives on other values Total 31.12.2005 112,860 735,742 557,971 1,406,573
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1.2.6 FINANCIAL DERIVATIVES
B. CREDIT DERIVATIVES
The Bank does not operate in credit derivatives.
520
1.3 LIQUIDITY RISK
QUALITATIVE INFORMATION A. General aspects, liquidity risk management and measurement
QUANTITATIVE INFORMATION 1. Breakdown of remaining contractual life of financial assets and liabilities – Denominated in: Euro Over 3 From On Up to 3 months over 1 Over 5 Items/Time frames Unlimited life demand months to 12 year to 5 years months years Cash assets 851,389 601,437 392,593 875,901 1,130,957 285,613 A.1 Government bonds 0 923 39,624 68,079 114,031 0 A.2 Listed debt securities 0 0 4,562 18,697 93,159 0 A.3 Other debt securities 152 1,760 1,543 65,049 57,805 0 A.4 Stakes in OICR 0 0 0 0 0 93,028 A.5 Loans 851,237 598,754 346,864 724,076 865,962 192,585 - Banks 65,909 2,038 0 0 0 19,171 - Customers 785,328 596,716 346,864 724,076 865,962 173,414 Cash loans 1,569,315 492,026 422,424 1,414,383 308,871 0 B.1 Deposits 1,568,015 381,988 (3,642) 131,111 6,046 0 - Banks 32,771 244,635 (4,506) 3,630 1,001 0 - Customers 1,535,244 137,353 864 127,481 5,045 0 B.2 Debt securities 1,300 110,038 426,066 1,283,272 302,825 0 B.3 Other liabilities 0 0 0 0 0 0 “Off-balance sheet” operations 0 0 0 0 0 0 C.1 Financial derivatives with exchange of capital - Long positions 0 112,406 37,215 5,856 0 0 - Short positions 0 112,406 37,215 5,856 0 0 C.2 Deposits and loans receivable - Posizioni lunghe - Short positions 0 1,090 0 0 0 0 C.3 Irrevocable commitments to 0 1,090 0 0 0 0 grant finance - Long positions 2 536 6,105 998 236 295 - Short positions 0 7,877 0 0 0 295
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2. Distribution by sector of financial liabilities
Governments Other public Financial Insurance Non-financial Exposure/Counterparty and Central Other entities entities companies companies companies Banks 1. Due to customers 0 3,873 71,593 22,535 379,816 1,195,684 2. Outstanding securities 0096,836 0 0 1,565,016 3. Financial liabilities for trading 0011,282 0 537 (57) 4. Financial liabilities at fair value 000 0 0 457,408 TOTAL 31.12.2005 0 3,873 179,711 22,535 380,353 3,218,051
3. Geographical distribution of financial liabilities
OTHER REST OF THE Exposure/Counterparty ITALY EUROPEAN AMERICA ASIA WORLD COUNTRIES 1. Due to customers 1,662,527 8,425 1,691 630 228 2. Due to banks 221,605 45,921 10,006 0 0 3. Outstanding securities 1,565,015 96,836 0 0 0 4. Financial liabilities for trading 582 10,399 781 0 0 5. Financial liabilities at fair value 457,408 0 0 0 0 TOTAL 31.12.2005 3,907,137 161,581 12,478 630 228
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1.4 OPERATIONAL RISK
QUANTITATIVE INFORMATION
A. General aspects, operational risk management and measurement
Definition The term operational risk expresses the risk of losses resulting from errors or inadequacies of internal processes, of human resources and of the organisational systems or resulting from external events. The Risk Management service of the Parent Bank is currently developing the project for control and management of operational risk, according to the guidelines below, taken from the departmental regulations: monitoring, management of exceptions, reporting.
• Monitoring Ensures the monthly measurement of exposure to the main operational risks. In particular, analyses company risk profiles relating to different types of operating risk. Carries out simulations of qualitative-quantitative stress on a monthly basis, aimed at verifying likely effects of events.
• Management of exceptions Upon the discovery of exceptions and/or anomalies, notifications are made to the competent offices and bodies of the Parent Bank, as established in the reference manual.
• Reporting The Risk Manager produces summary reports for General Management and the administrative and control bodies of the Parent Bank. These reports document the activities carried out in order to verify the correctness of the studies and entries performed.
The legal actions involving the Parent Bank are monitored on a quarterly basis, providing updates as regards potential liabilities and, consequently, allocations to provisions.
523
QUANTITATIVE INFORMATION
The type of legal actions at 31/12/2005 can be summarised as follows:
expected existing actions at type of action amount sought expenditure 31/12/2005
anatocism 471.00 151.50 7 generic 24,598.00 50.00 9 against recording as NPL 755.00 0.00 2 claims for damages 166,022.00 80.00 11 securities trading 1,577.00 289.00 10 bankruptcy action for 19 avoidance 30,022.00 1,054.00 Total 223,445.00 1,624.50 58
As for their duration, it is not possible to forecast from the beginning, as it is not possible to know how the actions will evolve regarding the various stages of the legal proceedings which will be necessary to face. Currently, only 6 of the 52 ongoing legal actions are at the “appeal” stage.
The following table sets forth the time frames for expected payouts:
expected payouts time frame expected payouts (months)
73.00 3 30.00 6 296.00 12 428.00 84 100.00 20 15.00 21 142.00 24 11.00 26 400.00 27 28.00 30 101.50 36 1,624.50
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Part F – INFORMATION ON CONSOLIDATED EQUITY
Section 1 – Consolidated shareholders’ equity
A. Qualitative information
The Group has always paid maximum attention to the means of equity in relation to the expected development and evolution of risk. Over the years, and in the recent past, the Parent Bank has used capital increases and the issue of convertible and/or subordinated loans in order to support this fundamental requirement. The lack of a suitable level of equity at the moment is the obvious consequence of the loss recorded during the year. The moment the amount of such loss was revealed, countermeasures were taken to dampen its effects, such as the transfer of non-strategic shareholdings, the sale of several properties held for investment, and an initial transfer of non-performing loans. In February 2006, a subordinated loan was issued for 40 million euro, placed with institutional investors. The accounting of this loan under supplementary regulatory capital was authorised by the Bank of Italy with letter dated 15 March 2006. As well, the free share capital increase which will be proposed to the Extraordinary Shareholders’ Meeting is aimed at increasing the basic regulatory capital with respect to supplementary equity.
B. Qualitative information
See table 15 of part B Liabilities in these Explanatory Notes.
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Section 2 – Equity and bank regulatory ratios
2.1 Scope of application of the regulations
The Group, as well as its banks, are required to respect the minimum obligatory requisites.
2.2 Bank regulatory capital
The regulatory capital is the basic parameter upon which prudential supervision is founded. It is the point of reference for the prudential credit risk ratios, the requirements for market risk, the rules regarding “transformation of maturities” and the concentration of risk (the "large risks" regulations). In compliance with the Bank of Italy regulations regarding regulatory capital and ratios, the calculations at 31.12.2005 take into account the “prudential filters” introduced in compliance with the recommendations of the CEBS (Committee of European Supervisors) in order to limit the potential volatility of aggregates as a result of the adoption of the IAS/IFRS. The data at 31.12.2004 were produced based on the regulations in force at that date, and therefore, the values are not comparable.
A. Qualitative information
1. Tier 1 capital The positive elements of tier 1 capital comprise capital, share premiums, reserves and the share of profits of subsidiaries which have been allocated to reserves on the basis of resolutions by their respective shareholders’ meetings. Instead, negative elements comprise the loss for the year and intangible fixed assets, including goodwill. Group Banks did not issue any innovative equity instruments.
2. Supplementary equity The positive elements of supplementary equity comprise the revaluation reserves, including those resulting from the redetermination of the cost of properties upon the first-time adoption of the IAS/IFRS, the calculatable share of the subordinated loans, and 50% of the securities valuation reserves.
526
3. Tier 3 equity There are no items to be calculated in Tier 3 equity.
B. Qualitative information
Total Total 31.12.2005 31.12.2004 excluding IAS 39 A. Tier 1 capital before application of prudential filters 211,065 365,519 Prudential filters on Tier 1 capital: - positive IAS/IFRS prudential filters 607 - negative IAS/IFRS prudential filters A. Tier 1 capital after application of prudential filters 211,672 365,519 C. Supplementary equity before application of prudential 89,651 90,155 filters Prudential filters on supplementary equity: - Positive IAS/IFRS prudential filters - Negative IAS/IFRS prudential filters -895 D. Supplementary equity after application of prudential filters 88,756 90,155 E. Total Tier 1 capital and supplementary equity after 300,428 455,674 application of prudential filters Elements to be deducted from total Tier 1 capital and supplementary equity F. Regulatory capital 300,428 455,674
2.3 Capital adequacy
C. Qualitative information
The table below sets out the Group’s position in terms of compliance with the capital adequacy regulations. Banking Groups are required to have a regulatory capital/risk-weighted asset ratio equal to at least eight percent. The combined effect of the issuing of the abovementioned subordinated loan and the capital increase which will be proposed to the Extraordinary Shareholders’ Meeting – without prejudice to the foregoing – will bring the level of Tier 1 capital/risk-weighted assets and regulatory capital/risk-weighted assets respectively to 5.86% and 8.67%.
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B. Qualitative information
Categories/values Unweighted amounts Weighted amounts/requisites 31.12.2005 31.12.2004 31.12.2005 31.12.2004 Excluding excluding IAS 39 IAS 39 A. RISK ASSETS A.1 CREDIT RISK 4,331,480 4,525,010 3,712,227 3,796,106 STANDARD METHOD CASH ASSETS 4,055,322 4,294,465 3,485,847 3,581,577 1. Exposures (different to equity securities and other 3,558,901 3,770,219 3,231,846 3,287,313 subordinated assets) towards (or guaranteed by): 1.1 Governments and Central Banks 296,439 335,655 0 0 1.2 Other public entities 2,352 2,914 470 583 1.3 Banks 36,030 181,150 7,206 36,230 1.4 Other entities (different to mortgage loans on 3,224,170 3,250,500 3,224,170 3,250,500 residential and non-residential property) 2. Mortgage loans on residential property 364,582 386,088 182,291 193,044 3. Mortgage loans on non-residential property 0 0 0 0 4. Shares, shareholdings and subordinated assets 0 12,051 0 13,365 5. Other cash assets 131,839 126,107 71,710 87,855 OFF-BALANCE SHEET ASSETS 276,158 230,545 226,380 214,529 1. Guarantees and commitments towards (or guaranteed 265,086 220,254 224,121 212,085 by): 0 168 0 0 1.1 Governments and Central Banks 101 955 20 34 1.2 Public entities 1,522 219,131 51 177 1.3 Banks 263,463 10,291 224,050 211,874 1.4 Other entities 11,072 0 2,259 2,444 2. Derivatives contracts towards (or guaranteed by): 0 0 0 0 2.1 Governments and Central Banks 0 0 0 0 2.2 Public entities 11,072 0 2,259 0 2.3 Banks 0 0 0 2.4 Other entities B. MINIMUM REQUIREMENTS FOR SUPERVISORY 283,167 295,542 PURPOSES 18,424 18,029 B.1 CREDIT RISK X B.2 MARKET RISK X 1. STANDARD METHOD X 8,624 10,766 of which: X X 9,423 6,762 + position risk on debt securities X X 0 0 + position risk on equity securities X X 377 501 + exchange rate risk X X 0 0 + other risks X 2. INTERNAL MODELS X 0 0 of which: X X 0 0 + position risk on debt securities X X 0 0 + position risk on equity securities X X 13,000 13,000 + exchange rate risk X X 314,591 326,571 B.3 OTHER MINIMUM REQUIREMENTS X X B.4 TOTAL REGULATORY REQUIREMENTS X X 3,932,388 4,082,138 (B1+B2+B3) X C. RISK ASSETS AND ADEQUACY RATIOS X 5.38% 8.95% C.1 Risk-weighted assets X C.2 Tier 1 capital/Risk-weighted assets (Tier 1 capital ratio) X 7.64% 11.16% C.3 Regulatory capital/Risk-weighted assets (Total capital X ratio)
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Part G – BUSINESS COMBINATION TRANSACTIONS REGARDING BUSINESS OR COMPANY BRANCHES
During the year, no operations of this type were carried out.
529
Part H – TRANSACTIONS WITH RELATED PARTIES
530
1. Information on directors and managers’ fees
Fees paid to the Parent Bank Officers include the following fees resolved by the Shareholders’ Meeting and/or the Board of Directors (as regards the Secretary of the Board): a) Directors • Attendance fees and Secretary’s fees € 171 thousand c) Statutory auditors • Fees € 131 thousand • Attendance fees € 101 thousand
It is pointed out that the Income Statement 2005 also contains charges of: - € 86 thousand for VAT and social security contributions for 2004 profit distribution - approximately € 23 thousand for travel expense reimbursement for Directors and Auditors.
The following table, prepared in compliance with CONSOB Deliberation no. 11971/99, art. 78, breaks down the fees paid to Directors, Statutory Auditors and the General Manager of the Parent Bank in 2005.
FEES PAID TO DIRECTORS, STATUTORY AUDITORS AND GENERAL MANAGER (art. 78 CONSOB Deliberation no. 11971 of 14 May 1999 – Annex 3C, table 1)
PERSON ROLE FEES Surname and name Role Term Fees Non- Bonuses Other covered of office for office monetary and compensa benefits other tion incentives
Saini Sandro Chairman of the Board 243 days 6 Ponti Cesare Director 243 days 10 2 Chairman of the Board 122 days Brogonzoli Luciano Vice Chairman of the Board 243 days 9 1 Director 22 days Moroni Vitaliano Vice Chairman of the Board 243 days 7 Director 22 days Paolillo Ernesto Vice Chairman of the Board 80 days 3 Albonico Mauro Director 365 days 15 5 Alessi Anghini Michele Director 365 days 7 Balzarini Paola Director - Secretary of the Board 365 days 45 Bonomi Luigi Director 365 days 8 Bruni Raffaele Director 59 days 2 Compostella Angelo Director 365 days 9 3 Alessandro
531
De Vecchi Lino Director 365 days 11 Fortis Marco Director 10 days 1 Pellicelli Giorgio Director 365 days 11 Viganò Claudio Carlo Director 365 days 6 5 Vivarelli Lanfranco Director 340 days 7 3 Scruzzi Roberto Chairman of the Board of Statutory 365 days 80 69 Auditors Bussi Roberto Statutory Auditor 365 days 57 18 Battaini Ferruccio Statutory Auditor 365 days 56 41 Ferrari Claudio General Manager 365 days 490 10 1
The fees paid to directors comprise the attendance fees paid during 2005, regarding the 2005 meetings. “Other compensation” includes fees and expense reimbursement for offices in subsidiaries, as well as expense reimbursement for the Parent Bank.
2. Information on transactions with related parties
As set forth in IAS 24, the Directors, Auditors, General Manager and Deputy General Manager with substitute functions, their immediate families or subjects upon which they exert control or significant influence, companies of the group and the pension fund for Banca Popolare di Intra employees are considered to be related parties.
Relations with subsidiaries and the pension fund for the personnel of Banca Popolare di Intra in 2005 are described in the relevant paragraph in the Report on Operations and Consolidated Report on Operations.
Relations between the Parent Bank and its Directors, Auditors, General Manager and Deputy General Manager with substitute functions, their immediate families or subjects upon which they exert control or significant influence are summarised in the following tables:
Loans and guarantees issued Agreed Used a) Directors directly: - cash loans 682 36 - credit commitments 0 0 Indirectly: - cash loans 27,010 7,475 - credit commitments 1,164 1,164 b) Statutory auditors directly: - cash loans 566 218 - credit commitments 0 0 Indirectly:
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- cash loans 2,462 1,083 - credit commitments b) General Management directly: - cash loans 42 34 - credit commitments 0 0 Indirectly: - cash loans 0 0 - credit commitments 0 0
All credit lines were resolved in compliance with art. 136 of Legislative Decree no. 385 of 1 September 1993 and at market conditions.
Professional roles entrusted to Directors and Amount Auditors a) Directors - directly 0 - indirectly 4 b) Statutory Auditors - directly 0 - indirectly 0
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REPORT OF THE BOARD OF DIRECTORS TO THE EXTRAORDINARY SHAREHOLDERS’ MEETING
534
Dear Shareholders,
We have called you to this extraordinary meeting in order to submit to your examination and approval the motion that is illustrated in detail below and which, pursuant to regulations in force, has been forwarded in advance to the Bank of Italy and CONSOB.
2. Motion to implement free share capital increase with utilisation of the revaluation reserves pursuant to Law no. 266 of 23 December 2005 and Law no. 413 of 30 December 1991, of the reserve pursuant to Article 13 of Legislative Decree 124/93 and with partial utilisation of the available reserve, through increase of the unit par value of the ordinary shares from € 3.00 to € 3.40 for a total of 19,385,758.80. Subsequent amendment of Article 5 of the Articles of Association
The transaction that we propose, with the approval of the Board of Statutory Auditors, is part of the 2006-2008 Strategic Plan to strengthen the Bank’s and the Group’s capital and to improve the prudential ratios, as reported in detail in the Report to the Financial Statements 2005. It involves free share capital increase of € 19.4 million, of which € 17 million is to be implemented through capitalisation of the revaluation reserves pursuant to Law no. 266 of 23 December 2005 ensuing from First Time Adoption IAS with regard to capital property and € 2.4 million through the utilisation of minor reserves, with increase of the unit par value of the ordinary shares of the Bank from the current € 3.00 to € 3.40. Further details are provided below: - in compliance with the provisions of IFRS 1 which permits use of the fair value at the transition date of 1 January 2004 as substitute of the cost of the tangible assets, upon first time adoption of the IAS/IFRS accounting standards the capital property has been valued, on the basis of a special survey, by the deemed cost method (equal to the fair value at the First Time Adoption date). - an F.T.A. reserve has been created on the capital property existing as at 31 December 2005 which, net of deferred taxes calculated at 37.5% (€ 7,259,000.00), is equal to € 12,097,469.86. Following application of the 12% substitute tax on the monetary revaluation balances, the taxes calculated upon FTA is used only to the extent of 2,322,776.00 and the residual (€ 4,936,224.00) has been used to adjust the revaluation reserve, bringing it to a total of € 17,033,693.86.
Given that Article 7, sub-section 6, of Legislative Decree no. 38 of 28 February 2005 which governs the “changes in shareholders’ equity recorded in the opening
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balance sheet of the first financial statements drawn up according to the international accounting standards”, allows for the equity increases arising from recording of the tangible assets at fair value as substitute of cost to be ascribed to capital, we propose a motion to use the aforesaid revaluation reserve to implement the free share capital increase.
Hence, considering that: • as at 31 December 2005 the share capital of the Bank was equal to € 145,393,191.00 and was made up of 48,464,397 ordinary shares, each with a par value of € 3.00, we propose to: • utilise: √ the revaluation reserves Law 266 23.12.2005: €17,033,693.86 √ the revaluation reserves Law 413 30.12.1991: € 1,706,533.31 √ the reserve under Art. 13 Lgs. Dec. 124/93: € 163,811.28 √ part of the available reserve: € 481,720.35 €19,385,758.80 for the free share capital increase, to be executed by increasing the par value of the ordinary Banca Popolare di Intra shares, outstanding as at 1 January 2006; • increase the par value of the 48,464,397 ordinary shares of the Bank, from €3.00 to € 3.40 (€ 0.40 x 48,464,397 shares outstanding as at 31 December 2005 = € 19,385,758.80).
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The table below shows the effects that the transaction will have on the Bank’s and the Group’s regulatory capital and on the prudential ratios:
Consolidated Capital Requirements I.A.S. I.A.S. 31.12.2005 31.12.2005 (4th quarter figures) (figures inclusive of the subordinated loan for which Bank of Italy authorised computation in the tier 2 capital and the proposed share capital increase) A. Regulatory capital A.1 Tier 1 capital 211,672 211,672 transfer monetary revaluation balances 18,740 A.1 Tier 1 capital 211,672 240,412 A.2 Tier 2 capital 88,756 88,756 transfer monetary revaluation balances (18,740) new subordinated bond issue 40,000 A.2 Tier 2 capital 88,756 110,016 A.3 Items to deduct 0 0 A.4 Regulatory capital 300,428 340,428 B. Prudential regulatory requirements B.1 Credit risks 283,167 283,167 B.2 Market risks 18,424 18,424 of which: - trading portfolio risks 18,424 18,424 - currency risks 0 0 - concentration risks 0 0 B.3 3rd level subordinated loans 0 0 B.4 Other prudential requirements 13,000 13,000 B.5 Total prudential requirements 314,591 314,591 A.4-B.5 Surplus (deficit) (14,163) 25,386 C. Risk assets and regulatory ratios C.1 Risk weighted assets 3,932,388 3,932,388 C.2 Tier 1/Risk weighted assets 5.38% 5.86% C.3 Total capital/Risk weighted assets 7.64% 8.66%
With regard to the outstanding subordinated convertible bonds of the “Banca Popolare di Intra 3% 2001-2006” loan (7,152,082 potentially convertible in the July-November 2006 period, at an exchange rate of 1.1 ordinary BPIntra share with a par value of € 3.00 for each convertible bond with a par value of € 12) pursuant to Article 6, sub-section 2, letter c) of the relative Regulations, the par value of the ordinary shares to be issued for the purposes of any future conversion of the bonds will automatically rise to € 3.40. Pursuant to the new IAS/IFRS rules, the difference will be ascribed to the item “issue premium”.
We hereby specify that the scheduled transaction will require amendment of Article 5 of our Articles of Association, which will affect only the unit par value of shares, as reported below.
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PROPOSED AMENDMENT OF ARTICLE 5 OF THE ARTICLES OF ASSOCIATION
CURRENT WORDING REASON FOR AMENDMENT PROPOSED WORDING Art.5 – Share capital Art.5 – Share capital The share capital is variable and is The share capital is variable and is determined by the total number of determined by the total number of registered shares – each with a unit par The proposed amendment follows the registered shares – each with a unit par value of € 3.00 – subscribed by the resolution submitted to the Extraordinary value of € 3.40 – subscribed by the shareholders. Shareholders’ Meeting to implement free shareholders. As a general rule share issues may share capital increase by utilising the As a general rule share issues may occur without limitation. reserves and increasing the unit par value occur without limitation. The extraordinary shareholders’ meeting of the ordinary shares. The extraordinary shareholders’ meeting of 30 June 2001 approved the share of 30 June 2001 approved the share capital increase through issue of a capital increase through issue of a maximum number of 7,967,162 ordinary maximum number of 7,967,162 ordinary shares, to be issued exclusively for shares, to be issued exclusively for exercise of the conversion right to which exercise of the conversion right to which holders of the Banca Popolare di Intra holders of the Banca Popolare di Intra 3.00% 2001-2006 convertible bonds are 3.00% 2001-2006 convertible bonds are entitled. entitled. The share capital will be progressively The share capital will be progressively varied to the extent to which the varied to the extent to which the conversion rights are exercised by the conversion rights are exercised by the holders of the convertible bonds referred holders of the convertible bonds referred to in the previous paragraph. to in the previous paragraph. The extraordinary shareholders’ meeting The extraordinary shareholders’ meeting of 18 April 2004 passed a resolution to of 18 April 2004 passed a resolution to vest the Board of Directors with the
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CURRENT WORDING REASON FOR AMENDMENT PROPOSED WORDING authority to increase, within a maximum vest the Board of Directors with the of three years, and in one or more authority to increase, within a maximum tranches, pursuant to Articles 2443 and of three years, and in one or more 2349 of the Italian Civil Code, the share tranches, pursuant to Articles 2443 and capital up to maximum par value of € 2349 of the Italian Civil Code, the share 1,350,000.00, through issue of a capital up to maximum par value of € maximum of 450,000 ordinary shares. 1,350,000.00, through issue of a For as long as the shares are subject to maximum of 450,000 ordinary shares. listing in official markets, the issue of For as long as the shares are subject to new shares may only occur through listing in official markets, the issue of extraordinary shareholders’ meeting new shares may only occur through resolution, in compliance with the extraordinary shareholders’ meeting provisions of Article 2441 of the Italian resolution, in compliance with the Civil Code, or through resolution of the provisions of Article 2441 of the Italian Board of Directors pursuant to Article Civil Code, or through resolution of the 2443 of the Italian Civil Code upon Board of Directors pursuant to Article delegation of the extraordinary 2443 of the Italian Civil Code upon shareholders’ meeting which determines delegation of the extraordinary the criteria with which the directors must shareholders’ meeting which determines comply, without prejudice to the the criteria with which the directors must formalities and conditions necessary to comply, without prejudice to the the acquisition of the capacity of formalities and conditions necessary to shareholders set forth in Articles 6 and 7 the acquisition of the capacity of below and, specifically the provisions of shareholders set forth in Articles 6 and 7 the second sub-section of Article 7. below and, specifically the provisions of The extraordinary shareholders’ meeting the second sub-section of Article 7. may pass resolutions to effect The extraordinary shareholders’ meeting extraordinary share issues also pursuant may pass resolutions to effect
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CURRENT WORDING REASON FOR AMENDMENT PROPOSED WORDING to Article 2349, sub-section 1, of the extraordinary share issues also pursuant Italian Civil Code. to Article 2349, sub-section 1, of the Italian Civil Code.
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PROPOSED RESOLUTION
Dear Shareholders, Should you agree with the proposal submitted to your examination, we invite you to pass the following resolution: “The Extraordinary Shareholders’ Meeting of Banca Popolare di Intra Società Cooperativa per Azioni, which validly convened on 30 April 2006: √ having heard the report of the Board of Directors, √ having acknowledged confirmation from the Board of Statutory Auditors that the current share capital of € 145,393,191.00, represented by 48,464,397 ordinary shares each with a par value of € 3.00, is fully paid in and existing, RESOLVES 1. to implement free increase of the Bank’s share capital of € 19,385,758.80, with utilisation of the revaluation reserves pursuant to Law no. 266 of 23 December 2005 and Law no. 413 of 30 December 1991, of the reserve pursuant to Article 13 of Legislative Decree 124/93 and with partial utilisation of the available reserve, increasing the unit par value of the 48,464,396 ordinary shares of Banca Popolare di Intra outstanding as at 1 January 2006, from € 3.00 to € 3.40; 2. to approve the consequent amendment of Article 5 of the Articles of Association in accordance with the new wording proposed by the Board of Directors and reproduced in its “Report”; 3. to vest the Board of Directors and on its behalf the Chairman and Deputy Chairman, being empowered to act severally, with full and widest powers to perform the actions necessary to implementation of the aforesaid resolutions, and to fulfil all the formalities necessary to ensuring that the resolutions passed obtain the authorisations required by law, with the power to make any amendments that may be required for the purpose, even at the time of registration, and in general all that is necessary to the full execution of said resolutions, with each and every power necessary and appropriate to this end, with no exclusion or exception, including the power to file and publish, pursuant to law, the updated version of the Articles of Association.
Verbania Intra, 16 March 2006
THE BOARD OF DIRECTORS
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REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE EXTRAORDINARY SHAREHOLDERS’ MEETING
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REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE EXTRAORDINARY SHAREHOLDERS’ MEETING
Dear Shareholders, The Directors’ Report illustrates the reasons behind the motion to implement a free share capital increase with utilisation of the revaluation reserves pursuant to Law no. 266 of 23 December 2005 and Law no. 413 of 30 December 1991, of the reserve pursuant to Article 13 of Legislative Decree 124/93 and with partial utilisation of the available reserve, through increase of the unit par value of ordinary shares from € 3.00 to € 3.40 for a total of 19,385,758.80 and subsequent amendment of Article 5 of the Articles of Association contained in the agenda. The Board of Statutory Auditors deems the reasons behind the motion to be positive and hence expresses favourable opinion to the approval thereof, in accordance with the Directors’ specifications.
Verbania, 14 April 2006 the Board of Statutory Auditors Ferruccio Battaini Roberto Bussi Marta Lodari
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Supplementary Information for the Shareholders’ Meeting of 29-30 April 2006
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Notice is given that, with letter dated 20 April 2006 – a full transcription of which is provided below – CONSOB requested that we supply supplementary information for the Shareholders’ Meeting on the points specified:
“From CONSOB – Issuers Division – Listed Issuers Information Office – Accounting Rules Office – prot. no. DEM / 6034771 Rome 20 April 2006
Re: Shareholders’ Meeting called for 29 April 2006 and, in second call, 30 April 2006. Request of supplementary information pursuant to Article 114, sub-section 5, Legislative Decree no. 58/1998
Reference is made to the draft financial statements and to the consolidated financial statements as at 31 December 2005, approved by the Board of Directors of your Bank on 29 March 2006 and subsequently amended on 13 April 2006.
With regard to the above you are kindly requested, pursuant to the afore- mentioned legislation, to supplement the information on the Shareholders’ Meeting called for 29 April 2006 in first call and 30 April 2006 in second call to approve the financial statements 2005, providing the information stated below: 1. estimation of the length of time required to complete the actions taken in order to effect reorganisation of the control system; 2. specification of the motivations provided to Bank of Italy, backed by the analytic report carried out by PricewaterhouseCoopers, concerning the failure to assimilate in the accounting statements some of the observations raised by the Regulatory Authority’s inspectors relating to the classification of non-performing loans; 3. description of the performance and recent trends in loans with relation to the significant exposures category; 4. specification as at 31 December 2005 of the various gross and net debt positions towards the groups of subjects forming the so-called “Fin.part aggregate”; 5. description of the existence, or absence, of any risks ensuing from the claw-back actions within the Fin-part bankruptcy with reference to the reductions in indebtedness and to the enforcement of guarantees implemented in the past; 6. specification of the performance of the regulatory aggregates at a recent date; 7. specification of the principal assumptions and most significant targets set forth in the 2006/2008 business plan approved by the Board of Directors on 5 April 2006.
This request and the relevant information provided must be fully transcribed in the minutes of the Shareholders’ Meeting specified above.
Signed The Chairman: Lamberto Cardia”
This being stated, we now move on to the discussion of each of the points.
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1) Estimation of the length of time required to complete the actions taken in order to effect reorganisation of the control system.
Reorganisation of the internal control systems and related implementation times
1.1 Group organisational system
In compliance with the objectives defined in the 2006/2008 business plan as approved by the Board of Directors on 5 April 2006, revision of the Group organisation model has been given the go-ahead. The aim is to ensure that the internal control systems comply with the law provisions in force (Legislative Decree 231/2001, corporate law, Law 262/2005, etc.) as well as with the Regulatory provisions (Agreement on equity requisites and compliance in banks). The Group organisation model specifically consists of all the governance processes (governance model), production and administration processes (management models) as well as all the control processes (control model). Each process is divided into phases which correspond to the risk profiles defined in the Supervisory Instructions (risk policies, risk assumption, risk recording and assessment, risk controls). Operations are scheduled to start on 8 May 2006 with an initial phase of interviews with the representatives of the structures involved and this will be followed by the operative launch of the reorganisation process on 9 May 2006.
By dividing the processes into phases it will be possible to: - define the components of said phases in terms of: 1) risk management criteria; 2) activities to be performed to ensure sound application of the aforesaid criteria; 3) procedures to be used to support the aforesaid activities; 4) organisational structures entrusted with the actual performance of the activities and with use of the procedures; - identify the professional profiles for management of the risks involved in the phase of the process and assign powers and responsibilities to said professional profiles for the aforesaid management (control culture); - make a distinction between operating functions and control functions (clear separation of the organisational functions); - define and establish the information to be transferred from the operating functions to the control functions and vice-versa with regard to the recording, assessment and control of risks (transfer of information); - define and establish the information to be transferred from the control functions to the company offices (coordination of offices)
1.2 Group internal control systems
Each individual process and the organisation system as a whole are regularly checked to verify:
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a) compliance, that is, that the internal rules comply with the external rules (preventive compliance activity); b) organisational risk, comparing the activities that have actually been performed in each individual process with the external rules regardless of the internal rules (subsequent compliance activity); c) adequacy, comparing the activities actually performed in each individual process with those governed by the internal regulations or provisions (application of the rules); d) functionality of the organisational system in terms of effectiveness (the system’s capacity to achieve the target objectives) and in terms of efficiency (the system’s capacity to record costs, risks and profitability consistent with those expressed by the banking system or by similar intermediaries). In this context, observance of the technical criteria defined by Bank of Italy for sound and prudent management is verified.
The aforesaid inspections are effected through performance of the types of controls set forth in the Supervisory Instructions issued by Bank of Italy (line controls, risk management controls, internal audit controls, group controls) which together form the internal control system. In particular, the Internal Audit function, directly or on the basis of information provided by the operating and control functions, assesses compliance, adequacy and organisational risk of the organisational system, of the risk profiles and of the types of controls and also forwards the results of this assessment to the company offices (Board of Directors, Top Management, Board of Statutory Auditors).
1.3 Rules governing the Group governance system
The selected solutions for review of the Bank’s governance system and that of the Group, as described above, will be set forth in the general regulations of the company offices (Board of Directors, Top Management, Board of Statutory Auditors). Said regulations will be drawn up and approved by the individual competent offices of the Group companies by the end of June 2006. Within this context, the regulations of the Internal Control Committee will also be reviewed.
In particular: a) Top Management will be responsible for planning the organisational system and the internal control system and will check compliance, adequacy, organisational risk and system functionality through the Internal Audit activities; b) the Board of Directors will perform the controls with which it is entrusted, specifically through the Internal Control Committee which is made up of Directors and representatives of the Board of Statutory Auditors and of the Internal Control function. Said Committee will verify that:
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- the organisational functions responsible for risk control of each individual phase of the processes perform their duties in full autonomy and free from dependency on operating functions; - the risk management procedures allow for appropriate assessment and control of the risks relating to each individual process; - the organisational functions entrusted with control of the risks involved in the processes are provided with the necessary information by the various operating functions; - any irregularities found by the operating and control functions are promptly brought to the notice of those responsible for each individual phase of the process and subsequently eliminated. If these irregularities prove significant, that is, if they hinder achievement of the final objectives and jeopardise risk control, they must be brought to the notice of the Board of Directors and of the Board of Statutory Auditors; - the Board of Directors, or the company offices to which the Board has delegated, are provided with the back-up reports necessary to acquire full knowledge of and the capacity to govern the corporate risks relating to each individual phase of the process; - Top Management regularly performs verification of compliance, adequacy, organisational risk and functionality of the organisational system, that is, the internal control system; c) The Board of Statutory Auditors will verify: - directly the compliance, adequacy and organisational risk of the governance process of the Board of Directors, of Top Management, of its own process and of the process of the Internal Audit activity; - directly or through the Internal Control function the compliance, adequacy and organisational risk of the organisational system. Within this context, the Board of Statutory Auditors will report to the Board of Directors on the result of said controls and will inform the Supervisory Authorities in the event of significant deficiencies being found, that is, deficiencies which prevent risk management and achievement of the objectives.
1.4 Rules governing the Group organisation system
The solutions selected for review of the Group’s organisational system and briefly described above will be set forth in the regulations governing the Group’s organisational process which, passed by the Parent Bank’s Board of Directors, will be assimilated by the individual Group companies by the end of June 2006.
With reference to said regulations the individual Group companies (including the Parent Bank) will draw up, by the end of September 2006 and then, subject to Parent Bank’s confirmation, will approve, by the end of December 2006: a) the regulations of each individual corporate process governing the general aspects of said processes in terms of risk management criteria and activities
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to be performed to ensure sound application of the said criteria. Specifically, the production processes for management of the relative risks (credit risk, market risk, interest-rate risk, liquidity risk) will be set forth. The procedures necessary to application of the regulations in question will be set forth, by the end of the current year, in the so-called second level provisions. These provisions will introduce the products and procedures manuals as well as the guidelines and consolidation documents drawn up to summarise the various provisions concerning the same issue. Within this context, priority will be given to the processes involved in the investment services performed on customers’ behalf. It is also stated that in the Board meeting held on the 5 April 2006, with a view to identifying and implementing the measures required to promptly deal with the problems area observed in the finance division, the Board of Directors set up an operating group, consisting of the General Manager, one Member of the Board, one of the Bank’s IT experts, the head of the internal management division and the head of the finance division, which will submit the solutions to be adopted to the Board; b) the regulations of the macrostructure and of the territorial network setting forth the role and the responsibilities of the organisational functions, in compliance with the principles defined in the Supervisory Instructions (clear distinction between governance and control functions and operating functions, transfer of information from the Top Management functions and from these to the company offices); c) the regulations of the decisional system process setting forth the procedures by which the Board of Directors assigns powers to the other company offices or to the heads of the organisational functions as well as the procedures by which the delegating parties may verify the correct exercise of delegated powers; d) the regulations of the information-management process setting forth the information to be transferred from one function to another and between functions and company offices. The regulations of the Group organisational process will also set forth the activities to be implemented by the Group companies and by the Parent Bank for the purposes of defining the Group strategic guidelines and performing the activity of management and coordination of the Group.
1.5 Rules governing the Group internal control systems
Lastly, the regulations of the Group organisational process govern the controls that must be effected to ascertain compliance, adequacy, organisational risk and functionality of the Group organisational system.
Specifically:
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a) each individual Group company, within the scope of controls entrusted to the organisational functions (line controls), to the risk management function (risk management controls) and to the Internal Audit function (internal audit activity), will regularly verify: - compliance of the organisational system, that is, comparing the external rules and the internal rules at individual process level (preventive compliance activity); - adequacy of the organisational system, that is, comparing the internal rules and the activities actually performed for each individual process; - organisational risk of the organisational system, that is, comparing the external rules and the activities actually performed regardless of the internal rules for each individual process (subsequent compliance activity); - functionality of the organisational system in terms of effectiveness (the system’s capacity to achieve the target objectives) and in terms of efficiency (the system’s capacity to record costs, risks and profitability that are consistent with those posted by similar intermediaries and by the system) as well as in terms of compliance with the technical criteria defined by Bank of Italy for sound and prudent management; - observance of the limits established in terms of credit, market and operating risks, that is, the risks that may be borne by each individual Group company taking into account the relative technical situation; b) the Parent Bank, with regard to the information gained from the individual Group companies and in compliance with the provisions of the Supervisory Instructions, will be responsible for effecting: - strategic control in order to verify that the strategies adopted by the other Group companies are consistent with the relevant guidelines deliberated by the Parent Bank; - management control to verify that the other Group companies and the Group as a whole are characterised by balanced management of the economic process, the equity process and the risk process. This will include control of the effectiveness and efficiency of the organisational system, that is, the Group’s capacity to achieve set targets, recording costs, risks and profitability that are consistent with those posted by similar banking Groups in compliance with the technical criteria defined by Bank of Italy for sound and prudent management; - technical-operational control aimed at quantifying the (credit, market and operating) risks of the other Group companies and of the Group as a whole. This will include verification that the criteria for drawing up the financial statements and the valuation criteria for the balance-sheet items have been soundly and correctly applied, as well as control of the report on operations prepared by the other Group companies; - verification of compliance, adequacy and organisational risk of the organisational system at Group level.
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2) Specification of the motivations provided to Bank of Italy, backed by the analytic report carried out by PricewaterhouseCoopers, concerning the failure to assimilate in the accounting statements some of the observations raised by the Regulatory Authority’s inspectors relating to the classification of non-performing loans.
Firstly we would like to state that the recording of loans in the balance sheet involves two fundamental and quite separate steps: a) the “classification”, which consists in placing the loan: i) under “performing loans”, in the case of loans which present no problems in management; ii) under “non performing loans”, in the case of those which may present various types of problems ranging from expired loans, to restructured loans, to problem loans and bad debts; b) the “valuation”, that is the process by which the loan is attributed the so-called “fair value”. It is important to remember that even performing loans are submitted to a valuation process, albeit a “collective” one. CONSOB’s request for further information concerns only the first of the two aspects set forth above.
The extent to which the Group has failed to comply with Bank of Italy specifications, as at 31 December 2005, is summarised below: 1) 15 positions for a total of € 39.6 million, in addition to mortgages for a total of € 0.6 million, for which Bank of Italy has requested classification as problem loans and maintained by our Bank under performing loans; 2) 15 positions for a total of € 104.2 million, in addition to some mortgages for a total of € 0.4 million, for which Bank of Italy has requested classification as bad debt and maintained by our Bank: 2.1 as problem loans for a total of € 104.4 million (of which € 99.7 million pertaining to the Mazzola group); 2.2 as performing loans for € 0.2 million relating to a position, of an original gross value of € 9 million at the date of the inspections, which has been almost entirely assigned to a trustworthy company, with extended collection subordinate to the achievement of set parameters. . In both groups the classifications were made on the basis of motivations that reflected the assessments provided by PricewaterhouseCoopers.
With particular regard to the positions set forth in point 1), these are essentially attributable to the following: • regularisation of debt positions; • favourable trends in the overall performance of the debtor’s financial and economic positions compared to the Regulatory Authority’s findings; • forecast of positive evolution of the relations on the basis, for example, of the decrease in the number of payments in arrears and in existing overruns;
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• updated information from the return flow of the Central Credit Register.
With regard to the group referred to in point 2.1), it must firstly be recalled that this group contains 12 positions pertaining to the Mazzola Group, for a total utilisation of € 99,7 million as at 31 December 2005.
Said positions have been maintained as problem loans on the basis of the following considerations:
• specific nature of the (real estate) activity performed by the Group companies; • prospect of regularisation of the existing facilities on the basis of a schedule presented by the aforesaid Group in January 2006, also with a view to issuing further collateral; • absence of reports of “bad debts” from the banking community, inferred from the return flow of the Central Credit Register, with the exception of a position for an amount of negligible importance.
3) Description of the performance and recent trends in loans with relation to the significant exposures category.
As far as the individual performance of significant exposures is concerned, it is specified that in accordance with Bank of Italy regulations, the prudential reports will be adjusted only with effect from the June 2006 reports, hence the figures provided below have been drawn up on the basis of Italian accounting standards. It is also noted that the examination of the aggregate specifically performed by PricewaterhouseCoopers led to the latter to deliver a fully positive opinion.
Figures as at 31 March 2006 (€/thousands) Item Banca Popolare di Banca Popolare Intra Private Intra Monza e Brianza Bank Spa Spa Regulatory capital 386,160 44,736 14,591 10% Reg. capital = limit to be considered 38,616 4,474 1,459 significant exposure 40% Reg. capital = max. limit for 154,464 17,894 5,837 significant exposure 8 times reg. capital = max. total amount of 3,089,277 357,886 116,728 significant exposure Number of significant exposures 7 7 3 Total significant exposures 359,666 42,647 10,438
Figures as at 31 December 2005 (€/thousands) Item Banca Popolare di Banca Popolare Intra Private Intra Monza e Brianza Bank Spa Spa Regulatory capital 346,369 44,736 14,591
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10% Reg. capital = limit to be considered 34,637 4,474 1,459 significant exposure 40% Reg. capital = max. limit for 138,548 17,894 5,837 significant exposure 8 times reg. capital = max. total amount of 2,770,952 357,886 116,728 significant exposure Number of significant exposures 7 8 3 Total significant exposures 366,625 56,000 10,445
Figures as at 30 September 2005 (€/thousands) Item Banca Popolare di Banca Popolare Intra Private Intra Monza e Brianza Bank Spa Spa Regulatory capital 385,473 45,282 13,385 10% Reg. capital = limit to be considered 38,547 4,528 1,338 significant exposure 40% Reg. capital = max. limit for 154,189 18,113 5,354 significant exposure 8 times reg. capital = max. total amount of 3,083,784 362,258 107,077 significant exposure Number of significant exposures 4 6 2 Total significant exposures 249,838 44,861 5,446
With regard to Banca Popolare di Intra, the change in the number of significant exposures between September 2005 and March 2006 is due to oscillation of the exposure of some counterparts, with high credit standing, whose indebtedness with the bank reaches as much as 40/45 million. As at 31 March 2006 the largest significant exposure amounts to € 72.9 million, while the smallest amounts to € 40 million. The arithmetic average of the exposures amounts to € 51.3 million.
It should be noted that comparison of the above figures with those as at 31 December 2003 (5 significant exposures with a limit of approximately € 43 million) shows that the Bank has increased its exposure towards large customers by only 2 units, which besides have high standing, substantially following the decrease in regulatory capital.
With regard to Banca Popolare di Monza e Brianza on the other hand, significant exposures concern positions ranging from € 5.1 million to € 8.3 million with the “average” significant exposure totalling € 6.1 million. As far as Intra Private Bank spa is concerned, as this is a bank which does not disburse loans to customers, significant exposure refers only to trading financial instruments held in the bank’s own portfolio.
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As far as significant exposure at consolidated level is concerned, it must be remembered that the supervisory report for the month of December 2005 was made in accordance with the IAS/IFRS standards, while the previous report relating to June 2005 was still made according to Italian standards. Hence the two figures are not comparable.
Significant Exposures at Consolidated level (€/thousands) Item 31/12/2005 30/6/2005 Italian standards IAS/IFRS Regulatory capital 300,428 351,060 10% Reg. capital = limit to be considered 30,043 35,106 significant exposure 25% Reg. capital = max. limit for significant 75,107 87,765 exposure 8 times reg. capital = max. total amount of 2,403,427 2,808,481 significant exposure Number of significant exposures 8 3 Total significant exposures 395,601 166,714
Compared to the significant exposures at individual level as at 31 December 2005, one further position has been added, the balance of which slightly exceeds € 30 million, one position has increased insofar as one of its subsidiaries is a customer of Banca Popolare di Monza, while another has decreased following further write-downs effected on the basis of the IAS/IFRS standards.
Compared to the situation as at 30 June 2005, the number of significant exposures has increased, which is also due to the fact that the Fin.part, Facchini and Mazzola groups have undergone re-composition, following the well-known developments in corporate circumstances.
4) Specification as at 31 December 2005 of the various gross and net debt positions towards the groups of subjects forming the so-called “Fin.part aggregate”.
Cash exposure and endorsement exposure as at 31 December 2005 towards the groups forming the so-called “Fin.part aggregate”:
Gross Write-downs IAS/IFRS Net exposure exposure Cap. int actualisations cap +int. [1] [2] [3] [1]-[2]-[3] Finpart Operating Group [a] 36,729 17,621 3,085 16,023 Gianni Mazzola Group [b] 103,440 58,610 4,197 40,633 Finpart/Mazzola Group [c] = [a] + 140,169 76,231 7,282 56,656 [b] GianLuigi Facchini Group [d] 63,783 50,792 2,366 10,625
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Third parties [e] 92,372 56,211 2,353 33,808
General Total [c] + [d] + [e] 296,324 183,234 12,001 101,089
It is specified that with regard to the groups the following have been provided: a) cash pledge for € 4 million (transaction closed in April 2006), in addition to pledge on 80% of the Frette shares and to personal security; b) transactions secured by mortgages for € 30.5 million in addition to personal security; d) transactions secured by mortgages for € 10 million, in addition to personal security; e) transactions secured by mortgages for € 19.3 million; the group contains various customers, not mutually associated, of which some are classified as performing.
5) Description of the existence, or absence, of any risks ensuing from the claw-back actions within the Fin.part bankruptcy with reference to the reductions in indebtedness and to the enforcement of guarantees implemented in the past.
It must first be stated that the lawyer Galeazzo Montella has informed us, on behalf of Mr. Canevelli, Trustee of the Fin.part Bankruptcy Proceeding, that the latter has been authorised by the Official Receiver to bring action, presumably, for restoration of alleged damages.
According to Montella the Bank is not only liable to claw-back actions, but also allegedly interfered “over the past years” in the management of the company that was then declared bankrupt, disbursing credit without authorisation and keeping it “alive”, despite the financial/economic unbalance.
Also on the basis of news which has appeared in the press, the alleged damage corresponding to the bankruptcy liabilities has been quantified as € 300 million.
Mr. Fumagalli and Mr. Costanza, the Bank’s legal counsel, replied to this letter challenging the assumptions of the Trustee and, at the same time, stating their willingness to discuss the matter.
The question of the unauthorised disbursement of credit has recently been dealt with - as readers will perhaps be aware – by the En banc Sessions of the Court of Cassation in the judgment filed on 28 March 2006. In said judgment the liability of the Bank, which was summoned by the Bankruptcy Proceeding, precisely for unauthorised disbursement of credit, has been put into perspective. The judgment is mentioned because it constitutes a useful precedent by which to oppose the initiatives which Bankruptcy Proceedings today tend to take against the reference
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banks of the bankrupt companies. Besides, in our case, from the documentation in the lawyers’ possession and previously submitted to the attention of the Proceedings within the scope of the allegations filed together with the petition for proving in bankruptcy, it emerges that the credit institution’s exposure remained constant from 2003 to 2005, without any enforcement of the securing guarantees, so that there has been no increase in the Fin.part’s debt position with B.P.I.
Turning now to the Bank’s alleged interference in company management, this claim has been used as a mere pretext by the Trustee’s legal counsel. The Bank has in fact never had any role that was related, be it directly or indirectly, to the administration/management activities of the bankrupt company, neither at the time during which G. Facchini was the Chairman of Fin.part, nor thereafter.
In this regard it is specified that, from a jurisprudential point of view, in order to prove the presence of a de facto director, there must be unfailing evidence of systematic and continuous interference in the managerial functions, which must amount to more than simple “execution of (…) acts of a sundry and occasional nature” (Cass. 14 September 1999, no. 9795). Likewise, the Court of Cassation – with reference to the correct interpretation of Article 2639 of the Italian Civil Code34 – affirmed that “the notion of de facto director (…) postulates the exercise in a continuous and significant manner of the powers which customarily pertain to the office or to the function” of directors (Cass. 21 May, no. 22413; Cass. 17 November 2004, no. 21759).
With reference to the “content” of the management function that is significant for the purposes of qualification of a given party as “de facto director”, legal theory states that said function must consist in the continuous and systematic exercise of all of the legal and material transactions instrumental to the pursuit of the corporate object (see RODORF, Art. 2380-bis Amministrazione delle società, in Codice commentato delle nuove società, Milan, 2004; NAZZICONE, Commento agli artt. 2380-2396, in Società per azioni – Amministrazione e controlli, Varese, 2003, page 11; similarly, see MINERVINI, Gli amministratori di società per azioni, Turin, 1956, page 216).
Legal theory also states that the management function not only consists of the so- called “internal administration”, which refers to the decisional activity required in making the choices which prove necessary to achievement of the corporate object, but also of the so-called “external administration”, that is, the activity of representing the company in order to acquaint third parties with the company’s purpose and the related legally ascribable effects (see FRANZONI, Gli
34 Pursuant to which “for offences envisaged under this heading (offences committed by directors) in addition to the subject formally vested with the title or performing the function as provided by civil law, other subjects may be treated as such where they perform the same function, though under a different title, or where they exercise in a continuous and significant manner the powers customarily associated with the office or with the function”.
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amministratori e i sindaci, Turin, 2002, page 119; similarly see TAMBORLINI, L’Amministrazione, in Impresa e società, edited by V. CUFFARO, 2005, page 448).
On the basis of the above, it appears evident that in the case at issue the Bank cannot be considered “de facto director” of Fin.part S.p.A. As the Bank did no more than provide the company with financing, it exercised no managerial power whatsoever, much less so in a continuous and systematic manner.
The extent of the sum stated by the Bankruptcy’s legal counsel appears devoid of any shred of factual reality and moreover said counsel motivated its reasoning with news appearing in the press. Hence the sum of € 300 million constitutes a value which lacks any capacity to provide an effective measure.
The allegations of the Bankruptcy’s legal counsel seem to echo the positions expressed by Mr. Gianluigi Facchini in his writ of summons served on the Bank in August 2005. The Bank has already replied to the allegations in its statement of defence upon joining proceedings (the first hearing will take place on 11 July 2006). For this reason the objections already raised against the conclusions forwarded by G. Facchini also apply with regard to the Trusteeship in Bankruptcy. Hence, as things stand we believe, and in this we are backed by the opinion of our legal counsel, that the Trusteeship in Bankruptcy merely caused a stir by sending the letter which in itself is of no real consequence and provides no fact upon which can be based the sum stated by the Trusteeship in its conclusions.
6) Specification of the performance of the regulatory aggregates at a recent date.
As already stated with regard to significant exposures, the prudential supervisory regulations provide for application of the Italian standards up until 30 June 2006, after which the relative reports will be made according to IAS/IFRS standards. Below we provide the figures for Group banks relating to the reports on the adequacy of individual capital ratios reminding that there is an obligation to maintain a positive weighted risk/regulatory capital ratio in excess of 7%.
Figures as at 31 March 2006 (€/thousands)
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Item Banca Popolare Banca Popolare Intra Private di Intra Monza e Brianza Bank Spa Spa Tier 1 Capital [a1] 258,508 44,736 14,591 Tier 2 Capital [a2] 127,652 0 0 REGULATORY CAPITAL[b]= [a1]+[a2] 386,160 44,736 14,591 Credit risk 237,647 19,075 312 Market risks 13,779 32 1,039 Other capital requirements 13,000 0 TOTAL CAPITAL REQUIREMENTS [c] 264,426 19,107 1,351 Risk weighted assets [d]= [c] / 0.07 3,777,514 272,957 19,300 Tier 1 Capital / Risk weighted assets / 6.8% 16.4% 75.6% (Tier 1 ratio) = [a] / [d] Regulatory capital / Risk weighted assets 10.2% 16.4% 75.6% /Total tier ratio) = [ b] / [d] -Æ>min 7%
Figures as at 31 December 2005 (€/thousands) Item Banca Popolare Banca Popolare Intra Private di Intra Monza e Brianza Bank Spa Spa Tier 1 Capital [a1] 258,508 44,736 14,591 Tier 2 Capital [a2] 87,861 0 0 REGULATORY CAPITAL[b]= [a1]+[a2] 346,369 44,736 14,591 Credit risk 237,003 19,832 585 Market risks 16,583 43 1,018 Other capital requirements 13,000 0 0 TOTAL CAPITAL REQUIREMENTS [c] 266,586 19,875 1,603 Risk weighted assets [d]= [c] / 0.07 3,808,371 283,929 22,900 Tier 1 Capital / Risk weighted assets / 6.8% 15.8% 63.7% (Tier 1 ratio) = [a] / [d] Regulatory capital / Risk weighted assets 9.1% 15.8% 63.7% /Total tier ratio) = [ b] / [d] -Æ>min 7%
Figures as at 30 September 2005 (€/thousands) Item Banca Popolare Banca Popolare Intra Private di Intra Monza e Brianza Bank Spa Spa Tier 1 Capital [a1] 297,574 45,282 13,385 Tier 2 Capital [a2] 87,899 0 0 REGULATORY CAPITAL[b]= [a1]+[a2] 385,473 45,282 13,385 Credit risk 234,234 18,458 440 Market risks 18,402 39 722 Other capital requirements 13,000 0 TOTAL CAPITAL REQUIREMENTS [c] 265,636 18,497 1,162 Risk weighted assets [d]= [c] / 0.07 3,794,800 264,2432 16,600 Tier 1 Capital / Risk weighted assets / 7.8% 17.1% 80.6% (Tier 1 ratio) = [a] / [d] Regulatory capital / Risk weighted assets 10.1% 17.1% 80.6% /Total tier ratio) = [ b] / [d]
558
-Æ>min 7% Attention is drawn to the fact that the improvement in the total tier ratio as at 31 March 2006 is due to the issue of the “Banca Popolare di Intra 2006/2016 non- convertible” subordinated loan for an amount equal to € 40 million. Bank of Italy authorised computation of said loan for regulatory capital purposes on 15 March 2006.
The same considerations expressed for the significant exposures also apply to the regulatory requirements at consolidated level. The December 2005 report was made in accordance with IAS/IFRS standards, while the previous report, relating to June 2005, was drawn up according to the Italian standards. Hence the two reports are not comparable. Legislation in force orders that banking groups observe a risk weighted/regulatory capital ratio which is equal to at least eight percent. As at 31 December 2005 our Group failed to achieve this limit.
Regulatory Ratios at Consolidated level (€/thousands) Item 31/12/2005 30/6/2005 Italian standards IAS/IFRS Tier 1 Capital [a1] 211,672 262,402 Tier 2 Capital [a2] 88,756 88,658 REGULATORY CAPITAL[b]= [a1]+[a2] 300,428 351,060 Credit risk 283,167 282,084 Market risks 18,424 20,131 Other capital requirements 13,000 13,000 TOTAL CAPITAL REQUIREMENTS [c] 314,591 315,215 Risk weighted assets [d]= [c] / 0.08 3,932,388 3,940,188 Tier 1 Capital / Risk weighted assets / (Tier 1 5.4% 6.7% ratio) = [a] / [d] Regulatory capital / Risk weighted assets 7.6% 8.9% /Total tier ratio) = [ b] / [d] -Æ>min 8%
The actions implemented in the early months of 2006, with the aforesaid € 40 million subordinated bond issue and the free capital increase that the extraordinary Shareholders’ Meeting of 29/30 April has been called to deliberate, are aimed at restoring said regulatory threshold which, if the other values remain unchanged, would be raised to 8.67%.
7) Specification of the principal assumptions and most significant targets set forth in the 2006/2008 business plan approved by the Board of Directors on 5 April 2006.
With regard to the last point of the CONSOB requests relating to the principal assumptions and financial targets contained in the Group Three-Year Strategic Plan approved by the Board of Directors on 5 April 2006, attached hereto is the
559
scheduled presentation of the plan’s strategic guidelines and targets that will be submitted to the Shareholders’ Meeting of 29-30 April.
560
RESOLUTIONS OF THE SHAREHOLDERS’ MEETING
561
The Ordinary and Extraordinary Shareholders’ Meeting of the Banca Popolare di Intra, held on 30 April 2006, chaired by Mr. Cesare Ponti, approved in ordinary session, the Financial Statements as at 31 December 2005, being aware of the Group 2005 Consolidated Financial Statements, which were subject to auditing by the company Reconta Ernst & Young S.p.A. The Ordinary Shareholders’ Meeting also approved the carrying forward the loss from financial year 2005 of €125,396,014 and, pursuant to art. 6 of Legislative Decree no. 38 of 28 February 2005, second paragraph, the creation of restricted reserves of € 4,440,939.54, drawing from the available reserves from gains recorded in the profit and loss account, net of the related taxes, which derive from the application of fair value criteria. Therefore, the Shareholders’ Meeting, resolved the following, in ordinary session: * the initiation of a stockholders’ suite against ex-Managing Director, Mr. Giovanni Brumana; * the confirmation of compensation to the Board of Statutory Auditors for the years 2006- 2007-2008 in the amount of 30,000.00 annually (5,000.00 Euro per year for the quarterly audits, and 25,000.00 per year for auditing the financial statements) to each Standing Auditor, and an increase of 50% for the Chairman of the Board of Statutory Auditors (therefore, a total of 45,000.00 Euro), without prejudice to adjustments which could be provided by law or professional tariffs, as well as the attendance fee, equal to 250.00 Euro for each meeting of the Board of Directors, the Executive Committee, the Loans Committee and the Commissions, and a fee of 250.00 Euro for each inspection of the branch offices and headquarters, plus reimbursement of any expenses; * to appoint, for the years 2006-2007-2008: ⇒ as Directors, Messrs. Francesco Amendola, Raffaele Bruni, Marco Fortis, Giuliano Marini, Ernesto Paolillo, Luigi Terzoli, Marco Umbertini, and Antonio Zacchera; ⇒ as Chairman of the Board of Statutory Auditors, Mr. Giovanni Camera; as Standing Auditors, Messrs. Roberto Bussi and Riccardo Petroni; as Alternate Auditors, Messrs. Antonio Prino and Gilberto Terziotti; ⇒ as Standing Arbitrator, Mr. Giuseppe Uglietti and as Alternate Arbitrator, Mr. Sergio Napoletano.
Within the Ordinary Shareholders’ Meeting, the strategic guidelines and objectives of the new Three-Year Plan 2006/2008 were illustrated. A presentation of the plan is available on the website www.bpintra.it.
The Extraordinary Shareholders’ Meeting approved the free share capital increase through the use of valuation reserves as per Law no. 266 of 23 December 2005 and Law no. 413 of 30 December 1991, the reserves as per art. 13 of Legislative Decree 124/93 and partial use of available reserves, by increasing the nominal value of ordinary shares from € 3.00 to € 3.40 for a total of € 19,385,758.80. The resulting amendment to article 5 of the Articles of Association was also resolved,
562
vesting the Board of Directors, and, on its behalf, the Chairman and Deputy Chairman, severally, the broadest powers to perform any act required to implement the aforementioned resolutions, as well as to fulfil all formalities required for the resolutions adopted to obtain legal approval, with the right to introduce any changes as could be required for said purposes, also upon subscription thereof, and in general any act required for the complete execution of said resolutions, with each and every power necessary for such purposes, with no exclusions or exceptions, including the right to register and publish the updated Articles of Association, in compliance with the law.
563
FINANCIAL STATEMENTS OF SUBSIDIARIES
564
BANCA POPOLARE DI MONZA E BRIANZA S.P.A.
BALANCE SHEET (in euro)
Assets at 31.12.2005 at 31.12.2004 10. Cash and cash equivalents 1,136,649 854,018
20. Financial assets held for trading 11,214,226 14,146,347
40. Financial assets available for sale 49,759 46,707
60 Due from banks 9,219,421 12,294,090
70. Loans to customers 286,439,135 269,208,281
80 Hedging derivatives 287,714 193,132
100 Shareholdings 224,824 224,824
110 Tangible assets 3,303,223 1,451,648
120 Intangible assets 3,409,998 3,394,123 of which: goodwill 3,355,200 3,355,200
130 Tax assets 4,203,267 1,637,290 a) current 2,717,508 1,392,903 b) prepaid 1,485,759 244,387
150 Other assets 2,100,639 1,137,016 321,588,855 304,587,476
565
Liabilities and shareholders’ equity at 31.12.2004 at 31.12.2004 10. Due to banks: 5,549,979 17,018,463
20. Due to customers 119,955,562 119,475,724 30. Outstanding securities 109,735,414 80,121,552
40. Financial trading liabilities 459,154 0
50. Financial liabilities at fair value 28,179,087 30,230,053
80. Tax liabilities 2,398,730 2,159,399 a) current 1,851,730 1,891,995 b) deferred 547,000 267,404 100. Other liabilities 6,324,989 4,536,727 110. Employee severance indemnity 399,467 336,818
120 Provisions for risks and charges: 488,217 360,035 a) pensions and similar obligations 0 0 b) other provisions 488,217 360,035
130. Valuation reserves (1,305) (4,357)
160. Reserves (985,278) 259,607
170. Share premiums 10,337,429 10,337,429
180. capital 37,418,339 37,418,339
200. Profit (loss) for the year (+/-) 1,329,071 2,337,687 321,588,855 304,587,476
566
INCOME STATEMENT (in euro) Items 31.12.2005 31.12.2004 10. Interest and similar income 15,233,632 16,644,049 20. Interest and similar expenses (4,987,337) (4,927,858) 30. Interest margin 10,246,295 11,716,191 40. Fee income 2,962,755 2,729,294 50. Fee expense (208,036) (319,635) 60. Net fees 2,754,719 2,409,659 70. Dividends and similar income 167 111 80. Net income from trading htf-cfv (13,741) 0 90. Net income from hedging activities (8,339) 0 100. Profit/loss from disposal or repurchase of: a) loans and receivables 0 0 b) financial assets available for sale 0 0 c) financial assets held to maturity 0 0 d) financial liabilities 0 0 110. Net income from financial assets/liabilities at fair value 6,845 0 120. Net interest and other banking income 12,985,946 14,125,961 130. Net value adjustments for deterioration of: a) loans and receivables (815,254) (2,087,748) b) financial assets available for sale c) financial assets held to maturity d) other financial transactions (5,892) (9,572) 140. Net income from financial management 12,164,800 12,028,641 150 Administrative expenses: (9,203,351) (7,858,167) a) personnel costs (4,971,996) (4,473,629) b) other administrative expenses (4,231,355) (3,384,538) 160. Net allocations to provisions for risks and charges (180,836) (348,600) 170. Net value adjustments to tangible assets (383,193) (287,477) 180. Net value adjustments to intangible assets (26,438) (15,766) 190. Other operating income/costs 614,388 439,457 200. Operating costs (9,179,430) (8,070,553) 240. Profit (loss) from the sale of investments 410 (11,408) 250. Profit (loss) from current operations before taxes 2,985,780 3,946,680 260. Income tax for the year for current operations (1,656,709) (1,608,993) 270. Profit (loss) from current operations after taxes 1,329,071 2,337,687 280. Profit (loss) from non-current assets being disposed, after taxes 290. Profit for the year 1,329,071 2,337,687
567
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Variations during the year
Allocation of previous year’s results
Transactions on shareholders’ equity
at
balances 31.12.2004 Variations Variations in reserves 31/12/2004 Stock capital Change in opening options Profit (Loss) Issue of Shareholders’ equity Shareholders’ Reserves Balances at 31.12.03 Balances at 31.12.03 Balances at 01.01.04 dividends and other and other Dividends allocations new shares instruments Purchase of of Purchase Variation in (FTA excluding IAS 39) excluding IAS (FTA Extraordinary distribution of of distribution Derivatives on Derivatives treasury shares treasury shares
Capital: a) Ordinary shares 37,418,339 37,418,339 37,418,339 b) other shares Share premiums 10,337,429 10,337,429 10,337,429
Reserves: 259,607 a) profits 131,326 131,326 156,287 287,613 b) others 567 (27,283) (26,716) 0 (1,290) (28,006)
Valuation reserves: (4,357) a) available for sale 0 0 b) cash flow hedges 0
c) other (to detail):
- property revaluations 0 (4,357) (4,357) (4,357) - securities and foreign 0 0 exchange transactions 0 0 - loans and receivables 0 0 - tangible assets 0 0 - intangible assets 0 0 - other
Capital instruments 0 Treasury shares 0 Profit (Loss) for the year 1,786,138 1,786,138 (156,287) (1,629,851) 2,337,687 2,337,687 Shareholders’ equity 49,673,799 49,642,159 (1,629,851) 0 2,337,687 50,348,705
568
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY Variations during the year
Allocation of previous year’s results
Transactions on shareholders’ equity
at
balances 31.12.2005 31.12.05 31.12.05 Variations Variations in reserves Stock capital Change in opening options Profit (Loss) Issue of Shareholders’ equity Shareholders’ Reserves Balances at 31.12.04 Balances at 31.12.04 Balances at 01.01.05 dividends and other and other Dividends allocations new shares instruments Purchase of of Purchase Variation in (FTA excluding IAS 39) excluding IAS (FTA Extraordinary distribution of of distribution Derivatives on Derivatives treasury shares treasury shares
Capital: a) Ordinary shares 37,418,339 37,418,339 37,418,339 b) other shares Share premiums 10,337,429 10,337,429 10,337,429
Reserves: (985,278) a) profits 287,613 287,613 545,637 833,250 b) others (28,006) (2,426,772) (2,454,778) 636,250 (1,818,528)
Valuation reserves: (1,305) a) available for sale 0 1,637 1,637 1,415 3,052 b) cash flow hedges
c) other (to detail):
- property revaluations (4,357) (4,357) (4,357) - securities and foreign 0 0 exchange transactions 0 0 - loans and receivables 0 0 - tangible assets 0 0 - intangible assets 0 0 - other
Capital instruments 0 Treasury shares 0 Profit (Loss) for the year 2,337,687 2,337,687 (1,181,887) (1,155,800) 1,329,071 1,329,071 Shareholders’ equity 50,348,705 47,923,570 0 (1,155,800) 1,415 1,329,071 48,098,256
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CASH FLOW STATEMENT DIRECT METHOD
OPERATING ACTIVITIES 31.12.2005 31/12/2004 Excluding IAS 39
1. Management 1,380,363 5,061,248 - interest income collected (+) 15,960,052 16,644,049 - interest expense paid (-) (4,763,133) (4,927,858) - dividends and similar income 167 111 - net fees (+/-) 2,839,484 2,409,659 - personnel costs (4,971,996) (4,473,629) - other costs (-) (3,726,590) (3,410,140) - other income (+) 723,863 428,049 - taxes and duties (-) (4,681,484) (1,608,993)
2. Cash flow generated by reduction in financial assets 3,144,622 12,077,329 - financial assets held for trading 2,610,677 10,103,975 - financial assets at fair value 0 0 - financial assets available for sale 0 0 - due from customers 0 0 - due from banks 533,945 1,973,354 - other assets 0 0
3. Cash flow used by increase in financial assets 18,198,194 2,237,505 - financial assets held for trading 0 0 - financial assets at fair value 0 0 - financial assets available for sale 3,052 0 - due from customers 17,837,779 1,872,890 - due from banks 0 - other assets 357,363 364,615
4. Cash flow generated by increase in financial liabilities 29,247,817 39,653,397 - due to banks 0 - due to customers 490,966 8,455,307 - outstanding securities 0 - financial trading liabilities 334,483 0 - financial liabilities at fair value 28,075,440 30,230,053 - other liabilities 346,928 968,037 5. Cash flow used by redemption/repurchase of financial liabilities 11,859,674 54,818,975 - due to banks 11,470,031 51,808,532 - due to customers 0 - outstanding securities 389,643 3,010,443 - financial trading liabilities 0 0 - financial liabilities at fair value 0 0 - other liabilities 0 0 Net cash flow generated/used by operations 3,714,934 (264,506) INVESTMENT ACTIVITIES 1. Cash flow generated 577 164,598 - sale of shareholdings 0 0 - dividends collected from shareholdings 0 0 - sale of financial assets held to maturity 0 0 - sale of tangible assets 577 164,598 - sale of intangible assets 0 0 - sale of subsidiaries and other lines of business 0 0 2. Cash flow used 2,277,080 24,478 - purchase of shareholdings 0 0
570
- purchase of financial assets held to maturity 0 0 - purchase of tangible assets 2,277,080 19,588 - purchase of intangible assets 0 4,890 - purchase of subsidiaries and other lines of business 0 0 Net cash flow generated/used by investment (2,276,503) 140,120 FUNDING - issue/purchase of treasury shares 0 0 - issue/purchase of capital instruments 0 0 - distribution of dividends and other purposes (1,155,800) 0 Net cash flow generated/used by funding (1,155,800) 0 NET CASH FLOW GENERATED/USED DURING THE YEAR 282,631 (124,386)
RECONCILIATION
Financial statement items
Cash and cash equivalents at the beginning of the year 854,018 978,404 Total net cash flow generated/used during the year 282,631 (124,386) Cash and cash equivalents Effects of changes in foreign exchange rates 0 0 Cash and cash equivalents at the end of the year 1,136,649 854,018
571
INTRA PRIVATE BANK SPA
BALANCE SHEET (in euro)
Assets 31.12.2005 31.12.2004 (excluding IAS 39) 20. Financial assets held for trading 56,615,360 41,084,348 40. Financial assets available for sale 1,065,749 1,197,146 60. Due from banks 15,704,299 25,912,136 70. Loans to customers 80,394 24,951 100. Shareholdings 0 0 110. Tangible assets 545,369 596,041 120. Intangible assets 1,989,360 2,188,209 of which: - goodwill 1,958,172 1,958,172 130. Tax assets 2,078,202 1,399,784 c) Current 1,044,402 1,015,784 d) Prepaid 1,033,800 384,000 150. Other assets 599,552 426,955
Total assets 78,678,284 72,830,200
572
Liabilities and shareholders’ equity 31.12.2005 31.12.2004 (excluding IAS 39) 10. Due to banks 2,576 33 20. Due to customers 56,954,073 54.434.109 80. Tax liabilities 1,770,485 1.049.063 a) current 1,734,815 1.010.063 b) deferred 35,670 39.000 100. Other liabilities 3,117,368 2.408.493 110. Employee severance indemnity 255,478 196.593 120. Provisions for risks and charges: 774,290 416.388 a) pensions and similar obligations 0 0 b) other provisions 774,290 416.388
130. Valuation reserves (132,028) (22.337)
160. Reserves (3,104,055) (4.378.130) 180. Capital 17,493,000 17.493.000
200. Profit (loss) for the year (+/-) 1,547,097 1.232.988 Total liabilities and shareholders’ equity 78,678,284 72,830,200
573
INCOME STATEMENT Items 31.12.2005 31.12.2004 (excluding IAS 39) 10. Interest and similar income 1,638,374 1,548,597 20. Interest and similar expenses (299,164) (166,469) 30. Interest margin 1,339,210 1,382,128 40. Fee income 16,723,420 13,828,999 50. Fee expense (9,324,483) (8,144,879) 60. Net fees 7,398,937 5,684,120 70. Dividends and similar income 535 889 80. Net income from trading htf-cfv (25,724) 343,135 b) financial assets available for sale -afs 0 1,354 120. Net interest and other banking income 8,712,958 7,411,626 150. Administrative expenses: (7,002,827) (6,202,669) a) personnel costs (3,176,537) (2,911,454) b) other administrative expenses (3,826,290) (3,291,215) 160. Net allocations to provisions for risks and charges (417,735) (80,449) 170. Net value adjustments to tangible assets (196,372) (198,849) 180. Net value adjustments to intangible assets (198,849) (183,928) 190. Other operating income/costs 1,684,061 304,241 200. Operating costs (6,131,722) (6,361,654) 240. Profit (loss) from the sale of investments 18,731 2,389 250. Profit (loss) from current operations before taxes 2,599,967 1,052,361 260. Income tax for the year for current operations (1,052,870) 180,627 270. Profit (loss) from current operations after taxes 1,547,097 871,734 290. Profit (loss) for the year 1,547,097 1,232,988
574
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY at 31.12.2004 Variations during the year
Allocation of previous year’s results
Transactions on shareholders’ equity
at
balances (IAS 39) 31.12.2004 Variations Variations in reserves Stock capital Change in opening options Profit (Loss) Issue of Shareholders’ equity Shareholders’ Reserves Balances at 31.12.03 Balances at 31.12.03 Balances at 01.01.04 dividends and other and other Dividends allocations new shares instruments Purchase of of Purchase Variation in (FTA excluding IAS 39) excluding IAS (FTA Extraordinary distribution of of distribution Derivatives on Derivatives treasury shares treasury shares
Capital: a) Ordinary shares 17,493,000 17,493,000 0 0 17,493,000 b) other shares 0 0 0 0
Share premiums 0 0 0 0
Reserves: a) profits (2,721,973) 0 (2,721,973) (1,656,157) 0 0 0 00 (4,378,130) b) others 0 22,337 (22,337) 0 0 0 0 (22,337)
Valuation reserves:
a) available for sale 0 0 0 0 0 b) cash flow hedges 0 0 0 0 0 c) other (to detail):
- securities and foreign 0 0 0 0 exchange transactions 0 0 0 0 - loans and receivables 0 0 0 0 - tangible assets 0 0 0 0 - intangible assets 0 0 0 0 - other
Capital instruments 0 0 0 0
Treasury shares 0 0 0 0 0 Profit (Loss) for the year (1,656,157) 0 (1,656,157) 1,656,157 0 1,232,988 1,232,988 Shareholders’ equity 1,311,870 13,092,533 0 0 0 0 0 0 0 0 1,232,988 14,325,520
575
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY at 31.12.05 Variations during the year
Allocation of previous year’s results
Transactions on shareholders’ equity
at
balances (IAS 39) 31.12.2005 Variations Variations in reserves Stock capital Change in opening options Profit (Loss) Issue of Shareholders’ equity Shareholders’ Reserves Balances at 31.12.04 Balances at 31.12.04 Balances at 01.01.05 dividends and other and other Dividends allocations new shares instruments Purchase of of Purchase Variation in (FTA excluding IAS 39) excluding IAS (FTA Extraordinary distribution of of distribution Derivatives on Derivatives treasury shares treasury shares
Capital: a) Ordinary shares 17,493,000 17,493,000 0 0 17,493,000 b) other shares 0 0 0 0
Share premiums 0 0 0 0
Reserves: a) profits (4,378,131) 0 (4,378,131) 601,149 0 0 0 00 (3,776,982) b) others (22,337) 63,425 41,088 631,839 0 0 0 (672,927)
Valuation reserves:
a) available for sale (132,028) 0 (227,115) (227,115) 95,087 b) cash flow hedges 0 0 0 0 0 c) other (to detail):
- securities and foreign 0 0 0 0 exchange transactions 0 0 0 0 - loans and receivables 0 0 0 0 - tangible assets 0 0 0 0 - intangible assets 0 0 0 0 - other
Capital instruments 0 0 0 0
Treasury shares 0 0 0 0 0 Profit (Loss) for the year 1,232,988 0 1,232,988 (1,232,988) 0 1,547,097 1,547,097 Shareholders’ equity 14,325,520 14,161,830 0 95,087 0 0 0 0 0 0 1,547,097 15,804,014
576
CASH FLOW STATEMENT DIRECT METHOD
OPERATING ACTIVITIES 31.12.2005
1. Cash flow generated by income management 2,613 2. Cash flow generated by reduction in financial assets 10,208 3. Cash flow used by increase in financial assets 15,753 4. Cash flow generated by increase in financial liabilities 3,077 5. Cash flow used by redemption/repurchase of financial liabilities 0 Net cash flow generated/used by operations 145 INVESTMENT ACTIVITIES 1. Cash flow generated 1 2. Cash flow used (146) Net cash flow generated/used by investments (145) FUNDING Net cash flow generated/used by funding 0 NET CASH FLOW GENERATED/USED DURING THE YEAR 0
RECONCILIATION
Financial statement items
Cash and cash equivalents at the beginning of the year 0 Total net cash flow generated/used during the year 0 Cash and cash equivalents Effects of changes in foreign exchange rates 0 Cash and cash equivalents at the end of the year 0
577
INTRAFID SRL BALANCE SHEET (in euro) ASSETS 2005 2004
B) Fixed assets I - Intangible fixed assets 2) development costs 1,500 3,291 Total 1,500 3,291 II - Tangible fixed assets 4) other assets - furniture 0 0 - electronic office machines 3,410 4,913 - automobiles 9,738 15,892 - furniture and equipment less than € 516.45 0 0 Total 13,148 20,805
Total Fixed Assets 14,648 24,096
C) Current assets II – Loans and receivables 1) due from customers - within the following year 219,342 139,176 5) due from others - within the following year 74 18,793 - beyond the following year 42 42 Total 219,458 158,011
III – Short-term investments 5) other securities 2,507 2,507 Total 2,507 2,507
IV – Cash and cash equivalents 1) bank deposits 75,344 106,284 2) cash on hand 1,594 429 Total 76,938 106,713
Total current assets 298,903 267,231
D) Accrued income and prepayments - accrued income 73 73 - prepayments 2,004 2,127
Total accrued income and prepayments 2,077 2,200
Total assets 315,628 293,527
MEMORANDUM ACCOUNTS 2005 2004 - Third party securities under fiduciary administration 181,703,410 201,941,575 - Third parties for sureties issued by us 115,000 115,000
578
- Sureties received from third parties 131,000 0 Total 181,949,410 202,056,575
579
LIABILITIES 2005 2004
A) Shareholders’ equity I - Capital 100,000 100,000 IV - Legal reserves 27,492 24,678 VII - Extraordinary reserves 51,246 51,246 VIII - Retained earnings (losses) 0 0 IX - Profit (loss) for the year (+/-) 69,111 56,286 Total 247,849 232,210
C) - Employee severance indemnity - Employee severance indemnity 10,161 7,040 Total 10,161 7,040
D) payables - within the following year
3) due to banks 0 0 6) due to suppliers 3,963 2,089 10) due to subsidiaries 0 0 11) income taxes payable 35,299 32,457 12) due to Social Security 12,694 12,221 13) other payables 5,662 7,510 Total 57,618 54,277
Total liabilities and shareholders’ equity 315,628 293,527
MEMORANDUM ACCOUNTS 2005 2004
- Third parties for securities and amounts under fiduciary 181,703,410 201,941,575 administration - Sureties granted to third parties 115,000 115,000 - Creditors for sureties received 131,000 0 Total 181,949,410 202,056,575
580
INCOME STATEMENT
(in euro) 2005 2004 A) Value of production 1) revenues from sales and services 462,756 444,991 5) other revenues and income 9,106 9,552 Total 471,862 454,543
B) Cost of production 6) raw materials, consumables and goods for resale (4,450 (4,209) 7) services (251,709 (257,654) 9) personnel costs (51,391) (44,642) 10) amortisation, depreciation and write-downs 0 a) amortisation of intangible assets (1,791) (1,791) a) depreciation of tangible assets (8,274) (8,073) d) bad debt 0 (1,167) 14) other operating costs (21,753) (23,678) Total (339,368) (341,214) c) financial income and charges 16) other financial income c) from securities 174 174 d) other income 3,422 2,533 17) interest and other financial charges d) other 0 (45) Total 3,596 2,662
E) Extraordinary income and charges 20) income: - extraordinary income 67 222 21) charges: 0 - extraordinary charges (1,986) (2,187) Total miscellaneous items (1,919) (1,965)
Pre-tax profit (loss) 134,171 114,026
22) Income taxes for the year (65,060) (57,740) 26) Profit for the year 69,111 56,286
581
MONZA E BRIANZA LEASING SPA
ASSETS 31.12.2005 31.12.2004
10. CASH AND CASH EQUIVALENTS 1,270 1,165
20. LOANS TO CREDIT INSTITUTIONS: 610,519 300,109 e) on demand 610,519 300,109
40. LOANS TO CUSTOMERS 6,452,289 4,729,604
90. INTANGIBLE FIXED ASSETS 182,314 275,948 of which: Goodwill 109,605 219,210
100. TANGIBLE FIXED ASSETS 57,920,132 42,116,299 of which: Assets for own use 78,236 194,367 Assets under financial lease 57,222,372 41,584,127 Assets for future financial lease 315,895 230,265 Assets not currently under financial lease 303,629 107,540
130. OTHER ASSETS 4,396,212 5,087,065
140. ACCRUED INCOME AND PREPAYMENTS: 517,769 419,429 a) Accrued income 12,168 66,602 b) Prepayments 505,601 352,827
TOTAL ASSETS 70,080,505 52,929,619
LIABILITIES 31.12.2005 31.12.2004
10. DUE TO CREDIT INSTITUTIONS: 61,212,823 46,676,211 a) on demand 40,678,679 20,964,812 b) on maturity or with notice 20,534,144 25,711,399
50. OTHER LIABILITIES 2,501,676 1,432,047
60. ACCRUED LIABILITIES AND DEFERRED INCOME: 4,342,588 3,176,134 a) Accrued liabilities 15,734 27,380 b) Deferred income 4,326,854 3,148,754
70. EMPLOYEE SEVERANCE INDEMNITY 141,697 118,906
80. PROVISIONS FOR RISKS AND CHARGES 83,829 28,878 b) tax provisions 83,829 22,689 c) other provisions 0 6,189
120. CAPITAL 2,066,000 2,066,000
140. RESERVES: 6,150 6,150 a) Legal reserves 312 312 b) other provisions 5,838 5,838
160. RETAINED EARNINGS (LOSS) (574,707) (520,567)
170. PROFIT (LOSS) FOR THE YEAR 300,449 (54,140)
TOTAL LIABILITIES 70,080,505 52,929,619
GUARANTEES AND COMMITMENTS 31.12.2005 31.12.2004
582
20 COMMITMENTS 2,471,142 1,711,083
COSTS 31.12.2005 31.12.2004
10. INTEREST AND SIMILAR EXPENSES 1,266,977 1,187,440
20. FEE EXPENSE 310,305 234,856
40. ADMINISTRATIVE EXPENSES: 1,016,300 841,524 (a) personnel costs 470,252 394,460 of which: Wages and salaries 339,499 279,350 Social security costs 99,075 86,633 Employee severance indemnity 23,177 20,223 Other expenses 8,501 8,254 (b) other administrative expenses 546,048 447,064
50. VALUE ADJUSTMENTS TO FIXED ASSETS 18,568,549 13,083,903 of which: Intangible assets for own use 155,734 140,627 Tangible assets for own use 132,397 34,988 Assets under financial lease 18,280,418 12,908,288
60. OTHER OPERATING CHARGES: 456,311 323,000 of which: Charges for management of assets under financial 267,097 168,774 lease Charges for surrenders of assets under financial lease 70,785 44,995 Other charges 118,429 109,231
70. PROVISIONS FOR RISKS AND CHARGES 0 6,189
110. EXTRAORDINARY COSTS 131 439
130. INCOME TAXES FOR THE YEAR 124,890 22,689
140. Profit for the year 300,449 0 TOTAL COSTS 22,043,912 15,700,040
583
REVENUE 31.12.2005 31.12.2004
10. INTEREST AND SIMILAR INCOME 71,258 56,978
30. FEE INCOME 203,728 176,510
40. PROFIT FROM FINANCIAL TRANSACTIONS 558 0
70. OTHER OPERATING INCOME: 21,572,314 15,401,607 of which: Instalment income for assets under financial lease 20,753,437 14,815,396 Income from management of assets under financial 391,410 291,035 lease Income from surrenders of assets under financial lease 113,212 76,633 Other income 314,255 218,543
80. EXTRAORDINARY INCOME 196,054 10,805
100. LOSS FOR THE YEAR 0 54,140
TOTAL REVENUES 22,043,912 15,700,040
584