Half-Yearly Financial Report at 30 June 2019

Contents

Composition of the Corporate Bodies 3

The first half of 2019 in brief Economic figures and performance indicators 4 Equity figures and performance indicators 5

Accounting statements Balance Sheet 7 Income Statement 9 Statement of comprehensive income 10 Statements of Changes in Shareholders' Equity 11 Statement of Cash Flows 13

Report on Operations Macroeconomic situation 16 Economic results 18 Financial aggregates 22 Business 31 Operating structure 37 Significant events after the end of the half and business outlook 39 Other information 39

Notes to the Financial Statements Part A – Accounting policies 41 Part B – Information on the balance sheet 78 Part C – Information on the income statement 121 Part D – Comprehensive Income 140 Part E – Information on risks and relative hedging policies 143 Part F – Information on capital 155 Part H – Transactions with related parties 166 Part L – Segment reporting 173 Certification of the condensed Half-Yearly Financial Statements pursuant to Article 81-ter of 175 CONSOB Regulation 11971 of 14 May 1999, as amended

Composition of the Corporate Bodies

Board of Directors

Chairperson Massimiliano Cesare Chief Executive Officer Bernardo Mattarella Director Pasquale Ambrogio Director Leonarda Sansone Director Gabriella Forte

Board of Statutory Auditors Chairperson Paolo Palombelli Regular Auditor Carlo Ferocino Regular Auditor Marcella Galvani Alternate Auditor Roberto Micolitti Alternate Auditor Sofia Paternostro

* * *

Auditing Firm PricewaterhouseCoopers S.p.A.

Financial Reporting Manager Elena De Gennaro

The first half of 2019 in brief

Economic figures and performance indicators

Change Reclassified income statement (millions of euro) Amount %

13.4 Net interest income -4.0 -23 17.4 15.7 of which: interest income -4.0 -20 19.7 -2.3 of which: interest expense -2.3 0.0 0

27.0 -2.1 -7 Net fees and commissions 29.1

40.3 Net banking and insurance income Titolo asse46.9 -6.6 -14

19.0 -5.3 -22 Operating profit/(loss) 24.3

11 Net operating profit/(loss) 15.1 -4.1 -27

9.9 -5.8 -37 Gross profit from continuing operations 15.7

7.7 Profit for the period -3.5 -31 11.2

Profitability indicators (%)

52.8 Cost/Income (net of expense 48.2 recoveries) 5.8 Annualised net operating income/average shareholders’ equity 9.1 (ROE) 33.2 Net interest income/Net banking and insurance 37.1 income 67.0 Net fees and commissions/Net banking and insurance 62.1 income 0.6 Annualised net income/Total 1.8 assets

Number of employees

Employees 310 300

30/06/2019 Equity30/06/2018 figures and performance indicators

Change Balance sheet data (millions of euro) Amount %

1,466.9 Due from customers 36.0 3 1,430.9

1,408.6 of which: performing 40.9 3 1,367.7

87.9 Due from banks 25.6 41 62.3

2,060.9 Total deposits 75.3 4 1,985.6

272.6 Shareholders’ equity (excluding profit for the period) 27.4 11 245.2

Capital ratios (%)

22.17 Tier 1 capital/risk weighted assets (Tier 1 capital ratio) 19.62

Risk indicators (%)

0.8 Bad loans/Loans to customers 0.7

Classified loans/Loans to customers 4.0 4.4

30/06/2019 30/06/2018

Ratings

Moody’s S&P Global Ratings

Long-term deposit Baa3 Long-term Issuer Rating BBB-

Short-term deposit P-3 Short-term Issuer Rating A-3

Outlook Stable Outlook Negative

Issuer Rating Ba1

Accounting statements

BALANCE SHEET - ASSETS

Assets 30/06/2019 31/12/2018 10. Cash and cash equivalents 930,561 25,018,540 20. Financial assets measured at fair value through profit and loss 969 969 a) financial assets held for trading; b) financial assets designated at fair value; c) other financial assets mandatorily measured at fair value 969 969 30. Financial assets measured at fair value through other comprehensive income 758,736,495 715,751,445 40. Financial assets measured at amortised cost 1,554,791,456 1,493,237,182 a) due from banks 87,933,714 62,357,866 b) due from customers 1,466,857,742 1,430,879,316 50. Hedging derivatives 87,132,809 82,649,638 60. Value adjustments of financial assets with macro-hedging (+/-) 70. Equity investments 600,000 600,000 80. Property, plant and equipment 18,947,008 625,565 90. Intangible assets 1,896,658 1,997,729 - goodwill 100. Tax assets 11,849,026 20,277,305 a) current 793,435 5,424,640 b) deferred 11,055,591 14,852,665 110. Non-current assets and disposal groups held for sale 120. Other assets 21,027,849 10,292,557 Total assets 2,455,912,831 2,350,450,930

BALANCE SHEET - LIABILITIES

Liabilities and shareholders' equity 30/06/2019 31/12/2018 10. Financial liabilities measured at amortised cost 2,060,937,166 1,985,601,291 a) due to banks 804,448,013 892,752,597 b) due to customers 1,102,568,290 796,149,883 c) securities issued 153,920,863 296,698,811 20. Financial liabilities held for trading 30. Financial liabilities designated at fair value 40. Hedging derivatives 50. Value adjustments of financial liabilities with macro-hedging (+/-) 84,064,131 73,788,761 60. Tax liabilities 183,929 107,822 a) current b) deferred 183,929 107,822 70. Liabilities associated with assets held for sale 80. Other liabilities 19,812,719 15,851,849 90. Employee severance benefits 3,180,535 3,162,656 100. Provisions for risks and charges: 7,469,812 6,556,576 a) commitments and guarantees given 1,736,004 581,369 b) pensions and similar obligations 3,469,693 3,287,261 c) other provisions for risks and charges 2,264,115 2,687,946 110. Valuation reserves (3,341,813) (10,517,063) of which relative to discontinued operations 120. Redeemable shares 130. Equity instruments 140. Reserves 71,390,348 51,189,025 Interim dividends 150. Share premium reserve 160. Share capital 204,508,690 204,508,690 170. Treasury shares (-) 180. Profit (Loss) for the period (+/-) 7,707,314 20,201,323 Total liabilities and shareholders’ equity 2,455,912,831 2,350,450,930

Income Statement

INCOME STATEMENT

Item 30/06/2019 30/06/2018 10. Interest and similar income 20,805,869 26,975,002 of which interest income calculated using the effective interest method 20. Interest and similar expense (7,392,387) (9,594,645) 30. Net interest income 13,413,482 17,380,357 40. Fee and commission income 27,227,557 29,326,570 50. Fee and commission expense (179,079) (207,629) 60. Net fee and commission income 27,048,478 29,118,941 70. Dividend and similar income 80. Net gains/(losses) on trading activities 90. Net gains/(losses) on hedging activities 1,195 4,150 100. Gains/(losses) on disposal or repurchase of: 499,612 a) financial assets measured at amortised cost 499,612 b) financial assets measured at fair value through other comprehensive income c) financial liabilities Net gains/(losses) of other financial assets and liabilities measured at fair value through profit 110. (92) and loss a) financial assets and liabilities designated at fair value b) other financial assets mandatorily measured at fair value (92) 120. Net banking and insurance income 40,463,063 47,003,060 130. Net value adjustments for credit risk: (7,956,922) (9,214,271) a) financial assets measured at amortised cost (7,932,366) (9,221,303) b) financial assets measured at fair value through other comprehensive income (24,556) 7,032 140. Gains/losses from contractual changes without derecognition (84,658) 150. Net gains/(losses) on financial operations 32,421,483 37,788,789 160. Administrative expenses: (20,646,726) (22,614,397) a) personnel expenses (12,937,138) (13,249,186) b) other administrative expenses (7,709,588) (9,365,211) 170. Net provisions for risks and charges (1,078,640) 643,437 a) commitments and guarantees given (1,154,635) 294,731 b) net other provisions 75,995 348,706 180. Net value adjustments on property, plant and equipment (913,887) (143,624) 190. Net value adjustments on intangible assets (474,809) (271,166) 200. Other operating income/expenses 644,799 329,777 210. Operating expenses (22,469,263) (22,055,973) 220. Gains(losses) from equity investments Net gains/(losses) from fair value measurement of intangible assets and property, plant and 230. equipment 240. Specific value adjustments on goodwill 250. Gains/(losses) on disposal of investments 12,000 260. Profit (Loss) from continuing operations before tax 9,952,220 15,744,816 270. Income taxes for the period on continuing operations (2,244,906) (4,523,952) 280. Profit (Loss) from continuing operations after tax 7,707,314 11,220,864 290. Profit (Loss) from discontinued operations after tax 300. Profit (Loss) for the year 7,707,314 11,220,864

Statement of comprehensive income

STATEMENT OF COMPREHENSIVE INCOME

Item 30/06/2019 30/06/2018 10. 10. Profit (Loss) for the year 7,707,314 11,220,864 Other income components after tax without reversal to income statement: 20. Equity securities at fair value through other comprehensive income Financial liabilities designated at fair value through profit and loss (changes in own credit 30. standing) 40. Hedging of equity securities at fair value through other comprehensive income 50. Property, plant and equipment 60. Intangible assets 70. Defined-benefit plans (294,614) 67,195 80. Non-current assets and disposal groups held for sale 90. Portion of reserves from valuation of equity investments carried at equity Other income components after tax with reversal to income statement: 100. Hedging of foreign investments 110. Exchange differences 120. Cash flow hedges 130. Hedging instruments (non-designated elements) Financial assets (other than equity securities) measured at fair value through other 140. 7,469,864 (10,570,289) comprehensive income 150. Non-current assets and disposal groups held for sale 160. Portion of reserves from valuation of equity investments carried at equity 170. Total other income components after tax 7,175,250 (10,503,094) 180. Comprehensive income (Item 10 +170) 14,882,564 717,770

SHAREHOLDERS' EQUITY 30.06.2019

Statement of changes in shareholders' equity at 30.06.2019

Allocation of previous Shareholders’ Changes during the period year’s results equity at

- -

Stock

equity equity equity equity equity equity

Issue of

’ ’ ’ ’ ’ ’ -

Changes

Purchase

- -

options

balance

Reserves

30/06/2019

allocations

new shares

Extraordinary

transactions transactions

year year to 30.06.2019

of of treasury shares

Changes in opening transactions

Dividends and other

Changes in reserves

Shareholders Shareholders Shareholders Shareholders Shareholders Shareholders

in equityin instruments

Balance at 31.12.2018 Balance at 01.01.2019

transactions

transactions Derivatives treasury on

Comprehensive income

transactions

distribution of dividends

Share capital 204,508,690 204,508,690 204,508,690 a) ordinary shares 204,508,690 204,508,690 204,508,690 b) other shares Share premium reserve Reserves 51,189,025 51,189,025 20,201,323 71,390,348 a) of profits 51,189,025 51,189,025 20,201,323 71,390,348 b) other Valuation reserves (10,517,063) (10,517,063) 7,175,250 (3,341,813) Equity instruments Own shares Profit (Loss) for the year 20,201,323 20,201,323 (20,201,323) 7,707,314 7,707,314 Shareholders’ equity 265,381,975 265,381,975 14,882,564 280,264,539

SHAREHOLDERS' EQUITY 30.06.2018

Statement of changes in shareholders' equity at 30.06.2018

Allocation of previous Shareholders’ Changes during the period year’s results equity at

- -

Stock

equity equity equity equity equity equity

Issue of

’ ’ ’ ’ ’ ’ -

Changes

Purchase

- -

options

balance

Reserves

30/06/2018

allocations

new shares

Extraordinary

transactions transactions

period period 30.06.2018

of of treasury shares

Changes in opening transactions

Dividends and other

Changes in reserves

Shareholders Shareholders Shareholders Shareholders Shareholders Shareholders

in equityin instruments

Balance at 31.12.2017 Balance at 01.01.2018

transactions

transactions Derivatives treasury on

Comprehensive income

transactions

distribution of dividends

Share capital 204,508,690 204,508,690 204,508,690 a) ordinary shares 204,508,690 204,508,690 204,508,690 b) other shares Share premium reserve Reserves 36,330,245 (5,494,449) 30,835,796 20,353,228 51,189,024 a) of profits 36,330,245 (5,494,449) 30,835,796 20,353,228 51,189,024 b) other Valuation reserves (5,611,236) 387,206 (5,224,030) (10,503,094) (15,727,124) Equity instruments Own shares Profit (Loss) for the period/year 20,353,228 20,353,228 (20,353,228) 11,220,864 11,220,864 Shareholders’ equity 255,580,927 (5,107,243) 250,473,684 717,770 251,191,454

STATEMENT OF CASH FLOWS Indirect Method

Amount

30/06/2019 30/06/2018

A. A. OPERATING ACTIVITIES 1. 1. Operations 20,784,599 17,589,877 - result for the period (+/-) 7,707,314 11,220,864 - capital gains/(losses) on hedging activities (-/+) (1,195) (4,149) - net value adjustments for credit risk (+/-) 8,041,580 9,214,271 - net value adjustments of PPE and intangible assets (+/-) 1,388,695 414,790 - net provisions for risks and charges and other costs/revenues (+/-) 1,116,384 (598,139) - taxes, duties and tax credits not paid (+/-) 2,244,906 4,523,952 - other adjustments (+/-) 286,915 (7,181,712) 2. Cash generated/used by financial assets (114,246,631) 120,488,192 - financial assets measured at fair value through other comprehensive income (31,849,603) 9,220,634 - financial assets measured at amortised cost (69,903,926) 104,186,100 - other assets (12,493,102) 7,081,458 3. Cash generated/used by financial liabilities 69,787,458 (137,085,307) - financial liabilities measured at amortised cost 75,385,001 35,396,855 - other liabilities (5,597,543) (172,482,162) Net cash generated/used by operating activities (23,674,574) 992,762 B. INVESTING ACTIVITIES 1. Cash generated by 12,000 - sales of property, plant and equipment 12,000 2. Cash used by (413,405) (304,228) - purchases of property, plant and equipment (39,667) (17,983) - purchases of intangible assets (373,738) (286,245) Net cash generated/used by investment activities (413,405) (292,228) C. FUNDING ACTIVITIES Net cash generated/used by funding activities NET CASH GENERATED/USED IN THE PERIOD (24,087,979) 700,534

Key: (+) provided (-) used

RECONCILIATION

Amount

Accounting item 30/06/2019 30/06/2018 Cash and cash equivalents at start of period 25,018,540 75,592 Total net cash generated/used in the period (24,087,979) 700,534 Cash and cash equivalents: effect of currency fluctuation Cash and cash equivalents at end of period 930,561 773,126

Report on Operations

Macroeconomic situation

Despite the slight improvement during the first quarter of the year, in Italy, economic activity has stagnated, suffering above all from the lack of energy in the industrial cycle. Some signs of improvement emerged during the second quarter, albeit small, mainly coming from abroad, due to assurances from central bankers ready to fight against indications of a recession. These small positive signals should be further triggered by the expansive measures being implemented: the Quota 100 for retirement and citizen’s basic income are the two key provisions in the 2019 Budget Law which entered into force and, as of April, beneficiaries have been able to take advantage of them. In the meantime, the spread between the ten-year BTP and the Bund has increased by almost 150 basis points, while debt relative to GDP increased by 1.3 percentage points. Hence, this situation confirms the structural fragility of our economy, which has suffered in the same way as, but to a greater extent than, other European countries:  the negative impacts of the slowdown in global trade, given its exposure to countries with greater problems (e.g. Turkey);  the integration of the automobile and mechanical industries in general with Germany, with which Italy has shared the problems associated with new regulations for diesel engine emissions. Therefore, it is crucial to proceed with greater care, not only for an orderly development of the global cycle, but also to prudentially manage budget policies and relationships with European authorities. A fundamental step will be taken in September when the updates to the DEF and the subsequent 2020 Budget Law are made definitive. In terms of monetary policy, the measures announced by the ECB to guarantee liquidity for the banking system (TLTROIII) and the further reduction in the coverage rate for deposits support expectations about the economic cycle holding on and favour financing for the economy, limiting the risk of increased constraints on the supply side. In a projection printed in the Bank of Italy Economic Bulletin published in July, GDP growth is expected to be equal to 0.1% in 2019 and just under 1% on average in the subsequent two-year period.

In terms of companies, as indicated in the Prometeia July 2019 Outlook Report, investments net of construction fell by 1.1%. Investments in means of transport also saw decreases, as did investments in plant and machinery. 16

On the other hand, the trend for construction investments was more favourable, showing an increase for residential and other types of construction. Against investments, the request for loans was concentrated in the sector with maturities of less than one year, while those of other durations decreased. Mainly in the construction sector, companies appear to be making use of internal types of financing, while net bond issues have stopped for the most part, while liquidity held with banks has increased.

Economic results

Net profit at 30 June 2019 amounted to 7.7 million (11.2 million at 30 June 2018) showing a decrease in net banking and insurance income, due to a lower contribution from interest income from customers and fee-subsidised activities, partially compensated by actions taken to improve efficiency relative to operating expenses and by writebacks of 5 million for the loan portfolio, mitigating the additional 13 million in writedowns recognised for impaired stock, in line with the approach already adopted for the 2018 financial statements, guaranteeing a coverage rate for non-performing loans that is more than consistent with the average system figure.

Change RECLASSIFIED INCOME STATEMENT 30/06/2019 30/06/2018 Amount %

figures in €/millions Net interest income 13.4 17.4 -4.0 -23%

of which: Interest income 15.7 19.7 -4.0 -20%

of which: Interest expense (2.3) (2.3) 0.0 0%

Net fees and commissions 27.0 29.1 -2.1 -7%

Net result of financial transactions and other income (0.1) 0.4 -0.5 -129%

NET BANKING AND INSURANCE INCOME 40.3 46.9 -6.6 -14%

Personnel expenses (12.9) (13.3) 0.4 -2%

Other administrative expenses (7.7) (9.4) 1.7 -18%

Expense recoveries 1.7 1.0 0.7 78%

Net value adjustments of PPE, intangible assets and third-party assets (2.4) (0.9) -1.5 153%

OPERATING EXPENSES (21.3) (22.6) 1.3 -6%

OPERATING PROFIT/(LOSS) 19.0 24.3 -5.3 -22%

Net adjustments for credit risk on financial assets (8.0) (9.2) 1.2 -13%

NET OPERATING PROFIT/(LOSS) 11.0 15.1 -4.1 -27%

Provisions for risks and charges, charges for transactions (1.1) 0.6 -1.7 -268%

GROSS PROFIT ON CONTINUING OPERATIONS 9.9 15.7 -5.8 -37%

Income taxes for the period (2.2) (4.5) 2.3 -50%

PROFIT FOR THE PERIOD 7.7 11.2 -3.5 -31%

Change NET BANKING AND INSURANCE INCOME 30/06/2019 30/06/2018 Amount % figures in €/millions Net interest income 13.4 17.4 -4.0 -23% of which: Interest income 15.7 19.7 -4.0 -20% of which: Interest expense (2.3) (2.3) 0.0 0% Net fees and commissions 27.0 29.1 -2.1 -7% Net result of financial transactions and other income (0.1) 0.4 -0.5 -129%

Total 40.3 46.9 -6.6 -14%

More specifically, net banking and insurance income of 40.3 million (-14% compared with the first half of 2018) reflects:  the lower contribution from net interest income (-23%), attributable to the continuing spreads contraction and the decrease in the portfolio; loan stock at 30 June 2019 amounted to 1,466.9 million (1,534.7 million at 30.6.2018), due to natural amortisation effects and to subrogations/early repayments (of over 190 million);  the decrease in net fees and commissions (-7%) due to a slowdown in transactions associated with the National Guarantee Fund (-7%), after the reform decree entered into force as of 15 March 2019. In the first half, the number of requests received fell by 7.6%, while requests granted fell by 7.5% with respect to the first half of 2018; loans disbursed by the banking system, guaranteed by the Fund, amounted to 9,610.7 million (-1.6% with respect to the first half of 2018), of which 2,794.2 million to businesses in southern Italy (-1.5% compared with the first half of 2018).

Change OPERATING EXPENSES 30/06/2019 30/06/2018 Amount % figures in €/millions Personnel expenses (12.9) (13.3) 0.4 -2% Other administrative expenses (7.7) (9.4) 1.7 -18% Expense recoveries 1.7 1.0 0.7 78% Net value adjustments of PPE, intangible assets and third-party assets (2.4) (0.9) -1.5 153%

Total (21.3) (22.6) 1.3 -6%

Operating expenses amounted to 21.3 million (22.6 million at 30/6/2018), down by 6% due to the combined effect of:

 personnel expenses of 12.9 million, down slightly (13.3 million at 30/6/2018), while staff increased (310 employees at 30/6/2019 vs. 300 employees at 30 June 2018 - see Operating structure);  other administrative expenses of 7.7 million (9.4 million at 30/6/2018), due to renegotiation of servicing contracts and outsourcing fees, and the elimination of the component relative to leasing fees (office and representation buildings, vehicles) in the amount of around 0.9 million following the introduction of the new standard IFRS 16 as of 1 January 2019 which requires the recognition of a Right of use asset among the balance sheet assets, subject to periodic amortisation/depreciation, and the recognition of the corresponding payable relative to discounted contractual leasing fees, with the relative recognition of interest payable for the period;  net value adjustments of PPE, intangible assets and third-party assets of 2.4 million, up due to the recognition of amortisation/depreciation for the aforementioned Rights of Use for 0.8 million and greater investments in software, both proprietary and non, which began use during the half, above all, relative to functions added to the digital channel to develop credit business and to adjust the Guarantee Fund platform.

Change NET GAINS/(LOSSES) 30/06/2019 30/06/2018 Amount % figures in €/millions OPERATING PROFIT/(LOSS) 19.0 24.3 -5.3 -22%

Net adjustments for credit risk on financial assets (8.0) (9.2) 1.2 -13%

NET OPERATING PROFIT/(LOSS) 11.0 15.1 -4.1 -27%

Provisions for risks and charges, charges for transactions (1.1) 0.6 -1.7 -268%

GROSS PROFIT ON CONTINUING OPERATIONS 9.9 15.7 -5.8 -37%

Income taxes for the period (2.2) (4.5) 2.3 -50%

PROFIT FOR THE PERIOD 7.7 11.2 -3.5 -31%

Net value adjustments for credit risk on financial assets, of 8.0 million (9.2 million at 30.6.2018), included adjustments on financial receivables for 7.9 million and adjustments on trade receivables for 0.1 million. During the period, writebacks on financial receivables were recognised for 5.1 million (of which 4.1 million in writebacks on performing positions, due to repaid positions transferred from stage 2 to stage 1 and from stage 2 to impaired positions; 0.2 million in writebacks from collected amounts; and 0.8 million in writebacks on impaired loans) and adjustments for 13.0 million, of which 12.1 million relative to impaired positions.

Net provisions for risks and charges included adjustments for commitments to disburse for a total of 1.2 million. The item includes amounts released for 0.1 million for previous allocations for operating risks.

Taxes of 2.2 million (compared to 4.5 million at 30 June 2018) reflected a tax rate of 22.6% due to the tax program known as “Patent Box”, the benefits of which were reduced when the ACE (Aiuto alla Crescità Economica - Economic Growth Aid) subsidy ceased as of 1 January 2019.

Financial aggregates

Change BALANCE SHEET - ASSETS 30/06/2019 31/12/2018 Amount % figures in €/millions Cash and cash equivalents 0.9 25.0 -24.1 -96% Financial assets measured at fair value through other comprehensive income 758.7 715.8 42.9 6% Financial assets measured at amortised cost 1,554.8 1,493.2 61.6 4% Due from banks 87.9 62.3 25.6 41% Due from customers 1,466.9 1,430.9 36.0 3% Hedging derivatives 87.1 82.6 4.5 5% Equity investments 0.6 0.6 0.0 0% Property, plant and equipment and intangible assets 20.9 2.6 18.3 695% Tax assets 11.9 20.3 -8.4 -42% Other assets 21.0 10.4 10.6 103%

TOTAL ASSETS 2,455.9 2,350.5 105.4 4%

Financial assets at fair value through other comprehensive income

Financial assets at fair value through other comprehensive income, totalling 758.7 million (715.8 million at 31 December 2018), consisted of investments in Italy government securities.

Financial assets measured at amortised cost

Gross value Total value adjustments Net Stage Stage one Stage two Stage three Stage one Stage two Value three Due from banks 87,348 (62) 87,287 Other due from banks 650 (3) 647 Due from customers: 20,595 (24) 20,571 Securities Due from customers 1,182,154 89,292 140,105 (5,852) (4,021) (81,798) 1,319,880 Due from PA customers 94,252 (2,496) 91,755 Other due from customers 319 (251) 69 Postal current accounts 18,401 (14) 18,387 Due from RMBS 16,115 16,115 Security deposits 80 80 Total item A40 1,419,914 89,292 140,105 (8,701) (4,021) (81,798) 1,554,791

Due from banks

Amounts due from banks amounted to 87.9 million, compared to 62.3 million at 31 December 2018. The item consists of liquidity held in bank current accounts totalling around 78.6 million (56.3 million at 31 December 2018), obligatory reserves of around 8.7 million (5.5 million at 31 December 2018) and other receivables totalling 0.6 million (0.7 million at 31 December 2018).

Due from customers

This item, of 1,466.9 million (1,430.9 million at 31 December 2018) consists of:

 loans to customers totalling 1,319.9 million (1,336.2 million at 31.12.2018), consisting of gross loans for 1,411.6 million, of which 1,271.4 million performing, stage 1 and 2 (1,421.8 million at 31.12.2018) and adjustment provisions for 91.7 million, of which 81.8 million relative to impaired loans and 9.9 to performing loans (85.6 million at 31.12.2018). Impaired loans (with a gross value of 140.1 million and adjustment provisions of 81.8 million) of 58.3 million (against 63.2 million at 31.12.2018), accounting for 4.4% of total financial receivables (against 4.7% at 31.12.2018). The impact of the item "due from customers" relative to the total on a net basis is 4.0% (from 4.4% at 31 December 2018). In particular, loans classified as Bad loans totalled 11.2 million (0.8% of the portfolio), with a coverage rate of 68.4%. Unlikely to pay totalled 47.0 million (3.2% of loans to customers), with a coverage rate of 55.0%. At 30 June 2019 past-due exposures came to 0.1 million;

 two bond issues in the sub-form of basket bonds subscribed during the half and recognised at 20.5 million, of which one equal to 20 million with SACE guarantees in the context of synergies with ELITE (EBB Export), and the other of 0.5 million in cooperation with the Region of Sardinia to support the agricultural/food sector;  net trade receivables due from public administrations for management of subsidised funds of 91.8 million (against 66.6 million at 31 December 2018), due to fees accruing during the half;

 current accounts open with Poste Italiane of 18.4 million (5.6 million at 31 December 2018);  receivables claimed from the vehicle company MCC RMBS srl of 16.1 million (22.4 million at 31 December 2018), for collections recorded by the same during the first half of 2019 as part of the securitisation transaction involving the Bank’s mortgage loan portfolio, completed pursuant to Italian Law 130/99. The item amounts due to customers includes security deposits and other net receivables for 0.1 million.

Other asset items

The item “hedging derivatives” at 30 June 2019 was equal to 87.1 million, and showed the fair value of derivatives established to hedge against interest rate risk relative to bond issues.

Equity investments amount to 0.6 million and derive from the subscription of 558,140 shares of the Istituto della Enciclopedia Italiana fondata da Giovanni Treccani, equal to 0.89% of the Institute's share capital.

Property, plant and equipment and intangible assets amount to 20.9 million (2.6 million at 31 December 2018) and include 1.9 million for investments in software, 0.6 million for PPE relative to furniture, fixtures and hardware functional to the Bank’s operations and 18.4 million for Rights of use relative to leases of properties and vehicles recognised in accordance with standard IFRS 16.

Tax assets equal to 11.9 million (20.3 million at 31 December 2018) for 0.8 million refer to current taxes against credits due from the tax authority and IRAP advances paid and, for 11.1 million refer to deferred tax assets (of which 7.3 million for adjustments on loans, 2.5 million for allocations to provisions for risks and charges, 1.2 million for negative fair value changes recognised in the securities valuation reserves and 0.1 million for other items).

Other assets totalled 21.0 million (10.4 million at 31.12.2018), increasing due to the effect of items in transit of 8 million with regards to direct debit orders made by customers and due to the recognition within this item, based on tax consolidation, of net IRES receivables due to the parent company (2.7 million). The other figures included in the

item at 30 June 2019 are costs incurred on third-party assets (3.3 million), tax receivables (3.7 million), prepaid expenses (1.3 million), receivables due from the parent company (0.5 million) and other receivables to be invoiced and other items (1.5 million).

LIABILITIES

Change BALANCE SHEET - LIABILITIES 30/06/2019 31/12/2018 Amount % figures in €/millions Financial liabilities measured at amortised cost 2,060.9 1,985.6 75.3 4% Due to banks 804.4 892.8 -88.4 -10% Due to customers 1,102.6 796.1 306.5 38% Securities issued 153.9 296.7 -142.8 -48% Value adjustments of financial liabilities with macro-hedging 84.1 73.8 10.3 14% Tax liabilities 0.2 0.1 0.1 71% Other liabilities 19.8 15.8 4.0 25% Employee severance benefits 3.2 3.2 0.0 1% Provisions for risks and charges 7.5 6.6 0.9 14% Reserves 68.0 40.7 27.3 67% Share capital 204.5 204.5 0.0 0% Profit for the period 7.7 20.2 -12.5 -62%

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY 2,455.9 2,350.5 105.4 4%

Deposits, consisting of financial liabilities and measured at amortised cost, amounted to 2,060.9 million (1,985.6 million at 31 December 2018).

Amounts due to banks at 804.4 million, compared to 892.8 million at 31 December 2018 can be broken down as follows:

Change DUE TO BANKS 30/06/2019 31/12/2018 Amount % figures in €/millions Open market transactions with ECB 321.2 396.8 (75.6) -19% Deposits guaranteeing hedging derivatives 89.6 87.3 2.3 3% Time deposits and interbank loans from Italian banks 0.0 180.0 (180.0) -100% Repurchase agreements 343.8 199.0 144.8 73% EIB Funds 46.5 25.0 21.5 86% Other items (amounts to be returned for pool operations) 3.3 4.6 (1.3) -28%

Total 804.4 892.8 (88.4) -10%

The breakdown of the item “amounts due to banks” indicates the reduction in the use of ECB refinancing operations and time deposits with banks against an increase in repurchase agreements.

Amounts due to customers at 1,102.6 million, compared to 796.1 million at 31 December 2018, can be broken down as follows:

Change DUE TO CUSTOMERS 30/06/2019 31/12/2018 Amount % figures in €/millions CDP funding 74.2 59.6 14.6 24% PA current accounts 218.8 115.5 103.3 89% Customer current accounts 245.7 275.4 (29.7) -11% Invitalia current accounts 0.2 0.4 (0.2) -52% Time deposits from corporate customers 373.1 184.3 188.8 102% Invitalia time deposits 162.0 150.0 12.0 8% Financial payables for Rights of use 18.4 0.0 18.4 n.s. Other items (including amounts to be returned) 10.1 10.9 (0.8) -7%

Total 1,102.6 796.1 306.5 38%

The item “amounts due to customers” increased by around 306 million during the period, mainly due to greater time deposits made by corporate customers, of around 189 million, and by public administration current accounts opened to manage liquidity for certain subsidised instruments, for around 103 million. At 30 June 2019, amounts due to customers included time deposits from companies in the Invitalia Group of around 162 million. Finally, the item includes financial payables for Rights of use of around 18 million, recognised in accordance with standard IFRS 16.

The item “securities issued”, of 153.9 million (296.7 million at 31 December 2018), consists of a bond loan listed on the MOT. The decrease derives from the repayment of a bond issue in February 2019, in accordance with the natural maturity.

Value adjustments of financial liabilities with macro-hedging

The value adjustment of financial liabilities subject to macro hedging was 84.1 million, compared to 73.8 million at 31 December 2018.

Tax liabilities

Tax liabilities, equal to 0.2 million (0.1 million at 31 December 2018), refer to deferred taxes recognised as contra-entries in shareholders’ equity, as they relate to taxes on valuation reserves, as well as actuarial gains on employees’ severance indemnities.

Other liabilities

Other liabilities of 19.8 million (15.8 million at 31 December 2018) consisted of 6.3 million in operating payables due to suppliers, 7 million of payables due to public administrations, 3.2 million of payables to employees and social security institutions, 1.3 million in tax payables, 0.3 million of payables due to the parent company Invitalia , 1 million in security deposits and 0.7 million in other items.

Equity

Shareholders’ equity at 30 June 2019 was made up of the share capital - represented by 40,901,738 ordinary shares with a face value of € 5 each, for a total amount of 204.5 million, the legal reserve and other reserves for a total amount of 71.4 million, valuation reserves, negative for 3.3 million and the profit for the period amounting to 7.7 million.

Shareholders’ equity at 30 June 2019 including profit for the period amounts to 280.3 million (See the Notes - Part B - Section 12).

The Bank holds no shares of its own either directly or through trust companies or intermediaries.

At 30 June 2019 own funds, determined on the basis of the current rules issued by the Bank of Italy, were 279.2 million (242.9 million at 31 December 2018) capable of guaranteeing a level of capitalisation for the Bank more than sufficient with respect to expected risks and the target level of capitalisation, outlined in the Risk Appetite Framework (RAF) (see the Notes, Part E).

The capital absorptions and thus the capital requirements are determined on the basis of the following approaches:

 Credit Risk: Standardised Approach;

 Counterparty Risk: Standardised Approach applied to exposures calculated with the Current Value Method;

 Operational Risk: Basic Approach;

 Credit Valuation Adjustment Risk: Standardised Approach.

In the absence of a trading book, no absorption is calculated for market risk.

The overall total of risk-weighted assets (credit, counterparty, market and operational risks) amounted to 1,259.5 million compared to 1,238.2 million at 31 December 2018.

The CET1, Tier1 and Total Capital Ratios are 22.17%.

Total prudential requirements, calculated with the Basel III approaches, amount to 100.8 million. 29

CET1, Tier1 and Total Capital ratios are all in line with both the Bank of Italy indications relative to SREP (see the Notes, Part F: 2.2 Capital Adequacy) and the RAF issued by the Board of Directors (15.5%).

With reference to the RAF (Risk Appetite Framework) the risk targets identified by the Bank for 2019 are presented below:

Area Ratio Appetite TCR ≥ 15.5% Capital adequacy Leverage ratio ≥ 6%

Asset quality Net NPL Ratio ≤ 6%

Operating efficiency Cost/Income ≤ 55%

Profitability ROE ≥ 6%

∆ Economic Val. Banking Book /Own Funds ≤ 10% Banking Book interest rate ∆ Net interest income ≤ 5.5€/mln

Operating (LCR) ≥ 140% Liquidity Structural (Stable Funding/Illiquid assets) ≥ 100%

Asset encumbrance Tied assets/Total Assets ≤ 55%

Business

During the first half of 2019, the Bank, in line with its Business Plan:

 combined public financial instruments supporting the productive system with loans to SMEs through secured and unsecured medium/long-term loans for investments, internationalisation and current assets, as well as through factoring and advances;  worked with the Invitalia Group, the main credit organisations (banks and loan consortia), institutional entities (MED, MIUR, EIB, CDP, Regions and local entities), trade associations from the business/professional sector and with professional organisations, to support financial needs and offer SMEs access to credit;  offered consulting services for investments and restructuring financial transactions, mainly to SMEs;  reviewed its business model to meet the varying requirements of the its two types of target business customers, to which the following are dedicated:  a network of professionals working on "significant" transactions;  a portal to manage transactions with SMEs. Specifically, the "Easy SME" web portal uses B2C logic to allow companies to independently make requests for financing of up to € 500,000 and uses B2B logic to serve as interface supporting commercial cooperation with partners;  enhanced its portfolio of offers, which includes:  Credit products managed through the Portal:  Chiro Fast (Fast Unsecured): simple, fast and effective variable rate loan with the National Fund guarantee and a term: o from 18 to 60 months for inventories and other financial needs; o from 18 to 84 months for investments in property, plant and equipment and in intangible assets;  Chiro PMI (Usecured SME): variable rate loan supported by the National Fund guarantee, with a term: o from 18 to 60 months for inventories and other financial needs; o from 18 to 84 months for investments in property, plant and equipment and in intangible assets;  Chiro Nuove Imprese (New Business Unsecured): loan supported by the National Fund guarantee, for small and medium enterprises with a maximum

of two financial statements filed and/or for innovative start-ups, to support the start of business and initial growth stages, with a term: o from 18 to 60 months for inventories and other financial needs (in the case of innovative start-ups or when supported by Confidi guarantees); o from 18 to 84 months for investments in property, plant and equipment and in intangible assets;  Credit products for large companies:  Medium/long-term loans: unsecured or secured loans with excellent flexibility to satisfy even highly structured requirements: o from 18 to 60 months for inventories and other financial needs; o from 18 to 84 months for investments in property, plant and equipment and in intangible assets;  Factoring: financing for trade receivables in several technical forms: o With recourse; o Without recourse; o Reverse;  Subsidy advance: Unsecured loan for businesses benefiting from subsidy measures. Allows a company to more efficiently make use of sums needed for investment, without waiting for the subsidies to be disbursed  Unsecured loans: loans dedicated to SMEs, large companies and midcaps, available: o on demand: up to 18 months for commercial commitments; o with set maturity: short or medium/long-term; The maturity can be undetermined if the guaranteed counterparty is a public entity;  Advances on invoices: loan which provides an advance on trade payables, prior to their effective availability and maturity, which the company has due from debtors.

Essentially, viewed structurally, the Bank's operations, downstream from implementations completed and in progress, involve:

2 Direct Indirect

• Local specialists for • Institutional the corporate sector partners • Digital SME platform • Commercial partners 5

Channels

Banks 16 5 SMEs

Confidi 14 • Semi-automatic processing of unsecured loan requests up to 42 € 200k MCC Authorised Financial 2 • Incoming unsecured loan requests Credit from € 200k to € 500k portal partners Operations 5 Intermediaries

Associations/Oth 5 er

Products

• Medium/long-term loans (unsecured and secured) • Factoring with/without recourse/reverse/export • Advances and complementary subsidies • Unsecured loans

In the Subsidies area:

 the SME Guarantee Fund (hereinafter the “Fund”), slowed during the first half of the year, due to the Reform Decree taking effect as of 15 March 2019; 63,277 applications were received, down by -7.6% compared to 2018, while the transactions admitted to guarantee by the Fund were 62,304 (-7.5% compared to 2018), for a volume of loans of approximately € 9.6 billion (-1.6% compared to 2018) and a guaranteed amount of € 6.8 billion (-1.6% compared to 2018). In terms of transactions during the first half of 2019, worthy of note was the admission of 5 loan portfolios to Fund guarantee, for an amount of 530 million in additional loans which can be activated in favour of businesses. During the half, resources totalling 304 million were deposited relative to the Fund, of which:

 300 million relative to resources of the Development and Cohesion Fund based on the CIPE Resolution of 22 December 2017, pursuant to Article 1, paragraph 53, second sentence in Italian Law 147 of 27 December 2013;  2.8 million relative to resources in the National Operational Program “Companies and Competitiveness” FESR 2014-2020, pursuant to the Italian Ministry of Economic Development Decree, in concert with the Italian Ministry of Economy and Finance of 13 March 2017, published in Official Journal 92 of 20 April 2017;  1.3 million for resources for the 2014-2020 Emilia-Romagna FESR Regional Operating Programme, following the establishment of the relative Special Section, pursuant to the agreement signed between the Italian Ministry of Economic Development, the Italian Ministry of the Economy and Finance and the Emilia-Romagna Region on 11 February 2019. Among the most significant events with regards to the Fund:  the exemption of micro-credit transactions from the limitation on direct Fund guarantees in the Marche Region, in accordance with the Italian Unified Conference resolution 136 of 13 December 2018;  publication of the operating provisions, which entered into force as of 15 March 2019, pursuant to the Italian Ministry of Economic Development Decree, after hearing from the Italian Ministry of Economy and Finance of 12 February 2019, regarding approval of the conditions for admission and general provisions relation to the "New methods of evaluating businesses" and the Ministry of Economic Development Decree of 12 February 2019 regarding approval of admissions conditions and general provisions for financial transactions with tripartite risk;  the start of operations for the "Special Section, Calabria Region", following the deposit of 1.3 million relative to resources for the FESR Regional Operating Programme 2014-2020 for Calabria;  the start of operations for the "Special Section, Emilia-Romagna Region", following the deposit of 1.3 million relative to resources for the FESR Regional Operating Programme 2014-2020 for Emilia-Romagna;  the update of methods used for the Special Section, Sicily Region, as of when the Fund Reform Decree entered into force, increasing ordinary coverage measures up to 80% with direct guarantees and up to 90% with reinsurance and counter-guarantees, as well as extending it to transactions with tripartite risk;

 the update of methods used for the Special Section, Friuli Venezia Giulia Region, as of when the Fund Reform Decree entered into force, increasing ordinary coverage measures up to 80% with direct guarantees, reinsurance and counter guarantees;  the update of methods used for the Special Section, Veneto Region, as of when the Fund Reform Decree took effect, increasing ordinary coverage measures up to 70% with direct guarantees and up to 90% with reinsurance and counter guarantees; Finally, during the first half of 2019, pursuant to article 1 of Law 147 of 27 December 2013, published in Official Journal 302 of 27 December 2013, aimed at supporting growth and strengthening the capital solidity of loan consortia, resources totalling 32.2 million were deposited relative to the Fund, in favour of 30 loan consortia.

 the Sustainable Growth Fund (SGF), managed on the account of the Italian Ministry of Economic Development as the head of a temporary consortia of 8 banks and the National Council for Research, which supports R&D investments and provides cofinancing with PON I&C 2014/2020 resources. On 22 January, a first-come-first-served tender was begun for the presentation of research and innovation projects in the Agrifood and Intelligent Factory sectors, issued by the Italian Ministry of Economic Development through Ministerial Decree 5/3/2018 (implementation decree of 20 November 2018), with initial resources of around 167 million. As of the date the tender was issued, a total of 349 projects had been presented, of which 139 in the Agrifood sector and 210 in the Intelligent Factory sector. The resources provided were not sufficient to allow all the demands presented on the day the tender was opened to be met. Consequently, the initial resources were increased by around 244.7 million through the Italian Ministerial Decree of 5 June 2019, reaching around 411.7 million. Assessment of projects on the basis of the list approved by the Italian Ministry of Economic Development on 7 March 2019 is currently under way. The presentation and assessment of project proposals relative to the tenders for Innovation Agreements for research and development projects continued during the first half of 2019 (Italian Ministerial Decrees 24/5/2017 and 5/3/2018); in particular for the thematic tender for Agrifood, Intelligent Factory and Life Science, pursuant to Ministerial Decree 5/3/2018. The initial financial resources of around 395.7 million 35

were increased by 150 million through Italian Ministerial Decree of 12 February 2019, reaching 545.7 million, in order to ensure greater coverage of the 151 project proposals presented, for total subsidies of around 830 million requested. Additionally, assessment and decrees regarding projects presented for various tenders previously issued by the Administration starting in 2014 continued: Digital Agenda and Sustainable Industry (FRI), Horizon 2020 PON, Innovation Agreements and Framework Agreements, Large Projects PON. During the period, award decrees were issued for 36 projects, for investments totalling 367.7 million and subsidies granted of 203.5 million. Disbursement for the Horizon 2020, Digital Agenda and Sustainable Industry, Horizon 2020 PON, Large Projects PON, Framework Agreements, Digital Agenda and Sustainable Industry (FRI) and the Euro Trans Bio tenders involved 281 projects, for a total of 115.4 million. On 15 January 2019, a call for tender was issued for the Arranger Service in favour of Campania Development, to provide financial services, with the goal of structuring a Minibond issue by SMEs operating in Campania, supported by public guarantees in the form of cash collateral, as a basket bond, subscribed by a special purpose vehicle in turn financed through the issuing of ABS notes subscribed by institutional investors. The Bank, as part of a temporary consortia with FISG S.r.l., participated in this procedure and on 19/6/2019 was definitively awarded the tender.

Operating structure

Human Resources

The Bank had 310 employees at 30 June 2019: 14 executives1, 172 middle managers2 and 124 non-managerial staff. Additionally, there are 8 new graduates working as interns. During the first half of 2019, 33 new employees were hired, of which 1 executive (previously seconded by the parent company), 9 middle managers and 23 non- managerial staff. 5 employees left (1 executive, 1 middle manager and 3 non-managerial staff).

Organisational solutions and operating projects implemented

During the first half, implementation activities defined in the Business Plan continued. In particular, with reference to credit offerings:  prescreening instruments used to support assessments of loan requests presented by SMEs were further refined in the credit portal through a direct digital channel (in B2B mode) which verifies the feasibility of an operation in real time on the basis of information obtained from public databases and gives initial feedback to the entrepreneur in real time with regards to the result of the request, including new features which improve the customer’s user experience;  ad hoc criteria were defined to assess start-ups;  models used to define and apply pricing for loans were updated;  processes used to assess companies with legality ratings were updated to reflect pricing benefits;  credit granting processes were updated, with specific pathways to assess financing requests:

1 Of which an executive seconded by the parent company.

2 Of which a manager seconded by the parent company.

o Tranched Cover, carried out synergistically with Banca Monte dei Paschi di Siena, reserved for companies operating in integrated logistics with operating headquarters in southern Italy; o supported by the "InnoVFin SME Guarantee” provided by the European Investment Fund; o presented by companies with a legality rating, also adjusting the pricing benefits recognised in these cases;  revised the operating model to develop factoring. The Bank also reviewed the criteria and process for conventions with distribution networks and for signing commercial partnerships. As regards projects for the Subsidies department, the main work regarded:

 adjusting the Guarantee Fund platform, in line with the new operating provisions introduced following the reform of the SME Guarantee Fund, which included, in addition to extending operations for the Ratings model, significant integration of the platform with external databases (Infocamere, Revenue Agency, Central Credit Register, Credit Bureau) to ensure checks on admissability for the Fund are automated and rapid.  extending investigation functions supporting the liquidation of losses relative to the SME Guarantee Fund;  enriching functions available on the Sustainable Growth Fund (FCS) application platform to manage innovation agreements signed with the Ministry of Economic Development, regions and beneficiary businesses;  extension of functions for compliant conservation of digital documentation relative to all Guarantee Fund processes.

Significant events after the end of the half and business outlook

No significant events occurred after the end of the half. The Bank, as outlined in the 2019 budget, is intent on developing its business during the year in course, with regards to the principle that support to the economy of the South takes prevalence in business development, consolidating its role as a level II bank, through the necessary revision of its commercial and operational models. On 19 July, the first Euro Medium Term Note (EMTN) programme was signed in London and listed on the Luxembourg Stock Market, through which the Bank can issue, in upcoming financial years, senior preferred, senior non preferred and subordinate instruments aimed at institutional investors to finance projects for an amount of up to € 1 billion, in compliance with the requirements dictated in the Social Bond Principles.

Other information

Information on Risks

This Half-Yearly Financial Statement mainly discusses aspects relative to the Bank's management performance and performance indicators.

All the other information required can be found in the Notes to the Financial Statements.

In particular, the information on risks and uncertainties is given in the Notes to the Financial Statements, specifically in part A where the going concern information is provided; risks and uncertainties linked to the use of estimates are considered in part B (Section 10.6 Provisions for Risks and Charges); and part E illustrates in detail the information on financial and operational risks.

The Notes to the Financial Statements also give information on relations with the Parent Company and the Group companies, in part H, Transactions with related parties.

Notes to the Financial Statements

Part A – Accounting policies

A1. General information Introduction This condensed Half-Yearly Financial Report (hereafter also "Half-Yearly Report" or "Interim Report") refers to the half year ending on 30 June 2019. It consists of the Balance Sheet, Income Statement, the Statement of Comprehensive Income, Statement of Changes in Shareholders' Equity, the Statement of Cash Flows and the related Notes. In support of the comments on the results of the period, the Report on Operations presents and illustrates the reclassified Income Statement and Balance Sheet. The financial statement schedules have been prepared in euro, while the Notes are in thousands of euro. The condensed Half-Yearly Financial Report includes the half year accounting schedules submitted to limited review by PricewaterhouseCoopers S.p.A., only for the purposes of determining the result for the period to be included in the Common Equity Tier 1 at 30 June 2019, as envisaged in Regulation (EU) 575/2013 relative to prudential requirements for credit institutions.

1. PRESENTATION OF THE HALF-YEARLY FINANCIAL REPORT, METHODOLOGIES AND ACCOUNTING STANDARDS APPLIED

1.1 COMPLIANCE WITH THE IAS/IFRS

This Half-Yearly Financial Report has been drawn up according to the IAS/IFRS accounting standards issued by the International Accounting Standards Board (IASB) and the related interpretations of the International Financial Reporting Interpretations Committee (IFRIC) and endorsed by the European Commission, as provided for in European Union Regulation no. 1606 of 19 July 2002 up to the date of approval of the Draft Half-Yearly Financial Report by the Board of Directors (1 August 2019). Additionally, the Half-Yearly Financial Report was prepared on the basis of the instructions for preparing Financial Statements issued by the Bank of Italy exercising the powers established by Art. 9 of Italian Legislative Decree no. 38/2005, with the Provision of 22 December 2005, through which Circular no. 262/05 was issued, and subsequent updates. These instructions mandatorily establish the format of the

Financial Statements and the related preparation methods, as well as the content of the Notes to the Financial Statements.

2. BASIS OF PREPARATION

This Half-Yearly Report was prepared in compliance with IAS 34 - Interim Financial Reporting and with Article 154-ter (paragraph 3) of the Consolidated Law on Finance (TUF). Applying the option granted by the cited standard, the informational content contained in this Financial Report is limited compared to that of the complete annual financial statements (pursuant to IAS 1 - Presentation of Financial Statements), given that the aim is to provide an update on the business, events and circumstances occurred during the reference half — if deemed relevant — in addition to the minimum additional information expressly required in the same standard, omitting, therefore, information, data and notes already presented and commented upon in the Financial Statements of Mediocredito Centrale at 31 December 2018, to which the reader is referred for a more complete understanding of the information provided in this document. The significance of the information provided below has been assessed, based on that established in IAS 34, with the aim to ensuring the understandability of equity, financial and economic changes determined during the course of the first half of 2019. The accounting standards and recognition, measurement and classification criteria adopted in this Half-Yearly Financial Report are consistent with those used to prepared the Financial Statements at 31 December 2018, with the exception of those regarding the recognition of leasing contracts, modified after the adoption of the new accounting standard IFRS 16 - Leasing.

3. SUBSEQUENT EVENTS

Subsequent to the reporting date no events occurred that would lead to adjustments in the Bank’s economic results, equity and financial situation.

4. OTHER ASPECTS

Use of estimates

Preparation of the Half-Yearly Financial Report generally requires greater use of estimates and assumptions which may have influenced the values recognised in the Balance Sheet and Income Statement, as well as information relative to contingent

assets and liabilities, when compared to that required for the annual financial statements. Estimates and the relative hypotheses are based on the use of available management data and subjective assessments based on historic experience. By their nature, the estimates and assumptions used may change from period to period and, therefore, it is possible that in subsequent years the values shown in the Half- Yearly Financial Report may differ, even significantly, as a result of a change in the subjective evaluations used. The main cases which require the use of subjective valuations in these Financial Statements are listed below:  quantification of provisions for risks and charges (determined on the estimate of the outgoings necessary to fulfil the obligations for which it is considered probable that resources will have to be used);  quantification of employees’ severance indemnity provisions, of the company pension fund and of the other employee benefits (determined on the estimate of the present value of the obligations referred to the probable outgoings which are discounted considering financial aspects — interest rates — estimated trend of remuneration, turnover rates and demographic data);  tax assets (the recognition of items related to tax assets is based on the assessment that in coming years the Bank will produce taxable income of amounts such as to have the reasonable certainty that the future taxes to be paid on the said income will enable full absorption of the deferred tax assets);  use of assessment models to determinate the fair value related to financial instruments not quoted on active markets. It follows, therefore, that risk assessment is mainly linked both to the evolution of the national and international socio-economic context, and to the performance of the financial markets, which can have consequences on the trend in bank rates, price fluctuations, actuarial bases and, more in general, counterparties’ creditworthiness.

The transition to international accounting standard IFRS 16

Regulatory provisions The new accounting standard IFRS 16, issued by the IASB in January 2016 and endorsed by the European Commission through Regulation 1986/2017, as of 1 January 2019, replaced IAS 17 Leasing, IFRIC 4 Determining Whether an Arrangement Contains a Lease, SIC 15 Operating Leases - Incentives and SIC 27 Evaluating the Substance of Transactions in the Legal Form of a Lease, and establishes requirements for recognising leasing contracts. The new standard requires determination of whether a contract is or contains a lease, based on the concept of control over the use of an identified asset for a given period of time. It follows that rental, leasing or free rent contracts also fall within the scope of the new rules. In light of the above, significant changes were introduced in terms of recognising leasing transactions in the financial statements of the lessee/user, involving the introduction of a single accounting model, based on the Right of use. More specifically, the main change consists in overcoming the distinction between operating and financial leases according to IAS 17: all leasing contracts must be recognised in the same manner, as an asset and as a liability. The accounting model involves recognition of the Right of use relative to the leased asset in the Balance Sheet Assets, while the payables due for the leasing fees yet to be paid are recognised in the Liabilities. The method of recognising components in the income statement has also changed. While under IAS 17 leasing fees were recognised under Administrative Expenses, under IAS 16, charges relative to amortisation/depreciation of the Right of use and interest expense on the payable are recognised under the relevant items. On the other hand, outside of greater disclosure requirements, there are no substantial changes with regards to leasing accounting for the lessor, as the distinction between operating and financial leases continues. As of 1 January 2019, the effects on the financial statement with regards to the application of IFRS 16 for the lessee - assuming profitability and final cash flows are the same - involve an increase in the assets recorded in the financial statements (leased assets) an increase in the liabilities (payable with regards to the leased asset), a decrease in administrative expenses (leasing fees) and a simultaneous increase in financial expense (payment of the recognised payable) and amortisation/depreciation (relative to Rights of use). With reference to the income statement, considering the entire duration of the contracts the economic impact does not change over the total horizon of the lease, whether applying the previous IAS 17 or the new IFRS 16, but the division occurs differently over the time period.

During 2018, together with the Group to which it belongs, the Bank began a specific project to implement IFRS 16 - Leasing in order to investigate and determine the associated qualitative and quantitative impacts. In terms of procedure, the IT outsourcer provided a specific application module to determine values under IFRS 16.

Scope of contracts - lessee The Standard applies to all types of contracts which contain a lease, that is contracts which give the lessee the right to control usage of an identified asset for a given period of time (period of use) in exchange for a fee. The logic of the Standard is that "control" over an asset requires the asset be identified, for example if explicitly specified within the contract, or implicitly specified at the moment it becomes available for use by the customer. An asset is not identified if the supplier has the substantial right to replace it or if the supplier is essentially able to substitute the asset with an alternative asset throughout the period of use and receives economic benefits from making use of this right. Once it has been established that an identified asset underlies the contract, it must be determined whether the entity has the right to control it, as it simultaneously has both the right to obtain substantially all economic benefits deriving from use of the asset and the right to decide on the use of the identified asset. For the Bank, analysis of the contracts falling under the scope of the standard involved those in the following categories: (i) real estate, (ii) vehicles. Real estate leasing contracts represented the most significant area of impact in that these contracts represent 99.7% of the value of Rights of use. In general, real estate leasing contracts have terms exceeding 12 months and generally include renewal and termination options which can be exercised by either the lessor or lessee based on the rules of the law or specific contractual provisions. G7enerally, these contracts do not include a purchase option at the end of the lease or significant restoration costs for the Bank. Contracts regarding other types of leasing relate to vehicles. These are long-term leasing contracts for the company fleet, made available to certain employees. They have a multi-year term, without renewal options. These contracts generally do not include an option to purchase the asset.

The Bank's choices The Bank decided to carry out First-Time Adoption (FTA) of IFRS 16 using the modified retrospective approach, which offers the option to recognise the cumulative effects of applying 47

the Standard as of the date of FTA and not to restate comparative amounts in the financial statements where IFRS 16 is applied for the first time. Therefore, amounts from accounting schedules relative to financial year 2019 will not be comparable with reference to the amounts for Rights of use and corresponding leasing payables. At first-time application, the Bank adopted some of the practical expedients provided under the standard in paragraph C10 and subsequent. More specifically, contracts with remaining terms of 12 months or less were excluded ("short-term contracts"). Also, when applied in its entirety, the Bank has decided not to apply the new standard to contracts with a total term of 12 months or less or to low value contracts, that is contracts where the value of the underlying asset, when new, is € 5,000 or less.

Contractual term The term of a lease is determined by the non-annullable period during which the Bank has the Right to use the underlying asset, also considering: (i) periods covered by options to extend the lease, if the lessee is reasonably certain to exercise the option; and (ii) periods covered by options to terminate the lease, if the lessee is reasonably certain it will not exercise this option.

Discount rate With regards to the discount rate, on the basis of IFRS 16 requirements, the Bank uses the marginal loan rate, that is the rate that would be applied to disburse a loan with a similar duration and guarantees.

The effects of first-time application (FTA) of IFRS 16 The adjustment of the opening financial statements following application of IFRS 16 using a modified retrospective approach led to an increase in assets, following the recognition of new Rights of use totalling € 12,024 thousand, and an increase in financial liabilities (payable due to the lessor) of the same amount. Therefore, first-time application of the standard did not give rise to impacts on shareholders' equity since, given the choice to adopt the modified approach (option B), asset and liability values coincide at first time application. IFRS 16 provides a practical expedient for first time application which allows the Bank to not redetermine the scope of application, but instead apply the standard solely to leasing contracts identified on the basis of the requirements of IAS 17 and IFRS 4 (paragraph C3a of IFRS 16). 48

More specifically, at FTA, the Bank used the practical expedient in paragraph C3 referenced above. For all operating leases classified as such under IAS 17, it recognised liabilities determined as future discounted fees as well as Rights of use in the same amount (known as modified B).

Below are the financial statement items affected by the change to the opening balances.

Assets 31.12.2018 Impact of 01.01.2019 IFRS 16

80. Property, plant and equipment 625,565 12,023,911 12,649,476 Total assets 2,350,450,930 12,023,911 2,362,474,841

Liabilities and shareholders' equity 31.12.2018 Impact of 01.01.2019 IFRS 16

10. Financial liabilities measured at 1,985,601,291 12,023,911 1,997,625,202 amortised cost

Total liabilities and shareholders’ equity 2,350,450,930 12,023,911 2,362,474,841

A.2 FINANCIAL STATEMENT ITEMS 1. Financial assets measured at fair value through profit and loss (FVTPL) This category includes financial assets other than those classified among financial assets measured at fair value through other comprehensive income and among financial assets measured at amortised cost. In particular, the item includes: - financial assets held for trading, essentially represented by debt and equity securities and the positive value of derivative contracts held for trading purposes; - financial assets which must be measured at fair value, represented by financial assets which do not meet the requirements for measurement at amortised cost or fair value through other comprehensive income. These are financial assets for which contractual terms do not involve solely payments of principal and interest (meaning the SPPI test is not passed), or which are not held within the scope of a business model whose objective is to hold an asset in order to collect contractual cash flows (Hold to Collect business model) or whose objective is achieved both through the collection of contractual cash flows and through the sale of financial assets (Hold to Collect and Sell business model);

- financial assets designated at fair value, that is financial assets measured in this way at the time of initial recognition and when the requirements are met. In relation to this type, an entity may irrevocably designate a financial asset as measured at fair value through profit and loss at the time of initial recognition if, and only if, by doing so a measurement inconsistency is eliminated or significantly reduced (fair value option). This item may potentially include: - debt securities and loans included in an Other/Trading business model (meaning not classifiable within a Hold to Collect or Hold to Collect and Sell business model) or which do not pass the SPPI test, including in the percentage of pooled loans subscribed which, as of origination are destined for sale and cannot be classifiable within a Hold to Collect and Sell business model; - equity instruments - which cannot be classified as controlling, joint control or associated - held for trading purposes or for which designation at fair value through other comprehensive income was not selected at the time of initial recognition; - units in collective investment undertakings; - the positive value of derivatives held for trading purposes.

In accordance with the general rules established in IFRS 9 regarding reclassification of financial assets (with the exception of equity securities, for which no reclassification is allowed), reclassifications to other categories of financial assets is not permitted unless the entity changes its business model to manage financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified from the category measured at fair value through profit and loss to one of the other two categories included under IFRS 9 (financial assets measured at amortised cost and financial assets measured at fair value through other comprehensive income). The transfer value is represented by the fair value at the time of reclassification and the effects of the reclassification operate prospectively starting from the date of reclassification. In this case, the effective interest rate for the reclassified financial asset is determined on the basis of its fair value on the reclassification date and this date is also considered to be the initial recognition date for allocation within the various credit stages (stage assignment) for impairment purposes. Financial assets are initially recognised at the settlement date for debt and equity securities, on the disbursement date for loans and the subscription date for derivative contracts.

Upon initial recognition, financial assets measured at fair value through profit and loss are recognised at fair value, without considering transaction costs or income directly attributable to the instrument in question. After initial recognition, financial assets measured at fair value through profit and loss are measured at fair value. The effects of applying this measurement criteria are recognised in the Income Statement. Market listings are used to determine the fair value of financial instruments listed on an active market. When there is not an active market, commonly used estimation methods and measurement models are used, which take into account all the risk factors associated with the instruments and are based on market data such as measurement of listed instruments with similar properties, calculations of discounted cash flows, option price determination models, amounts recognised for recent comparable transactions, etc. Financial assets are eliminated from the financial statements only if the disposal involved substantial transfer of all risks and benefits associated with the assets in question. On the other hand, if a significant portion of the risks and benefits relative to the financial assets transferred remain, they continue to be recognised in the financial statements, even if legal ownership of the same has effectively been transferred. In the case it is not possible to ascertain substantial transfer of risks and benefits, the financial assets are eliminated from the financial statements if no type of control over the same has been retained. Otherwise, even partial retention of control means that the asset must continue to be recognised in the financial statements in an amount equal to the residual continuing involvement, measured by the exposure to changes in value to the asset transferred and changes in the cash flows of the same. Finally, the financial asset transferred is eliminated from the financial statements in the case in which contractual rights to receive the relative cash flows has been retained, with simultaneous assumption of an obligation to pay said flows, and only said flows, to other third- party subjects, without a significant delay.

2. Financial assets measured at fair value through other comprehensive income (FVOCI) This item includes financial assets which meet both of the following conditions: - financial assets are held based on a business model whose objective is achieved both through the collection of contractually established cash flows and through sale (Hold to Collect and Sell business model), and 51

- the contractual terms of the financial asset establish, at certain dates, cash flows solely representing payment of principal and interest on the amount of capital to be repaid (SPPI test passed). In addition, this item can also include equity instruments, not held for trading purposes, for which at the time of initial recognition the option to designate them at fair value through other comprehensive income was exercised. In accordance with the general rules established in IFRS 9 regarding reclassification of financial assets (with the exception of equity securities, for which no reclassification is allowed), reclassifications to other categories of financial assets is not permitted unless the entity changes its business model to manage financial assets. In these cases, which are expected to be very infrequent, financial assets can be reclassified from the category measured at fair value through other comprehensive income to one of the other two categories included under IFRS 9 (financial assets measured at amortised cost and financial assets measured at fair value through profit and loss). The transfer value is represented by the fair value at the time of reclassification and the effects of the reclassification operate prospectively starting from the date of reclassification. In the case of reclassification from the category in question to that of amortised cost, the cumulative profit (loss) recognised in the valuation reserve is used to adjust the fair value of the financial asset at the date of reclassification. On the other hand, in the case of reclassification to the category of fair value through profit and loss, the cumulative profit (loss) previously recognised in the valuation reserve is reclassified from shareholders’ equity to profit (loss) for the year. Financial assets are initially recognised at the settlement date for debt and equity securities and on the disbursement date for loans. They are initially recognised at their fair value inclusive of transaction costs or income directly attributable to the instruments. After initial recognition, assets measured at fair value through other comprehensive income, other than equity securities, are measured at fair value, with recognition in the Income Statement of impacts deriving from application of the amortised cost and the effects of impairment, while other profits or losses deriving from a change in fair value are recognised in a specific shareholders’ equity reserve until the financial asset is eliminated. At the time of disposal, whether total or partial, the cumulative profit or loss in the valuation reserve is entirely or partially posted to the Income Statement. When the decision is made to classify equity instruments in this category, they are measured at fair value and the amounts recognised in a contra entry to shareholders’ equity (Statement of comprehensive income) do not need to subsequently be transferred to the income 52

statement, even in the case of disposal. The only component relative to the equity securities in question subject to recognition in the income statement is any associated dividends. Fair value is determined on the basis of the criteria previously illustrated for financial assets measured at fair value through profit and loss. Financial assets measured at fair value through other comprehensive income — both in the form of debt securities and loans — are subject to verification of a significant increase in credit risk (impairment) as established under IFRS 9, with consequent recognition of a value adjustment in the income statement to cover expected losses. More specifically, for instruments classified in stage 1 (that is financial assets at the time of origination, when not impaired, and instruments which have not seen a significant increase in credit risk with respect to initial recognition) expected losses after one year are recognised on the initial recognition date and at each subsequent reporting date. On the other hand, for instruments classified in stage 2 (performing, but with a significant increase in credit risk with respect to initial recognition) and in stage 3 (impaired exposures) expected loss is recognised for the entire residual life of the financial instrument. Financial assets are eliminated from the financial statements only if the disposal involved substantial transfer of all risks and benefits associated with the assets in question. On the other hand, if a significant portion of the risks and benefits relative to the financial assets transferred remain, they continue to be recognised in the financial statements, even if legal ownership of the same has effectively been transferred. In the case it is not possible to ascertain substantial transfer of risks and benefits, the financial assets are eliminated from the financial statements if no type of control over the same has been retained. Otherwise, even partial retention of control means that the asset must continue to be recognised in the financial statements in an amount equal to the residual continuing involvement, measured by the exposure to changes in value to the asset transferred and changes in the cash flows of the same. Finally, the financial asset transferred is eliminated from the financial statements in the case in which contractual rights to receive the relative cash flows has been retained, with simultaneous assumption of an obligation to pay said flows, and only said flows, to other third- party subjects, without a significant delay.

3. Financial assets measured at amortised cost This category includes financial assets (in particular loans and debt securities) which meet both of the following conditions: 53

- financial assets are held based on a business model whose objective is achieved through the collection of contractually established cash flows (“Hold to Collect” business model), and - the contractual terms of the financial asset establish, at certain dates, cash flows solely representing payment of principal and interest on the amount of capital to be repaid (SPPI test passed).

More specifically, this item includes: - loans to banks in various technical forms which meet the requirements indicated in the previous paragraph; - loans to customers in various technical forms which meet the requirements indicated in the previous paragraph; - debt securities which meet the requirements indicated in the previous paragraph. In accordance with the general rules established in IFRS 9 regarding reclassification of financial assets, reclassifications to other categories of financial assets is not permitted unless the entity changes its business model to manage financial assets. In these cases, financial assets can be reclassified from the category measured at amortised cost to one of the other two categories included under IFRS 9 (financial assets measured at fair value through other comprehensive income and financial assets measured at fair value through profit and loss). The transfer value is represented by the fair value at the time of reclassification and the effects of the reclassification operate prospectively starting from the date of reclassification. Profits or losses resulting from the difference between the amortised cost of the financial asset and the relative fair value are recognised in the income statement in the case of reclassification between the financial asset measured at fair value through profit and loss and shareholders' equity, in the specific valuation reserve, in the case of reclassification between financial assets at fair value through other comprehensive income. Financial assets are initially recognised at the settlement date for debt securities and on the date of disbursement in the case of loans. They are initially recognised at their fair value inclusive of transaction costs or income directly attributable to the instruments. In particular, with regard to loans, the disbursement date normally coincides with the date the contract was signed. If they do not coincide, a commitment to grant the funds is recognised on the date when the contract is signed; the commitment then ends when the instrument is disbursed. The loan/receivable is posted at its fair value, equal to the amount disbursed, or the subscription price, including costs/income directly attributable to the individual loan and 54

which can be defined from the beginning of the transaction, even if settled subsequently. Costs which, even if they have the aforementioned characteristics, are subject to reimbursement by the debtor counterparty or can be classified as normal internal administrative costs are excluded. Subsequent to initial recognition, the financial assets in question are measured at amortised cost with the effective interest rate method. In these terms, the asset is recognised in the financial statements for an amount equal to the initial recognition value minus repayments of principal, plus or minus cumulative amortisation and adjusted for any provision to cover losses. The effective interest rate is the rate equal to the present value of the future cash flows of the asset, in terms of both principal and interest, of the amount disbursed inclusive of the costs/income attributable to said financial asset. This method of recognition, using a financial logic, makes it possible to distribute the economic effect of costs/income directly attributable to a financial asset throughout its expected residual life. The amortised cost method is not used for assets - measured at historical cost - which have a short enough duration to make the effects of apply discounting negligible, nor for those without a defined maturity date and for those payable on demand. Measurement criteria are closely connected to the inclusion of the instruments in question in one of the three credit risk stages envisaged under IFRS 9, the last of which (stage 3) includes impaired financial assets, while the remaining two (stages 1 and 2) include performing financial assets. With reference to the accounting recognition of the aforementioned measurement effects, value adjustments relative to this type of assets are recognised in the Income Statement: - at initial recognition, in an amount equal to the expected loss after 12 months; - when the asset is measured subsequently, when the credit risk has not significantly increased with respect to initial recognition, in relation to changes in the amount of value adjustments for expected losses after 12 months; - when the asset is measured subsequently, when the credit risk has significantly increased with respect to initial recognition, in relation to the recognition of value adjustments for expected losses relative to the entire residual life contractually established for the asset; - when the asset is measured subsequently, when—after a significant increase in credit risk has been seen with respect to initial recognition—the significance of the increase no longer exists, in relation to the adjustment of cumulative value adjustments in order

to take into account the passage from lifetime expected losses to losses over twelve months. When the financial assets in question are performing, they are subject to measurement, aimed at determining value adjustments to be recognised in the financial statements, at the level of the individual loan, as a function of the risk represented by probability of default (PD), loss given default (LGD) and exposure at default (EAD), with the aim of taking into account the provisions of accounting standard IFRS 9. If, in addition to a significant increase in credit risk, objective evidence of a loss of value is also determined, then the amount of the loss is measured as the difference between the book value of the asset - classified as impaired, in the same way as all other relationships held with the same counterparty - and the current value of estimated future cash flows, discounted at the original effective interest rate. The amount of the loss, to be recognised in the Income Statement, is determined on the basis of an analytical measurement process or determined for homogeneous categories and, therefore, analytically attributed to each position and takes into account, as detailed in the section on "Impairment of financial assets", forward looking information and possible alternative collection scenarios. The scope of impaired assets includes financial instruments classified as Bad loans, Unlikely to pay or Past-due/over-the-limit for more than 90 days, based on Bank of Italy rules, in line with IAS/IFRS and European regulations. Expected cash flows take into account expected collection times and the presumable value in use of any collateral. When the reasons for the impairment no longer exist following an event occur subsequent to the recognition of the reduction in value, writebacks are carried out, recognised in the Income Statement. Writebacks cannot exceed the amortised cost which the financial instrument would have had in the absence of previous adjustments. Writebacks connected with the passing of time are posted as net interest income. In some cases, during the life of the financial assets in question and, in particular, those of loans, the original contractual conditions are subject to later modification by the parties to the contract. When, during the course of the life of an instrument, the contractual clauses are subject to change, it must be verified whether the original asset must continue to be recognised in the financial statements or whether, instead, the original instrument should be derecognised and a new financial instrument recognised in its place.

In general, changes to a financial asset lead to its derecognition and the recognition of a new asset, when the changes are substantial. Assessment of whether a change is substantial must include consideration of both qualitative and quantitative elements. Financial assets are eliminated from the financial statements only if the disposal involved substantial transfer of all risks and benefits associated with the assets in question. On the other hand, if a significant portion of the risks and benefits relative to the financial assets transferred remain, they continue to be recognised in the financial statements, even if legal ownership of the same has effectively been transferred. In the case it is not possible to ascertain substantial transfer of risks and benefits, the financial assets are eliminated from the financial statements if no type of control over the same has been retained. Otherwise, even partial retention of control means that the asset must continue to be recognised in the financial statements in an amount equal to the residual continuing involvement, measured by the exposure to changes in value to the asset transferred and changes in the cash flows of the same. Finally, the financial asset transferred is eliminated from the financial statements in the case in which contractual rights to receive the relative cash flows has been retained, with simultaneous assumption of an obligation to pay said flows, and only said flows, to other third- party subjects, without a significant delay.

4. Hedging Hedging transactions are carried out to deal with risks connected to changes in market value or in future cash flows relating to a certain element or groups of elements which could have potential effects on the Bank’s income statement. The type of hedging used by the Bank is fair value hedging, with the aim of hedging exposure against changes in fair value (attributable to the various kinds of risks) of assets and liabilities posted on the balance sheet, or portions of the same, groups of assets/liabilities, irrevocable commitments and portfolios of financial assets and liabilities, as allowed by IAS 39 endorsed by the European Commission3. Hedging derivatives, like all derivatives, are initially recognised and subsequently carried at fair value. Fair value hedging makes it possible to offset the change in fair value of the item hedged with the change in the fair value of the hedging instrument. This offsetting is recognised by booking the changes in value to the income statement of both the hedged item

3 Hedge accounting provisions established under IAS 39 are still applicable while awaiting the definition of new rules relative to macro-hedging by the IASB.

(as regards the changes produced by the underlying risk factor), and the hedging instrument. Any difference, representing the partial ineffectiveness of the hedge, consequently constitutes its net economic effect. The derivative instrument is designated as a hedging instrument if there is official documentation regarding the relationship between the hedged item and the hedging instrument, and if it is effective from the start of the hedging and throughout the life of the hedge. Hedging effectiveness depends on the degree to which the changes in fair value of the hedged item are offset by those of the hedging instrument. Consequently, the effectiveness is measured by comparing these changes, taking into account the Bank’s intended goal at the time the hedge was put in place. A hedge is effective when the changes in the fair value of the hedging instrument almost completely neutralise, within the limits established by the 80–125% range, the changes in the hedged item, resulting from the risk element being hedged (Dollar offset method). Effectiveness is assessed at every annual or interim reporting date. If it is found that the hedging is not effective, as of that moment the hedging transaction is no longer entered in the accounts as such and the derivative contract is reclassified under instruments held for trading, and the hedged item is subsequently measured according to its accounting classification. Under IAS 39, fair value hedging can cover not only a single financial asset or liability but also a monetary amount resulting from a number of financial assets and liabilities (or parts of the same), so that a series of derivative contracts can be used to reduce the changes in the fair value of the hedged instruments consequent to changes in market interest rates (macrohedging). Net amounts resulting from asset or liability imbalances cannot be covered by macro hedging. As in the case of fair value microhedging, macrohedging is considered highly effective if, both at the start and during its life, the changes in the fair value of the monetary amount hedged are offset by changes in the fair value of the hedging derivatives and if the effective results fall within a range specified by IAS 39. In accordance with the instructions issued by the Bank of Italy for preparation of banks’ financial statements, value adjustments on macrohedged financial assets/liabilities are posted under item 60 of the Assets and item 50 of the Liabilities, with a contra item under item 90 of the Income Statement.

5. Equity investments Equity investments, as defined by IAS 32, include instruments representing the equity of another entity, generally in the form of shares or quotas of a company. Investments in the equity of other companies may be: equity investments in controlled companies (over which direct or indirect control is exercised); in joint ventures (for which a 58

joint control agreement exists) and in associated companies (over which significant influence is exercised, but not classifiable as one of the two previous categories). Equity investments are recognised at the acquisition or subscription cost, adjusted in the case of value losses deemed lasting. The original value is restored in subsequent years if the reason for the value adjustments made no longer exists. Economic results relative to measurement and gains/losses on disposal are recognised in a specific item in the income statement. Dividends are recognised in the financial year in which they are resolved. Equity investments are derecognised when they are disposed of, when all associated risks and benefits are substantially transferred or when the contractual rights of the financial cash flows that derive from them expire.

6. Property, plant and equipment Property, plant and equipment includes plant, office machinery, furniture, computers, printers, fittings and equipment of any type. These are instrumental assets used for the exercising of the company’s business. In application of the new accounting standard IFRS 16, the item also includes Rights of use acquired through leases and relative to the use of property, plant and equipment for lessees. Property, plant and equipment items are initially recognised at cost, inclusive of any directly attributable transaction costs. The cost is increased by any expenses incurred subsequently to improve these assets, replace a part or perform non-routine maintenance activities resulting in an increase in their future economic benefits. Routine maintenance expenses are recognised directly in the income statement. Property, plant and equipment items are carried at cost minus any depreciation and impairment. Property, plant and equipment depreciates as follows: Fittings and equipment 15% Furniture 12% Office machines 20% Depreciation is calculated at the reporting date and recognised in the income statement. In the case of impairment, assets are written down and the amount of the impairment is recognised in the income statement. The carrying amount of an item of property, plant and equipment must be derecognised in case of disposal, or when no future economic benefit is expected from its use. Gains and losses arising from the difference between the price 59

collected from the sale of an asset and the carrying amount of such an asset must be recognised in a specific item of the income statement.

7. Intangible assets Intangible assets, mainly represented by software, are stated at cost, adjusted by any related charges, only if it is probable that the future economic benefits attributed to the assets will arise and if the cost of the assets can be reliably determined. There are no intangible assets generated internally. After initial recognition, intangible assets with a definite useful life are posted at cost net of total accrued amortisation and impairment. Intangible assets are derecognised at the moment of their disposal or when no future economic benefits are expected. The amortisation charge on intangible assets with a definite useful life (normally three years) is posted on the income statement at the reporting date and tests are performed for any impairment to be recognised in the income statement. The Bank has no intangible assets with an indefinite useful life.

8. Other Assets Other assets essentially include items awaiting processing and items not classifiable under other items in the balance sheet, among which we note receivables associated with supplies of non-financial goods and services, and tax items different from those recognised under the specific item.

9. Current and deferred taxes Income taxes are accounted for as cost on an accrual basis, in consistency with the methods for recognising the costs and revenues which have generated them. Therefore, they represent the balance of current and deferred taxes relating to the income of the period. Deferred taxes are calculated by applying the balance sheet liability method, bearing in mind the fiscal effect connected with temporary differences between the carrying value of assets and liabilities and their fiscal value, which lead to taxable or deductible amounts in future periods. For such purposes, taxable temporary differences are those which in future periods will determine taxable amounts and deductible temporary differences those which in future periods will determine deductible amounts. Deferred taxes are calculated by applying tax rates established under current laws to temporary taxable difference for which there is an effective probability that taxes will be paid and to temporary deductible differences for which there is reasonable certainty of future taxable amounts at the time the relative tax deductibility will arise (probability test). Prepaid and deferred taxes relative to the same tax and maturing during the same period are offset. 61

When deferred tax assets and liabilities refer to components that impacted the income statement, the contra entry is represented by income taxes. In cases in which prepaid and deferred taxes refer to transactions which directly affected shareholders’ equity without impacting the income statement (such as adjustments from first time application of IAS/IFRS, measurements of financial instruments recognised at fair value through other comprehensive income or cash flow hedges derivative instruments), these are recognised as a contra entry to shareholders’ equity, relative to specific reserves when appropriate (e.g. valuation reserves). The Bank has complied with the parent company’s request to exercise the option to adhere to national tax consolidation for the 2018-2020 period (introduced by Legislative Decree 344 of 12 December 2003). The exercising of this option, which is neutral for the Bank with respect to its prior status, allows the following for Group’s tax burden:  immediate total or partial use of tax losses during the period for companies participating in consolidation, decreasing the taxable income of other consolidated companies;  the introduction of an IRES credit and debit compensation mechanism among the companies participating in tax consolidation;  the exclusion of taxation of dividends distributed between the companies participating in the tax consolidation within the same financial year.

10. Provisions for risks and charges Provisions for retirement and similar benefits Retirement funds are established in implementation of company agreements and can be classified as defined benefit plans. The liability for these plans and the related social security cost for current provisions of labour are determined on the basis of actuarial hypotheses which involve projections of future payments on the basis of analysis of historic statistics and the demographic curve, and financial discounting of said flows on the basis of a market interest rate. Actuarial gains and losses (variations in the current value of the obligation deriving from changes to actuarial hypotheses and adjustments based on past experience) are recognised in the statement of comprehensive income.

Provisions for risks and charges for commitments and guarantees issued 62

This sub-item of provisions for risks and charges includes provisions for credit risk recognised against commitments to disburse funds and to guarantees given which fall within the scope of application of the impairment rules pursuant to IFRS 9. As a basic principle, for these cases the same methods of allocation are used with reference to the three credit risk stages and to calculation of expected losses, indicated with reference to financial assets measured at amortised cost or at fair value through other comprehensive income.

Other provisions Other provisions for risks and charges include allowances for legal obligations or associated with employment relations, or to disputes, including tax disputes, originating from a past event for which the disbursement of financial resources is probable in order to fulfil the said obligation, as long as the relevant amount can be reliably estimated. Consequently, a provision is recognised if and only if:

- there is an obligation in course (legal or implicit) as the result of a past event;

- it is probable that in order to fulfil the obligation it will be necessary to make use of resources aimed at producing economic benefits; and

- a reliable estimate can be made of the amount deriving from fulfilment of the obligation. The amount recognised for the provision represents the best estimate of the sum required to comply with the obligation existing at the reporting date and reflects risks and uncertainties which inevitably are associated with multiple events and circumstances. When the time factor is significant, provisions are discounted using current market rates. The provision and increases due to the time factor are recognised in the Income Statement. The provision is reversed when it becomes improbable that resources aimed at producing economic benefits will be used to fulfil the obligation or when the obligation is eliminated.

11. Financial liabilities measured at amortised cost Amounts due to banks, amounts due to customers and securities issued include the various forms of inter-bank funding and funding from customers, as well as repurchase agreements with repurchase obligation on maturity and funding via bonds and other funding instruments issued, net of any redeemed amounts. These also include financial liabilities for leases, representing the current value of future payments to be made by the lessee on the basis of leasing contracts. Such financial liabilities are recognised on the date on which the related contract is signed, which normally coincides with the moment of the receipt of the sums collected or the issue of the debt securities. Initial recognition takes place at the fair value of the liabilities, usually equal to the amount collected or to the issue price, increased by any additional costs/income directly attributable to the individual deposit or issue transactions. Internal administrative costs are excluded. After initial recognition, these financial liabilities are measured at the amortised cost, using the effective interest rate method. Short term liabilities, for which the time factor is negligible, are entered at the amount collected. Financial liabilities are derecognised when they have matured or been discharged. Derecognition also takes place when previously issued debt securities are repurchased. The difference between the carrying amount of a liability and the amount paid for purchase is booked to the Income Statement.

12. Financial liabilities held for trading The financial instruments in question are recognised on the subscription date or issue date at a value equal to the fair value of the instrument, without considering any transaction costs or income directly attributable to the instruments themselves. All liabilities held for trading are measured at fair value with recognition of the result of said measurement in the Income Statement. Financial liabilities held for trading are derecognised from the financial statements when the contractual rights over relative cash flows expire or when the financial liability is transferred, including the substantial transfer of all risks and benefits deriving from ownership of the same.

13. Financial liabilities designated at fair value Financial liabilities designated at fair value with a contra entry in the Income Statement are recognised in this item, on the basis of the option granted to companies (fair value option) under IFRS 9 and in compliance with the cases illustrated under the reference regulations. Recognition of these liabilities is done on the issue at their fair value, including the value of any embedded derivative and net of placement fees paid. These liabilities are measured at fair value and the result is recognised in accordance with the following rules established under IFRS 9:

- changes in fair value attributable to changes in own credit standing must be recognised in the statement of comprehensive income (shareholders’ equity);

- the remaining fair value changes must be recognised in the Income Statement. Financial liabilities measured at fair value are derecognised from the financial statements when the contractual rights over relative cash flows expire or when the financial liability is transferred, including the substantial transfer of all risks and benefits deriving from ownership of the same.

14. Other information

Revenue recognition Revenues are recognised when they are received or, in the case of the performance of services, when they are performed. In particular: - interest is recognised pro rata temporis according to the contractual interest rate or to the effective interest rate in case of application of the amortised cost; - fees for revenues from services, including commissions for the management of public subsidies, are stated, on the basis of the existence of contractual agreements, in the period in which the services were provided; - fees considered in the amortised cost for the purpose of determining the effective interest rate are included in interest; - revenues or costs deriving from the sale of financial instruments, resulting from the difference between the amount paid or collected on the transaction and the fair value of the instrument, are posted on the income statement when the transaction is recognised.

Recognition of costs Costs are recognised on the income statement whenever there is a decrease in future economic benefits entailing a decline in assets or an increase in liabilities. Financial expenses are interest and other expenses incurred in connection with amounts borrowed and are recognised as a cost on an accrual basis.

Expenditure on third-party assets Costs incurred on third parties’ assets (tangible and intangible) are capitalised in consideration of the fact that, for the term during which the Bank uses the same, it has control of the assets and can obtain future economic benefits. The said costs, classified as other assets, as provided for in the Bank of Italy instructions, are amortised according to the contractual terms.

Offsetting financial assets and liabilities On the basis of the indications of IAS 32 asset and liability items are offset in the accounts if the following requisites are fulfilled: - possession of the contractual right exercisable for offsetting the amounts recognised in receivables and payables; - the intention to settle the items net, or to realise the asset and at the same time extinguish the liabilities. In accordance with the provisions of IFRS 7, more detailed information is provided in the tables of the Notes to the Financial Statements included in Part B - Other information. In particular, the carrying amounts affected by the standard before and after the effects of the offset and the measurement of the associated real guarantees are recognised.

Classification criteria for financial assets

Classification of financial assets into the three categories established under the accounting standard IFRS 9 depends on two classification criteria, or drivers. The business model under which the financial instruments are managed and the verification of the contractual characteristics of the cash flows deriving from financial assets (SPPI test). Financial assets are classified based on the combination obtained from these two drivers, in accordance with that indicated below:

- Financial assets measured at amortised cost: assets which pass the SPPI test and fall under the Hold to collect (HTC) business model;

- Financial assets measured at fair value through other comprehensive income (FVOCI): assets which pass the SPPI test and fall under the Hold to collect and sell (HTCS) business model;

- Financial assets measured at fair value through profit and loss (FVTPL): this is a residual category, which includes financial instruments which cannot be classified within the previous categories on the basis of the results of the business model test or due to failure of the SPPI test.

SPPI test For a financial asset to be classified at amortised cost or FVOCI, in addition to business model analysis, it is necessary that the contractual terms of the asset give rise to cash flows on certain dates which consist solely of payments of principal and interest (SPPI). This analysis must be done, in particular, on loans and debt securities. The SPPI test must be performed on each individual financial instrument, at the time it is recognised in the financial statements. After initial recognition, and as long as it is recognised in the financial statements, the asset is not subjected to new assessments in terms of the SPPI test. When a financial instrument is derecognised and when a new financial asset is recognised, it is necessary to carry out the SPPI test on the new asset. For the purposes of applying the SPPI test, IFRS 9 provides the following definitions:

- Principal: the fair value of the financial asset at the time of initial recognition. This value may change during the life of the financial instrument, for example as an effect of repayments of principal;

- Interest: the payment for the time value of money and the credit risk associated with the capital, existing at a particular moment in time. It may also include remuneration for other base risks and costs associated with lending activity and a profit margin. When assessing whether cash flows from a financial asset can be defined as SPPI, IFRS 9 refers to the general concept of a basic lending arrangement which is independent of the legal form of the business. When the contractual clauses introduce exposure to risks or volatility of cash flows not in line with the definition of a basic lending arrangement, the contractual cash flows do not meet the definition of SPPI. Application of the classification driver based on contractual cash flows will occasionally require a subjective decision and, therefore, the definition of internal policies for application. 67

In case of a modified time value of money, or when the interest rate is periodically redetermined on the basis of the average of given short or medium/long-term rates, the company must assess, using both quantitative and qualitative elements, whether the contractual cash flows still meet the definition of SPPI (benchmark cash flows test). When the test indicates that the (non-discounted) contractual cash flows are significantly different with respect to the cash flows deriving from a benchmark instrument (also non-discounted), or without the time value element modified, contractual cash flows does not meet the definition of SPPI. As established under IFRS 9, a given characteristic of contractual cash flows does not influence classification of a financial asset if it can only have a minimal effect on the contractual cash flows of the financial asset (in each financial year and cumulatively). Similarly, if a characteristic of the cash flows is not realistic, (not genuine), or influences the contractual cash flows of the instrument only when an event occurs which is extremely rare, very unusual or very improbable, it does not influence classification of the financial asset.

Business model With regards to the business model, IFRS 9 identifies three cases regarding the methods used to manage cash flows and sales of financial assets:

- Hold to Collect (HTC): this is a business model in which the objective is achieved by receiving contractual cash flows from financial assets included in their relative portfolios. The insertion of a portfolio of financial assets in this business model does not necessary mean it is impossible to sell these instruments, even if it is necessary to consider the frequency, value and schedule of sales in previous years, the reasons for the sales and expectations regarding future sales;

- Hold to Collect and Sell (HTCS): this is a mixed business model, in which the objective is achieved by receiving contractual cash flows from the financial assets in the portfolio and also through sales, which are an integral part of the strategy. Both activities (collection of cash flows and sales) are indispensable for achieving the objective of the business model. Therefore, sales are more frequent and significant with respect to an HTC business model and are an integral part of the strategies pursued;

- Other/Trading: this is a residual category which includes both financial assets held for trading purposes and financial assets managed using a business model which is different to the previous categories (Hold to Collect and Hold to Collect and Sell). In general, this

classification is applied to a portfolio of financial asset for which management and performance are measured on a fair value basis. The business model reflects the methods with which the financial assets are managed to generate cash flows to benefit the entity and is defined by top management with appropriate involvement of business structures. It should be determined considering the method used to manage the financial assets and, as consequence, the degree to which cash flows in the portfolio derive from the receipt of contractual cash flows, from sales or financial assets or from both activities.

Method of determining amortised cost Amortised cost is one of the possible measurements of a financial asset or liability. Receivables, financial assets held to maturity and those available for sale (before adjustment to fair value), payables and securities issued are measured at amortised cost. Amortised cost must be calculated using the effective interest rate method, a method that involves distributing interest received or paid, and transaction costs and revenues, along the period of duration of the financial instrument. The amortised cost makes it possible to allocate all the costs and revenues generated by a financial instrument along the entire expected life of the said instrument. The costs and revenues to be allocated along the expected life of the said financial instrument include the transaction costs (revenues) which are the marginal costs (revenues) directly attributable to the issue/acquisition of a financial instrument. Marginal means the costs (revenues) that would not have been produced if the entity had not acquired or issued the financial instrument. With particular reference to receivables, the commissions payable to the distribution channels and fees payable for participation in pooled loans are considered costs attributable to the financial instrument; while the revenues considered in calculating the amortised cost are up-front commissions, and those for participation in pooling operations. For securities issued and other funding transactions the placing commissions are considered in calculating the amortised cost. The effective interest rate is the rate that reduces to zero the present value, at the time of the measurement, of the total cash flow (the future payments or collections envisaged along the expected life of the financial instrument) of the financial instrument. The calculation of the effective interest rate must include all the economic components paid or received which are an integral part of the same, the transaction costs, and all the other premiums or discounts. Determination of the amortised cost is different according to whether the financial instruments considered are at fixed rate or variable rate and — in this latter case — according to whether the variability of the rate is known in advance 69

(fixed rate for time bands) or otherwise. For financial instruments at fixed rate or at fixed rate for time bands (with the rate that varies after a certain period in fixed mode), the future cash flows must be quantified on the basis of the known interest rate (single or variable) during the life of the instrument. For instruments at variable rate, the variability of which is not known in advance (for example because it is linked to an index), the cash flows must be determined on the basis of the last known rate, and at each rate revision date the new effective rate of return is recalculated. Measurement at amortised cost does not apply for assets/liabilities whose short duration leads the economic effect of the discounting to be considered negligible, nor for receivables with no definite maturity or on demand.

Method of determining impairment Pursuant to IFRS 9, at every reporting date, financial assets not measured at fair value through profit and loss are subject to an assessment in order to determine whether there is evidence to suggest that the carrying value of the assets is not entirely recoverable. Similar analysis is done also for commitments to disburse funds and for guarantees given which fall within the scope subject to impairment under IFRS 9. In the case where evidence is identified (evidence of impairment), the financial assets in question — together with all other remaining assets pertaining to the same counterparty — are considered impaired and placed in stage 3. Against these exposures, represented by financial assets classified in the categories of Bad loans, Unlikely to pay and Past-due over 90 days, pursuant to the provisions of Bank of Italy Circular 262/2005, value adjustments must be recognised in an amount equal to expected losses over their entire residual life. For financial assets for which no evidence of impairment is found (non-impaired financial assets), it is instead necessary to determine whether there are indicators that the credit risk of an individual operation has significantly increased with respect to the initial recognition. From a staging and measurement point of view, the consequences of this verification are the following: - when these indicators exist, the financial asset is placed in stage 2. In this case, in line with the dictates of international accounting standards and even in the absence of a manifest loss of value, the measurement involves recognition of value adjustments equal to expected lifetime losses. These adjustments are subject to review at each subsequent reporting date, in order to periodically verify their congruence with respect to constantly updated loss estimates and to take into account — if the indications of

significantly increased credit risk no longer exist — the change in the time horizon for calculating expected losses; - when these indicators do not exist, the financial asset is placed in stage 1. In this case, in line with international accounting standards and even in the absence of a manifest loss of value, the measurement involves recognition of expected losses over the next twelve months for the specific financial instrument. These adjustments are subject to review at each subsequent reporting date, both in order to periodically verify their congruence with respect to constantly updated loss estimates and to take into account — if indications of significantly increased credit risk present themselves — the change in the time horizon for calculating expected losses. Considering that at each reporting date the Bank must recognise in the Income Statement the amount of the change in expected lifetime losses as an impairment gain or loss, the model adopted by the Bank to calculate value adjustments on financial assets at the individual transaction level is the following: 푁 퐸퐴퐷푡푖 ∙ 푚푃퐷푡푖 ∙ 퐿퐺퐷푡푖 퐸퐶퐿푡 = ∑ ( ) 0 (1 + 푅)푡푖−1 푖=1 where:

 퐸퐶퐿푡0 = value adjustment calculated at the reporting date;  N = residual life of the relationship (contractual maturity minus reporting date);

 퐸퐴퐷푡푖 = value of EAD in the immediate future푡푖;

 푚푃퐷푡푖 = marginal probability of default in푡푖;

 퐿퐺퐷푡푖 = value of LGD in the immediate future푡푖;  푅 = discounting rate equal to IRR. With reference to the financial assets classified in stage 1, the formula outlined above is calculated only to 1 year (n equal to or less than 12 months), while for financial assets classified in stage 2, instants ti indicated in the formula are consistent with the frequency of cash flows established in the case of multi-period EAD or annually, in the case of an amortisation plan with a single payment at maturity (bullet). The degree of specificity used to determine impairment is, for the loan portfolio, the individual position, while for the securities portfolio, reference should be made to individual tranches remaining. In the cases that multiple tranches4 of the same security are purchased at different

4 The term “tranche” means a lot of a given ISIN acquired at a specific moment in time. 71

times, it is possible that different initial acquisition conditions are seen (different ratings at issue or different issuer ratings) and therefore it is appropriate to consider each tranche acquired as an individual financial instrument, even if they are from the same security. This leads to the need to assess impairment of credit standing at the level of each individual tranche acquired, and the possibility of classifying different tranches from the same security in different stages.

Probability of default (PD) While awaiting consolidation of a portfolio able to provide robust evidence of internal risk, the Bank estimates PD at one year for its exposures with the help of an external rating model. In particular, PDs are estimated for each rating class on the basis of a recalibration process which uses the PDs for the model and a multiplier, provided by the external provider, in order to determine Bank level PDs from system level PDs. Input data are subject to quality control and when appropriate are normalised to guarantee monotonicity of PDs with respect to ratings. Positions without rating are placed in rating classes with an average PD, unless analysis and monitoring indicate a risk profile significantly higher than the average. To guarantee proper application of the accounting standard, PDs are subject to the following processing, broken down into the following steps: 1) PIT adjustment Prudentially and considering the volatility of default rates observed on the loan portfolio, when appropriate 1Y PD from the model are recalibrated using a Bayesian approach on the basis of an average decay rate observed on the portfolio (Central Tendency – CT). This parameter is updated periodically, on the basis of risk trends observed internally, in order to estimate PDs which represent the riskiness of the portfolio as accurately as possible; 2) Forward-looking correction The PD curves obtained in this way are subject to forward-looking correction, generally for the first 3 years, on the basis of multipliers estimated using satellite models. 3) Calculation of multiperiod cumulative PDs Multiperiod PDs are derived from1Y PD through a Markovian approach, using the transition matrices provided by the same provider. For the Private segment and in particular for residential mortgages, the multiperiod PDs are derived using a negative exponential distribution (described below), as this is deemed

more appropriate for estimating the PD curve for this product/segment, with respect to the Markovian approach: 퐹(푡) = 1 − 푒−휆푡 In particular, the first three years of the yield curve are obtained using parameter λ derived from PD PIT, while for subsequent years, an λ derived from PD TTC is used. 4) Determination of conditional marginal PDs The yield curve for marginal and conditional PDs is determined starting from the yield curve of cumulative PDs.

Loss Given Default (LGD) Considering the lack of availability of internal loss rates after default, assignment of loss given default (LGD) to individual positions is done by making use of regulatory values or those derived from benchmarks, considered flat for the entire duration of the loan and suitably updated, evaluating the appropriateness of using prudential margins. In relation to the type of collateral associated with a loan product, the loans portfolio has been broken down into the following segments: 1) Unsecured mortgage / Other loans; 2) Mortgage with guarantee from the Central SME Guarantee Fund (FdG); 3) Non-residential mortgage; 4) Residential mortgage; 5) Salary-backed loan (CQS); 6) Factoring.

Exposure at Default (EAD) For on balance positions, the Bank uses cash flows resulting from the effective amortisation plans for loans as exposure at default. In particular, for the first year5 (positions in stage 1 and stage 2), the respective book value of the exposure is used, while for subsequent years (stage 2), the residual debt for the capital component of the exposure is considered, as in the IAS plan. For off-balance sheet positions, exposure at default is determined in compliance with Regulation 575/2013, under article 111, Part Three, chapter 2, section 1.

5 For stage 1 positions with residual life of less than one year, expected loss at one year is rendered proportional to the number of months to maturity. 73

Separate accounting Management of Public Funds and provision of services related to them is governed by contracts signed with the Public Administrations. Management of the related resources is recorded in separate accounts, reported annually to the Public Administrations.

A.3 DISCLOSURE ON TRANSFERS BETWEEN FINANCIAL ASSET PORTFOLIOS The Bank has not carried out any reclassifications between portfolios measured at fair value and those measured at amortised cost.

A.4 FAIR VALUE DISCLOSURE Qualitative information Fair value represents the price at which an asset can be exchanged, or a liability extinguished, between aware and willing parties, in an orderly transaction in a free market context. Substantially fair value is a criterion that presupposes that the entity is carrying on its business normally with no intention to liquidate its assets or to carry out transactions at unfavourable conditions. For financial instruments the fair value is determined according to a hierarchy of criteria in relation to the type and quality of the information used. More specifically three different input levels are identified according to whether the prices for the measurements: - are represented by prices for identical assets and liabilities on active markets to which the entity has access; - or are observable directly or indirectly; - or, lastly, not observable. The Bank has no assets or liabilities carried at fair value in level 3.

FAIR VALUE OF DERIVATIVE INSTRUMENTS Determination of the fair value of derivatives is based on level 2 inputs, since they are instruments not listed on active markets; in particular, determination of the fair value is based on the spot interest rates curve and on the forward values and volatility of the money market rates. Derivatives in the portfolio, all used for hedging purposes, have the following properties: IRS (receive fixed rate, pay Euribor 6 months) for hedging liabilities. These positions are measured on the basis of the income method; this involves the application of the discounted cash-flow method, which contemplates:

- an estimate of the uncertain future interest flows, indexed to the 6-month Euribor parameter, determining the forward values of the parameter implicit in the specific curve of the spot rates at the date of reference; - the discounting of certain future interest flows and future interest flows estimated as indicated above, in order to take into account the time value of money. In terms of assessing counterpart risk, the derivative contracts in question are backed by CSA (Credit Support Annex), with collateral consisting of cash and daily margining: counterparty risk on these positions is considered negligible and therefore no CVA/DVA (Credit Value Adjustment / Debt Value Adjustment) is applied;

Following this approach, the market factors which affect determination of the fair value of derivatives are attributable to risk-free interest rates, EUR IRS interest rates, to the forward values of the 6-month EurLibor. Input data for measurement models: The curve of the discount factors used in determining the fair value is taken from a zero- coupon rates curve using the conventional ACT/365 day count and the compound capitalisation system. In turn, the zero-coupon rate curve is obtained through bootstrap and linear interpolation of the EUR OIS rate curve identified on the market (source: Reuters), as the derivatives are cash collateralised, with daily margining and remuneration at the EONIA rate. The forward values of the 6-month EurLibor parameter are calculated on the basis of a zero-coupon rates curve obtained by bootstrap and linear interpolation starting from Futures and Forward Rate Agreement contracts (for securities maturing within 12 months) and from the EUR IRS rates (for subsequent maturities).

A.4.3 Fair value hierarchy With regard to the breakdown of portfolios according to fair value hierarchies, there are three separate levels: - the fair value of the financial instrument is level 1 in the case of instruments listed on active markets which allow reliable use of market prices for their measurement; - the fair value of the financial instrument is level 2 in the case of instruments not listed on active markets, whose fair value can, in any case, be determined by means of valuation models based on market prices;

- the fair value of the financial instrument is level 3 in the case of instruments not listed on active markets whose fair value cannot be determined by means of valuation models based on market prices.

To be precise, at present the Bank has the following financial instruments carried at fair value: - financial assets measured at fair value through other comprehensive income represented by Italian government securities listed on a regulated market, which are level 1 since the fair value posted on the financial statements is acquired from active market prices and is available on a price list under a regulatory authority; these prices represent actual market transactions which take place regularly in normal trading; - hedging derivatives, which are level 2 since, although there is no official listing on an active market, active markets exist for the parts of which they are composed and, therefore, the fair value is determined on the basis of the pertinent market prices of their components. Therefore any transfers between the various fair value levels occur in practice only when the markets of reference of which the quotations are adopted in determining the related fair value are closed, or if the quotations give prices for the financial instruments to be measured, which are no longer deemed significant due to the absence of trading or low market liquidity. In such cases, full information is given on the date of the event and the related reasons, describing the measurement models adopted (mark to model) in line with the generally accepted methods.

Quantitative information A.4.5 Fair value hierarchy A.4.5.1 Assets and liabilities carried at fair value on a recurrent basis: breakdown by fair value level The following table shows the breakdown of the financial portfolios on the basis of the aforementioned fair value levels; there are no assets or liabilities classified as level 3.

Total 30/06/2019 Total 31/12/2018

Assets/financial liabilities carried at fair value L1 L2 L3 L1 L2 L3

Financial assets measured at fair value through 1. 1 1 profit and loss a) financial assets held for trading b) financial liabilities designated at fair value c) other financial assets obligatorily measured 1 1 at fair value Financial assets measured at fair value through 2. 758,736 715,751 other comprehensive income 3. Hedging derivatives 87,133 82,650 4. Property, plant and equipment 5. Intangible assets Total 758,736 87,133 1 715,751 82,650 1 1. Financial liabilities held for trading 2. Financial liabilities designated at fair value 3. Hedging derivatives Total

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

A.4.5.4 Assets/liabilities not measured at fair value or measured at fair value on a non- recurring basis: breakdown by fair value level

30/06/2019 31/12/2018

Assets/liabilities not carried at fair value or carried CA L1 L2 L3 CA L1 L2 L3 at fair value on a non-recurrent basis

1. Financial assets measured at amortised cost 1,554,791 1,695,147 1,493,390 1,629,590 2. Property, plant and equipment held for investment Non-current assets and disposal groups held for 3. sale Total 1,554,791 1,695,147 1,493,390 1,629,590 1. Financial liabilities measured at amortised cost 2,060,937 217,792 1,907,487 1,985,601 347,871 1,682,026 2. Liabilities associated with assets held for sale Total 2,060,937 217,792 1,907,487 1,985,601 347,871 1,682,026

Key: CA = Carrying Amount L1 = Level 1 L2 = Level 2 L3 = Level 3

Part B – Information on the balance sheet

Assets

Section 1 - Cash and cash equivalents - Item 10

1.1 Cash and cash equivalents: breakdown

Total 30/06/2019 Total 31/12/2018

a) Cash on hand 1 2 b) On demand deposits with Central Banks 930 25,017 Total 931 25,019

Section 2 - Financial assets measured at fair value through profit and loss - Item 20

2.5 Other financial assets mandatorily measured at fair value: breakdown by type

Total 30/06/2019 Total 31/12/2018

Item/Amount L1 L2 L3 L1 L2 L3 1. Debt securities 1.1 Structured securities 1.2 Other debt securities 2. Equity securities 1 1 3. UCITS units 4. Loans 4.1 Repurchase agreements 4.2 Other Total 1 1

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

The item includes the portion due to the Bank of securities subscribed through the FITD Voluntary Scheme following the interventions carried out by the same.

2.6 Other financial assets mandatorily measured at fair value: breakdown by debtor/issuer

Item/Amount Total 30/06/2019 Total 31/12/2018 1. Equity securities 1 1 of which: banks of which: other financial companies 1 1 of which: non-financial companies 2. Debt securities a) Central Banks b) Public administrations c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies 3. UCITS units 4. Loans a) Central Banks b) Public administrations c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies f) Households Total 1 1

Section 3 - Financial assets measured at fair value through other comprehensive income - Item 30

3.1 - Financial assets measured at fair value through other comprehensive income: breakdown

Total 30/06/2019 Total 31/12/2018

Item/Amount L1 L2 L3 L1 L2 L3 1. Debt securities 758,736 715,751 1.1 Structured securities 1.2 Other debt securities 758,736 715,751 2. Equity securities 3. Loans Total 758,736 715,751

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

The portfolio consists solely of Italian Government securities (BTPs and CCTs) with a residual life of just over 2 years.

3.2 Financial assets measured at fair value through other comprehensive income: breakdown by debtor/issuer

Item/Amount Total 30/06/2019 Total 31/12/2018 1. Debt securities 758,736 715,751 a) Central Banks b) Public administrations 758,736 715,751 c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies 2. Equity securities a) Banks b) Other issuers: - other financial companies of which: insurance companies - non-financial companies - other 3. Loans a) Central Banks b) Public administrations c) Banks d) Other financial companies of which: insurance companies e) Non-financial companies f) Households Total 758,736 715,751

3.3 Financial assets measured at fair value through other comprehensive income: gross value and total value adjustments

Gross value Total value adjustments

of which: Total instruments Stage one Stage two Stage three Stage one Stage two Stage three partial with low write-offs* credit risk

Debt securities 759,327 759,327 (591) Loans Total 30/06/2019 759,327 759,327 (591) Total 31/12/2018 716,317 716,317 (566)

* Values to be shown for informational purposes

Section 4 - Financial assets measured at amortised cost - Item 40

4.1 Financial assets measured at amortised cost: breakdown of amounts due from banks

Total 30/06/2019 Total 31/12/2018

------

L1 L2 L3 L1 L2 L3

------

Type of transaction/Amount acquired

impaired impaired

Stage three Stage three

or originatedor originatedor

Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value

Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount

Stage one and twoStage one and twoStage one and

of acquired which: of which:

A. Due from Central Banks 1. Time deposits 2. Mandatory reserve 3. Repurchase agreements 4. Other B. Due from banks 87,934 87,934 62,358 62,510 1. Loans 87,934 87,934 62,358 62,510 1.1 Current accounts and demand deposits 78,567 56,278 1.2. Time deposits 8,720 5,511 1.3. Other loans and advances: 647 569 - Reverse repurchase agreements - Financing for leasing - Other 647 569 2. Debt securities 2.1 Structured securities 2.2 Other debt securities Total 87,934 87,934 62,358 62,510

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

The increase in the item compared to 31 December 2018 is mainly due to a greater amount of cash available in current accounts and in demand deposits.

For better comparison, certain trade receivables totalling € 152,000 were reclassified in sub-item "other receivables and other entries" of other assets at 31 December 2018, where they had been recognised among due from banks in the annual financial statements at 31 December 2018.

4.2 Financial assets measured at amortised cost: breakdown of amounts due from customers

Total 30/06/2019 Total 31/12/2018

------

L1 L2 L3 L1 L2 L3

------

Type of transaction/Amount amount

h: acquiredh:

impaired impaired

Stage three Stage three

or originatedor originatedor

Fair Value Fair Value Fair Value Fair Value Fair Value Fair Value

Carrying Carrying amount Carrying amount Carrying amount Carrying amount Carrying amount

Stage one and twoStage one and twoStage one and

of acquired which: of whic

1. Loans 1,387,979 58,307 1,607,213 1,367,681 63,198 1,567,080 1.1. Current accounts 18,387 0 5,559 1.2. Reverse repurchase agreements 1.3. Mortgage loans 1,196,979 58,307 1,221,798 63,198 1.4. Credit cards, personal loans and salary-backed 3,096 2,666 loans 1.5. Financing for leasing 1.6. Factoring 21,391 141 1.7. Other loans 148,126 137,517 2 Debt securities 20,571 2.1. Structured securities 2.2. Other debt securities 20,571 Total 1,408,550 58,307 1,607,213 1,367,681 63,198 1,567,080

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

For the breakdown and change in the item with respect to 2018, please see the Report on Operations - Financial aggregates.

The item "other loans" shown in the table at € 148,126 thousand, includes: - Subsidies granted of € 39,510 thousand; - Receivables from the vehicle company of € 16,115 thousand; - Receivables from Public Administrations, for fees earned and to be collected for services rendered in managing public subsidies of € 91,755 thousand; - Other receivables of € 1,046 thousand.

4.3 Financial assets measured at amortised cost: breakdown of amounts due from customers by debtor/issuer

Total 30/06/2019 Total 31/12/2018

of which: of which: acquired or acquired or Stage one Stage one Type of transaction/Amount Stage three originated Stage three originated and two and two impaired impaired assets assets 1. Debt securities 20,571 a) Public administrations b) Other financial companies 20,571 of which: insurance companies c) Non-financial companies 2. Loans to: 1,387,979 58,307 1,367,681 63,198 a) Public administrations 91,739 66,562 b) Other financial companies 47,524 54,004 of which: insurance companies c) Non-financial companies 874,789 54,059 853,715 58,665 d) Households 373,927 4,248 393,400 4,533 Total 1,408,550 58,307 1,367,681 63,198

4.4 Financial assets measured at amortised cost: gross value and total value adjustments

Gross value Total value adjustments

of which: instruments Stage Stage Total partial Stage one Stage two Stage one Stage two with low three three write-offs* credit risk Debt securities 20,595 (24) Loans 1,399,320 89,292 140,105 (8,677) (4,021) (81,798) Total 30/06/2019 1,419,915 89,292 140,105 (8,701) (4,021) (81,798) Total 31/12/2018 1,291,784 154,661 135,311 (8,269) (7,984) (72,113)

(*) Values to be shown for informational purposes

Section 5 - Hedging derivatives - Item 50

5.1 - Hedging derivatives: breakdown according to type of hedge and level

FV 30.06.2019 FV 31.12.2018

NV NV L1 L2 L3 L1 L2 L3 30.06.2019 31.12.2018 A. Financial derivatives 87,133 151,421 82,650 288,583 1) Fair value 87,133 151,421 82,650 288,583 2) Cash flows 3) Foreign investments B. Credit derivatives 1) Fair value 2) Cash flows Total 87,133 151,421 82,650 288,583

Key: NV=notional value L1 = Level 1 L2 = Level 2 L3 = Level 3

Hedging derivatives are all related to funding obtained through bond issues. The change with respect to 31.12.2018 is in line with the changes that the discount rates of expected hedging flows observed during the reference period and the reduction in the residual life of the operations.

5.2 Hedging derivatives: breakdown according to portfolios hedged and type of hedge

Fair value - specific Fair value Cash flows

Transaction/type of hedge

gold

other

Micro

Macro Macro

Foreign

loans and

receivables

Investments

commodities

interest rates

currencies and

equity securities

and indexes share

debt securities and

Financial assets measured at fair value through other 1. comprehensive income 2. Financial assets measured at amortised cost 3. Portfolio 4. Other transactions Total assets 1. Financial liabilities 2. Portfolio 87,133 Total liabilities 87,133 1. Expected transactions 2. Portfolio of financial assets and liabilities

Section 7 - Equity investments - Item 70

7.1 Equity investments: information on equity investment relationships

Name Registered office Operating office Stake held % Available votes A. Fully held companies 0 0 B. Jointly controlled companies 0 0 C. Companies subject to significant influence 0 0 Piazza Piazza Istituto della Enciclopedia Italiana fondata da Giovanni dell'Enciclopedia dell'Enciclopedia 0.890 Treccani S.p.A. Italiana 4 Italiana 4

7.4 Insignificant equity investments: accounting information

Name

tax

tax (2)

after tax

of equity

continuing

the (1) year

Total assets

investments

Other income

Total liabilities

Total revenues

Profit for (Loss) Comprehensive

operations after operationsafter

Carrying amount

Profit from (Loss) Profit from (Loss) components after

income (3)=(1)+(2)

ceased operations

A. Fully held companies B. Jointly controlled companies C. Companies subject to significant influence Istituto della Enciclopedia Italiana fondata da Giovanni 600 149,660 82,391 53,390 (1,663) 282 282 Treccani S.p.A.

The figures shown in the table refer to the most recently approved financial statements (31.12.2018): on the basis of the information available, there is no evidence of impairment.

7.5 Equity investments: annual change

Total 30/06/2019 Total 31/12/2018 A. Opening balance 600 600 B. Increases B.1 Purchases B.2 Write-backs B.3 Revaluations B.4 Other changes C. Decreases C1. Sales C.2 Value adjustments C.3 Impairment C.4 Other changes D. Closing balance 600 600 E. Total revaluations F. Total adjustments

Section 8 - Property, plant and equipment - Item 80

8.1 Property, plant and equipment for business use: breakdown of assets carried at cost

Asset/Amount Total 30/06/2019 Total 31/12/2018 1. Owned assets 525 626 a) land b) buildings c) furniture and fixtures 243 292 d) electronic equipment 227 245 e) other 55 89 2. Rights of use acquired with leasing 18,422 a) land b) buildings 18,320 c) furniture and fixtures d) electronic equipment e) other 102 Total 18,947 626 of which: obtained through enforcement of guarantees received

The item is made up of furniture, fixtures and equipment used for the Bank’s operations. Rights of use, recognised on the basis of the new accounting standard IFRS 16, mainly refer to real estate leasing contracts, including that for the Bank's registered offices, and to leasing contracts for company vehicles.

8.6 Property, plant and equipment for business use: annual changes

Electronic Land Buildings Furniture Other Total equipment A. Gross opening balance 1,628 795 538 2,961 A.1 Total net adjustments 1,336 550 450 2,336 A.2 Net opening balance 292 245 88 625 B. Increases: 4 35 1 40 B.1 Purchases 4 35 1 40 B.2 Capitalised improvement costs B.3 Write-backs B.4 Positive fair value changes booked to: a) equity b) income statement B.5 Exchange gains B.6 Transfers from property held for investment B.7 Other changes C. Decreases: 53 52 35 140 C1. Sales C.2 Depreciation 53 52 35 140 C.3 Impairment losses recognised in: a) equity b) income statement C.4 Negative fair value changes booked to: a) equity b) income statement C.5 Exchange losses C.6 Transfers to: a) property, plant and equipment held for investment b) non-current assets and disposal groups held for sale C.7 Other changes D. Net closing balance 243 228 54 525 D.1 Total net adjustments 1,389 602 485 2,476 D.2 Gross closing balance 1,632 830 539 3,001 E. Measured at cost

8.6-Bis Rights of use acquired with leasing: annual changes

Electronic Land Buildings Furniture Other Total equipment A. Gross opening balance A.1 Total net adjustments A.2 Net opening balance B. Increases: 29,861 119 29,980 B.1 Purchases 17,875 81 17,956 B.2 Capitalised improvement costs B.3 Write-backs B.4 Positive fair value changes booked to a) equity b) income statement B.5 Exchange gains B.6 Transfers from property held for investment B.7 Other changes 11,986 38 12,024 C. Decreases: 11,541 17 11,558 C1. Sales C.2 Depreciation 756 17 773 C.3 Value adjustments due to impairment recognised in a) equity b) income statement C.4 Negative fair value changes booked to a) equity b) income statement C.5 Exchange losses C.6 Transfers to: a) property, plant and equipment held for investment b) non-current assets and disposal groups held for sale C.7 Other changes 10,785 10,785 D. Net closing balance 18,320 102 18,422 D.1 Total net adjustments 237 17 254 D.2 Gross closing balance 18,557 119 18,676 E. Measured at cost

Section 9 - Intangible assets - Item 90

9.1 Intangible assets: breakdown by type

Total 30/06/2019 Total 31/12/2018

Asset/Amount Finite life Indefinite life Finite life Indefinite life A.1 Goodwill A.2 Other intangible assets 1,897 1,998 A.2.1 Assets carried at cost: 1,897 1,998 a) Intangible assets generated internally b) Other assets 1,897 1,998 A.2.2 Assets carried at fair value: a) Intangible assets generated internally b) Other assets Total 1,897 1,998

The item comprises exclusively software. To develop software, the Bank uses an IT outsourcing consortium, therefore it has a limited need to invest in the same.

9.2 Intangible assets: annual changes

Other intangible assets: Other intangible assets: generated internally other

Goodwill FIN INDEF FIN INDEF Total

A. Opening balance 5,271 5,271 A.1 Total net adjustments 3,273 3,273 A.2 Net opening balance 1,998 1,998 B. Increases 374 374 B.1 Purchases 374 374 B.2 Increases in internal intangible assets B.3 Write-backs B.4 Positive fair value changes recognised in: - in equity - in income statement B.5 Exchange gains B.6 Other changes C. Decreases 475 475 C1. Sales C.2 Value adjustments 475 475 - Amortisation 475 475 - Impairment: + equity + income statement C.3 Negative fair value changes recognised in: - in equity - in income statement C.3 Transfer to non-current assets held for sale C.5 Exchange losses C.6 Other changes D. Net closing balance 1,897 1,897 D.1 Total net adjustments 3,748 3,748 E. Gross closing balance 5,645 5,645 F. Measured at cost

Key: FIN = finite life INDEF = indefinite life

Section 10 – Tax assets and liabilities – Asset Item 100 and Liability Item 60

10.1 Deferred tax assets: breakdown

Amount

Asset/Amount 30/06/2019 31/12/2018 1. Deferred tax assets Write-downs of loans 7,260 7,736 Other financial instruments 1,178 4,753 Property, plant and equipment and intangible assets 17 17 Provisions for risks and charges 2,514 2,273 Other assets/liabilities 87 74 Total 11,056 14,853

Deferred tax assets totalled € 11,056 thousand, a contra entry of € 9,128 thousand was recognised in the income statement and a contra entry of € 1,929 thousand in equity.

10.2 Deferred tax liabilities: breakdown

Amount

Asset/Amount 30/06/2019 31/12/2018 1. Deferred tax liabilities Other financial instruments 130 14 Other assets/liabilities 54 94 Total 184 108

Deferred tax liabilities are all recognised as a contra entry in equity.

10.3 Changes in deferred tax assets (recognised in the income statement)

Total 30/06/2019 Total 31/12/2018 1. Opening balance 9,443 8,983 2. Increases 704 3,045 2.1 Deferred tax assets recognised during the year 704 3,045 a) relating to previous years 11 b) due to change in accounting policies 2,206 c) write-backs d) other 704 828 2.2 New taxes or increases in tax rates 2.3 Other increases 3. Decreases 1,019 2,585 3.1 Deferred tax assets derecognised in the year 1,019 2,585 a) reversals 1,019 2,585 b) write-downs for supervening non-recoverability c) change in accounting policies d) other 3.2 Reductions in tax rates 3.3 Other decreases: a) transformation into tax credits pursuant to Italian Law 214/2011 b) other 4. Closing balance 9,128 9,443

10.3bis Changes in prepaid taxes pursuant to Italian Law 214/2011

Total 30/06/2019 Total 31/12/2018 1. Opening balance 5,436 5,436 2. Increases 3. Decreases 375 3.1 Reversals 375 3.2 Transformation into tax credits a) deriving from losses for the year b) deriving from tax losses 3.3 Other decreases 4. Closing balance 5,061 5,436

Deductibility of impairment and losses on loans

The regime pursuant to Law 83 of 27 June 2015, converted with Law 132 of 6 August 2015, introduced changes in relation to the deductibility of impairment and losses on loans of financial and credit institutions. In particular, from financial year 2016 impairment and losses on loans to customers recognised in the financial statements and losses incurred following sales for a consideration are fully deductible, for IRES and IRAP purposes, in the year in which they are recognised, while impairment not deducted at 31 December 2015 can be deducted by 31/12/2025 based on specific annual rates. As a consequence, deferred tax assets pursuant to the table above will no longer increase as a result of the full deductibility of write-downs on loans. The current amount will be progressively recovered in tax returns through to financial year 2025. Italian Law 216/2016 ensured the compatibility of DTAs (Deferred Tax Assets) with the European rules on state aid. In particular the possibility of converting qualified DTAs (related to: write-downs of loans, goodwill and other intangible assets) into tax credits was introduced for banks but only exercising an option that provides for payment of an annual fee. The Bank made use of the option, and therefore continues to not deduct DTAs from calculation of Own Funds.

100

10.5 Changes in deferred tax assets (with contra entry in shareholders’ equity)

Total 30/06/2019 Total 31/12/2018 1. Opening balance 5,410 3,009 2. Increases 94 2,492 2.1 Deferred tax assets recognised during the year 94 2,492 a) relating to previous years b) due to change in accounting policies c) other 94 2,492 2.2 New taxes or increases in tax rates 2.3 Other increases 3. Decreases 3,575 91 3.1 Deferred tax assets derecognised in the year 3,575 91 a) reversals 3,575 91 b) write-downs for supervening non-recoverability c) due to change in accounting policies d) other 3.2 Reductions in tax rates 3.3 Other decreases 4. Closing balance 1,929 5,410

101

10.6 Changes in deferred tax liabilities (recognised in shareholders’ equity)

Total 30/06/2019 Total 31/12/2018 1. Opening balance 108 125 2. Increases 116 2.1 Deferred tax liabilities recognised in the year 116 a) relating to previous years b) due to change in accounting policies c) other 116 2.2 New taxes or increases in tax rates 2.3 Other increases 3. Decreases 40 17 3.1 Deferred tax liabilities derecognised during the year 40 17 a) reversals 40 17 b) due to change in accounting policies c) other 3.2 Reductions in tax rates 3.3 Other decreases 4. Closing balance 184 108

102

Section 12 - Other assets - Item 120

12.1 Other assets: breakdown

Amount

Asset/Amount 30/06/2019 31/12/2018 1. Expenses for costs incurred on third-party assets 3,305 4,057 2. Loans and receivables to be invoiced 393 296 3. Items in transit (direct debits) 8,086 4. Other receivables and other entries 1,029 619 5. Tax receivables 3,719 3,803 6. Receivables due from the parent company 457 355 7. Due from parent company for tax consolidation 2,702 8. Prepaid expenses 1,336 1,163 Total 21,027 10,293

The increase in the item with respect to 31/12/2018 is mainly due to:

 8,086 thousand for items in transit, relative to payment orders made by customers, carried out on the first business day of the subsequent month;  2,702 thousand in IRES tax receivables which, based on the tax consolidation agreement with the parent company, are classified in the item in question.

For better comparison, certain trade receivables totalling € 152 thousand were reclassified in subitem "other receivables and other entries" of other assets at 31 December 2018, where they had been recognised among due from banks in the annual financial statements at 31 December 2018.

103

Liabilities

Section 1 - Financial liabilities measured at amortised cost - Item 10

1.1 Financial liabilities measured at amortised cost: breakdown of amounts due to banks

Total 30/06/2019 Total 31/12/2018

Carrying Fair Value - Fair Value - Fair Value - Carrying Fair Value - Fair Value - Fair Value - Type of transaction/Amount amount L1 L2 L3 amount L1 L2 L3

1. Due to central banks 321,169 396,822 2. Due to banks 483,279 495,931 2.1 Current accounts and on demand deposits 0 0 2.2 Time deposits 2.3 Loans and advances 390,330 404,013 2.3.1 Repurchase agreements 343,781 199,002 2.3.2 Other 46,549 205,011 2.4 Payables for commitments to repurchase own equity instruments 2.5 Payables for leasing 2.6 Other payables 92,949 91,918 Total 804,448 800,319 892,753 888,194

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

The item, down with respect to 31 December 2018, shows, beyond greater use of repurchase agreements payable:

- 321,169 thousand relative to Eurosystem financing transactions; - 46,523 thousand for funding from the EIB - 89,616 thousand for deposits guaranteeing variation margins received from other banks (item 2.5 Other payables).

104

1.2 Financial liabilities measured at amortised cost: breakdown of amounts due to customers

Total 30/06/2019 Total 31/12/2018

Carrying Fair Value - Fair Value - Fair Value - Carrying Fair Value - Fair Value - Fair Value - Type of transaction/Amount amount L1 L2 L3 amount L1 L2 L3

1. Current accounts and demand deposits 464,671 391,214 2. Time deposits 535,104 334,315 3. Loans 74,169 59,641 3.1 Repurchase agreements 3.2 Other 74,169 59,641 Payables due to commitments to repurchase own 4. equity instruments 5. Payables for leasing 18,443 6. Other payables 10,181 10,980 Total 1,102,568 1,107,168 796,150 793,832

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

This item, which rose with respect to 31 December 2018, reflects the consolidation of actions undertaken by the Bank on the funding market, in order to diversify its funding sources, also through offers aimed at corporate counterparties. It should also be noted the increase in funding from public administrations, in part thanks to the opening of current accounts for liquidity coming from subsidy measures managed by the parent company Invitalia.

105

1.3 Financial liabilities measured at amortised cost: breakdown of securities issued

Total 30/06/2019 Total 31/12/2018

Carrying Fair Value - Fair Value - Fair Value - Carrying Fair Value - Fair Value - Fair Value - Type of transaction/Amount amount L1 L2 L3 amount L1 L2 L3 A. Securities 1. bonds 153,921 217,792 296,699 347,871 1.1 structured 1.2 other 153,921 217,792 296,699 347,871 2. other securities 2.1 structured 2.2 other Total 153,921 217,792 296,699 347,871

Key: L1 = Level 1 L2 = Level 2 L3 = Level 3

Securities issued at 30 June 2019 consist of a bond listed on the MOT. The decrease with respect to 31 December 2018 is due to the repayment of a bond in February 2019 in accordance with its contractual maturity.

106

Section 5 - Value adjustments of financial liabilities with macro hedging - item 50

5.1 Value adjustments of hedged financial liabilities: breakdown by portfolios hedged

Value adjustment of hedged liabilities/Amount Total 30/06/2019 Total 31/12/2018 1. Positive adjustment of financial liabilities 84,064 73,789 2. Negative adjustment of financial liabilities Total 84,064 73,789

This item reflects the changes in discount rates with respect to the previous year.

Section 6 - Tax liabilities - Item 60

See section 10 of the assets.

107

Section 8 - Other Liabilities - Item 80

8.1 Other liabilities: breakdown

Amount

Asset/Amount 30/06/2019 31/12/2018 1. Due to parent company Invitalia S.p.A. 273 586 2. Social security charges 618 893 3. Trade payables 952 1,360 4. Payables for invoices to be received 5,392 3,855 5. Payables to personnel 2,567 1,492 6. Payables to public administrations 7,061 5,164 7. Sundry payables 542 315 9. Tax payables for indirect taxes 1,276 2,096 11. Deferred income 103 91 12. Security deposits 1,030 Total 19,813 15,852

The item “security deposits” refers to an advance received in relation to the possible disposal of a transaction classified as non-performing.

108

Section 9 - Employee severance benefits - Item 90

9.1 Employee severance indemnity: annual changes

Total 30/06/2019 Total 31/12/2018 A. Opening balance 3,163 3,260 B. Increases 157 96 B.1 Provisions in the year 13 33 B.2 Other changes 144 63 C. Decreases 140 193 C.1 Indemnities paid 140 193 C.2 Other changes D. Closing balance 3,180 3,163 Total 3,180 3,163

9.2 Other Information

The Bank’s provisions for employee severance benefits from 1 January 2007 are no longer increased by the annual amount set aside for the participants, because on the basis of the employees’ choice the same are put into a special Treasury fund set up by the INPS or into a complementary pension fund. As the indemnity represents a post-employment benefit, it is recognised on the basis of its actuarial value taking into account the appraisal carried out by an independent expert. The costs of the period are posted under personnel costs and actuarial gains and losses are posted as a contra item in equity. At 30 June 2019, the cumulative actuarial gains recognised in equity amounted to € 288,000, while the related deferred tax recognised as a reduction amounted to € 79,000. During the period, actuarial gains decreased by € 144,000. In particular, negative changes in fair value refer for € 136,000 to financial and demographic assumptions and for € 8,000 to changes associated with assessment of a collective nature (new recruits, resignations, etc.).

109

Section 10 - Provisions for risks and charges - Item 100

10.1 Provisions for risks and charges: breakdown

Item/Amount Total 30/06/2019 Total 31/12/2018 1. Provisions for credit risks relative to financial commitments and guarantees issued 1,736 581 2. Provisions for other commitments and guarantees given 3. Company pension funds 3,470 3,287 4. Other provisions for risks and charges 2,264 2,688 4.1 legal and tax disputes 234 234 4.2 personnel expenses 1,771 2,030 4.3 other 259 424 Total 7,470 6,556

10.5 Defined-benefit company pension funds

1. Illustration of the features of the funds and of the related risks

The company’s pension fund posted on the Financial Statements since 1982 regards the management of the remaining balance of the complementary pension fund, related to a minority of retired employees who at the time voted against its liquidation. At 30 June 2019, participants in this fund included only 8 pensioners and no active employees.

10.6 Provisions for risks and charges - other provisions

Legal disputes

Specific allocations have been made for a labour lawsuit and three disputes with customers. There are also other disputes with customers and another tax dispute (further information is given below) for which no allocations have been made since at present the cost is unknown and the cases are expected to be won by the Bank. We can also note that several other tax disputes and disputes with customers, as the result of agreements with contractual counterparties in the context of extraordinary operations (business unit spin-offs or sales, termination of a series of legal agreements) agreed between 1 July 2008 and 1 September 2010 with companies of the UniCredit Group, are substantially the responsibility of these latter, although the Bank may still formally be involved in the proceedings. Lastly, in relation to subsidies managed by the Bank on the account of public administrations, there are several disputes with no relative provisions, in that any adverse judgements would be payable by the public administrations and therefore sustained through the available balances managed.

110

Notification of IRES assessment for financial year 2008

In December 2011, on conclusion of a general inspection by the Italian Tax Authority (“Agenzia delle Entrate”) regarding the year 2008, the Bank was served a Report of Findings which challenged the deductibility of the costs incurred in 2008 — for a total of € 19.6 million — for transactions concluded for current and potential disputes with the Parmalat Group. In relation to this dispute, following observations sent by the Bank on 29 February 2012, no notification of assessment has been received from the Italian Tax Authority. The said Report of Findings also assessed the Bank as having a taxable income of € 16.2 million, pursuant to art. 37 bis of Italian Presidential Decree 600/73, resulting from a reorganisation operation of the credit recovery sector, gained from the sale on the part of the Bank and other companies of the UniCredit Group of non-performing positions in the factoring and loans segment to a subsidiary of the then parent company UniCredit S.p.A. Following the Report of Findings in 2012 the Lazio Regional Head Office of the Italian Tax Authority charged the Bank and UniCredit S.p.A., pursuant to art. 37 bis, for deducting losses resulting from the sale of the non performing positions. An appeal lodged against this charge by UniCredit SpA and the Bank was accepted by the Rome Provincial Tax Commission on 2 October 2014. In May 2015, the Italian Tax Authority lodged an appeal. The hearing for discussion was held on 10 May 2016 with judgement filed on 13 June with a positive result as in the first instance. On 13 January 2017, the Italian Tax Authority lodged an appeal with the Court of Cassation. Unicredit, as the consolidating entity, presented a request for a facilitated settlement pursuant to article 6 of Decree Law 119 of 23 October 2018, relative to the judgement originally made jointly with MCC, as well as a request to suspend the judgement until 31 December 2020, formulated pursuant to paragraph 10 of the aforementioned article 6. In this regard, as for the previous year, the Bank decided not to set aside any provisions for risks and charges, as these are expenses, obligations and responsibilities referable to the Corporate Business Unit, already demerged to UCCB SpA (now UniCredit SpA) on 1 September 2010 and, therefore, of exclusive pertinence to the former parent company UniCredit S.p.A.

111

Personnel expenses

The provision includes an estimate of direct and indirect charges relative to production bonuses/incentives which on the basis of subsequent resolutions or trade union agreements will have to be paid to personnel, as well as the allocation of a residual € 800,000 in restructuring charges, resolved by the Board of Directors at the time the 2018 - 2020 Business Plan was approved, aimed at guaranteeing that the organisational structure is streamlined through redundancy and part-time incentives supporting the strategic repositioning of the Bank, in line with the development guidelines contained in the Plan.

Other

The item includes Provisions for liabilities attributable essentially to operational risks deriving from the management of public subsidies (€ 190,000), to the estimated value of liabilities related to irrevocable commitments — assumed between 2007 and 2008 — following changes in market conditions, in terms of cost of funding (€ 69,000).

112

10.2 Provisions for risks and charges: annual changes

Provisions for Other provisions other Pension funds for risks and Total commitments and charges guarantees given A. Opening balance 3,287 2,688 5,975 B. Increases 308 899 1,207 B.1 Provisions in the year 24 899 923 B.2 Changes due to passage of time B.3 Changes due to changes in discount rate B.4 Other changes 284 284 C. Decreases 125 1,323 1,448 C.1 Use during the year 125 1,131 1,256 C.2 Changes due to changes in discount rate C.3 Other changes 192 192 D. Closing balance 3,470 2,264 5,734

113

10.3 Provisions for credit risks relative to financial commitments and guarantees issued

Provisions for credit risks relative to financial commitments and guarantees issued

Stage one Stage two Stage three Total 1. Commitments to disburse funds 1,646 6 35 1,687 2. Financial guarantees given 10 39 49 Total 1,656 45 35 1,736

The table shows adjustment provisions associated with irrevocable commitments, broken down by stage, relative to loans stipulated and unsecured loans granted.

114

Section 12 - Capital - Items 110, 130, 140, 150, 160, 170 and 180

12.1 “Share capital” and “Own shares”: breakdown

Paid-up share capital € 204,508,690 represented by 40,901,738 ordinary shares with a value of € 5 each.

12.2 Share capital - Number of shares: annual changes

Items/Types Ordinary Other A. Shares outstanding at start of period 40,901,738 - fully paid up 40,901,738 - not fully paid up A.1 Own shares (-) A.2 Shares outstanding: opening balance B. Increases B.1 New issues - against payment: - business combinations - bond conversion - exercise of warrants - other - free of charge: - to employees - to directors - other B.2 Sale of own shares B.3 Other changes C. Decreases C.1 Cancellation C.2 Purchase of own shares C.3 Disposal of companies C.4 Other changes D. Shares outstanding: closing balance 40,901,738 D.1 Own shares (+) D.2 Shares at end of the year 40,901,738 - fully paid up 40,901,738 - not fully paid up

115

12.3 Share capital: other information

Share capital is subscribed by the sole shareholder Invitalia S.p.A. for an amount of € 204,508,690 made up of 40,901,738 shares of € 5 each.

12.4 Profit reserves: other information

Amount

Item/Amount 30/06/2019 31/12/2018 1. Legal reserve 25,461 24,451 2. Extraordinary reserve 66,880 47,689 3. UniCredit Infrastrutture merger surplus reserve 826 826 4. Negative reserve for sales to companies in the UniCredit group (16,355) (16,355) 5. Positive reserve for sales to companies in the UniCredit group 72 72 6. FTA IFRS 9 reserve (5,494) (5,494) 7. Profits carried forward Total 71,390 51,189

1. The legal reserve, made up of net income, can be used to cover losses. 2. The extraordinary reserve, composed of profit reserves, can be used to cover losses, for capital increases and for shareholder distributions. 3. The reserve from the merger of UniCredit Infrastrutture can be used to cover losses, for capital increases and for shareholder distributions. The reserve is made up of paid-up share capital of € 695 thousand and, for the remainder, the income reserves of the company taken over in 2008. 4. The negative reserve includes capital losses incurred in 2008 subsequent to the sale of the non-performing positions to the company Aspra Finance, within the sphere of the overall restructuring of the non-performing loan department of the UniCredit Group. 5. The positive reserve derives from the sale, in 2010, of the Information Technology branch to the company UGIS belonging to the UniCredit Group. 6. The FTA IFRS 9 reserve is associated with the application of the new international accounting standard relative to recognition of financial assets. 7. Profits carried forward.

116

12.6 Other information

Amount

Item/Amount 30/06/2019 1. Actuarial gains on Employees’ Severance Indemnity Provision 209 2. Actuarial losses on Company pension funds (1,494) 3. Negative reserve for financial assets measured at fair value through other comprehensive income (2,060) Total (3,342)

117

Other information

Profit for the period of € 7,707,314.19 is included in Own Funds at 30 June 2019 for a total of € 5,780,415.64.

1. Financial commitments and guarantees given not designated at fair value

Nominal value of financial commitments and guarantees given

Stage one Stage two Stage three Total 30/06/2019 Total 31/12/2018 1. Commitments to disburse funds 122,959 491 171 123,621 99,298 a) Central Banks b) Public administrations 574 574 200 c) Banks d) Other financial companies 2,500 2,500 e) Non-financial companies 119,789 491 171 120,451 99,048 f) Households 96 96 50 2. Financial guarantees given 3,408 563 3,971 3,688 a) Central Banks b) Public administrations c) Banks d) Other financial companies e) Non-financial companies 3,408 563 3,971 3,688 f) Households

118

2. Other commitments and guarantees given

Nominal value

Total 30/06/2019 Total 31/12/2018 1. Other guarantees given 9 3 of which: impaired a) Central Banks b) Public administrations c) Banks 9 3 d) Other financial companies e) Non-financial companies f) Households 2. Other commitments of which: impaired a) Central Banks b) Public administrations c) Banks d) Other financial companies e) Non-financial companies f) Households

119

4. Management and intermediation services for customer accounts

Type of services Amount 1. Execution of orders on behalf of customers a) purchases 1. settled 2. not settled b) sales 1. settled 2. not settled 2. Individual portfolio management a) individual b) collective 3. Securities custody and administration 910,934 a) third-party securities deposited: connected with the role of depositary bank (excluding portfolio management) 1. securities issued by the bank which prepares the Financial Statements 2. other securities b) third-party securities deposited (excluding portfolio management): other 1. securities issued by the bank which prepares the Financial Statements 2. other securities c) third-party securities deposited with third parties d) securities owned by bank deposited with third parties 910,934 4. Other transactions 5,521,652

With reference to point 4. Other transactions from the table above, below we summarise the balances at 30 June 2019 for the main funds managed using separate accounting on the basis of specific agreements with the national government and the regions:

Other transactions Amount Italian Law 662/96 Guarantee Fund 5,319,080 Sustainable Growth Fund 92,585 Italian Law 388 Risk Capital Fund 32,491 Italian Law 454 Fund 21,541 National Operational Programme Fund for Research and Innovation 2014/2020 13,416 Marche Region Fund 8,568 Liguria Region Fund 8,756 Italian Law 488 Fund RTI 7,445 Other provisions 17,770 Total 5,521,652

120

Part C – Information on the income statement

121

Section 1 - Interest - Items 10 and 20

1.1 Interest and similar income: breakdown

Other Total Total Items/Technical types Debt securities Loans transactions 30/06/2019 30/06/2018 Financial assets measured at fair value 1. through profit and loss: 1.1 Financial assets held for trading 1.2 Financial assets designated at fair value 1.3 Other financial assets mandatorily measured at fair value Financial assets measured at fair value 2. 529 529 420 through other comprehensive income Financial assets measured at amortised 3. 14,471 14,471 18,664 cost: 3.1 Due from banks 3 3 1 3.2 Due from customers 14,468 14,468 18,663 4. Hedging derivatives 4,456 4,456 6,645 5. Other assets 21 21 6. Financial liabilities 1,329 1,246 Total 529 14,471 4,477 20,806 26,975 of which: interest income on impaired 464 financial assets of which: interest income on financial leasing

The major component of this item consists of interest on the customer loan portfolio. The item saw a decrease with respect to June 2018, essentially due to lower contributions from customers, both due to lower spreads and lower volumes due to significant subrogations/early repayments during the period, only partially compensated for by new production.

122

1.3 Interest and similar expense: breakdown

Other Total Total Items/Technical types Payables Securities transactions 30/06/2019 30/06/2018 Financial liabilities measured at amortised 1. (2,496) (4,816) (7,312) (9,523) cost 1.1 Due to central banks 1.2 Due to banks (711) (711) (1,889) 1.3 Due to customers (1,785) (1,785) (1,073) 1.4 Securities issued (4,816) (4,816) (6,561) 2. Financial liabilities held for trading 3. Financial liabilities designated at fair value 4. Other liabilities and provisions 5. Hedging derivatives 6. Financial assets (80) (72) Total (2,496) (4,816) (7,392) (9,595) of which: interest payable on leasing 242 242 payables

123

1.5 Differentials relating to hedging transactions

Item/Amount Total 30/06/2019 Total 30/06/2018 A. Positive differentials relating to hedging transactions 4,456 6,646 B. Negative differentials relating to hedging transactions C. Balance (A-B) 4,456 6,646

124

Section 2 - Fees and commissions - Items 40 and 50

2.1 Fee and commission income: breakdown

Type of service/Amount Total 30/06/2019 Total 30/06/2018 a) guarantees given 10 10 b) credit derivatives c) management, broking and consultancy services: 1. financial instrument trading 2. foreign currency trading 3. individual portfolio management 4. custody and administration of securities 5. depositary bank 6. securities placement 7. receiving and transmitting orders 8. advisory services 8.1 on investments 8.2 on financial structure 9. distribution of third-party services 9.1. portfolio management 9.1.1. individual 9.1.2. collective 9.2 insurance products 9.3 other products d) collection and payment services 102 114 e) servicing activities for securitisations 28 31 f) services for factoring transactions 14 2 g) tax collection services h) management of multilateral trading facilities i) holding and managing current accounts j) other services 27,074 29,169 Total 27,228 29,326

125

2.3 Fee and commission expense: breakdown

Service/Amount Total 30/06/2019 Total 30/06/2018 a) guarantees received (102) (134) b) credit derivatives c) management and broking services: 1. financial instrument trading 2. foreign currency trading 3. portfolio management: 3.1 own 3.2 third-party portfolio 4. custody and administration of securities 5. financial instrument placement 6. off-premises offer of financial instruments, products and services d) collection and payment services (64) (67) e) other services (13) (7) Total (179) (208)

126

Section 5 - Net gains/(losses) on hedging activities - Item 90

5.1 Net gains/(losses) on hedging activities: breakdown

Income component/Amount Total 30/06/2019 Total 30/06/2018 A. Income related to: A.1 Fair value hedges 10,276 A.2 Hedged financial assets (fair value) A.3 Hedged financial liabilities (fair value) 4,014 A.4 Cash flow hedges A.5 Assets and liabilities in foreign currencies Total hedging income (A) 10,276 4,014 B. Expenses related to: B.1 Fair value hedges (4,010) B.2 Hedged financial assets (fair value) B.3 Hedged financial liabilities (fair value) (10,275) B.4 Cash flow hedges B.5 Assets and liabilities in foreign currencies Total expense on hedging activities (B) (10,275) (4,010) C. Net gains/(losses) on hedging activities (A - B) 1 4 of which: net result of hedging activities

127

Section 6 - Gains/(losses) on disposal or repurchase - Item 100

Section 6.1 Gains (Losses) on disposal/repurchase: breakdown

Total 30/06/2019 Total 30/06/2018

Net Net Items/Income components Gains Losses Gains Losses gains/(losses) gains/(losses) A. Financial assets 1. Financial assets measured at amortised 500 500 cost: 1.1 Due from banks 1.2 Due from customers 500 500 2. Financial assets measured at fair value 1 (1) through other comprehensive income 2.1 Debt securities 1 (1) 2.2 Loans and advances Total assets (A) 1 (1) 500 500 Financial liabilities measured at B. amortised cost 1. Due to banks 2. Due to customers 3. Securities issued Total liabilities (B)

128

Section 8 – Net value adjustments for credit risk – item 130

8.1 Net value adjustments for credit risk relative to financial assets measured at amortised cost: breakdown

Writedowns (1) Writebacks (2)

Stage one Stage three - Stage three - Stage one Total Total Transactions/Income components Stage three and two write-off Other and two 30/06/2019 30/06/2018

A. Due from banks (23) 3 (20) 49 - loans (23) 3 (20) 49 - debt securities Of which: acquired or originated impaired loans B. Due from customers: (972) (64) (12,021) 4,093 1,051 (7,913) (9,270) - loans (948) (64) (12,021) 4,093 1,051 (7,889) (9,270) - debt securities (24) (24) Of which: acquired or originated impaired loans C. Total (995) (64) (12,021) 4,096 1,051 (7,933) (9,221)

Net value adjustments for credit risk on financial assets totalled 7.9 million (against 9.2 in the first half of 2018) and refers almost entirely to adjustments on financial receivables. During the period, writebacks on financial receivables were recognised for 5.1 million (of which 4.1 million in writebacks on performing positions, due to repaid positions, transferred from stage 2 to stage 1 and from stage 2 to impaired positions, 0.2 million in writebacks from collected amounts and 0.8 million in writebacks on impaired loans) and additional adjustments of 13.1 million, almost entirely relative to impaired positions (over 80% relative to positions classified as Unlikely to pay).

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8.2 Net value adjustments for credit risk relative to financial assets measured at fair value through other comprehensive income: breakdown

Writedowns (1) Writebacks (2)

Stage one Stage three - Stage three - Stage one Total Total Transactions/Income components Stage three and two write-off Other and two 30/06/2019 30/06/2018

A. Debt securities (32) 7 (25) 7 B. Loans - to customers - to banks of which: acquired or originated impaired financial assets Total (32) 7 (25) 7

130

Section 10 - Administrative expenses - Item 160

10.1 Personnel expenses: breakdown

Type of expense/Amount Total 30/06/2019 Total 30/06/2018 1) Employees (12,796) (12,769) a) wages and salaries (9,133) (9,244) b) social security contributions (2,431) (2,437) c) severance benefits (439) (422) d) pensions e) allocation to employee severance benefit provision (13) (22) f) provisions for pension fund and similar obligations: (24) (24) - defined contribution plans - defined benefit plans (24) (24) g) payments to external pension funds: (174) (166) - defined contribution plans (174) (166) - defined benefit plans h) costs deriving from payment agreements based on own equity instruments i) other employee benefits (582) (454) 2) Other personnel in service 3) Directors and statutory auditors (161) (168) 4) Retired personnel 5) Recovery of expenses for employees seconded to other companies 251 131 6) Refunds of expenses for third-party employees seconded to the company (231) (443) Total (12,937) (13,249)

131

10.5 Other administrative expenses: breakdown

Type of expense/Amount 30/06/2019 30/06/2018 1. Indirect taxes and duties (81) (104) 2. Sundry costs and expenses (7,629) (9,261) a) advertising, marketing and communication expenses (42) (20) - entertainment expenses (3) (8) - advertising expenses (33) - sponsorship expenses (6) (12) b) expenses related to credit risk (459) (458) - legal expenses for recovery of receivables (47) (40) - commercial information, inspections and other expenses (413) (417) c) indirect labour costs (203) (198) - travel and motor vehicle rental costs (196) (193) - other personnel expenses (7) (5) d) Information and communication technology expenses (2,086) (2,722) - telephone and data transmission expenses (89) (169) - ICT service (1,996) (2,553) e) consulting and professional services (2,091) (2,009) - Technical and specialist advisory services (23) (29) - other professional services (442) (885) - legal and notarial expenses (1,626) (1,094) f) expenses related to properties (556) (1,557) - security (107) (130) - cleaning services (99) (120) - Maintenance of furniture and fixtures, plant and equipment (2) (2) - Maintenance of premises (80) (109) - rental expenses for rented premises (187) (1,116) - utilities (80) (79) g) other overheads (2,192) (2,298) - insurance (89) (102) - postal expenses (52) (40) - printing and stationery (12) (24) - duties, subscriptions and contributions to trade associations and guarantee funds (89) (121) - contribution to the Resolution Fund (1,476) (1,390) - administrative and logistical services (172) (215) - other (301) (405) Total (7,710) (9,365)

132

Section 11 - Net provisions for risks and charges - Item 170

11.1 Net provisions for credit risks relative to commitments to disburse funds and financial guarantees given: breakdown

Amount

Item/Amount 30/06/2019 30/06/2018 a) Provisions for credit risks relative to financial commitments and guarantees issued 1,213 738 Total a 1,213 738 b) Excess for credit risk relative to commitments to disburse (59) (1,032) Total b (59) (1,032) Total (a+b) 1,155 (295)

133

11.2 Net provisions relative to other commitments and other guarantees given: breakdown

Amounts

Item/Amount 30/06/2019 30/06/2018 - Other provisions 1 57 Total a 1 57 Excess provisions in previous years: - for legal disputes (404) - for other provisions (77) (2) Total b (77) (406) Total a+b (76) (349)

134

Section 12 - Net value adjustments on property, plant and equipment - Item 180

12.1 Net value adjustments on property, plant and equipment: breakdown

Impairment Net adjustments Asset/Income component Amortisation (a) Write-backs (c) losses (b) (a+b-c) A. Property, plant and equipment 1. For business use 913 913 - owned 140 140 - rights of use acquired with leasing 773 773 2. Held for investment purposes - owned - rights of use acquired with leasing 3. Inventories Total 913 913

135

Section 13 - Net value adjustments of intangible assets - Item 190

13.1 Net value adjustments of intangible assets: breakdown

Impairment Net adjustments Asset/Income component Amortisation (a) Write-backs (c) losses (b) (a+b-c) A. Intangible assets A.1 Owned (475) (475) - Generated within the company - Other (475) (475) A.2 Rights of use acquired with leasing Total (475) (475)

136

Section 14 – Other operating income and expenses- Item 200

14.1 Other operating expenses: breakdown

Amounts

Item/Amount 30/06/2019 30/06/2018 1. Amortisation/depreciation of third-party assets (936) (514) 2. Transactions and negotiations (99) (39) 3. Securitisation expenses (114) (57) 4. Other sundry expense (32) (23) Total (1,181) (633)

137

14.2 Other operating income: breakdown

Amounts

Item/Amount 30/06/2019 30/06/2018 1. Customer recoveries 96 120 2. Recoveries from management with public administrations 1,600 833 3. Other income 130 10 Total 1,825 963

138

Section 19 - Income taxes for the period on continuing operations - Item 270

19.1 Income taxes for the period on continuing operations: breakdown

Income component/Amount Total 30/06/2019 Total 30/06/2018 1. Current taxes (-) (1,929) (3,190) 2. Changes in current taxes for previous years (+/-) 3. Reduction of current taxes for the year (+) 3.bis Reduction of current taxes of the year for tax credits pursuant to Italian Law 214/2011 (+) 4. Changes in deferred tax assets (+/-) (316) (1,334) 5. Changes in deferred tax liabilities (+/-) 6. Taxes pertaining to the year (-) (-1+/-2+3+3bis+/-4+/-5) (2,245) (4,524)

139

Part D – Comprehensive Income

140

COMPREHENSIVE INCOME

Detailed statement of comprehensive income

Item Total 30/06/2019 Total 30/06/2018 10. Profit (Loss) for the year 7,707 11,221 Other income components without reversal to income statement 20. Equity securities at fair value through other comprehensive income: a) changes in fair value b) transfers to other equity components Financial liabilities designated at fair value through profit and loss (changes in own credit 30. standing): a) changes in fair value b) transfers to other equity components 40. Hedging of equity securities at fair value through other comprehensive income: a) changes in fair value (instrument hedged) b) changes in fair value (hedging instrument) 50. Property, plant and equipment 60. Intangible assets 70. Defined-benefit plans (428) 106 80. Non-current assets and disposal groups held for sale 90. Portion of reserves from valuation of equity investments carried at equity 100. Income taxes relative to other income components without reversal to income statement 134 (38) Other income components with reversal to income statement 110. Hedging of foreign investments: a) changes in fair value b) reversal to income statement c) other changes 120. Exchange differences: a) changes in value b) reversal to income statement c) other changes 130. Cash flow hedges: a) changes in fair value b) reversal to income statement c) other changes of which: net result of positions 140. Hedging: (non-designated elements) a) changes in value b) reversal to income statement c) other changes Financial assets (other than equity securities) measured at fair value through other 150. 11,160 (15,793) comprehensive income: a) changes in fair value 11,135 (15,785) b) reversal to income statement 25 (8) - adjustments for credit risk 24 (7) - gains/losses on disposal 1 (1) 141

c) other changes 160. Non-current assets and disposal groups held for sale: a) changes in fair value b) reversal to income statement c) other changes 170. Portion of reserves from valuation of equity investments carried at equity: a) changes in fair value b) reversal to income statement - write-downs for impairment - gains/losses on disposal c) other changes 180. Income taxes relative to other income components with reversal to income statement (3,691) 5,222 190. Total other income components 7,175 (10,503) 200. Comprehensive income (Item 10 +190) 14,882 718

142

Part E – Information on risks and relative hedging policies

143

Section 1 – Credit risk

QUANTITATIVE INFORMATION - A. CREDIT QUALITY

A.1 Impaired and non-impaired loan exposures: amounts, value adjustments, trend and economic distribution

A.1.1 Distribution of loan exposures by portfolio and credit quality (carrying amount)

Non-impaired Other non- Unlikely to Past-due Portfolio/quality Bad loans past-due impaired Total pay exposures exposures exposures Financial assets measured at amortised 1. 11,214 47,019 75 13,774 1,482,710 1,554,792 cost Financial assets measured at fair value 2. 758,736 758,736 through other comprehensive income 3. Financial assets designated at fair value Other financial assets mandatorily 4. measured at fair value 5. Financial assets held for sale Total 30/06/2019 11,214 47,019 75 13,774 2,241,446 2,313,528 Total 31/12/2018 9,937 52,999 262 22,722 2,123,069 2,208,989

144

A.1.2 Distribution of financial assets by portfolio and credit quality (gross and net amounts)

Impaired Non-impaired Total

Total partial Gross Total value Net Gross Total value Net (net Portfolio/quality write-offs exposure adjustments exposure exposure adjustments exposure exposure) (*) Financial assets measured at amortised 1. 140,105 81,798 58,307 1,509,206 12,722 1,496,484 1,554,791 cost Financial assets measured at fair value 2. 759,327 591 758,736 758,736 through other comprehensive income 3. Financial assets designated at fair value Other financial assets mandatorily 4. measured at fair value 5. Financial assets held for sale Total 30/06/2019 140,105 81,798 58,307 2,268,533 13,313 2,255,220 2,313,527 Total 31/12/2018 135,311 72,113 63,198 2,162,610 16,819 2,145,943 2,208,989

* Values to be shown for informational purposes

Exposure to non-impaired customers includes receivables due from public administrations for services rendered for gross exposure of 94,252 thousand (69,238 thousand at 31/12/2018) against which portfolio adjustments of 2,496 thousand were made (2,661 thousand at 31 December 2018). On 8 July 2019, 53,094 thousand was received relative to 2018 fees accrued for management of the Guarantee Fund.

145

A.1.2-bis Distribution of financial assets by portfolio and credit quality (gross and net amounts)

Assets of evident low credit quality Other assets

Cumulative Portfolio/quality Net exposure Net exposure capital losses 1. Financial assets held for trading 2. Hedging derivatives 87,133 Total 30/06/2019 87,133 Total 31/12/2018 82,650

146

A.1.6 On-balance sheet and off-balance sheet loan exposures to banks: gross and net amounts

Gross exposure

Total value Total partial Type of exposure/Amounts Impaired Non-impaired adjustments and Net exposure write-offs* total provisions ON-BALANCE SHEET LOAN A. EXPOSURES a) Bad loans - of which: forborne exposures b) Unlikely to pay - of which: forborne exposures c) Impaired past-due exposures - of which: forborne exposures d) Non-impaired past-due exposures 3 3 - of which: forborne exposures e) Other non-impaired exposures 87,995 62 87,933 - of which: forborne exposures TOTAL A 87,998 65 87,933 OFF-BALANCE SHEET LOAN B. EXPOSURES a) Impaired b) Non-impaired 87,142 87,142 TOTAL B 87,142 87,142 TOTAL A+B 175,140 65 175,075

* Values to be shown for informational purposes

147

A.1.7 On-balance sheet and off-balance sheet loan exposures to customers: gross and net amounts

Gross exposure

Total value Total partial Type of exposure/Amounts Impaired Non-impaired adjustments and Net exposure write-offs* total provisions ON-BALANCE SHEET LOAN A. EXPOSURES a) Bad loans 35,450 24,236 11,214 - of which: forborne exposures 2,846 1,334 1,512 b) Unlikely to pay 104,572 57,554 47,018 - of which: forborne exposures 69,545 45,019 24,526 c) Impaired past-due exposures 83 8 75 - of which: forborne exposures d) Non-impaired past-due exposures 16,420 2,646 13,774 - of which: forborne exposures 484 40 444 e) Other non-impaired exposures 2,164,115 10,602 2,153,513 - of which: forborne exposures 14,986 662 14,324 TOTAL A 140,105 2,180,535 95,046 2,225,594 OFF-BALANCE SHEET LOAN B. EXPOSURES a) Impaired 171 35 136 b) Non-impaired 127,422 1,701 125,721 TOTAL B 171 127,422 1,736 125,857 TOTAL A+B 140,276 2,307,957 96,782 2,351,451

* Values to be shown for informational purposes

148

B. DISTRIBUTION AND CONCENTRATION OF LOAN EXPOSURES

B.1 On-balance-sheet and off-balance-sheet exposures to customers by sector

Financial companies Non-financial Public administrations Financial companies (of which: insurance Households companies companies)

Exposure/Counterparty Total value Total value Total value Total value Total value adjustments adjustments adjustments adjustments adjustments Net exposure Net exposure Net exposure Net exposure Net exposure

A. On-balance sheet loan exposures

A.1 Bad loans 9,259 21,344 1,955 2,893

- of which: forborne exposures 1,410 1,200 103 134

A.2 Unlikely to pay 44,796 56,176 2,223 1,378

- of which: forborne exposures 24,123 44,779 404 240

A.3 Impaired past-due exposures 5 1 70 8

- of which: forborne exposures

A.4 Non-impaired exposures 850,476 3,008 68,095 570 874,789 8,232 373,927 1,439

- of which: forborne exposures 11,575 516 3,193 186

Total (A) 850,476 3,008 68,095 570 928,849 85,753 378,175 5,718

B. Off-balance sheet loan exposures

B.1 Impaired exposures 136 35

B.2 Non-impaired exposures 573 1 2,468 32 122,583 1,668 96 0

Total (B) 573 1 2,468 32 122,719 1,703 96

Total (A+B) 30.06.2019 851,049 3,009 70,563 602 1,051,568 87,456 378,271 5,718

Total (A+B) 31.12.2018 782,511 3,346 54,004 678 1,014,540 80,249 397,983 5,384

149

B.2 On-balance-sheet and off-balance-sheet loan exposures to customers by geographical area (carrying amount)

Operations with Italy

ITALY – SOUTH AND NORTH WEST ITALY NORTH EAST ITALY CENTRAL ITALY ISLANDS

Net Total value Net Total value Net Total value Net Total value Exposure/Geographical area exposure adjustments exposure adjustments exposure adjustments exposure adjustments

A. On-balance sheet loan exposures A.1 Bad loans 729 968 198 1,928 11,448 8,557 11,622 A.2 Unlikely to pay 1,413 496 28,623 33,003 7,850 18,800 9,132 5,255 A.3 Impaired past-due exposures 22 2 53 6 A.4 Non-impaired exposures 178,448 2,190 212,141 1,332 1,218,920 3,370 557,650 6,355 Total (A) 180,590 3,654 240,764 34,533 1,228,720 33,620 575,392 23,238 B. Off-balance sheet loan exposures B.1 Impaired exposures 136 35 B.2 Non-impaired exposures 19,206 578 13,901 608 58,804 347 33,809 168 Total (B) 19,206 578 14,037 643 58,804 347 33,809 168 Total (A+B) 30.06.2019 199,796 4,232 254,801 35,176 1,287,524 33,967 609,201 23,406 Total (A+B) 31.12.2018 204,924 5,502 230,325 27,019 1,185,853 34,722 627,636 22,216

The above geographical distribution is based on the criteria of the concentration models (borrowers’ province of residence) and, therefore, does not give a picture of the prevalence of the Bank’s operations. Furthermore, of exposures classified as Central Italy, an amount of € 758.7 million regards Italian Government bonds, classified as financial assets measured at fair value through other comprehensive income, and an amount of € 91.8 million represents receivables due from Public Administrations for commissions earned on services rendered.

150

Operations outside of Italy

OTHER EUROPEAN ITALY AMERICAS ASIA REST OF WORLD COUNTRIES

Exposure/Geographical area

exposure

Total value Total value Total value Total value Total value

adjustments adjustments adjustments adjustments adjustments

Net exposure Net exposure Net Net exposure Net exposure

A. On-balance sheet loan exposures A.1 Bad loans 11,214 24,236 A.2 Unlikely to pay 47,019 57,554 A.3 Impaired past-due exposures 75 8 A.4 Non-impaired exposures 2,167,159 13,248 128 0 Total (A) 2,225,467 95,046 128 B. Off-balance sheet loan exposures B.1 Impaired exposures 136 35 B.2 Non-impaired exposures 125,721 1,701 Total (B) 125,857 1,736 Total (A+B) 30.06.2019 2,351,324 96,782 128 Total (A+B) 31.12.2018 2,248,738 89,461 131 168 1

151

B.3 On-balance-sheet and off-balance-sheet loan exposures to banks by geographical area

Operations with Italy

ITALY – SOUTH AND NORTH WEST ITALY NORTH EAST ITALY CENTRAL ITALY ISLANDS

Net Total value Net Total value Net Total value Net Total value Exposure/Geographical area exposure adjustments exposure adjustments exposure adjustments exposure adjustments

A. On-balance sheet exposures A.1 Bad loans A.2 Unlikely to pay A.3 Impaired past-due exposures A.4 Non-impaired exposures 42,437 27 365 1 44,485 34 3 Total (A) 42,437 27 365 1 44,485 34 3 B. Off-balance sheet exposures B.1 Impaired exposures B.2 Non-impaired exposures 9 Total (B) 9 Total (A+B) 30.06.2019 42,437 27 365 1 44,494 34 3 Total (A+B) 31.12.2018 17,115 14 440 2 44,339 34 3

152

Operations outside of Italy

OTHER EUROPEAN ITALY AMERICAS ASIA REST OF WORLD COUNTRIES

Exposure/Geographical area

exposure

Total value Total value Total value Total value Total value

adjustments adjustments adjustments adjustments adjustments

Net exposure Net exposure Net exposure Net Net exposure

A. On-balance sheet exposures A.1 Bad loans A.2 Unlikely to pay A.3 Impaired past-due exposures A.4 Non-impaired exposures 87,287 65 647 Total (A) 87,287 65 647 B. Off-balance sheet exposures B.1 Impaired exposures B.2 Non-impaired exposures 9 Total (B) 9 Total (A+B) 30.06.2019 87,296 65 647 Total (A+B) 31.12.2018 61,895 53 467

153

Large Exposures

In application of prudential supervisory regulations regarding large exposures (see Part II, Chapter 10 of Bank of Italy Circular 285/2013 and articles 387 and subsequent of Regulation (EU) 575/2013), at 30 June 2019 there were 5 exposures of this kind (more than 10% of the Regulatory Capital) for a nominal amount of € 1,131,880 thousand, corresponding to a weighted amount of € 136,269 thousand.

154

Part F – Information on capital

155

Section 1 – Capital

A. Qualitative information

The company’s Capital, broken down in detail in the following sections, is composed of share capital, profit reserves, the valuation reserve related to the HCTS securities portfolio and the defined-benefit plans.

It is subjected to constant monitoring carried out jointly by the Risk Management and Administration, Control and Finance Departments, in order to check current and future adequacy, linked to the capital needs, connected with development of the Business and in keeping with the risk appetite, defined by the Board of Directors.

Internal capital management procedures also take into account the mandatory minimum capital requirements set by the Supervisory Regulations (known as Basel 3), which sets two fundamental objectives:

 to strengthen banks’ ability to absorb the shocks deriving from financial and economic stress;

 to increase transparency and disclosure to the public in relation to the risks that banks assume.

Implementing the first objective, the Basel III framework introduced measures to improve the quantity and quality of intermediaries’ capital endowment, through additional reserves compared with the minimum requirements (capital conservation buffer and countercyclical supervisory instruments), rules on the management of liquidity risk and financial leverage (further requirements needed to cope with short term liquidity risk, to maintain the long-term structural balance and to contain financial leverage).

Additionally, implementing the EBA guidelines on the SREP, the Supervisory Authority reviews every year the capital requirements of the individual banks in relation to their overall riskiness and to the results of the prudential control process.

In particular, in relation to the three capital ratios provided for in the legislation (CET1, Tier1 and TCR), as part of the SREP the Bank of Italy defines, for each Bank subject to its direct supervision, the individual level of the following requirements:

 Total SREP capital ratio (TSCR) or binding requirement  Overall Capital Requirements (OCR) or total requirement  Pillar 2 guidance (P2G) or target requirement (where provided for) 156

B. QUANTITATIVE INFORMATION B.1 The Bank’s capital: breakdown

Amount Amount Item/Amount 30.06.2019 31.12.2018 1. Share capital 204,509 204,509 2. Share premium reserve 3. Reserves 71,390 51,189 - of profits 71,390 51,189 a) legal 25,461 24,451 b) statutory c) own shares d) other 45,929 26,738 - other 3.5 Advances on dividends (-) 4. Equity instruments 5. (Own shares) 6. Valuation reserves (3,342) (10,517) - Equity securities at fair value through other comprehensive income - Hedging of equity securities at fair value through other comprehensive income - Financial assets (other than equity securities) measured at fair value (2,057) (9,526) through other comprehensive income - Property, plant and equipment - Intangible assets - Hedging of foreign investments - Cash flow hedges - Hedging instruments (non-designated elements) - Exchange differences - Non-current assets and disposal groups held for sale - Financial liabilities designated at fair value through profit and loss (changes in own credit standing) - Actuarial gains (losses) on defined-benefit pension plans (1,285) (991) - Portion of valuation reserves related to investees booked to shareholders' equity - Special revaluation laws 7. Profit (loss) for the year 7,707 20,201 Total 280,264 265,382

157

B.2 Valuation reserves for financial assets measured at fair value through other comprehensive income: breakdown

Total 30/06/2019 Total 31/12/2018

Asset/Amount Positive reserve Negative reserve Positive reserve Negative reserve 1. Debt securities 256 (2,313) 29 (9,555) 2. Equity securities 3. Loans Total 256 (2,313) 29 (9,555)

158

B.3 Valuation reserves for financial assets measured at fair value through other comprehensive income: annual change

Debt securities Equity securities Loans

1. Opening balance (9,526) 2. Positive changes 7,469 2.1 Fair value increases 7,453 2.2 Net value adjustments for credit risk 16 2.3 Reversal to income statement of negative reserves from realisation 0 2.4 Transfers to other equity components (equity securities) 2.5 Other changes 3. Negative changes 3.1 Fair value decreases 3.2 Writebacks for credit risk 3.3 Reversal to income statement of positive reserves: from realisation 3.4 Transfers to other equity components (equity securities) 3.5 Other changes 4. Closing balance (2,057)

159

B.4 Valuation reserves relating to defined benefit plans: annual changes

Amounts

Employees’ severance Internal pension Asset/Amount Total indemnity fund provision 1. Opening balance 313 (1,304) (991) 2. Positive changes 2.1 Fair value increases 2.2 Other changes 3. Negative changes 3.1 Fair value decreases 104 190 294 3.2 Other changes 4. Closing balance 209 (1,494) (1,285)

Section 2 - Own funds and regulatory banking ratios

2.1 Own funds

A. Qualitative information

1. Common Equity Tier 1 - CET1

Own Funds are determined every quarter according to the rules established in Bank of Italy Circular no. 285 of 17 December 2013 implementing the new Basel capital agreement (known as Basel III), as updated.

Own Funds are calculated as the sum of positive and negative components on the basis of the capital quality; the positive components must be fully available by the Bank in order to be usable in the calculation of the capital absorption.

Own Funds are divided into Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) Capital and Tier 2 (T2) Capital, adjusted by prudential filters and net of certain detractions.

CET1 includes capital paid in, reserves and non-distributed profit for the period and components of an economic nature accumulated over time directly to equity against valuation of financial assets measured at fair value and gains or losses related to the defined benefit plans.

Intangible assets, deferred tax assets based on future profitability and not deriving from temporary differences (net of the related deferred tax liabilities) and, if higher than certain thresholds, deferred tax assets which are based on future profitability and emerging from temporary differences must then be deducted from CET1. 160

As already described in the paragraph on "Preparation criteria" in Part A Accounting Policies, at 1.1.2018 the Bank adopted the transitional regime to determine the impact of the introduction of new accounting standard IFRS 9 on its own funds.

Please note that no elements exist that contribute to AT1 and to T2 (essentially similar to equity instruments of secondary quality and the subordinated loans provided for in the previous Basel II accord as components of Tier II capital).

161

B. Quantitative information

Amount Item/Amount Amount 30.06.2019 31.12.2018 A. Common Equity Tier 1 – CET1 before application of the prudential filters 278,338 245,181 of which CET1 instruments subject to transitory rules - - B. CET1 capital prudential filters (+/-) - - C. CET1 gross of ineligible elements and effects of transitory regime (A +/- B) 278,338 245,181 D. Elements to be deducted from CET1 3,825 7,408 E. Transitory regime – Impact on CET1 (+/-) 4,670 5,161 F. Total Common Equity Tier 1 – CET1 (C – D +/-E) 279,183 242,934 G. Additional Tier 1 (AT1) capital gross of deductions and transitional adjustments - - of which AT1 instruments subject to transitory rules - - H. Elements to be deducted from AT1 - - I. Transitory regime - Impact on AT1 (+/-), including instruments issued by subsidiaries and included in AT1 based on transitory rules - - L. Total Additional Tier 1 (AT1) capital (G - H +/- I) - - M. Tier 2 (T2) Capital gross of ineligible elements and effects of transitory regime - - of which T2 instruments subject to transitory rules - - N. Elements to be deducted from T2 - - O. Transitory regime - Impact on T2 (+/-), including instruments issued by subsidiaries and included in T2 based on transitory rules - - P. Total Tier 2 (T2) capital (M - N +/- O) - - Q. Total own funds (F + L + P) 279,183 242,934

162

2.2 Capital adequacy

A. Qualitative information

The prudential supervisory rules for banks (Bank of Italy Circular no. 285 of 17 December 2013 and subsequent updates), which implement the regulations on the subject of measuring capital and capital ratios (Basel III), state the Bank’s total own funds must represent at least 10.5% (Total capital ratio including the minimum requirement and capital conservation buffer) of total weighted assets deriving from the typical risks of the banking and financial business (credit, counterparty, market and operational risks). In particular, regulatory requirements for own funds consist of 8% as the minimum requirement, in compliance with article 92 of Regulation EU 575 of 26 June 2013 (or CRR) and 2.5% as the capital conservation reserve. In the context of the Supervisory Review and Evaluation Process (SREP), the competent authorities can provide for additional capital requirements with respect to those resulting from application of the legislative provisions.

On the basis of the structure of Own Funds indicated in the previous paragraph, the regulatory capital ratios are subject to the following limits:

 Common Equity Tier 1 must be equal, at all times, to at least 4.5% of risk-weighted assets, as a minimum requirement, and at least 7.0% as total requirement (including also the capital conservation buffer);

 Tier 1 must be equal, at all times, to at least 6% of risk-weighted assets, as a minimum requirement, and at least 8.5% as total requirement;

 Own Funds must be equal, at all times, to at least 8% of risk-weighted assets, as a minimum requirement, and at least 10.5% as total requirement.

For 2019, the Bank of Italy, after assessing the overall risk level of the institute, done within the context of the Supervisory Review Evaluation Process (SREP), confirmed the additional capital levels for the bank established in 2017, adjusting only the overall capital ratio (OCR), in relation to the reference phase of the capital conservation reserve:

163

Binding requirement Capital Guidance[2] Capital ratio Total requirement (OCR) (TSCR) (P2G)

CET1 Ratio 5.9% 8.40% N/A

T1 Ratio 7.85% 10.35 10.45%

TCR 10.5% 13.0 13.50%

Considering that at 30 June 2019 the Bank has a capitalisation level for the CET1 ratio of 22.17% no difficulties can be foreseen in observing the requirements requested by the Bank of Italy, also taking into account that the Risk Appetite Framework (RAF), approved by the Board of Directors, identifies as target threshold 15.5%.

[2]In order to ensure that binding measures are respected even in the case of a deterioration in the economic and financial situation, in consideration of exposure to risks under stress conditions, in the same provision the Regulatory Authority identified the guiding capital levels (capital guidance), which constitute the Regulatory Authority's expectations relative to additional capital resources which the Bank must hold. 164

B. Quantitative information

Category/Amount Unweighted Weighted Unweighted Weighted amounts amounts/requirements amounts amounts/requirements 30.06.2019 30.06.2019 31.12.2018 31.12.2018

A. RISK ASSETS A.1 CREDIT AND COUNTERPARTY RISK

1) STANDARDISED APPROACH 2,425,450 1,081,843 2,314,044 1,060,503 2) INTERNAL RATING-BASED APPROACH 0 0 0 0 2.1 Basic 2.2 Advanced 3) SECURITISATIONS B. REGULATORY CAPITAL REQUIREMENTS

B.1 CREDIT AND COUNTERPARTY RISK 86,547 84,840

B.2 CREDIT VALUATION ADJUSTMENT RISKS 430 432 B.3 REGULATORY RISK B.4 MARKET RISK 0 0 1. STANDARD APPROACH 2. INTERNAL MODELS 3. CONCENTRATION RISK B.5 OPERATIONAL RISK 13,786 13,786 1. BASIC APPROACH 13,786 13,786 2. STANDARDISED APPROACH 3. ADVANCED APPROACH B.6 OTHER CALCULATION ELEMENTS 0 0 B.7 TOTAL PRUDENTIAL REQUIREMENTS 100,763 99,058

C. RISK ASSETS AND CAPITAL RATIOS C.1 Risk-weighted assets 1,259,535 1,238,224 C.2 Common Equity Tier 1/Risk-weighted assets (CET1 capital ratio) 22.17 19.62 C.3 Tier 1 Capital/Risk-weighted assets (Tier 1 capital ratio) 22.17 19.62 C.4 Total own funds/Risk-weighted assets (Total capital ratio) 22.17 19.62

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Part H – Transactions with related parties

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In relation to the provisions of IAS 24 the perimeter of related parties was identified as including the following categories:

- the parent company, at 100%: Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo d’impresa S.p.A. (Invitalia S.p.A.); - companies belonging to the Invitalia Group; - companies which, directly or indirectly, hold stakes in the parent company such as to exercise a considerable influence over the same; - subjects who hold administrative, management and control positions - including the Directors and Statutory Auditors of the Bank or its parent company (key management personnel); - companies controlled directly and/or indirectly, also jointly, by key management personnel; - companies subject to considerable influence on the part of key management personnel, i.e. companies in which key management personnel directly or indirectly hold a significant portion of the voting rights; - the close family members of key management personnel and the entities which they control, individually or jointly, or over which they exercise a considerable influence, or which hold, directly or indirectly, a significant portion of the voting rights; - Pension Funds for Bank employees.

Although the Bank applies the exemption contemplated by paragraph 25 of IAS 24 for public entities, for the sake of standardisation in respect of the criteria adopted by the Parent Company in the preparation of the consolidated financial statements full information is given in the Bank’s separate financial statements on transactions with the Ministry of Economic Development and the Ministry of the Economy and Finance and companies controlled by said Ministries.

Information is given below concerning fees paid to key management personnel and transactions with various types of related parties.

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1. Disclosure on the fees of key management personnel

The following table provides the amount of benefits provided to key management personnel including VAT and accessory charges, when applicable.

Post- Short-term Other long-term Severance employment benefits benefits benefits benefits

Fees to directors 124

Fees to statutory auditors 37

Fees to the Bank's key management personnel 1,932 11

2. Information on transactions with related parties

During the first half of 2019, with the parent company Invitalia S.p.A., no transactions took place with related parties or with subjects other than related parties, which were atypical or unusual or which, for their importance, could have given rise to doubts in relation to safeguarding the company’s capital.

The non-typical or unusual transactions carried out with related parties all fall within the sphere of the Bank’s ordinary operations and are normally carried out under market conditions and, in any case, at the same conditions as applied to independent third parties.

Without prejudice to compliance with art. 2391 of the Italian Civil Code, on the interests of directors, the Bank was subject to the provisions of art. 136 of the Consolidated Banking Act regarding the obligations of bank representatives, pursuant to which the latter cannot assume obligations of any kind or conduct buying and selling transactions, directly or indirectly with the Bank that they direct, manage or control, unless approved by a Board of Directors’ resolution passed unanimously, with the exclusion of the vote of the representative involved and with the favourable vote of all members of the company’s Board of Auditors.

The table below shows the assets, liabilities, economic data and guarantees in effect at 30 June 2019 according to type of related party.

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Assets Liabilities Income Statement Commitments

Other Commitments Due from Other Due to Other Interest Interest Personnel administrative to disburse Customers assets customers liabilities income expense expenses expenses funds

Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo d’impresa S.p.A. 3,159 70,449 273 258 20 1 (Invitalia S.p.A.)

Infratel Italia S.p.A. 76,225 124 12,000

Key Executives-Directors-Statutory Auditors 1,587 10

Relative to the Ministry of Economy and Finance, note receivables of € 47 thousand relative to expenses advanced by the Bank relative to its public subsidy management activity.

Assets Liabilities Income Statement Commitments

Fee and Fee and Commitments Due from Other Due to Other Interest Interest Administrative commission commission to disburse Customers assets customers liabilities income expense expenses income expense funds

Cassa Depositi e Prestiti S.p.A. 81,606 278

Enel S.p.A. 100,015 15 Fincantieri Cantieri Navali Italiani 1,489 45 10,000 S.p.A. Leonardo S.p.A. 37

Gruppo Poste Italiane S.p.A. 18,401 160,021 1,672 1 7 762

Rai Way S.p.A. 278 1

Raffineria di Milazzo S.C.P.A. 9,500 26 RAM Logistica Infrastrutture e 11 20 Trasporti S.p.A.

Additionally, note receivables due from the Ministry of Economic Development for € 87,593 thousand for invoices issued or to be issued relative to commissions accrued in the context of subsidised fund management.

During the first half of 2019, the Bank received guarantees from SACE S.p.A. totalling € 3,174 thousand and subscribed a basket bond with a nominal value of € 20 million, entirely guaranteed by SACE S.p.A.

With regard to the complementary pension fund for Bank employees, contributions paid to the Previgen pension fund totalled € 511 thousand.

Finally, we can note that the principle of guaranteeing the objectivity and impartiality of transactions carried out in favour of subjects close to banks’ decision-making centres — set forth in Bank of Italy Circular no. 263 of 27 December 2006, Title V, Chapter 5 — is applied

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through the Policy for managing transactions with associated subjects, approved by the Board of Directors.

This Policy, in observance of the Bank of Italy Circular, not only emphasises the role of the Independent Directors and of the Board of Statutory Auditors for the purpose of the correct execution of the process for concluding transactions with associated subjects, but also contemplates specific resolution procedures aimed at maintaining the integrity of the decision-making processes, and specific prudential limits for the Bank’s risk activities with associated subjects.

Other aspects

Parent Company: Agenzia nazionale per l’attrazione degli investimenti e lo sviluppo d’impresa S.p.A. (Invitalia S.p.A.) Registered office: Via Calabria 46, Rome, Italy

Disclosure on the activity of direction and coordination of companies

The Bank is subject to the direction and coordination of the Parent Company. The essential information about Invitalia, provided in the following summary schedule as required by Article 2497 bis of the Civil Code, was taken from the relative annual financial statements, most recently approved at 31 December 2017. For full and complete understanding of Invitalia S.p.A.'s equity and financial situation at 31 December 2017, as well as the results achieved by the company in the financial year ending on said date, please read the financial statements which, accompanied by the independent auditor’s report, are available in the form and using the methods envisaged under the law.

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BALANCE SHEET OF FINANCIAL YEAR 2017

Assets 31/12/2017

Cash and cash equivalents 14,356 Financial assets held for trading 37,866,685 Financial assets measured at fair value 32,907,577 Financial assets available for sale 8,269,165 Loans and receivables 1,062,666,155 Equity investments 238,012,460 Property, plant and equipment 70,370,686 Intangible assets 5,472,525 Tax assets 14,835,596 Assets held for sale 132,474,826 Other assets 37,267,675

Total assets 1,640,157,706

Liabilities and shareholders' equity 31/12/2017

Payables 128,728,648 Securities issued 349,728,249 Tax liabilities 948,901 Other liabilities 395,004,458 Employee severance benefits 7,349,879 Provisions for risks and charges 8,105,677 Valuation reserves (4,999,307) Reserves (83,159,319) Share capital 836,383,864 Net loss for the period 2,066,656

Total liabilities and shareholders’ equity 1,640,157,706

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INCOME STATEMENT OF FINANCIAL YEAR 2017

Item 31/12/2017

Interest and similar income 3,946,426 Interest and similar expenses (2,412,939) Net interest income 1,533,487 Fee and commission income 123,684,093 Fee and commission expense (8,073,162) Net fees and commissions 115,610,931 Dividends and similar income 77,000 Net gains/(losses) on trading activities (407,871) Net gains/(losses) on financial assets and liabilities at fair value 788,941 Gains/(Losses) on disposal or repurchase of financial assets 189,361 Net banking and insurance income 117,791,849

Net value adjustments for impairment of financial assets (5,845,414) Net gains/(losses) on financial operations 111,946,435 Administrative expenses: (116,697,034) a) personnel expenses (92,897,218) b) other administrative expenses (23,799,816) Net provisions for risks and charges (594,593) Net value adjustments on property, plant and equipment (2,312,521) Net value adjustments on intangible assets (4,387,243) Other operating income/expenses 4,692,921 Operating expenses (119,298,470)

Gains(losses) from equity investments 11,593,117 Profit on continuing operations before tax 4,241,082

Income taxes for the period on continuing operations (1,351,736) Profit on continuing operations after tax 2,889,346 Profit (loss) from disposal groups held for sale after tax (822,690)

Profit (loss) for the period 2,066,656

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Part L – Segment reporting

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The segment reporting of Mediocredito Centrale is based on the elements that the management uses in making its operating decisions (the management approach) and is therefore in line with the disclosure requirements provided for in IFRS 8.

In the context of the activities related to achieving the targets set forth in the Business Plan, the Bank’s organisational model is divided into two business segments:

Lending business and subsidised fund management.

Attribution of the economic and financial results to the two business segments is based on the accounting standards used for preparing and presenting the Half-Yearly Financial Report. For each segment subject to disclosure the result achieved is presented in terms of gross profit from current operations. The main income statement figures and the main financial aggregates that summarise the contribution of each business segment to the Bank are presented below.

ECONOMIC RESULTS 30/06/2019 30/06/2018

Management Management of of Lending Subsidised Total Lending Total Subsidised Funds (figures in thousands of euro) Funds

NET BANKING AND INSURANCE INCOME 13.851 26.497 40.348 18.554 28.340 46.893

OPERATING PROFIT/(LOSS) 6.199 12.873 19.072 12.007 12.297 24.304

Net value adjustments on receivables and on (136) (111) provisions for guarantees and commitments (7.905) (8.042) (9.103) (9.214)

NET OPERATING PROFIT/(LOSS) 12.737 11.031 2.904 12.186 15.089 (1.706)

GROSS PROFIT ON CONTINUING 12.814 9.952 3.155 12.590 15.745 OPERATIONS (2.861)

Income taxes (2.245) (4.524)

PROFIT FOR THE PERIOD 7.707 11.221

OTHER INFORMATION 30/06/2019 31/12/2018 Management Management of of Lending Subsidised Total Lending Total Subsidised Funds (figures in thousands of euro) Funds Loan brokerage: loans and advances to customers and banks 1.453.644 101.148 1.554.791 1.415.583 77.807 1.493.390

Management of Public Funds:

funds of third parties under management, 5.521.652 5.593.051 recognised under separate accounting (*) of which: Guarantee Fund Italian Law 5.319.080 5.310.083 662/96

______(*) See Part B of the Notes to the Financial Statements - “Management and intermediation services for third parties” 174

Certification of the condensed Half-Yearly Financial Statements pursuant to article 81-ter of CONSOB Regulation 11971 of 14 May 1999, as amended

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Certification of the condensed Half-Yearly Financial Report pursuant to article 81 – ter of CONSOB Regulation 11971 of 14 May 1999 as amended

1. The undersigned, Bernardo Mattarella, in his capacity as Chief Executive Officer of Mediocredito Centrale S.p.A., and Elena De Gennaro, in her capacity as Financial Reporting Manager of Mediocredito Centrale S.p.A., attest, taking into account also the provisions of Article 154-bis, paragraphs 3 and 4 of Italian Legislative Decree no. 58 of 24 February 1998:

• the adequacy in relation to the characteristics of the business, and • the effective application

of the administrative and accounting procedures for preparing the condensed half-yearly financial report, during the course of the first half of 2019. 2. Verification of the adequacy and effective application of the administrative and accounting procedures for preparing the Half-Yearly Financial Report at 30 June 2019 was carried out on the basis of methods defined by Mediocredito Centrale S.p.A. in keeping with the COSO and, for the IT component, COBIT models, which constitute the framework of reference for the internal reference system generally accepted at the international level6.

In consideration of the gradual implementation of the processes in line with the strategic guidelines and, taking into account the continual evolution of the relevant legislation on the banking sector, the design and effective operation of the Bank’s administrative and accounting procedures remain the subject of further evolution and monitoring. 3. The undersigned attest, in addition, that 3.1 the condensed half-yearly financial report: a. has been drawn up in accordance with the applicable international accounting standards recognised in the European Community pursuant to Regulation (EC) no. 1606/2002 of the European Parliament and of the Council of 19 July 2002; b. corresponds with the entries in the accounting ledgers and documents; c. is capable of providing a true and correct representation of the issuer’s equity, economic and financial situation. 3.2 the half-yearly report on operations includes a reliable analysis of the important events which occurred during the first six months of the year and their impact on the condensed half-yearly financial report, together with a description of the main risks and uncertainties applying to the remaining six months of the year.

Rome, 1 August 2019

The Chief Executive Officer The Financial Reporting Manager Bernardo Mattarella Elena De Gennaro

6 The COSO Framework was prepared by the Committee of Sponsoring Organizations of the Treadway Commission, an American organisation which has the objective of improving the quality of financial disclosure, by defining ethical standards and an effective system of corporate governance and organisation.

The COBIT Framework - Control Objectives for IT and related technology is a set of rules prepared by the IT Governance Institute, an American organisation which has the objective of defining and improving corporate standards in the IT sector. 176

REVIEW REPORT ON CONDENSED INTERIM FINANCIAL STATEMENTS

BANCA DEL MEZZOGIORNO – MEDIOCREDITO CENTRALE SPA

177 REVIEW REPORT ON CONDENSED INTERIM FINANCIAL STATEMENTS

To the Board of Directors of Banca del Mezzogiorno – MedioCredito Centrale SpA

Foreword

We have reviewed the accompanying condensed interim financial statements of Banca del Mezzogiorno – MedioCredito Centrale SpA as of 30 June 2019, comprising the balance sheet, income statement, statement of comprehensive income, statement of changes in Shareholders’ Equity, statement of cash flows and related notes. The directors of Banca del Mezzogiorno – MedioCredito Centrale SpA are responsible for the preparation of the condensed interim financial statements in accordance with International Accounting Standard 34 applicable to interim financial reporting (IAS 34) as adopted by the European Union. Our responsibility is to express a conclusion on these condensed interim financial statements based on our review.

Scope of Review

We conducted our work in accordance with the criteria for a review recommended by Consob in Resolution No. 10867 of 31 July 1997. A review of condensed interim financial statements consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than a full-scope audit conducted in accordance with International Standards on Auditing (ISA Italia) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion on the condensed interim financial statements.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed interim financial statements of Banca del Mezzogiorno – MedioCredito Centrale SpA as of 30 June 2019 are not prepared, in all material respects, in accordance with International Accounting Standard 34 applicable to interim financial reporting (IAS 34) as adopted by the European Union.

Rome, 24 September 2019

PricewaterhouseCoopers SpA

Signed by

Fabrizio De Dominicis (Partner)

This report has been translated into English from the Italian original solely for the convenience of international readers. We have not examined the translation of the financial statements referred to in this report.

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