Annual Report UBI Factor S.p.A.

Transcription

1 Annual Report 2010 UBI Factor S.p.A. Registered Office: Milano - Via F.lli Gabba, 1 - Tel Fax Operation Unit: Pordenone - Via Giardini Cattaneo, 4 - Tel Fax R.E.A Share Capital fully paid-up Euro 36,115,820 - Reserves Euro 83,056,079 Tax code, VAT and company registration no Cod. ABI C.P Milano info@ubifactor.it UBI Factor S.p.A. is a member of: Associazione Bancaria Italiana Associazione Italiana per il Factoring Factors Chain International

2 2 Annual Report 2010

3 Contents Company officers 4 Calling of the shareholders meeting 5 Directors report 7 Allocation of profit for the year 12 Statutory auditors report 13 Independent auditors report 17 Financial statements as at and for the year ended 31 December Statement of financial position 22 Income statement 23 Statement of comprehensive income 24 Statement of changes in equity 25 Statement of cash flows 26 Notes to the financial statements Part A Accounting policies 27 Notes to the financial statements Part B Notes to the statement of financial position - assets 37 Loans and receivables - Caption Current and deferred tax assets Caption Current and deferred tax liabilities Caption Other assets Caption Notes to the financial statements Part B Notes to the statement of financial position liabilities 48 Financial liabilities Caption Other liabilities Caption Provisions for risks and charges Caption Notes to the financial statements Part C Notes to the income statement 53 Interest Captions 10 and Commissions Captions 30 and Net impairment losses/reversals of impairment losses Caption Administrative expenses Caption Personnel expense 57 - Other administrative expenses 59 Net accruals to the provision for risks and charges Caption Other operating income and expenses Caption Income taxes Caption Notes to the financial statements Part D Other information 64 B. Factoring and transfers of loans and receivables 64 - Factoring with recourse 65 - Factoring without recourse 65 - Impairment losses 66 - Turnover 67 D. Guarantees given and commitments 68 Highlights of the parent 69 Section 3: Risks and risk management policies 70 Section 4: Capital requirements 87 Section 5: Analytical statement of comprehensive income 90 Section 6: Related party transactions 91 Annual Report

4 COMPANY OFFICERS Board of Directors CHAIRMAN * Angelo Rampinelli Rota DEPUTY CHAIRMAN * Gaudenzio Cattaneo * Sergio Rabbia (1) * Federico Ghiano (2) DIRECTORS Sergio Borlenghi Alberto Ciocca Bruno Degrandi Piero Fenaroli Valotti * Giovanni Lupinacci Fausto Minelli Carlo Porcari (3) Gian Cesare Toffetti * Members of the Executive Committee (1) appointed 26 March 2010 resigned 11 June 2010 (2) appointed 24 September 2010 (3) appointed 26 March 2010 Board of Auditors Chairman Rodolfo Luzzana (4) Marco Confalonieri (5) (4) in office until 26 March 2010 (5) in office until 26 March 2010 Standing Auditors Giorgio Ferrino Paolo Golia General Management General Manager Deputy General Manager Gianpiero Bertoli Attilio Serioli Independent Auditors KPMG S.p.A. 4 Annual Report 2010

5 Calling of the ordinary shareholders meeting The shareholders of UBI Factor Unione di Banche Italiane per il Factoring S.p.A. are called for an ordinary meeting at the company s registered office in Milan, Via Fratelli Gabba 1, on 8 April 2011, at 10:00 am, on first call and, if necessary, at the same place and time on 9 April 2011 on second call, to discuss and resolve on the following agenda: 1. Directors and statutory auditors reports; 2. approval of the 2010 annual report; 3. appointment of directors and statutory auditors and fixing of their fees; 4. any other business. Milan, 25 February 2011 The Chairman (Angelo Rampinelli Rota) Annual Report

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7 Annual Report 2010 Directors Report Annual Report

8 DIRECTORS REPORT 2010 Dear shareholders, The financial statements as at and for the year ended 31 December 2010, prepared in accordance with the International Financial Reporting Standards (IFRS), relate to the company s twenty-ninth year of operation. They show a profit for the year of 18.6 million, net of income tax of 9.8 million. This profit underscores the company s strong performance in a year that was characterised by a persistently critical economy and market. R.O.E. remained at a sound level of 17.30%, while the drop on 2009 (21.05%) reflects the company s policy of strengthening capital in recent years, as instructed by its parent and to meet the requirements of supervisory regulations and the Basel Accord. With respect to the company s competitive position, in 2010, it was named outstanding and ranked fourth in its sector (fifth in 2009), with a market share of 6.5%. It also maintained this position in terms of with recourse advances and without recourse loans, with a market share of 7.1% (source: Assifact). The profit for the year highlights the company s sound profitability and significant overall growth in operations. Revenue from the core business is the result of the constant consolidation of the company s business strategy, which, as risk is increasingly concentrated among large corporate counterparties whose suppliers turn to maturity factoring, shows that the company has achieved its aim of substantial returns on greater investments, in spite of interest rates remaining low throughout the year. Net trading income amounts to 51.1 million, down on 2009 (-7.1%), mainly due to net interest income of 34.8 million, down 10.0% on 2009, but perfectly in line with the domestic factoring market trend, while net commission income totals 16.3 million, in line with The company continued to pursue its two-point strategy of gradually reducing business with customers factoring receivables due from the Public Administration and exiting high-risk product sectors which enabled it to attain high commissions. The expense/income ratio (administrative expenses and net impairment losses/reversals of impairment losses to property and equipment and intangible assets plus net trading income and other operating income/expenses) came to 40.74%, versus 35.79% in the previous year, showing a worsening of 4.95%. Administrative expenses, which total 21.0 million, are in line with 2009 (+1.2%). In addition to the decrease in net trading income, this worsening is substantially due to the impact of the following non-recurring factors on personnel expense (up 5.0%): 1) disbursement of termination benefits in 2010, amounting to 190 thousand (nil in 2009); 2) adjustment of the redundancy provision in 2009, which generated a positive impact of 300 thousand, due to the parent s recalculation of accruals, which were found to exceed the expected outlay. Other administrative expenses decreased by 2.7% on 2009, showing a positive trend. Total turnover from factoring transactions, the company s core business, totals 7.1 billion for 2010, up 40.0% on the 5.1 billion of The total volume of trading transactions amounts to 7.6 billion, compared to 5.5 billion, up 38.1%. Average operating loans amount to 2.1 billion, up 12.7% on Total loans and advances to customers amount to 2.7 billion, up 17.6% on 2009 ( 2.3 billion). In 2010, credit quality improved through careful and prudent risk management. Net impaired assets due to nonperforming loans come to 11.5 million (31 December 2009: 13.6 million) and make up 0.42% of total loans (0.59% in 2009), with coverage of 50.8%, while doubtful loans amount to 4.2 million (31 December 2009: 4.3 million), accounting for 0.15% of total loans (0.19% in 2009). Individual impairment losses on loans and receivables, amounting to 3.9 million, are deemed fair, considering 8 Annual Report 2010

9 their total value and market trends. Moreover, doubtful positions mainly relate to acquired receivables due from the public administration and, more specifically, commissioners, with residual collection periods that require classification in this category, although the amounts are expected to be fully collected saw the beginning of a deterioration process in the instalment credit sector, although not to a significant extent. This was due to the vendor business agreed with certain high standing counterparties in the automatic food and drink distributor industry. The impairment of other than performing loans and receivables in total company assets affected nearly the entire sector, with certain counterparties even requesting the grace periods permitted by the law, although for amounts that were, taken together, negligible (2.8% of total amounts disbursed). However, the specific attention devoted to the core business of lending has meant that there has not been any specific credit deterioration, despite the weak economy and credit market in Italy and around the world. In terms of trading volumes, in the past three years, the company has noted the growing contribution of activities brokered by group banks on UBI Factor s total results, with an average annual growth rate of 67.7%, reaching 39.2% of the total. The impact of net trading income generated by group banks reached 22.2% of the company s total in 2010, up on the previous years (8% in 2008 and 15.4% in 2009). This is a direct result of the commercial efforts in synergy with the group s network banks, through projects kicked off in recent years. To this end, the Large Corporate Business Plans were launched in 2010 to enable the company to develop business with counterparties with high standing, significant trading volumes and very low risk. Specific offers were prepared for these customers, identified by UBI Banca s Corporate Division, and visits were scheduled jointly with other UBI Banca vehicles. Two years after the business partnership agreement between UBI Factor and the UBI Banca Group s network banks took effect, the agreement is being revised in order to recognise the network banks best aligned with UBI Factor s business strategies and the banks contribution to business on the basis of information provided by the company. Foreign business continues its constant growth with export and import factoring in order to develop transactions with high standing customers. These transactions are profitable and boast very low credit risk. This growth has been achieved through efforts on both consolidated and developing markets. The Poland branch put in an outstanding performance, with a gross operating profit of 1.2 million ( 0.2 million in 2009) and net trading income of approximately 1.4 million ( 0.4 million in 2009). Turnover totals 334 million, compared to 131 million in 2009, and average loans to customers amount to 57.4 million, compared to 19.8 million in Furthermore, the business partnership with leading Turkish factoring company Strateji Faktoring Hizmetleri A.S. continued, generating turnover of roughly 149 million in 2010, compared to 77 million in 2009, and revenue of approximately 574 thousand, versus 324 thousand in These results confirm the company s wisdom in pursuing negotiations to acquire the Turkish company in order to develop the markets of large industrial groups that already operate with UBI Factor S.p.A. in that geographical segment, in which domestic volumes are increasingly significant. Accordingly, during the year, the company signed a letter of intent in relation to such acquisition, which will entail the progressive acquisition of 100% of the company over the next three years, provided that all regulatory and market conditions remain unchanged. Moreover, the Turkish market confirmed the growth trend of its exports, with substantial export factoring, including through other national factoring companies that use the FCI chain. In 2010, UBI Factor S.p.A. consolidated its leading position among all Italian factors in terms of import factoring from Turkey, with total turnover of approximately 272 million. With respect to investments, Tex Factor S.p.A. was put into liquidation by shareholders resolution of 16 June 2010, with effect as from 1 July The final liquidation financial statements showed a total loss of 222 thousand, which did not however affect Annual Report

10 the carrying amount of UBI Factor S.p.A. s investment. Siderfactor S.p.A. posted a profit for 2010 of 669 thousand, up on With respect to the contract portfolio acquired from the Italcementi Group in February 2010, the intangible asset recognised at 864 thousand was not impaired in 2010, as the gains realised on the contract portfolio exceeded those forecast when the intangible asset was measured. With respect to the content of Banca d Italia/Consob/ISVAP document no. 2 of 6 February 2009, the Banca d Italia, Consob and ISVAP coordination forum on applying IFRS, concerning Disclosures in financial reports on the going concern assumption, financial risks, impairment testing of assets and uncertainties in the use of estimates, together with article 2428 of the Italian Civil Code, it is noted that the company is currently able to continue as a going concern for the foreseeable future, and the financial statements that follow have been prepared on the basis of this assumption. Considering the range of factors relating to the company s current and expected profitability, the payment and collection plan of contractual counterparties, sources of funding mainly the parent, UBI Banca the company does not currently present any factors of uncertainty and/or doubt regarding its ability to continue as a going concern. To this end, there are no negative indicators, such as, but not limited to, those provided for by Document 570 Going concern recommended by Consob in its resolution no of 21 November As required by article 6.2 of Banca d Italia regulation of 31 July 1992, and on the basis of article 2428 of the Italian Civil Code, the following information is provided: a) Research and development: the company did not carry out any research and development activities during the year. b) Number and nominal amount of treasury shares and shares of the parent: the company does not directly or indirectly own treasury shares or shares of its parent. It did not acquire and/or sell treasury shares or shares of the parent either directly or through trustees or nominees during the year. c) Outlook: activities continue in preparation for the switch over to the new company IT system, scheduled for 30 June 2011, with a potential postponement to 30 September 2011, depending on the outcome of the various planned tests. Negotiations also continue in relation to the acquisition of an initial investment of 9.9% in the Turkish company Strateji Factoring Hizmetleri A.S., with the consequent right for UBI Factor to appoint a representative to the Turkish company s board of directors. The revision of the Business Partnership Agreement between UBI Factor and the UBI Banca Group network banks will enable the company to further develop trade volumes in addition to its customer portfolio, the latter through increased synergy with other group companies, particularly UBI Leasing and UBI Banca International, with which it has prepared cross-selling strategies. Potential partnership agreements with large industrial groups are being studied and specific focus will be devoted to the mid corporate market, which should enable the company, against a slight and weighted increase in credit risk, significant returns in terms of profitability. This will make it possible to charge higher interest rates and maintain constant profitability. d) Related party transactions: pursuant to article 2497-bis.4 of the Italian Civil Code, it is noted that within the scope of management and coordination by UBI Banca S.c.p.A., as parent, the company benefitted from synergies arising from its membership in the group, using such synergies to improve business management and development. Transactions with the parent UBI Banca and the group companies, which main consist of bank credit facilities, are carried out on an arm s length basis, including in terms of the potential interests of directors. Guarantees issued by UBI Banca cover large risks on important debtors. Commission expense is recognised on such guarantees. The costs of other services provided by the parent or group companies (relating to the audit, accounting and administration coordination, human resources, loans and receivables, risk management and information technology) are charged on the basis of master agreements for the provision of technical and administrative services. Furthermore, a business partnership agreement is in place with the group s network banks in relation to 10 Annual Report 2010

11 the acquisition of factoring transactions, whereby commissions are recharged. The company participates in the UBI Banca Group s tax consolidation scheme. Pursuant to article 2497-bis.4 of the Italian Civil Code, UBI Banca s most recent set of approved financial statements are attached to the notes. The nature of the captions and amounts is shown analytically in the individual statement of financial position and income statement captions in Section 6 - Related party transactions. e) Significant events after the reporting date: the company did not perform any atypical or unusual transactions after the reporting date, nor were any underway at that date, whereby such transactions are those outside the scope of normal operations and that could significantly impact the company s financial position and results of operations. f) Derivatives: the company has no derivatives at the reporting date. Accordingly, there is no fair value disclosure to provide. g) Other information: during the year, the company met its reporting obligations to Banca d Italia with respect to supervisory activities, the Credit Information Centre and usury. In accordance with safety legislation (Legislative decree no. 81/08), the company updated the Risk assessment document and took measures to meet additional requirements under such legislation. With respect to personal data protection, the company updated the Personal data protection document. The company has complied with legislative provisions concerning the obligations of banks/financial company personnel (article 136 of the Consolidated banking act), related party transactions and the interests of directors, in accordance with IAS 24. In terms of the transparency of banking and financial services, as from 2 January 2011, the company has updated its organisational and procedural system, in accordance with the new provisions of Legislative decree no. 141/2010 of 13 August In coordination with its parent, the company meets the legal requirements concerning the correct keeping of the Register of persons with access to privileged information established by UBI Banca pursuant to article 115-bis of the Consolidated financial act and, in general, all legal requirements applicable to the company. In accordance with anti-money laundering and counter-terrorism legislation (Legislative decree no. 231/2007), the company has revised its organisational model, setting up a function specifically responsible for preventing and countering money laundering and terrorism. In this context, it has appointed a new Anti-money Laundering Manager for the company pursuant to article 42 of Legislative decree no. 231/2007, in the position of Risk Management and Anti-money Laundering Manager. Furthermore, the company has commenced a revision of its internal regulations through the adoption of a Consolidated anti-money laundering policy that is consistent with the parent s. In accordance with legislation concerning the liability of entities for administrative offences deriving from crimes committed by employees (Legislative decree no. 231/2001), in 2010, the company updated its Organisational, Management and Control Model pursuant to Legislative decree no. 231/2001, following the introduction of new types of crimes covered by the decree. UBI Factor S.p.A. s supervisory body continued monitoring that the model worked and was complied with. During its meeting on 24 September 2010, the company s board of directors approved the plan to replace UBI Factor s current IT system, identifying (following research by the company s Information Technology division, together with the relevant UBI Sistemi e Servizi structure) K4F supplied by Visiant Stone S.p.A. as the most sophisticated package on the market in terms of technology, architecture and use, making it ideal for UBI Factor s present and future needs. Annual Report

12 h) Risk exposure and risk management techniques: reference should be made to Section 3 Risks and risk management policies of the notes to the financial statements in its entirety. There are no risks of fluctuations in cash flows and no other significant risks or uncertainties in addition to those detailed in Section 3. i) Personnel: during the year, together with its parent, the company ensured specific training for its employees, both in compliance with legislative requirements and as part of company initiatives. In the light of the growth in trade volumes and in view of continuing to ensure operating efficiency, the company plans to increase its workforce during the year. Allocation of the profit for the year We propose allocating the profit for 2010 of 18,601,018 as follows: - 13,739,273 to other reserves - 4,861,745 to the shareholders in the form of a dividend amounting to 0.07 ( 0.07 in 2009) for each of the 69,453,500 shares. We ask that you approve the financial statements and the allocation of the profit for the year as proposed above. Chairman of the board of directors Angelo Rampinelli Rota Milan, 25 February Annual Report 2010

13 Annual Report 2010 Statutory Auditors Report Annual Report

14 Report pursuant to article 2429 of the Italian Civil Code Dear shareholders, as UBI Factor S.p.A., pursuant to the provisions of section V of Legislative decree no. 39 of 27 January 2010, is a public interest entity, the board of statutory auditors does not perform the legally-required audit, which is instead performed by KPMG S.p.A.. Furthermore, due to the aforementioned Legislative decree no. 39/2010, the board of statutory auditors also services as the internal control and audit committee. In accordance with our responsibilities under article 2429 of the Italian Civil Code, we note the following: 1) Financial statements The company has prepared the financial statements as at and for the year ended 31 December 2010 in accordance with IFRS, in the format required by Banca d Italia. We, the board of statutory auditors, have monitored the preparation of the financial statements as at and for the year ended 31 December 2010 and the general compliance of their preparation and structure with the law. We have nothing to report in this respect. We note that: a) in summary, the financial statements show a profit for the year of 18,601,018 and equity of 126,099,473 (including the above profit for the year); b) we have read the independent auditors report dated 24 March 2011, prepared pursuant to articles 14 and 16 of Legislative decree no. 39 of 27 January 2010 and article 165 of Legislative decree no. 58 of 24 February 1998, in which the auditors express that, on the basis of their work, the financial statements are compliant with the rules governing the preparation of financial statements and, accordingly, they have been prepared clearly and give a true and fair view of the company s financial position, results of operations, changes in equity, cash flows and comprehensive income. The independent auditors report also attests to the consistency of the directors report with the financial statements. c) we have also read the independent auditors report dated 24 March 2011, provided for by article 19.3 of Legislative decree no. 39 of 27 January 2010, with respect to fundamental matters that arose during the legallyrequired audit, noting no significant weaknesses in internal controls on financial reporting; d) we have explicitly approved the capitalisation of deferred costs in the statement of financial position; e) with reference to article of the Italian Civil Code, the company has not used any of the waivers pursuant to article of the Italian Civil Code in the preparation of the financial statements; f) the financial statements and accompanying directors report provide a thorough description of the company s financial position, the characteristics of the performance of operations in the year and outlook. 14 Annual Report 2010

15 2) Code of conduct and activities performed a) During the year, we have performed the activities required by law, also considering the code of conduct recommended by the Italian Accounting Profession. In particular, we have: participated in the ordinary shareholders meeting of 26 March 2010 and the extraordinary shareholders meeting of 10 November 2010, the meetings of the board of directors, those of the Executive Committee and the meetings of the Supervisory Board pursuant to article 6 of Legislative decree no. 231/2001; performed routine checks, also with the assistance of the organisational structures that perform the internal control functions, audit (activities performed by the parent UBI Banca S.c.p.A.), risk management and antimoney laundering and compliance functions in particular; held routine meetings with the independent auditors in order to exchange relevant data and information for the purposes of fulfilling our respective duties and to analyse the independent auditors findings. They also informed this board that they had not noted any censurable events; monitored, in our role of Internal Control and Audit Committee, that the company complied with article 19 of Legislative decree no. 39 of 27 January 2010; monitored the company s compliance with legislation concerning anti-money laundering, counter-terrorism, anti-usury, data protection, suspicious transactions, the administrative liability of companies, the obligations of bank/financial company personnel, related party transactions and the interests of the directors; verified that Banca d Italia instructions on the transparency of services and the economic terms of individual facilities summarised in the Compilation, had been correctly applied, also in relation to the proposed unilateral changes to the contractual terms, and monitored the application of the provisions of Banca d Italia for the specific activity; verified that Banca d Italia s risk concentration rules are correctly applied. b) Following these activities, we have also: ascertained that the company is compliant with the principles of correct administration, the law and the memorandum of incorporation; evaluated the adequacy (considering the company s size, configuration and operations) of the organisational structure, for as far as it is concerned, of the internal control system, with specific focus on credit, market, interest rate and operational risk controls, as well as of the IT/accounting system. 3) Management and coordination With respect to article 2497-bis of the Italian Civil Code, which requires the disclosure of the company that manages and coordinates UBI Factor S.p.A., a specific section of the notes to the financial statements provides the key financial figures of the most recently approved financial statements of the company that manages and coordinates UBI Factor S.p.A.. Furthermore, the director report provides information on transactions with the company that manages and coordinates UBI Factor S.p.A. and the other companies managed and coordinated thereby, as well as the impact of such transactions on the statement of financial position and income statement. Annual Report

16 4) Conclusions Dear shareholders, as a result of the above, we are in favour of approving the financial statements as at and for the year ended 31 December 2010, accompanied by the directors report, and allocating the profit for the year as proposed by the directors, noting that residual available reserves sufficiently cover undepreciable costs pursuant to article of the Italian Civil Code. The legal reserve of 7,223,164 has reached the maximum limit under article 2430 of the Italian Civil Code. Our term of office ends with the approval of these financial statements. We ask that you take the necessary steps. Milan, 24 March 2011 The Board of Statutory Auditors 16 Annual Report 2010

17 Report of the Auditors Annual Report

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21 Annual Report 2010 Financial statements of financial intermediaries pursuant to article 107 of the Consolidated banking act (Banca díitalia instructions of 16 December 2009) Annual Report

22 Financial statements of financial intermediaries pursuant to article 107 of the Consolidated banking act (Banca d Italia instructions of 16 December 2009) STATEMENT OF FINANCIAL POSITION (Euros) Assets 31/12/ /12/ Cash and cash equivalents 16,199 10, Held-to-maturity investments 8,456,007 10,607, Loans and receivables 2,747,618,900 2,352,641, Equity investments 958, , Property and equipment 537, , Intangible assets 1,611, , Tax assets 3,375,513 3,192,926 a) current 2,650,651 2,249,264 b) deferred 724, , Other assets 12,475,213 12,221,297 Total assets 2,775,048,741 2,380,707,558 Liabilities 31/12/ /12/ Financial liabilities 2,621,621,567 2,240,583, Tax liabilities 2,869,421 3,585,193 a) current 2,866,151 3,539,903 b) deferred 3,270 45, Other liabilities 21,015,046 20,454, Post-employment benefits 2,576,829 2,456, Provisions for risks and charges: 866,406 1,185,061 b) other provisions 866,406 1,185, Share capital 36,115,820 36,115, Share premium 2,065,828 2,065, Reserves 69,371,593 54,682, , Valuation reserves (54,787) 27, Profit for the year 18,601,018 19,551,031 Total liabilities and equity 2,775,048,741 2,380,707, Annual Report 2010

23 Financial statements of financial intermediaries pursuant to article 107 of the Consolidated banking act (Banca d Italia instructions of 16 December 2009) INCOME STATEMENT (Euros) 31/12/ /12/ Interest and similar income 50,237,038 57,768, Interest and similar expense (15,416,431) (19,089,046) Net interest income 34,820,607 38,679, Commission income 24,420,633 24,554, Commission expense (8,170,209) (8,294,668) Net commission income 16,250,424 16,260, Dividends and similar income - 23,000 Net trading income 51,071,031 54,962, Net impairment losses/reversals of impairment losses on: (3,147,046) (8,118,833) a) financial assets (3,147,046) (8,029,827) b) other financial transactions - (89,006) 110. Administrative expenses: (21,038,421) (20,779,901) a) personnel expense (11,179,529) (10,643,920) b) other administrative expenses (9,858,892) (10,135,981) 120. Net impairment losses/reversals of impairment losses on property and equipment (237,669) (235,879) 130. Net impairment losses/reversals of impairment losses on intangible assets (410,948) (113,342) 150. Net accruals to provision for risks and charges (1,000) (80,499) 160. Other operating income and expenses 2,158, ,483 Operating income 28,394,572 29,703,741 Profit from continuing operations before income tax 28,394,572 29,703, Income taxes on continuing operations (9,793,554) (10,152,711) Profit from continuing operations, net of income tax 18,601,018 19,551,031 Profit for the year 18,601,018 19,551,031 Annual Report

24 STATEMENT OF COMPREHENSIVE INCOME (Euros) 31/12/ /12/ Profit for the year 18,601,018 19,551,031 Other comprehensive income, net of income tax 20. Available-for-sale financial assets Property and equipment Intangible assets Hedge of foreign investments Cash flow hedges Exchange rate gains (losses) Non-current assets available for sale Actuarial gains (losses) on defined benefit plans (82,418) 27, Portion of valuation reserves of equity-accounted investees Total other comprehensive income, net of income tax (82,418) 27, Comprehensive income (Captions ) 18,518,600 19,578, Annual Report 2010

25 STATEMENT OF CHANGES IN EQUITY (Euros) Balance at 31/12/2008 Restatement of opening balance Balance at 01/01/2009 Allocation of profit for prior year Changes of the year Reserves Dividends and other allocations Changes in reserves Issue of new shares Purchase of treasury shares Equity transactions Distribution of extraordinary dividends Change in equity instruments Other changes 2009 comprehensive income Share capital 36,115,820-36,115,820 36,115,820 Share premium 2,065,828-2,065,828 2,065,828 Reserves: 39,072,057-39,072,057 15,610, ,682,308 a) income-related 30,857,034-30,857,034 15,610,251 46,467,285 b) other 8,215,023-8,215,023 8,215,023 Valuation reserves ,147 27,631 Equity instruments Treasury shares Profit for the year 21,166,531-21,166,531 (15,610,251) (5,556,280) 19,551,031 19,551,031 Equity 98,420,720-98,420,720 - (5,556,280) ,578, ,442,618 Equity at 31/12/2009 Balance at 31/12/2009 Restatement of opening balance Balance at 01/01/2010 Allocation of profit for prior year Changes of the year Reserves Dividends and other allocations Changes in reserves Issue of new shares Purchase of treasury shares Equity transactions Distribution of extraordinary dividends Change in equity instruments Other changes 2010 comprehensive income Share capital 36,115,820-36,115,820 36,115,820 Share premium 2,065,828-2,065,828 2,065,828 Reserves: 54,682,308-54,682,308 14,689, ,371,594 a) income-related 46,467,285-46,467,285 14,689,286 61,156,571 b) other 8,215,023-8,215,023 8,215,023 Valuation reserves 27,631-27,631 (82,418) (54,787) Equity instruments Treasury shares Profit for the year 19,551,031-19,551,031 (14,689,286) (4,861,745) 18,601,018 18,601,018 Equity 112,442, ,442,618 - (4,861,745) ,518, ,099,473 Equity at 31/12/2010 Annual Report

26 STATEMENT OF CASH FLOWS (Direct method) (Euros) A. OPERATING ACTIVITIES 31/12/ /12/ OPERATIONS 22,574,462 28,436,289 - Interest income collected 50,237,038 57,768,674 - Interest expense paid (15,416,431) (19,089,046) - Dividends and similar income - 23,000 - Net commission income 16,250,424 16,260,084 - Personnel expense (11,179,529) (10,643,920) - Other expense (9,858,892) (10,135,981) - Other revenue 2,158,625 4,069,483 - Taxes and duties (9,616,773) (9,816,005) - Expense/revenue of disposal groups, net of tax effect CASH FLOWS GENERATED BY/(USED IN) FINANCING ASSETS (413,808,459) (209,122,588) - Financial assets held for trading Financial assets at fair value Available-for-sale financial assets Loans and advances to banks 1,819,198 (7,481,043) - Loans and advances to financial institutions (21,782,525) (47,021,162) - Loans and advances to customers (393,189,829) (154,464,425) - Other assets (655,303) (155,958) 3. CASH FLOWS GENERATED BY/(USED IN) FINANCIAL LIABILITIES 380,642, ,781,686 - Due to banks 387,444, ,603,111 - Due to financial institutions Due to customers (6,406,808) 3,967,151 - Outstanding securities Financial liabilities held for trading Financial liabilities at fair value Other liabilities (394,804) (10,788,576) NET CASH FLOWS GENERATED BY/(USED IN) OPERATING ACTIVITIES (10,591,068) (16,904,613) B. INVESTING ACTIVITIES 31/12/ /12/ CASH FLOWS GENERATED BY 2,151, Sales of equity investments Dividends collected Sales/repayments of held-to-maturity investments 2,151, Sales of property and equipment Sales of intangible assets Sales of business units CASH FLOWS USED IN (1,721,659) (525,752) - Acquisitions of equity investments Acquisitions of held-to-maturity investments - (332,941) - Purchases of property and equipment (38,218) (80,897) - Acquisitions of intangible assets (1,683,441) (111,914) - Acquisitions of business units - - NET CASH FLOWS GENERATED BY/(USED IN) INVESTING ACTIVITIES 429,681 (525,752) C. FINANCING ACTIVITIES 31/12/ /12/ Issue/purchase of treasury shares Issue/purchase of equity instruments Distribution of dividends and other allocations (4,861,745) (5,556,280) NET CASH FLOWS GENERATED BY/(USED IN) FINANCING ACTIVITIES (4,861,745) (5,556,280) NET CASH FLOWS OF THE YEAR A+B+C (15,023,132) (22,986,645) RECONCILIATION Opening cash and cash equivalents 17,899,902 40,886,547 Total net cash flows of the year (15,023,132) (22,986,645) Closing cash and cash equivalents 2,876,770 17,899, Annual Report 2010

27 NOTES TO THE FINANCIAL STATEMENTS The notes to the financial statements include the following parts: 1) Part A Accounting policies 2) Part B Notes to the statement of financial position 3) Part C Notes to the income statement 4) Part D Other information Each part of these notes is divided into sections, each of which illustrates an individual aspect of company operations. The sections provide both qualitative and quantitative information. Part A ACCOUNTING POLICIES A.1 GENERAL PART Section 1 - Statement of compliance The financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS) issued by the IASB and endorsed by the European Commission, as established by EU regulation 1606 of 19 July 2002 regulating the endorsement of IFRS and subsequent modifications and integrations. The financial statements have been prepared using the formats contained in the instructions of Banca d Italia Governor s regulation dated 16 December 2009 Instructions for the preparation of the financial statements of financial intermediaries included in the Special List, electronic money institutions (IMEL), fund management companies (SGR) and ass management companies (SIM), which fully supersede the instructions attached to the regulation of 14 February Section 2 - Basis of preparation The company has applied the IFRS also with reference to the Framework for the preparation and presentation of financial statements with particular regard to the essential clauses for the preparation of financial statements relating to the principle of substance over form and the concept of information relevance and materiality. The financial statements have been prepared on an accruals basis. The statement of cash flows has been prepared on a cash basis. Assets and liabilities and expense and revenue are only offset if this is required or permitted by a standard or interpretation. The financial statements consist of the statement of financial position, the income statement, the statement of comprehensive income, the statement of cash flows, the statement of changes in equity and the notes thereto. The financial statements are accompanied by the directors report on the company s performance and financial position. The financial statements have been prepared on a going concern basis, in accordance with IAS 1. The presentation and classification criteria of the financial statements captions are consistent from one year to the next, unless a change therein is required by a standard or interpretation or unless this is necessary in order to increase the significance and reliability of presentation. In the event that a standard is revised, this is applied retrospectively and the nature, reason and amount of the captions concerned by the revision are indicated. The tables provided in the notes to the financial statements are in thousands of Euros and also present prior year comparative figures. Annual Report

28 The following statement of financial position captions have been reclassified since the 2009 financial statements (thousands of Euros): Previous balance Reclassification Reclassified balance ASSETS Caption 60 - Loans and receivables 2,341,119,006 11,522,404 2,352,641,410 Caption Other assets 9,393,001 2,828,296 12,221,297 LIABILITIES Caption 10 - Financial liabilities 2,226,233,134 14,350,700 2,240,583,834 due to bank advance exposure on usual reserve bills. Section 3 Events after the reporting date As required by IAS 10, it is reported that in the period between the reporting date and the date of approval of the financial statements, on the basis of all currently available information, nothing arose that would entail an adjustment to the figures presented. Section 4 Other matters When preparing the financial statements, management is required to make judgements, estimates and assumptions that affect the application of the accounting policies, as well as the carrying amounts of assets, liabilities, expenses and revenue. These estimates and the related assumptions are based on past experience and factors that management considers reasonable in each case, and are used to estimate the carrying amount of assets and liabilities that would not be easily calculated using other sources. These estimates and assumptions are reviewed regularly. Any changes due to revisions of estimates are recognised in the year in which the revision is applied, if it only affects that year. If the revision affects current and future years, the change is recognised in the year in which the revision was applied and in subsequent years. The financial statements have been audited, as required by article 14 of Legislative decree no. 39 of 27 January 2010 and articles 156 and 165 of Legislative decree no. 58 of 24 February 1998, by the independent auditors KPMG S.p.A. on which the shareholders, during the meeting of 5 April 2007, conferred the legally-required audit engagement for A.2 NOTES TO THE MAIN FINANCIAL STATEMENTS CAPTIONS The recognition, classification, measurement and derecognition criteria for the main financial statements captions are described below. A.2.2 Held-to-maturity investments Held-to-maturity investments are non-derivative financial instruments with fixed or determinable payments and fixed maturity which the company intends and is able to hold to maturity. The company has classified as such variable yield investment insurance policies that guarantee the surety given to the tax authorities to secure a VAT receivable for which the company is factor and for which it is contractually obligated to hold to maturity. Measurement These assets are recognised at the purchase option amount at the preparation date of the financial statements. The amortised cost is recognised under Interest and similar income in the income statement, as a reduction in the carrying amount of the investment (yield capitalisation). 28 Annual Report 2010

29 Derecognition Held-to-maturity investments are derecognised when the contractual rights to cash flows from such assets expire or when the asset is transferred with the substantial transfer of all the risks and rewards of ownership. A.2.3 Loans and receivables Loans and receivables consist of non-derivative financial assets from customers and banks with fixed or determinable payments, which are not listed on an active market. Recognition In accordance with the general principle of substance over form, an entity may derecognise a financial asset only if, due to transfer, it has transferred the risks and rewards associated with that asset. Indeed, IAS 39 requires an entity to derecognise a financial asset if and only if: a) the financial asset has been transferred and, with it, substantially all the risks and contractual rights to cash flows from the asset expire; b) the rewards associated with ownership of the asset no longer exist. A company transfers a financial asset if, and only if, it either: a) transfers the contractual rights to receive the cash flows of the financial asset; b) retains the contractual rights to receive the cash flows of the financial asset, but assumes a contractual obligation to pay the cash flows to one or more recipients in an arrangement that meets all the following conditions: the company has no obligation to pay amounts to the eventual recipients unless it collects equivalent amounts from the original asset; the company cannot sell or pledge the financial asset; the company has an obligation to remit any cash flows it collects on behalf of the eventual recipients without material delay. In addition, the company is not entitled to reinvest such cash flows, except for investments in cash or cash equivalents during the short settlement period from the collection date to the date of required remittance to the eventual recipients, and interest earned on such investments When the company transfers a financial asset resulting in its derecognition, the company must evaluate the extent to which it retains the risks and rewards of ownership of the financial asset. The transfer of risks and rewards is evaluated by comparing the company s exposure, before and after the transfer, with the variability in the amounts and timing of the net cash flows of the transferred asset. The transferor substantially retains all the risks and rewards of ownership of a financial asset if its exposure to the variability in the present value of the future net cash flows from the financial asset does not change significantly as a result of the transfer. On the other hand, it substantially transfers all the risks and rewards of ownership of a financial asset if its exposure to such variability is no longer significant. In short, one of three situations may arise, with certain specific effects, as follows: 1) if the company transfers substantially all the risks and rewards of ownership of the financial asset, the company shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer; 2) if the company retains substantially all the risks and rewards of ownership of the financial asset, the company shall continue to recognise the financial asset; 3) if the company neither transfers nor retains substantially all the risks and rewards of ownership of the financial asset, the company shall determine whether it has retained control of the financial asset. In this case: if the company has not retained control, it shall derecognise the financial asset and recognise separately as assets or liabilities any rights and obligations created or retained in the transfer; if the company has retained control, it shall continue to recognise the financial asset to the extent of its continuing involvement in the financial asset. Annual Report

30 The company has recognised receivables acquired without recourse only after verifying that there are no contractual clauses that would eliminate the effect of the substantial transfer of all risks and rewards. With respect to the portfolio of receivables transferred with recourse, only the amounts paid to the transferor as advances on the fee are recognised and maintained in the financial statements. More specifically, these types of contracts relate to the following: a) receivables transferred with recourse and without legal recourse (without derecognition by the transferor) are recognised, but only to the extent of amounts paid to the transferor as an advance on the fee, including interest and accrued charges. They are initially recognised on the basis of the advanced fee to the transferor for the transfer of the receivables. b) receivables acquired definitively without recourse, with the substantial transfer of risks and rewards and maturity receivables paid at the due date are recognised at the nominal amount of the transferred invoices (with derecognition by the transferor). They are initially recognised at the nominal amount of the receivable (equal to fair value). c) receivables acquired for significantly less than their nominal amount are recognised at the amount actually paid upon acquisition, due to the transferred debtor s financial situation. d) loans granted for future receivables not underlying factoring transactions and instalment loans are recognised at the amount of the loan, including interest and accrued fees. Measurement Loans and receivables are initially recognised at their nominal amount and subsequently measured at amortised cost, using the effective interest method Other than performing loans and receivables, which consist of those classified as non-performing, doubtful and restructured, are measured analytically, considering the objective possibility of impairment. The criteria applied when calculating the impairment losses to be recognised on loans and receivables are based on the discounting of expected cash flows, including both principal and interest, considering any guarantees securing the amounts. In order to calculate the present value of the flows, the identification of estimated collections, the related due dates and the discount rate to be applied are fundamental elements when each of the loans/receivables is classified as non-performing. When projecting the recovery of other than performing loans and receivables, the company refers to analytical recovery plans, if such are available, and, if they are, estimated, flat amounts based on internal historical data, research in the sector and third party experts. These estimates are performed considering both the specific solvency of the debtor, the factoring party and the guarantor. A loan or receivable is considered other than performing when it is probable that the company will not recover the entire amount, on the basis of the original contractual terms, or an equivalent amount. It is fully impaired when it is believed to be unrecoverable or if it is entirely derecognised. Impairment losses recognised on impaired loans or receivables are reversed only when it is reasonably certain that more of the loan or receivable will be recovered than the post-impairment amount, within the limit of amortised cost. Performing loans and receivables, including those over 180 days past due, provided that they are due from the public administration, relate to assets for which the company has not noted any objective losses and, accordingly, has measured collectively. The year-end portfolio of performing loans is collectively measured by applying a flat percentage that is substantially in line with the loss rates for financial intermediaries published by Banca d Italia, suitably weighted on the basis of UBI Factor S.p.A. s turnover from its trade portfolio. Derecognition Loans are derecognised when the contractual rights to their cash flows expire, when they are sold, with the substantial transfer of all the risks and rewards of ownership or when they are considered definitively unrecoverable. They are reinstated when the reasons for their impairment no longer apply. The amount of the 30 Annual Report 2010

31 losses is recognised in profit or loss, net of previous impairment losses. Reversals of previously impaired amounts are recognised in profit or loss, as a reduction in net impairment losses/reversals of impairment losses on loans and receivables. A.2.4 Equity investments Recognition and measurement This caption consists of investments in associates, which the company has acquired and holds as long-term investments. Investments in associates are measured at cost, adjusted to reflect any necessary impairment losses. When there is evidence of an impairment loss, the recoverable amount of the equity investment is estimated, considering the present value of future cash flows that the equity investment could generate, including its final sale price. The impairment process begins when there are indications that lead the company to assume that the investment s carrying amount may not be recovered. These indications may be either qualitative or quantitative. Qualitative indications relate to the investee s profitability and future earning prospects, while quantitative indications relate to an estimate of a significant or prolonged decline in the investment s fair value to below its carrying amount. If the recoverable amount of an equity investment is less than its carrying amount, the difference is recognised in profit or loss. If the reasons for the impairment no longer apply following an event that occurs after the recognition of the impairment loss, it is reversed in profit or loss, up to the amount of historical cost. Derecognition Equity investments are derecognised when the contractual rights cash flows arising from the assets expire or when the financial asset is sold, with the substantial transfer of all associated risks and rewards. A.2.5 Property and equipment Recognition and classification This caption includes furniture, plant and other machines and equipment owned for use by the company for a period longer than one year. Property and equipment are initially recognised at cost, including all expenses directly related to the use of the asset. Ordinary maintenance costs are recognised directly in profit or loss. Measurement Subsequent to initial recognition, items of property and equipment are measured at cost, net of accumulated depreciation and any impairment losses. Their depreciable amount, which is equal to cost less residual value (i.e., the amount the company would normally expect to receive from disposal, less expected disposal costs), is distributed systematically over their useful life, with depreciation charged on a straight-line basis. Depreciation begins when the asset becomes available for use and ends when the asset is derecognised. Accordingly, depreciation does not end when an asset is idle or withdrawn from use, unless it has already been completely depreciated. Material leasehold improvements, which mainly relate to the cost of renovating leased property, are depreciated for no longer than the term of the related lease agreement. Annual Report

32 Derecognition An item of property and equipment is derecognised when sold or when it is permanently withdrawn from use and the company does not expect any future economic benefits from its disposal. A.2.6 Intangible assets An intangible asset is an identifiable, non-monetary asset without physical substance used in the company s activity. An asset is identifiable when: it is separable, i.e. capable of being separated or divided and sold, transferred, licensed, rented or exchanged; it arises from contractual or other legal rights, regardless of whether those rights are transferable or separable from other rights and obligations. Assets are characterised by the fact that they can be controlled by the company as the result of past events and that it is assumed that the asset will generate future economic benefits that will flow to the company and that the company may limit third parties from accessing such benefits. The future economic benefits of an intangible asset may include income from the sale of goods or services, cost savings or other benefit arising from the company s use of the asset. An intangible asset is recognised as such if, and only if: a) it is probable that the future estimated economic benefits attributable to the asset will flow to the company; b) the cost of the asset can be reliably determined. Recognition and classification Intangible assets mainly consist of application software to be used in the long-term. They are recognised at cost, and any expenses incurred following initial recognition are capitalised only if they generate future economic benefits and only if they can be reliably determined and allocated to the asset. Measurement Intangible assets with definite useful lives are recognised at cost, net of accumulated amortisation and any impairment losses. Amortisation is calculated systematically over the best estimate of the asset s useful life, on a straight-line basis. Amortisation begins when the asset becomes available for use and ends when the asset is derecognised. Derecognition Intangible assets are derecognised upon disposal or when the asset is permanently withdrawn from use. A.2.7 Tax assets and liabilities Tax assets and liabilities are recognised in statement of financial position captions 120 Tax assets and 70 Tax liabilities. Current tax assets and liabilities Le imposte correnti dell esercizio e di quelli precedenti, nella misura in cui esse non siano state pagate, sono 32 Annual Report 2010

33 Current taxes and those relative to prior years, but not yet paid, are recognised as liabilities. Any amounts paid in excess of the balance due are recognised as assets. Current tax assets and liabilities relative to the current or prior years are measured at the amount expected to be paid/recovered to/from the tax authorities, applying current tax rates and tax legislation. Tax assets/liabilities also include the risk of any tax dispute. As the company has opted to participate in the national tax consolidation scheme with its parent, the above applies only to IRAP (regional tax on production activities). Assets and liabilities from/to the parent in relation to IRES (corporate income tax) are recognised under Other assets and Other liabilities. Deferred tax assets and liabilities Deferred tax liabilities are recognised on all taxable temporary differences. Deferred tax liabilities are recognised in statement of financial position caption 70 Deferred tax liabilities. Deferred tax assets are recognised on deductible temporary differences if it is probable that taxable profit will be generated against which the deductible temporary difference may be used. Deferred tax assets are recognised in statement of financial position caption 120 Deferred tax assets. Deferred tax assets and liabilities are constantly monitored and calculated at the tax rates expected to be applicable when the tax asset will be realised or the tax liability settled, considering tax legislation currently in effect. A.2.8 Financial liabilities Recognition Financial liabilities include both bank borrowings and the residual fee not yet paid to transferors for the definitive acquisition of receivables without recourse. These liabilities are recognised when the funds raised are received. They are recognised at their fair value, which includes any additional income/expense that is directly attributable to the transaction and determinable from inception, regardless of when it is paid. Measurement After initial recognition, financial liabilities are measured at amortised cost, using the effective interest method. Financial liabilities with an original term of less than one year are recognised at the nominal amount collected, as the use of amortised cost does not give rise to significant changes. In these cases, any income and expense directly attributable to the transaction are recognised in profit or loss, under the relevant captions. Derecognition Financial liabilities are derecognised when settled or expired. A.2.9 Post-employment benefits Recognition Post-employment benefits are considered defined benefit plans and, as such, the relevant obligation must be calculated using actuarial techniques and discounted, as the liability can be settled long after the employees Annual Report

34 provided the related service. The amount recognised as a liability is equal to: (a) the present value of the defined benefit obligation at the reporting date; (b) plus any actuarial gains (less any actuarial losses) recognised in a specific equity reserve; (c) less any past service cost not yet recognised; (d) less the fair value of any plan assets at the reporting date. Measurement For discounting purposes, the projected unit credit method is use, which considers each individual service period as separately giving rise to an additional unit of post-employment benefits, together forming the final obligation. This additional unit is calculated by dividing the total expected service by the number of years from hire to the expected payment date. This method provides for the projection of future expenditure on the basis of historical/ statistical analyses and the demographic curve and the discounting of such flows at the market interest rate. A.2.11 Foreign currency transactions Definition The provisions for risks and charges relate to certain or probable costs and charges of a specific nature, the amount or due date of which is unknown at the reporting date. Accruals to the provisions for risks and charges are recognised only when: there is a present obligation (legal or constructive) as a result of a past event; it is probable that an outflow of resources will be required to settle the obligation; a reliable estimate can be made of the obligation. The accrual recognised reflects the best estimate of the outflow required to settle the obligation at the reporting date, as well as the risks and uncertainties that inevitably characterise a plurality of factors and circumstances. The accrual is equal to the present value of the amount expected to be needed to settle the obligation if the time value of money is material. Future events that could affect the amount needed to settle the obligation are considered only if there is sufficient objective evidence that they will occur. Potential contingent liabilities are not recognised but are disclosed, unless they are deemed remote. A.2.11 Foreign currency transactions Recognition Foreign currency transactions are initially recognised in the presentation currency, by applying the exchange rate ruling at the date of the transaction. Measurement At each reporting date, foreign currency captions are translated at the closing rate. Exchange rate gains and losses arising from the translation of foreign currency items at rates that differ from those applied at initial recognition during the year or in previous financial statements are recognised in profit or loss in the year in which they arise 34 Annual Report 2010

35 A.2.12 Recognition of revenue and expense Definition Revenue is the gross inflow of economic benefits arising from the company s ordinary operating activities, when such flows generate increases in equity other than increases due to shareholders injections. Recognition Revenue is measured at the fair value of the consideration received or due and is recognised when it can be reliably estimated. Revenue from the provision of services can be reliably estimated when all of the following conditions have been met: the amount of the revenue can be reliably measured; it is probable that the economic benefits arising from the transaction will flow to the company; the transaction s percentage of completion at the reporting date can be reliably measured; costs incurred for the transaction and costs to completion can be reliably calculated. Revenue recognised on the provision of services is recognised on a percentage of completion basis. Revenue is only recognised when it is probable that the economic benefits of the transaction will flow to the company. However, when the recoverability of an amount already recognised as revenue become uncertain, the non-recoverable amount, or the amount that is no longer probable to be recovered, is recognised as an expense rather than as an adjustment to the original revenue. Revenue from third party use of the company s assets, generating interest or dividends, is recognised when: -it is probable that the economic benefits of the transaction will flow to the company; -the amount of the revenue can be reliably measured. Interest is recognised on an accruals basis considering the actual yield of the asset. Dividends are recognised as from when the shareholders have the right to receive payment. Expense is recognised when it is incurred, in accordance with the principle of matching expense and revenue that derive directly or jointly from the same transactions or events. Expense that cannot be associated with revenue is immediately recognised in profit or loss. Other matters Although the company owns investments in associates, it has exercised its right under current legislation to not prepare consolidated financial statements, as such are prepared by the parent, UBI Banca S.c.p.A., with registered office in Piazza V. Veneto 8 Bergamo. A.3 FAIR VALUE DISCLOSURE Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable, willing parties in an arm s length transaction. The fair value of financial assets and liabilities is calculated with reference to prices on financial markets, for financial instruments listed on active markets, or using valuation techniques for other financial instruments. In accordance with IAS 39, official prices in an active market offer the best evidence of fair value. These prices therefore take priority in the measurement of financial assets and liabilities (level 1 fair value). A financial instrument is regarded as listed in an active market if listed prices are readily and regularly available from an exchange, dealer or information provider and those prices represent actual regularly occurring market transactions on an arm s length basis. The purpose is to calculate the fair value of a financial instrument that is traded in an active market and to determine the price that would be applied to the transaction at the reporting date in such market. If there is an active market, the fair value of financial instruments is the spot price at the reporting date (bid, ask or average price, depending on the relevant financial instrument). Financial instruments that are not considered Annual Report

36 as listed in an active market are mainly measured using techniques that aim to adequately reflect their market price at the measurement date. The valuation techniques used include: reference to market values indirectly associated with the instrument to be measured, based on similar products in terms of risk profile (level 2 fair value); measurements using, even only in part, non-market input, based on estimates and assumptions (level 3 fair value). The company believes that the carrying amount, net of the collective/individual impairment, constitutes a reliable approximation of fair value for assets and liabilities with unknown or short-term maturities recognised in the financial statements at cost or amortised cost. The company has only held-to-maturity investments at 31 December Annual Report 2010

37 Part B NOTES TO THE STATEMENT OF FINANCIAL POSITION Assets Section 1 Cash and cash equivalents - Caption thousand (+ 5 thousand) This caption consists of banknotes and coins with legal tender, bank cheques, banker s drafts and tax stamps 31/12/ /12/2009 a) Cash b) Deposits with Central Banks Total Section 5 Held-to-maturity investments - Caption 50 8,456 thousand (- 2,151 thousand) This caption includes variable yield life investment policies with SAI Fondiaria, with yield not lower than 2.0%, which are pledged to guarantee the surety given to the tax authorities to secure a VAT receivable for which the company is factor and for which it is contractually obligated to hold to maturity (December 2015). In 2010, the aforementioned policy, which was agreed in 2005, was repaid in the amount of 10,718 thousand, and a new policy was agreed for 8,500 thousand. The increase in point B.4 of table 5.2 relates to the capitalisation of interest accrued in the year, while the decrease in point C.5 reflects the payment of flat commissions on the new policy to the insurance company. 5.1 Held-to-maturity investments: analysis by debtor/issuer Carrying amount at Fair value at 31/12/2010 Carrying amount Fair value at 31/12/ /12/2010 L1 L2 L3 at 31/12/2009 L1 L2 L3 1. Debt instruments 1.1 Structured instruments a) Government and Central Banks b) Other public bodies c) Banks d) Financial institutions e) Other issuers 1.2 Other instruments a) Government and Central Banks b) Other public bodies c) Banks d) Financial institutions e) Other issuers 8,456 8,456-10,607 10, Loans a) Banks - - b) Financial institutions c) Customers Total 8,456-8,456-10,607-10,607 - Key: L1 - listed price on an active market; L2 - input of various prices on a listed market, which can be observed directly (prices) or indirectly (price derivatives) on the market; L3 input not based on observable market data. Annual Report

38 5.2 Held-to-maturity investments: changes in the year Debt instruments Loans Total A. Opening balance 10,607 10,607 B. Increases 8,618-8,618 B1. Purchases 8,500 8,500 B2. Reversals of impairment losses - B3. Reclassifications from other portfolios - B4. Other changes C. Decreases (10,769) - (10,769) C1. Sales - C2. Repayments (10,718) (10,718) C3. Impairment losses - C4. Reclassifications to other portfolios - C5. Other changes (51) (51) D. Closing balance 8,456-8,456 Section 6 Loans and receivables - Caption 60 2,747,619 thousand (+ 394,977 thousand) This caption mainly consists of loans and advances to transferors and receivables from debtors as a result of factoring activities. 6.1 Loans and advances to banks 8,547 thousand (- 16,846 thousand) These mainly consist of positive balances due to temporary liquidity in current accounts and deposits with banks. Financing relates to factoring activities. Total at 31/12/2010 Total at 31/12/ Deposits and current accounts 2,861 17, Financing 5,686 7, Repurchase agreements 2.2 Finance leases 2.3 Factoring 5,661 7,481 - with recourse without recourse 5,661 7, Other loans Debt instruments structured instruments - other debt instruments 4. Other assets - - Total carrying amount 8,547 25,393 Total fair value 8,547 25,393 The fair value corresponds with the carrying amount since these are current amounts. 38 Annual Report 2010

39 6.2 There are no loans and advances to banks securing liabilities or commitments. 6.3 Loans and advances to financial institutions 142,369 thousand (+ 21,783 thousand) Total at 31/12/2010 Total at 31/12/2009 Performing Impaired Performing Impaired 1. Financing 142, , Repurchase agreements 1.2 Finance leases 1.3 Factoring 70,216 28,747 - with recourse 63,645 15,741 - without recourse 6,571 13, Other loans 72,153 91, Debt instruments structured instruments - other debt instruments 3. Other assets - - Total carrying amount 142, ,586 Total fair value 142, ,586 Caption 1.4 Other financing includes 71,143 thousand due from Siderfactor S.p.A.. There are no amounts due from Tex Factor S.p.A. in liquidation, as such were fully repaid thereby at 31 December The fair value corresponds with the carrying amount since these are current amounts. 6.4 There are no loans and advances to financial institutions securing liabilities or commitments. 6.5 Loans and advances to customers 2,596,703 thousand (+ 390,040 thousand) Loans and advances to customers mainly arise from factoring activities, the disbursement of loans and loans granted for a specific purpose. Loans and advances consist of: 1) receivables factored with recourse, which are recognised in line with the amount advanced; 2) receivables factored without legal recourse, i.e., which do not meet the requirements for recognition, and, accordingly, only the amount advanced is recognised; 3) receivables factored without recourse, which have be definitively acquired; 4) paid at maturity receivables with debtor payment deferrals; 5) receivables acquired for an amount significantly lower than their nominal amount (price paid); 6) advances against future en bloc receivables (without the transfer of the underlying receivable); 7) loans for specific purposes. Annual Report

40 Total at 31/12/2010 Total at 31/12/2009 Performing Impaired Performing Impaired 1. Finance leases including: without final purchase option 2. Factoring 2,432,112 16,301 2,073,774 48,013 - with recourse 1,425,501 15,895 1,259,910 47,187 - without recourse 1,006, , , Consumer credit (including revolving credit cards) 4. Credit cards 5. Other loans 147, , including: from enforcement of guarantees and commitments 6. Debt instruments - structured instruments - other debt instruments 7. Other assets Total carrying amount 2,579,419 17,284 2,157,816 48,845 Total fair value 2,579,419 17,284 2,157,816 48,845 Total loans and advances relating to the Poland branch amount to 82,165 thousand. 6.6 There are no loans and advances to customers securing liabilities or commitments. 6.7 Loans and receivables: guaranteed assets Loans and advances to banks Loans and advances to financial institutions Total at 31/12/2010 Total at 31/12/2009 Loans and advances to customers Loans and advances to banks Loans and advances to financial institutions Loans and advances to customers VE VG VE VG VE VG VE VG VE VG VE VG 1. Performing assets guaranteed by: - Assets under finance lease - Factoring loans 1,505,041 1,505,041 1,322,838 1,322,838 - Mortgages - Pledges - Personal guarantees - Derivatives on loans and receivables 2, Impaired assets guaranteed by: - Assets under finance lease - Factoring loans - Mortgages - Pledges - Personal guarantees - Derivatives on loans and receivables Total ,505,041 1,505, ,322,838 1,322,838 CA = carrying amount of assets FV = fair value of the guarantees The fair value of guarantees of factoring receivables relates to the total amount of receivables for with recourse factoring. Section 9 Equity investments - Caption thousand (no change) This caption consists of investments in two unlisted financial companies that operate in the factoring sector: Tex Factor S.p.A. in liquidation and Siderfactor S.p.A., which do not belong to the UBI Banca Group. It also includes the investment in the UBI Banca Group company Sistemi e Servizi S.c.p.A.. Tex Factor S.p.A. was put into liquidation by resolution of its shareholders on 16 June 2010, with effect as from 1 July Annual Report 2010

41 9.1 Equity investments: information on relationships with investees Company Carrying amount % of investment % of available votes Reg. office Total assets Total revenue Equity Profit for previous year Listed (Yes/No) A. Wholly owned B. Jointly controlled C. Subject to significant influence * Tex Factor S.p.A. in liquidation % 20.00% Milano 14, , No * Siderfactor S.p.A % 27.00% Milano 94,865 2,027 2, No * UBI Sistemi e Servizi S.c.p.A % 0.74% Brescia 214, ,667 52,076 - No Total 958 Although the company s investment in UBI Sistemi e Servizi S.c.p.A. is less than 20%, it is not classified as an available-for-sale financial asset, but rather under equity investments because of the UBI Banca Group s investment therein, notwithstanding the fact that exclusive control can only be attributed to the parent UBI Banca. Accordingly, UBI Factor S.p.A. classifies this investee as subject to significant influence. Equity of the companies indicated does not include the profit for Based on the data in the draft financial statements approved by Siderfactor S.p.A. s board of directors, it generated a profit for the year of 669 thousand, up on During an extraordinary meeting held on 11 February 2011, the shareholders of Tex Factor S.p.A. in liquidation approved the final liquidation financial statements, showing a loss of 222 thousand, and the allocation plan to shareholders, without entailing the impairment of the investment s carrying amount for UBI Factor S.p.A.. The carrying amounts of assets, revenue and equity refer to the most recent set of approved financial statements (2009). There is no qualitative and/or quantitative evidence of impairment losses on the carrying amounts. 9.2 Equity investments: changes in the year There were no changes in the year. 9.3 There are no equity investments securing liabilities or commitments. 9.4 There are no commitments relating to equity investments. Section 10 Property and equipment - Caption thousand (- 199 thousand) This caption consists of property and equipment used in operations. It is depreciated in accordance with IAS 16 on the basis of each asset s useful life. Annual Report

42 10.1 Analysis of caption 100 Property and equipment Assets measured at cost Total at 31/12/2010 Total at 31/12/2009 Assets measured at fair value or deemed cost Assets measured at cost Assets measured at fair value or deemed cost 1. Assets used in operations 1.1 owned a) land b) buildings c) furniture d) equipment e) other under finance lease a) land b) buildings c) furniture d) equipment e) other Total Assets under finance lease 2.1 assets with unexercised purchase option 2.2 assets withdrawn following termination 2.3 other assets Total Investment property including: assets under operating lease including: assets under operating lease Total Total (1+2+3) Totale (assets at cost and deemed cost) Property and equipment: changes in the year Land Buildings Furniture Equipment Other Total A. Opening balance B. Increases B.1 Purchases B.2 Reverals of impaiment losses - B.3 Increases in fair value recognised in: a) equity - b) profit or loss - B.4 Other changes - C. Decreases - - (14) (42) (187) (243) C.1 Sales (3) (2) (5) C.2 Depreciation (14) (39) (185) (238) C.3 Impairment losses recognised in: a) equity - b) profit or loss - C.4 Decreases in fair value recognised in: a) equity - b) profit or loss - C.5 Other changes - D. Closing balance Annual Report 2010

43 Analysis of useful life (in years) of each item of property and equipment: Useful life Years Furniture 8.3 Equipment 2.5 Other: - Cars Officine machines Communication systems Registered office furnishing There are no items of property and equipment securing liabilities or commitments. Section 11 Intangible assets - Caption 110 1,612 thousand (+ 1,272 thousand) Intangible assets consist of software licences. In addition, in February 2010, the company finalised the acquisition of a portfolio of receivables from the Italcementi Group for 11.2 million, which generated the recognition of an intangible asset of 864 thousand, measured by discounting future economic benefits for the company as a result of the customer relationship. This intangible asset is amortised in accordance with IAS 38 on the basis of its useful life Analysis of caption 110 Intangible assets Assets measured at cost 31/12/ /12/2009 Assets measured at Assets measured at Assets measured at fair value cost fair value 1. Goodwill Other intangible assets: 2.1 owned 1, internally generated other 1, under finance lease Total 2 1, Assets under finance lease: 3.1 assets with unexercised purchase option assets withdrawn following termination other assets Total Assets under operating lease Total ( ) 1, Total (assets at cost + assets at fair value) 1, Annual Report

44 11.2 Intangible assets: changes in the year Increases in the year relate to software licences for the applications of the company s new IT system and the recognition of the intangible asset relating to the customer relationship. Total A. Opening balance 339 B. Increases 1,684 B.1 Purchases 1,684 B.2 Reverals of impaiment losses B.3 Increases in fair value - - equity - profit or loss B.4 Other changes C. Decreases (411) C.1 Sales C.2 Depreciation (411) C.3 Impairment losses - - equity - profit or loss C.4 Decreases in fair value - - equity - profit or loss C.5 Other changes D. Closing balance 1,612 The useful life of software licences is five years, while that of the intangible asset relating to the customer relationship is three years. Section 12 Tax assets and liabilities 12.1 Analysis of caption 120 Tax assets: current and deferred 3,376 thousand ( thousand) 31/12/ /12/2009 A) Current tax assets 2,651 2,249 B) Deferred tax assets Deferred tax assets with balancing entry in profit or loss Impairment losses on loans and receivables Accruals to the provision for risks and charges Personnel expense Other sundry Deferred tax assets with balancing entry in equity Personnel expense Total recognised deferred tax assets Temporary differences not included in the calculation of deferred tax assets - - Total recognisable deferred tax assets Annual Report 2010

45 12.2 Analysis of caption 70 Tax liabilities: current and deferred 2,869 thousand (- 716 thousand) 31/12/ /12/2009 A) Current tax liabiliites 2,866 3,540 B) Deferred tax liabilities 3 45 Deferred tax liabilities with balancing entry in profit or loss Accruals to the allowance for impairment Other 3 45 Deferred tax liabilities with balancing entry in equity Other sundry - - Total recognised deferred tax liabilities Temporary differences not included in the calculation of deferred tax liabilities - - Total recognisable deferred tax liabilities Changes in deferred tax assets (recognised in profit or loss) 31/12/ /12/ Opening balance 834 1, Increases Deferred tax assets recognised in the year a) relative to prior years - - b) due to change in accounting policies - - c) reversal of impairment losses - - d) other New taxes or increases in tax rates Other increases Decreases (260) (811) 3.1 Deferred tax assets derecognised in the year (260) (811) a) reversals (211) (811) b) impairment losses due to non-recoverability - - c) due to change in accounting policies - - d) other (49) Reduction in tax rates Other decreases Closing balance The change is mainly due to the reversal of accruals on the provision for risks and charges, specifically the redundancy provision and other personnel expense. Annual Report

46 12.4 Changes in deferred tax liabilities (recognised in profit or loss) 31/12/ /12/ Opening balance Increases Deferred tax liabilities recognised in the year - - a) relative to prior years - - b) due to change in accounting policies - - c) other New taxes or increases in tax rates Other increases Decreases (42) (35) 3.1 Deferred tax liabilities derecognised in the year (2) (35) a) reversals (2) (35) b) due to change in accounting policies - - c) other Reduction in tax rates Other decreases (40) - 4. Closing balance 3 45 Caption 3.3 Other changes reflects the reclassification of deferred tax liabilities (caption 3.3 Other decreases in table 12.5), with respect to the taxation of post-employment benefits, which are calculated using actuarial techniques Changes in deferred tax assets (recognised in equity) 31/12/ /12/ Opening balance Increases Deferred tax assets recognised in the year 31 - a) relative to prior years - - b) due to change in accounting policies - - c) other New taxes or increases in tax rates Other increases Decreases Deferred tax assets derecognised in the year - - a) reversals - - b) impairment losses due to non-recoverability - - c) due to change in accounting policies - - d) other Reduction in tax rates Other decreases (40) (10) 4. Closing balance Annual Report 2010

47 12.6 Changes in deferred tax liabilities (recognised in equity) 31/12/ /12/ Opening balance Increases Deferred tax liabilities recognised in the year - - a) relative to prior years - - b) due to change in accounting policies - - c) other New taxes or increases in tax rates Other increases Decreases Deferred tax liabilities derecognised in the year - (17) a) reversals - - b) due to change in accounting policies - - c) other - (17) 3.2 Reduction in tax rates Other decreases - 4. Closing balance - - Section 14 Other assets Caption ,475 thousand (+ 254 thousand) 14.1 Analysis of caption 140 Other assets This caption consists mainly of the following: 31/12/ /12/2009 Tax consolidation receivables from the parent 8,065 4,759 Receivables from social security institutions 1,038 1,038 Receivables from the public administration 1,906 1,906 UUR portfolio - 2,828 Other items 1,225 1,202 Prepayments and accrued income (not allocated) Total 12,475 12,221 Receivables from the parent include IRES advances paid in 2010 and other receivables under the national tax consolidation scheme. Other items mainly relate to invoices issued and to be issued to extra-factoring counterparties, in addition to advances to service providers. Annual Report

48 Liabilities Section 1 Financial liabilities - Caption 10 2,621,622 thousand (+ 381,037 thousand) 1.1 Financial liabilities This caption includes accrued interest expense of 394 thousand on bank current account overdrafts and loans. banks financial institutions 31/12/ /12/2009 customers banks financial institutions customers 1. Financing 2,117, ,102, Repurchase agreements Other loans 2,117, ,102, Other financial liabilities 494,279-9, ,511-15,946 Total 2,612,083-9,539 2,224,637-15,946 Fair value 2,612,083-9,539 2,224,637-15,946 Total financial liabilities relating to the Poland branch amount to 81,213 thousand. Loans mainly consist of funding from the parent UBI Banca. Other financial liabilities relate to current account overdrafts. Other amounts due to customers relate to the residual amount of the consideration due to transferors for receivables acquired without recourse. 1.2 There are no subordinated liabilities. Section 7 Tax liabilities - Caption 70 2,869 thousand (- 716 thousand) This caption is analysed in Section 12 of Assets - Tax assets and liabilities. Section 9 Other liabilities Caption 90 21,015 thousand (+ 561 thousand) 9.1 Analysis of caption 90 Other liabilities 31/12/ /12/2009 Tax consolidation payables to the parent 7,947 8,224 Trade payables 1, Invoices to be received 4,014 3,273 Due to employees Social security charges payable Collections pending allocation 4,826 4,626 Payable to transferor Fenig 1,029 1,022 Guarantees issued to UBI Leasing Other financial liabilities Accrued expenses (unallocated) Total 21,015 20, Annual Report 2010

49 Payables to the parent relate to the IRES tax liability for 2010, under the national tax consolidation scheme. Liabilities for invoices to be received include invoices that have not yet been received from service providers, including the parent. Collections pending allocation relate to payments received in relation to factored receivables, which, at the reporting date, the company has not been able to allocate to the relevant transferor position. Section 10 Post-employment benefits - Caption 100 2,577 thousand (+ 120 thousand) 10.1 Post-employment benefits: changes in the year 31/12/ /12/2009 A. Opening balance 2,457 2,511 B. Increases B.1 Accrual B.2 Other increases C. Decreases (41) (126) C.1 Pay-outs (41) (89) C.2 Other decreases (37) D. Closing balance 2,577 2, Other information In accordance with IAS 19, the post-employment benefit liability can be classified as a defined benefit plan, requiring the calculation of the amount of the obligation using actuarial techniques. In particular, this accrual should consider the amount that has already vested at the reporting date, projected into the future in order to estimate the amount that will be due when employment ends. This amount is then discounted to reflect the time value of money. The present value of commitments is calculated by an independent expert using the projected unit credit method. This method considers future salary increases up to the termination of employment, outlays to be made on the basis of historical/statistical analyses and the demographic curve, with the discounting of such flows on the basis of a market interest rate. Contributions paid each year are considered separate and additional units. Demographic assumptions (termination of employment, disability, death, etc.) are formulated using historical personnel data, suitably integrated and equalised to taken into account redundancies provided for by the business plan and current legislation on the maximum retirement age. The financial and economic assumptions are based on prudent forecasts, whereas labour market variables reflect historical data and trends in line with the economy. The cost of living index for white and blue collar families, amounting to 2.0%, has been used as the revaluation rate. The Euro Composite A rate curve at the measurement date has been used to calculate the discount rate. This rate curve is the yield of low-risk securities issued only by corporate issuers that are rated A and within the Eurozone (source: Bloomberg). The rate is the average calculated on the curve of rates ranging from 1.76% (1 year) to 5.36% (30 years). Annual Report

50 Section 11 Provisions for risks and charges - Caption thousand (- 319 thousand) 11.1 Analysis of caption 110 Provisions for risks and charges 31/12/ /12/ Company pension funds 2. Other provisions for risks and charges 866 1, litigation personnel other Total 866 1, Changes in the year in caption 110 Provisions for risks and charges 31/12/ /12/2009 Pension and similar Pension and similar Other provisions costs costs Other provisions A. Opening balance - 1,185-3,645 B. Increases (+) B.1 Accrual B.2 Changes due to passage of time B.3 Changes due to adjustments to the discount rate B.4 Other changes C. Decreases (-) - (326) - (2,580) C.1 Utilisations - (326) - (2,069) C.2 Changes due to adjustments to the discount rate - - C.3 Other changes - - (511) D. Closing balance ,185 C.1 Utilisations relate to termination benefits, legal expenses and claw-back actions in insolvency proceedings. Section 12 Equity Captions 120, 130, 140 and Analysis of caption 120 Share capital 36,116 thousand (no change) 31/12/ /12/ Share capital 1.1 Ordinary shares 36,116 36, Other shares - - Total 36,116 36,116 The fully subscribed and paid-up share capital includes 69,453,500 shares with a nominal amount of 0.52 each Analysis of caption 150 Share premium 2,066 thousand (no change) This caption was set up in 1993 following the share capital increase. 50 Annual Report 2010

51 12.5 Other information Analysis of caption 160 Reserves 69,372 thousand (+ 14,690 thousand) Legal reserve Retained earnings Other Total A. Opening balance 7, ,457 54,682 B. Increases ,690 14,690 B.1 Allocation of profit 14,690 14,690 B.2 Other changes - C. Decreases C.1 Utilisations - - to cover losses - dividends - transfer of share capital - C.2 Other changes - D. Closing balance 7, ,147 69,372 B.1 The increase is due to the allocation of the profit for 2009, as resolved by the shareholders on 26 March An analysis of other reserves is provided below: Analysis of other reserves: Extraordinary reserve 53,933 Negative goodwill 6,573 General financial risks 2,484 FTA reserves (843) Total 62,147 EQUITY CAPTION DISCLOSURE PURSUANT ARTICLE bis OF THE ITALIAN CIVIL CODE Amount Possibility of use Available portion Summary of uses in the previous three years To cover losses For other reasons Share capital 36,116 Share premium 2,066 Income-related reserves: - legal reserve 7,223 B - extraordinary reserve 53,933 A,B,C 53,933 Other reserves 8,215 A,B,C 8,215 Valuation reserve (55) Retained earnings 18,601 A,B,C 18,601 TOTAL 80,749 - Non-distributable portion - - Residual distributable portion 80,749 (key: A - to increase share capital; B - to cover losses; C - dividends) No reserves are non-distributable. Annual Report

52 12.6 Analysis of caption 170 Valuation reserves and changes in the year - 55 thousand (- 83 thousand) Availablefor-sale financial assets Property and equipment Intangible assets Hedge of foreign investments Cash flow hedges Exchange rate gains (losses) Noncurrent assets available for sale Special revaluation laws Actuarial gains (+)/ losses (-) on postemployment benefits Total A. Opening balance B. Increases B.1 Increases in fair value - B.2 Other changes - C. Decreases (83) (83) C.1 Decreases in fair value - C.2 Other changes (83) (83) D. Closing balance (55) (55) 52 Annual Report 2010

53 Part C NOTES TO THE INCOME STATEMENT Section 1 Interest Captions 10 and Analysis of caption 10 Interest and similar income 50,237 thousand (- 7,532 thousand) Debt instruments Financing Other transactions 31/12/ /12/ Financial assets held for trading 2. Financial assets at fair value - 3. Available-for-sale financial assets - 4. Held-to-maturity investments Loans and advances Loans and advances to banks Loans and advances to financial institutions Loans and advances to customers 50,068 50,068 57, Other assets - 7. Hedging derivatives - Total ,119-50,237 57, Interest and similar income: other information Interest on held-to-maturity investments relates to the portion of yield on the insurance policies classified under asset caption 50 in the statement of financial position. Interest on loans and advances to banks relates to temporary positive current account balances with banks. Interest on loans and advances to customers relates to factoring activities and is collected on advances to transferors and with debtors as a result of payment deferrals, in addition to contract loans. Furthermore, this caption includes interest income on loans for specific purposes. The significant decrease in this caption is due to the trend in market interest rates, which affect the terms applied to loans to customers. 1.3 Analysis of caption 20 Interest and similar expense 15,416 thousand (- 3,673 thousand) Lending Securities Other 31/12/ /12/ Due to banks (15,377) (15,377) (19,064) 2. Due to financial institutions Due to customers Outstanding securities Financial liabilities held for trading Financial liabilities at fair value Other liabilities (39) (39) (25) 8. Hedging derivatives - - Total (15,377) - (39) (15,416) (19,089) Annual Report

54 Interest mainly includes that paid to banks for current account overdrafts and loans. The amounts shown do not include expenses for subordinated liabilities. The significant decrease in this caption is due to the trend in market interest rates, which affect the terms applied to bank loans. Section 2 Commissions Captions 30 and Analysis of caption 30 Commission income 24,421 thousand (- 134 thousand) 31/12/ /12/ finance leases 2. factoring 24,352 24, consumer credit 4. merchant banking 5. guarantees given services: - third party mandated fund management - forex brokerage - product distribution - other collection and payment services 8. securitisation servicing 9. other commissions Total 24,421 24,555 This caption mainly consists of flat commissions for with and without recourse factoring, analysed below: Factoring commission income 31/12/ /12/ with recourse commissions 18,435 15, without recourse commission 4,036 7, mandate commissions expense recoveries with mark-ups other Total 24,352 24,357 Commissions relate to factoring activities and are analysed on the basis of the life of the receivables. Other mainly relates to credit management commissions and commissions invoices to debtors. The significant change in without recourse commissions is due to the impact of a substantial transaction in 2009 with the public administration as counterparty, amounting to 2.8 million. Expense recoveries with mark-ups mainly relate to: preliminary investigation fees, handling expenses, chamber of commerce inquiry and information expenses, debtor assessment fees, account statement processing and postage, account expenses, account closing expenses and home-factoring fees. 54 Annual Report 2010

55 2.2 Analysis of caption 40 Commission expense 8,170 thousand (- 125 thousand) 31/12/ /12/ guarantees received (1,600) (1,114) 2. third party distribution of services collection and payment services - (7) 4. other commissions: 4.1 reversal of commissions to third parties (6,153) (6,517) 4.2 credit insurance premiums (17) (357) 4.3 bank charges (400) (300) Totale (8,170) (8,295) This caption mainly relates to commissions paid to third parties for the reporting of factoring transactions, as well as commissions on sureties from the parent. Section 3 Dividends and similar income Caption Analysis of caption 50 Dividends and similar income 0 thousand (- 23 thousand) 31/12/ /12/2009 Dividends Income from Income from Dividends UCITS units UCITS units 1. Financial assets held for trading 2. Available-for-sale financial assets 3. Financial assets at fair value 4. Equity investments: 4.1 merchant banking other activities - 23 Total The associate Tex Factor S.p.A. did not approve the distribution of any dividends on its profit for 2009, given the low amount thereof. Annual Report

56 Section 8 Net impairment losses/reversals of impairment losses Caption Net impairment losses/reversals of impairment losses on loans and receivables 3,147 thousand (- 4,883 thousand) Impairment losses Reversals of impairment losses 31/12/ /12/2009 individual portfolio individual portfolio 1. Loans and advances to banks - leases - factoring other loans and receivables Loans and advances to financial institutions leases factoring other loans and receivables Loans and advances to customers (4,687) - 1,540 - (3,147) (8,030) - leases factoring (4,062) - 1,524 - (2,538) (8,009) - consumer credit other loans and receivables (625) (609) (21) Total (4,687) - 1,540 - (3,147) (8,030) In detail, these changes relate to the following: 31/12/ /12/2009 1) Individual impairment losses: (4,687) (11,008) Loans and receivables (4,485) (10,732) Adjustments on the discounting of impaired assets (202) (276) 2) Reversals of individual impairment losses: 1,540 3,738 Reversals of impairment on loans and receivables 1,540 3,738 Adjustments on the discounting of impaired assets - - 3) Portfolio impairment losses: - (760) Collective impairment losses on loans and receivables - (760) Total (3,147) (8,030) The decrease in impairment losses on individual loans and receivables is due to the favourable trend in the nonperforming portfolio, which was significantly impaired in 2009, through careful and prudent risk management. Again in 2010, the company collected insurance compensation of approximately 0.5 million, recognised under reversals of impairment losses. 56 Annual Report 2010

57 8.4 Analysis of sub-caption 100 b) Net impairment losses/reversals of impairment losses on other financial transactions 0 thousand (- 89 thousand) Impairment losses Reversals of impairment losses individual portfolio individual portfolio 31/12/ /12/ Guarantees given 2. Derivatives on loans and receivables 3. Commitments to disburse funds - 4. Other transactions - Total (89) This caption has a nil balance for the year. Section 9 Administrative expenses Caption Analysis of caption 110 a) Personnel expense 11,180 thousand (+ 536 thousand) 31/12/ /12/ Employees (9,867) (9,734) a) wages and salaries (6,763) (6,965) b) social security contributions (1,930) (2,125) c) post-employment benefits - - d) pension and similar costs - - e) accrual for post-employment benefits (48) (72) f) accrual for pension and similar costs: (148) (156) - defined contribution plans (148) (156) - defined benefit plans - - g) payments to external complementary pension funds: (442) (302) - defined contribution plans (442) (302) - defined benefit plans h) other expenses (536) (114) 2. Other personnel (529) (521) 3. Directors and statutory auditors (371) (317) 4. Retired personnel Expense recoveries for personnel seconded to other companies Refunds for employees seconded to the company (490) (104) Total (11,180) (10,644) Annual Report

58 Employees include accruals for: - change in the provision for vacation, holiday pay and comp time; - the accrual for the 2010 performance bonus and the related contributions of 99 thousand; - other expenses, which include training, restaurant vouchers and employee insurance policies. Caption h) other expenses includes termination benefits of 190 thousand paid in 2010, while the 2009 balance reflected the positive impact ( 300 thousand) of the reversal, approved by the parent, to adjust the redundancy provision which was accrued in on the basis of calculations by the parent s human resource department, which the parent provided to the company, and which the company at the time considered excessive considering its expected payment commitment. Other personnel includes fees paid to contract workers and the cost of temporary contracts. 9.2 Average number of employees by category average year-end average year-end Employees: a) managers b) total senior and junior managers including 3rd and 4th level managers c) residual employees Other personnel At 31 December 2010, the company s workforce consists of: - employees, numbering 145 (+2 on 31 December 2009), with an average of 144 in the year (as in 2009); - other resources, numbering 15 (+3 on 31 December 2009), with an average of 15 (+7 on 2009). Other personnel includes: - seconded employees; - contract workers; - temporary staff. 58 Annual Report 2010

59 9.3 Analysis of sub-caption 110 b) Other administrative expenses 9,859 thousand (- 277 thousand) Other administrative expenses 31/12/ /12/2009 Lease expense (1,386) ( 1,378) Professional ICT services (240) ( 272) Legal and corporate advisory services (822) ( 751) Car and furniture rental (349) ( 317) Hardware lease (327) ( 293) Hardware maintenance and assistance (13) ( 8) Software maintenance and assistance (7) ( 23) Other building management expenses (17) ( 17) Cleaning (86) ( 82) Building maintenance (46) ( 54) Membership fees (74) ( 65) Information and chamber of commerce queries (429) ( 446) Periodicals and books (23) ( 25) Postal costs (226) ( 200) Insurance premiums (40) ( 29) Advertising and publicity (246) ( 231) Entertainment expenses (3) ( 6) Electronic transmission and telephone networks (165) ( 162) Outsourcing to third parties (808) ( 726) Outsourcing to group companies (440) ( 532) Travel expenses (171) ( 207) Credit recovery expenses (2,693) ( 3,201) Printed matter, stationary and consumables (90) ( 68) Transport and relocations (29) ( 19) Work experience stipends (57) ( 37) Other expenses (576) ( 399) Total administrative expenses (9,363) ( 9,548) Indirect taxes and duties (496) ( 588) - Indirect taxes and duties (non-deductible VAT) - ( 40) - VAT on infragroup agreements (263) ( 280) - Stamp tax (215) ( 249) - Other taxes (18) ( 19) Total (9,859) ( 10,136) N.B. Under the VAT system adopted by the company, in accordance with article 36-bis of Presidential decree no. 633/72, as from 2009, even the related VAT recognised at cost, where applicable. The most significant changes compared to 2009 relate to credit recovery expenses, due to the trend in impaired assets. Annual Report

60 Section 10 Net impairment losses/reversals of impairment losses on property and equipment Caption Analysis of caption 120 Net impairment losses/reversals of impairment losses on property and equipment 238 thousand (+ 2 thousand)) Depreciation Impairment losses Reversals of impairment losses carrying amount at 31/12/2010 carrying amount at 31/12/ Assets used in operations 1.1 owned (238) - - (238) ( 236) a) land b) buildings c) furniture (14) - - (14) ( 14) d) equipment (39) - - (39) ( 34) e) other (185) - - (185) ( 188) 1.2 under finance lease a) land b) buildings c) chattels d) equipment e) other Assets under finance lease Investment property including operating leases - Total (238) - - (238) (236) Section 11 Net impairment losses/reversals of impairment losses on intangible assets - Caption Analysis of caption 130 Net impairment losses/reversals of impairment losses on intangible assets 411 thousand (+ 298 thousand) Amortisation Impairment losses Reversals of impairment losses carrying amount at 31/12/2010 carrying amount at 31/12/ Goodwill Other intangible assets (411) - - ( 411) ( 113) 2.1 owned (411) - - ( 411) ( 113) 2.2 under finance lease Assets under finance lease Assets under operating lease Total (411) - - ( 411) ( 113) The change in this caption is mainly due to the amortisation of the new intangible asset, as described in Section 11 of Assets - Caption 110 Intangible assets, and the purchase of the software licences for the company s new IT system. 60 Annual Report 2010

61 Section 13 Net accruals to the provision for risks and charges Caption Analysis of caption 150 Net accruals to the provision for risks and charges 1 thousand (- 79 thousand) 31/12/ /12/2009 Insolvency litigation and legal expenses - - Risks for lawsuits by third parties and legal expenses - - Other risks and charges ( 1) ( 80) Total ( 1) ( 80) In addition, utilisations of provision for risks and charges are allocated to the individual income statement captions in which the expense covered by the accrual is classified. Furthermore, this caption includes the effect of the time reversal following the discounting of the amounts accrued, in accordance with IAS 37, at the current market rate (IRS) at the reporting date, on the basis of the expected financial outlay. Section 14 Other operating income and expenses Caption Analysis of caption 160 Other operating income and expenses 2,159 thousand (- 1,911 thousand) a) Other operating income 31/12/ /12/2009 Expense recoveries 1,495 1,606 Factoring 377 2,015 Services Prior year income 37 2 Other sundry 3 16 Total a 2,454 4,165 b) Other operating expenses 31/12/ /12/2009 Prior year expense and losses ( 295) ( 91) Other sundry - ( 5) Total b ( 295) ( 96) Total a+b 2,159 4,069 Expense recoveries refer to recharges to transferors without mark-ups, including legal expenses, registration taxes and bank expenses. Factoring revenue mainly relates to gains recognised on the collection of receivables which were acquired at prices significantly lower than their nominal amount. The significant change on 2009 is due to the considerable amount that was not repeated in Annual Report

62 Section 17 Income taxes on profit from continuing operations Caption Analysis of caption 190 Income taxes on profit from continuing operations 9,794 thousand (- 358 thousand) 31/12/ /12/ Current taxes (9,742) (10,305) 2. Changes in current taxes of prior years Decrease in current taxes of the year Change in deferred tax assets (210) (378) 5. Change in deferred tax liabilities 2 35 Income taxes of the year (9,794) (10,152) Current taxes and the effects of deferred tax assets and liabilities have been calculated at the current rates of 27.50% for IRES (corporate income tax) and 4.82% for IRAP (regional tax on production activities). The effects of deferred tax assets and liabilities mainly relate to accruals to the provision for risks and charges, as well as to the allowance for impairment Reconciliation of the theoretical tax charge with the effective tax charge Tax base Tax % Tax base Tax % Other tax effects Total IRES IRAP Profit before tax 28,395 28,395 28,395 Net trading income - 51,071 - Theoretical tax (at the ordinary rate) 7, % 2, % 10,270 Permanent decreases (351) (97) (0.34)% (12,555) (605) (1.18)% (702) Permanent increases 1, % 3, % 556 Temporary differences: - Differences that will reverse in upcoming years ,18% % 53 - Reversals of differences of prior years (767) (211) (0.74)% (28) (1) (0.00)% (212) Actual tax 7, % 2, % 9,963 Adjustment for income generated abroad (Poland) (58) (58) Tax consolidation adjustment (assets from the parent) (163) (163) Total current taxes 7,785 1, ,742 Change in deferred tax assets/liabilities Change in prior year current taxes (156) (156) Recognised income taxes 7,785 1, ,794 IRES is calculated as a percentage of profit before tax. However, IRAP is calculated as a percentage of net trading income. In 2010, the Polish branch s activities generated taxable profit under Italian legislation of approximately 1,239 thousand. This profit, adjusted by the tax reversals provided for by Polish legislation (mainly in application of the thin capitalisation rule, which entails the non-deductibility of interest expense paid to the parent, UBI Banca) and subject to the rate of 19%, did not generate a greater direct tax charge than that calculated under Italian tax law (IRES). 62 Annual Report 2010

63 Section 19 Income statement: other information 19.1 Analysis of interest and commission income Banks Interest income Financial institutions Customers Banks Commission income Financial institutions Customers 31/12/ /12/ Finance leases buildings chattels equipment intangible assets Factoring , ,352 72,420 78,959 - current receivables - 36, ,300 57,206 58,137 - future receivables receivables acquired definitively - - 9, ,041 13,917 19,316 - receivables acquired at below the nominal amount other loans - - 1, ,186 1, Consumer credit personal loans loans for specific purposes transfer of 1/5 of salary Guarantees and commitments trade financial Total , ,361 72,429 79,013 In addition to that disclosed above, additional non-factoring interest income of 2,169 thousand has been recognised in profit or loss. It is analysed below: - loans for specific purposes of 2,000 thousand - positive current account balances of 51 thousand - insurance policy return of 118 thousand Furthermore, additional non-factoring commission income of 60 thousand was recognised in profit or loss, relating to: - fees received for leasing referrals; - expense recoveries with mark-ups on loans for specific purposes. Annual Report

64 Part D OTHER INFORMATION B. FACTORING AND TRANSFERS OF LOANS AND RECEIVABLES B.1 - Gross amount and carrying amount Total at 31/12/2010 Total at 31/12/2009 Gross amount Adjustments Carrying amount Gross amount Adjustments Carrying amount 1. Performing assets 2,512,088 (4,099) 2,507,989 2,114,679 (4,677) 2,110,002 - exposure to transferors (with recourse): 1,491,541 (2,395) 1,489,146 1,278,830 (3,179) 1,275,651 - transfers of future receivables 1,773-1,773 4,388-4,388 - other 1,489,768 (2,395) 1,487,373 1,274,442 (3,179) 1,271,263 - exposure to transferred debtors (without recourse) 1,020,547 (1,704) 1,018, ,849 (1,498) 834,351 2, Impaired assets 27,424 (11,123) 16,301 61,458 (13,445) 48, Non-performing 21,486 (10,485) 11,001 26,136 (12,713) 13,423 - exposure to transferors (with recourse): 18,371 (7,776) 10,595 22,102 (9,505) 12,597 - transfers of future receivables 438 (358) 80 - other 17,933 (7,418) 10,515 22,102 (9,505) 12,597 - exposure to transferred debtors (without recourse): 3,115 (2,709) 406 4,034 (3,208) acquired at below nominal amount (1,343) 13 1,360 (1,360) - - other 1,759 (1,366) 393 2,674 (1,848) Doubtful 4,335 (638) 3,697 4,357 (732) 3,625 - exposure to transferors (with recourse): 4,317 (620) 3,697 4,357 (732) 3,625 - transfers of future receivables - other 4,317 (620) 3,697 4,357 (732) 3,625 - exposure to transferred debtors (without recourse): 18 (18) acquired at below nominal amount - other 18 (18) Restructured exposure to transferors (with recourse): transfers of future receivables - other - - exposure to transferred debtors (without recourse): acquired at below nominal amount - other 2.4 Past due 1,603-1,603 30,965-30,965 - exposure to transferors (with recourse): transfers of future receivables - other 1,603 1,603 30,965 30,965 - exposure to transferred debtors (without recourse): acquired at below nominal amount - other Total 2,539,512 (15,222) 2,524,290 2,176,137 (18,122) 2,158,015 As required by Banca d Italia circular no. 216 of 5 August 1996, with recourse exposure includes amounts over 180 days past due (the 90 day limit may be extended to 180 days up to 31 December 2011) totalling 1,603 thousand, for which 1,129 thousand has been collected at the date of approval of the draft financial statements, with a residual amount of 474 thousand. This residual amount mainly consists of receivables from the public administration, which generally pay over 200 days late. 64 Annual Report 2010

65 B.2 - Residual life of exposure and total loans B Factoring with recourse: advances and total loans Maturities Advances Total loans Total at 31/12/2010 Total at 31/12/2009 Total at 31/12/2010 Total at 31/12/ on demand up to 3 months 682, , ,223 - from 3 to 6 months 120, ,537 71,031 - from 6 months to 1 year 438, , ,578 - over 1 year 34,274-38, ,163 - undetermined 229,133 1,322, , ,178 Total 1,505,041 1,322,838 2,226,864 1,763,173 The balance includes advances to the transferor for factoring with recourse, advances for receivables factored without legal recourse, i.e., when the factoring has not given rise to substantial transfer ( derecognition ) to the factor of the risks and rewards of the transferred receivables, on the basis of IAS 39, and advances for future receivables. As provided for by Attachment 3.4 of Banca d Italia circular of 12 February 2010, at 31 December 2009, these amounts were conventionally classified in the undetermined life category, as it was impossible to calculate the average due date of the acquired receivables. B Factoring without recourse: exposure Maturities Total at 31/12/2010 Total at 31/12/ on demand up to 3 months 602, ,170 - from 3 to 6 months 64,266 69,290 - from 6 months to 1 year 153,410 29,882 - over 1 year 13, ,090 - undetermined 185, ,745 Total 1,019, ,177 This balance consists of total receivables acquired definitively without recourse, i.e., when the factoring has given rise to substantial transfer ( derecognition ) to the factor of the risks and rewards of the transferred receivables, on the basis of IAS 39. Loans and receivables classified in the undetermined life category substantially consist of with and without recourse factoring of receivables from the tax authorities (due to higher VAT), from the government (mainly the ministries), the payment of which is subject to measures for payment and access to earmarked funds, and, lastly, from local health units for healthcare receivables, the collection of which will follow specific judicial orders or government/regional payment measures, which are currently under negotiation between the parties. Finally, a portion of the loans classified in this category is subject to the provisions of article 1.51 of Law no. 220 of 13 December 2010 (published in the Official Gazette 297 of 21 December 2010 as the 2011 Stability law ), which confirmed the suspension of seizure against the Lazio Region at least until 1 January 2012, guaranteeing interest paid, and extending the additional suspension period to be defined in another regulatory measure. Annual Report

66 B.3 - Impairment losses Increases Decreases Opening impairment losses Impairment losses Reclassifications Other from other increases Reversals of impairment losses Reclassifications to other Derecognition Other increases Closing impairment losses Individual impairment losses on impaired assets 13,445 2,743 1, ,071 3, ,123 Exposure to transferors 10,237 2, ,071 1, ,396 - Non-performing 9,505 2, ,027 1,892-7,776 - Doubtful Restructured Past due Exposure to transferred debtors 3, , ,857-2,727 - Non-performing 3, ,857-2,709 - Doubtful Restructured Past due Individual impairment losses on performing assets 1, , Exposure to transferors 1, , Exposure to transferred debtors Portfolio impairment losses on other assets 3, ,495 - Exposure to transferors 1, ,791 - Exposure to transferred debtors 1, ,704 Total 18,122 3,333 1, ,303 3, ,222 Individual impairment losses on performing assets of 604 thousand relate to transferor positions classified as obligation pending non-performing, in line with the company s Credit Regulation, as the transferred debtor is already insolvent. In factoring transactions without recourse, past due receivables pending the term for any payment of a subguarantee to the transferor, the contractual obligation to the transferor is classified as obligation pending non-performing. Only when the sub-guarantee is actually paid to the transferor is the amount paid classified as non-performing. 66 Annual Report 2010

67 B.4 - Other information B Turnover from factored receivables Total at 31/12/2010 Total at 31/12/ Without recourse 2,213,328 1,578,520 - including: acquired at below nominal amount With recourse 4,904,355 3,509,110 Total turnover from factoring 7,117,683 5,087,630 Loans for a specific purpose 37,442 29,651 Other transactions (Table B.4.2.) 408, ,536 Total operating volumes 7,563,453 5,474,817 B Collection only services Total at 31/12/2010 Total at 31/12/2009 Loans and receivables collected during the year 408, ,536 Loans and receivables in place at the reporting date 53, ,982 B.4.3 Nominal amount of factoring agreements for future receivables Total at 31/12/2010 Total at 31/12/2009 Flow of agreements to acquire future receivables in the year 408, ,536 Agreements in place at the reporting date 53, ,982 Annual Report

68 D. Guarantees given and commitments D.1 - Value of guarantees given and commitments Transactions 31/12/ /12/ Financial guarantees given 1,202 42,363 a) Banks - - b) Financial institutions 1,202 42,363 c) Customers Trade guarantees given a) Banks - - b) Financial institutions - - c) Customers Irrevocable commitments to provide funds 127,206 98,013 a) Banks - - i) of certain use - - ii) of uncertain use - - b) Financial institutions - - i) of certain use - - ii) of uncertain use - - c) Customers 127,206 98,013 i) of certain use - - ii) of uncertain use 127,206 98, Commitments underlying derivatives on loans and receivables: hedge sales Assets pledged to guarantee third party obligations Other irrevocable commitments - - Total 128, ,389 The value of firm commitments to disburse funds is calculated as the difference between the total approved amount and the total financed amount within the scope of without recourse factoring transactions. 68 Annual Report 2010

69 Name and registered office of the parent preparing the consolidated financial statements The company s financial statements will be consolidated by: UBI Banca S.c.p.A, Piazza V.Veneto 8 - Bergamo (which directly wholly owns the company). In accordance with article 2497-bis.4 of the Italian Civil Code, the highlights of the parent s most recent set of approved financial statements are provided below (thousands of Euros): FINANCIAL STATEMENTS OF THE CCOMPANY THAT MANAGES AND COORDINATES UBI FACTOR S.p.A. HIGHLIGHTS (article 2497-bis.4 of the Italian Civil Code) FINANCIAL STATEMENTS UBI Banca S.c.p.a. Balance sheet (Thousands of Euros) Assets Cash and cash equivalents 215,835 Financial assets held for trading 1,857,484 Financial assets at fair value 173,727 Held-for-sale financial assets 4,919,281 Loans and advances to banks 28,278,016 Loans and advances to customers 12,560,060 Hedging derivatives 122,894 Equity investments 12,183,514 Fixed assets 1,198,709 Tax assets 633,576 Non-current assets held for sale and disposal groups 658,463 Other assets 648,633 TOTAL ASSESTS 63,450,192 Liabilities Due to customers and outstanding securities 21,277,596 Due to banks 27,737,223 Financial liabilities held for trading 1,393,829 Heading derivatives 379,598 Tax liabilities 472,810 Liabilities associated with disposal groups 646,320 Other liabilities 832,235 Post-employment benefits 40,120 Provisions for risks and charges 8,231 Equity 10,255,913 Profit for the year 406,317 TOTAL LIABILITIES 63,450,192 Income statement (Thousands of Euros) Net interest expense (108,971) Net commission income 16,349 Net trading income 586,121 Net financial income 540,742 Operating expenses (162,997) Profit from continuing operations before income tax 396,581 Income taxes 9,736 Profit for the year 406,317 Annual Report

70 Section 3 - Risks and risk management policies 3.1 CREDIT RISK QUALITATIVE INFORMATION 1 General information Factoring consists of establishing a continuous relationship in which the company transfers, in accordance with Law no. 52 of 1991 or pursuant to the Italian Civil Code, a significant portion of its portfolio of existing or future receivables to the factor, which provides a customised service based on three specific activities: credit management, guaranteeing against debtor default and lending by providing advances on the same receivables (the financing, therefore, is self-paying and, normally short-term, depending on the collection time of the outstanding trade receivables). Through this credit management service (accounting, checking due dates, collecting receivables, sending payment reminders and credit collection activities, etc.), the factor forges a continuous relationship with the transferor and, accordingly, with the latter s debtors, acquiring in-depth knowledge of the trade receivable policy developed. Indeed, the factor enters into a business relationship that is already in place between the parties, or that will take place between them in the future, in the event of the factoring of future receivables. Accordingly, the relationship between the factor, transferor and debtors are not merely occasional and/or temporary, but must instead develop systematically and continuously, enabling the intermediary to monitor the counterparties financial positions and performance. In this context, risk monitoring and consequent risk management (credit risk, in particular) based on factoring logic use analytical/subjective evaluations of the transferors and the transferees that are both quantitative (primarily based on previous, current and prospective financial conditions) and qualitative (level of management, competitiveness and prospects of the product, acquirer market its economic circumstances), with the largescale digitalisation of information and settlement of flows, within the scope of an overall activity in which the various company functions operate synergetically, constantly, reactively and flexibly. Risk containment is then integrated by the diversification policy, which, first and foremost, considers individual counterparties (concentration of imports, types of credit granted, duration, type of factored credit and the possibility of its assessment-management-recovery). Risk diversification must then extend to the company s total portfolio of factored receivables, diversifying by product, region, size and financial and service content of the company s overall business, in line with the parent s guidelines. In the light of the above, the company has developed commercial activities with the aim of providing the most up-to-date offer possible, in line with changes in demand, and making the most of the resources in the Milan office, the operating unit in Pordenone and the Polish branch. The company has also ramped up the development of synergies with the UBI Banca Group s network. 2 Credit risk management policies The main principles and operating methods are set forth in the Governance and control rules approved by the parent s board of directors and implemented by UBI Factor S.p.A.. In this way, on the basis of a structure series of guidelines, the company s institutional aspects (corporate officers, extraordinary equity transactions, strategic business plans, relationships with the supervisory bodies, etc.) and functional relationships with the parent (Planning and Control, Organisation and Human Resources, Operations and Services, entering new sectors and products) are regulated as part of a centralised control and monitoring system. Accordingly, credit risk management policies also fall under this system. The main risk factors As factor, the company s activities are characterised by its offer of customised services (lending, management and guarantee services) and enable it to outline the following main risk factors: 70 Annual Report 2010

71 Lending Without lending With recourse Management service No management service Management service No management service Without recourse Management service No management service Management service No management service Credit risk originating from cash exposure Credit risk originating from guarantee exposure No credit risk The purpose of the lending service is to provide customers with advances on receivables that have not yet fallen due. It leads to cash exposure for the factor equal to the agreed advance, which does not generally exceed an established percentage of the transferred receivables. Guarantees against insolvency guarantee transferors against default by the transferred debtor, with the exception of cases explicitly governed by the factoring agreement (e.g.: non-existent receivable, offsetting and contested supplies). Except for certain specific products, the factor undertakes to pay, in the absence of an advance, the amount of the transferred receivables after a certain number of days have passed from when they fell due. If the receivables are not acquired definitively or if no advance is provided, this service gives rise to guarantee exposure for the factor, equal to the revolving plafond (which becomes available again as the transferred receivables are collected) within which the factor undertakes to guarantee payment of receivables to the transferor. In order to mitigate the assumed risk, the factor may negotiate specific types of restrictions to the guarantee. Factoring transactions therefore provide for the structural and concurrent presence of three parties: the transferor, the factor and the transferred debtor(s). Accordingly, in order to measure risk, the unit of observation is the transferor/transferee relationship (except for direct lending, in which the financed debtor constitutes the observation unit) in which the intermediary may be exposed in a variety of ways: part of the transferred receivables may be with recourse and part may be without; part of the transferred receivables may be advanced and part not, etc.. The composition of the individual exposures in each transferor/transferee relationship is a crucial element for the factor, as it enables the latter to measure the actual risk level of its exposure. Indeed, the types of factoring transactions are determined on the basis of the transferor/transferee relationship. Similarly, the acquisition of any guarantees from third parties is generally based on that relationship and not the individual transfer. 2.1 Organisational information In the light of the above, risks are monitored using an organisational structure in order to separately analyse and grant credit to counterparties (transferor, debtor/s) and manage the related financial transactions. Risks are monitored throughout all core phases of the lending process and may be summarised as follows: analysis and evaluation : quantitative and qualitative information is gathered from the relevant counterparties and from the system in order to assign a credit rating to the counterparty and quantify the proposed credit line; approval and formalisation : once the proposal has been approved, the contractual documentation is prepared for the transferor s signature; monitoring : continuous monitoring of counterparties to whom credit has been granted, both in relationships with the factor and in the system, in order to identify any irregularities and, accordingly, act in a timely manner; with specific reference to past due loans, monitoring includes an out-of-court activities involving automated and customised reminders, and, if necessary, legal action with the support of legal advisors. Annual Report

72 2.2 Risk management, measurement and control Risk classification The internal classification rules for loans and receivables are set forth in the new Credit Regulation, which has been approved by the board of directors and which considers the parent s guidelines. It is an integral part of the company s activities and currently applicable service orders, in accordance with Banca d Italia provisions. Reclassifications between the various categories are specifically defined by company regulations, which have been approved by the board of directors, with the identification of specific circumstances in terms of form and/ or substance. The Credit Committee is specifically responsible for the classification and proposed management of default assets (continuously past due by over 180 days, restructured, doubtful and non-performing), after having requested and received an opinion of consistency with group credit guidelines in advance from the parent s Credit or Credit Recovery Departments. Under the aforementioned Credit Regulation, such amounts are initially classified as follows: first level risk (direct risks), which identifies the party to which the factoring company is initially exposed; second level risk, which identifies the credit granted to the counterparty of the party to which the factoring company is initially exposed. Furthermore, within this macro classification, there are sub-groups depending on the type of counterparty to which the obligation has been assumed and the type of underlying transaction. In order to more efficiently monitor the lending process, additional sub-categories have been created for performing assets (operating, under observation, under monitoring, suspended, under elimination, start-up and revoked). Assets are classified as default (continuously past due by over 180 days, restructured loans, doubtful loans and non-performing loans) in accordance with the criteria established in the Credit Regulation and the parent s directives. Classification as such is not the result of discretionary assessment, but it is based on counterparty conduct, which is deemed to anticipate a temporary or definitive difficulty in meeting obligations. Given the particular risk of these loans, they are managed by a specific organisational unit (Credit Collection). Control systems Credit risk monitoring involves the entire structure responsible for managing relationships with transferors and transferred debtors. It is defined in the specific internal Credit Monitoring Manual. Risk measurement systems The definition of a credit risk measurement system in the factoring segment relates closely to this specific type of activity, which, as noted above, differs in structure from that of a banking business. The related conceptual model can be summarised as follows: 72 Annual Report 2010

73 The credit risk of the factoring transaction therefore arises from default risk and dilution risk, which must be measured separately and then reconciled. Default risk relates to all borrower ratings and transaction ratings. The former can be defined by the probability of default (PD) regulatory parameter, related to the counterparty s credit quality, while the latter is an overall rating of the characteristics of the transaction taken as a whole, which, summarised to the extreme, can be expressed by the loss given default (LGD) regulatory parameter. This logical scheme serves as the company s guideline for the development of internal credit risk measurement models. Moreover, until internal rating-based (IRB) models are developed with the parent, the company has decided to use the standardised method provided for by the New Basel Accord (and implemented by the Supervisory instructions for financial intermediaries included in the Special List circular no. 216 of 5 August 1996, 7th update dated July 2007 and subsequent updates), in accordance with the agreement signed by the parent, UBI Banca with the rating agency, Lince S.p.A., which is an ECAI recognised by Banca d Italia. Accordingly, in this context, PD has not yet been measured. It follows that the borrower rating is still incomplete and the result of a joint analysis of quantitative information based on the financial statements of previous three years (using data provided by a third party market leader approved by the parent) and qualitative information gathered informally by the sales managers. Although the calculation of the LGD with respect to the transaction rating uses an advanced approach, the company believes that it is strategically advantageous for the factoring segment. It is waiting to agree on a calculation method with the parent for the subsequent preparation of the overall model. 1 As indicated in paragraph 369 of the New Basel Accord, Dilution refers to the possibility that the receivable amount is reduced through cash or non-cash credits to the receivable s obligor.[...] Examples include offsets or allowances arising from returns of goods sold, disputes regarding product quality, possible debts of the borrower to a receivables obligor, and any payment or promotional discounts offered by the borrower Annual Report