Report on operations and financial statements of Banca Lombarda e Piemontese S.p.A. as of December 31, 2002

Transcription

1 Report on operations and financial statements of Banca Lombarda e Piemontese S.p.A. as of December 31,

2 REPORT ON OPERATIONS ACTIVITIES OF BANCA LOMBARDA E PIEMONTESE The financial statements of Banca Lombarda e Piemontese («BLP») reflect its activities as a holding and operating company as well as a provider of centralized services to Group companies. Accordingly, the financial statement structure is characterized by a particularly high proportion of equity investments, interbank lending and the securities portfolio to total assets, and of dividends to net interest and other banking income. One of the main events in 2002 was the Bank s capital increase in July. The purpose of this increase in capital, approved by the stockholders in their meeting of April 24, 2002, was to raise funds for financing and carrying out the Group s plans for development. The capital increase was structured as a Public Subscription Offering in Italy, part of which was reserved for stockholders of the Bank, as well as a private placement for Italian professional and foreign institutional investors. The operation also included an issue of warrants giving the right to subscribe to ordinary shares of Banca Lombarda e Piemontese, which would be allotted free of charge to the stockholders before the end of the Offering, in compliance with CONSOB and Borsa Italiana instructions. In detail, the operation consisted of an increase in capital, in one or more installments, for cash and excluding option rights as per article of the Italian Civil Code, up to a maximum value at par of million euro, by issuing up to million ordinary shares in Banca Lombarda e Piemontese (including around 4.43 million to service the warrants ) with a par value of one euro each, with normal dividend rights and the share premium to be determined by the Board of Directors shortly before the Offering, based on criteria and legal requirements applying to companies with listed financial instruments. On June 28, 2002, the Public Subscription Offering of ordinary shares in Banca Lombarda e Piemontese ended successfully and the Global Offering for 28,500,000 shares was fully subscribed in July at the price of 9.70 euro per share, thereby boosting capital by an amount of 276,450,000 euro. 140

3 As regards key events affecting operations during the year, and in particular: changes in the portfolio of equity investments in Group companies and minority shareholdings; organizational measures to fine tune the holding company model and to upgrade its governance and control systems; initiatives taken by the Marketing Department for the launch of new services and products, the opening of the Banca Lombarda Points, and reinforcement of the network of financial consultants; changes in the risk management control structures and systems; human resource management; please refer to the comments made in the director s report on the consolidated financial statements for The following parts of this report explain: the Bank s adoption of the Code of Conduct for Listed Companies; the Bank s approval of the Code of Conduct for Internal Dealing and Internal Regulations for managing and handling confidential information and communicating documents and information externally; the results for 2002; transactions with Group companies and related parties and other information on stockholders and shares; significant subsequent events; proposal for approval of the financial statements and allocation of net income. ADOPTION OF THE CODE OF CONDUCT FOR LISTED COMPANIES The Board of Directors at Banca Lombarda e Piemontese has accepted the recommendations on corporate governance contained in the Code of Conduct for Listed Companies prepared by Borsa Italiana, as a further sign of openness and fairness toward the market. Banca Lombarda e Piemontese has always been sensitive to corporate governance issues, and had already set up an organizational structure in keeping with the best practices recommended in the Code of Conduct. More specifically, it has always observed a complex set of rules and regulations designed to ensure the good management of the bank, concerning, for example, the duties and limitations of the Board of Directors as established by the Bank of Italy, and the professional and ethical qualifications that the Treasury requires of bank officers. 141

4 The Bank took steps to comply with the remaining principles in the Code of Conduct, to which it in any case aspired, and thus to complete the internal regulations which already governed the operations of its units in keeping with the Code and with current legislation for listed banks. For example, the Board of Directors was already responsible for setting the Bank s strategic and structural orientation, and for making sure that the proper controls were in place for monitoring the Bank s performance. In this regard, the Bank decided to create a «Committee for the Compensation of Directors» and an «Internal Control Committee» and gave priority to independent, non-executive directors when designating the committee members. The Board of Directors has also acknowledged the changes made to the Code of Conduct in July by the Committee for Corporate Governance. In December 2002, following the recommendations contained in this code, the Board of Directors of Banca Lombarda e Piemontese S.p.A. approved the adoption of a code of conduct governing reporting requirements for «internal dealing». This Code came into force with effect from January 1, The «Relevant Persons» needing to report have been identified as the directors, statutory auditors, members of senior management and department heads of Banca Lombarda e Piemontese S.p.A. and other Group companies. Based on the Code s guidelines, these Relevant Persons must report transactions in: financial instruments listed on organized markets in Italy, as described in articles 63 and 67 of Decree 58/98, issued by Banca Lombarda e Piemontese S.p.A. or its subsidiaries, excluding non-convertible bonds; listed and unlisted financial instruments, carrying the right to subscribe to, buy or sell the instruments described in the point above; derivatives, as well as covered warrants, whose underlying assets are the financial instruments described in point a), even when their exercise involves paying a cash differential. 142

5 The Relevant Person must report to Banca Lombarda e Piemontese S.p.A. the transactions undertaken every quarter that are equal to or above a cumulative total of 50,000 euro. Significant transactions, defined as those above 250,000 euro on an individual basis or in conjunction with other previously undeclared transactions in the same reporting period, must be immediately notified by the Relevant Person to Banca Lombarda e Piemontese S.p.A. and in any case by the next stockmarket trading day after the trade is executed. Banca Lombarda e Piemontese S.p.A. is responsible for notifying the market of transactions undertaken by relevant persons as follows: by the tenth stockmarket trading day of each new quarter, for quarterly reports relating to the previous quarter; immediately, in the case of significant transactions. The Code of Conduct leaves it up to the Board of Directors to prohibit or restrict relevant persons from conducting the transactions in question in certain periods of the year, with the possibility of making exceptions upon justified reason by the relevant person. The Code also leaves it to the Board to establish any reporting requirements concerning the exercise of stock options and options. For the purpose of ensuring proper control over confidential information relating to Banca Lombarda e Piemontese S.p.A. and its subsidiaries, the Board of Directors has also approved a set of «Internal Regulations for managing and handling confidential information and communicating documents and information externally»; These Regulations identify the persons in charge of managing this information, define the conduct to be adopted by directors, statutory auditors and employees of Banca Lombarda and its subsidiaries, as well as the procedures for communicating documents and information externally, with particular reference to price sensitive information. We are therefore able to state that the rules of governance and control currently in effect through the Bank s by-laws and organizational structure respect the principles of transparency and good practice, are based on the central role of the Board of Directors, and are aimed at creating stockholder value. 143

6 RESULTS FOR THE YEAR RECLASSIFIED BALANCE SHEET (in thousands of euro) Changes ASSETS +/- % Cash and deposits with central banks and post offices 38,961 10,520 28,441 n.s. Loans to customers 2,321,108 1,235,106 1,086, of which: - loans 2,256,664 1,217,979 1,038, repurchase agreements 52,139 8,073 44, non-performing loans 12,304 9,054 3, Due from banks 2,048,550 1,777, , Securities 1,028, , , Equity investments 2,383,167 2,207, , Intangible and tangible fixed assets 42,700 35,227 7, Other assets 698, ,290 55, TOTAL ASSETS 8,561,563 6,790,287 1,771, LIABILITIES AND STOCKHOLDERS EQUITY Changes +/- % Due to customers 1,305,379 1,348,976-43, of which: - deposits 1,257,565 1,226,865 30, repurchase agreements 47, ,111-74, own checks in circulation n.s. Due to banks 3,504,628 2,287,922 1,216, Provisions for specific use 170, ,141-52, Other liabilities 572, , , Reserves for possible loan losses 14,066 8,839 5, Subordinated liabilities 1,301,480 1,082, , Stockholders' equity: - Capital stock, reserves and retained earnings 1,579,115 1,224, , Net income for the year 114, ,840-57, TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 8,561,563 6,790,287 1,771,

7 BALANCE SHEET Loans to customers Loans to customers, 2,321 million euro, almost doubled compared with the previous year, consisting mainly of loans granted to Group companies and prime customers. Non-performing loans rose from 9 to 12 million euro, representing 0.53% of total lending (0.73% at December 31, 2001). Securities Securities totaled 1,029 million euro at the end of 2002, an increase of 16.7% on the previous year. Of these, 150 million euro refer to the investment portfolio and the remaining 879 million euro to the dealing portfolio. The dealing portfolio comprises equities and funds (15%), fixed-rate securities (13%), floating-rate securities (58%) and zero-coupon securities (14%). It has a duration of 1.23 years. The investment portfolio consists entirely of floating-rate securities. It has a duration of 0.25 years. Derivatives Derivative trading by the Parent Bank was geared towards realizing hedging transactions designed to match the Bank s assets and liabilities in terms of duration, maturity and reference parameters and playing an important role on behalf of the other banks in the Group, by serving as an intermediary for operations designed to hedge their structural risks. Equity investments Equity investments amounted to 2,383 million euro at the end of 2002, up 8% with respect to December 31, Direct deposits Direct deposits, 1,305 million euro, were 3.2% lower than at the end of 2001 due to a contraction in repurchase agreements. The amount of bonds (which represented 94% of total funding) was unchanged relative to the year before. Subordinated liabilities Subordinated loans reached a total of 1,301 million euro, an increase of 20.2% on December 31, A lower tier II loan for 250 million euro was issued during the year. Stockholders equity The Bank s stockholders equity, excluding net income for the year, stood at 1,579 million euro at the end of December 2002, 28.9% higher than a year earlier. Changes in the individual items making up stockholders equity are reported in the notes. 145

8 RECLASSIFIED STATEMENT OF INCOME (in thousands of euro) Changes +/- % 10. Interest income 158, ,256 2, Interest expense -208, ,805-15, Dividends and other revenues 296, ,732-22, NET INTEREST INCOME 246, ,183-4, Commission income 12,293 13,392-1, Commission expense -21,251-16,808 4, Other operating income 39,377 54,604-15, Other operating expenses Net income from services 29,425 50,280-20, Profits (losses) on financial transactions 6,388 9,915-3, NET INTEREST AND OTHER BANKING INCOME 282, ,378-29, Administrative costs - Payroll costs -33,653-44,620-10, Other administrative costs -48,125-44,221 3, Administrative costs -81,778-88,840-7, OPERATING INCOME 200, ,537-21, Total adjustments to tangible and intangible assets -7,551-4,643 2, Provisions for liabilities and charges -4,078-28,383-24, Adjustments to loans and provisions for guarantees and commitments -2, ,457 1, Writebacks of loans and provisions for guarantees and commitments 5-5 n.s Provisions to reserves for possible loan losses -12,238-7,374 4, Adjustments to financial fixed assets -6,810-2,879 3, Writebacks of financial fixed assets INCOME FROM OPERATING ACTIVITIES 167, ,385-11, Extraordinary income 2,961 59,554-56, Extraordinary charges -2,036-15,893-13, INCOME BEFORE INCOME TAXES 168, ,046-54, Income taxes for the year -54,313-75,912-21, NET INCOME FOR THE YEAR 114, ,134-32, (prior to allocations to equity reserves) 210. Change in reserve for general banking risks - 24,727-24, Allocation to reserve as per art. 13 of Decree 124/ NET INCOME FOR THE YEAR 114, ,840-57, (1) the figures at December 31, 2001 have been reclassified, by transferring 11,652 thousand euro from "Provisions for liabilities and charges" to "Income taxes for the year". This provision had been made against the risk that the benefits available under the Ciampi Law would be disallowed. 146

9 STATEMENT OF INCOME Net interest income Net interest income fell by 1.9% to million euro. While net income from loans and deposits improved by 18 million euro, dividend income came down by 22.6 million euro. Dividends from Group companies recorded on an accruals basis actually increased by 22.8 million euro, but those from other equity investments were lower. The overall improvement in net income from lending and deposit-taking activities reflects a larger fall in rates on deposits than on loans. Interest expense also included 3.1 million euro in charges paid to the tax authorities for the suspension of the tax benefits under the «Ciampi» Law. The explanatory notes contain more information in this regard. Net income from services Net income from services fell by 41.5% on 2001 to 29.4 million euro. This balance includes recharges for staff seconded to other Group companies, as well as commissions paid by the Parent Bank s banking subsidiaries on sales made by financial consultants. Profits (losses) on financial transactions Profits (losses) on financial transactions came to 6.4 million euro, compared with 9.9 million euro in 2001; the decrease is due to the smaller volume of activities on financial markets and the reduction in unit profit margins. Net interest and other banking income Net interest and other banking income was 9.3% lower at million euro. Administrative costs Total administrative costs came down from 88.8 to 81.8 million euro, mainly due to the decrease in payroll costs (-24.6%), in turn reflecting the secondment of members of the Parent Bank s staff to Lombarda Sistemi e Servizi during

10 Operating income Operating income came to million euro, 9.9% lower than in Adjustments to tangible and intangible fixed assets Adjustments to tangible and intangible fixed assets were 62.6% higher than in The increase is mainly due to the amortization of capitalized costs incurred for the recent increase in capital stock. Provisions for liabilities and charges Provisions for liabilities and charges dropped from 28.4 to 4.1 million euro. In 2001 these provisions included a prudent charge to neutralize the tax benefits enjoyed under the Ciampi Law. This provision had been made by releasing a corresponding amount from the Reserve for general banking risks. Net extraordinary income Net extraordinary income came to 926 thousand euro. The corresponding figure in 2001 was 43.7 million euro, which included the capital gains on the partial sale of the investment in Banco di San Giorgio and the disposal of other non-core equity investments and investment securities. Net income for the year Net income for the year was 33.6% lower than the previous year at million euro. INFORMATION ON THE TAX POSITION The Finance Act for 2003 (Law 289 of December 27, 2002) came into force at year end. It made for provision for a variety of tax amnesties, ranging from complete to supplementary amnesties to the settlement of outstanding tax disputes. The law was subsequently modified under Law 27 dated February 21, 2003 which enacted Decree 282 of December 24,

11 The Bank has always respected its tax obligations by applying current regulations using the best interpretations adopted in current practice and in accordance with an objective, proper fiscal logic. However, given the large number and size of extraordinary transactions undertaken in the recent past, and given the interpretational doubts in certain areas and the inevitable related debatability of the subject, the Bank is deciding whether to subscribe to a supplementary amnesty in the area of direct taxes and a full one for VAT. Furthermore, the related charges are not expected to have a major impact on the Bank s overall financial and economic position. INTERCOMPANY AND RELATED PARTY TRANSACTIONS In compliance with CONSOB communications of February 20, 1997 and of February 27, 1998, we confirm that there have not been any atypical or unusual transactions during the year and that there are none in place at the end of the period. Such transactions are defined respectively as those outside the normal activities of the company and those that could have a significant impact on the results and financial position of the Bank and other Group companies. With regard to transactions with related parties, which have been identified in accordance with IAS 24 and article 2359 of the Italian Civil Code, we confirm that all such transactions have taken place in the normal course of business, including the granting of loans and lines of credit, deposits and the provision of services relating to the securities intermediation business. These transactions are settled on arms -length terms. In addition to the types of transaction mentioned above, there have also been transactions of a commercial nature with the group of related parties comprising ultimate parent companies and direct or indirect subsidiaries and associated companies. These transactions refer to outsourcing agreements in the IT and administrative fields, with the purpose of obtaining better services than could otherwise be obtained from outside the Group, also with a view to achieving a desirable level of uniformity throughout the Group. This is also the underlying reason for the secondment of our staff to these companies, whose costs are being recharged. The following table shows the amounts involved in such transactions with Group companies and related parties, including balances at the end of the period. 149

12 (in thousands of euro) Assets Liabilities Guarantees Commitments Costs Revenues SUBSIDIARY COMPANIES Banca CR Tortona 12,700 90,078 28,513-1,715 1,264 Banca Regionale Europea 33, , , ,310 7,896 Banca di Valle Camonica 23, , ,962-2,765 2,720 Banco di Brescia 328,404 1,588,975 4,798, ,806 29,093 Banco di San Giorgio 203,284 29, , ,883 Banca Lombarda International Banca Lombarda Preferred Capital Capitalgest ,284 CBI Factor 580, , ,722 Lombarda Sistemi e Servizi ,578 4,204 Mercati Finanziari SIM , SBIM 10, SBS Leasing 1,141, , ,835 Sifru Silf 299, ,316 SOLIMM Solofid Veneta Factoring 206, , ,333 ASSOCIATED COMPANIES Brescia on line Lombarda Vita Prisma ,838,925 2,665,572 5,902,560 48,271 48, ,012 For further information, please refer to Part B section 3.2 of the notes. OTHER INFORMATION Stockholders and share ownership At December 31, 2002, the capital stock of Banca Lombarda e Piemontese S.p.A. is as follows: Authorized for a maximum of: Euro 321,824,919 Subscribed and paid in: Euro 315,728,514 divided into ordinary shares with a par value of Euro 1 each. 150

13 There are 29,177,536 more paid-in shares than at the end of 2001, resulting from the following increases in capital stock: 677,536 shares subscribed under the stock granting plan; 28,500,000 shares subscribed under the increase in capital stock. Details are provided below of resolutions to increase capital stock during 2002 and the first few months of 2003 up until approval of this report, other than those relating to the capital increase in July 2002, described earlier. Stock Option and Stock Granting Plans forming part of incentive schemes In partial execution of the authority given by the stockholders on January 11, 2002, the Board of Directors voted: on February 28, 2002, to service the stock granting plan by increasing capital stock by 101,593 euro by issuing 101,593 shares of par value 1 euro each, fully subscribed and paid in. on July 24, 2002, to service the stock option plan by increasing capital stock by up to 585,500 shares, reserved for the exercise of 585,500 options granted to executives of Banca Lombarda e Piemontese, Lombarda Sistemi e Servizi, Banco di Brescia, Banca di Valle Camonica, Banca CR Tortona, Banco di San Giorgio, SBS Leasing, Capitalgest, CBI Factor, Veneta Factoring and Solofid. A total of 1,233,500 options have been allotted under this stock option plan, of which: - 144,000 are exercisable between January 11 and 26, 2004 at a price of euro per share; - 504,000 are exercisable between July 11 and 26, 2004 at a price of euro per share; - 585,500 are exercisable between July 24 and August 8, 2005 at a price of euro per share. On July 24, 2002, in partial execution of the authority given by stockholders on April 27, 2001, the Board of Directors voted to service the stock option plan by increasing capital stock by up to 243,405 euro by issuing a maximum of 243,405 shares of par value 1 euro each, reserved for the exercise of 243,405 options awarded to the Managing Director of Banco di San Giorgio S.p.A. and financial consultants of Banca Lombarda e Piemontese S.p.A.. 151

14 A total of 432,905 options have been allotted under this stock option plan, of which: - 189,500 are exercisable between July 11 and 26, 2004 at a price of euro per share; - 243,405 are exercisable between July 24 and August 8, 2005 at a price of euro per share. Warrants As mentioned earlier, warrants have been issued free of charge to stockholders in execution of the stockholders resolution passed on April 24, These warrants entitle holders to subscribe to up to 4,430,000 ordinary shares in Banca Lombarda e Piemontese in the ratio of 1 share for every 65 warrants held at a price of 9.7 euro, in accordance with the rules contained in the regulations for «Banca Lombarda e Piemontese 2002/2004 stock warrants». In January 2003, a total of 48,685 warrants were exercised, resulting in the issue of 749 shares. This means that at the date of approving this report, capital stock is as follows: authorized for a maximum of: Euro 321,824,919 subscribed and paid in: Euro 315,729,263 At the end of the year, the Bank had approximately 52,000 stockholders. Stockholders with more than 2% of capital at the end of 2002 are as follows: Stockholders No. of shares % of capital stock Fondazione Cassa di Risparmio di Cuneo 14,560, Carlo Tassara S.p.A. 11,683, Fondazione Banca del Monte di Lombardia 9,230, Società Cattolica di Assicurazione scrl 8,879, La Scuola S.p.A. 6,733, There are also the following trustee holdings in the names of: Solofid S.p.A.: 8,306,803 shares equal to 2.63% of capital stock. The trustee has declared that none of the settlors, directly or indirectly, holds more than 2% of the capital stock. Spafid S.p.A.: 6,861,719 shares equal to 2.17% of capital stock. The trustee has declared that none of the settlors, directly or indirectly, holds more than 2% of the capital stock. In February 2003, Spafid S.p.A. reported that it had reduced its holding to under 2%. 152

15 As required by specific regulations, we report that the Bank does not hold any of its own shares, whether directly, through trustees or through any other intermediary. Share information (amounts in euro) 12/31/ /31/2001 Consolidated net income for the year (in thousands) 130, ,094 Ordinary shares at year end (number) 315,728, ,550,978 Consolidated stockholders' equity (excluding net income for the year) per Banca Lombarda share(*) Consolidated net income for the year per Banca Lombarda share (*) Stockmarket prices:. low high year end Dividend per share Dividend/price:. low 3.57% 3.88%. high 2.84% 2.84% (*) calculated on the year-end number of shares, excluding those issued in 2002 and 2003 with rights to the 2001 and 2002 dividend respectively. Like the other main international markets, the Italian Stock Exchange turned in a very negative performance in The Mib 30 index lost 26% while the MIB Banking index fell by even more (26.8%). The performance of the BLP stock was reasonable in comparison, losing just 4.6% of its value. Shares held by Directors, Statutory Auditors and the General Manager In compliance with the instructions contained in CONSOB resolution no of May 14, 1999 and subsequent amendments, the following are the shares held directly or indirectly in Banca Lombarda e Piemontese and its subsidiaries by directors, statutory auditors and the general manager of Banca Lombarda e Piemontese, including their spouses (unless legally separated) and minor children. In the event that the term of office is for less than 12 months, the movement refers to the same period as the term of office. 153

16 Name Interest Type of Shares held Purchases Sales Shares held by held by ownership at in 2002 in 2002 at Directors in office at the end of 2002 Gino Trombi Banca Lombarda full ownership Alberto Folonari Banca Lombarda full ownership 1,767, , ,000 2,127,206 Banca Lombarda bare property 345, ,611 Total 2,112, , ,000 2,472,817 Giovanni Bazoli Banca Lombarda full ownership 199,084 5,687 10, ,771 Banca Lombarda beneficial interest 264, ,456 Total 463,540 5,687 10, ,227 Corrado Faissola Banca Lombarda full ownership 284,329 8, ,450 Luigi Bellini Banca Lombarda full ownership 11,865-11,865 - Banca Lombarda beneficial interest 728,750 33, ,771 Total 740,615 33,021 11, ,771 Piero Bertolotto Banca Lombarda Giuseppe Camadini Banca Lombarda full ownership 774,375 22, ,500 BVC full ownership 2, ,000 Mario Cattaneo Banca Lombarda Mario Cera Banca Lombarda full ownership 17,500-17,500 - Virginio Fidanza Banca Lombarda full ownership 52,500 54, ,733 Attilio Franchi Banca Lombarda full ownership 68,345 1, ,782 Banca Lombarda beneficial interest 146, ,228 Total 214,573 1, ,010 Ugo Gussalli Beretta Banca Lombarda full ownership 3,449,494-3,449,494 - Giuseppe Lucchini Banca Lombarda full ownership 1,877,450 83,040 30,240 1,930,250 Felice Martinelli Banca Lombarda Giovanni Minelli Banca Lombarda full ownership 423,844 61, ,320 Banca Lombarda beneficial interest 711,463 29, ,286 Total 1,135,307 91,299-1,226,606 Luigi Nocivelli Banca Lombarda full ownership 3,722,494 68,856 1,400,000 2,391,350 Francesco Passerini Glazel Banca Lombarda full ownership 421,273 29, ,840 Banca Lombarda bare property 214, ,649 Total 635,922 29, ,489 Pierfrancesco Rampinelli Rota Banca Lombarda full ownership 468,121 62, ,444 Banca Lombarda bare property 108,207-40,000 68,207 Banca Lombarda beneficial interest 35, ,930 Total 612,258 62,323 40, ,581 Adriano Rodella Banca Lombarda full ownership 3,426, ,403-3,527,034 Antonio Spada Banca Lombarda full ownership 5,148, , ,508 5,162,578 Romain Zaleski Banca Lombarda (following) 154

17 (straight) Name Interest Type of Shares held Purchases Sales Shares held by held by ownership at in 2002 in 2002 at Auditors Sergio Pivato Banca Lombarda Angelo Coen Banca Lombarda full ownership 4, ,114 Filippo Rovetta Banca Lombarda full ownership 167,134 4,631 5, ,765 Alternate auditors Vincenzo Broli Banca Lombarda full ownership 2, ,250 Marco Confalonieri Banca Lombarda General Manager Bruno Degrandi Banca Lombarda full ownership 79,516 4,934 12,700 71,750 SIGNIFICANT SUBSEQUENT EVENTS AND FUTURE OUTLOOK Events of significance in the period since the year end are described below. On February 1, 2003, Victor Massiah took up the office of General Manager of Banca Lombarda e Piemontese S.p.A.., taking over from Bruno Degrandi, who terminated his employment with the Bank but continues to hold office as a director of some of the Group companies. In February 2003, the Board of Directors voted to put before the next stockholders meeting: a proposed capital increase; a new Stock Option Plan; some amendments to the Bank s by-laws. The proposed capital increase aims to support the growth in the Group s operations, seeking to comply with the capital requirements laid down by supervisory authorities, while making the most of any opportunities to expand by external means. Having analyzed the manner and timing for carrying out this proposal, the Board of Directors has decided to ask you to approve the adoption of the mechanism allowed by article 2443 of the Italian Civil Code, whereby the Board itself decides when to make the necessary increase. This mechanism is considered to be more flexible than others since it can respond more quickly to trends in the stock price and any actual opportunities for the Group to expand. As a result, it is proposed that the Board of Directors is empowered to increase capital stock, pursuant to article 2443 of the Italian Civil Code, on one or more occasions over a period of five years, by issuing for cash up to 45,000,000 ordinary shares to be offered under option to stockholders. The Group managers Stock Option Plan approved by the stockholders in January 2001 has now come to an end. This instrument has proved to be a valid tool for incentivizing staff and fostering their loyalty. As a result, it is proposed that the stockholders now grant the Board of Directors the power to increase capital stock, pursuant to article 2443 of the Italian Civil Code, on one or more occasions over a period of five years, excluding option rights under article of the Italian Civil Code, by issuing up to 3,500,000 ordinary shares for cash to service the Plan. Stockholders will also be asked to approve certain amendments to the by-laws aimed at streamlining activities in the property management area. 155

18 PROPOSAL FOR APPROVAL OF THE FINANCIAL STATEMENTS AND ALLOCATION OF NET INCOME Stockholders, We submit the 2002 financial statements for your approval, We also propose allocating net income for the year of 114,171,041 and retained earnings from previous years as follows: (in euro) Net income for ,171,041 Retained earnings 2,245 Total earnings for allocation: 114,173,286 - Dividend 104,190,750 - Extraordinary reserve 9,980,000 - To be carried forward 2,536 If these proposals are approved, it will be possible to distribute a dividend of 0.33 euro per share to each of the 315,729,546 shares entitled to the 2002 dividend from May 8, 2003, with the shares going ex-div on May 5, The shares entitled to the 2002 dividend are the 315,728,514 shares existing as of December 31, 2002, plus the 1,032 shares issued to service the warrants exercised between January 1 and March 12, The dividends attract a full tax credit. As a result of these proposed allocations, the capital stock and equity reserves as of December 31, 2002 would amount to Euro 1,589,095,596 made up as follows: Capital stock 315,728,514 Legal reserve 132,641,109 Extraordinary reserves 303,941,098 Additional paid-in capital 621,702,772 Revaluation reserves 3,130,201 Other reserves and retained earnings 174,823,298 Reserve for writedown of investments to net equity (article 19.5, Decree 87/92) 30,971,404 Reserve for general banking risks 6,157,200 Total 1,589,095,596 March 2003 The Board of Directors 156

19 Report of the Board of Statutory Auditors 157

20 REPORT OF THE BOARD OF STATUTO- RY AUDITORS TO THE FINANCIAL STATEMENTS AS OF DECEMBER 31, 2002 pursuant to article 153, Decree 58/98 and article of the Italian Civil Code Stockholders, During the year ended December 31, 2002, the Board of Statutory Auditors operated in accordance with the «Financial Services Act» issued under Decree 58 of February 24, The board also performed its work in consideration of the principles of conduct recommended by the Italian Accounting Profession. The report has also been prepared bearing in mind the recommendations contained in CONSOB Communication DEM/ of April 6, 2001 and subsequent amendments. Transactions during the year of particular importance from an economic or financial point of view are all described in the directors report and explained in further detail in the notes. We have examined these documents carefully and agree with their content. Of the more important events during the year, we would mention the following: the increase in Banca Lombarda s capital stock in July, which was subscribed in full at the price of Euro 9.70 per share and which raised additional capital of Euro 276,450,000. the change in the Group s structure through the acquisition of controlling interests in Artesia Bank Luxembourg, a company operating predominantly in the private banking sector, and Grifogest SGR S.p.A., which operates in the asset management sector; the subscription of Euro million to the capital increase by Banco di Brescia, raising its capital stock from Euro million to Euro million; on the organizational front, the positive handling of the important changeover phase to the euro in the early part of 2002; the integration of Banca Cassa di Risparmio di Tortona s IT platform; the adoption by Banco di San Giorgio of the Group s retail, private and corporate distribution model; the reorganization of the territorial network with the consequent transfer of branches between Group banks; more specifically, 6 branches were transferred from Banca Regionale Europea to Banco di Brescia, 9 branches from Banco di Brescia to Banca Regionale Europea and 4 branches were swapped between Banca Regionale Europea and Banca Cassa di Risparmio di Tortona; the making of a five-year agreement with IBM for the construction of a Disaster Recovery Plan; a complete reorganization of the Data Processing center in order to improve security still further; the launch of a project to reorganize Banca Lombarda s entire Management business Area; measures to improve the management of the Bank s own portfolio of investments and securities. 158

21 We remind you that the following additional increases in capital stock were carried out in 2002: in February 2002, in partial execution of the authority given by the stockholders on January 11, 2002, the Board of Directors voted to service the stock granting plan by increasing capital stock by Euro 101,593 through the issue of 101,593 shares of par value Euro 1 each, fully subscribed and paid in; in July 2002, in partial execution of the authority given by the stockholders on January 11, 2002, the Board of Directors voted to increase capital stock by up to 585,500 shares, reserved for the exercise of 585,500 options granted to executives of the Banca Lombarda Group; in July 2002, in partial execution of the authority given by stockholders on April 27, 2001, the Board of Directors voted to increase capital stock by up to 243,405 shares, reserved for the exercise of 243,405 options granted to the current Managing Director of Banco di San Giorgio S.p.A. and the Bank s financial consultants. In addition, following the issue of warrants, allocated free of charge of Banca Lombarda s stockholders in execution of the stockholders resolution passed on April 24, 2002, a total of 67,080 warrants were exercised during the period January 1, 2003 to March 12, 2003, involving the issue of 1,032 new shares. This means that at the current date, the Bank s capital stock is as follows: authorized for a maximum of: Euro 321,824,919 subscribed and paid in: Euro 315,729,546 The Board of Directors is submitting a number of proposals for your approval concerning: 1. a plan to increase capital, aimed at supporting the growth in the Group s operations, while seeking to comply with the capital requirements laid down by supervisory authorities; 2. a new stock option plan, reserved for the Group s management; 3. a number of amendments to the by-laws, aimed at streamlining activities in the property management area, and complying with Ministerial Decree 162 of March 30, 2000 concerning the professional qualifications of statutory auditors. Having reviewed the report prepared by the Board of Directors, we consider that these proposals warrant being approved. The Board of Directors has continued to adopt an ethical, prudent management policy, avoiding exposure to anomalous business risks, complying with legal requirements and those laid down in the Bank s by-laws, and keeping the Bank s best interests in mind. We are not aware of any atypical or unusual transactions, whether with Group companies or related parties. After an analysis of related party transactions, we are not aware of any transaction that could have a material impact on the results, assets and liabilities and financial position of the Bank. The independent Auditors Report attached to the financial statements does not contain any qualifications regarding the results for the year, the assets and liabilities and financial position of the Bank, or as regards how it is managed. 159

22 During 2002, we did not receive any complaints as allowed by article 2408 of the Italian Civil Code. As regards complaints concerning Group bank s financial activities and/or their administration and custody of financial instruments, a number of complaints or claims relating to these investment services were received in 2002, mostly involving financial transactions, to which response was duly given in the prescribed term. A detailed report on each petition was duly sent to CONSOB. In each case, we were able to exclude that the Bank s procedures were in any way at fault. In addition to the audit engagements, during 2002 the Banca Lombarda Group used the services of Deloitte and Touche Italia S.p.A. (formerly Arthur Andersen S.p.A.) for the following tasks: Services provided Professional services for the issue of an opinion on the reasonableness of the minimum issue price of the shares in Banca Lombarda e Piemontese S.p.A. under the proposed capital increase excluding option rights, in accordance with article of the Italian Civil Code, to service the public offering reserved for the general public and institutional investors; such an opinion is a Banca Lombarda requirement of article 158 of Decree 58 dated February 24, Fees for assistance in preparing the Listing Particulars of Banca Lombarda e Piemontese S.p.A. for the public Banca Lombarda offering of its shares. Fees for assistance in preparing Sections 1 and 4 of the Banca Lombarda Bank's Listing Particulars relating to its share issue. Fees relating to the review of the quarterly consolidated figures of the Banca Lombarda Group at March 31, 2002 for the purposes of their inclusion in the Bank's Listing Banca Lombarda Particulars relating to its share issue. Professional fees for the performance of activities requested by the Global Coordinator in relation to Banca Lombarda the Bank's capital increase. Fees for assistance in updating the Listing Particulars relating to the MTN program and the issue of the related Banca Lombarda comfort letter Cost excl. VAT 50,000 (A) 60,000 (B) 50,000 (B) 40,000 (B) 70,000 (B) 15,000 (B) Quarterly review at December 31, 2002 of the financial flows to and from the vehicle company Lombarda Mortgage Finance S.r.l., Banco di Brescia set up under Law 130/99 for the securitization of loans 13,800 (C) Quarterly review at December 31, 2002 of the financial flows to and from the vehicle company Lombarda Lease Finance S.r.l., set up under Law 130/99 for the securitization SBS Leasing of loans 13,500 (C) SBS Leasing Lombarda Lease Finance 2 Securitization 24,500 (C) Analysis of Group-level compliance with existing Banca Lombarda procedures concerning the status of Qualified Intermediary 20,000 (D) 356,

23 These services were performed as part of the increase in capital stock, the issue of quoted bonds, the securitization of loans, and the audit of figures to send to the Inland Revenue Service in the USA, as required by Qualified Intermediary contracts, stipulated by Group companies which indicate Deloitte and Touche Italia SpA as the appointed auditor. These jobs by the independent auditors were therefore carried out to comply with current regulations (A) and/or at the explicit request of the Global Coordinator in relation to the increases in capital stock(b), issues of quoted bonds (B) and for securitizations (C) and the Qualified Intermediaries contract (D), as described above. The Studio di Consulenza Legale e Tributaria, the tax and legal advisory arm of the audit firm, was also engaged to perform two jobs as follows: 1. a due diligence review of the Banca Lombarda Group s tax position, requested by the Global Coordinator of the capital increase ( 100,000); 2. assistance in preparing the tax returns to be submitted to the Inland Revenue Service in the USA, under the Qualified Intermediary contract made with the US tax authorities ( 65,000). In accordance with the provisions of the Consolidated Banking Act, we issued our favorable opinion in connection with the resolutions taken by the Board of Directors pursuant to article of the Consolidated Banking Act. We are well aware of the role that we have been given by the law and have constantly supervised the Bank s activities in their various decision-making, executive and operational stages. In brief, our supervision involved: - attendance at all 19 meetings of the Board of Directors and all 5 meetings of the Executive Committee, as well as the stockholders meetings; - 11 inspections and meetings with the various division heads and with the external auditors. As regards the work of the Board of Directors, which we have always been able to follow in complete liberty, we can state that the various decisionmaking stages have always been followed by adequate instructions on how the decisions should be implemented, making it possible to execute the Board s strategic plans. This confirms the fact that the Board has always applied the principles of good management. The information on the Bank s performance required by article 150 of Decree 58/1998 has always been provided. 161

24 As summarized in the introduction, there were further developments in 2002 in the process of integrating IT platforms and organizing the Group, particularly involving the migration of the information system of Banca Cassa di Risparmio di Tortona to that used by the Group; the application to Banco di San Giorgio of the retail, private and corporate distribution model; the transfer of branches between banks as part of the plan to reshape the geographic areas covered by the Group s banks. Our review suggests that the actual organizational structure is appropriate to the Group s current and prospective size. We also note the ongoing improvements being made by the Bank s top management to comply ever more effectively with the requirements associated with its larger scale of business and the new regulatory demands. As regards the system of internal control, which is under constant review by the Internal Audit Department, we are of the opinion that the controls are adequate for the Bank s level of operations. Those in charge of internal control have a great deal of experience and specialized skills in the various areas that they supervise, while all of those involved in this delicate and important activity are involved in ongoing education. The administrative and accounting system was mechanized some time ago and the procedures are sufficiently reliable, accurate and secure; they avoid duplications in the processing of data and make it possible to keep items in transit under control. The accounting balances that result from this approach are in line with the periodic recommendations of the Bank of Italy. The balances that appear in the financial statements are also produced by a special procedure, in the same way that the figures shown in the notes are extracted from the accounting records. On the subject of the accounting system, a project has been started in 2003 involving changes to its organization and software. These changes aim to improve still further the process of producing the Bank s financial statements and other financial reports. Relations between the Parent Bank and the subsidiaries are subject to constant monitoring and, in particular, the Board of Directors reviews all significant situations taking place within the Group; to this end, Group companies have all been made aware of the need to ensure a constant flow of information with head office, also to ensure compliance with the requirements of article 114 of Decree 58/98. No material matters, far less problems, have arisen at our meetings with the auditors, as per article of Decree 58/

25 In the area of Corporate Governance, in 2000 the Board of Directors introduced the recommendations contained in the Code of Conduct for listed companies prepared by the Committee for Corporate Governance. In compliance with this code, the Board has appointed a Committee for the Compensation of Directors and an Internal Control Committee. The Board of Directors has also acknowledged the changes made to the Code of Conduct in July by the Committee for Corporate Governance and in December 2002 it approved the Code of Conduct governing reporting requirements for Internal dealing the Internal regulations for managing and handling confidential information and communicating documents and information externally. Furthermore, in March of this year, the Board of Directors approved the Internal regulations for related party transactions which define guidelines for conducting transactions with related parties, including significant transactions as defined by article 71-bis of CONSOB Regulation 11971/99, which are the exclusive responsibility of the Board of Directors. To conclude, based on our audit work during 2002, we can say that our overall opinion is substantially positive. We can confirm that the Bank is run in a way that is based on concepts of fairness and openness, in compliance with the rules on governance and control laid down in current regulations, the by-laws and the organizational and structural approach decided by the Board. The minor imperfections and inaccuracies that we found during our reviews can be considered normal and immaterial, and not such as to compromise the Bank s typically prudent and ethical approach to management. We do not therefore have any proposals to make to you in accordance with article of Decree 58/98. In our opinion, the 2002 financial statements presented by the Board of Directors, together with the report on operations, warrant your approval; we are also in agreement with the Board of Directors proposal for allocating net income. Brescia, April 11, 2003 The Board of Statutory Auditors 163

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27 Report of the Indipendent Auditors 165

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31 Financial statements of Banca Lombarda e Piemontese S.p.A. as of December 31,

32 BALANCE SHEET (amounts in euro) ASSETS Changes +/- % 10 Cash and deposits with central banks and post offices 38,960,765 10,520,032 28,440, Treasury bills and other bills eligible for refinancing with central banks 76,383,935 53,240,058 23,143, Due from banks: 2,048,549,840 1,777,880, ,669, a) repayable on demand 152,214,280 88,630,631 63,583, b) other deposits 1,896,335,560 1,689,250, ,085, Loans to customers 2,321,108,082 1,235,105,945 1,086,002, of which: - loans using public funds Bonds and other debt securities: 818,026, ,270, ,756, a) public entities 367,354, ,800,199 71,554, b) banks 423,671, ,910, ,761, of which: - own securities c) financial institutions d) other issuers 27,000,414 14,560,000 12,440, Shares, quotas and other forms of capital 134,253, ,664,781-63,411, Equity investments 349,480, ,359,673 8,120, Equity investments in Group companies 2,033,687,306 1,865,729, ,957, Intangible fixed assets 13,181,350 3,601,098 9,580, of which: - start-up costs goodwill 736, , , Tangible fixed assets 29,518,225 31,625,481-2,107, Other assets 458,135, ,349,947-25,214, Accrued income and prepaid expenses: 240,278, ,939,972 80,338, a) accrued income 235,540, ,727,522 79,812, b) prepaid expenses 4,738,013 4,212, , of which: bond issue discount 1,111,681 1,337, , TOTAL ASSETS 8,561,562,859 6,790,287,438 1,771,275,