Skjern Bank

Annual Report • Feb 9, 2023

Untitled 1 ANNUAL REPORT 2022 2 VERY ACCEPTABLE PROFIT AND DEVELOPMENT CORE EARNINGS NET INTEREST AND FEE IN- COME IMPAIRMENT LENDING CAPITAL DIVIDENDS Core earnings of DKK 233.6 million, compared with DKK 175.6 million in 2021 Net interest and fee income increased by 21.7 % to DKK 463.7 million Impairment of DKK 2.7 million including increase in management estimate of DKK 20 million to DKK 70 million Lending increased by 15.8 % and amounts to DKK 5,464 million and deposits increased by 11.6 % and amount to DKK 7,840 Satisfactory capital ratio of 23.1 % and individual solvency requirements of 9.8 % Proposal of DKK 3 per share, corresponding to 19.2 % of prot after tax for the year EXPECTATIONS FOR 2023 Prot before tax for 2023 is expected to be in the range of DKK 210 – 250 million PR. 31/12 2022 Prot before tax of DKK 191.1 million RETURN IN EQUITY Equity yielded interest of 15.0 % before tax VALUE ADJUSTMENTS Exchange rate adjustments of DKK -30.8 million compared with DKK 20.2 million in 2021 KR KR 3 Content Management’s nancial report for 2022 .................................................. 4 Endorsement of the Annual Report by the Management ..................................... 19 Prot and loss account ............................................................... 20 Statement of comprehensive income .................................................... 20 Proposal for distribution of prot ........................................................ 20 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Information on changes in equity ....................................................... 23 Notes ............................................................................. 25 5 years in summary .................................................................. 62 5 years nancial ratios ................................................................ 63 Financial Calendar 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64 Committee of representatives .......................................................... 65 List of board members’ managerial ofces ................................................ 66 4 Management’s nancial report for 2022 A profit before tax of DKK 191.1 million is very acceptable in a year marked by war in Europe, inflation, eco- nomic slowdown and a challenging securities market. Profit has been positively affected by increases in net interest and fee income, which increased by DKK 82.7 million or 21.7 %. Equity yielded a very satisfactory interest of 15.0 % before tax and 11.7 % after tax. The positive earnings development over the year has resulted in 3 upwards adjustments of the core earnings outlook, most recently on 22 December 2022, when the expectation was adjusted to the range of DKK 225 – 235 million. The expectation for profit before tax has been maintained in the range of DKK 175 – 205 milli- on, which was primarily due to negative trends in the securities markets throughout 2022. In 2023, a profit before tax is expected in the range of DKK 210 – 250 million and a core earnings in the ran- ge of DKK 225 - 275 million. The solid development is thus expected to continue in 2023. In light of the achieved profit, expectations for future earnings and the adequate capital coverage, it is re- commended to the Annual General Meeting that dividends of DKK 3 per share be distributed. The Bank is also budgeting for capital-intensive growth in lending in 2023 and the years ahead and also wants a satisfac- tory capital coverage, primarily based on equity. It is therefore proposed that only 19.2 % of the profit for the year be distributed to the shareholders. A distribution of DKK 3 per share or a total of DKK 28.9 million is considered fully prudent in terms of capital, as the Bank has also strengthened its earnings and capital positi- on in 2022. The Bank’s development is very satisfactory in all areas and the main performance goals in the Bank’s strate- gic plan up to 2022 have been realised. The most important factors in the strategy are high employee satis- faction, high customer satisfaction and earnings at the top of the sector. All 3 factors are absolutely key to maintaining the Bank’s status as a solid and independent local bank that makes a difference for all the Bank’s stakeholders. Customer satisfaction is measured in an independent study conducted by Finanssektorens Uddannelsescen- ter. In the survey, 83 % respond that they are very satisfied with being a customer of Skjern Bank and nearly 9 out of 10 recommend the Bank to others. We are both proud and humbled by this. Customer satisfaction is thus extremely satisfactory and at the very top of the sector. Employee satisfaction, which has been very high for many years, is measured by an anonymous and inde- pendent employee satisfaction survey every year in Q4. In 2022, employee satisfaction and pride in working at Skjern Bank was set at 96.5 %, which is very satisfactory. 5 The Bank’s earnings in the form of return on equity and earnings per cost ratio are 15.0 % and 1.78 respecti- vely, and are also expected to be at the very top once the financial institutions’ 2022 annual reports have been published. In the Bank’s strategic plan up to 2025, the primary focus areas remain unchanged: maintaining the high employee satisfaction, high customer satisfaction and earnings at the top of the sector, and ambitious tar- gets have also been established in the ESG area, amongst others. The Bank’s credit provision increased in 2022. Lending increased by DKK 745 million, or 15.8 %, while the creditworthiness of the portfolio has improved. The provision of mortgage loans from Totalkredit and DLR Kredit are respectively DKK 13.4 billion and DKK 4.7 billion. The customers’ participation in pool schemes has grown by DKK 307 million or 23.5 %, while at the same time deposits have grown by DKK 813 million or 11.6 %. In 2021, the Bank established branches in Hørsholm and Ølgod. The development in both branches is very acceptable and the customer growth, as in the Bank’s other branches, has been very high. The positive de- velopment has led to the start-up of another branch in the Valby area, where we look forward to moving into our own premises during the first half of 2023. The Bank then has a total of 10 branches with 6 in South/ West Jutland and 4 in the capital area. The Bank’s solid development in growth in earnings and business volume, combined with a generally positi- ve outlook on bank shares, has contributed to a very satisfactory development of the price of the Bank’s sha- res in 2022. At the beginning of the year, the rate was 103.5 and at the end of the year, this increased to 122.0, meaning an increase of 18.5 percentage points, corresponding to 17.9 %. The increasing interest levels in Danmarks Nationalbank have led to an increase in average interest on the Bank’s total lending portfolio. This, along with the lending growth, has meant that the Bank’s interest income on loans has been increased by DKK 35.3 million compared to 2021. In addition, interest rates in Danmarks Nationalbank have become positive again, and in the last months of 2022, interest income of DKK 7.7 was realised from placement of surplus liquidity in Danmarks Nationalbank. The development in interest rates means that the Bank no longer charges negative interest on deposits, which is very satisfactory. It has been a special situation, but unfortunately in terms of the market it has been absolutely necessary to charge negative interest rates on deposits. Net interest income increased by a satisfactory DKK 48.7 million to DKK 254.3 million, corresponding to an increase of 23.7 %. Fee income increased by DKK 31.7 million or 17.8 %. The increase is due to a large influx of customers, 6 which has led to an increase in all transaction income. Loan processing fees have increased by a total of DKK 12.7 million due to high activity in the residential housing area in general. The development is very satisfacto- ry and in line with the Bank’s strategy to increase non-interest-based income relative to interest income, in part through increased activity in the housing, securities, pension and insurance sectors. The share of the Bank’s earnings from fees relative to net interest and fee income has increased from 43 % in 2019 to 44 % in 2022, which is satisfactory. The rapidly increasing interest income will make it difficult to maintain the same relative share of fee income in the future, but a satisfactory development in this regard will also be a high priority in the future. Total net interest and fee income increased by DKK 82.7 million or 21.7 %. Staff and administration expenses etc. increased by DKK 26.5 million, corresponding to 12.8 %, from DKK 207.5 million compared with DKK 234.0 million. The increase follows the expectations and is due to a strate- gic decision to grow and increase the level of activity in all branches, including the Bank’s two newly esta- blished branches. Staff costs have increased by DKK 14.4 million as a result of a net of 15 new employees and general collecti- ve bargaining increases. Hiring has largely been in customer-oriented positions, where the Bank is well equipped to handle the strong influx of customers, but internal positions have also been reinforced to ensure management of the continued complicated and highly resource-intensive sets of rules in the sector. The Bank’s administrative expenses were increased by DKK 12.0 million, primarily as a result of higher IT expen- ses. Impairment has increased by DKK 17.9 million to an expense of DKK 2.7 million, corresponding to 0.1 % of the Bank’s loans and guarantees. The managerial estimate for countering the uncertainty around increasing inflation and interest rates, as well as the generally challenged financial prospects, increased by DKK 15 milli- on during the year to DKK 70 million at the end of 2022. The Bank has only identified limited impairment and economic challenges with customers in 2022. A few customers, particularly in the construction sector, have found the continued operation has not been possible due to the repayment of COVID-19 loans combined with difficult economic conditions with increasing raw material prices and decreasing demand. The Bank’s other business has generally done well and is financially well-cushioned. In 2022, no industries have accounted for a larger share of write-downs in isolation. In general, the agricul- tural sector has done well through 2022, though in the pig sector there have been and still are considerable challenges as a result of African Swine Fever in surrounding countries and weak terms of trade. Milk produ- cers, which is by far the Bank’s largest professional segment in agriculture, have had very reasonable terms of trade in 2022 and are also looking at a year of good terms of trade and high settlement prices. 7 The Bank’s private customers have been doing well and are characterised by strong creditworthiness. Howe- ver, the proportion of private customers facing financial challenges in 2023 is expected to increase, which has been taken into account in the management estimate of DKK 70.0 million. At the beginning of 2022, the Bank expected a core earnings in the range of DKK 170 – 190 million. The pro- fit expectations have been adjusted upwards during the year, most recently on 22 December 2022 to the range of DKK 225 – 235 million. Core earnings were realised at DKK 233.6 million and were thus increased by a very satisfactory DKK 58.0 million compared to 2021. The expectation for the profit before tax for the year at the beginning of 2022 was a range of DKK 175 – 205 million and was adjusted to the upper part of the range on 22 December 2022. Expectations were realised at DKK 191.1 million. The capital ratio is calculated at 23.1 % and the core capital ratio at 21.5 %. As a result of the solid profit, the capital coverage was increased in the course of 2022 compared to the individual solvency requirements, from 12.4 % points in 2021 to 13.3 % points in 2022. With deduction of the capital conservation buffer of 2.5 percentage points, cyclical buffer of 2 percentage points and NEP supplement of 3.7 percentage points, the capital coverage at the end of 2022 amounted to 5.1 percentage points. The Bank has a goal of a surplus compared to the capital requirement of min. 4 percentage points, which is thus met. The capital base increased by DKK 80.4 million to DKK 1,343 million. The increase is primarily due to profit af- ter tax of DKK 150.2 million less interest on hybrid loans of DKK 5.3 million, the proposed dividends of DKK 28.9 million and also less sectoral shares of DKK 24 million due to purchase of shares in DLR Kredit on the basis of increased distribution of credit union loans via DLR Kredit. In addition, at the end of 2022 the Bank has a deduction of DKK 7.5 million from the capital base as a result of the commitment with PRAS. The capital ratio increased by 0.9 percentage points compared to the end of 2021. The Bank’s lending has in- creased by a satisfactory DKK 745 million, while the Bank’s guarantees have been reduced by DKK 666 milli- on, which is the main reason the weighted items alone have increased by DKK 119 million. The solvency re- quirements have been calculated at 9.8 % and overall the Bank’s capital base is considered solid and adequ- ate. With regards to the bank’s capital position in general, refer to note 28. 8 FUTURE CAPITAL RESERVES In the coming years, the following regulatory capital buffers will be phased in: • The cyclical buffer currently amounts to 2 %, but is being phased in by an additional 0.5 % in Q1 2023 The cyclical buffer will then be fully phased in at 2.5 %. • NEP supplement of 5.8 percentage points once fully phased in on 1 January 2024. The NEP supplement was phased in by 3.7 % at the end of 2022, but increased to 4.7 % on 1 January 2023. Upon full phasing in of all known capital requirements, and with a solvency requirement of 9.8 %, the Bank’s capital requirement amounts to 20.6 %. The NEP supplement of 5.8 % will be phased in on 1 January 2024, and with the cyclical buffer fully phased in at this time, at the end of 2023 the Bank will have a capital ratio of 24.6 %, achieving the Bank’s target of capital reserves of a minimum of 4 percentage points. This corre- sponds to an increase of 1.5 % compared to 31 December 2022. The Bank expects that the continued growth in the earnings base will mean that the rest of the known capi- tal requirements can be phased in via consolidation from operating earnings, but will continually weigh the need to possibly raise Tier III capital to partially cover the NEP requirement. 9 EXPECTATIONS FOR 2023 The Bank has had a very satisfactory 2022, where expectations for most all areas have been met and ex- ceeded. The only exception is in exchange rate adjustments, which have been negative as a result of the tur- bulent year in the securities markets. A continued acceptable profit is expected in 2023, but also a more limi- ted development in business volume, including in lending and mortgage brokerage. There is expected to be an increasing core earnings and an increasing impairment level, but the growth in or- dinary operations means that the bank also expects a very acceptable profit in 2023. Profit before tax is expected to be in the range of DKK 210 – 250 million and core earnings are expected to in the range of DKK 225 – 275 million. The most important strategic and performance objectives for the coming year are set out below. In light of the satisfactory customer growth, based on referrals and relations to the Bank, the management is very confident in terms of continuing to attract new customers and increasing business volume with the many existing and loyal customers. The focus is on strengthening the Bank’s earnings and increasing capital provisioning, partly via retention of satisfied customers and employees. This will secure our position as the independent and local financial institution, which makes a difference in the areas where the Bank’s branches are, as well in the long term. We are pleased to note that the private customers still have a robust economy, despite an economic slow- down in society, resulting in falling housing prices as a result. In recent years, the Bank has experienced strong growth in the number of and business volume with private customers, but expects that the growth in business volume in 2023 will decrease, despite the fact that the Bank continues to be chosen by a large number of private customers. The Bank still has close ties to the agricultural industry, which represents a significant and valuable customer group. Easily the largest of the Bank’s customer groups in agriculture is milk producers, who have generally had very reasonable profitability in operations in 2022, which is expected to continue in 2023. For pig producers, 2022 has been challenging with poor terms of trade, primarily as a result of increasing feed prices etc. The Bank expects that 2023 will bring better terms of trade and thus better market conditions for pig producers. There is still increased risk as a result of the economic slowdown, but in general the Bank believes there will be reasonable conditions for positive operations within agriculture in 2023. Lending and guarantees to agriculture account for 8.5 % of the total lending, where the distribution is 4.9 % to cattle farming, 0.4 % to mink production, 1.1 % to pig farming, 1.3 % to crop farming and 0.8 % to other forms of production. The number of customers in the agricultural segment has increased in 2022 and this is 10 expected to continue in 2023 through the acquisition of well-run and well-capitalised agricultural customers. The real estate segment amounts to 9.5 %, which is the same percentage as of 31 December 2021, and the exposure in real estate is primarily within rental for residential purposes. The general rule for project fi- nancing is that sales are documented before the start of the construction, or alternatively there is adequate liquid collateral. The other business segments are generally assessed to be in positive development, although the economic slowdown will leave a clear mark on many markets and business opportunities. The Bank’s liquidity is solid, and there will be an unchanged focus on maintaining a satisfactory liquidity re- serve, primarily via a balanced relationship between the total deposit and lending volumes. In the future, the Bank wants to base essentially all of its liquidity provision on customer deposits. ACTIVITIES AND BUSINESS VOLUME As planned, an additional branch was established in the capital area during the year, while the branches in Ølgod and Hørsholm that were established in 2021 are now both operating well. The branch network is not planned to be expanded in the coming year. Skjern Bank Leasing offers financial leasing of most types of assets to the Bank’s business customers. The administrative management of this is outsourced to a well-established player in the industry. The business volume in Skjern Bank Leasing is still increasing, and at the end of 2022 there is a volume of just over DKK 181 million, which is expected to increase in 2023. Overall, 2023 is expected to lead to a solid increase in earnings, while due to the economic slowdown, a more moderate increase in the total business volume is expected. BUSINESS VOLUME IN CONTROLLED DEVELOPMENT The Bank’s business model and credit policy were essentially unchanged in 2022. The focus is, and will con- tinue to be, to be ready to participate in the customers’ goals for financing etc. when this can be done in a prudent and risk-acceptable manner. In total, lending volume increased by DKK 744.7 million, or 15.8 %, to DKK 5,464 million. Deposits from cust- omers increased by DKK 812.8 million or 11.6 % to DKK 7,840 million. The total guarantees for customers de- creased by DKK 666.5 to DKK 2,024 million. CAPITAL GOALS AND DIVIDEND POLICY The management will have the utmost focus on ensuring that the Bank has a solid capital base to support the continued development of the Bank’s activities and implementation of current and future regulatory capi- tal requirements. 11 The capital base will continue to be largely based on actual core capital, but raising foreign capital may also be included in the future capital structure. The Bank has a satisfactory capital coverage, and therefore it is the management’s assessment that there is a solid base to reward the Bank’s many shareholders with an appropriate portion of the realised profit. The Danish Financial Supervisory Authority’s recommendations and the management’s expectations for fu- ture growth and earnings have been taken into account in the assessing the sufficient capital coverage. It is proposed to distribute DKK 3 per share, or DKK 28.9 million, which constitutes 19.2 % of the realised profit after tax in 2022. The dividend level must be assessed on the basis of the management’s position of primarily strengthening the Bank’s solvency through consolidation from operations. The distribution is in line with the distribution for the financial year 2021. The Bank’s management has decided to maintain the following capital goals and dividend policy: CAPITAL GOALS It is the Bank’s goal to be well capitalised to ensure the Bank’s strategic goals and to accommodate regulato- ry requirements. The management will continuously assess the adequacy of the capital base, including the distribution between equity and foreign capital, to ensure the optimal distribution between returns to share- holders and sufficient increase of the bank’s actual core capital. DIVIDEND POLICIES In light of the bank’s capital goals, the bank wants to be stable in payments of dividends. The goal is for di- stribution to amount to 30-50 % of the annual profit after tax, either as share buy-backs or cash distributions, which exceeds a return on equity of 6 %. THE BANK’S IMPORTANT STAKEHOLDERS The Bank’s management considers the cooperation with and involvement of the Bank’s many stakeholders and the running of a well-functioning local Bank to be equally important. The focus has always been on creating value for the Bank’s stakeholders, which in 2022 is considered to have been the most important factor in the solid business development. The Bank’s strategic objective is primarily a controlled organic growth based on long-term relations with all stakeholders. When the customers choose the way the Bank is run, it increases the profits to the benefit of the shareholders. The local community benefits from this in the form of the Bank’s local backing as well as product distribution to local businesses and private customers. The employees benefit from this in the form of job retention and an exciting job where they can develop. The customers clearly express that it is valuable to have a local bank that knows their needs and where they have an advisor who knows them and who back 12 the local community’s activities. SHAREHOLDERS The management recognises the importance of a stable and loyal shareholder community and, taking into account the bank’s capital adequacy, aims to give them competitive returns on their investment. The share- holders’ loyalty and continued backing, from small shareholders to major professional investors, is extremely important to the continued development of the bank. CUSTOMERS The bank is pleased to note that the private customer business is growing rapidly and that the bank is being chosen by new customers from most of the country, primarily on the recommendation of existing custo- mers. The corporate client business is also in solid development with a focus on small and medium-sized customers, primarily in the Bank’s local areas. The experience has been that the close personal knowledge between customer and adviser is crucial for choosing Skjern Bank. This combined with solid advice, living up to the Bank’s key values and the electronic options, such as online meetings and mobile banking, make daily life work smoothly and flexibly. Customer satisfaction with the Bank is paramount, and the external anonymous measurements of satisfacti- on with the Bank are conducted annually. It is very gratifying to note that customer satisfaction with the Bank is extremely high and that nearly 9 out of 10 of the Bank’s customers would recommend the Bank to others. The Bank is very grateful and humbled by the trust shown by the customers as they refer their family, fri- ends and acquaintances to the Bank in large numbers. EMPLOYEES As of As of 31 December 2022, the Bank employs 195 employees, which is an increase of 6 over the year. All employees are offered employment terms that conform to the market as well as relevant training and continuing education in order to always ensure a high level of professionalism. Employee job satisfaction is very important for the Bank and there are annual measurements of the emplo- yee satisfaction in each department and the Bank as a whole. It is a strategic goal for the Bank to have employees who feel the Bank is a good workplace and who are proud to work at the Bank. There is a very high level of employee satisfaction, which is an important foundation for always being able to offer advice and service at the high level expected by the customers. LOCAL COMMUNITIES The Bank’s goal is to play an important role in the Bank’s local communities, both as a partner for the many business owners, and of course also for the local population in general. It is important for the bank to back 13 local initiatives and the Bank helps a great number of businesses – entrepreneurs and existing customers - with counselling and financing, so that ideas and investment goals have the best chance of being realised. The Bank is also a partner for a very large percentage the local communities’ associations and organisations and supports both sports and culture and associations in general. The bank’s commitment to and support for local communities is largely based on reciprocity, such that financial backing of any size is given in anticipati- on of and is subject to the bank being rewarded with customer referrals and a generally positive attitude towards the bank. The foundation for banking operations in Skjern Bank is the many shareholders, customers, talented emplo- yees and the local community. The Bank is aware that all stakeholders play an important role both now and in the future and the Bank views it as an important community role to encourage the many stakeholders to work together for the benefit of both the stakeholders and the Bank. SUSTAINABLE DEVELOPMENT The financial sector has a key role in ensuring that society develops in a more sustainable direction. The Bank is aware of this responsibility and fully supports the points from the Forum for Sustainable Finance (Fo- rum for Bæredygtig Finans), which the Bank is actively working to comply with. In the Bank’s ESG report for 2022, the Bank’s status on compliance with the points is presented, and the goals for the future work are described. In Skjern Bank, the focus on sustainability can generally be divided into two main tracks: 1. Our influence on our stakeholders, especially our customers. 2. The Bank as a company. The influence on customers must take place via positive customer dialogue, which must also include a dia- logue on opportunities and threats related to sustainability to a greater extent. Private customers must be presented with relevant opportunities, such as: making their properties more energy efficient, getting attractive financing for electric cars and placing investments to influence sustainable development in line with the customer’s sustainability preferences. Business customers must be made aware of issues relating to the concept of sustainability (ESG), which concerns: Environmental conditions (E – Environment), Social conditions (S – Social) and Management condi- tions (G – Governance). For several years, the Bank has been working to reduce energy consumption through energy reduction mea- sures, and also compensates for its own use of power through the purchase of certificates of origin for pow- 14 er from Danish wind turbines. The bank also supports climate measures in third world countries via its elec- tric bill. The ESG report can be read in full on the Bank’s website. NET INTEREST INCOME Net interest income amounts to DKK 254.3 million, which is an increase of 23.7 % compared to last year, when net interest income was DKK 205.6 million. Interest income on net customer loans has increased by DKK 35.7 to DKK 219.8 million, which is very satis- factory and due to increased lending and increasing interest income on lending and deposits in Danmarks Nationalbank. The Bank’s proportion of lending where there was impairment, but where interest still continu- es to be accrued, decreased and amounts to DKK 7.2 million in 2022 compared with DKK 7.6 million in 2021. Bond interest income increased by DKK 2.4 million, while there has been an increase of DKK 6.2 million on financial instruments. Overall, interest income has thus increased by DKK 52.3 million compared to last year. In terms of accounting, negative interest rates on deposits are placed under interest income in a special line in the statement of profit or loss. The Bank has realised DKK 25.5 million on this in 2022, compared with DKK 28.6 million in 2021. Interest expenses increased to DKK 10.7 million, primarily as a result of the increasing interest level, which means that there are no longer negative interest rate deposits in the Bank. The Bank’s interest expenses for deposits in Danmarks Nationalbank decreased in 2022 by DKK 2.1 million to DKK 8.4 million. FEE INCOME Income from fees and commissions has increased very satisfactorily by 17.8 % to DKK 209.8 million, driven by growth in the number and volume of customers. Borrowing fees have increased by DKK 12.7 million to a total of DKK 93.1 million and guarantee provisions have increased by DKK 3.5 to DKK 29.8 million. The customer-driven activity has increased satisfactorily, which increased the income from securities trading and payment services and other fees by a total of DKK 15.5 million. DIVIDENDS In 2022, dividends from shareholdings increased by DKK 1.8 million and amounted to DKK 4.5 million. NET INTEREST AND FEE INCOME Net interest and fee income including dividends increased by 21.7 % to DKK 463.7 million, which is very sa- tisfactory. 15 EXCHANGE RATE ADJUSTMENTS In 2022, the securities markets were characterised by increasing interest rates, decreasing share prices, and in particular decreasing bond prices. A capital loss of DKK 1.5 million was realised in the shareholdings, compared with a gain of 2021 in DKK 17.5 million. The Bank wants a continued low share price exposure and the treasury portfolio of shares is thus still of a modest size. Exchange rate adjustments on bond portfolios have been negative in 2022 by DKK 38.5 million. The Bank continues to have a cautious investment policy for bonds, which promises a short maturity and low interest risk and the total bond holdings in 2022 were reduced by DKK 80.1 million to DKK 861.8 million. The total exchange rate adjustments amount to DKK -30.8 million and, in addition to the exchange rate adju- stments on bonds and shares, consist of earnings on currency and financial instruments of a satisfactory DKK 9.1 million. EXPENSES Staff and administration expenses increased by 12.8 % and amount to DKK 234.0 million, compared with DKK 207.5 million in 2021. The increase is as expected in a year in which considerable investment has been made in the expansion of the branch network. Personnel expenses have increased by DKK 14.4 million, cor- responding to 11.5 %, due to an increasing number of employees, collective bargaining wage increases and an increase in payroll tax. Other administrative expenses increased in 2022 by DKK 12.0 million to DKK 92.5 million, which is primarily due to higher IT costs. DEPRECIATION AND WRITE-DOWNS In 2022, there was depreciation and impairment on tangible fixed assets of DKK 6.6 million, compared with DKK 7.3 million in 2021. IMPAIRMENT Impairment on loans and customer receivables etc. amounted to 0.1 % of the total loans and guarantees, corresponding to DKK 2.7 million, compared with an income of DKK 15.2 million in 2021. As a result of the increasing uncertainty due to the economic slowdown, increasing inflation, the risk of an increase in unemployment, etc., the management estimate was increased by DKK 15.0 million in 2022 to DKK 70.0 million. Reversal of impairment from previous accounting years amounted to DKK 130.7 million, while recorded los- 16 ses amounted to DKK 3.9 million, of which DKK 3.2 million had not been previously written down. In total, the Bank has provisioned DKK 302.5 million to accommodate future losses, which corresponds to 3.8 % of the Bank’s total lending and guarantees. CORE EARNINGS At the beginning of 2022, the Bank expected a core earnings in the range of DKK 170 – 190 million. The pro- fit expectations have been adjusted upwards 3 times during the year, most recently on 22 December 2022 to the range of DKK 225 – 235 million. The realised core earnings amount to DKK 233.6 million, compared with DKK 175.6 million in 2021, and are considered highly satisfactory. The growth is primarily due to increa- sed interest income on lending and a sharp increase in fee income. PROFIT BEFORE TAX The expectation for the profit before tax for the year at the beginning of 2022 was a range DKK 175 – 205 million and was adjusted to the upper part of the range on 22 December 2022. The bank’s profit before tax amounted to DKK 191.1 million compared to DKK 204.5 million in 2021. As the primary reason for the lower profit in 2022 is negative exchange rate adjustments, the result is considered very satisfactory. CAPITAL The capital base, which consists of equity and supplemental borrowing, amounted to DKK 1,342.8 million at the end of 2022 and the total risk exposure amounted to DKK 5,802.8 million. The capital ratio is calculated at 23.1 % and the core capital at 21.5 %. The solvency requirement amounted to 9.8 %, whereby there is a satisfactory coverage in relation to the solvency requirement of 13.3 percentage points, corresponding to DKK 772.8 million. At the end of 2022, in addition to the solvency requirements, the Bank will also add a capital conservation buffer of 2.5 percentage points, a cyclical buffer of 2 percentage points and a NEP supplement of 3.7 per- centage points. Including this capital requirement, the solvency coverage relative to the total capital require- ments amounts to 5.1 percentage points, corresponding to DKK 297 million. The solvency requirements, which are calculated according to the Danish Financial Supervisory Authority’s credit reservation method, are recognised at DKK 464.2 million, corresponding to 8.0 % for the Column 1 re- quirement (Søjle 1-kravet). DKK 16.4 has been allocated on the basis of the Bank’s lending growth, which has exceeded 10 %. In addition, DKK 69.2 million was provisioned for credit risk, including “NPE backstops”, where DKK 11.6 million was reserved for an interest risk of DKK 0.5 million and a credit spread risk of DKK 9.7 million under the market risk and DKK 10.0 million for reservations under the operational risk. Overall, the Bank has a capital requirement of DKK 570.0 million. The Bank’s goal for capital coverage relative to the calculated solvency requirements plus the current pha- sed-in capital requirements is a minimum of 4 percentage points. In the coming years, the capital require- ments will be further increased by 0.5 percentage points in the cyclical buffer and an additional 2.1 percenta- 17 ge points in NEP requirements. At the same time, the Bank has a goal of organic growth in business volume at a level of 3-5 % in the coming years, which increases the requirements for the capital base. The management considers the Bank to have a solid capital foundation, but there is a constant focus on al- ways having an appropriate capital structure and coverage. For more information on capital and solvency requirements, please refer to the Bank’s website: www.skjern- bank.dk/banken/investor/solvensbehov LIQUIDITY The bank’s goal is to maintain liquidity reserves at a continued sufficient and solid level based on deposits from the bank’s customers. In 2022, the goal was met by increasing the total deposits to a total of DKK 7.840 million. The bank’s liquidity reserves are solid. The LCR (Liquidity Coverage Ratio) of DKK 2.510 million exceeds both the regulatory requirements and the stricter liquidity goals established by the Bank’s Board of Directors. The liquidity coverage ratio shows how the bank is able to meet its payment obligations for an upcoming 30-day period without access to market funding. The ratio is calculated by comparing the Bank’s cash reserves and liquid assets with the Bank’s payment obligations for the next 30 days calculated according to certain rules. Skjern Bank has established an internal limit for the minimum liquidity reserves of 175 %, which exceeds the minimum requirements of 100 % from the Danish Financial Supervisory Authority. The Bank achieved the goal and as of 31 December 2022 has an LCR financial ratio of 352 %. MAJOR SHAREHOLDERS The Bank has 3 major shareholders, all of whom have 5 % of the voting rights: Investeringsselskabet, 15 May (AP Pension Livsforsikringsaktieselskab, København Ø.), which as of the most recent ownership report held 20.75 % of the share capital, EURO STEEL 1988 APS, which as of the most re- cent ownership report held 5.15 % of the share capital, and Kim Pedersen, who both personally and via his wholly-owned company Immoinvest.dk ApS held 5.0 % of the share capital as of the most recent ownership report. LIQUIDATION RESERVE In connection with establishing the statutory liquidation reserve, the Bank has prepared business procedu- res and implemented tests to ensure compliance with the special requirements resulting from the legislati- on. This has been done in cooperation with the Bank’s data centre, and it is the management’s assessment that the Bank is in compliance with the requirements. 18 SIGNIFICANT AGREEMENTS If control of the Bank is changed, a number of agreements will cease or terms will be changed. Withdrawal from the data centre Bankdata, where, depending on the change in question, a severance allowance corre- sponding to 5 times the previous year’s bill for Bankdata may be applied. All other agreements are assessed to be immaterial. EVENTS OCCURRING AFTER 31 DECEMBER 2022 No events have occurred after 31 December 2022 that significantly affect the Bank’s circumstances. AUDIT The Danish version of the Annual Report for 2022 is equipped with internal audit statements and indepen- dent auditors’ statement. The statements are without reservations and complementary information. 19 Endorsement of the Annual Report by the Management We have today discussed and approved the annual report for the period 1 January – 31 December 2022 for Skjern Bank A/S. The annual report has been prepared in accordance with the Danish legislation on nancial activities, including executive order on nancial reports for credit institutes and stock broker companies, etc. Furthermore, the annual report has been prepared in accordance with accordance with the Danish Financial Business Act. The Financial Statements have been pre- pared in accordance with Danish legal requirements for listed nancial companies. It is also our opinion that the annual report has been prepared in accordance with the ESEF regulation in all material respe- cts. We consider the accounting practice chosen to be appropriate so that the annual report gives a correct impression of the bank’s assets, liabilities, nancial position as at the 31st December 2022 and of the result of the bank’s activities for the accounting year 1 January – 31 December 2022. The management report includes a correct presentation of the development of the bank’s activities and nancial conditions together with a description of the material risks and uncertainties by which the bank may be affected. Supplementary reports provide a true and fair view within the framework of generally accepted guidelines for such reports. The annual report is recommended for approval by the General Meeting. Skjern, the 9 February 2023 The board of Skjern Bank A/S Per Munck Manager Skjern, the 9 February 2023 The board of Skjern Bank A/S Hans Ladekjær Jeppesen Bjørn Jepsen Chairman Vice-chairman Niels Erik Kjærgaard Finn Erik Kristiansen Ole Strandbygaard Lars Skov Hansen Carsten Jensen Michael Tang Nielsen 20 Prot and loss account Note DKK 1,000 2022 2021 2 Interest receivable 247.922 195.584 Interest receivable deposits 25.507 28.611 3 Interest payable 10.684 8.024 Interest payable central banks 8.421 10.596 Net income from interest 254.324 205.575 Dividend on shares and other holdings 4.485 2.657 4 Charges and commission receivable 209.801 178.044 Charges and commission payable 4.887 5.306 Net income from interest and charges 463.723 380.970 5 Value adjustments -30.830 20.181 Other ordinary income 2.078 3.487 6 Staff costs and administrative expenses 234.038 207.517 Depreciation and write-downs on intangible and tangible assets 6.620 7.337 Other operating expenses 477 480 9 Write-downs 2.703 -15.227 Result before tax 191.133 204.531 10 Tax 40.894 41.230 Net-result for the financial year 150.239 163.301 Of which are holders of shares of hybrid core capital instruments etc. 5.287 5.289 PROPOSAL FOR DISTRIBUTION OF PROFIT Dividends 28.920 28.920 Holders of hybrid core capital instruments 5.287 5.289 Transferred to/from retained earnings 116.032 129.092 Total distribution of the amount available 150.239 163.301 STATEMENT OF COMPREHENSIVE INCOME Profit for the financial year 150.239 163.301 Total comprehensive income 150.239 163.301 21 Note DKK 1,000 2022 2021 ASSETS Cash in hand and demand deposits with central banks 2.830.343 2.566.381 11 Receivables at credit institutions and central banks 54.939 74.300 12 Loans and other receivables at amortised cost 5.464.400 4.719.737 13 Bonds at fair value 861.733 941.900 14 Shares etc. 231.757 208.217 15 Shares associated with pool schemes 1.614.083 1.306.663 16 Holdings in associated enterprises and group enterprises 67.204 67.599 Investment properties 3.019 3.019 Owner-occupied properties 47.868 45.895 Owner-occupied properties, leasing 16.317 18.685 17 Other tangible assets 5.375 5.626 Current tax assets 6.175 3.640 Other assets 92.424 84.106 Prepayments 60 329 Total assets 11.228.493 9.978.498 Balance Sheet 22 Note DKK 1,000 2022 2021 LIABILITIES DEBT 18 Debt to credit institutions and central banks 2.974 0 19 Deposits and other debts 7.840.474 7.027.670 Deposits in pooled schemes 1.614.083 1.306.663 Other liabilities 292.451 280.201 Prepayments 850 1.832 Total debt 9.750.832 8.616.366 PROVISIONS 20 Provisions for deferred tax 3.749 2.298 12 Provisions for loss on guarantees 11.716 14.423 Total provisions 15.465 16.721 SUBORDINATED DEBT 21 Subordinated loan capital 98.835 98.334 Total subordinated debt 98.835 98.334 EQUITY 22 Share capital 192.800 192.800 Retained earnings 1.080.626 964.476 Proposed dividend 28.920 28.920 Capital owners share of equity 1.302.346 1.186.196 23 Holders of hybrid capital 61.015 60.881 Total equity 1.363.361 1.247.077 Total liabilities 11.228.493 9.978.498 23 Information on changes in equity Share capital Proposed dividends Hybrid capital Retained earnings Total Equity 01.01.2021 192.800 19.280 60.748 834.814 1.108.059 24 Purchase of own funds 122 122 Dividend own shares 30 30 Amortization hybrid capital -133 -133 Paid interest hybrid capital -5.023 -5.023 Dividends proposed 2021 -19.280 -19.280 Profit or loss 28.920 5.289 129.092 163.301 Equity 31.12.2021 192.800 28.920 60.881 964.058 1.247.076 24 Purchase of own funds 90 90 Dividend own shares 30 30 Dividends paid 2021 -28.920 -28.920 Amortization hybrid capital -131 -131 Paid interest hybrid capital -5.023 -5.023 Prot or loss 28.920 5.287 116.032 150.239 Equity 31.12.2022 192.800 0 61.014 1.080.210 1.363.361 24 Notes 1 Accounting policies ............................................................... 25 2 Interest income .................................................................. 35 3 Interest expenses................................................................. 35 4 Fees and commission income ....................................................... 35 5 Value adjustments ................................................................ 35 6 Staff costs and administrative expenses ............................................... 36 7 Incentive and bonus schemes ....................................................... 37 8 Audit fee........................................................................ 37 9 Write-downs on loans and receivables ................................................ 37 10 Tax ............................................................................ 38 11 Receivables at credit institutions and central banks....................................... 38 12 Loans and other debtors at amortised cost price......................................... 39 13 Bonds at fair value ................................................................ 41 14 Shares etc. ...................................................................... 41 15 Shares associated with pool scheme.................................................. 41 16 Land and buildings ................................................................ 41 17 Other tangible assets .............................................................. 42 18 Debt to credit institutions and central banks ............................................ 42 19 Deposits and other debts ........................................................... 42 20 Deferred taxation ................................................................. 42 21 Subordinated debt ................................................................ 43 22 Share capital ..................................................................... 43 23 Holders of hybrid capital............................................................ 43 24 Own capital shares................................................................ 44 25 Contingent liabilities ............................................................... 44 26 Lawsuits etc. .................................................................... 45 27 Related parties ................................................................... 45 28 Capital requirement ............................................................... 46 29 Current value of nancial instruments ................................................. 47 30 Risks and risk management ......................................................... 48 31 Credit Risk ...................................................................... 49 32 Market risks and sensitivity information................................................ 59 33 Derivate nancial instruments ....................................................... 60 34 5 years in summary ............................................................... 62 35 5 years of nancial ratio ............................................................ 63 36 Coperative agreements ............................................................ 63 25 1. ACCOUNTING POLICIES The Financial Statements have been prepared in accordance with the Danish Financial Business Act and the Executive Order on nancial reports for credit institutions and investment companies, etc. The Financial Statements have been prepared in accordance with additional Danish legal requirements for Fi- nancial Statements for listed nancial companies. The Financial Statements are presented in DKK and rounded to the nearest DKK 1,000. General information on recognition and measurement Assets are recognised in the statement of nancial position when it is probable that future economic benets will ow to the Bank and the asset’s value can be measured reliably. Liabilities are recognised in the statement of nancial position when they are likely and can be measured re- liably. Assets and liabilities are initially recognised at fair value. However, tangible assets are measured at cost at the time of initial recognition. Measurement after initial recognition occurs as described for each item below. Foreseeable risks and losses which may arise before the Financial Statements are reported and which conrm or invalidate conditions existing on the balance date are taken into account in recognition and measurement. Income is recognised in the statement of prot or loss and other comprehensive income as it is earned, while expenses are recognised at the amounts which relate to the nancial year. Purchases and sales of nancial instruments are recognised on the transaction date and are no longer recog- nised when the right to receive/deliver cash to or from the nancial asset or liability has expired or, if it is trans- ferred, the Bank has transferred all signicant risks and rewards of ownership. The bank has not used the rules for reclassication of certain nancial assets at fair value to amortised cost. Determination of fair value The fair value is the amount to which an asset can be converted or at which a liability can be settled in a transa- ction under normal conditions between knowledgeable, willing and independent parties. The fair value of nancial instruments for which there is an active market is usually determined as the closing price on the Balance Sheet date or, if not available, another published price considered to best correspond to this. For nancial instruments for which there is an active market, fair value is established using generally accepted valuation techniques which are based on relevant observable market data. 26 Accounting estimates When determining the carrying amount of certain assets and liabilities, discretion is used as to how future events will affect the value of the assets and liabilities on the balance date. The estimates used are based on assumptions which the management considers to be reasonable, but which are associated with some uncertainty. Therefore, the actual nal results may differ from the estimates used, because the Bank is affected by risk and uncertainty, which can affect this. The areas which involve a greater degree of assessments/assumptions and estimates are impairment of loans and receivables, determination of fair value of unlisted nancial instruments, corporate and investment proper- ties and provisions. Although the carrying amounts are calculated in accordance with the Danish Executive Order on the Presen- tation of Financial Statements, particularly including appendices 9 and 10 and related guidelines, there is un- certainty and estimates associated with these carrying amounts, as they are based on a number of assumpti- ons. If these assumptions change, the nancial reporting may be affected and the impact may be signicant. Changes may occur through a change in practice or interpretation by the authorities and amended principles from the management - for example, the value of collateral may entail changes to the calculations. Foreign currency Assets and liabilities in foreign currencies are recognised on the balance date at the National Bank of Denmark’s listed rates. Foreign currency spot transactions are adjusted on the balance date based on the spot rate. Cur- rency translation adjustments are recognised on an ongoing basis in the statement of prot or loss and other comprehensive income. General When determining the carrying amount of certain assets and liabilities, discretion is used as to how future events will affect the value of the assets and liabilities in question on the balance date. The estimates used are based on assumptions which the management considers to be reasonable, but which are uncertain and unpredictable. Therefore, the actual nal results may differ from the estimates used, becau- se the Bank is affected by risk and uncertainty, which can affect this. Model uncertainty In addition to establishing expectations for the future, write-downs in stages 1 and 2 are also subject to uncer- tainty because the model does not account for all relevant circumstances. As there is still limited historical data as a basis for the models, it has been necessary to supplement the model’s calculations with management estimates. Assessment of the effect of the long-term probability of default on customers and segments th- rough improved and deteriorated outcomes of macroeconomic scenarios is associated with estimates. Please 27 refer to the more detailed description in note 31. Statement of collateral values To reduce the risk on the individual exposures in the Bank, collaterals have been received, primarily in the form of mortgages on physical assets (of which mortgages on real estate are the most signicant form), securities etc. Signicant management estimates are included in the valuation of the collateral. For a more detailed de- scription of matters relating to collateral, see also note 31. Fair values of owner-occupied properties The return method is used to measure owner-occupied properties at fair value. Future cash ows are based on the Bank’s best estimate of future ordinary prot and required rate of return for each property, taking into ac- count factors such as location and maintenance. A number of these assumptions and estimates have a signi- cant impact on the calculations. Changes in these parameters as a result of a change in market conditions affect the expected returns and thus the owner-occupied properties’ fair value. Also refer to the discussion in note 1 “Accounting policies used etc.” under the section “Land and buildings” and note 16 “Land and buildings”. Practice for writing off nancial assets from the statement of nancial position Financial assets that are measured at amortised cost are wholly or partially written off from the statement of nancial position if the Bank no longer has reasonable expectations that the outstanding amount will be whol- ly or partially covered. Recognition ceases based on specic, individual assessment of each exposure. For pri- vate and corporate customers, the Bank will typically write off losses when the pledged collateral is realised and the residual receivable is unsustainable. When a nancial asset is written off from the statement of nan- cial position in whole or in part, the impairment on the nancial asset is removed from the calculation of accumu- lated impairment, cf. note 9. The bank continues its collection efforts after the assets have been written off, with the measures depending on the specic situation. The bank essentially tries to enter a voluntary agreement with the customer, including renegotiation of terms or reconstruction of a business, such that debt collection or bankruptcy proceedings are only put to use when other measures have been tried. STATEMENT OF PROFIT OR LOSS Interest, fees and commissions, etc. Interest income and expenses are recognised in the statement of prot or loss and other comprehensive in- come in the period to which they relate. Interest income from deposits and interest expense to central banks are presented separately in the statement of prot or loss. Received interest on credit-impaired loans on which impairment has occurred are passed to the impaired part 28 of the loan in question under the item “Impairment of loans and receivables” and are thus offset in impairment for the year. Commissions and fees which are an integral part of the effective interest rate of a loan are recognised as part of the amortised cost and are therefore part of interest income under loans. Commissions and fees which are part of an ongoing service are accrued over the loan period. Other fees and commissions and dividends are recognised in the statement of prot or loss and other com- prehensive income when the rights to them are acquired. Staff and administration expenses Staff and administration expenses include wages and salaries, social costs, pensions, IT costs and administra- tive and marketing costs. Pension schemes The bank has entered into dened contribution schemes with the employees. In dened contribution schemes, xed contributions are paid to an independent pension fund. The bank has no obligation to make further con- tributions. Ta x Tax for the year, which consists of current tax for the year and movements in deferred tax, is recognised in the statement of prot or loss and other comprehensive income as the portion which is attributable to the net pro- t for the year and directly in equity as the portion which is attributable to items in equity. Current tax liabilities and current tax receivables are recognised in the Balance Sheet as tax calculated on ta- xable income for the year adjusted for tax paid on account. Deferred tax is recognised on all temporary differences between carrying values and tax values of assets and liabilities. Any deferred tax assets, including the tax value of tax loss carry forwards, are recognised in the statement of nancial position at the value at which the asset is expected to be realised, either against deferred tax liabiliti- es or as net assets. STATEMENT OF FINANCIAL POSITION Classication and measurement According to the IFRS 9-compatible accounting regulations, classication and measurement of nancial assets is done based on the business model for the nancial assets and the contractual cash ows relating to the - nancial assets. This means that nancial assets must be classied into one of the following two categories: 29 • Financial assets that are held to generate the contractual payments, and where the contractual payments exclusively consist of interest and repayments on the outstanding amount, are measured at amortised cost after the date of rst recognition. This category includes loans at amortised cost and receivables from credit institutions. • Financial assets that do not meet the above criteria for the business model or where the contractual cash ows do not exclusively consist of interest and repayments on the outstanding amount are initially recognised at fair value through the statement of prot or loss. Skjern Bank does not have nancial assets that are included in the measurement category for recognition of nancial assets at fair value through other comprehensive income. Instead, the Bank’s bond portfolio is mea- sured at fair value through the statement of prot or loss because they are included in a trading portfolio. Cash holdings and demand deposits with central banks Cash holdings and demand deposits with central banks are initially recognised at fair value and then at amor- tised cost. Receivables from credit institutions and central banks Receivables from credit institutions and central banks include receivables from other credit institutions. Initial- ly recognised at fair value plus transaction costs and minus origination fees, etc. and subsequently measured at amortised cost. Loans The accounting item consists of loans disbursed directly to the borrower. Loans are measured at amortised cost, which usually corresponds to the nominal value minus origination fees etc. and minus provisions for los- ses expected but not yet realised. Model for impairment for expected credit losses In accordance with the IFRS 9-compatible impairment rules, impairment is done for expected credit losses on all nancial assets that are recognised at amortised cost and provisions are made according to the same rules for expected credit losses on unused credit lines, loan commitments and nancial guarantees. The impairment rules are based on an expectation-based model. For nancial assets recognised at amortised cost, impairment for expected credit losses is recognised in the statement of prot or loss and the value of the asset is reduced in the statement of nancial position. Provisi- ons for losses on unused credit lines, loan commitments and nancial guarantees are recognised as a reserved liability. (See also under contingent liabilities). Stages of development in credit risk 30 The expectation-based impairment rules means that a nancial asset etc. at the time of rst recognition is im- paired by an amount corresponding to the expected credit loss over 12 months (stage 1). If there is subse- quently a signicant increase in the credit risk compared to the time of rst recognition, the nancial asset is impaired by the amount corresponding to the expected credit loss in the asset’s remaining life (stage 2). If impaired credit (stage 3) is discovered for the instrument, the asset is written down by an amount correspon- ding to the expected credit loss in the asset’s remaining life, and interest income is recognised in the statement of prot or loss according to the effective interest method based on the impaired amount. Financial assets where the customer has signicant nancial difculties or where the Bank has offered easier terms due to the customer’s nancial difculties are kept at stage 2 if losses are not expected in the most li- kely scenario. Placement in stages and calculation of the expected loss is based on the Bank’s rating models, which were developed by the data centre Bankdata and the Bank’s internal credit management. Assessment of signicant increase in credit risk In the assessment of the development of credit risk, it is assumed that a signicant increase in credit risk has occurred in relation to the time of initial recognition when a downwards adjustment of the Bank’s internal ra- ting of the debtor corresponds to one rating class in the Danish Financial Supervisory Authority’s rating classi- cation guidelines. If the credit risk on the nancial asset is considered to be low on the reporting date, the asset is kept at stage 1, where a signicant increase in credit risk has not occurred. Skjern Bank considers the credit risk to be low when the Bank’s internal rating of the customer corresponds to 2a or better, though an overdraft for more than 30 days for a customer with an internal rating of 2a will lead to a signicantly impaired credit risk. The catego- ry of assets with low credit risk also includes lending and receivables that meet the rating criterion, as well as receivables from Danish credit institutions. New customers are always placed in stage 1 unless they are credit impaired. Denition of credit impairment and default An exposure is dened as being impaired and as being in default if it meets at least one of the following crite- ria: • The borrower is experiencing signicant nancial difculties, and the Bank assesses that the borrower will not be able to honour their obligations as agreed. • The borrower has committed a breach of contract, such as in the form of non-compliance with payment ob- ligations for principal and interest or repeated overdrafts. • The bank has granted the borrower easier terms than it would have granted were it not for the borrower’s nancial difculties. • It is likely that the borrower will go bankrupt or be subject to other nancial reorganisation. • The exposure has been in arrears/overdrawn for more than 90 days by an amount that is considered signi- cant. 31 The denition of credit impairment and default that the Bank uses when measuring the expected credit loss and for transfer to stage 3 is in line with the denition used for internal risk management purposes. Calculation of expected loss The calculation of impairment on exposures in stages 1 and 2, except for the weakest exposures in stage 2, are made on a portfolio-based calculation model, while the impairment on the rest of the exposures are made through a manual, individual assessment based on three scenarios (basic scenario, a more positive scenario and a more negative scenario) with the associated likelihood that the scenarios will occur. The portfolio model calculation is based on the Bank’s division of customers into different rating classes and an assessment of the risk of loss in each rating class. The calculation occurs in a setup that is developed and maintained in Bankdata, supplemented with a predictive macroeconomic module, which is developed and maintained by LOPI, and which forms the basis for the incorporation of management’s expectations for the future. The macroeconomic module is based on a series of regression models that establish the historical correlation between impairment for the year within a number of sectors and industries and a number of explanatory ma- croeconomic variables. Estimates are then applied to the regression models for the macroeconomic variables based on forecasts from consistent sources such as Det Økonomiske Råd [The Danish Economic Council], Danmarks Nationalbank etc. where the forecasts are generally for two years in the future and include variables such as increase in public consumption, increase in GDP, interest rates etc. The expected impairment is thereby calculated for up to two years in the future for each sector and industry. For maturities longer than two years and up to year 10, a pro- jection of the impairment percentage is made such that it converges towards a normal level in year 10. Matu- rities longer than 10 years are given the same impairment percentage as in year 10. Finally, the calculated im- pairment percentages are converted into adjustment factors that correct the data centre’s estimates in the individual sectors and industries. The Bank makes adjustments to these based on its own expectations for the future and based on the loan composition. Changes in write-downs are adjusted in the statement of prot or loss and other comprehensive income under the item “Impairment of loans and receivables etc”. Bonds and shares, etc. Bonds and shares traded on a listed stock exchange are measured at fair value. Fair value is usually determined as the ofcial closing price on the balance date. Unlisted securities and other equity investments (including level 3 assets) are also recognised at fair value, calculated based on what the transaction price would be in a trade between independent parties. If there is no current market data, the fair value is determined based on the published nancial reports or on a return 32 model which is based on cash ows and other available information. Value adjustments on bonds and shares, etc. are recognised on an ongoing basis in the statement of prot or loss and other comprehensive income under the item “Exchange rate adjustments”. Pool activities All pool assets and deposits are recognised in separate balance sheet items. Returns on pool assets and di- stributions to pool participants are entered under the item “exchange rate adjustments”. Land and buildings Land and buildings include • “Owner-occupied properties”, which consist of the properties from which the bank conducts banking activi- ties • “Leased company domiciles”, which consist of the leased properties from which the Bank conducts • “Investment properties”, which consist of all other properties the bank owns and possess in order to obtain rental income. Owner-occupied properties are measured in the statement of nancial position at revalued amount, which is the fair value determined based on the return method with a rate of return in the range of 5.6 - 7 % less accumu- lated depreciation and any impairment loss. Depreciation is recognised in the statement of prot or loss and revaluation is done so frequently that there are no signicant differences in fair value. Increases in the ow- ner-occupied properties’ revalued amount are recognised under revaluation reserve in equity. If an increase in the revalued amount corresponds to an earlier case and is thus recognised in the statement of prot or loss in a previous year, the increase is recognised in the statement of prot or loss. A decrease in the revalued amount is recognised in the statement of prot or loss and other comprehensive income, unless there is a reversal of previous revaluations. Owner-occupied properties are depreciated linearly over 50 years based on the cost ad- justed for any value adjustments where residual values are not used. Leased company domiciles All lease agreements must be recognised by the lessee in the form of a leasing asset that represents the value of the right of use. The asset is initially recognised at present value of the lea- se liability including costs and any prepayments. After initial recognition, lease contracts for domicile properti- es are measured in the same way as other domicile properties. At the same time, the present value of the agreed lease payments are recognised as a liability. Assets leased on short-term contracts and leased assets of low value are excluded from the requirement for recognition of a lease asset. In calculating the properties’ value, an internal interest rate in the range of 3.5 % - 5.5 % was used. Investment properties are measured in the statement of nancial position at fair value determined based on 33 the return method. Ongoing changes in fair value of investment properties are recognised in the statement of prot or loss and other comprehensive income. Establishment of the revalued amount of owner-occupied properties and the fair value of investment properti- es are associated with signicant estimates. The estimates particularly relate to the establishment of required rate of return. Other tangible xed assets Other tangible xed assets, including plant and machinery, are recognised at the acquisition at cost. Then, other tangible assets and conversion of rented premises are recognised at cost minus accumulated depreciation. A linear amortisation is done over 3-5 years based on the cost and amortisations and impairment losses recog- nised in the statement of prot or loss. Other assets Other assets include interest receivable and provisions and positive market value of derivative nancial instru- ments. Prepayments and accrued income Prepayments and accrued income recognised under assets include costs relating to subsequent nancial years. Prepayments and accrued income recognised under liabilities include prepaid interest and guarantee provisions relating to subsequent nancial years. Liabilities to credit institutions and central banks Items are measured at amortised cost. Deposits and other payables Items are measured at amortised cost. Subordinated debt Items are measured at amortised cost. Hybrid core capital under equity Hybrid core capital that meets the rules in CRR to be classied as additional tier I capital with indenite matu- rity and where the payment of interest is voluntary is classied as equity. Interest on hybrid core capital is deducted from equity. The tax effect of the interest is recognised under current tax in the statement of prot or loss. 34 Other liabilities Other liabilities include interest payable and provisions and negative market value of derivative nancial instru- ments and debt to Danmarks Nationalbank. Provisions Assurances, guarantees and other liabilities which are uncertain in terms of size or time of settlement are re- cognised as provisions when it is probable that the liability will result in nancial resources owing out from the bank and the liability can be measured reliably. The liability is calculated at the present value of the costs required to settle the liability. Treasury shares Acquisition and disposal and dividends from treasury shares are recognised directly under equity. Derivative nancial instruments All derivative nancial instruments, including forward contracts, futures and options in bonds, shares or cur- rency, as well as interest and currency swaps, are measured at fair value on the balance date. Exchange rate adjustments are included in the statement of prot or loss and other comprehensive income. Positive market values are recognised under other assets, while negative market values are recognised under other liabilities. Contingent liabilities The bank’s outstanding guarantees are disclosed in the notes under the item “Contingent liabilities”. The liabi- lity relating to outstanding guarantees which are assessed to lead to a loss for the bank is provisioned under the item “provisions for loss on guarantees”. The liability is expensed in the statement of prot or loss under “Impairment of loans and receivables etc”. Non-nancial guarantees, cf. IFRS 9, are not included in stages 1 and 2. Financial highlights Key gures and ratios are presented in accordance with the requirements in the Danish Executive Order on the Presentation of Financial Statements. 35 Note DKK 1,000 2022 2021 2 INTEREST INCOME Centralbanks 7.723 0 Loans and other receivables 226.970 191.640 Loans (interest conc. the written-down part of loans) -7.154 -7.551 Bonds 6.642 4.252 Other derivative nancial instruments, total of which 13.471 7.216 Interest-rate contracts -373 -70 Currency contracts 13.844 7.286 Other interest income 270 27 Total 247.922 195.584 3 INTEREST EXPENSES Deposits 3.081 330 Subordinated debt 6.615 6.632 Other interest expenses 988 1.062 Total 10.684 8.024 No income or expenses are entered from genuine purchase or repurchase contracts in notes 2 and 3. 4 FEES AND COMMISSION INCOME Securities trading and custody accounts 28.344 23.762 Payment services 16.322 12.546 Loan fees 93.162 80.479 Guarantee commission 29.806 26.270 Other fees and commission 42.167 34.987 Total 209.801 178.044 5 VALUE ADJUSTMENTS Bonds -38.467 -3.165 Total shares -1.518 17.513 - Shares in sectorcompanies etc 9.236 10.516 - Other shares -10.754 6.997 Foreign currency 8.888 6.454 Other financial instruments 267 -621 Assets linked to pooled schemes 104.331 -85.013 Deposits in pooled shemes -104.331 85.013 Total -30.830 20.181 As the bank essentially operates deposits and lending activity in its local areas, the division of market areas is not specified for notes 2-5. Notes 36 Note DKK 1,000 2022 2021 6 STAFF COSTS AND ADMINISTRATIVE EXPENSES Salaries and remuneration of audit committee, managers etc. Management board 1.425 1.336 Audit Committee 92 90 Committee of representatives 181 181 Total salaries and remuneration of board etc 1.698 1.607 Staff costs Wages and salaries 108.224 97.412 Pensions 12.154 10.678 Social security costs 1.706 1.557 Payroll tax 17.749 15.753 Total staff costs 139.833 125.400 Salary to management and special risk takers (11 persons in 2021, 11 persons in 2022) 10.925 10.714 Pensions to management and special risk takers (11 persons in 2021, 11 persons in 2022) 879 844 The bank has no employees with variable salary shares. Other administrative expenses IT expenses 51.324 44.862 Rent, electricity, heating etc 3.759 2.721 Postage, telephony etc 848 922 Other administrative expenses 36.576 32.005 Total other administrative expenses 92.507 80.510 Total staff costs and administrative expenses 234.038 207.517 37 Note DKK 1,000 2022 2021 Pension and severance terms for the executive board Upon retirement, Skjern Bank pays a severance payment equivalent to 6 months’ salary. The management may retire at 62 years. Skjern Bank’s notice period to the management is 36 months, but may be 48 months in special circumstances. The management’s notice period to the bank is 6 months. The Board’s pension terms No pension is paid to the Board Special risk takers’ pension terms The special risk takers receive 11,25 % of their respective salary grades in annual pension, which is contributionbased through a pension com- pany in which the payments are expensed continually. Average number of employees during the financial year converted into full-time employees Employed in credit institution business 181 166 Total 181 166 7 INCENTIVE AND BONUS SCHEMES The bank does not have any incentive or bonus schemes. 8 AUDIT FEE Total remuneration to the auditors appointed by the Annual General Meeting who perform the statutory audit 835 759 Honorariums for statutory audits of nancial statements 550 458 Honorariums for assurance services 129 157 Honorariums for tax advice 0 72 Honorariums for other services 156 72 Honorariums for other declarations of certainty concerning statutory declarations to public authorities and Nets. Honorariums for tax advice concerning advice on tax matters. Other services relating to review in connection with the recognition of current profits in the capital base and accounting advice. 9 WRITE-DOWNS ON LOANS AND RECEIVABLES Write-downs and provisions during the year 140.742 132.591 Reversal of write-downs made in previous years -130.784 -144.766 Finally lost, not previously written down 764 5.847 Interest on the written-down portion of loans -7.154 -7.551 Recoveries of previously written off debt -865 -1.348 Total 2.703 -15.227 38 Note DKK 1,000 2022 2021 10 TAX Calculated tax of income of the year 40.782 42.038 Adjustment of deferred tax 803 865 Adjustment of tax calculated in previous years -691 -1.673 Total 40.894 41.230 Tax paid during the year 42.610 43.150 EFFECTIVE TAX RATE (%) (Pct.) (Pct.) Tax rate currently paid by the bank 22,00 22,00 Non deductable costs and not taxable income -0,40 -1,17 Adjustment of tax calculated for previous years -0,36 -0,82 Other adjustments 0,16 0,15 Effective tax rate 21,40 20,16 11 RECEIVABLES AT CREDIT INSTITUTIONS AND CENTRAL BANKS Receivables at credit institutions 54.939 74.300 Total 54.939 74.300 Remaining period Demand 54.939 74.300 Total 54.939 74.300 No assets related to genuine purchase and resale transactions included. 39 Note DKK 1,000 2022 2021 12 LOANS AND OTHER DEBTORS AT AMORTISED COST PRICE Remaining period Claims at call 2.061.586 1.599.516 Up to 3 months 145.101 133.723 Over 3 months and up to 1 year 618.456 609.199 Over 1 year and up to 5 years 1.001.882 1.093.075 Over 5 years 1.637.375 1.284.224 Total loans and other debtors at amortised cost price 5.464.400 4.719.737 DEVELOPMENT IN WRITE-DOWNS AND PROVISIONS RELATING TO FINANCIAL ASSETS AT AMORTIZED COST AND OTHER CREDIT RISKS STAGE 1 IMPAIRMENT CHARGES Stage 1 impairment charges at the end of the previous financial year 12.597 21.271 Stage 1 impairment charges / value adjustment during the period 12.437 7.314 Stage 1 impairment reversed during the period -7.005 -15.987 Cummulative stage 1 impairment total 18.030 12.597 STAGE 2 IMPAIRMENT CHARGES Stage 2 impairment charges at the end of the previous financial year 100.028 109.773 Stage 2 impairment charges / value adjustment during the period 87.041 44.694 Stage 2 impairment reversed during the period -37.866 -54.439 Cummulative stage 2 impairment total 149.203 100.028 STAGE 3 IMPAIRMENT CHARGES Stage 3 impairment charges at the end of the previous financial year 168.566 217.886 Stage 3 and impairment charges / value adjustment during the period 39.287 72.139 Reversal of stage 3 impairment charges during the period -81.161 -70.850 Recognised as a loss, covered by stage 3 impairment charges -3.169 -50.610 Cummulative stage 3 impairment total 123.522 168.566 Total cumulative impairment charges IFRS9 290.755 281.191 40 Note DKK 1,000 2022 2021 PROVISIONS Provisions beginning of the year 14.423 10.472 Provisions during the year 2.045 8.402 Reversal af provisions -4.752 -3.490 Provisions for losses 0 -961 Guarantees end of year 11.716 14.423 Total cumulative impairment charges IFRS9 and guarantees 302.471 295.614 Stage 1 Stage 2 Stage 3 Beginning Impairment 12.598 100.028 168.565 - in % of total impairment 4% 36% 60% Maximum credit risk 10.638.886 1.213.375 365.591 - in % of maximum credit risk 87% 10% 3% Rating, weighted average 2,6 6,8 10,0 End Impairment 18.030 149.202 123.523 - in % of total impairment 6% 51% 42% Maximum credit risk 11.356.470 1.266.093 309.258 - in % of maximum credit risk 88% 10% 2% Rating, weighted average 2,5 6,9 10,0 In light of the war in Ukraine and the resulting effects thereof, such as increasing inflation, increasing interest rates and energy prices etc., as of 31 December 2022 the Bank has reserved an additional amount of DKK 70 million as a management estimate, which is placed in Stage 2. This is an increase of DKK 15.0 million relative to the amount as of 31 December 2021. Compared to the management estimate for the agricultural sector of DKK 5.0 million as of 31 December 2021, the Bank has fully reversed during the year and placed the impairment for agriculture in Stage 3. The Bank made an estimate of increased impairment rates for the private, business and agriculture segments in the event of an economic down- turn. Compared to 2021, where the total management estimates for impairment relating to the COVID-19 pandemic was DKK 55.0 million, in 2022 the Bank has updated the estimate of impairment percentages in the event of cyclical downturns to incorporate new uncertainty factors, which has led to an increase in management estimates. At the beginning of the year, the Bank had DKK 55.0 million, of which DKK 5 million has been reversed and an additional reserve of DKK 20 mil- lion in management estimates was added, which in total results in DKK 70.0 million in management estimates as of 31 December 2022, which are placed in Stage 2. Refer to note 31 for a description of ratings. Loans etc. with suspended calculation of interest 48.534 45.653 41 Note DKK 1,000 2022 2021 13 BONDS AT FAIR VALUE Treasuries 841.192 921.654 Mortgage credit bonds 8.918 8.483 Other bonds 11.623 11.763 Total bonds at fair value 861.733 941.900 The bank has no held-to-maturity assets 14 SHARES ETC Quoted on Nasdaq OMX Copenhagen A/S 17.266 21.886 Quoted on other stock exchanges 12.807 17.967 Sectorshares recorded at fair value 201.683 168.364 Total shares etc 231.756 208.217 15 SHARES ASSOCIATED WITH POOL SCHEMES Investment units 1.612.015 1.305.385 Cash deposits etc. 2.068 1.278 I alt 1.614.083 1.306.663 16 LAND AND BUILDINGS Investment properties Fair value - end of previous nancial year 3.019 3.019 Fair value end-of-year 3.019 3.019 Owner occupied properties 45.895 43.166 Reassessed value - end of previous nancial year 4.494 6.156 Acquisitions during the year incl. improvements -1.496 -1.427 Depreciations -1.025 -2.000 Reassessed value end-of-year 47.868 45.895 External experts have not been involved by measurement of investment- and owner-occupied properties. Return method is used for measurement of investment and owner-occupied properties where used required rate of return between 5.6-7 %. Owner-occupied properties (leasing) Beginning of the year 18.685 20.573 Acquisitions during the year incl. improvements 0 412 Depreciations -2.368 -2.300 End of the year 16.317 18.685 42 Note DKK 1,000 2022 2021 17 OTHER TANGIBLE ASSETS Total cost price beginning-of-year 23.027 26.220 Acquisitions during the year incl. Improvements 1.479 3.080 Reduction during the year 0 -6.273 Total cost price beginning-of-year 24.506 23.027 Total write-ups/downs and depreciations beginning-of-year 17.401 21.968 Depreciations during the year 1.730 1.610 Reversal of depreciations 0 -6.177 Total write-ups/downs and depreciations end-of-year 19.131 17.401 Book value end-of-year 5.375 5.626 18 DEBT TO CREDIT INSTITUTIONS AND CENTRAL BANKS Debt to credit institutions 2.974 0 Total debt to credit institutions and central banks 2.974 0 Term to maturity Demand 2.974 0 Total debt to credit institutions and central banks 2.974 0 No liabilities related to genuine sale and repurchase transactions included 19 DEPOSITS AND OTHER DEBTS Demand 7.147.965 6.458.049 At notice 18.063 19.733 Time deposits 71.050 0 Special types of deposits 603.396 549.888 Total deposits and other debts 7.840.474 7.027.670 Term to maturity Demand 7.171.507 6.484.203 Desposits redeemable at notice: Up to 3 months 80.515 86.320 Over 3 months and up to 1 year 80.189 6.167 Over 1 year and up to 5 years 59.387 54.675 Over 5 years 448.876 396.305 Total deposits and other debts 7.840.474 7.027.670 No liabilities related to genuine sale and repurchase transactions included. 20 DEFERRED TAXATION (Tax amount) Tangible assets 7.106 5.103 Loans and other receivables -3.721 -3.308 Other 364 503 Total deferred taxation 3.749 2.298 43 Note DKK 1,000 2022 2021 21 SUBORDINATED DEBT Supplementary capital DKK 100 mio 98.835 98.334 Rate 6,4573% 6,4573% Due date 20.05.2030 20.05.2030 The loan may be paid early with the Danish Financial Supervisory Authority’s approval starting on 20 May 2025 and then on each interest payment date. The interest rate is determined as the 6-year swap rate plus a premium of 6.3 percentage points, valid for 6 years from date of issue. Subordinated debt total 98.835 98.334 Subordinated debt that may be included in the capital base 98.835 98.334 Interest on subordinated liabilities recognised in income 6.615 6.632 22 SHARE CAPITAL 192.800 192.800 Number of shares is 9,640,000 at DKK 20 each The bank has pr. 31. December 2022 13,541 registered shareholders. 93,21 % of the share capital are registered on name 23 HOLDERS OF HYBRID CAPITAL Hybrid core capital 61.015 60.881 Rate 8,6632% 8,6632% Due date No date No date The hybrid core capital has an innite maturity and payment of interest is voluntary, which is why it is treated as equity for accounting purposes. The loan can be repaid early on 14 September 2026 with the approval of the Danish Financial Supervisory Authority. As of 14 September 2026, the interest rate will be changed to a half-year variable coupon rate corresponding to the CIBOR rate published by Nasdaq OMX for a term of 6 months with the addition of 8.80 % annually. 44 Note DKK 1,000 2022 2021 24 OWN CAPITAL SHARES Purchase and sales of own shares Holdings beginning of the year Number of own shares 4.725 6.047 Nominal value of holding of own shares (DKK 1,000) 95 339 Own shares proportion of share capital 0,05 0,18 Addition Number of own shares 47.000 55.500 Nominal value of holding of own shares (DKK 1,000) 940 1. 110 Own shares proportion of share capital 0,49 0,58 Purchase price (DKK 1,000) 5.216 4.934 Disposal Number of own shares 47.012 56.822 Nominal value of holding of own shares (DKK 1,000) 940 1.136 Own shares proportion of share capital 0,49 59,00 Sale price (DKK 1,000) 5.188 4.948 Holdings end of the year Number of own shares 4.713 4.725 Nominal value of holding of own shares (DKK 1,000) 94 95 Own shares proportion of share capital 0,05 0,05 At the Annual General Meeting, the bank requests that shareholders be allowed to acquire up to a total nominal value of 3% of the bank’s share capital, cf. the provisions in the Danish Budget Act (nansloven), Section 13, paragraph 3. The bank has asked the Danish Financial Supervisory Authority for a framework for holding of treasury shares of 0.25% of the bank’s total share capital. The bank wants this authorisation in order to always be able to meet customers’ and investors’ demand for purchasing and selling Skjern Bank shares and the net acquisitions in 2022 are a consequence of this. 25 CONTINGENT LIABILITIES Guarantees Finance guarantees 397.280 602.385 Guarantees against losses on mortgage credit loans 811.308 955.781 Registration and conversion guarantees 684.593 998.185 Other contingent liabilities 131.026 134.329 Total 2.024.207 2.690.680 Other binding engagements Irrevocable credit-undertakings 370.096 799.908 Total 370.096 799.908 45 Note DKK 1,000 2022 2021 Assets pledged as collateral The bank has pledged cash for a total of DKK 10 million. Contract Legal obligations If the control of the bank changes, there will be a number of agreements that will end or the terms will be changed. Withdrawal from the data center Bankdata, where, depending on the given change, a severance allowance corresponding to 5 times the last year’s bill for Bankdata may be applied. All other agreements are considered to be immaterial. Like other Danish nancial institutions, Skjern Bank is liable for loss sustained by the Deposit Guarantee Fund. The most recent calculation of Skjern Bank’s share of the industry’s assurances to the Deposit Guarantee Fund is DKK 24,1 million, which is 0,7527 %. In 2022, Skjern Bank paid 0,5 mio DKK to Afviklingsformuen (Settlement Assets). The Bank is a tenant in one leases, which can be terminated with 3 months’ notice, the yearly lease is 299 TDKK. The Bank is a tenant in one leases, which can be terminated with 12 months’ notice, the yearly lease is 163 TDKK. 26 LAWSUITS ETC. As part of ordinary operations, the bank is involved in disputes and lawsuits. The bank´s risk in these cases are evaluated by the bank´s soliciters and management on an ongoing basis, and provisions are made on the basis of an evaluation of the risk of loss. 27 RELATED PARTIES Loans and warranties provided to members of the bank’s management board, board of directors and committee of representatives are on marked-based terms. Transactions with related parties There have during the year not been transactions with related parties, apart from wages and salaries, etc. and loans and similar. Wages and considerations to the bank’s management board, board of directors, audit commitee and committee of representatves can be found in note no. 6. There are no related with control of the bank. Amount of loans, mortgages, guarantees, with accompanying security for members of the management and related parties mentioned below: Management: 2022 2021 Loans 400 7.162 Bid Bond 400 0 Rate of interest 5,30 2,95 46 Note DKK 1,000 2022 2021 Board of directors: Loans 5.086 6.798 Bid Bond 2.683 2.903 Rate of interest 0,95-16,10% 0,7864-5,25% Holding of shares in Skjern Bank: The board of managers - Per Munck 32.862 31.687 The board of directors Hans Ladekjær Jeppesen 11.115 11.115 Bjørn Jepsen 5.286 5.286 Niels Erik Kjærgaard 300 300 Finn Erik Kristiansen 1.941 1.941 Ole Strandbygaard 2.085 2.085 Lars Skov Hansen 704 704 Carsten Jensen 2.415 2.303 Michael Tang Nielsen 140 140 28 CAPITAL REQUIREMENT Equity 1.357.788 1.246.660 Proposed dividend -28.920 -28.920 Holders of hybrid capital -61.015 -60.881 Deduction for the sum of equity investments etc. above 10 % -74.426 -47.622 NPE -4.159 -1.020 CVA deduction -1.097 -977 Deduction of trading framework for own sharers -575 -2.494 Core tier 1 capital 1.187.596 1.104.746 Holders of hybrid capital 61.015 59.378 Tier 1 capital 1.248.611 1.164.124 Deduction for the sum of equity investments etc. above 10 % 98.835 98.334 Subordinated loan capital -4.604 0 Capital base 1.342.842 1.262.458 Weighted items Credit risk 4.788.415 4.672.450 Market risk 255.266 288.622 Operational risk 759.073 722.581 Weigthed items total 5.802.754 5.683.653 Core tier 1 capital ratio (excl. hybrid core capital) 20,5 19,4 Tier 1 capital ratio 21,5 20,5 Solvency ratio - Tier 2 23,1 22,2 47 Note 29 CURRENT VALUE OF FINANCIAL INSTRUMENTS Financial instruments are measured in the statement of nancial position at either fair value or at cost. Fair value is the price which would be received from the sale of an asset or which will be paid to transfer a liability in a normal transaction between market participants on the measurement date. For nancial assets and liabilities valued on active markets, the fair value is calculated based on ob- servable market prices on the market date. For nancial instruments valued on active markets, the fair value is calculated based on generally ac- cepted valuation methods. Shares, etc. and derivative nancial instruments are measured in the accounts at fair value so that recognised values correspond to fair value. Lo- ans are recorded in the bank’s statement of nancial position at amortised cost. The difference to fair value is calculated as fees and commissions received, expenses incurred through lending transactions, interest receivable which is rst due for payment after the end of the nancial year and for xed-rate loans, also the variable interest rate, which is calculated by comparing the current market rate with the loans’ nominal interest rate. The fair value of receivables from credit institutions and central banks is determined by the same method as for loans, since the bank does not currently recognise impairments on receivables from credit institutions and central banks. Bonds issued and subordinated liabilities are measured at amortised cost. The difference between the carrying amount and fair value is calculated based on rates in the market of its own listed emissions. For oating rate nancial liabilities in the form of lending and payables to credit institutions measured at amortised cost, the difference fair value is estimated to be interest payable which is rst due for payment after the end of the nancial year. For xed-rate nancial liabilities in the form of lending and payables to credit institutions measured at amortised cost, the difference to fair value is estimated to be interest payable which is rst due for payment after the end of the nancial year and the variable interest rate. DKK 1,000 2022 2021 Book value Fair value Book value Fair value Financial assets Cash in hand+claims at call on central banks 2.830.343 2.830.343 2.566.381 2.566.381 Claims on credit institutes and central banks 1) 54.939 54.939 74.300 74.300 Loans and other debtors at amort. costprice 1) 5.465.049 5.475.070 4.720.266 4.725.991 Total nancial assets 9.447.439 9.461.274 8.514.407 8.514.873 Financial liabilities Debt to credit institutions and central banks 1) 2.974 6.258 0 0 Deposits and other debts 1) 7.840.730 7.840.713 7.027.670 7.027.894 Subordinated debt 1) 2) 100.445 100.445 99.944 99.944 Total nancial liabilities 7.947.038 7.950.305 7.130.856 7.131.080 1) The entry includes calculated interest on the balance sheet date, which is included in ”Other assets” and ”Other liabilities”. 2) Applied the latest quoted trading price at the balance sheet date 48 Note DKK 1,000 2022 2021 30 RISKS AND RISK MANAGEMENT Skjern Bank is exposed to various types of risks which are controlled at various levels within the organisation. Skjern Bank’s nancial risks consist of: Credit risk: Risk of losses due to debtors’ or counterparties’ default on payment obligations. Market risk: Risk of losses resulting from the fair value of nancial instruments and derivative nancial instruments uctuating due to changes in market prices. Skjern Bank classies three types of risk for the market risk area: Interest rate risk, equity risk and currency risk. Liquidity risk: Risk of losses due to nancing costs rising disproportionately, the risk that Skjern Bank is prevented from maintaining the adopted business model due to a lack of nancing/funding or ultimately, the risk that Skjern Bank cannot honour incoming payment obligations when due as a result of a lack of nancing/funding. Evaluation of securities: The bank is exposed to the sectors agriculture and real-estate. The Bank has in the assessment of collateral in agricultural exposures used acres of arable land prices in the range of 125 TDKK - 160 TDKK. In the real-estate sector is used return requirement in the range 4.5% - 10%. Valuations in both agricultural exposures as real-estate exposures are made in accordance with the FSA’s current guidance. The Bank notes that estimating the value of collateral is generally associated with uncertainty. The following notes to the annual report contain some additional information and a more detailed description of the bank’s credit- and market risks. 49 Note Figures in pct. 2022 2021 31 CREDIT RISKS Loans and guarantees distributed on sectors Public authorities 0,0 0,0 Business: Agriculture, hunting, forestry & shing 8,5 9,9 - Plant production 1,3 1,3 - Cattle farming 4,9 5,7 - Pig farming 1,1 1,0 - Mink production 0,4 0,7 - Other agriculture 0,8 1,2 Industry and mining 4,4 3,8 Energy 1,2 1,3 Building and constructions 6,6 6,8 Wholesale 7, 6 6,7 Transport, hotels and restaurants 1,4 1,8 Information and communication 0,1 0,2 Financial and insurance business 6,2 4,9 Real-esate 9,5 9,5 Other business 2,7 3,8 Total business 48,2 48,7 Private persons 51,8 51,3 Total 100,0 100,0 The industry breakdown is based on Danmarks Statistik’s industry codes etc. Furthermore, an individual assessment is made of the individual exposures, which has resulted in some adjustment. Earmarked credit limit divided by exposure, guarantees and credit commitments 2022 2022 2022 (DKK 1,000) (DKK 1,000) (DKK 1,000) Exposure Guarantees Credit-under- takings Public authorities 0 0 0 Business - agriculture 816.049 153.689 13.700 Business - other 3.719.060 474.209 330.772 Private persons 3.803.422 1.396.309 25.624 Total 8.338.531 2.024.207 370.096 Which recognized in the balance after deduction of depreciation 5.464.400 50 Note 2021 2021 2021 (DKK 1,000) (DKK 1,000) (DKK 1,000) Exposure Guarantees Credit-under- takings Public authorities 0 0 0 Business - agriculture 871.776 174.452 168.440 Business - other 3.677.608 645.311 558.850 Private persons 3.005.618 1.870.917 72.618 Total 7.555.002 2.690.680 799.908 Which recognized in the balance after deduction of depreciation 4.719.737 Description of collateral 2022 2022 2022 Security distributed by type (DKK 1,000) Business, agriculture Business, other Private Securities 14.541 306.322 78.705 Real property 571.653 1.120.234 1.985.922 Chattels, vehicles and rolling stock 33.893 754.257 588.075 Guarantees 7.808 69.186 701 Other forms of security 181.636 557.557 1.055.786 Total 809.531 2.807.556 3.709.189 2021 2021 2021 Security distributed by type (DKK 1,000) Business, agriculture Business, other Private Securities 17.883 206.849 74.936 Real property 526.755 1.186.006 1.255.913 Chattels, vehicles and rolling stock 60.095 669.842 492.518 Guarantees 3.637 69.719 1.388 Other forms of security 169.830 665.280 1.314.644 Total 778.200 2.797.696 3.139.399 As a general rule, the bank receives security in the funded asset. In addition, security is taken in the form of guarantees and mortgagesin parts and shares. The above list reects the loan value attributable to the individual exposures. The loan value reects the fair value calculated in accordance with the bank’s business process with a security margin of 10 - 60%,though less by government bonds. The bank strives to reduce the calculated balance (maximum credit exposure excluding credit commitments less value of collateral andtotal wri- te-downs) across the entire customer portfolio. In 2022, this resulted in a blank of DKK 2.745,7 million. This is a fall of DKK 489 million compared to 2021. 51 Note DKK 1,000 31.12.2022 Financial assets, loan commitments and nancial guarantees. Instruments without signicant increase in credit risk (stage 1) Rating classication 1 2 3 4 5 6 7 8 9 10 Total Industry group Public authorities 2.250 0 0 0 0 0 0 0 0 0 2.250 Agriculture 112.418 79.608 166.926 2.605 287.985 11.614 4.899 75.017 24.644 0 765.715 Property 236.316 476.859 32.108 167.007 72.580 16.170 24.556 20.420 4.023 0 1.050.039 Other 764.914 925.090 185.000 255.763 195.759 26.530 59.824 204.655 28.211 0 2.645.746 Private 1.345.642 988.599 389.879 780.612 623.101 77.840 25.705 46.652 62.598 0 4.340.629 Deposits at Danmarks Nation- albank 2.760.630 0 0 0 0 0 0 0 0 0 2.760.630 Accounts with other banks 1.527 40.000 114.130 0 0 0 0 0 0 0 155.656 Instruments without signicant increase in credit risk (stage 2) 5.223.698 2.510.156 888.042 1.205.987 1.179.425 132.155 114.984 346.744 119.475 0 11.720.666 Instruments for which impairment has been recognised corresponding to expected credit losses in their lifetime (stages 2 and 3) Rating classication 1 2 3 4 5 6 7 8 9 10 Total Industry group Agriculture 0 0 0 18.171 48.378 28.991 15.627 7.109 20.846 0 139.122 Property 0 0 0 39.354 25.034 19.423 22.430 2.600 14.791 0 123.632 Other 0 0 1 126.920 56.531 67.455 19.464 27.166 75.671 0 373.208 Private 132 0 2.043 92.327 101.313 32.981 10.353 20.090 65.711 0 324.950 Accounts with other banks 0 0 0 2.250 3.000 2 0 0 0 0 5.252 Instruments with signicant increase in credit risk (stage 2) 132 0 2.045 279.022 234.257 148.851 67.875 56.965 177.018 0 966.165 Industry group Agriculture 0 0 0 0 0 0 0 0 0 138.725 138.725 Property 0 0 0 0 0 0 0 0 0 56.537 56.537 Estate agents and other property administration 0 0 0 0 0 0 0 0 0 8.383 8.383 Other 0 0 0 0 0 0 0 0 0 277.637 277.637 Private 0 0 0 0 0 0 0 0 0 133.805 133.805 Credit-impaired instruments (stages 3 and 2 weak) 0 0 0 0 0 0 0 0 0 615.087 615.087 Instruments for which impair- ment has been recognised cor- responding to expected credit losses in their lifetime) 132 0 2.045 279.022 234.257 148.851 67.875 56.965 177.018 615.087 1.581.251 Total nancial assets, loan commitments and nancial guarantees. 5.223.830 2.510.156 890.087 1.485.008 1.413.682 281.006 182.859 403.709 296.493 615.087 13.301.918 Work guarantees etc. not covered by IFRS9 Rating classication 1 2 3 4 5 6 7 8 9 10 Total Total 188.575 194.615 69.196 129.900 113.810 17.799 1.855 2.400 16.713 27.878 762.740 Total 5.412.405 2.704.770 959.283 1.614.908 1.527.492 298.805 184.715 406.109 313.206 642.965 14.064.657 52 Note DKK 1,000 31.12.2021 Financial assets, loan commitments and nancial guarantees. Instruments without signicant increase in credit risk (stage 1) Rating classication 1 2 3 4 5 6 7 8 9 10 Total Industry group Agriculture 182.416 83.934 128.777 22.353 434.094 82.678 37.586 9.686 31.338 0 1.012.863 Property 227.286 510.272 67.392 178.106 248.783 32.306 28.052 9.683 3.586 0 1.305.466 Other 643.580 790.363 202.655 297.476 420.935 30.800 56.765 69.735 32.446 0 2.544.755 Private 852.821 825.200 411.842 975.818 564.437 106.023 57.558 66.462 47.012 0 3.907.172 Deposits at Danmarks Nation- albank 2.500.976 0 0 0 0 0 0 0 0 0 2.500.976 Accounts with other banks 3.247 73.000 86.316 0 0 0 0 0 0 0 162.562 Instruments without signicant increase in credit risk (stage 2) 4.410.326 2.282.768 896.982 1.473.754 1.668.248 251.807 179.961 155.567 114.381 0 11.433.794 Instruments for which impairment has been recognised corresponding to expected credit losses in their lifetime (stages 2 and 3) Rating classication 1 2 3 4 5 6 7 8 9 10 Total Industry group Agriculture 0 0 1 13.012 39.752 17.645 16.233 12.928 33.314 0 132.885 Property 10 0 0 26.057 25.645 22.317 14.752 3.092 7.842 0 99.715 Other 0 0 2 125.134 78.905 60.011 50.196 20.973 111.024 0 446.245 Private 50 0 26 119.817 90.459 15.996 10.793 8.815 39.966 0 285.923 Accounts with other banks 0 0 0 2.250 0 2 0 0 0 0 2.252 Instruments with signicant increase in credit risk (stage 2) 60 0 29 286.270 234.761 115.971 91.974 45.808 192.146 0 967.019 Industry group Agriculture 0 0 0 0 0 0 0 0 0 149.231 149.231 Property 0 0 0 0 0 0 0 0 0 82.945 82.945 Other 0 0 0 0 0 0 0 0 0 259.090 259.090 Private 0 0 0 0 0 0 0 0 0 120.681 120.681 Credit-impaired instruments (stages 3 and 2 weak) 0 0 0 0 0 0 0 0 0 611.947 611.947 Instruments for which impair- ment has been recognised cor- responding to expected credit losses in their lifetime) 60 0 29 286.270 234.761 115.971 91.974 45.808 192.146 611.947 1.578.967 Total nancial assets, loan commitments and nancial guarantees. 4.410.386 2.282.768 897.011 1.760.024 1.903.009 367.779 271.934 201.375 306.528 611.947 13.012.761 Work guarantees etc. not covered by IFRS9 Rating classication 1 2 3 4 5 6 7 8 9 10 Total Total 166.977 222.782 103.314 341.192 165.081 25.004 17.174 10.682 10.574 38.328 1.101.108 Total 4.577.363 2.505.550 1.000.325 2.101.215 2.068.090 392.783 289.108 212.057 317.102 650.275 14.113.869 53 Note Credit-quality on loans which are neither in arrears not written down * ) Calculated based on the guidelines for accounting reports for credit institutions and investment companies, etc. regarding thresholds for repor- ting credit quality classes. Where high credit quality is the classes 3 and 2a, medium credit quality is class 2b and low credit quality is class 2c. Reasons for individual write-downs and provisions incl stage 2 weak 2022 2022 2022 Exposure before write-down Write-downs Securities Signicant nancial difculties 401.907 138.047 285.956 Breach of contract 5.026 4.222 398 Reductions in terms 7.164 3.703 2.363 Probability of bankruptcy 57.864 27.840 37.916 Total 471.961 173.812 326.633 2021 2021 2021 Exposure before write-down Write-downs Securities Signicant nancial difculties 406.670 155.208 250.712 Breach of contract 6.621 4.999 509 Reductions in terms 9.186 5.713 3.204 Probability of bankruptcy 63.938 29.828 45.421 Total 486.415 195.748 299.846 3.894 3.075 254 0 3.308 3.536 271 0 0 500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 4.500 High Medium Low Not classified DKK 1,000 Credit quality Fordeling af udlån og garantier uden nedskrivning eller restance 2022 2021 54 Note DKK 1,000 2022 2021 The calculation of securities does not include the value of guarantees and transports. Collateral is calculated at the customer level. The collateral value of securities in the above table reects the fair value calculated in accordance with the Bank’s business process with a securi- ty margin of 10 - 60 %. In connection with the calculation of expected loss, other haircuts are used for security values that reect the estimated fair value at the time the security is expected to be sold, depending on the type of security. There will thus be differences between the collateral value of securities and the valuation of securities when calculating expected loss. Management estimates are not included in the calculation of impairment losses. Arrears amount for loans, which have not been written down 0-90 days 13.270 12.658 >90 days 125 154 Total 13.395 12.812 Loans and arrears amount for loans, which have not been written down 0-90 days 111.060 95.228 >90 days 2.600 3.202 Total 113.660 98.430 Practice for managing credit risk The bank’s credit risk is managed by debtors and other counterparties being rated based on various models that are mainly based on the debtor’s/ counterparty’s nancial capacity. In addition to the models, a number of checks are made to ensure a correct rating. The ratings, both in the models and the checks, are largely ba- sed on the Danish Financial Supervisory Authority’s guidelines on risk classication. However, the bank uses a 10-step rating scale that can be compared with the Danish Financial Supervisory Authority’s scale in the following way: The bank’s rating class 1 2 3 4 5 6 7 8 9 10 The Danish Financial Supervisory Authority’s risk class 3/2A 3/2A 3/2A 2B 2B 2B 2B 2B 2C 1 Rating 1 is assets with very good credit quality, while rating 10 is impaired assets. The credit risk is assessed to have increased signicantly if the rating has deteriorated since initial recognition corresponding to one step on the Danish Financial Supervisory Authority’s risk scale. However, this does not apply to assets with low credit risk, which are dened as the Danish Financial Supervisory Authority’s risk classes 3 and 2A. Whether or not it is an asset with a low credit risk, the credit risk is considered to have increased signicantly if the asset is overdrawn for more than 30 days, though arrears on loans are essentially considered an impairment. Examples of assets with and without signicantly impaired credit risk: Example 1 Example 2 Example 3 Starting risk class 3 2A 2A Current risk class 2A 2A 2B Overdrawn for 30 days No Ye s No Signicantly impaired credit risk No Ye s Ye s 55 Note The bank’s exposures are grouped by industry in the following groups based on DS industries: Industry Government Agencies Agriculture etc. Industry and raw materials Energy Building and construction Transport Information and communication Financing Property etc. PI and mortgage Other industries Private At least once a year, all assets with a rating of 9 (the Danish Financial Supervisory Authority’s risk class 2C) are reviewed to assess whether the asset is impaired. In addition to this, a sample is taken from the other rating classes once a year for the same purpose. All loan options that are handled in the Credit Department by the bank’s Executive Board or Board of Directors are also assessed for any impairment. A nancial asset is considered impaired if one or more events have occurred that have a negative impact on the expected cash ows from the asset. Common to the assets is that the following factors are included in the assessment: • Arrears, overdrafts and/or the bank has discontinued repayment for the asset • Other creditors have granted a deferment or other easier terms • The customer is only in this nancial context due to a variable-interest loan or repayment freedom, or because the loan has otherwise been offered on easier terms • The customer is in RKI (Ribers Credit Information), has signicant tax debt or distraint has been levied • The customer is associated with other customers who have impaired credit When assessing business customers, the following factors are included: • Negative or fragile equity ratio • Negative or decreasing consolidation • Tight liquidity • Uncertain/negative future • The customer applies for reconstruction or an agreement to avert bankruptcy • The customer is bankrupt When assessing private customers, the following factors are included: • Negative assets and/or small available amount • Uncertain future e.g. due to unemployment, divorce or illness • The customer takes out loans to cover expenditures • The customer applies for debt relief or an agreement to avert bankruptcy 56 Note Information base, assumptions and assessment methods in assessing expected credit loss Assets with or without signicant increase in credit risk The bank’s credit losses are measured based on the following formula: ECL = PD x LGD x EAD Where: • PD is the probability that the asset will impaired • LGD is the expected loss, provided the asset is impaired • EAD is the expected exposure in terms of loss The probability that the asset will be impaired (PD) is composed of several factors: • PD at 12 months of credit loss = PD - 12 months x macro factors • PD in the asset’s lifetime = PD - 12 months x macro factors x extension factors Calculation of 12 months of credit loss or credit loss in the asset’s lifetime is determined as described in ”Practice for managing credit risk”. Three factors are used for this: Starting risk class, current risk class and overdraft for 30 days. Information base, assumptions and assessment methods for each factor are described in the overview below. Factor Information base Assumptions Assessment methods PD - 12 months The bank's statistics on cus-tomers for 01.01.2017 - 30.06.2022 distrib- uted by rating class and private and business by DS industry codes The proportion of custom-ers with impaired credit during the period and the selected groups are repre-sentative of the upcoming 12 months. However, see "Macro factors". PD is the proportionate num-ber of customers in the men-tioned groups who have impaired credit during the period. Extension factors Calculated extension factors from BankData The factors are representa-tive of the bank's custom-ers. The bank has provided data for the calcula- tions. Calculated based on histori-cal PD gures from 6 small nancial institu- tions in the years 2010-2016. The asset's lifetime Settlement agreements for assets, as well as calculated average matur- ities from BankData Loans are settled as agreed (other- wise the loan is impaired). Credits with renegotiation typically run longer than the initial negotiation. A loan with a calculated residual maturity of 8 years will have loss estimated for 8 years, with the balance ex-pected for each year. A credit with renegotiation of 10 months will be calculated with the size of the credit on the reporting date in 5 years. 57 Note Factor Information base Assumptions Assessment methods Macro factors Factors calculated with Lokale Pengeinstitutter's (The Association of Local Banks, Savings Banks and Coopera-tive Banks in Denmark) mac-ro-tools based on forecasts. The factors are representa-tive of the bank's custom-ers in the near future. The factors were phased out of the model over 10 years, as the extension factors are considered to contain suf-cient cyclical balancing. The two variables that must be entered in the tool were selected based on the bank’s historical loss data in the years 2011-2021. Factor 1 will limit the increase in the macro from year to year. Factor 1 was chosen based on the greatest increase experienced during the period, so there is not actually a limitation. Factor 2 is a conversion factor between the bank’s impairment and realised loss. Factor 2 is set to 100, as there are indications, but not documentation, that the bank’s impairment have historically been greater than the realised loss. Both are thus determined based on a principle of caution. LGD The bank's statistics for realised loss on assets that were impaired during the period 1/1/2012 to 30/06/2022. The loss rates are divided into private and business according to DS indus- try codes. The loss rate is representa-tive of the future loss in the mentioned groups. The loss rate is the realised loss in relation to EAD. To the degree possi- ble, EAD is cal-culated based on the expo-sure one year before the asset was found to be im-paired, and the value of the collateral is not deduct- ed so that it is consistent with the application of the loss calculation. EAD EAD is calculated based on expo- sures divided by type. Each type is multiplied by a Credit Conversion Factor, which is determined based on the principles of article 11 of CRR. The value of collat-eral is not deduct- ed when calculating expected loss. EAD in relation to the expo-sure's size divided by type of asset is expected to remain unchanged in the future For example, EAD for a credit will be calculated as: Used part x 100% + unused part x 20%. All exposures except for non-nan- cial guarantees are included in the calculation of EAD. 58 Note Factor Information base Assumptions Assessment methods Starting risk class The as the asset’s initial recognition date is the exposure’s establish- ment date or the date the exposure is subsequently extended by 50% or more. Since June 2017, assets have been labelled with a starting rating. To the degree possible, previous labels are entered based on the bank’s methods for rating on the date of initial recognition. The return on the asset reects the risk on the date of establishment (and when there are major increas- es). Ratings over time are care-fully converted to the current 10-step scale. If there is no initial rating, the loss is recognised in the asset's lifetime, except for assets with low risk (Rating class 1-3) Current risk class The customer's rating class on the reporting date The rating reects the credit risk See "Practice for managing credit risk" Overdrawn for 30 days The facility's balance and credit facility If the facility is overdrawn for more than 30 days, the credit risk has increased signicantly There is no minimum thresh-old for overdrafts or offset-ting of any deposits on the customer's other facilities When using the mentioned macro factors, predictive information is taken into account. No changes to important assumptions and assessment methods have occurred during the accounting period. Assets that are impaired See “Practice for managing credit risk” regarding assessment of whether the asset is impaired. When calculating the credit loss, the available existing information on the reporting date is used, as well as expectations for future development. The credit loss on impaired exposures is calculated based on the following criteria: Exposure in thousands of DKK Industry Calculation 0-150 Everyone The entire exposure is written off as a credit loss 150 - Private The credit loss is calculated weighted based on a minimum of 3 scenarios determined by the cause of the credit impairment 150- Industries except agriculture The credit loss is calculated weighted based on a minimum of 3 scenarios determined by the cause of the credit impairment 150- Agriculture The credit loss is calculated weighted based on a minimum of 3 scenarios The calculations include the following parameters: Cause of credit impairment, scenario weight, EAD, value of collateral, expected settlement ability/dividends. Information base, assumptions and assessment methods for each parameter are described in the overview below. 59 Note Factor Information base Assumptions Assessment methods Cause of credit impairment The cause of the customer's credit impairment registered by the bank The probability of each scenario is the same for each cause: Probability of bankruptcy, breach of contract, easier terms and signi- cant nancial difculties When stating the reason the guidelines in Appendix 10 of the Executive Order are followed Scenario weight Exposures that have impaired credit during the period 1/1/2013 – 30/06/2022 where the case has been closed The historical distribution of scenar- ios is representative of the credit loss on customers with similar causes and industries. The number of zero-losses uctu- ates with the economic trend. The distribution of exposures by percentage is calculated based on a placement in one of the three sce- narios: Zero-loss, Sale and Collapse. The percentage of zero-losses is then reduced in relation to a cyclical factor calculated based on the bank’s impairment and provisions during the period 2007-2021. EAD Exposure on the reporting date See under EAD in the table above See under EAD in the table above Value of collateral Current assessments less costs and expected reductions. There are generally greater reductions for a collapse scenario than a sales scenario. The actual assessment is the clos- est we can get to a real selling price until the sale is nal. Less reduc- tions are expected if the customer cooper-ates with a sale than if it is a forced sale For agriculture, reductions are used based on histori-cal documentation. There are little experience with oth- er exposures. Reduc-tions are thus estimated based on a precautionary principle. Expected settlement abil- ity/dividends Availability calculations for private customers, operating prot and budgets/periodic results for busi- ness custom-ers, dividend state- ments from bankruptcies The basis indicates something about the ability to settle the expo-sure Great caution is taken with recog- nition. If the customer is no longer cooperating with the bank, the settlement ability is generally not recognised When using the cyclical factors under “Scenario weight”, predictive information is taken into account. 32 MARKET RISKS AND SENSITIVITY INFORMATION In connection with Skjern Bank’s monitoring of market risk, a number of sensitivity calculations, which include market risk variables, have been carried out. Interest rate risk In the event of a general increase in interest rates by 1 percentage point in the form of a parallel shift of the yield curve, equity is affected as shown below 60 Note DKK 1,000 2022 2021 Interest rate risk on debt instruments etc - total 11.476 12.263 Interest rate risk in pct of core capital after deductions 0,9 1,1 Interest rate risk split in currencies with highest risk: DKK 11.619 12.500 EUR -54 -112 CHF -38 -40 JPY 0 -1 USD -68 -80 Other 17 -4 Total 11.476 12.263 Foreign currency risk Total assets in foreign currency 196.163 229.317 Total liabilities in foreign currency 159.118 117.819 In the event of a general change in exchange rates of 10%, and in the euro of 2.25%, Currency Indicator 1 will also be increased 871 1.180 Currency indicator 1 in pct of core capital after deductions 0,1 0,1 In the event of a general change in exchange rates of 10%, and in the euro of 2.25%, Currency Indicator 2 will also be increased 9 12 Currency indicator 2 in pct of core capital after deductions 0,0 0,0 Currency Indicator 1 represents the sum of the respective positions in the currencies in which the bank has a net asset position, and currencies where the bank has net debt. Currency Indicator 2 expresses the bank’s currency risk more accurately than indicator 1, as it takes into account the different currencies’ volatility and covariation. A value of indicator 2 of TDKK 25 means that as long as the bank does not change its currency positions in the following 10 days, there is a 1% chance that the institution will get a capital loss greater than TDKK 25, which will affect the bank’s prot and equity. Equity Risk If stock prices change by 10 percentage points, equity is affected as shown below: Quoted on Nasdaq OMX Copenhagen A/S 1.727 2.189 Quoted on other stock exchanges 1.281 1.797 Unquoted shares recorded at fair value 20.168 16.836 Total shares etc. 23.176 20.822 33 DERIVATE FINANCIAL INSTRUMENTS Derivatives are used solely to hedge the bank’s risks. Currency and interest rate contracts are used to hedge the bank’s currency and interest rate risks. Cover may not be matched 100%, so the bank has own risk. However, this risk is minor. 61 Note DKK 1,000 2022 2022 2022 2022 2021 2021 2021 2021 Net Market- Market- Net Market- Market- Nominal market- value- value- Nominal market- value- value- value value positive negative value value positive negative Currency-contracts Up to 3 months 245.808 -27 396 423 261.394 488 1.338 850 Over 3 months and up to 1 year 88.799 0 0 0 92.781 -59 218 277 Average market value 2.363 2.345 902 609 Interest-rate contracts Up to 3 months 270.659 299 594 295 292.560 -450 588 1.038 Over 3 months and up to 1 year 38.908 50 69 19 16.618 -28 30 58 Over 5 years 5.047 5.748 1.826 2.418 Average market value Shares contracts 13 2 7 5 0 0 0 0 Up to 3 months 2 3 0 0 Average market value 0 0 12 0 DKK 1,000 2022 2021 Credit risk on derivative nancial instruments Positive market value, counterparty with risk weighting of 20 % 3.614 3.367 Positive market value, counterparty with risk weighting of 50% 537 843 Positive market value, counterparty with risk weighting of 75% 1.586 2.176 Positive market value, counterparty with risk weighting of 100% 1. 01 5 293 Positive market value, counterparty with risk weighting of 150% 56 0 Total 6.808 6.679 Unsettled spot transactions Market- Market- Market- Nominal value- value- value- value positive negative net Foreign-exchange transactions, purchase 1.026 4 - 4 Foreign-exchange transactions, sale 613 2 - 2 Interest-rate transactions, purchase 23.331 26 46 -20 Interest-rate transactions, sale 23.331 88 19 69 Share transactions, purchase 1.136 50 38 12 Share transactions, sale 1.137 49 47 2 Total 2022 50.574 219 150 69 Total 2021 63.068 199 140 59 62 Note DKK 1,000 2022 2021 2020 2019 2018 34 5 YEARS IN SUMMARY Prot and loss account Net income from interest 254.324 205.575 190.244 185.287 185.242 Dividend on shares 4.485 2.657 2.089 5.863 3.476 Charges and commission, net 204.914 172.738 155.181 143.257 119.515 Income from core business 463.723 380.970 347.514 334.407 308.233 Value adjustments -30.830 20.181 26.513 40.225 69.389 Other ordinary income 2.078 3.487 1.977 1.945 1.503 Staff cost and admin. expenses 234.038 207.517 193.929 191.861 191.626 Depreciation of intangible and tangible assets 6.620 7.337 5.195 2.821 3.004 Other operating expenses 477 480 234 112 127 Write-downs on loans etc. (net) 2.703 -15.227 32.874 16.831 19.729 Operating result 191.133 204.531 143.772 164.952 164.639 Taxes 40.894 41.230 28.131 29.469 22.126 Prot for the year 150.239 163.301 115.641 135.483 142.513 Of which are holders of shares of hybrid core capital instruments etc. 5.287 5.289 6.487 6.626 6.626 Balance as per 31st December Summary Total assets 11.228.493 9.978.498 8.974.467 7.614.080 6.703.573 Loans and other receivables 5.464.400 4.719.737 4.224.773 4.325.613 4.359.561 Guarantees etc 2.024.207 2.690.680 2.630.139 2.379.168 1.543.324 Bonds 861.733 941.900 959.506 1.045.717 1.016.994 Shares etc 231.757 208.217 201.220 225.094 220.498 Deposits and other debts 7.840.474 7.027.670 6.463.735 6.223.604 5.457.413 Subordinated debt 98.835 98.334 97.834 97.334 99.976 Total equity 1.363.361 1.247.077 1.108.059 1.026.569 926.740 - of which proposed dividend 28.920 28.920 19.280 28.920 28.920 Capital Base 1.342.842 1.262.458 1.135.869 1.032.679 923.409 Weighted items 5.802.754 5.683.653 5.370.562 5.551.264 5.310.230 63 Note 2022 2021 2020 2019 2018 35 FINANCIAL RATIO (FIGURES IN PCT.) Solvency ratio 23,1 22,2 21,2 18,6 1 7, 4 Core capital ratio 21,5 20,5 19,3 16,9 15,5 Return on equity before tax 15,0 1 7, 9 13,7 1 7, 3 19,5 Return on equity after tax 11,7 14,2 10,9 14,1 16,8 Return on assets 1,3 1,6 1,3 1,8 2,1 Earning/expense ratio in DKK 1,78 2,02 1,62 1,78 1,77 Interest rate risk 0,9 1,1 1,3 1,6 1,7 Foreign currency position 0,1 0,1 0,1 0,2 0,2 Foreign currency risk 0,0 0,0 0,0 0,0 0,0 Loans etc. against deposits 60,8 60,0 60,9 74,6 86,3 Statutory liquidity surplus - - - - 165,1 NSFR 1,35 1,42 - - - LCR 352 353 351 357 247 Total large commitments 106,9 114,4 118,3 136,5 144,1 Loans and debtors at reduced interest 0,6 0,6 0,9 1,2 1,9 Accumulated impairment ratio 3,8 3,8 4,9 4,7 5,8 Impairment ratio for the year 0,1 -0,2 0,4 0,2 0,3 Increase in loans etc. for the year 15,8 11,7 -2,3 -0,8 11,1 Ratio between loans etc. and capital funds 4,0 3,8 3,8 4,2 4,7 (value per share 100 DKK) Earnings per share 75,3 103,4 56,8 66,8 70,5 Book value per share 676 616 544 502 450 Rate on Copenhagen Stock Exchange 610 518 352 3 11 305 Dividend per share 15 15 10 15 15 Market value/net income per share 8,1 5,0 6,2 4,7 4,3 Market value/book value 0,90 0,84 0,65 0,62 0,68 (value per share 20 DKK) Earnings per share 15,1 20,7 11,4 13,4 14,1 Book value per share 135 123 109 100 90 Rate on Copenhagen Stock Exchange 122,0 103,5 70,4 62,2 61,0 ) Key ratios are calculated as if the hybrid core capital is accounted for as an obligation with which the key gures are calculated based on the shareholders’ share of earnings and equity. Shareholders’ share of earnings and equity is stated in the equity statement. ) New calculation formula from the beginning of 2018 cf. the Danish Financial Supervisory Authority’s guidance. 36 COPERATIVE AGREEMENTS Skjern Bank cooperates with receives commission relating to paymnet transfers from, and is co-owner of some of the following companies: Total- kredit A/S, Nykredit A/S, DLR Kredit A/S, Jyske RealKredit A/S, Privatsikring A/S, Eurocard, PFA Pension, Sparinvest A/S, Valueinvest Asset Mana- gement S.A., BI Asset Management Fondsbørsmæglerselskab A/S, Jyske Invest, Forvaltningsinstituttet for Lokale Pengeinstitutter, Sydinvest A/S, HP Fondsbørsmæglerselskab A/S, Investeringsforeningen Maj Invest, Stonehenge Fondsmæglerselskab A/S, Investeringsforeningen Falcon Invest, SEB Invest A/S, Investeringsforeningen BIL Danmark, Codan, Dankort A/S, Nets A/S, Visma Enterprise, Krone Kapital, Købstædernes Forsikring og 64 FINANCIAL CALENDER 2023 20 January Deadline for submission of items for the agenda for the Annual General Meeting 9 February Announcement of Annual Report 2022 6 March General Meeting – Ringkøbing-Skjern Kulturcenter 11 May Announcement of quarterly report 1st quarter 2023 17 August Announcement of half-yearly report 2023 26 Ocotober Announcement of quarterly report 3rd quarter 2023 AUDIT COMMITTEE Name Jobposition City Niels Erik Kjærgaard (chairman) Former city manager Skjern Finn Erik Kristiansen Manager Varde Lars Skov Hansen Advisor Esbjerg 65 COMMITTEE OF REPRESENTATIVES Name Jobposition City Elected Born Hans L. Jeppesen (board chairman) Lawyer Skjern 2011 1964 Ole Strandbygaard (board vice-chairman) Printer Ringkøbing 2008 1972 Jørgen Søndergaard Axelsen Real estate agent Skjern 2002 1960 Ebbe Storgaard Bendixen Manager Bramming 2020 1981 Britta Boel Manager Varde 2022 1976 Heine Delbing Manager Odense 2019 1953 Poul Frandsen Manager Herning 2012 1967 Bjarke Hansen Manager Ringkøbing 2020 1977 Ole Blach Hansen Manager Gørding 2021 1971 Kasper Herrestrup Chief Investmest Officer Brabrand 2019 1982 Tom Jacobsen Manager Tarm 2010 1970 Mike Jensen Bookseller Skjern 2005 1966 Bjørn Jepsen Farmer Borris 2011 1963 Niels Erik Kjærgaard Former city manager Skjern 2002 1954 Birgitte Kloster Former logisticdirector Ribe 2018 1966 Dorte H. Knudsen Nurse Hviding 2006 1956 Finn Erik Kristiansen Manager Varde 2020 1969 Karsten Larsen Manager Dejbjerg 2020 1979 Mads Sand Madsen Manager Charlottenlund 2022 1965 Tommy Noer Technical teacher Esbjerg 2005 1954 Torben Ohlsen Manager Esbjerg 2020 1965 Morten Henrik Pedersen Merchant Holte 2019 1963 Niels Christian Poulsen Mink farmer No 2006 1963 Jesper Ramskov Manager Esbjerg 2005 1964 Dina Reffstrup Sales Manager Esbjerg 2022 1973 Bente Tang Farmer Hanning 2006 1969 Birte Bruun Thomsen Manager Esbjerg 2014 1966 Poul Thomsen Former trader Skjern 1993 1952 Torben Tobiasen Manager Videbæk 2020 1977 Members of the board of directors 66 Hans Ladekjær Jeppesen, lawyer, Skjern Board chairman Born 11th September 1964 Elected on the board in 2011 Current term expires in 2023 Other management duties: Manager of KLA 2010 ApS Board chariman of Byggefirmaet Ivan V. Mortensen A/S Board chariman ofGrey Holding 2 A/S Board chariman of Grønbjerg Grundinvest A/S Board chariman of LHI Invest A/S Board chariman of PE Trading A/S Board chariman of Roslev Trælasthandel A/S Board chariman of Specialfabrikken Vinderup A/S Board member of Advokatpartnerselskabet Kirk Larsen & Ascanius Board member of Carl C A/S Board member of Carl C Ejendomme ApS Board member of Gråkjær A/S Board member of Gråkjær Holding A/S Board member of Gråkjær Aqua A/S Board member of Gråkjær Aqua International A/S Board member of Gråkjær Landbrug A/S Board member of Gråkjær Erhverv A/S Board member of Grønbjerg Ejendomsselskab A/S Board member of IFN Denmark ApS Board member of Kastrup A/S Board member of Kastrup Ejendomme ApS Board member of Skanva Group A/S Board member of Skjern Håndbold A/S Board member of Vinduesgrossisten ApS BOARD OF DIRECTORS Bjørn Jepsen, farmer, Borris Vice board chariman Born 17 October 1963 Elected on the board in 2012 Current term expires in 2022 Other management duties: Vice board chairman of Mejeriforeningen Danish Dairy Bo- ard Board member of Arla Foods AmbA Board member of Kvægafgiftsfonden Board member of Mælkeafgiftsfonden Board member of SEGES- kvæg Niels Erik Kjærgaard, former city manager, Skjern Born on 3 July 1954 Elected on the board in 2019 Current term expires in 2022 Other management duties: Board chairman of Investeringsselskabet Lionek A/S Board chairman of Iværksætterselskabet K&S ApS Board member of Ringkøbing-Skjern Kulturcenter Board member of Ejendomsselskabet Husumparken A/S Board member of Ejendomsselskabet Husumparken af 2000 A/S Board member of Skjern Udviklingsforum 67 Finn Erik Kristiansen Born 23 April 1969 Elected on the board 2020 Current term expires 2024 Other management duties: Manager of ProVarde S/I Manager of i Bordin Holding ApS Board chairman of Bog & Idé Aalborg Storcenter ApS Board chairman of Kristiansen Bog & Idé A/S BOARD OF DIRECTORS Ole Strandbygaard Born 21 February 1972 Elected on the board 2022 Current term expires 2024 Other management duties: Manager of Strandbygaard A/S Board member of Strandbygaard A/S Board member of MOGIS A/S Board member of OSBH Invest ApS Board member of SH Invest, Skjern A/S Board member of Strandbygaard Board member of SH 1ApS Board member of SH 2 ApS Board member of Lokalvækst Board member of PrinfoDenmark A/S Board member of Prinfo Holding A/S Board member of Dejbjerglund Efterskole Board member of KOSS Ejendomme ApS Lars Skov Hansen, advisor, Esbjerg Employee-selected Born 17 May 1973 Elected on the board in 2011 Current term expires in 2023 Michael Tang Nielsen, finance manager, Velling Employee-selected Born 17 December 1977 Elected on the board in 2019 Current term expires in 2023 BOARD OF DIRECTORS Carsten Jensen, advisor, Skjern Employee-selected Born 29 April 1980 Elected on the board in 2015 Current term expires in 2023 Per Munck, banking executive, Skjern Born 12 November 1954 Hired 1 November 1999 Other management duties: Boardmember of Foreningen Bankdata Boardmember of Forvaltningsinstituttet for Lokale Pengeinstitutter MANAGEMENT SKJERN ESBJERG RIBE VIRUM ØLGOD Banktorvet 3 Kongensgade 58 J. Lauritzens Plads 1 Kongevejen 159 Storegade 16-18 6900 Skjern 6700 Esbjerg 6760 Ribe 2830 Virum 6870 Ølgod Tlf. 9682 1333 Tlf. 9682 1500 Tlf. 9682 1600 Tlf. 9682 1480 Tlf. 9682 1540 VARDE BRAMMING HELLERUP HØRSHOLM VALBY Bøgevej 2 Storegade 20 Strandvejen 143 Lyngsø Allé 3 Kongevejen 159 6800 Varde 6740 Bramming 2900 Hellerup 2970 Hørsholm 2830 Virum Tlf. 9682 1640 Tlf. 9682 1580 Tlf. 9682 1450 Tlf. 9682 1420 Tlf. 9682 1680