Annual Report • Feb 10, 2022
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Download Source FileUntitled - Page 1 - Skjernpigen / Nicole with chair Original version of Hanne Varming - Banktorvet, Skjern ANNUAL REPORT 2021 - Page 2 - 2021 EQUITY CORE EARNINGS NET INTEREST AND FEE INCOME IMPAIRMENT LENDING CAPITAL PROFIT BEFORE TAX EXPECTATIONS Prot before tax of DKK 204,5 million Equity yielded interest of 17,9 % before tax Core earnings amounted to DKK 175,6 million Increased by9,6 % to DKK 381 million Increased to DKK -15,2 million, cor- responding to -0,2 % of loans and guarantees Loans increased 11,7 % amounted to DKK 4.720 million and deposits amounted to DKK 7.028 million Satisfactory capital ratio of 22,2 % and individual solvency requirements of 9,8 % Prot before tax in 2022 is expected in the range of DKK 175 - 205 million Extremely satisfactory 2021 KR. KR. - Page 3 - Content Management’s nancial report for 2021 ................................... 4 Endorsement of the Annual Report by the Management ...................... 20 Prot and loss account ................................................ 21 Statement of comprehensive income ..................................... 21 Proposal for distribution of prot ......................................... 21 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22 Information on changes in equity ........................................ 24 Notes .............................................................. 25 5 years in summary ................................................... 63 5 years nancial ratios ................................................. 64 Financial Calendar 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66 Committee of representatives ........................................... 67 List of board members’ managerial ofces ................................. 68 - Page 4 - Management’s nancial report for 2021 A profit before tax of DKK 204.5 million is the result of the Bank’s best operating year thus far. The profit was positively affected by growth in net interest and fee income, posi- tive exchange rate adjustments and write-downs recognised as income. Equity yielded a very satisfactory interest of 17.9 % before tax and 14.2 % after tax. The positive trend in profits over the year have resulted in 5 upward adjustments, most recently on 6 January 2022, where the realised level was announced together with the expectations for profit for 2022. In 2022, a profit before tax is expected in the range of DKK 175 - 205 million and a core earnings in the range of DKK 170 - 190 million. The solid development is thus expected to continue in 2022. In light of the achieved profit, expectations for future earnings and the adequate capital coverage, it is recommended 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 2022 and the years ahead and also wants a satisfactory capital coverage, primarily based on equity. This is the reason why the position of this year’s dividend distribution is at the lower end of the range of the Bank’s dividend policy. 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 position in 2021. The Bank’s development is very satisfactory in all areas and the main performance goals in the Bank’s strategic plan up to 2022 have been realised at the end of 2021. The most important factors in the strategy are high employee satisfaction, high customer satisfacti- on and earnings relatively near 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 differen- ce for all the Bank’s stakeholders. Employee satisfaction is measured by an anonymous employee satisfaction survey every year in Q4. The satisfaction has been very high for several years and in 2021, employee satisfaction and pride in working at Skjern Bank was set at 96.3 %, which is very satisfac- tory. Customer satisfaction is measured in an independent study conducted by Finans- sektorens Uddannelsescenter in Skanderborg. In the survey, 87 % respond that they are very satisfied with being a customer of Skjern Bank and 9 out of 10 recommend the Bank - Page 5 - to others. We are both proud and humbled by this. Customer satisfaction is thus extre- mely satisfactory and at the very top of the sector. The Bank’s earnings in the form of re- turn on equity and earnings per cost ratio are 17.9 % and 2.02 respectively, and are also expected to be at the very top once the financial institutions’ 2021 annual reports have been published. The Bank’s credit provision increased in 2021. Lending increased by 11.7 %, while the creditworthiness of the portfolio has improved. The provision of mortgage loans from To- talkredit and DLR Kredit have increased significantly. The customers’ participation in pool schemes has grown while at the same time deposits have grown by DKK 563 million or 8.7 %. Amongst other things, the positive development has led to the Bank establishing 2 more branches in Hørsholm and Ølgod in 2021, while there has also been an influx of employees, where at the end of 2021 there were 14 more employees than at the end of 2020. The Bank’s solid development, combined with the generally positive development of the stock markets, has contributed to a very satisfactory development of the price of the Bank’s shares in 2021. At the beginning of the year, the rate was 70.4 and at the end of 2021, this increased to 103.5, meaning an increase of 33.1 percentage points, correspon- ding to 47 %. The low market interest rates have meant that interest income on lending alone has been maintained at the level of 2020, despite lending having increased over the course of the year by DKK 495 million, corresponding to 11.7 %, while a larger share of the average increase was realised at the end of 2021. The net inflow of customers has been very satisfactory and, together with high demand for loans from the Bank’s existing customers, lending has increased very satisfactorily. Interest income on deposits increased from DKK 15.1 million in 2020 to DKK 26.9 million in 2021. The low interest rate in society means that the Bank’s placement of surplus liquidity in certificates of deposit in Nationalbanken bore a negative interest rate of 0.50 %, corresponding to a total of DKK 10.5 million. Net interest income has increased satisfactorily by DKK 15.3 million to DKK 205.6 million, corresponding to an increase of 8.1 %. Net interest and fee income increased by a total of DKK 33.4 million. The main reasons for this are the increase in interest income on deposits and the increasing fee income as a result of increased activity with the Bank’s many new and existing customers. Primarily in the spring of 2021, the opportunities for restructuring mortgage financing have been fa- vourable, and many of the Bank’s customers have chosen to take advantage of this. The many loan restructurings, combined with the large influx of new customers with mortga- ge financing, has resulted in an increase in loan case fees of DKK 4.3 million. The Bank’s - Page 6 - goal has been to increase the proportion of fee earnings compared to interest income th- rough increased activity in the areas of real estate, securities, pension and insurance. The share of the Bank’s earnings from fees relative to net interest and fee income has increa- sed from 43 % in 2019 to 45 % in 2020, which is satisfactory. Staff and administration expenses etc. increased by DKK 13.6 million, corresponding to 7.0 %, from DKK 193.9 million compared with DKK 207.5 million. The increase follows the expectations and is primarily due to a strategic decision to grow and increase the level of activity in all branches, including the Bank’s two newly established branches. Staff costs have increased by DKK 7.3 million as a result of a net of 14 new employees and general collective bargaining increases. Hirings have 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 expen- ses were increased by DKK 6.3 million, primarily as a result of higher IT costs and other administrative expenses. Impairment has decreased by DKK 48 million to an income of DKK 15.2 million, corre- sponding to -0.2 % of the Bank’s loans and guarantees. At the end of the year, a manage- ment estimate of DKK 50.0 million was provisioned to accommodate any write-downs as a result of the COVID-19 pandemic and the effects thereof, such as uncertainty regarding global supply lines, rising inflation and rising interest rates etc. The Bank has also alloca- ted a management estimate of DKK 5 million in 2021 for the Bank’s exposure within pig production as a result of the uncertainty regarding African Swine Fever and the pressure on terms of trade. In 2021, the Bank has only realised limited impairment as a result of COVID-19, and the Bank’s customers have generally recovered well financially through the first 2 years of the pandemic. Some of the Bank’s business customers have deferred VAT and A-tax pay- ments. At the end of 2021, this amounts to around DKK 250 million, which must be re- paid during 2022. The Bank is positive about providing financing to the customers who have deferred payments to the public sector and where an individual credit assessment shows that credit can be granted on a sound basis. The need for write-downs has been limited, and there are no industries that have accoun- ted for a larger share of write-downs in isolation. Overall, the agricultural sector has done reasonably well through 2021, though in the pig sector there have been and still are con- siderable challenges as a result of African Swine Fever and very weak terms of trade. Milk producers, which is by far the Bank’s largest sub-segment in agriculture, have had reasonable terms of trade and in 2022 are looking at a year of good terms of trade and - Page 7 - high settlement prices. The Bank’s other businesses are generally doing well, and the Bank’s exposures within the hardest-hit industries in connection with the shutdown of Denmark – e.g. the experi- ence industry, hotels and restaurants etc. – are limited. Within the manufacturing industri- es and the construction sector, challenges continue to arise with high price increases on materials and very sluggish supply lines. This is expected to continue in 2022. The Bank’s private customers have recovered well through 2021, and thus there has been a larger net reversal of write-downs. At the beginning of 2021, the Bank expected a core earnings in the range of DKK 140 – 155 million. The profit expectations have been adjusted upwards during the year, most re- cently on 6 January 2022 to approximately DKK 177 million. Core earnings were realised at DKK 175.6 million and were thus increased by a very satisfactory DKK 20.8 million compared to 2020. The increase is partly due to the large influx of customers and high ac- tivity amongst existing customers. There has been an increasing provision of credit union loans, increasing fee income and increasing guarantees driven by continued high activity in the housing market and increa- sed income from negative interest on deposit accounts. The expectations for the profit before tax for the year at the beginning of 2021 was a ran- ge of DKK 125 – 140 million, which was adjusted upwards over the course of the year, the most recent adjustment was on 6 January 2022 to around DKK 202 million. Expecta- tions were realised at DKK 204.5 million. Both the achieved core earnings and the profit before tax are considered entirely satisfactory. The capital ratio is calculated at 22.2 % and the core capital ratio at 20.5 %. As a result of particularly satisfactory profit, the capital coverage was increased in the course of 2021 compared to the individual solvency requirements, from 11.4 % points in 2020 to 12.4 % points in 2021. With deduction of the capital conservation buffer of 2.5 percentage points and NEP supplement of 3.11 %, the capital coverage at the end of 2021 amounted to 6.8 percentage points. The Bank has a goal of a surplus compared to the capital requirement of min. 5 percentage points, which is thus met. The capital base increased by DKK 126.6 million to DKK 1,262 million. The increase is primarily due to a profit after tax of DKK 163.3 million less interest on hybrid loans of DKK 5.3 million and proposed dividends of DKK 28.9 million. The Bank’s capital ratio amounted to 22.2 % at the end of 2021 and has thus increased - Page 8 - by 1.0 percentage points compared to the end of 2020. If the risk-weighted items had been unchanged compared to the end of 2020, the capital ratio would have been increa- sed by 2.3 percentage points. The increase in risk-weighted assets of a total of DKK 313 million thus reduces the capital ratio by 1.3 percentage points. The Bank’s solvency requi- rements have been calculated at 9.8 % and overall the Bank’s capital base is considered solid and adequate. With regards to the bank’s capital position in general, refer to note 28. In 2021, the Danish Financial Supervisory Authority investigated the Bank’s handling of money laundering. As expected, the investigation proceeded very positively, and the Bank confirmed that the Bank’s management in the area was working satisfactorily. The Bank received 4 minor instructions, which have subsequently been prepared and incorpo- rated into the Bank’s business procedures and other relevant areas in monitoring money laundering. FUTURE CAPITAL RESERVES At the end of 2021, the Bank had a solid capital base with a capital coverage including ca- pital conservation buffer and NEP supplement of 6.8 %. In the coming years, the follow- ing capital buffers will be phased in to the requirement for the Bank’s capital base: • The cyclical buffer currently amounts to 0.00 %, but is being phased in by 1 % in Q3 2022 and an additional 1 % in Q4 2022. The cyclical buffer can at maximum be pha- sed in by 2.5 %. • NEP supplement of 6.0 percentage points once fully phased in on 1 January 2024 The NEP supplement was phased in by 3.11 % at the end of 2021, but increased to 3.7 % on 1 January 2022. Upon full phasing in of all known capital requirements, and with a solvency requirement of 9.8 %, the Bank’s capital requirement can be calculated at 20.8 %. The NEP supple- ment of 6 % will be phased in on 1 January 2024, and with the cyclical buffer fully pha- sed in at this time, at the end of 2023 the Bank will have a capital ratio of 25.8 %, achie- ving the Bank’s target of capital reserves of 5 percentage points. This corresponds to an increase of 3.6 % compared to 31 December 2021. The Bank expects that the continued improvement in the earnings will mean that the Bank can phase in the remaining known capital requirements through consolidation from operating earnings, but will eventually raise Tier III capital to partially cover the NEP requi- rement. - Page 9 - EXPECTATIONS FOR 2022 The Bank has had a very satisfactory 2021, where expectations for all areas have been met and exceeded. In light of this, the Bank is optimistic about 2022 and expects an in- crease in business volume, including an increase in lending volume of up to 5 %. The ear- nings trend in 2021 was driven by high activity in all areas, positive exchange rate adjust- ments and write-downs recognised as income. The Bank expects an increase in core earnings, but is not budgeting with exchange rate adjustments and write-downs at the same level as in 2021. However, the growth in ordi- nary operations is sufficient for the Bank to also expect very satisfactory profit in 2022. On 6 January 2022, the Bank announced that it expects core earnings for 2022 in the ran- ge of DKK 170 - 190 million and a profit before tax in the range of DKK 175 - 205 million. The bank has established the strategic and profit-related goals for the coming year, of which the most significant are listed below. In light of the very 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 reten- tion of satisfied customers and employees. This will secure our position as the indepen- dent 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, which is supported by stable housing prices and general financial accountability and diligence. The Bank is experiencing major growth in the number and business volume of private custo- mers and does not expect any significant challenges with lending to them in 2022. The Bank still has close ties to the agricultural industry, which represents a significant and va- luable customer group. Easily the largest of the customer groups in agriculture is milk producers, who have ge- nerally had reasonable profitability in operations in 2021. Reasonable operations are expe- cted to continue in 2022, as favourable settlement prices are expected in 2022. The forecasts are not as good for pig producers for 2022, as the settlement prices have fluc- tuated considerably in 2021. Furthermore, there is uncertainty regarding African Swine Fever, therefore the Bank expects a tough year for the industry in 2022. To address this, the Bank has made a management estimate of DKK 5 million below the write-downs. The Bank’s customers within the mink industry are still waiting for final settlement for their production facilities, but are generally expected to benefit financially from the acquisition. - Page 10 - Overall, we expect quite a reasonable year in agriculture, and the Bank is confident with regard to how the industry will meet the challenges in the coming years. There will still be customers for whom it will be difficult to achieve profitability in 2022 and here the Bank will continue, out of loyalty and respect and in close cooperation with individual far- mers, to try to find the best possible solutions. Lending to agriculture accounts for 9.9 % of the total lending, where the distribution is 5.7 % to cattle farming, 0.7 % to mink production, 1.0 % to pig farming, 1.3 % to crop farming and 1.2 % to other forms of production. The number of customers in the agricul- tural segment has increased in 2021 and this is expected to continue in 2022 through the acquisition of well-run and well-capitalised agricultural customers within the various indu- stries. The real estate segment amounts to 9.5 % compared with 11.8 % at the end of 2020 and the exposure in real estate is primarily within rental for residential purposes. The starting point for project financing is typically that they have been sold after completion of the project before commissioning or that there is an adequate liquid security. The other busi- ness segments are generally assessed to be developing well, although the COVID-19 pandemic and the effects thereof will also have a clear impact on many markets and busi- ness opportunities in 2022, which could lead to losses for the Bank. The Bank’s liquidity is solid, and there will be an unchanged focus on maintaining a satis- factory liquidity reserve, 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 During the year, it has been possible to establish new branches in Ølgod and Hørsholm. The branch network is planned to be expanded with a single branch in the Copenhagen area in 2022 if the business potential is assessed to be satisfactory. Skjern Bank Leasing offers financial leasing of most types of assets to the Bank’s busi- ness customers. The administrative management of this is outsourced to a well-establis- hed player in the industry. The business volume in Skjern Bank Leasing is still increasing, and at the end of 2021, there is a volume of just over DKK 156 million, which is expected to increase in 2022. Overall, 2022 is expected to lead to a satisfactory increase in the Bank’s business volume and earnings, including in insurance and pension products. - Page 11 - BUSINESS VOLUME IN CONTROLLED DEVELOPMENT The Bank’s business model and credit policy were essentially unchanged in 2021. The focus is, and will continue to be, to be ready to participate in our customers’ goals for fi- nancing etc. when this can be done in a prudent and risk-acceptable manner. In total, lending volume increased by DKK 494.9 million, or 11.7 %, to DKK 4,720 million. Deposits from customers increased by DKK 563.9 million or 8.7 % to DKK 7,028 million. The total guarantees for customers increased by DKK 60.5 to DKK 2,691 million. CAPITAL GOALS AND DIVIDEND POLICY Due to the acceptable profit after tax, satisfactory capital reserves have been achieved, primarily consisting of a solid core capital of 19.4 % compared with the individual solven- cy requirement of 9.8 %. An added capital conservation buffer of 2.5 % and NEP supple- ment of 3.11 % results in a total capital requirement of 15.41 % and a capital coverage relative to the capital requirements of 6.79 percentage points. 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 capital requirements. 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 asses- sment that there is a solid base to reward the Bank’s many shareholders with an approp- riate portion of the realised profit. The Danish Financial Supervisory Authority’s recom- mendations and the management’s expectations for future growth and earnings have been taken into account in the assessing the sufficient capital coverage. DKK 3 per share is being distributed, which represents a small portion of the satisfactory earnings in 2021. The dividend level must be assessed on the basis of the management’s position of pri- marily strengthening the Bank’s solvency through consolidation from operations. The di- stribution is higher than the distribution for the financial year 2020, where DKK 2 per sha- re was distributed based on the Danish Financial Supervisory Authority’s recommendati- ons for increased caution as a result of the COVID-19 pandemic. 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 also to accommodate regulatory requirements in future recessions. The management will conti- - Page 12 - nuously 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 distribution, either as share buy-backs or cash distributions, to amount to 30-50 % of the annual profit after tax, 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 impor- tant. The focus has always been on creating value for the Bank’s stakeholders, which in 2021 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 in- creases 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 busines- ses 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 va- luable to have a local bank that knows their needs and where they have an advisor who knows them and who back the local community’s activities. SHAREHOLDERS The management recognises the importance of a stable and loyal shareholder communi- ty and, taking into account the Bank’s capital adequacy, aims to give them competitive re- turns on their investment. The shareholders’ loyalty and continued backing, from small shareholders to major professional investors, is extremely important to the continued de- velopment of the Bank. The shareholders achieved satisfactory price development in 2021, as the price in 2021 has increased from 70.4 to 103.5, corresponding to 47 %. A cash dividend of DKK 3 per share, a total of DKK 28.9 million, is proposed for the financial year 2021. 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 customers. The corporate client business is also in solid - Page 13 - 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 advi- ser 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 ban- king, make daily life work smoothly and flexibly. Customer satisfaction with the Bank is paramount, and the external anonymous mea- surements of satisfaction 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. All the employees at the Bank are very thankful and humbled by the trust shown by the customers when they refer their family, friends and acquaintances to the Bank in large numbers via the Bank’s customer referral concept. EMPLOYEES As of 31 December 2021, the Bank employs 189 employees, which is an increase of 14 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 le- vel of professionalism. Employee job satisfaction is very important for the Bank and there are annual measure- ments of the employee 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 there. 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, the employees and the Bank. LOCAL COMMUNITIES The Bank’s goal is to play an important role in all of the Bank’s local communities, both as a partner for the many business owners, but of course also for the local population in ge- neral. It is important for the Bank to back local initiatives and the Bank helps a great num- ber of businesses – entrepreneurs and existing customers - with counselling and finan- cing, so that ideas and investment goals have the best chance of being realised. The bank is also a partner for more than 400 of 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, - Page 14 - such that financial backing of any size is given in anticipation 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, custo- mers, talented employees and the local community. The Bank is aware that all stakehol- ders play an important role both now and in the future and the Bank views it as an impor- tant community role to encourage the many stakeholders to work together for the bene- fit of both the stakeholders and the Bank. ESG-REPORTING The Bank supports the green transition and the initiatives taken in various ways in Den- mark, the EU and the rest of the world. Like other parts of the financial sector, the busi- ness community and society in general, the Bank is making good progress in the devel- opment of new initiatives and general reporting in the area and is transitioning to a more sustainable utilisation of resources. The Bank’s efforts are based on the Un Global Goals for sustainable development and the Bank’s also works actively with the recommendations from Forum for Bæredygtig Finans (the Forum for Sustainable Finance). The Bank has published its ESG report for 2021 in connection with the publication of the Annual Report for 2021, which describes the work on activities that promote sustainability, both for the Bank itself and for its customers. The ESG report also constitutes the Bank’s report on corporate social responsibility and can be found on the Bank’s website. For several years, the Bank has been working to reduce energy consumption through energy reduction measures, and its own consumption of electricity is Co2-neutral th- rough the purchase of certificates of origin for power from Danish wind turbines. The Bank also supports climate measures in third world countries. The customers are offered investment products as well as pension investments that acti- vely support sustainable development. Similarly, customers can obtain attractive finan- cing for energy-improvement measures on properties or purchase of an electric or plug-in hybrid car. NET INTEREST INCOME Net interest income amounts to DKK 205.6 million, which is an increase of 8.1 % compa- red to last year, when net interest income was DKK 190.2 million. Interest income on customer lending decreased by a net of DKK 0.9 million to DKK 184 - Page 15 - million, which is not satisfactory, but unfortunately unavoidable as a result of the continu- ed low interest rate level and fierce competition in the market, which has resulted in low- er average lending prices. This includes the Bank’s proportion of lending where there was impairment but where interest still continues to be accrued having decreased and inte- rest on this amounts to DKK 7.6 million in 2021 compared with DKK 11.2 million in 2020. Bond interest income decreased by DKK 0.8 million, while there has been an increase of DKK 1.9 million on financial instruments. Overall, interest income is thus on a par with 2020 with DKK 195.6 million. In terms of accounting, the Bank’s 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 26.9 million on this in 2021, compared with DKK 15.1 million in 2020. Interest in- come including interest income from deposits has increased by a total of DKK 11.7 milli- on, corresponding to 5.6 %. Interest expenses decreased by 23.6 % to DKK 6.4 million, which is due to lower interest expenses on deposits of DKK 1.9 million. The Bank’s interest expenses for deposits in Nationalbanken decreased by DKK 1.6 milli- on to DKK 10.6 million in 2021, and in terms of accounting the expenses were placed in a special line in the statement of profit or loss. FEE INCOME Income from fees and commissions has increased very satisfactorily by 11.2 % to DKK 178.0 million, driven by growth in the number and volume of customers. Borrowing fees have increased by DKK 4.4 million to a total of DKK 80.5 million and guarantee provisions have increased by DKK 5.3 to DKK 26.3 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 4.6 million. DIVIDENDS Dividends from shareholdings increased marginally in 2021 and amount to DKK 2.6 milli- on. NET INTEREST AND FEE INCOME Net interest and fee income including dividends increased by 9.6 % to DKK 380.9 million, which is very satisfactory. EXCHANGE RATE ADJUSTMENTS In 2021, securities markets were characterised by optimism and increasing share prices - Page 16 - but also slightly lower bond prices. A profit of DKK 17.5 million was realised in the Bank’s shareholdings, compared to DKK 23.4 million in 2020. The Bank wants a continued low share price exposure and the trea- sury portfolio of shares is thus still of a modest size. Exchange rate adjustments on bond portfolios have been negative in 2021 by DKK 3.1 million. The bank continues to have a cautious investment policy for bonds, which dicta- tes short maturities and low interest rate risk. The total exchange rate adjustments amount to DKK 20.2 million and, in addition to the exchange rate adjustments on bonds and shares, consist of earnings on currency and financial instruments of a satisfactory DKK 5.8 million. EXPENSES Staff and administration expenses increased by 7.0 % and amount to DKK 207.5 million, compared with DKK 193.9 million in 2020. This is considered satisfactory in a year in which considerable investment has been made in the expansion of the branch network. Salary expenses have increased by DKK 7.3 million, corresponding to 6.3 %, due to an in- creasing number of employees, collective bargaining wage increases and an increase in payroll tax. Other administrative expenses increased in 2021 by DKK 6.3 million to DKK 80.5 million, which is primarily due to higher IT costs. DEPRECIATION AND WRITE-DOWNS In 2021, there was depreciation and impairment on tangible fixed assets of DKK 7.3 milli- on, compared with DKK 5.2 million in 2020. The increase is due to the fact that the Bank has written down DKK 2.0 million on a newly acquired domicile in Virum. IMPAIRMENT Impairment on loans and customer receivables etc. amounted to -0.2 % of the total loans and guarantees, or an income of DKK 15.2 million, compared with DKK 32.9 million in 2020. As a result of the continued uncertainty around the COVID-19 pandemic and the potential effects thereof, the management estimate of DKK 50 million was maintained at the end of 2021. In addition, a management estimate of DKK 5 million has been allocated for exposures in pig production as a result of the uncertainty around African Swine Fever and the highly fluctuating terms of trade in general. - Page 17 - Reversal of impairment from previous accounting years amounted to DKK 144.8 million, while recorded losses amounted to DKK 56.5 million, of which DKK 50.6 million had not been previously written down. In total, the Bank has provisioned DKK 295.6 million to ac- commodate future losses, which corresponds to 3.8 % of the Bank’s total lending and guarantees. CORE EARNINGS At the beginning of 2021, the Bank expected a core earnings in the range of DKK 140 – 155 million. The expectations for profit have been adjusted upwards several times, most recently on 6 January 2022 to approximately DKK 177 million. Realised core earnings amounted to DKK 175.6 million compared to DKK 154.7 million in 2020 and are conside- red very satisfactory. The growth is primarily due to increased interest income on depo- sits and to a sharp increase in fee income. PROFIT BEFORE TAX At the beginning of 2021, the expectations for profit before tax for the year were in the range of DKK 125 – 140 million, and over the course of the year, this was adjusted upwards several times, the most recent adjustment was on 6 January 2022 to approxi- mately DKK 202 million. The bank’s profit before tax amounted to DKK 204.5 million com- pared to DKK 143.8 million in 2020. The profit is considered extremely satisfactory. CAPITAL At the end of 2021, the Bank’s equity amounted to DKK 1,247.1 million, of which DKK 60.9 million was hybrid core capital, which for accounting purposes is included under equity. At the end of 2020, equity was a total of DKK 1,108.1 million. The increase is due to the realised profit in 2021 less approved and paid dividends for the financial years 2020 and 2021 as well as interest on hybrid core capital. The capital base, which consists of equity and supplemental borrowing, amounted to DKK 1,262.4 million at the end of 2021 and the total risk exposure amounted to DKK 5,683.7 million. The capital ratio is calculated at 22.2 % and the core capital at 20.5 %. The solvency requirement amounted to 9.8 %, whereby there is a satisfactory coverage in relation to the solvency requirement of 12.4 percentage points, corresponding to DKK 707.7 million. At the end of 2021, in addition to the solvency requirements, the Bank will also add a capital conservation buffer of 2.5 % and a NEP supplement of 3.11 %. Includ- ing this capital requirement, the solvency coverage relative to the total capital require- ments amounts to 6.79 percentage points, corresponding to DKK 385.9 million. The solvency requirements, which are calculated according to the Danish Financial Super- visory Authority’s credit reservation method, are recognised at DKK 454.7 million, corre- - Page 18 - sponding to 8.0 % for the Column 1 requirement (Søjle 1-kravet). In addition, DKK 73.1 million was provisioned for credit risk, including “NPE backstops”, where DKK 9.3 million was reserved for an interest risk of DKK 1.1 million and a credit spread risk of DKK 13.3 million under the market risk and DKK 12.5 million for reservations under the operational risk. The Bank’s goal for capital coverage relative to the calculated solvency requirements plus the current phased-in capital requirements is 5 percentage points. In the coming years, the capital requirements will increase significantly by up to a potential 2.5 % in the cycli- cal buffer and from 3.11 % to 6 % 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. Over the coming years, the bank wants to strengthen the capital base with consolidation from operations and, depending on growth, also supplement it with foreign capital in the form of either hybrid capital, subordinated capital or Tier III capital. The management considers the Bank to have a solid capital foundation, but there is a constant focus on always having an appropriate capital structure and coverage. For more information on capital and solvency requirements, please refer to the Bank’s website: www.skjernbank.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 2021, the goal was met by increasing the total deposits to a total of DKK 7.028 million. The bank’s liquidity reserves are solid. The LCR (Liquidity Coverage Ratio) of DKK 2.373 million exceeds both the regulatory requirements and the stricter liquidity goals establis- hed 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 obliga- tions for the next 30 days calculated according to certain rules. Skjern Bank has establis- hed an internal limit for the minimum liquidity reserves of 175 %, which exceeds the mi- nimum requirements of 100 % from the Danish Financial Supervisory Authority. The Bank achieved the goal and as of 31 December 2021 has an LCR financial ratio of 353 %. - Page 19 - MAJOR SHAREHOLDERS The Bank has a major shareholder - Investeringsselskabet af 15. maj (AP Pension Livsfor- sikringsaktieselskab, København Ø.) - who at the last ownership announcement posses- sed 20.75% of the share capital and 5 % of the voting rights. LIQUIDATION RESERVE In connection with establishing the statutory liquidation reserve, the Bank has prepared business procedures and implemented tests to ensure compliance with the special requi- rements resulting from the legislation. 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. EVENTS OCCURRING AFTER 31 DECEMBER 2021 No events have occurred after 31 December 2021 that significantly affect the Bank’s circumstances. AUDIT The Danish version of the Annual Report for 2021 is equipped with internal audit state- ments and independent auditors’ statement. The statements are without reservations and complementary information. - Page 20 - Endorsement of the Annual Report by the Management We have today discussed and approved the annual report for the period 1 January – 31 December 2021 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 prepared in accordance with Danish legal requirements for listed nancial companies. We consider the accounting practice chosen to be appropriate so that the annual report gives a cor- rect impression of the bank’s assets, liabilities, nancial position as at the 31st December 2021 and of the result of the bank’s activities for the accounting year 1 January – 31 December 2021. 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. The annual report is recommended for approval by the General Meeting. Skjern, the 10 February 2022 The board of Skjern Bank A/S Per Munck Manager Skjern, the 10 February 2022 The board of Skjern Bank A/S Hans Ladekjær Jeppesen Bjørn Jepsen Chairman Vice-chairman Niels Erik Kjærgaard Finn Erik Kristiansen Lars Skov Hansen Carsten Jensen Michael Tang Nielsen - Page 21 - Prot and loss account Note DKK 1,000 2021 2020 2 Interest receivable 195.584 195.693 Interest receivable deposits 26.963 15.119 3 Interest payable 6.376 8.344 Interest payable central banks 10.596 12.224 Net income from interest 205.575 190.244 Dividend on shares and other holdings 2.657 2.089 4 Charges and commission receivable 178.044 160.113 Charges and commission payable 5.306 4.932 Net income from interest and charges 380.970 347.514 5 Value adjustments 20.181 26.513 Other ordinary income 3.487 1.977 6 Staff costs and administrative expenses 207.517 193.929 Depreciation and write-downs on intangible and tangible assets 7.337 5.195 Other operating expenses 480 234 9 Write-downs -15.227 32.874 Result before tax 204.531 143.772 10 Tax 41.230 28.131 Net-result for the financial year 163.301 115.640 Of which are holders of shares of hybrid core capital instruments etc. 5.289 6.487 PROPOSAL FOR DISTRIBUTION OF PROFIT Dividends 28.920 19.280 Holders of hybrid core capital instruments 5.289 6.487 Transferred to/from retained earnings 129.092 89.873 Total distribution of the amount available 163.301 115.640 STATEMENT OF COMPREHENSIVE INCOME Profit for the financial year 163.301 115.640 Total comprehensive income 163.301 115.640 - Page 22 - Note DKK 1,000 2021 2020 ASSETS Cash in hand and demand deposits with central banks 2.566.381 192.109 11 Receivables at credit institutions and central banks 74.300 2.225.139 12 Loans and other receivables at amortised cost 4.719.737 4.224.773 13 Bonds at fair value 941.900 959.506 14 Shares etc. 208.217 201.220 15 Shares associated with pool schemes 1.306.663 1.039.002 16 Holdings in associated enterprises and group enterprises 67.599 66.758 Investment properties 3.019 3.019 Owner-occupied properties 45.895 43.166 Owner-occupied properties, leasing 18.685 20.573 17 Other tangible assets 5.626 4.253 Current tax assets 3.640 183 Other assets 84.106 60.806 Prepayments 329 718 Total assets 9.978.498 8.974.467 Balance Sheet - Page 23 - Note DKK 1,000 2021 2020 LIABILITIES DEBT 18 Debt to credit institutions and central banks 0 181.165 19 Deposits and other debts 7.027.670 6.463.735 Deposits in pooled schemes 1.306.663 1.039.002 Other liabilities 280.201 71.121 Prepayments 1.832 1.656 Total debt 8.616.366 7.756.679 PROVISIONS 20 Provisions for deferred tax 2.298 1.423 12 Provisions for loss on guarantees 14.423 10.472 Total provisions 16.721 11.895 SUBORDINATED DEBT 21 Subordinated loan capital 98.334 97.834 Total subordinated debt 98.334 97.834 EQUITY 22 Share capital 192.800 192.800 Revaluation reserves 417 417 Retained earnings 964.059 834.814 Proposed dividend 28.920 19.280 Capital owners share of equity 1.186.196 1.047.311 23 Holders of hybrid capital 60.881 60.748 Total equity 1.247.077 1.108.059 Total liabilities 9.978.498 8.974.467 - Page 24 - Note DKK 1,000 2021 2020 Share capital beginning-of-year 192.800 192.800 Share capital end-of-year 192.800 192.800 Revaluation reserves beginning-of-year 417 417 Revaluation reserves end-of-year 417 417 Retained earnings beginning-of-year 834.815 744.402 Profit or loss for the financial year 129.092 89.873 Dividend own shares 30 30 24 Purchase of own funds 122 509 Retained earnings end-of-year 964.059 834.814 Dividend beginning-of-year 19.280 28.920 Proposed dividend 28.920 19.280 Dividends paid -19.280 -28.920 Dividend end-of-year 28.920 19.280 Holders of hybrid capital beginning-of-year 60.748 60.030 Hybrid capital out - -60.030 Hybrid capital in - 59.244 Net profit or loss for the year (interest hybrid capital) 5.156 6.211 Paid interest -5.023 -4.707 Holders of hybrid capital end-of-year 60.881 60.748 Total equity 1.247.077 1.108.059 Information on changes in equity - Page 25 - Notes 1 Accounting policies ............................................ 26 2 Interest income ............................................... 36 3 Interest expenses.............................................. 36 4 Fees and commission income .................................... 36 5 Value adjustments ............................................. 36 6 Staff costs and administrative expenses ............................ 37 7 Incentive and bonus schemes .................................... 38 8 Audit fee..................................................... 38 9 Write-downs on loans and receivables ............................. 38 10 Tax ......................................................... 39 11 Receivables at credit institutions and central banks.................... 39 12 Loans and other debtors at amortised cost price...................... 40 13 Bonds at fair value ............................................. 42 14 Shares etc. ................................................... 42 15 Shares associated with pool scheme............................... 42 16 Land and buildings ............................................. 42 17 Other tangible assets ........................................... 43 18 Debt to credit institutions and central banks ......................... 43 19 Deposits and other debts ........................................ 43 20 Deferred taxation .............................................. 43 21 Subordinated debt ............................................. 44 22 Share capital .................................................. 44 23 Holders of hybrid capital......................................... 44 24 Own capital shares............................................. 45 25 Contingent liabilities ............................................ 45 26 Lawsuits etc. ................................................. 46 27 Related parties ................................................ 46 28 Capital requirement ............................................ 47 29 Current value of nancial instruments .............................. 48 30 Risks and risk management ...................................... 49 31 Credit Risk ................................................... 50 32 Market risks and sensitivity information............................. 60 33 Derivate nancial instruments .................................... 61 34 5 years in summary ............................................ 63 35 5 years of nancial ratio ......................................... 64 36 Coperative agreements ......................................... 65 - Page 26 - 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 benets 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 conrm or invalidate conditions existing on the balance date are taken into account in recognition and measurement. Income is recognised in the statement of prot 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 signicant risks and rewards of ownership. The bank has not used the rules for reclassication 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. - Page 27 - 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 signicant. 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 prot 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 - Page 28 - 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 signicant form), securities etc. Signicant 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 prot 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 specic, 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 specic 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 prot 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 prot or loss. Received interest on credit-impaired loans on which impairment has occurred are passed to the impaired part - Page 29 - 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 prot 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 dened contribution schemes with the employees. In dened 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 prot 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 Classication and measurement According to the IFRS 9-compatible accounting regulations, classication 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 classied into one of the following two categories: - Page 30 - • 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 prot 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 prot 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 prot 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 - Page 31 - 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 signicant 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 prot or loss according to the effective interest method based on the impaired amount. Financial assets where the customer has signicant nancial difculties or where the Bank has offered easier terms due to the customer’s nancial difculties 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 signicant increase in credit risk In the assessment of the development of credit risk, it is assumed that a signicant 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 signicant 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 signicantly 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. Denition of credit impairment and default An exposure is dened as being impaired and as being in default if it meets at least one of the following crite- ria: • The borrower is experiencing signicant nancial difculties, 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 difculties. • 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. - Page 32 - The denition 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 denition 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. However, the outbreak of the corona pandemic has led to signicant uctuations in both GDP and public con- sumption in particular, which remains the case. These uctuations mean that a linear adjustment to the long- term equilibrium over 10 years will overestimate a more likely development in the macroeconomic variables. Therefore, the method of adjusting for the long-term equilibrium for GDP and public consumption respective- ly changed in such a way that these two variables affect the long-term equilibrium as early as 2023 and main- tain this level for the subsequent 10 years. Changes in write-downs are adjusted in the statement of prot or loss and other comprehensive income under the item “Impairment of loans and receivables etc”. - Page 33 - 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 ofcial 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 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 prot 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. 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 prot or loss and revaluation is done so frequently that there are no signicant 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 prot or loss in a previous year, the increase is recognised in the statement of prot or loss. A decrease in the revalued amount is recognised in the statement of prot 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 - Page 34 - 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 the return method. Ongoing changes in fair value of investment properties are recognised in the statement of prot 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 signicant 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 prot 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 classied as additional tier I capital with indenite matu- rity and where the payment of interest is voluntary is classied as equity. - Page 35 - Interest on hybrid core capital is deducted from equity. The tax effect of the interest is recognised under current tax in the statement of prot or loss. 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 prot 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 prot 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. - Page 36 - Note DKK 1,000 2021 2020 2 INTEREST INCOME Loans and other receivables 191.640 196.227 Loans (interest conc. the written-down part of loans) -7.551 -11.188 Bonds 4.252 5.022 Other derivative nancial instruments, total of which 7.216 5.249 Interest-rate contracts -70 5.782 Currency contracts 7.286 -533 Other interest income 27 383 Total 195.584 195.693 3 INTEREST EXPENSES Deposits -1.318 640 Subordinated debt 6.632 6.542 Other interest expenses 1.062 1.162 Total 6.376 8.344 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 23.762 21.647 Payment services 12.546 11.098 Loan fees 80.479 76.106 Guarantee commission 26.270 20.919 Other fees and commission 34.987 30.343 Total 178.044 160.113 5 VALUE ADJUSTMENTS Bonds -3.165 -1.040 Total shares 17.513 23.433 - Shares in sectorcompanies etc 10.516 9.012 - Other shares 6.997 14.421 Foreign currency 6.454 4.615 Other financial instruments -621 -219 Assets linked to pooled schemes -85.013 -71.313 Deposits in pooled shemes 85.013 71.037 Total 20.181 26.513 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 - Page 37 - Note DKK 1,000 2021 2020 6 STAFF COSTS AND ADMINISTRATIVE EXPENSES Salaries and remuneration of audit committee, managers etc. Management board 1.336 1.370 Audit Committee 90 90 Committee of representatives 181 165 Total salaries and remuneration of board etc 1.607 1.625 Staff costs Wages and salaries 97.412 91.530 Pensions 10.678 9.725 Social security costs 1.557 1.243 Payroll tax 15.753 15.637 Total staff costs 125.400 118.135 Salary to special risk takers (11 persons in 2021, 11 persons in 2020) 10.716 11.085 Pensions to special risk takers (11 persons in 2021, 11 persons in 2020) 844 864 The bank has no employees with variable salary shares. Other administrative expenses IT expenses 44.862 41.745 Rent, electricity, heating etc 2.721 2.248 Postage, telephony etc 922 1.038 Other administrative expenses 32.005 29.138 Total other administrative expenses 80.510 74.169 Total staff costs and administrative expenses 207.517 193.929 - Page 38 - Note DKK 1,000 2021 2020 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 circum- stances. 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 company 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 166 158 Total 166 158 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 759 665 Honorariums for statutory audits of nancial statements 458 482 Honorariums for assurance services 157 31 Honorariums for tax advice 72 115 Honorariums for other services 72 37 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 132.591 177.716 Reversal of write-downs made in previous years -144.766 -135.040 Finally lost, not previously written down 5.847 4.828 Interest on the written-down portion of loans -7.551 -11.188 Recoveries of previously written off debt -1.348 -3.442 Total -15.227 32.874 - Page 39 - Note DKK 1,000 2021 2020 10 TAX Calculated tax of income of the year 42.038 28.315 Adjustment of deferred tax 865 783 Adjustment of tax calculated in previous years -1.673 -967 Total 41.230 28.131 Tax paid during the year 43.150 28.148 EFFECTIVE TAX RATE (%) (Pct.) (Pct.) Tax rate currently paid by the bank 22,00 22,00 Non deductable costs and not taxable income -1,17 -1,96 Adjustment of tax calculated for previous years -0,82 -0,67 Other adjustments 0,15 0,20 Effective tax rate 20,16 19,57 11 RECEIVABLES AT CREDIT INSTITUTIONS AND CENTRAL BANKS Deposits with central banks 0 2.171.326 Receivables at credit institutions 74.300 53.813 Total 74.300 2.225.139 Remaining period Demand 74.300 2.225.139 Total 74.300 2.225.139 No assets related to genuine purchase and resale transactions included. - Page 40 - Note DKK 1,000 2021 2020 12 LOANS AND OTHER DEBTORS AT AMORTISED COST PRICE Remaining period Claims at call 1.599.516 1.404.900 Up to 3 months 133.723 111.271 Over 3 months and up to 1 year 609.199 526.959 Over 1 year and up to 5 years 1.093.075 928.421 Over 5 years 1.284.224 1.253.222 Total loans and other debtors at amortised cost price 4.719.737 4.224.773 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 21.271 20.005 Stage 1 impairment charges / value adjustment during the period 7.314 12.848 Stage 1 impairment reversed during the period -15.987 -11.582 Cummulative stage 1 impairment total 12.597 21.271 STAGE 2 IMPAIRMENT CHARGES Stage 2 impairment charges at the end of the previous financial year 109.773 63.076 Stage 2 impairment charges / value adjustment during the period 44.694 92.635 Stage 2 impairment reversed during the period -54.439 -45.938 Cummulative stage 2 impairment total 100.028 109.773 STAGE 3 IMPAIRMENT CHARGES Stage 3 impairment charges at the end of the previous financial year 217.886 240.252 Stage 3 and impairment charges / value adjustment during the period 72.139 66.707 Reversal of stage 3 impairment charges during the period -70.850 -70.684 Recognised as a loss, covered by stage 3 impairment charges -50.610 -18.389 Cummulative stage 3 impairment total 168.566 217.886 Total cumulative impairment charges IFRS9 281.191 348.930 - Page 41 - Note DKK 1,000 2021 2020 PROVISIONS Provisions beginning of the year 10.472 13.590 Provisions during the year 8.402 5.527 Reversal af provisions -3.490 -6.906 Provisions for losses -961 -1.739 Guarantees end of year 14.423 10.472 Total cumulative impairment charges IFRS9 and guarantees 295.614 359.402 Stage 1 Stage 2 Stage 3 Beginning Impairment 21.271 109.773 217.886 - in % of total impairment 6% 31% 63% Maximum credit risk 7.386.203 1.153.356 332.182 - in % of maximum credit risk 83% 13% 4% Rating, weighted average 3,2 6,9 10,0 End Impairment 12.597 100.028 168.566 - 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 In light of the COVID-19 pandemic and the effects thereof, such as uncertainty around global supply lines, rising infla- tion and rising interest rates etc., an extra amount has been reserved as a management estimate of DKK 50.0 million, of which DKK 32.5 million is in Stage 2 and DKK 17.5 million is in Stage 3. There is also a management estimate for the agricultural industry of DKK 5.0 million, which is placed in Stage 2. This is a total of DKK 55.0 million in management estimates, divided into DKK 37.5 million in Stage 2 and DKK 17.5 in Stage 3. Refer to note 31 on page 83 for a description of ratings. Loans etc. with suspended calculation of interest 45.653 61.596 - Page 42 - Note DKK 1,000 2021 2020 13 BONDS AT FAIR VALUE Treasuries 921.654 942.144 Mortgage credit bonds 8.483 5.636 Other bonds 11.763 11.726 Total bonds at fair value 941.900 959.506 The bank has no held-to-maturity assets 14 SHARES ETC Quoted on Nasdaq OMX Copenhagen A/S 21.886 29.719 Quoted on other stock exchanges 17.967 16.943 Sectorshares recorded at fair value 168.364 154.558 Total shares etc 208.217 201.220 15 SHARES ASSOCIATED WITH POOL SCHEMES Investment units 1.305.385 1.037.873 Cash deposits etc. 1.278 1.129 I alt 1.306.663 1.039.002 16 LAND AND BUILDINGS Investment properties Fair value - end of previous nancial year 3.019 2.961 Acquisitions during the year incl. improvements 0 58 Fair value end-of-year 3.019 3.019 Owner occupied properties 43.166 44.179 Reassessed value - end of previous nancial year 6.156 408 Acquisitions during the year incl. improvements -1.427 -1.421 Depreciations -2.000 - Reassessed value end-of-year 45.895 43.166 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-year 20.573 0 Increase from changes in accounting policies at the beginning of the year - 22.859 Acquisitions during the year incl. improvements 412 Depreciations -2.300 -2.286 End of the year 18.685 20.573 - Page 43 - Note DKK 1,000 2021 2020 17 OTHER TANGIBLE ASSETS Total cost price beginning-of-year 26.220 23.927 Acquisitions during the year incl. Improvements 3.080 2.418 Reduction during the year -6.273 -125 Total cost price beginning-of-year 23.027 26.220 Total write-ups/downs and depreciations beginning-of-year 21.968 20.604 Depreciations during the year 1.610 1.489 Reversal of depreciations -6.177 -125 Total write-ups/downs and depreciations end-of-year 17.401 21.968 Book value end-of-year 5.626 4.252 18 DEBT TO CREDIT INSTITUTIONS AND CENTRAL BANKS Debt to credit institutions 0 181.165 Total debt to credit institutions and central banks 0 181.165 Term to maturity Demand 0 181.165 Total debt to credit institutions and central banks 0 181.165 No liabilities related to genuine sale and repurchase transactions included 19 DEPOSITS AND OTHER DEBTS Demand 6.458.049 5.844.944 At notice 19.733 13.430 Special types of deposits 549.888 605.361 Total deposits and other debts 7.027.670 6.463.735 Term to maturity Demand 6.484.203 5.862.675 Desposits redeemable at notice: Up to 3 months 86.320 87.148 Over 3 months and up to 1 year 6.167 6.212 Over 1 year and up to 5 years 54.675 47.383 Over 5 years 396.305 460.317 Total deposits and other debts 7.027.670 6.463.735 No liabilities related to genuine sale and repurchase transactions included. 20 DEFERRED TAXATION (Tax amount) Tangible assets 5.103 3.847 Loans and other receivables -3.308 -3.067 Other 503 643 Total deferred taxation 2.298 1.423 - Page 44 - Note DKK 1,000 2020 2019 21 SUBORDINATED DEBT Supplementary capital DKK 100 mio 98.334 97.834 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 98.334 97.834 Subordinated debt that may be included in the capital base 98.334 97.834 Interest on subordinated liabilities recognised in income 6.632 6.542 22 SHARE CAPITAL 192.800 192.800 Number of shares is 9,640,000 at DKK 20 each The bank has pr. 31. December 2020 15,057 registered shareholders. 96,18 % of the share capital are registered on name 23 HOLDERS OF HYBRID CAPITAL Hybrid core capital 60.881 60.748 Rate 8,6632% 8,6632% Due date Ingen dato Ingen dato The hybrid core capital has an innite 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. - Page 45 - Note DKK 1,000 2021 2020 24 OWN CAPITAL SHARES Purchase and sales of own shares Holdings beginning of the year Number of own shares 6.047 16.957 Nominal value of holding of own shares (DKK 1,000) 121 339 Own shares proportion of share capital 0,06 0,18 Addition Number of own shares 55.500 57.335 Nominal value of holding of own shares (DKK 1,000) 1. 110 1.147 Own shares proportion of share capital 0,58 0,59 Purchase price (DKK 1,000) 4.934 3.491 Disposal Number of own shares 56.822 68.245 Nominal value of holding of own shares (DKK 1,000) 1.136 1.365 Own shares proportion of share capital 0,59 0,71 Sale price (DKK 1,000) 4.948 4.093 Holdings end of the year Number of own shares 4.725 6.047 Nominal value of holding of own shares (DKK 1,000) 95 121 Own shares proportion of share capital 0,05 0,06 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 2021 are a consequence of this. 25 CONTINGENT LIABILITIES Guarantees Finance guarantees 602.385 689.786 Guarantees against losses on mortgage credit loans 955.781 787.151 Registration and conversion guarantees 998.185 1.015.910 Other contingent liabilities 134.329 137.292 Total 2.690.680 2.630.139 Other binding engagements Irrevocable credit-undertakings 799.908 466.619 Total 799.908 466.619 - Page 46 - Note DKK 1,000 2021 2020 Assets pledged as collateral The bank has pledged cash for a total of DKK 10 million. Contract Legal obligations As a member of Bankdata, the bank is due to a possible resgination required to pay a withdrawal benet with the addition of the bank’s part of capitalized development costs. 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 22,1 million, which is 0,6914 %. In 2021, Skjern Bank paid 464 TDKK to Afviklingsformuen (Settlement Assets). The Bank is a tenant in one leases, which can be terminated with 6 months’ notice, the yearly lease is 223 TDKK. The Bank is a tenant in one leases, which can be terminated with 12 months’ notice, the yearly lease is 157 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: 2021 2020 Loans 0 0 Bid Bond 0 0 Rate of interest - - - Page 47 - Note DKK 1,000 2021 2020 Board of directors: Loans 6.798 25.220 Bid Bond 2.903 41.513 Rate of interest 0,7864-5,25% 0,333-12,65% Holding of shares in Skjern Bank: The board of managers - Per Munck 31.687 30.199 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 Lars Skov Hansen 704 704 Carsten Jensen 2.303 2.164 Michael Tang Nielsen 140 140 28 CAPITAL REQUIREMENT Equity 1.247.077 1.108.059 Proposed dividend -28.920 -19.280 Revaluation reserves -417 -417 Holders of hybrid capital -60.881 -60.748 Deduction for the sum of equity investments etc. above 10 % -47.622 -46.125 NPE -1.020 - CVA deduction -977 -1.002 Deduction of trading framework for own sharers -2.494 -1.697 Core tier 1 capital 1.104.746 978.790 Holders of hybrid capital 59.378 59.245 Tier 1 capital 1.164.124 1.038.035 Subordinated loan capital 98.334 97.834 Capital base 1.262.458 1.135.869 Weighted items Credit risk 4.672.450 4.369.781 Market risk 288.622 293.700 Operational risk 722.581 707.072 Weigthed items total 5.683.653 5.370.553 Core tier 1 capital ratio (excl. hybrid core capital) 19,4 18,2 Tier 1 capital ratio 20,5 19,3 Solvency ratio - Tier 2 22,2 21,2 - Page 48 - 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 observable market prices on the market date. For nancial instru- ments valued on active markets, the fair value is calculated based on generally accepted valuation methods. Shares, etc. and derivative nancial instruments are measured in the accounts at fair value so that recognised values correspond to fair value. Loans are recorded in the bank’s statement of nancial position at amortised cost. The differen- ce 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 in- terest 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 nan- cial year and the variable interest rate. DKK 1,000 2021 2020 Book value Fair value Book value Fair value Financial assets Cash in hand+claims at call on central banks 2.566.381 2.566.381 192.109 192.109 Claims on credit institutes and central banks 1) 74.300 74.300 2.225.139 2.225.139 Loans and other debtors at amort. costprice 1) 4.720.266 4.725.991 4.225.804 4.231.398 Bonds at current value 1) 941.900 943.638 961.774 961.774 Shares etc. 208.217 201.220 201.220 201.220 Derivative nancial instruments 3.343 3.343 2.884 2.884 Total nancial assets 8.514.407 8.514.873 7.808.930 7.814.524 Financial liabilities Debt to credit institutions and central banks 1) 0 0 181.165 181.165 Deposits and other debts 1) 7.027.670 7.027.894 6.463.736 6.465.015 Derivative nancial instruments 3.242 3.242 2.211 2.211 Subordinated debt 1) 2) 99.944 99.944 99.444 99.444 Total nancial liabilities 7.130.856 7.131.080 6.746.556 6.747.835 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 - Page 49 - Note DKK 1,000 2021 2020 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 classies 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 90 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. - Page 50 - Note Figures in pct. 2021 2020 31 CREDIT RISKS Loans and guarantees distributed on sectors Public authorities 0,0 0,0 Business: Agriculture, hunting, forestry & shing 9,9 10,8 - Plant production 1,3 1,2 - Cattle farming 5,7 5,8 - Pig farming 1,0 1,2 - Mink production 0,7 1,8 - Other agriculture 1,2 0,8 Industry and mining 3,8 3,6 Energy 1,3 1,8 Building and constructions 6,8 4,5 Wholesale 6,7 6,3 Transport, hotels and restaurants 1,8 1,4 Information and communication 0,2 0,8 Financial and insurance business 4,9 4,0 Real-esate 9,5 11,8 Other business 3,8 3,8 Total business 48,7 48,8 Private persons 51,3 51,2 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 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 - Page 51 - Note 2020 2020 2020 (DKK 1,000) (DKK 1,000) (DKK 1,000) Exposure Guarantees Credit-under- takings Public authorities 0 0 0 Business - agriculture 857.462 146.486 25.260 Business - other 3.261.468 674.946 331.988 Private persons 2.674.527 1.808.706 109.371 Total 6.793.457 2.630.138 466.619 Which recognized in the balance after deduction of depreciation 4.224.773 Description of collateral 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 2020 2020 2020 Security distributed by type (DKK 1,000) Business, agriculture Business, other Private Securities 8.694 161.853 84.255 Real property 457.376 994.372 1.020.113 Chattels, vehicles and rolling stock 76.147 628.293 430.886 Guarantees 8.632 55.160 2.479 Other forms of security 146.560 622.717 820.140 Total 697.409 2.462.395 2.357.873 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 reects the loan value attributable to the individual exposures. The loan value reects 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 write-downs) across the entire customer portfolio. In 2021, this resulted in a blank of DKK 3.234,7 million. This is a fall of DKK 311 million compared to 2020. - Page 52 - Note DKK 1,000 31.12.2021 Financial assets, loan commitments and nancial guarantees. Instruments without signicant increase in credit risk (stage 1) Rating classication 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 signicant 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 classication 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 signicant 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 classication 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 - Page 53 - Note DKK 1,000 31.12.2020 Financial assets, loan commitments and nancial guarantees. Instruments without signicant increase in credit risk (stage 1) Rating classication 1 2 3 4 5 6 7 8 9 10 Total Industry group Agriculture 133.449 112.536 111.990 40.546 157.658 114.137 40.137 1.618 65.763 0 777.834 Property 161.074 286.921 115.083 177.901 53.187 117.898 36.231 45.151 3.700 0 997.147 Other 515.369 889.947 158.367 242.294 262.411 55.423 50.266 44.450 58.756 0 2.277.284 Private 677.727 712.239 393.699 824.201 572.545 130.099 52.434 90.031 54.140 0 3.507.115 Deposits at Danmarks Nation- albank 119.097 0 0 0 0 0 0 0 0 0 119.097 Accounts with other banks 2.771 73.000 88.414 0 0 0 0 0 0 0 164.185 Instruments without signicant increase in credit risk (stage 2) 1.609.487 2.074.643 867.553 1.284.943 1.045.802 417.556 179.069 181.250 182.359 0 7.842.661 Instruments for which impairment has been recognised corresponding to expected credit losses in their lifetime (stages 2 and 3) Rating classication 1 2 3 4 5 6 7 8 9 10 Total Industry group Agriculture 0 205 0 12.474 18.722 6.755 4.783 0 36.289 0 79.228 Property 0 0 0 27.740 45.259 9.431 3.887 0 12.037 0 98.354 Other 1 521 152 120.102 82.846 58.393 7.466 56.208 95.242 0 420.932 Private 1 156 362 106.292 100.470 15.263 2.546 11.130 49.260 0 285.480 Accounts with other banks 0 0 0 2.250 0 1.000 0 0 0 0 3.250 Instruments with signicant increase in credit risk (stage 2) 1 882 514 268.858 247.298 90.842 18.682 67.338 192.829 0 887.244 Industry group Agriculture 0 0 0 0 0 0 0 0 0 184.766 184.766 Property 0 0 0 0 0 0 0 0 0 96.672 96.672 Other 0 0 0 0 0 0 0 0 0 187.711 187.711 Private 0 0 0 0 0 0 0 0 0 134.306 134.306 Credit-impaired instruments (stages 3 and 2 weak) 0 0 0 0 0 0 0 0 0 603.455 603.455 Instruments for which impair- ment has been recognised cor- responding to expected credit losses in their lifetime) 1 882 514 268.858 247.298 90.842 18.682 67.338 192.829 603.455 1.490.699 Total nancial assets, loan commitments and nancial guarantees. 1.609.488 2.075.525 868.067 1.553.801 1.293.100 508.399 197.751 248.588 375.187 603.455 9.333.360 Work guarantees etc. not covered by IFRS9 Rating classication 1 2 3 4 5 6 7 8 9 10 Total Total 153.003 221.641 127.699 345.916 141.209 24.549 16.819 17.758 19.852 41.516 1.109.962 Total 1.762.491 2.297.166 995.767 1.899.717 1.434.308 532.948 214.570 266.345 395.039 644.971 10.443.323 - Page 54 - 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. re- garding thresholds for reporting 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 2021 2021 2021 Exposure before write-down Write-downs Securities Signicant nancial difculties 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 2020 2020 2020 Exposure before write-down Write-downs Securities Signicant nancial difculties 450.320 202.549 260.806 Breach of contract 7.825 5.477 1.743 Reductions in terms 10.209 4.946 4.041 Probability of bankruptcy 45.265 30.517 21.785 Total 513.619 243.489 288.375 3.308 3.536 271 0 3.106 3.249 308 0 0 500 1.000 1.500 2.000 2.500 3.000 3.500 4.000 High Medium Low Not classified Mio kr. Credit quality Credit-quality on loans which are neither in arrears not written down 2021 2020 - Page 55 - Note DKK 1,000 2021 2020 The calculation of securities does not include the value of guarantees and transports. Collateral is calculated at the cust- omer level. The collateral value of securities in the above table reects the fair value calculated in accordance with the Bank’s busi- ness process with a security margin of 10 - 60 %. In connection with the calculation of expected loss, other haircuts are used for security values that reect 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 12.658 9.138 >90 days 154 84 Total 12.812 9.222 Loans and arrears amount for loans, which have not been written down 0-90 days 95.228 89.453 >90 days 3.202 2.851 Total 98.430 92.304 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 based on the Danish Financial Supervisory Authority’s guidelines on risk classication. 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 signicantly if the rating has deteriorated since initial recognition correspon- ding 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 dened as the Danish Financial Supervisory Autho- rity’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 signicantly if the as- set is overdrawn for more than 30 days, though arrears on loans are essentially considered an impairment. Examples of assets with and without signicantly 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 Signicantly impaired credit risk No Ye s Ye s - Page 56 - Note Assets with and without signicantly impaired credit risk, but which are not impaired, 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 signicant 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 - Page 57 - Note Information base, assumptions and assessment methods in assessing expected credit loss Assets with or without signicant 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 - 30.06.2020 distributed by rating class and private and business by DS industry codes The proportion of cus- tom-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 repre- senta-tive of the bank's custom-ers. The bank has provided data for the calculations. Calculated based on histori-cal PD gures from 6 small nancial institutions in the years 2010-2016. The asset's lifetime Settlement agreements for assets, as well as calculat- ed average maturities from BankData Loans are settled as agreed (otherwise 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 calcu- lated with the size of the credit on the reporting date in 5 years. - Page 58 - 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 Den- mark) mac-ro-tools based on forecasts. The factors are repre- senta-tive of the bank's custom-ers in the near future. The factors were phased out of the model over 10 years, as the ex- tension factors are consid- ered 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 2010- 2019. Factor 1 will limit the increase in the macro from year to year. Factor 1 was chosen based on the great- est 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 deter- mined based on a principle of caution. LGD The bank's statistics for realised loss on assets that were impaired during the period 1/1/2011 to 30/06/2020. The loss rates are divided into private and business according to DS industry codes. The loss rate is repre- senta-tive of the future loss in the mentioned groups. The loss rate is the realised loss in relation to EAD. To the degree possible, 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 exposures 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 deducted 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-nancial guarantees are included in the calcula- tion of EAD. - Page 59 - Note Factor Information base Assumptions Assessment methods Starting risk class The as the asset’s initial recognition date is the exposure’s establishment 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 reects the risk on the date of establishment (and when there are major increases). 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 reects 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 signicantly 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 expecta- tions 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. - Page 60 - Note Factor Information base Assumptions Assessment methods Cause of credit impairment The cause of the custom- er'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 signicant nan- cial difculties When stating the reason the guidelines in Appendix 10 of the Executive Order are followed Scenario weight Exposures that have im- paired credit during the pe- riod 1/1/2011 – 30/09/2019 where the case has been closed The historical distribution of scenarios is represent- ative of the credit loss on customers with similar causes and industries. The number of zero-losses uctuates with the eco- nomic trend. The distribution of ex- posures by percentage is calculated based on a placement in one of the three scenarios: Zero-loss, Sale and Collapse. The per- centage of zero-losses is then reduced in relation to a cyclical factor calculated based on the bank’s impair- ment and provisions during the period 2007-2018. 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 reduc- tions. There are generally greater reductions for a collapse scenario than a sales scenario. The actual assessment is the closest 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 his- tori-cal documentation. There are little experience with other exposures. Reduc-tions are thus esti- mated based on a precau- tionary principle. Expected settlement abil- ity/dividends Availability calculations for private customers, operating prot and budgets/periodic results for business custom-ers, dividend statements from bankruptcies The basis indicates some- thing about the ability to settle the expo-sure Great caution is taken with recognition. If the custom- er is no longer cooperating with the bank, the settle- ment 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 - Page 61 - Note DKK 1,000 2021 2020 Interest rate risk on debt instruments etc - total 12.263 13.398 Interest rate risk in pct of core capital after deductions 1,1 1,3 Interest rate risk split in currencies with highest risk: DKK 12.500 13.560 EUR -112 -75 CHF -40 -47 JPY -1 -2 USD -80 -38 Other -4 0 Total 12.263 13.398 Foreign currency risk Total assets in foreign currency 229.317 190.396 Total liabilities in foreign currency 117.819 103.934 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 1.180 828 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 12 4 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 prot 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 2.189 2.972 Quoted on other stock exchanges 1.797 1.694 Unquoted shares recorded at fair value 16.836 15.456 Total shares etc. 20.822 20.122 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. - Page 62 - Note DKK 1,000 2021 2021 2021 2021 2020 2020 2020 2020 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 261.394 488 1.338 850 117.268 -228 240 468 Over 3 months and up to 1 year 92.781 -59 218 277 16.811 -24 254 278 Average market value 902 609 350 545 Interest-rate contracts Up to 3 months 292.560 -450 588 1.038 232.194 -339 1.282 1.621 Over 3 months and up to 1 year 16.618 -28 30 58 35.564 -54 134 188 Over 5 years 0 0 0 0 Average market value 1.826 2.418 2.881 3.074 Shares contracts Up to 3 months 0 0 0 0 0 0 0 0 Average market value 0 0 12 0 DKK 1,000 2021 2020 Credit risk on derivative nancial instruments Positive market value, counterparty with risk weighting of 20 % 3.367 1.452 Positive market value, counterparty with risk weighting of 50% 843 85 Positive market value, counterparty with risk weighting of 75% 2.176 1.553 Positive market value, counterparty with risk weighting of 100% 293 806 Total 6.679 3.896 Unsettled spot transactions Market- Market- Market- Nominal value- value- value- value positive negative net Foreign-exchange transactions, purchase 2.065 7 - 7 Foreign-exchange transactions, sale 979 3 1 2 Interest-rate transactions, purchase 21.809 7 26 -19 Interest-rate transactions, sale 20.309 61 1 60 Share transactions, purchase 8.953 96 24 72 Share transactions, sale 8.953 25 88 -63 Total 2021 63.068 199 140 59 Total 2020 45.133 329 290 39 - Page 63 - Note DKK 1,000 2021 2020 2019 2018 2017 34 5 YEARS IN SUMMARY Prot and loss account Net income from interest 205.575 190.244 185.287 185.242 171.972 Dividend on shares 2.657 2.089 5.863 3.476 10.020 Charges and commission, net 172.738 155.181 143.257 119.515 114.620 Income from core business 380.970 347.514 334.407 308.233 296.612 Value adjustments 20.181 26.513 40.225 69.389 31.045 Other ordinary income 3.487 1.977 1.945 1.503 1.031 Staff cost and admin. expenses 207.517 193.929 191.861 191.626 161.052 Depreciation of intangible and tangible assets 7.337 5.195 2.821 3.004 3.071 Other operating expenses 480 234 112 127 52 - Contribution to the Guarantee Fund for deposits 464 194 112 52 52 - Other operating expenses 16 40 0 75 0 Write-downs on loans etc. (net) -15.227 32.874 16.831 19.729 19.886 Operating result 204.531 143.772 164.952 164.639 144.627 Taxes 41.230 28.131 29.469 22.126 20.804 Prot for the year 163.301 115.640 135.482 142.513 123.823 Of which are holders of shares of hybrid core capital instruments etc. 5.289 6.487 6.626 6.626 5.168 Balance as per 31st December Summary Total assets 9.978.498 8.974.467 7.614.080 6.703.573 6.367.636 Loans and other receivables 4.719.737 4.224.773 4.325.613 4.359.561 3.924.509 Guarantees etc 2.690.680 2.630.139 2.379.168 1.543.324 1.125.541 Bonds 941.900 959.506 1.045.717 1.016.994 1.072.833 Shares etc 208.217 201.220 225.094 220.498 245.686 Deposits and other debts 7.027.670 6.463.735 6.223.604 5.457.413 5.240.913 Subordinated debt 98.334 97.834 97.334 99.976 99.797 Total equity 1.247.077 1.108.059 1.026.569 926.740 814.332 - of which proposed dividend 28.920 19.280 28.920 28.920 0 Capital Base 1.262.458 1.135.869 1.032.679 923.409 819.582 Weighted items 5.683.653 5.370.562 5.551.264 5.310.230 4.605.145 - Page 64 - Note 2021 2020 2019 2018 2017 35 FINANCIAL RATIO (FIGURES IN PCT.) Solvency ratio 22,2 21,2 18,6 1 7, 4 1 7, 8 Core capital ratio 20,5 19,3 16,9 15,5 15,8 Return on equity before tax 1 7, 9 13,7 1 7, 3 19,5 19,8 Return on equity after tax 14,2 10,9 14,1 16,8 1 7, 1 Return on assets 1,6 1,3 1,8 2,1 1,9 Earning/expense ratio in DKK 2,02 1,62 1,78 1,77 1,75 Interest rate risk 1,1 1,3 1,6 1,7 1,9 Foreign currency position 0,1 0,1 0,2 0,2 0,1 Foreign currency risk 0,0 0,0 0,0 0,0 0,0 Loans etc. against deposits 60,0 60,9 74,6 86,3 81,4 Statutory liquidity surplus - - - 165,1 191,6 NSFR 1,42 - - - - LCR 353 351 357 247 262 Total large commitments 114,4 118,3 136,5 144,1 55,1 Loans and debtors at reduced interest 0,6 0,9 1,2 1,9 2,2 Accumulated impairment ratio 3,8 4,9 4,7 5,8 6,3 Impairment ratio for the year -0,2 0,4 0,2 0,3 0,4 Increase in loans etc. for the year 11,7 -2,3 -0,8 11,1 6,4 Ratio between loans etc. and capital funds 3,8 3,8 4,2 4,7 4,8 (value per share 100 DKK) Earnings per share 103,4 56,8 66,8 70,5 61,5 Book value per share 616 544 502 450 390 Rate on Copenhagen Stock Exchange 518 352 3 11 305 368 Dividend per share 15 10 15 15 0 Market value/net income per share 5,0 6,2 4,7 4,3 6,0 Market value/book value 0,84 0,65 0,62 0,68 0,94 (value per share 20 DKK) Earnings per share 20,7 11,4 13,4 14,1 12,3 Book value per share 123 109 100 90 78 Rate on Copenhagen Stock Exchange 103,5 70,4 62,2 61,0 73,5 ) 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. - Page 65 - Note DKK 1,000 36 COPERATIVE AGREEMENTS Skjern Bank cooperates with receives commission relating to paymnet transfers from, and is co-owner of some of the following companies: Totalkredit A/S, Nykredit A/S, DLR Kredit A/S, BRF Kredit A/S, Privatsikring A/S, Eurocard, PFA Pen- sion, Sparinvest A/S, Valueinvest Asset Management S.A., BI Asset Management Fondsbørsmæglerselskab A/S, Jyske Invest, Forvaltningsinstituttet for Lokale Pengeinstitutter, Sydinvest A/S, HP Fondsbørsmæglerselskab A/S, Investerings- foreningen 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 Visa International. - Page 66 - FINANCIAL CALENDER 2022 21 January Deadline for submission of items for the agenda for the Annual General Me- eting 10 February Announcement of Annual Report 2021 7 March General Meeting – Ringkøbing-Skjern Kulturcenter 5 May Announcement of quarterly report 1st quarter 2022 18 August Announcement of half-yearly report 2022 27 Ocotober Announcement of quarterly report 3rd quarter 2022 AUDIT COMMITTEE Name Jobposition City Niels Erik Kjærgaard (chairman) Former city manager Skjern Finn Erik Kristiansen Manager Varde Lars Skov Hansen Advisor Esbjerg - Page 67 - 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 Jens Bruun Former manager Aarhus 2007 1952 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 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 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 Helle Vingolf Manager Esbjerg 2018 1968 Members of the board of directors - Page 68 - 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 Poppelstykket 8 ApS Board chairman of Byggefirmaet Ivan V. Mortensen A/S Board chairman of Grey Holding 2 A/S Board chairman of Grønbjerg Grundinvest A/S Board chairman of Gråkjær A/S Board chairman of Gråkjær Holding A/S Board chairman of Gråkjær Aqua A/S Board chairman of Gråkjær Aqua International A/S Board chairman of LHI Invest A/S Board chairman of ODJ Holding ApS Board chairman of PE Trading A/S Board chairman of Roslev Trælasthandel A/S Board chairman 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 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 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 BOARD OF DIRECTORS - Page 69 - 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 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 MANAGEMENT Lars Skov Hansen, advisor, Esbjerg Employee-selected Born 17 May 1973 Elected on the board in 2011 Current term expires in 2023 Carsten Jensen, advisor, Skjern Employee-selected Born 29 April 1980 Elected on the board in 2015 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 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 Pengeinsti- tutter SKJERN ESBJERG RIBE VIRUM ØLGOD Banktorvet 3 Kongensgade 58 J. Lauritzens Plads 1 Frederiksdalsvej 65 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 Bøgevej 2 Storegade 20 Strandvejen 143 Lyngsø Allé 3 6800 Varde 6740 Bramming 2900 Hellerup 2970 Hørsholm Tlf. 9682 1640 Tlf. 9682 1580 Tlf. 9682 1450 Tlf. 9682 1420 skjernbank.dk
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