Skjern Bank

Annual Report • Feb 2, 2017

Annual Report 2016 (Extract)

Very satisfactory results and solid capital base

• Profit before tax of DKK 104.7 million compared to DKK 51.0 million in 2015
• Return on equity before tax of 15.9 %
• Capital ratio of 16.5 % and individual solvency requirements of 10.4 %
• Solid liquidity reserves of DKK 1,219 million, corresponding to 185.4 %.
• Core earnings of DKK 127.7 million, compared with DKK 116.2 million in 2015
• Decrease in impairment to DKK 36.2 million, compared to DKK 63.9 million in 2015
• For 2017 a core earnings in the range of DKK 120 130 million is expected

Content

Management's financial report for 2016 .	4
Endorsement of the Annual Report by the Management .	6
Profit and loss account .	7
Statement of comprehensive income .	7
Proposal for distribution of profit .	7
Balance Sheet .	8
Information on changes in equity .	9
Notes .	10
5 years in summary .	29
5 years financial ratios .	30
Financial Calendar 2017 .	30
Committee of representatives .	31
List of board members' managerial offices .	31

Management's financial report for 2016

Principal activities

Skjern Bank's main activity is offering financial services to private customers, corporate and institutional customers and public companies. Private customers live throughout Denmark, while business customers are mainly from West and Southwest Jutland, and the Hellerup area north of Copenhagen. The bank wishes to offer its customers a full product range combined with professional consultancy services.

2016 in review

A profit before tax of DKK 104.7 million is considered very satisfactory. Profits were positively affected by the improvement in the bank's net interest and fee income and the significantly reduced impairment need.

Net interest income has increased by DKK 1.5 million. The bank has noticed the fierce competition in the market and has seen a decline in interest income of DKK 18.4. However the bank's interest expenses were further reduced, which is due to significantly reduced interest on deposits of DKK 17.0 million and reduced interest on subordinated debt by DKK 2.9 million.

Net interest and fee income increased by DKK 19.3 million, which is very satisfactory. The reason is increasing loan transaction income and guarantee commissions, which together increased by DKK 10.1 million as a result of increased activity in the provision of mortgage loans to the bank's customers.

The bank's objective has been to increase fee earnings in relation to interest income through increased activity in the areas of securities, pension and insurance. The bank's earnings from these types of business has gone from 27% in 2013 to 36% in 2016, which is a very satisfactory development.

The impairment need has decreased in relation to 2015 and amounts to DKK 36.1 million, corresponding to 0.7 % of the bank's loans and guarantees.

The impairment largely stems from the agricultural segment, as the crisis in agriculture in 2016 led to reduced settlement prices, particularly in pork and milk. Impairments in the segment were made according to current guidelines from the Danish Financial Supervisory Authority. The crisis in agriculture is expected to slow in 2017 as the prices of pork and milk increased substantially during the end of 2016. The price level is expected to continue in 2017.

The total impairment was reduced by DKK 27.7 million to DKK 36.2 million, where the level in 2015 was unsatisfactory and this makes the comparison difficult. The bank's management assesses the impairment need in 2016 to be at a normal level, taking the challenges in agriculture into account.

At the beginning of 2016, the bank expected a base profit in the range of DKK 100–110 million. On 13 January 2017 the bank issued a stock exchange announcement about increasing the expectations for core earnings to the range of DKK 120-125 million, which is realised at DKK 127.7 million. The core earnings have thus increased by DKK 11.6 million compared to 2015, corresponding to an increase of 9.9 %.

Profit before tax amounted to DKK 104.7 million compared to DKK 51.0 million in 2015.

Both the achieved core earnings and the profit before tax are considered very satisfactory.

The capital coverage was strengthened in the course of 2016 in rela-

tion to the individual solvency requirements, from 4.9 percentage points in 2015 to 6.1 % percentage points in 2016. In 2016 the bank increased its capital base by DKK 41 million, while at the same time in 2016 a nominal DKK 70 million of hybrid core capital was repaid, which on 31/12/2015 was weighted in the capital base as DKK 49 million. Simultaneous with the bank's capital base increasing, the solvency requirement reduced from 11.4 % to 10.4 % as a result of improved credit quality in the bank's larger corporate exposures.

With regard to the bank's capital position in general, refer to note 29 on page 37.

Dividend considerations and future regulation

It is basically the bank's view that excess capital beyond what is used to cover the bank's current activities and any planned new initiatives, plus a sufficient and solid buffer, should be paid to the bank's shareholders in the form of dividends and/or share buybacks.

At the end of 2016 the bank had a fully satisfactory and solid capital basis based on the current regulatory framework, including continued implementation of the additional buffer requirements until the end of 2018. In one scenario, where additional capital-related regulation of the sector was not imminent, it was the management's recommendation to propose that the Annual General Meeting adopt distribution of dividends and/or share buybacks.

However, the situation is that two additional EU regulatory frameworks are taking shape in the Danish Financial Supervisory Authority for phasing in in 2018. These have to do with IFRS 9 and the NEP regulatory frameworks, which both enter into force in 2018, but which are still not finally settled and therefore there the capital consequences for the bank cannot be calculated.

However, it is clear that these new regulations will require significant additional capital padding for the banking sector, and because of this it is assessed by the bank's management that it is currently not feasible to propose use of capital for distribution of dividends and/or share buybacks.

It is expected that the additional capital requirements can be quantified in mid-2017, after which the bank's management will assess the capital situation, and possibly define and implement a dividend programme.

Expectations for 2017

The bank's expectations for 2016 were met and exceeded in most areas. Because of this the bank is optimistic about 2017 and expects, based on the increasing number of customers and the continued decline in interest expenses, the earnings level realised in 2016 to be maintained.

The bank has established the strategic and profit-related goals for the coming year, of which the most significant are listed below.

Goals have been established for 2017 based on cautious growth in the bank's current departments and business areas. The focus is on strengthening the bank's earnings and capital provisioning in order to secure the position as the independent and local West and South Jutland bank, which will make a difference in the local areas as well in the long term.

We are still experiencing that private customers in the West and South Jutland areas have a very robust economy, which is supported by relatively low and stable housing prices and general economic caution. The bank does not expect significant challenges in lending to private customers in 2017, nor has this been the case in recent years.

The bank still has close ties to the agricultural industry, which represents a significant customer group.

The crisis in Danish agriculture is expected to slow in 2017 as a result of rising prices of pork and milk. Parts of Danish agriculture are likely to have problems with achieving profitability in 2017 and here the bank will continue — in loyalty and respect — and in close cooperation with individual farmers, to try to find the best possible solutions. Despite the price increases, the extremely difficult framework conditions in the industry still place high demands on individual farmers, and we still assess that the bank's agricultural portfolio very much has the skills that are a prerequisite for being part of the future agricultural industry.

Loans to agriculture constitute 14.4 % of total lending. As with any other business, the bank has made a careful review of the commitments and the management is confident about these commitments.

In recent years, financing of alternative energy has brought in many new customer relationships. The share of loans so far is also expected to be a significant business area for the bank in 2017.

The bank's other business segments are generally considered to be in good development and are distributed amongst many small and medium businesses in the market area.

The focus will be on maintaining a satisfactory liquidity reserve, primarily via a balanced relationship between the total deposit and lending volumes, since in the future the bank also wants to base lending on deposits from customers and only to a lesser extent on loans from other institutes, etc.

The satisfactory capital coverage of 6.1 % points is expected to continue and expand in 2017, to ensure the capital margins for the development of the bank.

New activities and business volume

At the beginning of 2017 the bank launched Skjern Bank Leasing, which has so far focused on leasing most types of assets to the bank's business customers. The administrative management of the bank's leasing activities are outsourced to a well-established player in the industry.

Leasing is expected to result in significant business volume and earnings.

In 2017 the bank will assess the possibilities of expanding the branch network. The bank is experiencing a significant influx of customers from all over Denmark and therefore it is assessed that it will create business, strategic and profitability value for the bank to expand the branch network.

Overall, 2017 is expected to lead to a satisfactory increase in the bank's business volume and a continued high activity in securities and the foreign sector. It is also expected that the sale of insurance and pension products will continue the positive trend of recent years. Interest expense is expected to be reduced as a result of lower prices on the bank's deposits and particularly on high-interest deposits. A very significant factor in recent years — impairment on trade receivables — is expected to decrease further, such that a satisfactory result and return on the bank's equity is expected.

In 2017 the bank expects core earnings in the range of DKK 120 - 130 million.

Audit

The Danish version of the Annual Report for 2016 is equipped with internal audit statements and independent auditors' statement. The statements are without reservations and complementary information.

Endorsement of the Annual Report by the Management

We have today discussed and approved the annual report for the period 1 January – 31 December 2016 for Skjern Bank A/S.

The annual report has been prepared in accordance with the Danish legislation on financial activities, including executive order on financial reports for credit institutes and stock broker companies, etc. Furthermore, the annual report has been prepared in accordance with addi-tional Danish requirements regarding information in annual reports for financial companies listed on the Stock Exchange.

We consider the accounting practice chosen to be appropriate so that the annual report gives a correct impression of the bank's assets, liabilities, financial position as at the 31st December 2016 and of the result of the bank's activities for the accounting year 1 January – 31 December 2016.

The management report includes a correct presentation of the development of the bank's activities and financial conditions together with a description of the material risks and uncertain-ties by which the bank may be affected.

The annual report is recommended for approval by the General Meeting.

Skjern, the 2nd February 2017 Executed Board of Skjern BankA/S

Per Munck

Skjern, the 2nd February 2017

The Board of Skjern Bank A/S

Hans L. Jeppesen Jens Okholm Chairman Vice-Chairman

Bjørn Jepsen Finn Erik Kristiansen Søren Dalum Tinggard Lars Skov Hansen Lars Lerke Carsten Jensen

	Profit and loss account		2015
Note:		(DKK 1,000)	(DKK1,000)
2 I	nterest receivable	200,058	218,537
3 I	nterest payable	36,313	56,309
	Net income from interest	163,745	162,228
D	ividend on shares and other holdings	12,493	11,692
4 C	harges and commission receivable	101,952	93,459
C	harges and commission payable	3,672	12,143
	Net income from interest and charges	274,518	255,236
5 V	alue adjustments	17,216	11,536
O	ther ordinary income	1,592	1,610
6 S	taff costs and administrative expenses	148,990	139,680
D	epreciation and write-downs on intangible and tangible assets	3,746	3,924
O	ther operating expenses total	255	9,066
	ontribution to the Guarantee Fund for deposits C	52	8,926
	ther operating expenses O	203	140
9	Write-downs	36,172	63,908
10	Profit on equity investments in non-affiliated and affiliated companies	490	-760
	Result before tax	104,653	51,044
11 T	ax	22,543	10,929
	Net-result for the financial year	82,110	40,115
O	f which are holders of shares of hybrid core capital instruments etc	6,626	1,831

Proposal for distribution of profit

D ividends	0	0
Holders of hybrid core capital instruments	6,626	1,831
T ransferred to/from retained earnings	75,484	38,284
Total distribution of the amount available	82,110	40,115

Statement of comprehensive income

Profit for the financial year	82,110	40,115
O ther comprehensive income after tax	0	0
Total comprehensive income	82,110	40,115

	Balance Sheet		2015
Note:		(DKK 1,000)	(DKK 1,000)
Assets
C	ash in hand and demand deposits with central banks	120,542	277,630
12 R	eceivables at credit institutions and central banks	786,764	605,809
13 L	oans and other receivables at amortised cost	3,687,509	3,511,175
14	Bonds at fair value	926,950	707,428
15 S	hares etc.	219,447	179,233
16	Holdings in associated enterprises	0	0
16	Holdings in group enterprises	0	0
17 L	and and buildings (total)	50,163	51,141
	nvestment properties I	2,961	2,961
	wner-occupied properties O	47,202	48,180
18 O	ther tangible assets	4,444	5,176

Current tax assets........................................................................... 0 2,536 19 Deferred tax assets ......................................................................... 14,210 28,455 Other assets ................................................................................ 41,520 47,787

Prepayments ................................................................................ 8,642 8,369

Total assets ................................................................................ 5,860,191 5,424,739

Liabilities
	Debt
20 D	ebt to credit institutions and central banks	134,199	85,561
21 D	eposits and other debts	4,871,359	4,483,104
C	urrent tax liabilities	1,720	0
O	ther liabilities	56,387	66,536
	Prepayments	1,162	612
	Total debt	5,064,827	4,635,813
	Provisions
13	Provisions for loss on guarantees	433	62
	Total provisions	433	62
22	Subordinated debt Subordinated loan capital Hybrid core capital	99,618 0	99,436 70,000
	Total subordinated debt	99,618	169,439
	Equity
23 S	hare capital	192,800	192,800
R	evaluation reserves	417	417
R	etained earnings	443,117	367,579
	Proposed dividend	0	0
24	Holders of hybrid capital	58,979	58,629
	Total equity	695,313	619,425
	Total liabilities	5,860,191	5,424,739

	Information on changes in equity	2016	2015
Note:		(DKK 1,000)	(DKK 1,000)
23 S S	hare capital beginning-of-year hare issue	192,800 0	192,800 0
23	Share capital end-of-year	192,800	192,800
R O	evaluation reserves beginning-of-year Additions related to reassessed value ther movements	417 0 0	417 0 0
	Revaluation reserves end-of-year	417	417
R 25 S	etained earnings beginning-of-year Profit or loss for the financial year ale of own funds	367,579 75,484 10,626	329,314 38,284 17,512
25	Purchase of own funds Retained earnings end-of-year	-10,572 443,117	-17,530 367,579
	Holders of hybrid capital beginning-of-year Net profit or loss for the year (interest hybrid capital) Paid interest	58,629 6,626 -6,276	0 1,831 -1,569
I	ssue of hybrid core capital, net Holders of hybrid capital end-of-year	0 58,979	58,367 58,629

Total equity	695,313	619,425

Notes

		Page
1 A	ccounting policies .	11
2 I	nterest income .	15
3 I	nterest expenses .	15
4	Fees and commission income .	15
5 V	alue adjustments .	15
6 S	taff costs and administrative expenses .	15
7 I	ncentive and bonus schemes .	16
8 A	udit fee .	16
9	Write-downs on loans and receivables .	17
10	Profit on equity investments in non-affiliated and affiliated companies .	17
11 T	ax .	17
12 R	eceivables at credit institutions and central banks .	17
13 L	oans and other debtors at amortised cost price .	17
14	Bonds at fair value .	18
15 S	hares etc. .	18
16 E	quity investments in non-affiliated and affiliated companies .	18
17 L	and and buildings .	19
18 O	ther tangible assets .	19
19 D	eferred taxation .	19
20 D	ebt to credit institutions and central banks .	19
21 D	eposits and other debts .	20
22 S	ubordinated debt .	20
23 S	hare capital .	20
24	Holders of hybrid capital .	21
25 O	wn capital shares	21
26 C	ontingent liabilities .	21
27 L	awsuits etc. .	22
28 R	elated parties .	22
29 C	apital requirement .	23
30 C	urrent value of financial instruments .	24
31 R	isks and risk management .	24
32 C	redit Risk .	25
33	Market risks and sensitivity information .	27
34 D	erivate financial instruments .	29
35 C	operative agreements .	29
36	5 years in summary .	30
37	5 years of financial ratio .	31

vigour · individual solutions · presence Presence · vigour · individual solutions

1. Accounting Policies

The Financial Statements have been prepared in accordance with the Danish Financial Business Act and the Executive Order on financial reports for credit institutions and investment companies, etc.

The Financial Statements have been prepared in accordance with additional Danish legal requirements for Financial Statements for listed financial companies.

The Financial Statements are presented in DKK and rounded to the nearest DKK 1,000.

The accounting practice used is unchanged compared to the previous year.

Upcoming accounting rules

At the time of the publication of this annual report there are a number of provisions being changed in the Danish IFRS-compatible Executive Order on the Presentation of Financial Statements. The reason for this is the emergence of the international accounting standard IFRS 9 Financial Instruments, which is mandatory to use for IFRS preparers from 1 January 2018.

The general provisions in IFRS 9 will similarly be incorporated into the Danish Executive Order on the Presentation of Financial Statements and supplemented by special Danish impairment rules in appendix 10 of the Executive Order that complete the general principles of IFRS 9.

The adjusted Danish Executive Order is expected to take effect for the accounting periods beginning 1 January 2018.

The accounting standard IFRS 9, which is incorporated into the Danish accounting rules, is changing significantly with the new impairment rules.

IFRS 9 replaces the current impairment model, which is based on incurred loss (the "incurred loss model") with an impairment model based on expected loss (the "expected loss model"). The new expectation-based impairment model means that a financial asset at the time of first recognition is impaired by an amount corresponding to the expected credit loss over 12 months (stage 1). If there is subsequently a significant increase in the credit risk compared to the time of first recognition, the asset is impaired by the amount corresponding to the expected credit loss in the asset's remaining expected life (stage 2). If impairment need for the asset is discovered (stage 3), the asset is written down unchanged by an amount corresponding to the expected credit loss in the asset's remaining life, but based on an increased risk of loss.

There is ongoing development work anchored in the bank's data centre Bankdata, with the participation of the associated member institutions and LOPI, with the purpose of developing an IFRS 9-compatible impairment model.

The model, which is under development, is particularly intended to be used for customers/facilities in stage 1, and a subset of customers/facilities in stage 2. For weak stage 2 customers/facilities and stage 3 customers/facilities, the impairment calculation is expected to be made by a manual, individual assessment of the financial assets rather than a model calculation.

It is not possible at this time to make a reasonable estimate of the accounting effect of the initial application of IFRS 9 with regard to depreciation rules. However it is generally expected that the new impairment rules for banks will overall lead to increased impairment and thus a greater allowance account, as according to the new rules all loans and guarantees will be attached to an impairment corresponding to the expected credit loss for 12 months or the expected credit loss in the asset's remaining life if there is a significant increase in the credit risk.

According to the new rules collective impairment will not be continued, which will reduce the impact of IFRS 9 to some extent. In addition to this, there are the special Danish impairment rules in the Danish Executive Order on the Presentation of Financial Statements, appendix 10, which move impairments forward in time, and thus partially offset the effect of the upcoming IFRS 9 impairment rules.

A negative net accounting impact on the new expectation-based IFRS 9 impairment rules will initially have a similar effect on the capital base. To counter an adverse effect on the capital base and thus the bank's opportunities to support credit, the European Commission, as an element of the reform package presented by the Commission on 23 October 2016 (capital requirements package), proposed a 5-year transition period so that a negative impact of the new IFRS 9 impairment rules would not come into full effect until after 5 years.

Overall, the bank assesses the impact of IFRS 9 on the capital coverage to be insignificant at the entry into force of the rules in 2018, while the impact on the capital coverage in the future will be moderately negative as the impact of the transition period is phased out.

General notes on recognition and measurement

Assets are recognised in the statement of financial position when it is probable that future economic benefits will flow to the bank and the asset's value can be measured reliably.

Liabilities are recognised in the statement of financial position when they are likely and can be measured reliably.

Assets and liabilities are initially recognised at fair value. However, intangible and 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 confirm or invalidate conditions existing on the balance date are taken into account in recognition and measurement.

Income is recognised in the statement of profit or loss and other comprehensive income as it is earned, while expenses are recognised at the amounts which relate to the financial year.However, value increases in owner-occupied properties are recognised directly in equity.

Purchases and sales of financial instruments are recognised on the

transaction date and are no longer recognised when the right to receive/deliver cash to or from the financial asset or liability has expired or if it is transferred and the bank has transferred all significant risks and rewards of ownership. The bank has not used the rules for reclassification of certain financial 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 transaction under normal conditions between knowledgeable, willing and independent parties. The fair value of financial 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 financial 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.

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 final 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 include impairment of loans and receivables, determination of fair value of unlisted financial instruments, tangible fixed assets, deferred tax assets and provisions.

Foreign currencies

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.

Currency translation adjustments are recognised on an ongoing basis in the statement of profit or loss and other comprehensive income.

Income statement

Interest, fees and commissions, etc.

Interest income and expenses are recognised in the statement of profit or loss and other comprehensive income in the period to which they relate.

Received interest on loans on which a write down has occurred are passed to the written-down part of the loan in question under the item "Impairment of loans and receivables" and are thus offset in net write-downs.

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 profit or loss and other comprehensive income when the rights to them are acquired.

Staff and administrative expenses

Staff and administration expenses include wages and salaries, social costs, pensions, EDB costs and administrative and marketing costs.

Pension plans

The bank has entered into defined contribution schemes with the employees.

In defined contribution schemes, fixed contributions are paid to an independent pension fund. The bank has no obligation to make further contributions.

Tax

Tax for the year, which consists of current tax for the year and movements in deferred tax, is recognised in the statement of profit or loss and other comprehensive income as the portion which is attributable to the net profit 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 statement of financial position as tax calculated on taxable 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.

Deferred tax assets, including the tax value of tax loss carry forwards, are recognised in the statement of financial position at the value at which the asset is expected to be realised, either against deferred tax liabilities or as net assets.

The bank is jointly taxed with all Danish companies in which it exercises a controlling interest. The current Danish corporation tax is allocated between jointly taxed Danish companies in proportion to their taxable income (full allocation with tax relief for losses).

Balance sheet

Receivables from credit institutions and central banks

Initially 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 losses incurred but not yet realised.

Loans, etc. are written down either individually or on a group basis when there are objective indications of poor credit quality which result in a reduction in the expected future series of payments based on an assessment of the most probable outcome.

For loans and receivables which are not individually written down, a group assessment is made of whether there are objective indications of impairment in the group.

The collective assessment is made for groups of loans and receivables which have similar characteristics in terms of credit risk.

The bank operates with 11 groups: a group of public authorities, a group of private customers and 9 groups of commercial customers, where the commercial customers are divided by industry.

The collective assessment is based on a segmentation model developed by the association Lokale Pengeinstitutter, which is responsible for ongoing maintenance and development. The segmentation model establishes the relationship in each group between recognised loss and a number of significant explanatory macroeconomic variables via a linear regression analysis. The explanatory macroeconomic variables include unemployment, housing prices, interest rates, number of bankruptcies/foreclosures, etc.

The macroeconomic segmentation model is initially calculated based on loss data for the entire banking sector.

The bank has therefore assessed that the model estimates reflect the credit risk for the bank's own lending portfolio.

For each group of loans and receivables, an estimate is made which reflects the percentage of impairment related to a specific group of loans and receivables on the balance date. By comparing the individual loan's current risk of loss with the loan's original risk of loss and the loan's risk of loss at the beginning of the current accounting period, the individual loan's contribution to the group impairment is shown. Impairment is calculated as the difference between the carrying value and the discounted value of expected future payments.

Changes in write-downs made are adjusted in the statement of profit or loss and other comprehensive income under the item "Impairment of loans and receivables, etc."

Bonds and shares etc.

Bonds and shares traded on a listed stock exchange are measured at fair value. Fair value is usually determined as the official 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 financial reports or on a return model which is based on cash flows and other available information. The Executive Board takes an active approach to the calculation of fair value.

Value adjustments on bonds and shares, etc. are recognised on an ongoing basis in the statement of profit or loss and other comprehensive income under the item "Exchange rate adjustments."

Investments in associates

Equity investments in associated and group enterprises are recognised and measured according to the book value method, which means that the equity investments are measured at the proportionate share of the companies' book value at the end of the year.

The bank's share of the companies' profit after tax is recognised in the statement of profit or loss and other comprehensive income.

Land and buildings

Land and buildings include

• "Occupied properties", which consists of the properties from which the bank conducts banking activities, and

• "Investment property", which consists of all other properties owned by the bank.

Occupied properties are measured at revalued amounts, which is the fair value measured by the return method on 5.25 -7 %, less accumulated depreciation and any impairment losses. Depreciation is recognised in the income statement. Reassessments are made so frequently that there are no significant deviations from fair value.

Investment properties are measured at fair value according to the return method.

Ongoing changes in fair value of investment property are recognised in the income statement.

Other tangible fixed assets

Other tangible fixed assets, including assets used in operations, are recognised at cost.

Subsequently, other tangible assets and the conversion of leasehold improvements are valued at cost, less accumulated depreciation. A linear depreciation is carried out over 3-5 years on the basis of cost. Depreciation and impairment losses are recognised in the income statement.

Other assets

Other assets include outstanding interest and commissions, as well as the positive market value of derivative financial instruments.

Prepayment items

Prepayments posted under assets include costs relating to subsequent financial years.

Prepayments posted under liabilities include prepaid interest and guarantee provisions relating to subsequent financial years.

Amounts owed to credit institutions and central banks/deposits and other debt issued bonds/subordinated debt

These items are measured at amortised cost.

Other liabilities

Other liabilities include due interest and commissions as well as the negative market value of financial instruments.

Provisions

Commitments, guarantees and other liabilities which are uncertain in terms of size or time of settlement are recognised as provisions when it is probable that the liability will result in a drain on the Bank's financial resources and the liability can be measured reliably. The liability is calculated at the present value of the costs required to settle the liability.

However, guarantees are not measured lower than the provision which is received for the guarantee, accrued over the guarantee period.

Treasury shares

Acquisition and disposal and dividends from treasury shares are recognised directly under equity.

Derivative financial instruments

All derivative financial instruments, including forward contracts, futures and options in bonds, shares or currency, 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 profit 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 liability 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 profit or loss and other comprehensive income under "Impairment of loans and receivables, etc."

Financial highlights

Key figures and ratios are presented in accordance with the requirements in the Danish Executive Order on the Presentation of Financial Statements.

Note
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		2016	2015
		(DKK 1,000)	(DKK 1,000)
2	Interest income
R	eceivables at credit institutions and central banks	-3,668	-1,766
L	oans and other receivables	207,281	222,217
L	oans (interest conc. the written-down part of loans)	-13,800	-12,900
	Bonds	9,438	10,915
O	ther derivative financial instruments, total	787	59
	of which
	nterest-rate contracts I	1,049	416
	urrency contracts C	-262	-357
	Other interest income	20	12
	Total	200,058	218,537
3	Interest expenses
C	redit institutions and central banks	26	35
D	eposits	28,304	45,338
	Bonds, issued	0	0
S	ubordinated debt	7,967	10,923
O	ther interest expenses	16	13
	Total	36,313	56,309
	No income or expenses are entered from genuine purchase or repurchase contracts in notes 2 and 3.
4	Fees and commission income
S	ecurities trading and custody accounts	23,118	27,820
	Payment services	8,632	7,586
L	oan fees	40,880	35,999
G	uarantee commission	11,634	6,355
O	ther fees and commission	17,688	15,699
	Total	101,952	96,459
5	Value adjustments
O	ther loans	60	0
	Bonds	5,867	-13,148
T	otal shares	6,969	21,892
	- Shares in sectorcompanies etc.	5,378	9,422
	- Other shares	1,597	12,470
	Foreign currency	4,323	2,884
O	ther financial instruments	-3	-92

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.

6 Staff costs and administrative expenses

Salaries and remuneration of board of directors, audit committee, managers etc. Board of managers (1 person)*	2,830
Fixed fees.	2,790
Pension contributions	40
Management board	1,034
udit Committee	50
ommittee of representatives	189
Total salaries and remuneration of board etc.	4,103
*The Board of manager has a company car
Board of Directors' remuneration
Hans Ladekjær Jeppesen	259
Jens Okholm	185
Bjørn Jespsen	103
Finn Erik Kristiansen	114
øren Dalum Tinggaard	103
ars Skov Hansen	114
ars Lerke	103
	103
arsten Jensen

Total ........................................................................................ 17,216 11,536

Note
	2016	2015
	(DKK 1,000)	(DKK 1,000)
Staff costs and administrative expenses (continued)
Staff costs
Wages and salaries	66,747	64,503
Pensions	7,488	7,106
ocial security costs	850	852
Payroll tax	10,542	9,042
Total staff costs	85,627	81,503
alary to special risk takers (11 persons in 2016, 11 persons in 2015)	7,913	7,723
Pensions to special risk takers (11 persons in 2016, 11 persons in 2015)	857	836
Other administrative expenses
IT expenses	28,360	25,624
ent, electricity, heating etc.	4,262	4,749
Postage, telephony etc.	751	852
ther administrative expenses	25,887	22,911
Total other administrative expenses	59,260	54,136
Total staff costs and administrative expenses	148,990	139,680

Pension and severance terms for the executive board

The management receives 11% of salary grade 31 in annual pension, which is contribution-based through a pension company. Therefore, Skjern Bank has no pension obligations to the management, since there is regular payment to a pension company as indicated. Upon retirement, Skjern Bank pays a severance payment equivalent to 6 months' salary.

The management may retire at 62 years.

Skjern Bank's notice period to the management is 36 months, but may be 48 months in special circumstances.

The management's notice period to the bank is 6 months.

The Board's pension terms

No pension is paid to the Board

Special risk takers' pension terms

The special risk takers receive 11% of their respective salary grades in annual pen-sion, which is contribution-based through a pension company in which the payments are expensed continually.

				Average number of employees during the financial year converted into full-time employees

E	mployed in credit institution business	132	128
E	mployed in other business	0	0
	Total	132	128

7 Incentive and bonus schemes

The bank does not have any incentive or bonus schemes.

8 Audit fee

T otal fee to the firm of accountants, elected by the annual meeting,
that perform the statutory audit	719	1,026
Honorariums for statutory audits of financial statements	583	657
Honorariums for tax services	19	29
Honorariums for assurance services	36	22
Honorariums for other services	81	319

		2016 (DKK 1,000)	2015 (DKK 1,000)
9	Write-downs on loans and receivables
	Write-downs and provisions during the year	90,161	119,545
R	eversal of write-downs made in previous years	-47,258	-45,262
	Finally lost, not previously written down	10,036	4,516
I	nterest on the written-down portion of loans	-13,800	-12,900
R	ecoveries of previously written off debt	-2,967	-1,991
	Total	36,172	63,908
10	Profit on equity investments in non-affiliated and affiliated companies
	Profit on equity investments in non-affiliated companies	490	0
	Profit on equity investments in affiliated companies	0	-760
	Total	490	-760
11	Tax
C	alculated tax of income of the year	8,205	3,227
A	djustment of deferred tax	14,245	7,123
A	djustment of tax calculated in previous years	93	579
	Total	22,543	10,929
T	ax paid during the year	4,180	3,890
	Effective tax-rate	(Pct.)	(Pct.)
C	urrent tax rate	22.00	23.50
N	on-deductible expenses and non-taxable income	0.58	-3.37
A	djustment of prior years' taxes	0.09	1.18
R	eduction in future tax rate	0.00	0.69
O	ther adjustments	0.30	0.21
	Total effective tax rate	22.97	22.21
12	Receivables at credit institutions and central banks
D	eposits with central banks	729,092	555,104
R	eceivables at credit institutions	57,672	50,705
	Total	786,764	605,809
	Remaining period
D	emand	786,764	605,809
O	ver 1 year and up to 5 years	0	0
	Total	786,764	605,809
N	o assets related to genuine purchase and resale transactions included.
13	Loans and other debtors at amortised cost price
	Remaining period
C	laims at call	1,273,221	1,302,164
U	p to 3 months	127,213	77,100
O	ver 3 months and up to 1 year	400,336	308,845
O	ver 1 year and up to 5 years	864,976	827,507
O	ver 5 years	1,021,763	995,559
	Total loans and other debtors at amortised cost price	3,687,509	3,511,175
N	o assets related to genuine purchase and resale transactions included
	Individual write-downs and provisions
	Write-downs beginning of the year	340,059	337,551
	Write-downs during the year	87,936	115,849
R	eversal of write-downs made in previous years	-47,258	-42,829
	Write-downs in previous years - now lost	-64,264	-70,512
	Write-downs end of year	316,473	340,059
	Group write-downs and provisions
	Write-downs - beginning of the year	24,166	22,902
	Write-downs during the year	2,225	1,264
	Group write-downs - end of year	26,391	24,166
	Total write-downs	342,864	364,225

Note
		2016	2015
13	Loans and other debtors at amortised cost price (continued)	(DKK 1,000)	(DKK 1,000)
	Guarantees
	Provisions beginning of the year	62	0
	Provisions during the year	433	62
L	oss on guarantees	0	0
T	ransferred to liabilities	-62	0
	Guarantees end of year	433	62
	Loans etc. with suspended calculation of interest	120,504	144,970
	Loans and other debtors with an objective indication of impairment
	included in the balance sheet at a book value greater than zero
	Individual written-down loan
	Balance for loans and other debtors before write-downs	664,474	770,735
	Write-downs	-316,906	-340,121
	Balance for loans and other debtors after write-downs	347,568	430,614
	Group written-downs loans
	Balance for loans and other debtors before write-downs	3,366,332	3,104,727
	Write-downs	-26,391	-24,166
	Balance for loans and other debtors after write-downs	3,339,941	3,080,561
T	here are no write-downs of receivables from credit institutions, or any other receivables.
14	Bonds at fair value
	Mortgage credit bonds	756,034	556,213
O	ther bonds	170,916	151,214
	Total bonds at fair value	926,950	707,427
T	he bank has no held-to-maturity assets
15	Shares etc
	Quoted on Nasdaq OMX Copenhagen A/S	34,116	34,049
	Quoted on other stock exchanges	21,855	15,969
S	ectorshares recorded at fair value	163,476	129,215
	Total shares etc.	219,447	179,233
16	Equity investments in associated companies	2016
A		ssociated
		companies
		(DKK 1,000)
	Total cost price beginning-of-year	505
A	cquisitions during the year	0
R	eduction during the year	-505
	Total cost price end-of-year	0
	Total write-ups/downs and depreciations beginning-of-year	-505
R	esult	0
D	isposals during the year	505
	Total write-ups/downs and depreciations end-of-year	0
	Book value end-of-year	0
	of this credit institutions	0
	Book value beginning-of-year of this credit institutions	0 0

All agreements and transactions with affiliated undertakings is entered into on market terms.

Note		2016 (DKK 1,000)	2015 (DKK 1,000)
17	Land and buildings
I	nvestment properties
A	Fair value - end of previous financial year cquisitions during the year incl. improvements	2,961 0	6,974 0
D	isposals during the year	0	-2,750
A	djustment of fair value for the year	0	-1,263
	Fair value end-of-year	2,961	2,961
	Owner occupied properties
R	eassessed value - end of previous financial year	48,180	48,367
A D	cquisitions during the year incl. improvements isposals during the year	442 0	33 0
D	epreciations	-1,420	-1,420
	Adjustment of fair value for the year	0	0
C	hanges in value recognized in income	0	1,200
	Reassessed value end-of-year	47,202	48,180
	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 5.25-7 %.
18	Other tangible assets
T	otal cost price beginning-of-year	41,786	41,770
A	cquisitions during the year incl. Improvements	2,590	2,044
R	eduction during the year Total cost price beginning-of-year	-20,374 24,002	-2,028 41,786
T	otal write-ups/downs and depreciations beginning-of-year	36,610	35,873
D	epreciations during the year	2,327	2,441
R	eversal of depreciations	-19,379	-1,704
	Total write-ups/downs and depreciations end-of-year	19,558	36,610
	Book value end-of-year	4,444	5,176
19	Deferred taxation
	(Tax amount)
T	angible assets	1,799	2,177
L	oans and other receivables	2,220	2,144
O O	ther ther deficits carried forward	-366 10,557	-483 24,617
	Total deferred taxation	14,210	28,455
	The activated deficit is expected to be utilised within the next 3-5 years.
20	Debt to credit institutions and central banks
	Debt to credit institutions and central banks
	Debt to central banks	0	33,595
D	ebt to credit institutions	134,199	51,966
	Total debt to credit institutions and central banks	134,199	85,561
	Term to maturity
D	emand	134,199	85,561
	Total debt to credit institutions and central banks	134,199	85,561

No liabilities related to genuine sale and repurchase transactions included.

Note		2016	2015
		(DKK 1,000)	(DKK 1,000)
21	Deposits and other debts
D	emand	4,223,350	3,802,610
A	t notice	20,209	20,897
T	ime deposits	30,204	70,997
S	pecial types of deposits	597,596	588,618
	Total deposits and other debts	4,871,359	4,483,104
	Term to maturity
D D	emand esposits redeemable at notice:	4,239,821	3,823,813
U	p to 3 months	100,721	95,205
O	ver 3 months and up to 1 year	36,714	62,547
O	ver 1 year and up to 5 years	62,436	75,112
O	ver 5 years	431,667	426,427
	Total deposits and other debts	4,871,359	4,483,104
	No liabilities related to genuine sale and repurchase transactions included.

22 Subordinated debt

Supplementary capital DKK 100 mio	99,618	99,439
R ate	6.595%	6.595%
D ue date	21.05.2024	21.05.2024
T he loan may be paid early with the Danish Financial Supervisory Authority's approval
starting on 19 May 2019 and then on each interest payment date.
T he interest rate is determined as the 5-year swap rate plus a premium of 5.5 percentage points,

valid for 5 years from date of issue. Then the interest rate will be Cibor 3 months with a premium of 5.5 percentage points.

R	Hybrid core capital DKK 70 mio ate	0	70,000 6.09%
D	ue date Repaid 1st May 2016 N		o due date
	Subordinated debt total	99,618	169,439
S	ubordinated debt that may be included in the capital base	99,618	148,439
C	osts related to admission	0	0
I	nterest on subordinated liabilities recognised in income	7,967	10,923
23 N	Share capital umber of shares is 9,640,000 at DKK 20 each	192,800	192,800

The bank has pr. 31. December 2016 16,557 registered shareholders. 98.85% of the share capital are registered on name.

24 Holders of hybrid capital

Hybrid core capital	58,979	58,629
R ate	10.4593%	10.4593%
D ue date N	o due date N	o due date
T he loan can be repaid prematurely by the bank on the 15th September 2020

On September 15 2020, the interest rate is changed to a halfyearly variable coupon rate equal to the CIBOR rate published by .Nasdaq OMX for a maturity of six months plus 9.75% pa.

Note		2016 (DKK 1,000)	2015 (DKK 1,000)
25	Own capital shares
	Purchase and sales of own shares
	Holdings beginning of the year
N	umber of own shares	9,979	8,979
N	ominal value of holding of own shares (DKK 1,000)	200	180
O	wn shares proportion of share capital	0.10	0.09
	Addition
N	umber of own shares	286,512	524,660
N	ominal value of holding of own shares (DKK 1,000)	5,730	10,493
O	wn shares proportion of share capital	2.97	5.44
	Purchase price (DKK 1,000)	10,572	17,530
	Disposal
N	umber of own shares	287,044	523,660
N	ominal value of holding of own shares (DKK 1,000)	5,741	10,473
O	wn shares proportion of share capital	2.98	5.43
S	ale price (DKK 1,000)	10,626	17,512
	Holdings end of the year
N	umber of own shares	9.447	9,979
N	ominal value of holding of own shares (DKK 1,000)	189	200
O	wn shares proportion of share capital	0.10	0.10

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 (finansloven), 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 2016 are a consequence of this.

26 Contingent liabilities

Contingent liabilities

Finance guarantees	25,526	29,136
uarantees against losses on mortgage credit loans	357,902	287,347
egistration and conversion guarantees	116,098	108,124
ther contingent liabilities	341,562	367,440
Total	841,088	792,047
Other binding engagements
rrevocable credit-undertakings	127,271	67,050
Total	127,271	67,050

Assets pledged as collateral

From the security portfolio, the bank has pr. 31. December 2016 put as collateral for clearing with Danmarks Nationalbank, securities with a total market value of DKK 0 million. In addition, there is pledged bonds 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 benefit.

Like other Danish financial 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 0.572 %.

In 2016, Skjern Bank paid 50 TDKK to Afviklingsformuen (Settlement Assets).

The Bank is a tenant in two leases, which can be terminated with 6 months' notice, the yearly lease is 879 TDKK. The third lease is irrevocable until 31 December 2021, and the yearly lease is 1,9 mio. DKK.

Note ^{2016 2015} (DKK 1,000) (DKK 1,000)

27 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.

28 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:

L	oans Bid Bond	85 0	10 0
R	ate of interest	6.75%	6.75%
	Board of directors:
L	oans	3,541	3,421
	Bid Bond	2,330	2,330
R	ate of interest/interest range	1.11-9.00%	1.48-8.00%
	Holding of shares in Skjern Bank:
T	he board of managers
	Per Munck	28,545	28,545
T	he board of directors
	Hans Ladekjær Jeppesen	11,115	11,115
	Jens Okholm	13,022	13,022
	Bjørn Jepsen	5,286	4,536
	Finn Erik Kristiansen	2,748	2,748
S	øren Dalum Tinggaard	1,234	3,234
L	ars Sov Hansen	710	710
L	ars Lerke	8,246	9,882
C	arsten Jensen	1,976	1,976

Note		2016	2015
		(DKK 1,000)	(DKK 1,000)
29	Capital requirement
E	quity	695,313	619,425
	Revaluation reserves	-417	-417
	Holders of hybrid capital	-58,979	-58,367
D	eferred tax assets	-14,210	-28,455
D	eduction for the sum of equity investments etc. above 10 %	-44,341	-29,616
CVA	deduction	-981	-751
D	eduction of trading framework for own sharers	-1,289	-865
	Core tier 1 capital (excl. hybrid core capital)	575,096	500,692
	Hybrid core capital	0	49,000
	Holders of hybrid capital	58,717	58,367
D D	eduction for equity investments etc. above 10 % eduction for the sum of equity investments etc. above 10 %	0 -14,780	0 -22,211
	Tier 1 capital	619,033	449,236
	Subordinated loan capital	99,618	99,439
D	eduction for the sum of equity investments etc. above 10 %	-14,780	-22,211
	Capital base	703,871	663,076
	Weighted items
	Credit risk	3,388,583	3,260,404
	Market risk	358,672	330,563
O	perational risk	508,277	484,450
	Weigthed items total	4,255,532	4,075,417
	Core tier 1 capital ratio (excl. hybrid core capital)	13.5	13.5
	Tier 1 capital ratio Solvency ratio - Tier 2	14.6 16.5	14.4 16.3

30 Current value of financial instruments

Financial instruments are measured in the statement of financial 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 financial assets and liabilities valued on active markets, the fair value is calculated based on observable market prices on the market date. For financial instruments valued on active markets, the fair value is calculated based on generally accepted valuation methods.

Shares, etc. and derivative financial 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 financial position at amortised cost. The difference to fair value is calculated as fees and commissions received, expenses incurred through lending transactions, interest receivable which is first due for payment after the end of the financial year and for fixed-rate loans, also the variable interest rate, which is calculated by comparing the current market rate with the loans' nominal interest rate.

The fair value of receivables from credit institutions and central banks is determined by the same method as for loans, since the bank does not currently recognise impairments on receivables from credit institutions and central banks.

Bonds issued and subordinated liabilities are measured at amortised cost. The difference between the carrying amount and fair value is calculated based on rates in the market of its own listed emissions.

For floating rate financial 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 first due for payment after the end of the financial year.

For fixed-rate financial 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 first due for payment after the end of the financial year and the variable interest rate.

30 Current value of financial instruments (continued)

	31. december 2016		31. december 2015
	Book value	Fair value	Book value	Fair value
	(DKK 1,000)	(DKK 1,000)	(DKK 1,000)	(DKK 1,000)
Financial assets
C ash in hand+claims at call on central banks	120,542	120,542	277,630	277,630
C laims on credit institutes and central banks 1)	786,764	786,764	605,809	605,809
L oans and other debtors at amort. costprice 1)	3,693,837	3,703,721	3,517,751	3,533,634
Bonds at current value 1) .	930,027	930,027	709,974	709,974
S hares etc. .	219,447	219,447	179,233	179,233
C apital shares in associated companies .	0	0	0	0
C apital shares in group companies .	0	0	0	0
D erivative financial instruments .	6,978	6,978	20,640	20,640
Total financial assets	5,757,595	5,767,479	5,311,037	5,326,920
Financial liabilities
D ebt to credit institutions and central banks 1)	90,098	90,098	85,567	85,567
D eposits and other debts .	4,886,026	4,914,783	4,501,200	4,644,717
D erivative financial instruments .	3,381	3,381	5,346	5,346
S ubordinated debt 1) 2) .	103,438	103,438	176,449	176,449
Total financial liabilities .	5,082,943	5,111,700	4,768,562	4,912,079

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

31 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 financial 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 financial instruments and derivative financial instruments fluctuating due to changes in market prices. Skjern Bank classifies three types of risk for the market risk area: Interest rate risk, equity risk and currency risk.

Liquidity risk:

Risk of losses due to financing costs rising disproportionately, the risk that Skjern Bank is prevented from maintaining the adopted business model due to a lack of financing/funding or ultimately, the risk that Skjern Bank cannot honour incoming payment obligations when due as a result of a lack of financing/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 120 TDKK - 135 TDKK. In the real-estate sector is used return requirement in the range 5.25% - 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.

32 L	Credit risks oans and guarantees distributed on sectors	2016 (Pct)	2015 (Pct)
	Public authorities	0.0	0.0
	Business:
A	griculture, hunting, forestry & fishing
	- Plant production	1.6	1.5
	- Cattle farming	8.3	8.4
	- Pig farming	1.9	2.2
	- Mink production	1.5	1.5
	- Other agriculture	1.1	1.5
I	ndustry and mining	2.4	2.5
E	nergy	6.0	6.8
	Building and constructions	6.3	6.1
	Wholesale	8.8	9.0
T	ransport, hotels and restaurants	1.5	1.4
I	nformation and communication	0.3	0.3
	Financial and insurance business	5.8	6.5
R	eal-esate	13.1	12.7
O	ther business	5.2	6.1
	Total business	63.8	66.5
	Private persons	36.2	33.5
	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. From the above sectoral distribution represents alternative energy 5.6 % in 2016 and 6.3 % in 2015.

Maximum credit exposure classified by loan, guarantees and credit-undertakings

	2016	2016	2016
	(DKK 1,000)	(DKK 1,000)	(DKK 1,000)
L	oans G		uarantees Credit-undertakings
Public authorities	1,010	0	0
Business - agriculture	821,168	33,729	2,250
Business - other	2,662,574	409,066	107,816
Private persons	1,775,027	398,293	17,205
	5,259,779	841,088	127,271

Which recognized in the balance after deduction of depreciation ....... 3,687,509

	2015	2015	2015
	(DKK 1,000)	(DKK 1,000)	(DKK 1,000)
L	oans G		uarantees Credit-undertakings
Public authorities	0	0	0
Business - agriculture	818,376	50,242	2,700
Business - other	2,597,912	412,492	64,350
Private persons	1,611,222	329,313	0
	5,027,510	792,047	67,050
Which recognized in the balance after deduction of depreciation	3,511,175

32 Credit risks (continued)

Description of collateral

S ecurity distributed by type	2016	2016	2016	2016
	(1,000 kr.)	(1,000 kr.)	(1,000 kr.)	(1,000 kr.)
	Public	Business,	Business,	Private
	authorities	agriculture	other
S ecurities	0	19,764	161,114	67,740
R eal property	0	455,499	761,198	529,027
C hattels, vehicles and rolling stock.	0	50,790	396,468	207,023
G uarantees	0	25,483	21,502	7,584
O ther forms of security	0	45,861	478,144	220,750
	0	597,397	1,818,426	1,032,124
Security distributed by type	2015	2015	2015	2015
	(1,000 kr.)	(1,000 kr.)	(1,000 kr.)	(1,000 kr.)
	Public	Business,	Business,	Private
	authorities	agriculture	other
S ecurities	0	32,501	184,112	64,735
R eal property	0	440,431	701,506	432,457
C hattels, vehicles and rolling stock.	0	56,737	346,154	172,598
G uarantees	0	29,996	27,664	14,191
O ther forms of security	0	38,990	419,561	160,449
	0	598,655	1,678,997	844,430

.As a general rule, the bank is secured through financed assets. It is also secured in the form of sureties and mortgages on equity and shares. The above listings reflect the collateral value which can be attributed to individual commitments. The bank wants to reduce the estimated credit in blank of the entire customer portfolio. In 2016 this led to a reduction of estimated credit in blank of DKK 23 million compared to 2015.

Credit-quality on loans which are neither in arrears not written down*

*) Calculated based on the guidelines for accounting reports for credit institutions and investment companies, etc. regarding thresholds for 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.

32 Credit risks (continued) Reasons for individual write-downs and provisions

	2016	2016	2016
	Exposure before
	write-down	Write-downs	Securities
S ignificant financial difficulties	481,607	235,403	222,860
Breach of contract	17,824	9,904	4,557
R eductions in terms	39,025	15,535	17,569
Probability of bankruptcy	129,910	55,631	73,414
Total	668,366	316,473	318,400

	2015 Exposure before	2015	2015
	write-down	Write-downs	Securities
S ignificant financial difficulties	515,877	219,454	249,338
Breach of contract	23,320	17,095	3,668
R eductions in terms	64,758	16,966	30,555
Probability of bankruptcy	226,589	86,544	135,887
Total	830,544	340,059	419,448

According to the bank's credit policy, all commitments, particularly including commitments which are subject to individual impairment, must be covered by collateral to the greatest extent possible. When determining impairment need, the value of the pledged collateral is compared to the expected net realisable value.

Also refer to the relevant section on the bank's credit risk in the Management's Review in the Danish version.

	2016	2015
	(DKK 1,000)	(DKK 1,000)
Arrears amount for loans, which have not been written down
0-90 days	13,987	8,945
>90 days	107	44
Total	14,094	8,989
Loans and arrears amount for loans, which have not been written down
0-90 days	85,813	97,939
>90 days	1,045	33
Total	86,858	97,972

33 Market risks and sensitivity information

In connection with Skjern Bank's monitoring of market risk, a number of sensitivity calculations, which include market risk variables, have been carried out.

Interest rate risk

In the event of a general increase in interest rates by 1 percentage point in the form of a parallel shift of the yield curve, equity is affected as shown below

I nterest rate risk on debt instruments etc - total	5,141	-4,869
I nterest rate risk in pct of core capital after deductions	0.8	-0.8

Note
		2016	2015
33	Market risks and sensitivity information (continued)	(DKK 1,000)	(DKK 1,000)
I	nterest rate risk split in currencies with highest risk:
D C EUR USD O	KK HF JPY thers Total	3,843 1,443 -124 -3 -4 -14 5,141	-5,756 1,031 -139 -2 -2 -1 -4,869
	Foreign currency risk Total assets in foreign currency	381,582	410,193
T	otal liabilities in foreign currency	76,218	34,492
I C C	n the event of a general change in exchange rates of 10%, and in the euro of 2.25%, urrency Indicator 1 will also be increased urrency indicator 1 in pct of core capital after deductions	1,070 0.2	2,295 0.4
I C C	n the event of a general change in exchange rates of 10%, and in the euro of 2.25%, urrency Indicator 2 will also be increased urrency indicator 2 in pct of core capital after deductions	10 0.0	4 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 profit and equity.

Equity Risk

Total shares etc.	21,945	17,923
U nquoted shares recorded at fair value	16,348	12,921
Quoted on other stock exchanges	2,186	1,597
Quoted on Nasdaq OMX Copenhagen A/S	3,412	3,405
If stock prices change by 10 percentage points, equity is affected as shown below.

34 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.

N		2016	2016 et	2016 Market-	2016 Market- N	2015	2015 et	2015 Market-	2015 Market-
N		ominal	market-	value	value N	ominal	market-	value	value
		value	value	positive	negative	value	value	postive	negative
	Currency-contracts
	Up to 3 months	360,888	3517	5,089	1,572	545,471	15,252	17,629	2,377
	Over 3 months and up to 1 year	11,002	-59	203	262	16,517	-24	384	408
	Over 1 year and up to 5 years					3,328	4	74	70
O	ver 5 years
	Average market value			13,206	2,066			20,429	3,953
	Interest-rate contracts
	Up to 3 months
	Over 3 months and up to 1 year	21,508		327	327	29,850		639	639
	Over 1 year and up to 5 years					21,491		874	874
O	ver 5 years	4,843		773	773	5,166		811	811
A	verage market value			2,032	1,998			3,521	3,495

	2016	2015
	(DKK 1,000)	(DKK 1,000)
Credit risk on derivative financial instruments
Positive market value, counterparty with risk weighting of 0 %	0	0
Positive market value, counterparty with risk weighting of 20%	1,014	2,930
Positive market value, counterparty with risk weighting of 100%	5,964	17,710
Total	6,978	20,640

Unsettled spot transactions

	DKK 1,000	Nominal value	Market- value Positive	Market- value Negative	Net market- value
	Foreign-exchange transactions, purchase	2,305	-	7	7
	Foreign-exchange transactions, sale	557	-	-	-
I	nterest-rate transactions, purchase	29,620	139	-	139
I	nterest-rate transactions, sale	5,690	3	33	-30
S	hare transactions, purchase	5,390	76	24	52
S	hare transactions, sale	5,406	25	75	-50
	Total 2016	48,928	243	139	104
	Total 2015	33,641	114	93	21

35 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, DLR Kredit A/S, BRF Kredit A/S, Privatsikring A/S, Eurocard, PFA Pension, SparInvest, A/S, Valueinvest Asset Management S.A., BI Asset Management Fondsbørsmæglerselskab A/S, Jyske Invest, Forvaltningsinstituttet for Lokale Pengeinstitutter, Sydinvest A/S, Investeringsforeningen Egns-Invest, HP Fondsbørsmæglerselskab A/S, Investeringsforeningen Danske Invest, Investeringsforeningen Maj Invest, Codan, Dankort A/S, Nets A/S, Bluegarden A/S, Krone Kapital, Købstædernes Forsikring & Visa International

Note
36	5 years in summary (DKK 1,000)	2016	2015	2014	2013	2013
	Profit and loss account
N	et income from interest	163,745	162,228	159,926	160,505	153,006
D	ividend on shares	12,493	11,692	6,491	8,231	5,414
C	harges and commission, net	98,280	81,316	81,608	61,861	55,296
	Income from core business	274,518	255,236	248,025	230,597	213,716
V	alue adjustments	17,216	11,536	10,770	16,236	8,096
O	ther ordinary income	1,592	1,610	1,195	1,745	1,131
S	taff cost and admin. expenses	148,990	139,680	138,473	131,117	132,557
D	epreciation of intangible and tangible assets	3,746	3,924	14,118	4,047	3,709
O	ther operating expenses	255	9,066	9,254	9,834	5,292
	- Contribution to the Guarantee Fund for deposits	52	8,926	9,018	9,127	4,843
	- Other operating expenses	203	140	236	707	449
	Write-downs on loans etc. (net) Profit on equity investments in non	36,172	63,908	154,386	67,073	69,204
	affiliated and affiliated companies	490	-760	-507	-332	91
	Operating result	104,653	51,044	-56,748	36,175	12,272
T	axes	22,543	10,929	-712	11,720	2,433
O	Profit for the year f which are holders of shares of hybrid	82,110	40,115	-56,036	24,455	9,839
	core capital instruments etc.	6,626	1,831	0	0	0
	Balance as per 31st December
	summary
T	otal assets	5,861,891	5,424,729	5,384,120	5,322,821	6,004,480
L	oans and other receivables	3,687,509	3,511,175	3,643,989	3,647,129	3,498,499
G	uarantees etc	841,088	792,047	553,311	584,713	482,157
	Bonds	926,950	707,428	830,645	824,171	1,270,360
S	hares etc.	219,447	179,233	245,966	211,354	203,258
D	eposits and other debts.	4,871,359	4,483,104	4,485,996	3,856,710	4,499,426
S	ubordinated debt	99,618	169,439	169,260	269,201	358,475
	Total equity	695,313	619,425	522,531	578,596	546,986
	- of which proposed dividend	0	0	0	0	0
	Capital Base	703,871	663,076	486,912	670,207	747,407

Note
		2016	2015	2014	2013	2012
37 S C R R	Financial ratio (figures in pct.)
	olvency ratio	16.5	16.3	12.0	16.9	19.6
	ore capital ratio	14.6	14.4	11.1	14.2	15.7
	eturn on equity before tax	15.9	8.9	-10.3	6.5	2.7
	eturn on equity after tax	12.4	7.0	-10.2	4.4	2.1
R	eturn on assets	1.4	0.7	-1.0	0.5	0.2
E	arning/expense ratio in DKK	1.52	1.23	0.82	1.17	1.06
I	nterest rate risk	0.8	-0.8	-2.1	-1.3	-2.8
	Foreign currency position	0.2	0.4	2.5	0.2	0.9
	Foreign currency risk	0.0	0.0	0.0	0.0	0.0
L	oans etc. against deposits	82.7	86.4	89.3	98.3	83.0
S	tatutory liquidity surplus	182.5	171.8	131.0	144.6	265.6
T L A I I R E R D	otal large commitments	10.3	23.4	38.4	23.2	13.1
	oans and debtors at reduced interest	2.5	3.1	4.1	4.2	4.5
	ccumulated impairment ratio	7.0	7.8	7.9	5.4	5.8
	mpairment ratio for the year	0.7	1.4	3.4	1.5	1.6
	ncrease in loans etc. for the year	5.0	-3.8	-0.1	4.1	-0.8
	atio between loans etc. and capital funds	5.8	6.3	7.0	6.4	6.4
	(value per share 100 DKK)
	arnings per share	39.2	19.9	-29.1	12.7	5.1
	Book value per share	330	291	271	298	286
	ate on Copenhagen Stock Exchange	268	168	190	220	120
	ividend per share	0	0	0	0	0
	Market value/net income per share	6.8	8.4	-6.5	17.3	23.5
	Market value/book value	0.81	0.58	0.70	0.74	0.42

Financial Calendar 2017

23rd January:	Deadline for submission of items for the agenda for the Annual General Meeting
2nd February:	Announcement of Annual Report 2016
6th March:	General Meeting – Skjern Kulturcenter
4th May:	Announcement of quarterly report 1st quarter 2017
17th August:	Announcement of half-yearly report 2017
26th October:	Announcement of quarterly report 3rd quarter 2017

Committee of representatives

Hans Ladekjær Jeppesen, Skjern, lawyer, boardchairman Ole Strandbygaard, Ringkøbing, printer, vice-head of the committee of representatives Michael Albrechtslund, Rungsted, adviser Jørgen Søndergaard Axelsen, Skjern, real estate agent Ole Bladt-Hansen, Ribe, city manager Jens Bruun, Viby J, Manager Jens Chr. Fjord, Skjern, former bicycle dealer Poul Frandsen, Herning sales manager Børge Lund Hansen, Skjern, manager Orla Varridsbøl Hansen, Tarm, manufacturer Tom Jacobsen, Tarm, manager Mike Jensen, Skjern, bookseller Niels Erik Kjærgaard, Skjern, city manager Dorte H. Knudsen, Hviding, Ribe, hospital nurce Tommy Noer, Esbjerg, technical teacher Torben Ohlsen, Tjæreborg, manager Jens Christian Ostersen, Stauning, farmer Jens Kirkegaard Pedersen, Hemmet self-employee Niels Chr. Poulsen, No, Ringkøbing, mink farmer Jesper Ramskov, Esbjerg, manager Birte Bruun Thomsen, Esbjerg, manager Bente Tang, Hanning, Skjern, farmer Poul Thomsen, Skjern, trader in men's clothing Carsten Thygesen, Skjern, manager Jesper Ørnskov, Århus, manager

Audit Committee

Jens Okholm, Ribe, adviser Finn Erik Kristiansen, Varde, bookseller Lars Skov Hansen, Esbjerg, advisor, employee-selected

Board of directors *)

Hans Ladekjær Jeppesen, 52 years old, Skjern, lawyer, board chairman. Elected in the board of directors in 2011, re-elected in 2013 and 2015, up for election in 2017.

Jens Okholm, 68 years old, Ribe, adviser, board vicechairman.

Elected in the board of directors in 2010, re-elected in 2012, 2014 and 2016, up for election in 2018.

Bjørn Jepsen, 53 years old, Borris, farmer. Elected in the board of directors in 2012, re-elected in 2014 and 2016, up for election in 2018.

Finn Erik Kristiansen, 47 years old, Varde, bookseller. Elected in the board of directors in 2010, re-elected in 2012, 2014 and 2016, up for election in 2018.

Søren Dalum Tinggaard, 47 years old, Randers, vice manager. Elected in the board of directors in 2013, reelected in 2015, up for election in 2017.

Lars Skov Hansen, 43 years old, Esbjerg, advisor, employee-selected. Elected in the board of directors in 2011, re-elected in 2015, up for election in 2019.

Lars Lerke, 40 years old, Skjern, head of finance, employee-selected. Elected in the board of directors in 2012, re-elected in 2015, up for election in 2019.

Carsten Jensen, 36 years old, Skjern, adviser, employee-selected. Elected in the board of directors in 2015, up for election in 2019.

Management

Per Munck, 62 years old, banking executive. Employed 1st November 1999

*) Shareholder-selected board of directors are a part of the Committee of representatives.

List of board members' managerial offices in companies as per December 31, 2016 Lawyer Hans Ladekjær Jeppesen:

Boardchairman of ODJ Holding ApS Boardchairman of PE Trading A/S Boardchairman of Grønbjerg Grundinvest A/S Boardchairman of Byggefirmaet Ivan V. Mortensen A/S Boardchairman of LHI Invest A/S Boardchairman of Grey Holding 1 A/S Boardchairman of Grey Holding 2 A/S Boardchairman of Specialfabrikken Vinderup A/S Boardchairman of Roslev Trælasthandel A/S Board member of Skjern Håndbold A/S Board member of Gråkjær A/S Board member of BS Invest af 1992 A/S Board member of Carl C A/S Board member of Carl C Ejendomme ApS Board member of Grønbjerg Ejendomsselskab A/S Board member of AA Properties A/S Board member of AA Ejendomme 1 A/S Board member of Advokatpartnerselskabet Kirk Larsen & Ascanius Board member of Kastrup A/S Board member of Kastrup Ejendomme ApS Board member of Kastrup Vinduet Holding ApS Board member of Spray Away A/S

Consultant Jens Okholm: Boardchairman of Hansen & Bay Byg A/S Board member of it-Craft A/S

Bookseller Finn Erik Kristiansen:

Manager of ProVarde S/I Manager and board member of Kristiansen Ejendomme A/S Manager of Bordin Holding ApS

Boardchairman of Kristiansen Bog & Idé A/S Boardchairman of Flensborg A/S

Farmer Bjørn Jepsen:

Board member of Arla Foods AmbA Board member of Kvægafgiftsfonden Board member of Kvægbrugets Forsøgscenter Board member of SEGES - kvæg

Vice manager Søren Dalum Tinggaard: Board member of AP Pension A/S

Banking executive Per Munck:

Board member of BankData Board member of Value Invest Luxembourg S.A. Board member of Forvaltningsinstituttet for Lokale Pengeinstitutter

CVR NR. 45 80 10 12

Skjern Bank, Skjern: Banktorvet 3 · 6900 Skjern Ph. +45 9682 1333

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Skjern Bank, Esbjerg: Kongensgade 58 · 6700 Esbjerg Ph. +45 9682 1500

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