Annual Report • Feb 3, 2021
Annual Report
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Annual report 2020 1 ÅNNUAL REPORT 2020 2 Annual report 2020 Annual report 2020 3 2020 EQUITY CORE EARNINGS NET INTEREST AND FEE INCOME IMPAIRMENT LENDING CAPITAL CORE EARNINGS EXPECTATIONS Prot before tax of DKK 143,8 million Equity yielded interest of 13,7 % before tax Core earnings amounted to DKK 154,7 million Increased by 3,9 % to DKK 347,5 million Increased to DKK 32,9 million, corresponding to 0,4 % of loans and guarantees Loans amounted to DKK 4,225 million and deposits amounted to DKK 6,464 million Satisfactory capital ratio of 21,2 % and individual solvency requirements of 9,8 % Core prot in 2021 is expected to be in the range of DKK 140 - 155 million ESPECIALLY SATISFACTORY RESULTS KR. KR. 4 Annual report 2020 Content Management’s nancial report for 2020 ............................... 7 Endorsement of the Annual Report by the Management .................. 22 Prot and loss account ............................................ 23 Statement of comprehensive income ................................. 23 Proposal for distribution of prot ..................................... 23 Balance Sheet . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 Information on changes in equity .................................... 26 Notes .......................................................... 29 5 years in summary ............................................... 67 5 years nancial ratios ............................................. 68 Quarterly overviews .............................................. 69 Financial Calendar 2021 ............................................ 70 Committee of representatives ....................................... 71 List of board members’ managerial ofces ............................. 72 5 Annual report 2020 6 Annual report 2020 Annual report 2020 7 Management’s nancial report for 2020 A profit before tax of DKK 143.8 million is considered especially satisfactory. Profits were positively affected by the improvement in the Bank’s net interest and fee income and po- sitive exchange rate adjustments, as well as only marginally increased costs. Equity yiel- ded interest of 13.7 % before tax and 10.9 % after tax, which the management considers very satisfactory. In light of the achieved profit and the adequate capital coverage, it is recommended to the Annual General Meeting that dividends of DKK 2 per share be distributed. As a result of the Danish Financial Supervisory Authority’s announcement of restraint in distributing dividends, the Bank has chosen to limit the distribution compared to 2019, when the di- stribution was DKK 3 per share. The distribution is fully justifiable and follows the Bank’s dividend policy, as the Bank has also strengthened its earnings and capital situation in 2020. The distribution amounts to DKK 19.3 million. The unchanged low interest rate environment has meant that interest income on loans has been reduced by DKK 5.9 million, corresponding to 2.9 %. The net growth of custo- mers has been especially satisfactory, and in particular the proportion of private custo- mers has increased more than expected. Despite this, lending has decreased by DKK 100.8, corresponding to 2.3 %, which, in addition to ordinary repayment of some major business loans, is also due to business customers’ receipt of assistance packages, inclu- ding deferral of payment of VAT and A-tax, which has significantly reduced the need for loans. At the same time, the Bank’s existing and new customers have a strong focus on savings, and consequently the demand for loans is limited. Interest income on deposits increased from DKK 2.1 million in 2019 to DKK 15.1 million in 2020. The low interest rate in society means that the Bank’s placement of surplus liquidi- ty in certificates of deposit in Nationalbanken bore a negative interest rate of 0.60 %. Expenses for the Bank in 2020 increased by DKK 4.8 million to DKK 12.2 million as a re- sult of an increasing deposit surplus and thus an increased need for placement of liquidi- ty. For this reason, it has also been necessary to introduce negative deposit rates for the Bank’s private customers, after which all customer segments are now covered by negati- ve deposit rates. 8 Annual report 2020 Net interest income increased satisfactorily by DKK 4.9 million to DKK 190.2 million, cor- responding to 2.7 %. Net interest and fee income increased by a total of DKK 13.1 milli- on. The main reasons for this are the increase in interest income on deposits and the in- creasing income on fees as a result of increased activity with the Bank’s many new and existing customers. Also in 2020, the opportunities for restructuring mortgage financing have been favourable, 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 mortgage financing, has resulted in an increase in loan case fees of DKK 7.2 million. The Bank’s goal has been to increase fee earnings compared to interest income through increased activity in the areas of real estate, securities, pension and insurance. The Bank’s earnings from fees have increased from 43 % in 2019 to 45 % in 2020, which is satisfactory. Expenses for staff and administration increased marginally from DKK 191.9 million to DKK 193.9 million, or by DKK 2.0 million, corresponding to 1%. The Bank’s staff costs have in- creased by DKK 7.5 million as a result of a net of 8 new employees and general collective bargaining increases. Hirings have primarily 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 high- ly resource-intensive sets of rules in the sector. The Bank’s administrative expenses were reduced by DKK 5.4 million, primarily as a result of lower marketing costs but also a re- duction in rental expenses. Impairment has increased by DKK 16 million to DKK 32.9 million, corresponding to 0.4 % of the Bank’s loans and guarantees. As of 31 December 2020, a management estimate of DKK 50.0 was allocated to accommodate any impairment as a result of the COVID-19 pandemic in 2021. The Bank has only realised very limited impairment as a result of CO- VID-19, and the Bank’s customers have generally recovered well financially through the first approximately 10 months of the pandemic. The COVID-19 pandemic has left its mark on developments in the world economy and GDP has fallen in Denmark. The effect of this desaturation is not reflected in the finances of the Bank’s customers, which in particular can be attributed to the aid packages adop- ted by the government and the postponement of payment deadlines. At the end of 2020, there is thus significant uncertainty regarding the effect of the COVID-19 pandemic on the Bank’s corporate customers in 2021. The management estimate of DKK 50.0 million is an expression of this uncertainty. Without the management estimate of DKK 50.0 million, the impairment for the year would have been an income of DKK 17.1 million, which is a clear indication of the high qu- Annual report 2020 9 ality of the Bank’s loan portfolio. In 2020, there are no industries that have accounted for a larger share of write-downs in isolation. Agriculture has historically had headwinds with weak terms of trade, primarily as a result of low settlement prices, but the industry has generally performed well th- rough 2020. An overriding exception is the mink industry, which the government decided to phase out in Q4. This has been and continues to be an extremely difficult time for the Bank’s mink breeders, both financially and on a human level, but in terms of impairment, what this has meant for the Bank has been limited, as the Bank’s customers in the seg- ment have been well run and well capitalised. In addition to the general impairment in the agricultural segment, a management estima- te of DKK 7.5 million has been included as a result of the continued significant uncertainty in the industry, particularly in pig and milk production. A buffer has thus been set aside in the form of a pool for write-downs on the hardest-hit farms. 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. The Bank’s private customers have thus also recovered well through 2020, and thus there has been a larger net rever- sal of write-downs. At the beginning of 2020, the Bank expected a core earnings in the range of DKK 125 – 140 million. In the stock exchange announcement of 6 October 2020, the expectation was increased to the range of DKK 140 – 155 million, and on 5 January 2021, it was adju- sted to the range of DKK 150 – 155 million. Core earnings were realised at DKK 154.7 million and were thus increased by a very sa- tisfactory DKK 8.6 million compared to 2019. The increase is due to several different fac- tors, including a large influx of new customers, many conversions of customers’ mortga- ge financing as a result of the low interest level and high activity in the housing market, as well as increased income from negative interest rates on deposit accounts. The expectations for the profit before tax for the year at the beginning of 2020 was a ran- ge of DKK 115 – 130 million, which was adjusted upwards to the range of DKK 125 – 140 million on 6 October. The 2nd upwards adjustment for the financial year to the range of DKK 140 – 145 million followed on 5 January 2021. Expectations were realised at DKK 143.8 million. Both the achieved core earnings and the profit before tax are considered very satisfactory. 10 Annual report 2020 As a result of particularly satisfactory profit, the capital coverage was increased in the course of 2020 compared to the individual solvency requirements, from 9.0 % points in 2019 to 11.4 % points in 2020. After deduction of the capital conservation buffer of 2.5 percentage points and NEP supplement of 1.865 %, the capital coverage at the end of 2020 amounted to 7.0 percentage points. The Bank has a goal of a surplus compared to the capital requirement of min. 5 percentage points, which is thus met. In 2020, the Bank has increased the capital base by DKK 103.2 million to DKK 1,136 milli- on. The increase in the capital base is primarily due to earnings in 2020 less proposed di- vidends of DKK 19.3 million. The Bank’s capital ratio amounted to 21.2 % at the end of 2020 and has thus increased by 2.6 percentage points compared to the end of 2019. The introduction of changed capi- tal rules, the “Quick-fix” rules and marginally reduced lending as well as increased gua- rantees, have reduced the risk-weighted assets by a total of DKK 180 million, which in isolation increases the capital ratio by 0.7 percentage points. The bank’s solvency require- ments are estimated at 9.8 %. Overall, the Bank’s capital base is considered solid and adequate. With regard to the Bank’s capital position in general, refer to note 28 on page 50. FUTURE CAPITAL RESERVES At the end of 2020, the Bank had a solid capital base with a capital coverage including ca- pital conservation buffer and NEP supplement of 7.0 %. In the next 2 years, the following capital buffers will be phased in to the Bank’s requirement for the Bank’s capital base: • The cyclical buffer currently amounts to 0.00 %, as it was suspended in the first half of 2020 as a result of COVID-19. The cyclical buffer can potentially be phased in at 2.5 percentage points. • Up to 6.0 % points, NEP supplement. In its latest announcement on this, the Danish Financial Supervisory Authority has calculated the supplement for the bank to be 5.6 %, of which 1.865 % has been phased in. The Bank thus expects that the requirements for the Bank’s future capital ratio at the end of 2022, including a buffer of 5 % and fully phased-in cyclical buffer, will be at the level of 25.5 %, corresponding to 4.3 percentage points higher than the current capital ratio of 21.2 %. It is the Bank’s expectation that the continuous improvement in the earnings base will mean that in the coming year, primarily through consolidation from operations, the Bank Annual report 2020 11 will be able to increase the capital base sufficiently to maintain a satisfactory capital coverage. The Bank will increase Tier III capital to partially cover the NEP supplement to the extent deemed appropriate. EXPECTATIONS FOR 2021 The Bank has had a very satisfactory 2020, where expectations for the vast majority of areas have been met and exceeded. Because of this, the Bank is optimistic about 2021 and expects a continued increase in business volume and a lower lending growth. The profit in 2020 was partly based on high mortgage activity and positive exchange rate adju- stments, which are not expected to be at a similar level in 2021. For this reason, earnings are expected to be lower than in 2020. Core earnings in 2021 are expected to be in the range of DKK 140 – 155 million and profit before tax in the range of DKK 125 – 140 million, assuming positive exchange rate adjust- ments at a level of DKK 7 million and impairment at a level of DKK 25 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 and its key values, the management is very confident in terms of continuing to at- tract new customers and increasing business volume with the many existing and loyal customers. For this reason, we expect an organic growth in lending of up to 2 %. The focus is on strengthening the Bank’s earnings and increasing capital provisioning in order to secure our position as the independent and local financial institution, which makes a difference in the local areas where the Bank’s branches are, as well in the long term. The Bank is pleased to note that the private customers in the local areas still have a ro- bust economy, which is supported by stable housing prices and general financial accoun- tability and diligence. The bank is experiencing strong growth in the number of and busi- ness volume with private customers and does not expect significant challenges with len- ding to these customers in 2021 as this has not been the case in previous years. The Bank still has close ties to the agricultural industry, which represents a significant and valuable customer group. Easily the largest of the customer groups in agriculture is milk producers, who have ge- nerally had profitability in operations in 2020, and despite an expectation of decreasing settlement prices in 2021, this is expected to continue in 2021. The forecasts for pig pro- ducers are not as good in 2021 as they were in 2020, but there are still expected to be 12 Annual report 2020 acceptable terms of trade and operating profit, though with the African swine fever as a significant uncertainty factor. The Bank’s lending for mink production is mainly expected to be repaid in 2021 in line with the level of compensation being declared politically. 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 2021 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. The agricultural industry has historically been associated with major fluctuations in profi- tability and thus the Bank’s risk. Decreasing settlement prices and deteriorating terms of trade have again been seen. Combined with the outbreak of African swine fever in Euro- pe, this increases uncertainty compared to 2021. In light of this, a management estimate of DKK 7.5 million has been made on the agricultural industry as a whole. Lending to agriculture accounts for 10.8 % of the total lending, where the distribution is 5.8 % to cattle farming, 1.8 % to mink production, 1.2 % to pig farming, 1.2 % to crop far- ming and 0.8 % to other forms of production. As with any other industry, the Bank has made a careful review of the exposures and the management is confident in the mea- surement of these exposures. In 2021, the Bank expects to expand its exposures in the agricultural segment by acqui- ring well-run and well-capitalised agricultural customers within the various industries. The bank’s loans within the real estate segment amounted to 11.8 %, compared with 13.4 % at the end of 2019. The Bank’s exposures in real estate are primarily within rental for residential purposes and the Bank’s individual project financings, before initiation, are typically guaranteed to be sold after the completion of the project or where there is suffi- cient liquid collateral available. Financing of alternative energy was 0.8 % at the end of 2020, compared with 2.1 % in 2019. In the future, the bank also wants to support green initiatives and invest in sustai- nability. The Bank’s other business segments are generally assessed to be developing well, alt- hough the pandemic will also have a clear impact on many markets and business oppor- tunities well into 2021, 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- Annual report 2020 13 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. The satisfactory capital adequacy ratio of 7.0 percentage points at the end of 2020 after the capital conservation buffer and NEP requirement amounts to 6.8 % at the end of 2021, provided that the profit and growth in the risk-weighted assets is realised as expec- ted. This is fully in accordance with the Bank’s long-term capital plan and the capital coverage is considered to be fully adequate to ensure flexibility in terms of capital for the development of the Bank. ACTIVITIES AND BUSINESS VOLUME The Bank has not established new branches in 2020 and the Bank’s branches are thus still located in Skjern, Varde, Esbjerg, Bramming, Ribe, Hellerup and Virum. The bank’s employees in all branches are strongly anchored and have many years of seniority right in their local areas. The branch network is not expected to be expanded in 2021, but if there is an opportunity to start a branch in an attractive area and with the right employees, the Bank will consider this after careful assessment of the growth and earnings potential. Skjern Bank Leasing is financial leasing of most types of assets to the Bank’s business customers. The administrative management of the Bank’s leasing activities are outsour- ced to a well-established player in the industry. The business volume of Skjern Bank Leasing continues to increase and at the end of 2020, a total remaining lease liability of over DKK 120 million was realised. The develop- ment is expected to continue and increase in volume and profitability in 2021. Overall, 2021 is expected to lead to a satisfactory increase in the Bank’s business volume and earnings, including an increased focus on the provision of insurance and pension pro- ducts to strengthen the Bank’s earnings. BUSINESS VOLUME IN CONTROLLED DEVELOPMENT The bank’s business model and credit policy were essentially unchanged in 2020. 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 decreased by DKK 100.8 million, or 2.3 %, to DKK 4,225 million. Deposits from customers increased by DKK 240.1 million or 3.9 % to DKK 6,464 million. The total guarantees for customers increased by DKK 251 to DKK 2,630 million. 14 Annual report 2020 CAPITAL GOALS AND DIVIDEND POLICY Due to the satisfactory operating earnings, the Bank has achieved a satisfactory capital coverage, primarily consisting of a solid actual core capital of 18.2 % compared with the individual solvency requirements of 9.8 %, which, added to the capital conservation buf- fer of 2.5% and NEP requirement of 1.865 %, amounts to total capital requirements of 14.165 percentage points and a capital coverage relative to the capital requirements of 7.0 percentage points. In the future, the management will also 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 operating profit. The Danish Financial Supervisory Authority’s recommendations for increased caution have been taken into account in the assessing the sufficient capital coverage. The continued uncertainty as a result of the ongoing CO- VID-19 pandemic has been incorporated, which is why DKK 2 per share has been distri- buted, which constitutes a lower share of the satisfactory earnings in 2020. The distributi- on is smaller than the distribution for the financial year 2019, when DKK 3 per share was distributed, and is included in the dividend policy. 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- 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 Annual report 2020 15 many stakeholders and the running of a well-functioning local Bank to be equally impor- tant. The Bank has always had a strong focus on creating value for the Bank’s stakeholders. This focus works and in 2020 led to a satisfactory increase in the total business volume of all of the Bank’s branches. The bank’s goal is controlled growth of good customers, which is to the benefit of all 4 stakeholder groups. When the customers choose the way Skjern Bank runs the Bank, it increases the profits in the form of higher earnings capacity, to the benefit of the share- holders. The local community benefits from this in the form of the Bank’s local backing as well as lending services to local businesses and private customers. The employees bene- fit from this in the form of job retention and an exciting job where they can develop. The customers express that it is valuable to have a local bank that knows their needs and where they have an advisor who knows them and who back the local community’s activi- ties. 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 bank’s management proposes a cash dividend of DKK 2 per share, a total of DKK 19.3 million, for the financial year 2020. CUSTOMERS The Bank has a great many private customers in most of the country and small and medi- um-sized business customers in the Bank’s local areas. The Bank is largely chosen by new customers who, like the Bank’s many existing customers, want a local bank where they know their adviser and where they have time for them. Through a close familiarity with individual customers and their needs, the Bank wants to make a difference when our customers are facing important financial decisions, but also in daily life when online banking, mobile banking and cards have to work. The bank wants to be close to the customers, to have short response times and to find the products and financing solutions that work for each customer. At Skjern Bank, we define this by our key values: customer focus, presence, drive and decency. 16 Annual report 2020 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 ambassador concept. The references from satisfied customers is the biggest reason why the Bank experiences high and satisfactory customer growth year after year. EMPLOYEES As of 31 December 2020, the Bank employs 172 employees, which is an increase of 8 employees in one year. All employees are offered employment terms that conform to the market as well as relevant training and continuing education in order to always ensure a high level of professionalism. Employee job satisfaction is very important for the Bank and there are annual measure- ments of the development in 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 satis- faction, 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 new local businesses with counselling and financing, so that entrepreneurs’ ideas have the best opportunity for 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 com- munities is largely based on reciprocity, 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. NET INTEREST INCOME Net interest income amounts to DKK 190.2 million, which is an increase of 2.7 % compa- red to last year, when net interest income was DKK 185.3 million. Annual report 2020 17 Interest income on customer lending decreased by DKK 5.9 million to DKK 196.2 million, which is not satisfactory, but unfortunately unavoidable in a year of declining lending and fierce competition in the market with marginally declining average lending rates. Bond in- terest income decreased by DKK 1.5 million, while there has been an increase of DKK 2.8 million on financial instruments. 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 15.1 million on this in 2020, compared with DKK 2.1 million in 2019. Interest income including interest income from deposits has increased by a total of DKK 8.1 million, corre- sponding to 4.0 %. The Bank’s proportion of lending where there was impairment, but where interest still continues to be accrued, increased marginally and interest on this amounts to DKK 11.2 million in 2020 compared with DKK 10.5 million in 2019. Interest expenses decreased by 16.8 % to DKK 8.3 million, which is due to lower interest expenses on deposits of DKK 2.8 million. The bank’s interest expenses for deposits in Nationalbanken increased by DKK 4.8 million to DKK 12.2 million in 2020, 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 9.0 % to DKK 160.1 million. The increase is primarily due to an increase in loan case fees of DKK 7.2 mil- lion to a total of DKK 76.1 million as a result of a high number of loan cases in 2020, but also increased volume in mortgage financing. The Bank’s income from guarantee provisions have increased by a satisfactory DKK 4.0 million, primarily as a result of high activity in mortgage brokerage. The number of custo- mers and the activity of the Bank’s customers also increased satisfactorily, with an in- crease in other fees of a total of DKK 1.9 million as a result. DIVIDENDS In 2020, the Bank’s dividends from shareholdings decreased by DKK 3.8 million and amount to DKK 2.1 million, which is solely due to the partial sale of shares in Sparinvest Holdings SE in 2019. 18 Annual report 2020 NET INTEREST AND FEE INCOME Net interest and fee income including dividends increased by 3.9 % to DKK 347.5 million, which is very satisfactory. EXCHANGE RATE ADJUSTMENTS In 2020, securities markets were characterised by optimism and increasing share prices as well as stable bond prices. In the Bank’s shareholdings, a capital gain of DKK 23.4 mil- lion was realised, compared with DKK 40.0 million in 2019, where the Bank realised capi- tal gains of approximately DKK 21 million from sale of some of the ownership in Sparin- vest Holdings SE. The Bank wants a continued low share price exposure and the Bank’s investment in shares is thus still of a modest size. Exchange rate adjustments on bond portfolios have been negative in 2020 by DKK 1.0 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 26.5 million and, in addition to the exchange rate adjustments on bonds and shares, consist of earnings on currency and financial instruments of DKK 4.1 million. COSTS Staff and administration expenses increased by 1.0 % and amount to DKK 193.9 million, compared with DKK 191.9 million in 2019. It is considered satisfactory that this increase only amounts to 1.0 % in a year with 8 new employees. Salary expenses have increased by DKK 7.5 million, corresponding to 6.7 %, due to an increasing number of employees, collective bargaining wage increases and an increase in payroll tax. In 2020, other administrative expenses decreased by DKK 5.4 million to DKK 74.1 million, which is partly due to lower marketing expenses, but also that the Bank’s leased com- pany domiciles were capitalised at the beginning of the year, and the rental expense has thereby been reposted to interest expense and depreciation. DEPRECIATION AND WRITE-DOWNS In 2020, there was depreciation and impairment on tangible fixed assets of DKK 5.2 milli- on, compared with DKK 2.8 million in 2019. The increase is solely due to the Bank’s lea- sed company domiciles from the beginning of 2020 being capitalised in the statement of financial position and that they must thereafter be depreciated on an ongoing basis. IMPAIRMENT Impairment on loans and customer receivables etc. amounted to 0.4 % of the total loans and guarantees, or DKK 32.9 million, compared with DKK 16.8 million in 2019. Annual report 2020 19 The level is considered satisfactory in a year where COVID-19 has taken up a lot of space and the continued uncertainty for the development in 2021 means that as of 31 Decem- ber 2020, a management estimate of a total of DKK 50.0 million has been expensed as a result of COVID-19, as well as DKK 7.5 million on the Bank’s most challenged agricultural exposures as well as on the industry in general. Reversal of impairment from previous accounting years amounted to DKK 135.0 million, while recorded losses amounted to DKK 23.1 million, of which DKK 18.3 million had not been previously written down. In total, the Bank has provisioned DKK 359.4 million to ac- commodate future losses, which corresponds to 4.9 % of the Bank’s total lending and guarantees. CORE EARNINGS At the beginning of 2020, the Bank expected a core earnings in the range of DKK 125 – 140 million. With the stock exchange announcement on 6 October 2020, the expectati- ons for profit have been adjusted upwards to the range of DKK 140 – 155 million, and specified at DKK 150 – 155 million with the stock exchange announcement on 5 January 2021. The realised core earnings amount to DKK 154.7 million in 2020, compared with DKK 146.1 million in 2019, and are considered highly satisfactory. The increase is primarily due to very satisfactory customer growth, increased interest income on deposits and in- creased loan case fees. PROFIT BEFORE TAX At the beginning of 2020, the expectations for profit for the year before tax were in the range of DKK 115 – 130 million, and over the course of the year, this was adjusted upwards two times. The first adjustment was with the stock exchange announcement on 6 October 2020 to the range of DKK 125 – 140 million, and on 5 January 2021, the range was increased to DKK 140 – 145 million. The bank’s profit before tax amounted to DKK 143.7 million compared to DKK 164.9 milli- on in 2019. The profit is considered very satisfactory. CAPITAL At the end of 2020, the Bank’s equity amounted to DKK 1,108.1 million, of which DKK 60.7 million was raised hybrid core capital, which for accounting purposes is included un- der equity. At the end of 2019, equity was DKK 1,026.6 million. The increase is due to the realised profit in 2020 less approved and paid dividends for the financial year 2019. The capital base, which consists of equity and supplemental borrowing, amounted to DKK 1,136 million at the end of 2020 and the total risk exposure amounted to DKK 20 Annual report 2020 5,370.5 million. The capital ratio is calculated at 21.2 % and the core capital at 19.3 %. The solvency requirement amounted to 9.8 %, whereby there is a satisfactory coverage in relation to the solvency requirement of 11.4 percentage points, corresponding to DKK 612.2 million. At the end of 2020, in addition to the solvency requirements, the Bank will also add a capital conservation buffer of 2.5 % and a NEP supplement of 1.865 %. Includ- ing this capital requirement, the solvency coverage relative to the total capital require- ments amounts to 7.0 percentage points, corresponding to DKK 377.8 million. The solvency requirements, which are calculated according to the Danish Financial Super- visory Authority’s credit reservation method, are recognised at DKK 429.6 million, corre- sponding to 8.0 % for the Column 1 requirement (Søjle 1-kravet). In addition, DKK 54.1 million was provisioned for credit risk, DKK 1.7 million for interest risk, DKK 0.1 million for share risk, and DKK 11.5 million for credit spread risk under the market risk and DKK 12.5 million for reservations under the operational risk. A new element in the solvency requirement as of 31 December 2020 is the provision for future deductions in the capital base as a result of the “NPE backstop” capital rules. The Bank calculates the supplement to the solvency requirement to be in the range of DKK 5-6 million, but is allocating DKK 18.5 million, as the deduction in capital is increased to this level on 30 June 2021. The other risk groups have not given rise to additional solven- cy reserves. The Bank’s goal for capital coverage relative to the calculated solvency requirements plus the current phased-in capital requirements is 5 percentage points. Capital requirements will increase significantly in the coming years by a potentially up to 2.5 % cyclical buffer and up to 6 % NEP requirements fully phased in at the end of 2022. At the same time, the Bank has a goal of organic growth in business volume at a level of 2 % in the coming years, which increases the requirements for the capital base. Over the coming years, the Bank wants to increase the capital base with earnings and, depending on growth, also supplement it with foreign capital in the form of either hybrid capital, subordinated capital or Tier III capital, depending on what is most valuable in terms of capital and earnings. 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 Annual report 2020 21 LIQUIDITY The Bank’s goal is to maintain liquidity reserves at a continued sufficient and solid level, mainly based on deposits from the Bank’s customers. In 2020, the goal was met by in- creasing the total deposits to a total of DKK 6.464 million. The bank’s liquidity reserves are solid. The LCR (Liquidity Coverage Ratio) of DKK 2.248 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 established an internal limit for the minimum liquidity reserves of 175 %, which exceeds the minimum requirements of 100 % in the Danish Financial Supervisory Authority’s Supervisory Diamond. The Bank achieved the goal and as of 31 December 2020 has an LCR financial ratio of 351 %. 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% and 5 % of the voting rights. LIQUIDATION RESERVE n 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 2020 No events have occurred after 31 December 2020 that significantly affect the bank’s circumstances. AUDIT The Danish version of the Annual Report for 2020 is equipped with internal audit state- ments and independent auditors’ statement. The statements are without reservations and complementary information. 22 Annual report 2020 Endorsement of the Annual Report by the Management We have today discussed and approved the annual report for the period 1 January – 31 December 2020 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 additional Danish requirements regarding information in annual reports for nancial companies listed on the Stock Exchange. 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 2020 and of the result of the bank’s activities for the accounting year 1 January – 31 December 2020. 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 3 February 2020 The board of Skjern Bank A/S Per Munck Manager Skjern, the 3 February 2020 The board of Skjern Bank A/S Hans Ladekjær Jeppesen Bjørn Jepsen Chairman Vice-chairman Niels Christian Poulsen Niels Erik Kjærgaard Finn Erik Kristiansen Lars Skov Hansen Carsten Jensen Michael Tang Nielsen Annual report 2020 23 Prot and loss account Note DKK 1,000 2020 2019 2 Interest receivable 195.693 200.586 Interest receivable deposits 15.119 2.157 3 Interest payable 8.344 10.032 Interest payable central banks 12.224 7.424 Net income from interest 190.244 185.287 Dividend on shares and other holdings 2.089 5.863 4 Charges and commission receivable 160.113 146.937 Charges and commission payable 4.932 3.680 Net income from interest and charges 347.514 334.407 5 Value adjustments 26.513 40.225 Other ordinary income 1.977 1.945 6 Staff costs and administrative expenses 193.929 191.861 Depreciation and write-downs on intangible and tangible assets 5.195 2.821 Other operating expenses total 234 112 Contribution to the Guarantee Fund for deposits 194 112 Other operating expenses 40 0 9 Write-downs 32.874 16.831 Result before tax 143.772 164.952 10 Tax 28.131 29.469 Net-result for the financial year 115.640 135.482 Of which are holders of shares of hybrid core capital instruments etc. 6.487 6.626 PROPOSAL FOR DISTRIBUTION OF PROFIT Dividends 19.280 28.920 Holders of hybrid core capital instruments 6.487 6.626 Transferred to/from retained earnings 89.873 99.936 Total distribution of the amount available 115.640 135.482 STATEMENT OF COMPREHENSIVE INCOME Profit for the financial year 115.640 135.482 Total comprehensive income 115.640 135.482 24 Annual report 2020 Note DKK 1,000 2020 2019 ASSETS Cash in hand and demand deposits with central banks 192.109 229.494 11 Receivables at credit institutions and central banks 2.225.139 1.673.392 12 Loans and other receivables at amortised cost 4.224.773 4.325.613 13 Bonds at fair value 959.506 1.045.717 14 Shares etc. 201.220 225.094 15 Shares associated with pool schemes 1.039.002 0 16 Holdings in associated enterprises and group enterprises 66.758 47.140 Investment properties 3.019 2.961 Owner-occupied properties 43.166 44.179 Owner-occupied properties, leasing 20.573 0 17 Other tangible assets 4.253 3.323 Current tax assets 183 4.804 Other assets 60.806 58.396 Prepayments 718 1.107 Total assets 8.974.467 7.614.080 Balance Sheet Annual report 2020 25 Note DKK 1,000 2020 2019 LIABILITIES DEBT 18 Debt to credit institutions and central banks 181.165 206.536 19 Deposits and other debts 6.463.735 6.223.604 Deposits in pooled schemes 1.039.002 0 Other liabilities 71.121 44.386 Prepayments 1.656 1.386 Total debt 7.756.679 6.475.912 PROVISIONS 20 Provisions for deferred tax 1.423 675 12 Provisions for loss on guarantees 10.472 13.590 Total provisions 11.895 14.265 SUBORDINATED DEBT 21 Subordinated loan capital 97.834 97.334 Total subordinated debt 97.834 97.334 EQUITY 22 Share capital 192.800 192.800 Revaluation reserves 417 417 Retained earnings 834.814 744.402 Proposed dividend 19.280 28.920 Capital owners share of equity 1.047.311 966.539 23 Holders of hybrid capital 60.748 60.030 Total equity 1.108.059 1.026.569 Total liabilities 8.974.467 7.614.080 26 Annual report 2020 Note DKK 1,000 2020 2019 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 744.402 644.923 Profit or loss for the financial year 89.873 99.936 Dividend own shares 30 30 24 Purchase of own funds 509 -487 Retained earnings end-of-year 834.814 744.402 Dividend beginning-of-year 28.920 28.920 Proposed dividend 19.280 28.920 Dividends paid -28.920 -28.920 Dividend end-of-year 19.280 28.920 Holders of hybrid capital beginning-of-year 60.030 59.680 Hybrid capital out -60.030 0 Hybrid capital in 59.244 0 Net profit or loss for the year (interest hybrid capital) 6.211 6.626 Paid interest -4.707 -6.276 Holders of hybrid capital end-of-year 60.748 60.030 Total equity 1.108.059 1.026.569 Information on changes in equity Annual report 2020 27 Notes 1 Accounting policies ............................................ 29 2 Interest income ............................................... 39 3 Interest expenses.............................................. 39 4 Fees and commission income .................................... 39 5 Value adjustments ............................................. 39 6 Staff costs and administrative expenses ............................ 40 7 Incentive and bonus schemes .................................... 41 8 Audit fee..................................................... 41 9 Write-downs on loans and receivables ............................. 41 10 Tax ......................................................... 42 11 Receivables at credit institutions and central banks.................... 42 12 Loans and other debtors at amortised cost price...................... 43 13 Bonds at fair value ............................................. 45 14 Shares etc. ................................................... 45 15 Shares associated with pool scheme............................... 45 16 Land and buildings ............................................. 45 17 Other tangible assets ........................................... 46 18 Debt to credit institutions and central banks ......................... 46 19 Deposits and other debts ........................................ 46 20 Deferred taxation .............................................. 46 21 Subordinated debt ............................................. 47 22 Share capital .................................................. 47 23 Holders of hybrid capital......................................... 47 24 Own capital shares............................................. 48 25 Contingent liabilities ............................................ 48 26 Lawsuits etc. ................................................. 49 27 Related parties ................................................ 49 28 Capital requirement ............................................ 50 29 Current value of nancial instruments .............................. 51 30 Risks and risk management ...................................... 52 31 Credit Risk ................................................... 53 32 Market risks and sensitivity information............................. 64 33 Derivate nancial instruments .................................... 65 34 5 years in summary ............................................ 67 35 5 years of nancial ratio ......................................... 68 36 Quarterly overviews ............................................ 69 37 Coperative agreements ......................................... 67 Annual report 2020 28 Annual report 2020 29 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. Changed accounting policies All signicant lease agreements must be recognised 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 lease liability including costs and any prepayments. At the same time, the present value of the agreed lease payments are recognised as a liability. Assets leased on short-term contracts and leased assets of low value are excluded from the requirement for recognition of a lease asset. The decision has been made to recognise leasing assets at the beginning of 2020 without correcting compa- rative gures. Leased properties are recognised at DKK 22.8 million at the beginning of the year, as well as a corresponding amount under liabilities. The effect on the prot for the year is an expense of DKK 0.4 million. 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. 30 Annual report 2020 Udsigt over Vadehavet, ved Kammerslusen i Ribe 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 ac- cepted 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 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. 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. Annual report 2020 31 Received interest on credit-impaired loans on which impairment has occurred are passed to the impaired part 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 - 32 Annual report 2020 nancial assets. This means that nancial assets must be classied into one of the following two categories: • 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. Receivables from credit institutions and central banks Initially recognised at fair value plus transaction costs and minus origination fees, etc. and subsequently mea- sured 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 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 liability. Stages of development in credit risk 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 Annual report 2020 33 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. 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 rating of the debtor corresponds to one rating class in the Danish Financial Supervisory Authority’s rating classica- tion 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 pay their liabilities 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. However, nancial assets where the customer has signicant nancial difculties or where the bank has offe- red easier terms due to the customer’s nancial difculties are kept at stage 2 if losses are not expected in the most likely scenario. 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. This means 34 Annual report 2020 that an exposure that is considered to be credit impaired is always placed in stage 3. 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. The predictive macroeco- nomic module generates a series of adjustment factors which are multiplied by the data centre’s “raw” estimates, which are then adjusted in relation to the starting point. 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”. Accounting estimates and assessments In 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. Annual report 2020 35 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 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. 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. 36 Annual report 2020 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”. 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. At the same time, the present value of the agreed lease payments are recognised as a liability. Assets leased on short-term contracts and leased assets of low value are excluded from the requirement for recognition of a lease asset. The comparative gures have not been corrected for recognition at the beginning of 2020. 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. Annual report 2020 37 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 de- preciation. 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. Payables to credit institutions and central banks as well as deposits and other debt The 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. 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. 38 Annual report 2020 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. Annual report 2020 39 Note DKK 1,000 2020 2019 2 INTEREST INCOME Loans and other receivables 196.227 202.138 Loans (interest conc. the written-down part of loans) -11.188 -10.512 Bonds 5.022 6.521 Other derivative nancial instruments, total of which 5.249 2.439 Interest-rate contracts 5.782 2.755 Currency contracts -533 -316 Other interest income 383 0 Total 195.693 200.586 3 INTEREST EXPENSES Deposits 640 3.506 Subordinated debt 6.542 6.525 Other interest expenses 1.162 1 Total 8.344 10.032 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 21.647 16.238 Payment services 11.098 12.423 Loan fees 76.106 68.877 Guarantee commission 20.919 16.918 Other fees and commission 30.343 32.481 Total 160.113 146.937 5 VALUE ADJUSTMENTS Bonds -1.040 -4.551 Total shares 23.433 39.974 - Shares in sectorcompanies etc 9.012 8.858 - Other shares 14.421 31.116 Foreign currency 4.615 4.587 Other financial instruments -219 215 Assets linked to pooled schemes -71.313 0 Deposits in pooled shemes 71.037 0 Total 26.513 40.225 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 40 Annual report 2020 Note DKK 1,000 2020 2019 6 STAFF COSTS AND ADMINISTRATIVE EXPENSES Salaries and remuneration of board of directors, audit committee, managers etc. Board of managers (1 person - the board of manager has a company car) 3.378 3.285 Fixed fees 3.378 3.285 Management board 1.370 1.303 Audit Committee 90 80 Committee of representatives 165 177 Total salaries and remuneration of board etc 5.003 4.845 Board of Directors’ remuneration Hans Ladekjær Jeppesen 381 349 Bjørn Jepsen 219 195 Niels Christian Poulsen 152 105 Niels Erik Kjærgaard 182 122 Finn Erik Kristiansen 110 25 Lars Skov Hansen 152 142 Carsten Jensen 132 124 Michael Tang Nielsen 132 102 Søren Dalum Tinggard 0 132 Jens Okholm 0 40 Troels Bülow-Olsen 0 25 Lars Lerke 0 22 Total 1.460 1.383 Staff costs Wages and salaries 88.152 82.245 Pensions 9.725 9.138 Social security costs 1.243 1.182 Payroll tax 15.637 14.859 Total staff costs 114.757 107.424 Salary to special risk takers (10 persons in 2020, 11 persons in 2019) 7.707 9.288 Pensions to special risk takers (10 persons in 2020, 11 persons in 2019) 864 1.022 Other administrative expenses IT expenses 41.745 41.013 Rent, electricity, heating etc 2.248 5.396 Postage, telephony etc 1.038 987 Other administrative expenses 29.138 32.196 Total other administrative expenses 74.169 79.592 Total staff costs and administrative expenses 193.929 191.861 Annual report 2020 41 Note DKK 1,000 2020 2019 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 158 150 Total 158 150 7 INCENTIVE AND BONUS SCHEMES The bank does not have any incentive or bonus schemes. 8 AUDIT FEE Total fee to the rm of accountants, elected by the annual meeting, that perform the statutory audit 665 626 Honorariums for statutory audits of nancial statements 482 550 Honorariums for assurance services 31 38 Honorariums for tax consultancy 115 38 Honorariums for other services 37 0 Fees for other statements with certainty regarding statutory statements to public authorities. Fees for tax advice include advice on various VAT and tax matters. 9 WRITE-DOWNS ON LOANS AND RECEIVABLES Write-downs and provisions during the year 177.716 116.865 Reversal of write-downs made in previous years -135.040 -91.928 Finally lost, not previously written down 4.828 3.998 Interest on the written-down portion of loans -11.188 -10.512 Recoveries of previously written off debt -3.442 -1.592 Total 32.874 16.831 42 Annual report 2020 Note DKK 1,000 2020 2019 10 TAX Calculated tax of income of the year 28.315 27.076 Adjustment of deferred tax 783 2.597 Adjustment of tax calculated in previous years -967 -204 Total 28.131 29.469 Tax paid during the year 28.148 25.814 EFFECTIVE TAX RATE (%) (Pct.) (Pct.) Tax rate currently paid by the bank 22,00 22,00 Non deductable costs and not taxable income -1,96 -4,19 Adjustment of tax calculated for previous years -0,67 -0,12 Other adjustments 0,20 0,18 Effective tax rate 19,57 17,87 11 RECEIVABLES AT CREDIT INSTITUTIONS AND CENTRAL BANKS Deposits with central banks 2.171.326 1.632.136 Receivables at credit institutions 53.813 41.256 Total 2.225.139 1.673.392 Remaining period Demand 2.225.139 1.673.392 Total 2.225.139 1.673.392 No assets related to genuine purchase and resale transactions included. Annual report 2020 43 Note DKK 1,000 2020 2019 12 LOANS AND OTHER DEBTORS AT AMORTISED COST PRICE Remaining period Claims at call 1.404.900 1.558.453 Up to 3 months 111.271 148.123 Over 3 months and up to 1 year 526.959 340.160 Over 1 year and up to 5 years 928.421 864.441 Over 5 years 1.253.222 1.414.436 Total loans and other debtors at amortised cost price 4.224.773 4.325.613 DEVELOPMENT IN WRITE-DOWNS AND PROVISIONS RELATING TO FINANCIAL ASSETS AT AMORTIZED COST AND OTHER CREDIT RISKS ASSETS INCLUDED IN IFRS9 STAGE 1 IMPAIRMENT CHARGES Stage 1 impairment charges at the end of the previous financial year 20.005 16.768 Stage 1 impairment charges / value adjustment during the period 12.848 11.997 -hereby new facilities in the period 10,270 TDKK Stage 1 impairment reversed during the period -11.582 -8.760 Cummulative stage 1 impairment total 21.271 20.005 STAGE 2 IMPAIRMENT CHARGES Stage 2 impairment charges at the end of the previous financial year 63.076 48.650 Stage 2 impairment charges / value adjustment during the period 92.635 36.250 Stage 2 impairment reversed during the period -45.938 -21.824 Cummulative stage 2 impairment total 109.773 63.076 STAGE 3 IMPAIRMENT CHARGES Stage 3 impairment charges at the end of the previous financial year 240.252 286.140 Stage 3 and impairment charges / value adjustment during the period 66.707 63.590 Reversal of stage 3 impairment charges during the period -70.684 -60.576 Recognised as a loss, covered by stage 3 impairment charges -18.389 -48.902 Cummulative stage 3 impairment total 217.886 240.252 Total cumulative impairment charges IFRS9 348.930 323.333 44 Annual report 2020 Note DKK 1,000 2020 2019 PROVISIONS Provisions beginning of the year 13.590 9.420 Provisions during the year 5.527 9.193 Reversal af provisions -6.906 -5.023 Provisions for losses -1.739 0 Guarantees end of year 10.472 13.590 Total cumulative impairment charges IFRS9 and guarantees 359.402 336.923 Stage 1 Stage 2 Stage 3 Beginning Impairment 20.005 63.076 240.252 - in % of total impairment 6% 20% 74 % Maximum credit risk 6.546.649 1.088.483 571.517 - in % of maximum credit risk 80% 13% 7% Rating, weighted average 3,3 6,6 10,0 End Impairment 21.271 109.773 217.886 - in % of total impairment 6% 31% 62% 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 Because of the Corona crisis, an additional amount has been reserved as a management estimate of DKK 50.0 million, of which DKK 25.0 million is in Stage 2 and DKK 25 million is in Stage 3. The management estimate for the agricultural industry of DKK 7.5 million is placed in Stage 3. This is a total of DKK 57.5 million in management estimates, divided into DKK 25.0 million in Stage 2 and DKK 32.5 in Stage 3. Refer to note 31 on page 83 for a description of ratings. Loans etc. with suspended calculation of interest 61.596 83.586 Annual report 2020 45 Note DKK 1,000 2020 2019 13 BONDS AT FAIR VALUE Treasuries 942.144 925.108 Mortgage credit bonds 5.636 5.742 Other bonds 11.726 114.867 Total bonds at fair value 959.506 1.045.717 The bank has no held-to-maturity assets 14 SHARES ETC Quoted on Nasdaq OMX Copenhagen A/S 29.719 38.881 Quoted on other stock exchanges 16.943 18.178 Sectorshares recorded at fair value 154.558 168.035 Total shares etc 201.220 225.094 15 SHARES ASSOCIATED WITH POOL SCHEMES Investment units 1.037.873 - Cash deposits etc. 1.129 - I alt 1.039.002 - 16 LAND AND BUILDINGS Investment properties Fair value - end of previous nancial year 2.961 2.961 Acquisitions during the year incl. improvements 58 0 Disposals during the year 0 0 Adjustment of fair value for the year 0 0 Fair value end-of-year 3.019 2.961 Owner occupied properties Reassessed value - end of previous nancial year 44.179 45.527 Acquisitions during the year incl. improvements 408 73 Depreciations -1.421 -1.421 Reassessed value end-of-year 43.166 44.179 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 0 - Increase from changes in accounting policies at the beginning of the year 22.859 - Depreciations -2.286 - End of the year 20.573 - 46 Annual report 2020 Note DKK 1,000 2020 2019 17 OTHER TANGIBLE ASSETS Total cost price beginning-of-year 23.927 25.903 Acquisitions during the year incl. Improvements 2.418 909 Reduction during the year -125 -465 Total cost price beginning-of-year 26.220 26.347 Total write-ups/downs and depreciations beginning-of-year 20.604 21.809 Depreciations during the year 1.489 1.401 Reversal of depreciations -125 -186 Total write-ups/downs and depreciations end-of-year 21.968 23.024 Book value end-of-year 4.252 3.323 18 DEBT TO CREDIT INSTITUTIONS AND CENTRAL BANKS Debt to credit institutions 181.165 206.536 Total debt to credit institutions and central banks 181.165 206.536 Term to maturity Demand 181.165 206.536 Total debt to credit institutions and central banks 181.165 206.536 No liabilities related to genuine sale and repurchase transactions included 19 DEPOSITS AND OTHER DEBTS Demand 5.844.944 5.398.876 At notice 13.430 18.591 Time deposits 0 562 Special types of deposits 605.361 805.575 Total deposits and other debts 6.463.735 6.223.604 Term to maturity Demand 5.862.675 5.415.150 Desposits redeemable at notice: Up to 3 months 87.148 108.404 Over 3 months and up to 1 year 6.212 11.819 Over 1 year and up to 5 years 47.383 44.656 Over 5 years 460.317 643.575 Total deposits and other debts 6.463.735 6.223.604 No liabilities related to genuine sale and repurchase transactions included. 20 DEFERRED TAXATION (Tax amount) Tangible assets 3.847 2.800 Loans and other receivables -3.067 -2.762 Other 643 637 Total deferred taxation 1.423 675 Annual report 2020 47 Note DKK 1,000 2020 2019 21 SUBORDINATED DEBT Supplementary capital DKK 100 mio 97.834 97.334 Rate 6,4573% 6,4573% Due date 20.05.2030 20.05.2030 The loan may be paid early with the Danish Financial Supervisory Authority’s approval starting on 20 May 2025 and then on each interest payment date. The interest rate is determined as the 6-year swap rate plus a premium of 6.3 percentage points, valid for 6 years from date of issue. Subordinated debt total 97.834 97.334 Subordinated debt that may be included in the capital base 97.834 97.334 Interest on subordinated liabilities recognised in income 6.542 6.525 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 - 60.030 Rate - 10,4593% Due date - None The loan is 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. Hybrid core capital 60.748 - Rate 8,6632% - Due date None - 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. 48 Annual report 2020 Note DKK 1,000 2020 2019 24 OWN CAPITAL SHARES Purchase and sales of own shares Holdings beginning of the year Number of own shares 16.957 10.000 Nominal value of holding of own shares (DKK 1,000) 339 200 Own shares proportion of share capital 0,18 0,10 Addition Number of own shares 57.335 6.957 Nominal value of holding of own shares (DKK 1,000) 1.147 139 Own shares proportion of share capital 0,59 0,07 Purchase price (DKK 1,000) 3.491 488 Disposal Number of own shares 68.245 0 Nominal value of holding of own shares (DKK 1,000) 1.365 0 Own shares proportion of share capital 0,71 0,00 Sale price (DKK 1,000) 4.093 0 Holdings end 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 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 2020 are a consequence of this. 25 CONTINGENT LIABILITIES Guarantees Finance guarantees 689.786 512.488 Guarantees against losses on mortgage credit loans 787.151 663.378 Registration and conversion guarantees 1.015.910 961.248 Other contingent liabilities 137.292 242.054 Total 2.630.139 2.379.168 Other binding engagements Irrevocable credit-undertakings 466.619 121.121 Total 466.619 121.121 Annual report 2020 49 Note DKK 1,000 2020 2019 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 0.6295 %. In 2020, Skjern Bank paid 194 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 225 TDKK. The Bank is a tenant in one leases, which can be terminated with 12 months’ notice, the yearly lease is 156 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: 2020 2019 Loans 0 0 Bid Bond 0 0 Rate of interest - - 50 Annual report 2020 Note DKK 1,000 2020 2019 Board of directors: Loans 25.220 22.228 Bid Bond 41.513 41.211 Rate of interest 0,333-12,65% 0,5349-8,0% Holding of shares in Skjern Bank: The board of managers - Per Munck 30.199 28.545 The board of directors Hans Ladekjær Jeppesen 11.115 11. 115 Bjørn Jepsen 5.286 5.286 Niels Christian Poulsen 32.681 32.681 Niels Erik Kjærgaard 300 300 Finn Erik Kristiansen 1.941 2.748 Lars Skov Hansen 704 710 Carsten Jensen 2.164 1.976 Michael Tang Nielsen 140 100 28 CAPITAL REQUIREMENT Equity 1.108.059 1.026.569 Proposed dividend -19.280 -28.920 Revaluation reserves -417 -417 Holders of hybrid capital -60.748 -60.030 Deduction for the sum of equity investments etc. above 10 % -46.125 -59.007 CVA deduction -1.002 -1.119 Deduction of trading framework for own sharers -1.697 -1.499 Core tier 1 capital 978.790 875.577 Holders of hybrid capital 59.245 59.768 Tier 1 capital 1.038.035 935.345 Subordinated loan capital 97.834 97.334 Capital base 1.135.869 1.032.679 Weighted items Credit risk 4.369.781 4.510.623 Market risk 293.700 367.033 Operational risk 707.072 673.608 Weigthed items total 5.370.553 5.551.264 Core tier 1 capital ratio (excl. hybrid core capital) 18,2 15,8 Tier 1 capital ratio 19,3 16,9 Solvency ratio - Tier 2 21,2 18,6 Annual report 2020 51 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 2020 2019 Book value Fair value Book value Fair value Financial assets Cash in hand+claims at call on central banks 192.109 192.109 229.494 229.494 Claims on credit institutes and central banks 1) 2.225.139 2.225.139 1.673.392 1.673.392 Loans and other debtors at amort. costprice 1) 4.225.804 4.231.398 4.326.873 4.332.998 Bonds at current value 1) 961.774 961.774 1.048.316 1.048.316 Shares etc. 201.220 201.220 225.094 225.094 Derivative nancial instruments 2.884 2.884 2.764 2.764 Total nancial assets 7.808.930 7.814.524 7.505.933 7.512.058 Financial liabilities Debt to credit institutions and central banks 1) 181.165 181.165 206.536 206.536 Deposits and other debts 1) 6.463.736 6.465.015 6.223.606 6.224.785 Derivative nancial instruments 2.211 2.211 1.157 1.157 Subordinated debt 1) 2) 99.444 99.444 99.649 99.649 Total nancial liabilities 6.746.556 6.747.835 6.530.948 6.532.127 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 52 Annual report 2020 Note DKK 1,000 2020 2019 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. Annual report 2020 53 Note Figures in pct. 2020 2019 31 CREDIT RISKS Loans and guarantees distributed on sectors Public authorities 0,0 0,0 Business: Agriculture, hunting, forestry & shing 10,8 12,0 - Plant production 1,2 1,6 - Cattle farming 5,8 6,7 - Pig farming 1,2 1,5 - Mink production 1,8 1,5 - Other agriculture 0,8 0,7 Industry and mining 3,6 4,0 Energy 1,8 2,6 Building and constructions 4,5 6,2 Wholesale 6,3 5,9 Transport, hotels and restaurants 1,4 1,7 Information and communication 0,8 0,2 Financial and insurance business 4,0 5,1 Real-esate 11,8 13,4 Other business 3,8 4,9 Total business 48,8 56,0 Private persons 51,2 44,0 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 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 54 Annual report 2020 Note 2019 2019 2019 (DKK 1,000) (DKK 1,000) (DKK 1,000) Exposure Guarantees Credit-under- takings Public authorities 0 0 0 Business - agriculture 871.218 174.002 0 Business - other 3.196.503 825.446 87.023 Private persons 2.300.904 1.379.720 34.098 Total 6.368.625 2.379.168 121.121 Which recognized in the balance after deduction of depreciation 4.325.613 Description of collateral 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 2019 2019 2019 Security distributed by type (DKK 1,000) Business, agriculture Business, other Private Securities 14.678 177.844 75.303 Real property 456.066 987.160 890.612 Chattels, vehicles and rolling stock 59.801 544.676 362.073 Guarantees 11.738 52.658 2.927 Other forms of security 104.189 632.486 446.216 Total 646.472 2.394.824 1.777.131 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 2020, this resulted in a blank of DKK 3,546 million. This is a fall of DKK 47 million. DKK compared to 2019. Annual report 2020 55 56 Annual report 2020 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. 1.291.285 1.705.214 849.919 1.139.782 1.294.629 415.996 175.050 214.614 365.656 754.505 8.206.650 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 Annual report 2020 57 Note DKK 1,000 31.12.2019 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 133.476 79.357 58.283 24.525 151.757 59.638 42.224 14.144 95.164 0 658.568 Property 116.709 231.639 171.207 181.128 69.313 18.173 30.830 24.657 6.530 0 850.186 Other 446.224 743.755 205.582 176.806 343.816 98.486 36.836 39.943 35.870 0 2.127.318 Private 494.800 620.547 346.085 542.822 447.527 137.236 52.228 86.738 43.926 0 2.771.909 Deposits at Danmarks Nation- albank 111.389 0 0 0 0 0 0 0 0 0 111.389 Accounts with other banks 2.957 75.000 70.443 0 0 0 0 0 0 0 148.400 Instruments without signicant increase in credit risk (stage 2) 1.290.269 1.704.876 848.780 888.587 1.000.834 313.533 156.118 162.162 181.490 0 6.546.649 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 0 835 9.925 25.873 14.371 6.850 3.892 71.267 0 133.013 Property 0 0 0 12.432 45.759 10.767 350 330 5.650 0 75.288 Other 117 0 7 125.528 110.651 61.169 9.767 44.280 66.879 0 418.398 Private 899 338 297 96.058 107.512 16.156 1.965 3.950 40.370 0 267.545 Accounts with other banks 0 0 0 7.252 4.000 0 0 0 0 0 11.252 Instruments with signicant increase in credit risk (stage 2) 1. 016 338 1.139 251.195 293.795 102.463 18.932 52.452 184.166 0 905.496 Industry group Agriculture 0 0 0 0 0 0 0 0 0 179.532 179.532 Property 0 0 0 0 0 0 0 0 0 212.277 212.277 Other 0 0 0 0 0 0 0 0 0 224.823 224.823 Private 0 0 0 0 0 0 0 0 0 137.873 137.873 Credit-impaired instruments (stages 3 and 2 weak) 0 0 0 0 0 0 0 0 0 754.505 754.505 Instruments for which impair- ment has been recognised cor- responding to expected credit losses in their lifetime) 1. 016 338 1.139 251.195 293.795 102.463 18.932 52.452 184.166 754.505 1.660.001 Total nancial assets, loan commitments and nancial guarantees. 1.291.285 1.705.214 849.919 1.139.782 1.294.629 415.996 175.050 214.614 365.656 754.505 8.206.650 Work guarantees etc. not covered by IFRS9 Rating classication 1 2 3 4 5 6 7 8 9 10 Total Total 133.895 265.862 92.471 239.783 174.410 37.600 16.092 14.580 23.028 37.457 1.035.178 Total 1.425.180 1.971.076 942.390 1.379.565 1.469.039 453.596 191.142 229.194 388.684 791.962 9.241.828 58 Annual report 2020 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 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 2019 2019 2019 Exposure before write-down Write-downs Securities Signicant nancial difculties 437.887 205.884 203.303 Breach of contract 7.850 4.930 804 Reductions in terms 14.310 6.378 6.809 Probability of bankruptcy 120.137 41.207 79.628 Total 580.184 258.399 290.544 3.106 3.249 308 0 2.922 2.989 329 27 0 500 1.000 1.500 2.000 2.500 3.000 3.500 High Medium Low Not classified Million DKK Credit quality Fordeling af udlån og garantier uden nedskrivning eller restance 2020 2019 Annual report 2020 59 Note DKK 1,000 2020 2019 The above calculation does not include the value of guarantees and transports. Collateral is calculated at the customer level. The collateral value reects the fair value calculated in accordance with the Bank’s business process with a security margin of 10 - 60 %. Arrears amount for loans, which have not been written down 0-90 days 9.138 17.606 >90 days 84 945 Total 9.222 18.551 Loans and arrears amount for loans, which have not been written down 0-90 days 89.453 161.847 >90 days 2.851 5.784 Total 92.304 167.631 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 Yes No Signicantly impaired credit risk No Ye s Ye s 60 Annual report 2020 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 Annual report 2020 61 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. 62 Annual report 2020 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. Annual report 2020 63 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. 64 Annual report 2020 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 Annual report 2020 65 Note DKK 1,000 2020 2019 Interest rate risk on debt instruments etc - total 13.398 15.206 Interest rate risk in pct of core capital after deductions 1,3 1,6 Interest rate risk split in currencies with highest risk: DKK 13.560 14.504 EUR -75 770 CHF -47 -55 JPY -2 -2 USD -38 -11 Total 13.398 15.206 Foreign currency risk Total assets in foreign currency 190.396 270.450 Total liabilities in foreign currency 103.934 66.419 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 828 2.022 Currency indicator 1 in pct of core capital after deductions 0,1 0,2 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 4 24 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 2.972 3.888 Quoted on other stock exchanges 1.694 1.818 Unquoted shares recorded at fair value 15.456 16.804 Total shares etc. 20.122 22.509 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. 66 Annual report 2020 Note DKK 1,000 2020 2020 2020 2020 2019 2019 2019 2019 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 117.268 -228 240 468 222.510 1.387 1.672 285 Over 3 months and up to 1 year 16.811 -24 254 278 6.772 28 36 8 Average market value 350 545 2.418 660 Interest-rate contracts Up to 3 months 232.194 -339 1.282 1.621 Over 3 months and up to 1 year 35.564 -54 134 188 Over 5 years 3.852 0 519 519 Average market value 2.881 3.074 1.493 1.311 Shares contracts Up to 3 months 0 0 0 0 Average market value 12 0 DKK 1,000 2020 2019 Credit risk on derivative nancial instruments Positive market value, counterparty with risk weighting of 20 % 1.452 2.346 Positive market value, counterparty with risk weighting of 50% 85 48 Positive market value, counterparty with risk weighting of 75% 1.553 2.318 Positive market value, counterparty with risk weighting of 100% 806 275 Positive market value, counterparty with risk weighting of 150% 0 8 Total 3.896 4.995 Unsettled spot transactions Market- Market- Market- Nominal value- value- value- value positive negative net Foreign-exchange transactions, purchase 573 3 - 3 Foreign-exchange transactions, sale 971 3 - 3 Interest-rate transactions, purchase 18.088 34 3 31 Interest-rate transactions, sale 18.088 16 10 6 Share transactions, purchase 3.689 66 169 -103 Share transactions, sale 3.724 207 108 99 Total 2020 45.133 329 290 39 Total 2019 52.305 134 197 -63 Annual report 2020 67 Note DKK 1,000 2020 2019 2018 2017 2016 34 5 YEARS IN SUMMARY Prot and loss account Net income from interest 190.244 185.287 185.242 171.972 163.745 Dividend on shares 2.089 5.863 3.476 10.020 12.493 Charges and commission, net 155.181 143.257 119.515 114.620 98.280 Income from core business 347.514 334.407 308.233 296.612 274.518 Value adjustments 26.513 40.225 69.389 31.045 17.216 Other ordinary income 1.977 1.945 1.503 1.031 1.592 Staff cost and admin. expenses 193.929 191.861 191.626 161.052 148.990 Depreciation of intangible and tangible assets 5.195 2.821 3.004 3.071 3.746 Other operating expenses 234 112 127 52 255 - Contribution to the Guarantee Fund for deposits 194 112 52 52 52 - Other operating expenses 40 0 75 0 203 Write-downs on loans etc. (net) 32.874 16.831 19.729 19.886 36.172 Prot on equity investments in nonafliated and afliated companies 0 0 0 0 490 Operating result 143.772 164.952 164.639 144.627 104.653 Taxes 28.131 29.469 22.126 20.804 22.543 Prot for the year 115.640 135.482 142.513 123.823 82.110 Of which are holders of shares of hybrid core capital instruments etc. 6.487 6.626 6.626 5.168 6.626 Balance as per 31st December Summary Total assets 8.974.467 7.614.080 6.703.573 6.367.636 5.860.191 Loans and other receivables 4.224.773 4.325.613 4.359.561 3.924.509 3.687.509 Guarantees etc 2.630.139 2.379.168 1.543.324 1.125.541 841.088 Bonds 959.506 1.045.717 1.016.994 1.072.833 926.950 Shares etc 201.220 225.094 220.498 245.686 219.447 Deposits and other debts 6.463.735 6.223.604 5.457.413 5.240.913 4.871.359 Subordinated debt 97.834 97.334 99.976 99.797 99.618 Total equity 1.108.059 1.026.569 926.740 814.332 695.313 - of which proposed dividend 19.280 28.920 28.920 0 0 Capital Base 1.135.869 1.032.679 923.409 819.582 703.871 68 Annual report 2020 Note 2020 2019 2018 2017 2016 36 FINANCIAL RATIO (FIGURES IN PCT.) Solvency ratio 21,2 18,6 1 7, 4 1 7, 8 16,5 Core capital ratio 19,3 16,9 15,5 15,8 14,6 Return on equity before tax 13,7 1 7, 3 19,5 19,8 16,4 Return on equity after tax 10,9 14,1 16,8 1 7, 1 12,6 Return on assets 1,3 1,8 2,1 1,9 1,4 Earning/expense ratio in DKK 1,62 1,78 1,77 1,75 1,52 Interest rate risk 1,3 1,6 1,7 1,9 0,8 Foreign currency position 0,1 0,2 0,2 0,1 0,2 Foreign currency risk 0,0 0,0 0,0 0,0 0,0 Loans etc. against deposits 60,9 74,6 86,3 81,4 82,7 Statutory liquidity surplus - - 165,1 191,6 185,4 LCR 351 357 247 262 334 Total large commitments 118,3 136,5 144,1 55,1 10,3 Loans and debtors at reduced interest 0,9 1,2 1,9 2,2 2,5 Accumulated impairment ratio 4,9 4,7 5,8 6,3 7, 0 Impairment ratio for the year 0,4 0,2 0,3 0,4 0,7 Increase in loans etc. for the year -2,3 -0,8 11,1 6,4 5,0 Ratio between loans etc. and capital funds 3,8 4,2 4,7 4,8 5,8 (value per share 100 DKK) Earnings per share 56,8 66,8 70,5 61,5 39,2 Book value per share 544 502 450 390 330 Rate on Copenhagen Stock Exchange 352 311 305 368 268 Dividend per share 10 15 15 0 0 Market value/net income per share 6,2 4,7 4,3 6,0 6,8 Market value/book value 0,65 0,62 0,68 0,94 0,81 (value per share 20 DKK) Earnings per share 11,4 13,4 14,1 12,3 7, 8 Book value per share 109 100 90 78 66 Rate on Copenhagen Stock Exchange 70,4 62,2 61,0 73,5 53,6 ) 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. Annual report 2020 69 Note DKK 1,000 4Q 2020 3Q 2020 2Q 2020 1Q 2020 4Q 2019 37 QUARTERLY OVERVIEWS Prot and loss account Net income from interest 47.344 48.183 46.174 48.543 46.713 Div. on shares and other holdings 51 78 1.672 288 76 Charges and commissions (net) 40.456 36.304 34.959 43.462 37.368 Net inc. from int. & charges 87.851 84.565 82.805 92.293 84.157 Value adjustments 10.002 10.451 15.882 -9.822 3.432 Other ordinary income 439 953 296 289 593 Staff costs and administrative expenses 51.973 45.547 47.365 49.044 51.156 Depreciation of intangible and tangible assets 1.651 1.181 1.598 765 526 Other operating expenses 40 0 194 0 0 Operating expenses 0 0 194 0 0 Guarantee commission first guarantee scheme 40 0 0 0 0 Write-downs on loans etc. (net) 951 4.767 16.525 10.631 5.629 Operating profit 43.677 44.474 33.301 22.320 30.871 Taxes 12.671 3.223 7.327 4.910 4.591 Profit for the period 31.005 41.251 25.974 17.410 26.279 Of which are holders of shares of hybrid core capital instruments etc. 1.780 1.569 1.569 1.569 1.919 Balance Loans and other debts 4.224.773 4.258.988 4.230.606 4.449.383 4.325.613 Deposits 6.463.735 6.271.667 6.550.184 6.135.817 6.223.604 Subordinated cap. investments 97.834 97.709 97.584 97.459 97.334 Equity 1.108.059 1.077.215 1.038.051 1.017.460 1.026.569 Total assets 8.974.467 8.819.796 8.008.599 7.581.001 7.614.080 Guarantees etc. 2.630.139 2.553.613 2.308.723 2.519.235 2.379.168 Core earnings Core income 89.638 86.704 84.105 93.659 85.832 Total costs -53.664 -46.728 -49.157 -49.809 -51.682 Core earnings 35.974 39.976 34.948 43.850 34.150 34 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. 70 Annual report 2020 FINANCIAL CALENDER 2021 15 January Deadline for submission of items for the agenda for the Annual General Me- eting 3 February Announcement of Annual Report 2020 1 March General Meeting – Ringkøbing-Skjern Kulturcenter 6 May Announcement of quarterly report 1st quarter 2021 19 August Announcement of half-yearly report 2021 28 Ocotober Announcement of quarterly report 3rd quarter 2021 AUDIT COMMITTEE Name Jobposition City Niels Erik Kjærgaard (chairman) Former city manager Skjern Niels Christian Poulsen Fur breeder No Lars Skov Hansen Advisor Esbjerg Annual report 2020 71 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 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 Annual report 2020 72 Hans Ladekjær Jeppesen, lawyer, Skjern Board chairman Born 11th September 1964 Elected on the board in 2011 Current term expires in 2021 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 73 Annual report 2020 Niels Christian Poulsen, fur breeder, No Born 6 February 1963 Elected on the board in 2019 Current term expires in 2022 Other management duties: Board member of Holstebro Minkfodercentral AmbA Board member ofP/F Hovla Fish - Færøerne Board member of K/S Holmen Vindmølle 4 Board member of Vindmølle Holmen ApS Board member of Nørhede-Hjortmose Vind I/S Board member of Heager Kærs Pumpeinteressentskab 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 Finn Erik Kristiansen Born 23 April 1969 Elected on the board 2020 Current term expires 2021 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 Annual report 2020 74 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 75 Annual report 2020 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 Banktorvet 3 Kongensgade 58 J. Lauritzens Plads 1 Frederiksdalsvej 65 6900 Skjern 6700 Esbjerg 6760 Ribe 2830 Virum Tlf. 9682 1333 Tlf. 9682 1500 Tlf. 9682 1600 Tlf. 9682 1480 VARDE BRAMMING HELLERUP Bøgevej 2 Storegade 20 Strandvejen 143 6800 Varde 6740 Bramming 2900 Hellerup Tlf. 9682 1640 Tlf. 9682 1580 Tlf. 9682 1450 skjernbank.dk
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