SPAREBANKEN PLUSS. Annual Report

Transcription

1 SPAREBANKEN PLUSS Annual Report

2 ANNUAL REPORT MACROECONOMIC ENVIRONMENT 2008 was affected by the global financial crisis, which hit American and European banks hard. During the course of the autumn of 2008, the American house mortgage loan giants, Freddy Mac and Fannie Mae, were placed under public administration. In the wake of this, several large investment banks were restructured, merged or acquired by the state. In many countries, it became necessary to introduce and implement comprehensive measures in order to re-establish trust in the financial institutions. Turbulence and uncertainty in the financial markets brought about a situation in which the inter-bank market ceased to function. Banks all over the world were uncertain about their own and other banks financial situation and avoided lending to each other. This triggered increased interest rates in the money markets. Norwegian banks also felt the effects of the global financial crisis. This manifested itself in losses on securities, higher costs for funding loans and reduced access to liquidity. Interest rates for deposits from Norwegian investors in financially strong Norwegian banks rose during the course of last autumn, involving a premium of more than two percentage points to be added to the already high interest rates in the money markets. The international situation was dramatic. In several countries, the authorities were gradually forced to guarantee people s deposits with the banks, and in our neighbouring countries state guarantees were provided for the funding of the banking system. In spite of different international government packages of measures, the access to long-term funding still remained difficult. By late autumn last year, the Norwegian authorities also had to introduce different measures in order to ensure the banks funding, partly through Bankpakke 1 ( Banking package 1 ). The global financial crisis contributed to intensifying the change in the general economic situation which was already in its first phase by the end of During the course of 2008, house prices and company values fell much more than most observers had expected. Weaker international growth resulted in lower demand for Norwegian goods, coupled with the fact that the prices of raw materials plummeted on a global basis. Norges Bank changed its benchmark rates of interest five times in The interest rate was changed twice during the second quarter, on each occasion by 0.25 percentage points. As a result of the financial crisis, interest rates were cut three times in the fourth quarter, on the first two occasions by 0.50 percentage points, and the last time by as much as 1.75 percentage points. At the end of 2008, the benchmark rate of interest was 3 per cent. The annual growth in domestic gross debt, K2, fell to 9.9 per cent at the end of December last year. The 12-month growth fell, both for the business sector and private households, the growth of the latter not having been that low since September For the Oslo Stock Exchange, 2008 was a turbulent year. During the first half of the year, prices fell by 5.6 per cent. During the first part of the third quarter, prices continued to fall, and in September and October plummeted by 25 and 23 per cent respectively. Overall, prices on the Oslo Stock Exchange fell by 54.1 per cent in The Norwegian krone weakened during the autumn of 2008, and the tightness in the labour market eased markedly. Figures from NAV showed an increase in unemployment, which at the end of December was 2.0 per cent. On a seasonally adjusted basis, there were 64,211 jobless, including people relying on local, municipal initiatives BUSINESS AREA AND MARKET Sparebanken Pluss provides services within the areas of financing, savings and placements, insurance, pensions and payment transmission. The following is a brief excerpt from the Bank s corporate vision statement: Sparebanken Pluss shall be The Bank for Sørlandet ; a leading, financially strong and independent bank, with Sørlandet (the area along the southern coast and immediate inland districts of Norway, including Vest- and Aust-Agder) as its main market. The Bank s head office is located in Kristiansand. There are 15 local branches, 10 in Vest-Agder and 5 in Aust-Agder. During the last four years, the Bank has opened four new branches, at Arendal, Grimstad, Søgne and Lillesand. The last branch to be opened was Lillesand in May The new branches have attracted a large number of new customers and have been very important for the Bank s overall growth in recent years. The Bank has plans for further branches in the Agder region, especially in the western part of Vest-Agder. The branch at Lund in Kristiansand was closed in February 2008, and the customers were transferred to the Bank s head office. Even after this closure, Sparebanken Pluss has three branches in Kristiansand, and is the only bank with more than one branch in the town. In recent years, Sparebanken Pluss has also enjoyed strong growth in geographic areas outside Sørlandet. This development has been evident for several years and is primarily related to the Bank s agreement with Norway Christian Purchasing Society (KNIF). It has also been noticed that customers who move away from Sørlandet still like to maintain relations with their old bank. Recently there has also been a tendency for customers who have been using so-called fee-free Internet-linked banks, in addition to their main banks, to bring their banking transactions home, a situation which Sparebanken Pluss has also noticed. This is partly related to changed fee policy. In 2008, a comprehensive restructuring of fees was introduced, which means that customers at Sparebanken Pluss can also take advantage of the virtual absence of fees by using the Bank s services.

3 In 2008, it was decided to change provider in the insurance area. The agreement with Terra Forsikring AS was cancelled on 1 July Tennant Forsikring is now the Bank s new provider of insurance services. The company is wholly-owned by Gjensidige Forsikring. Tennant provides both non-life- and personal insurance. As a result of this cooperation, Sparebanken Pluss will be managing some insurance portfolios for Gjensidige at Agder. In this connection, however, the Bank has temporarily established a branch in the municipality of Lyngdal. In addition to having changed provider of insurance, the Bank has also established its own insurance centre, which means increased focus on this area, coupled with the fact that customers are now offered improved advisory services as well as special competence. For the same reason, a separate investment centre was also established in was the first whole year of operations for Pluss Garanti Eiendomsmegling AS. The company is owned by Kristiansand og Omegn Boligbyggelag (KOBB) and the Bank. The company conducts business in Kristiansand and at Vennesla. In 2009, the real estate brokerage firm and the Bank will intensify their cooperation in Kristiansand. By this spring, all the company s brokers will be working at the Bank s premises. At Vennesla, this is already the case. Pluss Garanti Eiendomsmegling AS, as were other real estate brokerage firms, was affected by the financial crisis during the second half of Adaptations to a market with lower sales have been made, even though the sale of residential property has picked up strongly at the beginning of Pluss Garanti Eiendomsmegling AS is not involved in the markets for holiday cottages and commercial property. OPERATING RESULT In 2008, Sparebanken Pluss made a NOK million pre-tax profit from operations, as against NOK million in This is equivalent to 0.83 per cent of average assets, as opposed to 1.25 per cent in The Bank s net interest income was up by NOK 64.0 million, totalling NOK million. This amounted to 1.61 per cent of average assets, compared to 1.64 per cent in After several years of exemption from the levy normally payable to The Norwegian Savings Banks Guarantee Fund by the savings banks, the levy started to apply again in Sparebanken Pluss made a payment of NOK 3.5 million to the fund in Other (non-interest) operating income totalled NOK 43.1 million in 2008, down by NOK 54.8 million on The shrinkage is due to the Bank - on account of the turbulence in the financial markets in having written down its bond portfolio by NOK 58.1 million. In view of the fact that the Bank does not have any subsidiaries, IFRS has not been implemented as accounting standard, and the Bank has accordingly continued to do its accounts according to NRS. This means that the bond portfolio is included in the accounts according to the lower of book- and market value. A limited part of the Bank s securities portfolio is today classified as To be held until maturity (about 5 per cent). The opposite aspect of the NOK 58.1 million write-down is the value change of the bond debt. At the end of the year, the latent gain on the bond-related funding and subordinated loan capital (the spread effect) far exceeds the loss on the bond portfolio. However, this impact has not been booked as income in the profit and loss account. Such income inclusion in the accounts could have been applied according to IFRS. The Bank has a low level of exposure in the bond- and share markets. In 2008, operating costs totalled NOK million, up by NOK 15.2 million on However, the relative figures show excellent progress. Costs in relation to average assets finished up at a low level, 0.75 per cent, down from 0.82 per cent 12 months earlier. Costs as a percentage of income have also remained at a very low level. The overall ratio at the end of 2008 was 42.1 per cent In 2008, a NOK 8.8 million write-down was applied to businesses in which the Bank has shares and participations. The significant part of the total amount is accounted for by write-down on shares in and guarantees provided for Eksportfinans. After an estimated tax cost of NOK 69.8 million, the profit for the year ended up at NOK 155 million, down from NOK million in With reference to Law of Annual Financial Statements etc., paragraph 3-3, the Bank s Board of Directors confirms that the assumption of a going concern still applies, and that the annual report and accounts have been prepared on the basis of this assumption. LOSSES ON LOANS AND COMMITMENTS IN DEFAULT In 2008, under the heading of losses on loans and guarantees, the Bank ended up with a gross loss cost of NOK 48.2 million. Recoveries relating to previous confirmed losses totalled NOK 2.6 million. Overall, therefore, the Bank finished up with a net loss cost of NOK 45.6 million in About 25 per cent of the total amount was accounted for by collective write-downs. The Bank s collective write-downs at the end of the year totalled NOK 91.9 million, equivalent to 0.36 per cent of gross lending. In view of the composition of the Bank s loan portfolio, its diversification in relation to different commercial, industrial and other sectors, and the risk contained in the portfolio, the Board of Directors is of the opinion that the writedowns are sufficient in order to cover the credit risk in the Bank s loan portfolio. During the course of 2008, there was a marked increase in gross commitments in default, from NOK 13.0 million to NOK million. In spite of the market growth, the level is deemed to be moderate in view of the current economic downturn. The relationship between gross commitments in default and gross loans therefore amounts to 0.53 per cent, whereas the corresponding ratio for 2007 was 0.06 per cent. Against the background of the present economic downturn, the Board of Directors is of the opinion that there is an increasing risk of losses

4 in For many years, the Bank has experienced very low credit loss costs, and for the period , the Board of Directors maintains a target for the Bank s aggregate loss level of under 0.25 per cent of gross lending per annum. ALLOCATION OF PROFIT FOR THE YEAR The Board of Directors proposes that Sparebanken Pluss s NOK million profit for the year is allocated as follows: (NOK 1000) Dividend of NOK 12,00 per PCC Transferred to the Dividend Equalisation Fund 35 Transferred to the Savings Bank s Fund Allocated for Donations Fund ASSETS Assets expanded by NOK 4,474 million in 2008, standing at NOK 30.1 billion at the end of the year. In 2008, the rate of growth was 17.4 per cent, compared to 19.2 per cent in Deposits/Netloans (NOK mill.) Deposits Netloans DEPOSITS Deposits from customers totalled NOK 12,936 million at the end of the year under review, following a reduction from NOK 13,425 during the last 12 months. At the end of the year, 51.1 per cent of the Bank s loans were funded by deposits from customers. The Bank makes every effort to fund the growth in assets mainly through deposits and long-term funding loans in the Norwegian and international money- and capital markets. The global financial crisis has meant challenges as far as this work is concerned. However, the Bank s good results and strong capital adequacy have helped to make sure that funding and capital have still been available at competitive terms and conditions. LOANS As at , gross loans totalled NOK 25,445 million, up by NOK 3,403 million or 15.4 per cent, compared to lending growth of 16.6 per cent a year earlier. At the end of 2008, retail banking- and corporate banking customers accounted for 60.9 and 39.1 per cent respectively of the Bank s total loans. Corresponding figures a year earlier were 62.7 and 37.3 per cent respectively. FINANCIAL STRENGTH AND CAPITAL ADEQUACY EU s new directive for capital adequacy, Basel II, was implemented by Sparebanken Pluss with effect from 1 January Until further notice, the Bank will apply the standard approach for credit risk and the basis approach for operational risk. The new rules and regulations are to a larger extent than previously, based on a closer conformity between actual risk and the capital employed. The introduction of Basel II means that figures for capital adequacy for 2007 will not be directly comparable with those for The Bank will adapt to the new rules and regulations in an optimal manner from the point of view of its size and risk profile, and in relation to what is expected from banks of a corresponding size. The Bank will therefore have an ongoing process in relation to whether it shall apply for IRB-approval in due course. An important part of the new capital adequacy rules and regulations is the need for the Bank to make regular assessments of the Bank s aggregate capital requirements based on its risk profile as well as management and control of risk (Internal Capital Adequacy Assessment Process - (ICAAP). The process shall help make sure that the Bank has a level of risk management and control which provides an overview of the risk to which the Bank is exposed, and which ensures that the Bank maintains a level of equity and related capital which takes care of these risks to a sufficient extent. The Board of Directors completed this capital assessment procedure in 2008, and Sparebanken Pluss has a level of equity and related capital which substantially exceeds the requirement which was arrived at through the ICAAP-process. However, the Bank wishes to maintain a big, strategic buffer of equity and related capital in order to ensure a large degree of freedom of action, and the importance of this has become even more apparent during the current financial crisis. At the end of the year, the Bank had subordinated loan capital of NOK 698 million and equity and related capital of NOK 1,899 million. The capital adequacy ratio was 13.52, far in excess of regulatory requirements. In spite of strong turbulence in the financial markets, the

5 Bank has managed to maintain a relatively high return on equity capital. At the end of the fourth quarter, it amounted to 8.5 per cent, as against 12.0 per cent at the end of Total equity capital (NOK mill.) Paid-in equity capital Retained earnings PLUSS BOLIGKREDITT AS On 22 December 2008, Sparebanken Pluss received the required licence to establish a mortgage company which will be able to issue covered bonds. Pluss Boligkreditt AS is in the process of being established and the company will be wholly-owned by Sparebanken Pluss. The company is expected to become operative during the first quarter of The main purpose of the mortgage company is to ensure access for the Bank to stable and long-term funding at competitive terms and conditions. The establishment of Pluss Boligkreditt AS forms part of Sparebanken Pluss s long-term strategy, according to which the mortgage company s main purpose will be to issue preference bonds to be bought by national and international investors. Through the establishment of the credit company, the Bank will also be in a position to participate in the authorities scheme according to which covered bonds may be swapped for government securities. PRIMARY CAPITAL CERTIFICATES (PCCs) In 2008, 212,437 PCCs were traded, equivalent to approximately 17 per cent of the Bank s outstanding certificates. In 2007, the comparative figure was about 12 per cent. At the end of the year, the Bank had 1,772 PCC-holders. More than 49 per cent of these investors were domiciled in the Agder counties, accounting for 54 per cent of the Bank s PCC-capital. The Bank s 20 largest PCC-holders are shown in note 22 in Notes to the Accounts. These investors represented more than 38 per cent of the PCC-capital at the end of the year. 12 of the Bank s 20 largest PCC-holders were domiciled in Agder. Earnings per PCC ended up at NOK in In accordance with the Bank s dividend policy, the Board of Directors proposes to pay a cash dividend of NOK per PCC. RISK AND INTERNAL CONTROL Risk is a fundamental aspect of banking business, and risk management and control represents a key area of the Bank s day-to-day operations and follow-up by the Board of Directors. The Bank s risk management and internal control shall help to ensure that the Bank s risk is managed in a way which supports the Bank s strategic targets, contributing to the Bank s long-term wealth creation. The overall framework of the Bank s risk management and exposure is assessed and agreed annually by the Board of Directors in connection with the maintenance of the Bank s internal strategy- and steering documents. The Board of Directors fixes concrete targets and limits for the Bank s credit risk, market risk and funding risk, as well as powers of attorney and a structure for follow-up and control which include reporting systems for management and the Board of Directors as far as the different risk groups are concerned. The Bank s aim is to have a low level of risk exposure, and there is a continual process aimed at further developing and improving the Bank s risk management. The most significant risk factors may be classified as strategic and business risk, financial risk and operational risk. Strategic risk is related to the strategies, plans and changes which the Bank has or is planning to have in connection with its marketing efforts. Financial risk comprises credit risk, market risk (relating to the Bank s exposure in the interest rate-, foreign exchange- and stock markets) and funding risk. Operational risk is defined as the risk of loss which may be incurred due to insufficient or failing internal processes, systems or external events. The Bank has an ongoing process relating to the monitoring and assessment of the different risk factors. Against the background of rules and regulations for internal control, all main areas have been subject to the completion of internal control confirmation, and an overall risk assessment has also been done. The Bank has a separate risk management committee. In the Board of Directors opinion, the Bank s risk management is satisfactory. Credit risk Credit risk represents the most significant area of risk in the Bank, and is defined as the risk of loss as a result of customers or counterparts failing to meet their obligations to the Bank. As a consequence of this, all work involving credit risk is therefore given high priority in day-to-day operations and as far as follow-up by the Board of Directors is concerned. The Board of Directors agrees the Bank s credit strategy and credit policy, and credit risk is also managed through credit routines, credit processes and delegated lending authority. Amongst other things, limits and ratios are agreed for expected credit losses, concentration risk and large customers. Compliance with the Bank s credit policy is monitored by a unit which is independent of the customer-related departments. The Bank s customers with credit commitments are classified through the

6 Bank s own risk classification system. During 2008, the risk classification system was changed, and customers are now classified in default classes where the likelihood of default during a 12-month period is calculated on the basis of different internal and external financial data. The portfolio is divided into 10 different risk classes in addition to one class for commitments in default and commitments with loss write-downs which are not in default. Risk development in the portfolio is registered through the classification system. Market risk Market risk affects the Bank s results through value changes in the interest rate-, foreign currency- and securities portfolios. The Board of Directors agrees limits for the Bank s market risk and reporting, and the limits are reviewed and assessed on an annual basis. Interest rate risk occurs as a result of different interest rate fixing periods relating to agreements entered into for claims- and debt items on and off the balance sheet. At the end of the year, the Bank s interest rate risk measured as the impact on the Banks overall result of a certain change in interest rates for different maturities was well within the limits agreed by the Board of Directors. Sparebanken Pluss is a foreign exchange bank and therefore subject to the authorities limits for position taking. The Bank has given itself significantly lower limits than those stipulated in the authorities requirements. At the end of 2008, all limits agreed by the Board of Directors were adhered to. Operational risk Operating risk is the risk of loss from different potential loss sources relating to the current operations of the Bank. This may occur as a result of insufficient or failing internal routines and processes, human failure or insufficient competence, failing IKT-systems, crime or internal fraud, irregularity, malpractice or misconduct, mistakes from subcontractors etc. The Bank has routines which cover all significant areas, and the internal control is an important help in order to reduce operational risk, both as far as the laying off of risk and follow-up are concerned. The Bank s security systems are maintained and periodically tested throughout the year. ORGANISATION The working environment in the Bank is regarded as good. Systems and routines are in accordance with the requirements contained in Rules and Regulations relating to Health, Environment and Safety. The Bank has embraced the concept of Care in the Workplace, having entered into an arrangement in this connection with the Norwegian Social Security Department. In relation to this agreement, the Bank wishes to see a reduction in staff s absenteeism through illness. The Bank also wants its employees to work actively until their ordinary retirement age. Absenteeism through illness fell from an average of 3.3 per cent in 2007 to 2.6 per cent in 2008, which is well below the average for the Norwegian savings bank industry as a whole. In 2008 too, the Bank had a very limited portfolio of shares. Investment in bonds and certificates was mainly related to the scheme involving securities pledged with Norges Bank as collateral security for borrowing and related to the authorities requirements according to which there must at all times be sufficient liquidity in order to cover the Bank s liabilities at maturity. Funding risk The Board of Directors attaches a great deal of importance to the Bank s maintenance of a high level of internally generated funding in conjunction with other long-term funding of its operations. At the end of the year, deposits from customers funded 51 per cent of the Bank s aggregate lending. During the course of 2008, the reduction in customer deposits was compensated for by other long-term funding obtained from the market. 40 per cent of the Bank s assets were funded through the Norwegian bond market. In addition, the Bank had established other long-term borrowing relationships with other Norwegian financial institutions. At the end of 2008, the Bank s long-term external funding (funding with maturities in excess of 12 months) amounted to 37 per cent of the balance sheet total. In addition, the Bank had established standby facilities equivalent to 39 per cent of its bond- and certificaterelated financing, with maturities within 12 months. At the end of the year currently under review, the Bank s liquidity reserves were high. The Bank has attached a great deal of importance to this in view of the ongoing financial crisis. Development in number of man-years and total assets Total assets Number of man-years

7 As at , the Bank employed 190 people, equivalent to 170 man-years. During the last two years, the number of man-years worked at the Bank decreased by of the Bank s staff work on a part-time basis. The Bank s operations do not cause any pollution of the external environment. EQUALITY BETWEEN THE SEXES - EQUAL OPPORTUNITIES Since 1996, one of Sparebanken Pluss s aims has been to achieve a relatively even distribution of men and women at all staff levels. This has helped to achieve an evening out of the levels of different positions both in the case of internal and external recruitment. At the present time, the ratio of women among the Bank s managers and professional experts is 26 per cent, compared to 20 per cent a year earlier. In the case of the Bank s staff (excluding General Managers), the salary index for men is 110 and for women 92. The Bank has 8 departmental managers, 4 of whom are women. Absenteeism through illness at Sparebanken Pluss is still higher for women than for men, the ratios being 3.7 and 1.5 per cent respectively. However, the difference became somewhat smaller last year and is now in line with what may be found in similar firms. Of the Bank s 190 permanent employees, women account for 51 per cent. 55 per cent of women work part-time. In 2008, the Bank recruited 6 new staff, 3 women and 3 men. The Bank s Board of Directors consists of 6 members 3 women and 3 men. IFRS (International Financial Reporting Standards) Listed companies and companies which have debt instruments quoted on a stock exchange are required to prepare group accounts in accordance with the international accounting standards (IFRS). As Sparebanken Pluss has no subsidiaries the Bank does not prepare group accounts for 2008 CORPORATE GOVERNANCE Business concept, fundamental ideas and value basis: The Bank s corporate vision is to be a leading, financially strong and independent bank with Sørlandet as its main market. The Bank shall contribute to growth and development within the region. Strict requirements with regard to honesty and business morals shall be the basis of the Bank s operations. The Bank will accordingly expect its staff to have a high degree of integrity and to have attitudes in accordance with the Bank s ethical guidelines. Management structure: The Bank s most senior body is the Board of Trustees, which consists of representatives from the depositors, PCC-holders, staff and publicly appointed members, each of the four groups being represented in equal proportions. The Board of Trustees elects an election committee which proposes elected representatives for the Bank s various bodies. The Bank is managed by a Board of Directors consisting of six members. The Bank s Chief Executive Officer is not a member of the Board of Directors, in accordance with the rules and regulations contained in the Savings Banks Act, agreed in The Bank s staff provides one member of the Board of Directors. The Bank has introduced a separate routine for the assessment of suitability requirements for members and deputy members of the Board of Directors Control mechanisms: The Control Committee is the Board of Trustees control body for monitoring the Bank s operations and consists of 3 members. The Control Committee makes an annual statement to the Board of Trustees and also provides a report to FSAN about its work. The Bank has its own internal audit department, which reports to the Board of Directors. The Internal Auditor attends the meetings of the Control Committee. The Bank is subject to Rules and regulations relating to the clarification of control responsibility, documentation and confirmation of the internal control. An annual report is sent to the Board of Directors. The Bank has a clear risk strategy which is explained in the Credit Document, the Finance Document and the ICAAP Document, which are discussed every year at the Board of Directors. In addition, there are the Principles for Internal Control, which have been agreed by the Board of Directors. In general, the Bank has a low risk profile. Furthermore, the Bank is subject to the Financial Supervisory Authority of Norway s (FSAN) rules and regulations relating to Minimum requirements for capital adequacy and rules pertaining to large commitments to individual customers in relation to equity and related capital. In addition, the Bank is subject to Oslo Stock Exchange s rules for the reporting of trading for own account by primary insiders. PROSPECTS FOR 2009 The development in the Norwegian economy will continue to be dependent upon the situation in the global economy. Lower international demand and lower prices of raw materials will directly affect the Norwegian krone rate, investment activity and employment is likely to involve a marked change in the Norwegian economy, including an increase in the jobless level towards 4 per cent by the end

8 of the year. The Ministry of Finance now expects the overall growth in the Norwegian economy to be negative in At the beginning of 2009, the government will be implementing packages of economic measures in order to counteract the negative impact on the economy. The fiscal measures are in particular aimed at counteracting the marked downturn in the labour market. Private consumption and households demand have been the dual driving force of the growth in the Norwegian economy in recent years. Private households demand fell markedly during the latter half of 2008 and there is reason to believe that this trend will continue. Lower employment and weaker wage growth affect decisions on saving and spending. Coupled with banks tighter credit practice, this may result in reduced investment in residential property and a further fall in house prices. Lack-lustre international growth and low prices of raw materials will also have an impact on the level of employment in the Norwegian export industry. Norwegian money market interest rates and the funding of the Norwegian banking industry will be affected by the situation in the global international banking system. It is to be expected that the Ministry of Finance in cooperation with Norges Bank will continue to provide Norwegian banks with satisfactory liquidity. The expansive monetary policy coupled with lower benchmark rates of interest is expected to be continued in line with developments in other countries. In addition to this, through a special scheme involving the issuance of hybrid capital, the banks are being provided with the necessary financial support in order to be able to take care of credit demand from Norwegian industry and commerce in a satisfactory manner. Weaker growth in the Norwegian economy will demand for credit from private households and companies to which the savings banks industry normally lend. In view of the fact that several businesses are now likely to experience lower revenue generation, coupled with a reduced ability to service their outstanding debt, credit losses in the banking sector are expected to increase. After several years of high growth, good profitability and small credit losses, however, Sparebanken Pluss is expected to be well prepared to handle future challenges. The Board of Directors expects the Bank s operating result to be satisfactory in 2009 too, but the financial crisis is likely to adversely affect loan growth, overall result margins, commitments in default and losses on loans during the year. VOTE OF THANKS The Board of Directors would like to thank all staff and elected representatives for another good year for the Bank in spite of turbulent framework conditions, and for their excellent efforts. At the same time, the Board would wish to thank the Bank s customers, PCC-holders and other connections for the way in which they have all supported the Bank, and for the trust they have shown in the Bank during the year which is now behind us. DECLARATION IN ACCORDANCE WITH THE SECURITIES ACT, PARAGRAPH 5-5 The Board of Directors and Sparebanken Pluss s Chief Executive Officer hereby confirm that the Bank s 2008 annual accounts have been prepared in accordance with the currently valid accounting standards and that the information provided in the accounts provides a true and correct picture of the Parent Bank s and Group s assets, liabilities, financial position and overall result. In addition, we confirm that the annual accounts give a true and correct picture of the Bank s development, result and financial position, together with a description of the most central risk- and uncertainty factors facing the Bank. Kristiansand, 31. December February 2009 Arvid Grundekjøn Chairman Norunn Tveiten Benestad Deputy Chairman Thore Westermoen Kristin Wallevik Peder Syrdalen Bente Pedersen Stein A. Hannevik Chief Executive Officer

9 Profit and loss account (Amounts in NOK thousand) Notes: Interest receivable and similar income from loans to and claims on credit institutions Interest receivable and similar income from loans to and claims on customers Interest receivable and similar income from certificates, bonds and other int. bearing securities Interest receivable and similar income Interest payable and similar costs relating to liabilities to credit institutions Interest payable and similar costs relating to deposits from and liabs. to customers Interest payable and similar costs relating to securities issued Other interest payable and similar costs Other interest and similar costs Interest payable and similar costs NET INTEREST- AND CREDIT COMMISSION INCOME Dividends and other income from securities with variable yield Guarantee commission Other fees and commission income Commissions receivable and income from banking services Commissions payable and costs relating to banking services Net value change and gains on certificates, bonds and other interest-bearing securities Net value change and gains on shares and other securities with variable yield Net value change and gains on foreign exchange and financial derivatives Net value change and gains on f/x and securities classified as current assets Operating income from real estate Other operating income Other operating income TOTAL OTHER OPERATING INCOME Wages, salaries etc. 10/ Broken down as follows: Wages and salaries Pensions Social costs Administration costs Wages, salaries and general administration costs Depreciation etc. of fixed and intangible assets Operating costs relating to real estate Other operating costs Other operating costs TOTAL OPERATING COSTS OPERATING RESULT BEFORE CREDIT LOSSES Losses on loans, guarantees etc Write-downs on securities classified as fixed assets OPERATING RESULT Tax payable on ordinary result RESULT FOR THE ACCOUNTING YEAR Result/diluted earnings/result per PCC 12,00 17,00 18,81 Allocations: 8 Dividend payable on PCCs Transferred to Savings Bank s Fund Transferred to Donations Transferred to Dividend Equalisation Fund Allocation of the result for the accounting year

10 Balance sheet ASSETS (Amounts in NOK thousand) Notes: Cash-in-hand and claims on central banks 16/ Loans to and claims on credit insts. without agreed maturity or notice of withdrawal Loans to and claims on credit insts. with agreed maturity or notice of withdrawal Net loans to and claims on credit institutions Overdraft- and working capital facilities Building loans Repayment loans 5/ Loans before specific and non-specific loss provisions 1/3/10/ Individual write-downs Write-downs on groups of lending Net loans and claims on customers Repossessed assets Securities issued by public sector borrowers: Certificates and bonds Issued by other borrowers: Certificates and bonds Certificates, bonds and other interest-bearing securities 4/ Equities, unit trust shares and PCCs with variable yield Equities stakes in general partnerships, limited partnerships etc Equities, unit trust shares and PCCs with variable yield Deferred tax asset Intangible assets Machinery, fixtures and fittings, and transport equipment Buildings and other real estate Fixed assets Other assets Accrued income, not yet received Over-funding of pension liabilities Prepaid costs, not yet incurred - accrued income, not yet received TOTAL ASSETS

11 Balance sheet LIABILITIES AND EQUITY CAPITAL (Amounts in NOK thousand) Notes: Loans and deposits from credit insts. - no agreed maturity or notice of withdrawal Loans and deposits from credit insts. - with agreed maturity or notice of withdrawal Liabilities to credit institutions 16/ Deposits from and liabilities to customers - without agreed maturity Deposits from and liabilities to customers - with agreed maturity Deposits from and liabilities to customers Certificates and other short-term borrowings Bond debt Borrowings through the issuance of securities Other liabilities Incurred costs and income received, not yet accrued Pension commitments Deferred tax Other provisions Provisions for liabilities Perpetual capital bond Subordinated loan capital Subordinated loan capital TOTAL LIABILITIES Equity capital Paid-in equity capital: PCC-capital Premium Fund Paid-in equity capital Accrued equity capital/retained earnings: Savings Bank s Fund Donations Fund Dividend Equalisation Fund Accrued equity capital/retained earnings: TOTAL EQUITY CAPITAL TOTAL LIABILITIES AND EQUITY CAPITAL Accounting items off the balance sheet: Contingent liabilities: Guarantees 2/3/ Assets pledged as collateral security Liabilities: Forward exchange contracts/share index-related bond loan 19/ December 2008 Kristiansand, 26. February 2009 Arvid Grundekjøn Chairman Norunn Tveiten Benestad Deputy Chairman Thore Westermoen Kristin Wallevik Peder Syrdalen Bente Pedersen Stein A. Hannevik Chief Executive Officer

12 Cash flow statement (Amounts in NOK thousand) Cash flows from operations Interest receivable Interest payable Dividends received Other payments received Other payments made Recoveries relating to confirmed losses Payment of tax Payments - donations Net cash flow from operations Cash flows from investment activities Change in loans to and claims on other financial institutions Change in net loans to and claims on customers Net change in securities Net change in fixed assets etc Change in other claims Net cash flow from investment activities Cash flows from financing activities Net change in deposits from customers Net change in deposits from Norges Bank and other financial institutions Net change in bond debt Change in short-term liabilities Subordinated loan capital Payment of dividend Net cash flows from financing activities Net change in liquid assets during the year + / Liquid assets as at ) Liquid assets as at ) ) which consist of: Cash-in-hand; Norges Bank

13 N OT E S TO THE ACCOUNTS ACCOUNTING PRINCIPLES The annual financial statement is prepared in accordance with the applicable accounting law for banks, and according to good accounting practice. In connection with the Bank s accounts, certain assessments and estimates have been applied in some areas where there has been uncertainty relating to the assessments. The use of critical estimates and assessments is primarily related to write-down of individual loans or groups of loans, pension liabilities, depreciation and amortisation, coupled with the stipulation of fair market value of financial assets. In each note to the accounts, the accounting principles applied are explained. All figures in the Notes to the Accounts are stated in NOK thousand, unless otherwise specified. Financial instruments In the balance sheet, financial instruments comprise shares, bonds and commercial papers. In addition, in 2008 the Bank has used financial derivatives in order to hedge interest rate- and foreign exchange risk which has been incurred in connection with the Bank s ordinary operations. The use of financial derivatives comprises foreign currency swaps, interest rate swaps, and equity swaps (see note 12/19). As at , the Bank did not have a trading portfolio of financial instruments. Accrual accounting of income and costs Interest, fees and commissions are included in the profit and loss account according to the accrual of this income and costs. Prepaid income and incurred, not yet paid costs, are subject to accrual accounting and are entered as liabilities in the balance sheet. Accrued, not yet received income is treated as income and shown under accounts receivable in the balance sheet. Dividends on shares are included as income in the profit and loss account during the year such funds are received. Fees related for the establishment of loan agreements with customers are included as income in their entirety in the year in which the loan agreement is established, as such fees are deemed to cover the costs relating to the establishment of the loan in question. Cash flow statement The cash flow statement has been prepared on the basis of net cash flows from operational-, investment- and financial activities. The cash flow statement is based on the direct model where cash flows from operational activities are shown through net, aggregate payments received and made. Impairment in value of loans individual write-downs of losses The Bank makes a quarterly assessment of its loans in order to ascertain whether there is objective proof of a loan having been subject to impairment in value which would trigger a need for write-downs of loss. Write-down for impairment in value is done when there is objective proof of individual loans having been subject to impairment in value as a result of impaired creditworthiness. Write-down is calculated as the difference between book and present value of estimated future cash flows. Losses as a result of impairment in value are charged to the profit and loss account during the period in which they occur. Group-related write-downs Loans are divided into groups with largely similar risk characteristics with regard to borrowers ability to service/pay their outstanding debt to the bank. Group-related write-downs shall cover expected credit loss incurred through events which have occurred and shall take into account losses contained in the portfolio at the time of assessment, but which are not yet identified in the case of individual commitments. Losses as a result of impairment in value of groups of loans are charged to the profit and loss account during the period in which they occur. Confirmed losses When it is highly probable that losses are final, these are classified as confirmed losses. Some confirmed losses will be covered through previous individual loss write-downs, and the amounts will then be booked while taking into consideration such earlier write-downs. Confirmed losses without cover through individual loss write-downs, and any over- or under-coverage in relation to previous loss write-downs, are charged to the profit and loss account. Commitments in default A customer s outstanding commitment is deemed to be in default if a part repayment has not been made within 90 days after the due date, or if a credit facility has been overdrawn for more than 90 days. Default is also deemed to have occurred when debt negotiations have been initiated or in the case of bankruptcy, or when legal steps have been taken in order to recover the claim in question. When a customer has one or more loans in default, the customer s total outstanding commitment is reported and not just the individual loan in question. In the case of default, this represents objective proof which means that the need for write-down of losses must be assessed. Bad and doubtful commitments Commitments which are not in default, but where the customer s financial position is such that the Bank has had to make write-downs for losses, or in cases where it is highly probable that the Bank will have to make write-downs for losses, are classified as bad and doubtful commitments. 1. LOSSES ON LOANS 1a. Principles relating to the assessment of commitments As at , loans are evaluated according to Rules and regulations relating to the accounting treatment of loans and guarantees. At the time of establishment, loans are assessed at market value plus direct transaction costs. In the case of subsequent assessments, loans are valued at amortised cost, using the effective interest method. Amortised cost is defined as the acquisition cost minus repayments on the principal amount, with additions or deductions for cumulative amortisation as a result of the application of the effective interest rate method, and with any deductions due to impairment in value (loss assessment). Repossessed assets When the Bank repossesses assets as a result of commitments in default, such assets are assessed at their market value. Normally, such assets would be booked as current assets. If the assets are assessed at a lower value at a later date, the difference will be booked as a confirmed loss. In the case of a sale, any loss is booked as a confirmed loss on loans and guarantees, and any gain as recoveries relating to previous losses on loans and guarantees. If the repossessed assets are to be owned by the Bank on a long-term basis, they will be shown in the accounts as fixed assets. Repossessed assets are as follows: Number Number Number of units 2008 of units 2007 of units 2006 Sites and building plots Total reposessed assets