The year Management group 5. Key Figures Group 6. Directors Report Profit and Loss Account 16. Balance sheet 17

Transcription

1 Annual Report 2012

2 2 CONTENTS Page The year Management group 5 Key Figures Group 6 Directors Report Profit and Loss Account 16 Balance sheet 17 Statement of changes in equity 18 Cash Flow Statement 19 Notes to the 2012 Accounts 20 Corporate Governance 62 The control committee s Annual Report for Auditor s Report for Declaration 69 Key figures and ratios (group) 70 Organisation plan 71 Branch Network 72

3 THE YEAR Throughout 2012, new milestones have been reached and at year-end, deposits exceeded BNOK 21 and loans BNOK 37. We still have higher deposit growth than lending growth and deposits are growing faster than the market, as is lending growth. Volume growth can be attributed to the whole region and it is gratifying to note that the welcome following the opening of our branch Skien has exceeded all expectations. This shows that we also have a place in Telemark, and that we really are the bank for Agder and Telemark. In 2012, we established our position as the advisor bank in the region. The bank has had significant growth in commission income and a significant contributor to this is the cooperation with and ownership in Frende Forsikring. Sparebanken Sør has a portfolio and customer growth of 30 per cent. More than 10,000 customers have insurance with us and at year-end, the portfolio exceeded MNOK 125. In addition, 750 companies and 3,500 employees have their pension schemes through Sparebanken Sør. During the past year, Sparebanken Sør has implemented a number of initiatives and investments that have enhanced our range of products and services. Our customers now have good self-service solutions in everyday banking through cashpoints, customer service centre, online banking and mobile banking. This eases the customer s everyday life and availability of services is now much better than before. During the year, more than 18,000 customers have started using our mobile banking services, and more than 12,000 are following us on Facebook and gives us continuous feedback via our blog. Over time this will result in more satisfied customers. For Sparebanken Sør 2012 has been a year of change with implementation of a new strategy. Through the year we have had continuous confirmation that we are on the right path. I am proud of the journey of change the bank has been through and the results all the bank s employees have helped achieve in Adjusted for valuation of liabilities, in 2012, Sparebanken Sør delivered a good result of MNOK 376. The result consists of a historically high net interest of more than MNOK 700, which has been achieved through good volume growth and because margins have returned to previous levels. A good increase in commission income gives us more legs to stand on and shows that our customers want to buy more products from us. Defaulted and bad and doubtful loans have been reduced and show that conscious efforts to improve the quality of the portfolio have yielded results. We in Sparebanken Sør have set ourselves the goal to one of the best banks in the region for customer satisfaction. Very satisfied customers is a goal in itself, while we know that this creates loyalty and profitability over time. The path to top customer satisfaction goes through our ability to deliver positive customer experiences and top quality service and products. If we are to achieve such an objective, we must be one of the most customer-focused banks in Norway. That we are on the right path was confirmed in October when an annual customer satisfaction survey conducted by EPSI showed that we were one of the top three of all the banks in Norway. Developments following the financial crisis have resulted in much more stringent regulations for European banks. In several cases, the Norwegian authorities have decided to go even further, through special Norwegian requirements, especially relating to capital adequacy. In the coming years, Norwegian banks will in all probability have to meet requirements relating

4 4 to more equity than the banks in the rest of Europe. This will also be a challenge for banks that have good capital adequacy, such as Sparebanken Sør! We are positioned to meet new capital adequacy requirements, have resolved an IRB initiative and through establishment of Sparebankstiftelsen Sparebanken Sør and an equity certificate have acquired the tools to strengthen our capital further. January February Official launch of mobile banking Launch of Sør Markets Agder and Telemark are the regions of opportunity. The region s 450,000 inhabitants or around 10 per cent of the Norwegian retail banking market, and 9 per cent of the total new establishments in Norway provide the basis for continued growth and development. As an independent savings bank with presence and local decision-making power, we will continue to be the most important and best bank for the counties of Agder and Telemark in the future. March May August Supervisory Body resolves to establish foundation Gulledagen at Kristiansand zoo with record attendance Establishment and opening of Skien branch Geir Bergskaug CEO October November Sparebanken Sør one of the best banks in an annual customer satisfaction survey Sparebanken Sør launches new website and brand image December Bank issues equity certificates

5 MANAGEMENT GROUP 5 Geir Bergskaug (1960) CEO from 1 November Formerly Director /CEO of Gjensidige during the period , Chairman of the Board of Gjensidige Bank , General Manager/Director of DnB NOR Master in Business and Economics from the Norwegian School of Economics and Business Administration. Additional studies from Harvard Business School in Boston GMP, INSEAD Fontainebleau France MBA. Rolf H. Søraker (1960) Director Group Support from 2009 and member of the group management team from Educated in the Norwegian Armed Forces, Telemark University College and the Norwegian School of Business Management BI (Economics Graduate, Master of Management). Has experience from Norwegian school system and the Norwegian Armed Forces. Broad experience from various roles in the bank since Man. Dir. of Sør Boligkreditt from Gunnar P. Thomassen (1965) Director Retail Banking Market from 2009 and member of the group management team since Manager of the Kragerø branch from 1999 to Regional Director for Region East during the period M.Sc. in Engineering from the Norwegian University of Science and Technology s Industrial Economics Programme. Has experience from the Industrial Fund /the National Business and District Development Fund and Ernst & Young Management Consulting. Kjetil Korneliussen (1965) Director Capital Markets and member of the group management team from Head of the Capital Markets Division from Has had broad responsibility within securities since 1993 and has experience from other parts of the bank from Graduated as a performance and team coach from the University of Agder and Economics graduate from the Norwegian School of Business Management BI. Member of the Expert Committee on the Securities Market under the direction of Finance Norway (FNO), and has previously been a member of the board for Asset Management and Financial Markets. Gry Moen (1963) Director Business Support from Member of the group managemen team from 2006, except for the period , when she was General Manager of ABCenter Holding. Marketing Director of the bank between Educated at Trondheim Business College/ Ecôle Superiéure de Commerce Grenobles/ Nantes. Responsible for Business Development, IT, Market and Digital Channels. Previous experience from, among others, Statoil, Telenor and LOS/ Agder Energi. Øyvind Aasen (1963) Director Corporate Market from 2009 and member of the group management team from Manager of the Kristiansand branch from 1997 to Regional Director for Region West during the period Has broad bank experience. Educated at the Norwegian College of Banking and Agder University. Board member of Brage Finans A/S. Magne Kvaslerud (1956) Director Risk Management and member of the group management team from Broad responsibility within the credit area since 1991, including several years as Head of the Credit. Qualified as an engineer in technical / natural science from the University of Stavanger and is an Economics Graduate from the Norwegian School of Business Management BI. Varied experience from working in Norconsult, Asplan Viak and Storebrand. Flemming Holm (1969) Director Economic Management and Control and member of the group management team from 2013, with responsibility for the bank s financial management, performance management and strategy and group development. Has more than 20 years experience from insurance, banking and finance, latterly as Director and Group Financial Controller in Gjensidige Forsikring ASA. Higher economics and management education from the Nowegian School of Business Management BI in Oslo and from MiL Institute in Lund.

6 6 KEY FIGURES - GROUP Result MNOK % of aver. MNOK % of aver. total assets total assets Interest income % % Interest costs % % Net interest and credit comm. Income % % Other income % % Operating costs % % Result before losses % % Losses % % Result before tax cost % % Balance sheet Total assets Gross loans Lending growth 9.6 % 8.4 % Deposits Deposit growth 10.4 % 9.9 % Equity and related capital Core capital adequacy 14.1 % 14.2 % Deposits as a percentage of gross loans 56.5 % 54.9 % No. of FTE - Group

7 DIRECTORS REPORT SPAREBANKEN SØR GROUP S BUSINESS Sparebanken Sør is an independent financial institution that engages in banking, securities and real estate brokerage tivities in the counties of Aust-Agder, Vest-Agder and Telemark. The bank has 30 branch offices and the head office is located in Arendal. Sparebanken Sør Group engages in sale of insurance, leasing and securities through partly owned product companies and also reals estate brokerage and mortgaging through wholly owned subsidiaries ABCenter and Sør Boligkreditt. ac- HIGHLIGHTS PROFIT FOR THE YEAR Accounting principles Sparebanken Sør Group s accounts have been prepared in cordance with International Financial Reporting Standards, IFRS and the accounting principles have been explained in more detail in the notes to the accounts. The annual accounts have been based on the assumption of a going concern. In the view of the board of directors, there are no circumstances to suggest anything other than the bank s continued operations. The figures referred to in the annual report are group figures, unless it is stated that the figures apply to the parent ac- bank. March August October Sparebankstiftelsen At its meeting on 27 March, the supervisory board resolved to convert 600 million of the bank s primary capital to equity share capital. The equity certificates were issued to Sparebankstiftelsen Sparebanken Sør, which was established in connection with the conversion. Sparebanken Sør aims to continue to grow and through issuing equity certificates the bank will achieve greater flexibility and new opportunities to raise capital when needed. In this way, it will be better equipped to meet the authorities capital adequacy requirements. Through the foundation, the bank will have a stable longterm owner and through equity certificates a settlement instrument in case of possible future mergers. The necessary applications were submitted to the Ministry of Finance during the spring. The necessary approvals were received in the autumn and Sparebankstiftelsen Sparebanken Sør was formally approved by the Gaming and Foundation Authority on 20 December. New branch in Skien On Wednesday 21 August, we opened our new branch in Skien. Opening of the new branch is a result of the bank s investment in Grenland. New board member Leidulv Nesgård, a self-employed agricultural economist from Lyngdal, was elected as board member at the supervisory board s by-election meeting on 30 October Profit for the year Sparebanken Sør Group s pre-tax profit for 2012 was MNOK 251, which is equivalent to 0.58% of the average total assets, compared with MNOK 325 the previous year and 0.83% of the total assets. The most important reason for the decline is the effect of valuation of the securities debt. It this is not included, profit was MNOK 376, compared with MNOK 254 in As a percentage of average total assets, this is equivalent to 0.87% in 2012, compared with 0.65% in On the positive side, net interest income and fee and commission income have improved and there has been a positive change in the value of securities on the assets side and also reduced losses. There was an increase in operating costs due to investments in and enhancement of expertise in strategic priority areas. Return on net capital after tax is 5.8% for 2012, compared with 7.9% for Adjusted for the profit element associated with valuation of liabilities, the return on net capital after tax would have been 8.8%. Net interest income In 2012, net interest income was MNOK 705, compared with MNOK 631 in 2011, which is up MNOK 74 or 11.7% compared with the previous year. This is equivalent to 1.63% of the average total assets, compared with 1.61% in There are several underlying circumstances that can explain this trend. Through the year, lending margins have improved, while deposit margins have weakened somewhat. Moreover, a falling money market rate through the year will have positive impact on the net interest income. On the other hand, there are higher average credit margins on the Group s securities debt than in the previous year. This is due to a longer maturity on debt established in 2012 and higher general credit margins on senior debt in 2012 than in Our holding of treasury bills and covered bonds, which we have for liquidity purposes, is a significant part of the total balance sheet. As there is relatively low return on this type of securities, this helps to reduce the

8 8 total net interest income. However, growth in deposit and lending volume helps contribute to a positive overall picture for the trend in net interest income in At the beginning of the year, Norges Bank s reference rate of terest was 1.75%, but was changed to 1.50% in March. The bank has continuously adjusted its customer terms on loans and deposits to the competitive situation and the applicable interest rate level, at the same time as focusing on securing earnings. Other (non-interest) income Net other operating income was MNOK 120, compared with MNOK 248 at the end of the previous year. Measured as a percentage of the average total assets, this is equivalent to 0.28%, compared with 0.63% the previous year. The most important reason for this lower income is the impact on profit of the change in value of financial instruments to fair value through the result. This amounted to MNOK -86, compared with MNOK 61 in the previous year. MNOK -125 of this is due to lower credit margins in today s market through establishment of new securities debt. Financial instruments on the asset side and other financial instruments at fair value through the result have given an income of MNOK 39. In 2012, net fee and commission income was MNOK 175, which is up MNOK 22 compared with the previous year. Income from payment services, insurance sales and the real estate brokerage business represents most of the increase. Costs In 2012, total costs were MNOK 513, which is up MNOK 30 compared with Measured as a percentage of total assets, costs were down from 1.23% in 2011 to 1.19% in Measured as a percentage of income, excluding financial instruments, costs were down from 60.1% in 2011 to 57.5% in A significant part of the increase in costs is due to increased personnel costs related to enhancing expertise in strategic priority areas. This includes development of digital channels and opening a new branch in Skien in August with seven employees. The total number of employees in the Group at year-end is now 375 FTE, compared with 367 FTE in the previous year, of which 47 FTE are in ABCenter. The increase in costs reflects essentially new system solutions and customer service concepts. In connection with this, it can be mentioned that during the year, the bank has phased out traditional cash desk solutions and has installed cash machines in the office in- network. CREDIT LOSSES AND COMMITMENTS IN DEFAULT At year-end, net losses were MNOK 61, which is down MNOK 10 compared with 2011 and is equivalent to 0.16% of the loans, compared with 0.21% the previous year. Collective write-downs are up by MNOK 4 during the year and are now at MNOK 128. Most of the losses can are due to commitments in the corporate market. Fewer losses are a result of conscious work to ensure the quality of the loan portfolio. At year-end 2012, net commitments in default and bad and doubtful loans were MNOK 408, which is equivalent to 1.10% of the loans. Compared with the previous year-end, this is down MNOK 29 or 0.10 percentage points measured as a percentage of the loans. BALANCE SHEET Total assets At year-end 2012, total assets were BNOK 44.5, compared with BNOK 41.9 in the previous year. This is an increase of BNOK 2.6 or 6.3%. Total loans Total loans were BNOK 37.2, compared with BNOK 33.9 the previous year. This is a growth of 9.6%, compared with 8.4% in In the retail banking market, growth has been 11.6%, compared with 9.9% in 2011.On a national level, household lending growth has been around 7.0%. In 2012, there has also been considerable lending activity and good demand for loans. Sør Boligkreditt is an important instrument in order to have competitive terms in the retail banking market. At year-end, BNOK 8.9 in loans was transferred to the company. In the corporate market, the bank has had a growth of 5.5%, compared with 5.3% in On a national level, lending growth to the corporate market is 5.0%. Stronger growth in the retail banking market than in the corporate market has meant that the retail banking market s share of the loans has increased from 68.2% in 2011 to 69.4% at yearend 2012.

9 9 Deposits At year-end, deposits totalled BNOK 21.0, which is up BNOK 2.0 or 10.4%. In 2011, growth was 9.9%. In the retail banking market, growth has been 9.1%, compared with 8.0% in Deposits in the retail banking market have shown a steady and positive trend through the year despite strong competition for deposits. In the corporate market, deposit growth was 12.0% compared with 12.4% in The deposit portfolio in the corporate market is composed of significantly fewer and larger individual deposits than in the retail banking market, and from experience these are more volatile. As deposit growth has been higher than lending growth, debtto-loan ratio is up from 56.1% at the end of 2011 to 56.5% at the end of An important factor behind the positive development both in the retail banking and corporate market is increased focus on deposits. Customer direction and broad sales toward new and existing customers has generated good results both in the retail banking and corporate market. Debt established through issue of securities and liabilities to financial institutions Besides customer deposits, this is the bank s most important source of funding. At year-end 2012, debt securities were up by BNOK 3.1 to BNOK The maturity structure of the loans is well-adjusted to the business. New long-term loans are established through issue of covered bonds and senior debt. Access to funding has improved during the year. Other external funding comes from loans in the money market, Norges Bank and through the swap scheme for covered bonds. At year-end 2012, this item has been reduced by BNOK 2.2 to BNOK 2.5. Deposits MNOK Securities At year-end, the Group s portfolio of bonds and certificates totalled BNOK 5.8, which is down BNOK 0.8 compared with The portfolio is the bank s most important liquid reserve. The bank s liquidity situation is very reassuring. Bonds equivalent to BNOK 1.4 of the total portfolio lie has security for loans from Norges Bank. Investments in share and equity certificates amount to MNOK 359, which is a relatively modest part of the balance sheet. Shares in the trading portfolio total MNOK 38 of this. Equity and related capital At year-end, the Group s equity and related capital was BNOK 3.3, which included BNOK 3.12 in equity. In the 4th quarter, MNOK 600 of the Savings Bank s Fund was converted to equity share capital. Following the conversion and supply of the profit for the year, at year-end primary capital now totals BNOK 2.4. The bank also has Perpetual Hybrid Tier 1 Capital totalling MNOK 200. With a risk-weighted calculation basis (Basel II Standard Method) of BNOK 23.0 at year-end, capital adequacy ratio is 14.1% and core capital adequacy ratio is 13.3%. ALLOCATION OF PROFIT FOR THE YEAR In the view of the board of directors, the presented profit and loss account and balance sheet give a fair view of the group and the parent bank s financial position and result. The board of directors is not aware of any circumstances that have arisen after the turn of the year, which would change its view in this respect. The board of directors proposes that the parent bank s profit for the year after tax of MNOK 137 is allocated as follows: Donations to good causes MNOK 15 Equalisation reserve Net lending MNOK 22 Dividend MNOK MNOK 6 Transferred to primary capital MNOK 94 Total transferred MNOK Corporate market Retail banking market Corporate market Retail banking market

10 10 RISK MANAGEMENT Risk management ensures that the Group s risk exposure is known at any time and is instrumental in helping the Group to achieve its strategic objectives, and also compliance with legislation and regulatory requirements. Management objectives have been set for the Group s overall risk level, and specific management objectives within each risk area. Systems have been established to measure, manage and control risk. The Group will have a well-diversified portfolio on both side of the balance sheet, and a risk that is adjusted to its capital adequacy and profitability. The Group s risk exposure is monitored through periodic reports to the group management and board of directors. Overall risk management and reporting are carried out by Risk Management, who report directly to the CEO. Credit risk Credit risk is defined as the risk of loss due to customers or counterparties failing to meet their obligations. Credit risk is managed through the Group s strategy and policy documents, credit routines and processes and powers of attorney. These factors constitute the overall guidelines for the Group s lending. The credit strategy is agreed annually by the board of directors and comprises credit policy guidelines and also management objectives for risk profile and concentrations in the Group. Management objectives have been set for the portfolio and concentration risk, etc. Risk management objectives are monitored and reported periodically to the board of directors. The Group develops and actively uses credit models integrated in credit processes for credit decisions, risk pricing and portfolio management in the retail banking and corporate market. Credit handling routines, credit policy and risk classification models set requirements regarding the credit process to be used and analyses to be conducted in connection with granting and following-up retail banking and corporate commitments. The board of directors is responsible for the Group s lending and has delegated authority limits to the CEO, who within his authority has delegated authority further down the organisation. The authorisations are related to expertise, market, size of commitment and risk. The Group s Credit Committee is used when processing large and / or complex commitments. Market risk Market risk is the risk of loss due to unfavourable changes in interest and exchange rates and market prices in the equity market. The market risk management strategy ensures that the business is run in accordance with the Group s overall strategy plan and that risk is reflected in the return. The board of directors has set management objectives for investments in shares, bonds and positions in the interest rate and foreign currency market. Compliance with the management objectives is monitored by Risk Management and monthly reports are submitted to the group management and board of directors. At year-end, the Group s total share investments were MNOK 359, including MNOK 38 in the trading portfolio. Among the largest items are Nets Holding, Eksportfinans, and also ownership interests in the partly-owned product companies Frende Forsikring, Norne Securities and Brage Finans. Most of the Group s interest rate risk is associated with the portfolio of interest-bearing securities, fixed rate loans and deposits. The board of directors has set a limit of MNOK 25 for the total interest rate risk on and off the balance sheet. On average for the year, around 35% of the agreed limit for the interest rate Pre-tax profit Equity and related capital / Capital adequacy ratio MNOK MNOK Pre-tax proifit Equity and related capital Capital adequacy ratio

11 11 risk was used and at year-end, the bank s net interest position was MNOK 5. The Group was affected by fluctuations in the foreign currency market. The most important balance sheet items are foreign currency loans to customers and bonds and shares in foreign currency. Foreign currency items will mainly be hedged using forward exchange contracts, currency swaps or funding in the same currency. The total limit for currency risk is MNOK 10 and at year-end around 20% had been used. In 2012, a credit spread risk was introduced. Calculations are carried out using the Norwegian Financial Supervisory Authority s recommended values for changes in credit spread for the various rating classes. Funding risk Funding risk is defined as the risk that the Group is unable to meets its obligations or is not able to fund normal growth in assets. Funding risk is managed through the Group s liquidity strategy and policy, routines, guidelines and authorisations. Important operational management parameters are the liquidity structure for long-term funding, LCR indicator, ability to survive without supply of new capital from the market and debt-to-loan ratio. Funding risk is also limited through spreading borrowing from the capital market among different terms of maturity, markets, borrowing sources and instruments. Deposits from customers are the most important and stable source of funding. The board of directors emphasises that the relationship between deposits from customers and loans must be satisfactory, and adjusted to the Group s total funding situation. Sør Boligkreditt has become an important funding instruments and meets a significant part of the Group s funding requirements through issue of covered bonds. This provides a good and steady supply of long-term funding on favourable terms. The Group has significant liquid reserves, such as liquid securities, drawing rights in Norges Bank and loan-free mortgage portfolio in Sør Boligkreditt. The bank also has mortgages that are ready for transfer to the mortgage company at short notice. Drawing rights in Norges Bank total BNOK 1.3, of which MNOK 250 has been used at year-end. Liquid, unpledged securities consisting of government securities, other zero-weighted securities and municipal bonds total BNOK 3.6. During the year, the liquidity indicator for long-term funding has increased from to 110.1, while at the last measurement, the Norwegian Financial Supervisory Authority s average for the reference banks was In addition to an increase in the percentage of long-term funding, the Group has prioritised maintaining significant liquid reserves. Available liquid reserves indicate that with normal operations, the Group can survive for 20 months without a new supply of capital from the market. Operational risk Operational risk is defined as the risk of losses resulting from inadequate or failing internal processes, routines or systems, human error, crime or external events. Management of operational risk is based on the Operational Risk Strategy. Operational risk is managed through skills training, good systems and routines, good internal control and quality assurance. Management objectives have been set for operational risk. Annual risk assessments are conducted for all relevant risk areas in the Group. These form the basis for development of management plans, follow-up and handling operational risk. Strategic management objectives and risk development are monitored through event databases and also interim reports to the group management and board of directors. In 2012, significant weaknesses were discovered that are of importance to the Group s risk and capital adequacy. Ownership risk Ownership risk is the risk that the Group will incur negative results from holdings in owned companies and / or must supply new equity to these companies. Ownership is defined as companies where Sparebanken Sør has significant ownership or influence. The management and boards of directors in subsidiaries will be taken care of in accordance with company law. In several of the companies, management and / or employees from the Group are used on the board of directors or in other functions. Ownership risk is primarily associated with ownership interests in the partly-owned product companies Frende Forsikring, Norne Securities and Brage Finans. Capital management Capital management shall ensure that the Group has good core capital adequacy, financial stability and a satisfactory return in relation to risk profile. The Group shall have a capital adequacy that ensures a good foundation for taking care of market opportunities and ambitions, and which provides a good supply of long and short-term funding. Capital adequacy must be robust and have reserves to survive a serious, but realistic economic downturn. The Group s capital adequacy is monitored through periodic reporting to the group management and the board of directors.

12 12 RETAIL BANKING MARKET The retail banking market s divisions have had a positive trend in 2012, with very good growth, higher interest rate margin and modest losses. In the last 12 months, the division has increased its loans, including mortgages in Sør Boligkreditt, by 11.6%, at the same time as deposits have risen by 9.1%. Customer growth in the retail banking market has been significant through the year. Growth comes as a result of general market growth in addition to an increase in market shares. Opening of a new branch in Skien in August in addition to long-term focus on providing qualified advice has contributed positively to the strong growth. Focus on distribution through digital channels and maintaining a local presence have also been positive factors. Growth in commission income is related to income from sale of insurance, investment products and sale of MasterCard. This commission income is 14% of the division s result and is rising. Increased product sales are a direct result of the strategic change that began two years ago, where focus on providing broad advice has been a key part of this. Sparebanken Sør has 110 customer advisers who are authorised financial advisers (AFR). Automation of cash handling and opening of a customer service centre are important elements in the change, which have both contributed positively. CORPORATE MARKET Sparebanken Sør s corporate market has also experienced a positive trend in Lending growth has been 5.5% and loans to the corporate customer segment are 31% of the bank s loans. Deposits have risen slightly through 2012 following strong growth in the autumn of Commercial activity is good, as the same time as there is strong competition in the market. Lending margins have improved somewhat in There is a positive trend in the quality of the portfolio. Economic developments affect the credit quality and the impact of the financial crisis has not affected businesses as hard as previously expected. In 2012, the bank maintained its strong position in relation to business in the south of Norway and in Telemark, especially within the SMB segment. The positive trend in Kristiansand and Grenland, which are special priority areas, has continued in Customer satisfaction has been strengthened through The bank has divided the corporate market into three regions, one in each county, and the total number of employees at year-end is 41. Leasing company Brage Finans had its second year of operation in The company has succeeded very well in the mar- ket and in close cooperation with its distributors, it will have a broad appeal to corporate customers requiring funding of business assets in A steady economic trend with modest lending growth is pected. CAPITAL ex- MARKETS Capital Markets takes care if the Group s activities within liquidity management, securities trading and international payment transfer services. The division is divided into business areas Sør Markets and Treasury. Sør Markets Sør Markets manages customer-related trading in foreign currency, shares and interest rate products and also payment transfer services. Securities trading with customers is a strategic priority area. Foreign currency, share and interest rate products are important elements, which together with good advice satisfy the needs of key customer groups. The initiative contributes to a desired diversification of the Group s income. Treasury Treasury manages the Group s funding, financial investments, market risk and investor relations. Through prudent liquidity management and adequate liquid reserves, funding risk has been managed within all management objectives and limits in Risk associated with financial investments and market risk has also been handled well and within all management objectives and limits in Information to investors and other stakeholders is provided through stock exchange reports, our website at and participation at various events. RATING Moody s has given Sparebanken Sør s long-term borrowing an A3 rating with a stable future outlook. Covered bonds issued by Sør Boligkreditt have an Aaa rating. CORPORATE GOVERNANCE Sparebanken Sør s corporate governance principles and policy are based on the Norwegian Code of Practice for Corporate Governance, prepared by the Norwegian Corporate Governance Committee (NUES). The Financial Supervisory Authority s module for evaluation of overall management and control, which reflects the principles from the European Banking Au-

13 13 thority (EBA), is used as far are this is relevant to the Group. See also the full report on corporate governance in the annual report. RESEARCH AND DEVELOPMENT The Group does not conduct any research. All development work in the Group focuses on the IT area, innovation and business development. PERSONNEL AND WORKING ENVIRONMENT At the end of 2012, there were 328 FTE in the bank and 375 FTE in the Group. The overall manning level is stable and operations are run in accordance with the framework adopted by the board of directors. There has been strong focus on skills training in Through the Sør Skolen project, the bank has developed its own training and development school. In 2012, the focus has been authorising financial advisers, credit qualifications for employees who work with corporate customers and training employees in the retail banking market in new roles. The bank has continuous focus on the working environment. This is important in order to create good results and to provide a good, competitive workplace for employees and management. Sickness absence has remained low at 3.7% in 2012, which is down from 3.9% in Sickness absence is divided into 0.7% on short-term absence and 3.0% on long-term absence. Sparebanken Sør is an Inclusive Workplace and works actively to prevent discrimination. All employees are entitled to fair and equal treatment. The bank arranges so that employees with disabilities shall be able to remain in their job. New buildings and alterations have a universal design so that everyone is able to use them on an equal footing, as far as this is possible, without special adaptations or aids. No cases of discrimination have been registered in Sparebanken Sør in The bank has a good working environment. Systems and routines are in accordance with the requirements in the Regulations relating to Health, Safety and Environment. The main HSE focus areas have been robbery and security drills, refurbishment of banks, safety inspections and general environmental questions. Collaboration between the senior safety delegate, occupational health services and the Group s HR department has been good and cases put forward have been solved at the lowest possible level and as quickly as possible. Annual employee appraisals have been carried out and through these the bank obtains important input for development of the organisation and each employee. EQUALITY Sparebanken Sør has a long-term objective to achieve a relatively equal distribution between sexes on all job levels. The bank has a total of 347 employees, of which 190 are women and 157 are men. 38% of the bank s management are female and the aim is to increase the percentage of women in executive positions. There are a total of 397 employees in the Group, of which 210 are woman. In the bank s supervisory bodies, 25% of the supervisory board and 33% of the board directors are women. EXTERNAL ENVIRONMENT The Group does not use input factors or production methods that directly pollute the external environment. The Group has a widely differentiated corporate portfolio. Several of the companies to which the Group has provided loans engage in activities that will have an impact on the external environment. Through lending, the Group has indirect impact on the external environment and therefore this situation is assessed in connection with the Group s credit handling process. The Group s head office and Arendal branch have an Environmental Lighthouse Certificate. The bank prepares annual climate accounts in accordance with the international standard Greenhouse Gas Protocol Initiative. DONATIONS TO GOOD CAUSES Pursuant to the Savings Bank Act, savings banks may set aside parts of their profit after tax and dividend for good causes. In recent years, Sparebanken Sør has defined donations as a strategic priority area. When awarding donations, the bank is concerned that chosen projects benefit the community in some way. In this way, donations provide the opportunity to stimulate growth and development in society and industry and commerce. Sustainable society, industry and commerce form the basis for the bank s future financial results. Donations give the bank a competitive advantage and are important in building the bank s reputation. Donations awarded in 2012 focused especially on projects within community and business development, youth initiatives, culture and sport. The local bank managers have used 30% of the donation funds, which has enhanced our local image. From the 2011 accounts, MNOK 15 was allocated to good causes in 2012 and the board of directors has proposed allocating the same amount for 2013.

14 14 SUBSIDIARIES AND ASSOCIATED COMPANIES In 2008, the bank established Sør Boligkreditt AS, as its enterprise for issue of covered bonds. The mortgage company is an important tool in adapting to future framework conditions and for strengthening our focus on the retail banking market through providing reasonable funding. At year-end, a total of BNOK 8.9 was transferred to the company. IN 2012, the company had a pre-tax profit of MNOK 89.9 and a return on net capital of 15.8%. At year-end, capital adequacy was 14.8%. The company has entered into an agreement with the parent bank, which involves loan management, group services and treasury functions, etc. The bank owns 100% of the shares in ABCenter Holding AS, which is the parent company of the real estate brokerage group ABCenter. The company has 12 branches in Aust-Agder, Vest- Agder and Telemark, as well as several showcases further inland. The head office of ABCenter is located together with our Kristiansand branch at Markensgt. 9 in Kristiansand. During the year, the company has sold 1,432 residential properties, including new builds, second-hand properties, holiday cottages and commercial buildings, all at an aggregate value of BNOK 3.3. The bank s other subsidiaries mainly manage commercial properties where the bank has operations. For a complete list of subsidiaries and assets refer to note 18. PARTLY-OWNED PRODUCT COMPANIES Brage Finans Brage Finans offers the bank s corporate customers leasing, secured loans and business loans. Brage Finans is owned by 10 independent savings banks and Sparebanken Sør Group has a 14% stake. Frende Forsikring Frende Forsikring offers the bank s retail banking and corporate customers good general insurance and life insurance products. Frende Forsikring is owned by 14 independent savings banks and Sparebanken Sør as a 10% stake. Norne Securities Norne Securities offers the bank s customers online trading of shares, traditional broker services and corporate finance services. Norne Securities is owned by 14 independent savings banks and also Must Invest AS and Sparebanken Sør Group have a 17.8% stake. SUMMARY AND FUTURE OUTLOOK The board of directors is satisfied with the results achieved through the year. Greater focus on specialisation and offering a wide range of products has been well received by our customers. The chosen strategy has proved to be correct and feasible. Growth has been generally higher than the rest of the market and shows that the Group is taking market shares. Strict regulatory requirements relating to capital adequacy may mean that customer margins will increase in future, even though there is tough competition in the market. There will be challenges related to cutting costs at the same time as improving capacity in key areas such as risk management and development of digital surfaces. The board of directors has positive expectations for market development in both the retail banking and corporate market. However, growth is expected to be lower than it has been in the last few years. At the same time, we are prepared for further turbulence in the financial markets and a dip in the economy may have a negative impact on profit in the years ahead. The board of directors confirms that the Group has a strong financial position and is well positioned to meet new challenges in the form of increased liquidity and capital adequacy requirements. Arendal, 5 March 2013 Torstein Moland Unni Grete Farestveit Kjell Pedersen-Rise Erling Holm Leidulv Nesgård Chairman Jill Akselsen Olav Inge Nordbø Per Adolf Bentsen Cathy Steller

15 15 Board of Directors and CEO Front from left: Geir Bergskaug (CEO), Torstein Moland (chairman), Unni Grete Farestveit (deputy) Back from left: Jill Akselsen, Leidulv Nesgård, Kjell Pedersen-Rise, Erling Holm, Olav Inge Nordbø, Per Adolf Bentsen (employee rep.) and Cathy Steller (employee rep.)

16 16 PROFIT AND LOSS ACCOUNT PARENT BANK GROUP MNOK Notes Interest and similar income 4, Interest and similar costs 4,16, Net interest and credit commission income 4, Commission and income from banking services Commission costs and costs relating to banking services Net fee and commission income Income from financial instruments at fair value with value changes through the P&L account Write-down and gains/losses on investments valued at cost or investment designated as available for sale Income from financial instruments Other operating income Total other operating income Personnel costs 21, Deprec. and write-down on fixed and intangible assets Other operating costs 8, Total operating costs Operating result before losses Losses on loans, guarantees, etc Pre-tax profit Tax cost Profit for the year Minority interests Majority interests The equity certificates share of the result divided 4,88 by the number of equity certificates (in whole NOK) 6,08 Total Profit Statement Annual profit Net change in fair value of financial assets available for sale Net change in fair value of financial assets available for sale transferred to result Total other income and costs in the period carried to equity Total result for the period

17 BALANCE SHEET 17 PARENT BANK MNOK GROUP ASSETS Notes Cash and claims on central banks Loans to and claims on financial institutions 11, Gross loans to customers Individual write-downs 14, Write-downs on groups of loans 14, Net loans to customers 13,22,23,25, Repossessed assets Bonds and certificates 25, Shares 25, Financial derivatives 25, Equity stakes in group companies Equity stakes in associated companies Intangible assets Deferred tax asset Fixed assets Other assets 10, TOTAL ASSETS 13, EQUITY AND LIABILITIES Liabilities to financial institutions 11,16, Deposits from and liabilities to customers 13,15,16,23, Debt established through issue of securities 16,25, Financial derivatives 25, Liabilities relating to period tax Deferred tax Other liabilities 12, Subordinated loan capital 24, Perpetual hybrid tier 1 capital 24,25, Total liabilities 13,28, Equity certificates Equalisation reserve Total equity share capital Primary capital Other equity Minority interests Total equity TOTAL EQUITY AND LIABILITIES 13, OFF-BALANCE SHEET ITEMS Conditional liabilities: Guarantees Book value of assets provided as security for liabilities Other conditional liabilities Arendal, 31 December 2012 / 5 March 2013 Torstein Moland Unni Grete Farestveit Kjell Pedersen-Rise Erling Holm Leidulv Nesgård Chairman Deputy Chairman Jill Akselsen Olav Inge Nordbø Per Adolf Bentsen Cathy Steller Geir Bergskaug CEO

18 18 STATEMENT OF CHANGES IN EQUITY Equity Equalisation Primary Fair value Other Minority TOTAL Group certificates reserve capital reserve equity interests Equity as at 1 January Profit Donations Change in fair value of equity instruments available for sale -3-3 Equity as at 31 December Profit Donations Dividend 0 Converted to equity certificates Change in fair value of equity instruments 0 available for sale -4-4 Equity as at 31 December Parent bank Equity as at 1 January Profit Donations Change in fair value of equity instruments available for sale -3-3 Equity as at 31 December Profit Donations Dividend 0 Converted to equity certificates Change in fair value of equity instruments available for sale -4-4 Equity as at 31 December

19 CASH FLOW STATEMENT 19 PARENT BANK GROUP MNOK Interest receivable Interest payable Other payments received Operations-related payments Recoveries from confirmed losses Period tax paid Payments relating to donations Paid group contribution Minority interest Net cash flow from operations Change in loans and repossessed assets Change in other assets Change in securities Change in loans - other financial institutions Change in deposits from customers Change in funding loans from financial institutions Change in other liabilities Net cash flow from current financial operations Investment in fixed assets Net investment in group and associated companies Sale of fixed assets Net cash flow from investments Change in debt established through issue of securities Change in subordinated loan capital and perpetual hybrid tier 1 capital Net cash flow from long-term funding activities Net change in liquid funds Liquid funds as at Liquid funds as at

20 20 NOTES TO THE 2012 ACCOUNTS 1. GENERAL INFORMATION The Sparebanken Sør Group consists of the parent bank, Sparebanken Sør and subsidiaries Sør Boligkreditt AS, ABCenter Holding AS, Bankbygg AS, AS Eiendomsvekst, Markensgate 9 AS, Prosjektutvikling AS and Rettighetskompaniet AS. The Group conducts banking operations in 30 locations and real estate brokerage in 12 locations in Aust-Agder, Vest-Agder and Telemark. The head office of the parent bank and the mortgage company is in Arendal, whereas the head office of the real estate brokerage business, ABCenter, is located in Kristiansand. 2. ACCOUNTING PRINCIPLES Use of IFRS Sparebanken Sør reports its parent bank and group accounts according to International Financial Reporting Standards, IFRS, and applicable interpretations, and also the additional Norwegian information requirements set out in the Norwegian Accounting Act. The accounts have been based on IFRS standards and interpretations, which are mandatory and approved by EU for accounts presented for Consolidation and group companies The group accounts include the parent bank and subsidiaries, where the bank alone, or together with subsidiaries, owns more than 50 per cent and / or has controlling interest and also that the ownership is considered to be permanent. Inter-company transactions and balances are netted out. When a subsidiary is acquired, the cost price of the shares in the parent company is netted out against equity in the subsidiary at the time of acquisition. The difference between the cost price and net book value of assets in the subsidiary at the time of acquisition is added to the assets to which the surplus value relates within the market value of these assets. The part of the cost price that cannot be added to specific assets represents goodwill. If the value of the acquired assets exceeds the cost price, the difference is carried to income. In the parent bank s accounts, the assets are recognised at the cost price on initial incorporation. The shares are tested annually for impairment in value and if necessary, a write-down to the recoverable amount is made. Associated companies Associated companies are companies in which the bank has significant interest. Significant interest exists when the bank has an equity stake of between 20 and 50 per cent. Associated companies are incorporated in the group accounts according to the equity method. This means that on initial incorporation, the assets are recognised at cost price and then adjusted for the bank s share of the associated company s result. In the parent bank s accounts, the assets are recognised at the cost price on initial incorporation. The shares are tested annually for any impairment in value and if necessary, a write-down to the recoverable amount is made. Foreign currency The accounts are presented in NOK, which is also the Group s functional currency. Transactions in foreign currency are converted to NOK at the exchange rates on the transaction date. Any foreign exchanges losses and gains arising from such transactions and from conversion of money items in foreign currency on the balance sheet date are recognized in the profit and loss account. In the accounts, the Group s receivables and liabilities in foreign currencies are converted into NOK at the middle rate of exchange on Oslo Stock Exchange on the balance sheet date. Foreign currency positions are limited through the use of hedging transactions in the same currencies. Interest income and costs Interest income and costs associated with assets and liabilities assessed at the amortized cost are recognised in the profit and loss account on an ongoing basis using the effective interest rate method. Effective interest rate is defined as the rate of interest that when applied means that the present value of the expected cash flow over the anticipated lifetime of the financial assets or liabilities becomes equal to the book value of the financial asset or liability. When calculating the effective interest rate, the cash flow incorporated in the agreement is estimated, but without taking into consideration any future credit losses. If a financial asset is written-down for impairment of value, the new effective interest rate is calculated using an adjusted, estimated cash flow. For interest-bearing instruments measured at fair value, the interest rate will be classified as the interest income or cost, where the effect of the value change will be classified as in- come or costs relating to financial instruments.