Semi-Annual Report First Half of 2015

Semi-Annual Report First Half of 2015

Table of Contents Page Information about Merkur Cooperative Bank 2 Statement by the Executive Board and the Board of Directors 3 Management s Review 4 8 Income Statement for the period 1 January 30 June 2015 9 Balance Sheet as of 30 June 2015 10 Statement of Capital 11 Notes 12 14 1

Information about Merkur Cooperative Bank Main Office Merkur Cooperative Bank Vesterbrogade 40, 1 DK-1620 Copenhagen CVR-nr: 24255689 Place of Domicile: Copenhagen Board of directors: Morten Gunge (chair) Henrik Tølløse (vice-chair) Klaus Loehr-Petersen Jakob Brochmann Laursen Annette Hartvig Larsen Lene Diemer Carsten Juul Henrik Kronel Søren Sivesgaard Executive Board: Lars Pehrson, CEO Asbjørn Andersen, CFO and COO Audit Committee Henrik Tølløse (Chair) Jakob Brochmann Laursen Carsten Juul Auditing Beierholm, State-Certified Auditing Firm Branches: Aalborg, Bispensgade 16,1 DK-9000 Aalborg Copenhagen, Vesterbrogade 40,1 DK-1620 Copenhagen Odense, Mageløs 12,1. tv DK-5000 Odense C Aarhus, Sct. Clemens Torv 17,1 DK-8000 Aarhus 2

Statement by the Executive Board and the Board of Directors We have today processed and approved the semi-annual report for 1 January through 30 June 2015 for Merkur Cooperative Bank. The semi-annual report has been prepared in accordance with the Danish Financial Business Act, including the executive order on financial reporting for credit institutions, investment companies, etc. We consider the accounting policies appropriate for the semiannual report to provide a true and fair review of the cooperative bank's assets and liabilities, financial position and performance. We consider that the management's review includes a fair review of the development in the cooperative bank's activities and finances, as well as a description of the most significant risks and uncertainties that might affect the cooperative bank. The external auditors have not revised the semi-annual report nor performed a review. Copenhagen, 28 August 2015 Executive Board: Lars Pehrson, CEO Asbjørn Andersen, CFO and COO Board of Directors: Morten Gunge (Chair) Henrik Tølløse (vice-chair) Klaus Loehr-Petersen Jakob Brochmann Laursen Annette Hartvig Larsen Lene Diemer Carsten Juul Henrik Kronel Søren Sivesgaard 3

Management's Review for the first half of 2015 The first half of 2015 concluded with a profit of DKK 3.2m, on par with the profit for the first half of 2014. Net income from interest and fees has grown slightly and impairments continue to display a downward trend. The capital base has been considerably strengthened, partly through new share capital amounting to DKK 4.9m and partly through raising approx. DKK 23m in new subordinated loan capital. It has proven more difficult than expected to increase lending and thereby income from interest. Gross lending, in itself, has been satisfactory, but the repayment of existing loans has been significantly greater than expected, resulting from a widespread emphasis on paying down debt. In the meantime, a number of large loans are in the process of being realised, which we expect will result in increased lending during the second half of the year. Denmark has moved beyond the crisis, but the new reality in which banks are operating is significantly more difficult than the one prior to the crisis. The extremely low interest rate level hollows out income and, in combination with new regulation, resulting in less leeway. The general focus of banks is, to a high degree, on the distribution of standardised products that leave less room for specialised solutions. This development also influences Merkur. From 2008 through 30 June 2015, the clean-up in the financial sector and the bolstering of the Deposit Guarantee Fund have cost us DKK 30.5m. This amount has swallowed a very large part of our income from said period. We expect that 2015 will be the last year with large contributions to the Deposit Guarantee Fund, which now is reaching the stipulated size. We therefore look forward to a cost reduction in the size of DKK 4m from 2016. Financial Developments During the first half of 2015, Merkur had a net customer intake of 453 new customers, which is significantly more than the first half of 2014. The overall customer total is now 24,195. During the six-month period, gross customer intake has been 1,392. This is also more than the same period in 2014, when the gross intake was 1,066. Deposits have grown by 8.1% (DKK 175m) since the beginning of the year and by 9.2% (DKK 198m) since 30 June 2014. Merkur s deposit surplus and liquidity has thus been increased further. Loans, on the other hand, have fallen slightly by 1.3%, since the beginning of the year but if one views the past 12-month period, there has been a growth of 4.7%. We expect loans to continue to grow in the second half of 2015, but whether we will reach the budgeted target of 10% is uncertain. The high savings ratio, which is a general phenomenon in Denmark these years, also influences Merkur, both in terms of customers repaying their debt at a faster pace and in terms of increased deposits. This also entails that more lending is necessary in order to keep abreast of repayments of existing loans. Since the interest rate level, and thereby the passive income from the liquidity holding, is at record lows, it is very important that we exploit a larger portion of the very large deposit surplus as a basis for increased lending. The positive development in Merkur s share capital continues with a growth of DKK 4.9m for the first half of 2015. The number of shareholders has been increased by 177 to a total of 5,211. In addition to this, successful subscription of new subordinated loan capital of DKK 23m has been achieved, which partly is used to repay older subordinated loans of approx. DKK 17m and partly as an overall bolstering of Merkur s capital base. The total capital base, as of 30 June 2015, amounts to DKK 262.8m, after deductions, compared to DKK 247.7m at the close of 2014. The capital ratio has, as of 30 June 2015, thus increased to 16.2% compared to 15.8% at year s end. Merkur is therefore adhering to its capital plan for the period until the year 2019. Success has also been achieved in reducing a number of risks, which make up part of Merkur s ICAAP ratio. This can now be calculated as 10.2%, and we have thereby increased the difference between the ICAAP ratio and the capital ratio from 5.0% to 6.0% 4

By virtue of its large deposit surplus, Merkur is extremely well padded when it comes to liquidity. The deposit surplus also represents a great potential for lending to good projects. Actual capital ratio (Formerly termed solvency ratio) 30 June 2015 Excess cover relative to statutory minimum 16.2% + 8.2 percentage points relative to the statutory minimum of 8%.* Calculated ICAAP ratio 10.2% 6.0 percentage points relative to actual solvency ratio. Liquidity DKK 1,200m + DKK 905m (306.8%) * In 2015, EU regulations allow for authorities to introduce an add-on of 0.5%, a so-called countercyclical buffer, which will bring the minimum capital requirement to 8.5%. This option has not been exercised. By far the greater part of Merkur s deposits 75.6% - are either fully covered (pension accounts, etc.) or within the Deposit Guarantee Scheme s cover limit of approx. DKK 750,000. The six-month period resulted in a profit of DKK 3.2m after tax, compared to DKK 3.4 for the first half of 2014. Income from interest has decreased by 8.6%, or DKK 4.2m, compared to the first half of 2014. Interest expenses have fallen by 29.0% compared to the same period in 2014, which was effected by the falling interest rate level for deposits, despite the increase in deposits. Net interest rate income has decreased by 5.5%, or DKK 2.4m, of which DKK 2.3m can be attributed to decreasing interest income from Merkur s bond position. The lack of growth in lending has entailed that interest rate income from lending is approx. DKK 3.6m lower than budgeted. Net income from fees and commissions has risen by 22.8% (DKK 2.9m), compared to the first half of 2014, to a total of DKK 15.5m. One of the reasons for this is very high level of activity in the home financing sector, not least in the form of rescheduling mortgage loans. This is a very satisfactory development and contributes toward reducing Merkur s dependence on interest income. The total net income from interest and fees thus constitutes DKK 56.1m, an increase of 0.9%, or DKK 0.5m, compared to the same period in 2014. We have therefore succeeded in compensating for the decrease in interest income through an increase of income from other sources. Our ambition is, of course, to increase total income, which depends on whether or not we succeed in increasing lending. Value adjustments have been positive by DKK 2.7m, compared to DKK 2.9m as of 30 June 2014. Price increases on Merkur s shares in the credit institutions and sector companies with which we collaborate constitute DKK 2.6m. The foreign currency gains in connection with foreign transfers constitute DKK 0.6m and bonds have contributed with a negative adjustment of DKK 0.5m, as a consequence of the moderate interest increases that occurred in the second quarter. Total costs, as of 30 June 2015, constituted DKK 44.1m; compared to DKK 41.3m in the same period the previous year; that is, an increase of 6.8%. The increase of DKK 2.8m, can almost exclusively be attributed to expenses paid toward wages (DKK 1.1m), as a result of investing in more manpower in the area of advisors and for an expense for Merkur s IT provider, BEC (DKK 1.4m), as a consequence of the new direct membership, which has now been almost fully implemented. 5

Earnings per cost unit, excluding value adjustments, impairments and the Deposit Guarantee Fund have fallen from 1.46, as of 30 June 2014, to 1.35, as of 30 June 2015. This is not a satisfactory development, the cause of which primarily lies with the aforementioned expenses paid to BEC (which have now peaked), as well as stagnation in lending. The financial developments of the two six-month periods in 2014 and the first half of 2015 can be summarized in the following manner: DKK 1,000 H1 2014 H2 2014 H1 2015 Net interest income 42,854 42,112 40,492 Other income 13,075 15,889 15,847 Net income from interest and 55,929 58,001 56,339 fees etc. Value adjustments etc. +2,934-4,610 +2,711 Costs 41,343 40,161 44,141 Losses and impairments 13,446 8,812 11,881 Result before taxes 4,074 4,418 3,028 Impairments of the cooperative bank's own loans in the first half of 2015 constituted DKK 11.9m, compared to approx. DKK 13.4m in the first half of 2014. This thus signifies a reduction, even though the level of impairments remains too high. We expect further reductions over the coming six-month periods and expect to remain within a level of approx. DKK 18m for 2015 as a whole, or DKK 3-4m more than estimated in the budget. Supervisory Diamond In light of the financial crisis, the Danish Financial Supervisory Authority (DFSA) has introduced a number of benchmarks, which can give an indication of whether a financial institution is beginning to take on risks that are too large. The five benchmarks can be configured in a pentagon, hence the term diamond, and are the following: 1. The sum of large commitments should not exceed 125% of a bank s capital base. Large commitments are defined as commitments whose individual sizes are in excess of 10% of the capital base. 2. The ratio between loans measured in proportion to working capital (deposits + Tier 1 capital + Tier 2 capital*) should at most be 1:1. This ratio is defined as the funding ratio. 3. The bank should have excess liquidity coverage of at least 50% more than required by law. 4. The bank should at most have an exposure to the real estate sector of 25% of the loan and guarantee portfolio. It must be underscored that the real estate sector, naturally, includes many other elements than the speculators who have received so much attention in connection with foreclosing, and in other ways crisis-struck, banks. 5. The annual growth rate for loans should not exceed 20%. * issued bonds with a remaining maturity of more than 1 year and debt to the Danish Central Bank may also be calculated as part of this category, but this is currently not relevant for Merkur. It must be emphasized that exceeding the benchmarks, in and of themselves, does not entail a breach of legislation non-adherence to the benchmarks will merely lead to different degrees of increased attention and reactions on the part of the DFSA. At the end of the first six months of 2015, Merkur meets all five benchmarks. 6

SUPERVISORY DIAMOND IN NUMBERS 30 JUNE 2015 31 DEC. 2014 Diamond s threshold values Sum of large commitments Ratio between loans measured in proportion to working capital (funding ratio) Excess liquidity coverage Exposure to the real estate sector Growth rate for loans 40.8%* 34.6% Max. 125% 51.2% 56.0% Max. 100% 306.8% 264.4% Min. 50% 9.7% 11.2% Max. 25% 4.7% 5.9% Max. 20% * This includes an exposure to Merkur s IT provider BEC of 15.2%, in the form of a guarantee deposit etc. In the adjusted supervisory diamond, which enters into force from 1 January 2018, the exposure to joint IT providers is excluded. Share price The price per share compared at year's end has risen from DKK 169.28 to DKK 171.00, an increase of 1.02% in six months. This represents a slow, but positive development, and reflects that we can continue 2014 s trend with a positive return to shareholders. We expect the return gradually to grow larger henceforth. Important events in H1 This six-month period has primarily been used to strengthen efforts to increase lending. In addition, great interest has been shown regarding share subscriptions. Also investment of customer funds in securities from Triodos and Sparinvest has received much attention. This has resulted in a significant growth in the brokered securities portfolios. 7

Uncertainties relating to recognition and measurement Management believes that there are no uncertainties relating to recognition and measurement, other than that drawing up financial accounting values always requires a certain degree of estimation. Recognition and measurement in this six-month period have not been affected by unusual circumstances. Events after the balance sheet date No events have occurred after the end of the financial period that would affect the evaluation of the semi-annual report. Accounting Policies Accounting policies are consistent with the 2014 annual report. Outlook for the remainder of 2015 Merkur expects growth in the second half of 2015, both in deposits and loans. The growth in loans for 2015, as a whole, is expected to be 6-7%, compared to the approx. 10% that formed the expectation in the annual report for 2014. In comparison with the years preceding the financial crisis, we still expect a relatively high level of impairments on the cooperative bank's own commitments, even though we expect a lower level than in 2014. This estimate, as well, is naturally associated with great uncertainty, as it depends on, among other things, the general economic developments in society overall, just as developments in individual commitments may also affect the overall picture. The abovementioned factors' effect on financial performance for the remainder of the year is difficult to assess, but our best estimate is a full-year profit for 2015 in the interval of DKK 9-11m after tax. This would thus be a clear improvement on 2014 but also represent a somewhat smaller profit than was expected in the annual report for 2014. 8

Income statement January-June 2015 In 1,000 DKK Period ended Period ended Note June 30 June 30 2015 2014 1 Interest income 45,068 49,298 2 Interest expense 4,576 6,444 Net interest income 40,492 42,854 Dividends from shares etc. 60 65 3 Fee and commission income 16,459 13,501 Fee and commission expense 922 845 Net interest and fee income 56,089 55,575 4 Securities and foreign exchange income 2,711 2,934 Other operating income 250 354 5 Staff costs and administrative expenses 39,871 36,720 Depreciation 412 487 Other operating expenses 3,858 4,136 Operating result before provisions and tax 14,909 17,520 6 Provisions for bad and doubtful debts 11,881 13,446 Result from holdings in associated undertakings 0 0 Profit before tax 3,028 4,074 Computed tax of the period's result (140) 649 Net profit after tax 3,168 3,425 9

Balance sheet ASSETS (IN 1,000 DKK) June 30 Dec. 31 June 30 2015 2014 2014 Cash in hand and demand deposits with central banks 257,695 200,844 123,691 Due from credit institutions + deposits with central banks 141,260 39,745 36,193 Loans and advances 1,348,795 1,368,814 1,287,862 Bonds at fair value 808,510 755,191 931,744 Bonds at amortized cost 49,795 49,754 49,713 Shares etc. 46,401 42,013 37,504 Holdings in associated undertakings 631 631 638 Intangible assets 0 0 0 Real estate (investment properties) 15,260 15,260 12,904 Real estate in the use of the bank 8,342 8,290 8,368 Other tangible assets 1,978 1,578 1,670 Actual tax assets 1,722 77 644 Deferred tax assets 2,699 2,699 4,875 Assets in temporary possession 9,506 13,250 18,080 Other assets 52,377 49,287 30,249 Prepayments and accrued income 2,166 1,809 2,054 TOTAL ASSETS 2,747,137 2,549,242 2,546,189 EQUITY AND LIABILITIES (IN 1,000 DKK) Due to credit institutions and central banks 82,422 79,083 104,679 Deposits 2,347,874 2,172,766 2,149,584 Current tax liabilities - 0 649 Other liabilities 28,401 28,782 35,393 Total debt 2,458,697 2,280,631 2,290,305 Provisions for obligations: Provision for pensions and similar liabilities 111 111 110 Provisions for deferred taxes 0 0 0 Provisions for potential losses on guarantees - 0 800 Total provisions for obligations 111 111 910 Subordinated debt: Subordinated debt 52,098 38,352 38,474 Net capital: Share capital 124,963 122,053 116,835 Share premium account 57,668 55,664 52,124 Revaluation of real property 859 859 859 Other reserves 4,708 4,708 4,708 Brought forward from previous years incl. result of period 48,032 44,864 41,974 Total net capital 236,231 228,148 216,500 TOTAL LIABILITIES 2,747,137 2,547,242 2,546,189 OFF-BALANCE SHEET ITEMS: Guarantees etc. 480,928 448,838 379,000 TOTAL OFF-BALANCE SHEET ITEMS 480,928 448,838 379,000 10

STATEMENT OF CAPITAL Statement of capital June 30, 2015 June 30 Dec. 31 June 30 In DKK 1,000 2015 2014 2014 Share capital, beginning of year 122,053 112,458 112,458 Capital increase 2,910 9,595 4,377 Share capital, end of period 124,963 122,053 116,835 Value of shares, end of period Value of shares, relative to 100 171.00 169.28 166.25 Share premium account, beginning of year 55,664 49,311 49,312 Share premiums from shares issued 2,004 6,327 2,812 Other comprehensive income 0 26 0 Share premium account, end of period 57,668 55,664 52,124 Other reserves, beginning of year 4,708 4,708 4,708 Other reserves, end of period 4,708 4,708 4,708 Revaluation reserves Beginning of the year 859 859 859 Revaluation reserves, end of period 859 859 859 Profit brought forward, beginning of year 44,864 38,549 38,549 Increased through net profit of year 3,168 6,315 3,425 Profit brought forward, end of period 48,032 44,864 41,974 Composition of net capital, end of period Share capital 124,963 122,053 116,835 Share premium account 57,668 55,664 52,124 Other reserves 4,708 4,708 4,708 Revaluation reserves, real estate 859 859 859 Brought forward from prior years 44,864 38,549 38,549 Appropriated from net profit for the period 3,168 6,315 3,425 Total net capital 236,231 228,148 216,500 11

NOTES (in 1,000 DKK) Period ended Period ended June 30 June 30 Note 2015 2014 1 Interest income Credit institutions and central banks 66 60 Loans 42,357 44,333 Bonds 2,611 4,866 Other interest income 34 39 Total interest income 45,068 49,298 of which repo transactions 0 0 2 Interest expenses Credit institutions and central banks 973 1,139 Deposits 2,827 4,512 Subordinated debt 774 783 Other interest expenses 2 10 Total interest expenses 4,576 6,444 of which repo transactions 0 0 3 Fees and commission income Securities trade and securities in account 1,246 887 Payment handling 2,525 2,394 Loan business, fees and charges 2,554 1,664 Guarantee commission 4,652 4,575 Other charges, fees and commission income 5,482 3,981 Total fees and commission income 16,459 13,501 4 Securities and foreign exchange income Bonds (mark-to market valuation) (483) 1,163 Shares 2,625 1,273 Foreign exchange income 569 498 Total securities and foreign exchange income 2,711 2,934 5 Staff costs and administrative expenses Salaries and remuneration of board of directors, executive board and shareholders committee: Executive board 698 690 Board of directors 375 374 Total 1,073 1,064 Staff costs: Salaries 18,184 17,601 Pension costs 2,130 2,052 Financial services employer tax 2,674 2,444 Total 22,988 22,097 Other administrative expenses 15,810 13,559 Total staff costs and administrative expenses 39,871 36,720 Average number of employees (full time equivalents) for the period was 80.6 12

6 Impairments Individual impairments Collective impairments June 30 June 30 June 30 June 30 2015 2014 2015 2014 Impairments of the period 16,197 13,346 1,024 283 Reversal of impairments from previous years 5,177 1,791 176 1,062 Write offs, previously impaired 0 0 0 0 Direct write offs 1,026 3,630 0 0 Income from prior years write offs and interest from impairments 2,525 960 0 0 Net impairments from income statement 9,521 14,225 848-779 Write offs, previously impaired 2,043 11,338 0 0 7 Financial highlights June 30 June 30 June 30 June 30 June 30 2015 2014 2013 2012 2011 Net interest and fee income 40,492 55,575 50,858 50,205 42,783 Market value adjustments 2,711 2,934 984 2,348-326 Staff and administrative expenses 39,871 36,720 32,355 31,986 29,675 Impairments on loans etc. 11,881 13,446 17,515 15,987 9,472 Result from holdings in ass. undertakings 0 0 0 0 0 Profit of the period 3,168 3,425-2,155 1,492-2,169 Deposits 2,347,874 2,149,584 1,926,211 1,764,249 1,559,239 Loans 1,348,795 1,287,862 1,198,051 1,172,517 1,148,910 Net capital 236,231 216,500 191,745 183,392 185,034 Total assets 2,747,137 2,546,189 2,244,847 2,073,744 1,893,563 13

8 FINANCIAL RATIOS June 30 June 30 June 30 June 30 June 30 Profit 2015 2014 2013 2012 2011 Income/cost ratio DKK 1.05 1.07 0.95 1.04 0.95 Income/cost ratio DKK, before impairments and bank packages 1.35 1.46 1.49 1.50 1.40 Return on equity before tax (%) 1.3 1.9-1.50 1.1-1.20 Return on equity after tax (%) 1.4 1.6-1.20 0.8-1.20 Development in % of the value of shares, 12 months from 20. July the preceding year 2.86 3.91-1.99-4.81 0.15 Solvency Solvency ratio (BIS Ratio) 16.2 15.1 13.8 14.3 16.0 Core capital ratio 13.5 13.0 11.7 12.1 13.5 Market risks Interest-rate risk (%) 0.5 2.9 0.9 1.3 1.1 Currency position (%) 0.9 1.3 1.0 0.6 2.7 Currency risk (%) 0.0 0.0 0.0 0.0 0.0 Liquidity Loans + impairments in % of deposits 59.9 62.3 64.8 68.6 76.1 Excess cover in % relative to the statutory liquidity requirement 306.3 304.5 281.7 248.1 211.9 Credit risk Impairment ratio of the period 0.5 0.8 1.0 1.0 0.6 Accumulated impairment ratio 3.0 3.0 3.0 2.3 2.4 Sum total large-scale commitments in % of capital base 40.8 36.1 20.6 75.1 119.1 Growth in % in loans of the period -1.3-0.3 3.5-0.9 5.2 Loans relative to equity 5.7 6.0 6.2 6.4 6.2 14