2014 ANNUAL REPORT (This translation from Norwegian has been prepared for information purposes only.) 1 2 Content 4 The year 2014 6 Report of the Board of Directors 16 Profit and losses account 17 Balance sheet 18 Equity statement 19 Cash flow statement 20 Notes 70 Corporate Governance 76 Declaration from the Board of Directors and CEO 77 Auditor’s report 79 The control committee’s annual report 80 Organisation 80 The Bank’s branches 81 The Group Management 83 Information 84 Key figures Group 3 The year 2014 ONE BANK 1 January 2014 was the beginning of a new era in the history of the bank. Two traditional and well-run banks merged, one with a history dating back to 1824 in Kristiansand and the other from 1825 in Arendal. Two complementary banks, with different perspectives and strengths, merged together. Two banks, which individually delivered historically good results in 2013 and in so doing, showed that they could maintain a steady course on their own, but which nevertheless became one bank. Our first year of operation is now behind us and we are satisfied with the presented financial statements. The result has been achieved by almost 500 employees, who through the whole of 2014 have worked hard in the customers and region’s best interests. We have had one clear aim from the outset and that is to be the bank for our region. This is expressed through our powerful ambition which says that we will; • Contribute to further growth and development in the region through developing a large and energetic bank that focuses on the region and is regional. • Create a new financial centre in the region with capacity, risk diversification, competitive power and profitability. • Develop a new bank that is better equipped to manage changed framework conditions and regulatory requirements. • Be a bank with a complete office network providing a common understanding of perspective and direction for the customer proximity and competitive advantages. way forward. Even though from the outside and individually • Create one of the region’s most attractive workplaces, we knew each other’s strengths, since the merger we have with significant expertise and room for specialisation. become even more certain that two complementary banks have become one. If we add to that the authorities’ regulatory No other bank is better placed to deliver in accordance with requirements and that the need to invest in technology also this ambition. favours larger units, we have established a bank that is well The foundation for the result in 2014 was laid through equipped to meet the challenges of tomorrow. systematic work that got underway in 2013. The management In the first half-year, the most important prerequisites were team was established at an early stage, which has enabled in place. IT systems were integrated and linked, the bank them to start the preparations in good time before the established a common product structure and employees merger. Furthermore, all personnel were briefed on their have moved together into joint offices. A new corporate tasks, workplace and immediate superior in good time before identity was rolled out in all offices and digital media. In 2014, the year-end. A few, dedicated personnel were involved in the bank has renewed and strengthened its commitment the merger work, which ensured that the vast majority could to local sports teams and through agreements with Team focus on following-up our customers. This meant that the Sparebanken Sør cycle team, Start football club and ØIF bank was ready to start a new era at the beginning of 2014. Arendal handball club, the bank received more media The reason for the merger was an assumption that we should coverage than the major national banks. This underlines our build on the best of both banks, and creating a winning team ambition to be a bank for the region. from two former competitors has had top priority. Therefore, The merged bank has reinforced its position as the regional in the first months of the year we developed a new corporate bank for Agder and Telemark. Despite all the work involved identity that everyone could identify with and established 4 in the merger, the bank has experienced growth, both in the retail banking and corporate market. Competition for mortgage customers has been strong through the year and all banks have found it necessary to cut lending rates to maintain market shares. Competition is also strong in the corporate market, but Sparebanken Sør is competitive. The bank has also received renewed trust as a business partner for Kristen-Norges Innkjøpsfellesskap (KNIF). Sparebanken Sør will continue to be competitive in the future. An essential element will be cost efficiency and through 2014, the bank has realised a significant portion of the gains arising from the merger. Through natural attrition, partly as a result of age structure, the workforce has been reduced from 520 to 454 FTEs since the idea of a merger was introduced. This, together with the fact that the costs related to the merger have been recognised in 2014, gives the bank the best starting point for future cost-effective operations. With 2014 behind us, we can say with certainty that implementation of the merger has gone according to plan and the positive effects have begun to materialise. New Sparebank Sør has had a very satisfactory first year of operation. The bank has presented a sound financial result, positively impacted by the income and cost trends and negatively by loss provisions the bank made in 3Q. With the transactions the bank has made in 2014 it is well positioned to face a somewhat more uncertain situation in 2015. The foundation for the new bank has been laid and we are looking forward to contributing to further growth and development in the region. Geir Bergskaug CEO Sparebanken Sør 5 Report of the Board of Directors THE NATURE OF THE BUSINESS adjustment in the interest rate since March 2012. Due to the market situation, Sparebanken Sør also cut its interest rates. ACTIVITY Sparebanken Pluss and Sparebanken Sør merged with effect BUSINESS SEGMENTS from 1 January 2014. Sparebanken Pluss was the acquiring bank in the merger and was renamed Sparebanken Sør. Retail banking market Sparebanken Sør is an independent financial institution that The retail banking market is the largest organisational unit engages in banking, securities and real estate brokerage in the bank, with around 300 employees. Through 2014, the activities in Vest-Agder, Aust-Agder and Telemark. work in the division has been characterised by the merger. Sparebanken Sør Group engages in addition sale of insurance, In addition to organisational adjustment, including physical leasing and securities through partly owned product colocation in Mandal, Kristiansand, Grimstad and Arendal, companies and mortgaging through wholly owned subsidiary new systems and routines have been adopted and new Sparebanken Sør Boligkreditt AS. The bank has 40 branch products launched. The work through the merger year has offices and the head office is located in Kristiansand. developed a positive organisation characterised by good cooperation and adaptability. FRAMEWORK CONDITIONS 2014 The bank has a strong market position in the retail banking market. The digital surfaces have to an increasing extent characterised the bank’s communication and sales channels. The merger Use of self-service solutions on mobile phones and the During 2014, a considerable amount of work went into Internet has grown rapidly and customer service has had implementing the merger and ensuring good integration. an influx of inquiries via electronic channels in addition to The merged bank has reinforced its position as the regional the traditional switchboard service. The digital surfaces, bank for Agder and Telemark. The merger has gone as customer service and the bank’s wide distribution network planned and the positive effects of the merger are beginning have together formed a complete consultancy and service to materialise. Colocation of bank employees has been option to our customers. completed and realisation of merger benefits is happening In 2014, the retail banking market has had good growth in faster than anticipated. Most of the work on the merger is the savings and investment sector. Deposits have increased now considered to have been completed. by 11.2 per cent to NOK 23.2 billion and at year-end were around 48 per cent of the bank’s total deposits. Weaker growth Lending growth, including loans transferred to Sparebanken On the whole, there has been a weak downward trend in credit Sør Boligkreditt AS has been at 4.5 per cent and at year-end, growth from 2013 and through 2014. Households and non- loans totalled NOK 54.1 billion. This was around 66 per cent financial enterprises have reduced their debt growth in this of the bank’s total loans. In 2014, there has been a steady period. For households, growth has fallen from around 7 per increase in sales of insurance, card and investment products. cent on an annual basis down toward 6 per cent. Non-financial enterprises have reduced credit growth from around 4 per cent Corporate market to around 3 per cent. In the bank’s market area, growth has been lower and the last available statistics for the region indicate a The merged bank has been well-received by businesses in lending growth of 3.9 per cent in total, and 5.2 and 1.2 per cent the region. Through the merger, the bank has reinforced its for households and non-financial enterprises respectively. position as a regional bank for Agder and Telemark. This is due to a doubling of the bank’s financial capacity and a The key interest rate strengthening of the expertise in the corporate market.