Pareto Bank ASA (A public limited liability company organised under the laws of Norway) Org.no

Transcription

1 Pareto Bank ASA (A public limited liability company organised under the laws of Norway) Org.no Rights Issue of 6,666,666 New Shares Subscription Price: NOK 30 per New Share Subscription Period: From 29 November 2016 to 13 December 2016 at 16:30 CET Trading in Subscription Rights: From 29 November 2016 to 9 December 2016 at 16:30 CET Transfer of all issued and outstanding Shares of Pareto Bank ASA ("Pareto Bank" or the "Bank"), a public limited liability company organized under the laws of Norway, currently 51,953,022 Shares, from listing on Oslo Axess to Oslo Børs (the "Listing Transfer"). Other than the Rights Issue, no offering or other sale of Shares will be completed in connection with the Listing Transfer. It is expected that the last day of listing on Oslo Axess will be on or about 9 December 2016, and the first day of listing on Oslo Børs will be on or about 12 December The Shares will be listed on Oslo Børs under the current ticker code "PARB". Pareto Bank is offering 6,666,666 new Shares in the Bank (the "New Shares") with a nominal value of NOK 12 each at a subscription price of NOK 30 per New Share (the "Rights Issue"). Holders of the Bank's Shares in the Norwegian Securities Depository (the "VPS") as of the end of 28 November 2016 (the "Existing Shareholders") are being granted transferable subscription Rights (the "Subscription Rights") that, subject to applicable law, provide preferential rights to subscribe for and be allocated New Shares in the Rights Issue. Existing Shareholders will be granted Subscription Rights for each Share registered as held by such Existing Shareholder as of the end of 28 November 2016 (the "Record Date") ("Eligible Shares"), rounded down to the nearest whole Subscription Right. Each Subscription Right will give the right to subscribe for one (1) New Share. The subscription period commences on 29 November 2016 and expires on 13 December 2016 at 16:30 CET (the "Subscription Period"). The Subscription Rights will be listed and tradable on Oslo Axess under the ticker code "PARB T" from 29 November 2016 until the end of trading on Oslo Axess on 9 December 2016 at 16:30 CET. Over-subscription is permitted; however, there can be no assurance that New Shares will be allocated for such subscriptions. Subscription without Subscription Rights is not permitted. Subscription Rights that are not used to subscribe for New Shares before expiry of the Subscription Period, or that are not sold before the end of trading on Oslo Axess on 9 December 2016 at 16:30 CET, will have no value and will lapse without compensation. This prospectus (the "Prospectus") has been prepared to provide information about the Bank and its business in relation to the Rights Issue, the listing of the New Shares on Oslo Børs and the Listing Transfer. The Bank is not taking any action to permit a public offering of the Subscription Rights or the New Shares in any jurisdiction outside Norway. The New Shares are being offered only in those jurisdictions in which, and only to those persons to whom, offers of the New Shares (pursuant to the exercise of Subscription Rights or otherwise) may lawfully be made. For more information regarding restrictions in relation to the Rights Issue pursuant to this Prospectus, please see Section 18 "Selling and Transfer Restrictions". Prospective investors should read this Prospectus in its entirety. Investing in the Shares involves a high degree of risk. See Section 2 "Risk factors". Manager Pareto Securities AS The date of this Prospectus is 28 November 2016 i

2 IMPORTANT INFORMATION For the definitions of terms used throughout this Prospectus, see Section 20 "Definitions and glossary of terms" of this Prospectus. This Prospectus has been prepared in order to provide information about the Bank and its business in relation to the Rights Issue, the listing of the New Shares on Oslo Børs and the Listing Transfer. This Prospectus has been prepared solely in the English language. This Prospectus serves as a listing prospectus in relation to the Shares. This Prospectus does not constitute an offer to buy, subscribe or sell any of the Shares other than the New Shares to be issued in connection with the Rights Issue. The Bank has furnished the information in this Prospectus. This Prospectus has been prepared in compliance with the Norwegian Securities Trading Act Chapter 7 and related legislation, including the EC Commission Regulation EC/809/2004 implementing Directive 2003/71/EC of the European Parliament and of the Council of 4 November 2003 regarding information contained in prospectuses (the "Prospectus Directive") as well as the format, incorporation by reference and publication of such prospectuses and dissemination of advertisements (hereafter "EC Regulation 809/2004"). The Financial Supervisory Authority of Norway (the "Norwegian FSA") has reviewed and approved this Prospectus in accordance with the Norwegian Securities Trading Act sections 7-7 and 7-8. The Norwegian FSA's control and approval in this respect is limited to whether the issuer has included descriptions according to a pre-defined list of content requirements. The Norwegian FSA has not verified or approved the accuracy or completeness of the information provided in this Prospectus. It is the Bank's responsibility to ensure that the information in the prospectus is accurate and complete. Furthermore, the Norwegian FSA has not made any sort of control or approval of the corporate matters described in or otherwise included in the Prospectus. All inquiries relating to this Prospectus should be directed to the Bank or Pareto Securities AS (the "Manager"). No other person has been authorised to give any information, or make any representation on behalf of, the Bank in connection with the Rights Issue or the Listing Transfer and, if given or made, such other information or representation must not be relied upon as having been authorized by the Bank or the Manager. The information contained herein is as of the date hereof and subject to change, completion or amendment without notice. There may have been changes affecting the Bank subsequent to the date of this Prospectus. Any new material information and any material inaccuracy that might have an effect on the assessment of the Shares arising after the publication of this Prospectus and before the end of the Subscription Period or the listing of the Shares on Oslo Børs, will be published and announced promptly as a supplement to this Prospectus in accordance with section 7-15 of the Norwegian Securities Trading Act. Neither the delivery of this Prospectus nor the completion of the listing at any time after the date hereof will, under any circumstances, create any implication that there has been no change in the Bank's affairs since the date hereof or that the information set forth in this Prospectus is correct as of any time since its date. The distribution of this Prospectus and sale of the New Shares and Subscription Rights in certain jurisdictions may be restricted by law. This Prospectus does not constitute an offer of, or an invitation to purchase, any of the New Shares or the Subscription Rights in any jurisdiction in which such offer or sale would be unlawful. No one has taken any action that would permit a public offering of New Shares to occur outside of Norway. Accordingly, neither this Prospectus nor any advertisement or any other offering material may be distributed or published in any jurisdiction except under circumstances that will result in compliance with any applicable laws and regulations. The Bank and the Manager ii

3 require persons in possession of this Prospectus to inform themselves about and to observe any such restrictions. The New Shares and Subscription Rights are subject to restrictions on transferability and resale and may not be transferred or resold except as permitted under applicable securities laws and regulations. Any failure to comply with these restrictions may constitute a violation of the securities laws of any such jurisdiction. The Subscription Rights and the New Shares have not been and will not be registered under the U.S. Securities Act of 1933, as amended (the "Securities Act") or the securities laws of any state of the United States and may not be offered or sold within the United States or to, or for the account or benefit of, U.S. persons (as defined in Regulation S under the Securities Act). Outside the United States, the Subscription Rights and New Shares are being offered to non-us persons in offshore transactions in reliance on Regulation S under the Securities Act. Investors should be aware that they may be required to bear the financial risks of this investment for an indefinite period of time. For further information on the manner of distribution of the Securities and the selling and transfer restrictions to which they are subject, see Section 18 "Selling and Transfer Restrictions". The contents of this Prospectus are not to be construed as legal, business or tax advice. Each reader of this Prospectus should consult with its own legal, business or tax advisor as to legal, business or tax aspects of an investment in the Bank's Shares. If you are in any doubt about the contents of this Prospectus you should consult your stockbroker, bank manager, lawyer, accountant or other professional adviser. The Manager makes no representation or warranty, whether express or implied, as to the accuracy or completeness of the information contained in this Prospectus, and nothing contained in this Prospectus is, or shall be relied upon as, a promise or representation by the Manager. In the ordinary course of their respective businesses, the Manager and certain of its respective affiliates have engaged, and may continue to engage, in investment and commercial banking transactions with the Bank. iii

4 TABLE OF CONTENTS 1. SUMMARY 1 2. RISK FACTORS Risks related to the business of the Bank and the industry in which the Bank operates Risk related to laws and regulations Risk relating to the Rights Issue and Listing Transfer RESPONSIBILITY FOR THE PROSPECTUS PRESENTATION OF INFORMATION Date of information Presentation of financial information Rounding Industry and market data Forward-looking statements DIVIDENDS AND DIVIDEND POLICY Dividend policy Dividend payouts Legal constraints on the distribution of dividends Manner of dividend payments INDUSTRY AND MARKET Market overview Norwegian economic overview Niche Markets BUSINESS Introduction Operations Strategy and competitive strengths History and important events Products Competitive landscape Risk and capital management Employees Infrastructure and IT systems Legal proceedings Material contracts Property, plants and equipment Insurance Research, development, patents and licences Dependency on contracts, patents, licences etc. 57 iv

5 7.16 Regulatory overview CAPITALISATION AND INDEBTEDNESS Capitalisation Net financial indebtedness Working capital statement Contingent and indirect indebtedness SELECTED FINANCIAL INFORMATION Introduction Summary of accounting policies Statement of comprehensive income Condensed statement of financial position Condensed statement of cash flows Condensed statement of changes in equity Auditor OPERATING AND FINANCIAL REVIEW General overview Significant factors affecting business performance Selected balance sheet items as of 31 December 2015, 2014, 2013 and as of 30 September 2016 and Results of operations Key figures and ratios Liquidity Financing Capital base and capital adequacy Investments Basis for the preparation of financial reporting Recent development and changes BOARD OF DIRECTORS, MANAGEMENT, EMPLOYEES AND CORPORATE GOVERNANCE Introduction Board of directors Management Shares acquired by the Management and the Board of Directors Benefits upon termination Pension and retirement benefits Loans and guarantees Nomination committee Audit Committee Remuneration committee Conflicts of interests Convictions for fraudulent offences, bankruptcy etc Corporate governance 132 v

6 12. RELATED PARTY TRANSACTIONS Introduction Agreements with related parties CORPORATE INFORMATION AND DESCRIPTION OF THE SHARE CAPITAL General corporate information Listing Transfer Shares and share capital Shareholders Holdings Own Shares Convertible instruments, warrants and share options Outstanding authorisations Shareholder agreements The Articles of Association Certain aspects of Norwegian corporate law SECURITIES TRADING IN NORWAY Introduction Trading and settlement Information, control and surveillance The VPS and transfer of shares Shareholder register Norwegian law Foreign investment in Norwegian shares Disclosure obligations Insider trading Mandatory offer requirements Foreign exchange controls TAXATION Taxation of dividends Taxation upon realization of shares Net wealth tax Inheritance tax Stamp duty THE RIGHTS ISSUE Resolution to issue new shares Subscription Price in the Rights Issue Subscription Period Record Date Subscription Rights Trading in the Subscription Rights Subscription Procedure and Subscription Offices Financial Intermediaries Mechanism for Allocation of New shares 158 vi

7 16.10 Payment for the New Shares Delivery of the New Shares 160 Listing and Trading of the New Shares 161 Shares and Share Capital 161 Conditions for completion of the Rights Issue 161 Dilution 161 The Underwriting and the Underwriting Syndicate 162 Manager and Adviser 162 Net Proceeds and Expenses Relating to the Rights Issue 162 Selling and Transfer Restrictions 162 Interests of Natural and Legal Persons Involved in the Rights Issue 163 Participation of Major existing Shareholders and Members of the Bank s Management, Supervisory and Administrative Bodies in the Rights Issue 163 Publication of Information related to the Rights Issue 163 Governing Law and Jurisdiction THE LISTING TRANSFER Purposes of the Listing Transfer 164 Listing Transfer 164 Advisors SELLING AND TRANSFER RESTRICTIONS Specifically for the Subscription Rights and New Shares ADDITIONAL INFORMATION Incorporation by reference 168 Documents on display DEFINITIONS AND GLOSSARY 169 Appendix A: Appendix B Articles of Association Subscription Form vii

8 1. SUMMARY Summaries are made up of disclosure requirements known as "Elements". These Elements are numbered in Sections A E (A.1 E.7) below. This summary contains all the Elements required to be included in a summary for this type of securities and the issuer. Because some Elements are not required to be addressed, there may be gaps in the numbering sequence of the Elements. Even though an Element may be required to be inserted in the summary because of the type of securities and issuer, it is possible that no relevant information can be given regarding the Element. In this case a short description of the Element is included in the summary with the mention of "not applicable". Section A Introduction and Warnings A.1 Warning This summary should be read as an introduction to the Prospectus. Any decision to invest in the Shares should be based on consideration of the Prospectus as a whole by the investor. Where a claim relating to the information contained in the Prospectus is brought before a court, the plaintiff investor might, under the national legislation in its Member State, have to bear the costs of translating the Prospectus before the legal proceedings are initiated. Civil liability attaches only to those persons who have tabled the summary including any translation thereof, but only if the summary is misleading, inaccurate or inconsistent when read together with the other parts of the Prospectus or it does not provide, when read together with the other parts of the Prospectus, key information in order to aid investors when considering whether to invest in such securities. A.2 Resale or final placement of securities by financial intermediaries Not applicable; financial intermediaries are not entitled to use this Prospectus for subsequent resale or final placement of securities. Section B - Issuer B.1 Legal and commercial name B.2 Domicile/Legal form/legislation/co untry of incorporation Pareto Bank ASA is the Bank's legal name and Pareto Bank is the commercial name of the Bank. Pareto Bank is a public limited liability company organised and existing under the laws of Norway pursuant to the Norwegian Public Limited Companies Act. The Bank was incorporated in Norway on 19 January 2007, and the Bank's registration number in the Norwegian Register of Business Enterprises is

9 B.3 Current operations, principal activities and markets B.4a Significant recent trends affecting the issuer and the industry in which it operates Pareto Bank is a niche player within project financing in Norway, and is located in Oslo. The Bank has a licence as a commercial bank and as an investment firm from the Norwegian FSA. The Bank offers financing primarily to corporate customers within three business areas: real estate, securities & corporates and shipping & offshore. In addition, the Bank offers ordinary banking services to retail and corporate customers. Real estate financing is the Bank's largest business area. The Bank is a well-respected player and has a sizable portfolio of projects within financing of residential property in Oslo and Southeast Norway. Moreover, the Bank is a full scale provider of securities financing and it also offers a range of financing solutions to corporate clients. The Bank offers a wide range of securities financing products and some investment services. The Bank primarily finances shares and short trades in shares listed on the Oslo Børs with a loan to value of 0 to 80%. The Bank entered into the shipping & offshore market in 2011 and has since built a diversified portfolio.. The rationale behind this is partly to take advantage of the Pareto Group's strong position within these markets and partly to serve a market for smaller players in these sectors. It is the Bank's ambition to deliver an annual net lending growth of 10% within its niche markets. Thus, a growth strategy within existing markets is targeted. To realise such growth, the Bank focuses on three main goals and corresponding activities: to achieve an accelerated lending growth, to make the credit decision processes more efficient, and to further develop the Bank's culture as unique and demanding. The Bank's main non-financial target is to be Norway's leading project bank. Profitability is a cornerstone of the Bank's strategy: all loans shall be profitable from day one. The Bank does not compete on price, but adds value through professionalism, effective decision-making and a solution-oriented mind set. Combined with low costs this makes the Bank highly profitable. Risk management and internal control are other key components of the Bank's strategy. The Bank has a relatively conservative risk profile and a high focus on thoroughness in all processes and in particular with respect to credit analysis and the credit decision process. The long-term outlook in Norway seems to be one of firmer economic growth and satisfactory financial stability after a temporary cyclical downturn in 2015/2016 initiated by a sharp fall in the oil price and thus also petroleum investment. Given the size of the petroleum and supplier industries in the country one might initially have expected the economic downturn to be more pronounced. However, because of Norway's 2

10 B.5 The Group Not applicable. relatively low dependence on governmental oil money spending, which again is due to the restrictive fiscal rule and regulatory framework around the Government Pension Fund Global, the authorities are able to meet the downturn with an expansionary fiscal and monetary policy. Due to the latter the credit appetite and debt servicing capability of both households and enterprises are maintained and this will support the financial industry in Norway. B.6 Persons having an interest in the issuer's capital or voting rights B.7 Selected historical key financial information As of the date of this Prospectus, Pareto Bank has 615 shareholders. Major shareholders do not have different voting rights. Shareholders with ownership exceeding 5% must comply with disclosure obligations according to the Norwegian Securities Trading Act section 4-3. As of the date of this Prospectus the following shareholders have holdings exceeding 5%: Pareto AS, Pecunia Forvaltning AS, Arne Helge Fredly, AS, Indigo Invest AS and Saga Tankers ASA. The following financial information has been extracted from the Bank's interim financial information as of and for the three month period and nine month period ended 30 September 2016 (with comparable figures for the three month period and nine month period ended 30 September 2015) and the Bank's financial information as of and for the years ended 31 December 2015, 2014 and The Financial Statements incorporated by reference to this Prospectus, have been prepared in accordance with IFRS. The Interim Financial Statements incorporated by reference to this Prospectus have been prepared in accordance with IAS 34. Since 30 September 2016, there have been no significant changes in the Bank's financial position or trading position. Statement of comprehensive income: Three months ended Nine months ended Year ended 30 September 30 September 31 December In NOK millions 2016 (unaudited) 2015 (unaudited)* 2016 (unaudited) 2015 (unaudited)* 2015 (unaudited)* 2014 (unaudited)* 2013 (unaudited)* Interest income Interest expense (50.9) (47.2) (154.0) (164.2) (208.8) (264.9) (263.7) Net interest income Fee and commission income Fee and commission expense (0.1) (0.1) (0.4) (0.3) (0.5) (0.8) (0.8) Net gains on financial instruments 10.2 (2.8) 21.8 (8.1) (2.3) Other operating income Net other operating (17.8)

11 income Total income Personnel expenses (15.4) (14.1) (44.6) (38.4) (53.0) (54.4) (49.6) Administrative expenses (6.3) (5.7) (24.5) (18.2) (25.1) (21.7) (21.5) Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets (1.0) (1.2) (3.3) (3.4) (4.6) (3.7) (3.9) Total expenses before loan losses (22.7) (20.9) (72.4) (60.0) (82.7) (79.8) (75.0) Profit before loan losses Net loan losses (7.4) 0 (18.8) (4.0) (31.6) (7.9) (10.3) Profit before tax Income tax expense (22.8) (18.9) (60.1) (54.7) (67.7) (58.2) (45.7) Net profit for the period Total other comprehensive income, net of tax Total profit for the period * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September Selected balance sheet items: In NOK millions As of 30 September As of 31 December ASSETS (unaudited) (unaudited)* (unaudited)* (unaudited)* (unaudited)* Cash and balances with central banks Loans to central banks Loans to and receivables from credit institutions 1, Loans to and receivables from customers 8, , , , ,181.4 Individual impairment on loans to and receivables from customers (31.4) 0 (17.6) 0 (0.8) Group impairment on loans to and receivables from customers (45.7) (30.7) (40.7) (26.7) (18.7) Net loans to customers, central banks and credit institutions 10, , , , ,713.5 Interest bearing securities 3, , , , ,100.1 Shares and mutual funds Financial derivatives Intangible assets Deferred tax assets Property, plant and equipment Other assets Prepaid expenses and accrued income Total assets 13, , , , ,889.8 LIABILITIES 4

12 Due to credit institutions Deposits from and borrowings to customers 7, , , , ,110.1 Debt securities issued 3, , , , ,513.4 Financial derivatives Other liabilities Accrued expenses and prepaid income Subordinated loan capital Total liabilities 11, , , , ,862.4 Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , , , ,027.4 Total liabilities and equity 13, , , , ,889.8 * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September Condensed statement of cash flow: In NOK millions Nine months ended 30 September (unaudited) (unaudited) 2015 (audited) Year ended 31 December 2014 (audited 2013 (audited) Cash flow from Operating activities Interest paid by central banks and credit institutions Receipts/payments of deposits by customers 1,176.5 (916,8) (892.6) 1, Interest paid on deposits by customers (70.8) (139.5) (167.0) (183.7) (170.1) Receipts/payments on loans to customers (976.4) (280.0) (754.9) (53.7) (418.2) Interest received on loans to customers Receipts/payments of deposits by credit institutions (1.4) (1.2) (10.1) (188.0) Interest paid on deposits by credit institutions (0.5) (0.3) (1.0) (0.4) (2.6) Receipts/payments on certificates and bonds (1,207.3) ,106.4 (2,283.6) (120.1) Interest received on certificates and bonds Receipts/payments on shares, mutual fund units and other securities (9.9) (230.5) 50.0 Receipts/payments on securities debt (76.0) Interest paid on securities debt (63.0) (55.4) (71.7) (74.5) (59.9) Receipts/payments on financial derivatives (72.0) (61.1) (72.7) Commission received Commission paid (0.4) (0.3) (0.5) (0.8) (0.8) Payments for operations (64.8) (45.2) (81.6) (56.6) (40.3) 5

13 Tax paid (57.6) (52.3) (83.4) (54.2) (23.1) Cash flow from operating activities (135.1) Investing activities Investments in tangible assets (0.2) (0.0) (0.6) (0.0) (0.1) Sale of tangible assets Investments in intangible assets (1.0) (4.4) (5.4) (4.5) (0.9) Cash flow from investing activities (1.2) (4.4) (6.0) (4.6) (1.1) Financing activities Received on sales of own shares Investment in own shares (0.0) (0.0) (0.0) (0.0) (2.9) New share capital and additional paid-in capital Paid on repayment of subordinated loan capital (124.0) 0.00 Payment received of subordinated loan capital Interest paid, hybrid and subordinated loan capital (11.3) (12.4) (16.0) (16.9) (17.6) Dividend paid 0.0 (25.5) (25.5) (25.5) (25.5) Cash flow from financing activities (37.9) (41.5) 36.5 (46.0) Cash flow for the period (103.2) Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period 1, Changes in cash and cash equivalents (103.2) B.8 Selected key pro forma financial information B.9 Profit forecast or estimate B.10 Qualifications in the audit report on the historical financial information Not applicable. There is no pro forma financial information. Not applicable. No profit forecasts or estimates are made. Not applicable. There are no qualifications in the audit reports. B.11 Working capital The Bank is of the opinion that the working capital available to the Bank is sufficient for the Bank's present requirements and for the period covering at least 12 months from the date of this Prospectus. Section C - Securities C.1 Type and class of securities admitted to trading and identification number The Bank has one class of shares in issue and all shares provide equal rights in the Bank. Each of the Shares carries one vote. The Shares have been created under the Norwegian Public Limited Companies Act and are registered in book-entry form with the VPS and carry the ISIN number NO

14 C.2 Currency The Shares are denominated in NOK. C.3 Number of shares and par value C.4 Rights attached to the securities C.5 Restrictions on free transferability The Bank's current share capital is NOK 623,436,264 divided into 51,953,022 Shares of a nominal value of NOK 12 each. The Bank has one class of shares, and each Share carries one vote and has equal rights to dividend. All the Shares are validly issued and fully paid. All of the Bank's shareholders have equal voting rights. The Articles of Association do not provide for any restrictions on the transfer of Shares, or a right of first refusal upon a transfer of Shares. Share transfers are not subject to approval by the Board of Directors. C.6 Admission to trading On 8 November 2016, the Bank submitted an application for Listing of the Shares on Oslo Børs and a simultaneous delisting from Oslo Axess (a transfer of listing). The Bank's listing application will be considered by the board of directors of Oslo Børs on 6 December C.7 Dividend policy The Board of Directors has adopted a dividend policy according to which the Bank targets a dividend payout ratio of 30 to 50% of the Bank's profit after tax for a given year. The first dividend payout after the Listing is intended to be in 2017 based on the profit after tax for The actual dividend payout ratio will depend on the potential for profitable growth in lending. The dividend payout ratio will normally be in the lower end of the interval when the Bank sees business opportunities with attractive credit margins. Section D - Risks D.1 Key information on the key risks that are specific to the issuer or its industry The key risks relating to the Bank and the industry in which it operates are the following: The Bank is subject to risks relating to changes and the volatility of global and macroeconomic conditions. Changes in economic conditions may have material adverse effects on the Bank's operations, funding and liquidity. The Bank is exposed to credit risk, which is the risk of losses due to the failure of a customer to meet his or her obligations and the collateral not covering the obligations. In addition, concentration risk is the risk of negative development of an entire sector or correlated loans. Adverse changes in the credit quality or behaviour of the Bank's borrowers or other counterparties could reduce the value of the Bank's assets and increase the Bank's write-downs and allowances for impairment losses. The Bank is exposed to risk related to interest rates. The Bank is exposed to variations in funding costs 7

15 and availability of funding. The Bank is exposed to foreign currency risk. The Bank is exposed to credit spread risk. The Bank is exposed to operational risks related to systems and processes and inadequacy in internal control procedures. The Bank relies heavily on IT systems and is exposed to the risk of failure or inadequacy in these systems. The Bank is exposed to risk of information and communication technology crime and such crime may have an adverse effect on the Bank's business, reputation and results of operations. The Bank may not be able to maintain sufficient insurance to cover all risks related to its operations. The Bank is exposed to risk related to money laundering activities and identity fraud. The Bank is exposed to changes in banking and financial services regulations and changes in the interpretation and operation of such regulations. The Bank is subject to regulatory capital adequacy requirements and an increased level of risk could lead to an increase in its capital adequacy requirements. The implementation of EU Banking Recovery and Resolutions Directive may impact the senior debt funding for the Bank. D.3 Key information on the key risks that are specific to the securities The key risks relating to the Rights Issue and Listing Transfer are the following: Existing Shareholders who do not participate in the Rights Issue may experience significant dilution in their shareholding An active trading market in Subscription Rights may not develop on Oslo Axess and/or the market value of the Subscription Rights may fluctuate. The sale of Subscription Rights on behalf of Existing Shareholders who do not take up their Subscription Rights may result in a reduction in the market price of the Subscription Rights and the Shares and increased volatility in the Shares. The price of the Shares could fluctuate significantly based on factors which affect securities markets including changes in general economic conditions or specific factors relating to the Bank's operations such as changes in the 8

16 Bank's actual or projected results of operations. Future issuances of Shares or other securities could dilute the holdings of shareholders and could materially affect the price of the Shares. Investors could be unable to exercise their voting rights for Shares registered in a nominee account. Norwegian law could limit shareholders' ability to bring an action against the Bank. Section E - Offer E.1 The total net proceeds of the Rights Issue and an estimate of the total expenses E.2a Reasons for the Rights Issue and use of proceeds E.3 Terms and conditions of the Rights Issue The Bank will bear the fees and expenses related to the Rights Issue, which are estimated to amount to approximately NOK 2.5 million, for net proceeds of NOK million. The net proceeds from the Rights Issue shall be applied for fulfilling the Bank's T1 and total capital requirements as of 31 December 2016, ensuring capacity for further lending growth and making possible the exercise of the first ordinary call option on the Bank's T1 Hybrid bond NO of NOK 110 million on 29 March Existing Shareholders who are registered in the Bank's shareholder register in the VPS as of the end of 28 November 2016 (the "Record Date") will, in accordance with section 10-4 of the Norwegian Public Limited Companies Act, be granted tradable Subscription Rights which, subject to applicable securities laws, provide for a preferential right to subscribe for and be allocated New Shares in the Rights Issue. The Bank will issue Subscription Rights for each Share registered as held by such Existing Shareholder on the Record Date. The number of Subscription Rights granted to each Existing Shareholder will be rounded down to the nearest whole Subscription Right. Each Subscription Right will, subject to applicable securities laws, give the right to subscribe for and be allocated one (1) New Share in the Rights Issue. Over-subscription is permitted; however, there can be no assurance that New Shares will be allocated for such subscriptions. Subscription without Subscription Rights is not permitted. The subscription price for the New Shares in the Rights Issue has been set at NOK 30 per New Share (the "Subscription Price"). The subscription period for the Rights Issue will commence on 29 November 2016 and end on 13 December 2016 at 16:30 CET (the "Subscription Period"). The Subscription Period will not be shortened or extended. The Subscription Rights may be used to subscribe for New Shares in the Rights Issue before the expiry of the 9

17 Subscription Period on 13 December 2016 at 16:30 CET or alternatively sold before end of trading on Oslo Axess on 9 December 2016 at 16:30 CET. Acquired Subscription Rights will give the same right to subscribe for and be allocated New Shares as Subscription Rights held by Existing Shareholders. The Subscription Rights, including acquired Subscription Rights, must be used to subscribe for New Shares before the end of the Subscription Period (i.e. 13 December 2016 at 16:30 (CET). Subscription Rights which are not sold before end of trading on Oslo Axess on 9 December 2016 at 16:30 CET or exercised before the end of the Subscription Period on 13 December 2016 at 16:30 CET will have no value and will lapse without compensation to the holder. Allocation of the New Shares will take place after the expiry of the Subscription Period on or about 14 December In accordance with the resolution passed by the Extraordinary General Meeting of the Bank on 24 November 2016, the allocation of the New Shares will be made according to the following criteria: (i) Allocation will be made to subscribers on the basis of granted and acquired Subscription Rights which have been validly exercised during the Subscription Period. Existing Shareholders will be granted Subscription Rights for each Share registered as held by such Existing Shareholder as of the end of 28 November 2016 (the "Record Date"), rounded down to the nearest whole Subscription Right. (ii) If not all Subscription Rights are validly exercised in the Subscription Period, subscribers having exercised their Subscription Rights and who have over-subscribed will have the right to be allocated remaining New Shares on a pro rata basis based on the number of Subscription Rights exercised by the subscriber. In the event that pro rata allocation is not possible, the Bank will determine the allocation by lot drawing. (iii) Any remaining New Shares not allocated pursuant to the criteria in items (i) and (ii) will be subscribed by and allocated to the Underwriters to the extent the Underwriters have not fulfilled their underwriting obligations through subscription for shares in the Subscription Period, based on and in accordance with their respective underwriting obligations. Notifications of allocated New Shares and the corresponding subscription amount to be paid by each subscriber are expected to be distributed in a letter by the Manager on or about 14 December The payment for New Shares allocated to a subscriber falls due on 16 December 2016 (the "Payment Date"). 10

18 Payment must be made in accordance with the requirements set out in Section "Payment for the New Shares". For further information on the Rights Issue please refer to Section 16 "The Rights Issue". E.4 Material interests in the Rights Issue The Manager has provided from time to time, and may provide in the future, investment banking services and other services to the Bank in the ordinary course of business, for which it may have received and may continue to receive customary fees and commissions. The Bank also has certain other agreements relating to its ongoing business with the Manager and its affiliated companies as further described in Section 12 "Related Party Transactions". Pareto AS, an affiliate of the Manager, owns 15.18% of the Bank's shares, and employees of Pareto AS or the Manager may currently own shares in the Bank. Further, in connection with the Rights Issue, the Manager, its employees and any affiliates acting as an investor for their own account may receive Subscription Rights (if they are Existing Shareholders) and may exercise their right to take up such Subscription Rights and acquire New Shares, and, in that capacity, may retain, purchase or sell Subscription Rights or New Shares and any other securities of the Bank or other investments for their own account and may offer or sell such securities (or other investments) other than in connection with the Rights Issue. The Manager does not intend to disclose the extent of any such investments or transactions other than in accordance with any legal or regulatory obligation to do so. E.5 Selling shareholders and lock-up agreements There are no selling shareholders in the Rights Issue, nor are there any lock-up restrictions on the New Shares. E.6 Dilution resulting from the Rights Issue The Rights Issue will result in an immediate dilution of % for existing shareholders who do not participate in the Rights Issue. E.7 Estimated expenses charged to investor Not applicable. Expenses related to the Rights Issue will not be charged to the subscribers by the Bank. 11

19 2. RISK FACTORS An investment in the Bank and the Shares involves inherent risks. Before making an investment decision with respect to the Shares, investors should carefully consider the risk factors set forth below and all information contained in this Prospectus, including the Financial Statements and related notes. The risks and uncertainties described in this Section 2 are the principal known risks and uncertainties faced by the Bank as of the date hereof that the Bank believes are relevant to an investment in the Shares. An investment in the Shares is suitable only for investors who understand the risks associated with this type of investment and who can afford to lose all or part of their investment. The absence of negative past experience associated with a given risk factor does not mean that the risks and uncertainties described in that risk factor are not a genuine potential threat to an investment in the Shares. If any of the following risks were to materialise, individually or together with other circumstances, they could have a material and adverse effect on the Bank and/or its business, financial condition, results of operations, cash flows and/or prospects, which could cause a decline in the value and trading price of the Shares, resulting in the loss of all or part of an investment in the Shares. The order in which the risks are presented does not reflect the likelihood of their occurrence or the magnitude of their potential impact on the Bank's business, financial condition, results of operations, cash flows and/or prospects. The risks mentioned herein could materialise individually or cumulatively. The information in this Section 2 is as of the date of this Prospectus. 2.1 Risks related to the business of the Bank and the industry in which the Bank operates The Bank is exposed to economic conditions The global capital and credit markets can be volatile from time to time. This volatility may cause a material adverse effect on the international banking sector's performance and lead to reduced liquidity and increased credit risk premiums for many market participants. The Bank has had good access to domestic capital markets funding, but any recurrence or relapse of the type of volatility, disruption or deterioration in the local/global macroeconomic environment, or a slow and drawn-out recovery from the Norwegian and/or global growth, may have a material adverse effect on the Bank's ability to access capital and/or its business, results of operations and/or financial condition. As the Bank's revenue is derived almost entirely from customers based in Norway, deterioration of macroeconomic conditions in Norway may have a material adverse effect on the Bank's business, results of operations and financial condition. If Gross Domestic Product ("GDP") does not grow at expected levels, or if oil prices decline further, or if unemployment or inflation increases or asset values decrease, businesses and consumers could be adversely affected. In addition to reducing demand for the Bank's products and services, the quality of the Bank's credit portfolio could be adversely affected and the Bank could experience credit losses. The majority of the Bank's lending is within project financing in real estate, shipping and offshore, securities and corporates. A negative macroeconomic development impacting these businesses areas will therefore have a material adverse effect on the Bank's business, results of operations and/or financial condition. Based on the current development in oil prices and the resulting low level of activity in the oil and offshore sector, there is a substantial risk of loan losses in the offshore segments for Norwegian financial enterprises with loan portfolios exposed within these 12

20 segments. Shipping segments are in general cyclical markets, and the risk of loan losses for Norwegian financial enterprises operating within these segments are thus substantial. Housing prices are growing rapidly, in particular in Oslo and the region of South Eastern Norway. This provides the bank with new business from developers who wish to capitalize on strong demand and high prices. There is a risk that the market is entering a speculative bubble, and if so, this may lead to a corresponding rapid fall in housing prices and demand. Although the Bank is not directly exposed to housing price risk this may lead to losses on building projects as well as a reduction in lending volume to this sector The Bank is exposed to credit risk The Bank is exposed to credit risk, which is the risk of losses due to the failure of a customer to meet his or her obligations and the collateral not covering the obligations. In addition, concentration risk is the risk of negative development of an entire sector or correlated loans. Adverse changes in the credit quality or behaviour of the Bank's borrowers or other counterparties could reduce the value of the Bank's assets and increase the Bank's write-downs and allowances for impairment losses. The overall credit quality profile of the Bank's borrowers and other counterparties can be affected by a range of macroeconomic events and other factors, including increased unemployment, reduced asset values, lower consumer spending, increased customer indebtedness, increased interest rates and/or higher default rates. See Section "Risk management" for a further description of the Bank's classification and management of credit risk The Bank is exposed to risk related to interest rates The Bank's business is exposed to risk related to interest rate margins as changes in interest rate spreads may materially affect the interest rate margin realised between lending and borrowing costs. Changes in interest rate spreads may directly impact the Bank to the extent they cause yields on interest-earning assets, and rates paid on interest-bearing liabilities, to change disproportionately or unexpectedly, or otherwise affect the Bank's funding costs. The Bank's main funding cost is interest paid on customer deposits and money market funding, whereas the main interest income comes from customer lending and interest bearing securities. When the timing of spread adjustments does not match, e.g., an increased spread in the funding market is not possible to transfer to customer lending, this can affect income adversely until the next spread adjustment. Changes in interest rates may also affect the values of fixed-rate loans, deposits and derivative instruments. The Bank has policies in place to hedge this interest rate risk. There is also the risk that liquidity in interest rate markets related to the NOK will dry up, making it difficult or impossible to hedge currency risk or settle existing hedges The Bank is exposed to variations in funding costs and availability of funding The Bank is dependent on access to sufficient liquidity on acceptable terms in order to be able to meet its obligations as they fall due. This liquidity risk is inherent in banking operations and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding (including, for example, short-term and overnight funding), changes in credit ratings or market-wide phenomena such as market dislocation and major disasters. Furthermore, the Bank is dependent on sufficient funding in order to carry out its lending business. The Bank's funding requirements are primarily covered through customer deposits. Deposits are subject to fluctuation due to certain factors outside the Bank's control, such as loss of customer confidence and competitive pressures, and as a result, the Bank could experience a significant outflow of deposits within a short period of time. In 13

21 addition, any uncertainty regarding the Bank's financial position may lead to withdrawal of deposits, resulting in a funding deficit for the Bank. Moreover, there may be a reduction in the current Norwegian deposit guarantee scheme due to the EU Directive 2014/749/EC which imposes a harmonised level of deposit guarantees of EUR 100,000 per bank in the event of a bank failure. The current Norwegian guarantee scheme provides for a deposit guarantee corresponding to about EUR , and such a decrease may also lead to withdrawal of deposits. There is a further risk that corporate and institutional counterparties may take measures to reduce their credit exposures to banks, given current and recent risk aversion trends. The Bank's second funding source is senior unsecured debt, mainly from domestic lenders. The market for unsecured senior loans to banks is subject to fluctuation due to certain factors outside the Bank's control, such as loss of investor confidence in the banking sector, competitive pressures, regulatory matters and other macro factors, and as a result, the Bank could experience increased costs and/or limit availability in financing and refinancing opportunities for its senior debt. The Bank's exposure to short-term and overnight funding is limited. However, the Bank does rely from time to time on certain facilities and committed credit. Should these become restricted or available only at a high cost, the Bank may experience difficulty in meeting its obligations. If the Bank has difficulty in securing adequate sources of short- and long-term funding, this could have a material adverse effect on its business, financial condition and/or results of operations The Bank is exposed to foreign currency risk The Bank has a number of loans and deposits in foreign currencies, including but not limited to USD, EUR, SEK, DKK, GBP and CHF. Foreign currency rates in financial markets are volatile and fluctuate rapidly. Changes in currency rates could cause the Bank's assets to decrease or liabilities to increase in value. The Bank has internal policies in place to manage this risk by hedging currency risk in financial markets. There is also the risk that liquidity in currency markets related to the NOK will dry up, making it difficult or impossible to hedge currency risk or settle existing hedges. In addition, currency rate movements will affect the size of the Bank's balance sheet and can therefore increase the Bank's capital requirements The Bank is exposed to credit spread risk The Bank invests the majority of its surplus liquidity in bonds and to a lesser extent in mutual funds. This exposes the Bank to changes in credit spreads. The price of a bond is related directly and inversely to its credit spread, and these credit spreads can fluctuate in the market due to changes in general macroeconomic conditions, issuer-specific conditions, liquidity or market sentiment. The Bank measures and limits its credit spread risk exposure. However, larger changes to credit spreads than anticipated can cause larger than expected losses on these investments. The Norwegian investment grade bond market has until recently been supported by a large number of investment houses providing shadow ratings. Recently, due to regulatory changes, practically all shadow ratings have been discontinued. The lack of such shadow ratings may increase uncertainty and this increase credit spreads. In addition, portfolio managers may need to revise their mandates and potentially sell off bonds without official credit ratings, causing the credit spreads of unrated bonds to increase. 14

22 2.1.7 The Bank is exposed to systemic risk Given the high level of interdependence between financial enterprises, the Bank is and will continue to be subject to the risk of deterioration of the commercial and financial soundness, or perceived soundness, of other financial enterprises. Within the financial services industry, the default of any one enterprise could lead to defaults by other enterprises. Concerns about, or a default by, one enterprise could lead to significant liquidity problems, losses or defaults by other enterprises, because the commercial and financial soundness of many financial enterprises may be closely related as a result of their credit, trading, clearing or other relationships. This risk is sometimes referred to as "systemic risk" and may adversely affect financial intermediaries, such as clearing agencies, clearing houses, banks, securities firms and exchanges with whom certain of the Bank's subsidiaries interact on a daily basis. Systemic risk could have a material adverse effect on the Bank's ability to raise new funding and on its business, financial condition, results of operations, liquidity and/or prospects The Bank is exposed to operational risks related to systems and processes and inadequacy in internal control procedures The Bank depends on a number of operations every day. The success of the Bank depends on its ability to handle and report these operations efficiently and accurately. The Bank is exposed to operational risks such as failure or inadequacies in internal processes and systems (including, but not limited to, financial reporting and risk monitoring processes), equipment, IT infrastructure, documentation of transactions or agreements with third parties, failure to protect material and immaterial assets and employee errors. Further, the Bank may fail to obtain or maintain proper authorisations, or comply with regulatory requirements (including, not limited to, data protection and anti-money laundering regulations). The Bank is also exposed to operational risks due to customer complaints and failure in external systems. In addition, many financial enterprises, including the Bank, may be negatively impacted by fraudulent acts or violations of internal instructions committed by their own employees. The Bank cannot predict whether such instances of internal fraud will occur or, if they were to occur, the extent to which these acts would negatively impact it. There can be no assurance that the risk controls, loss mitigation and other internal controls or actions in place across the Bank will be effective in managing each of the operational risks faced by it. Some of the risk mitigating measures used by the Bank is based on historical information. Future development may significantly differ from observed historical development; there is a risk that such measures are inadequate in predicting future risk exposure. Furthermore, risk management methods may rely on estimates, assumptions and available information that may be incorrect or outdated. If the risk management is insufficient or inadequate, this could have a material adverse effect on the Bank. Should any of the operational risks mentioned above materialise, this could lead to both reputational and financial damage, and could have a material adverse effect on the Bank's business, financial situation, liquidity and/or results of operations The Bank could fail to attract or retain management or other key employees The Bank's success depends on the continued service and performance of its key employees, particularly its senior management, and its ability to attract, retain and develop talent and specialists. Competition for the best employees from within the financial sector, including from other financial enterprises, and from businesses outside the financial services industry, is significant. If the Bank is not able to retain and attract sufficient personnel with the appropriate qualifications, this could have a material adverse effect on the business of the Bank. Furthermore, loss of key personnel and 15

23 management could have a material adverse effect on the continued success of the Bank's business, financial position, results of operations and/or prospects The Bank is exposed to material risks as a result of its operation in competitive markets The Bank operates in niche markets with smaller customers who are to a large degree less attractive to large banks even when they compete in similar markets. The competitive landscape may change. There are a number of new smaller and niche banks starting up, and should any existing or future banks become strong competitors it could result in a smaller market share for the Bank. Also, large banks increase their attention to smaller customers and this would also strengthen competition and threaten the Bank's volumes and business strategy going forward The Bank relies heavily on IT systems and is exposed to the risk of failure or inadequacy in these systems The Bank relies heavily on the uninterrupted operation of its IT systems for the efficient running of its business and operations, and, in particular in order to offer customers an online bank with 24-hour availability. Further, the Bank relies on certain financial infrastructure services that are widely used in the Norwegian financial services market to process payments and transactions. Furthermore, the Bank depends on a few third party providers for the supply of important IT services to the Bank, such as EVRY ASA and Jakob Hatteland Solutions AS. Changes in regulatory or operational requirements may imply material changes to the Bank's current IT systems and could further lead to a change in the systems and solutions provided to the Bank by its third party providers. Despite the contingency plans and facilities that the Bank has in place, its ability to conduct business may be adversely impacted by a disruption in the infrastructure that supports the business of the Bank, some of which are beyond the Bank's control. Any failure, inadequacy, interruption or security failure of those systems, or the failure to seamlessly maintain, upgrade or introduce new systems, could harm the Bank's ability to effectively operate its business and increase its expenses and harm its reputation. There is a risk that customers, as a result of interruptions in the digital bank, terminate their relationship with the Bank. These risks may in turn have a material adverse effect on the Bank's financial condition, results of operations and/or prospects The Bank is exposed to risk of information and communication technology crime and such crime may have an adverse effect on the Bank's business, reputation and results of operations Like other financial enterprises, the Bank's activities have been, and are expected to continue to be, subject to an increasing risk of information and communication technology ("ICT") crime in the form of Trojan attacks and denial of service attacks, the nature of which is continually evolving. Cyber security risks are foremost related to the Bank's internet bank users and include potential unauthorized access to privileged and sensitive customer information, including internet bank credentials as well as account and credit card information. The Bank may experience security breaches or unexpected disruptions to its systems and services in the future, which could in turn, result in liabilities or losses to the Bank, its customers and/or third parties and have an adverse effect on the Bank's business, reputation and results of operations The Bank may not be able to maintain sufficient insurance to cover all risks related to its operations The Bank's business is subject to a number of risks, including, but not limited to fraud, disruption in the infrastructure, human errors, litigation and changes in the regulatory 16

24 environment. Such occurrences could result in financial losses and possible legal liability. Although the Bank seeks to maintain insurance or contractual coverage to protect against certain risks in such amounts as it considers reasonable, its insurance may not cover all the potential risks associated with the Bank's operations, which could have a material and adverse effect on the Bank's business, financial condition, results of operations and/or prospects The Bank is exposed to potential litigation, claims and compliance risks The Bank may in the future become involved in various disputes and legal, administrative and governmental proceedings in Norway and other jurisdictions that potentially could expose the Bank to losses and liabilities The Bank is exposed to risk related to money laundering activities and identity fraud In general, the risk that banks will be subjected to or used for money laundering has increased worldwide. The turnover of employees can create challenges in consistently implementing related policies and technology systems. The risk of future incidents in relation to money laundering always exists for financial enterprises. Any violation of antimoney laundering rules, or even the suggestion of violations, may have severe legal and reputational consequences for the Bank and may, as a result, adversely affect the Bank's business and/or prospects The Bank currently benefits from its close relations with Pareto Securities AS Pareto Bank is financially and operationally independent of Pareto AS and its affiliated companies, including the Norwegian investment firm Pareto Securities AS, (the "Pareto Group"). However, within the securities & corporates and shipping & offshore segments, clients/deals are partly sourced from Pareto Securities AS. The basis of this collaboration is the agreement entered into between Pareto Bank and Pareto Securities on 20 September 2007 which provides the framework for such collaboration. Please refer to Section "Cooperation agreements with Pareto Securities AS" for more information on this agreement. Should the collaboration between Pareto Securities AS and the Bank be brought to a close or be reduced, this may lead to fewer clients and deals within the abovementioned segments and may, as a result, adversely affect the Bank's business. Pareto Securities AS has informed the Bank that their Swedish subsidiary Pareto Securities AB is considering expanding its current securities financing services into the Norwegian retail market, offering standardised securities financing to Pareto Securities AS retail client base. Any such expansion may have significant impact on the Bank s securities financing exposure to the retail segment. 2.2 Risk related to laws and regulations The Bank is exposed to changes in banking and financial services regulations and changes in the interpretation and operation of such regulations The Bank is subject to financial services laws, regulations, administrative actions and policies in Norway. Changes in supervision and regulation in Norway and in the European Union ("EU")/the European Economic Area ("EEA"), could materially affect the Bank's business, the products and services offered or the value of its assets. Future changes in regulation, fiscal or other policies can be unpredictable and are beyond the control of the Bank. Areas where changes or developments in regulation and/or oversight could have a material adverse impact include, but are not limited to (i) changes in monetary, interest rate and other policies, (ii) general changes in government and regulatory policies or regimes which may significantly influence investor decisions or increase the costs of doing business in Norway, (iii) changes in competition and pricing environments, (iv) 17

25 differentiation among financial enterprises with respect to the extension of guarantees to bank deposits and borrowings from customers and the terms attaching to such guarantees, (v) increased financial reporting requirements and (vi) changes in regulations affecting the Bank's current structure of operations. Financial regulators responding to future crisis or other concerns may adopt new or additional regulations, imposing restrictions or limitations on banks' operations, including, but not limited to, increased capital requirements, disclosure and/or reporting standards or restrictions on certain types of transaction structures. Although the Bank works closely with its regulators and continues to monitor the legal framework, future changes in the Norwegian FSA's or other government agencies' interpretation or operation of existing legislation or regulation can be unpredictable and are beyond the control of the Bank. Currently, following the Norwegian Government's proposal for a tax reform which was announced on 7 October 2015, the finance committee of the Norwegian Parliament reached agreement on 4 May 2016 that a new tax will be introduced for the added value of financial services (Norwegian: finansskatt) from A new tax consisting of the two following elements was introduced in the proposed State budget for 2017: (i) Tax at a rate of 5% on the basis for calculation of Norwegian payroll taxes (the tax is proposed to be a deductible item); (ii) No reduction in the applicable income tax rates for entities engaged in financial activities (i.e. the tax rate remains at 25% even though the general income tax rate is proposed to be reduced to 24% in 2017). As of November 2016, it is uncertain if the tax will be introduced, and if so, what the rate and basis for calculation should be. Moreover, the Bank may be affected by the EU proposal concerning decreased level of deposit guarantees. In addition, the proposed new directive 2015/2366 of the European Parliament and of the Council of 25 November 2015 on payment services in the internal market, may lead to increased competition between banks and other payment services providers as the directive requires banks to reformulate their approach to providing secure data access to third parties, and thus it increases the competition between payment service providers because more payment service providers are given access to customers' account information, including funds available. A non-exhaustive overview of the current regulatory framework for the Bank, including the main future developments, is described in Section 7.16 "Regulatory overview" below The Bank is subject to regulatory capital adequacy requirements and an increased level of risk could lead to an increase in its capital adequacy requirements The global financial market turbulence in gave rise to international focus on certain issues identified as contributors to the crisis. This resulted in the Basel III accord and subsequent changes in the European regulatory framework including the new capital adequacy rules known as CRD IV/CRR, that are also implemented in Norway and which the Bank is subject to. These rules entail a step-up in the Tier 1/Tier 2 risk-weighted capital requirement, most of which are in force. The counter-cyclical buffer (maximum 2.5%) is to be re-assessed each quarter; an increase will normally be with 12 months' notice. The new rules also include capital requirement on a non-risk weighted basis to be implemented by The public hearing on the draft regulation on non-risk based leverage ratio and the adherent discussion paper for public comment was completed on 25 August The Norwegian FSA recommends that the implementation of the nonrisk based leverage ratio requirement should be put on hold until the EU legislation is finalized. The effect of these new rules is likely to be more significant to other banks, 18

26 with Internal Ratings-Based ("IRB") assessments and portfolios carrying a low average risk weight. The CRD IV/CRR framework also includes liquidity requirements. The proposed regulation regarding non-risk based leverage ratio has not yet been adopted by the Norwegian Ministry of Finance. Liquidity Coverage Ratio ("LCR") was introduced 2016 onwards, with gradual implementation. An additional Net Stable Funding Ratio ("NSFR") shall be implemented within In addition to these general "Pillar 1" requirements referred to above, CRD IV permits regulators to require additional capital calibrated individually to address the specific risk profile of each bank at any time. The Bank may in the future be subject to further increases in capital and liquidity requirement as well as other regulatory requirements and constraints concerning increased capital requirements pursuant to Pillar 1. Moreover, the Norwegian FSA may impose stricter capital requirements for the Bank pursuant to the specific risks relating to the Bank's operations under the Pillar 2 assessment. Moreover, the Bank is not regarded as a systemic important bank in Norway; however there can be no assurance that the regulator will change its view on the classification. Should the Bank be classified a systemic important bank it will subject to stricter capital requirements. Any such requirements as mentioned above could have material adverse effect on the Bank's financial position and profitability The Bank is subject to the Norwegian provisions on ownership control Pursuant to the Norwegian Act on Financial Enterprises and Financial Groups of 10 April 2015 No. 17 ("FEA"), acquisition of qualifying holdings in a financial enterprise is subject to prior approval by the Norwegian Ministry of Finance or the Norwegian FSA. A qualifying holding is a holding that represents 10% or more of the capital or voting rights in a financial enterprise or allows for the exercise of significant influence on the management of the enterprise and its business. Approval may only be granted if the acquirer is considered appropriate according to specific non-discriminatory tests described in the FEA (the so-called "fit and proper" test). Any person intending to acquire 10% or more of the capital or voting rights of the Bank, must be explicitly approved as applicable by the Norwegian FSA and/or the Norwegian Ministry of Finance, before the transaction can be carried through. Such persons run a risk that their application for approval is denied or that Norwegian authorities impose unfavourable conditions related to an approval. Further details on the Norwegian rules on ownership control in financial enterprises are provided for in Section 7.16 "Regulatory overview" The share capital of the Bank may be written down by the Bank's shareholders or the Norwegian authorities under the Act on Financial Enterprises and Financial Groups The share capital of the Bank may be written down by the shareholders of the Bank or by the Norwegian authorities pursuant to powers granted to them under Chapter 21 of the Act on Financial Enterprises and Financial Groups (FEA). Further details on FEA are provided in Section 7.16 "Regulatory overview" The implementation of BRRD may impact the senior debt funding for the Bank It is expected that the implementation of the EU Banking Recovery and Resolutions Directive ("BRRD") will impact the senior debt funding for banks and lead to added regulatory requirements on a number of banks. BRRD requires banks to draw up recovery and resolution plans to be scrutinised by regulators, and introduces inter alia the bail-in tool here after the regulators can affect a write-off of unsecured senior debt or conversion into equity in a financial distress scenario. BRRD is expected to be implemented in Norway in

27 It is expected that BRRD will increase cost of unsecured senior bank debt, in particular as comparted to secured debt exempted from bail-in. Consequently, under BRRD, any perceived uncertainty regarding a bank's financial position may significantly limit its access to senior debt funding. Thus, the Bank may be subject to increased costs of unsecured senior bank debt in the future and this may adversely affect the Bank's access to senior debt funding The implementation of the EU Market Abuse Regulations may lead withholding of information to the public in certain distress scenarios The EU Regulation No. 596/2014 of European Parliament and of the Council of 16 April 2014 on market abuse ("MAR"), which is expected to be implemented in Norway in 2017, increases the risk for holders of listed shares and bonds issued by banks, providing for an exemption from ordinary disclosure requirements for listed companies. The new rules allow banks to withhold information on a distress scenario, even where this delay of disclosure is likely to mislead the public. The relevant MAR rule provides that, in order to preserve the stability of the financial system, an issuer that is a credit institution or a financial enterprise, may, on its own responsibility, delay public disclosure of inside information, including information which is related to a temporary liquidity problem and, in particular, the need to receive temporary liquidity assistance from a central bank or lender of last resort, provided certain conditions are met, including that disclosure entails a risk of undermining the financial stability of the issuer and of the financial system. The Bank is not regarded as a systemic important bank in Norway but there can be no assurance that regulators will limit this exemption to such banks in light of the interlinks among banks The Bank is exposed to changes in tax or VAT laws and regulations and changes in the interpretation and operation of such regulations The Bank is subject to Norwegian laws and regulations regarding tax and VAT. Future actions by the Norwegian government to change the tax or VAT laws or regulations, to increase tax or VAT rates or to impose additional taxes or duties, such as a new tax on financial services which is currently being discussed by the Norwegian government, might reduce the Bank's profitability. Further, changes in the interpretation of tax or VAT legislation as well as differences in opinion between the Bank and Norwegian tax authorities with respect to the interpretation of relevant legislation or regulations might also adversely affect the Bank's business. There can be no assurance that any change in tax or VAT legislation or the interpretation of tax and VAT legislation will not have a retroactive effect. Any such event might have a material adverse effect on the Bank's business, financial situation, results of operations, liquidity and/or prospects. 2.3 Risk relating to the Rights Issue and Listing Transfer Existing Shareholders who do not participate in the Rights Issue may experience significant dilution in their shareholding Subscription Rights that are not exercised by the end of the Subscription Period will automatically expire without compensation to the holder. To the extent that an Existing Shareholder does not exercise its Subscription Rights prior to the expiry of the Subscription Period, whether by choice or due to a failure to comply with procedures set forth in Section 16 "The Rights Issue", or to the extent that an Existing Shareholder is not permitted to subscribe for New Shares as further described in Section 16 "The Rights Issue" and Section 18 "Selling and Transfer Restrictions", such Existing Shareholders proportionate ownership and voting interests in the Bank after the completion of the Rights Issue will be diluted. Even if an Existing Shareholder elects to sell its unexercised Subscription Rights, or such Subscription Rights are sold on its behalf, the consideration it receives on the trading market for the Subscription Rights may not reflect the immediate dilution in its shareholding as a result of the completion of the Rights Issue. 20

28 2.3.2 An active trading market in Subscription Rights may not develop on Oslo Axess and/or the market value of the Subscription Rights may fluctuate. An active trading market in the Subscription Rights may not develop on Oslo Axess. In addition, because the trading price of the Subscription Rights depends on the trading price of the Shares, the price of the Subscription Rights may be volatile and subject to the same risks as described for the Shares in the below risk factors. The existing volatility of the Shares may also have an effect on the volatility of the Subscription Rights The sale of Subscription Rights on behalf of Existing Shareholders who do not take up their Subscription Rights may result in a reduction in the market price of the Subscription Rights and the Shares and increased volatility in the Shares. Certain Existing Shareholders will be unable to take up and exercise their Subscription Rights as a matter of applicable law. The Subscription Rights of such Existing Shareholders, with the exception of Subscription Rights held through financial intermediaries, will, to the extent possible, be sold on their behalf in the market by the Manager pursuant to instructions from the Bank, but no assurance can be given as to whether such sales may actually take place or as to the price that may be achieved. Other Existing Shareholders may also choose not to exercise their Subscription Rights and therefore sell them in the market. The sale of Subscription Rights by or on behalf of Existing Shareholders could cause significant downward pressure on, and may result in a substantial reduction in, the price of the Subscription Rights and the Shares The price of the Shares could fluctuate significantly The trading volume and price of the Shares could fluctuate significantly. Securities markets in general have been volatile in the past. Some of the factors that could negatively affect the price of the Shares or result in fluctuations in the price or trading volume of the Shares include, for example, changes in the Bank's actual or projected results of operations or those of its competitors, changes in earnings projections or failure to meet investors' and analysts' earnings expectations, investors' evaluations of the success and effects of the strategy described in this Prospectus, as well as the evaluation of the related risks, changes in general economic conditions, changes in consumer preferences, changes in shareholders and other factors. This volatility has had a significant impact on the market price of securities issued by many companies. Those changes may occur without regard to the operating performance of these companies. The price of the Shares may therefore fluctuate based upon factors that have little or nothing to do with the Bank, and these fluctuations may materially affect the price of the Shares Future issuances of Shares or other securities could dilute the holdings of shareholders and could materially affect the price of the Shares The Bank may in the future decide to offer additional Shares or other securities in order to finance new capital-intensive projects, in connection with unanticipated liabilities or expenses or for any other purposes. There is no assurance that the Bank will not decide to conduct further offerings of securities in the future. Depending on the structure of any future offering, certain existing shareholders may not have the ability to subscribe for or purchase additional equity securities. If the Bank raises additional funds by issuing additional equity securities, holdings and voting interests of existing shareholders could be diluted Investors could be unable to exercise their voting rights for Shares registered in a nominee account Beneficial owners of the Shares registered in a nominee account (through brokers, dealers or other third parties) could be unable to vote for such Shares unless their ownership is re-registered in their names with the VPS prior to any General Meeting. 21

29 There is no assurance that beneficial owners of the Shares will receive the notice of any General Meeting in time to instruct their nominees to either effect a re-registration of their Shares or otherwise vote their Shares in the manner desired by such beneficial owners Norwegian law could limit shareholders' ability to bring an action against the Bank The Bank is a public limited company organised under the laws of Norway. The members of the Bank's Board of Directors and Management reside in Norway. As a result, it may not be possible for investors to effect service of process in other jurisdictions upon such persons or the Bank, to enforce against such persons or the Bank judgments obtained in non-norwegian courts, or to enforce judgments on such persons or the Bank in other jurisdictions Exchange rate fluctuations could adversely affect the value of the Shares and any dividends paid on the Shares for an investor whose principal currency is not NOK The Shares are priced and traded in NOK on Oslo Axess and will be so on Oslo Børs and any future payments of dividends on the Shares will be denominated in NOK. Exchange rate movements of NOK will therefore affect the value of these dividends and distributions for investors whose principal currency is not NOK. Further, the market value of the Shares as expressed in foreign currencies will fluctuate in part as a result of foreign exchange fluctuations. This could affect the value of the Shares and of any dividends paid on the Shares for an investor whose principal currency is not NOK Market interest rates could influence the price of the Shares One of the factors that could influence the price of the Shares is its annual dividend yield as compared to yields on other financial instruments. Thus, an increase in market interest rates will result in higher yields on other financial instruments, which could adversely affect the price of the Shares. 22

30 3. RESPONSIBILITY FOR THE PROSPECTUS This Prospectus has been prepared in connection with the Rights Issue and the transfer of the listing of the Shares from Oslo Axess to Oslo Børs (the Listing Transfer). The Board of Directors of Pareto Bank ASA accepts responsibility for the information contained in this Prospectus. The members of the Board of Directors confirm that, after having taken all reasonable care to ensure that such is the case, the information contained in this Prospectus is, to the best of their knowledge, in accordance with the facts and contains no omission likely to affect its import. 28 November, 2016 The Board of Directors of Pareto Bank ASA Åsmund Skår Chairman Brita Eilertsen Deputy Chairman Camilla Wahl Board member Carl Erik Steen Board member Lena Krog Board member (employee elected) 23

31 4. PRESENTATION OF INFORMATION 4.1 Date of information The information contained in this Prospectus is current as at the date of the Prospectus and is subject to change or amendment without notice. In accordance with section 7-15 of the Norwegian Securities Trading Act, significant new factors, material mistakes or inaccuracies relating to the information included in this Prospectus, which are capable of affecting the assessment of the Shares between the time of approval of this Prospectus by the Norwegian FSA and the Rights Issue/Listing Transfer, will be included in a supplement to this Prospectus. Except as required by applicable law and stock exchange rules the Bank does not undertake any duty to update the information in this Prospectus. The publication of this Prospectus shall not under any circumstances create any implication that there has been no change in the Bank's affairs or that the information herein is correct as of any date subsequent to the date of this Prospectus. 4.2 Presentation of financial information The Bank's audited financial statements as of, and for the years ended, 31 December 2015, 2014 and 2013 have been prepared in accordance with the International Financial Reporting Standards, as adopted by the EU ("IFRS"). The Bank's audited financial statements as of, and for the years ended, 31 December 2015, 2014 and 2013 are together referred to as the "Annual Financial Statements". The Bank's unaudited interim financial statements as of, and for the three month and nine month period ended, 30 September 2016 (the "Interim Financial Statements"), have been prepared in accordance with International Accounting Standard 34 Financial Reports ("IAS 34"). The Annual Financial Statements and Interim Financial Statements are together referred to as the "Financial Statements". The Financial Statements are incorporated by reference in this Prospectus; see Section 19.1 "Incorporation by reference". The Annual Financial Statements have been audited by PricewaterhouseCoopers AS, as set forth in their auditor's report included together with the Annual Financial Statements. With effect from 1 January 2016, the Bank has reclassified its two perpetual subordinated loans amounting to approximately NOK 160 million in the balance sheet from long term debt to shareholders' equity. Furthermore, Pareto Bank has changed its accounting policy relating to the guarantee fund levy charged from the Norwegian FSA. Previously this levy has been accrued over the year, while the Bank with effect from January 1, 2016 has recognized this in its entirety for Q See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September 2016 for further details regarding these two changes. The Bank presents the Financial Statements in NOK (presentation currency). 4.3 Rounding Percentages and certain amounts included in this Prospectus have been rounded for ease of presentation. Accordingly, figures shown as totals in certain tables may not be the precise sum of the figures that precede them. 4.4 Industry and market data This Prospectus contains statistics, data, statements and other information relating to markets, market sizes, market shares, market positions and other industry data pertaining to the Bank's business and the industries and markets in which it operates. Unless otherwise indicated, such information reflects the Bank's estimates based on analysis of multiple sources, including data compiled by professional organisations, consultants and analysts and information otherwise obtained from other third party sources, such as annual and interim financial statements and other presentations published by listed companies operating within the same industry as the Bank, as well as 24

32 the Bank's internal data and its own experience, or on a combination of the foregoing. Unless otherwise indicated in the Prospectus, the basis for any statements regarding the Bank's competitive position is based on the Bank's own assessment and knowledge of the market in which it operates. The Bank confirms that where information has been sourced from a third party, such information has been accurately reproduced and that as far as the Bank is aware and is able to ascertain from information published by that third party, no facts have been omitted that would render the reproduced information inaccurate or misleading. Where information sourced from third parties has been presented, the source of such information has been identified. The Bank does not intend, and does not assume any obligations to, update industry or market data set forth in this Prospectus. Industry publications or reports generally state that the information they contain has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. The Bank has not independently verified and cannot give any assurances as to the accuracy of market data contained in this Prospectus that was extracted from these industry publications or reports and reproduced herein. Market data and statistics are inherently predictive and subject to uncertainty and not necessarily reflective of actual market conditions. Such statistics are based on market research, which itself is based on sampling and subjective judgments by both the researchers and the respondents, including judgments about what types of products and transactions should be included in the relevant market. As a result, prospective investors should be aware that statistics, data, statements and other information relating to markets, market sizes, market shares, market positions and other industry data in this Prospectus and projections, assumptions and estimates based on such information may not be reliable indicators of the Bank's future performance and the future performance of the industry in which it operates. Such indicators are necessarily subject to a high degree of uncertainty and risk due to the limitations described above and to a variety of other factors, including those described in Section 2 "Risk Factors" and elsewhere in this Prospectus. 4.5 Forward-looking statements This Prospectus contains forward-looking statements. All statements contained in this Prospectus other than statements of historical fact, including statements regarding the Bank's future results of operations and financial position, its business strategy and plans, and its objectives for future operations, are forward-looking statements. The words "believe", "may", "will", "estimate," "continue", "anticipate", "intend", "expect", and similar expressions are intended to identify forward-looking statements. The Bank has based these forward-looking statements largely on its current expectations and projections about future events and trends that it believes may affect its financial condition, results of operations, business strategy, short-term and long-term business operations and objectives, and financial needs. Forward-looking statements are subject to a number of risks and uncertainties, including those described in Section 2 "Risk Factors", and are based on numerous assumptions regarding the Bank's present and future business strategies and the environment in which the Bank operates. The actual results, performance or achievements of the Bank may differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. Although the Bank believes that the expectations reflected in the forward-looking statements are reasonable, it cannot guarantee future results, levels of activity, performance, or achievements. Given these uncertainties, investors should not rely upon forward-looking statements as predictions of future events or performance. Except as required by the applicable law or stock exchange rules, the Bank does not intend, and expressly disclaims any obligation or undertaking, to update any of these forward-looking statements after the date of this Prospectus or to conform these 25

33 statements to actual results or revised expectations. Forward-looking statements are found in Sections 6 "Industry and Market", 7 "Business", 10 "Operating and financial review", 11 "Board of Directors, Management, employees and corporate governance" and 13 "Corporate information and description of the share capital". 26

34 5. DIVIDENDS AND DIVIDEND POLICY 5.1 Dividend policy The Board of Directors has adopted a dividend policy according to which the Bank targets a dividend payout ratio of 30 to 50% of the Bank's profit after tax for a given year. The first dividend payout after the Listing is intended to be in 2017 based on the profit after tax for The actual dividend payout ratio will depend on the potential for profitable growth in lending. The dividend payout ratio will normally be in the lower end of the interval when the Bank sees business opportunities with attractive credit margins. The targeted dividend payout ratio is based on the current regulatory capital requirements. Future changes regarding regulatory capital requirements could affect the Bank's dividend target. When determining whether to propose a dividend and the actual dividend amount, the Board of Directors will take into account the Bank's capital adequacy requirements (see Section 7.16 "Regulatory overview" and Section 10.8 "Capital Base and Capital Adequacy") as well as any applicable legal restrictions as set out in the Norwegian Public Limited Companies Act (see Section 5.3 "Legal constraints on the distribution of dividends"). There can be no assurance that a dividend will be proposed or declared in any given year. If a dividend is proposed or declared, there can be no assurance that the dividend amount or yield will be as contemplated above. 5.2 Dividend payouts Below is a table showing the dividend payouts in the financial years ended 31 December 2015, 2014 and 2013: Dividends million) (NOK Dividends per Share Legal constraints on the distribution of dividends The Norwegian Public Limited Liability Companies Act provides several constraints on the distribution of dividends: Dividend may only be distributed to the extent that the Bank after the distribution has a sound equity and liquidity. The Bank may only distribute dividends to the extent that its net assets following the distribution are at least equal to the sum of (i) the Bank's share capital, (ii) the reserve for valuation differences and (iii) the reserve for unrealised gains. In determining the distribution capacity, deductions must be made for (i) the aggregate amount of any receivables held by the Bank and dating from before the balance sheet date which are secured by a pledge over Shares in the Bank, (ii) any credit and collateral etc. from before the balance sheet date which according to sections 8-7 to 8-10 of the Norwegian Public Limited Liability Companies Act must not exceed the Bank's distributable equity (unless such credit has been repaid or is set-off against the dividend or such collateral has been released prior to the decision to distribute the dividend), (iii) other dispositions carried out after the balance sheet date which pursuant to law must not exceed the Bank's distributable 27

35 equity and (iv) any amount distributed after the balance sheet date through a capital reduction. The calculation of the distributable equity shall be made on the basis of the balance sheet in the Bank's last approved annual accounts, provided, however, that the registered share capital as of the date of the resolution to distribute dividends shall apply. Dividends may also be distributed by the general meeting based on an interim balance sheet which has been prepared and audited in accordance with the provisions applying to the annual accounts and with a balance sheet date which does not lie further back in time than six months before the date of the general meeting's resolution. The Bank is subject to capital adequacy requirements as described in Section 7.16 "Regulatory overview" and Section 10.8 "Capital base and capital adequacy". Pursuant to the FEA, the Bank cannot distribute dividends which would lead to the Bank being in breach of applicable capital adequacy requirements. The Norwegian Public Limited Companies Act does not provide for any time limit after which entitlement to dividends lapses. Subject to various exceptions, Norwegian law provides a limitation period of three years from the date on which an obligation is due. There are no dividend restrictions or specific procedures for non-norwegian resident shareholders to claim dividends. For a description of withholding tax on dividends applicable to non-norwegian residents, see Section 15 "Taxation". 5.4 Manner of dividend payments Any future payments of dividends on the Shares will be denominated in NOK, and will be paid to the shareholders through the VPS. Investors registered in the VPS whose address is outside Norway and who have not supplied the VPS with details of any NOK account, will, however, receive dividends by check in their local currency, as exchanged from the NOK amount distributed through the VPS. If it is not practical in the sole opinion of DNB, being the Bank's VPS registrar, to issue a check in a local currency, a check will be issued in USD. The issuing and mailing of checks will be executed in accordance with the standard procedures of DNB. The exchange rate(s) that is applied will be DNB's rate on the date of the distribution of dividend. Dividends will be credited automatically to the VPS registered shareholders' NOK accounts, or in lieu of such registered NOK account, by check, without the need for shareholders to present documentation proving their ownership of the Shares. 28

36 6. INDUSTRY AND MARKET The following is a brief overview of the Norwegian banking sector, including Pareto Bank's chosen niches, their history and key drivers. The analysis is based on figures, reports and information provided by the Central Bank of Norway ("Norges Bank"), the Financial Supervisory Authority of Norway (the "Norwegian FSA"), Statistics Norway ("SSB"), the Norwegian Finance Association ("NFA"), the International Monetary Fund ("IMF") as well as other relevant sources. 6.1 Market overview The Norwegian banking sector has been through significant changes over the last decades. Increasing market integration, stricter regulatory requirements, accelerating technological developments and volatile macroeconomic surroundings are some of the main forces for the on-going changes in the financial markets. Mergers, acquisitions and alliances have been high on the agenda and in the Nordics cross-border initiatives have been in focus. The lion's share of Norway's banking sector consists of well-established conventional commercial banks and savings banks, however, in recent years several new banks have also flourished. Together with Pareto Bank banks such as Bank2, ya Bank, Gjensidige Bank, Bank Norwegian, KLP Banken, OBOS Banken, Komplett Bank and Monobank have all been established over the previous decade. 1 Although the number of operating banks around the country is large, the market is concentrated with a few large banks enjoying significant market share. Measured by total assets, the four banks DNB, Nordea, Danske Bank and Handelsbanken constitute almost 70% of the combined market. 2 While most of the commercial banks have a nationwide presence, the savings banks traditionally focus on their home regions. Within project financing and securities backed lending, Pareto Bank's chosen niches, services are offered by several banks (see Section 7.6 "Competitive landscape"). However, few banks have so far had these areas as the main focus of their product offering. Pareto Bank believes there is a market opportunity for a fast, flexible and professional player with tailored made solutions focusing solely on these niches. 6.2 Norwegian economic overview In the following section recent trends and forecasts in selected economic indicators in the Norwegian economy will be addressed. Including, inter alia, the development in key national accounts, total outstanding debt, household consumption, GDP, unemployment, inflation, oil and housing prices as well as fiscal and monetary policies. In short, the long-term outlook in Norway seems to be one of firmer economic growth and satisfactory financial stability after a temporary cyclical downturn in 2015/2016 initiated by a sharp fall in the oil price and thus also petroleum investment. Given the size of the petroleum and supplier industries in the country one might initially have expected the economic downturn to be more pronounced. However, because of Norway's relatively low dependence on governmental oil money spending, which again is due to the restrictive fiscal rule and regulatory framework around the Government Pension Fund Global, the authorities are able to meet the downturn with an expansionary fiscal and monetary policy. Due to the latter the credit appetite and debt servicing capability of both households and enterprises are maintained and this will support the financial industry in Norway. 1 "Nye banker, fusjoner, navneendringer, opphør", Finans Norge, 2 November "Markedsandeler - forvaltningskapital" & "Sparebankenes årsregnskaper" & "Forretningsbankenes årsregnskaper", Finans Norge, 2 November

37 The following figures demonstrate the safe haven status of Norway given its high government surplus and low debt, as well as Norwegian credit growth (shown here as K2, an indicator for total domestic credit in NOK and foreign currency): 3 Net government debt (% of GDP) Spain Sweden Denmark UK Germany Norway K2 (NOKbn) 5,000 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1,000 CAGR: 8.5% 100 France Italy Government deficit (% of GDP) Q3-16 The following table shows key metrics and estimates for the Norwegian economy: 4 Key metrics and estimates Type '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16E '17E '18E '19E Household consumption growth (%) Norwegian GDP growth (%) Mainland Norway GDP growth (%) Unemployment rate level (%) Consumer price index CPI (%) Consumer price index ATE* CPI (%) Housing prices growth (%) Money market rate level (%) Avg. Brent Blend oil price level (NOK) * CPI adjusted for tax changes and excluding energy products Operating risks in Norway are limited, thanks to highly stable political and macroeconomic conditions. The governmental system is effective, providing high-quality services and facilitating superb conditions for both the public and private business sectors. Both the government and the central bank follow well-established, credible guidelines for implementing fiscal and monetary policy, which again results in effective and good-quality policymaking. The national economy is robust, sustained by strong domestic demand, high productivity levels and the North Sea offshore oil and gas sector. The government will continue to save the abundant proceeds of hydrocarbons revenue in the Government Pension Fund Global, spending it gradually on public welfare and investing according to predefined and strict fiscal guidelines. Despite a historic tendency to somewhat overspend the oil wealth, Norway's macroeconomic fundamentals are undoubtedly solid. Norway can be considered as a "safe haven" compared to its neighbouring countries and European peers going forward. The credit appetite in Norway, illustrated by the credit indicator (K2), has grown with an annual compounded growth rate of 8.5% from 2004 to In September 2016 the total outstanding loan balance was NOK 5,086 billion, more than 2.5 times the outstanding amount in The growth is expected to continue due to a relatively low 3 "World Economic Outlook Database October 2015", IMF, 7 April 2016 & "The credit indicator C2, March 2016", SSB, 1 November "Norwegian economy - Economic Survey ", SSB, 1 November

38 average debt burden compared to peers together with a sustained strong debt servicing capability going forward. As mentioned before, the macroeconomic conditions in Norway are expected to stabilize in the years to come compared to the current situation. The following is a summary of SSB's updated view on the Norwegian economy (through selected macroeconomic indicators) published in November 2016: 5 Petroleum Industry & Oil Price: Since Norway discovered oil in the North Sea on Christmas Eve in 1969, the petroleum industry and its relating service industries have been an integral part of the Norwegian economy. The operational and financial development in the latter mentioned sector is thus an important driver of economic activity in the country. Petroleum investment on the Norwegian Continental Shelf ("NCS") started falling in the fourth quarter of 2013, and by the fourth quarter of 2015 it had dropped by 27%. This development was initially a reaction to the high cost level and relatively poor profitability, and was exacerbated by a sharp fall in the oil price. From a level of around USD 110 per barrel which lasted up to the summer of 2014, the price of oil fell in several rounds, bottoming out in mid-january 2016, when the price was well under USD 30 per barrel. The price has since stabilized at around USD per barrel. The record low oil price and corresponding drop in new investment on the NCS have initiated a cyclical downturn in the Norwegian economy. The direct impact of this development is currently highly regional, being the strongest in the southern and western parts of Norway which have the highest level of exposure depending on petroleum related markets. SSB expects the oil price to continue to decline throughout 2016 before improving and reaching NOK 485 per barrel in The oil sector will remain an important part of the Norwegian economy for some decades to come, but investments are unlikely to reach the same level of importance as before. Monetary & Fiscal Policy: The oil price fall has without doubt had a negative impact on the Norwegian economy. However, the effects on the overall economic activity level have been relatively limited, viewed in light of the major negative earnings shock implied by such a large fall in prices for Norway's most important export product. The reason for the latter is that authorities have been able to meet the downturn with an expansionary fiscal and monetary policy, meaning predominantly low and steadily declining interest rates, increased spending over government budgets and targeted tax reliefs. These tools are available in the war chest due to Norway's self-imposed strict fiscal rule and regulatory framework in connection with the Government Pension Fund Global which have ensured disciplined historical use of income generated by petroleum activities. The central bank signal rate was cut to 0.5% in March 6, which is its lowest level in history. Since then, the Central Bank has indicated that rates will remain low for the coming years. NOK exchange rate: Lower interest rates coupled with the decline in oil prices have led to a NOK depreciation of almost 30% from the peak of its strength in early 2013 to the end of This 5 "Norwegian economy - Economic Survey ", SSB, 1 November Norges Bank, Press Release 17 March

39 means a strong improvement in cost-competitiveness, which in turn eases the situation for all Norwegian businesses with international exposure. In other words, imports are curbed and exports are boosted. SSB expects this effect to be temporary because the NOK will likely gradually appreciate as a consequence of money market rate normalising and oil price recovering in the years to come. Unemployment: There has been a pronounced rise in unemployment in Southern and Western Norway due to its exposure towards the petroleum industry, while the rise in unemployment has been more moderate or totally absent so far in other parts of the country. The effects will however most likely spread gradually. According to the labor force survey (LFS) carried out by SSB, the unemployment rate in the Norwegian labor market has ranged from 2.5% to 4.6% in the period from 2004 to Going forward, SSB expects that the labour market will weaken, as the unemployment rate is expected to reach 4.7% in 2016, before declining to 4.3% in Housing Prices: The Norwegian housing market has developed strongly since the financial crisis, with a year-on-year growth in housing prices ranging from 2.7% to 8.3% in the period from 2010 to The current interest rate situation has helped to stimulate the housing market despite the cyclical downturn. Going forward, SSB expects that housing prices will continue to increase, with a year-onyear growth ranging from 2.5% to 7.1% in the period from 2016 to Household purchasing power: Household consumption growth was predominantly above 5% before it took a hit during the financial crisis in 2008/09. Since then it has averaged around 2.5%. Household real disposable income increased by 2.3% in Despite declining interest rates and a high rise in house prices, household consumption increased by only 2.0% after a relatively steady trend through the year. Increased uncertainty about own income developments due to the relatively high unemployment is a factor that has probably prompted the increase in saving, from 8.8% of income in 2014 to 9.4% in SSB expects household consumption growth to remain relatively low, under 3%, in the years to come due to the slow recovery from the current downturn. Inflation: Inflation measured by the consumer price index ("CPI") was 2.1% in 2015, which is in line with previous years. Underlying inflation, measured by the consumer price index adjusted for tax changes and excluding energy products ("CPI-ATE") has risen markedly for the past four years, from 0.9% in 2011 to 2.7% in The rise in the CPI-ATE over the last three years can be attributed to the depreciation of the krone. The recent fall in oil prices together with the gradual decline in electricity prices have led to the CPI increasing appreciably less than the CPI-ATE. The overall CPI is expected to have minor fluctuations around its policy inflation target of 2.5% going forward. Gross Domestic Product (GDP): Over the recent decades Norway has experienced an incredible economic growth. If the burst of the "IT bubble" in 2001/2002 and the financial crisis in 2008/2009 are excluded, 32

40 Norway's GDP has increased consecutively year after year. In the period after 2009 both overall and mainland GDP growth have lagged behind pre-crisis levels due to several smaller global downturns such as the sovereign debt crisis in Europe and the current oil price decline. However, in a weak cyclical upturn is expected to materialize. 6.3 Niche Markets The following sections give an overview of trends and statistics from the Bank's niche markets Real Estate Market The following chart shows house building loans and other building loans issued by Norwegian banks: 7 Issued loans (NOKm) 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q The following graph shows the price index for new dwellings in Norway: 8 The following chart shows registered building permissions last 12 months in Norway: 9 7 "Banks and mortgage companies", SSB, 7 October "Price index for new dwellings, Q2 2016", SSB, 20 September

41 # of dwellings 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q Oslo + Akershus Vestfold + Østfold + Buskerud Rest of Norway The real estate project finance market in Norway, measured in total outstanding house building loans, was NOK 72.0 billion in Q Over the past five years ( ) this market has grown by more than 10% per year from NOK 41.3 billion at year-end The majority of outstanding house building loans are towards the corporate sector. One of the main drivers in the real estate project finance market is the price of new dwellings. The latter has been steadily increasing over the past couple of years. The prices for both detached and multi-dwelling housing have grown almost 5% per year since The underlying reasons for this development are inter alia a shortage of supply in urban areas, due to urbanization and immigration, as well as increased household buying power, due to improved ability to service debt through low general unemployment and record low mortgage interest rates. As a result of the favorable macroeconomic climate for new real estate the number of initiated dwelling projects in Norway has grown from 19,576 in 2009 to 30,927 in 2015, or almost 8% per year. Between September 2015 and September 2016 more than 35,000 projects were initiated. The activity in Pareto Bank's core market, namely Oslo, Akershus, Buskerud, Østfold and Vestfold, has been higher than for the country as a whole with a growth of more than 11% per year since Between September 2015 and September 2016, 14,993 new dwellings were initiated in the Bank's core market, or 43% of total activity in Norway. It is expected that the advantageous real estate environment observed in Norway over the last 5-6 years will endure. This will ensure continued growth in the corresponding credit market which is favorable for Pareto Bank. 9 "Building statistics, Q3 2016", SSB, 3 November

42 6.3.2 Securities backed lending market The following charts show loans backed by securities in Norway: 10 The following chart shows turnover on Oslo Børs: 11 Issued loans (NOKm) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2, Q2-16 Turnover (NOKbn) 2,000 1,800 1,600 1,400 1,200 1, YTD The Norwegian FSA has since 2013 collected data regarding the securities backed lending market in Norway through its ORBOF reporting framework. The latter is a collaboration between SSB, Norges Bank and the Norwegian FSA. As of Q2 2016, the total market measured NOK 14.4 billion, almost 14% from NOK 12.7 billion in Q The market has historically consisted mainly of structured products, however in recent years gearing of securities trading has become increasingly important. Trading activity actually increased in the years following the financial crisis. However, trade volumes have come down somewhat in the following years. Volumes are still considered high in a historical perspective. In 2015, the turnover was NOK 1,155 billion, up 16% per year since The high turnover on Oslo Børs is expected to continue which supports further securities backed lending growth. YTD 2016 the turnover amounted to NOK 777 billion Shipping Market The global shipping market is diverse and consists of several separate submarkets such as bulk, container, tank, product, gas carriers, PCTC and chemical. Each market has its own specific characteristics and some may be procyclical while others may be countercyclical. Dry bulk shipping is experiencing a challenging market. The Baltic Dry Index hit historical low levels in February Rates for the biggest ships fell the most and were considerably below Operating Expenses ("OPEX"). 13 The negative sentiment has increased demolition and lay-up. Due to firm shipment of iron ore out of Brazil and Australia recently, rates and vessel values have rebounded from all time low in February. The lower earnings in the segment are in a large part due to a fall in Chinese imports of 10 "ORBOF - Rapport 11 - Tilleggsspesifikasjoner ", from Kaia Solli in Finanstilsynet, 3 November "Main Operational Figures - Oslo Børs 3Q 2016", Oslo Børs VPS Holding, 7 October Bloomberg BDIY index graph, accessed 25 April Pareto Securities AS Equity Reseach, Shipping Weekly 4 April

43 coal and iron ore. 14 The Bank assesses that the balance of supply as well as potential consumption growth in China will be factors affecting rates going forward. The container market is largely linked to retail sales and durable item sales such as appliances. Major container trade grew by 0.4% in 2015 and the slow growth is mainly due to soft trade from Asia to Europe. The container trade experienced the slowest pace since 2009 in terms of box volumes. Recycling of the fleet is expected to hit record levels in 2016 and fleet growth is expected at 1,6% in 2016, down from 8,1 % growth in In October ,7 % of the fleet was idle which is an increase from 4,5 % in July Hanjin Shipping collapsed at the end of August, and although contributing to increased uncertainty in the market, with their vessels laying idle, the spot rates increased by 10 % for the bigger size container vessels. 15 The tank and product segments tend to be positively affected by the fall in oil prices. Cheaper oil increases demand for energy for transport, refining and storage. Rates have fallen from their highs but are still at healthy levels after a rate rebound since August this year. The volatility in day rates has affected asset values negatively over the last few months. 16 A risk to this market is the anticipated cuts in production by oil producers in order to stimulate oil prices has turned out to be a challenging year with a fleet growth of more than 5% and a potential lift in oil prices due to lower US shale production. 17 The markets for shipping of natural gas and propane (LNG and LPG) have performed quite the opposite during While large LPG carriers ("VLGC") have earned historical high Time Charter Rates ("T/C-rates") during 2015, the LNG owners have seen rates fall from low levels to even lower levels. 18 Spot fixture activity for LNG carriers has increased significantly the first months of 2016 compared to last year. 19 Fleet utilization remains low, but new LNG supplies are coming on stream throughout the year, which might help utilization. Over the last nine months the LPG owners have seen rates fall significantly due to fear of lower US LPG production and the opening of the new Panama Canal. 20 Car carriers (Pure Car Truck Carriers, "PCTC") are naturally highly depending on demand for new cars, and are as such linked to the global economy in a way similar to container traffic. Car production in the US and Europe fell during the financial crisis, and in Europe it fell further during the debt crisis. Sales have returned but not to their former levels. Recent data is showing healthy car sales in Europe. 21 Imports to Latin America and China have also fallen in recent years. Demolition spiked in 2009 and has since been at a higher level than before the financial crisis. 22 Chemical shipping has been relatively healthy and rates have increased gradually in the past two years. 23 Strong margins for chemical manufacturers have spurred demand for chemical vessels similar to what we have seen among refineries and tank market Chinese import growth of chemicals have been encouraging. 25 The fleet has seen a small 14 Pareto Securities AS Equity Research, Shipping Research Report 21 April 2016, p Clarksons Research, Containter Intelligence Monthly, October 2016, p. 2 and p. 3 (paid) 16 VesselsValue.com (paid), accessed 31 October 2016; Clarksons Shipping Intelligence Network marked data (paid), 17 Clarksons Research, Oiil & Tanker Trades Outlook, March 2016, p. 1; Pareto Bank's own assessments 18 VLGC Timecharter Equivalent Rates and LNG 160k Spot Rates timeseries, Clarksons Research (paid) 19 Pareto Securities AS Equity Research, Shipping Weekly, 4 April 2016, p.2 20 Pareto Securities AS Equity Research, VLGC market "An excellent buying opportunity near term", 14 April 2016, p European Automobile Manufacturers Association, Press Embargo 15, December Clarksons Research, Car Carrier Trade & Transport 2015, p. 7 (paid) 23 ref. Basis 5,999mt Easychems Houston-Far East, Clarksons Research, Shipping Intelligence Weekly 22 April 2016, p Clarksons Platou Securities AS, Shipping Brief, 26 August Pareto Securities AS Equity Research, Odfjell SE Initial Coverage, "Chemical bargain", 20 April 2016, p

44 increase in size, but the Bank believes that a fall in demand from China could have an adverse effect on rates Offshore market Exploration and production ("E&P") spending was down 25% in 2015 and most oil majors have been reporting cuts in 2016, which will reduce exploration activity. The offshore vessel ("OSV")-fleet is highly correlated with rig activity and we have seen the utilization of the rig fleet fall to about 55%. North Sea spot rates for both Anchor Handling Tug Supply ("AHTS") and Production Supply Vessels ("PSV") are below OPEX levels and now 36% of the North Sea fleet is laid up. Brazil is one of the key markets being the biggest employer of OSV vessels. Foreign flagged vessels are heading from Brazil to other regions as local flagged vessels are blocking them. The order book continues to remain high, but slippage and cancellations are materializing as expected. Transaction volumes of OSV assets are scarce and bids are significantly below broker values. This could result in further drop in asset values for all segments within the offshore space Pareto Securities AS Equity Research "Oil Services OSV/LCV market", April

45 7. BUSINESS 7.1 Introduction Pareto Bank is a niche player within project financing in Norway, and is located in Oslo. The Bank's vision is to be Norway's leading project bank. The Bank has a licence as a commercial bank and as an investment firm from the Norwegian FSA. The Bank offers financing primarily to corporate customers within three business areas: real estate, securities & corporates and shipping & offshore. In addition, the Bank offers ordinary banking services to retail and corporate customers. On 30 September 2016, the Bank had total assets of NOK 13,643.3 million and a lending volume of NOK 8,907.5 million. Profits after tax were NOK 68.4 million for Q and NOK million for the first three quarters of Return on Equity after tax was 17.3% for Q and 16.4% for the first three quarters of The Bank is highly cost efficient with a Cost/Income Ratio of 18.7% for Q and 21.8% for the first three quarters of The Bank has the following long-term financial and operational targets: Return of equity A return of equity of more than 15%. CET1 ratio A Core Equity Tier 1 ("CET1") capital ratio of 15.0% and a total capital ratio of 18.5%. Lending growth An annual lending growth of 10%. Dividend payout ratio A targeted payout ratio of 30 to 50% of the Bank's profit after tax for a given year. Note that the targets above both are subject to the current capital requirements applicable to the Bank and the economic climate. Any future regulatory changes or changes in the economic environment may result in changes in the Bank's strategy and the financial and operational targets above. 7.2 Operations General Pareto Bank has a licence as a commercial bank and as an investment firm from the Norwegian FSA and provides a number of banking services and some investment services that are closely linked to the banking services. The Bank offers financing primarily to corporate customers within three business areas: real estate, securities & corporates and shipping & offshore. In addition, the Bank offers ordinary banking services such as deposits and payment and card services to retail and corporate customers. Within the business area real estate financing, the Bank focuses largely on the financing of property construction projects in Oslo and the region including the counties of Østfold, Akershus, Hedmark, Oppland, Buskerud and Vestfold ("Southeast Norway"). Real estate financing is the Bank's largest business area and it represented some 58% of the total credit exposure by the end of Q The Bank is a full scale provider of securities financing, and it also offers a range of financing solutions to corporate clients. Approximately 27% of the total credit exposure came from securities & corporate financing by the end of Q Within the market for shipping & offshore financing, the 38

46 Bank has built up a diversified loan portfolio. By the end of Q3 2016, the shipping & offshore exposure amounted to NOK 1,344 million or 12% of the Bank's total credit exposure. The following charts show how the Bank's credit exposure is divided as of 30 September 2016: The Bank's lending is funded with customer deposits (NOK 7,631.4 million by 30 September 2016), senior debt (NOK 3,867.8 million) and subordinated debt (NOK million) and hybrid capital (NOK 160 million) in addition to core capital (NOK 1,562.9 million). The deposit-to-loan ratio was 86% by the end of Q3 2016, which is just above the Bank's targeted level of 70 to 80%. The deposit portfolio is diversified by type, customer, size and maturity. The Bank has a compact organization with one office where all employees sit in an open office space. The organizational structure is flat and decision lines are short. The Bank is organized by product, with separate teams for different business areas. Support functions include Collateral, Treasury, Banking Services, Accounting and IT. The Bank has a thorough credit process where in-depth credit analysis plays a key role. The credit decision process is unbureaucratic and frequent credit committee meetings facilitate fast time to market. Credit decisions are made by either a credit committee or by the Board of Directors depending on the size and kind of credit. 39

47 Customer profitability is a strategic cornerstone: all loans shall be profitable from day one. Value is added through efficient decision-making, professionalism and a solution oriented mind-set. The table below shows the credit exposure of the various business areas from 2013 to 30 September. In NOK million As of 30 September As of 31 December (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Real estate financing 6,607 5,104 5,667 5,051 5,346 Securities financing 1,981 1,900 1,748 1,698 1,674 Corporate financing 1, , Shipping and offshore financing 1,344 1,452 1,553 1, Other (including home mortgages) Write downs/amortization Total 11,262 9,693 10,281 8,986 8,920 Real estate financing has been a stable to growing area for the Bank. Due to the short terms of the loans the area gets a high natural redemption rate, so new lending needs to be high to both make up for matured loans and to grow the area. This explains the seemingly flat development from 2013 to However, the area realized net growth in 2015 and has grown strongly in Securities financing is a stable area with little growth. Both corporate financing and financing of shipping and offshore are relatively new areas with the highest growth rates. Exposure in shipping and offshore has fallen in 2016 because of redemptions. Furthermore, the Bank has been cautious granting new loans in this market due to the current high level of risk. Real estate Real estate financing is the Bank's largest business area. The credit exposure within this business area was NOK 6,607 million or 58% of the total credit exposure by the end of Q The number of active clients was 231 and average exposure per client approximately NOK 29 million. Profitability is high with an average credit margin of 4.4% over cost of funds. Interest contribution was NOK 248 million for 2015 or 65% of the Bank's total interest income. 40

48 The following chart shows the Bank's real estate exposure by type of collateral as of 30 September The Bank is a well-respected player and has a sizable portfolio of projects within financing of residential property in Oslo and Southeast Norway. The Bank may finance real estate in other geographical areas, but exposure outside of Southeast Norway will normally be limited to a small part of the Bank's lending portfolio. Exposure to residential property projects was NOK 4,640 million (property lots NOK 1,518 million and residential property NOK 3,122 million). In addition, the Bank offers lending to transaction oriented clients that buy and sell property at a fast pace. For these customers the Bank plays an active role in the transaction phase of the investment. The Bank also finances renovation projects and conversion of commercial property to residential property. A residential property project typically has two phases. In the first phase, the Bank finances the customers' acquisition of the lot. The Bank requires 20 to 40% equity to finance a property lot purchase, and it finances primarily regulated lots purchased for development with a clear exit strategy. In the second phase, the Bank finances the development of the project e.g. the building of houses or apartment buildings. There are several conditions precedent that have to be met before the Bank opens the building construction facility. First, all necessary permissions have to be in place. Second, the Bank's requirement with respect to sale of units must be met. The Bank will normally require that if the price of the unsold units falls by 50% compared to the sold units, the sales amount must still be sufficient to cover the Bank's credit. Furthermore, the developer must demonstrate the ability to successfully complete projects and have experience with residential development. A typical project is composed of a lot financing and a building construction facility in the range of NOK 10 to 50 million for the construction of 4 to 8 houses in the greater Oslo area. The Bank's employees are themselves skilled in housing projects, regulations and contractual issues. The Bank has in-house regulatory skills of residential property development in Oslo and Southeast Norway as well as market knowledge. Tight project follow up is a requirement, and the Bank will normally appoint a professional building inspector that operates on its behalf. All projects are followed up monthly and primarily turnkey projects are financed. The portfolio is stress tested semi-annually to determine potential losses due to a decrease in property prices. As of 30 September 2016, the exposure to Oslo was 53%, while the second largest exposure was to Romerike (in Akershus county) with 16%. The remainder of the 41

49 exposure was largely to other counties in Southeast Norway (Akershus (including Asker and Bærum), Vestfold, Buskerud, Østfold and Oppland). There was 3% exposure to Bergen. The following chart shows the geographical distribution of the Bank's real estate exposure as of 30 September 2016: In the area of commercial real estate, the Bank offers financing of development (building loans), second mortgage loans, owner financing and short bridge financing. The Bank also offers first mortgage loans where the building must be renovated before it can be refinanced or sold. The Bank is normally not competitive on traditional long term mortgages against long cash flows. However, for good projects the Bank may finance further up the capital structure, covering the most junior debt with additional collateral. Within development of commercial real estate the Bank normally requires sound rental agreements and a clear project exit either through sale or refinancing from another bank. Securities & Corporates The Bank is a full scale provider of securities financing, and it also offers a range of financing solutions to corporate clients. The credit exposure within securities financing was NOK 1,981 million or 18% of the total credit exposure by the end of Q The number of active clients was 377 and average exposure per client approximately NOK 5 million. Only some 48 customers had a credit facility of above NOK 10 million. The average credit margin over the Bank's cost of funds was 4.0% with an interest contribution of NOK 35 million for Q or 9% of the Bank's total interest income. The Bank is a full scale provider of securities financing, and it also offers a range of financing solutions to corporate clients. The Bank offers a wide range of securities financing products and some investment services. The Bank primarily finances shares and short trades in shares listed on Oslo Børs with a loan to value of 0 to 80%. The loan to value of a share depends on its volatility and liquidity. The Bank has developed a statistical model where the share's historical volatility and liquidity determines its loan to value. A share with a high volatility and a low liquidity will have a low loan to value, while a share which is traded in high volumes normally will have a higher loan to value. The Bank recalculates and reviews the loan to value of shares semi-annually or more frequently if market conditions are negative. 42

50 The Bank offers financing of high-yield bonds with up to 50% loan to value. It is a requirement for bond financing that the bond is a part of a diversified portfolio of bonds and/or shares. In addition, the Bank offers more specialised products such as forwards and total return swaps on shares as well as guarantees in favour of Oslo Børs on behalf of companies in a mandatory offer position. The Bank also provides tailor made solutions to professional clients where it finances a combination of different securities and funds. All securities credits are subject to daily follow up in real-time. In a falling market, loan to value limits can come in breach. The Bank will in such a market immediately make margin calls and the client will normally have to the end of next day to repair the loan to value limits with cash or some other type of pledge acceptable to the Bank. The following chart shows the Bank's exposure to securities financing as of 30 September 2016: The main rationale behind the Bank's focus on securities financing is to take advantage of the opportunities afforded by the Bank's link to the Pareto Group. Securities financing clients are normally also always clients of Pareto Securities, an independent full service investment bank in the Nordic capital markets. The Bank provides the client with the financing, while Pareto Securities provides the client with investment services such as trades in the primary and secondary equity market and the market for fixed income as well as with a wide range of analysis specializing in sectors such as oil services, E&P, shipping, seafood, industrials, financials, telecoms and natural resources. The corporate finance exposure was NOK 1,036 million or 9% of the total credit exposure. The average exposure per client was approximately NOK 31 million and the number of clients 33 by the end of Q The average credit margin over cost of funds was 4.6% with an interest contribution of NOK 40 million for Q or 10% of the Bank's total interest income. Within this market, the Bank offers a range of financing solutions including bridge financing in connection with investments and issues, M&A financing and financing of investments with guarantees from solid owners. The value proposition within this area lies in the transaction phase of an investment. The clients are professional and appreciate a dedicated credit team that efficiently structure a tailor made financing for a specific project with a clear exit. Shipping & Offshore The Bank entered into the shipping & offshore markets in 2011 and has since built a diversified portfolio. The rationale behind this is partly to take advantage of the Pareto Group's strong position within these markets and partly to serve a market for smaller players within these sectors. By the end of Q3 2016, total exposure to the shipping and 43

51 offshore markets was NOK 1,344 million or 12% of the Bank's total credit exposure. Interest contribution within this area was NOK 51 million for Q with an average credit margin over cost of funds of 3.9%. The Bank has built up a diversified portfolio. It is a policy requirement that a single segment will not normally exceed 25% of the total shipping and offshore exposure. By Q3 2016, the total offshore exposure was NOK 144 million or approximately 1.3% of the Bank's total credit exposure. This exposure was made up of three loans of which two loans are for the financing of two small anchor handling tug supply vessels. In addition, the Bank participates in an international loan syndicate for the financing of a floating production, storage and offloading unit. The remainder of the portfolio was diversified among various shipping segments. The following chart shows the Bank's exposure to shipping and offshore sectors as of 30 September 2016: The portfolio consists of 25 loans financing a total of 36 vessels. The Bank is the sole lender in all but three loans which are syndicates or club deals. The average loan size is USD 6.5 million, while the largest exposure is USD 12.6 million as of 30 September The Bank normally requires a minimum equity of between 40% and 50%. Secondly, the clients should be based in Norway and have extensive experience and expertise concerning vessel operations and maintenance. Moreover, the projects should have a high quality charterer with transparent books and the ships should be built in renowned shipyards with liquid second-hand markets and well proven designs. Management has a critical eye on the Bank's shipping & offshore lending activities. Current strategy is under 44

52 revision given the negative market outlook in general, the Bank's recent experiences and dialogues with key shareholders. A more restrictive credit policy already applies and will apply going forward. Equity analysts and specialists in the Pareto Group are good sources of information. The Bank also makes use of expertise from partners regarding valuations, marine insurance and technical assessments. Individual valuations of the portfolio are obtained from independent and reputable shipbrokers every quarter. In addition, real time vessel values are continuously monitored via Vesselsvalue.com, which is a real-time provider of values of ships within several shipping markets. Moreover, tight covenants setting is essential as well as continuous follow-up of covenants such as loan to value and minimum cash. The Bank takes immediate action upon any covenant breaches Investment services Pareto Bank has a licence as an investment firm from the Norwegian FSA and is authorised to provide several investment services. The investment services are all closely linked to the banking services that the Bank offers. The Bank currently provides the following investment services: Facilitating execution of orders in financial instruments to other institutions on behalf of clients. The Bank will convey orders in financial instruments to DNB on behalf of clients that need to hedge interest rate or currency exposure. The Bank will issue a guarantee in favour of DNB to eliminate any credit risk associated with the client. Dealing in financial instruments for the Bank's own account. Equity forwards and total return swaps with clients fall into this category of investment service. Offering investment advice. Currently, the Bank does not offer this service to its clients. Placing of public offerings, placing of issues, as well as underwriting of issues or offers to acquire financial instruments. Currently, the Bank does not offer this service to its clients. In addition, the Bank provides the ancillary investment service of safekeeping and administration of financial instruments. The Bank does not currently advice on undertakings on capital structure, industrial strategy and related matters nor does it provide advice and services relating to mergers and the purchase of undertakings. 7.3 Strategy and competitive strengths It is the Bank's ambition to deliver an annual net lending growth of 10% within its niche markets. Thus, a growth strategy within existing markets is targeted. To realise such growth, the Bank focuses on three main goals and corresponding activities: to achieve an accelerated lending growth, to make the credit decision processes even more efficient, and to further develop the Bank's culture as unique and demanding. The Bank's main non-financial target is to be Norway's leading project bank. Profitability is a cornerstone of the Bank's strategy: All loans shall be profitable from day one. The Bank does not compete on price, but adds value through professionalism, effective decision-making and a solution-oriented mind set. Combined with low costs, this makes the Bank highly profitable. Risk management and internal control are other key components of the Bank's strategy. The Bank has a relatively conservative risk profile and a high focus on thoroughness in all processes and in particular with respect to credit analysis and the credit decision process. 45

53 The following competitive strengths are critical in realising this growth strategy and in meeting the needs of the Bank's customers: Fast mover With a team numbering 36 employees, Pareto Bank is a bank with short decision lines, no bureaucracy and an efficient credit process. Frequent credit committee meetings facilitate fast time to market. This allows customer to execute transactions in a timely manner. For professional and transaction oriented clients, timing is everything. The Bank's value proposition lies in the transaction phase of an investment. The Bank's clients appreciate a professional and dedicated credit team that efficiently structures a tailor made financing for a specific project. Flexible The Bank has a solution-oriented culture. Some 80% of its employees work with customers on a day-to-day basis. Clients are met with a high level of service and availability. All clients have a dedicated relationship manager that maintain close contact and is available to them when and as needed. Professional The Bank has a culture that is commercially oriented. Customer profitability is a strategic cornerstone and all loans shall be profitable from day one. The Bank has developed a model for measuring customer profitability. The profitability of customers and portfolios of loans are regularly calculated and benchmarked internally. Furthermore, the Bank has established a thorough credit decision process based on indepth credit analysis of each project. Experience and knowledge about its markets are the basis for such credit analysis. In addition, the Bank is highly skilled in the structuring of loan agreements with relevant covenant precedents and covenants. All clients are closely followed up by a dedicated relationship manager. Expertise The Bank is specialised in project financing. It has a strong market position within residential property development financing and holds in house regulatory skills of the housing market and of relevant contractual issues. It also has high project management experience and all projects are managed tightly. The Bank is a player in the market for shipping and offshore investment projects and offers a range of financing solutions to corporates and its owners. The Bank adds value to these clients through its ability to efficiently structure tailor made financing for a specific project. The Bank's professional and experienced employees provide a platform to discuss and develop all aspects of a project with the customer, allowing both the Bank and the customer to be profitable. 46

54 7.4 History and important events Pareto Bank was established on 19 January 2007 as Pareto Privat AS, which later that year was changed to Pareto Bank ASA. The Bank opened for business on 4 January Its initial focus was financing of property development and securities. During the financial crisis, the Bank experienced healthy growth due to restrictive credit conditions in the market and a strong capital base. At that time the Bank expanded its business areas by building up portfolios in corporate financing and shipping and offshore. Currently, the Bank has a strong market position in its main business areas with high profits and low credit losses. The table below provides an overview of key events in the history of the Bank: Date Important events 19 January 2007 The Bank was incorporated as Pareto Privat AS 1 November 2007 The Norwegian FSA granted the Bank a banking licence November 2007 The Bank completed a private placement of NOK 750 million 4 January 2008 The Bank opened for business October 2009 The Bank's first bond was listed on Nordic ABM 14 February 2011 The Norwegian FSA authorised the bank to carry on certain investment services and ancillary services 7 March 2014 The Bank was registered on the NOTC list February - March 2016 The Bank completed a Private Placement, Bonus Issue, Repair Offering and Employee Issue of in total NOK 203 million 27 May 2016 The Bank's Shares were listed on Oslo Axess November/December 2016 Contemplated Rights Issue of NOK 200 million 7.5 Products The Bank offers credit to customers in the form of short and longer term loans, credit facilities and guarantees. Lending is offered in NOK as well as in foreign currency such as USD, EUR, SEK, DKK, GBP and CHF. Lending in property development is comprised in a large part by secured loans on lots and property development facilities. The latter usually have a maturity from 18 to 24 months. Property development facilities normally have a number of conditions precedent that must be fulfilled before the facility is opened to the client. Securities are financed through facilities with short termination notice. Currency and multi-currency facilities can be made available. These facilities are secured by the securities being financed. Corporate financing is comprised of e.g. bridge loans and M&A loans depending on the needs of the customer. Within shipping & offshore the Bank offers secured lending normally with a maturity of 3-5 years. Fixed rate loans can be but are rarely offered. The Bank offers a number of banking and transaction services. The Bank offers accounts with internet banking to both retail and business customers. Deposits with both floating 47

55 and fixed interest rates are available as well as debit and credit cards and foreign exchange services. The Bank's funding is made up by a combination of deposits and issuance of unsecured certificates and bonds to investors. The Bank is not currently in the process of developing any new products. 7.6 Competitive landscape The Bank serves small to medium size corporate clients with a range of financing solutions and investment services. These clients are to a certain degree underserved. Pareto Bank competes with the largest providers of banking services in the Norwegian market, e.g. DNB, Nordea and Danske Bank. However, the Bank provides more attention to serving these smaller clients. It is more cost efficient for the larger banks to serve large corporate clients. The savings banks are less active in the Bank's niche markets and they normally operate locally in their home markets. From a capital point of view, the Bank operates within markets where the capital requirement will be relatively similar for a bank using the standard method as for a bank using the IRB method to calculate its various capital ratios. The Bank only operates in capital intensive markets. Real Estate The Bank has gained a strong market position within residential property financing in the greater Oslo area. Its toughest competitors within this market are DNB, Nordea Bank and Handelsbanken, all of whom have dedicated teams that operate within this market. The Bank's market position is based on its ability to respond quickly to customers' needs combined with in-house expertise within residential property development. Securities & Corporates Securities financing are linked to the activities provided by Pareto Securities AS, a company within the Pareto Group. The Bank provides the client with the financing, while Pareto Securities provides the client with investment services. Thus, there is less direct competition within this area. However, similar solutions are offered by the larger banks such as DNB, SEB and Danske Bank. All the larger commercial banks are active in the market for corporate financing. The Bank concentrates on small to medium size corporate clients and experiences that these clients are of less interest to the larger banks. Shipping & Offshore There are few offerings to small and medium-sized clients and investment projects in the shipping market. Before the financial crisis in 2008 a number of Norwegian and foreign banks operated in this market. Today only a few are active of which the most important currently are DNB, Nordea Bank, DVB Bank and ABN Amro Bank. Currently, the Bank experiences little competition for small and medium sized shipping projects and clients. Historically, all the larger commercial banks and saving banks have been very active in the offshore market. Today, this market is being characterized by very low activity and restructuring due to a low oil price. 7.7 Risk and capital management Overall risk strategy Risk management and internal control are key components of the Bank's strategy and operation. The Bank has a moderately conservative risk profile. It is also a core principle 48

56 that the Bank should not be exposed to risk that does not originate from its core business. A vast set of policies, routines and procedures are adopted to ensure that the risk management and internal control are effective and in line with the Bank's risk appetite. The Bank's risk management and internal control are also the sum of its employees' values, knowledge, understanding and awareness of risks and their relevant internal controls. Openness is a prerequisite for the Bank's control culture. It is a natural part of the Bank's operation to internally report risks and inefficient internal controls. In this way the Bank's risk management and internal control is continuously improved. The Bank carries out an annual assessment of all risks associated with its operation and of the efficiency of its internal control. The following types of risk are associated with the Bank's operation, with the risk level that the Board of Directors has adopted with respect to each: Risk type Credit risk Liquidity risk Market risk Operational risk Risk level Moderate Low to moderate Low Moderate In addition to the risk types mentioned above, the Bank is exposed to business risk. The Bank's risk management is based on the following principles: The Board of Directors has adopted a set of policies that determines the risk profile for each risk type. The risk level for each risk type is operationalized into specific risk limits that are approved by the Board of Directors. Risk Exposures are monitored relative to their limits daily or monthly. Risk Exposures are reported monthly to the Board of Directors. An extensive set of routines that covers the Bank's operation is in place and is updated when needed. Routines are in place for immediately reporting any deviation from established practices to the Bank's compliance officer, and these are reported monthly to the Board of Directors. Authority to enter into agreements on behalf of the Bank that exposes the Bank to risk is granted to employees by personal authorisations. Operational risk and business risk are managed by performing an internal annual assessment of the Bank's operation. All risks and capital necessary to cover them are calculated annually in the Bank's Internal Capital Adequacy Assessment Process ("ICAAP"). A risk assessment will be carried out prior to the introduction of new products or the entrance into new markets and the necessary policies and routines will be adopted. 49

57 7.7.2 Risk management The Bank distinguishes between credit risk, liquidity risk, market risk and operational risk as well as business risk. Market risk is made up of interest rate risk, currency risk and credit spread risk. Below is a description of each type of risk with its correspondent mitigating actions. Credit risk Credit risk is the risk of losses due to the failure of a customer to meet his or her obligations and the collateral not covering the obligations. In addition, concentration risk is the risk of negative development of an entire sector or correlated loans. The Bank measures and manages its credit risk based on a risk classification system. The risk classification system is based on an assessment of the debitor's debt-servicing and repayment ability as well as on the market value of the collateral. The risk classification model also forms the basis for the Bank's pricing model, which is designed to ensure that risk is correctly priced in terms of debitor's debt-servicing and repayment ability, the collateral in place for the commitment and the applicable capital requirements. Mitigating actions credit risk Credit risk appetite is set by the Board of Directors in the Bank's credit policy Clearly defined levels of credit authority Diversification of the credit exposure in terms of industry, collateral and size of individual commitments A thorough credit decision process and efficient controls including several credit committees An independent risk control function that carries out random controls Credit risk is measured and reported monthly and quarterly in an aggregated risk matrix Strict, clear and well-defined terms of lending Liquidity risk Pareto Bank's goal is to maintain a moderate level of liquidity risk, in both the short and the long term. A further goal of the bank is to ensure that it at all times has an adequate liquidity buffer in place, the size of the buffer being determined by the bank's growth and balance sheet structure. The deposit mix of the bank and ability to issue securities may vary more than will be the case for an average Norwegian bank. For this reason Pareto Bank needs to maintain a somewhat higher level of surplus liquidity than the average Norwegian bank. Pareto Bank's policy is to have a robust liquidity management system in place based on guidelines adopted by the Board of Directors. The Bank has defined limits and principles for managing its liquidity risk. In addition, forecasts and contingency plans have been drawn up for use in the event of a liquidity crisis. A policy document has been drafted defining levels of liquidity risk tolerance and limits in accordance with guidelines issued by the Norwegian FSA. Mitigating actions liquidity risk Liquidity risk appetite is set by the Board of Directors in the Bank's policy for management of liquidity risk 50

58 Daily reporting of liquidity risk and balance structure to the administration and monthly reporting to the Board of Directors Daily updated prognosis for short, medium and long-term liquidity requirements Daily measurement of LCR and other risk measurements Minimum levels of cash, cash equivalents and balances at other banks to cover short-term liquidity fluctuations Committed credit facilities and repo-agreements to cover shortfalls Highly liquid bond portfolio Dynamic pricing of fixed-rate deposits Maintaining liquidity in the Bank's own issued bonds Contingency plan tested and updated annually in case of liquidity crisis Market risk Pareto Bank does not trade for its own account in the fixed income and currency markets and, insofar as this is possible, continuously manages any exposure that occurs. All items on and off the balance sheet and the associated income and expense items are identified, which entails that the exposure of the bank will be limited. Exposure must at all times lie within limits and powers granted by the Board of Directors. The Bank has internal limits in place governing overall interest rate risk in NOK and foreign currency and measures this risk within defined maturity intervals and as the total of pairs of proximate maturity intervals on a continuous basis. The limit is in force on a continuous basis and encompasses all maturities, all financial instruments and all currencies. The Bank uses financial instruments such as Interest Rate Swaps and Forward Rate Agreements to reduce interest rate risk. The Bank measures currency risk as the net position of the bank in an individual currency. In addition, the Bank measures the total of net positions in each individual currency as a gross value without netting between currencies. The net positions are converted to NOK. The bank stress tests the currency positions by analysing the impact on the income statement of a market change of 10 percentage points for each individual currency and for all currencies overall. The Bank uses financial instruments in the currency market such as Foreign Currency Forwards and Foreign Currency Swaps to reduce currency risk. The Bank will be exposed to the risk of changes in the market value of its portfolio of bonds, certificates and mutual funds as a consequence of general changes in credit spreads. The Bank uses a methodology based on the Norwegian FSA's Module for Market and Credit Risk for monitoring and managing the credit spread risk. Risk must be moderately diversified. Limits and guidelines have been put in place to ensure that the portfolio is diversified in terms of individual issuers, individual sectors and geographical areas. The market risk in the portfolio must be moderate and its market liquidity must be high. Limits and guidelines on liquidity risk are in place. Most of the portfolio must be highly liquid, with a limited difference between bid and ask prices and a large depth of market in relation to the Bank's exposure. Mitigating actions market risk Market risk limits are set by the Board of Directors in the Bank's policy for management of market risk 51

59 Daily reporting of liquidity risk and balance structure to the administration and monthly reporting to the Board of Directors Daily and continuous hedging of any interest rate and currency risk which occurs within the Bank's normal course of business Daily calculation of credit spread risk Targets for credit spread risk and portfolio composition are re-evaluated at regular intervals and annually in the Bank's ICAAP Operational risk Operational risk occurs when failures in the Bank's structure, policies, routines, systems or controls lead to the management's inability to capture and discover risks, abuses or mistakes which interrupt the normal flow of transactions. The Bank limits operation risk through a good system of policies, routines and controls, a dedicated risk control and compliance function and through insurance against economic crime. Mitigating actions operational risk Routines to identify and control potential risks Continuous controls of practice Reporting of deviations Annual internal risk review involving employees from all departments Annual review of risk in the Bank's ICAAP Business risk The Bank is exposed to business risk in the development of its business areas, the region's macroeconomic development and with respect to competition from other financial enterprises. Mitigating actions business risk Regular executive group meetings to discuss market conditions, deal flow and other business issues Regular strategy gatherings for both the executive team and for all employees Annual strategy meeting with the Management and the Board of Directors Business area analyses and stress-tests Presentations of business area status to the Board of Directors Flexibility in the Bank's balance sheet allows for rapid response to changes in strategy Organisational structure and internal control The Bank's risk management and internal control are based on three lines of defence. The first line of defence The first line of defence includes all employees and the management of the Bank except the second line of defence employee. The first line performs risk assessments and risk controls that are meant to make sure that the Bank operates within the risk framework and risk appetite defined by the Board of Directors. First line is considered to be the risk 52

60 owner, i.e., the one who is responsible for monitoring and implementing the adequate control actions. The second line of defence The second line of defence consists of an independent control function the risk control and compliance function. This function monitors and controls that the Bank operates within the Bank's risk limits. The function is responsible for developing policies and reports as well as for preparing risk and compliance reports for the Board of Directors. The function is also responsible for assessing the level of compliance with relevant laws and regulations as well as for executing unannounced controls. The risk control and compliance function is held by the Bank's risk control and compliance officer and it reports directly to the Bank's Chief Executive Officer ("CEO") or directly to the Board of Directors. The third line of defence The third line of defence consists of the internal and external auditor. Their function is to carry out independent testing of the risk management and internal control. The functions are independent. The internal auditor is appointed by the Board of Directors and the external auditor is appointed by the General Meeting. Both functions report directly to the Board of Directors. The Bank's organisation reflects the above principles of internal control. The Board of Directors The Board of Directors has the overall responsibility to ensure that the Bank manages risk effectively and according to the defined risk levels. This is done by approving the Bank's risk policies and risk management framework, and by monitoring the Bank's aggregate risk exposure. In addition, the Board of Directors will ensure that the allocated capital to meet these risks fulfils internal and external requirements. The Board of Directors will also oversee that the CEO and the Management establish and maintain an efficient system for risk management and that necessary controls are in place. Furthermore, the Board of Directors will ensure that the Management provides regular and adequate information enabling it to execute risk monitoring duties and to make policy decisions relating to risk management. The Board of Directors also constitutes the Bank's risk committee, audit committee and remuneration committee. The risk committee monitors and makes policy decisions regarding the aggregate risk exposure of the Bank. Within this mandate also lies the responsibility to assess whether the Bank's risk management and internal control are adequately adapted to risk exposure and the nature of the Bank's operation. The committee is also responsible for evaluating the work and independence of the internal auditor. The audit committee monitors and ensures adequate quality of financial statements and reporting as well as the work and independence of the Bank's external auditor. The remuneration committee recommends the principles for the remuneration policy of the Bank. It also monitors the Bank's compliance with the remuneration policy and assesses whether the Bank's remuneration policy creates incentives that are in conflict with the Bank's risk profile. CEO and management The CEO of the Bank is the overall responsible for implementing risk management and internal controls to make sure that the Bank operates within the risk levels and limits adopted by the Board of Directors. 53

61 Credit committees The Bank has two credit committees which are chaired by the Bank's head of credit. The mandate of the committees is to approve applications for credit according to adopted credit policy and credit routines. It is also a responsibility to adopt and review the Bank's credit policy and routines. Balance management committee The Bank has a balance management committee that is composed of the CEO, the Chief Financial Officer ("CFO"), the deputy CEO and the Director of Real Estate. The purpose of the committee is to discuss changes in lending and liquidity management that affect the Bank's ability to achieve its capital targets and to discuss funding strategy. The committee will ensure that all relevant information is updated so that the Bank can make good liquidity and capital forecasts and discuss the need for potential changes in financing and asset management strategy. Risk control and compliance function This function monitors and controls that the Bank operates within the Bank's risk limits. The function is responsible for developing policies and reports as well as for preparing risk and compliance reports for the Board of Directors. The function is also responsible for assessing the level of compliance with relevant laws and regulations as well as for executing unannounced controls. Internal audit The internal audit function reports to the CEO and the Board of Directors in accordance with the annual plan adopted by the Board of Directors, providing independent confirmation of the Bank's risk management and internal control. The internal audit function is currently carried out by BDO AS. Risk policies The following policies have been adopted by the Board of Directors: Policy for risk management, internal control and ICAAP (internal adequacy assessment process) Policy for credit risk Policy for investment services Policy for liquidity risk Liquidity contingency plan Policy for market risk Policy for management of surplus liquidity Policy for financial management Policy for IT securitiy Policy for economic crime Policy for communication Policy for corporate governance Policy for ethics, corporate social responsibility and conflicts of interest 54

62 7.7.4 Internal Capital Adequacy Assessment Process (ICAAP) ICAAP is the Bank's tool for analysing and evaluating the Bank's current and future risk levels and capital requirements. It ensures that the Bank's capital is sufficient to cover its chosen level of risk and maintains the Bank's solidity. The result of the ICAAP is the Bank's estimate of Pillar 2 capital requirements, which together with the Norwegian FSA's Supervisory Review Process ("SREP") will determine the Bank's necessary capital levels. The ICAAP ensures the following: that the Bank's chosen risk appetite is at a correct level an optimal and proper use of capital that risk control is established through good systems, policies and routines for measurement, follow-up and control of the Bank's activities that the Bank's management is involved in risk management ICAAP is an annual process which is evaluated by the Bank's auditor and on occasion by the Norwegian FSA. The process is followed up during the year by daily and monthly reporting of credit, liquidity and market risk as well as a prognosis on capital. In this way the Bank's management can follow-up the Bank's risk level and solidity. 7.8 Employees As the date of this Prospectus, the Bank has 36 employees and 34.2 Full Time Equivalents ("FTE's"). The following table illustrates the number of employees as per the end of each calendar year in addition to full time equivalents for 2015, 2014 and 2013: Total number of employees Total number of FTE's

63 7.9 Overview Infrastructure and IT systems Pareto Bank has outsourced all its IT services to external contractors. EVRY is its main provider and delivers its banking platform including both the front-end systems and the core system. This includes internet bank, card services, systems for lending and deposits, data warehousing, core systems and more. Additional suppliers are Bloomberg, Vitec (Portman, portfolio management system), Tieto (Probroker, a trading system for securities used in co-operation with Pareto Securities) and Laboremus Software (Construo, a content management system as well as a work-flow system). Recently, the Bank upgraded its main banking system. As a result of this, all front-end systems are now web-based and all integration with the core system is done as webservices. The bank recently terminated its ASP contract with EVRY and moved to a new contractor, Jakob Hatteland Solutions AS. The ASP solution includes server and client operations as well as application services such as Exchange, Office, Portman and Construo. These services have no direct influence on the core banking platform delivered by EVRY. All servers and clients are based on Microsoft architecture with the exception of one Linux webserver. Pareto Bank has recently renewed its contract for Core banking systems with EVRY. As a result of this there is an ongoing project for a new Internet Bank solution as well as a new E-signing solution for customers and a new payment solution Organization IT and Security for Pareto Bank are maintained by an IT manager. The IT manager's role is to maintain all IT operations delivered by the Bank's IT suppliers, act as first line support for the Bank's employees and maintain all IT agreements and contracts with the suppliers in a cost efficient way. In-house developed user interfaces and integrations All in-house development is outsourced to external developers. Thus the Bank has no permanently employed developers itself. For most internal development projects the Bank uses Laboremus Software. The developers in Laboremus Software have valuable knowledge about the Bank's systems, architecture and how it all connects. Operations IT operations are coordinated by the Bank's IT manager and maintained by each systems supplier. The banking platform operations are performed by EVRY. Server architecture and networking are managed by Hatteland Solutions. Security The Bank's systems have a high level of security through EVRY's and Telenor's security regime. This protects the Bank against external threats and secured data and communication Legal proceedings The Bank is from time to time involved in litigation, disputes or other legal proceedings arising from the normal conduct of its business. 56

64 The Bank is not nor has been during the preceding twelve months involved in any legal, governmental or arbitration proceedings which may have or have had significant effects on the Bank's financial position or profitability. The Bank is not aware of any such proceedings that are pending or threatening Material contracts The Bank has not entered into any material contracts outside the ordinary course of business for the two years prior to the date of this Prospectus Property, plants and equipment The Bank leases its offices in Dronning Mauds gate 3 in Oslo, Norway. The lease agreement is entered into with Dronning Mauds gate 1-3 KS, a subsidiary of the Bank's shareholder Pecunia Forvaltning AS. The agreement runs until The agreement is on market terms, and the rent is adjusted in accordance with the Norwegian consumer price index (Norwegian: konsumprisindeksen). The Bank does not own any real estate. The Bank's tangible fixed assets are fixtures, equipment and office machines. The Bank has not mortgaged or accepted other restrictions on its right to dispose its property, plant and equipment. Apart from its own consumption of paper, energy and its waste products, the Bank does not pollute the external environment Insurance The Bank is covered by various operating insurance policies including liability (Codan), property damage/business interruption (Codan), employer's liability insurance (Protector), health (Storebrand), travel (Europeiske) and professional liability/crime (AIG). In addition, a general directors' and officers' liability insurance is in force for the members of the Board of Directors and the Management (AIG). The Bank considers it to be adequately covered with regard to the nature of its business. The Management regularly reviews the adequacy of the insurance coverage. However, the Bank cannot guarantee that the Bank will not incur any damages that are not covered by its insurance policies or that exceed the coverage limits of the policies Research, development, patents and licences The Bank does not carry out research or development on its own. The Bank's IT systems are important for its business. The most important IT systems are standard and they are delivered by EVRY ASA. It is thus EVRY that is responsible for the development of the Bank's main IT systems. The Bank has developed a work flow system in collaboration with an IT supplier to ensure an efficient credit process Dependency on contracts, patents, licences etc. It is the Bank's opinion that the Bank's existing business or profitability is not dependent upon any licenses or contracts other than the following: The Bank's banking licence as well as the licence to offer certain investment services as further described in Section "Investment Services". The following agreements relate to the Bank's day-to-day operations: o A framework agreement with EVRY ASA and supplementary agreements. EVRY ASA is the Bank's main supplier of IT solutions including core banking systems and other banking applications and support of these solutions. The main agreement was renegotiated during Q in order to cover product changes that have taken place since the agreement was entered into. The new 57

65 agreement will be in effect as of 1 January An agreement with EVRY ASA concerning operation of among other things server and client operations, and other application services has recently been terminated and moved to Jakob Hatteland Solutions AS in June The agreement with Jakob Hatteland Solutions AS is an agreement to purchase ASP-services and it expires on 1 June o o o The Bank has standard agreements for delivery of services from Nets, BankAxept and Visa. An agreement entered into on 20 September 2007 with the Pareto Group which entitles the Bank to use the "Pareto" brand and profile. The agreement is further described in Section "Agreements with the Pareto Group". The Bank uses DNB Bank ASA as its main bank. Settlement of accounts is executed through Norwegian Interbank Clearing System ("NICS") as a level 2 bank connected to DNB Bank ASA. Moreover, the Bank does not hold any business critical patents Regulatory overview Introduction Pareto Bank is a Norwegian bank established on 19 January 2007, and holds a licence as a commercial bank from the Norwegian Ministry of Finance. In addition, the Bank holds a licence as an investment firm from the Norwegian FSA for certain investment services and ancillary services. Consequently, the Bank is subject to supervision by the Norwegian FSA, which prepares and/or issues regulations and supervises the operations carried out by Norwegian financial enterprises, including banks. In the event that a financial enterprise is in breach of the applicable laws or regulations within the Norwegian FSA's jurisdiction including capital adequacy requirements, it may impose administrative sanctions on that enterprise, and it may also, subject to further conditions, revoke the enterprise's license to operate. As a member of the EEA, Norway has an obligation to implement all relevant directives and regulations relating to financial services that have been incorporated into the EEA Agreement. Note, however, that EU Directives and EU Regulations that delegate powers to the European Banking Authority ("EBA") (including CRR and CRD) have not yet been implemented into the EEA Agreement due to Norwegian constitutional concerns related to the powers granted to EBA under EU regulation No. 1093/2010 establishing a European Supervisory Authority (the "EBA-regulation"). On the 13 June 2016, the Norwegian Parliament adopted a resolution concerning the delegation of powers in connection with the implementation of the directives and regulations concerning financial services. The resolution allows for the implementation of EU directives and EU regulations which delegates authority to supervisory bodies established by the EU including EBA. Thus, it is expected that EU directives and EU regulations which have been pending due to the constitutional concerns related to the powers granted to EBA will be fully implemented into Norwegian legislation following this adoption. Pursuant to the resolution, EBA will hold no formal power over Norwegian financial enterprises; however, EBA will be responsible for drafting the decisions of the EFTA Surveillance Authority, which will hold the supervisory powers over Norwegian enterprises. Pending incorporation in the EEA Agreement, parts of the EU-legislation 58

66 relating to banks and credit institutions (most importantly the revised capital adequacy rules) have been directly implemented into Norwegian legislation on a unilateral basis. In connection with the adoption of the resolution, the Norwegian Parliament adopted Act of 17 June 2016 no. 30 concerning EEA financial supervision which establishes that all EU regulations concerning supervisory authorities, including EBA, shall be incorporated into the EEA-agreement. The resolution model was formally adopted by the EEA joint committee on 30 September 2016 and is to be set in force in connection with the Parliamentary approval and subsequent enforcement of the proposed amendments to the Act on Financial Supervision of 7 December 1956 No. 1 (the "Financial Supervision Act"). In the following, a high-level, non-exhaustive, overview of current and future regulatory framework applicable to the Bank will be described Current regulation The Bank is subject to Norwegian regulatory legislation applicable to Norwegian commercial banks. This encompasses, but is not restricted to, the following acts: The Act on Financial Enterprises and Financial Groups of 10 April 2015 No. 17 (FEA) The Act on Financial Contracts and Financial Assignments of 25 June 1999 No. 46 ("FCA") The Act on Financial Supervision of 7 December 1956 No. 1 (Financial Supervision Act) The Bank is also subject to the adherent regulations under the abovementioned legislative acts adopted by the Norwegian Ministry of Finance and the Norwegian FSA. FEA entered into force on 1 January 2016, replacing the previous fragmented legislation concerning various financial enterprises. FEA covers a variety of matters concerning financial enterprises, and includes provisions on the incorporation of financial enterprises, the required licenses and licensing procedures and other requirements regarding the conduct of business, including requirements concerning the management and governmental bodies in financial enterprises. Moreover, FEA sets forth provisions on capital requirements applicable to certain financial enterprises, including banks. Ownership control The Bank is subject to provisions on ownership control, which apply to all financial enterprises. The provisions on ownership control in FEA implement Directive 2007/44/EC. Under the FEA, acquisitions of so-called qualified holdings in a financial enterprise are subject to a pre-approval by the Norwegian Ministry of Finance or the Norwegian FSA. A "qualifying holding" is a holding that represents 10% or more of the capital or voting rights in a financial enterprise or that allows for the exercise of significant influence on the management of the enterprise and its business. Approval may only be granted if the acquirer is considered appropriate according to specific non-discriminatory criteria as further described in the FEA (the so-called "fit and proper" test). Further, requirement of new approvals are triggered when a holding reaches or exceeds certain thresholds (20%, 30% and 50%). In practise the Norwegian regulator has refused to approve ownership in excess of 20-25% by owners not being regulated financial enterprises themselves. Deposit guarantee scheme In addition, FEA also provides rules on the deposit guarantee schemes for banks. Pursuant to FEA, all banks with head offices in Norway, and subsidiaries of foreign banks 59

67 shall be members of the Norwegian Banks' Guarantee Fund. The Norwegian Guarantee Fund provides deposit guarantees of each NOK 2 million per member bank should the bank be unable to meet its commitments. The EU has in Directive 2014/749/EC imposed a harmonised level of deposit guarantee of EUR which shall apply within the EU by 31 December The Norwegian Banking Law Commission has proposed that the current level is maintained in FEA, at least until 31 December 2018 in the event that the harmonized level is introduced. The proposal is currently subject to a public hearing which will expire in January For the time being, the Norwegian guarantee scheme provides for a deposit guarantee corresponding to about EUR Obligation to notify the Norwegian FSA, public administration Further, chapter 21 of FEA provides rules regarding certain reporting obligations and intervention rules that are escalating in character, depending on the seriousness of the payment and solidity problems of the bank in question. The FEA does not implement the requirements under the Directive 2014/59 (Banking Recovery and Resolutions Directive) which currently is not part of the EEA cf. further below. Under the FEA the board of directors and the chief executive officer of a financial enterprise each have a duty to notify the Norwegian FSA if there is reason to fear that: the enterprise will not be able to fulfil its obligations as they fall due; the enterprise will not be able to satisfy the minimum requirements for own funds or other solidity and security requirements specified by act or regulation; or circumstances have occurred that can result in serious loss of confidence or loss which will significantly weaken or threaten the solidity of the enterprise. In such instances (regardless of whether notification has been given or not) the Norwegian FSA has relatively broad powers to promptly enforce measures deemed necessary. In the first instance, the enterprise itself shall be involved in the process. One of the Norwegian FSA's policy instruments is to ensure that the enterprise prepares an "audited statement of financial position" which is a vital policy instrument for determining the enterprise's financial situation. If the audited statement of financial position shows that a "significant part" or 25% of the share capital is lost, the board of directors is immediately obligated to call for a general meeting. Determining what is "significant" will depend on a discretionary assessment. The general meeting shall decide whether the enterprise has sufficient capital for continued, satisfactory operations and, if so, whether operations should continue. Such a decision must be made with a two-thirds majority of the votes cast at the general meeting. If it is decided to discontinue operations, the general meeting may vote by simple majority to transfer the enterprise's business in its entirety to other financial enterprises. If such a resolution is not passed, the general meeting shall pass a resolution to liquidate the enterprise. If the general meeting does not pass such a resolution, (or passes resolutions of which the Norwegian FSA does not approve), the Norwegian FSA shall appoint a liquidation board to liquidate the company. In this case, the rules on public administration described below will apply. If the audited statement of financial position shows that 75% or more of the share capital is lost, the board of directors shall present a proposal to the general meeting for a reduction of the share capital corresponding to the losses incurred. If the general meeting does not pass a resolution to this effect, the Norwegian Ministry of Finance may decide that the share capital shall be reduced by the amount of capital which pursuant to the audited statement of financial position is lost. Equivalent resolutions can be passed for write-downs of subordinated loan capital (regardless of provisions in the loan agreements). In addition, the Norwegian Ministry of Finance may (if necessary in order to ensure continued, satisfactory operations) decide that the share capital shall be 60

68 increased. The Norwegian Ministry of Finance can specify subscription conditions and decide that the pre-emptive right of existing shareholders shall be disregarded. This type of measure presupposes that private or public capital is available in the share issue. If not, the alternative will be public administration as further described below. It is this process that resulted in the state obtaining ownership interests in a number of Norwegian banks at the beginning of the 1990s. A Norwegian bank cannot be subject to regular insolvency proceedings, i.e. debt settlement proceedings and/or bankruptcy proceedings initiated pursuant to the regular insolvency legislation. Instead, a special regime of proceedings public administration proceedings applies to banks as further regulated in section II of chapter 21 in FEA. In the event of illiquidity, insufficient funds or failure to satisfy capital requirements, the Norwegian FSA shall immediately give notice to the Norwegian Ministry of Finance. The Norwegian Ministry of Finance may decide that the bank shall be placed under public administration, provided that the bank is unable to meet its liabilities as they fall due and that a sufficient financial basis for continued, satisfactory operations cannot be secured. The same applies if the bank is unable to meet the capital adequacy requirements. If the parent company in a financial group is placed under public administration, the Norwegian Ministry of Finance may also decide that all or parts of the group shall be placed under public administration. The decision of the Norwegian Ministry of Finance is made on a discretionary basis. Capital requirements Although not yet formally a part of the EEA Agreement, Norway has implemented the main provisions of Directive 2013/36 and Regulation 575/2013 (together referred to as "CRD IV") into the FEA and adherent regulations. These amendments imply a gradual increase in capital adequacy requirements applicable to the Bank over the coming years. FEA requires that the capital adequacy requirement of 8% shall consist of at least 4.5% CET1, 1.5% Tier 1 capital and 2.0% Tier 2 capital. In addition to the requirement of 4.5% CET1, FEA imposes various capital buffer requirements applicable to all Norwegian financial enterprises, and all consisting of CET1. The capital buffer requirements consist of (i) a conservation buffer of 2.5% and (ii) a systemic risk buffer of 3% and (iii) a counter-cyclical buffer of maximum 2.5%. The level of the counter-cyclical buffer is to be determined by the Norwegian Ministry of Finance each quarter after receiving advice from Norges Bank. The counter-cyclical buffer was increased to 1.5% on 30 June On 24 September 2015, the Ministry of Finance decided to keep the level of the countercyclical capital buffer for banks unchanged. The decision was in line with the advice from Norges Bank. In addition, systemically important banks must hold a buffer for systemically important institutions of 1% of CET1 capital from 1 July However, the Bank is not deemed to be a systemically important institution, and consequently this capital buffer requirement does not apply to the Bank. Consequently, the Bank is required to hold at least a total of 11.5% of CET1 capital. This is referred to as the Pillar 1 requirement under CRD IV. In addition to the regulatory minimum Pillar 1 requirement, the Bank is required to hold such capital as deemed necessary under the Bank's internal assessment of its capital needs. This capital assessment must be made at least on an annual basis, and is made according to the ICAAP as laid down in CRD IV (called "Pillar 2"), as well as the Norwegian FSA's supervisory review process (SREP). The Norwegian FSA published a circular 12/2016 on 27 June 2016 describing a methodology for performing the SREP. Effective from 30 September 2014, the Norwegian Government amended the requirements for each of the different types of capital, namely common equity Tier 1 61

69 (Norwegian: ren kjernekapital), additional tier 1 (Norwegian: annen kjernekapital) and Tier 2 capital (Norwegian: tilleggskapital), in line with the definitions set out in CRD IV. According to the recommendation from the Basel committee and EU regulations, quantitative non-risk based leverage ratio requirements are scheduled for implementation in the EU from 1 January On 31 March 2016, the Norwegian FSA responded to the Ministry of Finance's request to prepare proposals for discussion paper and draft regulations concerning the leverage ratio requirements (Norwegian: uvektet kjernekapital). In the draft regulations, the non-risk based leverage ratio is given the same meaning as set forth in the CRR, and thus encompasses an enterprise's capital measure (consisting of CET1) divided by that enterprise's total exposure measure (including group internal transactions and engagements with public enterprises). Moreover, the non-risk based leverage ratio shall be expressed as a percentage. The draft regulation suggests a minimum 6% leverage ratio requirement for banks, finance companies, holding companies in a financial group and investment firms that provide certain investment services. The public hearing on the draft regulation and the discussion paper for public comment expired 25 August However, the proposed regulation regarding non-risk based leverage ratio has not yet been adopted by the Norwegian Ministry of Finance. The regulations on non-risk based leverage ratio requirements are expected to be adopted by the Ministry of Finance within 2016/2017 pursuant to section 14-4 of FEA. The Norwegian FSA recommends that the implementation of the leverage ratio requirement should be put on hold until the EU legislation is finalized. However, the Norwegian FSA suggests that the leverage ratio should be addressed in the Pillar 2 assessments of the enterprises until On 23 November 2016, the EU Commission proposed amendments to the capital requirement directive and regulation. The proposal includes a requirement for a leverage ratio of 3 % of Tier 1 capital. Liquidity Requirements CRD IV imposes quantitative liquidity requirements applicable to banks and other credit institutions. More specifically, CRD IV foresees the imposition of a Liquidity Coverage Ratio (LCR) and a Net Stable Funding Ratio ("NSFR"). The LCR is the requirement that banks should have enough high quality liquid assets in their liquidity buffer to cover the difference between the expected cash outflows and the expected capped cash inflows over a 30-day stressed period. The LCR has been imposed gradually in the EU from 1 October 2015 and will apply in full in the EU from 1 January Each member state may decide to introduce the LCR in national legislation prior to the EU requirements enter into force. In November 2015, the Norwegian Ministry of Finance adopted regulations concerning the implementation of LCR for banks and other financial enterprises. The requirements will be gradually implemented, taking full effect (100%) from 31 December 2017 for not systemically important banks. The Bank is currently not regarded as a systemically important bank and is thus subject to the gradual implementation of the LCR requirements. The LCR of the Bank has to be at least 80% by 31 December On 23 November 2016, the EU commission proposed several amendments to the CRR/CRD including requirements concerning a binding NSFR to address the excessive reliance on short-term wholesale funding and to reduce long-term funding risk. The proposal from the EU-commission further states that the NSFR should be expressed as a percentage and set at a minimum level of 100%, which indicates that an institution holds sufficient stable funding to meet its funding needs during a one-year period under both normal and stressed conditions. 62

70 Investment services The Bank also holds a licence as an investment firm and is therefore also subject to the Norwegian Securities Trading Act. The Norwegian Securities Trading Act implements Directive 2004/39/EC on the Markets in Financial Instruments ("MiFID"). The Bank is authorised to provide the following investment services: Facilitating execution of orders in financial instruments to other institutions on behalf of clients Dealing in financial instruments for the Bank's own account Offering investment advice Placing of public offerings, placing of issues, as well as underwriting of issues or offers to acquire financial instruments In addition, the Bank provides the ancillary services of safekeeping and administration of financial instruments, foreign exchange services related to the aforementioned investment services, advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings. AML Banks are subject to the legislative framework concerning anti-money laundering which comprises of (i) the Norwegian Act of 6 March 2009 no. 11 concerning Measures to Combat Money Laundering and the Financing of Terrorism ("AML") and (ii) adherent regulations of 13 March 2009 no. 303 (the "AML Regulations"). Under the AML, banks are regarded as entities with reporting obligation pursuant to the AML section 4. Consequently, banks, and other financial enterprises, are subject to the following obligations: Apply customer due diligence measures of various nature depending on the particular risk concerning the customer, customer relationship, product or transaction Ongoing monitoring of existing customer relationships The obligation to make inquiries Reporting obligation Establish internal control- and communications procedures Retention of documents for five years after the customer relationship has ended or five years after the transaction has been carried out The Norwegian FSA is responsible for the supervision of financial enterprises and their compliance with AML and adherent regulations. Financial enterprises shall report suspicious transactions to the Financial Intelligence Unit ("FIU"), which is organised under the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime ("ØKOKRIM"), which are responsible for the assessment, based on information received, of whether to pursue criminal prosecution in connection with transactions relating to proceeds of crime or acts of terrorism, both the principal and/or potential accomplices. Legal entities and persons acting in capacity of their professions encompassed by the AML may be defined as gatekeepers ("Gatekeepers"), because they provide services which ensure the carrying out of transactions on behalf of their customers. 63

71 The obligations pursuant to the AML may be divided into three main categories of obligations. Firstly, Gatekeepers shall conduct customer due diligence measures of its customers and retain documentation deriving from these customer due diligence measures. Secondly, Gatekeepers shall carry out ongoing monitoring of its existing customers and transactions, carry out inquiries regarding suspicious transactions and are in certain circumstances obligated to report to FIU. Thirdly, Gatekeepers shall establish internal control and communication procedures, apply necessary measures to ensure that employees have the necessary knowledge to comply with the requirements pursuant to the AML and appoint a specific person in the legal entity as the main responsible for the follow-up of these procedures. The Norwegian Ministry of Finance has established committee with a mandate including the drafting of a new act and adherent regulations in connection with EU directive 2015/847 on preventing the use of financial system for money laundering or terrorist financing (the Fourth Anti-Money Laundering Directive). The committee shall also take into considerations the remarks in FATF evaluation report 27 of the Norwegian anti-money laundering regulatory scheme. The committee submitted the first part of its proposal on 13 September The second part of the committee's proposal is expected to be published on 16 December It is expected that a potential new regulatory scheme will be passed by the Norwegian Parliament at the earliest in The Fourth Anti- Money Laundering directive imposes a more extensive risk based approach in order to ensure an efficient implementation of measures and the Norwegian FSA will most likely be given a wider powers to sanction breaches of the AML regulatory scheme, including the authority to (i) issue a public warning (ii) order the person responsible to cease the conduct and to desist from a repetition of the conduct (iii) withdrawal or suspension of the authorisation of entities holding such authorisation (iv) issue a temporary ban of the person discharging managerial responsibilities in a legal entity from exercising management functions in obliged entities (v) issue fines. Note that member states are given the authority to impose additional administrative sanctions. Thus, the Norwegian FSA may be empowered to impose other administrative sanctions, and the fines may exceed the amount stated in the directive Future developments BRRD FEA, and other legislative acts concerning financial enterprises, are likely to be materially amended or the need for new legislative measures will be triggered by the implementation of Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit enterprises and investment firms (the BRRD). The BRRD is designed to provide authorities with a credible set of tools to intervene sufficiently early and quickly in an unsound or failing institution so as to ensure the continuity of the institution's critical financial and economic functions, while minimising the impact of an institution's failure on the economy and the financial system. The BRRD contains four resolution tools and powers which may be used alone or in combination where the relevant resolution authority considers that (a) an institution is failing or likely to fail, (b) there is no reasonable prospect that any alternative private sector measures would prevent the failure of such institution within a reasonable timeframe, and (c) a resolution action is in the public interest: (i) sale of business which enables resolution authorities to direct the sale of the firm or the whole or part of its business on commercial terms; (ii) bridge institution which enables resolution authorities to transfer all or part of the business of the firm to a "bridge institution" (an entity created for this purpose that is wholly or partially in public control); (iii) asset 27 Anti-money laundering and counter-terrorist financing measures Norway, mutual evaluation report published on 18 December

72 separation which enables resolution authorities to transfer impaired or problem assets to one or more publicly owned asset management vehicles to allow them to be managed with a view to maximising their value through eventual sale or orderly wind-down (this can be used together with another resolution tool only); and (iv) bail-in which gives resolution authorities the power to write down claims of unsecured creditors of a failing financial enterprise (with some exemptions, most notably deposits falling within the deposit guarantee level) and/or to convert such claims to equity (the "general bail-in tool"), which such equity could also be subject to any future application of the general bail-in tool. In addition to the general bail-in tool, the BRRD provides for resolution authorities to have the further power to permanently write-down or convert into equity subordinated capital instruments at the point of non-viability and before any other resolution action is taken (non-viability loss absorption). The BRRD also provides for a member state as a last resort, after having assessed and exploited the above resolution tools to the maximum extent possible whilst maintaining financial stability, to be able to provide extraordinary public financial support through additional financial stabilisation tools ("bail-out"). These consist of the public equity support and temporary public ownership tools. Any such extraordinary financial support must be provided in accordance with the EU state aid framework. The BRRD is already implemented in the EU. As a minimum harmonisation initiative, member states may adopt more onerous provisions when implementing the BRRD, meaning that it is difficult to anticipate the full potential implications for relevant enterprises in the absence of finalised national implementing measures. However the main consequence of BRRD implementation will be that the member states will prohibited from providing public financial support to the financial enterprises under its jurisdictions without executing a bail-in as required under BRRD. It is expected that this will increase funding costs for financial enterprises. In Norway, the Norwegian Banking Law Commission has submitted proposed amendments in FEA to implement BRRD in NOU 2016:23. A public hearing on the proposal for public comment was issued 28 October 2016 and will expire 9 January MiFID II A directive that will amend and replace MiFID, directive 2014/65/EU on markets in financial instruments ("MiFID II"), and adherent regulation (EU) No 600/2014 of 15 May 2014 of the European Parliament and of the Council on markets in financial instruments ("MiFIR") have been adopted by the EU and shall be implemented by the EU member states into national law by 3 January The new framework is comprehensive and will, inter alia, introduce enhanced provisions on best execution and restrictions on the payment of commissions to distributors of financial instruments (such as investment funds). Each member state may decide to go further than the minimum requirements, and introduce a general ban on such commissions, regardless of whether the investment advisors are independent or not. Member states may also introduce a general ban on commissions relating to reception and transmission of orders ("execution only"). A legislative committee has been mandated to propose national rules to implement the new MiFID-framework into Norwegian law, with a deadline to report by January It is currently uncertain when the Norwegian rules implementing MiFID II will enter into force. It is also uncertain whether the Norwegian rules concerning MiFID II will implement the minimum rules that restrict commissions to be paid to independent investment advisors only, whether they will introduce a general ban on paying commissions to independent advisors or whether the ban will be extended to execution only. Depending on how MiFID II is implemented into Norwegian law, the upcoming rules concerning commissions may inter alia impact the profitability of the Bank's platform for distribution of investment funds. 65

73 PSD2 The new Payment Services Directive, directive 2015/2366/EU on payment services in the internal market ("PSD2") repealing the original payment services directive 2007/64/EC, entered into force 12 January The new directive shall be implemented in national law by 13 January The main purpose of PSD2 is to enhance consumer protection, promote innovation and improve the security of payment services. A key element of PSD2 includes the right of third party payment services providers to access customers' payment accounts held at other payment service providers (i.e. banks). PSD2 introduces two third party payment service providers: account information service providers and payment initiation service providers. Pursuant to PSD2, banks will be required to provide access to the customers' payment accounts, provided that the relevant payment accounts are accessible online, the customers' accounts qualify as payment accounts and the third party payment service providers are duly licensed. The new framework requires banks to reformulate their approach to providing secure data access to third parties, and it increases the competition between payment service providers because more payment service providers are given access to customers' account information, including funds available. Other key elements of PSD2 include tightening of the exemptions from the application of PSD2, enhancements of the rights of consumers with respect to refunds, liability for unauthorised payments and the obligations of payment services providers when securing customer data. PSD2 also introduces improved consumer protection for payments made outside of the EU or in non-eu currencies. The Norwegian Ministry of Finance has asked the Norwegian FSA to prepare a draft consultation paper recommending implementation of the revised payment services directive in Norwegian law. There is no set deadline for the assignment. 66

74 8. CAPITALISATION AND INDEBTEDNESS The information presented below should be read in conjunction with the other parts of this Prospectus, in particular Section 9 "Selected Financial Information" and Section 10 "Operating and Financial Review", and the Financial Statements and the notes related thereto, incorporated by reference in this Prospectus, see Section 19.1 "Incorporation by reference". There has been no material change to the Bank's unaudited capitalisation and net financial indebtedness since 30 September Capitalisation (In NOK millions unless otherwise stated) As of 30 September 2016 Actual (unaudited) Total current debt: Guaranteed 0.0 Secured Unguaranteed/Unsecured 8,707.4 Total current debt 8,723.0 Total non-current debt: Guaranteed 0.0 Secured 0.0 Unguaranteed and unsecured 3,197.4 Total non-current debt 3,197.4 Total indebtedness 11,920.4 Shareholders' equity Share capital Legal Reserve Other Reserves Total shareholders' equity 1,562.9 Total Tier 1 Hybrid loan capital Total capitalisation 13, Collateral for settlement of financial instruments. 67

75 8.2 Net financial indebtedness Capitalisation As of (In NOK millions unless otherwise stated) 30 September 2016 Actual (unaudited) (A) Cash 0.0 (B) Cash equivalents 1,093.5 (C) Trading securities 3,525.1 (D) Liquidity (A)+(B)+(C) 4,618.6 (E) Current financial receivables 6,395.1 (F) Current bank debt 128,3 (G) Current portion of non-current debt (H) Other current financial debt (I) Current financial debt (F)+(G)+(H) 8,582.8 (J) Net current financial indebtedness (I)-(E)-(D) -2,420.9 (K) Non-current bank loans 0.0 (L) Bonds issued 3,337.6 (M) Other non-current loans 0.0 (N) Non-current financial indebtedness (K)+(L)+(M) 3,337.6 (O) Net financial indebtedness (J)+(N) In 2016, the Bank has increased its securities debt by net NOK 850 million. In April and March 2016 there were redemptions of two bonds by net NOK 700 million. In October 2016 there was a redemption of NOK 500 million and additional there will be two more redemptions in January and February 2017 by net NOK 800 million. For this reason the Bank had a high liquidity as at 30 September 2016 to meet the cash outflow of in total NOK 1,300 million. 8.3 Working capital statement The Bank is of the opinion that the working capital available to the Bank is sufficient for the Bank's present requirements, for the period covering at least 12 months from the date of this Prospectus. 8.4 Contingent and indirect indebtedness The Bank issues guarantees in its course of business. This guarantee exposure amounts to NOK million as of 30 September Other than this the Bank did not have any contingent or indirect indebtedness as the date of this Prospectus. 68

76 9. SELECTED FINANCIAL INFORMATION 9.1 Introduction The following tables present selected Historical Financial Information in respect of the Bank. Unless otherwise stated herein, the selected interim condensed financial information as of, and for the three month period ended, 30 September 2016 (with comparable figures for the three months ended 30 September 2015), for the nine month period ended 30 September 2016 (with comparable figures for the three months period ended 30 September 2015) and the selected financial information as of, and for the years ended, 31 December 2015, 2014 and 2013 have been derived from, and are based on, the Interim Financial Statements and the Annual Financial Statements, respectively. The Annual Financial Statements as of, and for the years ended, 31 December 2015, 2014 and 2013, incorporated by reference in this Prospectus (see Section 19.1 "Incorporation by reference"), have been prepared in accordance with IFRS as adopted by the EU. The Interim Financial Statements, as of, and for the three months and nine months ended, 30 September 2016 (with comparable figures for the three months ended 30 September 2015) incorporated by reference in this Prospectus, have been prepared in accordance with IAS 34. The Annual Financial Statements have been audited by PricewaterhouseCoopers AS, as set forth in their report thereon included together with the Annual Financial Statements. The selected financial information included herein should be read in connection with, and is qualified in its entirety by reference to, the Annual Financial Statements and Interim Financial Statements incorporated by reference in this Prospectus, see Section 19.1 "Incorporation by reference", and should be read together with Section 10 "Operating and Financial Review". 9.2 Summary of accounting policies For information regarding accounting policies and the use of estimates and judgements, please refer to Note 2 of the Annual Financial Statements as of, and for the year ended, 31 December 2015, and Note 1 Interim Financial Statements as of 30 September 2016, incorporated by reference in this Prospectus. With effect from 1 January 2016, the Bank has reclassified its two perpetual subordinated loans amounting to approximately NOK 160 million in the balance sheet from long term debt to shareholders' equity. The reason for this reclassification is that these loans have certain characteristics that under IAS 32 deem these loans to be considered equity under IFRS. As a consequence of this reclassification, interest expense previously recorded in the comprehensive statement of income for the years ended 31 December 2015, 2014 and 2013, and the three month and nine month period ended 30 September 2015, have been reversed, and the associated interest expense has instead been recognized as a deduction to shareholders' equity. The net effect on shareholder's equity of the above reclassification is equal to the carrying amount of the two perpetual subordinated loans, for the years in question. The Bank has restated its comparative figures for the third quarter of 2015 and for the years ended 31 December 2013, 2014 and 2015 in line with this reclassification. For further details see notes 1 to the Interim Financial Statements. Furthermore, following the release of the Norwegian FSA's Circular 12 "FSA's review of financial reporting in 2015" dated 19 November 2015; Pareto Bank has changed its accounting policy relating to the guarantee fund levy. Previously this levy has been accrued over the year, while the Bank with effect from 1 January 2016 has recognized this in its entirety for Q The charge for 2016 was NOK 5.72 million. If the Bank 69

77 had accrued this cost according to its previous policy it would have amounted to NOK 1.43 million for the third quarter. The corresponding amounts for 2015 were NOK 5.4 million and 1.36 million. The comparative figures have been changed accordingly. The Norwegian Department of Finance Ministry has on 19 September 2016 approved a new regulation regarding withdrawal from the guarantee fund as of 1 January This means that the Bank will again accrue the guarantee fund levy over the year in accordance with previous practice. 9.3 Statement of comprehensive income The table below sets out selected data from the Bank's interim statement of comprehensive income for the three month and nine month period ended 30 September 2016 and 2015 and its statement of comprehensive income for the years ended 31 December 2015, 2014 and Certain amounts have been reclassified as set out in Section 9.2. Three months ended Nine months ended Year ended 30 September 30 September 31 December In NOK millions 2016 (unaudited) 2015 (unaudited)* 2016 (unaudited) 2015 (unaudited)* 2015 (unaudited)* 2014 (unaudited)* 2013 (unaudited)* Interest income Interest expense (50.9) (47.2) (154.0) (164.2) (208.8) (264.9) (263.7) Net interest income Fee and commission income Fee and commission expense (0.1) (0.1) (0.4) (0.3) (0.5) (0.8) (0.8) Net gains on financial instruments 10.2 (2.8) 21.8 (8.1) (2.3) Other operating income Net other operating income (17.8) Total income Personnel expenses (15.4) (14.1) (44.6) (38.4) (53.0) (54.4) (49.6) Administrative expenses (6.3) (5.7) (24.5) (18.2) (25.1) (21.7) (21.5) Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets (1.0) (1.2) (3.3) (3.4) (4.6) (3.7) (3.9) Total expenses before loan losses (22.7) (20.9) (72.4) (60.0) (82.7) (79.8) (75.0) Profit before loan losses Net loan losses (7.4) 0 (18.8) (4.0) (31.6) (7.9) (10.3) Profit before tax Income tax expense (22.8) (18.9) (60.1) (54.7) (67.7) (58.2) (45.7) Net profit for the period Total other comprehensive income, net of tax Total profit for the period ,

78 * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September The table below sets out selected data from the Bank's statement of comprehensive income for the years ended 31 December 2015, 2014 and 2013 derived from the Annual Financial Statements. Year ended 31 December In NOK millions 2015 (audited) 2014 (audited) 2013 (audited) Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net gains on financial instruments Other operating income Net other operating income Total income Personnel expenses Administrative expenses Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets Other operating expenses Total expenses before loan losses Profit before loan losses Net loan losses Profit before tax Income tax expense Net profit for the period Total other comprehensive income, net of tax Total profit for the period Condensed statement of financial position The table below sets out selected data from the Bank's interim statement of financial position as of 30 September 2016 and 2015 and its statement of financial position as of 31 December 2015, 2014 and Certain amounts have been reclassified as set out in Section

79 In NOK millions As of 30 September As of 31 December ASSETS (unaudited) (unaudited)* (unaudited)* (unaudited)* (unaudited)* Cash and balances with central banks Loans to and receivables from credit institutions 1, Loans to and receivables from customers 8, , , , ,161.9 Interest bearing securities 3, , , , ,100.0 Shares and mutual funds Financial derivatives Intangible assets Deferred tax assets Property, plant and equipment Other assets 0.5 0, Prepaid expenses and accrued income Total assets 13, , , , ,889.8 LIABILITIES Due to credit institutions Deposits from and borrowings to customers 7, , , , ,110.1 Debt securities issued 3, , , , ,513.4 Financial derivatives Other liabilities Accrued expenses and prepaid income Subordinated loan capital Total liabilities 11, , , , ,862.4 Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , , , ,027.4 Total liabilities and equity 13, , , , ,889.8 * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September

80 The table below sets out selected data from the Bank's statement of financial position as of 31 December 2015, 2014 and 2013 derived from the Annual Financial Statements. In NOK millions As of 31 December ASSETS (audited) (audited) (audited) Cash and balances with central banks Loans to and receivables from credit institutions Loans to and receivables from customers 7, , ,161.9 Interest bearing securities 2, , ,100.1 Shares and mutual funds Financial derivatives Intangible assets Deferred tax assets Property, plant and equipment Other assets Prepaid expenses and accrued income Total assets 11, , ,889.8 LIABILITIES Due to credit institutions Deposits from and borrowings to customers 6, , ,110.1 Debt securities issued 3, , ,513.4 Financial derivatives Payable tax Other liabilities Accrued expenses and prepaid income Subordinated loan capital Total liabilities 9, , ,971.2 Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , ,6 Total liabilities and equity , , Condensed statement of cash flows The table below sets out selected data from the Bank's interim statement of cash flows for the three month period ended 30 September 2016 and 2015 and its statement of cash flows for the years ended 31 December 2015, 2014 and 2013 as derived from the Interim Financial Statements and the Annual Financial Statements. 73

81 In NOK millions Nine months ended 30 September Year ended 31 December 2016 (unaudited) 2015 (unaudited) 2015 (audited) 2014 (audited 2013 (audited) Cash flow from Operating activities Interest paid by central banks and credit institutions Receipts/payments of deposits by customers 1,176.5 (916,8) (892.6) 1, Interest paid on deposits by customers (70.8) (139.5) (167.0) (183.7) (170.1) Receipts/payments on loans to customers (976.4) (280.0) (754.9) (53.7) (418.2) Interest received on loans to customers Receipts/payments of deposits by credit institutions (1.4) (1.2) (10.1) (188.0) Interest paid on deposits by credit institutions (0.5) (0.3) (1.0) (0.4) (2.6) Receipts/payments on certificates and bonds (1,207.3) ,106.4 (2,283.6) (120.1) Interest received on certificates and bonds Receipts/payments on shares, mutual fund units and other securities (9.9) (230.5) 50.0 Receipts/payments on securities debt (76.0) Interest paid on securities debt (63.0) (55.4) (71.7) (74.5) (59.9) Receipts/payments on financial derivatives (72.0) (61.1) (72.7) Commission received Commission paid (0.4) (0.3) (0.5) (0.8) (0.8) Payments for operations (64.8) (45.2) (81.6) (56.6) (40.3) Tax paid (57.6) (52.3) (83.4) (54.2) (23.1) Cash flow from operating activities (135.1) Investing activities Investments in tangible assets (0.2) (0.0) (0.6) (0.0) (0.1) Sale of tangible assets Investments in intangible assets (1.0) (4.4) (5.4) (4.5) (0.9) Cash flow from investing activities (1.2) (4.4) (6.0) (4.6) (1.1) Financing activities Received on sales of own shares Investment in own shares (0.0) (0.0) (0.0) (0.0) (2.9) New share capital and additional paid-in capital Paid on repayment of subordinated loan capital (124.0) 0.00 Payment received of subordinated loan capital

82 In NOK millions Nine months ended 30 September Year ended 31 December 2016 (unaudited) 2015 (unaudited) 2015 (audited) 2014 (audited 2013 (audited) Interest paid, hybrid and subordinated loan capital (11.3) (12.4) (16.0) (16.9) (17.6) Dividend paid 0.0 (25.5) (25.5) (25.5) (25.5) Cash flow from financing activities (37.9) (41.5) 36.5 (46.0) Cash flow for the period (103.2) Cash and cash equivalents at the start of the period Cash and cash equivalents at the end of the period 1, Changes in cash and cash equivalents (103.2) Condensed statement of changes in equity The table below sets out selected data from the Bank's statement of changes in equity for the years ended 31 December 2013, 2014 and 2015 and its interim statement of changes in equity for the three month period ended 30 September Share capital Other paid in capital Fund for unrealized gains Retained earnings Shareholders' equity Hybrid capital Total Equity In NOK millions Balance sheet as at 31 December ,027.4 Profit for the year Sale own shares Paid interest on hybrid capital (10.8) (10.8) Reduced tax interest hybrid capital Paid dividend for (25.5) (25.5) 0.0 (25.5) Issue hybrid capital Balance sheet as at 31 December , ,209.0 Balance sheet as at 31 December , ,209.0 Profit for the year (11.2) Paid interest on hybrid capital (10,8) (10.8) 0.0 (10.8) Reduced tax interest hybrid capital Paid dividend for (25.5) (25.5) 0.0 (25.5) Balance sheet as at 31 December , ,350.4 Balance sheet as at 31 December , ,350.4 Profit for the period Share issues Paid interest on hybrid capital (7.8) (7.8) 0.0 (7.8) Reduced tax interest hybrid capital Reduced tax interest Share issues Balance sheet 30 September , , Auditor The Bank's auditor is PricewaterhouseCoopers AS with registration number and business address at Dronning Eufemias gate 8, 0191 Oslo, Norway. PricewaterhouseCoopers AS is a member of Den Norske Revisorforeningen (The Norwegian Institute of Public Accountants). PricewaterhouseCoopers AS has been the Bank's auditor since December 2007 and thus throughout the period covered by financial information included in this Prospectus. 75

83 PricewaterhouseCoopers AS' audit reports on the Annual Financial Statements are included within the Annual Financial Statements and incorporated by reference together with the Annual Financial Statements. 76

84 10. OPERATING AND FINANCIAL REVIEW This operating and financial review should be read together with Section 9 "Selected Financial Information" and the Annual Financial Statements and the Interim Financial Statements and related notes as incorporated by reference in this Prospectus (see Section 19.1 "Incorporation by reference"). The operating and financial review contains forward-looking statements. These forwardlooking statements are not historical facts, but are rather based on the Bank's current expectations, estimates, assumptions and projections about the Bank's industry, business and future financial results. Actual results could differ materially from the results contemplated by these forward-looking statements because of a number of factors, including those discussed in Section 2 "Risk Factors" and Section 4.5 "Forwardlooking statements", as well as other Sections of this Prospectus. See Section "Basis for the preparation of financial reporting" General overview The Bank opened for business on 4 January Its initial focus was financing of property development and securities. During the financial crisis, the Bank experienced healthy growth due to restrictive credit conditions in the market and a strong capital base. The Bank then started building up a shipping and offshore team and portfolio as well as an offering of corporate financing. Currently, The Bank has a strong market position in its main business areas with good results and low credit losses. Good banking practices and a thorough understanding of the markets, combined with efficiency of operations, have enabled the Bank to deliver steadily improving results. In the last three years, the post-tax profits have risen from approximately NOK 116 million in 2013 to just over NOK 174 million in During the same period the post-tax Return on Equity grew from 13.3% to 15.6%. The Bank holds a strong position in the real estate development market in the Oslo area. With over 200 active customers, this sector contributed to 65% of total interest income as of the third quarter of 2016, and accounted for 62% of total lending. At the end of Q3 2016, the Bank provided 377 customers with a broad range of securities financing products and investment services. The main rationale behind this business is to take advantage of the opportunities afforded by the Bank's link to the Pareto Group. The Bank has a cooperation agreement with Pareto Securities concerning securities financing. See Section "Cooperation agreements with Pareto Securities AS" for further details regarding this agreement. Securities financing products and investment services are primarily distributed by Pareto Securities to clients of Pareto Securities. In order to manage the administrative risk associated with these products, it is normally a requirement that the client holds a VPS account with Pareto Securities and executes trades through Pareto Securities. In addition, the Bank is boosting its efforts to provide financing to small and medium-sized companies and their owners. The Bank has a diversified portfolio in the shipping and offshore sectors. At the end of Q3 2016, this portfolio comprised 25 loans, three of which were in the offshore sector, distributed among 36 different vessels. The Bank has made a profit in every year of its existence, has continuously grown its lending portfolio and has had low losses. At the same time, it has maintained a compact, cost-effective organisation which has enabled it to achieve high returns for its investors. 77

85 10.2 Significant factors affecting business performance Macroeconomic environment and monetary policy Norway is currently experiencing a mild economic downturn. One of the main drivers behind this is the sharp decline in the oil price which from 2014 to the beginning of The price of oil has since stabilized around USD Growth abroad also affects the Norwegian economy. Europe has experienced a long-lasting downturn while the US is starting to recover from the financial crisis of Developing economies are experiencing lower growth, although growth rates are still high. Among other things, this is keeping commodity prices low and interest rates close to zero in many regions. The fall in oil prices has caused a sharp decline in petroleum investment activity. Economic growth as measured by Norwegian gross national product has bottomed out and is picking up gradually in the course of 2016, mainly driven by housing. Housing prices have grown significantly in Oslo and the eastern part of the country, with growth rates as high as 18% annually. Contraction in the housing markets in the west coast areas of Hordaland and Rogaland have slowed but prices are still lower than they were a year ago. Traditional exports are soft. Consumption has levelled off but picked up in the services sector. Employment continues to decline, but is expected to bottom out at the end of the year. Inflation is expected to rise temporarily due to a weaker krone. 28 Norges Bank, the Norwegian central bank, has responded to lower petroleum investments, slowing growth and low rates abroad by gradually lowering its key rate. The latest rate change was on 17 March when the central bank lowered key rates to 0.50 percent, the lowest in Norwegian history. According to the third annual inflation report, the central bank expects rates to remain under 1.00 percent for at least the next three years. There is a small probability of another rate cut which will happen if the outlook deteriorates. 29 Low interest rates are in general putting pressure on banks' net interest rate margins, as there is a limit to how low banks can set deposit rates, while competition for lending in retail markets remains strong. 30 This is in particular a problem in countries like Sweden where interest rates are significantly negative, and banks rarely price customer deposits under zero. Norges Bank has admitted that negative rates are a possibility, but that it will move slowly and evaluate such moves carefully, as the long-term effects of such unprecedented moves are unknown. 31 Pareto Bank's net interest margin is less sensitive to further downward moves in the key rates. The Bank's niche areas and lending to project clients are less price sensitive than lending to retail segments such as home lending. The Bank's strengths including speed of response and flexibility are more important to transaction-based clients than price, and allow the Bank to take high margins even in a low rate environment. Likewise, the Bank offers competitive deposits at rates which can plenty of room to be adjusted downward should it be necessary due to market rates. However, extreme moves to very negative rates will eventually affect the Bank's ability to price deposits lower. Combined with lower business activity or higher competition in the Bank's key segments, this could put pressure on its interest rate margins. Low interest rates also affect the return the Bank makes on its capital. In a zero rate environment, holding a liquidity buffer is a costly though necessary use of capital. A more serious economic downturn which affects a larger area of the country can have a negative effect on the Bank's business areas. These will be described below. 28 Handelsbanken Macro Forecast Norway, "The headwinds have subsided what now?", 11 October Norges Bank, Norges Bank Monetary Policy Report 3/2016, 22 September Norges Bank, Survey of Bank Lending 1/ Norges Bank, Press Release 17 March 2016; Norges Bank Monetary Policy Report 1/

86 New housing development activity and property values The housing market has been particularly strong in the Oslo region in the past year despite lower growth in the economy due to falling oil prices. Housing prices in Oslo have risen by an annual rate of 18.5%, and prices in surrounding areas have grown by high rates as well. This is attributed mainly to low interest rates, low regional unemployment, high demand for housing and a restricted supply. 32 Only a small percentage of petroleum activity is located in the Southeast Norway and more specifically in the Oslo region. Strong demographic trends contribute to the growth of the property market in the Oslo region. Urbanisation trends have led to a steadily increasing number of people moving from more rural regions to cities and to Oslo in particular. Secondly, increased immigration has created additional need for housing, particularly in the form of less expensive apartments. On the other hand, increased building regulation and entrepreneurial costs have limited the amount of new housing being built. These trends have kept housing prices on an upward trend except for a dip during the financial crisis. 33 The majority of the Bank's real estate lending is made to fund building projects for residential property. Of the real estate portfolio, 70% of the credit exposure by the end of Q was towards either property lots for development or development projects. These projects have a short time to completion and the Bank's loans of this kind will generally be repaid within 12 to 24 months. The Bank requires that enough units be presold before the credit is opened. The requirement is such that if the price of unsold units falls by 50% compared to pre-sold units the sales amount will still be sufficient to cover the credit. This means that the Bank's exposure to a fall in property prices is limited. The majority of the Bank's property loans are made to properties in Oslo. As of Q3 2016, 53% of lending is made to Oslo, 16% is made to suburbs of Oslo in Akershus county, and the remainder is largely made to neighbouring counties in the Southeast Norway such as Romerike, Buskerud, Østfold, Vestfold and Oppland. 3% of the real estate exposure was in Bergen. This protects the Bank from property downturns in the western area of the country which is more connected to the petroleum industry. A downturn in housing market in the Oslo region could have two effects on the Bank's business. Lower activity in development could arise from lower demand or lower supply. Lower demand could arise from falling housing prices or the expectation of lower prices, causing residents to delay housing purchases or to avoid the risk of selling one home before buying the next one. Lower activity could also be caused by rising building costs or increased regulation or cumbersome city planning which reduces project profitability. As a large part of the Bank's project portfolio has a short maturity, a substantial reduction in activity would reduce the Bank's ability to maintain volumes and interest margins in the short term. It would force the Bank to move volume from one segment to another, introducing potentially another kind of risk. On the other hand, reduced lending volumes would in the short term also improve the Bank's capital strength. A fall in property prices would mainly affect the Bank's business if it affected the amount of development activity as described above. Because of the short maturity of building project loans and the requirement for presale, property prices would have to fall dramatically in a very short period of time to threaten the creditworthiness of this loan portfolio. The Bank performs stress tests of the portfolio, assuming that property prices fall up to 40%. In this stress test the effect of falling property prices on the value of the project is isolated and the financial strength of the debtor is not taken into account. These stress tests demonstrate that under extreme circumstances, although the Bank would make losses on certain loans, it would normally be able to absorb losses within its annual earnings. 32 Handelsbanken Macro Forecast Norway, "The headwinds have subsided what now?", 11 October Pareto Bank's own assessments 79

87 Oil prices The Norwegian economy is in a large part reliant on the petroleum industry. As such, any Norwegian business, and especially one in the financial sector, will be dependent on the price of oil and the strength of the oil market. The Bank does not have commitments as of the end of Q directly to the petroleum sector. The most directly related loans to the sector are three loans and one guarantee made to the offshore sector, comprising an exposure of NOK 145 million, or 1.3% of the Bank's total exposure. A further price collapse causing petroleum investment to be curtailed further could weaken loans made to this sector. The Bank has an indirect exposure to the oil sector, in two main respects. The strength of the petroleum industry affects corporate activity and may affect the Bank's access to business in the corporate sector. The Bank also provides security lending to investors owning Norwegian stocks and bonds, and many of these may be related to the petroleum sector. Secondly, the second-hand effects of a further decline in oil prices may include lower growth in other sectors, increased unemployment, lower housing prices and lower investment and spending. This would potentially affect the Bank's other business, creating uncertainty and potentially lowering lending activity. On the other hand, a recovery in oil prices could cause a rebound in offshore investment and activity. Arguably this would be a healthier, more cost effective market than was the case before oil prices began to fall and could boost optimism, investment and growth Shipping and offshore market The Bank is exposed to a diversified portfolio of shipping markets: product, bulk, car carrier, chemical, industrial, LNG/LPG, tank, container and, as mentioned above, offshore service. Each market has its own characteristics and some may be procyclical while others may be countercyclical. In addition, the Bank has some exposure to the offshore market for anchor handling tug supply vessels (AHTS) and floating production storage and offloading units. The chart below shows the Bank's exposure in the Shipping and Offshore segments broken down by market as of Q

88 Many shipping markets are facing challenging times with high supply and low rates see Section 6.2 "Norwegian economic overview". These markets are directly linked to world economic activity. While growth is picking up in the US, growth in Europe is still quite slow and the future of developing markets such as China is uncertain. To the extent that the Bank has exposure to these markets, further declines in rates may threaten the creditworthiness of the commitments. The Bank's Shipping & Offshore team is therefore focusing its efforts on conserving value, evaluating risk and following up covenants and collateral values. On the other hand, a volatile market can present the Bank with good risk to value opportunities. As such Pareto Bank is in a good position to be able to make high value loans to solid Norwegian industrial clients Regulatory environment The Bank operates in a strongly regulated industry and faces regulation from both Norwegian authorities as well as regulation instigated by international bodies such as the Bank of International Settlements and the European Union that may be implemented in Norwegian law. The financial crisis of caused waves of new regulation aimed at strengthening capital and increasing liquidity, among other things. This was the essence of the new standard dubbed "Basel III" which led to a new directive CRD IV and regulation CRR implementing Basel III in the EU. Both CRD IV and CRR are now implemented in Norwegian law. In some cases, such as is the case for Pillar 2 capital requirements and transitions for liquidity requirements, the Norwegian regulators have gone beyond what is required in the applicable EU legislation. The purpose of this regulation has been to strengthen the industry and increase the robustness of financial enterprises. The definition of core equity and hybrid capital has been made stricter requiring banks to make changes to their capital structures and in some cases by calling outstanding hybrid bonds and issuing new ones to conform to new standards. Capital has also become more 81

89 costly as hybrid capital has taken properties that make it riskier and closer to equity for investors. Any further strengthening or changes in these requirements can increase the Bank's cost of capital. Authorities have also required that banks meet a number of capital buffers to absorb the effect of economic and financial shocks. The Bank must meet a capital conservation buffer, a system buffer and a countercyclical buffer. The purpose of the countercyclical buffer is that it be built up gradually during good times so that it is available to absorb losses in crises. The Norwegian Ministry of Finance makes an evaluation every quarter whether to increase the level of the buffer. The buffer was last increased from 1.0% to 1.5% on 30 June The buffer was kept at this level at the latest evaluation on 22 September 2016 after a recommendation by Norges Bank. 34 The Bank has set off extra capital within its capital targets to be able to meet a new increase in the countercyclical buffer, but any increase or increases in the future will require the bank to increase its capital base. Any further increase in capital requirements will force the Bank to evaluate whether to increase capital ratios by reducing lending growth, retaining a larger degree of earnings by reducing dividends or by raising additional capital. In addition to minimum capital requirements and capital buffers, banks are required to evaluate their own capital needs not covered by so-called Pillar 1 requirements. These requirements will vary from bank to bank and are called Pillar 2 requirements. Pareto Bank has made such an evaluation (ICAAP) in the end of 2015, estimating the Bank's Pillar 2 requirements for 2015 through The Bank will perform a new ICAAP evaluation at the end of 2016, and will do so on an annual basis. Changes in the Bank's business, such as concentration of risk in certain areas, decrease in quality or increase in market risk can lead to a higher Pillar 2 requirements and higher total capital requirements. In addition to the Bank's own evaluation, the Norwegian FSA will evaluate the Bank's risks and Pillar 2 requirements in a process dubbed a Supervisory Review and Evaluation Process (SREP). The Norwegian FSA published a new circular on 27 June 2016 describing a methodology for performing the SREP, and the bank expects to be evaluated in The result of this process may be that the Norwegian FSA requires the Bank to hold additional Pillar 2 capital. The Bank is also meeting additional liquidity requirements which are being phased in gradually. Among these are Liquidity Coverage Ratio (LCR), Net Stable Funding Ratio (NSFR), Additional Monitoring Metrics (AMM) and Leverage Ratio (LR). AMM reporting has started as of the month of September 2016, while LR is not fully defined and will be phased in on a future date. Stricter liquidity requirements will mean that the Bank must hold a higher amount of liquid assets or switch to assets with higher quality. This could increase the cost of holding a liquidity buffer. The Bank Resolution and Recovery Directive (BRRD) has been implemented in the EU and is currently in the process of being implemented in Norwegian law. This directive sets out the rules for the solution of banks in all EU Member States. Banks will be required to prepare recovery plans to overcome financial distress. Authorities are also granted a set of powers to intervene in the operations of banks to avoid them failing. If they do face failure, authorities are equipped with comprehensive powers and tools to restructure them, allocating losses to shareholders and creditors following a clearly defined hierarchy. Among other things, this directive can lead to investors facing increased risk of loss on senior securities issued by banks, increase the cost of market funding. Finally, it should be underscored that while stricter bank regulations may increase costs, it also has a beneficial effect on the robustness of the Bank itself and on the sector as a whole. A strong and robust financial sector allows the Bank to operate in a stable environment which benefits both business opportunities and funding costs. 34 Norges Bank, Norges Bank Monetary Policy Report 3/2016, 22 September

90 10.3 Selected balance sheet items as of 31 December 2015, 2014, 2013 and as of 30 September 2016 and 2015 The table below summarises selected balance sheet items as of 30 September 2016 and 2015, as well as 31 December 2015, 2014 and Certain amounts have been reclassified as set out in Section 9.2. In NOK millions As of 30 September As of 31 December ASSETS (unaudited) (unaudited)* (unaudited)* (unaudited)* (unaudited)* Cash and balances with central banks Loans to and receivables from credit institutions 1, Loans to and receivables from customers 8, , , , ,181.4 Individual impairment on loans to and receivables from customers (31.4) 0 (17.6) 0 (0.8) Group impairment on loans to and receivables from customers (45.7) (30.7) (40.7) (26.7) (18.7) Net loans to customers, central banks and credit institutions 10, , , , ,713.5 Interest bearing securities 3, , , , ,100.1 Shares and mutual funds Financial derivatives Intangible assets Deferred tax assets Property, plant and equipment Other assets Prepaid expenses and accrued income Total assets 13, , , , ,889.8 LIABILITIES Due to credit institutions Deposits from and borrowings to customers 7, , , , ,110.1 Debt securities issued 3, , , , ,513.4 Financial derivatives Other liabilities Accrued expenses and prepaid income Subordinated loan capital Total liabilities 11, , , , ,862.4 Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , , , ,027.4 Total liabilities and equity 13, , , , ,889.8 * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September

91 The table below sets out selected data from the Bank's statement of financial position as of 31 December 2015, 2014 and 2013 derived from the Annual Financial Statements. In NOK millions As of 31 December ASSETS (audited) (audited) (audited) Cash and balances with central banks Loans to and receivables from credit institutions Loans to and receivables from customers 7, , ,161.9 Interest bearing securities 2, , ,100.1 Shares and mutual funds Financial derivatives Intangible assets Deferred tax assets Property, plant and equipment Other assets Prepaid expenses and accrued income Total assets 11, , ,889.8 LIABILITIES Due to credit institutions Deposits from and borrowings to customers 6, , ,110.1 Debt securities issued 3, , ,513.4 Financial derivatives Payable tax Other liabilities Accrued expenses and prepaid income Subordinated loan capital Total liabilities 9, , ,971.2 Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , ,6 Total liabilities and equity , ,

92 Three-month period ended 30 September 2016 compared with three month period ended 30 September 2015 The table below sets out the Bank's balance sheet as of, and for the three-month periods ended, 30 September 2016 and 30 September In NOK millions As of 30 September % Change ASSETS (unaudited) (unaudited)* Cash and balances with central banks (75) Loans to and receivables from credit institutions 1, Loans to and receivables from customers 8, , Individual impairment on loans to and receivables from customers (31.4) 0 n.m. Group impairment on loans to and receivables from customers (45.7) (30.7) 49 Net loans to customers, central banks and credit institutions 10, , Interest bearing securities 3, , Shares and mutual funds Financial derivatives Intangible assets (8) Deferred tax assets (22) Property, plant and equipment Other assets (38) Prepaid expenses and accrued income Total assets 13, , LIABILITIES Due to credit institutions ,050 Deposits from and borrowings to customers 7, , Debt securities issued 3, , Financial derivatives (61) Other liabilities (40) Accrued expenses and prepaid income Subordinated loan capital Total liabilities 11, , Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , Total liabilities and equity 13, , * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September The Bank had at the end of the third quarter 2016 total assets of NOK 13,643 million (NOK 10,870 million). Net lending to customers increased to NOK 8,908 million (NOK 7,486 million). The growth in lending in the first three quarters of 2016 was NOK 977 million as opposed to a decrease in lending of NOK 444 million in the same period of the previous year. The majority of this lending growth was in real estate financing, corresponding with a strong positive trend in the real estate market in Oslo, fuelled by low interest rates and demographics. Real estate credit exposure increased by NOK 958 million during the first three quarters of Securities and corporate financing grew moderately. Shipping & offshore financing fell due to partial redemptions and a stronger NOK. The shipping and 85

93 offshore markets are facing challenging conditions and the Bank is exercising caution in making new loans in this area. Undrawn credit lines and guarantees made up NOK 2,348 million (NOK 2,201 million) at the turn of the quarter. The lending portfolio has a high degree of short credits which means that the rate of redemption is naturally high. There has been high activity and the Bank granted credit lines amounting to NOK 6,956 million (NOK 2,085 million) during the first three quarters of Deposits from customers amounted to NOK 7,631 million (NOK 6,431 million) at the end of the quarter, a deposit growth of NOK 1,176 million. Much of this growth was due a marketing campaign offering fixed rate deposits during the first quarter in order to increase long-term funding and finance lending growth. The share of fixed rate deposits at the end of the quarter was 26.0% of total deposits, as opposed to 21.1% at the end of The Bank targets a deposit-to-loan ratio of 80%, and at the end of the third quarter the ratio was at 85.7% (97.9%). Net outstanding securities debt at the end of the quarter was NOK million (2,714 million). The Bank has in the first three quarters issued two certificates and two bonds and has in total issued and expanded debt by NOK 1,250 million. The bank met maturities on two bonds in April and May of in total NOK 700 million. In addition the Bank has a maturity in October of NOK 500 million and two maturities in January and February respectively of in total NOK 800 million. The Bank had at the end of the quarter therefore a relatively high surplus liquidity of NOK 4,619 million (NOK 3,301 million). The liquidity is mainly invested in interestbearing debt, deposits in larger Norwegian banks and in Norges Bank. Investments in bonds are made in government and municipal debt, covered bonds, senior bank debt, other investment grade bonds and funds with investment grade ratings. The Bank may also invest in fixed-income funds and individual bonds with credit ratings below investment-grade and a minimum credit rating of B in a separate investment portfolio. At the end of the quarter the Bank had no investments in this portfolio. 86

94 Year ended 31 December 2015 compared with year ended 31 December 2014 The table below sets out the Bank's balance sheet as of, and for the year ended, 31 December 2015 and 31 December In NOK millions As of 31 December % Change ASSETS (unaudited)* (unaudited)* Cash and balances with central banks Loans to and receivables from credit institutions Loans to and receivables from customers 7, , Individual impairment on loans to and receivables from customers (17.6) 0 - Group impairment on loans to and receivables from customers (40.7) (26.7) 52.4 Net loans to customers, central banks and credit institutions 8, , Interest bearing securities 2, , Shares and mutual funds Financial derivatives Intangible assets Deferred tax assets Property, plant and equipment Other assets Prepaid expenses and accrued income Total assets 11, , LIABILITIES Due to credit institutions Deposits from and borrowings to customers 6, , Debt securities issued 3, , Financial derivatives Other liabilities Accrued expenses and prepaid income Subordinated loan capital Total liabilities 9, , Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , Total liabilities and 11, ,

95 In NOK millions equity As of 31 December % Change * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September At year-end 2014, the Bank held total assets of NOK 11,140 million (NOK 11,340 million). Net loans to customers amounted to NOK 7,931 million (NOK 7,207 million), while undrawn credit lines and guarantees amounted to NOK 2,351 million (NOK 1,779 million). The credit portfolio contains a high proportion of short-term credits, which means that the rate of redemption on the portfolio of loans is naturally high. Activity levels were very satisfactory, and credit lines amounting to NOK 9,320 million (NOK 6,682 million) were granted during the course of Growth in credit exposure was evenly spread between real estate, corporate and shipping & offshore. Growth in exposure to real estate by NOK 616 million was primarily due to an increase in financing of property lots and development of residential housing, with little growth in commercial property. The property market in Oslo continued its positive trend, and there was a transition from small housing projects in western Oslo to cheaper housing in other areas of Oslo and neighbouring counties of Akershus and Romerike. During 2015, the Bank was growing its corporate and shipping & offshore portfolios. Credit exposure in these segments grew by NOK 364 million and NOK 450 million respectively. The Bank financed seven new projects in various shipping segments. At year-end, loans, undrawn credit lines and guarantees were composed of 54.9% (56.2%) for real estate financing, 3.2% (5.3%) for mortgages, 27.0% (26.3%) for company and securities financing and 14.9% (12.3%) for shipping and offshore financing. At year-end 2015, deposits stood at NOK 6,455 million (NOK 7,348 million), a reduction of NOK 893 million on the figure reported one year earlier. The Bank had targeted a reduction in deposits, since the Bank was able to obtain financing at a more reasonable rate in the securities market at the same time as the deposit-to-lending ratio had been excessive due to high surplus liquidity. The proportion of fixed-rate deposits at year-end stood at 21.1% of total deposits, as compared with 39.3% at year-end The target deposit-to-lending ratio is in the region of 80%, and at year-end 2015 this ratio stood at 81.4% (102.0%). Net outstanding securities debt at year-end 2015 was NOK 3,018 million (NOK 2,351 million). Demand for the Bank's securities loans increased during 2015, a situation that enabled the Bank to issue large amounts at lower premiums relative to other similarly sized savings banks. Credit premiums on bank bonds increased sharply post-summer 2015 and the credit premiums on the Bank's bonds rose by approximately basis points. This is generally the case for the market as a whole. The increase in the credit premiums of niche banks and smaller banks was somewhat sharper than was the case for the larger banks. During 2015, the Bank issued and extended existing bonds and certificates by a total of NOK 1,390 million. At year-end, the Bank held surplus liquidity amounting to NOK 3,141 million (NOK 4,048). This is primarily invested in interest-bearing securities, or is on deposit with large Norwegian banks and Norges Bank. Securities investments are in sovereign and municipal bonds, covered bonds, banks and other investment-grade bonds. Credit premiums in all sectors rose in the second half of 2015 as a consequence of low levels of liquidity and negative macroeconomic views, resulting in a drop in the value of the portfolio and a capital loss for 2015 of in total NOK 49.3 million. The Bank may also invest in fixed-income funds and individual bonds with credit ratings below investment-grade and a minimum credit rating of B in a separate investment 88

96 portfolio. During the second quarter of 2015, the Bank sold off the bulk of its mutual fund units and its holding of bonds in this portfolio at a total profit of NOK 12.7 million. At year-end, the Bank had no investments in this portfolio. 89

97 Year ended 31 December 2014 compared with year ended 31 December 2013 The table below sets out the Bank's balance sheet as of, and for the year ended, 31 December 2014 and 31 December In NOK millions As of 31 December % Change ASSETS (unaudited)* (unaudited)* Cash and balances with central banks Loans to and receivables from credit institutions Loans to and receivables from customers 7, , Individual impairment on loans to and receivables from customers 0 (0.8) Group impairment on loans to and receivables from customers (26.7) (18.7) 42.8 Net loans to customers, central banks and credit institutions 7, , Interest bearing securities 3, , Shares and mutual funds Financial derivatives Intangible assets Deferred tax assets Property, plant and equipment Other assets Prepaid expenses and accrued income Total assets 11, , LIABILITIES Due to credit institutions Deposits from and borrowings to customers 7, , Debt securities issued 2, , Financial derivatives Other liabilities Accrued expenses and prepaid income Subordinated loan capital Total liabilities 10, , Share capital and additional paid-in capital Other equity Hybrid capital Total equity 1, , Total liabilities and 11, ,

98 In NOK millions equity As of 31 December % Change * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September At year-end 2014, the Bank held total assets of NOK 11,340 million (NOK 8,890 million). The increase in total assets in 2014 was the result of increased customer deposits and issuances of securities loans. Loans to customers amounted to NOK 7,207 million (NOK 7,162 million), while undrawn credit lines and guarantees amounted to NOK 1,779 million (NOK 1,754 million). The credit portfolio contains a high proportion of short-term credits, which means that the rate of redemption on the portfolio of loans is naturally high. This gives the Bank broad scope for adjusting the size of the loan portfolio to match the applicable capital requirements. Activity levels remained high throughout 2014 and credit lines amounting to NOK 6,682 million were granted. Despite high activity in the real estate sector a number of redemptions caused credit exposure in this segment to fall by NOK 295 million during The Bank was making a transition from less profitable commercial projects to high margin residential projects, and a number of the Bank's commercial loans were redeemed. The Bank was gradually building its shipping & offshore portfolio, and credit exposure in this segment rose by NOK 347 million. The Bank financed new projects in a number of segments, including rig and bulk. At year-end, loans, undrawn credit lines and guarantees broke down into 56.2% (62.7%) for real estate financing, 5.3% (5.4%) for mortgages, 26.3% (20.1%) for company and securities financing and 12.3% (8.5%) for shipping and offshore financing. Deposits grew by NOK 1,237 million in 2014 to NOK 7,348 million. The deposit-to-lending ratio at year-end was 102.0% (85.3%). The increase in deposits came about as a result of a number of large individual deposits. The Bank holds a high proportion of large individual deposits, of which a high proportion is stable deposits in the form of various types of client account and fixed rate deposits. Over the course of 2014, the Bank has reduced its deposit rate on a number of occasions and has also launched new deposit products. These measures have been put in place in order to adapt to new and future liquidity requirements and to strengthen the profits of the Bank. Total fixed-rate deposits at year-end 2014 amounted to 39.3% (50.7%) of overall customer deposits. Net outstanding securities debt at year-end stood at NOK 2,351 million (NOK 1,513 million). Demand for the Bank's securities loans increased in 2014 and the credit spreads on the Bank's loans fell by 35 to 45 basis points. During 2014, the Bank issued new loans with maturities of 3 to 5 years in both Norwegian and Swedish kroner. At year-end, the Bank held surplus liquidity amounting to NOK 4,048 million. Liquid assets are primarily invested in interest-bearing securities, on deposit in large Norwegian Banks, Norges Bank and in mutual funds. Securities placements are split between a liquidity portfolio and an investment portfolio. The value of the liquidity portfolio stood at NOK 3,729 million and was made up of investments in fixed income funds, banks and investment-grade bonds. The investment portfolio contains investments in fixed income funds and individual bonds with credit ratings below investment-grade and a minimum credit rating of B. The value of the investment portfolio stood at NOK 319 million at yearend

99 Results of operations Three month and nine month period ended 30 September 2016 compared with three month and nine month period ended 30 September 2015 The table below sets out the Bank's financial information as of, and for the three month and nine month periods ended, 30 September 2016 and September In NOK millions Three months ended 30 September (unaudited) (unaudited)* % change Nine months ended 30 September (unaudited) (unaudited)* % change Interest income Interest expense (50.9) (47.2) 8 (154.0) (164.2) (6) Net interest income Fee and commission income Fee and commission expense (0.1) (0.1) 0 (0.4) (0.3) 33 Net gains on financial instruments 10.2 (2.8) (464) 21.8 (8.1) (369) Other operating income 0 0 n.m Net other operating income , (17.8) (285) Total income Personnel expenses (15.4) (14.1) 9 (44.6) (38.4) 16 Administrative expenses (6.3) (5.7) 11 (24.5) (18.2) 35 Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets (1.0) (1.2) (17) (3.3) (3.4) (3) Total expenses before loan losses (22.7) (20.9) 9 (72.4) (60.0) 21 Profit before loan losses Net loan losses (7.4) 0 n.m. (18.8) (4.0) 370 Profit before tax Income tax expense (22.8) (18.9) 21 (60.1) (54.7) 10 Net profit for the period * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September The net profit for the three month period ended 30 September 2016 increased by 35% from the same period in Increased credit margins, a higher volume of credit as well as increased commissions contributed to a sound rise in the Bank's net interest income by 20%. The Bank recorded gains on holdings of securities of NOK 10.2 million in the third quarter of 2016 compared to losses of NOK 2.8 million in the same period in The Bank recorded individual write-downs on loans of NOK 5.4 million (NOK 0.0 million) while collective write-downs were increased by NOK 2.0 million (NOK 0.0 million) in Q Net profit for the nine month period ended 30 September 2016 increased by 22% from the same period in This was driven by a 20% increase in net interest income and a stable cost base. The Bank recorded individual write-downs on loans of NOK 13.8 million (NOK 0.0 million) and an increase in collective write-downs of NOK 5.0 million (NOK 4.0 million) in the first three quarters of These write-downs were connected to the shipping sector. Net interest income Net interest income for Q totaled NOK million (NOK 90.3 million). This increase came about as a consequence of an improved credit margin and a higher volume of lending. The Bank's funding cost fell somewhat in the third quarter as a result of reductions in deposit rates. Credit premiums on the Bank's senior bonds fell although this was compensated by a general increase in market rates. 92

100 The net interest margin between lending and deposits in Q was 5.25%, as compared with 5.02% for the same period in 2015, which corresponds to an increase of 0.23 per cent points. Net operating income Net other operating income recorded in third quarter of 2016 amounted to NOK 13.3 million (NOK 0.3 million). Net fee and commission income from banking services was NOK 3.2 million (NOK 3.1 million). The increase in other income is related to net capital gains on the Bank's portfolio of financial instruments of NOK 10.2 million (-NOK 2.8 million). Although the Bank has largely neutralised all interest rate and currency risk, it is exposed to changes in credit premiums on its portfolio of interest-bearing securities, units in mutual funds, issued securities and fixed rate deposits. The principle of valuing financial instruments at fair value means that the results reported by the bank may vary considerably. Operating expenses Operating expenses in the three month period ended 30 September 2016 amounted to NOK 22.7 million (NOK 20.9 million). This made for a Cost/Income Ratio in the third quarter of 2016 of 18.7% (23.1%). Cost/Income for the first nine months of 2016 was 21.8% (22.5%). Salaries and other personnel costs account for the largest proportion of the overall operating costs of the bank, amounting to NOK 15.4 (NOK 14.1 million). This includes a provision for profit sharing with employees in the amount of NOK 4.2 million (NOK 3.5 million). The scheme is performance-based and the variable remuneration is paid out as shares in Pareto Bank. The Bank has increased its number of FTE's by 3 in the previous year. The increase in personal is according to plan and is primarily within sales-oriented activities. Administrative expenses amounted to NOK 6.3 million (NOK 5.7 million) and consisted largely of IT, marketing and costs related to leased premises. Net loan losses Non-performing credit commitments stood at NOK 28.0 million at the end of Q (NOK 42.5 million), spread across six credit commitments. Individual write-downs have been made for two of these credits for in total NOK 2.4 million, whereas NOK 0.6 million was written down in the third quarter. Net non-performing credit commitments amounted to NOK 25.6 million, which corresponded to 0.29% of gross lending (0.57%). The Bank had three impaired credit commitments amounting to NOK million, for which individual write-downs have been made for NOK 29.0 million. The background for these write-downs is the recent substantial reduction in value recorded in the dry-bulk and offshore sectors. The commitments are not in default. Net outstanding amount is NOK million, corresponding to 1.23% of gross lending. The Bank increased its collective write-downs in Q by NOK 2.0 million to NOK 45.7 million, equivalent to 0.51% of gross lending. This was largely in response to a reduction in ship values within individual sectors. No objective events necessitating write-downs in other parts of the credit portfolios of the Bank have occurred. Net write-downs and losses in Q amounted to NOK 7.4 million compared to NOK 0.0 million in the same period of Net write-downs in the first nine months of 2016 amounted to NOK 18.8 million compared to NOK 4.0 million in the same period of

101 Year ended 31 December 2015 compared with the year ended 31 December 2014 The table below sets out selected data from the Bank's statement of comprehensive income for the years ended 31 December 2015 and Certain amounts have been reclassified as set out in Section 0. The net profit for the year ended 31 December 2015 increased by 7.8% from Increased credit margins on a higher volume of credit contributed to a sound rise in the Bank's net interest income in Profits were reduced as a consequence of losses on the Bank's holdings of securities and write-downs on loans. The Bank recorded individual write-downs of NOK 17.6 million (NOK 0.0 million) and increased collective write-downs by NOK 14.0 million (NOK 8.0 million). In NOK millions Year ended 31 December (unaudited)* (unaudited)* % change Interest income Interest expense (208.8) (264.9) (21.2) Net interest income Fee and commission income Fee and commission expense (0.5) (0.8) (44.6) Net gains on financial instruments (2.3) 9.8 (123.3) Other operating income (29.2) Net other operating income (38.1) Total income Personnel expenses (53.0) (54.4) (2.6) Administrative expenses (25.1) (21.7) 15.6 Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets (4.6) (3.7) 23.6 Total expenses before loan losses (82.7) (79.8) 3.6 Profit before loan losses Net loan losses (31.6) (7.9) Profit before tax Income tax expense (67.7) (58.2) 16.3 Net profit for the period * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September The table below sets out selected data from the Bank's statement of comprehensive income for the years ended 31 December 2015 and 2014 derived from the Annual Financial Statements. 94

102 In NOK millions Year ended 31 December (audited) (audited) Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net gains on financial instruments Other operating income Net other operating income Total income Personnel expenses Administrative expenses Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets Other operating expenses Total expenses before loan losses Profit before loan losses Net loan losses Profit before tax Income tax expense Net profit for the period Net interest income Net interest income totaled NOK (NOK million). The increase in net interest income in 2015 came about as a consequence of an improved credit margin, lower borrowing costs and a higher volume of lending. The Bank brought down its borrowing costs in 2015 by reducing interest rates on deposits and lowering credit premiums on issued securities. The net interest margin between lending and deposits in 2015 was 4.94%, as compared with 4.20% in 2014, which corresponds to an increase of 0.74 per cent points. Net operating income Net other operating income recorded in 2015 amounted to NOK 12.4 million (NOK 20.0 million). Net fee and commission income from banking services developed positively, amounting to NOK 14.6 million (NOK 10.2 million). Of this, guarantee commissions accounted for NOK 10.4 million (NOK 7.0 million). The reduction in other income is related to capital losses on the Bank's portfolio of financial instruments. Although the Bank has largely neutralised all interest rate and currency risk, it is exposed to changes in credit premiums on its portfolio of interestbearing securities, units in mutual funds, issued securities and fixed rate deposits. The principle of valuing financial instruments at fair value entails that the results reported by the bank may vary considerably. Net losses on financial instruments in 2015 amounted to NOK 2.3 million compared to a gain of NOK 9.8 million in The losses in 2015 were due to higher credit premiums on the Bank's holdings of bonds. During 2015 the Bank recorded net losses on its holdings of securities in the total amount of NOK 49.3 million. At the same time, the 95

103 Bank recorded net gains on its own debt of NOK 24.9 million and net gains on its investment portfolio of NOK 12.7 million. Operating expenses Operating expenses in 2015 amounted to NOK 82.7 million (NOK 79.8 million). This made for a Cost/Income Ratio in 2015 of 23.2% (25.9%). Salaries and other personnel costs account for the largest proportion of the overall operating costs of the bank, amounting to NOK 53.0 (NOK 54.4 million). This includes a provision for profit sharing with employees in the amount of NOK 10.8 million (NOK 17.4 million). The scheme is performance-based and the variable remuneration is paid out as shares in Pareto Bank. Administrative expenses amounted to NOK 25.1 million (NOK 21.7 million) and consisted largely of IT, marketing and costs related to leased premises. Net loan losses Non-performing credit commitments stood at NOK million at year-end 2015 (NOK 0.0 million), spread across five credit commitments. Four of these were property commitments with an amount outstanding of NOK 90.8 million. These credit commitments are assessed by the Bank as well secured and not impaired and accordingly no individual write-downs have been performed with respect to the commitments. The fifth credit commitment was in the shipping sector and involved an amount outstanding of NOK 52.8 million. An individual write-down of NOK 17.6 million was made with respect to this commitment, as a consequence of which the net amount outstanding is NOK 35.2 million. The background for this write-down is the recent very substantial reduction in value recorded in the dry-bulk sector. Net non-performing credit commitments amounted to NOK million, which corresponded to 1.58% of gross lending (0.00%) at year-end. The Bank increased its collective write-downs in 2015 by NOK 14.0 million to NOK 40.7 million, equivalent to 0.51% of gross lending. This was largely in response to a reduction in ship values within individual sectors. No objective events necessitating write-downs in other parts of the credit portfolios of the Bank have occurred. Net write-downs and losses in 2015 amounted to NOK 31.6 million compared to NOK 7.9 million in Income tax expenses The income tax expenses in 2015 came to NOK 67.7 million compared to NOK 58.2 million in Taxes payable amounted to NOK 57.6 million (NOK 83.4 million). The Bank has negative temporary differences of NOK million (NOK million), and at year-end deferred tax assets stood at NOK 25.2 million (NOK 32.2 million). The negative temporary differences relate primarily to net gains/(losses) on the Bank's holdings of derivatives and securities. The change in the rate of corporation tax from 27% to 25% in 2016 resulted in a reduction in the value of the deferred tax assets of the Bank and increased the tax cost for 2015 by NOK 2.0 million Year ended 31 December 2014 compared with year ended 31 December 2013 The table below sets out selected data from the Bank's statement of financial position as of 31 December 2014 and Certain amounts have been reclassified as set out in Section

104 The net profit for the year ended 31 December 2014 increased by 39.3% from Net interest income showed strong growth in 2014 due to higher net interest margins and loan growth in areas with better credit margins. Total income increased to NOK million in 2014 compared to NOK million in 2013, while operating expenses and total loan loss provisions were at approximately the same level as in In NOK millions Year ended 31 December (unaudited)* (unaudited)* % change Interest income Interest expense (264.9) (263.7) 0.5 Net interest income Fee and commission income Fee and commission expense (0.8) (0.8) 10.5 Net gains on financial instruments (5.3) Other operating income Net other operating income (1.2) Total income Personnel expenses (54.4) (49.6) 9.7 Administrative expenses (21.7) (21.5) 0.9 Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets (3.7) (3.9) (4.4) Total expenses before loan losses (79.8) (75.0) 6.5 Profit before loan losses Net loan losses (7.9) (10.2) (22.9) Profit before tax Income tax expense (58.2) (45.7) 27.4 Net profit for the period * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September The table below sets out selected data from the Bank's statement of comprehensive income for the years ended 31 December 2014 and 2013 derived from the Annual Financial Statements. 97

105 In NOK millions Year ended 31 December (audited) (audited) Interest income Interest expense Net interest income Fee and commission income Fee and commission expense Net gains on financial instruments Other operating income Net other operating income Total income Personnel expenses Administrative expenses Depreciation, amortisation and impairment of property, plant and equipment, and intangible assets Other operating expenses Total expenses before loan losses Profit before loan losses Net loan losses Profit before tax Income tax expense Net profit for the period Net interest income Net interest income in 2014 totalled to NOK compared to NOK million in This increase of 26.9% came about as a consequence of an improved credit margin and lower borrowing costs. The Bank increased its profitability on lending by shifting focus to projects with higher margins, such as residential housing. The Bank brought down its borrowing costs in 2014 by reducing interest rates on deposits and lowering credit premiums on issued securities. The net interest margin between lending and deposits in 2014 was 4.20%, as compared with 3.26% in 2013, which corresponds to an increase of 0.93 per cent points. The yearly fee of NOK 5.5 million (NOK 4.8 million) payable to the Norwegian Banks' Guarantee Fund is charged to net interest income for Net operating income Net other operating income recorded in 2014 amounted to NOK 20.0 million (NOK 20.3 million). Net fee and commission income from banking services developed slightly positively, amounting to NOK 10.2 million (NOK 9.8million). Of this, guarantee commissions accounted for NOK 7.0 million (NOK 5.6 million). Net other operating income includes net gains/losses on the Bank's portfolio of financial instruments valued at fair value. Although the Bank has largely neutralised all interest rate risk and currency risk, it is exposed to changes in credit premiums on its portfolio of interest-bearing securities, units in mutual funds, issued securities and fixed rate deposits. For 2014, as a whole, net gains on financial instruments totalled NOK 9.8 million (NOK 10.4 million). The principle of valuing financial instruments at fair value will entail that the results of the Bank may vary considerably. 98

106 Operating expenses Operating expenses in 2014 amounted to NOK 79.8 million (NOK 75.0 million). This made for a Cost/Income Ratio in 2014 of 25.9% (30.3%). Salaries and other personnel costs accounted for most of the overall operating costs of the Bank, amounting to NOK 54.4 million (NOK 49.6 million). The increase in the 2014 figure was caused by a provision for profit sharing with employees of NOK 17.4 million (NOK 11.0 million). The scheme is performance-based and for the most part the variable remuneration is paid out in the form of Pareto Bank shares. Administrative costs amounted to NOK 21.7 million (NOK 21.5 million) and consisted largely of IT, marketing and costs related to leased. Net loan losses In the first quarter of 2014, the Bank wrote off losses of NOK 0.2 million and reversed write-downs in the amount of NOK 0.6 million relating to a real estate commitment that had been written down in 2011 and Moreover, in the fourth quarter, losses were written off in the amount of NOK 0.5 million on a real estate commitment. The Bank received payment in full of the principal and interest on this commitment since it held priority collateral claims, but did not recover its collection costs. Collective write-downs were increased in 2014 by NOK 8.0 million to NOK 26.7 million. Net write-downs and losses in 2014 amounted to NOK 7.9 million (NOK 10.2 million). Income tax expenses Income tax expenses totalled NOK 58.2 million (45.7 million), while taxes payable amounted to NOK 83.4 million (NOK 54.2 million). In 2014 and 2013, the Bank has recorded high negative temporary differences and at year-end 2014 deferred tax assets totalled NOK 32.2 million (NOK 4.0 million). The negative temporary differences relate primarily to net gains/(losses) on the Bank's holdings of derivatives and securities Key figures and ratios In order to measure the Bank's performance on a historic basis, Management has primarily made use of the following measures: (i) Lending Growth, (ii) Net Interest Margin, (iii) Cost/income Ratio and (iv) Loan Loss Ratio. These are Alternative Performance Measures ("APMs") which are provided to give a deeper understanding of the Bank's financial performance and which are further defined below and in Section 20 of this Prospectus Lending Growth Lending Growth is defined as the percentage difference in the Bank's loans to and receivables from customers excluding individual and group impairments between time periods. The Bank believes this is a useful measure because it provides an indication of the Bank's activity level over time. The Bank's loans to customers excluding losses grew by 10.4% and 0.7% for the fiscal years ended 31 December 2015 and 2014, respectively. The following table sets out the development in the Bank's Lending Growth comparing the years ended 31 December 2015, 2014 and

107 In NOK millions (unless otherwise stated) Year ended 31 December (audited) (audited) (audited) Loans to and receivables from customers excluding individual and group impairments 7, , ,181.4 Lending Growth,% Undrawn credit lines and guarantees are off-balance items used to show the Bank's total credit exposure. Percentage growth is calculated in the same way as above. In the same periods undrawn credit lines and guarantees grew by 32.1% and 1.4%. The credit portfolio contains a high proportion of short-term credits, which means that the rate of redemption on the portfolio of loans is naturally high. This gives the Bank broad scope for adjusting the size of the loan portfolio to match the applicable capital requirements. Activity levels remained high throughout the three year period. Credit lines amounting to NOK 4,581 million, NOK 6,682 million and NOK 9,320 million were granted in 2013, 2014 and 2015, respectively. The figure below summarizes drawn amounts and redemptions per year. 100

108 Net Interest Margin The Bank's Net Interest Margin is an APM which measures the profitability of the Bank's lending operations. The Bank measures both lending and deposit margins relative to 3 months Norwegian Interbank Offer Rate ("NIBOR"). The Bank believes this is a useful measure because it provides an understanding of the main profit and cost drivers of the Bank's business excluding other temporary effects such as net gains on financial instruments which can fluctuate over time. The Net Interest Margin is the difference between the Bank's Lending Margin and the Bank's Deposit Margin. The Lending Margin is calculated by aggregating the Bank's interest income on loans to customers, dividing it by the average monthly lending volume, adjusting for the number of days in the period and subtracting the average 3 months NIBOR rate. The Deposit Margin is likewise calculated by aggregating the Bank's interest cost on deposits to customers, dividing it by the average monthly deposit volume, adjusting for the number of days in the period and subtracting the average 3 months NIBOR rate. (Note that the monthly average lending and monthly average deposits, listed in the table below, are calculated by averaging the volumes for individual months weighted by the number of days, and thus are not numbers that are available in the Bank's quarterly statements.) The table below provides an overview of the development in the Bank's interest margins compared to 3 month NIBOR. In % unless otherwise stated Nine months ended 30 September Year ended 31 December Interest income Interest income on lending to customers, NOKm Interest cost on customer deposits, NOKm (80.2) (98.3) (123.6) (178.7) (188.5) Average used as a basis for Rates Monthly average Total Lending, NOKm 8, , , , ,855.0 Monthly average Total Deposits, NOKm 7, , , , ,937.7 Average nominal 3 month NIBOR The Bank's Rate Margins The Bank's Lending Margin over NIBOR The Bank's Deposit Margin over NIBOR (0.48) (0.63) (0.59) (1.00) (1.42) The Bank's Net Interest Margin over NIBOR The Bank's Net Interest Margin has improved from 3.26% for the year ended 31 December 2013 to 4.94% for the year ended 31 December In the first nine months of 2016, the Net Interest Margin was 5.07%. The Bank has been able to improve its Net Interest Margin through two main drivers: a focus on profitability in customer lending and improvement in penetration of deposit financing. Margins for lending have improved while funding margins decreased due to higher funding rates in the first quarter. The Bank has a relatively high interest contribution from its business areas. As of Q3 2016, the Bank earned its highest margins on real estate development and corporate 35 Oslo Børs, Monthly average of nominal interest rate ( 101

109 loans at 4.4% and 4.6% over funding costs, respectively. Securities financing had a margin of 4.0% and shipping and offshore financing 3.9%. The Bank has a strong focus on profitability and evaluates each loan separately with an internal profitability model. The Bank does not provide unprofitable loans to build customer relations or the like. Rather, the Bank's key competitive advantage of providing quick and tailored funding to transaction-based customers allows it to maximize its margins. The figure below summarizes the development of net interest margins for individual quarters from 2013 to Q (Note that quarterly interest margins will differ from periodic and annual interest margins as shown in the table above.) Cost/Income Ratio The Cost/Income Ratio is an APM which measures operating efficiency. It is calculated by dividing the Bank's total expenses by total net income for the same period and expressed as a percentage. The Bank believes this ratio is useful because it demonstrates the Bank's cost efficiency and ability to increase earnings at a higher rate than costs. The Bank's Cost/Income Ratio improved from 29.3% for the year ended 31 December 2013 to 23.2% for the year ended 31 December The Cost/Income Ratio was 21.8% in the first nine months of This improvement has been driven by economies of scale as well as increasing operational efficiency. The Cost/Income Ratio improved in 2016 despite a slight nominal cost increase compared to 2015 due to two new FTEs. The following table sets out the development in the Bank's Cost-to-Income Ratio for the nine month periods ended 30 September 2016 and 2015, as well as years ended 31 December 2015, 2014 and

110 In NOK millions (unless otherwise stated) Nine months ended 30 September Year ended 31 December (unaudited) (unaudited)* (unaudited)* (unaudited)* (unaudited)* Total net income Total expenses Cost/Income Ratio,% * Certain amounts have been reclassified. See Section 9.2 "Summary of accounting policies" and note 1 of the Interim Financial Statements as of 30 September Loan Loss Ratio The Loan Loss Ratio is an APM measuring the quality of the Bank's lending operations. It is calculated by dividing the Bank's net loan losses by the Bank's loans to and receivables from customers excluding individual and group impairments for the same period and expressed as a percentage. The Bank believes that Loan Loss Ratio is a useful measure because it shows the quality of the Bank's credit portfolio and can indicate the Bank's skill in evaluating credit risk over time. The following table sets out the development in the Bank's Loan Loss Ratio for the nine month periods ended 30 September 2016 and 2015, as well as years ended 31 December 2015, 2014 and In NOK millions (unless otherwise stated) Nine months ended 30 September Year ended 31 December (unaudited) (unaudited) (audited) (audited) (audited) Loans to and receivables from customers excluding individual and group impairments 8, , , , ,181.4 Net loan losses Loan Loss Ratio,% The Bank's Loan Loss Ratio increased from 0.13% for the year ended 31 December 2013 to 0.38% for year ended 31 December 2015, and fell thereafter to 0.21% for the quarter ended 30 September The increase in 2015 is mainly due to an individual writedown of one specific loan within shipping (0.21% of gross lending). Losses in 2016 are also related to the shipping sector. The figure below shows the bank's group and individual write-downs. 103

111 10.6 Liquidity The Bank targets holding liquidity risk at a low to moderate level in the short and long term. The Bank's most important financing sources are deposits and issuance of certificate and bond loans. Deposits should normally compose about 55% of the Bank's liabilities with a target deposit to lending ratio of 70% to 80%. Securities debt should normally compose about 30% of the Bank's liabilities. The Bank should have a sufficient liquidity buffer. The target for this buffer is that it is about 25% of the Bank's assets Strategic liquidity targets and limits The Bank has certain limits for liquidity management in the short and long term: The Bank's holding of cash (including cash equivalents and accounts with other banks) should be about 20% of the Liquidity Requirement as defined below. The Bank has good intraday liquidity with accounts in several banks and a committed credit facility from DNB at NOK 250 million. This is kept to meet short-term cash requirements. At least 60% of the Bank's owned securities shall be valid as security for loans from Norges Bank. The Bank has well over this amount as its portfolio of bonds consists largely of covered bonds and bonds issues by states and state-guaranteed issuers. The limit for the Bank's Liquidity Coverage Ratio (LCR) will increase gradually in a transitional phase and shall be at least 100% in 2016 and at least 120% in The Bank shall have a positive Liquidity Gap ("LG") in the current month as well as the next three months. The LG is defined as the Bank's liquidity buffer after haircuts less a potential loss of deposits and drawing of granted credit facilities by clients. The target is that the Bank's LG shall be positive for the next twelve months. The Bank's target level for the Norwegian FSA's Liquidity Indicator 1 ("LI1") is 1.10 and it shall not fall under The Bank performs a stress test on the LI1 and Liquidity Indicator 2 ("LI2") by simulating a loss of deposits and drawing of credit facilities. When the stress tested LI1 falls below 1.05 the Bank shall initiate activities to improve liquidity. The limits for Net Stable Funding Ratio (NSFR) are not yet defined but the Bank has an NSFR of around 130% in its quarterly measurements. 104

112 Liquidity buffer The Bank's strategic target for the liquidity buffer is that it be about 25% of the Bank's assets. The Bank's policy for management of the liquidity buffer describes how the buffer is to be composed including targets and limits for rating, sectors, maturities and other factors. Limits on issuers and counterparties are approved on a case-by-case basis by the Bank's credit committee or in certain cases the Board of Directors. The main purpose of the liquidity buffer is to provide a high degree of liquidity and flexibility to the Bank and therefore the Bank has a strong focus on purchasing bonds and other interest-bearing papers with a high degree of liquidity in the market. The Bank regularly buys and sells bonds in the portfolio and continuously monitors market conditions and liquidity. In addition, bonds may be used for collateral for loans from Norges Bank or commercial banks via GMSLA agreements. The Bank may also use the bonds in the portfolio on repo or buy/sellback transactions regulated by Global Master Repurchase Agreements ("GMRA") agreements with other financial enterprises. The Bank had a liquidity buffer of NOK 4,618.6 million at Q % of this is made up of cash deposits in Norges Bank and other banks. Of these deposits, the Bank had currency deposits in USD, EUR, SEK, CHF, GBP and DKK. The value of these currency deposits was NOK million. 34% of the liquidity buffer is made up of bonds issues by states, state-guaranteed issuers or municipalities, 52% is made up of covered bonds and the remaining 14% is made up of other bonds, mainly senior debt in the bank and finance sector. The bond portfolio is comprised of 74% papers rated AAA, 12% rated AAtil AA+, 0% rated A- to A+ and 14% rated BBB- to BBB+. (Official ratings are used where they exist. The Bank has otherwise used shadow ratings issued by DNB or Nordea. These banks have since discontinued these shadow ratings, but here the Bank has used the latest ratings issued.) The Bank owned no bonds rated under investment grade. The Bank has an investment portfolio in which it can place up to NOK 500 million of bonds with rating under investment grade, but as of Q it had no investments in this portfolio. The following charts show the composition of the Bank's liquidity buffer as of 30 September 2016 by issuer. 105

113 In NOK millions As of 30 September As of 31 December (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Cash and deposits with central banks Lending to and deposits with credit institutions 1, Bonds issued by governments and public sector entities 1, , Covered bonds issued by financial institutions 1, , , , Senior debt issued by financial institutions Other investment grade bonds Contingent drawings Investment portfolio Total liquid assets 4, , , , , LCR The Bank measures LCR on a daily basis and reports this figure monthly to the Norwegian FSA. The Bank shall have a minimum LCR of 100% in 2016 and 120% in These levels are comfortably above minimum levels set for all Norwegian banks by the Norwegian FSA. The Bank's liquidity buffer consists in very large part of bonds which qualify as LCR level 1 assets as defined in CRR/CRD IV: bonds issued by governments, public sector entities and covered bonds. Certain covered bonds and Norwegian municipalities make up level 2 assets, which bonds issued by other financial institutions do not qualify for LCR. By satisfying LCR requirements the Bank ensures that it has the ability to cover liquidity losses due to an outflow of deposits and an increase in the drawdown on credit lines on a 30-day basis. The Bank reduces the risk of this outflow by offering longer term fixed rate deposits and deposits with limits on withdrawals (see Section "Deposit Financing" below). The following chart shows the Bank's surplus liquidity broken down as of 30 September 2016: 106

114 As of 30 September As of 31 December (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) LCR All currencies 227% 169% 188% 162% 61%* LCR NOK 232% 174% 187% 171% *LCR in 2013 was defined without covered bonds as level 1 assets Liquidity indicator The Norwegian FSA's LI1 and LI2 measure the Bank's ability to finance its assets on a one year and one month horizon, respectively. The Norwegian FSA has determined fixed targets for these indicators: 1.05 for LI1 and 1.10 for LI2. The Bank has higher target levels and treats the Norwegian FSA targets as minimum levels. Upon breach of target levels the Bank must evaluate actions to bring the LI back to target. As of 30 September As of 31 December (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Liquidity indicator 1 (min 1.05, target 1.10) Liquidity indicator 2 (min 1.10, target 1.15) The Bank also calculates a stressed LI. The purpose of this is to give an early warning indicator of a falling LI which may indicate a need to generate additional funding. The stressed LI is calculated assuming an outflow of deposits and an increase in drawing of credit lines corresponding to calculation of the Liquidity Requirement. The limits for the stress test correspond to the minimum requirements of the LI from the Norwegian FSA, 1.05 for LI1 and 1.10 for LI2. If the stressed LI is under these levels then the Bank shall evaluate measures to bring it above its minimum levels Liquidity Gap The Bank's Liquidity Gap (LG) is composed of the Bank's liquidity buffer after haircuts less the Bank's Liquidity Requirement. Haircuts are applied to the liquidity buffer based on increased credit spreads depending on the paper's rating, based on the Norwegian FSA model for calculating credit spread risk. In practice this haircut is about 3 to 4% of the portfolio's value. The liquidity requirement is composed of the Bank's order book for lending in the current month, increased drawing on facilities offered to customers and a potential loss of deposits. The Bank shall have a positive, accumulated LG for the next three months. Furthermore the Bank targets a positive LG for the next twelve months. If the accumulated LG during the next twelve months becomes negative then the Board is to be notified and the management should design a plan to bring the LG back to target. In NOK millions As of 30 September As of 31 December (unaudited) (unaudited) (unaudited) (unaudited) (unaudited) Liquidity Buffer (with haircut) 4,552 3,209 3,067 3,886 1,546 Liquidity Requirement 1,566 1,617 1,467 1,490 1,049 Liquidity Gap 2,985 1,592 1,600 2, NFSR Net Stable Funding Ratio (NSFR) measures the Bank's long-term liquidity risk. It is defined in CRR/CRD IV as the ratio of the sum of stable financing (capital, deposits and market financing) over the sum of assets requiring financing (lending and illiquid assets). 107

115 It has not been implemented at this time in Norwegian law, although the Bank reports preliminary figures to the Norwegian FSA. Figures will therefore not be presented in this Prospectus. NSFR will in time replace the Liquidity Indicator targets, and its minimum level will likely be set to 100% Financing The Bank's financing consists of mainly of customer deposits and market loans (issuance of certificates and bonds). The Bank's target for deposit to loan ratio is between 70 and 80%, and no less than 60%. The Bank's target for market lending is that it shall comprise about 20 to 30% of the Bank's total assets and no more than 40%. The balance between these two funding sources will change depending on market conditions and competition for deposits Deposit financing The Bank offers deposits to retail and business customers. The Bank's primary deposit product is the Paretokonto, which offers a variable interest rate without restrictions. The Paretokonto is composed of three tiers: under NOK 0.5 million, from NOK 0.5 to 20 million and over NOK 20 million. The Bank offers the best rate in the middle tier and a reduced rate for small deposits. Above NOK 20 million the Bank reserves the right to set the rate individually and usually sets a low NIBOR-based rate to discourage a high concentration of large deposits. The Bank also offers two deposits with liquidity restrictions. The Plasseringskonto offers a higher interest rate than the Paretokonto but withdrawals must be requested 31 days ahead and the customer has a maximum of 11 withdrawals per year. The Plasseringskonto is only for deposits between NOK 0.5 and 20 million. The Bank also offers fixed rate deposits with maturities for up to 3 years. As of Q3 2016, the Bank offered fixed rates for 1, 2 and 3 year deposits. These agreements offer a fixed rate for the entire period, but the customer will incur a termination fee in excess of the interest rate differential for early withdrawals. The minimum amount for a fixed rate deposit is NOK 0.5 million and the Bank reserves the right to individually price any deposit for over NOK 10 million. If the sum of a customer's deposits exceeds NOK 20 million, the Bank reserves the right to individual pricing or restriction in use of products such as fixed rate deposits. Finally, the Bank offers deposits for currencies, tax deduction, and custodian and escrow accounts, among others. The Bank had a deposit to loan ratio at the end of Q of 86%. The deposit to loan ratio at the end of 2015, 2014 and 2013 respectively were 81%, 102% and 85%. Because of the nature of the Bank's lending, which can have variations during the year and between years, matching funding to lending has not always been possible. Therefore, there has been variation in the deposit to lending ratio. In 2013, it looked like lending growth was outpacing funding and the Bank ran a campaign to advertise fixed rate deposits which achieved a great response. However, lending did not grow as quickly as projected and this led to a high deposit to loan ratio topping out at 102%. During the years of 2014, and in particular 2015, the Bank has focused on bringing the level of deposits back to a level more suitable for the Bank's lending and resulted in bringing the deposit to loan ratio back to its target area. Lending growth in the first three quarters of 2016 was NOK million. Much of this came in the first quarter with a growth of NOK 494 million as a result of a campaign to attract fixed-rate deposits. The Bank has attracted a growing amount of client deposits. Increased deposits contribute to financing of lending growth in See the Section "Borrowing requirements" below. 108

116 The following table sets forth an overview of deposits and lending in the years from 2013 to Q3 2016: Deposits consisted at the end of Q of 26% fixed-term deposits, 21% deposits with 31-day withdrawal restrictions and 53% other deposits with variable rates and no restrictions. Maturity of fixed-rate deposits are between NOK 60 and 80 million in October and November, increasing to around NOK 200 to 250 million per month in December and in the first quarter of The Bank has a high share of corporate deposits at 65% and a relatively large amount of large deposits. 26% of deposits are under NOK 2 million while 20% are over 20 million as of the end of Q

117 The following table shows the deposit allocation among retail and corporate customers as of 30 September 2016: The table below shows the deposits by size (NOK million): The table below shows time to maturity distribution of Fixed Rate Deposits (NOK million): 110

118 Market funding The Bank regularly issues bonds with up to five year maturities. These usually have up to NOK 500 million outstanding with evenly distributed maturities. The loans shall as a main rule be listed on Nordic ABM or Oslo Børs. It is important for the Bank to establish a liquid market for its bonds and build a good reputation as an issuer. To this end the Bank issues senior bonds regularly, and will at times issue bonds in good markets even when there is not an immediate need for funding. The Bank also issues investor presentations every quarter, holds regular meetings with investors and quotes two-way prices in its own loans. The Bank has had increasingly better access to funding markets in 2014 and Large investment offices have opened lines for Pareto Bank bonds, and there has been an increase in second hand market volume. However, the Bank is a small player and funding market access can be quickly closed off in turbulent markets. In the second half of 2015, for example, credit spreads on bank bonds increased dramatically and access to funding was more difficult. In 2016 the Bank has issued, including tap issues, NOK million in senior debt. Senior debt issued in NOK million as of 30 September 2016 ISIN Name Coupon Margin over 3M NIBOR Maturity Amount Issued Own holding Net Outstanding NO Pareto Bank ASA 13/16 FRN + 1,20 % NO Pareto Bank ASA 13/17 FRN + 1,85 % NO Pareto Bank ASA FRN CERT ,20 % NO Pareto Bank ASA 14/17 FRN + 0,70 % NO Pareto Bank ASA 14/18 FRN + 1,35 % NO Pareto Bank ASA 15/18 FRN + 1,37 % NO Pareto Bank ASA 16/19 FRN +1,75 % NO Pareto Bank ASA 14/19 FRN + 1,00 % NO Pareto Bank ASA 16/20 FRN + 1,40 % Total senior debt 4, ,883 Subordinate debt issued in NOK million as of 30 Sept 2016 ISIN Name Maturity Amount Issued Own holding Net Outstanding NO Pareto Bank ASA 14/24 FRN C SU NO Pareto Bank ASA 12/PERP FRN C Perpetual NO Pareto Bank ASA 14/PERP FRN C Perpetual Total subordinated debt The table below summarises market debt maturing (not including calls) in the current and following years as of 30 September 2016: 111

119 In NOK millions >2019 & Perpetual Issued market debt maturing 500 1, , Market debt maturing (net of own holdings) 450 1, , The Bank attempts to spread maturities in order not to concentrate maturities unduly in any one period. 40% of the Bank's market debt matures in the current and next year. The remained senior debt matures in 2018, 2019 and All senior debt matures at parity. The Bank's subordinated T2 loan NO (outstanding NOK 150 million) matures in 2024 but may be called on 3 September 2019 and on following quarters. In certain circumstances the Bank can perform a regulatory call (e.g., if it no longer qualifies as T2 capital due to changes in regulatory conditions). For this loan both ordinary and regulatory calls are made at parity. Both the Bank's hybrid T1 loans are perpetual; however, they may also be called by the Bank. The hybrid T1 loan NO (outstanding NOK 110 million) can be called on 29 March 2017 and on following quarters. This call is made at parity. The Bank can perform a regulatory call under certain conditions (e.g., if it no longer qualifies as hybrid capital due to changes in regulatory conditions). This call will be made at a price of 101. The Bank's hybrid T1 loan NO (outstanding NOK 50 million) can be called on 3 September 2019 and on following quarters. The Bank can perform a regulatory call under certain conditions (e.g., if it no longer qualifies as hybrid capital due to changes in regulatory conditions). For this loan both ordinary and regulatory calls are made at parity. The table below summarises market value of debt issued as at 30 September 2016 and 2015, as well as 31 December 2015, 2014 and In NOK millions As at 30 September As at 31 December (unaudited) (unaudited) (audited) (audited) (audited) Market debt issued 3, , , , , Borrowing requirements The Bank will need to secure enough liquidity to meet future lending growth, bond maturities and maturities of fixed-rate deposits. The Bank has not set growth targets for 2017 at the date of this Prospectus. Senior debt totalling NOK 450 million matured on 3 October 2016 and the Bank will face additional bonds maturities totalling NOK 1,215 million in The Bank expanded via tap issues senior debt totalling NOK 200 million ahead of the maturity in October. Otherwise the Bank has a relatively large surplus liquidity and aims to partially use these liquidity reserves to meet current and future bond maturities. The Bank will evaluate replacing senior bonds maturing in January and February next year depending on market conditions and the Bank's balance sheet. Fixed-rate deposits amounting to NOK 362 million are expected to mature in the fourth quarter of 2016 and NOK 1,048 million in deposits are expected to mature in the course of NOK 623 million of these deposits will mature in the first quarter of The Bank will generally renew these deposit agreements with customers. Rates will be adjusted depending on market rates, competition and the Bank's borrowing needs. 112

120 The Bank plans to raise NOK 120 million in additional subordinated debt in T2 bonds in the fourth quarter of 2016 to fulfil capital requirements. In addition, the Bank plans to raise NOK 200 million in equity funding in the fourth quarter of 2016 in the Rights Issue as described in this Prospectus. This amount will improve the bank's capital ratios as well as refinancing NOK 110 million in a hybrid T1 bond which has a call on 29 March Cash flows The following table sets out financial information extracted from the Bank's cash flow statement for the years ended 31 December 2015, 2014 and 2013, and for the nine month period ended 30 September 2016 and Figures have been extracted without material adjustment from, and should be read in conjunction with, Section 9.5 "Condensed statement of cash flows" above and the Financial Statements including the auditor's reports in respect of the Annual Financial Statements and the Interim Financial Statements. In NOK millions Nine months ended 30 September Year ended 31 December (unaudited) (unaudited) (audited) (audited) (audited) Cash provided (used) by operating activities (135.1) Cash provided (used) by investing activities (1.2) (4.4) (6.0) (4.6) (1,1) Cash provided (used) by financing activities (37.9) (41.5) 36.5 (46.0) Net change in Cash and Cash Equivalents (103.2) Cash and cash equivalents at the end of the period 1, Cash and cash equivalents The Bank has cash and cash equivalents of NOK 1,090.7 million as of 30 September Of this, NOK 57.0 million was current receivables with Norges Bank and NOK 1,033.7 million was current receivables with credit institutions. In addition, the Bank has a drawing facility of NOK 250 million. See also Sections 10.6 "Liquidity" for descriptions of the Bank's liquidity. Changing in cash and cash equivalents For the nine month period ended in 30 September 2016, the Bank had a net inflow in cash and cash equivalents of NOK million compared to a net inflow of NOK 81.7 million in the same period of Net loans to customer increased NOK million which was funded by an increase in deposits from customers of NOK 1,176.5 million. The Bank also issued bonds of net NOK million and share issues of net NOK million. Mostly of the net surplus of cash, NOK 1,246.8 million, was invested in bonds. Cash and cash equivalents for the year ended 31 December 2015 amounted to NOK million. Net loans to customers increased in 2015 by NOK million, while deposits from customers decreased by NOK million. To finance the cash outflow the Bank issued bonds of net NOK million and sold bonds for NOK 1,061.2 million. Including the profit of the year, net cash and cash equivalent therefore increased by NOK million in Cash and cash equivalents for the year ended 31 December 2014 amounted to NOK million. Net loans to customer increased by NOK 44.9 million in At the same time deposits from customers increased by NOK 1,237.4 million. The Bank also issued 113

121 bonds of net NOK million. The net surplus of cash, NOK 2,279.9 million, was mostly invested in bonds. Including the annual profit net cash and cash equivalent was reduced by NOK million in Cash and cash equivalents for the year ended 31 December 2013 amounted to NOK million. Net loans to customer increased by NOK million in At the same time deposits from customers increased by NOK million. Net issued bonds was reduced by NOK 71.1 million and investments in bonds amounted to NOK 37.8 million. With the annual profit net cash and cash equivalent from operating activities was therefore increased by NOK million. Operating activities For the nine month period ended in 30 September 2016, the Bank had a net outflow of cash from operating activities of NOK 87.8 million compared to a net inflow of NOK million in the same period of This reflects an increase in customer deposits, a higher lending growth and purchases of bonds in the Bank's liquidity portfolio. Cash flows from operating activities for the year ended 31 December 2015 amounted to NOK million compared to a net outflow of cash from operating activities of NOK million for the year ended 31 December In 2014 the Bank increased its financing in customer deposits and purchased a significant amount of bonds. In 2015 the Bank reversed the trend, increasing lending volume, decreasing customer deposits and selling bonds from its liquidity portfolio. This caused a net outflow of cash in There was a net inflow of cash from operating activities of NOK million for the year ended 31 December Investing activities Cash flow related to investing activities has been relatively stable and immaterial. The cash flow is mainly attributable to investments in intangible assets. Financing activities For the nine month period ended in 30 September 2016, the Bank had net inflow of cash from financing activities of NOK million compared to a net outflow of NOK 37.9 million in the same period of New share capital paid in the first quarter of 2016 amounted to NOK million. Cash flows from financing activities for the year ended 31 December 2015 amounted to an outflow of NOK 41.5 million compared to a net inflow of cash from financing activities of NOK 36.5 million for the year ended 31 December 2014 and a net outflow of cash from financing activities of NOK 46 million for the year ended 31 December Significant changes since 30 September 2016 Since 30 September 2016 until the date of this Prospectus, the following events have reduced the Bank's cash equivalents (current receivables with credit institutions): the bond NO matured on 3 October 2016 reducing the Bank's liquidity by NOK 500 million. On 24 November 2016, the general meeting adopted a Rights Issue of NOK 200 million. In addition, the general meeting adopted a resolution to raise a subordinated loan of up to NOK 120 million in accordance with the proposal from the Board of Directors. Following, the approval of the Norwegian FSA to raise the subordinated loan, the Bank expects to raise such a loan in the bond market. Other than changes as a result of the Bank's ordinary operations, there has been no material change to the Bank's cash position aside from the transactions mentioned above. 114

122 Restrictions on the use of capital resources The Bank's senior bond loan agreements are standard agreements with no special conditions or covenants attached. The Bank's hybrid T1 and subordinated T2 loans' structure and conditions meet the requirements set by the regulations on measurement of the own funds of financial enterprises, clearing houses and investment firms of 1 January 1990 No. 435 (Norwegian: Beregningsforskriften). The Bank follows normal market practice for these kinds of bond loans, including conditions upon which the loans can be written down. The loan agreements for all of the Bank's bond loans are under the standards of Nordic Trustee ASA Financial derivatives The Bank uses financial instruments such as Interest Rate Swaps or Forward Rate Agreements to manage interest rate risk and instruments such as Foreign Currency Forwards and Foreign Currency Swaps to manage foreign currency risk. These instruments are only used to reduce market risk arising from assets and liabilities on the Bank's balance sheet, and are not used to take positions in the market Capital base and capital adequacy The capital level and capital adequacy ratios of the Bank are calculated as a percentage of the sum of (i) credit risk based on risk-weighted assets, (ii) market risk and (iii) operational risk, in accordance with applicable regulatory requirements. The Group's riskweighted assets consist of balance sheet and off-balance sheet items. The largest of these components are loans and other credit assets held on the balance sheet. All components are weighted according to regulatory standards. Consequently, any increase in the Bank's risk-weighted assets will imply a corresponding increase in the capital adequacy ratios applicable to the Bank. The Bank's equity capital was per 31 December 2015 in total NOK 1,191.2 million. The Bank's regulatory capital also includes hybrid Tier 1 Capital of NOK 160 million (made up of two perpetual loans) and Tier 2 Capital of NOK 150 million (one subordinated loan). The Bank has in the course of February and March 2016 completed four issues which have raised new equity capital of NOK million: the private placement raising about NOK 150 million the employee issue raising about NOK 2 million, the bonus issue raising about NOK 4 million and the repair offering raising about NOK 47 million. After the four share issues the registered share capital of Pareto Bank is NOK 623,436,264 divided into 51,953,022 shares, each with a par value of NOK After these share issues, the Bank complies with all current legal and regulatory capital requirements and strives to meet all future requirements and targets in a timely manner. Consequently, the Bank complies with the requirements pursuant to the regulations on capital requirements of 14 December 2006 No ("Capital Requirements Regulation") (Norwegian: kapitalkravsforskriften) which implements the CRD IV directive and the adherent CRR regulations. The contemplated Rights Issue and the new subordinated loan of up to NOK 120 million will further improve and strengthen the Bank's capital adequacy. These capital funds shall be applied for fulfilling the Bank's T1, T2 and total capital requirements as of 31 December 2016, ensure capacity for further lending growth and making possible the exercise of the first ordinary call option on the Bank's T1 Hybrid bond NO of NOK 110 million on 29 March

123 Below is a figure that illustrates the different capital requirements which the Bank is subject to pursuant to the Capital Requirements Regulation: Under the Capital Requirements Regulation, the Bank must fulfil both a Pillar 1 requirement consisting of 4.5% core equity Tier 1 (CET1) capital, 1.5% hybrid Tier 1 capital (T1) and 2% subordinated Tier 2 capital (T2), totalling 8%. In addition, the Bank must fulfil buffer requirements of a 3% system buffer, 2.5% conservation buffer and a countercyclical buffer ("CCB") which is currently set at 1% and to increase to 1.5% from 30 June The CCB is reviewed every quarter by the Ministry of Finance and consequently the CCB may be adjusted. In addition to Pillar 1, the Bank must carry out a review of risk exposure that is not covered by Pillar 1 and set off a sufficient amount of CET1 for Pillar 2. This consists among other things of concentration risk, risk by business area, market risk, liquidity risk and operational risk. The level of capital required for Pillar 2 is determined in part by the Bank's own ICAAP as well as the Norwegian FSA's supervisory review process (SREP). Below is a table stating the regulatory requirements for pillar 1 are as of 31 December 2015: w/max CCB CET1 capital ratio 11.00% 11.00% 11.50% 12.50% CET1 and T1 capital ratio 12.50% 12.50% 13.00% 14.00% Total capital ratio 14.50% 14.50% 15.00% 16.00% In addition, the Bank is subject to the Pillar 2 requirements and if needed the Bank has a planning buffer comprised of CET1. As of 31 December 2015, Pareto Bank's Pillar 2 requirement was 2.58% and estimated as of 31 December 2016 to be 2.26%. The Bank does not need to fulfil a planning buffer. Consequently, the following capital requirements apply to Pareto Bank: 116