REPORT ON 2004 OPERATIONS for the period January - December 2004

Bank of Åland Plc STOCK EXCHANGE RELEASE 15.2.2005 09.00 hrs REPORT ON 2004 OPERATIONS for the period January - December 2004 The report period in brief . Consolidated net operating profit rose by 1.4 per cent to 15.4 million euros (EUR 15.2 M in 2003) . Total income amounted to an unchanged EUR 49.4 M (49.4) . Expenses excluding nonrecurring items rose by EUR 1.8 M to EUR 35.1 M (33.3) . Loan losses were EUR 0.7 M (-0.1) . Lending volume rose by 17.8 per cent to EUR 1,631 M (1,385) . Deposits rose by 9.9 per cent to EUR 1,537 M (1,398) . Mutual fund assets under management rose by 38 per cent to EUR 163 M (117) . Return on equity after taxes (ROE) was 10.8 per cent (11.4) . The total capital ratio amounted to 11.4 per cent (11.4) . Earnings per share after taxes amounted to EUR 0.99 (1.02) . The Board of Directors proposes a dividend of EUR 1.00 per share Important events during the report period New subsidiary: Crosskey Banking Solutions Ab Ltd The banking software sales and development business area was turned into a limited liability company in order to achieve greater efficiency and focus and lay the groundwork for continued growth. Human resources programme To achieve full business benefits from its long-term relationship banking strategy, the Bank has built up a many-faceted human resources programme. Long-term financial targets The Board of Directors of the Bank of Åland has adopted long-term financial targets for the Group. (See page 10) Top marks According to Euromoney magazine's worldwide survey of the Private Banking units at banks, the Bank of Åland placed first in Finland for asset management, discretion and customer relationships. Comments by the Managing Director and the Executive Team The Bank of Åland turned 85 years old in 2004. No other bank in Finland has succeeded in preserving its autonomy for such a long time, without undergoing major changes of ownership or being drawn into mergers. The shareholders and employees of the Bank have always defended its independence and identity in both difficult and successful years. At the same time, our history bears witness to a strong sense of trust among our customers for the work that the Bank of Åland performs. Changes Continuity is not incompatible with renewal. In 2004, many changes took place in the Bank. On July 1, we began fully applying the Helsinki Stock Exchange's recommendation on rules for corporate governance. For Finnish banks, this recommendation will become a regulation in the near future. The Bank of Åland endeavours to achieve maximum transparency in its operations, within the existing regulations. One innovation during 2004 was that we organised information meetings for the Bank's shareholders in conjunction with the publication of our Interim Reports, thereby giving shareholders an opportunity to meet the Bank's ex ecutives in an informal setting. The undersigned assumed the position of Managing Director on March 1, 2004. The Annual Meeting completed the modernisation of the Bank's oversight structure by abolishing the Supervisory Board. I would like to express our deep gratitude to all of those who have served on the Bank of Åland's Supervisory Board over the years. Our employees Customers' perceptions of their meetings with our employees are crucial to the credibility and success of our relationship banking strategy. This is why honing the skills and attitudes of our employees is a task close to our heart. During 2004, we approved far-reaching investments in our staff, among other things through a new programme that includes instruction, leadership training, trainee activities and an incentive system. Our customers Customers form the basis of all our operations. This is why we are strongly customer-focused and we invest extensively in building, developing and deepening our customer relationships. This relationship-building effort, supported by such innovative products as our Premium concept, enabled us to attract many new customers during the year. Earnings In 2004 our earnings were satisfactory, given a market situation with extremely squeezed margins and persistently low interest rates, which adversely impacted our net income from financial operations - a vital component of the Bank's earnings. During many years, the Bank's earnings have been aff ected by major nonrecurring items, and this was also true in 2004. For a number of years, the Bank has pursued a policy of disbursing more in dividends than its actual earnings from banking operations have covered. We cannot continue to do so. The Bank of Åland's total capital ratio is good, but to ensure the resources needed to grow with our customers and welcome new ones, we need to build up additional capital. It is a matter of having the capacity to provide lending for the future projects of individual and corporate customers, as well as to develop the operations of the Bank in other ways. The requirements established by the new Basel 2 capital adequacy rules and the International Financial Reporting Standards (IFRS) will also necessitate investments in systems and staff resources. In short, the Bank of Åland must continue to grow in order to further strengthen its capacity to implement the investments demanded by public authorities and by our customers. The Bank's Board of Directors has therefore adopted a clear financial strategy that implies a focus on strongly improved profitability over the next few years - an ambition to keep the dividend at its current euro level and meanwhile expand our capital base. We will adhere to our relationship banking strategy, increase our pace and aim for higher profitability. I would like to express my sincere gratitude to the shareholders, my fellow employees and all our customers, who contributed to a successfu l 2004. Peter Grönlund Managing Director External factors During 2004, the world economy grew at a good pace. Meanwhile companies were able to begin reaping the fruits of earlier cost cutbacks, combined with rising demand. In spite of this, financial markets were characterised by uncertainty during the first three quarters of the year. The situation in Iraq remained unstable. Meanwhile disruptions in oil production elsewhere in the world as well contributed to a sharp rise in oil prices until the autumn. The Federal Reserve - the US central bank - began its interest rate hiking cycle during the spring, while in China the authorities signalled that it was time to slow the rapid growth of the Chinese economy. These factors combined to create uncertainty about future economic trends. In the euro zone, which includes Finland, exports in particular made a manifestly positive contribution to growth. However, private consumption remained listless due to a weak labour market and a slowing pace of wage and salary increases. The money and bond markets The European Central Bank (ECB) kept its key interest rate unchanged at 2.0 percent throughout the year, even though inflation and money supply growth exceeded the Bank's official thresholds during much of the year. The ECB did not want to interrupt the gradual economic recovery prematurely. Meanwhile the rise in inflation could largely be ascribed to temporary factors such as oil prices. During the autum n, the sharp decline in the US dollar contributed to a further cooling in growth prospects. At year-end, the yield on 10-year German government bonds again fell below the 4.0 per cent level and thus stood at a lower level than at the beginning of 2004. The foreign exchange market The Swedish krona remained comparatively stable and the euro traded at an average of around SEK 9.16. The krona exchange rate strengthened for a while during the autumn, when there were increased expectations that the Riksbank - Sweden's central bank - would raise interest rates, at the same time as more and more observers were postponing the probable date of a rate hike by the ECB. The growth- and inflation-dampening effects of the krona appreciation, combined with continued uncertainty in the labour market, nevertheless led to a new cooling of rate hike expectations late in 2004, and the krona rose to a level of SEK 9.02 per euro by year-end. The stock market The Helsinki Stock Exchange performed more strongly than its counterparts abroad. In December the HEX Portfolio Index stood 17 per cent higher than at the beginning of 2004. Due to the abolition of the avoir fiscal system, which eliminates double taxation of dividends, many exchange-listed companies chose to pay extra large dividends during 2004. Counting dividends, the value of the HEX Portfolio Index rose a full 24 per cent. At the sectoral level, the energy industry was among the strongest sectors with an upturn o f 66 per cent. During the autumn, commodity-oriented metal companies delivered earnings that far surpassed market expectations. The stock market rally was broad, with the banking and financial services sector also noting share price increases exceeding 20 per cent. The forest product sector was subdued but stable. Difficulties in raising paper prices in Europe, along with the weak dollar exchange rate, contributed to this trend. The telecom and electronics sector was one of the few that experienced reversals. Finnish-based telecom giant Nokia was forced to issue profit warnings on several occasions during the first half of 2004. During the autumn, its share price rose by 30 per cent above the year's lowest quotation in August, but this did not suffice to give Nokia a price increase for the full year. The Finnish banking industry During 2004 the Finnish banking industry was stable. No major changes or mergers took place during the year. However, there was a clear tendency for the industry to make an effort to adapt its costs to stiff competition and low margins. Savings Regular savings rose in Finland during the year, according to a survey published by the Finnish Bankers' Association in November. More than 70 per cent of respondents stated that they saved regularly or sporadically, and only 28 per cent replied that they had no extra assets left for savings. Most people who save have their money in bank accounts. Of the survey respondents, 27 per cent had funds in savings and investments accounts and 26 per cent in current accounts. Mutual fund savings also rose. Retirement savings declined somewhat due to the uncertainty that prevailed for many years concerning taxation of voluntary retirement savings. According to the survey, three fourths of those with retirement savings intend to continue saving. Euro-denominated deposit accounts in Finnish financial institutions rose by 4.4 per cent in the twelve months from November 2003 to November 2004. Residential mortgages and consumer lending According to the interview survey, 56 per cent of respondents had loans. In the spring of 2004, the corresponding figure was 51 per cent. Those with housing loans rose from 28 per cent in the spring to 31 per cent in October. Consumer lending also showed a similar growth trend. The total volume of residential mortgage loans in Finland grew by 15.1 per cent during the 12 months to November 2004. The average interest rate on new mortgage loans fell during the same period from 3.32 per cent to 3.12 per cent, while the 12-month market interest rate fell from 2.41 to 2.30 per cent. Payments The Internet services of Finnish banks are becoming increasingly popular and, according to the survey, they are used by 62 per cent of respondents. Of Finland's population, 60 per cent already handle their payments regularly via the Net, five per cent pay their bills at the bank and one per cent pay cash at the bank. Other techniqu es used are ATM cash dispensers, direct debiting, payment services and telephone. Bank-issued debit cards are becoming an increasingly common means of payments for daily purchases, with 43 per cent of respondents stating that they use their debit card for daily purchases. Sources: Finnish Bankers' Association and Bank of Finland The Mainland Division Growth in the Bank of Åland's Mainland Division was stable during 2004. The number of active customers rose by two per cent. Business volume (deposits plus lending) increased by 16 per cent and totalled EUR 1,993 M. During the year, operations focused on continued customer acquisition within the framework of the Bank's relationship banking strategy. The introduction of the Premium concept was a major success on the Finnish mainland and helped us gain many new satisfied customers. The Mainland Division accounted for 63 per cent of the Bank's deposits, 74 per cent of its lending volume and 38 per cent of operating earnings at the Bank's units. The number of employees totalled 108 (112). Operations took place in the same locations are earlier and no new branch offices were opened during the year. The mainland offices report directly to the Managing Director. Private Banking The Private Banking unit, located in Helsinki, works to build up long-lasting customer relationships with individuals and companies with growth potential. During the year, there was a special emphasis on deepening existing customer relationships. One positive outcome of this work, among others, is that customers with multiple banking relationships have increasingly chosen to concentrate their business with us. The unit showed a stable, positive trend. Our network of business partners also gave us increased business volume. The demand for investment products continued to increase, as did deposits and lending. It was an especially successful year for our Corporate Advisory Service, which offers comprehensive services to small and medium-sized companies as well as to private individuals closely affiliated with them. It was gratifying that the Private Banking unit maintained its position in the Helsinki region and was recognised as one of Finland's leading players in its market (Euromoney, January 2005). Investment Banking Division Investment advisory services and investment products are of growing importance to the Bank's earnings. The Bank's ambition is to strengthen its position in the investment segment and increase its earnings from non-risk-bearing products. The Division was reorganised during the year to create a greater focus on providing back-up to the sales organisation in stock brokerage operations and investment advisory services. As a result, the Bank's liquidity management and foreign payment departments were spun off from the Investment Banking Division, and administration was transferred to the Business and Human Resources Development Division. The launch of Persona l Financial Planning, which began during 2003, continued during the year. An evaluation of this product was made during 2004 and development work will continue during 2005. The year was successful and income from customer stock brokerage and trading for the Bank's own account rose by 64 per cent. During the year, the Bank issued seven stock index-linked loans totalling EUR 50 M. In order to strengthen the Bank's capital base, it issued two debenture loans totalling EUR 20 M. These products were launched in collaboration with both the Bank's subsidiary Ålandsbanken Asset Management Ab and outside suppliers. Liquidity Management, Foreign Exchange Dealing and International Operations This department is responsible for managing the Bank's liquid assets, balance and interest rate risks, its foreign exchange dealing as well as its international payments and correspondent bank contacts. The Bank tries to avoid interest rate positions and is currently working to introduce a new system for monitoring balance and interest rate risks. The introduction of IFRS, which makes special demands on calculation and market appraisal of various hedging instruments, is very time-consuming for the department. The Åland market We continued to be the market-leading bank in the Åland Islands. The Business Centre unit was created to serve companies and large private investors. It combines know-how in asset management, legal matters and financing. This col laboration within the new unit gives us an even better opportunity to create comprehensive solutions for customers, which in turn leads to increased business volume. Among other things, the invested assets managed by the Business Centre rose by nearly 70 per cent during the year. Shipping credits, which are traditionally of major importance to the Bank, rose by 22 per cent. Financing of home purchases by private individuals was lively throughout the year, and the influx of new customers was gratifyingly high. Low interest rates improved the financial situation of customers, who often used their extra funds for supplementary principal payments. In spite of this, the volume of home mortgage loans rose by 13 per cent. In all, the Bank's business volume in Åland rose by 11 per cent. Premium The introduction of the Premium package was the biggest innovation for indivudal customers. The Bank developed this service in order to offer customers economic security combined with greater enjoyment of life. The service includes travel insurance, emergency cash and account blocking services along with travel offers, international concierge services and offers of additional banking services. During 2004, 2,653 chose to begin to using this service. Personalisation Our strategy of adapting offers and communication to the needs and interests of customers permeates our work, both via digital channels and in our direct contacts with customers. To further refine per sonalisation, we perform regular follow-ups. We have also improved the personalisation task by deducing customers' needs from their behaviour, which in turn has enabled us to develop and create new customer processes. Human resources programme To achieve full business benefits from its long-term relationship banking strategy, the Bank has built up a many-faceted human resources programme. Its three cornerstones are staffing and leadership strategies, the Relationship Academy and a human resource development programme. During the spring, the Bank updated its staffing and leadership strategies. Health profile The Bank's employees underwent a health profile examination, which will be repeated in 2006. The examination showed that Bank of Åland employees are active and take good care of their health. Gender equality plan A new gender equality plan was drafted during the autumn. During preparatory work, a survey of the gender equality situation in the Bank was conducted. A concrete action plan for the period 2005-2007 was developed in order to further improve equality between men and women at the Bank of Åland. Personnel fund In December the Board of Directors established a personnel fund and approved the introduction of local, target-oriented bonus programmes for employees. The purpose is to increase motivation to achieve the Bank's target of improving its income/expense ratio in the medium term to 2. The disbursement to the personnel fun d will be determined by the extent to which the Bank exceeds a yearly income/expense ratio target and surpasses the unweighted earnings index of a defined group of Nordic banks. The maximum disbursement to the personnel fund and to local target-focused programmes is 3 per cent of the Bank of Åland's earnings. The Relationship Academy On September 15, the Relationship Academy began operation. Its objective is to help employees become even more professional relationship builders by knowing how, wanting, daring and having energy to perform their assignments. The Academy endeavours to introduce a solutions-oriented working method, focusing on the customer's overall financial situation. The Academy consists of seven departments. Ensuring a supply of leadership talent To safeguard the Bank's long-term need for leadership talent, a long-term human resource development programme was designed. This programme includes trainee activities, and in August the Bank recruited two trainees for one year, out of more than 60 outside applicants. During their year of employment, they will undertake advanced tasks in a number of areas at the Bank. The 10 openings in the newly established leadership programme attracted applications from 55 of the Bank's employees. During a two-year period, those who were accepted in the programme will undergo specialised academic training, participate in the Bank's management work during certain periods and undergo professional develo pment in collaboration with their mentors. New units Digital Business Development and the Department of Concept and Business Development were combined into the Business Development Department. Administrative departments from several divisions were combined into a new unit - Business Support. This step created a more efficient organization that is responsible for the Bank's back office functions and products. New subsidiary: Crosskey Banking Solutions Ab Ltd The banking software systems sales and development business area was turned into a limited liability company in order to achieve greater efficiency and focus and lay the groundwork for continued growth. The name of the company is Crosskey Banking Solutions Ab Ltd and it is a wholly owned subsidiary of the Bank of Åland. The mssion of Crosskey is to develop, sell and maintain banking systems - either as whole systems or in modules - to small and medium-sized banks in Europe, as well as sell operational and support contracts for its deliveries. Those staff members who worked at the Bank of Åland with systems development, operation and maintenance were all transferred to Crosskey, which has a total of 95 employees. General Manager Peter Wiklöf was appointed as the first Managing Director of the company in August. The Bank's systems development business was transferred to the new company late in 2004. Crosskey currently works with three banks: Tapiola Bank, Den Norske Bank and Ål andsbanken. The systems sales business area increased its operating income by 13 per cent to SEK 3.0 M (2.7). Inspired by the Bank of Åland's old logotype - a compass rose with crossed keys - we created a modern logotype. This, in turn, inspired the name of the company, which is usable in an international marketplace. EARNINGS AND PROFITABILITY Earnings In 2004, the consolidated net operating profit of the Bank of Åland Group amounted to EUR 15.4 M (15.2). This was an increase of EUR 0.2 M compared to the year before. Return on equity before taxes, measured as net operating profit divided by average equity capital and reserves, was 14.3 per cent (15.0). The Bank thus yielded a return on shareholders' equity at a level that stood about 11 percentage points (11) above five-year Finnish bond yields. The income/expense ratio amounted to 1.45 (1.44). Earnings per share after taxes reached EUR 0.99 (1.02). Net income from financial operations Net income from financial operations totalled EUR 29.5 M (29.6). Despite strong growth in lending volume and a favourable trend in deposit accounts, narrowing customer margins led to nearly unchanged net income from financial operations, compared to the previous year. Other income Dividend income amounted to EUR 0.5 M (1.2). In 2003, this income included EUR 0.5 M in dividend income of a nonrecurring nature. Commision income rose by 19.9 per cent to EUR 12.4 M (10.3). The favourable trend in com mision income was primarily due to increased income from stock brokerage and from capital market and investment products. Reported net income from the Bank's own securities trading totalled EUR 0.5 M (1.9). Other operating income amounted to EUR 5.6 M (5.6), which was the same as the previous year's figure. This included EUR 4.0 M (4.5) in income from sales of banking computer systems and other income from the Bank's systems sales business area. Other income amounted to EUR 19.9 (19.8) Total income - net income from financial operations and other income - amounted to EUR 49.4 M (49.4). This included EUR 1.9 M (2.4) in income of a nonrecurring nature. Expenses New staff recruitments and salary adjustments raised staff costs by EUR 2.5 M to EUR 19.0 M (17.7). Also included in the item "Staff costs" was a negative item related to a refund of EUR 1.6 M in surplus contributions to Ålandsbankens Abps pensionsstiftelse, the Bank's pension fund, including tax compensation. During 2003, this item included a provision of about EUR 1 M as a consequence of the dismissal of the Bank´s then Managing Director. Other administrative expenses (office costs, marketing, telecommunications and computer costs) rose by EUR 0.5 M to EUR 8.7 M (8.2). Depreciation/amortisation was EUR 0.2 M lower than the year before and amounted to EUR 2.1 M (2.3), while other operating expenses were unchanged, amounting to EUR 3.9 M. Total expenses, including planned depreciatio n, fell by EUR 1.1 M to EUR 33.3 M (34.4). Excluding nonrecurring items in 2003 and 2004, total expenses rose by EUR 1.8 M to EUR 35.1 M (33.3). Loan losses Net loan losses amounted to EUR 0.7 M (2003: recovery of EUR -0.1 M). Reported net loan losses as a percentage of the Bank's receivables and contingent liabilities amounted to 0.04 per cent. Net operating profit Altogether, net operating profit amounted to EUR 15.4 M (15.2). Earnings structure 2004 2003 Contributions from operations - branch offices 21.6 21.2 - systems sales 1) 3.0 2.7 - Investment Banking Division, incl. portfolio management 4.8 6.7 Head office expenses -14.0 -15.4 NET OPERATING PROFIT 15.4 15.2 1) Including EUR 1.0 M in nonrecurring items affecting comparability in 2004. Deposits During 2004, the Bank's total deposits, including bonds and certificates of deposit issued to the public and public sector entities, rose by EUR 139 M or 9.9 per cent, amounting to EUR 1,537 M. Deposit accounts rose by EUR 111 M or 9.8 per cent and amounted to EUR 1,245 M. Bonds issued to the public rose by EUR 18 M or 12.8 per cent. During the year, seven share index loans were issued and were subscribed at a nominal value of EUR 50 M. During the year, share index loans with a nominal amount of EUR 51 M fell due and were repa id. In order to strengthen the Bank's capital base, two risk debenture loans were issued. They were subscribed at a nominal value totalling EUR 20 M. Within the framework of the Bank's bond programme, two bond loans totalling EUR 115 M were also floated via external issuing agents. These loans were targeted mainly to institutional investors. Lending The Bank's total lending volume rose by EUR 246 M or 17.8 per cent, amounting to EUR 1,631 M on December 31, 2004. As in prior years, the increase was mainly attributable to private households and service sector businesses. Private households accounted for 67.1 per cent of the Bank's total loans outstanding, while business and professional activities accounted for 31.1 per cent. The corresponding figures in 2003 were 68.1 per cent and 31.0 per cent, respectively. Nonperforming receivables Total nonperforming receivables and other zero-interest receivables amounted to EUR 2.0 M (1.4), or 0.1 per cent of loans and guarantees outstanding. Imputed taxes due Imputed taxes due have been calculated according to a tax rate of 26 per cent, compared to the earlier 29 per cent. This reduced taxes by EUR 0.7 M. Appropriations The Bank's accumulated appropriations in the form of voluntary reserves amounted to EUR 22.7 M (22.7). Balance sheet total The balance sheet total rose by 7.1 per cent to EUR 1,984 M (1,851). Personnel At the end of 2004, the number of employees in the Group - recalcu lated as full- time equivalents - was 392. This represented an increase of 17 positions, compared to year-end 2003. Åland Mainland Total Ålandbanken Abp 185 108 293 Crosskey Banking Solution Ab Ltd 82 4 86 Ålandsbanken Asset Management Ab 0 9 9 Ålandsbanken Fondbolag Ab 4 0 4 Total 271 121 392 Capital adequacy Capital adequacy rules require that the capital base in the form of equity capital and reserves total at least 8 per cent of risk-weighted receivables and contingent liabilities. At the end of December, the Group's capital adequacy according to the Credit Institutions Act was 11.4 (11.4) per cent. The core capital ratio was 8.2 (9.3) per cent. The capital base amounted to EUR 120.0 M (106.8). Ålandsbanken Asset Management Ab Ålandsbanken Asset Management Ab is a subsidiary of the Bank of Åland Plc. The company offers a comprehensive range of asset management services. The company's task is to manage its customers' finances in their entirety, i.e. in partnership with the Bank to create comprehensive solutions consisting of portfolio management, insurance alternatives, financing arrangements and banking services. Aside from direct equity and bond investments, the company's portfolio management uses share index loans as well as mutual funds. The company's expertise is sufficiently broad to cover any kind of macroeconomic situation, enabling us to pursue the customer's interests in the securities market both when share prices are rising and falling. Our managed portfolio volume continued to grow during 2004, as a consequence of successful investment decisions and numerous new asset management mandates. Ålandsbanken Fondbolag Ab Ålandsbanken Fondbolag Ab is a wholly-owned subsidiary of the Bank of Åland Plc. The mutual funds (unit trusts) that the company manages are registered in Finland and comply with the Act on Mutual Funds. The strategy of Ålandsbanken Fondbolag Ab is that its mutual funds shall be competitive and adapted to the investment needs of Bank of Åland customers. In 2004, most of the mutual funds had clearly better returns than their comparative indexes. On several occasions during 2004, the Bank of Åland's mutual funds were mentioned in the trade press and other media as being among Finland's most successful mutual funds, as part of their comparisons of mutual funds and fund companies. During the financial year, the company managed the following mutual funds: Placeringsfonden Ålandsbanken Corporate Bond - a bond fund that invests in euro-denominated corporate bonds Placeringsfonden Ålandsbanken Euro Bond - a medium-term bond fund with euro-denominated investments Placeringsfonden Ålandsbanken Europe Active Portfolio - a European balanced fund wit h active allocation between fixed income and equities investments Placeringsfonden Ålandsbanken Europe Value - a European equities fund with a value-oriented investment strategy Placeringsfonden Ålandsbanken Global Value - an international equities fund with a value-oriented investment strategy Placeringsfonden Ålandsbanken Nordic Value - a Nordic equities fund with an active, value-oriented investment strategy New investment fund - Ålandsbanken Cash Manager On December 31, 2004, a new investment fund, Placeringsfonden Ålandsbanken Cash Manager, began its operations. Ålandsbanken Cash Manager is a short-term bond fund that invests in euro-denominated assets. The fund is intended to offer an alternative to investors who desire a better interest return than on traditional savings accounts, at the lowest possible risk. Mutual fund investment operations The portfolio management of the mutual funds managed by the company are handled under an agreement by Ålandsbanken Asset Management Ab. Growth of the funds On December 31, 2004, the number of unit holders totalled 6,480 (5,337 on Dec. 31, 2003), which represented an increase of about 21 per cent from one year earlier. Total assets under management amounted to EUR 162.5 M (117.4), an increase of EUR 45.1 M or about 38 per cent from the preceding year. Forecast for 2005 Net income from financial operations is projected to rise, despite stiff competition. Staff costs and other expens es will increase somewhat. Loan losses are projected to remain at a low level. Overall, during the full year 2005 earnings will probably improve somewhat, compared to earnings in 2004. Long-term financial targets The Board of Directors of the Bank of Åland has adopted the following long-term financial targets for the Group: The Bank of Åland endeavours to earn a return on shareholders' equity that will exceed the unweighted average of a defined group of Nordic banks. The total capital ratio shall amount to at least 10 per cent. In a medium-term perspective, the Bank's income/expense ratio shall continuously improve to 2. The Bank of Åland endeavours to pursue a dividend policy in which an increasing percentage of after-tax profit is retained by the Bank, in order to safeguard its sound business development. This is expected to result in a dividend that approaches the industry standard for Nordic banks as a percentage of earnings. It implies a dividend which, in a medium-term perspective, on average will remain at today's level in euro terms. Shares in Chips Abp On the balance sheet date, the Bank of Åland owned 227,505 Series A shares and 13,450 Series B shares in Chips Abp, an Åland-based food processing company. The book value of these shares amounted to EUR 17.80 and 17.98 per share, respectively. If Norwegian-based Orkla ASA completes its public offer to purchase Chips Abp for EUR 22.85 per share, this will give the Bank a ca pital gain of EUR 1.2 M. IFRS In accordance with the International Accounting Standards (IAS) Regulation that was adopted by the European Union in 2002, listed companies throughout the EU must apply International Financial Reporting Standards (IFRS) beginning in 2005. The Bank of Åland will prepare its consolidated financial statements in compliance with international practice (IFRS) beginning on January 1, 2005. The IFRS standards become mandatory for listed EU companies as the European Commission approves them. The transitional rules according to standard IFRS 1, which may still be changed, will be applied. These rules assume that all standards except IFRS 39 (Financial instruments) will be applied retroactively. The 2004 comparative figures will thus be recalculated according to the new principles. The net effect of changes in accounting principles will be reported directly against shareholders' equity. No later than April 26, 2005 - the publication date of its Interim Report for the first quarter of 2005 - the Bank of Åland will describe the effects arising from the transition to IFRS, the 2004 comparative figures and the effect on shareholders' equity. Important events after the close of the financial period No important events have occurred after the close of the financial period. Proposed distribution of profit The Board of Directors proposes that the Annual General Meeting approve a dividend of EUR 1.00 per share, which is equivale nt to a total amount of EUR 11.0 M. The Board of Directors INCOME STATEMENT (EUR M) The Group 1-12/0 1-12/03 % 4 Net income from financial 29.5 29.6 -0.3 operations Income from investment in form of equity capital 0.5 1.2 -56.0 Commission income 12.4 10.3 19.9 Net income from securities trans- actions and foreign exchange 1.4 2.7 -47.3 dealing Other operating income 5.6 5.6 0.0 TOTAL INCOME 49.4 49.4 0.0 Commission expenses -1.3 -1.3 6.1 Staff costs -17.2 -18.9 -8.8 Other administrative expenses -8.7 -8.2 6.1 Depreciation -2.1 -2.3 -6.7 Other operating expenses -3.9 -3.9 2.4 TOTAL EXPENSES -33.3 -34.4 -3.3 Loan and guarantee losses -0.7 0.1 Share in operating re sults of company consolidated according to equity method -0.1 0.3 NET OPERATING PROFIT 15.4 15.2 1.4 PROFIT BEFORE APPRO- PRIATIONS AND TAXES 15.4 15.2 Income taxes -4.1 -4.4 -7.9 Share of profit for the financial year attributable to minority interests -0.2 -0.1 Profit for the year 11.1 10.6 4.7 BALANCE SHEET (EUR M) The group 1-12/0 1-12/03 % 4 ASSETS Cash 72 40 80 Claims usable as collateral at central bank 112 263 -57 Claims on credit institutions 110 77 43 Claims on the public and public sector entities 1,632 1,405 16 Leasing assets 0 1 -38 Debt securities 2 8 -76 Shares and participations 9 15 -40 Shares and participations in associ- ated companies and subsidiaries 1 2 -52 Intangible assets 4 3 16 Tangible assets 14 14 -2 Other assets 19 15 26 Accrued income and prepayments 8 8 5 TOTAL ASSETS 1,984 1,851 7 LIABILITIES AND EQUITY CAPITAL Liabilities Liabilities to credit institutions and central banks 24 93 -75 Liabilities to the public and public sector entities 1,249 1,140 10 Debt securities issued to the public 500 433 16 Other liabilities 36 30 21 Accrued expenses and deferred income 12 14 -10 Subordinated liabilities 45 25 82 Imputed taxes due 6 7 -10 Minority share of capital 1 0 37 Equity capital Share capital 22 22 0 Share premium reserve 25 25 2 Reserve fund 25 25 0 Capital loan 9 10 -4 Profit brought forward 17 18 -2 Other equity capital 11 11 5 TOTAL LIABILITIES AND EQUITY 1,984 1,851 7 CAPITAL OFF-BALANCE SHEET COMMITMENTS 110 114 -3 INCOME STATEMENT (EUR M) Bank of Åland Plc 1-12/0 1-12/03 % 4 Net income from financial 29.2 29.4 -0.5 operations Income from investment in form of equity capital 1.5 2.5 -41.3 Commission income 10.0 8.5 16.8 Net income from securities trans- actions and foreign exchange 1.5 2.6 -44.7 dealing Other operating income 5.6 5.6 0.1 TOTAL INCOME 47.7 48.6 -1.9 Commission expenses -1.1 -1.1 6.8 Staff costs -15.6 -18.2 -14.2 Other administrative expenses -9.1 -7.9 14.8 Depreciation -2.1 -2.3 -7.3 Other operating expenses -3.8 -3.8 1.7 TOTAL EXPENSES -31.8 -33.3 -4.3 Loan and guarantee losses -0.7 0.1 Write-downs in securities held as financial fixed assets 0.3 0.0 NET OPERATING PROFIT 15.5 15.5 0.4 PROFIT BEFORE APPRO- PRIATIONS AND TAXES 15.5 15.5 0.4 Provisions 0.0 0.0 Income taxes -4.6 -4.5 1.8 Profit for the year 11.0 11.0 -0.2 BALANCE SHEET (EUR M) 12/04 12/03 % Bank of Åland Plc ASSETS Cash 72 40 80 Claims usable as collateral at central bank 112 263 -57 Claims on credit institutions 110 77 43 Claims on the public and public sector entities 1,632 1,405 16 Leasing assets 0 1 -38 Debt securities 2 7 -78 Shares and participations 8 14 -44 Shares and participations in associ- ated companies and subsidiaries 5 3 74 Intangible assets 2 3 -51 Tangible assets 14 14 -5 Other assets 18 15 24 Accrued income and prepayments 8 8 -3 TOTAL ASSETS 1,982 1,851 7 LIABILITIES AND EQUITY CAPITAL Liabilities Liabilities to credit institutions and central banks 24 93 -75 Liabilities to the public and public sector entities 1,250 1,140 10 Debt securities issued to the public 501 433 16 Other liabilities 36 30 20 Accrued expenses and deferred income 11 14 -16 Subordinated liabilities 45 25 82 Imputed taxes due Accumulated appropriations Provisions 23 23 0 Equity capital Share capital 22 22 0 Share premium reserve 25 25 2 Reserve fund 25 25 0 Capital loan 9 10 -4 Profit brought forward 0 0 22 Other equity capital 11 11 0 TOTAL LIABILITIES AND EQUITY 1,982 1,851 7 CAPITAL OFF-BALANCE SHEET COMMITMENTS 110 114 -3 CAPITAL ADEQUACY 12/04 12/03 The Group's capital adequacy according to the Credit Institutions Act: Capital base, EUR M Core capital 86.6 86.5 Supplementary capital 33.4 20.3 Total capital base 120.0 106.8 Risk-weighted volume, EUR M 1052.2 932.7 TOTAL CAPITAL RATIO, % 11.4 11.4 Core capital as % of risk- weighted volume 8.2 9.3 NONPERFORMING LOANS Nonperforming loans, EUR M 2.0 1.4 FINANCIAL RATIOS Net operating profit per share, 0.99 1.02 EUR Equity capital per share, EUR 9.25 9.22 Return on equity after tax es, % (ROE) 10.8 11.4 Income/expense ratio - before loan losses 1.48 1.44 - after loan losses 1.45 1.44 INCOME STATEMENT (EUR M) Q4 Q3 Q2 Q1 Q4 The Group 2004 2004 2004 2004 2003 Net income from financial 7.6 7.4 7.1 7.4 7.4 operations Income from investment in form of equity capital 0.0 0.0 0.4 0.1 0.2 Commission income 3.6 2.6 3.1 3.1 3.0 Net income from securities trans- actions and foreign exchange 0.1 0.4 0.6 0.2 0.7 dealing Other operating income 1.1 1.3 1.0 2.2 2.1 TOTAL INCOME 12.4 11.7 12.2 13.0 13.5 Commission expenses -0.4 -0.3 -0.4 -0.3 -0.3 Staff costs -4.9 -4.8 -3.2 -4.3 -5.7 Other administrative expenses -2.4 -1.8 -2.5 -2.0 -2.6 Depreciation -0.6 -0.5 -0.5 -0.5 -0.6 Other operating expenses -1.1 -0.9 -1.0 -1.0 -1.1 TOTAL EXPENSES -9.4 -8.2 -7.6 -8.1 -10. 3 Loan and guarantee losses -0.2 0.1 -0.6 0.0 0.1 Share in operating results of company consolidated according to equity method 0.1 0.1 -0.3 0.1 -0.2 NET OPERATING PROFIT 2.9 3.7 3.8 5.0 3.1