3 Key figures. 4 Directors report. 6 Profit and loss account. 7 Balance sheet. 8 Cash flow statement. 9 Equity statement. 10 Notes

Transcription

1 Annual Report 2011

2 CONTENT 3 Key figures 4 Directors report 6 Profit and loss account 7 Balance sheet 8 Cash flow statement 9 Equity statement 10 Notes 30 Auditor s report 31 Audit committee s annual report 31 Declaration by the Board of Directors and CEO 33 Information about the company GRAphic Design: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS, Florø

3 Key figures Figures in NOK 000s PROFIT AND LOSS ACCOUNT Net interest margin 0,61 % 0,80 % Profit after tax as a % of average total assets 0,26 % 0,42 % KEY BALANCE SHEET FIGURES Gross loans to customers Collectively assessed impairment provisions Equity Total assets Average total assets OTHER KEY FIGURES Cost income ratio 24,72 % 19,07 % Impairment charge as a % of total assets 0,08 % 0,05 % Impairment provisions as a % of total assets 0,15 % 0,14 % Return on equity after tax* 4,10 % 7,18 % Capital adequacy ratio 21,29 % 20,82 % BALANCE SHEET YEAR-ON-YEAR GROWTH % % Growth in total assets 86,46 % 72,77 % Growth in customer lending 88,47 % 81,31 % *) Calculated using the opening equity balance adjusted for capital increases. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

4 Annual Report 2011 HIGHLIGHTS Bustadkreditt Sogn og Fjordane AS is a whollyowned subsidiary of Sparebanken Sogn og Fjordane, The Company is based at the Bank's head office in Førde. In January 2009 Sparebanken Sogn og Fjordane was licensed by The Financial Supervisory Authority of Norway to set up a residential mortgage company that would issue covered bonds. The Company was formed through reorganising SSF Eigedom AS. It started normal operations in March 2009, and by the end of 2011 it had issued covered bonds with a face value of NOK 4 billion. At the close of 2011 the total cover pool was worth NOK 5.16 billion. This is around 29% more than the value of the covered bonds issued. Until Sparebanken Sogn og Fjordane has an international rating equivalent to or better than an A2 from Moody's, the cover pool must be worth at least 11% more than the face value of the covered bonds. The cover pool was made up of residential mortgages worth NOK 4.9 billion, as well as bonds and bank deposits with a total value of NOK 264 million that are included as substitute assets. Subtitute assets made up 5.1% of the total cover pool. The establishment of Bustadkreditt Sogn og Fjordane AS was an important part of Sparebanken Sogn og Fjordane's strategy for securing long-term liquidity. At the close of 2011, the company had 4,722 residential mortgages worth a total of NOK 4,908 million. 31.8% of the loan book is made up of flexible mortgages. A further 14.8% of the loans are interest-only. The average loan-to-value ratio (weighted by initial value) was 54.7%, and the weighted average remaining term was 14.4 years. The weighted average age of the loans was 2.5 years. The average volum per loan was NOK 1.04 million. The Company's total loan portfolio grew by NOK 2,304 million over the past year. The geographic distribution of the residential mortgage portfolio split by the customers' address was as follows: Region Share Western Norway 75,6 % Sogn og Fjordane 48,7 % Førde 14,2 % Eid, Flora, Sogndal and Stryn 11,0 % Rest of Sogn og Fjordane 23,4 % Region Share Hordaland 22,5 % Bergen 8,9 % Rest of Hordaland 13,7 % Rogaland, Møre og Romsdal 4,5 % Eastern Norway 22,2 % Oslo and Akershus 18,3 % Rest of eastern Norway 3,9 % Central Norway 0,9 % Southern Norway 0,7 % Northern Norway 0,3 % Overseas 0,3 % Total 100,0 % PROFIT AND LOSS ACCOUNT In 2011 the company made an operating profit before loan impairment charges of NOK 17.5 million. The net loan impairment charge was NOK 3.8 million, which related to collectively assessed impairment provisions. Profit for the year after tax was NOK 9.9 million. Net interest income was NOK 22.9 million in 2011, equivalent to 0.61% of average total assets. This is down from 0.81% of average total assets in 2010, mainly due to increase funding costs. Other operating income came to NOK 0.3 million. In 2011, operating expenses were NOK 5.7 million, equivalent to 24.7% of total operating income. The Company has no employees, and buys services from Sparebanken Sogn og Fjordane and Edb Ergo Group AS. Services are bought on market terms. TRENDS IN NON-PERFORMING LOANS At the close of 2011, the Company had no loans that were more than 90 days in arrears. Nonperforming loans are monitored carefully. BALANCE SHEET AND CAPITAL ADEQUACY Total assets have increased in line with the loan portfolio, and at 31 December 2011 they totalled NOK 5,171 million. This was an increase of almost NOK 2.4 billion over 31 December The Company borrows money through covered bonds. In addition, the Company has good long-term credit facilities with Sparebanken Sogn og Fjordane. Equity at the close of the year was NOK million after allocation of the profit for the year. In 2011 Sparebanken Sogn og Fjordane injected NOK 175 million of new share capital to ensure that the company was adequately capitalised. At 31 December 2011 the Company had NOK million of net equity and subordinated debt and a core capital adequacy ratio of 21.3%. 4 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

5 The Board of Directors considers the company's equity to be satisfactory and adequate in relation to its activities and operations. INTERNASJONAL RATING In September 2011, Bustadkreditt Sogn og Fjordane AS's covered bond programme was given a longterm rating of Aaa by the credit rating agency Moody's. GUARANTEES AND MORTGAGES The Company has not issued any kind of guarantees. Nor has it issued any collateral, except residential mortgages and the substitute assets in the cover pool. Residential mortgages and substitute assets are collateral for the covered bonds. RISK In accordance with its licence to operate as a credit institution (Norw.: kredittforetak), Bustadkreditt Sogn og Fjordane AS is subject to laws, regulations and rules that limit the level of risk to which it can be exposed. The Board of Directors and CEO are responsible for establishing risk management procedures, and for ensuring that they are adequate and in compliance with laws and regulations. Bustadkreditt Sogn og Fjordane AS is exposed to credit risk, operational risk, liquidity risk and interest rate risk. Credit risk is the most significant of these. Capital adequacy has been calculated by measuring credit risk using the standardised approach and operational risk using the basic ind icator approach. Limits have been set on exposure to the various classes of risk. The Board considers it a priority for the Company to maintain a low risk exposure. Credit risk Bustadkreditt Sogn og Fjordane AS is exposed to credit risk through residential mortgages, and to counterparty risk through its investments in financial markets. The loans that it purchases from Sparebanken Sogn og Fjordane have good collateral. At the time of purchase, the loan must represent no more than 75% of the approved value of the collateral. The values of properties used as collateral for residential mortgage loans are updated quarterly. Estimated values provided by Eiendomsverdi AS, used alone or in combination with valuations from surveyors or estate agents, determine the approved values for properties. The first tranche of loans from Sparebanken Sogn og Fjordane was bought in March Since then, the market value of residential property has risen. Sparebanken Sogn og Fjordane services the loans held by Bustadkreditt Sogn og Fjordane AS. The loans are performing well, and are closely monitored by the Bank. Around 54.4% of Bustadkreditt Sogn og Fjordane AS's loan portfolio has a loan-to-value ratio of less than 60%. The Company considers its loan portfolio to be low-risk. The figure shows the weighted loan-to-value ratio for the loans held by the company Weighted loan-to-value ratio 21 % Under 40% 15 % 40-50% 19 % 50-60% 42 % 60-75% 4 % over 75% The performance of the loan portfolio is monitored monthly through a credit report which sets out areas such as the composition of the portfolio by risk group, loan performance and the impact of a fall in property prices and higher default rates on the cover pool. The Company's counterparty risk derives from investments in financial markets and exposure to other financial institutions. There are limits on the Company's exposure to any given counterparty. In order to protect itself against losses, the Company only has exposure to financially sound counterparties. Liquidity risk Liquidity risk is the risk that the Company will be unable to repay its debts when they are due. The Company's liquidity buffer shall be sufficient to allow it to repay all of its debts when they are due. The Company manages its liquidity position in accordance with the minimum liquidity buffer required by the Board. The actual liquidity risk is within the internal limits that have been set. Interest rate risk The Company shall manage its interest rate risk in such a way as to ensure that it has little exposure to interest rate fluctuations. Credit spread risk is managed through limits on exposure to credit risk that incorporate maximum terms to maturity for securities. There are also limits on the interest level risk, which is reported on a monthly basis. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

6 Foreign currency risk The Company does not have any foreign-currencydenominated loans or other foreign-currencydenominated investments. STAFF, ORGANISATIONAL STRUCTURE AND EXECUTIVE BODY Bustadkreditt Sogn og Fjordane AS has an agreement with Sparebanken Sogn og Fjordane setting out the terms on which loans are purchased, transferred and serviced. Other tasks are carried out by employees at Sparebanken Sogn og Fjordane. Services are performed in accordance with agreements setting out which services are provided and at what price. The agreements are updated as required. The Supervisory Board consists of six members, several of whom are, or have been, members of Sparebanken Sogn og Fjordane's executive committee. The Board of Directors is made up of three members from within the Group and one external member. Sparebanken Sogn og Fjordane's audit committee also acts as the audit committee for Bustadkreditt Sogn og Fjordane AS. The CEO is officially employed by Sparebanken Sogn og Fjordane. EMPLOYEES AND WORKING ENVIRONMENT There are three men and one woman on the Board of Directors. The CEO is a man. The Board of Directors and management believe, like the rest of the Bank, in proactively promoting equal opportunity and preventing discrimination at the work-place. EQUAL OPPORTUNITY AND DISCRIMINATION There are three men and one woman on the Board of Directors. The CEO is a man. The Board of Directors and management believe, like the rest of the Bank, in proactively promoting equal opportunity and preventing discrimination at the workplace. REVIEW OF THE ANNUAL FINANCIAL STATEMENTS SThe Board believes that the profit and loss account, balance sheet and notes provide sufficient information about the Company's operations and financial position at 31 December The Board believes that the going concern assumption is appropriate. The Board confirms that the going concern assumption has therefore been used in the preparation of the financial statements for POST BALANCE SHEET EVENTS The Board is not aware of any events after 31/12/2011 that have a material impact on the financial statements or on the company's financial position. STRATEGY AND PROSPECTS FOR 2012 In 2012, Bustadkreditt Sogn og Fjordane AS will continue with its core business, which is purchasing residential mortgage loans from Sparebanken Sogn og Fjordane so that it can issue covered bonds. The target group for its covered bonds is Norwegian and international financial institutions and other investors. Bearing in mind the uncertainty surrounding global economic prospects, the housing market and loan performance will be monitored carefully in A great deal of work has been put into ensuring that the company has good procedures and highquality data for the property values that underpin the cover pool. This work will be continued in order to ensure compliance with government rules. The Companys covered bonds are sold in financial markets. The Company participated in the forum for covered bonds, which aims to coordinate marketing efforts, amongst other things. The Company achieved the goals set out in its strategy for 2011, which were discussed in the 2010 annual report. ALLOCATION OF PROFIT FOR THE YEAR Bustadkreditt Sogn og Fjordane AS made a profit of NOK 9.9 million. The Board recommends transferring the profit to the Company's equity. Førde, 2 February 2012 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Hallvard Klakegg Chair Peter Midthun Kjetil Joar Bjørset Ingeborg Aase Fransson Harald Slettvoll CEO 6 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

7 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

8 Profit/loss Note Interest income Interest expenses Net interest income 3, Commission income Net commission income Net gain/loss on securities Total other operating income Net other operating income Total operating income Wages, salaries, etc Administration expenses Other operating expenses Total operating expenses Operating profit/loss before loan impairment charge Loan impairment charge 7, Operating profit/loss Tax expense Profit for the reporting period COMPREHENSIVE INCOME Profit/loss for the financial year Comprehensive income for the financial year Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

9 Balance sheet Note ASSETS Loans and advances to credit institutions 3, Gross loans to customers Collectively assessed impairment provisions 7, Net loans to customers Financial assets measured at fair value through profit or loss: Commercial paper and bonds 10, Deferred tax Earned income not received Total assets SHAREHOLDERS EQUITY AND LIABILITIES Paid-up equity Share capital Total paid-up equity Retained earnings Other equity Total retained earnings Total equity Debt Debt to credit institutions Other financial liabilities: Issued commercial paper and bonds Tax payable Other liabilities/accrued costs Total liabilities Total liabilities and equity Førde, 2 February 2012 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Hallvard Klakegg Chair Peter Midthun Kjetil Joar Bjørset Ingeborg Aase Fransson Harald Slettvoll CEO Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

10 Cash flow statement Profit/loss before tax Impairment charge Tax paid Other non-cash transactions A) Net cash flow from operating activities Reduction/increase in loans and advances to customers Reduction/increase in investments in commercial paper and bonds B) Net cash flow from investment activities Increase/reduction in loans from credit institutions Increase/reduction in debt securities Increase/reduction in paid-up share capital C) Net cash flow from financing activities D) Net cash flow during the year (A+B+C) Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents Details of cash and cash equivalents Deposits at other financial institutions Total Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

11 Equity statement PAID-UP EQUITY RETAINED EARNINGS Total paid-up Other Total other Total Share capital equity equity equity equity Opening balance 01/01/ Profit for the reporting period Equity transactions New paid-up equity Closing balance 31/12/ Opening balance 01/01/ Profit for the reporting period Equity transactions New paid-up equity Closing balance 31/12/ Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

12 Notes to the accounts 1 Accounting principles 2 Critical accounting estimates and judgements 3 Remuneration of senior management and the Board of Directors Transactions with related parties 4 Segments 5 Auditor's fee 6 Net income from financial instruments 7 Impairment of loans and guarantees 8 Operating expenses 9 Tax 10 Classification of financial instruments 11 Loans and advances to credit institutions 12 Commercial paper and bonds 13 Breakdown of loans and guarantees 14 Loan-to-value and cover pool 15 Changes in impairment reserve for loans and guarantees 16 Other current assets 17 Debt to credit institutions 18 Debt incurred through the issue of securities 19 Other liabilities 20 Off-balance-sheet obligations 21 Capital adequacy ratio 22 Valuation 23 Risk 24 Credit risk 25 Credit risk 26 Sensitivity analyses 27 Disputes 28 Share capital 12 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

13 NOTE 1 ACCOUNTING PRINCIPLES GENERAL The 2011 financial statements for Bustadkreditt Sogn og Fjordane AS were discussed and adopted at the Board meeting of 2 February All amounts in the financial statements and notes are stated in thousands of NOK, unless otherwise specified. ACCOUNTING PRINCIPLES The financial statements have been prepared in accordance with Section 3 9 of the Norwegian Accounting Act and the regulations on the simplified application of IFRS issued by the Norwegian Ministry of Finance on 21 January In general this means that recognition and measurement principles follow international accounting standards (IFRS) and that the financial statements and notes are presented in accordance with the Norwegian Accounting Act and generally accepted accounting principles. CHANGES TO ACCOUNTING PRINCIPLES In the event of fundamental accounting reforms/ changes to accounting principles, the figures for previous years must be adjusted to allow accurate comparison. If items in the accounts are reclassified, comparative figures for previous periods shall be calculated and reported in the financial statements. No changes were made to the accounting principles in AMENDMENTS IN 2011 TO STANDARDS AND INTERPRETATIONS APPROVED BY THE EU Revised IAS 24 Information about related parties Amendments to IAS 32 Financial instruments presentation Amendments to IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction IFRIC 19 Extinguishing financial liabilities with equity instruments ESTIMATES When preparing the financial statements, certain estimates are made that affect reported amounts. Note 2 sets out significant estimates and assumptions in greater detail. Inclusion on the balance sheet Assets and liabilities are included on the balance sheet from the date on which the Company achieves genuine control over the assets and takes on genuine liabilities. Assets are taken off the balance sheet on the date on which genuine risk relating to the assets is transferred and control over the assets is lost or ceases. FINANCIAL INSTRUMENTS Classification of financial instruments A financial instrument is any contract that provides both a financial asset to one enterprise and a financial obligation or an equity instrument to another enterprise. For the initial calculation, all financial instruments covered by the standard have been identified and classified in one of the following categories, depending on the purpose of the investment: Financial assets and liabilities held for trading purposes, measured at fair value through profit and loss Financial assets and liabilities measured at fair value with changes in fair value recognised in profit or loss, in accordance with the Fair Value Option Loans and advances, carried on the balance sheet at amortised cost Financial assets and liabilities held for trading purposes, measured at fair value through profit and loss The trading portfolio contains instruments that were mainly acquired or taken on with the aim of being resold or bought back in the short term, or instruments that are part of a portfolio of identified instruments that are managed jointly and for which there is an established pattern of realising short-term gains. Financial derivatives are always measured at fair value through profit and loss. Financial assets and liabilities measured at fair value with changes in fair value recognised in profit or loss, in accordance with the Fair Value Option, referred to as FVO This portfolio includes investments in commercial paper and bonds. The above-mentioned instruments, as well as interest rate swaps, are managed collectively and measured at fair value. Loans and advances, carried on the balance sheet at amortised cost This category includes all loans and advances that are not defined at their fair value in the profit and loss account, or as financial assets available for sale. Commercial paper borrowings are included in this category. Valuation Initial valuation of financial instruments Financial instruments are included on the balance sheet at their fair value at the transaction date. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

14 Subsequent valuations Calculating fair value Fair value is defined as the amount that an asset or liability can be exchanged for, in a transaction between independent parties. The valuation is based on a going concern assumption, and on the assumption that credit risk has been allowed for. Instruments that are traded in an active market A market is considered active if it is possible to obtain external, observable prices, rates or volatilities, and if these prices represent actual and frequent market transactions. For instruments that are traded in an active market, we use the listed price obtained from a stock exchange, broker or price-setting firm. If there is no price listed for the instrument, we break it down into its components and value it on the basis of the prices listed for the individual components. Instruments traded in an active market include financial instruments that are listed on a stock exchange or that are quoted on some other market, such as shares, bonds and commercial paper. They also include financial derivatives that are based on underlying quoted or stock exchange listed prices/ indexes/ instruments. Instruments that are not traded in an active market Financial instruments that are classified in this category are valued using various valuation methods. For example, normal and simple financial instruments are valued using recognised models based on observable market data. Amortised cost method Financial instruments that are not valued at fair value, are valued at amortised cost, and income is calculated using the effective interest rate method. This method involves calculating the effective interest rate on the instrument. This is calculated by discounting contractual cash flows over the anticipated term to maturity. Cash flows include arrangement fees, direct transaction costs that are not covered by the customer and any residual value when the anticipated term to maturity expires. The amortised cost is the present value of these cash flows discounted by the effective interest rate. Impairment of financial assets Individually assessed impairment provisions If there is objective evidence that it has fallen in value, a loan is written down by the difference between the carrying amount of the loan and the current value of the estimated future cash flows discounted by the loan's effective interest rate. The effective interest rate used is the loan's effective interest rate before evidence of a fall in value was identified, adjusted for changes in the market rate up to the impairment date. Changes in interest rates as a result of changes in the credit risk associated with the loan are not taken into account when adjusting the effective interest rate used for discounting purposes. Objective evidence that a loan or group of loans has fallen in value includes significant financial problems at the debtor, default or other major breaches of contract, cases where it is likely that the debtor will try to renegotiate his debt and other specific events that have occurred. Individually assessed impairment provisions reduce the loan's carrying amount, and changes in valuations for the reporting period are recognised in the profit and loss account under Loan impairment charge. Interest on loans that have previously been impaired is calculated using the discount rate that was used to calculate the impairment. Interest calculated on the present value of the loan is included under Net interest income. Collectively assessed impairment provisions Loans that have not been individually tested for impairment, are assessed collectively in groups. These assessments are based on objective evidence of falls in value on the balance sheet date that can be linked to the group. The groups are defined as loans with similar risk and valuation patterns based on the classification of customers by risk classes. The need for impairment provisions is calculated for each customer group on the basis of an assessment of the current economic climate and historical losses for the customer group in question. Collectively assessed impairment provisions reduce the loans' carrying amount. Changes in valuations for the reporting period are recognised in the profit and loss account under Loan impairment charge. Like individually assessed impairment provisions, collectively assessed provisions are calculated on the basis of discounted cash flows. Cash flows are discounted using market interest rates. Presentation on the balance sheet and in the profit and loss account Loans Loans are shown on the balance sheet, depending on who the counterparty is, under either Loans and advances to credit institutions or Loans to customers, regardless of how they have been valued. 14 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

15 Interest income from financial instruments classified as loans is included under Interest income using the effective interest rate method, regardless of the valuation method used. The effective interest rate method is described under Amortised cost method. Impairment provisions as a result of identifiable, objective evidence of a fall in value on the balance sheet date are included under Loan impairment charge. Commercial paper and bonds his portfolio includes commercial paper and bonds defined as assets measured at fair value with changes in fair value recognised in profit or loss (FVO). Interest income and expenses on commercial paper and bonds are included under Net interest income using the effective interest rate method. This method is described in the paragraph on amortised cost. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. Debt to credit institutions Liabilities to credit institutions are recorded as Debt to credit institutions regardless of the calculation method used. Interest expenses on these instruments are included under Interest expenses using the effective interest rate method. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. Debt securities Debt securities include commercial paper, bonds and subordinated debt issued by the Bank, regardless of the valuation method. Interest expenses on these instruments are included under Net interest income using the effective interest rate method. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. and regulations that apply on the balance sheet date, or that are very likely to be adopted and will apply when the deferred tax asset is realised or the deferred tax becomes payable. Deferred tax assets are included on the balance sheet on the assumption that the Bank will have taxable income as a result of profits in future years. Tax payable and deferred tax are charged to equity if the tax relates to items that in the current or previous periods have been taken to equity. ACCRUAL OF INTEREST AND FEES Interest and commission are recognised in the profit and loss account as they accrue as income or expenses. Arrangement fees for loans are included in the cash flow when calculating the amortised cost, and are taken to income under Net interest income using the effective interest rate method. RECOGNITION OF INTEREST INCOME Interest income is recognised in the profit and loss account using the effective interest rate method. This involves taking arising nominal interest plus amortised set-up fees to income. Interest income is calculated using the effective interest rate method both for balance sheet items measured at amortised cost and for ones measured at fair value through profit and loss. Interest income on impaired loans is calculated as the effective interest rate on the carrying value. CASH FLOW STATEMENT The cash flow statement shows cash flows grouped by source and area of use. Cash is defined as cash and receivables from central banks, and instant access deposits with credit institutions. POST BALANCE SHEET EVENTS Post balance sheet events shall be reported in accordance with IAS 10. Events that are not covered by the financial statements, but that are material to any evaluation of the company, shall be disclosed. TAXATION The tax expense stated in the profit and loss account includes both tax payable on income and assets, and changes to deferred tax for the financial period. Deferred tax/ deferred tax assets are calculated by applying a 28% tax rate to temporary differences that exist between accounting and taxable values at the close of the year. Deferred tax is calculated using the tax rates Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

16 NOTE 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continuously reassessed, and are based on past experience and other factors, such as expectations of future events that are considered probable. The Company prepares estimates and makes assumptions about future developments. Accounting estimates produced on this basis rarely entirely correspond with what actually happens. Estimates that constitute a significant risk of changes to the carrying value of assets and liabilities over the coming financial year are discussed below. Fair value of financial instruments For securities that are not listed and for which there is not an active market, the Company uses valuation techniques to determine their fair value. The Company makes its assessments and uses methods and assumptions that in so far as it is possible are based on market conditions on the balance sheet date. Valuations are based on the most recent private placement price, any transaction prices that we are aware of and discounted cash flows. We also obtain valuations and estimated credit spreads from external brokers. Loan impairment charge An impairment provision shall be made when there is objective evidence of a fall in value. Objective evidence that a loan or group of loans has fallen in value includes significant financial problems at the debtor, default or other major breaches of contract, cases where it is considered likely that the debtor will try to renegotiate his debt and other specific events that have occurred. To decide whether there exists objective evidence justifying collectively assessed impairment provisions, we use models that have been developed to calculate credit risk, as well as our own data on the loans' statistical remaining term to maturity. All impairment provisions are based on discounted values, with the loan's internal rate of return before impairment being used as the discount rate. In principle, all cash flows from loans and groups of loans must be identified, and an assessment must be made as to what cash flows are at risk of default. With the large number of loans that are subject to assessment at an individual level, these calculations have to be based on the specifics of the loans and past experience. The models that are used to calculate credit risk are evaluated and validated regularly. This is also true of the model for collectively assessed impairment provisions for groups of loans. Changes are implemented in order to ensure that estimates of future losses are based on past experience and our knowledge of the Bank's portfolio and the macroeconomic prospects. For further details of the approach to individually and collectively assessed provisions, see Note 1 Accounting Principles. Contingent liabilities From time to time, Bustadkreditt Sogn og Fjordane AS will be involved in legal disputes. The potential impact on the financial statements will be assessed on a case-by-case basis. NOTE 3 REMUNERATION OF SENIOR MANAGEMENT AND THE BOARD OF DIRECTORS. TRANSACTIONS WITH RELATED PARTIES Remuneration of senior management and the Board of Directors The Company hires its CEO from Sparebanken Sogn og Fjordane on a contract basis. The CEO has received no remuneration from the Company. The Board of Directors has one external member. The external member receives a fee. FIGURES IN WHOLE NOK Board of Directors Remuneration Loans at 31/12/2011 Hallvard Klakegg 0 0 Kjetil Joar Bjørset Ingeborg Aase Fransson 0 0 Peter Olav Midthun Audit committee Knut Jon Sunde Solicitor Andreas Rønnekleiv 0 0 Ingrid Kassen FIGURES IN NOK '000s Intra-group transactions Interest received from Sparebanken Sogn og Fjordane Interest paid to Sparebanken Sogn og Fjordane Interest paid to Sparebanken Sogn og Fjordane on covered bonds Services bought from Sparebanken Sogn og Fjordane Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

17 Intra-group transactions, cont Deposits at Sparebanken Sogn og Fjordane Liabilities to Sparebanken Sogn og Fjordane Covered bonds held by Sparebanken Sogn og Fjordane Bustadkreditt Sogn og Fjordane AS has no employees and purchases business services from Sparebanken Sogn og Fjordane. All of the Company's loans have been acquired from Sparebanken Sogn og Fjordane, and an agreement has been signed with the bank on the servicing of the portfolio. Transactions comply with arm's length principles. For further information about credit facilities, etc., see Note 17. NOTE 4 SEGMENTS The Company mainly operates in one segment, which is residential mortgages to retail customers, in addition there is also a small volume of residential mortgages to private business. All of the Company's loans have been bought from Sparebanken Sogn og Fjordane. The Company does not have any operations outside Norway. Customers with overseas addresses are classified as part of the Norwegian operations. NOTE 5 AUDITOR S FEE Statutory audit Fee paid to Deloitte as independent inspector Other services Total NOTE 6 ET INCOME FROM FINANCIAL INSTRUMENTS Net interest income Interest income and similar income from loans and advances to credit institutions, measured at amortised cost Interest income and similar income from loans and advances to customers, measured at amortised cost Interest income and similar income from commercial paper and other interest-bearing securities, measured at fair value Other interest and similar income from receivables measured at fair value Total interest income Interest and similar charges on debt to credit institutions, measured at amortised cost Interest and similar charges on issued securities, measured at amortised cost Other interest and similar charges on debt, measured at amortised cost Total interest expenses Total net interest income Net gain/loss on securities Bonds, commercial paper and other interest-bearing securities measured at fair value through profit or loss Commercial paper and bonds issued by the public sector Commercial paper and bonds issued by the other parties Net income and gains from financial instruments measured at fair value NOTE 7 LOAN IMPAIRMENT CHARGE Loan impairment/recoveries during the period New individually assessed impairment provisions for the period 0 0 Change in collectively assessed impairment provisions for the period Other adjustments to impairment provisions 0 0 Amounts written off against impairment provisions 0 0 Losses realised for which no provision had previously been made 0 0 Recoveries of amounts previously written off 0 0 Loan impairment/recoveries during the period Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

18 NOTE 8 OPERATING EXPENSES Fees and social security costs 32 0 IT expenses Other expenses 47 0 Total wages, salaries and general administration expenses Purchase of services from the Group Auditor's fee Expenses on bond debt Outside consultants Other operating expenses Total other operating expenses Total operating expenses NOTE 9 TAX TAX EXPENSE Tax payable for the period Total tax payable Change in deferred tax/tax assets Deferred tax relating to the origination and reversal of temporary differences Total change in deferred tax/tax assets Total tax expense Reconciliation of expected tax expense with actual tax expense Profit/loss before taxation Expected income tax applying nominal tax rate of 28% Other differences 0 6 Tax expense Tax payable Tax payable on balance sheet BREAKDOWN OF THE TAX IMPACT OF TEMPORARY DIFFERENCES Deductible temporary differences Financial instruments Loss carryforwards Total deductible temporary differences Net difference Net deferred tax assets/tax ( ) on the balance sheet Deferred tax assets are only recognised to the extent that it is probable that it will be possible to offset them against future taxable income. 18 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

19 NOTE CLASSIFICATION OF FINANCIAL INSTRUMENTS BOOK FAIR BOOK FAIR VALUE VALUE VALUE VALUE Net loans and advances to credit institutions Loans and advances to credit institutions measured at amortised cost Total loans and advances to credit institutions Bonds and commercial paper Commercial paper and bonds measured at fair value *) Total bonds and other securities Net loans to customers Loans to customers measured at amortised cost Total loans before individually and collectively assessed impairment provisions Individually assessed impairment provisions Collectively assessed impairment provisions Total net loans to customers Other assets Other assets, amortised cost Total other assets Total financial assets Financial assets grouped by category Financial assets measured at fair value, FVO *) Financial assets measured at amortised cost, loans and advances Total financial assets Debt to credit institutions Loans and deposits from credit institutions measured at amortised cost Total debt to credit institutions Debt securities UIssued commercial paper and bonds measured at amortised cost Total debt securities Other financial liabilities Other debt measured at amortised cost Total other financial liabilities Total financial liabilities Financial liabilities grouped by category Financial liabilities designated at fair value, FVO *) Financial liabilities at amortised cost, loans and advances Total financial liabilities *) FVO: Fair Value Option NOTE 11 LOANS AND ADVANCES TO CREDIT INSTITUTIONS Total loans and advances to credit inst. without an agreed term at amortised cost *) Total loans and advances to credit inst. with an agreed term at amortised cost *) 0 0 Total loans and advances to credit institutions measured at amortised cost *) Overdraft/running account that Bustadkreditt Sogn og Fjordane AS has with Sparebanken Sogn og Fjordane. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

20 NOTE 12 COMMERCIAL PAPER AND BONDS Commercial paper and bonds measured at fair value, for which changes in fair value are recognised in the profit and loss account COMMERCIAL COMMERCIAL PAPER BONDS TOTAL PAPER BONDS TOTAL Commercial paper and bonds, bonds, book value Of which listed on a stock exchange Face value Distribution by sector Finance, banking and insurance Government and government-backed Total Modified duration 0,22 0,16 0,19 0,21 0,16 0,19 Average effective interest rate at 31 Dec. 1,28 % 3,71 % 2,30% 2,06 % 2,89 % 2,43 % Maturity structure of investments in bonds and commercial paper (market value) All securities are NOK-denominated. The weighting used to calculate the average effective interest rate for the whole portfolio is based on the individual security's share of the overall interest rate sensitivity. NOTE 13 GEOGRAphic DISTRIBUTION OF LOANS AND GUARANTEES Loans to customers measured at amortised cost Total gross loans to customers Individually assessed impairment provisions 0 0 Collectively assessed impairment provisions (see note 15) Net loans to customers Distribution of loans by sector and industry Employees, etc Total Geographic distribution Gross loans Share Gross loans Shares Oslo ,91 % ,74 % Akershus ,27 % ,93 % Eastern Norway ,94 % ,52 % Southern Norway ,67 % ,29 % Western Norway ,75 % ,22 % Central Norway ,87 % ,63 % Northern Norway, Svalbard ,34 % ,53 % International ,25 % ,14 % Total gross loans by geographic area ,00 % ,00 % Bustadkreditt Sogn og Fjordane AS has issued no guarantees to customers. 20 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

21 NOTE 14 LOAN-TO-VALUE RATIO AND COVER POOL Gross loans to customers Average volume per loan Number of loans Total value of properties securing the loans Weighted average loan age (months) Weighted average remaining term (months) Weighted loan-to-value ratio 55 % 52 % Composition of cover pool: Residential mortgages 1) Substitute assets 2) Total ) Under the regulations relating to credit institutions that issue covered bonds, the loan-to-value ratio cannot exceed 75%. At 31/12/2011, the company had NOK 10.1 million exceeding that limit. That amount was therefore not included when calculating the cover pool. 2) Substitute assets consist of investments in short-term government debt and covered bonds with an AAA rating, and deposits with the parent bank. NOTE 15 IMPAIRMENT OF LOANS AND GUARANTEES Individually assessed impairment provisions at 1 Jan. 0 0 Amounts written off against individually assessed impairment provisions during the year 0 0 New individually assessed impairment provisions for the year 0 0 Recoveries against individually assessed impairment provisions for the year 0 0 Other adjustments to impairment provisions 0 0 Individually assessed impairment provisions at 31 Dec. 0 0 Collectively assessed impairment provisions at 1 Jan Increase in collectively assessed impairment provisions for the year Collectively assessed impairment provisions at 31 Dec Total impairment provisions NOTE 16 OTHER CURRENT ASSETS Accrued interest on loans Accrued interest on bonds Total other current assets NOTE 17 DEBT TO CREDIT INSTITUTIONS Total debt to credit inst. without an agreed term at amortised cost Total debt to credit inst. with an agreed term at amortised cost Total debt to credit institutions, measured at amortised cost The Company has arranged a NOK 750 million credit facility with Sparebanken Sogn og Fjordane, running for three years from December 2011, which is primarily intended to finance the purchase of loans and the redemption of covered bonds. The Company also has an arrangement that allows it to borrow up to NOK 600 million from the bank, depending on the volume of covered bonds that it issues. The bank has also undertaken to finance the funds available to the holders of flexible mortgages and future repayments of covered bonds. All agreements adhere to arm's length principles. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

22 NOTE 18 DEBT INCURRED THROUGH THE ISSUE OF SECURITIES FACE ISSUE MATURITY BOOK VALUE BOOK VALUE ISIN NUMBER VALUE CURRENCY INTEREST RATE DATE DATE NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate NO NOK Variable rate Amortisation Total debt incurred through the issue of securities All loan agreements are subject to standard covenants. In 2011, Bustadkreditt Sogn og Fjordane AS met all of the relevant conditions. NOTE 19 OTHER LIABILITIES Accrued costs and advance income Other liabilities Total other liabilities NOTE 20 OFF-BALANCE-SHEET OBLIGATIONS Available funds, flexible mortgages Total contingent liabilities Available funds represent credit limits that have been authorised, but not used, within flexible mortgages. The Company has no other off-balance-sheet obligations. 22 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2011

23 NOTE 21 CAPITAL ADEQUACY Equity and subordinated debt Share capital Other equity Equity Deductions: Deferred tax assets Core capital Net equity and subordinated loan capital Minimum requirement for equity and subordinated debt Credit risk Of which: Institutions Retail loans Residential mortgage loans Overdue advances Covered bonds Other advances Total minimum requirement for credit risk Operational risk Deductions: Collectively assessed impairment provisions Minimum requirement for equity and subordinated debt Capital adequacy Capital adequacy ratio 21,29 % 20,82 % Core capital ratio 21,29 % 20,82 % The capital adequacy ratio has been calculated using the new capital adequacy regulations (Basel II). The standard method has been used for credit risk and market risk, whilst the basic method has been used for operational risk. The minimum capital requirement is 8.00%. There are three pillars to the Basel II regulations. Pillar 1 relates to minimum capital adequacy requirements, and builds on the previous regulations in Basel I. Pillar 2 relates to the institution's internal assessment of total capital requirements (ICAAP), whilst Pillar 3 covers disclosure requirements for financial information. NOTE 22 VALUATION Breakdown of financial assets measured at fair value Bonds and other fixed-interest securities QUOTED PRICES AND OBSERVABLE ASSUMPTIONS BOOK VALUE Finance, banking and insurance Government and government-backed Total Bonds and other fixed-interest securities Norwegian short-term government debt is valued at its most recent price on the stock exchange. Other Norwegian bonds and securities are measured at fair value based on valuation techniques. The valuation techniques incorporate yield curves and credit spreads supplied by external parties, and valuations are quality assured at year-end, primarily by comparing our prices with those of other valuers. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT