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 2010

2 Contents 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 0,80 % 1,07 % Profit after tax as a % of average total assets 0,42 % 0,53 % KEY BALANCE SHEET FIGURES NOK NOK Gross loans to customers Collectively assessed impairment provisions Equity Total assets Average total assets OTHER KEY FIGURES Cost income ratio 19,07 % 23,62 % Impairment charge as a % of total assets 0,05 % 0,15 % Impairment provisions as a % of total assets 0,14 % 0,15 % Return on equity after tax 7,18 % 5,39 % Capital adequacy ratio 20,82 % 19,61 % BALANCE SHEET TRENDS % NOK Growth in total assets 72,77 % Growth in customer lending 81,31 % Bustadkreditt Sogn og Fjordane AS Annual report

4 Annual Report 2010 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 over the course of 2009 and 2010 it issued covered bonds with a face value of NOK 2.35 billion. At the close of 2010 the total cover pool was worth NOK 2.7 billion. The cover pool was made up of residential mortgages worth NOK 2.6 billion, as well as two bonds with a total value of NOK 100 million that are included as substitute assets. Substitute assets made up 3.7 percent of the total cover pool. All of the company s loans are subject to variable interest rates. 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 2010, the company had 2850 residential mortgages worth a total of NOK 2,600 million. The weighted average loan-to-value ratio was 52.0 percent, and the weighted average loan term was 12.0 years. The average mortgages for each customer has a value of NOK The geographic distribution of the residential mortgage portfolio was as follows: Region Share Western Norway 73.2 % Førde 24.0 % Eid, Florø, Sogndal and Stryn 7.9 % Rest of Sogn og Fjordane 9.3 % Sogn og Fjordane 51.2 % Bergen 13.0 % Western Norway (Rogaland, Møre og Romsdal and rest of Hordaland) 9.2 % Eastern Norway 24.2 % Oslo and Akershus 19.7 % Rest of eastern Norway 4.5 % Central Norway 1.6 % Southern Norway 0.3 % Northern Norway 0.5 % International 0.1 % Total % PROFIT AND LOSS ACCOUNT In 2010 the company made an operating profit before loan impairment charges of NOK 12.5 million. The net loan impairment charge was NOK 1.4 million, which related to collectively assessed impairment provisions. Profit for the year after tax was NOK 8.0 million. Net interest income was NOK 15.3 million in 2010, equivalent to 0.80 percent of average total assets. Other operating income totalled around NOK 0.1 million. In 2010, operating expenses were NOK 2.9 million, equivalent to 19.1 percent of total operating income. The company has no employees, and buys services from Sparebanken Sogn og Fjordane and Edb Business Partner AS. Services are bought on market terms. TRENDS IN NON-PERFORMING LOANS At the close of 2010, the company had one loan with a balance of NOK 1.2 million that was more than 90 days overdue. This loan is not included as part of the cover pool. Non-performing loans are monitored carefully. BALANCE SHEET AND CAPITAL ADEQUACY Total assets have increased in line with the loan portfolio, and at 31 December 2010 they totalled NOK 2,773 million. This was an increase of almost NOK 1.2 billion over 31 December The Company borrows money through covered bonds. The Company also has a long-term credit facility of NOK 300 million with Sparebanken Sogn og Fjordane. At the close of the year, NOK 105 million of the credit facility was unused. Equity at the close of the year was NOK million after allocation of the profit for the year. In 2010 Sparebanken Sogn og Fjordane injected NOK 100 million of new share capital to ensure that the company was adequately capitalised. At 31 December 2010 the company had NOK million of net equity and subordinated debt and a core capital adequacy ratio of 20.8 percent. The Board of Directors considers the company s equity to be satisfactory and adequate in relation to its activities and operations. 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 4 Bustadkreditt Sogn og Fjordane AS Annual report 2010

5 in the cover pool. Residential mortgages and substitute assets are collateral for the covered bonds. RISK 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 indicator 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. The company considers that there was no significant change in the inherent risk associated with the various risk classes over the course of the year. 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 percent of the approved value of the collateral. The values of properties used as collateral for residential mortgage loans are updated quarterly. Valuations by Eiendomsverdi AS are used to determine the approved values of the 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 63.5 percent of the loan portfolio held by Bustadkreditt Sogn og Fjordane AS has a loan-to-value ratio of under 60 percent. 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. 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. Credit risk has increased somewhat in parallel with the increase in the size of the portfolio, but nevertheless the Board considers the risk to be low. 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 always maintains the minimum liquidity buffer required by the Board and sufficient liquidity to cover its net obligations over the next six months. 35% 30% 25% Weighted loan-to-value ratio Interest rate risk The company shall manage its exposure to interest rate risk in order to minimise its exposure to interest rate fluctuations. Exposure to changes in interest rate spreads is limited by the rules on credit risk. There are also limits on the exposure to changes in the absolute level of interest rates that are monitored and reported monthly. 20% 15% Foreign currency risk The company does not have any foreign-currencydenominated loans or other foreign-currencydenominated investments. 10% 5% 0% Under 40% 40 50% 50 60% 60 75% over 75% 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 Bustadkreditt Sogn og Fjordane AS Annual report

6 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, all of whom are of have in the past 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 The company has no employees. As a result, no special measures have been implemented to improve the working environment. The Board does not consider that the company s operations pollute the environment. 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 The 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 also believes that the going concern assumption is appropriate. Consequently, the Board confirms that the going concern assumption has been used in the preparation of the financial statements for POST BALANCE SHEET EVENTS The Board is not aware of any events after 31 December 2010 that have a material impact on the financial statements or on the company s financial position. STRATEGY AND PROSPECTS FOR 2011 In 2011, Bustadkreditt Sogn og Fjordane AS will continue with its core business, which is the purchase of residential mortgage loans from Sparebanken Sogn og Fjordane. Throughout 2011 a conciderable increase in total assets is expected. The target group for its covered bonds are 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 high-quality data for the property values that underpin the cover pool. This work will be continued in order to ensure that government requirements are met. The discontinuation of the government s swap scheme will mean that the company will need to sell its covered bonds through the financial markets. Consequently, the company will participate in the Forum for covered bonds, which aims to coordinate marketing efforts, amongst other things. ALLOCATION OF PROFIT FOR THE YEAR Bustadkreditt Sogn og Fjordane AS made a profit of NOK 8.0 million. The Board recommends transferring the profit to the company s equity. Førde, 31 January 2011 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Hallvard Klakegg Chair Kjetil Joar Bjørset Gro Skrede Mardal Harald Slettvoll CEO 6 Bustadkreditt Sogn og Fjordane AS Annual report 2010

7 Bustadkreditt Sogn og Fjordane AS Annual report

8 Profit and loss account Note Interest income 3, Interest expenses Net interest income Commission income Net commission income Net gain/loss on securities Total other operating income Net other operating income Total operating income 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 year STATEMENT OF COMPREHENSIVE INCOME Profit and loss account Other comprehensive income after tax 0 0 Comprehensive income and expenses Bustadkreditt Sogn og Fjordane AS Annual report 2010

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: Fixed-interest 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 Accrued costs Total liabilities Total liabilities and equity Førde, 31 January 2011 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Hallvard Klakegg Chair Kjetil Joar Bjørset Gro Skrede Mardal Harald Slettvoll CEO Bustadkreditt Sogn og Fjordane AS Annual report

10 Cash flow statement Profit/loss before tax Impairment losses 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 (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 2010

11 Equity statement PAID-UP EQUITY RETAINED EARNINGS Total paid-up Other Total other Total Share capital equity equity equity equity Opening balance 1 January Profit for the reporting period Equity transactions New paid-up equity Closing balance 31 December Opening balance Profit for the reporting period Equity transactions New paid-up equity Closing balance 31 December 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 expenses 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 of financial assets 23 Credit risk 24 Liquidity risk 25 Risk exposure 26 Sensitivity analysis of market risk 27 Disputes 12 Bustadkreditt Sogn og Fjordane AS Annual report 2010

13 NOTE 1 ACCOUNTING PRINCIPLES GENERAL The 2010 financial statements for Bustadkreditt Sogn og Fjordane AS were discussed and adopted at the Board meeting of 31 January 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 No relevant changes were made to standards or interpretations in 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, fixed-interest loans and certain bonds issued by the company. 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. 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. Bustadkreditt Sogn og Fjordane AS Annual report

14 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 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 internal rate of return method. For the internal rate of return method, the investment s internal rate of return is used. The internal rate of return is calculated by discounting contractual cash flows over the anticipated term to maturity. Cash flows include arrangement fees and direct transaction costs that are not covered by the customer, as well as any residual value when the anticipated term to maturity expires. The amortised cost is the current value of these cash flows discounted by the internal rate of return. 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 internal rate of return. The internal rate of return used is the loan s internal rate of return 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 internal rate of return 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 or other specific events that have occurred. Individually assessed impairment provisions reduce the loan s value on the balance sheet, and changes in valuations for the reporting period are taken to the profit and loss account under Loan impairment charge. Interest on loans that have previously been impaired down is calculated using the discount rate that was used to calculated the impairment provision. 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 tested jointly in groups. Loans that have been tested individually, but which have not been impaired, are also tested 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. Interest income from financial instruments classified as loans is included under Interest income using the internal return method, regardless of the valuation method used. The internal return method is described under Amortised cost method. 14 Bustadkreditt Sogn og Fjordane AS Annual report 2010

15 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 This category includes commercial paper and bonds that the Group does not intend to hold to maturity. This portfolio includes commercial paper and bond 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 internal rate of return 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 cost using the internal rate of return 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 internal rate of return method. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. 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 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. Deferred tax and deferred tax assets within the Group are offset against one another, and only the net liability or asset is included on the balance sheet. 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. Set-up 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 internal rate of return method. RECOGNITION OF INTEREST INCOME Interest income is recognised in the profit and loss account using the internal rate of return method. This involves taking arising nominal interest plus amortised set-up fees to income. Interest is taken to income using the internal rate of return method both for balance sheet items measured at amortised cost and ones measured at fair value through profit and loss. Interest income on impaired loans is calculated as the internal rate of return 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 dates 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. 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 the basis of this 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. Impairment provisions 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 likely that the debtor will try to renegotiate his debt or 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, SSF Bustadkreditt 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 No remuneration has been paid to senior management or the Board of Directors. The company buys all of the services it needs, including management of the company, from Sparebanken Sogn og Fjordane. The company has not provided any loans to Board members or the CEO. FIGURES IN WHOLE NOK Audit committee: Loans at 31 December 2010 Solicitor Andreas Rønnekleiv: Intra-group transactions Sparebanken Sparebanken Sogn og Fjordane Sogn og Fjordane FIGURES IN NOK 000s Interest income Interest expenses Services bought Deposits Debt Bustadkreditt Sogn og Fjordane AS Annual report 2010

17 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. NOTE 4 SEGMENTS The Company mainly operates in one segment, which is retail customers. This segment consists of loans to retail customers and a small volume of loans to private businesses. 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 Tax advice 0 1 Other services Total NOTE 6 NET INCOME FROM FINANCIAL INSTRUMENTS Net interest income 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 income and similar income from receivables measured at fair value Total interest income Interest and similar expenses on issued securities measured at amortised cost Other interest and similar expenses 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 IMPAIRMENT OF LOANS AND GUARANTEES Loan impairment/recoveries of loans and guarantees during the period New individually assessed impairment provisions for the year 0 0 Change in collectively assessed impairment provisions for the year 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 Impairments/recoveries on loans and guarantees during the period Bustadkreditt Sogn og Fjordane AS Annual report

18 NOTE 8 OPERATING EXPENSES IT expenses Office equipment 0 4 Total general administrative expenses Purchase of services from the Group Auditor s fee Expenses on bond debt Outside consultants Other operating expenses 19 3 Total other operating expenses Total operating expenses NOTE 9 TAX TAX EXPENSE Tax payable for the year 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 Other differences Tax expense Tax payable Tax payable on balance sheet BREAKDOWN OF THE TAX EFFECT OF TEMPORARY DIFFERENCES AND LOSS CARRYFORWARDS Taxable temporary differences Financial assets Total taxable temporary differences Deductible temporary differences 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 2010

19 NOTE 10 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 measured at 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 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 *) 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 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 PAPER BONDS TOTAL COMMERCIAL PAPER BONDS TOTAL Commercial paper and bonds, carrying amount Of which listed on a stock exchange Par value Distribution by sector Finance, banking and insurance Government and government-backed Total Modified duration 0,21 0,16 0,19 0,20 0,16 0,19 Average effective interest rate at 31 Dec. 2,06 % 2,89 % 2,43 % 2,02 % 2,42 % 2,13 % 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 BREAKDOWN 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 Overseas Total Geographic distribution Loans Share Loans Share Oslo ,74 % ,85 % Akershus ,93 % ,04 % Eastern Norway ,52 % ,61 % Southern Norway ,29 % ,64 % Western Norway ,22 % ,61 % Central Norway ,63 % ,72 % Northern Norway, Svalbard ,53 % ,45 % Overseas ,14 % ,08 % Total gross loans by geographic area ,00 % ,00 % SSF Bustadkreditt AS has issued no guarantees to customers. 20 Bustadkreditt Sogn og Fjordane AS Annual report 2010

21 NOTE 14 LOAN-TO-VALUE RATIO AND COVER POOL Gross loans to customers Average loan per customer 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 52 % 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 December 2010, the company had NOK 10.3 million exceeding that limit. That amount was therefore not included when calculating the cover pool. At 31 December 2010 the company had one NOK 1.2 million loan that was in default. Non-performing loans are not included in the cover pool. 2) Substitute assets consist of investments in short-term government debt and covered bonds. All investments are AAA-rated by Standard & Poor s 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 0 0 Total debt to credit institutions, measured at amortised cost The company has arranged a NOK 300 million credit facility with Sparebanken Sogn og Fjordane, which is primarily intended to finance the purchase of loans and the redemption of covered bonds. The facility has been arranged in accordance with arm s length principles. Bustadkreditt Sogn og Fjordane AS Annual report

22 NOTE 18 DEBT INCURRED THROUGH THE ISSUE OF SECURITIES BOOK BOOK FACE INTEREST ISSUE MATURITY VALUE VALUE ISIN NUMber VALUE CURRENCY RATE DATE DATE NO NOK Variable rate 30 Mar Aug NO NOK Variable rate 14 May Aug NO NOK Variable rate 22 June Aug NO NOK Variable rate 20 Apr Apr NO NOK Variable rate 24 June June NO NOK Variable rate 21 Sept Apr NO NOK Variable rate 1 Dec Mar NO NOK Variable rate 14 Dec Apr Amortization Total debt incurred through the issue of securities All loan agreements are subject to standard covenants. In 2010, 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 Unused credit facilities Total contingent liabilities The unused credit facilities are undrawn home equity lines of credit. The company has no other off-balance-sheet obligations. 22 Bustadkreditt Sogn og Fjordane AS Annual report 2010

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 20,82 % 19,61 % Core capital ratio 20,82 % 19,61 % 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 OF FINANCIAL ASSETS 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

24 NOTE 23 CREDIT RISK CREDIT RISK BY CLASS OF FINANCIAL INSTRUMENT MAXIMUM EXPOSURE Bonds and commercial paper Net loans and advances to customers* 0 0 Total *) Net loans and advances to customers, measured at fair value 0 0 CREDIT RISK RELATING TO BONDS AND COMMERCIAL PAPER Credit risk by counterparty Interest-bearing securities Debtor category by guarantor AAA AA A BBB Non-investment Total 2010 Total 2009 fair fair fair fair grade fair fair Figures in NOK 000s value value value value fair value value value Finance, banking and insurance Government and government-backed Total Standard & Poor s ratings have been used. Changes in value Total change in book value Changes in value recognised in the profit and loss account for the period Customers with residential mortgage loans are assessed according to the willingness and ability to repay their loans. When customers apply for a loan, they are subjected to a risk assessment and their debt servicing ability is calculated. The loan-to-value ratio of Bustadkreditt Sogn og Fjordane AS s residential mortgage loans is less than 75 % at the time they are transferred from Sparebanken Sogn og Fjordane. The credit quality of loans that are not in arrears is high. Bustadkreditt Sogn og Fjordane AS s collateral consists of mortgages on residential properties. We consider the collateral for the portfolio to be very good. One account is over 90 days in arrears. The collateral for this non-performing loan is also considered to be good. The credit risk associated with the portfolio is low. LOANS BY CUSTOMER GROUPS Gross Individually Net Loans and Unused Average non- assesed nonadvances to credit Total loan performing impairment performing customers Guarantees facilities amount value amount provisions amount Salaried employees, etc Overseas Total Collectively assessed impairment provisions other changes in value Total loans and advances to customers Bustadkreditt Sogn og Fjordane AS Annual report 2010