3 Key figures. 4 Directors report. 8 Profit and loss account. 9 Balance sheet. 10 Cash flow statement. 11 Equity statement.

Transcription

1 ANNUAL REPORT 2013

2 CONTENT 3 Key figures 4 Directors report 8 Profit and loss account 9 Balance sheet 10 Cash flow statement 11 Equity statement 12 Notes 32 Auditor s report 33 Audit committee s annual report 34 Declaration by the Board of Directors and CEO 35 Information about the company GRAPHIC DESIGN: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS

3 Key figures FIGURES IN NOK 000s PROFIT AND LOSS ACCOUNT Net interest margin 1,60 % 1,08 % Profit/loss after tax as a % of average total assets 1,09 % 0,67 % KEY BALANCE SHEET FIGURES Gross loans to customers Loan impairment Equity Total assets Average total assets OTHER KEY FIGURES Cost-to-income ratio 4,70 % 6,12 % Impairment charge as a % of gross loans 0,01 % 0,08 % Impairment provisions as a % of gross loans 0,17 % 0,18 % Return on equity after tax*) 20,95 % 11,16 % Capital adequacy ratio 13,16 % 14,37 % BALANCE SHEET YEAR-ON-YEAR GROWTH Growth in total assets 8,15 % 64,56 % Growth in customer lending 7,44 % 64,57 % Information about the loan portfolio Surplus value of cover pool (NOK millions) Surplus value of cover pool (%) 28,4 % 30,7 % Committed surplus (%) 11,0 % 11,0 % Indexed LTV 55,9 % 54,0 % Unindexed LTV 57,6 % 58,0 % Value of covered bonds issued (NOK millions) Substitute assets other than loans (NOK millions) Weighted average time since issue of loans (years) 2,6 2,6 Weighted average remaining term of loans (years) 16,2 15,1 Proportion of variable-rate loans 100 % 100 % Proportion of flexible mortgages 29,2 % 29,4 % Average loan value (NOK millions) 1,12 1,11 Number of loans Proportion of loans secured by an overseas property 0 % 0 % *) Calculated using the opening equity balance adjusted for capital increases. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

4 Annual Report 2013 HIGHLIGHTS Bustadkreditt Sogn og Fjordane (BSF) 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. By the end of 2013 it had issued covered bonds with a face value of NOK 7.1 billion, and the total value of its cover pool was NOK 9.2 billion. This leads to an overcoolateralization of 28 %. Sparebanken Sogn og Fjordane has an international credit rating of A3 issued by Moody s. For Bustadkreditt Sogn og Fjordane AS, this rating means that the surplus value of its cover pool must be at least 11 percent. The cover pool was made up of residential mortgages worth NOK 8,678 million, as well as bonds and bank deposits with a total value of NOK 530 million that are included as substitute assets. Substitute assets made up 5.8% of the total cover pool. All of the Company s loans are subject to variable interest rates. 29.2% of the loan book was made up of flexible mortgages. The establishment of Bustadkreditt Sogn og Fjordane AS was an important part of Sparebanken Sogn og Fjordane s strategy for securing long-term liquidity. The Company has also played a decisive role in enabling the bank to offer its customers mortgages on competitive terms. At the end of 2013, the Company had mortgages with a total face value of NOK million. The average loan-to-value ratio (weighted by initial value) was 55.9 % percent, and the weighted average loan term was 16.2 years. The weighted average time since the loans were granted was 2.6 years. The average loan per customer was NOK 1.12 million. The company s total loan portfolio grew by NOK 601 million over the past year. The geographic distribution of our mortgage portfolio, based on the addresses of the borrowers, was as follows: Region Share Western Norway 78,9 % Eastern Norway 19,0 % Central Norway 0,8 % Southern Norway 0,7 % Northern Norway 0,4 % Overseas 0,2 % Total 100,0 % 5 biggest counties measured by loan volume County Share Sogn og Fjordane 50,0 % Hordaland 24,7 % Oslo 9,2 % Akershus 6,5 % Rogaland 2,5 % Rest of Norway + overseas 7,1 % Total 100,0 % 5 biggest municipalities measured by loan volume Municipality Share Bergen 20,4 % Førde 16,1 % Flora 10,6 % Oslo 9,2 % Sogndal 3,6 % Rest of Norway + overseas 40,1 % Total 100,0 % The distribution of the loans by value is as follows: Distribution by loan value Loan value Volume (NOK millions) 0 1 mill mill mill over 3 mill Total PROFIT AND LOSS ACCOUNT In 2013 the company made an operating profit before loan impairment charges of NOK million. The net loan impairment charge of NOK 0.7 million was the result of collectively assessed impairment provisions and one individually assessed impairment charge. Profit for the year after tax was NOK 94.0 million, up from NOK 45.1 million in The improvement in 2013 was due to a combination of higher loan volumes, higher margins on loans to customers and lower borrowing costs. Net interest income was NOK million in 2013, equivalent to 1.60 percent of average total assets. Other operating income came to around NOK 1.0 million. The equivalent figures for 2012 were NOK 72.3 million in net interest income (1.08% of average total assets), and other operating income of NOK 0.8 million. 4 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2013

5 In 2013, operating expenses were NOK 6.5 million, equivalent to 4.7% of total operating income. Operating expenses in 2012 were NOK 4.5 million (6.1% of total operating income). The company has no employees, and buys services from Sparebanken Sogn og Fjordane and Evry ASA. All services are bought on market terms. The Company s biggest expense was the purchase of services from Sparebanken Sogn og Fjordane. TRENDS IN NON-PERFORMING LOANS At the close of 2013, the Company had two loans that were more than 90 days in arrears. These loans represented 0.03% of total loans. 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 2013 they totalled NOK million. That represents an increase of just under NOK 0.7 billion over the past year. The funding is raised through covered bonds. In addition, the Company has good, long-term credit facilities with Sparebanken Sogn og Fjordane. During 2013, the Company paid NOK 72.9 million in dividends to its parent company. This was equivalent to the distributable equity built up by the Company over the period , less value adjustments to bonds. 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. 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 Credit risk is the risk of losing money as a result of customers or counterparties being unable or unwilling to fulfil their obligations to BSF. The Company has its own rules on which loans it can buy from its parent company. The rules are strict, which means that the credit risk is low by transferring. The rules specify requirements relating to the type of loan, loan-to-value ratio, risk class and type of collateral. At the end of 2013, the Company s average loan-to-value ratio was 55,9% of the approved value of the collateral calculated by Eiendsomsverdi AS. The Board of Directors considers the loan portfolio to be of high quality, and to be associated with a low credit risk. The figure below shows the weighted loan-to-value ratio for the loans held by the Company. In 2013, the proportion of the loan portfolio with a Equity at the close of the year was NOK million. All of the Company s equity is core Tier 1 capital, and its core Tier 1 capital adequacy ratio was 13.2 percent. Capital adequacy has been calculated by measuring credit risk using the standardised approach and operational risk using the basic indicator approach Weighted loan-to-value ratio 37% In January 2014, Sparebanken Sogn og Fjordane subscribed for new shares in the amount of NOK 300 million. This expansion in capital will enable the Company to increase its total assets without breaking capital adequacy requirements. It will also give the Company greater flexibility in its dividend policy % 13% 16% 13% The Board of Directors considers the Company s equity to be satisfactory and adequate in relation to its activities and operations. INTERNATIONAL RATING In September 2011, Bustadkreditt Sogn og Fjordane AS s covered bond programme was given a long-term 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 Under its licence as a credit institution, 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 5 0 Under 40% 40-50% 50-60% 60-75% over 75% loan-to-value ratio exceeding of over 75% rose. This was due to a fall in house prices over the second half of the year. It is particularly loans granted in 2013 with a loan-to-value ratio of close to 75% that have now moved into the over 75% category. Market risk Market risk is the risk arising from the Bank s Company s open positions relating to loans and financial instruments whose values fluctuate over time in response to changes in market prices. Bustadkreditt Sogn og Fjordane has not invested in shares or foreign currencies, so all of its market risk therefore relates to interest rate risk. BSF s risk management framework sets boundaries to the Company s exposure to market risk. The Board considers it a priority for the Company to maintain a low exposure to market risk. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

6 Liquidity risk Liquidity risk is the risk that the Company will be unable to fulfil its obligations and/or finance an increase in assets without significant additional cost, either because it has to realise losses on the sale of assets or because it has to make use of unusually expensive financing. The Board has decided that the Company s exposure to liquidity risk shall be kept low. This is, amongst other things, reflected in the size of the required liquidity buffer. Operational risk Operational risk is defined as the risk of losses due to human error, external actions or failures and defects in the Company s systems, procedures and processes. Bustadkreditt Sogn og Fjordane AS has signed an agreement with Sparebanken Sogn og Fjordane on the provision of services in areas such as customer service, administration, IT, finance and risk management. In these areas, the parent company is responsible for resolving any mistakes and for handling the operational risk. It is the Board s assessment that this area is handled well. Laws and regulations set out specific requirements relating to various records that have to be kept. Establishing and monitoring these records helps the Board and CEO to uncover errors or inadequacies in the running of the Company. Internal controls also play a very important role in reducing the Company s operational risk. The Board considers Bustadkreditt Sogn og Fjordane s operational risk to be low. ADMINISTRATION AND MANAGEMENT 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 CEO is employed by Sparebanken Sogn og Fjordane and seconded to Bustadkreditt 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. CORPORATE GOVERNANCE BSF s governance is based on Norwegian law, including the Norwegian Accounting Act, the Financial Institutions Act and the Regulations relating to Credit Institutions. The AGM is the Company s highest decision-making body. Amongst other things, the AGM elects the Board of Directors, Audit Committee and auditor, and monitors the Board and CEO s management of the Company. The election of the Board is governed by Section 3 of the articles of association. Board members are elected for a period of two years at a time. The Board is responsible for ensuring that the Company is managed and governed in accordance with laws, rules, the articles of association and specific guidelines adopted by the AGM. The Board of Directors is made up of three members from within the Group and one external member. The audit committee monitors that the Company is being run properly and responsibly in accordance with laws and regulations, the articles of association, guidelines from the AGM and rules laid down by the Financial Supervisory Authority of Norway. The committee shall ensure that the Board implements the necessary measures to limit significant risks of losses, and that any comments made by the auditor are dealt with appropriately. Bustadkreditt Sogn og Fjordane has elected the same audit committee as Sparebanken Sogn og Fjordane. The CEO is responsible for the management of the Company, and shall follow the guidelines and rules laid down by the Board. The Company shall be managed in accordance with the regulatory framework provided by laws, regulations, the Financial Supervisory Authority of Norway s circulars, government rules and the Company s articles of association. Internal controls have been established in accordance with the Internal Control Regulations. All of the reporting units within the Group, including Bustadkreditt Sogn og Fjordane, are responsible for having effective and appropriate internal controls to deal with their own risks. Units must assess risk levels prior to and after risk-reduction measures. They must then evaluate what internal controls are required to deal with the remaining risks and ensure that these risks are managed and monitored in a satisfactory manner. Over the course of the year numerous reports enable the CEO to closely follow developments in the Company s various areas of risk. These reports are produced on a daily, monthly or quarterly basis, and provide the necessary information for managing risks and implementing any required risk-reduction measures. The reports are also sent to the Board for review. Once a year, the CEO prepares an overall assessment of risks and internal controls, which is presented to the Board. The Company s internal auditor (PwC) also produces an independent report on internal controls each year. 6 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2013

7 The independent inspector (Deloitte) also plays an important role in the Company s corporate governance, but is not involved in internal controls. The scope of control mechanisms and oversight bodies makes it likely that any errors, defects or risks will be discovered, reported and corrected. Internal controls and financial reporting As part of the internal control process the management of Bustadkreditt Sogn og Fjordane AS shall also assess whether the Company s activities give rise to a risk of inaccurate financial reporting. Processes and internal control procedures have been established to assure the quality of the financial reporting. These include rules on authorisation, the allocation of responsibilities, reconciliation, IT controls, etc. Financial reporting must at all times also satisfy external laws and regulations. Sparebanken Sogn og Fjordane s CFO is responsible for the Group s accounting and finance functions, and as such the has overall responsibility for external laws and regulations being followed throughout the Group. The Group s senior management team also continuously monitors the financial results of the various business areas and subsidiaries. The Board supervises procedures for financial reporting and internal controls, and ensures that they are effective. The annual financial statements are finally approved by the AGM, after they have been reviewed by the Board. Each year the external auditor produces a report summarising the results of its financial audit. The report also includes information about any weaknesses and defects, as well as suggested corrective measures. POST BALANCE SHEET EVENTS The Board is not aware of any events after 31 December 2013 that have a material impact on the financial statements or on the Company s financial position. STRATEGY AND OUTLOOK FOR 2014 In 2014, Bustadkreditt Sogn og Fjordane AS will continue with its core business, which is purchasing residential mortgage loans from Sparebanken Sogn og Fjordane in order to issue covered bonds. The target group for its covered bonds are Norwegian and international financial institutions and other investors. It appears that 2014 may be the first year in a long time that Norwegian house prices will stagnate or fall. In that case, the volume of loans that qualify for being purchased from our parent company will be lower than in a rising housing market. Nevertheless, low unemployment and high wage growth will probably provide good conditions for further growth at the parent company in the retail market. That will also provide the foundations for future growth at Bustadkreditt Sogn og Fjordane. It will be worked proactively to ensure that BSF will be able to buy a larger proportion of Sparebanken Sogn og Fjordane s mortgage portfolio in the coming years, and hence issue more covered bonds. APLLOCATION OF PROFIT FOR THE YEAR Bustadkreditt Sogn og Fjordane AS made a profit of NOK million. The Board recommends transferring the profit to the Company s equity. REVIEW OF THE ANNUAL FINANCIAL STATEMENTS The Board consider 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 Førde, 3 February 2014 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Hallvard Klakegg Chair Peter Midthun Frode Vasseth Ingeborg Aase Fransson Harald Slettvoll CEO Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

8 Profit & loss account Note Interest income Interest expenses Net interest income 3, Commission income Net commission income Net other operating income Net gain/loss on securities 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 7, Operating profit/loss Tax expense Profit/loss for the financial year COMPREHENSIVE INCOME Profit/loss for the financial year Comprehensive income for the financial year Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2013

9 Balance sheet ASSETS Note Loans and advances to credit institutions 3, Gross loans to customers Individually assessed impairment provisions 7, 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 assets Other receivables/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 Contingent liabilities Førde, 3 February 2014 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Hallvard Klakegg Chair Peter Midthun Frode Vasseth Ingeborg Aase Fransson Harald Slettvoll CEO Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

10 Cash flow statement Profit/loss before taxation Impairment provisions for loans and guarantees 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 Dividends 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 2013

11 Equity statement PAID-UP EQUITY RETAINED EARNINGS Total Total Share capital paid-up equity Other equity other earnings Total equity Opening balance 01/01/ Profit/loss for the reporting period Closing balance 31/12/ Opening balance 01/01/ Distributions Profit/loss for the reporting period 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 expense 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 Impairment provisions 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 Liquidity risk 26 Sensitivity analyses 27 Disputes 28 Share capital and shareholder information 12 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2013

13 Notes to the accounts NOTE 1 ACCOUNTING PRINCIPLES GENERAL The 2013 financial statements for Bustadkreditt Sogn og Fjordane AS were discussed and adopted at the Board meeting of 3 February All amounts in the accounts and notes are given in thousands of NOK unless otherwise stated. ACCOUNTING STANDARDS APPLIED 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 2013 TO STANDARDS AND INTERPRETATIONS APPROVED BY THE EU None of the changes to standards or interpretations introduced in 2013 affected the Company s financial statements for 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. 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, referred to as FVO Loans and receivables, 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 sold 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 covers investments in commercial paper and bonds. These instruments, along with interest swap contracts, are managed and measured jointly at fair value. Loans and receivables, carried on the balance sheet at amortised cost This category includes all loans and receivables that are not defined at their fair value in the profit and loss account, and that are not defined as financial assets available for sale. Debt securities in issue are included in this category. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

14 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. 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, using the effective interest rate method. This involves calculating the effective interest rate 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. 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 or other similar specific events. 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. In the same way as for individually assessed impairment provisions, collectively assessed provisions are calculated on the basis of discounted cash flows. Impairment of financial assets Individually assessed impairment provisions If objective evidence that it has fallen in value is identified, a loan is written down by the difference between the carrying amount of the loan and the present value of the estimated 14 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2013

15 RESENTATION 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 effective interest rate method, regardless of the valuation method used. The effective interest rate method is described under Amortised cost method. Impairments to loans 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 Our 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 gain/loss 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 gain/loss on financial instruments measured at fair value. Debt securities in issue Debt securities include commercial paper, bonds and subordinated debt issued 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. TAXATION The tax expense stated in the profit and loss account includes both tax payable on income (28%) and changes to deferred tax for the financial period. Deferred tax/deferred tax assets are calculated as 27% of 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 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 Company will have taxable 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 amount. 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. 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 amount 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. Thus, 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 An impairment provision shall be made when there is objective evidence of a fall in value. Objective evidence that a loan 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. 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. 16 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2013

17 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 has received a remuneration. FIGURES IN WHOLE NOK Board of Directors Remuneration Loans at Hallvard Klakegg 0 0 Frode Vasseth 0 0 Ingeborg Aase Fransson 0 0 Peter Olav Midthun Intra-group transactions Knut Jon Sunde 0 0 Jan Nicolai Hvidsten 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 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. An agreement has been signed with Sparebanken Sogn og Fjordane on the supply of loan servicing and administrative services. 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. Risk associated with loans bought from the parent company is transferred to Bustadkreditt Sogn og Fjordane AS at the purchase date. Bustadkreditt Sogn og Fjordane AS has been given access to good credit facilities with Sparebanken Sogn og Fjordane. These will allow the Company to make interest and principal payments to the owners of covered bonds, enable it to make advances to customers with flexible mortgages, provide bridge financing when loans are being transferred, and fund the necessary surplus in the cover pool. Further details of the credit facilities: Bustadkreditt Sogn og Fjordane AS has four credit facilities with Sparebanken Sogn og Fjordane (SSF): a) A 3-year facility that expires in November The credit facility is to be used for buying mortgage loans from SSF. It has a limit of NOK 750 million. b) A credit fasility to ensure that owners of covered bonds will be paid even if the mortgage finance subsidiary is unable to meet its obligations. The limit on the facility at 31 December 2013 was NOK 160 million. Under the agreement, the obligations of the Bank relate to all payments due to the owners of the covered bonds over the coming year. c) A credit facility that can be used to finance advances to customers with available credit within their flexible mortgages. At 31 December, the limit on the facility was NOK 877 million. d) A credit facility related to overcollateralisation. The facility shall be used to buy loans for inclusion in the cover pool, and to buy instruments that qualify as part of a liquidity buffer. At 31 December 2013 the limit on the facility was NOK 1,070 million, but this limit depends on the volume of covered bonds issued at any given time. All agreements and transactions adhere to arm s length principles. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

18 NOTE 4 SEGMENTS The company has one main segment. 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 incl. VAT Fee paid to Deloitte as independent inspector incl. VAT Total NOTE 6 NET INCOME FROM FINANCIAL INSTRUMENTS Net interest income Interest receivable and similar income on loans and advances to credit institutions, measured at amortised cost Interest receivable and similar income on loans and advances to customers, measured at amortised cost Interest receivable and similar income on commercial paper and other interest-bearing securities, designated at fair value Other interest receivable and similar income from receivables measured at fair value 0 0 Total interest income Interest payable and similar charges on debt to credit institutions, measured at amortised cost Interest payable and similar charges on issued securities measured at amortised cost Other interest payable 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/losses on financial instruments designated at fair value NOTE 7 LOAN IMPAIRMENT CHARGE Loan impairment/recoveries during the period New individually assessed impairment provisions for the period 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 2013

19 NOTE 8 OPERATING EXPENSES Fees and social security costs IT costs Other services (Eiendomsverdi AS) Other expenses Total wages, salaries and general administration expenses Purchase of services from the Group Auditors fees (external and internal auditor) Expenses on bond debt and rating fees Other operating expenses 21 9 Total other operating expenses Total operating expenses NOTE 9 TAX EXPENSE TAX EXPENSE Tax payable for the period Shortfall in allocation last year 0 5 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 29 5 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. An expected tax rate of 27% has been used when calculating deferred tax assets. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

20 NOTE 10 CLASSIFICATION OF FINANCIAL INSTRUMENTS BOOK VALUE FAIR VALUE BOOK VALUE FAIR VALUE Net loans and advances to credit institutions Total 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 designated at fair value *) Total bonds and other securities Net loans to customers Loans and advances 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 designated 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 in issue Issued commercial paper and bonds measured at amortised cost Total debt securities in issue 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 measured at amortised cost, loans and advances Total financial liabilities *) FVO: Fair Value Option 20 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2013

21 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. NOTE 12 COMMERCIAL PAPER AND BONDS COMMERCIAL PAPER BONDS TOTAL Commercial paper and bonds designated at fair value through profit or loss COMMERCIAL PAPER BONDS TOTAL Commercial paper and 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 0,21 0,15 0,19 0,22 0,15 0,20 Average effective interest rate at 31 Dec. 1,30 % 2,23 % 1,54 % 1,43 % 2,48 % 1,69 % 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. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT