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 2014

2 CONTANTS 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 Profit/loss after taxation Net interest margin 1,64 % 1,61 % Profit/loss after tax as a % of average total assets 1,19 % 1,09 % KEY BALANCE SHEET FIGURES Gross loans to customers Loan impairment charge Equity Total assets Average total assets OTHER KEY FIGURES Cost-to-income ratio 4,59 % 4,70 % Impairment charge as a % of gross loans 0,05 % 0,01 % Impairment provisions as a % of gross loans 0,10 % 0,17 % Return on equity after tax*) 15,07 % 20,95 % Capital adequacy ratio 16,75 % 13,16 % BALANCE SHEET YEAR-ON-YEAR GROWTH Growth in total assets 13,20 % 8,15 % Growth in customer lending 11,33 % 7,44 % Information about the loan portfolio Overcollateralisation in cover pool (NOK millions) Overcollateralisation in cover pool (%) 24,9 % 28,4 % Committed overcollateralisation (%) 11,0 % 11,0 % Loan-to-value ratio, indexed 55,7 % 55,9 % Loan-to-value ratio, not indexed 58,0 % 57,6 % Face value of covered bonds issued (NOK millions) Substitute assets other than loans (NOK millions) 755,3 530,0 Weighted average seasoning (years) 3,1 2,6 Weighted average remaining term of loans (years) 16,3 16,2 Proportion of variable-rate loans 100 % 100 % Proportion of flexible mortgages 27,3 % 29,2 % Average loan value (NOK millions) 1,17 1,12 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 2014 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 mortgage credit institution that would issue covered bonds. By the end of 2014 it had issued covered bonds with a face value of NOK 8.3 billion, and the total value of its cover pool was NOK 10.4 billion. On an adjusted basis the overcollateralisation (OC) is 24,9 %. The commited OC is 11 %. The cover pool was made up of residential mortgages with a gross value of NOK billion, as well as bonds and bank deposits with a total value of NOK 755 million that are included as substitute assets. Substitute assets made up 7.3% of the total cover pool. All of the Company s loans are subject to variable interest rates. 27.3% 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 close of 2014, the Company had 8,273 mortgages. The average loan-to-value ratio (weighted by initial value) was 55.7%, and the weighted average loan term was 16.3 years. The weighted average time since the loans were granted was 3.1 years. The average loan per customer was NOK 1.17 million. The Company s total gross lending grew by NOK 984 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 79,1 % Eastern Norway 18,8 % Central Norway 0,9 % Southern Norway 0,6 % Northern Norway 0,5 % Total 100,0 % 5 largest counties measured by loan volume County Share Sogn og Fjordane 49,7 % Hordaland 25,4 % Oslo 9,1 % Akershus 6,3 % Rogaland 2,5 % Rest of Norway 7,0 % Total 100,0 % 5 largest municipalities measured by loan volume Municipality Share Bergen 21,7 % Førde 14,7 % Flora 11,2 % Oslo 9,1 % Sogndal 3,9 % Rest of Norway 39,4 % Total 100,0 % The distribution of the loans by value is as follows: Distribution by loan value Loan value Volum (NOK millions) 0 1 million million million Over 3 million Total PROFIT AND LOSS ACCOUNT In 2014 the Company made an operating profit before loan impairment charges of NOK million. The net loan impairment charge was NOK 5.1 million, which was the result of a reduction in collectively assessed impairment provisions and in the individually assessed impairment of one loan. Profit for the year after tax was NOK million, up from NOK 94.0 million in The improvement in 2014 was due to a combination of higher loan volumes and lower borrowing costs. Net interest income was NOK million in 2014, equivalent to 1.64% of average total assets. Other operating income came to around NOK 1.4 million. The equivalent figures for 2013 were NOK million in net interest income (1.61% of average total assets), and other operating income of NOK 1.0 million. In 2014, operating expenses were NOK 7.1 million, equivalent to 4.6% of total operating income. Operating expenses in 2013 were NOK 6.5 million 4 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014

5 (4.7% 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 2014, the Company had one loan that was more than 90 days in arrears. This loan 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 2014 they totalled NOK 10,417 million. That represents an increase of just over NOK 1.2 billion over the past year. The Company borrows money from financial markets using covered bonds. In addition, the Company has good, long-term credit facilities with Sparebanken Sogn og Fjordane. Credit risk Credit risk is the risk of losing money as a result of customers or counterparties being unable or unwilling to meet their obligations to Bustadkreditt Sogn og Fjordane AS. The Company has its own rules on which loans it can buy from its parent company. The rules are strict, which means that in principle the credit risk is low. The rules specify requirements relating to the type of loan, loan-to-value ratio, risk class and type of collateral. At the end of 2014, the Company s average loan-to-value ratio was 55.7%, based on the approved valuations of the collateral established by Eiendomsverdi 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. During 2014, the Company paid NOK 93.9 million in dividends to its parent company. This amount was equivalent to the equity earned by the Company in 2013, less exchange rate adjustments to bonds. 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 16.75%. Capital adequacy has been calculated by measuring credit risk using the standardised approach and operational risk using the basic indicator approach. The Board of Directors considers the Company s equity to be satisfactory and adequate in relation to its activities and operations Weighted loan-to-value ratio 43% 21% 17% 12% 7% 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 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 market 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. 0 Under 40% 40-50% 50-60% 60-75% over 75% Market risk Market risk is the risk arising from the Bank 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 AS does not have any investments in shares of foreign currencies, so all of its market risk is related to interest rate risk. BSF s risk management framework sets limits on the Company s exposure to market risk. The Board considers it a priority for the Company to maintain a low exposure to market risk. 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 should maintain a low exposure to liquidity risk. This is, amongst other things, reflected in the size of the required liquidity buffer. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

6 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. The Board believes that it handles this area 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 AS s operational risk to be low. 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 Bustadkreditt Sogn og Fjordane AS s corporate governance principles are based on the Norwegian Code of Practice for Corporate Governance, as drawn up by the Norwegian Corporate Governance Board NUES. The AGM is the Company s highest decisionmaking 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 governance and management of the Company complies with relevant legislation and regulations, the articles of association and any guidelines issued by the AGM. The Board of Directors is made up of three members from within the Group and one external member. Five board meetings were held during 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 AS has chosen 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 day-to-day management of the Company should adhere to the framework provided by legislation, regulations, the Financial Supervisory Authority of Norway s circulars, government requirements and the Company s articles of association. Internal controls comply with the Norwegian Internal Control Regulations. All reporting units within the Sparebanken Sogn og Fjordane Group, including Bustadkreditt Sogn og Fjordane AS, are responsible for managing their own risks using effective and appropriate internal controls. 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. The independent inspector (Ernst & Young) is another important element of the Company s control mechanisms, but is not part of the 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. 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 works for Bustadkreditt Sogn og Fjordane AS as a contractor. Internal controls and financial reporting As part of its internal controls, Bustadkreditt Sogn og Fjordane AS s management must also assess whether 6 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014

7 the Company s activities create a risk of inaccurate financial reporting. Processes and internal control procedures have been established to quality assure 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 function, which includes overall responsibility for compliance with external legislation throughout the Group. The Group s senior management team also continuously monitors the financial results of the various business areas and subsidiaries. The Board oversees financial reporting and internal controls, and makes sure that they operate effectively. 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. 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. REVIEW OF THE ANNUAL FINANCIAL STATEMENTS The Board concider that the profit and loss account, balance sheet and notes provide sufficient information about the Company s operations and financial position at 31 December The Board believes that the going concern assumption is appropriate. The Board confirms that the going concern assumption has therefore been used in the preparation of the financial statements for POST BALANCE SHEET EVENTS The Board is not aware of any events after 31 December 2014 that have a material impact on the financial statements or on the Company s financial position. STRATEGY AND OUTLOOK FOR 2015 In 2015, Bustadkreditt Sogn og Fjordane AS will continue with its core business, which is purchasing residential mortgage loans from Sparebanken Sogn og Fjordane so that it can issue covered bonds. The target group for its covered bonds are Norwegian and international financial institutions and other investors. There is uncertainty about what will happen to house prices in The sharp fall in the oil price at the start of the year may lead to cutbacks in the oil industry. This would in turn put a damper on wage growth and inflation, as well as on house prices. Conversely, low unemployment and very low interest rates will have the opposite effect, supporting high loan growth and continued house price increases in That would also provide the foundations for future growth at Bustadkreditt Sogn og Fjordane AS. We are working proactively to ensure that we 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. ALLOCATION OF PROFIT FOR THE YEAR Bustadkreditt Sogn og Fjordane AS made a profit of NOK million. The Board recommends that NOK million be paid in dividends to the parent company. The remainder of the profit, NOK 0.3 million, will be transferred to other equity. The dividend payout ratio is considered justified on account of Bustadkreditt Sogn og Fjordane AS s strong capital position. Førde, The Board of Directors of Bustadkreditt Sogn og Fjordane AS Frode Vasseth Chair Peter Midthun Hallvard Klakegg Ingeborg Aase Fransson Harald Slettvoll CEO Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

8 Profit/loss Note Interest income Interest expenses Net interest income 3, Commission income Net commission income Net gains/losses on financial instruments Total other operating income Net other operating income Total operating income Wages, salaries, etc Administration expenses Other operating expenses Total operating expenses Operating profit/loss before loan impairment charge Loan impairment charge 7, Operating profit/loss Tax expense Profit/loss for the financial year COMPREHENSIVE INCOME Profit/loss for the financial year Other comprehensive income and costs 0 0 Comprehensive income for the financial year Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014

9 Balance sheet ASSETS Note Loans and advances to credit institutions 3, Loans to customers 7,13, 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 Suggested dividends Total retained earnings Total equity Liabilities Debt to credit institutions Debt securities in issue Tax payable Accrued costs Total liabilities Total liabilities and equity Førde, The Board of Directors of Bustadkreditt Sogn og Fjordane AS Frode Vasseth Chair Peter Midthun Hallvard Klakegg Ingeborg Aase Fransson Harald Slettvoll CEO Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

10 Cash flow statement Note Profit/loss before taxation Impairment provisions for loans and guarantees Tax paid Reduction/increase in loans and advances to customers Other non-cash transactions A) Net cash flow from operating activities 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 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 Breakdown of cash and cash equivalents Deposits at other financial institutions Total Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014

11 Equity statement EQUITY STATEMENT Share capital RETAINED EARNINGS Suggested Other Allocated equity dividends Total equity Opening balance Dividends paid Profit/loss for the reporting period Closing balance Opening balance Dividends paid Profit/loss for the reporting period Equity transactions New paid-up equity Closing balance 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 securities in issue 19 Other liabilities 20 Off-balance-sheet obligations 21 Capital adequacy ratio 22 Valuation 23 Risk 24 Credit risk 25 Liquidity risk 26 Sensitivity analysis 27 Disputes 28 Share capital and shareholder information 12 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014

13 Notes to the accounts NOTE 1 ACCOUNTING PRINCIPLES GENERAL The 2014 financial statements for Bustadkreditt Sogn og Fjordane AS were discussed and adopted at the Board meeting of 30 January 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. On 3 March 2014, the Norwegian Ministry of Finance issued new regulations on the simplified application of IFRS. The new regulations came into force as of the 2014 financial year. The new regulations include a transition arrangement, whereby the old regulations can be used for the 2014 and 2015 financial years. The Company has chosen to make use of this transition arrangement, and has prepared its financial statements under the old regulations. 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 TO STANDARDS AND INTERPRETATIONS APPROVED BY THE EU None of the changes to standards or interpretations introduced in 2014 affected the Company s financial statements for Changes that apply to future years are set out at the end of this note. ESTIMATS 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 Other financial liabilities carried 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, Bustadkreditt Sogn og Fjordane AS ÅRSMELDING

14 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. Other financial liabilities carried at amortised cost Other financial liabilities that are neither part of the trading portfolio nor defined as liabilities measured at fair value through profit and loss are to be carried at amortised cost. Debt securities in issue 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 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. Impairment of financial assets Individually assessed impairment provisions If objective evidence that it has fallen in value is found, a loan is written down by the difference between the carrying amount of the loan and the present value of the estimated future cash flows discounted by the loan s effective interest rate. The effective interest rate used is the loan s effective interest rate before evidence of a fall in value was identified, adjusted for changes in the market rate up to the impairment date. Changes in interest rates as a result of changes in the credit risk associated with the loan are not taken into account when adjusting the effective interest rate used for discounting purposes. Objective evidence that a loan or group of loans has fallen in value includes significant financial problems at the debtor, default or other major breaches of contract, cases where it is likely that the debtor will try to renegotiate his debt 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 ULoans 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 14 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014

15 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. 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 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 gains/losses on financial instruments measured at fair value. Debt to credit institutions Liabilities to credit institutions are recorded as Debt to credit institutions regardless of the calculation method used. Interest expenses on these instruments are included under Interest expenses using the effective interest rate method. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. Debt securities in issue Debt securities include commercial paper, bonds and subordinated debt issued by the Bank, regardless of the valuation method. Interest expenses on these instruments are included under Net interest income using the effective interest rate method. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. 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 27% 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 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. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

16 NOTE 1 ACCOUNTING PRINCIPLES (cont.) 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. CHANGES TO ACCOUNTING STANDARDS AND INTERPRETATIONS THAT MAY AFFECT FUTURE FINANCIAL REPORTING IFRS 9 Financial instruments In July 2014, the IASB published the last subproject for IFRS 9, which means that the standard has now been completed. IFRS 9 will result in changes to classification and measurement, hedge accounting and impairment. IFRS 9 will replace IAS 39 Financial Instruments: Recognition and Measurement. The parts of IAS 39 that have not been changed as part of the project have been incorporated into IFRS 9. The standard has not yet been approved by the EU. The changes will come into force for financial years starting in 1 January 2018 or later. 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 charge An impairment provision shall be made when there is objective evidence of a fall in value. Objective evidence that a loan or group of loans has fallen in value includes significant financial problems at the debtor, default or other major breaches of contract, cases where it is 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 effective 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 2014

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 receives a fee. FIGURES IN WHOLE NOK Board of Directors Remuneration Loans at Frode Vasseth 0 0 Hallvard Klakegg 0 0 Ingeborg Aase Fransson 0 0 Peter Olav Midthun Audit committee 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. Bustadkreditt Sogn og Fjordane AS takes on all of the risk associated with the loans that it acquires from its parent. 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 credit that matures in June The credit facility is to be used for buying mortgage loans from SSF. It has a limit of NOK 750 million. b) A credit agreement to ensure that owners of covered bonds will be paid even if the mortgage credit subsidiary is unable to meet its obligations. At 31 December 2014, the agreement had a limit of NOK 1,176 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 2014, the limit on the facility was NOK 1,022 million. d) A credit facility related to overcollateralisation. This facility must only be used to buy loans that form part of the cover pool, and instruments that qualify as a liquidity buffer. At 31 December 2014 the limit on the facility was NOK 1,247 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 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 Inspection fees incl. VAT Other services not related to auditing incl. VAT 11 0 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 gains/losses 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 Change in 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 2014

19 NOTE 8 OPERATING EXPENSES Fees and social security costs IT expenses 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) Bond issuance and credit rating costs Other operating expenses Total other operating expenses Total operating expenses NOTE 9 TAX EXPENSE TAX EXPENSE Tax payable for the period Shortfall in allocation last year 0 0 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 27% (28% in 2013) Impact on deferred tax assets of change in tax rate from 28% to 27% 0 29 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 The tax rate was reduced from 28% in 2013 to 27% in This reduced the tax expense by NOK 1.5 million in 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% was used to calculated deferred tax assets both in 2013 and Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

20 NOTE 10 CLASSIFICATION OF FINANCIAL INSTRUMENTS CARRYING- AMOUNT FAIR VALUE CARRYING AMOUNT FAIR 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 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 with changes in fair value recognised in profit or loss, Fair Value Option *) 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 2014