a n n u a l r e p o r t

Transcription

1 a n n u a l r e p o r t 2008 BN Boligkreditt AS

2 contents Report of the Directors... 4 Income Statement...12 Balance Sheet...12 Statement of Changes in Equity...13 Cash Flow Statement...13 Notes 1 Accounting policies Interest and similar income Interest expense and similar charges Change in value of financial instruments carried at fair value Other operating income, gains and losses Salaries and general administrative expenses Related party disclosures Loans to employees and elected officers Other operating expenses Other expenses, gains and losses Impairment losses & write-downs on loans carried at amortised cost Tax Cash and balances due from credit institutions Loans and advances Financial derivatives (assets and liabilities) Liabilities to credit institutions Debt securities in issue Subordinated loan capital Shareholder structure and share capital Capital adequacy Financial instruments classified by category Fair value of financial instruments Risk in financial instruments - qualitative description Risk in financial instruments - quantitative description Events after the balance sheet date Elected Officers and Executive Management Auditor`s report for Control Committee [ 2 ]

3 [ 3 ]

4 report of the directors [ 4 ]

5 [ 5 ] Summary of 2008 At the turn of the year 2008/2009, BN Boligkreditt AS owner, Glitnir Bank ASA, changed its name to BNbank ASA (BNbank). The SpareBank 1 banking alliance (SpareBank 1 SMN, SpareBank 1 SR-Bank, SpareBank 1 Nord-Norge, Sparebanken Hedmark and Samarbeidende Sparebanker Bankinvest AS) were granted a licence to acquire the bank, which took place on 5 December BNbank had been owned by the Icelandic banking group, Glitnir banki hf, since Glitnir Bank ASA was the result of a merger between Bolig- og Næringsbanken ASA and Glitnir Bank ASA (formerly KredittBanken ASA). The merger was carried out in March The former Bolig- og Næringsbanken was divided into two business areas, retail market and commercial property, while the former KredittBanken, which dealth largely with loans to the offshore, seafood and shipbuilding markets, became a separate business area. KredittBanken s retail and commercial property activities were transferred to related activities in the other business areas. Commercial property is financed largely through the credit institution Bolig- og Næringskreditt AS (BNkreditt), while residential mortgage loans are financed primarily via the credit institution BN Boligkreditt. BNkreditt and BN Boligkreditt are separate subsidiaries and in connection with the merger were retained without any changes to the companies operations or articles of association. The financial turmoil, the situation in Iceland and the general trend in the Norwegian economy have had an impact on the BNbank Group and thus BN Boligkreditt in After a number of international financial institutions applied for creditor protection, failed, or had to be rescued by the authorities, parts of the financial market stopped functioning towards the end of the third quarter. This caused challenges for BNbank s former owner, Glitnir banki hf., among others, and it was taken over by the Icelandic government at the beginning of October At the same time, a decision was made to sell all foreign subsidiaries, including the Norwegian banking operations. The situation in Iceland gave rise to liquidity challenges for the Norwegian banking operations, and from 8 October 2008 the former Glitnir Bank ASA was secured liquidity of up to NOK 5 billion through support from the Norwegian Banks Guarantee Fund. A process to sell the Norwegian banking operations was initiated immediately, and on 20 October an agreement was signed with the SpareBank 1 banking alliance for the acquisition of the former Glitnir Bank ASA with its subsidiaries BNkreditt, BN Boligkreditt and Glitnir Factoring AS. The Board of Directors of BNbank regards the new ownership as a sound solution for customers, lenders, staff and the bank s subsidiaries. The new ownership has stabilised operations in the BNbank Group and laid a sound foundation for further development of the Group. The SpareBank 1 banks have a strong basis for developing the business and customer relationships. As new owners, they have expressed their interest in continuing to build on the expertise that BNbank can offer. BN Boligkreditt AS annual Report 2008

6 The risk of negative consequences for the real economy resulting from the financial turmoil increased significantly in the fourth quarter of On a nationwide basis, house prices fell in 2008 and unemployment increased. On the other hand, the start of 2009 saw a fall in interest rates. Group writedowns increased during the fourth quarter by NOK 4 million and stood at NOK 7 million at 31 December. This was 0.09 per cent of all loans at the same date. Given the low risk associated with BN Boligkreditt s residential mortgage business, the Company s loss provisions are considered adequate to face the economic downturn in Operations, objectives and strategy BN Boligkreditt has been granted a licence by the Financial Supervisory Authority of Norway to operate as a mortgage credit institution. BN Boligkreditt is BNbank s company for the issue of covered bonds. The plan is to finance BNbank s home loans chiefly through BN Boligkreditt. BN Boligkreditt s strategy is to issue covered bonds with a basis in BNbank s well-secured residential mortgage loans and provide the Group with access to this financing instrument. The objective is to facilitate an effective and more diversified form of funding for the Group s operations. BN Boligkreditt does not provide loans itself, but acquires home loans from BNbank. The Company acquires loans which qualify for issuance of covered bonds. The maximum loan disbursed at the date of acquisition has a 75 per cent loan-to-value ratio. The loan portfolio consists of home loans and variablerate credit lines secured on dwellings. BN Boligkreditt was established in 2007, and the first loan portfolio was acquired in January The Company s head office is in Trondheim. Borrowers are geographically spread, but concentrated in the largest Norwegian towns and cities. Strategy within the SpareBank 1 banking alliance Following the acquisition of the banking operations by the SpareBank 1 alliance, a process has been carried out to assess how best to co-ordinate and integrate the operations with the owner banks. Various alternatives have been considered. In the further co-ordination process, the SpareBank 1 banks wish to develop BNbank further on the basis of deposits, home loans and loans for commercial properties. This is in line with BNbank s original strategy prior to the merger with the former Kreditt- Banken. The owners consider the desired structure moving forward to be a robust and future-oriented structure. BNbank has a long tradition in these banking areas, based on cost-effectiveness, low risk, specialisation and competitive terms. In collaboration with the SpareBank 1 alliance, this will be developed further and strengthened. BNbank s head office will remain in Trondheim, and the bank will retain a branch office in Oslo. The operations in Ålesund, which largely comprise loans to the corporate market, will be organisationally subordinate to SpareBank 1 SMN. The work to further develop and co-ordinate the operations of the credit institutions BNkreditt, BN Boligkreditt and SpareBank 1 Boligkreditt aimed at strengthening the funding of the Group s and the alliance s operations, will continue. Financial developments BN Boligkreditt presents its financial statements in compliance with International Financial Reporting Standards (IFRS). As a consequence of applying IFRS, the Company s results will fluctuate owing to changes in the value of financial instruments. [ 6 ]

7 [ 7 ] Profit performance for 2008 BN Boligkreditt recorded a profit after tax for 2008 totalling NOK 33 million, compared with a loss of NOK 2 million for The Company acquired its first loan portfolio in January 2008, and the 2007 results reflect start-up and establishment costs. Net interest income for 2008 amounted to NOK 58 million. Net interest income in the first half of the year was negatively impacted by the requirement to adjust interest rates on home loans with six weeks notice. The situation improved in the second half-year, when net interest income rose to NOK 37 million, compared with NOK 21 million for the first half-year. The Company s financial instruments that mature after one year are carried at fair value. Interest rate risk in the Company is low, and fluctuations in interest rates should have a limited net effect on earnings. During periods when interest rate spreads between different instruments develop differently, effects on earnings may arise. For 2008 as a whole, this had a positive effect of NOK 27 million on earnings. In the fourth quarter, however, this had a negative effect of NOK 25 million. In the long term, these effects will even out. Other operating income was negatively affected by costs related to the issue of covered bonds in the second quarter of Other operating expenses amounted to NOK 22 million for 2008, while totalling NOK 5 million for the fourth quarter. The Company purchases all its operation management services from BNbank. Impairment losses on loans came to NOK 7 million for The losses are chiefly owing to the downturn in the Norwegian economy and are in their entirety group write-downs. Group write-downs accounted for 0.09 per cent of loans at 31 December Balance sheet development and solvency Total assets were NOK 9.7 billion at the end of The loan portfolio at 31 December 2008 stood at NOK 8.1 billion. Covered bonds totalled NOK 6.6 billion at the same date. The lending business is funded chiefly by the issue of covered bonds and by intercompany funding. In January 2008, the Company acquired a portfolio of home loans from the Parent Bank amounting to NOK 9.2 billion. Loans for a further NOK 2.5 billion were acquired during the year. The acquisitions were funded by the Parent Bank by means of a capital increase, subordinated loans and ordinary loan capital. The Parent Bank continues to manage these loans. BN Boligkreditt AS annual Report 2008

8 In 2007, the Company established a programme for the issue of covered bonds. These were assigned an AAA rating by Moody s. Owing to the prevailing market conditions, the bond issue planned for January 2008 was not carried out. Following this, Moody s withdrew the rating as a matter of routine. BN Boligkreditt carried out an issue of covered bonds in the Norwegian market totalling NOK 6.6 billion in May Since the SpareBank 1 banks acquired BNbank, any further issues and rating processes will wait. The capital base of BN Boligkreditt, on the basis of the Board s proposal for allocation of profits, was NOK 371 million at the end of the period, giving a capital adequacy ratio of 11.6 per cent. Tier 1 capital totalled NOK 294 million, giving a tier 1 capital ratio of 9.2 per cent at 31 December Risk-weighted assets amounted to NOK million at the same date. The Board considers that the Company s solvency is satisfactory. The financial statements give a true and fair view of BN Boligkreditt s assets and liabilities, financial position and results. The assumptions for continued operations are present, and the annual accounts have therefore been prepared on a going concern basis. Risk Management It is part of BN Boligkreditt s business strategy to maintain a low risk profile in all its activities. This policy remained unchanged through 2008, although the financial turmoil, the situation in Iceland and the general economic trend impacted on the Company in BN Boligkreditt has guidelines for managing all the relevant types of risk. These include risk tolerance limits, choice of risk monitoring method, and reporting requirements. The Board receives regular status reports on all relevant risks. The Company has no stock market exposure. New capital adequacy rules for banks (Basel II) came into force with effect from Financial institutions with low credit risk and good risk management systems may be subject to a lower capital base requirement under the new rules. BN Boligkreditt was planning to apply the advanced Internal Ratings-Based (IRB) method for the majority of its loan portfolio. As a result of developments in 2008, these plans were shelved. During 2009, the Company will re-assess its strategy within this area. An assessment of the most important risks is provided below. Recommended allocation of profit for the year The Board recommends that the Company s profit for the year of NOK 33 million be allocated as follows: Transfer to other reserves Group contribution to BNbank ASA Total allocations and transfers NOK 19 million NOK 14 million NOK 33 million The Company has no unrestricted equity at year-end Credit risk Credit risk in the loan portfolio is a product of two factors, both of which must be present if a loss is to arise. One factor is the possibility that the borrower will be unable to repay the loan. The other is that the value of the underlying asset will be insufficient to cover the amount owed to BN Boligkreditt in the event of default and subsequent realisation of the asset. Creditworthiness assessments place emphasis generally on the borrower s financial position, financial results/cash flow, ability and willingness to pay, amount of equity, and collateral. [ 8 ]

9 [ 9 ] The financial position of Norwegian households is still good overall, despite rising interest rates. These are factors which will keep defaults at a low level, also among the Bank s personal customers. Owing to falling interest rates, the financial position of households in general is considered good, despite increased risk because of the downturn in the Norwegian economy and rising unemployment. Most of the loans given to retail customers are secured by a mortgage on residential property. The Bank s credit policy requires the property to be centrally located. House prices fell slightly in 2008, and the trend for 2009 is uncertain. Historically, house prices are high in relation to consumer prices and rents, but more moderate viewed in the light of developments in households disposable income. 79 % of the home loan portfolio consists of loans secured on up to 60 % of the appraised value of the mortgaged property at the time the loan is granted, and the average loan disbursed is 49 per cent of the loan-to-value. The risk of non-performing loans and impairment losses on loans is considered low. Risk classification BN Boligkreditt has a risk classification system for home loans. The risk classification model used by the Company classifies the loans in relation to the probability of default and the estimated loss which may arise from default. The model uses quantitative methods such as logistical regression. The risk classification system and analysis of risk in the loan portfolio, as well as the new capital adequacy rules, are described in more detail in Notes 20, 22 and 23. The portfolio divided into classes of risk, and other relevant information from the system, is reported regularly to the Board. Expected losses The risk classification system estimates expected losses in the various portfolios. Expected impairment losses on loans express an expectation of the size of the annual average loss over an economic cycle. At the end of 2008, expected impairment losses on loans in the entire portfolio was 0.06 per cent. In 2008, write-downs on loans have been in line with the expected losses over an economic cycle. Write-downs on loans were 0.08 per cent of average lending during the year. The write-downs in 2008 were in their entirety group write-downs. Historically, losses on loans have been lower than in 2008, and also lower than the estimates of expected losses. The loss trend in 2008 must be taken in context with the generally increased level of uncertainty following the economic downturn which began to impact during the year. BN Boligkreditt AS annual Report 2008

10 The level of losses over time in BN Boligkreditt is closely linked to macroeconomic trends. The trend in the real economy and property prices will therefore influence the extent of losses in the time ahead. It must be emphasised that there is uncertainty attached to estimating the loss trend in BN Boligkreditt will remain highly focused on the quality of the loan portfolio and on following up doubtful loans and commitments. Liquidity risk The Board has adopted general guidelines for controlling liquidity risk, including setting requirements for measuring, monitoring and reviewing risk. In addition, the Board has adopted a contingency plan for use in any liquidity emergency, and has also set limits for net financing requirements within given time horizons. The Company s liquidity position is reported monthly to the Board. An important part of the Company s funding strategy is to use the best-secured loans as a basis for funding. A key element here will be the growth of the market in covered bonds. Through the establishment of the swap arrangement with Norway s central bank, Norges Bank, in 2008, the importance of this financing instrument has become strengthened even further. The Group still has a challenging liquidity situation, but the owners financial position and support, and the measures taken by the authorities to improve the liquidity in the market, will give the Group a sound basis for funding the lending business. The Company s unrestricted funds (equity) have a short investment horizon. This means that the return on these funds will vary with short-term interest rates. The Board has adopted guidelines and set limits for the Company s interest rate and foreign exchange exposure. Interest rate and foreign exchange exposure is reported monthly to the Board. Commercial risk Commercial risk is defined as the risk of loss owing to changes in external conditions such as the market situation or the authorities regulatory decisions. The definition also includes reputational risk. The most important factors that can be affected by changes in the market situation or the authorities regulatory decisions are volume and margins in the funding and lending businesses, impairment losses on loans and operating expenses. Operational risk The Company seeks to keep operational risk at a low level through the use of standardised products and services, the maintenance of a small, flexible organisation with clear division of responsibilities, and good working procedures and management and control systems. The Board receives an annual review of operational risks in BN Boligkreditt, and is also regularly updated on any significant operational disruption or deviation. Interest rate risk and foreign exchange risk BN Boligkreditt s exposure to the interest rate market is limited, and the Company has no foreign exchange exposure. Differentials in fixed interest rate periods between BN Boligkreditt s borrowing and lending are equalised with the use of hedging instruments. Board activities The Board of Directors of BN Boligkreditt held 7 board meetings in The liquidity situation, the relationship with the Parent Bank, and the risk of losses, were the main topics of focus in [ 10 ]

11 [ 11 ] Working environment and organisation The Company employed 3 full-time equivalents at 31 December The Company also employs group functions in its operations. The working relationship between management and employees is good. The Group has a Working Environment and Liaison Committee, which consists of representatives from group management and the salaried employees association. There were no significant employee accidents or injuries in The Company s objective is to be an equal opportunities workplace with gender equality between women and men. There shall be no discriminatory treatment on grounds of gender. Of the Company s 4 employees, 2 are women. The Company aims to achieve a balance between numbers of male and female employees at all levels. The Board considers the working environment within the BN Boligkreditt to be good, even though 2008 has been a demanding year for all employees. BN Boligkreditt uses no products or energy sources in its operations that have a significant adverse impact on the environment. The Company s operations are therefore not of such a nature as to pollute the external environment. Outlook Further growth in lending will depend on the Company s solvency and funding opportunities. Utilising the opportunity to issue covered bonds will be a prioritised area. Continued turbulence in the credit markets may have a negative impact on funding opportunities. The Board expects low growth in loans in Future growth in margins and volumes in the lending business is burdened with uncertainty. Interest rates, economic conditions, the general demand for credit, and competition in the market all have an effect. Trondheim 3 march 2009 Harald Lundh terje Bostad olav S. Austmo (Chair) terje Namtvedt trond Søraas (Managing Director) BN Boligkreditt AS annual Report 2008

12 income statement nok million Note Interest and similar income Interest expense and similar charges Net income from interest and credit commissions 58 2 Change in value of financial instruments carried at fair value Other operating income, gains and losses Total other operating income 17 0 Salaries and general administrative expenses 6, 7, Other operating expenses Total other operating expenses 22 5 Operating profit/loss before impairment losses 53-3 Impairment losses on loans and advances Operating profit/loss after impairment losses 46-3 Tax Profit/loss for the period/net profit for the year 33-2 Balance Sheet at 31 December nok million Note assets Loans and advances 14, 21, 22, 23, Prepayments and accrued income 21, Financial derivatives 15, 21, 22, 23, Cash and balances due from credit institutions 13, 21, 22, 23, Total assets Equity and liabilities Share capital Retained earnings Total equity Deferred tax liabilities Subordinated loan capital 18, 21, 22, 23, Liabilities to credit institutions 16, 21, 22, 23, Debt securities in issue 17, 21, 22, 23, Other short-term liabilities 21, Total liabilities Total equity and liabilities Trondheim 3 march 2009 Harald Lundh terje Bostad olav S. Austmo (Chair) terje Namtvedt trond Søraas (Managing Director) [ 12 ]

13 [ 13 ] Statement of Changes in Equity Share other Share premium paid-up other total nok million capital reserve share capital equity1 equity Balance Sheet at 1 January Group contribution received Result for the year Balance Sheet at 31 December Result for the year Capital increase Balance Sheet at 31 December The reserve for unrealised gains is included in Other Reserves. At 31 December 2008 provision had been made totalling NOK 19 million. (At 31 December 2007 no provision hade been made). Cash Flow Statement nok million Cash flows from operating activities Interest/commission received & fees received from customers Interest received on other investments 68 2 Interest paid on other loans Receipts/disbursements (-) on loans & advances to customers Receipts/payments(-) on customer deposits and debt 1 4 Receipts/payments(-) on liabilities to credit institutions Receipts/payments(-) on securities in issue Other receipts/payments Payments to suppliers for goods and services Tax paid 0 0 Net cash flow from operating activities Cash flows from investing activities Receipts/payments(-) on balances at credit institutions 0 0 Net cash flow from investing activities 0 0 Cash flows from financing activities Subordinated loan capital receipts 75 0 Change in capital (share issues, etc.) Net cash flow from financing activities Net cash flow for the period Cash and balances at credit institutions at 1 January Cash and balances at credit institutions at 31 December BN Boligkreditt AS annual Report 2008

14 notes to the account [ 14 ]

15 [ 15 ] Note 1 Accounting policies etc. Information about the company BN Boligkreditt AS is a limited liability company, established and domiciled in Norway, and with its registered office in Trondheim. The credit institution BN Boligkreditt is part of the BNbank Group. Within the framework of BN Boligkreditt s articles of association and subject to the legislation that is in force at any time, the Company may carry on all business and perform all services that it is customary or natural for credit institutions to perform. Basis for preparation of the financial statements BN Boligkreditt presents its annual financial statements for 2008 in compliance with International Financial Reporting Standards (IFRS), as approved by the EU. Interpretations that became effective in 2008 IFRIC 14 IAS 19 The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction provides guidance for assessing the amount of overfunding that can be recognised as an asset on the balance sheet in compliance with IAS 19. It also explains how pension assets or pension liabilities can be impacted by statutory or contractual minimum funding requirements. This interpretation has no implication for the BNbank Group or for BN Boligkreditt s accounts since BNbank has a net pension liability and is not subject to the minimum funding requirement. The BNbank Group has chosen early application of the following standards and amendments IFRS 8 Operating Segments replaces IAS 14 Segment Reporting and co-ordinates segment reporting with the requirements in the FASB standard SFAS 131 Disclosures about Segments of an Enterprise and Related Information. The new standard requires the adoption of a management approach to reporting in which segment information is presented in the same way as in internal reporting. In addition, the segments should be reported in a manner consistent with the internal reporting to the chief operating decision maker. Standards and amendments to, and interpretations of, existing standards that are not yet effective and where the Company has not chosen early application The following standards and amendments to, and interpretations of, existing standards have been published, and application will be obligatory for the Group in their consolidated financial statements for the annual period beginning on 1 January 2009 or later, but without the Group having chosen early application: BN Boligkreditt AS annual Report 2008

16 IAS 1 (Revised) Presentation of Financial Statements (effective 1 January 2009). The revised standard will prohibit the presentation of income and expense items in changes in equity (i.e. changes in equity that are not related to the owners) and will require changes in equity that are not owner-related to be presented separately from transactions with the owners. All non-owner changes in equity shall be presented in an income statement, but entities can elect to present income and expenses using a single income statement ( statement of comprehensive income ) or to adopt a two-statement approach (a separate income statement and statement of comprehensive income showing other (non-owner) movements in equity). When entities change or reclassify comparative information, they are also required to present a changed opening balance for the comparative periods in addition to the present requirement to present the closing balance for the relevant period and comparative periods. The Company will apply IAS 1 (Revised) from 1 January The income statement and statement of comprehensive income will probably be presented as a single statement of comprehensive income. IAS 36 (Amended) Impairment of Assets (effective 1 January 2009). The amendment is part of IASB s annual improvement project published in May When the fair value less the costs to sell (net selling price) of an asset is calculated using discounted cash flows, disclosures shall be made equivalent to those made when calculating the value of the asset in use. The Company will apply IAS 36 (Amended) and will if necessary provide the obligatory disclosures at the testing for write-downs from 1 January IAS 19 (Amended) Employee Benefits (effective 1 January 2009). The amendment is part of IASB s annual improvement project published in May The amendment makes clear that a change to the costs of a pension plan which results in a change in whether a pension undertaking is impacted by future wage increases is a reduction, while a change to the costs of a pension plan which changes the pension attributable to service in prior periods results in a negative cost to prior periods pensionable service if it results in a reduction in the present value of a defined benefit pension obligation. - The definition of the return on pension plan assets has been amended to establish that the costs of administering the plan will be deducted from the calculation of the return on pension plan assets only to the extent that such costs have been excluded from the measurement of the defined benefit pension obligation. - The difference between short-term and long-term employee benefits will be based on whether the benefits fall due within or after 12 months after the service rendered by the employee. - IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that contingent liabilities be disclosed in a note, and not recognised in the balance sheet. IAS 19 has been amended for the sake of consistency. The Company will apply IAS 19 (Amended) from 1 January IAS 1 (Amended) Presentation of Financial Statements (effective 1 January 2009). The amendment is part of IASB s annual improvement project published in May The amendment makes clear that there is no direct connection between the classification that held for trading purposes (part of the category of fair value through profit or loss) in accordance with IAS 39 Financial Instruments: Recognition and Measurement and categorisation as short-term or long-term items. The Company will apply IAS 1 (Amended) from 1 January The change is not expected to impact the Company s financial statements. A number of changes have been introduced in IFRS 7 Financial Instruments: Disclosures, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, IAS 10 Events after the Reporting Period, IAS 18 Revenue and IAS 34 Interim Financial Reporting, which are part of IASB s annual improvement project published in May 2008 (not addressed above). As it is unlikely that these changes will impact the Company s financial statements, they have not been analysed in detail. [ 16 ]

17 [ 17 ] Comparative figures All amounts stated in the income statement, balance sheet, cash flow statement and disclosures are given with one year s comparative figures. Comparative figures are prepared on the basis of the same principles as figures for the most recent period. Discretionary measurements, estimates and assumptions In applying the consolidated accounting policies, the Company s management have in some areas exercised discretion and based the accounting on estimates and assumptions regarding future events. There will naturally be an inherent uncertainty associated with accounting items based on discretionary estimates and assumptions regarding future events. In exercising discretion and determining assumptions concerning future events, the management will have regard for the available information at the balance sheet date, historical experience with similar valuations, and market and third-party assessments of the matters in question. However, although the management use their best discretion and build on the best available estimates, in some cases the actual outcome may differ significantly from what the accounting was based on. Measurements, estimates and assumptions that represent a significant risk of material change in the capitalised value of assets and liabilities during the next accounting year, are discussed below. Fair value of financial instruments The fair value of financial instruments is based partly on assumptions that are not observable in the market. This applies particularly to setting a relevant premium for credit risk when determining the fair value of fixed-rate securities in the form of borrowing, lending and securities issued by others. In such cases, the management have based their measurements on the information available in the market, combined with their best discretionary estimates. Information of this kind will include credit evaluations made by other credit institutions. Write-downs on loans Write-downs for impairment losses are made when there is objective evidence that a loan or group of loans is impaired. The write-down is calculated as the difference between the capitalised balance sheet value and the net present value of estimated future cash flows discounted by the effective interest rate. Impairment losses on loans and advances are based on a review of the Bank s loan and guarantee portfolio according to the rules for valuing loans issued by the Financial Supervisory Authority of Norway. The Bank specifically determines all impairment losses on loans and guarantees at the end of every quarter. Non-performing loans and doubtful commitments are followed up with continuous assessments. BN Boligkreditt AS annual Report 2008

18 Accounting policies Recognition of income and expenditure Interest earned from variable-rate loans, including loans with a rolling fixed-rate period, is taken to income over the term of the loan using the loan s effective interest rate. Income from fees and commissions is included in the calculation of effective interest. Interest earned from fixed-rate loans is recognised as interest income as it is earned, and changes in the fair value of expected future cash flows are carried in the income statement through the line for changes in the value of financial instruments carried at fair value. Fees, commissions etc., which are not included in the effective interest rate calculation for borrowings or loans, are recognised in the income statement as they are earned as income or accrued as expense. Premiums/discounts at the early redemption of fixed-rate loans are recognised in the income statement as they arise. Premiums/discounts at the repurchase of bond issues are recognised in the income statement as they arise. Financial instruments Classification, etc. On initial recognition on the balance sheet, financial instruments will be assigned to a class of financial instruments or assets as described in IAS 39. The various classes defined in IAS 39 are Financial instruments at fair value with value changes carried through profit or loss, Loans and receivables at amortised cost, Liabilities at amortised cost, Held-to-maturity investments at amortised cost and Available-for-sale financial assets with value changes carried in equity. The two last-mentioned classes are normally not relevant for BN Boligkreditt. Within the class Financial instruments at fair value with value changes carried through profit or loss, assigning the asset to a class may be obligatory, or the assignment can be voluntary if other specific criteria are fulfilled. In BN Boligkreditt, all derivatives are obliged to be measured at fair value with value changes carried through profit or loss. In addition, all fixed-rate securities in the bank portfolio will be selected for measurement at fair value through profit or loss, including own issued securities and fixed-rate borrowing and lending. In this context, all securities that have a fixed rate of interest over the entire term will be reckoned as fixed-rate securities. Securities that have a fixed rate on a rolling basis will not be reckoned as fixedrate securities. Fixed-rate securities are selected for measurement at fair value through profit or loss in order to avoid what would otherwise be accounting asymmetry through the related interest rate hedging instruments being recognised at fair value. In that fair value recognition avoids the most material parts of this accounting asymmetry, the criteria for recognising the instruments at fair value are regarded as fulfilled. Financial instruments other than those measured at fair value with value changes carried through profit or loss, will be recognised at amortised cost using the effective interest rate method. All financial instruments are recognised initially on the trading date of the instrument (and not the settlement date). Currency Income and expenditure in foreign currencies is translated into Norwegian kroner according to the rate of exchange at the time of the transaction. Balance sheet items in foreign currencies are mainly hedged by corresponding items on the opposite side of the balance sheet or by hedge transactions. Forward-exchange contracts are used only as hedges and are entered into in order to hedge identified items. Assets and liabilities in foreign currencies are translated into Norwegian kroner at the banks middle rates for currencies on the balance sheet date. Forward-exchange contracts are measured at fair value with changes in value carried through profit or loss. Loans, impairment losses and provisions for impairment losses measured at amortised cost The Company capitalises loans on the balance sheet at cost at the date of establishment. Cost includes the principal of the loan, as well as fees and any direct costs. [ 18 ]

19 [ 19 ] In subsequent periods, loans are measured at amortised cost, and interest income is recognised as income according to the effective interest rate method. The effective interest rate is the rate by which the loan s cash flows are discounted over the expected term of the loan at the amortised cost of the loan at the date of establishment. The effective interest rate method also means that interest on written-down loans is recognised as income. For such loans, the internal rate of interest at the date of establishment is adjusted for changes in interest rate up until the date of the write-down. Interest is recognised as income based on the written-down value of the loan. Write-downs for impairment losses are made when there is objective evidence that a loan or a group of loans has become impaired. The write-down is calculated as the difference between the balance sheet value and the net present value of estimated future cash flows discounted by the effective interest rate. In the income statement, the item Impairment losses on loans and advances consists of write-offs, changes in write-downs on loans and provisions for guarantees, as well as recoveries on previous write-offs. Non-performing loans Non-performing loans are defined as loans where the borrower defaults on the loan agreement for reasons not due to normal delays or other chance circumstance affecting the borrower. Loans that are not serviced 90 days after the due date are in all events considered as non-performing loans. Doubtful commitments where bankruptcy or debt settlement proceedings have been instituted, debt recovery has been instituted through the courts, distress has been levied, the debtor s assets have been attached, or where there are other circumstances such as a failure of liquidity or solvency or breach of other clause of the loan agreement with the Bank, are also defined as non-performing loans. Renegotiated loans are treated as doubtful loans as they are loans that could otherwise become non-performing loans. Write-offs Write-offs are impairment losses on loans which are considered final and which are booked as write-offs. These include losses where the Company has lost its claim against the debtor as a result of bankruptcy or insolvency, affirmed voluntary arrangement, unsuccessful execution proceedings, final and enforceable judgment, or debt relief. This also applies in those cases where the Company has in some other way stopped enforcement of payment or waived its claim for payment of some of the loan or the entire loan. Loans and impairment losses measured at fair value Fixed-rate loans are capitalised on the balance sheet at fair value with changes in value carried through profit or loss. With measurement at fair value, losses are expressed through changes in the credit risk premium in the discount rate, and through adjustments of expected cash flows on which the discount is based. BN Boligkreditt AS annual Report 2008

20 The objective evidence of a decline in value or impairment, which forms the basis for writing down the loan to amortised cost, is the same type of event which forms the basis for changed assessments of credit risk and expected cash flows at fair value estimations in the case of loans measured at fair value. Impairment losses connected with loans measured at fair value are presented as part of the fair value change in loans. Financial derivatives Financial derivatives are obliged to be measured at fair value with changes in value carried through profit or loss. Where BN Boligkreditt is concerned, such financial instruments are interest rate swaps. Bonds and certificates In general In the case of own bonds and certificates, a distinction is drawn between acquisition for refinancing purposes and the purchase/sale of own bonds in connection with the market promotion included in the investment portfolio. Bonds and certificates Classification Bond loans where the decision to acquire the bonds is taken on the basis of ordinary lending criteria are classified as loans. The accounting treatment of bond loans is thus analogous with that of ordinary loans. Own bonds and certificates are deducted from the bond debt and certificate debt respectively. Bonds and certificates Estimation of gains/losses When estimating gains/losses on the sale of bonds and certificates, the opening value is set as the weighted average purchase cost of the entire holding of the bonds/certificates in question. Financial instruments measured at fair value Financial instruments which are sold in an active market are valued at observed market prices. Financial instruments which are not sold in an active market are measured using a valuation technique. Valuation techniques are based on recent transactions between independent parties, and reference to instruments with approximately the same content or discounted cash flows. As far as possible, valuations are based on externally observable parameter values. All loans, borrowings and deposits which are measured at fair value are valued on the basis of discounted cash flows. Where the measurement of financial instruments at fair value is performed using a valuation technique, the valuation can potentially give rise to a gain or a loss on day one if the fair value according to the valuation model differs from the transaction price. Such gains and losses cannot be recognised in the accounts on day one. When measuring loans at fair value, BN Boligkreditt will calculate a customerspecific margin on each individual customer commitment, and this margin will be included in all subsequent valuations, so that what might otherwise have given risen to a day-one gain or a day-one loss will be amortised over the entire term of the loan. In the case of borrowings, the result of the valuation is checked against the transaction price, and where there are not immaterial differences a specific supplement will be calculated in the discount rate per contract that is added to the discount rate in all subsequent valuations, so that the day-one gain or day-one loss is amortised over the entire term of the security. Financial instruments Classification of accrued interest Accrued interest is shown throughout together with the value of the related financial instruments, both for borrowings, loans, and derivatives. In the case of borrowings and loans, this classification applies irrespective of whether the instrument is measured at amortised cost or fair value. [ 20 ]

21 [ 21 ] Tax Tax is accrued as an expense irrespective of the date it is paid. The tax charge thus reflects the year s and future tax payable as a result of the year s activity. Tax which it is estimated will be assessed on the year s profit is included in the tax charge for the year and designated as tax payable. Deferred tax is calculated on the basis of differences between reported accounting and taxable profits that will be off-set in the future. Tax-adding and tax-deducting temporary differences within the same interval of time are valued against one another. Any net deferred tax asset is stated as an asset on the balance sheet when it is probable that the tax-deducting temporary differences will be realised. Presentation of dividend The proposed distribution of dividend is presented as equity until a final resolution to distribute the dividend has been made. Distributed dividend is then presented as provision for dividend until the dividend has been paid. Provisions, contingent assets and contingent liabilities A provision is recognised only if it is a present obligation (legal or constructive) resulting from a past event, it is probable that an outflow of resources from the enterprise embodying economic benefits would be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are recognised in the amount that expresses the best estimate of the expenditure required to settle the present obligation at the balance sheet date. Where the effect is material, account is taken of the time value of money when calculating the amount of provision. There is no recognition of contingent assets or contingent liabilities. Cash The line for cash includes deposits and balances at credit institutions and central banks. Segment reporting Operating segments at group level are reported in the same way as with internal reporting to the Company s chief operating decision maker. The Company s chief operating decision maker, who is responsible for allocating resources for and assessing performance in the operating segments, has been identified as the Group Executive Management. BN Boligkreditt AS annual Report 2008

22 Note 2. Interest and similar income nok million Interest from financial instruments carried at amortised cost: Interest and similar income from loans to and balances due from credit institutions 68 2 Interest and similar income from loans to and receivables from customers Total interest from financial instruments carried at amortised cost Interest from financial instruments selected for fair value carrying through profit or loss: Interest and similar income from loans to and balances due from credit institutions 0 0 Interest and similar income from loans to and receivables from customers 0 0 Total interest from financial instruments selected for fair value carrying through profit or loss 0 0 Total interest and similar income Note 3. Interest expense and similar charges nok million Interest expense for financial instruments carried at amortised cost: Interest expense and similar charges on liabilities to credit institutions Interest expense and similar charges on securities issued Interest expense and similar charges on subordinated loan capital 6 0 Total interest expense for financial instruments carried at amortised cost Interest expense for financial instruments selected for fair value carrying through profit or loss: Interest expense and similar charges on securities issued Interest expense and similar charges on subordinated loan capital 0 0 Total interest expense for financial instruments selected for fair value carrying through profit or loss Total interest expense and similar charges Note 4. Change in value of financial instruments carried at fair value nok million Change in value interest rate derivatives carried oblig at fair value through profit or loss Change in value borrowings selected for fair value carrying through profit or loss Total change in value of financial instruments carried at fair value 27 0 [ 22 ]

23 [ 23 ] Note 5. Other operating income, gains and losses nok million Income from payment transfer commissions 0 0 Total income and commission from banking services 0 0 Commission charges on payment services and loan brokerage 10 0 Total commission charges and banking services expenses 10 0 Net commission income/charges 10 0 Total other operating income, gains and losses 10 0 Note 6. Salaries and general administrative expenses nok million Salaries to employees and fees to elected officers Salaries and other staff costs 1 1 Computing costs 1 1 Office expenses 19 1 General administrative expenses 20 2 Total salaries and general administrative expenses 21 3 Number of permanent full-time employees at 31 December 0 0 Number of permanent part-time employees at 31 December 3 3 Number of temporary staff at 31 December 0 0 Number of full-time equivalents (FTEs) at 31 December 3 0,5 Average number of FTEs during the year 0,5 0 FTEs including share of joint group functions at 31 December 0,5 0 1 The Company s employees have a shared employment relationship between BNbank ASA and BN Boligkreditt AS. Salaries are paid by the Parent Bank, which charges these expenses to BN Boligkreditt AS. Pension commitments are discharged by BNbank ASA. BN Boligkreditt AS annual Report 2008