ANNUAL REPORT
2014
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
C
ONT
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Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 3
Key figures
FIGURES IN NOK ’000s 2014 2013
PROFIT AND LOSS ACCOUNT
Profit/loss after taxation 112 243 93 971
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 9 661 293 8 677 723
Loan impairment charge 9 887 15 013
Equity 788 098 469 755
Total assets 10 416 896 9 202 569
Average total assets 9 457 067 8 648 834
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) 2 068 2 027
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) 8 302 7 133
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 8 273 7 743
Proportion of loans secured by an overseas property 0 % 0 %
HIGHLIGHTS
Bustadkreditt Sogn og Fjordane AS is a wholly- owned 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 9.661 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
Annual Report 2014
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 1.967
1 – 2 million 3.992
2 – 3 million 2.319
Over 3 million 1.383
Total 9.661
PROFIT AND LOSS ACCOUNT
In 2014 the Company made an operating profit before loan impairment charges of NOK 148.6 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
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 Spare-banken 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. 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 788.1 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.
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.
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.
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.
Weighted loan-to-value ratio
0 10 20 30 40 50 over 75% 60-75% 50-60% 40-50% Under 40% 21% 12% 17% 43% 7%
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 decision-making body. Amongst other things, the AGM elects the Board of Directors, Audit Committee and auditor, and monitors the Board and CEO’s management of the Company.
The election of the Board is governed by Section 3 of the articles of association. Board members are elected for a period of two years at a time. The Board is responsible for ensuring that the governance and management of the Company complies with relevant legislation and regulations, the articles of association
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
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 2014. 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 2014.
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 finan-cial 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 2015. 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 2015. 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 112.2 million. The Board recommends that NOK 111.9 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, 30.01.2015
The Board of Directors of Bustadkreditt Sogn og Fjordane AS
Frode Vasseth Chair
Peter Midthun Hallvard Klakegg Ingeborg Aase Fransson
Harald Slettvoll CEO
Profit/loss
Note 2014 2013
Interest income 354 122 334 046
Interest expenses 198 573 194 879
Net interest income 3, 6 155 549 139 167
Commission income 1 359 973
Net commission income 1 359 973
Net gains/losses on financial instruments 6 – 1 133 – 2 359
Total other operating income – 1 133 – 2 359
Net other operating income 226 – 1 385
Total operating income 155 775 137 781
Wages, salaries, etc. 3 29 28
Administration expenses 3 1 441 1 194
Other operating expenses 5 5 674 5 256
Total operating expenses 8 7 144 6 477
Operating profit/loss before loan impairment charge 148 631 131 304
Loan impairment charge 7, 15 – 5 126 749
Operating profit/loss 153 757 130 555
Tax expense 9 41 514 36 584
Profit/loss for the financial year 112 243 93 971
COMPREHENSIVE INCOME
Profit/loss for the financial year 112 243 93 971
Other comprehensive income and costs 0 0
Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 9
Balance sheet
Førde, 30.01.2015
The Board of Directors of Bustadkreditt Sogn og Fjordane AS
ASSETS Note 31.12.14 31.12.13
Loans and advances to credit institutions 3, 11 402 799 219 927
Loans to customers 7,13,15 9 651 406 8 662 710
Commercial paper and bonds 10,12 352 365 310 091
Deferred tax assets 9 828 777
Other receivables/Earned income not received 16 9 499 9 064
Total assets 10 416 896 9 202 569
SHAREHOLDERS’ EQUITY AND LIABILITIES Paid-up equity
Share capital 28 675 000 375 000
Total paid-up equity 675 000 375 000
Retained earnings
Other equity 21 1 198 94 755
Suggested dividends 111 900 0
Total retained earnings 113 098 94 755
Total equity 788 098 469 755
Liabilities
Debt to credit institutions 17 1 256 635 1 543 651
Debt securities in issue 18 8 312 310 7 134 039
Tax payable 9 41 566 36 785
Accrued costs 19 18 287 18 338
Total liabilities 9 628 798 8 732 814
Total liabilities and equity 10 416 896 9 202 569
Frode Vasseth Chair
Peter Midthun Hallvard Klakegg Ingeborg Aase Fransson
Harald Slettvoll CEO
Cash flow statement
Note 2014 2013
Profit/loss before taxation 153 757 130 555
Impairment provisions for loans and guarantees 7 – 5 126 749
Tax paid 9 – 41 578 – 17 611
Reduction/increase in loans and advances to customers 13 – 983 570 – 601 009
Other non-cash transactions 4 306 – 2 852
A) Net cash flow from operating activities – 872 210 – 490 168
Reduction/increase in investments in commercial paper and bonds 12 – 42 274 54
B) Net cash flow from investment activities – 42 274 54
Increase/reduction in loans from credit institutions 17 – 287 016 17 822
Increase/reduction in debt securities 18 1 178 271 638 179
Increase/reduction in paid-up share capital 28 300 000 0
Dividends – 93 900 – 72 871
C) Net cash flow from financing activities 1 097 356 583 129
D) Net cash flow during the year (A+B+C) 182 872 93 015
Opening balance of cash and cash equivalents 219 927 126 912
Closing balance of cash and cash equivalents 402 799 219 927
Breakdown of cash and cash equivalents
Deposits at other financial institutions 402 799 219 927
Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 11
Equity statement
EQUITY STATEMENT RETAINED EARNINGS
Share capital Other equity Suggested Allocated dividends Total equity Opening balance 01.01.13 375 000 73 655 0 448 655 Dividends paid 0 – 72 871 0 – 72 871
Profit/loss for the reporting period 0 93 971 0 93 971
Closing balance 31.12.13 375 000 94 755 0 469 755
Opening balance 01.01.14 375 000 94 755 0 469 755
Dividends paid 0 – 93 900 0 – 93 900
Profit/loss for the reporting period 0 343 111 900 112 243
Equity transactions
New paid-up equity 300 000 0 0 300 000
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
Not
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Bustadkreditt Sogn og Fjordane AS ÅRSMELDING 2014 13 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 2015.
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 2008. 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 2014.
AMENDMENTS TO STANDARDS AND INTERPRETATIONS APPROVED BY THE EU None of the changes to standards or inter- pretations introduced in 2014 affected the Company’s financial statements for 2014. 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 com-mercial paper and bonds. These instruments,
Notes to the accounts
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
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
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.
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
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 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 sub- project 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.
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 31.12.2014
Frode Vasseth 0 0
Hallvard Klakegg 0 0
Ingeborg Aase Fransson 0 0
Peter Olav Midthun 25 000 0
Audit committee
Knut Jon Sunde 0 0
Jan Nicolai Hvidsten 0 0
Ingrid Kassen 0 1 587 159
FIGURES IN NOK ’000s Intra-group transactions
2014 2013
Interest received from Sparebanken Sogn og Fjordane 4 515 3 286
Interest paid to Sparebanken Sogn og Fjordane 27 793 32 572
Interest paid to Sparebanken Sogn og Fjordane on covered bonds 6 332 24 928
Services bought from Sparebanken Sogn og Fjordane 3 808 3 449
Deposits at Sparebanken Sogn og Fjordane 402 799 219 927
Liabilities to Sparebanken Sogn og Fjordane 1 256 635 1 543 651 Covered bonds held by Sparebanken Sogn og Fjordane 402 458 632 968 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 2017. 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.
NOTE 6 – NET INCOME FROM FINANCIAL INSTRUMENTS
Net interest income 2014 2013
Interest receivable and similar income on loans and advances
to credit institutions, measured at amortised cost 4 515 3 286 Interest receivable and similar income on loans and advances
to customers, measured at amortised cost 343 429 325 377
Interest receivable and similar income on commercial paper
and other interest-bearing securities, designated at fair value 6 179 5 383 Other interest receivable and similar income
from receivables measured at fair value 0 0
Total interest income 354 122 334 046
Interest payable and similar charges on debt to credit institutions,
measured at amortised cost 27 257 31 882
Interest payable and similar charges on issued securities
measured at amortised cost 170 647 162 307
Other interest payable and similar charges on debt
measured at amortised cost 669 690
Total interest expenses 198 573 194 879
Total net interest income 155 549 139 167
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 0 124
Commercial paper and bonds issued by the other parties – 1 133 – 2 483 Net income and gains/losses on financial instruments
designated at fair value – 1 133 – 2 359
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
2014 2013
Statutory audit incl. VAT 52 99
Inspection fees incl. VAT 89 138
Other services not related to auditing incl. VAT 11 0
Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 19 NOTE 8 – OPERATING EXPENSES
2014 2013
Fees and social security costs 29 28
IT expenses 734 393
Other services (Eiendomsverdi AS) 631 710
Other expenses 76 91
Total wages, salaries and general administration expenses 1 470 1 222
Purchase of services from the Group 3 808 3 449
Auditors’ fees (external and internal auditor) 152 189
Bond issuance and credit rating costs 1 687 1 596
Other operating expenses 27 21
Total other operating expenses 5 674 5 255
Total operating expenses 7 144 6 477
NOTE 9 – TAX EXPENSE TAX EXPENSE
2014 2013
Tax payable for the period 41 566 36 785
Shortfall in allocation last year 0 0
Total tax payable 41 566 36 785
Change in deferred tax/tax assets
Deferred tax relating to the origination and reversal
of temporary differences -51 -201
Total change in deferred tax/tax assets -51 -201
Total tax expense 41 514 36 584
Reconciliation of expected tax expense with actual tax expense
Profit/loss before taxation 153 757 130 555
Expected income tax applying nominal tax rate of 27% (28% in 2013) 41 514 36 555 Impact on deferred tax assets of change in tax rate from 28% to 27% 0 29
Tax expense 41 514 36 584
Tax payable 41 566 36 785
Tax payable on balance sheet 41 566 36 785
BREAKDOWN OF THE TAX IMPACT OF TEMPORARY DIFFERENCES Deductible temporary differences
Financial instruments 2 725 2 450
Loss carryforwards 342 427
Total deductible temporary differences 3 067 2 877
Net difference 3 067 2 877
Net deferred tax assets/tax (–) on the balance sheet 828 777
The tax rate was reduced from 28% in 2013 to 27% in 2014. This reduced the tax expense by NOK 1.5 million in 2014.
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 2014.
NOTE 10 – CLASSIFICATION OF FINANCIAL INSTRUMENTS
2014 2013
CARRYING-AMOUNT VALUEFAIR CARRYING AMOUNT VALUEFAIR
Net loans and advances to credit institutions Loans and advances to credit institutions
measured at amortised cost 402 799 402 799 219 927 219 927 Total loans and advances
to credit institutions 402 799 402 799 219 927 219 927
Bonds and commercial paper Commercial paper and bonds
designated at fair value *) 352 365 352 365 310 091 310 091
Total bonds and other securities 352 365 352 365 310 091 310 091
Net loans to customers
Loans and advances to customers
measured at amortised cost 9 661 293 9 661 293 8 677 723 8 677 723 Total loans before individually
and collectively assessed impairment
provisions 9 661 293 9 661 293 8 677 723 8 677 723
– Individually assessed
impairment provisions 0 0 – 283 – 283
– Collectively assessed
impairment provisions – 9 887 – 9 887 – 14 730 – 14 730
Total net loans to customers 9 651 406 9 651 406 8 662 710 8 662 710 Other assets
Other assets, amortised cost 9 499 9 499 9 064 9 064
Total other assets 9 499 9 499 9 064 9 064
Total financial assets 10 416 068 10 416 068 9 201 792 9 201 792
Financial assets grouped by category Financial assets designated at fair value with changes in fair value recognised
in profit or loss, Fair Value Option *) 352 365 352 365 310 091 310 091 Financial assets measured at amortised
cost, loans and advances 10 063 703 10 063 703 8 891 701 8 891 701
Total financial assets 10 416 068 10 416 068 9 201 792 9 201 792
Debt to credit institutions Loans and deposits from credit
institutions measured at amortised cost 1 256 635 1 256 635 1 543 651 1 543 651 Total debt to credit institutions 1 256 635 1 256 635 1 543 651 1 543 651 Debt securities in issue
Issued commercial paper and bonds
Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 21 NOTE 11 – LOANS AND ADVANCES TO CREDIT INSTITUTIONS
2014 2013
Total loans and advances to credit inst. without an agreed
term at amortised cost *) 402 799 219 927
Total loans and advances to credit inst. with an agreed
term at amortised cost *) 0 0
Total loans and advances to credit institutions
measured at amortised cost 402 799 219 927
*) Overdraft/running account that Bustadkreditt Sogn og Fjordane AS has with Sparebanken Sogn og Fjordane.
NOTE 12 – COMMERCIAL PAPER AND BONDS
2014 2013
COMMERSIAL
PAPER BONDS TOTAL
COMMERSIAL
PAPER BONDS TOTAL
Commercial paper and bonds designated at fair value through profit or loss Commercial paper and
bonds, carrying amount 24 885 327 480 352 365 209 416 100 675 310 091 Of which listed on a stock exchange 24 885 327 480 352 365 209 416 50 569 259 985 Face value 25 000 325 000 350 000 210 000 100 000 310 000 Distribution by sector Finance, banking and insurance 0 327 480 327 480 0 100 675 100 675 Government and government-backed 24 885 0 24 885 209 416 0 209 416 Total 24 885 327 480 352 365 209 416 100 675 310 091
Modified duration (years) 0,46 0,18 0,20 0,21 0,15 0,19
Average effective
interest rate at 31 Dec. 1,01 % 2,03 % 1,86 % 1,30 % 2,23 % 1,54 % Maturity structure of investments in bonds and commercial paper (market value)
2014 0 0 0 209 416 0 209 416
2015 24 885 50 174 75 059 0 50 106 50 106
2016 0 151 144 151 144 0 50 569 50 569
2017 0 75 726 75 726 0 0 0
2018 0 50 436 50 436 0 0 0
All securities are NOK-denominated.
The weighting used to calculate the average effective interest rate for the whole portfolio is based on the individual security’s share of the overall interest rate sensitivity.
NOTE 13 – BREAKDOWN OF LOANS AND GUARANTEES
2014 2013
Loans to customers measured at amortised cost 9 661 293 8 677 723
Total gross loans to customers 9 661 293 8 677 723
Individually assessed impairment provisions 0 283
Collectively assessed impairment provisions
(see note 15) 9 887 14 730
Net loans to customers 9 651 406 8 662 710
Distribution of loans by sector and industry
2014 2013
Employees, etc. 9 661 293 8 677 723
Total gross loans to customers 9 661 293 8 677 723
Geographic distribution 2014 2013
Loans Share Loans Share
Eastern Norway 1 779 527 18,42 % 1 646 225 18,98 %
Southern Norway 58 109 0,60 % 61 742 0,71 %
Western Norway 7 685 281 79,55 % 6 844 535 78,87 %
Central Norway 96 381 1,00 % 73 003 0,84 %
Northern Norway, Svalbard 41 994 0,43 % 36 675 0,42 %
Overseas 0 0,00 % 15 543 0,18 %
Total gross loans by geographic area 9 661 293 100,00 % 8 677 723 100,00 % The geographic distribution is reported based on the home address of borrowers. Bustadkreditt Sogn og Fjordane AS has issued no guarantees to customers.
NOTE 14 – LOAN-TO-VALUE RATIO AND COVER POOL
2014 2013
Gross loans to customers 9 661 293 8 677 723
Average loan per customer 1 168 1 121
Number of loans 8 273 7 741
Total value of properties securing the loans 24 116 910 21 416 770
Weighted average loan age (months) 37 31
Weighted average remaining term (months) 196 194
Weighted loan-to-value ratio 55,7 % 56,0 %
Composition of cover pool:
Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 23 NOTE 15 – IMPAIRMENT OF LOANS AND GUARANTEES
2014 2013
Individually assessed impairment provisions at 1 Jan. 283 0
Amounts written off against individually assessed
impairment provisions during the year 0 0
New individually assessed impairment provisions for the year 0 283 Recoveries against individually assessed impairment provisions for the year – 283 0
Other adjustments to impairment provisions 0 0
Individually assessed impairment provisions at 31 Dec. 0 283
Individually assessed impairment provisions at 1 Jan. 14 730 14 264 Change in collectively assessed impairment provisions for the period – 4 843 466
Collectively assessed impairment provisions at 31 Dec. 9 887 14 730
Total impairment provisions at 31 Dec. 9 887 15 013
NOTE 16 – OTHER CURRENT ASSETS
2014 2013
Accrued interest on loans 9 086 8 835
Accrued interest on bonds 412 229
Total other current assets 9 499 9 064
NOTE 17 – DEBT TO CREDIT INSTITUTIONS
2014 2013
Total debt to credit inst. without an agreed term at amortised cost 0 0 Total debt to credit inst. with an agreed term at amortised cost 1 256 635 1 543 651 Total debt to credit institutions, measured at amortised cost 1 256 635 1 543 651 The Company has several agreements with Sparebanken Sogn og Fjordane regulating various
matters relating to its operations and credit facilities. For further details about these agreements, please see Note 3.
2014 ISIN NUMBER FACE VALUE INTEREST RATE SPREAD MATURITY DATE CARRYING AMOUNT 31.12.14 NO0010572290 700 000 3 MND. NIBOR 0,55 % 27.04.15 *) 301 516 NO0010593155 700 000 3 MND. NIBOR 0,58 % 10.03.16 696 730 NO0010625619 1 000 000 3 MND. NIBOR 0,55 % 28.06.16 997 271 NO0010630973 500 000 3 MND. NIBOR 0,70 % 07.12.15 499 300 NO0010637101 1 000 000 3 MND. NIBOR 0,72 % 17.02.17 1 001 300 NO0010660020 800 000 3 MND. NIBOR 0,55 % 18.04.18 800 080 NO0010665177 1 000 000 3 MND. NIBOR 0,58 % 13.08.19 1 003 836 NO0010673395 1 000 000 3 MND. NIBOR 0,48 % 20.09.18 1 000 480 NO0010710676 1 000 000 3 MND. NIBOR 0,36 % 15.06.20 2 008 390 Amortisation 3 407
Total debt securities in issue 8 312 310
The table shows the agreed maturity date.
*) The terms of the loan allow for the maturity date to be extended by one year. All loans are denominated in NOK.
All loan agreements are subject to standard loan terms. NOTE 18 – DEBT SECURITIES IN ISSUE
31.12.14 31.12.13
Commercial paper and other short-term borrowings 0 0
Bonds in issue 8 302 000 7 132 500
Own commercial paper/bonds, not amortised 0 0
Total debt securities in issue (face value) 8 302 000 7 132 500
Term to maturity
Remaining term to maturity (face value)
2015 802 000 1 632 500 2016 1 700 000 1 700 000 2017 1 000 000 1 000 000 2018 1 800 000 1 800 000 2019 1 000 000 1 000 000 2020 2 000 000 0 Total 8 302 000 7 132 500 New borrowings in 2014 2 000 000
Repaid during the reporting period 830 500
2013 ISIN NUMBER FACE VALUE INTEREST RATE SPREAD MATURITY DATE CARRYING AMOUNT 31.12.13 NO0010572290 700 000 3 MND. NIBOR 0,55 % 27.04.15 699 355 NO0010504194 432 500 3 MND. NIBOR 0,40 % 17.08.15 432 414
Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 25 NOTE 19 – OTHER LIABILITIES
2014 2013
Accrued costs and advance income 18 275 18 257
Other liabilities 12 82
Total other liabilities 18 287 18 338
NOTE 20 – OFF BALANCE SHEET ITEMS
The company has no other off-balance-sheet obligations.
NOTE 21 – CAPITAL ADEQUACY
EQUITY AND SUBORDINATED DEBT 31.12.14 31.12.13
Share capital and share premium account 675 000 375 000
Other equity 1 198 94 755
Equity 676 198 469 755
Other core capital 0 0
Deductions:
Deferred tax assets - 828 - 777
Net core capital 675 370 468 978
Core Tier 1 capital 675 370 468 978
Net supplementary capital 0 0
Net equity and subordinated loan capital 675 370 468 978
BASIS FOR CALCULATION Credit risk
Institutions 78 686 43 988
Retail loans 235 363 339 425
Residential mortgage loans 3 452 788 3 018 388
Overdue advances 2 791 2 588
Covered bonds 32 748 10 063
Other advances 412 2 388
Total calculation basis for credit risk 3 802 788 3 416 840
Operational risk 229 697 146 843
Total calculation basis 4 032 485 3 563 683
Excess equity and subordinated debt 352 772 183 883
CAPITAL ADEQUACY
Capital adequacy ratio 16,75 % 13,16 %
Core capital adequacy ratio 16,75 % 13,16 %
Core Tier 1 capital adequacy ratio 16,75 % 13,16 %
The capital adequacy ratio has been calculated using the new capital adequacy regulations (Basel II). The standardised approach has been used for credit risk and market risk, whilst the basic indicator approach has been used for operational risk.
There are three pillars to the Basel II regulations. Pillar 1 relates to minimum capital adequacy requirements, and builds on the previous regulations in Basel I. Pillar 2 relates to the institution’s internal assessment of total capital requirements (ICAAP), whilst Pillar 3 covers disclosure requirements for financial information.
NOTE 23 – RISK
RISK
Bustadkreditt Sogn og Fjordane AS is exposed to credit risk, operational risk, liquidity risk and interest rate risk. Credit risk is the most significant of these. Limits have been set on exposure to the various classes of risk. The Board considers it a priority for the Company to maintain a low risk exposure. The most important goals of the risk management strategy are to ensure: that the Company meets its goals and deals with risks that might prevent it from doing so; that internal and external reporting is of a high standard; and that the Company operates in keeping with internal guidelines and relevant legislation.
Credit risk
Bustadkreditt Sogn og Fjordane AS is exposed to credit risk through residential mortgages, and to counterparty risk through its investments in financial markets.
The loans that it purchases from Sparebanken Sogn og Fjordane have good collateral. At the time of purchase, the loan must represent no more than 75 percent of the approved value of the collateral. The values of properties used as collateral for residential mortgage loans are updated quarterly. Estimated values provided by Eiendomsverdi AS, used alone
The figure below shows the weighted loan-to-value ratio for the loans held by the Company.
The loans held by Bustadkreditt Sogn og Fjordane are granted by Sparebanken Sogn og Fjordane, and the credit scoring of its mortgage customers there-fore follows the credit scoring procedures of the parent bank. Customers who apply for a mortgage are carefully assessed on the basis of the collateral, their ability to service the loan, their debt levels and the probability of default. The probability of default
Weighted loan-to-value ratio
0 10 20 30 40 50 over 75% 60-75% 50-60% 40-50% Under 40% 21% 12% 17% 43% 7% NOTE 22 – VALUATION
Breakdown of financial assets measured at fair value Bonds and other fixed-interest securities
QUOTED PRICES AND
OBSERVABLE ASSUMPTIONS CARRYING AMOUNT
2014 2013 2014 2013
Finance, banking and insurance 327 480 100 675 327 480 100 675 Government and government-backed 24 885 209 416 24 885 209 416
Total 352 365 310 091 352 365 310 091
Bonds and other fixed-interest securities
Norwegian short-term government debt is valued at its most recent price on the stock exchange. Other Norwegian bonds and securities are measured at fair value based on valuation techniques. The valuation techniques incorporate yield curves and credit spreads supplied by external parties, and valuations are quality assured at year-end, primarily by comparing our prices with those of other valuers.
Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2014 27 responsibility for carrying out the checks and for
reporting.
The performance of the loan portfolio is
monitored monthly through a credit report which sets out areas such as the composition of the port-folio by risk group, loan performance and the impact of a fall in property prices and higher default rates on the cover pool.
The Company’s counterparty risk derives from investments in financial markets and exposure to other financial institutions.
There are limits on the Company’s exposure to any given counterparty. In order to protect itself against losses, the Company only has exposure to financially sound counterparties.
Liquidity risk
Liquidity risk is the risk that the Company will be unable to meet its obligations when they fall due. The company’s liquidity buffer shall be sufficient to allow it to meet all of its obligations when they fall due. The company always maintains the minimum liquidity buffer required by the Board and sufficient liquidity to cover its net obligations over the next six months.
Interest rate risk
The company shall manage its exposure to interest rate risk in order to minimise its exposure to interest rate fluctuations. Exposure to changes in interest rate spreads is limited by the rules on credit risk. There are also limits on exposure to changes in the absolute level of interest rates, which are monitored and reported monthly.
Currency risk
The Company does not have any foreign-currency-denominated loans or other foreign-currency- denominated investments.
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. Laws and regulations set out specific requirements relating to various records that have to be kept. This is partly to make it possible to check that the loans transferred to the Company genuinely satisfy all of the relevant requirements. Section 11 of the Regulations relating to mortgage loan businesses requires there to be a database for the cover pool detailing all of the relevant loans, forward interest rate and currency contracts, substitute assets and covered bonds. The Bank has established a database that satisfies the require-ments of the regulations. Establishing these data-bases will make it easier for the Bank to uncover errors or defects with the Company’s loan portfolio. In order to make sure that the Company always has sufficient collateral for its borrowings, the cover pool is monitored on a daily basis, and checks are
performed to confirm compliance with regulatory requirements and internal rules. In addition, stress tests are carried out in order to ensure that require-ments relating to surplus liquidity and cover pools would be met under a variety of scenarios.
REPORTING
Bustadkreditt Sogn og Fjordane AS considers it a priority to report its risk exposure and capital position accurately and completely. It has therefore established various periodic reports for the Board to review, as well as reports that form part of the day-to-day running of the Company, which are designed to ensure compliance with current legislation and internal guidelines at all times. These reports keep Board members up-to-date on whether the Company is on target to achieve the goals that have been set for it, and whether risk exposure is within the established limits.
An ICAAP is performed and reported each year. Bustadkreditt Sogn og Fjordane AS is covered by the overall ICAAP report for the whole Group. Internal control reports are also produced annually. The internal control report is presented to the Board of Bustadkreditt Sogn og Fjordane AS, and also constitutes part of the overall internal control report for the Group. The report includes an assessment of, and comments on, internal controls at the Company, a review of all important areas of risk, an assessment of compliance with legislation and proposals for improvements.
Each year, the internal auditor performs an independent assessment of the Company’s internal controls. This is presented to the Board, as are the independent inspector’s quarterly reports.
Credit reports, finance reports and liquidity reports are prepared monthly, and are reviewed by the Board on a quarterly basis. In addition, there is a monthly report on non-performing loans and a daily report to show that lending volumes and the cover pool comply with current legislation and internal guidelines.
The CEO also attends at least one audit committee meeting each year.
CAPITAL MANAGEMENT
Bustadkreditt Sogn og Fjordane AS buys loans from Sparebanken Sogn og Fjordane, and it finances the majority of these purchases by issuing covered bonds. The rest of its financing consists of equity and credit facilities with the parent company. CAPITAL ADEQUACY
Bustadkreditt Sogn og Fjordane AS uses the stand-ardised approach set out in the Basel II rules to cal-culate credit risk, and the basic indicator approach to calculated operational risk.
NOTE 24 – CREDIT RISK
CREDIT RISK BY CLASS OF FINANCIAL INSTRUMENT
MAXIMUM CREDIT EXPOSURE 2014 2013
Bonds and commercial paper 352 365 310 091
Total loans and advances to customers 10 683 499 9 554 271
Loans and advances to credit institutions 402 799 219 927
Total 11 438 663 10 084 289
Advances to credit institutions consist of deposits held at Sparebanken Sogn og Fjordane, which has been given an A3 rating by Moody’s.
CREDIT RISK RELATING TO BONDS AND COMMERCIAL PAPER Credit risk by counterparty
Interest-bearing securities Debtor category by guarantor AAA Fair value AA Fair value A Fair value BBB Fair value Non-investment grade Fair value Total 2014 fair value Total 2013 fair value
Finance, banking and
insurance 327 481 0 0 0 0 327 481 100 675
Government and
government-backed 24 884 0 0 0 0 24 884 209 416
Total 352 365 0 0 0 0 352 365 310 091
Standard & Poor’s ratings have been used. Changes in value:
Total change in carrying
amount 1 127 0 0 0 0 1 127 713
Changes in value recognised in the profit and loss account
for the period 414 0 0 0 0 414 71
Customers with residential mortgage loans are assessed according to the willingness and ability to repay their loans. When customers apply for a loan, they are subjected to a risk assessment and their debt servicing ability is calculated. The loan-to-value ratio of Bustadkreditt Sogn og Fjordane AS’s residential mortgage loans is less than 75% at the time they are transferred from Sparebanken Sogn og Fjordane. The credit quality of loans that are not in arrears is high.
Bustadkreditt Sogn og Fjordane AS’s collateral consists of mortgages on residential properties.
We consider the collateral for the portfolio to be very good. The credit risk associated with the portfolio is low.
