Design: Rød T rå d AS - P hoto: Ar thur Ar nes en
Annual Report 2013
Annual Accounts 2013
40Corporate social responsibility
166Operations
128History 3
Organisational charts 4
Annual Report 6
Important events in 2013 9
Vision and business consept 9
The bank’s history 10
Localisation 11
From the CEO 12
Report and results 14
Income Statement 42
Balance Sheet 43
Changes in equity 44
Cash flow statement 46
Notes 47
Statement from the Main Board of Directors 124
Report from the Control Committee 2013 125
Auditor's Report 126
Together we make things happen 168
Waiting time is over 170
The cycling festival of the ages in Northern Norway 172
Welcome to SNN Day 174
Faith in the culture industry 176
Group Management 130
Main Board of Directors 134
Governing bodies in SpareBank 1 Nord-Norge 136
Principles for Corporate Governance 138
Risk management, internal control and capital management 144
Ownership 156
Operations 158
HISTORY
40
SpareBank 1 Nord-Norge is the result of the merger of about 40 savings banks in Nordland, Troms and Finnmark.177
It all started 177 years ago when Tromsø Sparebank was established in 1836.
A major wave of mergers began in the 1960s and 1970s and culminated in the establishment of Sparebanken Nord-Norge on 1 July 1989. Early in the 1990s Nordkapp Sparebank
and Sparebanken Nordland became part of SparebankEN Nord-Norge. The history of the Bank is now being written at the University of Tromsø.
74
SpareBank 1 Nord-Norge has an extensive network with a total of 74 branches, whereof 72 are in the region. The Bank also has two branches in Russia.
1996
In 1996 the Bank became part of the SpareBank 1 Alliance - a group of four regional banks and 16 smaller savings banks. These banks collectively own SpareBank 1 Gruppen AS,which is a supplier of various financial products and services.
The SpareBank 1 Alliance and the SpareBank 1 Group have been key to the positive development of SpareBank 1 Nord-Norge, and have thereby also contributed to the Bank becoming a strong, solid bank “For North Norway” - which is the Bank’s vision.
2011
SpareBank 1 Nord-Norge celebrated its 175-year anniversary in autumn 2011. The customers were invited to a magnificent concert where they enjoyed performances from the best artists the region has to offer. A number of other events were also arranged in the local area.
2012
Organisational chart
Board of Directors
Chief Executive Officer
Business Development Internal Auditing Finance Markets Risk management/compliance HR/Internal operations Communications Subsidiaries and strategic
ownership interests Finnmark Region Hålogaland Region Salten Region Subsidiaries Helgeland
- Tromsø - Bodø - Tromsø - Bodø - Alta - Hammerfest - Kirkenes Mo i Rana Mosjøen - Harstad - Sandnessjøen - Finnsnes - Tromsø - Harstad - Finnsnes - Balsfjord - Hammerfest - Alta - Mo i Rana - Mosjøen - Trofors - Sandnessjøen SpareBank 1 Nord-Norge Financial Services Group
SpareBank 1 Finans Nord-Norge AS Equity stake 100 % EiendomsMegler 1 Lofoten AS Equity stake 60 % Nord-Norge Eiendom IV AS Equity stake 100 % Alsgården AS Equity stake 100 % EiendomsMegler 1 Nord-Norge AS Equity stake 100 %
North-West 1 Alliance Bank Equity stake 75 % SpareBank 1 Nord-Norge Forvaltning ASA Equity stake 100 % SpareBank 1 Regnskapshuset Nord-Norge AS Equity stake 100 %
SpareBank 1 Nord-Norge Invest AS Equity stake 100 % SpareBank 1 Gruppen AS Equity stake 19,50 % Alliansesamarbeidet SpareBank 1 DA Equity stake 17,74 % SpareBank 1 Boligkreditt AS Equity stake 13,15 % SpareBank 1 Næringskreditt AS Equity stake 20,92 % BN Bank ASA Equity stake 23,50 % SpareBank 1 Verdipapirservice AS Equity stake 24,90 % SpareBank 1 Kundesenter AS Equity stake 14,91 % SpareBank 1 Kredittkort AS Equity stake 19,83 % SpareBank 1 Markets AS Equity stake 23,89 %
Organisation of
Annual Report
Financial results
In NOK million and as percent of average assets
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Net interest income 1 038 1 103 1 075 1 206 1 320 1 173 1 129 1 129 1 166 1 285
Commission income and other income 325 366 416 465 411 462 513 506 656 931
Net return on financial investments 42 73 175 201 -84 524 404 184 260 346
Total income 1 405 1 542 1 666 1 872 1 647 2 159 2 046 1 819 2 082 2 562
Personnel costs 647 621 457 473 463 508 477 514 581 638
Other operating expenses 167 175 415 489 508 464 480 522 539 571
Total operating expenses 814 796 872 962 971 972 957 1 036 1 120 1 209 Result before losses 591 746 794 910 676 1 187 1 089 783 962 1 353
Loss on loans, guarantees etc. 318 169 65 17 183 185 87 101 195 172
Result before tax 273 577 729 893 493 1 002 1 002 682 767 1 181
Tax charge 62 174 172 186 143 143 186 157 172 214
Net profit 64 211 403 707 350 859 816 525 595 967
Balance sheet
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Cash and loans to and
claims on credit institutions 649 426 980 2 814 3 433 3 067 3 294 2 866 2 142 2 047
CDs. bonds and other
interest-bearing securities 2 807 3 124 4 511 5 403 7 228 9 453 12 178 11 841 12 997 11 919 Loans and advances to customers 36 869 37 931 41 638 50 213 51 268 48 180 49 046 51 642 54 551 57 282
- Individual write-downs
for impaired value 503 320 264 134 201 228 271 206 303 244
- Collective write-downs
for impaired value 322 321 217 170 204 238 200 226 198 209
Other assets 567 779 1 501 2 539 3 578 3 539 4 262 4 683 5 639 6 272
Total assets 40 892 42 260 48 630 60 969 65 507 64 239 68 780 71 032 75 329 77 520
Deposits from credit institutions 3 366 2 790 1 773 2 414 3 708 6 868 6 123 6 446 4 295 4 284
Deposits from customers 21 666 22 999 25 350 32 034 34 572 34 877 39 389 41 765 43 588 44 940
Debt securities in issue 11 171 11 738 15 668 19 665 19 746 14 162 14 477 13 342 16 534 16 336
Other liabilities 828 1 026 1 603 1 348 1 562 1 564 1 774 1 767 1 936 2 008
Subordinated loan capital 1 502 1 194 1 289 1 254 1 461 1 608 1 347 1 356 2 095 1 450
Total equity 2 359 2 513 2 947 4 254 4 458 5 160 5 670 6 356 6 881 8 502
Key figures
In NOK million and as percent of average assets
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Return on equity capital 9.0 % 16.8 % 20.5 % 18.1 % 8.1 % 18.2 % 15.3 % 8.5 % 9.0 % 13.0 %
Cost/income group 57.9 % 51.6 % 52.3 % 51.4 % 59.0 % 45.0 % 46.8 % 57.0 % 53.8 % 47.2 %
Cost/income group.
ex. financial inv. 59.7 % 54.2 % 58.5 % 57.6 % 56.1 % 59.4 % 58.3 % 63.4 % 61.5 % 54.6 %
Cost/income parent bank 56.9 % 51.6 % 51.6 % 55.7 % 62.6 % 46.8 % 50.1 % 57.6 % 51.8 % 44.0 %
Cost/income parent bank.
ex. financial inv. 59.0 % 52.8 % 54.4 % 53.4 % 50.0 % 54.8 % 53.3 % 58.8 % 57.3 % 46.5 %
12-month cost growth 2.6 % -2.2 % 9.5 % 5.6 % 0.9 % 0.1 % -1.5 % 8.3 % 8.1 % 7.9 %
Gross loans to customers* 36 869 37 931 41 638 52 582 56 806 59 061 63 334 68 034 75 914 80 581
Growth in loans last 12 months* 9.8 % 2.9 % 9.8 % 13.7 % 8.0 % 4.0 % 7.2 % 7.4 % 11.6 % 6.1 %
Growth in loans last 12 months 9.8 % 2.9 % 9.8 % 8.6 % 2.1 % -6.0 % 1.8 % 5.3 % 5.6 % 5.0 %
Deposits from customers 21 666 22 999 25 350 32 034 34 572 34 877 39 389 41 765 43 588 44 940
Growth in deposits last 12 months 7.4 % 6.2 % 10.2 % 15.3 % 7.9 % 0.9 % 12.9 % 6.0 % -1.3 % 3.1 %
Share of loans transferred to Sp 1 Boligkreditt of total loans to retail customers
14.7 % 26.7 % 32.3 % 35.0 % 41.1 % 40.8 %
Share of loans transferred to Sp 1 Boligkreditt of total loans to customers 9.7 % 18.4 % 22.6 % 24.1 % 28.1 % 28.5 % Deposits as a percentage of gross lending* 58.8 % 60.6 % 60.9 % 60.9 % 60.9 % 59.1 % 62.2 % 61.4 % 54.3 % 55.8 % Deposits as a percentage of gross lending 58.8 % 60.6 % 60.9 % 63.8 % 67.4 % 72.4 % 80.3 % 80.9 % 75.6 % 78.5 % Total assets 40 892 42 260 48 630 60 969 65 507 64 239 68 780 71 032 75 329 77 520 Average assets 39 347 41 992 44 911 58 023 61 267 65 169 66 245 70 291 72 921 75 952 Branches 92 83 85 81 81 76 75 75 74 74
Number of man-years (Group) 770 758 778 813 821 778 788 794 881 922
Number of man-years (parent bank) 708 699 714 722 724 690 675 670 672 647
Number of man-years (subsidiares) 63 60 64 91 97 88 113 124 209 275
Net other operating
income of total income 23.1 % 23.7 % 25.0 % 24.8 % 25.0 % 21.4 % 25.1 % 27.8 % 31.5 % 36.3 %
Total regulatory Capital % 11.8 % 10.9 % 10.9 % 10.0 % 10.8 % 12.8 % 11.9 % 12.5 % 13.2 % 13.9 %
Tier I Capital % 9.0 % 9.2 % 9.6 % 8.9 % 9.5 % 10.7 % 10.9 % 11.6 % 12.1 % 13.4 %
Tier I capital 2 619 2 706 3 037 3 342 4 229 4 846 5 334 6 002 6 672 7 783
Equity and related capital resources 3 430 3 180 3 464 3 746 4 789 5 776 5 849 6 465 7 270 8 069
Total risk-weighted assets base IRB 29 296 31 750 35 594 37 452 44 565 42 567 48 966 51 704 55 098 57 989
Losses on loans to customers as a percentage of gross loans incl.agency loans
0.86 % 0.45 % 0.16 % 0.03 % 0.32 % 0.31 % 0.14 % 0.15 % 0.26 % 0.21 %
Non-perf. commitments
as % of gross loans 1.96 % 0.61 % 0.60 % 0.41 % 0.80 % 0.97 % 0.78 % 0.69 % 0.52 % 0.60 % Other doubtfull commitments
as % of gross loans* 1.15 % 2.04 % 1.71 % 0.66 % 0.53 % 0.39 % 0.60 % 0.50 % 0.78 % 0.46 % Net commitments in default and
at risk of loss as a percentage of gross loans*
0.88 % 0.90 % 0.75 %
Annual Report - Group Profit Analysis
Amounts in % of average assets
31.12.13 31.12.12 31.12.11 31.12.10 31.12.09 31.12.08 31.12.07 31.12.06 31.12.05 31.12.04
From profit and loss account
Interest income 3.94 % 3.90 % 4.02 % 3.85 % 3.91 % 4.51 % 5.61 % 4.32 % 3.93 % 4.51 %
Interest costs 2.24 % 2.30 % 2.41 % 2.14 % 2.18 % 2.60 % 3.53 % 2.18 % 1.54 % 2.60 %
Net interest income 1.69 % 1.60 % 1.61 % 1.70 % 1.73 % 2.15 % 2.08 % 2.14 % 2.39 % 2.62 % Dividend and other income
from investments 0.43 % 0.31 % 0.30 % 0.44 % 0.47 % 0.50 % 0.42 % 0.34 % 0.22 % 0.06 %
Fees and commissions receivable 1.17 % 0.94 % 0.81 % 0.89 % 0.81 % 0.86 % 0.87 % 0.83 % 0.90 % 0.90 % Fees and commissions payable 0.10 % 0.10 % 0.11 % 0.13 % 0.14 % 0.14 % 0.11 % 0.13 % 0.14 % 0.17 % Net gain/loss on securities
and foreign exchange 0.02 % 0.05 % -0.04 % 0.17 % 0.17 % 0.36 % -0.07 % 0.19 % 0.17 % 0.07 % Other operating income 0.15 % 0.06 % 0.03 % 0.01 % 0.04 % 0.04 % 0.05 % 0.16 % 0.17 % 0.14 % Net overall contribution 3.37 % 2.86 % 2.59 % 3.09 % 3.14 % 2.69 % 3.23 % 3.53 % 3.71 % 3.62 % Wages. salaries an
general administration costs 1.28 % 1.23 % 1.18 % 1.14 % 1.22 % 1.29 % 1.32 % 1.39 % 1.58 % 1.53 % Depreciation etc. on
fixed- and intangible assets 0.07 % 0.07 % 0.07 % 0.07 % 0.08 % 0.08 % 0.09 % 0.10 % 0.11 % 0.12 % Other operating costs 0.24 % 0.23 % 0.23 % 0.23 % 0.20 % 0.21 % 0.23 % 0.23 % 0.25 % 0.29 % Result before losses 1.78 % 1.32 % 1.11 % 1.64 % 1.82 % 1.10 % 1.58 % 1.81 % 1.77 % 1.67 % Losses on loans and guarantees 0.23 % 0.27 % 0.14 % 0.13 % 0.28 % 0.30 % 0.03 % -0.08 % 0.14 % 0.40 % Profit before tax 1.55 % 1.05 % 0.97 % 1.51 % 1.54 % 0.80 % 1.55 % 1.90 % 1.62 % 1.27 % Tax 0.28 % 0.24 % 0.22 % 0.28 % 0.22 % 0.23 % 0.33 % 0.40 % 0.38 % 0.40 %
Profit for the year 1.27 % 0.82 % 0.75 % 1.23 % 1.32 % 1.40 % 1.22 % 1.50 % 1.24 % 0.87 % Minority interests 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.00 % 0.01 % 0.01 % 0.01 % 0.00 % Majority interests 1.27 % 0.82 % 0.75 % 1.23 % 1.32 % 1.40 % 1.21 % 1.49 % 1.23 % 0.87 %
CEO change
On 1 January 2013, the leadership of SpareBank 1 Nord-Norge changed hands. Jan-Frode Janson succeeded the bank’s long serving CEO, Hans Olav Karde.
New era for Northern Norway
In autumn 2013, SpareBank 1 Nord-Norge published new growth figures for Northern Norway covering the next few years via its Busi-ness Barometer for Northern Norway (KB). The autumn analysis shows that the region is enjoying a historic growth phase, and in 2014 Northern Norway will, for the first time, see higher growth than the total growth for Norway as a whole. Growth in Southern Norway has until now always been higher than growth in Northern Norway.
Equity issue
SpareBank 1 Nord-Norge is the region’s local bank and has a simple, clear vision: For Northern Norway! In order to ensure that the bank is in a position to serve northern Norwegian business and households during a period of strong growth, it carried out a rights issue of equity certificates worth up to NOK 750 million.
Simplification and customer orientation
In 2013, SpareBank 1 Nord-Norge implemented organisational changes that clarify our position as the region’s local bank. All regional directors are now part of the executive management team, and stronger mandates for our local banks make it more likely that our customers will see SpareBank 1 Nord-Norge as a bank that makes decisions on a local level.
Arctic Race of Norway
We want great things for our region. One of last year’s big highlights was the realisation of the Arctic Race of Norway bike race. SpareBank 1 Nord-Norge contributed to the project from the start and is also an of-ficial partner. The Arctic Race was a great success in its first year. The TV pictures broadcast to 110 countries were an advert for Northern Norway unlike any we have seen before.
Record result
With a result before tax of almost NOK 1.2 billion and return on equity of 13%, SpareBank 1 Nord-Norge is one of the most profitable banks in the Nordic region. This clearly shows that Northern Norway is doing well.
Important events in 2013
The region’s own bank
SpareBank 1 Nord-Norge is a leading provider of financial services within the retail banking and corporate banking markets in North Norway. Below is a presentation of the Group’s vision and business concept, as well as the overall financial goals.
Our corporate vision is For North Norway! Very simple, but ambitious and demanding as well. This means that SpareBank 1 Nord-Norge wants to be known as being:
• The region’s local bank
• A Group that creates value in, and invests it back into, Northern Norway
• Close and competent, with decisions taken on a local level
• Financially sound, generous and people-oriented - rich in tradition, yet modern
• A driving force in the development of Northern Norway – we care about you!
Business concept
SpareBank 1 Nord-Norge provides comprehensive, modern fi-nancial solutions to customers with a basis in the North Norway market. We create competitive advantages by being “Close and Competent” in all our customer relationships. We know our cus-tomers and have empathy for their situation. Therefore we are best at identifying needs and creating value-adding solutions.
operations and business are based on strict requirements with regard to integrity and commercial ethics as set out in the SNN Corporate Code of Conduct.
SpareBank 1 Nord-Norge is an independent financial services group within the SpareBank 1 Alliance. We know North Norway extremely well and contribute to development and growth within the region
Our general targets
SpareBank 1 Nord-Norge’s general financial targets are as follows:
Financial strength
Core Tier 1 capital ratio of 14.5% or higher in 2016.
Profitability
Top international class banking operations.
This currently entails a return on equity of at least 12%.
Cost-effectiveness
The parent bank’s annual average growth in costs should be a maximum of 2%. The parent bank’s cost/income ratio shall be on a par with, or better than, comparable banks.
Income growth
Tromsø Sparebank
1836
Malangen Sparebank Alta Sparebank Astafjordene Sparebank Bardu Sparebank Berlevåg Sparebank Hillesøy Sparebank Salangen Sparebank Skjervø og Nordreisa Sparebank Sør-Varanger Sparebank Talvik Sparebank Tromsøsundets Sparebank Gisund Sparebank Lyngen Sparebank Dyrøy Sparebank Tranøy SparebankSparebanken Nord
1980
Sparebanken Nord-Norge
1989
Torsken Sparebank Måsøy Sparebank Andenes Sparebank Øst-Finnmark Sparebank Kvedfjord Sparebank Merges 1963 Merges 1980 Merges 1991 1992 1982 1984 1969 1970 1978 1982 1984 Nordkapp Sparebank Sparebanken Nordland Hammerfest Sparekasse Trondenes SparebankThe bank’s history
Sparebanken Nord-Norge was established on 1 July 1989
through a merger of the following savings banks:
SpareBank 1 Nord-Norge
74 branches in 64 municipalities as well as Svalbard.
In addition there are 2 branch offices in North-West Russia.
HEAD OFFICE:
TromsøORGANISATION:
5 regionsREGION BRANCHES:
HammerfestTromsø Harstad Bodø Mo i Rana
LOCALISATION:
74 branchesNUMBER OF MAN-YEARS:
922FINNMARK
Alta Berlevåg Breivikbotn Båtsfjord Hammerfest Havøysund Honningsvåg Karasjok Kautokeino Kirkenes Kjøllefjord Lakselv Tana Vadsø Vardø ØksfjordHÅLOGALAND
Andenes Borkenes Bø Evenskjer Hamnvik Harstad Leknes Lødingen Melbu Myre Narvik Ramberg Reine Sortland Stokmarknes SvolværNORDLAND
Bodø, Storgata 40 Bodø, City Nord Fauske Hamarøy Leinesfjord Misvær Moldjord Rognan Røst Værøy Ørnes, MeløyTROMS
Bardufoss Brøstadbotn Burfjord Finnsnes Gryllefjord Hansnes Jektabanken Lyngseidet Nordkjosbotn Olderdalen Oteren Setermoen, Bardu Senjahopen Sjøvegan Skjervøy Stonglandseidet Storslett StorsteinnesHELGELAND
Brønnøysund Mo I Rana Mosjøen Nesna SandnessjøenSPITSBERGEN
LongyearbyenNORTH-WEST
RUSSIA
Murmansk St. PetersburgSpareBank 1 Nord-Norge
Vi har totalt 74 kontorer i 64 kommuner i landsdelen,på Svalbard og i nordvest Russland
HOVEDKONTOR: Tromsø ORGANISERING: 5 regioner REGIONKONTOR: Hammerfest Tromsø Harstad Bodø Mo i Rana LOKALISERING: 74 steder ANTALL ÅRSVERK: 922 FINNMARK Alta Berlevåg Breivikbotn Båtsfjord Hammerfest Havøysund Honningsvåg Karasjok Kautokeino Kirkenes Kjøllefjord Lakselv Tana Vadsø Vardø Øksfjord HÅLOGALAND Andenes Borkenes Bø Evenskjer Hamnvik Harstad Leknes Lødingen Melbu Myre Narvik Ramberg Reine Sortland Stokmarknes Svolvær NORDLAND Bodø, Storgata 40
Bodø, City Nord Fauske Hamarøy Leinesfjord Misvær Moldjord Rognan Røst Værøy Ørnes, Meløy TROMS Bardufoss Brøstadbotn Burfjord Finnsnes Gryllefjord Hansnes Jektabanken Lyngseidet Nordkjosbotn Olderdalen Oteren Setermoen, Bardu Senjahopen Sjøvegan Skjervøy Stonglandseidet Storslett Storsteinnes Sørreisa Tennevoll Tromsdalen, Amfi Tromsø, Storgata 65 Tromsø, Sjøgata 8 HELGELAND Brønnøysund Mo I Rana Mosjøen Nesna Sandnessjøen SPITSBERGEN Longyearbyen NORDVEST RUSSLAND Murmansk St. Petersburg Branches Regional Offices
From the CEO
On 1 January 2013, the leadership of SpareBank 1 Nord-Norge changed hands. The undersigned succeeded the bank’s long serving chief executive officer, Hans Olav Karde. My most important focus will be on continuing and strengthening the bank’s unique position in Northern Norway, in parallel with the modernisation required to keep up with other social trends.
This gives meaning to working “For Northern Norway” as a vision and guiding star. Given that the region is characterised by optimism, a high level of activity and economic growth, it is even more inspiring. Expectations for the future are great, thanks to our natural resources. A growing Northern Norway needs a solid, local bank that knows this part of the country.
In order to improve our customer orientation and clarify our posi-tion as Northern Norway’s bank, SpareBank 1 Nord-Norge simpli-fied the organisation and oriented it more towards the customer throughout 2013. All of Northern Norway is now represented in the bank’s new executive management team via our five regional directors. This means that important decisions are being taken closer to the customer, which helps to reinforce the principle of local decisions. No decisions in SpareBank 1 Nord-Norge are taken outside Northern Norway.
With a result before tax of almost NOK 1.2 billion and return on equity of 13%, SpareBank 1 Nord-Norge is one of the most profit-able banks in the Nordic region. This clearly shows that Northern Norway is doing well.
Our core activity is banking in Northern Norway. We strength- ened our focus on our core activity in 2013, including by selling Bank 1 Oslo Akershus and winding up/freezing SNN Invest. In order to ensure that the bank is in a position to play its part in Northern Norway’s growth, a rights issue of equity certificates worth up to NOK 750 million was conducted. The issue was well received in the market and oversubscribed by 65%. This demonstrates great faith in the development of the north and confidence in us as a bank. SpareBank 1 Nord-Norge is solid and well-equipped to participate in the development of this region. The stricter requirements concerning financial strength are coming into force at the same time as Northern Norway is experiencing strong growth. Other Norwegian and international banks have an-nounced they will be rationing lending. SpareBank 1 Nord-Norge has implemented and will continue to implement measures, both to meet the authorities’ requirements and to ensure that the bank’s financial strength cannot be questioned. Not the least, we want to participate in Northern Norway’s growth.
Having “the most satisfied customers” is one of the bank’s strategic
Our local presence provides us with proximity to, and knowledge about, the markets we seek to serve. Confirmation of the attractive-ness of our local branches came on SNN day in Tromsø when 7,000 people visited the Rødbanken building.
Northern Norway is enjoying a period of major investments, that to a large degree, are being made by the public sector and big, inter-national and inter-national companies. While SpareBank 1 Nord-Norge wants to strengthen its position in the corporate market, it is not these major companies that are our bank’s target group. We want to be the indisputable first choice for small and medium-sized, northern Norwegian companies and are now focusing even more strongly on this customer group.
The bank has a strong, heartfelt commitment to the region. We live out our vision “For Northern Norway” primarily through being a bank for the people who live or have ties to Northern Norway and northern Norwegian trade and industry.
As part of our active social commitment, we contributed NOK 62 million to northern Norwegian clubs, associations and knowledge institutions through the SpareBank 1 Nord-Norge Fund and our cooperation agreements. These funds are distributed evenly across culture, athletics and sports, and development of competence. We want great things for our region. A good example of this, and one of last year’s big highlights, was the realisation of the Arctic Race of Norway bike race. SpareBank 1 Nord-Norge contributed to this project right from the start and was also an official partner when the race started in Bodø on 8 August 2013. The region got to show itself off at its very best over four days. The whole race was broadcasted to hundreds of thousands of TV viewers on 110 TV channels around the world. We are proud to have contributed to a cycling festival whose ripple effects will be felt throughout Northern Norway.
KB, The Business Barometer for Northern Norway, has become an important factual basis for social debate in Northern Norway. It is published twice a year and presented at customer meetings throughout Northern Norway. The Business Barometer has become an important reference document in a national context as well. In 2013, KB presented forecasts for the region for the coming years for the first time. For 2014, this forecast estimates GDP growth in Northern Norway of 4%, compared to 2% nationally. Investments are being made in further growth in the north. In the absence of major disruptions and a reversal in the inter-national economy, the outlook for further growth and develop- ment in the region is very positive.
The bank is very busy at the start of 2014. The changes that
Report and results
Northern Norway has been enjoying a period of strong growth since 2010. This can be seen in all sectors of
society. The business sector is undergoing wide-ranging renewal, the labour market is tight, and households
have healthy finances and are strongly optimistic.
T
S
Northern Norway and
SpareBank 1 Nord-Norge – in brief
Northern Norway has been enjoying a period of strong growth since 2010. This can be seen in all sectors of society. The business sector is undergoing wide-ranging renewal, the labour market is tight, and households have healthy finances and are strongly optimistic. Growth and value creation in the region is being slowed to some extent due to a lack of competent labour and efficient infrastructure.
The good growth is due to the greater economic importance of the region’s access to natural resources. This applies to both the traditional maritime resources and the significant oil and gas finds in the Norwegian Sea and Barents Sea. At the same time, recoverable and very high value deposits of minerals and rock types have been discovered. The situation for aquaculture and traditional fisheries is good, and there is considerable capacity for growth in aquaculture. All the most important fish stocks are enjoying good, sustainable development. Historically, the summer season has been the most important one for tourism, but winter tourism is now becoming equally as important. Business sector growth, major public investments and increa-sing house building have resulted in a high level of activity in the building and civil engineering sector. Analyses of the region’s economy are published twice a year in KB, the bank’s Business Barometer for Northern Norway.
Although the outlook for the northern Norwegian economy is good, there is continuing uncertainty about its future develop- ment. This is due both to the fact that Norwegian economic growth appears to be slowing somewhat and the fact that the outlook for international economic growth remains uncertain.
Board of Directors’
report 2013
Highlights for 2013
• Pre-tax profit: NOK 1,181 million (NOK 767 million)
• Net profit for the year: NOK 967 million (NOK 595 million)
• Return on equity (Group): 13.0 % (9.0 %). • Earnings per equity certificate (Group): NOK 4.13
(NOK 3.78).
• Very good and improved underlying banking operations.
• Good profit contribution from joint ventures. • Improved profit contribution from subsidiaries. • Cost/income ratio (Group): 47.2 % (53.8 %). • Net loan losses: NOK 172 million
(NOK 195 million).
• Lending growth: 6.1 % (11.6 %) including intermediary loans.
• Growth in deposits in last 12 months: 3.1 % (-1.3 %). • Deposit coverage ratio: 78.5% (75.6 %)
• Very good liquidity
• Successful issues completed in autumn 2013 with gross proceeds totalling NOK 772 million.
• Good financial strength:
• Total capital adequacy ratio: 13.9 % (13.1 %). • Tier 1 capital ratio (Group): 12.3 % (10.3 %). • Core Tier 1 capital ratio: 12.3 % (10.31 %). • Proposed cash dividend for equity certificate holders:
NOK 1.10 (NOK 1.15).
(Same period 2012)
Strategic goals and target attainment
Strategic goals Targets Group 2013 Parent Bank 2013
Profitability
Loans to the retail sector increased by 8.4% in 2013, and de-posits rose by 6.1%. Lending growth in the corporate sector was 1.6% and the growth in deposits was 5.0%. Even with higher general growth in the north than in the country as a whole, the bank increased its market share within retail sector loans in 2012. Full official statistics have yet to be published for last year, but it would appear that its market share within retail sector loans increased in 2013 as well.
In autumn 2013, the bank carried out a successful rights issue and a private placement for employees. The issues raised gross proceeds totalling NOK 772 million and will ensure the bank financial strength and the capacity to be a good team player in the region’s development.
New regulatory requirements for equity in financial institutions also entail a requirement to increase the core Tier 1 capital in SpareBank 1 Nord-Norge. The strategic capital target is a core Tier 1 capital ratio of 14.5% or higher in 2016. Please refer to the section on the Group’s capital adequacy ratio later on in the annual report.
SpareBank 1 Nord-Norge has successfully increased the Group’s net interest income (including commissions from transferred portfolios) by 20% from NOK 1,341 million in 2012 to NOK 1,617 million in 2013. Besides growth, this is due to the fact that the banks, including SpareBank 1 Nord-Norge, have in general implemented margin expanding measures as one of the means of satisfying the new regulatory requirements for financial strength. Reduced money market interest rates also helped to expand margins.
The Group’s net commissions and other operating income (excluding commissions from transferred portfolios) totalled NOK 599 million in 2013, NOK 121 million more than the year before. The Group will continue to work on increasing commissions and other operating income.
The importance of the Group’s strategic cooperation with the SpareBank 1 Alliance has grown in recent years. The collabo-ration takes place in several dimensions, and the importance of the direct contribution to the result from the joint ventures in the SpareBank 1 Alliance has increased for SpareBank 1 Nord-Norge.
The contribution to the result from the joint ventures amounted to NOK 303 million in 2013. The corresponding figure for 2012 was NOK 210 million.
The total net profit from financial investments was NOK 346 million for 2013, compared with NOK 260 million for 2012. The cost/income ratio in the 2013 consolidated financial state-ments is 47.2%, a reduction from 53.8% in 2012.
The Group recognised NOK 172 million in losses on loans in 2013, NOK 23 million less than in 2012. The Group’s risk classi- fication system indicates that the overall credit risk in the loan portfolio remains low. Good work is currently being done on non-performing and doubtful commitments in the Group,
Systematic customer activity generated good results in 2013. The customer satisfaction trend in both the retail and corporate markets is good. The retail market’s customer service centre has performed well with regard to customer satisfaction. New, digital solutions are also helping to ensure customers enjoy a positive experience. All advisers in SpareBank 1 Nord-Norge are authorised, which reassures customers when they are in contact with the bank.
The Group’s return on equity was 13.0% for 2013, compared with 9.0% for 2012.
Please also see the additional comments on the Group’s income statement and balance sheet later on in this report.
Goals and strategy
SpareBank 1 Nord-Norge holds a unique position in the region, enjoying customer relationships with almost half of the popu- lation and a powerful distribution system thanks to branches in 74 locations and a customer service centre that is open around the clock.
Our corporate vision is “For Norhern Norway!”
It is very simple, but at the same time ambitious and demanding. This means that SpareBank 1 Nord-Norge wants to be known as being:
• The region’s local bank
• A Group that creates value in, and invests it back into, Northern Norway
• Close and competent, with decisions taken on a local level
• Financially sound, generous and people-oriented - rich in tradition, yet modern
• A driving force behind the development of Northern Norway – we care about you!
Business concept
SpareBank 1 Nord-Norge provides comprehensive, modern financial solutions to customers based in the northern Norwe-gian market. We ensure our competitive edge by being Close and Competent in all customer relationships. We know our customers and, therefore, are the best at identifying needs and creating value-adding solutions.
SpareBank 1 Nord-Norge is an attractive workplace with a corporate culture characterised by dynamic training, a will to win, and a willingness to work together towards a common goal. Our operations are based on strict requirements concerning integrity and business ethics.
SpareBank 1 Nord-Norge is an independent financial services group within the SpareBank 1 Alliance. We know Northern Norway extremely well and contribute to the region’s growth and development.
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Our general targets
• Financial strength
Core Tier 1 capital ratio of 14.5% or higher in 2016.
• Profitability
Top international class banking operations.
This currently entails a return on equity of at least 12 %.
• Cost-effectiveness
The parent bank’s annual average growth in costs should be a maximum of 2%. The parent bank’s cost/income ratio shall be on a par with, or better than, comparable banks.
• Income growth
The Group’s interest income and commissions should increase by a minimum of 2% more than costs.
SpareBank 1 Alliance
and SpareBank 1 Group
The bank’s participation in the SpareBank 1 Alliance and its stake in SpareBank 1 Gruppen form an important part of the bank’s strategy. The participation has been important with respect to the development of SpareBank 1 Nord-Norge and has greatly contributed to the fact that the bank has become a financially sound, strong bank “for Northern Norway”. The SpareBank 1 banks run the Alliance and develop the product companies through the jointly-owned companies, SpareBank 1 Utvikling, and the holding company, SpareBank 1 Gruppen. The purpose of the SpareBank 1 Alliance is to acquire and pro-vide competitive financial products and services, and to achieve economies of scale in the form of lower costs and/or higher quality. Accordingly, the Alliance provides retail and corporate customers with local roots, competence and easier day-to-day banking. The Alliance should also help to ensure the creation of value by the banks for the benefit of their region and the banks’ owners.
Please also see the special report on companies in the Spare- Bank 1 Alliance later on in this annual report.
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Comments on
the annual accounts
In accordance with the provisions of the Norwegian Accounting Act, the financial statements for 2013 have been prepared on the assumption that the Group is a going concern. SpareBank 1 Nord-Norge’s consolidated financial statements have been prepared in accordance with section 3-9 of the Norwegian Accounting Act in compliance with IFRS (International Financial Reporting Standards), as approved by the EU.
The return on equity of 13% for 2013 exceeds the strategic target, which was a minimum of 12%. The return on equity in the final quarter was 13.6%, which must be characterised as good, not least because equity increased in the fourth quarter 2013. The bank’s basic operations were further strengthened throughout 2013 and remain extremely good.
The financial strength of both the Group and the parent bank is satisfactory, and they have good deposit coverage ratios and liquidity.
In the opinion of the Main Board of Directors the Group is well placed to satisfy the region’s needs for financial services in the years ahead.
Net interest income
Total net interest income increased by NOK 119 million from 2012, amounting to NOK 1,285 million for 2013. The bank enjoyed good lending growth in the retail market in 2013, while
Net commissions and other operating income
SpareBank 1 Nord-Norge aims to increase its income from risk-free areas by offering a broad range of products within savings, investment and insurance. In 2013, net commissions and other operating income accounted for 36% of total income, compared with 32% in 2012.
Commissions from SpareBank 1 Boligkreditt increased significantly in 2013. This growth is also primarily attributable to higher prices and lower funding costs in the company. As far as other commissions are concerned, higher income from both estate agency and the Group’s subsidiary accounting firms should be mentioned.
Net interest income, including commissions from transferred loan portfolios, increased from NOK 1 341 million in 2012, to NOK 1 617 million in 2013.
Net interest income, including commissions from SpareBank 1 Boligkreditt, relative to average total assets: (2008-13)
Net income from financial investments
Net income from financial investments totalled NOK 346 million in 2013. This income can be broken down as follows:
Financial performance Group Parent Bank
Amounts in NOK million 2013 2012 2013 2012
Net interest income 1 285 1 166 1 113 1 034 Net commissions and
other operating income 931 656 735 540
Net income from
financial investments 346 260 383 272
Operating costs 1 209 1 120 978 954
Losses 172 195 146 224
Pre-tax profit 1 181 767 1 107 668
Tax 214 172 192 153
Profit for the year 967 595 915 515
2,5% 2,0% 1,5% 1,0% 0,5% 0,0% 2008 2009 2010 2011 2012 2013
Associated companies and joint ventures
Result contributions from associated companies and joint ventures are recognised in the consolidated financial statements in proportion to the bank’s stake using the equity method. In accordance with the cost method, only received dividends are recognised in the parent bank’s financial statements.
SpareBank 1 Gruppen
SpareBank 1 Gruppen’s net profit in 2013 amounted to NOK 1 118 million (NOK 443 million). The SpareBank 1 Nord-Norge Group’s share of the result, amounting to NOK 210 mil-lion (NOK 96 milmil-lion), has been incorporated into the finan-cial statements. SpareBank 1 Livsforsikring and SpareBank 1 Skadeforsikring made the greatest contributions to Spare- Bank 1 Gruppen’s profit. SpareBank 1 Gruppen sold its stake in SpareBank 1 Markets AS in the third quarter.
SpareBank 1 Boligkreditt
and SpareBank 1 Næringskreditt
SpareBank 1 Boligkreditt was set up by the banks in the SpareBank 1 Alliance to benefit from capital market funding through the use of covered bonds. The banks transfer mort-gages with very good security to this company. This reduces funding costs and increases the competitiveness of the Spare-Bank 1 banks.
The bank owned a 13.15% stake in SpareBank 1 Boligkreditt as of 31 December 2013 and the share of its result for 2013 was NOK 29 million (NOK 33 million).
The SpareBank 1 banks established SpareBank 1 Nærings-kreditt in 2009 based on the same model and with the same management as SpareBank 1 Boligkreditt. SpareBank 1 Nord-Norge owned a 20.92% stake in the company and the share of its result for 2013 was NOK 5 million (NOK 4 million).
Bank 1 Oslo Akershus
As of 31 December 2012, SpareBank 1 Nord-Norge owned a
Akershus to 4.8%. This agreement was signed together with SpareBank 1 SR-Bank and SpareBank 1 SMN, with Sparebanken Hedmark as the buyer. The transaction’s sale price matched the book value of Bank 1 Oslo Akershus AS as of 30 September 2012. The agreement was approved by both the Financial Su-pervisory Authority of Norway and the Ministry of Finance. The transaction was formally executed in the second quarter 2013. The share of the result has not been incorporated in 2013 (NOK 25 million).
BN Bank
SpareBank 1 Nord-Norge owned a 23.5% stake in BN Bank as of 31 December 2013. The share of the result as of the fourth quarter 2013 amounted to NOK 66 million (NOK 52 million) including the effect of amortisation from the date of pur-chase.
In 2013, BN Bank implemented measures to improve profit-ability that have significantly reduced costs and expanded lending margins. The net profit for the period increased from NOK 188 million to NOK 252 million. Loan losses were higher than the expected long-term level. This is due to specific cir-cumstances relating to a few commitments in the corporate market portfolio and losses in BN Bank’s former portfolio in Ålesund (guarantee portfolio). Structural solutions and further internal measures aimed at improving profitability and reducing the risk-weighted balance sheet are in progress. The bank’s application for Advanced IRB is one of these measures.
SpareBank 1 Markets
SpareBank 1 Markets, whose main shareholder was
Spare-Company 2013 2012 2013 2012
Amounts in NOK million
Profit sharing in the consolidated financial statements Profit sharing in the consolidated financial statements Dividends in the parent bank’s financial statements Dividends in the parent bank’s financial statements SpareBank 1 Gruppen AS (19.50 %) 210 96 134 85 SpareBank 1 Boligkreditt AS (13.15 %) 29 33 19 14 SpareBank 1 Næringskreditt AS (20.92 %) 5 4 3 4 SpareBank 1 Utvikling DA (17.74 %) 0 0 0 0
Bank 1 Oslo Akershus (4,90 %) 0 0 25 13
BN Bank ASA (23.50 %) 66 44 52 21 SpareBank 1 Kundesenter AS (14.91 %) 0 0 0 0 SpareBank 1 Verdipapirservice AS (24.90 %) -2 0 0 0 SpareBank 1 Kredittkort AS (19.83 %) -5 0 0 0 SpareBank 1 Markets AS (23.89 %) -1 0 0 0 Total 302 201 210 138
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Norge (23.89%), Sparebanken Hedmark (14.33%), Samspar (23.89%), the Norwegian Federation of Trade Unions (12%) and employees (2%).
In connection with the change in ownership structure, Spare-Bank 1 Gruppen wrote down its stake in SpareSpare-Bank 1 Markets by NOK 132 million in the second quarter 2013. SpareBank 1 Nord-Norge’s share of this write-down was NOK 26 million. The result in SpareBank 1 Markets in the fourth quarter 2013 shows a loss of NOK 11.5 million. SpareBank 1 Nord-Norge’s share of this was NOK 2.8 million.
The share of the result as of the fourth quarter 2013 amounted to NOK -1 million.
Other companies
The Alliance companies SpareBank 1 Verdipapirservice and SpareBank 1 Kundesenter were established at the end of the second quarter 2012. SpareBank 1 Nord-Norge’s stakes in these are 24.9% and 14.91%, respectively. Shares of the results from these totalling NOK -2 million have been incorporated for the full year 2013. The share of the result for 2013 of NOK -5 mil-lion from the 19.83% stake in SpareBank 1 Kredittkort has also been incorporated.
Securities
The consolidated financial statements received NOK 27 million in dividends from equity investments in 2013, and NOK 57 million in net capital gains were recognised for the portfolio. The net capital gains include capital losses of NOK 23 million from a subsidiary, SpareBank 1 Invest AS.
In the bank’s financial statements, dividends amount to NOK 25 million and net capital gains NOK 164 million. Gains and increases in value of NOK 99 million from the sale of the stake in Bank 1 Oslo Akershus are recognised as income. Parts of these gains are eliminated in the consolidated financial state-ments such that the net gains amount to NOK 18 million.
Subsidiaries
The Group’s subsidiaries reported a combined pre-tax profit for the year of NOK 87 million. The profit contribution of NOK 64 million after tax has been consolidated into the consolidated financial statements. Only dividends received from the subsidiaries are recognised, in accordance with the cost method, in the parent bank’s financial statements.
The result in SNN Portefølje AS (formerly SpareBank 1 Nord-Norge Invest AS) was affected by write-downs in some stakes, including NOK 12 million in the investment funds Nord I IS and Nord II IS, NOK 8 million in the stake in Nord-Norge
SpareBank 1 Nord-Norge’s banking operations in Russia, through the North-West 1 Alliance Bank, are 75% owned by SpareBank 1 Nord-Norge and 25% owned by the bank’s Russian partner Bank Tavrichesky in St. Petersburg.
Subsidiaries
Amounts in whole NOK 1,000
Share of the result for 2013 after tax
Dividends for 2013 in the parent bank’s financial statements
Write-downs in 2013 in the parent bank’s financial statements
SpareBank 1 Finans Nord-Norge AS 72 416 52 151 0
SNN Portefølje AS -20 992 0 - 20 000
Nord_Norge Eiendom IV AS 0 0 0
Alsgården AS -3 0 0
EiendomsMegler 1 Nord-Norge AS 11 056 5 200 0
EiendomsMegler 1 Lofoten AS -37 0 0
SpareBank 1 Nord-Norge Forvaltning AS 1 724 901 0
North-West 1 Alliance Bank 1 859 0 0
SpareBank 1 Regnskapshuset Nord-Norge AS* 2 909 0 0
Total 68 935 58 252 - 20 000
Operating costs
Ordinary operating costs for 2013 amounted to NOK 1 209 million, an increase of NOK 89 million, or 7.9%, from 2012. Costs amounted to 1.59% of average total assets, an increase of 0.05 percentage points compared with 2012.
Development of costs relative to average total assets: (2008-13)
The cost/income ratio in the 2013 consolidated financial statements is 47.2%, a reduction from 53.8% in 2012. The nominal costs show an increase of 7.8% for the Group, while the corresponding figure for the parent bank is 2.5%. One important reason for the increase in costs in the Group is the higher level of activities in the bank’s subsidiaries. This is especially true for SpareBank 1 Regnskapshuset Nord-Norge, which completed several acquisitions in 2013. Otherwise, costs are primarily increasing due to the general rise in wages and higher payroll costs for new employees compared with the average for all employees. The financial statements were charged with around NOK 8 million in profit sharing for employees in the fourth quarter 2013. If this cost is ignored, the increase in costs from 2012 to 2013 in the parent bank would be within the target for the average annual increase in costs of a maximum of 2% in the parent bank.
The Group’s personnel costs rose by 9.8% in 2013 and by 2.1% in the parent bank.
Cost reducing measures were implemented in the parent bank in 2013 such as rationalisation measures within staffing and cuts in other costs. Further cost reduction measures are planned to take effect in 2014.
Losses and defaults on loans
The Group’s net losses on loans as of 31 December 2013 amounted to NOK 172 million: NOK 144 million from the corporate market and NOK 28 million from the retail market. Losses in the corporate market are considered to be slightly higher than the economic situation would suggest they should be.
The Group’s total individual loss write-downs as of 31 December 2012 were NOK 244 million, a reduction of NOK
Group write-downs during the year increased by NOK 11 million to NOK 209 million as of 31 December 2013. On the same date, Group write-downs accounted for 0.37% of the Group’s combined gross lending, or 0.26% of gross lending when intermediary loans are included.
In the opinion of the Main Board of Directors, the quality of the loan portfolio is good and the bank is still doing high quality work on Group commitments in default and doubtful commitments. Based on this, and with reference to the region’s good economic performance, the Main Board of Directors believes that the level of losses will remain moderate for the immediate future.
Tax
The Group’s tax cost for 2013 is estimated at NOK 214 million. The tax basis has been reduced by permanent differences and the effects of the exemption model. In accordance with IFRS wealth tax is not a tax cost. NOK 11 million has, therefore, been recognised under other operating costs.
Dividend policy and
allocation of profit for the year
The bank’s dividend policy states that the bank aims to distribute up to 50% of the profit for the year as a dividend (cash dividends and donations for publicly beneficial purposes), the bank’s financial strength permitting. Stricter regulatory requirements for banks’ equity will mean that a dividend rate of less than 50% must be expected in the next few years. The parent bank’s net profit for the period is distributed between the equity certificate holders and the bank’s community-owned capital in accordance with the relative distribution of equity capital between the groups of owners in the parent bank. The equity certificate fraction (the proportion of equity held by equity certificate holders) as of 1 January 2013 was 42.91%. A cash dividend of NOK 1.10 per equity certificate, for a total of NOK 110.4 million, and an allocation of NOK 28.3 million to the dividend equalisation fund have been approved. NOK 43.1 million has been set aside for publicly beneficial purposes. These funds will be distributed via the bank’s grant fund: the SpareBank 1 Nord-Norge Fund. The bank’s Supervisory Board has approved the annual financial statements and allocation of the result.
Allocation of the result for 2013 Total
Parent bank's net profit for the year 915.1
Distribution/dividend 153.5
Retained profit 761.6
of which to dividend equalisation fund 282.3
of which to Savings Banks Fund 479.3
Total allocations 915.1
Retained portion, parent bank's profit 83.2 %
Retained portion, Group profit 84.1 %
1,80% 1,60% 1,40% 1,20% 1,00% 0,80% 0,60% 0,40% 0,20% 0,00% 2008 2009 2010 2011 2012 2013
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The Group’s deposits fund 78.5% of gross lending as of 31 December 2013. The corresponding fi gure at year-end 2012 was 75.6%. The deposit coverage ratio is considered to be good.
Portfolio of certificates and bonds
The Group’s portfolio of certifi cates and bonds totalled NOK 11,207 million as of 31 December 2013. The corresponding fi gure as of 31 December 2012 was NOK 12,444 million. The holdings of interest-bearing securities include covered bonds issued under the government’s swap scheme.
As of 1 July 2008, a large portion of the bank’s interest-bearing securities in the trading portfolio were reclassifi ed from ‘fair value through profi t and loss’ to categories that are valued at amortised cost. Had the reclassifi cation not been performed, the Group would have had to recognise a charge of NOK 212
Capital adequacy ratio
On 1 January 2007, SpareBank 1 Nord-Norge received per-mission from the Financial Supervisory Authority of Norway to use internal calculation methods (IRB - Internal Rating Based Approach) for credit risk.
Capital adequacy ratio as of 31 December 2013
Group Parent Bank
2013 2012 2013 2012
Core Tier 1
capital ratio 12.29 % 10.31 % 16.23 % 11.69 %
Balance sheet performance
Amounts in NOK million 31.12.13 31.12.12 Change Change in %
Balance
Total assets 77 520 75 329 2 191 3 %
Gross lending 57 282 54 551 2 731 5 %
Lending to customers including intermediary loans 80 581 75 914 4 677 6 %
Deposits from customers 44 940 43 588 1 352 3 %
Group’s gross lending (including transferred home mortgages) and deposits as of 31 December 2013, by the various markets
30 % 70 % RM incl. Boligkreditt CM/PM LOANS RM CM PM 28 % 17 % 55 % DEPOSITS
If the full impact of the IRB approach is included (without a ‘floor’) the Group’s core Tier 1 capital ratio amounts to 14.29%. The bank’s financial strength is considered good in relation to the current regulatory minimum requirements.
The Group uses proportional consolidation for its capital adequacy reporting for the stakes in SpareBank 1 Boligkreditt, SpareBank 1 Næringskreditt, BN Bank, SpareBank 1 Markets and SpareBank 1 Verdipapirservice. As a result of the transitional rules in the new regulations, the IRB banks were to benefit in full from the reduced regulatory capital adequacy requirements starting in 2010. This has been postponed until 2017, and the transitional rules (the ‘floor’) have therefore also been applied in 2013.
SpareBank 1 Nord-Norge submitted an application for A-IRB approval to the Financial Supervisory Authority of Norway in mid-June 2013. This application is expected to be processed within 12 months. Permission to use A-IRB in the calculation of capital requirements for lending to the corporate market is important for the bank’s ongoing adaptation to new capital requirements.
Stricter new regulatory requirements for banks’ capital ade-quacy entail a considerable improvement in banks’ financial strength. SpareBank 1 Nord-Norge has already implemented and will continue, a number of measures to improve the bank’s capital adequacy, including:
• various measures to increase earnings, including higher margins on loans
• reduced dividend payout ratio
• reduced lending growth, especially in the corporate market
• application for A-IRB approval
• measures to increase capital utilisation
• selling down of the bank’s stake in Bank 1 Oslo Akershus
• utilisation of capital allocated to the Sparebankstiftelsen SpareBank 1 Nord-Norge foundation
In the opinion of the Main Board of Directors, it would be possible to achieve the new capital requirements using the measures mentioned above. However, this would require heavily restricting the Group’s lending growth – especially within the corporate market. Continuing to significantly restrict lending growth would impact short-term and long-term earning opportunities and the Group’s long-long-term market position. Profitable participation in Northern Norway’s growth forms an important part of the bank’s socio-economic role as the region’s own bank. Based on this, on 9 September 2013 the bank’s Supervisory Board decided to strengthen the bank’s equity through a rights issue of up to NOK 750 million. A successful rights issue for this amount was, therefore, carried out at the end of September. At the same time, a private placement for the Group’s employees was carried out on the basis of previous authorisations granted by the Supervisory Board. The latter raised gross proceeds of NOK 22.5 million. The due date for payments for the new equity was 8 October 2013 and the new capital was recognised in the fourth quarter 2013.
Corporate governance
The governance of SpareBank 1 Nord-Norge is based on the Norwegian Accounting Act and the principles stated in the Norwegian Code of Practice for Good Corporate Governance. Please see the special section in the annual report on ‘Corporate governance’ which also covers the requirements of section 3-3b of the Norwegian Accounting Act. It provides a detailed description of SpareBank 1 Nord-Norge’s compliance with the Code of Practice.
Good corporate governance in SpareBank 1 Nord-Norge is defined as the aims, targets and overall principles in accordance with which the bank is managed and controlled for the purpose of safeguarding the interests of the owners and other groups in the bank. The Group’s corporate governance principles shall ensure the sound and appropriate management of the bank’s assets and liabilities, providing additional assurance that all agreed targets, aims and strategies are met and adhered to. The bank’s equity certificates are listed on the Oslo Stock Exchange. The Articles of Association include no regulations that limit their negotiability. The Main Board of Directors is not aware of any agreements between the equity certificate holders that limit their negotiability or the exercising of the voting rights they represent.
Risk and capital management
Risk and capital management is one of the Main Board of Directors’ priority areas, and it supports the Group’s strategic ambitions, goals and development. The Group stresses the importance of good risk management that ensures financial stability and prudent asset management over time.
The Group’s control and management model clearly defines responsibilities and roles. SpareBank 1 Nord-Norge invests a great deal of resources in establishing, following up and developing the Group’s quality and risk management systems and processes.
The Group’s principles and framework for risk management and internal control are set out in the bank’s ‘Policy for Risk Management and Compliance’. This is reviewed annually by the Main Board of Directors and forms the Group’s internal framework for good management and control. The framework provides guidelines for the Group’s overall approach towards risk management, and is intended to ensure that the Group has an effective and appropriate process for this.
Please also see the sections on ‘Risk management’, ‘Capital management’ and ‘Corporate governance’ in the annual report. This following section describes internal control and risk management in more detail.
Internal control
The Main Board of Directors reviews the framework for manage- ment and control and the ongoing follow-up of the development of key quality and risk indicators annually. Each year, all man- agers must confirm that laws, regulations, guidelines and routines
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The Main Board of Directors receives an annual independent assessment of the Group’s risks, and whether internal control is working in an appropriate and satisfactory manner. The independent assessment is carried out by the bank’s internal auditor and the responsible auditor.
Risk management
Financial activities entail a need to control and manage risk. SpareBank 1 Nord-Norge’s Main Board of Directors stresses the importance of good risk management as a strategic tool for increasing value creation, and is responsible for monitoring the Group’s risk exposure. This Main Board of Directors sets limits for all the key business and risk areas, which in turn are measured and reported on in accordance with the adopted guidelines.
The risk management and compliance department prepares a quarterly summary of the risk picture for the Group. This forms the basis for the Main Board of Directors’ discussions and evaluations of necessary measures. A key part of this review is an assessment of the Group’s financial strength, profitability and efficiency based on developments in the underlying portfolios and risks.
Business risk
The Group’s business risk arises from potential falls in earnings, significant changes in capital requirements due to new regulatory requirements, and/or declining confidence, or damage to its reputation, in the market due to serious events.
Business risk can arise as a result of various risk factors and the Group makes use of a broad range of tools (quantitative and qualitative) to identify and report such risks.
Good strategic planning is the most important tool for reducing business risk, and the Board reviews business strategies and plans every year. The Group’s limits and guidelines for good corporate governance and the SNN Code play an important role in the commercial management of its operations. The guidelines focus on attitudes and ethics and how SpareBank 1 Nord-Norge does business with its customers and other associates.
New, stricter requirements for financial strength and liquidity mean the bank’s earnings must be improved. This must be achieved through higher earnings, more efficient operations and good capital management.
Credit risk
In 2013, the Group experienced good lending growth in the retail market and low lending growth in the corporate market. The performance of the portfolio showed that the growth
medium-sized customers. The performance of the combined credit portfolio confirms that economic development in the region is strong.
The credit strategy emphasises the establishment of targets and limits for the ongoing management of credit risk. The bank’s rules and regulations relating to the granting of credit and the associated authorisations are linked to the probability of default and collateral coverage, and they apply within the credit strategy and overall credit policy guidelines. The rules and regulations relating to the granting of credit are reviewed annually by the Main Board of Directors.
The Main Board of Directors continuously monitors the risk in the bank’s loan portfolio. This is done to ensure that trends are uncovered as early as possible and any necessary adjustments can be made to the credit policy.
Market risk
The Group’s market risk is classified as moderate. The portfolio of assets that are directly exposed to market fluctuations represents a small part of total assets, and the bank is involved in securities trading for own account to a limited degree only. The book value of equities and units as of 31 December 2013 was NOK 712 million, an increase of NOK 159 million from the year before. The bond and certificates portfolio totalled NOK 11,207 million as of 31 December 2013. This represents a reduction of NOK 1,237 million since 31 December 2012. Stress tests for market risk show that the bank and Group have the capacity to keep the level of risk within the adopted limits. Changes in market values, together with the profit contribution from associated companies, mean that profits may be exposed to greater fluctuations than was previously the case. Stricter financial strength requirements require a stronger focus on the Group’s capital use and total risk tolerance.
Liquidity risk
The bank’s liquidity risk is regarded as moderate. SpareBank 1 Boligkreditt AS and SpareBank 1 Næringskreditt AS represent important sources of funding for the Group, and there remains potential for increased transfers of loans to these companies. When the expected growth in lending and refinancing of current capital market funding upon maturity are taken into account, the bank is of the opinion that its refinancing needs for 2014 are fully manageable.
Securities issued and debt to financial institutions amounted to NOK 20,620 million as of 31 December 2013, a reduction of NOK 209 million compared with 2012. The work and focus on the area of liquidity is a high priority for the bank.
un-• The LCR standard will be phased in over a 4-year period, but for SIFI banks (systemically important financial institutions) the LCR requirement is 100%, and for Liquidity Indicator 1 the requirement is 110%.
In connection with the implementation of Basel III and new liquidity requirements, the Group’s overall liquidity risk will be a high priority in the bank. The area will also be prioritised in 2014, both with regard to ongoing follow-up, stress testing and reporting. For the same reason, a prudent funding strategy is still required. It must take different considerations into account, including balancing between the lowest possible borrowing costs in the capital market and the costs related to diversification of the bank’s funding with regard to terms to maturity and funding sources.
The Main Board of Directors considers the Group’s liquidity strategy and contingency plans at least once a year.
The Group’s deposit coverage ratio was 78.5% as of 31 December 2013 compared with 75.6% in 2012 and 80.9% in 2011. The Group has enjoyed a positive trend in its deposit coverage ratio over the last several years. The fall in 2012 was due to high lending growth and negative deposit trends from the public sector. A good deposit coverage ratio and stable customer deposits are important for the bank’s liquidity management, and the bank expects new liquidity buffer requirements and the monitoring of liquidity risk to increase the competition for stable customer deposits.
Operational risk
The importance of managing operational risk is well under-stood. Therefore, special systems for monitoring, documenting and reporting risk and improvement areas have been established. The Group pays a lot of attention to external threats such as crime and fraud. Risk analyses are conducted based on the Financial Supervisory Authority of Norway’s Risk and Vulnerability Analysis and the Financial Services Industry’s threat assessment.
Given the inherent risks of using information technology, the area is subject to constant monitoring. The internal auditor also conducts independent reviews and tests of the bank’s security in this area. Incidents that have affected, or may affect, the Group’s profitability and/or its reputation are followed up systematically. There is also a close collaboration within the SpareBank 1 Alliance to ensure good and stable operations. There were no serious incidents in 2013, and operational losses were low. In the opinion of the Main Board of Directors, the area satis-factorily supervised but constant vigilance is required.
Ownership risk
The stakes in joint ventures have increased significantly and total NOK 2 436 million (cost price for the parent bank) and NOK 3 564 million (Group) as of 31 December 2013. These joint venture companies are important to the Group’s overall business model, and the bank continuously assesses which stakes are strategically important and which can be classified
The risk in the various companies is moderate, but the bank is indirectly exposed to significant market risk through its equity stake in SpareBank 1 Gruppen.
The Group holds a capital adequacy reserve for SpareBank 1 Gruppen. For the stakes in SpareBank 1 Boligkreditt, Spare- Bank 1 Næringskreditt, BN Bank, SpareBank 1 Markets and SpareBank 1 Verdipapirservice, the Group uses proportional consolidation to calculate the regulatory capital requirement. The risk-adjusted capital is calculated for all the significant risk areas. This is an important prerequisite for assessments related to risk exposure, capital buffers and solvency targets in order to secure the Group’s operations even under stressed market conditions.
One of the overall aims is to ensure that the Group’s combined risk level is moderate and within the limits determined by the Group’s capital and other provisions. The goal is for good risk management to ensure the Group’s earnings and profit performance are within acceptable stability and predictability limits.
Capital management
SpareBank 1 Nord-Norge’s aim is to manage all significant risks in accordance with the best practices for comparable banks. Processes have been established to assess the capital require-ments in light of the risk profile and the quality of the established risk management and control systems.
The capital adequacy regulations set minimum requirements for core Tier 1 capital, Tier 1 capital and primary capital, and cover credit risk, market risk and operational risk. Financial institutions must also carry out an internal capital adequacy assessment process (ICAAP). The Financial Supervisory Authority of Norway has provided guidelines for the content of the process, and the capital adequacy assessment shall include all significant risks, including risks beyond the regulatory minimum requirement. The assessment must also be forward-looking and based on satisfactory methods and data. Uncertainty relating to the calculations, methods and data must also be taken into account. The Group’s risk and capital situation is assessed and summed up in a separate report to the Main Board of Directors every quarter.
The Group’s financial strength targets are included as key figures in the strategy and planning process.
New regulatory requirements
New EU regulations for financial institutions and securities firms were adopted on 27 June 2013. The regulations, known as ‘CRD IV’ (Capital Requirements Directive IV), came into effect in the EU on 1 January 2014. CRD IV is mainly based on the Basel Committee’s capital and liquidity standards (Basel III). CRD IV consists of regulations containing minimum re-quirements for various forms of capital, quantitative liquidity requirements, provisions concerning major commitments and the disclosure of financial information, as well as a directive containing licensing provisions, provisions concerning the
