3 Key figures. 4 Directors report. 8 Income statement. 9 Balance sheet. 10 Cash flow statement. 11 Equity statement. 12 Notes. 34 Auditor s report

Transcription

1 Annual Report 2017

2 CONTENTS 3 Key figures 4 Directors report 8 Income statement 9 Balance sheet 10 Cash flow statement 11 Equity statement 12 Notes 34 Auditor s report 36 Declaration by the Board of Directors and CEO 37 Information about the company GRAPHIC DESIGN: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS ENGLISH TRANSLATION: Språkverkstaden AS

3 Key figures FIGURES IN NOK 000s INCOME STATEMENT Profit/loss after taxation Net interest margin 1,24 % 1,06 % Profit/loss after tax as a % of average total assets 0,88 % 0,74 % KEY BALANCE SHEET FIGURES Gross loans to customers Impairment provisions Equity Total assets Average total assets OTHER KEY FIGURES Cost-to-income ratio 4,57 % 6,40 % Impairment charge as a % of gross loans 0,03 % 0,01 % Impairment provisions as a % of gross loans 0,09 % 0,08 % Return on equity after tax *) 11,44 % 8,49 % Capital adequacy ratio 21,74 % 20,00 % Liquidity Coverage Ratio (LCR) 174 % 152 % BALANCE SHEET YEAR-ON-YEAR GROWTH Growth in total assets 23,67 % 4,05 % Growth in customer lending 23,86 % 7,11 % Information about the loan portfolio Surplus value of cover pool (NOK millions) Surplus value of cover pool (%) 22,6 % 20,7 % Loan-to-value ratio, indexed 56,9 % 53,3 % Loan-to-value ratio, not indexed 58,1 % 58,2 % Face value of covered bonds issued (NOK millions) Substitute assets other than loans (NOK millions) 249,3 263,5 Weighted average time since issue of loans (years) 3,4 3,4 Weighted average remaining term of loans (years) 17,1 16,3 Proportion of variable-rate loans 100 % 100 % Proportion of flexible mortgages 20,8 % 24,5 % Average loan value (NOK millions) 1,30 1,25 Number of loans Proportion of loans secured by an overseas property 0 % 0 % *) Calculated using the opening equity balance adjusted for capital increases and dividend payments. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

4 Annual Report 2017 HIGHLIGHTS Bustadkreditt Sogn og Fjordane AS (BSF) is a whollyowned subsidiary of Sparebanken Sogn og Fjordane, based at the Bank s head office in Førde. In January 2009 Sparebanken Sogn og Fjordane was licensed by the Financial Supervisory Authority of Norway to set up a mortgage credit institution that would issue covered bonds. By the end of 2017 it had issued covered bonds with a face value of NOK 13.1 billion, and the total value of its cover pool was NOK 16.0 billion. On an adjusted basis, this is around 22.6% more than the value of the covered bonds issued. The cover pool was made up of residential mortgages with a gross value of NOK million, as well as bank deposits with a total value of NOK million. Bank deposits are considered substitute assets, which made up 1.55% of the total cover pool. All of the Company s loans are subject to variable interest rates. 20.8% of the loan book was made up of flexible mortgages. Establishing BSF was an important part of Sparebanken Sogn og Fjordane s strategy for securing long-term liquidity. The Company has also played a decisive role in enabling the bank to offer its customers mortgages on competitive terms. At the end of 2017, the Company held 12,240 mortgages. The average loan-to-value ratio (weighted by initial value) was 56.9%, and the weighted average loan term was 17 years. The weighted average time since the loans were granted was 3.4 years. The average loan per customer was NOK 1.30 million. The Company s total gross lending grew by NOK 3,070 million over the past year. The geographic distribution of our mortgage portfolio, based on the addresses of the borrowers, was as follows: Region Share Western Norway 80,1 % Eastern Norway 18,0 % Central Norway 0,9 % Southern Norway 0,4 % Northern Norway 0,5 % Overseas 0,1 % Total 100,0 % County 5 biggest counties measured by loan volume Share Sogn og Fjordane 51,8 % Hordaland 25,5 % Oslo 9,4 % Akershus 5,6 % Rogaland 1,7 % Rest of Norway 6,0 % Total 100,0 % 5 biggest municipalities measured by loan volume Municipality Share Bergen 21,2 % Førde 12,0 % Flora 11,1 % Oslo 9,2 % Sogndal 3,4 % Rest of Norway 43,1 % Total 100,0 % The distribution of the loans by value is as follows: Loan value Distribution by loan value Volume (NOK millions) NOK 0 1 million NOK 1 2 million NOK 2 3 million over 3 million Total INCOME STATEMENT In 2017 the Company made an operating profit before loan impairment charges of NOK million. The loan impairment charge was NOK 4.5 million, which related to collectively assessed impairment provisions. Profit for the year after tax was NOK million. In 2016, profit after tax was NOK 93.6 million. Almost all of the NOK 41.0 million increase is due to good lending margins and falling funding costs, combined with an increase in total assets. Net interest income was NOK million in 2017, equivalent to 1.24% of average total assets. Other operating income came to NOK 2.0 million. The equivalent figures for 2016 were NOK million in net interest income (1.06% of average total assets), and other operating income of NOK 1.8 million. In 2017, operating expenses were NOK 8.7 million, equivalent to 4.6% of total operating income. Operating expenses in 2016 were NOK 8.7 million (6.4% of total operating income). The cost of issuing bonds and credit rating agency fees both rose. Meanwhile, the cost of IT expenses and services supplied by the parent company fell. The reduction in the cost/income ratio is overwhelmingly due to higher revenues. The Company has no employees, and buys services from Sparebanken Sogn og Fjordane and Evry ASA. All services are bought on market terms. The Company s biggest expense was the purchase of services from Sparebanken Sogn og Fjordane. TRENDS IN NON-PERFORMING LOANS At the close of 2017, the Company had two loans that were more than 90 days in arrears. The value of loans over 30 days in arrears was 0.03% of total loans. Non-performing loans are monitored carefully. 4 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

5 BALANCE SHEET AND CAPITAL ADEQUACY Total assets have increased in line with the loan portfolio, and at 31 December 2017 they totalled NOK 16,322 million. That represents an increase of NOK 3,124 million 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 2017, the Company paid NOK 93 million in dividends to its parent company. This amount was equivalent to the profit retained by the Company in Equity at the close of the year was NOK 1,487 million. All of the Company s equity is core Tier 1 capital, and its core Tier 1 capital adequacy ratio was 21.74%. 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, BSF s covered bond programme was given a long-term rating of Aaa by the credit rating agency Moody s. This rating has remained unchanged since then. After Moody s revised its rating system in 2015, and after Sparebanken Sogn og Fjordane was upgraded to A2, Bustadkreditt Sogn og Fjordane s Aaa rating is considered just as strong as it was. 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 MANAGEMENT Under its licence as a credit provider, BSF 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. BSF 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 danger of losing money as a result of customers or counterparties being unable or unwilling to fulfil their obligations to BSF. The Company has its own rules on which loans it can buy from its parent company. The rules are strict, which means that 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 2017, the Company s average loan-to-value ratio was 56.9%, based on the approved valuations of the collateral established by Eiendomsverdi AS. In 2016, the average loan-to-value ratio was 53.3%. The increase in the average loan-to-value ratio reflects a significant fall in house prices across Norway. 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. Weighted loan-to-value ratio % Under 40% 12% 40-50% 50-60% 60-75% over 75% Market risk Market risk is the risk arising from the Bank s open positions relating to loans and financial instruments whose values fluctuate over time in response to changes in market prices. BSF does not have any investments in shares or foreign currencies, so all of its market risk is related to interest rate 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. 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. BSF 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. The risk management department is responsible for assessing whether the Company has an adequate first line of defence. 17% 36% 15% Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

6 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 of Directors considers the level of operational risk at BSF to be low. EQUAL OPPORTUNITY AND DISCRIMINATION There are three men and one woman on the Board of Directors. The CEO is a woman. The Board of Directors and management believe, like the rest of the Bank, in proactively promoting equal opportunity and preventing discrimination at the workplace. CORPORATE GOVERNANCE BSF s corporate governance principles are based on the Norwegian Code of Practice for Corporate Governance, as drawn up by the Norwegian Corporate Governance Board (NUES). In October 2017 the Company employed a new CEO. The AGM is the Company s highest decision-making body. Amongst other things, the AGM elects the Board of Directors 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 two-year term. The Board is responsible for ensuring that the Company is managed and governed in accordance with laws, rules, the articles of association and specific guidelines adopted by the AGM. The Board of Directors is made up of three members from within the Group and one external member. Five board meetings were held during The Board has drawn up an annual plan for its activities, and one of its main priorities is ensuring that the Board members have sufficient knowledge and expertise between them. The CEO is responsible for the management of the Company, and must follow the guidelines and rules laid down by the Board. The Company must be managed in accordance with the regulatory framework provided by laws, regulations, the Financial Supervisory Authority of Norway s circulars, government rules and the Company s articles of association. 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. Internal controls comply with the Norwegian Internal Control Regulations. All of the reporting units within the Group, including Bustadkreditt Sogn og Fjordane, are responsible for having effective and appropriate internal controls to deal with their own risks. Units must assess risk levels prior to and after riskreduction 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. The Company s internal auditor (PwC) also produces an independent report on internal controls each year. The independent inspector (Deloitte) and external auditor (Deloitte) are two other important elements of the Company s control mechanisms. 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 BSF has an agreement with Sparebanken Sogn og Fjordane setting out the terms on which loans are purchased, transferred and serviced. Other tasks are carried out by employees at Sparebanken Sogn og Fjordane. The CEO is employed by Sparebanken Sogn og Fjordane and seconded to Bustadkreditt Sogn og Fjordane. Internal controls and financial reporting As part of its internal controls, BSF s management must also assess whether 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 the 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. CORPORATE SOCIAL RESPONSIBILITY Please refer to Sparebanken Sogn og Fjordane s annual report, which sets out how the Group, including BSF, meets its corporate social responsibility. 6 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

7 REVIEW OF THE ANNUAL FINANCIAL STATEMENTS The Board believes that the income statement, balance sheet and notes provide sufficient information about the Company s operations and financial position at 31 December The Board believes that the going concern assumption is appropriate. The Board confirms that the going concern assumption has therefore been used in the preparation of the financial statements for POST BALANCE SHEET EVENTS The Board is not aware of any events after 31 December 2017 that have a material impact on the financial statements or on the Company s financial position. STRATEGY AND OUTLOOK FOR 2018 In 2018, BSF 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 groups for its covered bonds are Norwegian and international financial institutions and other investors. The Norwegian economy strengthened over the course of This was the result of expansive fiscal and monetary policy, a weak Norwegian krone, low wage growth and an increase in housebuilding. Since the first quarter of 2017, house prices have been falling. Nationally, house prices were around 6.2% lower at the end of the year than at the end of the first quarter. In Oslo, prices fell by 11% over the same period. One of the important reasons for this was the introduction of new mortgage regulations at the start of The regulations were particularly aimed at curbing prices in Oslo, where price rises in 2016 suggested that a housing bubble was being inflated. Many housing projects were completed during the year, while the influx of people from other countries fell in parallel with the strengthening of the eurozone economies. The combination of these factors led to falling house price across much of Norway, including Sogn og Fjordane and Hordaland, where BSF has most of its loan portfolio. Norges Bank s key rate remained unchanged at 0.5% throughout The expectation is that the central bank will put up interest rates for the first time around the end of However, interest rates will remain low. This, combined with low unemployment and the prospect of slightly faster real wage growth, suggests that Norwegian households will continue to enjoy a strong financial position in the coming years. If house prices continue to fall, this may act as a brake on the Norwegian economy. In spite of this, the Board of Directors believes that the macroeconomic picture means that demand for mortgages will remain strong over the next few years. Strong competition for borrowers will continue to put pressure on margins. In spite of this, the Board expects the profitability of the Company to remain satisfactory. Looking forward, BSF will remain an important source of long-term funding for the Sparebanken Sogn og Fjordane group. We are working proactively to ensure that we will be able to buy a larger proportion of Sparebanken Sogn og Fjordane s mortgage portfolio, and hence issue more covered bonds. ALLOCATION OF PROFIT FOR THE YEAR BSF made a profit of NOK million. The Board recommends that NOK million after tax be paid in dividends to the parent company. The remainder of the profit, NOK 0.6 million, will be transferred to other equity. This high dividend is considered justified in view of BSF s strong capital position. Førde, 13 February 2018 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Frode Vasseth Chair Hallvard Klakegg Ingeborg Aase Fransson Peter Midthun Irene Flølo CEO Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

8 Income statement Note Interest income Interest expenses Net interest income 14, Commission income Net commission income Net gains/losses on financial instruments Total other operating income Net other operating income Total operating income Wages, salaries, etc Administration expenses 15, Other operating expenses 15, Total operating expenses Operating profit/loss before loan impairment charge Impairment provisions 10, Operating profit/loss Tax expense Profit/loss for the financial year COMPREHENSIVE INCOME Profit/loss for the financial year Other comprehensive income 0 0 Comprehensive income for the financial year Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

9 Balance sheet ASSETS Note Loans and advances to credit institutions 7, Loans to customers 8, 10, Commercial paper and bonds 19, Deferred tax assets Other current assets Total assets DEBT AND EQUITY Liabilities Debt to credit institutions Debt securities in issue Tax payable Deferred tax Other liabilities Total liabilities Paid-up equity Share capital Total paid-up equity Retained earnings Other equity Proposed allocation for dividends Total retained earnings Total equity Total liabilities and equity Førde, 13 February 2018 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Frode Vasseth Chair Hallvard Klakegg Ingeborg Aase Fransson Peter Midthun Irene Flølo CEO Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

10 Cash flow statement Note Profit/loss before taxation Loan impairment charge Tax paid Reduction/increase (-) in loans and advances to customers Other non-cash transactions A) Net cash flow from operating activities Reduction/increase (-) in investments in commercial paper and bonds B) Net cash flow from investment activities Increase/reduction (-) in loans from credit institutions Increase/reduction (-) in debt securities Increase/reduction (-) in paid-up share capital Dividends C) Net cash flow from financing activities D) Net cash flow during the year (A+B+C) Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents Breakdown of cash and cash equivalents Deposits at other financial institutions Total Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

11 Equity statement PAID-UP EQUITY Share capital RETAINED EARNINGS Other equity Total equity Opening balance Dividends paid Profit/loss for the reporting period Equity transactions New paid-up equity Closing balance Opening balance Dividends paid Profit/loss for the reporting period Equity transactions New paid-up equity Closing balance The proposed dividend for 2017 is NOK 134,000,000. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

12 Notes to the financial statements 1 Accounting principles 2 Critical accounting estimates 3 Segments 4 Capital adequacy ratio 5 Risk 6 Credit risk 7 Loans and advances to credit institutions 8 Breakdown of loans and guarantees 9 Loan-to-value ratio and cover pool 10 Changes in impairment reserve for loans and guarantees 11 Impairment of loans and guarantees 12 Sensitivity analyses 13 Liquidity risk 14 Net income from financial instruments 15 Operating expenses 16 Remuneration of senior management and the Board of Directors. Transactions with related parties 17 Auditor s fee 18 Tax expense 19 Classification of financial instruments 20 Valuation of financial assets 21 Commercial paper and bonds 22 Other current assets 23 Debt to credit institutions 24 Debt securities in issue 25 Other liabilities 26 Off-balance-sheet obligations 27 Disputes 28 Share capital and shareholder information 12 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

13 Notes to the financial statements NOTE 1 ACCOUNTING PRINCIPLES GENERAL Bustadkreditt Sogn og Fjordane is a wholly-owned subsidiary of Sparebanken Sogn og Fjordane. The Company was established to issue covered bonds on behalf of the bank. Bustadkreditt Sogn og Fjordane was founded in 2009 and has its head office in Førde. The 2017 financial statements for Bustadkreditt Sogn og Fjordane AS were discussed and adopted at the Board meeting of 13 February All amounts in the accounts and notes are given in thousands of NOK unless otherwise stated. ACCOUNTING STANDARDS APPLIED The financial statements have been prepared in accordance with Section 3 9 of the Norwegian Accounting Act and the regulations on the simplified application of IFRS issued by the Norwegian Ministry of Finance on 3 March In general this means that recognition and measurement principles follow international accounting standards (IFRS) and that the financial statements and notes are presented in accordance with the Norwegian Accounting Act and generally accepted accounting principles. CHANGES TO ACCOUNTING PRINCIPLES In the event of fundamental accounting reforms/changes to accounting principles, the figures for previous years must be restated 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. AMENDMENTS TO STANDARDS AND INTERPRETATIONS APPROVED BY THE EU None of the changes to standards or interpretations introduced in 2017 affected the Company s financial statements for ESTIMATES When preparing the financial statements, certain estimates are made that affect reported amounts. Note 2 sets out significant estimates and assumptions in greater detail. Assets and liabilities are included on the balance sheet from the date on which the Company achieves genuine control over the assets and takes on genuine liabilities. Assets are taken off the balance sheet on the date on which genuine risk relating to the assets is transferred and the Company no longer has genuine control over the assets. 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 or 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 at amortised cost Financial assets and liabilities held for trading purposes, measured at fair value through profit or 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 or loss. Bustadkreditt Sogn og Fjordane AS ÅRSMELDING

14 Financial assets and liabilities measured at fair value with changes in fair value recognised in profit or loss, in accordance with the Fair Value Option, referred to as FVO. This portfolio covers investments in commercial paper and bonds. These instruments, along with interest swap contracts, are managed and measured jointly at fair value. Loans and receivables, carried at amortised cost This category includes all loans and receivables that are not defined at their fair value in the income statement, and that are not defined as financial assets available for sale. Debt securities in issue are included in this category. VALUATION Initial measurement 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 find external, observable prices, rates or equivalent data, and these prices represent actual and frequent market transactions. For instruments that are traded in an active market, the listed price obtained from a stock exchange, broker or price-setting firm is used. If there is no price listed for the instrument, we break it down into its components and value it on the basis of the prices listed for the individual components. Instruments traded in an active market include financial instruments that are listed on a stock exchange or that are quoted on some other market, such as shares, bonds and commercial paper. They also include financial derivatives that are based on underlying quoted or stock exchange listed prices/indexes/ instruments. Instruments that are not traded in an active market Financial instruments classified in this category are valued using various valuation methods. For example, normal and simple financial instruments are valued using recognised models based on observable market data. Amortised cost method Financial instruments that are not valued at fair value are valued at amortised cost, using the effective interest rate method. This involves calculating the effective interest rate by discounting contractual cash flows over the anticipated term to maturity. Cash flows include arrangement fees, direct transaction costs that are not covered by the customer and any residual value when the anticipated term to maturity expires. Impairment of financial assets Individually assessed impairment provisions If objective evidence that it has fallen in value is found, a loan is written down by the difference between the carrying amount of the loan and the present value of the estimated future cash flows discounted by the loan s effective interest rate. The effective interest rate used is the loan s effective interest rate before evidence of a fall in value was identified, adjusted for changes in the market rate up to the impairment date. Changes in interest rates as a result of changes in the credit risk associated with the loan are not taken into account when adjusting the effective interest rate. 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 income statement under Loan impairment charge. Interest 14 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

15 on loans that have previously been impaired is calculated using the discount rate that was used to calculate the impairment. Interest calculated on the present value of the loan is included under Net interest income. Collectively assessed impairment provisions Loans that have not been individually tested for impairment are assessed collectively in groups. These assessments are based on objective evidence of falls in value on the balance sheet date that can be linked to the group. The groups are defined as loans with similar risk and valuation patterns based on the classification of customers by risk classes. The need for impairment provisions is calculated for each customer group on the basis of an assessment of the current economic climate and historical losses for the customer group in question. Collectively assessed impairment provisions reduce the loans carrying amount. Changes in valuations for the reporting period are recognised in the income statement 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 INCOME STATEMENT 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». 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». 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». TAX EXPENSE The tax expense stated in the income statement includes both tax payable on income and assets, and changes to deferred tax for the financial period. Deferred tax/deferred tax assets are calculated as 24% of temporary differences that exist between accounting and taxable values at the close of the year. Deferred tax is calculated using the tax rates and regulations that apply on the balance sheet date, or that are likely to be adopted and will apply when the deferred tax asset is realised or the deferred tax becomes payable. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

16 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 income statement 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 income statement 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 or loss. Interest income on impaired loans is calculated as the effective interest rate on the carrying value. 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. ADOPTED ACCOUNTING STANDARDS AND OTHER CHANGES THAT MAY AFFECT FUTURE FINANCIAL REPORTING Relevant standards and interpretations that have been adopted prior to the presentation of the consolidated financial statements, but that will be implemented at a later date, are listed below. The Company intends to implement relevant changes as and when they come into force, provided that the EU approves them before the financial statements are prepared. IFRS 9 Financial instruments IFRS 9 Financial instruments will replace IAS 39 Financial instruments recognition and measurement. IFRS 9 will introduce changes to the recognition, classification, measurement and derecognition of financial instruments, as well as to hedge accounting. IFRS 9 has three primary measurement categories for financial assets: amortised cost, fair value through profit or loss and fair value through comprehensive income. Financial assets are classified in one of these three categories based on how they are managed and on their contractual cash flow characteristics. This classification is done on initial recognition. For financial assets, a distinction will be made between debt instruments, derivatives and equity instruments. All financial assets that are not derivatives or equity instruments are classified as debt instruments. For financial liabilities, there are only minor changes from IAS 39. One of the changes is that the standard introduces a new requirement for financial liabilities designated at fair value, which is that changes in fair value attributable to changes in credit risk must be presented in other comprehensive income rather than in the income statement. The standard is to be applied retrospectively, except in the area of hedge accounting, but there is no requirement to present comparative figures. With only a few exceptions, the rules on hedge accounting will be applied prospectively. Impairment IFRS 9 replaces the impairment model based on incurred losses with one based on expected losses. This means that it is no longer necessary for a loss event to have occurred for an impairment to be recognised. Under the expected loss model, the impairment provision is either measured as the 12-month expected credit losses or as the lifetime expected credit losses, depending on whether or not there has been a significant increase in credit risk since initial recognition. 16 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

17 The general approach to impairment will apply to financial assets measured both at amortised cost and at fair value through other comprehensive income. The approach in IFRS 9 will result in slightly greater volatility in impairment charges and is based on economic prospects. Impairments are expected to be recognised at an earlier point in time than is currently the case. This will, for instance, have an impact at the start of an economic downturn. The standard was approved by the EU on 22 November 2016 and will take effect for financial years starting on 1 January Sparebanken Sogn og Fjordane and Bustadkreditt Sogn og Fjordane have participated in a joint project with Sparebanken Sør, Helgeland Sparebank and Fana Sparebank to develop a model for valuing the Bank s loan portfolio in accordance with the new rules in IFRS 9. In 2017, the IFRS project has continued developing the model, calculating impacts and setting parameters. Expected credit losses are calculated using models for probability of default (PD), loss given default (LGD) and exposure at default (EAD). Three different macroeconomic scenarios are used to take into account the non-linear nature of expected losses. A weighted average of the expected losses under the three scenarios is reported as the loss allowance. The losses calculated by the model are affected by changes in the PD and the values of collateral. Changes in these factors are used as inputs in the scenarios, and adjustments are made in view of macroeconomic conditions. Expected changes in the unemployment rate and house prices are two of the important macroeconomic variables that indirectly influence the loss allowances calculated by the model. This is because any expected changes in these factors affect the solvency of customers (and hence the PD) and the value of the bank s collateral, which in turn has an impact on the LGD. We assume that any deterioration in the macroeconomic variables will increase the PD and reduce the value of collateral, and these are the values that we adjust to illustrate a recession. The likelihood of the various scenarios playing out is kept unchanged, but their impacts are modified by adjusting the PD and value of our collateral. The Company s management has no influence over the loss allowance estimated by the model. Responsibility for assessing the macroeconomic situation and adjusting the variables in the scenarios lies with our experts working in areas like credit and risk management. The credit department is also responsible for assessing whether the risk profiles of individual customers are higher than the models suggest, and hence whether they need to be monitored extra closely. This may also have implications for how the customers are dealt with by the loss model. Credit losses are split into three stages. If the credit quality has not changed significantly since initial recognition, expected credit losses are calculated for the coming 12 months (stage 1). If the credit quality has changed significantly, credit losses are calculated for the whole expected life of the loan (stage 2). For individually assessed impairment provisions, there are no significant differences from the rules in IAS 39, but they are now referred to as stage 3, together with losses on non-performing loans that have not been individually impaired. A combination of quantitative and qualitative factors are considered to determine whether there has been a significant change in credit quality. The most important quantitative factor is any change in the probability of default (PD), including both absolute and relative changes. A minimum PD has also been set for transfer to stage 2. This is less sensitive at the lower end of the risk scale and more sensitive at the higher end of the risk scale. The loss allowance for mortgage lending to customers with good credit scores backed by strong collateral will be lower under the new model than under the old one. Consequently, the transition to IFRS will reduce our impairment provisions at 31/12/2017 by NOK 8.5 million (i.e. from NOK 14.5 million to NOK 6.0 million). Equity will thus increase by NOK 6.5 million, and our capital adequacy ratio will increase from 21.74% to 21.84%. The Company has never realised any losses on its loans to customers, and we believe that the risk level associated with the portfolio remained low at the end of We therefore believe that the lower loss allowance under the new model is justified. A comparison with the impairment provisions at other Norwegian credit institutions also suggests that it is reasonable to reduce our impairment provisions from their current levels. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

18 With the new model there may in the future be greater fluctuations in losses between periods than with the current model, since the new model is more sensitive to changes in credit risk. The changes in IFRS 9 relating to new categories and presentation will only have a small impact. There are various new and revised disclosure requirements. For instance, the note on loan impairments will be revised, and it will be necessary to break down loss allowances by stages 1, 2 and 3. Our impairment model meets the requirements stipulated by IFRS 9 and will be implemented in January Other changes Not all amendments to accounting standards and other changes that have been adopted are included above. Those that are not included will either not have a significant impact or are not relevant to the Company. NOTE 2 CRITICAL ACCOUNTING ESTIMATES Estimates and judgements are continuously reassessed, and are based on past experience and other factors, such as expectations of probable future events. The Company prepares estimates and makes assumptions about future developments. Accounting estimates produced on the basis of this rarely entirely correspond with what actually happens. Estimates that constitute a significant risk of changes to the carrying amount of assets and liabilities over the coming financial year are discussed below. Fair value of financial instruments For securities that are not listed and for which there is not an active market, the Company uses valuation techniques to determine their fair value. The Company makes its assessments and uses methods and assumptions that in so far as it is possible are based on market conditions on the balance sheet date. Thus, valuations are based on the most recent private placement price, any transaction prices that we are aware of and discounted cash flows. We also obtain valuations and estimated credit spreads from external brokers. Impairment provisions An impairment provision shall be made when there is objective evidence of a fall in value. Objective evidence that a loan is impaired 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. To decide whether there exists objective evidence justifying collectively assessed impairment provisions, we use models that have been developed to calculate credit risk, as well as our own data on the loans statistical remaining term to maturity. All impairment provisions are based on discounted values, with the loan s internal rate of return before impairment being used as the discount rate. In principle, all cash flows from loans and groups of loans must be identified, and an assessment is made as to what cash flows are at risk of default. With the large number of loans that are subject to assessment at an individual level, these calculations have to be based on the specifics of the loans and past experience. The models that are used to calculate credit risk are evaluated and validated regularly. This is also true of the model for collectively assessed impairment provisions. Changes are implemented in order to ensure that estimates of future losses are based on past experience, our knowledge of the Bank s portfolio and macroeconomic prospects. For further details of the approach to individually and collectively assessed provisions, see Note 1 Accounting Principles. NOTE 3 SEGMENTS The Company has one main segment. This segment consists of loans to retail customers and a small volume of loans to private businesses. All of the Company s loans have been bought from Sparebanken Sogn og Fjordane. The Company does not have any operations outside Norway. Customers with overseas addresses are classified as part of the Norwegian operations. 18 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

19 NOTE 4 CAPITAL ADEQUACY EQUITY AND SUBORDINATED DEBT Share capital and share premium account Other equity Equity Other core capital 0 0 Deductions: Valuation adjustment (prudent valuation rules) Net core capital Core Tier 1 capital Net supplementary capital 0 0 Net equity and subordinated debt BASIS FOR CALCULATION Credit risk Institutions Retail loans Residential mortgage loans Overdue advances Covered bonds Other advances Total calculation basis for credit risk Operational risk Total calculation basis Excess equity and subordinated debt CAPITAL ADEQUACY RATIO Capital adequacy ratio 21,74 % 20,00 % Core capital adequacy ratio 21,74 % 20,00 % Core Tier 1 capital adequacy ratio 21,74 % 20,00 % Unweighted core capital ratio 8,21 % 7,52 % 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. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

20 NOTE 5 RISK Bustadkreditt Sogn og Fjordane AS (BSF) 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 at BSF are updated quarterly. Estimated values provided by Eiendomsverdi AS, used alone or in combination with valuations from surveyors or estate agents, determine the approved values for properties. The first tranche of loans from Sparebanken Sogn og Fjordane was bought in March Since then, the market value of residential property has risen. Sparebanken Sogn og Fjordane services the loans held by BSF. The loans are performing well, and are closely monitored. At 31 December 2017, the Company had no loans that were more than 90 days in arrears. Around 49% of Bustadkreditt Sogn og Fjordane AS s loan portfolio has a loan-to-value ratio of less than 60%. The Company considers its loan portfolio to be low-risk. The figure below shows the weighted loan-to-value ratio for the loans held by BSF. The loans held by BSF are granted by Sparebanken Weighted loan-to-value ratio Sogn og Fjordane, and the credit scoring of mortgage customers follows the credit scoring 40 procedures of the parent company. Customers who 36% apply for a mortgage are carefully assessed on the 35 basis of the collateral, their ability to service the loan, their debt levels and the probability of default. 30 The probability of default is calculated in the model for application scoring. Consideration is also given 25 to the risks associated with factors such as the 20% customer s situation in life, employment situation 20 17% and education. Procedures have also been put in 15% place for transferring loans to BSF, specifying the 15 12% criteria that must be fulfilled by the loans in order for them to be moved to the Company. These 10 criteria comply with all regulatory requirements. In addition the bank has additional internal 5 restrictions on the kinds of loans that can be transferred to the company. Loans that are held by 0 Under 40% 40-50% 50-60% 60-75% over 75% BSF are also monitored very carefully in relation to non-performance. BSF also has risk management procedures in place that have been approved by the Board, which set out the checks that must be made in order to minimise credit risk, and allocate 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 portfolio 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 BSF s exposure to any given counterparty. In order to protect itself against losses, BSF only has exposure to financially sound counterparties. 20 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

21 Liquidity risk Liquidity risk is the risk that BSF 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. 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 BSF genuinely satisfy all of the relevant requirements. Section of the Financial Institutions Act 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 requirements of the law. Establishing these databases 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 requirements 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. Credit reports, finance reports and liquidity reports are prepared monthly, and are reviewed by the Board on a quarterly basis. The same applies to finance and accounting reports. 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. An ICAAP is performed and reported each year. BSF 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 BSF, 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 review of the Company s internal controls, which is presented to the Board, as are the independent inspector s quarterly reports. FINANCING BSF 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 RATIO BSF uses the standardised approach to calculate credit risk, and the basic indicator approach to calculate operational risk. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

22 NOTE 6 CREDIT RISK CREDIT RISK BY CLASS OF FINANCIAL INSTRUMENT MAXIMUM EXPOSURE Bonds and commercial paper Total loans and advances to customers Loans and advances to credit institutions Total Advances to credit institutions consist of deposits held at Sparebanken Sogn og Fjordane, which has an A2 rating from Moody s. CREDIT RISK RELATING TO BONDS AND COMMERCIAL PAPER Credit risk by counterparty FIGURES IN NOK 000S Debtor category of AAA- AA- A- BBB- NON- TOTAL TOTAL interest-bearing RATED RATED RATED RATED INVESTMENT securities based on guarantor FAIR VALUE FAIR VALUE FAIR VALUE FAIR VALUE GRADE FAIR VALUE FAIR VALUE FAIR VALUE Finance, banking and insurance Government and government-backed Total Standard & Poor s ratings have been used. Changes in value: Total change in carrying amount Changes in value recognised in the income statement for the period Customers with residential mortgage loans are assessed according to 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. LOANS BY CUSTOMER GROUPS LOANS AND ADVANCES TO CUSTOMERS UNUSED CREDIT FACILITIES TOTAL LOANS AND ADVANCES IND. ASS. IMP. PROV. GUAR- ANTEES AVER- AGE LOAN VALUE GROSS NON-PER- FORMING ASSETS NET NON-PER- FORMING ASSETS Employees, etc Overseas Total Collectively assessed impairment provisions Total loans and advances to customers Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

23 NOTE 6 CREDIT RISK (CONT.) GEOGRAPHIC DISTRIBUTION OF LOANS LOANS AND ADVANCES TO CUSTOMERS GUARAN- TEES UNUSED CREDIT FACILITIES TOTAL LOANS AND ADVANCES GROSS NON- PERFORMING ASSETS IND. ASS. IMP. PROV. NET NON- PERFORMING ASSETS Eastern Norway Western Norway Southern Norway Central Norway Northern Norway Overseas Total TOTAL VALUE OF LOANS BY REMAINING TERM TO MATURITY LOANS AND ADVANCES TO CUSTOMERS UNUSED CREDIT FACILITIES TOTAL LOANS AND ADVANCES GUARANTEES Up to 1 month months months 1 year years over 5 years Total AGED ANALYSIS OF LOANS IN ARREARS FOR WHICH NO INDIVIDUAL IMPAIRMENT PROVISION HAS BEEN MADE LOANS AND ADVANCES TO CUSTOMERS GUARANTEES UNUSED CREDIT FACILITIES TOTAL LOANS AND ADVANCES 1 30 days in arrears days in arrears days in arrears Over 90 days in arrears Total GEOGRAPHIC DISTRIBUTION OF LOANS MORE THAN 90 DAYS IN ARREARS LOANS AND ADVANCES TO CUSTOMERS UNUSED CREDIT FACILITIES TOTAL LOANS AND ADVANCES GUARANTEES Eastern Norway Western Norway Southern Norway Central Norway Northern Norway Overseas Total The geographic distribution is only provided for non-performing loans. An account is considered non-performing when a client is overdrawn for more than 90 days or when a repayment loan is more than 90 days in arrears and the amount in question is at least NOK FINANCIAL ASSETS MEASURED AT FAIR VALUE THROUGH PROFIT OR LOSS (FVO) BONDS AND COMMERCIAL PAPER Carrying amount Government and government-backed securities = Maximum exposure to credit risk Fair value is determined through a theoretical calculation in which the agreed cash flow is discounted by the interest rate offered on new loans with an equivalent fixed interest period and credit risk. Financial assets are designated at fair value through profit or loss (FVO) upon initial recognition if any other valuation method would result in inconsistencies in the income statement. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

24 NOTE 7 LOANS AND ADVANCES TO CREDIT INSTITUTIONS Total loans and advances to credit inst. without an agreed term at amortised cost *) Total loans and advances to credit inst. with an agreed term at amortised cost *) 0 0 Total loans and advances to credit institutions measured at amortised cost *) Overdraft/running account that Bustadkreditt Sogn og Fjordane AS has with Sparebanken Sogn og Fjordane. NOTE 8 BREAKDOWN OF LOANS AND GUARANTEES Loans to customers measured at amortised cost Total gross loans to customers Individually assessed impairment provisions 0 0 Collectively assessed impairment provisions (see note 10) Net loans to customers Distribution of loans by sector and industry Employees, etc Total gross loans to customers Geographic distribution LOANS SHARE LOANS SHARE Eastern Norway ,04 % ,73 % Western Norway ,02 % ,63 % Southern Norway ,43 % ,40 % Central Norway ,85 % ,63 % Northern Norway ,53 % ,49 % Overseas ,12 % ,12 % Total gross loans by geographic area ,00 % ,00 % The geographic distribution is reported based on the home address of borrowers. Bustadkreditt Sogn og Fjordane AS has issued no guarantees to customers. 24 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

25 NOTE 9 LOAN-TO-VALUE RATIO AND COVER POOL Gross loans to customers Average loan per customer Number of loans Total value of properties securing the loans 1) Weighted average loan age (months) Weighted average remaining term (months) Weighted loan-to-value ratio 56,9 % 53,3 % Composition of cover pool: Residential mortgages 2) Substitute assets 3) Total ) The 2016 figure for the total value of properties securing the loans has been corrected from what was published in the 2016 annual report. 2) When calculating the cover pool, non-performing assets and the portions of loan balances that exceed 75% of the value of the collateral are excluded. 3) Substitute assets consist of deposits held at Sparebanken Sogn og Fjordane. NOTE 10 IMPAIRMENT PROVISIONS Individually assessed impairment provisions at 1 Jan. 0 0 Amounts written off against individually assessed impairment provisions during the year 0 0 New individually assessed impairment provisions for the year 0 0 Recoveries against individually assessed impairment provisions for the year 0 0 Other adjustments to impairment provisions 0 0 Individually assessed impairment provisions at 31 Dec. 0 0 Collectively assessed impairment provisions at 1 Jan Change in collectively assessed impairment provisions for the period Collectively assessed impairment provisions at 31 Dec Total impairment provisions at 31 Dec NOTE 11 LOAN IMPAIRMENT CHARGE Change in individually assessed impairment provisions for the period 0 0 Change in collectively assessed impairment provisions for the period Other adjustments to impairment provisions 0 0 Amounts written off against impairment provisions 0 0 Losses realised for which no provision had previously been made 0 0 Recoveries of amounts previously written off 0 0 Loan impairment charge/recovery for the period Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

26 NOTE 12 SENSITIVITY ANALYSIS Based on the balance sheet at 31 December 2017, any changes in market risk taking place over the coming year will have the following impact on profit and equity. Impact on profit/equity INTEREST RATE 1,50 % 1,50 % Loans and advances to credit institutions Bonds and commercial paper Loans to customers Debt securities in issue Debt to credit institutions Total This note sets out the impact on the financial statements over a period of 12 months of an immediate parallel change in interest rates of +1.5 percentage points and -1.5 percentage points. It takes into account ongoing interest income and expenses, the one-off impacts that any such immediate change in interest rates would have on items measured at fair value and the impact of a change in interest rates on profit over remaining fixed interest terms until the change impacts income and expenses. NOTE 13 LIQUIDITY RISK Undiscounted cash flows required to meet financial obligations 0 1 MONTHS 1 3 MONTHS 3 12 MONTHS 1 5 MONTHS >1 5 YEARS PERPE- TUAL LOANS TOTAL Debt to credit institutions Debt securities in issue Other liabilities Unused credit facilities Total MONTHS 1 3 MONTHS 3 12 MONTHS 1 5 MONTHS >1 5 YEARS PERPE- TUAL LOANS TOTAL Debt to credit institutions Debt securities in issue Other liabilities Unused credit facilities Total The above tables include interest payable. In order to calculate the interest expense on variable-rate borrowing, current interest rates on the reporting date were used. 26 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

27 NOTE 14 NET INCOME FROM FINANCIAL INSTRUMENTS Net interest income Interest receivable and similar income on loans and advances to credit institutions, measured at amortised cost Interest receivable and similar income on loans and advances to customers, measured at amortised cost Interest receivable and similar income on commercial paper and other interest-bearing securities, designated at fair value Other interest receivable and similar income from receivables measured at fair value 0 20 Total interest income Interest payable and similar charges on debt to credit institutions, measured at amortised cost Interest payable and similar charges on debt securities in issue measured at amortised cost Other interest payable and similar charges on debt measured at amortised cost Total interest expenses Total net interest income Net gains/losses on financial instruments 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 0 Commercial paper and bonds issued by the other parties Net gains/losses on financial instruments designated at fair value NOTE 15 OPERATING EXPENSES Wages, salaries, etc IT expenses Other services Other expenses Total administration expenses Purchase of services from the Group Auditors fees (external and internal auditor) Bond issuance and credit rating costs Other operating expenses Total other operating expenses Total operating expenses Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

28 NOTE 16 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 received no remuneration from the Company. The Board of Directors has one external member. The external member receives a fee. FIGURES IN WHOLE NOK Board of Directors REMUNERATION LOANS AT Frode Vasseth Hallvard Klakegg 0 0 Ingeborg Aase Fransson 0 0 Peter Olav Midthun FIGURES IN NOK 000s Intra-group transactions Interest received from Sparebanken Sogn og Fjordane Interest paid to Sparebanken Sogn og Fjordane Interest paid to Sparebanken Sogn og Fjordane on covered bonds Services bought from Sparebanken Sogn og Fjordane Deposits at Sparebanken Sogn og Fjordane Liabilities to Sparebanken Sogn og Fjordane Covered bonds held by Sparebanken Sogn og Fjordane Bustadkreditt Sogn og Fjordane AS har ingen tilsette. Det er inngått avtale med Sparebanken Sogn og 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 it 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 December The credit facility is to be used for buying mortgage loans from SSF. It has a limit of NOK 750 million, but can only be used for the bulk transfer of loans. 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. The limit on the facility at 31/12/2017 was NOK 180 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 31/12/2017, the limit on the facility was NOK 1,444 million. d) A credit facility related to overcollateralisation. The facility shall only be used to buy loans for inclusion in the cover pool, and to buy instruments that qualify as part of a liquidity buffer. At 31/12/2017, the limit on the facility was NOK 1,046 million, but this limit depends on the volume of covered bonds issued at any given time. All agreements and transactions adhere to arm s length principles. 28 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

29 NOTE 17 AUDITOR S FEE Statutory audit incl. VAT Inspection fees incl. VAT Other services not related to auditing incl. VAT 10 0 Total NOTE 18 TAX EXPENSE Tax payable for the period Shortfall in allocation last year 0 0 Total tax payable Change in deferred tax/tax assets Deferred tax relating to the origination and reversal of temporary differences Total change in deferred tax/tax assets Total tax expense Reconciliation of expected tax expense with actual tax expense Profit/loss before taxation Expected income tax applying nominal tax rate of 24% (25% in 2016) Reduction in income tax Shortfall in allocation last year 0 0 Other differences Tax expense Tax payable Tax payable on balance sheet BREAKDOWN OF THE TAX IMPACT OF TEMPORARY DIFFERENCES Deductible temporary differences Financial instruments 0 0 Loss carryforwards Total deductible temporary differences Taxable temporary differences Financial instruments Loss carryforwards 0 0 Total deductible temporary differences Net difference Net deferred tax assets/tax ( ) on the balance sheet The tax rate for tax payable is 24% in In 2016 it was 25%. 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. The tax rate for deferred tax assets/deferred tax was 24% in 2016, and was reduced to 23% in Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

30 NOTE 19 CLASSIFICATION OF FINANCIAL INSTRUMENTS CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE Net loans and advances to credit institutions Total loans and advances to credit institutions measured at amortised cost Total loans and advances to credit institutions Bonds and commercial paper Commercial paper and bonds designated at fair value *) Total bonds and other securities Net loans to customers Loans and advances to customers measured at amortised cost Total loans before individually and collectively assessed impairment provisions Individually assessed impairment provisions Collectively assessed impairment provisions Total net loans to customers Other assets Other assets, amortised cost Total other assets Total financial assets Financial assets grouped by category Financial assets designated at fair value, Fair Value Option *) Financial assets measured at amortised cost, loans and advances Total financial assets Debt to credit institutions Loans and deposits from credit institutions measured at amortised cost Total debt to credit institutions Debt securities in issue Issued commercial paper and bonds measured at amortised cost Total debt securities in issue Other financial liabilities Other debt measured at amortised cost Total other financial liabilities Total financial liabilities Financial liabilities grouped by category Financial liabilities designated at fair value, FVO *) Financial liabilities measured at amortised cost, loans and advances Total financial liabilities *) FVO: Fair Value Option 30 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

31 NOTE 20 VALUATION OF FINANCIAL ASSETS Breakdown of financial assets measured at fair value QUOTED PRICES AND OBSERVABLE ASSUMPTIONS CARRYING AMOUNT Finance, banking and insurance Government and government-backed Total Valuation method 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, which are quality assured at year-end, primarily by comparing them with those of other valuers. NOTE 21 COMMERCIAL PAPER AND BONDS COMMER- CIAL PAPER BONDS TOTAL Commercial paper and bonds designated at fair value through profit or loss COMMERCIAL PAPER BONDS TOTAL Commercial paper and bonds, carrying amount Of which listed on a stock exchange Face value Distribution by sector Finance, banking and insurance Government and government-backed Total Modified duration (years) 0,22 0,16 0,16 0,20 0,17 0,17 Weighted average effective interest rate at 31 Dec. 0,26 % 1,19 % 1,10 % 0,33 % 1,93 % 1,80 % Maturity structure of investments in bonds and commercial paper (market value) TOTAL All securities are NOK-denominated NOTE 22 OTHER CURRENT ASSETS Accrued interest on loans Accrued interest on bonds Total other current assets Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

32 NOTE 23 DEBT TO CREDIT INSTITUTIONS 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 Total debt to credit institutions, measured at amortised cost 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 16. NOTE 24 DEBT SECURITIES IN ISSUE Bonds in issue Total debt securities in issue (face value) Term to maturity Remaining term to maturity (face value Total New borrowings in Repaid during the reporting period ISIN NUMBER FACE VALUE INTEREST RATE SPREAD MATURITY DATE *) CARRYING NO MTH NIBOR 0,55 % NO MTH NIBOR 0,48 % NO MTH NIBOR 0,58 % NO MTH NIBOR 0,36 % NO MTH NIBOR 0,43 % NO MTH NIBOR 0,67 % NO MTH NIBOR 0,60 % Amortisering Total debt securities in issue ISIN NUMBER FACE VALUE INTEREST RATE SPREAD MATURITY DATE *) CARRYING NO MND. NIBOR 0,55 % NO MND. NIBOR 0,48 % NO MND. NIBOR 0,58 % NO MND. NIBOR 0,36 % NO MND. NIBOR 0,43 % NO MND. NIBOR 0,67 % Amortisation Total debt securities in issue 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. 32 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

33 NOTE 25 OTHER LIABILITIES Accrued costs and advance income Other liabilities Total other liabilities NOTE 26 OFF BALANCE SHEET ITEMS The company has no other off-balance-sheet obligations. NOTE 27 DISPUTES Bustadkreditt Sogn og Fjordane AS was not involved in any disputes in NOTE 28 SHARE CAPITAL AND SHAREHOLDER INFORMATION At , the Company s share capital was made up of the following classes of shares: NUMBER FACE VALUE BOOK VALUE Class A shares Total Ownership structure Biggest shareholders in the Company at : CLASS A SHARES OWNERSHIP INTEREST SHARE OF VOTING RIGHTS Sparebanken Sogn og Fjordane % 100 % Total number of shares % 100 % Neither the members of the Board of Directors nor the CEO own any shares or options. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

34 Auditor s report To the General Meeting of Bustadkreditt Sogn og Fjordane AS INDEPENDENT AUDITOR S REPORT Report on the Audit of the Financial Statements Opinion Deloitte AS Strandavegen 15 NO-6905 Florø Norway Tel: We have audited the financial statements of Bustadkreditt Sogn og Fjordane AS which comprise the balance sheet as 31 December 2017, income statement, statement of comprehensive income, statement of changes in equity and statement of cash flows for the year then ended, and notes to the financial statements, including a summary of significant accounting policies. In our opinion, the accompanying financial statements are prepared in accordance with law and regulations and present fairly, in all material respects, the financial position of the Company as at 31 December 2017, and its financial performance and its cash flows for the year then ended in accordance with simplified application of international accounting standards according to section 3-9 of the Norwegian Accounting Act. Basis for Opinion We conducted our audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including International Standards on Auditing (ISAs). Our responsibilities under those standards are further described in the Auditor s Responsibilities for the Audit of the Financial Statements section of our report. We are independent of the Company as required by laws and regulations, and we have fulfilled our other ethical responsibilities in accordance with these requirements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Other information Management is responsible for the other information. The other information comprises the Board of Directors report, but does not include the financial statements and our auditor's report thereon. Our opinion on the financial statements does not cover the other information and we do not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit or otherwise appears to be materially misstated. If, based on the work we have performed, we conclude that there is a material misstatement of this other information, we are required to report that fact. We have nothing to report in this regard. Responsibilities of The Board of Directors and the Managing Director for the Financial Statements The Board of Directors and the Managing Director (management) are responsible for the preparation in accordance with law and regulations, including fair presentation of the financial statements in accordance with simplified application of International Accounting Standards according to the Norwegian Accounting Act section 3-9, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. 34 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

35 Auditor s Responsibilities for the Audit of the Financial Statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with laws, regulations, and auditing standards and practices generally accepted in Norway, including ISAs, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error. We design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. evaluate the overall presentation, structure and content of the financial statements, including the disclosures, and whether the financial statements represent the underlying transactions and events in a manner that achieves fair presentation. We communicate with those charged with governance regarding, among other matters, the planned scope and timing of the audit and significant audit findings, including any significant deficiencies in internal control that we identify during our audit. Report on Other Legal and Regulatory Requirements Opinion on the Board of Directors report Based on our audit of the financial statements as described above, it is our opinion that the information presented in the Board of Directors report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit is consistent with the financial statements and complies with the law and regulations. Opinion on Registration and Documentation Based on our audit of the financial statements as described above, and control procedures we have considered necessary in accordance with the International Standard on Assurance Engagements (ISAE) 3000, Assurance Engagements Other than Audits or Reviews of Historical Financial Information, it is our opinion that management has fulfilled its duty to produce a proper and clearly set out registration and documentation of the company s accounting information in accordance with the law and bookkeeping standards and practices generally accepted in Norway. Førde, 13 February 2018 Deloitte AS Rune Norstrand Olsen State Authorised Public Accountant Note: This translation from Norwegian has been prepared for information purposes only. Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT

36 DECLARATION BY THE BOARD OF DIRECTORS AND CEO We declare that, to the best of our knowledge, the financial statements for 2017 have been prepared in accordance with current accounting standards, and that the information contained therein provides a true picture of the assets, liabilities, financial position and results of the Company. The Board believes that the annual report gives a true picture of the performance, results and financial position of the Company, and assesses the most important areas of uncertainty and potential risks it faces. Førde, 13 February 2018 The Board of Directors of Bustadkreditt Sogn og Fjordane AS Frode Vasseth Chair Hallvard Klakegg Ingeborg Aase Fransson Peter Midthun Irene Flølo CEO 36 Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT 2017

37 INFORMATION ABOUT THE COMPANY Address: Bustadkreditt Sogn og Fjordane AS Langebruvegen Førde Tel. no: Organisation number: Management: Irene Flølo CEO Board of Directors: Frode Vasseth Hallvard Klakegg Ingeborg Aase Fransson Peter Midthun Chair Board member Board member Board member Bustadkreditt Sogn og Fjordane AS ANNUAL REPORT