EIENDOMSMEGLER VEST FRENDE FORSIKRING NORNE SECURITIES brage finans KYTE NÆRINGSMEGLING. Sparebanken Vest Boligkreditt AS

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1 EIENDOMSMEGLER VEST FRENDE FORSIKRING NORNE SECURITIES brage finans KYTE NÆRINGSMEGLING Sparebanken Vest Boligkreditt AS Annual Report 2011

2 Content About Sparebanken Vest Boligkreditt AS 3 Directors report Profit and loss account 8 Balance sheet 9 Statement of cash flows 10 Equity movements 11 Notes Statement pursuant to Section 5-5 of the Securities Trading Act 33 Auditor s report 34 Photos p. 3 and 7: Layout/production:

3 Sparebanken Vest Boligkreditt AS Sparebanken Vest Boligkreditt AS is a wholly owned subsidiary of Sparebanken Vest. The company has a concession to operate as a financing company which can issue covered bonds whereby the investors have a preferential right to coverage of their bonds against the company s underlying cover pool. This cover pool consists of mortgaged home loans issued by Sparebanken Vest and which meet the company s requirements for loans that may be included in the cover pool. One of the main requirements is that the outstanding loan balance on each loan shall not exceed 75% of the market value of the mortgaged property. With a firmly rooted local presence, and a leading financial services group in the Western Norway, Sparebanken Vest offers a broad range of products to retail customers and the commercial sector in the region. As a dominating bank in the retail market, home loans are one of the Group s most important products. Mortgaged home loans form the basis for the bonds issued by Sparebanken Vest Boligkreditt AS. By covering its funding requirement through the issue of covered bonds, the Sparebanken Vest Group is able to offer its customers home mortgage loans on competitive terms. Bonds issued by Sparebanken Vest Boligkreditt AS provide investors with a very high level of security, and the bonds have been accorded the best rating from Moody s and Fitch Ratings. Information about the composition of the underlying asset pool and outstanding bonds can be accessed at: Boligkreditt.aspx Contact: Egil Mokleiv, Managing Director, tel Fredrik Skarsvåg, Risk Manager, tel Sparebanken Vest Boligkreditt AS Annual Report2011 3

4 Directors Report 2011 Introduction Sparebanken Vest Boligkreditt has its head office in Bergen and is a wholly owned subsidiary of Sparebanken Vest. The company has a concession to operate as a financing enterprise with the right to issue covered bonds. The vast bulk of the loan portfolio consists of mortgaged home loans issued by Sparebanken Vest and which meet the conditions set by the company for loans which may be included in the loan portfolio. At year-end 2011 the company s lendings totalled NOK 31.1bn, corresponding to growth of NOK 9.4bn, or 43%, in the course of the calendar year. Debt established through the issue of covered bonds increased from NOK 18.5bn from year-end 2010 to NOK 28.3bn at the end of The rating accorded by the rating agencies to Sparebanken Vest Boligkreditt and Sparebanken Vest is important for the Group s funding ability and cost of borrowing. The company has commissioned the services of the rating agencies Fitch Ratings and Moody s Investor Service, and all bond issues by Sparebanken Vest Boligkreditt have a credit rating of AAA, or a corresponding rating. The company has established a bond programme with a total framework of EUR 5bn which is applied on the issue of bonds, both in Norway and internationally. As the overall volume of issues is now approaching the limit under the programme, an application to increase this limit will be made in connection with the annual update of the programme which will take place in the spring of Since May 2009, Sparebanken Vest Boligkreditt has had permission from the Financial Supervisory Authority of Norway to apply the IRB method for calculation of the company s capital. A further extension of the transitional rules for companies with such approval means that the present capital adequacy requirement will continue to apply in Application of the IRB method has resulted in better risk and capital management, and the company expects that the use of such methods will lead to more efficient utilisation of capital when the transitional period ends. The market The scope for funding through the issue of covered bonds was relatively good in 2011, taking the year as a whole. Investors in Norway have been showing increasing interest in covered bonds and the market for bonds of this kind has grown considerably, especially for issues with a good rating. The international market was characterised by high and increasing volatility throughout the year, leading foreign investors to place a greater focus on country risk and the quality of the assets in the cover pools. Norway had a better macroeconomic development than most countries, with a low level of public debt and low unemployment. The activities of Norwegian covered bond companies are subject to strict Norwegian legislation, and covered bonds are issued by special banks which investors perceive as being of high quality. All of the bonds issued by Sparebanken Vest Boligkreditt have the best rating from two recognized rating agencies, and this has also resulted in very good demand for the company s covered bonds. In February 2011 Sparebanken Vest Boligkreditt carried out its second issue denominated in Euro. The issue was well received in the market and was considerably over-subscribed. This was followed by issues from four different series with different terms and different fixed rates in the Norwegian market, and there was even some demand by international investors for issues denominated in NOK. In January 2012 the company held investor meetings in nine European cities which were very well received. This was followed the company carried out its third public issue in the Euro market. There was substantial demand from investors in Europe and the bonds were taken up by 102 investors on very competitive terms for the company. Annual Accounts Profit and Loss Account Sparebanken Vest Boligkreditt s financial statements for 2011 are reported in accordance with full IFRS. The figures for 2010 are comparable and the notes to the accounts have been extended in compliance with full IFRS. The operating profit for the year before write-downs and tax was NOK 105.3m, against NOK 90.2m in After tax provisions the profit was NOK 75.9m, against NOK 64.9m in Gross interest and similar income amounted to NOK m, against NOK 613.3m in 2010, while the corresponding net figures were NOK 157.9m in 2011 and NOK 122.5m in Net other operating income was minus NOK 6.7m in 2011, against approximately NOK 0 in The net loss in 2011 was largely due to the accounting effects of realised and unrealised changes in the value of financial instruments. Operating expenses came to NOK 45.8m, against NOK 32.3m in Cooperation with Sparebanken Vest is formalised through various agreements which ensure that the company has the required expertise in key areas, while at the same time facilitating cost-effective operations. The fees paid by the company to the parent bank are based on normal commercial principles and amount to NOK 37.4m, against NOK 22.9m in The increase is mainly due to the volume growth in the loan portfolio. Previous collective loan write-downs amount to NOK 0.68m. No further loan write-downs were posted to financial year The tax charge for 2011 is calculated at NOK 29.5m, corresponding to 28% of the pre-tax profit. The net profit after tax was thus NOK 75.9m, reflecting a return on equity of 5.9% after tax. In conformity with section 3-3a of the Accountancy Act (Norway), the Board confirms that the accounts have been prepared on a going concern basis. Balance Sheet At year-end 2011 Sparebanken Vest Boligkreditt had total assets of NOK 32.8bn, an increase of NOK 8.5bn, or 35%, over the year. During the same period, net loans to customers increased by NOK 9.4bn, or 43% and totalled NOK 31.1bn at year-end Sparebanken Vest Boligkreditt AS Annual Report 2011

5 The increase was due the purchase of mortgage portfolios from the parent bank. In 2011 the company s securitised debt increased by NOK 9.8bn and the outstanding portfolio financed by the issue of covered bonds amounted to NOK 28.3bn at year-end At the same time, debt to financial institutions stood at NOK 2.5bn, against NOK 4.7bn at the end of This debt item is linked to a credit facility which the company has with the parent bank. At year-end, the capital adequacy ratio was 11.5%, based on the transitional rules for IRB-approved entities. The capital coverage is made up solely of core capital. If the full effect of the BASEL II rules had applied to the company, the capital ratio would have been 59.4%. At year-end 2010 the company s capital ratio was 9.3%, calculated in accordance with the transitional rules. The net cash flow in 2011 shows a reduction in liquid funds of approximately NOK 1 516m. The decline arose mainly because the company s deposits with financial institutions were reduced following new rules which were introduced in 2011 stipulating the maximum amount of individual commitments that financial companies are permitted to hold. The decline in bank deposits has to some extent been offset by the buy-back of the company s own bonds and an increase in holdings of marketable interest-earning securities. Risk Under the legislation and regulations governing enterprises with a concession to issue covered bonds, all types of risk are required to be at a low level. The Board attaches great importance to risk management in respect of the various types of risk that are identified and measured. The company has drawn up guidelines and parameters for the management and control of different kinds of risk to ensure that the company enjoys confidence in the market. It is the view of the Board that the company s overall risk exposure is low. Credit risk The credit risk is defined as the risk that a lender or counterparty is unable to meet its obligations to Sparebanken Vest Boligkreditt. The company s credit approval framework contains requirements which stipulate which loans may be included in the loan portfolio. There were no changes of significance in the company s risk profile in the financial year. Sparebanken Vest Boligkreditt s assets consist mainly of home mortgage loans where the outstanding balance on the loan shall not exceed 75% of an appropriate value assessment of the mortgaged property. In 2011 the company started using a new product-based scoring system to assess risk elements related to home mortgage loans. It is expected that in the future the new scoring system will also be a tool that can be used in the company s capital calculations. At year-end 2011, gross defaulted loans accounted for 0.01% of total commitments. No losses were incurred by the company in 2011 and the Board considers the quality of the loan portfolio to be very good. Any fall in house prices would reduce the gross value of the company s mortgage security, and quarterly stress tests are carried out to calculate the effect of any negative trend in house prices. The company s investments in interest-earning securities are of high quality and relate to Norwegian issuers of covered bonds with a high rating. The Board considers the quality of the loan portfolio to be very good and is comfortable with the results of the quarterly stress tests. The credit risk attached to the company s other investments is also considered to be low. Market risk The market risk is defined as the risk of economic loss as a result of changes in observable market variables such as interest and exchange rates and the price of financial instruments. Sparebanken Vest Boligkreditt AS shall have a low market risk and parameters are established setting out the maximum interest and exchange rate risk to which the bank may be exposed. The company uses financial derivatives in order to keep the market risk at a low level. All of the company s mortgages run at a variable rate of interest which can be adjusted with six weeks notice to the customers. As at year-end 2011 the company had issued bonds denominated in NOK and EUR at both fixed and floating rates. The company seeks to eliminate the risk attached to bond issues at fixed interest rates or denominated in a foreign currency by entering into swap agreements concurrent with the issue of the bonds. Swap agreements of this kind are entered into with counterparties of high quality and based on agreements that are considered to be advantageous for the company and which are accepted by the rating agencies which it uses. The company s investments in interest-earning securities are denominated in NOK and run at a floating rate of interest. The market risk is therefore low. The Board considers the interest and exchange rate risk, as well as the overall market risk to be low. Liquidity risk This is the risk that the company will not be able either to refinance its requirements on maturity or to finance its assets on market terms. All bonds issued by Sparebanken Vest Boligkreditt are based on agreements whereby the company has a unilateral right to extend the term of the bonds by 12 months. This right is only exercised if the company has difficulty arranging refinancing on normal maturity. Sparebanken Vest Boligkreditt plans for major maturities by buying back its own bonds and reinforcing liquidity prior to maturity. The company also has a long-term credit facility with Sparebanken Vest as well as an agreement whereby the bank undertakes to provide liquid support to ensure that the company effects timely settlement of outstanding bonds and related derivatives. The Board considers the liquidity risk to be low. Operational risk This is the risk of losses as a result of mistakes and irregularities in the management of transactions, a lack of internal control or irregularities in the systems used. The identification of operational risks is achieved through expert assessments and management confirmations which are part of the company s internal control. The company has established a management agreement with Sparebanken Vest covering management, production and IT operations, as well as financial Sparebanken Vest Boligkreditt AS Annual Report

6 and risk management. Under the agreement, the bank bears the risk for any defects related to the deliveries and services to be provided. The operational risk is assessed on an ongoing basis, PriceWaterhouseCoopers acting as internal auditor, any non-conformance is reported to the Board. The Board considers the operational risk to be low, including the risk related to the financial reporting process. Employees and working environment Sparebanken Vest Boligkreditt has one permanent employee. The managing director is formally employed by the parent bank and he is hired to be the general manager of Sparebanken Vest Boligkreditt. The managing director reports to the company s Board of Directors. Other resources required to operate the company are provided by the relevant departments of Sparebanken Vest based on agreements between the company and the parent bank. The working environment is considered to be good and it is the view of the Board that the company s activities do not pollute the external environment. The Board comprises five members, two of whom are women. The incidence of sick leave in 2011 stood at 2%. No serious accidents occurred or were reported in Outlook The international economy is in a period of recession, and for many European countries, the sovereign debt situation means that they are facing cutbacks and challenges. This, in turn, is also likely to contribute to a declining level of activity among Norway s important trading partners. Economic development in Norway, especially in the West of Norway, will to some extent be less affected by the downturn in the international economy since the region is benefiting from a continuing high level of investment in oil-related activities as well as having a large public sector. The West of Norway is the most diversified region in the country, and consequently it has more legs to stand on. Various factors affect house prices. Low interest rates with little likelihood of an appreciable rise in rates, a relatively low level of house building and a tight labour market are all factors that reduce the risk of a sharp decline in the house prices. The market for issues of covered bonds from Norwegian issuers with a high rating is expected to remain firm. Both the demand and the market for covered bonds in Norway are expected to experience further growth, and in the international market Norwegian issuers of bonds of this kind will be supported by Norway s relatively robust financial position. The Board is therefore of the view that Sparebanken Vest Boligkreditt will be able to cover its funding requirement through new issues both in Norway and internationally, and that in 2012 this should again be possible on acceptable terms. Further steps will be taken to market the company with a special focus on existing and potentially new investors in Norway and abroad, with a view to securing broad distribution of the company s bond issues. The funding costs incurred by credit enterprises in issuing covered bonds increased considerably throughout 2011, but the cost of corresponding funding for banks increased considerably more. The activities of Sparebanken Vest Boligkreditt therefore help the Sparebanken Vest Group to offer mortgages on competitive terms, and in 2012 the company s activities are again expected to be very profitable for the owner in a market characterised by keen competition for mortgage customers. Sparebanken Vest Boligkreditt will be purchasing more portfolios of qualified mortgages from the parent bank in 2012 and the expected increase in volume will entail a need to increase the company s capital base further, since the transitional rules for capital coverage for IRB-approved entities also apply in Allocations The profit before tax for the year ending 31 December 2011 was NOK 105.3m and distributable equity at year end amounted to NOK 80.5m. The Board proposes that a group contribution of NOK 68.4m after tax be made to Sparebanken Vest for The Board considers the group contribution to be appropriate, based on the view that the parent bank will increase the company s capital if the need arises. Bergen, 14 February 2012 The Board of Directors of Sparebanken Vest Boligkreditt AS Knut Ravnå Pål Pedersen Inga Lise Moldestad Vibeke Knudsen Eivind A. Norebø Egil Mokleiv Chairman Deputy Chairman Managing Director 6 Sparebanken Vest Boligkreditt AS Annual Report 2011

7 Sparebanken Vest Boligkreditt AS Annual Report

8 Profit and loss account Notes Interest income etc Interest expenses etc Net interest income and credit commissions Commissions receivable and income from banking services Commissions payable and cost of banking services Net gain/loss and change in value of financial instruments Other operating income Net other operating income Net operating income Salaries and general administration expenses Depreciation Other operating expenses Total operating expenses Profit befor write-downs and tax Write-downs and losses on loans 4,7 0 0 Profit before tax Taxes Profit after tax Earnings per share (NOK) 60,39 87,90 Diluted earnings per share (NOK) 60,39 87,90 Extended Profit and Loss Account Profit for the period Other items in the extended profit and loss account 0 0 Total profit for the period Sparebanken Vest Boligkreditt AS Annual Report 2011

9 Balance sheet Assets Notes 31/ / /12-09 Loans to and deposits with credit institutions Net lendings 3,4,5,6, Commercial paper and bonds Intangible assets Financial derivatives Accrued income Total assets Liabilities and equity Debt to credit institutions 10, Securitised debt 11,13, Financial derivatives Public dues payable and holiday pay Deferred tax Tax provision Other liabilities Total liabilities Share capital Total paid-up capital Other equity Total equity Total liabilities and equity Bergen, 31 December 2011/14 February 2012 The Board of Directors of Sparebanken Vest Boligkreditt AS Knut Ravnå, Chairman pål Pedersen, Deputy Chairman Inga Lise Moldestad Vibeke Knudsen Eivind Areklett Norebø egil Mokleiv, CEO Sparebanken Vest Boligkreditt AS Annual Report

10 Statement of Cash Flows Cash flows from operations Interest, commission and fee income Interest, commissions and fees paid Payments for goods and services Payments to employees, pension schemes, national insurance, tax deductions etc Payment of taxes and public dues Interest paid to credit institutions and bond debt interest Net cash flow from operations Cash flows from investment activities Net change in loans to customers Net payments made/received on short term securities Payments on purchase of fixed assets etc Net cash flow from investment activities Cash flows from financing activities Net revenues/payments on deposits from financial institutions Income related to the issue of bond debt Payments related to bond debt Revenues from the issue of new shares Group contribution paid Net cash flow from financing activities Net cash flow in period Net change in cash and cash equivalents Liquid assets at 1 January Liquid assets at 31 December Sparebanken Vest Boligkreditt AS Annual Report 2011

11 Equity movements Share capital Other equity Total Equity at 31 December Profit for the year Group contribution paid Equity at 31 December Capital increase on 9 April Capital increase on 21 June Profit for the year Group contribution paid Equity at 31 December Capital increase on 5 January Capital increase on 31 August Capital increase on 2 December Profit for the year Group contribution paid Equity at 31 December The share capital at 31 December 2011 totals NOK million and comprises shares, each with a nominal value NOK The entire share capital is owned by Sparebanken Vest. Sparebanken Vest Boligkreditt AS Annual Report

12 Noter Note 1 General Sparebanken Vest Boligkreditt AS is a wholly owned subsidiary of Sparebanken Vest. The company was established to serve as the bank s issuer of covered bonds. Sparebanken Vest Boligkreditt offers mortgaged home loans within 75% of the market value of the mortgaged property. The company was established on 21 May 2008 with its head office in Bergen. The head office address is: Kaigaten 4, NO-5016 Bergen. All amounts in the accounts and the notes to the accounts are stated in NOK thousand, unless stated otherwise. The Norwegian krone is the company s presentation currency and its functional currency. ACCOUNTING PRINCIPLES Effective from and including 2011 the company accounts of Sparebanken Vest Boligkreditt AS are presented in accordance with the International Financial Reporting Standards (IFRS) adopted by the EU and published by the International Accounting Standards Board (IASB), and which were compulsory at 31 December In previous years the company s accounts were prepared in accordance with Sections 1-5 of Regulations issued by the Norwegian Ministry of Finance governing the preparation of annual financial statements relating to simplified application of International Financial Reporting Standards (simplified IFRS). The accounting and measurement principled used to prepare the financial statements according to simplified IFRS are the same as those used for IFRS. The transition to full IFRS has not revealed any matters of, beyond the fact that IFRS entails extended information requirements. Where information is provided in the notes to the accounts that was not included in 2010, the company has sought to prepare corresponding comparative figures. In accordance with the requirements of IAS 1.39, the balance sheet figures and notes to the accounts are also presented for The consolidated accounts of the Sparebanken Vest Group have been prepared in accordance with IFRS since In preparing the annual financial statements and implementing IFRS, the management has applied assumptions which affect estimates of assets, income, costs and information related to contingent liabilities. Future events may lead to changes in these assumptions. Estimates and the underlying assumptions are subject to continuous assessment. The effect of these changes will be reflected in the accounts when the new estimates can be determined with sufficient certainty. Dividends, group contributions and other distributions related to the accounting result are recognised when the distribution is adopted. The accounts are prepared on a going concern basis. The Group has applied the following new standards and changes in 2011: - ias 24 (revised) Information about related parties. In relation to the current IAS 24, the revised standard clarifies and simplifies the definition of related parties. IAS 24 (revised) has been applied by the Group effective from 1 January Reference is made to the note Transactions with Related Parties for details of assessments and the Group s definition of related parties. - ifrs 7 Financial Instruments Disclosure (improvement project 2010). Amendments have been made to the standard which underline the interaction between quantitative and qualitative information, and the nature and treatment of risk related to financial instruments. Among other things, there is no longer any requirement to specify the maximum credit exposure in the notes in respect of instruments where the balance sheet amount represents the maximum credit exposure. The maximum exposure of the company s loan portfolio is specified in note 5. - ias 1 Presentation of Financial Statements (improvement project 2010). A specification has been included requiring the presentation of analysis of the extended profit and loss account (OCI) for each component of equity, either in the presentation of the total performance statement or in notes to the financial accounts. New and amended standards/ interpretations with no significance for the annual financial statements for amendment of IAS 32 Financial Instruments Presentation. The amendment to IAS 32 means that subscription rights issued in another currency than the company s functional currency can be classified as equity. - amendment in IFRIC 14 (to IAS 19) e Limits on a net defined benefits-based pension asset, minimum funding requirements and their interaction. - ifric 19 Extinguishing Financial Liabilities with Equity Instruments. Interpretation gives guidance on the accounting treatment of transactions when a company extinguishes all or part of its financial liabilities through the issue of equity instruments, and applies when the debt conversion takes place as a result of renegotiation of a loan agreement. - ifrs 3 Business combinations (improvement project 2010). A specification has been included clarifying the relationship between IFRS 7, IAS 32 and IAS 39, as well as limiting the scope of measurement alternatives for components of noncontrolling owner interests. Standards, amendments to and interpretations of existing standards which have not entered into force and where the Group has not opted for early application - amendments to IAS 19 Employee Benefits. The proposed amendments are not deemed to be relevant for the company since at present the company only has a defined contributionbased pension scheme. - amendment to IFRS 7 Financial Instruments Disclosures. The amendments relate to notes to the accounts in connection with the transfer of financial assets in which the company has a continuing involvement and aims to give the users an enhanced perception of the exposure of the transferor of the financial assets. The amendments are effective for annual periods which start on or after 1 July Sparebanken Vest Boligkreditt AS Annual Report 2011

13 - ifrs 9 Financial Instruments. IFRS 9 will replace the present IAS 39. Under IFRS 9 measurement is determined by the company s business model and the characteristics of the individual financial assets. A financial asset is recognised at amortised cost if the aim of the company s business model is to keep the asset in order to receive cash flows and the cash flows from the asset only represent instalments and interest on outstanding amounts. IFRS 9 is effective for annual periods which start on or after 1 January The EU has not approved this standard. The Group has not completed its assessment of the effects of IFRS 9. - ifrs 13 Fair Value Measurement. The standard set out the principles to be used and guidance on measurement of the fair value of assets and liabilities which other standards require or permit for the measurement of fair value. IFRS 13 is effective for annual periods which start on or after 1 January EU has not approved this standard. - amendments to IAS 1 Presentation of Financial Statements. The amendments to IAS 1 relate to the grouping of income and costs in the extended profit and loss account based on whether they can potentially be recycled to profit or loss or not. The amendments are effective for annual periods which start on or after 1 July The EU has not approved these amendments. RECOGNITION OF INTEREST AND FEES Interest income is recognised using the effective interest rate method. This implies that nominal interest is recorded when incurred, with the addition of amortised front-end fees less direct establishment costs. SEGMENT INFORMATION The company s activities are managed as a single segment. The vast bulk of the loan portfolio relates to the private market.. EMPLOYEE BENEFITS The company has one employee. Other services are purchased from the parent company and transactions between the company and the parent bank are conducted on the basis of normal commercial terms and principles. The company has a defined benefits based pension scheme for its only employee. The pension premium is recorded when it falls due. FINANCIAL ASSETS AND LIABILITIES Financial assets and liabilities are stated and classified in accordance with IAS 39 and presented in accordance with IFRS 7. The bulk of the company s financial instruments are classified as financial instruments stated at amortised cost, but it also has financial instruments classified at as being the category stated at fair value through profit or loss. Recognition and derecognition The date of the agreement is deemed to be the recognition date. Financial assets are removed from the balance sheet when the right to receive cash flows from the investment terminates or is transferred on realisation. Financial assets stated at fair value through profit or loss Financial instruments initially classified for recognition at fair value through profit or loss are stated at fair value in the balance sheet as this method of valuation eliminates or to a large extent reduces inconsistent measurement and calculation that would otherwise arise with the measurement or calculation of capital gains/losses based on different assumptions. Accordingly, the effect of value changes on financial instruments which are managed as a single item is at the same time reflected in the accounts. Financial instruments initially classified for recognition at fair value through profit or loss includes commercial paper and bonds. Financial assets stated at fair value through profit or loss are initially stated at fair value and the transaction costs are posted in the profit and loss account. Subsequent measurements are recorded at fair value. Realised gains/losses and changes in assessed values of financial investments stated at fair value through profit or loss are posted in the accounts in the period when they arise. Financial instruments stated at amortised cost Loans and receivables are stated at amortised cost. Loans and receivables are defined as non-derivative financial assets with fixed or determinable payments which are not traded in an active market. Loans are initially recognised at fair value plus direct transaction costs. In periods after the initial valuation assessment, loans are recognised at amortised cost based on the effective interest rate method, as an expression of the fair value of the loan. If there is objective evidence of impairment of individual loans or groups of loans, the loans are written down. The amount of the write-down is calculated as the difference between the book value and the present value of future cash flows, based on the expected lifetime of the loan. Write-downs are classified as a chargeable cost. Interest income is recorded using the effective interest method. In respect of commitments with individually determined writedowns, the effective interest rate is locked in cases where a) the loan is not in default, or b) the changed rate is regardless of the fact that the loan is in default and the interest rate change affects the expected cash flow. Financial liabilities at a floating rate of interest are recognised at amortised cost. Amortised cost is defined as the initially recognised amount of the instrument (cost price) less repayments of loan principal, with an addition or deduction for the accumulated amortisation for any differences between the cost price and nominal value, less the amount of any writedown. Amortisation takes place using the effective interest method. Financial instruments for use in hedge accounting The company uses hedge accounting to manage the interest risk and the foreign exchange risk attached to long-term borrowings. This is posted in the accounts as hedging of fair value. There is a clear, direct and documented correlation between changes in the value of the hedged item resulting from the hedged risk, and changes in the value of the financial derivative (hedging instrument). The hedging instruments are interest rate and foreign currency swaps. The hedge is documented to show the correlation with the company s risk management strategy, with clear identification of the hedged item and hedging instrument, a clear description of the hedged risk and a statement explaining why the hedge is expected to be effective. Derivatives intended for use as hedging instruments are stated at fair value and changes in fair value are posted as they arise, as are changes in the value of the hedged item due to the risk against which the item is hedged. Sparebanken Vest Boligkreditt AS Annual Report

14 INTANGIBLE ASSETS Software that has been developed is recorded and classified under intangible assets when the amounts involved are deemed to be material and the items are expected to have lasting value. In the development of software, the use of own resources is capitalised provided that the accrued costs can be reliably measured. Costs related to pre-planning, implementation and training are charged in the profit and loss account as they arise. Software that has been developed by the company is depreciated on a straight line basis over its expected lifetime. There is continuous assessment of the need for write-downs where the expected economic benefits are less than the balance sheet value. TAXATION Deferred tax and deferred tax assets are recorded in the balance sheet in accordance with IAS 12 Income Taxes. The tax charge in the profit and loss account comprises taxes payable for the financial year and the change in deferred tax. Deferred tax/deferred tax assets are calculated at a tax rate of 28% on the basis of timing differences between values for accounting and taxation purposes at year-end. Taxable and tax-deductible timing differences which are reversed or can be reversed within the same time interval are netted against each other and entered net. Tax payable in the balance sheet relates to tax on the profit for the year and tax payable related to the group contribution paid. STATEMENT OF CASH FLOWS The statement of cash flows is prepared on the basis of gross cash flows from operations, investment and financing activities. Cash flows from operations are defined as ongoing interest related to customer borrowings, net receipts/ payments related to lending activities, and payments related to the cost of ordinary operations. Cash flows from other securities transactions, as well as the issue and repayment of bond debt and equity are defined as financing activities ACCOUNTING ESTIMATES AND DISCRETIONARY ASSESSMENTS When preparing the annual financial statements in accordance with IFRS, the management makes estimates and assumptions which affect the recorded value of assets, liabilities, equity and results. The estimates are based on discretionary assessments which are considered to be realistic at year-end. New information and future events can give rise to substantially changed estimates with related changes in recorded amounts. Changes in accounting estimates are posted in the period in which the change occurs. If the changes also apply to future periods, the effect is divided over the current and future periods. The most important of these estimates and assumptions are discussed below. Loan losses If there is objective evidence to indicate that one or more events have occurred since the asset was initially recorded, and these events affect the future cash flow, the commitment is written down. Objective events includes defaults, a lack of liquidity or other substantial problems affecting the debtor. Individual commitments are written down if there is objective evidence that a loss event has been identified pertaining to a commitment, and the loss event will reduce the commitment s estimated future cash flows. If there is objective evidence of loan impairment exists, the loss is calculated as the difference between the balance sheet value (loan principal + accrued interest at the date of valuation) and the net present value of future cash flows discounted by the effective interest rate, and taking account of the expected lifetime of the loan. In estimating future cash flows, account is only taken of the credit loss caused by the loss events which have arisen. The estimation of future cash flows from a loan also takes account of loan security which is taken over and sold, including costs in this connection. In valuing loan security, models and rules are used for the calculation of expected realisable values for different types of loan security in a realisation situation. Commitments which have not been individually evaluated for impairment, or commitments which have been individually evaluated but not individually written down, are included in commitments which are evaluated in groups for collective writedowns. In considering the need for a write-down, the loans are divided into groups with largely the same type of risk. Fair value of financial instruments, including derivatives The fair value of financial instruments that are not traded in an active market is determined by using different valuation techniques. This is done on the basis of what the company expects the market to use as a basis for valuing corresponding financial instruments and available information at year-end. When financial instruments are not traded in an active market, valuation requires broad use discretionary assessments. 14 Sparebanken Vest Boligkreditt AS Annual Report 2011

15 Note 2 Classification and valuation of financial instruments 31/12-11 Assets Posted at fair value Financial instr. posted on basis of hedge accounting Valued at amortised cost Loans to and deposits with credit institutions Lendings Commercial paper and bonds Financial derivatives Total Totalt Liabilities Debt to credit institutions Securitised debt Financial derivatives Total / Assets Loans to and deposits with credit institutions Lendings Commercial paper and bonds Financial derivatives 0 0 Total Liabilities Debt to credit institutions Securitised debt Financial derivatives Total / Assets Loans to and deposits with credit institutions Lendings Totl Liabilities Debt to credit institutions Securitised debt Total Sparebanken Vest Boligkreditt AS has no financial instruments classified as held-for-trading, held-to-maturity, or available for sale. The valuation of financial instruments at fair value is determined on the basis of different levels, depending on how objectively the valuation can be determined: Level 1 Financial instruments traded in active markets are classified in level 1. A market is deemed to be active if the market prices are easily and regularly accessible from a stock exchange, broker, industry standard classification system, price-setting service or regulation authority, and these prices represent actual and regularly occurring market transactions at arm s lengh. The market price used for financial assets is the current purchase price. The current selling price is used for financial obligations. Instruments included in level 1 include primary equity and interest rate instruments quoted on the Oslo Stock Exchange. Sparebanken Vest Boligkreditt AS Annual Report

16 Level 2 The fair value of financial instruments that are not traded in an active market (such as certain OTC derivatives) is determined using valuation methods. These valuation methods maximise the use of observable data where this is available, with as little reliance as possible on the concern s own estimates. If all of the essential data needed to determine the fair value of an instrument is observable data, the instrument is included in level 2. Level 3 If part of the essential data is not based on observable market information, the instrument is included in level 3. Sparebanken Vest Boligkreditt AS has commercial paper and bonds classified at fair value. They are all valued using valuation methods (Level 2), except for holdings of Treasury bills in the balance sheet at 31 December 2010 corresponding to NOK 49.8m where the valuation is in accordance with level 1. Note 3 Risk classification of the credit portfolio Credit risk The credit risk is the risk of losses if the bank s customers are unable to meet their obligations related to loans, lines of credit, guarantees and the like. The credit risk is controlled on the basis of predetermined targets for risk profile, rate of return, concentration risk and growth. Measurement of credit risk is based on the following main components: i) probability of default(pd), and ii) exposure on default (EAD) and iii) loss given default (LGD). i) Probability of default (PD) is defined as the likelihood that the customer will default on a commitment in the course of the next 12 months. The default may be a payment default of more than 90 days or other specific circumstances («unlikeness to pay», cf. Basel II), affecting the customer s ability to service its debt. The probability of default is calculated using statistical models (scorecards) based on logistic regression. The models use internal and external data and predict whether the connections are statistical. The results are interpreted and form the basis for logical key figures. Risk classification of all commitments takes place each month through the automatic collection of data from internal and external sources. ii) Expected exposure at default (EAD) is a calculated figure which shows the total exposure to the customer on default. The expected exposure at default is estimated as the expecyed drawdown with an addition for the expected utilisation of the available drawdown rights. iii) Loss given default (LGD) shows the default loss rate for the commitment as a percentage of EAD. It is calculated on the basis of internal models in which the type and value of the collateral and the likelihood of a return to debt-servicing ability are key parameters in calulating LGD. Risk classification of loans and guarantees Sparebanken Vest Boligkreditt AS credit portfolio is split into 11 risk classes from A to K based on debt-servicing ability (probability of default). Sparebanken Vest Boligkreditt and Sparebanken Vest use the same risk classification system. Classification in class K means that the customer has defaulted on a commitments, but not necessarily on the commitment with Sparebanken Vest Boligkreditt AS. As regards defaults related to Sparebanken Vest Boligkreditt AS vises, reference is made to the specification of defaults in note Sparebanken Vest Boligkreditt AS Annual Report 2011

17 Note 3 Risk classification of the credit portfolio cont. Risk classification used by Sparebanken Vest Boligkreditt AS Risk class Probability of default From & incl. Til A 0,01 0,15 B 0,15 0,30 C 0,30 0,45 D 0,45 0,62 E 0,62 0,78 F 0,78 1,01 G 1,01 1,41 H 1,41 2,59 I 2,59 4,48 J 4,48 100,00 K 100,00 write-down Gross loans distributed by risk groups 31/12-11 Loans A-E F-H I-J K Accrued interest Ind. write-downs Total /12-10 A-E F-H I-J K Accrued interest Total /12-09 A-E F-H I-J K 925 Accrued interest Total Sparebanken Vest Boligkreditt AS Annual Report

18 Note 4 Lendings distributed by type of loan, markets and geographical areas 31/ / /12-09 Lendings distributed by type of loan, nominal loan principal Flexiloans Instalment loans Gross lendings to customers Individual loan writedowns Writedowns of loan groups Loans to and receivables from customers at amortised cost Lendings distributed by markets Wage earners Distributed by commercial area; sole traders with mortgage loan Gross lendings to customers Writedown of loan groups Loans to and receivables from customers at amortised cost Loan losses Change in individual write-downs in period Change in writedown of loan groups in period Total losses on loans and guarantees etc Realised losses on loans covered by previous write-downs Realised losses on loans not covered by previous write-downs Realised losses Payment defaults - Individually assessed Defaulted commitments days days More than 90 days Total defaulted commitments Payment defaults of less than 30 days lie outwith the assessment criteria. Gross lendings distributed by geographical area Ind. 31/12-11 Proportion (%) Lendings write-downs Hordaland 87, Sogn og Fjordane 7, Rogaland 4, Other 0, Total - Norway 100, Foreign 0, Total geographical areas 100, Sparebanken Vest Boligkreditt AS Annual Report 2011

19 Note 4 Lendings distributed by type of loan, markets cont. 31/12-10 Proportion (%) Lendings Hordaland 90, Sogn og Fjordane 6, Rogaland 2, Other 0, Ind. writedowns Total - Norway 100, Foreign 0, Total geographical areas 100, /12-09 Proportion (%) Lendings Hordaland 91, Sogn & Fjordane 6, Rogaland 1, Other 0,0 0 Ind. writedowns Total - Norway 100, Foreign 0, Total geographic areas 100, Note 5 Commitments distributed by industries and retail market 2011 Gross loans Unapplied credit Total commitments Retail clients, domestic Retail clients, abroad Total - retail clients Primary industries Industry and mining Building and construction, power and water supply Commerce, hotels and restaurants Transportation, post and telecommunications Real estate operations Other Total - sole traders with mortgage loan Total gross commitments Individual write-downs Write-down of loan groups Total net commitments Sparebanken Vest Boligkreditt AS Annual Report

20 Note 5 Commitments distributed by industries cont Gross loans Unapplied credit Total commitments Retail clients, domestic Retail clients, abroad Total - retail clients Primary industries Industry and mining Building and construction, power and water supply Commerce, hotels and restaurants Transportation, post and telecommunications Real estate operations Other Total - sole traders with mortgage loan Total gross commitments Individual write-downs Write-down of loan groups Total net commitments Gross loans Unapplied credit Total commitments Retail clients, domestic Retail clients, abroad Sum personkunder Primary industries Industry and mining Building and construction, power and water supply Commerce, hotels and restaurants Transportation, post and telecommunications Real estate operations Other Total - sole traders with mortgage loan Total gross commitments Individual write-downs Write-down of loan groups Total net commitments Sparebanken Vest Boligkreditt AS Annual Report 2011

21 Note 6 Loan security Gross lendings are secured largely by a mortgage/charge on assets. The assets consist of real estate. The table below shows the percentage distribution of commitments related to the different levels of mortgage security. For example, 0-50% means that the commitments are less than 50% of the value of the secured object, while 100% means that the loan amount exceeds the value of the secured object. Security level % - 50% 35,6 % 42,9 % 50% - 75% 60,2 % 52,5 % 75% - 90% 2,0 % 3,1 % 90% - 100% 0,7 % 0,5 % 100% - 1,5 % 0,9 % Total 100,0 % 100,0 % Note 7 Loan write-downs posted in the balance sheet Loan write-downs posted in the balance sheet 31/ / /12-09 Write-down of loan groups Loan write-downs at 1 January (nominal values) Increase in write-down of loan groups Reduction in write-down of loan groups Write-down of loan groups Total write-down of commitments All commitments which are to individually assessed shall be considered to determine it there is objective evidence that a loss has arisen and that the loss event will reduce the loan s estimated future cash flow. If objective evidence of impairment is found, the loss on the loan is calculated as the difference between the balance sheet value (balance + accrued interest at the date of assessment) and the present value of futire cash flows. In estimating future cash flows only the credit loss caused by the loss event that has occurred shall be taken into account. The estimation of future cash flows from a loan shall also take account of the takeover and sale of related loan collateral, including the costs of such takeover and sale. When the best estimate of the future cash flow is estimated and recorded, the system will calculate the new value of the loan (amortised cost) and the difference will be the amount of the write-down. The write-down of the loss (against the customer s commitment) shall be carried out when all of the loan collateral has been realised and it is certain that no further payments will be received on the commitment. The claim on the customers remains and will be followed up, unless an agreement has been made with the customer to waive the claim. As at no individual write-downs were posted. Nor were any individual provisions made at or As no individual write-downs were posted in 2011, all commitments are included in those to be assessed for write-downs of group loans. The company has found no need to change the amount of the write-down of loan groups posted in the balance sheet. Sparebanken Vest Boligkreditt AS Annual Report

22 Note 8 Loans to and receivables from credit institutions 31/ / /12-09 Loans to and deposits with credit institutions with no agreed term or period of notice Net loans to and receivables from credit institutions Geographical areas Hordaland Total geographical areas Note 9 Commercial paper and bonds Commercial paper and bonds are recognised at fair value (see note 2). Cost Fair value at 31/ DNB Boligkreditt AS, 3,25 % Sparebank1 Boligkreditt, 3,59 % Terra Boligkreditt AS, 3,67 % Møre Boligkreditt AS, 3,78 % Storebrand Boligkreditt AS, 3,76 % Sparebanken Øst Boligkreditt, 3,53 % Storebrand Boligkreditt AS, 3,65 % DNB Boligkreditt, 3,57 % Sparebanken Sør Boligkreditt AS, 3,53 % Total Cost Fair value at 31/ Treasury bills, 0 % Sparebanken 1 Boligkreditt AS, 2,99 % Terra Boligkreditt AS, 3,04 % Storebrand Boligkreditt AS, 3,05 % Total The company accounts for 2009 contained no commercial paper or bonds. 22 Sparebanken Vest Boligkreditt AS Annual Report 2011

23 Note 10 Debt to credit institutions Debt to credit institutions is classified at amortised cost (see note 2). 31/ / /12-09 With no agreed term Debt to credit institutions The loans are funded through Sparebanken Vest s ordinary funding programme. As compensation, the company pays an interest rate corresponding to 3 mth NIBOR +0.55%. Note 11 Securitised debt Debt established through the issue of securities is classified at amortised cost or subject to hedge accounting (see note 2). Covered bonds ISIN code Nominal amount Coupon rate Issued Currency Maturity 31/ / /12-09 NO NOK Floating 3M Nibor + 0,45 % NO NOK Floating 3M Nibor + 0,55 % NO NOK Floating 3M Nibor + 0,55 % NO NOK Floating 3M Nibor + 0,30 % XS ) EUR Fixed 2,50 % NO NOK Floating 3M Nibor + 0,55 % NO ) NOK Fixed 4,05 % NO NOK Floating 3M Nibor + 0,30% NO NOK Floating 3M Nibor + 0,48% XS ) EUR Fixed 3,13 % NO ) NOK Fixed 5,20 % NO NOK Floating 3M Nibor+0,50 % NO ) NOK Floating 4,96 % NO NOK Floating 3M Nibor+0,69 % Verdijusteringer Total listed covered bonds Financial derivatives to hedge securitised debt (liability) Financial derivatives to hedge securitised debt (asset) Total covered bond obligations in loan portfolio Loan portfolio 31/ / /12-09 Loans secured by home mortgage (hypothecated home loan) 2)3) Commercial paper and bonds Receivables which constitute substitute assets Loan portfolio Level of loan portfolio mortgage cover 115 % 130 % 117 % 1) Sparebanken Vest Boligkreditt AS has established hedge accounting for the relavant bonds. 2) The loan portfolio includes loans totalling NOK 13.6m (9.9m) to Norwegian nationals resident abroad and secured by a mortgage on property in Norway. 3) Of total gross loans, NOK 88m (150m) relates to the non-qualifying part of the loan portfolio, corresponding to 0.28% (0.56) % of gross lendings to customers. Sparebanken Vest Boligkreditt AS Annual Report

24 Note 12 Financial derivatives Financial derivatives are contracts entered into with financial institutions which set interest rate conditions and exchange rates for specific periods. The derivatives are recognised at fair value (see note 2). The company uses financial derivatives exclusively in connection with hedge accounting of fixed interest loans. The hedging instruments consist of tinterest rate and foreign currency swaps. Further information is provided under accounting principles and in note 14 - Market risk. Financial derivatives as at 31/ Nominal value Positive market value Negative market value Interest rate der. earmarked for hedge accounting Interest rate and currency derivatives earmarked for hedge accounting Total derivatives earmarked for hedge accounting Financial derivatives as at 31/ Nominal value Positive market value Negative market value Interest rate and currency derivatives earmarked for hedge accounting The company had no financial derivatives in its accounts for Note 13 Fair value of financial instruments 31/ /12-10 Book value Fair value Book value Fair value Assets Loans to and receivables from credit institutions, amortised cost Net loans to customers, amortised cost Commercial paper and bonds issued by public authorities, recognised at fair value Financial derivatives classified as for hedge accounting Total Liabilities Debt to credit institutions, amortised cost Securitised debt, amortised cost Securitised debt, classified as for hedge accounting Financial derivatives classified as for hedge accounting Total Loans to and receivables from credit institutions are recognised at amortised cost. This relates to floating rate loans where the fair value is virtually the same as amortised cost. The same applies to loans to customers and debt to credit institutions. In the annual accounts for 2009 it was only securitised debt that showed a difference between fair value (NOK ) and book value (NOK ). 24 Sparebanken Vest Boligkreditt AS Annual Report 2011

25 Note 14 Market risk Sparebanken Vest Boligkreditt defines market risk as the risk of losses on financial instruments due to changes in market variables and/or market conditions within a specified time horizon. Market risk can arise if the company has open positions in different financial instruments and this risk can be split into the following main groups; i) the interest rate risk which is the risk of loss due to a change in the market rates, ii) foreign currency risk which is the risk of loss due to a change in exchange rates, and iii) the credit spread risk which is the risk of loss due a change in credit spreads. The company is not exposed to risk related to equity capital instruments. The company s market risk is managed and controlled through establishe Board-approved parameters for maxumum exposure to interest rate and foreign currency risk. The interest rate risk is defined as the risk of loss arising due to changed in the level of interest rates. Sparebanken Vest Boligkreditt s balance sheet consists mainly of loans to the private market at a floating rate of interest and funding through the issue of covered bonds. In the case of bonds issued at a fixed rate of interest, swap agreements must be entered into at a floating rate of interest, at the same time as the bonds are agreed. The company therefore considers the interest rate risk to be very low. For information on sensitivity analyses, reference is made to the tables below. All of the company s home loans are denominated in NOK. The foreign exchange risk arising when bonds are issued in a foreign currency is hedged through a foreign exchange swap staring on the issue date and with repayment on the date of maturity. The company is therefore not exposed to foreign currency risk. The company has established hedge accounting related to bonds issued at a fixed rate and/or in a foreign currency. For a further description of the principles applied please refer to the separate section in note 1. The tables below show the potential gain/loss in the event of a parallel rise in the interest rate of 1 percentage point for the bank s overall positions. Interest rate sensitivity per time period 0-3 months 3-12 months Over 1 year Total 31/ Value change - total balance sheet / Value change - total balance sheet Interest rate sensitivity- distributed by balance sheet items Balance Sheet 31/ /12-10 Lendings Bonds/commercial paper Other Total assets Bonds/commercial paper Other Total liabilities Total Sparebanken Vest Boligkreditt AS Annual Report

26 Note 15 Liquidity risk / residual maturity Liquidity risk is defined as the risk that the company is unable to refinance its debt as it matures, or is unable to fund increases in assets. The liquidity risk is determined by considering the balance sheet structure reduced by adjusting the balance sheet structure, including the bank s dependence on funding, and the extra costs involved in raising long-term funding in the money market compared with the cost of shorter-term funding until maturity. Sparebanken Vest Boligkreditt s current strategy takes account of the recommendations of the Basel Committee concerning good liquidity management for lending institutions. Residual maturity of balance sheet items as at 31/ month 1-3 months 3-12 months 1-5 years Over 5 years Total Debt to credit institutions Securitised debt Interest paid Financial instruments, gross settlement (outflows) Total debt Financial instruments, gross settlement (inflows) Residual maturity of balance sheet items as at 31/12-10 Inntil 1 måned Fra 1-3 måneder Fra 3 mnd til 1 år Fra 1-5 år Over 5 år Totalt Debt to credit institutions Securitised debt Interest paid Financial instruments, gross settlement (outflows) Total debt Financial instruments, gross settlement (inflows) All values are nominal and in NOK million. Note 16 Net interest income and credit commissions Interest etc. on loans to and receivables from credit institutions Interest etc. on lendings to and receivables from customers (amortised cost) Interest etc. on commercial paper and bonds Interest and similar income Interest etc. on debt to credit institutions Interest etc. on securitised debt Other interest and similar costs 0 1 Interest and similar costs Net interest income and credit commissions Sparebanken Vest Boligkreditt AS Annual Report 2011

27 Note 17 Other operating expenses Salaries and fees Pensions Social security expenses Administration expenses Salaries and general administration expenses Ordinary depreciation of fixed assets (cf. note 20) Depreciation Management fees Other operating expenses Other operating expenses Total operating expenses Fee to elected auditor Audit fee Assistance with Covered Bond Programme and research Total fees The audit fee relates to ordinary audit functions and includes value added tax. Sparebanken Vest Boligkreditt AS Annual Report

28 Note 18 Transactions with related parties This information is provided in accordance with IAS 24 - Related Party Disclosures. Sparebanken Vest Boligkreditt defines it parent company, Board members and the Group Management of Sparebanken Vest as related parties in relation to this accounting standard. Remuneration to the managing director and the Board of Directors is stated in accordance with the requirements of the Accountancy Act (Norway). Transactions between the company and the parent bank are conducted on the basis of normal commercial terms and principles. Office support functions and the management of loans are mainly services purchased from Sparebanken Vest. A complete Transfer and Servicing Agreement has been entered into between the company and Sparebanken Vest. Intra-group transactions Sparebanken Vest Key personnel Profit and Loss Account Interest received and credit commissions from related parties Interest on deposits from related parties Salaries Management fee Balance Sheet Loans to related parties Debt to related parties of which securitised debt Group contribution paid Intra-group transactions Sparebanken Vest Key personnel Profit and loss account Interest received and credit commissions from related parties Interest on deposits from related parties Salaries Management fee Balance Sheet Loans to related parties Debt to related parties of which securitised debt Group contribution paid Sparebanken Vest Boligkreditt AS Annual Report 2011

29 Note 18 Transactions with related parties cont. Salaries and other remuneration to senior employees Sparebanken Vest Boligkreditt AS purchases administrative services from Sparebanken Vest, including the cost of managing director services. The company has had one employee in the course of 2011 and a defined contribution based pension scheme has been established for this person. The pension premium is charged when it falls due. Elected officers 2011 Salary/ fee Loan Managing director Consideration paid to Sparebanken Vest for managing director services Board of Directors Knut Ravnå, chairman 75 0 Pål Pedersen, deputy chairman Inga Lise Moldestad 50 0 Vibeke Knudsen Eivind Areklett Norebø 8 0 Total Elected officers 2010 Salary/ fee Loan Managing director Consideration paid to Sparebanken Vest for managing director services Board of Directors Knut Ravnå, chairman 75 0 Pål Pedersen, deputy chairman Inga Lise Moldestad 50 0 Vibeke Knudsen 50 0 Total Board fees are in accordance with resolutions of the Corporate Assembly. Sparebanken Vest Boligkreditt AS Annual Report

30 Note 19 Taxes Tax charge for the year Tax payable Change in deferred tax Tax effect of group contribution Correction related to previous year Tax charge for the year Pre-tax profit % tax on Accounting result before tax Non-deductible costs Tax charge Effective rate of tax 28 % 28 % 28 % Change in deferred tax in balance sheet: 31/ / /12-09 Book value at 1 January Profit for the year Timing difference related to group contribution paid Book value at 31 December The calculation of deferred tax /deferred tax assets is based on the timing differences between the accounting and taxation values at year-end and the tax loss to be carried forward. Deferred tax assets relates to the following timing differences 31/ / /12-09 Securitised debt Commercial paper and bonds Total deferred tax assets The deferred tax liability relates to the following timing differences 31/ / /12-09 Group contribution paid Securitised debt Commercial paper and bonds Interest swap agreements Total deferred tax liability Net deferred tax The proposed group contribution of NOK 95m for financial year 2011 will be considered by the AGM in the spring of Sparebanken Vest Boligkreditt AS Annual Report 2011

31 Note 20 Intangible assets Software and licences Financial year 2009 Book value at 1/ Additions 267 Depreciation Book value at 31/ At 31 December 2009 Cost Accumulated depreciation Book value at 31/ Financial year 2010 Book value at 1/ Additions 91 Accumulated depreciation Book value at 31/ At 31 December 2010 Cost Accumulated depreciation Book value at 31/ Financial year 2011 Book value at 1/ Additions 0 Depreciation 521 Book value at 31/ At 31 December 2011 Cost Accumulated depreciation Book value at 31/ Software/licences are depreciated on a straight line basis over their expected economic lifetime which is estimated at 3 years. Note 21 Post-balance sheet events «The loan portfolio has been increase with the transfer of new home loans totalling NOK 5 965m from the parent bank since year-end (2 and 23 January 2012). In addition, the company issued a new covered bonds in February 2012 with a nominal value of EUR 500m in the European market. The bonds mature in 2017.» Sparebanken Vest Boligkreditt AS Annual Report

32 Note 22 Capital adequacy With effect from and including the second quarter of 2009 Sparebanken Vest Boligkreditt AS has been permitted to calculate the minimum capital base requirement for the credit risk attached to the home loan portfolio applying the IRB method. This permission means that the company must apply the transitional rules provided for in the regulations governing capital adequacy requirements. The transitional rules are based on previous Basel I rules, with a gradual de-escalation of the capital requirement. Capital base 31/ /12-10 Share capital Other equity Total balance sheet equity Intangible assets Group contribution Expected loss Total deduction Core capital Supplementary capital - - Net capital base Minimum capital requirement under Basel II 31/ /12-10 Credit risk Market risk - - Operational risk Minimum capital requirement under IRB Correction to transitional scheme Minimum capital base requirement Capital adequacy, Basel II 31/ /12-10 Basis of calculation Core capital ratio (%) 59,4 % 39,8 % Capital ratio (%) 59,4 % 39,8 % Calculated regulatory surplus Capital adequacy - transitional scheme Basis of calculation - IRB Basis of calculation - transitional scheme 80 % Core capital ratio % 11,5 % 9,3 % Capital ratio (%) 11,5 % 9,3 % Calculated regulatory surplus Sparebanken Vest Boligkreditt AS Annual Report 2011

33 Statement pursuant to Section 5-5 of the Securities Trading Act We herby confirm that the annual accounts for the company for 2010 to the best of our knowledge have been prepared in accordance with applicable accounting standards and give a true and fair view of the assets, liabilities, financial position and profit and loss of the company taken as a whole. The directors report gives a true and fair development and performance of the business and the position of the company, as well as a description of the principal risks and uncertainties facing the company. Bergen, 14 February 2012 The Board of Directors of Sparebanken Vest Boligkreditt AS Knut Ravnå, styrets leder pål Pedersen, styrets nestleder Inga Lise Moldestad Vibeke Knudsen Eivind Areklett Norebø egil Mokleiv, adm.direktør Sparebanken Vest Boligkreditt AS Annual Report

34 Auditor s report 34 Sparebanken Vest Boligkreditt AS Annual Report 2011