EIENDOMSMEGLER VEST KYTE NÆRINGSMEGLING NORNE SECURITIES BRAGE FINANS FRENDE FORSIKRING SPAREBANKEN VEST BOLIGKREDITT AS. Annual Report 2012

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1 EIENDOMSMEGLER VEST SPAREBANKEN VEST BOLIGKREDITT AS FRENDE FORSIKRING NORNE SECURITIES Annual Report 2012 BRAGE FINANS KYTE NÆRINGSMEGLING

2 Content About Sparebanken Vest Boligkreditt AS 3 Directors report Profit and loss account 9 Balance sheet 10 Statement of cash flows 11 Equity movements 12 Notes Statement pursuant to Section 5-5 of the Securities Trading Act 31 Auditor s report 32 Photo p. 3 & 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 Årsberetning 2012

4 Directors Report 2012 Introduction Sparebanken Vest Boligkreditt s registered office is in Bergen. It is a wholly owned subsidiary of Sparebanken Vest. The company has a licence to operate as a finance company with the right to issue covered bonds. Most of the cover pool consists of home mortgage loans granted by Sparebanken Vest that meet the conditions set by the company for loans that may be included in the cover pool. At year-end 2012, the company s lendings totalled NOK 39.2 billion, an increase of NOK 8.1 billion, or 25.9% in the financial year. Debt established through the issuing of covered bonds increased from NOK 28.3 billion at year-end 2011 to NOK 34.7 billion at the end of The rating agencies assessment of Sparebanken Vest Boligkreditt and Sparebanken Vest is important to the Group s ability to raise funds and to borrowing costs. The company uses the rating agencies Fitch Ratings and Moody s Investor Service, and all bonds issued by Sparebanken Vest Boligkreditt have a credit rating of AAA and Aaa, respectively. The company has established a bond programme which is used in connection with the issuing of bonds, both in Norway and abroad. In connection with the annual update in 2012, the programme s total limit was increased from EUR 5 billion to EUR 8 billion. Since May 2009, Sparebanken Vest Boligkreditt has had permission from the Financial Supervisory Authority of Norway to use the IRB method to calculate regulatory capital. The transitional rules for companies with such approval continued to apply in 2012 as well, which means a weighting of 40% for home mortgages. In autumn 2012, however, the authorities indicated that the weighting of home mortgages should be at least 35%, and it is reasonable to assume that the lowest weighting can be used for home mortgages in companies with IRB approval. IRB approval will therefore not result in significantly lower weighting than if the company had not used the IRB method, but the use of such methods results in better risk and capital management in the company. The market The opportunities for raising funds by issuing covered bonds were good in 2012 as well. Investors in Norway still show great interest in covered bonds. This type of bonds has become established as an important asset class in the Norwegian market, especially because the volume of the Norwegian government bond market is limited. Because Norway has experienced better economic development than most other countries for several years, interest in covered bonds issued by Norwegian companies is also high in foreign markets, and in the European market in particular. Foreign investors focus on country risk and the quality of the assets in the the cover pool. In 2012, Sparebanken Vest Boligkreditt issued new bonds in the amount of NOK 9.8 billion. The volume of bonds is equally divided between bonds denominated in NOK and in foreign currencies. The company also saw its first bonds reach maturity in June In February, Sparebanken Vest Boligkreditt carried out its third public issue denominated in EUR. This issue was also well very received in the market and was considerably oversubscribed. The loan was divided between approximately 100 different investors. Corporate governance Sparebanken Vest Boligkreditt s principles and policy for corporate governance are based on the Norwegian Code of Practice for Corporate Governance adopted by the Norwegian Corporate Governance Board (NUES). The company adjusts its governance to this framework to the extent that it is appropriate. Sparebanken Vest Boligkreditt s principles and policy are intended to ensure that its corporate governance is in accordance with generally accepted and recognised perceptions and standards and in compliance with statutes and regulations. Moreover, the bank s corporate governance shall ensure good cooperation between its different stakeholders, such as shareholders, lenders, customers, employees, governing bodies, management and society as a whole. In the Board of Directors opinion, Sparebanken Vest Boligkreditt s corporate governance is satisfactory and in compliance with these principles and policy. The Board of Directors held seven meetings in The Board of Directors main focus has been on following up operations, strategy, risk and capital management, and on monitoring markets and framework conditions. The Board of Directors has drawn up a yearly plan for its work, and it endeavours to ensure that its members have the requisite knowledge and expertise. Sparebanken Vest Boligkreditt is a wholly owned subsidiary of Sparebanken Vest and it is therefore exempt from the requirement for a separate audit committee. The company has an independent and effective external and internal audit function, as well as financial reporting and risk reporting that is in accordance with statutes and regulations. Sparebanken Vest Boligkreditt carries out an annual review of risk and internal control, and any operational incidents that can result in non-conformities and/or losses are registered on a continuous basis. The company s risk strategy is considered by the Board of Directors. Identified risk areas and any material deviations of the company s financial reporting are followed up using the company s system for risk management and internal control, with reporting to the Board at all board meetings. Sparebanken Vest Boligkreditt has signed an agreement with Sparebanken Vest s Finance and Accounting Department. This agreement comprice financial reporting, internal financial management, direct and indirect taxes, and internal control of financial reporting. This includes quarterly financial reporting in accordance with applicable legislation, accounting standards and the accounting principles adopted for the company. A template 4 Sparebanken Vest Boligkreditt AS Annual Report 2012

5 has been drawn up for reporting, which is intended to ensure the completeness of the reporting basis and the consistent application of principles. In addition to reviewing the accounts and risk reporting, the company s management carries out a monthly review of operating reports seen in relation to the budget for company s operations, and briefs the Board of Directors at each board meeting. The company s ethical guidelines include a duty to report matters that warrant criticism, including breaches of internal guidelines, laws and regulations, and a procedure for how such information is to be given. Sparebanken Vest Boligkreditt s business is subject to supervision by the Financial Supervisory Authority of Norway. The Board of Directors and management endeavour to maintain an open and constructive dialogue with the Financial Supervisory Authority. Statement concerning the annual accounts Income statement Sparebanken Vest Boligkreditt s financial statements are reported in accordance with full IFRS from and including the financial year The figures for 2011 are therefore comparable with the presentations and notes to the accounts for The company recorded an operating profit before write-downs and tax of NOK million for the financial year 2012, compared with NOK million in After tax provisions, the profit amounted to NOK million in 2012, compared with NOK 75.9 million in The company s interest and similar income amounted to NOK 1,499.1 million in 2012, compared with NOK 1,117.9 million in Net interest and similar income amounted to NOK million in 2012, compared with NOK million in Net other operating income was NOK 2.8 million in 2012, largely due to income statement effects relating to realised and unrealised changes in the value of financial instruments. The corresponding figure for 2011 was minus NOK 6.8 million. The company s operating expenses amounted to NOK 54.2 million in 2012, compared with NOK 45.8 million in Cooperation with Sparebanken Vest is formalised in various agreements that ensure that the company has the required expertise in key areas, while at the same time facilitating cost-efficient operation. The fees paid by the company to the parent bank are based on normal commercial principles. They amounted to NOK 43.9 million in 2012, compared with NOK 37.4 million in The increase is mainly due to growth in the volume of the loan portfolio. Group write-downs of NOK 2.0 million on loans were expensed in Previous group write-downs on the company s loans amounted to NOK 0.7 million, so that the total write-downs at year-end 2012 amounted to NOK 2.7 million. The tax expense for 2012 is calculated to be NOK 87.4 million, corresponding to 28% of the profit before tax and write-downs. The net profit after tax for 2012 was thus NOK million, corresponding to a return on equity of 12.0% after tax. In conformity with Section 3-3a of the Norwegian Accounting Act, the Board of Directors confirms that the accounts have been prepared on the basis of the going concern assumption. Balance sheet At the end of the financial year, Sparebanken Vest Boligkreditt had total assets of NOK 41.5 billion, an increase of NOK 8.7 billion, or 26.5%, for the financial year. During the same period, net loans to customers increased by NOK 8.1 billion, or 25.9%, and amounted to NOK 39.2 billion at year-end The increase was due to the purchase of home mortgage portfolios from the parent bank. In 2012, the company s securities debt increased by NOK 6.4 billion and the outstanding portfolio financed by issuing covered bonds amounted to NOK 34.7 billion at year-end. The company s debt to financial institutions amounted to NOK 3.9 billion at year-end, compared with NOK 2.5 billion at year-end This liability item is related to a credit facility the company has with the parent bank. At year-end, the capital adequacy ratio was 9.8%, based on the transitional rules for IRB-approved entities. The capital adequacy consists in its entirety of core capital. If the capital adequacy is calculated on the basis of the Basel II-rules, the capital adequacy ratio would be 42.8% at year-end. At year-end 2011, the company s capital adequacy ratio was 11.5 % calculated on the basis of the transitional rules. The net cash flow in 2012 was positive in the amount of NOK 94.3 million, which resulted in a corresponding increase in the company s deposits with financial institutions. Risk Pursuant to the laws and regulations governing enterprises with a licence to issue covered bonds, all types of risk must be at a low level. The Board of Directors places great emphasis on managing risk by identifying and measuring different types of risk. The company has adopted guidelines and parameters for the management and control of different kinds of risk in order to ensure that the company enjoys the market s trust. It is the Board s opinion that the company s overall risk exposure is low. Credit risk Credit risk is defined as the risk that a borrower or counterparty will be unable to meet its obligations to Sparebanken Vest Boligkreditt. The company s credit approval framework contains requirements stipulating which loans may be included in the company s loan portfolio. There were no significant changes in the company s risk profile in the financial year. Sparebanken Vest Boligkreditt s assets largely consist of home mortgage loans where the outstanding balance on the loan does not exceed 75% of an appropriate value assessment of the mortgaged property. At year-end, gross defaulted loans were 0.06% of total commitments. No actual losses on loans were incurred by the company in the financial year and the Board of Directors 5 Sparebanken Vest Boligkreditt AS Annual Report 2012

6 considers the quality of the loan portfolio to be very good. A fall in house prices would reduce the net value of the company s cover pool, and quarterly stress tests are carried out to calculate the effect of any negative trend in house prices. The Board of Directors 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 since the company s investments in interest-bearing securities are of high quality and are placed with Norwegian issuers of covered bonds with a high rating. Market risk Market risk is defined as the risk of financial loss as the 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 have been adopted that define maximum expo sure to fluctuations in the interest and exchange rate markets. All of the company s home mortgages are at a variable rate of interest that can be adjusted with six weeks notice to the customers. At year-end 2012, the company had issued bonds denominated in NOK and EUR at both fixed and floating interest rates. The company uses financial derivatives in order to eliminate market risk as far as possible. The company endeavours to eliminate the risk attached to issuing bonds at fixed interest rates or denominated in a foreign currency by entering into swap agreements concurrently with the issuing of the bonds. Swap agreements of this kind are entered into with counterparties of high quality. They are based on agreements that are considered to be advantageous for the company and that are accepted by the rating agencies it uses. The company s investments in interest-bearing securities are denominated in NOK and run at a floating rate of interest. The market risk is therefore low. The Board of Directors considers the interest and exchange rate risk, as well as the overall market risk, to be low. Liquidity risk Liquidity risk is the risk that the company will not be able either to refinance its commitments 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 to maturity of the bonds by up to 12 months. This right can exercised if the company has difficulty arranging refinancing on the ordinary maturity date. Sparebanken Vest Boligkreditt plans for major maturities falling due by buying back its own bonds and reinforcing liquidity prior to maturity. The company also has a long-term drawing right with Sparebanken Vest, as well as an agreement whereby the parent bank undertakes to provide liquidity support to ensure that the company makes timely settlement of outstanding bonds and related derivatives. The Board of Directors considers the liquidity risk to be moderate. Operational risk Operational risk is the risk of losses as the result of errors and irregularities in the management of transactions, inadequate internal control or irregularities in the systems used by the company. Operational risk is identified through expert assessments and management confirmations that are part of the company s internal control. The company has entered into a management agreement with Sparebanken Vest that includes management, bank production and IT operations, as well as financial and risk management. Under the agreement, the bank must compensate the company for any expenses incurred as the result of any defects in the deliveries and services the bank provides. The operational risk is assessed on an ongoing basis. The company uses PriceWaterhouseCoopers as its internal auditor, and any non-conformities are reported to the Board. The Board of Directors considers the operational risk to be low, including the risk related to the financial reporting process. Employees and the working environment Sparebanken Vest Boligkreditt s assets largely consist of home mortgage loans where the outstanding balance on the loan does not exceed 75% of an appropriate value assessment of the mortgaged property. At year-end, gross defaulted loans were 0.06% of total commitments. No actual losses on loans were incurred by the company in the financial year and the Board of Directors considers the quality of the loan portfolio to be very good. A fall in house prices would reduce the net value of the company s cover pool, and quarterly stress tests are carried out to calculate the effect of any negative trend in house prices. The Board of Directors 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 since the company s investments in interest-bearing securities are of high quality and are placed with Norwegian issuers of covered bonds with a high rating. Sickness absence was 3 % in No serious accidents occurred or were reported during the year. Outlook Overall, the international economy is still in a period of falling or low growth. The sovereign debt crisis has been less acute in several European countries in recent months, but the economic outlook is still weak. The development of Norway s economy, and in Western Norway in particular, is to some extent sheltered from economic developments abroad. A strong Norwegian krone and high cost level will probably lead to export-oriented industries facing bigger challenges in the longer term. House prices in Norway continued to rise throughout 2012, with an average price growth of 8.8% in Norway as a whole, and 8.2% for houses in Western Norway. The reasons for the price increase are high demand for houses, continued low building activity, a high employment level, good wage growth and relatively low interest rates. Most likely house prices will continue to rice in There will probably be several regulatory changes in the future. 6 Sparebanken Vest Boligkreditt AS Annual Report 2012

7 The possible introduction of a requirement for capital buffers will affect Sparebanken Vest Boligkreditt s capital level. The authorities are also considering introducing limitations on how much of a bank s assets can be transferred to issuers of covered bonds. It is expected that these possible limitations will not be quantitative, but that they will be of a qualitative nature based on an evaluation of the individual banking group. The Board of Directors has also noted that the Ministry of Finance has asked both Norges Bank and the Financial Supervisory Authority of Norway for their views on granting issuers of covered bonds access to loans from Norway s central bank. In the Board opinion, this would formalise the Norwegian authorities view that issuers of covered bonds are important to Norway s financial stability. The market for covered bonds issued by Norwegian issuers with a high rating is expected to remain firm. Demand for covered bonds is expected to remain high in Norway. In the European market the demand for Norwegian covered bonds will remain high because large earlier investments by foreign investors are approaching maturity, and these investors will have access to a relatively small volume of new issues in their own markets. Covered bonds issued in Norway are considered to be a good investment alternative because of Norway s robust financial position. Only a very small volume of bonds issued by Sparebanken Vest Boligkreditt will mature in In the Board of Directors view, the company will therefore be able to cover its financing needs through new issues both in Norway and internationally, and this can be done on better terms in 2013 than the company experienced the year before. The company will continue to market itself actively to existing and potential new investors both in Norway and abroad with a view to securing broad distribution of the company s bonds. Banks and credit companies financing costs in connection with the issuing of covered bonds decreased considerably in the last six months of The activities of Sparebanken Vest Boligkreditt therefore help the Sparebanken Vest Group to offer home mortgages on competitive terms, and in 2013 the company s activities are again expected to be profitable for the owner in a market characterised by keen competition for home mortgage customers. In January 2013, Sparebanken Vest Boligkreditt further increased its share capital by NOK 300 million, so that it now amounts to NOK 2.0 billion. Sparebanken Vest Boligkreditt therefore plans to purchase more portfolios of qualified mortgages from the parent bank in Allocations The profit after tax for 2012 amounted to NOK million, and the bank s distributable equity at year end amounted to NOK million. The Board of Directors proposes distributing a dividend of NOK million to Sparebanken Vest for The remaining part of the profit after tax, NOK 0.7 million, will be transferred to other equity. The dividend size is considered to be justifiable since the Board assumes that the parent bank will increase the company s capital if the need arises. Bergen, 31 December 2012 / 5 February 2013 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 7 Sparebanken Vest Boligkreditt AS Annual Report 2012

8 8 Sparebanken Vest Boligkreditt AS Årsberetning 2012

9 Income statement Notes Interest income and similar income Interest expenses and similar expenses Net interest and credit commission income Commission income and income from banking services Commission expenses and expenses relating to banking services Net gain/(loss) on and change in value of financial instruments Other operating revenues Net other operating revenues Net operating revenues Payroll and general administration expenses Depreciation Other operating expenses Total operating expenses Operating profit/loss before write-downs and tax Write-downs and losses on loans 4, Pre-tax profit Tax expense Profit after tax Profit per share (NOK) 132,11 60,39 Diluted profit per share (NOK) 132,11 60,39 Statement of comprehensive income Profit for the period Other items in the statement of comprehensive income 0 0 Total profit for the period Sparebanken Vest Boligkreditt AS Annual Report 2012

10 Balance sheet Assets Notes 31 Dec Dec Loans to and receivables from credit institutions Net lending 3,4,5,6, Certificates and bonds Deferred tax asset Intangible assets Financial derivatives Earned income not received Total assets Liabilities and equity Debt to credit institutions 10, Securitised debt 11, Financial derivatives Public charges and holiday pay owed Deferred tax Tax payable Other liabilities Total liabilities Share capital Total paid-up equity Other equity Total equity Total liabilities and equity Bergen, 31 December 2012 / 5 February 2013 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 10 Sparebanken Vest Boligkreditt AS Annual Report 2012

11 Cash flow statement 31 Dec Dec Cash flows from operations Interest, commission and customer fees received Interest, commission and customer fees paid Interest received on other investments Payment of interest on borrowings Payments to other suppliers for goods and services Paym. to employees, pens. schemes, empl. Nat. Ins. contr., tax withholdings etc Payments of direct and indirect taxes Net cash flow from operations Cash flows from investment activities Payments made/received on loans to customers Paym. made/recvd. on purch./sales of other securities in the bank portfolio Net cash flow from investment activities Cash flows from financing activities Payments made/received relating to debt to credit institutions Payments received on issuing bond debt Payments made relating to redemption of bond debt Payments received on issuing of new shares Payment of group contribution Net cash flow from financing activities Net cash flow for the period Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Sparebanken Vest Boligkreditt AS Annual Report 2012

12 Changes in equity Share capital Other equity Total Equity at 31 December Capital increase 5 January Capital increase 31 August Capital increase 2 December Profit for the period Group contribution paid Equity at 31 December Profit for the period Group contribution paid Equity at 31 December The share capital as of 31 Dec is NOK 1,700 million divided between 1,700,000 shares with a nominal value of NOK 1,000. All the shares are owned by Sparebanken Vest. The company increased its share capital by NOK 300 million on 15 January The proposed dividend for 2012 is NOK 224 million. 12 Sparebanken Vest Boligkreditt AS Annual Report 2012

13 Noter Notes 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). 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 Company has applied no new standards or changes in 2012 New and amended standards/ interpretations with no significance for the annual financial statements for 2012 Amendment of IFRS 7 Financial Instruments Presentation. The change relates to increased transparency requirements in regards the transferring of financial assets that the company still has an involvement in, and aims to give its users a better picture of the exposure of the company that is transferring the financial assets. Amendment of IFRS 1. First-time adoption of IFRS after period of severe hyperinflation and Removal of fixed dates for first-time adopters Amendment of IAS 12. Deferred tax: Recovery of Underlying Assets. 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. 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. Amendments to IAS 32 (Revised) Presentation of Financial Statements. Provides clarification relating to offsetting of financial assets and liabilities where the counterparty is the same. Change is effective for fiscal years beginning 1 January 2014 or later. The EU has approved the changes.amendment to IFRS 7. 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 EU has approved the standard. Changes to IAS 1 (Improvement program 2011). Clarification of the requirements for comparative data and information. The EU has not approved this standard. Changes to IAS 32 (Improvement program 2011). Stresses that the tax effect of distributions to equity owners should be accounted for in regards to IAS 12 income taxes. The EU has not approved this standard. 13 Sparebanken Vest Boligkreditt AS Annual Report 2012

14 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 from loans are recognised under net interest income in those cases where there are write downs. Interest income on impaired loans are accounted for with the use of the original effective interest rate with the impaired loan as the basis. This results in the estimated interest until to the write down date ( healthy interest) being added to the principal by calculating the amortised cost. Changes in the loan s interest rate, which reflect changest in the market rates, do not affect the value of the loan. Financial liabilities at a floating rate of interest in NOK 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 write-down. 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. 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. 14 Sparebanken Vest Boligkreditt AS Annual Report 2012

15 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 In 2012 there were changes approved in the classification of the 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. 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 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 write-downs. In considering the need for a write-down, the loans are divided into groups with largely the same type of risk.the evaluation is based on objective evidence of a fall in value that has occurred on the balance sheet date and can be linked to the group. The calculation of write down needs at the group level is based on the bank s risk classification system, which shall be suitable to recognize impairments in payment statuses based on observable and registered data. 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. Individual commitments are written down if there is objective evidence that a loss event has been identified pertaining to a 15 Sparebanken Vest Boligkreditt AS Annual Report 2012

16 Note 2 Classification and valuation of financial instruments 31 Dec Assets Posted at fair value Financial instr. posted on basis of hedge accounting Valued at amortised cost Loans to and receivables from credit institutions Lendings Certificates and bonds Financial derivatives Total Totalt Liabilities Debt to credit institutions Securitised debt Financial derivatives Total Dec Assets Loans to and receivables from credit institutions Lendings Certificates and bonds Financial derivatives Total Liabilities Debt to credit institutions Securitised debt Financial derivatives Total Sparebanken Vest Boligkreditt AS has no financial instruments classified as held for trading purposes, held to maturity, or available for sale. The valuation of financial instruments at fair value is divided into different levels depending on how objectively the valuation can be performed: Level 1 Financial instruments traded in active markets are classified as level 1. A market is deemed to be active if the market prices are easily and regularly available from a stock exchange, broker, industry group, pricing service or regulatory authority, and these prices represent actual and regularly occurring market transactions at arm s length. The market price used for financial assets is the applicable purchase price, while the applicable sales price is used for financial commitments. Level 2 The fair value of financial instruments that are not traded in an active market is determined by using valuation methods. These valuation methods maximise the use of observable data where available and, as far as possible, are not based on the use of own estimates. If all the material data required to determine the fair value of an instrument are observable data, the instrument is included in level 2. Level 3 If one or more data items are not based on observable market information, the instrument is included in level 3. Sparebanken Vest Boligkreditt AS has certificates and bonds classified at fair value. They are all valued using valuation methods (Level 2). 16 Sparebanken Vest Boligkreditt AS Annual Report 2012

17 Note 3 Risk classification of the credit portfolio Credit risk Credit risk is the risk of losses if the bank s customers are unable to meet their commitments to the company relating to loans, credit facilities, guarantees etc. Credit risk relating to derivative transactions is quantified using conversion factors that depend on the contract type and term to maturity. The measurement of credit risk is based on the following main components: i) probability of default (PD), ii), expected exposure at default (EAD) and iii) loss given default (LGD). i) Probability of default (PD) is defined as the probability of a customer defaulting on a loan within the next 12 months. A default can be default of payment in excess of 90 days or other concrete circumstances ( unlikely to pay, cf. Basel II), that affect the customer s ability to service the debt. The probability of default is calculated using statistical models (scorecards) based on logistic regression. Eleven risk classes from A to K are used in order to group the credit portfolio by debt-servicing ability. ii) Expected exposure at default (EAD) is an estimated amount that shows the total exposure in relation to the customer in the event of default. EAD is estimated as the expected utilisation of credit plus the expected utilisation of unutilised drawing rights. iii) Loss given default (LGD) indicates the loss ratio on a commitment in default expressed as a percentage of EAD. It is calculated on the basis of internal models. The type and value of loan security and the probability of recovery are key parameters in calculating the loss ratio. Risk classification of loans and guarantees The scorecard models combine internal and external data to predict statistical relationships. The results are interpreted and form the basis for logical key figures, and they have a central place in the management of credit risk. A risk classification of all commitments is carried out every month in which data from internal and external sources are retrieved automatically. Sparebanken Vest Boligkreditt and Sparebanken Vest use the same risk classification system and adjusted scorecards were developed in The adjusted scorecards distinguish between products, so that customers are assigned one PD for home mortgages and another PD for other products. These models are used internally in connection with the granting of loans and pricing, and the calculation of group write-downs. The group is waiting for approval from the Financial Supervisory Authority of Norway as regards the calculation of capital. A new system of risk classes has been introduced internally in this connection. The new system endeavours to achieve a more stable distribution across risk classes. Decision zones have been adjusted in accordance with the new risk classes, but they have not been significantly changed. The old and new system of risk classes is shown in the table below. Risk classes based on probability of default Risk class New intervals Old intervals From and incl. Up to From and incl. Up to A 0,00 % 0,10 % 0,00 % 0,15 % B 0,10 % 0,25 % 0,15 % 0,30 % C 0,25 % 0,50 % 0,30 % 0,45 % D 0,50 % 0,90 % 0,45 % 0,62 % E 0,90 % 1,50 % 0,62 % 0,78 % F 1,50 % 2,75 % 0,78 % 1,01 % G 2,75 % 5,00 % 1,01 % 1,41 % H 5,00 % 10,00 % 1,41 % 2,59 % I 10,00 % 25,00 % 2,59 % 4,48 % J 25,00 % 99,99 % 4,48 % 100,00 % K 100,00 % 100,00 % 100,00 % 100,00 % Loans broken down by risk class Commitment A-D E-H I-J K Total 2) ) The definition of a customer s commitment in connection with the calculation of risk classification will deviate somewhat in a few areas from the definition of credit exposure pursuant to IFRS. The total amount in this note will therefore not be fully reconcilable with commitments as defined in Note Sparebanken Vest Boligkreditt AS Annual Report 2012