CONTENTS. PHOTOS: Vegard Fimland, Gaute Hatlem, Tomas Morel, Reiel Haugland GRAPHIC DESIGN: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS

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1 ANNUAL ÅRSMELDING REPORT

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3 CONTENTS 4 A time of change! 6 Key figures, parent company 7 Key figures, consolidated 8 About the Bank 10 Good for society = Good for the bank 12 Financial literacy for young adults 15 Directors report 26 Profit and loss account 28 Balance sheet 30 Cash flow statement 31 Equity statement 32 Notes 82 Declaration by the Board of Directors and CEO 84 Auditor s report 85 The audit committee 86 Consolidated financial results by quarter 89 Key figures for regional banking centres 90 Directors and committee members 9 1 Executive committee 92 Organisational chart 94 Ownership structure 95 Contact us PHOTOS: Vegard Fimland, Gaute Hatlem, Tomas Morel, Reiel Haugland GRAPHIC DESIGN: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS Sparebanken Sogn og Fjordane ANNUAL REPORT

4 A time of change! Greater expertise, a good working environment and new technology are combining to make us stronger and more effective. It is essential to implement and adapt to new technology if we want to successfully compete for customers. However, it is the expertise of our employees and our good working environment that enable us to turn that technology into a competitive advantage. It isn t the technology per se that makes us competitive it is how we use it. That s why the expertise of our employees and our working environment have always been our top priorities. PERFORMING STRONGLY We re keeping up with the best of them. In a year when the big national and Nordic banks, operating in much larger markets than we do, delivered fantastic results, we kept up with them. In terms of our cost/income ratio, we re one of the leading banks in Norway. That s quite an achievement, given that we re based in a relatively sparsely populated county where we operate 22 branches. We are, and want to remain, both the market leader and the bank with the widest physical presence in the county. That s why we also need to look at new ways of going about our business. Our videoconferencing equipment is getting used more and more. We have flexible employees who are willing to travel the length and breadth of the county in the course of their work. For us, adaptation and change are continuous processes. A STRONG FINANCIAL PERFORMANCE GENERATES TRUST Last year, we achieved record profits once again. NOK 475 million is such a big number that is hard for most people to fathom what it really means. But for the Sparebanken Sogn og Fjordane Group, it is the proof that taking a long-term, consistent approach brings rewards. 4 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

5 Our performance is also just what we need to maintain the trust of financial markets, while giving us the resources and muscle to continue developing our organisation and keep up with technological developments. If we want our funding costs in the financial markets to remain reasonable, we must consistently deliver strong financial results. In total we have borrowed NOK 15 billion in bond markets, to fund our lending programme and provide the reserves we need. When we compete for this funding, trust is the key. Trust is the most precious commodity in our industry. A LOCAL, REGIONAL AND NATIONAL BANK The challenge for us is to be perceived as a local bank by our customers, to have a regional outlook for our development and value creation, and to be competitive at a national level. That s a difficult balancing act, but not an impossible one. Our customer surveys show that many people see us as their local bank. Our contribution to value creation in the region, and our position as the clear market leader, suggest that we are managing to do our bit for local businesses and the local community. We may be a local bank, but our customer growth outside our home county demonstrates that we remain competitive even when our customers dream is to own a house in a completely different part of Norway. Measured by total lending, Bergen is now our biggest market, closely followed by Oslo, with Førde and Flora following in third and fourth place. Soon half of all our lending to retail customers will be invested in properties outside our home county. A CHANGING COUNTY Looking at the bigger picture, the developments that have taken place over the past ten years are hard to believe. In our day-to-day lives we don t always notice them, but they are immense all the same. New infrastructure, new technology and new expertise are powerful forces that are changing our lives, wherever we live and whatever we do for a living. So far they have not seriously altered the basic fabric of society in our county. However, those changes will come, whether we like it or not. They will affect all of us. They will create new regions for living and working. They will alter travel and trading patterns, and they will move boundaries. They will create conflicts and challenges, but they will also provide new opportunities. As a bank, we will do everything we can to make sure that the changes benefit our county. Nevertheless, our primary task is to position ourselves to participate in developments in a way that enables us to be a good bank for people and businesses. READY FOR THE FUTURE I m often told that it s easy to run a bank. The one thing that all of the people who tell me that have in common is that they ve never tried doing it. I m happy to admit that on some days running a bank isn t the biggest challenge in the world. Even at the weekend the money keeps on coming in. The real challenge is developing the bank. Just like developing a municipality, a shop, a consultancy or a contracting company, it requires hard work, courage and knowledge. Never before has it been so difficult to look ahead at the future, and get the organisation to agree on where we need to improve. Never before has the industry undergone such rapid development. Never before has it been so important to focus on improvements and change every single day! Just over two years ago we decided that alongside developing the Bank, we needed to reduce our staff levels by percent. That meant 15 fewer full-time equivalents per year for three years, without any redundancies. We are doing that without upsetting the equilibrium of our organisation. We are right on track, having achieved a net reduction of almost 30 full-time equivalents. Meanwhile, we have taken on over 20 new members of staff. That shows how dynamic our organisation is. That dynamism is vital for an organisation that is constantly developing. Førde, 29 January 2014 Arvid Andenæs Sparebanken Sogn og Fjordane ANNUAL REPORT

6 Key figures AMOUNTS IN NOK MILLION PARENT COMPANY PROFIT AND LOSS ACCOUNT Net interest income Dividends and gains/losses on financial instruments Other operating income Operating expenses Profit/loss before impairment charge (incl. gain/loss on fin. instr.) Profit/loss before impairment charge (excl. gain/loss on fin. instr.) Net gain on sale of fixed assets Loan impairment charge Profit/loss before taxation Tax expense Profit/loss after taxation Other comprehensive income Comprehensive income BALANCE SHEET Assets Gross loans and advances to customers Loan impairment Security investments (shares, commercial paper and bonds) Debt and equity Deposits from and debt to customers Debt securities and debt to credit institutions Equity Total assets Average total assets KEY FIGURES Profitability Net interest income as a % of average total assets 1,68 % 1,71 % 1,58 % 1,68 % 1,61 % Dividends and gains/losses on financial instruments 0,05 % 0,19 % 0,06 % 0,29 % 0,43 % Other operating income (excl. profit/loss on fin. instr.) as a % of average total assets 0,37 % 0,36 % 0,34 % 0,33 % 0,34 % Operating expenses as a % of average total assets 1,17 % 0,92 % 1,08 % 1,02 % 1,00 % Profit before impairment charge as a % of average total assets 0,93 % 1,34 % 0,79 % 1,28 % 1,38 % Profit/loss before tax as a % of average total assets 0,65 % 0,93 % 0,17 % 1,12 % 1,25 % Comprehensive income as a % of average total assets 0,56 % 0,70 % 0,15 % 0,86 % 0,98 % Oper. exp. as a % of oper. income excl. gain/loss on fin. instr. 57,08 % 44,49 % 55,79 % 50,67 % 51,19 % Oper. exp. as a % of oper. income incl. gain/loss on fin. instr. 55,73 % 40,82 % 57,61 % 44,31 % 41,95 % Impairment charge as a % of gross loans 0,33 % 0,49 % 0,80 % 0,21 % 0,16 % Return on equity before tax 9,86 % 13,31 % 2,34 % 15,20 % 15,68 % Return on equity (comprehensive income) 8,08 % 10,18 % 2,14 % 11,71 % 12,25 % Financial strength Capital adequacy ratio 11,92 % 13,34 % 14,42 % 15,81 % 15,95 % Core capital adequacy ratio 10,82 % 12,33 % 13,29 % 14,70 % 15,24 % Core Tier 1 capital 10,82 % 11,13 % 11,68 % 13,04 % 13,65 % Equity ratio 7,35 % 7,42 % 7,24 % 8,15 % 8,75 % Balance sheet history Growth in total assets (year on-year) 24,20 % 13,76 % 2,94 % 2,10 % 3,42 % Growth in loans to customers (year-on-year) 0,81 % 11,11 % 2,38 % 4,16 % 6,35 % Growth in customer deposits (year-on-year) 17,39 % 18,61 % 6,19 % 7,05 % 8,31 % Deposits as a % of gross lending 59,73 % 63,76 % 69,36 % 77,47 % 78,90 % Employees Full-time equivalent administrative staff as of 31 Dec Full-time equivalents, cleaning, canteen, etc. as of 31 Dec Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

7 Key figures AMOUNTS IN NOK MILLION CONSOLIDATED PROFIT AND LOSS ACCOUNT Net interest income Dividends and gains/losses on financial instruments Other operating income Operating expenses Profit/loss before impairment charge (incl. gain/loss on fin. instr.) Profit/loss before impairment charge (excl. gain/loss on fin. instr.) Net gain on sale of fixed assets Loan impairment charge Profit/loss before taxation Tax expense Profit/loss after tax on discontin. operations and assets held for sale Profit/loss after taxation Other comprehensive income Comprehensive income BALANCE SHEET Assets Gross loans and advances to customers Loan impairment Security investments (shares, commercial paper and bonds) Debt and equity Deposits from and debt to customers Debt securities and debt to credit institutions Equity Total assets Average total assets KEY FIGURES Profitability Net interest income as a % of average total assets 1,72 % 1,75 % 1,59 % 1,70 % 1,74 % Dividends and gains/losses on financial instruments 0,04 % 0,17 % 0,06 % 0,26 % 0,17 % Other operating income (excl. profit/loss on fin. instr.) as a % of average total assets 0,42 % 0,41 % 0,39 % 0,35 % 0,33 % Operating expenses as a % of average total assets 1,20 % 0,97 % 1,07 % 0,94 % 0,89 % Profit before impairment charge as a % of average total assets 0,98 % 1,37 % 0,84 % 1,37 % 1,35 % Profit/loss before tax as a % of average total assets 0,70 % 0,94 % 0,37 % 1,21 % 1,24 % Comprehensive income as a % of average total assets 0,59 % 0,69 % 0,20 % 0,92 % 0,90 % Oper. exp. as a % of oper. income excl. gain/loss on fin. instr. 56,18 % 44,72 % 54,23 % 45,86 % 42,90 % Oper. exp. as a % of oper. income incl. gain/loss on fin. instr. 55,10 % 41,40 % 55,90 % 40,71 % 39,63 % Impairment charge as a % of gross loans 0,32 % 0,45 % 0,53 % 0,18 % 0,12 % Return on equity before tax 9,92 % 13,39 % 5,24 % 18,26 % 17,55 % Return on equity (comprehensive income) 8,46 % 9,89 % 2,80 % 13,94 % 12,81 % Financial strength Capital adequacy ratio 11,85 % 13,04 % 13,83 % 14,64 % 14,59 % Core capital 10,76 % 12,06 % 12,77 % 13,64 % 13,97 % Core Tier 1 capital 10,76 % 10,90 % 11,24 % 12,15 % 12,56 % Equity ratio 7,43 % 7,26 % 6,84 % 7,29 % 7,63 % Balance sheet history Growth in total assets (year-on-year) 4,78 % 17,33 % 7,41 % 5,44 % 6,57 % Growth in loans to customers (year-on-year) 5,21 % 15,12 % 5,76 % 6,95 % 6,62 % Growth in customer deposits (year-on-year) 6,21 % 18,64 % 6,18 % 7,05 % 8,27 % Deposits as a % of gross lending 56,29 % 58,01 % 58,23 % 58,29 % 59,19 % Employees Full-time equivalent administrative staff as of 31 Dec Full-time equivalents, cleaning, canteen, etc. as of 31 Dec Sparebanken Sogn og Fjordane ANNUAL REPORT

8 About Sparebanken Sogn og Fjordane MARKET, TOTAL ASSETS AND NUMBER OF EMPLOYEES Sparebanken Sogn og Fjordane is the largest bank in the county of Sogn og Fjordane, with total assets of NOK 39.6 billion and 264 full-time equivalent employees. The Bank has 22 branches and 17 bank-in-shop agreements, and is present in 21 of the county s 26 municipalities. It also has a branch in Bergen. RETAIL BANKING MARKET We are the dominant player in the retail banking market in the county of Sogn og Fjordane. We have NOK 24.5 billion in outstanding loans to people in Sogn og Fjordane and the rest of Norway. This comprises 70 percent of the Bank s total lending. Deposits from retail customers total NOK 12.2 billion, comprising 59% of our total deposits. The Bank aims to have regional financial services centres offering financing, investment, estate agency and insurance products. In recent years the Bank has been responsible for the sale and distribution of Gjensidige s insurance products to retail customers in Sogn og Fjordane. We also operate 40 cash machines, and 55,000 of our customers have signed up for online banking. CORPORATE BANKING MARKET The Bank has NOK 10.3 billion of outstanding loans to businesses, primarily in the county of Sogn og Fjordane. This comprises 30 percent of the Bank s total lending. Corporate deposits total NOK 5.8 billion. PUBLIC/FINANCIAL SECTOR Many of the municipalities in the county use Sparebanken Sogn og Fjordane as their main bank. In total, the public and financial sectors have NOK 2.6 billion of deposits held with us. THE BANK AS A DRIVING FORCE IN THE COUNTY Sparebanken Sogn og Fjordane s vision is to be a driving force in the county. We aim to fulfil this vision by providing good advice and supplying capital to sound commercial projects and private individuals. We are also involved in a wide range of cultural ventures, and recognise the value of culture in the widest possible sense to the development of local communities. We are the main sponsor of most major cultural events in the county, and have set aside NOK 40 million of our 2013 profits for donations and dividends, which mainly go to support the voluntary sector. Quality of life, diversity and innovation are the keywords that guide our contributions. FINANCIAL CALENDAR We expect to publish our 2014 interim reports on 29 April 2014 (Q1), 12 August 2014 (Q2) and 28 October 2014 (Q3). These reports will also be published on our website at and will be available in English as well. THE GROUP In addition to the parent bank, the Group operates through a total of three subsidiaries and three associates. 8 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

9 «Greater flexibility for families» Sparebanken Sogn og Fjordane a driving force for agriculture Sparebanken Sogn og Fjordane ANNUAL REPORT

10 Good for society = Good for the bank In recent years, an increasing proportion of the donations made by Sparebanken Sogn og Fjordane have gone to education and business development. Helping to make life easier for businesses and enabling them to exploit the incredible resources we have available in our county are fundamental aspects of our vision of being a driving force for the county. The things that are good for society around us, are also good for us. Along with Sparebankstiftinga Sogn og Fjordane, we have once again played an important role in funding a new higher education course for the county. In 2012 we supported the establishment of a Subsea course in Florø. This time it was the new course on electrical power systems at Sogn og Fjordane University College that received funding. We helped to ensure that it was fully funded by providing NOK 1.5 million. This course represents a giant leap towards making the county self-sufficient in terms of the skilled workers needed to exploit its energy resources. Businesses in Sogn og Fjordane will need at least 120 new electrical power engineers over the coming ten years, according to calculations of the energy industry. The course at the university college will partly be taught in a modern laboratory, so that the students get the practical experience they need to prepare them for working life. 10 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

11 Credit cards for kids New product in 2013 Sparebanken Sogn og Fjordane ANNUAL REPORT

12 Financial literacy for young adults During 2013, around 1,300 sixth-form students attended two different programmes run by Sparebanken Sogn og Fjordane. From student to professional prepares young people for the transition from studying to working. The emphasis is on helping students to understand their own interests, skills and personal values, in order to equip them to take important decisions that will affect the rest of their lives. The Personal finance licence is a programme developed by Finance Norway and the Consumer Ombudsman, which gives young people the chance to test themselves on questions relating to personal finance. The aim is to put young people in a better position to manage their personal finances successfully and sensibly. Both of these programmes are designed to help young people through two important phases of their lives, which can appear too daunting and overwhelming for them to face on their own. The feedback from the students who have participated in the programmes has been entirely positive. We are therefore looking to continue our efforts in 2014 with In charge of your own life. This new programme will aim to teach students about managing their finances for their whole lives. The financial decisions that you take today affect your future finances. A digital programme will help students to understand how their choices affect their personal finances over the course of their lives. They can choose a career and the associated training, decide where they would like to live and say how much they want to spend and save, and then see the financial consequences of their actions. All of these programmes are organised in collaboration with the Sogn og Fjordane branch of Ungt Entreprenørskap, an organisation that supports young entrepreneurs. 12 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

13 Not just think about it Campaign saving for retirement Sparebanken Sogn og Fjordane ANNUAL REPORT

14 Sponsorship and charitable donations We have handed out NOK 100 million over the past five years

15 Directors report INTRODUCTION In 2013, the Sparebanken Sogn og Fjordane Group s comprehensive income amounted to NOK 347 million. Highlights in 2013: Strong growth in deposits and lending Higher net interest margin Lower external funding costs Level operating expenses Lower loan impairment charge Strong contribution from financial items Acquired a 10% ownership interest in Frende Holding AS The Board of Directors is very satisfied with the Group s profit and return on equity, which was 12.8%. Our record profits show that we are on the right track, and capable of dealing with the challenges that we face. The most pleasing thing is that keeping a tight lid on costs with the help of deeply integrated processes has not had a negative impact on job satisfaction or the customer experience. This provides a good platform for staying competitive and investing in new expertise and technology. WHAT WE DO Sparebanken Sogn og Fjordane is an independent savings bank with products in banking, financing, insurance, savings, pensions and payment services. Our main market is Sogn og Fjordane, but we are also aggressively targeting the retail market in other major population centres in Norway. In the retail market, around 56 percent of loan growth and 41 percent of total lending related to customers living outside the Bank s home county. Our head office is in Førde, and we have branches in 21 of the 26 municipalities in Sogn og Fjordane. Including the Bergen branch, we have 23 branches in total, and we also offer our services through 17 Bank-in-shop outlets in Sogn og Fjordane. Sparebanken Sogn og Fjordane is responsible for the sale and distribution of Gjensidige s insurance products to retail customers in Sogn og Fjordane. We also collaborate with Gjensidige on pension products. Our agreement with Gjensidige will be discontinued during the first half of From 1 July 2014 onwards, Sparebanken Sogn og Fjordane will offer Frende s insurance products to the retail and corporate markets. The Bank offers estate agency services through Eigedomsmekling Sogn og Fjordane AS, which is a wholly-owned subsidiary of the Bank. Bustadkreditt Sogn og Fjordane AS is a wholly-owned subsidiary, which has the aim of buying high-quality residential mortgage loans from Sparebanken Sogn og Fjordane as a basis for issuing covered bonds. The Bank has gathered most of its property management activities at its wholly-owned subsidiary Bankeigedom Sogn og Fjordane AS. The main activity of the company is managing the properties used by the Bank itself. Sparebanken Sogn og Fjordane helped to set up the Fjord Invest investment community in Førde. At 31 December 2013, the Bank owned a 45.3% ownership interest in Fjord Invest AS, a 40.4% direct and indirect interest in Fjord Invest Industri AS and a 20.1% interest in Fjord Invest Sør Vest AS. Fjord Invest is an important complement to the financial services industry in the county. STRATEGY Sparebanken Sogn og Fjordane s vision is to be a driving force for the development of the county. It is essential to have a strong commercial focus, and produce good financial results, if we are to realise our vision of playing an important role in local society and business life. Sparebanken Sogn og Fjordane is the leading bank in the county, and has for a number of years been strengthening its position in the market. Nevertheless, over half of our growth in the retail market comes from outside the county, and this proportion is increasing. We want to remain an independent and autonomous savings bank, and our growth strategy in the retail market has helped to lay the foundations for this. Our aim is to achieve consistently high customer satisfaction and loyalty, and we have managed to do that. Cooperating with other banks also helps to guarantee our independence, as it gives us the muscle to develop, and allows us to share costs and expertise. Our acquisition of a 10 percent ownership interest in Frende Holding AS means that we now part of a stronger network, and it has also given us ownership of insurance products. Sparebanken Sogn og Fjordane is working proactively to maintain high levels of job satisfaction, and to develop a performance culture based around highly skilled employees. Being cost-efficient is a priority for Sparebanken Sogn og Fjordane, and our goal is for this to remain an area that gives us a competitive advantage. PROFIT AND LOSS ACCOUNT Financial results Sparebanken Sogn og Fjordane s comprehensive income amounted to NOK 347 million in 2013, compared with NOK 334 million in 2012, equivalent to a return on equity of 12.8%, against 13.9% in In 2013, the Group benefited from higher net interest income and a lower loan impairment charge than in Operating expenses remained unchanged from 2012, while the net gain on financial instruments was lower than the previous year. Sparebanken Sogn og Fjordane ANNUAL REPORT

16 16,0 % 14,0 % Comprehensive income Return on equity 13,9% 12,8% A total of 19 employees left during the year, while the Group hired 17 new members of staff. Apart from the reduction in headcount, the main reason for the reduction in wage costs was that employees received a bonus in 2012, whereas there was no such bonus for ,0 % 10,0 % 8,0 % 8,5% 9,9% Assets per full-time equivalent rose by 7 percent over the past year. We will continue to focus on controlling costs and increasing efficiency in 2013, and we expect our headcount to be further reduced. 6,0 % 4,0 % 2,8% Total assets per full-time equivalent employee Amounts in NOK million 2,0 % 0,0 % Net interest income Net interest and commission income was NOK 666 million, 8.5% higher than in The Bank paid a total fee of NOK 18 million to the Norwegian Banks Guarantee Fund in 2013, whereas it paid no such fee in Excluding this fee, the Group s net interest income would have risen by 11.5% from 2012 to The underlying increase was mainly due strong growth in customer deposits and lending, and a reduction in external funding costs The net interest margin was 1.74% in 2013, compared with 1.70% in Excluding the contribution to the guarantee fund, the net interest margin was 1.79% in Net other income Net other operating income came to NOK 192 million in 2013, which was NOK 28 million less than in This reduction was mainly due to the very strong performance of financial instruments in Net gain/loss on financial instruments The Bank had a net gain of NOK 65 million on financial instruments in 2013, against NOK 94 million in Although it was weaker than in 2012, we still consider the 2013 performance to be strong. The biggest difference in relation to 2012 was due to changes in the value of fixed-rate loans to customers. NOK 24 million of the net gain in 2013 related to dividends and higher share prices. For further details see Note 7. Net commission income Net commission income totalled NOK 108 million, which was NOK 5 million higher than in The areas where income increased were guarantee commissions, payment services and securities trading on behalf of customers. Other income Other income came to NOK 33 million, which was NOK 5 million less than in The reduction was mainly due to lower income from estate agency services. Operating expenses Operating expenses came to NOK 340 million in 2013, which was roughly unchanged from Wages, salaries, etc. Wages, salaries, etc. came to NOK 179 million, which was NOK 3.6 million (2.0%) less than the previous year. The Bank had a total of 264 full-time equivalent employees at the end of 2013, which was 2 less than a year earlier. Pension expenses totalled NOK 15.3 million, up NOK 1.1 million from This increase was mainly due to changes in the assumptions used when calculating pension liabilities. Implementation of revised IAS 19 Employee benefits In 2013, the Group implemented the revised standard for employee benefits, IAS 19. Amongst other things, it will no longer be possible to use a corridor when accounting for actuarial gains and losses, which are renamed remeasurements. Instead, remeasurements must be recognised in the reporting period in which they occur, under other comprehensive income in the statement of comprehensive income. Implementation of the revised standard resulted in pension liabilities rising by NOK 13 million in 2013, and reduced equity by NOK 10 million, after tax at 28 percent had been deducted. Comparative figures for previous periods have been restated as a result of this change. Remeasurements in 2013 amounted to NOK 9 million after tax, which was recognised in other comprehensive income. Other expenses Other expenses totalled NOK 138 million in IT costs rose by NOK 2 million, and there was an additional cost of NOK 3 million associated with redesigning our bank cards. Meanwhile, marketing costs fell by NOK 2 million. In total, other operating expenses rose by NOK 3 million (2.5%) from 2012 to Cost/income ratio In 2013, operating expenses totalled 39.6% of total income including net financial items, down from 40.7% in 2012, and we are very pleased with this performance. 16 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

17 80,0% 70,0% 60,0% 55,1% Cost/income ratio 55,9% Subsidiaries Bustadkreditt Sogn og Fjordane AS Bustadkreditt Sogn og Fjordane AS is a wholly-owned subsidiary of the Bank. At 31 December 2013, the company had a NOK 8.7 billion loan portfolio and NOK 470 million in equity. 50,0% 40,0% 48,2% 6,8% 40,7% 39,6% The company s activities have expanded over the past year, and the company made a pre-tax profit of NOK 131 million, compared with NOK 63 million in ,0% 20,0% 10,0% Bankeigedom Sogn og Fjordane AS Bankeigedom Sogn og Fjordane AS is a wholly-owned subsidiary, which owns the Group s largest buildings. Pre-tax profit for 2013 was NOK 5.8 million, compared with NOK 8.1 million in ,0% The green part of the column for 2010 shows the adjustment for transfer of AFP liability Loan impairment charge Amounts in NOK million Loan impairment charge The net impairment provision for loans and guarantees was NOK 43 million in 2013, against NOK 58 million in In 2013, the net impairment charge was equivalent to 0.12% of gross loans, compared with 0.18% in At 31 December 2013, gross non-performing loans that were over 90 days in arrears improved to NOK 384 million, down NOK 7 million from the equivalent figure at 31 December Relatively few new loans fell into arrears in Only a small percentage of retail customers are in arrears with their loan repayments. For corporate customers, the default rate is high, but a significant proportion of the arrears relate to one loan that is being terminated. Tax expense The tax expense for 2013 was NOK 133 million, equivalent to 27.9% of pre-tax profits. The 2012 tax expense was NOK 114 million, equivalent to 26.1% of pre-tax profits. The tax rate partly varies because gains and losses on shares are covered by the exemption method. Eigedomsmekling Sogn og Fjordane AS Eigedomsmekling Sogn og Fjordane AS is a wholly-owned subsidiary of the Bank. Revenues from estate agency services fell from NOK 24.4 million in 2012 to NOK 20.2 million in 2013, due to a reduction in the number of property sales. It is worth noting that revenues in 2012 were particularly high. Pre-tax profit for 2013 was NOK 2.9 million, compared with NOK 7.0 million in Financial results The Group s comprehensive income for 2013 was NOK 347 million, up from NOK 334 million. This corresponds to a return on equity of 12.8% for 2013, against 13.9% in Comprehensive income and return on equity were in line with expectations, and the Board is very satisfied with the Group s performance. Allocation of the parent company s profit for the year Parent company s profit for the year NOK Transferred to reserve for unrealised gains NOK Available NOK At the meeting of the executive committee on 13 March 2014, the Board will propose that the profit for the year be allocated as follows: Dividends NOK Charitable donations NOK Dividend equalisation reserve NOK Primary capital NOK Total allocated NOK The Bank will also make a NOK 2,310,000 intra-group distribution to one of its subsidiaries. BALANCE SHEET At the close of 2013, the Group had NOK 39.6 billion in total assets, up NOK 2.4 billion (6.6%) from 31 December The increase in total assets was due to increased lending to customers. Loans to customers At the close of 2013, gross loans amounted to NOK 34.8 billion, an increase of NOK 2.2 billion (6.6 %) over the past year. Lending to the retail market rose 9.5%, while lending to the corporate market rose 0.4%. At 31 December 2013, 70 percent of gross outstanding loans were to retail customers, whilst 30 percent were to corporate customers and the public sector. Sparebanken Sogn og Fjordane ANNUAL REPORT

18 A year earlier, corporate loans comprised around 31 percent of all lending. The share of the Bank s loans that go to the corporate sector has been falling for a number of years. Loans by sector consolidated 0,2 % sector and 13 percent were from the public/financial sectors, which was roughly unchanged from the distribution at 31 December Deposits by sector consolidated 13% 29,4% PS/fin. sector Corporate market Retailmarket 70,4 % PS./ fin. sector Corporate market Retail market 59% 28% The figure beneath shows the distribution of loans to the corporate market by industry at 31 December The distribution of loans by industry remained relatively unchanged from 2012 to Loans by industry consolidated 5,9 % 32,5 % 9,5 % 8,0 % 14,6 % 2,7 % 6,8 % 5,0 % 5,8 % 9,0 % Fishing industry/ Acuaculture Bygg og anlegg Industry/Mining Commerce Kraft Farming/Forestry Transport Eigedomsdrift Hotel/Travelling Tenesteyting Services Property Hotell/reiseliv management Power generation Transport Construction/ Enginering Loan impairment charge Impairment provisions for loans and guarantees on the balance sheet totalled NOK 214 million, compared with NOK 268 million the previous year. NOK 89 million of the provisions were collectively assessed impairment provisions, whilst NOK 125 million were individually assessed. At 31 December 2013, impairment provisions for loans represented 0.61% of gross outstanding loans, down from 0.82% the previous year. This reduction was the result of realising losses against loans for which individually assessed provisions had previously been made, as well as relatively low levels of new impairments. Customer deposits and deposit/ loan ratio Customer deposits amounted to NOK 20.6 billion at the end of 2013, up NOK 1.6 billion (8.3%) over the year. Retail deposits increased by 8.2%, whilst deposits from corporate customers, including the public and financial sectors, rose by 8.4%. At 31 December 2013, 59 percent of deposits were from the retail sector, 28 percent were from the corporate Security investments Shares, etc. At 31 December 2013, the Bank held shares and primary capital certificates with a book value of NOK 420 million, compared with NOK 251 million at 31 December Of the Bank s portfolio at 31 December 2013, NOK 69 million was made up of short-term investments, and NOK 351 represented long-term strategic investments. In December 2013, the Bank acquired a 10 percent ownership interest in Frende Holding AS. This is a long-term strategic investment, and it explains most of the increase in the value of the Bank s shareholdings. Commercial paper and bonds The Bank s investments in commercial paper and bonds had a book value of NOK 3.7 billion at the end of the year, compared with NOK 3.9 billion at 31 December These securities are used to manage liquidity and as a liquidity buffer. Commercial paper and bonds are measured at fair value. The carrying amount of the Bank s bonds and commercial paper was NOK 21 million higher than their cost. Debt securities in issue At the close of 2013, the Bank had commercial paper and bonds in issue with a book value of NOK 14.1 billion, against NOK 13.0 billion at 31 December The Bank had good access to liquidity throughout 2013, both from wholesale markets and by using Bustadkreditt Sogn og Fjordane AS to issue covered bonds. Subordinated debt and hybrid debt The total book value of our subordinated and hybrid debt at 31 December 2013 was NOK 514 million, which was roughly unchanged from the previous year. Shareholders equity and capital adequacy At 31 December 2013 the Group had NOK 3,021 million of equity, compared with NOK 2,708 million at 31 December In addition, the Group had NOK 514 million of subordinated and hybrid debt. Net equity and subordinated debt, which is used to calculate the capital adequacy ratio, amounted to NOK 3.3 billion in total. Sparebanken Sogn og Fjordane has NOK 2,440 million of equity share capital, and NOK 338 million of primary capital. 18 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

19 The profit for the year for 2013, after dividends and the change in the reserve for unrealised gains, has been allocated proportionately to equity share capital and primary capital at 31 December 2012, so that the ratio between the two remains unchanged. The Group s capital adequacy ratio at 31 December 2013 was 14.6%, which was roughly unchanged from the previous year. The core Tier 1 capital adequacy ratio was 12.6% at 31 December 2013, against 12.2% at 31 December This ratio rose in 2013 thanks to a large proportion of the profit for 2013 being used to boost our capital. The acquisition of 10% of the shares in Frende Holding AS in December 2013 resulted in a deduction when calculating the Group s equity and subordinated debt, which is equivalent to 0.6% of the capital adequacy ratio. As of the third quarter of 2014, changes to the rules on capital adequacy will mean that this deduction no longer applies. The Board of Directors considers shareholders equity at the close of 2013 satisfactory. The graph shows recent changes in the Group s capital adequacy ratio. 16,0% 14,0% 12,0% 10,0% 8,0% 11,9% 1,1% 12,9% 1,0% 1,0% 13,8% 1,1% 1,5% 14,6% 14,6% 1,0% 0,6% 1,4% 1,4% foundations of its kind in Norway. The Bank may decide to list its equity certificates on a stock market, and it is following market developments with that in mind. Collaboration with other banks Sparebanken Sogn og Fjordane is an independent bank, but it works with other banks on several joint development projects. The Bank has a formal agreement with Gjensidige Bank, Sparebanken Sør, Helgeland Sparebank and Sandnes Sparebank on procurement, the monitoring of purchased systems in operation and various development projects. Four of these banks have a joint framework agreement to purchase payment services from EVRY. This collaboration is designed to achieve competitive terms for the operation, management and development of software solutions. The parties work actively to follow the technological developments and to select offensive and progressive suppliers of technology and solutions. CORPORATE GOVERNANCE SSF s governance is based on Norwegian law, including the Norwegian Accounting Act, the Savings Bank Act and the Financial Institutions Act. In general the Bank follows the corporate governance principles set out by the Norwegian Code of Practice for Corporate Governance. SSF s highest decision-making body is the executive committee. The executive committee is composed of representatives of the equity certificate holders (18 representatives), depositors (13 representatives), employees (11 representatives) and the public sector (3 representatives). The executive committee appoints the election committee, which nominates candidates for the Bank s other decision-making bodies. 6,0% 4,0% 2,0% 0,0% 10,8 % 10,9% Core Tier 1 capital Hybrid capital 11,2 % ,2 % ,6 % 2013 Equity and subordinated debt SSF s Board of Directors has seven members, including one employee representative. The CEO and other senior managers do not sit on the Board. The election of the Board is governed by Section 5-1 of the articles of association. Directors are elected by the executive committee for two-year periods, while deputies are elected for one year. The Board held 12 meetings in Some of the important topics covered were strategy, financial development, capitalisation, risk management and internal controls. The Board has two sub-committees: The audit committee and the compensation committee. Going concern assumption The 2013 financial statements have been prepared on the assumption of the business being a going concern. Post balance sheet events There have been no post balance sheet events that significantly affect the financial statements presented here. ORGANISATIONAL STRUCTURE AND COLLABORATIONS Ownership structure Sparebanken Sogn og Fjordane was converted into an equity certificate bank in The foundation Sparebankstiftinga Sogn og Fjordane owns 94.12% of the equity certificates, while the foundation Sparebankstiftinga Fjaler owns the remaining 5.88%. With NOK 1.8 billion of equity, Sparebankstiftinga Sogn og Fjordane is one of the largest The audit committee, which comprises two Board members, held six meetings in The audit committee reviews the interim and annual financial statements, with a particular focus on accounting principles, critical estimates and judgements, related parties and the work of the auditor. The committee also evaluates the organisation and implementation of internal controls and risk management procedures, as well as the internal auditor s annual report and annual plan. The compensation committee, which comprises three Board members, held five meetings in The committee is responsible for guidelines on senior management compensation and proposes the CEO s compensation, as well as acting as an advisory body for the CEO when setting the compensation of the rest of the senior management team. Under Section 11 1 of the articles of association, the Board is authorised to buy the Bank s own equity certificates or Sparebanken Sogn og Fjordane ANNUAL REPORT

20 to increase its equity share capital. Any such decision requires the same majority as for a change to the articles of association, and at least a 2/3 majority of the votes cast by the representatives elected by the owners of equity certificates. On 14 March 2013, the executive committee authorised the Board to increase the equity share capital by up to 3 million new equity certificates, each with a face value of NOK 100. The authorisation is valid for 24 months from the date of the meeting at which it was given. Meanwhile, the Board was also authorised to buy back equity certificates with a total face value of up to NOK 150 million. The authorisation is valid for 18 months from the date of the meeting at which it was given. The Board did not make use of either of these authorisations in INTERNAL CONTROLS AND RISK MANAGEMENT The Bank s risk management procedures and internal controls shall help it to reach its strategic goals by correctly measuring, monitoring and pricing risk, as well as by ensuring that its operations are efficient and that risk is managed appropriately. Internal controls comply with the Norwegian Internal Control Regulations. The Board has adopted guidelines for risk and capital management. There are three levels of responsibility for risk management and monitoring, comprising 1st, 2nd and 3rd line controls. An annual cycle has been established for internal controls at various levels, which specifies risk assessment requirements, including risk-reduction measures, reviews of regulations, monitoring, reporting and confirmation of internal controls. Operational risk is identified through similar assessments and the views of senior management. Internal controls related to financial reporting The Board, represented by the audit committee, supervises the procedures for financial reporting and internal controls, and ensures that they work properly. The audit committee handles interim and annual reports, and makes sure that the Group has an independent and effective external auditor. The audit committee reviews all judgements and accounting estimates, as well as any changes to accounting principles. At least once a year, the committee holds a meeting with the external and internal auditor. The annual financial statements are finally approved by the executive committee, after they have been reviewed by the Group s Board of Directors. The CFO is responsible for the Bank s accounting and finance functions, which includes responsibility for financial reporting and the associated internal controls. This also covers ensuring that financial reporting satisfies current legislation and regulation at all times. Processes and internal control procedures have been established to quality assure financial reporting. These include rules on authorisation, the allocation of responsibilities, reconciliation, IT controls, etc. All reporting units are responsible for having effective and appropriate internal controls for managing their own risks in general, and for financial reporting in particular. This includes a responsibility to assess whether the activities of the unit/ discipline represent a potential source of errors in financial reporting. Units must assess risks prior to taking any action and consider what risk-reduction measures are needed. They must then evaluate what internal controls are required to deal with the remaining risks and ensure that these risks are managed and monitored in a satisfactory manner. Units must report their findings continuously, and evaluate compliance and the need for additional measures at least once a year. Senior management should continuously monitor the financial results of the various business areas and departments, and discuss them during meetings with the departments. Each year, the external auditor writes a report on the results of the financial audit. The report also includes information about any weaknesses and defects, and suggested corrective measures. This is then followed up by the relevant units and by the risk management department. The external auditor also holds annual meetings with the Board, which are not attended by the senior management team. RISK AND CAPITAL MANAGEMENT Each year, the Board adopts and reviews the Bank s Internal Capital Adequacy Assessment Process (ICAAP). It also adopts a credit strategy and finance strategy, as well as limits for capital adequacy, credit risk, liquidity risk and market risk (interest rates, exchange rates and share prices). Quarterly reports allow the Board to evaluate the Bank s risk exposure compared with its corporate governance goals. Risk management involves managing credit risk, operational risk, market risk, concentration risk, liquidity risk and business risk. The Bank complies with the rules in the Norwegian capital adequacy regulations, and uses the standardised approach to calculate its capital requirements arising from credit risk and market risk. For operational risk, the Bank uses the basic indicator approach. Over the past three years, the Bank s risk exposure and capital requirements have varied as follows: (Amounts in NOK million) Capital requirements and capital adequacy Credit risk Operational risk Min. capital adequacy (Pillar I) Market risk Concentration risk within industries Liquidity risk Business risk Additional cap. for cred., per. and market risk Total risk-adjusted capital (Pillar II) Equity and subordinated debt Surplus capital (Pillar 2) Capital adequacy ratio 13,83 % 14,63 % 14,59 % Core capital Core capital adequacy ratio 12,77 % 13,64 % 13,97 % Core capital excluding hybrid debt Core Tier 1 capital adequacy ratio 11,24 % 12,15 % 12,56 % 20 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

21 The core Tier 1 capital adequacy ratio rose by 0.4% over the course of the year. The Bank s profit in 2013 implies a bigger increase, but under current capital adequacy rules its investment in Frende Holding AS results in a deduction when calculating the Bank s equity and subordinated debt. As of the third quarter of 2014 those rules will change, and there will no longer be any need to make a deduction. Had the Bank been reporting under the new rules, its core Tier 1 capital adequacy ratio at 31 December 2013 would have been just under 12.9%, while its capital adequacy ratio would have been around 15.2%. Credit risk Credit risk is managed based on the risk profile and probability of default/losses, growth and concentration. The credit strategy is established each year in light of the Bank s overall strategy. Our credit strategy covers: guidelines for the risk profile of our lending; spreading exposure between the retail banking market and corporate market; concentration risk for big loans; and limits for individual regions and industries. The overall credit risk is monitored through monthly reports that show how the Bank is complying with its risk frameworks. Going forward, the Bank will focus on reducing concentration risk and the proportion of high-risk loans. In 2010 and 2011, the Bank experienced high losses on some big loans to the shipping industry. Loan losses were lower in 2012, at 0.18% of gross outstanding loans. For the forecast period, the Bank anticipated loan losses of 0.15% per year. In 2013, the Bank s loan impairment charge was 0.12% of gross outstanding loans. As of 1 January 2013, we have established a new credit department, which focuses on, and is responsible for, credit quality. The overall risk level associated with the Bank s loan portfolio fell during 2013, mainly because some loans moved from the high risk category to medium or low risk. CM RM Risk Low risk 55,3 % 52,8 % 58,1 % 58,1 % Medium risk 32,7 % 33,1 % 37,5 % 37,1 % High risk 12,0 % 14,1 % 4,4 % 4,8 % Liquidity risk Liquidity risk is measured using two main parameters: losses due to higher funding costs resulting from any ratings downgrade by market players lack of access to liquidity Each year, the Board reviews the liquidity position. The main focus is on ensuring that random events do not seriously affect the ability to meet obligations. We have therefore built up a liquidity buffer of securities and bank deposits that should cover our repayments to the financial markets over the coming months, in addition to fluctuations in our liquid outgoings. The Board s aim is for the Bank to fall within the moderate risk category as measured by the Financial Supervisory Authority of Norway s liquidity indicators. At the end of 2013, customer deposits, long-term borrowings from financial markets and equity constituted 103.8% of the Bank s non-current assets (gross loans and fixed assets). Market risk Market risk is managed and measured in three main areas: interest rate risk, equity risk and currency risk. Interest rate risk derives from interest-bearing securities, forward contracts, fixed-rate loans and fixed-rate deposits. Interest rate risk is calculated by working out how much financial values will change if interest rates change. The Board adopts limits on exposure within various fixed interest ranges and on overall exposure. At the end of the year, interest rate risk was higher than a year earlier. Our risk-adjusted capital requirement for interest rate risk rose from NOK 9.9 million in 2012 to NOK 28.9 million in The Board has set an upper limit on stock market investments. It has also raised the underlying limit on exposure to equity risk. The risk-adjusted capital requirement at the close of the year was NOK 193 million, compared with NOK 117 million the previous year. Currency risk is linked to international payment services, foreign currency holdings, foreign currency loans and futures contracts. Currency risk is managed by setting limits on total risk, as well as limits for individual currencies. The Bank s positions are reported daily. At 31 December 2013, the Bank s risk-adjusted capital requirement was NOK 6.7 million, up from NOK 5.0 million in Risk and capital requirements are reported to the Board in accordance with the Bank s risk management principles, strategies and frameworks. This means that the Board always knows whether the Bank is adequately capitalised. A financial contingency plan has also been prepared to ensure that the Bank has sufficient funding and adequate capital in the event of unexpected incidents or economic downturns. The Board considers the risk level and capital adequacy to be satisfactory. RETAIL MARKET In 2013, Sparebanken Sogn og Fjordane once again performed strongly in the retail market. One of the main reasons for this is our consistent and long-term strategy to attract customers outside Sogn og Fjordane. We also achieved good, steady growth in our home county, which means that we now have a 46 percent share of the retail market in Sogn og Fjordane. Overall, deposits from, and loans to, retail customers grew by 82% and 9.5% respectively in We experienced strong demand for loans, savings products and insurance services in Personal pension products and mortgages for first-time buyers were two of our priority areas. We focus heavily on customers in the age bracket, as this is the segment where there is greatest competition. Competition in the retail market remained steady over the course of the year. Fierce competition and strong growth in lending to retail customers mean that we must transfer loans to our mortgage subsidiary if we want to remain sufficiently competitive and profitable. At the turn of the year, around 41 percent of our loans to retail customers had been transferred to Bustadkreditt Sogn og Fjordane AS. Thanks to the fact that most people s finances are in good shape, and our strong in-house focus on credit quality, our ratio of non-performing loans in the retail market was at a record low at the end of the year. Sparebanken Sogn og Fjordane ANNUAL REPORT

22 For a long time we have been focusing hard on building good customer relationships and on selling additional services to our customers. The aim is to be a local and professional supplier of a complete range of financial services. We thus offer banking, estate agency, insurance and savings services throughout our home county. This gives us a unique competitive edge in Sogn og Fjordane. We consider our focus on building customer relationships and developing our expertise to be two of the important reasons why we get very high scores in customer satisfaction surveys. In the retail market, our most recent customer satisfaction rating was 78.3 points. This is well above the industry average. Sparebanken Sogn og Fjordane is the leading provider of savings and investment products in the county was a good year for our customers with unit trusts, with an average return of 23 percent. Changes to the Norwegian national insurance system in 2011 have given individuals greater responsibility for saving for their retirement. Our customers are showing a growing interest in regular, long-term saving. We believe that this trend will become even more marked in the future. Sparebanken Sogn og Fjordane is continuing to experience strong growth in the use of its self-service banking services. The use of mobile channels such as mobile phones and tablets is growing rapidly. We have been working proactively to maintain our strong social media presence, and we now have just over 15,000 followers on Facebook. Continuing to develop our online services remains a high priority. We have changed the way in which we handle cash at our branches. Traditional counter services and counters have been replaced with machines and self-service solutions. This has made our operations significantly more efficient. We will continue to adapt our distribution channels to changing customer behaviour and new technology. CORPORATE MARKET In 2013 we once again concentrated on providing a good service to our existing customers in Sogn og Fjordane. As a result, our volume of loans to this segment has remained stable. Our market share was also roughly unchanged, which shows that there was relatively weak demand for business financing. Nevertheless, most businesses did well in 2013, particularly those serving the oil and gas industries. Naturally the situation varies between companies, and risk assessment and monitoring the credit risk associated with our loans are vital aspects of our business. Competition for corporate customers remains tough, and this is particularly true for large, financially sound customers, where risks are low. Sparebanken Sogn og Fjordane has maintained its strong position in the corporate market in the county, holding on to around 40 percent of the market. The public sector is a customer group with large volumes of potential deposits. Offering a wide range of electronic payment services is important for this group. The competition for these customers is reflected by the fact that many municipalities put their banking business out to tender. We are satisfied that we managed to strengthen our position in the municipal market by keeping and winning municipal customers who held tenders in Deposits from both the public sector and businesses rose strongly in Our strong position in the corporate market has enabled us to be very successful at selling mandatory occupational pension schemes, and we continued our focus on that area in Revenues from this product area represented around 20 percent of the Bank s total revenues from savings products. We are constantly working to develop and improve our expertise and capacity in areas such as capital markets and electronic payment services. Our aim is be a complete supplier of financial services and a professional adviser to our businesses customers. Our revenues from these areas of our business have been rising. Our customers greatly value our local expertise and decision-making processes, and this is particularly true in the area of credit provision. Although other product areas have become increasingly important, credit provision remains the main driver for success in the corporate market. We put a lot of effort into properly understanding the industries that we provide credit to. ORGANISATIONAL STRUCTURE Employees and training In 2013 we had to embark on a variety of demanding and challenging tasks, which helped to raise both individual skills and to enhance our overall expertise. We have invested a lot of resources in internal courses and training in collaboration with university colleges. There is a continuous process of training all of our customer advisers as authorised financial advisers, and of doing refresher courses for the ones who are already authorised. Courses, training events and tests are used to ensure and document their competence to provide good advice. Skills development is also encouraged amongst administrative and support staff. Organisational development Sparebanken Sogn og Fjordane constantly adapts its organisational structure in response to changes in the banking industry, regulations and customer behaviour. As of 1 January 2013, we decided to split our organisation into two divisions, one for retail banking and one for corporate banking. By working systematically on a variety of projects we are constantly developing and changing our organisation in order to adapt it to new needs and requirements. Working environment Sparebanken Sogn og Fjordane carries out annual surveys to find out how satisfied employees are with their work. The surveys show that we have a good working environment, both in relation to the industry and workplaces in general. Areas where there is room for improvement will be followed up in order to further strengthen our performance. Since 2003, we have been signed up to the IA programme for inclusive working life. This means that we have undertaken to work on minimising sickness absence, and on making it possible for employees who develop partial incapacities to continue work. We renewed our commitment to the IA programme in 2011, and we have set up a dedicated IA committee, whose responsibilities include preparing an action plan for this area. There were no reported occupational lost time injuries in Our working environment committee held four meetings in 2013, and dealt with 13 working environment cases. Average sickness absence was 3.59% in 2013, down from 22 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

23 4.49% in The sickness absence rate was highest at the start of the year, but subsequently fell. Diversity Sparebanken Sogn og Fjordane aims to be one of the best places to work in its home county. This includes providing equal opportunity and fair treatment to all employees. 61 percent of employees are women and 39 percent are men, which is virtually unchanged from We aim to have a system that allows women to take up management positions. At the close of 2013, 37% of line managers were women. Three of the seven Board members are women. Our strategic plan for the period states that we shall: Develop social responsibility as an integrated part of our corporate culture and strategic planning Social responsibility as a competitive advantage Build up the expertise of our Board, executive management and employees, so that social responsibility becomes a natural part of interaction with our customers and other stakeholders Continue to use social responsibility to build the Sparebanken Sogn og Fjordane brand Establish and implement a system for sustainability reporting 100 % 80 % 60 % 40 % 20 % Equal opportunities Women Men Women Men Company life One of our fundamental goals is to be an attractive workplace, and we define our employees and business culture as important competitive advantages. We are working proactively to further develop our business culture, by taking steps such as cooperating closely with trade unions, consulting on working conditions, allocating resources for measures to increase job satisfaction and providing training. We also believe in treating all people equally, which is reflected in our goals as an IA business. Both the day-to-day running of our business and our recruitment activities aim to maintain and increase diversity. We believe that employing different kinds of people is good for the development of the Bank. 0 % Total employees Managers We welcome employees with disabilities and employees from all ethnic backgrounds, and will continue to focus on equal opportunities and fair treatment at all levels of the organisation. The Bank s pay policy Our vision is to be one of the driving forces in our home county. It is important for us to have in-house expertise in dealing with the risks that we face. The pay policy shall stimulate and motivate current and future employees. Pay shall be competitive with comparable enterprises in the market and region. The qualifications and areas of responsibility of individual employees are also taken into account. In addition, our pay policy should stimulate the development of teamwork. CORPORATE SOCIAL RESPONSIBILITY Sparebanken Sogn og Fjordane s future is inextricably linked to that of the local communities in Sogn og Fjordane, and the best interests of the county and of the Bank are closely intertwined. Our vision, a driving force in the county, is a reflection of that fact. More competitive and profitable The underlying goal of Sparebanken Sogn og Fjordane s activities in relation to corporate social responsibilities is to make us more competitive and profitable. We do this by trying to meet standards of social responsibility that reflect global and national concerns in areas such as the environment and climate change. We also help local businesses to put social responsibility on the agenda by participating in relevant projects. We believe that by teaching our employees about the importance of social responsibility to the future of businesses, we can challenge our corporate customers to take greater responsibility. Moreover, by doing so we add value for our customers. Sparebanken Sogn og Fjordane takes steps to ensure that employees are familiar with and adhere to the Bank s ethical guidelines and anti-fraud rules. This is followed up through training programmes for new employees and by raising the issue at staff meetings. The ethical guidelines are continuously assessed and adjusted. In 2013 there were no reported breaches of our ethical guidelines or anti-fraud rules. The Board considers that the Bank maintains high ethical standards, both internally and in its dealings with customers. Environment and climate change Sparebanken Sogn og Fjordane does not use inputs or production methods that directly pollute the environment. We are environmentally conscious in our use of paper, energy saving in buildings, our HSE procedures and our purchasing decisions. We have invested in videoconferencing equipment for most of our branches, which has significantly reduced road and air travel. NEW REGULATORY FRAMEWORK In recent years there have been major changes to how banks are regulated, and the new rules are continuously being developed and implemented. In 2013, many of the uncertainties surrounding capital adequacy requirements were cleared up. The new requirements will be gradually introduced over the coming three years. The Bank will need to further increase its capital, but it is in a good position to do so. Meanwhile, a number of questions relating to other aspects of the new CRD IV regulations remain to be answered, including ones relating to liquidity and reporting. We are carefully following the progress of these regulations. SUMMARY AND FUTURE PROSPECTS Thanks to the combinations of steady growth, higher margins and lower expenses, 2013 was a record year for Sparebanken Sogn og Fjordane. We worked persistently Sparebanken Sogn og Fjordane ANNUAL REPORT

24 and successfully in all of the important areas of our business. While reducing overall staff numbers according to plan, we also took on new highly-skilled employees. A number of restructuring measures were successfully implemented, affecting both front-line and back-office staff. Changes are a natural part of constantly developing organisations, and these measures put us in a good position to meet future challenges. The Bank is well capitalised, with a core Tier 1 capital adequacy ratio of 12.6%. That is well above existing requirements, and satisfactory in relation to comparable banks. We also took a strategic decision to change our supplier of general insurance products, acquiring a 10 percent stake in Frende Holding AS. These actions put us in a strong position to meet the new competitors, new requirements and new rules that are sure to come. The Norwegian economy is in a strong position, and in comparison with the rest of Europe the prospects for 2014 are satisfactory. Two of the key factors are that employment will remain high and that most people s disposable incomes will increase. There are still many uncertainties surrounding the European debt problems, and the European economy will probably grow slowly in In the US the macroeconomic situation appears to be improving slowly, while the biggest uncertainty surrounds China s prospects. Prospects for global growth are very dependent on what happens there and in other developing economies. Competition for retail customers will remain tough. In 2014 we are prepared for even harder competition for them, and for the biggest and safest corporate customers. The Board of Directors believes that the Bank will achieve steady growth in 2014, and that it will maintain its strong market position in the county of Sogn og Fjordane. In recent years the population of the county has remained flat, which means that it will remain important to grow in the retail market outside Sogn og Fjordane. 56 percent of our growth in 2013 came from outside our home county, which shows how successful we have been in getting young people to choose our services wherever they decide to live. Sparebanken Sogn og Fjordane is by far the leading provider of corporate banking services in the county. In recent years, our lending to this segment has remained stable. The main reason for the stagnation in lending is a fall in business investment. There are also big regional differences, with coastal areas in general seeing more investment. The industrial sector is dependent on the development of competitive suppliers to the oil industry, amongst other things. Here we are cautiously optimistic. Investment in public buildings has fallen, whereas investment in new infrastructure will remain relatively high. Going forward, we expect moderate growth in lending to businesses. We are in a stronger position than ever before, in terms of both our financial capital and human capital. We believe that our main competitive advantage resides in the nature of our organisation. Our flexible and competent employees are the most important reason why we have achieved what we have. They are also the best guarantee for our ability to develop and add value in the future. The Board would like to thank all of the Bank s employees for their great work. We would also like to thank our customers and our business partners for another successful year together. Førde, Hallgeir Kleppe Chair Randi Engen Deputy Chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Sindre Kvalheim Aage Indrebø Arvid Andenæs CEO 24 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

25 The Board of Sparebanken Sogn og Fjordane Hallgeir Kleppe Chair Randi Engen Deputy Chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Sindre Kvalheim Aage Indrebø Arvid Andenæs CEO Sparebanken Sogn og Fjordane ANNUAL REPORT

26 Profit & loss account PARENT COMPANY CONSOLIDATED Note Restated Restated Interest income Interest expenses Net interest income Commission income Commission expenses Net gains/losses from financial instruments Other income Net other operating income Total revenues Wages, salaries, etc. 9, 10, Other expenses Depreciation and writedowns on fixed assets and intangible assets 9, Total operating expenses Profit before loan impairment charge and net gain on fixed assets Net gain on sale of fixed assets Loan impairment charge Profit/loss before taxation Tax expense Profit/loss for the financial year COMPREHENSIVE INCOME Profit/loss for the financial year Other comprehensive income Other items that may be reclassified subsequently to profit or loss, after tax 4 13 Gain/loss on available-for-sale financial assets 13 4 Other items that will never be reclassified to profit or loss, after tax 5 9 Remeasurements Total other comprehensive income for the year, after tax Comprehensive income Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

27 Profit and loss account As a % of average total assets PARENT COMPANY CONSOLIDATED ,43 % 4,22 % Interest income 4,31 % 4,47 % 2,75 % 2,61 % Interest expenses 2,57 % 2,77 % 1,68 % 1,61 % Net interest income 1,74 % 1,70 % 0,32 % 0,33 % Commission income 0,28 % 0,29 % 0,04 % 0,04 % Commission expenses 0,04 % 0,04 % 0,29 % 0,43 % Net gains/losses from financial instruments 0,17 % 0,26 % 0,05 % 0,05 % Other income 0,09 % 0,11 % 0,61 % 0,77 % Net other operating income 0,50 % 0,61 % 2,30 % 2,38 % Total revenues 2,24 % 2,31 % 0,53 % 0,51 % Wages, salaries, etc. 0,47 % 0,51 % 0,42 % 0,42 % Other expenses 0,36 % 0,37 % 0,06 % 0,06 % Depreciation and writedowns on fixed assets and intangible assets 0,06 % 0,06 % 1,02 % 1,00 % Total operating expenses 0,89 % 0,94 % 1,28 % 1,38 % Profit before loan impairment charge and net gain on fixed assets 1,35 % 1,37 % 0,00 % 0,00 % Net gain on sale of fixed assets 0,00 % 0,00 % 0,16 % 0,13 % Loan impairment charge 0,11 % 0,16 % 1,12 % 1,25 % Profit/loss before taxation 1,24 % 1,21 % 0,29 % 0,29 % Tax expense 0,35 % 0,32 % 0,83 % 0,97 % Profit/loss for the financial year 0,89 % 0,90 % Other comprehensive income 0,01 % 0,04 % Gain/loss on available-for-sale financial assets 0,03 % 0,01 % 0,02 % 0,03 % Remeasurements 0,02 % 0,02 % 0,03 % 0,01 % Other comprehensive income for the period after tax 0,01 % 0,03 % 0,86 % 0,98 % Comprehensive income 0,90 % 0,92 % AVERAGE TOTAL ASSETS Sparebanken Sogn og Fjordane ANNUAL REPORT

28 Balance sheet PARENT COMPANY CONSOLIDATED Note Restated ASSETS Restated Cash and receivables from central banks Loans and advances to credit institutions Gross loans Individually assessed impairment provisions Collectively assessed impairment provisions Net loans to customers Commercial paper and bonds Shares Financial derivatives Investments in associates Investments in subsidiaries Intangible assets and goodwill Deferred tax assets Fixed assets Other assets Total assets DEBT AND EQUITY Debt to credit institutions Deposits from and debt to customers Financial derivatives Debt securities in issue Tax payable Deferred tax Other liabilities Provisions Subordinated/hybrid debt Total liabilities Equity certificates Dividend equalisation reserve Total equity share capital Primary capital certificates Total primary capital Reserve for unrealised gains Other equity Allocated for dividends and gifts Total equity Total debt and equity Contingent liabilities Førde, Hallgeir Kleppe Chair Randi Engen Deputy Chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Sindre Kvalheim Aage Indrebø Arvid Andenæs CEO 28 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

29 «Now we ve committed ourselves to the family business» Sparebanken Sogn og Fjordane a driving force for the fishing industry

30 Cash flow statement PARENT COMPANY CONSOLIDATED Profit/loss before taxation Depreciation and writedowns Loan impairment charge Losses/gains on sale of fixed assets Tax paid Other non-cash transactions Adjustment for other items A) Net cash flow from operating activities Reduction/increase in loans and advances to customers Reduction/increase in shares and interests in other enterprises Reduction/increase in investments in commercial paper and bonds Investments in fixed assets, intangible assets and goodwill Sale of fixed assets B) Net cash flow from investment activities Increase/reduction in loans from credit institutions Increase/reduction in deposits from and debt to customers Increase/reduction in debt securities Increase/reduction in subordinated debt Dividends and gifts C) Net cash flow from financing activities D) Net cash flow during the year (A+B+C) Opening balance of cash and cash equivalents Closing balance of cash and cash equivalents Details of cash and cash equivalents Cash and receivables from central banks Deposits at other financial institutions Total Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

31 Equity statement PARENT COMPANY EQUITY SHARE CAPITAL Equity certificates Dividend equalisation reserve PRIMARY CAPITAL Primary capital Reserve for unrealised gains Other equity Allocated dividends, gifts and intra-group distributions Balance at Impact of amendments to IAS 19 Employee benefits Balance at (restated) Allocated for dividends and gifts Profit/loss for the reporting period Comprehensive income available for sale assets and remeasurements Balanse (restated) Balance at (restated) Adopted dividends, gifts and intra-group distribution Profit/loss for the reporting period Comprehensive income available for sale assets and remeasurements Balance at Total EQUITY SHARE CAPITAL PRIMARY CAPITAL CONSOLIDATED Equity certificates Dividend equalisation reserve Primary capital Reserve for unrealised gains Other equity Allocated dividends, gifts and intra-group distributions Balance at Impact of amendments to IAS 19 Employee benefits Balance at (restated) Allocated for dividends and gifts Profit/loss for the reporting period Comprehensive income available for sale assets and remeasurements Balance at (restated) Balance at (restated) Adopted dividends, gifts and intra-group distribution Other adjustments to equity Profit/loss for the reporting period Comprehensive income available for sale assets and remeasurements Balance at Total Note Figures for 2011 and 2012 have been restated as a result of the implementation of IAS 19R (adjustments for remeasurements relating to pension liabilities). Sparebanken Sogn og Fjordane ANNUAL REPORT

32 Notes to the accounts Note 1 Accounting principles, etc.... p. 33 Note 2 Critical accounting estimates and judgements... p. 41 Note 3 Changes to corporate structure... p. 42 Note 4 Segmentation... p. 42 PROFIT AND LOSS ACCOUNT Note 5 Net interest income... p. 44 Note 6 Net commission income... p. 44 Note 7 Net gains/losses from financial instruments... p. 44 Note 8 Other income... p. 45 Note 9 Operating expenses... p. 45 Note 10 Pension liabilities... p. 45 Note 11 Loan impairment charge... p. 50 Note 12 Tax expense... p. 50 BALANCE SHEET ASSETS Note 13 Fair value of financial instruments... p. 51 Note 14 Credit institutions receivables and loans... p. 55 Note 15 Loans and advances to customers... p. 55 Note 16 Loans by geographic area... p. 56 Note 17 Loans by customer groups... p. 56 Note 18 Impairment of loans and guarantees... p. 57 Note 19 Loans in default and impaired loans... p. 58 Note 20 Loans associated with financial leases... p. 58 Note 21 Bonds, commercial paper and other interest-bearing securities... p. 59 Note 22 Shares... p. 59 Note 23 Subsidiaries and associates... p. 61 Note 24 Intangible assets and goodwill... p. 62 Note 25 Fixed assets... p. 64 Note 26 Other assets... p. 65 BALANCE SHEET LIABILITIES Note 27 Customer deposits... p. 65 Note 28 Debt securities in issue... p. 66 Note 29 Other liabilities and provisions... p. 66 Note 30 Financial derivatives... p. 67 Note 31 Subordinated debt... p. 67 RISK EXPOSURE Note 32 Risk factors... p. 68 Note 33 Liquidity risk... p. 71 Note 34 Credit risk... p. 72 Note 35 Market risk... p. 74 OTHER INFORMATION Note 36 Wages, salaries, etc... p. 74 Note 37 Capital adequacy ratio... p. 76 Note 38 Operating leases... p. 77 Note 39 Government grants... p. 77 Note 40 Branch network... p. 77 Note 41 Off balance sheet items... p. 77 Note 42 Related parties... p. 78 Note 43 Expected incomings (assets) and outgoings (liabilities)... p. 79 Note 44 Foreign currency positions... p. 80 Note 45 Loan-to-value ratio and cover pool... p. 80 Note 46 Disputes... p. 80 Note 47 Equity certificates... p. 81 Note 48 Offsetting... p Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

33 NOTE 1 ACCOUNTING PRINCIPLES GENERAL The 2013 financial statements for Sparebanken Sogn og Fjordane were discussed and adopted at the Board meeting of 25 February All amounts in the accounts and notes are given in millions of NOK unless otherwise specifically stated. Similarly, notes cover both the parent bank and Group unless otherwise stated. Sparebanken Sogn og Fjordane has debt securities listed on Oslo Børs. ACCOUNTING STANDARDS APPLIED Sparebanken Sogn og Fjordane s consolidated accounts and parent company accounts have been prepared in accordance with international accounting standards (IFRS International Financial Reporting Standards), which are approved by the EU. CHANGES TO ACCOUNTING PRINCIPLES AND DISCLOSURES IN NOTES As a general rule, all income and expenses are measured through profit and loss. The exception to this rule is the effect of changes to accounting principles. In the event of fundamental accounting reforms/changes to accounting principles, the figures for previous years must be restated to allow accurate comparison. If items in the accounts are reclassified, comparative figures for previous periods shall be calculated and reported in the financial statements. The Group did not change its accounting principles in 2013, with the exception of the changes to IFRS that were implemented by the Group during the financial year. Below we have listed the changes that were relevant to the Group in 2013, and set out what impact they have had on the annual financial statements. Accounting standards implemented and other relevant changes to laws and regulations in 2013: IAS 1 Presentation of financial statements The amendments to IAS 1 mean that the items under other comprehensive income should now be grouped into two categories. Items that may be reclassified subsequently to profit or loss (such as net gains or losses on available-for-sale financial assets) shall be presented separately from items that will never be reclassified (such as remeasurements related to defined benefit pension schemes). The change only affects how these items are presented, and does not affect the Group s financial position or profit. Changes to IAS 19 Employee benefits The changes that follow from IAS 19R affect how defined benefit pension schemes are accounted for and presented in the financial statements. There have also been changes to the disclosure requirements (note requirements) in relation to defined benefit pension schemes. Amongst other things, it will no longer be possible to use a corridor when accounting for actuarial gains and losses, which are renamed remeasurements. Instead, remeasurements must be recognised in the reporting period in which they occur. In accordance with the revised version of IAS 19, the pension expense has been split up, with the service cost and net interest income/expense being included in the line item Wages, salaries, etc. Meanwhile, valuation movements as a result of remeasurements should be included under Other comprehensive income, and are therefore included in the comprehensive income for the relevant reporting period. The implementation of IAS 19R as of 2013 resulted in the actuarial gains and losses at 31 December 2012 being recognised through profit and loss. This increased the pension liability by NOK 14 million and reduced equity by NOK 10 million, after tax had been deducted. Figures for previous reporting periods have been restated. Remeasurements in 2013 were NOK 9 million after tax. Changes to IFRS 7 Disclosures Offsetting financial assets and financial liabilities The amendment will result in an obligation to disclose any rights of set-off and related arrangements. The disclosures shall enable people to evaluate the effect of netting arrangements on the Group s financial position. The new notes are required for all financial instruments that are set off in accordance with IAS 32 Financial instruments presentation. The changes do not affect the Group s profit or financial position. See Note 48 Offsetting financial assets and financial liabilities. IFRS 13 Fair value measurement This standard sets out the principles and guidelines that apply to the fair value measurement of assets and liabilities that other standards require or permit to be measured at fair value. The standard does not change when fair value measurement is permitted. IFRS 13 applies to both initial recognition and subsequent measurement. The standard requires additional disclosures Sparebanken Sogn og Fjordane ANNUAL REPORT

34 both in interim and annual financial statements. The new rules do not affect the Group s profit or financial position. See Note 13 Financial instruments measured at fair value. ESTIMATES In the preparation of the consolidated accounts, the management make certain assessments, estimates, and assumptions that affect the application of the accounting principles, and therefore also the values recorded in the financial statements. Note 2 sets out significant estimates and assumptions in greater detail. CONSOLIDATION PRINCIPLES The consolidated accounts include the parent company Sparebanken Sogn og Fjordane and its subsidiaries and associates. The consolidated accounts have been prepared as if the Group were a single financial entity. Identical accounting principles have been used for all companies included in the consolidated accounts. All major intragroup transactions and balances, including unrealised profits and losses on intragroup transactions, have been eliminated in the consolidated accounts. The Group classifies businesses as held for sale if the carrying amount will primarily be recovered through the sale of the business. They are classified as held for sale from the moment when Group management has adopted a specific plan to sell the business in its current form, and if we consider it very likely that the sale will be completed within one year. Discontinued operations are measured at the lower of carrying amount and fair value less costs to sell. On initial recognition, acquired businesses immediately classified as held for sale are measured at fair value less costs to sell. In the consolidated financial statements, the profit/ loss after tax of any such businesses is presented separately in the line item Profit/loss after tax on discontinued operations and assets held for sale. Assets relating to such businesses are presented under Discontinued operations and assets held for sale. SUBSIDIARIES AND ASSOCIATES Subsidiaries are defined as companies in which Sparebanken Sogn og Fjordane has a controlling stake through direct or indirect shareholdings or for other reasons, and owns more than 50 percent of the voting share capital or subordinated loan capital. Normally Sparebanken Sogn og Fjordane assumes that it has a controlling stake if it owns more than 50 percent of another company, but the Bank also assesses whether or not it actually has a controlling stake in practice. Subsidiaries are consolidated from the date on which the Bank acquired control of them. Subsidiaries that are disposed of are fully consolidated until the date on which risk and control is transferred. The following companies satisfy our criteria for subsidiaries: Shareholding and share Company of voting rights Bustadkreditt Sogn og Fjordane AS 100 % Bankeigedom Sogn og Fjordane AS 100 % Eigedomsmekling Sogn og Fjordane AS 100 % Associates are companies over which Sparebanken Sogn og Fjordane wields significant influence, i.e. where it can influence the company s financial and operational guidelines, but over which it does not have control or joint control. Sparebanken Sogn og Fjordane assumes that it exercises significant influence over companies in which it has an ownership interest of between 20 and 50 percent. Associates are accounted for using the equity method in the consolidated accounts. The companies that satisfy our criteria for associates are: Shareholding and share Company of voting rights Fjord Invest AS 45,3 % Fjord Invest Industri AS 40,5 % Fjord Invest Sørvest AS 20,1 % Investments in subsidiaries and associates are included in the company accounts using the historical cost method. Business combinations Entities purchased by the Bank are accounted for using the acquisition method. The historical cost at the time of the acquisition is calculated as the fair value of the assets acquired, equity instruments issued and liabilities taken over, and costs directly associated with the acquisition. Identifiable assets and liabilities acquired are measured at their acquisition date fair value. Any cost over and above the fair value of the Group s share of the assets acquired is recorded as goodwill. The rules on the use of fair value are not applied to business combinations that involve entities or businesses controlled by the same owners. Goodwill is not depreciated, and is instead tested for impairment annually, or more frequently if there 34 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

35 is evidence to suggest that it has fallen in value. If the purchase price is less than the value of the identifiable assets and liabilities, the difference is recorded in the accounts on the transaction date. For purchases of ownership interests of less than 100 percent, the entire excess value is recognised on the balance sheet, with the exception of goodwill, where only Sparebanken Sogn og Fjordane s share is included. CURRENCY The Group s accounts are presented in Norwegian kroner (NOK), and this is also the Group s functional currency. On the balance sheet date, cash items in foreign currency are translated using the exchange rate on the balance sheet date, non-cash items are translated using the historical exchange rate on the transaction date and non-cash items measured at fair value are translated using the exchange rate on the date on which the fair value was calculated. Foreign currency transactions are translated using the exchange rate on the transaction date. Changes in value resulting from exchange rate fluctuations between the transaction date and the payment date are recognised in the profit and loss account. INCLUSION ON THE BALANCE SHEET Assets and liabilities are included on the consolidated balance sheet from the date on which the Group achieves genuine control over the assets and takes on genuine liabilities. Assets are taken off the balance sheet on the date on which genuine risk relating to the assets is transferred and control over the assets is lost or ceases. FINANCIAL INSTRUMENTS Classification of financial instruments A financial instrument is any contract that provides both a financial asset to one enterprise and a financial obligation or an equity instrument to another enterprise. For the initial calculation, all financial assets and liabilities covered by the standard have been identified and classified in one of the following categories, depending on the purpose of the investment: Financial assets and liabilities held for trading purposes, measured at fair value through profit and loss Financial assets and liabilities measured at fair value with changes in fair value recognised in profit or loss, in accordance with the Fair Value Option, referred to as FVO Loans and receivables, carried on the balance sheet at amortised cost Held to maturity investments, carried at amortised cost Available for sale financial instruments, measured at fair value, with changes in value recognised in equity Other financial liabilities carried at amortised cost Financial assets and liabilities held for trading purposes, measured at fair value through profit and loss The trading portfolio contains instruments that were mainly acquired or taken on with the aim of being resold or bought back in the short term, or instruments that are part of a portfolio of identified instruments that are managed jointly and for which there is an established pattern of realising short-term gains. Financial derivatives, such as interest swap and currency futures contracts, are always measured at fair value through profit and loss. Financial assets and liabilities measured at fair value with changes in fair value recognised in profit or loss, in accordance with the Fair Value Option, referred to as FVO. This portfolio includes investments in commercial paper and bonds, fixed-rate loans, fixed-rate deposits, and certain bonds issued by the Bank. These instruments, and interest rate swaps, are managed collectively and measured at fair value. Financial instruments are classified in this category if they meet one of the following criteria: Doing so eliminates or significantly reduces an accounting mismatch that would otherwise have arisen when measuring the assets or liabilities or recognising associated gains or losses. The financial instruments form part of a portfolio that is managed and measured on the basis of its fair value in accordance with a documented risk management or investment strategy. Loans and receivables, carried on the balance sheet at amortised cost This category includes all loans and receivables that are not defined at their fair value in the profit and loss account, and that are not defined as financial assets available for sale. Some of our debt securities in issue are included in this category. Held to maturity investments, carried at amortised cost Portfolio of securities held to maturity, valued at their amortised cost. This category was not used. Sparebanken Sogn og Fjordane ANNUAL REPORT

36 Available for sale financial instruments, measured at fair value, with changes in value recognised in equity This category includes assets that are not classified in any of the categories mentioned above. Other financial liabilities carried at amortised cost Other financial liabilities that are neither part of the trading portfolio nor defined as liabilities measured at fair value through profit and loss are to be carried at amortised cost. Impairment of financial assets If most of the risk and return associated with an asset has been transferred to a counterparty, the asset should be derecognised. Sparebanken Sogn og Fjordane has transferred residential mortgage loans to its subsidiary Bustadkreditt Sogn og Fjordane. When the loans are transferred, all of the credit risk associated with them is also transferred. For more details about the agreement between the companies see Note 42, which includes information about transactions and agreed credit facilities. VALUATION Initial valuation of financial instruments Financial instruments are included on the balance sheet at their fair value at the transaction date. Subsequent valuations Fair value Fair value is defined as the amount that an asset or liability can be exchanged for, in a transaction between independent parties. The valuation is based on a going concern assumption, and on the assumption that credit risk has been allowed for. Instruments that are traded in an active market A market is considered active if it is possible to obtain external, observable prices, rates or volatilities, and these prices represent actual and frequent market transactions. For instruments that are traded in an active market, we use the listed price obtained from a stock exchange, broker or price-setting firm. If there is no price listed for the instrument, we break it down into its components and value it on the basis of the prices listed for the individual components. Instruments traded in an active market include financial instruments that are listed on a stock exchange or that are quoted on some other market, such as shares, bonds and commercial paper. They also include financial derivatives that are based on underlying quoted or stock exchange listed prices/ indexes/ instruments. Instruments that are not traded in an active market Financial instruments that are classified in this category are valued using various valuation methods. For example, normal and simple financial instruments such as shares are valued using recognised models based on observable market data. Financial instruments that are not traded in an active market are mainly portfolios of fixed interest loans, deposits and borrowings, investments in shares that are not publicly listed, structured products and financial guarantees. The latter are initially recognised at fair value. In subsequent financial reports these guarantees are valued at whichever is higher of the fair value adjusted for the amortisation of guarantee commission and the underlying liability of the guarantee. The fair value of the portfolio of fixed interest loans is calculated as the value of the contractual cash flows discounted at the market interest rate. Equity investments in shares and stakes that are traded in inactive markets are valued at fair value based on the following criteria: Price at the time of the last capital increase or last trade between independent parties, adjusted for changes in market conditions since the capital increase/trade. Past valuations used in conjunction with a business combination, adjusted for any changes in market conditions since the business combination. Fair value based on anticipated future cash flows from the investment. Amortised cost method Financial instruments that are not valued at fair value, are valued at amortised cost, and income is calculated using the effective interest rate method. This method involves calculating the effective interest rate on the instrument. This is calculated by discounting contractual cash flows over the anticipated term to maturity. Cash flows include arrangement fees, direct transaction costs that are not covered by the customer and any residual value when the anticipated term to maturity expires. The amortised cost is the present value of these cash flows discounted by the effective interest rate. Impairment of financial assets Individually assessed impairment provisions If there is objective evidence that it has fallen in value, a loan is written down by the difference between the carrying amount of the loan and the present value of the estimated future cash flows discounted by the loan s effective interest rate. The effective interest rate used is the loan s effective interest rate before evidence of a fall in value was identified, adjusted for changes in the market rate 36 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

37 up to the impairment date. Changes in interest rates as a result of changes in the credit risk associated with the loan are not taken into account when adjusting the effective interest rate used for discounting purposes. Examples of objective evidence that a loan or group of loans has fallen in value include significant financial problems, default, major breaches of contract, and cases where it is likely that the debt is likely to be renegotiated. Individually assessed impairment provisions reduce the loan s carrying amount, and changes in valuations for the reporting period are recognised in the profit and loss account under Loan impairment charge. Interest on loans that have previously been impaired is calculated using the discount rate that was used to calculate the impairment. Interest calculated on the present value of the loan is included under Net interest income. Collectively assessed impairment provisions Loans that have not been individually tested for impairment, are assessed collectively in groups. Loans that have been tested individually, but which have not been impaired, are also tested in groups. These assessments are based on objective evidence of falls in value on the balance sheet date that can be linked to the group. The groups are defined as loans with similar risk and valuation patterns based on the classification of customers by main sectors or industries and by risk classes. The need for impairment provisions is calculated for each customer group on the basis of an assessment of the current economic climate and historical losses for the customer group in question. Collectively assessed impairment provisions reduce the loans carrying amount, and changes in valuations for the reporting period are recognised in the profit and loss account under Loan impairment charge. Like individually assessed impairment provisions, collectively assessed provisions are calculated on the basis of discounted cash flows. Cash flows are discounted using the effective interest rate. PRESENTATION ON THE BALANCE SHEET AND IN THE PROFIT AND LOSS ACCOUNT Cash and receivables from Norges Bank Cash is defined as cash and receivables from Norges Bank. Loans Loans are shown on the balance sheet, depending on who the counterparty is, under either Loans and advances to credit institutions or Loans to customers, regardless of how they have been valued. Interest income from financial instruments classified as loans is included under Net interest income using the effective interest rate method, regardless of the valuation method used. The effective interest rate method is described under Amortised cost method. For loans carried on the balance sheet at amortised cost, and portfolios of fixed interest loans measured at fair value, impairments as a result of identifiable, objective evidence of a fall in value on the balance sheet date are included under Loan impairment charge. Any portion of the change in the value of fixed-rate loans attributable to changes in interest rate levels is included under gains/losses on financial instruments. Foreign currency loans for which the Bank acts as the guarantor are carried on the balance sheet as if they were loans, as this type of guarantee does not fulfil the requirements for exclusion under IAS 39. Commercial paper and bonds This category includes commercial paper and bonds that the Group does not intend to hold to maturity. Our portfolio includes both commercial paper and bonds in the trading portfolio and commercial paper and bonds defined as assets measured at fair value with changes in fair value recognised in profit or loss (FVO). Interest income and interest expenses on commercial paper and bonds are included under Net interest income using the effective interest rate method. This method is described in the paragraph on amortised cost. Other changes in value are included under Net gain/loss on financial instruments measured at fair value. Shares Shares measured at fair value through profit and loss (FVO) Shares measured at fair value through profit and loss (FVO) includes shares, primary capital certificates and unit trusts that have been acquired with the intention of reselling or repurchasing them in the short term. These shares are measured at fair value through profit and loss in accordance with the FVO. Changes in the value of shares are included under Net gain/loss on financial instruments measured at fair value. Shares, available for sale, measured at fair value Unrealised changes in the value of the available for sale portfolio are recognised directly in equity. If there is objective evidence that instruments classified as available for sale have fallen in value on the balance sheet date, the impairment is Sparebanken Sogn og Fjordane ANNUAL REPORT

38 recognised in the profit and loss account. The impairment is the difference between the historical cost and fair value. When gains or losses are realised they are included under Net realised gains on financial instruments, available for sale. Reversals of impairments are recognised directly in equity. Financial derivatives A derivative is a financial instrument with the following characteristics: The value of the instrument changes as a result of changes to the interest rate, value or price of an underlying asset The instrument requires little or no initial investment The instrument is settled at a future date Derivatives are initially recognised at their fair value on the date on which the contract was signed, and subsequently at fair value. Financial derivatives are presented as an asset if they have a positive value and as a liability if they have a negative value. Assets and liabilities are offset against one another if the Bank has a binding contract with its counterparty stating that they will be offset, and if the Bank intends to settle net or to sell the assets and redeem the liabilities at the same time. Interest income and interest expenses for financial derivatives are included under Net interest income using the effective interest rate method. This method is explained in the paragraph on amortised cost. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. Debt to credit institutions and customer deposits Debt to credit institutions and customers is recorded as Debt to credit institutions and Customer deposits respectively, regardless of the calculation method used. Interest expenses on these instruments are included under Net interest income using the effective interest rate method. Other changes in value are included under Net gain/loss on financial instruments measured at fair value. Debt securities in issue Debt securities (and subordinated debt) include commercial paper, bonds and subordinated debt issued by the Bank. Interest expenses on these instruments are included under Net interest income using the effect interest rate method. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. LEASES Leases are classified as financial leases if they transfer the vast majority of the risk and return. Other leases are classified as operating leases. Financial leases Financial leasing agreements are agreements that essentially transfer all risk and return associated with the leased item to the lessee. Leasing agreements are treated as loans on the balance sheet and are measured at amortised cost. Their value at the start of the lease term is set as the net investment in the lease. The net investment is the minimum rent, unguaranteed residual value and any direct costs incurred by the lessor prior to the agreement being signed, discounted by the internal rate of return. Rent is recognised as income on an annuity basis, with the interest being included under Net interest income, whilst capital repayments are used to reduce the carrying value of the loan. The sale of leased items usually results in a gain or loss. The present value of expected future net sales proceeds is carried on the balance sheet as a loan. Realised gains and changes in the value of future sales proceeds are included under Net interest income. Operating leases where Sparebanken Sogn og Fjordane is the lessee Rent payments are expensed in a straight line over the course of the lease term unless some other method better reflects the actual use of the asset over time. FIXED ASSETS Tangible assets are valued at their historical cost including direct costs, less accumulated depreciation and writedowns. When assets are sold or disposed of, the historical cost and accumulated depreciation are written back, and the gain or loss on the sale/disposal is recognised in the profit and loss account. The historical cost of fixed assets is the purchase price, including taxes/ charges and costs directly related to preparing the asset for use. Costs that accrue after the fixed asset has been taken into operation, repairs and maintenance, are charged as expenses. If necessary, the individual fixed assets are split into components with different useful lives. Sites are not depreciated. Based on their historical cost, less any residual values, other fixed assets are depreciated using the straight line method over their anticipated useful lives, which are as follows: Buildings Fixtures, fittings and furnishings Office equipment IT equipment years 8 years 5 years 3 years 38 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

39 TESTING FOR IMPAIRMENT For each interim report, an assessment is made as to whether there is any evidence that any tangible or intangible assets have fallen in value. If there is any such evidence, the remaining value is calculated. The remaining value is the highest of the asset s fair value less costs to sell and its utility value. If the carrying amount is higher than the estimated remaining value, the carrying amount is written down to the remaining value. INTANGIBLE ASSETS IT systems and software Software purchased is carried on the balance sheet at its historical cost plus any expenses involved in preparing the software for use. Identifiable expenses related to in-house software, and where it can be demonstrated that the probable future economic benefits will cover the development cost, are capitalised as intangible assets. Direct expenses include the cost of staff directly involved in developing the software, office equipment and a share of the relevant administration expenses. Expenses related to the maintenance of software and IT systems are expensed directly in the profit and loss account. Software on the balance sheet is depreciated over its anticipated useful life, which is normally three years. Any need for impairment is assessed using the same principles as set out above. Goodwill Capitalised goodwill is not depreciated. For the Group, goodwill arises through the acquisition of other companies, and represents excess value over and above identifiable assets and liabilities. This excess value is tested for impairment for each interim report. PENSIONS Defined benefit schemes In 2013 the Group implemented the revised version of IAS 19 Employee benefits. The changes that follow from IAS 19R affect how defined benefit pension schemes are accounted for and presented in the financial statements. There have also been changes to the disclosure requirements (note requirements) in relation to defined benefit pension schemes. Amongst other things, it will no longer be possible to use a corridor when accounting for actuarial gains and losses, which are renamed remeasurements. Instead, remeasurements shall be recognised in the reporting period in which they occur. In accordance with the revised version of IAS 19, the pension expense has been split up, with the service cost and net interest income/expense being recognised in the profit and loss account. Meanwhile, valuation movements as a result of remeasurements should be included under Other comprehensive income, and are therefore included in the comprehensive income. Net pension liabilities are included on the balance sheet under Other liabilities. Net pension liabilities are the difference between gross pension liabilities, which are the present value of estimated future benefit obligations, and fund assets held in insurance or pension funds. Net pension liabilities are adjusted for the remeasurements and changes in assumptions. The implementation of IAS 19R as of 2013 resulted in the actuarial gains and losses at 31 December 2012 being recognised through profit and loss. This increased the pension liability by NOK 14 million and reduced equity by NOK 10 million, after tax at 28 percent had been deducted. Figures for previous reporting periods have been restated. The Bank follows The Norwegian Accounting Standards Board s guidelines when calculating pension liabilities. Defined contribution schemes With a defined contribution scheme, the Group does not promise to pay a specific amount as a future pension benefit, and instead makes an annual contribution to a group pension scheme. The future pension benefit payable will depend on the size of the contribution and the annual return on the pension fund. The Group s only responsibility is to make the annual contribution. With a defined contribution scheme, there is no need to make a provision for accrued pension liabilities. Contributions to defined contribution schemes are expensed immediately in the relevant reporting period. The Bank has closed its defined benefit scheme, and since April 2012, new employees join a defined contribution scheme. The pension expense for the year is reported on the profit and loss account under Wages, salaries, etc.. TAXATION Deferred tax and deferred tax assets are reported on the balance sheet in accordance with IAS 12 Deferred tax. The tax expense stated in the profit and loss account includes both tax payable on income and assets, and changes to deferred tax for the financial period. Deferred tax/ deferred tax assets are calculated by applying a 27% tax rate to temporary differences that exist between accounting and taxable values at the close of the year. Deferred tax Sparebanken Sogn og Fjordane ANNUAL REPORT

40 is calculated using the tax rates and regulations that apply on the balance sheet date, or that are likely to be adopted and will apply when the deferred tax asset is realised or the deferred tax becomes payable. Deferred tax assets are included on the balance sheet on the assumption that the Bank will have taxable income in future years. Deferred tax and deferred tax assets within the Group are offset against one another, and only the net liability or asset is included on the balance sheet. Tax payable and deferred tax are charged to equity if the tax relates to items that in the current or previous periods have been taken to equity. Single entity for tax purposes The parent company and subsidiaries in which the parent company holds more than nine tenths of the shares, and has an equivalent share of the votes at AGMs, are treated as a single entity for tax purposes. ACCRUAL OF INTEREST AND FEES Interest and commissions are recognised in the profit and loss account as they accrue as income or expenses. Arrangement fees for loans are included in the cash flow when calculating the amortised cost, and are taken to income under Net interest income using the effective interest rate method. RECOGNITION OF INTEREST INCOME Interest income is recognised in the profit and loss account using the effective interest rate method. This involves taking arising nominal interest plus amortised set-up fees to income. Interest income is calculated using the effective interest rate method both for balance sheet items measured at amortised cost and for ones measured at fair value through profit and loss. Interest income on impaired loans is calculated using the effective interest rate method applied to the carrying value. Also see Fair value, Amortised cost valuation and Impairment of financial assets. RESTRUCTURING If restructuring plans have been adopted that will affect the extent or nature of the company s business, an assessment is made of the need for any provisions for restructuring measures. If restructuring costs will not lead to higher income in subsequent periods, and the future expenses are definite obligations on the balance sheet date, a provision is made on the balance sheet for the net present value of future cash flows. These provisions are written back as the expenses accrue. CASH FLOW STATEMENT The indirect method is used to produce the cash flow statement. This is then adjusted for the impact of non-cash transactions, the accrual of future receipts or payments related to operating activities, and revenues or expenses associated with cash flows arising from investing or financing activities. EQUITY Equity is made up of equity share capital, primary capital, a reserve for unrealised gains and other equity. The equity share capital consists of equity certificates and the dividend equalisation reserve. The ownerless capital consists of primary capital certificates and the gift fund. The reserve for unrealised gains relates to changes in the value of financial instruments classified as available for sale. It also includes changes in the value of financial instruments where there is a discrepancy between the measurement methods used under IFRS and NGAAP. Charitable donations, dividends and group contributions are classified as equity until they have been adopted by the executive committee. POST BALANCE SHEET EVENTS Post balance sheet events shall be reported in accordance with IAS 10. Events that are not covered by the financial statements, but that are material to any evaluation of the company, shall be disclosed. ADOPTED ACCOUNTING STANDARDS AND OTHER CHANGES THAT MAY AFFECT FUTURE FINANCIAL REPORTING IAS 32 Financial instruments presentation The amendment to the standard includes a clarification of the rules on offsetting financial instruments and reporting them net on the balance sheet. Amongst other things, it clarifies the rules if there is the same counterparty for several transactions. The amendment will come into force on 1 January 2014 or later. IAS 39 Financial instruments recognition and measurement The amendment allows some exceptions, which mean that it is no longer necessary to discontinue hedge accounting if the hedging derivative is novated, provided that certain criteria are met. The change has no impact, as the Group does not use hedge accounting. The amendment will come into force on 1 January 2014 or later. IFRS 9 Financial instruments IFRS 9 is the first phase of IASB s project to replace IAS 39, and deals with the classification and measurement of financial assets and financial liabilities. The amendment will come 40 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

41 into force on 1 January 2015 or later. The EU has not yet approved the standard. Subsequent phases of this project will deal with hedge accounting and the impairment of financial assets. IFRS 12 Disclosure of interests in other entities IFRS 12 applies to entities with interests in subsidiaries, joint ventures, associates or unconsolidated structured entities. IFRS 12 replaces the disclosure requirements under IAS 27 Consolidated and separate financial statements, IAS 28 Investments in associates and IAS 31 Interests in joint ventures. It also introduces a number of new disclosure requirements. The changes do not affect the Group s financial statements. The amendment will come into force on 1 January 2014 or later. Changes arising from the annual improvement process IASB has adopted several changes that come into force on 1 July The EU is expected to approve the changes in the third quarter of The following changes may have an impact on Sparebanken Sogn og Fjordane IFRS 8 Operating segments The changes require disclosure of aggregation of segments, and reconciliation of assets in the individual aggregated segments with the total assets. IFRS 13 Fair value measurement Clarifies that IFRS 13 and IAS 39 do not remove the ability to measure current receivables and liabilities at their invoice amounts without discounting if the effect of not discounting is immaterial. Clarifies the scope of the portfolio exception. The portfolio exception allows an entity to measure the net fair value of a group of financial assets and liabilities, provided that they are managed on the basis of the entity s net exposure to market and credit risk. The portfolio exception includes all financial instruments accounted for within the scope of IAS 39 or IFRS 9, regardless of whether they meet the definition of financial assets or financial liabilities as defined in IAS 32. NOTE 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continuously reassessed, and are based on past experience and expectations of probable future events. Accounting estimates produced on the basis of this rarely entirely correspond with what actually happens. Estimates that represent a significant risk of large changes to balance sheet values are discussed below. Estimated impairment of goodwill Goodwill is tested annually for impairment; see discussion in Note 1 Accounting principles. The recoverable value from cash-flow generating units is determined by calculating their utility value. These calculations require certain estimates to be made. Also see the note on intangible assets and goodwill. Fair value of financial derivatives and other financial instruments For securities that are not listed and for which there is not an active market, the Group uses valuation techniques to determine their fair value. The Group makes its assessments and uses methods and assumptions that in so far as it is possible are based on market conditions on the balance sheet date. For interest-bearing securities that are not actively traded in the period leading up to the reporting date, we use valuations and estimated credit spreads that we obtain from various brokers and from the Norwegian Securities Dealers Association. Shares that are not listed on a stock exchange are valued on the basis of the most recent private placement price, any transaction prices that we are aware of and discounted cash flows. Securities that are not traded are valued based on available financial information. Interest rate derivatives are valued using discounted cash flows based on the swap rate at the reporting date. Fixed-rate loans and fixed-rate deposits are valued using discounted expected cash flows based on an internal pricing model, which is supposed to represent the cost of alternative sources of financing for the Bank. The fair value of liabilities arising from financial guarantees provided by the Bank is calculated using the same techniques as the ones described below for loan loss provisions. The Bank has guaranteed Eksportfinans against a fall in value of parts of Eksportfinans s liquid assets. This guarantee is valued in accordance with the valuations that Eksportfinans has obtained from external brokers. Also see the note on Fair value of financial instruments. Loan portfolio held by Bustadkreditt Sogn og Fjordane The parent company has transferred mortgage loans to its subsidiary Bustadkreditt Sogn og Fjordane. A number of agreements govern the relationship between the two parties. These agreements transfer the credit risk and entitlement to interest income from the parent company to the subsidiary. The loans have therefore been Sparebanken Sogn og Fjordane ANNUAL REPORT

42 derecognised from the parent company s accounts. Also see Note 42 Related parties. Loan loss provisions An impairment provision shall be made when there is objective evidence of a fall in value. Objective evidence that a loan has fallen in value includes significant financial problems at the debtor, default or other major breaches of contract, cases where it is likely that the debtor will try to renegotiate his debt or other specific events that have occurred. To decide whether there exists objective evidence justifying collectively assessed impairment provisions at the Group, we use models that have been developed to calculate credit risk, as well as our own data on the loans statistical remaining term to maturity. All impairment provisions are based on discounted values, with the loan s effective interest rate before impairment being used as the discount rate. In principle all cash flows from loans and groups of loans must be identified, and an assessment must be made as to what cash flows are at risk of default. With the large number of loans that are subject to assessment, these calculations have to be based on the specifics of the loans and past experience. The models that are used to calculate credit risk are evaluated and validated regularly. This is also true of the model for collectively assessed impairment provisions for groups of loans. Changes are implemented in order to ensure that estimates of future losses are based on past experience and our knowledge of the Bank s portfolio and the macroeconomic prospects. For further details of the approach to individually and collectively assessed impairment provisions, see the note on Accounting Principles. Pension liabilities The present value of pension liabilities depends on various financial and actuarial assumptions. Any change to these assumptions affects the carrying value of pension liabilities and pension expenses. The assumptions on discount rates are based on the long-term interest rates on covered bonds. The expected return on pension fund assets is the same as the discount rate, in accordance with IFRS rules. Other important assumptions that affect pension liabilities include annual wage inflation, annual adjustment of pensions, anticipated adjustment of the National Insurance Scheme s basic amount (known as G ) and the take-up percentage for the government backed early retirement scheme (AFP). Here the Group has used the assumptions set out in The Norwegian Accounting Standards Board s 2013 guidelines. Also see the note on Pensions and note on Accounting Principles. Economic life of plant and equipment Sparebanken Sogn og Fjordane determines the economic life and associated depreciation rates for fixed assets. The depreciation is increased if the economic life is shorter than previously estimated, and obsolete and discarded assets are written down. Contingent liabilities From time to time, Sparebanken Sogn og Fjordane will be involved in legal disputes. The potential impact on the financial statements will be assessed on a case-by-case basis. NOTE 3 CHANGES TO THE GROUP S ORGANISATIONAL STRUCTURE There were no changes to the Group s organisational structure in NOTE 4 SEGMENT REPORTING Geographic segments All of the segments operate in Norway. General information about segments The segments reflect the organisation of the Group. Corporate banking market/public sector/financial sector offers a wide range of financial products and services, such as various types of financing, deposits, investments, insurances, foreign currency services and interest rate instruments to small and medium-sized enterprises, the public sector and the financial sector Retail market including residential mortgages offers a wide range of financial products and services, such as various types of financing, deposits, investments, insurances, foreign currency services and interest rate instruments to retail customers Finance responsible for financing and for managing liquidity Other supplies services to Sparebankstiftinga Sogn og Fjordane and manages various properties Estate agency offers estate agency services in conjunction with the purchase and sale of properties Property management manages the Group s largest properties 42 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

43 NOTE 4 SEGMENT REPORTING (cont.) PROFIT AND LOSS ACCOUNT 2013 Total for group Finance Corp. market/ PS/FS Retail incl. residential mort. Other Estate agency Property management Eliminations Net interest and credit income Net other operating income Net other operating income Operating expenses Profit/loss before loan impairment charge Net gain on fixed assets Loan impairment charge Profit/loss before taxation BALANCE SHEET AT Net loans and advances to customers Other assets Total assets Deposits from and debt to customers Other liabilities Equity (incl. profit/loss for the period) Total debt and equity PROFIT AND LOSS ACCOUNT 2012 Total for group Finance Corp. market/ PS/FS Retail incl. residential mort. Other Estate agency Property management Eliminations Net interest and credit income Net other operating income Total operating income Operating expenses Profit/loss before loan impairment charge Net gain on fixed assets Loan impairment charge Profit/loss before taxation BALANCE SHEET AT Net loans and advances to customers Other assets Total assets Deposits from and debt to customers Other liabilities Equity (incl. profit/loss for the period) Total debt and equity Sparebanken Sogn og Fjordane ANNUAL REPORT

44 NOTE 5 NET INTEREST INCOME PARENT COMPANY CONSOLIDATED Interest income Loans and advances to credit institutions, measured at amortised cost Loans and advances to customers, measured at amortised cost Loans and advances to customers, designated at fair value Interest-bearing securities measured at amortised cost Interest-bearing securities, measured at fair value Other interest income, measured at amortised cost Total interest income Interest expenses 10 5 Debt to credit institutions, measured at amortised cost Customer deposits/advances, measured at amortised cost Customer deposits/advances, designated at fair value Debt securities measured at amortised cost Debt securities, measured at fair value Subordinated + hybrid debt, measured at amortised cost Derivatives, measured at fair value Other interest expenses, measured at amortised cost Contribution to the Norwegian Banks Guarantee Fund Total interest expenses Net interest income NOTE 6 PARENT COMPANY NET COMMISSION INCOME CONSOLIDATED Payment services Security trading Guarantee commissions Currency services and international payments Insurance services Other commission income Total charges and commission income Interbank fees Payment services Total commission expenses Net commission income NOTE 7 NET GAINS ON FINANCIAL INSTRUMENTS PARENT COMPANY CONSOLIDATED Net gains/losses on foreign currency Net gains/losses on financial derivatives Net gains/losses on financial instruments, trading portfolio Net gains/losses on loans measured at fair value Net gains/losses on deposits measured at fair value Net gains/losses on commercial paper and bonds Net gains/losses on shares Net gains/losses on financial liabilities Net gains/losses on financial instruments designated at fair value Net gains/losses on financial instruments measured at fair value Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

45 NOTE 8 OTHER INCOME PARENT COMPANY CONSOLIDATED Income from property Income from Gjensidige Bank ASA Estate agency Mortgage loan business Property management The savings bank foundation Other operating income Total other income NOTE 9 OPERATING EXPENSES PARENT COMPANY CONSOLIDATED Ordinary wages, salaries, fees, etc Pension expenses Employer s NI contributions Other staff-related expenses Total wages, salaries, etc IT expenses Marketing Postage, money transport and telecommunications Office supplies, plastic cards, journals, etc Travel and training costs Total administration expenses Rent Property expenses Auditor s fee Expenses, payment terminals External consultants Other operating expenses Other expenses Total other expenses Depreciation and writedowns on fixed assets and intangible assets Total operating expenses NOTE 10 PENSION LIABILITIES General The Sparebanken Sogn og Fjordane Group s pension schemes meet the Group s obligations under the Act relating to mandatory occupational pensions. The Group has the following pension schemes: 1. Defined benefit scheme The defined benefit pension scheme, which is arranged through an insurance company, includes a retirement pension, disability pension, spouse s pension and dependant s pension. Employees must have 30 qualifying years of service to obtain a full pension, which entitles them to virtually 70 percent of their final salary, including benefits from the National Insurance Scheme. If an employee leaves the company before reaching retirement age, a paid-up policy is issued. The disability and spouse s pensions for employees and retired employees are unfunded insurances. In 2012 the old company pension scheme was closed to new members. New employees join a defined contribution pension scheme (see 2 next page). Sparebanken Sogn og Fjordane ANNUAL REPORT

46 NOTE 10 PENSION LIABILITIES (cont.) 2. Defined contribution scheme Sparebanken Sogn og Fjordane has a defined contribution pension scheme for all employees taken after 31 March 2012 and certain younger employees who were taken on before that. Under the scheme, the Bank contributes 5 percent of ordinary wages up to six times the National Insurance Scheme s basic amount G, and 8 percent of ordinary wages between six and twelve times G. Employees are free to choose when they want to start receiving their pension, but it cannot be before they turn 62 or after they turn 75. The normal payout period is ten years. The pension contributions plus the accumulated return on them, less management fees, are the property of the individual employee, and pension funds can be inherited if the employee dies before his or her fund has been paid out. The defined contribution pension scheme is not included on the balance sheet. 3. Early retirement scheme (AFP) The Bank has unfunded residual liabilities for its old early retirement scheme (AFP) on its balance sheet. Under the old scheme, the Bank covered 100 percent of pension benefits payable at the ages of 62 and 63, after which the National Insurance Administration covered 40 percent of benefits until the age of 67. The scheme was unfunded, which means that pension benefits were expensed as they arose. As of 2012, a new AFP scheme has been introduced. The new AFP scheme, which is funded through pension premiums, is recognised in the accounts as a defined contribution scheme, which means that there are no associated liabilities on the balance sheet. The new AFP scheme allows employees to take early retirement or partial early retirement on reaching the age of CEO s pension scheme (unfunded) Top-up pension and severance agreement In 2013 the Bank renegotiated the CEO s terms of employment, including the top-up pension scheme, extending the period of service by two years. This reduced the Bank s overall pension liability, but a severance agreement providing three years pay was given as compensation. The pension scheme and severance agreement have been included as liabilities on the balance sheet at 31 December Also see Note 36. Implementation of IAS 19R Employee benefits and restatement of previous years figures In the first quarter of 2013, the Group implemented the revised version of IAS 19 Employee Benefits. The changes that follow from IAS 19R affect how defined benefit pension schemes are accounted for and presented in the financial statements. Amongst other things, it will no longer be possible to use a corridor when accounting for remeasurements. Instead, remeasurements shall be recognised in the reporting period in which they occur. Under the revised version of IAS 19, the pension expense shall be split up, with the service cost and net interest income/expense being included in the line item Wages, salaries, etc.. Meanwhile, valuation movements that result in remeasurements should be included under Other comprehensive income, and are therefore included in the comprehensive income for the relevant reporting period. In 2013 the actuarial gains and losses at 31 December 2012 were recognised, and the balance sheet for 2012 has been restated. The following changes were made to the consolidated financial statements: Balance sheet at 31 December 2012: The pension liabilities included under provisions were increased by NOK 13.2 million, deferred tax liabilities were reduced by NOK 3.7 million and other equity was reduced by NOK 9.5 million. The note on pensions below shows the effect of implementation on a separate line called Increase/(decrease) in equity as a result of transition to IAS 19R at 01/01/2013 in the column for Profit and loss account for 2012: A NOK 6 million remeasurement gain was recognised, and was presented on a separate line under Other comprehensive income. Figures for the parent company have also been restated. The implementation has only resulted in minor changes between the parent company and Group. Parent company and group There is little difference between the figures for the parent company and group. We have therefore chosen to only show the consolidated figures. 46 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

47 NOTE 10 PENSION LIABILITIES (cont.) CONSOLIDATED Economic assumptions Discount rate 4,10 % 3,90 % Expected rate of return on assets 4,10 % 4,00 % Wage increases 3,75 % 3,50 % Adjustment of the National Insurance Scheme s basic amount G 3,50 % 3,25 % Adjustment of existing pensions 1,40 % 1,40 % Employer s NI contributions rate 13,0 % 13,0 % Demographic assumptions Life table (death) K2013 K2005 Life table (disability) IR02 IR02 AFP take-up percentage 50,0 % 50,0 % Staff turnover (all age groups) Frå 0 til 8 % Frå 0 til 8 % All figures in NOK 000s Funded Unfunded Total Funded Unfunded Total Breakdown of net pension expense recognised in P&L Current service cost and other expenses/(income) (A+B+C+D) Current service cost for the period Interest on current service cost Employer s NI contributions Current service cost incl. interest and NICs (A) Administration expenses Employer s NI contributions Administration expenses incl. NICs (B) Amortisation of past service cost Plan amendments during the period Employer s NI contributions Amortisation of gain/(loss) incl. NICs (C) Curtailment/settlement of DBO Net curtailment/settlement Employer s NI contributions Net curtailment/settlement incl. NICs (D) Finance expense/(income) (E) Interest expense/(income) on net liabilities Employer s NI contributions Net interest expense/(income) (E) Net pension expense/(income) for the period (A+B+C+D+E) Sparebanken Sogn og Fjordane ANNUAL REPORT

48 NOTE 10 PENSION LIABILITIES (cont.) 2013 Funded 2013 Unfunded 2013 Total 2012 Funded 2012 Unfunded Remeasurements change in discount rate Remeasurements change in other economic assumptions Remeasurements change in life table Remeasurements change in other demographic assumptions Remeasurements other changes Remeasurements other changes relating to pension fund assets Cost of unit trust and interest rate guarantees Pre-tax loss/(gain) recognised in comprehensive income for the period Total Net amount on balance sheet incl. employer s NICs 2013 Funded 2013 Unfunded 2013 Total 2012 Funded 2012 Unfunded Net pension (liabilities)/assets at start of period Increase/(decrease) in equity as a result of transition to IAS 19R at 01/01/ Net pension expense for the period Contributions Pension benefits expensed as they arise Remeasurements Other changes in the period Net pension (liabilities)/ assets at end of period Net amount on balance sheet, excl. employer s NICs 2013 Funded 2013 Unfunded 2013 Total 2012 Funded 2012 Unfunded Net pension (liabilities)/ assets at start of period Increase/(decrease) in equity as a result of transition to IAS 19R at 01/01/ Net pension expense for the period Contributions Pension benefits expensed as they arise Remeasurements Other changes in the period Net pension (liabilities)/ assets at end of period Employer s NICs, net amount on balance sheet 2013 Funded 2013 Unfunded 2013 Total 2012 Funded 2012 Unfunded Net pension (liabilities)/ assets at start of period Increase/(decrease) in equity as a result of transition to IAS 19R at 01/01/ Net pension expense for the period Contributions Pension benefits expensed as they arise Remeasurements Other changes in the period Net pension (liabilities)/ assets at end of period Total 2012 Total 2012 Total 48 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

49 NOTE 10 PENSION LIABILITIES (cont.) CONSOLIDATED Pension liabilities Opening balance (adjusted for implementation of IAS 19R) Current service cost for the year Pension benefits paid Interest expenses Employer s NICs on pension contributions New plans Remeasurements Total at 31 Dec Pension fund assets Opening balance Expected rate of return on assets Remeasurements Administration expenses Pension contributions Pension benefits paid Closing balance (estimated) Allocation of pension fund assets: The pension benefits are guaranteed through an insurance contract with DNB Livsforsikring AS (Figures at 31 December are not yet known, so figures for 30 September have been used as a best estimate) Shares 6,80 % 9,20 % Other investments 3,50 % 0,00 % Short-term bonds 17,00 % 15,60 % Money markets 22,00 % 18,30 % Long-term bonds 35,20 % 36,80 % Property 14,30 % 18,30 % Other 1,20 % 1,80 % Total 100,00 % 100,00 % Number of people covered by funded pension scheme Current staff Pensioners Total Sensitivity analysis of defined benefit pension scheme Increasing the discount rate, wage growth, National Insurance Scheme s basic amount ( G ) and the pension adjustment amount by one percentage point would have the following impact on the service cost (SC) and defined benefit obligation (DBO): Discount rate (+1% point) Wage growth (+1% point) G (+1% point) Pension adjustment (+1% point) Service cost (expense) 20 % 28 % 5 % 15 % Defined benefit obligation (liability) 15 % 14 % 2 % 13 % Average duration of the defined benefit obligation The average duration of the defined benefit obligation is estimated to be approximately 36 years. In 2013 the Group started using a new life table. The new life table estimates slightly higher life expectancy than the table used in Implementing the assumptions of the new life table increased pension liabilities by NOK 16 million. Expected cost of defined benefit pension scheme It is estimated that the net cost of the defined benefit pension scheme will be NOK 13 million in Sparebanken Sogn og Fjordane ANNUAL REPORT

50 NOTE 11 LOAN IMPAIRMENT CHARGE Writedowns Loans Writedowns Guarantees Total Parent company Total Consolidated Total Parent company Total Consolidated Realised losses New individually assessed provisions Total new individually assessed provisions Reductions in individually assessed provisions Total individually assessed provisions Recoveries of amounts previously written off Changes to collectively assessed provisions Changes to individually assessed provisions for accrued interest and amortisation Loan impairment charge NOTE 12 TAX EXPENSE PARENT COMPANY CONSOLIDATED 2012 Restated 2013 Tax expense Restated Tax payable on taxable income Shortfall/surplus calculated last year Changes to deferred tax Tax payable on income Tax payable on assets Tax expense Reconciliation of nominal and actual tax rates Profit for the year before tax Estimated income tax based on nominal tax rate (28%) Tax impact of the following items: 3 2 Shortfall/surplus calculated in previous years Non-deductible expenses Other permanent differences related to shares Group contributions Other differences Tax payable on income ,1 % 22,4 % Effective tax rate 27,4 % 25,6 % Change in capitalised deferred tax assets/(deferred tax) 15 6 Deferred tax assets/(deferred tax) at 1 January Change recognised in profit or loss Other changes Deferred tax assets/(deferred tax) at 31 December 6 16 Deferred tax assets and deferred tax on the balance sheet relate to the following temporary differences Fixed assets Receivables Financial instruments Net pension liabilities Other differences Net deferred tax assets/ (deferred tax) Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

51 NOTE 12 TAX EXPENSE (cont.) PARENT COMPANY CONSOLIDATED 2012 Restated 2013 Deferred tax in the profit and loss account relates to the following temporary differences Restated Fixed assets Receivables Financial instruments Net pension liabilities Other differences Changes in deferred tax recognised in profit or loss 5 26 Deferred tax assets are only recognised to the extent that it is probable that it will be possible to offset them against future taxable income. NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS Method used to calculate fair value of financial instruments. Financial instruments measured at fair value (incl. financial instruments available for sale). See Note 1 Accounting Principles. Financial instruments measured at amortised cost Market prices are used to price loans and receivables from credit institutions and loans to customers. The value of loans that have been written down is determined by discounting future cash flows using the internal rate of return based on market conditions for equivalent loans that have not been written down. Fair value is considered to be the carrying amount for loans and receivables measured at amortised cost. No allowance has been made for any changes in credit risk over and above the changes in estimated future cash flows for loans that have been written down. The fair value of short-term liabilities to credit institutions is estimated as being their amortised cost. Long-term liabilities to credit institutions are measured at fair value based on the equivalent interest rate as the Bank pays on its own bonds. Debt securities in issue measured at amortised cost are valued in the same way as debt securities in issue measured at fair value, cf. note 1. Off balance sheet obligations and guarantees Mortgaged assets are measured at fair value, cf. Note 1. Other off balance sheet obligations and guarantees are measured at their nominal value. The fair value is shown on the balance sheet under provisions. value value value value CONSOLIDATED ASSETS Cash and receiv. from central banks Loans and advances to credit institutions, measured at amortised cost Loans and advances to credit institutions Loans and advances to customers, measured at amortised cost Loans and advances to customers, designated at fair value Loans and advances to customers Interest-bearing securities, receivables and loans, amortised cost Interest-bearing securities, designated at fair value Interest-bearing securities Shares, designated at fair value Shares, available for sale Shares Derivatives, trading portfolio Derivatives Total Book Fair Book Fair Sparebanken Sogn og Fjordane ANNUAL REPORT

52 NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.) Book value Fair value Book value Fair value KONSERN LIABILITIES Debt to credit institutions, measured at amortised cost Debt to credit institutions Deposits from and debt to customers, measured at amortised cost Deposits from and debt to customers, measured at fair value Deposits from and debt to customers Debt incurred through the issue of securities, measured at amortised cost Debt incurred through the issue of securities, measured at fair value Debt incurred through the issue of securities Derivatives, trading portfolio Derivatives Total Off balance sheet obligations and guarantees Obligations Guarantees Mortgages *) *) Mortgaged assets include bonds and commercial paper mortgaged with Norges Bank as security for loans/ credit facility with Norges Bank. PARENT COMPANY Book value Fair value Book value Fair value ASSETS Cash and receiv. from central banks Loans and advances to credit institutions, measured at amortised cost Loans and advances to credit institutions Loans and advances to customers, measured at amortised cost Loans and advances to customers, designated at fair value Loans and advances to customers Interest-bearing securities, receivables and loans, amortised cost Interest-bearing securities, designated at fair value Interest-bearing securities Shares, designated at fair value Shares, available for sale Shares Derivatives, trading portfolio Derivatives Total Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

53 NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.) PARENT COMPANY Book value Fair value Book value Fair value LIABILITIES Debt to credit institutions, measured at amortised cost Debt to credit institutions Deposits from and debt to customers, measured at amortised cost Deposits from and debt to customers, measured at fair value Deposits from and debt to customers Debt incurred through the issue of securities, measured at amortised cost Debt incurred through the issue of securities, measured at fair value Debt incurred through the issue of securities Derivatives, trading portfolio Derivatives Total Off balance sheet obligations and guarantees Obligations Guarantees Mortgages *) * Mortgaged assets include bonds and commercial paper mortgaged with Norges Bank as security for loans/ credit facility with Norges Bank. CLASSIFICATION BY LEVEL Assets and liabilities that are measured at fair value, whether this is because they are part of the trading portfolio, were initially recognised at fair value or are held as available for sale, shall be classified according to how reliable the fair value estimate is. There are three classification levels, with level 1 assets having prices quoted in active markets. Level 2 valuations are directly or indirectly based on observable prices for similar assets. Level 3 valuations are not based on observable prices, and instead rely on e.g. our own valuation models CONSOLIDATED Level 1 Level 2 Level 3 Total Loans and advances to customers, designated at fair value Interest-bearing securities, designated at fair value Shares, designated at fair value Shares, available for sale Derivatives, trading portfolio Total assets measured at fair value Deposits from and debt to customers, measured at fair value Debt incurred through the issue of securities, measured at fair value Derivatives, trading portfolio Total liabilities measured at fair value CONSOLIDATED Level 1 Level 2 Level 3 Total Loans and advances to customers, designated at fair value Interest-bearing securities, designated at fair value Shares, designated at fair value Shares, available for sale Derivatives, trading portfolio Total assets measured at fair value Deposits from and debt to customers, measured at fair value Debt incurred through the issue of securities, measured at fair value Derivatives, trading portfolio Total liabilities measured at fair value Sparebanken Sogn og Fjordane ANNUAL REPORT

54 NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.) PARENT COMPANY Level 1 Level 2 Level 3 Total Loans and advances to customers, designated at fair value Interest-bearing securities, designated at fair value Shares, designated at fair value Shares, available for sale Derivatives, trading portfolio Total assets measured at fair value Deposits from and debt to customers, measured at fair value Debt incurred through the issue of securities, measured at fair value Derivatives, trading portfolio Total liabilities measured at fair value PARENT COMPANY Level 1 Level 2 Level 3 Total Loans and advances to customers, designated at fair value Interest-bearing securities, designated at fair value Shares, designated at fair value Shares, available for sale Derivatives, trading portfolio Total assets measured at fair value Deposits from and debt to customers, measured at fair value Debt incurred through the issue of securities, measured at fair value Derivatives, trading portfolio Total liabilities measured at fair value Shares valued at NOK 8 million have been moved from level 3 to level 2, as the valuation in 2013 was based on a transaction price. There were no other major moves between levels 1, 2 and 3 in Breakdown of changes in level 3 in 2013: Loans and advances to customers Shares Deposits from and debts to customers Total Opening balance Gain/loss through profit or loss recognised in equity Acquisitions over the period Sales/redemptions over the period Moved into level Moved out of level Closing balance There is no material difference between the Group and the parent bank, so the above table of changes in level 3 assets applies to both the Group and the parent bank. Loans to customers and customer deposits measured at fair value comprise fixed-rate loans and deposits. The purchases or sales/redemptions shown for the period represent the net change excluding changes in market value. Fixed-rate deposits and fixed-rate loans are valued based on discounted cash flows. The discount rate that we use is supposed to represent the interest rate on an equivalent new product issued at the reporting date, with the same term and cash flow. In order to calculate that interest rate, we use our own model for those products, which is not an observable value to outsiders. For fixed-rate deposits the weighted average remaining term is approx years. Roughly speaking, a 1% fall in interest rates will reduce the value of our fixed-rate deposits by approx. NOK 1.47 million. For fixed-rate loans the weighted average remaining term is approx. 3.4 years. Roughly speaking, a 1% rise in interest rates will reduce the value of our fixed-rate loans by approx. NOK million. 54 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

55 NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.) Shares defined as level 3 assets are not listed on a stock exchange, have no known transactions and are shares for which the Bank has no observable assets that can be used for valuation purposes. In such cases we use our own valuations based on discounted cash flows or key financial ratios such as the price to book ratio. For example, a 10% reduction in the *price to book ratio and a 1% increase in the required rate of return would cut their value by approx. NOK 18 million. NOTE 14 RECEIVABLES FROM, AND DEBT TO, CREDIT INSTITUTIONS PARENT COMPANY CONSOLIDATED Loans and advances to credit institutions Sight loans and advances Loans and advances with an agreed maturity or notice period Total loans and advances to credit institutions, measured at amortised cost Debt to credit institutions Sight loans and advances from credit institutions Loans and advances from credit institutions with an agreed maturity or notice period Total debt to credit institutions, measured at amortised cost Term to maturity Remaining term to maturity of debt to credit institutions Payable on request/less than one month months months 1 year years Total NOTE 15 LOANS AND ADVANCES TO CUSTOMERS PARENT COMPANY CONSOLIDATED Loans and advances to customers Leasing, at amortised cost Loans to customers, at amortised cost Loans to customers, FVO *) Foreign currency loan guarantees, at amortised cost Gross loans and advances to customers Impairment provisions for individually assessed loans that have fallen in value Impairment provisions for collectively assessed loans that have fallen in value Net loans and advances to customers *) of which fair value adjustments Sparebanken Sogn og Fjordane ANNUAL REPORT

56 NOTE 16 LOANS BY GEOGRAPHIC AREA PARENT COMPANY Loans Share Loans Share Sogn og Fjordane ,8 % ,2 % Hordaland ,8 % ,0 % Oslo and Akershus ,7 % ,8 % Elsewhere ,6 % 716 2,9 % Total gross loans by geographic area ,0 % ,0 % CONSOLIDATED Loans Share Loans Share Sogn og Fjordane ,1 % ,3 % Hordaland ,0 % ,1 % Oslo and Akershus ,2 % ,8 % Elsewhere ,6 % ,7 % Total gross loans by geographic area ,0 % ,0 % Loans include lease agreements and foreign currency guarantees, which all relate to Sogn og Fjordane. NOTE 17 LOANS BY CUSTOMER GROUPS Loans Guarantees Unused credit facilities PARENT COMPANY Wage and salary earners Public sector Farming and forestry Fishing and hunting Fish farming and hatcheries Industry and mining Power generation Construction and engineering Commerce Transport Hotel and travelling Services Property management Other Total deposits by sector and industry Of which: Retail banking market Corporate market Public sector/other Gross loans to customers CONSOLIDATED Wage and salary earners Public sector Farming and forestry Fishing and hunting Fish farming and hatcheries Industry and mining Power generation Construction and engineering Commerce Transport Hotel and travelling Services Property management Other Total deposits by sector and industry Of which: Retail banking market Corporate market Public sector/other Gross loans to customers Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

57 Consolidated NOTE 18 IMPAIRMENT OF LOANS AND GUARANTEES Total 2013 Gross loans Guarantees Parent company Consolidated Opening balance at 01/01/2013, individually assessed impairment provisions Amounts written off during the current period against previously impaired loans, guarantees, etc Reversal of provisions made in previous years Additional provisions for previously impaired loans, guarantees, etc New provisions for loans, guarantees, etc Changes to individually assessed provisions for interest and repayments due in the period Balance at Individually assessed impairment provisions for loans measured at amortised cost and for guarantees Individually assessed impairment provisions for loans measured at fair value Collectively assessed impairment provisions Gross value of loans individually assessed for impairment, prior to impairment Gross loans Parent company Total 2012 Guarantees Opening balance at 01/01/2012, individually assessed impairment provisions Amounts written off during the current period against previously impaired loans, guarantees, etc Reversal of provisions made in previous years Additional provisions for previously impaired loans, guarantees, etc New provisions for loans, guarantees, etc Changes to individually assessed provisions for interest and repayments due in the period Balance at Individually assessed impairment provisions for loans measured at amortised cost and for guarantees Individually assessed impairment provisions for loans measured at fair value Collectively assessed impairment provisions Gross value of loans individually assessed for impairment, prior to impairment Sparebanken Sogn og Fjordane ANNUAL REPORT

58 RECONCILIATION OF INDIVIDUALLY AND COLLECTIVELY ASSESSED IMPAIRMENT PROVISIONS FOR LOANS AND ADVANCES Ind. ass. imp. prov. Coll. ass. imp. prov. Total, parent company Total, consolidated Ind. ass. imp. prov. Coll. ass. imp. prov. Total, parent company Total consolidated Balance at 1 January Amounts written off during the current period against previously impaired loans, guarantees, etc Reversal of provisions made in previous years Increase in impairment provisions Interest on impaired loans and receivables Impairment provisions at 31 December Mortgages tied to loans and advances that have been individually assessed for impairment consist of: cash, securities, letters of guarantee, properties, stock, equipment and receivables. NOTE 19 LOANS IN DEFAULT AND IMPAIRED LOANS Figures are stated for the parent company, as there are no significant differences between the parent company and group. Loans are defined as being in default if they are overdrawn/overdue by more than NOK 1,000 for more than 90 days. Loans in default and individually assessed impairment by sector and industry Loans in default Indiv. ass. imp. prov. Share % Indiv. ass. imp. prov. Share % Farming and forestry ,0 % 0 0,2 % Fishing ,0 % 0 0,0 % Fish farming ,0 % 0 0,0 % Fishing industry ,0 % 0 0,0 % Other industry ,0 % 18 9,9 % Building/constr., power/water supply ,2 % 1 0,8 % Commerce ,4 % 9 4,8 % Hotels and restaurants ,5 % 23 12,9 % Property management ,8 % 35 19,5 % Other leasing, transport, social and personal services ,6 % 78 43,8 % Total for all sectors ,6 % ,8 % Retail banking market, including international ,4 % 15 8,2 % Public sector ,0 % 0 0,0 % Other ,0 % 0 0,0 % Total ,0 % ,0 % LOANS THAT ARE EITHER IN DEFAULT OR IMPAIRED Balance at 31/12/2013 Per Over forming 120 days 180 days 360 days 360 days Total Non-performing financial loans that have not been impaired Financial loans that have been impaired Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

59 NOTE 19 LOANS IN DEFAULT AND IMPAIRED LOANS (cont.) LOANS THAT ARE EITHER IN DEFAULT OR IMPAIRED Balance at 31/12/2012 Per Over forming 120 days 180 days 360 days 360 days Total Non-performing financial loans that have not been impaired Financial loans that have been impaired NOTE 20 LOANS ASSOCIATED WITH FINANCIAL LEASES Figures are stated for the parent company, as there are no differences between the parent company and group. Gross loans associated with financial leases: Under 1 year Between 1 and 5 years Over 5 years Total The Bank has outsourced the financing of leases to SG Finans. This is the reason for the reduction in financial leases. NOTE 21 BONDS, COMMERCIAL PAPER AND OTHER INTEREST-BEARING SECURITIES PARENT COMPANY CONSOLIDATED Covered bonds Total, loans and advances at amortised cost Government and state-owned enterprises Municipal and mun. auth. backed bonds/comm. paper Covered bonds Fin. inst., other bonds/commercial paper Other bonds/commercial paper Total, designated at fair value Total for both categories Stock exchange listed securities Unlisted securities Total ,20 0,23 Modified duration (years) 0,23 0,22 2,73 1,63 Weighted average effective interest rate 1,54 2,66 Maturity structure of investments in bonds and commercial paper Book value Face value Maturity Book value Face value year Sum All securities are NOK-denominated The weighting used to calculate the average effective interest rate for the whole portfolio is based on the individual security s share of the overall interest rate sensitivity. Sparebanken Sogn og Fjordane ANNUAL REPORT

60 NOTE 22 SHARES PARENT COMPANY CONSOLIDATED Shares, designated at fair value Stock exchange listed shares Unlisted shares Total shares, designated at fair value Shares, available for sale 5 8 Stock exchange listed shares Unlisted shares Total shares, available for sale Total shares Breakdown of shares Market value/ A) Shares, measured at fair value Number of shares book value Financial institutions, listed DnB Bank ASA Sparebank1 Nord Norge Sparebank 1 SR-bank Gjensidige Forsikring Financial institutions, listed Financial institutions, unlisted Hjelmeland Sparebank Financial institutions, unlisted 734 Other listed companies Aberdeen Eiendom AS Aker Solution ASA DNO International ASA Golden Ocean Group AS Kværner ASA Norsk Hydro ASA Norway Royal Salmon ASA Opera Software ASA PGS ASA Polarcus AS Royal Caribbean Cruises Ltd Schibsted ASA Standard Drilling Plc Statoil ASA Subsea 7 AS Telenor ASA Yara International ASA Other listed companies Other unlisted companies Other unlisted companies 449 Other unlisted companies 449 Subtotal A) Shares, designated at fair value Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

61 NOTE 22 FIGURES IN NOK 000S SHARES (cont.) B) Shares, available for sale Financial institutions, listed Visa Inc Financial institutions, listed Financial institutions, unlisted Frende Holding AS Eksportfinans ASA PBS Holding AS (Nets Holding AS) Eiendomskreditt AS Eikagruppen Eika Boligkreditt AS Kredittforeningen for sparebanker Financial institutions, unlisted Shares, measured at fair value Number of shares Market value/ book value Listed companies Domstein ASA Listed companies 219 Other unlisted companies Nordisk Areal AS Hotell Alexandra AS Sunnfjord Hotell AS Nordito Property AS Other unlisted shares 852 Other unlisted companies Subtotal B) Shares, available for sale Sum A + B, Total shares NOTE 23 SUBSIDIARIES AND ASSOCIATES PARENT COMPANY Subsidiaries Balance at 1 January Acquisitions/disposals 0 0 Balance at 31 December CONSOLIDATED PARENT COMPANY Associates Balance at 1 January Acquired Writedowns Balance at 31 December Sparebanken Sogn og Fjordane ANNUAL REPORT

62 NOTE 23 SUBSIDIARIES AND ASSOCIATES (cont.) PARENT COMPANY FIGURES FROM SUBSIDIARIES Ownership interst/share of voting rights Book value Assets Debt Revenues Profit/ loss Bankeigedom Sogn og Fjordane AS 100 % Eigedomsmekling Sogn og Fjordane AS 100 % Bustadkreditt Sogn og Fjordane AS 100 % Investments in subsidiaries FIGURES FROM ASSOCIATES (100 %) Fjord Invest AS 45,3 % Fjord Invest Industri AS*) 40,5 % Fjord Invest Sørvest AS 20,1 % Investments in associates **) 9 *) Total ownership interest held directly and indirectly via Fjord Invest AS. **) Figures for associates are not final. All of the companies have their registered business addresses in Førde. Loans to, and deposits from, subsidiaries and associates at 31/12/2013: Loans Deposits Interest paid on loans Interest received on depositsr Bankeigedom Sogn og Fjordane AS Eigedomsmekling Sogn og Fjordane AS Bustadkreditt Sogn og Fjordane AS Fjord Invest AS Fjord Invest Industri AS Fjord Invest Sørvest AS Total receivables from and debt to subsidiaries and associates NOTE 24 INTANGIBLE ASSETS AND GOODWILL 2013 PARENT COMPANY Software Goodwill Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life 3 years No depreciation Depreciation method Linear 62 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

63 NOTE 24 INTANGIBLE ASSETS AND GOODWILL (cont.) CONSOLIDATED Software Goodwill Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life 3 years No depreciation Depreciation method Linear Goodwill In previous years, goodwill was tested annually for impairment. Eigedomsmekling Sogn og Fjordane AS made a profit after tax of NOK 2.1 million in 2013 and NOK 5.1 million in In 2007, NOK 4,575,000 of goodwill was paid in conjunction with the acquisition of Sogn Eigedomskontor. In 2008, the value of this goodwill was written down by NOK 2,800,000 to NOK 1,775,000. This value has subsequently been tested for impairment. The company had NOK 15,8 million of retained earnings. Based on the method previously used, and in view of the financial results achieved in 2013, the value of the goodwill was not written down in The remaining NOK 12,380,000 of goodwill relates to the acquisition of Fjaler Sparebank in The Bank considers that there is no need to write down the value of this goodwill at 31 December PARENT COMPANY Software Goodwill Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life 3 years No depreciation Depreciation method Linear CONSOLIDATED Software Goodwill Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life 3 years No depreciation Depreciation method Linear Goodwill In previous years, goodwill was tested annually for impairment. Eigedomsmekling Sogn og Fjordane AS made a profit after tax of NOK 5.1 million in 2012 and NOK 4.0 million in In 2007, NOK 4,575,000 of goodwill was paid in conjunction with the acquisition of Sogn Eigedomskontor. In 2008, the value of this goodwill was written down by NOK 2,800,000 to NOK 1,775,000. This value has subsequently been tested for impairment. Based on the method previously used, and in view of the good financial results achieved in 2012, the value of the goodwill has not been written down in The remaining NOK 12,380,000 of goodwill relates to the acquisition of Fjaler Sparebank in The Bank considers that there is no need to write down the value of this goodwill at 31 December Sparebanken Sogn og Fjordane ANNUAL REPORT

64 NOTE 25 FIXED ASSETS 2013 Buildings and other Machinery, fixtures, PARENT COMPANY real property fittings and vehicles Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life years 3 8 years Depreciation method Linear Linear Buildings and other Machinery, fixtures, CONSOLIDATED real property fittings and vehicles Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life years 3 8 years Depreciation method Linear Linear Our bank premises are mortgaged for loans taken out by the property company PARENT COMPANY Buildings and other real property Machinery, fixtures, fittings and vehicles Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life years 3 8 years Depreciation method Linear Linear CONSOLIDATED Buildings and other real property Machinery, fixtures, fittings and vehicles Total Carrying amount at Acquired Disposed of Depreciation Carrying amount at Historical cost Accumulated depreciation and writedowns Carrying amount at Useful life years 3 8 years Depreciation method Linear Linear Our bank premises are mortgaged for loans taken out by the property company. 64 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

65 NOTE 26 OTHER ASSETS PARENT COMPANY CONSOLIDATED Earned income not received Other payments made in advance, not yet accrued Various expenditures/stock Total other assets, measured at amortised cost NOTE 27 CUSTOMER DEPOSITS Figures are stated for the parent company, as there are no significant differences between the parent company and group Deposits Share Deposits Share Customer deposits, at amortised cost ,4 % ,0 % Customer deposits, designated at fair value *) 332 1,6 % 574 3,0 % Deposits from and debt to customers ,0 % ,0 % Average interest rate 2,49% 2,59% *) A valuation gain of NOK 1.5 million was recognised in *) A valuation loss of NOK 1.5 million was recognised in Deposits Share Deposits Share Wage and salary earners ,2 % ,2 % Public sector ,5 % ,8 % Farming and forestry 494 2,4 % 525 2,8 % Fishing and hunting 253 1,2 % 308 1,6 % Fish farming and hatcheries 246 1,2 % 82 0,4 % Industry and mining 465 2,3 % 476 2,5 % Power generation 99 0,5 % 84 0,4 % Construction and engineering 646 3,1 % 630 3,3 % Commerce 718 3,5 % 584 3,1 % Transport 360 1,7 % 251 1,3 % Hotel and travelling 98 0,5 % 89 0,5 % Services ,8 % ,6 % Property management ,0 % 863 4,5 % Other ,2 % 935 4,9 % Total deposits by sector and industry ,0 % ,0 % Of which: Retail market ,2 % ,2 % Corporate market ,1 % ,0 % Public sector/other ,7 % ,8 % Total deposits ,0 % ,0 % Sogn og Fjordane ,5 % ,9 % Hordaland ,1 % ,3 % Oslo and Akershus ,5 % 863 4,5 % Other 996 4,8 % 810 4,2 % Total deposits by region ,0 % ,0 % Remaining term to maturity (book value) Payable on request Total deposits by remaining term to maturity The Bank has NOK million in ordinary fixed-rate deposits. The market value of these deposits at 31 December 2013 was estimated as being NOK million. The difference between the face value and market value is NOK 1.5 million. The difference in 2012 was NOK 2.9 million. The increase of NOK 1.5 million was credited to the profit and loss account for Sparebanken Sogn og Fjordane ANNUAL REPORT

66 NOTE 28 DEBT SECURITIES IN ISSUE Face value Book value CONSOLIDATED Bond debt own bonds, not amortised Debt securities measured at amortised cost Commercial paper and other short-term borrowings Bond debt own bonds, not amortised Debt securities, designated at fair value Total debt securities in issue Maturity structure of debt securities in issue (face value): Total debt securities (face value) New borrowings in Repayments in Credit risk In the opinion of the Bank, changes in the price of its debt securities are not due to changes in Sparebanken Sogn og Fjordane s specific credit risk, but rather the result of changes in market interest rates in financial markets. The method that we have used to assess the Bank s specific credit risk is to compare the pricing/ credit spread on our securitised loans and bonds with the pricing/ credit spread on the debt securities and bonds of other mid-sized Norwegian savings banks. NOTE 29 OTHER LIABILITIES AND PROVISIONS Estimated liabilities PARENT COMPANY CONSOLIDATED 2012 Restated 2013 OTHER LIABILITIES Restated Other liabilities Fixed terms Total other liabilities PROVISIONS Pension liabilities Total provisions Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

67 NOTE 30 FINANCIAL DERIVATIVES Sparebanken Sogn og Fjordane trades in financial derivatives in conjunction with hedging and managing market risk and in its dealings with customers Total nominal values Positive market value Negative market value Total nominal values Positive market value Negative market value Interest rate contracts Swaps Eksportfinans portfolio guar.*) Total interest rate contracts Foreign exchange contracts Forwards and swaps Total foreign exchange contracts Total financial derivatives *) Eksportfinans portfolio guarantee: together with the other shareholders in Eksportfinans, the Bank has agreed to provide guarantees against falls in value in a defined portfolio of bonds and securities owned by Eksportfinans. The ceiling on the guarantee is NOK 5.0 billion, and the Bank s share of this is 1.33%, which is equivalent to NOK 67 million. The agreement was signed on 31 March 2008, and runs until 31 December The positive market value shown in the table represents our share of the increase in value at 31 December If the market value rises above the market value when the contract was signed, the Bank will receive the increase in value up to a ceiling equivalent to the face value of the bonds. The Bank also receives commission for the guarantee agreement. All derivatives are measured at fair value using the principles for held-for-sale assets (the trading portfolio). The Bank has no derivatives that are measured using hedge accounting principles. NOTE 31 SUBORDINATED DEBT Face value Book value CONSOLIDATED Hybrid debt Subordinated debt Subordinated debt, measured at amortised cost Subordinated debt by year of maturity (par value): Year 2019 (but with clause on change of terms in 2014) Perpetual hybrid debt Total subordinated debt Hybrid debt counts towards the Bank s core capital. However, it is not included in core Tier 1 capital; cf. Note 37. At 31/12/2013, the average interest rate on the subordinated debt was 6.07%. Sparebanken Sogn og Fjordane ANNUAL REPORT

68 NOTE 32 RISK MANAGEMENT Each year, the Board reviews and adopts the Bank s capital requirements and Internal Capital Adequacy Assessment Process (ICAAP). It also adopts a credit strategy and finance strategy, as well as limits for capital adequacy, credit risk, liquidity risk and market risk. Quarterly reports allow the Board to evaluate the Bank s risk exposure compared with its corporate governance goals. Risk management involves managing credit risk, operational risk, market risk (interest rates, exchange rates and share prices), concentration risk, liquidity risk and business risk. Rules on capital adequacy The Bank adheres to the requirements set out in the Capital Requirement Regulations ( ) and the Basel II regulations. The rules consist of three pillars: Pilar 1 Minimum capital requirement Pilar 2 The internal capital adequacy assessment process (ICAAP) Pilar 3 Disclosure of financial information Pilar 1: The Bank uses the standardised approach for credit risk, and the basic indicator approach for operational risk. Pilar 2: The Bank has submitted ICAAP documentation to the Financial Supervisory Authority of Norway during the period The documentation is prepared with the broad involvement of the Bank s senior management and technical managers, and is discussed by the Board on several occasions. The Board will finally approve the ICAAP documentation for 2014 at its meeting in April Pilar 3: The Bank has looked closely at the requirements that the regulations set out for the disclosure of information. The Board has produced and adopted requirements and guidelines for this area. Capital requirements have changed as a result of the implementation of Basel III and CRD IV into Norwegian regulations. Capital requirements under the new regulations are stricter than they were. In recent years, the Bank has built up its equity by increasing both its core Tier 1 capital and core capital, and it is now well capitalised, which means that it satisfies the new capital requirements. The aim is to further increase capital levels over the coming years. The Bank s disclosures on capital adequacy and risk management are described in a separate document published on the Bank s website. The Bank s areas of risk The Bank has developed a model for measuring the Bank s total risk, which uses the value at risk method. The model is the result of a collaboration between the Bank, Sparebanken Sør, Sparebanken Møre, Sandnes Sparebank and Gjensidige Bank. The model calculates the level of unexpected losses based on various confidence levels relating to the areas of credit risk, market risk, operational risk and liquidity risk. At the end of 2013 the model was used to report capital requirements arising from market risk and liquidity risk. Credit risk Credit risk is the danger of losing money as a result of customers/counterparties being unable or unwilling to fulfil their payment obligations to the Bank. The vast majority of the Bank s credit risk relates to loans, but credit risk also arises from the obligations of customers under leasing contracts, interest-bearing securities, currency services, guarantees and credit facilities. The Board provides the framework for the Bank s credit risk through its credit policy and rules on the granting of loans and credits. Each autumn the Board also adopts an annual credit strategy which provides guidelines for credit activities the following year. The Bank also has credit underwriting guidelines, and procedures for monitoring compliance during first and second line credit checking. Models for calculating credit risk The Banks has developed its own models for estimating the probability that customers will default. These models are validated each year. For the retail banking market it has developed a statistical model for application and behaviour scoring, which predicts the likelihood of customers going into default during a given 12 month period. The application model uses both internal and external data about the customer, and is used when the customer is going through the application process. The behaviour model only uses internal data held by the Bank, and calculates the probability of default based on the customer s use of the Bank. Risk classification using the behaviour scoring model is done monthly, and is used to inform the Bank s approach towards the individual customers. We have also developed a model to calculate the probability of default within a 12 month period for the Bank s corporate customers. This is a hybrid model, which uses a combination of statistical analyses of our customer 68 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

69 NOTE 32 RISK MANAGEMENT (cont.) base and the personal knowledge of experienced Bank employees. The model includes variables to allow it to take into account the customer s financial statements and use of the Bank. We have also developed a model to calculate the probability of default within a 12 month period for the Bank s corporate customers. This is a hybrid model, which uses a combination of statistical analyses of our customer base and the personal knowledge of experienced Bank employees. The model includes variables to allow it to take into account the customer s financial statements and use of the Bank. The Bank uses these models to classify all of its loans monthly, in the risk classes A K, with A being the lowest risk class and K being loans in default. Based on that, it places its customers in three main groups: low risk, medium risk and high risk. In the retail banking market, the Bank also has a framework model to estimate the loss severity of each account that is in default. The loss severity is calculated on the basis of the type of product involved, what kind of security the Bank has and the estimated amount owed. As the Bank has had very low credit losses over an extended period of time, it has been difficult to develop a statistical model using our own data. The Bank has worked with Sparebanken Sør, Sandnes Sparebank and Helgeland Sparebank on a project to develop a statistical model for loss severities based on joint data. Impairment of loans and guarantees In the event of objective evidence of impairment (such as bankruptcy, composition with creditors, debt negotiations or other defaults), indicating that it is likely that we will incur losses in relation to a loan, the necessary individually assessed impairment provisions are calculated. This takes into account estimated future cash flows and the realisable value of any collateral. Default occurs if an account is overdrawn, or if a borrower does not meet due payments, and the customer fails to bring it up-to-date within 90 days. A customer is reported as being in default if the amount overdrawn or arrears is greater than NOK If a loan is written down even though it is not in default, it is reported under Impaired loans, not in default. All major loans, i.e. loans to corporate customers of over NOK 30 million and loans to retail customers (including the self-employed) of over NOK 6 million are reviewed quarterly to see if there is objective evidence of a fall in value. Loans that are not defined as major/that are below these limits are reviewed if the Bank s models or other information about the customer suggests that there may be objective evidence of a fall in value. Corporate banking customers that are in default or are considered at risk are reviewed and assessed each quarter. Corporate customers whose financial statements reveal negative equity and/ or a loss are also reviewed. Corporate customers that are allocated a risk class which places them in the high risk group are also reviewed quarterly. An assessment of potential impairment/ losses should also be carried out if the Bank is aware of other circumstances that suggest that the customer s future ability to service the loan is in doubt. The Bank has developed its own model for calculating impairment provisions for groups of loans and guarantees. The model is based on the Bank s models for calculating the credit risk and the value of collateral associated with each individual account. Collectively assessed impairment provisions are calculated at the level of individual accounts, and provide an estimate of expected losses on the current portfolio over the portfolio s statistical term to maturity. Impairment provisions for groups of loans allow for defaults by customers who are in the Bank s portfolio, but who on the balance sheet date are not identified as at risk (customers in risk class K, which covers impaired loans and loans in default, are not included). The model also includes parameters that take into account macroeconomic conditions. If the macroeconomic outlook is poor, collectively assessed impairment provisions are higher than if macroeconomic conditions are expected to improve. Concentration risk Concentration risk is the risk of losses that arises from lending a high proportion of your capital to individual enterprises or limited geographic regions or industries. Concentration risk is managed through the Bank s risk management frameworks, and is measured using Hirschman-Herfindahl indexes for industries and major loans. The risk management framework sets out guidelines for the exposure that the Bank can take on in the different industries. The framework has resulted in what we consider to be a good spread across industries. Market risk Market risk is the danger of losses related to unfavourable fluctuations in market prices, in our case related to positions and activities in the interest rate, currency and stock markets. The Board has placed limits on the Sparebanken Sogn og Fjordane ANNUAL REPORT

70 NOTE 32 RISK MANAGEMENT (cont.) Bank s permitted interest rate risk, as well as on its exposure to the stock and foreign currency markets. The Bank measures its market risk using a VaR analysis in the Bank s total risk model. Liquidity risk Liquidity risk is the risk that the Bank will be unable to fulfil its obligations and/ or finance an increase in assets without significant additional cost, either because it has to realise losses on the sale of assets or because it has to make use of unusually expensive financing. We distinguish between two types of liquidity risk: 1. The Bank s credit rating is downgraded as a result of high losses, but it still able to obtain financing through financial markets. 2. The Bank is unable to obtain financing due to high losses. Provisions for the first type of liquidity risk are estimated in the total risk model. Liquidity risk as a result of losses leading to a credit rating downgrade is defined as a charge to equity through higher financing costs. This is a consequential risk, in the sense that it arises as a result of high losses in other areas making it difficult for the Bank to finance its borrowing requirements. The new rating derives from the overall loss. The higher risk premium is in turn a consequence of the new rating. The liquidity requirement is entered in the total risk model, and multiplied by the change in the risk premium. In order to reduce its liquidity risk, the Bank has a portfolio of liquid assets such as interest-bearing securities and bank deposits that can be used to cover repayments to the financial markets over the coming months, in addition to other liquid outgoings. Requirements relating to the deposit/loan ratio, maturity structure and liquidity buffer are calculated on the basis of stress tests that look at the probability and impact of funding difficulties. The Bank s liquidity buffer shall be sufficient to cover at least one year of normal operations and give it at least 4 months to implement suitable measures in the event of credit stress. Periodic stress tests are carried out to see whether the liquidity buffer would be sufficient in the event of the Bank losing access to liquidity. The Bank also has a contingency plan for dealing with any loss of access to liquidity. Also see Note 33 for more information. Operational risk By operational risk we mean the risk of losses due to human error, external actions or failures and defects with the Bank s systems, procedures and processes. We have established an incident database for the assessment, recording and measurement of operational problems. Operational risk is reported using the basic indicator approach. Compliance risk Compliance risk is the risk that the Bank will incur government sanctions, financial losses or loss or reputation as a result of failure to comply with laws, regulations and standards. The Bank has adopted guidelines for risk and capital management. These guidelines define the Bank s overall risk profile and set limits on exposure to specific areas of risk. They also set out how the Bank s risk exposure and compliance shall be managed, and how the Bank should go about ensuring that risks are eliminated and controlled. In 2013 compliance risk was evaluated through the risk management department s ongoing activities during the year and the internal control report at the end of the year. Business risk/reputation risk The risk of unexpected fluctuations in income for other reasons than credit risk, market risk and operational risk is known as business risk. This can arise in various business or product segments, and may be related to changes in the economic climate and/or changes in customer behaviour, for example due to changes in reputation and strategic misjudgements. The Bank sets aside financial capital to cover losses as a result of business risk. A special model has been developed to calculate the financial capital required to meet business risk based on fluctuations in the Bank s budgets for income, expenses and losses. The Bank sets aside sufficient capital to cover unexpected losses due to business risk with a confidence level of 99.95%. 70 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

71 NOTE 33 LIQUIDITY RISK CONSOLIDATED < Perpetual Liquidity risk remaining term at month months months years > 5 years loans Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Subordinated debt Unused credit facility and loans not yet drawn Financial derivatives gross amount (outflows) * Total payments *) Financial derivatives (gross inflows) Net outflows from financial derivatives (negative figure implies net inflow) < Perpetual Liquidity risk remaining term at month months months years > 5 years loans Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Subordinated debt Unused credit facility and loans not yet drawn Financial derivatives gross amount (outflows) * Total payments *) Financial derivatives (gross inflows) Net outflows from financial derivatives (negative figure implies net inflow) PARENT COMPANY < Perpetual Liquidity risk remaining term at month months months years > 5 years loans Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Subordinated debt Unused credit facility and loans not yet drawn Financial derivatives gross amount (outflows) * Total payments *) Financial derivatives (gross inflows) Net outflows from financial derivatives (negative figure implies net inflow) Sparebanken Sogn og Fjordane ANNUAL REPORT

72 NOTE 33 LIQUIDITY RISK (cont.) Liquidity risk remaining term at < Perpetua month months months years > 5 years loans Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Subordinated debt Unused credit facility and loans not yet drawn Financial derivatives gross amount (outflows) * Total payments *) Financial derivatives (gross inflows) Net outflows from financial derivatives (negative figure implies net inflow) The tables include interest, based on current interest rates on the reporting date, so it cannot be reconciled with the balance sheet. Liquidity risk is the risk that the Bank cannot meet its payment obligations when they arise, or replace deposits that are withdrawn, resulting in the Group defaulting on its obligations. Liquidity risk is managed and measured using several methods. The Board has established a framework that limits the proportion of the Bank s liabilities that mature within certain time periods, and goals for the long-term financing of illiquid assets (liquidity indicator). The Board has also established principles for a liquidity buffer. NOTE 34 CREDIT RISK Credit risk by class of financial instrument PARENT COMPANY CONSOLIDATED Maximum exposure Loans and advances to credit institutions Net loans and advances to customers Bonds and commercial paper Financial derivatives Total Credit risk on loans and advances to credit institutions The parent company has provided financing for the purchase of mortgage loans to its wholly-owned subsidiary Bustadkreditt Sogn og Fjordane AS. At 31 December 2013, NOK 1,544 million of the credit had been drawn. The remaining NOK 358 million of advances to credit institutions almost entirely consist of deposits in instant access accounts at other banks, related to the Bank s transaction settlement activities. These counterparties have a credit rating of A- or higher. 72 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

73 NOTE 34 CREDIT RISK (cont.) Loans and advances to customers Risk classification of corporate customers and the public sector (Figures are stated for the parent company, as there are no significant differences between the parent company and group.) Share of total Indiv. ass. imp. Coll. ass. imp. prov. Share of total Indiv. ass. imp. Coll. ass. imp. prov. Accounts* Accounts* Low risk ,0 % ,8 % 0 5 Medium risk ,6 % ,1 % 0 9 High risk ,9 % ,5 % Public sector 63 1,6 % ,6 % 0 0 Total ,0 % % Risk classification of retail customers, parent company Share of total Indiv. ass. imp. Coll. ass. imp. prov. Share of total Indiv. ass. imp. Coll. ass. imp. prov. Accounts* Accounts* Low risk ,5 % ,6 % 0 8 Medium risk ,3 % ,0 % 0 17 High risk 893 5,2 % ,4 % Total ,0 % % Risk classification of retail customers, consolidated Share of total Indiv. ass. imp. Coll. ass. imp. prov. Bonds and commercial paper Book values represent the maximum exposure for investments in bonds and commercial paper. The Bank does not use credit derivatives or other such instruments to reduce its exposure to credit risk. The Bank has NOK 3.5 million in hybrid debt included under bonds. Share of total Indiv. ass. imp. Coll. ass. imp. prov. Accounts* Accounts* Low risk ,1 % ,1 % 0 11 Medium risk ,5 % ,1 % 0 24 High risk ,4 % ,8 % Total ,0 % ,0 % *) Accounts generally consist of loan balances, guarantees, unused credit facilities, credit lines for currency trading and accrued interest. They exclude a small portfolio of leases. Approx. 91.4% of the parent company and 90.7% of the Group portfolio has an international rating. Below the portfolio is classified by rating. For companies with an international rating the rating from Standard & Poor or Moody s has been used where possible. Internal ratings are based on ratings given by Norwegian brokers. PARENT COMPANY CONSOLIDATED International rating Intern rating Rating Intern rating Internasjonal rating AAA AA A BBB BB B Unrated Finansielle derivat Financial derivatives with corporate or retail customers as counterparties are classified in the above table. For other derivatives, the counterparties are Scandinavian banks with credit ratings of A or higher. Sparebanken Sogn og Fjordane ANNUAL REPORT

74 NOTE 35 MARKET RISK Value at Risk (VaR analysis) Market risk arises as a result of the Bank having open positions in interest rate, foreign currency and equity instruments, and the risk consists of potential losses due to unfavourable changes in market prices. The capital requirement for market risk is calculated using statistical methods. The model uses a simulation-based methodology to generate the statistical distribution of market losses over a one-year period. The Bank has chosen to use a confidence level of 99.95%. The confidence level expresses the level of security that the Bank wishes to maintain. For example, a confidence level of 99.95% means that there is only a 0.05% probability that future losses will exceed the capital requirement calculated by the Bank. The model reports VaR. The methodology takes into account market volatility and the correlation between the various types of risk. However, it does not take into account the diversification effect that results from that correlation. Financial capital 99.95% Interest rate risk 28,9 9,9 28,2 Equity risk 192,7 116,9 130,8 Currency risk 6,7 5,0 2,0 Diversification impact 0,0 0,0 0,0 Total 228,3 131,8 161,0 NOTE 36 WAGES, SALARIES, ETC. Salaries, fees and other compensation of senior management, directors and committee members (consolidated figures): FIGURES IN WHOLE NOK The Board of Sparebanken Sogn og Fjordane Fees Wages and salaries Benefits in kind Total compensation Loans at Deposits at Hallgeir Kleppe, Chair Randi Engen, Deputy Chair Heidi Grande Røys, member Jan Petter Vadheim, member Anne Kristin Hjelle Jordal, member Sindre Kvalheim, member Aage Indrebø, member Total for Board of Directors Wages and salaries Benefits in kind Total compensation Loans at Deposits at Audit Committee Fees Knut Jon Sunde, Chair Ingrid Kassen, member Andreas Rønnekleiv, member until Jan Nikolai Hvidsten, member since Total for audit committee Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

75 NOTE 36 WAGES, SALARIES, ETC. (cont.) Total for executive committee Total loans to other employees Total No directors, committee members or senior managers have terms and conditions that are better than the general terms for the Bank s employees. In 2013, the value of subsidised interest rates on loans to employees was NOK 0. Senior management Fees Wages and salaries Benefits in kind Total compensation Loans at Deposits at Arvid Andenæs, CEO Frode Vasseth, CFO Janne Marie Solheimslid, Director of Human Resources Kjetil Bjørset, Corporate Banking Director Hallvard Klakegg, Retail Banking Director Trond Teigene, Director of Strategy and Business Development Gro Skrede Mardal, Director of Credit Management Total for senior management Details of CEO s long-term pension benefits Pension expense Effect of implementing IAS 19R Remeasurements Pension liabilities at » Sev. agmt liabilities at Arvid Andenæs, CEO FIGURES IN NOK 000S PARENT COMPANY CONSOLIDATED WAGES, SALARIES, ETC Wages, salaries and other cash benefits Directors, executive committee s and audit committee s fees Pension expenses Employer s NI contributions Other social security costs Total PARENT COMPANY CONSOLIDATED AUDITOR S FEES DELOITTE *) Statutory audits Tax consultancy Other services not related to auditing Other accreditation services Total PARENT COMPANY INTERNAL AUDITOR S FEES CONSOLIDATED PRICEWATERHOUSECOOPERS AS **) Internal auditing Total *) Including VAT. Sparebanken Sogn og Fjordane ANNUAL REPORT

76 NOTE 37 CAPITAL ADEQUACY PARENT COMPANY CONSOLIDATED Equity and subordinated debt Equity share capital The Bank s own funds/primary capital certificates Dividend equalisation reserve Allocated dividends/intra-group distributions Reserve for unrealised gains Other equity Equity Other core capital Hybrid capital Deductions 0 2 Deferred tax assets Other intangible assets Other deductions % of ownership interest in other financial institutions Net core capital Core Tier 1 capital Supplementary capital Unrealised gains on shares, ownership interests and primary capital certificates classified as available for sale Subordinated debt % of ownership interest in other financial institutions Net supplementary capital Net equity and subordinated loan capital Minimum requirement for equity and subordinated debt Credit risk Of which: 2 1 Local and regional authorities Institutions Enterprises Retail loans Residential mortgage loans Overdue advances High-risk advances Covered bonds Other advances Total minimum requirement for credit risk Currency risk Operational risk Collectively assessed impairment provisions Other deductions Minimum requirement for equity and subordinated debt Excess equity and subordinated debt Capital adequacy 15,81 % 15,95 % Capital adequacy ratio 14,59 % 14,64 % 14,70 % 15,24 % Core capital adequacy ratio 13,97 % 13,64 % 13,04 % 13,65 % Core Tier 1 capital adequacy ratio 12,56 % 12,15 % 76 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

77 NOTE 38 OPERATING LEASES The Bank as lessee The Bank leases premises for its activities in many places around the county. The Bank leases premises in Førde (HQ), Florø, Dale, Askvoll, Stryn and Sandane from its wholly-owned subsidiary Bankeigedom Sogn og Fjordane AS. The Bank paid NOK 9.7 million in rent for these premises in In 2012 it paid NOK 10.2 million. The Bank has signed long-term leases that cannot be cancelled during the term of the lease. In addition to these lease contracts, many smaller contracts have been signed for premises used by the Bank for its activities throughout the county. Rents between related parties are set at normal market rates Total rent paid for offices Total Of which rent on leases with related parties The Bank as lessor The Bank owns one building in which part of the space is leased out to various enterprises. The Bank has in recent years sold several buildings, so there are fewer such arrangements now than there used to be. The Bank has office-sharing agreements with Eigedomsmekling Sogn og Fjordane AS, Sparebankstiftinga Sogn og Fjordane and Gjensidige Forsikring ASA regarding the lease of various office premises in the county Rent on buildings/offices/office-sharing agreements 3 3 Total 3 3 NOTE 39 GOVERNMENT GRANTS Sparebanken Sogn og Fjordane did not receive any government grants in 2012 or NOTE 40 BRANCH NETWORK Figures at 31 Dec Branches Bank-in-shop agreements Bank buses Cash machines Payment terminals Corporate terminals Internet banking customers NOTE 41 OFF BALANCE SHEET ITEMS PARENT COMPANY CONSOLIDATED Guarantees Payment guarantees Contract guarantees Other guarantee liabilities Commitments to investments in shares Total in NOK FIGURES IN NOK 000S Of which in foreign currency: EUR USD Total foreign currency in NOK Payment guarantees Total Sparebanken Sogn og Fjordane ANNUAL REPORT

78 NOTE 42 RELATED PARTIES Balances and gains/losses on transactions with related parties Subsidiaries Associates Outstanding loans at 31 Dec Interest income Deposits at 31 Dec Interest expenses Covered bonds Interest income from covered bonds Other operating income Other operating expenses The above table relates to Sparebanken Sogn og Fjordane s three wholly-owned subsidiaries and three associates. These are: Subsidiaries: Bustadkreditt Sogn og Fjordane AS Bankeigedom Sogn og Fjordane AS Eigedomsmekling Sogn og Fjordane AS Associates: Fjord Invest AS (45.3% ownership interest) Fjord Invest Industri AS (direct interest 5.39%, indirect interest 35.06%, total interest 40.45%) Fjord Invest Sørvest AS (20.1% ownership interest) Sparebanken Sogn og Fjordane and Bustadkreditt Sogn og Fjordane have signed an agreement for the former to supply loan servicing and administrative services to the latter. All of Bustadkreditt Sogn og Fjordane s loans have been acquired from Sparebanken Sogn og Fjordane, and an agreement has been signed on the servicing of the portfolio. Bustadkreditt Sogn og Fjordane AS takes on all of the risk associated with the loans that it acquires from its parent. Bustadkreditt Sogn og Fjordane AS has been given access to good credit facilities with Sparebanken Sogn og Fjordane. These will allow the company to make interest and principal payments to the owners of covered bonds, enable it to make advances to customers with flexible mortgages, provide bridge financing when loans are being transferred, and fund the necessary surplus in the cover pool. The parent company leases premises from Bankeigedom Sogn og Fjordane AS. See Note 38 for further details. Bustadkreditt Sogn og Fjordane AS has four credit agreements with Sparebanken Sogn og Fjordane: a) A 3-year facility that expires in November The credit facility is to be used for buying mortgage loans from SSF. It has a limit of NOK 750 million. b) A credit agreement to ensure that owners of covered bonds will be paid even if the mortgage finance subsidiary is unable to meet its obligations. At 31 December 2013, the agreement had a limit of NOK 160 million. Under the agreement, the obligations of the Bank relate to all payments due to the owners of the covered bonds over the coming year. c) A credit facility that can be used to finance advances to customers with available credit within their flexible mortgages. At 31 December 2013 the limit on the facility was NOK 877 million. d) A credit facility related to overcollateralisation. The facility shall be used to buy loans for inclusion in the cover pool, and to buy instruments that qualify as part of a liquidity buffer. At 31 December 2013 the facility had a limit of NOK 1,070 million, and it reflects the volume of covered bonds issued at any given time. There are also a number of agreements between the Bank and its subsidiaries relating to leases on premises and the supply of various services. All agreements adhere to arm s length principles. Under IAS 24, we must collect the necessary information to ascertain whether there are any transactions between Sparebanken Sogn og Fjordane and companies owned by senior managers at the Bank or elected officers at companies in the Group. A record has been made of all of the ownership interests held by Sparebanken Sogn og Fjordane s related parties, who are defined as senior Group management, the Board of the Bank, the Board of Bustadkreditt Sogn og Fjordane AS, the Board of the Bank s foundation, the director of the foundation and the Managing Director of Bustadkreditt Sogn og Fjordane AS. For these people and their family members, information has been collected about any ownership interests of more than 20 percent in any type of enterprise. The information collected shows that one such company supplied services to Sparebanken Sogn og Fjordane in The total value of the services supplied was NOK 30,200. Thirteen companies where related parties hold ownership interests of more than 20 percent are customers of the Bank. The total outstanding balance of the loans to these companies was NOK 19.1 million at 31 December 2013, while deposits totalled NOK 15.6 million. In 2013, interest paid on the loans amounted to NOK 1.2 million and interest on the deposits came to NOK 0.4 million. None of these companies have been given special terms. 78 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

79 NOTE 43 EXPECTED INCOMINGS (ASSETS) AND OUTGOINGS (LIABILITIES) 2013 PARENT COMPANY CONSOLIDATED Total Over 12 months Up to 12 months ASSETS Up to 12 months Over 12 months Total Cash and receivables from central banks Loans and advances to credit institutions Loans and advances to customers *) Commercial paper and bonds Shares Financial derivatives Investments in associates Shares in subsidiaries Intangible assets Deferred tax assets Fixed assets Other assets Total assets LIABILITIES Debt to credit institutions Deposits from and debt to customers *) Financial derivatives Debt securities in issue Tax payable Deferred tax Other liabilities Other provisions Subordinated debt Total liabilities *) All credits are assumed to have a term to maturity of under 12 months, as are all sight deposits from customers Restated PARENT COMPANY CONSOLIDATED Total Over 12 months Up to 12 months ASSETS Up to 12 months Over 12 months Total Cash and receivables from central banks Loans and advances to credit institutions Loans and advances to customers *) Commercial paper and bonds Shares Financial derivatives Investments in associates Shares in subsidiaries Intangible assets Deferred tax assets Fixed assets Other assets Total assets LIABILITIES Debt to credit institutions Deposits from and debt to customers *) Financial derivatives Debt securities in issue Tax payable Deferred tax Other liabilities Other provisions Subordinated debt Total liabilities *) All credits are assumed to have a term to maturity of under 12 months, as are all sight deposits from customers. Sparebanken Sogn og Fjordane ANNUAL REPORT

80 NOTE 44 FOREIGN CURRENCY POSITIONS The figures in the table show the equivalent in NOK million at 31 December 2013, including financial derivatives. Total foreign Foreign currency EUR USD SEK DKK GBP Other currency in NOK Net exposure at Net exposure at NOTE 45 LOAN-TO-VALUE RATIO AND COVER POOL The figures relate to the subsidiary Bustadkreditt Sogn og Fjordane AS Gross loans to customers 8 677, ,7 Average loan per customer 1,1 1,1 Number of loans 7,7 7,2 Total value of properties securing the loans , ,6 Weighted average loan age (months) Weighted average remaining term (months) Weighted loan-to-value ratio 56 % 54 % Composition of cover pool Residential mortgages 1) 8 627, ,5 Substitute assets 2) 530,0 436,3 Total 9 157, ,9 1) Under the regulations relating to credit institutions that issue covered bonds, the loan-to-value ratio cannot exceed 75 percent. At 31 December 2013, the company had NOK 50.0 million exceeding that limit. That amount was therefore not included when calculating the cover pool. 2) Substitute assets consist of deposits held at Sparebanken Sogn og Fjordane and investments in short-term government debt and covered bonds. All investments are AAA-rated by Standard & Poor. NOTE 46 DISPUTES In 2013 Sparebanken Sogn og Fjordane was involved in one dispute. A judgement in the case is expected in spring The financial statements take into account the dispute. The outcome of the case will not have any significant impact on the Group s business. 80 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

81 NOTE 47 EQUITY CERTIFICATES At 31 December 2013, the Bank s equity share capital consisted of ,530 equity certificates with a face value of NOK 100. Equity of parent company (NOK 000s) Equity share capital Restated Equity certificates Dividend equalisation reserve Total equity share capital (A) Primary capital (B) Reserve for unrealised gains Allocated dividends, gifts and group contributions Total equity Equity share capital ratio A / (A+B) 87,83 % 87,83 % Dividend (figures in NOK) Dividend allocated per equity certificate 1, ,62228 Total dividends Owners of equity certificates Number of equity certificates % share % share Sparebankstiftinga Sogn og Fjordane ,12 % 94,12 % Sparebankstiftinga Fjaler ,88 % 5,88 % Total ,00 % 100,00 % NOTE 48 OFFSETTING Gross carrying amount Amounts offset in the balance sheet Netting agreements Carrying amount Other collateral Net exposure after offsetting Assets at Loans to customers Financial derivatives Liabilities at Borrowings from Norges Bank in conjunction with swap Financial derivatives No financial instruments are reported net in the Bank s financial statements. The Bank has two types of agreements that regulate counterparty risk and the netting of derivative contracts. The Bank has framework agreements for derivatives trading with both retail and corporate customers, which require customers to put up collateral to cover possible falls in market values. Derivative contracts have been entered into with some of the big Scandinavian banks. The Bank s agreements with other financial institutions do not require collateral. On termination of the contracts, there is a right to set-off. For customers with foreign currency loans, the Bank has an agreement to set-off balances against an allowance account established for this purpose. In the table, Other collateral refers to the amounts in these allowance accounts. In addition to the allowance accounts, currency loans are backed by ordinary collateral. Sparebanken Sogn og Fjordane ANNUAL REPORT

82 Declaration by the Board of Directors and CEO We declare that, to the best of our knowledge, the financial statements for 2013 have been prepared in accordance with current accounting standards, and that the information contained therein provides a true picture of the assets, liabilities, financial position and results of the Group. The Board believes that the annual report gives a true picture of the most important areas of uncertainty and potential risks facing the Group in Førde, Hallgeir Kleppe Chair Randi Engen Deputy Chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Sindre Kvalheim Aage Indrebø Arvid Andenæs CEO 82 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

83 Run-of-the-river hydroelectric power? Sparebanken Sogn og Fjordane a driving force for the energy sector Sparebanken Sogn og Fjordane ANNUAL REPORT

84 Auditor s report 84 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

85 Audit committee s annual report Sparebanken Sogn og Fjordane ANNUAL REPORT

86 Consolidated financial results by quarter Q Q Q Q Q Q Net interest income Other operating income Dividends and gains/losses on financial instruments Net other operating income Total revenues Operating expenses Profit/loss before loan impairment charge and net gain on fixed assets Loan impairment charge and net gain on fixed assets Profit/loss before taxation Tax expense Profit/loss after tax on discontinued operations and assets held for sale Profit/loss after taxation Gain/loss after tax on available-for-sale financial assets Remeasurements COMPREHENSIVE INCOME CONSOLIDATED FINANCIAL RESULTS BY QUARTER As a % of average total assets Q Q Q Q Q Q Net interest income 1,88 % 1,81 % 1,69 % 1,58 % 1,74 % 1,77 % Other operating income 0,31 % 0,37 % 0,34 % 0,31 % 0,36 % 0,37 % Dividends and changes in the value of fin. instr. 0,32 % 0,00 % 0,27 % 0,09 % 0,22 % 0,27 % Net other operating income 0,63 % 0,37 % 0,61 % 0,40 % 0,57 % 0,64 % Total revenues 2,50 % 2,18 % 2,30 % 1,99 % 2,33 % 2,43 % Operating expenses 0,95 % 0,81 % 0,85 % 0,93 % 1,04 % 0,81 % Profit/loss before loan impairment charge and net gain on fixed assets 1,56 % 1,39 % 1,44 % 1,02 % 1,29 % 1,60 % Loan impairment charge and net gain on fixed assets 0,12 % 0,04 % 0,07 % 0,21 % 0,28 % 0,23 % Profit/loss before taxation 1,44 % 1,34 % 1,36 % 0,81 % 1,00 % 1,37 % Tax expense 0,40 % 0,38 % 0,38 % 0,23 % 0,19 % 0,38 % Profit/loss after tax on discontinued operations and assets held for sale 0,00 % 0,00 % 0,00 % 0,00 % 0,00 % 0,00 % Profit/loss after taxation 1,04 % 0,96 % 0,98 % 0,58 % 0,81 % 0,99 % Gain/loss after tax on available-for-sale financial assets 0,09 % 0,07 % -0,03 % 0,01 % 0,01 % -0,04 % Remeasurements -0,10 % 0,00 % 0,00 % 0,00 % 0,07 % 0,00 % COMPREHENSIVE INCOME 1,04 % 1,03 % 0,95 % 0,59 % 0,83 % 0,95 % 86 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

87 Consolidated financial results by quarter Q Q Q Q Q Q Net interest income Other operating income Dividends and gains/losses on financial instruments Net other operating income Total revenues Operating expenses Profit/loss before loan impairment charge and net gain on fixed assets Loan impairment charge and net gain on fixed assets Profit/loss before taxation Tax expense Profit/loss after tax on discontinued operations and assets held for sale Profit/loss after taxation Gain/loss after tax on available-for-sale financial assets Remeasurements COMPREHENSIVE INCOME CONSOLIDATED FINANCIAL RESULTS BY QUARTER As a % of average total assets Q Q Q Q Q Q Net interest income 1,68 % 1,66 % 1,57 % 1,65 % 1,56 % 1,62 % Other operating income 0,38 % 0,31 % 0,39 % 0,40 % 0,40 % 0,36 % Dividends and changes in the value of fin. instr -0,05 % 0,60 % 0,01 % -0,20 % 0,01 % -0,06 % Net other operating income 0,33 % 0,92 % 0,40 % 0,21 % 0,41 % 0,30 % Total revenues 2,01 % 2,58 % 1,96 % 1,87 % 1,97 % 1,92 % Operating expenses 0,95 % 0,99 % 1,14 % 1,02 % 1,07 % 1,07 % Profit/loss before loan impairment charge and net gain on fixed assets 1,05 % 1,58 % 0,82 % 0,84 % 0,90 % 0,83 % Loan impairment charge and net gain on fixed assets 0,06 % 0,06 % 0,86 % 0,72 % 0,20 % 0,08 % Profit/loss before taxation 0,99 % 1,52 % -0,04 % 0,13 % 0,70 % 0,74 % Tax expense 0,28 % 0,42 % 0,03 % 0,04 % 0,20 % 0,20 % Profit/loss after tax on discontinued operations and assets held for sale 0,05 % -0,05 % -0,21 % -0,02 % -0,17 % 0,00 % Profit/loss after taxation 0,76 % 1,05 % -0,29 % 0,06 % 0,32 % 0,54 % Gain/loss after tax on available-for-sale financial assets 0,07 % 0,01 % -0,13 % 0,05 % -0,12 % 0,37 % Remeasurements 0,00 % 0,00 % 0,00 % 0,00 % 0,00 % 0,00 % COMPREHENSIVE INCOME 0,82 % 1,06 % -0,42 % 0,09 % 0,22 % 0,91 % Sparebanken Sogn og Fjordane ANNUAL REPORT

88 Market support and gifts Opptur Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

89 Key figures for regional banks FIGURES IN NOK 000s INDRE SUNNFJORD Total lending Total customer deposits Full-time equivalent employees 39,5 43,3 45,0 49,3 55,4 YTRE FJORDANE Total lending Total customer deposits Full-time equivalent employees 23,1 25,8 28,6 26,8 35,0 NORDFJORD Total lending Total customer deposits Full-time equivalent employees 20,6 21,2 25,2 24,6 28,6 INDRE SOGN Total lending Total customer deposits Full-time equivalent employees 11,2 13,8 15,4 15,8 16,7 SØR VEST Total lending Total customer deposits Full-time equivalent employees 24,7 27,6 30,6 33,7 19,5 BERGEN Total lending Total customer deposits Full-time equivalent employees 10,5 10,5 12,0 11,9 8,3 Sparebanken Sogn og Fjordane ANNUAL REPORT

90 Directors and committee memebers BOARD OF DIRECTORS Members: Hallgeir Kleppe, Flora (Chair) Randi Engen, Fjaler (Deputy Chair) Heidi Grande Røys, Flora Anne Kristin Hjelle Jordal, Bergen Jan Petter Vadheim, Sogndal Sindre Kvalheim, Vågsøy Aage Indrebø, Gloppen (employee representative) AUDIT COMMITTEE Members: Knut Jon Sunde, Førde (Chair) Ingrid Kassen, Flora (Deputy Chair) Jan Nikolai Hvidsten, Førde ELECTION COMMITTEE FOR EXECUTIVE COMMITTEE Members: Aslaug Nesje Bjørlo, Gloppen (Chair) Marit Lunde, Leikanger (Deputy Chair) Ole Jakob Nedrebø, Fjaler Harald Kvame, Naustdal Lise Mari Haugen, Askvoll Susan Fagerstrøm, Førde Eirik Rostad Ness, Flora Deputies: 1st deputy: Geir Opseth, Førde 2nd deputy: Ranveig Indrekvam, Naustdal Astrid Borlaug, Høyanger (personal deputy for employee representative) Deputies: Asbjørn Løvik, Førde Deputies: Martin Berntsen, Førde Karoline Bjerkeset, Gloppen Hanne Marie Sæbø, Balestrand Atle Søreide, Gloppen 90 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

91 EXECUTIVE COMMITTEE Members representing Sunnfjord electoral district: Ole Jakob Nedrebø, Fjaler Kjersti Østerbø Bell, Gaular Martin Berntsen, Førde Trude Høgseth Felde, Fjaler Anne Marit Sølvberg Rygg, Naustdal Aud Kari Steinsland, Askvoll (Deputy Chair) Harald Kvame, Naustdal Members representing Nordfjord electoral district: Bernt Reed, Gloppen (Chair) Jørund Årdal, Gloppen Monika Hammer, Stryn Karoline Bjerkeset, Gloppen Members representing Sogn/Bergen electoral district: Sigrun Marit Dale, Balestrand Marit Lunde, Leikanger Jostein Bjarte Kråkås, Solund Monica Oppedal, Høyanger Finn B. Førsund, Hyllestad Employee members: Harald Slettvoll, Førde Eirik Rostad Ness, Flora Torunn Steimler, Bergen Atle Søreide, Gloppen Nils Vegard Kvam, Sogndal Gunvor Follevåg, Førde Jan Arne Aasen, Førde Jarle Nedrebø, Fjaler Elin Botnen Viken, Førde Susan Fagerstrøm, Førde Geir Haugen, Førde Representatives of equity certificate owners: Jonn Helle, Fjaler Ingvard Flekke, Fjaler Trude Brosvik, Gulen Kjartan Strand, Flora Aslaug Nesje Bjørlo, Gloppen Kåre Furnes, Vågsøy Jon Gimmestad, Gloppen Bente Nesse, Høyanger Viggo Leikanger, Naustdal Myrtel Janne Thomassen, Stryn Tom Joensen, Bremanger Tore Dvergsdal, Førde Anne Oline Gullaksen, Førde Geir Opseth, Førde Ole Vidar Øren, Årdal Trude Risnes, Leikanger Geir Holmen, Eid Hanne Marie Sæbø, Balestrand Deputies for Sunnfjord electoral district: Grete Marøy Sellevoll, Førde Sjur Hage, Gaular Deputies for Nordfjord electoral district: Svein Fosse, Bremanger Olaug Solheim Rotihaug, Eid Deputies for Sogn/Bergen electoral district: Hallvard Oppedal, Gulen Kari Maria Rutle Fjærestad, Balestrand Employee deputies: 1st deputy: Roger Svarstad, Vågsøy 2nd deputy: Ørjan Skåden, Stryn 3rd deputy: Aslak Nyhammer, Gulen Deputies for representatives of equity certificate owners: 1st deputy: Rolf Årdal, Førde 2nd deputy: Gro Rukan, Flora 3rd deputy: Lise Mari Haugen, Askvoll 4th deputy: Jøril Hovland, Sogndal Sparebanken Sogn og Fjordane ANNUAL REPORT

92 Organisational chart at 31 Desember 2013 CEO Arvid Andenæs Risk Management Kjell Sandnes HR Janne Marie Solheimslid Strategy and Bus. Dev. Trond Teigene Retail Market Hallvard Klakegg Credit Gro Mardal Skrede Corporate Market Kjetil Bjørset CFO Frode Vasseth Organisation Development Marketing Gunn Aase Moldestad Insurance Toril Haugen Indre Sunnfjord Alexander E. Dvergsdal Depot Heidi Berge Indre Sunnfjord Roy Stian Farsund Finance Frank-Rune Ås Training Magnus Vie Business Development Reiel Haugland Investment Gunnar Heggheim Ytre Fjordane Ole Aukland Credit RM Elect. Payment Services Kjell Gillestad Economics Ingeborg Aase Fransson Operational Administration Aslaug Solvær Channel and Product Development Inger B. Skinlo Customer Service Centre Kari Paulen Nordfjord Odd Kjetil Tonning Credit CM Ytre Fjordane Tom Staveteig Capital Markets Jan Arne Aasen ICT Geir Grime Products Arne Øvrebø Indre Sogn Leif Arne Bakke Nordfjord Ørjan Skåden Int. Payments and Financing Helena Igelkjøn Business Intelligence/ DWH Anne L. Wingo Online Banking Per Magne Hervik Bergen / Sør Vest Leon Bakkebø Indre Sogn Leif Arne Bakke Bustadkreditt Harald Slettvoll Shared Services Signe Grotle Estate Agency Pål A. Kårstad Bergen / Sør Vest Ingar Valvik Legal Dept Asgeir Bjørdal Property Einar Paulsen Senior Management Wholly owned subsidiary 92 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

93 The Group Management Team at Sparebanken Sogn og Fjordane From left: Frode Vasseth (CFO), Gro Mardal Skrede (Director of Credit Management), Hallvard Klakegg (Retail Banking Director), Kjetil Bjørset (Corporate Banking Director) and Janne Marie Solheimslid (Director of Human Resources). Front from left: Arvid Andenæs (CEO) and Trond Teigene (Director of Strategy/Business Development). Sparebanken Sogn og Fjordane ANNUAL REPORT

94 Ownership structure Annual General Meeting Board of Directors Annual General Meeting Board of Directors Sparebankstiftinga Fjaler NOK 1,783.5 million NOK million 18 representatives 94,12 % 5,88 % Primary capital certificates NOK 270 million 27 representatives 13 representing depositors 3 representing public sector 11 representing employees Executive committee 45 members Board 7 members 94 Sparebanken Sogn og Fjordane ANNUAL REPORT 2013

95 INFORMATION ABOUT THE COMPANY Sparebanken Sogn og Fjordane Visiting address: Langebruvegen 12 Postal address: P.O.Box 113 NO-6801 Førde Tel. no.: Website: address: Organisation number : Contact people: Arvid Andenæs CEO Tel Frode Vasseth CFO Tel Sparebanken Sogn og Fjordane ANNUAL REPORT