Eldsjelsamling. A market leader

Transcription

1 Annual Report 2011

2 Eldsjelsamling A market leader For We are andre the år dominant på rad arrangerte player in the vi Eldsjelsamling retail banking for market fulle hus in the på county Skei Hotell. of Sogn På samlinga og Fjordane. fekk We dei mange have outstanding trufaste og loans svært of viktige NOK 20.1 eldsjelene billion i to fylket people på fyll in Sogn med og kunnskap, Fjordane underhaldning, and the rest of inspirasjon Norway. og This lokal comprises mat. På 66% scena of stod the Bank s mellom total anna lending. Kjetil André Deposits Aamodt from og retail Arvid customers Andenæs, total og NOK vi fekk 10.4 billion, comprising nydeleg song 58% of frå the Einar bank s Bolstad. total deposits. The Bank is aiming to develop regional financial servert 2 services Sparebanken centres Sogn offering og Fjordane financing, ANNUAL investment, REPORT 2011 estate agency and insurance products.

3 CONTENT 4 A difficult year! 6 Key figures, parent company 7 Key figures, consolidated 8 About the Bank 11 Directors report 22 Income statement 24 Balance sheet 26 Cash flow statement 27 equity statement 29 notes 74 Declaration by the Board of Directors and CEO 76 Auditor s report 77 the control committee s report 78 Consolidated financial result by quarter 81 Key figures from branches 82 Directors and committe members 84 organisational chart 86 Contact us PHOTOS: Sparebanken Sogn og Fjordane / Vegard Fimland / Are Fjellstad / Arve Ullebø GRAPHIC DESIGN: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS Sparebanken Sogn og Fjordane ANNUAL REPORT

4 A difficult year We must just accept that big losses on a small number of loans to businesses did a lot of damage to our results in To a large extent, this was due to the turbulence in financial markets, unfortunate circumstances and matters beyond our control. However, risk management involves dealing with those things, so we have learnt from what has happened. It has been an expensive lesson, but it has meant that we have improved our procedures, increased our focus on compliance and done even more to improve the quality of our credit scoring. Apart from these few bad loans, we have a good portfolio of corporate loans, with loyal customers and low default rates. We will demonstrate that in the years ahead, by achieving strong profitability combined with low loan losses. Obtaining a credit rating is an important step forward One big and important step in 2011 was obtaining credit ratings for both the Bank and our mortgage subsidiary. Getting the ratings involved a lot of hard work, and during the first half of the year this was our most important project. I can proudly state that we once again managed to reach our goals, relying almost entirely on our own resources. Given that 2011 was a volatile year with high risk premiums in bond markets, it has proved to be a very important move. On the other hand, we have to live with the fact that financial turbulence meant that stock market conditions were not conducive to realising our plan to list the Bank. However, we are keeping those plans on the back burner, and will continue to monitor the situation with interest. Pressure on margins Last autumn, the big increase in the cost of money hit the profit margins of all Norwegian banks, particularly in the case of mortgages. Put simply, the prices being charged to customers were lower than the cost of the money. To some extent this was rectified by the price increase implemented in November, but our margins on mortgages remain 4 Sparebanken Sogn og Fjordane Annual report 2011

5 very low. This means that we will have to focus even more on obtaining financing through our mortgage subsidiary, on selling additional services to our customers and on cutting costs. I will come back to the last of these areas later. First I would like to brag a little bit about our market position, and about our performance in the retail banking market. Greater market share Over the course of 2011 we enhanced our position as the leading bank in the county of Sogn og Fjordane, and for people originally from the county. With loan growth of over 11 percent, we are taking market share from our competitors in the county, and we are lending more and more money to young people from the county who have moved to bigger towns. Around 40 percent of new lending goes to this customer group. We are also doing well at attracting deposits, which grew by more than 9 percent. It would have been impossible to manage that without competitive pricing, but I think that it is just as important that we are professional, while having a high profile on social media sites and offering personal advice and service. The retail market now represents 66 percent of the Bank s overall loan portfolio, and it is also where growth will be strongest in Increasing demands Increasing demands are being placed on us in terms of expertise and efficiency. We have done better in the first of those areas. By collaborating with, and supplying services to, Gjensidige Bank, we have built up strong expertise in all of the areas that we will need going forward. This is particularly true of risk management, financing, economics and technology. The contract to supply services to Gjensidige Bank had been almost entirely terminated by the end of Clearly that will give us some challenges in terms of our income, but it also makes it easier for us to concentrate on our own operations and development activities. Our main focus will therefore be on introducing cost-cutting measures and on becoming even more efficient, which is something that our staff are aware of and are motivated to achieve. Our aim is to be one of the most cost-efficient banks, and to deliver a return on equity that is in line with the ten largest savings banks in Norway. Bearing in mind last year s financial results, we have a long way to go, but we will work incredibly hard to achieve our goals. Social capital If you want to implement difficult measures, knowledge and skill are not enough. You also need energy and enthusiasm. This was the theme of our highly inspiring company event in September. I want us to improve even further in this respect, by having a good working environment, through physical activity and by creating a good, pleasant atmosphere at work. I am well aware that this will not happen simply because I want it to. But as I have said before: the winners will be the organisations that manage to release their social capital. As part of the team, we all have a responsibility here. However, this must be built on the foundations of a sound, wellrun bank. We have a lot to prove, but we also know that we have the energy and skill needed for success. Arvid Andenæs Sparebanken Sogn og Fjordane ANNUAL REPORT

6 Key figures AMOUNTS IN NOK MILLION PARENT COMPANY INCOME STATEMENT Net interest income Dividends and changes in the value of financial instruments Other operating income Operating expenses Profit/loss before impairment charges (incl. securities) Profit/loss before impairment charges (excl. securities) Net gain on the sale of fixed assets Recoveries (-) /losses (+) on loans and guarantees Profit/loss before tax Tax expense Profit/loss after taxation Gain/loss on financial assets available for sale Comprehensive income BALANCE SHEET Loans and advances to credit institutions Gross loans and advances to customers Individually assessed impairment provisions Collectively assessed impairment provisions Security placements Debt to credit institutions Deposits from and debt to customers Debt securities Equity Total assets Average total assets KEY FIGURES Profitability Net interest rate as a % of average total assets 2,07 % 2,10 % 1,68 % 1,71 % 1,58 % Other operating income as a % of average total assets (excl. gain/loss on fin. instr.) 0,51 % 0,44 % 0,37 % 0,36 % 0,34 % Operating expenses as a % of average total assets 1,34 % 1,28 % 1,17 % 0,92 % 1,08 % Oper. exp. as a % of oper. income excl. inc. from fin. instr. 51,84 % 50,26 % 57,08 % 44,49 % 55,79 % Oper. exp. as a % of oper. income incl. inc. from fin. instr. 50,10 % 54,28 % 55,73 % 40,82 % 57,61 % Profit before impairment charge as a % of average total assets 1,33 % 1,08 % 0,93 % 1,34 % 0,79 % Profit before tax as a % of average total assets 1,52 % 0,83 % 0,65 % 0,93 % 0,17 % Profit after tax as a % of average total assets 1,07 % 0,47 % 0,45 % 0,74 % 0,11 % Return on equity before tax 19,37 % 10,99 % 9,86 % 13,31 % 2,34 % Return on equity after tax 13,71 % 6,22 % 6,73 % 10,52 % 1,50 % Return on equity (comprehensive income) 13,71 % 6,04 % 8,08 % 10,18 % 2,14 % Financial strength Capital adequacy ratio 11,20 % 10,51 % 11,92 % 13,34 % 14,42 % Core capital ratio 11,20 % 10,51 % 10,82 % 12,33 % 13,29 % Equity ratio ratio 8,10 % 7,18 % 7,35 % 7,42 % 7,24 % Losses as a % of gross lending 0,15 % 0,25 % 0,33 % 0,49 % 0,80 % Impairment provisions as a % of total assets 0,72 % 0,79 % 1,02 % 1,19 % 0,95 % Balance sheet history Growth in total assets 19,76 % 18,50 % 24,20 % 13,76 % 2,94 % Growth in customer lending 19,39 % 17,54 % 16,58 % 11,11 % 2,38 % Growth in customer deposits 17,53 % 10,56 % 17,39 % 18,61 % 6,19 % Deposits as a % of gross lending 59,32 % 55,80 % 59,73 % 63,76 % 69,36 % 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 2011

7 Key figures AMOUNTS IN NOK MILLION CONSOLIDATED INCOME STATEMENT Net interest income Dividends and changes in the value of financial instruments Other operating income Operating expenses Profit/loss before impairment charges (incl. securities) Profit/loss before impairment charges (excl. securities) Net gain on the sale of fixed assets Recoveries (-)/losses (+) on loans and guarantees Profit/loss before tax Tax expense Profit/loss after tax on businesses and assets held for sale Profit/loss after taxation Gain/loss on financial assets available for sale Comprehensive income BALANCE SHEET Loans and advances to credit institutions Gross loans and advances to customers Individually assessed impairment provisions Collectively assessed impairment provisions Security placements Debt to credit institutions Deposits from and debt to customers Debt securities Equity Total assets Average total assets KEY FIGURES Profitability Net interest rate as a % of average total assets 2,07 % 2,10 % 1,72 % 1,75 % 1,59 % Other operating income as a % of average total assets (excl. gain/loss on fin. instr.) 0,52 % 0,48 % 0,42 % 0,41 % 0,39 % Operating expenses as a % of average total assets 1,32 % 1,32 % 1,20 % 0,97 % 1,07 % Oper. exp. as a % of oper. income excl. inc. from fin. instr. 51,03 % 50,95 % 56,18 % 44,72 % 54,23 % Oper. exp. as a % of oper. income incl. inc. from fin. instr. 49,70 % 54,62 % 55,10 % 41,40 % 55,90 % Profit before impairment charge as a % of average total assets 1,34 % 1,09 % 0,98 % 1,37 % 0,84 % Profit before tax as a % of average total assets 1,52 % 0,85 % 0,70 % 0,94 % 0,37 % Profit after tax as a % of average total assets 1,07 % 0,48 % 0,48 % 0,73 % 0,15 % Return on equity before tax 19,20 % 11,17 % 9,92 % 13,39 % 5,24 % Return on equity after tax 13,52 % 6,36 % 6,81 % 10,43 % 2,17 % Return on equity (comprehensive income) 13,52 % 6,18 % 8,46 % 9,89 % 2,80 % Financial strength Capital adequacy ratio 11,27 % 10,51 % 11,85 % 13,04 % 13,83 % Core capital ratio 11,27 % 10,51 % 10,76 % 12,06 % 12,77 % Equity ratio 8,15 % 7,23 % 7,43 % 7,26 % 6,84 % Losses as a % of gross lending 0,15 % 0,25 % 0,32 % 0,45 % 0,53 % Impairment provisions as a % of total assets 0,72 % 0,79 % 0,97 % 1,09 % 0,82 % Balance sheet history Growth in total assets 19,73 % 18,55 % 4,78 % 17,33 % 7,41 % Growth in customer lending 19,43 % 17,56 % 5,21 % 15,12 % 5,76 % Growth in customer deposits 17,48 % 10,60 % 6,21 % 18,64 % 6,18 % Deposits as a % of gross lending 59,27 % 55,76 % 56,29 % 58,01 % 58,23 % 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 the Bank 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 35.2 billion and 279 full-time equivalent employees. The Bank has 22 branches and 17 bank-in-shop outlets in the county, and is present in 21 of the county s 26 municipalities. It also has a branch in Bergen. Retail banking market The Bank is the dominant player in the retail banking market in the county of Sogn og Fjordane. We have NOK 20.1 billion in outstanding loans to people in Sogn og Fjordane and the rest of Norway. This comprises 66% of our total lending. Deposits from retail customers total NOK 10.4 billion, representing 58% of total deposits. The Bank aims to have regional financial services centres offering financing, investment, estate agency and insurance products. We are the main agent for the sale and distribution of Gjensidige s insurance products to retail customers in Sogn og Fjordane. We also operate 34 cash machines, and 52,000 of our customers have signed up for online banking. Corporate banking market The Bank has NOK 10.4 billion of outstanding loans to businesses, primarily in the county of Sogn og Fjordane. This comprises 34% of the Bank s total lending. Corporate deposits total NOK 5.6 billion. 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. Consequently, we are the main sponsor of most of the big cultural events in the county, and we have set aside NOK 20 million of our profit for 2011 for charitable donations/dividends primarily aimed at supporting the voluntary sector. Quality of life, diversity and innovation are the keywords that guide our contributions. Financial calendar We expect to publish our 2012 interim reports on 3 May 2012 (Q1), 7 August 2012 (Q2) and 6 November 2012 (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 one associate. Public sector Many of the municipalities in the county use Sparebanken Sogn og Fjordane as their main bank. In total, the municipal sector has NOK 1.5 billion of deposits held with us. 8 Sparebanken Sogn og Fjordane Annual report 2011

9 Young entrepreneurs As the main sponsor of a programme to support young entrepreneurs in Sogn og Fjordane, we were once again heavily involved with young people setting up businesses in the county. These photos are from the county trade fair in Sogndal in March. Sparebanken Sogn og Fjordane ANNUAL REPORT

10 Cutting-edge expertise for corporate customers Sparebanken Sogn og Fjordane is the leading supplier of banking services to businesses in Sogn og Fjordane, as well as being the biggest financial sector company in the county. Our strength lies in our highly-qualified and experienced members of staff, with relevant industry knowledge and cutting-edge expertise.

11 Directors report In 2011, the Sparebanken Sogn og Fjordane Group s comprehensive income amounted to NOK 67 million. Brief summary: Good growth in customer deposits and loans, but margins under pressure Turbulence in financial markets impacted financial income Higher costs, partly due to one-off factors High loan losses caused by a few large loans to corporate customers 2011 highlights: Credit rating process successfully completed - Completed the transfer of customers after the merger with Fjaler Sparebank The Board of Directors is not satisfied with the Group s profit and return on equity in In the last two years, loan impairment charges have been too high, and are largely caused by two involvements in the shipping industry. The bank is in the process of ending these involvements. Apart from these two loans, the Bank only has minimal exposure to shipping. Nevertheless, the Board of Directors believes that the Bank has made good progress over the course of the year. Thanks to continued strong growth, the successful completion of the credit rating process, a reduction in the proportion of high-risk loans, an organisation that is able to adapt and good capital adequacy, the Board is optimistic about the future. WHAT WE DO Sparebanken Sogn og Fjordane is an independent savings bank with products in banking, financing, insurance, savings, pension and payment services. Its main market is Sogn og Fjordane, but the Bank is also aggressively targeting the retail market in other major population centres in Norway. By volume, around 38% of retail loans are to customers who live 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, the Bank has a total of 23 branches, while it also offers basic banking 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. The Bank offers estate agency services through Eigedomsmekling Sogn og Fjordane AS, which is a wholly-owned subsidiary of the Bank. The purpose of Bustadkreditt Sogn og Fjordane AS, a wholly-owned subsidiary of the Bank, is to buy mortgages with good collateral from Sparebanken Sogn og Fjordane in order to allow it to issue a type of very safe bonds (covered bonds). Since 2006, Sparebanken Sogn og Fjordane has, through its collaboration with Gjensidige Forsikring, supplied a variety of specialist services to Gjensidige Bank ASA. As of 31 December 2011, the vast majority of this agreement had been terminated. 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. The Bank also owns a 45.3% stake in Fjord Invest AS. 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. ECONOMIC CLIMATE 2011 was a turbulent year for the world economy. It started early in the year, when the demonstrations associated with the Arab Spring created uncertainty about the future of the Middle East. Then, in March, the world s third largest economy Japan was hit by an earthquake and tsunami. And throughout the year there has been a great deal of concern regarding the situation in Europe, with the government debt crisis affecting Greece, Italy, Spain and others. By the end of the year it appeared that the world economy as a whole had got through 2011 relatively well, once again being driven by China. For Europe the situation remains uncertain, but to date, Norway has not been seriously affected. Unemployment is low, and oilrelated industries are growing strongly. Due to the exceptionally low interest rates set by our trading partners, Norwegian interest rates are also low. However, Norway would not be untouched by a long-term downturn in the European economy. We are already noticing the impact through higher risk premiums on bonds, which is making it more expensive for us to fund our activities. It also means higher interest rates on the loans to customers, particularly in the corporate banking market. Many businesses in Sogn og Fjordane operate in very international markets. These businesses are vulnerable to a strong Norwegian krone and high costs in Norway. Demand from many of our trading partners has fallen, due to the economic downturn in their domestic Sparebanken Sogn og Fjordane ANNUAL REPORT

12 markets. In the near term we are therefore expecting slow growth and relatively little business investment in the county. INTEREST RATES At the start of 2012, Norges Bank s key rate was 1.75%. Interest rates were higher than that for parts of 2011, but low inflation, global economic problems and the prospect of slower growth in the future resulted in Norwegian interest rates being lowered back down. Nevertheless, Norwegian interest rates remain higher than in many other countries. Our trading partner are unlikely to raise their interest rates significantly in 2012, which limits the extent to which Norges Bank can raise its rates. It appears that the interest rates hikes that were expected for much of 2011 will be delayed. Recent trends in household consumption and house prices suggest that higher Norwegian interest rates would be healthy. However, Norges Bank also has to prevent the Norwegian krone from strengthening too much, as this would make exporters less competitive. Another argument against raising the key rate is the expected big differential between the key rate and market interest rates during This is because both European and Norwegian banks are finding it increasingly expensive and difficult to obtain funding. By the end of 2012, the key rate is expected to be in the range %, but there is a great deal of uncertainty surrounding this prediction, given the volatile state of the global economy. ORGANISATIONAL STRUCTURE AND COLLABORATIONS Ownership structure Sparebanken Sogn og Fjordane was converted into an equity certificate bank as of 1 September The foundation Sparebankstiftinga Sogn og Fjordane owns 94.12% of the equity certificates, while the foundation Sparebankstiftinga Fjaler owns the remaining 5.88%. With almost NOK 1.8 billion of equity, Sparebankstiftinga Sogn og Fjordane is one of the largest foundations of its kind in Norway. We are considering listing the equity certificates on the stock exchange, and the Bank is monitoring the market with this in mind. Collaboration with other banks Sparebanken Sogn og Fjordane is an independent bank, but it collaborates with other banks on several joint development projects. It has a formal collaboration agreement with Gjensidige Bank, Sparebanken Sør and Helgeland Sparebank within the following areas: purchasing; management and operations related to purchasing; and development projects. The four banks have a joint agreement with EDB ErgoGroup ASA for the purchase of IT services. The aim of the collaboration and the agreement with EDB Ergo- Group is to make us more competitive in our operation, management and development of software solutions. Fjord Invest AS and associates Sparebanken Sogn og Fjordane helped to set up the Fjord Invest investment community in Førde, and it owns 45.3% of Fjord Invest AS, one of four private equity funds with combined capital of around NOK 400 million. The semi-public seed capital fund is also managed by Fjord Invest s asset management team in Førde. No additional capital was injected into Fjord Invest in Fjord Invest is an important addition to the financial services industry in the county. Collaboration with Sogn og Fjordane University College In 2011 the Bank worked with Sogn og Fjordane University College to establish and develop a Bachelor s degree in renewable energy. The collaboration has been running for three years, and the programme now has around 50 students, including a number of PhD students doing research on various relevant topics. The programme has also been incorporated into the Centre for Sustainable Energy Studies (CenSES), which does research on a variety of issues related to renewable energy. MARKET CONDITIONS Sparebanken Sogn og Fjordane s retail banking business once again experienced strong growth in customer numbers and volumes. By adding many new customers, as well as merging with Fjaler Sparebank, the Bank has significantly strengthened its position in Sogn og Fjordane. It is also growing outside its home county. Including loans transferred to its mortgage subsidiary, the Bank has approximately NOK 7.6 billion in outstanding loans to retail customers outside Sogn og Fjordane. Overall, deposits from, and loans to, retail customers grew by 9% and 11.3% respectively in The equivalent figures for corporate customers were a 6% increase in deposits and a 3.5% reduction in loans. During the year, the Bank prioritised encouraging customer deposits, as well as the sale of alternative savings and insurance products. Meanwhile, we continued to focus heavily on services for customers in the age group, since this is where there is greatest competition. In general, competition is constantly increasing in the retail market. This fact, combined with strong growth in lending to retail customers, meant that transferring loans to our mortgage subsidiary was a high priority. At the turn of the year, 24% of loans to retail customers had been transferred to Bustadkreditt Sogn og Fjordane. This approach is necessary in order to remain competitive and to achieve satisfactory profitability in the retail market. The Bank is focusing on building good customer relationships and on selling additional services to its customers. The aim is to be a local and professional supplier of a complete range of financial services. The Bank currently has five regional financial services centres offering banking, estate agency, insurance and savings services. These centres give us a unique 12 Sparebanken Sogn og Fjordane Annual report 2011

13 competitive edge in Sogn og Fjordane. Our twin focus on building customer relationships and on training is one of the main reasons why the Bank gets such high marks for customer satisfaction. In the retail market, the Bank s most recent customer satisfaction rating was 78.8 points. This is well above the industry average. For many years the Bank has had a successful distribution arrangement with the insurance company Gjensidige Forsikring. Strong sales and portfolio growth have turned insurance services into a very important source of other income. The estate agency Eigedomsmekling Sogn og Fjordane AS produced its best ever financial results in 2011, and the company is very happy with how the year went. In 2011 it worked on 685 contracts, turnover rose by almost NOK 5 million and profit before tax was over NOK 5 million. The Bank has successfully managed to build up and develop an estate agency service that is unique in the county. In 2011 the business continued to expand, building on its highly qualified and experienced team of estate agents. Sparebanken Sogn og Fjordane is the leading provider of savings and investment products in the county. In conjunction with the introduction of the new national insurance scheme and the pension reform, in 2011 the Bank retained its focus on long-term savings for pensions. This includes mandatory occupational pension schemes, which now represent almost 20% of the Bank s income from savings products, after a successful was a relatively poor year for our unit trust customers, with an average return of around minus 7%. Our Norwegian and Nordic funds fell most in value, whereas global funds did better, relatively speaking. This also impacted our portfolio income, which was below budget, although once again in 2011 our customers bought more units than they sold. A large proportion of purchases are through regular savings plans, and these are relatively unaffected by short-term fluctuations in fund prices. Share trading by customers was the area where we experienced the biggest drop in income in 2011, at approximately 20%. Around 90% of transactions take place online. Nevertheless, thanks to a healthy 35% increase in income from pensions, our total income from savings products rose by 3%. Most of this growth came from occupational pensions schemes for corporate customers, which is an area that will continue to grow strongly in the future. Sparebanken Sogn og Fjordane is continuing to experience strong growth in the use of its selfservice banking services. In 2011, mobile banking services really took off, with over 10,000 downloads of our apps and a huge increase in the use of our mobile phone and text banking services. The Bank has been proactive in maintaining its high profile on social media sites, and it now has around 11,000 fans on Facebook was a satisfactory year for businesses, although there were variations within this overall picture. Demand for loans was relatively low, which meant that the Bank s volume of outstanding loans fell in relation to As the financial performance of businesses has been variable, good risk assessment and monitoring the credit risk associated with the Bank s loans are two important areas of operations. Competition for corporate customers remains tough, particularly in the case of large, low-risk customers. Sparebanken Sogn og Fjordane has on the whole maintained its strong position in the corporate market in the county. The Bank is constantly working to develop and improve its expertise and capacity in areas such as credit scoring, currency services, financing and electronic payment services. The Bank aims to be a complete supplier of financial services and a professional adviser to businesses. Our customers greatly value our local expertise and decisionmaking processes. ORGANISATIONAL STRUCTURE AND MANAGEMENT Employees and training In 2011 the Bank once again had to embark on a variety of demanding and challenging tasks, which helped to raise both individual skills and to enhance the Bank s overall expertise. In 2011 the Bank used a great deal of resources on developing the skills of its employees, through internal courses and in collaboration with university colleges. The Bank is in the process of training all of its customer advisers to become authorised financial advisers. Skills development is also encouraged amongst administrative and support staff. The Bank has run management development programmes for the senior management team, regional bank managers and middle managers. These, along with the certification and authorisation of customer advisers through courses, training events and tests, are supposed to ensure and document our ability to provide good advice. Working environment Sparebanken Sogn og Fjordane carries out annual surveys to find out how satisfied employees are with their work. The survey results show that the Bank has a good working environment, both by industry and Norwegian standards. Areas where there is room for improvement and development will be followed up in 2012, so that we get even better in this area. Since 2003, the Bank has 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. This agreement was renewed in 2011, and a separate IA committee was set up. There were no reported lost Sparebanken Sogn og Fjordane ANNUAL REPORT

14 time injuries in In 2011, the Bank s working environment committee had four meetings and dealt with eight matters relating to the working environment. Average sickness absence was 3.75% in 2011, slightly up from 3.26% in The activities of the Bank have little impact on the external environment, but nevertheless we aim to protect the environment, for instance by implementing measures to reduce CO 2 emissions. 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. 62% of employees are women and 38% 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 2011, 29% of line managers were women. The Bank welcomes employees with disabilities and employees from all ethnic backgrounds. Three of the seven Directors on the Board are women. The Bank will continue to focus on equal opportunities and fair treatment at all levels of the organisation. 100,00 % 80,00 % 60,00 % 40,00 % 20,00 % 0,00 % Equal opportunities Women Men Total employees Women Managers Men The Bank s pay policy The Bank s vision is to be one of the driving forces in its home county. It is important for the Bank to have in-house expertise in dealing with the risks that it faces. Our pay policy shall stimulate and motivate current and future members of staff. Pay shall be competitive with comparable enterprises in the market. The qualifications and areas of responsibility of individual employees are also taken into account. The Bank shall have a pay policy that stimulates the development of teamwork. There are no special rules for senior management or employee representatives. INCOME STATEMENT Financial results The Group s comprehensive income for 2011 was NOK 67 million, compared with NOK 209 million in This is equivalent to a return on equity of 2.8%, against 9.9% in The fall in comprehensive income for 2011 was mainly due to unrealised losses on financial instruments, high operating expenses, a loss on businesses held for sale and higher writedowns on loans. Total revenues were down 7.4% to NOK 650 million, while operating expenses rose by 25%, mainly due to one-off factors. The Bank s net impairment charge was NOK 163 million, against NOK 130 million in Businesses held for sale contributed a loss of NOK 34 million after tax. 16,00% 14,00% 12,00% 10,00% 8,00% 6,00% 4,00% 2,00% 0,00% Comprehensive income after tax Return on equity based on comprehensive income Net interest income Net interest and commission income was NOK 539 million, 2.4% higher than in The increase was primarily due to higher volumes of deposits and loans. Net interest income as a percentage of average assets fell from 1.75% in 2010 to 1.59% in This reduction was due to lower customer margins and higher funding costs than in The increase in funding costs is the result of higher risk premiums on securities financing. Net other income Net other operating income was NOK 111 million, which was NOK 65 million (36.9%) less than the previous year. The decline was mainly due to losses on financial instruments. Net gain/loss on financial instruments There was a net loss of NOK 20 million on financial instruments, against a net gain of NOK 52 million in Most of this loss represents unrealised changes in the value of financial instruments. The Bank made a net loss of NOK 11 million on shares, compared with a NOK 60 million gain in Some of our debt securities are valued using the fair value option, and in 2011 their value rose by NOK 17 million, resulting in an equivalent expense, as opposed 14 Sparebanken Sogn og Fjordane Annual report 2011

15 to a NOK 4 million writedown (resulting in a gain) in Changes in the value of debt securities must be viewed in the context of changes in the value of other interest-bearing financial instruments. For further details see Note 7. Other income Other income excluding gains on financial instruments was NOK 131 million, an increase of NOK 7 million (5.6%) over the previous year. There were increases in income from estate agency (up NOK 5 million), payment services (up NOK 3.2 million), insurance (up NOK 1.9 million) and securities trading on behalf of customers (up NOK 0.5 million). Other income includes NOK 12.4 million of income for services provided to Gjensidige Bank, down NOK 2.8 million from the previous year. As of 1 January 2012, Gjensidige Bank has insourced most of the services that we formerly provided, and so the volume of services that we provided gradually decreased over the course of Operating expenses Total operating expenses for 2011 were NOK 363 million, NOK 72 million (24.7%) more than in The increase in operating expenses was impacted by various one-off factors. In 2010 the Bank reversed its provision for AFP obligations, while in 2011 it expensed NOK 12 million of extra costs and one-off expenses related to what was formerly Fjaler Sparebank. Adjusted for the one-off factors, the rise in operating expenses was around 4%. Wage costs and fees paid to elected officers amounted to NOK 136 million, which was similar to the previous year. The total number of full-time equivalent staff at the end of 2011 was 279, which was 18 less than at the end of This reduction was due to greater efficiency, together with the loss of the contract to supply services to Gjensidige Bank. The Bank is constantly looking at ways to reduce costs, and the number of full-time equivalent staff is expected to fall again in The graph in the next column shows the Bank s assets per full-time equivalent in recent years. Net pension costs totalled NOK 18 million, which was NOK 54 million higher than in The increase in pension costs was mainly due to the reversal of provisions under the old AFP scheme in IT costs were NOK 72 million, NOK 16 million (29%) more than the previous year. Adjusted for costs related to Fjaler Sparebank, IT costs rose 7%. Other expenses that also increased included consultancy fees paid to the auditor and rent. The increase in rent was due to the sale of several branches, which means that the Bank now leases more of its premises. Cost income ratio In 2011, operating expenses represented 54.2% of income excluding net income from financial instruments, against 44.7% the previous year. Including net income from financial instruments, the cost/income ratio was 55.9% in 2011, against 41.4% in Adjusted for one-off factors in 2011, the cost/income ratio was 52.4% of income excluding financial instruments and 54.0% of income including financial instruments. Impairment charge on loans and guarantees The Bank made a net impairment charge for loans and guarantees of NOK 163 million in 2011, against NOK 130 million in In 2011, net impairment charge were 0.53% of gross loans, compared with 0.45% in Gross non-performing assets (loans more than 90 days in arrears) totalled NOK 380 million at 31 December 2011, down from NOK 392 million at 31 December Nonperforming assets were slightly lower than the previous year, and only a small number of new loans became delinquent in In the retail market, non-performing assets are at an acceptable level, whereas non-performing assets remain too high in the corporate market, with a large proportion constituting a few large loans. 50 Charges on/recoveries from loans and guarantees (NOK million) On a consolidated basis Total assets per full-time equivalent employee (in NOK million) On a consolidated basis Net gain on the sale of fixed assets In 2011 the Bank realised a NOK 2 million profit on the sale of properties and fixed assets, the same as in Sparebanken Sogn og Fjordane ANNUAL REPORT

16 Tax expense The Bank s tax expense in 2011 was NOK 39 million, which is equivalent to 31.2% of pre-tax profits. In 2010 the tax expense was NOK 63 million, or 22.3% of pre-tax profits. The main reason for the variation in the effective tax rate is that most gains and losses on shares are covered by the exemption method. In 2011 the Bank made a net loss on shares that cannot be deducted for tax purposes. Profit/loss after tax on businesses and assets held for sale The Bank acquired all of the shares in the company Silver Statt AS, as part of a restructuring of its involvement with the company. Over the course of 2011, the Bank has sold some of the company s assets, as well as signing contracts to sell the remaining assets. After writing down the assets to fair value, the Bank made a NOK 34 million loss on businesses and assets held for sale. the previous year. Lending to the retail market rose 11.3%, while lending to the corporate market fell 3.5%. At 31 December 2011, 66% of gross outstanding loans were to retail customers, whilst 34% were to corporate customers and the public sector. The proportion of loans to the corporate market fell from 37% to 34% over the course of The graphs show the distribution of loans by sector and industry as of 31 December Loans by sector On a consolidated basis Public sector Corporate market Retail banking market 66% 34% Allocation of profit for the year Parent company s profit for the year NOK Transfer from the reserve for unrealised gains nok Available NOK At the meeting of the Executive Committee on 28 February 2012, the Board will propose that the following appropriations be made: Dividends and charitable donations NOK Dividend equalisation reserve NOK Primary capital nok Total allocated NOK Loans by industry Consolidated basis 14,70 % 51,79 % 8,18 % 15,62 % 4,60 % 4,48 % 4,91 % 8,50 % Fishing industry/ aquaculture Other industry, mining, oil and gas exploration Commerce Farming and forestry Other leasing, transport, social and personal services Building/construction, power/water supply BALANCE SHEET At the close of 2011, the Bank s total assets were NOK 35.2 billion, an increase of NOK 2.4 billion (7.4%), over the previous year. The increase was mainly due to growth in loans and investments in bonds/commercial paper. Loans to customers At the end of 2011, the Bank had NOK 30.5 billion of gross outstanding loans, up NOK 1.7 billion (5.8%) from Loans to customers (in NOK million) On a consolidated basis Impairment reserve for loans and guarantees Impairment provisions for loans and guarantees totalled NOK 257 million at the end of the year. Of the total impairments, NOK 87 million were collectively assessed, and NOK 170 million were individually assessed. At 31 December 2011, impairment provisions for loans represented 0.8% of gross outstanding loans, down from 1.1% the previous year. This reduction was due to losses being realised in 2011 on loans that were impaired at 31 December Customer deposits and deposit/ loan ratio Customer deposits amounted to NOK 17.8 billion at the end of 2011, up NOK 1.0 billion (6.2%). Retail deposits increased by 9.1%, corporate deposits rose by 6.0% and public sector/other deposits fell by 7.0% % of deposits at 31 December 2011 were from the retail sector, 31% were from the corporate sector and 11% were from the public sector/others At the close of 2011, 58.2% of gross outstanding loans were financed by customer deposits, against 58.0% at the close of Sparebanken Sogn og Fjordane Annual report 2011

17 Customer deposits (in NOK million) On a consolidated basis The Bank had satisfactory access to liquidity during 2011, both by borrowing through wholesale banking markets and by using Bustadkreditt Sogn og Fjordane to issue covered bonds. Subordinated debt and hybrid debt At 31 December 2011, the total carrying amount of the Bank s subordinated debt and hybrid debt was NOK 512 million, compared with NOK 412 million at 31 December In order to strengthen its capital position, the Group issued NOK 100 million of hybrid debt in Hybrid debt is perpetual, but it can be redeemed after five years, or earlier, if new regulations affect the extent to which hybrid debt counts as core capital Deposits by sector Consolidated basis % Shareholders equity and capital adequacy At 31 December 2011, the Group had NOK 2,410 million in equity, compared with NOK 2,381 million at 31 December In addition, the Group had NOK 512 million of subordinated debt and hybrid debt. Net equity and subordinated debt, which is used to calculate the Bank s capital adequacy ratio, amounted to NOK 2.8 billion. 58% 31% 3000 Equity (in NOK million) On a consolidated basis 2500 Public sector Corporate market 2000 Retail market 1500 Security placements Shares, etc. At 31 December 2011, the carrying amount of the Bank s shares and primary capital certificates was NOK 235 million, against NOK 247 million at 31 December Of the Bank s portfolio at 31 December 2011, NOK 57 million was made up of short-term investments, while NOK 178 represented strategic investments. The Bank also has an ownership interest in its associate Fjord Invest AS, with a carrying amount of NOK 24 million. Commercial paper and bonds The carrying amount of investments in commercial paper and bonds was NOK 3.6 billion at the close of the year, compared with NOK 3.2 billion at 31 December These are used to manage liquidity and as a liquidity buffer. Commercial paper and bonds are carried at fair value, and the Bank recorded a net writedown of NOK 14 million in Part of this was a reversal of past increases in value, and at the end of the year the fair value and carrying amount of the Bank s bonds and commercial paper was NOK 9 million higher than their cost. Debt securities At the close of 2011, the Bank had outstanding commercial paper and bond issues with a carrying amount of NOK 12.2 billion, against NOK 10.5 billion in In 2010, Sparebanken Sogn og Fjordane s funds were converted into equity share capital and primary capital. Equity share certificates and primary capital were issued. At 31 December 2011, equity share capital amounted to NOK 2,018 million and primary capital amounted to NOK 280 million. The profit for the year for 2011 and the change in the reserve for unrealised gains have been allocated proportionately to equity share capital and primary capital at 31 December 2011, adjusted for changes in primary capital during the year. For a more detailed description, see the equity statement. At 31 December 2011, the Group had a capital adequacy ratio of 13.8%, compared with 13.0% at the end of Its core capital adequacy was 12.8%, against 12.1% at 31 December The Group s capital adequacy position improved significantly during 2011, thanks to retained earnings, the issue of hybrid debt and a reduction in risk exposure. The Board of Directors considers the Bank s equity position at the end of 2011 to be satisfactory. Sparebanken Sogn og Fjordane ANNUAL REPORT

18 Capital adequacy ratio (in %) On a consolidated basis CAPITAL REQUIREMENTS AND CAPITAL Risk Credit risk Operational risk Tot. min. cap. req. (Pillar 1) Market risk Concentration risk within industries Liquidity risk Going concern assumption The 2011 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. RISK AND CAPITAL MANAGEMENT Risk management, capital management and supervision are three of the Board s most important responsibilities. 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. 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. New, stricter rules on capital adequacy are expected to be introduced through CRD IV, the EU s latest Capital Requirements Directive. This directive is expected to enter into force as of 1 January 2013, but it will only be fully implemented as of 1 January The Bank believes that it will comply with the new rules on capital adequacy. Changes in the Bank s risk exposure and capital requirements over the past three years: Business risk Tot. risk-adjusted capital (Pillar 2) Equity and subordinated Excess capital (Pilar 2) Capital adequacy ratio 13,83 % 13,04 % 11,8 % Core capital Core capital ratio 12,77 % 12,06 % 10,8 % The Bank s financial strength improved over the course of the year. Our capital adequacy ratio is 13.8%, while our core capital adequacy ratio is 12.8%. Core capital includes NOK 315 million of hybrid debt. One of the reasons for the reduction in the Bank s capital requirement is the decline in lending to corporate customers during Credit risk is managed based on the risk profile and probability of default/losses, growth and concentration. Credit strategy and policy are established each year in light of the Bank s overall strategy Our credit strategy covers: guidelines for the risk profile of our lending; relative exposure to 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. We have limited lending growth to businesses, which means that corporate loans now represent a smaller proportion of our total loan portfolio. We have also reduced the proportion of loans classified as high risk. Going forward, the Bank will focus on reducing concentration risk and the proportion of high-risk loans. The highest credit risk is associated with the Bank s biggest loans to corporate customers. In 2011 the Bank suffered severe losses on a few large loans to companies in the shipping industry, and loan losses for the year were higher than budgeted for by the Bank. During 2011, measures were implemented to limit credit risk. This has reduced the likelihood of losses in Overall, the risk level associated with the Bank s loan portfolio fell during 2011, and by the end of the year a higher proportion of loans were classified as low risk: 18 Sparebanken Sogn og Fjordane Annual report 2011

19 Risk CM RM Low risk 55,9% 50,5% 65,4% 66,4% Medium risk 30,8% 34,4% 30,1% 30,0% High risk 13,3% 15,1% 4,5% 3,6% Growth in lending to retail banking customers remained strong in 2011, although it was lower than in recent years. Liquidity risk is measured using two main parameters: losses due to higher funding costs resulting from a ratings downgrade by players in the financial markets 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 of the Bank to meet its 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. Liquidity management is based on meeting that goal. At the close of 2011, customer deposits, long-term borrowings from financial markets and equity were equivalent to 101.3% of the Bank s noncurrent assets (gross loans and fixed assets). In 2009, Sparebanken Sogn og Fjordane established Bustadkreditt Sogn og Fjordane AS. The idea was that it would acquire mortgages with good collateral from the Bank, using covered bonds to finance its purchases. The company started operating in March To date, the company has issued bonds with a face value of NOK 4 billion, NOK 1.2 billion of which have been used in the government-backed swap scheme for covered bonds. In 2012 the Bank aims to increase the volume of covered bonds issued by Bustadkreditt Sogn og Fjordane AS. Interest rate risk arises from interest-bearing securities, 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. Interest rate risk has been maintained comfortably inside the Board s limits for moderate risk. At the end of 2011, the Bank s exposure to interest rate risk was around NOK 4 million in the event of a 2% shift in the interest rate curve. The Board has set an upper limit on stock market investments. There are also limits on individual investments and on concentration risk relating to specific industries and regions. In 2011 the Bank reduced its exposure to stock market risk. At the close of the year, the Bank had NOK 57 million of financial investments in shares. The Bank also has strategic investments in shares, including in local companies for business purposes. Currency risk is linked to international payment services, foreign currency holdings, foreign currency loans on the Bank s balance sheet 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 2011, the Bank s exposure to currency risk was NOK 22 million. 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. Corporate governance Internal controls have been established in accordance with the Internal Control Regulations. Operational risk is identified through assessments and the views of senior management. The person responsible for preparing financial reports continuously assesses whether our financial reporting complies with the relevant legislation and regulations. Internal control procedures have been established for financial reporting. The audit committee oversees the process, and ensures that internal controls and internal audits are effective. The audit committee also 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 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. Under Section 11 1 of the articles of association, the Board is authorised to buy equity certificates or to increase the Bank s 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 owners elected by the owners of the equity certificates. This authorisation was given, subject to further conditions, by the executive committee on 28 February Sparebanken Sogn og Fjordane ANNUAL REPORT

20 Corporate governance The governance of the Group is based on the principles set out in the Norwegian guidelines on corporate governance. These guidelines have almost all been implemented at the Group. Each year the Board of Directors evaluates its performance and way of working. The Board believes that the Bank s corporate governance is satisfactory, and fulfils the Norwegian guidelines on corporate governance. FUTURE PROSPECTS 2011 was a challenging year, due to the uncertain economic climate in general and high loans losses in particular. Nevertheless, the Board of Directors can see that good progress has been made in many areas. The Bank has loyal, satisfied customers, and highly qualified employees. A number of restructuring measures have been successfully implemented, affecting both frontline and back-office staff. That has put us in a good position to deal with future challenges. At the start of 2012 it appears that a slight appetite for risk is returning to stock exchanges and bond markets around the world. There are still many uncertainties surrounding the European debt problems, and the European economy will probably grow slowly or contract in In the United States, on the other hand, the macroeconomic situation appears to be gradually improving. Nevertheless, global economic growth in 2012 will be dependent on the performance of developing economies. The Norwegian economy is in a strong position, and in comparison with the rest of Europe the prospects for 2012 are good. Two of the key factors are that employment will remain high and that most people s disposable incomes will increase. Competition for private sector customers will remain tough, with continuing pressure on customer margins. The large Norwegian and Nordic financial institutions are dictating the terms on which we have to compete. The Board of Directors still believes that the Bank will achieve strong growth in 2012, and that it will maintain its 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 the county. The Board therefore believes that almost of the Bank s growth in the retail banking market will come from outside its home county. Overall, the Bank expects loans to corporate customers in Sogn og Fjordane to level off. Businesses in Sogn og Fjordane have coped well during the past few years, but we are seeing a spalling out of some industries, and 2012 will be a challenging year for many enterprises. The construction industry remains strong, thanks to both the commercial and residential property markets. Capital-intensive activities such as commercial property construction are benefiting from low interest rates. Local export-oriented industries and tourism will obviously feel the effects of the turbulent situation in the international economy, in the same way as in other parts of Norway. In general we are noticing slightly less competition in certain segments of the corporate market, as the main focus of most banks is on looking after their own customers in these challenging times. We have implemented processes and projects that will help to reduce loan losses and improve cost-efficiency. In combination with our strong market position, and our highly qualified and motivated staff, the Board believes that they will help to raise profits in was a challenging year for the Bank, and the Board of Directors would like to thank all of the employees for their great work. We would also like to thank our customers and our business partners for a good cooperation in Førde, 17 February 2012 Hallgeir Kleppe Chair Randi Engen Deputy Chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Sindre Kvalheim Aage Indrebø Arvid Andenæs CEO 20 Sparebanken Sogn og Fjordane Annual report 2011

21 Senior Management Sparebanken Sogn og Fjordane Kjetil Bjørset Director of Corporate Market Hallvard Klakegg Director of Retail Market Janne Marie Solheimslid Director of HR Trond Teigene Director of Business Development Frode Vasseth Director of Business Support Arve Sandal Director of public relations Arvid Andenæs CEO Sparebanken Sogn og Fjordane ANNUAL REPORT

22 Income statement PARENT COMPANY Konsern Note Interest income Interest expenses Net interest income Commission income Commission expenses Net gains on financial instruments Other income Net other operating income Total income Wages, salaries, etc Other expenses Depreciation and writedowns on fixed assets and intangible assets 9, Total operating expenses Profit/loss before loan impairment charge and net gains on fixed assets Net gain on the sale of fixed assets Loan impairment charge Profit/loss before tax Tax expense Profit/loss after tax on businesses and assets held for sale 1B Profit for the reporting period Majority share of the profit for the year Non-controlling interest s share of the profit for the year 0 0 COMPREHENSIVE INCOME Profit for the reporting period Other income and expenses Gain/loss on financial assets available for sale Other comprehensive income for the year after tax Comprehensive income Majority share of the profit for the year Non-controlling interest s share of the profit for the year Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

23 Income statement As a % of average total assets PARENT COMPANY CONSOLIDATED ,25 % 4,45 % Interest income 4,48 % 4,15 % 2,54 % 2,86 % Interest expenses 2,89 % 2,40 % 1,71 % 1,58 % Net interest income 1,59 % 1,75 % 0,32 % 0,31 % Commission income 0,30 % 0,32 % 0,05 % 0,05 % Commission expenses 0,05 % 0,05 % 0,19 % 0,06 % Net gains on financial instruments 0,06 % 0,17 % 0,10 % 0,09 % Other income 0,14 % 0,15 % 0,55 % 0,28 % Net other operating income 0,33 % 0,58 % 2,26 % 1,87 % Total income 1,91 % 2,33 % 0,41 % 0,54 % Wages, salaries, etc. 0,54 % 0,43 % 0,45 % 0,48 % Other expenses 0,47 % 0,45 % 0,06 % 0,06 % Depreciation and writedowns on fixed assets and intangible assets 0,06 % 0,09 % 0,92 % 1,08 % Total operating expenses 1,07 % 0,97 % 1,34 % 0,79 % Profit before loan impairment charge and net gain on fixed assets 0,84 % 1,37 % 0,02 % 0,01 % Profit before loan impairment charge and net gain on fixed assets 0,01 % 0,01 % 0,43 % 0,63 % Loan impairment charge 0,48 % 0,43 % 0,93 % 0,17 % Profit/loss before taxation 0,37 % 0,94 % 0,20 % 0,06 % Tax expense 0,11 % 0,21 % 0,00 % 0,00 % Profit/loss after tax on businesses held for sale 0,10 % 0,00 % 0,74 % 0,11 % Profit for the reporting period 0,15 % 0,73 % AVERAGE TOTAL ASSETS Sparebanken Sogn og Fjordane ANNUAL REPORT

24 Balance sheet PARENT COMPANY CONSOLIDATED ASSETS Note 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 associated companies Investments in subsidiaries Intangible assets and goodwill Deferred tax assets Fixed assets Businesses and assets held for sale 1A Other assets Total assets DEBT AND EQUITY Debt to credit institutions Deposits from and debt to customers Financial derivatives Debt securities Tax payable Other liabilities Provisions Subordinated/hybrid debt Total liabilities Equity certificates Dividend equalisation reserve Total equity share capital Primary capital Gift fund Total primary capital Reserve for unrealised gains Other equity Allocated for dividends and gifts Total equity Total debt and equity Contingent liabilities Førde, 17 February 2012 Hallgeir Kleppe Chair Randi Oddny 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 2011

25 Kinnaklova Sparebanken Sogn og Fjordane ÅRSMELDING

26 Cash flow statement PARENT COMPANY CONSOLIDATED Profit/loss before taxation 1) Depreciation and writedowns Loan impairment charge Losses/gains on disposal of fixed assets Tax paid Other non-cash transactions Adjustment for other off balance sheet 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 Dividend and donations, buyout of non-controlling interest 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 ) Profit/loss before tax as stated on the official income statement 125 Profit/loss before tax on businesses and assets held for sale 47 Profit/loss before tax used in the cash flow statement Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

27 Equity statement PARENT COMPANY EQUITY SHARE- CAPITAL Dividend equalisation reserve PRIMARY CAPITAL Primary capital Gift fund Available for sale Reserve for unrealised gains Other equity Allocated dividends and donations Balance at 31 Dec Allocated for charitable donations Changes in capital due to merger and issue of equity Profit for the year Comprehensive income available for sale Balance at 31 Dec Total Balance at 31 Dec Allocated for charitable donations Profit for the year Comprehensive income available for sale Balance at 31 Dec EQUITY SHARE CAPITAL Equity certificates Dividend equalisation reserve Primary capital Gift fund Available for sale Reserve for unrealised gains Other equity Allocated dividends and donations Equity certificates PRIMARY- CAPITAL Noncontrolling interests CONSOLIDATED Total Balance at 31 Dec Allocated for charitable donations Capital for merger and issue of equity certificates Profit for the year Buyout of non-controlling 0 interest Comprehensive income available for sale Balance at 31 Dec Balance at 31 Dec Allocated for charitable donations Profit for the year Buyout of non-controlling interest Comprehensive income available for sale Balance at 31 Dec Sparebanken Sogn og Fjordane ÅRSMELDING

28 Notes to the accounts Note 1A Accounting principles, etc. 1B Business and assets held for sale Note 3 Changes to corporate structure Note 4 Segmental information income statement INCOME STATEMENT Note 5 Net interest income Note 6 Net commission income Note 7 Net gain on financial instruments Note 8 Other income Note 9 Operating costs Note 10 Pensions Note 11 Write-downs of loans and guarantees Note 12 Tax expense Balance sheet assets Note 13 Fair value of financial instruments Note 14 Loans to and receivables from credit institutions Note 15 Loans to and receivables from customers Note 16 Loans by geographic areas Note 17 Loans by customer groups Note 18 Change in write-downs of loans and guarantees Note 19 Loans that have been written down or are in default Note 20 Loans associated with financial leases Note 21 Commercial paper and bonds Note 22 Shares Note 23 Subsidiaries and associated companies Note 24 Intangible assets and goodwill Note 25 Fixed assets Note 26 Other assets Note 27 Note 28 Note 29 Note 30 Note 31 Note 32 Note 33 Note 34 Note 35 Note 36 Note 37 Note 38 Note 39 Note 40 Note 41 Note 42 Note 43 Note 44 Note 45 Note 46 Balance sheet - debt Customer deposits Debt securities Other liabilities and provisions Financial derivatives Subordinated debt Information about risk Risk management Liquidity risk Credit risk Market risk Other information Wages, salaries, etc. Capital requirements Operational leasing contracts Details of government grants Branch network Off balance sheet items Closely related companies Anticipated cash flow and outflows Foreign currency positions Loan-to-value ratio and cover pool Disputes 28 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

29 NOTE 1A ACCOUNTING PRINCIPLES GENERAL The 2011 financial statements for Sparebanken Sogn og Fjordane were discussed and adopted at the Board meeting of 17 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 specifically stated otherwise. 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 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 adjusted 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 any accounting principles in 2011, but the following changes were implemented as of 1 January 2011: The revised version of IAS 24 Related party disclosures includes changes to the disclosure requirements for information about related parties, while the definition of related parties has been clarified and simplified. New standards and interpretations that came into force in 2011, but which have not been applied: Amendments to IAS 32 Financial instruments presentation Amendments to IFRIC 14, IAS 19 The limit on a defined benefit asset, minimum funding requirements and their interaction IFRIC 19 Extinguishing financial liabilities with equity instruments 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. Businesses held for sale 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 post-tax profit or loss of such businesses is presented separately under Profit/loss after tax on businesses and assets held for sale. Assets relating to such businesses are presented under Businesses and assets held for sale on the balance sheet. 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% 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: Company Shareholding and share 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 Sparebanken Sogn og Fjordane ANNUAL REPORT

30 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 financial statements. The companies that satisfy our criteria for associates are: Company Shareholding and share of voting rights Fjord Invest AS 45.3 % 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 sum of the fair value of the assets acquired, equity instruments issued and liabilities taken over, as well as 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 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%, 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. Foreign currency The Group s accounts are presented in Norwegian krone (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 Loans and advances, carried on the balance sheet at amortised cost Investments held until maturity, carried on the balance sheet at amortised cost Financial instruments available for sale, valued at fair value, with changes in value recognised in equity Other financial liabilities carried on the balance sheet 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, capital guaranteed products and certain debt securities. The above-mentioned instruments, as well as interest rate swaps, are managed collectively and measured at fair value. 30 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

31 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 advances, 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, or as financial assets available for sale. Some of our commercial paper borrowings are included in this category. Investments held until maturity, carried on the balance sheet at amortised cost. Portfolio of securities held to maturity, valued at their amortised cost. The following categories were not used in Financial instruments available for sale, valued 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 on the balance sheet 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. 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 not 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 the anticipated future cash flows of 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 and direct transaction costs that are not covered by the customer, as well as 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 Sparebanken Sogn og Fjordane ANNUAL REPORT

32 discounted by the loan s effective interest rate. The effective interest rate used is the loan s effective interest rate before evidence of a fall in value was identified, adjusted for changes in the market rate up to the impairment date. Changes in interest rates as a result of changes in the credit risk associated with the loan are not taken into account when adjusting the effective interest rate used for discounting purposes. Objective evidence that a loan or group of loans has fallen in value includes significant financial problems at the debtor, default and other major breaches of contract, as well as cases where it is likely that the debtor will try to renegotiate his debt or other specific events have occurred. 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 tested jointly 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. 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 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. This portfolio includes commercial paper and bonds defined as assets measured at fair value with changes in fair value recognised in profit or loss (FVO). Interest income and expenses on commercial paper and bonds are included under Net interest income using the effective interest rate method. This method is described in the paragraph on amortised cost. Other changes in value are included under Net gains/losses on financial instruments measured at fair value option. Shares Shares measured at fair value through profit and loss (FVO) This 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 gains/ losses 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 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 gain realised on financial instruments, available for sale. Reversals of impairments are recognised directly in equity. Financial derivatives A derivative is a financial instrument with the 32 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

33 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 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 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 gains/losses on financial instruments measured at fair value. Debt securities Debt securities (and subordinated debt) include commercial paper, bonds and subordinated debt issued by the Bank, regardless of the valuation method. Interest expenses on these instruments are included under Net interest income using the effective interest rate method. Other changes in value are included under Net gains/losses on financial instruments 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 leases are agreements that transfer the vast majority of the risk and return associated with the leased item to the lessee. These leases 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 amount 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 incl. 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 accrued 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 and holiday apartments 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 years Fixtures, fittings and furnishings 7-10 years Vehicles 5 years Office equipment 5 years IT equipment 3-5 years 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 the cost of selling it and its utility value. If the carrying value is higher than the estimated remaining value, the carrying value is immediately 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 Sparebanken Sogn og Fjordane ANNUAL REPORT

34 related to in-house software that have been checked by the Group, 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. Capitalised software investments are depreciated over their anticipated useful life, which is normally three years. Any need for impairment is assessed on 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 the excess value not directly attributable to identifiable assets and liabilities. This excess value is tested for impairment for each interim report. PENSIONS Defined benefits pension schemes The economic parameters used to calculate pension liabilities are updated on the balance sheet date, which includes determining the discount rate based on the market interest rate on the balance sheet date. The Bank follows The Norwegian Accounting Standards Board s guidelines. The effect of differences between actuarial assumptions and what actually occurs does need to be recognised if it lies within a corridor. The value of these actuarial gains or losses is compared with the larger of gross pension obligations and total pension fund assets including employer s national insurance contributions. If the gain or loss exceeds 10% of the larger of those two figures, the difference is amortised over the average remaining working lives of the active employee participants in the pension plan. 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 plan assets held in insurance or pension funds. Net pension liabilities are also adjusted for the accumulated actuarial gain or loss and changes in assumptions. Defined contribution pension schemes In the case of defined contribution pension schemes, the Group does not promise a specific level of pension benefit, and instead it makes an annual contribution to a group pension scheme. The future pension benefit depends on the amount contributed and on the annual return on the pension fund. The Group is not in any way responsible for the benefit payable, and simply has to make Its annual contribution. For these kinds of pension schemes, there is no need to make a provision for accrued pension liabilities. Instead, defined contribution pension schemes are expensed as and when contributions are made. The Bank has two types of defined contribution schemes. One is an ordinary defined contribution scheme at one of its subsidiaries, while the other is a new AFP scheme that was introduced as of 1 January 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 28 % tax rate to temporary differences that exist between accounting and taxable values at the close of the year. Deferred tax is calculated using the tax rates and regulations that apply on the balance sheet date, or that are very 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 as a result of profits 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 commission are recognised in the profit and loss account as they accrue as income or expenses. Unrealised gains and losses that arise on interest rate swaps as a result of changes in market interest rates on fixed rate deposits and foreign currency borrowings are accrued under Net interest income. 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. Set-up fees for financial guarantees are included in the valuations of the guarantees, and are taken to income under Net gains on financial instruments measured at fair value. 34 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

35 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 as the effective interest rate on 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 cash flow statement shows cash flows grouped by source and area of use. Cash is defined as cash and receivables from central banks, and instant access deposits with credit institutions. 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 a dividend equalisation reserve. The primary capital consists of primary capital certificates and a gift fund. The reserve for unrealised gains relates to changes in the value of financial instruments classified as held 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 and dividends are classified as equity until they have been approved by the Executive Committee. POST BALANCE SHEET EVENTS Post balance sheet dates 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. NOTE 1B BUSINESSES AND ASSETS HELD FOR SALE Businesses held for sale Silver Statt AS During winter 2010/2011, Sparebanken Sogn og Fjordane (SSF) acquired all of the shares in Silver Statt AS for NOK 1, as part of a restructuring of the Bank s involvement with the business. Silver Statt AS operates in the reefer ship market. SSF s strategy is to hold on to operations that it obtains through defaults for a short time, which normally means no longer than one year. In the fourth quarter of 2011, the Bank sold and received payment for the ship Silver Statt. The Bank is also in the process of selling the ship Silver Stockholm. Silver Statt AS s financial performance has been presented under Profit/loss on businesses and assets held for sale in the profit and loss account and under Businesses and assets held for sale on the balance sheet. In 2011, Silver Statt AS had a cash outflow of NOK 1 million. After eliminating intra-group transactions, Businesses and assets held for sale contributed a NOK 34 million loss after taxation in On the balance sheet, Businesses and assets held for sale are measured at fair value, which is NOK 6 million. NOTE 2 CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS Estimates and judgements are continuously reassessed, and are based on past experience and other factors, such as expectations of future events that are considered probable under current circumstances. The Group prepares estimates and makes assumptions about the future. Accounting estimates produced on the basis of this rarely entirely correspond with what actually happens. Estimates and assumptions that entail a significant risk of major changes to the carrying amount of assets and liabilities over the coming financial year are discussed below. Estimated impairment of goodwill The Group tests goodwill annually for impairment; see discussion in the note on 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. 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. Sparebanken Sogn og Fjordane ANNUAL REPORT

36 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. For securities that are not traded, the value is determined 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 obtained by Eksportfinans from external brokers. Also see the note on Fair value of financial instruments. 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 and other major breaches of contract, as well as cases where it is likely that the debtor will try to renegotiate his debt or other specific events have occurred. To decide whether there exists objective evidence justifying collectively assessed impairment provisions within 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 at an individual level, these calculations have to be based on the specifics of the loans and past experience. The models that are used to calculate credit risk are evaluated and validated regularly. This is also true of the model for collectively assessed impairment provisions 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 specific and general 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 costs. The discount rate assumption is based on the 10-year government bond yield on the balance sheet date, plus an adjustment to allow for the relevant term of the liabilities. The expected return on pension fund assets is based on how the pension fund assets are invested and historic returns. The average return on pension fund assets has historically been higher than the risk free return, as some of the pension fund assets are normally invested in securities carrying a slightly higher risk than government bonds. The expected return is based on the discount rate plus the expected return. 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). 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 CORPORATE STRUCTURE In 2011, Sparebanken Sogn og Fjordane increased its share capital by NOK 175 million through a private placement with its wholly-owned subsidiary Bustadkreditt Sogn og Fjordane AS. After this, the Bank s share capital totals NOK 375 million. The reason for the capital increase is growth in the Bank s volume of business. 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 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 mediumsized enterprises and the public sector. 36 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

37 NOTE 4 SEGMENT REPORTING (cont.) Retail market 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 consists of services supplied to Gjensidige Bank. Total for group Corporate market/ Finance Public sector Residential mortgages offers mortgage loans to retail customers and issues very safe covered bonds. Estate agency offers estate agency services in conjunction with the purchase and sale of properties. Property management manages the Group s largest properties. Retail market Residential Other mortgages INCOME STATEMENT AT Net interest and credit income Net other operating income Total operating income Operating expenses Profit/loss before loan impairment charge Net gains on fixed assets Loan impairment charge Profit/loss before taxation Total for group Corporate market/ Finance Public sector Retail market Residential Other mortgages BALANCE SHEET AT Net loans and advances to customers Assets Total assets Deposits from and debt to customers Other liabilities Equity Total debt and equity Total for group Corporate market/ Finance Public sector Retail market Residental Other mortgages Property Estate management agency Eliminations Property Estate management agency Eliminations Property Estate management Agency Balestrand townhall Eliminations INCOME STATEMENT AT Net interests and credit income Net other operating income Total operating income Operating expenses Profit/loss before loan impairment charge Net gains on fixed assets Loan impairment charge Profit/loss before taxation Total for group Corporate market/ Finance Public sector Retail market Residental Other mortgages Property Estate management Balestrand Agency townhall Eliminations BALANCE SHEET AT Net loans and advances to customers Assets Total assets Deposits from and debt to customers Other liabilities Equity Total debt and equity Sparebanken Sogn og Fjordane ANNUAL REPORT

38 NOTE 5 PARENT COMPANY NET INTEREST INCOME 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 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 Net interest expenses Net interest income NOTE 6 NET COMMISSION INCOME PARENT COMPANY CONSOLIDATED Payment transactions Security trading Guarantee commissions Currency services and international payments Insurance services Other commission income Total charges and commission income Interbank fees Payment transactions Total commission expenses Net commission income NOTE 7 NET GAINS ON FINANCIAL INSTRUMENTS PARENT COMPANY CONSOLIDATED Net gains on foreign currency Net gains on financial derivatives Net gains on financial instruments, trading portfolio Net gains on loans measured at fair value Net gains on deposits measured at fair value Net gain on commercial paper and bonds Net gains on shares Net gains on financial liabilities Net gains on financial instruments, designated at fair value Net gains on financial instruments measured at fair value Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

39 NOTE 8 OTHER INCOME PARENT COMPANY CONSOLIDATED Income from property Income from Gjensidige Bank ASA Estate agency Mortgage loan business The savings bank foundation Other operating income Total other income NOTE 9 OPERATING EXPENSES PARENT COMPANY CONSOLIDATED Wages, salaries, etc Pension costs 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 Outside 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 Bank has the following pension schemes: 1. Company pension plan Company pension plan arranged through an insurance company. Pension benefits include a retirement pension, disability pension, spouse s pension and dependant s pension, and are used to top up benefits payable under the National Insurance Scheme. Employees must have 30 qualifying years of service to obtain a full pension, which entitles them to virtually 70 percent of their final salary. If an employee leaves the company before reaching retirement age, he or she is entitled to a paid-up policy. The disability and spouse s pensions for employees and retired employees are unfunded insurances. The annual insurance premium is included in the pension cost. Sparebanken Sogn og Fjordane ANNUAL REPORT

40 NOTE 10 PENSION LIABILITIES (cont.) 2. Early retirement scheme The Bank has unfunded residual liabilities for its old early retirement scheme (AFP) on its balance sheet. Under the 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. The Bank reversed the provisions under the old AFP scheme in 2010, and so the only provision on the balance sheet is now for residual liabilities relating to pensioners who retired under the old scheme. No provision has been made on the balance sheet for the new AFP scheme, which entered into force as of 1 January The new AFP scheme is funded through annual premiums, and it is included in the financial statements as a defined contribution scheme. The new AFP scheme allows employees to take early retirement on reaching the age of Individual pension plans The Bank has three pension plans for past CEOs, in addition to a plan for the current CEO. Under the plan for the CEO, the Bank will cover 70 percent of the CEO s final salary from the age of 60 to 67. In addition the Bank shall make up national insurance payments, in order to ensure that the sum of the national insurance and pension benefits paid by the Bank is also 70 percent of the CEO s final salary after the age of 67. The CEO s pension plan is unfunded. 4. Defined contribution pension schemes At the Bank s subsidiary Eigedomsmekling Sogn og Fjordane, one member of staff has a defined contribution pension scheme. Economic assumptions Discount rate 3.30 % 3.20 % Expected rate of return on assets 4.80 % 4.60 % Wage increases 4.00 % 4.00 % Adjustment of the National Insurance Scheme s basic amount G 3.75 % 3.75 % Adjustment of existing pensions 0.70 % 0.50 % Amortisation schedule (expected remaining years of service) 15 years 15 years Employer s NI contributions rate 14.1 % 14.1 % Demographic assumptions Life table (death) K2005 K2005 Life table (disability) IR02 IR02 AFP take-up percentage 50,0 % 50,0 % Staff turnover (all age groups) From 0 til 8 % From 0 til 8 % FIGURES IN NOK 000s PARENT COMPANY Pension expense Secured Unsecured Total Secured Unsecured Total Present value of pension benefits earned during the year Interest expense on pension liabilities Expected return on pension fund assets Administration expenses Actuarial losses/(gains) recognised in P&L Change in net liability (discontinuation old AFP scheme) recognised in P&L Actuarial losses/(gains) recognised in P&L for old AFP scheme Changes to pension schemes recognised in P&L Accrued employer s NI contributions Net pension expense incl. employer s NICs Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

41 NOTE 10 PENSION LIABILITIES (cont.) parent company Pension liabilities on the balance sheet Secured Unsecured Total Secured Unsecured Total Pension liabilities Fair value of pension fund assets Net pension liabilities excl. employer s NICs Employer s NI contributions Net pension liabilities incl. employer s NICs Changes to pension schemes/ implementation effects not recognised in P&L Actuarial gains/losses not recognised in P&L Net pension liabilities incl. NICs on the balance sheet parent company Pension liabilities Opening balance Pension benefits earned during the year Pension benefits paid Impact of discontinuation of old AFP scheme Interest expenses Actuarial losses/gains Total as of 31 December parent company Pension fund assets Opening balance (fair value) Expected rate of return on assets Actuarial (losses)/gains Administration expenses Pension contributions Pension benefits paid Closing balance (estimated) parent company Number of people covered by funded pension scheme Current employees Pensioners Total CONSOLIDATED Pension expense Secured Unsecured Total Secured Unsecured Total Present value of pension benefits earned during the year Interest expense on pension liabilities Expected return on pension fund assets Administration expenses Actuarial losses/gains recognised in P&L Change in net liability discontinuation old AFP scheme Actuarial losses/(gains) recognised in P&L for old AFP scheme Changes to pension schemes recognised in P&L Accrued employer s NI contributions Net pension expense incl. employer s NICs Sparebanken Sogn og Fjordane ANNUAL REPORT

42 NOTE 10 PENSION LIABILITIES (cont.) consolidated Pension liabilities on the balance sheet Secured Unsecured Total Secured Unsecured Total Pension liabilities Fair value of pension fund assets Net pension liabilities excl. employer s NICs Employer s NI contributions Net pension liabilities incl. employer s NICs Changes to pension schemes/implementation effects not recognised in P&L Actuarial gains/losses not recognised in P&L Net pension liabilities incl. NICs on the balance sheet CONSOLIDATED Pension liabilities Opening balance Pension benefits earned during the year Pension benefits paid Impact of discontinuation of old AFP scheme Interest expenses Actuarial losses/gains Total as of 31 December CONSOLIDATED Pension fund assets Opening balance (fair value) Expected rate of return on assets Actuarial (losses)/gains Administration expenses Pension contributions Pension benefits paid Closing balance (estimated) CONSOLIDATED Number of people covered by funded pension scheme Current employees Pensioners Total PARENT COMPANY AND CONSOLIDATED Investment of pension fund assets Pensions are insured through Vital Forsikring ASA Shares 19,50 % 18,70 % Short-term bonds 14,50 % 15,40 % Money markets 13,30 % 13,60 % Long-term bonds 32,70 % 33,20 % Property 17,00 % 17,60 % Other 3,00 % 1,50 % Total 100,00 % 100,00 % 42 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

43 NOTE 11 loan impairment charge Total 2011 Total 2010 PARENT COMPANY Gross loans Guarantees Par. company Consolidated Par.company Cosolidated 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 Tax expense Tax payable on taxable income Shortfall/surplus calculated last year Capitalised deferred tax related to intragroup transfers Tax recognised in equity in conjunction with merger Tax impact of businesses held for sale 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 (incl. merged operations in 2010) Estimated income tax based on nominal tax rate (28%) Tax impact of the following items 4 1 Shortfall/surplus calculated in previous years Tax recognised in equity in conjunction with merger Non-deductible expenses Other permanent differences related to shares Other differences Tax payable on income ,7 % 33,2 % Effective tax rate 30,0 % 20,8 % Change in capitalised deferred tax assets/(deferred tax) 8 12 Deferred tax assets/(deferred tax) at 1 January Change recognised in the P&L account Other changes Deferred tax assets/(deferred tax) at 31 December 6 2 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) 6 2 Sparebanken Sogn og Fjordane ANNUAL REPORT

44 NOTE 12 TAX EXPENSE (cont.) PARENT COMPANY CONSOLIDATED Deferred tax in the P&L account relates to the following temporary differences 10 4 Fixed assets Receivables Financial instruments Net pension liabilities Other differences Deferred tax 4 4 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 measured at amortised cost are valued in the same way as debt securities 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. CONSOLIDATED 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, measured at 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 2011

45 NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.) Book value Fair value Book value Fair value CONSOLIDATED 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 collateral for loans/ credit facility with Norges Bank. parent company ASSETS Book value Fair value adjustment Book value Fair value adjustment 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, measured at 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

46 NOTE 13 FAIR VALUE OF FINANCIAL INSTRUMENTS (cont.) Book Fair value Book Fair value value adjustment value adjustment PARENT COMPANY DEBT 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 *) 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 2011

47 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 7 million have been moved from level 3 to level 2, as the valuation in 2011 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 2011: Loans and Deposits from and advances to customers Shares debt to customers Total Opening balance Gains or losses 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 loans the 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 3.6 million. For fixed-rate loans the weighted average remaining term is approx. 3.5 years. Roughly speaking, a 1% rise in interest rates will reduce the value of our fixed-rate loans by approx. NOK 65 million. 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 10 million. Sparebanken Sogn og Fjordane ANNUAL REPORT

48 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 Maximum credit exposure to the group Loans to customers, FVO is the carrying amount of outstanding loans (NOK 1,795.7 million) + market value adjustment (NOK 64.2 million), or NOK 1,859.9 million in total. NOTE 16 LOANS BY GEOGRAPHIC AREA PARENT COMPANY Loans Share Loans Share Sogn og Fjordane ,3 % ,4 % Hordaland ,1 % ,2 % Oslo and Akershus ,9 % ,5 % Elsewhere ,7 % ,9 % Total gross loans by geographic area ,0 % ,0 % Individually assessed impairment provisions Collectively assessed impairment provisions Total impairment provitions Total net loans Loans include lease agreements and foreign currency guarantees, which all relate to Sogn og Fjordane. 48 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

49 NOTE 16 LOANS BY GEOGRAPHIC AREA (cont.) CONSOLIDATED Loans Share Loans Share Sogn og Fjordane ,0 % ,6 % Hordaland ,5 % ,2 % Oslo and Akershus ,9 % ,7 % Elsewhere ,6 % ,5 % Total gross loans by geographic area ,0 % ,0 % Individually assessed impairment provisions Collectively assessed impairment provisions Total impairment provisions Total net loans Loans include lease agreements and foreign currency guarantees, which all relate to Sogn og Fjordane. NOTE 17 LOANS BY CUSTOMER GROUPS Unused credit Gross loans Guarantees facilities PARENT COMPANY Wage and salary earners Public sector Farming and forestry Fishing/hunting Fish farming Industry Construction, civil engineering, power generation Trading Service industry and personal service providers Other Total loans by sector and industry Of which: Retail market Corporate market Public sector/other Gross loans to customers Individually assessed impairment provisions Collectively assessed impairment provisions Net loans to customers Unused credit Gross loans Guarantees facilities CONSOLIDATED Wage and salary earners Public sector Farming and forestry Fishing/hunting Fish farming Industry Construction, civil engineering, power generation Trading Service industry and personal service providers Other Total loans by sector and industry Sparebanken Sogn og Fjordane ANNUAL REPORT

50 NOTE 17 LOANS BY CUSTOMER GROUPS (cont.) Unused Gross loans Guarantees credit facilities CONSOLIDATED Of which: Retail market Corporate market Public sector/other Gross loans to customers Individually assessed impairment provisions Collectively assessed impairment provisions Net loans to customers NOTE 18 IMPAIRMENT OF LOANS AND GUARANTEES Total 2011 Gross loans Guarantees Par. comp.consolidated Opening balance at , 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 amortisation Elimination of impairment provisions related to businesses held for sale 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 Total 2010 Gross loans Guarantees Par.comp. Consilidated Opening balance at , 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 amortisation 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 2011

51 NOTE 18 IMPAIRMENT OF LOANS AND GUARANTEES (cont.) RECONCILIATION OF INDIVIDUALLY AND COLLECTIVELY ASSESSED IMPAIRMENT PROVISIONS FOR LOANS AND ADVANCES Individ. assesed Collect. assesed Total parent Total Individ. assesed Collect. assesed Total parent Total impairment impairment comp. consolid. impairment impairment comp. consolid. At 1 January Amounts written off during the current period against previously 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. NOK 18 mill of the collectively assessed impairment provisions at are in the 1. quarter of 2011 transformed into individually assessed impairment provisions. Adjusted for this the collectively assessed provisions are increased by NOK 6 million for the parent company and NOK 9 million for the Group. 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 1000 for more than 90 days Loans in default and individually assessed impairment Loans in Indiv. Share Indiv. Share by sector and industry default ass.imp.prov % ass.imp.prov % Farming and forestry ,2 % 2 0,9 % Fishing ,0 % 0 0,0 % Fish farming ,1 % 5 2,2 % Fishing industry ,0 % 0 0,0 % Other industry ,4 % 21 9,6 % Building/constr., power/water supply ,2 % 7 3,3 % Commerce ,3 % 14 6,1 % Hotels and restaurants ,0 % 0 0,0 % Property management ,1 % 74 33,1 % Other leasing, transport, social and personal services ,3 % 79 35,5 % Total for all sectors ,0 % ,8 % Retail banking market, including international ,0 % 21 9,2 % Public sector ,0 % 0 0,0 % Other ,0 % 0 0,0 % Total ,0 % ,0 % LOANS THAT ARE EITHER IN DEFAULT OR IMPAIRED At over Performing 120 days 180 days 360 days 360 days Total Non-performing financial loans that have not been impaired Financial loans that have been impaired LOANS THAT ARE EITHER IN DEFAULT OR IMPAIRED At over Performing 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

52 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 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 ,29 0,25 Modified duration 0,28 0,35 3,99 3,85 Weighted average effective interest rate 3,86 4,10 Maturity structure of investments in bonds and commercial paper Book value Face value Face value Book value Maturity year Total 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. NOTE 22 SHARES PARENT COMPANY CONSOLIDATED Shares, measured at fair value Stock exchange listed shares Unlisted shares Total shares, designated at fair value Shares, available for sale 3 4 Stock exchange listed shares Unlisted shares Total shares, available for sale Total shares Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

53 NOTE 22 SHARES (cont.) FIGURES IN NOK 000s Breakdown of shares Number Voting shares Market value/ Shares, measured at fair value of shares % book value Financial institutions, listed DnB Nor ASA Sparebank1 Nord Norge Sparebank 1 SR-bank Gjensidige Forsikring Listed financial institutions, total Financial institutions, unlisted Hjelmeland Sparebank ,7 734 Unlisted financial institutions, total 734 Other listed companies PGS ASA Yara International ASA Norsk Hydro ASA Kværner ASA Statoil ASA Standard Drilling Plc Telenor ASA Orkla ASA Polarcus AS Subsea 7 AS Aker Solution ASA Opera Software ASA Kverneland ASA Statoil Fuel & Retail ASA Schibsted ASA Norway Royal Salmon ASA Golden Ocean Group AS Seadrill Ltd Royal Caribbean Cruises Ltd DNO International ASA Songa Offshore SE ScanArc ASA ,7 313 Other listed companies, total Other unlisted companies 478 Other unlisted companies, total 478 Total shares, designated at fair value Shares, available for sale Financial institutions, listed Visa Inc Listed financial institutions, total Financial institutions, unlisted Eksportfinans ASA , Nets AS , Eiendomskreditt , Terra Gruppen AS , Kredittforeningen for Sparebanker , Financial institutions, total Sparebanken Sogn og Fjordane ANNUAL REPORT

54 NOTE 22 SHARES (cont.) FIGURES IN NOK 000s Number Voting shares Market/ Shares, available for sale of shares % book value Listed companies Domstein ASA ,3 212 Listed companies, total 212 Other unlisted companies Nordisk Areal AS , Hotell Alexandra AS , Sunnfjord Hotell AS , Nordito Property AS , Other unlisted shares Other unlisted companies, total Total shares, available for sale Total shares NOTE 23 SUBSIDIARIES AND ASSOCIATES PARENT COMPANY Subsidiaries At 1 January Acquisitions/ disposals Valuation loss on Eigedomsmekling Sogn og Fjordane AS 0-1 At 31 December CONSOLIDATED PARENT COMPANY Associates At 1 January Acquired Writedowns At 31 December PARENT COMPANY FIGURES FROM SUBSIDARIES Share Book holding 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 Fjord Invest AS 45,3% Investments in associates Investments in associates Loans to, and deposits from, subsidiaries and associates at : Loans Deposits Interest paid Interest paid Bankeigedom Sogn og Fjordane AS Eigedomsmekling Sogn og Fjordane AS Bustadkreditt Sogn og Fjordane AS Fjord Invest AS Balestrand Rådhus AS Total loans to, and deposits from subsidaries and associates Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

55 NOTE 24 INTANGIBLE ASSETS AND GOODWILL 2011 PARENT COMPANY Software Goodwill Total Book value at Acquired Disposed of Depreciation Book value at Historical cost Accumulated depreciation and writedowns Book value at Useful life 3 years No depr. Depreciation method Straight line CONSOLIDATED Software Goodwill Total Book value at Acquired Disposed of Depreciation Book value at Historical cost Accumulated depreciation and writedowns Book value at Useful life 3 years No depr. Depreciation method Straight line Goodwill In previous years, goodwill was tested annually for impairment. Eigedomsmekling Sogn og Fjordane made a profit after tax of NOK 1.6 million in 2010 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 2011, 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 PARENT COMPANY Software Goodwill Total Book value at Acquired Disposed of Depreciation Book value at Historical cost Accumulated depreciation and writedowns Book value at Useful life 3 years No depreciation Depreciation method Straight line Sparebanken Sogn og Fjordane ANNUAL REPORT

56 NOTE 24 INTANGIBLE ASSETS AND GOODWILL (cont.) CONSOLIDATED Software Goodwill Total Book value at Acquired Disposed of Depreciation Book value at Historical cost Accumulated depreciation and writedowns Book value at Useful life 3 years No depreciation Depreciation method Straight line Goodwill In previous years, goodwill was tested annually for impairment. Eigedomsmekling Sogn og Fjordane made a profit after tax of NOK 1.6 million in Based on the method previously used, the value of the goodwill has not been written down in New goodwill acquired in 2010 arose from the merger with Fjaler Sparebank in September The Bank considers that there is no need to write down the value of this goodwill at 31 December NOTE 25 FIXED ASSETS 2011 Building and Machinery, fixtures PARENT COMPANY other real property fittings and vehicles Total Book value at Acquired Disposed of Depreciation Book value at Historical cost Accumulated depreciation and writedowns Book value at Useful life years 3 8 years Depreciation method Straight line Straight line CONSOLIDATED Book value at Acquired Disposed of Depreciation Book value at Historical cost Accumulated depreciation and writedowns Book value at Useful life years 3 8 years Depreciation method Straight line Straight line Our bank premises are mortgaged for loans taken out by the property company. 56 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

57 NOTE 25 FIXED ASSETS (cont.) 2010 Buildings and other Machinery, fixtures PARENT COMPANY real property fittings and vehicles Total Book value at Acquired Disposed of Depreciation Book value at 31/12/ Historical cost Accumulated depreciation and writedowns Book value at Useful life years 3 8 år Depreciation method Straight line Straight line Buildings and other Machinery, fixtures CONSOLIDATED real property fittings and vehicles Total Book value at Acquired Disposed of Depreciation Book value at Historical cost Accumulated depreciation and writedowns Book value at Useful life years 3 8 years Depreciation method Straight line Straight line Our bank premises are mortgaged for loans taken out by the property company. NOTE 26 OTHER ASSETS PARENT COMPANY CONSOLIDATED Earned income not received Other payments made in advance, not yet accrued Other receivables Various expenditure/ 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 ,3 % ,4 % Customer deposits, designated at fair value *) 654 3,7 % 596 3,6 % Deposits from and debt to customers ,0 % ,0 % Average interest rate 2,71 % 2,26 % *) A valuation gain of NOK 1.1 million was recognised in A valuation loss of NOK 2.0 million was recognised in Sparebanken Sogn og Fjordane ANNUAL REPORT

58 NOTE 27 CUSTOMER DEPOSITS (cont.) Deposits Share Deposits Share Wage and salary earners ,3 % ,8 % Public sector ,2 % ,5 % Farming and forestry 563 3,2 % 504 3,0 % Fishing/hunting 292 1,6 % 175 1,0 % Fish farming 105 0,6 % 149 0,9 % Industry 552 3,1 % 458 2,7 % Construction, civil engineering, power generation 612 3,4 % 563 3,4 % Trading 574 3,2 % 499 3,0 % Service industry and personal service providers ,0 % ,2 % Other 401 2,3 % 414 2,5 % Total deposits by sector and industry ,0 % ,0 % Of which: Retail market ,3 % ,8 % Corporate market ,2 % ,2 % Public sector/other ,5 % ,0 % Total ,0 % ,0 % Sogn og Fjordane ,3 % ,8 % Hordaland ,3 % ,5 % Oslo and Akershus 827 4,6 % 726 4,3 % Other 498 2,8 % 566 3,4 % Total deposits by region ,0 % ,0 % Term to maturity, deposits Remaining term to maturity (book value) Payable on request Up to 3 months 0 11 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 2011 was estimated as being NOK million. The difference between the face value and market value is NOK 1.4 million. The difference in 2010 was NOK 2.5 million. The change of value of NOK 1.1 million was credited to the profit and loss account for There is no longer any requirement to present fixed-rate deposits broken down by term to maturity. The reason given for this is that the deposits can in practice be withdrawn at any time, subject to a penalty. NOTE 28 DEBT SECURITIES ISSUED Face value Book value CONSOLIDATED Commercial paper and other short-term borrowings 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 incurred through the issue of securities Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

59 NOTE 28 DEBT SECURITIES ISSUED (cont.) Commercial paper and bond debt by year of maturity (par value): Total commercial paper and bond debt NOTE 29 OTHER LIABILITIES AND PROVISIONS Liabilities PARENT COMPANY CONSOLIDATED OTHER LIABILITIES Other liabilities Accruals Total other liabilities PROVISIONS Pension liabilities Specified provisions on guarantees Total provisions NOTE 30 FINANCIAL DERIVATIVES Sparebanken Sogn og Fjordane trades in financial derivatives to manage the Bank s interest rate risk (interest swaps), and to hedge foreign currency loans on its balance sheet and its portfolio related to customer trades (currency swaps). Gains/losses are included under net interest income and net gains on financial instruments Total Positive Negative Total Positive Negative nominal market market nominal market market value value value value value 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 negative market value shown in the table represents our share of the fall in value at 31 December If the current 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. Sparebanken Sogn og Fjordane ANNUAL REPORT

60 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 Perpetual hybrid debt Total subordinated debt NOTE 32 RISK MANAGEMENT The Board of Sparebanken Sogn og Fjordane has set out frameworks for what risks the Bank can take in relation to the various categories of risk, and how those risks should be monitored. Exposure is measured and reported in accordance with principles and strategies drawn up by the Board. The Bank s risk management framework has been determined on the basis that the overall risk level shall be well within the limits that the Bank s equity allows. The Board of Directors has decided that the Bank shall have sufficient capital for a confidence level of 99.95%. This means that the Bank shall manage its risk in such a way that it has sufficient capital to avoid bankruptcy in 9,995 out of every 10,000 years. 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: Pilar 2: Pilar 3: The Bank has complied with the simplest method, which means using the standardised approach for credit risk and the basic indicator approach for operational risk. 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 2012 at its meeting in March/April 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 on this area. It is expected that the rules on capital adequacy will be amended with respect to the proportions of the various types of equity and subordinated debt, and that there will be new requirements in relation to capital conservation buffers and countercyclical capital buffers when CRD IV is implemented into Norwegian regulations. CRD IV is supposed to enter into force on 1 January 2013, but there will be transition rules until The Bank considers that it is well capitalised under the new rules. 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, with the Norwegian Computing Center acting as consultant. The model calculates the level of unexpected losses based on various confidence levels relating to the areas of credit risk, market risk and operational risk. The model is also used to calculate the Bank s liquidity risk. Credit risk Credit risk is the danger of losing money as a result of customers or counterparties being unable or unwilling to repay their debts 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. 60 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

61 NOTE 32 RISK MANAGEMENT (cont.) Models for calculating credit risk In 2006 and 2007 the Bank developed its own models for estimating the probability that any given customer would 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 so-called hybrid model, which means that it 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. For certain types of organisation, whose financial statements are not published in searchable databases, the Bank uses the credit score given by Lindorff for risk classification purposes. All of the Bank s corporate accounts are risk classified each month. 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. Based on the risk classification of its customers and its loss severity model, the Bank can calculate its capital requirements arising from credit risk and other types of risk in its total risk model. Currently the model is used to report market risk and liquidity risk. Credit risk is reported using the standardised approach. The Bank also has guidelines for calculating anticipated exposure to customers if they go into default. On first introducing the models, the Bank has chosen to be conservative in the parameters that it has set, in terms of severities, exposure levels and default rates. 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 specific impairment provisions are calculated, taking into account estimated future cash flows and the realisable value of any securities. 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 in 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 5 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. Sparebanken Sogn og Fjordane ANNUAL REPORT

62 NOTE 32 RISK MANAGEMENT (cont.) 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. General 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, general 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 and assessed in annual stress tests/ scenario analyses relating to credit risk. 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. The Bank has given certain employees responsibility for its most important industries. They are experienced customer advisers who have particular knowledge of the industry they have been given responsibility for. These employees play a vital role in credit scoring customers within their respective industries. They are also responsible for writing an annual industry analysis for the industry in question. These industry analyses are used for the preparation of the Bank s credit strategy and to inform its credit activities. Risk management framework for loans The Board has set out the following risk management framework for loans to customers: With the exception of customers in the public sector, the Bank shall not have more business with a single customer than 20 % of the Bank s equity based on the most recent interim financial statements. The sum of the five largest loans outside the public sector shall not exceed 80% of the Bank s equity based on the most recent interim financial statements. The sum of the five largest risk-weighted loans outside the public sector, and within the same industry code (main group), shall not exceed 50% of the Bank s equity based on the most recent interim financial statements. Corporate loans shall not constitute more than 40% of gross outstanding loans. Total loans to the property sector shall not constitute more than 35 % of total loans to corporate customers. 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 Bank s permitted interest rate risk, as well as on its exposure to the stock and foreign currency markets. Periods of fixed interest for the Bank s assets and liabilities, arising from fixed rate loan and deposit products, also constitute a market risk. The Bank does not have a trading portfolio, and considers its market risk to be moderate. The Bank measures its market risk using a VAR analysis in the Bank s total risk model. 62 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

63 NOTE 32 RISK MANAGEMENT (cont.) 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 risk premium is simulated by assuming a normal distribution, with a specific expectation and a specific standard deviation. The liquidity requirement is entered in the total risk model, and multiplied by the change in the risk premium. The liquidity risk arising from the potential inability to obtain financing can be dealt with by having sufficient liquid assets to meet maturing obligations. 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 in a recession scenario. The Bank s liquidity buffer shall be sufficient to 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. Using the total risk model, we calculate the financial capital needed to cover the Bank s operational risk based on the chosen confidence level. The total risk model uses a log normal loss distribution to estimate the probability of various consequences of operational losses. 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 2011 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. We have developed a separate model to calculate the financial capital required for business risk, based on the Bank s budgets for revenue, expenses and losses. The Bank sets aside sufficient capital to cover unexpected losses due to business risk with a confidence level of 99.95%. Sparebanken Sogn og Fjordane ANNUAL REPORT

64 Note 33 LIQUIDITY RISK CONSOLIDATED < No Liquidity risk remaining term at months months months year > 5 year maturity 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 facilities and loans not yet drawn Financial derivatives (gross outflows) *) Total payments *) Financial derivatives (gross inflows) Financial derivatives, net (negative number means net receipt) < No Liquidity risk remaining term at months months months year > 5 år maturity Sum Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Subordinated debt Unused credit facilities and loans not yet drawn Financial derivatives (gross outflows) *) Total payments *)Financial derivatives (gross inflows) Financial derivatives, net (negative number means net receipt) PARENT COMPANY < No Liquidity risk remaining term at months months months year > 5 years maturity 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 facilities and loans not yet drawn *) Financial derivatives (gross outflows) *) Total payments *)Financial derivatives (gross inflows) Financial derivatives, net (negative number means net receipt) Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

65 Note 33 LIQUIDITY RISK (cont.) Liquidity risk remaining term at < No month month month years > 5 years maturity 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 facilities and loans not yet drawn *) Financial derivatives (gross outflows) *) Total payments *) Financial derivatives (gross inflows) Financial derivatives, net (negative number means net receipt) The tables include interest, based on current interest rates on the reporting date. 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 to its wholly-owned subsidiary Bustadkreditt Sogn og Fjordane AS to finance the purchase of mortgage loans. At 31 December 2011, NOK 754 million of the credit had been drawn. The remaining approx. NOK 272 million of advances to credit institutions consist almost entirely 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. 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. Accounts* excl.leasing Share of total Ind. ass prov. Coll.ass prov. Accounts* excl.leasing Share of toal Ind. ass prov. Coll.ass prov. Low risk ,3 % ,4 % 0 5 Medium risk ,5 % ,2 % 0 13 High risk ,8 % ,8 % Public sector (low risk) 182 1,6 % ,6 % 0 0 Total ,0 % ,0 % *) Accounts generally consist of loan balances, guarantees, unused credit facilities, credit lines for currency trading and accrued interest. Sparebanken Sogn og Fjordane ANNUAL REPORT

66 NOTE 34 CREDIT RISK (cont.) Risk classification models and probability of default (PD): Risk class PD % A [0,00 0,10> B [0,10 0,25> C [0,25 0,50> D [0,50 0,75> E [0,75 1,25> F [1,25 2,00> G [2,00 3,00> H [3,00 5,00> I [5,00 8,00> J [8,00 100> K [100] Risk classes A-D are classified as low risk, E-G as medium risk, and H-K as high risk. Risk classification of retail customers, parent company Risk classification of corporate customers and the public sector Accounts* excl. leasing Share of total Indiv. ass. imp. Coll. ass. imp. Accounts* excl. leasing Share of total Indiv. ass. imp. Coll. ass. imp Low risk ,0 % ,2 % 0 7 Medium risk ,8 % ,0 % 0 15 High risk 857 5,2 % ,8 % Total ,0 % ,0 % *) Accounts generally consist of loan balances, guarantees, unused credit facilities, credit lines for currency trading and accrued interest. Risk classification of retail customers, consolidated Risk classification of corporate customers and the public sector Accounts* excl. leasing Share of total Indiv. ass.imp. Coll. ass.imp. Accounts* excl. leasing Share of total Indiv. ass. imp. Coll. ass. imp Low risk ,4 % ,4 % 0 8 Medium risk ,1 % ,0 % 0 17 High risk 990 4,5 % ,6 % Total ,0 % ,0 % *) Accounts generally consist of loan balances, guarantees, unused credit facilities, credit lines for currency trading and accrued interest. 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. Approx. 88 % of the parent company and 83 % 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. NOK 54.5 million is unrated, but NOK 52 million of this relates to Norwegian municipal bonds. parent company consolidated International rating Internal rating Rating Internal rating International rating AAA AA A BBB BB B Unrated Total Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

67 NOTE 34 CREDIT RISK (cont.) Financial derivatives 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. Changes in credit risk Changes in the fair value of fixed-rate loans and fixed-rate deposits are caused by changes in underlying interest rates, and are therefore a market risk. If there is a change in the credit risk associated with fixed-rate loans, they are tested for impairment in the same way as other loans. Some of our debt incurred through the issue of securities is valued using the fair value option. At the end of 2011, the market value of debt securities measured at fair value was NOK 35 million higher than their amortised cost. This is mainly due to changes in underlying interest rates, but changes in credit risk also affect their values. At the end of 2010, the equivalent difference between fair value and amortised cost was NOK 18 million. The change in value will be reversed over the remaining term to maturity of the debt securities. NOTE 35 MARKET RISK Value at Risk (VaR-analyse) 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 the Bank has not made sufficient allowance for future losses. The model reports VaR. The methodology takes into account market volatility and the correlation between the various types of risk. Financial capital 99.95% Interest rate risk 28,2 22,4 Equity risk 130,8 139,8 Foreign currency risk 2 4,1 Diversification impact 0 0 Total NOTE 36 WAGES, SALARIES, ETC. PARENT COMPANY FIGURES IN NOK 000s CONSOLIDATED Fees Agency fees Outside consultants Statutory audits Other services provided by auditor Internal auditing TOTAL All fees include VAT Salaries, fees and other compensation of senior management, directors and committee members (consolidated figures): FIGURES IN NOK The board of Sparebanken Sogn og Fj. 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 Sparebanken Sogn og Fjordane ANNUAL REPORT

68 NOTE 36 WAGES, SALARIES, ETC. (cont.) Salaries, fees and other compensation of senior management, directors and committee members Control Committee Fees Wages and salaries Benefits in kind Total comp. Loans at Deposits pr Knut Jon Sunde, chair Advokat Andreas Rønnekleiv, member Ingrid Kassen, member Total for control committee Senior management Arvid Andenæs, CEO Frode Vasseth, Business Support Director Janne Marie Solheimslid, Director of Human Resources Kjetil Bjørset, Corporate Banking Director Hallvard Klakegg, Retail Banking Director Trond Teigene, Director of Business Development Arve Sandal, Director of Communications and Community contact Total for senior management 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. Interest rate subsidies on loans to employees total NOK 686,790. Cost Pension liabilities Arvid Andenæs, 70% from the age of 60 to 67 + over 12G scheme Total pension liabilities on balance sheet 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 costs 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 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

69 NOTE 36 WAGES, SALARIES, ETC. (cont.) PARENT COMPANY KONSERN INTERNAL AUDITOR S FEE PRICEWATERHOUSECOOPERS AS *) Internal auditing Total *) Including VAT. The Bank s pay policy The Bank s vision is to be one of the driving forces in its home county. It is important for the Bank to have inhouse expertise on dealing with the risks that the Bank faces. The pay policy shall stimulate and motivate current and future employees. Pay shall be competitive with comparable enterprises in the market. The qualifications and areas of responsibility of individual employees are also taken into account. The Bank shall have a pay policy that stimulates the development of teamwork. NOTE 37 CAPITAL ADEQUACY PARENT COMPANY CONSOLIDATED Equity and subordinated debt Equity share capital The Bank s own funds/primary capital certificates Gift fund and other equity Dividend equalisation reserve Allocated dividends Reserve for unrealised gains Equity Other core capital Hybrid capital Deductions Deferred tax assets Other intangible assets Other deductions Core capital Unrealised gains on shares, ownership interests and primary capital certificates classified as available for sale Subordinated debt, less the Bank s own holding Deductions Net equity and subordinated debt Minimum requirement for equity and subordinated debt Credit risk Of which: 2 2 Local and regional authorities Institutions Enterprises Retail loans Residential mortgage loans Overdue advances Covered bonds Other advances Total minimum requirement for credit risk Foreign currency risk Operational risk Deductions Minimum requirement for equity and subordinated debt Capital adequacy 13,34 % 14,42 % Capital adequacy ratio 13,83 % 13,04 % 12,33 % 13,29 % Core capital ratio 12,77 % 12,06 % Sparebanken Sogn og Fjordane ANNUAL REPORT

70 NOTE 37 CAPITAL ADEQUACY (cont.) The capital adequacy ratio has been calculated using the new capital adequacy regulations (Basel II). The standard method has been used for credit risk and market risk, whilst the basic method has been used for operational risk. The minimum capital requirement is 8.00%. There are three pillars to the Basel II regulations. Pillar 1 relates to minimum capital adequacy requirements, and builds on the previous regulations in Basel I. Pillar 2 relates to the institution s internal assessment of total capital requirements (ICAAP), whilst Pillar 3 covers disclosure requirements for financial information. 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, Sandane and Bergen from its wholly-owned subsidiary Bankeigedom Sogn og Fjordane AS. The Bank paid NOK 10.1 million in rent for these premises in In 2010 it paid NOK 7.8 million. The Bank has signed long-term leases that cannot be cancelled during the term of the lease. In Bergen, the premises that the Bank was leasing from its subsidiary have been vacated and put up for sale. A new lease was signed with an external lessor for new, larger premises. 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 10 8 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 and Gjensidige Forsikring ASA regarding the lease of various office premises Rent on buildings/offices/office-sharing agreements 3 3 Total 3 3 NOTE 39 DETAILS OF GOVERNMENT GRANTS Sparebanken Sogn og Fjordane did not receive any government grants in 2010 or NOTE 40 BRANCH NETWORK Figures as of 31 December Branches Bank-in-shop agreements Bank buses Cash machines Payment terminals Corporate terminals Internet banking customers Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

71 NOTE 41 OFF BALANCE SHEET ITEMS PARENT COMPANY CONSOLIDATED Guarantees Payment guarantees Contract guarantees Loan guarantees Other guarantee liabilities Commitments to investments in shares Total in NOK FIGURES IN NOK 000s Of which in foreign currency: EUR USD DKK GBP NOK Payment guarantees Contract guarantees Total NOTE 42 RELATED PARTIES Balances and gains/losses on transactions with related parties Subsidaries Associates Outstanding loans at 31 December Interest income Deposits at 31 December Interest expenses Covered bonds Interest income from covered bonds Other operating income 3 2 Other operating expenses 10 8 The above table relates to Sparebanken Sogn og Fjordane s three wholly-owned subsidiaries and one associate. These are: Subsidiaries: Bustadkreditt Sogn og Fjordane AS Bankeigedom Sogn og Fjordane AS Eigedomsmekling Sogn og Fjordane AS Associate: Fjord Invest AS (45.3% ownership share) Loans to, and deposits from, these companies are on market terms. Bustadkreditt Sogn og Fjordane AS has also arranged a NOK 750 million credit facility with Sparebanken Sogn og Fjordane, running for three years from December 2011, which is primarily intended to finance the purchase of loans and the redemption of covered bonds. The Company also has an arrangement that allows it to borrow up to NOK 600 million from the bank, depending on the volume of covered bonds that it issues. The Bank has also undertaken to finance the funds available to the holders of flexible mortgages. All agreements adhere to arm s length principles. There are also a number of agreements between the Bank and its subsidiaries relating to leases on premises and the supply of various services. 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 Related parties to Sparebanken Sogn og Fjordane. A record has been made of all of the ownership interests held by related parties, who are defined as the senior management team, the Board of the Bank, the Board of the Bank s foundation and the director of the foundation. For these people and their family members, information has been collected about any ownership interests of more than 20% in any type of enterprise. The information collected shows that two such companies supplied services to Sparebanken Sogn og Fjordane in In total, the contracts with these companies were worth NOK 46,832. Five companies where related parties hold ownership interests of more than 20% are customers of the Bank. The total outstanding balance of the loans to these companies was NOK 23 million at 31 December 2011, while deposits totalled NOK 4.8 million. In 2011, interest on the loans amounted to NOK 1.1 million and interest on the deposits came to NOK 0.3 million. None of these companies have been given special terms. Sparebanken Sogn og Fjordane ANNUAL REPORT

72 NOTE 43 EXPECTED INCOMINGS (ASSETS) AND OUTGOINGS (LIABILITIES) 2011 PARENT COMPANY CONSOLIDATED Total Over 2 months Up to 12 months ASSETS Up to 12 months Over 12 months Cash and receivables from Norges Bank 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 Tax payable 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 PARENT COMPANY CONSOLIDATED Total Over Up to Up to Over Total 12 months 12 months ASSETS 12 months 12 months Cash and receivables from Norges Bank 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 Tax payable 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. Total 72 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

73 NOTE 44 FOREIGN CURRENCY POSITIONS The figures show the NOK equivalent of the net currency exposure of the Group and parent company at 31 December, including financial derivatives. Net foreign currency exposure EUR USD SEK DKK GBP Others Total foreign currency in NOK ,06 10,05 0,14 2,21 0,19 5,60 22, ,13 0,30 0,04 1,51 0,90 3,33 5,55 The tablet show that the Group and parent company have relatively little exposure to foreign currencies. The parent company is in the process of terminating a foreign currency loan, and in conjunction with that the management are considering measures to mitigate foreign currency risk. Valuations and other items involving exposure to foreign currency, as well as hedging activities in conjunction with the termination of the loan, are included in this note. NOTE 45 FIGURES IN NOK 000s LOAN-TO-VALUE RATIO AND COVER POOL The figures relate to the subsidiary Bustadkreditt Sogn og Fjordane AS Gross loans to customers Average loan balance Number of loans Total value of properties securing the loans Weighted average loan age (months) Weighted average remaining term (months) Weighted loan-to-value ratio 55 % 52 % Composition of cover pool: Residential mortgages 1) Substitute assets 2) Total ) Under the regulations relating to credit institutions that issue covered bonds, the loan-to-value ratio cannot exceed 75 %. At 31 December 2011, the company had NOK 10.3 million exceeding that limit. That amount was therefore not included when calculating the cover pool. 2 ) Substitute assets consist of investments in short-term government debt and covered bonds. All investments are AAA-rated by Standard & Poor. Note 46 DISPUTES At 31 December 2011, Sparebanken Sogn og Fjordane was involved in four court cases, but the outcome of the disputes will not have a material impact on the Group s business. The Bank constantly receives new claims relating to its operations. Provisions are made for losses where it is considered appropriate. Sparebanken Sogn og Fjordane ANNUAL REPORT

74 Declaration by the Board of Directors and CEO We declare that, to the best of our knowledge, the financial statements for 2011 have been prepared in accordance with current accounting standards, and that the information contained therein provides a true picture of the assets, liabilities, financial position and results of the company. The Board believes that the Directors report gives a true picture of the performance, results and financial position of the company, and assesses the most important areas of uncertainty and potential risks faced by the Bank in Førde, 17 February 2012 Hallgeir Kleppe Chair Randi Oddny Engen Deputy Chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Sindre Kvalheim Aage Indrebø Arvid Andenæs CEO 74 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

75 The Board Front from left; Heidi Grande Røys, Randi Engen, Anne Kristin Hjelle Jordal, Hallgeir Kleppe Left behind; Jan Petter Vadheim, Aage Indrebø. Absence: Sindre Kvalheim. Sparebanken Sogn og Fjordane ANNUAL REPORT

76 Auditor s report 76 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

77 Control Committee s report Førde, Knut Jon Sunde Andreas Rønnekleiv Ingrid Kassen - chair - - deputy - - member - (Translation has been made for information purposes only) Sparebanken Sogn og Fjordane ANNUAL REPORT

78 Consolidated financial results by quarter 4. q q q q q q. 10 Net interest income Other operating income Dividends and changes in the value of fin. instr Net other operating income Total income 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 businesses and assets held for sale Profit/loss after taxation Gain/loss after tax on financial assets held for sale COMPREHENSIVE INCOME As a % of average total assets 4. q q q q q q. 10 Net interest income 1,57 % 1,65 % 1,56 % 1,68 % 1,76 % 1,85 % Other operating income 0,39 % 0,41 % 0,40 % 0,38 % 0,45 % 0,44 % Dividends and changes in the value of fin. instr. 0,01 % 0,20 % 0,01 % 0,06 % 0,12 % 0,26 % Net other operating income 0,40 % 0,21 % 0,41 % 0,32 % 0,56 % 0,70 % Total income 1,96 % 1,86 % 1,97 % 1,99 % 2,33 % 2,55 % Operating expenses 1,14 % 1,02 % 1,07 % 1,12 % 1,15 % 1,03 % Profit before loan impairment charge and net gain on fixed assets 0,82 % 0,84 % 0,90 % 0,87 % 1,17 % 1,52 % Loan impairment charge and net gain on fixed assets 0,86 % 0,72 % 0,20 % 0,09 % 0,50 % 0,38 % Profit/loss before taxation 0,04 % 0,13 % 0,70 % 0,78 % 0,67 % 1,14 % Tax expense 0,03 % 0,04 % 0,20 % 0,21 % 0,04 % 0,33 % Profit/loss after tax on businesses and assets held for sale 0,21 % 0,02 % 0,17 % 0,00 % 0,00 % 0,00 % Profit/loss after taxation 0,29 % 0,06 % 0,32 % 0,57 % 0,71 % 0,81 % Other income and expenses 0,13 % 0,05 % 0,12 % 0,39 % 0,14 % 0,04 % COMPREHENSIVE INCOME 0,42 % 0,10 % 0,22 % 0,96 % 0,55 % 0,77 % 78 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

79 Consolidated financial results by quarter 2. q q q q q q. 09 Net interest income Other operating income Dividends and changes in the value of fin. instr Net other operating income Total income 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 businesses and assets held for sale Profit/loss after taxation Gain/loss after tax on financial assets held for sale COMPREHENSIVE INCOME As a % of average total assets 2. q q q q q q. 09 Net interest income 1,73 % 1,84 % 1,84 % 1,64 % 1,73 % 1,80 % Other operating income 0,40 % 0,40 % 0,46 % 0,44 % 0,40 % 0,39 % Dividends and changes 0,47 % 0,14 % 0,24 % 0,10 % 0,24 % 0,22 % in the value of fin. instr. Net other operating income 0,88 % 0,26 % 0,70 % 0,34 % 0,63 % 0,17 % Total income 2,60 % 2,10 % 2,54 % 1,97 % 2,36 % 1,97 % Operating expenses 1,07 % 0,70 % 1,26 % 1,08 % 1,20 % 1,36 % Profit before loan impairment charge and net gain on fixed assets 1,53 % 1,40 % 1,28 % 0,89 % 1,17 % 0,61 % Loan impairment charge and net gain on fixed assets 0,46 % 0,40 % 0,06 % 0,69 % 0,18 % 0,22 % Profit/loss before taxation 1,07 % 1,00 % 1,22 % 0,20 % 0,99 % 0,39 % Tax expense 0,31 % 0,29 % 0,40 % 0,03 % 0,31 % 0,12 % Profit/loss after tax on businesses and 0,00 % 0,00 % 0,00 % 0,00 % 0,00 % 0,00 % assets held for sale Profit/loss after taxation 0,77 % 0,71 % 0,82 % 0,18 % 0,68 % 0,27 % Other income and expenses 0,43 % 0,14 % 0,40 % 0,06 % 0,04 % 0,00 % COMPREHENSIVE INCOME 0,35 % 0,87 % 1,22 % 0,23 % 0,72 % 0,27 % Sparebanken Sogn og Fjordane ÅRSMELDING

80 Furore Sparebanken Sogn og Fjordane s annual grant award ceremony took place in October. Seven fantastically talented youngsters were honoured with a banquet and given a grant to encourage them in their development. The filmmaker Stian Hafstad from Førde walked away with the biggest grant, of NOK 100,000. We hope that he, and 80 the Sparebanken other youngsters Sogn og awarded Fjordane grants, ANNUAL will REPORT continue 2011 to create a furore in their chosen fields for many years to come.

81 Key figures from branches FIGURES IN NOK OOO s INDRE SUNNFJORD Total loans Total customer deposits Full time equivalent employees 45,0 49,3 55,4 54,4 52,9 YTRE FJORDANE Total loans Total customer deposits Full time equivalent employees 28,6 26,8 35,0 30,7 32,0 NORDFJORD Total loans Total customer deposits Full time equivalent employees 25,2 24,6 28,6 29,3 27,7 INDRE SOGN Total loans Total customer deposits Full time equivalent employees 15,4 15,8 16,7 13,6 11,5 SYDVEST Total loans Total customer deposits Full time equivalent employees 30,6 33,7 19,5 18,9 20,2 BERGEN Total loans Total customer deposits Full time equivalent employees 12,0 11,9 8,3 7,9 7,0 Sparebanken Sogn og Fjordane ANNUAL REPORT

82 Representatives Board of directors Members: Hallgeir Kleppe, Florø (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 repr.) Control committee Members: Knut Jon Sunde, Førde (chair) Andreas Rønnekleiv, Førde (deputy chair) Ingrid Kassen, Flora Deputies: 1. deputy: Ingrid Døskeland, Gaular 2. deputy: Tore Dvergsdal, Førde Astrid Borlaug, Høyanger (personal deputy for employees repr.) Deputy: Jan Nikolai Hvidsten, Førde Election executive committee Members: Dagfinn Nyhammer, Gloppen (chair) Monica Åsnes, Leikanger (deputy chair) Hallvard Oppedal, Gulen Karoline Bjerkeset, Gloppen Aslaug Nesje Bjørlo, Gloppen Geir Opseth, Førde Marit Lunde, Leikanger Deputies: Martin Berntsen, Førde Berit Seljeset Osa, Flora Hanne Marie Sæbø, Balestrand Susan Fagerstrøm, Førde 82 Sparebanken Sogn og Fjordane ANNUAL REPORT 2011

83 Executive committee Members constituency Sunnfjord: Alex Vassbotten, Flora Grete Marøy Sellevoll, Førde Martin Berntsen, Førde Lars Terje Standal, Flora Anne Marit Sølvberg Rygg, Naustdal Aud Kari Steinsland, Askvoll (deputy chair) Berit Seljeseth Osa, Flora Members constituency Nordfjord: Bernt Reed, Gloppen (chair) Sissel Loen, Stryn Svein Fosse, Bremanger Karoline Bjerkeset, Gloppen Members constituency Sogn with Bergen: Monica Åsnes, Leikanger Hallvard Oppedal, Gulen Jostein Bjarte Kråkås, Solund Monica Oppedal, Høyanger Finn B. Førsund, Hyllestad Deputies constituency Sunnfjord: Grete Skaar Sunde, Jølster Sjur Hage, Gaular Deputies constituency Nordfjord: Kjartan Aa Berge, Gloppen Olaug Solheim Rotihaug, Gloppen Deputies constituency Sogn with Bergen: Olav Lunden, Leikanger Kari Maria Rutle Fjærestad, Balestrand Members employees: Magnus Vie, Førde Dagfinn Nyhammer, Gloppen Ottar Dalsøren, Askvoll Ørjan Skåden, Stryn Nils Vegard Kvam, Sogndal Svein Follevåg, Askvoll Marit Lunde, Leikanger Jarle Nedrebø, Fjaler Elin Botnen Viken, Førde Susan Fagerstrøm, Førde Geir Haugen, Førde Repr. equity certificates: 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 employees: 1. deputy: Torunn Steimler, Bergen 2. deputy: Marit Havn, Flora 3. deputy: Aslak Nyhammer, Gulen Deputies equity certificates: 1. deputy: Rolf Årdal, Førde 2. deputy: Gro Rukan, Flora 3. deputy: Lise Mari Haugen, Askvoll 4. deputy:jøril Hovland, Sogndal Sparebanken Sogn og Fjordane ANNUAL REPORT

84 Organisation Board of Directors Internal audits Arvid Andenæs CEO Finance Frank-Rune Ås Public relations Arve Sandal HR Janne Marie Solheimslid Business development Trond Teigene Retail Hallvard Klakegg Regions Corporate Kjetil Bjørset Business support Frode Vasseth HR development Strategy Consulting/ sales Indre Sunnfjord Consulting/ sale Risk management Competence Marketing Insurance Ytre Fjordane Leasing Accounting HR Culture Customer service-centre Nordfjord Payment services Depot IKT Online banking Sør Vest Foreign exchange Business Intelligence DVH Product development Indre Sogn Legal Investments/ savings Bergen og NHL Support Gjensidige Bank Bankeigedom Sogn og Fjordane AS (Property management) Eigedomsmekling Sogn og Fjordane AS (Real estate) Bustadkreditt Sogn og Fjordane AS (Mortgage credit institution) Subsidiaries (100% owned by Sparebanken Sogn og Fjordane) 84 Sparebanken Sogn og Fjordane Annual report 2011

85 Framtidsfylket careers fairs Sparebanken Sogn og Fjordane is a shareholder in Framtidsfylket AS. The annual careers fairs that Framtidsfylket AS holds in Oslo, Bergen and Trondheim give businesses and the public sector a useful and important point of contact with people who have moved away from the region and potential employees. Sparebanken Sogn og Fjordane ANNUAL REPORT