CONTENTS. Photo: Vegard Fimland. Graphic design: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS

Transcription

1 ANNUAL REPORT 2010

2 Annual staff outing In 2010, Sparebanken Sogn og Fjordane s staff outing was to Nordfjord Folkemuseum, where comfortable hotel beds were replaced with sleeping bags in a Sami-style tent. Together with Nordfjord Folk High School we used the surrounding countryside to put together a challenging programme of activities ranging from kayaking through climbing to a course on making food outdoors. It was a great weekend, in spite of the snow and cold, which both inspired us and reinforced our team spirit. 2 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

3 CONTENTS 4 We are preparing ourselves for the future! 6 Key Figures, parent company 7 Key Figures, group 8 Information about the bank 1 1 Directors report 22 Income statement 23 Balance Sheet 24 Cash flow statement 25 Statement of changes in equity 26 Notes to the accounts 74 Declaration by the board of directors and CEO 76 Auditor s report 77 Control Committee`s report 79 Key figures from branches 80 Representatives 8 1 Executive Committee 82 Organisation chart 85 Contact information Photo: Vegard Fimland. Graphic design: Sparebanken Sogn og Fjordane / E. Natvik Prenteverk AS Sparebanken Sogn og Fjordane ANNUAL REPORT

4 We are preparing ourselves for the future! Over the past ten years, the bank has grown fourfold, mostly through organic growth. We have managed to do this without suffering any major setbacks, and we have built up over NOK 2 billion of equity by creating value year after year. We should be proud of that. It is by no means a foregone conclusion that a county with 2.1% of Norway s population should be home to its tenth largest savings bank. The next challenge is how to build on these achievements. During our strategic review in the autumn, the Board and executive management addressed this issue, and we found some, but not all, of the answers. It s not even possible to come up with all of the answers. Society and the regulatory environment are simply changing too fast. One of the answers is therefore that our organisation must be capable of responding to changes. We must constantly be willing to transform ourselves in response to changes and the challenges that arise clearly demonstrated the importance of this. Never before have we had to focus on so many different fronts at once. We experienced strong growth, we merged with Fjaler Sparebank and we restructured the bank, creating the holding foundation Sparebankstiftinga Sogn og Fjordane. Not to mention the fact that a large proportion of our employees underwent extensive training. In many ways, the restructuring and merger process took us into new territory, and it involved many of our employees. I can proudly say that we managed it well, almost exclusively using our own resources, which yet again demonstrates the breadth of expertise that we have here. Now I hope that our new members of staff in Dale and in Bergen will enjoy being part of the bank and its culture. The past two years have clearly shown that there are risks involved in lending money to corporate 4 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

5 customers. To put it simply, we have lost too much money. Partly due to the economic climate, and partly due to bad judgements. Regardless of the reasons, we must learn from our experiences, so that we improve and become more thorough in the future. We have already changed some of our procedures and authorisation structures. However, most importantly we must manage to make demands of our customers, as well as advising them, by drawing on our financial expertise, as well as on our knowledge of the customer and the industry. This is an area where we must be better than any other bank! That will allow us to maintain our involvement with businesses in the county, without suffering higher losses than other banks. It is through our work that we lay the foundation for wealth creation and progress, and we spend a lot of our time at work. It is therefore vital to create good working environments, ensuring both job satisfaction and good financial results. But not only that: a good working environment can act as a catalyst for motivation, creativity and enthusiasm. These qualities can in turn make us a better bank for our customers, as well as supporting our development. As an organisation we are ambitious, and we embark on lots of projects, but we aren t always as good at acknowledging that some areas must be given lower priority. As well as inspiring our staff, one of our roles as managers is taking responsibility for setting the right priorities, even when that involves making tough choices. In 2010 we invested around NOK 20 million in new technology. The most important areas were credit management software, bank ID and mobile banking. At the end of the year we also invested in videoconferencing equipment for a number of locations. However, the hardest part is not making the investments. What is difficult is subsequently reaping the benefits of those investments through improved quality, more efficient and safer procedures and lower costs. Learning how to use the technology efficiently is the first step in that process. The next step is reallocating resources that have been liberated to other tasks that create added value. We must manage this if we are to reach our goal of becoming an even more cost-efficient organisation in the coming years, and I believe that our success in this area will be vital to our ability to compete in an ever tougher market. We are dependent on obtaining equity and liquidity from markets that are becoming increasingly demanding in terms of collateral, risk and return on capital. That was also one of the key reasons why we chose to convert ourselves into an equity certificate bank. In 2011 we will need to take further steps to adapt our operations to national and international financial markets. We have therefore started the process of obtaining international ratings for the parent company and our mortgage finance subsidiary. This is crucial to our ability to offer competitive prices, particularly for mortgages. Our growth and development, as well as the regulatory and economic environment, will then determine whether we decide to carry out an initial public offering in the second half of the year, and at the same time apply to be listed at the OSE. In the middle of January we passed 10,000 friends on Facebook. The use of social media has exploded over the past two years, and it is another area where the bank has shown its ability to keep up with the times. In relation to our customer base, we are far ahead of any other bank. I believe that this helps to create an image of us as innovative and futureoriented. That in turn helps build customer loyalty and generate publicity in the retail market. Together with the personal customer service and good financial advice that we provide, this has helped us achieve the bank s highest ever customer satisfaction ratings. Satisfied customers are loyal customers. They are also a valuable resource. Very valuable! Our loyal customers and highly qualified, motivated staff put us in a great position to meet the challenges that lie ahead! Arvid Andenæs Sparebanken Sogn og Fjordane ANNUAL REPORT

6 Key Figures Figures in NOK 1000 Parent company income statement Net interest income Dividends and capital gains on securities Other operating revenues Operating expenses Operating profit before losses (incl. securities) Operating profit before losses (excl. seucrities) Net gain on disposal of fixed assets Losses on loans, guarantees, etc Profit before tax Tax Profit after tax Balance sheet Loan to and receivables from credit institutions Gross loans to and receivables from customers Individual write-downs Group write-downs Security placements Debt to credit institutions Deposits from and liabilities to customers Bond debt Equity Total assets Average total assets KEY FIGURES Profitability (%) Net interest rate as a % of average total assets 2,03 % 2,07 % 2,10 % 1,68 % 1,71 % Other operating income as a % of average total assets 0,44 % 0,51 % 0,44 % 0,37 % 0,36 % Operating expenses as a % of average total assets 1,42 % 1,34 % 1,28 % 1,17 % 0,92 % Oper. exp. as a % of oper. income excl. income from securities 57,45 % 51,84 % 50,26 % 57,08 % 44,49 % Oper. exp. as a % of oper. income incl. income from securities 57,60 % 50,10 % 54,28 % 55,73 % 40,82 % Oper. profit before losses as a % of average total assets 1,05 % 1,33 % 1,08 % 0,93 % 1,34 % Profit before tax as a % of average total assets 1,27 % 1,52 % 0,83 % 0,65 % 0,93 % Profit after tax as a % of average total assets 0,92 % 1,07 % 0,47 % 0,45 % 0,74 % Return on equity before tax 15,44 % 19,37 % 10,99 % 9,39 % 13,28 % Return on equity after tax 11,18 % 13,71 % 6,22 % 6,41 % 10,49 % Financial strength (%) Capital adequacy ratio 12,19 % 11,20 % 10,51 % 11,92 % 13,28 % Core capital ratio 12,19 % 11,20 % 10,51 % 10,82 % 12,33 % Equity ratio 8,61 % 8,10 % 7,18 % 7,35 % 7,42 % Losses as a % of gross lending - 0,20 % - 0,15 % 0,25 % 0,33 % 0,49 % Loan loss provisions as a % of gross lending 1,10 % 0,72 % 0,79 % 1,02 % 1,19 % Balance sheet history (%) Growth in total assets 13,04 % 19,76 % 18,50 % 4,81 % 13,76 % Growth in customer lending 13,41 % 19,39 % 17,54 % - 0,81 % 11,11 % Growth in customer deposits 10,10 % 17,53 % 10,56 % 6,18 % 18,61 % Deposits as a % of gross lending 60,25 % 59,32 % 55,80 % 59,73 % 63,76 % Employees Man years, banking as of Man years, cleaning, canteen etc. as of Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

7 Key Figures Figures in NOK 1000 Group income statement Net interest income Dividends and capital gains on securities Other operating revenues Operating expenses Operating profit before losses (incl. securities) Operating profit before losses (excl. seucrities) Net gain on disposal of fixed assets Losses on loans, guarantees, etc Profit before tax Tax Profit after tax Balance sheet Loan to and receivables from credit institutions Gross loans to and receivables from customers Individual write-downs Group write-downs Security placements Debt to credit institutions Deposits from and liabilities to customers Bond debt Equity Total assets Average total assets KEY FIGURES Profitability (%) Net interest rate as a % of average total assets 2,02 % 2,07 % 2,10 % 1,72 % 1,75 % Other operating income as a % of average total assets 0,46 % 0,52 % 0,48 % 0,42 % 0,41 % Operating expenses as a % of average total assets 1,41 % 1,32 % 1,32 % 1,20 % 0,97 % Oper. exp. as a % of oper. income excl. income from securities 56,89 % 51,03 % 50,95 % 56,18 % 44,72 % Oper. exp. as a % of oper. income incl. income from securities 56,61 % 49,70 % 54,62 % 55,10 % 41,40 % Oper. profit before losses as a % of average total assets 1,08 % 1,34 % 1,09 % 0,98 % 1,37 % Profit before tax as a % of average total assets 1,30 % 1,52 % 0,85 % 0,70 % 0,94 % Profit after tax as a % of average total assets 0,92 % 1,07 % 0,48 % 0,48 % 0,73 % Return on equity before tax 15,69 % 19,20 % 11,17 % 9,92 % 12,87 % Return on equity after tax 11,13 % 13,52 % 6,36 % 6,81 % 10,02 % Financial strength (%) Capital adequacy ratio 12,35 % 11,27 % 10,51 % 11,85 % 12,97 % Core capital ratio 12,35 % 11,27 % 10,51 % 10,76 % 12,06 % Equity ratio 8,71 % 8,15 % 7,23 % 7,43 % 7,26 % Losses as a % of gross lending - 0,20 % -0,15 % 0,25 % 0,32 % 0,45 % Loan loss provisions as a % of gross lending 1,10 % 0,72 % 0,79 % 0,97 % 1,09 % Balance sheet history (%) Growth in total assets 13,07 % 19,73 % 18,55 % 4,78 % 17,33 % Growth in customer lending 13,38 % 19,43 % 17,56 % 5,21 % 15,12 % Growth in customer deposits 10,15 % 17,48 % 10,60 % 6,21 % 18,64 % Deposits as a % of gross lending 60,26 % 59,27 % 55,76 % 56,29 % 58,01 % Employees Man years, banking as of Man years, cleaning, canteen etc. as of Sparebanken Sogn og Fjordane ANNUAL REPORT

8 Sparebanken Sogn og Fjordane Market, total assets and number of employees Sparebanken Sogn og Fjordane is the largest bank in the county of Sogn og Fjordane, with total assets of NOK 32.8 billion and 297 full-time equivalent employees. We have 22 branches and 17 bank-in-shop agreements in the county, and are present in 21 of the county s 26 municipalities. We also have a branch in Bergen. We have a strategic partnership with Gjensidige, which amongst other things led to a new, national online bank being established in the county in Retail banking market We are the dominant player in the retail banking market in the county of Sogn og Fjordane. We have NOK 18.1 billion in outstanding loans to people in Sogn og Fjordane and the rest of Norway, which constitutes 63 % of our total loan portfolio. Deposits from retail customers total NOK 9.5 billion, or 57 % of total deposits. We are aiming to develop regional financial services centres offering financing, investment, estate agency and insurance products. We also have chief responsibility for the sale and distribution of Gjensidige s insurance products to retail customers in Sogn og Fjordane. We operate 36 cash points, and have almost 49,000 customers with Internet banking agreements. Corporate banking market We have NOK 10.7 billion in outstanding loans to businesses, primarily in the county of Sogn og Fjordane, which constitutes 37 % of our total portfolio. After several years of rapid growth in lending to corporate customers, we have reduced the proportion of loans going to this sector over the past two years. We hold NOK 5.2 billion in deposits from businesses. 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 1.6 billion deposited with us. The Bank as a driving force in the county Sparebanken Sogn og Fjordane s vision is to be a driving force in the county. We shall fulfil that vision by providing good advice and supplying capital to sound commercial projects and private individuals. We are also involved in a wide range of cultural ventures, and recognise the value of culture in the widest possible sense to the development of local communities. We are the main sponsor of most major cultural events in the county, and have set aside NOK 30 million of our 2010 profits for donations/dividends, which are primarily aimed at supporting the voluntary sector. Quality of life, diversity and innovation are the keywords that guide us in this area. Financial calendar We expect to publish our 2011 interim reports on 5 May 2011 (Q1), 9 August 2011 (Q2) and 2 November 2011 (Q3). The reports will also be published on our website at: where they will also be available in English. Group structure In addition to the parent company, the Group operates through four subsidiaries/associates. 8 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

9 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. The photo shows Director of Human Resources Janne Marie Solheimslid at our stand during the Oslo fair. Sparebanken Sogn og Fjordane ANNUAL REPORT

10 Record donation In 2010 we made the biggest single donation that we have ever made. NOK 8 million was awarded to the project Hafstad Sports and Recreation Ground, which will be a multi-use park in the centre of Førde. The park is important for local sports clubs, which lack facilities, for informal sporting and cultural activities, and for the town of Førde as a whole. The photo shows board member Kjetil Bjørset, who presented the donation to the local sports club Førde Idrettslag, which is running the project. In addition to this big donation, we distributed around NOK 15 million to various associations, organisations and projects in the county. 10 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

11 Directors report The Sparebanken Sogn og Fjordane Group made a profit before tax of NOK 283 million in Brief summary: Strong growth in deposits and lending Increase in other income Good return on financial instruments Cost reductions Some large losses in the corporate market Important events in 2010 The merger with Fjaler Sparebank The establishment of Sparebankstiftinga Sogn og Fjordane The Board is very pleased with the work that has been done in most areas of the Bank. There has been a growth in business, higher quality and stable performance. Nevertheless, this should not be allowed to overshadow the fact that losses in the corporate market were too high in WHAT WE DO Sparebanken Sogn og Fjordane s main activities are providing banking services in accordance with the Savings Bank Act and investment services in accordance with the Securities Trading Act. The Bank operates in both the retail and corporate markets. Bustadkreditt Sogn og Fjordane AS is a wholly-owned subsidiary of the Bank, which has the aim of buying high-quality residential mortgage loans from Sparebanken Sogn og Fjordane as a basis for issuing covered bonds. The Bank has separate divisions offering payment services, leasing, investment and currency services. Sparebanken Sogn og Fjordane is also 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. As a result of changes to the laws governing the savings bank sector, Sparebanken Sogn og Fjordane and Fjaler Sparebank merged, with effect from 1 September In conjunction with the merger, Sparebankstiftinga Fjaler received 5.88% of Sparebanken Sogn og Fjordane s equity certificates. Sparebanken Sogn og Fjordane was converted into an equity certificate bank, and Sparebankstiftinga Sogn og Fjordane was established with a 94.12% holding of the equity certificates. With equity of almost NOK 1.8 billion, Sparebankstiftinga Sogn og Fjordane is the second largest entity of its kind in Norway, after Sparebankstiftelsen DnB NOR. The Bank has branches in 21 of the 26 municipalities in Sogn og Fjordane. In autumn 2010 we moved into new premises in Bergen, as a result of the merger with Fjaler Sparebank. The Bank also offers basic banking services through 17 bank in shop branches in the county. Its head office is in Førde. The Bank has brought together the majority of its property management activities at Bankeigedom Sogn og Fjordane AS, which is a wholly-owned subsidiary. The main activity of the company is managing the properties used by the Bank itself. The Bank also owns 45.3% of Fjord Invest AS. ECONOMIC CLIMATE World economic growth picked up again in 2010, after the severe slowdown in the wake of the credit crisis. Nevertheless, the picture varies greatly between countries and regions. On the one hand, growth has been strong in emerging economies and in a few industrialised nations such as Germany and Sweden. On the other hand, several countries in Europe are struggling with high levels of government debt. The US economy grew moderately in 2010, but it still faces headwinds from high unemployment, a large budget deficit and a weak housing market. However, overall 2010 was a good year for the world economy. The credit crisis also had severe repercussions for the Norwegian economy, which experienced a slowdown in 2008/2009. Nevertheless, activity levels picked up over the course of After a slow start to the year, private consumption picked up during the second half of the year. This was, along with export growth and higher investment, one of the key causes of faster growth in the mainland economy. Overall, the Norwegian mainland economy grew by around 2% in 2010 year-on-year. The Norwegian economy has largely recovered from its slowdown in 2009, and it is expected to perform well going forward. However, the Norwegian economy is highly dependent on the performance of other countries economies. If the debt crisis spreads, it may lead to another collapse in financial markets. Going Sparebanken Sogn og Fjordane ANNUAL REPORT

12 forward, many countries will also have to make severe cuts in government spending, which will put a damper on growth. Equally, such measures are needed to restore confidence in the economic governance of many countries with large budget deficits. In Europe, the performance of the German economy will be a particularly important driving force. At a global level, emerging economies such as Brazil, Russia, India and China will play an increasingly important role. Many companies in the county of Sogn og Fjordane operate in highly competitive markets. They are particularly vulnerable to changes in costs and exchange rates. At the end of 2010, the Norwegian krone (NOK) was relatively strong in relation to many other currencies, hurting the competitiveness of export-oriented industrial companies in the county. There are very big disparities between the profitability of different industries. Retailing and aquaculture were two sectors that did well in When the accounts of companies in the construction industry are published, they will probably show a fairly normal performance. In the hotel and tourism industry there is a lot of variation. In 2010 the transport industry to some extent benefited from increasing volumes due to the improvement in the economy. However, the Bank expects results for 2010 to be variable, but overall relatively weak. Increasing volumes will not in isolation improve the prospects of the industry, as the pricing of services will be the key to future performance. In the wake of the credit crisis, the credit markets for Norwegian banks appear to be functioning again. Interest rates on the banks borrowings have nevertheless stabilised at a significantly higher level than previously. If banks are to maintain a sufficient return on equity in a competitive market, they face the challenge of passing on this cost increase to their own customers through interest rates on loans. INTEREST RATES At the start of 2011, Norges Bank s key rate was 2.0%. This was 0.25% higher than at the same time last year. For a while interest rates were as low as 1.25%, to stimulate investment and consumption, and to help return the economy to growth. The stimulus proved effective, and for the past eighteen months the Norwegian economy has been doing well. The interest rate differential with respect to other countries is relatively high. Our trading partners are unlikely to raise their interest rates significantly, which limits the extent to which Norges Bank can put up interest rates. Recent trends in household consumption and home prices suggest that additional interest rate adjustments would be healthy. However, Norges Bank also has to prevent the Norwegian krone from strengthening too much, as this would make exporters less competitive. By the close of 2011, the key rate is expected to be around 2.5 3%. ORGANISATIONAL STRUCTURE AND COLLABORATIONS Regulatory framework for the savings bank sector By converting itself into an equity certificate bank, Sparebanken Sogn og Fjordane has adapted to the new regulatory framework for savings banks that has been in place since 1 July This means that the Bank is positioned to participate in any restructuring of the sector, and the equity certificates may be listed on the stock exchange at some point in Collaboration with Gjensidige The Bank has collaborated closely with Gjensidige since Amongst other things, Sparebanken Sogn og Fjordane distributes Gjensidige s general insurance products to the retail market in the county. One important result of the collaboration has been the establishment of Gjensidige Bank ASA, which has created around 80 jobs in the finance sector in Førde. Sparebanken Sogn og Fjordane supplies Gjensidige Bank with services within eleven separate areas. Collaboration with other banks Sparebanken Sogn og Fjordane is an independent bank, but it works with other banks on several joint development projects. The Bank has a formal agreement with Gjensidige Bank, Sparebanken Sør and Helgeland Sparebank on procurement, monitoring systems purchased in operation and development projects. The four banks also have a joint agreement with EDB ErgoGroup ASA for the purchase of IT services. This collaboration and the agreement with EDB ErgoGroup are designed to achieve competitive terms for the operation, management and development of software solutions. Fjord Invest AS and associates The Bank owns 45.3% of Fjord Invest AS, which invests in local companies in Sogn og Fjordane. In 2010 the value of this ownership interest was written down by NOK 7.3 million. The Bank s ownership interest increased by 0.8% in 2010 as a result of it taking over Fjaler Sparebank s interest. Fjord Invest AS is one of four private equity funds managed by Fjord Invest Management AS, which is an investment fund in Førde with total capital of around NOK 400 million. Fjord Invest is an important supplement to the financial services industry in the county. Collaboration with Vestlandsforsking In 2007 the Bank launched a climate change campaign, and since then the Bank has worked with Vestlandsforsking on implementing further research projects and studies. An important element of that has been evaluating the potential for developing a sustainable wind power industry in the county. In 2010 Vestlandsforsking was commissioned by the Bank to develop an online service to provide information about climate change to private individuals and companies. 12 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

13 Vestlandsforsking has a strong reputation for its research into environmental issues. MARKET CONDITIONS In 2010, Sparebanken Sogn og Fjordane experienced strong growth in its customer base and volumes in the retail sector. The Bank did particularly well in Sogn og Fjordane. By gaining many new customers, and merging with Fjaler Sparebank, the Bank has considerably strengthened its position in the county. The merger with Fjaler Sparebank also strengthened the Bank s position in the county of Hordaland, since both of the banks had branches in Bergen. Including the loans held by its mortgage loan subsidiary, the Bank has approximately NOK 3.5 billion in loans to retail customers in Bergen and Hordaland. Overall, loans to retail customers grew by 22% in Deposits from retail customers increased by 15%. The sale of deposit, savings and insurance products to customers was a high priority throughout the year. The Bank also focuses heavily on customers in the age bracket, as this is the segment where there is greatest competition. Overall, competition is becoming ever tougher in the retail banking market. Tougher competition and strong growth in lending to retail customers means that transferring loans to the Bank s mortgage loan subsidiary will be a high priority going forward. It will be necessary for us to do so if we wish to remain competitive and to achieve satisfactory profitability. The Bank is focusing on building good customer relationships and on selling additional services to its customers. This is to ensure that the Bank is seen as a local and professional supplier of the complete range of financial services, as well as to boost other income. The Bank has five regional financial services centres in the county of Sogn og Fjordane offering banking, estate agency, insurance and savings services. This gives it a unique competitive edge in its home county. The Bank s focus on building relationships and staff training has been highlighted as one of the important reasons why it achieves very high marks for customer satisfaction. In the retail market, the Bank s most recent customer satisfaction score was 79.4 points. This is well above the industry average. The Bank has developed a successful distribution partnership with Gjensidige Forsikring. Strong sales and good customer retention have made insurance a very important contributor to other income. Eigedomsmekling Sogn og Fjordane AS had its best ever year. In 2010 the company handled over 550 transactions and its turnover rose by around NOK 1 million. The Bank has been successful in developing an estate agency service that is unique in the county. The company has highly trained estate agents with lots of experience. Sparebanken Sogn og Fjordane is also the county s leading supplier of savings and investment products. In 2010, with the introduction of the latest reforms to Norwegian national insurance and pension policy, the Bank focused particularly heavily on long-term saving for top-up pensions. We also successfully continued to offer mandatory occupational pension schemes, and in the long term they will become a valuable addition to the Bank s income from savings products was another good year for our unit trust customers. Gross sales of unit trusts were in line with the previous year. As in the industry as a whole, our net sales of unit trusts were relatively low, because a number of customers chose to realise their profits. In 2010 the Bank focused particularly hard on staff training in the field of investments. Over the course of the year, many customer advisers were accredited under industry standards. Training will continue to be a priority in Sparebanken Sogn og Fjordane is continuing to experience strong growth in the use of its online, mobile and self-service banking services. In 2010 the Bank launched a number of mobile phonebased services and worked hard to increase its visibility in social media. The Bank is using new communication channels such as Facebook, Twitter, newsletters and company blogs on a daily basis. We have had good experiences with the bank-in-shop concept, which replaced 17 branches just over a year ago was a satisfactory year for businesses, although there was a lot of variation within that. Demand for bank loans picked up in comparison with 2009, which resulted in the Bank s corporate loan book rising by 6%. As the financial performance of companies varies greatly, risk assessment and monitoring the credit risk associated with its loans are vital elements of the Bank s operations. Competition for corporate customersremains tough, particularly for large, low-risk customers. Sparebanken Sogn og Fjordane has 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 currency services, financing, electronic payment services and leasing. This has made the Bank a complete supplier of financial services and a professional adviser to businesses. Our customers greatly value our local expertise and decisionmaking processes. Income statement Profit and loss In 2010 the Group made a profit after taxation of NOK 221 million, which was NOK 89 million more than the previous year. This is equivalent to a post-tax return on equity of 10.6, compared with 6.8% in Sparebanken Sogn og Fjordane ANNUAL REPORT

14 Profit after tax (NOK million) consolidated Net gains on financial instruments There was a net gain of NOK 52 million on financial instruments, against NOK 12 million in Net gains on shares amounted to NOK 60 million, compared with NOK 11 million in Of the gains in 2010, NOK 30 million related to the merger between Nordito and PBS. Some of the Bank s debt securities are measured using the fair value option, and in 2010 their value was written down by NOK 4 million (income), whereas in 2009 their value rose by NOK 120 million (expense). For further details see Note Comprehensive income for 2010, after taking into account income and expenses recognised directly in equity, amounted to NOK 209 million, up from NOK 163 million in Profit/loss before changes in the value of financial instrument and impairments (NOK million) consolidated Profit rose in 2010 thanks to a combination of income growth and cost reductions. Total income amounted to NOK 702 million, up 17.3%, while operating expenses were NOK 291 million, 11.9% lower than the previous year. The net loan impairment charge was NOK 130 million, against NOK 80 million in Net interest income Net interest and commission income amounted to NOK 526 million, 11.5% higher than in Net interest income constituted 75% of total income in The Bank s net interest margin was 1.75%, around the same as in The increase in net interest income was primarily due to growth in deposits and loans. Net other income Net other operating income was NOK 176 million, NOK 49 million (39%) more than the previous year. Of the NOK 49 million increase, NOK 41 million related to financial instruments. Other income Net other income excluding gains on financial instruments was NOK 124 million, an increase of NOK 8.6 million (7.5%) over the previous year. There were increases in income from insurance (NOK 3.1 million), payment services (NOK 2.4 million), guarantees (NOK 1.8 million), securities trading on behalf of customers (NOK 1.6 million) and estate agency services (NOK 1.0 million). Other income includes NOK 15.2 million of income for services provided to Gjensidige Bank, up from NOK 14.5 million in Operating expenses Total operating expenses for 2010 amounted to NOK 291 million, NOK 39 million (11.9%) less than in 2009, including around NOK 11 million of expenses relating to Fjaler Sparebank. This comprises around NOK 5 million of expenses associated with the merger itself, and around NOK 6 million of ordinary operating expenses for the period since the merger, which was completed on 1 September Wages, salaries and other staff-related costs amounted to NOK 129 million, which was NOK 50 million less than the previous year. Wages and salaries totalled NOK 136 million, compared with NOK 131 million in The Bank had a total of 297 full-time equivalent employees at the end of 2010, 7 less than at the end of The merger with Fjaler Sparebank added 22 full-time equivalents from September If we adjust for the full-time equivalents that were added through the merger, the Bank had 29 fewer full-time equivalents than at 31 December The reduction is due to a hiring freeze and the introduction of measures to improve efficiency at the Bank. There was a negative pension cost of NOK 36 million, compared with a pension cost of NOK 18 million in 2009, giving an improvement of NOK 54 million. The reduction in pension costs was mainly due to the reversal of provisions made under the old earlyretirement scheme (AFP). IT expenses amounted to NOK 56 million, a reduction of 1.0% over the previous year. Costs were reduced in a number of areas, thanks to a strong focus on costcutting over the course of the year. 14 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

15 One cost that rose significantly was marketing, which came to NOK 18.5 million, 24% more than in The increase was due to a campaign to give the Bank a new profile and new sponsorship agreements. Cost income ratio In 2010, operating expenses totalled 44.7% of income excluding net financial items, against 56.2% the previous year. Including net financial items the cost income ratio was 41.4% in 2010, against 55.1% in Impairment provisions for loans and guarantees The Bank had a net impairment charge for loans and guarantees of NOK 130 million in 2010, against NOK 80 million in In 2010, the net impairment charge was equivalent to 0.45% of gross loans, compared with 0.32% in The Bank added NOK 120 million to its individually assessed provisions, while NOK 13 million was added to its collectively assessed provisions. Recoveries of amounts previously written off came to NOK 3 million. Gross non-performing loans (loans more than 90 days in arrears) totalled NOK 392 million at 31 December 2010, which is around the same as at 31 December Loan impairment/recoveries (NOK million) consolidated Allocation of profit for the year Parent company s profit for the year NOK mill. Transferred to reserve for unrealised gains NOK mill. Other transfers as a result of restructuring NOK mill. Available for allocation nok mill. At the meeting of the Executive Committee on 28 February 2011, the Board will propose that the profit for the year be allocated as follows: Dividends NOK 26,3 mill. Equalisation reserve NOK 97,5 mill. Primary capital NOK 13,9 mill. Gifts NOK 3,7 mill. Total allocation NOK 141,4 mill. BALANCE SHEET At the close of 2010, the Bank s total assets were NOK 32.8 billion, an increase of NOK 4.8 billion, or 17.3%, over the previous year. Of the increase, around NOK 1.2 billion was due to the merger with Fjaler Sparebank. Loans to customers At the close of 2010, gross loans amounted to NOK 28.9 billion, an increase of NOK 3.8 billion, or 15.1%. Of the increase, around NOK 1.1 billion came from loans transferred from Fjaler Sparebank. Adjusted for the loans transferred from Fjaler Sparebank, lending growth was around 9%. By comparison, total lending growth in 2009 amounted to 5.2%. Including Fjaler, retail lending grew by 22% and corporate lending by 6% Loans to customers (NOK million) consolidated Net profit realised on the sale of fixed assets In 2010 the Bank realised a NOK 2.1 million profit on the sale of properties and fixed assets, whereas in 2009 it made a profit of NOK 1.9 million. Tax expense The Bank s tax expense in 2010 was NOK 63 million, or 22.1% of pre-tax profits. The 2009 tax expense was NOK 60 million, equivalent to 31.3% of pre-tax profits. The main reason for the variation in the tax rate is that most of the Bank s gains on shares are tax free. Moreover, the Bank s estimated wealth tax fell from NOK 6.7 million in 2009 to NOK 1.8 million in 2010, as equity share capital can be deducted as debt when calculating taxable wealth At 31 December 2010, 63% of gross outstanding loans were to retail customers, whilst 37% were to corporate customers and the public sector. The proportion of loans to the corporate market fell from 41% to 37% over the course of The figure below shows the distribution by industry at 31 December Sparebanken Sogn og Fjordane ANNUAL REPORT

16 Loans by sector consolidated Customers deposits (NOK million) consolidated % % Public sector Corporate market Retail banking market Loans by industry consolidated 30,46 % 2,95 % 8,18 % 4,60 % 4,95 % Fishing industry Hotels and restaurants Other industry, mining, oil and personal service Fish farming Commerce Deposits by sector consolidated 12% 8,06 % Farming and forestry 12,00 % 12,68 % 16,12 % Other leasing, transport, social and personal services Fishing Building(constr., power/water supply Sale, leasing and management of real property Loan impairment charge At the close of the year, total impairment provisions for loans and guarantees totalled NOK 318 million. Of that, NOK 95 million was for collectively assessed loans and NOK 223 was for individually assessed loans. Total impairment provisions at 31 December 2010 amounted to 1.1% of gross loans, compared with 1.0% a year earlier. Customer deposits and deposit/loan ratio At the close of 2010, customer deposits amounted to NOK 16.7 billion, an increase of NOK 2.6 billion, or 18.6% over the year. Of the growth in deposits, around NOK 0.9 billion was due to the merger with Fjaler Sparebank. Adjusted for the deposits transferred from Fjaler Sparebank, growth in deposits was around 12%. Including Fjaler, retail deposits increased by 15%, corporate deposits by 17% and public sector/other deposits by 44%. 57% of deposits at 31 December 2010 were from the retail sector, 31% were from the corporate sector and 12% were from the public sector/other. At the close of 2010, 58.0% of gross outstanding loans were financed by customer deposits, against 56.3% at the close of Public sector Corporate market Retail banking market 57% 31% Security placements Shares, etc. At 31 December 2010, the Bank held shares and primary capital certificates with a book value of NOK 247 million, compared with NOK 192 million at 31 December Of the portfolio at 31 December 2010, NOK 88 million constituted financial investments, while NOK 158 million related to strategic investments. The Bank also has an ownership interest in its associate Fjord Invest AS, with a book value of NOK 24 million. Commercial paper and bonds The Bank s investments in commercial paper and bonds had a book value of NOK 3.2 billion at the end of the year, compared with NOK 2.3 billion at 31 December These are used to manage liquidity and as a liquidity buffer. Commercial paper and bonds are measured at fair value, resulting in a gain of NOK 23 million at the end of the year. In addition to its liquidity buffer consisting of interestbearing securities and deposits at other banks, the Bank has an unused credit facility of EUR 60 million. 16 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

17 Debt securities At the close of 2010, the Bank had outstanding commercial paper and bond issues with a book value of NOK 10.5 billion, against NOK 8.6 billion in The Bank had good access to liquidity throughout 2010, both from wholesale markets and by using Bustadkreditt Sogn og Fjordane AS to issue covered bonds. Like other banks, however, we are having to pay a significantly higher risk premium on our borrowings than before the credit crisis. debt and thanks to the profit for the year. The Board of Directors considers shareholders equity at the close of 2010 satisfactory Capital adequacy ration (%) consolidated Subordinated and hybrid debt The total book value of our subordinated and hybrid debt at 31 December 2010 was NOK 412 million, compared with NOK 198 million at 31 December In order to strengthen its core capital, the Group issued NOK 200 million of hybrid debt through the financial markets in The hybrid debt is perpetual, but can be repaid after 10 years or earlier if new government regulations affect the extent to which hybrid debt is considered core capital Equity and capital adequacy ratio At 31 December 2010 the Group had NOK 2,381 million of equity, compared with NOK 2,077 million at 31 December In addition, the Group had NOK 412 million of subordinated and hybrid debt. Net equity and subordinated debt, which is used to calculate the capital adequacy ratio, amounted to NOK 2.7 billion. The 2010 financial statements have been prepared on the assumption of the business being a going concern. Post balance sheet events There have been no events since the balance sheet date that significantly affect the financial statements presented Equity (NOK million) consolidated ORGANISATIONAL STRUCTURE AND CORPORATE GOVERNANCE Employees and training Demanding and challenging roles have helped to raise both individual skills and to enhance the Bank s overall expertise. In 2010 the Bank used a great deal of resources on developing the skills of its employees, through internal courses and in collaboration with university colleges. In 2010 we completed the internal certification programme for all of our customer advisers, and we are in the process of getting them all authorised as financial advisers. The Bank facilitates training for administrative and support staff On 1 September 2010, Sparebanken Sogn og Fjordane s own funds were converted into equity share capital and primary capital. Equity share certificates were issued, and an primary capital reserve was established. At 31 December 2010, equity share capital amounted to NOK 1,992 million, while primary capital amounted to NOK 284 million. At 31 December 2010, the Group had a capital adequacy ratio of 13.0%, compared with 11.9% at the end of The core capital adequacy ratio was 12.1% at 31 December 2010, against 11.0% at 31 December The Bank significantly improved its capital adequacy ratio in 2010, by issuing hybrid The Bank has run a management development programme for the senior management team, regional bank managers and middle managers. In combination with the certification and authorisation of customer advisers through courses, training and testing, this is intended to ensure and document our ability to provide sound financial advice. Sparebanken Sogn og Fjordane increased its number of employees from 315 at the close of 2009 to 317 in There has been a strong focus on making work processes more efficient, and increasing demand for resources has been dealt with through internal adjustments. The fact that in spite of this the number of employees has risen is a result of the merger with Fjaler Sparebank. Sparebanken Sogn og Fjordane ANNUAL REPORT

18 Working environment Sparebanken Sogn og Fjordane carries out annual surveys to find out how satisfied employees are with their work. The surveys show that the Bank has a good working environment in relation to the industry and workplaces in general. Areas where we could strengthen and enhance our efforts will be followed up in 2011 in order to further improve our performance 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. There were no reported occupational lost time injuries in The Bank s working environment committee held three meetings in 2010 and dealt with 11 working environment cases. Average sickness absence was 3.26% in 2010, down from 6.52% in The Bank s activities have little impact on the environment, but green business practices are nevertheless a priority, which includes efforts to reduce CO 2 emissions. Equal opportunity and discrimination 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. 60% of employees are women and 40% 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 2010, around 1/3 of line managers were women. The Bank welcomes employees with disabilities and employees from all ethnic backgrounds Equal opportunities Men Three of the Bank s seven Board members are women. The Bank will continue to focus on equal opportunities and fair treatment at all levels of the organisation. 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. RISK AND CAPITAL MANAGEMENT Risk management, capital management and supervision are some 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 covers credit risk, operational risk, market risk (interest rates, exchange rates and shares), concentration risk, liquidity risk and business risk. Over the past three years, the Bank s risk exposure and capital requirements have varied as follows: (Amounts in NOK million) RISK Credit risk Operational risk Total Minimum Capital requirement (Pillar 1) Market risk Concentration risk Liquidity risk Business risk Total capital requirement (Pillar 2) Equity and Subordinated debt Surplus equity and subordinated debt Capital adequacy ratio 13,0 % 11,9 % 10,5 % Core capital Surplus core capital Core capital adequacy ratio 12,1 % 10,8 % 10,5 % Men Total employees Women Managers The Bank s total capital requirement rose by NOK 322 million in This was mainly due to an increase in lending and in concentration risk relating to loans. In addition, operational risk and business risk increased somewhat, due to an increase in activity in other business areas. Exposure to market risk rose as a result of an increase in the Bank s investments in shares, while exposure to currency and interest rate risk fell. Liquidity risk rose as a result of an increase in the amount the Bank borrows from financial markets. 18 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

19 Equity and subordinated debt increased by NOK 521 million. In addition to the equity transferred to the Bank in conjunction with the merger with Fjaler Sparebank, the profit for the year of NOK 209 million was added to equity. Combined with the addition of NOK 200 million in hybrid debt, this means that our capital adequacy ratio increased to 13%. Within this, the core capital adequacy ratio was 12.1%. In 2010, areas of priority for the Board of Directors and senior management included monitoring and securing access to capital, improving profitability by cutting costs and reducing losses from lending and currency activities, and increasing other income. The above table shows that the Bank s risk exposure is satisfactory. 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 taking into account the Bank s overall strategy. Our credit strategy covers: guidelines for the risk profile of our lending; spreading exposure between the retail banking market and corporate market; concentration risk for big loans; and limits for individual regions and industries. The overall credit risk is monitored through monthly reports that show how the Bank is complying with its risk frameworks. The Bank has limited growth in corporate lending in order to reduce the proportion of its overall loan portfolio consisting of loans to corporate customers. In parallel with this it has reduced the number of loans in the high-risk group. The Bank will continue its efforts to limit growth in lending to corporate customers. The greatest credit risk is associated with the Bank s biggest loans to businesses. In 2010 the Bank suffered major losses in relation to a few big loans in the shipping, cod-farming, industrial and property sectors. Measures have been taken to limit risk. We expected a loan impairment charge for 2010 of NOK 75 million, but in the end it came in at NOK 130 million. Lending growth in the retail market increased in The growth was high quality, and the proportion of high-risk loans fell, as a result of our successful efforts to keep on top of non-performing loans. Liquidity risk is measured using two main parameters: losses due to higher funding costs resulting from any ratings downgrade by market players lack of access to liquidity The table shows the capital required to cover liquidity risk if the Bank s rating were to be downgraded by one notch. Each year, the Board reviews the Bank s liquidity position. The main focus is on ensuring that random events do not seriously affect the ability to meet obligations. We have therefore built up a liquidity buffer of securities and bank deposits that should cover our repayments to the financial markets over the coming months, in addition to fluctuations in our liquid outgoings. The Board s aim is for the Bank to fall within the moderate risk category as measured by the Financial Supervisory Authority of Norway s liquidity indicators. Liquidity management is based on meeting that goal. At the end of 2010, customer deposits, long-term borrowings from financial markets and equity constituted 98.6% of the Bank s non-current assets (gross loans and fixed assets). In 2009 Sparebanken Sogn og Fjordane established Bustadkreditt Sogn og Fjordane AS. The purpose was to acquire mortgages with good collateral from the Bank using covered bonds to finance its purchases. The company started operating in March It has issued NOK 2.35 billion of bonds. Of that, NOK 1.2 billion has been used in the swap scheme with Norges Bank. In 2011 the Bank aims to increase the volume of covered bonds issued by Bustadkreditt Sogn og Fjordane AS. Interest-rate risk derives from interest-bearing securities, forward contracts, fixed-rate loans and fixed-rate deposits. Interest rate risk is calculated by working out how much financial values will change if interest rates change. Interest rate risk has been maintained comfortably inside the Board s limits for moderate risk. At the close of 2010, the Bank was exposed to NOK 11 million of losses in the event of a 2% shift in the interest rate curve. That was unchanged from its exposure at 31 December 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 2010 the Bank s exposure to stock market risk rose as a result of more funds being invested in shares. At the close of the year, the Bank held NOK 88 million of shares as financial investments. The Bank also has strategic shareholdings in local companies for commercial reasons. Currency risk is linked to international payment services, foreign currency holdings, foreign currency loans on the 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 2010, the Bank had NOK 19 million of exposure to currency risk. Internal controls comply with the Norwegian Internal Control Regulations. Operational risk is identified through expert assessments and the views of senior management. Sparebanken Sogn og Fjordane ANNUAL REPORT

20 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. SUMMARY World economic growth picked up again in 2010, after the slowdown in the wake of the credit crisis. Overall 2010 was a good year for the world economy. Nevertheless, the picture varies greatly between countries and regions. For example, several European countries are struggling with high government debt and high unemployment. The Norwegian economy has largely recovered from its slowdown in 2009, and it is expected to perform well going forward. However, the Norwegian economy is highly dependent on the performance of other countries economies, and there is great uncertainty surrounding the future. If the debt crisis spreads, it may lead to another collapse in financial markets, which will have a serious impact on economic activity. In Europe how the German economy performs will be particularly important, while at a global level, emerging economies such as Brazil, Russia, India and China will play an increasingly significant role. Many businesses in Sogn og Fjordane operate in highly competitive markets, and they are particularly vulnerable to changes in their cost base and exchange rate fluctuations. At the end of 2010, the Norwegian krone (NOK) was relatively strong, hurting the competitiveness of export-oriented companies in the county. The Bank is noticing very big disparities between the profitability of different industries. Interest rates on the banks borrowings have stabilised at a significantly higher level than previously. If banks are to maintain a sufficient return on equity in a competitive market, they face the challenge of passing on this cost increase to their own customers through interest rates on loans. Sparebanken Sogn og Fjordane had a busy The restructuring and merger with Fjaler Sparebank were two of the key challenges. Skills development, the accreditation of customer advisers and our management training programme have been some of the important development projects, in addition to strengthening our focus on credit quality. In 2010 the Bank reinforced its position as the leading bank in the county, and it now has a market share of around 40% in both the corporate and retail markets. The merger with Fjaler Sparebank further bolstered the Bank s position in the Sunnfjord region, and helped build up its operations in Bergen. In spite of some big losses on individual loans, the Bank made a good profit in This was thanks to strong growth in loans and deposits, an increase in other income, a good return on financial instruments and lower expenses. The Bank s implementation of cost-cutting measures has been successful, and cost-efficiency will be one of the key factors that will allow us to achieve satisfactory profitability going forward. The Board expects competition for customers to increase going forward. The Bank will respond to this competition by providing the products demanded by the market, with profitable growth and return on capital invested being other key priorities. The Board wishes to thank the Bank s employees for their hard work in Førde, 9 February 2011 Hallgeir Kleppe Chair Randi Engen Deputy chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Helge Leiro Baastad Aage Indrebø Arvid Andenæs CEO 20 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

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 Kjell Sandnes Director of Business Support Arvid Andenæs CEO Sparebanken Sogn og Fjordane ANNUAL REPORT

22 Income statement PARENT COMPANY Group FIGURES IN NOK 1000 note Interest income Interest expenses Net interest income Commission income, etc Commission costs, etc Net gains on financial instruments Other income Net other operating income Total income Wages, salaries, etc. 9, 10, Other expenses 9, Depreciations and write-downs on fixed assets and intangible assets Total operating expenses Profit before write-downs and net gain on fixed assets Net gain on disposal of fixed assets Write-downs on loans and guarantees Profit before tax Tax Profit for the year Majority share of the profit for the year Minority share of the profit for the year Comprehensive income statement Profit for the year O other recognized income and expenses Financial assets available for sale O other recognized income and expenses for the year, after tax Total recognized income and expenses for the year Majority share of the profit for the year Minority share of the profit for the year Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

23 Balance sheet PARENT COMPANY GROUP figures in nok 1000 note ASSETS Cash and receivables from central banks Loans to and receivables from credit institutions Loans to customers 15, 16, 17, 18, 19, Commercial paper and bonds Shares Financial derivatives Investments in associated companies Investments in subsidiaries Intangible assets and goodwill Deferred tax assets Fixed assets Other assets Total assets debt AND EQUITY Debt to credit institutions Deposits from and liabilities to customers Financial derivatives Debt securities Tax payable Deferred tax Other liabilities Provisions Subordinated 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 Minority Share Sparebanken Sogn og Fjordane s funds Allocated dividends and gifts Total equity Total debt and equity Contingent liabilities Førde, Hallgeir Kleppe Chair Randi Engen Deputy chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Helge Leiro Baastad Aage Indrebø Arvid Andenæs CEO Sparebanken Sogn og Fjordane ANNUAL REPORT

24 Cash flow statement parent company group figures in nok million Profit before tax Depreciations and write-downs Losses on loans and guarantees Losses/(gains) on disposal of fixed assets Tax paid Other none cash flow transactions Adjustment for other off balance sheet items A) Net cash flow from operating activities Reduction/increase in loans to and receivables from customers Reduction/increase in shares and stakes in other enterprises Reduction/increase in investment in sertificates and bonds Investments in fixed assets, intangible assets and goodwill Sale of fixed assets B) Net cash flow from investment activities Increase/(decrease) in loans from credit institutions Increase/(decrease) in deposits from and liabilities to customers Increase/(decrease) in certificates and bonds Increase/decrease in subordinated debt Dividend and donations, buyout of minority 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 1 ) 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 ) The discrepancy between the closing and opening balance of cash and cash equivalents is a result of the cash balance transferred from Fjaler Sparebank in conjunction with the merger, which was completed for accounting purposes in the third quarter. Sparebankstiftinga Fjaler s cash balance is included in the total. 24 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

25 Statement of changes in equity FIGURES IN NOK million Equity share capital Primary capital Dividend reserve for Allocated equity equalisation Primary Gift- Available unrealised Other dividends Parent company certificates reserve capital fund for sale gains equity and gifts Total Balance Allocated for charitable donations Comprehensive income for the year Balance Balance Allocated for charitable donations Changes in capital due to merge and issue of equity certificates Profit for the year Comprehensive income available for sale Balance Equity share capital Primary capital Dividend reserve for Allocated equity equalisation Primary Gift- Available unrealised Other dividends Minority GroUP certificates reserve capital fund for sale gains equity and gifts interests Total Balance Comprehensive income for the year Allocated for charitable donations Balance Balance Allocated for charitable donations Changes in capital due to merge and issue of equity certificates Profit for the year Byout of minority interest Comprehensive income available for sale Balance Sparebanken Sogn og Fjordane ANNUAL REPORT

26 Notes to the accounts Note 1A Accounting principles, etc. 1B Integration of Fjaler Sparebank for accounting purposes Note 3 Changes to corporate structure Note 4 Segmental information profit and loss account 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 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 Equity share capital and ownership structure 26 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

27 NOTE 1A accounting principles, etc. GENERAL The 2009 financial statements for Sparebanken Sogn og Fjordane were discussed and adopted at the Board meeting of 9 February All amounts in the accounts and notes are given in thousands of NOK unless otherwise specifically stated. Similarly, notes cover both the parent bank and Group unless otherwise specifically stated. Sparebanken Sogn og Fjordane has debt securities listed on Oslo Børs. ACCOUNTING PRINCIPLES 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 has not made any changes to accounting principles as of No new standards, amendments or interpretations were introduced in 2010 that effect the Group s financial reporting. ESTIMATS 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 under assets and liabilities, income and expenses. 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 associated companies. The consolidated accounts have been prepared as if the Group were a single financial entity. Parts of companies that are currently being used as security for loans are not consolidated. 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 intra-group transactions, have been eliminated in the consolidated accounts. 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 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 a shareholding of between 20 and 50 percent. Associates are accounted for using the equity method in the consolidated accounts. The companies that satisfy our criteria for associates are: 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 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. Sparebanken Sogn og Fjordane ANNUAL REPORT

28 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 stakes 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 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 receivables, carried on the balance sheet at amortised cost Investments held to 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 bonds issued by the Bank. The abovementioned instruments, as well as interest rate swaps, are managed collectively and measured at fair value. Loans and receivables, carried on the balance sheet at amortised cost This category includes all loans and receivables that are not defined at their fair value in the profit and loss account, or as financial assets available for sale. Some of our commercial paper borrowings are included in this category. Held to maturity investments, carried at amortised cost Portfolio of securities held to maturity, valued at their amortised cost. Available for sale financial instruments, measured at fair value, with changes in value recognised in equity. This category includes assets that are not classified in any of the categories mentioned above. Other financial liabilities carried at amortised cost Other financial liabilities that are neither part of the trading portfolio nor defined as liabilities measured at fair value through profit and loss are to be carried at amortised cost. Valuation Initial valuation of financial instruments Financial instruments are included on the balance sheet at their fair value at the transaction date. Subsequent valuations Calculating 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 28 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

29 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 pricesetting 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. Certain products are made up of several components such as deposits, securities and financial derivatives, and these are referred to as structured products. They mainly consist of guaranteed capital agreements. All of the components covered by the agreement are measured jointly at fair value. There are insignificant volumes of other structured products. Equity investments in shares and stakes that are traded in inactive markets are valued at fair value based on the following criteria: Price at the time of the last capital increase or last trade between independent parties, adjusted for changes in market conditions since the capital increase/ trade. Past valuations used in conjunction with a business combination, adjusted for any changes in market conditions since the business combination. Fair value based on anticipated future cash flow from the investment. Amortised cost method Financial instruments that are not valued at fairvalue, are valued at amortised cost, and income is calculated using the internal rate of return method. For the internal rate of return method, the investment s internal rate of return is used. The internal rate of return 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 current value of these cash flows discounted by the internal rate of return. Impairment of financial assets Specific 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 current value of the estimated future cash flows discounted by the loan s internal rate of return. The internal rate of return used is the loan s internal rate of return 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 internal rate of return used for discounting purposes. Objective evidence that a loan or group of loans has fallen in value includes significant financial problems at the debtor, missed payments or other major breaches of contract, cases where it is likely that the debtor will try to renegotiate his debt or other specific events that have occurred. Specific 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 Writedowns of loans and guarantees. Interest on loans that have previously been written down is calculated using the discount rate that was used to calculated the writedown. Interest calculated on the present value of the loan is included under Net interest income. General 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 written down, are also tested in groups. These assessments are based on objective evidence of falls in value on the balance sheet date that can be linked to the group. The groups are defined as loans with similar risk and valuation patterns based on the classification of customers by main sectors or industries as well as by risk classes. The need for impairment provisions is calculated for each customer group on the basis of an assessment of the current economic climate and historical losses for the customer group in question. Sparebanken Sogn og Fjordane ANNUAL REPORT

30 General impairment provisions reduce the loans carrying amount, and changes in valuations for the reporting period are recognised in the profit and loss account under Writedowns of loans and guarantees. Like specific provisions, general impairment provisions are calculated on the basis of discounted cash flows. Cash flows are discounted using market interest rates. 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 to and receivables from credit institutions or Loans to customers, regardless of how they have been valued. Interest income from financial instruments classified as loans is included under Net interest income using the internal return method, regardless of the valuation method used. The internal return 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, impairment provisions as a result of identifiable, objective evidence of a fall in value on the balance sheet date are included under Writedowns of loans and guarantees. Foreign currency loans for which the Bank acts as the guarantor are carried on the balance sheet as if they were loans, as this type of guarantee does not fulfil the requirements for exclusion under IAS 39. Commercial paper and bonds This category includes commercial paper and bonds that the Group does not intend to hold to maturity. Our portfolio includes both commercial paper and bonds in the trading portfolio and commercial paper and bonds defined as assets measured at fair value with changes in fair value recognised in profit or loss (FVO). Interest income and expenses on commercial paper and bonds are included under Net interest income using the internal rate of return 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. 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 realised gains on financial instruments, available for sale. Reversals of impairments are recognised directly in equity. Financial derivatives A derivative is a financial instrument with the following characteristics: The value of the instrument changes as a result of changes to the interest rate, value or price of an underlying asset The instrument requires little or no initial investment The instrument is settled at a future date Derivatives are initially recognised at their fair value on the date on which the contract was signed, and subsequently at fair value. Financial derivatives are presented as an asset if they have a positive value and as a liability if they have a negative value. Assets and liabilities are offset against one another if the Bank has a binding contract with its counterparty stating that they will be offset, and if the Bank intends to 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 internal rate of return 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. 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 internal rate of return method. Other changes in value are included under Net gains/ losses on financial instruments measured at fair value. Debt securities Debt securities include commercial paper, bonds and subordinated debt issued by the Bank, regard- 30 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

31 less of the valuation method. Interest expenses on these instruments are included under Net interest income. Other changes in value are included under Net gains/losses on financial instruments measured at fair value. LEASING Financial leasing agreements are agreements that essentially transfer all risk and return associated with the leased item to the lessee. Leasing agreements are treated as loans on the balance sheet and are measured at amortised cost. Rent is recognised as income on an annuity basis, with the interest being included under Net interest income, whilst capital repayments are used to reduce the carrying value of the loan. The sale of leased items usually results in a gain or loss. The present value of expected future net sales proceeds is carried on the balance sheet as a loan. Realised gains and changes in the value of future sales proceeds are included under Net interest income. 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 Fixtures, fittings and furnishings Vehicles Office equipment IT equipment years 7 10 years 5 years 5 years 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 amount is higher than the estimated remaining value, the asset s carrying amount 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 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 benefit schemes Pension liabilities have been calculated in accordance with IAS 19. 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. Under IAS 19, 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 plan 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 schemes With a defined contribution scheme, the Group does not promise to pay a specific amount as a future pension benefit, and instead makes an annual Sparebanken Sogn og Fjordane ANNUAL REPORT

32 contribution to a group pension scheme. The future pension benefit payable will depend on the size of the contribution and the annual return on the pension fund. The Group s only responsibility is to make the annual contribution. With a defined contribution scheme, there is no need to make a provision for accrued pension liabilities. Defined contribution schemes are expensed directly. The Bank has two types of defined contribution schemes. There is an ordinary defined contribution scheme at one of the subsidiaries and a new earlyretirement (AFP) scheme which came into force on 1 January The cost of both the defined benefit and defined contribution schemes are 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. Set-up 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 internal rate of return 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. REcognition of interest income Interest income is recognised in the profit and loss account using the internal rate of return method. This involves taking arising nominal interest plus amortised set-up fees to income. Interest is taken to income using the internal rate of return method both of balance sheet items measured at amortised cost and ones measured at fair value through profit and loss. Interest income on impaired loans is calculated as the internal rate of return on the carrying value. Also see Fair value, Amortised coast 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 consists of equity share capital, primary capital, the reserve for unrealised gains and other equity. The equity share capital consists of equity certificates and the dividend equalisation reserve. The primary capital consists of primary capital certificates and the gift fund. The reserve for unrealised gains relates to changes in the value of financial instruments classified as available for sale. It also includes changes in the value of financial instruments whose valuation method under IFRS differs from the method under NGAAP. Charitable donations and dividends are classified as equity until they have been adopted 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. 32 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

33 NOTE 1B INTEGRATION OF FJALER SPAREBANK FOR ACCOUNTING PURPOSES On 12 March 2010, the executive committees of Fjaler Sparebank and Sparebanken Sogn og Fjordane decided to merge the two banks. The Financial Supervisory Authority of Norway approved the merger on 15 June On 1 September 2010 the merger was formally completed. The merger involved Fjaler Sparebank s savings bank operations being transferred to Sparebanken Sogn og Fjordane. For accounting purposes the merger with Fjaler Sparebank was an acquisition completed on 1 September On 1 September, Sparebankstiftinga Fjaler and Sparebankstiftinga Sogn og Fjordane were created. Sparebankstiftinga Fjaler received equity certificates in Sparebanken Sogn og Fjordane and cash in consideration for Fjaler Sparebank. The fair value of Fjaler Sparebank s identifiable assets, liabilities and goodwill on the transaction date 1 September was: IFRS-adjusted excess over Acquired balance sheet fair value balance sheet Cash and receivables from central banks Loans and advances to credit institutions Loans and advances to customers Loan loss provisions Net loans to customers Bonds Shares and other securities Intangible assets (incl. goodwill) Fixed assets Other assets Advance payments and earned income Total assets Debt to credit institutions Deposits from and debt to customers Bond debt Other liabilities Accrued costs and advance income Provisions Subordinated debt Total liabilities Sparebanken Sogn og Fjordane s funds Gift fund 3 3 Total equity Total debt and equity At the time of the transaction, goodwill and the excess over the fair value of buildings was NOK 15.1 million. Goodwill reflects expectations of future synergies, profitability, market knowledge and expertise at the acquired organisation. Consideration for Fjaler Sparebank Acquired equity measured at fair value Cash consideration Equity certificates issued to Sparebankstiftinga Fjaler 1,114,530 at NOK Fjaler Sparebank s financial results for the period September through December have been incorporated into the consolidated accounts as a pre-tax loss of NOK 0.4 million, after a NOK 1.3 million writedown of excess values associated with fixed assets (buildings) and a NOK 2.3 million loan impairment charge. Goodwill was not impaired. If the integration had taken place at the start of the year, the financial results for 2010 would have been as follows: Fjaler Jan. Aug. Group excl. Fjaler Spb. Group incl. Fjaler Spb. Net interest Profit/loss before taxation Sparebanken Sogn og Fjordane ANNUAL REPORT

34 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. The 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 value of assets and liabilites over the coming financial year are discussed below. Estimated impairment of goodwill The Group tests goodwill annually for impairment; see discussion in Note 1 Accounting Principles. The recoverable value from cash-flow generating units is determined by calculating their utility value. These calculations require certain estimates to be made. See the note on intangible assets and goodwill. Fair value of financial derivatives and other financial instruments For securities that are not listed and for which there is not an active market, the Group uses valuation techniques to determine their fair value. The Group makes its assessments and uses methods and assumptions that in so far as it is possible are based on market conditions on the balance sheet date. For interes-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 Loan loss provisions shall only 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, missed payments or other major breaches of contract, cases where it is likely that the debtor will try to renegotiate his debt or other specific events that have occurred. To decide whether there exists objective evidence justifying general impairment provisions, we use models that have been developed to calculate credit risk, as well as our own data on the loans statistical remaining term to maturity. All impairment provisions are based on discounted values, with the loan s internal rate of return before impairment being used as the discount rate. In principle all cash flows from loans and groups of loans must be identified, and an assessment 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 general 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 Note 1 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 scheme assets is based on how the pension scheme assets are invested and historic returns. The average return on pension scheme assets has historically been higher than the risk free return, as some of the pension scheme 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 historic 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). See the note on Pensions and note on Accounting Principles. 34 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

35 Economic life of plant and equipment Sparebanken Sogn og Fjordane determines the economic life and associated depreciation rates for fixed assets. The depreciation rate 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 2010, the Bank sold its shares in its subsidiary Balestrand Rådhus AS (60% ownership interest). Apart from that there were no changes to the Groups organisation strukture in NOTE 4 segmental information The Bank only operates in Norway, and reporting by geographic segments provides little additional information. Figures in NOK million Bustad- Eigedoms- Bank- Total corporate Retail kreditt mekling eigedom Balestrand REsult group 2010 group Finans market Market Sogn og Fj. Sogn og Fj. Sogn og Fj. rådhus Other Net interest and credit income Net other operating income Total income Operating expenses Profit before gains/losses Net gain on fixed assets Recoveries (-)/ losses (+) on loans and guarantees Profit before tax Bustad- Eigedoms- Bank- Total corporate Retail kreditt mekling eigedom Balestrand BALANCE PR group Finans market Market Sogn og Fj. Sogn og Fj. Sogn og Fj. rådhus Other Net interest and credit income Net other operating income Total income Deposits from and liabilities to customers Other liabilities Equity Total debt and equity This year the Groups activitites have been split into more segments than were reported in Subsidiaries have been designated as separate segments. Figures for individual segments are stated before intersegment eliminations, in order to reflect the value creation and financial position of each segment as accurately as possible. Total Corporate Retail- Mortage Estate - RESULT GROUP group market market loan business agency Other Net interest and credit income Net other operating income Total income Operating expenses Profit before gains/losses Recoveries (-)/ losses (+) on loans and guarantees Profit before tax Sparebanken Sogn og Fjordane ANNUAL REPORT

36 NOTE 4 segmental information (cont.) Figures in NOK million Total Corporate Retail- Credit- Estate - group market market institu. agency Other Net loans to and receivables from customers Other assets Total assets Deposits from and liabilities to customers Other liabilities Equity Total debt and equity NOTE 5 net interest income Parent company figures in nok 1000 Group Interest income Loans to and receivables from credit institutions, measured at amortised cost Loans to and receivables from customers, at amortised cost Loans to and receivables from customers, at fair value Interest-bearing securities, measured at amortised cost Interest-bearing securities, measured at fair value Other interest income, at amortised cost Total interest income debt to credit institutions Debt to credit institutions, measured at amortised cost Deposits and liabilities from customers, at fair value Deposits and liabilities from customers, at fair value Securities issued, at amortised cost Securities issued, at fair value Subordinated debt + hybrid debt measured at amortised cost Other interest expenses at amortised cost Total interest expenses Net interest income Note 6 net comission income Parent company Group figures in nok Payment transactions Security trading Guarantee commissions Foreign exchange and payment to abroad Insurance services Other commission income Total charges and commission income Interbank fees Payment transactions Total commission expenses Total net commission income Netto provisjonsinntekter Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

37 Note 7 Net gain ON FINANCIAL INSTRUMENTS Parent Company Group figures in nok Net gains on foreign currency Net gains on financial derivates Net gain/loss on financial instruments, trading portfolio Net gains on loans measured at fair value Net gains on deposits measured at fair value Net gains on commercial papers and bonds Net gains on shares Net gains on financial debt Net gains on financial instruments, designated at fair value Net gains on financial instruments measured at fair value NOTE 8 Other income Parent Company Group Figures in nok Income from property Income relating to Gjensidige Bank ASA Estate agency Mortage loan business Sparebankstiftinga Sogn og Fjordane Other operating income Total other income NOTE 9 OPERATING Expenses Parent Company Group Figures in nok Ordinær lønn, honorar og liknande Pension costs Employer s NI contributions Other employee related expenses Total wages, salaries, etc IT-expenses Marketing Postage and telecommunications Office equipment Travel and training costs Fee to stand-in bureau Total administrations expenses Rent Leased property Auditor Expenses, payment terminals External consultans Other operating expenses Other expenses Total other expenses D depreciation and writedowns on fixed assets and intangible assets Total operating expenses Sparebanken Sogn og Fjordane ANNUAL REPORT

38 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. 2. Government-backed early-retirement scheme The Bank has an unfunded early retirement scheme, referred to as AFP Avtalefestet førtidspensjon. Under the scheme, the Bank covers 100 percent of pension benefits payable at the ages of 62 and 63, after which the National Insurance Administration covers 40 percent of benefits until the age of 67. At 31 December 2010, 16 employees were using the AFP scheme. The scheme is unfunded, which means that pension benefits are expensed as they arise. In 2010 the Bank reversed the provision that had been made for the old AFP scheme. No provision has been made for the new AFP scheme. The new AFP scheme entered into force on 1 January 2011, and will be financed through annual pension premiums. The new AFP scheme will be included in the accounts as a defined contribution scheme. 3. 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 scheme At the subsidiary Eigedomsmekling Sogn og Fjordane, three employees are members of a defined contribution pension plan. Economic Assumptions Discount rate 3,20 % 4,40 % Expected rate of return on assets 4,60 % 5,60 % Wage increases 4,00 % 4,25 % Adjustment of the National Insurance Scheme s basic amount G 3,75 % 4,00 % Adjustment of existing pensions 0,50 % 1,30 % Amortisation schedule (expected remaining service period) 15 years 15 years Employer s NICs 14,1 % 14,1 % Demographic assumptions Life table K2005 K2005 Disability IR02 IR02 Expected AFP take-up 50,0 % 50,0 % Staff turnover (all age groups) From 0 to 8 % From 0 to 8 % Parent company Pension costs Fund. Unfund. Total Fund. Unfund. Total Present value of pension benefits earned during year Interest expense on pension liabilities Expected return on pension scheme assets Administration expenses Actuarial gains/losses recognised in profit or loss Change in net liability (discontinuation of AFP scheme) recognised in profit or loss Actuarial gains/losses on old AFP scheme recognised in profit or loss Changes to pension scheme recognised in profit or loss Accrued employer s NICss Net pension expense incl. NICs Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

39 NOTE 10 PENSion LIABILITIES (cont.) Parent company Pension liabilities on the balance sheet Funded Unfund. Total Fund. Unfund. Total Pension liabilities Market value of pension fund assets Net pension liabilities excl. NICs Employers NI contributions Net pension liabilities incl. NICs Changes to pension plans/implementation effects not recognised in profit or loss Actuarial gains/losses not recognised in profit or loss 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 gains/losses Total at 31 Dec Parent company Pension fund assets Opening balance (fair value) Expected rate of return on assets Actuarial gains/losses Administration expenses Pension contributions Pension benefits paid Closing balance (estimated) Parent company Number of staff covered by funded pension plan Current staff Retired Total Group Pension cost Fund. Unfund. Total Fund. Unfund. Total Present value of pension benefits earned during the year Interest expense on pension liabilities Expected return on pension scheme assets Administration expenses Actuarial gains/losses recognised in profit or loss Change in net liability (discontinuation of AFP scheme) recognised in profit or loss Changes to pension scheme recognised in profit or loss Changes to pension scheme recognised in profit or loss Accrued employer s NICs Net pension expense incl. NICs Sparebanken Sogn og Fjordane ANNUAL REPORT

40 NOTE 10 PENSion LIABILITIES (cont.) Consolidated Pension laiabilities on the balance sheet Funded Unfund. Total Funded Unfund. Total Pension liabilities Market value of pension fund assets Net pension liabilities excl. NICs Employer s NI contributions Net pension liabilities incl. NICs Changes to pension plans/ implementation effects not recognised in profit or loss Actuarial gains/losses not recognised in profit or loss 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 gains/losses Total at 31 Dec Consolidated Pension fund assets Opening balance (fair value) Expected rate of return on assets Actuarial gains/losses Administration expenses Pension contributions Pension benefits paid Closing balance (estimated) Consolidated Number of staff covered by funded pension plan Current staff Retired Total Parent company and group Investment of pension fund assets Pension fund assets are invested with Vital Forsikring ASA Shares 15,60 % 13,50 % Short-term bonds 16,60 % 23,30 % Money markets 13,20 % 8,50 % Long-term bonds 32,50 % 35,70 % Property 16,10 % 16,60 % Other 6,00 % 2,30 % Total 100,0 % 100,0 % 40 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

41 NOTE 11 Write-downs on loans and guarantees FIGURES IN NOK MILLION Total 2010 total 2009 Gross Guaran- Parent Parent PARENT COMPANY loans tees comp. Group comp. Group Realised losses New individual write-downs Total new individual write-downs Reduced individual write-downs Total individual write-downs Recoveries against previously impaired loans Changes to group write-downs Changes to individually assessed provisions for accured interest and amortisation Write-downs on loans and guarantees NOTE 12 Tax Expense PARENT COMPANY GROUP Tax expence Tax payable on taxable income Shortfall/surplus calculated last year Capitalised deferred tax related to intragroup transaction Tax charged to equity in conjunction with merger Changes to deferred tax Tax payable on income Tax payable on assets Tax expense R reconciliation of nominal and actual tax rate Profit for the year before tax Estimated income tax based on nominal tax rate (28%) T tax implications of the following items: Shortfall/ surplus allocated in previous years Tax charged to equity in conjunction with merger Non-deductible expenses Non-taxable income Other differences Tax payable on income ,0 % 19,7 % Effective tax rate 20,8 % 27,8 % C change in capitalised deferred tax assets (deferred tax) Deferred tax assets/(deferred tax) as of 1 January Change not taken into the P&L account Tax charged to equity in conjunction with merger Deferred tax assets/(deferred tax) as of 31 December C capitalised DTA/DT for the following temp. difference Business assets Receivables Financial instruments Net pension liabilities Other differences Net deferred tax assets/(deferred tax) dt in the P&I account for the following temp. differences Business assets Receivables Financial instruments Net pension liabilities Other differences Deferred tax Deferred tax assets are capitalised if it is likely that it will be possible to make use of them against future taxable income. Sparebanken Sogn og Fjordane ANNUAL REPORT

42 NOTE 13 FAIR VALUE AT FINANCIAL INSTRUMENTS figures in nok million 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 flow using the internal rate of return based on market conditions for equivalent loans that have not been written down. The 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 amove the changes in estimated future cash flows for loans that have been written down. The fair value is considered to be the book value for loans and receivables measured at amortised cost. Long term debt to creditinstitutions is measured at fair value corresponding to the price the bank is paying for its debt securities. 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. Book value Fair value Book value Fair value Group Assets Cash and receivables from central banks Loans to and rec. from credit inst., at amortised cost Loans to and receivables from credit institutions Loans to and rec. from customers, at amortised cost Loans to and rec. from customers, at fair value Interest-bearing securities Interest-bearing securities, receivables and loans at amortised cost Interest bearing debt securities, at fair value Interest-bearing securities Shares, designated at fair value Shares, available for sale Shares Derivatives, trading portfolio Derivatives Total LIABILITIES Liabilities to credit institutions, at amortised cost Debt to credit institutions Dep. from and liabilities to customers, at amortised cost Deposits from and liabilities to customers, at fair value Deposits from and liabilities to customers Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

43 NOTE 13 FAIR VALUE AT FINANCIAL INSTRUMENTS (cont.) figures in nok million Book value Fair value Book value Fair value GROUP, cont Debt incurred through issue of securities, at amortised cost Debt incurred through issue of securities, at fair value Debt incurred through the issue of securities Derivatives, trading portfolio Derivatives Total Off balance sheet obligations and guarantees Obligations Guarantees Mortgages *) *) Mortgaged assets include bonds and commercial paper mortgaged with Norges Bank as security for loans/ credit facility with Norges Bank. Justering til Justering til Book value Fair value Book value Fair value Parent Company ASSENTS Cash and receivables from central banks Loans to and rec. from credit inst., at amortised cost Loans to and receivables from credit institutions Loans to and rec. from customers, at amortised cost Interest bearing debt securities, at fair value Interest-bearing securities Interest bearing debt securities, receivables and loans, at amortised cost Interest bearing debt securities, at fair value Interest-bearing securities Shares, measured at fair value Shares, available for sale Shares Derivatives, trading portfolio Derivatives Total LIABILITIES Debt to credit institutions, at amortised cost Debt to credit institutions Deposits from and debt to customers, at amortised cost Deposits from and debt to customers, at fair value Deposits from and debt to customers Sparebanken Sogn og Fjordane ANNUAL REPORT

44 NOTE 13 FAIR VALUE AT FINANCIAL INSTRUMENTS (cont.) figures in nok million PARENT COMPANY Debt incurred through issue of securities, at amortised cost Debt incurred through issue of securities, at fair value Debt incurred through the issue of securities Derivatives, trading portfolio Derivatives Total Off balance sheet obligations and guarantees Obligations Guarantees Mortgages *) *) Mortgaged assets include bonds and commercial paper mortgaged with Norges Bank as security for loans/ credit facility with Norges Bank CLASSIFICATION BY LEVEL Assets and liabilities that are measured at fair value, whether this is because they are part of the trading portfolio, were initially recognised at fair value or are held as available for sale, shall be classified according to how reliable the fair value estimate is. There are three classification levels, with level 1 assets having prices quoted in active markets. Level 2 valuations are directly or indirectly based on observable prices for similar assets. Level 3 valuations are not based on observable prices, and instead rely on e.g. our own valuation model Group Level 1 Level 2 Level 3 Total Loans and rec. from customers, measured at fair value Interest-bearing securities measured at fair value Shares, designated at fair value Shares, available for sale Derivatives, trading portfolio Total assets measured at fair value Deposits from and liabilities 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 Group Level 1 Level 2 Level 3 Total Loans to and rec. from customers, at fair value Interest-bearing securities, at fair value Shares designated at fair value Shares, available for sale Derivatives, trading portfolio Total assets measured at fair value Deposits from and liabilities 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 2010

45 NOTE 13 FAIR VALUE AT FINANCIAL INSTRUMENTS (cont.) figures in nok million Parent Company level 1 Level 2 Level 3 Total Loans to and rec. frm customers, at fair value Interest-bearing securities, at fair value Shares, designated at fair value Shares, available for sale Derivatives, trading portfolioe Totalt assets, measured at fair value Deposits from and liabilities to customers, at fair value Debt incurred through issue of securities, at fair value Derivatives, trading portfolio Totalt liabilities, measured at fair value Parent Company level 1 Level 2 Level 3 Total Loans to and rec. from customers, at fair value Interese-bearing securities, at fair value Shares, designated at fair value Shares, available for sale Derivatives, trading portfolio Total assets measured at fair value Deposits from and liabilities to customers, at fair value Dept incurred though issue of securities, at fair value Derivatives, trading portfolio Totalt liabilities, measured at fair value Theres were no major moves between levels 1, 2 and 3 in Spesification of changes in level 3 in 2010: loans to and deposits from receivables to cust. Shares and liab. to cust. Total Opening balance Gains or loss through profit or loss Recognised in the equity 6 6 Sales over the period Acquisitions over the period 0 Transference into level 3 0 Transference out of level 3 0 Closing balance There is no material difference between the Group and the parent bank, so the above table of changes in level 3 assets applies to both the Group and the parent bank. Loans to customers and customer deposits measured at fair value comprise fixed-rate loans and deposits. The purchases or sales/redemptions shown for the period represent the net change excluding changes in market value. Fixed-rate deposits and fixed-rate loans are valued based on discounted cash flows. The discount rate that we use is supposed to represent the interest rate on an equivalent new product issued at the reporting date, with the same term and cash flow. In order to calculate that interest rate, we use our own model for those products, which is not an observable value to outsiders. For fixed-rate deposits the average remaining term is approx. 0.7 years. Roughly speaking, a 1% fall in interest rates will reduce the value of our fixed-rate deposits by approx. NOK 4 million. For fixed-rate loans the weighted average remaining term is approx. 3.4 years. Roughly speaking, a 1% rise in interest rates will reduce the value of our fixed-rate loans by approx. NOK 45 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 5.4 million. Sparebanken Sogn og Fjordane ANNUAL REPORT

46 NOTE 14 receivables from and debt to credit institutions Parent company GROUP L loans and receivables to credit institutions Sight loans and receivables Loans and receivables with an agreed maturity or notice period Total loans to and receivables from credit institutions at amortised cost D debt to credit institutions Loans and deposits from credit institutions without a fixed term or notice period Loans and deposits from credit institutions with a fixed term or notice period Debt to credit institutions Term to maturity R remaining term to maturity Payable on request/ less than 1 month months months 1 year year More than 5 years Total NOTE 15 loans to and receivables from customers Parent Company Group Leasing, amortised cost Loans to customers, amortised cost Loans to customers, fair value Foreign currency loan guarantees, amortised cost Gross loans to and receivables from customers Write-downs on individual loans that have fallen in value Write-downs for groups loans that have fallen in value Net loans to and receivables from customers The maximum credit exposure for the group of loans classified as Loans to customers measured at fair value is the remaining book value of the loans NOK adjustment of value to market value NOK = NOK in total. 46 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

47 NOTE 16 loans by geographical area FIGURES IN NOK MILLION Parent Company Value % Value % Sogn og Fjordane ,4 % ,5 % Hordaland ,2 % ,2 % Oslo and Akershus ,5 % ,6 % Elsewhere ,9 % ,7 % Total gross lending by geographic area ,0 % ,0 % Individual write-downs Group write-downs Total write-downs Total net loans Loans include leasing and foreign currency guarantees, which are all in Sogn og Fjordane GROUP Value % Value % Sogn og Fjordane ,6 % ,6 % Hordaland ,2 % ,5 % Oslo and Akershus ,7 % ,8 % Elsewhere ,5 % ,1 % Total gross lending by geographic area ,0 % ,0 % Individual write-downs Group write-downs Total write-downs Total net loans Loans include leasing and foreign currency guarantees, which are all in Sogn og Fjordane. NOTE 17 loans by customer groups FIGURES IN NOK MILLION Unused Gross loans Guarantees cr.fac. Parent Company Farming and forestry Fishing Fish farming Fishing industry Other industry, mining, oil and gas exploration Building/constr., power/water suppl Commerce Hotels and restaurants Sale, leasing and management of real property Other leasing, transp., social and personal services Total for all sectors Retail banking market, including international Public sector Other Total outstanding loans before write-downs Individual write-downs Group write-downs Loans to customers Sparebanken Sogn og Fjordane ANNUAL REPORT

48 NOTE 17 loans by customer groups (cont.) FIGURES IN NOK MILLION Unused Gross loans Guarantees cr.fac. GROUP Farming and forestry Fishing Fish farming Fishing industry Other industry, mining, oil and gas exploration Building/constr., power/water suppl Commerce Hotels and restaurants Sale, leasing and management of real property Other leasing, transp., social and personal services Total for all sectors Retail banking market, including international Public sector Other Total outstanding loans before write-downs Individual write-downs Group write-downs Loans to customers OTE 18 change in write-downs on loans and guarantees FIGURES IN NOK MILLION TOTALT 2010 Gross Parent Opening balance 1 Jan loans Guarante. company Group individual write-downs Losses realised during current period on previously impaired loans, guarantees, etc Recoveries on previously impaired loans Increase in write-downs on loans and guarantees were write-downs earlier have taken place Additional write-downs on loans Changes to individual write-downs on accrued interest and amortisation As of Individual write-downs on loans measured at amortised cost and write-downs on guarantees Individual write-downs on loans measured at fair value Group write-downs Gross value of loans individually tested for impairment, before write-downs Opening balance as of 1 Jan individual write-downs Losses realised during the current period on previously impaired loans, guarantees, etc Recoveries on previously impaired loans Increase in write-downs on loans and guarantees were write-downs earlier have taken place Additional write-downs on loans Changes to individual write-downs onaccrued interest and amortisation As of Individual write-downs on loans measured at amortised cost and write-downs on guarantees Individual write-downs on loans measured at fair value Group write-down Gross value of loans individ. tested for impairment, before write-downs Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

49 NOTE 18 change in write-downs on loans and guarantees (cont.) FIGURES IN NOK MILLION reconciliation of individual and group write-downs on loans and receivables individ. Group- Total Totalt individ. Group- Total Total figures in nok million wr.-downs wr.-downs. par.comp. group wr.-downs. wr.-downs. par.comp. group As of 1 Jan Losses realised on previously impaired loans, guarantees, etc. during the current period Recoveries on previously impaired loans Increase in write-downs on loans Interest on imparied loans and receivables Write-downs at 31 Dec Mortgages tied to loans and receivables that are subject to individual write-downs consist of: cash, securities, letters of guarantee, properties, stock, equipment and receivables. NOTE 19 loans that have been written down or are in default (Figures are for parent company, as there are no significant differences between it and the group.) Loans in default are defined as loans that are overdrawn/ overdue by more than NOK 1000 for more than 90 days. FIGURES IN NOK MILLION Defaults and individual write-downs Loans Indiv. indiv. by sector and industry in default w.downs Share w.downs Share Farming and forestry ,9 % 3 1,7 % Fishing ,0 % 0 0,0 % Fish farming ,2 % 34 19,8 % Fishing industry ,0 % 0 0,0 % Other industry ,6 % 9 5,2 % Building/constr., power/water suppl ,3 % 42 24,4 % Commerce ,1 % 9 5,2 % Hotels and restaurants ,0 % 1 0,6 % Sale, leasing and management of real property ,1 % 48 27,9 % Other leasing, transport, social and personal services ,5 % 14 8,1 % Total for all sectors ,8 % ,0 % Retail banking market, including international ,2 % 12 7,0 % Public sector ,0 % 0 0,0 % Other ,0 % 0 0,0 % Total ,0 % ,0 % financial loans that have been impaired or have fallen in value At Not over default 120 d. 180 d. 360 d. 360 d. Total Financial loans in default, not yet impaired Financial loans that have been impaired financial loans that have been impaired or have fallen in value At Not over default 120 d. 180 d. 360 d. 360 d. Total Financial loans in default, not yet impaired Financial loans that have been impaired Sparebanken Sogn og Fjordane ANNUAL REPORT

50 NOTE 20 LOANS ASSOCIATED WITH FINANCIAL LEASES (Figures are for parent company, as there are no significant differences between it and the group) Gross loans assosiated with financial leases Not later than 1 year Later than 1 year and not later than 5 years Later than 5 years Total NOTE 21 BONDS, Commercial paper AND OTHER INTEREST-BEARING SECURITIES figures in nok million PARENT COMPANY GROUP Covered bonds (OMF) Totalt, booked at amortized cost loans and receivables Publicly owned enterprises Municipal and municipal auth. backed bonds/cert Covered bonds Finansinst., other bonds/commercial papers Other bonds/ commercial paper Total commercial paper and bonds, designated at fair value Stock exchange listed securities Unlisted securities Total ,36 0,29 Modified duration 0,35 0,47 4,15 3,99 Duration weighted average effective interest rates 4,10 4,33 Terms of maturity on commercial paper and bonds Book value Par value Par value Book value due Without due total All securities are NOK-denominated The assembly to average effective interest rate for the stock as a total is based on the proportional weighted single interest rate of sensivity. 50 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

51 NOTE 22 ShARES figures in nok million Parent company Group shares, measured at fair value Listed shares Unlisted shares Total shares, designated at fair value shares, available for sale 0 3 Listed shares Unlisted shares Shares, available for sale Total shares Breakdown of shares (Figures in NOK 1000) Number Voting- Market/ Shares, measured at fair value of shares rights % Book value Financial institutions, listed DnB Nor ASA , Storebrand ASA , Sparebank 1 SR-bank , Sparebanken Vest , Gjensidige Forsikring , Financial institutions, listed Hjelmeland Sparebank , Financial institutions, unlisted 734 Other listed companies Yara International ASA , Norsk Hydro ASA , Statoil ASA , Telenor ASA , Orkla ASA , Schibsted ASA , Seadrill Ltd , Royal Caribbean Cruises Ltd , DNO International ASA , Songa Offshore SE , ScanArc ASA , Other listed shares 395 Other listed companies, total Other unlisted companies Others unlisted companies 498 Other unlisted companies, total 498 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

52 NOTE 22 shares (cont.) number Voting- Market/ Shares measured at fair value of shares rights % Book value Listed companies Domstein ASA , Listed companies, total 451 Other unlisted companies First Eiendomsinvest ASA , 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 associated companies PARENT COMPANY Subsidiaries At 1 Jan Acquisitions/disposals Write-down Eigedomsmekling Sogn og Fjordane AS Acquisitions Eigedomsmekling Sogn og Fjordane AS Share of profit 0 0 At 31 Dec GROUP PARENT COMPANY Accociated companies At 1 Jan Acquisitions Write-down Share of profit At 31 Dec Parent company Figures from the subsidaries Share- Book holding value Assets Liabilities Revenues Profit Bankeigedom Sogn og Fjordane AS Eigedomsmekling Sogn og Fjordane AS Bustadkreditt Sogn og Fjordane AS Balestrand Rådhus AS Investments in subsidiaries Fjord Invest AS 45, Investments in associated companies 45, Receivables from and debt to subsidiaries and associated companies as of 31. Dec. 2010: Interest Interest loans Deposits paid received Bankeigedom Sogn og Fjordane AS Eigedomsmekling Sogn og Fjordane AS Bustadkreditt Sogn og Fjordane AS Fjord Invest AS Balestrand Rådhus AS Total receivables from and debt to subsidiaries and associated companies Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

53 NOTE 24 intangible asstes and goodwill 2010 PARENT COMPANY Software Goodwill Total Book value as of 1 Jan Acquisitions Disposals Depreciation Book value as of 31 Dec Historiacal cost Accumulated depreciation ang write-downs Book value as of Useful life 3 years No depreciation Depreciation method Flat GROUP Software Goodwill Total Book value as of Acquisitio Avgang Disposals Book value as of 31 Dec Historical cost Accumulated depreciation and write-downs Book value as of Useful life 3 years No depreciation Depreciation method Flat Goodwill In previous years goodwill associated with Eigedomsmekling Sogn og Fjordane was tested for impairment. Based on the old method, we see no reason to impair the goodwill in 2010, as the company achieved a strong profit after tax for the year. New goodwill acquired in 2010 arose from the merger with Fjaler Sparebank in September The value of this goodwill is considered to be intact at 31 December PARENT COMPANY Software Goodwill Total Book value as of 1 Jan Acquisitions Disposals Depreciation Book value as of 31 Dec Historiacal cost Accumulated depreciation ang write-downs Book value as of 31 Dec Useful life 3 år No depreciation Depreciation method Flat Sparebanken Sogn og Fjordane ANNUAL REPORT

54 NOTE 24 intangible asstes and goodwill (cont.) GROUP Software Goodwill Total Book value as of 1 Jan Acquisitions Disposals Depreciation Book value as of 31 Dec Historiacal cost Accumulated depreciation ang write-downs Book value as of 31 Dec Useful life 3 years No depreciation Method of depreciation Flat Cash generating unit reason for choice of cash generating system Eigedomsmekling Sogn og Fjordane AS Goodwill from purchase of all the shares in Sogn Eigedomskontor AS, which was acquired on Eigedomsmekling Sogn og Fjordane AS Writedown of goodwill that was acquired in conjunction with the purchase of shares in Sogn Eigedomskontor AS Testing for impairment Under IFRS, values must be tested annually for impairment. In general, autumn 2008 was weak for all estate agencies, and turnover was expected to remain low for a number of years. As a result, the goodwill arising from the acquisition of Sogn Eigedomskontor AS was impaired by NOK 2.8 million in At 31 December 2009, new cash flow simulations were carried out based on a budget for 2010 and normal profitability in the Sogn region, which is particularly relevant to an assessment of the goodwill from the acquisition. A discount rate of 9.65% was applied. The conclusion was that prospects for future profitability improved over the course of 2009, but that under Section 124 of IAS 36 there are no grounds to reverse the previous goodwill. NOTE 25 Fixed assets 2010 Buildings Machinery, and other furnitures, fittings employee PARENT COMPANY real property and vehicles Total pc scheme Total Book value as of 1 Jan Acquisitions Disposals Depreciation Book value as of 31 Dec Historical cost Acc. depreciation and write-downs Book value as of 31 Dec Useful life years 3 8 years 3 years Method of depreciation Flat Flat Buildings Machinery, and other furnitures, fittings employee GROUP real property and vehicles Total pc scheme Total Book value as of 1 Jan Acquisitions Disposals Depreciation Book value as of 31 Dec Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

55 NOTE 25 Fixed assets (cont.) Buildings Machinery, and other furnitures, fittings employee GROUP real property and vehicles Total pc scheme Total Historical cost Acc. depreciation and write-downs Book value as of 31 Dec Useful life years 3 8 years 3 years Method of depreciation Lineær Lineær Our bank premises are mortgaged for loans taken out by the property company PARENT COMPANY Buildings Machinery, and other furnitures, fittings employee real property and vehicles Total pc scheme Total Book value as of 1 Jan Acquisitions Disposals Depreciation Book value as of 31 Dec Historical cost Acc. depreciation and write-downs Book value as of 31 Dec Useful life years 3 8 years 3 years Method of depreciation Flat Flat GROUP Buildings furnitures, fittings and other furnitures, fittings employee real property and vehicles Total pc scheme Total Book value as of 1 Jan Acquisitions Disposals Depreciation Book value as of 31 Dec Historical cost Acc. depreciation and write-downs Book value as of 31 Dec Useful life years 3 8 years 3 years Method of depreciation Flat Flat Our bank premises are mortgaged for loans taken out by the property company. NOTE 26 Other assets figures in nok million PARENT COMPANY GROUP Earned income not received Other payments made in advance, not yet accrued Miscellaneous expenditure/stock Total other assets measured at amortised cost Sparebanken Sogn og Fjordane ANNUAL REPORT

56 NOTE 27 CUSTOMER DEPOSITS figures in nok million Figures are stated to parent company, as there are no significant differences between the parent company and the group deposits Share Deposits Share Customer deposits at amortised cost ,4 % ,8 % Customer deposits, disignated at fair value *) 596 3,6 % 315 2,2 % Deposits from/liabilities to customers ,0 % ,0 % Average interest rate 2,26 % 2,58 % *) A valution loss of NOK 2,0 millon was recognised in A valuation gain of NOK 11,1 million was recognised in Deposits by sector and industry Deposits Share Deposits Share Farming and forestry 548 3,3 % 535 3,8 % Fishing 175 1,0 % 191 1,4 % Fish farming 149 0,9 % 46 0,3 % Other industry, mining, oil and gas exploration 459 2,7 % 384 2,7 % Building/constr., power/water supply 520 3,1 % 487 3,4 % Commerce 510 3,0 % 490 3,5 % Hotels and restaurants 75 0,4 % 67 0,5 % Sale, leasing and management of real property 806 4,8 % 586 4,1 % Other leasing, transport, social and personal services ,9 % ,9 % Total corporate deposits ,2 % ,7 % Public sector ,0 % ,9 % Retail banking market ,8 % ,5 % Total deposits by sector and industry ,0 % ,0 % Deposits by region Sogn og Fjordane ,8 % ,4 % Hordaland ,5 % 715 5,1 % Oslo and Akershus 726 4,3 % 461 3,3 % Other 566 3,4 % 468 3,3 % Total deposits by region ,0 % ,0 % Løpetid, innskot Gjenståande løpetid (bokført verdi) Payable on request Up to 3 months months years 0 27 More than 5 years 0 0 Total The Bank has NOK million in ordinary fixed-rate deposits. The market value of these deposits at 31 December 2010 was estimated as being NOK million. The difference between the face value and market value is NOK 2.5 million. The difference in 2009 was NOK 0.5 million. The increase of NOK 2.0 million was charged 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 payment of a fee. 56 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

57 NOTE 28 debt securities figures in nok million KONSERN Par value Book value Commercial papers and other short term borrowings Bond debt own bonds, not amortised Debt securities, measured at amortised cost Commercial papers 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 Commercial paper and bond debt by year of maturity (par value): Total commercial paper and bond debt NOTE 29 other liabilities and provisions Estimated liabilities parent company Group other liabilities Other liabilities Fixed terms Total other liabilities provisions Pension liabilities Specified provisions on guarantees Unspecified provisions on guarantees Total other liabilities Sparebanken Sogn og Fjordane ANNUAL REPORT

58 NOTE 30 Financial derivatives figures in nok million Sparebanken Sogn og Fjordane trades in financial derivatives in conjuction with hedging and managing market risk and in its dealing with customers nominal Positive Negativ Nominal Postive Negativ values market market value market market Interest rate contracts in total value value in total value value 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 negative market value corresponds to our share of the fall in the market value since the agreement was signed. If the market value rises above the market value when the contract was signed, the Bank will receive the gains, up to a limit equivalent to the par 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 principle In the balance sheet for 2009, there is a slight misclassification of financial derivatives (assets) as other assets and of financial derivatives (liabilities) as other liabilities. NOTE 31 RISIK 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. The frameworks are measured and reported in accordance with principles and strategies determined by the Board. The Bank s risk 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 the Bank 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 years out of every 10,000. New capital requirement rules The Bank has started complying with the Basel II regulations as of 1 January The new rules are based on the main principles in the report International Convergence of Capital Measurement and Capital Standards, which was presented by the Basel Committee1 in June The new rules consist of three pillars: Pillar 1 Minimum capital requirement Pillar 2 The internal capital adequacy assessment process (ICAAP) Pillar 3 Disclosure of financial information Pillar 1: With the introduction of the new rules on capital requirements, the Bank will comply with the simplest method, which means using the standard method for credit risk and the basic method for operational risk. Pillar 2: The Bank presented its first ICAAP document to the Financial Supervisory Authority of Norway by 15 March The senior management and specialists at the Bank will bea heavily involved in preparing the document, and it will be discussed by the Board on several occasions, including at a one-day seminar on the subject. The ICAAP-document will have its final discussion at the board meeting on the 23rd of March Pillar 3: The Bank has looked closely at the requirements that the Basel II regulations set out for the disclosure of information. The Board has produced and adopted requirements and guidelines on this area. Information about the capital adequancy ratio and risk managment is available in a seperate document published on our website on the internet (only in Norwegian language). 1) 58 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

59 NOTE 31 RISIK MANAGEMENT (cont.) 1) The Basel Committee on Bank Supervision is and international body representing central banks. The main purpose of the committee is corporation on banking supervision. 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 and Sparebanken Møre, with the Norwegian Computing Center acting as a consultant. The model calculates the level of unexpected losses on the basis of 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, guarantees and credits. 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 in the following year. Models for calculating credit risk In 2006 and 2007 the Bank developed its own models for measuring and reporting credit risk. 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 model is a so-called hybrid model, which means that it uses a combination of the statistical properties of a number of variables and the personal knowledge of experienced Bank employees. The model includes variables to allow it to take into account the customer s accounts, as well as his use of the Bank. For certain types of organisation, whose accounts 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 is difficult to develop a statistical model using our own data. The Bank also has guidelines for calculating antici-pated 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, both in terms of severities, exposure levels and default rates. Write-downs on 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 individual write-downs are calculated, taking into account estimated future cash flows and the realisable value of any securities. Sparebanken Sogn og Fjordane ANNUAL REPORT

60 NOTE 31 RISIK MANAGEMENT (cont.) Default occurs if an account is overdrawn, or if a borrower does not meet due payments, and the customer fails to bring it up-to-date within 90 days. A customer is reported as being in default if the amount overdrawn or arrears is greater than NOK If a loan is written down even though it is not in default, it is reported under Impaired loans, not in default. All major loans, i.e. loans to corporate customers of over NOK 30 million and loans to retail customers (including the self-employed) of over NOK 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. Corporate banking customers that are in default or are considered at risk are reviewed and assessed each quarter. Corporate customers whose financial statements reveal negative equity and/ or a loss are also reviewed. Corporate customers that are allocated a risk class which places them in the high risk group are also reviewed quarterly. An assessment of potential impairment/ losses should also be carried out if the Bank is aware of other circumstances that suggest that the customer s future ability to service the loan is in doubt. The Bank has developed its own model for calculating impairment provisions for groups of loans and guarantees. The model is based on the Bank s models for calculating the credit risk and the value of collateral associated with each individual account. Collectively assessed impairment provisions are calculated at the level of individual accounts, and provide an estimate of expected losses on the current portfolio over the portfolio s statistical term to maturity. Impairment provisions for groups of loans allow for defaults by customers who are in the Bank s portfolio, but who on the balance sheet date are not identified as at risk (customers in risk class K, which covers impaired and non-performing loans, 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 are both a source of information internally at the Bank and a resource for our customers, and are good ambassadors for the Bank. 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. 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 are both a source of information internally at the Bank and a resource for our customers, are good ambassadors for the Bank. These employees play a vital role in the credit scoring of customers within their industry. 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 framework for loans The Board has set out the following risk 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 accounts. The sum of the five largest customers outside the public sector shall not exceed 80% of the Bank s equity based on the most recent interim accounts. 60 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

61 NOTE 31 RISIK MANAGEMENT (cont.) The sum of the five largest customers 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 accounts. Loans to the Corporate Market shall not exceed 40% of totale lending. Total involvement to the conduct of real property shall not exceed 35% of the total of the corporate market. As part of the Bank s ICAAP process, the Bank s risk frameworks are being assessed and revised. Market risk Market risk is the danger of losses related to un-favourable fluctuations in market prices, in our case related to positions and activities in the interest rate, currency and stock markets. The Board has put limits on the Bank s permitted interest rate risk, as well as on its Bank s 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. 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. These calculations look at a relatively short-term horizon. The liquidity buffer shall cover the sum total of: a) 100% of funding requirements in the first month b) 75% of funding requirements in the second month c) 50% of funding requirements in the third and fourth months d) 25% of funding requirements in the fifth and six months e) A 13% fall in deposits in relation to the most recently published interim financial statements Stress tests have also been carried out to assess the Bank s need for a liquidity buffer based on future recession and credit crisis scenarios. 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 standardised approach. Sparebanken Sogn og Fjordane ANNUAL REPORT

62 NOTE 31 RISIK MANAGEMENT (cont.) 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 2010 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 risk 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 budget and forecasts, which assumes that income is a stochastic variable with a log normal distribution. The Bank sets aside sufficient capital to cover unexpected losses due to business risk with a confidence level of 99.95%. Note 32 liquidity risk Figures in NOK million GROUP Liquidity risk remaining term to maturity as of 31 Dec < > 5 år No rem. month months months year years term Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Subordinated debt Unused credit facility and loans not yet drawn Gross outflows from financial derivatives *) Total payments *) Gross inflows from financial derivatives Net cash flow from fin. der. (neg. = net receipt) Remaining term to maturity < > 5 No rem. on liabilities as of 31 Dec month months months year years term Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Subordinated debt Unused credit facility and loans not yet drawn Gross outflows from financial derivatives *) Total payments *) Gross inflows from financial derivatives Net cash flow from fin. der. (neg. = net receipt) Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

63 Note 32 liquidity risk (cont.) Figures in NOK million Parent company Liquidity risk remaining term to maturity as of 31 Dec < > 5 år No rem. month months months year years term Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Unused credit facility and loans not yet drawn Unused credit facility and loans not yet drawn Gross outflows from financial derivatives*) Total payments *) Gross inflows from financial derivatives Net cash flow from fin. der. (neg. = net receipt) Liquidity risk remaining term to maturity as of 31 Dec < > 5 No rem. month months months years years term Total Debt to credit institutions Deposits from/debt to customers Debt incurred through the issue of securities Non interest-bearing debt Unused credit facility and loans not yet drawn Unused credit facility and loans not yet drawn Gross outflows from financial derivatives*) Total payments *) Gross inflows from financial derivatives Net cash flow from fin. der. (neg. = net receipt) The table include interest, based on current interest rates on the reporting date. As a result, the totals cannot be directly reconciled with the balance sheet. Liquidity risk is the risk that the Bank cannot meet its payment obligations when they arise, or replace deposits that are withdrawn, resulting in the Group defaulting on its obligations. Liquidity risk is managed and measured using several methods. The Board has established a framework that limits the proportion of the Bank s liabilities that mature within certain time periods, and goals for the long-term financing of illiquid assets (liquidity indicator). The Board has also established principles for a liquid reserve. Sparebanken Sogn og Fjordane ANNUAL REPORT

64 NOTE 33 credit risk Figures in NOK million Credit risk by class of financial instruments Parent company Group Max credit exposure Loans and advances to credit institutions Net loans and advances to customers Bonds and commercial papers Financial derivatives Total Credit risk on loans and advances to credit institutions: The parent company has provided a NOK 300 million credit to its wholly owned subsidiary Bustadkreditt Sogn og Fjordane AS to finance the purchase of mortgage loans. At 31 December 2010, NOK million of the credit had been drawn. The remaining approx. NOK 117 million of advances to credit institutions almost entirely consist of deposits in instant access accounts at other banks, related to the Bank s transaction settlement activities. These counterparties have a credit rating of A- or higher. Loans and advances to customers: Risk classification of corporate customers and the public sector (Figures are stated for the Bank, as there are no significant differences between the Bank and the Group.) tot. lending* % Individ. Group Tot. lending* % Individ. Group excl. leasing of total writed. writed. excl. leasing of total writed. writed. Low risk ,4 % % 0 3 Medium risk ,2 % % 0 13 High risk ,8 % % Public sector (low risk) 199 1,6 % % 0 0 Total ,0 % % *) Accounts generally consist of loan balances, guarantees, unused credit facilities, credit lines for currency trading and accrued interest. Risk classification of retail customers, Parent Company engasjem.* % Individ. Group Tot. lending* % Individ. Group excl. leasing of total writed. writed. excl. leasing of total writed. writed. Low risk ,2 % ,0 % 0 7 Medium risk ,0 % ,0 % 0 13 High risk 643 3,8 % ,7 % Total ,0 % ,7 % Risk classification of retail customers, Group engasjem.* % Individ. Gruppe- Engasjem. % Individ. Group excl. leasing of total writed. writed. excl. leasing of total writed. writed. Low risk ,4 % ,6 % 0 8 Medium risk ,0 % ,2 % 0 14 High risk 667 3,6 % ,5 % *) 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 of hybrid debt and NOK 3.5 million of convertible bonds on its balance sheet under bonds. 64 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

65 NOTE 33 Credit RISK (cont.) Figures in NOK million Approx. 54% of the parent company and 80% 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 55.5 million is unrated, but NOK 52 million of this relates to Norwegian municipal bonds. Parent Company Group international Intern intern International rating rating Rating rating rating AAA AA A BBB BB B No rating total Financial derivatives: Financial derivatives with corporate and retail customers as counter parties are classified in the above table. For other derivatives, the counter parties are Scandinavian banks with credit ratings of A- or higher. NOTE 34 MARKET RISK Figures in NOK million 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 require-ment 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 con-fidence 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 the value at risk. The methodology takes into account market volatility and the correlation between the various types of risk. Økonomisk kapital 99,95% Interest rate risk 22,4 28,9 22,5 16,37 25,92 Stock market risk 139,8 107,7 135,5 78,5 75,5 Foreign currency risk 4,1 4,7 15,6 1,75 0 Diversification impact 0-36,3-39,6-22,72-22,72 Total ,9 78,7 NOTE 35 ges, salaries, etc. Figures in NOK 1000 Parent Company GROUP Remuneration Agency fee Outside consultants Statutory audits Other services provided by auditor Internal auditing Total Sparebanken Sogn og Fjordane ANNUAL REPORT

66 NOTE 35 ges, salaries, etc. (cont.) Figures in NOK Salaries, fees and other comp. of senior management, directors and committee members (Group): Benefits Total Loans Deposits Fees Salary in kind remun Boards of directors Sparebanken Sogn og Fjordane Hallgeir Kleppe, chair Randi Engen, dep. chair Heidi Grande Røys, member Jan Petter Vadheim, member Anne Kristin Hjelle Jordal, member Helge Leiro Baastad, member Aage Indrebø, member Total for Board of Directors Audit Committee Knut Jon Sunde, Chair Lawyer Andreas Rønnekleiv, member Ingrid Kassen, member Total Audit Committee Senior management Arvid Andenæs, CEO Kjell Sandnes, Director of Business Support Janne Marie Solheimslid, Director of Human Resources Kjetil Bjørset, Director of Corporate Banking Hallvard Klakegg, Director of Retail Banking Trond Teigene, Director of Business Development Total for senior management Total for Executive Committee Total for other employees Grand total No Board of committee members or senior managers receive terms and conditions that are better than the general terms offered to the Bank s employees. Interest rate subsidies on loans to emplyees total NOK Managing director Arvid Andenæs, cost Pension liability 70% from age of 60 to 67 + over 12G agreement Share of group pension scheme Parent company GROUP 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 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

67 NOTE 35 ges, salaries, etc. (cont.) Figures in NOK auditor s fees deloitte as Statutory audits Consultancy on accounting issues Other Total internal auditor s fees Internal auditing Total The wage-policy of the bank It is important for the Bank to have in-house expertise in 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, and shall reflect the qualifications and areas of responsibility of the individual employee. The Bank shall have a pay policy that stimulates the development of teamwork. NOTE 36 capital requirements Parent company Group Equity certificates Primary capital Gift fund and other equity Dividend equalisation reserve Allocated dividends Reserve for unrealised gains Equity other core capital Hybrid capital D deductions Deferred tax assets Other intangible assets Other deductions Core capital Unrealized gain on shares, stakes PCC, 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 this: Local and regional authorities Institusions Enterprises Retail loans Residential mortgage loan Overdue advances Covered bonds (OMF) Other advances Total minimum requirements for credit risk Sparebanken Sogn og Fjordane ANNUAL REPORT

68 NOTE 36 capital requirements (cont.) Parent company Group Foreign currency risk Operational risk Deductions Minimum requirement for equity and subordinated debt Capital adequacy 11,92 % 13,34 % Capital adequacy ratio 13,04 % 11,85 % 10,82 % 12,33 % Core capital ratio 12,06 % 10,76 % The capital adequacy ratio has been calculated using the new capital adequacy regulations (Basel II). The standardised approach has been used for credit risk and market risk, whilst the basic indicator approach has been used for operational risk. 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 37 operational leasing contracts 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, Bergen and Svelgen from its wholly-owned subsidiary Bankeigedom Sogn og Fjordane AS. The Bank paid NOK 7.8 million in rent for these premises in In 2009 it paid NOK 7.7 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 of office premises Total Of which rent paid to closely related parties The Bank as lessor The Bank owns buildings 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. In 2008 office-sharing agreements were signed with SSF Eigedomsmekling AS and Gjensidige Forsikring regarding the lease of various office premises Total rent of office premises Total NOTE 38 details of government grants FIGURES IN NOK In 2010, Sparebanken Sogn og Fjordane did not receive any government grants through Innovation Norway and the Confederation of Norwegian Enterprise in Sogn og Fjordane. In 2009 we received grants for business development, compensation for higher employer s NI contributions and a subsidy for our trainee project. The grants are used to offset the costs that they are supposed to help with. 68 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

69 NOTE 39 Branch network Innovasjon Norge Bus. dev. grants compensation for higher employer s NICs NHO Sogn og Fjordane Subsidy for trainee project from the DAA fund. Total Figures as of Branches Bank-in-shop agreements Bank buses Cash points Payment terminals Corporate terminals Internet banking customers NOTE 40 Off balance sheet items FIGURES IN NOK 1000 Parent company GROUP Garantiar Guarantees Payment guarantees Contract guarantees Other guarantee liabilities Commitments to investments in shares Total in NOK Of which foreign currency-denominated: eur USD DKK GBP NOK Payment guarantees Contract guarantees Total NOTE 41 closely related companies Receivables from and debt to subsidiaries and associated companies Asociated Related companies companies Outstanding loans at 31 Dec Interest income Deposits at 31 Dec Interest expences Covered bonds Interest income from covered bonds Other operating income Other operating expences The parent company leases premises from Bankeigedom Sogn og Fjordane AS, cf. Note 36 for further details. Loans to and deposits from subsidiaries, associated companies and the Board are made on market terms. Loans to and deposits from the senior management are on the terms that apply for all employees, which are similar to ordinary terms. Sparebanken Sogn og Fjordane ANNUAL REPORT

70 NOTE 42 anticipated cash inflows (assets) and outflows (liabilities) FIGURES IN NOK MILLION 2010 parent company Group Over Under Under Over Total 12 months 12 months ASSETS 12 months 12 months Total Cash and receivables from central banks Loans and advances to credit institutions Loans and advances to customers *) Commercial paper and bonds Shares Financial derivatives Investments in associated companies Shares in subsidiaries Intangible assets Deferred tax assets Fixed assets Other assets Total assets liabilities Debt to credit institutions Deposits from and liabilities to customers *) Financial derivatives Debt securities Tax payable Deferred tax Other liabilities Other provisions Subordinated debt Total liabilities *) All credits are assumed to have a term to maturity of under 12 months, as are all sight deposits from customers parent company Group over Under Under Over Total 12 months 12 months ASSETS 12 months 12 months Total Cash and receivables from central banks Loans and advances to credit institutions Loans and advances to customers *) Commercial paper and bonds Shares Financial derivatives Investments in associated companies Shares in subsidiaries Intangible assets Deferred tax assets Fixed assets Other assets Total liabilities liabilities Debt to credit institutions Deposits from and liabilities to customers*) Financial derivatives Debt securities Tax payable Deferred tax Other liabilities Other provisions Subordinated debt Total liabilities Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

71 NOTE 43 FOREIGN CURRENCY POSITIONS FIGURES IN NOK MILLION The figures show the net currency exposure of the Group and parent company at 31 December, including financial derivatives Net currency positions EUR USD SEK DKK GBP Other Total foreign currency in NOK *) *) At 31 Dec. 2010, the Bank had collateral in the process of being sold valued at NOK 48 million. Transactions are normally in USD and the NOK-USD exchange rate can affect values in the event of any sale. This is not included in the table in Note 43. NOTE 44 LOAN-TO-VALUE RATIO AND COVER POOL The figures relate to the subsidiary Bustadkreditt Sogn og Fjordane AS Gross loans to customers Average loan per customer 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 52 % 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 2010, the company had NOK 10.3 million exceeding that limit. That amount was therefore not included when calculating the cover pool. At 31 December 2010 the company had one NOK 1.2 million loan that was in default. Non-performing loans are not included in 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 45 Disputes At 31 December 2010, Sparebanken Sogn og Fjordane was involved in two 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

72 NOTE 46 EQUITY SHARE CAPITAL AND OWNERSHIP STRUCTURE In June 2009, changes to the Financial Institutions Act paved the way for mergers and restructurings at Norwegian banks, partly by allowing primary capital certificates at savings banks to be converted into equity share capital. This capital can be held by a foundation, which thus becomes a shareholder in the bank that continues to operate. On 12 March 2010 the Executive Committee at Sparebanken Sogn og Fjordane and the Executive Committee at Fjaler Sparebank adopted an agreement to merge the two banks, which in practice would mean Sparebanken Sogn og Fjordane taking over Fjaler Sparebank s banking operations. At the same time, a decision was adopted to convert 87.5%, or NOK 1,783,500,000, of Sparebanken Sogn og Fjordane s primary capital certificates into equity share capital. In the main agreement between Sparebanken Sogn og Fjordane and Fjaler Sparebank, it was agreed that Sparebankstiftinga Fjaler would receive a consideration of 1,064,530 equity certificates in Sparebanken Sogn og Fjordane, plus NOK 22,355,230 in cash. Of this, up to NOK 11,177,565 could be converted into equity certificates. Fjaler Sparebank requested that NOK 5,000,000 of the cash consideration be converted into equity certificates. This was done by increasing the Bank s equity share capital by issuing 50,000 new equity certificates with a face value of NOK 100. The merger of the two banks was completed on 1 September 2010, and Sparebankstiftinga Sogn og Fjordane and Sparebankstiftinga Fjaler were established. On 1 September 2010 the equity share capital was increased to NOK 1,889,953,000 through the issue of 18,899,530 equity certificates. At the time of its establishment, the Bank s primary capital amounted to NOK 270 million. The primary capital is represented by the depositor-elected members of the Bank s Executive Committee and holds 60% of voting rights. The owners of the equity certificates are limited to 40% of the votes on the Executive Committee. The Group s equity share capital and organisational structure at the close of the year was unchanged from when it was established, and comprised the following: Owner ownership number of Face historical interest equity certificates value cost Sparebankstiftinga Sogn og Fjordane 94, Sparebankstiftinga Fjaler 5, Total 100, Sparebanken Sogn og Fjordane aims to achieve a profit that represent a good and stable return on equity. Profits shall provide the owners with a competitive, long-term return through dividends and increases in equity. The share of the net profit attributable to equity certificate holders allocated to dividends shall reflect the Bank s equity position. All equity certificate holders shall receive equal treatment. 72 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

73 Furore Sparebanken Sogn og Fjordane s annual grant award ceremony took place in October. Nine fantastically talented youngsters were honoured with a banquet and given a grant to encourage them in their development. The ski jumper Anders Fannemel from Hornindal went away off with the biggest grant, for NOK 100,000. We hope that he, and the other youngsters awarded grants, will continue to create a furore in their chosen fields for many years to come. Photo: Vegard Fimland. 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 2010 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 Director s report gives a true picture of the performance, results and financial position of the company, and assesses the most important areas of uncertainty and potential risks it faces in Førde, 9 February 2011 Hallgeir Kleppe Chair Randi Engen Deputy chair Heidi Grande Røys Jan Petter Vadheim Anne Kristin Hjelle Jordal Helge Leiro Baastad Aage Indrebø Arvid Andenæs CEO 74 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

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

76 Auditor s report 76 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

77 Control Committee s report ANNUAL REPORT FOR 2010 SPAREBANKEN SOGN OG FJORDANE S CONTROL COMMITTEE 1. In 2010, the Control Committee has consisted of: Chair: Knut Jon Sunde Deputy: Chair: Solicitor Andreas Rønnekleiv Member: Ingrid Kassen 2. The Control Committee has, since the annual accounts for 2009 were presented, held eleven meetings. The committee has met the chair of the Board, Managing Director and the Chair of the Executive Committee. Staff from the joint administration and account managers for large corporate loans have attended the meetings and have answered questions where required. 3. The committee has worked well with the internal auditor which has attended all of these meetings. In consultation with the internal auditor, the Committee has drawn up a schedule of work and meetings for The Committee has reviewed the minutes of the Board meetings, as well as the minutes and loan records of the Credit Committee. 5. The committee has reviewed and been informed of particularly risky loan, and has looked particularly carefully at the largest loans in the most risky industries. It has reviewed lists of employees going overdrawn, and lists of loans in default. 6. Period accounts have been presented to the Committee. 7. The committee has made inspections to make sure the bank is in compliance with legislations, articles of associations and other associations and decisions that the bank is obligated to follow. 8. The Committee has reviewed the Directors Report and the annual accounts and associated notes for The external auditor has summarised the accounts and has presented an audit report dated 09. February The Committee considers the Auditor s assessment of the financial position of the Bank to be accurate, and it recommends that the profit and loss account and balance sheet presented be adopted as the Bank s accounts for Førde, 9 February 2011 Knut Jon Sunde chair Andreas Rønnekleiv deputy Ingrid Kassen member Sparebanken Sogn og Fjordane ANNUAL REPORT

78 Sogn og Fjordane hiking association As the main sponsor of the Sogn og Fjordane hiking association, we were the first company in the county to join as a corporate member. 174 of our employees participated through our membership in The hiking association represents positive values, and does a great job at getting young and old people out into our spectacular countryside. The photo shows Jøran Løvik (17), who became the association s 5,000th member. Both the bank and the association gave him various prizes. Here he is pictured with the head of the Sogn og Fjordane hiking association, Astrid Kalstveit (left), and the head of Indre Sunnfjord hiking association, Atle Holsen (right). 78 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

79 Key figures from branches Figures in NOK INDRE SUNNFJORD Total assets Total customer deposits Full-time equivalent employees 49,3 55,4 54,4 52,9 54,2 YTRE FJORDANE Total assets Total customer deposits Full-time equivalent employees 26,8 35,0 30,7 32,0 34,0 NORDFJORD Total assets Total customer deposits Full-time equivalent employees 24,6 28,6 29,3 27,7 28,0 INDRE SOGN Total assets Total customer deposits Full-time equivalent employees 15,8 16,7 13,6 11,5 10,2 SYDVEST Total assets Total customer deposits Full-time equivalent employees 33,7 19,5 18,9 20,2 20,4 BERGEN Totale utlån Totale innskot frå kundar Full-time equivalent employees 11,9 8,3 7,9 7,0 1,7 Sparebanken Sogn og Fjordane ANNUAL REPORT

80 Representatives Board of directors Members: Hallgeir Kleppe, Florø (chair) Randi Engen, Guddal (deputy chair) Heidi Grande Røys, Florø Anne Kristin Hjelle Jordal, Bergen Jan Petter Vadheim, Kaupanger Helge Leiro Baastad, Gjensidige Forsikring Aage Indrebø, Breim (employee repr.) *) Control committee Members: Knut Jon Sunde, Førde (chair) Andreas Rønnekleiv, Førde (deputy chair) Ingrid Kassen, Florø Deputies: 1. deputy: Sindre Kvalheim, Måløy 2. deputy: Ingrid Døskeland, Sande * Astrid Borlaug, Lavik * (personal deputy for employees repr.) Deputy: Jan Nikolai Hvidsten, Førde Election executive committee Members Bernt Reed, Breim (deputy) Monica Åsnes, Leikanger Karoline Bjerkeset, Sandane Aslaug Nesje Bjørlo, Sandane Geir Opseth, Førde Dagfinn Nyhammer, Sandane Marit Lunde, Leikanger Deputies: Ole Jakob Nedrebø, Straumsnes Berit Seljeset Osa, Eikefjord Per Stedje Holen, Leikanger Susan Fagerstrøm, Førde 80 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

81 Executive committee Members constituency Sunnfjord: Elin Schei Stuhaug, Naustdal (chair) Mette Rysjedal, Dale Ole Jakob Nedrebø, Straumsnes Anders Lien, Holmedal Aud Kari Steinsland, Askvoll Grete Skaar Sunde, Vassenden Berit Seljeseth Osa, Eikefjord Members constituency Nordfjord: Anders Hjellbakk, Hornindal Sissel Loen, Stryn Bernt Reed, Breim (deputy) Karoline Bjerkeset, Sandane Members constituency Sogn with Bergen: Hilmar Høl, Øvre Årdal Olav Lunden, Leikanger Tor Arne Ness, Kaupanger Monica Åsnes, Leikanger Finn B. Førsund, Leirvik Deputies constituency Sunnfjord: Lars Terje Standal, Eikefjord Sjur Hage, Viksdalen Deputies constituency Nordfjord: Siv Solheim, Hornindal Olaug Solheim Rotihaug, Lote Deputies constituency Sogn with Bergen: Hallvard Oppedal, Brekke Kari Maria Rutle Fjærestad, Balestrand Members employees: Magnus Vie, Førde Ottar Dalsøren, Askvoll Geir Haugen, Førde Jarle Nedrebø, Dale Susan Fagerstrøm, Førde Marit Havn, Eikefjord Marit Lunde, Leikanger Dagfinn Nyhammer, Sandane Svein Follevåg, Askvoll Helena Igelkjøn, Førde Ørjan Skåden, Stryn Repr. equity certificates: Jonn Helle, Dale Ingvard Flekke, Flekke Trude Brosvik, Eivindvik Kjartan Strand, Florø Aslaug Nesje Bjørlo, Sandane Kåre Furnes, Måløy Jon Gimmestad, Sandane Bente Nesse, Vadheim Viggo Leikanger, Naustdal Myrtel Janne Thomassen, Stryn Tom Joensen, Davik Tore Dvergsdal, Førde Anne Oline Gullaksen, Førde Geir Opseth, Førde Ole Vidar Øren, Øvre Årdal Trude Risnes, Leikanger Geir Holmen, Nordfjordeid Per Stedje Holen, Leikanger Deputies employees: 1. vara: Torunn Steimler, Bergen 2. vara: Steinar Ryland, Bremanger 3. vara: Asbjørn Steinhovden, Florø Deputies equity certificates: 1. vara: Hanne Marie Sæbø, Balestrand 2. vara: Rolf Årdal, Førde 3. vara: Gro Rukan, Eikefjord 4. vara: Lise Mari Haugen, Askvoll Sparebanken Sogn og Fjordane ANNUAL REPORT

82 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 Kjell Sandnes 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 Information Online banking Sør Vest Foreign exchange IKT Product development Indre Sogn Business Intelligence DVH Investments/ savings Bergen og NHL Legal 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) 82 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010

83 Modern milk-maids In 2010, Sparebanken Sogn og Fjordane organised a photography competition with the aim of capturing unique moments from everyday life in the county. We received very many good, creative entries to the three classes in the competition: Culture, People and Open. The winning photo was Modern milk-maids by Andreas Nygjerd. Sparebanken Sogn og Fjordane ANNUAL REPORT

84 Social media A bank, but more than just a bank. We want you to have a good experience each time you interact with Sparebanken Sogn og Fjordane, wherever that is. You can follow us here on Facebook, on our blog meirennbank.no and on Twitter. Sparebanken Sogn og Fjordane was one of the first companies in the Norwegian financial industry to build up a strong presence in social media. Although other banks have followed in our footsteps, we are still one of the most active ones, and by far the biggest relative to our customer base. The slogan more than just a bank guides our activities in this area. Through our blog, Facebook, Twitter and YouTube, we have raised people s awareness of all of the things that we do, including how we fulfil our corporate social responsibility. Both our customers and other people appreciate the way in which we have done this. We have created our own fora for putting forward opinions, telling good news and providing information about events and other activities that we are involved in. It has helped both our customers and other partners to get to know us better, and we have also got to know them better through these channels. 84 Sparebanken Sogn og Fjordane ANNUAL REPORT 2010