Annual report 2018 Content
3 Managing director
5 Key financial figures
7 Governing bodies and officers
8 The board of directors
10 The management group 11 Sustainability and corporate responsibility at Sandnes Sparebank 2018 14 Corporate governance
20 Investor information
26 Directors report
37 Annual accounts - Statement of income and comprehensive income - Balance sheet - Statement of equity - Cash flow statement - Notes 118 Statement pursuant to § 5-5 of the Norwegian Securities Trading Act 119 Auditor’s report The year 2018
After two years in the CEO chair, I can testify Every day, we strive to provide the best possible that Sandnes Sparebank indeed has what it experiences for individual customers – whether takes to be a bank you can count on going they are engaging with us digitally or in person. forward! We are striving to be visible, to ensure that we will be “top of mind” also with potential With an improvement of earnings after tax of customers. NOK 47 million during the past year, we can rightly claim the best result in the Bank's history. During the second quarter of 2019, we will pay It is gratifying that we are able to show positive out more than double the customer dividend performance with respect to several measure- relative to last year. A total of NOK 53 million ment parameters, including profitable growth, of the Bank's 2018 profits will be repaid to cost reduction, risk reduction, increasing our customers! Hurrah! It is our experience customer satisfaction and increasing brand that customer dividends increase customer awareness. We are an attractive employer and satisfaction, and that we are attracting new are attracting the right people with the right customers with this attractive arrangement. competencies. All this means that we are well positioned and equipped for further profitable growth – and to deal with the changes that are bound to take place going forward.
The cooperative alliance with Eika is also providing us with a number of advantages that we would not like to be without. In addition to the access to good products, we get economies of scale with e.g. common purchasing, IT operations and technology development – and not least; a good dividend payout last year.
Although managing a bank today is quite different than it was just a few years ago, the customers Trine Karin Stangeland are clearly in focus. Managing Director
Sandnes Sparebank annual report 2018 3 KEY FIGURES Key figures as of 31.12.2018
Group Parent bank
2018 2017 Profit summary (NOK ‘000) 2018 2017 461 980 474 236 Net interest income 388 574 394 980 122 550 122 857 Other operating income 120 180 161 851 261 137 268 638 Other operating cost 232 112 240 013 23 729 72 499 Net loss/writedowns 24 264 76 710 299 664 255 954 Operating profit before taxes 252 378 240 108 55 284 58 604 Tax cost 44 595 42 518 244 380 197 351 Operating profit after taxes 207 783 197 590 14 555 -24 781 Other income and cost (after taxes) 14 841 -24 781 258 935 172 569 Total profits 222 624 172 809 258 601 172 026 Majority share of profits 334 543 Minority share of profits
31.12.2018 31.12.2017 Balance sheet excerpts (NOK ‘000) 31.12.2018 31.12.2017 27 209 26 100 Total assets 20 170 19 911 26 655 26 260 Average total assets 20 040 20 151 22 214 21 473 Loans to customers 14 799 14 816 11 252 10 857 Deposits from customers 11 253 10 859 3 661 3 333 Notes and bonds 3 116 3 090 150 155 Financial derivatives 85 106 2 961 2 709 Equity capital 2 767 2 549
31.12.2018 31.12.2017 Key figures 31.12.2018 31.12.2017 Performance during quarter/last 12 months 4.3 % -1.2 % - Asset management 1.3 % -2.4 % 2.7 % -0.1 % - Lending -1.1 % -0.1 % 3.6 % -0.4 % - Deposits 3.6 % -0.5 % 50.7 % 50.6 % Deposit to loan ratio 76.0 % 73.3 % 171.0 % 238.0 % Liquidity indicator (LCR) 184.0 % 222.0 % Profitability 1.73 % 1.81 % Net interest income in % of avg. total assets 1.94 % 1.96 % 44.7 % 45.0 % Cost to income ratio 45.6 % 43.1 % 1.0 % 1.0 % Total cost in % of avg. total assets 1.2 % 1.2 % 10.8 % 9.7 % Return on equity before taxes 9.7 % 9.7 % 8.8 % 7.5 % Return on equity after taxes 8.0 % 8.0 % Solvency 18.6 % 20.0 % Capital ratio 20.6 % 22.3 % 17.3 % 18.1 % Tier-1 capital ratio 19.0 % 20.0 % 16.6 % 16.6 % Core Tier-1 capital ratio 18.3 % 18.3 % 15 540 15 440 Risk-weighted capital 13 005 13 180 Human Resources 136 135 Number of full-time equivalents as of date of balance sheet 114 113 Equity capital certificates 55.0 54.5 Quoted price 55.0 54.5 65.3 % 65.1 % Equity capital certificate return 65.3 % 65.1 % 6.9 5.6 Earnings per equity capital certificate 5.9 5.6 6.9 5.6 Diluted earnings per equity capital certificate 5.9 5.6 81.1 76.6 Book equity per equity capital certificate 75.6 72.1 0.68 0.71 Price/book equity (P/B) 0.73 0.76
Sandnes Sparebank annual report 2018 5 GOVERNING BODIES AND OFFICERS Governing bodies and officers
The Committe of Representatives
External auditor The Nomination Committe
Internal auditor Board of Directors
Trine Karin Stangeland CEO
Erik Kvia Hansen Magnar Oanes Director Retail Market Director Corporate Market
Lene Nordal Thomas Nordbø Middelthon Director of Customer Experiences CFO
Ingrid Fure Schøpp Director of Communications
Sandnes Sparebank annual report 2018 7 The board of directors
1. 2. 3. 4.
5. 6. 7. 8.
1. Harald Espedal 3. Arne Lee Norheim 6. Birte Norheim Chairman Director Director Chairman of the Board of Directors since 2015. Member of the Board of Directors since 2015. Member of the Board of Directors since 2008. Mr. Espedal holds an MBA and has postgraduate Mr. Norheim has a Bachelor of Science from Ms. Norheim has a Master of Finance from studies in Advanced Auditing from NHH – Purdue University, Indiana, US and Advanced Queensland University of Technology, Australia Norwegian School of Economics. He is currently Strategic Management from IDM, Switzerland and is currently working as CFO for Nordic chairman of the investment company Espedal and Yale, US. He has been CEO of IBM, Norway Mining ASA. She has more than 15 years of & Co AS. Mr. Espedal was previously managing since 2013. Mr. Norheim also has 21 years work experience from oil and gas industry in addition director and investment director at Skagen. He experience for IBM from the US, France, and to experience from finance and investor relations. has also experience as Investment Director at the Scandinavian Countries. Ms. Norheim worked in the period 2012-2017 Vesta, European equity manager at Skandia, Mr. Norheim owns 10.960 equity capital at Njord Gas Infrastructure, the last four years as finance and chief analyst at Sparebank 1 SR-Bank certificates. CEO. Member of the Board of Directors since and head of consulting and auditing firm Arthur 2017. Norheim owns 960 equity capital Andersen in Stavanger. certificates. Mr. Espedal owns 886.861 equity capital 4. Marion Svihus certificates through his investment company Director Espedal & Co AS. Espedal also manages 7. Jan Inge Aarreberg Member of the Board of Directors since 2008. 515.000 equity capital certificates through Employee representative Salt Value AS. Ms. Svihus has a Bachelor of Commerce degree from NHH - Norwegian School of Economics. Deputy member in 2010 and member of the She is currently acting director of organization Board of Directors since 2015. Mr. Aarreberg 2. Frode Svaboe and business support at Petoro AS, after ten years holds a bachelor from BI – Norwegian Business of experience as CFO. Ms. Svihus has previously School, and works as a financial adviser at Nestleder been Director of Finance at the Technology Sandnes Sparebank. Employed by the bank Member of the Board of Directors since 2010. and Project division with Statoil ASA. since 2007. Mr. Aarreberg owns 2.706 equity Mr. Svaboe has a Bachelor of Commerce degree capital certificates. from BI – Norwegian Business School, and a graduate of the top level audit course at the 5. Heidi Nag Flikka Norwegian School of Economics. He is currently Director 8. Solveig Vatne Partner/General Manager at SVAL Revisjon Employee representative og Rådgivning AS. Mr. Svaboe has previous Member of the Board of Directors since 2016. experience as auditor with KPMG and as Ms. Nag Flikka has postgraduate studies in Ms. Vatne is trained in economics at the BI Partner/General Manager of KPMG SørVest. Advanced Auditing from NHH - Norwegian Norwegian School of Management and the Svaboe owns 5.700 equity capital School of Economics. She is currently Managing Bank Academy. Employed by the Bank since certificates through his investment Director at AF Offshore Aeron-Mollier AS. She 1982. She is now working as a financial advisor company FS Invest AS. was previously Financial Director at AF Gruppen in the credit department. Member of the Board ASA, Energy division. She has experience as of Directors since 2017. assisting regional manager for the corporate Ms. Vatne owns 16.393 equity capital certificates. division at SpareBank1 SR-Bank in Agder, and has worked several years as an auditor. Flikka owns 960 equity capital certificates.
Sandnes Sparebank annual report 2018 8 THE MANAGEMENT GROUP The Management Group
1. 2. 3.
4. 5. 6.
1. Trine Karin Stangeland 3. Magnar Oanes 5. Tomas Nordbø Middelthon CEO Director Corporate Market CFO
Ms. Stangeland has a bachelor degree Mr. Oanes has a degree in Economics and Mr. Middelthon is an certified financial analyst in economics and a master in strategic Administration from the College of Agder. and holds an MBA in Finance from NHH and is management from BI Norwegian Business Previous experience includes positions as an - Norwegian School of Economics. He has School. In addition to various management CEO and CFO of Dalema Gruppen, CEO previously worked five years as portfolio manager roles in the Lyse Group since 2005, she also of WestControl AS, an electronics firm, and and two years as risk manager with Skagen- has several years of economic and financial CFO of Technor ASA, an industrial and offshore fondene. Prior he worked four years as a senior management experience from industrial company. In addition, Mr. Oanes has 10 years consultant within financial services in Statoil. concerns. Ms. Stangeland has been with of banking experience from Kredittkassen Mr. Middelthon joined the position as CFO Sandnes Sparebank since March 2017. in Stavanger and ABC Bank. He has been in April 2017. Ms. Stangeland owns 11.143 equity capital employed by Sandnes Sparebank since 2013. Middelthon owns 1.707 equity capital certificates.. Mr. Oanes owns 12.525 equity capital certificates. He also owns 17.623 equity capital certificates.. certificates through his investment company investment company, Majacato AS. 2. Erik Kvia Hansen 4. Ingrid O. Fure Schøpp Director Private Market Director Communications 6. Lene Nordahl Director Customer Experiences Mr. Hansen has education within marketing Ms. Schøpp holds a Cand. Mag. degree from from BI Norwegian Business School. He has Hamar College of Education and the University Lene Nordahl has studied economics and infor- ten years of experience from various roles in of Stavanger. She has been employed by Sandnes matics at the University of Stavanger. She has Nordea, such as financial advisor and branch Sparebank since 1987 and has previously worked 11 years of experience from different roles with manager. In addition, he has seven years as Marketing Manager and Information Manager. GE Money Bank and six years of experience of experience as a project manager at the She is responsible for the Banks’ overall marketing from Lyse Dialog AS where she had the role marketing department at GE Money Bank, communication and branding. Ms. Schøpp as Strategic Manager Customer Service. within CRM and product development. is the press officer of the Bank. Nordahl has been employed by Sandnes Kvia has been with Sandnes Sparebank Ms. Schøpp owns 6.449 equity capital Sparebank since June 2017. since July 2017. certificates. Nordahl owns 342 equity capital certificates. Kvia owns 683 equity capital certificates.
Sandnes Sparebank annual report 2018 10 Social responsibility
Sustainability and corporate responsibility at Sandnes Sparebank 2018
The Bank's guidelines and principles for the practice of ethics mapping of how a number of select Norwegian banks satisfy and corporate citizenship are presented in their entirety on corporate citizenship requirements. The results of the 2018 our website www.sandnes-sparebank/samfunnsansvar. In this survey showed that Sandnes Sparebank achieved a score of annual report we are highlighting some of the key areas with 61% and was awarded the "Climber" award for the best result a short description. improvement from 2017 to 2018. The Bank is well pleased with a result that reflects systematic efforts over time. Sustainability and corporate citizenship are becoming increasingly important as business drivers. We are of the opinion that companies that have integrated sustainability Environment in their business strategy, will perform better than their Many measures for environmental protection competitors in the long run. . The core corporate responsi- The Bank has a number of measures and motivators to make bility in the financial industry is to create values and operate it simple for both employees and customers to be friends profitably, but not at the expense of the people around us, of the environment. Some examples: the environment and in breach of basic ethical principles. Low energy consumption. The Sandnes Sparebank head As a bank, or role puts us in a position where we are able to office is the first commercial building in Sandnes with status influence other companies to conduct systematic improve- as a passive building. ment. We shall be a contributor and driver of value creation in society through the operation of responsible banking. Environmentally friendly transport The Bank's main office is located in a car-free zone in the middle of the Sandnes Responsible and sustainable business practices are ensured city center, without any parking spaces available. Thus, by integrating corporate citizenship in our business processes. employees are encouraged to travel by means of public All bank employees get an annual update regarding the Bank's transportation or use their bicycles to and from work, and policy for corporate citizenship and sustainability. The purpose the Bank is a member of a public transportation scheme of the policy is to ensure that the Bank does not contribute called "HomeWorkHome". to the violation of human and employee rights, corruption, serious environmental damage and other unethical acts. Fewer flights. As a bank in the Eika Alliance, which is located in Oslo, many bank employees take part in weekly coordina- The Ethic Bank Guide is a collaborative effort by the NGO tion meetings. These are generally conducted as video Fremtiden i våre hender ("The Future in Our Hands") and the conferences, telephone conferences or via Skype. Norwegian Consumer Council. They conduct an annual
Sandnes Sparebank annual report 2018 11 Social responsibility
Digital solutions. The majority of our customers receive Our requirements to fund providers information about their customer relationship and accounts We are also concerned about where our customers' money via mobile banking, Internet banking, text messages and e-mail. is invested. Sustainable fund products All products offered Most customer agreements may now be signed digitally. by Sandnes Sparebank shall be in compliance with our Simpler for the customer – better for the environment! requirements for corporate citizenship, sustainability, generally accepted business practice, ethics and openness. We offer Green car loans prizes the environmentally conscious management of fund products via external fund managers. Sandnes Sparebank wishes to reward customers who act proactively for a cleaner and greener environment. There- We are working closely with our fund managers to ensure fore, the Bank is offering a lower rate of interest on Green that the Bank does not contribute to the violation of human Car Loans, a climate friendly loan, defining an environmen- and employee rights, corruption, serious environmental tally friendly car in the same way as the Norwegian govern- damage and other unethical acts. ment and the European Parliament.
Loans Gift Fund An important part of our corporate responsibility is to return We don't lend to just anybody! We have additional require- some of the Bank's profits to worthy causes. Ever since Sandnes ments for industries with higher risk related to environmental, Sparebank was founded in 1875, the further development corporate citizenship and corporate governance issues. of the local community has been a key to the Bank’s daily activities. Every year, the Bank distributes several million We take for granted that all our corporate customers, regard- kroner, for the benefit of projects small and large. less of industry, observe Norwegian laws, respect human rights and actively disapprove of discrimination, harassment and money laundering. Our customers have to sign a customer Economic crime statement to that effect. Sandnes Sparebank is working actively to suppress economic Investments crime such as money laundering, terrorist financing, tax avoidance and corruption. This is part of our corporate We don't invest in just anything! In investing and fund manage- citizenship. Our main tasks in this context is to implement ment we don't invest in companies that are involved in acts risk assessments of the Bank's business, through customer that are contrary to our guidelines and values. control, investigation of suspicious transactions and customers, and the reporting of suspicious transactions to Norwegian The Bank's investment strategy National Authority for Investigation and Prosecution of We have some ownership positions in which the majority Economic and Environmental Crime (Økokrim). are Norwegian municipalities and finance institutions. Our investment strategy provides clear guidelines for what we Tax should own. We conduct ongoing assessments of the existing Sandnes Sparebank will never facilitate or give companies investment portfolio in order to ensure that it is in compliance advice about tax avoidance. Neither will we invest in companies with the Bank's ethical code and the investment strategy. or provide credit to customers that organize their activities Our ownership positions are followed up and reviewed in so-called tax heavens. by the Bank's Board of Directors semi-annually.
Sandnes Sparebank annual report 2018 12 Social responsibility
Corruption Sandnes Sparebank has a zero tolerance policy regarding corruption. governing body – a fourth of the members are employees. This applies both internally, and with respect to our customers, In addition, two of the Directors of the Bank are elected by suppliers, companies we invest in and our fund providers. the employees.
Sustainable purchasing Gender and equal pay As of August 2018, the company had 118 employees. Sandnes Sparebank assumes responsibility for contributing Female employees constitute 68% of the Bank’s employees. to sustainable development of environment, people and The top management team of the Bank consists of 50% biodiversity also through our procurement. Thus, our suppliers women, and we have female managing director. Of middle must deliberately comply with human rights, employee rights managers, 47% are women. The Bank's Board of Directors and rules regarding working conditions, environmental protec- consists of 50% women and 50% men. tion and money laundering.
Pay reflects market wages, education level and the individual The Bank's purchasing policy describes our purchasing employee’s qualifications and responsibilities, to the greatest principles in more detail. Here is a selection of the main extent possible. Female managers in the Bank earn 93% relative points: to male managers. For other employees, this percentage is • Safe working conditions 80. This is in line with the rest of the financial industry, but • Goods that last: environmentally friendly and sustainable is not a level that we are satisfied with. The Bank is aware products. Our purchases shall be environmentally friendly of the importance of equal pay, and is taking measures to and sustainable. Quality goods have a long life cycle, leading make pay more equal.Equal pay is also part of the overall to less wastage. picture in wage negotiations. • Economic crime Our suppliers must actively oppose money laundering, black labor, corruption, bribery, embezzlement Zero tolerance for discrimination and anti-competitive collaboration. Sandnes Sparebank cares about strict observance of the rights of its employees. Thus, we have zero tolerance for all forms In order to ensure focus and compliance, we require our of discrimination. suppliers to sign a statement in which they confirm that they conduct their business in line with our expectations and Employee satisfaction and health requirements. Our annual employee survey shows that bank employees are very satisfied with working for Sandnes Sparebank and Organization that the working environment is a good one. We are seen, heard and consulted. There is no prejudice at Sandnes Sparebank – and that is how we like it! Ethical guidelines for all employees. Every year, all employees have to sign the Bank's Ethical guidelines, the purpose of which Employee influence is to, inter alia, ensure professional conduct among colleagues Sandnes Sparebank appreciates unionized employees, and and customers. around 60% of the employees are members of the Finans- forbundet union. Of the Board of Trustees – the Bank's highest
Sandnes Sparebank annual report 2018 13 Corporate governance
Corporate governance
This chapter illustrates how Sandnes Sparebank is governed, The Bank’s ethical guidelines have been reviewed and and how activities are controlled. Good governance and approved by the Board of Directors. The guidelines have been management must ensure effective and efficient use of the communicated to the employees of the Bank and are available Bank’s resources and optimal creation of added value. The on the Bank’s intranet. All new employees have to sign the wealth created by Sandnes Sparebank shall benefit the Bank’s Bank’s ethical guidelines to attest that they have been reviewed, owners, depositors, customers, employees and society as and their knowledge of these guidelines are measured in a whole. The Bank’s corporate governance shall ensure prudent connection with the annual employee satisfaction survey. asset management and provide assurance with respect to attainment and realization of established objectives Business and strategies. The Bank’s Articles of Association state that the objective of the company is to promote savings by accepting deposits from an indeterminate circle of depositors. The assets which Statement of corporate governance the Bank has at its disposal must be managed in a prudent and management manner and in accordance with the current laws and regula- To the extent that it is relevant, the Board of Directors complies tions pertaining to savings banks. The Bank may conduct with the framework laid down by “Norwegian Recommenda- all normal banking business and provide banking services tion for Good Corporate Governance” dated October 17, 2018. in compliance with the provisions of the Norwegian Act on In this chapter, the Board of Directors will, to the extent it is Savings Banks. The Bank is also licensed to provide investment possible, provide a further account of the items comprising services that are regulated by the Securities Trading Act. this recommendation. The “Norwegian Recommendation In addition, the Bank owns 60% of the shares in Aktiv for Good Corporate Governance” is primarily directed at Eiendomsmegling Jæren AS. corporations. Sandnes Sparebank is organized as an equity capital certificate bank, and has to consider the requirements Through its Gift Fund, Sandnes Sparebank has the facility to which the Bank is subject pursuant to the legislation to allocate some of its profits to customer dividends and pertaining to savings banks. generally beneficial purposes. The Gift Fund is used to provide inspiration, and to promote growth and development. The management of the Bank is the responsibility of the Board The award of gifts must be rooted in the Bank’s vision and of Directors. The Board of Directors must ensure that the Bank business concept, and be distributed in a way that supports is prudently organized, and is responsible for establishing reach and diversity. control systems and ensuring that the business is operated in compliance with applicable Norwegian laws, regulations and the Bank’s Articles of Association.
Sandnes Sparebank annual report 2018 14 Corporate governance
The Board of Directors continuously reviews and updates has decided to increase the counter cyclical capital buffer the objectives and strategies of the Bank. The Board of Directors by 0.5%, to 2.5%, as of January 01, 2020. The Board of Directors receives regular risk reports, operations reports and financial of the Bank is satisfied with the capital situation. The Bank statements, in order to monitor to what extent the Bank is increased its core Tier-1 capital ratio to 16.6% which is the in compliance with applicable strategies and objective same level as the start of 2018. The Bank’s objective for its achievement. core Tier-1 capital ratio is at least 15.2%.
The Bank’s dividend policy is as follows: Equity capital and dividends The objective of Sandnes Sparebank is to manage its total The Bank’s equity certificate capital is NOK 230,149,020, resources in such a way as to provide equity capital certificate made up of 23,014,902 fully paid-up equity capital certificates, holders a good, stable and competitive return in the form of each with a face value of NOK 10. Of these, 18,684 are treasury dividends and price appreciation. Annual profits will be allocated equity capital certificates. External injection of equity capital to equity certificate capital (equity capital certificate holders) takes place through the issuance of equity capital certificates and primary capital on a pro rata basis relative to their respective or other equity instruments that satisfy statutory requirements. shares of the Bank’s equity capital. Sandnes Sparebank intends that 50%-75% of the equity certificate capital’s share of profits One of the most important objectives of the Board of Directors will be distributed as dividends, and correspondingly that is to safeguard the interests of the Bank, and thereby also the 50%-75% of the primary capital’s share of profits will be long-term interests of equity capital certificate holders, in any distributed as gifts customer dividends. Considerations will context and regard. By means of a continuous dialogue, the emphasize that the equity capital certificate holders’ share Bank will provide equity capital certificate holders with the of total equity (ownership ratio) ought to be kept stable. opportunity to express their views on the Bank’s activities and In the determination of total distribution level, factors to development. The Bank shall maintain an image that ensures be considered include expected earnings performance, credibility and predictability in the market. The Bank will seek external framework conditions and the Group’s estimated long-term and competitive returns. need for Tier-1 capital.
The Bank shall provide the market with relevant and complete The Bank’s Board of Trustees annually approves a separate information in order to ensure balanced and correct valuation authorization to the Board of Directors regarding procure- of its equity capital certificates. This is ensured through com- ment and repurchase of subordinated debt capital. This pliance with the laws and regulations applying to listing on authorization is transferred by the Board of Directors to the Oslo Stock Exchange. For further details regarding equity Management. capital certificates, please refer to the “Investor information” chapter. In addition, the Board of Directors has authorization from the Committe of Representatives to increase the equity In order to have a basis for assessing whether the Bank’s capital by up to 10% of the outstanding equity certificate equity capital fits its current objectives, strategy and risk capital. The Committe of Representatives has given the Board exposure, the Board of Directors conducts a thorough review of Directors authority to increase the Bank’s registered equity of the Bank’s Internal Capital Adequacy Assessment Process certificate capital by up to NOK 230 million through one or (ICAAP) and receives an updated risk report each quarter. several issues. This authorization is valid for 2 years, and The Bank’s ICAAP and capital plan are reviewed by the Financial is contingent on the approval by the Financial Supervisory Supervisory Authority of Norway, and in 2016 it provided feed- Authority of Norway. back for a Pillar II requirement of 2.5%. Beyond this, the Ministry of Finance
Sandnes Sparebank annual report 2018 15 Corporate governance
Equal treatment of equity capital certificate The Committe of Representatives also allocates the amount holders and transactions with intimates that, pursuant to §10-7 of the Norwegian Financial Institutions Act, may be used for generally beneficial purposes, in addition Sandnes Sparebank has one equity capital certificate class. to resolving whether to raise subordinated loan capital. The holders of equity capital certificates are ensured equal treatment and the same terms and conditions for influence Meetings of the Committe of Representatives shall be on the Bank. Sandnes Sparebank conducts quarterly earnings convened by the Bank with at least 21 days’ notice, cf. §8-3 presentations, to which the Bank’s equity capital certificate of the Financial Institutions Act and §5-11 of the Norwegian holders are invited. Public Limited Companies Act. The Committe of Representatives may not pass resolutions on any other matters than those At the end of 2018, the Bank’s equity certificate capital specifically provided in the notice of the meeting. constituted 65.3%. The Bank’s 20 biggest owners represent 56.24% of the equity certificate capital. The Committe of Representatives consists of 40 Trustees and 11 Deputy Trustees with the following representation: The directive to the Board of Directors contains clear Holders of equity capital certificates: 15 Trustees provisions regarding ethics and competence. The Bank’s and 4 Deputy Trustees, ethical guidelines cover both elected officers and employees, Sandnes Municipal Council: 5 Trustees and provide guidance regarding entertaining, benefits/gifts and 2 Deputy Trustees, and professional secrecy. All transactions with intimates take Depositors: 10 Trustees and 3 Deputy Trustees, and place according to the arm’s length principle. Employees: 10 Trustees and 3 Deputy Trustees.
The directive to the Board of Directors includes provisions The minutes from meetings of the Committe of Represen- underscoring the Directors’ obligation of due care with respect tatives are published at www.sandnes–sparebank.no/ to ethical behavior, competence and integrity. A Director or investor-relations. the Managing Director must not take part in the deliberations or the resolution of issues that are of particular significance Nomination Committee to the person concerned, or of any intimates, making it appear that the person in question has a prominent personal or The Bank’s Nomination Committee is established by the financial special interest in the case. For further information Articles of Association, as are the guidelines for its operation. about transactions with intimates, please refer to note 43. The Committe of Representatives elects the members of the Nomination Committee from among the Trustees. The Nomination Committee consists of four members, Freely negotiable of which the equity capital certificate holders, depositors, The Articles contain no form of limitations on marketability. publicly elected representatives and employees are repre- sented by one member each. One personal deputy is elected from each group. The members are elected for The Committe of Representatives periods of two years at a time. The Committe of Representatives is the Bank’s supreme authority, supervising the Board of Directors’ management The Nomination Committee shall prepare the election of the Bank. The Committe of Representatives approves of the Chairman and Deputy Chairman of The Committe the Bank’s Articles of Association, approves the financial of Representatives, Chairman and Deputy Chairman of the statements and elects the Directors of the Bank, the Board of Directors, the other Directors and Deputy Directors, Nomination Committee, and the external auditor. with the exception of the employee representatives, as well
Sandnes Sparebank annual report 2018 16 Corporate governance
as the Head, other members and deputy members of the The Board of Director is responsible for the appointment Nomination Committee. For the Director and Deputy Director and dismissal of the head of internal audit, if applicable. to be elected by the employees, a separate election committee The Board of Directors has also the sole responsibility for has been appointed and charged with the responsibility the employment and dismissal of the Managing Director. of electing the employee representatives for the Board The Board of Directors also supervises the day-to-day of Directors and Board of Trustees. management of the Bank.
The Nomination Committee also prepares the election of The Board of Directors receives periodical reports on earnings Trustees and Deputy Trustees representing the equity capital performance, market developments, management, personnel certificate holders and depositors. In its deliberations, the and organizational developments, and the Bank’s risk exposure. Nomination Committee shall ensure that the Committe of Representatives, the Audit Committee, the Nomination The Bank’s financial reporting is reviewed and approved Committee and the Board of Directors have the necessary by the Board of Directors. competencies, and that both genders are adequately represented. Directors are defined as primary insiders and must comply with the Bank’s regulations for acquisition of its equity capital certificates. The same applies to the purchase of shares in Board of Directors, composition certain companies that are customers of the Bank. and autonomy
The Board of Directors is elected by the Committe of Repre- The proceedings of the Board of Directors are regulated sentatives and normally consists of 8 Directors, of which two by a special directive to the Board of Directors. The Board are Directors elected by the employees. The Managing of Directors undertakes an annual self-evaluation of its mode Director is not a member of the Board of Directors. The of operation, administrative procedures, meeting structure, Bank’s Board of Directors is considered to fulfill the require- and its prioritization of tasks. Normally, the Board of Directors ments to autonomy, and represents a broad diversity of back- holds 12 meetings a year. grounds and competencies. Financial legislation pertaining to savings banks provides a framework for the right of The Board of Directors has established a separate Audit representation of various interest groups. Sandnes Spare- Committee to ensure that the Bank has a sound management bank endeavors to achieve the greatest possible autonomy that is well and properly organized, and has effective control between owners, Board of Directors and management. systems. The Audit Committee consists of three Directors, of which at least one possesses relevant accounting or audit All Directors are elected for two-year terms. Directors and skills. The objective, tasks and functions of the Audit Committee Deputy Directors may be reelected. To ensure continuity, has been determined pursuant to the law amendments brought half the Directors are elected every second year. As of about by the implementation of the EU audit directive and December 31, 2018, 4 of 8 regular Directors are women. its recommendation. Inter alia, the Audit Committee reviews Information about the Bank’s Directors is presented the financial reporting of the Bank. In this context, Manage- in a separate chapter of the Annual Report. ment presents material issues related to the Bank’s quarterly financial statements, as well as issues that are subject to individual assessment. As part of its review, the Committee Duties of the Board of Directors consults with the management, the Bank’s Management and its external auditor. The Board of Directors determines the Bank’s objectives, strategies and plans. These are reviewed and revised at least annually, in accordance with a fixed meeting calendar.
Sandnes Sparebank annual report 2018 17 Corporate governance
Beyond monitoring the financial reporting process, the Audit Accountability Committee is also responsible for ensuring that the Group Accountability is achieved through clear communication is subject to independent and effective internal and external to the employees of the Bank’s strategic measures and auditing, and that the risk management systems are effective. established goals. Operationally, this is achieved through At least once a year, the Committee will meet with the external clearly defined roles, responsibilities and expectations, where and internal auditor separately without anyone from Manage- area managers are responsible for achieving the goals within ment present. their areas of responsibility. Risk factor developments are periodically reported to the Managing Director and the Due to a new regulation regarding compensation in the Board of Directors. financial sector, on December 15, 2010, the Bank established a separate Compensation Committee. The committee is Compliance with laws, regulations and ethical standards responsible for preparing all issues regarding compensation Sandnes Sparebank has prepared ethical guidelines. In addition, plans to be decided by the Board of Directors. The Committee a separate reporting procedure has been established. Its pur- consists of 3 Directors. pose is to make it simpler for the employees of the Bank to raise ethical issues and undesirable incidents. Due to requirements in the §47.4 of the Capital Requirement Regulation, the Bank has, effective 2014, established a separate Internal guidelines have been developed for trading for own Risk Committee. The Risk Committee shall ensure that the account and the treatment of inside information. These guide- control and management of the risks of Sandnes Sparebank lines describe the laws and regulations that apply to all employ- is of a satisfactory high quality in order to achieve the Group’s ees, temporary staff and elected officers. The ethical guide- strategic objectives through proper management of the lines are clearly communicated within the organization and Group’s assets. The Committee consists of 3 Directors. have also been published on the Bank’s intranet. From Management, the Director of Risk Management has an obligation to appear, whereas the Managing Director and A database of undesirable events has been established. This the Financial Director are entitled to appear. The Committee database is managed by the Director of Risk Management. shall be convened at least once a year. The Bank has organized all compliance activity in a separate function under the Director of Risk Management. The mission Risk management and internal audit of this function is to check that both the Bank and the securities Risk management company are operating in compliance with present regulations. Effective risk management is a prerequisite if the Bank is to reach its strategic objectives. Risk management is an integral Internal Audit part of the Management decision-making process. The Bank Sandnes Sparebank has established an internal audit function. has established a separate risk management function that In 2018, the Bank entered an agreement with KPMG AS reports directly to the Managing Director. The Bank’s risk regarding the management of the internal audit function and the exposure relative to the set framework and objectives is provision of internal audit services, starting January 1, 2019. reported monthly to the Board of Directors. The agreement covers the Parent Bank, subsidiaries subject to the internal audit regulation, as well as other significant The Bank’s risk management function also coordinates the subsidiaries. continuous process whereby the Bank’s solvency is assessed relative to its risk exposure. The Bank’s risk exposure and capital The main purpose of internal audit is to evaluate whether requirements are reviewed on an annual basis. The review internal controls work as intended. In addition, internal audit is considered by the Board of Directors and submitted to shall contribute to the improvement of the Bank’s risk manage- the Financial Supervisory Authority of Norway. ment and internal controls.
Sandnes Sparebank annual report 2018 18 Corporate governance
An annual internal audit plan is prepared on the basis of the Information and communication internal audit function’s risk evaluations and discussions with Sandnes Sparebank endeavors to provide identical, timely management, external auditors and the Audit Committee/ and relevant information to all stakeholders. Financial results Board of Directors. The Board of Directors adopts the annual are published through the Oslo Stock Exchange and presented plan and budget for the internal audit function. Audit reports quarterly to investors, analysts and the media. The information with proposed improvement measures are prepared for each is also posted on the Bank’s website. Regular presentations are internal audit project. These are presented to the responsible also made to international partners and lenders. All quarterly manager and Group Management. A report summary, including reports, press releases and presentations are published on the high priority recommendations, are presented to the Audit Bank’s website on www.sandnes-sparebank.no/investor- Committee. All reports are available to the Board of Directors relations and the Audit Committee through Admincontrol. The status of previous recommendations are followed up by internal audit, and is part of the regular reporting to the Audit Committee Corporate takeovers and the Board of Directors. As a self-owning institution, Sandnes Sparebank cannot Internal audit does not perform financial audits. become the object of direct takeover, according to current legislation. In the case of acquisitions by the Bank, the best possible safeguard of the interests of all interested parties, Remuneration of Directors including equal treatment of shareholders/owners, is prioritized. The Bank will endeavor to ensure that any takeovers will The Directors receive an annual compensation that is deter- have the least possible negative impact on the Bank’s daily mined by the Bank’s Board of Trustees. The Directors may operations. elect to receive up to 50% of the fixed Director’s fee in the form of Bank equity capital certificates. The certificates are allocated quarterly on the basis of market price. No fees are External auditor paid in addition to this. Information about compensation and loans to Directors is provided in the notes to the annual The duty of the external auditor is to evaluate whether the financial statements. information provided by the annual report concerning the annual financial statements, the Bank’s accounting principles, the management of risk, the assumption of continued opera- Remuneration of senior management tions as a going concern, and proposals for allocation of profit or cover of loss, comply with laws and regulations. Remuneration of the Managing Director is determined by The external auditor shall also evaluate whether the Bank’s the Board of Directors. The Managing Director, under the asset management is satisfactorily arranged and under supervision of the Board of Directors, prepares guidelines adequate control. The Committe of Representatives elects for the remuneration of other senior employees of the Bank. the external auditor. The Bank’s bonus and compensation plan is in compliance with the requirements of the Regulation regarding compen- The external auditor submits a report to The Committe sation plans of finance institutions. No option plans or similar of Representatives on these matters. schemes have been established. The principles for remunera- tion of senior management, as well as information about actual compensation and loans to senior managers, are provided in the notes to the annual financial statements.
Sandnes Sparebank annual report 2018 19 Investor Information
Investor Information
The Equity Capital Certificate
Return and dividend policy "The objective of Sandnes Sparebank is to manage its total resources in such a way as to provide equity capital certificate holders a good, stable and competitive return in the form of dividends and price appreciation. Annual profits will be allocated to equity certificate capital (equity capital certificate holders) and primary capital on a pro rata basis relative to their respective shares of the Bank’s equity capital. Sandnes Sparebank intends that between 50% and 75% of the equity certificate capital’s share of profits will be distributed as dividends, and correspondingly that between 50% and 75% of the primary capital's share of profits will be distributed as gifts customer dividends. Considerations will emphasize that the equity capital certificate holders' share of total equity (ownership ratio) ought to be kept stable. In the determination of total distribution level, factors to be considered include expected earnings performance, external framework conditions and the Group’s estimated need for Tier-1 capital.”
Historical development of the equity certificate capital since the stock exchange listing in 1995:
Equity certificate Subscription capital Year Type of change price Number Face value (NOK ‘000) 1995 Grunnfondsemisjon (børsnotering) 110.00 1 300 000 100 130 000
1997 Fortrinnsrettet emisjon (eiere) 130.00 1 300 000 100 260 000
2001 Rettet emisjon (ansatte) 102.13 50 000 100 265 000
2001 Fortrinnsrettet emisjon (eiere) 110.00 1 250 000 100 390 000
2003 Fortrinnsrettet emisjon (eiere) 125.00 1 300 000 100 520 000
2007 Fortrinnsrettet emisjon (eiere) 166.00 1 500 000 100 670 000
2008 Utbytteemisjon 115.00 405 811 100 710 581
2016 Endring pålydende 7 105 811 10 71 058
2016 Fortrinnsrettet emisjon 22.00 15 909 091 10 230 149
Sandnes Sparebank annual report 2018 20 Investor Information
2018 price performance of SAGD
As of December 31, 2018, the SADG price was NOK 55.0 (last OSE price quote). The board has proposed to pay NOK 119.7 million in dividends for 2018, corresponding to NOK 5.2 per equity capital certificate. Relative to the stock exchange quotation as of December 31, 2017, the SADG performance in 2018 represents a price increase of 6,1%. This is slightly stronger develop- ment than Oslo Stock Exchange Equity Capital Certificate Index (OSEEX), which had a positive performance of 5.7% during 2018.
SADG vs OSEEX
65 400 000
60 350 000
300 000 55 250 000 50 200 000 Price 45 150 000 Volume (millio) Volume 40 100 000
35 50 000
30 0 Des Jun Des Jun Des 16 17 17 18 18
SADG volum SADG OSEBX (rebasert) OSEEX (rebasert)
Sandnes Sparebank annual report 2018 21 Investor Information
As of December 31, 2018, the 20 biggest owners controlled 56.2% of the equity certificate capital. This is an increase from the 55.5% as of December 31, 2017. At the end of 2018, there were 2312 equity certificate holders in total.
Owner summary:
The 20 biggest equity capital certificate owners as of 12/31/2018 Number Share
1. Sparebank 1 SR-Bank C/O SR-Investering 3 485 009 15.14 2. Merrill Lynch 2 270 083 9.86 3. AS Clipper 1 088 738 4.73 4. VPF EIKA Egenkapital C/O Eika Kapitalforvaltning 931 971 4.05 5. Espedal & Co AS 886 861 3.85 6. Wenaasgruppen AS 650 000 2.82 7. Salt Value AS 515 000 2.24 8. Holmen Spesialfond 500 000 2.17 9. Skagenkaien Investering AS 350 000 1.52 10. Nordhaug Invest AS 309 957 1.35 11. Meteva AS 261 881 1.14 12. Kristian Falnes AS 260 000 1.13 13. Grunnfjellet AS 217 000 0.94 14. Velde Holding AS 204 353 0.89 15. MP Pensjon PK 196 726 0.85 16. Innovemus AS V/Oskar Bakkevig 185 000 0.80 17. Hausta Investor AS 165 000 0.72 18. Barque 159 651 0.69 19. Tirna Holding AS 156 255 0.68 20. Parra Eiendom AS 150 000 0.65 = 20 biggest owners 12 943 485 56.24 + Other owners 10 071 417 43.76 = Total 23 014 902 100.00
Dividend and equity capital certificate percentage
It was resolved to pay dividends of NOK 5.2 per equity capital certificate for 2018, and a corresponding payment to primary capital. The dividend corresponds to 75% of annual earnings.
In 2018, the Bank introduced customer dividends on the basis of the 2017 annual earnings. The purpose of customer dividends is to return some of the Bank's profits to its customers. Customer dividend has been an important customer measure. It contri- butes to retaining existing customers and to welcome new customers to the Bank.
In 2018, NOK 24 million was paid out as customer dividends. As a consequence of increased earnings and dividend rate for 2018, customer dividends will also increase. The Board of Directors recommends customer dividends for 2018 of NOK 53 million.
Customer dividends also contribute to keeping the equity capital certificate capital ratio stable. The equity capital certificate capital ratio was 65.3% at the end of 2018, up from 65.1% at the end of 2017.
Sandnes Sparebank annual report 2018 22 Investor Information
Liquidity
The Bank's liquidity situation is good. The Bank will have an acceptable need for refinancing in 2019.
The establishment of SSB Boligkreditt AS has enabled the Sandnes Sparebank Group to issue covered bonds (OMF) and thus reduce the Group’s liquidity risk. Covered bonds issued by SSB Boligkreditt AS carry a AAA rating from Scope Ratings. AAA is Scope’ best rating. Net lending by SSB Boligkreditt constitutes a volume of NOK 7.4 billion, which is an increase of NOK 0.8 billion during the past 12 months. As of 12/31/2018, SSB Boligkreditt AS had covered bonds in issue worth NOK 6.8 billion, net. The Bank is deemed to be well diversified with respect to both funding sources and maturities.
At the end of the year, the Bank had a liquidity portfolio (excluding cash) of NOK 3.7 (3.3) billion. One of the Bank's objectives is to keep liquidity risk at a low level. In the Bank’s liquidity strategy, the Board of Directors has determined a framework for the Bank always having holdings of strategic liquidity making operations under normal operating conditions possible for at least 15 months without injection of liquidity. The available liquidity as of December 31, 2018 ensures operation for 24 months without supply of liquidity.
Refinancing requirements
3 500
3 000
2 500 2 192 222 2 086 677 2 095 677
1 490 677 2 000 438 273 1 475 677 NOKm 1 500
1 000
500 1 753 949
0
Q1/19 Q2/19 Q3/19 Q4/19 Q1/20 Q2/20 Q3/20 Q4/20 Q1/21
Central Bank Facility Cash and Bank Deposits Liquidity buffer
Sandnes Sparebank annual report 2018 23 Investor Information
Senior Bank 1.3 % Foreign credit Norwegian institutions municipalities 10.2 % 17.7 %
Foreign municipalities 5.0 %
Government guaranteed 2.1 %
Norwegian credit institutions 61.0 %
The bond portfolio
The Bank values its entire bond portfolio at fair value through the income statement. The portfolio is used for investment of excess liquidity.
Market information
The Bank desires to pursue an open information policy aimed at providing holders of equity capital certificates and the securities market simultaneous, correct and relevant information about the Bank's financial performance. The Bank prepares quarterly reports. All press releases and stock exchange announcements are available on the Bank's website at www.sandnes-sparebank.no/ investor-relations. Alternatively, information regarding capital ratios is available on the website of the Oslo Stock Exchange, www.ose.no. The ticker code for the Sandnes Sparebank equity capital certificate on the Oslo Stock Exchange is SADG.
The bank organizes earnings presentations in Oslo after the publication of the quarterly financial reports.
SADG - Financial Calendar 2019
Q1 Report 2019 May 21 Semi-annual report August 15 Q3 Report 2019 October 30
The Bank's financial calendar may be subject to changes.
Sandnes Sparebank annual report 2018 24 DIRECTORS’ REPORT Directors’ report
Directors’ report 2018
Nature of the business
Sandnes Sparebank is an independent savings bank and Nationally, the network companies are also reporting further a member of the EIKA Alliance, with its head office in the city in production and investments, of which much is in the oil center of the municipality of Sandnes. The Bank offers a sector. Estimates of 2019 oil investments indicate that this broad range of banking and investment products to retail trend will continue. For the local business community in and corporate customers. The Group is also involved in real Rogaland, the activity level in oil related businesses is a major estate brokerage through its subsidiary, Aktiv Eiendomsme- growth driver. gling Jæren AS. NAV is reporting a continued decline in unemployment The Group consists of the Parent Bank and the SSB Bolig in the region. The registered unemployment in Rogaland kreditt AS subsidiary. In addition, the Group owns 60% has declined steadily, from 3.2% at the start of the year, of Aktiv Eiendomsmegling Jæren AS. The accounts of the to 2.5% at the end. The region’s labor market is almost back abovementioned companies are fully consolidated in the to the national level and is approaching full capacity utiliza- Group financial statements of Sandnes Sparebank. tion. Several companies are reporting lack of labor resources in some competency groups, e.g. digital competence. The Board of Directors considers the Bank's capital adequacy and liquidity levels to be satisfactory. We confirm that the The home prices in the region has remained almost conditions for considering the Company a going concern unchanged in 2018 (a 0.4% increase). In the longer term, are present, in accordance with §3-3a of the Norwegian home prices recorded strong growth until 2014, then a decline Accounting Act, and the financial statements have been of approximately 10% until 2016. In recent years, prices have prepared on this basis. Sandnes Sparebank prepares both been more or less flat. In the context of the recession after its Group financial statements and Parent Bank financial the drop in the oil price during 2014-2015, the home prices statements in compliance with the International Financial in the region have proved to be both stable and robust Reporting Standards (IFRS), as approved by the EU. The appli- throughout the period. cable accounting principles are described in Note 2 to the annual financial statements. In September, the Norwegian Central Bank increased its policy rate for the first time in seven years, and the rate is expected to increase further in 2019. A higher interest rate Market conditions level may contribute to mitigate price increases in the housing Local conditions – Rogaland markets going forward. Locally, home prices are at a mode- Most local economic indicators in Rogaland are in a positive rate level, and this will, together with an improved labor trend. During 2017 and 2018, the region experienced stable market, contribute to no further weakening of debt servicing and positive development. In December, Norges Bank, the capacity by a moderate rate increase. Norwegian central bank, reported that the results of its regional network survey showed that companies in the region conti- The positive trend is also having a positive impact on commer- nued to grow with respect to production, investments and cial real estate. The most recently updated reports from the employment. The same companies are also reporting autumn of 2018 showed total vacancy rates in the region of positive outlook for 2019, but are a little more cautiously 9.7%, down from 13.5% in 2017. There are great differences optimistic than a year ago. within the commercial real estate sector, both with respect
Sandnes Sparebank annual report 2018 26 Directors’ report
to geographic location, but also function. To a great extent, Return on equity after taxes, last 5 years it's the office market at Forus that contributes to the relatively high vacancy rate. When looking at Forus in isolation, the 8.8 % vacancy rate is around 14% for office buildings, and there are 7.3 % 7.5 % a few large empty individual buildings that contribute signifi- 6.2 % cantly to the statistics. Other building, such as combined premises and commercial building have a normal, low vacancy rate, also at Forus. Although the macro prospects are better, it will take time before the market for leased office premises at Forus will normalize. For city center areas of Stavanger and Sandnes, and in the business cluster around Jåttåvågen, there is little vacancy and normal rents. 2014 2015 2016 2017 2018
Earnings performance -3.5 % Numbers in brackets are for the corresponding period in 2017. Unless otherwise noted, descriptions apply to the Group. Net interest income The Group's net interest income was NOK 462.0 (474.2) For the year, profits after taxes were NOK 244.4 million, million for 2018. The interest margin was 1.73% in 2018, compared to NOK 197.4 million in 2017.The increase may compared to 1.81% in 2017. be explained mainly with lower operating cost and lower write- downs and losses on loans, as well as a positive one-time The decline in net interest income is due to a higher Nibor impact related to the VIPPS merger. This was partially coun- rate in 2018 than in 2017, which has resulted in higher funding tered by lower net interest income. costs for the Bank as well as some pressure on lending margins due to increased market competition. However, Pre-tax profits for 2018 were NOK 299.7 million. This is an the increased lending volume does reduce this impact increase of NOK 43.7 million compared to 2017. Total profits somewhat. Additionally, during the past year, the Bank has were NOK 258.9 million, compared to NOK 172.6 million in reduced the credit risk of its liquidity portfolio in order to avoid 2017. significant negative performance by theportfolio in case of unrest on the fixed income market. The latter issue has For the year, return on equity after taxes was 8.8%, resulted in NOK 3 million less in current interest income in compared to 7.5% for 2017. 2018 than in 2017.
Annual development in profit after tax and return on equity
Profit after taxes, last 5 years Net interest income in % of avg. total assets, last 5 years
244 1.81 % 1.73 % 1.65 % 197 1.60 % 1.64 % 172
129
2014 2015 2016 2017 2018 2014 2015 2016 2017 2018
-74
Sandnes Sparebank annual report 2018 27 Directors’ report
Other operating income Norge AS, BankAxept AS and Vipps AS. Counter to this was Total other operating income amounted to NOK 122.6 negative valuation developments for the Bank's liquidity million for 2018. This is a decline of NOK 0.3 million portfolio and repurchase of bond debt in connection with compared to 2017. refinancing.
Net commission income amounted to NOK 49.2 million, Other operating income was NOK 1.8 million higher which is NOK 4.7 million less than in 2017. There has been compared to 2017. The improvement was due to positive an increase in commission income on the sale of insurance development of the real estate market in the region and a services and portfolio management fees. A general pressure higher market share, which has resulted in higher income on fee income has countered this because the Bank has from real estate brokerage services for the Aktiv Eiendoms- adjusted its fee structure in order to be more competitive. megling Jæren AS subsidiary. In addition, in 2018 the Bank has reclassified certain income types from commission income to net interest income and Other operating income must be expected to fluctuate from operating income. quarter to quarter due to seasonal and market volatility.
In 2018, dividends amounted to NOK 30.3 million, compared Operating cost to NOK 27.0 million in 2017. The main reason for the uptick Group operating cost was NOK 261.1 million in 2018. This is is increased dividends from Eika Gruppen AS, which amounted a decline of NOK 7.5 million compared to 2017. The Bank’s to NOK 29.1 million, compared to NOK 24.2 million during cost level has been declining for several years due to cost 2017. efficiency improvements.
For 2018, the net return on financial investments was NOK In 2018, the Group cost to income ratio was 44.7%, while 14.1 million, whereas it was NOK 14.9 million in 2017. it was 45.0% in 2017. The total cost to total asset ratio was . 1.0% in both 2018 and 2017. In 2018, the Bank had a positive return on its share portfolio, which includes a recognized but unrealized capital gain of NOK 18.3 million as a result of the merger between BankID
Other income, last 5 years Other operating income, last 5 years
174 406 27 330 80.9 % 47 123 123 288 269 261 54 27 29 58.9 % 85 32 46.8 % 62 15 14 45.0 % 44.7 % 26 54 49 51 59 39 27 30 0,1 20 -0,3 2014 2015 2016 2017 2018 -50
Total other operating costs Cost to income ratio 2014 2015 2016 2017 2018
Other income, subsidiaries Valuation change, currencies and and affiliates securities (current assets)
Net commission income Dividends and income from securities (w/ var. returns)
Sandnes Sparebank annual report 2018 28 Directors’ report
Losses and non-performing loans Losses on loans and guarantees, last 5 years A new loss model in accordance with IFRS 9 was implemented 234 as of January 1, 2018, replacing the previous loss model according to IAS 39. One result of the implementation is that 0.98 % historical figures will not be directly comparable. Please refer to Note 8 for a more detailed description of the new loss model. 112
0.49 % 73 Losses and writedowns of loans and guarantees of NOK 0.33 % 39 23.7 (72.5) million were recognized during 2018. The reason 24 0.16 % for the decline is mainly due to general improvement of the 0.11 % market conditions, lower risk and fewer defaults in the Bank's loan portfolio, and the restructuring of some of the Bank's 2014 2015 2016 2017 2018 individual loans. Significant efforts has been made during the past year to reduce the scope of problem loans and the loss Losses on loans and guarantees Loss in % of gross lending exposure of the loan portfolio.
As of the end of 2018, total expected losses (provisions for Net non-performing and problem loans, last 5 years losses on loans and guarantees) were NOK 242.5 (391.5) million, of which NOK 41.5 (65.2) were related to the Retail 554 481 Market and NOK 201.0 (326.3) million related to the Corpo- 463 rate Market.
Step 3 writedowns (individual writedowns) of loans and 240 2.32 % 2.24 % 233 guarantees were at NOK 156.7 million at the end of 2018, 2.16 % which is a decline of NOK 127.4 million during the past 12 1.05 % 1.05 % months. Step 1 and 2 writedowns (group writedowns) amounted to NOK 85.8 million at the end of 2018, represen- ting a decline of NOK 21.7 million during the past 12 months. 2014 2015 2016 2017 2018
As of 12/31/2018, net non-performing and problem loans Net non-performing Net non-performing and problem and problem loans loans in % of net lending subject to individual writedowns were NOK 233.4 (463.4) million. This is 1.05% (2.16%) of the Group's net lending volume. Of the net non-performing and problem loans, NOK 73.5 (123.9) million are related to the Retail Market and NOK 159.9 Balance sheet developments (339.5) million are related to the Corporate Market. Group total assets were NOK 27.2 (26.1) billion at the end Gross non-performing loans over 90 days amounted to of 2018. This represents an increase of 4.3% compared NOK 151.4 million as of 12/31/2018, compared to NOK 184.8 to the end of 2017, and may be primarily explained by million as of 12/31/2017. lending growth.
At the end of 2018, gross lending to customers amounted to NOK 22.4 (21.9) billion. During the past 12 months, gross Group lending has grown by 2.7%. Retail Market lending grew by 4.7% and loans to the Corporate Market grew by
Sandnes Sparebank annual report 2018 29 Directors’ report
-1.1%. In the retail market, the Bank increased its market At the end of 2018, deposits amounted to NOK 11.3 (10.9) share in 2018. With respect to the corporate market, several billion. During the past 12 months, deposits from customers measures have been taken, pursuant to the agreed strategy, have increased by 3.6%. Retail Market deposits declined by to improve the portfolio quality. There is healthy and -1.1% and Corporate Market deposit increased by 7.4%. At the profitable growth in the small and medium corporate end of 2018, the Group deposit to loan ratio was 50.7% segment at the same time as the share of major and risky (50.6%). loans has been reduced. Additionally, a number of loans previously carried with a loss, have been terminated or written down. Solvency At the end of the year, the Group capital ratios were above At the end of 2018, the Retail Market share of total lending the regulatory capital requirements and the internal objec- was 68% (67%). tive for Core Tier-1 capital.
As of 12/31/2018 the Group has a Core Tier-1 ratio of 16.6%, Gross group lending growth (12 mo) unchanged compared to 12/31/2017. The core Tier-1 capital ratio was somewhat reduced due to lending growth and the Group purchase of equity capital certificates in Jæren Sparebank, 4.1 % and an increase in the valuation of Vipps/VBB AS, but is offset 2.3 % 2.7 % by retained earnings in 2018. 1.3 %
-0.1 % As of 12/31/2018, the unweighted equity ratio of the Group was 9.9%, compared to 10.0% as of 12/31/2017. -3.5 % -4.2 %
-5.9 % -5.6 % -6.5 % Core Tier-1 capital ratio, last 5 years
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 16.6 % 16.6 % 2016 2017 2018 15.6 %
12.0 % 12.1 %
Gross segment lending growth (12 mo)
Retail Market Corporate Market 4.5 % 4.7 % 2.8 % 1.3 % -0.3 % 2014 2015 2016 2017 2018 -1.7 % -3.1 % -4.4 % 3.5 % -7.1 % -6.5 % 1.4 % 1.4 % 0.2 % -1.1 %
-4.8 % -4.2 % -5.4 % -7.8 % -8.8 %
Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2016 2017 2018
Sandnes Sparebank annual report 2018 30 Directors’ report
Liquidity and funding Subsidiaries The Bank's liquidity situation at the end of the quarter is deemed For 2018, the total profits of the Bank's three subsidiaries to be satisfactory. At the end of the quarter, the Bank had – prior to intergroup offsets – were NOK 39.5 (49.5) after a liquidity portfolio (excluding cash) of NOK 3.7 (3.3) billion. taxes. One of the Bank's objectives is to keep liquidity risk at a low level. SSB Boligkreditt AS was established as a part of the Group's long-term funding strategy and the main objective of this Net lending by SSB Boligkreditt constitutes a volume of NOK mortgage company is to issue covered bonds in the market. 7.4 billion, which is an increase of NOK 0.8 billion during the For 2018, company profits after taxes were NOK 38.7 (48.8) past 12 months. As of 12/31/2018, SSB Boligkreditt AS had million. covered bonds in issue worth NOK 6.8 billion, net. The Bank is deemed to be well diversified with respect to both funding Aktiv Eiendomsmegling Jæren AS offer real estate brokerage sources and maturities. services to both retail and corporate customers. For 2018, company profits after taxes were NOK 0.8 (0.7) million.
SSB Private Equity II AS was wound up during the fourth quarter The liquidity portfolio of 2017. The company contributed no profits during 2017.
Senior Bank Norwegian municipalities (1 %) (18 %) Foreign municipalities (5 %) Risk management Foreign credit institutions The Norwegian (11 %) Government Financial activity requires management of risk. Good risk (2 %) management is of strategic importance for the Group's
Norwegian value creation. The combination of risk management and credit institutions (63 %) internal compliance contributes to efficient operations, satisfactory handling of major risks, as well as assurance of high quality internal and external reporting. In addition, high quality risk management and internal compliance ensure that the Group is operating in compliance with relevant laws, regulations and internal guidelines for its operations. The Funding sources Group's core values and ethical framework are also part of the internal guidelines.
Deposits Covered bonds It is an objective of Sandnes Sparebank to maintain a low 29 % to moderate risk profile, and to have risk management of high 47 % quality. The desired risk profile is based on the Bank’s internal capital adequacy and return objectives. Day-to-day risk management will reduce the probability of individual events 23 % occurring that may inflict significant financial damage on the Supplementary capital 1 % Senior debt Bank. 1 % A key part of the Bank’s risk management is the Group’s assessment of its total capital requirement (Pilar II or ICAAP – Internal Capital Adequacy Assessment Process). In this process we assess the risk to which the Bank is exposed relative to the appurtenant assessment of management and
Sandnes Sparebank annual report 2018 31 Directors’ report
control. On the basis of this assessment, we calculate the SSB Boligkreditt has been an important instrument for main- amount of capital required to cover these risks. The assess- taining the Group's risk profile. SSB Boligkreditt has taken ments are summarized at least on an annual basis in a report over well collateralized home mortgages from the Bank and submitted to the Financial Supervisory Authority of Norway. issued covered bonds to finance them, which has provided In order to ensure that the Bank's ICAAP is of satisfactory the Group with better diversification on the funding side, quality, the Bank's internal audit function performs an annual at more advantageous terms. The bonds issued by SSB review of the process. This report is also submitted to the Boligkreditt has a “AAA” rating from Scope. Financial Supervisory Authority of Norway. At the end of 2018, loans worth NOK 7.4 billion had been Credit risk transferred from the Bank to SSB Boligkreditt. SSB Boligkre- Overall, the Group has a moderate risk profile. The credit risk ditt has issued covered bonds with a nominal value NOK 6.8 for current ordinary loans is mainly in the low and medium billion. In addition, bonds with a face value of NOK 7.9 billion risk categories (please refer to Note 8). For loans with indica- have been issued by Sandnes Sparebank. tions of potential loss, individual writedowns have been made on the basis of concrete evaluations. The Group’s deposit to loan ratio was stable during 2018, and was just over the 50% target at the end of the year. In our There has been a reduction of the Bank's credit risk during opinion, the liquidity risk is acceptable. This is because the 2018. The lending volume to customers increased by 3.3% composition of the Bank’s deposits is more stable, and thus during 2018, but the calculation base for capital requirements no large daily fluctuations of the Bank’s liquidity. has only increased by 0.6% at the Group level, which, seen in isolation, indicates a reduced credit risk level. The Bank's The Group carries a low short-term liquidity risk. loss exposure to loans over NOK 100 million was reduced by 15% during 2018. Market risk The Bank has no trading portfolio of equity instruments, It is our assessment that the loan portfolio of corporate currencies, bonds or notes. customers carries a moderate risk profile, and the quality of the portfolio is considered satisfactory. 64.7% of the The Bank’s holdings of bonds and notes are part of the exposure to corporate customers satisfies the Group’s Bank's liquid assets. The Group requires a credit rating, and internal requirement for classification as low risk. an additional main principle is that the securities must qualify for access to borrowing from the Norwegian Central Bank. The quality of the retail loan portfolio is considered to be In the financial statements, liquid assets are valued at fair good. 90.6% of the retail loan portfolio satisfies the Group’s value, and are thus exposed to market risk. The credit risk internal requirement for classification as low risk. Home for these assets is quantified as risk of default. prices in the Bank's catchment area remained stable during 2018, and unemployment is reduced, particularly in Roga- Beyond this, the Group’s market risk consists of foreign land. The Bank is satisfied with the quality of the retail currency risk and interest rate risk. Trading in foreign customer loan portfolio. currencies and interest rates takes place within the agreed frameworks and authorizations. Foreign currency risk is For the Group, problem and non-performing loans beyond mainly related to interest accruing on customers' currency 90 days were reduced during 2018 from 2.16% to 1.05%. loans, currency derivatives and our cash balance. The Bank has guidelines for hedging of foreign currency risk. The Liquidity risk foreign currency risk is considered to be moderate to low. At the end of 2018, the Bank’s liquidity strategy was reviewed by the Board of Directors. The liquidity strategy reflects a Interest rate risk is related to the holdings of fixed income continuation of the Bank's conservative approach to liquidity securities, as well as loans and deposits with fixed interest risk. Management of liquidity risk shall reflect the Group’s rates. The Board of Directors has set a limit of NOK 21 million moderate risk profile. for total interest rate risk on and off the Group balance sheet.
Sandnes Sparebank annual report 2018 32 Directors’ report
This is measured by the effect on earnings of a 2% parallel tives, to follow this up by making visible and sharing results, shift in the interest rate. At the end of the year, the estimated and by appreciating and call attention to cases of good earnings effect of a positive interest rate shift of 2% was NOK performance. 1.9 million, whereas the estimated earnings effect of a negative interest rate shift of 2%, was NOK -2.2 million. Thus, interest The EIKA Alliance has provided the Bank with a basis for risk is considered to be low. In total, the Group’s exposure following technological developments and enabled us to to market risk is considered to be moderate. offer up-to-date solutions to our customers. Overall, the Board of Directors is of the opinion that the EIKA Alliance Operational risk provides the Bank with a business and technological basis Operational risks comprise all the potential sources of loss for building the bank of the future in Sandnes. related to the Bank's ongoing operations. Failure of proce- dures, computer systems, mistakes made by subcontractors, The average age of bank employees is 43 years. Female and breach of trust on the part of employees and customers employees constitute 68% of the Bank’s employees. The are examples of such risks. The Bank emphasizes the Bank's management team consists of three men and three importance of purposeful initiatives to prevent and reduce women, and of the eight Directors, four are women. operational risks. Good internal control is an important aid in reducing operational risks, with respect to prevention, It is a fundamental principle of the Bank's personnel policy disclosure and follow-up. Risk evaluations are made in all that women and men shall have the same opportunities for business areas. The major risks, together with action plans qualifying for all kinds of work, and that their career opportu- for reducing these to acceptable levels, are reported to the nities shall be the same. Furthermore, everybody shall have Managing Director. The Managing Director, in consultation equal opportunities regardless of ethnicity, national origin, with the Bank’s top management, assesses the Bank’s skin color, language, religion, faith or functional ability. strategic risk. The major risks and the appurtenant measures Working environment surveys at the Bank show that the to minimize risk are presented to the Board of Directors. The employees are well satisfied with their work place, and of Bank’s internal auditor performs an audit and independently the opinion that the working environment is good. Pay reflects confirms whether the Bank’s internal audit activities satisfy market wages and the individual employee’s qualifications the requirements set by the Internal Audit Regulation. and responsibilities, to the greatest extent possible.
In addition, the Bank has a notification and follow-up system The Bank's retail market customer advisors are authorized for undesirable events. This enables the Bank to analyze in accordance with the authorization scheme for financial operational events and then initiate changes to internal advisors, and authorized in accordance with the authoriza- processes to reduce the likelihood of recurrence. tion scheme for general insurance sales people and advisors. During 2018, the advisor team of the Bank has also been authorized for the new credit authorization system. Organization, employees and environment In 2018, the Group’s average number of full time equivalent For both the retail market and the corporate market, Sandnes employees was 133.5. At the end of the year, the Group had Sparebank has a highly competent corps of advisors that both 135.5 full-time employee equivalents, an increase of two ensures good customer experiences and quality in the equivalents from December 2017. Aktiv Eiendom had 21.5 customer processes. full-time equivalents at the end of the year. In isolation, the Bank had 114 full-time employee equivalents at the end of The company does not pollute the external environment. the year. No serious incidents or accidents took place or were reported during the year. One of the Bank's strategic focus areas is to develop compe- tent, committed and performance oriented employees. In Average absence due to illness was 2.2% in 2018. Since 2012, order to reach these objectives, the Bank has facilitated the the Bank has been an IA (inclusive work environment development of a performance oriented culture that makes agreement) company in order to ensure good procedures the most out of available resources. One effective way to for the follow-up of people on sick leave and a good working build a good performance oriented culture has been to clarify environment at the Bank. what is expected of each unit in order to achieve our objec-
Sandnes Sparebank annual report 2018 33 Directors’ report
The Bank's equity capital certificate (SADG) The Board of Directors proposes Amount (in millions of NOK)) the following allocation: As of 12/31/2018, the SADG price was NOK 55.00, compared For allocation 207.8 to NOK 54.50 as of 12/31/2017. To cash dividends on equity capital certificates 119.7 To equalization reserves 16.5 At the end of 2018, the registry showed 2,312 owners of the To the Savings Bank Fund 8.7 Bank’s equity certificates. At this point in time, the 20 biggest To the Gift Fund/customer dividend 63.0 owners controlled 56.24% of the equity certificate capital. To hybrid capital holders 1.2 From reserves for unrealized gains -1.3 The total number of equity capital certificates as of 12/31/2018 Total proposed allocation 207.8 was 23,014,902, of which 18,684 constituted a treasury holding. The profits have been allocated on the equity capital and the A summary of the 20 biggest holders of equity capital saving Bank's Fund relative to their share of equity, in order certificates is available under Investor Information in the to provide equity capital certificate holders with 65.52% of Annual Report. the allocated profits.
The Bank’s dividend policy is as follows; Events after the balance sheet date "It is an objective of Sandnes Sparebank to manage its total resources in order to ensure a good, stable and competitive Tax deduction for customer dividends return in the form of dividends and price appreciation. On 1/28/2019, SpareBank 1 Østlandet reported a binding Annual profits will be allocated to equity certificate capital opinion prior to implementation regarding tax deduction for (equity capital certificate holders) and primary capital on a customer dividends. We assume that the prior opinion also pro rata basis relative to their respective shares of the Bank’s will apply to Sandnes Sparebank. On 1/26/2018, Sandnes equity capital. Sandnes Sparebank intends that between 50% Sparebank received approval from the Financial Supervisory and 75% of the equity certificate capital’s share of profits will Authority of Norway for customer dividends, and the Bank be distributed as dividends, and correspondingly that between paid NOK 24 million to its customers in 2018. For the Bank, 50% and 75% of the primary capital's share of profits will be the payment of customer dividends is an important vehicle distributed as gifts customer dividends. Considerations will for future income acquisition both with respect to recruiting emphasize that the equity capital certificate holders' share new customers to the Bank and to keep existing customers. of total equity (ownership ratio) ought to be kept stable. The tax deduction is recorded in the income statement In the determination of total distribution level, factors to be pursuant to IAS 12 as a reduction of the 2018 tax cost. considered include expected earnings performance, external framework conditions and the Group’s estimated need for Otherwise, there have been no significant events after the Tier-1 capital. date of the balance sheet that affects the financial state- ments as of 12/31/2018. Application of earnings for 2018 In line with the Bank’s dividend policy, different factors are Summary 2018 emphasized with respect to distribution of dividends. The The Bank is presenting good earnings for 2018 and there is decisive elements are solvency and strengthening the Tier-1 a positive trend for most key ratios. The Bank is experiencing ratio. The Board of Directors is proposing to the Board of healthy growth in the retail market, and has a stable but Trustees the payment of a dividend for 2018 of NOK 5.2 per improved corporate market portfolio. 2018 losses are NOK equity capital certificate, corresponding to 75% of the 23.7 million, which is lower than previously expected. The Group’s earnings per equity capital certificate. Of the NOK share of non-performing and problem loans was reduced 63.0 million dividend allocated to the primary capital, the Board during the year. Interest income was under pressure in 2018, of Directors proposes an allocation to the Gift Fund of NOK both due to competition and a higher Nibor rate than in 10.0 million, and NOK 53.0 million as customer dividend. 2017, but remained stable. The cost level of the Bank was lower than in the prior year. Both customer satisfaction and brand awareness are increasing, which is important in order to reach our strategic objectives.
Sandnes Sparebank annual report 2018 34 Directors’ report
In 2018, the Bank changed credit rating agency from Fitch Regional macro conditions are showing signs of somewhat Rating to Scope Ratings. Scope Ratings has awarded the higher economic activity going forward, at the same time as parent bank a BBB+ rating with positive prospects, and an credit growth in the region is lower than the national average. AAA rating to SSB Boligkreditt. There are still individual companies and industries that are struggling to adapt to a new activity and price level, but this In 2018, the Bank introduced customer dividends on the applies to fewer and fewer entities. This positive trend is basis of the 2017 annual earnings. The purpose of customer expected to continue in 2019. dividends is to return some of the Bank's profits to its custo- mers. Customer dividend is an important customer measure. The Bank is well capitalized. At the end of the year, the Bank It contributes to retaining existing customers and to welcome had a Core Tier-1 capital ratio of 16.6%, after payment of the new customers to the Bank. In 2018, NOK 24 million was annual dividend. The authorities required Tier-1 capital ratio paid out as customer dividends. As a consequence of incre- is 14.5%, and the objective of the Board of Directors for the ased earnings and dividend rate for 2018, customer dividends core Tier-1 capital ratio is at a minimum of 15.2%. During 2019, will also increase. The Board of Directors recommends the Bank will have the Pilar II requirements updated, and it has customer dividends for 2018 of NOK 53 million. been decided to increase the counter-cyclical buffer by 0.5% from 12/31/2019. The Directors will return with an updated The Bank is well on its way to deliver 9% return on equity target for the Tier-1 capital ratio during the year. by 2020. The Board of Directors wishes to give thanks to the Bank organization for having turned around a negative trend Based on these premises, from 2018, the Board expects to to deliver results in line with the strategic objectives for implement a dividend policy for the Bank of paying 50%-75% profitable growth, very satisfied customers and a return on of its earnings as dividend, subject to expected earnings equity above the average of peer banks. performance, external framework conditions and the Group’s estimated need for Tier-1 capital. However, the Directors Prospects for 2019 want to stress that there is uncertainty related to all future estimates. The Board of Directors is expecting good and Sandnes Sparebank has set tall objectives for customer stable development of the underlying banking operations, satisfaction and positive customer experiences. The Bank’s and improving market conditions. The Bank is well prepared objective is to be the leader with respect to service and for 2019, in the form of good liquidity, good solvency and advice for people in general and local businesses. The Bank's competencies. vision is “best in class with respect to good and personal customer experiences”. The strategic objectives of the Bank towards 2020 provides direction with respect to ensuring: • Very satisfied customers and a splendid reputation • Competent, committed and performance oriented employees • Profitable growth • Return on equity exceeding the peer average.
Sandnes, March 12, 2019 The Board of Directors of Sandnes Sparebank
Harald Espedal Frode Svaboe Heidi Nag Flikka Marion Svihus Chairman of the Board Deputy Chairman Director Director
Arne Lee Norheim Birte Norheim Solveig Vatne Jan Inge Aarreberg Trine Karin Stangeland Director Director Employee representative Employee representative CEO
Sandnes Sparebank annual report 2018 35 ANNUAL ACCOUNTS Income statement
Group Parent bank
The year The year The year The year NOK '000 Note 2018 2017 2018 2017 727 026 726 473 Interest income measured with the yield method 17 563 003 564 872 71 004 79 296 Interest income measured at fair value 17 65 728 75 552 336 050 331 534 Interest cost 17 240 157 245 444 461 980 474 236 Net interest income 388 574 394 980 57 359 66 022 Commission income 18 74 175 81 502 -8 126 -12 096 Commission cost 18 -8 126 -12 096 30 315 26 989 Dividends 31 920 76 962 14 121 14 868 Net change in valuation of financial instruments 19 21 065 15 473 28 881 27 074 Other operating income 20 1 147 10 122 550 122 857 Total other operating income 120 180 161 851 134 382 129 890 Personnel cost 21,22,23 115 702 111 687 114 100 120 251 Other operating cost 21 103 821 110 021 12 655 18 498 Depreciation/writedowns 21,31,32 12 589 18 306 261 137 268 638 Total operating cost 232 112 240 013 323 393 328 454 Operating profit before writedowns taxes 276 642 316 818 23 729 72 499 Writedowns and losses on loans and guarantees 11 24 264 76 710 299 664 255 954 Operating profit before taxes 252 378 240 108 55 284 58 604 Tax cost 24 44 595 42 518 244 380 197 351 Operating profit after taxes 207 783 197 590
Statement of other income and cost Items that will not be reclassified to the income statement Valuation adjustment of shares recognized at fair value 14 535 33 14 535 through comprehensive income 26 -758 Actuarial gains and losses, defined benefit pension 23 26 -758 7 -190 Taxes 7 -190 14 555 -569 Total 14 555 -569 Items that later may be reclassified to the income statement -24 213 Financial instruments available for sale 33 -24 213 Valuation adjustment of loans recognized at fair value 286 through comprehensive income -24 213 Total 286 -24 213 14 555 -24 781 Other income and cost (after taxes) 14 841 -24 781 258 935 172 569 Total profits 222 624 172 809 258 601 172 026 Majority share of profits 334 543 Minority share of profits 6.9 5.6 Earnings per equity capital certificate 44 5.9 5.6 6.9 5.6 Diluted earnings per equity capital certificate 5.9 5.6
Sandnes Sparebank annual report 2018 37 Balance sheet
Group Parent bank
31.12.2018 31.12.2017 NOK '000 Noter 31.12.2018 31.12.2017 454 707 472 646 Cash and deposits with central banks 25,26 454 707 472 646 201 566 172 782 Loans to and claims on credit institutions 11,25,26,27 100 247 71 787 21 439 328 20 746 928 Loans to customers at amortized cost 8-11,25,26 13 197 892 14 090 076 775 118 725 972 Loans to customers at fair value 8-11,25,26 1 601 203 725 972 3 660 633 3 333 184 Notes and bonds 25,26,28,34 3 116 404 3 090 432 203 148 126 491 Equities 25,26,30 203 148 126 491 150 356 154 560 Financial derivatives 15,25,26 85 082 106 487 Ownership interests in subsidiaries 29 354 345 354 315 30 741 40 740 Intangible assets 31 26 188 36 187 8 708 5 919 Deferred tax benefit 24 8 349 4 801 6 057 7 518 Tangible fixed assets 32 6 007 7 400 13 719 12 356 Other assets 29,41 751 034 529 623 9 864 48 190 Prepaid cost and accrued income 25,26 9 864 42 203 Financial instruments with valuation changes through 255 414 25,26,33 255 414 comprehensive income 252 443 Financial instruments available for sale 25,26,33 252 443 27 209 358 26 099 729 Total assets 20 169 884 19 910 866
50 197 36 740 Payable to credit institutions 25,26,34 24 836 55 123 11 252 168 10 857 443 Deposits from customers 25,26,35 11 252 906 10 859 382 12 317 863 11 702 343 Debt securities in issue 25,26,36 5 544 024 5 683 365 147 945 102 085 Financial derivatives 15,25,26 117 901 99 356 33 993 37 270 Other liabilities 25,26,38 31 079 34 627 56 528 36 461 Taxes payable 24,25,26 45 784 19 781 782 1 217 Deferred taxes 24,25,26 56 818 84 779 Accrued expenses and received, not accrued income 25,26 54 564 77 469 14 499 7 736 Provisions 11,23,37 14 342 7 736 317 563 524 907 Subordinated loan capital 25,26,39 317 563 524 907 24 248 357 23 390 979 Total liabilities 17 402 999 17 361 744
230 149 230 149 Equity capital certificate capital 40,44,45 230 149 230 149 -187 -358 Own equity capital certificates -187 -358 987 313 987 313 Share premium 40 987 313 987 313 389 294 372 735 Equalization reserves 40 389 294 372 735 820 224 811 510 The Savings Bank's Fund 40 820 224 811 510 88 159 64 592 Gift Fund/customer dividend 40 88 159 64 592 23 829 21 214 Net unrealized gains reserve 40 23 829 21 214 100 000 Hybrid capital 40 100 000 318 640 217 278 Retained earnings 40 128 105 61 967 3 581 4 317 Non-controlling ownership interests 2 961 001 2 708 750 Total equity 2 766 885 2 549 121 27 209 358 26 099 729 Total liabilities and shareholders' equity 20 169 884 19 910 866
March 12 2019 The Board of Directors of Sandnes Sparebank
Harald Espedal Frode Svaboe Heidi Nag Flikka Marion Svihus Chairman of the Board Deputy Chairman Director Director
Arne Lee Norheim Birte Norheim Solveig Vatne Jan Inge Aarreberg Trine Karin Stangeland Director Director Employee representative Employee representative CEO
Sandnes Sparebank annual report 2018 38 Changes in equity capital
Group Treasury of own The Gift Net un- Non- Equity equity Equali- Savings Fund/ realized controlling Total certificate capital Share zation Bank’s customer gains Hybrid Retained ownership equity capital certificates premium reserve Fund dividend reserve capital earnings Total interests capitall Equity capital as of 1/1/2017 230 149 -624 987 313 308 075 777 269 47 417 45 876 182 143 2 577 618 5 622 2 583 239 Dividends paid -28 761 -28 761 -1 037 -29 799 Gifts paid -16 953 -16 953 -16 953 Actuarial gains and losses, defined -370 -199 -569 -569 benefit pensions (after taxes) Net unrealized gains reserve -450 -450 -450 Financial instruments available -24 213 -24 213 -24 213 for sale Change, own equity capital 266 240 506 506 certificates Disposals, non-controlling -810 -810 ownership interests Annual profits allocated 65 030 34 440 99 470 99 470 to equity capital reserves Annual profits allocated/used 64 442 64 442 64 442 for dividends Annual profits allocated/used 34 128 34 128 34 128 for gift fund/customer dividends Annual profit rest of group -783 -783 543 -239 Equity capital as of 12/31/2017 230 149 -358 987 313 372 735 811 510 64 592 21 214 0 217 278 2 704 435 4 317 2 708 750
Equity capital as of 1/1/2018 230 149 -358 987 313 372 735 811 510 64 592 21 214 0 217 278 2 704 435 4 317 2 708 750 Reclassification of financial -10 579 10 579 instruments from available for sale to fair value through profit and loss in connection with the transition to IFRS 9 Change in writedowns for -1 473 -1 473 -1 473 losses in connection with the transition to IFRS 9 Equity capital as of 1/1/2018 230 149 -358 987 313 372 735 811 510 64 592 10 636 0 226 384 2 702 962 4 317 2 707 277 (revised) Dividends paid -64 342 -64 342 -1 070 -65 412 Gifts and customer dividends -39 409 -39 409 -39 409 paid Actuarial gains and losses, defined 13 7 20 20 benefit pensions (after taxes) Net unrealized gains reserve -1 342 -1 342 -1 342 Valuation adjustment of shares 14 535 14 535 14 535 recognized at fair value through comprehensive income Change, own equity capital 171 667 838 838 certificates Issue of new hybrid capital 100 000 100 000 100 000 Unpaid interest/cost on hybrid -1 226 -1 226 -1 226 capital Annual profits allocated 16 546 8 707 25 253 25 253 to equity capital reserves Annual profits allocated/used 119 677 119 677 119 677 for dividends Annual profits allocated/used 62 976 62 976 62 976 for gift fund/customer dividends Annual profits allocated to 1 218 1 218 1 218 hybrid capital holders Annual profit rest of group 36 263 36 263 334 36 597 Equity capital as of 12/31/2018 230 149 -187 987 313 389 294 820 224 88 159 23 829 100 000 318 640 2 957 421 3 581 2 961 001
Sandnes Sparebank annual report 2018 39 Changes in equity capital
Parent bank Treasury of own equity Gift Fund/ Net Equity certifi- capital Share Equalization The Savings customer unrealized Hybrid Retained cate capital certificates premium reserve Bank's Fund dividend gains reserve capital earnings Total equity
Equity capital as of 1/1/2017 230 149 -624 987 313 308 075 777 269 47 417 45 876 26 046 2 421 522
Dividends paid -28 761 -28 761
Gifts paid -16 953 -16 953 Actuarial gains and losses, defined -370 -199 -569 benefit pensions (after taxes)
Net unrealized gains reserve -450 -450 Financial instruments available for sale -24 213 -24 213
Change, own equity capital certificates 266 240 506
Annual profits allocated to equity 65 030 34 440 99 470 capital reserves Annual profits allocated/used 64 442 64 442 for dividends Annual profits allocated/used 34 128 34 128 for gift fund/customer dividends
Equity capital as of 12/31/2017 230 149 -358 987 313 372 735 811 510 64 592 21 214 0 61 967 2 549 121
Equity capital as of 1/1/2018 230 149 -358 987 313 372 735 811 510 64 592 21 214 0 61 967 2 549 121 Reclassification of financial instru- -10 579 10 579 ments from available for sale to fair value through profit and loss in con- nection with the transition to IFRS 9 Change in writedowns for losses -719 -719 in connection with the transition to IFRS 9 Equity capital as of 1/1/2018 230 149 -358 987 313 372 735 811 510 64 592 10 636 0 71 827 2 548 402 (revised) Dividends paid -64 342 -64 342 Gifts and customer dividends paid -39 409 -39 409 Actuarial gains and losses, defined 13 7 20 benefit pensions (after taxes) Valuation adjustment of loans recognized at fair value through 286 286 comprehensive income Net unrealized gains reserve -1 342 -1 342 Valuation adjustment of shares recognized at fair value through 14 535 14 535 comprehensive income Change, own equity capital certificates 171 667 838 Issue of new hybrid capital 100 000 100 000 Unpaid interest/cost on hybrid -1 226 -1 226 capital Annual profits allocated to equity 16 546 8 707 25 253 capital reserves Annual profits allocated/used 119 677 119 677 for dividends Annual profits allocated/used 62 976 62 976 for gift fund/customer dividends Annual profits allocated to hybrid 1 218 1 218 capital holders Equity capital as of 12/31/2018 230 149 -187 987 313 389 294 820 224 88 159 23 829 100 000 128 105 2 766 885
Please also refer to Note 40, 44 and 45 regarding equity capital and equity capital certificates.
Sandnes Sparebank annual report 2018 40 Cash flow statement
Group Parent bank
2018 2017 NOK '000 2018 2017 Cash flow from operations 796 097 800 585 Payment of interest, commissions and fees from customers 637 152 657 253 -104 838 -107 942 Payment of interest to customers -104 838 -107 942 24 780 89 594 Net payment in/out in connection with trading of financial assets 24 780 89 594 30 315 26 962 Receipt of dividends 31 920 76 962 48 229 61 204 Interest payments received on securities 42 925 54 438 -226 083 -234 534 Operational payables -225 927 -230 699 -37 627 -7 511 Taxes -21 835 -181 -39 410 -16 953 Gifts and customer dividends paid from profits -39 410 -16 953 491 463 611 405 Net cash flow from operations 344 768 522 472
Cash flow from investment activities -1 195 -2 028 Purchase/sale of fixed assets -1 195 -2 028 -36 042 -826 Purchase of long-term investments in equities and other assets -36 072 -826 -335 001 -342 689 Net payment in/out in connection with trading of interest-bearing securities -25 699 -313 802 -372 238 -345 544 Net cash flow from investment activities -62 966 -316 657
Cash flow from financing activities -752 492 -25 647 Net payments in/out on installment loans, lines of credit -207 743 69 639 391 210 -49 151 Net payments received from deposits 391 210 -49 251 13 457 -31 136 Net deposits/loans from credit institutions -30 288 -31 508 4 200 000 2 170 000 Placement of note and bond debt 2 300 000 1 170 000 -3 590 098 -2 456 775 Repayment of notes and bond debt -2 445 883 -1 575 793 300 000 Placement of subordinated loan capital and investment grade bonds 300 000 -410 067 -124 503 Repayment of subordinated loan capital and investment grade bonds -410 067 -124 503 -64 342 -28 761 Distribution of dividends -64 342 -28 761 -196 048 -223 037 Net interest payments made on funding activities -104 168 -137 735 -108 380 -769 009 Net cash flow from funding activities -271 280 -707 911
10 845 -503 148 Net cash flow for the period 10 521 -502 096 645 429 1 148 577 Cash and cash equivalents at the beginning of the period 544 433 1 046 528 656 273 645 429 Cash and cash equivalents at the end of the period 554 954 544 433
Sandnes Sparebank annual report 2018 41 NOTES Notes
Innhold
Balance sheet Note 1 General information 45 Note 25 Classification of financial instruments 92
Note 2 Accounting policies 45 Note 26 Fair value of financial instruments 95
Note 3 Application of estimates and discretionary assessments 52 Note 27 Loans to and claims on credit institutions 102
Note 4 Acquisition, sale, liquidation and establishment of companies 53 Note 28 Notes and bonds 102
Note 5 Segments 53 Note 29 Ownership interests in subsidiaries 103
Note 6 Balance sheet management and capital adequacy 56 Note 30 Equities 104
Note 7 Risk management 59 Note 31 Intangible assets 105 Note 32 Fixed assets 106 Note 33 Financial instruments with valuation changes 107 Credit risk through comprehensive income Note 8 Credit risk 61 Note 34 Debt to credit institutions 107
Note 9 Allocation of loans on customer groups and geographic area 66 Note 35 Deposits from customers 108
Note 10 Written-down loans distributed on customer groups 68 Note 36 Securities debt 109
Note 11 Losses on loans/guarantees and non-performing/ 69 Note 37 Provisions for other liabilities 110 problem loans Note 38 Other liabilities 111
Note 39 Subordinated loan capital 111
Market risk Note 40 Shareholders’ equity 112 Note 12 Interest rate risk 72
Note 13 Foreign currency risk 75 Other information Note 14 Price risk 76 Note 41 Contingent liabilities and operational leases 113 Note 15 Financial derivatives 77 Note 42 Events after the date of the balance sheet 113
Note 43 Transactions with intimates 114 Liquidity risk Note 44 Earnings per equity capital certificate and calculation 115 of the equity capital certificate percentage Note 16 Liquidity risk 78 Note 45 Equity certificate capital and equity capital 116 certificate holders
Income statement Note 17 Net interest income 81
Note 18 Net commission income 81
Note 19 Net change in valuation of financial instruments 82
Note 20 Other operating income 82
Note 21 Other operating cost 83
Note 22 Compensation 84
Note 23 Pensions 88
Note 24 Taxation 90
Sandnes Sparebank annual report 2018 43 Notes
GENERAL INFORMATION
Sandnes Sparebank is an equity capital certificate bank listed on the Oslo The 2018 Group and Parent Bank Financial Statements were approved Stock Exchange. The Bank is headquartered in the municipality of Sandnes, by the Board of Directors on March 12, 2019 and by the Board of Trustees and its office address is Rådhusgata 3, 4306 Sandnes. on March 28, 2019.
ACCOUNTING PRINCIPLES
Contents 1. Basis for preparation of financial statements 2. New standards and interpretations employed 2. New standards and interpretations employed as of the 2018 financial year as of the 2018 financial year IFRS 9 Financial instruments 3. Consolidation IFRS 9 Financial instruments was implemented for the Group effective 4. Presentation currency 1/1/2018. The standard is replacing IAS 39 Financial Instruments – Recognition 5. Accrual of income and Measurement. The implementation of IFRS 9 resulted in a new model 6. Balance sheet recognition of assets and liabilities for the classification and measurement of financial assets, a new model for 7. Financial instruments the write-down of financial assets and new rules for hedge accounting. 8. Intangible assets 9. Tangible fixed assets Implementation of IFRS 9 10. Pensions Sandnes Sparebank has been part of the IFRS9 project conducted by SDC, 11. Other liabilities our system vendor, since it was started in 2015. In 2016, the Eika Group 12. Income tax started a multidisciplinary project group that worked in parallel with SDC 13. Dividend and earnings per equity capital certificate on the implementation of IFRS 9. Sandnes Sparebank took part in this group. 14. Equity capital In addition to a project manager, the Eika project group consisted of repre- 15. Cash flow analysis sentatives from the credit, data warehouse and accounting/reporting areas. 16. Segment information The project group was responsible for implementing its own inputs for use 17. Adopted standards and interpretations in the write-down model being used (developed by SDC, the vendor of with effective dates in the future banking systems to the Eika banks). The project has also considered areas of IFRS 9 with respect to classification, measurement and reporting. 1. Basis for preparation of financial statements The Group financial statements for Sandnes Sparebank have been prepa- Transition rules red in accordance with International Financial Reporting Standards (IFRS), With the exception of hedge accounting, IFRS 9 will apply retrospectively. as approved by the EU. The same applies to the financial statements of Retrospective application entails that the Bank will prepare the opening the Parent Bank. The financial statements are based on IFRS standards and balance on 1/1/2018 according to the IFRS 9 principles. It is possible to interpretations that are mandatory for annual financial statements presented forgo the preparation of comparative figures for historical periods, and the as of 12/31/2018. Requirements for additional information in current banking Bank has elected not to prepare comparative figures. It is also possible to laws and regulations have also been met. delay the implementation of the hedge accounting rules pursuant to IFRS 9. The Bank has elected to continue to use the hedge accounting rules in The measurement basis for the financial statements is historical cost, with the accordance with IAS 39. The effects of the new principles for the 2018 exception of financial derivatives and the financial assets and liabilities that are opening balance was charged against equity capital. Thus, the Group had reported at fair value with changes in value through the ordinary or extended its equity capital reduced by NOK 1.5 million, and the Parent Bank had income statement. a corresponding reduction of its equity capital of NOK 0.7 million. The effect was caused by increased writedowns of loans to customers and For the group financial statements, the principles mentioned here have credit institutions. been consistently applied for all reporting periods. The same applies to the parent company, with clarifications as stated for the relevant items. The financial statements are presented in Norwegian Kroner (NOK), and all figures are shown in whole thousands, unless otherwise specifically indicated. The Group balance sheet presentation is primarily based on an assessment of the liquidity of the balance sheet items.
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Effects of IFRS 9 implementation The Group has classified its financial assets in the following IFRS 9 categories: Group
Classification 12/31/2017 31.12.17 Financial instrument 01.01.18 Classification 1/1/2018 Amortized cost 472 646 Cash and deposits with central banks 472 646 Amortized cost Amortized cost 172 782 Loans to and claims on credit institutions 172 614 Amortized cost Amortized cost 20 746 928 Loans to customers 20 745 132 Amortized cost Fair value through profit and loss 725 972 Loans to customers 725 972 Fair value through profit and loss Fair value through profit and loss 3 333 184 Notes and bonds 3 333 184 Fair value through profit and loss Fair value through profit and loss 126 491 Equities 141 530 Fair value through profit and loss Fair value through comprehensive income Available for sale 252 443 Equities 237 405 without recycling Fair value through profit and loss 36 284 Financial derivatives 36 284 Fair value through profit and loss Hedge accounting 118 276 Financial derivatives 118 276 Hedge accounting Amortized cost 33 247 Accrued income* 33 247 Amortized cost 81 476 Other assets, non-financial assets 81 476 Other assets, non-financial assets 26 099 729 Total assets 26 097 765 Implementation effect Equity -1 473 Implementation effect Deferred tax benefit -491
* earned income in the table as of 1 January 2018 includes accrued interest on financial instruments, including interest on loans, bonds and derivatives. Accrued interest is now allocated to the various financial assets.
The accounting principles for the financial statements are based on the In April 2018, NOK 24 million was paid in customer dividends to the Bank's application of the new IFRS 9 rules. For accounting principles applying loan and deposit customers. The payment provides a tax deduction of previously pursuant to IAS 39, please refer to the principle note of the NOK 6 million for the 2018 fiscal year. The tax deduction is recorded in the 2017 financial statements. income statement pursuant to the changed principle, as a reduction of the 2018 tax cost. Pending statements from the tax authorities, the tax deduction IFRS 15 Income from customer contracts has not been recognized earlier. On 1/28/2019, SpareBank 1 Østlandet IFRS 15 was implemented for the Group effective 1/1/2018. According reported a binding opinion prior to implementation regarding tax deduction to IFRS 15, income is included in the amount reflecting the compensation for customer dividends, that it was assumed also would apply to Sandnes that a company expects to be entitled in exchange for the transfer of Sparebank. Thus, the tax deduction will have an earnings effect for the goods or services to a customer. The new principles enshrined in IFRS 15 fourth quarter 2018. represent a more structured approach to the measurement and accrual of income. The new income standard replaced all applicable income In addition, the Group has classified funding bonds as equity capital in the accrual rules pursuant to IFRS. However, customer contracts that are financial statements, and in cases interest payments are tax deductible. The recognized according to the provisions of IFRS 9 shall follow the rules tax deduction was previously recognized directly against equity. The effect of IFRS 9, as they explicitly excluded from the scope of IFRS 15. of the change in principle, where the tax deduction is recognized through the income statement, amounts too NOK 0.3 million in earnings for the As the Group primarily receives income from customer agreements com- fourth quarter 2018. prised by the IFRS 9 code, and that the Group's other income does not contain significant elements of separate delivery obligations, the imple- Thus, the change of principle has a total earnings effect of NOK 6.3 million mentation of the standard has not had any significant impact on the for the 2018 financial statements. Group's financial position or profits. This type of principle change is at the outset, implemented with retroactive Tax treatment of equity transactions effect, pursuant to IAS 8, which requires disclosure of accounting effects In previous periods, the Group has treated the taxation of all equity trans- in previous periods. However, the Group had no such distributions in 2017, actions (distributions) as a part of the equity transaction, directly in the equity so the change of principle would not had any impact on the 2017 financial account. In the 4th quarter of 2018, the Group modified this principle. statements. If the source of the distribution is previous profits (retained earnings), the tax consequences of the distribution are now presented as tax cost 3. Consolidation in the income statement when the distribution was decided. The consolidated financial statements comprise the Parent Bank, Sandnes Sparebank, and the subsidiaries listed in Note 29. Subsidiaries are consoli- The change in principle has consequences for the Bank in case of payment dated from the date the Bank assumed control and are excluded from the of customer dividends and payment of interest on funding bonds. date the Bank cedes control. Control is present when the investor has
Sandnes Sparebank annual report 2018 45 Notes
power over the investment, has exposure to or is entitled to variable returns Commission income and costs are generally accrued as and when a service and has the ability to use this power to direct those activities of the invest- is rendered and classified as "Commission income" and "Commission cost", ment that to a significant degree impacts returns. Potential voting rights, respectively. Fees associated with fixed income instruments are part of the options, convertible debt instruments and other issues are part of the yield calculation and is correspondingly recognized in the income statement. assessment. Fees for advisory services are accrued in accordance with consultancy agreements, usually as and when the service is rendered. Fees earned on The accounting principles are being consistently applied for incorporation trading or distribution of financial instruments, property or other investment of ownership interests and the reporting is based on the same accounting objects that do not generate balance sheet items in the Bank's financial periods as the Parent Bank. statements, are accrued as income when the transaction is completed.
Intra-group transactions and balances between the consolidated companies Income on the sale of goods is accrued at the time of delivery. Services are are eliminated. Unrealized losses are eliminated unless the loss is caused capitalized in line with performance. The portion of sales revenues related by impairment. to future service performance is recognized in the balance sheet as unearned income at the time of the sale and thereafter capitalized as and when delivery Subsidiaries is made. Subsidiaries are defined as companies in which Sandnes Sparebank has direct or indirect control, ownership interests or other relationships. Normally Dividends on shares and equity capital certificates are recognized as income Sandnes Sparebank is assumed to have control when its ownership interests at the time when they are adopted by the annual general meeting. in another company is greater than 50%. 6. Balance sheet recognition of assets and liabilities For acquisitions and transfers, the following applies: The Group recognizes assets at the time when the Group achieves real The acquisition method is used in case of acquisition of control of a com- control of the rights to the assets. Similarly, liabilities are recognized when pany. All identifiable acquired assets and liabilities are included at fair value. the Group assumes real liabilities. Assets are derecognized at the time when For every acquisition, non-controlling ownership interests will be valued real risk regarding the assets is transferred and the control over the rights either at fair value, or as a proportionate share of the acquired company’s to the assets lapses or expires. identifiable assets. Transaction costs are recognized as expenses. In other respects, please refer to the description of recognition and measure- If control is achieved through gradual acquisition, any difference between ment under item 7, Financial Instruments the fair value at the time of acquisition and the book value of the part of the company already recognized, will be recognized through the income 7. Financial instruments statement. Classification of financial instruments Classification of financial instruments is based on the purpose of their Any conditional part of the acquisition price will be valued at fair value acquisition and the characteristics of the instrument. at the time of acquisition. Financial assets are classified as: Basically, goodwill is measured as the difference between the total purchase • Financial instruments valued at amortized cost (AC) price and the value of non-controlling ownership interests, and the net fair • Financial instruments valued at fair value with valuation value of acquired identifiable assets and liabilities. The difference is recognized changes through ordinary profit or loss (FVTPL) through the income statement if it is negative. • Financial instruments valued at fair value with valuatio changes through comprehensive income (FVTPL) 4. Presentation currency The presentation currency is Norwegian Kroner (NOK), which is also the Financial liabilities are classified as: functional currency for all Group companies. Transactions in foreign cur- • Financial liabilities at fair value with change in value rencies are converted to the functional currency according to the exchange through the income statement rates on the day of the transaction. Foreign exchange losses and gains arising • Other financial liabilities measured at amortized cost from such transactions and on the conversion of cash items in foreign currency as of 12/31 are recognized through the income statement. The definition of a financial instrument is determined by IAS 32 and has 5. Accrual of income not been changed due to IFRS 9. In the determination of the measure- Interest income and interest costs are recognized in the income statement ment category, IFRS 9 differentiates between ordinary debt instruments using the yield method. The yield method calculates the amortized cost of and equity instruments, including derivatives. Ordinary debt instruments are loans and deposits and distributes earned interest or interest expense over defined as fixed income instruments on which the yield is dependent on the expected term to maturity. The yield is determined by discounting the time value of money, credit risk and other relevant risks for ordinary contractual cash flows within the anticipated term to maturity. The method debt instruments. entails current income accrual of nominal interest with the addition of amortization of up-front fees. If a loan has been written down due to value impairment (part of step 3), interest income is accrued as the yield on the written down value.
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Derivatives of and investments in equity instruments Subsequent measurement Equity instruments are in the fair value through profit and loss category Measurement at fair value (FVTPL). With respect to equity instruments that are not derivatives and For all financial instruments traded on an active market, the quoted price which are not held for trading purposes, there is opportunity to elect obtained either from a stock exchange, broker or a pricing agency, is applied. to recognized these at fair value through other comprehensive income Financial instruments not traded on an active market are valued with various (FVOCI). valuation techniques, and some are valued by professional agencies. All changes in fair value are recognized directly in the income statement All derivatives used by the Group are measured at fair value with valuation unless the asset is classified as financial instruments at fair value with changes through the income statement, but derivatives designated valuation changes through comprehensive income (FVOCI). as hedging instruments shall be recognized in line with the principles for hedge accounting. The Bank has set the fair value of floating rate loans to correspond to the nominal value, adjusted for the associated expected credit loss on the loan Financial assets that are debt instruments (ECL). The reason is that such loans are repriced almost continuously, and For ordinary debt instruments, the measurement category is determined that any deviation from the nominal value in an arm’s length transaction by the purpose of the investment. Debt instruments that are part of a port- between informed and willing parties is considered insignificant. folio created for the purpose of receiving contractual cash flows in the form of interest and installments, shall be measured at amortized cost. Amortized cost valuation Financial instruments not measured at fair value are valued at amortized Debt instruments that are part of a portfolio created for the purpose of both cost and income/cost is estimated using the yield method. The yield is receiving cash flows and making sales, shall be measured at fair value determined by discounting contractual cash flows within the anticipated through other comprehensive income (FVOCI), with interest income, effects term to maturity. Amortized cost is the present value of the cash flows of currency exchange rate conversions and writedowns presented via the discounted by the yield. income statement. Hedge accounting Instruments that at the outset should be measured at amortized cost or at The Group applies hedge accounting for fair value hedging of some fair value with valuation changes through comprehensive income (FVOCI), fixed rate funding (bonds, subordinated loans and hybrid capital bonds). may be designated to be measured at fair value with valuation changes in Derivatives related to this funding are earmarked for hedging purposes. value through the income statement if this will eliminate or significantly The hedge effect is valued and documented both at initial classification and reduce an accounting mismatch (Fair Value Option/FVO). at each closing of the accounts. In case of fair value hedging, the hedging instrument is recognized at fair value and the value of the hedging object is adjusted for the change in valuation associated with the hedged risk. Fixed income instruments of the other business models, shall be measured Changes in these values from the starting balance are recognized in the at fair value through profit and loss. income statement. This method ensures that the presentation in the financial statements of these instruments complies with the Group's policies for Financial liabilities managing interest rates and actual economic developments. If the hedge The rules for financial liabilities are essentially the same as in the current is terminated, or if sufficient hedging efficiency cannot be verified, the IAS 39. One change from IAS 39 is that for financial liabilities that has been change in value of the hedging object is amortized over its remaining decided recognized at fair value through ordinary profit and loss, changes maturity. in value due to the company's own credit risk shall be recognized through comprehensive income (OCI), unless the recognition through comprehensive Writedown of financial assets income (OCI) creates or reinforces an accounting mismatch. Pursuant to IAS 39, writedowns for losses should only take place when there is objective proof of the occurrence of a loss event after the first time The scope of liabilities recognized at fair value is of limited scope, and the recognition. Pursuant to IFRS 9, provisions for losses shall be recognized impact on the Group is therefore considered insignificant. on the basis of expected credit losses. The general model for the write-down of financial assets comprises only financial assets recognized at amortized Hedge accounting cost or fair value through comprehensive income. In addition, loan grants In connection with the implementation of IFRS 9, new rules for hedge and financial guarantee contracts that are not recognized at fair value through accounting were introduced, including the removal of the required hedging profit and loss, and receivables on lease agreements, are included. efficiency of 80-125% and replacing it with more qualitative requirements. It is also possible to delay the implementation of the hedge accounting Upon the first time balance sheet recognition, provisions shall be made for rules pursuant to IFRS 9. The Bank has elected to continue to use the losses corresponding to expected losses for 12 months (step 1). The expected hedge accounting rules in accordance with IAS 39. loss for 12 months, is the loss that is expected to occur over the life of the instrument, but that may be linked to events occurring during the first 12 Measurement months. Initial recognition At initial recognition, all financial instruments are measured at fair value on If the credit risk for an asset or a pool of assets, is considered to have increased the trading day. Transaction costs that are directly attributable to the estab- materially since the first-time recognition, there has to be made a provisions lishment of the asset/liability are included in the cost price of all financial for losses corresponding to the entire expected life of the asset (step 2). instruments that are not classified at fair value with changes in value through If a credit loss occurs, the interest income shall be recognized on the basis ordinary profit and loss. of the recognized amount after adjustment for provisions for losses.
Please refer to Note 8 for a more detailed description of the loss model.
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Individual writedowns of loans and guarantees (step 3) Financial derivatives At each balance sheet date an assessment is made whether there is objective Derivatives are valued at fair value with valuation changes through ordinary evidence of any impairment of the value of an individually assessed loan. profit and loss (FVTPL). Fair value is valued on the basis of quoted market The impairment must be the result of one or more events occurring after prices in an active market, including recent market transactions and various the first-time recognition in the balance sheet (a loss event) and it must valuation techniques. All derivatives are recognized as assets if the fair value also be possible to measure the result of the loss event (or events) reliably. is positive and as liabilities if the fair value is negative. Examples of such events are material financial problems for the debtor, payment default or other breach of contract. If there is objective proof of Funding and other financial liabilities the occurrence of impairment of value, the amount of the loss is calculated. Fixed rate deposits from customers are valued at fair value with valuation In the case of loans carried at amortized cost, the loss is calculated as the changes through ordinary profit and loss. difference between the value recognized in the balance sheet and the present value of estimated future cash flows discounted by the loan's Other financial liabilities are measured at amortized cost where differences original yield. The changes during the period in the valuation of loans are between the received amount less transaction costs and redemption value recognized under “Writedowns and losses on loans and guarantees”. are distributed over the term of the loan using the yield method. Any premium or discount on the repurchase of own bonds is distributed correspondingly. Losses are considered realized when a voluntary arrangement, insolvency Any purchase premium in case of repurchase of debt before it matures, is or bankruptcy is confirmed, when attachment proceedings have failed, by considered to be a price loss/gain and is presented and recognized in the an enforceable judgment, or otherwise if the Group waives all or part of income statement in the item "valuation changes of financial instruments". the loan, or if the Group considers the loan to be a loss for the Group. Interest from other financial liabilities is reported as “interest cost” in income statement. Writedowns of shares in subsidiaries At the parent company level, shares in subsidiaries are valued at acquisition IFRS does not allow immediate recognition as income from “day 1 gains”. cost with a deduction for writedowns. The need for writedowns is assessed Such gains are calculated for each individual transaction and generally on an annual basis in the same way as for other long-term assets. amortized over the term of the transaction unless other observable market data or similar, clearly support a different profile of accrual. Takeover of assets Assets taken over in connection with follow-up of loans in default and Recognition and derecognition of financial assets and liabilities written-down loans, are valued at fair value at the time of takeover. In the Financial assets and liabilities are recognized on the day of transaction, balance sheet, takeover assets are classified according to their character. meaning the time when the bank becomes party to the contractual terms Subsequent valuation and classification of effects on earnings is according and conditions for the instruments. to the principles for the relevant balance sheet item. Financial assets are derecognized when the contractual rights to the cash More details about some types of financial instruments flows from the financial assets have expired, or when the right to the cash Loans and receivables flows from the assets are transferred in such a way that the risk and return Loans and receivables are financial assets without market quotations. related to the ownership for all intents and purposes have been transferred. Floating rate loans are valued at amortized cost or according to yield to maturity. Fixed rate loans are recognized at fair value with valuation changes With respect to financial liabilities, these are derecognized when the con- through ordinary profit/loss (FVO). For these loans, the change in fair value tractual terms and conditions are met, have expired or are cancelled. is reported in the income statement under the item “change in valuation of financial instruments”. The interest rate risk in fixed rate loans is controlled Modified assets and liabilities with interest rate swaps that are recognized at fair value. It is the Group's If the terms and conditions of an existing financial asset or liability is modified opinion that valuing fixed rate loans at fair value provides more relevant or otherwise changed, the instrument will be treated as a new financial asset information about values in the balance sheet. or liability if the renegotiated terms and conditions are significantly changed from the old terms and conditions. If the requirements for significant change In the financial statements for the Parent Bank, loans that the Parent Bank are satisfied, the old asset and liability is derecognized and the new asset may transfer to SSB Boligkreditt AS, are classified at fair valuation changes or liability is recognized. In general, a loan is considered to be a new financial through comprehensive income (FVOCI), as the business model indicates asset if new loan documentation is issued, at the same time as there is that the Parent Bank has the intention of collect contractual cash flows, a new credit process with the determination of new terms and conditions but may also sell/transfer the loans to SSB Boligkreditt AS. In the Group for the loan. financial statements, the loans are recognized at amortized cost, as the Group does not intend to sell the loans. If the modified instrument is not considered to be significantly changed from the original instrument, for accounting purposes the instrument is Shares, notes and bonds considered to be a continuation of the existing instrument. In such cases Shares and units are valued at fair value with changes in value over profit and the new cash flows are discounted with the instrument's original effective loss (FVTPL), except the Bank's investment in EIKA Gruppen AS, which is classi- rate of interest, and any difference to the existing amount recorded in the fied as financial instruments with valuation changes through comprehensive balance sheet will be recognized through the ordinary income statement. income (FVOCI) as this investment is considered strategic for the Bank. 8. Intangible assets The Bank's liquidity portfolio of notes and bonds is valued at fair value with Goodwill valuation changes through ordinary profit and loss (FVTPL) according to Basically, goodwill is measured as the difference between the total purchase the business model governing the management of the liquidity portfolio, price and the value of non-controlling ownership interests, and the net fair pursuant to IFRS 9. The business model provides a required rate of return value of acquired identifiable assets and liabilities. Goodwill arising from for the liquidity portfolio, and purchases and sales are made for the purpose acquisition of subsidiaries is recognized as intangible assets. Individual of maximizing profits.
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goodwill items and intangible assets in the Group's balance sheet are allo- present value of the defined benefits at the date of the balance sheet cated to profit centers on the basis of which activities benefit from the minus the fair value of the pension assets. The pension liability is calculated acquired asset. Choice of profit center is made on the basis of whether annually by an independent actuary using a straight-line accruals method. it is possible to identify and exclude cash flows related to the activities. The discount rate is a calculated market rate on covered bonds (OMF). Goodwill is tested annually for writedown and recognized at cost price Other parameters, such as wage adjustments, inflation and pension increases, reduced by accumulated amortization. Valuation is based on historical are determined on the basis of anticipated long-term developments of the results, approved budgets and management forecasts. The required rate of parameters. The determination of anticipated return on pension assets return is based on an assessment of the market’s required rate of return for takes into account the composition of the assets, and is based on long-term the type of activities that are comprised by the evaluation entity, and thus return expectations for the various classes. Changes in the pension plan's reflects the risk of the business. benefits are accrued as cost or capitalized in the income statement on a current basis. Software and development of IT systems Costs directly associated with major investments in software, which are Deviations from estimates are recognized through comprehensive income expected to bring significant financial benefits over time, are recognized as (OCI) during the period they accrue and form part of total earnings. intangible assets. Cost of purchased licenses is capitalized and straight-line depreciated over their useful economic life, normally 3-5 years. Software The net pension cost for the period is included in wages and social benefits, maintenance costs are accrued as costs as and when they occur. and consists of pension accruals during the period, the interest cost con the calculated pension liability, expected return on pension assets and At each balance sheet date, all intangible assets are assessed for indications accrued employers' social security contributions. Pension costs are based of impairment. If there are indications of impairment, an analysis is made on assumptions set at the start of the period. to assess whether the book value of the intangible assets may be fully recovered. The recoverable amount is the net sales price or the utility value, 11. Other liabilities whichever is higher. The utility value is calculated by discounting expected Provisions for liabilities are made when the Group has a commitment based future cash flows to present value by applying a discount rate after tax that on a previous event and it is likely that the commitment will be settled reflects the market pricing of the time value of money and the risk related financially and the liability can be reliably estimated. to the specific asset. In the case of assets that generally do not generate independent cash flows, the recoverable amount is determined for the 12. Income tax cash-flow generating entity to which the asset belongs. If the recoverable Annual tax cost is comprised of taxes payable and changes in deferred amount is lower than book value, the value is written down to the recov- taxes on temporary differences. Payable tax is the tax calculated on the erable amount. year's taxable profits. Deferred tax is recognized according to the debt method in accordance with IAS 12. Liabilities or assets are calculated on 9. Tangible fixed assets deferred tax on temporary differences, which is the difference between the Tangible fixed assets comprise buildings and operating equipment. book value and the taxable value of assets and liabilities. However, no liability Buildings and operating equipment are recognized at original cost less or asset is calculated for deferred tax on goodwill that does not generate tax accumulated depreciation and writedowns. The cost price includes all deductions, or on the initial recognition items that neither influence account- directly attributable costs related to the purchase of the asset. Straight line ing nor taxable profits. An asset is estimated in the event of deferred tax on depreciation is used to allocate the cost price less any residual value over tax-related losses carried forward. Deferred tax benefits are recognized in the estimated economic life of the asset. Tangible assets are assessed on the balance sheet if it is likely that they may be applied against future taxable the date of the balance sheet for indications of impairment. If there are earnings. When calculating deferred taxes, the same tax rates and rules are indications of impairment, the recoverable amount of the asset is calculated. used as those applying on the date of the balance sheet, or which most The recoverable amount is the utility value or the fair value less sales costs, likely will be introduced. whichever is higher. The asset is immediately written down to the recoverable amount if this is lower than the book value. Thereafter the economic lifetime In previous periods, the Group has treated the taxation of all equity transactions and depreciation are adjusted for the remaining lifetime in case of changes. (distributions) as a part of the equity transaction, directly in the equity account. In the 4th quarter of 2018, the Group modified this principle. If the source 10. Pensions of the distribution is previous profits (retained earnings), the tax consequences The companies in the Group have different pension plans. The pension of the distribution are now presented as tax cost in the income statement plans are mainly financed by contributions to insurance companies. The when the distribution was decided. Group has a defined contribution plan for the employees of the company, as well as an operational pension plan with defined benefits for a former The change in principle has consequences for the Bank in case of payment managing director. A defined contribution plan is a pension plan where the of customer dividends and payment of interest on funding bonds. Group pays regular contributions to a legal entity that invests these assets on behalf of the members of the plan. The contributions are recognized As of 1/1/2019, the tax rate on ordinary income in Norway was changed as payroll costs when due. from 23% to 22%. An exception is made for financial companies, which continue at the 2016 level, and thus the Group is not affected by the change Defined benefit plans define the pension benefits an employee will receive to a significant extent. upon retirement. Normally, pension benefits depend on one or more factors such as age, years of service in the company and wage level. The liability According to IAS 12, asset tax cannot be considered a tax, and is recognized recognized in the balance sheet with respect to defined benefit plans is the as operating cost.
Sandnes Sparebank annual report 2018 49 Notes
13. Dividend and earnings per equity capital certificate The Bank has elected to apply the modified retrospective method, which Dividend on equity certificates is recognized as equity during the period entails that comparative figures are not recomputed, and that the transition until the date it is approved by the Bank’s Board of Trustees. Earnings per effect is charged against the starting balance for retained earnings in the equity certificate are calculated by dividing the profit/loss allocated to holders year of implementation. For leases recorded as agreements with losses of equity certificates by the weighted average number of outstanding pursuant to IAS 37, the associated provisions for losses is recognized certificates. against the value of the usage right at the time of transition.
14. Equity capital In order to determine whether an agreement contains a lease agreement, it has been considered whether the agreement transfers the right to control The equity certificate holders’ share of equity consists of the equity certificate the use of an identified asset. For the Group, the standard will mainly apply capital, the share premium and equalization reserves. The equalization to leases for office premises, which entails that rent cost is no longer reserves consist of accumulated retained earnings and may be used for recognized as an operating cost, but as depreciation of a usage right asset future cash or stock dividends. and interest cost on the associated lease liability in the income statement. The balance sheet is impacted by an increase in the company's recognized The nominal value of treasury equity capital certificates is reported as assets (usage rights) and lease liabilities. The IT agreements of the Bank is a reduction of the equity certificate capital. Purchase price in excess of not considered to be comprised by IFRS 16, since they are based on the nominal value is recognized as other equity. Gains or losses on transactions purchase of capacity that is not physically separate, and thus not in treasury equity capital certificates are recognized directly against other identifiable. equity. The lease period will be limited by the duration of the agreement, with Other equity comprises the Savings Bank Fund, the Gift Fund/customer the addition of any option periods, if it reasonably certain that they will be dividends, Reserves for unrealized gains, other equity and minority interests. exercised. Expenses related to buyout clauses before final agreement expiration Other equity includes provisions for dividends. are included in the lease liability if it is probable that the clause will be utilized. Common cost and other variable lease payments, etc. will not be recog- Annual profits are attributed to holders of equity certificates and primary nized as part of the lease liability for the lease agreements. The discount capital on a pro rata basis relative to their respective shares of the Bank’s rate for lease agreements will be determined by applying the interest rate equity capital. a tenant in a similar economic environment would have to pay in order to borrow, for a corresponding period and with similar collateral, the funds Funding bonds that do not satisfy the debt definition of IAS 32, are classified needed for an asset of corresponding value to the usage right asset. The as equity capital (hybrid capital), at historical cost. rate reflects both the risk-free rate of interest, credit risk and lease specific mark-ups, including collateral/pledging of the lease agreement. The rate 15. Cash flow analysis will be adjusted to the actual duration of the lease agreement, type of The cash flow analysis is prepared according to the direct method and the asset, etc. statement shows cash flows grouped according to sources and application areas. Liquid assets comprise cash and receivables from Norges Bank, as The Bank will recognize its lease liabilities at the present value of the remaining well as loans to and receivables from credit institutions. rent payments, discounted with the marginal lending rate at the time of first time application, and recognize associated usage rights as an amount reflecting 16. Segment information the value of the assets, as if the standard applied from the time when the Segment reporting is based on internal management reporting. The income agreement was entered. statements and balance sheets of the segments are a result of a composition of internal departmental financial reporting, pursuant to the Group’s manage- ment model. Please refer to Note 5 regarding assumptions and allocation The consequence of the implementation results in a lease liability of just principles. over NOK 100 million, and a somewhat lower value of the usage right asset. The implementation of the standard is expected to result in a negative 17. Adopted standards and interpretations with effective dates in the future impact on Group equity of approximately NOK 9 million, as well as a reduction Only interpretations and standards that are considered relevant for the Group of core Tier-1 capital ratio by approximately 0.15%. have been included. Annual improvement projects IFRS 16 Lease agreements In connection with its annual improvement projects, IASB has made some The introduction of the standard means that there shall no longer be a dif- minor changes in a number of standards. The changes are considered to ferentiation between operational leasing and financial leasing, where agree- be of no significant consequence for the Group, with the exception of the ments entered transfers the right to use a specific asset from the lessor to clarification of the existing IAS 12 standard (income tax), where the conse- the lessee for a specific period. For the lessor, the rules from IAS 18 are mainly quence is that the tax effect of distributions (including customer dividends being continued. The standard is approved by the EU and applies to annual and interest on hybrid capital) now shall be recognized through the income financial statements starting from January 01, 2019. Short-term lease agree- statement (ref. discussion in item 2 above). ments (less than 12 months) and the lease of assets with a low value are exempt from the requirements.
Sandnes Sparebank annual report 2018 50 Notes
APPLICATION OF ESTIMATES AND DISCRETIONARY ASSESSMENTS
he preparation of financial statements in compliance with generally of credit risk, liquidity risk and volatility. A change in one or more of these accepted accounting principles in some cases requires the management factors may affect the set value of the instrument. The fair value of financial to make assumptions and to rely on estimates and discretionary assess- instruments is presented in Note 26. ments. Estimates and discretionary assessments are evaluated on a current basis, and are based on historical experiences and assumptions about future Fixed rate loans: events that appear probable on the date of the balance sheet. There is According to IFRS, the valuation shall be based on an assessment of what uncertainty associated with the assumptions and expectations that have an external investor would have assumed for an investment in a similar been used in estimates and discretionary assessments. Actual results loan. There is no well-functioning market for the purchase and sale of may deviate from the estimates and the assumptions. fixed rate loans between market participants. The value of fixed rate loans is estimated by discounting the cash flows by a risk-adjusted discount rate Writedowns of loans and guarantees that is supposed to take into account the preferences of market partici- In the case of individually assessed loans and for groups of loans that pants. The discount rate is calculated on the basis of an observable swap have been identified as doubtful, a calculation is made to determine a rate with a margin requirement added. value for the loan or group of loans. The calculation assumes the use of numbers that are based on judgment, and these affect the quality of the The observable market interest rates on similar loans are taken into account calculated value. Write-down assessments are performed each quarter. in the estimate of the margin requirement. The margin requirement of market participants is not directly observable, and has to be estimated on Step 3 writedowns (individual writedowns) the basis of the difference between the observable market rates and the If there is objective proof of impairment of the value of a loan valued swap rate over a certain period. As the margin requirement is not directly at amortized cost, the loss is calculated as the difference between the observable, there is uncertainty associated with the calculation of the fair balance sheet value and the present value of estimated future cash flows, value for fixed rate loans. discounted by the original yield of the loan. The estimate of future cash flows is made on the basis of experience and discretionary assessment Customer dividends of probable outcomes for, inter alia, market developments and concrete Customer dividend is new as of 2018 and thus entails some discretionary issues pertaining to each loan, including empirical data regarding the debtor’s assessments regarding the application of accounting principles Each year, ability to handle a pressured financial situation. In the valuation of write- it is the responsibility of the Bank’s Board of Trustees to consider whether downs of loans, there is uncertainty related to the identification to be and how much should be distributed as customer dividends. The first written down, estimate of timing and amount of future cash flows, resolution was passed by the meeting of the Bank's Board of Trustees on as well as the valuation of collateral. March 21, 2018, and in April 2018, the Bank paid NOK 24 million in customer dividends to the Bank's loan and deposit customers. Step 1 & 2 writedowns (statistical writedowns) Loans that are not subject to individual writedowns are part of the The customers will receive an amount based on the Bank's annual profits calculation of statistical writedowns (IFRS 9 writedowns) of loans and and the size of the customer's deposits and loans with the Bank. guarantees. Writedown is calculated on the basis of the development • Dividends are given to private individuals and companies. of the customers' risk classification (as described in Note 8) and loss • The customer may receive customer dividends based on a maximum experience for the respective customer groups (PD and LGD). Beyond this, NOK 2 million in loans from the Bank. cyclical and market developments (macro conditions) that have yet to • Co-debtors (people with joint loans) may receive customer dividends impact the above-mentioned risk classification, are considered in the for up to NOK 4 million. evaluation of the need for writedowns for customer groups in aggregate. • The customer may receive customer dividends based on a maximum The statistical model for the computation of Expected credit losses (ECL) NOK 2 million in deposits in the Bank. on loans, is built on several critical assumptions, including probability of • Customer dividends apply from the first krone up to NOK 2 million. default, loss in case of default, expected lifespan of the loans and macro • The vesting of customer dividends is based on daily balances. developments. Due to significant estimate uncertainty, the presentation of sensitivity analyses are requirement for a given change in the different The Ministry of Finance has granted permission to use the primary capital parameters. This is shown in Note 11. for customer dividends. The payment of customer dividends is regulated by §10-17, fourth subsection of the Financial Institutions Act, which classifies Fair value of financial instruments customer dividends as a profit allocation. For accounting purposes, the Bank The fair value of financial instruments that are not traded in an active market, has used this classification and has thus treated the payment as an equity are valued with the use of different valuation techniques. The Group seeks transaction. On 1/26/2018, the Financial Supervisory Authority of Norway to base these valuations to the greatest extent possible on the market approved the amendment of the Articles of Incorporation regarding conditions prevailing on the date of the balance sheet. If there are no customer dividends.The payment of customer dividends provides a tax empirical market data, assumptions are made regarding how the market deduction of NOK 6 million for the 2018 fiscal year. The tax deduction is will price the instrument, e.g. based on the pricing of similar instruments. recognized in the income statement pursuant to the change in principle Valuations require extensive use of discretion, inter alia in the assessment mentioned above, as a reduction of the 2018 tax cost.
Sandnes Sparebank annual report 2018 51 Notes
ACQUISITION, SALE, LIQUIDATION AND ESTABLISHMENT OF COMPANIES
There are no material changes to the Group structure as of December 31, 2018.
SEGMENTERS
The Group has three segments, Retail Market (RM), Corporate Market (CM) and Real Estate Agency. RM and CM are the banking businesses related to the two main customer groups. They also include general investment advice to the Bank's customers.
The Estate Agency segment is real estate brokerage business. This segment consists of the Aktiv Eiendomsmegling Jæren AS subsidiary.
The accounting principles applied in the preparation of the segment information are the same as the principles described in Note 2, Accounting principles. The Group does not distribute tax or non-recurring gains or losses on the segments. The Group recognizes inter-company transactions according to the arm's length principle. Funding cost is allocated according to capital requirements of RM and CM, respectively. Net commission income is distributed according to sales volume, and common costs according to a cost distribution formula.
The Group has activities in Norway only, and all income is earned in Norway.
Group
Segment reporting as of 12/31/2018 RM GM Property Other Total Net external interest income 237 045 224 866 461 911 Net internal interest income 69 69 Net interest income 237 045 224 866 69 461 980 Net commission income 26 614 25 005 (2 387) 49 233 Income from securities (6 368) 50 804 44 436 Other operating income 27 734 1 147 28 881 Total other operating income 20 246 25 005 27 734 49 565 122 550 Personnel cost 66 301 38 828 18 639 10 614 134 382 Other operating cost 74 269 29 395 7 978 2 459 114 100 Depreciation/writedowns 8 969 3 617 67 3 12 655 Profit before loan losses 107 753 178 032 1 050 36 559 323 393 Writedowns and losses on loans and guarantees (7 601) 31 330 23 729 Writedowns of repossessed assets Segment profits before taxes 115 353 146 702 1 050 36 559 299 664
Net lending to customers 15 035 422 7 179 023 22 214 445 Other assets 16 664 4 978 248 4 994 913 Total assets 15 035 422 7 179 023 16 664 4 978 249 27 209 358
Deposits from customers 5 937 933 4 949 117 365 118 11 252 168 Other liabilities 5 274 12 990 916 12 996 189 Total liabilities 5 937 933 4 949 117 5 274 13 356 033 24 248 357
Sandnes Sparebank annual report 2018 52 Notes
Group
Segment reporting as of 12/31/2017 RM GM Property Other Total Net external interest income 251 682 222 447 474 129 Net internal interest income 107 107 Net interest income 251 682 222 447 107 474 236 Net commission income 24 793 24 860 4 272 53 925 Income from securities -2 179 168 43 868 41 857 Other operating income 27 065 10 27 074 Total other operating income 22 614 25 028 27 065 48 150 122 857 Personnel cost 60 908 36 906 18 166 13 910 129 889 Other operating cost 69 493 39 964 7 873 2 922 120 251 Depreciation/writedowns 12 923 5 387 192 -5 18 498 Profit before loan losses 130 972 165 217 834 31 430 328 454 Writedowns and losses on loans and guarantees 5 617 66 882 72 499 Writedowns of repossessed assets Segment profits before taxes 125 355 98 335 834 31 430 255 954
Net lending to customers 14 339 074 7 133 826 21 472 900 Other assets 18 318 4 608 511 4 626 829 Total assets 14 339 074 7 133 826 18 318 4 608 511 26 099 729
Deposits from customers 6 006 008 4 609 644 241 792 10 857 443 Other liabilities 5 088 12 528 448 12 533 536 Total liabilities 6 006 008 4 609 644 5 088 12 770 240 23 390 979
Parent bank
Segment reporting as of 12/31/2018 RM GM Other Total Net interest income 163 708 224 866 388 574 Net commission income 43 430 25 005 (2 387) 66 048 Income from securities 576 52 409 52 985 Other operating income 1 147 1 147 Total other operating income 44 005 25 005 51 170 120 180 Personnel cost 66 261 38 828 10 614 115 702 Other operating cost 71 967 29 395 2 459 103 821 Depreciation/writedowns 8 969 3 617 3 12 589 Profit before loan losses 60 516 178 032 38 094 276 642 Writedowns and losses on loans and guarantees (7 065) 31 330 24 264 Segment profits before taxes 67 582 146 702 38 094 252 378
Net lending to customers 7 620 073 7 179 023 14 799 095 Other assets 28 380 12 163 5 330 245 5 370 788 Total assets 7 648 453 7 191 186 5 330 245 20 169 883
Deposits from customers 5 937 933 4 949 855 365 118 11 252 906 Other liabilities 6 150 092 6 150 092 Total liabilities 5 937 933 4 949 855 6 515 210 17 402 999
Sandnes Sparebank annual report 2018 53 Notes
Parent bank
Segment reporting as of 12/31/2017 RM GM Other Total Net interest income 172.534 222.447 0 394.980 Net commission income 40 273 24 860 4 272 69 405 Income from securities 50 000 168 42 268 92 436 Other operating income 10 10 Total other operating income 90 273 25 028 46 550 161 851 Personnel cost 60 801 36 906 13 980 111 687 Other operating cost 67 280 39 964 2 777 110 021 Depreciation/writedowns 12 923 5 387 -5 18 306 Profit before loan losses 121 803 165 217 29 797 316 818 Writedowns and losses on loans and guarantees 9 828 66 882 76 710 Segment profits before taxes 111 975 98 335 29 797 240 108
Net lending to customers 7 682 223 7 133 826 14 816 049 Other assets 33 872 14 517 5 046 428 5 094 817 Total assets 7 716 095 7 148 343 5 046 428 19 910 866
Deposits from customers 6 006 008 4 611 601 241 774 10 859 382 Other liabilities 6 502 362 6 502 362 Total liabilities 6 006 008 4 611 601 6 744 136 17 361 744
Sandnes Sparebank annual report 2018 54 Notes
BALANCE SHEET MANAGEMENT AND CAPITAL ADEQUACY
The Bank assumes achievement of the capital requirements pursuant to CRD IV with the addition of internal buffers. This means that the Bank's objective is a core Tier-1 capital ratio of 15.2%. The formal requirement of the Financial Supervisory Authority of Norway is 14.5%. A the same time, the bank will have a Tier-1 capital ratio of 16.5% and a capital ratio of 18.5%. In addition to these requirements, the bank must comply with internal capital buffers.
The adopted capitalization policy shall contribute to the Group having equity capital of a sufficient size to enable effective use of equity relative to the scope and risk profile of the business. The Bank will have sufficient equity to enable it to achieve competitive returns on equity, as well as be granted competitive terms and conditions in the various credit markets. Access to liquidity shall be the dominant consideration with respect to the goal of achieving competitive returns on equity. The equity capital shall also ensure that the Group will have sufficient capital buffers to withstand periods with losses.
The Group manages its assets with an eye to fluctuations in financial conditions. This entails that the Bank conducts monthly balance sheet management meetings to review the capital situation. At the meetings, recent volume metrics and estimates are reviewed relative to developments with respect to the calculation base and the Bank's performance relative to its capital objectives. Also, status is reviewed with respect to the measures adopted and any require- ments for further measures.
As of 12/31/2018, the Group's total assets equal NOK 27.2 billion. This is an increase of NOK 1.1 billion compared to 12/31/2017, corresponding to an increase of 4.3%, primarily due to lending growth.
Risk weighted capital is measured using the standard method for credit risk. Risk weightings are allocated to assets according to the capital regulation.
As of 12/31/2018, the Group had a core Tier-1 capital ratio of 16.6%, unchanged vs. 12/31/2017. The core Tier-1 capital ratio was reduced due to lending growth and the purchase of equity capital certificates in Jæren Sparebank, and an increase in the valuation of Vipps/VBB AS, but is offset by retained earnings in 2018.
The unweighted leverage ratio amounted to 9.4% at the end of the year, vs. 10.1 at the same time last year. The reason for the decline is primary the redemption of a bond with final maturity in January 2019. However, the unweighted leverage ratio is significantly higher than the government minimum requirement of 5%.
Group Parent bank
31.12.18 31.12.17 Subordinated capital 31.12.18 31.12.17 230 149 230 149 Equity capital certificate capital 230 149 230 149 -187 -358 Treasury holding of equity capital certificates -187 -358 820 224 811 510 The Savings Bank's Fund 820 224 811 510 1 638 161 1 578 879 Other equity 1 444 046 1 419 251 119 677 64 442 Allocated dividend 119 677 64 442 52 976 24 128 Provisions for customer dividends 52 976 24 128 2 861 001 2 708 750 Equity capital (excluding hybrid capital) 2 666 885 2 549 121 -59 097 Deduction for ownership of insignificant assets in the financial sector -77 941 -4 084 Transition rule for ownership of insignificant assets in the financial sector 817 -5 159 -4 308 Deduction prudent valuation -5 353 -4 065 -119 677 -64 442 Deduction for amount allocated to dividends -119 677 -64 442 -52 976 -24 128 Deduction for provisions for customer dividends -52 976 -24 128 -39 449 -46 659 Deduction for goodwill and other intangible assets -34 536 -40 989 2 584 641 2 569 213 Total core Tier-1 capital 2 376 400 2 412 231 100 000 225 400 Investment grade bond and hybrid capital 100 000 225 400 Transition rule for ownership of insignificant assets in the financial sector -408 2 684 641 2 794 613 Total Tier-1 capital 2 476 400 2 637 223 200 000 299 507 Subordinated loan capital (ex. accrued interest) 200 000 299 507 -301 Deduction for ownership of insignificant assets in the financial sector -396 -27 Transition rule for ownership of insignificant assets in the financial sector -408 2 884 341 3 094 120 Subordinated capital 2 676 004 2 936 294
Sandnes Sparebank annual report 2018 55 Notes
Group Parent bank
31.12.18 31.12.17 31.12.18 31.12.17 Risk-weighted capital Market risk – standard method 14 378 485 14 263 913 Credit risk – standard method 11 947 596 12 126 276 1 116 635 1 055 304 Operational risk 1 042 845 982 775 44 824 121 223 CVA surcharge 14 169 71 408 15 539 944 15 440 440 Calculation base 13 004 609 13 180 460 18.6 20.0 Capital ratio 20.6 22.3 17.3 18.1 Tier-1 capital ratio 19.0 20.0 16.6 16.6 Core Tier-1 capital ratio 18.3 18.3
Buffer requirements 388 499 386 011 Preservation buffer (2.50%) 325 115 329 511 310 799 308 809 Counter-cyclical buffer (2.00%) 260 092 263 609 466 198 463 213 System risk buffer (3.00%) 390 138 395 414 1 165 496 1 158 033 Total buffers for core Tier-1 capital 975 346 988 534 699 297 694 820 Minimum core Tier-1 capital requirement (4.50%) 585 207 593 121 Available core Tier-1 capital beyond minimum requirement 719 848 716 360 815 847 830 576 and buffer requirements
31.12.18 31.12.17 Specification of calculation base 31.12.18 31.12.17 Standard method Market risk
133 182 79 047 Local and regional authorities 133 182 79 047 123 908 228 185 Institutions 231 232 291 766 2 278 044 2 445 560 Companies 2 292 848 2 445 557 387 816 171 616 Mass market 304 510 150 612 10 228 909 9 438 883 Loans secured by real estate 7 477 622 6 924 192 338 260 536 799 Overdue loans 338 260 536 799 271 396 265 938 Covered bonds 217 732 245 785 36 272 35 474 Fund units 36 272 35 474 300 584 278 010 Equity positions 636 066 624 030 280 114 784 402 Others 279 871 793 014 14 378 485 14 263 913 Credit risk 11 947 596 12 126 276
1 116 635 1 055 304 Operational risk 1 042 845 982 775
44 824 121 223 CVA surcharge 14 169 71 408
15 539 944 15 440 440 Total calculation base 13 004 609 13 180 460
Sandnes Sparebank annual report 2018 56 Notes
Reporting of capital for owner company in cooperating group as of 12/31/2018: Companies that take part in a cooperating group, shall carry out proportionate consolidation of ownership shares in financial enterprises that is conducting the business comprised by the cooperation, cf. §17-13 (2) of the Financial Institutions Act and supplementary provisions in §16 (3) and §32 (4) of the CRR/ CRD regulation. For ownership shares under 10 percent, this obligation is effective from January 01, 2018.
Sandnes Sparebank takes part in a cooperating group with the EIKA Gruppen AS, of which the Bank owns 8.1% of the shares as of 12/31/2018. Consequently, the share of the EIKA Group is consolidated in capital ratio, ref. the below calculation.
Cooperating group with Vipps AS (VBB AS). Previously, the Bank was a shareholder in BankID Norge AS and BankAxept AS, which have now been merged with Vipps AS, and the bank will therefore receive compensatory shares in Vipps AS. The Ministry of Finance has granted dispensation from the requirement of pro rata consolidation for participants in the cooperating group with ownership interests of less than 10 percent. However, the dispensation is granted on the condition that the financial companies deduct the whole book value of the investment in Vipps AS from the core Tier-1 capital. The Bank owns less than 10 percent of Vipps AS, and its book value has been deducted from the core Tier-1 capital, meaning that the Bank does not effect a pro rata consolidation of its ownership share in this financial company.
The impact of the consolidated share on the Group capital ratio as of 12/31/2018, is as follows:
Core Tier-1 capital ratio Tier-1 capital Subordinated capital Capital, Group 2 584 641 2 684 641 2 884 341 Proportionate share of capital from Eika Gruppen 81 564 89 674 99 812 Reversal of deduction 59 097 59 097 59 398 Internal eliminations (-) -76 880 -76 880 -76 880 Deduction for non-transferrable capital (-) Group capital after consolidation of share of Eika Gruppen 2 648 423 2 756 534 2 966 672
Calculation base, Group 15 539 944 FProportionate share of net calculation base in Eika Group 465 162 Elimination of internal claims and capital (-) -196 317 Net calculation base after consolidation of share of Eika Gruppen 15 808 789
Core Tier-1 capital ratio Tier-1 capital Subordinated capital Capital ratio for owner company after consolidation of share of Eika Gruppen 16.8 % 17.4 % 18.8 %
Sandnes Sparebank annual report 2018 57 Notes
RISK MANAGEMENT
The Group’s business model entails exposure to risk and its professional Risk management management. Risk is defined as possible loss or lost earnings due to events In order to ensure independent risk management, the Group has established triggered by internal or external factors. a separate risk department. This department reports directly to the Managing Director, and the Director of Risk Management is in charge of the depart- The Group’s objective is to achieve a satisfactory balance between risk ment. The Director of Risk Management is also in charge of the Group's risk and return, at the same time as it seeks to minimize the potential negative control function, pursuant to §47-3 of the Capital Requirement Regulation, impact of unforeseen events on the Bank’s financial position/earnings. and responsible for Compliance.
Organization and authorization structure The main tasks of the risk management function is to identify all significant risks, measure them, manage risk exposure and evaluate capital requirements Board of Directors in consideration of the Bank’s actual risk profile. The department prepares The Board of Directors decides the Group’s risk profile. In addition, the monthly risk reports to the Bank’s Board of Directors. Reports include, inter Board of Directors also determines the overall framework and authorizations alia, any departures from fixed frameworks and results from stress testing. within the different risk areas. The Group’s risk management guidelines, as well as all significant aspects of the risk management models and decision processes are the responsibility of the Board of Directors. Implementation of risk management and risk monitoring A key part of the Bank’s risk management is the Group’s assessment of its Risk Committee total capital requirement (ICAAP – Internal Capital Adequacy Assessment In 2014, the Group established a risk committee. The purpose of the Risk Process). In this process we assess the risks to which the Bank is exposed Committee, which is a Board Committee, is to ensure that risk management relative to the appurtenant assessment of internal capital requirements and control are of a satisfactory high quality. This means, inter alia, that the related to the different risks. Risk Committee will follow up the Group's implementation of its risk strategy, provide advice to the Board of Directors regarding current risk strategy and With respect to daily risk management, individual managers within the risk tolerance, and provide preparatory work for risk issues for consideration Group must ensure that they are knowledgeable with respect to significant by the Board of Directors. risks within their own area of responsibility, enabling it to be managed in a financially and administratively prudent manner. The Bank's Managing Managing Director and the management team Director has issued further guidelines for the implementation of general The Managing Director has the daily responsibility for risk management, credit policies and credit strategies. Each business segment manages its a responsibility which has been delegated to the Director of Risk own credit processes according to specified guidelines. Management. This means that the Managing Director and the Director of Risk Management are responsible for implementing effective risk manage- All business segments in the Group undertake an annual risk review, ment systems, and ensuring that risk exposures are monitored and repor- which comprises: ted in a satisfactory manner. Significant decisions regarding risk manage- • Comments on their own internal control work ment are normally taken in consultation with Group Management. • Risk assessments • Assessment of their own compliance with external Several advisory bodies have been established for the purpose of providing and internal regulations the Managing Director with sound foundations for decision-making and • Planned improvement initiatives assisting him in the follow-up and control with respect to various risk issues. The Balance Sheet Management Group deals with issues related to Reporting takes place at departmental level, and forms the basis for collective management of market and funding risk, liquidity risk and capital structure. reports for each business segment and support areas that are included in The Credit Committee provides advice to the Management Group with the Managing Director's reporting to the Board of Directors. respect to the consideration of major individual loans, and other credit issues of special character, whereas the Risk Committee shall ensure In connection with ICAAP, the Board of Directors reviews the Group's that the management and control of risk is at a satisfactory high level. major risk areas and internal control. The aim of the review is to document the quality of the work within the major risk areas. The review should Audit ensure identification of changes in the risk picture, enabling initiation Both external and internal audit are important elements of risk management. of necessary improvement measures. Independent and effective auditing contributes to appropriate internal control and the reliability of financial reporting. Risk categories For risk management purposes, Sandnes Sparebank differentiates between The Bank has outsourced its internal audit function to BDO. The backdrop the following categories of risk: for this was consideration of both the necessary professional resources and the complexity involved in implementing audits. Internal audit still receives its instructions from the Board of Directors, which also approves the internal auditor’s annual plans. As of 1/1/2019, the Bank has recom- mended that KPMG be appointed as new internal auditor.
Sandnes Sparebank annual report 2018 58 Notes
Credit risk Credit risk is the risk of loss due to customers or counterparties being There is operational risk related to the Bank's IT systems, which to a great unable to fulfill their contractual obligations, or due to collateral not extent are outsourced to external service providers. SDC and Eika are the covering outstanding claims. Bank’s main providers of technology services. Good management and control of the IT systems, both in the Bank and at our service providers, Please refer to Note 8-11 for an evaluation of credit risk. are of material significance in order to ensure precise, complete and reliable financial reporting. The Bank has established an overall control model and Market risk internal audit activities related to the IT systems. Key systems are standardized, Market risk is the risk of loss of the market value of financial instruments, and there have been few actual operational malfunctions related to the due to fluctuations in share prices, interest rates, currency exchange rates IT systems. The operational risk is considered to be low. or commodity prices. One important element related to operational risk is the follow-up of Market risk arises due to open positions in fixed income, currency or equity undesirable events. The Bank has established tools for the reporting, classi- products. These are products that are affected by general or specific market fication and follow-up of undesirable events. This enables adjustment changes or changes in volatility in market prices, such as interest rates, credit of internal processes in order to reduce the probability of reoccurrence. spreads, currency exchange rates and the prices of equity products. Other risks Please refer to Note 12-15 for an evaluation of market risk. Other risks include strategic risk, owner risk and environmental risk.
Liquidity and settlement risk Strategic risk comprises potential events that prevent the attainment of objectives, due to fundamental changes in the economic or political frame Liquidity risk is the uncertainty regarding future earnings and capital levels work conditions. More specifically this relates to uncertainty regarding due to the Bank's lack of ability to meet its obligations when due. earnings, capital or the Bank's market value due to undesirable or incorrect business decisions or the lack of response to changes in the economic Please refer to Note 16 for an evaluation of liquidity risk. or political framework conditions.
Operational risk Owner risk is the risk that arises due to being an owner of a company, Operational risk includes the uncertainty regarding future earnings, e.g. through operation or the risk of having to provide fresh capital. capital and the Bank's market value due to: • Insufficient or failing internal processes or systems Environmental risk mainly means macroeconomic risks, such as • Dishonesty or errors by employees unemployment and bankruptcy rate developments. • Grave external events.
Legal risk is part of the Bank's definition of operational risk.
The Group evaluates its operational risk, inter alia, by reviewing and identifying significant risks in the various departments. Operational risk may be evaluated on the basis of event categories.
Sandnes Sparebank annual report 2018 59 Notes
CREDIT RISK
Credit risk primarily arises in the Bank’s loan portfolio, but may also arise in the Group’s holdings of bonds, notes and financial derivatives.
Credit risk is the Group’s major risk. The Group’s credit risk consists mainly of net lending to customers, cash and claims on central banks, as well as financial instruments. Credit risk on loans, guarantees and credit facilities are most important on the basis of the volume and the general risk level. This risk is therefore described in detail below. Other exposure involves limited credit risk.
Group Parent bank
31.12.18 31.12.17 Maximum exposure to credit risk 31.12.18 31.12.17 454 707 472 646 Cash and deposits with central banks 454 707 472 646 201 566 172 782 Loans to and claims on credit institutions 100 247 71 787 21 439 328 20 746 928 Loans to customers at amortized cost 13 197 892 14 090 076 775 118 725 972 Loans to customers at fair value 1 601 203 725 972 3 660 633 3 333 184 Notes and bonds 3 116 404 3 090 432 150 356 154 560 Financial derivatives 85 082 106 487 13 719 12 356 Other assets 751 034 529 623 9 864 48 190 Prepaid cost and accrued income 9 864 42 203 26 705 291 25 666 618 Total credit risk exposure in balance sheet items 19 316 434 19 129 228 607 527 745 564 Guarantee liabilities 607 526 745 564 2 631 246 2 679 856 Unused credit facilities and loan grants 1 674 229 1 822 251 29 944 064 29 092 038 Total credit exposure 21 598 189 21 697 042
Measurement of the credit risk of the loan portfolio Loan The Group has score card models for customers both in the Retail Market (RM) and the Corporate Market (CM). The Bank has developed and tested the models on its own database. The score card models are used to calculate the customer’s probability of default (PD) over the next 12 months.
Both RM and CM customers are scored monthly, classified in one of 11 classes (A-K) based on score card points. Class K consists of loans in default and loans with individual writedowns.
The below table shows the intervals for the different risk classes of RM.
Score (rounded) Risk class PD 685-690 A 0.050 % 660-684 B 0.175 % 640-659 C 0.375 % 630-639 D 0.625 % 615-629 E 1.000 % 600-614 F 1.625 % 585-599 G 2.500 % 570-584 H 4.000 % 560-569 IN 6.500 % 483-560 J 20.000 %
Sandnes Sparebank annual report 2018 60 Notes
The below table shows the intervals for the different CM risk classes..
Risk class Lower Upper PD B 91 100 0.175 % C 85 90 0.375 % D 79 84 0.625 % E 74 78 1.00 % F 69 73 1.625 % G 64 68 2.50 % H 58 63 4.00 % IN 52 57 6.50 % J 0 51 20.00 %
Collateral is used to reduce credit risk. Collateral may be physical collateral, guarantees or cash deposits. As a principal rule, physical collateral may be buildings, houses or inventories. In the assessment of the value of collateral, CM assumes an expected realization value, which entails a significant reduction factor. CM collateral is mainly real estate and fixed assets. For fixed assets, the standard reduction factor is 80% and for commercial real estate it is 20%. RM collateral is principally residential property and in this case the market value is used for valuation purposes, with quarterly general adjustments of the property value.
Collateral is classified into six groups, which form the basis for extent of loss in case of default. Divisions are as follows:
Collateral class Collateral coverage from Collateral coverage to Loan to asset ratio A 120% Up <60 % B 100% 120% 60-75 % C 70% 100% 75-100 % D 50% 70% 100-125 % E Under 50% >125 %
The distribution of the RM portfolio (gross loans) on the different collateral The distribution of the CM portfolio (gross loans) on the different collateral classes based on market value as of 12/31/2018, is as follows: classes based on realization value as of 12/31/2018, is as follows:
Collateral class RM Collateral class CM
43.6 %
31.3 % 28.3 %
23.3 % 23.4 % 22.9 %
15.6 %
6.4 % 2.2 % 2.2 % 0.4 % 0.4 %
A B C D E Unfunded A B C D E Unfunded
Sandnes Sparebank annual report 2018 61 Notes
The expected loss for each loan is calculated on the basis of the default probability and degree of loss in case of default. Three risk groups are defined for not written down loans/loans in default on the basis of expected loss. The table is the same for RM and CM.
Expected losses Expected losses Risk category lower limit upper limit Low 0.00 % 0.25 % Medium 0.25 % 1.00 % High 1.00 % 100.00 %
Part of the maintenance of the models is an annual validation. Validation of the PD models is done by evaluating how well the model predicts default versus observed defaults during the period. With respect to the LGD models, the LGD rates are evaluated against the different collateral classes, as well as overall against empirical data. This work also provides indications of possible adjustments that ought to be made in the further development of the models.
Risk classification is important for the level of monitoring of the customer, and is also included as a criterion in credit assessment and credit decisions. Additional to risk classification are discretionary issues like management, market, loan history, profitability, etc. Beyond the use of scoring models, the Group has guidelines for the composition of the various portfolios.
The risk classification is also the basis for the calculation of losses in step 1 and 2 pursuant to IFRS 9. In step 1, the expected loss over 12 months is calculated. In case of a material increase of credit risk, the loan shall be put in step 2, and the expected loss for the entire term of the loan is calculated. Material increase of credit risk is defined as:
where PDliv always uses the rating maturity (M) of the account at the time t, and r(t) is the rating at the time t. FtF is an expression for the fact that it is according to future expectations. x, y, z and f are set at 1%, 0.5%, 2.0% and 2 at the present time. In addition, an account is defined in step 2 if it is marked with forbearance or has been in default for more than 30 days. Step 3 corresponds to individual writedowns.
Markov chains are used to find the expected loss during the term of the loan in step 2. It is assumed that customers’ shift of risk category follows a Markov process. This makes it possible to apply a migration matrix based on historical risk category shifts to describe future risk category shifts. PD live cycle is there- fore based on migration matrices describing customers’ travel between risk categories from year to year. By the aid of the migration matrix, the probability of default may be computed for a an arbitrary number of years into the future. The PD lifecycle matrix sets the probability for a given risk category a given number of years into the future.
When the probability of default is under or equal to 5%, the expected maturity is used. The expected maturity is calculated on the basis of empirical data as an average per product type for both retail and corporate loans. When the probability of default is over 5%, the full maturity is used.
Sandnes Sparebank, together with Eika, will adjust provisions for losses with the expected development of different macro variable that are considered to affect expected losses. The outlook is derived from a macro model that considers three scenarios – base case, best case and worst case – for the expected macro-economic outlook for one to three years into the future. The base case and worst case are based on the values of the Financial Supervisory Authority for the base scenario and stress test in the Risk Outlook dated 12/5/2018. The scenario for best case is based on an estimate by the Chief Economist of the Eika Group. Variables such as unemployment, oil price, household debt and bank lending rates are part of the model. The variables are distributed on counties for the retail market and on industries for the corporate market. The weighting of the scenarios is done according to an expert evaluation. As of 12/31/2018, the following weightings are used: Base case 2/3, best case 1/6 and worst case 1/6.
Sandnes Sparebank annual report 2018 62 Notes
As of 12/31/2018, the Bank has the following expectations regarding the development of the macro variables:
Debt growth % Year Scenario Unemployment % households Bank interest rate Oil price 2018 Base case 3.9 % 6.0 % 2.5 % 54.5 2019 Base case 4.0 % 4.3 % 2.8 % 57.8 2020 Base case 4.0 % 3.7 % 3.2 % 59.3 2021 Base case 4.0 % 3.7 % 3.8 % 60.5 2022 Base case 4.0 % 3.7 % 4.0 % 62.5 2018 Worst case 3.9 % 6.0 % 2.5 % 54.5 2019 Worst case 4.3 % 3.9 % 2.8 % 56.2 2020 Worst case 4.9 % 1.8 % 3.3 % 53.9 2021 Worst case 5.4 % 1.8 % 3.9 % 51.8 2022 Worst case 5.5 % 6.0 % 4.4 % 49.8 2018 Best case 3.9 % 6.0 % 2.5 % 54.5 2019 Best case 3.9 % 8.1 % 2.6 % 57.9 2020 Best case 3.4 % 10.3 % 2.4 % 60.2 2021 Best case 2.9 % 12.5 % 2.0 % 62.7 2022 Best case 2.9 % 14.7 % 1.7 % 65.2
The EAD for agreements at step 1 consist of outstanding receivables or liabilities adjusted for cash flows during the next 12 months and for agreements in step 2, the discounted cash flows for the expected life of the agreement. For guarantees, EAD is equal to the outstanding liability at the date of reporting, multiplied with a conversion factor of 1 or 0.5 depending on the type of guarantee. Unused credit facilities have an EAD equal to the outstanding unused credit at time of reporting.
Total loans to corporate customers by risk groups as of 12/31/2018 Loans to customers Guarantees Unused limit Total loans and advances Share Risk classes Parent bank Group Parent bank Group Parent bank Group Parent bank Group Parent bank Group Low 4 565 324 4 574 130 357 649 357 649 519 589 519 589 5 442 562 5 451 368 64.3 % 64.4 % Medium 1 798 538 1 802 898 200 805 200 806 250 058 234 006 2 249 401 2 237 709 26.6 % 26.4 % High 557 914 557 914 29 259 29 259 37 389 37 389 624 561 624 561 7.4 % 7.4 % Non-perf/ 130 998 130 998 16 334 16 334 4 582 4 582 151 914 151 914 1.8 % 1.8 % writedowns Total 7 052 775 7 065 940 604 046 604 047 811 618 795 566 8 468 439 8 465 553 100.0 % 100.0 %
Total loans to corporate customers by risk groups as of 12/31/2017 Loans to customers Guarantees Unused limit Total loans and advances Share Risk classes Parent bank Group Parent bank Group Parent bank Group Parent bank Group Parent bank Group Lowest 1 728 305 1 728 305 128 129 128 129 146 571 146 571 2 003 005 2 003 005 23.3 % 23.3 % Low 3 373 663 3 373 663 356 738 356 738 464 411 464 411 4 194 812 4 194 812 48.8 % 48.9 % Medium 1 290 523 1 292 569 173 955 173 955 174 870 166 700 1 639 349 1 633 225 19.1 % 19.0 % High 269 045 269 045 16 496 16 496 22 326 22 326 307 868 307 868 3.6 % 3.6 % Highest 119 806 119 806 5 507 5 507 11 660 11 660 136 972 136 972 1.6 % 1.6 % Non-perf/ 228 280 228 280 61 483 61 483 19 834 19 834 309 598 309 598 3.6 % 3.6 % writedowns Total 7 009 623 7 011 669 742 309 742 309 839 671 831 501 8 591 603 8 585 479 100.0 % 100.0 %
Sandnes Sparebank annual report 2018 63 Notes
Total loans to retail customers by risk groups as of 12/31/2018 Loans to customers Guarantees Unused limit Total loans and advances Share Risk classes Parent bank Group Parent bank Group Parent bank Group Parent bank Group Parent bank Group Low 6 378 996 13 611 788 2 936 2 936 823 304 1 780 242 7 205 235 15 394 966 83.7 % 90.6 % Medium 539 273 614 131 117 117 30 295 46 427 569 685 660 675 6.6 % 3.9 % High 746 597 841 131 427 427 9 012 9 012 756 036 850 570 8.8 % 5.0 % Non-perf/ 81 455 81 455 81 455 81 455 0.9 % 0.5 % writedowns Total 7 746 321 15 148 505 3 480 3 480 862 611 1 835 681 8 612 412 16 987 666 100.0 % 100.0 %
Total loans to retail customers by risk groups as of 12/31/2017 Loans to customers Guarantees Unused limit Total loans and advances Share Risk classes Parent bank Group Parent bank Group Parent bank Group Parent bank Group Parent bank Group Lowest 4 114 756 9 579 242 1 429 1 429 790 436 1 639 399 4 906 620 11 220 069 55.8 % 68.8 % Low 1 990 860 2 971 835 1 046 1 046 115 074 137 970 2 106 980 3 110 851 24.0 % 19.1 % Medium 930 417 1 117 934 465 465 68 608 62 523 999 490 1 180 922 11.4 % 7.2 % High 86 041 98 896 38 38 86 079 98 934 1.0 % 0.6 % Highest 530 681 539 655 240 240 8 404 8 405 539 326 548 300 6.1 % 3.4 % Non-perf/ 153 671 153 671 75 75 19 19 153 765 153 765 1.7 % 0.9 % writedowns Total 7 806 426 14 461 231 3 255 3 255 982 580 1 848 355 8 792 260 16 312 841 100.0 % 100.0 %
The below table shows share of exposure (EAD) distributed on risk category and step
Group
Risk category Step Low Medium High Non-perf/loss Total 1 75 % 8 % 2 % 0 % 85 % 2 6 % 4 % 4 % 0 % 14 % 3 0 % 0 % 0 % 1 % 2 % TOTAL 81 % 11 % 6 % 2 % 100 %
Parent bank
Step Step 1 Middels Høy Mislighold/tap Total 1 2 11 % 3 % 0 % 82 % 2 3 5 % 5 % 1 % 15 % 3 TOTAL 0 % 0 % 2 % 2 % TOTAL 73 % 17 % 8 % 3 % 100 %
Sandnes Sparebank annual report 2018 64 Notes
Concentration risk Concentration risk is an element of total credit risk in the loan portfolio. Concentration risk may defined as risk in a portfolio arising due to a skewed distribution of loans on customer groups, industries or geographic regions. In order to assess and manage concentration risk, the Group evaluates the degree of bias in its loan portfolio on the basis of the following conditions:
• Big individual customers • Individual industries (industries with specific challenges or cyclical industries) • Geographical areas • Collateral with the same risk characteristics (e.g. dependent on property prices) • Counterparties in interbank operations or trading with financial derivatives
With respect to the calculation of concentration risk for individual and industry risk, the Group employs the same method as the Financial Supervisory Authority of Norway.
The Bank has a not insignificant concentration of loans for financing of property investments. A total of 47.9% of the Bank's loans and advances to corporate customers is related to property operations. The Bank focuses on monitoring this concentration risk.
In addition, the Bank faces concentration risk in relation to big individual loans. Major loans are defined as loans that exceed 10% of the capital base. There is a great overlap between major loans and loans related to property investments.
Age distribution, overdue, not individually written down loans The table shows overdue amounts on loans and overdrafts of credits/deposits distributed on the number of days overdue.
Group Parent bank
31.12.18 31.12.17 Overdue, not individually written-down loans 31.12.18 31.12.17 377 052 394 127 1-30 days 318 817 345 127 124 104 158 634 31-60 days 123 811 148 532 30 406 18 404 61-90 days 30 406 18 404 104 497 106 631 More than 90 days 104 497 106 631 636 060 677 796 Total 577 531 618 694
Bonds and notes In order to manage the credit risk associated with investments in bonds and notes, the Group has developed clear guidelines regarding the quality of implemented investments, in addition to requirements regarding industry composition and maturity structure. Investments in bonds and notes are primarily made as liquidity placements. In addition to the quality guidelines, duration and modified duration are computed for the portfolio.
Derivatives Derivatives are primarily used to manage the Group’s interest rate and currency risk. The Group’s counterparty exposure is measured as a combination of the market value of open contracts and the principal.
Monitoring of risk frameworks and risk mitigation measures The Group has established exposure frameworks for different segments of the various portfolios. The utilization of these frameworks are reported monthly to the Board of Directors and Group Management. Individual loans are monitored by the different credit environments within the Group. The Group also employs a number or risk mitigation measures:
Collateral The Group’s most important risk mitigation measure is the establishment of collateral for loans. It has clear guidelines both with respect to requirements for collateral coverage of loans and with respect to valuation of the collateral objects.
Exposure limits The Group has established a framework for the exposure to industries, type of loan and major loans. In addition, it has established guidelines for maximum exposure within the different risk categories.
Counter party exposure agreements There is a requirement that both International Swap Dealer Association (ISDA) agreements and Credit Support Annex (CSA) agreements have to be established prior to entering derivative transactions.
Sandnes Sparebank annual report 2018 65 Notes
ALLOCATION OF LOANS ON CUSTOMER GROUPS AND GEOGRAPHIC AREA
Group
Loans Guarantees Unused credit facilities By customer group 31.12.18 31.12.17 31.12.18 31.12.17 31.12.18 31.12.17 Agriculture and forestry 376 114 273 248 691 596 56 459 43 581 Fishing and hunting 677 973 200 200 Building and construction 1 217 385 1 004 268 311 146 297 112 165 093 227 811 Manufacturing 165 004 252 701 42 943 109 133 32 293 33 090 Oil and energy 117 932 30 954 650 400 14 131 38 848 Distributive trade 226 583 270 552 83 287 82 721 64 441 106 586 Hotels and restaurants 68 478 85 573 11 065 10 395 24 654 21 038 Transport and storage 225 810 229 526 29 899 28 720 7 482 7 619 Public and private services 870 335 1 051 723 75 913 109 582 237 010 239 653 Property management 3 827 242 3 893 894 48 453 103 274 194 710 157 007 Other customer groups 208 235 Retail customers 15 186 534 14 468 958 3 480 3 632 1 834 774 1 804 422 Total customers after step 3 writedowns 22 282 302 21 562 606 607 526 745 564 2 631 246 2 679 856 Step 1 & 2 writedowns (loans) 78 510 107 437 Change in valuation of loans at fair value -10 654 -17 732 Net lending to customers 22 214 445 21 472 900
Group
Loans Guarantees Unused credit facilities By geography 31.12.18 31.12.17 31.12.18 31.12.17 31.12.18 31.12.17 Rogaland 17 960 263 17 439 785 476 377 580 157 2 159 228 2 185 275 Oslo/Akershus 3 139 984 3 034 781 101 830 124 375 371 479 308 828 Other counties 1 116 667 1 010 352 29 319 41 032 90 065 127 622 Abroad 65 389 77 688 10 474 58 130 Total customers after Level 3 writedowns 22 282 302 21 562 606 607 526 745 564 2 631 246 2 679 856
Sandnes Sparebank annual report 2018 66 Notes
Parent bank
Loans Guarantees Unused credit facilities By customer group 31.12.18 31.12.17 31.12.18 31.12.17 31.12.18 31.12.17 Agriculture and forestry 376 114 273 248 691 596 56 459 43 581 Fishing and hunting 677 973 200 200 Building and construction 1 217 385 1 004 268 311 146 297 112 165 093 227 811 Manufacturing 165 004 252 701 42 943 109 133 32 293 33 090 Oil and energy 117 932 30 954 650 400 14 131 38 848 Distributive trade 217 765 261 389 83 287 82 721 64 441 106 586 Hotels and restaurants 68 478 85 573 11 065 10 395 24 654 21 038 Transport and storage 225 810 229 526 29 899 28 720 7 482 7 619 Public and private services 870 335 1 051 723 75 913 109 582 237 010 239 653 Property management 3 827 242 3 893 894 48 453 103 274 194 710 157 007 Other customer groups 208 235 Retail customers 7 775 179 7 817 044 3 480 3 632 877 756 946 817 Total customers after Level 3 writedowns 14 862 128 14 901 528 607 526 745 564 1 674 229 1 822 251 Step 1 & 2 writedowns (loans) 73 686 103 211 Change in valuation of loans at fair value -10 654 -17 732 Net lending to customers 14 799 096 14 816 049
Parent bank
Loans Guarantees Unused credit facilities By geography 31.12.18 31.12.17 31.12.18 31.12.17 31.12.18 31.12.17 Rogaland 11 333 706 11 403 462 476 377 580 157 1 301 634 1 410 274 Oslo/Akershus 2 623 490 2 621 942 101 830 124 375 300 454 255 568 Other counties 867 662 831 314 29 319 41 032 68 099 99 931 Abroad 37 270 44 810 4 042 56 478 Total customers after Level 3 writedowns 14 862 128 14 901 528 607 526 745 564 1 674 229 1 822 251
Group Parent bank
31.12.18 31.12.17 Guarantees 31.12.18 31.12.17 139 937 241 476 Payment guarantees 139 937 241 476 248 000 243 412 Contract guarantees 248 000 243 412 12 700 11 745 Tax deduction guarantees 12 700 11 745 13 113 11 743 Other guarantees 13 113 11 743 193 776 237 189 Unused guarantee limits 193 776 237 189 607 526 745 564 Total guarantees 607 526 745 564
Sandnes Sparebank annual report 2018 67 Notes
WRITTEN-DOWN LOANS DISTRIBUTED ON CUSTOMER GROUPS
Group
Written down, Step 3 Net written gross loans writedowns* down loans Writedowns by customer group 31.12.18 31.12.17 31.12.18 31.12.17 31.12.18 31.12.17 Agriculture and forestry 10 581 5 000 5 581 Building and construction 472 452 450 450 22 2 Manufacturing 34 892 250 600 15 900 72 000 18 992 178 600 Oil and energy 60 896 66 344 62 225 62 225 -1 329 4 119 Transport and storage 539 626 126 -87 -126 Public and private services 14 181 17 337 7 878 5 800 6 303 11 537 Property management 122 246 199 338 56 600 116 000 65 646 83 338 Retail customers 41 769 106 746 8 025 27 484 33 745 79 262 Total 285 576 640 816 156 704 284 085 128 872 356 731 Non-performing loans without step 3 writedowns 104 497 106 631 104 497 106 631 Total non-performing and written down loans 390 073 747 448 156 704 284 085 233 369 463 363 Gross non-performing and problem loans 1.74 % 3.42 % as a % of gross lending
Parent bank
Written down, Step 3 Net written gross loans writedowns* down loans Writedowns by customer group 31.12.18 31.12.17 31.12.18 31.12.17 31.12.18 31.12.17 Agriculture and forestry 10 581 5 000 5 581 Building and construction 472 452 450 450 22 2 Manufacturing 34 892 250 600 15 900 72 000 18 992 178 600 Oil and energy 60 896 66 344 62 225 62 225 -1 329 4 119 Transport and storage 539 626 126 -87 -126 Public and private services 14 181 17 337 7 878 5 800 6 303 11 537 Property management 122 246 199 338 56 600 116 000 65 646 83 338 Retail customers 41 769 106 746 8 025 27 484 33 745 79 262 Total 285 576 640 816 156 704 284 085 128 872 356 731 Non-performing loans without step 3 writedowns 104 497 106 631 104 497 106 631 Total non-performing and written down loans 390 073 747 448 156 704 284 085 233 369 463 363 Gross non-performing and problem loans 2.59 % 4.92 % as a % of gross lending
* In connection with the transition to IFRS 9, previous individual writedowns are also reported as step 3 writedowns. The table includes non-statistical writedowns (step 1 and 2 writedowns) per customer group.
Sandnes Sparebank annual report 2018 68 Notes
LOSSES ON LOANS/GUARANTEES AND NON-PERFORMING/PROBLEM LOANS
Group Parent bank
2018 2017 Losses on loans and guarantees 2018 2017 -16 792 Change in individual writedowns during the period (IAS 39) -16 792 -2 518 Change in group writedowns (IAS 39) 1 693 -427 Changes in provisions for losses during the period – step 1 * -862 -23 222 Changes in provisions for losses during the period – step 2 * -22 252 -127 381 Changes in provisions for losses during the period – step 3 * -127 381 173 377 86 968 Confirmations of previous writedowns 173 377 86 968 3 758 5 956 Confirmations without previous writedowns 3 758 5 956 -2 376 -1 115 Recovery of realized losses in previous periods -2 376 -1 115 23 729 72 499 Losses on loans and guarantees 24 264 76 710
* As of 2018, the step 1 and 2 writedowns (IFRS 9) will in the main replace previous group writedowns (IAS 39). Group writedowns in step 3 (IFRS 9) will in the main replace previous individual writedowns (IAS 39).
Group Parent bank
Step 1 Step 2 Step 3 Total Step 1 Step 2 Step 3 Total 12-month Lifetime Lifetime write- 12-month Lifetime Lifetime write- loss loss loss downs Changes in provisions for losses, Group: loss loss loss downs Provisions for losses as of 12/31/2017 according 391 522 387 296 to IAS 39 Impact of changes in provisions in connection 1 964 958 with the transition to IFRS 9 31 202 78 199 284 085 393 486 Provisions for losses as of 1/1/2018 (reworked) 30 188 73 981 284 085 388 254
Movements with impact on earnings: Transfers/movements: -1 947 20 680 18 733 Transfers from Step 1 to Step 2 -1 878 19 462 17 584 -62 250 188 Transfers from Step 1 to Step 3 -62 250 188 2 235 -19 251 -17 016 Transfers from Step 2 to Step 1 2 100 -17 884 -15 784 -2 111 10 950 8 839 Transfers from Step 2 to Step 3 -2 111 10 950 8 839 15 115 9 119 24 233 New loans and guarantees added during the period 14 756 8 835 23 591 -7 374 -25 454 -32 829 Disposals of loans and guarantees during the period -7 201 -24 349 -31 550 Changed provisions for losses during the period -8 393 -6 205 39 954 25 356 -8 578 -6 204 39 954 25 172 for loans and guarantees not migrated -173 377 -173 377 Declared losses -173 377 -173 377 -5 159 -5 159 Reversal of previous writedowns -5 159 -5 159 Other adjustments -370 -370 30 775 54 977 156 704 242 457 Provisions for losses as of 12/31/2018 28 956 51 730 156 704 237 390 21 550 30 644 148 753 200 946 of which provisions for losses CM 21 464 30 644 148 753 200 861 9 226 24 333 7 951 41 510 of which provisions for losses RM 7 492 21 086 7 951 36 529
233 Recognized as a reduction of loans to / claims 147 on credit institutions 235 214 Recognized as a reduction of loans to customers 230 390 7 010 Recognized as provisions for debit items 6 853 (guarantees and unused lines of credit) 242 457 Provisions for losses as of 12/31/2018 237 390
Sandnes Sparebank annual report 2018 69 Notes
Group Parent bank
Total Gross loans and guarantees with writedowns for Total Step 1 Step 2 Step 3 loans expected loss recognized in Group balance sheet: Step 1 Step 2 Step 3 loans Gross loans and guarantees recognized in the 17 941 043 3 993 322 544 325 22 478 690 12 291 828 2 999 842 544 325 15 835 995 balance sheet as of 1/1/2018 Transfers: -1 187 060 1 128 168 -58 892 Transfers from Step 1 to Step 2 -925 172 822 605 -102 568 -2 956 2 801 -155 Transfers from Step 1 to Step 3 -2 956 2 801 -155 1 169 380 -1 211 706 -42 325 Transfers from Step 2 to Step 1 777 837 -888 477 -110 640 -109 123 114 516 5 393 Transfers from Step 2 to Step 3 -109 123 114 516 5 393
5 702 291 701 583 6 403 875 New loans and guarantees added during the period 4 594 925 635 399 5 230 324 -3 620 959 -1 186 882 -4 807 841 Disposals of loans and guarantees during the period -2 689 335 -920 238 -3 609 573 Changes during the period for loans and guarantees -575 375 -17 973 -326 855 -920 203 -1 229 559 -48 356 -326 855 -1 604 769 not migrated Other adjustments -100 889 -100 889 Gross loans and guarantees recognized 19 426 365 3 297 390 334 787 23 058 541 12 716 678 2 491 653 334 787 15 543 117 in the balance sheet as of 12/31/2018*
6 788 674 924 751 293 847 8 007 272 of which gross balance sheet value CM 6 687 622 924 751 293 847 7 906 220 12 637 691 2 372 639 40 939 15 051 269 of which gross balance sheet value RM 6 029 055 1 566 902 40 939 7 636 897
*The above table is based on gross loans at the time of reporting, including loans to customers, and claims on credit institutions and the central bank.
Sensitivity analyses The statistical model for the computation of Expected credit losses (ECL) on loans is built on several critical assumptions, including probability of default, loss in case of default, expected lifespan of loans and macro developments. Thus, the model and the loss estimates are vulnerable with respect to changes in the assumptions used. Consequently, the Bank has reproduced loss estimates provided changes in key assumptions with the aim of illustrating how the loss estimates are affected by given scenarios.
Sensitivity analyses are made for the following factors: • Probability of default (PD) down 10% (all categories except those in default, risk category K/rating 11) • Probability of default (PD) up 10% (all categories except those in default, risk category K/rating 11) • 30% decline in home prices (adjusted LGD) • Expected lifespan equal to full maturity • In general, the future outlook in the model is optimistic. Sensitivity analyses have been run on the assumption that the future outlook is the same as the current situation.
The result of the sensitivity analysis is as follows, divided on group and the retail market (RM) and corporate market (CM);
Group 12/31/2018
Changes in key assumptions Unchanged future Drop in home Segment outlook Full maturity PD - 10% PD + 10% prices 30%* Percentage change in loss estimate CM 2.5 % 5.7 % -6.8 % 4.3 % 0.0 % Percentage change in loss estimate RM 1.4 % 10.1 % -4.2 % 3.0 % 80.6 % Percentage change in loss estimate Group 2.1 % 7.5 % -5.8 % 3.8 % 32.7 %
*The sensitivity analysis for home price drop is only illustrated for the retail market.
Sandnes Sparebank annual report 2018 70 Notes
Non-performing and problem loans The total loans non-performing over 90 days and other performing loans with individual writedowns for losses
Group
31.12.18 31.12.17 RM CM Total RM CM Total Problem loans before individual writedowns for losses (gross): Engagement non-performing over 90 days 59 494 91 876 151 370 120 091 64 752 184 843 Performing problem loans 21 973 216 730 238 703 30 394 532 210 562 605 Total loans before individual writedowns for losses (gross) 81 467 308 606 390 073 150 485 596 963 747 448
Individual writedowns of losses on: Engagement non-performing over 90 days 2 801 17 128 19 929 20 153 2 300 22 453 Performing problem loans 5 150 131 625 136 775 6 457 255 175 261 632 Total individual writedowns for losses (step 3) 7 951 148 753 156 704 26 610 257 475 284 085
Problem loans after individual writedowns for losses (net): Engagement non-performing over 90 days 56 693 74 748 131 441 99 938 62 452 162 390 Performing problem loans 16 823 85 105 101 928 23 938 277 035 300 973 Total loans after individual writedowns for losses (net) 73 516 159 853 233 369 123 875 339 488 463 363
Percentage provision for loans non-performing over 90 days 5 % 19 % 13 % 17 % 4 % 12 % Percentage provision for performing problem loans 23 % 61 % 57 % 21 % 48 % 47 %
Non-performing and doubtful loans and advances are valued according to law and regulations issued by the Financial Supervisory Authority of Norway. A loan is regarded as non-performing or in default when the customer has failed to pay an installment within 90 days of the due date, or when an overdraft of a credit of line has not been covered within 90 days after being overdrawn. Doubtful loans are written-down loans where the customer's financial situation indicates that loss will materialize at a later time, regardless of whether the loan is in default or not.
Sandnes Sparebank annual report 2018 71 Notes
INTEREST RATE RISK
Market risk Interest rate riskInterest rate risk is the risk of loss arising due to changes in interest rate levels. The risk arises primarily from fixed-rate lending and fixed- rate funding. The Group measures interest rate risk as the profit effect of a parallel shift in the yield curve. The risk of non-parallel shifts is covered through limitations on maximum exposure.
The main principle of the Bank's interest rate risk management is to neutralize the interest rate risk by matching the Bank's assets and liabilities. The Bank is constantly monitoring its interest rate exposure. Interest rate exposure is measured at 3 month intervals from 0-15 years.
The Bank's strategy is to not incur significant interest rate risk in its ordinary operations. The limit for Group interest rate risk is that maximum loss must not exceed NOK 21 million in case of a 2% shift in the yield curve. The Group limit is split on NOK 15 million for the Parent Bank and NOK 6 million for SSB Boligkreditt. Limits have also been established for the maximum interest rate exposure for different time frames.
Please refer to Note 15 regarding the Bank’s use of derivatives for hedging of its interest rate exposure.
Group 2018
Time to repricing date (gap) Up to 3 months More than No interest for assets and liabilities 1 month 1-3 months – 1 year 1-5 years 5 years exposure 31.12.18 Cash and deposits with central banks 454 707 454 707 Loans to credit institutions 201 566 201 566 Loans to customers 6 052 631 15 376 202 135 827 510 445 139 341 22 214 445 Notes and bonds 735 827 2 427 783 231 588 265 436 3 660 633 Financial derivatives 1 488 74 187 4 888 61 020 8 774 150 356 Other assets 527 651 527 651 Total assets 7 446 219 17 878 171 372 302 836 900 148 115 527 651 27 209 358
Payable to credit institutions 50 197 50 197 Deposits from customers 5 479 726 5 430 365 317 744 24 332 11 252 168 Debt securities in issue 1 413 773 4 953 773 1 183 773 3 167 773 1 598 773 12 317 863 Financial derivatives 2 566 46 736 8 286 85 094 5 263 147 945 Other liabilities 162 620 162 620 Subordinated loans 217 563 100 000 317 563 Equity capital 100 000 2 861 001 2 961 001 Total liabilities and shareholders' equity 7 163 826 10 630 874 1 509 803 3 277 198 1 604 035 3 023 621 27 209 358 Net liquidity exposure, balance sheet items 282 393 7 247 297 -1 137 501 -2 440 299 -1 455 920 -2 495 971 Net total all items 282 393 7 247 297 -1 137 501 -2 440 299 -1 455 920 -2 495 971
Sandnes Sparebank annual report 2018 72 Notes
Group 2017
Time to repricing date (gap) Up to 3 months More than No interest for assets and liabilities 1 month 1-3 months – 1 year 1-5 years 5 years exposure 31.12.17 Cash and deposits with central banks 472 646 472 646 Loans to credit institutions 172 782 172 782 Loans to customers 20 781 102 98 474 100 004 388 704 104 615 21 472 900 Notes and bonds 798 123 2 535 061 3 333 184 Financial derivatives 208 9 335 8 534 128 679 7 804 154 560 Other assets 95 563 398 094 493 657 Total assets 22 224 862 2 738 433 108 538 517 383 112 419 398 094 26 099 729
Payable to credit institutions 36 740 36 740 Deposits from customers 10 395 457 96 138 157 749 208 100 10 857 443 Debt securities in issue 1 497 000 10 205 343 11 702 343 Financial derivatives 692 5 724 8 368 80 795 6 506 102 085 Other liabilities 167 461 167 461 Subordinated loans 225 400 299 507 524 907 Equity capital 2 708 750 2 708 750 Total liabilities and shareholders' equity 12 155 289 10 606 712 166 117 288 894 6 506 2 876 211 26 099 729 Net liquidity exposure, balance sheet items 10 069 572 -7 868 279 -57 579 228 489 105 913 -2 478 116 Net total all items 10 069 572 -7 868 279 -57 579 228 489 105 913 -2 478 116
Parent bank 2018
Time to repricing date (gap) Up to 3 months More than No interest for assets and liabilities 1 month 1-3 months – 1 year 1-5 years 5 years exposure 31.12.18 Cash and deposits with central banks 454 707 454 707 Loans to credit institutions 100 247 100 247 Loans to customers 6 040 575 7 972 908 135 827 510 445 139 341 14 799 096 Notes and bonds 605 599 2 013 783 231 588 265 436 3 116 404 Financial derivatives 1 488 39 430 4 888 38 166 1 110 85 082 Other assets 1 614 348 1 614 348 Total assets 7 202 615 10 026 121 372 302 814 046 140 451 1 614 348 20 169 884
Payable to credit institutions 24 836 24 836 Deposits from customers 5 480 464 5 430 365 317 744 24 332 11 252 906 Debt securities in issue 1 408 605 868 605 178 605 2 819 605 268 605 5 544 024 Financial derivatives 2 566 37 692 8 286 68 907 449 117 901 Other liabilities 145 769 145 769 Subordinated loans 217 563 100 000 317 563 Equity capital 100 000 2 666 885 2 766 885 Total liabilities and shareholders' equity 7 134 035 6 536 662 504 636 2 912 844 269 053 2 812 654 20 169 884 Net liquidity exposure, balance sheet items 68 580 3 489 458 -132 333 -2 098 798 -128 602 -1 198 306 Net total all items 68 580 3 489 458 -132 333 -2 098 798 -128 602 -1 198 306
Sandnes Sparebank annual report 2018 73 Notes
Parent bank 2017
Time to repricing date (gap) Up to 3 months More than No interest for assets and liabilities 1 month 1-3 months – 1 year 1-5 years 5 years exposure 31.12.17 Cash and deposits with central banks 472 646 472 646 Loans to credit institutions 71 787 71 787 Loans to customers 14 124 251 98 474 100 004 388 704 104 615 14 816 049 Notes and bonds 728 123 2 362 309 3 090 432 Financial derivatives 208 9 335 8 534 87 485 925 106 487 Other assets 95 563 1 257 901 1 353 464 Total assets 15 397 015 2 565 682 108 538 476 189 105 540 1 257 901 19 910 866
Payable to credit institutions 55 123 55 123 Deposits from customers 10 397 396 96 138 157 749 208 100 10 859 382 Debt securities in issue 1 497 000 4 186 365 5 683 365 Financial derivatives 692 5 724 8 368 80 795 3 777 99 356 Other liabilities 139 612 139 612 Subordinated loans 225 400 299 507 524 907 Equity capital 2 549 121 2 549 121 Total liabilities and shareholders' equity 12 175 611 4 587 733 166 117 288 894 3 777 2 688 733 19 910 866 Net liquidity exposure, balance sheet items 3 221 404 -2 022 052 -57 579 187 296 101 763 -1 430 832 Net total all items 3 221 404 -2 022 052 -57 579 187 296 101 763 -1 430 832
Interest rate sensitivity The Board of Directors has set a limit of NOK 21 million for total interest rate risk on and off the Group balance sheet. This is measured by the effect on earnings of a 2% parallel shift in the interest rate. At the end of the year, the estimated earnings effect of a positive interest rate shift of 2% was NOK 1.9 million, whereas the estimated earnings effect of a negative interest rate shift of 2%, was NOK -2.2 million. Thus, interest risk is considered to be low. In total, the Group’s exposure to market risk is considered to be moderate.
Sandnes Sparebank annual report 2018 74 Notes
FOREIGN CURRENCY RISK
Currency risk is the risk of loss caused by changes in currency exchange rates.
The Bank has established a framework that defines the risk tolerance relate to currency exposure. Maximal permitted currency exposure is MNOK 2 per currency and the maximum aggregate gross currency exposure is MNOK 6. The framework only applies to customer related transactional services. The Bank has no framework for its own currency trading. Guidelines have also been prepared regarding the currencies to which the Bank may be exposed. Sensitivity analyses have not been prepared for currency risk related to changes in currency exchange rates, as its impact is considered insignificant relative to the Bank's low net currency exposure.
Most assets denominated in foreign currencies have a remaining period to maturity of 5 years, whereas liabilities denominated in foreign currencies mature in the 1-5 years interval. The time to the agreed repricing of assets and liabilities is mainly within 1-3 months. The group uses forward currency exchange contracts and swaps to hedge its foreign currency lending/funding.
With respect to the increased credit risk following from currency exchange rate fluctuations for customers with loans denominated in foreign currencies, deposits in escrow accounts are used as additional collateral. If currency exchange rate developments entail that the customer's loan, measured in NOK, exceeds a predefined deviation from the principal, the customer may use this option to establish additional collateral. If additional collateral in the form of deposits is not established, the loan is converted to NOK when the agreed limit is reached. The limit is originally set to a divergence of 20% from the original principal.
Assets and liabilities denominated in foreign currencies, and currency hedges, are valued at the current exchange rate as of 12/31.
Group/Parent bank
Foreign Currency positions 12/31/2018 currency USD EUR JPY CHF GBP SEK DKK CAD Other Cash and deposits with central banks 952 546 166 240 Loans to credit institutions 24 942 6 792 7 717 23 481 5 517 1 015 1 044 228 2 125 Loans to customers 713 757 64 055 136 499 47 896 349 557 115 738 12 Notes, bonds 454 526 248 560 72 791 133 175 Other assets 5 038 5 038 Total assets 1 199 215 75 885 393 323 47 919 350 038 5 683 189 544 134 459 228 2 136
Payable to credit institutions Deposits from customers 49 886 7 900 10 615 8 5 895 25 175 18 17 258 Debt established through the issue of securities Other liabilities Subordinated loans Equity capital Total liabilities and shareholders' equity 49 886 7 900 10 615 8 5 895 25 175 18 17 258 Net currency exposure, balance sheet 1 149 330 67 986 382 707 47 919 350 030 -212 164 369 134 442 211 1 879 items Currency hedge -1 136 002 -68 314 -375 221 -47 878 -349 396 741 -163 025 -132 909 Net currency exposure 13 327 -328 7 486 40 633 529 1 344 1 533 211 1 879
Sandnes Sparebank annual report 2018 75 Notes
Group/Parent bank
Foreign Currency positions 12/31/2017 currency USD EUR JPY CHF GBP SEK DKK CAD Other Cash and deposits with central banks 1 021 672 255 94 Loans to credit institutions 31 703 5 022 3 059 44 318 2 538 18 760 516 91 1 356 Loans to customers 815 421 83 690 171 734 44 185 380 697 135 103 12 Notes, bonds 457 798 4 675 246 019 74 974 132 130 Other assets 7 203 7 203 Total assets 1 313 145 100 590 421 483 44 229 381 015 2 793 228 836 132 739 91 1 368
Payable to credit institutions 22 1 20 Deposits from customers 41 140 10 050 11 464 211 2 584 16 739 41 51 Debt established through the issue of securities Other liabilities Subordinated loans Equity capital Total liabilities and shareholders' equity 41 162 10 050 11 465 211 2 584 16 739 41 71 Net currency exposure, balance sheet 1 271 983 90 540 410 018 44 229 380 803 209 212 097 132 699 91 1 297 items Currency hedge -1 262 025 -87 406 -408 645 -44 169 -380 495 166 -210 213 -132 130 654 214 Net currency exposure 9 958 3 134 1 373 60 308 375 1 884 569 745 1 510
PRICE RISK
Price risk on securities is the risk of loss arising from changes in the value of bonds, notes and equity related securities in which the Group has invested. The Bank has established limits for investments. The investment framework for securities (beyond liquidity placements) remained unchanged for the last 12 months. Any change of the existing exposure must be approved by the Bank's Board of Directors.
Sandnes Sparebank annual report 2018 76 Notes
FINANCIAL DERIVATIVES
The Group makes extensive use of derivatives to balance the Bank's currency, interest rate and equity risk. Currency and interest rate related instruments are used to minimize currency and interest rate risk on the Bank's loans to customers and funding from the capital markets.
The Group applies hedge accounting for fair value hedging of some fixed rate funding (notes, bonds, subordinated loans and hybrid capital bonds). Interest rate swaps are only used for interest rate hedging. All interest rate swaps are denominated in NOK, as the Group is not exposed to foreign currency debt. Each individual hedging is documented with reference to the Group’s risk management strategy, a unique identification of the hedged object and the hedging instrument, a unique description of the hedged risk, a description of why the hedging is expected to be effective, and a description of when and how the Group will document that the hedge has been effective during the accounting period and is expected to be effective during the next accounting period. The Group has defined the hedged risk as changes in value related to the NIBOR component of the funding. The hedge effect is valued and documented both at initial classification and at each closing of the accounts. In case of fair value hedging, the hedging instrument is recognized at fair value, and the value of the hedging object is adjusted for the change in valuation associated with the hedged risk. Changes in these values from the starting balance are recognized in the income statement. This method ensures that the presentation in the financial statements of these instruments complies with the Group's policies for managing interest rates and actual economic developments. See Note 19 for amounts recognized in the income statement.
The Board of Directors has adopted limits for the Bank's exposure vis-à-vis all counterparties in order to reduce the settlement risk related to the use of financial instruments. The Bank will use solid and established counterparties with a minimum rating of A from a recognized rating agency. CSA (Credit Support Annex) shall be established with all counterparties in order to ensure a positive marked-to-market value in case of the bankruptcy of a counterparty.
The set-off rights of the Parent Bank and the Group are in accordance with normal Norwegian law. Due to ISDA agreements entered between the Parent Bank and most derivatives counterparties, set-off rights are acquired if the counterparty defaults on his obligations. CSA agreements have also been entered with major financial counterparties. Derivative agreements are not set off in the Bank's balance sheet, as they do not conform to the requirements of IAS 32.
SSB Boligkreditt is also employing ISDA agreements with counterparties in relation to financial derivatives. Similarly to the Parent Bank, the agreements ensure set-off rights if the counterparties default on their obligations. CSA agreements have also been entered with most important financial counterparties.
Group
Fair vaule as of 12/31/2018 Fair vaule as of 12/31/2017 31.12.2018 31.12.2017 Contractual Positive Negative Contractual Positive Negative amount market vaule** market vaule** amoun market vaule market vaule Interest rate agreements * 10 092 800 146 581 134 610 8 135 489 138 171 88 963 Currency exchange rate agreements 964 538 3 775 13 335 1 413 243 16 389 13 121 Equity related instruments Other commodity related instruments Total financial derivatives 11 057 337 150 356 147 945 9 548 732 154 560 102 085 * Of which used for hedging purposes 4 829 000 135 511 75 624 5 364 000 118 275 16 338
**Due to the IFRS 9 implementation of 1/1/2018, the accrued interest on the agreements is included in the fair value of the derivatives. The 2017 figures have not been revised and do not include accrued interest.
Sandnes Sparebank annual report 2018 77 Notes
LIQUIDITY RISK
Liquidity risk is the risk of the Bank not being able to fulfill its obligations and/or finance an increase in assets without extra costs arising in the form of price reduction for assets that have to be realized, or in the form of extra expensive funding.
The Bank measures and manages liquidity risk within frameworks determined by the Board of Directors. Frameworks have been established for the following areas: • LCR • NSFR (Net Stable Funding Ratio) • Liquidity limits • Stress test • Debt financing (liquid holdings requirements measured relative to the maturities of debt financing) • Concentration risk (concentration in the maturity of debt financing) • Deposits (objective for deposit to loan ratio)
LCR (Liquidity Coverage Ratio) LCR addresses the importance of having holdings of high quality liquid assets in order to survive a 30 days stress period. As of January 1, 2018, there is a minimum requirement for LCR of 100%. The Bank is significantly above the requirement.
With respect to the determination of items and calculation of the indicators, the Bank is applying the guidelines of the F inancial Supervisory Authority of Norway.
NSFR (Net Stable Funding Ratio) NSFR addresses the importance of having stable long-term funding source over 1 year. The Bank has an objective of having an NSFR over 100% at all times.
Liquidity limits The Bank has defined limits for minimum liquidity holdings with respect to the maturity of debt financing and known in and outflows. At a minimum, liquid assets should cover maturing debt financing as well as known in and outflows within the next 9 months. At a minimum, strategic liquid assets should cover maturing debt financing as well as known in and outflows within the next 15 months.
Stress test Stress tests are performed to show the Group’s need for liquidity reserves, based on future scenarios related to slumps in business conditions. The Group has defined frameworks for how long the Bank may be operated without supply of capital in defined stress situations, with a defined minimum holding of liquid assets.
Liquidity is stressed on the basis of three types of crises, with different scenarios: • Banking crisis (challenging' and very challenging scenario) • Market crisis (challenging' and very challenging scenario) • Combined crisis (extreme scenario)
Debt financing The use of different types of loans from the capital markets helps reduce the added funding risk arising when the Bank’s lending activities are not 100% covered by deposits. The Bank's management objective is to maintain a balanced maturity structure in its funding portfolio on the capital markets. The maturities of funding are varied, and the Bank refinances its funding well before maturity in order to reduce the liquidity risk.
Liquidity risk is also managed by dispersing the funding on different markets, funding sources, instruments and maturities.
Deposits In order to be less dependent on debt financing, the Group has an objective for its deposit to loan ratio. The Sandnes Sparebank Group has the objective of maintaining a deposit to loan ratio of at least 50%. Provided it has been subject of review by ALCO, a temporary deviation of up to 2 percentage points in the negative direction, may be acceptable.
In order to reduce the liquidity risk, the Group has set limits for the size of big deposits, i.e. deposits of more than NOK 50 million.
Sandnes Sparebank annual report 2018 78 Notes
Other issues Settlement risk, which, inter alia, arises in connection with payment services as a result of all transactions not taking place in real time and in connection with derivative transactions, also entails counterparty risk. Sandnes Sparebank has International Swap Dealer Association (ISDA) agreements with its major counterparties in derivative transactions. Agreements of this nature reduce the settlement risk in connection with derivative transactions.
The Bank has established a separate Balance Sheet Management Group to monitor the Bank's liquidity risk. The members of this group represent the managers of various business segments that will affect or influence the Bank's liquidity situation. The Balance Sheet Management Group holds regular meetings.
A liquidity strategy has been prepared, which is reviewed by the Board of Directors at a minimum annually. It determines frameworks that consider future liquidity requirements. Compliance with the framework is monitored by Risk Management, and status is reported quarterly to the Board of Directors and the Risk Committee.
The Bank has prepared a readiness plan for possible liquidity crises. The readiness plan is approved by the Board of Directors at least once a year. A liquidity crisis means that the Bank ends up in a situation where there is no available liquidity to fulfill the Bank’s current obligations or insufficient liquidity to execute payment transactions for its customers. The readiness plan is intended to ensure the flow of information to the Bank’s management team and Board of Directors, and to set clear areas of responsibility for individual areas within the Bank. Flow of information and designation of responsibility will help the Bank to reach decisions and to try to replace lost cash flows on the basis of correct and sufficient information.
The use of different types of loans from the capital markets helps reduce the added funding risk arising when the Bank’s lending activities are not 100% covered by deposits. The Bank's management objective is to maintain a balanced maturity structure in its funding portfolio on the capital markets. The maturities of funding are varied, and the Bank refinances its funding well before maturity in order to reduce the liquidity risk. The Management prepares monthly reports on the balance sheet composition with associated maturities and limits, to the Board of Directors.
Liquidity management process The responsibility for daily liquidity management is with the Treasury department. The department monitors the Group’s cash flow on a daily basis in order to ensure that daily disbursements may be implemented. Such monitoring includes close dialogue with the Bank’s credit departments, as well as daily contact with the funding market.
As part of liquidity management, the Treasury department also manages the Bank’s strategic liquidity portfolio. This portfolio also includes liquid securities that may quickly be used as liquidity in case of unexpected impacts on the Bank’s cash flow.
Group 12/31/2018
Remaining period to maturity, Up to 3 months More than main items 1 month 1-3 months – 1 year 1-5 years 5 years 2018 Payable to credit institutions 50 197 50 197 Deposits from customers 10 629 278 280 813 317 744 24 332 11 252 168 Debt securities in issue 30 000 290 000 9 304 000 2 625 000 12 249 000 Other liabilities 162 620 162 620 Subordinated loans 115 500 200 000 315 500 Hybrid capital as EQ 100 000 100 000 Financial derivatives, gross settlement 2 566 46 736 8 286 85 094 5 263 147 945 Contractual interest payments 8 133 55 505 115 812 446 688 104 903 731 041 Total disbursements 10 998 295 383 054 731 843 10 160 113 2 735 165 25 008 471
Sandnes Sparebank annual report 2018 79 Notes
Group 12/31/2017
Remaining period to maturity, Up to 3 months More than main items 1 month 1-3 months – 1 year 1-5 years 5 years 2017 Payable to credit institutions 36 740 36 740 Deposits from customers 10 395 457 96 138 157 749 208 100 10 857 443 Debt securities in issue 272 000 939 000 9 784 000 625 000 11 620 000 Other liabilities 167 461 167 461 Subordinated loans 225 400 300 000 525 400 Financial derivatives, gross settlement 692 5 724 8 368 80 795 6 506 102 085 Contractual interest payments 7 545 39 443 162 785 209 773 Total disbursements 10 607 895 413 304 1 267 902 10 298 294 931 506 23 518 902
Parent Bank 12/31/2018
Remaining period to maturity, Up to 3 months More than main items 1 month 1-3 months – 1 year 1-5 years 5 years 2018 Payable to credit institutions 24 836 24 836 Deposits from customers 10 630 016 280 813 317 744 24 332 11 252 906 Debt securities in issue 30 000 210 000 4 961 000 300 000 5 501 000 Other liabilities 145 769 145 769 Subordinated loans 115 500 200 000 315 500 Hybrid capital as EQ 100 000 100 000 Financial derivatives, gross settlement 2 566 37 692 8 286 68 907 449 117 901 Contractual interest payments 8 133 12 596 93 732 289 162 13 748 417 370 Total disbursements 10 956 820 331 101 629 763 5 643 401 314 196 17 875 281
Parent Bank 12/31/2017
Remaining period to maturity, Up to 3 months More than main items 1 month 1-3 months – 1 year 1-5 years 5 years 2017 Payable to credit institutions 55 123 55 123 Deposits from customers 10 397 396 96 138 157 749 208 100 10 859 382 Debt securities in issue 272 000 669 000 4 484 000 200 000 5 625 000 Other liabilities 139 612 139 612 Subordinated loans 225 400 300 000 525 400 Financial derivatives, gross settlement 692 5 724 8 368 80 795 3 777 99 356 Contractual interest payments 7 545 19 424 98 600 125 570 Total disbursements 10 600 368 393 286 933 717 4 998 294 503 777 17 429 442
Sandnes Sparebank annual report 2018 80 Notes
NET INTEREST INCOME
Group Parent bank
2018 2017 Net interest income 2018 2017 Interest income on loans to credit institutions, measured with the yield 10 043 8 864 21 793 21 432 method 21 171 26 361 Interest income on loans to customers, measured at fair value 21 171 26 360 707 488 699 986 Interest income on loans to customers measured with the yield method 531 715 525 772 9 024 17 198 Interest on written-down loans, measured with the yield method 9 024 17 198 49 833 52 935 Interest on securities, measured at fair value 44 557 49 192 471 425 Other interest income, measured with the yield method 471 471 798 030 805 768 Interest income 628 731 640 424 727 026 726 472 Of which interest income measured with the yield method 563 003 564 872 298 102 Interest income on debt to credit institutions measured with the yield method 194 93 9 272 9 237 Interest cost on customer deposits, measured at fair value 9 272 9 237 86 671 85 957 Interest income on deposits from customers, measured with the yield method 86 829 86 121 213 464 206 505 Interest cost on issued securities, measured with the yield method, including 117 540 120 255 hedged items 17 253 19 784 Interest cost on subordinated loan capital, measured with the yield method, 17 253 19 784 including hedged items 9 093 9 949 Other interest cost, measured with the yield method 9 070 9 954 336 050 331 534 Interest cost 240 157 245 444 326 778 322 297 Of which interest cost measured with the yield method 230 885 236 207 461 980 474 236 Net interest income 388 574 394 980
NET COMMISSION INCOME
Group Parent bank
2018 2017 Net commission income 2018 2017 9 297 10 731 Underwriting commission 9 297 10 731 4 084 3 662 Distribution and management of securities 4 084 3 662 17 721 21 313 Payment services 17 721 21 313 7 958 6 203 Insurance 7 958 6 203 3 195 Income from financial investment products 3 195 18 296 23 919 Other fees 35 112 39 399 57 359 66 022 Commission income 74 175 81 502 -8 126 -12 096 Commission cost -8 126 -12 096 49 233 53 925 Net commission income 66 048 69 405
Sandnes Sparebank annual report 2018 81 Notes
NET CHANGE IN VALUATION OF FINANCIAL INSTRUMENTS
Group Parent bank
2018 2017 2018 2017 Net gains/losses on valuation of financial instruments at fair value 11 248 11 679 Net gains/losses on currency and financial derivatives 11 248 11 679 -7 078 -3 637 Net change in valuation of loans -7 078 -3 637 -7 944 6 606 Net realized gains/losses on interest-bearing securities -6 855 6 139 22 580 3 678 Net realized gains/losses on equities 22 580 2 104 1 170 -812 Net change in valuation of financial liabilities 1 170 -812 19 975 17 515 Net gains/losses on financial instruments at fair value 21 065 15 473
Net change in valuation of hedged items -83 941 -4 782 Net change in valuation of financial derivatives, hedging -48 114 1 962 83 941 4 782 Net change in valuation of hedged financial liabilities 48 114 -1 962 Net change in valuation of hedged items*
Net gains/losses on liabilities at amortized cost Net gains/losses on liabilities established through the issuance -5 854 -2 647 of securities at amortized cost -5 854 -2 647 Net gains/losses on liabilities at amortized cost
14 121 14 868 Net realized gains/losses on financial instruments 21 065 15 473
* The Bank uses hedge accounting for long-term funding. See Note 15."
OTHER OPERATING INCOME
Group Parent bank
2018 2017 Other operating income 2018 2017 20 699 20 932 Brokerage fees 8 182 6 142 Other income 1 147 10 28 881 27 074 Other operating income 1 147 10
Sandnes Sparebank annual report 2018 82 Notes
OTHER OPERATING COST
Group Parent bank
2018 2017 Operating cost 2018 2017 103 340 98 220 Wages 86 301 81 501 8 278 7 399 Pensions* 7 421 6 538 22 764 24 271 Social security cost 21 981 23 648 134 382 129 890 Personnel cost 115 702 111 687 5 349 5 438 Operating cost properties and premises 5 216 5 438 19 446 32 106 Rent** 17 417 30 108 1 415 1 749 Other operational leases*** 1 273 1 619 40 803 35 288 IT cost 40 465 34 958 9 494 10 122 Marketing and information 8 222 8 927 10 726 8 082 Other administrative costs 9 214 7 151 4 015 3 595 Consultancy fees 2 764 2 159 22 850 23 870 Other operating cost 19 251 19 661 114 100 120 251 Total other operating costs 103 821 110 021 12 655 18 498 Depreciation 12 589 18 306 12 655 18 498 Total depreciation and writedowns 12 589 18 306 261 137 268 638 Total operating cost 232 112 240 013
* See the specification of pension cost below ** See Note 41 regarding provisions for the Bank’s lease agreements *** See Note 41 regarding operational leases. **** See Note 29 concerning write-down of shares in subsidiaries.
In 2018, the auditor's fee amounted to NOK 918,750 (incl. VAT), whereas fees for other assistance from the external auditor totaled NOK 309,871 (incl. VAT).
Group Parent bank
2018 2017 Specification of pension cost* 2018 2017 6 805 5 890 Costs of defined contribution pensions 5 947 5 029 181 182 Costs of defined benefit pensions according to Note 23 181 182 1 293 1 327 Cost of contractual pension (AFP) 1 293 1 327 8 278 7 399 Total pension cost 7 421 6 538
2018 2017 Number of employees / full-time equivalents 2018 2017 141 140 Number of employees as of 12/31 118 118 136 135 Number of full-time equivalents as of 12/31 114 113 139 145 Average number of employees 116 119 134 134 Average number of full-time employee equivalents 112 113
Sandnes Sparebank annual report 2018 83 Notes
COMPENSATION
Requirements regarding remuneration are governed by chapter 15, §§15-1 to 15-6 of the Norwegian Financial Institutions Act
The provisions adopts the provisions of the EU capital requirements directive (CRD IV) regarding good remuneration arrangements, in order to reduce excessive risk taking and to promote healthy and effective risk management by financial institutions.
On this basis of this body of rules, the Bank established a compensation committee on December 15, 2010. The Committee consists of 3 Directors, of which 1 is an employee representative.
The provisions impose a direct responsibility on the Board of Directors for ensuring that:
• The Bank designs a compensation scheme for all employees of the Bank, which is suited to promote the objective of the regulation, and that the Bank's wage and bonus systems are practiced in compliance with this compensation scheme • The compensation scheme is in accordance with the Bank's overall objectives, risk tolerance and long-term interests • The compensation scheme contains special rules for officers, elected representatives and employees engaged in internal audit and risk management. The Board of Directors shall also ensure that the composition of fixed and variable wages for such employees are balanced and that at least half of any bonus payments are made in the form of equity capital certificates if the bonus exceeds 12.5% of basic pay. Equity capital certificates granted as bonus payment may not be disposed of freely by each individual. Disposals must be evenly distributed over a period of three years. The basis of variable compensation shall be a period of at least two years. • The Bank has a compensation committee that is responsible for preparing all issues regarding the compensation plan to be decided by the Board of Directors
The Bank has prepared a compensation policy. No major changes were made to the Bank's compensation policy during 2018.
• The purpose the compensation policy of Sandnes Sparebank is to attract employees with the competencies the Bank requires, to further develop and retain key skills, and to motivate long-term and continuous development in order to attain Sandnes Sparebank's business objectives. • The compensation may consist of the following elements: - Fixed basic pay. The Bank aims to pay salaries at the market rate. On this basis, the basic salary is adjusted annually, based on attained results within individual managers' areas of work and responsibility. The Managing Director determines the change in basic salary with effect from 1 January each year for members of the Bank's management team. The compensation committee recommends the wage of the Managing Director, and must be adopted by the Board of Directors. - Benefits in kind, such as telephone/mobile telephone, newspapers/trade magazines, home office and a company car scheme in exceptional cases. In addition, loans and banking services at special terms are provided under the same set of regulations as for other employees. - Bonuses. Bank employees are part of the Bank's current bonus scheme. All full-time employees of the Parent Bank are comprised by the group bonus model. The calculation is based on actual return on equity. In 2018, the model resulted in a payment of 4.4% (including employer's social security contribution and finance tax) of the base salary of all employees. The Board of Directors may reduce the bonus if special considerations so indicate. Beyond this, advisors with direct sales responsibility have the opportunity to earn a bonus based on their own KPI’s, with a ceiling of NOK 50,000 per employee annually. The Managing Director is part of the Bank's group bonus scheme, but does not receive any bonus beyond this. - Bank employees are given the opportunity to purchase equity capital certificates of Sandnes Sparebank at a discount once a year. The equity capital certificates are purchased at a discount of 33%, with savings amounts of up to 7.5% of basic pay per month or up to NOK 5,000 per month. Purchase involves one year for vesting and then a lock-in period of one year, for a total of two years. - Pension scheme. Senior officers have defined contribution pension plans up to incomes of 12G, according to the schemes for the Bank's employees in force at any time. The retirement age for the Bank’s officers is 67 years, with the opportunity of early retirement from 62 years, in accordance with the agreed terms applying to the finance sector at all times.
Sandnes Sparebank annual report 2018 84 Notes
Total expenditure with respect to salaries, pensions and other compensation for the Bank's management team, the Board of Directors, the Audit Committee and the Board of Trustees, is presented in the below table. The stated amounts are totals for the whole year, or from date of employment if the officer was hired during the year.
Ownership of Of which Of which equity capital wage comp. Of which other Lending as of certificates 2018 Wages *** bonus benefits 12/31**** as of 12/31 Group management Managing Director Trine Karin Stangeland 2 717 17 48 5 614 11 143 Chief Financial Officer (CFO) Tomas Nordbø Middelthon 1 668 8 18 19 330 Director Retail Market Erik Kvia Hansen 1 309 4 46 4 712 683 Director of Communications Ingrid O. Fure Schøpp*** 1 569 169 8 32 613 6 449 Director Corporate Market Magnar Oanes*** 2 170 154 25 195 12 525 Director of customer experiences Lene Nordahl 1 110 4 38 4 342
Ownership of Of which Of which equity capital 2017 wage comp. Of which other Lending as of certificates Wages *** bonus benefits 12/31**** as of 12/31 Group management Managing Director Trine Karin Stangeland 2 167 30 6 126 7 185 Managing Director Sune Svela Madland*** 2 627 57 15 93 5 623 (acting until 1/31/2017) Chief Financial Officer (CFO) Tomas Nordbø Middelthon 1 218 18 Chief Financial Officer (CFO) Terje Frafjord*** 700 28 15 55 2 826 (until 3/31/2017) Director Retail Market Erik Kvia Hansen 589 13 4 800 Director Retail Market Eirik Haver 1 211 31 47 5 153 820 (acting until 6/30/2017) Director of Communications Ingrid O. Fure Schøpp*** 1 571 179 13 32 597 5 936 Director Corporate Market Magnar Oanes*** 2 170 160 17 233 11 458 Corporate Counsel and Director Jonathan Garrett Wagner of Business Development and 1 561 73 14 60 4 380 6 390 Sunnarvik*** Corporate Staff Chief Risk Officer (CRO) Elisabeth Frøyland *** 1 258 21 12 23 (until 8/15/2017) Director of customer experiences Lene Nordahl 536 19 4 326
Sandnes Sparebank annual report 2018 85 Notes
Owns number of equity Fee's Lending as of 12/31 capital certificates 12/31 Directors, Audit Committee and Trustees 2018 2017 2018 2017 2018 2017 Board of Directors Chairman of the Board Harald Espedal 270 270 886 861 886 861 Deputy Chairman Frode Svaboe** 265 265 5 700 Director Marion Svihus** 185 185 Director Arne Norheim 135 135 10 960 10 000 Director Trine Karin Stangeland 11 6 126 7 185 Director Heidi Nag Flikka** 185 185 960 Director Birte Norheim 135 107 10 750 1 456 960 Director Solveig Vatne* 135 146 2 853 3 440 16 393 15 539 Director Jan Inge Aarreberg* 135 135 1 721 1 795 2 706 1 852 Audit Committee***** Chairman Sigrun Sagedal 20 3 009 Deputy Chairman Sverre Berge 18 4 000 Member Tove Jerstad 14 Board of Trustees Chairman Ørjan Gjerde 80 80 Member Elin Synnøve Andersen 2 Member Jan Erik Anfinsen 2 9 Member Svein Anfinsen 2 4 Member Jo Michael Asbjørnsen 4 Member Kenneth Austrått 2 Member Per Øyvind Berge 2 Member Anders Bjørndal * 2 4 Member Bjørn Bærheim 4 Member Annette Dahle Carlmark 2 Member Anne Lise Elle* 2 4 Member Olav Kristian Falnes 2 Member John Sverre Frøyland 4 Member Thor Erik Gilje* 2 4 Member Ann Kathrin Grødem* 2 6 Member Dag Halvorsen 4 Member Terese Albuquerque Helleland * 2 4 Member Ragnhild Hildonen 2 4 Member Venke Houge * 2 4 Member Gunn Jane Håland 2 4 Member Kari Solheim Larsen 2 4 Member Bente Løyning 2 4 Member Wenche E. Meinich-Bache 2 4 Member Geir Mikalsen 2 Member Mette Moen 2 2 Member Signe Nijkamp 2 Member Ragnvald Nilsen 2 6
Sandnes Sparebank annual report 2018 86 Notes
Fee's Directors, Audit Committee and Trustees 2018 2017 Continued Board of Trustees Member Hanne Brit Nordbø 2 Member Eli Halvorsen Norheim 2 Member Anne Karin Notland* 4 Member Arne Oftedal 4 Member Egil Omland 2 4 Member Jan Refsnes 2 Member Tom Risa 2 4 Member Kjell Rommetvedt 2 6 Member Mona Aadnøy Riska 2 4 Member Ingunn Ruud* 2 Member Åge Skår 2 2 Member Morten Hodne Steensland 2 2 Member Bjørg Storhaug 4 Member Bodil Sunde * 4 Member Tine Svanes 2 4 Member Katrine Sægrov 2 2 Member Siv Merethe Tuftedal 2 2 Member Kenneth Våge* 2 Member Jørg Weidemann Member Andre Wiethfeldt Member Johan Wigerstrand 2 4 Member Brynjulf Wik 2 4 Member Trond Wikstøl 2 2 Member Tove Wold 2 4 Member Edvard Aarsland 2 4 Member Tine Svanes 4 8 Member Katrine Sægrov 2 Member Vidar Torsøe 4 Member Siv Merethe Tuftedal 2 8 Member Kenneth Våge* 4 Member Jørg Weidemann 2 Member Andre Wiethfeldt 4 Member Johan Wigerstrand 4 8 Member Brynjulf Wik 4 6 Member Trond Wikstøl 2 12 Member Tove Wold 4 12 Member Rolf Årsheim 2 Member Edvard Aarsland 4
* Employee representative ** Includes an annual fee of NOK 30,000 and NOK 45,000 for the Audit Committee as well as NOK 20,000 for the Risk Committee *** In 2012, the Bank changed its pension plan for leading employees. The Bank went from a pension plan for wages over 12 G to a direct wage compensation. The amounts in the wage compensation column consists of monthly payments for the year. **** Subsidized interest rates on employee loans. The interest rate on loans to employees it the current norm rate minus 0.75%. Loans to directors and members of the Board of Trustees are granted at ordinary terms. ***** The Audit Committee convened its last meeting on March 17, 2017.
Also included in the holdings of owners listed above, are equity capital certificates held by a spouse, minor children, or company in which the person in question has a controlling interest as stated in Section 1-3, no. 2 of the Norwegian Companies Act.
Sandnes Sparebank annual report 2018 87 Notes
PENSIONS
Sandnes Sparebank has a defined contribution plan that meets the requirements set by the Corporate Pension Act.
From 1/1/2007, Sandnes Sparebank has offered new employees a defined contribution pension plan. In connection with the reorganization, employees hired before 1/1/2007 also changed over from the defined benefit pension scheme to the defined contribution pension plan. The remaining employees were converted to a defined contribution plan at the end of 2013. Those affected will get a current compensation in the form of wages.
In addition, the Parent Bank has a general early retirement scheme (AFP). The old AFP scheme was decided wound up in February of 2010. As a replacement for the old early retirement scheme, a new early retirement scheme has been established that provides a lifelong additional benefit to the ordinary pension. The new early retirement scheme is a defined benefit pension scheme for multiple companies, which is financed by premiums determined as a percentage of wages. For the time being there is no reliable measurement and allocation of the scheme’s liabilities and assets. For accounting purposes, the scheme is treated as a defined contribution pension scheme, for which premium payments are recognized currently and no provisions are made in the financial state- ments. No premiums were paid into the new scheme until 2011, and the premium is set at 1.4% of total disbursements between 1 G and 7.1 G to the company’s employees.
The Parent Bank also has an operational pension for a former managing director, with payments starting at the age of 67. The calculation of the pension liability is done by an external actuary. The following financial and actuarial assumptions have been used:
Assumptions 2018 2017 Discount rate 2.60 % 2.40 % Expected return on pension assets 2.60 % 0.00 % Expected annual wage increase 2.75 % 2.50 % G adjustment 2.50 % 2.25 % Adjustment of current pension 1.75 % 1.50 % Mortality table K2013BE K2013BE AFP withdrawals 0.00 % 0.00 % Expected voluntary resignations before retirement age 0.00 % 0.00 % Disability table KU KU
Group Parent bank
2018 2017 Net pension costs, defined benefit plans 2018 2017 22 22 Present value of the pension accruals for the year 22 22 158 159 Interest cost of accrued pension liabilities 158 159 181 182 Net pension costs 181 182 Employer's social security contribution 181 182 Total pension costs 181 182
Sandnes Sparebank annual report 2018 88 Notes
In 2018, costs related to defined contribution pension plans amounted to NOK 6.8 million and NOK 5.9 million for the Group and the Parent Bank, respectively. Corresponding amounts for 2017 were NOK 5.9 million and NOK 5.0 million for the Group and the Parent Bank, respectively.
The cost of the new AFP (early retirement) arrangement, which is treated as a defined contribution pension plan, is NOK 1.3 million for the Group and the Parent Bank for 2018, and NOK 1.3 million for 2017.
Group 31.12.2018 31.12.2017
Net pension liability Funded Unfunded Total Funded Unfunded Total Accrued pension entitlements 7 489 7 489 7 736 7 736 Pension assets Estimated pension liability 7 489 7 489 7 736 7 736 Employer's social security contribution on net liability Net pension liability 7 489 7 489 7 736 7 736
Parent bank 31.12.2018 31.12.2017
Net pension liability Funded Unfunded Total Funded Unfunded Total Accrued pension entitlements 7 489 7 489 7 736 7 736 Pension assets Estimated pension liability 7 489 7 489 7 736 7 736 Employer's social security contribution on net liability Net pension liability 7 489 7 489 7 736 7 736
The Group's insured schemes are underfunded. Net pension liabilities are recognized as long-term liabilities in the Balance Sheet.
Actuarial gains and losses are recorded against other income and cost (OCI) in the period in which they accrue. For 2018 this resulted in a recognition of total income through other income and cost (OCI) of NOK 0.02 million after taxes for the Group and the Parent Bank. The corresponding numbers for 2017 were NOK 0.6 million recognized as cost through profits after taxes for the Group and the Parent Bank.
Group Parent bank
31.12.2018 31.12.2017 Reconciliation of gross pension liabilities 31.12.2018 31.12.2017 7 736 6 996 Opening balance 7 736 6 996 22 -2 Accruals of the year 22 -2 158 159 Annual interest cost 158 159 -401 -176 Disbursals to retired employees -401 -176 -26 758 Estimate divergences recognized in other income and cost -26 758 7 489 7 736 Closing balance 7 489 7 736
Sandnes Sparebank annual report 2018 89 Notes
Group
Historical development 31.12.2018 31.12.2017 31.12.2016 31.12.2015 31.12.2014 Gross pension liabilities 7 489 7 736 6 996 7 576 7 180 Net pension liabilities recognized 7 489 7 736 6 996 7 576 7 180 in the balance sheet
Parent bank
Historical development 31.12.2018 31.12.2017 31.12.2016 31.12.2015 31.12.2014 Gross pension liabilities 7 489 7 736 6 996 7 576 7 180 Net pension liabilities recognized 7 489 7 736 6 996 7 576 7 180 in the balance sheet
Remaining net pension liabilities as of 12/31/2018 are related to an operational pension from the age of 67 for a former managing director.
TAXATION
Group Parent bank
2018 2017 Tax on profits 2018 2017 Taxes payable 58 221 36 604 Annual tax cost 47 910 19 925 -554 -63 Correction of prior years’ tax cost -54 Deferred taxes -2 386 22 056 Changes in temporary differences -3 315 22 648 4 7 Impact of changed taxation rules 55 284 58 604 Total tax on ordinary profit 44 595 42 518
Sandnes Sparebank annual report 2018 90 Notes
2018 2017 Avstemming av skattekostnad mot resultat før skatt 2018 2017 299 664 255 955 Resultat før skattekostnad 252 378 240 108 74 305 63 979 25/23% av resultat før skatt 63 095 60 027 -18 472 -5 319 Permanente forskjeller -18 499 -17 454 -554 -63 Korrigering av skatt tidligere år -54 4 7 Virkning av endring i skatteregler 55 284 58 604 Sum skatt på ordinært resultat 44 595 42 518 18 % 23 % Effektiv skattesats 18 % 18 %
31.12.2018 31.12.2017 Reconciliation of tax cost against profit before taxes 31.12.2018 31.12.2017 -4 702 -26 349 Profit before taxes -4 801 -27 314 -2 386 22 056 25/23% on pre-tax profit -3 315 22 648 7 -190 Permanent differences 7 -190 -491 Adjustment of tax for previous years -240 -435 -281 Impact of changed taxation rules 77 54 Total tax on ordinary profit 54 4 7 Effective tax rate -7 926 -4 702 Sum utsatt skattefordel / utsatt skatt -8 349 -4 801
Deferred tax benefits and deferred tax in the balance sheet distributed on temporary differences
Group Parent bank
31.12.2018 31.12.2017 Deferred tax benefit 31.12.2018 31.12.2017 -93 -1 492 Tangible fixed assets -214 -1 642 -74 -93 Income statement -57 -72 1 872 1 934 Pensions 1 872 1 934 4 616 7 927 Accounting provisions 4 616 7 927 1 917 -2 388 Financial instruments 1 892 -3 347 -21 31 Current assets 8 217 5 919 Total 8 109 4 801 491 The tax effect of the change in writedowns 240 on the implementation of IFRS 9 (recognized against EQ) 8 708 5 919 Total deferred tax benefit 8 349 4 801
31.12.2018 31.12.2017 Deferred taxes 31.12.2018 31.12.2017 782 1 217 Financial instruments 782 1 217 Total deferred tax
Deferred tax and deferred tax benefits are equalized on the company level.
Sandnes Sparebank annual report 2018 91 Notes
CLASSIFICATION OF FINANCIAL INSTRUMENTS
In connection with the transition to IFRS9, new principles for the classification and measurement of financial assets have been adopted. The IAS 39 measurement categories for financial assets (fair value through the income statement, available for sale, hold until maturity and loans and receivables at amortized cost) have been replaced by the following three measurement categories pursuant to IFRS 9: • Amortized cost • Fair value with valuation changes through comprehensive income (FVOCI) • Fair value with valuation changes through profit or loss (FVTPL)
In connection with the implementation of IFRS 9, new rules for hedge accounting were introduced, including the removal of the required hedging efficiency of 80-125% and replacing it with more qualitative requirements. It is also possible to delay the implementation of the hedge accounting rules pursuant to IFRS 9. The Bank has elected to continue to use the hedge accounting rules in accordance with IAS 39.
The rules for financial liabilities are essentially the same as in the current IAS 39.
For further description of the classification of financial instruments, please refer to Note 2.
Group 12/31/2018 Financial Financial Financial instruments instruments assets and at fair value with Financial at fair value liabilities valued valuation changes derivatives through Non-financial at amortized through profit as hedging comprehensive assets and Assets cost or loss (FVTPL) instruments. income (FVOCI) liabilities Total Cash and deposits with central banks 454 707 454 707 Loans to and claims on credit institutions 201 566 201 566 Loans to customers* 21 439 328 775 118 22 214 445 Notes and bonds 3 660 633 3 660 633 Equities 203 148 203 148 Financial derivatives 14 845 135 511 150 356 Accrued income 9 864 9 864 Financial instruments with valuation changes 255 414 255 414 through comprehensive income Other assets 59 224 59 224 Total assets 22 095 601 4 653 744 135 511 255 414 69 089 27 209 358
Liabilities Payable to credit institutions 50 197 50 197 Deposits from customers 10 562 230 689 938 11 252 168 Debt established through the issue of securities 12 317 863 12 317 863 Financial derivatives 72 321 75 624 147 945 Accrued cost 56 818 56 818 Subordinated loan capital 317 563 317 563 Other liabilities 91 303 91 303 Provisions 7 010 7 489 14 499 Total liabilities 23 254 864 762 259 75 624 155 611 24 248 357
*Fixed rate loans included in FVTPL are recognized at fair value with valuation changes through ordinary profits, on the basis of the fair value option (FVO) in order to avoid an accounting mismatch.
Sandnes Sparebank annual report 2018 92 Notes
Group 12/31/2017 Financial instruments at fair value through the income statement Financial assets Financial and liabilities Decided derivatives Financial Non-financial valued at Trading recognized as hedging assets held assets and Assets amortized costt portfolio at fair value instruments for sale liabilities Total
Cash and deposits with central banks 472 646 472 646 Loans to and claims on credit institutions 172 782 172 782 Loans to customers 20 746 928 725 972 21 472 900 Notes and bonds 3 333 184 3 333 184 Equities 126 491 126 491 Financial derivatives 36 284 118 276 154 560 Accrued income 33 247 33 247 Financial instruments for sale 252 443 252 443 Other assets 81 476 81 476 Total assets 21 425 603 162 776 4 059 156 118 276 252 443 81 476 26 099 729
Liabilities Payable to credit institutions 36 740 36 740 Deposits from customers 10 305 762 551 681 10 857 443 Debt established through the issue of 11 702 343 11 702 343 securities Financial derivatives 85 746 16 338 102 085 Accrued cost 84 779 84 779 Subordinated loan capital 524 907 524 907 Other liabilities 74 947 74 947 Provisions 7 736 7 736 Total liabilities 22 729 478 85 746 551 681 16 338 7 736 23 390 979
Parent Bank 12/31/2018 Financial instruments Financial instru- Financial assets at fair value with Financial ments at fair and liabilities valuation changes derivatives value through Non-financial valued at through profit as hedging comprehensive assets and Assets" amortized cost or loss (FVTPL) instruments income (FVOCI) liabilities Total Cash and deposits with central banks 454 707 454 707 Loans to and claims on credit institutions 100 247 100 247 Loans to customers* 13 197 892 775 118 826 086 14 799 096 Notes and bonds 3 116 404 3 116 404 Equities 203 148 203 148 Financial derivatives 14 845 70 236 85 081 Accrued income 9 864 9 864 Financial instruments for sale 255 414 255 414 Other assets 1 102 662 43 260 1 145 923 Total assets 14 855 509 4 109 515 70 236 1 081 500 53 125 20 169 884
Sandnes Sparebank annual report 2018 93 Notes
Parent Bank 12/31/2018 Financial instruments Financial instru- Financial assets at fair value with Financial ments at fair and liabilities valuation changes derivatives value through Non-financial valued at through profit as hedging comprehensive assets and Assets amortized cost or loss (FVTPL)) instruments income (FVOCI) liabilities Total Liabilities Payable to credit institutions 24 836 24 836 Deposits from customers 10 562 968 689 938 11 252 906 Debt established through the issue of 5 544 024 5 544 024 securities Financial derivatives 72 321 45 580 117 901 Accrued cost 54 564 54 564 Subordinated loan capital 317 563 317 563 Other liabilities 76 863 76 863 Provisions 6 853 7 489 14 342 Total liabilities 16 456 244 762 259 45 580 138 916 17 402 999
*Fixed rate loans included in FVTPL are recognized at fair value with valuation changes through ordinary profits, on the basis of the fair value option (FVO) in order to avoid an accounting mismatch.
Parent Bank 12/31/2017 Financial instruments at fair value through the income statement Financial assets Financial and liabilities Decided derivatives Financial Non-financial valued at Trading recognized as hedging assets held assets and Assets amortized costt portfolio at fair value instruments for sale liabilities Total Cash and deposits with central banks 472 646 472 646 Loans to and claims on credit institutions 71 787 71 787 Loans to customers 14 090 076 725 972 14 816 049 Notes and bonds 3 090 432 3 090 432 Equities 126 491 126 491 Financial derivatives 36 284 70 203 106 487 Accrued income 27 260 27 260 Financial instruments for sale 252 443 252 443 Other assets 947 270 947 270 Total assets 14 661 769 162 775 3 816 405 70 203 252 443 947 270 19 910 866
Liabilities Payable to credit institutions 55 123 55 123 Deposits from customers 10 307 701 551 681 10 859 382 Debt established through the issue 5 683 365 5 683 365 of securities Financial derivatives 85 746 13 609 99 356 Accrued cost 77 469 77 469 Subordinated loan capital 524 907 524 907 Other liabilities 54 408 54 408 Provisions 7 736 7 736 Total liabilities 16 702 972 85 746 551 681 13 609 7 736 17 361 744
Sandnes Sparebank annual report 2018 94 Notes
FAIR VALUE OF FINANCIAL INSTRUMENTS 6
Fair value of financial instruments valued at amortized cost
Group 31.12.2018 31.12.2017 Assets Book value Fair value Book value Fair value Cash and deposits with central banks 454 707 454 707 472 646 472 646 Loans to and claims on credit institutions 201 566 201 566 172 782 172 782 Loans to customers 21 439 328 21 439 328 20 746 928 20 746 928 Accrued income* 33 247 33 247 Total assets 22 095 601 22 095 601 21 425 603 21 425 603
Liabilities Payable to credit institutions 50 197 50 197 36 740 36 740 Deposits from and payable to customers 10 562 230 10 562 230 10 857 443 10 857 443 Debt established through the issue of securities 12 317 863 12 324 771 11 702 343 11 798 124 Accrued cost* 84 779 84 779 Subordinated loan capital 317 563 314 025 524 907 527 457 Provisions 7 010 7 010 Total liabilities 23 254 864 23 258 234 23 206 212 23 304 543
* In connection with the transition to IFRS 9, accrued interest is added to the underlying financial instrument instead of accrued income and accrued cost, as was previously the case.
Parent bank 31.12.2018 31.12.2017 Assets Book value Fair value Book value Fair value
Cash and deposits with central banks 454 707 454 707 472 646 472 646
Loans to and claims on credit institutions 100 247 100 247 71 787 71 787 Loans to customers 13 197 892 13 197 892 14 090 076 14 090 076 Accrued income* 27 260 27 260 Other assets 1 102 662 1 102 662 Total assets 14 855 509 14 855 509 14 661 769 14 661 769
Liabilities Payable to credit institutions 24 836 24 836 55 123 55 123 Deposits from and payable to customers 10 562 968 10 562 968 10 859 382 10 859 382 Debt securities in issue 5 544 024 5 554 108 5 683 365 5 743 189 Accrued cost* 77 469 77 469 Subordinated loan capital 317 563 314 025 524 907 527 457 Provisions 6 853 6 853 Total liabilities 16 456 244 16 462 790 17 200 245 17 262 620
* In connection with the transition to IFRS 9, accrued interest is added to the underlying financial instrument instead of accrued income and accrued cost, as was previously the case.
Sandnes Sparebank annual report 2018 95 Notes
With respect to financial instruments of short duration (less than three months), book value is assumed to represent fair value. This assumption is also applied to deposits and savings accounts without fixed maturity.
Loans to / deposits from customers valued at amortized cost, include floating rate loans. Loans and deposits with variable interest rates are adjusted for changes to the market interest rate and for changes in the credit risk. Consequently, the Group measures the fair value of such products as being approximately equal to the book value. Loans that do not satisfy this current repricing condition, are individually valued at fair value on the date of the balance sheet. Any excess or inferior values arising within any change of interest rate period are not considered to represent material for the Group.
Financial instruments valued at fair value The Group uses the following valuation hierarchy in the calculation of the fair value of financial instruments: Level 1 – Quoted prices in an active market for the relevant asset or liability Level 2 – Quoted prices in an active market for similar assets or liabilities, or another valuation method where all significant input is based on empirical market data Level 3 – Valuation techniques that are principally not based on empirical market data
Group Determination of fair value at the end of the period pursuant to the valuation hierarchy Total as of Group Level 1 Level 2 Level 3 12/31/2018 Financial instruments at fair value through the income statement Loans to customers 775 118 775 118 Notes and bonds 3 660 633 3 660 633 Equities 45 716 142 062 15 370 203 148 Financial derivatives 14 845 14 845 Financial derivatives, hedging instrument 135 511 135 511 Financial instruments at fair value through comprehensive income Equities 255 414 255 414 Total assets 45 716 3 953 051 1 045 902 5 044 668
Financial instruments at fair value through the income statement Deposits from customers 689 938 689 938 Financial derivatives 72 321 72 321 Financial derivatives, hedging instrument 75 624 75 624 Total liabilities 837 883 837 883
Sandnes Sparebank annual report 2018 96 Notes
Group Amortized cost at the end of the period pursuant to the valuation hierarchy Total as of Level 1 Level 2 Level 3 12/31/2018 Financial assets valued at amortized cost Cash and deposits with central banks 454 707 454 707 Loans to and claims on credit institutions 201 566 201 566 Loans to customers 21 439 328 21 439 328 Total assets 22 095 601 22 095 601
Financial liabilities valued at amortized cost Payable to credit institutions 50 197 50 197 Deposits from customers 10 562 230 10 562 230 Debt securities in issue 12 317 863 12 317 863 Subordinated loan capital 317 563 317 563 Provisions 7 010 7 010 Total liabilities 23 254 864 23 254 864
Group Determination of fair value at the end of the period pursuant to the valuation hierarchy Total as of Level 1 Level 2 Level 3 12/31/2017 Financial instruments at fair value through the income statement Loans to customers 725 972 725 972 Notes and bonds 3 333 184 3 333 184 Equities 13 474 113 018 126 492 Financial derivatives 36 284 36 284 Financial derivatives, hedging instrument 118 276 118 276 Financial instruments available for sale Equities 252 443 252 443 Total assets 13 474 3 600 761 978 415 4 592 651
Financial instruments at fair value through the income statement Deposits from customers 551 681 551 681 Financial derivatives 85 746 85 746 Financial derivatives, hedging instrument 16 338 16 338 Total liabilities 653 766 653 766
Sandnes Sparebank annual report 2018 97 Notes
Group Amortized cost at the end of the period pursuant to the valuation hierarchy Level 1 Level 2 Level 3Total as of 12/31/2017 Financial assets valued at amortized cost Cash and deposits with central banks 472 646 472 646 Loans to and claims on credit institutions 172 782 172 782 Loans to customers 20 746 928 20 746 928 Accrued income 33 247 33 247 Total assets 21 425 603 21 425 603
Financial liabilities valued at amortized cost Payable to credit institutions 36 740 36 740 Deposits from customers 10 305 762 10 305 762 Debt securities in issue 11 702 343 11 702 343 Accrued cost 84 779 84 779 Subordinated loan capital 524 907 524 907 Other liabilities 74 947 74 947 Total liabilities 22 729 478 22 729 478
Group Reconciliation of movements from Level 3 from 12/31/2017 to 12/31/2018 Shares at fair Shares at fair value through value through comprehensive profit and loss Loans income (FVOCI)* (FVTPL) Total Balance as of 12/31/2017 725 973 252 443 978 416 Reclassification of financial instruments with transition to IFRS 9 -15 038 15 038 Recognized profit/loss in the current income statement -7 078 1 088 -5 991 Recognized gains/losses in other income / OCI 14 535 14 535 Purchase 3 474 3 474 Issued 318 034 318 034 Settlement -261 811 -756 -262 567 Balance as of 12/31/2018 775 118 255 414 15 370 1 045 902
* The Available for sale category does not exist in IFRS 9. As of 1/1/2018, shares and units are valued at fair value with changes in value over profit and loss (FVTPL), except the Bank's investment in EIKA Gruppen AS, which is classified as financial instruments with valuation changes through comprehensive income (FVOCI) as this investment is considered strategic for the Bank.
With respect to loans and shares (FVTPL), gains/losses recognized in this year’s income statement are included in the changes in value of financial instruments at fair value.
Sandnes Sparebank annual report 2018 98 Notes
Parent bank Determination of fair value at the end of the period pursuant to the valuation hierarchy Total as of Level 1 Level 2 Level 3 12/31/2018 Financial instruments at fair value through the income statement Loans to customers 826 086 775 118 1 601 203 Notes and bonds 3 116 404 3 116 404 Equities 45 716 142 062 15 370 203 148 Financial derivatives 14 845 14 845 Financial derivatives, hedging instrument 70 236 70 236 Financial instruments at fair value through comprehensive income Equities 255 414 255 414 Total assets 45 716 4 169 633 1 045 902 5 261 251
Financial instruments at fair value through the income statement Deposits from customers 689 938 689 938 Financial derivatives 72 321 72 321 Financial derivatives, hedging instrument 45 580 45 580 Total liabilities 807 839 807 839
Parent bank Amortized cost at the end of the period pursuant to the valuation hierarchy Total as of Level 1 Level 2 Level 3 12/31/2018 Financial assets valued at amortized cost Cash and deposits with central banks 454 707 454 707 Loans to and claims on credit institutions 100 247 100 247 Loans to customers 13 197 892 13 197 892 Other assets 1 102 662 1 102 662 Total assets 14 855 509 14 855 509
Financial liabilities valued at amortized cost Payable to credit institutions 24 836 24 836 Deposits from customers 10 562 968 10 562 968 Debt securities in issue 5 544 024 5 544 024 Accrued cost Subordinated loan capital 317 563 317 563 Provisions 6 853 6 853 Total liabilities 16 456 244 16 456 244
Sandnes Sparebank annual report 2018 99 Notes
Parent bank Determination of fair value at the end of the period pursuant to the valuation hierarchy Level 1 Level 2 Level 3Total as of 12/31/2017 Financial instruments at fair value through the income statement Loans to customers 725 972 725 972 Notes and bonds 3 090 432 3 090 432 Equities 13 474 113 017 126 491 Financial derivatives 36 284 36 284 Financial derivatives, hedging instrument 70 203 70 203 Financial instruments available for sale Equities 252 443 252 443 Total assets 13 474 3 309 937 978 415 4 301 826
Financial instruments at fair value through the income statement Deposits from customers 551 681 551 681 Financial derivatives 85 746 85 746 Financial derivatives, hedging instrument 13 609 13 609 Total liabilities 651 037 651 037
Parent bank Amortized cost at the end of the period pursuant to the valuation hierarchy Level 1 Level 2 Level 3Total as of 12/31/2017 Financial assets valued at amortized cost Cash and deposits with central banks 472 646 472 646 Loans to and claims on credit institutions 71 787 71 787 Loans to customers 14 090 076 14 090 076 Accrued income 27 260 27 260 Total assets 14 661 769 14 661 769
Financial liabilities valued at amortized cost Payable to credit institutions 55 123 55 123 Deposits from customers 10 307 701 10 307 701 Debt securities in issue 5 683 365 5 683 365 Accrued cost 77 469 77 469 Subordinated loan capital 524 907 524 907 Other liabilities 54 408 54 408 Total liabilities 16 702 972 16 702 972
Sandnes Sparebank annual report 2018 100 Notes
Parent bank Reconciliation of movements from Level 3 from 12/31/2017 to 12/31/2018 Shares at fair Shares at fair value through value through comprehensive profit and loss Loans income (FVOCI)* (FVTPL) Total Balance as of 12/31/2017 725 973 252 443 978 416 Reclassification of financial instruments with transition to IFRS 9 -15 038 15 038 Recognized profit/loss in the current income statement -7 078 1 088 -5 991 Recognized gains/losses in other income / OCI 14 535 14 535 Purchase 3 474 3 474 Issued 318 034 318 034 Settlement -261 811 -756 -262 567 Balance as of 12/31/2018 775 118 255 414 15 370 1 045 902
*The Available for sale category does not exist in IFRS 9. As of 1/1/2018, shares and units are valued at fair value with changes in value over profit and loss (FVTPL), except the Bank's investment in EIKA Gruppen AS, which is classified as financial instruments with valuation changes through comprehensive income (FVOCI) as this investment is considered strategic for the Bank.
With respect to loans and shares (FVTPL), gains/losses recognized in this year’s income statement are included in the changes in value of financial instruments at fair value.
Please see below for a description of how fair value is calculated for financial instruments on level 2 and 3, i.e. where a valuation technique has been applied.
Financial instruments classified on level 2 Notes and bonds
Notes and bonds are valued at market value on the basis of information collected from bond brokers in the market. The valuation of bonds and notes is calculated on the basis of broker estimates of trading prices on the date of the balance sheet.
Loans at fair value with valuation changes through comprehensive income (FVOCI) For the Parent Bank, loans that the Parent Bank may transfer to SSB Boligkreditt AS, are classified at fair valuation changes through comprehensive income (FVOCI), as the business model indicates that the Parent Bank has the intention of collect contractual cash flows, but may also sell/transfer the loans to SSB Boligkreditt AS. In the Group financial statements, the loans are recognized at amortized cost, as the Group does not intend to sell the loans. The fair value of the loans are assumed to be approximately equal to the value of ordinary loans with floating rates of interest.
Financial investments Financial investments are valued according to the EVCA Valuation Principles, which calls for valuation to be implemented at company level.
Financial derivatives Financial derivatives are valued at market value on the basis of information collected about currency exchange rates and swap curves. The category includes interest rate swaps, currency swaps and forward contracts for which the observable market values are available via Reuters or Bloomberg.
Deposits from customers Customer deposits with a fixed rate < 1 year are valued on the basis of the agreed cash flow of the deposit discounted by the yield. The yield is based on current market terms fixed rate deposits on the date of the balance sheet.
Financial instruments classified on level 3 Loans Fixed rate loans to customers are valued on the basis of the agreed cash flow from the loans, discounted by the yield. The yield is based on the prevailing market terms for similar fixed rate loans. The value of the loan will be most sensitive to a change in the interest rate level and change in customer credit risk (corporate customers in particular). A 10 point change will affect the valuation of the portfolio with NOK 2.6 million.
Customer loans subject to writedowns are valued on the basis of probable cash flow from the loans, discounted by the yield, adjusted for market terms for similar not written-down loans.
Sandnes Sparebank annual report 2018 101 Notes
Shares – FVOCI Shares classified at fair value through comprehensive income (FVOCI) are valued on the basis of evaluations made on the basis of historical information and general market developments for the relevant industries. A change in market performance will influence the valuation of the equities.
Deposits from customers Customer deposits with a fixed rate > 1 year are valued on the basis of the agreed cash flow of the deposit discounted by the yield. The yield is based on the current interest rate level in the market and the Group’s general funding level. The value of the deposit is most sensitive to changes in interest rate level. Due to a small volume of relevant deposits, the change in value for the deposits is considered insignificant for the Group.
LOANS TO AND CLAIMS ON CREDIT INSTITUTIONS
Group Parent bank
31.12.18 31.12.17 Loans to and claims on credit institutions 31.12.18 31.12.17 201 566 172 782 Loans and claims without agreed maturity or call 100 247 71 787 Loans and claims with agreed maturity or call 201 566 172 782 Total loans to and claims on credit institutions 100 247 71 787
NOTES AND BONDS
Group Parent bank
31.12.18 31.12.17 Notes and bonds at fair value 31.12.18 31.12.17 572 806 427 675 Certificates 572 806 427 675 3 086 189 2 903 888 Bonds 2 541 960 2 661 136 1 638 1 622 Subordinated loan, bond issue 1 638 1 622 3 660 633 3 333 184 Total notes and bonds at fair value 3 116 404 3 090 432 239 521 240 270 Of which government-guaranteed notes/bonds 224 077 224 826 1.50 % 1.58 % Yield 1.50 % 1.59 % 2.01 2.24 Duration 1.85 2.22
The Bank's liquidity portfolio of notes and bonds is classified at fair value through profit and loss according to the business model governing the management of the liquidity portfolio, pursuant to IFRS 9. The business model provides a required rate of return for the liquidity portfolio, and purchases and sales are made for the purpose of maximizing profits.
Sandnes Sparebank annual report 2018 102 Notes
OWNERSHIP INTERESTS IN SUBSIDIARIES
31.12.2018
Share Organization Share of owner- Number Face Book Cost Shares in subsidiary number Address Location capital ship (%) of shares value value price Aktiv Eiendomsmegling Jæren AS 934 001 942 Jernbanegata 5 Bryne 608 60 36 465 472 0,01 4 185 4 185 SSB Boligkreditt AS 993 153 036 Rådhusgata 3 Sandnes 350 100 100 2 276 000 100 350 130 350 130 SSB Okarina AS 920 538 606 Rådhusgata 3 Sandnes 30 100 30 000 1 30 30 Book value as of 12/31/2018 354 345 354 345
Group minority interests In 2015, the Group purchased 100% of the shares in Aktiv Eiendomsmegling Jæren, and the company was merged with the Sandnes Eiendom subsidiary. After the merger, the Group sold 40% of the shares in the company to Jæren Sparebank. The company’s mission is to run a real estate agency.
Dividend between group companies A dividend of NOK 1.6 million was paid by the Aktiv Eiendomsmegling Jæren AS subsidiary to the Parent Bank in 2018.
Group Parent bank
31.12.2018 31.12.2017 Specification of other assets of the Group: 31.12.2018 31.12.2017 13 719 12 356 Other assets 2 717 929 Outstanding accounts with SSB Boligkreditt 748 318 528 694 13 719 12 356 Total other assets 751 035 529 623
Sandnes Sparebank annual report 2018 103 Notes
EQUITIES
Group Parent bank
31.12.2018 31.12.2017 Equities and funds 31.12.2018 31.12.2017 9 047 9 047 Eiendomskreditt AS (org. no. 979391285) 9 047 9 047 29 190 Jæren Sparebank (org. no. 937895976) 29 190 28 482 Vipps AS (org. no. 918713867) 28 482 16 526 13 474 Visa Inc 16 526 13 474 5 038 7 203 Saffron India Real Estate Fund I 5 038 7 203 10 335 VN Norge AS (org. no. 821083052) * 10 335 1 035 Boligeiendom Berlin AS (org. no. 991 301 798)* 1 035 4 000 Skandinavisk Data Center A/S* 4 000 89 1 204 Other unlisted 89 1 204 103 743 30 929 Total equities at fair value through the income statement 103 743 30 929 99 405 95 563 Units in bond funds 99 405 95 563 203 148 126 491 Total equities and funds 203 148 126 491
*The shares have previously been classified as available for sale. In connection with the implementation of IFRS 9 (1/1/2018), the shares have been classified as ordinary shares with valuation changes through ordinary profit and loss (FVTPL).
The shares and bonds are classified at fair value with change in value through profit or loss. See Note 19 for net change in value of the investments.
The total cost price of the shares is NOK 55.0 million. The cost price of the fixed income funds is NOK 96.9 million. Sandnes Sparebank does not have significant influence on the companies.
For Såkorn Invest, which is part of other unlisted companies, the uncalled committed capital is NOK 0.4 million.
The shares in Vipps AS are compensatory shares related to the merger between BankID Norge, BankAxept AS and Vipps AS, where the Bank previously was a shareholder in the companies acquired in the merger. The merger was completed in July 2018. Previously, the Group has also owned VIPPS shares through EIKA Gruppen (the Basic package), in which he shares were transferred to the Bank in the 4th quarter of 2018. After the transaction, the Bank owns 7197 shares in VIPPS AS as of 12/31/2018. Based on the transaction pricing of the merged company, the shares have an estimated market value of NOK 28.5 million and has contributed a gain for the Bank in 2018 of NOK 18.3 million in total.
The shares in VN Norge AS: In June 2018, it was resolved that VISA Norge FLI (previously classified as available for sale) should be converted to a limited company by transferring all activities of VISA Norge FLI to the newly formed VN Norge AS. The Bank received shares in the newly established company on a pro rata basis of its ownership share of VISA Norge FLI (0.739% of total shares).
Sandnes Sparebank annual report 2018 104 Notes
INTANGIBLE ASSETS
Group Parent bank
Other Total Other Total intangible intangible intangible intangible Goodwill assets assets Intangible assets Goodwill assets assets 4 553 50 326 54 879 Book value as of 12/31/2016 50 326 50 326 1 695 1 695 Additions 1 695 1 695 15 834 15 834 Depreciation 15 834 15 834 4 553 36 187 40 740 Book value as of 12/31/2017 36 187 36 187 4 553 186 235 190 788 Original acquisition cost 183 291 183 291 - 150 048 150 048 Total depreciation and amortization 147 104 147 104 4 553 36 187 40 740 Book value as of 12/31/2017 36 187 36 187 748 748 Additions 748 748 10 748 10 748 Depreciation 10 748 10 748 4 553 26 188 30 741 Book value as of 12/31/2018 26 188 26 188 4 553 186 984 191 537 Original acquisition cost 184 040 184 040 -0 160 796 160 796 Total depreciation and amortization 157 852 157 852 4 553 26 188 30 741 Book value as of 12/31/2018 26 188 26 188 3-5 år Useful life 3-5 år
Group
Book goodwill 31.12.2018 31.12.2017 31.12.2016 Aktiv Eiendomsmegling Jæren 4 553 4 553 4 553 Total goodwill 4 553 4 553 4 553
Individual goodwill items and other intangible assets in the Group's balance sheet are allocated to profit centers on the basis of which activities benefit from the acquired asset. Choice of profit center is made on the basis of whether it is possible to identify and exclude cash flows related to the activities.
The goodwill item of the Group is in its entirety related to Aktiv Eiendomsmegling Jæren. The first part of this item accrued in 2005, when the Group increased its ownership interest in its Sandnes Eiendom subsidiary from 50% to 100%. In 2015, the Group purchased 100% of the shares in Aktiv Eiendomsmegling Jæren, and the remaining goodwill amount is from this purchase. Sandnes Eiendom and Aktiv Eiendomsmegling Jæren were subsequently merged, and the Group sold 40% of its shares in the company. Testing for writedown of assets recognized in the balance sheet is carried out each year by means of discounting anticipated future cash flow from the business. The cash flow estimates are based on approved budgets and management estimates. Both budgets and estimates are associated with a high degree of uncertainty. If the actual economic conditions deviate from the assumptions on which budgets and plans are based, the writedown tests may yield a different result. Furthermore, the writedown tests depend on the required rate of return applied. The required rate of return is discretionarily determined on the basis of available information on the date of the balance sheet. Writedown tests are performed annually, and do not provide a basis for writedowns for 2018. Goodwill related to Aktiv Eiendomsmegling Jæren is reported under the Real Estate Agency segment.
Other immaterial assets relate to the development and purchase of IT applications, including applications for data analysis and risk assessment. Implemented systems are depreciated in a straight line over 3-5 years. The writedown test is performed annually. No requirement for the writedown of intangible assets was identified in 2018.
Sandnes Sparebank annual report 2018 105 Notes
FIXED ASSETS
Group Parent bank
Machinery, Machinery, fixtures and Land and real fixtures and Land and real fittings, etc. estate Total fixed assets Fixed assets fittings, etc. estate Total fixed assets 8 043 1 765 9 808 Book value as of 12/31/2016 7 775 1 766 9 540 374 374 Additions 333 333 2 613 51 2 664 Depreciation 2 421 51 2 472 5 803 1 714 7 518 Book value as of 12/31/2017 5 686 1 714 7 400 96 865 38 186 135 051 Original acquisition cost 92 143 2 900 95 043 91 062 36 472 127 534 Total depreciation and amortization 86 457 1 186 87 643 5 803 1 714 7 518 Book value as of 12/31/2017 5 686 1 714 7 400 447 447 Additions 447 447 1 856 51 1 907 Depreciation 1 789 51 1 840 4 394 1 663 6 057 Book value as of 12/31/2018 4 343 1 664 6 007 97 312 38 186 135 498 Original acquisition cost 92 590 2 900 95 490 92 918 36 523 129 441 Total depreciation and amortization 88 247 1 237 89 483 4 394 1 663 6 057 Book value as of 12/31/2018 4 343 1 664 6 007 3-5 years 50 years Useful life 3-5 years 50 years
Capitalized investments related to leased premises are depreciated over the remaining lease period.
Sandnes Sparebank annual report 2018 106 Notes
FINANCIAL INSTRUMENTS WITH VALUATION CHANGES THROUGH COMPREHENSIVE INCOME
Group Parent bank
31.12.2018 31.12.2017 Financial instruments available for sale (IAS 39)* 31.12.2018 31.12.2017 1 034 Boligeiendom Berlin AS (org. no. 991 301 798) 1 034 237 405 Eika Gruppen AS (org. no. 979 319 568) 237 405 9 382 Visa Norge FLI (org. no. 986 593 047) 9 382 4 621 Skandinavisk Data Center A/S 4 621 252 443 Total financial instruments available for sale (IAS 39) 252 443
Financial instruments with valuation changes through 31.12.2018 31.12.2017 comprehensive income (IFRS 9) 31.12.2018 31.12.2017 255 414 Eika Gruppen AS (org. no. 979 319 568) 255 414 Total financial instruments with valuation changes through 255 414 255 414 comprehensive income (IFRS 9)
* The Available for sale category does not exist in IFRS 9. As of 1/1/2018, shares and units are valued at fair value with changes in value over profit and loss (FVTPL), except the Bank's investment in EIKA Gruppen AS, which is classified as financial instruments with valuation changes through comprehensive income (FVOCI) as this investment is considered strategic for the Bank.
As of 12/31/2018, the investment in Eika Gruppen AS was valued at fair value on the basis of an updated valuation and recent market transactions. A valuation change of NOK 14.5 million was recognized through comprehensive income (OCI) in 2018, compared to NOK -24.2 million for 2017. Dividends paid by the Eika Gruppen were NOK 29.1 million in 2018, compared to NOK 24.2 million in 2017. Sandnes Sparebank owns 8.1% of the shares in the company, and the cost price is NOK 233.9 million.
With respect to shares that are now classified at fair value with valuation changes through ordinary profit and loss, please refer to Note 30.
DEBT TO CREDIT INSTITUTIONS
Group Parent bank
31.12.2018 31.12.2017 Payable to credit institutions 31.12.2018 31.12.2017 50 197 36 740 Loans and deposits from credit institutions without agreed term 24 836 55 123 Total payable to credit institutions with agreed term 50 197 36 740 Total payable to credit institutions 24 836 55 123
Specified by currency 50 197 36 720 NOK 24 836 55 103 20 Others 20 50 197 36 740 Total payable to credit institutions 24 836 55 123
As of 12/31/2018, bonds and notes valued at NOK 1,845 million in the Parent Bank, have been pledged as collateral for a loan facility with Norges Bank for up to NOK 1,833 million. As of 12/31/2017, bonds and notes valued at NOK 2,000 million in the Parent Bank, have been pledged as collateral for a loan facility with Norges Bank for up to NOK 1,988 million.
Sandnes Sparebank annual report 2018 107 Notes
DEPOSITS FROM CUSTOMERS
Group Parent bank
31.12.2018 31.12.2017 Deposits from customers 31.12.2018 31.12.2017 8 247 788 8 490 293 Deposits from customers, without fixed maturity 8 248 527 8 492 232 3 004 379 2 367 150 Deposits from customers, with fixed maturity 3 004 379 2 367 150 11 252 168 10 857 443 Total deposits from customers 11 252 906 10 859 382
Group Parent bank
31.12.2018 31.12.2017 Customer deposits by customer groups 31.12.2018 31.12.2017 132 489 124 386 Agriculture and forestry 132 489 124 386 26 259 25 088 Fishing and hunting 26 259 25 088 430 088 488 336 Building and construction 430 088 488 336 187 018 126 699 Manufacturing 187 018 126 699 108 553 82 581 Oil and energy 108 553 82 581 390 953 273 066 Distributive trade 390 953 273 066 71 602 54 170 Hotels and restaurants 71 602 54 170 202 082 368 013 Transport and storage 202 082 368 013 2 597 636 2 308 979 Public and private services 2 597 636 2 308 979 1 059 016 994 629 Property management 1 059 755 996 586 1 218 481 Other customer groups 1 218 481 6 045 253 6 011 015 Retail customers 6 045 253 6 010 996 11 252 168 10 857 443 Total deposits from customers 11 252 906 10 859 382
The average interest rate on deposits from customers, without fixed maturity, was 0.42% in 2018 and 0.55% in 2017. The average interest rate on deposits from customers, with fixed maturity, was 1.71% in 2018 and 1.74% in 2017. The average interest rate on deposits is calculated on the basis of the average balance throughout the year.
Deposits from customers with agreed term consists of fixed rate deposits, deposit accounts, BSU, escrow accounts for tax withholding and other accounts with withdrawal limitations.
Sandnes Sparebank annual report 2018 108 Notes
VERDIPAPIRGJELD
Group Parent bank
31.12.2018 31.12.2017 Debt securities in issue 31.12.2018 31.12.2017 14 686 863 14 247 343 Bond loan, adjusted for interest and premium/discount 7 913 024 7 628 365 -2 369 000 -2 545 000 Bond issues, own holdings -2 369 000 -1 945 000 12 317 863 11 702 343 Total debt securities in issue 5 544 024 5 683 365 2.13 % 1.95 % Average interest rate on bond issues 2.45 % 2.36 %
Change in securities debt – Group Balance as of Balance as of Issued Matured/redeemed Other changes 12/31/2017 12/31/2018 Bond debt, nominal value 11 620 000 4 200 000 3 571 000 12 249 000 Valuation adjustments 82 343 -13 480 68 863 Total debt securities in issue 11 702 343 12 317 863
Balance as of Balance as of Issued Matured/redeemed Other changes 12/31/2016 12/31/2017 Bond debt, nominal value 11 905 000 2 170 000 2 052 571 11 620 000 Valuation adjustments 91 790 -9 447 82 343 Total debt securities in issue 11 996 790 11 702 343
Change in securities debt – Parent bank Balance as of Balance as of Issued Matured/redeemed Other changes 12/31/2017 12/31/2018 Bond debt, nominal value 5 625 000 2 300 000 2 424 000 5 501 000 Valuation adjustments 58 365 -15 341 43 024 Total debt securities in issue 5 683 365 5 544 024
Balance as of Balance as of Issued Matured/redeemed Other changes 12/31/2016 12/31/2017 Bond debt, nominal value 6 030 000 1 170 000 1 575 000 5 625 000 Valuation adjustments 61 823 -3 458 58 365 Total debt securities in issue 6 091 823 5 683 365
Sandnes Sparebank annual report 2018 109 Notes
Bonds Face value Final due date Issued by Parent Bank NO0010649940 400 000 20.06.2022 NO0010814171 800 000 16.01.2023 NO0010714041 700 000 27.06.2019 NO0010724495 700 000 02.06.2020 NO0010729296 700 000 14.01.2020 NO0010730450 400 000 10.02.2021 NO0010745011 700 000 11.12.2020 NO0010746324 700 000 29.09.2022 NO0010756687 600 000 28.01.2019 NO0010812779 1 000 000 21.12.2023 NO0010778822 570 000 18.11.2021 NO0010831712 200 000 11.03.2024 NO0010823891 300 000 04.06.2021 NO0010831944 100 000 19.06.2024 Total nominal value of bonds issued by the Parent Bank 7 870 000 NO0010697691 80 000 04.12.2019 NO0010731938 2 000 000 15.06.2022 NO0010718331 2 000 000 03.09.2020 NO0010753320 425 000 18.03.2026 NO0010704232 343 000 25.02.2021 NO0010822398 600 000 08.05.2024 NO0010833254 1 000 000 27.09.2024 NO0010834070 300 000 10.10.2028 Total nominal value of bonds issued by the mortgage company 6 748 000 Total nominal value of bonds in aggregate 14 618 000
The bond issues are recognized at amortized cost. Hedge accounting is used for the Bank’s fixed rate bonds.
PROVISIONS FOR OTHER LIABILITIES
Group Parent bank
31.12.2018 31.12.2017 Provisions for other liabilities 31.12.2018 31.12.2017 7 489 7 736 Pension liabilities 7 489 7 736 7 010 Provisions for losses on guarantees/unused lines of credit 6 853 14 499 7 736 Total provisions for other liabilities 14 342 7 736
Provisions for losses on guarantees/unused lines of credit consist of provisions for losses pursuant to IFRS 9, on ex balance sheet assets. For further details, please refer to Note 11.
In other respects, please refer to Note 23 for further details regarding pension liabilities.
Sandnes Sparebank annual report 2018 110 Notes
OTHER LIABILITIES
Group Parent bank
31.12.2018 31.12.2017 Other liabilities 31.12.2018 31.12.2017 1 009 907 Banker's drafts 1 009 907 15 071 16 942 Interim accounts 15 071 16 942 17 913 19 421 Other liabilities 15 000 16 779 33 993 37 270 Total other debt 31 079 34 627
SUBORDINATED LOAN CAPITAL
Group/Parent bank
31.12.2018 31.12.2017 Subordinated loan capital, nominal value 200 000 300 000 Hybrid capital bonds, nominal value 115 500 225 400 Valuation adjustments 2 063 -493 Total subordinated loan capital 317 563 524 907
Change in subordinated loan capital, Group Balance as of Balance as of Borrowing Matured/redeemed Other changes 12/31/2017 12/31/2018 Subordinated loan capital 300 000 200 000 300 000 200 000 Hybrid capital bond loan 225 400 109 900 115 500 Interest / value adjustments -493 2 556 2 063 Total subordinated loan capital 524 907 317 563
Balance as of Balance as of Borrowing Matured/redeemed Other changes 12/31/2016 12/31/2017 Subordinated loan capital 350 000 50 000 300 000 Hybrid capital bond loan 300 000 74 600 225 400 Interest / value adjustments -680 187 -493 Total subordinated loan capital 649 320 524 907
Sandnes Sparebank annual report 2018 111 Notes
Year of issue Terms and Conditions Maturity Call date Nominal value Subordinated loan, time-limited 2018 3 mo NIBOR + 1.55% 16.02.28 16.02.23 100 000 2018 3 mo NIBOR + 1.90% 16.10.28 16.10.23 100 000 Total nominal value of subordinated loans 200 000 Hybrid capital bond, perpetual 2014 3 mo NIBOR + 3.75% 1/22/2019* 22.01.19 115 500 Total nominal value of perpetual hybrid capital bonds 115 500
*The capital bond with the ISIN NO. NO0010700446, is considered to satisfy the definition of a financial obligation pursuant to IAS 32 and is thus not classified as a liability. This is primarily based on the fact that the loan agreement is interpreted such that the issuer has a contractual obligation to pay interest, and that this will apply as long as the issuer is not in material financial difficulties and is in default of capital requirements. However, it is made clear that there is uncertainty related to the interpretation of this type of loan agreement. The Bank has exercised its call option for this capital bond, meaning that the final expiration date is 1/22/2019. Consequently, the loan does not qualify as Tier-1 capital as of 12/31/2018.
Also in 2018, the Group issued a new investment grade bond with a nominal value of NOK 100 million (ISIN NO0010832553). For accounting purposes, this is recognized as hybrid capital and is part of the Group's equity capital. This loan agreement clearly stipulates that interest may be withheld, and there- fore the loan does not satisfy the definition of a financial liability pursuant to IAS 32. Unpaid interest on the capital bond will be transferred to equity.
SHAREHOLDERS’ EQUITY
The equity certificate holders’ share of equity consists of the equity certificate capital, the share premium and equalization reserves. The equalization reserves consist of accumulated retained earnings and may be used for future cash or stock dividends.
The equity capital for Sandnes Sparebank, as stipulated by the by-laws, is NOK 230,149,020, divided on 23,014,902 equity capital certificates, each with a face value of NOK 10.
Other equity comprises the Savings Bank Fund, the Gift Fund/customer dividends, Reserves for unrealized gains, other equity and minority interests. In addition, a new funding bond is treated for accounting purposes as hybrid capital and is included in the Group's equity capital (ref. Note 39).
The payment of a dividend for 2018 of NOK 5.2 per equity capital certificate has been proposed, corresponding to 75% of the Group’s earnings per equity capital certificate. For 2017, the dividend paid per equity capital certificate was NOK 2.8.
On March 21, 2018, The Board of Trustees authorized the Board of Directors of Sandnes Sparebank to purchase its own equity capital certificates for the treasury, of up to NOK 23.015 million, equivalent to 10% of the equity certificate capital. Each equity capital certificate may be purchased at prices between NOK 1 and 150. The authorization is valid up to and including the ordinary general meeting of the Trustees in 2019, but no longer than 18 months from the date of the authorization. As of 12/31/2018, Sandnes Sparebank is holding 16,684 equity capital certificates in its treasury, which have been purchased in connection with the incentive program for bank employees.
On 1/26/2018, the Financial Supervisory Authority of Norway approved the amendment of the Articles of Incorporation that allows the Bank to pay a customer dividend. Customer dividends are part of the profit allocation, in addition to gifts for generally beneficial purposes. In 2018, provisions of NOK 53.0 have been made for customer dividends. For 2017, NOK 24.1 million was provided for customer dividends.
Sandnes Sparebank annual report 2018 112 Notes
CONTINGENT LIABILITIES AND OPERATIONAL LEASES
Contingent liabilities As of 12/31/2018, there are no significant contingent liabilities.
Operational leases The Group has entered into operational lease agreements for offices, IT systems and vehicles, and some minor lease agreements for computers and office equipment.
The Group has lease agreements for office premises, branch offices and ATMs, whit remaining lease periods of 1–10 years. In 2018, provisions were made in the amount of NOK 6.1 million to cover future losses on the Bank's lease commitments, compared to NOK 12.4 million in 2017.
The Group's total provisions for future losses on lease agreements, constitute NOK 17.4 million as of 12/31/2018, compared to NOK 31.7 million as of 12/31/2017. The decline of NOK 14.3 million is due to increased provisions during the current year of NOK 6.1 million, as well as reversals and charging of existing provisions of NOK 20.4 million. Provisions are based on the Bank’s outlook regarding future lease prices.
In connection with the implementation of IFRS 16 (1/1/2019), the Bank's lease agreements will be recognized in the balance sheet as a user right with a corresponding leasing liability. See Note 2 for a more detailed description. In the transition to IFRS 16, provisions for losses related to lease agreements will be netted against the user right in the balance sheet.
The table below shows future, non-terminable lease costs after provisions for future losses.
31.12.2018 31.12.2017 Future non-terminable lease costs 31.12.2018 31.12.2017 14 266 13 567 Within one year 14 266 13 567 53 235 46 871 Between one and five years 53 235 46 871 59 660 64 861 Over five years 59 660 64 861 127 160 125 299 Total estimated future lease costs 127 160 125 299
EVENTS AFTER THE DATE OF THE BALANCE SHEET
Tax deduction for customer dividends On 1/28/2019, SpareBank 1 Østlandet reported a binding opinion prior to implementation regarding tax deduction for customer dividends. We assume that the prior opinion also will apply to Sandnes Sparebank. On 1/26/2018, Sandnes Sparebank received approval from the Financial Supervisory Authority of Norway for customer dividends, and the Bank paid NOK 24 million to its customers in 2018. For the Bank, the payment of customer dividends is an important vehicle for future income acquisition both with respect to recruiting new customers to the Bank and to keep existing customers.
The tax deduction is recorded in the income statement pursuant to IAS 12 as a reduction of the 2018 tax cost. Please note that there is some uncertainty related to the distribution of the tax deduction from the customer dividends between different owner classes.
Otherwise, there have been no significant events after the date of the balance sheet that affects the financial statements as of 12/31/2018.
Sandnes Sparebank annual report 2018 113 Notes
TRANSACTIONS WITH INTIMATES
Transactions between the Parent and subsidiaries Transactions between the Parent Bank and subsidiaries relate to ordinary banking services only. The services are provided at arm's length terms and are eliminated in the consolidated accounts.
Government measures for ensuring bank liquidity In October 2008, the Storting (the Norwegian parliament) resolved to initiate a scheme whereby the government and banks exchange treasury notes for covered bonds, OMF. In order to utilize this scheme, in February 2009 SSB established its own mortgage company, SSB Boligkreditt. In the period to 12/31/2018, NOK 7.4 billion worth of loans have been transferred, of which NOK 6.7 billion have been financed through the issue of covered bonds, and NOK 0.7 billion financed through short-term credit from SSB.
Management fees for loans transferred to customers have been charged to SSB Boligkreditt in the amount of 17.0 million for 2018, compared to NOK 17.2 million for 2017. In addition, interest/credit commissions have been charged in the amount of NOK 12.8 million, compared to NOK 13.5 million in 2017.
The relationship between the Parent Bank and SSB Boligkreditt Assumption of home mortgages with repurchase Pursuant to an agreement between the Parent Bank and SSB Boligkreditt, the Parent Bank is obliged to transfer collateral to SSB Boligkreditt corresponding to any demand for topping up of collateral due to a change in the value performance of the home mortgage portfolio's share of the body of collateral, measured against the value of covered bonds in issue.
Briefly, the agreement entails the following: • Loans are valued prior to transfer. • When a loan is transferred from the Bank to SSB Boligkreditt, a letter of notification is sent to the customer. • Upon refinancing, loans are transferred back to the Bank for checking whether they qualify for transfer to SSB Boligkreditt. • Non-performing loans are transferred back to the Bank. Prior to return transfer, valuation is performed on each individual loan.
Line of credit SSB Boligkreditt has a line of credit with the Parent Bank to ensure timely payment of covered bonds and derivative transactions.
Group Parent bank
31.12.2018 31.12.2017 31.12.2018 31.12.2017 15 324 12 816 Total loans and guarantees to the Board of Directors and intimates 15 324 12 816 3 009 Total loans and guarantees to Audit Committee and intimates 3 009 98 481 50 764 Total loans and guarantees to the Board of Trustees 98 481 50 764 286 646 319 206 Total loans (included overdraft facilities) to employees 279 240 306 461 400 451 385 794 Total loans and guarantees to employees and elected officials 393 045 373 049
Sandnes Sparebank annual report 2018 114 Notes
EARNINGS PER EQUITY CAPITAL CERTIFICATE AND CALCULATION OF THE EQUITY CAPITAL CERTIFICATE PERCENTAGE
Group Parent bank
2018 2017 Earnings per equity capital certificate 2018 2017 6.9 5.6 Earnings per equity capital certificate 5.9 5.6 6.9 5.6 Diluted earnings per equity capital certificate 5.9 5.6 Calculation base 244 380 197 351 Profit after taxes 207 783 197 590 65.3 % 65.1 % Equity capital certificate percentage 65.3 % 65.1 % 159 471 128 493 Earnings allocated to holders of equity capital certificates 135 589 128 649 23 015 23 015 Average number of outstanding equity certificates 23 015 23 015
Calculation of the equity capital certificate percentage 2018 2017 Equity capital certificate capital 230 149 230 149 Own equity capital certificates (187) (358) Share premium 987 313 987 313 Equalization reserves 389 294 372 735 A = Capital, equity capital certificate holders 1 606 569 1 589 839
The Savings Bank's Fund 820 224 811 510 Gift Fund (ex. provisions for customer dividends) 35 182 40 464 B = Primary capital 855 406 851 974
A / (A + B) = The equity capital certificate percentage 65.3 % 65.1 %
As of 12/31/2018, the number of outstanding equity capital certificates was 23 014 902. For 2018 the amount includes a treasury holding of 18 684 own equity capital certificates, whereas the corresponding number for 2017 was 35 818.
Profits were allocated according to the share of equity certificate capital. The same principle has been applied to the calculation of earnings per equity capital certificate.
.
Sandnes Sparebank annual report 2018 115 Notes
EQUITY CERTIFICATE CAPITAL AND EQUITY CAPITAL CERTIFICATE HOLDERS
Equity capital certificate capital 31.12.2018 31.12.2017 Equity capital certificate capital, book value 230 149 230 149 Own equity capital certificates -187 -358 Number of equity capital certificates 23 015 23 015 Premium, book value 987 313 987 313 Equalization reserves 389 294 372 735
20 biggest holders of equity capital certificates as of 12/31/2018 Number of equity capital certificates % of total Sparebank 1 SR-Bank C/O SR-Investering 3 485 009 15.14 Merrill Lynch 2 270 083 9.86 AS Clipper 1 088 738 4.73 VPF EIKA Egenkapital C/O Eika Kapitalforvaltning 931 971 4.05 Espedal & Co AS 886 861 3.85 Wenaasgruppen AS 650 000 2.82 Salt Value AS 515 000 2.24 Holmen Spesialfond 500 000 2.17 Skagenkaien Investering AS 350 000 1.52 Nordhaug Invest AS 309 957 1.35 Meteva AS 261 881 1.14 Kristian Falnes AS 260 000 1.13 Grunnfjellet AS 217 000 0.94 Velde Holding AS 204 353 0.89 MP Pensjon PK 196 726 0.85 Innovemus AS V/Oskar Bakkevig 185 000 0.80 Hausta Investor AS 165 000 0.72 Barque 159 651 0.69 Tirna Holding AS 156 255 0.68 Parra Eiendom AS 150 000 0.65 20 biggest owners 12 943 485 56.24 Other owners 10 071 417 43.76 Total equity capital certificates 23 014 902 100.00
The equity capital for Sandnes Sparebank, as stipulated by the by-laws, is NOK 230,149,020, divided on 23,014,902 equity capital certificates, each with a face value of NOK 10.
As of 12/31/2018, there were 2,312 equity capital certificate holders. At this point in time, the 20 biggest owners controlled 56.24% of the equity certificate capital.
As of 12/31/2018, the total number of equity capital certificates of 23,014,902, includes a treasury holding of 16,684 equity capital certificates. These were purchased as part of an incentive program for bank employees.
Sandnes Sparebank annual report 2018 116 Notes
ALTERNATIVE PERFORMANCE MEASUREMENTS
The alternative performance measurements (APM) of Sandnes Sparebank are key ratios intended to provide useful additional information to the financial statements. These key ratios are either adjusted key ratios or key ratios not defined in IFRS or other legislation, and are not necessarily directly comparable with the corresponding key ratios of other companies. The APM metrics are not substitutes for accounting data prepared according to IFRS, and should not be given any more emphasis than the accounting data. They are, however, included in the financial reporting of the Bank in order to provide a fuller description of the Bank's performance. The Bank is exclusively using key ratios that are in demand by investors and analysts.
The APM metrics of Sandnes Sparebank are used in the summary of main numbers, in the Report of the Board of Directors, in the presentation of the financial statements and in prospectuses. All APM metrics are shown with corresponding numbers for previous periods for comparison.
DEFINITIONS OF APMS;
Deposit to loan ratio CB deposits from customers / CB net lending to customers
Liquidity indicator (LCR) Liquid assets / Net liquidity disposals within 30 days in a stress scenario
Net Stable Funding Ratio (NSFR) Available stable funding / necessary stable funding
Interest margin / Net interest income ((Net interest income / days in period) x days in year) / average total assets
Interest margin / net interest income incl. Guarantee Fund fee ((Net interest income incl. normal share of guarantee fund fee / days in period) x days in year) / average total assets
Cost to income ratio Total operating cost / (net interest income + total other operating income)
Total cost in % of avg. total assets ((Total operating cost) x days in period) x days in year) / average total assets
Return on equity before taxes (Profits before taxes / days in period x days in year) / ((total equity CB + total equity OB) / 2, ex. hybrid capital
Return on equity after taxes (Profits after taxes / days in period x days in year) / ((total equity CB + total equity OB) / 2, ex. hybrid capital
Equity capital certificate percentage (Equity certificate capital + treasury equity capital certificates + premium + equalization reserves) / (Equity certificate capital + treasury equity capital certificates + premium + equalization reserves + Savings Bank's Fund + Gift Fund (ex. customer dividends))
Earnings per equity capital certificate (Profits after taxes x equity capital certificate ratio) / number of equity capital certificates
Book equity per equity capital certificate (CB total equity - hybrid capital) x equity capital certificate ratio / number of equity capital certificates
Price/book equity (P/B) Quoted price / book equity per equity capital certificate
Operating earnings before losses and taxes Profits after taxes + tax cost + writedowns and losses on loans and guarantees
Sandnes Sparebank annual report 2018 117 Erklæring i henhold til verdipapirhandellovens § 5-5
Statement pursuant to§ 5-5 of the Norwegian Securities Trading Act
We confirm that the annual financial statements for the period from 1 January to 31 December 2018, to the best of our knowledge, have been prepared in accordance with IFRS, and that the information contained by the financial statements provides a true picture of the company’s and the Group’s assets, liabilities, financial position, and overall profits, and that the information in the Annual Report provides a true summary of develop- ments, results and the position of the company and the Group, together with the key risk and uncertainty factors facing the companies.
Sandnes, March 12, 2019 The Board of Directors of Sandnes Sparebank
Harald Espedal Frode Svaboe Marion Svihus Chairman of the Board Deputy Chairman Director
Heidi Nag Flikka Arne Lee Norheim Birte Norheim Director Director Director
Jan Inge Aarreberg Solveig Vatne Trine Karin Stangeland Employee representative CEO CEO
Sandnes Sparebank annual report 2018 118 Revisors beretning
Sandnes Sparebank annual report 2018 119 Revisors beretning
Sandnes Sparebank annual report 2018 120 Revisors beretning
Sandnes Sparebank annual report 2018 121 Revisors beretning
Sandnes Sparebank annual report 2018 122 Revisors beretning
Sandnes Sparebank annual report 2018 123 Design: Fasett 2019 Photo: Moxey www.sandnes-sparebank.no