Note 1

Accounting principles

1.1 GENERAL INFORMATION
Sparebanken Møre, which is the Parent company of the Group, is a savings bank registered in Norway. The bank’s Equity Certificates (ECs) are listed on the Oslo Stock Exchange.

The Group consists of Sparebanken Møre (the Parent Bank) and its subsidiaries Møre Boligkreditt AS, Møre Eiendomsmegling AS and Sparebankeiendom AS.

The Sparebanken Møre Group provides banking services for retail and corporate customers and real estate brokerage through a large network of branches within Møre og Romsdal, this region being defined as the bank’s geographic home market.

The company’s Head Office is located at Keiser Wilhelmsgt. 29/33, P.O.Box 121 Sentrum, 6001 Ålesund, Norway.

The preliminary annual accounts were approved for publication by the Board of Directors on 23 January 2019. The final annual accounts were presented by the Board of Directors on 20 February 2019.

The Group’s operations are described in note 17.

1.2 ACCOUNTING PRINCIPLES
The Group’s annual accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS), which have been stipulated by the International Accounting Standards Board, and implemented by the EU as at 31 December 2018.  

How to read the Group`s accounting principles:
Sparebanken Møre describes the accounting principles in conjunction with each note. See the table below for an overview the various principles and the notes in which they are described, as well as reference to relevant and important IFRS standards.


Accounting principleNoteIFRS-standard
ImpairmentsNote 6 Losses on loans and guaranteesIFRS 9, IFRS 7
Financial guarantees and uncertain liabilitiesNote 8 LiabilitiesIFRS 9, IAS 37
Financial derivativesNote 10.3 Financial derivativesIFRS 9, IFRS 7, IFRS 13
HedgingNote 12 Debt securitiesIFRS 9, IFRS 7
Classification of financial instrumentsNote 13 Classification of financial instrumentsIFRS 9, IFRS 7
Amortised costNote 14 Financial instruments at amortised costIFRS 9, IFRS 7
Fair valueNote 15 Financial instruments at fair valueIFRS 9, IFRS 13, IFRS 7
Operating segmentsNote 17 Operating segmentsIFRS 8
Revenue recognitionNote 18 Other operating incomeIFRS 15, IFRS 9
LeasesNote 20 LeasesIAS 17
PensionsNote 22 Pension costs and liabilitiesIAS 19
Fixed assetsNote 23 Fixed assetsIAS 16, IAS 36
Intangible assetsNote 24 Other intangible assetsIAS 38, IAS 36
TaxNote 26 TaxIAS 12
EquityNote 29 ECs and ownership structureIAS 1
Events after the reporting periodNote 30 Events after the reporting periodIAS 10
   
   

Consolidation principles
The consolidated financial statements comprise Sparebanken Møre and all companies in which Sparebanken Møre has control through ownership. An entity is controlled when the owner is exposed to or has rights to returns from the entity and has the opportunity to influence these returns through its influence over the entity. This applies to subsidiaries mentioned in note 16.   

Companies which are bought or sold during the year are included in the Group accounts from the time at which control is obtained and until control ceases.

The Group accounts are prepared as if the Group is one financial unit.

All transactions between companies in the Group, have been eliminated in the consolidated financial statements. Uniform accounting principles have been applied for all companies in the Group. In the Parent Bank’s accounts, investments in subsidiaries are valued at cost. The acquisition method is applied when recognising acquired units/entities. The acquisition cost relating to an acquisition is assessed as the fair value of the items involved, such as assets, equity instruments issued and liabilities taken over. Identifiable assets bought, liabilities taken over and debt obligations are assessed at fair value at the time of the acquisition. Any acquisition cost in excess of fair value of the Group’s equity stake of identifiable net assets is, according to IFRS 3, incorporated as goodwill. Transaction costs related to acquisitions are recognised in the income statement as incurred.   

Temporary acquired shares in connection with securing commitments are not consolidated, but are treated as equity investment valued at fair value.

Changes in accounting principles and presentation (classifications)
There are no material changes in accounting policies for 2018.    

New or amended standards
The Group has  implemented  one new  standard in 2018, IFRS 9 Financial instruments, replacing IAS 39 from 1 January 2018. See following notes for additional information:    

  • Changes in equity: implementation effect on equity by transition to IFRS 9
  • Note 6 Losses on loans and guarantees: information and specifications related to the effect of the implementation on expected credit losses
  • Note 13 Classification of financial instruments: the effect on classification and assessment

  • Note 10.3 Financial derivatives: changed principles for hedge accounting


The implementation of IFRS 9 had no impact on primary capital of the Group or the Parent Bank, as expected losses according to the capital adequacy requirements already exceeded losses according to IFRS 9. Sparebanken Møre therefore had no need to apply the transitional rule.

In addition, IFRS 15 was implemented in 2018, but this standard has not resulted in changes in the Group’s recognition of income.

Future standards
Standards and interpretations which are issued up to the date of issuance of the consolidated financial statements, but not yet effective, are disclosed below. The Group’s intention is to adopt the relevant new and amended standards and interpretations when they become effective, provided that the EU approves the changes prior to issuing the consolidated financial statements.

The following new standard with future effective date will not have  significant relevance for the Sparebanken Møre Group:

• IFRS 16 Leases

This standard replaces existing standard, IAS 17 Leases. IFRS 16 sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract, ie the customer (“lessee”) and the supplier (“lessor”). The new leases standard requires lessees to recognise assets and liabilities for most leases, which is a significant change from current requirements. Accounting requirements for lessor is unchanged. The new standard is effective for fiscal years beginning 1 January 2019 or later. Early adoption is permitted. Sparebanken Møre has not used the possibility of early adoption.  The new standard will affect the Group's  accounting for lease of property This will affect the Group’s balance sheet by the implementation on 1 January 2019, by recognizing assets related to rights of use with NOK 90 million and corresponding liabilities related to lease obligations are recognised at NOK 90 million. For the Parent Bank, the corresponding figures will be NOK 202 million. The implementation will not have any impact on the Group’s equity. Annual depreciation and interest cost according to IFRS 16 will not materially deviate from the current rental cost in accordance with IAS 17.

Annual improvements
Minor changes have been made in a number of standards during IASB`s annual improvement projects. None of these changes are considered to have significant impact on the financial position or performance of the Sparebanken Møre Group.

1.3 FOREIGN EXCHANGE
The Group presents its accounts in Norwegian kroner (NOK). The functional currency for the Parent Bank and its subsidiaries is NOK. All monetary items in foreign currencies have been recalculated into the bank’s functional currency (NOK) according to foreign exchange rates provided by Norges Bank as at 31.12.2018.

Current income and costs have been translated into NOK at the foreign exchange rates ruling at the time of the transactions, and the effects of changes in foreign exchange rates have been included in the income statement on an ongoing basis during the accounting period.

1.4 JUDGMENTS IN APPLYING ACCOUNTING PRINCIPLES
Financial assets and liabilities are allocated to the different categories in IFRS 9, which subsequently determine the measurement in the statement of financial position. The bank has clear procedures for the categorisation, and the process normally requires only limited use of judgment.

1.5 USE OF ESTIMATES AND JUDGMENT IN THE PREPARATION OF THE ANNUAL FINANCIAL STATEMENTS
Preparation of the annual accounts in accordance with certain IFRS accounting standards means that in certain cases management has to use best estimates and assumptions. The assessments are based on historical experience and assumptions deemed to be reasonable and sensible by management. The estimates and assumptions on which the abovementioned preparation is based, affect the reported amounts of assets, liabilities and off-balance sheet items, as well as income and costs in the submitted annual accounts. There is a risk that actual results may later, to a certain extent, deviate from the estimates and assumptions on which the abovementioned preparation is based.

Certain accounting principles are regarded as particularly important in order to illustrate the Group’s financial position, due to the fact that management is required to make difficult or subjective assessments, applying estimates which mainly relate to matters which are initially uncertain.

The executive management team makes assessments when choosing and applying accounting policies. The company's financial assets and liabilities are allocated to different categories in accordance with IFRS 9. Little discretionary judgment is normally exercised in this context. Please refer to note 13 for the measurement policies.

In the opinion of the management, the most important areas which involve critical estimates and assumptions are as follows:

Impairment on loans and guarantees   
Measurement of ECL (Expected Credit Loss) according to IFRS 9 requires an assessment when it comes to significant increase in credit risk and determining the level of impairment, particularly with regard to estimates of amounts and timing of future cash flows and colleteral. These estimates are driven by a number of  factors, where changes can result in different levels of provisions.

Sparebanken Møre has developed an ECL-model based on IRB parameters in the Group.. ECL-calculations are output from complex models with several underlying  prerequisites related to the choice  of variable inputs and the dependency ratio.

Elements of  the ECL-model containing assessments and estimates include:

  • The internal credit model, which specifies PDs (PD = Probability of Default)

  • The crieria assessing whether there’s been a significant increase in credit risk, so that lifetime ECL (ECL = Expected Credit Loss) is calculated

  • The development of the ECL-model, including variours formulas and choice of inputs

  • Choice of connection between macroeconomic scenarios and economic inputs, such as unemployment level and value of collateral, and the effect on PD, EAD (Exposure at Default) and LGD (Loss Given Default)

  • Choice of future-oriented macroeconomic scenarios and weighting of probability


Fair value of financial instruments – including derivatives

For financial instruments which are not traded in active markets, various evaluation methods are applied in order to ascertain fair value. Further information and a description of the techniques used may be found in note 15. Reference is also made to notes 9-14, dealing with financial instruments.

Pension liabilities
The present value of pension liabilities depends on several factors that are determined using a number of actuarial assumptions. Any change in these assumptions would affect the amount of the pension liabilities shown in the balance sheet. The rate of interest to be applied when discounting is decided at the end of the year. This is the rate of interest which is applied in order to calculate the present value of future necessary payments to cover the pension liabilities. The discount rate is based on the Norwegian market for covered bonds, and swap rates in the interbank market for the extrapolation of the curvature over 10 years, enabling us to arrive at an approximately similar maturity as that which applies to the pension liability. Other basic assumptions for the pension liabilities are partly based on actual market conditions. Mortality and death trend assumptions are based on standardized assumptions and other demographic factors. Please refer to note 22 for additional information.       

 

Note 2

Risk management

Strategy
Sparebanken Møre’s long-term strategic development and target achievement are supported by high quality risk- and capital management. The overall purpose of risk management and -control is to ensure that goals are achieved, to ensure effective operations and the handling of risks which can prevent the achievement of business related goals, to ensure internal and external reporting of high quality, and to make sure that the Group operates in accordance with relevant laws, rules, regulations and internal guidelines. Risk-taking is a fundamental aspect of banking operations, which is why risk management is a central area in the day-to-day operations and in the Board of Directors’ ongoing focus.

Sparebanken Møre’s Board of Directors has agreed overall guidelines for management and control throughout the Group. The Group shall have a low to moderate risk profile and revenue generation shall be a product of customer-related activities, not financial risk taking. In addition, the bank has introduced separate policies for each significant risk area: credit risk, counterpart risk, market risk, funding risk and operational risk. The risk strategies are agreed by the Board of Directors and revised at least once a year, or when special circumstances should warrant it. The Group has established a follow-up and control structure, which shall ensure that the overall framework of the strategic plan is adhered to at all times.

Corporate culture, organisation and responsibility
The risk management process is based on the bank’s and Group’s corporate culture. This includes management philosophy, management style and the people in the organisation. Staff’s integrity, value basis and ethical attitudes represent fundamental elements in a well-functioning corporate culture. Well-developed control and management measures cannot compensate for poor corporate culture. Against this background, Sparebanken Møre has established clear ethical guidelines and a clear value basis, which have been made well known throughout the organisation.

Sparebanken Møre attaches a great deal of importance to independence in the risk management. The responsibility for, and execution of risk management and control is therefore shared between the Board of Directors, management and operative units.

The Board of Directors of Sparebanken Møre bears the overall responsibility for ensuring the bank and the Group having adequate primary capital based on the desired levels of risk and the Group's activities, and for ensuring that Sparebanken Møre is adequately capitalized based on regulatory requirements. The Board shall also ensure that risk management and internal control is adequate and systematic, and that this is established in compliance with laws and regulations, articles of association, instructions, and external and internal guidelines. The Board also sets out the principles and guidelines for risk management and internal control for the various levels of activity, and regularly revises and adopts, at least once a year, various strategies and guidelines for risk management.

The Audit and Risk Committee is elected by and amongst the members of the Board of Directors. The committee is a sub-committee of the Board. Its purpose is to carry out more thorough assessments of designated areas and report the results to the Board. The Audit and Risk Committee shall ensure that the institution has independent and effective external and internal auditors, and satisfactory financial statement reporting and risk management routines, which comply with all pertinent laws and regulations.

The CEO is responsible for ensuring the establishment of appropriate risk management and internal control on the basis of assessments, agreed principles and guidelines introduced by the Board. The CEO is responsible for ensuring that good control environments are established in all levels of the bank and shall continuously monitor changes to the bank's risks and ensure that these are properly addressed in accordance with the Board's guidelines. The CEO shall ensure that the bank's risk management and internal control is documented according to current laws, rules, regulations and statutes, and shall, at least once a year, prepare an overall assessment of the risk situation, which shall be presented to the Board for their consideration.

The Risk Management Department is responsible for preparing and designing systems, guidelines and procedures for identifying, measuring, reporting and following up the bank’s most important inherent risks. The department is responsible for ensuring that the total risk exposure of Sparebanken Møre, including results of conducted stress tests, is reported to the CEO and the Board of Directors. Further, the department bears primary responsibility for the IRB process in the Group. It is also a key setter of conditions and adviser in the strategy process concerning risk assessments, risk tolerance and operationalisation of the bank's overall goals with regard to risks. The department also has responsibility for supervising the annual ICAAP work. The department forms part of the Risk management and Compliance, reporting directly to the CEO.

Pursuant to the requirements in the Financial Undertakings Act, Sparebanken Møre has an own compliance function. Each year, the Board of Directors of Sparebanken Møre approves compliance instructions, and an annual work- and action plan is prepared for the function. The department is responsible for coordinating annual internal control confirmations from the operational managers. The head of Compliance reports to Sparebanken Møre's CEO, but is organizationally subordinate to the EVP of the Risk management and Compliance Division.

Finance and Accounting is responsible for the Group's total financial management/reporting and accounting, and is part of the unit Finance and Facilities Management.

Sparebanken Møre`s operative managers of important business areas shall actively involve themselves in the process surrounding the assessment of whether or not the established risk management and internal control is being conducted as assumed. It is assumed that all managers at every level of the organisation are monitoring the approved control measures within their area of responsibility.

Sparebanken Møre`s Credit Committee deals with larger commitments and matters of a special nature, and shall provide an independent proposal to the person holding the power of attorney. The Credit Committee attaches special importance to the identification of risk in connection with each credit application, and makes its own assessment regarding credit risk. In addition, consideration is made whether commitments are in accordance with the Group’s credit risk strategy, credit policy, credit-granting rules and regulations, and credit handling routines.

The internal auditing is a monitoring function which, independent of the rest of the bank’s administration, deals with systematic risk assessments, control and examination of the Group’s internal control in order to ascertain whether it works according to its purpose and in a reassuring manner. The bank`s Board approves the resources and annual plans of the internal auditing. The internal auditor should also discuss the plan and scope of the audit work with the Audit and Risk Committee. The internal audit in Sparebanken Møre is outsourced to EY.

Reporting
Sparebanken Møre focuses on correct, complete and timely reporting of the risk and capital situation. Based on this, a number of different types of periodic reporting have been established, which are intended for the Group's management and Board, as well as reporting intended for the individual segments and departments, including customer account managers. The most important reports during the year are as follows:

ICAAP is carried out and reported at least once a year. The Board actively participates in the review and establishes ownership of the process, including through ICAAP's key role in the long-term strategic planning. Specific guidelines have been prepared for ICAAP in Sparebanken Møre. ICAAP is reviewed by the bank's management team, the Audit and Risk Committee and the Board of Directors.

A balanced scorecard report (BMS) is prepared every month. This illustrates the status and performance of the most important factors for Sparebanken Møre's target attainment. The report is being submitted to bank managers and the bank`s management team, and it is an integral part of the financial reporting to the Board of Directors.

A risk report is prepared every month. This is a key element of Sparebanken Møre's continuous monitoring of its risk situation. At the end of the quarter the risk report will also be expanded with supplementary comments from various disciplines within the Group. The report is dealt with by the bank`s management team, Audit and Risk Committee and Board of Directors.

Internal control reports are prepared annually. In this, an assessment is made of whether or not the internal control is adequate in relation to the risk tolerance. This includes an assessment of and comments on their own work on internal control, a review of all important risk areas, an assessment of their own compliance with external and internal regulations, and suggestions for and planned improvement measures. The internal control reports are dealt with by the bank`s management team, Audit and Risk Committee and the Board of Directors.

Compliance reports are prepared regularly and contain elements linked to an assessment of compliance risk and control, testing of compliance and the results of these tests, reassessments and plans for implementing guidelines, the follow-up of observations from external and internal auditors, the follow-up of observations from the FSA, deviation management in internal control, etc. The compliance reports are dealt with by the bank`s management team, Audit and Risk Committee and the Board of Directors.

Reports from external and internal auditors are dealt with by the bank`s management team, the Audit and Risk Committee and the Board of Directors. Both internal and external auditors have regular meetings with the Audit and Risk Committee.

Reports on mortgages are prepared quarterly for the bank`s Board of Directors.

A reporting portal has been established in Sparebanken Møre, in which each member of staff with customer responsibility has access to reports which show the position and development of credit risk in his or her portfolio. The portal has a hierarchical structure, allowing managers in Sparebanken Møre to monitor performance within their area of responsibility. The reports are also used to analyse customers, portfolios and different industries. The portal provides customer account managers with an overview of the customers' positions and limits in relation to exposure to financial instruments.

Finance and accounting reports are prepared monthly, and include monthly calculations of impairments. The reports are dealt with by the bank`s management team, Audit and Risk Committee and the Board of Directors.

Capital structure
Sparebanken Møre’s equity and related capital is composed with regard to several considerations. The most important considerations are the Group’s size, Møre og Romsdal’s internationally orientated industry and commerce, and a stable market for long-term funding whenever external funding is required. Furthermore, the Group’s long-term strategic plan is a significant provider of conditions with regard to which capital structure Sparebanken Møre should adopt.

Assessments of risk profile, capital requirements and profitability are always based on the Group's long-term strategic plan. The Group's capital requirements are calculated, at least, in the annual ICAAP. The Group's total capital shall comply with the Group`s accepted risk tolerance. The ICAAP clarifies all the alternatives the Group can implement if the Group's capital adequacy is subject to stress. The alternatives are listed in a prioritized order, with description of measures, and indication of planned implementation if necessary.

Sparebanken Møre's aim is to achieve financial results which provide a good and stable return on equity. The results shall ensure that all equity owners receive a competitive long-term return in the form of dividends and capital appreciation on the equity. The equity owners' share of the annual profits set aside as dividend funds, shall be adjusted to the equity situation. Sparebanken Møre's allocation of earnings shall ensure that all equity owners are guaranteed equal treatment.

Capital adequacy rules and regulations
The capital adequacy regulations aim to strengthen the stability in the financial system through more risk-sensitive capital requirements, better risk management and control, more stringent supervision and more information provided for the market.

The capital adequacy directive is based on three pillars:

• Pillar I – Minimum requirement for equity and related capital

• Pillar II – Assessment of aggregate capital requirements and regulatory follow-up (ICAAP)

• Pillar III – Publication of information

Sparebanken Møre`s capital adequacy is calculated according to the IRB Foundation Approach for credit risk. Calculations related to market risk are based on the Standard Approach and operational risk on the Basis Approach. Sparebanken Møre’s Board of Directors insists that the Group must be well capitalised, both during economic downturns and periods of strong economic expansion. Capital assessments (ICAAP) are conducted every year, and the Group’s capital strategy is based on the risk in the Group’s operations, different stress scenarios having been taken into consideration.

Reference is made to note 28 concerning "Capital adequacy" for further descriptions, as well as comments related to changes in the regulations.

Risk exposure and strategic risk management
Sparebanken Møre is exposed to several different types of risk. The most important risk groups are:  

• Credit risk: This is the Group’s biggest area of risk. Credit risk is defined as the risk of loss due to customers or other counterparties being unable to meet their obligations at the agreed time, and in accordance with written agreements, and due to the collateral security held not covering the outstanding claims. Counterparty risk and concentration risk are also included in this area of risk.

• Market risk: The risk of loss involving market values relating to portfolios of financial instruments as a result of fluctuations in share prices, foreign exchange rates and interest rates.

• Funding risk: The risk of the Group being unable to meet its obligations and/or fund increases in assets without incurring significant extra costs in the form of fall in prices of assets which have to be sold, or in the form of particularly expensive funding. The level of the institution`s capital is a key condition to attract necessary funding at any time.

Operational risk: The risk of loss due to insufficient or failing internal processes and systems, or due to human error or external events.

Sparebanken Møre tries to take account of the interaction between the various risk areas when setting desired levels of exposure. Overall it is the internal conditions, general conditions, customer base, etc. within the Group which form the basis for setting the desired overall risk exposure.

Based on an evaluation of the risk profile, management and control, Sparebanken Møre has set the following overall levels of risk exposure for the various risk areas:

  • Credit risk: A moderate to significant level of risk is accepted

  • Market risk: A low level of risk is accepted

  • Funding risk: A moderate level of risk is accepted

  • Operational risk: A low level of risk is accepted

The Group’s risk is quantified partly through calculations of expected loss and the requirement for capital in order to be able to cover unexpected losses. Expected losses and financial capital are calculated for all main groups of risks, and for different business areas within the Group. Expected loss describes the amount which in statistical context the bank must expect to lose during a 12-month period. Financial capital describes the amount of capital the Group deems to be required in order to cover the actual risk which has been incurred by the Group. Statistical methods for the computation of financial capital have been used as a basis. Please also refer to note 28 regarding capital adequacy for further comments concerning financial capital.

Credit risk
Credit risk represents Sparebanken Møre’s biggest risk area. Included in this risk area are counterparty risk and concentration risk. The Group is exposed to this type of risk through its lending products for the retail market and corporate customers, and through the activities of Sparebanken Møre's Treasury and Markets Division.

The credit risk strategy is revised and agreed each year by the Board of Directors. The strategy focuses on risk sensitive limits, which have been designed in such a way that they manage the Group’s risk profile within the credit area in the most appropriate and effective manner. Furthermore, limits, guidelines, and power of attorney-related rules and regulations have been established, which underpin and support Sparebanken Møre’s credit risk strategy and long-term strategic plan.

The core values of Sparebanken Møre are “Dedicated, Close and Solid”. These values are to be reflected in all contact with the market, create added value for the customers and help create a positive view of Sparebanken Møre. The credit policy is intended to promote a credit culture in which creditworthiness is viewed in a long-term perspective, where general and industry economic fluctuations are taken into account. Sparebanken Møre shall conduct itself in accordance with high ethical standards, and shall not be associated with activities, customers or industries of dubious repute. The Group is open to all types of customers within defined market areas, and discrimination based on the customer`s age, gender, nationality, religion or marital status shall not occur.

Sparebanken Møre's geographic core region is the county of Møre og Romsdal. However, it is allowed to financially support investments/businesses outside its core region when, from an ownership perspective, they are linked to individuals or companies in/from Møre og Romsdal. Commitments outside the Group's market area will also be considered as part of the deliberate diversification of the portfolio in terms of segment and geographical exposure. In such cases the Group's strategy sets clear limits for the maximum risk level for an individual commitment.

The Department for Risk Management has established monthly portfolio management reports which ensure that any discrepancies from the strategic targets incorporated in the credit risk strategy are identified. Officers responsible for the concepts relating to corporate and retail banking respectively, have independent responsibility for the ongoing monitoring of the position, in order to identify discrepancies in relation to the same strategic targets, and in order to implement measures in the case of any discrepancies having occurred.

The Board of Directors is responsible for the Group’s granting of loans and credits. Within certain limits, power of attorney is delegated to the bank’s CEO for the operational responsibility with regard to decisions in credit matters. Within his powers of attorney, the CEO may delegate powers of attorney to other officers in the bank. The grant authorisations are personal and graded after criteria like the size of grant, the limit of the commitment (corporate customers), the customers total debt (retail customers), and class of risk. Further, the power of attorney is related to the employee`s job level.

Sparebanken Møre actively uses internal reports in order to monitor the level and development of the Group’s credit portfolio. Each member of staff with customer responsibility has access to reports which show the position and development in the credit risk in his or her portfolio. The reports are prepared on a hierarchical basis, enabling the bank’s management to monitor the development within their own area of responsibility. The reports are also used to analyse customers, portfolios and different sectors.

The Group has prepared separate risk models for the corporate and retail markets, which are used in monthly measuring and reporting of credit risk. The Group has also developed application score models for the two customer segments, which are being used in the credit granting process.

There are mainly three central parameters within credit risk for which models are applied:

1. Probability of default (PD): PD is calculated per customer and states the probability of the customer defaulting on his or her outstanding commitment during the next 12 months. A separate PD is calculated for each customer, based on statistical models using variables of both external and bank-internal information, in the form of both financial key figures and non-financial criteria.

2. Degree of loss in the case of default (LGD): LGD indicates how big a part of the commitment is expected to be lost in the case of default. The assessments take into consideration the values of the collateral provided by the customer, and the costs which would be incurred in the case of the recovery/collection of commitments in default.

3. Expected exposure in the case of default (EAD): EAD indicates the level of exposure which is expected in connection with a commitment if and when it goes into default.

The abovementioned parameters form the basis for calculation of expected loss (EL), and are included in the computation of financial capital. By classifying customers according to probability of default, and by estimating the level of loss and the requirement for financial capital at customer level, the Group obtains information about the level and development of the aggregate credit risk in the total portfolio. In-house migration analyses show the development of the number of customers and EAD between different risk classes during different periods.

Treasury risk
Treasury risk is part of Sparebanken Møre's total credit risk. Board adopted limits for the Group's credit exposure in this area have been defined.

Credit exposure is linked to bonds and certificates in the Group's liquidity portfolio, short-term lending to other banks, including accounts held in foreign banks, and exposure in connection with financial derivatives which are signed to neutralise already present interest and currency risk which the bank has assumed. The portfolio consists of reputable domestic and foreign relationships. Credit quality is considered to be high, mainly due to investments in issuers with high ratings and low capital weight.

Sparebanken Møre's policy is that, especially in relation to placements in international banks and other debtors outside Norway, the Group shall use assessments carried out by the major official ratings agencies. The credit risk shall be at a minimum, but even highly rated issuers/papers can be exposed to risk. If a counterparty's status is changed to a negative outlook or their rating falls, Sparebanken Møre carries out a new internal assessment of existing lines of credit. If necessary the line of credit, and any exposure, is reduced or eliminated.

Treasury risk is also viewed in connection with the funding indicators LCR and NSFR. The LCR regulations entail a movement towards lower risk weighted counterparties, including state and state guaranteed papers and covered bonds.

The pre-classification process emphasises considering banks with which Sparebanken Møre has a mutual (reciprocity) and long business relationship. It is also necessary to have sufficient competition in products and instruments that are traded, as well as diversification in market and geography for Sparebanken Møre.

If changes occur in general conditions, the market, economic trends or Sparebanken Møre's activities which have a material effect on the Group's risk positions, limits must be assessed and possibly set for investment opportunities. This involves, for example, not investing in some countries, groups of countries, individual counterparties, counterparties with certain attributes, etc.

Sparebanken Møre and Møre Boligkreditt AS require the signing of CSA (Credit Support Annex) agreements before trading of derivatives against any counterparties. CSA agreements are part of an ISDA agreement and help to regulate the counterparty risk associated with changes in market conditions. This provides Sparebanken Møre with collateral for any given exposure. The agreements with counterparties define when the collateral shall be transferred between the parties. Sparebanken Møre practices cash collateral in relation to its counterparties. The market value of all derivatives signed between Sparebanken Møre and the counterparty is settled according to the different CSA-agreements and the counterparty risk will then largely be eliminated. EMIR - European Market Infrastructure Regulation –will ensure regulation and control of the market for derivatives traded outside regulated markets by requiring reporting of transactions to transaction records, and requirements for settlement (clearing) through central counterparties (CCPs).

Market risk
Sparebanken Møre’s market risk is managed through defined position limits for each risk area. Management of market risk is set out in Sparebanken Møre’s market risk strategy. The strategy is adopted by the Board of Directors, and provides the overall guidelines for the Group’s activities in the capital market, including the framework for Sparebanken Møre’s total exposures within currency, interest rate and shares.

The Group’s market risk can be divided into the following areas:

• Interest rate risk: Consists of market risk associated with positions in interest-bearing financial instruments, including derivatives with underlying interest instruments. Interest rate risk related to the liquidity portfolio, as well as hedging transactions related to it, are considered separately and will have its own set of risk parameters. See note 10.1 for the Group's interest rate risk.

• Equity risk: Consists of market risk on positions in equity instruments, including derivatives with underlying equity instruments. Shares in subsidiaries are not included. Sparebanken Møre has no trading portfolios. The financial risk of Sparebanken Møre is considered to be low. See note 13 for the equity risk of the Group.

• Currency risk: Consists of the risk of losses when exchange rates change. All financial instruments and other positions with currency risk are included in the assessment. Currency risk on the banking book, that is, foreign exchange risk arising as a result of hedging customer trading, including lending/deposit business, is considered separately and has its own set of risk parameters.

Sparebanken Møre`s exposure to currency risk is a result of mismatch between the underlying business and hedging transactions, as well as the necessary reserves of the Group's bank accounts in foreign banks. Changes in exchange prices in the market cause changes in the value of Sparebanken Møre`s currency position. The currency position also includes Sparebanken Møre`s cash holdings of notes denominated in foreign currencies. Sparebanken Møre has no trading portfolio of FX contracts. Sparebanken Møre`s currency risk is low and well within the limits specified in the regulations. See note 10.2 for the Group's currency risk.

• Spread risk: Defined as the risk of changes in market value of bonds and commitments as a result of general changes in credit spreads.

• Total market risk: The overall risk assessment is obtained by comparing the assessments of areas of interest rates, equities and foreign exchange. The FSA`s methodology in this area form the basis for assessing the overall market risk. Assessments are based on three risk factors:

• Exposure

• Risk spreading

• Market liquidity

Any diversification effects between asset classes are not taken into account.

Based on the recommendation from the CEO's Balance Board Committee, the Board of Directors annually approves a total limit for the market risk of Sparebanken Møre. The framework is adapted to the Group's activity level and risk tolerance. If required, the overall framework may be changed more frequently than the annual review.

Total limit for market risk is defined as the maximum loss on a stress scenario where the FSA`s methodology is applied. The approved overall market risk limit is delegated to the CEO, while the EVP of Treasury and Markets has administrative authority for the overall market risk limit. The EVP is responsible for administration of the limits within the various sub-portfolios being in compliance at all times.

Treasury and Markets has an independent responsibility for ongoing monitoring of positions within the various portfolios and daily follow up, or with the frequency required in relation to the level of activity. The Risk Management department has the primary responsibility for monitoring, reporting and control of the market risk area. Back Office is responsible for transaction control and processing of payment transactions.

SimCorp Dimension (SCD) is the principal risk management system in Sparebanken Møre within the market risk area. The system provides current status of market development. All financial instruments are recorded in the system and monitored continuously. The Risk Management department is responsible for good quality in valuation of financial instruments.

The Risk Management department monitors the compliance of the risk management framework and strategy continuously. If activities exceed limits or strategy, written reporting instructions are specified.

Reporting of the market activity is part of Sparebanken Møre`s periodic "Risk Report" to management, Audit and Risk Committee and Board of Directors. Monthly earnings performance reports are prepared, as well as actual risk exposure within each portfolio, both individually and in aggregate. The reports are compared to maximum activity frame and overall market risk limit (stress frame). The Board is also given a quarterly record of any violation of the framework, the strategy or laws and regulations.

There is no performance-based compensation to any person working in the market risk area beyond what is included in Sparebanken Møre`s general bonus scheme which deals with, and is equal to, all employees of the Group.

Funding risk
Liquidity may be defined as the Group’s ability to fund increases in assets and to meet its obligations as funding requirements occur. Sparebanken Møre is liquid when it is able to repay its debt as it falls due.

Management of the Group’s funding risk is based on the overall financing strategy, which is evaluated and approved by the Board of Directors at least once a year. The strategy reflects the moderate risk level accepted for this risk area.

The Group's funding risk requires special monitoring. This is due to the Group's special position as a manager of deposits for small and non-professional participants, as well as the central role the Group plays in payment systems. The banks’ duty to accept deposits from a non-specific base of depositors and the fact that these deposits are normally available on the same day, means that they face considerably greater risk than other financial institutions. The authorities' loan schemes and safety net for banks are based on these precise factors. The costs of reducing funding risk must be viewed in the context of the advantages lower funding risk provides. One fundamental prerequisite for maintaining the trust of depositors and other lenders is that the institutions always have sufficient liquidity to cover current liabilities.

LCR measures institutions' ability to survive a 30-day stress period. LCR increases the importance of high quality liquid assets. NSFR measures the longevity of an institution's funding. NSFR entails institutions having to fund illiquid assets with the aid of a greater proportion of stable and long-term funding. In this context, deposits are not regarded as an equally stable source of funding, which means that the quality of the deposits will increase in importance. This also means that financial institutions must, to a greater degree, fund themselves through bond issues with a higher maturity.

The Group also regularly reports on the trends for liquidity indicators to the supervisory authorities in line with the disclosure requirements.

The Group's long-term strategic plan, "Møre 2022", sets out a liquidity strategy protecting the structure and volume of the LCR requirement. The Authority's requirements amounts to 100 per cent.

At year-end 2018, the LCR indicator for the Group was 158 per cent and NSFR 108 per cent. In the composition of the external funding, priority is given to having a relatively high share of maturities above one year.

The funding section of Sparebanken Møre is organised within the Treasury and Markets Division. The division controls the funding on a day-to-day basis, and has the responsibility to meet the funding requirements in Sparebanken Møre, including utilization of the mortgage company Møre Boligkreditt AS. 

Liquidity control management is maintained by both the Treasury and Markets Division and by the Risk Management department. In this respect there is a distinction between the overall and the daily operational cash management and control. The daily operational management responsibility is handled by the Treasury and Markets Division, while the overall risk management, including strategies and framework controls, are handled by the Risk Management department.

Upon the occurrence of abnormal situations regarding liquidity, either in the market or within Sparebanken Møre, the bank's emergency task group comes together. The group consists of the following persons:

• CEO (leader)

• EVP Treasury and Markets

• EVP Information and Administration

• EVP Finance and Facilities Management

• EVP Risk Management and Compliance

• Head of Risk Management

• EVP Corporate Banking Divison

• EVP Retail Banking Division

• Managing director of Møre Boligkreditt AS

• Head of Treasury

The Board receives monthly reports on the liquidity situation. This report includes several key figures. In addition, early warning signals are reported by viewing the development of financial strength, balance sheet- and income statement-development, losses/defaults and the development of cost of funds.

The funding risk is attempted reduced by spreading funding on different markets, sources, instruments and maturities. In order to ensure the Group's funding risk is kept at a low level, lending to customers must primarily be financed by customer deposits and long-term securities issued. There is a major focus on efforts to increase ordinary deposits in all customer-related activities throughout the bank. The deposit to loan ratio in Sparebanken Møre was 57 per cent at year-end.

The Board shall be informed of the bank’s liquidity situation on a monthly basis, and immediately of any important events which may affect the bank’s current or future liquidity situation. The reporting tries to identify the funding situation during normal operations, identify any “early warning” signs and assess the bank’s stress capacity.

Møre Boligkreditt AS has a license from the FSA to operate as a mortgage company, and it provides the Group with increased diversification of its funding sources. The Parent Bank has throughout the year transferred parts of the mortgage portfolio to the mortgage company.

Operational risk
Operational risk includes all the potential sources of losses related to Sparebanken Møre's current operations. The Group has classified various types of operational risk into the following main categories:

• Internal fraud

• External fraud

• Employment conditions and safety at work

• Customers, products and business conduct

• Damage to assets

• Interruptions to operations and/or systems

• Settlements, delivery or other transaction processing

The Board of Directors of Sparebanken Møre has decided that a low risk profile is accepted related to operational risk. An overall strategy for this risk area is established, and there are several documents which support the Group’s risk management. These documents include the ICT-area, contingency plans for personnel and property, security handbooks, authorisation structures, ethical guidelines and insurance strategies.

For the Compliance Department, board adopted instructions, work plans and action plans have been established.

Operational responsibility for managing and controlling operational risk, and thus also the quality of Sparebanken Møre's operations, is borne by each manager involved. This responsibility follows from job descriptions and various guidelines and routines. All managers annually confirm to the CEO the quality of and compliance with internal controls within the risk areas stipulated in this document. They also suggest areas for improvement which are incorporated into special action plans. The CEO presents the report to the Audit and Risk Committee and the Board of Directors. The annual ICAAP also involves a review of the Group's material risk areas, including operational risk.

The Group’s established internal control routines are an important tool for reducing operational risk with regard to both identification and follow-up.

Internal Control
Internal control must be designed in order to provide reasonable certainty with regard to the achievement of goals and targets within the areas of strategic development, targeted and effective operations, reliable reporting and adherence to relevant laws, rules and regulations, including compliance with Group-internal guidelines and policies. Furthermore, a well-functioning internal control shall ensure that the bank’s risk exposure is kept within the agreed risk profile. 

The internal control in Sparebanken Møre is organised in a decentralized manner with Risk Management and Compliance as the coordinating unit and responsible for the annual reporting to the Audit and Risk Committee and the Board of Directors. The Compliance department monitors how the Group operationalises relevant laws, rules and regulations in operational context, and how the Group’s staff adhere to relevant rules and regulations, laws, licenses, agreements, standards for different industrial and commercial sectors, internal instructions etc. in the day-today operations. The Risk Management department is responsible for developing systems, guidelines and procedures in order to identify, measure, report and follow up on the Group’s most important inherent risks.

Reports on the Group’s operations and risk situations throughout the year are submitted to the Audit and Risk Committee and the Board of Directors on an ongoing basis. The bank’s CEO annually submits an overall assessment to the Board regarding the risk situation and whether the established internal control features function in a satisfactory manner. This report is based on confirmations received from managers at different levels throughout  Sparebanken Møre.

Sparebanken Møre’s Internal Auditor reports on a regularly basis to the Audit and Risk Committee and the Board of Directors on the Group’s internal control.

Discretionary Asset Management
The Group provides portfolio management for investment clients. The portfolio management is performed on behalf of clients, and related assets belong to the clients and not the Group. 

Financial derivatives
Sparebanken Møre utilizes financial derivatives in order to handle risk incurred as a result of the bank’s ordinary operations. In the case of customer transactions, these shall as a main principle immediately be covered by an opposite transaction in the market.

The following derivatives are in use in Sparebanken Møre:

• Forward exchange contracts
An agreement to buy or sell a certain amount in a foreign currency, against a certain amount in another currency, at a rate agreed in advance, with payment at a certain time later than two working days after the agreement was entered into.

• Swaps
A transaction in which two parties agree to swap cash flows for an agreed amount over a certain period of time. In an interest rate swap, only the interest involved is swapped. In the case of an interest rate and currency swap, both the interest rate and currency conditions are swapped.

• FRAs
A legally binding agreement concerning a rate of interest which shall apply for a future period for a defined principal amount. Upon settlement, only the difference between the agreed interest rate and the actual market interest rate is exchanged.

• Options
A right, but not an obligation, to buy (a call option) or sell (a put option) a certain product at a rate agreed in advance (strike price). When entering into an option contract, the person or company buying a call or put option will have to pay a premium to the person or company writing the option. Options can be offered on the basis of a financial instrument.

The risk relating to these financial instruments involves the credit risk of covering counterparts which are given prior credit clearance by the Board of Directors as well as operational risk.

These instruments are primarily utilized to provide the bank's customers with reliable cash flows and a desired risk position in the various markets. Limits for financial instruments involving customers are established by the staff responsible for the customers in question. The limits shall fix a maximum amount for the bank’s exposure against each individual customer in relation to the customer’s business volume in financial instruments and the market-related development in these. Each member of staff responsible for the customer in question, is responsible for the establishment of the limit and must make sure that such a limit has been subject to the necessary formal credit-handling procedures, and that a sufficient level of collateral and/or other security has been established to cover the limit. Furthermore, the member of staff responsible for the customer in question, together with the dealer involved, are both responsible for making sure that the credit risk as a result of the customer’s exposure to financial instruments is at all times within the limits which have been agreed. For all customers trading in financial instruments, a set-off agreement must be obtained. The purpose of this agreement is to reduce the bank’s credit exposure to the customer by having all contracts netted so that the bank ends up with just a net exposure towards the customer. It is the member of staff responsible for the customer in question who is responsible for establishing a set-off agreement with the customer, making sure that all customers using this type of financial instrument are made aware of the bank’s usual business terms and conditions.

The Department for Risk Management is responsible for follow-up and for all internal reporting and reporting to the relevant authorities relating to the bank’s exposure to different counterparts as a result of trading in financial instruments.  

 

Note 3

Credit risk

Credit risk is the Group’s most significant area of risk and is defined as the risk of loss relating to customers or other counterparties being unable to meet their obligations at the agreed time and in accordance with written agreements, and when the collateral held does not cover the outstanding claim. The Group is exposed to this type of risk through its lending products for the retail market and corporate customers, and through the activities of the Group's Treasury & Markets Division. Note 2, concerning Risk Management, specifies the strategies for the credit risk in the Group, as well as processes for management and control of this area of risk. A central feature in this connection is the calculation of the probability of default for each individual customer and portfolio.

Credit risk also includes remaining risk and concentration risk. Remaining risk is the risk that the collateral of a commitment is less effective than expected. Concentration risk is risk associated with large commitments with the same customer, concentration within geographic areas, with similar industries or similar groups of customers.

Concentration risk is managed in relation to the relevant targets for sector-based percentages, the largest individual commitments and the aggregate target for large commitments. Periodic stress tests are carried out in order to assess the loss potential in the credit portfolio due to large, but not implausible, negative changes in operating conditions. Management and measurement of credit risk is further described in the report Risk and Capital Management (Pillar 3). Reference is also made to note 28 where credit risk for the Group is quantified through risk-adjusted capital. As described in note 2, the probabilities of default (PD) for the commitments contained in Sparebanken Møre’s credit portfolio are calculated. PD is calculated per customer and indicates the probability of a customer defaulting on his or her commitment within the next 12 months and is modeled to be in line with the Capital Requirements Directive’s specifications for fundamental IRB. Calculated expected loss (PD x LGD x EAD) is used as basis when assessing customer profitability and is taken into consideration when fixing interest rate terms and conditions.

Loans and receivables
All loans and receivables are valued in the balance sheet at fair value at first assessment, with the addition of directly attributable transaction costs for instruments which are not assessed at fair value with value changes recognised in the income statement. Fair value when first assessed is normally the same as the transaction price. When determining the loan’s value at the time of transaction (transaction price), establishment fees are deducted and subject to accrual accounting over the lifetime of the loan as part of the loan’s effective interest rate. Loans are subsequently assessed at amortised cost by applying the effective interest rate method. The effective rate of interest is the rate at the signing time which exactly discounts estimated, future cash flows over the loan’s expected lifetime, down to the net value of the loan as shown in the balance sheet. By conducting this calculation, all cash flows are estimated, and all contract-related terms and conditions relating to the loan are taken into consideration.

The classification of loans and receivables at amortised cost assumes that the following requirements are met:

  • The asset is acquired to receive contractual cash flows
  • The contractual cash flows consist solely of principal and interest
Based on the bank’s risk assessments, in risk context, the commitments may be put into the following groups (the figures are based on nominal principal amount): 
Commitments according to risk classification based on probability of default - GROUP 2018Gross loansGuaranteesCredit facilitiesDerivativesTotalTotal EAD
Low risk (0 % - < 0.5 %)49 8585404 15557155 12554 493
Medium risk (0.5 % - <3 %)9 1753911 0152510 60610 289
High risk (3 % - <100 %)1 38235939452 1402 059
Commitments in default/problem loans17422358410387
Total loans before impairments60 5891 5135 56960968 28167 229
- Impairments-243-9500-338-338
Net loans to and receivables from customers 31.12.201860 3461 4185 56960967 94366 891
       
       
Commitments according to risk classification based on probability of default - GROUP 2017Gross loansGuaranteesCredit facilitiesDerivativesTotalTotal EAD
Low risk (0 % - < 0.5 %)47 9886954 10342053 20652 592
Medium risk (0.5 % - <3 %)8 0397826971449 6639 382
High risk (3 % - <100 %)96311111511 1901 193
Commitments in default/problem loans161181170359355
Total loans before individual and collective impairments57 1511 7694 93256564 41863 521
- Impairments-284-5200-336-336
Net loans to and receivables from customers 31.12.201756 8671 7174 93256564 08263 185
       
       
Commitments according to risk classification based on probability of default - PARENT BANK 2018Gross loansGuaranteesCredit facilitiesDerivativesTotalTotal EAD
Low risk (0 % - < 0.5 %)27 8515402 94457131 46231 175
Medium risk (0.5 % - <3 %)8 0473911 011259 4749 157
High risk (3 % - <100 %)1 22035939451 9771 897
Commitments in default/problem loans16722358403380
Total loans before impairments37 2841 5134 35460943 76042 609
- Impairments-225-9500-320-320
Net loans to and receivables from customers 31.12.201837 0591 4184 35460942 99642 289
       
       
Commitments according to risk classification based on probability of default - PARENT BANK 2017Gross loansGuaranteesCredit facilitiesDerivativesTotalTotal EAD
Low risk (0 % - < 0.5 %)28 0106952 90542032 03031 311
Medium risk (0.5 % - <3 %)7 0957826961448 7178 436
High risk (3 % - <100 %)84811111511 0751 077
Commitments in default/problem loans161181170359355
Total loans before individual and collective impairments36 1141 7693 73356542 18141 178
- Impairments-282-5200-334-334
Net loans to and receivables from customers 31.12.201735 8321 7173 73356541 84740 844

Collateral and other risk reducing measures
In addition to the assessment of debt servicing level, the Group accepts different kinds of collateral in order to reduce risk depending upon the market and type of transaction involved.

The main principle for value assessment of collateral is based on the realisation value of the asset in question, and what that value is deemed to be when the Bank needs the security. With the exception of commitments against which impairment has been made, the value of the collateral is calculated on the assumption of a going concern. When assessing the value of collateral, estimated sales costs are taken into consideration.

In the calculations of individual impairment on loans, the bank's valuation of the security objects is considered. Additional information is presented in note 6.

The main types of collateral used are: mortgage on property (residential and commercial), guarantees, surety, registered moveable property (chattels), charge on goods (stocks), operating equipment and licenses or set-off agreements. Guarantees represent a minor part of the bank’s risk exposure; guarantors relating to private persons (consumer guarantees), companies (professional), guarantee institutes and banks are accepted.

Collateral and other security is updated at least once every year or, in the case of the retail customers, when a new credit proposal is dealt with. In the case of corporate customers, the security involved is updated either when a new credit proposal is dealt with or when certain commitments are followed up. Value assessment is part of the credit decision.

When calculating capital requirement for credit risk, the bank does not apply set-off relating to exposure on, or off, the balance sheet.

Sparebanken Møre requires establishment of a CSA agreement before entering into derivatives trading with any interbank counterparty. This provides Sparebanken Møre with security for a given exposure. The agreement with the counterparty defines when the collateral is to be transferred between the parties. Sparebanken Møre practices cash collateral with their counterparties. The market value of all derivatives entered into between Sparebanken Møre and its counterparties are settled according to the actual CSA-agreement. Derivatives are presented gross in the balance sheet, either as asset or debt, depending on positive or negative value of the derivative, and net only when counterparty is the same and agreement with counterparty entitles set-off.          

In addition to an assessment of debt servicing level and future realisation value of collateral, the financial commitment terms (covenants) are included in most credit agreements for large corporate customers. These conditions are a supplement to reduce risks and to ensure proper monitoring and control of Commitments.  

The table below shows the percentage distribution of commitments with different levels of security. For example, the line 0 % - 60 % implies that the commitments are less than 60 % of the security object. Above 100 % implies that the loan amount exceeds the value of the security object. The bank's guidelines for valuation of collateral objects are utilized. This means that the security objects have been carefully considered in relation to the market value. The figures in the table are at group level.
       
Level of security - 2018Retail customers in MNOKRetail customers as percentage of totalCorporate in MNOKCorporate as percentage of totalTotal in MNOKTotal in percentage
0 % - 60 %18 13941.808 71050.7226 84944.33
60 % - 70 %7 32716.881 2197.108 54614.11
70 % - 80 %8 89520.501 4848.6410 37917.14
80 % - 90 %3 7718.691 3037.595 0748.38
90 % - 100 %1 7384.001 82010.603 5575.87
Above 100 %3 2087.392 40814.025 6169.27
Not secured3170.732291.335460.90
Total43 395100.0017 171100.0060 566100.00
       
       
Level of security - 2017Retail customers in MNOKRetail customers as percentage of totalCorporate in MNOKCorporate as percentage of totalTotal in MNOKTotal in percentage
0 % - 60 %17 42842.356 91443.3924 34242.64
60 % - 70 %7 29917.731 4178.898 71615.27
70 % - 80 %7 82419.011 4829.309 30616.30
80 % - 90 %3 4748.441 3198.284 7938.40
90 % - 100 %1 8394.471 0906.842 9295.13
Above 100 %2 9497.173 52922.156 47811.35
Not secured3430.831831.155260.92
Total41 156100.0015 934100.0057 091100.00
Collateralisation is a variable that indicates the level of over-collateralisation in relation to the volume of outstanding covered bonds.
   
Cover pool related to covered bonds issued by Møre Boligkreditt AS20182017
Pool of eligible loans22 97620 814
Supplementary assets1 30085
Financial derivatives applied in hedge accounting(debt)-23-4
Financial derivatives applied in hedge accounting(assets)625439
Total collateralised assets 1)24 87821 334
Collateralisation in %111.1113.3
1) NOK 433 million of total gross loans are not eligible for the cover pool as at 31 December 2018 (NOK 348 million in 2017).
 

Note 4

Commitments broken down according to sectors

In the financial statements, the loan portfolio with agreed floating interest rate is measured at amortised cost, while the loan portfolio with fixed-interest rate is measured at fair value. Deposits are measured at amortised cost.
     
LOANS TO CUSTOMERSGroupParent Bank
Broken down according to sectors2018201720182017
Agriculture and forestry542464536461
Fisheries3 2062 4023 1972 397
Manufacturing2 3692 0302 3642 024
Building and construction698562658536
Wholesale and retail trade, hotels676620653614
Supply/offshore1 0058821 005882
Property management6 7336 6726 5766 584
Professional/financial services1 2721 2611 2381 230
Transport and private/public services1 8672 1521 7282 064
Public entities0000
Activities abroad248123248123
Total corporate/public entities18 61617 16818 20316 915
Retail customers41 91739 81719 02919 058
Fair value adjustment of loans56665266
Accrued interest-100-75
Total loans to customers60 58957 15137 28436 114
Expected credit loss (ECL) - Stage 1-25 -22 
Expected credit loss (ECL) - Stage 2-60 -46 
Expected credit loss (ECL) - Stage 3-111 -110 
Individual impairment-47-48-47-48
Collective impairment--236--234
Total net loans to and receivables from customers60 34656 86737 05935 832
- of which loans with floating interest rate (amortised cost)56 53552 94429 75231 909
- of which loans with fixed interest rate (fair value)3 8113 9237 3073 923
     
     
DEPOSITS FROM CUSTOMERSGroupParent Bank
Broken down according to sectors2018201720182017
Agriculture and forestry181186181186
Fisheries9951 2149951 214
Manufacturing1 5591 8061 5591 806
Building and construction661636661636
Wholesale and retail trade, hotels813842813842
Property management1 5761 3091 5881 316
Transport and private/public services5 0434 2015 0544 211
Public entities780723780723
Activities abroad5555
Miscellaneous2 1772 1792 1772 179
Total corporate/public entities13 79013 10113 81313 118
Retail customers20 62419 68820 62419 688
Fair value adjustment of deposits0202
Accrued interest-12-12
Total deposits from customers34 41432 80334 43732 820
 

Note 5

Commitments broken down into geographical areas

 Møre og RomsdalRemaining parts of NorwayForeign countriesTotal
GROUP20182017201820172018201720182017
Gross loans49 85147 53610 4109 44632816960 58957 151
In percentage82.383.217.216.50.50.3100.0100.0
Deposits27 25426 2856 6816 10847941034 41432 803
In percentage79.290.119.48.61.41.3100.0100.0
         
PARENT BANK20182017201820172018201720182017
Gross loans32 00431 2074 9904 75829014937 28436 114
In percentage85.886.413.413.20.80.4100.0100.0
Deposits27 27726 3026 6816 10847941034 43732 820
In percentage79.280.119.418.61.41.3100.0100.0
 

Note 6

Losses on loans and guarantees

Implementation effect of IFRS 9 as of 1 January 2018
IFRS 9 came into force on 1 January 2018, replacing the then current standard IAS 39. The impairment rules according to IFRS 9 are based on a model of expected credit losses (ECL). IFRS 9 applies to financial assets measured at amortised cost or at fair value with value changes recognised through other comprehensive income (OCI). In addition, also financial guarantee contracts are included. Losses shall be allocated to all commitments from day one.

The following table shows the effect of the implementation of IFRS 9. The table shows a reconciliation of the total impairments according to IAS 39 against the ECL-provision under IFRS 9:  

GROUPLoss impairments under IAS 39 at 31 December 2017RemeasurementECLs under IFRS 9 at 1 January 2018
    
Impairments on loans and receivables per IAS 39/financial assets at amortised cost under IFRS 9-3361-335
 -3361-335
    
The calculation of expected credit loss for the Group Sparebanken Møre as of 1 January 2018 resulted in reduced impairments of MNOK 1.
    
PARENT BANKLoss impairments under IAS 39 at 31 December 2017RemeasurementECLs under IFRS 9 at 1 January 2018
    
Impairments on loans and receivables per IAS 39/financial assets at amortised cost under IFRS 9-33422-312
Change in fair value of loans prepared for sale0-9-9
 -33413-321
    
The calculation of expected credit loss for the Parent Banke Sparebanken Møre as of 1 January 2018 resulted in reduced impairments of MNOK 22.
    
In addition, the value of the loans prepared for sale to Møre Boligkreditt AS, which are measured at fair value, was reduced by MNOK 9 as of 1 January 2018.

Methodology for measuring expected credit loss (ECL) according to IFRS 9
Sparebanken Møre has developed an ECL-model based on the IRB-parameters in the Group, dividing the commitments into three stages when calculating expected credit loss (ECL) on loans to customers and financial guarantees in accordance with IFRS 9: 

Stage 1: At initial recognition and if there’s no significant increase in credit risk, the commitment is classified in stage 1 with 12-months ECL.

Stage 2: If a significant increase in credit risk since initial recognition is identified, but without objective evidence of loss, the commitment is transferred to stage 2 with lifetime ECL measurement.

Stage 3: If the credit risk increases further and there’s objective evidence of loss, PD = 100 % and/or individual impairments have been made, the commitment is transferred to stage 3 with lifetime ECL measurement. As opposed to stage 1 and 2, the effective interest rate in stage 3 is calculated on net impaired commitments (total commitments less expected credit losses) instead of gross commitments. 

An increase in credit risk, reflects both customer-specific circumstances and development in relevant macro factors for the particular customer segment. The assessment of what is considered to be a significant increase in credit risk is based on a combination of quantitative and qualitative indicators, as well as “backstops” (see separate section regarding “backstops”).

The calculation of expected credit losses is based on the following principles:  

  • The loss provision for commitments which are not credit-impaired is calculated as the present value of exposure at default (EAD) multiplied by the probability of default (PD) multiplied by loss given default (LGD). PD, LGD and EAD use the IRB framework as a starting point, but are converted into being point-in-time and forward-looking as opposed to through the cycle and conservative.

     

  • Past, present and forward-looking information is used to estimate ECL. For this purpose, Sparebanken Møre’s loan portfolio is divided into 7 segments (retail portfolio and 6 industry spesific corporate portfolios). All customers within a segment are exposed to the same risk drivers

     

  • For credit-impaired financial instruments in stage 3, individual assessments are performed.


The model used for calculating ECL follows four steps: Segmentation, determination of macro adjustments, staging/migration and calculation of ECL.

Segmentation and macro adjustments
The assessment of significant increase in credit risk and the calculation of ECL incorporates past, present and forward-looking information.  Segmentation of the portfolio is based on the customers’ fields of operation, and each segment is subject to separate macro adjustments. 

Theory of cyclical cycles has been used to model macro factors to estimate lifetime ECL in the model. A trend curve is prerequisite to show long-term GDP growth. Based on an assessment by the Chief Economist and the corporate unit managers in SBM, key indicators have been selected for the retail market and the various corporate sectors. Indicators issued by Statistics Norway (SSB) have been used to a large extent. Volatility in the indicators is taken into account when calculating the macro-factors. Standard deviations are calculated for each indicator, which entails that high/low volatility indicators will cause a higher/lower impact on the macro factor.

Important indicators for macro adjustment can be:
- Unemployment 
- Interest rate development 
- Debt burden 
- Housing price development

Calculation of expected credit loss
The determination of a significant increase in credit risk and the measurement of ECL are based on parameters already used in credit risk management and for capital adequacy calculations: PD, LGD and EAD. The parameters have been adjusted in order to give an unbiased estimate of ECL.

Probability of default (PD)
Sparebanken Møre applies several different models to determine a customer’s PD. The choice of model depends on whether it is a retail or corporate customer. PD models are key components both in calculating the ECL and in assessing whether a significant increase in credit risk has occurred since initial recognition. These models fulfil the IFRS 9 requirement to provide an unbiased probability-weighted estimate of ECL. Sparebanken Møre has been granted permission to use internal ratings based approach (IRB) models for determining PD in capital adequacy calculations. In order to apply these PDs for IFRS 9, modifications have been made to allow that the PDs used for IFRS 9 reflect management’s current view of expected cyclical changes and that all PD estimates are unbiased.

Loss given default (LGD)
LGD represents the percentage of EAD which the Group expects to lose if the customer fails to meet his obligations, taking the collateral provided by the customer, future cash flows and other relevant factors into consideration. 

Similar to PDs, Sparebanken Møre uses IRB LGDs for capital adequacy calculations. In order to convert the IRB LGDs to IFRS LGDs, modifications have been made to remove the margin of conservatism to produce unbiased projections rather than downturn projections as well as removing the effect of regulatory floors. 

These modifications imply that the LGDs used for IFRS 9 should reflect management’s current view and that all LGD estimates are unbiased.

Exposure at default (EAD)
EAD is the share of the approved credit that is expected to be drawn at the time of any future default. The EAD is adjusted to reflect contractual payments of principal and interest. The proportion of undrawn commitments expected to have been drawn at the time of default is reflected in the credit conversion factor.  

Significant increase in credit risk
The assessment of a significant increase in credit risk is based on a combination of quantitative and qualitative indicators and backstops. A significant increase in credit risk has occurred when one or more of the criteria below are met.

Quantitative criteria
A significant increase in credit risk is determined by comparing the PD at the reporting date with the PD at initial recognition. If the actual PD is higher than initial PD, an assessment is made of whether the increase is significant.

Significant increase in credit risk since initial recognition is considered to have occurred when either

  • PD has increased by 100 % or more and the increase in PD is more than 0.5 percentage points, or
  •  PD has increased by more than 2.0 percentage points  

Qualitative criteria
Qualitative information is normally reflected in the respective PD models for each group of customers.

«Backstops»

Backstops are used and a significant increase in credit risk has occurred if:

  • the customer’s contractual payments are 30 days past due
  • the customer has been granted forbearance measures due to financial distress, though it is not severe enough for the financial instrument to be classified as credit-impaired.  

Definition of default, forbearance and individual impairment
A commitment is defined to be in default if a claim is more than 90 days overdue and the overdue amount exceeds NOK 1 000.


A commitment is defined to be subject to forbearance if the bank agrees to changes in the terms and conditions because the debtor is having problems meeting payment obligations.


A commitment is defined to be credit-impaired if the commitment, as a result of a weakening of the debtor's creditworthiness, has been subject to an individual assessment, resulting in an individual impairment. The principles and estimation techniques for credit-impaired financial instruments are not affected by IFRS 9.

Expert credit judgement
The new rules require significant professional judgement of the input parameters in the ECL-measurement. The assessment of the macro prognoses and their impact are key judgements and Sparebanken Møre has established an advisory forum to address this. The forum’s purpose is to assess if the predicted macro prognoses for each segment reflect the management’s view on the expected future economic development.  

Validation
The ECL model is subject to annual validation and review.    

Individual impairment
Individual impairment for losses is made when there are indications that a loan is impaired. An impairment is reversed when the loss is reduced and when it can be related to an event which has occurred after the time of impairment. All commitments which are regarded as significant, and a selection of other loans, are assessed individually in order to determine whethe there are indications of credit deterioration

A financial asset is impaired when one or more events that have a negative impact on the financial asset's estimated future cash flows have taken place. Indications that a financial asset is impaired include observable data on the following events:  


a) the debtor having significant financial problems,  
b) breaches of contract, for example default or overdue payments,  

A financial asset is considered as defaulted if the borrower does not pay overdue installments, or overdrafts are not covered, maximum within 90 days  


c) When the borrower's lender, for financial or contractual reasons related to the borrower's financial difficulties, has given the borrower concessions that the lender would otherwise not have considered,
d) when it becomes likely that the borrower will go bankrupt or be subjected to another form of financial reorganization,  
e) when an active market for the financial asset disappears due to financial difficulties, or  
f) purchase or creation of a financial asset with a significant discount that reflects accrued credit losses.

It may not be possible to identify a single separate event - instead, the overall impact of several events may have been the cause of financial assets deteriorating.

Provisions for guarantee liabilities are made if the liability is likely to be settled and the liability can be estimated in a reliable manner. Best estimate is applied when determining the amount of the provisions to be made. Claims for recourse related to guarantees where provisions have been made are capitalized as an asset maximum equal to provisions made.


In case of individual impairment the impairment amount is calculated as the difference between the carrying amount (principal + accrued interest at the valuation date) and the present value of future cash flows, discounted at the effective interest method over the commitments` expected lifetime. 

The discounting rate for loans with floating interest rates is equal to the effective rate of interest at the time of assessment. For loans with fixed interest rates, the discounting rate is equal to the original, effective interest rate. For commitments which have altered interest rates as a result of debtors’ financial problems, the effective rate of interest ruling before the commitment’s interest rate was altered is applied. When estimating future cash flows, a possible takeover and sale of related collateral is taken into consideration, also including costs relating to the takeover and sale.

Impairment of commitments is recognised in the income statement as losses on loans. Interest calculated on loans which have previously been impaired, is recognised as interest income. Reversal of impairment is recognised in the income statement as a correction of losses. Estimates of future cash flows from a loan should also consider the acquisition and sale of related collateral. When evaluating security coverage there should be a qualified assessment of the collateral`s nature and market value, taking into account the costs of the acquisition and sale. Realisation values for different collateral in a realizable situation are determined by the use of best judgment. Timing for liquidation of loans with impairment is based on judgment and experiences from other liquidation engagements and bankruptcies. When all collateralised assets have been realised and when there is definitely no likelihood of the bank receiving any more payments relating to the outstanding commitment, the loss is confirmed. The claim against the customer will still exist and continued being followed up, unless the bank has agreed to debt forgiveness for the customer.

Write-off
Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the Group determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the write-off. This assessment is carried out at the individual asset level. Recoveries of amounts previously written off are included in “Impairment on loans, guarantees etc.” in the Statement of income. Financial assets that are written off could still be subject to enforcement activities in order to comply with the Group’s procedures for recovery of amounts due. 

 

 

Losses on loans and guarantees  
GROUP PARENT BANK
20172018Specification of losses on loans, guarantees etc.20182017
-45-Changes in collective impairment during the period (IAS 39)--42
-1Changes in ECL during the period - Stage 11-
-16Changes in ECL during the period - Stage 214-
--12Changes in ECL during the period - Stage 3-6-
52Increase in existing individual impairments25
6530New individual impairments3065
2511Confirmed losses, previously impaired1125
-49-33Reversal of previous individual impairments-33-49
188Confirmed losses, not previously impaired818
-6-7Recoveries-7-6
1316Total impairment on loans and guarantees2016
Changes in ECL in the period    
GROUPStage 1Stage 2Stage 3Total
Total impairments at 31.12.2017 according to IAS 39   336
Effect of transition to IFRS 9   -1
ECL 01.01.2018 according to IFRS 92546264335
New commitments916126
Disposal of commitments-6-12-13-30
Changes in ECL in the period for commitments which have not migrated-2-3138
Migration to stage 13-18-8-23
Migration to stage 2-232-1119
Migration to stage 30-165
Changes in individual impairments  -1-1
ECL 31.12.20182661251338
- of which expected losses on loans2560158243
- of which expected losses on guarantees119395
     
PARENT BANKStage 1Stage 2Stage 3Total
Total impairments at 31.12.2017 according to IAS 39   334
Effect of transition to IFRS 9   -22
ECL 01.01.2018 according to IFRS 92232258312
New commitments813223
Disposal of commitments-6-11-10-27
Changes in ECL in the period for commitments which have not migrated-101312
Migration to stage 12-12-8-18
Migration to stage 2-226-915
Migration to stage 30-154
Changes in individual impairments  -1-1
ECL 31.12.20182347250320
- of which expected losses on loans2560158225
- of which expected losses on guarantees119395
Changes in commitments (exposure) during the period    
GROUPStage 1Stage 2Stage 3Total
Commitments at 01.01.2018 acc. to IFRS 951 5912 3833 16757 141
New commitments15 5336862716 246
Disposal of commitments-9 299-441-645-10 385
Changes in ECL in the peroid for commitments which have not migrated-2 101-53-88-2 242
Migration to stage 11 791-1 107-739-55
Migration to stage 2-2 2602 527-493-226
Migration to stage 3-21-1433-2
Other changes-31-8-11-50
Commitments at 31.12.2018*55 2033 9731 25160 427
     
     
PARENT BANKStage 1Stage 2Stage 3Total
Commitments at 01.01.2018 acc. to IFRS 927 1601 6913 01331 864
New commitments9 303497329 832
Disposal of commitments-6 814-394-631-7 839
Changes in ECL in the peroid for commitments which have not migrated-1 170-39-88-1 297
Migration to stage 11 431-823-645-37
Migration to stage 2-1 9022 150-459-211
Migration to stage 3-10-1120-1
Other changes-23-2 -25
Commitments at 31.12.2018*27 9753 0691 24232 286
*) The tables above are based on exposure at the reporting date, not including fixed rate loans assessed at fair value. The figures are thus not reconcilable against balances in the statement of financial position.
Commitments (exposure) divided into risk groups based on probability of default
GROUPStage 1Stage 2Stage 3Total 31.12.2018
Low risk (0 % - < 0.5 %)48 342833049 175
Medium risk (0.5 % - < 3 %)6 3452 5336819 559
High risk (3 % - <100 %)5166071881 311
Problem loans  382382
Total commitments before ECL55 2033 9731 25160 427
- ECL-26-61-251-338
Net commitments *)55 1773 9121 00060 089
     
     
PARENT BANKStage 1Stage 2Stage 3Total 31.12.2018
Low risk (0 % - < 0.5 %)21 975549022 524
Medium risk (0.5 % - < 3 %)5 5692 0246818 274
High risk (3 % - <100 %)4314961791 106
Problem loans  382382
Total commitments before ECL27 9753 0691 24232 286
- ECL-23-47-250-320
Net commitments *)27 9523 02299231 966
*) The tables above is based on exposure at the reporting date, not including fixed rate loans assessed at fair value. The figures are thus not reconcilable against balances in the statement of financial position.
 

Note 7

Defaulted and doubtful commitments

The accounting policies on commitments in default and estimated losses are disclosed in note 6. The table Commitments in default shows the total of a customer's outstanding commitments broken down into the number of days past due caused by lack of ability or willingness to pay.  If a customer has one commitment that is overdue, then all the other commitments with this customer are regarded as overdue. Defaulted loans and overdrafts are continuously supervised. Impairment is assessed for commitments where a probable deterioration of customer solvency is identified. 

The table Problem loans consists of total commitments in default above 3 months and other commitments subject to individual impairment without being in default.      

Age analysis of commitments in default (total of a customer's outstanding commitments) 
Overdue commitments20182017
GROUPTotalRetailCorporateTotalRetailCorporate
0-1 months4053634252446559
1-3 months81206139318
3-6 months22101212102
6-12 months3527818180
Above 12 months1918132266
Gross loans in default56243812462555075
Thereof commitments with impairment26111523149
Thereof commitments without impairment53642710960253666
       
PARENT BANKTotalRetailCorporateTotalRetailCorporate
0-1 months2772354236230458
1-3 months76156134268
3-6 months22101212102
6-12 months3527818180
Above 12 months1918132266
Gross loans in default42930512445838474
Thereof commitments with impairment26111523149
Thereof commitments without impairment40329410943537065
       
Problem loans      
(total of commitments in default above 3 months and commitments subject to individual impairment without being in default)
 20182017
GROUPTotalRetailCorporateTotalRetailCorporate
Commitments in default above 3 months76552162539
Other bad and doubtful commitments subject to impairment306172892748266
Gross problem loans3827231033661275
Commitments in default above 3 months1192422
Other bad and doubtful commitments subject to impairment8808896492
Total individual impairment99990100694
Commitments in default above 3 months65461958517
Other bad and doubtful commitments subject to impairment218172011784174
Net problem loans2836322023655181
       
Gross problem loans as a percentage of total loans0.620.171.540.570.151.46
Net problem loans as a percentage of total loans0.460.151.090.400.140.96
       
PARENT BANKTotalRetailCorporateTotalRetailCorporate
Commitments in default above 3 months76552162539
Other bad and doubtful commitments subject to impairment306172892748266
Gross problem loans3827231033661275
Commitments in default above 3 months1192422
Other bad and doubtful commitments subject to impairment8808896492
Total individual impairment99990100694
Commitments in default above 3 months65461958517
Other bad and doubtful commitments subject to impairment218172011784174
Net problem loans2836322023655181
       
Gross problem loans as a percentage of total loans0.990.401.630.890.321.48
Net problem loans as a percentage of total loans0.740.351.160.620.290.97
Development last 5 years     
GROUP PARENT BANK
20142015201620172018 20182017201620152014
8674656276Gross commitments in default above 3 months7662637286
306170546274306Other bad and doubtful commitments subject to impairment306274546170306
392244611336382Gross problem loans382336609242392
211415411Impairments on commitments in default above 3 months114151421
12265649688Impairments on other bad and doubtful commitments subject to impairment88966465122
143797910099Total individual impairments991007979143
6560505865Net commitments in default above 3 months6558485865
184105482178218Other bad and doubtful commitments subject to impairment218178482105184
249165532236283Net problem loans283236530163249
           
0.800.471.120.570.62Gross problem loans a percentage of total loans0.990.891.740.701.16
0.510.320.980.400.46Net problem loans as a percentage of total loans0.740.621.510.470.74
 

Note 8

Guarantees, drawing rights and collateral

Financial guarantees
The Group issues financial guarantees as part of its ordinary operations. Credit risk is presented in note 3 and also includes financial guarantees and commitments. These guarantees are evaluated for impairment in accordance with the principles applied to loans, and are referred to in note 6.

Uncertain liabilities
These are uncertain liabilities and provisions, not directly related to the lending activities in the Bank. An item of provisioning is shown in the accounts when the Group has a valid (legal or assumed) liability as a result of events which have occurred, and if it can be argued as likely (more likely than not) that a financial settlement will be made as a result of the event involved, and that the amount can be estimated in a reliable manner. Any provisions raised are reviewed on each balance sheet date in question and their value assessed on the basis of the best estimate of the liability involved. In the case of insignificant time discrepancies, the amount of provisioning raised equals the cost of getting out of the liability. When the time discrepancy is significant, the amount of provisioning raised equals the present value of future payments to be made in order to cover the liability. An increase in the amount of provisioning raised as a result of the time involved, is shown as interest costs.

An uncertain liability where a financial settlement is not likely to happen is regarded as a contingent liability. A provision shall not be made for contingent liabilities. Mention has been made of significant contingent liabilities, with the exception of contingent liabilities where the likelihood of any liability being low. A contingent asset is not recognised in the annual accounts, but disclosed if it is likely that a benefit will accrue to the Group.  

GROUP PARENT BANK
20172018 20182017
1 7171 418Guarantee liabilities relating to customers1 4181 717
00Guarantee liabilites towards credit institutions00
00Guarantee provided for the Savings Bank's Guarantee Fund (SBGF)00
1 7171 418Guarantee liabilities as at 31.121 4181 717
4 9325 569Drawing rights facilities for customers4 3543 733
     
20172018Assets pledged as collateral security for loans etc.20182017
1 1051 400Certificates and bonds pledged as collateral for access to loans from Norges Bank1 4001 105
00Utilised under loan facility from Norges Bank00
     
As at 31.12.2018, the Group is not involved in any legal disputes.
 

Note 9

Liquidity risk

The management of Sparebanken Møre’s funding structure is defined in an overall liquidity strategy which is evaluated and agreed by the Board of Directors at least once every year. In this strategy document, the bank’s targets relating to the maintenance of its financial strength are described, and actual limits for the bank’s liquidity management within different areas are defined. Liquidity management also includes stress tests according to which the liquidity effect of different scenarios is simulated by quantifying the probability of refinancing from the various sources of funding involved. Part of the bank’s strategy is to apply diversification to its funding with regard to sources, markets, financial instruments and maturities, the object being to reduce the overall risk.

To ensure the Group's liquidity risk being kept at a low level, lending to customers should primarily be funded by customer deposits and long-term debt securities. Liquidity risk is managed through both short-term limits that restrict net refinancing needs, and a long-term management target.

The Group`s deposit-to-loan ratio, calculated including transferred mortgages to Møre Boligkreditt AS, amounted to 57.0 per cent at the end of 2018, opposed to 57.7 per cent by the end of 2017.

The average residual maturity of the portfolio of senior bonds and covered bonds were respectively 1.9 years and 3.7 years at the end of 2018, compared with 2.4 years and 3.5 years a year earlier.

The bank also has holdings of securities, which are included as part of the ongoing liquidity management. See additional information in note 13 and 15.

The tables below show contractual undiscounted cash flows. The figures can therefore not be reconciled with the figures in the balance sheet.
Liquidity risk 2018      
GROUPUp to 1 month1 to 3 months3 to 12 months1 to 5 yearsAbove 5 yearsTotal
       
Assets      
Cash and claims on Norges Bank8570000857
Loans to and receivables from credit institutions1 28800001 288
Loans to and receivables from customers8 1221931 49512 94446 07368 827
Certificates and bonds284049995 2606197 310
Total assets10 2955972 49418 20446 69278 282
       
Liabilities      
Loans and deposits from credit institutions455005000955
Deposits from customers33 0483391 00039034 426
Debt securities issued10813 39419 4665 07528 026
Subordinated loan capital31324767871 191
Total liabilities33 5164214 71820 0815 86264 598
       
Financial derivatives      
Cash flow in9502927743881 513
Cash flow out12793168702641 541
Total financial derivatives-3-29-24-96124-28
       
       
Liquidity risk 2017      
GROUPUp to 1 month1 to 3 months3 to 12 months1 to 5 yearsAbove 5 yearsTotal
       
Assets      
Cash and claims on Norges Bank6370000637
Loans to and receivables from credit institutions1 29500001 295
Loans to and receivables from customers8 7127893 08614 82842 13269 547
Certificates and bonds3511588244 2148346 381
Total assets10 9959473 91019 04242 96677 860
       
Liabilities      
Loans and deposits from credit institutions69005000569
Deposits from customers31 1413621 31614032 833
Debt securities issued298622 88720 0641 72025 562
Subordinated loan capital3336537305001 622
Total liabilities31 2421 5604 25621 3082 22060 586
       
Financial derivatives      
Cash flow in102379340195647
Cash flow out1539102462129747
Total financial derivatives-5-16-23-12266-100
       
       
       
Liquidity risk 2018      
PARENT BANKUp to 1 month1 to 3 months3 to 12 months1 to 5 yearsAbove 5 yearsTotal
       
Assets      
Cash and claims on Norges Bank8570000857
Loans to and receivables from credit institutions2 33000002 330
Loans to and receivables from customers4 3101921 48712 55526 99645 540
Certificates and bonds281071 6465 2196197 619
Total assets7 5252993 13317 77427 61556 346
       
Liabilities      
Loans and deposits from credit institutions1 1680050001 668
Deposits from customers33 0713391 00039034 449
Debt securities issued0241 4684 06905 561
Subordinated loan capital31324767871 191
Total liabilities34 2423642 7924 68478742 869
       
Financial derivatives      
Cash flow in935196347117704
Cash flow out1044205410123792
Total financial derivatives-1-9-9-63-6-88
       
       
Liquidity risk 2017      
PARENT BANKUp to 1 month1 to 3 months3 to 12 months1 to 5 yearsAbove 5 yearsTotal
       
Assets      
Cash and claims on Norges Bank6370000637
Loans to and receivables from credit institutions2 49700002 497
Loans to and receivables from customers4 8466082 20410 69625 44243 796
Certificates and bonds3511281 2484 1838346 744
Total assets8 3317363 45214 87926 27653 674
       
Liabilities      
Loans and deposits from credit institutions154005000654
Deposits from customers31 1413621 31614032 833
Debt securities issued218126284 79206 253
Subordinated loan capital3336537305001 622
Total liabilities31 3191 5101 9976 03650041 362
       
Financial derivatives      
Cash flow in1081942584
Cash flow out14235323169390
Total financial derivatives-4-15-34-189-64-306
 

10: Market risk

The bank’s Board of Directors stipulates the long-term targets with regard to the bank`s risk profile. These targets are made operational through powers of attorney and limits delegated within the organisation. Sparebanken Møre manages market risk and handles powers of attorney, limits and guidelines relating to financial instruments based on the bank’s strategy documents. The strategy documents are subject to periodical reviews and are revised/adopted once every year by the bank’s Board of Directors. In addition, the documents shall be passed on to, approved and understood by the operative units, the bank’s control functions and administration. In order to ensure the necessary quality and independence, the development of risk management tools and the execution of the risk reporting are organised in a separate unit, independent of the operative units.

Market risk in the Group is measured and monitored based on conservative limits, renewed and approved by the Board at least annually.  

 

10.1: Interest rate risk

Interest rate risk occurs due to the fact that the Group may have different interest rate periods on its assets and liabilities. Sparebanken Møre measures interest rate risk through analyses, showing the impact on the overall result of a 1 percentage point parallel shift in the yield curve. In this way, it is possible to quantify the risk incurred by the bank and the effect it has on the result there being changes in the interest rates in the market. The analysis shows effective maturity for the interest-bearing part of the balance sheet. The longer funds are fixed in the case of a placement, the bigger is the potential loss or gain following an increase or a fall in the interest rates in the market. The Group has a short interest-fixing period overall and the interest rate risk is deemed to be moderate. The table below shows the potential impact on the overall result of changes in value of financial assets and liabilities for the Group by an increase in interest rates of one percentage point. The calculation is based on the current positions and market interest rates at 31 December, and confirms the bank's low risk tolerance for changes in value due to interest rate developments. The potential effect on the profit and loss for the Group over a one-year period of an interest rate change of one percentage point is NOK 64 million. 

GROUP - 2018Up to 1 month1 - 3 months3 - 12 months1 - 5 yearsAbove 5 yearsTotal
NOK895-16-33
Cur140-1-31
Total9135-17-64
       
       
GROUP - 2017Up to 1 month1 - 3 months3 - 12 months1 - 5 yearsAbove 5 yearsTotal
NOK877-9-310
Cur13-1-40-1
Total9106-13-39
       
       
PARENT BANK - 2018Up to 1 month1 - 3 months3 - 12 months1 - 5 yearsAbove 5 yearsTotal
NOK-3154-13-21
Cur240-1-32
Total-1194-14-53
       
       
PARENT BANK - 2017Up to 1 month1 - 3 months3 - 12 months1 - 5 yearsAbove 5 yearsTotal
NOK-3166-7-210
Cur13-1-40-1
Total-2195-11-29
 

10.2: Foreign exchange risk

Sparebanken Møre measures foreign exchange risk on the basis of its net positions in the different currencies involved. It is a main principle that all transactions involving customers shall immediately be hedged by doing opposite transactions in the market so that the bank’s foreign exchange risk is reduced to a minimum level. The bank does not trade on its own account as far as foreign currency instruments are concerned. All balance sheet items in foreign currencies are converted into Norwegian kroner at the middle rate from Norges Bank as at 31 December. For notes and coins, approximate purchase prices are applied. Current income and costs are converted into Norwegian kroner at the prices ruling on transaction date. Net realised and unrealised gains or losses are included in the income statement. Throughout the year, unintentional foreign exchange risk has been at a minimum level.  

GROUP - 2018TotalNOKCurrencyOf which: USDEURJPYCHFOther
Cash and claims on Norges Bank8578561 1   
Loans to and receivables from credit institutions1 2881 17511346118840
Loans to and receivables from customers60 34657 1363 2101 054451241 065616
Certificates and bonds6 7895 988801 469  332
Other assets1 7941 77222121 81
Total assets71 07466 9274 1471 112933321 081989
Loans and deposits from credit institutions955943128   4
Deposits from customers34 41434 152262211337 11
Debt securities issued26 98021 3545 626 5 626   
Other liabilities1 3351 33055    
Subordinated loan capital9969960     
Equity6 3946 3940     
Total liabilities and equity71 07465 1695 9052245 6597015
Forward exchange contracts  1 762-8924 727-24-1 073-976
Net exposure foreign exchange  4-4118-2
Effect of a 10 per cent change in price (MNOK)1       
         
         
GROUP - 2017TotalNOKCurrencyOf which: USDEURJPYCHFOther
Cash and claims on Norges Bank6376352 2   
Loans to and receivables from credit institutions1 2951 253421861215
Loans to and receivables from customers56 86753 8243 043942509231 117452
Certificates and bonds6 0965 386710 415  295
Other assets1 5961 538581334 56
Total assets66 49162 6363 855956968291 134768
Loans and deposits from credit institutions56956276   1
Deposits from customers32 80332 562241202226 11
Debt securities issued24 48821 4443 044 3 044   
Other liabilities1 2151 20785   3
Subordinated loan capital1 3381 3380     
Equity6 0786 0780     
Total liabilities and equity66 49163 1913 3002133 0666015
Forward exchange contracts  -540-7412 102-23-1 129-749
Net exposure foreign exchange  1524054
Effect of a 10 per cent change in price (MNOK)2       
         
         
PARENT BANK - 2018TotalNOKCurrencyOf which: USDEURJPYCHFOther
Cash and claims on Norges Bank8578561 1   
Loans to and receivables from credit institutions2 3302 21711346118840
Loans to and receivables from customers37 05933 8493 2101 054451241 065616
Certificates and bonds7 0956 294801 469  332
Other assets2 5992 57722121 81
Total assets49 94045 7934 1471 112933321 081989
Loans and deposits from credit institutions1 6681 656128   4
Deposits from customers34 43734 175262211337 11
Debt securities issued5 4155 4150     
Other liabilities1 2581 25355    
Subordinated loan capital9969960     
Equity6 1666 1660     
Total liabilities and equity49 94049 661279224337015
Forward exchange contracts  -3 864-892-899-24-1 073-976
Net exposure foreign exchange  4-4118-2
Effect of a 10 per cent change in price (MNOK)1       
         
         
PARENT BANK - 2017TotalNOKCurrencyOf which: USDEURJPYCHFOther
Cash and claims on Norges Bank6376352 2   
Loans to and receivables from credit institutions2 4972 455421861215
Loans to and receivables from customers35 83232 7893 043942509231 117452
Certificates and bonds6 4615 751710 415  295
Other assets2 4862 428581334 56
Total assets47 91344 0583 855956968291 134768
Loans and deposits from credit institutions65464776   1
Deposits from customers32 82032 579241202226 11
Debt securities issued6 0906 0900     
Other liabilities1 1541 14685   3
Subordinated loan capital1 3381 3380     
Equity5 8575 8570     
Total liabilities and equity47 91347 657256213226015
Forward exchange contracts  -3 584-741-942-23-1 129-749
Net exposure foreign exchange  1524054
Effect of a 10 per cent change in price (MNOK)2       
 

10.3: Financial derivatives

IFRS 9 provides new principles for hedge accounting, with the purpose of better reflecting the risk management activities of the bank. Financial hedging previously subject to hedge accounting under IAS 39 will be continued under the new standard. Change in value on the Group’s basis-swaps inherent in hedging instruments, has up to 31.12.2017 been recognised in the income statement As of 01.01.2018, changes in value on basis-swaps due to changes in basis-swap spreads, will be recognised in OCI as a cost of hedging.

Calculation of fair value of financial derivatives is based on valuation models in which the price of underlying interest and currency are obtained in the market.

Financial derivatives are contracts entered into in order to hedge an already existing interest- and foreign exchange risk incurred by the bank. Financial derivatives are recognised at fair value, with value changes recognised in the income statement, and are capitalized on a gross basis per contract as assets or liabilities respectively. Changes in basis swaps effects are charged to Comprehensive income. The estimated fair value of financial OTC derivatives is adjusted for counterparty credit risk (CVA) or for the Group's own credit risk (DVA).

The table shows the financial derivatives’ nominal values and their market values. In the accounts, positive market value per contract is shown as an asset, whereas a negative market value is shown under liabilities in the balance sheet. The table includes both financial derivatives for customer transactions, incorporated under Other operating income, and financial derivatives in the bank’s portfolio, recognised in Net interest income.  

 20182017
GROUPNominal valueAssetLiabilityNominal valueAssetLiability
Interest rate related contracts      
Swaps12 05332920912 166365261
Foreign exchange related      
Swaps6 7254461124 263238103
FX forward9 3494342049 20336189
Earned interest    4030
Total financial derivatives 1 209525 1 004483
- hereof applied in hedge accounting8 405558134 9583740
       
       
 20182017
PARENT BANKNominal valueAssetLiabilityNominal valueAssetLiability
Interest rate related contracts      
Swaps9 00314620710 116185261
Foreign exchange related      
Swaps1 3754911 3633100
FX forward9 3494342049 20336189
Earned interest    1530
Total financial derivatives 584502 564480
- hereof applied in hedge accounting27760277170

The table shows the value of derivative contracts, covered by set-off agreements or secured by cash under Credit Support Annex (CSA). For customer transactions, limits are established based on necessary formal credit-handling procedures where sufficient security is demanded for the limit. For banking counterparties, the counterparty risk associated with changes in market conditions is regulated through CSA agreements. Sparebanken Møre practices cash collateral with these counterparties. As at 31.12.2018, Sparebanken Møre has a cash collateral of NOK million 566.

As of 31 December 2018, the following swaps were used in fair value hedging of interest rate risk:
GROUP - 2018 Up to 1 month1-3 months3-12 months1-5 yearsOver 5 years
Nominal amountNOK002771 0002 050
Average fixed interest rate --11.7 %1.5 %3.8 %
Nominal amountEUR0004 854225
Average fixed interest rate ---0.3 %2.8 %
       
GROUP - 2017 Up to 1 month1-3 months3-12 months1-5 yearsOver 5 years
Nominal amountNOK0001 2771 050
Average fixed interest rate ---3.7 %4.8 %
Nominal amountEUR0002 408223
Average fixed interest rate ---0.1 %2.8 %
       
PARENT BANK - 2018 Up to 1 month1-3 months3-12 months1-5 yearsOver 5 years
Nominal amountNOK0027700
Average fixed interest rate --11.7 %--
       
PARENT BANK - 2017 Up to 1 month1-3 months3-12 months1-5 yearsOver 5 years
Nominal amountNOK0002770
Average fixed interest rate ---11.7 %-
Maturity of financial derivatives, nominal value   
       
GROUP20182017
MaturityInterest rate swapsInterest rate and foreign exchange swapsForward exchange contractsInterest rate swapsInterest rate and foreign exchange swapsForward exchange contracts
2018---1 9733078 971
20191 1177668 6801 201705175
20201 8493115722 26030929
20211 621260651 2142164
20222 0222 498122 4752 4824
20239082 5704365214
2024387804318 4
20251 4771541 501 4
2026415 4426 4
2027252 4270 4
20281 832225 106223 
2029120     
203253  57  
 12 0536 7259 34912 1664 2639 203
       
       
       
PARENT BANK20182017
MaturityInterest rate swapsInterest rate and foreign exchange swapsForward exchange contractsInterest rate swapsInterest rate and foreign exchange swapsForward exchange contracts
2018---1 9733078 971
20191 1177668 6801 201705175
20201 849405722 2604029
20211 621260651 2142164
20221 02274121 475744
20239081404365214
2024387804318 4
2025427154451 4
2026415 4426 4
2027252 4270 4
2028832  106  
2019120     
203253  57  
 9 0031 3759 34910 1161 3639 203
 

Note 11

Subordinated loan capital and Additional tier 1 capital

GROUP AND PARENT BANK   
ISIN.NR.CurrencyIssueMaturityTerms31.12.2018
NO0010809304NOK31.10.201720233 mnth NIBOR + 1.55502
NO0010791692NOK03.05.201720223 mnth NIBOR + 1.46201
Subordinated loan capital703
      
ISIN.NR.CurrencyIssueMaturityTerms31.12.2018
NO0010532765NOK10.09.2009201911.70 %293
Additional Tier 1 Capital293
      
ISIN.NR.CurrencyIssueMaturityTerms31.12.2018
NO0010796154NOK15.06.201720223 mnth NIBOR + 3.25349
Additional Tier 1 Capital349

The Additional Tier 1 capital NO0010532765 is classified as liability. This is, like previous years, presented as a liability in the bank’s balance sheet, as the bank has interpreted the agreement in a manner which does not give the bank an unconditional right to, at any time, refrain from paying interests.

The Additional Tier 1 capital NO0010796154 is classified as equity in the balance sheet and is included in the Tier 1 capital. Based on the fact that the bank has a unilateral right not to pay interest or principal to investors, it does not qualify as debt under IAS 32. The interest cost is not presented in the income statement, rather as a reduction of retained earnings. The cost is recognised by payment. Interests totalling NOK  15.2 million has been paid in 2018. An additional NOK 0.7 mill has incurred in interest expense by year-end, so that together NOK 11.4 million of the profit after tax are allocated to the owners of Additional Tier 1 capital.

There is no option to convert the subordinated loan capital/additional tier 1 capital to EC-capital (Equity Certificates). The Group had no investments in subordinated loan capital in other enterprises (including financial institutions) at the end of 2018. Loan agreements are made available on the bank's website.    

 

Note 12

Debt securities

The debt securities in the Parent bank consist of bonds and certificates quoted in Norwegian kroner. Møre Boligkreditt AS has issued covered bonds quoted in NOK and EUR.

The bank’s loans at floating interest rates are assessed at amortised cost. Loans at fixed interest rates are assessed by using fair value hedging, with value changes recognised in the income statement. The bank hedges the value of interest rate and FX-risk on an individual basis. There is a clear, direct and documented relationship between value changes relating to the hedging instrument and the hedged object. The relationship is documented through a test of the hedging effectiveness when entering into the transaction and through the period of the hedging relationship. Hedging gains and losses result in an adjustment of the balance sheet value of hedged loans. The hedging adjustments are amortised over the remaining period of the hedging by adjusting the loans’ effective interest rate if the hedging no longer is effective, if hedging is discontinued or by other termination of hedging. By applying this principle, one establishes a correct accounting presentation which is in accordance with the bank’s interest rate and FX management and the actual financial development.  

Financial instruments in fair value hedging    
GROUP PARENT BANK
20172018 20182017
Nominal valueBook valueNominal valueBook value Nominal valueBook valueNominal valueBook value
4 9585 2668 4058 806Value secured debt securities with changes in value recognised in the income statement277283277292
4 9583748 405545Financial derivatives applied in hedge accounting277627717
Changes in value of financial instruments in fair value hedging recognised in the income statement
GROUP PARENT BANK
20172018 20182017
-92-174Value secured debt securities with changes in value recognised in the income statement1016
90173Financial derivatives applied in hedge accounting-10-17
-2-1Total0-1
Debt securities  
GROUP PARENT BANK
20172018 20182017
--Certificate debt, nominal value--
24 01726 325Bond debt, nominal value5 4096 082
5868Earned interest78
413587Value adjustments-1-
24 48826 980Total debt securities5 4156 090
Changes in debt securities     
GROUP     
 31.12.2017IssuedOverdue/ redeemedOther changes31.12.2018
Certificate debt, nominal value-   -
Bond debt, nominal value24 0176 6754 367 26 325
Earned interest58  1068
Value adjustments413  174587
Total debt securities24 4886 6754 36718426 980
      
      
PARENT BANK     
 31.12.2017IssuedOverdue/ redeemedOther changes31.12.2018
Certificate debt, nominal value-   -
Bond debt, nominal value6 0828001 473 5 409
Earned interest8  -17
Value adjustments-  -1-1
Total debt securities6 0908001 473-25 415
Maturity of securities-based debt, nominal value
GROUP PARENT BANK
20172018Maturity20182017
3 459 2018 1 382
4 0003 09220191 4091 500
6 8446 84420201 1001 100
5 1005 90020212 9002 100
3 3633 3632022  
 2 3752023  
 2 5002024  
1 0501 0502025  
2011 2012028  
24 01726 325Total5 4096 082
 

Note 13

Classification of financial instruments

Implementation effects of IFRS 9 as of 1 January 2018
The new regulations regarding classification and measurement did not result in any significant changes for the Group compared to measurement of financial instruments in IAS 39. The category Stocks available for sale with changes in value over Other comprehensive income ceased to exist from 1 January 2018. The Group’s change in value on equities and equity instruments were recognised in the income statement from this date onwards. For the Parent Bank, loans prepared for sale to Møre Boligkreditt AS are classified at fair value as these loans are not held to receive contractual cash flows, and changes in value on these loans are recognised in the income statement, included under Other operating Income.   

The table below shows a reconciliation of carrying amounts according to IAS 39 compared to balances reported under IFRS 9 as of 1 January 2018:  

 IAS 39  IFRS 9
 CategoryAmountReclassificationRemeasurementAmountCategory
GROUP 31.12.2017 ECL01.01.2018 
       
Financial assets      
Cash and claims on Norges BankL & R - AC637  637AC
Loans to and receivables from credit institutionsL & R - AC1 295  1 295AC
Loans to and receivables from customersL & R - AC52 944 152 945AC
Loans to and receivables from customersFVPL3 923  3 923FVPL
Certificates, bonds and other interest-bearing securitiesFVPL6 096  6 096FVPL
Financial derivativesFVPL1 004  1 004FVPL
Shares and other securities assessed at fair value through the income statementFVPL0188 188FVPL
Shares and other securities available for saleAFS188-188 0FVOCI
       
       
 IAS 39  IFRS 9
 CategoryAmountReclassificationRemeasurementAmountCategory
PARENT BANK 31.12.2017 ECL01.01.2018 
       
Financial assets      
Cash and claims on Norges BankL & R - AC637  637AC
Loans to and receivables from credit institutionsL & R - AC2 497  2 497AC
Loans to and receivables from customersL & R - AC31 909-3 2512228 680AC
Loans to and receivables from customersFVPL3 9233 251-97 165FVPL
Certificates, bonds and other interest-bearing securitiesFVPL6 461  6 461FVPL
Financial derivativesFVPL564  564FVPL
Shares and other securities assessed at fair value through the income statementFVPL0188 188FVPL
Shares and other securities available for saleAFS188-188 0FVOCI

Financial assets and financial liabilities are recognised in the balance sheet at the date when the Group becomes a party to the contractual provisions of the instrument. A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or the company transfers the financial asset in such a way that risk and profit potential of the financial asset is substantially transferred. Financial liabilities are derecognised from the date when the rights to the contractual provisions have been extinguished, cancelled or expired.  

CLASSIFICATION AND MEASUREMENT
The Group’s portfolio of financial instruments is at initial recognition classified in accordance with IFRS 9. Financial assets are classified in one of the following categories:    

• Fair value with value changes through the income statement

• Amortised cost  

The classification of the financial assets depends on two factors:  

• The purpose of the acquisition of the financial instrument

• The contractual cash flows from the financial assets

Financial assets assessed at amortised cost
The classification of the the financial assets assumes that the following requirements are met:

  • The asset is acquired to receive contractual cash flows

• The contractual cash flows consist solely of principal and interest

All lending and receivables are recorded in the accounts at amortised cost, based on expected cash flows. The difference between the issue cost and the settlement amount at maturity, is amortised over the lifetime of the loan.

Financial liabilities assessed at amortised cost
Debt securities, including debt securities included in fair value hedging, loans and deposits from credit institutions and deposits from customers, are valued at amortised cost based on expected cash flows. The portfolio of own bonds is shown in the accounts as a reduction of the debt.   

Financial instruments assessed fair value, any changes in value recognised through the income statement
The Group's portfolio of bonds in the liquidity portfolio is classified at fair value through the income statement, based on the business model of the bank. The portfolio is not held soley to receive principle and interest. The Group’s portfolio of fixed interest rate loans are assessed at fair value to avoid accounting mismatch in relation to the underlying interest rate swaps. 

Financial derivatives are contracts signed to mitigate an existing interest rate or currency risk incurred by the bank. Financial derivatives are recognised at fair value through the income statement and recognised gross per contract as an asset or liability.

The Group’s portfolio of shares is assessed at fair value with any value changes through the income statement.

Losses and gains as a result of value changes on assets and liabilities assessed at fair value, with any value changes being recognised in the income statement, are included in the accounts during the period in which they occur.

LEVELS IN THE VALUATION HIERARCHY
Financial instruments are classified into different levels based on the quality of market data for each type of instrument.

Level 1 – Valuation based on prices in an active market
Level 1 comprises financial instruments valued by using quoted prices in active markets for identical assets or liabilities. This category includes listed shares and mutual funds, as well as bonds and certificates in LCR-level 1, traded in active markets.

Level 2 – Valuation based on observable market data
Level 2 comprises financial instruments valued by using information which is not quoted prices, but where prices are directly or indirectly observable for assets or liabilities, including quoted prices in inactive markets for identical assets or liabilities. This category mainly includes debt securities issued, derivatives and bonds which are not included in level 1.

Level 3 – Valuation based on other than observable market data
Level 3 comprises financial instruments which can not be valued based on directly or indirectly observable prices. This category mainly includes loans to and deposits from customers, as well as shares.  

GROUP - 2018Financial instruments at fair value in the income statementFinancial instruments assessed at amortised cost  
Cash and claims on Norges Bank 857  
Loans to and receivables from credit institutions 1 288  
Loans to and receivables from customers3 81156 535  
Certificates and bonds6 789   
Shares and other securities182   
Financial derivatives1 209   
Total financial assets11 99158 680  
Loans and deposits from credit institutions 955  
Deposits from customers 34 414  
Financial derivatives525   
Debt securities issued 26 980  
Subordinated loan capital and Additional Tier 1 capital 996  
Total financial liabilities52563 345  
     
GROUP - 2017Financial instruments at fair value in the income statementFinancial instruments assessed at amortised costFinancial instruments assessed as held available for sale
 TradingAt fair value  
Cash and claims on Norges Bank  637 
Loans to and receivables from credit institutions  1 295 
Loans to and receivables from customers 3 92352 944 
Certificates and bonds 6 096  
Shares and other securities   188
Financial derivatives1 004   
Total financial assets1 00410 01954 876188
Loans and deposits from credit institutions  569 
Deposits from customers 1 34031 463 
Financial derivatives483   
Debt securities issued  24 488 
Subordinated loan capital and Additional Tier 1 capital  1 338 
Total financial liabilities4831 34057 858-
     
     
PARENT BANK - 2018Financial instruments at fair value in the income statementFinancial instruments assessed at amortised cost  
Cash and claims on Norges Bank 857  
Loans to and receivables from credit institutions 2 330  
Loans to and receivables from customers7 30729 752  
Certificates and bonds7 095   
Shares and other securities182   
Financial derivatives584   
Total financial assets15 16832 939  
Loans and deposits from credit institutions 1 668  
Deposits from customers 34 437  
Financial derivatives502   
Debt securities issued 5 415  
Subordinated loan capital and Additional Tier 1 capital 996  
Total financial liabilities50242 516  
     
PARENT BANK - 2017Financial instruments at fair value in the income statementFinancial instruments assessed at amortised costFinancial instruments assessed as held available for sale
 TradingAt fair value  
Cash and claims on Norges Bank  637 
Loans to and receivables from credit institutions  2 497 
Loans to and receivables from customers 3 92331 909 
Certificates and bonds 6 461  
Shares and other securities   188
Financial derivatives564   
Total financial assets56410 38435 043188
Loans and deposits from credit institutions  654 
Deposits from customers 1 34031 480 
Financial derivatives480   
Debt securities issued  6 090 
Subordinated loan capital and Additional Tier 1 capital  1 338 
Total financial liabilities4801 34039 562-

Interest income is recognised as income using the effective interest rate method. This implies interest income being recognised when received plus amortisation of establishment fees. The effective interest rate is set by discounting contractual cash flows within the expected term. All fees exceeding direct transaction costs related to interest-bearing loans and borrowings are included in the calculation of the balance sheet item's effective interest rate and are amortised over the expected term.

Recognition of interest income using the effective interest rate method is used for both balance sheet items valued at amortised cost, and balance sheet items valued at fair value through the income statement, with the exception of establishment fees on loans at fair value which are recognised as income when earned. Interest income on impaired loans is calculated as the effective interest rate on the impaired value. Interest income on financial instruments is included in the line item "Net interest income".

Interest income  
GROUP PARENT BANK
20172018 20182017
169178Interest income on financial assets assessed at fair value194177
1 6181 762Interest income on financial assets assessed at amortised cost1 1861 111
1 7871 940Total interest income1 3801 288
     
     
Interest costs  
GROUP PARENT BANK
20172018 20182017
180Interest costs on financial liabilities assessed at fair value018
669761Interest costs on financial liabilities assessed at amortised cost472429
687761Total interest costs472447
 

Note 14

Financial instruments at amortised cost

Loans are assessed at fair value at first assessment, with the addition of direct transaction costs. When determining the loan’s value at the time of transaction (transaction price), establishment fees are deducted and subject to accrual accounting over the lifetime of the loan as part of the loan’s effective interest rate. Loans are subsequently assessed at amortised cost by applying the effective interest rate method. The effective rate of interest is the rate at the signing time which exactly discounts estimated, future cash flows over the loan’s expected lifetime, down to the net value of the loan as shown in the balance sheet. By conducting this calculation, all cash flows are estimated, and all contract-related terms and conditions relating to the loan are taken into consideration. Fair value of the instruments traded in active markets is based on traded price on the balance sheet date. For those financial instruments not traded in an active market, own valuations based on current market conditions are applied, alternatively valuations from another market player.   

GROUP31.12.201831.12.2017
 Fair valueBook valueFair valueBook value
Cash and claims on Norges Bank857857637637
Loans to and receivables from credit institutions1 2881 2881 2951 295
Loans to and receivables from customers56 53556 53552 94452 944
Total financial assets58 68058 68054 87654 876
Loans and deposits from credit institutions955955569569
Deposits from customers34 41434 41431 46331 463
Debt securities issued27 03926 98024 57524 488
Subordinated loan capital and Additional Tier 1 capital1 0009961 3631 338
Total financial liabilities63 40863 34557 97057 858
     
     
PARENT BANK31.12.201831.12.2017
 Fair valueBook valueFair valueBook value
Cash and claims on Norges Bank857857637637
Loans to and receivables from credit institutions2 3302 3302 4972 497
Loans to and receivables from customers29 75229 75231 90931 909
Total financial assets32 93932 93935 04335 043
Loans and deposits from credit institutions1 6681 668654654
Deposits from customers34 43734 43731 48031 480
Debt securities issued5 4285 4156 1066 090
Subordinated loan capital and Additional Tier 1 capital1 0009961 3631 338
Total financial liabilities42 53342 51639 60339 562
GROUP - 2018Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank857  857
Loans to and receivables from credit institutions 1 288 1 288
Loans to and receivables from customers  56 53556 535
Total financial assets8571 28856 53558 680
Loans and deposits from credit institutions 955 955
Deposits from customers  34 41434 414
Debt securities issued 27 039 27 039
Subordinated loan capital and Additional Tier 1 capital 1 000 1 000
Total financial liabilities-28 99434 41463 408
     
GROUP - 2017Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank637  637
Loans to and receivables from credit institutions 1 295 1 295
Loans to and receivables from customers  52 94452 944
Total financial assets6371 29552 94454 876
Loans and deposits from credit institutions 569 569
Deposits from customers  31 46331 463
Debt securities issued 24 575 24 575
Subordinated loan capital and Additional Tier 1 capital 1 363 1 363
Total financial liabilities-26 50731 46357 970
     
     
PARENT BANK - 2018Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank857  857
Loans to and receivables from credit institutions 2 330 2 330
Loans to and receivables from customers  29 75229 752
Total financial assets8572 33029 75232 939
Loans and deposits from credit institutions 1 668 1 668
Deposits from customers  34 43734 437
Debt securities issued 5 428 5 428
Subordinated loan capital and Addtional Tier 1 capital 1 000 1 000
Total financial liabilities-8 09634 43742 533
     
PARENT BANK - 2017Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank637  637
Loans to and receivables from credit institutions 2 497 2 497
Loans to and receivables from customers  31 90931 909
Total financial assets6372 49731 90935 043
Loans and deposits from credit institutions 654 654
Deposits from customers  31 48031 480
Debt securities issued 6 106 6 106
Subordinated loan capital and Addtional Tier 1 capital 1 363 1 363
Total financial liabilities-8 12331 48039 603
 

Note 15

Financial instrumnets at fair value

Financial instruments are recognised at fair value at the time of entering into the agreement. Fair value of the instruments traded in active markets is based on the traded price on the balance sheet date. Financial instruments not traded in an active market are assessed by applying the bank’s own valuations based on currently applicable market conditions, or, alternatively, value assessment provided by another player in the market. Financial instruments which are assessed at fair value, but not traded in an active market, consist of the portfolios of fixed interest rate loans and unlisted shares. Acquisition cost or impaired value is applied for unlisted shares where a sufficiently reliable assessment of fair value cannot be made. Transaction costs relating to financial assets and liabilities recognised at fair value, with changes in value recognised through the income statement, are not recognised in the balance sheet.

A change in the discount rate of 10 basis points would result in a change of approximately NOK 10 million on fixed rate loans.

GROUP - 2018Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank   -
Loans to and receivables from credit institutions   -
Loans to and receivables from customers  3 8113 811
Certificates and bonds4 6962 093 6 789
Shares7 175182
Financial derivatives 1 209 1 209
Total financial assets4 7033 3023 98611 991
Loans and deposits from credit institutions   -
Deposits from customers   -
Debt securities issued   -
Subordinated loan capital and Additional Tier 1 capital   -
Financial derivatives 525 525
Total financial liabilities-525-525
     
     
GROUP - 2017Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank   -
Loans to and receivables from credit institutions   -
Loans to and receivables from customers  3 9233 923
Certificates and bonds4 2611 835 6 096
Shares19 169188
Financial derivatives 1 004 1 004
Total financial assets4 2802 8394 09211 211
Loans and deposits from credit institutions   -
Deposits from customers  1 3401 340
Debt securities issued   -
Subordinated loan capital and Additional Tier 1 capital   -
Financial derivatives 483 483
Total financial liabilities-4831 3401 823
     
     
     
PARENT BANK - 2018Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank   -
Loans to and receivables from credit institutions   -
Loans to and receivables from customers  7 3077 307
Certificates and bonds4 6352 460 7 095
Shares7 175182
Financial derivatives 584 584
Total financial assets4 6423 0447 48215 168
Loans and deposits from credit institutions   -
Deposits from customers   -
Debt securities issued   -
Subordinated loan capital and Additional Tier 1 capital   -
Financial derivatives 502 502
Total financial liabilities-502-502
     
     
PARENT BANK - 2017Based on prices in an active marketObservable market informationOther than observable market information 
 Level 1Level 2Level 3Total
Cash and claims on Norges Bank   -
Loans to and receivables from credit institutions   -
Loans to and receivables from customers  3 9233 923
Certificates and bonds4 2012 260 6 461
Shares19 169188
Financial derivatives 564 564
Total financial assets4 2202 8244 09211 136
Loans and deposits from credit institutions   -
Deposits from customers  1 3401 340
Debt securities issued   -
Subordinated loan capital and Additional Tier 1 capital   -
Financial derivatives 480 480
Total financial liabilities-4801 3401 820

Approach to valuation of financial instruments in Level 3 of the fair value hierarchy:

Fixed rate loans:
There have been no significant changes in the approach to the valuation of fixed-rate loans in 2018. Fair value is calculated based on contractual cash flows discounted at a market interest rate matching the rates applicable to the corresponding fixed-rate loans at the balance sheet date. In 2018, a total of NOK 7.3 million is recognised as a result of changes in value including changes in credit spreads on fixed rate loans. In the income statement, the change in value is presented under Other operating income.

Shares:
Shares presented in level 3 of the valuation hierarchy are primarily the bank's investment in Eksportfinans ASA (NOK 66 million) and the bank's claim on Vipps AS (NOK 39 million).

The bank's ownership in Eksportfinans ASA is valued based on its relative share of Eksportfinans` equity, adjustment made for unrealised changes in value of underlying financial investments and borrowings in Eksportfinans. In the valuation, a liquidity discount of 20 per cent is deducted. The value of Eksportfinans is reduced by NOK 7 million in 2018.

 

GROUP - Level 3 reconciliationLoans to and receivables from customersShares
Book value as at 31.12.20173 923169
Purchases/additions8662
Sales/reduction96816
Transferred to Level 300
Transferred from Level 300
Net gains/losses in the period-1020
Book value as at 31.12.20183 811175
   
   
PARENT BANK - Level 3 reconciliationLoans to and receivables from customersShares
Book value as at 31.12.20173 923169
Effect of implementation to IFRS 93 2420
Purchases/additions1 1202
Sales/reduction96816
Transferred to Level 300
Transferred from Level 300
Net gains/losses in the period-1020
Book value as at 31.12.20187 307175
 

Note 16

Subsidiaries

GROUP STRUCTURE    
CompanyHome countryCore operationsOwnership shareVoting share
Møre Eiendomsmegling ASNorwayReal estate brokerage100%100%
Sparebankeiendom ASNorwayReal estate management100%100%
Møre Boligkreditt ASNorwayFunding100%100%
The Parent Bank Sparebanken MøreNorwayBank  

Transactions involving subsidiaries
These are transactions between the Parent Bank and wholly-owned subsidiaries which have been done at arm’s length and at arm’s length’s prices.

Settlement of financing costs and -income between the different segments is done on an ongoing basis using the Parent Bank’s funding cost. The internal rate of interest for this is defined as the effective 3-month NIBOR + a funding supplement for long-term financing (1.83 per cent in 2018 and 1.65 per cent in 2017).

Rent is allocated according to the floor space used for each segment, based on the same principles and the same prices as those applicable to the Parent Bank, at market rent.

Other services (office supplies, IT-equipment etc.) are bought by the segment involved from the Parent Bank at the same price as the Parent Bank obtains from external suppliers.

There are transactions between Sparebanken Møre and Møre Boligkreditt AS related to the transfer of loan portfolio to Møre Boligkreditt AS, as well as Sparebanken Møre providing loans and credits to the mortgage company. The economic conditions for the transfer of loans from Sparebanken Møre are market value. If mortgages with fixed interest rates are purchased, the price will be adjusted for premium/discount.

Sparebanken Møre is responsible for ensuring that loans transferred to Møre Boligkreditt AS are properly established and in accordance with the requirements set forth in the agreement between the mortgage company and the Parent Bank. In case of violation of these requirements, the Bank will be liable for any losses that the mortgage company would experience as a result of the error. Sparebanken Møre and Møre Boligkreditt AS have formalised settlement of interest for transaction days from the date of transfer of the portfolio of loans to the date of settlement of the consideration.

To ensure timely payment to holders of covered bonds (OMF) and associated derivatives, a revolving credit facility (" Revolving Credit Facility Agreement ") is established between Sparebanken Møre and Møre Boligkreditt AS. Sparebanken Møre guarantees timely coupon payments and payments linked to derivatives on outstanding covered bonds from Møre Boligkreditt AS, and repayment of principal on the covered bonds maturing in the ongoing next 12 months. In addition to the revolving credit facility, Møre Boligkreditt AS has a credit facility in Sparebanken Møre with an allocated limit of NOK 5 billion.

The pricing of services provided to Møre Boligkreditt AS from Sparebanken Møre distinguishes between fixed and variable costs for the mortgage company. Fixed costs are defined as costs which the mortgage company must bear, regardless of the activity related to the issuance of covered bonds, acquisition of portfolio etc. Variable costs are defined as costs related to the size of the portfolio acquired from Sparebanken Møre, and the work that must be exercised by the Bank`s staff to provide adequate services given the number of customers in the portfolio.  

The most important transactions that have been eliminated in the Group accounts are as follows:
PARENT BANK20182017
Statement of income  
Interest and credit commission income from subsidiaries2628
Received dividend and group contribution from subsidiaries152156
Rent paid to Sparebankeiendom AS1717
Administration fee received from Møre Boligkreditt AS3430
   
Statement of financial position  
Claims on subsidiaries1 3001 328
Covered bonds818425
Liabilities to subsidiaries890102
Accumulated loan portfolio transferred to Møre Boligkreditt AS23 42421 164
 

Note 17

Operating segments

The operations in the Group are divided into three strategic business areas/segments, according to type of services, customers and products involved, also being reporting segments according to IFRS 8. The classification corresponds to the structure in the ongoing reporting to the CEO and the Board of Directors, defined as the primary decision makers. The different operating segments partly sell different products, have a somewhat different risk profile, but target many of the same groups of customers. 

The classification into different operating segments and financial information relating to segments are presented in the table below. Most of the income and operating costs involved apply to the Bank’s different operating segments according to actual usage or according to activity-based distribution formulae. Segment profit is presented before tax. Tax is not allocated to the segments.

Transactions between different operating segments are based on market values/prices, similar to transactions with subsidiaries. Please see note 16 for additional information on terms.  

The Group is divided into following three primary segments:
Primary segmentsCompany nameProduct/operations
CorporateSparebanken MøreFinancing, payment transmissions, saving/placement, advisory services etc.
RetailSparebanken MøreFinancing, payment transmissions, saving/placement, advisory services etc.
 Møre Boligkreditt AS 1)Financing (loans made against mortgages)
Real estate brokerageMøre Eiendomsmegling ASReal estate brokerage services
1) Loans to housing associations from Møre Boligkreditt AS are recognised in the commercial segment.

Geographical segments
The Group’s operations are mainly limited to Møre og Romsdal which is defined as the Group’s home market. In view of this, balance sheet and income statement figures are not split into geographical segments. Activities in areas other than the home county are not different from the Group’s other activities with regard to risk or return. Please see note 3 and note 5 for further information. Eliminations/other include Sparebankeiendom AS, handling real estate management of the Group’s own properties.    

Result - 2018GroupEliminations/ otherCorporateRetail 1)Real estate brokerage
Net interest income1 179-74547320
Other operating income2482410010420
Total income1 4271755483620
Operating costs6039812036718
Profit before impairment824-814344692
Impairment on loans, guarantees etc.1601420
Pre tax profit808-814204672
Taxes203    
Profit after tax605    
      
      
Key figures - 2018GroupEliminations/ otherCorporateRetail 1)Real estate brokerage
Loans to customers 1)60 3461 24417 96441 1380
Deposits from customers 1)34 41458811 80422 0220
Guarantee liabilities1 41801 41260
Deposit-to-loan ratio57.047.365.753.50.0
Man-years3611595113813
      
      
Result - 2017GroupEliminations/ otherCorporateRetail 1)Real estate brokerage
Net interest income1 100-204226980
Other operating income24235939618
Total income1 3421551579418
Operating costs59010111335818
Profit before impairment752-864024360
Impairment on loans, guarantees etc.13-51710
Pre tax profit739-813854350
Taxes182    
Profit after tax557    
      
      
Key figures - 2017GroupEliminations/ otherCorporateRetail 1)Real estate brokerage
Loans to customers 1)56 86794316 81539 1090
Deposits from customers 1)32 80356711 23121 0050
Guarantee liabilities1 71701 706110
Deposit-to-loan ratio57.760.166.853.70.0
Man-years3591555114013
1) The subsidiary, Møre Boligkreditt AS, is part of the Bank’s Retail segment. The mortgage company's main objective is to issue covered bonds for both national and international investors, and the company is part of Sparebanken Møre's long-term financing strategy. Key figures for Møre Boligkreditt AS are displayed in a separate table.
 MØRE BOLIGKREDITT AS
Statement of income20182017
Net interest income274261
Other operating income-1-13
Total income273248
Operating costs4238
Profit before impairment on loans231210
Impairment on loans, guarantees etc.1-3
Pre tax profit230213
Taxes5648
Profit after tax174165
   
   
Statement of financial position20182017
Loans to and receivables from customers23 40921 162
Equity1 7671 667
 

Note 18

Other operating income

All fees receivable relating to payment transactions are recognised in the income statement on an ongoing basis. Commissions and fees derived from the sale or brokerage of shares, unit trust certificates, property or similar investment objects which do not generate balance sheet items in the bank’s accounts, are recognised as income in the income statement when accrued. Customer transactions with financial instruments will generate revenue in the form of margins and brokerage which is booked as income once the trade has been completed. Margin income may have been realised when the contract has been entered into, but may also include a credit risk premium relating to the customer’s ability to settle any liabilities incurred as a result of future changes in the contract’s market value. If the margin incorporates a credit risk premium, this will be included in the income statement as it is being accrued. Dividends on shares are recognised as income once the dividends have been finally approved.   

GROUP  PARENT BANK
20172018 Note20182017
23Dividends and other income from securities with variable yields16 155158
3534Guarantee commission 3435
1819Income from the sale of insurance services 1918
812Income from the sale of shares in unit trusts/securities 128
2834Income from discretionary asset management 3428
1312Various fees relating to loans 1213
22Inter-bank fees 22
1213Fees relating to cheques and giro payments 1312
4949Fees from cards 4949
98Fees from international payment transmission services 89
2225Other fees and commission income 2521
196208Commission income and revenues from banking services 208195
-26-25Commission costs and expenditure in respect of banking services -25-26
-20-10Fixed interest loans -10-20
2618Derivatives related to fixed interest loans 1826
-87-176Issued bonds and certificates 1113
67176Derivatives related to issued bonds and certificates -10-17
-1010Gains/losses on shares 10-10
23-24Gains/losses on bonds -2323
3838Trading in FX (on behalf of customers) 3838
96Other income 147
4638Net gains/losses from securities and foreign exchange12 15 4860
21Operating revenues from real estate 00
1820Income from real estate brokerage 00
30Gains on sale of buildings 03
13Other operating income 3233
2424Total other operating income 3236
242248Total non-interest income17 418423
 

Note 19

Operating costs excl. personnel costs

GROUP PARENT BANK
20172018 20182017
93100IT-costs10093
2122Telephone/postage/office supplies/travel expenses2221
1716Marketing costs1617
3131Depreciation of fixed and intangible assets2727
2826Property costs3941
32Fees paid to External Auditor12
1111Costs relating to fixed assets1111
35Capital tax53
4850Other operating costs3734
255263Total operating costs excl.personnel costs258249
 

Note 20

Rental agreements

All of the Bank’s rental agreements are operational.

Rental of business premises
The Bank rents 26 of its business premises from external lessors, as well as 2 from the Bank’s wholly-owned real estate management company, Sparebankeiendom AS. Please see note 23 for furter information about the business premises.

 

 

 20182017
Rent paid to:  
Sparebankeiendom AS1716
Other external lessors1920

Duration of rental agreements
Rental agreements with external lessors are mainly of 10 years duration (some of 1 year) with a mutual 12 months’ notice period and at market prices. Rental agreements with the subsidiary Sparebankeiendom AS have a notice period of 6 months and run for one year at a time. The rent is at market price.  

Contract-related future rental costs (nominal amounts)Within 1 year1 to 5 yearsAbove 5 years
Sparebankeiendom AS1700
Other external lessors197897
Total367897

Other significant agreements
The Group has outsourced most of the operations within the IT-area. In 2015, Sparebanken Møre entered into a new agreement with the company EVRY ASA, for delivery of the Bank`s IT services. The total value of the agreement is approximately NOK 185 million, and it expires in 2019, with an option to extend for further two years. In December 2018, the agreement was extended for another two years. Sparebanken Møre continues the cooperation of a complete range of banking solutions and operating services from EVRY.  

EVRY delivers solutions that support key banking services such as deposits, financing, card and payment processing, accounting and reporting, message distribution and customer interaction services, self-service channels and solutions for branch offices. Along with these solutions, EVRY delivers operation of all banking systems and infrastructure.    

 

Note 21

Salaries and transactions with related parties

GROUP PARENT BANK
20172018(NOK million)20182017
231238Wages, salary and other cash-based benefits225218
32Fees paid to members of the Board of Directors and the General Meeting23
1113Bonus/profit sharing 1)1311
2522Pension costs (note 22)2225
3536Employers' social security contribution3635
1414Financial activity tax1414
1615Other personnel costs1516
335340Total wages and salary costs327322
     
20172018Manning levels:20182017
376373Number of employees as at 31.12359362
387374Average number of employees360372
359361Number of man-years as at 31.12348346
366360Average number of man-years347353
     
1) Part of the bonus (about 50 per cent) for 2018 and 2017 was given in the form of ECs (MORG), purchased at current share price in the market at the time. The total number of ECs purchased was about 27.000 in 2018 and about 25.000 in 2017.

As at 31.12.2018, the Bank had no obligations in relation to its Chief Executive Officer (CEO), the members of the Board of Directors or other employees regarding any special payment on termination or change of employment or positions, except a 6-month severance pay for the CEO. Furthermore, there are no accounting-related obligations relating to bonuses, profit sharing, options or similar for any of the abovementioned persons. Regarding the bonus schemes in the Group, see the discussion in the NUES document paragraph 12. The CEO’s contract includes a 6-month period of notice. Reference is also made to note 22, containing a description of pension schemes. All salaries and other remuneration for the Group’s employees and related parties are charged to the income statement at the end of the accounting year. Pension costs are an accounting-related expense for the Bank, including the payment of premiums relating to the various pension schemes.

Transactions with related parties
Board member Ragna Brenne Bjerkeset is employed as process manager in ProtoMore Knowledge Park. In 2018, the company has invoiced Sparebanken Møre for its services a total of NOK 489.629. Board member Henrik Grung is a partner in the law firm Sands. In 2018, Sands invoiced Sparebanken Møre for legal services, a total of NOK 190.293. 

The transactions have been entered into on ordinary market terms as if they were carried out between independent parties.

GROUP – Wages, salaries, other remuneration, pensions
Salaries to the CEO amounted to NOK 2.743.121 in 2018 (2017: NOK 2.224.086). The estimated value of benefits in kind totalled NOK 232.596 (2017: NOK 156.804). In addition, NOK 314.541 has been charged to the income statement related to the CEO’s pension agreement (2017: NOK 118.207) (note 22). The CEO has a retirement age of 65 and during the period from 65 to 67 years, it will be paid an annual pension amounting to 70 % of final salary. From the age of 67, the CEO will receive a pension from the bank’s ordinary defined contribution scheme.


Wages and salaries/fees to elected bodies      
GROUP (NOK thousand)    20182017
General Meeting    308277
Board of Directors    1 5561 628
       
Fees paid to External Auditor (including value added tax)  3 0093 512
- hereof fee for statutory audit    1 7951 987
- hereof other attestation services    496700
- hereof tax-related advisory services    97196
- hereof other non-audit services    621629
    
       
Loans, deposits and guarantees      
GROUP (NOK million)20182017
 LoansDepositsGuaranteesLoansDepositsGuarantees
General Meeting501503990
Board of Directors20701950
Employees1 04114309901450
       
Ordinary customer terms and conditions have been applied to loans and other commercial services provided for members of the Bank's General Meeting and the Board of Directors.
       
       
Interest rate subsidy of loans to the employees 
The total benefit in kind relating to loans provided at a rate of interest lower than the interest rate (average 2.15 per cent in 2018) which triggers a basis for taxing such benefits in kind to the employees has been estimated at NOK 3.679.969 compared to NOK 3.032.064 in 2017.
       
       
Interest income and interest costs related to the General Meeting and Board of Directors
(NOK million)    20182017
Interest income    00
Interest costs    21
Wages, salaries, other remuneration and pensions - PARENT BANK 
(NOK thousand)Wages/salariesOther remuneration
 2018201720182017
General Meeting    
Jan Kåre Aurdal5043  
Other members 3)258234  
Total308277  
Board of Directors    
Leif-Arne Langøy, Chairman380402 6
Roy Reite, Deputy Chairman186205  
Ragna Brenne Bjerkeset166185  
Henrik Grung190194  
Jill Aasen139-  
Ann Magritt Bjåstad Vikebakk175179  
Helge Karsten Knudsen, employees elected representative 1)160164  
Marie Rekdal Hide, employees elected representative 2)160120  
     
Former board members:    
Elisabeth Maråk Støle-179- 
Total1 5561 62806
CEO    
Trond Lars Nydal2 7432 224233157
     
Remuneration to Executive Management    
EVP, Retail Banking Division, Elisabeth Blomvik1 39763312615
EVP, Corporate Banking Division, Terje Krøvel1 5371 502153169
EVP, Organizational Development, Kjetil Hauge1 2251 12211137
EVP, Treasury and Markets, Runar Sandanger1 4871 408151131
EVP, Finance and Facilities Management, Idar Vattøy1 3681 344118129
EVP, Risk Management and Compliance, Erik Røkke1 3581 26414598
EVP, Business Support, Perdy Lunde1 3141 25511993
EVP, Communications and Group Support, Tone S. Gjerdsbakk1 2381 172137132
EVP, Customer Experience, Arild Sulebakk1 165-41-
Total remuneration to Executive Management12 0899 7011 102805
     
Fees paid to External Auditor (including value added tax)20182017  
Fees paid to External Auditor1 7622 232  
- hereof fee for statutory audit1 3881 575  
- hereof other attestation services360  
- hereof tax-related advisory services37116  
- hereof other non-audit services301542  
1) Ordinary salary amounts to NOK 518.389 (2017: NOK 499.449)  
2) Ordinary salary amounts to NOK 545.704 (2017: NOK 502.923)  
3) Deputy chairman and members of the General Meeting are compensated with NOK 3.000 per meeting in 2018. Two meetings have been held in 2018.
Loans and guarantees    
(NOK thousand)20182017
 LoansGuaranteesLoansGuarantees
General Meeting    
Jan Kåre Aurdal, Chairman5 44902 248 
Other members (43 members in 2018 and 39 members in 2017)46 550038 6990
Board of Directors    
Leif-Arne Langøy, Chairman8020
Roy Reite, Deputy Chairman0000
Ragna Brenne Bjerkeset3 50303 6160
Henrik Grung0000
Jill Aasen0000
Ann Magritt Bjåstad Vikebakk7 67106 6330
Helge Karsten Knudsen, employees elected representative3 55304 8270
Marie Rekdal Hide, employees elected representative5 60003 9000
     
Former Board members:    
Elisabeth Maråk Støle-000
CEO    
Trond Lars Nydal4 57004 9340
Employees1 041 4490989 6900
     
Ordinary customer terms and conditions have been applied to loans and other commercial services provided for members of the Bank's General Meeting and Board of Directors.
Loans to the CEO and employees elected representative are given according to staff conditions.
 

Note 22

Pension costs and liabilities

The Group has two pension plans, a defined benefit plan and a defined contribution plan. The Group also participates in the statutory early retirement pension (SERP) scheme.

The Group`s pension plans meet the requirements in the regulations regarding pensions.

Benefit-based pension scheme in own pension fund
The Group has provided its employees with pensions defined as benefit based schemes (retirement pensions). The benefit based scheme is guaranteed through payments to the bank’s pension fund. The existing benefit based pension plan was closed to new members as at 31 December 2009. With effect from 31.12.2015 the benefit based scheme was further closed by transferring all employees born in 1959 or later from the defined benefit scheme to the defined contribution scheme.

Pension costs and pension liabilities relating to the defined benefit scheme are recognised in accordance with IAS 19.

The pension liabilities are valued annually by an actuary, based on assumptions determined by the bank.

The pension liabilities and pension costs are determined by applying a straight line accrual formula. A straight line accrual formula spreads the accrual of future pension benefits on a straight line basis over the time of pension accruals, the accrued pension entitlements for staff during the period in question being regarded as the pension costs for the year. Net pension costs are included in personnel expenses in the financial statements.

Pension liabilities are calculated as the present value of future, probable pension payments and are based on economic and actuarial computations and assumptions. The difference between calculated, incurred liability and the value of the pension resources is shown in the balance sheet. Actuarial gains and losses due to changed assumptions or discrepancies between expected and actual return on the pension resources, is recognized in the period they occur in other income and costs in the statement of comprehensive income.

The discount rate is based on the interest rate on corporate bonds with high credit ratings. The Norwegian covered bond market is deemed to possess the characteristics required for use as the basis for calculating the discount rate.

Expected return on pension resources is calculated using the same interest rate used for discounting pension liabilities. Return in excess of the discount rate is recognised in other income and costs in comprehensive income.

The introductions of new schemes or changes to existing schemes that have retroactive effect, such that the employees have immediately earned a paid-up policy (or a change to a paid-up policy), are recognised in the income statement immediately. Gains or losses linked to restrictions or terminations of pension plans are recognised in the income statement when they occur.

The portion of the Group’s pension scheme which is defined benefit, entitles employees to agreed future pension benefits equaling the difference between 70 per cent of leaving salary at vesting age of 67 years and estimated benefits from the Norwegian National Insurance Scheme, assuming full vesting (30 years). This liability comprises 70 (88) active members and 259 (245) pensioners by the end of 2018.

Contribution based pension scheme
The Group`s contribution based pension schemes are delivered by DNB and a percentage of income is paid into the scheme, depending on the individual's level of income, and the payments are expensed as they occur. The contribution based pension scheme has contribution rates of 7 % of salary in the range up to 7.1 times the national insurance basic amount (G) and 15 % of salary in the range from 7.1 to 12 G. Pension payments are expensed as they occur and are recognised in Wages, salaries etc. in the income statement.

The bank's subsidiary Møre Eiendomsmegling AS has provided a contribution based pension scheme for its employees. The contribution represents 3 % of the employee's salary.

The Group`s costs related to the contribution based pension schemes amounted to NOK 12 million in 2018 (NOK 11 million in 2017).

Pension agreement for the Bank`s CEO
The CEO has a retirement age of 65 years and during the period between 65 to 67 years, it will be paid an annual pension amounting to 70 % of final salary. From the age of 67, the CEO will receive a pension from the bank’s ordinary defined contribution scheme.

Statutory early retirement pension (SERP)
The Group participated in the statutory early retirement pension (SERP) scheme for the financial industry, which meant that all employees with retirement age 67 years could choose to take early retirement from and including the age of 62. A decision was taken to wind up this scheme in February 2010 and it was only possible to take early retirement pursuant to the old scheme before 31 December 2010. A new SERP scheme was established as a replacement for the old SERP scheme. Unlike the old scheme, the new SERP scheme is not an early retirement scheme, but a scheme that provides a lifelong addition to the ordinary pension. Employees covered by the new scheme, and who meets the requirements, can choose to join the new SERP scheme from the age of 62, including in parallel with staying in work, and by working until 67 years old it provides additional earnings. The new SERP scheme is a defined benefit based multi-enterprise pension scheme, and is funded through premiums which are determined as a percentage of pay. The premium for 2018 was set at 2.5 per cent of total payments between 1 G (G = the national insurance basic amount) and 7.1 G to the company`s employees between 13 and 61 years old. For 2019 the premium is set at 2.5 per cent. The scheme does not involve the building up of a fund and the level of premiums is expected to increase in the coming years. At the moment, there is no reliable measurement and allocation of the liabilities and funds in the scheme. The scheme is treated in the financial statements as a contribution based pension scheme in which premium payments of NOK 4 million in 2018 (NOK 4 million in 2017) are recognised as costs on an ongoing basis and no provisions are made in the financial statements.

The figures in the table below are equal for the Parent Bank and the Group.  

Financial and actuarial assumptions    
 LiabilitiesCosts
 31.12.201831.12.201720182017
Rate of discounting/expected return on pension resources2.802.402.402.60
Wages and salary adjustment2.752.502.502.25
Pension adjustment0-0-
Adjustment of the National Insurance`s basic amount2.502.252.252.00
Employers` social security contribution19.1019.1019.1019.10
Table for mortality rate etcK 2013BEK 2013BEK 2013BEK 2013BE
Disability tariffIR02IR02IR02IR02
Pension costs in ordinary result20182017
Present value of pension accruals during the year including administration costs55
Interest cost of incurred pension liabilities88
Expected return on pension resources-7-8
Net effect of the transition to a defined contribution scheme00
Net pension cost for the pension fund66
Change in present value of pension accruals relating to other pension schemes-21
Payments/pension costs charged to the profit and loss account, incl. payments according to the defined-contribution scheme and the statutory early retirement pension (SERP)1818
Total pension costs2225
   
   
Specification of estimate deviations in comprehensive income20182017
Change in the rate of discounting18-9
Change in other financial assumptions-1-14
Estimate deviations on pension funds-511
Total estimate deviations12-12
   
   
Total pension liabilities/-funds20182017
Pension liabilities308334
Value of pension resources-325-322
Net pension liabilities/-funds relating to the pension fund-1711
Net pension liabilities relating to members of the Bank's executive management/bank managers3033
Total net pension liabilities/-funds1344
- of which recognised under Assets: "Overfunding defined benefit plan"-170
- of which recognised under Liabilities: "Provisions and other liabilities"3044
   
   
Funded pension liabilities20182017
Pension liabilities as at 01.01334328
Pension accruals for the year55
Pension payments-16-15
Interest costs88
Employers' social security contribution-4-2
Actuarial gains/losses-199
Pension liabilities as at 31.12308334
   
   
Funded pension resources20182017
Pension resources as at 01.01322321
Total amount paid in2010
Pensions paid out-16-15
Expected return78
Acturial gains/losses-8-1
Pension resources as at 31.12325322
Estimated payment for 2019 amounts to NOK 20 million.  
   
Pension liabilities - other pensions20182017
Pension liabilities as at 01.013333
Pension accruals for the year00
Pension payments-2-3
Interest costs11
Acturial gains/losses01
Other changes-10
Pension liabilities as at 31.123033
Sensitivity analysisChange in the rate of discountingEffect on the liability as at 31.12.2018Effect on the pension cost in 2018
The funded plan0.5-6.25.9
The funded plan-0.56.76.4
Unfunded schemes0.5-5.0-
Unfunded schemes-0.55.7-
    
The sensitivity analysis above is based on a change in the discount rate, given that all other factors remain constant.
Sensitivity calculations are performed using the same method as the actuarial calculation for the calculation of the pension liability in the balance sheet.
Historic development20182017201620152014
Pension liabilities incl. emloyers' social security contribution308334328346485
Pension resources-325-322-321-315-447
Pension liabilities SERP and other pensions3033332829
Total net pension liabilities/-funds1344405968
- of which recognised under Assets: "Overfunding defined benefit plan"-17    
- of which recognised under Liabilities: "Provisions and other liabilities"30    

Management of the pension fund`s resources
Sparebanken Møre has its own pension fund managing payments of the pension benefits at a vesting age of 67 years.

The capital shall be managed in consideration of security, the diversification of risk, return and liquidity. The pension fund shall manage the assets in such a way that the correct compliance with the insurance liabilities involved is secured and safeguarded. In particular, the management of the pension fund shall ensure security over time against the background of the pension fund’s long-term liabilities.

Within the framework of appropriate security and risk diversification, the pension fund shall over time make every effort to achieve the best possible return on the assets under management.

The long-term aspect of the asset management implies that the pension fund must undertake both interest rate and market risk in order to be assured a moderate extra return in addition to a risk-free placement rate of interest.

The pension fund shall ensure that it has sufficiently good liquidity in order to make all its expected payments.

The pension fund has invested in 4.164 (4.575) ECs issued by Sparebanken Møre. Beyond this the pension fund has not invested in financial instruments issued by Sparebanken Møre or in properties owned or used by the bank.

The pension fund has a deposit of NOK 18 million (NOK 12 million in 2017) with Sparebanken Møre 

Investment profile - pension resources20182017
 Fair valuePercentageFair valuePercentage
Shares7614.48115.5
Fund shares509.500.0
Bonds/certificates34866.236670.0
Bank deposits529.97614.5
Total pension resources526100.0523100.0
NOK 325 million (NOK 322 million) of the total pension resources of NOK 526 million (NOK 523 million) are related to the defined benefit scheme in Sparebanken Møre. The remaining NOK 201 million (NOK 201 million) are related to issued paid-up policies, administered by the Bank's pension fund.
     
     
     
Return on pension resources in percentage  20182017
Total pension resources  0.464.69
 

Note 23

Fixed assets

Fixed assets are valued at historical cost, including direct attributable cost, less accumulated depreciation and impairment. When assets are sold or disposed of, the cost price and accumulated depreciation are reversed in the accounts, and any gains or losses from the sale are shown in the income statement. The cost price of fixed assets is defined as the purchase price, including levies, indirect taxes and direct acquisition costs relating to preparing the asset for use. Costs incurred after the bank has started using the asset, including repairs and maintenance, are shown as costs in the income statement.

If the acquisition cost of a component is substantial in relation to the total acquisition cost, and the time of usage involved is significantly different, substantial fixed assets are broken down for depreciation purposes into separate components.

Depreciation is calculated by applying the straight-line method over the following time periods, taking into account the residual value:  

AssetsTime period depreciation
Building plots and sitesAre not depreciated
Holiday propertiesAre not depreciated
Buildings50 years
Technical installations10 years
Fixtures and fittings8-10 years
Cars5 years
Office machines5 years
IT-equipment3-5 years

An annual reassessment is made of remaining life and residual values for each separate asset. At each reporting date, fixed assets are assessed as to whether there are indications of impairment. If there are such indications, the assets’ recoverable amounts are calculated. The recoverable amount is the higher of fair value less sales costs, and the value of use. When assessing impairment, the fixed assets are grouped together at the lowest level in which it is possible to separate independent cash flows (cash flow-generating units). A cash flow-generating unit is defined as the smallest identifiable group generating cash flows, which to a very large extent is independent of other assets or groups. The book value of an asset is immediately impaired to the recoverable amount, if the book value is higher.

Similarly, an assessment is made in order to ascertain whether the basis for previous impairment still exists. If the basis for previous years’ impairment no longer is present, the previous years’ impairments are reversed and included in the income statement. Fixed assets are thus shown at their historical value, less accumulated depreciation and accumulated losses in the case of impairment.

Assets which separately are of minor importance, for instance PCs and other office equipment, are not assessed individually for residual values, economic life or permanent impairment, rather assessed as groups.

Assets under construction are classified as fixed assets and shown in the accounts at the incurred costs relating to the asset. Assets under construction are not depreciated until they are put in use. Any gains or losses from the sale of fixed assets are incorporated in the income statement on an ongoing basis.

Buildings and plots are fully owned by the bank’s subsidiary, Sparebankeiendom AS. The buildings are intended for own use relating to the operations of the bank, and are therefore not defined as investment properties. The buildings are also including holiday properties used by the employees. The buildings related to the operations of the bank are located in the Group’s geographical home market, the county of Møre og Romsdal. The aggregate floor space is about 10.000 square meters, of which some 500 square meters are rented to external tenants. Only smaller parts of the premises are vacant at present (about 1.400 square meters), and there are only commercial premises in the buildings. The buildings are recognised in the accounts at historical cost less accumulated depreciation and impairment. There is no evidence of impairment of the Group`s buildings as at 31.12.2018.

GROUP    
31.12.2018TotalBuildings, incl. tech.install. , building plots/holiday cabinsCars/IT/office machinesFixtures and fittings
Acquisition cost as at 01.013692772666
Additions7313
Disposals4004
Acquisition cost as at 31.123722802765
Accumulated depreciation and impairment as at 01.01141662154
Depreciation during the year15834
Impairment during the year0000
Disposals5005
Accumulated depreciation and impairment as at 31.12151742453
Carrying amount as at 31.12220206212
Straight-line depreciation period (years) 10-503-58-10
Fully depreciated fixed assets in use4801830
Estimated residual value of fixed assets66   
     
     
GROUP    
31.12.2017TotalBuildings, incl. tech.install. , building plots/holiday cabinsCars/IT/office machinesFixtures and fittings
Acquisition cost as at 01.013562702165
Additions14761
Disposals1010
Acquisition cost as at 31.123692772666
Accumulated depreciation and impairment as at 01.01127592048
Depreciation during the year15726
Impairment during the year0000
Disposals1010
Accumulated depreciation and impairment as at 31.12141662154
Carrying amount as at 31.12228211512
Straight-line depreciation period (years) 10-503-58-10
Fully depreciated fixed assets in use4001723
Estimated residual value of fixed assets70   
     
     
PARENT BANK    
31.12.2018TotalBuildings, incl. tech.install. , building plots/holiday cabinsCars/IT/office machinesFixtures and fittings
Acquisition cost as at 01.01118312562
Additions7214
Disposals4004
Acquisition cost as at 31.12121332662
Accumulated depreciation and impairment as at 01.0181102051
Depreciation during the year11435
Impairment during the year0000
Disposals5005
Accumulated depreciation and impairment as at 31.1287142351
Carrying amount as at 31.123420212
Straight-line depreciation period (years) 10-503-58-10
Fully depreciated fixed assets in use4601828
     
     
PARENT BANK    
31.12.2017TotalBuildings, incl. tech.install. , building plots/holiday cabinsCars/IT/office machinesFixtures and fittings
Acquisition cost as at 01.01106252061
Additions13661
Disposals1010
Acquisition cost as at 31.12118312562
Accumulated depreciation and impairment as at 01.017071845
Depreciation during the year12336
Impairment during the year0000
Disposals1010
Accumulated depreciation and impairment as at 31.1281102051
Carrying amount as at 31.123721511
Straight-line depreciation period (years) 10-503-58-10
Fully depreciated fixed assets in use3901722
 

Note 24

Intangible assets

Intangible assets consist of capitalised costs relating to the acquisition and development of software, licenses etc.

Intangible assets acquired separately are carried in the balance sheet at cost. The cost of intangible assets obtained through acquisition is included in the accounts at fair value in the Group’s opening balance sheet. Intangible assets on the balance sheet are carried at cost, reduced by any depreciation and impairment. Intangible assets are depreciated over estimated life-time of use.

Amounts paid for licenses and software are included in the balance sheet and depreciated on a straight-line basis over the expected time of useful economic life, which is normally 5 years. Such products bought are included in the balance sheet at acquisition cost plus the costs incurred in order to prepare the product for use. Impairment assessments are conducted annually. Costs relating to maintenance of software and IT-systems are charged on an ongoing basis to the income statement.    

GROUP PARENT BANK
20172018 20182017
115126Acquisition cost as at 01.01125114
1116Additions1611
03Disposals30
126139Acquisition cost as at 31.12138125
6884Accumulated depreciation and impairment as at 01.018367
1616Depreciation during the year1616
00Impairment during the year00
03Disposals30
8497Accumulated depreciation and impairment as at 31.129683
4742Carrying amount as at 01.014247
4242Carrying amount as at 31.124242
2020Straight-line depreciation rate2020
55Economic life – number of years55
 

Note 25

Other assets

GROUP PARENT BANK
20172018 20182017
87Repossessed assets78
3939Capital in Sparebanken Møre`s Pension Fund3939
2824Other receivables2025
7570Total other assets6672

Repossessed assets amounts to NOK 7 million (NOK 8 million in 2017). This consists of residential properties of NOK 3 million (NOK 4 million in 2017) and plots of NOK 4 million (NOK 4 million in 2017). These properties have mainly been acquired/repossessed as part of the Bank’s realisation of collateral security. Sparebanken Møre does not wish to remain the owner of repossessed properties. In the event of not obtaining an acceptable price, effort is made to rent out the properties.

 

Note 26

Tax

Taxes consist of payable income tax and change in deferred tax.

Deferred tax/tax benefit is calculated on the basis of the temporary differences, existing between the accounts-related and tax-related value of assets and liabilities at the end of the accounting year. Temporary negative and positive differences which are reversed or which may be reversed during the same period, have been offset and included in the accounts on a net basis.

Deferred tax benefit is included in the accounts when it is likely that the Group will have sufficient tax-related profits in the future to be able to utilize it. On each balance sheet day, the Group reviews the deferred tax benefit included in the accounts and its stated value. If applicable, the Group will reduce the amount of deferred tax benefit to the extent that the Group may no longer be able to utilize it.

Payable tax and deferred tax/tax benefits are shown in comprehensive income to the extent that this relates to items which are shown in comprehensive income. Temporary differences, including calculated deferred tax related to pension estimate deviations have been recognised in comprehensive income, in addition to payable tax related to changes in value on basis spreads.

Deferred tax and deferred tax benefits are calculated on the basis of the expected future tax rates applicable to the companies in the Group where temporary differences have materialised. Deferred tax and deferred tax benefits are incorporated in the accounts irrespective of when the differences are going to be reversed. Deferred tax benefit is shown at nominal value.

Sparebanken Møre is subject to financial tax and has therefore a tax rate of 25 per cent both for 2017, 2018 and 2019. For the subsidiaries, the tax rate altered from 24 per cent in 2017 to 23 per cent effective from 2018. The tax rate is further reduced to 22 per cent effective from 2019. For the Parent Bank this means that both tax payable and deferred tax are calculated at a tax rate of 25 per cent for all the years. For the subsidiaries, a tax rate of 23 per cent is used both for calculating tax payable for 2018 as well as the deferred tax as of 31 December 2017. For calculating deferred tax as of 31 December 2018, a tax rate of 22 per cent is applied. When calculating tax payable for the subsidiaries in 2017, a tax rate of 24 per cent was applied.

The entire tax cost is related to Norway.

Tax expense recognised in the income statement  
GROUP PARENT BANK
20172018 20182017
199195Tax payable on profit for the period*)136145
-142Changes in deferred taxes in the income statement7-9
-36Changes in estimates related to prior years3-3
182203Taxes146133
24.625.1Effective tax rate (tax expense as a percentage of pre-tax profit)20.219.6
*) Interest paid on Additional Tier 1 capital posted against equity reduces tax payable per 31.12.2018 by NOK 4 mill. (NOK 2 mill as of 31.12.2017)
     
Tax expense recognised in the comprehensive income statement  
GROUP PARENT BANK
20172018 20182017
-33Changes in deferred taxes due to pension estimate deviations3-3
--4Tax effect on tax payable related to changes in value on basis spreads0-
-3-1Tax expense in comprehensive income3-3
     
     
Specification of the difference between the pre-tax profit and the income subject to tax
GROUP PARENT BANK
20172018 20182017
739808Pre-tax profit721677
-3-12Non-taxable income and non-deductable costs related to shares-164-159
-8-15Deductable interests on Additional Tier 1 capital treated as equity-15-8
2614Other non-taxable income and non-deductable costs1426
43-11Changes in temporary differences-2836
797784Taxable income528572
197191Tax payable on ordinary profit (25 % for the Parent Bank and 23 % for the subsidiaries)132143
0-4Tax payable on comprehensive income (25 % for the Parent Bank and 23 % for the subsidiaries)00
197187Tax payable132143
     
     
Specification of temporary differences and the computation of deferred tax
GROUP PARENT BANK
20172018 20182017
  Temporary differences relating to:  
-60-47Fixed assets-65-82
187206Pension liabilities206187
10Added value related to transferred portfolio of loans01
-133-163Other temporary differences-136-127
-5-4Net negative (-) / positive differences recognised in the income statement5-21
-231-219Share of net pension liability recognised in other comprehensive income-219-231
33Limited partnerships33
-233-220Total negative (-) / positive differences-211-249
-59-54Deferred tax asset (-) or liability (25 % for the Parent Bank and 22 % for the subsidiaries)-53-62
-0Tax effect of the implementation of IFRS 93-
-59-54Deferred tax asset (-) or liability-50-62
     
     
Reconciliation of tax expense and pre-tax profit
GROUP PARENT BANK
20172018 20182017
17919625 % of pre-tax profit (23 % for the subsidiaries)180169
-1-3Shares 25 % (23 %)-41-40
74Other non-taxable income and non-deductable costs 25 % (23 %)47
-36Changes in estimates related to prior years3-3
182203Total taxes146133
 

Note 27

Profit-earnings per EC

The basic earnings per equity certificate (EC) is calculated as the ratio between the year’s profit accruing to the Bank’s EC holders according to the EC fraction as per 1 January, and the number of issued ECs at year-end, adjusted for any issues that do not entitle to full dividend. The diluted earnings per EC is no different to the basic earnings per EC.  

GROUP20182017
Earnings per EC (NOK) 2)29.8027.70
Diluted earnings per EC (NOK)29.8027.70
EC-holders' share of the profit:  
Profit594551
EC-holders' share of the profit according to the EC-fraction 1)294273
Weighted number of ECs - the Bank's own portfolio45 11048 700
Number of own ECs as at 31.1228 18344 215
Number of own ECs as at 01.0144 21529 850
Weighted average of outstanding ECs9 841 8449 838 254
Number of outstanding ECs as at 31.129 858 7749 842 734
Number of outstanding ECs as at 01.019 842 7349 857 104
Weighted average number of ECs issued9 886 9549 886 954
Number of ECs as at 31.129 886 9549 886 954
Number of ECs as at 01.019 886 9549 886 954

1) The EC ratio has been computed on the basis of figures for the Parent Bank which provides the basis for allocation of profit to the EC holders. The fund for unrealised gains was excluded from the computation. The EC ratio was 49.6 per cent in both 2018 and 2017.

2) Earnings per Equity Certificate (EC) is calculated as the EC holders' proportion of the result divided by the number of issued ECs at year-end, adjusted for any issues that do not provide entitlement to full dividend.  

 

Note 28

Capital adequacy

Sparebanken Møre's capital adequacy is calculated in accordance with IRB Foundation for credit risk. Market risk calculations are based on the standard method and operational risk calculations on the basic method.

The minimum requirement for the Common Equity Tier 1 capital ratio (CET1) at the end of the year for Pillar 1 was 12.0 %. The countercyclical capital buffer was increased from and including 31 December 2017 to 2 per cent and as of 31 December 2019 it will further increase to 2.5 per cent. The Financial Supervisory Authority of Norway set a Pillar 2 supplement of 1.8 per cent for Sparebanken Møre in 2016. When reassessing this supplement in 2018, it was reduced to 1.7 per cent, although with a minimum NOK 590 mill., effective from 31 March 2019. The Ministry of Finance set a minimum requirement for the leverage ratio of 3 per cent with effect from 30 June 2017. In addition to this there must be a core capital buffer of at least 2 per cent.

The Board of Sparebanken Møre has set a minimum target for the Group's CET1 of 14.8 per cent. It is emphasised that the various units in the Group at all times have adequate capitalisation. Moreover, assessments of the risk profile, capital requirements and profitability must always be based on the Group's long-term strategic plan. The Group's capital requirements are calculated in the annual ICAAP.

Analyses conducted as part of Sparebanken Møre's 2018 ICAAP show that the Group satisfies the capital requirements by a good margin.

Note 2 “Risk Management” provides further information about Sparebanken Møre's capital structure and relationship to the capital adequacy regulations. Otherwise please refer to the Group's Pillar 3 document, which is available on Sparebanken Møre's website.

In addition to regulatory capital, Sparebanken Møre also calculates financial capital. The level of the financial capital indicates the capital reserves required to cover any unexpected losses the Group may experience. Financial capital is used in the day-to-day management of Sparebanken Møre and provides a basis for business decisions. A risk adjusted equity figure that is distributed across the different segments, departments and customers is calculated based on the distribution of financial capital. It is this risk adjusted equity that provides the basis for, among other things, assessing a department's performance in relation to achieving its return on equity target.

Sparebanken Møre's ICAAP
Sparebanken Møre's ICAAP is tailored to the Group's position in relation to resources, competence, models and experience. The capital requirement assessment is based on an assessment of the risk profile and an assessment of the quality of management and control. The conclusions are based on figures and professional judgements.

Special board-approved guidelines have been drawn up for ICAAP, which is an important and integral part of Sparebanken Møre's annual strategy process. The process normally has to be carried out once a year. However, events can occur making it necessary to carry out/revise the ICAAP more frequently than once a year. The internal guidelines list the events that would require the carrying out of formal assessments in relation to this.

The ICAAP guidelines provide guidance for broad participation from different management levels in Sparebanken Møre, as well as from different departments and sections. The Group's board also actively participates in Sparebanken Møre's ICAAP process, including through its work on strategic plans and revising the Group's central steering documents. The Board receives monthly reports throughout the year on developments with respect to the Group's risk and capital situation.

All material risks are assessed in the calculation of capital requirements. The risks are assessed individually and overall. Model simulations assume both moderate and conservative development perspectives.

An analysis of Sparebanken Møre's risk exposure is designed to provide a picture of the risk profile, which is used as a basis for judging capital requirements. Every risk element is assessed on the basis of probability and consequences (inherent risk) and how Sparebanken Møre could manage/control this risk effectively. Risk reducing measures will reduce the inherent risk, leaving the institution with residual risk. An assessment of the probability and consequences of residual risk also entails an assessment of the capital Sparebanken Møre needs to retain in order to cover unexpected losses from the individual risks. Assessing residual risk also provides a basis for taking steps to limit the risk further.

The Group's internal auditor, EY, is involved in the Group's ICAAP. The internal auditor is kept up-to-date on the process, gives advice and reviews the documentation sent to the Board. The internal auditor also conducts own risk assessments throughout the year and produces an evaluation/report on Sparebanken Møre's ICAAP. This is included as part of the documentation submitted to the Financial Supervisory Authority of Norway.

Two different types of scenario models and stress tests are run in connection with the ICAAP. One method is based on a financial simulation model linked to the basic alternative in the long-term strategic plan, while the other method focuses on stress testing the credit area. ICAAP takes no account of any diversification effects between different areas of risk.

Sparebanken Møre's Pillar 3 document provides further descriptions of these stress tests and their effects on the Group's capital adequacy.  

GROUP PARENT BANK
20172018 20182017
989989EC capital989989
-5-3- ECs owned by the Bank-3-5
355356Share premium fund356355
349349Additional Tier 1 capital349349
1 2161 391Dividend equalisation fund1 3911 216
125125Gift fund125125
2 4702 649Primary capital fund2 6492 470
78-Value adjustment fund-78
138153Proposed dividend for the EC holders153138
141156Proposed dividend for the local community156141
222229Other equity10
6 0786 394Total equity6 1665 857
-100-42Goodwill, intangible assets, other deductions-42-100
-14-14Value adjustment due to the requirements for prudent valuation-13-14
0-13Deductable overfunding pension-13 
254197Additional Tier 1 capital197254
-151-173Expected losses exceeding actual losses, IRB portfolios-137-107
-138-153Proposed dividend for the EC holders-153-138
-141-156Proposed dividend for the local community-156-141
5 7886 041Total Tier 1 capital5 8495 610
5 1855 495Common Equity Tier 1 capital5 3035 007
     
530703Total supplementary capital (additional capital)703530
6 3186 743Net equity and subordinated loan capital6 5526 140
     
Capital requirements by engagement categories  
     
Exposure classes SA - credit risk
20172018 20182017
00Central governments or central banks00
1412Regional governments or local authorities1213
34Public sector companies43
3638Institutions (banks etc)406348
00Companies (corporate customers)1010
2532Covered bonds3728
88Equity88
8650Other items163191
172144Total capital requirements - credit risk, The Standardised Approach640601
     
Exposure classes IRB - credit risk
20172018 20182017
638689Retail - Secured by real estate342338
4750Retail - Other5047
682734SME713664
549543Specialised lending542549
252304Other corporate lending304252
2 1682 320IRB-F capital requirements1 9511 850
2 3402 464Total capital requirements - credit risk2 5912 451
     
Exposure classes SA - marked risk
20172018 20182017
00Debt00
00Equity00
00Foreign exchange00
2944Credit value adjustment risk (CVA)44
2944Total capital requirements - market risk44
     
200207Operational Risk (Basic Indicator Approach)195186
00Deductions from the capital requirement00
2 5692 715Total capital requirements less Transitional Rules2 7902 641
18137Additional capital requirements from Transitional Rules00
2 7502 751Total capital requirements2 7902 641
     
32 10533 930Risk-Weighted Assets excluding Transitional Rules34 88033 001
2 265460Risk-Weighted Assets Transitional Rules00
34 37034 390Risk-Weighted Assets including Transitional Rules34 88033 001
1 5421 548Minimum requirement Common Equity Tier 1 capital 4.5 %1 5701 485
     
Buffer Requirement
20172018 20182017
859860Capital conservation buffer 2.5 %872825
1 0311 032Systemic risk buffer 3.0 %1 046990
687688Countercyclical buffer 2.0 %698660
2 5782 579Total buffer requirements2 6162 475
1 0651 368Available Common Equity Tier 1 capital after buffer requirement1 1171 047
     
Capital adequacy as a percentage of the weighted asset calculation basis
20172018 20182017
18.419.6Capital adequacy ratio18.818.6
16.817.6Tier 1 capital ratio16.817.0
15.016.0Common Equity Tier 1 capital ratio15.215.2
     
Leverage ratio(LR)
20172018 20182017
8.28.1Leverage Ratio7.78.0
 

Note 29

ECs and ownership structure

Equity Certificates
At the end of 2018, Sparebanken Møre’s EC capital totalled NOK 989 million, consisting of 9 886 954 Equity Certificates, each with a nominal value of NOK 100. In addition to this, the EC holders’ capital consists of the dividend equalisation fund, amounting to NOK 1.391 million and the share premium fund, totalling NOK 356 million. According to the Bank’s by-laws, there are no limitations with regard to voting rights. Furthermore, no rights/options exist that may result in the issuance of new ECs.

Own Equity Certificates (ECs)
Nominal value of own ECs is shown in the balance sheet separately, as a reduction to issued ECs. Purchase price in excess of nominal value is posted against the primary capital fund and the dividend equalisation fund in accordance to historically adopted distribution. Losses and gains from transactions involving own ECs are posted directly against the primary capital fund and the dividend equalisation fund according to their mutual relationship.

Costs relating to equity transactions
Transaction costs relating to an equity transaction are posted directly against equity.

Dividend policy
The aim of Sparebanken Møre is to achieve financial results providing a good and stable return on the Bank’s equity. The results shall ensure that the owners of the equity receive a competitive long-term return in the form of dividends and capital appreciation on their equity. Dividends consist of cash dividends for equity certificate holders and dividends to the local community. The proportion of profits allocated to dividends is adapted to the Bank’s capital strength. Sparebanken Møre’s allocation of earnings shall ensure that all equity owners are guaranteed equal treatment.

There are no special agreements between the Bank and its owners. The Board of Directors cannot refuse purchase or sale of ECs unless this is covered by the stipulations contained in the Companies Act.

Classification of dividends
Dividends on ECs and dividend funds for the local community are classified as other equity until the Board of Directors’ proposal has been agreed by the Bank’s annual General Meeting.

Other equity items
The value adjustment fund consists of aggregate net value changes relating to fair value of financial instruments classified as available for sale. Realised gains and losses, as well as impairment, are incorporated in the income statement during the period in which they occur. The Group does not have convertible bonds or any other financial instruments which can be converted into euity.

EC capital
Sparebanken Møre’s EC capital totals NOK 988 695 400, consisting of 9 886 954 certificates, each with nominal value of NOK 100.

The EC capital was raised through nine separate issues:  

YearIssueChanges in EC capitalTotal EC capitalNumber of ECs
1988Public issue100.0100.01 000 000
1993Public issue100.0200.02 000 000
1994Public issue150.0350.03 500 000
1996Public issue100.0450.04 500 000
1996Issue, the Bank's staff1.7451.74 516 604
1998Public issue100.0551.75 516 604
1998Issue, the Bank's staff0.9552.65 526 154
2008Dividend issue42.3594.95 949 153
2009Rights issue58.5653.46 534 264
2010Scrip issue130.7784.17 841 116
2013Rights issue148.6932.79 327 603
2013Repair issue54.1986.89 868 144
2013Issue, the Bank's staff1.9988.79 886 954

EC holders' share of the profit
Earnings per equity certificate (EC) is calculated as the EC holders' proportion of the profit divided by the number of issued ECs at year-end, adjusted for any issues during the year, not entitled to full dividend. The EC holders' proportion of the profit corresponds to the EC capital's, the dividend equalisation fund's and the share premium fund's proportion of the Bank's total equity at the beginning of the year. If EC capital is expanded during the year in the form of an offering, a time-weighted proportion of the increase is included from and including the payment date.  

The 20 largest EC holders in Sparebanken Møre as at 31.12.18Number of ECsPercentage share of EC capital
Sparebankstiftelsen Tingvoll901 0009.11
Cape Invest AS751 0007.60
Verdipapirfond Pareto Aksje Norge419 4674.24
Verdipapirfond Nordea Norge Verdi386 0143.90
Wenaasgruppen AS380 0003.84
MP Pensjon339 7813.44
Pareto AS304 3553.08
Wenaas Kapital AS230 1612.33
FLPS - Princ All Sec207 7822.10
Verdipapirfondet Eika egenkapital173 0001.75
Beka Holding AS150 1001.52
Verdipapirfondet Landkreditt Utbytte125 0001.26
Lapas AS (Leif-Arne Langøy)113 5001.15
State Street Bank75 9130.77
PIBCO AS75 0000.76
Forsvarets personell pensjonskasse63 6600.64
Odd Slyngstad59 9150.61
Malme AS55 0000.56
U Aandals Eftf AS50 0000.51
Stiftelsen Kjell Holm49 8500.50
Total 20 largest4 910 49849.67
Total9 886 954100.00
Key financial figures (Parent Bank)     
 20182017201620152014
Price at OSE283262254188216
Number of ECs issued9 886 9549 886 9549 886 9549 886 9549 886 954
EC capital (NOK mill.)989989989989989
Dividend equalisation fund (NOK mill.)1 3911 2161 092935799
Share premium (NOK mill.)356355354354353
EC percentage (annual average)49.649.649.649.649.6
EC percentage 31.1249.649.649.649.649.6
Dividend per EC, in NOK15.5014.0014.0011.5013.50
Dividend per EC, in NOK as a % of price at OSE 31.125.55.35.56.16.3
Return (%)13.48.741.2-6.713.1
Dividend in % of EC-owners share of adjusted profit 1)54.751.848.644.846.4
Profit per EC, in NOK 1)28.3527.0029.8525.7029.10
Book value per EC, in NOK 1) 2)303289275257244
P/E 1)9.59.48.87.37.4
P/BV 1)0.930.910.930.730.89
1) Fund for unrealised gains has been excluded from the calculation (up to 31.12.2017)
2) Group figures, incl. proposed dividend.
Geographic distribution   
Number of owners20182017201620152014
Møre og Romsdal3 6063 6333 5763 6023 565
Others in Norway1 6751 9392 0032 1492 244
Outside Norway12112613610189
Total5 4025 6985 7155 8525 898
      
Number of ECs20182017201620152014
Møre og Romsdal5 218 9055 127 4915 182 3594 812 2724 361 378
Others in Norway4 065 4234 216 7844 059 2624 554 0105 076 773
Outside Norway602 626542 679645 333520 672448 803
Total9 886 9549 886 9549 886 9549 886 9549 886 954
Breakdown by number of Ecs    
Number of ECsNumber of ECsIn percentageNumber of ownersIn percentage
1 - 10073 3950.741 56929.04
101 - 1.0001 125 37711.382 74450.80
1.001 - 10.0002 520 53325.4999418.40
10.001 - 100.0001 702 77317.22821.52
Above 100.0004 464 87645.16130.24
Total9 886 954100.005 402100.00
 Number of ECsEC capitalShare premium
 201820172018201720182017
Change in ECs and share premium:      
Ordinary ECs as at 01.01.9 886 9549 886 954989989355354
Changes000011
Ordinary ECs as at 31.129 886 9549 886 954989989356355
Bank's own ECs:      
Own ECs as at 01.0144 21529 84753  
Changes-16 03214 368-22  
Own ECs as at 31.1228 18344 21535  
Distributed and proposed dividendTotal amount (NOK thousand)
Dividend paid on ECs 
NOK 13.50 per EC in 2015133 474
NOK 11.50 per EC in 2016113 700
NOK 14.00 per EC in 2017138 417
NOK 14.00 per EC in 2018138 417
Proposed dividend 
NOK 11.50 per EC in 2015113 700
NOK 14.00 per EC in 2016138 417
NOK 14.00 per EC in 2017138 417
NOK 15.50 per EC in 2018 1)153 248
1) Approved at the annual General Meeting on 20.03.2019. Included in the accounts as other equity as at 31.12.2018.
Elected representatives of the Bank owning/representing ECs as at 31.12.2018
 Number of ECs Number of ECs
Renate Austrheim15 145Christin Pedersen751 000
Ragna Brenne Bjerkeset950Roy Reite2 522
Mette Brit Bjordal25 150Kjell Martin Rønning8 000
Bjørn Bjåstad6 672Turid Sand1 813
Harald Jarle Eriksen162 600Aadne Sandanger1 076
Sverre A. Farstad12 000Åsmund Skår304 555
Linda Rafteseth Grimstad80Karianne Røsberg Slagnes967
Ann Magrit Grønningsæter1 274Alf Sollid1 100
Marie Rekdal Hide268Finn Moe Stene908 400
Elisabeth Husøy9 173Linda Strømmen540
Turi Indergaard1 264Stig Rune Sætre133
Ester Sørdal Klungre568Svein Arild Sættem4 003
Helge Knudsen1 273Solfrid Teigen1 411
Leif-Arne Langøy113 500Lilian Thomas948
Berit Larsen271Ann Magritt Bjåstad Vikebakk6 805
Lars Martin Lunde339 781Trude Wenaas17 500
Lise Løseth379Kaj Bang Westre13 565
 

Note 30

Events after the reporting period

Any new information about the Group’s positions on the date of financial position is included in the annual accounts. Events occurring after the date of financial position, which have no impact on the Group’s position on the date of financial position, but which will have an impact on the Group’s position in the future, are disclosed if they are material.

No events have occurred after the reporting period that will materially affect the figures presented as of 31 December 2018.