Board of Directors Report 2018

GROUP’S KEY FIGURES

(Comparable figures for 2017 in brackets)

• Profit after tax: NOK 605 million (NOK 557 million)
• Return on equity after tax: 10.6 % (10.4 %)
• Lending grew by 6.1 % (7.9 %)
• Deposits grew by 4.9 % (0.7 %)
• At year end, primary capital amounted to NOK 6.7 billion and represented 19.6 % of the basis for calculation. Consequently, the Tier 1 capital ratio was 17.6 % and the Common Equity Tier 1 capital ratio 16 %.
• Earnings per equity certificate: NOK 29.80 (NOK 27.70)
• The Board of Directors is well satisfied with the results for 2018
• The Board of Directors recommends that the General Meeting pays a cash dividend of NOK 15.50 per equity certificate and allocates NOK 156 million to dividend funds for local communities. In total, this represents 52 % of the total group profit for 2018.

PARENT BANK’S KEY FIGURES

(Comparable figures for 2017 in brackets)

• Profit after tax: NOK 576 million (NOK 544 million)
• At year end, primary capital amounted to NOK 6.55 billion and represented 18.8 % of the basis for calculation. Consequently, the Tier 1 capital ratio was 16.8 % and the Common Equity Tier 1 capital ratio 15.2 %.
• Earnings per equity certificate: NOK 28.35 (NOK 27.00)

Areas of operation and markets

The Sparebanken Møre Group consists of the Parent Bank, the mortgage company Møre Boligkreditt AS, the real estate agency Møre Eiendomsmegling AS, and the property company Sparebankeiendom AS. Sparebanken Møre has defined its geographic area of operation as Nordvestlandet, where the Bank had 28 branches in 24 municipalities at year end. 
Sparebanken Møre is a full-service provider with the following products and services for customers:

• Financing
• Deposits and other forms of investments
• Asset management
• Financial advisory services
• Payment transfers
• Currency and interest rate trading
• Insurance
• Real estate brokerage

The Bank’s distribution strategy covers its branch network, digital channels, specialist functions and customer services. Coordinated customer services are designed to ensure that the Bank provides the best customer experience with a high degree of service and good advice. The Bank aims to develop and maintain the high-quality standards in its distribution channels to increase the value created for customers and the Bank. This means we will provide expert advice in person and offer user-friendly services to our customers online. 

Results

The profit before losses on loans and guarantees amounted to NOK 824 million, or 1.19 per cent of average total assets, compared with NOK 752 million, or 1.18 per cent, for 2017.

The profit before tax amounted to NOK 808 million, or 1.17 per cent of average total assets, compared with NOK 739 million, or 1.16 per cent, for 2017.

The profit after tax amounted to NOK 605 million, or 0.88 per cent of average total assets, compared with NOK 557 million, or 0.88 per cent, for 2017.

Earnings per equity certificate in 2018 amounted to NOK 29.80 (NOK 27.70) for the Group and NOK 28.35 (27.00) for the Parent Bank.

Net interest income

Net interest income totalled NOK 1,179 million (1,100 million) or 1.70 per cent (1.72 per cent) of average total assets. Net interest income accounted for 82.6 per cent of total income in 2018.

A higher lending volume combined with a higher interest contribution from deposits and the Bank’s high level of equity resulted in higher net interest income in Norwegian kroner compared with last year. Strong competition on both lending and deposits and reduced risk have contributed to pressure on the net interest margin.

Other operating income

Other operating income amounted to NOK 248 million (0.36 per cent of average total assets) in 2018. This is an increase of NOK 6 million compared with 2017.

The value of the bond portfolio fell NOK 19 million in 2018 following capital gains of NOK 23 million in 2017.

Capital gains on equities totalled NOK 10 million in 2018, compared with capital losses of NOK 10 million in 2017.

Costs

Total costs amounted to NOK 603 million, which is NOK 13 million higher than in 2017. Personnel costs increased by NOK 5 million compared with 2017 and amounted to NOK 340 million. Financial activity tax in the form of higher employers’ National Insurance contributions amounted to NOK 14 million in 2018, the same as in 2017. Staffing has increased by two full-time equivalents in the last 12 months to 361 full-time equivalents. Other operating costs were NOK 8 million higher than in 2017.

The cost income ratio was 42.3 per cent in 2018. This represents a decrease of 1.7 percentage points compared with 2017. In the strategic plan for 2019-2022, the Board has decided to change the Group’s maximum target for the cost income ratio from 45 per cent to 40 per cent.

Problem loans

In 2018, the income statement was charged with NOK 16 million (NOK 13 million) in losses on loans and guarantees. This represents 0.02 per cent (0.02 per cent) of average total assets.

At the end of 2018, total loss impairments amounted to NOK 338 million, equivalent to 0.55 per cent of loans and guarantees (NOK 336 million and 0.57 per cent). Of the individually assessed commitments, NOK 11 million of the impairments were linked to commitments in default for more than 90 days (NOK 4 million), which amounts to 0.02 per cent of loans and guarantees (0.01 per cent). NOK 327 million relates to other commitments (NOK 332 million), which is equivalent to 0.53 per cent of gross loans and guarantees (0.56 per cent).

Net impaired commitments (loans that have been in default for more than 90 days and loans that are not in default but which have been subject to an individual impairment for losses) have in the last 12 months decreased by NOK 47 million. At the end of 2018, the corporate market accounted for NOK 220 million of net impaired commitments, and the retail market NOK 63 million. In total this represents 0.46 per cent of gross loans and guarantees (0.40 per cent).

Total assets

Total assets increased by NOK 4,583 million, or 6.9 per cent, in 2018 to NOK 71,074 million as at 31 December 2018. The change in total assets is primarily attributable to an increase in lending.

Lending to customers

At year-end 2018, lending to customers amounted to NOK 60,346 million (NOK 56,867 million). Customer lending has increased by a total of NOK 3,479 million, or 6.1 per cent, in the last 12 months. Retail lending has increased by 5.3 per cent, while corporate lending has increased by 8.4 per cent in the last 12 months. Retail lending accounted for 69.2 per cent of lending at the end of 2018 (70.0 per cent). 

Deposits from customers

Customer deposits have increased by 4.9 per cent in the last 12 months. At year-end 2018, deposits amounted to NOK 34,414 million (NOK 32,803 million). Retail deposits have increased by 4.8 per cent in the last 12 months, while corporate deposits have increased by 5.1per cent, and public sector deposits have increased by 7.9 per cent. The retail market’s relative share of deposits amounted to 59.9 per cent (60.0per cent), while deposits from the corporate market accounted for 37.9 per cent (37.8per cent) and from the public sector market 2.2 per cent (2.2 per cent). The deposit-to-loan ratio amounted to 57.0 per cent the end of 2018 (57.7 per cent).  

Securities

Holdings of investments in securities (the LCR portfolio) at year-end 2018 amounted to NOK 6,789 million compared with NOK 6,096 million at year-end 2017. The volume of the portfolio is tailored to the LCR requirement.
 
The Bank had no significant trading portfolio at year-end 2018.

The Bank’s Additional Tier 1 capital consists of two loans totalling NOK 627 million. One of the loans is subject to a variable interest rate, while the other is subject to a fixed coupon rate swapped to a variable interest rate. 

Subsidiaries

The aggregate profit of the Bank’s three subsidiaries amounted to NOK 177 million after tax in 2018 (NOK 166 million).

Møre Boligkreditt AS was established as part of the Group’s long-term funding strategy. The mortgage company’s main purpose is to issue covered bonds for sale to Norwegian and international investors. At the end of 2018, the company had net outstanding bonds of NOK 22.4 billion in the market. About 25 per cent of the borrowing was in a currency other than NOK. The company
contributed NOK 174 million to the result in 2018 (NOK 165 million).

Møre Eiendomsmegling AS provides real estate brokerage services to both retail and corporate customers. The company contributed NOK 1 million to the result in 2018 (NOK 0 million in 2017). At year end, the company employed 13 full-time equivalents.

Sparebankeiendom AS’s purpose is to own and manage the Bank’s commercial properties. The company contributed NOK 2 million to the result in 2018 (NOK 1 million in 2017). The company has no employees.

Equity certificates – MORG

At year-end 2018, there were 5,402 holders of Sparebanken Møre’s equity certificates. 9,886,954 equity certificates have been issued. The equity certificate capital accounts for 49.6 per cent of the Bank’s total equity. 

The 20 largest equity certificate holders represented 49.7 per cent of the Bank’s equity certificate capital at year end. Of these equity certificate holders, ten were residents of Møre og Romsdal, with a relative ownership interest among the 20 largest of 54.3 per cent (53.8 per cent). Note 10 includes a list of the 20 largest holders of the Bank’s equity certificates.

As at 31 December 2018, the Bank owned 28,193 of its own equity certificates. These were purchased on the Oslo Stock Exchange at market prices.

The equity certificates are freely negotiable in the market.

Dividend policy

Sparebanken Møre’s aim is to achieve financial results that provide a good and stable return on the Bank’s equity capital. The results should ensure that the owners of the equity receive a competitive long-term return in the form of cash dividends and capital appreciation on their equity. 

Dividends consist of cash dividends for equity certificate holders and dividend funds for local communities. The proportion of profits allocated to dividends is in line with the Bank’s capital strength. Unless the Bank’s capital strength dictates otherwise, it is expected that about 50 per cent of this year’s surplus can be distributed as dividends.

Sparebanken Møre’s allocation of earnings should ensure that all equity certificate holders are guaranteed equal treatment.

Proposed allocation of the profit for the year

In line with the rules for equity certificates etc., and in accordance with Sparebanken Møre’s dividend policy, it is proposed that 52 per cent of the Group’s profit be allocated to cash dividends and dividend funds for local communities. Based on the accounting breakdown of equity between equity certificate capital and the primary capital fund, 49.6 per cent of the profit will be allocated to equity certificate holders and 50.4 per cent to the primary capital fund. The earnings per equity certificate in the Group amounted to NOK 29.80 in 2018 (NOK 21.65). The recommendation to the General Meeting is that the cash dividend per equity certificate for the 2018 financial year be set at NOK 15.50.

Proposed allocation of profit (figures in NOK millions):

EFFECT OF TRANSITION TO IFRS 9

As a consequence of reduced impairments according to IFRS 9, the Group’s equity increased by NOK 1 million after taxes. The implementation of IFRS 9 had no impact on the Group’s primary capital 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.

Capital adequacy ratio and applicable regulations

Sparebanken Møre has authorisation from the Financial Supervisory Authority of Norway to use the IRB Foundation method for calculating capital requirements for credit commitments. 

The Group’s capital adequacy is reported in accordance with the Financial Supervisory Authority of Norway’s authorisation. Sparebanken Møre was subject to capital requirements associated with the transitional scheme for the Basel I floor at year-end 2018. Operational risk calculations are performed using the basic method. 

Sparebanken Møre’s capital adequacy at year-end 2018 was well above the regulatory capital requirements and the internally set minimum target for the Common Equity Tier 1 capital ratio of 14.8 per cent. The primary capital stands at 19.6 per cent (18.4 per cent) and Tier 1 capital 17.6 per cent (16.8 per cent), of which Common Equity Tier 1 capital accounts for 16.0 per cent (15.0 per cent). The capital adequacy figures include the annual profit and the Board’s proposed allocation of the profit. The Board’s proposal concerning the allocation of profit for the year entails retaining 48 per cent of the Group’s profit to further build up the Group’s financial strength. 

The minimum requirement for the Tier 1 leverage ratio has been set at 3 per cent. Every bank must also have a buffer of at least 2 per cent. At year-end 2018, the Tier 1 leverage ratio for Sparebanken Møre was 8.1 per cent (8.2 per cent), which provides a good margin with respect to the total requirement of 5 per cent.

Based on the capital adequacy regulations, the minimum requirement for capital adequacy consists of a Pillar 1 requirement and a Pillar 2 requirement. The Pillar 2 supplement applies to risks that are not covered or are only partly covered by Pillar 1. The Financial Supervisory Authority of Norway has set the Bank’s Pillar 2 requirement at 1.7 per cent, applicable from 31 March 2019. The represents a decrease of 0.1 percentage points compared with the Financial Supervisory Authority of Norway’s previous decision. The Ministry of Finance has further decided that the countercyclical buffer will be increased by 0.5 percentage points to 2.5 per cent from 31 December 2019. The total minimum requirement for the Common Equity Tier 1 capital ratio will thus increase to 14.2 per cent. The Board monitors capital adequacy in the Group on an ongoing basis and is prepared to rapidly deploy measures in the event of a need to strengthen capital balances.  

Risk management

Risk-taking is a fundamental element of banking operations. Risk management and risk control are two of the Board’s focus areas. The overall purpose of risk management and risk control is to ensure that set targets are attained, ensure effective operations, manage risks which may prevent the attainment of commercial targets, ensure high quality internal and external reporting, and ensure that the Group’s operations comply with all relevant laws, regulations and internal guidelines.  

The stated goal of the Board of Sparebanken Møre is to ensure that the operations of the Group maintain a low to moderate risk profile. Earnings should be a product of customer-related activities, and not financial risk taking. Sparebanken Møre constantly strives to maintain control of the risks that exist. In those cases where the risk is deemed to exceed an acceptable level, immediate steps will be taken to reduce this risk.

The overall framework and limits for Sparebanken Møre’s risk management are assessed annually by the Board as part of the preparation of the Bank’s strategic plan. In August 2018, the Board adopted a new strategic plan, “Møre 2022”. The Board approves overall guidelines for management and control in the Group each year, and the Parent Bank and subsidiaries adopt individual risk policies tailored to their activities. Separate policies have been approved for each significant risk area, including credit risk, counterparty risk, market risk, concentration risk, operational risk and liquidity risk. Risk strategies are approved by the Board and reassessed at least once a year, or when particular circumstances make it necessary. 

The various policies form the framework for the Group’s ICAAP. The Board actively participates in the annual process and establishes ownership of the assessments and calculations made, including through the ICAAP’s key role in long-term strategic planning. The ILAAP process, which is the Bank’s assessment of liquidity and funding risk, is included as part of the ICAAP. Calculations performed in ICAAP 2018 indicate that the Group’s capital adequacy is sufficiently robust to tolerate an economic development that is significantly more negative than the development on which the basic scenario in the long-term strategic plan is based. This is supported by both economic calculations and simulations based on various stress tests.

Sparebanken Møre has established a monitoring and control structure that is intended to ensure compliance with the overall framework of the Bank’s strategic plan. The Group’s risk exposure and risk development are monitored on an overall basis through periodic reports submitted to the management, the Audit Committee, the Risk Committee and the Board of Directors. One of the primary purposes of the Audit Committee and the Risk Committee is to ensure that Sparebanken Møre’s risk management is addressed satisfactorily.

The Board is of the opinion that Sparebanken Møre’s aggregate risk exposure conform to the Group’s targeted risk profile. The Board considers the Group’s and Bank’s risk management to be satisfactory.

Credit risk
Credit risk (or counterparty risk) is the risk of losses associated with customers or other counterparties being unable to fulfil their obligations at the agreed time pursuant to written agreements, and of received collateral not covering outstanding claims. 

Credit risk also encompasses concentration risk, including risk linked to major commitments with the same customer, concentration within geographic areas or industries or with similar groups of customers.

Credit risk represents Sparebanken Møre’s largest risk area. The Group has a moderate risk profile for credit risk, as this risk is defined through the Group’s credit risk strategy. The strategy provides, for example, limits for concentration in industrial sectors and the size of commitments, geographic exposure, growth targets and risk levels.  

Compliance with the Board’s resolutions within the area of credit is monitored by the Bank’s Risk Management and Compliance Section, which is independent of the customer divisions. The Board receives reports on credit risk trends throughout the year in monthly risk reports. In addition, periodic reviews of the credit area are carried out by the Audit Committee and the Risk Committee. The Board receives quarterly reports on mortgage lending, in line with the guidelines of the Financial Supervisory Authority of Norway. Sparebanken Møre’s internal guidelines conform to the Financial Supervisory Authority of Norway’s guidelines for mortgage lending.

Sparebanken Møre has, as part of the IRB system, developed its own risk classification models for classifying customers:  

• Probability of Default (PD) is used as an indicator of quality. Customers are classified in a risk class according to the probability of default. 
• Exposure At Default (EAD) is a calculated amount which includes drawn commitments or lending, loan commitments, and a proportion of approved, undrawn facilities. 
• Loss Given Default (LGD) indicates how much the Group would expect to lose if the customer defaulted on his obligations. The models take account of the collateral that the customer has pledged, future cash flows and other relevant factors. 

These models make an important contribution to the in-house management of credit risk. The customers are scored on a monthly basis, and this provides the basis for ongoing monitoring of the development of Sparebanken Møre’s credit risk. Specific application scoring models have also been implemented and are used in the credit approval process.

Through the Group’s reporting portal, all of the Financial Advisors have access to reports which show the development of the credit risk in her or his portfolio. The portal has a hierarchical structure allowing managers in Sparebanken Møre to monitor performance within their respective area of responsibility. The reports are used to analyse customers, portfolios and segments, among other things. The portal also provides customer account managers with an overview of the customers’ positions and limits in relation to exposure in financial instruments.

The Special Commitments Department is part of the Risk Management and Compliance unit The purpose of this department is to improve the efficiency of the processes associated with losses and commitments in default. This will improve the quality and professionalism in handling impaired commitments, and ensures that case processing will be objective and independent. The department reports upwards in the management hierarchy independent of the line. 

The Board finds that Sparebanken Møre’s overall credit risk is within the Group’s adopted risk tolerance. Exposure to large commitments is well within the adopted limits and follow-up and control of this area has been enhanced The Board finds that Sparebanken Møre is well prepared to handle any increased credit risk in the loan portfolio, and that the Group has a good foundation for increasing its focus on solid lending projects in Sparebanken Møre’s area of operation in the future. 

Market risk
Sparebanken Møre’s market risk is primarily a reflection of activities which are conducted in order to support the Group’s daily operations. This relates to the Group’s funding, the bond portfolio which is maintained in order to meet funding requirements and safeguard access to loans from Norges Bank, as well as customer-generated interest rate and foreign exchange trading.

The Board stipulates limits for the Group’s market risk in the market risk strategy. The limits are monitored by the Risk Management and Compliance unit. The limits are established based on analyses of negative market movements. Based on an evaluation of risk profile, management and control, it is assumed that the Bank accepts low risk within the market risk area. The control and management documents which deal with market risk are reviewed and renewed at least annually by the Board. The Bank’s board receives monthly reports on the development of market risk. The limits for market risk are conservative, and on an overall basis, market risk represents a small part of the Group’s aggregate risk.

The Board finds that the Group’s risk exposure in the area of market risk is within the adopted risk tolerance limits.

Funding risk 
The management of Sparebanken Møre’s funding structure is laid down in an overall funding strategy which is evaluated and approved by the Board at least once a year. The strategy reflects the moderate risk level that is accepted for this area of risk. It describes Sparebanken Møre’s targets for maintaining its financial strength. Specific limits have been defined for different areas of the Group’s liquidity management. Sparebanken Møre’s contingency plan for liquidity included in the Bank’s guidelines for stress testing and concentration risk describes how the liquidity situation is to be handled in unsettled financial markets.

Two key quantitative requirements have been established for liquidity: 

• Requirement for liquidity coverage under stress: Liquidity Coverage Ratio (LCR) 
• Requirement for long-term stable funding: Net Stable Funding Ratio (NSFR) 

LCR measures an institution’s 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 means that institutions have to fund liquid assets with the aid of a greater proportion of stable and long-term funding. 

The LCR requirement is 100 per cent. In recent years, the liquidity portfolio has stabilised at a higher level both in volume and against LCR quality securities. The LCR target established by the Group for complies with the regulatory requirement and the reporting shows that Sparebanken Møre has a good margin in relation to the requirement.

A stricter liquidity requirement generally entails a significant funding cost for the Bank. It also makes the Bank more vulnerable to changes in credit spreads.

To ensure that the Group’s funding risk is kept at a low level, lending to customers must primarily be financed by customer deposits and issuing long-term debt securities. The Bank’s deposit-to-loan ratio at the end of 2018 was 57.0 per cent. 

Møre Boligkreditt AS increases the diversification of the Group’s sources of funding. The company issues covered bonds. The Bank transfers parts of its mortgage portfolio to the mortgage company, and this facilitates access to these funding opportunities. At year-end 2018 around 39 per cent of the Group’s total lending (54 per cent of lending to the retail market) had been transferred to the mortgage company. Sparebanken Møre will continue to transfer loans to Møre Boligkreditt AS in accordance with the plans set out in the funding strategy. At year end, 85 per cent of Møre Boligkreditt AS’s outstanding bond volume was for an amount that qualifies for Level 2A liquidity in LCR. Møre Boligkreditt AS will issue and accumulate more loans in this category going forward.

In order to gain access to new sources of funding and seek stable access to funding from external sources, both Sparebanken Møre and securities issued by Møre Boligkreditt AS are rated by the rating agency Moody’s.

In December 2018, Moody’s maintained its good A2 rating of Sparebanken Møre. Bonds issued by Møre Boligkreditt AS are rated Aaa by Moody’s. 

As far as the composition of the external funding is concerned, priority is given to ensuring that a relatively high proportion of funding has a maturity above one year. Total market funding ended at net NOK 28.5 billion at year end – above 85 per cent of this funding has a remaining maturity of more than one year. The Parent Bank’s outstanding senior bonds, with a maturity above one year, had a weighted remaining duration of 1.93 years at year-end 2018, while covered bond funding correspondingly had a remaining duration of 3.72 years. 

The liquidity risk module consists of guidance for the Financial Supervisory Authority of Norway’s assessment of the institution’s liquidity risk level and guidance concerning the assessment of the institution’s system for the management and control of liquidity risk. Sparebanken Møre has implemented the proposed reporting structure from the module in the management report linked to liquidity.

The Board considers the Bank’s liquidity situation at year end to be good. The Board also considers the ongoing liquidity management of the Group to be good. 

Operational risk
Operational risk is defined as the risk of loss due to insufficient or failing internal processes, human or systems-related failure, or external events. This may for instance involve failures and breakdowns with regard to routines, electronic data processing systems, professional competence and the Bank’s subcontractors; and it may also involve staff and customer breaches of confidence/trust, robberies, embezzlement, etc. The Board of Sparebanken Møre has adopted a low  risk profile for this area of risk.

Targeted measures are necessary to prevent and reduce operational risk. Examples of risk-reducing measures include physical security measures, established contingency plans, robbery and conflict management exercises, contingency exercises, insurance schemes and training.

Sparebanken Møre attaches great importance to external activities in which the customer is in focus. The fact that our employees possess a good level of expertise is an important contribution to reducing operational risk and at the same time ensures our customers find being a customer of our bank a good experience. 

A great deal of resources have been expended in recent years in connection with the authorisation scheme for financial advisors and most of the managers in frontline positions have completed an AFA examiner course, which provides the managers with very good training and practice in exercising their managerial roles. 

In addition to this, Sparebanken Møre has worked hard on the authorisation scheme for credit and also takes part in the national certification scheme for non-life insurance. The Bank also has a standardised training programme provided by the Bank’s internal “Møreskolen”, which all new employees must undergo. The Board is delighted with the substantial skills boost that individual employees and the Bank have achieved over the last several years and will continue to emphasise this work in the years ahead.  

The quality and stability of our digital banking services and other ICT services were generally good in 2018. Good cooperation between the actors in the industry makes an important contribution to the work on reducing the consequences of targeted attacks aimed at banks and other financial institutions. Sparebanken Møre has a strong focus on ICT security, including amongst the Bank’s employees. All employees of the Bank must take a compulsory e-learning course in information security. Quality, stability and security will also be focused on in 2019.

There is a heavy focus on money laundering and terror financing in the Group. The Bank carries out a risk assessment of the area annually. A lot of resources are expended on internal control and training employees linked to this area. The work on combating money laundering and terror financing will also be a major focus area in Sparebanken Møre in 2019.

Sparebanken Møre’s overarching contingency plan is revised annually. Underlying contingency plans, such as the ICT contingency plan, are also updated on an ongoing basis. Exercises are arranged annually. The experience gained from the exercises is used to supplement contingency plans with additional details and provides valuable experience in managing any crisis situations that could arise. The exercises also help to raise awareness and vigilance in relation to issues that may arise during a crisis. 

Sparebanken Møre has established various forums and committees that actively work to manage the Group’s operational risk. This includes the annual security forum for employees within the Group who are responsible for security. The Group also has a security committee that performs an approval function for the Bank’s BankID regulations. The committee’s members represent a wide range of people from many functions within the Group. The Board receives an annual report on the security situation at Sparebanken Møre, in addition to ongoing reports relating to significant deviations and events that may occur. The annual ICAAP reviews the major areas of risk for the Group, and a lot of attention is paid to operational risk in this context.

Sparebanken Møre’s established, operational internal control represents an important tool for reducing operational risk, through both identification and follow-up.  

Internal control
An internal control system should be designed to ensure reasonable certainty with respect to attaining goals within the areas of strategic development, goal-oriented and efficient operations, reliable reporting, and compliance with acts and regulations, including compliance with internal group guidelines and policies. A well-functioning internal control system should also ensure that the Group’s risk exposure is within adopted risk profiles and risk tolerance limits.

Sparebanken Møre’s internal control processes are based on the principles of the global internal control standard, the COSO model. The processes and the internal controls should apply to the Group as a whole. This also means that risks that arise as a result of ownership and operation of subsidiaries must be handled by the Group’s overall internal control processes. 

At Sparebanken Møre, individual managers have a special individual responsibility to ensure that internal control within his or her area of responsibility functions and is implemented as intended. This means that managers at every level of the organisation monitor the control measures put in place in their areas of responsibility. This insight is normally achieved through personal presence, monitoring staff, spot checks, reviewing key figures and deviation measurements, etc. This principle also applies to the managers of the subsidiaries in the Group.

Internal control in connection with the financial reporting process
The purpose of internal control in connection with the financial reporting process is to ensure that the financial statements are prepared and presented free from material error, including that any errors shall be identified in time. Moreover, internal control shall ensure that external accounting requirements are met, as well as safeguard that information disseminated to analysts, supervisory authorities, investors, customers and other stakeholders is complete and provides a true and fair view of the Group’s financial situation. 

Responsibility for the financial reporting process itself is assigned to the Finance and Facilities Department, with the Finance Department the coordinating, lead unit. Plans clearly specifying the distribution of work and back-up lists for both tasks and personnel in this and other departments within the section have been established. 

Transactions are registered in the Bank’s core systems, and a reconciliation is performed between these systems and the accounting system (IROS) on a daily basis. Management reports are prepared periodically and quality checked. Any deviations that are recorded are rectified on an ongoing basis. Various management reports are prepared every month, Balanced Scorecard, analyses, risk reports, etc., and consolidation takes place on both a monthly and a quarterly basis. Items in the income statement, statement of financial position and note disclosures are reconciled against various systems and previous reports.

Part of the internal control in connection with reporting the annual financial statements, is the cooperation with the external auditor and their audit of the Group accounts. The cooperation is considered to be satisfactory, and contributes to the good financial reporting process. 

Quarterly and annual reports are reviewed by the Bank’s management group, the Audit Committee and the Risk Committee prior to final consideration by the Board and General Meeting.

Internal control reporting
Internal control reporting at Sparebanken Møre is decentralised, with the Compliance Department as the coordinating unit. 

The Board has received regular reports on the operations and risk situation throughout the year. The CEO has also submitted an annual report to the Board containing an overall assessment of the risk situation and an assessment of whether the established internal controls function satisfactorily. 

Based on the reports received, the Board believes that internal control is being properly addressed at Sparebanken Møre.

Internal auditing
The internal auditing function’s remit is to provide independent assessments of the quality and effectiveness of management and control, risk management and internal control, and compliance with relevant laws and regulations.

The Group’s internal auditing was outsourced to EY in 2018. The internal auditing function reports to the Audit and Risk Committee and the Board. A plan has been prepared for the work of the internal auditor and approved by the Board. The Audit Committee, the Risk Committee and the Board received regularly reports from the internal auditor in 2018 in accordance with this plan, and no material breaches of relevant laws or regulations were identified. 

Corporate governance report

Corporate Governance in Sparebanken Møre includes the aims, targets and overall principles in accordance with which the Group is managed and controlled for the purpose of safeguarding the interests of owners, depositors and other groups in the Group. The Group’s corporate governance should ensure prudent asset management and provide assurance that the communicated goals and strategies are attained and realised.

The Board highlights the following areas as critical to maintaining the confidence of the market:

• Capital appreciation for equity certificate holders and other investors in the Bank’s securities
• Competent and independent management and control
• Good internal management and monitoring processes
• Compliance with laws, rules and regulations
• Transparency and good communications with equity certificate holders, other investors, customers, employees and the community at large
• Equal treatment of all equity owners

The Group’s corporate governance is based on the Norwegian Code of Practice for Corporate Governance, most recently updated on 17 October 2018. Sparebanken Møre’s corporate governance report is included in the annual report in a separate section. 

Sparebanken Møre’s fulfilment of its corporate social responsibility

Savings banks have long played a role in society and are, thanks to their work, important actors in local communities for both businesses and the customers who live in the savings bank’s market area. Sparebanken Møre takes this responsibility very seriously. Sparebanken Møre was formed on 1 April 1985 by the merger of a number of savings banks in Møre og Romsdal. Since then a number of other banks in the county have merged with Sparebanken Møre, the last, Tingvoll Sparebank, in 2009. The banking activities of the merged banks can be traced back to 1843 and the founding of Herrøe og Røvde Sparebank.

In 2018, Sparebanken Møre celebrated its 175th anniversary by donating NOK 175,000 to each municipality where we have a branch. The gifts were given to projects aimed at improving well-being, growth and development in the region. The anniversary was also celebrated with free concerts in Ålesund and Molde. 

In line with the UN Sustainable Development Goal for sustainable cities and communities, Sparebanken Møre wants to help Møre og Romsdal become a better place to live and work in the future as well. 

Code of conduct and corporate social responsibility
Sparebanken Møre’s core values must permeate all of the organisation’s activities. Both the executive management group and the Group’s employees must do their utmost to ensure that Sparebanken Møre is perceived as “Committed, Close, and Sound”. These core values also permeate our code of conduct and corporate social responsibility, which provide guidelines for behaviour and how to  handle situations involving ethical judgements, human rights, labour rights, equality, social factors, the external environment, and combating money laundering and corruption. The guidelines were revised and updated in December 2017 with effect from January 2018.

The guidelines are operationalised through, for example, the personnel handbook, employment rules, security handbook, internal anti-money laundering rules, etc. New Sparebanken Møre employees are introduced to the Group’s regulations in the introduction course for new staff. All employees also undergo e-learning. 

Working environment 
“Guiding values”, which is Sparebanken Møre’s steering document for culture, values and attitudes, is designed to counter discrimination within the Group. No cases of discrimination were recorded in 2018. The Bank has specific guidelines for whistle-blowing, which must be used if the Bank’s employees see a need to report unwanted incidents of importance either to themselves or their colleagues.

The Bank’s annual surveys of the internal working environment analyse different aspects of the working environment and general working situation in the Bank. The survey provides a specific starting point for prioritising various improvement measures. The 2018 working environment survey shows that the staff perceive both the working environment and the learning environment to be good. Working environment surveys are discussed at board level in Sparebanken Møre.

Gender equality
In accordance with UN Sustainable Develop Goal number 5, gender equality, Sparebanken Møre systematically works to promote equality between the genders. The distribution between women and men showed that of the Group’s total staff of 373, 228 were women (61.1 per cent) and 145 were men (38.9 per cent). There are 359 employees in the Bank and 14 in the subsidiaries. Of the Parent Bank’s 359 employees, 221 are women (61.6 per cent) and 138 are men (38.4 per cent). The Bank employs 43 part-time staff, all of whom are women. The percentage of women in various managerial positions was 46.4 per cent, while the corresponding percentage for men was 53.6 per cent. The Bank wants to increase the proportion of women in senior positions. 

Sparebanken Møre’s Board consists of eight members – four women and four men.

Employees 
The Group’s workforce totalled 361 full-time equivalents at year end, a reduction of two full-time equivalents in 2018. The average age of the Bank’s employees was unchanged at 48.3. The average length of service with Sparebanken Møre of the current staff is 18.3 years. Sparebanken Møre recruited 19 new employees in 2018. Staff turnover was 7.5 per cent in 2018, compared with 6.4 per cent in 2017. 

Sparebanken Møre strives to be an attractive workplace in which individual employees are given independent responsibilities and an opportunity for personal development. Competition in the financial services market is strong and it is important to adapt to meet market expectations in the long term, both with respect to availability and expertise. The quality and efficiency of work processes that address the market are always a priority in the skills development measures we implement. Sparebanken Møre ensures this partly through development programmes and partly through its recruitment policy.

No discrimination against employees based on age, gender, nationality, religion or civil status is tolerated. Employees are free to organise and join unions, and Sparebanken Møre has established a system for electing employee representatives. Rules for this are set forth in the personnel administrative handbook and provide a basis for the Group’s recruitment procedures. The employees’ elected representatives and members of the Bank’s executive management group meet regularly once every quarter to discuss matters of importance to both parties, such as the working environment and job satisfaction. The collaboration between management and the employees’ elected representatives is good throughout Sparebanken Møre.

Sick leave and Inclusive Workplace 
The total sick leave rate was 3.42 per cent in 2018, compared with 3.91 per cent in 2017. The long-term sick leave rate was 2.04 per cent in 2018, compared with 2.52 per cent in 2017. The short-term sick leave rate was stable and almost unchanged at 1.38 per cent in 2018, compared with 1.39 per cent in 2017. Employees on long-term sick leave are followed up closely with the aim of helping them return to work as quickly as possible. 

Sparebanken Møre is a member of the Inclusive Workplace programme. The Bank’s experience of collaborating with public sector organisations on facilitating adapted arrangements for employees that need them has been positive. The leave absence rate was 2.87 per cent in 2018. 

The monitoring and follow-up system for health, environment and safety forms an integral part of the Bank’s other internal control procedures. Improvement measures within these areas are implemented whenever weaknesses are identified. HSE courses were organised for the Bank’s safety representatives and members of the working environment committee, and an HSE course was arranged for all managers with personnel responsibilities. Each department must prepare its own risk and vulnerability analysis each year. This must survey dangers and problems, assess risks and draw up plans that reduce the risk factors. Exercises are also arranged at regular intervals in order to teach staff how to deal with crisis situations, such as fires, robberies and conflict management. In 2018, three incidents of unacceptable behaviour/threats against employees of the Bank were reported. One minor personal injury due to a fall on a wet floor was also reported. These incidents were followed up immediately. There were also a number of false alarms. Besides these, no other similar incidents, injuries or accidents were registered or reported during 2018.

Human rights
Sparebanken Møre supports and respects international human rights. The Bank is a member of Finance Norway and is bound by agreements in this area. All of Sparebanken Møre’s business takes place in Norway and it has no employees or major customers with addresses outside Norway.

External environment and climate change 
Sparebanken Møre’s activities do not pollute the external environment. Therefore, no special guidelines have been drawn up for this area. Nonetheless, the fact that no such guidelines have been drawn up does not mean that we do not focus on the environmental challenges the rest of society faces. Our commitment to the environment is, for example, expressed through our use of various types of consumables, purchasing plans, electricity consumption, recycling schemes, waste management, and management of scrapped electrical and electronic equipment. 

We strive to offer paperless services to our customers, which include signing various documents digitally. When we need to communicate with customers, or vice versa, electronic channels such as email, the online bank’s letterbox, and online chat via Skype can be used. 

On those occasions when the Bank refurbishes and alters existing premises, the work also takes into account additional improvements to HSE conditions as well as, for example, energy efficiency requirements for the project. There is an emphasis on reducing the overall energy consumption through upgrading lighting and heating controls.

Sparebanken Møre has a broadly differentiated corporate portfolio. A number of enterprises the Bank has made loans to have operations that will have an impact on the environment. The Bank’s provision of credit gives it an indirect opportunity to impact the external environment. 

The Group must carry out special assessments when financing businesses (or people) where the customer’s products or activities could be associated with material environmental risk. Environmental factors must be assessed in the same way as other forms of risk.

Combating corruption and financial crime
As an actor in the financial services industry, we are subject to a range of laws and requirements aimed at countering corruption and other types of financial crime. Sparebanken Møre shall conduct itself according to high ethical standards and shall not be associated with activities, customers or industries of dubious repute. It is important that each member of staff is aware of such situations, and this is also a priority for the Board of Sparebanken Møre. As well as focusing on the staff in this area, through internal rules and ethical guidelines, Sparebanken Møre also has both internal processes and systems that help to prevent money laundering, corruption and other financial criminal acts. Among other things, the Bank regularly reports suspicious transactions to the Norwegian National Authority for Investigation and Prosecution of Economic and Environmental Crime (ØKOKRIM). Anti-money laundering measures when opening accounts for new customers and in other contact with our customers are also a high priority area. This work supports several of the secondary goals under UN Sustainable Development Goal number 16, peace, justice and strong institutions. 

Our Group has a zero-tolerance policy when it comes to internal fraud. We also have a very low threshold when it comes to reporting suspected criminal acts, e.g. suspicious transactions, to the correct authorities. The Board receives annual reports on the number of cases sent to ØKOKRIM in this area. Sparebanken Møre does its utmost, through systemic measures and staff training, to ensure any corruption and financial crime are identified and prevented as early as possible. Some of the general challenges within this area stem from the fact that crimes are increasingly becoming more speculative, and the fact that the technological opportunities for hiding corruption and financial crime are continually improving. Sparebanken Møre therefore cooperates with other financial industry actors in order to deal with these issues and maintains an ongoing dialogue with Finance Norway, ØKOKRIM and the police. The number of reported cases of fraud has remained relatively stable in recent years. The trend in cases of attempted fraud against both our customers and the Bank has been rising. Online fraud is a growing problem, and this means the need to launder the “proceeds” will increase correspondingly. More suspected cases of money laundering/terrorist financing were reported to ØKOKRIM in 2018 than in 2017. 

Our contribution to local communities in Møre og Romsdal

The non-profit work of savings banks and savings bank foundations has its roots in the establishment of a savings bank authority in Norway in the 1820s. The savings banks were in turn established to ensure communities had some financial infrastructure, while the banks also had strong socio-political motivations. The general public were to be given an opportunity to invest their savings safely and be assured a sensible return on them. At the same time, parts of the profits would be used to benefit good social causes in the Bank’s area of operations.

Sparebanken Møre has two groups of owners: equity certificate holders and local communities. The Bank’s dividend strategy states that our owners must be treated equally. The local communities in Møre og Romsdal own around 50 per cent of Sparebanken Møre, which means that half of the year’s distributed profit is channelled back to the community through what we have called “dividend funds for local communities” (“TEFT funds”).

Funds averaging NOK 140 million have been allocated as TEFT funds annually in the last few years. Through these funds Sparebanken Møre highlights its responsibility and social commitment to the local communities in Møre og Romsdal of which the Bank is proud to be a part.

Our vision for TEFT funds 
The funds that are allocated to publicly beneficial purposes every year are considerable. It is therefore important for us in Sparebanken Møre that these funds are properly managed and that we have a clear strategy concerning the purpose of the funds. Our corporate social responsibility vision is:

“Sparebanken Møre shall help to improve opportunities for people and enterprises to live, work, develop, and enjoy a good life in Møre og Romsdal.”

Main focus areas
A lot of people associate Sparebanken Møre’s corporate social responsibility with support for various kinds of sports. However, we are also one of the county’s most important sponsors of culture and an important contributor to various local community initiatives. In the last few years, we have also focused heavily on innovation and business development in close cooperation with university colleges, the university and science parks in the county. 

NOK 141 million was allocated to dividend funds for local communities for the 2017 financial year. These funds were distributed throughout 2018 in line with the Bank’s main focus areas: sports, culture, local communities, infrastructure, competence and business development.

TEFT grants
TEFT grants are grants Sparebanken Møre gives to talented young people aged 15-35. In 2018, we awarded 15 grants of NOK 50,000 within the categories culture and sports. 

NÆRINGSTEFT business innovation grants
2017 saw the launch of our new NÆRINGSTEFT business innovation grants, an entrepreneur concept based around a competition where the winner receives NOK 1 million. The business innovation grants have attracted great interest and almost 200 entrepreneurs in the Bank’s market area submitted applications. 50 of them were chosen to take part in a skills journey under the direction of the Bank and science parks in the county. This group was gradually reduced to ten semi-finalists and the winner was announced at Sparebanken Møre’s “Børs og Bacalao” investor seminar on 8 March 2018. The winner of NÆRINGSTEFT 2018 was Agrimare Bio. 

Thanks to good feedback, we organised a new round of innovation grants in the autumn 2018, which attracted 101 entrepreneurs. The unique feature of this competence journey is that many of the seminars are open to the public, which means you can continue to improve your skills even when you are out of the competition. In November, 50 ideas were chosen to move on to the next phases of the competition. On 6 December 2018, ten semi-finalists were announced. The semi-final was held in Molde on 1 February 2019. The three finalists were announced live. The winner will be named at the “Børs og Bacalao” investor seminar on 13 March 2019. 

Partnerships with schools and business 
Sparebanken Møre is an active partner for many schools in the county. One of the ways in which several of the Bank’s employees contribute is by teaching in primary and secondary schools and at a university/university college level. 

Sparebanken Møre is a main partner of Young Entrepreneurship Møre og Romsdal (UE). This collaboration stretches back to 2005. We do not just contribute financially, we make a considerable professional contribution. UE involves pupils and students across the country in pupil, young people and student enterprises. The local association in Møre og Romsdal is very active and several of the companies have made it to both the Norwegian finals and the European finals. It is natural for Sparebanken Møre to support enthusiastic young innovators and help ensure they acquire the knowledge they need to make good, independent choices.

One important part of the collaboration with UE involves teaching people about personal finances. Around 50 of the Bank’s staff are involved as mentors in the “Economics and Career Choices” and “Boss of Your Life” programmes in secondary schools in the county. The Bank taught more than 2,100 lower secondary school pupils in the 2017/2018 school year through the “Economics and Career Choices” programme. In addition to this, more than 1,000 upper secondary school pupils in the county received teaching through the “Boss of Your Life” programme. The feedback from both teachers and pupils indicates that this is very useful, and the Bank is experiencing increasing demand for both programmes from the schools. We signed a new 3-year agreement with UE in 2018. 

In 2017, Sparebanken Møre established a formal research collaboration with the Norwegian University of Science and Technology (NTNU) in Ålesund. The TEFT Lab is meant to contribute to research in the areas of service innovation, entrepreneurship, finance and technology, and is a good example of an exciting collaboration between academia and business. While this contributes expertise that business in the region needs, it also strengthens the academic environment in Møre og Romsdal. The goal is for the collaboration to help create synergies that can create value for our region. The Bank wants to be a driving force and take part in this work. 

The TEFT Lab also has office space for a number of PhD candidates. Lars Ole Hjelkrem from Sparebanken Møre started his business PhD in January 2018. His research could result in, among other things, advanced machine learning methods in general and the development of modern application scoring models in particular. 

Reporting
The Board wants Sparebanken Møre’s corporate social responsibility to be properly managed. Reports on plans, awards and the use of publicly beneficial funds are therefore prepared every six months.

GOING CONCERN ASSUMPTION

The Board confirms that the prerequisites for the going concern assumption have been met, and that the annual financial statements have been prepared and presented on a going concern basis. This is based on the Group’s long-term forecasts for the coming years. The Group’s capital adequacy ratio exceeds the authorities’ requirements.   

FUTURE PROSPECTS

Production and demand remain high in the county. This is due to low interest rates, a weak Norwegian krone, high activity levels in the public sector and continued growth in our export markets. In addition to this, there has been an upturn in important oil-related industries. The level of activity in the housing market is also satisfactory. Nevertheless, the uncertainty has increased somewhat due to unease in the financial markets and the prospects of lower growth in the global economy than previously anticipated. 

The upturn in the level of activity, together with significant restructuring in the labour market in recent years, has resulted in low unemployment. At the end of December, registered unemployment in Møre og Romsdal amounted to 2.3 per cent according to the Norwegian Labour and Welfare Administration (NAV), the same as the national unemployment rate. Given the prospect of moderate production growth in the county, unemployment will probably stabilise at around the current level over the year.

Credit growth in Norway, both for households and for business, fell throughout 2018 and the annual percentage growth figure at year-end 2018 was around 1.0 percentage point lower than at year-end 2017.

Competition in the market remains strong, both for loans and deposits. The Bank is competitive and recorded a good, but somewhat lower, growth rate in loans in the retail market. An increase in the growth rate for lending to the corporate market was registered in the last quarter. Deposit growth in the retail market is good and the deposit-to-loan ratio is high, especially in the corporate market. Lending growth within both the retail market and the corporate market in 2019 is expected to be on a par with the growth rate in 2018. This implies growth on a par with or above market growth. There is a constant focus on effective operations and increased profitability.

The Bank will remain a strong and committed supporter of the business sector in our region, Nordvestlandet. Sparebanken Møre’s target for cost-effective operations for the strategy period 2019-2022 is a cost income ratio below 40 per cent per cent. 

Sparebanken Møre’s losses are expected to be low also in 2019. Overall, a good result is expected for 2019. The Bank’s strategic target is for the return on equity to exceed 11 per cent in the strategy period 2019-2022.

VOTE OF THANKS

The Board of Directors would like to thank all of the Group’s employees and elected representatives for their good contributions in 2018. The Board of Directors would also like to thank Sparebanken Møre’s customers, investors and other associates for our good partnership throughout the year.

Ålesund, 31 December 2018
20 February 2019

THE BOARD OF DIRECTORS OF SPAREBANKEN MØRE

LEIF-ARNE LANGØY, Chairman
ROY REITE, Deputy Chairman
RAGNA BRENNE BJERKESET
HENRIK GRUNG
JILL AASEN
ANN MAGRITT BJÅSTAD VIKEBAKK
HELGE KARSTEN KNUDSEN
MARIE REKDAL HIDE

TROND LARS NYDAL, CEO