1.1 Main policies 

Møre Boligkreditt AS (the company) is part of the Sparebanken Møre Group. The company's Head Office is located at Keiser Wilhelmsgt. 29/33, P.O.Box 121 Sentrum, 6001 Ålesund, Norway. 

The company`s financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), which have been issued by the International Accounting Standards Board, and approved by the EU as at 31 December 2017.

Changes in accounting policies and presentation
There were no material changes to the accounting policies in 2017.

New or revised standards applicable for 2017
The mortgage company has not implemented any new or revised standards/interpretations in 2017.

Approved IFRSs and IFRICs with future effective dates
Standards and interpretations that are issued up to the date of issuance of the financial statements, but not yet effective are disclosed below. The company’s intention is to adopt the relevant new and amended standards and interpretations when they become effective, subject to EU approval before the financial statements are issued.

• IFRS 9 Financial Instruments will replace IAS 39 as of 1 January 2018. Please see note 1.13 for information and specifications regarding the effects of the implementation.

The following approved IFRSs with future effective dates are expected not to be relevant for the company, thus have no impact on the financial statements of the company:

• IFRS 15 Revenues from Contracts with Customers

• IFRS 16 Leases

1.2 Revenue recognition
Interest income is recognised as income using the effective interest rate method, including loan related fees and charges.

1.3 Currency
All amounts in the financial statements and notes are stated in NOK million, unless otherwise specified. The company's functional currency and presentation currency is Norwegian kroner (NOK). Cash items in foreign currencies are converted into NOK at the exchange rates at the reporting date. Changes in value for such items due to exchange rates differences between the transaction date and the reporting date are recognised in the income statement. Income statement items are converted using the exchange rate at the time of the transaction.

1.4 Recognition and derecognition of financial assets and liabilities
Financial assets and financial liabilities are recognized in the statement of financial position when the company becomes a party to the contractual provisions of the instruments. All financial instruments are measured initially at fair value plus transaction costs, except in the case of financial assets and financial liabilities recorded at fair value through profit or loss. Fair value at initial recognition is normally equal to the transaction price.

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 substantially all of the potential for risk and rewards of ownership of the asset is transferred. A financial liability is derecognised when the financial liability is discharged, cancelled or expired.

1.5 Financial instruments

1.5.1 Classification

The company's financial instruments are classified at initial recognition based on type of instrument and their purpose. Møre Boligkreditt AS has the following categories of financial instruments:

• Financial assets held for trading. This category includes derivatives, including derivatives designated as hedging instruments.

• Financial assets designated as at fair value through profit or loss. This category includes the company’s holding of covered bonds.

• Loans and receivables (at amortised cost). The category includes loans and receivables from customers and receivables from the parent bank.

• Other financial liabilities. This category includes securities-related debt recorded in the statement of financial position at amortised cost.

1.5.2 Measurement

Measurement at amortised cost
Financial instruments at amortised cost include loans to and receivables from credit institutions, loans to and receivables from customers, loans from credit institutions and debt securities issued. These are recognised at fair value at initial recognition, with the addition of establishment fees and other commissions. Loans are subsequently measured at amortised cost by applying the effective interest rate method. The effective rate of interest is the rate which exactly discounts estimated, future cash flows over the loan’s expected life to the carrying amount of the financial instrument as shown in the statement of financial position. In this process all cash flows are estimated, and all contract-related terms and conditions relating to the loan are taken into consideration. Fees and commissions are amortised over the life of the loans as an integral part of the instruments effective interest rate.

Measurement at fair value
Møre Boligkreditt AS has covered bonds and financial derivatives (interest rate swaps and currency swaps) measured at fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Furthermore, the fair value measurements are categorized into the following three levels based on the inputs used to measure fair value:  

- Financial instruments traded in an active market
For financial instruments traded in an active market, quoted price obtained from either an exchange, a broker or a pricing agency is used to measure fair value. None of the financial instruments of the company are quoted in an active market  

- Financial instruments not traded in an active market
For financial instruments that are not traded in active markets various valuation techniques are used to measure fair value. These measurements are divided into two types based on the inputs used in the measurement:

1) Measurement based on observable market data:

• Recently observed transactions in the same instrument between informed, willing and unrelated parties

• Instruments traded in an active market, which are substantially similar to the instruments that are valued  

2) Measurement based on other than observable market data:

• Estimated cash flows

• Other valuation techniques where material parameters are not based on observable market data

Impairment
Møre Boligkreditt AS assesses whether there is objective evidence that the financial assets have been exposed to loss events that have negative effects on future cash flows. A financial asset or group of financial assets are impaired if there is objective evidence that one or more loss events have occurred after initial recognition of the asset or assets. See note 3 for further description. Impairment of loans is recognised in the income statement.

Individual assessment
An impairment loss is recognised for a loan on an individual basis if there is objective evidence that impairment exists when they are assessed individually. Examples of objective evidence of impairment that may be observed for assets on individual basis are:

a) Significant financial problems in the case of the borrower in question

b) Default of payment or other significant breaches of contract. A loan or other asset is considered to be in default if the borrower fails to pay when due, or overdrawn amounts are not repaid, within a maximum of 90 days past due limit

c) Amendments to terms or conditions as a result of the borrower’s financial difficulties, such as deferment of payment or new credit to make the borrower able to pay an instalment, or amendments to interest rate terms

d) It becomes probable that the debtor will enter into debt negotiations or other financial restructuring, or that the debtor’s assets are subject to bankruptcy proceedings

Collective assessment
Assets for which no objective evidence of impairment is observed on an individual instrument basis are grouped based on similar credit risk characteristics and assessed on a collective basis. Collective impairments are recognised for sub-groups of loans when there is observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of loans since the initial recognition, while the decrease cannot yet be identified with the individual financial assets in the group.

The collective assessment is based on risk classification and loss experience for the group in question.

Objective evidence of loss events for groups of loans include:

a) Negative changes in the payment status for the borrowers in the group

b) Negative changes in national or regional economic conditions that have occurred at the reporting date that have not been fully taken into account in the group's risk classification system

An impairment is reversed if the loss decreases and the decrease can be related objectively to an event occurring after the impairment was recognised. If objective evidence of impairment is identified, impairment is calculated as the difference between the assets’ carrying amount and the present value of estimated future cash flows discounted using the effective interest rate. The effective interest rate used to calculate the impairment is the effective interest rate applicable to the loan before objective evidence of impairment was identified. The effective interest rate is accordingly not adjusted to reflect changes in the loan's credit risk or other amendments to terms. Impairment reduces the assets’ carrying amount and is recognised in the income statement as “Impairment on loans”. Interest income calculated using the effective interest method based on carrying amounts net of impairment, is included in “Net interest income”.

1.5.3 Hedge accounting
The company applies fair value hedge accounting and hedges interest rate risk and foreign exchange rate risk on debt securities issued with fixed interest rate or foreign currency denomination. Hedge accounting requires a clear, direct and proven correlation between changes in fair value or of the hedged item arising from the hedged risk and changes in fair value of the financial derivative (hedging instrument).

At the origination of the hedge, the relationship between the hedging instrument and the hedged item is documented. In addition the objectives and the strategy for the hedging transaction are documented. Changes in fair value related to the hedged risk of the hedged item and the hedging instrument are evaluated periodically to ensure sufficient hedge effectiveness. Hedging instruments are carried at fair value and are recorded under "Net change in value of securities and related derivatives".

For the hedged item, changes in fair value due to the hedged risk are recognised as an adjustment to the carrying value of the debt securities, and are recorded under "Net change in value of securities and related derivatives”.

1.6 Presentation in the statement of financial position and income statement

Lending
Lending is presented in the statement of financial position, depending on the counterparty, either as "Loans to and receivables from credit institutions" or "Loans to and receivables from customers". Interest income is recognised in the lines "Interest income from: Loans to and receivables from credit institutions and Loans to and receivables from customers" using the effective interest rate method. Impairments are recognised in "Impairment on loans".

Certificates and bonds
The holding of covered bonds measured at fair value is presented in the balance sheet as “Certificates and bonds”. The interest income is included in “Certificates, bonds and other interest-bearing securities” and fair value changes in “Net change in value of securities and related derivatives”.

Liabilities to financial institutions
Liabilities to financial institutions are recognised in the statement of financial position as "Loans from credit institutions". Interest expenses on liabilities are included in "Interest expenses in respect of loans from credit institutions" based on the effective interest rate method.

Debt securities issued
Debt securities issued include issued bonds. Interest expenses on the financial instruments are included in "Interest expenses in respect of debt securities" based on the effective interest rate method.  

1.7 Tax

Tax cost consists of payable tax for the income year, any tax payable for previous years, and any changes in deferred tax. Deferred tax is calculated on the temporary differences in accordance with IAS 12 Income Taxes. A temporary difference is the difference between the carrying amount of an asset or liability and the taxable value of that asset or liability. Tax increasing and tax reducing temporary differences that are reversed or could be reversed in the same period are offset and the net amount recognised. Deferred tax assets are recognised in the statement of financial position to the extent that it is likely they will be able to be utilised against future taxable income. Deferred tax (tax assets) is recognised at its nominal value and reported on a separate line on the statement of financial position.

1.8 Provisions, contingent assets and contingent liabilities

A provision is only recognised when an obligation exists (legal or constructive) as a result of a previous event, and it is likely that an outflow of resources embodying economic benefits will be required to fulfil the obligation, and a reliable estimate of the amount of the obligation can be made. Provisions are recognised at the amount that expresses the best estimate of the expenditure required to fulfil the existing obligation. If material the time value of money is taken into account when calculating the size of the provision. Contingent assets or contingent liabilities are not recognised.

1.9 Events occurring after the reporting period

New information about conditions that existed at the end of the reporting period is taken into account in the annual financial statements. Events after the reporting date that do not affect the mortgage company's position at that date, but will affect the mortgage company's financial position in the future, are disclosed if they are material.

1.10 Statement of cash flow

The cash flow analysis is prepared on the basis of the direct method with cash flows attributable to operational, investment and financing activities. Cash flows from operational activities are net receipts and payments from lending activities, and payments generated from costs associated with operational activities. Cash flows from investing activities are purchases or sales of bonds and other securities. Cash flows from other securities transactions, issuing and repaying securities issued, and equity are defined as financing activities.

1.11 Equity

The equity consists of paid-in share capital, share premium and retained earnings. Møre Boligkreditt AS recognises proposed dividends and group contributions as retained earnings until approved by the company's general meeting. Transaction costs associated with an equity transaction are recognized directly against Equity.

1.12 Use of estimates in the preparation of the annual financial statements
In the preparation of the financial statements, management makes estimates and assumptions that affect the financial statements and the reported amounts of assets and liabilities, income and costs. The assessments are based on historical experience and assumptions deemed to be reasonable and sensible by the management. There is a risk that the actual outcomes will deviate from the estimated outcomes.

The financial assets and liabilities of the company are allocated to different categories according to IAS 39 by the management. Normally this process requires limited judgment.

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

Impairment on loans
The company examines the lending portfolio at least every quarter. Loans are reviewed individually and deemed to be impaired when there is objective evidence of impairment, at the latest when the commitment have been in default for more than 90 days. Similarly, groups of loans are assessed collectively for impairment on a quarterly basis. When examining the lending portfolio to assess whether loans or groups of loans are impaired, management relies on approximation and prior experience.

Fair value assessments
For financial instruments which are not traded in active markets, various methods are applied in order to ascertain fair value. Further information and a description of the techniques used, is stated above. Financial instruments not traded in an active market are measured based on in-house judgments and assumptions with regards to current market conditions, or valuations from other market participants.

1.13 The effect of implementation of IFRS 9 at 01.01.2018

IFRS 9 Financial Instruments will replace IAS 39 as of 1 January 2018. IFRS 9 introduces a business oriented model for classification and measurement of financial instruments, an expected loss model for impairments and a new accounting regulation for hedge accounting.

For Møre Boligkreditt AS the transition to IFRS 9 will impact the company’s accounting for basisswap spreads as these will be charged to OCI as of 1.1.2018 as part of the new hedge accounting model where the cost of hedging can be charged to OCI in certain circumstances. In addition IFRS 9 fundamentally changes the loan loss impairment methodology. The standard replaces IAS 39’s incurred loss approach with a forward looking expected credit loss (ECL) approach.

The measurement of impairment losses both under IFRS 9 and IAS 39 across all categories of financial assets requires judgement, in particular, the estimation of the amount and timing of future cash flows and collateral values when determining impairment losses and the assessment of a significant increase in credit risk. These estimates are driven by a number of factors, changes in which can result in different levels of allowances.  

The Sparebanken Møre Group has developed an ECL-model based on the Group’s IRB parameters.

The ECL calculations are outputs of complex models with a number of underlying assumptions regarding the choice of variable inputs and their interdependencies. Elements of the ECL model that are considered accounting judgements and estimates include:

• The internal credit grading model, which assigns PDs to the individual grades
• The criteria for assessing if there has been a significant increase in credit risk and so allowances for financial assets should be measured on a lifetime ECL basis and the qualitative assessment
• Development of ECL models, including the various formulas and the choice of inputs
• Determination of associations between macroeconomic scenarios and, economic inputs, such as unemployment levels and collateral values, and the effect on PDs, EADs and LGDs
• Selection of forward-looking macroeconomic scenarios and their probability weightings, to derive the economic inputs into the ECL models

As a consequence of low levels of PDs and low LTVs almost the entire portfolio in Møre Boligkreditt AS is assigned to stage 1 in the ECL-model, thus loss is calculated according to 12 months ECL for the major part of the company’s portfolio.

The following tables set out the impact of adopting IFRS 9 on the statement of financial position, and retained earnings including the effect of replacing IAS 39’s incurred credit loss calculations with IFRS 9’s ECLs.  

Møre Boligkreditt AS’ business mainly comprises operations within the retail banking market. Møre Boligkreditt AS has only one operating segment. The following tables contain details of loans to customers by sector, business activity and geographical area.

Møre Boligkreditt AS reviews its loan portfolio continuously. If there is objective evidence that a loan is impaired, the impairment loss is calculated quarterly as the difference between the carrying value of the loan and the estimated present value of future cash flows. Loans and loan commitments are assessed to see whether or not objective evidence exists that a loss event has occurred at the reporting date that have a negative impact on future cash flows. Examples of such objective evidence are significant financial problems at the borrower, payment defaults, significant breaches of contract, amendments to terms as a result of the borrower’s financial difficulties, bankruptcy, etc.

If objective evidence of impairment exists, the impairment is estimated as the difference between the carrying amount and the present value of future cash flows. Estimates of future cash flows also take into account takeovers and sales of associated collateral, including expenses associated with such takeovers and sales.

When all collateral has been realised and there is no doubt that the mortgage company will not receive further payments relating to the loan, the impairment will be reversed and the actual loss will be booked. Nonetheless, the claim against the customer will remain and be followed up, unless a debt forgiveness agreement is reached with the customer.

Assets for which no objective evidence of impairment is observed on an individual instrument basis are grouped based on similar credit risk characteristics and assessed on a collective basis. Collective impairments are recognised for sub-groups of loans or loan commitments when there is observable data indicating that there is a measurable decrease in the estimated future cash flows from a group of loans or loan commitments since the initial recognition, while the decrease cannot yet be identified with the individual financial assets in the group.

The Sparebanken Møre Group has developed its own collective impairment model and calculations are conducted each month based on input from the risk classification system, data warehouse, and assessments of macroeconomic factors. Changes to risk classification, negative developments in collateral values, and registered macroeconomic events that affect future estimated cash flows are taken into account in the model. The Group's model for collective impairment is tailored to Møre Boligkreditt AS' assumptions and operations.

No objective evidence of loss events requiring impairment on an individual loan or loan commitment basis was observed at the reporting date. The company has no loans in arrear above 90 days at year-end. The collective impairment model on this date indicates a decrease in collective impairments for the mortgage company's portfolio of NOK 3 million. Total impairment amounts to NOK 2 million as at 31 December 2017.  

Strategy
The Sparebanken Møre Group`s, and thereby Møre Boligkreditt AS’, long-term strategic development and goal 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 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 as well as 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 Board of Directors of Møre Boligkreditt AS has agreed a separate risk policy for the company.

Møre Boligkreditt AS shall have a low risk profile and revenue generation shall be a product of customer related activities related to the company`s operations and purpose, not a product of financial risk-taking. In addition, the company has introduced separate policies for each significant risk area: credit risk, market risk, funding risk and counterparty risk. The risk strategies are adopted by the Board of Directors and revised at least once a year or when special circumstances should warrant it. The approved risk policies operationalize the business strategy set forth in the company's overall strategic plan. The company 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.

Reporting
Møre Boligkreditt AS 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 that are intended for the Group's Board. The most important reports during the year are as follows:

ICAAP (Internal Capital Adequacy Assessment Process) is carried out and reported at least once a year. Møre Boligkreditt AS is included in the assessments of overall ICAAP for the Sparebanken Møre Group, and the Managing Director of Møre Boligkreditt AS is involved in the process. The process is led by the department for Risk Management in Sparebanken Møre. Specific guidelines have been prepared for ICAAP in Sparebanken Møre. ICAAP is reviewed by the bank's management team and the Board of Directors. 

Møre Boligkreditt AS’ internal liquidity adequacy assessment process (ILAAP) is included in the company’s Internal Capital Adequacy Assessment Process (ICAAP).

A performance management report is prepared every month. The report presents the status and performance of the most important aspects of goal achievement at Møre Boligkreditt AS. The report is an integral part of the reporting to the Board of Directors.

A risk report is prepared every quarter. This is a key element of Møre Boligkreditt AS' continuous monitoring of its risk position. The risk report is reviewed by the Board of Directors in quarterly board meetings.

Each quarter, a liquidity forecast with a 5-year horizon is prepared, contributing to a continuous control of the liquidity situation and the refinancing needs of the mortgage company.

Internal control reports are produced every year. In the report an assessment is made of whether or not the internal control is adequate in relation to the risk tolerance. This includes an assessment and comments on internal control work performed, a review of all important risk areas, an assessment of compliance with external and internal regulations, and suggestions for and planned improvement measures. The internal control report is discussed by the Board of Directors. Møre Boligkreditt AS` internal control report is consolidated in the Group`s total internal control reporting.

Reports from external and internal auditors are reviewed by the Board of Directors, as well as the Audit Committee of Sparebanken Møre.

A reporting portal has been established in the Sparebanken Møre Group, and customer relationship employees have access to reports which show the position and development in the credit risk in his or her portfolio. The portal has a hierarchical structure, allowing managers in Sparebanken Møre and Møre Boligkreditt AS to monitor performance within their area of responsibility. The reports are also used to analyse customers, portfolios and different industrial, commercial and other sectors.

Finance and accounting reports are prepared monthly (and include calculations of collective impairment, as well as quarterly loss reviews of portfolios with a focus on the need for individual impairment). The reports are reviewed by the Board of Directors.

Capital management
Møre Boligkreditt AS acquires mortgages from Sparebanken Møre of which minimum 80 per cent are funded through the issue of covered bonds. The funding of the mortgage company in excess of issues of covered bonds is done by equity and established credit facility in the Parent Bank.

Capital adequacy rules and regulations
The EU’s capital adequacy directive`s purpose is 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:
   

• Pilar I – Minimum requirement for equity and related capital

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

• Pilar III – Publication of information

Møre Boligkreditt AS applies the IRB Approach when calculating capital adequacy for credit risk, the Standard Approach for market risk, and the base method for operational risk. Møre Boligkreditt AS’ Board of Directors ensures that plans for the capitalization of the Company are in place, both during economic downturns and periods of strong economic expansion. Capital assessments (ICAAP) are done every year, and the company’s capital strategy is based on the risk in the company’s operations, having taken into consideration different stress scenarios.  

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

  • Credit risk: This is the company’s most significant risk area. Credit risk is defined as the risk of loss due to customers or other counterparts being unable to meet their obligations at the agreed time in accordance with the written agreements, or that collateral held is not covering the outstanding claims. Included in the credit risk is also concentration risk, defined as the risk of loss resulting from the concentration of large individual clients, specific industries, geographical areas, collateral with the same risk characteristics, counterparties in interbank operations or trading in financial derivatives.

Møre Boligkreditt AS’ main credit risk is related to loans to customers with collateral in residential property and housing associations. Møre Boligkreditt AS acquires the loans from Sparebanken Møre, originally granted to customers by Sparebanken Møre, based on group policies and limits. At the time of the transfer of loan portfolios, only loans that qualifies as collateral for the issue of covered bonds, are accepted by Møre Boligkreditt AS. For all these mortgage loans, the value of the loan balance should not exceed 75 per cent of the total value of the property. The collateral value is monitored on an ongoing basis.

Møre Boligkreditt AS has adopted the credit risk policies as set by the Sparebanken Møre Group. The group manages and controls credit risk by setting limits on the amount of risk, and by monitoring exposures in relation to such limits. Collateral is taken to manage credit risk in the loan portfolios. According to the agreement relating to the transfer of loans between Sparebanken Møre and Møre Boligkreditt AS, the day-to-day monitoring of the loans are managed by Sparebanken Møre on behalf of Møre Boligkreditt AS. Sparebanken Møre`s risk classification system is based on the probability of default (PD), which estimates the likelihood of a customer defaulting on its contractual obligations.

See also the Group` s Pillar III document published on www.sbm.no.

• Market risk: The risk of loss due to changes in fair value of financial instruments as a result of fluctuations in market prices such as share prices, foreign exchange rates and interest rates.

Møre Boligkreditt AS minimizes currency risk through swap agreements with eligible counterparties.

The Board of Directors sets risk limits, positions are monitored on a daily basis, and quarterly exposure reports are prepared for the management and for The Board of Directors.

Fixed interest on the company's funding is managed through interest rate swaps with eligible counterparties.

• Liquidity risk: The risk that the company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

The Board of Directors sets annual limits for the company's liquidity risk, which means preparing liquidity risk limits, contingency plans, forecasts, stress tests, routines for monitoring limit utilisation and compliance with guidelines, management reporting and monitoring of management and control systems.

In a stress scenario where the mortgage company faces difficulties in refinancing its covered bonds through normal funding sources, Møre Boligkreditt AS can rely on a revolving credit facility in Sparebanken Møre covering the mortgage company’s payment obligations for the next 12 months, and a 12 month soft-call (12 month extendable maturity) on covered bonds issued.

Møre Boligkreditt AS` liquidity situation at year-end is considered to be sound.

• Operational risk: The risk of losses due to inadequate or failing internal processes, human error, system failures, or external events. Møre Boligkreditt AS has a management agreement with Sparebanken Møre. The services covered by this include administration, production, IT operations, and financial and risk management. Although the operational risk of Møre Boligkreditt AS is dependent of Sparebanken Møre's ability to manage this type of risk, Møre Boligkreditt AS independently bear risk associated with errors in the deliveries and services provided by Sparebanken Møre.

The evaluation of the management and control of operational risk is also afforded substantial space in the group's annual ICAAP. The operational and established internal control system in the mortgage company is also an important tool for reducing operational risk with respect to both uncovering it and following it up.

The internal control system should be designed to ensure reasonable certainty with respect to attaining goals within the areas of strategic development, efficient operations, reliable reporting, and compliance with acts and regulations, including compliance with intragroup and company-specific guidelines and policies. A well-functioning internal control system should also ensure the mortgage company's risk exposure being within the adopted risk profile. Reports are submitted to the company's Board concerning operations and the risk situation throughout the year. The Managing Director submits an annual report to the Board containing an overall assessment of the risk situation and an assessment of whether the internal controls are functioning satisfactorily.

Møre Boligkreditt AS tries to take account of the interaction between the various risk areas by setting desired levels of exposure. Overall, it is the internal conditions, general conditions, customer base etc. in the Group that form the basis for setting the desired overall risk exposure.

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

• Credit risk: A low level of risk is accepted

• Market risk: A low level of risk is accepted

• Liquidity risk: A low level of risk is accepted

• Operational risk: The acceptable risk level is low to moderate 

Credit risk represents the most significant area of risk and is defined as the risk of losses associated with customers being unable to fulfil their obligations at the agreed time and pursuant to written agreements, and the received collateral not covering outstanding claims. The company's credit risk strategy is revised and approved annually by the Board and sets forth the company's risk profile in the area of credit. Monthly portfolio management reports have been established to ensure that any deviations from the strategic goals set forth in the credit risk strategy are uncovered. The risk classification systems are used as decision support, monitoring and reporting. The risk parameters used in the classification systems are an integrated part of the credit process and ongoing risk monitoring, including the follow-up of credit strategies. Probability of default, PD, is used to measure quality.

The risk classification system is divided into ten risk classes where 1 represents the lowest and 10 the highest risk. The classification system is based on the probability of default which is an estimate of the likelihood of a counterparty defaulting on its contractual obligations within the next 12 months. In the table below, all loans to customers and undrawn commitments are presented according to risk level. The amounts are based on the nominal amounts before adjustments for impairment and accrued interest.

Loans for which payments are overdue with more than 90 days are considered non-performing and transferred to “Commitments in default”.    

Collateral
The company requires residential property as collateral to reduce the risk associated with customers' willingness and ability to serve their obligation. By the granting of loans there is an objective valuation of residential properties. Factors are also taken into account that may affect the security's value, such as licensing conditions or easements.

Møre Boligkreditt is the legal and beneficial owner of each loan in the portfolio and is secured rights to the collateral that is associated with each loan. Proper transfers of loans are handled through a separate agreement between the company and the Parent Bank. In cases where the collateral secures loans for both the company and the Parent Bank, it is agreed that Møre Boligkreditt AS is ranked first under the current security.

All loans in the cover pool had mortgages within 75 per cent of property value at the time of acquisition. The mortgage company had mortgages with loan balance exceeding 75 per cent of property value of a total of NOK 348 million as at 31 December 2017, see note 10.  

Liquidity risk is the risk that Møre Boligkreditt AS will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or other financial assets.

The Board of Møre Boligkreditt AS annually sets limits for management of liquidity risk in the company.

Pursuant to the Financial Institutions Act, a mortgage company which issues covered bonds must ensure that the cash flow from the cover pool enables the company to meet its payment obligations to holders of covered bonds and counterparties to derivative agreements at all times.

The loans acquired by Møre Boligkreditt AS are primarily financed through the issuing of covered bonds. The company's plan is to ensure that this type of funding shall over time account for a minimum of 80 per cent of the entity's financing of acquired loans. 

Loans that are acquired and not included in a portfolio financed by covered bonds, and loans that serve as over-collateralisation, are financed through a facility the company holds in the parent bank, Sparebanken Møre, or equity. The long-term overdraft facility in Sparebanken Møre has a total limit of NOK 2.25 billion. Undrawn facility amounts to NOK 1.11 billion as of 31.12.

Receivables from credit institutions and investments in covered bonds, not used for LCR purposes, are used as part of the cover pool.

As of 31.12.2017 the requirement for liquidity coverage ratio for Norwegian covered bond companies is 100 % on total currency level, 100% in significant currencies and 50% in NOK if significant currencies equals EUR or USD. As of 31.12.2017 Møre Boligkreditt AS reports 295 % on total currency level and NOK. There are no LCR-outflows in EUR as of 31.12.2017.  

Market risk arises as a consequence of open positions in foreign exchange and interest rate.

Møre Boligkreditt AS has funding in foreign currency. Currency risk associated with this funding is hedged and minimized by use of currency swaps. The financial derivatives are recognised at fair value, with value changes recognised in the profit and loss account, and are carried in the balance sheet on a gross basis per contract as assets or liabilities respectively. The estimated fair value of financial OTC derivatives is adjusted for counterparty credit risk (CVA) or for the company's own credit risk (DVA).

Through its regular operations, the company is exposed to interest rate risk. Interest risk occurs in the company's portfolio in connection with its activities relating to loans and bond debt in which different interest terms apply to the company's receivables and liabilities. Depending on the relationship between the interest terms for receivables and liabilities, changes to interest rates could result in increased income or expenses. Møre Boligkreditt AS uses interest rate swaps as part of its risk management to manage interest rate risk. The company's borrowings with fixed interest rates are swapped to floating interest rates. Potential effect of a 1 year period change in interest rate of 1 percentage point, is an increase/decrease in interest income of NOK 15 million. Relative to the company's total equity of NOK 1 667 million, the company's interest rate risk is considered to be insignificant.

All lending and receivables are recorded at amortised cost. Amortised cost is also used for fixed and floating rate securities issued.

The company's debt securities issued with fixed interest rates are accounted for using fair value hedging. Losses and gains, resulting from changes in value due to changes in market interest, of debt securities with fixed interest are recognised in the income statement in the period they arise.

For floating rate loans to customers, the interest rates and margins are changed when the market rates change. The customers have to be notified of all changes in advance of the changes being put into effect, so there is a short period of time where the terms of the loans diverge from market rates. However this delay in timing is considered to have an immaterial effect to the total value of the loans hence the carrying value of these loans are considered to be a relevant measure for fair value.

There are no major differences between the book value and the fair value of loans to credit institutions and customers, and liabilities to credit institutions agreed at variable rates and recognised at amortised cost. Fair value of debt securities is calculated allowing for change in the market interest rates and change in the credit margin.

Financial derivatives related to the company`s debt securities issued are carried at fair value through profit or loss, and recognised gross per contract, as either asset or debt.

Securities issued at floating interest rates are measured at amortised cost. Securities issued at fixed interest rates are measured at amortised cost as well, and fair value hedge accounting with changes in fair value (due to the hedged risk) recognised in profit and loss is used for the company's securities issued at fixed rate terms.

In order to conduct normal business, Møre Boligkreditt AS purchases services from Sparebanken Møre. There will also be transactions between the parties related to the acquisition of loan portfolio, and the fact that Sparebanken Møre provides loans and credits to the mortgage company.

Loans from Sparebanken Møre are transferred at market value. If the purchased mortgage loans have fixed interest rates the price is adjusted for the value above / below par. Sparebanken Møre is responsible for ensuring that the loans to be transferred to Møre Boligkreditt AS are properly established and in accordance with the requirements specified in the agreement between the mortgage company and the Parent Bank. In case of a violation of these requirements, the Parent 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 the settlement of interest for transaction days from date of transfer of loan portfolio to date of settlement of the consideration.

Should Møre Boligkreditt AS for any reason experience difficulties in obtaining financing, a revolving guarantee provided by Sparebanken Møre has been established in order to ensure timely payments to owners of bonds and derivative counterparties.

The pricing of the services provided to Møre Boligkreditt AS by Sparebanken Møre distinguishes between fixed and variable costs for the mortgage company. Fixed costs are defined as costs the mortgage company must bear regardless of the activity related to the issuance of covered bonds, the 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 employees to deliver satisfactory services given the number of customers in the portfolio. 

Møre Boligkreditt AS is billed for costs related to the lease of premises at Sparebanken Møre. It is assumed that regardless of operations, a certain area of the bank attributable to the mortgage company is utilised during the year. Regardless of the extent of the activity and the loan portfolio acquired by Møre Boligkreditt AS, charges related to accounting, financial reporting, risk management, cash management, financing, governance and general legal services will incur.

Sparebanken Møre bills the mortgage company based on actual salary costs, including social security contribution, pension costs and other social costs. Parts of the mortgage company's expenses related to services provided by Sparebanken Møre relates to the size of the portfolio acquired from Sparebanken Møre. Management fee is calculated and billed monthly, in which the month's average portfolio size form the basis of billing.

The interest rate of the mortgage company's deposit and credit limit in Sparebanken Møre is based on 3 months NIBOR + a premium.

Møre Boligkreditt AS has no employees at the end of 2017. Møre Boligkreditt AS remunerated Sparebanken Møre for the use of two man-years, but only the Managing Director of Møre Boligkreditt AS is dedicated full time to the company. A number of services are also outsourced for performance by Sparebanken Møre, and these are regulated by a specific agreement between the mortgage company and the bank. The above-mentioned pay and other cash benefits, as well as employer's national insurance contributions, are cost refunds to Sparebanken Møre. The employees are members of Sparebanken Møre's pension scheme. The scheme satisfies the current requirements for mandatory occupational pensions. The company had as per 31 December 2017 no obligation to pay the Managing Director, chairman of the Board of Directors or other employees special remuneration upon them leaving the company or in the event of a change in their employment relationship or duties. Nor do any obligations concerning bonuses, options, or similar exist for any of the aforementioned people.

Møre Boligkreditt AS follows the EU’s new capital adequacy regulations, CRR and CRD IV. The regulations are based on the Basel Committee’s recommendations on new and stricter capital and liquidity standards, Basel III. The Sparebanken Møre Group has been granted permission to use the Internal Ratings Based (“IRB”) approach for credit risk to calculate the total risk-weighted assets.

However, as long as Norwegian transitional rules relating to full implementation of the IRB approach remain in force, the total risk-weighted assets cannot be reduced below 80 per cent of the Basel I requirements.

The legislation requires a minimum common equity Tier-1 of 11.5 per cent, including a conservation-buffer of 2.5 per cent, a systemic-risk buffer of 3.0 per cent and a counter-cyclical buffer of 2.0 per cent. Minimum capital adequacy ratio is 15.5 per cent. The current defined long-term target for Møre Boligkreditt AS is to meet minimum capital requirements. Møre Boligkreditt AS has as of 31.12.2017 capital adequacy/core capital ratio of 16.5 per cent.    

No events of material significance for the financial statements for 2017 have occurred after the reporting date. The company is not involved in any legal proceedings.