1.1 GENERAL INFORMATION
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.

Preliminary Annual statement (4 quarter 2019 interim report) was approved for publishing by the Board of Directors 29 January 2020. Final Annual statement was approved by the Board of Directors 10 February 2020.

1.2 ACCOUNTING POLICIES
The company`s financial statements have been prepared in accordance with the International Financial Reporting Standards (IFRS), issued by the International Accounting Standards Board, and approved by the EU as at 31 December 2019.

How the company’s accounting policies are to be read:
Møre Boligkreditt AS describes accounting policies in connection with relevant notes. See the table below for an overview of accounting principles and the notes in which they are described, as well as reference to relevant and important IFRS-standards.

Changes in significant accounting policies and presentation
There were no material changes to the accounting policies in 2019.

New or revised standards applicable for 2019
A number of new or revised standards are effective from January 2019, but they do not have a material effect on the financial statements of the company.  

Approved IFRSs and IFRICs with future effective dates
The company’s intention is to adopt relevant new and amended standards and interpretations when they become effective, subject to EU approval before the financial statements are issued. There is no approved IFRS with future effective date relevant for the company as at 31.12.2019.  

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

Offsetting
Møre Boligkreditt AS uses bilateral ISDA agreements with external counterparties when entering into derivative contracts. The agreements allow for netting in each currency, ie. NOK and EUR. The company has also entered into agreements on daily margin requirement of collateral (CSA), which also apply for each currency. The agreements are one-way, meaning that only the counterparty must provide collateral when the market value fluctuates. Collateral from the counterparty shall be made when the market value breaches thresholds stated in the Credit Support Annex (CSA), in each currency. The CSA agreements also contain rating clauses whereby the counterparty must post more collateral if the rating drops below defined rating triggers. If the rating falls below a predetermined level, the counterparty must novate the contracts to another counterparty at the counterparties own expense. Netting agreements are not offset on the balance sheet, because the transactions are not settled on a net basis.  

1.5 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.

1.6 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 IFRS 9 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 measurement of expected credit losses (ECL) under IFRS 9 requires judgement when assessing whether there has been a significant increase in credit risk and in determining the level of impairment losses, in particular with regards to the estimation of the amount and timing of future cash flows and collateral values. These estimates are driven by a number of factors, in which changes 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 probability of default (PD)
• The criteria for assessing if there has been a significant increase in credit risk resulting in allowances for financial assets being measured on a lifetime ECL basis
• Development of the ECL model, 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 probability of default (PD), exposure and loss given default (LGD)
• Selection of forward-looking macroeconomic scenarios and their probability weightings

   

The business of Møre Boligkreditt AS mainly comprises operations within the retail banking market. Møre Boligkreditt AS has only one operating segment.

Country by country reporting
Møre Boligkreditt AS comprises operations solely in Norway and mainly within the retail market. Total revenue for 2019 amounted to NOK 305 million. Møre Boligkreditt AS has no employees at the end of 2019 (Møre Boligkreditt AS remunerated Sparebanken Møre for two man-years. Referance is made to note 12). Pre-tax profit amounted to NOK 271 million and taxes amounted to NOK 49 million. Møre Boligkreditt has not received any government grants/subsidies in 2019.

Expected credit losses (ECL) according to IFRS 9
Møre Boligkreditt AS applies a three-stage approach when assessing ECL on loans to customers in accordance with IFRS 9:

Stage 1: At initial recognition and if there’s no significant increase in credit risk, the commitment is classified in stage 1, and expected loss for the next 12 months is calculated.

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

Stage 3: If the credit risk increases further and there’s objective evidence of loss or if individual impairments have been made, the commitment is transferred to stage 3 and lifetime expected loss is calculated. As opposed to stage 1 and 2, the effective interest rate is calculated on amortised cost (gross carrying amount less loss allowance) instead of gross carrying amount.

Staging is performed at account level and implies that two or more accounts held by the same customer can be placed in different stages.

An increase in credit risk reflects both customer-specific circumstances and developments in relevant macro risk drivers for the segment where the customer belongs. The assessment of what is considered to be a significant increase in credit risk is based on a combination of quantitative and qualitative indicators and backstops.

The calculation of ECL is based on the following principles:

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

Past, present and forward-looking information is used to estimate ECL. All customers within the retail-banking segment are exposed to the same risk drivers.

For credit-impaired commitments in stage 3, individual assessments are performed.

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

Segmentation and macro adjustments
The assessment of significant increase in credit risk and the calculation of ECL incorporates past, present and forward-looking information. Møre Boligkreditt has only one operating segment (mainly comprises operation within the retail banking market). The entire segment is subject to equal macro adjustments.

Regression analyzes of changes in the default rate on changes in relevant macro time series have been performed. The established subpopulations of the ECL model are based on the macro time series used at present. 

The regression analyzes are based on the company’s customer data base.

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

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

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

Similar to PDs, Møre Boligkreditt AS uses IRB LGDs for capital adequacy calculations. In order to convert the IRB LGDs to IFRS LGDs, modifications have been made to remove the margin of conservatism to produce unbiased projections rather than downturn projections, and to exclude regulatory floors.

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

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

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

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

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

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

PD has increased by more than 2.0 percentage points.

Qualitative criteria
In addition to the quantitative assessment of changes in the PD, a qualitative assessment is made to determine whether there has been a significant increase in credit risk, for example if the commitment is subject to special monitoring.  

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

- the customer’s contractual payments are 30 days past due

- the customer has been granted forbearance measures due to financial distress, though it is not severe enough for the financial instrument to be classified as credit-impaired.

Significant reduction in credit risk – recovery
A customer migrates from stage 2 to stage 1 if there is a significant reduction in credit risk compared to last time customer migrated to stage 2. Significant reduction in credit risk means:

- The criteria for migration from stage 1 to stage 2 is no longer present, and

- This is satisfied for at least one subsequent month (total 2 months)

A customer migrates from stage 3 to stage 1 or stage 2 if the customer no longer meets the conditions for migration to stage 3:

- The customer migrates to stage 2 if more than 30 days in default.

- Otherwise, the customer migrates to stage 1.

Customers who are not subject to the migration rules above are not expected to have significant change in credit risk and retain the stage from previous month.  

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

A commitment is defined to be subject to forbearance if the bank agrees to changes in the terms and conditions because the debtor is having problems meeting payment obligations, and this is assumed to significantly reduce the value of the cash flow.

A commitment is defined to be credit-impaired if the commitment, as a result of a weakening of the debtor's creditworthiness, has been subject to an individual assessment, resulting in an individual impairment.

Sensitivity analysis
Macro factors and weighting of scenarios are subject to expert judgment and are important input factors in the company’s loss model that can contribute to significant changes in the calculation of losses. Each macroeconomic scenario includes a five-year period projection.

Three scenarios for macroeconomic variables in 5 years have been prepared.

The company’s base case scenario is based on monetary report from Norges Bank. Upside and downside scenarios are designed with emphasis on development in economic conditions.

The sensitivity analysis results in a low expected loss due to small recorded losses historically. Due to low levels of PDs in the portfolio and the minimum threshold of 0,5 percentage points for migration to stage 2, the sensitivity analysis shows low migration between the stages.

Management override
Quarterly review meetings evaluate the basis for the accounting of ECL losses. If there are significant events that will affect an estimated loss which the model has not taken into account, relevant factors in the ECL model will be overridden.

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

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.

Expected credit loss on loans is presented as a reduction of “Loans to and receivables from customers” in the Statement of financial position. 

Write-off
Loans and debt securities are written off (either partially or in full) when there is no reasonable expectation of recovering a financial asset in its entirety or a portion thereof. This is generally the case when the company determines that the borrower does not have assets or sources of income that could generate sufficient cash flows to repay the amounts subject to the impairment. This assessment is carried out at the individual asset level. 

Recoveries of amounts previously impaired are included in “impairment losses on financial instruments” in the statement of profit or loss and OCI. 

Impaired financial assets could still be subject to enforcement activities in order to comply with the Group’s procedures for recovery of amounts due. 
 

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, liquidity 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 Board of the company. 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.

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 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 Risk and Audit Committee of Sparebanken Møre.

A reporting portal has been established in the Sparebanken Møre Group, and each member of staff with customer responsibility have access to reports showing 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 expected credit loss, 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 issuance of covered bonds. The funding of the mortgage company in excess of issuance 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 1 – Minimum requirement for equity and related capital

• Pilar 2 – Assessment of aggregate capital requirements and regulatory follow-up (ICAAP)

• Pilar 3 – 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 and 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 3 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.
 
• 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 of high focus 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 in terms of both identifying risk as well as follow-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 takes into account 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: A low level of risk is accepted

Credit risk represents the most significant area of risk and is defined as the risk of losses associated with customers being unable to fulfill 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 credit facilities are presented according to risk level.

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 obligations. 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 AS 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.

Møre Boligkreditt has no repossessed assets or properties as at 31.12.2019.  

All mortgages in the cover pool had LTV within 75 per cent at the time of acquisition. Part of the mortgages exceeding LTV of 75 per cent, based on quarterly valuation from AVM company, totaled NOK 476 million as at 31 December 2019, see note 10.

The table below shows the percentage distribution of commitments with different levels of security. For example, the line 0 % - 50 % implies that the commitments are less than 50 % of the security object. Above 100 % implies that the loan amount exceeds the value of the security Object. The table shows all mortgages, including the part of a mortage exceeding LTV of 75 per cent.  

In addition to collateralized residential properties, certificates and bonds are included in substitute assets in the cover pool presented in note 10. Reference is made to note 8 for credit quality of these certificates and bonds.

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 5 billion. Undrawn facility amounts to NOK 2.8 billion as of 31.12.19.

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

As of 31.12.2019 the requirement for liquidity coverage ratio for Norwegian covered bond companies is on total currency level 100 %, 100 % in significant currencies and 50 % in NOK if significant currencies equal EUR or USD. As of 31.12.2019 Møre Boligkreditt AS reports 117 % on total currency level and on NOK. There are no LCR-outflows in EUR as of 31.12.2019.  

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 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 20,5 million. Relative to the company's total equity of NOK 2,274 million, the company's interest rate risk is considered to be insignificant.

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

•  Amortised cost
•  Fair value with any changes in value through the income statement

The classification of the financial assets depends on two factors:

• The purpose of the acquisition of the financial instrument
• The contractual cash flows from the financial assets

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

• The asset is acquired to receive contractual cash flows
• The contractual cash flows consist solely of principal and interest

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

Financial liabilities assessed at amortised cost
Debt securities, including debt securities included in fair value hedging and loans and deposits from credit institutions, are assessed at amortised cost based on expected cash flows. 

Financial instruments assessed at fair value, any changes in value recognised through the income statement
The company's portfolio of bonds in the liquidity portfolio is classified at fair value with any value changes through the income statement, based on the business model of the company.

Financial derivatives are instruments used to mitigate any interest- or currency risk incurred in the company. Financial derivatives are recorded at fair value, with any changes in value through the income statement, and recognised gross per contract, as either asset or debt.

Changes in basis swaps effects for swaps included in fair value hedging are recognised in OCI.

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

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

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

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

Level 3 – Valuation based on other than observable market data
Level 3 comprises financial instruments which cannot be valued based on directly or indirectly observable prices.  

The company’s funding must have a maximum of 3-months fixed interest rate and be in NOK. If funding is done by issuances of fixed rate- or foreign exchange bonds, it is swapped into 3-months Nibor. The company shall not take any currency risk.

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

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. 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 2019. 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 2019 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.

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 included in the accounts on a net basis.

Deferred tax is calculated on the basis of the differences which exist between the accounting-related and tax-related values at the end of the accounting year. 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.

A tax rate of 22 per cent is used as the prevailing tax rate in 2019. Realisation of deferred tax benefit is based on future results liable to tax, based on empirical experience and prognoses, exceeding the tax benefit in question in the case of reversal of any existing temporary differences. No temporary differences exist in relation to items recognised against comprehensive Income.

The entire tax-cost is related to Norway.  

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.

Møre Boligkreditt AS follows the EU’s new capital adequacy regulations, CRR and CRD IV. These 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.

Due to the Norwegian transitional rules relating to full implementation of the IRB approach, the total risk-weighted assets cannot be reduced below 80 per cent of the Basel I requirements. These rules do no longer apply as of 31.12.2019.

The legislation requires a minimum Common Equity Tier-1 of 12.5 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 2.5 per cent. Minimum capital adequacy ratio is 16.0 per cent. The current defined long-term target for Møre Boligkreditt AS is to meet minimum capital requirements. Møre Boligkreditt AS has as of 31.12.2019 capital adequacy/core capital ratio of 33.0 per cent.    

The share capital consists of 1 500 000 shares each with a nominal value of NOK 1 250. All shares are owned by Sparebanken Møre. The issue of share capital of NOK 450 million was fully paid on 22 February 2019, approved by the Norwegian FSA 11 March 2019, and registered in the Norwegian Register of Business Enterprises 13 March 2019.

Møre Boligkreditt AS is included in the consolidated financial statements of Sparebanken Møre and information about the consolidated financial statements can be obtained by contacting one of the bank's offices or via the bank's website: www.sbm.no.  

New information about conditions that existed at the end of the reporting period shall be 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, shall be disclosed if they are material.

No events of material significance for the financial statements for 2019 have occurred after the reporting date. The company is not involved in any legal proceedings.