1.1 GENERAL INFORMATION
Møre Boligkreditt AS (the company) is part of the Sparebanken Møre Group. The company's Head Office is located at Kipervikgata 6, 6001 Ålesund, Norway.

Preliminary Annual statement (4th quarter 2022 interim report) was approved for publishing by the Board of Directors 25 January 2023. Final Annual report was approved by the Board of Directors 14 February 2023.

This report contains alternative performance measures (APMs) as defined by The European Securities and Market Authority (ESMA). An overview of APMs can be found at www.sbm.no/mbk.

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 2022.

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 2022.

New or revised standards applicable for 2022
A number of new or revised standards were effective from 2022, but they did not have any 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 31.12.2022.

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 using the exchange rates at the reporting date. Changes in value for such items due to exchange rate 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 THE 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 line "Interest income" 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 "Interest income". Gains, losses and fair value changes are included in "Net gains/losses from financial instruments".

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" 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" based on the effective interest rate method.

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

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 actual outcome will deviate from estimated outcome.

Financial assets and liabilities of the company are allocated to different categories according to IFRS 9 by the management. Normally this process requires limited judgement.

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 expected credit losses, in particular with regard 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
  
  

Fair value of financial instruments
The fair value of financial instruments that are not traded in an active market is determined by using different valuation techniques. The company considers and chooses techniques and assumptions that as far as possible are based on observable market data representing the market conditions on the balance sheet date. When measuring financial instruments for which observable market data are not available, the company makes assumptions regarding what market participants would use as the basis for valuing similar financial instruments. The valuations require application of significant judgment when calculating liquidity risk, credit risk and volatility among others. Changes in these factors would affect the estimated fair value of the company’s financial instruments. For more information see note 20.

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.

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 control structures to ensure that the overall framework of the strategic plan is adhered to at all times.

Risk exposure and strategic risk management
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 to moderate level of risk is accepted

Møre Boligkreditt AS is exposed to several different types of risk. The most important risk groups are:

Credit risk
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. This is the company’s most significant risk area. Møre Boligkreditt AS’ main credit risk is related to mortgages to customers with collateral in residential property and housing associations. Møre Boligkreditt AS acquires the mortgages from Sparebanken Møre, originally granted to customers by Sparebanken Møre, based on group policies and limits. At the time of the transfer of mortgage portfolios, only mortgages that qualify as collateral for the issue of covered bonds, are accepted by Møre Boligkreditt AS. The eligible value of the mortgage balance in the cover pool should not exceed 80 per cent of the total value of the property. The collateral value is monitored on an ongoing basis.

According to credit risk policies set by the Board of Directors, Møre Boligkreditt AS 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 mortgage portfolios. According to the agreement relating to the transfer of mortgages between Sparebanken Møre and Møre Boligkreditt AS, the day-to-day monitoring of the mortgages are managed by Sparebanken Møre on behalf of Møre Boligkreditt AS.

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 non-default risk classes and 3 default risk classes. 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.

See also the Group’s Pillar 3 document published on www.sbm.no/investor-relations/.

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 and fixed-rate mortgages to customers are 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-months soft-call (12-months extendable maturity) on covered bonds issued.

LCR measures institutions' ability to survive a 30-day stress period. LCR has increased the importance of high-quality liquid assets.  The minimum regulatory requirement for LCR is 100 per cent.

The EU-harmonised covered bond framework entered into force in 2022 introduced a new 180-day liquidity buffer. The cover pool liquidity buffer shall cover the maximum cumulative net liquidity outflow over the next 180 days.

The new CRR2 banking package applicable in Norway from June 2022 introduced a minimum requirement for Net Stable Funding Ratio of 100 % on total currency level.

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 is 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 also ensures 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.

Capital management
Møre Boligkreditt AS acquires mortgages from Sparebanken Møre funded through the issuance of covered bonds, with equity and an 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 Foundation 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.

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, and 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 yearly. 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.

The equity consists of paid-in share capital, share premium and retained earnings. Møre Boligkreditt AS recognizes 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 capital adequacy regulations, CRR and CRD IV. The Sparebanken Møre Group has been granted permission to use the Internal Ratings Based (“IRB”) Foundation approach for credit risk to calculate the total risk-weighted assets. The average risk-weight on exposures secured in residential property in Norway cannot be lower than 20 percent.

The legislation as of 31.12.2022 requires a minimum Common Equity Tier 1 of 12.0 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 31.12.2022 capital adequacy/Tier 1 capital ratio of 19.3 per cent.

Norges Bank has decided to increase the countercyclical buffer to 2.5 per cent with effect from 31 March 2023. The Ministry of Finance has stated that the systemic risk buffer requirement will be increased from 3.0 per cent to 4.5 per cent with effect from 31 December 2023 for banks using the standardised approach and IRB Foundation.

On 21 December 2021, Sparebanken Møre applied to the Financial Supervisory Authority to make changes to the Group's IRB models and calibration framework. The Group received a preliminary response to the application on 13 July 2022 and responded to this on 14 December 2022. The Board is awaiting a final response from the Financial Supervisory Authority to the application that has been submitted.

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 income for 2022 amounted to NOK 234 million (NOK 357 million). Møre Boligkreditt AS has no employees at the end of 2022 (no employees in 2021). Møre Boligkreditt AS remunerated Sparebanken Møre for two man-years in 2022 and 2021. Reference is made to note 16. Pre-tax profit amounted to NOK 177 million (NOK 306 million) and taxes amounted to NOK 39 million (NOK 67 million). Møre Boligkreditt AS has not received any government grants/subsidies in 2022 or 2021.

In the financial statements, the loan portfolio with agreed floating interest rate is measured at amortised cost, while the loan portfolio with fixed-interest rate is measured at fair value. For more information about classification and measurement, see note 18.

Collateral
Residential properties serve as collateral to mortgages in the cover pool. An objective valuation of the residential properties was carried out at the time of granting the mortgage in the parent bank, and updated quarterly with valuation provided by AVM company thereafter.

Møre Boligkreditt AS is the legal and beneficial owner of each mortgage in the cover pool. Transfer of mortgage portfolios are handled through a separate agreement between the company and the parent bank. In cases where the collateral secures mortgages both for the company and the parent bank, Møre Boligkreditt AS is ranked first under the current security.

Møre Boligkreditt has no repossessed assets or properties as at 31.12.2022.

At the time of acquisition mortgages in the cover pool had LTV within 80 per cent. Part of the mortgages exceeding LTV of 80 per cent, based on quarterly valuation from AVM company, totaled NOK 91 million as of 31 December 2022 (NOK 193 million), see note 22.    

The table below provide the distribution of mortgage volume in each LTV-bucket. The 0 % - 60 % LTV-bucket contain only mortgages with whole LTV less than 60 %. LTV above 100 % implies that the mortgage volume exceeds the value of the collateral. 

In addition to collateralized residential properties, certificates and bonds are included in substitute assets in the cover pool presented in note 22. Reference is made to note 7 for credit quality of these certificates and bonds.

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. If the customer has an account in stage 3, all the customers’ accounts will migrate to stage 3.

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 (comprises mainly operation within the retail banking market). The entire segment is subject to equal macro adjustments.

Regression analyses 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 analyses are based on the company’s customer data base and historical PD and LGD observations.

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, and expected pre-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

12 months macro adjusted weighted PD-calculations are used to determine if increase in risk has been substantial. 

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

Migration to stage 1 or 2 – recovery
An account migrates from stage 2 to stage 1 if the criteria for migration from stage 1 to stage 2 are no longer present, and this is satisfied for at least one subsequent month. (Total 2 months)

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

• The account migrates to stage 2 if more than 30 days in default
• Otherwise, the account migrates to stage 1

Scenarios
Three macro-economic scenarios are developed: Best, Basis and Worst. For each of the scenarios, expected values of different parameters are given, for each of the next five years. The possibility for each of the scenarios to occur is also estimated. After five years, the scenarios are expected to converge to a long-term stable level.

Changes to PD as a result of scenarios, may also affect the staging.

Definition of default and credit-impaired exposures in stage 3
The definition of default has been amended from 1 January 2021 and has been extended to include breaches of special covenants and agreed payment reliefs (forbearance). The new default definition has not changed the assessment of credit risk associated with individual exposures, and there is therefore no significant effect on losses.

A commitment is defined to be in default and credit-impaired (non-performing) if a claim is more than 90 days overdue and the overdue amount exceeds the highest of 1 per cent of the exposure (loans and undrawn credits) and NOK 1,000 for the retail market and NOK 2,000 for the corporate market. Breaches of covenants can also trigger default.

The definition of credit-impaired is fully aligned with the regulatory definition of default. In order to determine the best estimate of expected credit loss according to IFSR 9, an override of the regulatory default definition may be required.

A commitment is also defined to be in default if Møre Boligkreditt AS:

• has made an individual impairment on a commitment as a result of a weakening of the debtor's creditworthiness
• 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 (forbearance)
• has reasons to assume that the debtor will be subject to debt settlement or bankruptcy/involuntary liquidation proceedings, or be placed in receivership
• has other reasons to assume that the payment obligation will not be met (anticipated default).

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 (normal-, positive-, and negative projections). 

A framework has been developed for determining macro factors and scenarios in the ECL model to comply with the requirement for forward-looking and expectation-based estimates. The company’s base case scenario is based on reports from Norges Bank and Statistics Norway. Upside and downside scenarios are designed with emphasis on development in economic conditions. The sensitivity analysis shows low expected credit losses. 

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.

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

Forbearance
Mortgages granted relief in the form of temporary postponement of payments due to borrower’s inability to make mortgage payments are not eligible for the cover pool or transfer to the mortgage company.

The Board of Directors stipulates the long-term targets with regard to the company’s risk profile. Market risk in the company is measured and monitored based on conservative limits, renewed and approved by the Board at least annually.

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 and fixed-rate loans to customers are swapped to floating interest rates.

Møre Boligkreditt AS has funding in foreign currency. Currency risk associated with this funding is hedged and minimized by use of currency swaps. No foreign currencies had a material net position on the company's balance sheet at the end of the year. 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).

The tables below show the potential effect of the change in market value of financial assets and liabilities of the company due to a one percentage point increase in interest rates, specified both by duration and by type of financial instruments. The calculation is based on current positions and market rates as of 31 December:

Møre Boligkreditt AS has funding in foreign currency. Currency risk associated with this funding is hedged and minimized by using currency swaps.

The table below shows the company’s balance sheet items specified by currency:

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 1,5 billion as of 31.12.22.

Receivables from credit institutions and investments in covered bonds, not used for LCR purposes, are used as part of the cover pool, see note 22.

The EU-harmonised covered bond framework entered into force in 2022, introducing a new 180-day liquidity buffer. The cover pool liquidity buffer shall cover the maximum cumulative net liquidity outflow over the next 180 days.

As of 31.12.2022, the requirement for Liquidity Coverage Ratio for Norwegian covered bond companies is 100 % on total currency, 100 % in significant currencies and 50 % in NOK if significant currencies equal EUR or USD. As of 31.12.2022, Møre Boligkreditt AS reports 436 % on total currency level and on NOK. There are no LCR-outflows in EUR as of 31.12.2022.

The new CRR2 banking package applicable in Norway from June 2022 introduced a new minimum requirement for Net Stable Funding Ratio of 100 % on total currency level. The NSFR are also to be reported in significant currencies. As of 31.12.2022 Møre Boligkreditt AS reports a NSFR of 110 % on total currency level.

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.

For information regarding financial derivatives and hedge accounting in the balance sheet, see note 21.

Møre Boligkreditt AS has no employees at the end of 2022. 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. Several services are also outsourced to Sparebanken Møre, and these are regulated by a specific agreement between the mortgage company and the bank. The above-mentioned payments 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 2022 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 positions. 

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 based on the differences existing 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 utilised against future taxable income. Deferred tax (tax assets) is recognised at nominal value and reported on a separate line in the statement of financial position.

A tax rate of 22 per cent is used as the prevailing tax rate in 2022. 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.  

CLASSIFICATION AND MEASUREMENT
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

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

Financial liabilities assessed at amortised cost
Debt securities, including debt securities included in fair value hedging 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.

The portfolio of fixed interest rate loans is assessed at fair value to avoid accounting mismatch in relation to the underlying interest rate swaps.

Financial derivatives are instruments used to mitigate any interest- or currency risk incurred by 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 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. Loans to customers are included in this category.

There have been no significant changes in the approach to the valuation of fixed-rate loans in 2022. Fair value is calculated based on contractual cash flows discounted at a market interest rate matching the rates applicable to the corresponding fixed-rate loans at the balance sheet date. In the income statement, the change in value is presented under Net gains/losses from financial instruments. A change in the discount rate of 10 basis points would result in a change of approximately NOK 7.1 million on fixed rate loans.

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. Credit Support Annex (CSA) to the Schedule to the ISDA Master Agreement regulates posting of collateral 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 posted when the market value breaches thresholds stated in the Credit Support Annex (CSA). Thresholds are zero in contracts entered into by Møre Boligkreditt AS after 2017. The CSA agreements also contain rating clauses whereby the counterparty must post additional 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 own expense. Netting agreements are not offset on the balance sheet, because the transactions are not settled on a net basis.

The table below shows nominal values on financial derivatives according to type of derivative as well as positive and negative market values. Positive market values are recognised as assets in the balance sheet, whereas negative market values are recognised as liabilities:

The table below provides details on the contractual maturity of financial derivatives based on nominal values:

For information regarding gains/losses on financial derivatives and hedge accounting, see note 15

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.

Møre Boligkreditt AS purchases services from Sparebanken Møre. There are also 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 purchase price is adjusted according to 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.

If Møre Boligkreditt AS should have difficulties obtaining financing, a revolving guarantee from Sparebanken Møre is established with the purpose of ensuring timely payments to owners of bonds and derivative counterparties.

The pricing of the services provided by Sparebanken Møre to Møre Boligkreditt AS 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 forms 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.

The share capital consists of 1 100 000 shares each with a nominal value of NOK 1 250. All shares are owned by Sparebanken Møre. 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 2022 have occurred after the reporting date. The company is not involved in any legal proceedings.