Notes to accounts
Note 1 General Information
SpareBank 1 Boligkreditt AS is the SpareBank 1 Alliance's separate legal vehicle established according to the specialist banking principle within the Norwegian legislation for covered bonds.
The Company's purpose is to acquire residential mortgages from its ownership banks organised in the SpareBank 1 Alliance and finance these by issuing covered bonds.
SpareBank1 Boligkreditt main office is located in Stavanger, visiting address Bjergsted Terrasse 1.
The accounts are prepared in accordance with "International Financial Reporting Standards" (IFRS), as determined by the EU and published by "International Accounting Standards Board" (IASB).
The Financial Statements for 2016 is approved by the Board of Directors on February 1, 2017.
Note 2 Summary of Significant Accounting Policies
Presentation Currency
The presentation currency is Norwegian Kroner (NOK), which is also the Company's functional currency. All amounts are given in NOK thousand unless otherwise stated.
Recognition and De-recognition of Assets and Liabilities on the Balance Sheet
Assets and liabilities are recognised on the balance sheet at the point in time when the Company establishes real control over the rights of ownership to assets and becomes effectively responsible for the discharge of a liabilities.
Assets are de-recognised at the point in time when the real risk of the assets has been transferred and control over the rights to the assets has been terminated or expired. Liabilities are de-recognised when they have been effectively discharged.
Lending
Lending is measured at amortised cost. Amortised cost is the acquisition cost less any repayments on the principal, adding or subtracting any cumulative amortisation from an effective interest rate method, and less any loss of value or risk of loss. The effective rate of interest is the interest that exactly discounts estimated future positive or negative cash payments made prior to the financial instrument’s maturity. Assessment of loans is thus carried out in accordance with the "lending regulation dated 21 December 2004" c.f. circular no 10/2005 from The Financial Supervisory Authority of Norway.
Evaluation of impairments (write downs) on mortgage loans
The Company evaluates the occurrence of impairment to loans or groups of loans at 31 December each year. Impairment has occurred if there is an objective proof of a reduction in value that can lead to a reduction in the future cash flow needed to service the debt. Impairment must result from one or more events that has occurred after the first entering into of a loan or group of loans (a loss incident), and the result of the loss incident (or incidents) must also be measured reliably. Objective proof that the value of a loan or a group of loans has been impaired includes observable data that is known to the group on the following loss incidents:
- substantial financial difficulties for the Issuer or with the borrower
- default on the contract, such as missing instalments or interest payments
- the Company grants the borrower particular terms on the basis of financial or legal circumstances related to the borrower's financial situation
- the probability that the debtor will enter into debt negotiations or other financial re-organisations
- the active market for the financial assets cease to exist due to financial difficulties, or
- observable data indicates that there is a measurable reduction in the future cash flow from a group of loans since they were first entered into, even though the reduction cannot be attributed to a single loan in the group, including;
- an unfavourable development in the payment status of the borrowers in the group, or
- national and/or local financial conditions correlating to the default of the assets in the group
The Company will first evaluate whether there exists individual objective proof of impairment for loans that are individually significant. For loans that are not individually significant, the objective proof of impairment will be evaluated either on an individual basis or collectively. If the Company concludes that there does not exist objective proof of impairment for an individually evaluated loan, whether it is significant or otherwise, the asset will be included in a group of loans having the same credit risk characteristics. This group will then be evaluated collectively for a possible impairment. Assets that are being evaluated individually for signs of impairment, and where an impairment is identified, or continues to be observed, will not be a part of a collective evaluation of impairment.
If objective proof of the occurrence of impairment exist, the magnitude of the loss will be considered to be the gap between the asset's book value and the present value of the estimated cash flow (exclusive of any future credit loss that has not yet occurred) discounted by the loan's last given effective interest rate. The book value of a loan will be reduced and the loss will be reflected in the income statement.
The future cash flow from a group of loans that has been collectively evaluated for impairment will be estimated in accordance with the contractual cash flow of the group as well as any historical loss on assets with a similar credit risk. Historic losses will be adjusted in accordance with existing observable data in order to allow for the effects of any current circumstances that were not present at the time of the historic losses, as well as the adjustment of the effects of circumstances that are not currently present.
According to Transfer and Servicing Agreement which the SpareBank 1 banks have entered into with the Company, SpareBank 1 Boligkreditt has the right to off-set any losses incurred on individual mortgage loans against the commissions due to all banks for the remainder of the calendar year. The Company has not since the commencement of its operations had any instances of off-sets against the commissions due to its owner banks.
Segment
Segments are organised by business activities and the Company has only one segment, mortgage lending to private individuals. All of the mortgages have been acquired from the SpareBank 1 Alliance banks. The Company's entire result therefore represents the result of the mortgage lending to private customers segment.
Established losses
When there is a prevailing possibility that the losses are final, the loss will be classified as established losses. Any established losses that have been covered by previously specified loan loss provisions will be set off against these provisions. Any established losses that have not been provided for in the loan loss provisions, as well as excessive or insufficient loan loss provisions will be reflected in the income statement.
Securities
Securities consists of certificates and bonds. These are either carried at fair value or hold to maturity. All securities that are classified at fair value in the accounts are recorded at fair value, and changes in value from the opening balance are allocated in the income statement as income from other financial investments. Certificates and bonds that are classified as hold to maturity are recorded at amortised cost by means of the effective interest rate method. The effective rate of interest is the interest that exactly discounts estimated future positive or negative cash payments made prior to the financial instrument's maturity.
Hedge Accounting
The company has implemented fair value hedge accounting for bonds with fixed rates and bonds in foreign currencies. These bonds are entered into a hedging relationship with individually tailored interest swaps and currency swaps. The company values and documents the efficacy of the hedge both at first entry and consecutively. In fair value hedging both the hedging instrument and the hedged object are entered into the accounts at fair value with respect to the relevant interest rate curve and currency, and changes in these values from the opening balance are recorded in net income. The cash flow is therefore known for the entire contractual duration after the hedging relationship has been established. Because the hedging relationship is intended to remain in place throughout the life of the hedged instrument, only those changes which the interest rate and currency swap agreements are intended to hedge have an influence on the valuation of the hedging instrument.
Valuation of Derivatives and Other Financial Instruments
The Issuer uses financial derivatives to manage essentially all market risk on balance-sheet items. Interest rate risk is hedged to a NIBOR 3 months floating rate basis and currency risk is hedged mostly by derivatives and in some cases by natural asset liabilities hedges.
Liabilities:
- The Issuer applies fair value hedge accounting under IFRS for fixed rate issued debt (covered bonds) utilizing derivatives (swaps) which hedge the fixed interest rate and currency elements of the issued bonds.
- Issued floating rate debt in NOK is accounted for at amortised cost
Assets:
- For liquidity management purposes the issuer maintains a portfolio of liquid assets (including bonds) of which a part is designated as held-to-maturity and valued at amortized cost
- The majority of the liquidity portfolio (trading portfolio) is valued at fair value (market value) and the associated derivatives (swaps) which hedge interest and/or currency risk are valued at fair value.
Though the issuer hedges all material interest rate and currency risk on its balance sheet, net unrealized gains (losses) from financial instruments may occur for the following reasons:
- Temporary mark-to-market differences in the value of an interest rate swap may occur depending on the difference between the level at which the 3 months floating rate leg in the swap was last fixed and the 3 months interest rate level at the financial reporting date.
- There is a credit risk element which forms a part of the fair value of the assets in the trading portfolio, which is not reflected in the value of the associated interest and/or currency swaps hedging the trading portfolio assets.
- There may be floating rate assets (bonds) in the held-to-maturity portfolio denominated in foreign currency which are hedged via a corresponding foreign exchange liability (issued debt) also on an effective floating rate basis. In such natural asset liability hedges there may be a small element of foreign currency risk which may impact the P&L in that the floating rate coupons on the asset and the liability are not reset on the same dates and/or may be of different magnitude.
- Temporary differences will result from basis swaps. Boligkreditt uses basis swaps in order to swap cash flows from floating interest rate foreign currency liabilities and assets into floating interest rate in Norwegian kroner. The valuation of the change in the cost element to enter into these swaps with counterparties change from time to time. The valuation change will only occur on the derivatives (hedging instrument) and not on the hedged instruments and thus can not be mitigated. The impact in net income from this valuation element may be large and volatile. All gains and losses from basis swaps reverse over time when basis swap prices and costs change from the point in time when a derivative was entered into and reduce over time as the derivatives remaining maturity decreases.
Intangible Assets
Purchased IT-systems and software are carried on the balance sheet at acquisition cost (including expenses incurred by making the systems operational) and will be assumed to amortise on a linear basis over the expected life span of the asset. Expenses related to development or maintenance are expensed as incurred.
Cash and Cash Equivalents
Cash and cash equivalents includes cash and deposits, other short term available funds and investments with a maturity of less than three months.
Taxes
Tax in the income statement consists of tax payable on the annual taxable result before tax and deferred tax. Deferred tax is calculated in accordance with the liability method complying with IAS 12. With deferred taxes the liability or asset is calculated based on temporary differences, which is the difference between tax due according to the statutory tax calculations and tax calculated according to the financial accounts, as long as it is probable that there will be a future taxable income and that any temporary differences may be deducted from this income.
The statutory tax rate for 2017 is 25%.
In terms of deferred taxes, assets will only be included if there is an expectation that a future taxable result makes it possible to utilise the tax relief. The assessment of this probability will be based on historic earnings and the future expectations regarding margins.
Pensions
SpareBank 1 Boligkreditt AS has a defined contribution pension plan. A defined benefits plan and was closed to new members in 2011. All employees were migrated to the defined contribution plan from January 1, 2016 .
Defined Contribution Plan
In a defined contribution plan the company pays a defined contribution into the pension scheme. The Company has no further obligations beyond the defined contributions. The contributions are recorded as salary expense in the accounts. Any prepaid contributions are recorded as assets in the balance sheet (pension assets) to the extent that the asset will reduce future payments when due.
The Company has eight employees as of year end 2016. All employees are included in SpareBank 1 SR-Bank ASAs pension scheme and accrue the same benefits as the other membership in that scheme which are employees of SpareBank 1 SR-Bank ASA.
In addition to the defined contribution plan, the Company has other uncovered pension obligations accounted for directly in the profit and loss statement. These obligations exist for early pensions according to AFP (“Avtalefestet pensjon”) and other family pension benefits in conjunction with a previous Chief Executive Officer. For the current Chief Executive Officer of SpareBank 1 Boligkreditt future pension obligations for remuneration above the limit of 12 times the basic allowance or limit (12G) as formulated by the national pension scheme are also accounted for in the Company's accounts.
Cash Flow Statement
The cash flow statement has been presented according to the direct method, the cash flows are grouped by sources and uses. The cash flow statement is divided into cash flow from operational, investment and finance activities.
Reserves
The Company will create reserves when there is a legal or self-administered liability following previous events, it is likely that this liability will be of a financial character, and it can be estimated sufficiently accurately. Reserves will be assessed on every accounting day and subsequently adjusted to reflect the most accurate estimate. Reserves are measured at the present value of the expected future payments required to meet the obligation. An estimated interest rate which reflects the risk free rate of interest in addition to a specific risk element associated with this obligation will be used as the pre-tax rate of discount.
Supplier Debt and other Short Term Liabilities
Supplier debt is initially booked at fair value. Any subsequent calculations will be at amortised cost, determined by using the effective rate of interest method. Supplier debt and other short term liabilities where the effect of amortising is negligible, will be recorded at cost.
Interest Income and Expense
Interest income and expense associated with assets, and liabilities measured at amortised cost, are recorded according to the effective rate of interest method. Any fees in connection with interest bearing deposits and loans will enter into the calculation of an effective rate of interest, and as such will be amortised over the expected maturity.
Commission Expense
Commissions are paid by the Company to its parents banks and represent most of the net interest margin earned in Boligkreditt.
Dividends
Proposed dividends are recorded as equity during the period up until they have been approved for distribution by the Company's general assembly.
Events after the Balance Sheet Date
The annual accounts are deemed to be approved for publication when the Board of Directors have discussed and approved them. The General Meeting and any regulatory authorities may subsequently refuse to approve the annual accounts, but they cannot change them. Events up until the annual accounts are deemed to be approved for publication and that concern issues already known on the accounting day, will be part of the information that the determination of accounting estimates have been based on, and as such will be fully reflected in the accounts. Events that concern issues not known on the accounting day, will be commented upon, provided that they are of relevance.
The annual accounts have been presented under the assumption of continuing operations. This assumption was, in the opinion of the Board of Directors, justified at the time when the accounts were presented to the Board of Directors for approval.
Share Capital and Premium
Ordinary shares are classified as equity capital. Expenses directly related to the issuing of new shares or options with tax relief, will be recorded in the accounts as a reduction in the proceeds received.
Fair Value Measurement
IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for share-based payment transactions that are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value (e.g. net realizable value for the purpose of measuring inventories or value in use for impairment assessment purposes).
IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements.
Adoption of New and Revised International Financial Reporting Standards (IFRSs)
For the previous year, no new or revised IFRS have been incorporated into the Company's accounts
Standards issued but not yet effective
Standards issued but not yet effective up to the date of issuance of the Company’s financial statements are listed below. This listing of standards and interpretations issued are those that the Company reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The new and revised IFRSs are not mandatorily effective for the year ended December 31, 2016. The Company intends to adopt these standards when they become effective.
IFRS 9 Financial instruments
IFRS 9 Financial instruments will replace today’s IAS 39 Financial instruments – recognition and measurement. IFRS 9 concerns recognition, classification, measurement and de-recognition of financial assets and liabilities as well as hedge accounting. IFRS 9 will be applicable from 1. January 2018 and has been approved by the EU. There is a possibility to implement the new standard early, which SpareBank 1 Boligkreditt will not do. In 2015 the SpareBank 1 Gruppen has created a joint task team across several work disciplines with participants from all the banks which use IFRS, and which will plan and implement IFRS 9 (‘the Project’). The Project has a management group and the following sub-teams:
- Models and methods
Development of a calculation solutions and models in order to establish forward looking estimates for expected loss.
- Strategy, organisation and processes
Define how the ongoing accounting work according to IFRS 9 shall be organised between all the cooperating banks.
- Accounts and reporting
Specify the accounting and notes, including accounting principle note and templates
- Classification and measurement
Map the financial instruments in the group and classify these in various categories
A description of the new requirements in IFRS 9 and changes from earlier standards follows below. Furthermore a clarification of the choices which SpareBank 1 Boligkreditt (the ‘Company’) has taken and the status of the Project implementation
- Classification and measurement
Financial assets
According to IFRS 9 financial assets are to be classified into three categories: fair value with changes in fair value over other income and expense (OCI), fair value with changes in fair value over the profit and loss and amortized cost. The measurement category is determined at the initial accounting for the asset. Within financial assets a differentiation is made between debt instruments, derivatives and equity instruments, where debt instruments are all instruments which are not derivatives or equity instruments. The classification of financial assets is determined based on the contractual terms and conditions for the assets and according to which business model is employed for the management of the portfolio which the assets are included in.
Financial assets which are debt instruments
Debt instruments with contractual cash flows which consists solely of interest rates and principal payments on specified dates and which are held for the purpose of receiving the contractual cash flows are measured at amortized cost. Instruments with contractual cash flows which consists solely of interest rates and principal payments on specified dates and which are held in order to both receive the contractual cash flows and in order to sell the instruments are measured at fair value with changes in fair value over OCI, but with interest income and any write downs included in the ordinary profit and loss statement. Changes to fair value recorded in OCI shall be reclassified to the profit and loss upon sale or upon any other de-recognition of the asset.
Other debt instruments are measured at fair value with changes in fair value over profit and loss. These are instruments with cash flows which involve not just the payment of interest rate (which is payment for the time value of money, credit margin and other normal margins tied to lending and receivables) and principal amount, and instruments which are included in portfolios where the aim is not the receipt of contractual cash flows. Instruments which according to IFRS 9 should be accounted for at amortized cost or at fair value with changes I fair value over OCI may be measured at fair value with changes over profit and loss if this eliminates or materially reduces an accounting mismatch.
Derivatives
All derivatives are measured at fair value with changes in fair value over profit and loss, though derivatives which are designated as hedging instruments are to be accounted for according to the principles of hedge accounting.
Financial liabilities
The rules for financial liabilities are essentially unchanged compared to today’s IAS 39. As a main rule financial liabilities are measured at amortized cost with the exception of financial derivative measured at fair value, financial instruments which are included in a trading portfolio and financial liabilities designated to be accounted for at fair value with changes in fair value over the profit and loss statement. A change compared to IAS 39 is that for financial liabilities which are accounted for at fair value over the profit and loss, the changes in fair value that are due to the company’s own credit risk are included in OCI, and not in the regular profit and loss as today.
Hedge accounting
IFRS 9 simplifies the requirements for hedge account in that the hedge efficiency is tied to management’s risk control and thereby more room for judgment is provided. The requirement of hedge efficiency within the 80 to 125 per cent range has been removed and replaced with more qualitative requirements, including an economic connection between the hedge instrument and the hedged instrument and that credit risk is not the dominating factor for changes in the value of the hedging instrument. According to IFRS 9 it is sufficient with a prospective test of efficiency, while the hedge efficiency according to IAS 39 has to be evaluated both prospectively and retrospectively. Hedge documentation is still required. The preliminary assessment is that hedge accounting will be continued along the same lines a today.
SpareBank 1 Boligkreditt has made the following choices for selected issues:
Lending
All loans the Company has made are at variable interest rates. The Company has the right to adjust the interest rate terms according to changes in market rates, in credit exposures, in the competitive landscape and so on. At the same time the debtor has the right to prepay the loan at par. The loans are made at standard terms and conditions for residential real estate mortgages in Norway, and the debtor’s right to early prepayment and the competition between banks means that the cash flows of the loans do not materially deviate from what IFRS 9 defines as the payment of interest rates and principal at defined dates. In the Project team’s assessment the nature of the loans are consistent with the requirement for measurement at amortized cost. The business model which the loans are included in is one where contractual cash flows are received, and therefore the conclusion is that the classification according to IFRS 9 is at amortized cost.
Lending at fixed interest rates and with a right to prepayment
Loans at fixed interest rates may be prepaid prior to maturity in exchange for the payment of an amount above or below par. Contractual terms which give a right to prepayment below par may result in that fixed rates loans have to be accounted for at fair value with changes in fair value in the profit and loss statement. This is due to that the nature of these cash flows are assessed not to be consistent with the receipt of only interest rate and principal payments. Rights which are provided by legal statutes as opposed to contracts may be disregarded in the assessment of classification. The Company’s assessment is that these loans are measured at fair value with changes in fair value over profit and loss according to IFRS 9. The question of whether prepayment rights lead to a requirement that such instruments must be accounted for at fair value has been raised with the IASB and changes to the rules in this area can not be excluded. SpareBank 1 Boligkreditt bars the transfer of fixed rate loans to its cover pool at the present time, and it has never been possible for the SpareBank1 banks to sell fixed rate loans to the Company since the founding in 2005.
Liquidity portfolio
The Company maintains a liquidity portfolio which has a business model that is the receipt of contractual cash flows and sales and the assessment is that this portfolio is accounted for at fair value with changes in fair value over profit and loss.
- Write downs for loan losses
According to today’s rules, write downs for loan losses are only to be made when objective evidence exists that a loss event has occurred. According to IFRS 9 the loan loss provisions shall be made based on expected loan losses (ECL). The general model for loan write downs of financial assets in IFRS 9 will be applicable to financial assets measured at amortized cost or at fair value with changes in fair value over OCI.
The measurement of the provision for expected losses in the general model depends on whether the credit risk has materially changed since the assets was originally recorded. At the initial accounting for a new assets and when the credit risk has not increased materially thereafter a loan loss provision corresponding to a 12 months expected loss shall be made. The 12 months expected loss is the loss that can be expected to occur over the life time of the instrument, but which is tied to events that may occur in the first 12 months. If the credit risk has materially increased a loan loss provision for the entire life of the asset shall be made.
The management team of the Project has established a method to determine whether the credit risk since the first recognition of a loan has materially increased by calculating the change in the probability of default for the remaining life time of the loan. The expected credit loss is calculated based on the present value of all cash flows according to the contract and the cash flows the lender expects to receive, discounted by the effective interest rate for the loan.
The method in the IFRS 9 standard implies a somewhat increased volatility in loan write downs based on the economic outlook. It is to be expected that loan write downs will occur at an earlier date that according to todays practice. This will be especially noticeable at the downturn of the economic and business cycle. The Company does however not expect any material increase in write downs at the time of implementation of IFRS 9. Preliminary tests indicate this.
The model for loan loss provisions
The assessment of loan losses will be made quarterly and will be based upon the existing database where all past history for all account- and customer data for the credit portfolio, lending and guarantees are included. The loan loss provisions will be calculated based on a customer’s probability of default (PD), the loan loss given default (LGD) and loan exposure at default (EAD). The database contains historical data for PD and LGD observations. This will form the basis on which estimates for future values for PD and LGD are made. Based on IFRS 9, the Company will categorize its loans into three levels. All limits are temporary and may be adjusted depending on the development of methods, new guidance and observed practice.
Level 1:
This is the starting point for all financial assets included in the general loan loss provision model. All assets which have no materially increased credit risk since the initial recognition will have a loan loss provisions corresponding to a 12 months expected loss. This level includes all assets not transferred to Level 2 or 3.
Level 2:
In level 2 in the loan loss provision model are assets which have had a material increase in credit risk since the initial recognition, but where an objective evidence of a loan loss does not exist. For these assets a loan loss provision corresponding to an expected loss over the life time of the asset is made. At this level there are accounts where a material degree of change with regards to adverse credit risk has taken place, but belong to customers which are classified as not in default, i.e. that have not been assigned to risk class J or K (default). The demarcation line between Level 2 and 3 is then clear. IFRS 9 does describe that a material increase in credit risk has taken place, unless it can be proven otherwise, when a payment is 30 or more days delayed.
SpareBank 1 has further defined that assets associated to customers which are on a watchlist shall be included in Level2 and that as a main rule there has been a material increase in credit risk when a loan has negatively migrated by two or more risk classes. Two risk classes translates into an increase in PD of approximately 150 per cent. A lower bound for PD has been set at 0.6 per cent in order that customers with a low PD are not included in Level 2.
The following criteria thereby must be met for a material adverse change in credit risk to have occurred:
- Payment delayed by 30 or more days or
- The probability of default has increased by 150% and
- The PD is above 0.6%
Level 3:
At Level 3 in the loan loss provision model there are assets which have had a material increase in credit risk since initial recognition and where there are objective evidence of a loss in existence at the balance sheet date. The Company has defined objective evidence when customers are categorized in risk classes J or K. This definition matches the definition which applies for internal risk management and control procedures and for the regulatory capital requirement calculation for the IRB banks. Customers in risk class J or K are in default. Default is defined as:
- 90 days past due payment of an amount larger than 1,000 kroner.
- Loss occurred
- Bankruptcy / debt restructuring
Further development of the model
The model for loan loss provision is still under continuous development. The Company will assess prospective information for macroeconomic factors such as for example unemployment, GDP growth rates, interest rates and real estate prices in order to attempt to make forecasts for input into the model. The model will calculate loan loss provisions per month-end and adjustments will be made for events occurring prior to the reporting point in time.
Note 3 Risk Management
SpareBank 1 Boligkreditt AS is an institution which acquires residential mortgages from banks in the SpareBank 1 Alliance.
This activity is predominantly financed by the issuance of covered bonds. The Company is therefore subject to the Norwegian legislation for covered bonds and the demands this imply for exposure to risk. In addition, the Company wishes to maintain the AAA/Aaa ratings from Fitch and Moody's, respectively, with regards to the covered bonds, which also requires a high degree of attention to risk management and a low risk exposure profile.
The purpose with the risk and capital adequacy management within SpareBank 1 Boligkreditt AS is to ensure a satisfactory level of capital and a responsible management of assets in accordance with the Company's statutes and risk profile. This is ensured through an adequate process for risk management and planning and implementation of the Company's equity capital funding and capital adequacy.
The Company's risk- and capital management are aiming to be in accordance to best practices - and this is ensured through:
- A risk culture characterised through high awareness about types of risk and the management thereof
- A competent risk analysis and control environment
- A good understanding of which material risks the Company is exposed to"
Organisation and organisational culture
SpareBank 1 Boligkreditt AS is focused on maintaining a strong and alert organisational culture characterised by high awareness about risk management.
SpareBank 1 Boligkreditt AS is focused on independence and control, and the responsibilities are divided between different roles within the organisation:
- The Board of Directors determines the main principles for risk management, including determining the risk profile, limits and guidelines. The Board also carries the responsibility to review capital levels in accordance with the risk profile and the requirements of the regulatory authorities.
- The Chief Executive Officer is responsible for the day to day administration of the Company's business and operations according to laws, statutes, powers of attorney and instructions from the Board. Strategic items or operational items of an unusual nature or importance are discussed with and presented to the Board of Directors. The CEO may however decide a matter in accordance with a power of attorney from the Board. The CEO is responsible for implementing the Company's strategy and in cooperation with the Board to also develop and evolve the strategy.
- The risk manager reports both directly to the CEO and to the Board. The risk manager is tasked with developing the framework for risk management including risk models and risk management systems. The position is further responsible for the independent evaluation and reporting of risk exposure in addition to maintain all relevant laws and regulations.
- The balance sheet committee is an advisory council for the operational management of the Company's balance sheet within the framework determined by the Board of Directors. The committee is an important component of Boligkreditt's operative management of liquidity risks. The balance sheet committee is headed by the CEO and consists of the CFOs of the largest banks in the SpareBank 1 Alliance in addition to one representative from the smaller Alliance banks (Samspar).
- The investment committee is an advisory council for the evaluation of counterparty exposure limits and for the composition of the liquidity portfolio. The committee is headed by the CEO and consists of Boligkreditt's financial director and director for asset liability management. The committee advises on credit limits for counterparties and the composition of the liquidity portfolio. The CEO has been tasked by the Board to make decisions regarding credit limits for counterparties and individual investments. "
Risk Categories:
In its risk management the Company's differentiates amongst the following categories of risk:
- Credit Risk: The risk of loss as a result of that counterparties are unwilling and/or unable to meet their obligations to the Company. Credit risk management is detailed in the Company's credit risk policy and this policy is approved by the Board of Directors annually.
- Liquidity Risk: The risk that the Company is unable to meet its obligations and/or finance its assets
- Market Risks: The risk of loss as a result of changes in observable market variables such as interest rates, foreign exchange rates and securities.
Further details about risk categories are discussed in later Notes
Note 4 Important Estimates and Considerations Regarding Application of Accounting Policies
The presentation of financial information in accordance with IFRS results in that management uses estimates and makes assumptions which affect the outcome of certain accounting principles, including the amounts accounted for assets, liabilities, income and cost.
Loss on loans and guarantees
The Company makes loan provisions for individual loans if an objective incident has occurred which can be identified in relation to a single exposure, and the objective incident reduces the future expected cash flow for repayment of the exposure. Objective incident may be the default, bankruptcy, lack of liquidity or other material financial problems. Individual loan loss provisions are calculated as the difference between the book value of the loan and the net present value of the future cash flow based on the effective interest rate at the time of the initial calculation of the individual write off. Subsequent changes in interest rates are considered for loan agreements with floating interest rates to the extent this impacts expected cash flow. Group loss provisions are estimated on groups of loans where there are objective evidence that an incurrence of loss has taken place following the initial accounting recognition of these loans on the balance sheet. Objective evidence include observable data which allows for a conclusion that the future cash flow from the group of loans is reduced. The development in probability of default over time is one such objective evidence which is utilised in order to identify a need for a group loan loss provision. Where a requirement for a group write down exists, the loss on the group of loans is calculated as the difference between the book value and the net present value of the future estimated cash flow. In order to calculate this difference (which equates to the amount of write downs) the starting point is the expected loss for the group of loans. The estimates of individual and group loan loss provisions are always evaluated and formulated with a considerable degree of uncertainty. Futures estimates based on historical incidents may prove to be erroneous because it is uncertain which relevance historical data have as a predictor for the future. Where loans are secured on collateral in stressed situations, such as when certain objects or industries are in distress, the proceeds from sales of collateral in relative illiquid markets may be subject to a high degree of uncertainty.
Fair value of financial instruments
The fair value of financial instruments which are not traded in a liquid market are determined using valuation techniques. The Company utilises methods and assumptions which are as far as possible based on observable market data and which represent market conditions as of the date of the financial accounts. When valuing financial instruments where no observable market data are available, the Company estimates values based on what it is reasonable to expect that market participants would use as a basis for valuation of financial instruments.
Pensions
Net pension obligations are based on a number of estimates including future investment returns, future interest rate and inflation levels, developments in compensation, turnover, development in the "G" amount (the basic level of pension as determined by the public pension system and used as a yardstick in several calculations nationally) and the general development in the number of disabled persons and life expectancy are of significant importance. The uncertainty is primarily related to the gross obligation for pensions and not the net amount which is recorded in the financial accounts (balance sheet). Changes in pension obligation estimates which may result from changes in the factors mentioned above will be charged directly against the Company's recorded equity.
Income Taxation
The calculation of the income tax also incorporates material estimates. For many transactions and calculations there will be a degree of uncertainty related to the final tax obligation. SpareBank 1 Boligkreditt AS records tax obligations in tax- and other legal disputes based upon whether future income tax obligations are expected to materialise. If the final outcome of a particular case deviate from the original accrued amount for tax, the difference will affect the profit and loss account for tax expense. The recognised amounts for deferred taxation in the period where the difference is established will also be affected.
Note 5 Net Interest Income
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Interest income | |||
| Interest income and similar income from loans to and balances with credit institutions | 526,792 | 300,398 | |
| Interest income and similar income from loans to and balances with customers | 4,511,245 | 5,258,746 | |
| Interest income treasury bills | 7,877 | 7,849 | |
| Commission expense (payable to shareholder banks) * | -1,247,952 | -1,687,085 | |
| Total interest income | 3,797,962 | 3,879,909 | |
| Interest expense | |||
| Interest expense and similar expenses to credit institutions | 12,258 | 31,291 | |
| Interest expense and similar expenses on issued bonds | 3,265,299 | 3,359,422 | |
| Interest expense and similar expenses on issued certificates | 9,107 | 1,735 | |
| Interest expense and similar expenses on Tier 1 capital ** | 45,227 | 22,047 | |
| Interest expense and similar expenses on Tier 2 capital | 54,001 | 58,537 | |
| Other interest expenses | 1,073 | 19 | |
| Total interest expense | 3,386,965 | 3,473,052 | |
| Net interest income | 410,997 | 406,857 | |
* Commissions to our parent banks are calculated daily for each mortgage loan transferred, whereby the commission equals the customer loan rate less a rate which incorporates the Company's average cost of funding and operational costs. The operational add-on element is expressed through an average rate which is from time to time decided by the Company's Board of Directors.
** The reclassification on Tier 1 capital, Hybrid capital to equity, occurred at 31.12.2016 so that the interest will first be recognized in other equity as of 01.01.2017
Note 6 Net Gains from Financial Instruments
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Net gains (losses) from financial liabilities (1) | -3,274,659 | -408,266 | |
| Net gains (losses) from financial derivatives. hedging liabilities. at fair value. hedging instrument (1.3) | 3,641,152 | 160,711 | |
| Net gains (losses) from financial assets (2) | -665,916 | -34,613 | |
| Net gains (losses) from financial derivatives. hedging assets. at fair value. hedging instrument (2.3) | 77,376 | 48,869 | |
| Net gains (losses) due to changes in basisswapspreads (4) | -299,947 | 467,146 | |
| Net gains (losses) | -521,993 | 233,847 | |
(1) The Company utilizes hedge accounting as defined in IFRS for issued fixed rate bonds (covered bonds) with derivatives (swaps) which hedges fixed rates to floating and foreign currencies to Norwegian kroner. The hedges are individually tailored to each issued bond and exactly matches the cash flows and duration of the issued bonds. Some liabilities in foreign currency are hedged with natural hedges (corresponding assets in the same currency) and this will cause the valuation change of the liabilities to be different to the valuation changes in the derivatives hedging the liabilities. There will also be valuation differences due to the the amortization of issuance costs and when the bonds are issued at prices different from par value.
(2) SpareBank 1 Boligkreditt AS manages its liquidity risk by refinancing its outstanding bonds ahead of expected maturities and keeping proceeds as a liquidity portfolio. The majority of this portfolio is valued according to observed market values (fair value). Fixed rate bonds and bonds in other currencies than Norwegian kroner are hedged using swaps. The latter are valued according to interest rate and foreign exchange rates and are also valued at fair value (though differences may occur because the valuation of the bonds include a credit risk/spread element which the swaps do not contain). A smaller part of the portfolio is classified as hold-to-maturity and consist of bonds in Norwegian kroner at floating rates. Included in assets in the table are also investments which are hedged with natural currency hedges, as well as investments in short term, highly rated bonds from funds received from swap counterparties for collateral purposes. Such investments do not have a corresponding value change in the financial derivatives hedging the assets (and are also not included in the liabilities in line 1 in the table above as this contains only the Company's issued debt securities).
(3) All derivatives are valued at fair value according to changes in market interest rates and foreign exchange rates. Changes in valuations from the previous period is accounted for in profit and loss.
(4) The Company utilizes basis swaps, which is the foreign exchange swap that changes foreign currency exposure into Norwegian kroner exposure, and this is entered into at a certain cost expressed in bps per annum. The change in this cost is used to adjust the valuation of all of the outstanding basis swaps each quarter, along with the change in other transaction charges to enter into the swaps. An increase in the costs for basis swaps results in a positive adjustment (gain), while a reduction in basis swap costs lead to a negative adjustment (loss). The effect of the basis swap valuation adjustments can be material from quarter to quarter because the Company's portfolio of swaps is extensive. All basis swap valuation adjustments will reverse in line the with the passage of time and will become zero at the latest at the point of the scheduled swap termination date.
Note 7 Salaries and Remuneration
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Salary | 9,903 | 10,726 | |
| Salaries reinvoiced to SpareBank1 Næringskreditt* | -2,691 | -3,108 | |
| Pension expenses | 1,956 | 706 | |
| Social insurance fees | 1,699 | 1,736 | |
| Other personnel expenses | 541 | 640 | |
| Total salary expenses | 11,409 | 10,700 | |
| Average number of full time equivalents (FTEs) | 8 | 8 | |
* The company’s employees have shared employment between SpareBank 1 Næringskreditt and SpareBank 1 Boligkreditt. All remuneration is effectuated through SpareBank 1 Boligkreditt and a portion is reinvoiced to SpareBank 1 Næringskreditt. The company also buys administrative services from SpareBank 1 SR-Bank ASA and SpareBank 1 Gruppen. Pension benefit obligations are covered in SpareBank 1 Boligkreditt through participation in the pension fund of SpareBank 1 SR-Bank ASA. This pension scheme meets the legal demands on mandatory occupational pension.
Note 8 Salaries and other Remuneration of Management
Paid in 2016
| NOK 1 000 | Total compensation | Bonus | Other compensation | Pension cost | Accrued Pensions | Employee mortgage loan |
|---|---|---|---|---|---|---|
| Management | ||||||
| Chief Executive Office - Arve Austestad | 2,122 | - | 277 | 536 | 5,438 | 3,828 |
| Chief Operating Officer - Henning Nilsen | 1,394 | - | 34 | - | 1,096 | 6,885 |
| Chief Financial Officer - Eivind Hegelstad | 1,439 | - | 63 | - | - | 4,178 |
| Total for Management | 4,955 | - | 374 | 536 | 6,534 | 14,891 |
Paid in 2015
| NOK 1 000 | Total compensation | Bonus | Other compensation | Pension cost | Accrued Pensions | Employee mortgage loan |
|---|---|---|---|---|---|---|
| Management | ||||||
| Chief Executive Office - Arve Austestad | 2,089 | - | 168 | 706 | 4,637 | 4,163 |
| Chief Operating Officer - Henning Nilsen | 1,347 | - | 35 | 208 | 1,043 | 1,383 |
| Chief Financial Officer - Eivind Hegelstad | 1,314 | - | 35 | - | - | 4,425 |
| Total for Management | 4,750 | - | 238 | 914 | 5,680 | 9,971 |
All employees have an offer of an employee mortgage loan from SpareBank 1 SR-Bank. The terms and conditions for this include an interest rate one percentage point below the standard rate as determined by the Norwegian Treasury Department from time to time.
| The Board of Directors | 2016 | 2015 | ||||
|---|---|---|---|---|---|---|
| Kjell Fordal | 100 | 100 | ||||
| Inge Reinertsen | 80 | 79 | ||||
| Tore Anstein Dobloug | 80 | 79 | ||||
| Merete N. Kristiansen | 80 | 79 | ||||
| Merete Eik | 80 | 79 | ||||
| Trond Sørås (Observer) | 23 | 20 | ||||
| Geir-Egil Bolstad (Observer) | 23 | 17 | ||||
| Total for the Board of Directors | 466 | 450 | ||||
| The Control Committee | ||||||
| Ola Neråsen | 10 | 10 | ||||
| Brigitte Ninauve | 10 | 10 | ||||
| Solveig Midtbø | 5 | 5 | ||||
| Kjersti Hønstad | 13 | 13 | ||||
| Total for the Control Committee | 39 | 38 | ||||
| The Committee of Representatives | ||||||
| Arne Henning Falkenhaug | 10 | 9 | ||||
| Sveinung Hestnes | - | 2 | ||||
| Vegard Sæten | - | 2 | ||||
| Kjersti Hønstad | 2 | 2 | ||||
| Hanne J Nordgaard | 2 | 2 | ||||
| Gudrun Michelsen | - | 2 | ||||
| Thor-Christian Haugland | 2 | - | ||||
| Vidar Norheim | 2 | - | ||||
| Kåre Johan Osen | 2 | - | ||||
| Total for the Committee of Representatives | 18 | 18 | ||||
Note 9 Pensions
SpareBank 1 Boligkreditt employees (eight in total) are all at a defined contribution pension scheme. The Company pays the agreed contribution into the pension scheme and has no further obligations. For the Company's CEO the Company has future pension,obligations for salary above 12G (the cap for contributions according to the defined contribution scheme) and these liabilities are,accounted for in the Company's accounts.
| 2016 | 2015 | ||
|---|---|---|---|
| Net pension obligations on the balance sheet | |||
| Present value pension obligation as of Dec 31 | 15,980 | 15,567 | |
| Pension assets as of Dec 31 | 4,121 | 4,734 | |
| Net pension obligation as of Dec 31 | 11,859 | 10,833 | |
| Employer payroll tax | 2,265 | 1,527 | |
| Net pension obligation recorded as of Dec 31 | 14,124 | 12,360 | |
| 2,016 | 2,015 | ||
| Pension expense in the period | |||
| Defined benefit pension accrued in the period | 941 | 602 | |
| Defined contribution plan pension costs including AFP | 1,019 | 292 | |
| Pension expense accounted for in the income statement | 1,960 | 894 | |
| The following economic assumptions have been made when calculating the value of the pension obligations which are not related to the defined contribution plan: | |||
| 2,016 | 2,015 | ||
| Discount rate | 2,60 % | 2,70 % | |
| Expected return on pension assets | 2,60 % | 2,70 % | |
| Future annual compensation increases | 2,50 % | 2,50 % | |
| Regulatory cap change | 2,25 % | 2,50 % | |
| Pensions regulation amount | 1,60%/2,00% | 1,60%/2,00% | |
| Employer payroll taxes | 14,10 % | 14,10 % | |
Note 10 Administration Expenses
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| IT operation and maintenance | 9,456 | 9,705 | |
| Travel | 944 | 1,087 | |
| Telephone and postage | 123 | 163 | |
| Misc other adm expenses | 9 | 10 | |
| Cost share with SpareBank 1 Næringskreditt AS | -284 | -340 | |
| Total | 10,247 | 10,625 | |
Note 11 Other Operating Expenses
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Auditing. hired personnel from SpareBank 1 Group. other services | 11,761 | 9,062 | |
| Operating expenses rented offices | 618 | 675 | |
| Operating expenses reinvoiced to SpareBank 1 Næringskreditt | -500 | -462 | |
| Misc other operating expenses | 436 | 486 | |
| Total | 12,315 | 9,760 | |
Auditing
Remuneration to Deloitte AS and cooperating companies is allocated as follows:
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Legally required audit | 516 | 571 | |
| Other attestation services. incl. examination services. loan documents sample testing. comfort letters | 611 | 841 | |
| Other services outside auditing | 300 | 57 | |
| Total (incl VAT) | 1,427 | 1,469 | |
Note 12 Taxes
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Pre-tax profit | -146,334 | 607,635 | |
| Permanent differences | 2 | 18 | |
| Change in temporary differences due to net unrealized gain/loss | 1,577,616 | -1,425,662 | |
| Change in temporary differences due to use of previously tax deficit | -931,692 | ||
| Tax base/taxable income for year | 499,591 | -818,009 | |
| Tax payable | 124,898 | 0 | |
| Change in deferred taxes | -161,481 | 164,066 | |
| Change in deferred tax due to rate change from 27 % to 25 % | 0 | -29,530 | |
| Tax expense | -36,583 | 134,535 | |
| Effective tax rate | 25,00 % | 22,14 % | |
| Tax effect on pension estimate deviation | -264 | 1,421 | |
| Tax effects on elements in comprehensive income and loss | -264 | 1,421 | |
| Temporary differences as of 31.12 | |||
| Net unrealized gain/loss | 1,069,618 | 2,646,524 | |
| Pension | -14,124 | -12,360 | |
| Tax deficit to be carried forward | - | -931,692 | |
| Corrections to be carried forward | -220,230 | -220,230 | |
| Total temporary differences that affect taxable income | 835,264 | 1,482,242 | |
| Net deferred tax benefit (-) / deferred tax (+) | 208,816 | 370,561 | |
| Taxrate applied | 25 % | 27 % | |
| Taxrate applied for temporary differences | 25 % | 25 % | |
Note 13 Other Assets
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Intangible assets * | 1,245 | 1,880 | |
| Account receivables from SpareBank 1 Næringskreditt AS | 299 | 1,791 | |
| Total | 1,543 | 3,671 | |
Intangible assets *
| NOK 1 000 | |||
|---|---|---|---|
| Acquisition cost 01.01.2015 | 32,397 | ||
| Acquisitions | 962 | ||
| Disposals | |||
| Acquisition cost 31.12.2015 | 33,359 | ||
| Accumulated depreciation and write-downs 01.01.2015 | 29,494 | ||
| Periodical depreciation | 1,985 | ||
| Periodical write-down | - | ||
| Disposal ordinary depreciation | - | ||
| Accumulated depreciation and write-downs 31.12.2015 | 31,479 | ||
| Book value as of 31.12.2015 | 1,880 | ||
| Acquisition cost 01.01.2016 | 33,359 | ||
| Acquisitions | 732 | ||
| Disposals | |||
| Acquisition cost 31.12.2016 | 34,091 | ||
| Accumulated depreciation and write-downs 01.01.2016 | 31,479 | ||
| Periodical depreciation | 1,367 | ||
| Periodical write-down | - | ||
| Disposal ordinary depreciation | - | ||
| Accumulated depreciation and write-downs 31.12.2016 | 32,846 | ||
| Book value as of 31.12.2016 | 1,245 | ||
| Financial lifespan | 3 years | ||
| Depreciation schedule | linear | ||
Note 14 Lending to Customers
Lending to customers are residential mortgages only. The mortgages generally have a low loan-to-value and losses have been very low. The total amount of lending to customers at the end of 2016 were NOK 174,5 billion. All mortgages carry a variable interest rate.
| NOK 1 000 | 2016 | 2015 | |||
|---|---|---|---|---|---|
| Revolving loans - retail market | 53,353,004 | 54,205,342 | |||
| Amortising loans - retail market | 120,969,630 | 114,989,151 | |||
| Accrued interest | 148,277 | 152,202 | |||
| Total loans before specified and unspecified loss provisions | 174,470,911 | 169,346,696 | |||
| Specified loan loss provisions | - | - | |||
| Unspecified loan loss provisions | 7,708 | 7,708 | |||
| Total net loans and claims with customers | 174,463,203 | 169,338,988 | |||
| Liability | |||||
| Unused balances under customer revolving credit lines (flexible loans) | 13,593,736 | 18,636,235 | |||
| Total | 13,593,736 | 18,636,235 | |||
| Defaulted loans | |||||
| Defaults* | 0.0 % | 0.0 % | |||
| Specified loan loss provisions | 0.0 % | 0.0 % | |||
| Net defaulted loans | 0.0 % | 0.0 % | |||
| Loans at risk of loss | |||||
| Loans not defaulted but at risk of loss | 0.0 % | 0.0 % | |||
| - Write downs on loans at risk of loss | 0.0 % | 0.0 % | |||
| Net other loans at risk of loss | 0.0 % | 0.0 % | |||
*The entire customer loan balance is considered to be in default and will be included in overviews of defaulted loans when overdue instalments and interest payments are not received within 90 days or if credit limits on revolving loans are exceeded for 90 days or more.
Changes to loan loss provisions
| NOK 1 000 | 2016 | 2015 | |||
|---|---|---|---|---|---|
| Loan loss provisions as of 01.01 | 7,708 | 7,708 | |||
| Change in group loan loss provisions | 0 | 0 | |||
| Loan loss provisions as of 31.12 | 7,708 | 7,708 | |||
Loans sorted according to geography (Norwegian countries)
| NOK 1 000 | Lending 2016 | Lending 2016 % | Lending 2015 | Lending 2015 % | |
|---|---|---|---|---|---|
| NO01 | Østfold | 6,529,476 | 3.74 % | 6,145,884 | 3.63 % |
| NO02 | Akershus | 19,581,758 | 11.22 % | 18,026,924 | 10.65 % |
| NO03 | Oslo | 17,923,579 | 10.27 % | 17,205,312 | 10.16 % |
| NO04 | Hedmark | 13,334,486 | 7.64 % | 12,782,891 | 7.55 % |
| NO05 | Oppland | 5,439,439 | 3.12 % | 4,570,495 | 2.70 % |
| NO06 | Buskerud | 10,316,497 | 5.91 % | 9,347,308 | 5.52 % |
| NO07 | Vestfold | 7,394,448 | 4.24 % | 6,825,251 | 4.03 % |
| NO08 | Telemark | 6,473,779 | 3.71 % | 6,027,434 | 3.56 % |
| NO09 | Aust Agder | 421,288 | 0.24 % | 459,263 | 0.27 % |
| NO10 | Vest Agder | 1,792,554 | 1.03 % | 1,923,355 | 1.14 % |
| NO11 | Rogaland | 21,176,762 | 12.14 % | 24,310,677 | 14.36 % |
| NO12 | Hordaland | 3,245,956 | 1.86 % | 3,604,683 | 2.13 % |
| NO14 | Sogn og Fjordane | 369,652 | 0.21 % | 316,366 | 0.19 % |
| NO15 | Møre og Romsdal | 10,341,902 | 5.93 % | 9,615,178 | 5.68 % |
| NO16 | Sør Trøndelag | 18,470,852 | 10.59 % | 17,932,825 | 10.59 % |
| NO17 | Nord Trøndelag | 7,779,190 | 4.46 % | 7,655,581 | 4.52 % |
| NO18 | Nordland | 9,800,260 | 5.62 % | 9,050,823 | 5.34 % |
| NO19 | Troms | 9,848,163 | 5.64 % | 9,713,575 | 5.74 % |
| NO20 | Finnmark | 4,177,157 | 2.39 % | 3,792,768 | 2.24 % |
| Svalbard | 46,006 | 0.03 % | 32,397 | 0.02 % | |
| SUM | 174,463,203 | 100.0 % | 169,338,988 | 100.0 % | |
Note 15 Share Capital and Shareholder Information
List of shareholders as of 31.12.2016
| No of Shares | in per cent | Share of votes | |
|---|---|---|---|
| SpareBank 1 SMN | 12,081,960 | 19.09 % | 19.09 % |
| SpareBank 1 Nord-Norge | 9,247,688 | 14.61 % | 14.61 % |
| SpareBank 1 SR-Bank ASA | 8,778,079 | 13.87 % | 13.87 % |
| Bank 1 Oslo Akershus AS | 6,466,157 | 10.21 % | 10.21 % |
| Sparebanken Hedmark | 6,357,786 | 10.04 % | 10.04 % |
| BN Bank ASA | 3,820,090 | 6.03 % | 6.03 % |
| SpareBank 1 BV | 2,926,026 | 4.62 % | 4.62 % |
| SpareBank 1 Østfold Akershus | 2,817,655 | 4.45 % | 4.45 % |
| Sparebanken Telemark | 2,669,547 | 4.22 % | 4.22 % |
| SpareBank 1 Ringerike Hadeland | 2,322,759 | 3.67 % | 3.67 % |
| SpareBank 1 Nordvest | 1,390,766 | 2.20 % | 2.20 % |
| SpareBank 1 Modum | 921,156 | 1.46 % | 1.46 % |
| SpareBank 1 Nøtterøy Tønsberg | 885,033 | 1.40 % | 1.40 % |
| SpareBank 1 Søre Sunnmøre | 823,622 | 1.30 % | 1.30 % |
| SpareBank 1 Hallingdal Valdres | 758,599 | 1.20 % | 1.20 % |
| SpareBank 1 Gudbrandsdal | 587,012 | 0.93 % | 0.93 % |
| SpareBank 1 Lom og Skjåk | 451,547 | 0.71 % | 0.71 % |
| Total | 63,305,482 | 100 % | 100 % |
The share capital consists of 63 305 482 shares with a nominal value of NOK 100
Note 16 Liabilities incurred by issuing Securities
| NOK 1 000 | Nominal value* 2016 | Nominal value 2015 | |
|---|---|---|---|
| Short term notes. unsecured | 950,000 | - | |
| Repurchased short term notes. unsecured | - | - | |
| Senior unsecured bonds | 3,481,000 | 6,476,000 | |
| Repurchased senior unsecured bonds | -232,000 | -74,000 | |
| Covered bonds | 185,292,077 | 177,244,869 | |
| Repurchased Covered bonds | -1,951,550 | -4,917,100 | |
| Total debt incurred by issuing securities | 187,539,527 | 178,729,769 | |
* Nominal value is incurred debt at exchange rates (EUR/NOK and USD/NOK) at the time of issuance
| NOK 1 000 | Book value 2016 | Book value 2015 | |
|---|---|---|---|
| Short term notes. unsecured | 949,966 | - | |
| Repurchased short term notes. unsecured | - | - | |
| Senior unsecured bonds | 3,480,574 | 6,475,779 | |
| Repurchased senior unsecured bonds | -231,456 | -73,998 | |
| Covered bonds | 209,376,266 | 215,868,978 | |
| Repurchased covered bonds | -2,136,734 | -5,125,020 | |
| Activated costs incurred by issuing debt | -163,181 | -158,707 | |
| Accrued interest | 1,781,147 | 1,866,571 | |
| Total debt incurred by issuing securities | 213,056,583 | 218,853,602 | |
Liabilities categorized by debt instrument and year of maturity (nominal value*, net of repurchased bonds) NOK 1,000:
Senior Unsecured Bonds and notes
| Due in | 2016 | 2015 | |
|---|---|---|---|
| 2015 | - | - | |
| 2016 | - | 3,752,000 | |
| 2017 | 2,518,000 | 2,650,000 | |
| 2018 | 800,000 | - | |
| 2019 | 881,000 | - | |
| Total | 4,199,000 | 6,402,000 | |
Covered bonds
| Due in | 2016 | 2015 | |
|---|---|---|---|
| 2016 | - | 20,621,625 | |
| 2017 | 19,449,500 | 21,013,000 | |
| 2018 | 35,754,250 | 35,754,250 | |
| 2019 | 27,535,470 | 27,167,690 | |
| 2020 | 24,958,500 | 24,958,500 | |
| 2021 | 28,770,128 | 25,402,456 | |
| 2022 | 21,148,750 | 12,648,750 | |
| 2023 | 9,252,750 | - | |
| 2024 | 1,517,529 | 1,462,848 | |
| 2025 | 1,010,000 | 1,010,000 | |
| 2026 | 12,185,000 | 1,650,000 | |
| 2027 | 475,850 | 475,850 | |
| 2028 | 1,282,800 | 162,800 | |
| Total | 183,340,527 | 172,327,769 | |
* Nominal value is incurred debt at exchange rates (EUR/NOK and USD/NOK) at the time of issuance
Debt incurred by currency (book values at the end of the period)
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| NOK | 62,584,741 | 56,218,289 | |
| EUR | 120,282,131 | 120,721,290 | |
| USD | 29,922,726 | 41,625,965 | |
| SEK | 266,985 | 288,058 | |
| Total | 213,056,583 | 218,853,602 | |
Note 17 Subordinated Debt
| NOK 1000 | ISIN | Interest rate | Issued year | Call option | Nominal amount | 2016 | 2015 |
|---|---|---|---|---|---|---|---|
| With maturity | |||||||
| Subordinated debt (Tier 2 capital instrument) | NO0010704109 | 3M Nibor + 225 bp | 2014 | 43,592 | 1,600,000 | 1,600,000 | 1,600,000 |
| Accrued interest | 3,778 | 3,778 | |||||
| Additional tier 1 capital classified as hybrid capital as of 31/12-16 | |||||||
| Perpetual | |||||||
| Hybrid (Tier 1 capital instrument) * | NO0010713746 | 3M Nibor + 310 bp | 2014 | 43,594 | 350,000 | - | 350,000 |
| Hybrid (Tier 1 capital instrument) * | NO0010745920 | 3M Nibor + 360 bp | 2015 | 44,097 | 300,000 | - | 300,000 |
| Hybrid (Tier 1 capital instrument) * | NO0010746191 | 3M Nibor + 360 bp | 2015 | 44,103 | 180,000 | - | 180,000 |
| Hybrid (Tier 1 capital instrument) * | NO0010767643 | 3M Nibor + 360 bp | 2016 | 44,369 | 250,000 | - | - |
| Accrued interest * | 0 | 603 | |||||
| Book value | 1,603,778 | 2,434,380 | |||||
*All hybrid instruments have been reclassified to equity from 31.12.2016. This is according to the definition of a financial liability under IAS 32.
Note 18 Financial Derivatives
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Interest rate derivative contracts | |||
| Interest rate swaps | |||
| Nominal amount | 69,479,995 | 80,539,030 | |
| Asset | 4,346,925 | 5,345,413 | |
| Liability | -667,779 | -638,503 | |
| Currency derivative contracts | |||
| Currency swaps | |||
| Nominal amount | 138,286,431 | 153,531,262 | |
| Asset | 22,604,660 | 35,103,579 | |
| Liability | -1,113,441 | -51,812 | |
| Total financial derivative contracts | |||
| Nominal amount | 207,766,425 | 234,070,292 | |
| Asset | 26,951,585 | 40,448,992 | |
| Liability * | -1,781,221 | -690,315 | |
| All derivative contracts exist for the purpose of hedging changes in interest rates and currency exchange rates. | |||
| * Including basis swap spread adjustments. see note 6. | |||
| Asset | 26,951,585 | 40,448,992 | |
| Net gain (loss) on valuation adjustment of basisswap spreads | 198,803 | 498,751 | |
| Net asset derivatives | 27,150,388 | 40,947,743 | |
Basis swaps are currency swaps and are entered into at a certain cost (spread) between SpareBank 1 Boligkreditt and banks which offer such swaps and which have signed an ISDA agreement with the Company. Changes in the cost are valued each quarter across all of the Company's swaps in accordance with the IFRS rules. An increase in the cost would result in an increase in the value of the basisswaps while a cost decrease would reduce the value of the basis swaps. The effect may be material from quarter to quarter because the Company's portfolio of swaps is extensive. All basisswap value changes will reverse over time towards the point of termination of the swaps.
Note 19 Classification of Financial Instruments
| NOK 1 000 | Financial instruments accounted for at fair value * | Financial assets and debt accounted for at amortised cost | Financial assets held to maturity | Non-financial assets and liabilities | 2016 |
|---|---|---|---|---|---|
| Assets | |||||
| Deposits at and receivables from financial institutions | - | 8,129,096 | - | - | 8,129,096 |
| Norwegian government short term debt certificates | 1,948,409 | - | - | - | 1,948,409 |
| Bonds | 40,483,363 | - | 74,846 | - | 40,558,209 |
| Lending to customers | - | 174,463,203 | - | - | 174,463,203 |
| Financial derivatives | 27,150,388 | - | - | - | 27,150,388 |
| Other assets | - | - | - | 1,543 | 1,543 |
| Total Assets | 69,582,160 | 182,592,299 | 74,846 | 1,543 | 252,250,848 |
| Liabilities | |||||
| Debt incurred by issuing securities | 169,924,011 | 43,132,572 | - | - | 213,056,583 |
| Collateral received in relation to financial derivatives | - | 24,304,397 | - | - | 24,304,397 |
| Financial derivatives | 1,781,221 | - | - | - | 1,781,221 |
| Deferred taxes | - | - | - | 208,816 | 208,816 |
| Taxes payable | - | - | - | 124,898 | 124,898 |
| Subordinated dept | - | 1,603,778 | - | - | 1,603,778 |
| Other liabilities | - | - | - | 117,865 | 117,865 |
| Total Liabilities | 171,705,232 | 69,040,747 | - | 451,579 | 241,197,558 |
| Total Equity | - | 1,081,034 | - | 9,972,256 | 11,053,290 |
| Total Liabilities and Equity | 171,705,232 | 70,121,781 | - | 10,423,835 | 252,250,848 |
*Fair value calculation according to changes in market interest rates and currencies exchange rates
| NOK 1 000 | Financial instruments accounted for at fair value * | Financial assets and debt accounted for at amortised cost | Financial assets held to maturity | Non-financial assets and liabilities | 2015 |
|---|---|---|---|---|---|
| Assets | |||||
| Deposits at and receivables from financial institutions | - | 8,083,543 | - | - | 8,083,543 |
| Norwegian government short term debt certificates | 8,705,692 | - | - | - | 8,705,692 |
| Bonds | 41,888,568 | - | 225,094 | - | 42,113,662 |
| Lending to customers | - | 169,338,988 | - | - | 169,338,988 |
| Financial derivatives | 40,947,743 | - | - | - | 40,947,743 |
| Other assets | - | - | - | 3,671 | 3,671 |
| Total Assets | 91,542,003 | 177,422,531 | 225,094 | 3,671 | 269,193,299 |
| Liabilities | |||||
| Debt incurred by issuing securities | 178,925,021 | 39,928,581 | - | - | 218,853,602 |
| Collateral received in relation to financial derivatives | - | 36,950,453 | - | - | 36,950,453 |
| Financial derivatives | 690,315 | - | - | - | 690,315 |
| Deferred taxes | - | - | - | 370,561 | 370,561 |
| Taxes payable | - | - | - | - | - |
| Subordinated dept | - | 2,434,380 | - | - | 2,434,380 |
| Other liabilities | - | - | - | 156,116 | 156,116 |
| Total Liabilities | 179,615,336 | 79,313,414 | - | 526,677 | 259,455,427 |
| Total Equity | - | - | - | 9,737,872 | 9,737,872 |
| Total Liabilities and Equity | 179,615,336 | 79,313,414 | - | 10,264,549 | 269,193,299 |
*Fair value calculation according to changes in market interest rates and currencies exchange rates
Note 20 Financial Instruments at Fair Value
Methods in order to determine fair value
General
The interest rate curve that is used as input for fair value valuations of hedging instruments and hedging objects consists of the NIBOR-curve for maturities less than one year. The swap-curve is used for maturities exceeding one year.
Interest rate and currency swaps
Valuation of interest rate swaps at fair value is done through discounting future cash flows to their present values. Valuation of currency swaps will also include the element of foreign exchange rates.
Bonds
Valuation of bonds at fair value is done through discounting future cash flows to present value.
With effect from 2009 SpareBank 1 Boligkreditt AS has implemented the changes in IFRS 7 in relation to the valuation of financial instruments as of the date of the financial accounts. The changes require a presentation of the fair value measurement for each Level. We have the following three Levels for the fair value measurement:
Level 1: Quoted price in an active market. Fair value of financial instruments which are traded in active markets are based on the market price at the balance sheet date. A market is considered to be active if the market prices are easily and readily available from an exchange, dealer, broker, industry group, pricing service or regulating authority and that these prices represent actual and regular market transactions on an arm's length basis.
Level 2: Valuation based on observable factors. Level 2 consist of instruments which are not valued based on listed prices, but where prices are indirectly observable for assets or liabilities, but also includes listed prices in not active markets.
Level 3: The valuation is based on factors that are not found in observable markets (non-observable assumptions). If valuations according to Level 1 or Level 2 are not available, valuations are based on not-observable information. The Company has a matter of principle neither assets nor liabilities which are valued at this level.
The following table presents the company’s assets and liabilities at fair value as of 31.12.2016
| NOK 1 000 | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Bonds and bills | 25,742,489 | 16,764,091 | - | 42,506,579 |
| Financial Derivatives | - | 27,150,388 | - | 27,150,388 |
| Total Assets | 30,189,424 | 45,929,039 | - | 76,118,463 |
| Bonds | - | 169,924,011 | - | 169,924,011 |
| Financial Derivatives | - | 1,781,221 | - | 1,781,221 |
| Total Liabilities | - | 171,705,232 | - | 171,705,232 |
The following table presents the company
| NOK 1 000 | Level 1 | Level 2 | Level 3 | Total |
|---|---|---|---|---|
| Bonds and bills | 41,286,375 | 9,307,886 | - | 50,594,260 |
| Financial Derivatives | - | 40,947,743 | - | 40,947,743 |
| Total Assets | 41,286,375 | 50,255,628 | - | 91,542,003 |
| Bonds | - | 178,925,021 | - | 178,925,021 |
| Financial Derivatives | - | 690,315 | - | 690,315 |
| Total Liabilities | - | 179,615,336 | - | 179,615,336 |
Note 21 Bonds classified as Hold to Maturity
As of 31.12.2016
| Bonds classified as | Book value 01.01.2016 | Investments | Matured | Amortizing | Exchange rate effects | Amortised cost 31.12.2016 |
|---|---|---|---|---|---|---|
| Hold to maturity | 224,605 | - | -150,000 | 240 | - | 74,845 |
| Total certificates and bonds | 224,605 | - | -150,000 | 240 | - | 74,845 |
Market value of bonds in hold to maturity portfolio
| Bonds classified as | Book value | Market value incl fx effect | Effect on results if fair value | |
|---|---|---|---|---|
| Hold to maturity | 74,845 | 75,204 | 358 | |
| Total certificates and bonds | 74,845 | 75,204 | 358 | |
Note 22 Other Liabilities
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Employees tax deductions and other deductions | 1,470 | 1,478 | |
| Employers national insurance contribution | 476 | 462 | |
| Accrued holiday allowance | 1,011 | 1,015 | |
| Commission payable to shareholder banks | 92,506 | 117,921 | |
| Deposits* | 1,010 | 12,977 | |
| Pension liabilities | 14,124 | 12,360 | |
| Other accrued costs | 7,267 | 9,902 | |
| Total | 117,865 | 156,116 | |
The Company does not have an overdraft facility or a revolving credit facility as of 31.12.2016
* Deposits represents temporary balances paid in by customers in excess of the original loan amount
Note 23 Credit Risk
Credit risk is defined as the risk that losses can occur as a consequence of that customers and others do not have the ability or willingness to meet their obligations to SpareBank 1 Boligkreditt as and when agreed.
Credit risk mainly includes loans to customers which are collateralised by private residences (residential mortgage loans), but also includes credit risk in derivatives contracts (counterparty credit risk) and investment in bonds within the Company's liquidity portfolio. SpareBank 1 Boligkreditt AS maintains a credit policy and limits in order to manage and closely monitor all credit risk the company is exposed to.
According to the Transfer and Servicing agreement between SpareBank 1 Boligkreditt and each parent bank, the Company has the right to reduce commissions payable for the remainder of the current calendar year to all of its parents banks by an amount equal to any incurred losses on individual mortgage loans. The Company has not since the commencement of its operations had any instances of off-set against the commissions due to its parent banks.
Credit exposure
| NOK 1 000 | 2016 | 2015 | ||||
|---|---|---|---|---|---|---|
| Loans to customers | 174,463,203 | 169,338,988 | ||||
| Loans to and deposits with credit institutions | 8,129,096 | 8,083,543 | ||||
| Government certificates | 1,948,409 | 8,705,692 | ||||
| Bonds | 40,558,209 | 42,113,662 | ||||
| Financial derivatives | 27,150,388 | 40,947,743 | ||||
| Total assets | 252,249,305 | 269,189,628 | ||||
| Unused credit on flexible loans | 13,593,736 | 18,653,742 | ||||
| Received collateral in relation to derivative contracts | -24,304,397 | -36,950,453 | ||||
| Total credit exposure | 241,538,644 | 250,905,798 | ||||
Lending to customers (residential mortgage loans)
The risk classification of the Company's lending is conducted on the basis of an evaluation of the exposures. The evaluation is based on the following main criteria:
• Ability of the customer to pay (income and debt)
• Willingness to pay (payment remarks)
• Size of the loan
• Loan to value (maximum loan to collateral value is 75% and the collateral must be valued by an independent source, Valuations are updated quarterly for the whole loan portfolio)
• Location
SpareBank 1 Boligkreditt AS utilizes the SpareBank 1 Alliance's IT platform and custom developed IT systems for the acquisition of loans from the banks in the SpareBank 1 Alliance. Credit risk is monitored by measuring the development of the mortgage portfolio's credit quality, details about missed payments, defaults and over the limit withdrawals. For defaults and losses in the portfolio the Company has set the following limits:
• Maximum probability of default for the portfolio: 0.90 %
• Expected loss in the portfolio: < 0.02 % of the loan volume
• Unexpected loss in the portfolio (at a 99.97% confidence level): < 0,75 % of the loan volume
The following risk classification, step 1 to 3 is executed monthly based on objective data
1.Probability of default (PD): The customers are classified in PD classes depending on the likelihood for default within the next 12 months based on a long average (through cycle). The PD is calculated on the basis of historical dataseries for financial key numbers tied to income and source of income, as well as on the basis of non-financial criteria such as age and behaviour. In order to group the customers according to PD, nine classes of probability of default are used (A to I). In addition the Company has to default classes (J and K) for customers with defaulted and/or written down exposures.
2. Exposure at default: This is a calculated number which provides the exposure with a customer at the point of default. This exposure is usually of lending volume and the approved but not utilized credit lines. Customers approved but not utilized credit lines are multiplied with a 100 per cent conversion factor.
3. Loss given default (LGD): This is a calculated number which expresses how much the Company potentially stands to lose if a custiner defaults on his or her obligations. The assessment takes into consideration the collateral and the cost the Company could incur by foreclosing and collecting on the defaulted exposure. The Company determines the realizable value on the collateral based on the experience of the SpareBank 1 banks over time, and so that the values reflect a cautious assessment in the lower point of an economic cycle. Seven classes (1 to 7) are used to classify the exposures according to LGD.
SpareBank 1 Boligkreditt AS will only purchase loans from the shareholder banks that have a high servicing capacity and low loan to value. This implies that the loans bought by the Company are in lower risk groups. The Company utilizes the same risk classification as the other banks in the SpareBank 1 Alliance. Presented below is an overview that shows how loans are allocated over the risk groups. The allocation in risk groups is based on expected loss (PD multiplied by LGD for each individual loan).
Definition of risk groups - based on probability of default
| Risk group | Lower limit | Upper limit | Distribution in % 2016 | Distribution in % 2015 | Total lending * 2016 | Total lending * 2015 |
|---|---|---|---|---|---|---|
| Lowest | 0,00 % | 0,01 % | 83,49 % | 75,98 % | 145,420,072 | 128,452,104 |
| Low | 0,01 % | 0,05 % | 12,66 % | 18,61 % | 22,058,993 | 31,469,568 |
| Medium | 0,05 % | 0,20 % | 2,60 % | 3,84 % | 4,531,889 | 6,483,931 |
| High | 0,20 % | 0,50 % | 0,62 % | 0,72 % | 1,079,148 | 1,216,783 |
| Highest | 0,50 % | 100 % | 0,63 % | 0,85 % | 1,094,298 | 1,433,267 |
| Total | 100,00 % | 100,00 % | 174,184,400 | 169,055,653 | ||
* Total exposures are presented as exposure at default exclusive of accrued interest and before group loan loss provisions.
Loans to and deposits with credit institutions
SpareBank 1 Boligkreditt only has deposits with financial institutions rated A-/A2 or higher as of 31.12.2016
Bonds and certificates
| Rating class | 2016 | 2015 | ||||
|---|---|---|---|---|---|---|
| AAA/Aaa | Covered Bonds | 24,681,109 | 14,832,945 | |||
| Norw. Government bills | 1,948,409 | 8,705,692 | ||||
| Other government or gov guaranteed bonds | 12,154,915 | 25,468,493 | ||||
| Financial institutions | ||||||
| Total | 38,784,432 | 49,007,130 | ||||
| AA+/Aa1 to AA-/Aa3 | Covered Bonds | 3,722,186 | 1,812,225 | |||
| Financial institutions | 3,981,316 | 3,319,040 | ||||
| Total | 7,703,501 | 5,131,265 | ||||
| A+/A1 - A/A2 | Financial institutions | 4,147,781 | 4,764,503 | |||
| Total | 4,147,781 | 4,764,503 | ||||
| Total | 50,635,714 | 58,902,897 | ||||
Fitch/Moody's/S&P rating classes are used. If the ratings differ, the lowest counts. All bonds are publicly listed.
Financial derivatives
Derivative contracts are only entered into with counterparties with a certain minimum rating by Fitch Ratings and Moody's Ratings. Service. If the value of the derivative exceeds the credit limits held by SpareBank 1 Boligkreditt for counterparty risk in derivative contracts the counterparty must post cash collateral in either NOK or EUR. SpareBank 1 Boligkreditt is not required to post collateral if the value of the contract should be in favour of the counterparty. Collateral received is included in the balance sheet under receivables with and debt to credit institutions.
Note 24 Liquidity Risk
Liquidity risk is defined as the risk that the business is not able to meet its obligations at maturity.
SpareBank 1 Boligkreditt AS issues covered bonds at shorter maturities than the residential mortgages which make up the largest portion of assets on the Company’s balance sheet. The Liquidity risk which arises is closely monitored and is in compliance with the Norwegian covered bond legislation which amongst other things requires that the cash flow from the cover pool is sufficient to cover outgoing cash flows for holders of preferential claims on the cover pool (holders of covered bonds and counterparties in associated hedging contracts (swaps). In order to manage the liquidity risk certain limits and liquidity reserves have been approved by the Board of Directors. SpareBank 1 Boligkreditt AS maintains a liquidity reserve which will cover undrawn amounts under revolving loans, a theoretical temporary halt to incoming interest payments from the mortgage loans and at any point in time cover bond maturities for the next six months (100 per cent) and 50 per cent for maturities between 6 and 12 months, according to the proposals for a new Net Stable Funding Ratio (NSFR). Liquidity risk is monitored on a regular basis and weekly reports are presented to the management and monthly reports to the Board.
Boligkreditt's shareholder banks have committed themselves to buying covered bonds in a situation where the primary market for issuance of covered bonds is not functioning. This commitment has no liquidity effects on the SpareBank 1 banks because the covered bonds can be deposited with the central bank at any time. The Company may require its shareholder banks to acquire covered bonds from it in an amount which is capped at the amount of the next 12 months upcoming maturities less what the Company holds as its own liquidity reserve. Each shareholder bank's responsibility is pro rata in accordance with its ownership stake in the Company and secondary up to a level of twice its pro rata stake if other banks are unable or unwilling to meet their commitment. Each bank may make a deduction in its commitment for bonds already purchased under this commitment.
Liquidity Risk - all amounts in 1000 NOK
| 31.12.2016 | No set term | Maturity 0 to 1 month | Maturity 1 to 3 months | Maturity 3 to 12 months | Maturity 1 to 5 years | Maturity more than 5 years | |
|---|---|---|---|---|---|---|---|
| Loans to credit institutions | 48,687,305 | 3,994,435 | 3,357,730 | 8,578,924 | 8,044,821 | 22,730,132 | 1,981,263 |
| Lending to customers | 174,463,203 | 461 | 11,380 | 54,358 | 1,335,536 | 173,061,469 | |
| Derivatives | 27,150,388 | 1,683,619 | 3,687,768 | 19,877,432 | 1,901,571 | ||
| Treasury Bills | 1,948,409 | 1,556,606 | 391,802 | ||||
| Other assets with no set term | 1,543 | 1,543 | |||||
| Total Assets | 252,250,848 | 3,995,978 | 3,358,191 | 11,830,529 | 12,178,749 | 43,943,099 | 176,944,302 |
| Liabilities incurred when issuing securities | -213,056,583 | 163,142 | -11,729,124 | -15,631,589 | -137,982,657 | -47,876,356 | |
| Other liabilities with a set term | -24,304,397 | -24,304,397 | |||||
| Derivatives | -1,781,221 | -4,334 | -1,665 | -26,161 | -910,328 | -838,733 | |
| Liabilities with no set term | -451,579 | -451,579 | |||||
| Subordinated debt | -1,603,778 | -1,603,778 | |||||
| Equity | -11,053,290 | -9,972,256 | -1,081,034 | ||||
| Total liabilities and equity | -252,250,848 | -10,260,693 | -24,308,730 | -11,730,788 | -15,657,751 | -138,892,985 | -51,399,901 |
| Net total all items | -6,264,714 | -20,950,540 | 99,741 | -3,479,002 | -94,949,886 | 125,544,401 | |
Liquidity Risk - all amounts in 1000 NOK
| 31.12.2015 | No set term | Maturity 0 to 1 month | Maturity 1 to 3 months | Maturity 3 to 12 months | Maturity 1 to 5 years | Maturity more than 5 years | |
|---|---|---|---|---|---|---|---|
| Loans to credit institutions | 50,197,205 | 6,434,928 | 3,286,100 | 11,086,835 | 15,806,019 | 12,100,177 | 1,483,146 |
| Lending to customers | 169,338,988 | 9,322 | 14,151 | 47,161 | 1,329,844 | 167,938,509 | |
| Derivatives | 40,947,743 | 6,565,858 | 25,343,180 | 9,038,705 | |||
| Treasury Bills | 8,705,692 | 4,739,781 | 3,965,912 | ||||
| Other assets with no set term | 3,671 | 3,671 | |||||
| Total Assets | 269,193,299 | 6,438,598 | 3,295,422 | 15,840,767 | 26,384,950 | 38,773,201 | 178,460,360 |
| Liabilities incurred when issuing securities | -218,853,602 | 158,707 | -672,290 | -568,436 | -29,744,075 | -136,813,686 | -51,213,822 |
| Other liabilities with a set term | -36,950,453 | -36,950,453 | |||||
| Derivatives | -690,315 | -3,130 | -35,394 | -447,723 | -204,067 | ||
| Liabilities with no set term | -526,677 | -526,677 | |||||
| Subordinated debt | -2,434,380 | 0 | -2,434,380 | ||||
| Equity | -9,737,872 | -9,737,872 | |||||
| Total liabilities and equity | -269,193,299 | -10,105,841 | -37,625,873 | -568,436 | -29,779,469 | -137,261,409 | -53,852,269 |
| Net total all items | -3,667,243 | -34,330,451 | 15,272,331 | -3,394,519 | -98,488,209 | 124,608,091 | |
Note 25 Interest Rate Risk
The interest rate risk is the risk of a negative profit effect due to rate changes.
The balance sheet of SpareBank 1 Boligkreditt consists in all essence of loans to retail clients with a variable interest rate that can be changed after a 6 week notice period, floating rate current deposits, bonds and certificates in the Company's liquidity portfolio and of issued bonds and certificates. In accordance with the Norwegian legislation applicable to Covered Bonds and internal guidelines, SpareBank 1 Boligkreditt hedges all interest rate risk by utilising interest rate swaps. The Board approves limits for interest rate risk for different terms. Reports to the Board are presented on a monthly basis. The table below reports the effect on market value in NOK for one per cent change in interest rates for the Company’s portfolios of mortgages, derivatives and issued bonds. The interest rate sensitivity shows the expected effect from a 100 basis points parallel shift in the interest rate curve:
Interest rate risk - all amounts in 1 000 NOK
| 31.12.2016 | No set term | Maturity 0 to 1 month | Maturity 1 to 3 months | Maturity 3 to 12 months | Maturity 1 to 5 years | Maturity more than 5 years | |
|---|---|---|---|---|---|---|---|
| Loans to credit institutions | 48,687,305 | 14,280,822 | 20,056,453 | 6,637,569 | 5,930,120 | 1,782,340 | |
| Lending to customers | 174,463,203 | 174,463,203 | |||||
| Treasury Bills | 1,948,409 | 1,556,606 | 391,802 | ||||
| Other assets with no set term | 1,543 | 1,543 | |||||
| Total Assets | 225,100,459 | 1,543 | 14,280,822 | 196,076,262 | 7,029,372 | 5,930,120 | 1,782,340 |
| Liabilities incurred when issuing securities | -213,056,583 | 163,142 | -2,582,945 | -53,356,072 | -13,584,329 | -102,482,711 | -41,213,669 |
| Other liabilities with a set term | -24,304,397 | -24,304,397 | |||||
| Liabilities with no set term | -451,579 | -451,579 | |||||
| Subordinated debt | -1,603,778 | -1,603,778 | |||||
| Equity | -11,053,290 | -9,972,256 | -1,081,034 | ||||
| Total liabilities and equity | -250,469,627 | -34,565,089 | -2,582,945 | -53,356,072 | -13,584,329 | -102,482,711 | -43,898,481 |
| Net interest rate risk | |||||||
| before derivatives | -25,369,168 | -34,563,546 | 11,697,877 | 142,720,191 | -6,554,958 | -96,552,591 | -42,116,140 |
| Derivatives | 25,369,168 | 0 | -13,613,890 | -108,987,025 | 12,419,060 | 96,568,067 | 38,982,956 |
| Net interest rate risk | -34,563,546 | -1,916,013 | 33,733,166 | 5,864,102 | 15,476 | -3,133,185 | |
| % of total assets | 14 | 1 | 13 | 2 | 0 | 1 | |
Interest rate risk - all amounts in 1 000 NOK
| 31.12.2015 | No set term | Maturity 0 to 1 month | Maturity 1 to 3 months | Maturity 3 to 12 months | Maturity 1 to 5 years | Maturity more than 5 years | |
|---|---|---|---|---|---|---|---|
| Loans to credit institutions | 50,197,205 | 13,798,383 | 18,996,862 | 13,290,834 | 3,674,048 | 437,078 | |
| Lending to customers | 169,338,988 | 169,338,988 | |||||
| Treasury Bills | 8,705,692 | 4,739,781 | 3,965,912 | ||||
| Other assets with no set term | 3,671 | 3,671 | |||||
| Total Assets | 228,245,556 | 3,671 | 13,798,383 | 193,075,631 | 17,256,746 | 3,674,048 | 437,078 |
| Liabilities incurred when issuing securities | -218,853,602 | 158,707 | -7,165,766 | -34,399,765 | -23,706,227 | -109,208,193 | -44,532,358 |
| Other liabilities with a set term | -36,950,453 | -36,950,453 | |||||
| Liabilities with no set term | -526,677 | -526,677 | |||||
| Subordinated debt | -2,434,380 | -2,434,380 | |||||
| Equity | -9,737,872 | -9,737,872 | |||||
| Total liabilities and equity | -268,502,984 | -47,056,294 | -7,165,766 | -34,399,765 | -23,706,227 | -109,208,193 | -46,966,738 |
| Net interest rate risk | |||||||
| before derivatives | -40,257,428 | -47,052,624 | 6,632,617 | 158,675,866 | -6,449,482 | -105,534,145 | -46,529,660 |
| Derivatives | 40,257,427 | 0 | -15,586,140 | -117,215,091 | 22,625,436 | 105,544,855 | 44,889,626 |
| Net interest rate risk | -47,052,624 | -8,953,523 | 41,460,774 | 16,175,954 | 10,710 | -1,640,034 | |
| % of total assets | 17 % | 3 % | 15 % | 6 % | 0 % | 1 % | |
The table below presents a net change in market value in NOK for all the Company's asset and liabilities given a one per cent parallel move of the interest rate curve.
| Sensitivity of net interest rate expense in NOK 1000 | |||||||
|---|---|---|---|---|---|---|---|
| Currency | Change in basis points | 2,016 | 2,015 | ||||
| NOK | 100 | 57,009 | 74,560 | ||||
Mortgage rates (variable) are set by SpareBank 1 Boligkreditt AS, but for all practical purposes follow the recommendations from the local originating banks. The mortgage interest rates are set dependent on collateral and LTV, customer risk category and the competitive mortgage lending landscape.
Note 26 Currency Risk
The foreign exchange risk is the risk of a negative P&L impact as a result of changes in foreign currencies.
SpareBank 1 Boligkreditt AS’s balance sheet consists mainly of lending to private individuals in Norway and in NOK, current deposits in NOK and liabilities issued in the Norwegian or international capital markets. In accordance with the Norwegian covered bond legislation and its internal guidelines the Company hedges all currency risk, either by the utilisation of swaps or by way of asset liability management, i.e. maintaining exposures in assets and liabilities of the same currency. Weekly risk reports are created by the management team and reports to the Board of Directors have a monthly frequency. The currency risk (sensitivity to currency movements) are calculated by adding the exposure in the various currencies. No other currencies than the NOK had a material net position on the Company's balance sheet at the end of the year.
Net currency exposure in NOK 1 000
| Currency | 2016 | 2015 | |
|---|---|---|---|
| EUR | 2,378 | -2,706 | |
| - Bank Deposits | 6,015 | 2,117 | |
| - Issued Bonds | -120,282,093 | -120,721,290 | |
| - Derivatives | 111,776,825 | 116,867,190 | |
| - Bond investments | 8,501,631 | 3,849,277 | |
| USD | 14,246 | 38,900 | |
| - Bank Deposits | 14,142 | 38,975 | |
| - Issued Bonds | -29,922,726 | -41,625,965 | |
| - Derivatives | 29,922,831 | 41,625,891 | |
| - Bond investments | |||
| SEK | 0 | 0 | |
| - Bank Deposits | - | - | |
| - Issued Bonds | -266,985 | -288,058 | |
| - Derivatives | 266,985 | 288,059 | |
| - Bond investments | - | - | |
| Total | 16,625 | 36,195 | |
P&L effect before tax. in NOK 1000
| Currency | Change in Exchange Rate (per cent) | 2016 | 2015 |
|---|---|---|---|
| EUR | +10 | -297 | 219 |
| USD | +10 | 183 | 4,422 |
| SEK | +10 | - | - |
| Total | -114 | 4,642 | |
Note 27 Operational Risk
Operational risk is defined as the risk of loss due to error or neglect in transaction execution, weakness in the internal control or information technology systems breakdowns. Reputational, legal, ethical and competency risks are also elements of operational risk.
The operational risk in SpareBank 1 Boligkreditt AS is limited. The Company is only involved in lending for residential real estate purposes, the placement of liquid assets in highly rated and liquid bonds and the financing of these activities.
Several of the operational processes and systems are supplied by third parties and the Company uses standardized systems for its own operations, such as Simcorp Dimension, for portfolio registration and valuation functions for liquid assets and debt issuances. Several tasks have been outsources to SpareBank 1 SR-Bank, which is a larger organization with overlaps with the systems and tasks of the Company within several treasury functions. The Company also cooperates closely with its other larger parent banks. Evry is the provider of basic bank IT functions, as it is for most banks in Norway and all banks within the SpareBank 1 Alliance. The Evry systems manage the informational data with regards to each individual loan and calculates interest rate payments, installments due and in SpareBank 1 Boligkreditt’s case also provisions due to parent banks on mortgage loans sold and transferred to the Company. Any potential changes and/or additions in the operations of the Company will be vetted thoroughly before implementation. The Company annually holds a risk-works shop to discuss and look for risks and improvements in any aspects of the operational systems. The Company’s management and control of operational risks are satisfactory.
Based on these facts there are no reasons which would lead to a different conclusion than that the standard method for the calculation of capital for operational risks are required. The Company therefore applies the standard method under the capital adequacy rules (CRD IV, Pillar 1) as method to calculate the operational risk capital requirement. The capital so calculated amounts to 52.9 million for 31.12.2016 (see also the note for capital adequacy).
Note 28 Asset Coverage Test
The asset coverage is calculated according to the Financial Services Act § 2-31 (Covered Bond Legislation). There is a discrepancy between the asset coverage test and the amounts in the balance sheet because for the purposes of the test mortgage loans which may have migrated above the 75% loan to value level are reduced to reflect the decrease in the value of the underlying collateral so that only a maximum loan corresponding to a value of 75% of the collateral is considered. Market values are used for all substitute collateral in the test. In addition any defaulted loans, i.e. loans in arrears at or beyond 90 days, are excluded from the test (there have been no occurrences of any defaults starting with the commencement of operations through 31.12.2016).
| NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Covered Bonds | 211,161,257 | 217,752,078 | |
| Repurchased Bonds | -2,155,498 | -5,155,728 | |
| Derivatives | -25,321,068 | -39,848,930 | |
| Total Covered Bonds | 183,684,691 | 172,747,420 | |
| Lending to customers | 173,757,431 | 168,792,683 | |
| Norwegian government s-t debt | 0 | 7,210,022 | |
| Substitute collateral (liquid assets) | 26,181,743 | 14,664,356 | |
| Total Cover Pool | 199,939,174 | 190,667,061 | |
| Asset-coverage | 108.8 % | 110.4 % | |
Note 29 Capital Adequacy
The primary goal for the Company's management of capital reserves is to ensure compliance with laws and regulatory requirements and maintain solid financial ratios and a high quality credit assessment in order to best support its business.
A new capital requirements directive was introduced in Norway as of January 1, 2007 (Basel II). SpareBank1 Boligkreditt AS obtained permission from the Financial Services Authority in Norway (Finanstilsynet) for the implementation of its own Internal Ratings Based (IRB) model for credit risks from the second quarter of 2009.
Transitional rules have been implemented by the FSA whereby regulated financial institutions with approved IRB models will not be able to fully benefit from the results of such models until the year 2018. Regulated entities are allowed to reduce by 20% the total sum of risk weighted assets which would otherwise have been in place under the previous Basel I framework. In the following years until the end of 2017, the transitional rules will lead to significantly higher capital requirements than what would otherwise have been applicable under Basel II.
The European Union has approved new regulatory requirements, CRD IV, which is implemented in Norway. The requirement of 15.0% total capital in effect from July 1, 2016 includes a 11.5% Core Tier 1 capital, including a 1.5% countercyclical buffer, and 3.5% other capital. From 31.12.2017 the countercyclical buffer will increase to 2.0%.
The Company's parent banks have committed themselves to keep the Equity Core Tier 1 capital at a minimum 9% (is currently being reviewed with a target to increase to 11%). Primarily this commitment is pro rata according to the ownership stakes in the Company, but it is a joint and several undertaking if one or more ownership banks are unable to comply, up to the maximum of twice the initial pro rata amount.
| Capital. NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Share capital | 6,330,548 | 5,710,548 | |
| Premium share fund | 3,167,922 | 2,857,922 | |
| Other equity capital | 359,836 | 1,169,402 | |
| Common equity | 9,858,306 | 9,737,872 | |
| Intangible assets | -1,245 | -1,880 | |
| Declared share dividend | - | -105,074 | |
| 100% deduction of expected losses exceeding loss provisions IRB (CRD IV) | -322,613 | -326,724 | |
| Prudent valuation adjustment (AVA) | -71,438 | -83,752 | |
| Core equity capital | 9,463,010 | 9,220,442 | |
| Hybrid bond | 1,080,000 | 830,000 | |
| Tier 1 equity capital | 10,543,010 | 10,050,442 | |
| Supplementary capital (Tier 2) | 1,600,000 | 1,600,000 | |
| Total capital | 12,143,010 | 11,650,442 | |
| Minimum requirements for capital. NOK 1 000 | 2016 | 2015 | |
|---|---|---|---|
| Credit risk | 3,173,049 | 3,122,194 | |
| Market risk | - | - | |
| Operational risk | 52,871 | 41,779 | |
| Depreciation on groups of loans | - | - | |
| CVA Risk | 109,651 | 165,228 | |
| Difference in capital requirement resulting from transitional floor | 2,545,697 | 2,463,358 | |
| Minimum requirement for capital | 5,881,268 | 5,792,559 | |
Capital coverage
| 2016 | 2015 | ||
|---|---|---|---|
| Risk-weighted assets incl. transitional floor | 73,515,848 | 72,406,991 | |
| Capital coverage (%) | 16.52 % | 16.09 % | |
| Tier 1 capital coverage (%) | 14.34 % | 13.88 % | |
| Core Tier 1 capital coverage (%) | 12.87 % | 12.73 % | |
| Leverage ratio (%) | 4.38 % | 3.54 % | |
Note 30 Related parties
The Company has 174 463 MNOK loans to customers. These are loans acquired from shareholder banks at market values (i.e. nominal value).
SpareBank 1 SR-Bank ASA
The Company purchases a substantial amount of their support functions from SpareBank 1 SR-Bank ASA. A complete SLA is established between the Company and SpareBank 1 SR-Bank ASA.
SpareBank 1 - Alliance
In addition the Company has a Transfer and Servicing agreement in place with each individual shareholder bank regulating amongst other things the servicing of mortgage loans.
SpareBank 1 Næringskreditt AS
All employees within SpareBank 1 Boligkreditt AS are also to various degrees working for SpareBank 1 Næringskreditt AS. Twenty percent of the administrative expenses in SpareBank 1 Boligkreditt AS to be charged to SpareBank 1 Næringskreditt AS. This division of administrative expenses between the two companies reflect the actual resources utilisation in SpareBank 1 Boligkreditt AS
Note 31 Collateral Received
SpareBank 1 Boligkreditt has signed ISDA-agreements including CSAs (Credit Support Annexes) with a number of financial institutions that are counterparties in interest rate and currency swaps. These institutions post collateral in the form of cash deposits to SpareBank 1 Boligkreditt. At the end of the period 31.12.2016 this collateral amounted to NOK 24 304 million. This amount is included in the balance sheet, but represents restricted cash. According to signed ISDA and CSA agreement, it is not permitted for the parties in derivatives transactions to net amounts amongst various transactions.
Note 32 Contingencies and Events after the Balance Sheet Date
SpareBank 1 Boligkreditt AS is not a party to any ongoing legal proceedings
No events have taken place after the balance sheet date which are expected to have any material impact on the financial statements as of the end of the period 31.12.2016
The dividend for 2016 is proposed to be NOK 114 million (NOK 1.8 per share)