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
IFRS 9 will become effective from January 1, 2018 and implemented for the Company in the 1st quarter 2018 financial statements.  The accounting for loan impairments under IFRS 9 will supersede IAS 39 as detailed below.  These financial statements contain a separate note which discusses IFRS 9 and the resulting loan write downs which would have taken place (Estimated Cumulative Loss) if IFRS 9 had been in effect as of 31.12.2017.

Under IAS 39, 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.

The introduction of IFRS 9 will not have any practical impact on the Company’s hedge accounting.  All hedges are deployed to exactly offset a cash flow for the duration of the hedged instrument, thus bringing financial liabilities (bonds outstanding) in fixed rate and/or foreign currency into a NOK 3 month NIBOR basis, while financial assets at fixed rates and/or foreign currency are transformed to a floating rate 3 month NIBOR asset through the derivative.  Derivatives used are swaps.

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) 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. Also, a change in a market credit spread element would impact the price of some of the foreign currency assets held (bonds), though not the liability.  
  • 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. Under IFRS 9 changes in basis swap spreads will no longer be included in the profit and loss account but only under other comprehensive income (OCI); This is due to that changes in fair value for liabilities must be reported in OCI unless the fair value option is elected (.  This is not the case for changes in the fair value of basis swaps which are thus reported in OCI.

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)
IFRS 9 is introduced from January 1, 2018. See the separate IFR 9 note for a discussion.


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.  The

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 2017 2016
 
Interest income
Interest income and similar income from loans to and balances with credit institutions 450,391 526,792
Interest income and similar income from loans to and balances with customers 4,599,141 4,511,245
Interest income treasury bills 3,500 7,877
Commission expense (payable to shareholder banks) * -1,582,762 -1,247,952
Total interest income 3,470,270 3,797,962
 
Interest expense
Interest expense and similar expenses to credit institutions -25,579 12,258
Interest expense and similar expenses on issued bonds 3,000,407 3,265,299
Interest expense and similar expenses on issued certificates 9,824 9,107
Interest expense and similar expenses on Tier 1 capital ** - 45,227
Interest expense and similar expenses on Tier 2 capital 51,641 54,001
Other interest expenses 8,124 1,073
Total interest expense 3,044,417 3,386,965
 
Net interest income 425,852 410,997

* 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 2017 2016
 
Net gains (losses) from financial liabilities (1) -3,819,661 -3,274,659
Net gains (losses) from financial derivatives. hedging liabilities. at fair value. hedging instrument (1.3) 3,006,425 3,641,152
Net gains (losses) from financial assets (2) 517,587 -665,916
Net gains (losses) from financial derivatives. hedging assets. at fair value. hedging instrument (2.3) 54,560 77,376
Net gains (losses) due to changes in basisswapspreads (4) -389,271 -299,947
Net gains (losses) -630,361 -521,993

(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 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 2017 2016
 
Salary 10,486 9,903
Salaries reinvoiced to SpareBank1 Næringskreditt* -2,945 -2,691
Pension expenses 2,002 1,956
Social insurance fees 2,251 1,699
Other personnel expenses 221 541
Total salary expenses 12,017 11,409
 
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 2017

NOK 1 000 Total compensation Bonus Other compensation Pension cost Accrued Pensions Employee mortgage loan
 
Management
Chief Executive Office - Arve Austestad 2,170 - 185 630 5,467 3,427
Chief Operating Officer - Henning Nilsen 1,466 - 88 - 1,197 6,708
Chief Financial Officer - Eivind Hegelstad 1,474 - 62 - - 4,271
Total for Management 5,110 - 335 630 6,664 14,406

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

All employees have an offer of an employee mortgage loan from SpareBank 1 SR-Bank. The terms and conditions for this include an interes trate one percentage point below the standard rate as determined by the Norwegian Treasury Department from time to time.

The Board of Directors 2017 2016
 
Kjell Fordal 105 100
Inge Reinertsen 85 80
Tore Anstein Dobloug 85 80
Merete N. Kristiansen 85 80
Merete Eik 85 80
Trond Sørås (Observer) 23 23
Geir-Egil Bolstad (Observer to 31. March 2017, then Board member)
Total for the Board of Directors 490 466
The Control Committee
Ola Neråsen - 10
Brigitte Ninauve - 10
Solveig Midtbø - 5
Kjersti Hønstad - 13
Total for the Control Committee - 39
The Committee of Representatives
Arne Henning Falkenhaug - 10
Sveinung Hestnes - -
Vegard Sæten - -
Kjersti Hønstad - 2
Hanne J Nordgaard - 2
Gudrun Michelsen - -
Thor-Christian Haugland - 2
Vidar Norheim - 2
Kåre Johan Osen - 2
Total for the Committee of Representatives - 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.

2017 2016
 
Net pension obligations on the balance sheet
Present value pension obligation as of Dec 31 17,093 15,980
Pension assets as of Dec 31 4,321 4,121
Net pension obligation as of Dec 31 12,772 11,859
Employer payroll tax 2,439 2,265
Net pension obligation recorded as of Dec 31 15,211 14,124
2017 2016
 
Pension expense in the period
Defined benefit pension accrued in the period 1,002 941
Defined contribution plan pension costs including AFP 1,043 1,019
Pension expense accounted for in the income statement 2,045 1,960

The following economic assumptions have been made when calculating the value of the pension obligations which are not related to the defined contribution plan:

2017 2016
 
Discount rate 2.60 % 2.60 %
Expected return on pension assets 2.60 % 2.60 %
Future annual compensation increases 2.50 % 2.50 %
Regulatory cap change 2.25 % 2.25 %
Pensions regulation amount 1.60%/2.00% 1.60%/2.00%
Employer payroll taxes 14.10 % 14.10 %

Note 10 Other Operating Expenses

NOK 1 000 2017 2016
 
IT and IT operations 9,143 9,295
Purchased services other than IT 10,290 11,471
Other Operating Expenses 1,934 1,796
Depreciation on fixed assets and other intangible assets 1,021 1,367
Total 22,389 23,929

Auditing

Remuneration to Deloitte AS and cooperating companies is allocated as follows:

NOK 1 000 2017 2016
 
Legally required audit 575 516
Other attestation services. incl. examination services. loan documents sample testing. comfort letters 682 611
Other services outside auditing 130 300
Total (incl VAT) 1,387 1,427

Note 11 Taxes

NOK 1 000 2017 2016
 
Pre-tax profit -238,914 -146,334
Permanent differences 34 2
Change in temporary differences due to net unrealized gain/loss 270,260 1,577,616
Change in temporary differences due to use of previously tax deficit - -931,692
Change in corrections to be carried forward -220,230 -
Tax base/taxable income for year -188,850 499,591
 
Tax payable - 124,898
Change in deferred taxes -59,720 -161,481
Tax expense -59,720 -36,583
 
Effective tax rate 25.00 % 25.00 %
 
Change in derered taxes. tax expence -59,720 -161,481
Tax on hybrid capital. directly against equity -12,376 -
Tax effect on pension estimate deviation. shown in other comprehensive income -87 -264
Change in derered taxes -72,182 -161,745
 
Temporary differences as of 31.12
Net unrealized gain/loss 800,099 1,069,618
Pension -15,211 -14,124
Tax deficit to be carried forward -238,353 -
Corrections to be carried forward - -220,230
Total temporary differences that affect taxable income 546,535 835,264
 
Net deferred tax benefit (-) / deferred tax (+) 136,634 208,816
 
Taxrate applied 25 % 25 %
Taxrate applied for temporary differences 25 % 25 %

Note 12 Other Assets

NOK 1 000 2017 2016
 
Intangible assets * 438 1,245
Account receivables from SpareBank 1 Næringskreditt AS 750 299
Total 1,188 1,543

* Intangible assets

NOK 1 000
 
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
 
Acquisition cost 01.01.2017 34,091
Acquisitions 214
Disposals
Acquisition cost 31.12.2017 34,305
 
Accumulated depreciation and write-downs 01.01.2017 32,846
Periodical depreciation 1,021
Periodical write-down -
Disposal ordinary depreciation -
Accumulated depreciation and write-downs 31.12.2017 33,867
Book value as of 31.12.2017 438
Financial lifespan 3 years
Depreciation schedule linear

Note 13 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 2017 were NOK 177.7 billion. All mortgages carry a variable interest rate.

NOK 1 000 2017 2016
 
Revolving loans - retail market 49,192,170 53,353,004
Amortising loans - retail market 128,318,018 120,969,629
Accrued interest 172,650 148,277
Total loans before specified and unspecified loss provisions 177,682,838 174,470,910
Specified loan loss provisions -
Unspecified loan loss provisions 7,708 7,708
Total net loans and claims with customers 177,675,130 174,463,203
 
Liability
Unused balances under customer revolving credit lines (flexible loans) 12,431,823 13,593,736
Total 12,431,823 13,593,736
 
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 2017 2016
 
Loan loss provisions starting balance 7,708 7,708
Change in group loan loss provisions 0 0
Loan loss provisions ending balance 7,708 7,708

Loans sorted according to geography (Norwegian countries)

NOK 1 000 Lending 2017 Lending 2017 % Lending 2016 Lending 2016 %
 
NO01 Østfold -6,880,200 3.87 % 6,529,476 3.74 %
NO02 Akershus -20,936,360 11.78 % 19,581,758 11.22 %
NO03 Oslo -19,905,974 11.20 % 17,923,579 10.27 %
NO04 Hedmark -13,975,457 7.87 % 13,334,486 7.64 %
NO05 Oppland -6,134,660 3.45 % 5,439,439 3.12 %
NO06 Buskerud -11,352,675 6.39 % 10,316,497 5.91 %
NO07 Vestfold -7,593,287 4.27 % 7,394,448 4.24 %
NO08 Telemark -6,776,593 3.81 % 6,473,779 3.71 %
NO09 Aust Agder -385,354 0.22 % 421,288 0.24 %
NO10 Vest Agder -1,236,810 0.70 % 1,792,554 1.03 %
NO11 Rogaland -12,545,415 7.06 % 21,176,762 12.14 %
NO12 Hordaland -2,737,304 1.54 % 3,245,956 1.86 %
NO14 Sogn og Fjordane -374,850 0.21 % 369,652 0.21 %
NO15 Møre og Romsdal -10,813,146 6.09 % 10,341,902 5.93 %
NO16 Sør Trøndelag -19,284,868 10.85 % 18,470,852 10.59 %
NO17 Nord Trøndelag -8,014,968 4.51 % 7,779,190 4.46 %
NO18 Nordland -12,121,195 6.82 % 9,800,260 5.62 %
NO19 Troms -11,517,284 6.48 % 9,848,163 5.64 %
NO20 Finnmark -4,985,577 2.81 % 4,177,157 2.39 %
Svalbard -103,153 0.06 % 46,006 0.03 %
SUM -177,675,130 100.0 % 174,463,203 100.0 %

Note 14 Share Capital and Shareholder Information

List of shareholders as of 31.12.2017

No of Shares in per cent Share of votes
 
SpareBank 1 Østlandet 13,850,375 21.08 % 21.08 %
SpareBank 1 SMN 13,039,586 19.85 % 19.85 %
SpareBank 1 Nord-Norge 11,072,943 16.85 % 16.85 %
SpareBank 1 SR-Bank ASA 5,228,563 7.96 % 7.96 %
BN Bank ASA 4,355,860 6.63 % 6.63 %
SpareBank 1 BV 4,101,771 6.24 % 6.24 %
SpareBank 1 Østfold Akershus 2,979,762 4.54 % 4.54 %
Sparebanken Telemark 2,920,903 4.45 % 4.45 %
SpareBank 1 Ringerike Hadeland 2,733,288 4.16 % 4.16 %
SpareBank 1 Nordvest 1,453,094 2.21 % 2.21 %
SpareBank 1 Modum 1,066,828 1.62 % 1.62 %
SpareBank 1 Søre Sunnmøre 847,945 1.29 % 1.29 %
SpareBank 1 Hallingdal Valdres 809,318 1.23 % 1.23 %
SpareBank 1 Gudbrandsdal 726,547 1.11 % 1.11 %
SpareBank 1 Lom og Skjåk 518,699 0.79 % 0.79 %
Total 65,705,482 100 % 100 %

The share capital consists of 65 705 482 shares with a nominal value of NOK 100

Hybrid capital

NOK 1000ISINInterest rateIssued year Call option 2017 2016
 
Perpetual
Hybrid (Tier 1 capital instrument)NO00107137463M Nibor + 310 bp2014 09.05.2019 350,000 350,000
Hybrid (Tier 1 capital instrument)NO00107459203M Nibor + 360 bp2015 23.09.2020 300,000 300,000
Hybrid (Tier 1 capital instrument)NO00107461913M Nibor + 360 bp2015 29.09.2020 180,000 180,000
Hybrid (Tier 1 capital instrument)NO00107676433M Nibor + 360 bp2016 22.06.2021 250,000 250,000
Hybrid (Tier 1 capital instrument)NO00108113183M Nibor + 310 bp2017 01.12.2022 100,000 -
Book value 1,180,000 1,080,000

Note 15 Liabilities incurred by issuing Securities

NOK 1 000 Nominal value*
2017
Nominal value*
2016
 
Short term notes. unsecured 121,000 950,000
Repurchased short term notes. unsecured - -
Senior unsecured bonds 2,747,000 3,481,000
Repurchased senior unsecured bonds - -232,000
Covered bonds 195,440,860 185,292,077
Repurchased Covered bonds -679,000 -1,951,550
Total debt incurred by issuing securities 197,629,860 187,539,527

* Nominal value is incurred debt at exchange rates (EUR/NOK and USD/NOK) at the time of issuance

NOK 1 000 Book value 2017 Book value 2016
 
Short term notes. unsecured 120,999 949,966
Repurchased short term notes. unsecured - -
Senior unsecured bonds 2,747,224 3,480,574
Repurchased senior unsecured bonds - -231,456
Covered bonds 220,881,928 209,376,266
Repurchased covered bonds -690,258 -2,136,734
Activated costs incurred by issuing debt -165,460 -163,181
Accrued interest 1,568,549 1,781,147
Total debt incurred by issuing securities 224,462,981 213,056,583

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 2017 2016
 
2017 - 2,518,000
2018 1,312,000 800,000
2019 1,556,000 881,000
Total 2,868,000 4,199,000

Covered bonds

Due in 2017 2016
 
2017 - 19,449,500
2018 33,624,750 35,754,250
2019 27,580,116 27,535,470
2020 24,963,500 24,958,500
2021 28,877,278 28,770,128
2022 38,749,200 21,148,750
2023 14,624,800 9,252,750
2024 11,191,944 1,517,529
2025 1,010,000 1,010,000
2026 12,185,000 12,185,000
2027 672,472 475,850
2028 1,282,800 1,282,800
Total 194,761,860 183,340,527
 
Total 197,629,860 187,539,527

* 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 2017 2016
 
NOK 65,008,436 62,584,741
EUR 135,362,359 120,282,131
USD 18,270,303 29,922,726
GBP 5,546,052 0
SEK 275,832 266,985
Total 224,462,981 213,056,583

Note 16 Subordinated Debt

NOK 1000 ISIN Interest rate Issued year Call option Nominal amount 2017 2016
 
With maturity
Subordinated debt (Tier 2 capital instrument) NO0010704109 3M Nibor + 225 bp 2014 07.05.2019 1,600,000 1,600,000 1,600,000
Accrued interest 3,356 3,778
Book value 1,603,356 1,603,778

Note 17 Reconciliation of liabilities arising from financing activities

The table below details changes in liabilities arising from financing activities. including both cash and non-cash changes.

Non-cash changes
NOK 1 000 2016 Financing cash flows Adjustments Other changes 2017
 
Liabilities
Debt incurred by issuing certificates 956,248 -828,967 - -4,576 122,705
Debt incurred by issuing bonds 212,100,336 10,266,970 2,180,994 -208,023 224,340,276
Collateral received in relation to financial derivatives 24,304,397 -1,413,538 - 737,394 23,628,253
Financial derivatives 1,781,221 - -887,665 4,737 898,292
Subordinated dept 1,603,778 - - -423 1,603,356
240,745,979 8,024,466 1,293,328 529,110 250,592,882

Note 18 Financial Derivatives

NOK 1 000 2017 2016
 
Interest rate derivative contracts
Interest rate swaps
Nominal amount 74,269,883 69,479,995
Asset 3,661,041 4,346,925
Liability -655,346 -667,779
Currency derivative contracts
Currency swaps
Nominal amount 145,676,228 138,286,431
Asset 23,483,084 22,604,660
Liability -52,478 -1,113,441
Total financial derivative contracts
Nominal amount 219,946,110 207,766,425
Asset 27,144,125 26,951,585
Liability -707,824 -1,781,221

All derivative contracts exist for the purpose of hedging changes in interest rates and currency exchange rates.

* Change due to basis swap spread adjustment Liability Asset
 
Asset/Liability -707,824 26,951,585
Net gain (loss) on valuation adjustment of basisswap spreads -190,468 198,803
Net asset/liability derivatives -898,292 27,150,388

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 2017
 
Assets
Lending to and deposits with credit institutions - 3,044,644 - - 3,044,644
Certificates and bonds 54,318,384 - - - 54,318,384
Lending to customers - 177,675,130 - - 177,675,130
Financial derivatives 27,144,125 - - - 27,144,125
Defered tax asset - - - - -
Other assets - - - 1,188 1,188
Total Assets 81,462,509 180,719,774 0 1,188 262,183,472
 
Liabilities
Debt incurred by issuing securities 176,536,265 47,926,716 - - 224,462,981
Collateral received in relation to financial derivatives - 23,628,253 - - 23,628,253
Financial derivatives 898,292 - - - 898,292
Deferred taxes - - - 136,634 136,634
Taxes payable - - - - -
Subordinated dept - 1,603,356 - - 1,603,356
Other liabilities - - - 182,231 182,231
Total Liabilities 177,434,557 73,158,325 - 318,865 250,911,747
 
Total Equity - 1,180,000 - 10,091,724 11,271,724
 
Total Liabilities and Equity 177,434,557 74,338,325 - 10,410,589 262,183,472

*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 2016
 
Assets
Deposits at and receivables from financial institutions - 8,129,096 - - 8,129,096
Certificates and bonds 42,431,771 - 74,846 - 42,506,617
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


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 31.12.2017

NOK 1 000 Level 1 Level 2 Level 3 Total
 
Bonds and bills 34,388,921 19,929,463 - 54,318,384
Financial Derivatives - 27,144,125 - 27,144,125
Total Assets 34,388,921 47,073,589 - 81,462,509
 
Bonds - 176,536,265 - 176,536,265
Financial Derivatives - 898,292 - 898,292
Total Liabilities - 177,434,557 - 177,434,557

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 25,742,489 43,914,479 - 69,656,968
 
Bonds - 169,924,011 - 169,924,011
Financial Derivatives - 1,781,221 - 1,781,221
Total Liabilities - 171,705,232 - 171,705,232

Note 21 Other Liabilities

NOK 1 000 2017 2016
 
Employees tax deductions and other deductions 911 1,470
Employers national insurance contribution 627 476
Accrued holiday allowance 1,038 1,011
Commission payable to shareholder banks 155,832 92,506
Deposits* 771 1,010
Pension liabilities 15,211 14,124
Other accrued costs 7,840 7,267
Total 182,231 117,865

The Company does not have an overdraft facility or a revolving credit facility as of 31.12.2017

* Deposits represents temporary balances paid in by customers in excess of the original loan amount


Note 22 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 2017 2016
 
Loans to customers 177,675,130 174,463,203
Loans to and deposits with credit institutions 3,044,644 8,129,096
Government certificates 1,457,489 1,948,409
Bonds 52,860,895 40,558,209
Financial derivatives 27,144,125 27,150,388
Total assets 262,182,284 252,249,305
Unused credit on flexible loans 12,430,867 13,593,736
Received collateral in relation to derivative contracts -23,628,253 -24,304,397
Total credit exposure 250,984,897 241,538,644

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: 0.75 % • Expected loss in the portfolio: < 0.05 % of the loan volume
  • Unexpected loss in the portfolio (at a 99.97% confidence level): < 0,5 % 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 customer 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 Distribution in % Total lending *
Risk group Lower limit Upper limit 2017 2016 2017 2016
 
Lowest 0.00 % 0.01 % 84.97 % 83.49 % 150,705,579 145,420,072
Low 0.01 % 0.05 % 11.45 % 12.66 % 20,315,920 22,058,993
Medium 0.05 % 0.20 % 2.40 % 2.60 % 4,247,925 4,531,889
High 0.20 % 0.50 % 0.62 % 0.62 % 1,092,737 1,079,148
Highest 0.50 % 100 % 0.56 % 0.63 % 994,165 1,094,298
Total 100.00 % 100.00 % 177,356,326 174,184,400

* 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 31.12.2017

Bonds and certificates

Rating class 2017 2016
 
AAA/Aaa Covered Bonds 33,109,780 24,681,109
Norw. Government bills 1,146,945 1,948,409
Other government or gov guaranteed bonds 18,772,424 12,154,915
Financial institutions
Total 53,029,149 38,784,432
AA+/Aa1 to AA-/Aa3 Other government bonds 1,289,235 0
Covered Bonds 0 3,722,186
Financial institutions 1,389,231 3,981,316
Total 2,678,466 7,703,501
A+/A1 - A/A2 Financial institutions 1,655,413 4,147,781
Total 1,655,413 4,147,781
Total 57,363,028 50,635,714

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 23 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

31.12.2017 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 57,002,570 3,044,644 1,786,446 3,676,825 18,875,514 27,951,055 1,668,086
Lending to customers 177,675,130 1,806 6,710 34,579 1,359,146 176,272,889
Derivatives 27,144,125 2,618,827 3,642,042 19,301,624 1,581,632
Treasury Bills 360,459 360,459
Other assets with no set term 1,188 1,188
Total Assets 262,183,472 3,045,832 1,788,251 6,302,362 22,912,594 48,611,825 179,522,607
Liabilities incurred when issuing securities -224,462,981 -122,705 -9,957,524 -31,044,197 -140,952,709 -42,385,846
Other liabilities with a set term -23,628,253 -23,628,253
Derivatives -898,292 0 -42,365 -577,844 -278,083
Liabilities with no set term -318,865 -318,865
Subordinated debt -1,603,356 -1,603,356
Equity -11,271,724 -11,271,724
Total liabilities and equity -262,183,472 -11,590,589 -23,750,959 -9,957,524 -31,086,561 -141,530,553 -44,267,285
Net total all items -8,544,757 -21,962,708 -3,655,162 -8,173,967 -92,918,728 135,255,322

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

Note 24 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

31.12.2017 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 57,002,570 10,927,048 20,539,188 14,045,322 9,885,412 1,605,600
Lending to customers 177,675,130 177,675,130
Treasury Bills 360,459 0 360,459
Other assets with no set term 1,188 1,188
Total Assets 235,039,347 1,188 10,927,048 198,214,318 14,405,781 9,885,412 1,605,600
 
Liabilities incurred when issuing securities -224,462,981 -2,715,292 -62,534,873 -24,406,676 -97,778,557 -37,027,584
Other liabilities with a set term -23,628,253 -23,628,253
Liabilities with no set term -318,865 -318,865
Subordinated debt -1,603,356 -1,603,356
Equity -11,271,724 -11,271,724
Total liabilities and equity -261,285,180 -35,218,843 -2,715,292 -62,534,873 -24,406,676 -97,778,557 -38,630,939
Net interest rate risk
before derivatives -26,245,833 -35,217,654 8,211,756 135,679,445 -10,000,895 -87,893,145 -37,025,339
Derivatives 26,245,833 0 -18,090,116 -103,224,852 24,233,598 87,919,170 35,408,033
Net interest rate risk -35,217,654 -9,878,361 32,454,594 14,232,703 26,025 -1,617,306
% of total assets 13 % 4 % 12 % 5 % 0 % 1 %

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 %

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 2017 2016
 
NOK 100 51,373 57,009

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 25 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 2017 2016
 
EUR -53,851 2,378
- Bank Deposits 12,650 6,015
- Issued Bonds -135,527,780 -120,282,093
- Derivatives 123,802,194 111,776,825
- Bond investments 11,659,085 8,501,631
USD 5,513 14,246
- Bank Deposits 5,413 14,142
- Issued Bonds -18,270,303 -29,922,726
- Derivatives 18,270,402 29,922,831
- Bond investments
SEK 0 0
- Bank Deposits - -
- Issued Bonds -275,832 -266,985
- Derivatives 275,832 266,985
- Bond investments - -
-
GBP - -
- Bank Deposits - -
- Issued Bonds -5,546,052 -
- Derivatives 5,546,052 -
- Bond investments -
Total -48,338 16,625

P&L effect before tax. in NOK 1000

CurrencyChange in Exchange Rate (per cent) 2017 2016
 
EUR +10 -5,385 -297
USD +10 551 183
SEK +10 0 -
GBP +10 -
Total -4,834 -114

Note 26 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 58.7 million for 31.12.2017 (see also the note for capital adequacy)


Note 27 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 2017). According to discussions the Company has had with the Financial Services Authority, the presentation of the table in this note has been modified in the following way for 2017 (2016 is shown on the previous basis): - The derivatives values, which are fx and/or hedges corresponding to issued covered bonds have been moved to be included in the cover pool. They were previously shown with the covered bonds. - Repurchased own bonds have been removed from the calculation

NOK 1 000 2017 2016
 
Covered Bonds 222,444,844 211,161,257
Repurchased Bonds ** - -2,155,498
Derivatives * - -25,321,068
Total Covered Bonds 222,444,844 183,684,691
Lending to customers 176,832,108 173,757,431
Lending to the public sector (gov. bonds/certificates or gov. guaranteed debt) 2,432,576 -
Liquid assets (substitute assets) 30,750,021 26,181,743
Derivatives * 26,599,558 -
Total Cover Pool 236 199
Asset-coverage 106.4 % 108.8 %
Liquidity Coverage Ratio (LCR) 2017 2016
 
Liquid assets 510,729 6,907,156
Cash outflow next 30 days 491,758 430,345
LCR ratio 104 % 1605 %
Net Stable Funding Ratio (NSFR) 2017 2016
 
Available amount of stable funding 185,243,178 179,903,405
Required amount of stable funding 181,490,902 178,901,734
NSFR ratio 102.1 % 100.6 %

Note 28 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 16.3% total capital in effect from December 31, 2017 includes a 12.8% Core Tier 1 capital (including a 2.0% countercyclical buffer and 0,8% pilar 2 requirment) and 3.5% other capital.

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 2017 2016
 
Share capital 6,570,548 6,330,548
Premium share fund 3,287,922 3,167,922
Other equity capital 233,254 473,786
Common equity 10,091,724 9,972,256
Intangible assets -438 -1,245
Declared share dividend -72,276 -113,950
100% deduction of expected losses exceeding loss provisions IRB (CRD IV) -338,144 -322,613
Prudent valuation adjustment (AVA) -32,770 -71,438
Core equity capital 9,648,096 9,463,010
Hybrid bond 1,180,000 1,080,000
Tier 1 equity capital 10,828,096 10,543,010
Supplementary capital (Tier 2) 1,600,000 1,600,000
Total capital 12,428,096 12,143,010
Minimum requirements for capital. NOK 1 000 2017 2016
 
Credit risk 3,318,616 3,173,049
Market risk - -
Operational risk 58,661 52,871
Depreciation on groups of loans - -
CVA Risk 245,931 109,651
Difference in capital requirement resulting from transitional floor 2,337,486 2,545,697
Minimum requirement for capital 5,960,695 5,881,268

Capital coverage

2017 2016
 
Risk-weighted assets incl. transitional floor 74,508,686 73,515,848
Capital coverage (%) 16.68 % 16.52 %
Tier 1 capital coverage (%) 14.53 % 14.34 %
Core Tier 1 capital coverage (%) 12.95 % 12.87 %
Leverage ratio (%) 3.63 % 4.38 %

Note 29 Related parties

The Company has 177 675 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 30 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 31.12.2017 this collateral amounted to NOK 23 628 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 31 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 year 2017.

The dividend for 2017 is proposed to be NOK 72 million (NOK 1.1 per share) 


Note 32.1 IFRS 9 Financial instruments

FRS 9 Financial instruments will replace today’s IAS 39 Financial instruments – recognition and measurement. IFRS 9 concerns recognition, classification, measurement and derecognition 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.  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 to work on IFRS 9 implementation (‘the Project’).  The Project has a management group and the following sub-teams:

  1. Models and methods

Development of a calculation solutions and models in order to establish forward looking estimates for expected loss.

  1. Strategy, organisation and processes

Define how the ongoing accounting work according to IFRS 9 shall be organised between all the cooperating banks.

  1. Accounts and reporting

Specify the accounting and notes, including accounting principle note and templates

  1. 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

  1. 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 derecognition 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 in 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.

The majority of Boligkreditts assets are lending to customers at variable rates.  The business model is the receive contractual cash flows from interest and principal.  These assets are held at amortized cost. All other financial assets (liquidity portfolio) are accounted for at fair (market value) with changes in fair value over profit and loss.

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.  Boligkreditt accounts for derivatives at fair value based on the market elements of interest rates and foreign exchange rates, while the hedged instruments which are financial assets are held at market values.

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. Boligkreditt accounts for derivatives at fair value based on changes in interest and foreign exchange rates while liabilities that are hedged are also held at fair value for changes in these elements, in addition to an amortized cost element.

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 judgments 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.  Hedge accounting will be continued along the same lines as today. 

Hedges at SpareBank 1 Boligkreditt are always used to exactly off-set cash flows, meaning all hedges are tailored to a specific debt issuance or asset for the duration of the hedged instrument.  Bonds issued in currency are thereby exactly matched to create an effective liability on a floating 3 months NIBOR basis. Fixed rate and/or currency assets held in the Company’s liquidity portfolio have hedges that exactly match the  return feature, creating 3 month NIBOR floating rate assets.  Another minor feature in the Company’s hedging activities is that natural liability-assets hedges may occur, whereby a liability in currency matches an investment in currency on a floating rate basis.  In natural hedges, due to differences in tenor between floating rate assets and floating rate liabilities there may be credit spread risk which is not exactly offset, but this is a minor component of the overall hedging activities.

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.

Generally about the Boligkreditt mortgage loan portfolio:
Boligkreditt has a granular and homogenous portfolio of loans originated and transferred to the Company by its parents’ banks to obtain covered bond funding. The criteria that governs which loans qualify for the cover pool are several, both legal criteria for covered bond companies in Norway internal and rules selecting certain customers with a lower probability of default, as well as based on other customer quality characteristics and documentation criteria. The legal limit for loan to value is 75 per cent at the time of loan transfer and the weighted current (updated quarterly) average loan to value has been around the 50 per cent level.  The Company has, as a consequence for which mortgage loans can come into the cover pool, a better credit quality than a typical bank

The mortgage loans are to a large degree in the lower loan to value intervals, with few loans over 75 per cent. The average mortgage loan size is 1.3 million kroner

Number of loans in each LTV intervall:

Share of loans (measured in NOK) in each LTV intervall:

  1. Loan loss write downs

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.

Individual loan loss write downs or actual loan losses have not been taken in the accounts at SpareBank 1 Boligkreditt in the past.  The Company’s parent banks (mortgage originators) have an incentive to take back loans which come into arrears beyond a certain point, and before a loan defaults at 90 days of arrears.  This practice is expected to continue.

The measurement of the provision for expected losses in the general IFRS 9 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 than according to todays practice.  This will be especially noticeable at the downturn of the economic and business cycle. 

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.  

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.  The loss is calculated by the formula below under the Level 2 heading, but only one year is considered

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:

5 years are considered in the model by PD and LGD point in time estimates for each year, after which the year 5 value applies for the following years.

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 ocurred:

  • 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

The corresponding ECL is calculated as the EAD x expected LGD

ECL estimates and impact on the accounts

The basis of the model are a certain set of macro assumptions which impact the default rate and the loss given default for each loan.  The Company use the same model as for the Company’s Internal Capital Adequacy Assessment Process (ICAAP).  The model estimates the default rate (PD) and the loss given based on two macro variables; the unemployment rate and the level of NIBOR.  The documentation behind the Company’s ICAAP model finds and discusses, and the models employs, the positive correlation between these variables and defaults for mortgage loans over the longer term, including also experience neighbouring Nordic countries.  The LGD is derived from calculations based on the degree of collateral coverage of the loans, i.e. the loan-to-value, also taking in a broader dataset to build the link between price developments and estimated losses. 

Mortgage loans which are renegotiated, where the terms are materially changed, are always removed from the Company’s cover pool and transferred back the originating lender.  All renegotiation of loans is outsourced to the Company’s parent banks.

For mass market loans (residential mortgages), the Company assesses the development in PD for each loan over time and negative migrations in this is reflected in the IFRS 9 model (see step 2 and 3 above).  In addition the Company reviews mortgages that are in arrears from one or a few days and up to the point where loans in arrears are transferred back to the originating parent back.  This transfer is not a strict requirement, but the banks are economically incentivized to take back loans in arrears.  Consequently the Company does not have any loans in default and have not incurred any individual loan loss write downs since the commencement of operations in 2007.

When considering the impact of the macroeconomic variables to estimate point in time PD and LGD factors for loans in the IFRS 9 expected loss model, three scenarios are selected and these are a base case (weight 80%), a downside case (10% weight) and an upside case (10% weight).  The three scenarios are deemed as sufficient to express the main directional views or outcomes over the next five years. The weighting of the base case reflects that this is what is considered the overall likely outcome with a symmetry around this to show the potential up- and downside.  The macro scenarios are an input to the ICAAP model which produces the PD and LGD estimates as input to the IFRS 9 expected loss model and the calculated expected loss in each Level and for each scenario.  A total ECL is created by adding the ECL at each loan Level 1, 2 and 3 and adding the weighted scenarios. The change in the total ECL from one period to the next will then be reflected in the Company’s result presentation.

Macroeconomic scenarios

Below are the assumptions that constitutes the base case and the corresponding development in PD and LGD which the ICAAP model produces as inputs in the IFRS 9 ECL model. The results have also been calibrated in light of actual observed PDs for the portfolio over time in order to represent the best point-in-time estimates for the next 5 years.

Base case
Year 1 Year 2 Year 3 Year 4 Year 5
Unemployment rate4.00%3.90%3.80%3.70%3.70%
Residental real estate prices0.00%5.00%10.00%15.00%20.00%
3 month NIBOR1.00%1.50%1.75%2.00%2.00%

The base case considers the current situation and the view for the development for the years ahead. In developing this view we have taken several sources into account, including forecasts from Statistics Norway as well as from other market based organizations that perform and publish economic research.

  • The unemployment rate is currently 4% in Norway and we see this heading slightly lower over the coming years alongside the growth in GDP in Norway
  • Residential real estate prices which are currently correcting in Norway (down 2.1% over 2017) are expected to continue with a 5% drop in the first year in the model, then growing from year 2 onwards (the property price development is cumulative in the table above)
  • The interest rate 3 month NIBOR is increasing to 1% during year one and continues to go up with the trajectory of the Norwegian economic performance and decline in unemployment

The upside and downside scenarios are considered as derivations on the base case. 

Upside case
Year 1 Year 2 Year 3 Year 4 Year 5
Unemployment rate4.00%3.50%3.00%2.80%2.50%
Residental real estate prices5.00%10.00%20.00%30.00%40.00%
3 month NIBOR1.00%1.50%2.00%2.50%2.50%

 

Downside case
Year 1 Year 2 Year 3 Year 4 Year 5
Unemployment rate5.00%5.50%6.00%6.00%5.00%
Residental real estate prices-10.00%-20.00%-20.00%-20.00%-10.00%
3 month NIBOR1.00%1.00%0.50%0.50%0.50%
  • In the downside scenario unemployment increases to 6% while house prices are assumed to drop 10% in the first and again in the second year, then level out (house prices are cumulative over the years in the tables above)
  • This development clearly increase the PD and the LGD estimates in scenario 3 (downside) as rendered below

These inputs create the following PD and LGD estimates and ECL for the scenarios per Level of loan categorization. Scenario 1 is the base case, scenario 2 the upside case and scenario 3 the downside case.  Boligkreditt does not have any loans in default, nor have any actual losses been observed since operations commenced.  The observed default rate for mortgage loans including loans which have been transferred back to parent banks have been ca. 0,13%, which is an anchor point for the PD estimate in the base case.

Scenario Year 1 Year 2 Year 3 Year 4 Year 5
Weighted PD 1 0.14% 0.13% 0.13% 0.12% 0.12%
Weighted PD 2 0.11% 0.11% 0.11% 0.10% 0.10%
Weighted PD 3 0.24% 0.24% 0.28% 0.27% 0.22%
Weighted avg. 0.14% 0.14% 0.14% 0.14% 0.13%
Weighted LGD 1 1.00% 0.54% 0.09% 0.00% 0.00%
Weighted LGD 2 0.57% 0.09% 0.00% 0.00% 0.00%
Weighted LGD 3 8.58% 13.09% 13.09% 13.09% 8.66%
Weighted avg. 1.71% 1.75% 1.38% 1.31% 0.87%
  • The total ECL amount to 11.8 million kroner and the change based on the December 2017 portfolio data
  • The downside scenario show expected losses of a total of 90 million kroner, the total EAD in Boligkreditt is 189 billion
  • No mortgage loans are in default (Level 3)
  • These expected losses according to IFRS 9 does not cause a deduction in core capital for expected losses as the regulatory deduction in capital is substantially higher.

 

Scenario Level 1 Level 2 Level 3 Total
ECL 1 1,617,527 1,690,974 3,308,501
ECL 2 773,380 640,918 1,414,298
ECL 3 24,720,869 65,428,400 90,149,269
ECL Weighted avg. 3,843,446 7,959,712 11,803,158
ECL/EAD Weighted avg. 0.00% 0.00% 0.01%

Note 32.2 IFRS 9

The following table shows the effects of implementing IFRS 9

Note Balance sheet according to IAS 39. 31 December 2017 Change due to reclassification Change due to new measurement Balance sheet according to IFRS 9. January 1. 2018
 
Amortised cost
Lending to and deposits with credit institutions 3,044,644 - - 3,044,644
Lending to customers 177,675,130 - -4,095 177,671,035
Other assets 1,188 - - 1,188
Total effect amortized cost 180,720,962 - -4,095 180,716,867
Fair value through profit or loss -
Certificates and bonds 54,318,384 - - 54,318,384
Financial derivatives 27,144,125 - - 27,144,125
Total fair value through profit or loss 81,462,509 - - 81,462,509
Total assets 262,183,472 - -4,095 262,179,377
 
Financial liabilities
Amortised cost
Collateral received in relation to financial derivatives 23,628,253 - - 23,628,253
Debt incurred by issuing securities 47,926,716 - - 47,926,716
Subordinated dept 1,603,356 - - 1,603,356
Other liabilities 318,865 - - 318,865
Total effect amortized cost 73,477,190 - - 73,477,190
Fair value through profit or loss
Debt incurred by issuing securities 176,536,265 - - 176,536,265
Financial derivatives 898,292 - - 898,292
Total fair value through profit or loss 177,434,557 - - 177,434,557
Total Liabilities 250,911,747 - - 250,911,747
 
Equity
Equity 10,091,724 - -4,095 10,087,629
Hybrid capital 1,180,000 - - 1,180,000
Totale equity 11,271,724 - -4,095 11,267,629
Total liabilities and equity 262,183,472 - -4,095 262,179,377

Note 32.3 IFRS 9

The following table shows loss provisions when implementing IFRS 9

Change in loss provisions Loss according to IAS 39. 31 December 2017 Change due to reclassification Change due to new measurement Losses according to IFRS 9 January 1. 2018
 
Loans under IAS 39 to be measured at amortized cost under IFRS 9 7,708 4,095 11,803
Total change loss provisions 7,708 - 4,095 11,803

 

2018 2017
Loans and advances to customers at amortized cost Level 1 Level 2 Level 3 Total Individual Group Total
 
Balance sheet on 1 January - - - - - 7,708 7,708
Transferred to 12 month ECL 3,843 - - 3,843 - - -
Transferred to lifetime ECL - No objective evidence of loss - 7,960 - 7,960 - - -
Transferred to lifetime ECL - objective proof of loss - - - - - - -
Balance sheet on 31 December 3,843 7,960 - 11,803 - 7,708 7,708