ANNUAL REPORT 2016 Kommunalbanken Norway The annual report 2016 Cover photo: is produced by KBN Johnny Bråtseth / Romsdalsmuseet

TABLE OF CONTENTS

Key figures...... 7

This is Kommunalbanken ...... 8

CEO’s foreword...... 10

We finance welfare services...... 14

Pricing of bonds issued by the local government sector...... 16

Funding from around the world ...... 20

Green focus...... 21

The Norwegian economy ...... 22

The Board of Directors’ Annual Report 2016 ...... 26

The Board of Directors of KBN...... 34

Financial statements 2016...... 37

Supervisory Board’s statement...... 75

Independent auditor’s report...... 76

Articles of Association...... 79

Governing bodies ...... 81

Organisation...... 82 KRONA, ROMSDALSMUSEET The museum building Krona has a distinctive wooden interior as well as exterior. The building contains showrooms for rent, a café, a museum shop, work shop and showroom for national costumes, auditorium, and library. KBN has partly financed the building which was officially opened in 2016. Photo: Johnny Bratseth/Romsdalsmuseet

ANNUAL REPORT 2016 / PAGE 7 5 54% 2015 1 043 2 583 1 870 1 642 2 979 525% 0.42% 0.23% 530% 12 202 68 644 46 757 Infinite 1 418% 3 855% 11.70% 18.81% 16.53% 15.09% 20.84% 254 421 146 611 400 894 449 361 110 604 919 689 2016 1 400 1 159 2 087 852% 558% 471% 6.27% 0.16% 0.33% 12 452 82 752 93 926 48 117 Infinite 1 116% 1 848% 12.74% 21.45% 18.39% 16.86% 266 558 116 413 376 785 418 327 2 2 4 2 2 3 3 3 1 NOK 19 million). This result measure is included to give relevant information about the company’s underlying operations. about the company’s information relevant give is included to measure result NOK 19 million). This ahead. 30 days period of stress in a given payments Total capital adequacy ratio Total Return on assets after tax Tier 1 capital adequacy ratio Common equity Tier 1 capital adequacy ratio Common equity Profit before tax year Profit for the Return on equity after tax Return on assets after tax (core earnings) Return on equity after tax (core earnings) JPY Total USD Core earnings debt Repurchase of own Redemptions NOK EUR AUD New long-term borrowings New disbursements Total borrowings Total Net interest income Outstanding loans KEY FIGURES KEY assets. equity and average average of as percentage on assets on equity and return 2 Annualised return 3 Principal amounts of net a percentage as is defined as liquid assets LCR liquidity reserve. the regulatory for is a measure (LCR) ratio 4 Liquidity coverage at this time. a significant currency not 5 EUR was 1 Profit after tax adjusted for unrealised gain/(loss) on financial instruments after tax (NOK 689 million + (0.75*NOK 974 million) - (0.75*NOK 689 million + tax (NOK after on financial instruments gain/(loss) for unrealised tax adjusted after 1 Profit (Amounts in NOK 1 000 000) (Amounts in NOK LIQUIDITY COVERAGE RATIO (LCR) RATIO LIQUIDITY COVERAGE TOTAL ASSETS TOTAL EQUITY LIQUIDITY PORTFOLIO BORROWINGS LENDING RESULTS

390 NOK million paid in dividends to the in 2016 owner

NOK million. NOK million.

ATTRACTIVE TERMS TO TO TERMS ATTRACTIVE ...AND LEND IT OUT ON OUT IT LEND ...AND ACROSS THE WORLD... THE ACROSS

AND COUNTYAND AUTHORITIES WE BORROW MONEY FROM MONEY BORROW WE NORWEGIAN MUNICIPALITIES MUNICIPALITIES NORWEGIAN 266 588 KBN’s total lending to the sector KBN’s Our role is to offer municipalities and county and municipalities offer is to Our role terms. attractive financing on authorities stable - and develop growth in the role a key KBN has played this play to In order nearly 90 years. for ment of Norway low with sufficiently operate able to be to need we role, to the local government its lending KBN finances costs. bor- Its low in the capital markets. borrowing by sector and this of its AAA rating, the result are costs rowing fulfil our mission. enables us to www.kbn.org

45% of municipal debt is financed through KBN THIS IS KOMMUNALBANKEN KOMMUNALBANKEN IS THIS

ANNUAL REPORT 2016 / PAGE 8 ANNUAL REPORT 2016 / PAGE 9

¥ 2016 13.5 Rp kr £ € 12.2 2015 (of 6) $ 5.14 2014 10.7 NOK bill 44% share of women among KBN employees 12 KBN issued bonds in 12 currencies 2013 8.6 GROWTH IN GREEN LOANS GREEN IN GROWTH

2012 6.5 15 10 5 0 aa 5 0 15 10 YEARS

OUR VISION OUR OUR VALUES OUR 89 Standard & Poor’s and Moody’s Standard & Poor’s KBN was founded in 1927 and will founded in KBN was of the country’s of the country’s municipalities are KBN customers Highest possible credit rating from Highest possible credit rating 99% celebrate its 90th anniversarycelebrate 2017 in Care homes Care AAA/A Open, responsible, engaging responsible, Open, Long-term partner welfare for local Nurseries Roads

Schools NOK billion in new long-term borrowings 2016 in 82.8 new loans granted in 2016 13.5 NOK billion lending to climate-friendly municipal projects 610 Satisfied customersSatisfied On a scale from 1 in 2016. with Kommunalbanken satisfied Both large and small customers were Small municipalities are slightly for all the questions. 5.14 points on average to 6 KBN achieved Municipalities believed (5.31 points) than the largest municipalities (5.00 points). more satisfied run KBN is well (5.16 points). that from two areas, we we areas, two IF I WERE TO SUMMARISE 2016 2016 SUMMARISE TO WERE I IF IN ADDITION TO THESE TO ADDITION IN are committed to ensuring we that - maintain high ethical standards in eve the In order to satisfy rything do. we set for our activities, high expectations are very the we reliant on employing achieve We best people in our sector. measures to this by taking proactive the diversity of our employees improve and maintain a good gender balance in our organisation. the same time, we want to contribute want we the same time, of global best practice to the creation in the definition of projects that This involved qualify for green loans. up clearer requirements us drawing projects financed using for climate man- funds from green investment to lend in want we Secondly, dates. will help to that a responsible way finan- our customersensure that have cially sustainable borrowing portfolios. This places particular emphasis on sharing expertise and maintaining a We good dialogue with our customers. Our in 2016. ‘KBN Finans’ launched target is to strengthen our customers’ them analysis capabilities by providing with a better digital basis for decision making. an international perspective, I would I would an international perspective, a year 2016 was ways in many that say objectives objectives in future on

WE INTEND TO FOCUS TO INTEND WE ONE OF THE OVERRIDING OVERRIDING THE OF ONE than necessary. At the same time, our same time, At the than necessary. annual dividends benefit society as a KBN is not at This means that whole. In all like a normal commercial bank. order for KBN to be able to serve its it needs regulatory function in society, reflect this. conditions that identified in our long-term is strategy corpo- fully recognise KBN’s we that achieved We social responsibility. rate We targets set for 2016. of the many carried program out a comprehensive will we 2016 to ensure that in of work managing at better our cor- be even social responsibility in future. porate asked our key stakeholders what We approved they had of us, expectations corporateseparate social responsibility and clarified our prioritiesguidelines, and ambitions. areas where we believe we can make a can we believe areas where we areas where There are two difference. we Firstly, this is particularly apparent. to contribute to the development want of green financing by on-lending funds to mandates from green investment municipalities wishing toNorwegian in ambitious environmentally invest expanded the We friendly projects. for range of lending products available At of this type in 2016. investments KBN’s vision is to be a long-term partner for partner for long-term be a vision is to KBN’s and its financing sector the local government for value create to want We of local welfare. time the same while at society as a whole, impact on people and the a positive having environment.

an important social

OUR ROLE IN SOCIETY IN ROLE OUR CEO’S FOREWORD CEO’S KBN HAS SERVED HAS KBN function throughout its 90-year function throughout its 90-year made it easier for have We history. municipalities to carryNorwegian out - by provi in welfare major investments A terms. ding financing on favourable high-quality welfare system is a central KBN social model. part of Norway’s this democratically helps ensure that agreed policy does not cost more than Our customers some of are necessary. borrowers in the world. the lowest-risk KBN has not incurred a single loss on its lending to the local government time in the 90 years any sector at This low it has been in existence. that own of risklevel is reflected in KBN’s and is importantcreditworthiness, to KBN maintaining the highest possible ensu- This rating AAA. of credit rating KBN can charge the lowest res that on its lending. possible interest rates a shared interest in therefore have We ensuring the production of ser- that sectorvices by the local government is carried as out as cost-effectively a tool ways KBN is in many possible. for the public sector to self-finance. bring- together the local govern We and borrowing needs, ment sector’s profits benefit the public KBN’s offered interest rates The low sector. in welfare by KBN ensure investing services does not constitute a greater budgets on municipalities’ burden

ANNUAL REPORT 2016 / PAGE 10 ANNUAL REPORT 2016 / PAGE 11 the most important

Falkgård Kristine & CEO President KBN SEEKS TO BE TO SEEKS KBN financial collaboration partnerfinancial collaboration to the aim to We sector. local government our customers with work to address the challenges of tomorrow by seizing Together the opportunities of today. increase local welfare. will help we low as possible. At the same time, we we At the same time, as possible. low to help our customerswant across to manage their the whole of Norway finances responsibly and sustainably. government WE EXPECT THE LOCAL LOCAL THE EXPECT WE development of society across Norway. of society across Norway. development Our lending grew by 4.8% in total, - and environ and lending to climate We ment projects grew by 11%. granted more than 600 loans totalling NOK 48.1 billion in 2016. sector to continue to have sizeable sector to continue to have - Norwe needs in future. investment are gians to urban areas, are moving growing in number and are ageing. people seven While in 1950 there were age behind each pensioner, of working by 2050. than two there will be fewer Nor- Agreement, the Paris Following has significant commitments in way terms of reducing its greenhouse gas All of these factors affect emissions. is Our ambition municipalities as well. and competitive to be able to deliver efficient finance solutions to keep the cost of producing welfare services as The results of the work we carried we The results of the work of unexpected events. The world is The world of unexpected events. facing a period of major economic and much In Norway, political uncertainty. of the focus has been on adjustment The the downturn in oil. following has coped so well fact Norway that through a period with a sharp fall in the price its that of oil demonstrates it seems However, society is robust. are facing we changes andlikely that will affect us regard- adjustments that live We less of the size of the oil fund. in an age in which technology is chal- lenging established structures. many In 2016 KBN defined clearer targets - Newly avai for its digitalisation work. lable technology is opening up a lot of exciting opportunities look we that - in collabora to investigating forward tion with our customers. once again we that out in 2016 show made a solid contribution to the KISTEFOSSDAMMEN NURSERY SCHOOL When the nursery school opens it might possibly be Norway’s first public energy-plus house. An energy-plus house produces excess energy through the use of a 300 square metres solar roof and geothermal heat pump. Climate friendly building materials, such as wood, has been the first choice. The construction itself reduces energy consumption to a minimum. The nursery school is partly financed through KBN’s green interest rate product in 2016.

Illustration: Christensen & Co AS

used by the local Counties 9 % Counties Municipally owned 21 % companies Municipalities 70 % Municipalities 70 WE PROVIDE LOW-COST FUNDING TO TO FUNDING LOW-COST PROVIDE WE NORWEGIAN LOCAL GOVERNMENT SECTOR GOVERNMENT LOCAL NORWEGIAN THE FINANCING MODEL FINANCING THE government sector to invest in facilities and sector to invest government services is primarily of based on a combination the Over funds and funds it borrows. its own Norwegian municipalities have last ten years, about 60% of the amountconsistently borrowed borrowing repre- However, invested. they have sented a smaller proportion of the total amount by the sector in both 2015 and 2016. invested An increasing number of municipalities are introducing budgetary for example, rules that, set requirements for the proportion of each has to be financed using that new investment nursing services. KBN expects there to be anursing services. existing continuing need to upgrade Norway’s and this will new ones, care homes and to build in of investment lead to an increase in the level the nursing and care area in the years ahead. grew by 3.6% in KBN provides stable long-term loan financing for loan financing long-term stable KBN provides municipalities by services welfare in investment growth, Population authorities. and county changes and demographic change, climate modernise and upgrade to need the continual the KBN expects mean that and services facilities long-term and the need for of investment level high. remain to borrowing will potentially contribute to

Investment in the WWS area has grown by 254% over the last ten WWS area has grown by 254% over in the Investment use making extensive elderly care will increasingly involve In the future, KBN expects there to be bigger differences between municipalities in municipalities between KBN expects there to be bigger differences total debt was sector’s of growth in the local government The rate

SERVICES WE FINANCE WELFARE WELFARE FINANCE WE INNOVATION AND NEW TECHNOLOGY TECHNOLOGY NEW AND INNOVATION INVESTMENT BY THE LOCAL GOVERNMENT SECTOR SECTOR GOVERNMENT LOCAL THE BY INVESTMENT changes in the local government sector’s investment requirements in investment sector’s changes in the local government As a result of new digital municipalities and opportunities, areas. several up county authorities to look to the future when drawing are having new technology will require At the same time, plans. their investment while the new technology itself will also infrastructure to be adapted, growth of investment Although the rate require significant investment. of the annual level than in previous years, is expected to be lower in water, investments KBN thinks that will continue to rise. investment waste-water and sanitation (WWS) area and elderly care will be the areas with the strongest growth going forward. A number of reports there continues to be a size- that highlight years. WWS able need to carry in the out upgrades and for new investment increasingly strictarea in the years ahead in order to satisfy quality and safety requirements and to adapt the infrastructure change, climate to for example. of providing of welfare technologies with different ways in combination 2016. This is the lowest rate of investment growth since 2012 and may growth since 2012 and may of investment rate This is the lowest 2016. in future. growth be lower will annual investment that be an indication increased the have all types of municipality the last ten years, Over growth been strongest in areas has This investment amount they invest. experiencedof the country growth. the greatest population have that municipalities will Many future in terms of investment. of their levels as a result requirements investment lower for some time to come have some At the same time, carriedof having large investments. out many be are experiencing growthmunicipalities that may strong population and debt of investment level responsible for a larger share of the overall growth than in the last ten years. in the sector this There is evidence that 6.1%. years at in 2016 than for many lower can be explained by the sector financing a higher proportion of its funds thanks to the strong financial results it using its own investments - annual invest lower Going forward, both 2015 and 2016. in achieved KBN of debt growth. annual rate ment growth will also lead to a lower sector in the of debt growth in the local government expects the rate years ahead to gradually decrease from the 2016 level.

ANNUAL REPORT 2016 / PAGE 14 ANNUAL REPORT 2016 / PAGE 15 to finance investments using to finance investments , the Local Government Reform the Local Government had resulted in 90, In 2016 there was a lot of focus on the sector’s use of short-term a lot of focus on the sector’s In 2016 there was BY THE END OF 2016 OF END THE BY MANY MUNICIPALITIES ARE CHOOSING CHOOSING ARE MUNICIPALITIES MANY county authorities. We do this because they represent the same low do this because they represent the same low We county authorities. regardless of their size and requirements. risk, loans with shorter maturities. The capital markets are the largest pro- loans with shorter maturities. KBN also from time to time offers lending vider of this type of loan. mostproducts with shorter terms KBN’s when customers so request. loans with long maturities, however, important lending products are, municipalities Norwegian of which there are few other providers. horizons. in numerous projects with long-term investment invest long-term lending products are importantKBN’s to ensuring finan- In 2016 KBN throughout the whole life of projects. cing is available which is a borrowing portal launched KBN Finans, and analysis tool KBN Finans is intended to contribute to KBN’s for its customers. customers access to the best possible basis for making decisi- having ons regarding managing and to help their financing and borrowing, customers their exposure to interest rate ensure make decisions that risk they desire. and refinancing at the level risk is as in partdebt financing, as a response to the approximately fact that within a twelve- mature outstanding debt would 20% of the sector’s on made in 2016 to the Regulations Changes were month period. financial and debt management, municipalities and county authorities’ with municipalities and county authorities being required with effect from 1 January 2017 to report the proportion of their borrowing that The amount of months. twelve the following will reach maturity over years of growth. debt of this type remained stable in 2016 after several municipalities voting to combine to form 37 new municipalities. There to combine to formmunicipalities voting 37 new municipalities. 426 municipalities to be reduced in number is a proposal for today’s - significant alterati The ongoing Regional Reform will involve to 358. KBN is Norway’s county authorities. ons to the structure of Norway’s sector and offerslargest lender to the local government loans to all the KBN is adapting to the regardless of size. municipalities, country’s structural changes taking place by offering the best financing solutions future borrowing needs. sector’s for the local government the most important KBN offers long-termat the same financing High revenue growth in 2016 cau- in the sector High revenue KBN’S OBJECTIVE IS TO BE TO IS OBJECTIVE KBN’S provider of long-term- provider financing to the Norwe loans In 2016, gian sector. local government from KBN represented about half the amount is to objective KBN’s by the sector. borrowed is flexible and adapted to eachoffer financing that requirements with the best possible customer’s for providing The foundation terms. interest rate is KBN’s interest rates at low stable financing highest possible credit rating KBN’s credit rating. good access to attractive AAA ensures it enjoys of This sources of funding from all across the world. KBN is able to offer loans also means that rating entirely independently of interest rates with low KBN thinks this is importantthe economic cycle. ability to plan their investments to municipalities’ local welfare services. and to provide to all municipalities and interest rate attractive In the future, elderly care will increasingly involve making extensive use of welfare technologies. Oppegård municipality Oppegård technologies. use of welfare making extensive involve will increasingly elderly care In the future, in improved has resulted system The homes in 2016. in all municipal care system a digital documentation introduced among nursing staff. communication better through care patient of theirThese measures may funds. their own accord contribute to decreases in the level own Budgetary some municipalities. at of investment rules sort of this a focus on operational also create efficiency and the need to maintain a stable net surplus foroperating can be used as the basis that own resources. from their financing investments - for all municipali sed the aggregated debt ratio amount though the overall even ties to decrease, for municipa- The debt ratio of debt increased. lities is usually measured as net interest-bearing debt as a percentage of gross revenue. operating The aggregated for all municipalities debt ratio while decreased in 2016 to 77.8% from 78.3%, for county authorities it increased from 58.6% to of investment. 66.6% as a result of a higher level There are not as many buyers for bonds issued buyers There are not as many Section 60 of the Local Government Act Section 60 of the Local Government LIQUIDITY RISK Government bonds can be bought and sold bonds can Government quickly and efficiently in the secondary market They generally have transaction costs. with low times. in turbulent even good liquidity, and the total outstanding by municipalities, amount of each issue and the overall of volume debt issued by each municipality are much lower. currently state The Norwegian has 12 outstanding comparison, For bonds totalling NOK 478 billion. income securities- the fixed issued in the Norwe county authorities gian market by 152 of Norway’s have 600 issues, approximately and municipalities, The of NOK 148 billion. a total outstanding value 6.5% of the sector represents local government of around NOK 2,300 billion of fixed total volume income securities in the Norwegian market. municipality or county authority not be may or institute debt settlement declared insolvent can payments however, In theory, proceedings». be deferred to the situa- until a solution is found are investors In such cases, has arisen. tion that cf. in the form compensated interest, of penalty Payments on Overdue to Interest Act relating the Regulations. and the associated etc. review «State on the also contains provisions Bor- obligations». of financial and approval municipality that decisions taken by a rowing is struggling and is on to balance its budget Registerthe Norwegian for Governmental (ROBEK) Obligations of Financial Approval been approved once they have are only valid Primarily as a result by the County Governor. and also AAA rating, state’s of the Norwegian taking into account the role of the Norwegian Ministry and Moderni of Local Government - the credit risk with lending to associated sation, sector should local government the Norwegian therefore be virtually zero.

Liquidity risk, credit risk and regulatory risk are all are risk and regulatory risk credit Liquidity risk, when evaluating consider investors that factors In this article, security. income a fixed the yield on Norwegian assess investors how consider we securities income fixed municipalities and price the sector. by issued Source: Norges Bank Norges Bond Pricing and Nordic Source:

APPROXIMATION OF INTEREST RATES IN NORWAY SINCE 1820 SINCE NORWAY IN RATES INTEREST OF APPROXIMATION

1820 1840 1860 1880 1900 1920 1940 1960 1980 2000 2020 1820 1840 1860 1880 1900 1920 Section 55 of the Norwegian Local Government Act states that «A that Act states Section 55 of the Norwegian Local Government The yield on Norwegian five-year government bonds has government fallen five-year The yield on Norwegian Unweighted average of various interest rates in Norway over just under 200 just over in Norway rates interest of various average Unweighted 2 years. From the year 2000, we have used the interest rate on five-year bonds. on five-year rate used the interest have we 2000, the year From years. 6 8 4 0 12

LOCAL GOVERNMENT SECTOR GOVERNMENT LOCAL PRICING OF BONDS ISSUED BY THE BY ISSUED BONDS OF PRICING CREDIT RISK CREDIT INTEREST RATE FLOOR RATE INTEREST Lenders might for the risk the borrower require compensation that taking into account the expected loss in the be declared insolvent, Although insolvent. is actually declared the borrower that event this is extremely unlikely to happen countries become insolvent, may country. AAA-rated to an The Kingdom of Norway has the best possible credit rating available, available, has the best possible credit rating The Kingdom of Norway and since Standard & Poor’s and has done so since 1975 in the case of Currently countries only ten in the world 1995 in the case of Moody’s. agencies. from both rating hold the highest possible credit rating nearly 7% in 2000 to 0.5% in from a high of the last 20 years, over rate the three-month money market During this same period, 2016. 8.5% in 1998 and under 1% this year. (NIBOR) has varied between interest Norges Bank holds are record lows. seen this year The levels - the low-in even that These show going back to 1820. statistics rate War World records set in the periodterest rate just after the Second been cheaper. Borrowing has never 2016. in beaten were 14 10

ANNUAL REPORT 2016 / PAGE 16 ANNUAL REPORT 2016 / PAGE 17 2016 Covered bonds Covered 2015 2014 Large municipality Large 2013 2012 SPREAD OVER NIBOR/SWAP OVER SPREAD Region bank Region 5-year bonds for municipalities and banks municipalities and bonds for 5-year 2011 2010 0 It therefore seems that the influence of regulatoryIt therefore seems that factors on the sector bonds have Although the credit spreads on local government fall therefore bonds may The credit spread on local government 20 60 80 40 120 160 180 140 100 bp 1/100% INVESTORS IN THE LOCAL GOVERNMENT SECTOR GOVERNMENT LOCAL THE IN INVESTORS 200 In terms of who lends to the sector, the life insurance and pension In terms of who lends to the sector, of certificatefunds sector holds 40% of bonds and 13% loans issued in the making it the largest investor sector, by the local government bonds and 28% of certifi government Banks hold 17% local - sector. By comparison, making them the second largest group. loans, cate 40%. market is slightly below their share of the overall not subject to LCR requirements, may lead to local government bonds lead to local government may not subject to LCR requirements, the credit Up until 2013, margin. lower a slightly being purchased at the credit spreads than lower bonds were spreads on local government the same, approximately In 2013 the spreads were bonds. on covered the last three years bonds the spreads on local government while over points higher 0.05 and 0.15 percentage generally been between have bonds. than the spreads on covered been an important bonds has pricing factor of covered in the pricing of sector in recent years. bonds issued by the local government it is possible fallen points in the last year, by more than 0.25 percentage bonds are being priced covered In Europe, fall may they further. that Currency reference rate. the applicable with almost no spread over krone in such securitieseuro to the Norwegian from the produceswaps Norwegian local an additional return of around 0.3 percentage points. bonds can therefore offer almost twice the returngovernment of covered Before the financial crisis in led to a strong increase in spreads bonds. 0 and a priced of between spreads bonds were at local government 2008, quarter rate. the NIBOR/Swap of a percentage point below in absolute terms interest rates will be meaningfully lower but further, difficult to achieve. A NUMBER OF CONSIDERATIONS AFFECT THE PRICING OF FIXED INCOME SECURITIES INCOME FIXED OF PRICING THE AFFECT CONSIDERATIONS OF NUMBER A has to pay to borrow money in the securities markets, i.e. the interest rate on government bonds. on government rate the interest i.e. markets, in the securities money borrow to pay itself has to country the that price The back might not get the investor that the risk say is to which risk involved, the credit for required amount of compensation The lends. it money 100% of the fixed in transferable Investors liquidity. greater benefit from investors different many have that borrowers Large Liquidity of the securities. require. if they maturity before can easily sell their holdings such borrowers by securities issued income of categories different applied to and the weightings requirements adequacy capital institutions, financial For issues. Regulatory bonds. in covered than investing return a better offer has to bonds government in local investing example, for bond mean that, their size. of regardless terms, all municipalities the same offers KBN, however, • • • • • If banks invest in bonds other than government If banks invest the return- offered by local govern In summary, The average size of local government sector sector of local government size The average KBN borrows a large number of investors from such During periods turbulence, of market REGULATORY RISK REGULATORY Covered bonds were introduced into the Nor- bonds were Covered since then and have wegian market in 2007, become a very important asset class for banks. They are firstly used as security for loans from and secondly as an important Norges Bank, part of the liquidity portfolios banks are that required to hold to meet the liquidity now The LCR (LCR) requirements. ratio coverage in investing rules the choice between mean that bonds is bonds or in local government covered to a large extent a question of price. to hold capital in addition to they have bonds, amount of capitalThe their normal funding. required is determined attached by the weightings which are 10% for to different types of asset, bonds and 20% for local government covered require a LCR calculations In addition, bonds. 15% haircut to be applied to the amount invested bonds while for covered for both types of bond, NOK 5 bil- of over with an outstanding volume a haircut of only 7% has to be applied. lion, ment bonds needs to be around 0.15 percentage bonds offered by covered points higher than that bonds. covered if banks are to choose them over needs and preferences for banks’ However, well as the existence of investors as diversification, fixed income issues is NOK 250 million, while issues is NOK 250 million, income fixed is NOK bond issues for government the average sector local government The largest 40 billion. both of bonds are issued by Oslo and Bergen, The smallest NOK 3 billion issues. which have with a certifi- Vang, of is the municipality player larger In general, of NOK 10 million. loan cate issues will be more liquid and will therefore liquidity riskthan smaller issues. a lower have Its largest outstanding bond from across the world. in US dollars to NOK 2 billion. is equivalent as during crisis banking the Norwegian in the 1990s and the financial crisis starting in 2007, the cost of liquidity for the local government seen sector increased by less than the increase The financial sector for the financial sector. which bonds, includes the market for covered are the safest category of bonds issued by the AAA-rated These bonds are financial sector. agencies to be and so are considered by rating as safe as debt issued by the City of Oslo. Astrid Blektvedt : Astrid Photo GOL SCHOOL school and secondary in primary students 750 2016 In August building contains in Gol. The school building the new into moved school is The seating. and retractable with a stage facilities the Gol village. from some distance area in a rural located KBN. by partly financed in 2016, completed building was The

ANNUAL REPORT 2016 / PAGE 18 ANNUAL REPORT 2016 / PAGE 19 Japan 38 % 26 % Europe Non-Japan Asia 15 % 7 % USA Americas 5 % 4 % Norway & Middle East 4 % Africa & Australia 1 % Zealand New by investor geography investor by TOTAL BORROWING 2016 BORROWING TOTAL GBP 2 % NOK 2 % INR 2 % Other 5 % by currencies by BRL 6 % USD 55 % 10 % JPY 9 % AUD EUR 6 % NZD 3 % TOTAL BORROWING 2016 BORROWING TOTAL US dollar as its base currency. This means that all other currenciesThis means that US dollar as its base currency. In addition, the point of borrowing. are hedged to the US dollar at borrowings krone for loans are hedged to the Norwegian KBN’s risk KBN does not take on interest rate or exchange to customers. riskrate hed- and only enters and exchange rate into interest rate All market risk is offset by ges with banks with high credit ratings. exchanging cash as collateral. Bringing together the borrowing the borrowing Bringing together local Norwegian of the entire requirements KBN cost-efficient gives sector government and important major investors to access This the world. across capital markets welfare in Norwegian enables investment possible at the lowest be financed to services rates. interest in that itin that green bond in 2016. of increasing the propor-

KBN borrows in a range of currencies, with the KBN borrows in a range of currencies,

In order to be a stable source of financing for theIn order to be a stable source of financing – TO FINANCE WELFARE SERVICES EFFICIENTLY EFFICIENTLY SERVICES WELFARE FINANCE TO –

AROUND THE WORLD THE AROUND FUNDING FROMFUNDING KBN ALSO HAS A TARGET A HAS ALSO KBN KBN ISSUED ITS THIRD MAJOR THIRD ITS ISSUED KBN KBN DIFFERS FROM COMMERCIAL BANKS BANKS COMMERCIAL FROM DIFFERS KBN This was a USD 500 million issue, and gave KBN and gave a USD 500 million issue, This was investors. access to environmentally-conscious Demand for climate-friendly skyrocketed bonds has one of the first KBN was Nordic in recent years. KBN channels the funds issuers of green bonds. from its green pro- bonds directly to environmental and sector, jects in the Norwegian local government the green a role in developing financethus is playing issuing green bonds givesAt the same time, market. which KBN access to a wider range of investors, target KBN’s base. helps further diversify its investor is for this to reduce its borrowing and costs further, for this in turn to benefit its customers. tion of funding it raises in the Norwegian capital tion of funding it raises in the Norwegian other issuers of bonds in Norway Few market. the same creditworthiness as and rating have KBN made progress in this area in 2016 KBN. - and issued NOK 1 billion of bonds with a matu rity of 20 years market. in the Norwegian does not take deposits. KBN raises all the money it does not take deposits. sector by issuinglends out to the local government KBN is currently securities in the capital markets. one of the largest Norwegian borrowers in the inter- credit rating Its highest possible markets. national and Moody’s AAA/Aaa from Standard & Poor’s of broad demand for its low-risk bonds andcreates funding costs. low KBN achieves ensures that KBN needs to ensure it is sector, local government particularnot dependent on market conditions in any funding program its activities spreads KBN’s market. - everyt- globally and across different types of investor investors. hing from central banks through to private

ANNUAL REPORT 2016 / PAGE 20 ANNUAL REPORT 2016 / PAGE 21 2016 Sustainable Sustainable land use 2 % 1 % energy Renewable change Climate 1 % adaptation Low-carbon Low-carbon 2 % transportation Green buildings Green 56.5 % manage- Waste ment 17 % and wastewater Water management 16.5 % efficiency Energy 4 % GREEN LENDING GREEN KBN has offered green loans since 2010. We We 2010. loans since green KBN has offered raising bond in 2016, green our third issued USD 500 million. uses money from investors who want uses money from investors totalling NOK 1.369 billion in 2016. totalling NOK 1.369 billion in 2016. , we followed up on the new framework followed we , since KBN first became involved in the market since KBN first became involved GREEN FOCUS GREEN KBN GRANTED 32 GREEN LOANS LOANS GREEN 32 GRANTED KBN WITH REGARD TO OUR LENDING OUR TO REGARD WITH A LOT HAS HAPPENED HAPPENED HAS LOT A KBN’S GREEN LENDING PROGRAM LENDING GREEN KBN’S for green finance products. Investors now expect much better repor- expect much better now Investors for green finance products. their funds will be used to finance and on the ting on the projects that This is reflected in impacts of the projects. and climate environmental released which we Framework, the new version of the KBN Green Bond expertise commits us to having version The updated in green in 2016. process for assessinglending internally as a high-quality KBN as well at produce annual reportsalso now will We for greenapplications loans. proceeds of our finance using the greenon the impact of the projects we possible rating the highest has been awarded Our framework bond issues. research centre CICERO. («Dark Green») by the independent climate and other stakeholders investors can be certainThis means that that are in line with Norway’s that green finance investments bonds KBN’s target for the countrynational society by 2050. to become a low-carbon by creating a stricterby creating set of criteria specific conditions that stipulate that in order to be grantedprojects must satisfy green financing on preferen- in green investors bonds are settingThe reason for this is that tial terms. KBN has therefore requirements for their portfolios. clearer environmental introduced a formal process as part application to of which customers have the impact of the greendocument what project will be for which they are - also expanded the family of lending products avai We applying for a loan. with customers to able lable as green now loans from the middle of 2016, or a NIBOR-lin- rate, a fixed apply for a green rate, a floating loan either at of green offer in this expanding the range hope that loans we We ked rate. to a broader range of customers. will make them attractive way This is a good result relative to previous years after excluding the funding This is a good result relative light rail service, which is the largest single by KBN for Bergen’s provided NOK 5.3project being financed by green loans (a total of approximately 60% (NOK In 2016 green represented approximately buildings billion). WWS projects in the Renovation 824 million) of the total lending volume. while area accounted for NOK 416 million of the total lending volume, renewable made up of smaller projects in the energy efficiency, the rest was transportation low-carbon sustaina- and change adaptation, climate energy, of the KBN aims to contribute to the development ble land use categories. green wishing to make finance market by connecting the funds of investors green projects in the with innovative friendly environmentally investments sector. Norwegian local government to make environmentally friendly investments to finance innovative green to finance innovative friendlyto make environmentally investments KBN on-lends green sector. projects in the Norwegian local government funds by borrowingmoney in the form of green bonds in the internatio- which it then lends out as green loans to Norwegian nal capital markets, on KBN’s rate The interest municipalities and municipal companies. than on its ordinarygreen lower loans. loans is somewhat - 1.9 1.7 1.5 5.0 1.2 0.0 3.0 1.4 1.7 2.3 6.2 2017

had not had 1.5 2.2 0.0 5.6 0.8 0.4 0.7 3.0 3.6 5.1 -1.7 -5.1 2016 Source: Statistics Norway and NAV Norway Statistics Source: KEY MACROECONOMIC INDICATORS INDICATORS MACROECONOMIC KEY Percentage change from previous year. year. previous change from Percentage Private consumption Private consumption Public sector formation capital fixed Gross Mainland Norway Exports gas Crude oil and natural goods Traditional GDP GDP - Mainland Norway (NAV) rate Unemployment Index Price Consumer surplus account Current GDP) of (percentage UP UNTIL 2016, THE ECONOMIC DOWNTURN DOWNTURN ECONOMIC THE 2016, UNTIL UP consequently becoming more expensive. The strong incre- consequently becoming more expensive. ase in electricity prices Lower is another important reason. growth in electricity prices and the krone strengthening will in 2017. lower to be significantly probably cause inflation much of an effect on household income and consumption. much of an effect on household income and consumption. wage growth, and low higher inflation saw however, 2016, impacted This and this actually caused a fall in real wages. 2016 saw low growth in the Norwegian in the Norwegian growth low saw 2016 in oil of the downturn as a result economy of international level and the moderate prices be a to continues There demand growth. economy. divide in the Norwegian marked Norway Southern and Western Oil-dominated in more growth challenges, while facing are Trøndelag regions such as Oslo, diversified is stable. and Northern Norway

in 2016 than in previous

was somewhat higher in 2016 somewhat was from the petroleum industry con-

Investment in the oil sector fell markedly once again in Investment THE NORWEGIAN ECONOMY ECONOMY NORWEGIAN THE INFLATION WAS MARKEDLY HIGHER HIGHER MARKEDLY WAS INFLATION THE UNEMPLOYMENT RATE UNEMPLOYMENT THE THE NEGATIVE IMPULSES NEGATIVE THE years. The 3.6% increase in the consumer price index can years. in part effect of the krone having be explained as a delayed with imported the last three years, goods over weakened tinue to be significant, but there are numerous indications there are numerous indications but tinue to be significant, challenges it has come through the biggest Norway that coped so economy The fact Norway’s that facing. was through a period with a sharpwell fall in the price of oil thought, than many it is more robust that demonstrates it has a flexible and adaptable labour market. and that and the challenging times facing indus- the supply 2016, there however, the end of 2016, Towards try continued. regions in petroleum-sensitive of improvement signs were price and by this point the of oil had increased to as well, At the the start seen at nearly double the level of the year. large projects with many the costs associated same time, This continental shelf virtuallyon the Norwegian halved. brighteris reason for hope that ahead. times lie

than in 2015, but with an annual unemployment rate for rate with an annual unemployment but than in 2015, There are remains moderate. unemployment 2016 of 3%, and peaked in 2016, unemployment that indications many the than at the end of the year at lower was unemployment sizeable. however, The regional differences are, beginning. Agder have Vest Agder and Aust The counties of Rogaland, 5% as a heading towards with unemployment struggled, industry. result of the strong presence of petroleum-related in the petroleum sector continues to Although investment fell in 2016. in these counties rate the unemployment fall, and that the labour market is flexible, that This indicates other industries are managing to use workers from the a lot of expertise. who often have petroleum sector, – A STATUS REPORT STATUS A –

ANNUAL REPORT 2016 / PAGE 22 ANNUAL REPORT 2016 / PAGE 23 in the Norwegian in the Norwegian is helping to limit the econ- IT IS REASONABLE TO EXPECT GROWTH EXPECT TO REASONABLE IS IT NORWAY’S LOW KEY POLICY RATE POLICY KEY LOW NORWAY’S economy to pick up in the time ahead. Lower unem- Lower to pick up in the time ahead. economy the fall that in demand from the expectations ployment, prospect of and the petroleum industry sharply, will slow higher international growth are important drivers for this. in the residential property sector, Increased investment are also impor- and fiscal policy remains expansive, that there will be a gradual that tant reasons for the expectation return time. to more normal growthover prices. A fall of international in the level demand for oil-re- prices. caused exports to fall significantly, however, products, lated The stron- in 2016. traditional exports down and overall were as a consequenceger krone and limited salmon production mean there are groundsof the need for disease prevention If the salmon to expect exports forward. going to be low the targets, industry environmental the authorities’ satisfies everyproduction will potentially increase by 6% second year. omic downturn. The key policy currently rate 0.5%, stands at omic downturn. and has led to residential mortgage falling rates to around 2%. fiscal policy is also further expansive limiting the Norway’s consump- private reductions are stimulating Tax downturn. while public sector consumption and investment tion growth, Budget for 2017 National Norway’s are increasing strongly. public sector consumption growth will continue that indicates A lot of the underlying growth is connected with to be high. - made by the Nati transfer payments social security benefits, are fewThere and the healthcare sector. onal Government, an election 2017 is also this growth will slow. that indications additional impetus for consumption provide which may year, sector in 2018. and the local government by the state , there was a there was , , the mainland economy the mainland economy , and services benefited EXPORTS OF TRADITIONAL GOODS TRADITIONAL OF EXPORTS UNLIKE THE PETROLEUM INDUSTRY PETROLEUM THE UNLIKE DESPITE THE LOW CONSUMPTION GROWTH CONSUMPTION LOW THE DESPITE high level of demand for residential property in 2016. This of demand for residential property high level in 2016. of with the annual rate caused house prices to grow strongly, 12.8% on a country-wide an impressive growth standing at with house price growth the biggest increases, Oslo saw basis. Other locations in the city reaching a record high of 23.3%. Trondheim, including strong growth, also saw in Norway where they were Tromsø, and where prices up 10.3%, were but fell by 2.6%, prices Stavanger in In contrast, up 7.5%. there seemed to be the situation the end of the year towards The strong house price growth on a country-wide improving. basis is leading to strong growth in residential construction. and This will probably lessen the excess demand somewhat, there is consequently reason to expect house prices to grow less strongly in the years ahead. saw higher investment in 2016. This was particularlyThis was due in 2016. investment higher saw in the energy supply and service industries. to investment in the manufacturing of willingness to invest The level industry weak. remains relatively consumption growth, which in 2016 was at its weakest its weakest at which in 2016 was consumption growth, the gra- interest rates, Low since the financial crisis. level and the stronger in the labour market dual improvement giving however, krone leading to cheaper imports are, grounds consumption growth will pick up to think that The growth in the housing market again in the time ahead. because households will also help increase consumption, will experience worth. an increase in net High level of demand for residential property in 2016. Oslo saw the biggest increases, with house price growth in the city growth with house price increases, the biggest Oslo saw in 2016. property residential of demand for High level NTB scanpix Nordrum, Svein Photo: S area. of a building in the Fornebu high of 23.3%. Detail a record reaching from the weak krone. The seafood index was up 23% in 2016The seafood index was krone. from the weak partly due to higher salmon in 2015, a record year following ANNUAL REPORT 2016 / PAGE 24 ANNUAL REPORT 2016 / PAGE 25 Net trading income (from market expenses in 2016 operating Total 31 Decem- KBN had total assets at fluctuations in the market reverse or in the market reverse fluctuations the instruments reach maturity. transactions such as repurchasing bonds and selling securi own - KBN’s ties held in the liquidity portfolio) as totalled NOK 15 million in 2016, compared to NOK 6 million in 2015. NOK 177 million as compa- were red to NOK 151 million in 2015. half the increase was Approximately on a new due to higher depreciation while the remainder finance system, due to higher salarywas costs as a result of an increase in the number in management and of employees This increase in control functions. numbers a necessary was employee consequence of various regulatory as a status KBN’s requirements, systemically important financial insti- and increased requirements tution, to internalin relation control and operating Total reporting activities. expenses represented 0.04% of total assets in 2016. ber 2016 of NOK 418.3 billion as 31 compared to NOK 449.4 billion at The decrease is due December 2015. of a decrease in the to a combination size of the liquidity portfolio in 2016 krone strength­ and the Norwegian ening against other currencies from reduces the which the start of 2016, Profit for the year was NOK 689 year Profit for the Net unrealised losses on financial 2016) have been prepared on a going 2016) have The Board of Directors concern basis. considers the financial statements that notes for the year and accompanying an ending 31 December 2016 provide finan- descriptionadequate of KBN’s The annual year-end. cial position at - been prepared in acco accounts have rdance with International Financial Reporting Standards (IFRS). million in 2016 as compared to NOK Net interest 1,870 million in 2015. income in 2016 totalled NOK 2,087 million as compared to NOK 1,642 The margins on million in 2015. lending portfolio increased KBN’s in line with an increase in in 2016, particularlyprices in in the market, the first partyear. of the profit instruments reduced KBN’s before tax by NOK 974 million in increased while in 2015 it was 2016, by net unrealised gains on financial instruments of NOK 1,116 mil- The unrealised losses partly lion. loans stem from losses on fixed-rate Other market fairmeasured at value. that parameters also changed in a way financial of KBN’s affected the value and caused unrealised derivatives financial instruments KBN’s losses. are normally held to maturity and the effects of unrealised gains and losses profits reverses either when on KBN’s

In view of KBN’s profit for the year profit for the In view of KBN’s Profit for the year was NOK 689 year Profit for the ANNUAL ACCOUNTS ACCOUNTS ANNUAL The Board of Directors confirms, in accordance with Section 3-3a of the Norwegian Accounting Act, that ability to continue as a going KBN’s and concern remains unchanged, (for the financial statements that million in 2016 as compared to NOK Net interest 1,870 million in 2015. higher than in 2015, income was of due to a combination and this was high margins in the markets relatively throughout large parts of 2016 and strong lending growth early in the was year profit for the KBN’s year. also influenced by unrealised losses which stem of NOK 974 million, loans and from losses on fixed-rate contracts used to convert derivatives kro- funding into Norwegian KBN’s NOK Unrealised gains totalling ner. recognised in 1,116 million were returnafter on equity KBN’s 2015. 6.3% as compared to 20.8% tax was in 2015. of a dividend for 2015and its payment equity increased KBN’s to its owner, by NOK 250 million in 2016. KBN’s lending grew by 4.8% in KBN’s which is a slightly bigger incre- 2016, Lending ase than in previous years. projects and environment for climate increased by 11% in 2016.

ANNUAL REPORT 2016 2016 REPORT ANNUAL THE BOARD OF DIRECTORS’ DIRECTORS’ OF BOARD THE Kommunalbanken Norway (KBN) finances important welfare services services welfare important (KBN) finances Norway Kommunalbanken In authorities. and county municipalities Norwegian by provided billion. KBN’s NOK 48.1 loans totalling new 610 granted KBN 2016 Its target its activities. it conducts how to is central social mission of AAA ensures rating credit possible the highest of maintaining credit KBN’s terms. funding on favourable access it can reliably on invest to borrow to sector enables the local government rating in independent of underlying conditions are that terms predictable can local services to ensuring This is important the financial markets. one of KBN is currently fashion. in a stable be planned and provided the local to loans long-term provides that organisations only a few sector. government

ANNUAL REPORT 2016 / PAGE 26 ANNUAL REPORT 2016 / PAGE 27 2016 2016 2016 2016 2016 2015 2015 2015 Core earnings Core 2015 2015 Common equity Tier 1 equity Tier Common ratio capital adequacy 2014 2014 2014 2014 2014

CAPITAL ADEQUACY CAPITAL LENDING GROWTH LENDING amounts in NOK bill amounts in NOK mill amounts in 2013 2013 Total capital Total ratio adequacy 2013 2013 Profit after tax after Profit 2013 PROFIT AFTER TAX VS. CORE EARNINGS CORE VS. TAX AFTER PROFIT 2012 2012 2012 2012 2012 0 0 20 % 15 % 10 % 5 0 15 10 25 500 20 1500 1000 500 5 2000 25 20 15 10 2000 1500 1000 0 25 20 15 10 KBN adapted its lending activity in county authorities and Seventeen Loans to toll road companies with need sector’s The local government KBN’s total primary 31 KBN’s at capital LENDING KBN granted 610 new loans in 2016 len- Total totalling NOK 48.1 billion. sector ding to the local government NOK 266.6 end of 2016 was the at loan portfolio grew KBN’s billion. representing by NOK 12.1 billion, market KBN’s an increase of 4.8%. - approxima share for the sector was unchanged from 2015. tely 45%, 2016 to the higher capital require­ it had to meet with ments that effect from 1 July 2016 and from strong KBN’s 31 December 2016. it earnings throughout 2016 allowed to grow by more than in its lending 2014 and 2015 while also meeting the higher capital requirements. 428 municipalities 99% of Norway’s Coun- Local as Longyearbyen as well the end of cil had loans from KBN at a range of muni- In addition, 2016. cipal and inter-municipal companies limi- Loans to loans from KBN. have ted liability companies require muni- KBN cipal or county guarantees. offers loans with the same interest termsrate to all its borrowers regard- thereby ensuring all less of their size, municipalities and county authorities equal access to debt financing have terms. on competitive municipal guarantees accounted for NOK 25.4 billion of the NOK 55.3 billion in outstanding loans to muni- cipal and inter-municipal companies and borrowers with municipal gua- the end of 2016. rantees at by the need is being driven to invest in new facilities and to both invest services and to carry out significant particularlyupgrades, to in relation primary schools and further educa- and wastewater and to the water, tion, With regard (WWS) area. sanitation analysis shows WWS area, to the there continues to be a signifi- that Norway’s cant maintenance backlog. value of KBN’s assets and liabilities assets and of KBN’s value in NOK terms. NOK 13,989 2016 was December which NOK 10,996 of million, Tier 1 common equity million is total Tier 1 capital consists KBN’s capital. retained earnings of share capital, The Tier 1 capital. and additional Tier 1 capital adequ- common equity 31 December 2016 was acy at ratio capital adequacyTier 1 the 16.86%, and the total capi- 18.39%, was ratio 21.45%. was tal ratio . 1 emissions, that are that emissions, 2 KBN’s green is lending product KBN’s 1 By KBN had a total of 2016, the end The framework for KBN’s green for KBN’s The framework There is increasing demand globally framework. The interest rate on interest rate The framework. green is products interest rate KBN’s the than point lower 0.1 percentage its ordinary on interest rate interest products. rate of drivingintended to be a means and ambitious climate forward local projects in the environmental interest A lower sector. government to the can be a supplement rate policies used to range of government for municipalities incentives create in and county authorities to invest environmental projects with higher of At the end ambitions. and climate green lending portfolio2016 KBN’s totalled NOK 13.5 billion of NOK 13.5 billion in outstanding lendingof NOK 13.5 billion in outstanding 2016 to 2010 from Loans as Green granted In Bond Framework. Green under our first reflect to the Framework updated we 2016, Bond market. in the Green expectations some projects this update, Following do not Loan a Green granted previously These eligibility criteria. our current satisfy rate interest the discounted keep projects of not included in the portfolio but are - in our Environ present we Projects Green lending Outstanding mental Impact Report. is Bond Framework Green under the new billion. NOK 10.5 facilitated by its green loans. KBN facilitated by its green loans. finances its green lending by issuing lending has been graded by the Center for International Climate Research - Oslo and Environmental This is as «dark green». (CICERO) the highest grade possible and means are financed projects that the that are partthrough the framework of the solution in terms of achieving a the vision of making Norway Exam- society by 2050. low-carbon ples of projects financed using the green product in 2016 interest rate first energy-plus include Norway’s nurseryAsker, municipality of in the and wastewater water innovative solutions in northern and Jæren first nursing and Norway’s Romerike, home constructed out of mass timber in the municipality of Frogn. for socially-responsible investments benefit the cli- and projects that investors At the same time, mate. increasingly expect transparency reportingand comprehensive on the impact of the investment climate greenprojects that bonds enable. KBN took steps to further In 2016, its reporting and will publish improve This its first impact report in 2017. report and the climate will show the including impacts, environmental reductions in CO - a detailed custo KBN conducted Changes have been made to the Changes have GREEN LENDING AND GREEN FUNDING GREEN AND LENDING GREEN THE LENDING MARKET LENDING THE mer survey had a high in 2016 that This demonstrated response rate. customersthat on the whole very are with KBN. satisfied experienced no loan losses in 2016. experiencedlosses in 2016. no loan has defaultedNo customer or had so with making payments, problems groundsthere are no expect any to in 2017. loan losses KBN is committed to helping Nor- their wegian municipalities achieve KBN has offered a targets. climate lending product specifically separate - in environmen to finance investment tally friendly projects since 2010. entire green lending program KBN’s relaunched in 2016 with a new was Norwegian Regulations on municipa- Norwegian Regulations financial lities and county authorities’ and debt management with effect from 1 January increase the 2017 that information requirements regarding of interest-be- the maturity dates 20% of Approximately aring debt. debt outstanding local government aim is KBN’s in 2017. will mature of to contribute to the availability simple financing solutions but robust and responsible debt management borrowing to ensure the sector’s patterns are financially sustainable. long-termKBN focuses on providing very which few financing solutions, The products other lenders offer. market- however, KBN offers are, oriented and adapted to customer KBN’s demands and requirements. portfolio of loans with maturities of less than 12 months represent a small lending and are partpart of its overall of its ongoing liquidity and capital This portfolio management activities. len- represented 4.7% of its overall the end of 2016 as compared ding at the end of 2015. to 6.26% at The local government lending market The local government is characterised by the long-term, offers KBN instalment loans that and by municipalities borrowing directly Demand for in the capital markets. bonds and short-local government termvariable certificatewas in loans VPS suggest and figures from 2016, of borrowing in the rate the that In capital markets has stabilised. 2016 short-term borrowing grew at The more since 2012. rate its lowest municipalities use short-term finan- vulnera- the more they become cing, supply and ble to imbalances between demand in the capital markets.

LOAN VOLUME 2016 VOLUME LOAN by type of borrower by County authorities 9 % authorities County Municipal and inter-municipal and other borrowers companies, 21 % with municipal guarantees Municipalities 70 % Municipalities 70 In 2016 KBN tasked Menon KBN launched a April 2016, In KBN As in previous years, municipalities are meeting the demo- graphic changes taking place both in sheltered by increasing investment In housing and care home places. grants investment national this area, State made through the Norwegian Housing Bank are important to growth in Population municipalities. cities and areas around large towns and other urban areas is an additional a need for more factor is creating that to figures According investment. C2 credit Norway’s from Statistics measure (an approximate indicator of the gross domestic debt of inter local government alia municipalities), sector borrowing grew by 5% in 2016 - which is 2.7 percen to 2015, relative tage points less than in 2015. Economics with forecasting the local investment sector’s government requirements in the period up to the The forecast predicts that 2040. and the associated of investment level need for debt financing will be high recent years Over in the years ahead. up drawn have municipalities many budgetaryfinancial target figures or rules set limits on the amounts that and borrow. they can invest new digital platform for customers This tool ena- ‘KBN Finans’. called customers to view their bles KBN’s portfolio of loans from KBN and to KBN other loans they have. enter any - usersFinans thus gives a good over view of their borrowings and facilitates while it can also be used for analysis, area of focus One reporting purposes. for KBN in 2017 is to further develop its digital offering for customers.

ANNUAL REPORT 2016 / PAGE 28 ANNUAL REPORT 2016 / PAGE 29 auditor External External Third line of defence auditor Internal Supervisory Board The liquidity portfolioThe liquidity is managed CORPORATE GOVERNANCE CORPORATE 2016 was NOK 116.4 billion, down down 116.4 billion, NOK 2016 was of the end 146.6 billion at from NOK of the point the value which at 2015, portfolio high. unusually was target reflects KBN’s that in a way liquidity reservesof having sufficient at it to meet its obligations to allow Excess liquidity is managed all times. strategy according to an investment risk is low in termsthat credit of both liquidity KBN’s risk risk. and market income in fixed reserves invested are securities by governments, issued multilateral regional authorities, banks and financial development credit high have institutions that bonds. as in covered as well ratings ratio KBN had a liquidity coverage the end of 2016. (LCR) of 1,116% at KBN complies with the Norwegian KBN complies with the Norwegian Code of Practice for Corporate are in those areas that Governance its to its type of company, relevant ownership structure and its finan- KBN cial regulatory requirements. is organised as a limited liability by the 100%-owned company Paper White In its Norwegian state.

Reporting, Reporting, Reporting, Reporting, Reporting, Reporting, recommendations recommendations recommendations Second line of defence Remuneration Committee Remuneration Finance Committee Finance Risk management and compliance KBN GOVERNING BODIES GOVERNING KBN KBN is the largest Norwegian issuer KBN is the largest Norwegian total borrowings decreased KBN’s KBN’s liquidity portfolioprimarily is KBN’s LIQUIDITY MANAGEMENT of green bonds. KBN carried out of green bonds. its third green bond issue in Octo- 500 million ber 2016 with a USD There bonds. issue of four-year globally for is increasing demand and investments socially-responsible and benefit the climate, projects that significantly green bonds were KBN’s oversubscribed. in 2016 from NOK 400.9 billion to NOK 376.8 billion. a maturity of five years, as well as a as years, a maturity of five benchmark bond EUR-denominated billion with a maturityof EUR 1.0 of of a high level was There ten years. and all KBN’s investors interest from significantly bonds were benchmark oversubscribed. KBN’s policy is to hold cash and cash KBN’s its net capital match that equivalents requirements for the subsequent This means all times. 12 months at to situation is able in any KBN that the next 12 over meet its obligations addi- to raise months without having tional funds. of The value held in foreign currencies. the liquidity portfolio 31 December at President & CEO President Risk Committee Board of Directors Board Department heads

Annual General Meeting Annual General Credit Committee Credit First line of defence Operational functions Operational Articles of Association, Articles of Association, authorisations, decisions Articles of Association, decisions Articles of Association, authorisations, decisions Audit Committee Audit FUNDING KBN’s AAA/Aaa credit ratings ensure ratings AAA/Aaa credit KBN’s funding on it has stable access to and this benefits terms, favourable KBN sector. the local government borrowing brings the sector’s together has a better requirements and it than each municipality credit rating KBN pursues on its own. have would that a diversified funding strategy base, ensures it has a broad investor refinan- borrowing costs and low low New long-termcing risk. borrowings amounted to NOK 82.8 billion in which is NOK 14.1 billion 2016, access KBN’s higher than in 2015. and diversified, to funding is well Europe Asian markets, other Japan, and the USA are its most important KBN issued bonds in 12 markets. including two currencies in 2016, benchmark bonds USD-denominated each with totalling USD 2.0 billion, green bonds. KBN is committed KBN is committed green bonds. leader in greento being a finance. role a clear it playing This involves funds from investors in on-lending in green projects. to invest who want - to be directly invol aim is KBN’s in further both the ved developing as the market for as well framework green internationally. bonds The Audit Committee’s role is to Audit Committee’s The Committee’s The Risk Management role Committee’s The Remuneration Risk management and internal CREDIT RISK CREDIT financial position and earningsfinancial Board considersThe the situation. of risk assessment and management’s this forming with an adverse events, integral activity routine part of KBN’s reporting processes. help the Board of Directors monitor reportingfinancial sys- the oversee and tems for internal control and audit by preparing to these areas related issues on them. and advising the Board of Directorsrole is to help the Board level and manage the overall oversee of risk preparing KBN by at issues the to this area and advising related Board accordingly. is to help the Board assess the compa- arrangements remuneration by ny’s preparing to this area issues related and advising the Board accordingly. control offer three lines of defence. activities repre- operational KBN’s sent the first line of defence and are responsible for monitoring and activities controlling whether KBN’s are carried the approved out within The risk management and limits. compliance functions represent the with both second line of defence, serving to support the first line of defence by assisting with advice and facilitating appropriate methodology. they are independent con- However, monitor compli- trol functions that risk and limits ance with the approved whether internal is KBN control at The internal functioning satisfactorily. auditor represents the third line of The Board uses the internal defence. auditor as an independent inspection and control function in its monitoring activities. of KBN’s Credit risk in the lending portfolio is being deferredlimited to payments cannot be obligations as payment Section 55 of the Local cancelled. that Act stipulates Government municipalities and county authorities The not be declared insolvent. may Act also contains Local Government regarding the procedures provisions if payments must be followed that - These provisi to be deferred. have opera- the state, that ons stipulate ting through the Ministry of Local will and Modernisation, Government take charge of running a municipality if it is unable to meet its payment This in practice protects obligations. to losses in relation lenders from any debt and accrued interest. The Board of Directors is regu- The CEO is responsible for runThe CEO is responsible - RISK MANAGEMENT AND INTERNAL AND MANAGEMENT RISK CONTROL THE BOARD OF DIRECTOR’S DIRECTOR’S OF BOARD THE REMUNERATION THE ON STATEMENT EXECUTIVES SENIOR OF The purpose of risk management KBN manages its is to ensure that The assets and liabilities responsibly. Board of Directors has established a risk appetite and risk tolerance for KBN and within this framework sets financial policies and framework policies and including risk limits, operational to KBN’s limits relating These policies are reviewed activities. The Board of Directors has annually. also produced policies on internal control and considers the manage- assessment of internal control ment’s basis. on a yearly activities, larly informed of KBN’s Each year the Board of DirectorsEach year guidelines on the remu- approves in the of senior executives neration The Board year. financial following on the remu- submits its statement to the of senior executives neration Annual General Meeting each year. and informationThe statement on paid to senior the remuneration in Note 6 of are provided executives page on financial statements KBN’s 48 in this annual report. activities, which includes appointing includes appointing which activities, for the mandate approving the CEO, decisions on borrowing the CEO, and authorising borrowing delegated the internal and appointing authority, of DirectorsThe Board has auditor. prepare that set up three committees whose and cases for its consideration members elected by and from are namely members, amongst its own the Risk Audit Committee, the and the Management Committee, Committee. Remuneration basis ning KBN on a day-to-day mandate in accordance with the of Directorsissued by the Board by the Supervisoryand approved The Risk Management and Board. Compliance department has overall responsibility for risk management The Chief KBN. and compliance at Risk and Compliance Officer reports has a direct repor- but to the CEO, ting line to the Board of Directors in accordance with Section 29 of the The V Regulations. Norwegian CRD Head of Compliance has a direct reporting line to the CEO and also to the Board of Directors for material breaches of compliance. - the Govern , 2 2 Diverse and Value-Creating Owners- and Value-Creating 2 Diverse «The objective of the state’s owners - of the state’s «The objective determines the state KBN’s As owner, The target return- is set in the Nati set for KBN state The objectives bodies are organi- governing KBN’s The Board of Directors is respon- on Ownership Policy hip (White Paper No. 27 2013-2014) 27 No. Paper hip (White ment classified KBN as a ‘Category KBN as a ment classified an entity is to say which entity, 3’ and objectives with commercial defined objectives other specifically purpose define the that the state’s of National Norway’s In ownership of it. the purpose of the Budget for 2017, ownershipdefined of KBN is state’s as follows: AS is hip of Kommunalbanken to facilitate for the local financing the company while sector, government - with a satis the state shall also provide factory return paid-in capital.» on the size of dividendscapital structure, paid and its target capital return. period, onal Budget for a three-year with the return for the 2016-2018 8%. periodset at been having important its that functions include ensuring the markets used to finance sector are the local government effects any for compensating efficient, of market deficiencies and ensuring access to have municipalities that when market tur- financing even moil reduces the capacity available KBN offers in the capital markets. long-term cost-efficient financing for with investments municipal welfare termsthe same interest rate - regard less of the size of the loan or muni- and this is an expression of cipality, sectoral-policy function. KBN’s sed in accordance with the provisions Public Limited of the Norwegian Act and the Liability Companies as as well Act, Financial Enterprises The Articles KBN’s of Association. Board of Directors and the Supervi- Annual sory Board are elected by the In connection with General Meeting. Act, the new Financial Enterprises made in 2016 to KBN’s changes were It ceased to be a bodies. governing legal requirement for KBN to have a Supervisory Board and a Control The Committee. Annual General to abolish the Control Meeting voted The Supervisory Board Committee. body governing a as retained been has Asso- Articles of required by KBN’s produce inter alia, and it will, ciation, concern on issues that statements the and be particularly company focused on corporate governance. sible for the management of KBN’s

ANNUAL REPORT 2016 / PAGE 30 ANNUAL REPORT 2016 / PAGE 31 KBN decided to prioritise the fol- money laundering, Ethics, 1: Topic Green bonds and green 2: Topic and equality Diversity 3: Topic Responsible lending 4: Topic sharing Knowledge and 5: Topic reporting on corporate KBN’s For KBN had 72 employees at the at KBN had 72 employees orga- made to KBN’s Changes were focus on digitalisation has KBN’s ORGANISATION AND EMPLOYEES EMPLOYEES AND ORGANISATION in 2016. KBN engaged in extensive engaged in extensive KBN in 2016. revised its stakeholders, dialogue with its priorities separate developed and corporate guide- social responsibility a corporate KBN will produce lines. reportsocial responsibility in for 2016 Global Reportingaccordance with the KBN’s reportingInitiative standard. is corporate responsibility work social and work incorporatedits strategy into its activity the process for developing corpoThis approach ensures - plans. an integral social responsibility is rate ordinarypart activities. of KBN’s on corporate areas for its work lowing in 2017: social responsibility the and corruption, tax evasion, finance supply chain lending dialogue with stakeholders social responsibility for 2016 and its Cor- see the separate targets for 2017, Social Responsibility Report.porate In order to meet its targets, KBN needs In order to meet its targets, - to recruit skilled employ and develop ees across a range of specialist areas. to 70.3 full- end of 2016 equating hold 61 employees time employees. The tempo- permanent positions. rary are replacements for employees and tem- leave on parental employees porary staff appointed in connection with various projects. structurenisational with effect from the start of the second half of 2016 in order to clarify further the separation and control operational between risk management KBN’s functions. now and compliance functions have been brought together to form a risk management and compliance The loan administration department. been and settlement functions have brought together along with other supportoperational functions into a department.staff and operations on customersconcentrated and robust We work processes. and efficient strengthened the customer experience in 2016 by launching a digital customer was finance system KBN’s platform. the course of its firstyearadapted over to furtherin operation and automate This internal processes. work improve will be accelerated. work automation KBN aims to help identify issues KBN aims to help identify KBN carried of activi- out a range is importantA good reputation to KBN held its annual conference in role in the «green shift» was KBN’s KBN carried out various marketing ETHICS AND CORPORATE SOCIAL CORPORATE AND ETHICS RESPONSIBILITY that constitute potential obstacles constitute potential that its purpose to its ability to achieve to its represent challenges or that In its external interests. customers’ KBN parti- in 2016, communications importancecularly emphasised the of a prudent approach to borrowing by its green sector, the local government lending products and the launch of KBN Finans. ties in 2016 to measure its reputation among major stakeholders. ensuring KBN is able to function and to recruiteffectively skilled closely with KBN works employees. in the local a range of organisations in sector and is active government discussions concerning important finance issues. local government KBN arranged a number of specialist conferences and seminars in 2016, some independently and some in partnership with other parties that sector. in the local government work the theme of which was April 2016, – way the Norwegian «Urbanisation sustainable cities and urban areas». also the theme of a panel discussion Arendalsuka the KBN hosted at that The main August 2016. conference in KBN target audience of the events in addition to custo- arranged was, lending products, mers for KBN’s consul- politicians, local and national tants and the official authorities. with a view to highlighting initiatives its position as a leading financial institution for the local government visibility in Increasing KBN’s sector. digital once again a prio media was - The purpose of this rity area in 2016. of contact the level to improve was KBN has with its target audiences, of understanding of increase the level and to in society, the role KBN plays website. drive more traffic to its regular, high-quality contact with contact high-quality regular, stakeholders major as an KBN’s important of ensuring means that understandingthere is a good of in the framework its model and Government The which it operates. of has expressed its expectations No. White Paper in the company and 27 (2013–2014) «Diverse Ownership». Value-Creating KBN further its work developed on corporate social responsibility

ments in respect of liquidity, ments in respect of liquidity, CORPORATE COMMUNICATIONS AND COMMUNICATIONS CORPORATE RELATIONS PUBLIC OPERATIONAL RISK OPERATIONAL COUNTERPARTY RISK COUNTERPARTY INTEREST RATE RISK AND RISK RATE INTEREST CURRENCY RISK CURRENCY LIQUIDITY RISK The Board of Directors regards Operational riskOperational is managed through help ensureprocesses and controls that which good internal KBN, control at includes ensuring there is an adequate - operati of duties between separation there that onal and control functions, processes and are documented work critical to in relation and that controls, functions there is a sufficient number of exper- with a high level of employees Annual risk reviews are underta - tise. ken for all critical functions to ensure there are sufficient risk-reduction The losses. measures in place to prevent Board of Directors is kept informed riskof operational and adverse events by activity and risk reports and annual assessments of internal control. KBN’s counterpartyKBN’s exposure is The Board of continually monitored. Directors is informed of risk levels by the activity reports and it receives more frequently when required. Interest rate riskInterest rate and currency risk are managed by ensuring the risk that assets exposure arising from KBN’s all times. and liabilities is balanced at Hedging into transactions are entered and currency interest rate to avoid When entering into a hedging risk. transaction to minimise interest rate or currency KBN assumes credit risk, risk in respect of the counterparty to KBN is transaction. the derivative risk credit only willing to accept low to such counterparties. in relation This credit risk is further reduced by exchanging for the cash collateral of the derivative. market value The Board has a veryThe Board limited risk regard to liquidityappetite with the purpose of which management, to sufficient liquid assets is to ensure any at ongoing liabilities KBN’s cover including to meet all liabilities point, arising during a subsequent 12-month period new borrowing. without The liquidity portfolio subject to is require­ counterpar- diversification, ratings, inter alia. ties and instrument types, Furthermore, liquidity management complies KBN is designed such that liquidity require- with the capital and ments set by the authorities. - % % ment level Next manage Next 16 Education Employees Employees 25 over 50 years over 42 abroad, more abroad, than one year %

% Regular health-promoting and social No accidents or serious injuries 1.41% in was The sickness rate ALLOCATION OF PROFIT OF ALLOCATION One major and one minor employee One major and one minor employee survey conducted. were facilities including exercise activities, offered for were and health checks, with collaboration in all employees various activity groups. KBN’s occurred recorded as having were during hours- or in conne working ction with journeys purpo- for work No accidents or injuries were ses. reported Labour to the Norwegian Inspection Authority. 2016 as compared to 4.4% in 2015. 1.64% for men was The sickness rate target KBN’s and 1.12% for women. to be below is for the sickness rate on health, actively KBN works 2.5%. environment, safety and the working up sick and following on preventing and on facilitating a swift leave, fol- return for employees to work of absence and sickness. leave lowing The Board of Directors of Kommu- AS proposes the following nalbanken of the profit for the 2016allocation NOK 390 million is to year: financial as a dividend, owner be paid to KBN’s NOK 19 million is to be paid in inte- Tier 1 capital rest on the additional and NOK 280 million is instruments, to be transferred to retained earnings. CEO and 17 12 International management 50 Employees 30 30 Employees work experience, work years or younger years more than one year more %

7 women Mean age Employees Nationalities 43 44

As of 31.12.2016 % %

CORPORATE DIVERSITY KBN IN CORPORATE men The target for succession planning for At the end of 2016 the proportion of Board of Board Directors HEALTH, SAFETY WORKING THE AND HEALTH, ENVIRONMENT Mean age management positions and other criti- to be identi- cal roles is for candidates in order to reducefied and developed talent. vulnerability and to develop on the Board of Directorswomen was proporti while the equivalent - 56%, team management ons for the CEO’s (permanentand for all employees and temporary) 50% and 44% were age of KBN The average respectively. 40 for men and 43 for was employees as and there are approximately women, under 30 as there are employees many 10% of employees 50. over employees do not hold Norwegian citizenship. responsibilities at home. responsibilities at The Working Environment Commit- Environment Working The contribute aim is to actively tee’s of a good working to the creation and the promotion of environment a health by building good physical corporate culture characterised by The and collaboration. well-being Committee has held regular meetings and has carried assess- out workplace measurements, indoor climate ments, and risk to assessments in relation issues. safety and environment health, In 2016 the ethics program that focused runwas for all employees zero-tolerance approach on KBN’s to discrimination and harassment. 10 40 56 than Norwegian Other citizenship Other citizenship

­ INTER NATIONAL AGE SHARE OF OF SHARE WOMEN When recruiting for or making chan- equally are treated All employees DIVERSITY EQUALITY AND KBN strives to work in a systematic in a systematic to work KBN strives on diversity and and targeted way and equality across the organisation up targets with specific to follow Its work measures in its activity plans. and equality is a to promote diversity fundamental part of its recruitment its development of new employees, and its of managers and employees, objective KBN’s succession planning. a good gender balance at is to achieve an with within all units, and all levels gender balance target of 40%. overall ges to the composition of its manage- units, ment teams and organisational KBN accords particular to weight the gender balance and requires that woman or man is the most qualified decision is taken. identified before any is given to gender, No consideration or geograp or cultural - age, disability, hic background when candidates’ professional and personal- qualificati ons are being assessed. access to the same oppor- and have tunities with regard to personal and and professional development who do not Employees promotion. with are provided speak Norwegian and diversity training in Norwegian, is partand equality work of manage- Flexible working ment development. hours are offered to facilitate arran- care who have gements for employees

ANNUAL REPORT 2016 / PAGE 32 ANNUAL REPORT 2016 / PAGE 33 Jarle Byre Nanna Egidius Member of the Board the Member of Employee representative Employee The regulatory for requirements robustness and analysis capabilities. analysis capabilities. and robustness increased have financial institutions KBN is recent years. in scope in on adapting continuously working of new regulatoryto a range requi- Agreement will The EEA rements. to introduce regula- require Norway up pri- the EU has drawn tions that from causing banks marily to prevent As a low-risk another financial crisis. KBN has a instrument of the state, In designing model. different business the EU has to some the regulations, for low-risk extent made provision such as KBN. financial institutions issued suitably countries have Several for financial insti- adapted regulations lend to the public sector, tutions that for example by classifying them as Predictability “promotional banks”. and maintaining the same terms with regard to the long-term in framework are importantwhich KBN operates to ensuring to KBN is able to continue - Norwe its key role in building play gian society.

Martha Takvam Member of the Board the Member of Employee representative Employee May-Iren Walstad Wassås Walstad May-Iren President & CEO President Chair of the Board the Chair of Falkgård Kristine Else Bugge Fougner 24 March 2017 Oslo, 31 December 2016 Oslo, Following the Paris Agreement, Agreement, Paris the Following of servicesThe development and KBN’s employees for a job well done. for a job well employees KBN’s years ahead. This analysis predictedThis analysis years ahead. sector’s the local government that double in would budget investment and 2040. now size between expectation there is a significant greenhousethat gas emissions will The local including in Norway. fall, - an impor sector plays government and KBN tant role in this work, to ensure is committed to helping municipalities access Norway’s that funding termsfavourable - when bor to finance important - rowing environ one Going forward, mental projects. ambitions is to increase the of KBN’s proportion used is that of its lending friendly projects for environmentally as to meet the demand in as well by the market for green investments issuing green bonds. products with a basis in digital dialogue In solutions is accelerating. will seek to we with our customers, the customer experience develop technologiby adopting relevant - to efficient cal solutions in relation operational customer management, The Board of Directors of Kommunalbanken AS The Board of Directors of Kommunalbanken Rune Midtgaard Jr. Steen Petter Member of the Board the Member of Member of the Board the Member of financing of local government welfare services in the years ahead. The Board of Directors would like to thank would like to thank The Board of Directors welfare services financing of local government yearsin the ahead. Vice Chair Vice The accounts for 2016 show that KBN achieved satisfactory results. KBN’s aim is to contribute to the long-term KBN’s satisfactory KBN achieved that The accounts for 2016 show results. Martin Skancke Martin Skancke The local government sector willThe local government Member of the Board the Member of FUTURE PROSPECTS FUTURE - growth Norwe in the low 2016 saw - as a result of the down gian economy turn in oil prices and the moderate of demand growth internatiolevel - be a marked There continues to nally. economy. divide in the Norwegian Western SouthernOil-dominated and facing are difficult times, Norway while growth in more diversified and Trøndelag regions as Oslo, such Growth Northern is stable. Norway - is expec economy in the Norwegian The time ahead. ted to pick up in the has come through fact Norway that the sharp despite this period well so fall in the price of oil demonstrates and a economy has a robust it that flexible and adaptable labour market. sizeable investment continue to have and this is the needs in the future, urbani- growth, result of population and the continuing increase in sation the proportion of older people in the the with KBN has worked population. analysis firm Menon Economics to - produce a forecast of the local govern needs in the investment ment sector’s Brit Kristin Sæbø Rugland Sæbø Brit Kristin

BRIT KRISTIN SÆBØ RUGLAND SÆBØ KRISTIN BRIT BYRE JARLE RUNE MIDTGAARD RUNE Member since june 2016 Bachelor of Business Master of Administration, KBN Member, Management. Figgjo Chair, Audit Committee. Member of the Board, AS. AS. Norge Talent Norfund and board in five Participated meetings in 2016. since 2015 representative Employee Master of Business and Senior Relationship Economics. Personal KBN. Manager, alternate is Andreas Aleström. in nine board Participated meetings in 2016. Member since 2014 Autho- Master of Business and Analyst (AFA). rised Financial AS. Norsk Luftambulanse CEO, KBN Remuneration Member, Audit Committee and KBN Committee. in eight board Participated meetings in 2016. NANNA EGIDIUS NANNA

Member since 2004 Director Master of Business. of Strategic Planning and Lillehammer Development, KBN Member, municipality. Norsk Chair, Audit Committee. Luftambulanse Vice AS. Chair, Ikomm AS. in nine board Participated meetings in 2016. THE BOARD OF DIRECTORS OF KBN OF DIRECTORS OF BOARD THE

ANNUAL REPORT 2016 / PAGE 34 ANNUAL REPORT 2016 / PAGE 35

MARTHA TAKVAM MARTHA Member since 2005 and an MBA in MSc in business Group Internal Director, finance. KBN Chair, ASA. Telenor Audit, KBN Member, Audit Committee. Risk Committee. in nine board Participated meetings in 2016. PETTER JR. STEEN ELSE BUGGE FOUGNER BUGGE ELSE SKANCKE MARTIN WASSÅS WALSTAD MAY-IREN Member since 2015 Consultant/advisor to Teacher. Member, Municipality. Sveio Committee. KBN Remuneration Haugaland Member of the Board, Kraft AS. in nine board Participated meetings in 2016. Chair since 1999 Admitted to the Supreme Attorney - Chair, Hjort at DA. Lawyer Court. Committee. KBN Remuneration Risk Committee. KBN Member, Eksportkreditt NorgeChair, Member of the liquidation AS. Aberdeen Eiendomsfondboard, Norden/Baltikum ASA and Aberdeen Eiendomsfond Norge Board, Member of the ASA. II andASA Aker Kværner Holding Protector Forsikring ASA. Participated in nine board meetings in 2016. since 2016 representative Employee - Senior Port MSc in business. KBN. Treasury, folio Manager, ACI Member of the Board, alternate is Personal Norge. Marit Urmo Harstad. board in five Participated meetings in 2016. Member since 2013, Member since 2013, Vice Chair since 2015 Owner and MSc in business. AS. CEO of Skancke Consulting KBN Risk Committee. Chair, Principles for Responsible Chair, the Board, Member of Investment. ASA and Norfund. Storebrand in nine board Participated meetings in 2016. ANNUAL REPORT 2016 / PAGE 36 ANNUAL REPORT 2016 / PAGE 37 61 62 62 62 63 64 65 65 65 65 67 70 70 73 71 ...... Other assets Notes, bonds and other bonds and other Notes, ...... institutions credit from Loans ...... Senior securities issued ...... Financial derivatives and offsetting...... Collateral debt. Subordinated capital. Share Risk management. Additional Tier 1 capital. Tier Additional Credit risk. Credit Interest rate risk. rate Interest Currency risk. Currency Liquidity risk. and Capital adequacy Note 17 Note Note 16 Note securities...... interest-bearing Note 18 Note 19 Note 20 Note 21 Note 22 Note 23 Note Risk management 25 Note Note 24 Note Note 26 Note Note 27 Note Note 28 Note Note 29 Note Note 30 Note capital management. 47 47 48 48 46 46 42 38 38 39 40 41 51 54 55 59 60 60 52 53 61 ...... income Net trading ...... expenses Salaries and administrative ...... Remuneration . Pensions gain/(loss) Net unrealised . Tax Financial instruments measured measured Financial instruments measured Financial instruments . Hedge accounting ...... institutions Deposits with credit loans. Instalment . Leases Categorisation of Categorisation FINANCIAL STATEMENTS 2016 STATEMENTS FINANCIAL NOTES TO THE FINANCIAL STATEMENTS FINANCIAL THE TO NOTES Note 4 Note Note 5 Note 6 Note 7 Note Income statements Income ...... income 1 Net interest Note ...... expenses and commission 2 Fees Note 3 Note . on financial instruments ...... statement Income ...... income of comprehensive Statement of financial position...... Statement of changes in equity...... Statement ...... of cash flows Statement policies Accounting Note 8 Note Note 11 Note . value fair at 12 Note . cost amortised at 13 Note 14 Note 15 Note Note 9 Note Balance Balance 10 Note . financial instruments

6 4 5 30 16 12 11 30 115 151 713 2015 2015 1 642 3 854 1 092 1 116 1 870 5 496 1 882 1 859 2 583 1 870

0 32 15 19 32 20 (1) (1) 689 125 688 670 177 919 230 689 2016 2016 (991) (974) 2 087 3 530 5 617

2 1 3 4 9 8 5,6,7 Note Note

Of which is which taxOf

Net interestNet income Feescommission expenses and Net unrealised gain/(loss)financial instruments on Salaries and administrative expenses Interest expense income Net trading income operating other Total income comprehensive Other Itemswillwhich to loss be reclassified or profit not Profit the for year Interest income Actuarial gain/(loss) on defined benefit plan income comprehensive other Total the year for income comprehensive Total STATEMENT OF INCOME STATEMENT COMPREHENSIVE (Amounts 1 000 000) NOK in INCOME STATEMENT (Amounts 000) 1 000 NOK in

Portion ofcapital owners additional allocated to 1 Tier Other expenses Depreciation assetsfixed on expenses operating Total Profit before before Profit tax Income tax Profit for the the year Profit for Portion shareholder allocated to

ANNUAL REPORT 2016 / PAGE 38 ANNUAL REPORT 2016 / PAGE 39

0

49 36

994 829 201 142

2015 3 145 8 063 1 764 7 167 12 202 37 207 22 831 19 428 449 361 437 159 390 107 449 361 256 815 149 944

0 0

52 45 12

994 153

2016 3 145 8 314 1 974 7 584 12 452 26 275 15 921 16 182 418 327 405 875 369 933 418 327 267 521 118 550

7 8 8 8 24 23 17 17 Note 10, 22 12, 10, 18, 12, 21 10, 12, 11, 15 10, 13, 21 12, 20, 10, 12, 19 11, 13, 10, 13, 21 12, 20, 10,12, 21 11, 14, 10, 12, 16 11, 13,

bearing securities

Total liabilities and equity and liabilities Total Share capital Additional capital Tier 1 Retained earnings Total equity Pension liabilities Pension Subordinated debt liabilities Total liabilities Other liabilitiesCurrent tax liabilitiesDeferred tax derivatives Financial Liabilities equity and institutions credit Loans from Senior securities issued securities Senior Deferred tax assetDeferred tax Other assets Total assets Deposits with credit institutions credit Deposits with Instalment loans Notes,interestand other bonds derivatives Financial Assets STATEMENT OF FINANCIAL POSITION OF FINANCIAL STATEMENT (Amounts 1 000 000) NOK in

0 0 0

12 (1)

689 994 (10) (20)

(417) 1 870 8 336 1 000 12 202 12 452 12 202 Total equity

Total equity

0 0 0 0 0

12 (1)

689 (10) (20) (417) 8 063 1 870 6 191 8 314 8 063 Retained earnings Retained

Retained earnings Retained

0 0 0 0 0 0 0 0 0 0 0 0

994 994 994 994

Additional Tier1 capital

Additional Tier1 capital

0 0 0 0 0 0 0 0 0 0 0

3 145 2 145 1 000 3 145 3 145

Share capital

Share capital

24 23 23 24 24 24

Note

Note

Interest paid on Tier 1 capitalInterest 1 Tier on paid Total other comprehensive income comprehensive Total other Profit the for year Equity as of 31 DecemberEquity 2015 Dividends for 2014

Equity as of 1 January 2015 Equity 1 of as 2015

Profit the for year income comprehensive Total other Dividends for 2015 shareIssue capital of

Equity as of 1 January 2016 Equity 1 of as Interest paid on Tier 1 capitalInterest 1 on Tier paid STATEMENT OF CHANGES IN OF IN STATEMENT EQUITY CHANGES Issuedcapital additional 1 Tier Issuedcapital additional 1 Tier shareIssue capital of Equity as of 31 DecemberEquity 2016 (Amounts 1 000 000) NOK in 2016

ANNUAL REPORT 2016 / PAGE 40 ANNUAL REPORT 2016 / PAGE 41

0 6 0 0 0

34 13 34 21 13 69 69 (7)

994 (30) (14)

2015 (146) (404) (123) 5 616 3 758 1 000 53 163 68 644 19 049 (3 175) (3 (3 855) (3 (7 298) (7 (7 302) (7 (53 149) (53 (45 917) (45 (20 789) (20 (116 443) (116

0 0 0 0 0

76 76 42 34 42 15 11 (32) (26) (20) (20) (12) 2016 (157) (838) (417) 2 793 5 433 1 991 3 212 82 752 25 204 16 947 (2 751) (2 (3 752) (3 (1 758) (1 (14 134) (14 (96 675) (96 (12 137) (12

bearing securities

Deposits with credit institutions without agreed time to maturity Loans from credit institutions without agreed time to maturity Interest paid Interest received Fees and commissions paid commissions and Fees Receiptsfrom securities issued repurchase of suppliersCashto payments employees and Repayment of commercial paper Proceeds from issuance of debt securitiesProceeds issuance debt from of Repaymentsecurities of debt Proceeds capital Tier issuance additional from of 1 Proceeds from issuance of commercialProceeds issuance paper from of Income taxes paid Interest paid on Tier 1 capitalInterest 1 on Tier paid Proceeds from issuance of subordinatedProceeds issuance from of debt Repaymentsubordinated of debt Dividends paid Proceeds from issuance shareof capital Net disbursement customers loans to of

Net (increase)/decreasecreditinstitutions deposits with in Net (increase)/decrease notes,bonds interest in other and Net (purchase)/sales equipment property and of Net (increase)/decrease other assets in

Net increase/(decrease) other liabilities in

Whereof Cash and cash equivalents at 31 DecemberCash equivalents 31 and at cash Cash and cashJanuary equivalentsCash and 1 at cash equivalents cashNet and in change Effects foreign of differences exchange differences exchange foreign after flows cash Net Net cashNet flows

Net cashNet from flows financing activities Cash flows from operating activities operating from flows Cash

Cash flows from financing activities financing from flows Cash STATEMENT OF FLOWS STATEMENT CASH (Amounts 1 000 000) NOK in Cash fromflows investing activities cashNet from flows investing activities

Net cashNet from flows operating activities

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o i s functional and presentation currency functionalthes and presentation Norwegian kroner liabilities is (NOK).Assets and a foreign denominated in t ’ i s i u q c cial instrumentsfairthrough at profitvalue loss or cial instruments the classified carrying receivables where Loans amount liabilities as Other or and that items hedged and are bearing securitie a - classified Held to maturity Held to CIAL INSTRUMENTS

“ cial assets are derecognised when thecial transferred. are cash derecognised or contractual assets flows when to expire rights are Financial the liabilities a cial maturity assets to held o t

e is adjusted for value changes attributable to the risks that are being hedged ischanges for attributable adjusted the value that being are to risks Finan Finan l b

Financialthisin primarily assets category are asset and selectedsecurities financialthatfrom been reclassifiedcrisis became the illiquid and have 2008 of a result in as a financial recognisedpurchaseare changessale ofthe thetrade asset, the of from date. a value asset or Finan recognisedcontractualWhen the obligation when securitiescancelled debt issued been discharged, expired. has has or rep are chased, liability the recognisedis carryingsettlement derecognised. Any the the in difference amount is between amount and visions of the instrument. At initial recognition, all financial assets and liabilities are measured at fair value. For finan For value. fair at measured are liabilities and assets financial all recognition, initial At instrument. the of visions not profit fair loss, initialthrough categorisedvalue at recognition as at the value or that includes are transaction costs RECOGNITION AND DERE Financial liabilities assetstorecognised contra financial and a party the statement becomes KBN are the in of position when the transaction at come loss statement or date. gain as CLASSIFICATION AND M Classification of financial instruments takes place at initial recognition and determines the subsequent measurement accordin category of classification is determined by the characteristics of the financial instrument and management ignated initial value fair at through loss or at as profit torecognition,order similar achieve intreatmentas deri related measurementmeasured inThisused risk, fair currency a reduction hedge interest in are at which leads to rate to value. and financial othersistency and bondsthe hand. on one hand, derivatives between bonds and notes, loans and issued on Finan Financial liabilities assetsfairvaluethrough and lossor atdesignated profit (FVO) theSelectedin liquidity and notes bonds portfolio, NIBOR rate fixed loans and to the ment and may add to the uncertaintyto valuations. of may degree thement tomay Assumptions in allocation and judgements add f of also apply and cial hierarchyinstruments 3). or fair in IFRS (Level measured1, 13 the value 2 at FINAN tivemethod. interest rate Loans and receivables market. Included in F quoted an active bondsthat in loans not customers, category are are and advancesthis to and notes and financial statements for the year ended 31 December 2016 were approvedfinancial the March 24 2017. by statements Board Directors were ended 31 Decemberfor of on year the 2016 PREPARATION OF BASIS The financialstatements in been prepared International have accordance with Financial adopted (IFRS) as Standards Reporting the EU. The financialthe presented historical statementscost EU. The for: are on a basis, except The preparationmanagement financialmake judgements of to statementsIFRS accordance requires in and assumptions, and with usethat use estimates accounting the of policies. affect The will estimates and accountingcarrying judgements affect amount ed to the nearest million kroner, with the exception of Notes 6 and 7 that are presented in NOK thousand. 7 thatthemillion presented are in ed to exception nearest NotesNOK kroner, the 6 and of with JUDGEMENTSSIGNIFICANTESTIMATES ACCOUNTING AND cial are: accounts date,Whena significant determined valuation techniques.management is makes to observable, using are inputs extent not assu consideringtions estimates and uses credit when liquidity risk and risk financial relatedto the instruments. Even assump if estimatesmarket the to conditions possible greatest extent, are, on actual based the prevailing date, reporting they invo at Fair value measurement The fair value of financial instruments that are not traded in an active market,thThe availablefinancial have fair of prices do not or an active quoted traded that value at not are in instruments assets and liabilities,mademarket aboutmay and revenues Assumptionschange changes and expenses. future development due to and actualsignificantmaymost estimates. results The the from deviate judgements and estimates preparation in used the t of assets assets When accountingHedge fair classifiedmay hedge accounting apply to and receivables. is and notes applie Loans value as bonds changethe that value iscarrying attributablethe theasto is of recognised amount under hedged risk part interest   REPORTING ENTITY municipal outpanieslevel.KBNcarry tasks a companies that at and other ACCOUNTING POLICIES Kommunalbanken AS FOREIGN CURRENCY TRANSLATION The Company ratethefinancial exchange at transaction date.the statementsrency The translated are presented and in NOK at are into NOK currency are translated into NOK at the exchange rate on the reporting date. Revenues and expenses denominateddate. rate reporting Revenuesat c exchange on the currency a foreign and expenses the in translated are into NOK

ANNUAL REPORT 2016 / PAGE 42 ANNUAL REPORT 2016 / PAGE 43 ”.

hen the ata the it nor, nor, t w of the the of puts ts that

r, meas- t d te in s posi-

red - een onds with art air value value air ruments

es meas-es he e i ent of Fi- of ent on tech- iti n f ates and

nst ati he levels is is levels he sedin Level 2 d items items dged tem sh collateral is is collateral sh n t ori d at a reportingd at a agreemen - Ca

rve

fair value measurement. but a dif- denominated in

he r indices indices

Standardmaster netting do agreements

and commodity

bearing securitiesand issued bonds benchmark -

Net unrealisedNet on financial gain/(loss) instruments “ indices

not traded in an active market inputs where a large extent in to are tradedan active and not rates, equity -

securities securities

and in the income statement as

features. Fair valuefinancial of instruments withoutembedded derivativesis determined ” ’

sactions. sactions.

IAL ASSETS AND LIABILITIES AND ASSETS IAL IAL INSTRUMENTS derivatives option elements. with - Senior securities issued

“

when the—when value is negative.

rate customers, loans debt to issued - s financial others share instruments interest of a larger and bonds Notes, s financial instruments Depositscredit withInstalment institutions of a larger share Notes, loans, and and other bonds ’ ’ bearing securities, Financial derivativessecurities Senior 2. allocated to and are issued Level inputs might include: inputs might include: bindingfrom price quotes different sources

-

- so that an adjustment for maturitythat adjustmentso for an is necessary ferent currency, so that an adjustment for currency is necessary Market indices, both bond and credit default swap indices,Marketcreditsimilarswap instruments indices, default for bond and both Non volatilities implied or Historical Indicative estimates similar pricesinstrumentsmarket for and other provided by participants Prices issuessimilar potentialsameissuer inthefrom new on instruments Quotedspreadsat credit reportingsimilar prices the for and date same issue instruments the by issued Actualmarket transactions identical ininstruments that reporting adjustment so after or the before betw date, for an events liquidMore instrumentsmaturity, the identical with sameissuer by issued for an adjustment but liquidity risk is necessary Observableinterest curves, spreads, yieldswap basis rate FX Quotedspreadsat credit but reportingsimilar prices a different the for with and date same issuer instruments the by issued date transactionthe of date reporting and is necessary

significancedata on observable is given done based are adjustmentmarket weigh to extent the data adjustments what of of and thecategorized instrumentIFRSOther in is to 13. used fairdetermination according inputs might include: value of not qualify for offsettingTherefore,assets presentation.the and net and liabilities Sta related presented the are gross in nancialPosition. collateral Cash securityfor pledged or additional received as derivative is subject ISDA exposure to give right liabilities offsetting assets to of default, and the of butfor IAS not in event does offsetting qualify 32. under Statement theFinancialpresented gross of in Position. basis on a KBN does not offset any financialKBN offsetassets not any and liabilities does the FinancialPosition. of in Statement unobservable, and OTC classifiednotes value fair bonds determine oftypeinput howeve might the Level to 2 and Level of as The 3, be used same and           Publicsome loansinstitutional from loans benchmark and investorsmarketsclassified public nichefinancial in as are liabil Financial liabilities amortised cost measured at carrying amount under done at the end of each reporting period. The valuation technique used to determine fair value of financial instruments categ c significantthe most 3 comprisesand estimatesinputs. The Level in valuation inputin used as the unobservable Level 2 and For financial instruments categorised in the fair value hierarchy at several period ends a reconciliation of movements betwee Fair value disclosures value Fair Of the bank interest Level 3 Level for3 is relevant financialfair market instruments determined using an activevalue valu traded and that is not are in or Levelis 3 determined basedonthe instruments using the discounted cash flows method, where discount rates are derived from the relevant observable money market interest r other risk factors that may significantly affect the fair value of the instruments. When such factors cannot be reliably obse date,management may make assumptions and use estimates when determiningthefair value. Fair financial value of instruments embeddedwith modelsmarke using option pricing derivatives is determined observable with premiumfor financial market. instruments an active traded that not are in FINANC OF OFFSETTING niques where significantniques where data. on unobservable Financial input isinstruments based classified b Level 3 include as notes and fixed liquidity, low ured atured the amortised cost,method. effectivemajorityliabilities using of interest Thecategory this in is designated he as accountingand hedge Thischanges applied. impliesthat that attributable are valuethe is recognised to are risk hedged p as Financial derivatives Financial Financial derivatives classified trading, contracts Held instruments the as of are for designated with hedging exception as i when they representwhen market actualtran allocatedare Level 1. to Level 2 For financialinstrumentssimilar market, either will without pricesKBN quoted available quoted i of in use prices an active possible,inmarkets,active valuationor where significant techniquesmarket where on observable based are data. inputs Level 2 Of the bank hedges.Allmeasured financial the assetsfair valuthrough when profitvalue derivatives presented are as loss are at and or tive,liabilities and as OF FINANC FAIR VALUE Financial instrumentscategorised are intofair the value hierarchy,the based lowest on level inputthatsignificant is to t Level 1 Formarket securities active frequenttradedmarket with t in reporting in observations an used the are prices date quoted on urement value. fair international provided are by of prices Quoted (Reuters/Bloomberg), classified vendors Level 1 and are as s s d in d g ent g- equiv- ng the ise

uding s and s and in the munici-

ncial ncial

olio sys- olio oeconom- . rie ve chang-ve cost price, ncl haracteris- and nd administra-

as Other ian rtf perati ina acr ati relationship

k c nd asured on an ed s risk, underly- s risk, n o ’ be zero. ue hedge. The

The value value The dge me leases, assets assets leases, to

profile of benefitsprofile of

val

e

linear

financial distress financial ’ d, and interest interest is presentedd, as without agreed agreed without time to maturity downs. Ordinary depreciation, based on - Assetsfor testedthere impairment annually. is an If are . Interest income for assets and liabilitiesfor Interestmeasured . income assets at

. ” line basis over the lease term. Under financUnder lineterm. the over basis lease -

at amounts equal to the fair value of the leasedamountsto the at value fair of equal if lower, the property or,

leases.

e position termcredit institutions deposits with

-

eceivables or Held to maturityWheneceivablestofor there Held or impairment. is objective assessed are r neffective part ofthe hedge is recognized in the income statement.

is also classified intangibleis also asset. acquisition an cost the is as amortised over The useful Any i s ability to pay, and the loss history for the various risk groups. Under current legislation limiting the

’ s risk. Securities carried at amortised cost are split into groups according tothe issuer ’ are classified as financ as classified are ng

IAL ASSETS IAL offset method. -

Net unrealised gain/(loss) on financial instruments financial on gain/(loss) unrealised Net “

The value of net pensionThe net value of calculated liabilities on economic and actuarial assumptions. is based

.

ASSETS there is objective evidence that a loss has been incurred, the loss is measured as the difference between thebetween asset'sthecarryinmeasured differencethe there been incurred, is that as loss has is a loss objective evidence Significant financial difficulty of the issuer or obligor or issuer the of difficulty financial Significant Paymentcontract breach or default of Deferral of of interest a result principal as or debtors renegotiationterms or payments loan of

goingbasis using Dollar - XED    I hange of the hedged items that is attributablethetheitems thatto item carrying the hedged risk, is part a as hange of the is recognized hedged amount of of Lease payments under an operating lease are recognised on a straight Lease lease recognised operating payments on a are an under lease.that Leases operati not are LEASES substantiallyA transfer that not classified lease, does related is asset, to risks a the as of the ownership and rewards all and liabilitiesfinancial statement recognised the are in of the present value of the minimumthe lease payment. present the value of administrative expenses" and consists of the sum of theserviceadministrative period'scosts, calculated sum consistsof thecosts the liability of interest and on expenses" a tive expenses amount and the present value of the estimated future cash flows. The loss is recognized in the income statement. Whenstatement.income loss recognizedcommitm estimated the flows.the The amount in the is future cash present value and of are assessedare individual for be takenfollowing into consideration:the loss may impairments, events Group impairments similarthe theFinancial into groupslevel, assets division with risfor tested on of a group assets based impairment at are es toescreditworthiness debtors' economic environment changesthat in correlate and/or the defaults with group. in Loans to customers are assessed as a uniform group, based on the provisions of the Local Government Act that rates all Norweg between a bond and a swap fulfils the criteria for hedge accounting and is designated as such, it is accounted for as a fair hedged items in the portfolio of bonds and notes are classified as Loans and receivables and hedged issued bonds are classifi tics.data impairedthe indicates Assets a result observable flows neg as in are group if a reduction of futurethe from cash palities equally with regard to the lender earned and expected final salary are used to and expected earned final usedsalary determine entitlements. is the included"Sala are The pension cost for period net in IMPAIRMENT FINANC OF Financial instruments classified as Loans and and Loans as classified instruments Financial impairedare shallevidence be written loss, down. assets and of the value Individual impairments When HEDGE ACCOUNTING Interest rate and cross currency swaps are used to hedge interest rate and currency risk in assets and liabilities.When a he municipalities' possibility of going bankrupt, the Company does not expect any impairments on its instalment loans. ing exposure and geographical spread. The impairment loss is calculated per risk group, based on expectations regarding the m ic conditions that can impact on the issuer liabilities. The hedge relationship is documented at designation, including the hedging strategy, and hedge effectiveness is on alents include cash on hand, demand depositsalents short hand, include and demand cash on Intereststatementcommissionsincome recognised are the they as accrue or and earned are in RECOGNITION REVENUES OF income independent interest or expense underlying of liabilities assets and statement incomeamortised effectivethe using the interest in cost is recognised fairmethod. measured at Forvalue, i items interest rate derivatives, interest isf recognized incomelosses as either it accrues expense. as or Unrealised on gains and and tem November 2015 deployed in was 2016. customer deployed portalthat in life. was same applies a new The for indication and the thedown, difference carrying assets written impaired, are that the assets value amount between of is the recoverableamountin recognizedprofit loss. is or PENSIONS plan. definedtreated pensionscheme scheme.The an employee A Company The has a benefit is pension as INTANGIBLE ASSETS classified intangible is A an indefinite acquired asset name with an domain usefulA as po newly life depreciated. and is not income statement as Hedgingcarrying instrumentsfairthroughmeasured at amounts profit and value accordingly. loss, adjusted or are are c FLOWS CASH OF STATEMENT using prepared Themethodclassifiedcash presents Flows direct Statement flows is Cash the activity. by of and and cash Cash instruments changes hedged items accounting hedge under risk attributable value fair and value the at to on hedged recogn are is calculated by using a straight line method over the estimated useful life, and the disposal value of the assets is assumed Fixedassets arecarried cost at withthe deduction of accumulated depreciation and write F thestatement unrealised income "Net financial gain/(loss) as chargescommission on Other instruments". expenses and reco are service theis provided. periodnised when the expenses in as

ANNUAL REPORT 2016 / PAGE 44 ANNUAL REPORT 2016 / PAGE 45

It

nom-

and- d in d st and ge perma-

co ise The

e tax e tax payable in m o es c red tax fer tax red n I

. t

e effective from 1 s

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a t

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g n i s a e r c n i s assets and a considerablefinancialfair a amount ofmeasured assets at s value, it is not and assets

’

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a T

. n o i t a l u c l was completed and published by the IASB in Julystand-completed effective with the in 1 January The 2014, date 2018. IASB and published was by a

c

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d e s s equity consists of shareconsists equity capital,s capitalthat fulfils of the additionalequity, 1 requirements Tier earnings. of and retained u ’

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x a t

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n the low creditthethe low risk bank associated with impairmentmodel standardforincludesmaterial. new expectedmodelthetheThe hed new also be will effects that a new from mayaccounting, entail the adjustments KBN hence adoption to and st treatmentsubject the under may furtherer given not suchto new as today, hedge accounting that economic be of are hedges ments measured at amortised cost, based on the new standard using an expected loss method, standard current an expected loss standardmeasuredthe the ments uses while an amortised new using cost, at on based impairmentincurredmethod.themodelKBNis currently loss the assessing bank of the on new effects modelmeasurement. theclassificationchanged for started and Company hasard. IFRS The Finally also assessing 9 has the new is expected that the new rulesisgive somethat effectsthethe for Company will expected new changesclassificationto financial its rules. of instruments expected effect the the An for bank new under measured value,fair that at bonds issued be recogn credit will caused changesvalue for by changes risk are in that own are 2018. January statement.other income 1 implementKBN will comprehensive of the IFRS of instead 9 as in income CHANGES IN POLICIESACCOUNTING The accounting policiestheto applied financialconsistentthe statements inthose previous used are year. with KBN effectivewith materialJanuary in not to 2016 have changes lead 1 date KBN has not implemented any new IFRSstandards in2016. KBN implemented new any not has ard was endorsed by the EU in the second half of 2016 and replaces IAS 39 IAS replaces 39 second 2016 and half the of endorsedEU the in was ard by paid asinterest dividends. subtracted retained earningssame from way the is in SEGMENT INFORMATION Thesegment: one operating Company has to lending Norwegian municipalitiesmunicipal the companies. and The not Company does provide separatea whole. other portfolio reporting disclosures lending segment than business on the and the as STANDARDS OF NEW ACCOUNTING IMPLEMENTATION ACCOUNTINGSTANDARDS ISSUED YET NOT BUT IFRS 9 Dividendsuntil classified are Annual Meeting.measured the by equity additional approved General as capital at The Tier 1 is January 2017. 2016, in and is unchanged EQUITY The Company Taxes are recognised in the income statement as they accrue, i.e. the income tax is based on profit before tax. Temporary and recognisedthey are Taxes statement on profit accrue,i.e. is income based in income before the the tax as TAXES nentcurrent differencescalculated.forbase for the tax adjusted taxesare is tax before year's liabilities Deferred and de calculatedofassets differences financial temporary thethe the are values basis between accounting on end. and tax year at i consists of current taxes (tax on the taxable profit and adjustment deferred taxable forlossconsists net year),tax the on tax changesto the current in taxes (tax of or reducedrespect was 27 from previous corporate Norway of income rate years. in The tax

0 0 0 0 0 0 0

0 0 0 0 0 0 0 0 0

19 11 30

2015 2 256 2 710 2 256 2 710 (2 256) (2 (2 710) (2 lities Other Other liabilities Other liabi- Other

0 0 0 0 0 0 0 0 0 0 0 0 0 0

66

214

1 768 1 706 1 983 1 706 1 639 1 983

les les 14 18 32 receivab- receivab- Loans and and Loans Loans and and Loans

2016

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

Held to Held to maturity maturity

0 0 0 0 0 0 0 0 0 0 0 0

556 (50) (50)

(606) (606) (111) (111) 1 709 (1 821) (1 (1 821) (1 hedge hedge Fair value Fair value Fair value Fair value

0 0 0 0 0 0 0 0 0 0 0 0

192 192

6 685 2 377 (6 493) (6 (3 775) (3 (6 493) (6 (3 775) (3 (1 398) (1 (1 398) (1 trading trading Held for for Held Held for for Held

4 0 0 1 7 0 0

64 27

496 (20)

1 670 3 348 8 373 6 740 8 308 6 706 3 769 3 293 5 022 (4 604) (4 (1 717) (1

option option

At fair value through profit or loss or profit through value fair At At fair value through profit or loss or profit through value fair At Fair value Fair value Fair value Fair value

5 1 7

64 27

142 562 (20)

Total Total 1 884 5 117 2 087 3 530 1 642 3 854 9 415 5 617 4 933 5 496 10 563 (7 098) (7 (5 595) (5 (1 509) (1

bearing bearing

Notes,interest and other bonds securities Instalment loans Deposits with credit institutions credit Deposits with 2015 Net interestNet income Total interest expenses Net interestNet income Subordinated debt Total interest expenses derivatives Financial Subordinated debt Senior securities issued securities Senior derivatives Financial Loans from institutions credit Loans from Senior securities issued securities Senior Total interest income Loans from institutions credit Loans from derivatives Financial Notes,interest and other bonds securities

Instalment loans Deposits with credit institutions credit Deposits with 2016 Total interest income

Other transaction costs Total and fees expenses commission Expenses bankingservices of (Amounts 1 000 000) NOK in derivatives Financial NET INTEREST INCOME FEES COMMISSION AND EXPENSES (Amounts 1 000 000) NOK in NOTE 2 NOTE 1 NOTES TO THE FINANCIAL NOTES TO THE FINANCIAL STATEMENTS

ANNUAL REPORT 2016 / PAGE 46 ANNUAL REPORT 2016 / PAGE 47

0 0 0 0 0 0 6 0 0 0 0

25 re 336 336 711 711 (19)

2015

ivati- ecuri- d related related be hand ns

ates, om value value Other Other Other Other reases nted innted

ly fr d in and liabilities liabilities t r

er

These These ented as as ented

inc

air net effects effects net The

ese

0 0 0 0 0 0 0 0 0 0

es. to res

(27) (27)

5 (109) (109) 15 10

les les 2016 receivab- receivab- Loans and and Loans Loans and and Loans

0 0 0 0 0 0 0 0 0 0

(213) (716) (213) (716) hedge hedge Fair value Fair value Fair value Fair value

0 0 0 0 0 0 0 0 0 0

3 962 3 962

(16 959) (16 (16 959) (16 trading trading

Held for for Held Held for for Held

NOK swap spreads, theswap der affect NOK which value of 0 0 0 0 -

70

115

(222) (271) bearing"Senior billion securities"s 146.2 in NOK and (158)

-

18 061 18 439 (4 904) (4 (3 274) (3 (1 542) (1 option

option At fair value through profit or loss or profit through value fair At At fair value through profit or loss or profit through value fair At Fair value Fair value Fair value Fair value

0 0

70

115

(974) (331) (271) (185) 1 116 3 247

18 775 (2 564) (2 (1 542) (1 (17 172) (17

Total Total

bearing securities bearing securities - -

NOK swap spreads. In cases where the fair changestermination sale,cases in where valueNOKIn spreads. realised are repurchase or swap on befo -

Net unrealised gain/(loss) on financial instruments financial on gain/(loss) unrealised Net Subordinated debt Senior securities issued securities Senior Net unrealised gain/(loss) on financial instruments financial on gain/(loss) unrealised Net Loans from institutions credit Loans from derivatives Financial Notes,interest and other bonds 2015 Net trading income trading Net Instalment loans Subordinated debt Gain/(loss)salesfrom bond investments and derivatives of terminations Senior securities issued securities Senior Gain/(loss)securitiesfrom repurchase of issued Loans from institutions credit Loans from

inspreads For primarilycredit to 2016. funding the USD is widening in loss due fundingcame securitiesSenior from unrealised 1.1 NOK.inconvertves Net amounting NOK to to2015 billion used to USD gains issuedmillion derivatives, and related millionspreads NOK with credit increases from resulting 600 500 resulting in and NOK reduction USD in maturity,tradingis"Netthe statement. resulting income" inincome loss presented or the as gain Financial profitfair derivativesfairthrough loss.measured accounting,seein 13 Hedge value value hedges, Note or are at interesthedged itemscomprise "Notes, and other billion bonds 1.1 in NOK derivatives Financial Notes,interest other and bonds transactionscomprisesales securities liquidity of the from repurchases portfolio gain/(loss) bond debt. Realised of or p is income. Net trading KBN to some extent does transactionssome extent doesKBNtothat realisations entail maturity assets and derecognition liabiliti or either before of in the income statement.inincomecreditthe in spreadsinvestments Changes for themay thebonds in liquidity oth on and issued portfolio lead to significant statementincome effects, may changesas in swap basis spreads. millionsecuritiesSeniorNet 974 comeInstalment from unrealised loans NOK 2016 amounting losses and to relate and issued in financialmillionmillionNOK derivatives, 550 respectively.to and NOK 400 around For with is due loss Instalment loans the tiesthatLoans issued", classified are Other and receivablesmeasured liabilities as f and cost. at in Changes amortised and attributablefor recognizedcarryingtheitem thetheto thethat adjust is and pr hedged risk amount item, and are hedged of thestatement unrealised income "Net financial gain/(loss) as presentedin colum on These valuethe changes instruments". are Loans Other and receivables liabilities and in table above. the 2016

the income statement. As KBN takes very limitedchangescurrencyinterest takesmostKBN the very ratethestatement. in parameters incomerelevant risk, As and will symmetricthesides Statement asset and liabilities the financial on of of extent give small rise position thereforeto a and NET UNREALISED GAIN/(LOSS) INSTRUMENTS ON FINANCIAL (Amounts 1 000 000) NOK in Instalment loans NET TRADING INCOME (Amounts 1 000 000) NOK in NOTE 4 credit spreads, basis swap spreads and FX rates, carryingthe financial reflected spreads are credit of in in Statement position amounts FX swap spreads, and and basis Changes in fair value are the result of changes in market parameters factors, changesChangesfair and risk thebonds,mainly of in market in result value on are interes prices NOTE 3

2 9 f 62 26 12 66 115 out out

2015

. o es other 4 s s t ’ int reviewed reviewed

owing owing nd

ves and ves nnual is oll

uti ttee.

3 mmi 70 27 12 10 73 125 s members are ’ 2016

, the, Regulation on 1

which carrieswhich on preparatory work out

s values, with leadership skills also also skills leadership with s values, ’ s managements comprising team, 6 persons. ’

adjustedcompletionthe retirement pension upon o s employment. The scheme also includes disability disability includes also scheme The s employment. ’ s value personnel proposition and its line and ispolicy, in ’

the Remuneration Committee

, the circularthisFinancialthe the,Supervisory Regulation by on issued Authority of

2 MAKING PROCESS MAKING s salary. ’

s defineds times salaries the pension administeredto scheme KLP for benefit National 12 up by ’

s SENIOR EXECUTIVES IN 2016 IN EXECUTIVES SENIOR s ’ years

fixed salaries are adjusted each year with effect from 1 January on the basis of a combined assessment KBN of of 1 January basis on the salaries a fixed from effect adjusted are with year each

s expectations guidelines Company and its remunerationthe the of forcentral senior executives. of The principles ’ ’

, Government's and the Norwegian state Guidelinesfor senior executives remuneration companies ownership of with in

3 basedmainthe remuneration salary options. or element remuneration Board Fixed received. Directors is of of The programs sscheme senior executives remuneration for provisions compliesFinancial the with theEnterprises of Act s remunerationthe senior executives policy for in Company is anchored ’ ’ Amounts 1 000) NOK in Average of number man Total salaries administrative expenses and Other personnel benefits Administrative expenses Salaries contributions Employer costs Pension NOTE 5 SALARIES AND ADMINISTRATIVE EXPENSES ADMINISTRATIVE AND SALARIES (Amounts 1 000 000) NOK in

leading when comparedleading equivalentcompanies with sector. when finance the in banking and KBN MANAGEMENT SYSTEM AND DECISION AND SYSTEM MANAGEMENT Thecommittee Board Directors appointed an advisory has of the principles applicable remuneration, to for guidelinessalary, and guidelines variable the for senior remuneration of exec the the of mandate Remunerationfor work Committee. Thefor Board a issued the has CEO. the remuneration of meetingsMinutes the circulatedBoard. of the Remunerationthe Remuneration of Committee Committee to three has are The Committee the of Board. end 2016, Atmembers year the themembers, appointed are and among by annually who Else MidtgaardFougnerSteenjr. (Chair), and Petter Bugge Rune The Board approves the guidelines each for senior executives remuneration year of variable payments. and for salary carri KBN sets quantitative criteria for financialsalary year f for variableeach next paymentsthe payments award the and can in year Remuneration for salary,senior including employees, all consists executives, fixed variable ofpayments,salary a pensions a benefits,including personnelinsurance,mobile mortgage not newspapers, and a residentialtelephone does KBN operate scheme. share month financialtimes one 1.5 up to of year remuneration schemes at financial institutions financial at schemes remuneration KBN observed when determiningobserved when seniorsalariesthe that executives overall of remunerationshould are competitivemarke but be not General Meeting: EXECUTIVES SENIOR FOR SCHEME REMUNERATION THE itswith owner NOTE 6 REMUNERATION ( theThe statement Board Directors following and other submit will salary of senior executives remunerationA on the the to of Norway The Board determines the remuneration offollowing the preparatory CEO workmatter on thiscarried out Remuneration the by Co an annual review ofan annual the review practicalthe implementationform variablethe that a written remunerationelement of report in of of theby internal remuneration auditor the accordance with in guidelines. results, theircontributionshared adherenceto their the attainment targets to the bank of and managersformingfor the of assessment part staff. reporting with Senior executives are definedPresidentthe as & Chief Executive Officer "CEO") (the the CEO and All employees The CEO determines the remuneration of the other senior determinestheThe otherBoard's CEO the remunerationthe executivesthe of limits set within takes by guidelines and makingaccount final such Board's decisionsThe remuneration. when the decisionson the CEO's views on senior remuneration of executives are subsequently submitted to the Board for information. REMUNERATION KBN OF Pension benefits Seniormembers executives KBN of are expectancyInsurancescheme a life the amount. to of entitled base are Members KBNsalarytime leaving the of 30 years service at of equivalent base to of 66% and lifeearly retirement.contractual and pensions

ANNUAL REPORT 2016 / PAGE 48 ANNUAL REPORT 2016 / PAGE 49

0

141 155 144 148 142 161 175 147 142 157 166 150 172 192 nd

2 236 2 256 1 066 2 711 2 317 1 126 costs costs e a

Pension Pension Pension Pension 5. 130,000,

h's salary. h's

4 ont

69 19 23 31 20 46 39 31 49

416 644 441 116 159 517 590 617 118 134 200

Other Other Other Other loyees, were benefits benefits y and Fisheries with emp str

34

182 169 172 150 217 294 351 188 177 154 210 224 298 361

2 231 2 178 1 569 2 775 1 886 1 612 period

period* Variable Variable salary ac- salary salary ac- salary crued in the the in crued crued in the the in crued

0 0 0 0 0 0 0 0 0 0 0 0

91 68 81 62 28

113 119

1 737 1 266 off pay- off off pay- off 01.01.15 01.01.16 - - 12G from from 12G 12G from from 12G ment above ment above One One

- 275

1 343 1 355 1 355 1 197 1 647 2 319 2 551 1 546 1 470 1 266 1 651 1 830 2 462 3 075 16 907 16 827 12 042 21 450 17 239 13 300 as well as salary a compensation in regards to the discontinuation before one before off payment off Fixed salary Fixed salary-

of the supplemental pension schemes for salaries in excess of 12 times the National Insurance base amount from 1 November 201 3) The Financial Supervisory Authority ofNorway: Circular 15/2014 effectfrom 13 February 2015. 1) 1) FinancialThe Enterprises Act Regulation2) on remuneration schemesfinancial at institutions, investmentfirms and fund managementcompanies Fixed salary payablein 2016 included the normal annual salary increase, Guidelines4) for remuneration senior of executives in companies with state ownership,adopted by the Ministry of Trade,Indu Fixed salary salary Fixed Variable salary Guidelines for variable salary in respect of the 2016 financial year, including the criteria for variable salary for all KBN approved by the Board in February 2016, and resulted in all employees receiving variable salary equivalent to 1.5 times one m travel insurance, salary. disability as to insuranceinsurance current well level as fixed the and life of up the annual Officerfixed NOK car theThe Financial Chief entitled of are to CEO, Lending benefit Chief Officer a and Markets 50,000NOK and NOK respectively. 80,000 contractual a has The CEO entitlement,conditions, salary. subject certainfixed year's to equivalent severanceto pay to one ______Other benefits Other benefits includemobile insuranceconditions subscription terms arrangements, as phone, and same newspaper the etc. on apply to insurance other employees. The arrangements personnelrelateto of including forms various insurance health insuranc Total remuneration to the employees in the independent independent in the employees the to remuneration Total functions control Total remuneration to employees whose professional whose professional to employees remuneration Total institution the of position risk the affect activities Lars Strøm Prestvik (Chief Lending Officer 01.07.2015) from Total remuneration executives to senior IlseStaff) Bache Margarete (Chief of Frank 30.10.2015) until Øvrebø (CRO Håvard ThorstadfromHåvard 01.11.2015) (CRO Tor Ole Steinsland (Chief Communications Officer) Officer) Communications (Chief Steinsland Ole Tor JannickeTrumpy Granquist (CFO) Martin Spillum (Chief Financial Markets Officer) Officer) Markets Financial (Chief Spillum Martin *Paid out inthe following year 2015 Remuneration senior executives to CEO) & (President Falkgård Kristine Total remuneration to the employees in the independent independent in the employees the to remuneration Total functions control Total remuneration to employees whose professional whose professional to employees remuneration Total institution the of position risk the affect activities Total remuneration executives to senior Lars Officer) Prestvik Strøm Lending (Chief Håvard ThorstadHåvard (CRO) IlseStaffOperations) Bache& Margarete (Chief of Tor Ole Steinsland (Chief Communications Officer) Officer) Communications (Chief Steinsland Ole Tor JannickeTrumpy Granquist (CFO) Martin Spillum (Chief Financial Markets Officer) Officer) Markets Financial (Chief Spillum Martin (until 30.10.16) Kristine Falkgård (President & CEO) CEO) & (President Falkgård Kristine Remuneration senior executives to 2016

7 0 0 0 0

77 23 32 67 90 57 90 35 70 70 54 35 35

822 386 155 273 304 178 178 123 162

2015 2015 2015 2015 2 004 1 098 1 913

0 0 0 0 0 57 23 73 29 98 96 18 70 18 72 18 83

520 981 983 405 100 210 264 310 182 197 162

2016 2016 2016 2016 2 541 2 070

1

3

1

2

Iren WalstadWassås (from 3 June 2016) 2

chairman from 5 June chairman 2015) 5 from

1 2 2 3

1 3 2

Ma TostrupMa Smith June 2016) (until 3

chairman Nils R SandalJunechairman (until 2015) R 5 Nils chairman Skancke Martin (vice

Total excl. fees VAT Other financial attestation audit services and Otherto services not audit related Tax services Tax Statutory audit fees Chairman Else Bugge Fougner Fees to the statutory auditor statutory the to Fees Board members Chairman Svein Ludvigsen ChairmanJuneKjell Skaldebø 2016) 3 Inge (until 1 Member of remuneration committee Member2 of audit committee 3 Member of risk committee Remuneration to Board of Directors of Board to Remuneration Total remuneration to Board of Directors of Board to remuneration Total Total remuneration to Supervisory Board Supervisory to remuneration Total

Committee member Anne Vice Board memberBoard employees' representative 2015) Fischer June Roald (until 5 Board member Petter Steen jr (from 5 June 2015) Board memberBoard Egidius Nanna Board memberBoard Sollie June Rune 2016) (until 3 Board memberBoard Midtgaard Rune Board memberBoard employees' representative3 June Harstad (until 2016) Marit Urmo Board memberBoard Martha Takvam Board Supervisory to Remuneration Remuneration to Control Committee Control to Remuneration Committee 2016) member June Rødal Ole (until 3 Board member3 JuneBoard Brit 2016) Rugland (from Vice Board memberBoard employees' 2015) representativeJarle June Byre 5 (from Board memberBoard employees' representative May CommitteeJuneJevard (until 2016) member 3 alternate Roy Alternate Board member employees' representative Andreas Alestrøm (from 5 June 2015) Alternatemember Board 2016) employees' June representative Urmo 3 Harstad (from Marit

Total remuneration to Control Committee Control to remuneration Total Alternatemember Board employees' JuneJarleByre representative (until 2015) 5

ANNUAL REPORT 2016 / PAGE 50 ANNUAL REPORT 2016 / PAGE 51

0 0 0

635 450 153 n 2015 2015 2015 of na- (266) 2 328 1 238

ter-

18 840 21 757 18 840 16 512 1.48 % 2.50 % 2.25 % 2.70 % (2 651) (2 (3 889) (3 (2 651) (2 rdi gia ion as e lary

31.12.2015 sa

0 0 0 0 1.48 % 2.50 % 2.25 % 2.60 % 62 778 443 505 273 778 2016 2016 2016 (270) 2 391 31.12.2016 19 349 18 840 19 349 16 958 Unfunded plan Unfunded Unfunded plan Unfunded Unfunded plan Unfunded

0

224 2015 2015 2015 1 099 1 099 3 695 8 191 1 342 29 900 39 029 29 900 94 813 10 856 (1 352) (1 778) (7 (1 352) (1 (68 608) (68 (12 208) (12

0 Funded plan Funded Funded plan Funded Funded plan Funded 249 902 2016 2016 2016 4 082 8 934 1 027 1 440 12 551 33 031 29 900 33 031 11 649 12 551 (9 419) (9 107 371

(78 422) (78

Amounts 000) 1 NOK in

NOTE 7 PENSIONS ( KBN has used Norwegian covered bonds as input when determininginput covered bondsthe 2015.KBN when Norwegian for discount as The used actuarial rate 2016 and assumptions has are based on standard basedare on assumptions Accountingrecommended demographicthe to factors related Board. Norwegian Standards by EstimatedBase in growth amount Expected inbenefit growth levels Estimated growth wage Economic estimates used in calculation of pension costs and defined benefit obligation benefit defined and costs pension of calculation in used estimates Economic Discount rate Net pension costs Contribution pensionscheme the to pensionNet liabilitiesof 31 December as NetJanuary pension liabilities 1 of as Movement in pension liabilities pension in Movement

Net pension liabilities pension Net contributions Employer Plan assets Net periodic pension cost Net interest Pension liabilities Pension Defined benefit obligation KBN has a defined benefit plan that covers benefit defined that employees KBN all is and plan administeredKommunal a through has Landspensjonskasse (KLP). Pension benefits include retirement pensions, disabilityfor pensions is children, coo pensions spouses and dependent and and Pension costs Pension statement income in recognised cost pension Total Service cost employer incl. statement income in recognised costs Pension contributionscosts service and contributions Employer Actuarialother gain/(loss)in comprehensive recognised in- come

pension w liabilities. April 2011, of definedcovering and closed 1 plan The amount salaries benefit as been has 12xBase over ted National benefitsScheme.The with Insurancethe from definedcompliantthe the requirements is of benefit Norwe with plan including the National Insurance Scheme. KBN also has a contractual pension plan (AFP). This plan is included in the calculat the in included is plan This (AFP). plan pension contractual a has also KBN Scheme. Insurance National the including Net pension costs pension Net

The defined plan benefit composition occupational is through administrated sector cannot be a public asset and pension scheme liabilities. and costs pension in included are contributions Employer's minated in 2015 for part furtherminatedthe current of employees plan. For 2015 thatthe information were of about in unwinding pension abov 12xBase amount, Note see 6. specified. Mandatory ServiceMandatory Act. Pension cent baseFull66 per of rightto the and gives service pension a retirement pension of benefit period 30 years of requires a

0 0 5 0 0 0 0 0 0 0 16 (1) 157 563 697 713 832 713 233 (33) (11) (86) 2015 2015 2015 2015 2015 (791) (201) (119) (201) (119) (233) 2 583 27.6 % (1 465) (1

0 0 0 0

48 12 12 (4) 0 0 0 0 0 230 919 230 230 230 230 (10) (52) (17) 2016 2016 2016 2016 (411) (201) 237 2 597 7 900 25.0% 2016 (237) (1 602) (1 (8 370) (8 Unfunded plan Unfunded

2015 (224) (955) 6 816 3 424 1 207 68 608 58 340

Funded plan Funded 996 2016 (249) (951) 8 255 1 762 78 422 68 608

Pension liabilities Pension Provisions derivatives Financial Fixed assetsFixed instruments financial on Premiums/discounts Unrealisedfinancial gain/loss on instruments instruments financial on gain/loss Currency Temporary differences Temporary Lossescarried purposes for tax forward differences temporary Total Deferred liability/(asset)tax Change inChange deferred tax on itemsChangestax comprehensive in in recognised deferredother income Calculated inin 27% 2015) income (25%2016, tax Deferred liability/(asset)tax liability/(asset)Deferred tax 1 January at as on itemsChangestax in in (additional recognised deferredequity 1 capital) Tier inDeferred liability/(asset)tax 2016, in 2015) 31 December as at (25% 27% Profit before tax ratechangeEffecttax in of Reconciliationincome of effective rate tax expenseTax rate tax income Effective Current taxes inChange deferred tax Too previous low/high expense years Total income tax Service cost scheme pension the to Contribution Benefits paid Januaryfromto 2016. 25 percent The27 percent 1 from corporate rateincome reduced was tax Actuarial gain/(loss) Actuarial Fair value of plan assets as of 31 Decemberof 31 Fair plan as assets of value (Amounts 1 000 000) NOK in Net interest TAX NOTE 8 Movement in the fair value of plan assets plan of value fair the in Movement Fair value of plan assets as of 1 January Fair 1 of plan as value of assets

ANNUAL REPORT 2016 / PAGE 52 ANNUAL REPORT 2016 / PAGE 53

7 6 0 ’ 23 29 2015

n er the the er in ion and ion and

s i ov

7 6 0 sat on 17 23 ati

2016

s income tax inthe ’ s view that the tax authoritiestax thatsthe view ’

lifetime. ’

5 years

Lease payments recognised as an expense in the period the in expense an as recognised payments Lease mainProperty KBN isthe a lessee. ofcomprises operatingVIIs part rental in the Haakon gate Oslo where leases in 1 Under 1 year Under Totalminimum future payments lease Future minimum lease lease payments minimum Future 5 years Over

instruments Inthe financialto authorities, the statements assertions adapted has has 2016 KBN tax change the for thus recognised and of ending temporary differences financial for the with the notification. instruments, inIt bank accordance is assertionsmore volatile result larger will temporary and material in differences, bank the but a for without effect income statement. Tax rate changes may however lead to some effect on the income tax. lead income to the on income some effect may rate however statement. changes Tax (Amounts 1 000 000) NOK in principle financialcurrencythein changedthe authorities to element periodimay tax on lead instruments. The of assertions time of recognition of taxable income/expense over time, but no change in which items are included in taxable income taxable time in total income/expense of itemschange includedwhich are taxable time, in of in over recognition no but LEASES NOTE 9 KBN has received notification of a probable change in tax returnsprobablea decisionchangeKBNtax expected2014. notification ongoing received for in and The has of is process is a 2017. KBN has opposed some of the assertions the the some2017.of opposed in notification. has KBN treatment tax Thethe case and periodisation tofinancial relates of instruments, principallythe realis use regarding the of

0 0 0 0 0 0 0 0 0 0 0 0 0 0 7 167 7 584 Other Other Other Other 153 807 146 223 158 775 165 942 liabilities liabilities

0 0 0 0 0 0 0 0 0 0 0 0 les les 3 188 1 115 17 238 10 974 97 289 117 716 114 864 102 773 receivab- receivab- Loans and and Loans Loans and and Loans

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 ty ty 69 69 21 21 Held to maturi- Held to maturi-

0 0 0 0 0 0 0 0 0 0 0 0

772 772 966 966 1 029 1 029 1 815 1 815 hedge hedge

Fair value Fair value Fair value Fair value

0 0 0 0 0 0 0 0 0 0 0 0

25 246 36 435 25 246 36 435 21 016 21 016 14 955 14 955 loss loss trading trading Held for Held Held for Held

0 0 0 0 0 0

1 974 1 764 2 190 5 208 231 332 223 710 225 684 233 096 308 402 159 525 146 687 164 748 287 370 117 414 option option At fair value through profit or profit through value fair At At fair value through profit or profit through value fair At Fair value Fair value Fair value Fair value

Total Total 7 167 1 974 7 584 1 764 26 275 37 207 19 428 16 182 22 831 15 921 390 107 369 933 405 765 436 245 449 018 256 815 149 944 267 521 418 174 118 550

bearing securities bearing securities

Senior securities issued securities Senior Loans from institutions credit Loans from Subordinated debt Total financial liabilities financial Total derivatives Financial Senior securities issued securities Senior Loans from institutions credit Loans from derivatives Financial Subordinated debt NOTE 10 NOTE 10

2015 Deposits with credit institutions credit Deposits with CATEGORISATION OF INSTRUMENTS FINANCIAL Total financial liabilities financial Total Instalment loans (Amounts 1 000 000) NOK in 2016 Deposits with credit institutions credit Deposits with Total financial assets Instalment loans derivatives Financial Notes,interest and other bonds

derivatives Financial Total financial assets Notes,interest and other bonds

ANNUAL REPORT 2016 / PAGE 54 ANNUAL REPORT 2016 / PAGE 55

0 0 a d/

As flows flows Total Total

2 190 1 974 1 764 5 208 under- 22 831 26 275 15 921 37 207 uments. uments. in these in these 231 332 331 233 146 687 251 959 159 525 223 710 303 291 270 302 117 414 164 747 sh ocedures ocedures ble prices prices ble be

str

s. Because pr :

rva

ion

0 0 0 0

rtainty 2 259 5 967 1 974 2 414 1 764 2 511 nce 72 702 67 056 99 197 58 830 20 366 76 857 70 653 29 680 65 728 Level 3 Level Level 3 Level 104 146 . These placements are . These placements are

Net unrealised gain/(loss) on 0 0 0 0 “

2 190 5 909 7 527 5 208 indexed interest rate. Withindexed interest rate. 20 572 56 060 13 507 56 628 99 019 - Level 2 Level Level 2 Level 158 630 179 517 152 762 100 695 146 853 174 363 166 157

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

. 84 660 84 660 58 275 58 275 Level 1 Level Level 1 Level

inputs are to a significantinputs unobservable a to are degree observable marketobservable data and estimates inputs. as Allchanges fair invalue of financial instruments observable inputs bearing securities bearing securities - -

using both

term debt certificates issued by municipalities floating Niborcertificates with and loans term debt by issued

-

”.

term nature,the value fair of these instrumentsis approximatelyto equal the notionalamount

- Valuation techniques with with techniques Valuation Quoted prices in active markets pricesfor activeQuoted identical in and liabilities assets Valuation techniques where

- - -

2 3

Financial derivatives Financial Senior securities issued securities Senior Loans from institutions credit Loans from Total financialmeasured fair at assets value derivatives Financial There were no significantThere reporting were the transfers Level period.1 and Level 2 in between 2015 Instalment loans Notes,interest and other bonds Deposits with credit institutions credit Deposits with Total financialliabilities measured value fair at Subordinated debt derivatives Financial Senior securities issued securities Senior Loans from institutions credit Loans from There were no significantThere reporting were the transfers Level period.1 and Level 2 in between Total financialmeasured fair at assets value Total financialliabilities measured value fair at derivatives Financial Subordinated debt adjustliabilities,carryingstatement theincome amounts and recognised assets are the as of in and and option pricingmodels Valuationtechniquesthe for determination used fair offinancialvalue of include instruments inLevel ca2 and 3 discounted Notes,interest and other bonds financial instruments financial guidelines established has forKBN financial valuation principlesfair policies thatmeasurement describe for and value of in Information value fair about Methodsused for the determination of fair value fall within three categories, which reflect different degrees of valuation u for control value. fair of institutions credit with Deposits Depositscredit institutions measured with short other term time with fairvalue that include credit at deposits are institut of their short allocated 2. to Level Instalment loans Level 2 includes short NOTE 11 NOTE 11 FINANCIAL INSTRUMENTS FAIRMEASURED VALUE AT Level 1 Level Level (Amounts 000) 1 000 NOK in 2016 Instalment loans The mainThe principles thatfair are value shouldmeasured atbe value the the may assetsold for the or be liability repurchase transferred for, that and observabledata shallto be usedpossible the extent inthe valuation, and quality assuranceshould obse the of use competitionmarketsubject greaterthe and allows to result, and better liquidityin these loans types are of taken alternative against Thethe guidelines sources. frequency of also set valuation out fortypes, different instrument and moreloan products,customers flexibility the loans in have marketrefinancingthe lenders change. other conditions with when Deposits with credit institutions credit Deposits with on new loans valuation inputs the as on new products. these in loan of

-

n et et re D ith nd

are ield ield tio n ions ions cant sure after after quity quity ark ark s a tego- evels may may , w s s in the group ifi

signif- n i ued in ued in some- tors

ecurity alance alance e y ned by ned by

mod- stimate the two ca es e l

ices, FX FX ices, t market t market in

oldings oldings low iss by ent as fac (Level 2). (Level 2).

e s e b rmi

e e en

risk risk is con- ind lects signif- t date. heet date.

s with em- e h the balance the balance

van . cy sed s ref dit to e ent i c i l o s credit rating, cur- rating, s credit ’ P

g n i features and structure. t binding indicat price binding ’ - n bearing securities include include securities bearing rates, e prices, stock - - u o c c A

e h t

e e s informationchannels. spreads Credit ’ s

, t n e m e r u s a e m

e u l a v

r i a f

n i

d flows. These models use interest rates, FX models interest rates, use flows. These e - s u

s t u Level 1 inputs for Notes, bonds and other interest for other 1 inputs and bonds Notes, Level

p n i

t u

o b

s creditmar-s on observable and liquidity risk based possible, large as as a degree to ’ a

n o i t s value changess period development ends, at the values.the value fair including for reason in ’ a m r o period before the reporting used determining are credit date in the spread,in toorder en - nf professional investors. these Bonds in groups two not are listed and normallytraded not i -

e r contracts usedhedges only in ofeconomic interest rate and currency risk.Forswaps (US basis o - bearing securities m

r o F NOK), FRAs and plain vanilla interest rate and cross currency swaps without option elements, fair value is value fair option elements, is crosscurrencyswaps without FRAs and interest vanilla and plain rate NOK),

. The choice of valuation techniques and inputs depends on the structure and terms of each loan. For all loan. each of and terms structurethe on depends inputs valuationtechniqueschoice and of The . - . y y t t

n n i i a a t t r

r currency swaps and interest swaps economic are which rate structuredbonds hedges and that of option ele- have e e - c c n n u u

n n o o EUR and EUR i i t - t a a u u l l a a v v

t t n n a a c c initial recognition.significantA input for suchcredit loans isthespread , is which estimated at date. reporting each Cre municipalities.for managementcredit all available,assumptionsmakes same spreads not the As a observable sidered are be to estimates relevant adjustmentsfor credit for risk differentmaturities, based on prices for loans a period closer in issued Level 3 includes fixed rate loans to customers that are not traded in an active market and do not have observable market observable have pric not market active an and do in traded customers that not are to Level 3 includes rate fixed loans sheet a limited from date. time Loans sufficient representative conditions th datacarried whether to estimates. leading and of evaluationIn is out addition up an sheet date suggest that the chosen time period does not to a sufficientconditionssuggestchosensheetthata market extent reflect timethes the to the period not does balance date on Notes,interest and other bonds valu fair sellers a gives buyers and many willing with market active an in prices on quoted valuefair Determination based of with thewith lowest valuation uncertainty of degree (Level 1). The fairvalue of quoted notes where and bonds prices not are availableto a sufficientreporting on the degree date, is dete market yield interestmoney rate observable from derived are discount rates method, where flow cash discounted the of the use quoted prices international provided by vendors (Reuters/Bloomberg), representtransactions which actualmarket. an active in curves. Discount rates for issuer adjusted are the Whenket applying credit/liquidity data. adjustments to discounton thethe based rates, grouped are issuer assets rency,maturity,to time and geographic underlying exposure location. Management allocates theirinvestments all to respectiv on each reporting date. Unobservable credit spreads are used to some extent when there is little or no market th activity for no is little thereor some extent when to reporting Unobservableon each spreads used credit are date. inconcern equivalent or securities.Where these material are valuation,the for security the isto Level 3, allocated which i characterised by listed syndicated loans in various currencies, where the size of the loan forms the primary difference betwe primary the forms loan the size of the currencies,syndicatedloanscharacterisedin where various listed by Senior securities issued securities Senior The funding portfolioissplit main intofour groups,the based funding product on and loan documentation used.mainfour The first group two retail The loans. markets, and placements niche private public loans loans, in benchmark EUR and ries USD are groups. For listed benchmark quotedmarket bonds in prices an activesuch thattheseto exist, Level belong 1 to assessed are i interestsimilar rates, prices prices quoted on and instrumentsmaturity, forcurrensize differences time adjusted and to in importantthe issues collectsKBN used in non in valuation, indicator an addition Prices as new and are on prices, stock equityto extent structured optionthat linked are a large secondarymarket, to are elements with products and ratescommodity or prices. prices Quoted hence are available not thefor security, and unobservableinputssign to used are a limited valuation uncertainty. Hedge accounting is mainly applied for these bonds, see Note 12 and 13. For Senior securities Senior For and 13. see 12 Note mainly theselimited bonds, for applied accounting valuation uncertainty. is Hedge market the liquidity however, somemarkets, extent, activity isto available and assessed public quoted also are prices niche lower.what The determinationfair ofvalue of thesesecuritiesmainly using is done by valuation techniquesm and observable m market discountsuch methodon observable as data.flows based data, discounted with these the cash is rates used bonds For from brokers. finalma investor.The single for specially adapted a loan are the terms placements private comprised of Group three where is to non sold loans i.e. loans, is retail degree indegree the valuation. therefore These loans are allocatedto Level 3 infair the value hierarchy, and thus characteri are curvescredit estimated brokers spreads indicationsprice from to and the that are Company via structured bonds For op elements, option an unobservable with an estimate. hence theseinput, groups forare as and regarded pricing models are used in addition to determine expected cash expected determine addition to in models used pricing are bonds in these groups fairbondsthese groups inputs in methodflow value is discountedcurrent determined interest using by the cash where are rat All financial derivatives are OTC are derivatives financial All indices and implicit or historical volatilities as inputs. inputs. as volatilities historical or implicit and indices derivatives Financial market.spreads Levelfor credit in3 are ofinstruments Fairan active traded financial that financial value not are instrum bedded derivativescombination option elements or is determinedcashmethod and option pricing using a flows a discounted of marketfinancial estimatesels inputs. For observable and with th instruments data as fair thatmeasured part are value of at over severalover periods, each of a reconciliation period.movements reporting the of the done at end between levels is periodKBNthe fair the analyses values and determined usingthe by discounted cash methodflow discount with rates derived frombasis observable spreadsswap swap and interest Hence, rates. these contracts allocated are toconsiderable Level 2, market with contracts activity for new and rele NOK, USD discountmethod,derived frommoneymarket where relevant rates other are the interest significant observable and risk rates parameters. Cross Whenthat instruments.maythecannotsuch reporting affect the value be reliablymanagem factors fair at of date, observed a most determiningmakeThe estimates significant value. fair and use when assumptions unobservable theinputs in valuatio used Fair financial value of instrumentswithout embedded derivatives the cash option elements f is determined discounted using or ments linked to for instance equity or FX ratesments FX or valued are usingthe linked for to instance same valuationmodels equity corresponding as issued and bonds unobservableclassified significantinputs when to used extent. a Level 3 as are techniques Valuation methodsfinancialfairforThethe determining valueinstruments of the instruments used defined are on based

ANNUAL REPORT 2016 / PAGE 56 ANNUAL REPORT 2016 / PAGE 57

0 0 0 0 0 0 0 0 1

221 (58) (81) l 1 alue alue (249) (166) 1 130 6 838 3 642 (4 054) (4 (1 011) (1 vatives vatives r v (14 092) (14 421) (27 (10 405) (10 (17 952) (17 (27 421) (27

ties red Impact of of Impact , see thus be Level 3 is le.

ill asu of uts assumptions imates as vab Financial deri- Financial Financial deri- Financial currency mar- changes in key key in changes

est

0 0 0 0 0 0 0 0 0 0

2015

(54)

debt debt (131) 1 764 1 895 1 974 2 051 1 764 (1 787) (1 5 967 5 58 830 58 (1 764) 764) (1 amount (27 421) (27 (37 090) 090) (37 (72 702) (72 Carrying Carrying Subordinated Subordinated Subordinated Subordinated

0 0 0 0 0 0

14 22 (5) 321 (41) (925) 1 285 (283) 72 702 17 809 89 562 76 857 33 974 72 702 (2 306) (2 (3 173) (3 (33 648) (33 (25 721) (25 Impact of of Impact ties issued ties issued assumptions Senior securi- Senior securi-

changes in key key in changes

- -

0 0 0 0

2016 bp to +76 bp for debt issuances. For Notes, and for For issuances. bonds bp to debt +76 bp

(130) 5 967 4 193 2 795 2 511 6 309 5 967 6 255 50 on (spread) to swap intereston (spread)swap securiSenior to For rates. 15 174 (3 589) (3 (1 236) (1 (7 560) (7 (7 223) (7 - –

(12 476) (12 2 511 2 65 728 65 (1 974) 974) (1 bp to + 200 bp for notes and bonds. Other significant Other and bonds. for notes unobserva- +200 bp bp to amount (17 952) (17 (28 544) 544) (28 (76 857) 857) (76 Carrying Carrying

20 otherinterest other interest

–

Notes, bonds and and bonds Notes, Notes, bonds and and bonds Notes, bearing securities bearing bearing securities bearing below.

”

0 0 0 0

2 383 4 279 3 259 1 874 loans loans 58 830 25 442 46 456 65 728 30 857 58 830 (5 553) (5 (5 908) (5

(14 177) (14 (23 184) (23 yield curve yield

Instalment Instalment – yield curve yield

-

bearing securities amounting to NOK 1 251 million fromto transferred bearing 251 securities Leve Level 3 to 1 were NOK amounting

-

bearing securities -

bearing securities spread the reflects liquiditycreditthemarket risk, issuer in relevant the risk of and risk

Impact changesof inkey assumptions “

ket. Measured against USD 3M Libor the spreads theket. between Libor vary USD Measured against 3M inputsmosttheThe to significant valuation technique. add estimate is an mainly obser are pricing option in used this, inputs than Other models. pricing option within volatilities include inputs ble In Notes, interest 2016, and other bonds market increased liquidity 2,or on improved securities.for based and these activity Fortransfer Instalment the loans, out activitymarketcasesthe little Ininstrument, no forsignificant very relevantto the of on based valuation a or is extent Significant unobservable inputs in fair value measurement, within Level 3 Level within measurement, value fair in inputs unobservable Significant against USD 3M Libor used in valuation at 31 December 2016 vary from from 2016 vary 31 December valuationagainst at Libor in used 3M USD other interest- issued spread the market reflectsmarket. liquidityrisk, relevant creditCredit riskme the and currency risk spreads in own interest,ofchange.customersdue to period fixed product ending i.e. a a Thecredit underlying is totalsensitivespreadchangesfair factor. curve oftoin instrument and yield The each value the w affectedmorecreditchangesmarket in liquidity spreads, information by unobservable sensitivity For riskto risk. inp or on table Gain/(loss)thein period recognised December2015 Carrying amount 31 at Settlement Transfer Level 3 of out Issue Transfer into Level 3 Carrying amount at 31 December2014 Carrying amount 31 at Purchase Sale Gain/(loss)thein period recognised December2016 Carrying amount 31 at Settlement Transfer Level 3 of out Instalment loans

Issue Transfer Level into 3 Notes,interest and other bonds Senior securities issued securities Senior Impact of changes in key assumptions assumptions in key changes of Impact Carrying amount at 31 December2015 Carrying amount 31 at Purchase Sale The changes in key assumptions are defined as a 10 bp change in the unobservablechangethe thatinputs in determining bp definedare for material are fai a 10 The key as changes assumptions in derivatives Financial Subordinated debt Total Reconciliation of movements in Level Level 3 in movements of Reconciliation of and liabilities assets

0 512 115 115 2015 (512) (269) (118) 14 801 14 801 ead (2 208) (2 s s lity is a unob- value value for (16 737) (16

instru- ifferent uld be uld se for

tie ati s (gains/ duction in duction spr equities or or

gain/(loss) al he ds quity indi- quity , d co ca Unrealised es allocat-es

re ease in the in ease ect

r e

ncr

Impact of changes changes of Impact in key assumptionsin key 2016

5 967 5 58 830 58 bearing securiti

(1 764) 764) (1

- amount (27 421) (27 (37 090) 090) (37 (72 702) 702) (72 1 946 1 Carrying Carrying

(15 912) (15 (13 966) (13

amount

Carrying Carrying 32 70 702 702 2016 4 225 4 225 (1 532) (1 (2 093) (2

gain/(loss) Unrealised

2 511 2

65 728 65 (1 974) 974) (1 amount (17 952) (17 (28 544) 544) (28 (76 857) 857) (76 Carrying Carrying

volatility

bearing securities -

with option elementwith equity linked equities to indices or

-

with optionelementwith indices to linked equity equities or

-

Financial derivatives derivatives Financial other structured types of funding option elements. with assumptions in key changes of Impact Total losses) will cancel each other out and will have no income statement no income have losses)and will elements effect.cancelStructured other to each option will out linked with bonds thebonds equityequityissued isfully derivative where vol exposure indices a type are contract of hedged using a and where significantand the derivative. associated option t unobservableThe the the table showsinput pricing for in bond both below servable)sign lead equivalentfor will opposite change value associated fair to with the in derivative. an hedging eff These sensitivity increase volatility,structured 10% bonds in such option elements for with associated linked a equities with to o ces financial and associated zero.the net statement This derivatives.the income is is alsotable shows that effect The also Senior securities issued value of NOK 283 million creditthesevaluecouldin discountSuchcaused of loans. an increase increase an the 283 forthe by NOK in be rate changesmaturitiesfor also envisaged. different may be option pricingof of change thatthe a parameter is part bond, (observable on that of is based Change an issued value fair of across all maturities.acrossinterestbp for and other bonds all Notes, Similarly, discount an increase the rate 10 of in million.credit incould sprea caused an increase either by Thislead reduction 5 tobe in would NOK value a ed to of Level 3 table a parallel shiftthe The curve assumes spread, ofabove KBN. yield casein credit caused this an increase for the in by Instalment loans Level 3 unrealised gain/(loss) in in the period gain/(loss) Level unrealised 3 The table below shows totalThe table unrealised forbelow liabili and the assets statement gain/(loss) 2016 and 2015 in income recognised in allocated 3. to Level

An increase in the discount rate used for measuringmaturities across all forAnInstalmentto used in discount increase in rate the lead will a 10 bp Level of 3 loans relevant bonds, increased or liquiditymarkets. in risk Forinterest securities Senior rate i allocated to issued an Level 3, discount rate of 10 bp would lead to a reduction in value of NOK 321 million, 321 an unrealised NOK leada reduction resultsvalue which discount gain. this Again of to in in bp would 10 of rate Senior securities issued securities Senior Subordinated debt derivatives Financial Notes,interest and other bonds Total Amounts in columnAmounts "Unrealisedin gain/(loss)" included are above linein table on thethe unrealised "Net financi gain/(loss) on ments" in the income statement. statement. income the in ments"

ANNUAL REPORT 2016 / PAGE 58 ANNUAL REPORT 2016 / PAGE 59

18 63 63

lue st

Total Total 1 119 7 167 3 209 3 209 97 264 97 264 17 238 etition etition value value Fair va- 145 815 145 815 103 820 102 683 165 603 158 436 117 773 158 436 158 436 100 535 these ities ities ets. ets. ognized

lue is is lue

g)

of

ark

omp

rec va

0 0 0 0 0 0 2015

69 620 745

7 167 3 188 15 759 15 846 15 226 97 289 17 238 16 503 Level 3 Level Level 3 Level 165 942 158 775 117 784 amount Carrying Carrying bearing secur

18

18 63

499 3 443 3 443 7 584 1 119 8 036 8 036 2 465 81 505 87 974 87 456 10 974 84 032 Level 2 Level Level 2 Level 153 399 145 815 114 794 102 683 Fair value

0 0 0 0 0 0 0 0 2016

21 7 584 1 115 10 974 Level 1 Level Level 1 Level 142 372 142 372 153 807 146 223 114 883 102 773 150 400 amount 150 400 Also for this purpose a discounted cash flow a discountedfor Also purpose this Carrying Carrying ”.

Net unrealised gain/(loss) on financial instruments “ bearing securities classified as as classified securities bearing bearing securities classified as Held to maturity maturity to Held as classified securities bearing bearing securities classified as as classified securities bearing bearing securities classified as Held to maturity maturity to Held as classified securities bearing bearing securities classified as as classified securities bearing bearing securities classified as Held to maturity maturity to Held as classified securities bearing

loansmaturitymargin interestmaturity fixed with intereto and/or time to have within rate 1 year) (time

loans with fixed interest rate margin interestloansmaturity granted are to fixed 1 year) with bilaterally above (time and a loan KBN rate between

Nibor P.t. loans and Nibor and loans P.t.

Notes,interest and other bonds Instalment loans 2015 Total fairliabilities,ofvalue financial measured amortised at cost Notes,interest and other bonds Senior securities issued securities Senior Total fairofvalue measured financial amortised assets, cost at Notes,interest and other bonds Loans and receivables Instalment loans Informationlevel the fair within about the value financialmeasured hierarchy, fair instruments for cost, at where amortised disclosed 2016 Total financialliabilities measured amortised costat Senior securities issued securities Senior Loans from institutions credit Loans from

Totalfinancial measured amortised at cost assets Notes,interest other and bonds Notes,interest other and bonds Loans and receivables Instalment loans Deposits with credit institutions credit Deposits with Total fairliabilities,ofvalue financial measured amortised at cost customer, and are not traded in an active market. activecustomer, in tradedan not and are issued securities Senior Senior securities issued measured at amortised cost consist mainly of USD or Euro benchmark loans and loans in public niche m Notes,interest and other bonds issued securities Senior Total fairofvalue measured financial amortised assets, cost at loan products. Level 3: and better liquidity in the market and allows the use of observable prices on new loans to be used as inputs in thein valuation inputs as and better used market loanstoprices allows observable the liquidity be in of on new the use and rate terms that give the customer more flexibility to change the loan provider if market terms change. This leads to higher c Forliabilities assets hedging and of relationships items interest that part are and other bonds hedged (Notes, as the discountmethod where currency hedged risk but reflects only the rate (interest is used, and element). Instalment loans Level 2: INFORMATION ABOUT FAIR VALUE FAIR ABOUT INFORMATION Loans and receivables measuredSee Financialinstruments Notefairfor 11 measurement. informationvalue regarding value fair at classifiedsecuritiesSenior and receivables Loans as and classified issued liabilities, accountin Other 13 Hedge as Note see calculated. thechangescarrying is to change hedged risk thethe This amount of adjusts value due asset liability or is and statementin income line the on the NOTE 12 NOTE 12 FINANCIAL INSTRUMENTS MEASURED AT AMORTISED COST (Amounts 1 000 000) NOK in

14 34

336

2015 2015 2015 (109) (213) s s eads, 3 188 1 043 2 190 19 428 17 204 158 775 163 006 spr are tionship tionship

ela

ese

711 (62) (27) (32)

2016 2016 (716) 1 115

146 223 147 275 76

2016

5 208

16 182 10 898

currency risk.Fairi value hedging

going basis ineffectiveness and all is recognised "Net under

bearing securities bearing securities

Cash collateral pledged institutions credit with deposits Total Depositscreditinstitutionsmaturity with time agreed with to (Amounts 1 000 000) NOK in DEPOSITSWITH CREDIT INSTITUTIONS NOTE 14 Depositscreditinstitutions with maturityto without time agreed KBN uses fairKBNvalue cross selectedinterest hedge accounting economic of for uses hedges and rate HEDGE ACCOUNTING NOTE 13 (Amounts 1 000 000) NOK in appliedindividual at the hedging transaction instrument where r level theis explicitly hedged item, linked the hedge to and ismeasured documented. properly effectiveness Hedge is on an on Notes,interest other and bonds Senior securities issued securities Senior derivatives Financial hedges value fair in instruments financial on changes value Recognised Notes,interest and other bonds unrealisedfinancial gain/(loss) on instruments". hedges value in fair instruments financial of amount Carrying Total issued securities Senior derivatives Financial Total Recognised underlying changesfactors,changes of riskcurrencysuch in interest a result are as value and swaps basis rates hencethe instrument hedged risk.financial hedging the For (the derivative),fullis theth fair recognised, change value as measured value. fair at

ANNUAL REPORT 2016 / PAGE 60 ANNUAL REPORT 2016 / PAGE 61

0 46

100 945

2015 2015 2015 2015 6 843 9 234 8 054 5 850 9 479 8 569 8 034 1 448 6 944 11 082 16 819 12 491 16 417 28 817 19 740 11 618 29 877 14 754 11 093 22 401 81 576 68 368 10 913 87 978 47 212 254 376 256 815 256 769 149 944 254 376 149 944

2016 2016 2 281 6 087 9 241 52 497 59 965 118 550 118 550 107 028

40

136 (93)

2016 2016 7 219 9 215 8 468 6 376 9 678 9 818 8 212 6 229 1 056 10 701 17 585 12 320 14 779 31 436 22 930 10 971 31 158 11 419 26 644 11 226 266 518 267 521 267 481 266 518

BEARINGSECURITIES

bearing securities bearing bearing securities bearing bearing securities by type of issuer of type by securities bearing bearing securities by time to maturity time to by securities bearing

1

Trøndelag Agder Agder

Trøndelag 5 years Issued by publicIssued bodies by Issued by otherIssued borrowers by Issued by otherIssued borrowers by Issuedsovereigns, guaranteed or by central by banks, regionalmultilateral authorities and development banks

Loans to customers, principal amount principal customers, to Loans Svalbard Finnmark Troms Nordland Nord Sør Møre og RomsdalMøre Sogn og Fjordane Hordaland Rogaland Vest Aust Telemark

Vestfold Foreign Buskerud Total instalment loans instalment Total Notes, bonds and other interest other and bonds Notes, Domestic Other loans Oppland Total loans to customers to loans Total

Hedmark Fair value adjustment value Fair Oslo

Principal amount Principal (Amounts 1 000 000) NOK in Notes, bonds and other interest other and bonds Notes, 1 5 years Over interest other and bonds notes, Total Under 1 year Under (Amounts 000) 1 000 NOK in Accrued interest Akershus NOTES, BONDS AND OTHERNOTES, INTEREST BONDS AND interest other and bonds notes, Total

1 NOTE 16 distribution Geographic NOTE 15 NOTE 15 INSTALMENT LOANS Østfold

2 2 4 9 13 36 11 12 125 142 343 2015 2015 2015 2015 3 017 3 7 167 7 167 as 68 644 68 57 408 57 risk (2 860) (2 390 107 390 400 894 400 391 285 391 (13 805) (13 it ond, ond, l w (113 583) (113 e on the

e b

2016 (118)

4 390 4 1 0 6 8 82 752 82 (2 749) (2 14 45 10 21 369 933 369 376 785 376 400 894 400 (93 926) (93 (10 185) (10 (11 242) (11 138 153 2016 2016 2016 7 584 7 584

on forcredit reporting the on the risk datevalu (fair on for date;credit issue and the on the risk

accrued accrued income expenses and

There was no breach in debt covenants as of 31 December 2016. December 31 covenants debt no breach of There as was in * Redemptions in 2016 includes buybacks of 1 159 million NOK. Fair value adjustment (value changes) that are due to changes in KBN's credit risk is a part of the total value change for ththefor valueFair change total part value adjustmentchanges)KBN'schanges credit of to in is a (value risk that due are which is not due to changes in marketcurrencychanges liketo in parameters iswhich interest or risk. due changes cred Value changes from resulting not in marketB)money Relevant add the at interest date reporting rate an with reporting date) amount theto difference values calculated the different using two between discount rates: marketA)money Relevant add the at interest date reporting rate an with Total senior securities issued risk own credit in changes due to is that adjustment value fair from gain/(loss) which Of Redemptions* Amortisation Translation differences Seniorissuedsecurities 31 December at amounts)(nominal as Accrued interest adjustment value Fair Senior securities issued (nominal amounts) as at 1 January Seniorissuedsecurities 1 January at amounts)(nominal as issuanceNew Total loans from credit institutions credit from loans Total Cash collateral received Intangible assets SENIOR SECURITIES ISSUED SECURITIES SENIOR (Amounts 1 000 000) NOK in NOTE 19 NOTE 18 NOTE 18 LOANS FROM CREDIT INSTITUTIONS NOTE 17 (Amounts 1 000 000) NOK in OTHER ASSETS OTHER Fixed assetsFixed (Amounts 1 000 000) NOK in

Other assets Prepaid, non Intangible assets are comprised of two IT systems. The portfolio system was brought into use in 2015, while thewhile ITsystems.Intangible lending 2015, two brought The in comprised porta system portfolio was into use are of assets systemsbrought theirinlifetimes. Both amortised over are into2016. expected use Total other assets OTHER LIABILITIES (Amounts 1 000 000) NOK in Accounts payable Public fees Other short term liabilities term short Other Accrued interest expenses yet and received, not accrued Total other liabilities

ANNUAL REPORT 2016 / PAGE 62 ANNUAL REPORT 2016 / PAGE 63

- s s 0

ign ign usi- 772 162 609 act

ured 2 119 2 195 do ore 37 207 36 435 32 121 ebt de- ebt market folio. folio. to offset eas ies. The The ies. values Negative liabilities inancial inancial . The The . d d esented ort ht art

pr ed with edged with

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as- 776 648

sets -

1 815 1 039 22 831 21 016 20 331 Positive Positive lues lues 2015 market va-

0

6 471 11 186 161 572 789 266 155 101 627 693 513 298 103 209 amount Notional Notional

0

43

986 ties

1 029 2 180 2 553 liabili- 26 275 25 246 20 513

- Negative market va-

lues lues

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966 546 420 221 798

15 921 14 955 13 936 assets 2016 ket valuesket Positive mar- Positive

0

4 053 17 107 752 026 147 464 604 561 143 411 467 790 119 665 amount Notional Notional

20 uses financialuses to derivatives economically only interest hedge exposures tocurrency rate arising and risk the in Company's b

as liabilities. as liabilities. notfinancial fulfil Statement IAS under the the netting o 32, requirements in derivatives for basis presented are a gross on contractsPosition,a positiveas value fair that and are a negative value contracts assets fair presented with are such with remainingmasterstandard as contracts instrumentsfair hedges. designated are As hedging in value netting (ISDA) agreements Allfinancial measuredloss. atvaluecontracts derivativestrad faircategorised through for and are as profit Most Held are Total financial derivatives

Currency derivatives hedges: Fair value Interest derivatives rate Commodity derivatives related Equity derivatives related Currency derivatives Interest derivatives rate NOTE FINANCIAL DERIVATIVES (Amounts 1 000 000) NOK in KBN ness activities, and to economically hedge exposure to option elements in issued structured bonds. KBN enters into swap contrswap entersKBN structured into issued bonds. in to ness option elements exposure hedge economically activities, to and (Amounts 1 000 000) NOK in nominatedforeign in interest currencyhedged with is currency rate swaps and such that only KBN has remaining3 exposures to with counterpartieswith creditlimitsBoard.Bon isderivatives subject risk rating and all the high by to with exposure approved hedge contractsto indiceslinked commodity used are equity Swap or EUR. to and market NOK,interest USD monthmoney in rates risk the where such returnindices.to in is linkedborrowing kroner.currency Interest interest in and pays rateNorwegian arising fixed risk customers termsloansfrom to rate is h with themarketto in liquiditycontracts. risk interest hedge Interest currency p swaps swaps also are used and FRA rate rate and credit portfolio.KBN derivatives the no in has Counterparty riskto related financial derivativescontracts ismitigated using by standard ISDA agreementsthat give the rig ofassets counterp addition collateral default, swap and liabilities and in all theagreements into with event in entered are derivatives ismonitoredon an ongoing exposure basis. m counterpartycollateral risk. is risk transfers Counterparty that reduce ISDA and agreements information on for 21 See note monitoredand an ongoing basis. on Borrowing inBorrowing foreign kroner currencyis converted to KBN through interestswaps, Norwegian f basis payments receives in where Held for trading: for Held

0 in 2015

t y be y 6 658 6 2 318 2 7 167 5 901 l on the re- at it is lated lated or- ged h (10 037) (10 (17 204) (17 edi ted ma t al re

ed

and liabil- collateral collateral

h n Grossn oans from led c netting and and netting netting and and netting u ets r L s lum

Amounts after after Amounts Amounts after after Amounts

, n N's cash cash KBN's

w

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2016 s 7 584 i

(3 315) (3 Cash Cash 7 167 7 584 s (10 898) (10 17 204 10 898 n o i t collateral collateral

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e u 7 584 l 10 898 13 345 13 345 a to a netting agreement netting a to to a netting agreement netting a to v

t e k r a m both asset and both asset and liabilities items liabilities liabilities items liabilities

e Netting effect for Netting effect for v i t Amounts that may not be presented net in the in the net presented be not may that Amounts Amounts that may not be presented net in the in the net presented be not may that Amounts counterparties with with counterparties counterparties with with counterparties a g statement of financial position but that are subject subject are that but position financial of statement statement of financial position but that are subject subject are that but position financial of statement

e

n

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s e i t r a p r ment of financial financial of ment ment of financial financial of ment e Amounts that are are that Amounts Amounts that are are that Amounts t offset in state- the offset in state- the

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s Gross fair fair Gross Gross fair fair Gross

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s e i t cash collateral for counterparties with negative market value. (Amounts 1 000 000) NOK in reflected how much the gross value maycounterparty.reflected much nettingthe value by aftercolumn be reduced gross per Amounts The how collatera netting and shows after netcollateral the effect exposure cash netting and receivedcounterparties for market positive with and p values derivatives Financial derivatives Financial Assets Assets derivatives Financial derivatives Financial Liabilities Liabilities 2015 2016 Effect of collateral offsetting and The table below shows items in the Statement of Financial Position that are subject to legally binding netting agreements and agreements netting binding to legally subject are that Position Financial of Statement the in items shows below table The collateralcounterparty Financialcomprises reduce thisKBN to item In the derivatives risk. and liabilities). (assets co The fairmarket totalvaluecontracts value presents the for market and negative positive presen are with same amounts The value. StatementtheFinancialclearthat of in thesethe items presented are make gross it column Position,to amount, Carrying bas ISDA agreements fulfillingnot the requirements for offsetting. In the column Netting effect for counterparties with both ass i

(Amounts 1 000 000) NOK in Support collater (CSA) Cash financial EUR. collateral or Annex to consists related derivatives The USD exposures. cash in of netted in the event of default. The ISDAnettedcontain default. The agreements the of collateral the agreements ofform in event the exchange regarding Cr in of cashceived collateralStatementthe and financial is presented of in credit pledged institutions Deposits position as with o creditinstitutionscreditto receivable or from payable a related with institutions. collateral Cash is included received in moneytermformarket Note additional shortmanagement, instruments. in See 20 inf notes in or and bonds and is placed either mation financial about derivatives. agreementsKBN derivatives into ISDA all with entered counterparties. has impliesthat counterparty all This the exposures vs NOTE 21 OFFSETTING AND COLLATERAL (Amounts 000) 1 000 NOK in Cash collateral received Cash collateral pledged Total cash collateral (Amounts 1 000 000) NOK in

ANNUAL REPORT 2016 / PAGE 64 ANNUAL REPORT 2016 / PAGE 65

0 % 994 100 994 an

risk 2015 fy as 1 743 1 743 2015* l, see in a in a on

tal NOK ita ment of Share inShare has been all partsall

not pre- to

hed in

age 0 are

e income sta- 2015 NOK 994 994 th

2016 2016 2 000 2 000 shares Carrying amount Carrying 3 144 625 Nominal amount in Nominal amount Number of of Number

100

+1.5% 3.02 % 3.74 % NIBOR 3 month Coupon Coupon Share inShare %

2016 s capacity bear to risk and the tolerance for 2020 2028 2016 ’ shares Redemp- Redemp- tion right tion right 3 144 625 Number of of Number

275 1 000 2 000 Nominal Nominal Nominal Nominal

s strategy and business processes, and are adapted to thestrategyto nature, adaptedand are business processes,s and ’ amount in CCY in amount amount in CCY in amount

CAD NOK NOK Currency Currency

sidedand notionaltheto qualithe investors, rightto interest not pay bond does not amount -

The risk committee is a preparatory and advisory body to the Board. Its three members are appointed are members Board.Itsthree therisk advisory to body The committee is a preparatory and

The Board of Directors overallBoardsets the the responsibility has of management appetiteforThe risk risk KBN in and the of

.

s activities. ’

tement. 19.4 million19.4thecapitalmillion isof additionaltax profit 11 holders insee attributed Tier to 2016,2015) after (NOK 1 in a liabilityis therefore classifiedFinancial ofPosition.in Statement equity 32 and as the IAS under interest The expenses reductionInterest Retainedline assented of thestatement, The a in income expenses earnings. but are the on expense rather million19.7 tax) interest NOK (after amount of In Statementrecognised the the equity. 2016 changes paid,see in of in when million millionmillionthat 0.8 2015), at inpaid addition, end (NOK such in (NOK year In in 0.6 10.3 2015). NOK had accrued KBN issued additional Tier 1 capital in the form of a subordinated bond in June 2015. The bond forms part of KBN's Tier 1 cap part KBN'sforms TierKBNissuedsubordinated ofJunecapitalThe 1 in the 2015. bond additional a 1 inof form Tier bond one havingKBN a NoteBased on 30. The Kingdom of Norway of Kingdom The Additional capital Tier 1 capital 1 Tier additional Total (Amounts 1 000 000) NOK in

Total subordinated debt subordinated Total The ordinary subordinated loan in CAD with redemption rights in 2016 was redeemed in May 2016. A new ordinary subordinatedThe ordinary subordinatedA 2016. redeemedCAD redemption new with in rights 2016 was in loMay in loan billion. month, 2 value par NOK with same issued the was in inNOK ADDITIONAL TIER 1 CAPITAL SHARE CAPITAL Ordinary subordinatedcapital loan Ordinary subordinatedcapital loan (Amounts000) 1 000 NOK in SUBORDINATED DEBT NOTE 25 RISK MANAGEMENT NOTE 24 NOTE 24 NOTE 23 *Nominal amount converted to NOK using the reporting date FX rate NOTE 22 NOTE 22 scopethe and complexity of exposure. risk Robustmanagementcontrolthe is establis internal the bank. is processes carried Risk of an integral business as of part out Risk managementRiskinternalKBNcontrol of an integralare and part thatstructurethree shall systematic lines defence ensure of on identification, based monitoring the of assessment and risk of KBN MANAGEMENT OF RISK ORGANISATION Board of Directors Statecustomerand sector ownership,KBNmaintains risk group politicalthat imply a low profile. role line with requirements from the owner and theline requirementsthe authorities. with The appetite owner risk reflects from KBN fluctuationscapital. profitsThe and risk the in is implemented through appetite determination limits. risk of Risk committee of the Board. making infunctionmain Board of assist Board. committee The the is decisions members to the annually the the of from and by capacity,including limitsfor development tolerance. risk Furthermoremonitoring itshall theBoard of assist theman in and a s s

s), ’ the ter a

n hat n. s s ves ’

of by

tio . pro ng. ansactions ansactions

n Moody s, ati nstruments (Deloitte from from (Deloitte eig g i and rates. tr All new s and Standards and and ’ external external ratings, types of s creditto s and access rating ’ ’

Average time to maturityAverage portfolio time the to of s total risk managementcompliance. totals risk and The ’ carried out by the carried internal KPMGauditor by out is

weight cent. per zero of s risk policy allows minimal exposure to changes in interestminimalchanges in to policy and FX risk allowss exposure rates ’

third line of defencethird of line

within risk managementinternalcontrolwithin risk the and comprises Lending department, the

.

s s internal credit models,risk available capital,risk counterparties ’ The price risk in the portfolio is managedissuer the is the limited at to portfolio is levelThe in portfolio price risk and due . monitors,tocontributes firstcontrols, improving the guides and and performs line

These responsibilitiesmanagementcompliance include and internal control risk external and of

. KBN has a credit assessment system for municipalities credit economic of loansKBN assessment based assessment . a on has

first line defence of s client base is theclientcreditworthiness. local sector, is government high base has which s credit The loans in risk ’ s s ’ KBN . KBN —derivative transactions . . The President & CEO has an overall responsibilityThefor CEOcontrol, an . President & riskfollowinghas and internal management and is up s risk exposures on an ongoing basis. s exposures risk

’

—liquidity portfolio second line of defencesecond of line

year as of 31 December 2016 December of as year 31

s. s assets consist of loans to municipalitiesconsist s loans to of similar assets liquidityissued and portfolio and a guaranteed or and notes by bonds of s total risk. ’ ’ ’ 1.1 Price risk in thePrice in liquidity risk portfolio

Counterparty default Issuer default Loss on loans granted to customersLossto on loans granted Interest risk and currency rate

municipality until it is ableto meet its payment obligations. KBN derivative into enters transactions financial to with institutions exposure interest FX hedge rates to and are subjectare strictto requirementscollateral rating ISDA counterparty agreement and a and also the require with agreement an Creditto liquidity lowest risk rating S&P the the average of the related is portfolio An low. of is on portfolio AA+(based MARKET RISKMARKET Market consists risk and currency interest rate KBN of risk. and 85 per cent of the portfolio is invested in securities portfolio BISinvested the cent in and 85 per of is a with short duration. municipality cannot bankrupt.go Should a municipality face difficulties,payment the central government would assume control The counterpartytransactions derivativestandardInISDA in managed through risk addition, and reduced agreements. KBN en is Poor intocollateral counterparties.collateral, posting swap agreements cash of require which new all with controlProceduresmonitorcredit been established. and to have and processes risk approves Management new all assesses and limitscounterparties, and KBN on based financialAll counterparties instruments Directors and tenor. also reviewed on an ongoing Board basis. annually of The are ap themunicipalmanagementfor creditgrantingassessedto policy the lending, by special of prior exposures are and all loan. Credit risk assessment granted is limitedtothe cannott postponement, obligation be eliminated. payment Actstates Local Government payment The as was KBN has strictKBN for guidelines has into entering financial transactions, instruments theto related liquidity portfolio and hedgin (financial derivatives).acceptablelowestfromA2/Ainvestments The forrating Moody bonds is in and notes sovereigns, regional authorities,multilateralfinancial bonds developmentcovered and institutions banks, credit high r with Frameworkfor credit assessment and other debtors.The analysis takes into account quantitativequalitative and key indicators, operatingcondition including regulatory framework, financial standing, profile,management debt geographic overall an the economic assessment of regio and Capital level risk Liquidity risk Operational KBN CREDIT RISK risk Market     CRO reports on a day to day basis to the President & CEO, but has a directSec accordance Board reportingPresident the in a the to has with to line basis CEO, but day & to reportsCRO a day on has the but to CRO, Capital47.3 theto of basis Norwegian day Regulation.Requirements reports on a day Compliance of Head direct Board. Thethe the and CEO to line reporting both themarkets. interbankfor positions liquidity interest open risk takes Credit rates in or generally are risk and KBN no low. currencies. KBN: for important most the as identified are factors risk following The Credit counterparty risk risk and regulations.the overall department responsibility The Management has Risk KBN for  1 January 2017),Board reportingthe to directly comprehensive measurement.risk RISK TYPES strictThe subjectmanagement internal are KBN risk guidelines exposure to and risk the in ensure bank to FinancialMarkets that performs department fundingmanagement, and liquidity lending the office administration and back and The functions. KBN President CEO & changes in KBN Three lines defence of

ANNUAL REPORT 2016 / PAGE 66 ANNUAL REPORT 2016 / PAGE 67 s s

it e to with total total

he nal nal

nd ny ia the ia the erage and tim Board tio al, de- t v av s a ly ges

institu- liquidity liquidity al he el and s thatare

al unctions and lev sk,

l f oan KBN holds a liquidityKBN holds a

s internals control facilitatestargeted and ’

s capitals the and expected risk sufficient actual level on is based

’

per cent. KBN is compliant with all regulatory capitalis compliant all with KBN requirements, cent. per regulatory 16.86 16.86

s capital requirements. ’

. financial risk. risk. financial - s liquidity requirements mainly can be met through maturities on the asset side. The liquidity ’

bearing securities.

TIONAL RISK TIONAL s Common equity Tier 1 capital adequacys Tier is equity ratio Common 1 ’ time to maturity ensures that KBN portfolioliquid investedcreditmaturity. in is to and notes high and short bonds rating with time OPERA through business reporting. Events recorded without reported are KBN undue delay. and KBN has zero tolerancemoney laundering toleranceKBNfor and corruption zero low has and very for operational risk. other Assessment of circumstances operationalwhen is otherwise performed and basis risk on a yearly least it. reported t at to warrant Risks are efficient operations, and compliance and internal reliable reporting external with regulations. Operational al risk in arises the municipalitiesthe authorities regional or provide guaranteesthat been politically have and authorised approved governmen by the or County governor Local Ministry loan is in and neither there and Modernisation.Government KBN losses 2016, a of no has financial notevidence does KBN 2016. issue 31 December of guarantees. at as default includesThe tablecredit exposuresthatbelow institutions, Deposits as with recognised are Instalment bond loans and Notes, portfolio in order to be able to meet its payment obligations for a minimum of 12 monthsmeet funding.portfolioto access to obligations Shortminimum payment be able its without for new to 12 order a of in LIQUIDITY RISK LIQUIDITY Liquiditymaturitymanagedmatching is risk interest profiles by rate liabilities. assets reset and periods for and isminimisedcontrols through processes, high competency work level, professional ethicalfocus of and on behaviour internal versus business robustnesscritical relations, in and the functions,Board others. opera the amongst on reportsto Management risk and incidents. tions shall have a rating of A or above. tions above. or A shall a rating of have entitiesKBN publicloans thatfor and regional to carry tasks sector grants conditions local out authorities. such The l for other interest- Tier 1 capitalTier 1 and primary/total capital) relatingminimum regulatory to requirements and bufferfor requirements,capit capitalTiermeasures all equity and 1 (common KBN maturity of up to 50 years, and credit years, and maturity tothe limits regulated are 50 regulation to on large up Credit by exposures. of financi exposures velopment banks, financial institutionsmunicipalitiescoveredtowithinthe of bonds and issuers given OECD. Loans may have risk, operational and other risk non the to changes Theframework.to Board IV regulatory specialimpending attention the and CRD changes pays to of in The risk nationalcapitalKBN requirements increase KBN has credit asmunicipalKBNauthorities,the well sovereigns, exposures against as against has in sector multilaterNorway, local assesses all the risks at least annually to ensure that theassessesleastthe at to all Company that risks annually ensure exposure. to and estimates capital t Inmay process of be exposed the management theassessment, KBN identifiesmeasures risks all and capitalthe cover level total to The exposure. risksnecessary separately:credit risk following market assessed are risk, ri

capitaltaking level substantial into accountThe all is capital Board exposed Directors discusses the to. of the risks bank CREDIT RISK (Amounts 1 000 000) NOK in NOTE 26 derivative instruments. CAPITAL MANAGEMENT Capitalrequirements Adequacy KBNisminimum subject the to and requirements forcapital. regulatory In assesses KBN addition rates.managedmatching risk currency Interestthroughthroughliabilities rate are economicof and and as assets well hed as

9 18 159 169 627

Total Total

1 741 3 728 2 739 9 118 6 113 2 052 5 540 16 889 15 460 11 741 12 022 26 835 41 130 11 869 16 126 18 971 402 253 402 253 331 309 270 137

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 183 916 144 1 034 2 331 252 060 252 060 251 877 247 635 Not rated Not rated

0 0 0 0 0 0 0 0 0 0 0 0 0 986 310 AAA AAA 6 943 1 960 4 805 5 368 7 130 5 127 30 270 30 270 16 562 11 351

0 0 0 0 0 0 0 0 0 0 0 76 83 AA AA 650 1 538 1 336 1 667 1 538 2 481 30 170 16 567 12 065 30 170 10 332 12 006 > 1 year > 1 year > 1 year

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 A A

181 181 1 187 1 006 1 006 1 187

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 BBB BBB

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

455 182 333 3 709 24 565 19 886 24 565 24 565

Not rated Not rated

9 18 87 1+ 1+ 159 746 253 963 627 6 979 1 630 9 598 1 402 3 227 1 348 9 784 1 537 7 458 4 631 1/A 1/A 10 271 57 382 10 686 20 732 57 382 11 733 10 886 A A < 1 year < 1 year < 1 year

2 0 0 0 2 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 A A 909 6 618 6 618 5 710 6 618

¹

Including loans to the municipal sector of NOK 267.5 billion. Risk class 2016 Time to maturity Securitisation institutions Financial Multilateral development banks Australia Total Risk class Credit exposure by country by exposure Credit ¹ DecemberUndisbursed 2016. billion 31 to at 3.4 as commitments NOK amount loan Amounts belowin table representthe credit actual exposure 2016 Time to maturity Norway Austria Covered bonds Covered France Japan Denmark Belgium Regional authorities Netherlands Finland Canada Sovereigns centraland banks Spain United Kingdom United States Total Switzerland Supranationals Germany Sweden

ANNUAL REPORT 2016 / PAGE 68 ANNUAL REPORT 2016 / PAGE 69

69 23 62 562 240 362

Total Total 4 100 4 864 1 757 2 553 8 169 1 871 16 605 22 295 42 839 20 395 13 654 12 947 33 358 44 253 20 461 22 103 426 187 307 231 271 603 426 187

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Not Not 365 rated rated 1 164 1 093 1 486 240 438 240 438 236 330 240 438

0 0 0 0 0 0 69 15 71 40 204 295 538 AAA AAA 3 416 1 242 8 743 7 496 7 869 2 621 3 895 42 559 14 775 11 062 42 559 11 708 11 062

0 0 2 0 0 0 0 0 0 0 0 82 74 26 26 AA AA 174 424 1 806 1 978 2 364 4 617 1 689 20 637 13 453 20 637 14 558 > 1 year > 1 year > 1 year > 1 year

0 0 0 5 0 0 5 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 A A 796 801 796 801

0 0 0 0 9 9 0 0 9 0 0 0 0 0 0 0 0 0 9 0 0 0 0 0 0 0 A A

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 14 14 14 14

BBB BBB

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 Not Not 428 463 156 rated rated 1 875 22 979 21 932 21 104 22 979

0 0 23 48 1+ 1+ 890 460 240 2 743 1 757 7 544 3 981 9 307 2 553 5 420 5 120 1 333 9 373 1/A 1/A 10 938 13 189 84 245 23 825 22 697 20 872 10 180 84 245 15 998 < 1 year < 1 year < 1 year < 1 year A A

2 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 0 A A 362 8 285 5 859

14 506 14 506 14 506

¹

Including loans to the municipalIncluding billion. sector the 256.8 loans to NOK of Risk class 2015 Time to maturity Finland France Credit exposure by country by exposure Credit Denmark Undisbursed loan commitments amount to NOK 3.9 billion as at 31 DecemberUndisbursed 2015. billion 31 to at 3.9 as commitments NOK amount loan ¹ Australia Canada Belgium Securitisation Total institutions Financial Covered bonds Covered New Zealand New Risk class Japan Netherlands Multilateral development banks 2015 Time to maturity Amounts table belowin representthe credit actual exposure Austria Norway Regional authorities Spain Sovereigns and central banks United Kingdom United States Switzerland Supranationals Total Germany Sweden

is 3.2 5.4 2.1 8.3 0.3 1.1 9.7 ncy 10.7

ning ning ina- nt rre assets in USD

ero into into NOK 12 mai ises due ises

pt NOK, NOK, pt rate risk ate omb of develop-

in FX in FX rate ar to t r days to an

ms ability to

of interest of al olute values values olute kes xce in the in the in-

10% change change 10% he table he he art Gross interest interest Gross

abs n t ces 2015 3.1

83.1 10.7 96.9 3.2 5.4 2.1 10.7 rate risk Net position Net

Net interestNet 0.2 0.8 0.6 1.6

in FX in FX rate 10% change change 10%

2016

1.7

8.2 5.9

15.8 Net position Net

accountthetotal direction the theinterest the effect of the statement currency, Gross is income in while of risk per rate of calculatedcurrency. the effect per tion of a value change based on fair value measurement,value interestfair income.interes latter on Net For thechangetion the and an effect part on based a value of change incomethe Netmonth period impact will the followingduring three interest the interest change. Net rate ta risk rate The table shows the total effect in the income statement related to the assumed change in interest rates. This comes from a c fromcomesthechangestatement assumed interest ThisThe rates. a total the in income table shows in the to related effect Total EUR USD NOK ment banks and financialment and institutions, banks and enters into derivativescontractsswaps.mainly contractsFRA interest, rate and severalinvestments debt in currencies,KBNcurrencies and bond fully for interest has however, all rate all is e risk hedged and liabilitieschangeinterest basis in point risk on a 100 interest rates based rateshift). t (parallel NOK depends The on regulatefloating the instalment rate on loans. million. Thesensitivity interest 12 interestmeasured rateThe assuming a limit rate NOK 50 Board for of adopted risk has is adjustment lendingthethe floatingmain portfolio. on The of sensitivity currencies interest rate rate the i in is presented million for a 10 percent absolute change in all FX rates.million inchange FX 10 percentall absolute for a to KBN's borrowing beingtoin mainlycurrency,foreign KBN's borrowing requireis bank's hedging lending NOK. of while The guidelines cu all in statement ite income to related positions term net short However, liabilities currency. foreign in and assets to risk related set is risk currency limit for The transaction level.and portfolio level both at is risk hedged may occur. Currency and EUR Currency ratemanagement, activelyKBN risksellssecurities buys rated and highly sovereigns, issued by local authorities,multilater interestcurrenciesthese rate three using hedged USD for The that EUR. risk and re onlyKBN has such is swaps, interest rate USD exposure to changes in 3 month money marketmonth interest exposurechangesInterest toin3 change value fair rates. sensitivity the measured in rate is as below: CURRENCY RISK (Amounts 1 000 000) NOK in NOTE 28 Currency risk is defined as the risk of loss due to changes in market values based on fluctuations in FX rates. Currency rates. risk fluctuations FX in valuesmarket on based changesto in due loss of risk the as Currency is defined risk terestfor different p rate due at and liabilities, are cash assets and out payments periods As that fact times. a in and the EUR Effect of 100 bp change in in- in change bp 100 of Effect terest rate INTEREST RATE RISK RATE INTEREST NOTE 27 (Amounts 000) 1 000 NOK in activities.ofInterest result and borrowing KBN's lending arises risk a rate as The results risk interestfrom rate differen Other currencies Total The table above shows an absolute effect in the income statement of a 10 percent change in FX rates amou NOK.change FX The relative to in a 10 percentThe effectthe statementshows table an absolute in income of above calculated sensitivity 2015. The positions foreigncurrency 2016 and net analysis 31 December assumes on all in at based z as correlationmarket rates FX other and factors. risk between

ANNUAL REPORT 2016 / PAGE 70 ANNUAL REPORT 2016 / PAGE 71

0 0 0 0 0 0 0 0 0

52 52

(52) a icant

emp- nstitu- Without Without dity is is dity maturity iabilities/ nding. nif l i ts and red nt losses qui fu s l

term

-

sse ica

0 0 0 0

9 722 2 423 6 054 74 866 72 443 156 417 215 506 221 560 >5 years

0 0

12

242

9 468 1 038 75 356 60 267 5 years 243 154 241 862 135 623 (98 064) (98 1

7 0 0

12 60 12

516 3 68 087 19 650 68 008 29 486 49 137

months (18 434) (18

0 6 0 0

22 2 292 2 171 9 873 26 147 26 119 16 153 26 026 3 months3 1

0 0

16 104

1 795 3 123 8 051 7 584 10 723 15 409 16 182 24 337 < month1

110 110 Total 2 725 1 056 7 584 57 447 23 793 16 182 423 030 411 555 320 490 120 011 456 683

-

.

extra costs being incurred in the form of reduction in value of assets that need to be sold, or in the form of moreofformsold, the costs in expensive or be thatextra need to reduction incurredof form in the assets beingvalue of in Liquidity throughmonitoredmanaged thepolicyBoard liquidity is Directors. set bank's risk the of by and The policy requiresthatof portfoliomonths' liquidityminimum should a time 12 holdings amounting a net of to be held over months'situation 10 netmay givenThistimecover below thetions, redemptions. it not all implies in bank thata any and at payables,thethat includingto related lending 12 months borrowing. activities, during without the new next maturesA theliquidity of thismonths. largematching maturities portfolio to part Further within 12 by is reduced risk on a manageshort credit DNBfunding with to line and a short programme term liabilitiesmonths. a alsoThe has bank 3 up to liquidity Liquidity risk is defined as the risk of KBN not being able to meet its commitmentsmeetLiquidity finance its sig and/or demand to of lending being risk without able the KBN not is defined as risk

(Amounts 000 000) 1 NOK in recognised repurchase market. The liquidityusingconservative portfoliomanagedkeeping investment a marketis credit policy Surplus low. both risk and li maturity time to by Exposure for KBN under severelymarketfor stresseddirect conditions, of KBN under throughthrough use sales in repurchase the agreements or either LIQUIDITY RISK LIQUIDITY Total liabilities Total Financial derivatives exposure liquidity Net 2016 In 2016 a portfolio of highly liquid securitiesIn highlyholdings of 2016 a portfolio liquid established.shallsignifcash was These transferrable without be to NOTE 29 sovereigns, by investedmultilateral local issued notes authorities, and bonds in highlyfinancia development banks rated and tions. Subordinated debt Additional capital Tier 1 payments. interest including period, that in maturities net of sum the shows table The Deposits with credit institutions credit Deposits with Instalment loans liabilities Other Senior securities issued securities Senior Notes,interest and other bonds bearing securities Loans from institutions credit Loans from Total assets

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0

49 49 52 52

(49) (52) Without Without Without Without maturity maturity

0 0 0 0 0 0 0 0 0

293

6 697 8 602 2 423 6 033 61 015 61 015 75 426 73 003 54 126 60 159 (6 664) (6 183 349 237 374 237 666 >5 years >5 years

0 0 0 0 0 0

38 12

242

6 693 1 056 8 412

43 527 67 701 53 570 50 385 5 years 5 years 276 893 275 838 111 228 201 598 201 306 103 955 (89 231) (89 (158 973) (158 1 1

7 0 0 7 0 0

12 20 12 60 12 (6)

(56) 3 3 1 654 1 776 51 401 11 713 49 599 41 399 53 111 53 904 53 825 18 295 24 967 43 262

months months (10 649) (10

7 0 0 0 0 0 0

22

708

2 020 3 839 1 006 24 582 11 371 10 054 23 868 23 879 33 933 80 768 41 345 79 740 92 392 25 883 118 275 3 months3 3 months3 1 1

0 0 0 0

15 16

5 225 2 761 7 167 2 946 3 680 7 584 27 389 17 970 20 207 19 428 17 944 40 133 11 281 16 182 12 743 122 699 102 108 131 033 < month1 < month1

110 110 779 Total Total 2 725 1 056 7 584 1 082 1 776 7 167 23 793 57 447 16 182 20 579 55 321 19 428 423 030 411 555 320 490 120 011 456 683 441 330 430 526 305 428 151 216 476 072

- -

Total liabilities Total Financial derivatives Net liquidity exposure liquidity Net The table shows the net amounts that are subjecttothat amounts are The interest net rate table shows the in relevant adjustmentthe periods. Subordinated debt Exposure by time to interest rate rate interest time to by Exposure reset Additional capital Tier 1 2015 Exposure by time to maturity time to by Exposure 2016 Total liabilities Total Instalment loans Deposits with credit institutions credit Deposits with issued securities Senior liabilities Other Financial derivatives exposure liquidity Net Additional capital Tier 1 Deposits with credit institutions credit Deposits with Loans from institutions credit Loans from The table shows the sum of net maturities in that period, including interest payments. interest including period, that in maturities net of sum the shows table The Subordinated debt Instalment loans Notes,interest and other bonds bearing securities Senior securities issued securities Senior liabilities Other Loans from institutions credit Loans from Notes,interest and other bonds bearing securities Total assets

Total assets

ANNUAL REPORT 2016 / PAGE 72

ANNUAL REPORT 2016 / PAGE 73

0 0 0 0 0 0 0 0 0

49 49 al

nt (49) al and ier 1 1 ier pit eme io Without Without otal maturity al buffer y T common e Board egulatory egulatory enter into

, t . A l r structure to pit 's capital capital 's

or

he

al

tal

0 0 0 0 0

224

55 033 35 979 27 549 46 380 55 033 46 604 >5 years

0 0 0 0

56

11 109 47 428 50 020 97 448 5 years 194 427 108 088 194 371 1

0 0 7 0

12 20

3 5 296 6 102 50 074 20 088 50 047 30 792 50 879 months

7 0 0

33

708

rating and to ensure efficient marketratingto efficient competition. ensure and Th 82 716 92 728 81 968 44 508 137 235 (96 448) (96 (41 929) (41 3 months3 1

15

1 000 1 743 7 167 59 032 19 428 98 805 52 538 49 107 25 673

143 906 (32 336) (32 < month1

779 Total 1 082 1 776 7 167 20 579 19 428 55 321 441 330 305 428 430 526 151 216 476 072

the level of common equity Tier 1, Tier 1 and total capital1 and total levelKBN relativecommontothe Tier assets.of weighted Tier equity risk 1,

30

Exposure by time to interest rate rate interest time to by Exposure reset capitalnew requirements. 2015 a dialogue regardingcapital changingcapital. thechangesshare with in of structure owner issue its dividend by T policy or equity capital Tier requirement 1 2016.this July from including to 13.5 Corresponding to from percent increased buffers 1 12 capitalisedand totalthe 8 percent isKBN well respectively. 4.5 reporting capi capital is adapting its on and date, are and capital requirementsJuly countercyclical addition the In 2016. 1 from includingto cafrom 17 percent increased buffers 15.5 minimumrequirement 2017. December from The increase will percentrequirements regarding 31 0.5 capit common by Tier equity 1 adequacy regulationsmarketshall a sufficienttheon its conditions. and profile risk capital level and have capit based The managementtarget operationalised 1 capitalcommon is Tier 1 capitalthe ratio, equity Tier rat through adequacy the adequacy assesses the capital level on an ongoing basis and approves KBN's principlesassesses basiscacapitalsubject KBN'sthe the an ongoing to capital and approves management. KBN islevel for on total capital adequacy ratio marketa normaltests. stress situationstatus against is and using assessed in Regulatory risk common requirements for equit Financialthe Supervisoryset 1.5has at percent is Authority compliant by been al Norway, in with of total KBN percent. 15.0 capital requirements 31 December 2016. at as maintainsufficientmarketIn to order conditions,a capital KBNcan, increase depending or on level, total reduce its assets NOTE CAPITAL ADEQUACY AND CAPITAL MANAGEMENT satisfactorymaintainingfor necessary as AAA capital seen the of level is 13.5 percentcapital including set and KBN's pillar at 2 requir 2016, 31 December buffer adequacy at been requirements as has (Amounts 1 000 000) NOK in KBN'scapitalconsistscapital, share of retained 1 capital supplementaryTier earnings, capital/subordinated and hybrid debt Total liabilities Total Deposits with credit institutions credit Deposits with Additional capital Tier 1 Financial derivatives Instalment loans Net liquidity exposure liquidity Net Subordinated debt Senior securities issued securities Senior The table shows the net amounts that are subjecttothat amounts are The interest net table rateshows the in relevant adjustmentthe periods. Notes,interest and other bonds bearing securities Loans from institutions credit Loans from liabilities Other Total assets

0 2 1 4 0 0 0 0 0 0

225 175 343 203 561 994

2015 (124) (417) (281) 5 507 5 282 1 571 1 571 4 184 4 195 1 870 3 145 6 193 capital 12 950 11 379 10 385 ts. ts. 16.53 % 18.81 % 15.09 % Minimum Minimum lised gain/ men requirements rea

0 0 0 0

29 17 46

0 0 0

65

2 814 2 193 4 284 2 542 7 015 994 689

assets 68 840 66 026 52 298 52 443 2016 (138) (390) 2 000 2 000 3 145 7 624 13 989 11 989 10 996 weighted weighted 2015

Risk

0

69 17 46

175

42 839 14 627 36 922 20 395 12 944 20 413 amount 444 940 256 769 311 119 Carrying

0 1 1 3 0 0 0

91

233 140 137 400

5 217 4 984 4 340 4 348 capital 16.86 % 18.39 % 21.45 % Minimum Minimum requirements

derivative and derivative liabilities.

0 0 0 0

13 15 40

2 909 1 750 1 137 1 714 4 999 65 211 62 302 54 245 54 347 weighted weighted 2016 assets

Risk

0

21 15 40

140

11 371 11 492 27 918 16 125 10 647 26 833 amount 416 507 267 481 323 397 Carrying

Basic Indicator Approach Indicator Basic

Of which are Norwegianwhich muni- are Of Of whichOf counterparty exposu-

Credit Valuation Adjustment Adjustment Credit Valuation Securitisation Other assets Covered bonds Covered Claims secured residential by pro- perty on derivativesre Financial institutions Financial Multilateral development banks Public sector entities cipalities Regional governments local and authorities Sovereignscentral banks and

Supplementary capital

*Only non reversing deferred tax asset to be deducted here. *Only assetto non reversingtax be deducted deferred Primarycapitalcalculation thethe under been calculated has Regulation on capital primary financial of for institutions. Un credit(loss) includechanges non risk on liabilitiesto in both own that is due Total primary capitalTotal primary Ordinary subordinated debt Total supplementary capitalTotal supplementary

Total Tier1 capital Othercapital Tier approved 1 Intangible assets Total common equity Tier1 capital Total common equity Deferred tax asset*Deferred tax Dividends payable Other additions/deductions incommon equity Tier 1 capital Share of unamortised estimate nulled differences Pension funds pension commitments above Share capital Retained earnings years previous Profit1 capital the Tier included for year in (Amounts 1 000 000) NOK in equityCommon capital Tier 1 Common equity Tier 1 capital adequacy adequacy capital 1 Tier equity Common ratio Tier 1 capital adequacy ratio adequacy capital 1 Tier Total capital ratio Minimum capital requirements capital Minimum Operational risk risk Operational Market risk Total creditrisk

Credit risk Credit

SupplementarycapitalKBN'stotalcapital.Tier 100 percentcapital capital satisfies cannot of the exceed 1 adequacy require Capital adequacy Capital KBN'stotalcapital primary following the comprises elements:

ANNUAL REPORT 2016 / PAGE 74 ANNUAL REPORT 2016 / PAGE 75 SUPERVISORY BOARD’S STATEMENT BOARD’S SUPERVISORY TO THE ANNUAL SHAREHOLDERS’ MEETING OF KOMMUNALBANKEN AS KOMMUNALBANKEN OF MEETING SHAREHOLDERS’ ANNUAL THE TO Svein Ludvigsen Svein Chair In accordance with §15 in Kommunalbanken’s Articles of Association, the annual accounts for 2016 have been accounts for 2016 have the annual Association, Articles of in Kommunalbanken’s In accordance with §15 examined by the Supervisory Board. The Supervisorythe and proposals for the income statement of Directors’ the Board Board recommends that Annual is adopted by the NOK 689,144,995 of profit, well as the application of financial position as statement Meeting. Shareholders’ April 2017 21 Oslo, SupervisoryAS Board for Kommunalbanken with with

.

statements,

comprehensive accordance and liabilities of

Our responsibilities . , comprisewhich the and classified as level 3

(ISAs)

653 million

0 7

were addressed in the context of our

and notes the to financial

have been prepared in

are valued based on models that use

ements in Norway, and we have fulfilled our ements Norway, in Foretaksregisteret: NO 976 389 387 MVA 387 389 976 NO Foretaksregisteret: 00 24 00 24 +47 Tlf: 01 24 00 24 +47 Fax: www.ey.no revisorforening norske Den av Medlemmer responsibilities the for ofaudit the financial

Kommunalbanken AS

income statement, statements of ,

. Standards on Auditing

Auditor’s responsibilities for the audit of the financial

audit opinion on the financial statements. for the for the then endedyear in accordance with

Auditor’s 2016 opted by the EU. statementfinancial position of aluation of these instruments key a audit matter 0191 Oslo -0191 0107 Oslo 0107 - Due the to materiality of the unlisted or illiquid instruments, and for the then ended year

International measured fair at value of Kommunalbanken AS

of Kommunalbanken AS

financial statements of

revisorer ents

asat 31 December

ignificant accounting policies and its financial performance Statsautoriserte AS Ernst Young & NO 6, gate Eufemias Dronning NO Sentrum, 1156 Postboks

accompanying

financial statements ards are further described in the

2016 ters t llion measuredllion at fair value in the the

, sectionWe of report. our independent are of Company the in accordance the ethicalwith section of our report, including in relation to these matters. Accordingly, our our audit includedsection the of report, our includingAccordingly, relationin to these matters. opinion

a summary of s on the audit the on the financial statements of

cash flows changesand in equity

is provided in that context. based calculationsbased as as well management's of review valuations provided by internalWe experts. Annual Shareholders' Meeting opinion

-

formance of procedures designed respond to to our assessment of risks the material of misstatement the

requirements that relevant are to our audit of the financial stat laws and regulations and present fairly, allin material respects, andlaws regulations the financial and presentposition of fairly, the Company as at 31 December statements ethical responsibilities as required by regulations.law Weand also complied have with otherour ethical obligations in accordance with these requirements.We believe thatthe audit evidence have we obtained is and appropriate sufficient provide to a basis for our opinion. including In our assumptions that are not observable in the marketThe place. valuation of these instruments therefore have a higher risk of errors. Such instruments comprise assets of NOK Unlisted or illiquid financial instrum Valuation of Financial Instruments Financial of Valuation Key audit ma Key auditKey matters are those matters in professionalour that, judgment, mostofwere significance in our audit of the financial statements of current the period.These matters statement of financial position conducted auditWeour in accordance with regulations,laws, and auditing standards practices and including generally accepted in Norway, audit of the financial statements as a whole, and in forming opinion our thereon, and do we not provide a separate opinion theseon our descriptionmatters. of how auditour For each matter addressed the below, matter fulfilled theWe responsibilities have described in the Basis for Basis We have audited theWe have Opinion statements Report per of financial the statements.The results of audit our procedures, including the procedures performed to provide the basisaddress for the our matters below, INDEPENDENT REPORT AUDITOR’S To

International Financial Reporting Standards as ad NOK 99 197 mi instruments the within fair value hierarchy. the increased risk of we considered errors, the v under thoseunder stand income, also assessedalso pricing model methodologies against industry practice and valuationWe guidelines. We design assessed the and tested the operating effectiveness of internal controls over the valuation process including management's and determination approval of assumptions and methodologies used in model INDEPENDENT AUDITOR’S REPORT AUDITOR’S INDEPENDENT

ANNUAL REPORT 2016 / PAGE 76 ANNUAL REPORT 2016 / PAGE 77

If, the

d or error, or error, d

that are are that are disclosed

a guarantee that an of users taken the on

not is

but decisions

used external source data where

economic

’s valuations. ’s

statement of financial position red material if, individually or in the our responsibilityour is to read the other information, le le the preparation of financial statementsare that Group

The Board of Directors and Chief Executive Director

n. an audit in accordance with law, regulations auditan accordance andin generally with law,

for the financial statements financial the for

ing,as applicable, matters to going related concern and using the

statements financial the of audit the for s y management; y he override of control; heinternal of override Kommunalbanken AS

-

n for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, omissions, intentional forgery, collusion, involve may fraud as error, from resulting one n for information ed auditing principles in Norway, including ISAs, ed exerciseauditing we principlesprofessional Norway, judgment in and maintain es our opinion. Reasonable assurance highis a level of assurance, obtain an understanding of internal control relevant to the audit in order to design audit procedures procedures audit design to order in audit the to relevant control of internal understanding an obtain and estimates accounting of the reasonableness and used policies of accounting appropriateness the evaluate b made disclosures related identify and assess the risks of material misstatement of the financial statements, whether due to frau due whether statements, financial of the misstatement material of risks the assess and identify design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and and sufficient is that evidence audit obtain and risks, those to responsive procedures audit perform and design from resulting misstatement material a detecting of not risk The opinion. our for a basis provide to appropriate tha is higher fraud of effectiveness the on opinion an of expressing purpose the for not but circumstances, the in appropriate misrepresentations, or t or misrepresentations, Company’s internal control; internal Company’s

Independent auditor's report ► ► ► available. Weavailable. compared results of valuations our to the preparingIn the financial statements, management responsible is for assessing ability the to Company’s continue as a going concern, disclos concerngoing basis of accounting, unless management either intends to liquidate Company the or to cease operations, or has no realistic alternative butto so. do Our objectives are obtainto reasonable assurance about thewhether financial statementswhole as are a free from misstatement,material and to issue an auditor’s whether due fraudto reportor error, that includ audit conducted in accordance ISAs with alwayswill detect material a misstatement exists.when it Misstatements can arise from error or fraud and are conside aggregate, could they reasonably be expected to influence the Auditor’s responsibilitie Auditor’s Responsibilities of management of Responsibilities Management responsible is forpreparation the and fair presentation ofthe financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as management determine necessary is to enab free from misstatement,material whether due fraudto or error. Other Other Other information consists of information the included in annual the Company’s report other than the financial statements our and auditor’s report thereo performed independent valuations for selected instruments and

Level Level 3 instruments which are presented fairat thevalue on (management) responsible is for the other information. Our opinion on the financial statements not does thecover other information, and we do notexpress any form assurance of conclusion thereon. connectionIn with auditour of financial the statements, and, in so,doing consider whether the other information materially is inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears be to materiallymisstated. based theon work have we performed,conclude we thatthere is a material misstatement of other this information, are requiredwe We report to that fact. nothing have report to thisin regard. As part basis ofof financial these statements. accept professional scepticism We throughout the audit. also: in note 11 the financialin statements. note in 11 ast

, it is our our is , it

orate social social orate corp rance Engagements (ISAE) proposal forallocation the of on

the circumstances,determine we that

and rare corporate social responsibility

with the lawwith and regulations.

Historical Financial Information

ndence, and applicable,related where ndence,

bookkeeping standards practices and use the adverse consequences of so doing would of the financial statements, including the disclosures, and and the disclosures, including statements, of financial the

or Reviews of

and on the statement the on and

content as described above,and control procedures havewe

International Standard on Assu International Standard on Audits and in the statement on the

e going concern assumption th

, statements isclosures are inadequate, to modify our opinion. Our conclusions are based on on based are conclusions Our opinion. our modify to inadequate, are isclosures to continue as a going concern; going a as continue to

have fulfilled their duty to ensure that the Company's accounting information is Directors’ report Directors’

Kommunalbanken AS

- those charged with governance regarding, among other matters, the planned al statements

Board of

the overall presentation, structure and structure presentation, overall the

is consistent financialwith the statements complies and in Norway.in

whether the financial statements represent the underlying transactions and events in a manner that achieves fair fair achieves that a manner in events and transactions underlying the represent statements the financial whether presentation. the audit evidence obtained up to the date of our auditor’s report. However, future events or conditions may may conditions or events future However, report. auditor’s our of date to the up obtained evidence audit the cease to Company the cause evaluate conclude on the appropriateness of management’s use of the going concern basis of accounting and, based on based and, accounting of basis concern going of the use management’s of appropriateness the on conclude c may that conditions or events to related exists uncertainty a material whether obtained, evidence audit the material a that conclude we If concern. going a as continue to ability Company’s the on doubt significant the in disclosures related the to report auditor’s our in attention draw to required are we exists, uncertainty financial statements if suchor, d also provide those provide also charged with governance with a statement that we have complied relevant with

he keyhe auditWe matters. these matters describe our in auditor’s report unless law or regulation responsibility 3000, Assurance Engagements Other than Independent auditor's report Based Based on auditour of financial the considered necessary in accordance with opinion that management accepted Based Based on auditour of financial the statements as described above,it our is opinion that the information presented in the documentation and registration on Opinion Report on other legal and regulatory requirements legal andReport on other regulatory report Directors’ of Board the on Opinion properly recorded and documented as required by law and We communicate with scope and timing of audit the significantand audit findings, including any significantdeficiencies in controlinternal that identifywe during audit.our safeguards. From matters the communicated with those charged with governance, we determine those matters that were of most significance in the audit of financial the statements of current the period and are therefore t precludes public disclosure aboutthe matter or when, in extremely ► ethical requirements regarding independence, and communicate them with relationships all and other mattersmay reasonably that be thoughtto bear on our indepe ► We

a matter should not communicated be report in our beca reasonably be expected to outweigh the public interest benefitsof such communication. concerning the financi resultthe

ANNUAL REPORT 2016 / PAGE 78 ANNUAL REPORT 2016 / PAGE 79 Ensure that the Company’s business operations/activities are operations/activities business the Company’s Ensure that soundly organised. and guidelines for the budgets up strategies and plans, Draw they and check that operations/activities business Company’s are followed. and position financial informeditself Keep Company’s the of accounts and fund management are its operations, ensure that control. subject to adequate Make decisions and grant authority for new loans raised. and authorisation to sign on behalf of the Grant special powers per procurationem. Company reportPresent the annual accounts and directors’ to the Annual General Meeting. with Annual General Meeting to the Make recommendations Association. Articles of to the respect to alterations Appoint the managing director. salary. Fix the managing director’s policy. on remuneration Prepare statements its and SuperviseCompany of the management the day-to-day operations. overall

CHAPTER IV - SUPERVISORY BOARD SUPERVISORY - IV CHAPTER meetings as often as the Company’s business necessitates, or when or necessitates, business Company’s as the as often meetings The Board constitutes a a member calls for a meeting to be held. resolu- Valid quorum if more than half the members are present. tions are those for which the majority of the members have present or amend- although a proposal which implies an alteration voted, If the members. ment requires more than one-third of all board the chairman shall of the meeting on each side are equal, votes the casting vote. have Com- the of management overall the for responsibility The 10 § belongs to the Board and shall therefore inter alia: pany 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. or the vice-chairmanThe chairman of the Board of the Board, § 11 shall jointly with one of the Board members or the managing direc- tor sign for the Company. The managing director shall be responsible for the day-to-day § 12 operations/activities and its business management of the Company in accordance with the instructions by the Board. laid down The Supervisory members and Board shall consist of twelve § 13 One member and one personal deputy deputy members. five The member shall be elected by and from amongst the employees. remainder of the members and deputy members be elected shall The Supervisory Board should Annual General Meeting. by the so as be composed of as broad a range of members as possible, ARTICLES OF ASSOCIATION OF ARTICLES CHAPTER I - COMPANY, OBJECTIVES, REGISTERED OFFICE REGISTERED OBJECTIVES, COMPANY, - I CHAPTER - CAPITAL LOAN EQUITY SUBORDINATED - AND II CHAPTER SHARES DIRECTORS OF BOARD - III CHAPTER The Articles of Association were last changed by the Annual General Meeting 29 June Meeting 29 June General Annual the last changed by were Association of Articles The into English. In case of in Norwegian and translated The bylaws are issued 2016. version prevails. the two versions, the Norwegian discrepancy between § 1 The Company’s name is Kommunalbanken AS. name is Kommunalbanken The Company’s § 1 of the enterprise is a direct continuation The Company § 2 Norges carried body, administrative out by the government Kommunalbank. counties, be assigned to municipalities, shares may The State’s Such intermunicipal municipal pension funds. companies and aim of Company’s assignment will be done in accordance with the maintaining highest possible creditworthiness. - loans to local govern are to provide objectives The Company’s § 3 intermunicipal companies and other companies counties, ments, carrythat tasks against either a municipal out local government or other satisfactory guarantee, government security. guarantee, can also undertakeThe Company other tasks appropriate to the business. Company’s registered office is in Oslo. The Company’s § 4 share capital is NOK 3,144,625,000 (three bil- The Company’s § 5 six hundred and twenty one hundred and forty-four million, lion, kroner) divided into 3,144,625 shares of thousand Norwegian five kroner) each. NOK 1,000 (one thousand Norwegian the the consent of conditional on of shares is acquisition The § 6 on withheld be only can Consent Directors. of Board Company’s grounds of fact. § 7 Pre-emption rights given to shareholders under section 4-19 shares for claimed be also can Act Companies Norwegian the of changed owner. which have Board of Directors exhibit shall collectively The Company’s § 8 experience and background diversity and breadth of qualifications, If a majority (5) and nine (9) members. five and consist of between a third and it can demand that should so decide, of the employees (2) of the members least two of the Board shall be elected by and at these members two For employees. from amongst the Company’s (2) personal deputies shall be elected. Annual General Meet- The other members shall be elected by the elected be shall (2) two least at that so terms, two-year for ing than four (4) of the elected members. no more but annually, Annual General Meeting shall elect the chairman and The vice-chairman of the Board of Directors. The chairman the Board holds of the Board shall ensure that § 9 the Board of Directors, the Board’s subcommittees and the subcommittees and Board’s the of Directors, the Board auditor. Company’s on remuneration statement Board of Director’s the Approve policy. referred business Address other - the notice of the meet to in fallsAssociation Articles under the of or by law ing or which Annual General Meeting. CHAPTER VI - AUDITOR - VI CHAPTER VII CHAPTER ACCOUNTS AND REPORT ANNUAL - VIII CHAPTER RETIREMENT OF AGE - IX CHAPTER OF ARTICLES THE TO ALTERATIONS - X CHAPTER ASSOCIATION 6. 7. state-authoriseda be shall auditor public Company’s The 17 § Annual General Meeting elected by the accountant and shall be of Directors. from the Board based on a recommendation prior weeks report least two at delivered shall be The auditor’s to the meeting of the Supervisoryshall consider the which Board accounts. issuing bonds, by for lending funds shall raise Company The 18 § certificates or other formentering of loan notes or by into loan raise primary may The Company capital and other agreements. foreign capital. Tier 1 capital instruments is effected Raising primarycapital and as in the General Meeting resolution Annual based on a majority or by the Board of Association, Articles of the in case of alterations Directorsthe authorityaccording to a majority. by such adopted The authority in amount and is not valid shall be limited upward or Meeting, Annual General regular the next year’s for longer than maximum of 18 months. inter- counties, § 19 Loans can only be granted to municipalities, carrymunicipal companies and other companies which local out - govern tasks against either a municipal guarantee, government can The Company ment guarantee or other satisfactory security. business. also undertake other tasks appropriate to the Company’s of DirectorsThe Board shall fix all lending terms and condi- § 20 time. any be in force at tions as may and financial administration capitalisation The Company’s § 21 and con- business shall be satisfactory to the Company’s in relation of maintaining highest possible aims sistent with the Company’s creditworthiness. year. the calendar year shall follow financial The Company’s § 22 annual accounts and an The Board of Directors shall deliver annual reportyear. for each financial auditor the of disposal the at placed be shall accounts annual The least one month priorat the ordinaryAnnual General Meeting. to The audited annual report and accounts shall be scrutinised by the Supervisory General Annual Board before being laid before the Meeting. report annual the adopt shall Meeting General Annual and The than the end of June. accounts no later The Board of Directors shall publish the annual report and by been adopted after they have than one week accounts no later Annual General Meeting. the Managing Director Company’s the for retirement of age The 23 § is 70 years. by be approved must Association Articlesof the to Alterations § 24 is If such approval so demand. regulations the King if prevailing will come into force on the Association Articles of the demanded, is forthcoming. such approval date Provide a statement to the Annual General Meeting in respect to the a statement Provide for the income statement proposals of Directors’ of the Board applica- proposals for the and balance sheet and the Board’s year. of loss for the tion of profit or covering Scrutinise report of Directors’ the Board and the auditor’s report. an opinion on matters concerning which Give the Company the Supervisoryare brought before Board of Board by the Directors the Supervisory or that Board considers necessary with a particular focus on corporateto address, governance. including annual report and accounts, Adopt the Company’s the and year, the for loss of covering or profit of application the of dividend. declaration Elect members to the Board of Directors with in accordance § 8. Elect members to the Supervisory Board in accordance with Association. Articles of § 13 of the auditor. Elect the Company’s for membersFix remuneration of the Supervisory Board and CHAPTER V - ANNUAL GENERAL MEETING GENERAL ANNUAL - V CHAPTER to ensure that the various districtsto ensure that groups and interest affected by of the No member are fairly business represented. the Company’s can senior executives Company’s of the Board of Directors nor any of the Supervisorybe elected member Board. The members the Supervisory of for two- shall be elected Board least At One third of the members shall retire each year. terms. year one third of the members shall be elected annually. The Supervisoryelect chairman Board shall and vice-chairman from amongst its members to serve for a term of one year. The Supervisory by the chairman Board shall be convened § 14 chairman or as often as the least once a year and meet at finds necessary or by a the Board of Directors, or when called for by The notice of members of the Supervisoryminimum of two Board. to be considered. the business the meeting shall set out called be shall auditor Directorsof Board The Company’s the and the Supervisory the meetings of to attend Unless otherwise Board. determined by the Supervisory the Board in individual instances, members of the Board of Directors the are entitled to be present at Supervisoryof the meetings rightwith the Board and the to speak The Ministry and Mod- of Local Government rightof initiative. ernisationparticipatecan Supervisorythe in with meeting Board observers. up to two The Supervisory constitutes a quorum Board least 2/3 of when at If the requisite num- its members or deputy members are present. a new meeting of the Supervisoryber of members is not present, The new meeting will constitute a quorum if Board shall be called. more than half the members are present. Supervisorythe of resolutions the which for those are Board Valid resolu- a although majority voted, membersof the present have all one third of more than for by only be passed if voted tion can the chairman of the on each side are equal, If the votes members. the casting vote. meeting shall have SupervisoryThe the that ensure to endeavour shall Board 15 § are being promoted in accordance with law, objectives Company’s and the reso- memorandum and articles of association, regulation, Annual General Meeting and the Supervisorylutions of the Board by: 1. The ordinaryAnnual General Meeting shall be held before § 16 the end of June. The Ministry (The Ministry and Moderni of Local Government - Annual General Meeting where members of the calls the sation) auditor are called. managing director and the Company’s Board, called if be held Meeting shall General Annual An extraordinary for by the Ministry the and Modernisation, of Local Government auditor. Board of Directors or the Company’s Annual General Meeting shall: The regular 1. 2. 3. 2. 3. 4. 5.

ANNUAL REPORT 2016 / PAGE 80 ANNUAL REPORT 2016 / PAGE 81 BOARD PREPARATORY COMMITTEES PREPARATORY BOARD Audit Committee Chair Martha Takvam, Nanna Egidius Rune Midtgaard Brit Kristin Rugland Risk Committee Chair Martin Skancke, Martha Takvam Else Bugge Fougner Committee Remuneration Chair Else Bugge Fougner, Rune Midtgaard Steen jr. Petter GOVERNING BODIESGOVERNING INTERNAL AUDITOR INTERNAL AUDITOR SUPERVISORY BOARD SUPERVISORY BOARD OF DIRECTORS OF BOARD Ernst & Young AS Accountant Authorised Public State Einar Hersvik, KPMG AS ArthurSvein Lyngroth, AuthorisedState Public Accountant Svein Ludvigsen, Chair, former County Governor, Troms county Troms former Governor, County Chair, Ludvigsen, Svein municipality Frøya Mayor, Vice Chair, Berit Flåmo, Eid municipality Mayor, Alfred Bjørlo, county Møre og Romsdal County Governor, ass. Rigmor Brøste, Klepp municipality Mayor, Ane Marie Braut Nese, Harstad municipality former CEO, Arne Johansen, Lillestrøm Kunnskapsbyen CEO, Anita Orlund, Evje og Hornnes municipality Mayor, Bjørn Ropstad, municipality Inderøy Mayor, Ida Stuberg, Stor-Elvdal municipality CEO, Walle, Leif Harald Asker municipality Mayor, Lene Conradi, KBN Manager, Senior Relationship representative, employee Dalby, Terje Alternates county Troms CFO, Berit Koht, municipality Toten Østre formerHans Seierstad, Mayor, Hordaland county former CFO, Stiansen, Johnny KBN Manager, Senior Relationship representative, employee Jonasen, M. Torger Observers to the Supervisory Board Ministry and Modernisation of Local Government General, Director Steffensen, Monica Sølve Ministry and Modernisation of Local Government Assistant Director General, Thor Bernstrøm, Else Bugge Fougner, Chair Else Bugge Fougner, Vice Chair Martin Skancke, Nanna Egidius Rune Midtgaard Brit Kristin June 2016) Rugland (from Martha Takvam Steen Jr. Petter (from June 2016) representative employee Wassås, Walstad May-Iren representative employee Byre, Jarle Alternates representatives to the employee Marit Urmo Harstad Andreas Aleström

IT Head Head Head Head HR & Business Business Ola Melby Roald Fischer & Settlement Operations Management Ilse Bache Knut Andresen administration Aleksander Larsen Chief of Staff & Loan administration administration Loan Staff & Operations Staff CCO Corporate Corporate Public Relations Tor Ole Steinsland Tor Communications & Communications PA CFO Finance & Finance Nancy Sørlie Paulsen Accounting Accounting department Jannicke T. Granquist T. Jannicke

Kristine Falkgård PRESIDENT & CEO Head Head Head Affairs CRO THE BOARD OF DIRECTORS THE BOARD Compliance Frank Øvrebø Middle Office Christina Jakobsen Thomas Yul Thomas Yul Hanssen Legal & Regulatory & Regulatory Legal Håvard Thorstad Håvard and Compliance Risk Management

Head Head Treasury Funding & Thomas Møller Ellen E. Scavenius Ellen E. department Chief Financial Markets Officer Markets Investor Relations Investor Financial Markets Financial Markets

Lending Lending department Lars S. Prestvik Lars S.

Chief Lending Officer ORGANISATION As of 31.12.2016

ANNUAL REPORT 2016 / PAGE 82 Kommunalbanken AS Telephone +47 2150 2000 PO Box 1210 Vika [email protected] N-0110 Oslo www.kbn.org