ANNUAL REPORT 2017 Kommunalbanken Norway

TABLE OF CONTENTS

Key figures...... 4

CEO’s foreword...... 5

This is Kommunalbanken ...... 7

The Board of Directors’ Annual Report 2017 ...... 8

The Board of Directors of KBN...... 18

Financial statements 2017...... 20

Supervisory Board’s statement...... 57

Independent auditor’s report...... 58

Articles of Association...... 62

Governing bodies ...... 66

919 689

2016 - 2 087 1 400 1 159 558% 471% 852% 2.65% 6.27% 0.16% 0.33% Infinite 48 117 82 752 93 926 12 452 21.45% 18.39% 16.86% 1 116% 1 848% 12.74% 376 785 418 327 266 558 116 413 lion) lion) age of net net age of mil ent

837

2017 2 162 1 517 1 783 1 429 570% 233% 308% 185% 3.68% 0.34% 0.36% Infinite 14 667 55 021 24.61% 21.65% 18.41% 2 052% 12.72% 13.51% 118 509 112 555 373 816 412 854 281 706 107 484

2 2

(core earnings) (core

term borrowings term

JPY EUR USD AUD Total NOK Leverage ratio Leverage (LCR) RATIO COVERAGE LIQUIDITY Tier 1 capital adequacy ratio adequacy capital 1 Tier ratio adequacy capital 1 Tier equity Common EQUITY ratio adequacy capital Total Total borrowings Total ASSETS TOTAL Repurchase of own debt own of Repurchase Redemptions BORROWINGS New long LIQUIDITY PORTFOLIO LIQUIDITY LENDING New disbursements loans Outstanding Return aftertax assets on Return after assets tax on Return on equity after tax after equity on Return tax after equity on Return Profit before before Profit tax the year Profit for Net interestNet income earnings Core RESULTS KEY FIGURES (Amounts 1 000 000) NOK in NOK 34million). This measure is included result give relevant to information about company's underlying the operations. 2 Annualisedaveragereturn equity equity on assets assets. return and percentage of and average on as 3 Principal amounts 4 Liquiditythea measure forcoverage regulatory ratio perc is liquidity liquid(LCR) is assets as defined reserve. a as LCR stresspaymentsof ahead. in period 30 days a given 1 Profittaxfor adjusted unrealised after financial gain/(loss) instruments + 429 million (0.75*NOK on 163 1 after tax (NOK

ANNUAL REPORT 2017 / PAGE 4 ANNUAL REPORT 2017 / PAGE 5 Y CIET TER SO . Through our lending to municipalities and county authorities, we helped to . Through our lending to municipalities and we celebrated the 90th anniversary of KBN's role in financing welfare service provision by the we celebrated the 90th anniversary of KBN's NG A BET S OF BUILDI 0 YEAR CEO's foreword In 2017 Norwegian local government sector before and after World War II, the construction of schools in the 50s finance the construction of power stations a range of reforms such as the Nursery Reform. KBN and its customers and 60s, and the investments needed for and development of the Norwegian welfare state. have played a central role in the creation lending to the local government sector at any time in the 90 years that KBN has not incurred a single loss on its AAA/Aaa, ensures that we have stable access to funding on it has been in existence. Our credit rating, lowest possible interest rates on lending. The low interest rates favourable terms and are able to offer the services does not constitute a greater burden on municipalities’ offered by KBN ensure investing in welfare to society through the dividends we pay to the state as our budgets than necessary. Our profits are returned owner. the welfare state KBN will continue to play an important role in the decades ahead as the task of financing the labour market will becomes more challenging. The proportion of the population actively engaged in associated with an ageing continue to fall, but the working population will have to support the increasing costs services provided by the population. These demographic changes will place greater demands on the welfare a decline in the country's local government sector. Moreover, it is likely that these changes will coincide with this as a shift from a income from the Norwegian continental shelf. The Productivity Commission describes the need for expertise and resource-based economy to a knowledge-based economy. This will in turn increase automation and skills. The way in which municipalities and county authorities invest in good schools, the shift towards a low- digitalisation may prove to be key factors for our success as a society. In addition, is to be a long-term emission society will also need very significant investment spending. KBN's objective and a greener society. partner for the efficient provision of welfare services, a good standard of local welfare for local government KBN plays an important role in Norwegian society as the largest provider of financing to our role, and to helping the investments. We are committed to taking a long-term and responsible approach with it the expectation that local government sector to find good financial solutions. Our role in society brings role in the development of we shall be open and transparent, maintain high ethical standards and play a driving is helping our corporate social responsibility. An important part of KBN's corporate social responsibility and debt management. Key customers maintain a sustainable financial position and exercise strong financial 9

689 919

2016 - 1 159 2 087 1 400 471% 852% 558% 2.65% 6.27% 0.16% 0.33% Infinite 12 452 93 926 82 752 48 117 1 116% 1 848% 21.45% 18.39% 16.86% 12.74% 376 785 418 327 116 413 266 558 lion) lion) age of net net age of mil ent

837

2017 1 517 1 783 1 429 2 162 233% 308% 185% 570% 3.68% 0.34% 0.36% Infinite 14 667 55 021 2 052% 24.61% 21.65% 18.41% 12.72% 13.51% 412 854 281 706 107 484 118 509 112 555 373 816

2 2

(core earnings) (core

2 2

term borrowings term

Common equity Tier 1 capital adequacy ratio adequacy capital 1 Tier equity Common ratio Leverage (LCR) RATIO COVERAGE LIQUIDITY Total NOK EUR USD AUD JPY KEY FIGURES (Amounts 1 000 000) NOK in RESULTS interestNet income earnings Core before Profit tax the year Profit for tax after equity on Return tax after equity on Return Return aftertax assets on Return after assets tax on LENDING New disbursements loans Outstanding PORTFOLIO LIQUIDITY BORROWINGS New long debt own of Repurchase Redemptions borrowings Total ASSETS TOTAL EQUITY ratio adequacy capital Total ratio adequacy capital 1 Tier 1 Profittaxfor adjusted unrealised after financial gain/(loss) instruments + 429 million (0.75*NOK on 163 1 after tax (NOK NOK 34million). This measure is included result give relevant to information about company's underlying the operations. 2 Annualisedaveragereturn equity equity on assets return assets. and percentage of and average on as 3 Principal amounts 4 Liquiditythea measure forcoverage regulatory ratio perc is liquidity liquid(LCR) is assets as defined reserve. a as LCR stresspaymentsof ahead. in period 30 days a given concepts for this work in 2017 were digitalisation, better information and tools to support financial decision- tools to support financial information and better were digitalisation, this work in 2017 concepts for with our customers. close collaboration and making, share as a increase in our market some achieved We financial performance. good year for KBN's 2017 was a 1 August from what rate was reduced on standard interest loans. KBN's demand for long-term result of greater and climate-friendly lending that is provided for environmental The proportion of was already a low level. projects increased. welfare investments for The green lending. in 2018 to accelerate the growth of our We intend to work hard obligations in respect of the Our society. financing today will last well into the low-carbon which KBN provides We want to on which we make decisions today. risk therefore need to be part of the basis climate and climate in the is committed to taking a leading role customers' awareness of climate risk. KBN help to increase our elected to the Executive KBN was In 2017 finance both in Norway and internationally. development of green authority for green bonds. is the leading international standards which Bond Principles, Committee of Green to produce a joint nine other Nordic issuers of green bonds and 2017 with in 2016 KBN also collaborated reporting framework. reached Norway. The campaign has in autumn 2017 and quickly The #Metoo campaign started in the USA of the issue of unwanted sexual attention, and a number of high profile created extensive debate and awareness of jobs and positions as a result of victims business and the media have lost their individuals in politics, seems likely to represent a turning point in This campaign misconduct speaking out about their experiences. work on gender equality. gender balance that complies with its 40% and has an overall KBN is committed to diversity and equality, effect on our corporate This has a positive Our employees represent many languages and nationalities. target. the best minds and the working environment and expertise. It is essential for us to attract attitudes, culture, In addition place to work. and inclusive attractive This means that KBN must be recognised as an best expertise. suppliers and partners to work systematically we also expect our to our internal work on diversity and equality, and with their own suppliers and subcontractors. on these issues both in their own organisations its customers to create financially and environmentally sustainable KBN is committed to working closely with of local welfare. a high standard deliver municipalities and county authorities that

ANNUAL REPORT 2017 / PAGE 6 ANNUAL REPORT 2017 / PAGE 7 55 7 NOK bill. 46% 100% of municipal debt was granted in 2017 are KBN customers and is ﬁnanced through KBN. is ﬁnanced NOK billion in new loans TOTAL LENDING: TOTAL 281. of the country’s municipalities Care homes Care

Nurseries 14.6 WORLD... This is 0.12 points higher than in 2016. municipal projects to climate-friendly TO NORWEGIAN NORWEGIAN TO NOK billion lending ATTRACTIVE TERMS ATTRACTIVE FROM ACROSS THE ACROSS FROM MUNICIPALITIES AND MUNICIPALITIES Roads WE BORROW MONEY BORROW WE COUNTYAUTHORITIES ...AND LEND IT OUT ON OUT IT LEND ...AND Schools aa Skoler 26 out of 6 . 5 NOK bill. and Moody’s "I am satisﬁ ed with KBN" am satisﬁ "I progress was made relative to the 2016 level, which was given by re- The average of the scores already very high. spondents when asked to rate on a scale from 1 to 6 (where 6 is the best) how strongly they agreed with the statement was 5.26. Approximately half of Norway’s municipalities and 70% of Approximately half of Norway’s 2017 customer satis- its county authorities responded to the to the statement: regard With faction survey. 5 Sports arenas Sports from Standard & Poor’s FUNDING IN 2017: FUNDING 118. AAA/A Highest possible credit rating SATISFIED CUSTOMERS concepts for this work in 2017 were digitalisation, better information and tools to support financial decision- tools to support financial information and better were digitalisation, this work in 2017 concepts for with our customers. close collaboration and making, share as a increase in our market some achieved We financial performance. good year for KBN's 2017 was a 1 August from what rate was reduced on standard interest loans. KBN's demand for long-term result of greater and climate-friendly lending that is provided for environmental The proportion of was already a low level. projects increased. welfare investments for The green lending. in 2018 to accelerate the growth of our We intend to work hard obligations in respect of the Our society. financing today will last well into the low-carbon which KBN provides We want to on which we make decisions today. risk therefore need to be part of the basis climate and climate in the is committed to taking a leading role customers' awareness of climate risk. KBN help to increase our elected to the Executive KBN was In 2017 finance both in Norway and internationally. development of green authority for green bonds. is the leading international standards which Bond Principles, Committee of Green to produce a joint nine other Nordic issuers of green bonds and 2017 with in 2016 KBN also collaborated reporting framework. reached Norway. The campaign has in autumn 2017 and quickly The #Metoo campaign started in the USA of the issue of unwanted sexual attention, and a number of high profile created extensive debate and awareness of jobs and positions as a result of victims business and the media have lost their individuals in politics, seems likely to represent a turning point in This campaign misconduct speaking out about their experiences. work on gender equality. gender balance that complies with its 40% and has an overall KBN is committed to diversity and equality, effect on our corporate This has a positive Our employees represent many languages and nationalities. target. the best minds and the working environment and expertise. It is essential for us to attract attitudes, culture, In addition place to work. and inclusive attractive This means that KBN must be recognised as an best expertise. suppliers and partners to work systematically we also expect our to our internal work on diversity and equality, and with their own suppliers and subcontractors. on these issues both in their own organisations its customers to create financially and environmentally sustainable KBN is committed to working closely with of local welfare. a high standard deliver municipalities and county authorities that 17 eport 20 l R ’ Annua ectors ir D oard of he B Kommunalbanken Norway (KBN) is the largest provider of investment financing for the welfare services provided by financing for the welfare services (KBN) is the largest provider of investment Kommunalbanken Norway regardless of attractive and long-term debt financing and county authorities, and offers Norwegian municipalities NOK 55 billion. Municipalities, county In 2017 KBN granted 646 new loans totalling economic conditions. health and to finance projects including schools, companies have used these loans authorities and intermunicipal change. to prevent and adapt to the effects of climate and wastewater area, and measures care facilities, the water society demonstrate that it is fulfilling its role in results and efficient operating model KBN’s robust financial successfully. increase than in previous years. Long-term by 5.7% in 2017, which is a slightly larger KBN’s lending grew by 7% in and environment projects increased good growth in 2017. Lending for climate instalment loans showed 2017. in 2017 as compared to NOK 689 million in 2016. Net interest income Profit for the year was NOK 1,429 million to a combination of favourable funding conditions through large was higher than in 2016, and this was due early in the year. KBN’s profit for the year was reduced somewhat by parts of 2017 and strong lending growth from losses on KBN’s borrowings and exchange rate swap unrealised losses of NOK 163 million stemming borrowings into Norwegian kroner. For comparison, KBN agreements used to convert non-NOK denominated in 2016 as a consequence of losses on fixed rate loans and hedging had unrealised losses of NOK 974 million tax was 12.7% as compared to 6.3% in 2016. derivatives. KBN’s return on equity after increased by NOK 1,440 million. KBN’s equity increased by a total of KBN’s total common equity Tier 1 capital issuance of subordinated debt in June 2017. NOK 2,215 million in 2017, partly due to ANNUAL ACCOUNTS with Section 3-3a of the Norwegian Accounting Act, that KBN’s The Board of Directors confirms, in accordance unchanged, and that the financial statements (for 2017) have ability to continue as a going concern remains The Board of Directors considers that the financial statements and been prepared on a going concern basis. 31 December 2017 provide an adequate description of KBN’s financial accompanying notes for the year ending have been prepared in accordance with International Financial position at year-end. The annual accounts Reporting Standards (IFRS). in 2016. Net interest income Profit for the year was NOK 1,429 million in 2017 as compared to NOK 689 million been high in the first in 2017 totalled NOK 2,162 million as compared to NOK 2,087 million in 2016. Having 2017. This related to KBN part of the year, KBN’s lending margins decreased somewhat in the second half of credit spreads in the decreasing its lending rate with effect from 1 August 2017 and also to generally lower market. NOK 163 million in 2017. Net Net unrealised losses on financial instruments reduced KBN’s profit before tax by reflect losses on borrowings unrealised losses in 2016 totalled NOK 974 million. KBN’s unrealised losses in 2017 and favourable changes in measured at fair value as a consequence of lower credit spreads on KBN’s own bonds relation to currency swap agreements. when measured at fair KBN’s liquidity portfolio investments and fixed rate loans generated unrealised gains of unrealised gains and losses value. KBN’s financial instruments are normally held to maturity and the effects reach maturity. on KBN’s profits reverse either when fluctuations in the market reverse or the instruments bonds and selling securities Net trading income (from market transactions such as repurchasing KBN’s own 15 million in 2016. held in the liquidity portfolio) totalled NOK 9 million in 2017, as compared to NOK million in 2016. This increase Total operating expenses were NOK 193 million in 2017 as compared to NOK 177 well as to expenses related to was in line with budget and was due primarily to an increase in staffing levels as T

ANNUAL REPORT 2017 / PAGE 8 ANNUAL REPORT 2017 / PAGE 9 further developing KBN’s customer portal and finance system and upgrading to 24/7 IT security monitoring. to 24/7 IT security system and upgrading portal and finance KBN’s customer further developing and by introduced in 2017 financial sector tax also impacted by the expenses were KBN’s operating represented operating expenses requirements. Total with new regulatory costs associated implementation assets in 2017. 0.05% of total 31 as compared to NOK 418.3 billion at at 31 December 2017 of NOK 412.9 billion KBN had total assets krone strengthening against other currencies, decrease is primarily due to the Norwegian December 2016. The liabilities. carrying amount of KBN’s assets and which reduces the NOK is total million, of which NOK 12,436 million capital at 31 December 2017 was NOK 16,625 KBN’s total primary consists of retained earnings. KBN’s Tier 1 capital 1 capital in the form of share capital and common equity Tier ratio at common equity Tier 1 capital adequacy 1 capital and additional Tier 1 capital. The common equity Tier ratio was 21.65%, and the total capital adequacy 18.41%, the Tier 1 capital adequacy ratio 31 December 2017 was ratio at 31 December 2017 was 3.68%.was 24.61%. The leverage LENDING 55 billion in 2017. Total lending to the local government sector at the KBN granted 646 new loans totalling NOK loan portfolio grew by NOK 15.2 billion in 2017, representing an end of 2017 was NOK 281.7 billion. KBN’s the sector was approximately 46%. increase of 5.7%. KBN’s market share for as well as Longyearbyen Local Council had loans from KBN All Norway’s municipalities and county authorities municipal and inter-municipal companies have loans from KBN. at the end of 2017. In addition, a range of municipal or county authority guarantees. KBN offers long-term Loans to limited liability companies require all its borrowers regardless of their size, ensuring all municipalities loans with the same interest rate terms to terms. have equal access to debt financing on competitive In its recommendation to Parliament regarding the on Local Government and Public Administration wrote that national budget for 2018, the Standing Committee function that contributes to high-quality welfare services across “KBN plays an important sectoral-policy Norway”. accounted for NOK 26.3 billion of the NOK 56.6 billion in At the end of 2017, loans to toll road companies companies and borrowers with municipal or county outstanding loans to municipal and inter-municipal authority guarantees. local government sector is increasing and is being driven by the need The level of investment taking place in the Analysis shows that there to invest in schools, the health and care sectors, and the water and wastewater area. In addition, there is continues to be a significant maintenance backlog in the water and wastewater area. to the effects of climate expected to be an increasing need for investment in measures to prevent and adapt for round-the-clock health change. In June 2017 the Norwegian Government increased the subsidies available their existing offer and to and care services. This creates an incentive for municipalities to invest in modernising is expected to grow strongly develop new capacity. The level of investment activity in the health and care sectors in the years ahead. unclear what the The rate of growth in Norway’s population has slowed over the last few years. It is of municipalities that consequences of this will be in terms of investment levels going forward. In a number now decreasing relative to have previously experienced strong population growth, the level of investment is in the years ahead. previously very high levels. Other municipalities will continue to need to invest significantly in recent years means that The strong financial performance of the local government sector taken as a whole extent than in previous years. municipalities are financing welfare services from their own reserves to a greater with 2016. This represents a Borrowing growth in the sector in 2017 was 4.9%, which is approximately in line significantly lower rate of growth than in previous years. are very satisfied with KBN again conducted a customer survey in 2017, and this demonstrated that customers margins and skilled customer KBN. KBN's high levels of service and availability, as well as its attractive lending adopted KBN’s debt managers, attracted particularly high scores. Approximately half of KBN’s customers The Board of Board The Directors’ Annual Report 2017 provided by financing for the welfare services (KBN) is the largest provider of investment Kommunalbanken Norway regardless of attractive and long-term debt financing and county authorities, and offers Norwegian municipalities NOK 55 billion. Municipalities, county In 2017 KBN granted 646 new loans totalling economic conditions. health and to finance projects including schools, companies have used these loans authorities and intermunicipal change. to prevent and adapt to the effects of climate and wastewater area, and measures care facilities, the water society demonstrate that it is fulfilling its role in results and efficient operating model KBN’s robust financial successfully. increase than in previous years. Long-term by 5.7% in 2017, which is a slightly larger KBN’s lending grew by 7% in and environment projects increased good growth in 2017. Lending for climate instalment loans showed 2017. in 2017 as compared to NOK 689 million in 2016. Net interest income Profit for the year was NOK 1,429 million to a combination of favourable funding conditions through large was higher than in 2016, and this was due early in the year. KBN’s profit for the year was reduced somewhat by parts of 2017 and strong lending growth from losses on KBN’s borrowings and exchange rate swap unrealised losses of NOK 163 million stemming borrowings into Norwegian kroner. For comparison, KBN agreements used to convert non-NOK denominated in 2016 as a consequence of losses on fixed rate loans and hedging had unrealised losses of NOK 974 million tax was 12.7% as compared to 6.3% in 2016. derivatives. KBN’s return on equity after increased by NOK 1,440 million. KBN’s equity increased by a total of KBN’s total common equity Tier 1 capital issuance of subordinated debt in June 2017. NOK 2,215 million in 2017, partly due to ANNUAL ACCOUNTS with Section 3-3a of the Norwegian Accounting Act, that KBN’s The Board of Directors confirms, in accordance unchanged, and that the financial statements (for 2017) have ability to continue as a going concern remains The Board of Directors considers that the financial statements and been prepared on a going concern basis. 31 December 2017 provide an adequate description of KBN’s financial accompanying notes for the year ending have been prepared in accordance with International Financial position at year-end. The annual accounts Reporting Standards (IFRS). in 2016. Net interest income Profit for the year was NOK 1,429 million in 2017 as compared to NOK 689 million been high in the first in 2017 totalled NOK 2,162 million as compared to NOK 2,087 million in 2016. Having 2017. This related to KBN part of the year, KBN’s lending margins decreased somewhat in the second half of credit spreads in the decreasing its lending rate with effect from 1 August 2017 and also to generally lower market. NOK 163 million in 2017. Net Net unrealised losses on financial instruments reduced KBN’s profit before tax by reflect losses on borrowings unrealised losses in 2016 totalled NOK 974 million. KBN’s unrealised losses in 2017 and favourable changes in measured at fair value as a consequence of lower credit spreads on KBN’s own bonds relation to currency swap agreements. when measured at fair KBN’s liquidity portfolio investments and fixed rate loans generated unrealised gains of unrealised gains and losses value. KBN’s financial instruments are normally held to maturity and the effects reach maturity. on KBN’s profits reverse either when fluctuations in the market reverse or the instruments bonds and selling securities Net trading income (from market transactions such as repurchasing KBN’s own 15 million in 2016. held in the liquidity portfolio) totalled NOK 9 million in 2017, as compared to NOK million in 2016. This increase Total operating expenses were NOK 193 million in 2017 as compared to NOK 177 well as to expenses related to was in line with budget and was due primarily to an increase in staffing levels as

Green lending and green funding force in relation to municipalities making the transition into climate- KBN is committed to serving as a driving a separate lending product specifically to finance investment in robust low-carbon societies. KBN has offered namely green loans. KBN finances its green loans by issuing green environmentally friendly projects since 2010, and internationally. bonds in the capital markets, both in Norway 0.1 percentage points lower than the interest rate on its ordinary The interest rate on KBN’s green loans is a green loan, the customer must demonstrate that its project interest rate products. In order to be granted adopted in 2016. These criteria require the municipality to have a complies with KBN’s criteria, which were of the relevant legislation clear environmental ambition for the project and for it to exceed the requirements and county authorities and regulations. A lower interest rate is intended to create incentives for municipalities perspective. to invest in projects that are more ambitious from an environmental and climatic is an increase of around 7% At the end of 2017 KBN’s green lending portfolio totalled NOK 14.6 billion. This lending satisfies KBN’s from the end of 2016. NOK 11.5 billion of the NOK 14.6 billion in outstanding green International Climate updated criteria set, which has been graded as “dark green” by CICERO Center for making Norway a low-carbon Research. “Dark green” means that the portfolio is compatible with the vision of society by 2050. Examples of projects KBN granted new green loans totalling NOK 1.65 billion in 2017 to 47 different projects. and Horten that have been financed using green loans include the new upper secondary schools in Romsdal a biogas plant in built in mass timber, an expansion to a seawater source heating system in Nordfjordeid, the projects that were Grødaland in Rogaland, and electrifying Båtsfjord port in Finnmark. Details of all report for 2017, which is financed through green loans in 2017 are provided in KBN’s environmental impact published at the same time as the annual report. and internationally. KBN was KBN wishes to play a leading role in the development of green finance in Norway international industry elected to the governing body of Green Bond Principles in 2017, which is the leading designed to promote green standard for green bonds. In 2017 KBN held and participated in a number of events finance solutions in order to drive forward the transition to a low-carbon society. management portal, KBN Finans, in 2017. Those customers that use KBN Finans are KBN’s most satisfied Finans are KBN’s that use KBN in 2017. Those customers portal, KBN Finans, management in 2018. a tool for customers KBN Finans as to work to further develop KBN will continue customers. to expect any loan there are no grounds payments, so had problems with making has defaulted or No customer losses in 2018. The lending market direct by KBN and by municipalities making lending market was again dominated In 2017 the local government other of long-term, instalment loans, which KBN is the most important provider use of the capital market. Over demand for long-term loans in 2017. offer to a limited extent. There was satisfactory market players only short-maturity loans by arranging long-term, number of customers chose to refinance the course of 2017 a instalment loans. of years stabilised in 2017. The amount the use of the capital markets seen in previous The strong growth in sector borrowing decreased in 2017. This can be seen in the context of outstanding short-term local government regarding the maturity dates of interest-bearing debt that entered the more extensive information requirements government sector borrowing in the capital markets grew by 3.7% in into force on 1 January 2017. Total local of total debt growth in the sector in 2017. 2017, which represents approximately 30% of robust but simple financing solutions and responsible debt KBN’s aim is to contribute to the availability patterns are financially sustainable. management to ensure the sector’s borrowing of less than 12 months represents a small part of its overall lending and KBN’s portfolio of loans with maturities management activities. This portfolio represented 3.5% of KBN's is part of its ongoing liquidity and capital to 4.7% at the end of 2016. overall lending at the end of 2017 as compared

ANNUAL REPORT 2017 / PAGE 10 ANNUAL REPORT 2017 / PAGE 11 KBN published its first impact report for its green bonds in March 2017. KBN collaborated with nine other KBN collaborated with bonds in March 2017. report for its green its first impact KBN published entitled framework. This document, a joint reporting and 2017 to produce bond issuers in 2016 Nordic green at an OECD was launched Bonds Impact Reporting”, paper on Green Position Sector Issuers: “Nordic Public and in Norway. both internationally a lot of attention and has attracted event in October FUNDING a KBN pursues terms. stable access to funding on favourable credit ratings ensure it has KBN’s AAA/Aaa risk. base and low refinancing that ensures it has a broad investor diversified funding strategy in billion higher than 35.8 billion in 2017, which is NOK amounted to NOK 118.5 New long-term borrowings KBN markets in 2017. the USA were KBN’s most important Europe and markets, other Asian Japan, 2016. currencies in 2017. issued bonds in 13 different while in Europe KBN billion in 2017, bonds totalling USD 3.5 KBN issued three USD-denominated benchmark These issues with a maturity of 10 years. billion of EUR 1.0 issued a EUR-denominated benchmark bond benchmark bonds were significantly and all KBN’s attracted a high level of interest from investors, oversubscribed. billion, and this change in 2017 from NOK 376.8 billion to NOK 373.8 KBN’s total borrowings decreased slightly was due to the NOK exchange rate. MANAGEMENT LIQUIDITY including lending match its capital requirements, that cash equivalents KBN’s policy is to operate with cash and situation to meet its This means that KBN is able in any for the subsequent 12 months at all times. growth, without having to raise additional funds. ongoing obligations over the next 12 months and primarily in foreign in zero-risk-weighted investments, KBN’s liquidity portfolio is primarily held the value of the krone strengthening against the US dollar in 2017, currencies. As a result of the Norwegian 2016. billion at the end of down from NOK 116.4 December 2017 was NOK 107.5 billion, liquidity portfolio at 31 that is intended to ensure KBN has liquidity reserves sufficient to The liquidity portfolio is managed in a way according to an investment strategy that is managed Excess liquidity allow it to meet its obligations at all times. market risk. There were sizeable exchange rate fluctuations in 2017, is low risk in terms of both credit risk and portfolio in NOK terms. and this affected the value of the liquidity regional authorities, KBN’s liquidity reserves are invested in fixed income securities issued by governments, banks and financial institutions that have high credit ratings as well as in covered multilateral development of 570% at the end of 2017. coverage ratio (LCR) KBN had a liquidity bonds. rates at the same time as interest Credit margins for both financial institutions and European states fell in 2017, Falling credit with the Federal Reserve raising interest rates three times. rose in both Europe and the USA, portfolio. margins reduce the returns from the liquidity CORPORATE GOVERNANCE to those areas that are relevant KBN complies with the Norwegian Code of Practice for Corporate Governance in KBN is organised as a its type of company, its ownership structure and its financial regulatory requirements. Policy In its White Paper on Ownership limited liability company that is 100%-owned by the Norwegian state. White Paper No. 27 2013-2014), the Government classified KBN as a Ownership, (Diverse and Value-Creating and other specifically defined objectives which is to say an entity with commercial objectives entity, ‘Category 3’ ownership of it. that define the purpose of the state’s management portal, KBN Finans, in 2017. Those customers that use KBN Finans are KBN’s most satisfied Finans are KBN’s that use KBN in 2017. Those customers portal, KBN Finans, management in 2018. a tool for customers KBN Finans as to work to further develop KBN will continue customers. to expect any loan there are no grounds payments, so had problems with making has defaulted or No customer losses in 2018. The lending market direct by KBN and by municipalities making lending market was again dominated In 2017 the local government other of long-term, instalment loans, which KBN is the most important provider use of the capital market. Over demand for long-term loans in 2017. offer to a limited extent. There was satisfactory market players only short-maturity loans by arranging long-term, number of customers chose to refinance the course of 2017 a instalment loans. of years stabilised in 2017. The amount the use of the capital markets seen in previous The strong growth in sector borrowing decreased in 2017. This can be seen in the context of outstanding short-term local government regarding the maturity dates of interest-bearing debt that entered the more extensive information requirements government sector borrowing in the capital markets grew by 3.7% in into force on 1 January 2017. Total local of total debt growth in the sector in 2017. 2017, which represents approximately 30% of robust but simple financing solutions and responsible debt KBN’s aim is to contribute to the availability patterns are financially sustainable. management to ensure the sector’s borrowing of less than 12 months represents a small part of its overall lending and KBN’s portfolio of loans with maturities management activities. This portfolio represented 3.5% of KBN's is part of its ongoing liquidity and capital to 4.7% at the end of 2016. overall lending at the end of 2017 as compared Green lending and green funding force in relation to municipalities making the transition into climate- KBN is committed to serving as a driving a separate lending product specifically to finance investment in robust low-carbon societies. KBN has offered namely green loans. KBN finances its green loans by issuing green environmentally friendly projects since 2010, and internationally. bonds in the capital markets, both in Norway 0.1 percentage points lower than the interest rate on its ordinary The interest rate on KBN’s green loans is a green loan, the customer must demonstrate that its project interest rate products. In order to be granted adopted in 2016. These criteria require the municipality to have a complies with KBN’s criteria, which were of the relevant legislation clear environmental ambition for the project and for it to exceed the requirements and county authorities and regulations. A lower interest rate is intended to create incentives for municipalities perspective. to invest in projects that are more ambitious from an environmental and climatic is an increase of around 7% At the end of 2017 KBN’s green lending portfolio totalled NOK 14.6 billion. This lending satisfies KBN’s from the end of 2016. NOK 11.5 billion of the NOK 14.6 billion in outstanding green International Climate updated criteria set, which has been graded as “dark green” by CICERO Center for making Norway a low-carbon Research. “Dark green” means that the portfolio is compatible with the vision of society by 2050. Examples of projects KBN granted new green loans totalling NOK 1.65 billion in 2017 to 47 different projects. and Horten that have been financed using green loans include the new upper secondary schools in Romsdal a biogas plant in built in mass timber, an expansion to a seawater source heating system in Nordfjordeid, the projects that were Grødaland in Rogaland, and electrifying Båtsfjord port in Finnmark. Details of all report for 2017, which is financed through green loans in 2017 are provided in KBN’s environmental impact published at the same time as the annual report. and internationally. KBN was KBN wishes to play a leading role in the development of green finance in Norway international industry elected to the governing body of Green Bond Principles in 2017, which is the leading designed to promote green standard for green bonds. In 2017 KBN held and participated in a number of events finance solutions in order to drive forward the transition to a low-carbon society.

gains and losses. with the return for the 2016-2018 period period, in the National Budget for a three-year The target return is set having been set at 8%. provisions of the Norwegian Public Limited are organised in accordance with the KBN’s governing bodies The Board Articles of Association. as well as KBN’s the Financial Enterprises Act, Companies Act and Liability is a The Supervisory Board General Meeting. Supervisory Board are elected by the Annual of Directors and the to produce statements is, inter alia, and its purpose by KBN’s Articles of Association, governing body required to be particularly focused on corporate governance. on issues that concern the company and which includes appointing the the management of KBN’s activities, The Board of Directors is responsible for borrowing and authorising delegated borrowing decisions on approving the mandate for the CEO, CEO, The Board of Directors has set up three committees that prepare authority, and appointing the internal auditor. namely the are elected by and from amongst its own members, cases for its consideration and whose members An analysis of the and the Remuneration Committee. the Risk Management Committee, Audit Committee, in 2017 shows that it allocated its time in a balanced activities various proportion of time the Board spent on its its work. reporting and developing control and audit, organisational issues, internal way to strategy, on a day-to-day basis in accordance with the mandate issued by the The CEO is responsible for running KBN The Risk Management and Compliance department Board. by the Supervisory Board of Directors and approved The Chief Risk and Compliance Officer and compliance at KBN. has overall responsibility for risk management line to the Board of Directors in accordance with Section 29 of the reports to the CEO, but has a direct reporting has a direct reporting line to the CEO and also to the The Head of Compliance Regulations. Norwegian CRD V of compliance. Board of Directors for material breaches Figure: KBN Governing Bodies ON THE REMUNERATION OF SENIOR EXECUTIVES THE BOARD OF DIRECTOR'S STATEMENT in the following executives Each year the Board of Directors approves guidelines on the remuneration of senior to the Annual General The Board submits its statement on the remuneration of senior executives financial year. Meeting The statement each year. the and information on remuneration paid to senior executives are provided in Note 6 of KBN’s financial statements in this annual report. RISK MANAGEMENT AND INTERNAL CONTROL in the capital markets, KBN finances its lending to Norwegian municipalities in Norwegian kroner by borrowing that consists of KBN has a liquidity portfolio primarily in foreign currencies from the international markets. and balance sheet are affected interest-bearing securities in a range of currencies. This means that its earnings the markets in which it of correlation between different risk components in by market fluctuations and the level operates. its its earnings and balance sheet, including However, interest rate and exchange rate risk. KBN seeks to avoid and losses that these of the unrealised gains equity, are affected by changes in market prices as a consequence other than as well as by the fact that the vast majority of its funding is denominated in currencies create, Changes in credit spreads and indices also contribute to unrealised Norwegian kroner. The objectives set for KBN as a state-owned entity stipulate that its important functions include ensuring the functions include stipulate that its important state-owned entity set for KBN as a The objectives of market for any effects are efficient, compensating government sector to finance the local markets used reduces the market turmoil to financing even when access municipalities have and ensuring that deficiencies welfare financing for municipal cost-efficient KBN offers long-term markets. in the capital capacity available and this is an size of the loan or municipality, same interest rate terms regardless of the investments with the function. sectoral-policy expression of KBN’s and its target capital return. the size of dividends paid capital structure, KBN’s the state determines As owner,

ANNUAL REPORT 2017 / PAGE 12 ANNUAL REPORT 2017 / PAGE 13

Organisation and governance Organisation relating to KBN’s sets policies and limits framework and a risk appetite of Directors has established KBN’s Board produced policies on of Directors has also The Board annually. are reviewed These policies activities. operational yearly basis. control on a assessment of internal the CEO’s and considers internal control Risk its assets and liabilities responsibly. is to ensure that KBN manages The purpose of risk management Stress KBN’s business areas at least annually. out in relation to material risks for all assessments are carried key risk areas. The results of these stress of KBN’s are used to assess the vulnerability tests and scenario analysis its its capital planning process, formation process, considered as part of KBN’s strategy tests are evaluated and on central policies. and decisions recovery planning, The position and earnings situation. activities, financial is regularly informed of KBN’s The Board of Directors with this forming an integral and risk events, management’s assessment of risk exposure Board considers the activity reporting processes. part of KBN’s routine of Directors supervise the company’s financial reporting and role is to help the Board The Audit Committee’s The Risk the Board on them. to these areas and advising control systems by preparing issues related of risk at and manage the overall level the Board of Directors oversee Management Committee’s role is to help and advising the Board accordingly. The Remuneration KBN by preparing issues related to this area company’s remuneration arrangements by preparing issues role is to help the Board assess the Committee’s the Board accordingly. related to this area and advising activities represent the first line of defence and are operational KBN’s KBN operates three lines of defence. activities are carried out within the approved limits whether KBN’s responsible for monitoring and controlling guides and helps The second line of defence monitors, regulations. and in accordance with internal and external responsibility comprises risk management and compliance This to improve and report on the first line checks. regulations. KBN’s financial control function and its risk control in relation to both internal and external The compliance function is part of the second line of defence. management and compliance function comprise The direct reporting lines to the CEO and the Board. functions have the risk management function, and both independent supervisory and control function, which is carried third line of defence is provided by the Board’s out by the internal auditor. risk Credit to payments being deferred as payment obligations cannot be Credit risk in the lending portfolio is limited authorities may not Section 55 of the Local Government Act stipulates that municipalities and county cancelled. that must be regarding the procedures Government Act also contains provisions be declared insolvent. The Local in relation to debt and This in practice protects lenders from any losses followed if payments have to be deferred. accrued interest. credit risk and it has a low appetite for in securities with a low credit risk, by investing KBN manages its liquidity in relation to its liquidity counterparties. associated with its to reduce or eliminate the interest rate risk and exchange rate risk KBN uses derivatives into The risk associated with entering portfolio investments. lending and funding activities and its liquidity with a high credit contracts is controlled by the use of central counterparties or other counterparties derivative and by exchanging cash collateral in order to reduce KBN’s exposure. rating, risk Liquidity of liquidity management is to KBN has a very limited risk appetite with regard to liquidity risk and the purpose portfolio is subject The liquidity ensure it has sufficient liquid assets to cover its ongoing liabilities at any point. inter alia. counterparties and instrument types, diversification, ratings, to requirements in respect of liquidity, Liquidity management is designed to incur only limited price risk and to ensure KBN complies with the capital management is designed to incur only limited price risk and to ensure KBN complies Liquidity to which it is subject. requirements and liquidity The objectives set for KBN as a state-owned entity stipulate that its important functions include ensuring the functions include stipulate that its important state-owned entity set for KBN as a The objectives of market for any effects are efficient, compensating government sector to finance the local markets used reduces the market turmoil to financing even when access municipalities have and ensuring that deficiencies welfare financing for municipal cost-efficient KBN offers long-term markets. in the capital capacity available and this is an size of the loan or municipality, same interest rate terms regardless of the investments with the function. sectoral-policy expression of KBN’s and its target capital return. the size of dividends paid capital structure, KBN’s the state determines As owner, with the return for the 2016-2018 period period, in the National Budget for a three-year The target return is set having been set at 8%. provisions of the Norwegian Public Limited are organised in accordance with the KBN’s governing bodies The Board Articles of Association. as well as KBN’s the Financial Enterprises Act, Companies Act and Liability is a The Supervisory Board General Meeting. Supervisory Board are elected by the Annual of Directors and the to produce statements is, inter alia, and its purpose by KBN’s Articles of Association, governing body required to be particularly focused on corporate governance. on issues that concern the company and which includes appointing the the management of KBN’s activities, The Board of Directors is responsible for borrowing and authorising delegated borrowing decisions on approving the mandate for the CEO, CEO, The Board of Directors has set up three committees that prepare authority, and appointing the internal auditor. namely the are elected by and from amongst its own members, cases for its consideration and whose members An analysis of the and the Remuneration Committee. the Risk Management Committee, Audit Committee, in 2017 shows that it allocated its time in a balanced activities various proportion of time the Board spent on its its work. reporting and developing control and audit, organisational issues, internal way to strategy, on a day-to-day basis in accordance with the mandate issued by the The CEO is responsible for running KBN The Risk Management and Compliance department Board. by the Supervisory Board of Directors and approved The Chief Risk and Compliance Officer and compliance at KBN. has overall responsibility for risk management line to the Board of Directors in accordance with Section 29 of the reports to the CEO, but has a direct reporting has a direct reporting line to the CEO and also to the The Head of Compliance Regulations. Norwegian CRD V of compliance. Board of Directors for material breaches Figure: KBN Governing Bodies ON THE REMUNERATION OF SENIOR EXECUTIVES THE BOARD OF DIRECTOR'S STATEMENT in the following executives Each year the Board of Directors approves guidelines on the remuneration of senior to the Annual General The Board submits its statement on the remuneration of senior executives financial year. Meeting The statement each year. the and information on remuneration paid to senior executives are provided in Note 6 of KBN’s financial statements in this annual report. RISK MANAGEMENT AND INTERNAL CONTROL in the capital markets, KBN finances its lending to Norwegian municipalities in Norwegian kroner by borrowing that consists of KBN has a liquidity portfolio primarily in foreign currencies from the international markets. and balance sheet are affected interest-bearing securities in a range of currencies. This means that its earnings the markets in which it of correlation between different risk components in by market fluctuations and the level operates. its its earnings and balance sheet, including However, interest rate and exchange rate risk. KBN seeks to avoid and losses that these of the unrealised gains equity, are affected by changes in market prices as a consequence other than as well as by the fact that the vast majority of its funding is denominated in currencies create, Changes in credit spreads and indices also contribute to unrealised Norwegian kroner. gains and losses.

Interest rate risk and exchange rate risk risk and exchange Interest rate rate changes. rate and exchange its exposure to interest with regard to very limited risk appetite KBN has a Interest rate risk and exchange rate risk are managed by ensuring that the risk exposure arising from KBN’s the risk exposure arising by ensuring that rate risk are managed risk and exchange Interest rate are also used to hedge interest rate risk and Hedging transactions is balanced at all times. assets and liabilities exchange rate risk. risk Operational there are across the organisation and to ensure risk management is to identify risk The purpose of operational risk reviews are undertaken for Annual losses. measures (controls) in place to prevent sufficient risk-reduction tool for prioritising resources and balancing risk management process is a The operational all critical functions. and controls set up to reduce The processes with risk and risk-reduction activities. the costs associated control at KBN. intended to contribute to high-quality internal operational risk are RELATIONS PUBLIC CORPORATE COMMUNICATIONS AND major stakeholders as an important contact with KBN’s high-quality The Board of Directors regards regular, The of its model and the framework in which it operates. means of ensuring that there is a good understanding (2013–2014) “Diverse and 27 company in White Paper No. has expressed its expectations of the Government Ownership”. Value-Creating are intended to help highlight issues that constitute potential obstacles KBN’s external communication activities KBN affect its customers. In its external communications in 2017, to its ability to achieve its purpose or that of a sustainable approach to borrowing by the local government sector, particularly emphasised the importance of its debt management portal KBN Finans. and its further development its green lending products, These to measure its reputation among major stakeholders. KBN carried out a range of activities in 2017 and investment banks the local government sector as well as investors activities prioritised KBN's customers in active in the capital markets. KBN is able to function effectively and to recruit skilled employees. A good reputation is important to ensuring in the local government sector and is active in discussions KBN works closely with a range of organisations KBN arranged a number of different specialist finance issues. concerning important local government conferences and seminars in 2017. investment sector’s the theme of which was the local government KBN held its annual conference in April 2017, through to 2040. requirements in collaboration with the KBN organised two events at the Arendalsuka conference in 2017. One of these was role local government sector’s Norwegian Association of Local and Regional Authorities (KS) and addressed the which addressed how digitalisation and on its own, KBN organised the other event in the “green shift”. using fewer resources in innovation can help the local government sector to provide better welfare services lending KBN’s in addition to customers for The main target audience of the events KBN organised was, future. and the official authorities. local and national politicians and advisers, products, a leading financial to highlighting its position as KBN carried out various marketing initiatives with a view again a priority Increasing KBN’s visibility in digital media was once sector. institution for the local government to of contact KBN has with its target audiences, the level The purpose of this was to improve area in 2017. to its website. and to drive more traffic increase the level of understanding of the role KBN plays in society, RESPONSIBILITY ETHICS AND CORPORATE SOCIAL social responsibility revised its corporate In 2016 KBN engaged in extensive dialogue with its stakeholders, KBN worked on the priorities and developed separate corporate social responsibility guidelines. In 2017 its strategy corporate social responsibility work is incorporated into KBN’s priorities that it adopted in 2016. social responsibility is work and the process for developing its activity plans. This approach ensures corporate

ANNUAL REPORT 2017 / PAGE 14 ANNUAL REPORT 2017 / PAGE 15 Topic 5: Sharing expertise and responsible lending Topic 5: Sharing expertise stakeholders Topic 6: Dialogue with Topic 1: Ethical conduct chain Topic 2: The supply Topic 3: Green finance equality Topic 4: Diversity and For KBN’s reporting on corporate social responsibility for 2017 and its objectives for 2018, see the separate on corporate social responsibility for 2017 For KBN’s reporting Report. Corporate Social Responsibility ORGANISATION AND EMPLOYEES to recruit and develop skilled employees across a range of specialist KBN is a knowledge business that needs areas in order to fulfil its aims. equating to 77.2 full-time employees. 70 employees hold permanent KBN had 80 employees at the end of 2017 students, replacements for employees on parental leave and temporary positions. The temporary employees are projects. staff appointed in connection with various structure in 2017 to further strengthen key deliveries and to ensure Changes were made to KBN’s organisational various areas. Legal and regulatory affairs have been made into a a unified allocation of responsibility for its strategy and digital development” department was also set up. This separate department, and a new “People, and internal service functions. houses HR, cyber security, business management with selected educational institutions to increase awareness of KBN increased its focus on building relationships its reputation. It also for the first time participated in 2017 in a KBN’s activities and to further strengthen and gave a number of guest lectures in its core areas for a number number of career days on various campuses of student placements it offers, which give students the opportunity to of courses. It also expanded the number studies. acquire practical experience relevant to their Diversity and Equality the organisation and to KBN strives to work in a systematic and targeted way on diversity and equality across diversity and equality is a follow up targets with specific measures in its activity plans. Its work to promote and employees, and its fundamental part of its recruitment of new employees, its development of managers and within all units, with succession planning. KBN’s objective is to achieve a good gender balance at all levels an overall gender balance target of 40%. and organisational units, When recruiting for or making changes to the composition of its management teams qualified woman or man is KBN accords particular weight to the gender balance and requires that the most age, or cultural or identified before any decision is taken. No consideration is given to gender, disability, are being assessed. geographic background when candidates’ professional and personal qualifications regard to personal and All employees are treated equally and have access to the same opportunities with are provided with training professional development and promotion. Employees who do not speak Norwegian Flexible working hours are in Norwegian, and diversity and equality work is part of management development. home. offered to facilitate arrangements for employees who have care responsibilities at is for internal candidates The target for succession planning for management positions and other critical roles to develop expertise. of both genders to be identified and developed in order to reduce vulnerability and an integral part of KBN’s ordinary activities. KBN has produced a corporate social responsibility report for 2017 social responsibility has produced a corporate activities. KBN part of KBN’s ordinary an integral (GRI) reporting standard. Reporting Initiative with the Global in accordance in 2018: social responsibility work on corporate areas for its to prioritise the following KBN decided Interest rate risk and exchange rate risk risk and exchange Interest rate rate changes. rate and exchange its exposure to interest with regard to very limited risk appetite KBN has a from KBN’s the risk exposure arising by ensuring that rate risk are managed risk and exchange Interest rate are also used to hedge interest rate risk and Hedging transactions is balanced at all times. assets and liabilities exchange rate risk. risk Operational there are across the organisation and to ensure risk management is to identify risk The purpose of operational risk reviews are undertaken for Annual losses. measures (controls) in place to prevent sufficient risk-reduction tool for prioritising resources and balancing risk management process is a The operational all critical functions. and controls set up to reduce The processes with risk and risk-reduction activities. the costs associated control at KBN. intended to contribute to high-quality internal operational risk are RELATIONS PUBLIC CORPORATE COMMUNICATIONS AND major stakeholders as an important contact with KBN’s high-quality The Board of Directors regards regular, The of its model and the framework in which it operates. means of ensuring that there is a good understanding (2013–2014) “Diverse and 27 company in White Paper No. has expressed its expectations of the Government Ownership”. Value-Creating are intended to help highlight issues that constitute potential obstacles KBN’s external communication activities KBN affect its customers. In its external communications in 2017, to its ability to achieve its purpose or that of a sustainable approach to borrowing by the local government sector, particularly emphasised the importance of its debt management portal KBN Finans. and its further development its green lending products, These to measure its reputation among major stakeholders. KBN carried out a range of activities in 2017 and investment banks the local government sector as well as investors activities prioritised KBN's customers in active in the capital markets. KBN is able to function effectively and to recruit skilled employees. A good reputation is important to ensuring in the local government sector and is active in discussions KBN works closely with a range of organisations KBN arranged a number of different specialist finance issues. concerning important local government conferences and seminars in 2017. investment sector’s the theme of which was the local government KBN held its annual conference in April 2017, through to 2040. requirements in collaboration with the KBN organised two events at the Arendalsuka conference in 2017. One of these was role local government sector’s Norwegian Association of Local and Regional Authorities (KS) and addressed the which addressed how digitalisation and on its own, KBN organised the other event in the “green shift”. using fewer resources in innovation can help the local government sector to provide better welfare services lending KBN’s in addition to customers for The main target audience of the events KBN organised was, future. and the official authorities. local and national politicians and advisers, products, a leading financial to highlighting its position as KBN carried out various marketing initiatives with a view again a priority Increasing KBN’s visibility in digital media was once sector. institution for the local government to of contact KBN has with its target audiences, the level The purpose of this was to improve area in 2017. to its website. and to drive more traffic increase the level of understanding of the role KBN plays in society, RESPONSIBILITY ETHICS AND CORPORATE SOCIAL social responsibility revised its corporate In 2016 KBN engaged in extensive dialogue with its stakeholders, KBN worked on the priorities and developed separate corporate social responsibility guidelines. In 2017 its strategy corporate social responsibility work is incorporated into KBN’s priorities that it adopted in 2016. social responsibility is work and the process for developing its activity plans. This approach ensures corporate At the end of 2017 the proportion of women on the Board of Directors was 56%, while the equivalent Board of Directors of women on the of 2017 the proportion At the end were 40% and and temporary) all employees (permanent team and for for the CEO’s management proportions was 41. age of KBN employees 43%. The average environment and the working Health, safety working conditions. The Working ensuring all its employees have high-quality KBN is committed to and the creation of a good working environment aim is to actively contribute to the Environment Committee’s The by well-being and collaboration. health by building a culture characterised promotion of good physical in relation to health, safety and meetings and carried out risk assessments Committee held regular for all employees focused on KBN’s zero- In 2017 the ethics program that was run environmental issues. discrimination and harassment. tolerance approach to for facilities and health checks, were offered and social activities, including exercise Regular health-promoting with KBN’s various activity groups. all employees in collaboration as having occurred during working hours or in connection with No accidents or serious injuries were recorded work. No accidents or injuries were reported to the Norwegian Labour journeys for work purposes or to or from Inspection Authority. to 1.41% in 2016. KBN’s target is for the sickness rate to be The sickness rate was 2.73% in 2017 as compared safety and the working environment, on preventing and following up below 2.5%. KBN works actively on health, to work for employees following leave of absence and sickness. Staff sick leave, and on facilitating a swift return turnover in 2017 was 11%. ALLOCATION OF PROFIT AS proposes the following allocation of the profit for the 2017 The Board of Directors of Kommunalbanken paid to KBN’s owner as a dividend and NOK 986 million is to be financial year: NOK 443 million is to be transferred to retained earnings. FUTURE PROSPECTS an annual rate of 1.5%, with unemployment at 3.0% at the end of the In 2017 the Norwegian economy grew at are benefiting from the Norwegian economy’s good general progress year. Norwegian municipalities’ finances period, the local government and the strong income growth they have enjoyed in recent years. In the 2008-2017 seen for local government sector saw its total real average income grow by 2.3% per year. The positive trend finances is expected to continue going forward. this driven by demographic The local government sector will continue to have sizeable investment needs, with society. KBN has worked with changes to Norway’s population, urbanisation, and the transition to a low-carbon sector’s investment and the analysis firm Menon Economics to produce a forecast of the local government local government sector will borrowing needs in the years ahead. This analysis indicates that borrowing by the the rate of growth seen in increase by 2.1% per year in the period up to 2040. This is approximately one-third the previous 12 years and is more in line with growth in the sector’s income. which involves a greater The Board of Directors of KBN has approved KBN’s strategy for the 2018-2020 period, dialogue with its customers, focus on customers through digitalisation and simpler financial management. In solutions in relation to KBN will seek to develop the customer experience by adopting new technological KBN will fulfil its role in efficient customer management, operational robustness and analysis capabilities. society by lending responsibly. and achieving the KBN’s framework, including its commitment to complying with all regulatory requirements earnings ensures KBN can return requirement set for it, forms the basis of its activities. Achieving satisfactory business performance enables achieve its mandate as a reliable and stable provider of long-term credit. A strong

ANNUAL REPORT 2017 / PAGE 16 ANNUAL REPORT 2017 / PAGE 17 28 February 2018 Oslo, 31 December 2017 Oslo, The Board of Directors of Kommunalbanken AS The Board of Directors of Kommunalbanken The Board of Directors would like to thank KBN’s employees for a job well done. would like to thank KBN’s employees The Board of Directors KBN to satisfy the expectations of its customers and other stakeholders. The Board expects that KBN will Board expects that KBN The other stakeholders. of its customers and the expectations KBN to satisfy over time. government sector for lending to the local stable market share maintain a KBN is working scope in recent years. have increased in financial institutions requirements for The regulatory the state, KBN instrument of As a low-risk requirements. range of new regulatory on adapting to a continuously has to some extent taken low-risk financial In designing the regulations, the EU model. has a different business suitably adapted regulations for financial Several countries have issued into account. institutions such as KBN A predictable them as “promotional banks”. to the public sector, for example by classifying institutions that lend KBN’s distinctive nature are important to conditions that are adapted to KBN’s environment and framework role it plays in building a better society. ability to fulfil the major At the end of 2017 the proportion of women on the Board of Directors was 56%, while the equivalent Board of Directors of women on the of 2017 the proportion At the end were 40% and and temporary) all employees (permanent team and for for the CEO’s management proportions was 41. age of KBN employees 43%. The average environment and the working Health, safety working conditions. The Working ensuring all its employees have high-quality KBN is committed to and the creation of a good working environment aim is to actively contribute to the Environment Committee’s The by well-being and collaboration. health by building a culture characterised promotion of good physical in relation to health, safety and meetings and carried out risk assessments Committee held regular for all employees focused on KBN’s zero- In 2017 the ethics program that was run environmental issues. discrimination and harassment. tolerance approach to for facilities and health checks, were offered and social activities, including exercise Regular health-promoting with KBN’s various activity groups. all employees in collaboration as having occurred during working hours or in connection with No accidents or serious injuries were recorded work. No accidents or injuries were reported to the Norwegian Labour journeys for work purposes or to or from Inspection Authority. to 1.41% in 2016. KBN’s target is for the sickness rate to be The sickness rate was 2.73% in 2017 as compared safety and the working environment, on preventing and following up below 2.5%. KBN works actively on health, to work for employees following leave of absence and sickness. Staff sick leave, and on facilitating a swift return turnover in 2017 was 11%. ALLOCATION OF PROFIT AS proposes the following allocation of the profit for the 2017 The Board of Directors of Kommunalbanken paid to KBN’s owner as a dividend and NOK 986 million is to be financial year: NOK 443 million is to be transferred to retained earnings. FUTURE PROSPECTS an annual rate of 1.5%, with unemployment at 3.0% at the end of the In 2017 the Norwegian economy grew at are benefiting from the Norwegian economy’s good general progress year. Norwegian municipalities’ finances period, the local government and the strong income growth they have enjoyed in recent years. In the 2008-2017 seen for local government sector saw its total real average income grow by 2.3% per year. The positive trend finances is expected to continue going forward. this driven by demographic The local government sector will continue to have sizeable investment needs, with society. KBN has worked with changes to Norway’s population, urbanisation, and the transition to a low-carbon sector’s investment and the analysis firm Menon Economics to produce a forecast of the local government local government sector will borrowing needs in the years ahead. This analysis indicates that borrowing by the the rate of growth seen in increase by 2.1% per year in the period up to 2040. This is approximately one-third the previous 12 years and is more in line with growth in the sector’s income. which involves a greater The Board of Directors of KBN has approved KBN’s strategy for the 2018-2020 period, dialogue with its customers, focus on customers through digitalisation and simpler financial management. In solutions in relation to KBN will seek to develop the customer experience by adopting new technological KBN will fulfil its role in efficient customer management, operational robustness and analysis capabilities. society by lending responsibly. and achieving the KBN’s framework, including its commitment to complying with all regulatory requirements earnings ensures KBN can return requirement set for it, forms the basis of its activities. Achieving satisfactory business performance enables achieve its mandate as a reliable and stable provider of long-term credit. A strong Martin r. and May-Iren Walstad Wassås. and r. J From left: Brit Kristin Sæbø Rugland, Rune Midtgaard, Jarle Byre, Nanna Egidius, Else Bugge Fougner, From left: Brit Kristin Sæbø Rugland, Rune Skancke, Martha Takvam, Petter Steen Martha Takvam, Petter Skancke, THE BOARD OF DIRECTORS OF KBN OF DIRECTORS THE BOARD

ANNUAL REPORT 2017 / PAGE 18 ANNUAL REPORT 2017 / PAGE 19 ,

. Owner and CEO of Participated in 14 board meetings in 2017. WASSÅS MAY-IREN WALSTAD Employee representative since 2016. Master of Business and Economics. Senior Portfolio Manager, KBN ACI Member of the Board, Treasury. Personal alternate is Marit Norge. Urmo Harstad. Participated in 14 board meetings in 2017. JARLE BYRE 2015. representative since Employee Economics. Master of Business and KBN. Manager, Senior Relationship MSc in business Skancke Consulting AS. Chair, KBN Risk Committee. Chair, Principles for Responsible Investment. Member of the Board, Storebrand ASA and Norfund. Member, KBN Remuneration alternate is Committee Personal Andreas Aleström. meetings in Participated in 13 board 2017. MARTIN SKANCKE Chair since Vice Member since 2013, 2015. Teacher. Consultant/advisor to Sveio Consultant/advisor Teacher. KBN Member, Municipality. Remuneration Committee. Member of the Board, Haugaland Kraft AS. Participated in 14 board meetings in 2017. Master of Business and Authorised Master of Business and Norsk CEO, Financial Analyst (AFA). KBN Member, AS. Luftambulanse and KBN Remuneration Committee Audit Committee. meetings in Participated in 13 board 2017. BUGGE FOUGNER ELSE Attorney - Admitted to the Supreme Chair, at Hjort DA. Court. Lawyer KBN Remuneration Committee. Chair, Member, KBN Risk Committee. Member of Eksportkreditt Norge AS. the Aker Kværner Holding ASA board and Protector Forsikring ASA board. Participated in 14 board meetings in 2017. PETTER STEEN JR. Member of the Board since 2005. 15. Master of Business and MBA in Finance. Director Group Internal Telenor ASA. Chair, KBN Audit, KBN Risk Member, Audit Committee. Committee. Participated in 14 board meetings in 2017. BRIT KRISTIN SÆBØ RUGLAND SÆBØ BRIT KRISTIN the Board since 2016.Member of RUNE MIDTGAARD Business Administration, Bachelor of the Board since 2014. Member of Member, Management. Master of Member of KBN Audit Committee. Member of the the Board, Figgjo AS. Norfund and Talent Norge AS. Board, Ethics for the Member of Council on Pension Norwegian Government Fund Global. meetings in Participated in 14 board 2017. NANNA EGIDIUS Member of the Board since 2004. Chair since 1999. Master of Business. Director of Strategic Planning and Development, Member, municipality. Lillehammer Chair, Vice KBN Audit Committee. Ikomm AS. Participated in 13 board meetings in 2017. MARTHA TAKVAM Member of the Board since 20 THE BOARD OF DIRECTORS OF KBN OF DIRECTORS THE BOARD Martin Else Bugge Fougner, Jarle Byre, Nanna Egidius, Runde Midtgaard, Brit Kristin Sæbø Rugland, From left: Walstad Wassås. and May-Irene Martha Takvam, Petter Steen jr. Skancke, sued y and atives sets dinated debt dinated e capital ency risk ency es, bonds and other erest rate risk rate erest edit risk dditional Tier 1 capital dditional Tier ollateral and offsetting ollateral oans from credit institutions credit oans from Subor Shar A Risk management Liquidity risk L Senior securities is Financial deriv C Cr Int Curr Capital adequac capital management Not securities interest-bearing Other as e 26 e 30 Note 22 Note 23 Note 24 Note Risk management 25 Note Not 29 Note Not Note 18 Note 19 Note 20 Note 21 Note 27 Note 28 Note Note 16 Note 17 Note trative expenses trative edit institutions truments measured truments measured truments measured counting ealised gain/(loss) ading income talment loans tegorisation of tegorisation emuneration ensions eases ax Net interest income Net interest expenses and commission Fees Net unr on financial instruments Net tr financial instruments Financial ins Ins Salaries and adminis R P T L Ca value fair at Financial ins amortised cost at Hedge ac Deposits with cr e 10 FINANCIAL STATEMENTS 2017 STATEMENTS FINANCIAL NOTES TO THE FINANCIAL STATEMENTS FINANCIAL THE TO NOTES Income statements Income 1 Note 2 Note 3 Note 4 Note 11 Note 15 Note Note 5 Note 6 Note 7 Note 8 Note 9 Note Balance Not 12 Note 13 Note 14 Note Income statement Income income of comprehensive Statement of financial position Statement of changes in equity Statement of cash flows Statement policies Accounting

ANNUAL REPORT 2017 / PAGE 20 ANNUAL REPORT 2017 / PAGE 21

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

0 9 34 21 32 40 (1) (1)

354 193 132

2017 2017 (163) (186) 1 395 1 428 1 429 5 843 2 162 3 681 1 429 1 783

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

Of which is which taxOf ortion of owners additional allocated to 1 Tier P Total other comprehensive income comprehensive other Total the year for income comprehensive Total Profit the for year income comprehensive Other Itemswillwhich to loss be reclassified or profit not (Amounts 1 000 000) NOK in STATEMENT OF COMPREHENSIVE INCOME (Amounts 1 000 000) NOK in INCOME STATEMENT Interest income Interest expense interestNet income Feescommission expenses and capital Income tax the year Profit for Portion shareholder allocated to Profit before before Profit tax Actuarial gain/(loss) on defined benefit plan Other expenses Net unrealised gain/(loss) financialinstruments on Total operating expenses operating Total Net income Net trading income operating other Total Salaries and administrative expenses Depreciation assetsfixed on interest-bearing securities interest-bearing capital management Note 16Note bonds and other Notes, 17Note assets Other 18Note institutions credit from Loans 19Note Senior securities issued 20Note Financial derivatives 21Note and offsetting Collateral 22Note debt Subordinated 23Note capital Share 24Note 1 capital Tier Additional Risk management 25Note Risk management 26Note risk Credit 27Note risk rate Interest 28Note risk Currency 29Note Liquidity risk 30Note and Capital adequacy on financial instruments financial instruments value fair at amortised cost at FINANCIAL STATEMENTS 2017 NOTES TO THE FINANCIAL STATEMENTS Income statement Income income of comprehensive Statement of financial position Statement of changes in equity Statement of cash flows Statement policies Accounting statements Income 1Note income Net interest 2Note expenses and commission Fees 3 Note gain/(loss) Net unrealised 4 Note income Net trading 5 Note expenses Salaries and administrative 6 Note Remuneration 7 Note Pensions 8 Note Tax 9 Note Leases Balance 10Note of Categorisation 11 Note measured Financial instruments 12Note measured Financial instruments 13Note Hedge accounting 14Note institutions Deposits with credit 15Note loans Instalment

0 0 12 52 45

994 153

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

0 50 86

551 214 137

2017 9 333 2 189 3 145 2 008 4 714 14 667 21 082 11 476 10 400 412 854 398 187 369 482 412 854 107 445 283 396

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

bearing securities -

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

ANNUAL REPORT 2017 / PAGE 22 ANNUAL REPORT 2017 / PAGE 23

0 (1) (1) 689 (20) (18)

(417) (390) 1 429 1 195 12 452 14 667 12 452 12 202 Total equity Totalequity

0 0 (1) (1) 689 (20) (18) (417) (390) 8 314 9 333 8 314 1 429 8 063 Retained earnings Retained Retained earnings Retained

0 0 0 0 0 0 0 0 0 994 994 994

2 189 1 195

Additional Tier1 capital Additional Tier1 capital

0 0 0 0 0 0 0 0 0 0 3 145 3 145 3 145 3 145

Share capital Share capital

23 24 24 23 24 24 Note Note

quity as of as 31 December 2016 quity Amounts 1 000 000) NOK in nterest paid on Tier 1 capitalnterest 1 on Tier paid ssued additional Tier 1 capitalssued additional 1 Tier I Dividends for 2015 E I Profit the for year income comprehensive Total other ( STATEMENT OF CHANGES EQUITY IN Profit the for year 2016 Total other comprehensive income comprehensive Total other Dividends for 2016 Interest paid on Tier 1 capitalInterest 1 on Tier paid 2017 Equity as of 31 DecemberEquity 2017 Issuedcapital additional 1 Tier Equity as of 1 January 2017 Equity 1 of as Equity as of 1 January 2016 Equity 1 of as 0 0 52 45 12 994 153 2016 8 314 1 974 3 145 7 584 12 452 26 275 15 921 16 182 418 327 405 875 369 933 418 327 267 521 118 550 0 86 50 214 551 137 2017 3 145 2 189 9 333 2 008 4 714 14 667 21 082 11 476 10 400 398 187 412 854 369 482 283 396 107 445 412 854 8 8 7 8 23 24 17 17 Note 10,12,22 10,11,12,15 10,12,18,21 10,11,12,14,21 10,11,12,13,16 10,12,13,20,21 10,11,12,13,19 10,12,13,20,21 bearing securities - Total equity and liabilities Total equity STATEMENT OF FINANCIAL POSITION FINANCIAL OF STATEMENT (Amounts 1 000 000) NOK in Assets Deposits institutions credit with Instalment loans Notes, other and bonds interest derivatives Financial assetDeferred tax Other assets Total assets Liabilities equity and Loans institutions credit from issued securities Senior derivatives Financial liabilities Other liabilitiesCurrent tax liabilitiesDeferred tax liabilities Pension Subordinated debt liabilities Total Share capital Additional capital Tier 1 Retained earnings

0 0 0 0 0

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

liabilities are

0 0 0 0 0 9

87 87 11 76 11 65 13 36

404 (54) (25) (18) (18) (32) 2017 (390) (417) (172) (157) 1 195 6 614 5 830 3 527

14 406 (3 310) (3 (6 531) (6 118 509 (15 148) (15 (12 094) (12 (112 676) (112

bearing securities -

ash suppliersto payments employees and Loans from credit institutions without agreed time to maturity Deposits with credit institutions without agreed time to maturity Repaymentsecurities of debt Proceeds from issuance of debt securities Proceeds debt issuance from of Repaymentsubordinated of debt Dividends paid Proceeds capital Tier additional issuance from of 1 capital Interest 1 on Tier paid subordinated Proceeds issuance from of debt Repayment of commercial paper Proceeds from issuance of commercialProceeds issuance paper from of C Net (purchase)/sales equipment property and of Interest received Interest paid paid commissions and Fees Receiptsfrom securities issued repurchase of Income taxes paid Net disbursement customers loans to of Net (increase)/decreasecreditinstitutions deposits with in Net (increase)/decrease financial derivatives in Net (increase)/decrease notes,bonds interest in and other Net (increase)/decrease other assets in Net increase/(decrease) other liabilities in Whereof Amounts 1 000 000) NOK in See note 19 for a reconciliation of changes in the carrying amount of liabilities a reconciliationchangesSeein 19 for carrying the note financing activities. amount of of that part are of Such Senior securities Subordinated issued debt. and Cash and cash equivalents at 31 DecemberCash equivalents 31 and at cash Net change in cash and cash equivalents cashNet and in change Cash and cashJanuary equivalentsCash and 1 at Effects foreign of differences exchange differences exchange foreign after flows cash Net Net cashNet flows Net cashNet from flows financing activities Cash flows from financing activities financing from flows Cash Net cashNet from flows investing activities Cash fromflows investing activities Cash flows from operating activities operating from flows Cash STATEMENT OF FLOWS STATEMENT CASH ( Net cashNet from flows operating activities

ANNUAL REPORT 2017 / PAGE 24 ANNUAL REPORT 2017 / PAGE 25

- ” classi- , and in rates, - s”

Senior securities

“ Held to maturity “ backed securities, that - bearing securitie -

to the the to ” inputs when they represent - Net unrealised gain/(loss) on “ butdenominated in a different curren- r r

Held for trading indices and volatilities “ IAL INSTRUMENTSIAL Net unrealised gain/(loss) on financial instru- “

”.

eceivables aremeasured amortised at cost,using the r

commodity Notes,bonds and other interest “ bearing securities and issued benchmark bonds are allocated financial instrumentsa larger share of Notes, bonds and - s ’

indices, inputs mightinputs include: and in the income statement as

- . ” ” cial assets held to maturity as Loans and Actual markettransactions in identical instruments before or after the reporting date, so thatan adjustment for events between the date of transaction and the reporting date is necessary cy, so cy, that an adjustmentfor basis swap spread is necessary Quoted prices and credit spreads at the reporting date for similar instru- mentsissued by the same issue Quoted prices and credit spreads at the reporting date for similar instru- mentsissued by the same issuer but with a different tenor,so that an adjustment for maturity is necessary Observable interest rate yieldcurves, basis swap spreads, FX equity

financial instruments Financial derivatives Financial derivatives are classified Heldas for trading, thewith exception of contractsdesignated as hedging instrumentsin fair value hedges.All financial derivatives are measured atfair value through profit lossor and are presented as assets when the value is positive, and as liabilities—when the value is negative. VALUEFAIR OF FINANC Level 1 For securities traded in an active market with frequent market observations quoted prices on the reporting date are used in the measurement of fair value.Quoted prices areprovided by international vendors (Reuters/ Bloomberg),and are classified Levelas 1 actual market transactions. Financial instruments are categorised into the fair value hierarchy, based on the lowestlevel inputthat is significantto the fair value measurement.  issued  similar treatment as related derivative contracts used to hedge interest rate andcurrency risk, which are measured atfair value. This leads to a reduction in measurementinconsistency between bonds and notes,loans and issued bonds on one hand,and financial derivatives on the other hand. Finan Financial assetsin this category are primarily asset have been acquired with the intention to holdto maturity, and selected securities that became illiquid aas resultthe of financial crisis in 2008 and have been reclassified from effective interestrate method. category as of July 1 2008. Financial assets held to maturity are measured atamortised cost, using the effective interest rate method. Loans and receivables Included in this category are loans and advances to customers, and bonds and notes thatare notquoted in an active market. Financial assets fied Hedge accountingmayapply to bonds andnotes classifiedas Loans and receivables. When fair value hedge accounting is applied, the value change that is attributable to the hedged risk is recognised as part ofthe carrying amount under incomethe statementas ments Financial liabilities measured atamortised cost Public benchmark loans and some loans from institutional investors in public niche marketsare classified as financial liabilities measured at amortised cost,using the effective interestmethod. The majority liabilities of in this category is designated as hedged items and hedge accounting is applied. This implies thatvalue changes thatare attributableto the hedged risk are recognised as part of the carrying amountunder   other interest to Level 1. Level 2 financialFor instruments withoutavailable quoted prices in an active market, KBN eitherwill use quoted prices ofsimilar instruments in active markets, where possible,or valuation techniques significantwhere inputs are based on observable market data (provided by Reuters). Level 2 Of the bank

For

s registered ’

is a limited company ”)

KBN “

” s intention at acquisition or issue.

’

EASUREMENT

the Company the (”

s functional and presentation currency is the Norwegian ’

indexed loans to customers and issued bonds are designated as at cial instruments classified as Loans and receivables or Other liabili- - CIAL INSTRUMENTS

cial assets are derecognised when the contractual rights to the cash Finan ties thatare hedged items and where the carrying amountis adjusted for value changes attributableto the risks that are being hedged Financial instruments fair at value through orprofit loss

fair valuefair through profitor loss atinitial recognition,in order to achieve Financial assets and liabilities designated fair valueat through profitor loss (FVO) Selected bonds and notes in the liquidity portfolio, fixed rate loans and NIBOR Classification offinancial instruments takes place at initial recognition and determines the subsequentmeasurement according to IAS 39.The catego- ofry classification is determined by the characteristics ofthe financial instrument and management FOREIGN CURRENCY TRANSLATION The Company kroner (NOK).Assets and liabilities denominated in a foreign currency are translated into NOK atthe exchange rate on the reporting date. Revenues and expenses denominated in foreign a currency are translated into NOK theat exchange ratethetransaction at date.Thefinancial statements are presented in NOK and rounded to the nearestmillion kroner, with the exception ofNotes 6 and 7 that are presented in NOK thousand. flows expire aretransferred. or Financial liabilities arederecognised when the contractual obligation has been discharged,cancelled or has expired. When issued debtsecurities are repurchased, the liability is derecognised. Any difference between the settlement amountand the carrying amountis recognised in the income statement as gain or loss at the transaction date. SIGNIFICANTESTIMATES AND ACCOUNTING JUDGEMENTS RECOGNITION AND DERECOGNITION Financial assets and liabilities are recognised in the Statement financial of position when KBN becomes a party to the contractual provisions of the instrument. At initial recognition, all financial assets and liabilities are measured atfair value. For financial assets that are notcategorised as at fair value through profit or loss,the value at initial recognition includes transac- coststion that are directly attributable to acquisition. Recognition and de recognition of financial instruments takes place on the settlement date. a regular way purchase or sale ofa financial asset, the value changes of the assetare recognised from the trade date. Finan CLASSIFICATION AND M Fair value measurement The fair value of financial instruments that are nottraded in an active market, or do nothave available quoted prices atthe reporting date, is determined using valuation techniques.When inputs are to a significant extent not observable, management makes assumptions and uses estimates when considering credit risk and liquidity risk related to financial instru- Evenments. ifthe assumptions and estimates are,to the greatestpossible extent, based on actual marketconditions prevailing at the reporting date, they involve judgementand may add to the degree of uncertainty in valuations. Assumptions and judgementsmay also apply to the allocation of financial instrumentsmeasured at fair value the in IFRS 13 hierarchy (Level 1,2 or 3). FINAN The preparation financialof statements in accordance with IFRS requires managementto make judgements and assumptions,and use estimates that will affect the use of accounting policies.The estimates and accounting judgements affect carrying amounts of assets and liabilities, and revenues and expenses. Assumptions made aboutfuture development may change due to marketchanges, and actual results may deviate from the estimates. The most significantjudgements and estimates used in the preparation of the financial accounts are: REPORTING ENTITY Kommunalbanken AS ACCOUNTING POLICIES  office is in Haakon VIIs gate Oslo.5B, The financial statements for the year ended 31 December 2017 were approved by the Board ofDirectors on 28 February 2018. BASIS OF PREPARATION  The financial statements have been prepared in accordance with Interna- tional Financial Reporting Standards (IFRS) as adopted by the EU.The financial statements are presented on a historical costbasis, except for: providing loans to counties,municipalities, intermunicipal companies and other companies thatcarry outtasks at a municipal level. KBN 0 0 0 0 0 76 34 42 76 42 11 15 (26) (20) (20) (12) (32) 2016 (417) (157) (838) 2 793 1 991 3 212 5 433 82 752 16 947 25 204 (2 751) (2 (1 758) (1 (3 752) (3 (14 134) (14 (96 675) (96 (12 137) (12 abilities are li 0 0 0 0 0 9 87 76 11 87 65 11 13 36 404 (54) (25) (18) (18) (32) 2017 (390) (172) 1 195 6 614 3 527 5 830 14 406 (6 531) (6 (3 310) (3 118 509 (12 094) (12 (15 148) (15 (112 676) (112 bearing securities - Deposits with credit institutions without agreed time to maturity Loans from credit institutions without agreed time to maturity Proceeds from issuance of commercial paper Repayment of commercial paper Proceeds from debt issuance of securities Repayment of debt securities Proceeds from additional issuance of capital Tier 1 capitalInterest 1 on Tier paid Proceeds from issuance of subordinated debt Repayment of subordinated debt Dividends paid Interest received Interest paid andFees paid commissions Receipts from securities issued repurchase of Cash payments suppliers to employees and Income taxes paid Net disbursement customers loans to of Net (increase)/decreasecredit deposits with in institutions Net (increase)/decrease notes, in bonds interest and other Net (increase)/decrease other assets in Net increase/(decrease) other liabilities in Net (increase)/decrease financial in derivatives Net (purchase)/sales equipment property and of Whereof Net cashNet from flows financing activities cashNet flows Effects foreign of differences exchange differences exchange foreign after flows cash Net cashJanuary equivalentsCash and 1 at Netin change cash equivalents cash and Cash and December equivalents 31 at cash a reconciliationSee 19 for note of changes in carrying the amount ofSenior securities Subordinated issued debt. and liabilities that part are of financing activities. Such STATEMENT OFSTATEMENT FLOWS CASH (Amounts 1 000 000) NOK in activities operating from flows Cash cashNet from flows operating activities Cash from flows investing activities cashNet from flows investing activities activities financing from flows Cash offset - Net “ . Interest

hange of the

pension accruals (plan ’ term deposits creditwith -

. line basis,based on assump- ” - The value c s risk, underlying exposure and and exposure underlying risk, s going going basis using Dollar ’

- .

s risk. Securities carried atamortised cost ’

downs. Ordinary depreciation, based on costprice, - d, and interestis presented as interest income or s ability to pay, and the loss history for the various risk ’

neffective part ofthe hedge is recognized in the income withoutagreed time to maturity

Any i XED XED ASSETS tions about discount rates,future salary adjustment, pensions and benefits from the National Insurance,as well as assumptions on mortality and voluntary retirement. The pension cost thefor period consistsof the sum of the period'saccrual, interestexpense on the calculated liability and administrative expenses.Changes in previous periods is calculated by using a straightline method over the estimated useful life, and the disposal value of the assets is assumed to be zero. institutions ASSETS INTANGIBLE Intangible assetsare measured atcost. A domain name is classified as an intangible asset anwith indefinite useful and is life not depreciated. Other intangible assets consist of IT systems. The acquisition costis amortised over the usefullife. Assets are tested for impairment annually. If there is an indication that assetsare impaired, the value of the assets is written down, and the difference between the carrying amount and the recoverable amountis recognized in profit loss.or PENSIONS For defined benefit plans, pension liabilitiesare measured atthe present value of future pension obligationsaccrued on the balance sheet date. Pension liabilities are calculated on straighta change) are recognized in the income statement when the pension plan change occurs. The netpension costfor the period is included in «Salaries and administrative expenses». Changes in pension liabilitites and plan assets under defined benefitplans that result from changes and deviations in the calculation assumptions (changes financial in and actuarial assumptions) are presented in the Statementof comprehensive income as Other comprehensive income. geographical spread.The impairment loss is calculated per risk group, based on expectations regarding the macroeconomic conditions thatcan impacton the issuer Loans to customers are assessed as a uniform group, based onthe provisions theof Local Government Actthat rates all Norwegian municipalities equally with regard to the lender are splitinto groups according to the issuer groups.Under current legislation limiting the municipalities' possibility of going bankrupt, the Company does not expect any impairments on its instalment loans. HEDGE ACCOUNTING Interestrate and cross currency swaps are used to hedge interestrate and currency risk in assets and liabilities.When a hedge relationship between a bond and swap a fulfils the criteriafor hedge accounting and is designated as such,it is accounted for as a fair value hedge.The hedged items in the portfolio of bonds and notes are classified as Loans and receivables and hedged issued bonds are classified as liabilities.Other The hedge relationshipis documented atdesignation, including the hedgingstrategy, and hedge effectiveness is measured on an on method. RECOGNITION OF REVENUES Interestand commissions are recognised in the income statement as they areearned accrue or interest expense independent of underlying assetsand liabilities income for assets and liabilities measured atamortised cost is recognised inthe income statement using the effective interest method. For items measured at fair value, including interestrate derivatives, interestis recognized as itaccrues either as income or expense.Unrealised gains and losses on financial instruments at fair value and value changes attributable to the hedged risk on hedged itemsunder hedge accounting are recognised in the income statement as "Net unrealised gain/(loss) on financial instruments".Other commission expenses and charges are recognised as expenses in the period when the service is provided. FI Fixed assets are measured at cost with the deduction of accumulated depreciation and write STATEMENT OF CASH FLOWS The Statementof Cash Flowsis prepared using the directmethod and presentscash flows classified by activity. Cash and cash equivalentsin- cludecash on hand,demand depositsand short statement. Hedging instruments are measured atfair value through profit or loss,and carrying amounts are adjusted accordingly. hedged items thatis attributableto the hedged risk,is recognized as part ofthe carrying amount of the item and in the income statement as unrealised gain/(loss) on financial instruments

bearing -

derivatives -

elements is deter- - eceivables or Held to ma-

nottraded in an active market

features. Fair value financialof elementsis determined using the - ’ IAL ASSETS AND LIABILITIES ASSETS AND IAL IAL ASSETS IAL financial distress ’

Standardmaster netting agreementsdo not qualify for

s financial instrumentsDeposits creditwith institutions and a ’

agreements that give rightto offsetting of assets and liabilitiesin -

binding price quotes from differentsources there is there objective evidence thata loss has been incurred, the loss is - Market indices, Market both bond and credit default swap indices,for similar More liquidMore instruments issued by the same issuer with identical maturi- as a result of debtors result of a as Payment default or breach of contract Historical or implied Historical volatilities or market participants instruments issuer ty, but ty, an adjustmentfor liquidity risk is necessary Significant financial difficulty of the issuer or obligor Deferral ofinterest or principal payments or renegotiation loan of terms

Non Indicative prices and estimates for similar instruments provided by other Prices on potential new issues in similar instruments from the same

Group impairments Financial assets are tested for impairment at a group level, based on the division of the assets into groups similarwith risk characteristics.Assets are impaired ifthe observable data indicates a reduction in future cash flows from the group as a result ofnegative changes to debtors'creditworthiness and/or changes in economic environment thatcorrelate de-with faults in the group.   Financial instruments classified as Loans and r  turity are assessed for impairment.When there is objective evidence of value loss,the assetsare impaired and shall be written down. Individual impairments When measured as the difference between the asset's carrying amount and the presentvalue of the estimated future cash flows. The loss is recognized in the income statement.When commitments are assessed for individual impairments, the following loss events may be taken into consideration: the event of default, butdo not qualify for offsetting in the Statement of financial position under IAS 32. Cash collateral is presented on a gross inbasis the Statement of financial position. IMPAIRMENT OF FINANC mined using both discounting and option pricing models observablewith marketdata and estimates as inputs. The mostsignificant unobservable inputused in the valuation in Level 2 and Level 3 comprises the credit premium for financial instruments thatare not traded in an active market. OFFSETTING OF FINANC KBN does not offset any financial assets and liabilities the in Statement of financial position. offsetting and net presentation. Therefore, the related assets and liabilities are presented gross in the Statement offinancial position.Cash collateral receivedor pledged as additional security for derivative exposure is subject ISDA to Fair value offinancial instruments with embedded option discounted cash flows method, where discountrates are derived from the relevantobservable money marketinterest rates and other risk that factors may significantly affectthe fair value instruments.of the When such factors cannotbe reliably observedat reportinga date,management maymake assumptions and use estimates when determining the fair value. For financial instruments categorised in the fair value hierarchy at several period ends a reconciliation movementsof between the levels is done at the end ofeach reporting period.The valuation technique used to determine fair value of financial instruments categorised in Level or2 Level is 3 determined based on theinstruments Fair value disclosures instruments without embedded option  The same type ofinput might be used to determine the fair value of notes and bonds classified as Level 2 and Level 3, however, the significance of adjustments of market data and to what extent the adjustmentis done based on observable data are given weight when the instrumentis catego- rized according to IFRS 13.Other inputs used in determination offair value might include:    with optionwith elements. larger share of Instalment loans, Notes, bonds and other interest Of the bank securities,Financial derivatives and Senior securities issued are allocated to Level 2. Level 3 Level 3 is relevant for financial instruments thatare nottraded in an active marketand fair value is determined using valuation techniques where significant inputis based on unobservable data. Financial instruments classified as Level include 3 notes and bonds with low liquidity, fixed rate loans to customers,issued debtsecurities and where inputs are to a large extent unobservable,and OTC  

ANNUAL REPORT 2017 / PAGE 26 ANNUAL REPORT 2017 / PAGE 27

looking and -

stage model where instrumentsall will be placed - s lending and portfolio systems.Expected credit ’ up systemthe of municipal sector as laid outby the -

s managementhas decided to implement IFRS 9 also for hedge ac-

’ into into accountthe rules as laid outby the Act,Municipality namely that municipalities cannot go bankrupt and the subsequentmeasures that will be taken by the government should there be paymentproblems. Through the cycle PDs mustbe adjusted to reflect prevailing marketconditions at the reporting date (pointin time PD).KBN uses recognised models this conversion.for Implementation of IFRS 9 leads to KBN recognising and presenting provisions for credit losses for the firsttime in its history. However,the recognised provisions are very small due to the quality ofthe portfolio. Loss provisions reduce equity and will increase the volatility of profit lossor going forward,especially if a significantincrease in creditrisk is seen to occur. All relevantexposures are considered to be in stage 1 as of 31 December 2017.See also the table below for measurement categories for relevant balance sheetitems under IAS 39 and IFRS 9,and related carrying amounts. being payments ofprincipal and interestand therefore can be measured at amortised cost.KBN will, however,continue using FairValue Option a to significant extentfor assets and liabilities in order to avoidinconsistencies (accounting mismatch) that otherwise would arise. Implementation of 9IFRS allows for changes previous of classification. KBN will reclassify some loans and floating rate notes (assets and liabilities) withoutassociated derivative contracts from Fair Value Option to Amortised Transition Cost. effects associated with this are shown thein table below. 2. Hedge Accounting KBN counting. additionIn fairto value hedging Senior of securities issued, which already is established, cash flow hedge for parts the of liquidity portfolio is considered,but only for bonds purchased after the system solution for cash flow hedge is in place. Furthermore, ithas been decided to introduce portfolio hedging ofinterest rate risk for partsthe of lending portfolio (Instalment loans fixedwith interest rate),for Instalmentloans granted after the system solution for portfolio hedge is in place. 3. Impairmentof financial assets objective requiresofimpairment only caserecognitionin evi- 39 IAS of dence impairment of (credit loss events). 9IFRS is forward requires recognitionExpected of Credit Losses (ECL) for financialall assets measured at amortised cost(including those hedge accounted) or atfair value through Other Comprehensive Income (OCI). IFRS 9 introduces a three instage 1 upon initial recognition.Stage 1 requires the calculation of a 12 According to IFRS 9, an entity shall assess whether the credit risk of a financial assethas increased significantly on each reporting date. is this If the case,the exposure shall be moved to stage 2 orStage 3. 2 and 3 require the calculation a of lifetime ECL. The definition of whatis considered to be a significantincrease in credit risk is the basis for moving the exposure between the stages.A significantincrease in creditrisk is mainly based on an increase in the Probability of Default (PD) since initial recognition. KBN uses an internal credit assess- mentmodel to determine whether there has been a significantincrease in creditrisk for lending customers. If a paymentstop has been decided under municipality assessed signifi- be Actfor Municipality it shall a whether a the cant deterioration has taken place.This is expected to be very unlikely given the preventive follow Municipality Act. Payment delays ofat least 90 days are also used as an additional indicator for lending customers including companies with municipal guarantees. issuersFor in the liquidity portfolio, a rating fall below in- vestmentgrade is regarded as a significantincrease in credit risk. Default (Stage is3) defined for lending as eventsthat result in actual credit losses (has never happened) or as late payments (at least 90 days) above a certain threshold amount. the For liquidity portfolio, defaultis defined as paymentdelays, bankruptcy or restructuring due to financial problems. KBN has developed models and systemIT solutions for the calculation of ECL, both in the bank losses are calculated per loan/instrument, based on the Exposure At Default (EAD),PD and the Loss Given Default (LGD), all estimated atthe reporting date. KBN uses recognised methods for determining the parameters that form the basis for the ECL calculation.For the calculation of LGD, KBN looks for instance to IRB assumptions (internal measurementmethods according to the capital requirement regulation).PD will normally be obtained from repu- table external sources (such as credit rating agencies) and represent historical (through the cycle) values. For the determination of the PD for municipal- and ities companiesowned or guaranteed for municipalities, by KBN takes month expected credit loss.This ECL reflects the entire loss on an asset weighted by the probability that the loss will occur in the next 12 months.

- and- line e- at - r th alcu- he fair elated re- ules in ax n ffset. re re o o t in , which apital that inimum ss for the is c c s a 016, and is ew r , and is ubtracted m lo

de separate o and the s bilities are o d are

rwaywas lia equal t

fit or e previous st lculated of the lculation. T ortfoli No nd nd rewards r nd tax values at the ca a anuary 2 ccrue, i.e. the in ot provi p ed on a straight in ca a easurement neral Meeting. The ng lease. Leases th isks a t value oes n ts are ssets 9 introduces n dditional Tier 1 a axable pro a e same perio s they t axrate from 1 J he r t sse OT YET EFFECTIVE STANDARDS t perati a nding to the Norwegian munici- resen ccounting a ll N o p sed for this and paid interest is pital, pital, n the lending le 9 Financial Instruments leases. x base for current taxes are recognis u ithin th he he ca t BUT is w e leases,e NSTRUMENTS effective I ognition and M d adjustment to taxes payable the Annual Ge ate nt, he Company d y n he standard replaces th d at cost principle, IFRS e statement a nanc eferredtax T ancial position at amounts bstantially a f share s finance d ax r x a f lower, etween the a o me dividends. as way a SSUED I he year's ta ACCOUNTING , i orporate income f fin nd nd sa t taxes (tax on the c classified anas easure INANCIAL 2016. T before tax. Temporary and permanent differ- s a an disclosures o 25 per ce is he e not lead to material changes in KBN’s financial F t n operating lease NEW ssified ansfer su approved b ompanies. U in eferred ta s. The f curren nstruments: Rec cla nt to andard in 2014, IFRS of equity,ts of and retained earnings. Dividend ntil ropertyor ne operating segment: he nominal t I RS 9 RS p tatement o reducing differences le. - he E IF apital is m TANDARDS x under a s business model and by the characteristics ofthe contrac- n net d ew st ’ S s year ng other th ed on profit O 017. sists o arnings in nd. T ACCOUNTING POLICIES s equityconsists ” for both the lending and liquidity portfolios. Evaluation ofall ng are who oes not tr quity u ’ 1 c ased e ed in the previous year. Changes in standards with effective 2 the S of the asset, 7 per ce

N NFORMATION le

I ier ed by t he lease term. Under fi ecognised in the incom bas ON T erati reviou 9 Financial e us Classification and measurement financial of instruments Hedge accounting Impairment of financial assets he g and ta nd municipal c . not implemented any new IFRS standards in 2017 e adjusted for before t ax con t p ued a n year e d as e t r

ayment. f f he he requiremen payments r are o p o a etained of temporary differences b over t s business model for managing financial assetsis considered to be r . Deferredliabilitietax ’ s t ase, that d wnership o op e not hold to collect was approv 3 IAS ard applicable from 1 January 2018. In three areas: 1. 2. 3. Classification 1. and measurement classificationthe financial IFRS9, Accordingis determinedto assets of both by the company tual cash flows associated with the assets. IFRS 9 further maintains the option to designate assetsand liabilities measured as at fair value through orprofit loss (Fair Value Option),if doing so eliminates (or significantly reduces) a measurement or recognition inconsistency (accounting mismatch). The rules forclassification and measurement financial of liabilities are unchanged in IFRS compared 9 to IAS 39, except for the treatment of changes in the fair valueliabilities of thatare attributableto changes in creditrisk for liabilities measured atfair value (Fair Value Option).Under IAS 39, these changes were presented inprofit or loss, while IFRS 9 requires these to be presented in Other Comprehensive Income (OCI).See table below for the transition effectassociated with this change. KBN TRANSITI IMPLEMENTATION OF from from segment reporti a business as KBN has IASB iss The accounting policies applied to the financial statements are consistent The Company has o unchanged in EQUITY The Company fulfil classifie additional T SEGMENT palities a CHANGES I cash cash flows suggests that the assets also meet the requirement solelyof “ ACCOUNTING statements. with thos date 1 January 2017 hav increasin TAXES Taxes value value lease come tax is ences financial spect duced from 2 lated basis Income year), changes i recognised in basis Lease to ar LEASES A le offset - Net “ . Interest hange of the pension accruals (plan ’ term deposits creditwith - . line basis, based on assump- ” - The value c s risk,s underlying and exposure going basis using Dollar ’ - . The acquisition costis amortised s risk. Securities carried atamortised cost ’ downs. Ordinary depreciation, based on costprice, - d, and interest is presented as interest income or s ability to pay, and the loss history for the various risk ’ Assets are tested for impairment annually. If there is an neffective part of the hedge is recognized in the income without agreed time to maturity Any i ASSETS XED I from the National Insurance, as well asvoluntary retirement. The pension cost thefor period consists assumptionsof the sum of on mortality and the period'saccrual, interestexpense on the calculated liability and administrative expenses. Changes in previous periods change) are recognized in the income statement when the pension plan change occurs. The netpension costfor the period is included in «Salaries and administrative expenses». Changes in pension liabilitites and plan assets under defined benefit plans that result from changes and deviationslation in assumptions the (changes calcu- financial in and actuarial assumptions) are presented in the Statement of comprehensive income as Other comprehensive income. RECOGNITION OF REVENUES Interest and commissions are recognised in the income statement as they are earned accrue or interest expense independent of underlying assets and liabilities income for assets and liabilities measured at amortised cost is recognised in the income statement using the effective interest method. For items measured at fair value, including interestrate derivatives, interestis recognized as it accrues either as income orlosses on financial instruments at fair value and value changes attributable expense. Unrealised gains and to the hedged risk on hedged itemsunder hedge accounting are recognised in the income statement as "Net unrealised gain/(loss) on financial instruments". Other commission expenses and charges are recognised as expenses in the period when the service is provided. F Fixed assets are measured at cost with the deduction of accumulated depreciation and write is calculated by using a straightline method overand the the estimated disposal useful life, value of the assets is assumed to be zero. ASSETS INTANGIBLE Intangible assets are measured at cost. A domain name isintangible asset classified as an with indefinite an useful and is life not depreciated. Other intangible assets consist of IT systems. over the usefullife. indication that assetsare impaired, the value of the assets is written down, and the difference between the carrying amount and the recoverable amount is recognized in profit loss. or PENSIONS For defined benefit plans, pension liabilities are measured at the present value of future pension obligationsaccrued on the balance sheet date. Pension liabilities are calculated on straight a tions about discount rates, future salary adjustment, pensions and benefits sions sions theof Local Government Act that rates all Norwegian municipalities equally with regard to the lender are split into groups according to the issuer geographical spread. The impairment loss is calculated per risk group, based on expectations regarding the macroeconomic conditions that can impact on the issuer groups.Under current legislation limiting the municipalities' possibility of going bankrupt, the Company does not expectinstalment loans. any impairments on its HEDGE ACCOUNTING Interest rate and cross currency swapscurrency risk are used in toassets hedge interest and liabilities. rate and When a hedge relationshipbond and swap a fulfils the criteria between a for hedge accounting and is designated as such, it is accounted for as a fairportfolio value ofhedge. bonds and notes The hedged items are classified in the as Loans and receivables and hedged issued bonds are classified as liabilities.Other The hedge relationship is documented at designation, including the hedging strategy, and hedge effectiveness is measured on an on method. statement. Hedging instruments are measured at fair value through profit or loss,carrying and amounts are adjusted accordingly. hedged items that is attributableof to the hedged risk, the carrying amount of the item is and in the recognized income statement as part as unrealised gain/(loss) on financial instruments STATEMENT OF CASH FLOWS The Statement of Cash Flows is prepared using the direct methodpresentscash and flows classified by activity. Cash and cash equivalentsin- clude cash on hand, demand deposits andinstitutions short Loans to customers are assessed as a uniform group, based on the provi- bearing - derivatives - elements is deter- - eceivables or Held to ma- r not traded in an active market features. Fair value financial of elementsis determined using the - ’ securities IAL ASSETS AND LIABILITIES ASSETS AND IAL IAL ASSETS IAL financial distress ’ Standardmaster netting agreements do not qualify for s financial instrumentsDeposits creditwith institutions and a ’ agreements that give rightto offsetting of assets and liabilitiesin - binding price quotes from different sources there is there objective evidence thata loss has been incurred, the loss is - More liquidMore instruments issued by the same issuer with identical maturi- indices, Market both bond and credit default swap indices,for similar Payment default or breach of contract Deferral ofinterest or principal payments or renegotiationloan of terms debtors result of a as ty, but ty, an adjustmentfor liquidity risk is necessary Prices on potential new issues in similar instruments from the same issuer Indicative prices and estimates for similar instruments provided by other market participants instruments Non Historical or implied volatilities Significant financial difficulty of the issuer or obligor financial position. offsetting and net presentation. Therefore, the related assets and liabilities are presented gross in the Statement offinancial position.Cash collateral received or pledged as additional security for derivative exposure is subject ISDA to the event of default, but do notfinancial qualify for position under offsetting in the Statement IAS of 32. inbasis the Statement of financial position. Cash collateral is presented on a gross IMPAIRMENT OF FINANC Financial instruments classified as Loans and turity are assessed for impairment.When there is objective evidence of value loss,the assetsare impaired and shall be written down. Individual impairments When measured as the difference between the asset's carrying amount and the present value of the estimated future cash flows. The loss is recognized in the income statement.When commitments are assessed for individual impairments, the following loss events may be taken into consideration:    Group impairments Financial assets are tested for impairment at a group level, baseddivision on of the the assets into groups similar with risk characteristics.Assets are impaired if the observable data indicates a reduction in future cash flows from the group as a result of negative changes to debtors'thiness and/or changes in economic environment thatcorrelate creditwor- de- with faults in the group.   Of the bank larger share of Instalment loans, Notes, bonds and other interest securities,Financial derivatives and Senior securities issued are allocated to Level 2. Level 3 Level 3 is relevant for financial instruments that are notmarket traded in an active and fair value is determined using valuation techniques wheresignificant inputis based on unobservable data. Financial instruments classified as Level include 3 notes and bonds with low liquidity, fixed rate loans to customers,issued debt and where inputs are to a large extent unobservable, and OTC optionwith elements. The same type of input might be used to determine the fair value of notes and bonds classified as Level 2 and Level 3, however, the significance of adjustments of market data and to what extent the adjustmentbased on observable data are given weight is done when the instrument is catego- rized according to IFRS 13. Other inputs used in determination ofmight include: fair value     Fair value disclosures For financial instruments categorised in the fair value hierarchy at several period ends a reconciliation of movements between the levels is done at the end of each reporting period. The valuation technique used to determine fair value of financial instruments categorised in Level or2 Level is 3 determined based on the instruments instruments without embedded option discounted cash flows method, where discount rates are derived from the relevantobservable money marketinterest rates and other risk that factors may significantly affectthe fair value instruments. of the cannot When such factors be reliably observed at reporting a date,assumptions and management use estimates when determining the may fair value. make Fair value of financial instruments with embedded option mined using both discounting and option pricing models observablewith market data and estimates as inputs. The most significantinput unobservable used in the valuation in Level 2 and Level 3 comprises the credit premium for financial instruments thatare not traded in an active market. OFFSETTING OF FINANC KBN does not offset any financial assets and liabilities the in Statement of

10 671 (480) 9 172 2 008 4 714 1 362 1 228

90 181 56 942 10 400 79 648 89 106 17 230 10 805 19 720 21 082 11 476

397 203 114 613 283 367 107 421 154 365 158 092 369 399 412 664 ued IFRS 9 amount amount Carrying Carrying

, in the form the , in iss 10 671 nds 4 714 9 172 1 228 2 008 1 362

90 181 17 254 57 025 10 400 79 648 89 129 10 805 19 720 21 082 11 476

397 286 114 619 283 396 107 445 154 365 158 092 369 482 412 717

IAS 39 amount amount Carrying Carrying

Value change based on based change Value or profit from own credit Comprehensi- Other to loss ve Income (OCI)*

(1)

— (10)

Transition effect in equity in effect Transition Expected Credit Loss (ECL) Loss Credit Expected Atfairthrough profitvalue loss or credit)(FVO) (own and OCI Amortised cost Amortisedcost (Fair value hedge) Atfairthrough profitvalue loss or credit) (FVO) (own and OCI Atfairthrough profitvalue loss or (FVO) Amortised cost Amortised cost Atfairthrough profitvalue loss or (FVO) Amortised cost Amortised cost Atfairthrough profitvalue loss or Atfairthrough profitvalue loss or (Fair value hedge) Atfairthrough profitvalue loss or Atfairthrough profitvalue loss or (Fair value hedge) Amortised cost Measurement category IFRS Measurement category 9 Amortised cost Amortised cost

— 84

(18) (23)

Transition effect in equity in effect Transition reclassification

Other liabilities Other Other liabilities value hedge) (Fair Atfairthrough profitvalue loss or (Held for trading) Atfairthrough profitvalue loss or (Fair value hedge) Atfairthrough profitvalue loss or (FVO) Atfairthrough profitvalue loss or (FVO) Atfairthrough profitvalue loss or (Held for trading) Atfairthrough profitvalue loss or (Fair value hedge) Atfairthrough profitvalue loss or (FVO) Atfairthrough profitvalue loss or (FVO) Atfairthrough profitvalue loss or (FVO) Loans and receivables Atfairthrough profitvalue loss or (FVO) Atfairthrough profitvalue loss or (FVO) Held to maturity

Measurement category IAS 39 Measurement category Loans and receivables Atfairthrough profitvalue loss or (FVO)

- bearing -

- - -

, based on KBN issuing debt convertedto dollars. issuingKBN debt US , on based

1 January 2018 1 January Instalment loans securities Notes,interest and other bonds Senior securities subordinated issued and debt

*Changes in the fair*Changesthe liabilitiesvalue in of that attributable are creditto price comprisethechanges risk bo issued in USD of interestchanges rate.spread USD This Liborof for the includes above value contracts derivative a directly associated with bonds Thetransition following effects: table shows (Amounts 1 000 000) NOK in Senior securities issued securities Senior Total financial liabilities Deposits with credit with institutions credit Deposits Instalment loans Instalment loans Instalment loans loans Instalment Notes,interest other and bonds bearing securities Notes,interest and other bonds bearing securities Notes,interest and other bonds bearing securities interest other and bonds Notes, securities bearing derivatives Financial derivatives Financial Senior securities issued securities Senior issued securities Senior Senior securities issued derivatives Financial derivatives Financial Financial derivatives debt Subordinated Financial derivatives Total financial assets Deposits with credit institutions credit Deposits with Loans from credit institutions credit from Loans Amounts in NOK 1 000 000) Amounts 1 000 inNOK 2018 1 January Deposits with credit institutions credit Deposits with

ANNUAL REPORT 2017 / PAGE 28 ANNUAL REPORT 2017 / PAGE 29

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

18 14 32

2 492 2 492 2 256 2 256 2016 (2 492) (2 (2 256) (2 Other Other liabilities liabilities

0 0 0 0 0 0 0 0 0 0 0 1 0 0 32 66

1 639 1 754 1 706 1 754 1 721 1 706 20 13 32 Loans and Loans Loans and Loans receivables receivables

2017

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

592 556 (15) (15) (50) (50)

(607) (607) (606) (606) hedge hedge Fair value Fair value Fair value Fair value

0 0 0 0 0 0 0 0 0 0 0 0 594 594 192 192

5 185 6 685 (4 592) (4 (4 591) (4 (6 493) (6 (6 493) (6 ding ding Held tra- for Held tra- for

0 1 0 0 1 0 60 64 (4)

391 496 (20)

3 293 6 387 6 326 8 373 3 510 3 123 8 308 3 769 (2 877) (2 (4 604) (4

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

1 1 60 64 (3)

562 579 423 142 (20)

Total Total 4 933 2 162 3 681 8 818 2 087 3 530 5 843 4 844 5 617 10 563 (5 198) (5 (7 098) (7

bearing bearing - -

T INTERESTT INCOME EES COMMISSION AND EXPENSES securities Notes,interest and other bonds Instalment loans Deposits with credit institutions credit Deposits with 2016 Net interestNet income Total interest expenses Subordinated debt derivatives Financial Senior securities issued securities Senior Loans from institutions credit Loans from Net interestNet income Total interest income Total interest expenses derivatives Financial Subordinated debt securities Notes,interest other and bonds derivatives Financial Instalment loans Deposits with credit institutions credit Deposits with Senior securities issued securities Senior Loans from institutions credit Loans from 2017 Total interest income (Amounts 1 000 000) NOK in derivatives Financial NE NOTE 1 NOTES TO THE FINANCIAL NOTES TO THE FINANCIAL STATEMENTS Expenses bankingservices of Other transaction costs Total and fees expenses commission NOTE 2 (Amounts 1 000 000) NOK in F 10 (480) 671 9 172 1 362 2 008 4 714 1 228 90 181 19 720 21 082 56 942 11 476 17 230 10 805 89 106 10 400 79 648 397 203 154 365 158 092 369 399 412 664 107 421 114 613 283 367 ued amount Carrying Carrying , in the form the , in iss 10 671 nds 4 714 1 228 9 172 1 362 2 008 17 254 90 181 19 720 21 082 57 025 11 476 10 805 89 129 10 400 79 648 158 092 369 482 397 286 107 445 412 717 154 365 114 619 283 396 amount Carrying Carrying Value change based on based change Value fromown credit or profit Comprehensi- Other to loss ve Income (OCI)* (1) — (10) Transition effectTransition equity in (ECL) Loss Credit Expected Amortised cost At fair value through profit loss or credit)(FVO) (own and OCI Amortised cost Amortisedcost (Fair value hedge) At fair value through profit loss or At fair value through profit loss or (Fair value hedge) At fair value through profit loss or credit) (FVO) (own and OCI Measurement category IFRS Measurement category 9 Amortised cost Amortised cost At fair value through profit loss or (FVO) Amortised cost Amortised cost At fair value through profit loss or (FVO) Amortised cost Amortised cost At fair value through profit loss or At fair value through profit loss or (Fair value hedge) — 84 (18) (23) Transition effectTransition equity in reclassification Other liabilities Other At fair value through profit loss or (FVO) At fair value through profit loss or (FVO) Other liabilities value hedge) (Fair At fair value through profit loss or (Held for trading) At fair value through profit loss or (Fair value hedge) At fair value through profit loss or (FVO) Measurement category IAS 39 Measurement category At fair value through profit loss or (FVO) Loans and receivables At fair value through profit loss or (FVO) At fair value through profit loss or (FVO) Loans and receivables At fair value through profit loss or (FVO) At fair value through profit loss or (FVO) Held to maturity At fair value through profit loss or (Held for trading) At fair value through profit loss or (Fair value hedge) - bearing - - - - 1 January 2018 1 January The following table shows transition effects: (Amounts 1 000 000) NOK in Instalment loans Notes, and other bonds interest securities Senior securities subordinated issued and debt *Changes infair the liabilities value of that attributable are credit to risk spread USD Liborof the above a comprisechanges in interest rate. This includes value price the bo issued USD of changes for contracts derivative directly associated with convertedto dollars. issuingbonds,KBN debt US on based Financial derivatives debt Subordinated liabilities fianancial Total Amounts in 000) 1 000 NOK 2018 1 January Deposits institutions credit with Deposits institutions credit with with creditDeposits institutions Instalment loans Instalment loans Instalment loans loans Instalment Notes, other and bonds interest bearing securities Notes, and other bonds interest bearing securities Notes, and other bonds interest bearing securities interest other and bonds Notes, securities bearing derivatives Financial derivatives Financial Financial derivatives Total financial assets credit from Loans institutions issued securities Senior issued securities Senior issued securities Senior Senior securities issued derivatives Financial derivatives Financial

0 0 0 0 5

0 0 0 0 10 15 ith

he he 711 711 815 815

t t 2016 re he tes, tes, ad to ymmet- t local ert local s a related related Other Other Other Other ates, bute w liabilities liabilities e s tri t r and in

ented as wap spre-

ffecting b and are and are 0 0 0 0 0 0 0 0

0 0 0 0 s 11 11 resulting he resulting hange o conv These es. These

res m,

is ffects in ition (27) teres c e 9 3 6 p t e s ed t her hand le pos 2017 alue iabiliti he it or loss. The ill mostly in ket of bas e us conivatives w Loans and and Loans Loans and and Loans receivables receivables e to ne

ese v 0 e maturity, t 0 0 0 0 by a o the loss der

0 0 0 0 0

inancial on the ot

or l sets ealised No from gains rowing e ris (716) (27) (716) (779) (779) amount of t arameters inancial hedge hedge through profit through as ther abilities and measured at amortised Fair value Fair value Fair value Fair value thativatives ar ealised gain/(loss) ealised i f ei

t somewhat fset by unr truments". Th 0 0 0 0 0

0 0 0

0 0 ices on bonds, mar value ther li ins elevant p pr

of der air he carrying 3 962 3 050 r of f the Statement as O st t and Senior securities issued and related finan- ding ding ssued and nar bonds e maturity o e. inancial of ge extent he value Held tra- for Held tra- for for ssued and related f

lassified 0 0 abov mounts in

0 0 be tfolio may and issued bonds 70 60

epurchase or termination befor

t fect mainly actors, o a lar a 760 (34) e c

he changes in (158) e measured f at e t (4 904)(4 3 962 (3 274) (3 (3 260)(3 3 050 (4 046) (4 (1 542) (1 for i preads s ecurities i 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 hat ar

and therefore to a small giv extent the table R epurchases of bond debt. Fair value Fair value Fair value Fair value

he hedged risk adju sses ar

redit ate t risk, 0 n carrying 0 70 71 or r sition o t lo

s enior 760

(34) t

swap spreads basis swap contributes (974) (185) (163) of c 3 247 2 271 the liquidity por po af spreads wap ssued", t statement. ealised gain/(loss)ealised on f (2 564) (2 (3 231) (3 (1 542) (1 i ding tfolio abilities in ameters and risk f Total Total NOK e realised on sale, r e realised - ome por asis s e reflected i ar swap spreads. swap basis SD inancial ttributable

f f "Net unr a s he inc s estments in securities quidity t of U ealisations and derecognition value

r market par to Fun NOK. and Other li

fair tail ates, and ar "Senior in ome" 163 million, to NOK S r tatement o ee Note 13 Hedge accounting, 13 Hedge ar ee Note ssued bond. B and from Instalment loans with gains of NOK 106 million and NOK 488 million, respectively. ed currency and interest r the li rom imarily due to narrowing inc mit he i in hanges on in he widening e statement a that en he S SD funding spreads for inv f t s pr edges, s 1 billi nd receivables rading i ss h bearing securities bearing securities ecurities f a - - thathe hedged item i lo credit ffects, as may changes in

U onvert

t Net the incom li very akes of s he or t here thehere changes in 2017 amounting f value o c urthermore, t

of c e the result he currency of t ed in fair ed t alue KBN t abilities sides o ar e sales

in ses hanges in v s SD. F w ases tatement e

air ses amounting to NOK 974 million in 2016 came from Instalment loans swap spreadssis swap and FX 1 000 000) NCOME f

o U n c

tent does transactions esented as " value ome. OK pr he columns Loans comprise 158. NOK ivatives in t come s N inc ivatives us

fair 756 million.OK T s is ealised los der tatement. A tatement. C f N ween USD and t ween ivatives. I hanges in o some ex spreads, ba of der

derivatives ncial or los T UNREALISEDT GAIN/(LOSS) INSTRUMENTS ON FINANCIAL der net unr and li on the asset enior securities issued securities enior oans from institutions credit oans from Net unrealised gain/(loss) on financial instruments financial on gain/(loss) unrealised Net Subordinated debt S L Fina Notes,interest and other bonds Net unrealised gain/(loss) on financial instruments financial on gain/(loss) unrealised Net Senior securities issued securities Senior Subordinated debt Loans from institutions credit Loans from Instalment loans 2016 Gain/(loss)fromsales bond investments and derivatives of terminations income trading Net Gain/(loss)securitiesfrom repurchase of issued derivatives Financial KBN t transactions compris Net trading Notes,interest other and bonds NET TRADING I (Amounts in (Amounts 1 000 000) NOK in NOTE 4 NOTE 3 NE Instalment loans 2017 income s ric in Changes credit income s ads bet currency bonds t value significant in cial gain Financial hedged items Of a loss o cost. C bonds and other interest-bearing securities recognized and present presented in Net unrealised los

ANNUAL REPORT 2017 / PAGE 30 ANNUAL REPORT 2017 / PAGE 31

3 27 73 10 12 70

125

2016

s s ’

7 2 33 76 15 74 132 2017

contribution 2017. from is 19.1% s SENIOR EXECUTIVES IN 2017 IN EXECUTIVES SENIOR s ’ ’

Minutes of the meetingsMinutes the of the Remuneration of Committee are circulated Committeeto four Board. has The the Remuneration the appointedmembers, are and among by annually who theBoard. end 2017,membersAt Committeethe year of members are Else Bugge Fougner (Chair),members Bugge Midtgaard, Else are Rune Fougner JarlePetterByre (employee Steen representative). jr. and The Board approves the each guidelines for remuneration year seniorof forsalary executives KBN variable payments. and of practicalcarries annual the implementationreview an out of the variable a writtenelement remuneration of in form of the the by report internal that auditor is reviewed accordance in with Regulation. Undertakings Financial the followingThe Board the remuneration of determines the CEO preparatory matter on this Remuneration outcarried the work by Committee. senior determinestheThe other CEO the remuneration of executives Board'sset the withinthe guidelines limits and by making when thetakes final Board's into account views decisionssuchthe CEO's on on The decisions remuneration. remuneration senior subsequentlyare of to executives submitted thefor Board information. REMUNERATION KBN OF Fixed salary salaryFixed salary payable thein annual2017 included normal increase. salary Variable Guidelinesforsalaryin variable adopted Board were the by forDecember financial 2017. the resulted These have 2016 year employees, all for wages monthly of1.5 salary variable a in the after by the be approved will which Board 2017 annual report hasbeen adopted. Other benefits Other benefits includemobile insurance arrangements, phone, conditions subscriptionnewspaper and same terms on the etc. toas employees. insurance other apply arrangements The relate toforms various insurance personnel of including health insurance as well travel disability insuranceinsurance, as and and life insurance up to the current level fixed of salary. Chief fixed Officer and the entitled toThe are CEO Lending a 50,000annual and NOK car 130,000 benefit NOK of respectively. contractual a has The CEO entitlement, certain subject to conditions, severance to fixed one year's equivalent to pay salary.

MAKING PROCESS MAKING s managements ’ - s values, with leadership leadership with values, s ’

which carries out which preparatory

years

- s Company and its expectations the of ’ based remuneration options. programs or

fixed salariesfixed effect adjusted are with year each leading when comparedleading equivalent with when -

’ s value itss proposition is personnel policy, and and

’ contributions2017.totalJanuary Hence employers from 1 finance include 5.0% tax of s salary for all employees. employees. all for salary s

’ ’

sschemesenior executives remuneration for complies with s remuneration senior executives policy for in is anchored s contribution their results, theto attainment shared of ’ ’ ’ Amounts 1 000) NOK in Remuneration forsenior including employees, all executives, salary,consistssalary a fixed variable of payments, pensions and other benefits, insurance, including personnel newspapers, mobiletelephonemortgage and a residential scheme. KBN does not operate share guidelinesforsenior remuneration the central executives. of The principles determiningsalaries theobserved when senior of executives that are competitive overall remuneration should be but marketnot companies in the banking and finance sector.companies finance the in banking and Financial the Act 1), Enterprises Financial the of provisions the Undertakingsthis Regulation Regulation circular on the 2), issued Financial 3), the Supervisory Authority by and of Norway Government'sthe Norwegian for Guidelines remuneration of seniorcompaniesstatein executives4). ownership with KBN inline owner its with the Company THE REMUNERATION SCHEME FOR SENIOR EXECUTIVES SENIOR FOR SCHEME REMUNERATION THE KBN The Board of Directors will submit the following statement on the the on statement following the submit will Directors of Board The salarysenior executivesAnnual and other the remuneration to of General Meeting: NOTE 6 NOTE 6 REMUNERATION ( Fixed salary is the main element of remuneration received. The The received. remuneration of element main the is salary Fixed Boardsets of Directors quantitative criteria for year each variable financialsalary for next payments the can and year paymentsaward following the to financial times in 1.5 up of year one month from 1 January on the basis of a combined assessmentthe a of January basis from of on 1 KBN bank targetsto adherence and their the All employees skillsmanagersforming assessment for the also with of part reporting staff. Senior President&the Chief executives defined as are Executivethe CEO Officer and (the "CEO") team, comprising 8 persons. DECISION AND SYSTEM MANAGEMENT Thecommittee Board Directors appointed an advisory has of the Remuneration Committee on thework principles applicable remuneration, to guidelines for variablesalary, the and guidelines forsenior remuneration of Board has Theexecutivesthe ofthe CEO. and for remuneration Remunerationthe ofmandateissuedfor Committee. work the a Totalsalaries administrative expenses and Average of number man Administrative expenses contributions Employer costs Pension Other personnel benefits Salaries Employers NOTE 5 EXPENSES ADMINISTRATIVE AND SALARIES (Amounts 1 000 000) NOK in

5 0 0 0 0 0 0 0 0 0 0

10 15

711 711 815 815

local local ian- 2016 re

ively. tes, tes, spread to d f ymmet-

ert s a related related d d in the Other Other Other Other

ates, le bute with with bute No

amortised

liabilities liabilities an e s tri t r

These These resulting resulting

as ented wap

and are and are at The 0 0 0 0 0 0 0 0 0 0

11 11 he es.

res

ffects in the (27) (27) 3 6 9 t e 2017 Loans and and Loans Loans and and Loans receivables receivables

0 0 0 0 0 0 0 0 0 0

(716) (716) (779) (779)

hedge hedge Fair value Fair value Fair value Fair value

0 0 0 0 0 0 0 0 0 0

3 962 3 962 3 050 3 050

ding ding Held tra- for Held tra- for

0 0 0 0

70 60

760 (34)

(158)

(4 904) (4 (4 046) (4 260) (3 542) (1 274) (3

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

Fair value Fair value Fair value

0 0

70 71

760

(34)

(974) (163) (185) 2 271 3 247 (3 231) (3 542) (1 564) (2 Total Total

NOK basis swap spreadsNOKcontributesswap basis to somewhat the the affecting by loss

bearing securities bearing securities - -

bearing securities and from Instalment loans with gains of NOK 106 million and NOK 488 million,bearing securities NOKmillion respect Instalment488 from loans and 106 NOK and gains of with -

NOTE 4 NET TRADING INCOME (Amounts 1 000 000) NOK in transactionssome extent doesKBNtothat realisations entail maturity assets and derecognition liabiliti or either before of transactionscomprisesales securities liquidity of the from repurchases portfolio gain/(loss) bond debt. Realised of or p is income. Net trading Gain/(loss)securitiesfrom repurchase of issued Gain/(loss)fromsales bond investments and derivatives of terminations income trading Net NOTE 3 NET UNREALISED GAIN/(LOSS) INSTRUMENTSON FINANCIAL (Amounts 1 000 000) NOK in 2017 Instalment loans Notes,interest other and bonds derivatives Financial institutions credit Loans from issued securities Senior Subordinated debt instruments financial on gain/(loss) unrealised Net 2016 Instalment loans Notes,interest and other bonds derivatives Financial institutions credit Loans from issued securities Senior Subordinated debt instruments financial on gain/(loss) unrealised Net value of derivatives used to convert USD funding to NOK. Funding losses are to a large extent offset by unrealised largefrom Funding extent offset tovaluefundingto of by a gains losses convert USD NOK. derivatives are to used bonds interest and other securitiesmillionSenior cameInstalmentfrom loans Net and and relate 2016 issued NOK unrealised to losses 974 in amounting cial thefair changesmaturity,termination on sale, cases in before where derivatives.value In realised repurchase are or t statement.gain income income" loss is trading or "Net presented the as in Financial profitfair derivativesfairthrough loss.measuredsee accounting,in 13 Hedge value value hedges, Note or are at hedged itemscomprise billion 158.1 securitiesin NOK "Senior that classifiedmeasured issued", liabilities Other as are and cost.hedged item thethatamount hedged risk valuecarrying is fair ite attributable Changes for the the the to adjust in of recognized"Netthestatement gain/(loss) and presentedin income unrealised financial as instruments". value on These change presented receivablescolumns Loans the liabilitiesthe and Other and in in table above. 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 rates, carryingthe financial reflected spreads are credit of in in position Statement amounts FX swap spreads, and and basis limitedvery incomecurrencyinterestchanges takes statement.KBN the relevant As risk, and mostly rate in parameters will b liabilitiesfinancialricthe Statementsmallsidestotherefore the and asset ne of of on a extent give rise position and to incomecredit statement.inspreadsfor Changes the investments in liquidity other may on the hand portfolioissued bonds and significant spreads.swap maychanges statement in income as basis effects, million, securitiesSenior Ofto 163 unrealised 2017 amounting net losses NOK financial and related issued in con derivatives of ofmillion.s basisto narrowing creditforThe is narrowing primarilya loss 756 loss issued due spreads NOK and of bonds convto spreadsthatBasisthecurrency bond. affect of swap derivativesthe issued value of the used ads are USD and between currency Furthermore, USD. to bonds USD the of widening

48 61

147 142 166 157 150 172 192 115 154 161 151 163 157 196

1 126 2 882 2 265 1 206 2 711 2 317 costs costs is Pension Pension Pension Pension

8 46 31 39 49 38 34 40 39 40 17

617 118 134 200 473 560 525 112 517 590 198

nefits nefits Other be- Other Other be- Other

the scheme and include and the scheme include 188 177 210 154 224 298 361 122 193 179 213 158 231 102 371

state ecutives in companies with 1 612 2 687 2 039 1 627 2 775 1 886 of Norway: Circular 15/2014 the period** the the period** the ry accrued ry in ry accrued ry in Fisheries with try of Trade, Industry and Variable sala- Variable sala-

467 973 813

pension and group life insurance / death 17 239 13 300 20 635 16 582 13 299 21 450 salary* salary* ld Paid fixed Paid fixed

the private sector the associated with the joint scheme compensation (30%), monthlypaid over two years, pro- comparedtodefined the benefit plan, have been granted

hip, adopted by the Minis Financial Enterprises Act 1 505 1 1 546 1 412 1 1 470 1 683 1 1 651 1 233 1 1 266 1 791 1 1 830 2 381 2 2 462 2 895 2 3 075 1 400 1 1 300 1 1 547 1 1 583 1 435 1 1 493 1 707 1 1 740 1 261 1 1 290 1 845 1 1 885 1 950 1 2 967 2 3 056 ial

salary salary salary salary up policies, chi 12 900 15 412 me -

on of senior ex Guidelines for remunerati The Financial Financial Undertakings Regulation The Authority The Financial Supervisory The offered a collective if and when agreementis into.entered Relat- in included are coverings insurance ed to the right without allowance child with scheme pension disability paid for salaries between 7.1 and 12G. A contractual contractual A plan pension for salaries between 7.1 and 12G. in (AFP) benefit. Employees who are estimated to receive a lower ex- lower a receive to estimated are who Employees benefit. pected retirement pensionat the age of 67 according to the new sche a part vided theyare still undertheKBN employmentduring payout period. ------owners effect from 13. February 2015. 4) 2) 3) 1) Agreed fixedAgreed Agreed fixedAgreed from

s s ’ s salary **Paid out in the following year s **Paid following the out in salary s salary **Paid out in the following year s **Paid following the in out salary ’ ’ August 2017 adjusted -

from 1

Affairs Officer),

Officer)

Officer) & Regulatory

Markets Officer),

and Digital Development Strategy and Digital of IT and Operations) Lending

(Chief Legal (Chief Communications (Chief Capital

Granquist (CFO)

(Chief People,

from 1 September 2017 2017 sscheme defined benefitfor administered pension KLP by

’

April The definedcontribution scheme established pension was a with zero and 7.1Gfor deposit salariesand 18% 7% of between rate employment. includesscheme The also disability and life pen- contractualsions and early retirement. been changed has scheme January the From 2018 on, pension 1 contribution Storebrandtowith a defined Livsforsikring scheme scheme employees,those all applies AS. to new except The who as2018, well January as partially disa- 55 yearsare 1 older or at bled fully or incapacitatedsickness employees entitled to benefit definedstartingcontributionpaymentsthethe time at pension of covered previousplans. by KLP. arrangements These are in Pension benefits retirementcompletion servicethe of 30 years pension upon of KBN leaving of time the at salary base of to 66% equivalent Until 31 December 2017, senior executives were membersseniorUntil were executives of 2017, 31 December KBN salaries Insurance 12 times the (G). amount below National base life expectancy toschemeMembersthis a of entitled are Total remuneration to employees whose professional acti- whose professional to employees remuneration Total institution the of position risk the affect vities Total remuneration executives to senior Lars Officer) Prestvik Strøm Lending (Chief IlseStaff Operations) BacheMargarete (Chief of and Håvard ThorstadHåvard (CRO) Tor Ole Steinsland (Chief Communications 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) & (President Falkgård Kristine *11 months fixed salary and holiday pay based on last year salary *11fixed on last months holiday based pay and Remuneration senior executives to 2016 Total remuneration to the employees in the independent independent in the employees the to remuneration Total functions control Total remuneration to employees whose professional acti- whose professional to employees remuneration Total institution the of position risk the affect vities Total remuneration executives to senior *11 months fixed salary and holiday pay based on last year salary *11fixed on last months holiday based pay and Total remuneration to the employees in the independent independent in the employees the to remuneration Total functions control Remuneration senior executives to Kristine Falkgård (President & CEO) Sigbjørn Birkeland Håvard Thorstad (CRO) Ilse Margarete Bache (Chief Prestvik (Chief Lars Strøm Morten Hatlem Thomas Yul Hanssen Tor Ole Steinsland Officer), Jannicke Trumpy 1 2017

ANNUAL REPORT 2017 / PAGE 32 ANNUAL REPORT 2017 / PAGE 33

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

405 264 197 310 210 162 100 182 520 981 983

2016 2016 2016 2016 2 070 2 541

0 0 6 0 0 0 0 0

24 70 94

414 270 202 317 187 244 202 161 145 490 866

2017 2017 2017 2017 2 148 2 1 087 1 156 3 599

s implementation of the new accounting implementations new the of ’

Iren WalstadWassås (from 3 June -

chairman from 5 June 3) chairman 2015) 5 from

Ma TostrupMa Smith June 2016) (until 3 -

chairman Skancke Martin (vice - Vice Remuneration to Board of Directors of Board to Remuneration Chairman Else Bugge Fougner 3) 1) Board memberBoard Egidius Nanna 2) Board member Martha Takvam 3) 2) Board memberBoard Sollie3 June Rune 2) (until 2016) Board memberBoard Midtgaard Rune 2) 1) Board member Petter Steen jr (from 5 June 2015) 1) member3 JuneBoard Brit 2) 2016) Rugland (from Board memberBoard employees' 1) 2015) representativeJarle June Byre 5 (from Board memberBoard employees' representative3 June Harstad (until 2016) Marit Urmo Board memberBoard employees' representative May 2016) Alternate Board member employees' representative Andreas Alestrøm (from 5 June 2017) Remuneration to Control Committee Control to Remuneration 3) of Member committee risk Total remuneration to Board of Directors of Board to remuneration Total 1) of Member remuneration committee 2)committee of Member audit ChairmanJuneKjell Skaldebø 2016) 3 Inge (until Committee member Anne Committee 2016) member June Rødal Ole (until 3 CommitteeJuneJevard (until 2016) member 3 alternate Roy *Other relatedto 2017 is accounting services assistance not related audit in KBN to related standard 9. IFRS Otherto services not audit related Total remuneration to Control Committee Control to remuneration Total Total excl. fees VAT Chairman Svein Ludvigsen Board Supervisory to Remuneration Board members Tax services Tax Total remuneration to Supervisory Board Supervisory to remuneration Total Other financial attestation audit services and Fees to the statutory auditor statutory the to Fees Statutory audit fees 48 61 147 150 157 166 142 192 172 161 154 115 157 163 151 196 1 126 2 317 2 711 1 206 2 265 2 882 costs costs is Pension Pension Pension Pension 8 49 39 31 46 34 38 17 40 39 40 118 617 590 517 200 134 525 560 473 112 198 nefits nefits Other be- Other Other be- Other 58 the scheme and include and the scheme include 361 298 224 154 210 177 188 122 371 102 231 158 213 179 193 2 775 1 612 1 886 1 627 2 039 2 687 the period** the the period** the ry accruedry in ry accruedry in Variable sala- Variable sala- 467 973 813 pension and group life insurance / death 3 075 2 462 1 830 1 266 1 651 1 470 1 546 3 056 1 885 1 290 1 740 1 493 1 583 21 450 13 300 17 239 13 299 16 582 20 635 salary* salary* ld Paid fixed Paid fixed the private sector the associated with the joint scheme compensation (30%), paid monthly over two years, pro- compared to the defined benefit plan, have been granted 1 683 1 412 1 505 1 1 261 1 707 1 435 1 547 1 400 1 300 1 895 2 381 2 791 1 233 1 2 967 2 950 1 845 1 ial salary salary up policies, chi 12 900 15 412 me - The Financial Undertakings Regulation offered if a collective and when agreement is into. entered in included are coverings insurance ed Relat- to theright without allowance child with scheme pension disability paid 1) Financial The Enterprises Act 2) 3) The Financial Supervisory Authority of Norway: Circular 15/2014 Guidelines4) for remuneration of senior executives in companiesownership, with adopted by the Ministry of Trade, state Industry and Fisheries with for salaries between 7.1 and 12G. A contractual contractual A plan pension for salaries between 7.1 and 12G. in (AFP) ex- lower a receive to estimated are who Employees benefit. pected retirement pension at thesche age of 67 according to thea part new vided they arestill under KBN employmentperiod. during the payout ------Agreed fixedAgreed Agreed fixedAgreed s ’ s **Paid out salary in year following the s **Paid out salary in year following the ’ ’ adjusted - s defined benefit pension scheme administered KLP by for ’ Pension benefits Until 2017, 31 December members senior were executives of KBN salaries 12 times the below National Insurance (G). amount base Members of this life expectancy to scheme a entitled are retirementcompletion servicethe of 30 years pension upon of base of to 66% equivalent leavingof time the at salary KBN employment. The includes scheme also disability and life pen- contractualsions and early retirement. From been changed has scheme January the 2018 on, pension 1 contributionto a defined scheme Storebrand with Livsforsikring scheme employees, all appliesAS. to new except The those who January 55 yearsare 1 older or at 2018, as well as partially disabled fully or incapacitatedsickness employees entitled to benefit payments atstarting the time of definedcontribution the pension covered previousplans. by KLP. arrangements These are in The definedcontribution pension scheme established was a with deposit 7% of rate zero and 7.1G for salaries between and 18% control functions control *11 monthssalary fixed on last holiday based pay and year 2016 Remuneration senior executives to CEO) & (President Falkgård Kristine Officer) Markets Financial (Chief Spillum Martin (until 30.10.16) JannickeTrumpy Granquist (CFO) OleTor Officer) Communications (Chief Steinsland ThorstadHåvard (CRO) Ilse BacheMargarete (Chief of Staff Operations) and Lars Strøm Officer) Prestvik Lending (Chief Total remuneration to executives senior Total remuneration acti- whose professional to employees institution the of position risk the affect vities independent in the employees the to remuneration Total functions control *11 monthssalary fixed on last holiday based pay and year Remuneration senior executives to Total remuneration to executives senior Total remuneration acti- whose professional to employees institution the of position risk the affect vities independent in the employees the to remuneration Total Kristine Falkgård (President & CEO) Birkeland Sigbjørn (Chief Capital Markets Officer), from 1 August 2017 Jannicke Trumpy Granquist (CFO) Tor Ole Steinsland (Chief Communications Officer) Håvard Thorstad (CRO) Ilse Margarete Bache (Chief of IT and Operations) Officer) Lending Prestvik (Chief Lars Strøm De-velopment Morten Hatlem and Digital Strategy People, (Chief Officer), from 1 September 2017 Thomas Yul Hanssen (Chief Legal & Regulatory Affairs Officer) from 1 April 2017 2017

0 0 0 0 62

443 505 273 778 778

of ren, ren, 2016 2016 2016 (270)

n e 2 391 e of 16 958 19 349 18 840 19 349 2.60% 2.50% 2.25% 1.48% ild

ent is was posi- s s nts w

com ion ion

alary defined nd tled totled 31.12.2016 eem e s nti

The The

0 0 0 0 2.40% 1.48% 2.50% 2.25% 62 438 499 506 2017 2017 2017 (275) 1 005 2 481 1 005 17 598 20 079 19 349 20 079 31.12.2017 Unfunded plan Unfunded Unfunded plan Unfunded Unfunded plan Unfunded

0 249 902

2016 2016 2016 8 934 1 027 1 440 4 082 11 649 12 551 33 031 29 900 12 551 33 031 (9 419) (9 107 371 (78 422) (78

The compensation amount has been finally set.

271 320 Funded plan Funded Funded plan Funded Funded plan Funded 2017 2017 2017 9 877 1 099 1 586 6 041 6 361 3 636 6 361 29 424 33 031 29 424 (6 791) (6 (9 969) (9 117 487 (91 700) (91

s pension scheme has been changed to a defined contribution scheme as from 1 January 2018. The new scheme applies all The to new changed a defined contribution Januaryfrom scheme to s 2018. scheme been has pension 1 as ’ Amounts 1 000) NOK in NOTE 7 NOTE 7 PENSIONS ( Service cost Pension costs Pension As of 31 December 2017 KBN has a defined benefit plan that covers all a defined benefitthatthrough employees covers plan and is Kommunal administered KBN has 2017 As 31 December Landspen- of sjonskassePension (KLP). benefits include pensions, retirement ch disabilityspouses dependentfor pensions and pensions and and are coordinatedand are Scheme.The Insurancefrom thecompliant benefits National with the with requireme isdefined benefit plan Service Mandatory the Norwegian Pension Act. cent bas per 66 the of retirementFull to right gives pensionservice a of pension benefits period 30 years of and requires a calculat the in included is plan This (AFP). plan pension contractual a has also KBN Scheme. Insurance National the including pension April liabilities. 2011, defined ascovering a closed 1 plan The amount of salaries benefit been (G) has 12xBase over terminatedcurrent partforthe of in employees plan. 2015 that were liabilities. and costs pension in included are contributions Employer's The defined plan benefit composition occupational is through administrated sector cannot be a public and asset pension scheme specified. KBN transitiondate, 55 years are partially olderemployees, or as fully at e or disabled well those as who employees except for transition.sickness time benefit the theof These individuals by at definedcovered described still are plan benefit above. tion. The pensionnew scheme entails costs from 2018. contribution pension scheme was established with a deposit rate of 7% for salaries between zero and 7.1 G and 18% for salarie for 18% contributionestablished and 7.1 for zero 7% G salaries ofand between rate was pension a deposit scheme with a collectivewhen private agr the scheme sector in 7.1 joint be offeredwill AFP if and the between associated and 12 G. with transition estimatedJanuary on the in 2018 and is based reduction pension. 1 date years,Compensationplace providedmonthly payments that duringtheKBN two coursetake works will th at of the employee over years.payouttwo period.cost compensation these over The be recognised will constitutesthat recognition results change end employees year in in a plan of at 62 a of for 74 schemeThe change pension of million corresponding December reducedamounting and a to pension liability 6.8 2017, 31 Statement NOK at the financial of in entered into. Employees who are estimatedenteredto according ne expected into. of the to are the a lower Employees 67 retirement pension receive at age who comparedtoscheme definedpartialbenefit the compensationcompensationcalculated a The been granted have is plan, (30%). o Net periodic pension cost Net interest Planchange transition contribution at toscheme defined contributions Employer Total pension cost recognised in income statement income in recognised cost pension Total Actuarialother gain/(loss)in comprehensive recognised income Net pension costs pension Net liabilities Pension Plan assets Defined benefit obligation contributions Employer liabilities pension Net Movement in pension liabilities pension in Movement NetJanuary pension liabilities 1 of as Net pension costs Contribution pension scheme the to Net pensionNet liabilitiesof 31 December as 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 Estimated growth wage EstimatedBase in growth amount Expected inbenefit growth levels determininginput covered bondsthe 2016.KBN when Norwegian for as discount The used actuarial rate 2017 and assumptions has standard basedare on assumptionsrecommended Accounting demographicthe to related factorsBoard. Norwegian Standards by

ANNUAL REPORT 2017 / PAGE 34 ANNUAL REPORT 2017 / PAGE 35

0 0 0 0 0 0 0 0 0 0 0 12 48 12 (4) 230 230 919 230 230 230 237 (10) (52) (17) 2016 2016 2016 2016 2016 25 % (201) (237) 2 597 7 900 (1 602) (1 (8 370) (8 payable tax as at

0 0

12 (6) (2) 0 0 0 0 0 220 539 354 446 551 551 539 354 (89) (11) (50) (89) 2017 2017 2017 2017 20 % (315) (574) (411) 241 1 055 1 783 9 905 2 202 2017 (241) (4 734) (4 (3 384) (3 1 capital) reduces Unfunded plan Unfunded Tier

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

capital (additional

Funded plan Funded 2017 (271) 8 737 4 320 1 931 91 700 78 422 (1 440) (1

from items recognised under equity

taxes on income for the period

in payable

Benefits paid Decemberof 31 Fair plan as assets of value Contribution to the pension scheme scheme pension the to Contribution Actuarial gain/(loss) Actuarial Service cost Net interest Fair value of plan assets as of 1 January Fair 1 of plan as value of assets Movement in the fair value of plan assets plan of value fair the in Movement Payable taxes on income for thePayable for period* taxes on income NOTE 8 TAX (Amounts 1 000 000) NOK in Januaryfromto 2016. 25 percentThe27 percent 1 from corporate rateincome reduced was tax inChange deferred tax changes returnof for result tax inChange years as previous deferred in tax a Effect of reduced tax rate as a result of changes return rateinEffect a result fortax as tax years previous reduced of of derivatives Financial *Change Total income tax Profit before tax liabilities Pension 31 December 2017 in the Statement of financial position to NOK 214 million. 31 December 2017 in the Statement of financial Provisions Reconciliationincome of effective rate tax Premiums/discounts on financial instruments financial on Premiums/discounts Unrealisedfinancial gain/loss on instruments Currency gain/loss on financial instruments financial on gain/loss Currency Fixed assetsFixed Calculated tax expense changes return rateinEffect a result fortax as tax years previous reduced of of differences Temporary Lossescarried purposes for tax forward Total temporary differences temporary Total Deferred liability/(asset)tax Change inChange deferred tax on itemsChangestax comprehensive in in recognised deferredother income Deferred liability/(asset)tax 31 December (25%) as at Effect of change in tax ratechangeEffecttax in of Deferred tax liability/(asset)Deferred tax 1 January at as Tax expenseTax rate tax income Effective Deferred liability/(asset)tax on itemsChangestax in in (additional recognised deferredequity 1 capital) Tier 0 0 0 0 62 778 505 273 778 443 of ren, 2016 2016 2016 (270) n e 2 391 si- e of 19 349 18 840 16 958 19 349 2.50% 2.25% 1.48% 2.60% ild ent is was po s nts w com ion alary defined nd tled totled 31.12.2016 eem e s nti The 0 0 0 0 2.40% 2.50% 2.25% 1.48% 62 506 438 499 2017 2017 2017 (275) 1 005 1 005 2 481 19 349 20 079 17 598 20 079 31.12.2017 Unfunded plan Unfunded plan Unfunded Unfunded plan Unfunded 0 902 249 2016 2016 2016 4 082 8 934 1 027 1 440 29 900 12 551 33 031 12 551 33 031 11 649 (9 419) (9 107 371 (78 422) (78 The compensation amount has been finally set. 271 320 Funded plan Funded Funded plan Funded plan Funded 2017 2017 2017 3 636 6 361 9 877 1 099 1 586 6 041 6 361 29 424 33 031 29 424 (9 969) (9 (6 791) (6 117 487 (91 700) (91 s pension schemechanged a defined contribution to been has scheme as January from 2018. 1 scheme all applies The new to ’ Amounts 1 000) NOK in NOTE 7 PENSIONS ( Net interest Service cost contributions Employer Plan change transition contribution at to defined scheme cost pension Total statement income in recognised Actuarial gain/(loss)in recognised other comprehensive income costs pension Net liabilities Pension Defined benefit obligation Plan assets contributions Employer liabilities pension Net liabilities pension in Movement NetJanuary pension liabilities 1 of as Net pension costs Contribution pension scheme the to pensionNet liabilitiesof 31 December as As of 31 December 2017 KBN has a defined benefit plan KBN has 2017 As 31 December of that covers allthrough employees and is Kommunal administered Landspen- sjonskasse (KLP). Pension benefits include retirement pensions, disability and pensions pensions for spouses dependent and coordinatedand are benefits with ch from the NationalScheme.The Insurance is benefit defined plan Service Mandatory the Norwegian Pension Act. compliant the with requireme Full givesservice pension benefits 30 years period of and requires a 66 per the retirement right to pension a of cent bas of the in included is plan including This (AFP). plan pension contractual a has also KBN calculat Scheme. Insurance National the pension liabilities.defined plan The benefit April 2011, as covering a closed 1 amount of salaries been (G) has 12xBase over terminatedin for 2015 current part of employees that were the plan. are contributions Employer's liabilities. and costs pension in included The defined plan benefit occupational is through administrated sector a public composition and asset pension scheme cannot be specified. KBN employees, except for 55 years are older or at those who transition date, partially as fully or e disabled well as employees sickness time benefit the at of transition. Theseindividuals still are contribution was pension scheme the by defined covered plan benefit established of rate a deposit with described above. 7% and 7.1 for zero G salaries between in 7.1 AFP between and 12 G. for 18% and private the sector joint the associated with salarie scheme willestimatedentered according expected into. ofto are the a lower Employees 67 pension retirement receive at age who be offered if and to ne a collective the when agr scheme comparedtopartial definedbenefit the a been granted plan, have compensation (30%). Thetransition estimatedJanuary on the 2018 and is in based reduction 1 date compensation is pension. calculated o Compensation payments will years,place providedmonthly that two course take of the over the works at employee during KBN th payout period. compensation The cost will these over be recognised years. two The change pension of schemeconstitutesthat results change end employees year in a plan 62 of at for 74 recognition in a of amounting to 6.8 NOK million corresponding December reduced a and pension liability 2017, 31 Statement at the financial of in tion. The new pension scheme entails costs from 2018. costs Pension Net periodic pension cost Economic estimates used in calculation of calculation in used estimates Economic obligation benefit defined and costs pension Discount rate Estimated growth wage Estimated in growth Base amount Expected in growth benefit levels covered bondsKBN Norwegian as used has determining inputthe 2016. when for discount The rate actuarial 2017 and assumptions standard basedare on assumptions demographic to related factors recommended by Accounting the Norwegian Standards Board.

hen he in o the t n , w a decision in s, and in ion hanges elates t . urrency horitie esults esults r he c a reduct but no c is mendment r or 2014 and 2015 his he tax aut a rinciple t on of t p with thee with decision decision. This decision. ’ of t ffect income f e pense time, over horities’ ’s view that the tax aut horities ealisation ear 2014. The axable accordanc %. The e / ex he r o the decisions ax y ax aut ed t he t for the bank tax expense, ithout a material effect ate above. incom ate of 25 ax r he use of t o the original t struments, in t ed on the t axable in eturn for t lifetime. It is the bank ith a tax r BN has adapt 17, bas egarding inancial he tax r w ter, t 20 ffective income t ear 2014 leads t and timing of t and timing f e instruments’ o incipally r ax y hanges in 2016 or la il c ferences for f he t ecognized in over the r total econciliation time unt struments, pr hich is in R eturn for t in emporary dif t hanged periodisation he financial statements for 2017 K he tax r ate changes. t n t ending 89 million, w of financial ovember 2017 regarding mplies a c i moved forward in moved forward N taxable income income in taxable in to NOK changes in hen the tax r % for 2017, see table iodisation , being decision ’ ed changes in of w included egarding ate of 20 r are inancial instruments. I horities f f ision 27% ate was s recognis e tax r but w differences and tax payments, ult in larger and more volatile temporary items eceived a decision eceived ax aut xpense amountingxpense reatment and per t dec tax e the tax r element o The tax t thus ha The effectiv which will res KBN r with thewith exception

ANNUAL REPORT 2017 / PAGE 36 ANNUAL REPORT 2017 / PAGE 37

0 0 0 0 0 0 0 0 0 0 0 0 0 0 6 0 7 17 23 lities lities 7 584 4 714 2016 162 806 146 223 158 092 153 807

Other liabi- Other Other liabi- Other 7 6 0 7

13 0 0 0 0 0 0 0 0 0 0 0 0 0 2017 1 115 9 172 10 974

114 864 102 773 123 791 114 619 Loans and and Loans Loans and and Loans receivables receivables

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 21 21 10 10

Held to Held to maturity maturity

0 0 0 0 0 0 0 0 0 0 0 0 966 966 671 671

1 029 1 362 1 362 1 029 hedge hedge Fair value Fair value Fair value Fair value

0 0 0 0 0 0

25 246 14 955 14 955 19 720 19 720 10 805 10 805 25 246 loss loss trading trading Held for Held Held for Held

0 0 0 0 0 0

5 208 1 974 2 008 1 228 223 710 164 748 287 370 117 414 213 398 211 390 277 440 168 777 107 435 225 684 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 1 974 7 584 2 008 4 714 16 182 26 275 15 921 21 082 11 476 10 400 369 933 267 521 418 174 118 550 397 286 369 482 412 717 283 396 107 445 405 765 the main KBN is a lessee. theof operating part the where leases

bearing securities bearing securities - -

5 years - otal financial liabilities financial otal Under 1 year Under NOTE 9 LEASES (Amounts 1 000 000) NOK in Future minimum lease lease payments minimum Future Over 5 years Over period the in expense an as recognised payments Lease 1 Total future minimumTotalfuture payments lease PropertycompriseVIIs rental in Haakon gate Oslo in Deposits with credit institutions credit Deposits with Subordinated debt Instalment loans 2016 derivatives Financial Loans from institutions credit Loans from issued securities Senior Total financial assets Notes,interest and other bonds derivatives Financial Subordinated debt Total financial liabilities financial Total derivatives Financial Senior securities issued securities Senior Loans from institutions credit Loans from Total financial assets Deposits with credit institutions credit Deposits with 2017 Instalment loans Notes,interest and other bonds derivatives Financial T CATEGORISATION OF INSTRUMENTS FINANCIAL (Amounts 1 000 000) NOK in NOTE 10 the hen and , w decision in the expense, ’ s, ency ax ion . urr decision. an in results This ’ s view that authorities tax view s the ’ lifetime. It is the bank ’ decision implies a changeddecision periodisation implies of a and timing taxable income changes time, in but/ over no expense ’ KBN received a decision in November 2017 regarding changes in the tax return for the tax year 2014. year return The for tax tax KBN amendment2017 regarding November to the the changes relates decision a in in received treatmenttax periodisation and of financial instruments, realisation principally the the of c use the regarding principle on element of financial instruments.financial the In statementstheto decisions adapted of KBN has for 2017 thus has authoritietax the changes recognised in temporary ending differences for financial instruments, in thewith decision accordance The decision regarding 2014 leads year return for tax tax the the changes in the to original taxable income and 2015 2014 for the rate 27%, being was tax in moved forward is a reduct rate this of The oftax effect 25%. time a with until later, or 2016 expense amountingtax to 89 NOK authorities million, tax on the based is recognized 2017, in which effective rate oftax 20% for 2017, see table Reconciliation rate income effective above. tax of authoritiesThe tax are items which included instruments the over total in income taxable in will result inmore volatile larger and temoporary payments,material differencestax without effect but a and forthe rate the changes. tax with exception when of the t bank

0 0

Total Total 1 974 5 208 2 008 1 228 period 26 275 15 921 21 082 11 476 - per 31 per 251 959 223 710 303 291 117 414 164 747 234 479 211 390 288 916 107 435 168 777 . These . These

0 0 0 0

574

1 974 2 414 2 511 2 008 2 722 99 197 20 366 76 857 70 653 65 728 95 072 12 905 80 159 72 609 69 313 Level 3 Level Level 3 Level bearing securities -

0 0 0 0

indexed interest rate. Within indexed interest rate.

- bearing securities 5 909 5 208 8 177 8 754 1 228 - 13 507 56 628 99 019 20 951 99 464 Level 2 Level Level 2 Level 152 762 146 853 174 363 131 428 123 251 130 397 termcertificates debt municipali-issued by -

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

7 980 7 980 58 275 58 275 85 910 85 910 Level 1 Level Level 1 Level ments is approximately theto notional equal amount placements2. allocatedto are Level Instalment loans Level 2 includes short ties and loans with floating Nibor floating with loans and ties flexibilitymorecustomers the refi- in have these loan products, nancing the other loans with market lenders when conditions change.of As a result, these loanssubject types are to greater use the allows marketthe and competition betterin liquidity and valuation of the in inputs loans as of on new prices observable these loan products. traded that not are customersloans to ratefixed Level 3 includes observablemarketinhave an active market and do not prices the is loans such for input significant A recognition. initial after creditspread , at is which estimated each reporting date. Credit municipalities. allconsidered sameriskfor the to is be As observ- makesmanagementable available,spreads as- credit not are sumptions and estimates adjustments relevant for creditfor risk differentmaturities, period for prices in loans based issued a on limited time a from Loans sheetthe date. balancecloser to before the reporting date are used in determining the credit credit in the useddetermining are date before reporting the representative sufficient ensure esti- and to data spread,inorder mates. condi-In evaluationcarried whether addition of an is out cho-sheetsuggestthattions the the dateto balance leading up sufficientmarkettothesen a extent reflect doestime not period conditionssheet the date. balance on Notes,interest and other bonds an active in prices quoted on fair based Determinationvalue of manymarket fair and sellers with willing buyers value a gives valuation uncertainty of degree estimate lowest the (Level 1). with

Net unrealised Net unrealised

“

observable marketobservable inputssignificant to are a

observable inputs ”. using both bearing securities bearing securities - -

termfair nature, the thesevalue instru- of -

Valuation techniques where Quoted prices in active markets for identical assets and Quotedidenticalmarkets for prices active in and assets

— — Valuation techniques with with techniques —Valuation 3 2

: There were no significantThere reporting were the transfers Level period.1 and Level 2 in between Total financialliabilities measured value fair at Subordinated debt derivatives Financial Senior securities issued securities Senior Loans from institutions credit Loans from Total financialmeasured fair at assets value derivatives Financial Notes,interest and other bonds Instalment loans Deposits with credit institutions credit Deposits with 2016 December 2017 Holdings of NOK 22 billion kroner are transferred Notes,are interest Holdings Level kroner1 for other and from to 22 billion bonds NOK of Level 2 Totalfinancial liabilities measured value fair at Subordinated debt derivatives Financial Senior securities issued securities Senior Loans from institutions credit Loans from Totalfinancial measured fair at assets value derivatives Financial Notes,interest other and bonds Instalment loans Deposits with credit institutions credit Deposits with (Amounts 1 000 000) NOK in 2017 NOTE 11 FINANCIAL INSTRUMENTS FAIRMEASURED VALUE AT gain/(loss) on financial instruments financial on gain/(loss) KBN established guidelines has policiesfor and valuationthat instru- financial of measurement value fair for principles describe meas- should be that value fair are main The ments. principles liability thebe sold for repur- or may at assetured value the the to shall be used thatchased/transferreddata observable for, and thethe extent possible in valuation,should and quality assurance be undertaken against sources. alternative The guidelines also types, different instrument valuation for frequencythe of set out and procedures for control fairof value. institutions credit with Deposits Deposits creditwith institutions that measuredare fairat value includecredit deposits othershort institutions. with term time Because theirshort of data and estimateschanges inputs. in as Allfair financialvalue of instruments and liabilities, carrying assets the of adjust amounts recognisedand are inthe statement income as Level 1 Methods used for the determination of fair value fall within three three fall within value determination fair of the for Methods used categories,degrees valuation uncertain- reflect of which different ty Level Level Valuationtechniques determinationthe forfair used value of of cash discounted include and 3 financial 2 inLevel instruments models flows and option pricing Information value fair about liabilities degree unobservabledegree

ANNUAL REPORT 2017 / PAGE 38 ANNUAL REPORT 2017 / PAGE 39 -

features and ’

s value changess at value ’ currency swapscurrency and interest - contracts only in used economic - NOK), FRAs and plain vanilla interest interest vanilla plain and FRAs NOK), -

EUR and EUR -

period ends, the includingfairfor development reason in the values. structure.financial Fair value of instruments without embedded derivativesthe option elements or is determined discount- using method, discounted cash flows where rates derivedthe are from relevantmoney observablemarket interest sig- and other rates nificantmaythefairthat the instru- factors affect value risk of Whenfactorsbe reliablyments. such cannot observed a re- at portingmakemanagementmay date, assumptions esti- and use most determiningmates significantfair when unob- The value. creditservable in theinputsLevel 3 are in valuation used spreadsfor financial instruments an active traded that not are in market.value financial of instruments Fair embedded with deriv- a of combination a using determined is elements option atives or discountedcashmethod option flowsmodels pricing and with marketobservablefinancial inputs. For and estimates data as instrumentsmeasuredthe value fair that holdings at part are of severalover periods, a reconciliationmovements of the between period. reporting levelsthe each at end of is done Financial derivatives Financial OTC are derivatives financial All hedgescurrency interest of swaps (USD basis risk. and For rate NOK, USD cross swaps currency withoutrateval- fair elements, option and with method flow cash discounted the determined using by ue is spreads discount swap basis derivedobservable from and rates interestswap rates.thesecontracts Hence, allocated are to Lev- activityconsiderablemarketel contracts 2, and for with new marketrelevant parameters. Cross periodKBNthe fair the analyses values and rate swaps which are economic hedges of structured bonds and hedgesrate structured of swaps economic and are which bonds thatfor to instance FX option elements equity have linked or ratessame valued are valuation using models the corre- as sponding issuedclassified bonds unob- and are Level 3 when as significantservabletoinputs a used are extent. techniques Valuation methodsfinancialfairforThe the determining value of in- used struments instruments the defined based are on - s s ’ . The . The bearing securi- - rates, stock prices, - binding price indica- price binding

- professional investors. - significant valuation uncertainty valuation significant

s s information channels. spreadsCredit forare

’ s credit rating, currency, time to maturity, currency, to underlying expo- time credits rating, ’ Level inputs1 otherfor interest Notes, and bonds The fair value of notes and bonds where quoted prices are not quoted not pricesThe where are notes value fair and bonds of available the sufficient date,to reporting is deter- on degree a mined the the by method, of flow discounted use cash where moneymarketdiscount inter- derived from observable are rates curves.for issuerest the Discount rate rates adjusted are yield ties include quoted international providedby prices vendors (Reuters/Bloomberg), transactions representan actual in which market. active based possible, as degree a large toliquidity as credit risk and When applyingmarketon observable credit/liquidity data. adjust- the ments based grouped are assets discount the on rates, to issuer sure and geographic location. Management allocates all invest- mentstheir torespective levelson each reporting date. Unob- servablecredit spreadsthere to is used are someextent when equivalent concern or security in themarket activity for little no or securities.Where these material forare the thevaluation, security is allocatedto Level 3, reflects which significant valuation un- value fair in used inputs about information more For certainty. measurement, see the Accounting Policies. issued securities Senior main the Thesplit funding portfoliofour on groups, based is into funding product and loan main documentationThe four used. categories USD are and EUR loans, benchmark loans inpublic nichemarkets, private placements and retail firstThe loans. two characterised various groups listed syndicated loans by in are currencies, thethe size loanthe forms where primary of difference the groups. between two For listed benchmark quot- bonds ed pricesmarketinactivean that these exist, such assessed are to belong to limited with valuation Level 1, uncertainty. Hedge accountingmainly is for applied these bonds, see Note 12 and 13. Senior For securities issued in public markets,niche quoted pricessomeextent, to alsomarket available are however, the activity and liquiditysomewhatis assessed The lower. deter- as usingmainly by securitiesthese done is fair of mination value of these Formarket valuation data. techniques and observable bondsmethod the discounted cash flows discount with is used ratesmarket based on observable data,suchmarket as interest rates, quoted similar and prices prices on instruments adjusted maturity,forcurrency tosize differences time (Level and 2). in importantthe issues indicator in an Prices as new used are on valuation, and inaddition collectsKBN non tions from brokers. Group three iscomprised the of placements loan private where termsspecially are adaptedsingle for a investor. finalmain The isgroup sold toi.e. retail non loans, loans traded not normally listed and not are groups two these Bonds in structured extent large a market, to are secondary and in the stock prices, to linked that are option elementsproducts with equity rates indices, FX commodity or prices. prices Quoted are hence not availablefor security, the and unobservable inputs are used to a significant in valuation. degree the These loans are fairtherefore the Level value3 in hierarchy, to allocated and thus characterised are by FX rates, interest use models These flows. choice valuationtechniques of inputs and struc- on the depends fair these groups in bonds all loan. For each of terms ture and method cash flow discounted the value is determined using by credit curves and current yield interest inputswhere rate are spreadsprice that estimated are from indications to brokers via the Company these as regarded groups input, an unobservable hence an and estimate.structured For option with bonds elements, option cash expected determine to inaddition models used pricing are equity indices and implicit or historical volatilities as inputs. inputs. as volatilities historical or implicit and indices equity 0 0 Total Total 1 974 5 208 2 008 1 228 period 15 921 26 275 21 082 11 476 - per 31 per 251 959 303 291 223 710 164 747 117 414 211 390 234 479 168 777 107 435 288 916 . These 0 0 0 0 574 2 511 2 414 1 974 2 722 2 008 65 728 70 653 76 857 20 366 99 197 72 609 80 159 12 905 95 072 69 313 Level 3 Level Level 3 Level bearing securities - 0 0 0 0 indexed interest rate. Within - bearing securities 5 208 5 909 8 754 8 177 1 228 - 99 019 56 628 13 507 20 951 99 464 Level 2 Level Level 2 Level 174 363 146 853 152 762 130 397 123 251 131 428 term debt certificates issued by municipali- - 0 0 0 0 0 0 0 0 0 0 0 0 0 0 7 980 7 980 58 275 58 275 85 910 85 910 Level 1 Level Level 1 Level spread, in representative sufficient ensure esti- and to data order mates. In evaluation addition an is condi- carried whether of out sheetsuggesttionsthe dateto balance leading up cho- that the sen doestime not period sufficient to a extent reflectmarket the conditionssheet the date. balance on Notes, and other bonds interest Determination of fair an active in prices quoted on based value manymarket fair and sellers with willing buyers a gives value valuation uncertainty of degree estimate lowest the (Level with 1). ments is approximately equal the to notional amount placements allocated are to Level 2. Instalment loans Level 2 includes short Nibor floating with loans and ties these loan products,flexibilitymorecustomers the refi- in have nancing the other loans with market lenders when conditions change. As a result, these types of loanssubject are to greater competition better liquidity and in use the allows market the and of observable valuation of the in inputs loans as on new prices these loan products. Level 3 includes customersloans to rate fixed that not are traded inmarket an active and do not observable have input significant A recognition. initial after market prices for such is loans credit spread , the at is which estimated each reporting date. Credit risk is considered same the to be all for municipalities. As observable credit available, spreads not are sumptions and estimates adjustments relevant management for credit risk makes as- for different maturities, prices based on for in loans issued period a closer to Loanssheet the date. balance fromlimited time a in used are date before reporting the the determining credit Net unrealised “ observable marketobservable inputssignificant to are a observable inputs ”. using both bearing securities bearing securities - - termfair nature, the these value instru- of - . Valuation techniques where Quotedmarkets for prices active in identical and assets Valuation techniques with techniques Valuation — — — 3 2 : NOTE 11 FINANCIAL INSTRUMENTS FAIR MEASURED VALUE AT (Amounts 1 000 000) NOK in 2017 Deposits institutions credit with Instalment loans Notes, other and bonds interest derivatives Financial Totalfinancial measured fair at assets value Loans institutions credit from issued securities Senior derivatives Financial Subordinated debt Totalfinancial liabilitiesmeasured value fair at Holdings 22 billion NOK of kroner transferred are from Level Level to 2 December 2017 Notes, interest 1 for and other bonds 2016 Deposits institutions credit with Instalment loans Notes, and other bonds interest derivatives Financial Total financialmeasured fair at assets value Loans institutions credit from issued securities Senior derivatives Financial Subordinated debt Total financial liabilitiesmeasured value fair at no significantThere were transfers Level between 1 and Level reporting the period. 2 in Level Level unobservabledegree Valuation techniques for used determination the offinancial instruments fair in value of discountedand 3 include 2 Level flows and option pricing cash models data and estimates inputs. as All changes in fair financial value of instruments and liabilities, carrying assets the of adjust amounts recognisedand are in the income statement as ongain/(loss) instruments financial KBN established guidelines has policies and for valuation that principlesdescribe for value fair instru- financial of measurement main The ments. principles that are fair meas- should be value at assetured value the the mayliability the be sold for repur- or chased/transferred for, and that observable data to shall be used the extent possible in the valuation, and quality assurance should be undertaken against sources. alternative The guidelines also set out types, different valuation instrument for frequency the of and procedures for control fair of value. institutions credit with Deposits Deposits credit with institutions thatincludeshort term measured are fairat deposits other with time value credit institutions. Because their of short Information value fair about determination fair of the for Methods used three fall within value categories, reflect which different degrees valuation uncertain- of ty Level 1 liabilities

0 0 0 0 0 0 0 0 22 14 (5) ”

out 321 (41)

tives tives alue alue 6 838 3 642 (283)

15 568 (1 011) (1 (6 081) (6 (1 717) (1 r v (17 952) (17 (27 421) (27 (10 183) (10 (17 952) (17 Impact of of Impact yield curve yield assumptions

– changes in key key in changes Financial deriva- Financial Financial deriva- Financial

2016 0 0 0 0 0 0 0 0 0 0 34

(54) debt debt 2 511 2 1 974 2 051 1 764 2 008 1 974 bearing securities 65 728 65 - (1 974) 974) (1 (1 787) (1

amount (28 544) 544) (28 (17 952) (17 (76 857) 857) (76

Carrying Carrying

Subordinated Subordinated Subordinated Subordinated

21 79 (1)

0 0 0 0 0 0 352 (16)

(277)

(925) 1 542 76 857 33 974 72 702 80 159 40 661 76 857 (3 173) (3 (1 126) (1 (25 721) (25 (37 775) (37 Impact of of Impact ties issued ties issued assumptions changes in key key in changes Senior securi- Senior securi-

2017

- - 0 0 0 0 574

574 871 164 Impact of changes in key assumptions assumptions key in changes of Impact

“ (760) 2 511 6 309 6 255 5 967 1 279 2 511 69 313 (2 008) (2 (1 236) (1 (7 560) (7 (7 223) (7 (3 491) (3 amount (10 183) (10 (80 159) (80 463) (22

Carrying Carrying optionmodels.this, pricing pric- option than inputs Other in used mainlying are observable. In Notes, interest 2017, and other bonds million transferred amountingfrom to to were 2 620 Level NOK 3 improved based liquidityLevel 2, 1 or on market and increased activitythese securities. for Instalment the loans, For transfer interest, a period fixed of customers ending is due to of Level 3 i.e.change. a product The total credit spread and yield curve is sensitive to changes in each underlyingthe fairthus of factor. instrument The value will spreads,be affected credit changesmarket by in liquidity or risk risk. For more information on sensitivity to unobservable inputs, seetable below. other interest other interest Notes, bonds and and bonds Notes, Notes, bonds and and bonds Notes, bearing securities bearing bearing securities bearing

0 0 0 0 bonds. bonds. 3 259 1 874 2 495 1 149

65 728 30 857 58 830 69 313 26 680 65 728 (5 908) (5 (3 519) (3 (23 184) (23 (23 221) (23

yield curve yield Instalment loans Instalment Instalment loans Instalment

market. Credit spreads

bearing securities spread the bearing securities - - bp to +35 bp for notes +35 and bp bp to 12 – bp to +39 bp for issuances. debt For bp to +39

–

on (spread) to swap intereston (spread) Senior to For rates. -

measured against USD 3M Libor used in valuationmeasured in Libor 31 Decem- used 3M at against USD from 2017 vary ber Significant unobservable inputs in fair value measurement, measurement, value fair in inputs unobservable Significant 3 Level within activitymarketcasesthe little Ininstru- no for very relevant of or ment, significant valuationto on estimates the extent based a is esti- significant most The technique. valuation the to as inputs mate an add is securitiesspread the reflects issued liquidity credit risk, risk own markettheand currency in relevant risk reflectsmarket liquidity issuer increditthe risk and risk, of risk thecurrencymarket. relevant Libor Measured against 3M USD the between spreads vary Notes,interest and other bonds within volatilities include inputs unobservable significant Other Instalment loans Impact of changes in key assumptions assumptions in key changes of Impact Notes,interest and other bonds derivatives Financial Senior securities issued securities Senior Subordinated debt Total unobservablechangethe thatinputs in determining bp defined are for material are fai a 10 The key as changes assumptions in of and liabilities assets Carrying amount at 31 DecemberCarrying2016 amount 31 at Gain/(loss)thein period recognised Transfer Level 3 of out Settlement Issue Transfer into Level 3 Sale Purchase Carrying amount at 31 DecemberCarrying2015 amount 31 at Carrying amount at 31 December2017 Carrying amount 31 at Gain/(loss)thein period recognised Transfer Level 3 of out Settlement Transfer into Level 3 Issue Purchase Sale Carrying amount at 31 December2016 Carrying amount 31 at Reconciliation of movements in Level Level 3 in movements of Reconciliation

ANNUAL REPORT 2017 / PAGE 40 ANNUAL REPORT 2017 / PAGE 41

0 70 32

512 702 702

(512) tions 4 225 4 225

(loss)

(2 093) (2 (1 532) (1

s allo-s instru- Impact of of Impact tie changes in in changes al key assump-key

2016 Unrealised gain/ Unrealised 1 946 1

2016

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

Carrying Carrying 1 974 1 2 511 2 65 728 65

amount (28 544) (28 (17 952) (17 (76 857) (76 0 Carrying Carrying 298 tions

Impact of of Impact (34) (18) changes in in changes (747) 3 771 (loss) key assump-key (1 006) (1 (3 978) (3

2017 (228) (298)

(7 730) (7 (7 958) (7

amount Unrealised gain/ Unrealised Carrying Carrying 2017

574 69 313 (2 008) (2 amount (22 463) (22 (10 183) (10 (80 159) (80 change of a parameter that is part of option pricingchange that (observable a parameter is part of or unobservable) lead will changefair to in an equivalent value with opposite derivative.thesign for associated hedging effects These (gains/losses)income outcancel no other have and will each will statement effect. option Structured with to elements linked bonds the equities of where bonds indices issued type equity or a are equity isfullycontract a derivative exposure hedged using and volatilitywhere significant a optioninput is unobservable the in pricing thethe associated derivative. for bond and The both table shows thebelow value sensitivityassociated increase a 10% with involatility, such structuredfor option elements linked with bonds to equities equityfinancial or indices and associated derivatives. statementthattheThe incomeis table zero.shows net effect also structuredfunding for types of with This other case is also the option elements. Carrying Carrying

bearing securi- -

volatility volatility

bearing securities - which results inan unrealised resultswhich gain. with option elementwith equity linked equities to or

with optionelementwith indi- to linked equities equity or

increase in the discount rate used for measuring forInstalment used in discount increasethe rate

loans in Level 3 of 10 bp across all maturities across reduc- all toloans lead 10 bp a will Level 3 of in million theseSuch loans. an increase 277 for tion NOK value of in credit an increase the by incould in caused the rate discount be spreadmaturities. across allSimilarly, discount an increase the in otherfor bonds interest Notes, rate bp and of 10 An Again this could be caused by an increase in the credit spread, creditcaused an increase the Again by in in could be this shiftthe assumesKBN.table this a parallel for The of caseabove yield curve,changesmaturitiesfor different different may also be envisaged. thebond, on that of is based Change an issued value fair of ties allocated to Level 3 would lead to a reductionlead ties of to in would NOK allocated a tovalue Level 3 1 million. This could be caused eitherby an increase incredit spreadsfor relevant increased or liquidity bonds, interest in risk markets.rate For securities Senior issued an Level 3, allocated to lead toinbp would a reduction increase the ofin discount rate 10 million, 352 of NOK value indices Total Senior securities issued Financial derivatives derivatives Financial ces Impact of changes in key assumptions assumptions in key changes of Impact Total columnAmounts "Unrealisedin gain/(loss)" included are linein table above on thethe unrealised "Net financi gain/(loss) on statement. income the in ments" Subordinated debt derivatives Financial Senior securities issued securities Senior Instalment loans Notes,interest and other bonds Level 3 unrealised gain/(loss) in in the period gain/(loss) Level unrealised 3 The table below shows totalThe table unrealised forbelow and liabili the assets statement gain/(loss) in 2017 and 2016 income recognised in cated to Level 3. 0 0 0 0 0 0 0 0 22 14 (5) ” out 321 (41) tives tives alue 6 838 3 642 (283) 15 568 (1 011) (1 (6 081) (6 (1 717) (1 r v (17 952) (17 (27 421) (27 (10 183) (10 (17 952) (17 Impact of Impact yield curve yield assumptions – changes in key in changes Financial deriva- Financial Financial deriva- Financial 2016 0 0 0 0 0 0 0 0 0 0 34 (54) debt debt 2 511 2 1 764 2 051 1 974 2 008 1 974 bearing securities 65 728 65 - (1 974) (1 (1 787) (1 amount (28 544) (28 (17 952) (17 (76 857) (76 Carrying Carrying Subordinated Subordinated 79 21 (1) 0 0 0 0 0 0 352 (16) (277) (925) 1 542 72 702 33 974 76 857 40 661 80 159 76 857 (3 173) (3 (1 126) (1 (25 721) (25 (37 775) (37 Impact of Impact ties issued ties issued assumptions changes in key in changes Senior securi- Senior securi- 2017 - - 0 0 0 0 574 164 871 574 Impactkey in changes of assumptions “ (760) 6 309 2 511 2 511 1 279 5 967 6 255 69 313 (2 008) (2 (7 223) (7 560) (7 236) (1 (3 491) (3 amount (10 183) (10 159) (80 463) (22 Carrying Carrying option pricing models.this, option pric- than inputs Other in used mainlying are observable. In Notes, interest 2017, and other bonds amounting to 2 620 NOK million transferredfrom were Level to 3 Level improved based liquidity 2, 1 or on market and increased activity for these securities. Instalment loans, For the transfer of Level interest, a period fixed of customers ending is due to 3 i.e. a product change. The total credit spread and yield curve is sensitive to changes in each underlying fair factor. The of value the instrument will thus be affected credit changes by in spreads, liquidity or risk market risk. For more information on sensitivity to unobservable inputs, seetable below. other interest other interest Notes, and bonds Notes, and bonds bearing securities bearing securities bearing 0 0 0 0 bonds. 1 874 3 259 1 149 2 495 65 728 65 728 26 680 69 313 58 830 30 857 (5 908) (5 (3 519) (3 (23 184) (23 (23 221) (23 yield curve yield Instalment loans Instalment loans Instalment - market. Credit spreads bearing securities spread the bearing securities - - bp to +35 bp for notes +35 and bp bp to 12 – bp to +39 bp for issuances. debt For 89 – on (spread) to swap interest For rates. Senior - as inputs toas inputs The technique. valuation the most esti- significant mate an add is securitiesspread the issued reflects liquidity creditrisk risk, own marketand in risk the relevant currency valuationmeasured in Libor 31 Decem- used 3M at against USD from 2017 vary ber Notes, and other bonds interest reflects liquidity risk, credit of risk market issuer the in risk and the relevant currency market. Libor Measured against 3M USD the between spreads vary within volatilities include inputs unobservable significant Other Significant unobservable inputs in fair value measurement, value fair in inputs unobservable Significant 3 Level within cases littleIn very of market no or activity for the relevant instrument, valuation the is significant to on estimates extent based a Impact of changes of Impact assumptions in key Instalment loans Notes, and other bonds interest derivatives Financial issued securities Senior Subordinated debt Total The key changes assumptions in change in bp defined are a 10 as unobservable the inputsof and liabilities assets that determining for material are fai Reconciliation Level in movements of 3 Carrying December amount 31 at 2016 Purchase Sale Issue Settlement Transfer into Level 3 Transfer Level of out 3 Gain/(loss)in recognised the period Carrying December amount 31 at 2017 Carrying December amount 31 at 2015 Purchase Sale Issue Settlement Transfer into Level 3 Transfer Level of out 3 Gain/(loss)in recognised the period Carrying December amount 31 at 2016

0 9 18 18 Total Total 7 584 1 119 1 119 10 974 114 712 145 815 153 399 102 683 102 683 114 722 158 041 158 041 114 794 103 820 145 815 145 815 Fair value

0 0 0 0 0 0 0 21 2016 disclosed is lue 620 7 584 1 115 va

24 242 10 974 15 226 24 242 15 846 Level 3 Level Level 3 Level 146 223 153 807 102 773 amount 114 883

Carrying Carrying

9 0 0 9 18 499 9 172 4 842 4 842 4 714 3 443 3 443 90 470 87 456 90 479 87 974 Level 2 Level Level 2 Level 158 041 162 755 114 712 123 893 Fair value

0 0 0 0 0 0 0 0 0 2017 10 9 172 4 714 Level 1 Level Level 1 Level 158 092 162 806 114 619 153 198 153 198 123 801 amount 142 372 142 372 Carrying Carrying

loans with fixed interest rate margin interestloansmaturi- to fixed with (time rate -

Nibor

est rate terms that give the customer more flexibility to change the loan provider ifmarketleadstocompe- change. terms This higher tition ob- of use and allows and better liquiditymarket the the in inputs theservable be used in loans valuation to as prices on new of products. these loan Level 3: granted are ty 1 year) bilaterally above loan KBN between and a market. activecustomer, in an traded not and are issued securities Senior main- cost consist at amortised measured issued Senior securities Euroloansloansin benchmarkpublic ly or of and niche USD markets.

Net unrealised “ bearing securities

Also for this purpose a dis-forAlso purpose this a ”. bearing securitiesclassified and receivables Loans as bearing securitiesclassified and receivables Loans as maturity to Held as classified securities bearing bearing securitiesclassified and receivables Loans as bearing securities classified as Held to maturity maturity to Held as classified securities bearing bearing securities classified as Held to maturity maturity to Held as classified securities bearing ------

loansmargin interest fixed with rate -

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

(time to maturity within 1 year) have time to maturity(timematurityto time have inter within to 1 year) and/or counted cash flow method is used, but where the method counted but discountcash rate where flow is used, reflects hedged risk only the (interest and currency element). Instalment loans Level 2: INFORMATION ABOUT FAIR VALUE FAIR ABOUT INFORMATION See Note Financial11 instruments measured fairat value for information regarding fairmeasurement.value Forliabilities assets hedging and of relationships that part are as hedged items interest and other bonds (Notes, classifiedsecuritiesSenior and receivables Loans as and issued classified liabilities,Note Other see accounting) 13 Hedge as calculated.riskvalue the changes to is hedged This value due change adjusts asset carrying liability or the is the of amount and recognizedthestatement in income line the on instruments financial on gain/(loss) Instalment loans Notes,interest and other bonds Senior securities issued securities Senior Total financialliabilities measured amortisedat cost Informationlevel the fair within about the value financialmeasured hierarchy, fair instruments for cost, at where amortised 2017 Instalment loans Totalfinancial measured amortised at cost assets Deposits with credit institutions credit Deposits with Notes,interest other and bonds Notes,interest other and bonds Notes,interest and other bonds Notes,interest and other bonds issued securities Senior Total fairliabilities,ofvalue financial measured amortised at cost 2016 Instalment loans Loans from institutions credit Loans from (Amounts 1 000 000) NOK in NOTE 12 FINANCIAL INSTRUMENTS MEASURED AT AMORTISED COST Notes,interest and other bonds Total fairofvalue measured financial amortised assets, at cost Senior securities issued securities Senior Total fairofvalue measured financial amortised assets, at cost Total fairliabilities,ofvalue financial measured amortised at cost

ANNUAL REPORT 2017 / PAGE 42 ANNUAL REPORT 2017 / PAGE 43

2016 711 5 208 (32) (27)

2016 2016 16 182 10 898 1 115 146 223 147 275 preads, are

ese

0 46 11

815

2017 2017 (779) (716) (691) (62) 87

158 092 157 402 2017 1 228 9 085 10 400 going all basis ineffectiveness and is recog- -

instrument the explicitly item, hedged the hedge to is and linked relationshipis documented. properly effectiveness Hedge is on measured on an nised unrealised "Net under gain/(loss) on financial instruments".

currency risk. value hedg- Fair - bearing securities bearing securities - -

ecognised value changes on financial instruments in fair value hedges value fair in instruments financial on changes value ecognised HEDGE ACCOUNTING NOTE 13 NOTE 13 (Amounts 1 000 000) NOK in KBN uses fairKBNvalue selected hedge accounting economic for uses hedgescross interest of and rate ing is applied individual transaction at the hedging level where Cash collateral pledged institutions credit with deposits Total Depositscreditinstitutionsmaturity with time agreed with to Depositscreditinstitutions with maturityto without time agreed NOTE 14 DEPOSITSWITH CREDIT INSTITUTIONS (Amounts 1 000 000) NOK in hencethe instrument hedged risk.financial the For hedging (the derivative),fullis the recognised,th fair change value as measured value. fair at Recognised underlying changesfactors,changes riskcurrency of in such interest a result are s as value swap and basis rates derivatives Financial Total Senior securities issued securities Senior Notes,interest and other bonds Notes,interest other and bonds issued securities Senior derivatives Financial Total Carrying amount of financial instruments in fair value hedges value in fair instruments financial of amount Carrying R 9 0 18 18 Total Total 1 119 7 584 1 119 10 974 103 820 145 815 145 815 102 683 114 722 158 041 158 041 153 399 114 712 114 794 145 815 102 683 Fair value 0 0 0 0 0 0 0 21 2016 620 lue is disclosed is lue 7 584 1 115 va 15 846 15 226 24 242 24 242 10 974 Level 3 Level Level 3 Level 153 807 114 883 146 223 amount 102 773 Carrying Carrying 0 9 0 9 18 499 3 443 3 443 4 842 4 842 4 714 9 172 87 456 87 974 90 470 90 479 Level 2 Level 2 Level 114 712 123 893 158 041 162 755 Fair value 0 0 0 0 0 0 0 0 0 2017 10 4 714 9 172 Level 1 Level 1 Level 142 372 142 372 153 198 153 198 114 619 123 801 158 092 162 806 amount Carrying Carrying loans with fixed interest rate margin interestloans fixed with rate maturi-to (time - Nibor markets. est rate terms that give the customer more flexibility to change the loan provider if market change. terms This leads to higher competition ob- of use and allows and better the liquiditymarket the in servable be used loans to as prices new on inputs the in valuation of products. these loan Level 3: granted are ty 1 year) bilaterally above loan KBN between and a customer,in traded not and are market. active an issued securities Senior Senior securities measured issued at main- cost consist amortised ly or of USD Euro benchmark loansloans and in public niche - Net unrealised “ bearing securities - Also for this purpose a dis-forAlso purpose this a ”. bearing securities classified and receivables Loans as securitiesbearing to Held as classified maturity bearing securities classified and receivables Loans as securitiesbearing toHeld as classified maturity bearing securities classified and receivables Loans as securitiesbearing to Held as classified maturity ------loans interest fixed with rate margin - P.t. loans and Nibor and loans P.t. INFORMATION VALUE FAIR ABOUT See Note 11 Financial instrumentsmeasured fairat value for information regarding fair value measurement. Forliabilities assets hedging and of relationships that part are as hedged items interest and other bonds (Notes, classifiedSenior and receivables Loans as and securities issued classified liabilities, Other as Note see accounting) 13 Hedge riskvalue the changes to is hedged due calculated. This value change adjusts asset carrying liability or the is the of amount and recognized in income the the statement line on ongain/(loss) instruments financial the methodcounted discount butcash rate where flow is used, reflects hedged risk only the (interest and currency element). Instalment loans Level 2: (timematurityto within time have to 1 year) maturity inter and/or Total fair value of financial liabilities, measured amortised at cost NOTE 12 FINANCIAL INSTRUMENTS MEASURED AT AMORTISED COST (Amounts 1 000 000) NOK in Deposits institutions credit with Instalment loans Notes, other and bonds interest Notes, other and bonds interest Totalfinancial measured amortised at cost assets Loans institutions credit from issued securities Senior Total financial liabilitiesmeasured amortised cost at Informationlevel the about within fair the value financial hierarchy, for instruments measured fair cost, at where amortised 2017 Instalment loans Notes, and other bonds interest Notes, and other bonds interest Total fair value of measured financial assets, amortised at cost issued securities Senior Total fair value of financial liabilities, measured amortised at cost 2016 Instalment loans Notes, and other bonds interest Notes, and other bonds interest Total fair value of measured financial assets, amortised at cost issued securities Senior

0 40

136 (93)

2016 2016 2016 2016 7 219 9 215 8 468 6 376 9 678 9 818 8 212 6 229 6 087 1 056 2 281 9 241 10 701 17 585 12 320 14 779 31 436 22 930 10 971 31 158 11 419 26 644 11 226 59 965 52 497 266 518 267 521 267 481 118 550 118 550 266 518 107 028

0 2017 2017 5 391 5 938 4 809 33 073 68 980 96 696 107 445 107 445

133 667

2017 2017 7 548 9 354 6 659 9 623 8 732 6 507 1 023 10 666 18 960 11 032 13 706 15 581 34 014 23 850 12 581 10 764 31 417 12 902 26 613 11 027 281 668 283 396 283 358 281 668

BEARING SECURITIES -

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

1 1

Trøndelag Agder Agder -

- - Trøndelag - 5 years Issued by publicIssued bodies by Issued by otherIssued borrowers by otherIssued borrowers by Issued by publicIssued bodies by - Issuedsovereigns, guaranteed or by by central banks, regionalmultilateral authorities and development banks Loans to customers, principal amount principal customers, to Loans Svalbard Finnmark Troms Nordland Nord Sør Møre og Romsdal og Møre Sogn og Fjordane Hordaland Rogaland Vest Aust Telemark Vestfold Buskerud Oppland Hedmark Oslo Akershus Østfold Geographic distribution Geographic Total instalment loans instalment Total Other loans Total notes, bonds and other interest other and bonds notes, Total Fair value adjustment value Fair customers to loans Total

Foreign interest other and bonds notes, Total Over 5 years Over 1 Principal amount Principal Accrued interest

Notes, bonds and other interest other and bonds Notes, Under 1 year Under 1 NOTE 16 OTHERNOTES, INTEREST BONDS AND NOTE 15 INSTALMENT LOANS (Amounts 1 000 000) NOK in (Amounts 1 000 000) NOK in interest other and bonds Notes,

Domestic

ANNUAL REPORT 2017 / PAGE 44 ANNUAL REPORT 2017 / PAGE 45

1 0 6 8 14 10 21 45 138 153 2016 2016 2016 2016

4 390 4 7 584 7 584

82 752 82 (2 749) (2

369 933 369 376 785 376 400 894 400 (11 242) (11 (93 926) (93 (10 185) (10

e the e the

hil

716

2017

(495) (118) 3 336

1 0 1 (7 670) (7 (8 802) (8 11 11 13 61 86 369 482 373 816 118 509 376 785 125 137 (113 392) (113 2017 2017 2017 4 714 4 714

on for the credit risk on theon for date; credit issue the on risk theon forcredit reporting the on risk - -

Relevant moneyRelevantmarketinterest reporting the at rate date an add with and moneyRelevantmarketinterest reporting the at rate date an add with date reporting (fair the date) value on A) B) **Amortisation is shown in an own line in the table line**Amortisationthe in in above, is an own shown but is includedthe securities Repayment debt in tablebelow. in of

NOK.

accrued accrued income expenses and

Redemptions in 2017 include buybacks of 837 millionRedemptions 2017 include 837 of buybacks in There was no breach in debt covenants as of 31 December December covenants 31 no breach debt of There as was in 2017. Fairvalue adjustmentchanges)changesto (value that due are totalthefor changecredit the in part KBN'svalue of is a risk marketchanges in parameters bond, like due to is which not interest currencyor risk. Value changes resulting from changes in differencecalcu-credit the the amount to risk between values lated different using two discount rates: * Cash collateral received institutions credit from loans Total (Amounts 1 000 000) NOK in NOTE 18 LOANS FROM CREDIT INSTITUTIONS Of which gain/(loss) from fair value adjustment that is due to changes in own credit risk own credit in changes due to is that adjustment value fair from gain/(loss) which Of Fair value adjustment value Fair Accrued interest Total senior securities issued New issuanceNew Redemptions* Translation differences Amortisation** Seniorissuedsecurities 31 December at amounts)(nominal as Senior securities issued (nominal amounts) as at 1 January Seniorissuedsecurities 1 January at amounts)(nominal as (Amounts 1 000 000) NOK in SENIOR SECURITIES ISSUED SECURITIES SENIOR NOTE 19 Other assets NOTE 17 ASSETS OTHER (Amounts 1 000 000) NOK in Intangible assets Prepaid, non Fixed assetsFixed Totalother assets Accounts payable Intangiblecomprisethreelendingsystem portfolioin the IT systems.into 2015, portal assets The brought 2016, was use w in management amortisedinformation brought theirAllsystemlifetimes.was over into 2017. are expected in use OTHER LIABILITIES (Amounts 1 000 000) NOK in Public fees liabilities term short Other Accrued interest expenses yet and received, not accrued Total other liabilities 0 40 136 (93) 2016 2016 2016 2016 6 087 9 241 2 281 7 219 8 468 9 215 8 212 9 818 9 678 6 376 6 229 1 056 52 497 59 965 17 585 10 701 22 930 31 436 14 779 12 320 31 158 10 971 11 226 26 644 11 419 118 550 107 028 118 550 266 518 267 521 266 518 267 481 0 2017 2017 5 391 4 809 5 938 68 980 33 073 96 696 107 445 107 445 38 133 667 2017 2017 9 623 6 659 9 354 7 548 6 507 8 732 1 023 12 581 23 850 34 014 15 581 13 706 11 032 18 960 10 666 11 027 26 613 12 902 31 417 10 764 281 668 283 358 283 396 281 668 BEARING SECURITIES - bearing securities bearing securities bearing - - bearing securities by time to maturity time to by securities bearing bearing securities by type of issuer of type by securities bearing - - 1 1 Trøndelag Agder Agder - - - Trøndelag - 5 years Issued by publicIssued bodies by otherIssued borrowers by publicIssued bodies by otherIssued borrowers by - Issued guaranteed or by by sovereigns, central banks, regionalmultilateral authorities and development banks (Amounts 1 000 000) NOK in interest other and bonds Notes, Domestic Foreign notes,Total interest other and bonds 1 interest other and bonds Notes, 1 year Under 1 5 years Over notes,Total interest other and bonds NOTE 15 INSTALMENT LOANS (Amounts 1 000 000) NOK in amount Principal Accrued interest adjustment value Fair customers to loans Total Other loans Total loans instalment distribution Geographic Østfold Akershus Oslo Hedmark Oppland Buskerud Vestfold Telemark Aust Vest Rogaland Hordaland Sogn og Fjordane Romsdal og Møre Sør Nord Nordland Troms Finnmark Svalbard customers, to Loans amount principal NOTE 16 NOTES, BONDS OTHER INTEREST AND

0 0 1 0 34 2 008 1 974

Subordinated debt Subordinated

ANCING ACTIVITIES ANCING 3 572 (1 054) 054) (1 (8 802) (8 118 509 369 482 369 933 (112 676) (112 Senior securities issued THAT ARE PART OFFIN

ANGES IN LIABILITIES IN ANGES

RECONCILIATION OF CH RECONCILIATION Proceeds from issuance of debt securitiesProceeds issuance debt from of Cash flows Repaymentsecurities of debt flowsChangescashto related that not are interest due toChange amortisation accrued and Changes in fair value Translation differences Carrying amount 31 December 2017 (Amounts 1 000 000) NOK in Carrying amount 31 December 2016

ANNUAL REPORT 2017 / PAGE 46 ANNUAL REPORT 2017 / PAGE 47

986 ties 2016

7 584 1 029 2 180 2 553 (3 315) (3 liabili- 26 275 25 246 20 513

(10 898) (10 - Negative market va-

lues lues

0 966 546 420 221

798

15 921 14 955 13 936 assets

- Positive Positive 2017 4 714 2016 (9 085) (9 (4 371) (4 market values lues

0 4 053 17 107 752 026 147 464 143 411 604 561 467 790 119 665 amount Notional Notional

0 0 355 ties

1 362 1 362 2 084 liabili- 21 082 19 720 17 281

- Negative

market values lues

0 671 441 230 122 795

9 888 ment of financial position even if they imply the right to offset in to offset right the imply they if even position financial of ment case default, of financial a gross derivatives presented are on basis inthe Statement of financial position, such that contracts a positivewith value and contracts fair assets presented are as a negativewith value fair presented are liabilities. as Borrowing inBorrowing foreign kronercurrency is converted to Norwegian KBNthroughinterestswaps, basis receives where in payments foreign kroner.interestin pays currencyNorwegian Interest and rate ratefixed customers risk termsloansfrom to is arising with contracts. interest FRAhedged with Interest swaps and rate rate themarket toand currency in swaps also risk used are hedge liquidity credit the derivatives portfolio. no in portfolio. has KBN financialcontracts derivatives is Counterparty to related risk mitigated usingstandard by agreements ISDAthat give the right addi- liabilities and in the event default, to and assets of offset in tion collateral agreements into entered are all with counter- swap parties. The derivatives ismonitored exposure on an ongoing basis. informationISDASee 21 forcollateral note agreements on and transferscounterparty that reduce risk. Counterparty is risk basis.measuredmonitored an ongoing and on 11 476 10 805 assets ed in the Statement of financialcredited in Statementthe Deposits of position as with institutions creditfrom Loans institutions related or paya- a with receivableblefromcreditto institutions. or collateral Cash re- management,cashceived and is placed KBN's is included in moneymarketshort either instru- term in or and bonds in notes forments. additional 20 Seefinancial information Note about derivatives.

- Positive Positive 2017 market values lues - -

0 3 078 8 012 765 563 158 619 606 944 155 541 470 355 128 577 amount Notional Notional

20 uses financial derivatives only to economically financial to derivatives hedge expo- uses only Allfinancial measured atvalue derivatives fair through are profit and loss.for contracts Most trading. categorised are Held as The remainingcontracts hedging as instruments designated are instandardfair master hedges. As value netting agreements (ISDA) fulfil not the requirements for State- do offsetting the in Cash collateral received (Amounts 1 000 000) NOK in FINANCIAL DERIVATIVES NOTE (Amounts 1 000 000) NOK in KBN suresto currency and risk interest rate the arising in Company's business op- economically to activities, to hedge exposure and tion elementsissued in structured bonds.KBN enters swap into deriv- all credithigh and rating counterparties contracts with with limitsBoard.subject atives theto by approved is risk exposure Bond debt denominated in currencyforeign inter- is hedged with estcurrency rate that and swaps such KBN only has remaining exposuresmoneymonthmarket to 3 interest rates inNOK, USD and EUR. contracts Swap linked commodityto equity or indices tolinked the is return where inborrowing hedge risk to used are indices. such Cash collateral pledged Total cash collateral COLLATERAL AND OFFSETTING AND COLLATERAL agreementsKBN derivatives into ISDA all with entered has counterparties.counterpar-Thisthe implies exposures that vs all the ISDAmay in event default.ty agreements The of be netted contain ofexchange collateral regarding theagreements the in (CSA)formfinancial Support Annex Credit relatedto of deriva- EUR.tives or cash collateral inconsistsUSD The exposures. of collateralCash collateralcash pledged and is present received NOTE 21 NOTE 21 (Amounts 1 000 000) NOK in Total financial derivatives Currency derivatives Fair value hedges: Fair value Interest derivatives rate Commodity derivatives related Currency derivatives Equity derivatives related Held for trading: for Held Interest derivatives rate (Amounts 1 000 000) NOK in 0 0 1 0 34 2 008 1 974 Subordinated debt Subordinated ANCING ACTIVITIES ANCING 3 572 (1 054) (1 802) (8 118 509 369 482 369 933 (112 676) (112 Senior securities issued THAT ARE PART OF FIN ANGES IN LIABILITIES IN ANGES RECONCILIATION OF CH (Amounts 1 000 000) NOK in Carrying amount 31 December 2016 Cash flows Proceeds from issuance debt of securities Repayment of debt securities flowsChangescashto related that not are interest due toChange amortisation accrued and Changes in fair value Translation differences Carrying amount 31 December 2017

0 0

teral teral 5 901 5 3 409

Amounts after after Amounts after Amounts

netting and colla- and netting colla- and netting

market value. Cash Cash 4 714 9 085 7 584 10 898 collateral collateral

7 584 7 584 8 588 8 588

10 898 10 898 a netting agreement netting a a netting agreement netting a

ties items ties items Netting effect for Netting effect for counterparties with with counterparties with counterparties both liabili- asset and both liabili- asset and tement of financial position but that are subject to to subject are that but position financial of tement tement of financial position but that are subject to to subject are that but position financial of tement Amounts that may not be presented net in the Sta- in the net presented be not may that Amounts Amounts that may not be presented net in the Sta- in the net presented be not may that Amounts

15 921 15 26 275 11 476 21 082

amount amount thethe if business, ordinary course of implies agreement a even for effect Netting column the In . default of case in offset to right counterparties liabilities assets both with the and effect items manycounterparties that both has with KBN and nega- positive suchmarkettivethat it is reflectedshown, positions how value is may reducedcounter- nettingmuch valuethe by be per gross party.column Amounts collateral The after nettingshows and net aftercollateralthe exposure cash netting and received effect for counterpartiesmarket positive with cash and pledged values collateralcounterparties for negative with Carrying Carrying Carrying

0 0 0 0

position position ment of financial financial of ment ment of financial financial of ment Amounts that are are that Amounts Amounts that are are that Amounts offset in State- the offset in State- the

value value 11 476 21 082 26 275 26 15 921 15

Gross fair fair Gross Gross fair fair Gross

items are presented gross in the Statementitems the presented are gross of in

(Amounts 1 000 000) NOK in Liabilities derivatives Financial Assets derivatives Financial Liabilities derivatives Financial Assets derivatives Financial (Amounts 1 000 000) NOK in 2016 2017 The table below shows items in the Statement of financial posi- financial of Statement the in items shows below table The tionsubjectlegally to netting that binding are agreements and relatedcom- collateral risk. thisKBN toIn counterparty reduce The liabilities). and (assets derivatives Financial item the prises columnfair Grossmarket totalvaluecon- the presents for value tractssame market and negative positive The with value. makeamountscolumnthe amount, Carrying presented are in to it clear that these financialto factISDAthat position. the the agree- is due This fulfilments requirementsfor presentation do not the net the in Statementfinancial of insince not position, payments netted are Effect of collateral offsetting and

ANNUAL REPORT 2017 / PAGE 48 ANNUAL REPORT 2017 / PAGE 49

994 100 994

7.9 2016 2016 orm 2 000 2 000 inves- ion in in ion s f ill tained Share inShare %

position. position. capital hol-

al within risk risk within is carried out

2016 994

r 1 2017 2017 2 000 2 189 2 000 1 195 shares 3 144 625 Carrying amount Carrying Number of of Number s total risk. ’ Nominal amount in Nominal NOK amount comprises financial financial comprises

100 3.26% 3.02 % first line defence of Coupon Coupon defence s risk exposures on an ongoing risk s ’ s s ’ Share inShare % KBN . . The President & CEO has an overall The CEO an . President & has 2017 3 month 3 NIBOR +1.5% second line of second of line

2028 right 2020 right 2027

3 144 625 Number of of Number sided notionaltheto interest right to pay and not amount - Redemption Redemption Redemption Redemption President CEO & responsibilitymanagementfor risk and internal control, is and followingKBN up changes in basis. Three lines defence of by theby internal auditor Deloitte, directly Board. reporting the to management internalcomprisescontrol the and Lending department,Financial the department Markets that performs funding and liquiditymanagement, post trade and the operation The functions. managementcontrol,compliancethe the as well risk as and function.secondmonitors, lineThe defence of guides and contributestofirst controls, line the improving and performs comprehensivemeasurement. This responsibility risk includes monitoringmanagementalso compliance of risk to and external and internal regulations. Thethirdline defence of are appointed annually from and by the members of the Board.members appointedare the the of annually and by from main Board assistcommittee the isThe in to the function of makingcapacity, decisions including on risk development of limitstolerance. for risk Furthermore itshall Board assist the in monitoringthemanagement of and KBN

2 000 1 000 1 200 Nominal Nominal Nominal Nominal amount in CCY in amount amount in CCY in amount

NOK NOK NOK

s capacity risk bear s to ’

Currency Currency s activities. ’

The risk committee is a a is committee risk The

The Board of Directors overallBoard the has of The

. s strategytos adapted and business the processes, and are ’ The Kingdom of Norway of Kingdom The million (after tax)(NOK 19.7 million in 2016) has been paid. In addition, NOK 16.0 million had accrued at year end (NOK 0.6 m million millionInmillion 0.6 19.7 (aftertax)(NOK end (NOK addition, year been paid. in at has 16.0 2016) NOK had accrued millionmillion isofthat additional2016),tax in (NOK profit inthe attributed such total 33.9 to2016) 19.4 Tie after NOK statement.see income ders the in 2017, Total subordinated debt subordinated Total reductionTheInterest Re as interestline of statement, the not are a income in but presentedthe expenses on expense rather Inearnings. 1 equity. 2017 interestthe changes paid, amounting NOK see of in expenses Statement to recognised are The when KBN issued additional Tier 1 capital in the form of a subordinated bond in June 2015 and a further one in bond June The further 2017. KBNissuedsubordinatedJunecapital inthe 2015 and a additional one a 1 inof form Tier bond havingKBN a one capital, Basedsee on 30. part KBN's Tier Note of 1 thereforeliability and are classifiedthe qualifyfinanciIAStors, not in Statement equity bonds a 32 as under the as do of Ordinary subordinatedcapital loan Additional capital Tier 1 capital 1 Tier additional Total (Amounts 1 000 000) NOK in ADDITIONAL TIER 1 CAPITAL NOTE 24 Additional capital Tier 1 NOTE 23 SHARE CAPITAL NOTE 22 SUBORDINATED DEBT (Amounts 1 000 000) NOK in ORGANISATION MANAGEMENT OF RISK ORGANISATION Board of Directors nature, scope and complexity of the risknature,scopethe complexity exposure. of and Statecustomerand sector ownership, group political imply role profile. risk low a maintains KBN that managementRiskinternalcontrol of an integral and are part KBN Robustcontrol internal theis carried of an integral as part out managementbusiness bank. the Risk is of processes establishedthatstructure three defence lines a of on based in shallsystematic identification, ensure assessment and KBN monitoringthe in parts risk all of of RISK MANAGEMENT NOTE 25 NOTE 25 and the toleranceand thefor fluctuations profits capital. in The and risk appetite implementedthrough determination is the limits. risk of Risk committee of the Board. preparatorymembers and advisory tothree Board.Its body the responsibilitymanagementfor risksets the the appetite risk and and the requirements with of line owner the from KBN in authorities.The appetite risk reflects KBN 0 0 teral teral 5 901 5 3 409 Amounts after after Amounts Amounts after after Amounts netting and colla- and netting netting and colla- and netting market value. Cash Cash 9 085 4 714 7 584 10 898 collateral collateral 7 584 8 588 8 588 10 898 a netting agreement netting a a netting agreement netting a ties items ties items Netting effect for Netting effect for counterparties with counterparties counterparties with counterparties both asset and liabili- both asset and liabili- tement of financial of tement but position to subject are that tement of financial of tement but position to subject are that Amounts that may not be presented net presented be not may that Amounts Sta- in the Amounts that may not be presented net presented be not may that Amounts Sta- in the 15 921 15 26 275 11 476 21 082 amount amount right to offset in case of default of case in offset to theright In . for effect Netting column counterparties liabilities assets both with and items the effect that has KBN many counterparties both with nega- and positive markettive positions value is suchthat it is reflected shown, how much valuethe gross may reduced netting by be per counterparty. The column Amounts collateral after netting and shows net after exposure collateral the nettingcash received and effect for counterpartiesmarket positive with cash and pledged values collateral for counterparties negative with the if business, ordinary course of even the implies agreement a Carrying Carrying Carrying Carrying 0 0 0 0 position position ment of financial of ment ment of financial of ment Amounts that are that Amounts Amounts that are that Amounts offset in State- the offset in State- the value value 11 476 21 082 15 921 15 275 26 Gross fair Gross Gross fair Gross items are presented gross in the Statementitems the presented are gross of in Financial derivatives Financial (Amounts 1 000 000) NOK in 2017 Assets derivatives Financial Liabilities derivatives Financial (Amounts 1 000 000) NOK in 2016 Assets derivatives Financial Liabilities Effect of collateral offsetting and items shows below table The posi- financial of Statement the in tionsubjectlegally to netting that binding are agreements and related collateral risk. to counterparty reduce thisKBN In com- theprises The liabilities). and (assets derivatives Financial item column Gross fair total value the presents market for value con- tractsmarket and negative positive The with value. same amounts presented are incolumn the amount, Carrying to make it clear that these financialto fact position. the is due This ISDA that the agreements do not fulfil requirements the for presentation net the in Statement of financial position, in since not payments netted are . per -

s s ’ capital 18.29 18.29 s s s capital ’ ’

. . Counterparties.

central Average time to

rates -

rate and currencyrate and risk. then the

have increasedhave KBN years as of 31 December 2016 31 December years of as 1.1

s shorts duration. ’ weight cent. per of zero -

rates.managed and currency Interest rate are risk - consists mainly of interest interest of mainly consists

s),centthe ofis portfolio invested and 89 per in s Common equity Tier 1 capital adequacys Tier is equity ratio Common 1 s risk policy allows minimal exposure to changessminimal in policy risk allowsinterest exposure ’ ’ financial risk. risk. financial changesThe Board special attention the pays to of in risk regulatory to framework. IVimpending and changes CRD The to the national capital requirements levelthe is expectedand risk sufficient actual on based exposure. capitalIn process of the management assessment, identifies tomay be exposed measures and KBN and risks the all estimatescapitalthe tothe level cover total necessary risk exposure.followingassessed risks The separately:credit are risk,market risk, liquidity operational risk, non and other risk RISK LIQUIDITY Liquiditymaturitymanagedmatching is risk profiles by and interest periodsfor rate and liabilities. assets reset KBN holds a liquiditymeet its to payment be able in portfolio to order monthsobligationsminimum 12 access of to for without new a funding. Short average time to maturity ensures that KBN liquidity requirements mainly can met be through maturities on bonds liquid in invested is portfolio liquidity The side. asset the maturity.credittoand notes short high time with and rating requirements. KBN cent.is compliant all with capital KBN regulatory requirements, relatingminimum regulatory to requirements and buffer requirements,for capitalmeasuresTier all equity and (common 1 capital,capitalcapital) total 1 and primary/total Tier riskloansthe postponement, payment in is limited to granted as payment obligation cannotTheeliminated. be Local Government municipalityActstates that a cannot a Should go bankrupt. municipalityface payment difficulties, The price risk in the portfolio is managed at issuer level and is at levelThein portfoliomanaged issuer price risk and is the is limitedto portfolio the due rates and FX matchingthrough and liabilities assets through of as well as economic derivative with hedges instruments. CAPITAL MANAGEMENT FinancialKBNisEnterprises subject the to capital its Act and requirements. assessesKBN addition, In capital level its taking into to. substantialThe all account exposed bank the is risks Board of capital Directors discusses the assesses level all and the that the annually ensure risks least to Company at KBN securitiesBIS a with government would assume control of the municipalitygovernmenttheof control assume it is would until ablemeet itsto obligations. payment institutions financial with transactions derivative into KBN enters to toFX interest hedge exposure rates and inthesecontracts derivativefinancial central are institutions or counterparties. All transactionsnew subjectare to strict rating requirementsISDA and a also agreement require an and collateral agreement thewith counterparty. centralA counterpartysubjectcapitalto is area EU/EEA established the in EUmanagementand risk through an own requirements lower regulation to considered a have (EMIR) and is counterpartycounterparties. than risk ordinary Creditto liquidity risk the average related is portfolio An low. and lowest S&P rating on the of AA+ (based the of is portfolio ’ Moody maturitythe portfolio of was MARKET RISKMARKET Market risk s s ’

s and s and

’ s internals credit ’ s credits and rating ’

base is the local is base related hedging instruments. . Guidelines for lending to for .lending Guidelines

external ratings,external size bank the of s client s exposure is therefores is directly exposure institutions with high credit rating. credit high with institutions ’ ’ ’ . KBN —derivative transactions

s. ’

LCH) forLCH) interest- month interest rates. - — —liquidity portfolio

s assets consist of loans to municipalities and similar and a a and similar and municipalities to loans of consist s assets ’ Price risk in thePrice in liquidity risk portfolio Issuer default Loss on loans granted to customersLossto on loans granted Counterparty default Interest risk and currency rate Frameworkfor credit assessment municipal approved are Board annually borrowers the and by specialmanagementcredits by if necessary, assessed are and, creditthe the Board granting a before loan. KBN has assessmentfor on economic loans assessment of based system municipalities analysis other The debtors. into account takes and quantitative qualitativekeyfor economic indicators the and strictdevelopmentcustomer.the KBN has and prospects of guidelines for entering into financial instruments transactions, relatedthe to liquidity and hedging portfolio instruments for rating acceptable lowest The derivatives). (financial A2/Ainvestments Moody from is in and notes bonds Standard Poorand clearingcentralservicesKBN counterparty a (London at uses Clearing House against ofKBN degree protection a high through achieves LCH. setup.this type of controlProceduresmonitorcreditto and and processes risk been established.have approves Management all assesses and limitscounterparties,new and on KBN based assessments, counterparties Capital level risk Liquidity CREDIT RISK KBN The counterpartytransactions derivative in managed risk and is reducedstandard through agreements ISDA (netting). In addition,collateral entersKBN into agreements require which counterparties. swap collateral,postingcashnew all of with membership and two KBN direct have LCH, not with does clearing KBN has KBN versus LCH. on behalf of brokers act chosensegregatetopositions derivative its collateral and (cash depositscollateral) in of relation the to possible default a of clearing bank the broker and Market risk Market  risk Operational liquidity guaranteed or by issued by portfolio and notes bonds of sovereigns, regional authorities,multilateral development banks, coveredfinancial bondsand   risk capital,tenor. financial types of instruments and Credit risk assessment government creditworthiness.sector, high has credit which The   The following risk factors are identified as the most important for for important most the as identified are factors risk following The KBN: Credit counterparty risk risk and access to the interbank markets.Credit interbankaccess the and liquidity to are risk generally Interestlow. hedged on currency risk and rate is transactioncurrencieslevelexcept and for for NOK, USD all InterestEUR.these currencies for risk is hedged with rate interest rate swaps, such that the bank is only exposed to changes in three RISK TYPES The subjectmanagement are KBN risk exposure to and risk in strict internalguidelines the ensure bank to

ANNUAL REPORT 2017 / PAGE 50 ANNUAL REPORT 2017 / PAGE 51

9 9 369 420 104 ma- Total Total 3 076 9 920 2 244 2 575 6 404 2 862 9 422 6 265 1 105 25 181 11 249 11 249 11 217 29 085 23 588 13 041 nd osures to

ent ent 343 663 401 240 401 240 289 421 mum

s a exp

rnm al develop- s are 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 151 551 oan 1 222 266 589 266 589 266 589 264 665 Not rated Not rated

0 9 0 0 0 9 0 0 0 0 987 495 356 AAA AAA 6 021 6 021 9 892 8 431 2 339 1 006 2 155 1 568 12 120 10 431 30 920 30 920

0 0 0 0 0 0 0 0 0 0 0 0 AA AA 952 952 117 433 589 904 433 1 700 2 535 1 148 5 619 5 619 1 477 > 1 year > 1 year

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 A A

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 targeted and efficient operations, reliablereporting and compliance and internal regulations. external with Operational risk arisesminimised in throughfunctions and is all work controls of processes,competency professional high level, focus on and ethical behaviour internally business relations, and versus and robustnesscriticalin functions, amongst Management others. thereports Board operationalincidents. risk the on to and

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

969 747

19 700 20 448 20 448 19 479 Not rated Not rated

0 0

1+ 1+ - - 420 103 766 199 369 3 076 4 277 4 277 8 724 3 149 6 402 1 570 4 249 1 779 8 518 3 772 3 278 1/A 1/A 11 361 44 407 18 346 21 302 75 170 75 170 - - A A < 1 year < 1 year < 1 year

0 2 0 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 0 0 0 0 - - A A s internal control facilitates ’ 2 493 2 493 2 493 2 493

bearing securities.

TIONAL RISK TIONAL

Including loans to the municipalIncluding billion. sector the 283.4 loans to NOK of OPERA tolerancemoney launderingKBNfor corruption and zero has and low tolerancevery for other operational risk. Assessment of operationalis and performed basis risk on a yearly least at circumstancesotherwise when warrant it. reported are to Risks thethrough Board business reporting. reported Eventsand are recorded withoutKBN delay. undue that the municipalitiesthatthe authorities regional or provide guarantees that been politically have and authorised approved gove by financial above. or institutions A shall of a rating have entitiesKBN public loansthat forand regional to tasks carry sector grants conditions local out authorities. such The l for turitythecredit Municipalitythe is determined regulations framework by by is commitment. governed Act and large on Credit viathe Ministry the or County neitherloan and Modernisation. governor Local Government 2017, losses of is and in no KBN has financial issue not KBN does there 2017. 31 December evidence guarantees. default any at actual as of includesThe tablecredit exposuresthatbelow institutions, Deposits as with recognised are Instalment bond loans Notes, and mentfinancial municipalthe banks, maxi issuerscovered Norwegian For within institutions ofthe bonds sector, and the OECD. other interest- Time to maturity Amountsin table below representthe credit actual exposure 2017 (Amounts 1 000 000) NOK in NOTE 26 CREDIT RISK credit asmunicipalKBNauthorities,the sovereigns, well exposures against as against has in sector multilaterNorway, local Spain Risk class United Kingdom Sovereigns and central banks Supranationals Multilateral development banks Regional authorities Switzerland institutions Financial Securitisation United States Germany Sweden Total Covered bonds Covered Time to maturity ¹ DecemberUndisbursed 2017. 31 billionto at 7.2 as commitments NOK amount loan country by exposure Credit 2017 Risk class Total Australia Belgium Canada Denmark Finland France Japan Netherlands Austria Norway . per - s ’ capital 18.29 s s capital ’ ’ . . Counterparties. central Average time to rates - rate and currencyrate and risk. then the have increasedhave KBN years as of 31 December 2016 31 December years of as 1.1 s shorts duration. ’ weight cent. per of zero - rates.managed and currency Interest rate are risk - consists interest of mainly s), and 89 per cent of theis portfolio invested in ’ s Tier equity Common 1 capital adequacy is ratio s policy risk allows minimal to changes in exposure interest ’ ’ interest periods rate reset for and liabilities. assets KBN holds a liquidityin portfolio meet its to payment be able to order obligations for a minimummonths 12 access of to without new funding. Short average time to maturity ensures that KBN liquidity requirements mainly can met be through maturities on assetthe bonds liquid in invested is portfolio liquidity The side. and notes high with credit short time and rating maturity. to CAPITAL MANAGEMENT KBN Financial is subject the to Enterprises capital its Act and requirements. addition, In assesses KBN capital level its taking into to. substantial all account exposed bank the is risks The Board of capital Directors discusses the level assesses all and the that annually the risks ensure least to Company at levelthe is sufficient actual on based and expected risk exposure. capitalIn process of the assessment, management identifies measuresand risks the all KBN to may be exposed and estimatescapital the level to cover necessary the total risk exposure. The followingassessed risks separately: are credit risk, market risk, liquidity operational risk, non and other risk risk. financial The Board special attention pays the to of risk changes in regulatory framework. The to IV impending and changes CRD to the national capital requirements requirements. KBN cent. KBN is compliant all with capital regulatory requirements, relating regulatory to minimum requirements and buffer requirements,for capital all and measures equity (common Tier 1 capital, totalcapital 1 and primary/total Tier capital) RISK LIQUIDITY Liquidity is risk managed by matching maturity profiles and payment obligation cannoteliminated. be TheLocal Government Actmunicipality states that a cannot a Should go bankrupt. municipality face payment difficulties, government would of control assume municipality the until it is ablemeet its to obligations. payment institutions financial with transactions derivative into KBN enters to toFX interest hedge exposure rates and in thesecontracts derivativefinancial are institutions or central counterparties. All new transactions subject are to strict ratingrequirementsISDAand a agreement also require an and collateral agreement the with counterparty. central A counterparty is area EU/EEA established the in subjectcapital to and risk management requirements EU through an own lower regulation to considered a have (EMIR) and is counterparty than risk ordinary counterparties. Creditto liquidity risk the average related is portfolio An low. rating the of is portfolio and lowest S&P on the of AA+ (based Moody securitiesBIS a with maturity of the portfolio was The risk price in portfolio the is at level managed issuer limitedto portfolio the due and is RISKMARKET Market risk KBN rates and FX matchingthrough and liabilities assets through of as well as economic derivative with hedges instruments. risk in loans postponement, payment is limited to granted as the s ’ s and ’ s internals credit ’ s credits and rating ’ base isbase the local related hedging instruments. - . Guidelines for. Guidelines lending to external ratings, size bank the of s client s is exposure therefore directly institutions with high with institutions rating. credit ’ ’ ’ derivative transactions . KBN — s. ’ LCH) forLCH) interest liquidity portfolio month interest rates. - — — s assets to loans of consist and municipalities a and similar ’ Price in risk the liquidity portfolio Loss on loans granted to customersLossto on loans granted Counterparty default Issuer default Interest risk and currency rate (financial derivatives). The derivatives). (financial lowest for rating acceptable investments in is and notes bonds A2/A from Moody Standard Poorand The counterpartytransactions derivative in risk is managed and reducedstandard through agreements ISDA (netting). In addition,collateral enters KBN into agreements require which posting ofcollateral, cash all with counterparties. swap new KBN uses clearingcentral services a at counterparty (London Clearing House KBN direct have not does membership and two LCH, with clearing KBN has KBN versus LCH. on behalf of brokers act chosensegregatetopositions derivative its collateral and (cash deposits of collateral) in relation the to possible default a of clearing bank the broker and against LCH. of KBN degree protection a high through achieves this type of setup. Procedures and processescontrolmonitor to and credit risk been established.have approves Management all assesses and limitscounterparties,new and on KBN based assessments, counterparties risk capital, financialtenor. types of instruments and Credit risk assessment government creditworthiness. sector, high has which The credit RISK TYPES The risk management exposure and risk in subject are KBN to strict internalguidelines the ensure bank to interbankaccess the to markets. Credit and liquidity are risk generally Interestlow. hedged on currency risk and rate is transaction level for all currencies except for and NOK, USD EUR. Interest for risk rate these currencies is with hedged interest rate swaps, such that the bank is only exposed to changes in three risk following The as identified are factors the for important most KBN: Credit counterparty risk risk and     risk Market  Capital level risk Liquidity risk Operational CREDIT RISK KBN liquidity guaranteed or by issued by portfolio and notes bonds of sovereigns, regional authorities, multilateral development banks, coveredfinancial bondsand Framework for credit assessment municipal approved are Board annually borrowers the and by special credits by assessed are management if necessary, and, the Board granting before credit the a loan. KBN has assessment system for on economic loans assessment of based municipalities analysis other The debtors. into account takes and quantitative qualitativekey indicators and for economic the development and prospects ofcustomer. the KBN has strict guidelines for entering into financial instruments transactions, relatedthe to liquidity and hedging portfolio instruments

9 18 159 169 627 Total Total 1 741 6 113 9 118 3 728 2 739 2 052 5 540 11 741 16 889 15 460 12 022 26 835 11 869 41 130 16 126 18 971 402 253 270 137 331 309 402 253

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

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

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

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 NOK, USD and EUR. The interestthese The forEUR. risk rate and NOK, USD for each of the currencies NOK, USD and EUR and NOK EUR and NOK NOK, and currencies the for USD of each

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 except for three currenciesissuch hedged usingswaps, interest that rate monthmoney remaining KBNchanges has to in3 only exposure market interestInterest rates.sensitivitymeasured is the rate as liabilitieschangefair and in assets value a 100 ba- of based on changesis in point interest in- rates shift). (parallel NOK The terestthe abilitythe regulate rate on to depends floating risk rate on instalment loans. 12 interestThe a limit rate NOK Board for of adopted risk has million million36 together. interestsensitivity all main rate The the in currencies is presented in

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

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

Including loans to the municipalIncluding billion. sector the 267.5 loans to NOK of Time to maturity ¹ DecemberUndisbursed 2016. 31 billionto at 3.4 as commitments NOK amount loan country by exposure Credit 2016 Risk class Total Securitisation institutions Financial Norway Austria Finland Covered bonds Covered Multilateral development banks Time to maturity Amounts table belowin representthe credit actual exposure 2016 Risk class Netherlands Japan France Denmark Belgium Australia Regional authorities Canada Total Spain Sovereigns centraland banks United States Sweden Switzerland Supranationals United Kingdom Germany NOTE 27 NOTE 27 RISK RATE INTEREST (Amounts 1 000 000) NOK in ofInterest result and bor- KBN's lending arises risk a rate as in differences from results risk rate interest The activities. rowing thefor interest rate and liabilities, assets periods fact and the due at differentAsthat times. in a are cash paymentsand out management,partinterest of activelyKBN risk rate buys and sellssecurities highly sovereigns, by rated issued local authori- institutions, financial and banks development multilateral ties, mainlyand entersinto contractscontracts FRA and , derivatives interest rate swaps. severalinvestments debt in currencies,KBN and bond has however, allfully hedged for interest rate currencies all is risk

ANNUAL REPORT 2017 / PAGE 52 ANNUAL REPORT 2017 / PAGE 53

. 25 0.2 3.1 0.8 0.6 1.6 10.2 11.7 is cor- Gross Gross nt uidity interest 10 rate risk ero

t extra extra t in FX inFX rate re- Liquidity Liquidity of

10% change 10% can ets and ng. authorities, term liq hat hat related to ss

- N under under KBN risk

10.2 (3.1) (4.6) 2016 g t (11.7) 1.7 8.2 5.9 Net in- 15.8 terest rate Net position Net

1.2 0.5 0.3 2.0 FX rate

10% in change 10%

2017 12 5.3 3.3 20.6

Net position Net

of all currency risk related to assets and liabilities in foreign cur- liabilities foreign in and assets to related currency risk of all rency. short However, term positions net to related state- income occur.mentmay Currency risk and EUR items in is hedged USD currency for The limit transaction level. and portfolio at level both risk is set to NOK 12 million for a 10 percent absolute change in rates.all FX

CURRENCY RISK NOTE 28 NOTE 28 (Amounts 1 000 000) NOK in Currency riskthe is defined aschanges risk due to loss of in rates. Currency risk FX in fluctuations on market values based mainlyarisesKBN's beingto foreign borrowing due in currency, hedging require guidelines bank's The NOK. in is lending while NOK Effect of 100 bp change in in- in change bp 100 of Effect terest rate USD The table shows the total effect in the income statement related to the assumed change in interest rates. This comes comes This rates. interest in change assumed to the related statement income in the effect total the shows table The the For income. interest Net on an effect and measurement, value fair on based change of a value combination a from the rate following period month three the during income interest Net the impact will change rate interest the part latter while currency, per statement income in the effect of the direction the account into takes risk rate interest Net change. currency. per effect calculated of the values absolute of the total the is risk rate interest Gross EUR Total A large part of thelargematchingthismonths.matures portfoliomaturities parttoA Further liquidity within of 12 by is reduced risk on a liabilities up to 3 months. The bank also has a short term funding programme and a credit line with DNB to manageshort credit DNBfunding with to line and a short programme term liabilitiesmonths. a alsoThe has bank 3 up to months' net redemptions. This implies that the bank has to be in the positionthe cover liabilities/payables,months' its in to all to redemptions.implies be net that This the has bank includin the lending 12 months borrowing. activities, during without the new next

Currency Currency USD risk is monitoredriskmanaged the through is bank's liquidityBoard Directors.set and the of by policy The policythat requirestheminimum liquidity portfoliomonths' at timeshould12 any a cover redemptions, generally net and KBN has a portfolio securities.KBN highlyshallof a liquid transferrable These holdings has significantcash be to without for losses Liquidity risk is defined as the risk of KBN not being able to meet its commitments or finance lending demand without signifi without demand lending finance or commitments meet its to able being not of KBN risk the as defined is risk Liquidity more expensive fundi of form sold, the reduction tocosts in or form be the that assets being value need of in of incurred in LIQUIDITY RISK LIQUIDITY (Amounts 1 000 000) NOK in NOTE 29 The liquidity sovereigns, creditissued bondsshall portfoliomarketin local by and isnotes invested risk and and low have severelymarket stressedconditions, repurchase the through recognised of eitherthrough sales use direct in agreements a or purchase market. multilateral highlyfinancial development rated banks and institutions. EUR 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 The FX relative to in a 10 percentThe effectthe statementshows table an absolute in income of above relation between FX rates and other market ratesrelation FX and other factors. risk between calculated sensitivity 2016. The positions foreigncurrency 2017 and net analysis 31 December assumes on all in at based z as 9 18 627 169 159 Total Total 1 741 5 540 2 739 6 113 3 728 9 118 2 052 18 971 41 130 11 869 16 126 12 022 11 741 26 835 15 460 16 889 402 253 270 137 402 253 331 309 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 144 916 183 2 331 1 034 252 060 247 635 252 060 251 877 Not rated Not rated 0 0 0 0 0 0 0 0 0 0 0 0 0 310 986 AAA AAA 7 130 5 127 5 368 6 943 1 960 4 805 11 351 30 270 30 270 16 562 0 0 0 0 0 0 0 0 0 0 0 76 83 AA AA the table below: the 650 > 1 year > 1 year 1 538 2 481 1 667 1 336 1 538 12 006 10 332 30 170 30 170 12 065 16 567 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 1 187 1 006 NOK, USD and EUR. and NOK, USD interest The for risk rate these for each of the currencies the for of each EUR and NOK NOK, and USD 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 million million36 together. interestsensitivity all rate The inmain the currencies is presented in except for three currencies is hedged usingswaps, interest rate such that remainingKBNchanges has to in only exposure 3 monthmoney market interest rates. Interestsensitivity rate is measured the as change in fairliabilities and assets a 100 ba- value of based on sis point change in interest rates (parallel in- shift). NOK The terestthe abilitythe regulate rate on to depends floating risk rate on instalment loans. 12 interestThe a limit rate NOK Board for of adopted risk has 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 455 333 182 3 709 19 886 24 565 24 565 24 565 Not rated Not rated 9 87 18 1+ 1+ - - 253 627 159 746 963 3 227 1 630 4 631 7 458 1 537 9 784 6 979 9 598 1 402 1 348 1/A 1/A 10 686 10 886 11 733 57 382 20 732 10 271 57 382 - - A A < 1 year < 1 year 0 0 0 0 0 0 0 0 0 0 2 0 0 0 0 0 2 0 0 0 0 0 - - A A 909 5 710 6 618 6 618 6 618 ¹ Including the loans to municipal billion. sector 267.5 NOK of United States Total Amounts in table below represent the actual credit exposure 2016 Time to maturity Risk class Sovereigns and central banks Regional authorities Multilateral development banks institutions Financial Securitisation bonds Covered Total ¹ Undisbursed commitments amount loan December 2016. 31 billion to at 3.4 as NOK country by exposure Credit 2016 Time to maturity Risk class Australia Belgium Canada Denmark Finland France Japan Netherlands Norway Austria Spain United Kingdom Supranationals Switzerland Sweden Germany NOTE 27 RISK RATE INTEREST (Amounts 1 000 000) NOK in Interest result arises risk a rate as of and bor- KBN's lending activities.rowing rate interest The differences from results risk in the interest rate periods for and liabilities, assets fact and the that cash payments indue at different times. are and out As a part of interest risk rate management, actively KBN buys and sellssecurities highly sovereigns, by rated issued local authorities, and banks development multilateral institutions, financial and enters into derivatives contracts , mainly contracts FRA and interest rate swaps. investments debt inKBN and bond has several currencies, however, all interest rate is risk fully hedged for currencies all

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

50 50 50 50

(50) (50)

Without Without Without Without maturity maturity

0 0 0 0 0 0

5 220 1 396 1 396 2 362 2 362 5 229 90 443 28 765 11 218 23 546 10 149 91 077 94 201 87 319 149 191 229 050 223 820 (55 287) (55

>5 years >5 years

0 0 0 0

179 242 242 551 551

9 637 9 563 1 179 63 551 25 726 37 824 76 420 33 691 42 729 5 years 5 years 191 988 237 825 192 960 235 854 - - (151 768) (151 (119 846) (119 1 1

8 0 0 8 0 0

50 50 60 60

7 310 1 220 4 000 1 366

39 996 42 749 25 917 16 831 41 281 40 115 41 162 47 371 35 948 11 423

12 months 12 12 months 12 - - 3 3

0 0 6 0 0 0 0

274 274

1 006 81 387 28 382 89 335 36 532 40 797 82 667 40 517 71 183 22 555 48 628 (2 004) (2 (1 847) (1

173 849 137 317 3 months3 3 months3 - - 1 1

0 0 0 0

17 17

6 006 4 714 1 260 2 099 9 700 4 970 4 714 3 518 16 716 15 266 10 400 10 737 25 157 11 238 10 400

131 628 140 265 114 599 < month1 < month1

899 899

Total Total 4 714 2 631 2 631 2 664 2 664 4 714 49 781 49 781 21 331 21 331 10 400 10 400

409 821 449 179 108 661 330 118 420 729 420 729 409 821 449 179 108 661 330 118 - -

liabilities Other Senior securities issued securities Senior Exposure by time to interest rate rate interest time to by Exposure reset The table shows the sum of net maturities net thatThe sum period, including table of shows in the interest payments. 2017 Loans from institutions credit Loans from Net liquidity exposure liquidity Net Total assets Notes,interest and other bonds bearing securities Net liquidity exposure liquidity Net subjecttothat amounts are The interest net rate table shows the in relevant adjustmentthe periods. Instalment loans Financial derivatives Deposits with credit institutions credit Deposits with Total liabilities Total Financial derivatives Total liabilities Total Additional capital Tier 1 Additional capital Tier 1 Subordinated debt Subordinated debt Exposure by time to maturity time to by Exposure 2017 liabilities Other Senior securities issued securities Senior Loans from institutions credit Loans from Totalassets Notes,interest other and bonds bearing securities Instalment loans Deposits with credit institutions credit Deposits with

ANNUAL REPORT 2017 / PAGE 54 ANNUAL REPORT 2017 / PAGE 55

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

52 52 52 52

(52) (52)

Without Without Without Without maturity maturity

0 0 0 0 0 0 0 0

2 423 9 722 2 423 8 602

74 866 75 426 (6 664) (6

156 417 221 560

0 0 0 0

38 12 12

242 242

9 468 1 038 8 412

5 years >5 years 5 years >5 years 103 955 60 159 243 154 201 598 135 623 (98 064) (98 (89 231) (89 - -

1 1

7 0 0 7 0 0

12 60 12 60 (6)

516

43 262 68 087 53 904 49 137

(18 434) (18 (10 649) (10

12 months 12 12 months 12 - - 3 3

0 0 6 0 0 0 0

22 22

1 006 2 171 2 292 3 839 9 873 19 650 75 356 215 506

26 147 41 345 80 768 26 026

118 275 minimum requirement for total capital requirements including 2017. 31 December cent at as buffersset at per is 17.5 Minimumcapital equity 1 requirementcommon Tier for percentadequacy 14.0 set has at buffer including been requirements from the same date on. percent the by KBN's set 1.4 at pillar been 2 requirement has Financial SupervisoryAuthorityNorway, intotal 15.4 a of percent capital.common addition Tier equity requirement In 1 on a leverage ratiocame into force 30 percentrequirement of 3 compliantallJune KBN is statutory 2017. capital with 2017. requirements December 31 at as In order maintainto a sufficient capital level, KBN can, depending on market conditions, reduce or increase its total regarding assets theinto dialogue owner enter or with a changing capitalstructure its changes by policy in or dividend issuecapital. share of capitalisedtheKBNis well date, reporting and is adapting its on capital capital structure requirements. new to

3 months3 3 months3 - - 1 1

0 0 0 0

16 16

104

3 680 79 740 53 825 201 306 73 003 7 584 1 795 3 123 26 119 68 008 241 862 72 443 2 946 7 584 8 051 16 153 29 486 60 267 6 054

15 409 12 743 25 883 24 967 50 385 6 033 10 723 16 182 11 281 24 337 16 182

131 033 102 108 92 392 18 295 53 570 54 126 122 699

< month1 < month1

110 110

Total Total 1 056 2 725 7 584 1 056 2 725 7 584

57 447 23 793 16 182 57 447 23 793 16 182

411 555 456 683 120 011 423 030 320 490 411 555 423 030 456 683 120 011 320 490 term stress tests. The The tests. stress term

- - -

ratingensure and to efficient market -

inancial derivatives (Amounts 1 000 000) NOK in KBN'scapitalconsistscapital, share retained of earnings, additionalcapitalsupplementary capital/subordinated 1 and Tier satisfactorydebt.A for necessary level as capital is seen of maintaining the AAA CAPITAL ADEQUACY AND CAPITAL MANAGEMENT NOTE KBN is subject to the capitalKBNis subject the regulationsshall to adequacy and a sufficienthave capitallevel risk on its the based profile and market conditions. The capital management target is operationalisedcapital equitythroughcommon 1 the Tier adequacy ratio, the Tier 1 capital adequacy ratio and total capital adequacycapital ratio. KBN's statusin risk against is assessed marketa normal long situation and using competition. capital Board the an ongoing assesses level The on basisKBN's principles and approvesfor capitalmanagement. Additional capital Tier 1 Subordinated debt liabilities Other Senior securities issued securities Senior Loans from institutions credit Loans from Exposure by time to interest rate rate interest time to by Exposure reset The table shows the sum of net maturities net thatThe sum period, including of tableshows in the interest payments. 2016 Net liquidity exposure liquidity Net Total assets Financial derivatives Notes,interest and other bonds bearing securities Instalment loans Total liabilities Total Deposits with credit institutions credit Deposits with Additional capital Tier 1 Subordinated debt liabilities Other Senior securities issued securities Senior Net liquidity exposure liquidity Net subjecttothat amounts are The interest net rate table shows the in relevant adjustmentthe periods. F Loans from institutions credit Loans from Total liabilities Total Totalassets Exposure by time to maturity time to by Exposure 2016 Notes,interest other and bonds bearing securities Instalment loans Deposits with credit institutions credit Deposits with 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 50 50 50 50 (50) (50) Without Without Without Without maturity maturity 0 0 0 0 0 0 2 362 1 396 5 220 2 362 1 396 5 229 90 443 94 201 10 149 23 546 28 765 87 319 91 077 11 218 229 050 149 191 223 820 (55 287) (55 >5 years >5 years 0 0 0 0 551 242 179 551 242 9 563 1 179 9 637 37 824 25 726 63 551 76 420 42 729 33 691 5 years 5 years 191 988 192 960 235 854 237 825 - - (119 846) (119 (151 768) (151 1 1 0 8 0 0 8 0 60 50 60 50 1 366 4 000 1 220 7 310 39 996 40 115 16 831 25 917 42 749 47 371 41 162 41 281 11 423 35 948 12 months 12 12 months 12 - - 3 3 0 0 0 0 0 0 6 274 274 1 006 36 532 81 387 82 667 89 335 48 628 22 555 71 183 40 517 40 797 28 382 (1 847) (1 (2 004) (2 137 317 173 849 3 months3 months3 - - 1 1 0 0 0 0 17 17 4 714 6 006 2 099 3 518 4 714 4 970 9 700 1 260 10 400 15 266 10 737 10 400 11 238 25 157 16 716 114 599 140 265 131 628 < month1 < month1 899 899 Total Total 4 714 2 664 2 631 4 714 2 664 2 631 10 400 21 331 49 781 10 400 21 331 49 781 330 118 108 661 449 179 409 821 420 729 330 118 108 661 449 179 409 821 420 729 - - Additional capital Tier 1 liabilities Total Financial derivatives exposure liquidity Net The table amounts net shows the subject that are to interest rate adjustment in relevant the periods. 2017 maturity time to by Exposure Deposits institutions credit with Instalment loans Notes, other and bonds interest bearing securities Totalassets Loans institutions credit from issued securities Senior liabilities Other Subordinated debt Additional capital Tier 1 liabilities Total Financial derivatives exposure liquidity Net The table maturities net that sum period, including of shows the in interest payments. 2017 rate interest time to by Exposure reset Deposits institutions credit with Instalment loans Notes, and other bonds interest bearing securities Total assets Loans institutions credit from issued securities Senior liabilities Other Subordinated debt

0 1 1 3 0 0 0 0 0 0

91 65

233 140 137 400 994 689

2016 (138) (390) 5 217 4 984 4 340 2 000 2 000 4 348 3 145 7 624 capital 13 989 11 989 10 996 ts. ts. 18.39 % 16.86 % 21.45 % Minimum Minimum lised gain/ men requirements rea

0 0 0 0

13 15 40

0 0 0

2 909 1 750 1 137 1 714 4 999 525

assets 65 211 62 302 54 245 54 347 2017 (125) (443) 2 000 2 000 2 189 3 145 1 429 7 904 16 625 14 625 12 436 weighted weighted 2016

Risk-

21 15 40

140

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

0 1 1 3 0 0 0

254 184 120 294

5 404 5 150 4 587 4 587 capital 21.65 % 18.41 % 24.61 % Minimum Minimum requirements

derivative and derivative liabilities. - 0 9 0 0 0

12 38

992

3 178 2 302 1 504 3 672 67 547 64 369 57 344 57 344 weighted weighted 2017 assets Risk-

0 9

12 38

184

9 920 8 528 8 467 19 366 11 249 25 181 amount 409 585 283 358 335 158 Carrying

Basic Indicator

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

Credit Valuation Adjustment Adjustment Credit Valuation Securitisation Other assets Covered bonds Covered Claims securedresidential by property re on derivativesre Financial institutions Financial Multilateral development banks Public sector entities nicipalities Regional governments local and authorities Sovereignscentral banks and

Supplementary capital Common equity Tier 1 capital adequacy adequacy capital 1 Tier equity Common ratio SupplementarycapitalKBN'stotalcapital.Tier 100 percentcapital capital satisfies of cannot the exceed 1 adequacy require KBN'stotalcapital primary following the comprises elements: Total capital ratio ratio adequacy capital 1 Tier Minimum capital requirements capital Minimum Operational risk risk Operational Approach Market risk Total credit risk Primarycapitalcalculation thethe under been calculated has Regulation on capital primary financial of for institutions. Un *Only non reversing deferred tax asset to be deducted here. *Only assetto non reversingtax be deducted deferred credit(loss) includechanges non risk on liabilitiesto in both own that is due Total primary capitalTotal primary Total supplementary capitalTotal supplementary Ordinary subordinated debt

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

ANNUAL REPORT 2017 / PAGE 56 ANNUAL REPORT 2017 / PAGE 57 017 have been 017 have Supervisory Board for Kommunalbanken AS Supervisory Berit Flåmo Chair examined by the Supervisory Board. examined by the Supervisory proposals for the the Board of Directors’ recommends that the General Meeting approve The Supervisory Board t of NOK 1 for the allocation of proﬁ nancial position, as well its proposal the statement of ﬁ income statement and and NOK 986 103 015 is to be to KBN’s owner as a dividend of which NOK 443 000 000 is to be paid 429 103 015, transferred to other equity. Oslo, 11 April 2018 To the annual shareholders’ meeting of Kommunalbanken AS of Kommunalbanken meeting the annual shareholders’ To the annual accounts for 2 in Kommunalbanken’s Articles of Association, In accordance with §15 Will be published 11 April 2018 published 11 April Will be SUPERVISORY BOARD’S STATEMENT BOARD’S SUPERVISORY 0 0 0 0 1 1 3 0 0 0 65 91 994 689 233 140 400 137 2016 (138) (390) 2 000 2 000 3 145 7 624 5 217 4 984 4 348 4 340 capital 13 989 11 989 10 996 ts. ts. 21.45 % 18.39 % 16.86 % Minimum Minimum lised gain/ men requirements rea 0 0 0 0 15 13 40 0 0 0 1 750 2 909 4 999 1 714 1 137 525 assets 62 302 65 211 54 245 54 347 2017 (125) (443) 2 189 2 000 2 000 3 145 7 904 1 429 12 436 14 625 16 625 weighted weighted 2016 - Risk 0 40 15 21 140 10 647 16 125 27 918 11 492 11 371 26 833 amount 416 507 267 481 323 397 Carrying 0 0 0 3 1 1 0 79 184 254 294 120 5 150 5 404 4 587 4 587 capital 24.61 % 21.65 % 18.41 % Minimum Minimum requirements derivative and derivative liabilities. - 0 0 0 9 0 38 12 992 3 672 1 504 2 302 3 178 57 344 57 344 64 369 67 547 weighted weighted 2017 - assets Risk 9 0 38 12 184 8 467 8 528 9 920 25 181 11 249 19 366 amount 335 158 283 358 409 585 Carrying Basic Indicator - Of Norwegian which mu- are Of whichOf counterparty exposu- Sovereignscentral banks and Regional governments local and authorities nicipalities Public sector entities Multilateral development banks institutions Financial on derivativesre Claims securedresidential by property bonds Covered Other assets Securitisation Credit Adjustment Valuation Supplementary capital Profit the Tier included for year in 1 capital Pension funds pension commitments above asset*Deferred tax Intangible assets Dividends payable Other additions/deductions in common equity Tier 1 capital Share of unamortised estimate nulled differences Total common equity Tier 1 capital Othercapital Tier approved 1 Total Tier 1 capital Ordinary subordinated debt capitalTotal supplementary capitalTotal primary *Only asset non reversingtax deferred here. to be deducted Primary capitalcalculation thethe under calculated been has Regulation on primary of capital financial for institutions. Un (loss) on liabilitieschangesto in that is due credit include non risk both own Capital adequacy Capital risk Credit Total credit risk Market risk risk Operational Approach requirements capital Minimum Total capital ratio ratio adequacy capital 1 Tier equityCommon adequacy capital 1 Tier ratio Supplementary capital 100 percent of cannot exceed capital. Tier 1 KBN'sKBN's total capital satisfies total primarycapital the capital following the comprises elements: adequacy require (Amounts 1 000 000) NOK in equityCommon capital Tier 1 Share capital Retained earnings years previous and

2017

statements,

Our responsibilities . , comprisewhich the million and liabilities of (ISAs)

with with andlaws regulations and 609

72, International Financial Reporting and notes the to financial

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

s ’ income statement, statementscomprehensive of , . Standards on Auditing Auditor’s responsibilities for the audit of the financial

Auditor 2017 0191 Oslo -0191 0107 Oslo 0107 - for the then endedyear . Thesematters. were addressed in the context of audit our of the International have beenhave prepared in measured fair at valueare valued based on models that use

financial statements of

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for the then the for ended year in accordance with ignificant accounting policies

Statsautoriserte revisorer AS Ernst Young & NO 6, gate Eufemias Dronning NO Sentrum, 1156 Postboks accompanying financial statements ards are further described in the

opted by the EU. ters t the

, million measured fair at value in the statementfinancial position of and classified as level 3 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. a summary of s

cash flows changesand in equity

opinion Annual Shareholders' MeetingAS of Kommunalbanken 95,072 the

instrumentsDue the to the within fairmateriality ofvalue the unlisted hierarchy. or illiquid instruments,we considered the valuation of these instruments key a audit matter. 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 NOK 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 Valuation of Financial Instruments Instruments of Financial Valuation Unlisted or illiquid financial instrum statements requirements that relevant are to our audit of the financial stat ethical responsibilitiesas 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. Key audit ma Key auditKey matters are those matters in professionalour that, judgment, mostwere of significance in our audit of the financial statements for financial statements as a andwhole, formingin opinion our thereon, and do we not provide separate a opinion on these our matters. description of For each how matter audit our below, addressed the matter is provided in thatcontext. fulfilled theWe responsibilities have described in the statements performance of procedures designed respond to to our assessment of risks the material of misstatement of financial the statements.The results of audit our procedures, including the procedures performed to provide the basisaddress for the our mattersaudit opinion on below, the financial statements. Basis for opinion for opinion Basis conducted auditWeour in accordance with regulations,laws, and auditing standards practices and including generally accepted in Norway, We have audited theWe have statement of financial position Report audit the on the Report financial statements of Opinion INDEPENDENT REPORT AUDITOR’S To including In our in materialall respects, financial the position ofpresent Company fairly, the as 31at December its financialits performance Standards as ad under thoseunder stand income,

ANNUAL REPORT 2017 / PAGE 58 ANNUAL REPORT 2017 / PAGE 59 a guarantee that an of users taken the on not is decisions The Board of Directors and Chief Executive Officer n. obtain an understanding of internal control relevant to the audit in order to design audit procedures that are that procedures audit design to order in audit the to control relevant of internal understanding an obtain ofthe effectiveness the on opinion an of expressing purpose the for not but circumstances, the in appropriate control; internal Company’s and estimates accounting of the reasonableness and policies used of accounting appropriateness the evaluate by management; made disclosures related identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, or to fraud due whether statements, financial of the misstatement material of risks the assess and identify and sufficient is that evidence audit obtain and risks, those to responsive procedures audit perform and design from resulting misstatement detectingmaterial a of not risk The opinion. our for a basis provide to appropriate omissions, intentional forgery, collusion, involve may fraud as error, from resulting one for than is higher fraud control; internal of the or override misrepresentations, Independent auditor's report Kommunalbanken- AS ► ► ► Auditor’s responsibilities for the audit of the financial statements financial the of audit the for responsibilities Auditor’s Our objectives are obtainto reasonable assurance about thewhether financial statementswhole as are a free from misstatement,material and to whether frauddue issue to an auditor’s or error, that report includes our opinion. Reasonable assurance highis a level of assurance, but Responsibilities of management for the financial statements financial the for management of Responsibilities Management responsible is forpreparation the and fair presentation of the financial statements in accordance with International Financial Reporting Standards as adopted by the EU, and for such internal control as management determinesis necessary to enable the preparation of financial statements that are free frommaterial misstatement, due towhether fraud error. or preparingIn the financial statements, management responsible is for assessing the Company’s ability to continue goingas a concern,disclosing, as applicable, matters to going related concern and using the concerngoing basis of accounting, unless management either intends to liquidate Company the or to cease operations, or has no realistic alternative butto so. do audit conducted in accordance ISAs with alwayswill detect material a misstatement exists.when it Misstatements can arise from error or fraud and are considered material if, individually or in the aggregate, could they reasonably be expected to influence the economic Other information information Other Other information consists ofinformation the included in the Company’s annual report other than the financial statements ourand auditor’s report thereo model-based calculations. Our assessment included also management's review of provided valuations by We internal experts. pricing assessed models against industry practice and valuationWe guidelines. performed independent valuations for selected instruments and used external source data where Weavailable. compared results of valuations our to the Company’s valuations. Level 3 instruments which are presented fairat thevalue on statement of financial position disclosedare the financialin statements. note in 11 (management) responsibleare 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, responsibility our is to read the other information, 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 materially misstated. If, based theon work have we performed,conclude we thatthere is a material misstatement of other this information, are requiredwe report to that fact.We nothing report have to thisin regard. basis of these financial statements. As part basis of financialof these statements. regulations auditan accordance andin generally with law, accepted auditing principles in Norway, including ISAs,accepted exerciseauditing we principlesprofessional Norway, judgment in and maintain professional scepticismWe throughout the audit. also: and 2017 Our responsibilities . , comprisewhich the million and liabilities of (ISAs) 609 72, Foretaksregisteret: NO 976 389 387 MVA 387 389 976 NO Foretaksregisteret: Tlf: 00 24 00 24 +47 www.ey.no revisorforening norske Den av Medlemmer responsibilities the for audit of the financial Kommunalbanken AS income statement, statements of comprehensive , . Standards on Auditing Auditor’s responsibilities for the audit of the financial 2017 0191 Oslo 0191 - 0107 Oslo 0107 - . Thesematters. were addressed in the context of audit our of the measured fair at value are valued based on models that use have beenhave prepared in accordance with andlaws regulations and 2017 ents ignificant accounting policies Dronning Eufemias gate 6, NO 6, gate Eufemias Dronning NO Sentrum, 1156 Postboks Statsautoriserte revisorer AS Ernst Young & financial statements ters t the million measured fair at value in the statement of financial position and classified as level 3 section of report, our including ourAccordingly, relation in to these matters. audit included the sectionWe of report. our independent are of Company the in accordance the ethicalwith Annual Shareholders' Meeting of Kommunalbanken AS opinion, 95,072 the sufficient and appropriatesufficient provide to a basis for our opinion. OK nstruments the within fair value hierarchy. Due the to materiality of the unlisted or illiquid instruments, we i considered the valuation of these instrumentskey a audit matter. 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 N Key auditKey matters are those matters in professionalour that, judgment, were of most significance in our audit of the financial statements for financial statements as a andwhole, forming in opinion our thereon, and dowe not provide separate a opinion on these our matters. description of For each how matter audit our below, addressed the matter is provided in thatcontext. fulfilled theWe responsibilities have described in the statements performance of procedures designed respond to to our assessment of risks the of material misstatement of financial the statements.The results of audit our procedures, including the procedures performed to provideaddress the matters below, the basis for our audit opinion on the financial statements. Instruments of Financial Valuation Unlisted or illiquid financial instrum assumptions that are not observable in the marketTheplace. valuation of these instruments therefore have a higher risk of errors. Such instruments comprise assets of NOK Key audit ma Key INDEPENDENT AUDITOR’S REPORT To Report the audit on the financial statements of Opinion audited theWe have accompanying financial statements of statement of financial position as at 31 December in materialall respects, financial the present fairly, position of Company the as31 at December financialits performance then the for ended year in accordance with International Financial Reporting Standards as adopted by the EU. forBasis opinion We conducted audit our in accordance with regulations,laws, and auditing standards practices and generally including accepted in Norway, International statements requirements that relevant are to our audit of the financial statements Norway, in and we have fulfilled our ethical responsibilitiesas required by law regulations.We and also complied have with otherour ethical obligations in accordance with these requirements.We believe thatthe audit evidence have we obtained is including a summary of s In our under thoseunder standards are further described in the Auditor’s income, cash flows changes and in equity for the then endedyear and notes the to financial statements,

responsibility lated disclosures in the s report to the re the to s report ’ the statement on corporate social social corporate on statement the s report. However, future events or conditions may conditions or events future However, s report. ’ on of the financial statements, including the disclosures, and the disclosures, including statements, of financial the

certainty exists related to events or conditions that may cast may that conditions or events to related exists certainty and s use of the going concern basis of accounting and, based on based and, accounting of basis concern going the of s use ’

content

report report report and in the statement corporate on social ’ s ability to continue as a going concern. If we conclude that a material a that conclude we If concern. a going as continue to s ability ’ to continue as a going concern; going a as continue to

Kommunalbanken AS - - Company to cease to Company

our auditour of financial the statements as described above,it our is opinion that the information whether the financial statements represent the underlying transactions and events in a manner that achieves fair a mannerin achieves that events and transactions underlying the represent statements the financial whether presentation. evaluate the overall presentation, structure and structure presentation, the overall evaluate conclude on the appropriateness of management of appropriateness the on conclude financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on based are conclusions Our opinion. our modify to inadequate, are disclosures such if or, statements financial auditor our of date to the up obtained evidence audit the the audit evidence obtained, whether a material un a material whether obtained, the evidence audit Company the on doubt significant auditor our in attention draw to required are we exists, uncertainty cause the cause also provide those provide also charged with governance with a statement that we have complied relevant with the resultthe is consistent financialwith the statements complies and the law andwith regulations. concerning the financial statements, goingthe concern assumption andthe proposal forallocation the of Independent auditor's report Based on presented in the Board of Directors Report on other legal and regulatory requirements legal andReport on other regulatory ’ Directors of Board the on Opinion ethical requirements regarding independence, and communicate them with relationships all and other mattersmay reasonably that be thoughtto bear on our independence,and where applicable, related 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 the current period and thereforeare keythe auditWe matters. these matters describe our in auditor’s report unless law or regulation precludes public disclosure aboutthe matter or when, in extremely rarecircumstances, determine we that a matter should not communicated be report in our because the adverse consequences of so doing would reasonably be expected to outweigh the public interest benefits of such communication. We ► communicateWe thosewith charged with governance regarding, among other matters, the planned scope and timing of audit the significantand audit findings, including any significantdeficiencies in controlinternal that identifywe during audit.our ► responsibility responsibility

ANNUAL REPORT 2017 / PAGE 60 ANNUAL REPORT 2017 / PAGE 61 , it is our our is , it or Reviews of Historical Financial Information International Standard on AssuranceInternational Engagements Standard on (ISAE) Audits the duty to ensure that the Company's accounting information is fulfilled its s ha AS OUNG OUNG in Norway. Norway. in

& 28 February 2018 , epted RNST Independent auditor's report Kommunalbanken- AS Opinion on registration and documentation and documentation registration on Opinion Based on auditour of financial the statementsas described above,and control procedures we have considered necessary in accordance with 3000, Assurance Engagements Other than E Oslo opinion that management properly recorded and documented as required by law and bookkeeping standards practices and acc Einar Hersvik Accountant (Norway) Authorised Public State (This from translation has been Norwegian made for information purposes only.) responsibility lated disclosures in the s report re the to ’ the statement on corporate social corporate on statement the s report. However,s report. or events future conditions may ’ on of statements, financial the the disclosures, including and certainty exists related to events or events to related exists certainty that conditions cast may and s use ofs use of basis concern going the and, accounting on based ’ content report report and in the statement corporate on social ’ s ability to continue as a going concern. a going as continue to s ability that conclude we If material a ’ Kommunalbanken AS - our auditour of financial the statements as described above,it our is opinion that the information whether the financialwhether represent statements transactions underlying the events and a manner in that fair achieves presentation. financial statementsfinancial or, if inadequate, are disclosures such Our opinion. our modify to conclusions auditthe on based are of date to the up obtained evidence auditor our conclude on the appropriateness of appropriateness the on conclude management the audit obtained, evidence un a material whether doubtsignificant Company the on exists,uncertainty our in attention draw to required are we auditor evaluate the overall presentation, and structure cause thecause cease to Company a as continue to concern; going also provide those provide also charged with governance with a statement that we have compliedrelevant with the resultthe is consistent financialwith the statements complies and the law with and regulations. concerning the financial statements, going the concern assumption andthe proposal forallocation the of Independent auditor's report ► ► We communicate those with charged with governance regarding, among other matters, the planned scope and timing of audit the significantand audit findings, including any significantdeficiencies in controlinternal that identifywe during audit. our We ethical requirements regarding independence, and communicatethem with relationships all and other mattersmay reasonably that be thoughtto bear on our independence,and where applicable, related 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 the current period and are therefore keythe auditWe matters. these matters describe our in auditor’s report unless law or regulation precludes public disclosure aboutthe matter or when, in extremely rare circumstances, determine we that a matter should not communicated be report in our because the adverse consequences of so doing would reasonably be expected to outweigh the public interest benefits of such communication. requirements legal andReport on other regulatory ’ Directors of Board the on Opinion Based on presented in the Board of Directors responsibility Adopt the Company's annual report and accounts, including the application of profit or covering of loss for the year, and the declaration of dividend. Elect members to the Board of Directors in accordance with § 8. Elect members to the Supervisory Board in accordance with § 13 of the Articles of Association. Elect the Company’s auditor. Fix remuneration for members of the Supervisory the Board’s Board and the Board of Directors, subcommittees and the Company’s auditor. 1. 5. 3. 2. 4. Chapter V - Annual General Meeting § shall be held 16 The ordinary Annual General Meeting before the end of June. and Government The Ministry (The Ministry of Local Meeting where Modernisation) calls the Annual General members of the Board, managing director and the Company’s auditor are called. An extraordinary Annual General Meeting shall be held if called for by the Ministry of Local Government and the Board of Directors or the Company's Modernisation, auditor. The regular Annual General Meeting shall: § to ensure The Supervisory Board shall endeavour 15 are being promoted in that the Company's objectives memorandum and regulation, accordance with law, of the Annual and the resolutions articles of association, by: Board the Supervisory General Meeting and 1. the Annual General Meeting in Provide a statement to for the respect of the Board of Directors' proposals the Board's income statement and balance sheet and covering of loss proposals for the application of profit or for the year. 2. the Board of Directors' report and the Scrutinise auditor's report. 3. an opinion on matters concerning the Company Give Board by the which are brought before the Supervisory Board Board of Directors or that the Supervisory with a particular focus on considers necessary to address, corporate governance. experience consist of between five (5) and nine

breadth of qualifications, Board of Directors shall collectively

majority of the employees should so If a it can exhibit diversity and and background and decide, Chapter III - Board of Directors § 8 The Company's The Articles of Association were last changed by the Annual General Meeting 29 June 2016. General Meeting 29 June 2016. were last changed by the Annual The Articles of Association between the two versions, the In case of discrepancy in Norwegian and translated into English. The bylaws are issued Norwegian version prevails. office registered objectives, Chapter I - Company, § AS. The Company's name is Kommunalbanken 1 § the The Company is a direct continuation of 2 by the government administrative enterprise carried out body, Norges Kommunalbank. The State's shares may be assigned to municipalities, intermunicipal companies and municipal counties, Such assignment will be done in pension funds. accordance with the Company's aim of maintaining highest possible creditworthiness. § 3 The Company's objectives are to provide loans to local intermunicipal companies and governments, counties, tasks other companies that carry out local government government against either a municipal guarantee, or other satisfactory security. guarantee, appropriate The Company can also undertake other tasks to the Company's business. § 4 The Company's registered office is in Oslo. loan capital and subordinated Chapter II - Equity - shares § capital is NOK 3,144,625,000 5 The Company's share six one hundred and forty-four million, (three billion, hundred and twenty five thousand Norwegian kroner) (one shares of NOK 1,000 divided into 3,144,625 thousand Norwegian kroner) each. § is conditional on the consent 6 The acquisition of shares Consent can only be of the Company's Board of Directors. withheld on grounds of fact. § given to shareholders under 7 Pre-emption rights section 4-19 of the Norwegian Companies Act can also be claimed for shares which have changed owner. ARTICLES OF ASSOCIATION ARTICLES (9) members.

ANNUAL REPORT 2017 / PAGE 62 ANNUAL REPORT 2017 / PAGE 63 remuneration policy. remuneration of Association which by law or Articles meeting or General Meeting. falls under the Annual . statement on the Board of Director's Approve 7.the to in the notice of business referred Address other 6 § can only be granted to municipalities, 19 Loans intermunicipal companies and other companies counties, tasks against either a which carry out local government municipal guarantee, government guarantee or other The Company can also undertake satisfactory security. other tasks appropriate to the Company's business. § shall fix all lending terms 20 The Board of Directors and conditions as may be in force at any time. § and financial 21 The Company's capitalisation administration shall be satisfactory in relation to the Company's business and consistent with the Company's aims of maintaining highest possible creditworthiness. Chapter VIII - Annual Report and Accounts § year shall follow the 22 The Company's financial calendar year. Chapter VI Auditor § auditor shall be a state-authorised 17 The Company's shall be elected by the Annual public accountant and on a recommendation from the General Meeting based Board of Directors. shall be delivered at least two weeks The auditor's report which shall prior to the meeting of the Supervisory Board consider the accounts. Chapter VII § lending by issuing 18 The Company shall raise funds for or by certificates or other form of loan notes bonds, may raise The Company entering into loan agreements. primary capital and other foreign capital. instruments is Raising primary capital and Tier 1 capital Meeting effected based on a majority Annual General the Articles of resolution as in the case of alterations in to the or by the Board of Directors according Association, shall The authority authority adopted by such a majority. for longer valid be limited upward in amount and is not Meeting, or than the next year’s regular Annual General maximum of 18 months.

Prepare statements on remuneration policy. Supervise the day-to-day management of the Ensure that the Company’s business guidelines Draw up strategies and plans, budgets and Keep itself informed of the Company’s financial Make decisions and grant authority for new loans Grant special powers and authorisation to sign on Present the annual accounts and directors' report to Make recommendations to the Annual General Appoint the managing director. Fix the managing director's salary. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. The Annual General Meeting shall elect the chairman and The Annual General Board of Directors. vice-chairman of the demand that a third and at least two (2) of the members a third and at least demand that of the Board shall be elected by and from amongst the and from amongst shall be elected by of the Board Annual General Meeting for two- shall be elected by the least two (2) shall be elected year terms, so that at Company's employees. For these members two (2) employees. For these Company's other members shall be elected.The personal deputies (4) of the elected but no more than four annually, members. § ensure that the 9 The chairman of the Board shall as often as the Company's business Board holds meetings to be or when a member calls for a meeting necessitates, half if more than The Board constitutes a quorum held. those for resolutions are the members are present. Valid have voted, which the majority of the members present or although a proposal which implies an alteration of all board amendment requires more than one-third the If the votes on each side are equal, members. vote. chairman of the meeting shall have the casting § management of the 10 The responsibility for the overall therefore inter Company belongs to the Board and shall alia: are soundly organised. operations/activities and for the Company's business operations/activities check that they are followed: and accounts position and ensure that its operations, fund management are subject to adequate control. raised. behalf of the Company per procurationem. the Annual General Meeting. Meeting with respect to alterations to the Articles of Association. operations. Company and its overall § or the vice-chairman of 11 The chairman of the Board, the Board shall jointly with one of the Board members or the managing director sign for the Company. Adopt the Company's annual report and accounts, including the application of profit or covering of loss for the year, and the declaration of dividend. Elect members to the Board of Directors in accordance with § 8. Elect members to the Supervisory Board in accordance with § 13 of the Articles of Association. Elect the Company’s auditor. Fix remuneration for members of the Supervisory the Board’s Board and the Board of Directors, subcommittees and the Company’s auditor. 1. 5. 3. 2. 4. Chapter V - Annual General Meeting § shall be held 16 The ordinary Annual General Meeting before the end of June. and Government The Ministry (The Ministry of Local Meeting where Modernisation) calls the Annual General members of the Board, managing director and the Company’s auditor are called. An extraordinary Annual General Meeting shall be held if called for by the Ministry of Local Government and the Board of Directors or the Company's Modernisation, auditor. The regular Annual General Meeting shall: § to ensure The Supervisory Board shall endeavour 15 are being promoted in that the Company's objectives memorandum and regulation, accordance with law, of the Annual and the resolutions articles of association, by: Board the Supervisory General Meeting and 1. the Annual General Meeting in Provide a statement to for the respect of the Board of Directors' proposals the Board's income statement and balance sheet and covering of loss proposals for the application of profit or for the year. 2. the Board of Directors' report and the Scrutinise auditor's report. 3. an opinion on matters concerning the Company Give Board by the which are brought before the Supervisory Board Board of Directors or that the Supervisory with a particular focus on considers necessary to address, corporate governance. Chapter III - Board of Directors § 8 The Company's Board of Directors shall collectively exhibit diversity and experience breadth of qualifications, and background and consist of between five (5) and nine If a(9) members. majority of the employees should so it can decide, ARTICLES OF ASSOCIATION ARTICLES General Meeting 29 June 2016. were last changed by the Annual The Articles of Association between the two versions, the In case of discrepancy in Norwegian and translated into English. The bylaws are issued Norwegian version prevails. office registered objectives, Chapter I - Company, § AS. The Company's name is Kommunalbanken 1 § the The Company is a direct continuation of 2 by the government administrative enterprise carried out body, Norges Kommunalbank. The State's shares may be assigned to municipalities, intermunicipal companies and municipal counties, Such assignment will be done in pension funds. accordance with the Company's aim of maintaining highest possible creditworthiness. § 3 The Company's objectives are to provide loans to local intermunicipal companies and governments, counties, tasks other companies that carry out local government government against either a municipal guarantee, or other satisfactory security. guarantee, appropriate The Company can also undertake other tasks to the Company's business. § 4 The Company's registered office is in Oslo. loan capital and subordinated Chapter II - Equity - shares § capital is NOK 3,144,625,000 5 The Company's share six one hundred and forty-four million, (three billion, hundred and twenty five thousand Norwegian kroner) (one shares of NOK 1,000 divided into 3,144,625 thousand Norwegian kroner) each. § is conditional on the consent 6 The acquisition of shares Consent can only be of the Company's Board of Directors. withheld on grounds of fact. §given to shareholders under 7 Pre-emption rights section 4-19 of the Norwegian Companies Act can also be claimed for shares which have changed owner. The Board of Directors shall deliver annual accounts and annual accounts of Directors shall deliver The Board year. report for each financial an annual of the at the disposal accounts shall be placed The annual prior to the ordinary Annual auditor at least one month and accounts The audited annual report General Meeting. the Supervisory Board before shall be scrutinised by Annual General Meeting.being laid before the Meeting shall adopt the annual The Annual General no later than the end of June.report and accounts shall publish the annual report The Board of Directors than one week after they have been and accounts no later adopted by the Annual General Meeting. Chapter IX - Age of retirement § 23 The age of retirement for the Company's Managing Director is 70 years. of to the Articles Chapter X - Alterations Association § 24 Alterations to the Articles of Association must be so approved by the King if prevailing regulations the Articles of If such approval is demanded, demand. such Association will come into force on the date approval is forthcoming.

one member of

any of the The remainder of the members The remainder of the for two-year terms. One third of the members shall retire One third of the members for two-year terms. be At least one third of the members shall each year. elected annually. and vice- The Supervisory Board shall elect chairman serve for a term chairman from amongst its members to of one year. § by the 14 The Supervisory Board shall be convened as often as the chairman and meet at least once a year or for by the Board chairman finds necessary or when called of the or by a minimum of two members of Directors, shall set out The notice of the meeting Supervisory Board. the business to be considered. The Board of Directors and the Company's auditor shall be called to attend the meetings of the Supervisory Board. Unless otherwise determined by the Supervisory Board in the members of the Board of individual instances, Directors are entitled to be present at the meetings of the Supervisory Board with the right to speak and the right of The Ministry of Local Government and initiative. Modernisation can participate in the Supervisory Board meeting with up to two observers. The Supervisory Board constitutes a quorum when at least 2/3 of its members or deputy members are present. If the requisite number of members is not present, a new Board shall be called. The new meeting of the Supervisory meeting will constitute a quorum if more than half the members are present. Company’s senior executives can be elected the Supervisory Board. be elected The members of the Supervisory Board shall personal deputy member shall be elected by and from personal deputy member amongst the employees. §for the shall be responsible managing director 12 The Company and its business management of the day-to-day with the instructions in accordance operations/activities laid down by the Board. Board Chapter IV - Supervisory § Board shall consist of twelve 13 The Supervisory One member and members. members and five deputy and deputy members shall be elected by the Annual and deputy members Board should be The Supervisory General Meeting. a range of members as possible, so composed of as broad interest groups as to ensure that the various districts and represented. affected by the Company's business are fairly No member of the Board of Directors nor

ANNUAL REPORT 2017 / PAGE 64 ANNUAL REPORT 2017 / PAGE 65 Valid resolutions of the Supervisory Board are those for Board are those of the Supervisory Valid resolutions present have voted, majority of the members which the by be passed if voted for resolution can only although a of all members. If the votes on each more than one third of the meeting shall have the side are equal, the chairman casting vote. The Board of Directors shall deliver annual accounts and annual accounts of Directors shall deliver The Board year. report for each financial an annual of the at the disposal accounts shall be placed The annual prior to the ordinary Annual auditor at least one month and accounts The audited annual report General Meeting. the Supervisory Board before shall be scrutinised by Annual General Meeting. being laid before the Meeting shall adopt the annual The Annual General no later than the end of June. report and accounts shall publish the annual report The Board of Directors than one week after they have been and accounts no later adopted by the Annual General Meeting. Chapter IX - Age of retirement § 23 The age of retirement for the Company's Managing Director is 70 years. of to the Articles Chapter X - Alterations Association § 24 Alterations to the Articles of Association must be so approved by the King if prevailing regulations the Articles of If such approval is demanded, demand. such Association will come into force on the date approval is forthcoming. §for the shall be responsible managing director 12 The Company and its business management of the day-to-day with the instructions in accordance operations/activities laid down by the Board. Chapter IV - Supervisory Board § Board shall consist of twelve 13 The Supervisory One member and members. members and five deputy one shall be elected by and from personal deputy member remainder of the members The amongst the employees. shall be elected by the Annual and deputy members Board should be The Supervisory General Meeting. a range of members as possible, so composed of as broad interest groups as to ensure that the various districts and affected by the Company's business are fairly represented. No member of the Board of Directors nor any of the Company’s senior executives can be elected member of the Supervisory Board. be elected The members of the Supervisory Board shall shall retire One third of the members for two-year terms. be At least one third of the members shall each year. elected annually. and vice- The Supervisory Board shall elect chairman serve for a term chairman from amongst its members to of one year. § by the 14 The Supervisory Board shall be convened as often as the chairman and meet at least once a year or for by the Board chairman finds necessary or when called of the or by a minimum of two members of Directors, shall set out The notice of the meeting Supervisory Board. the business to be considered. The Board of Directors and the Company's auditor shall be called to attend the meetings of the Supervisory Board. Unless otherwise determined by the Supervisory Board in the members of the Board of individual instances, Directors are entitled to be present at the meetings of the Supervisory Board with the right to speak and the right of The Ministry of Local Government and initiative. Modernisation can participate in the Supervisory Board meeting with up to two observers. The Supervisory Board constitutes a quorum when at least 2/3 of its members or deputy members are present. If the requisite number of members is not present, a new Board shall be called. The new meeting of the Supervisory meeting will constitute a quorum if more than half the members are present.

TEES

Chair Jr. BOARD PREPARATORY COMMIT BOARD PREPARATORY Audit Committee Martha Takvam, Chair Nanna Egidius Rune Midtgaard Brit Kristin Rugland Else Bugge Fougner, Rune Midtgaard Petter Steen Jarle Byre Risk Committee Risk Chair Martin Skancke, Martha Takvam Else Bugge Fougner Committee Remuneration Senior Chair ice Chair V Manager, KBN Relationship Terje Dalby, employee representative, SUPERVISORY BOARD SUPERVISORY Troms Chair, former County Governor, Svein Ludvigsen, county Frøya municipality Chair, Mayor, Vice Berit Flåmo, Eid municipality Alfred Bjørlo, Mayor, Klepp municipality Mayor, Ane Marie Braut Nese, Møre og Romsdal County Governor, ass. Rigmor Brøste, county Harstad municipality Arne Johansen, former CEO, Evje og Hornnes municipality Bjørn Ropstad, Mayor, Inderøy municipality Ida Stuberg, Mayor, Harald Walle, CEO, Stor-Elvdal municipality Leif Akershus county CEO, Bamrud, Tron CEO, Stjørdal municipality Anne Kathrine Slungård, Alternates to the employee representatives Alternates to the employee Marit Urmo Harstad Andreas Aleström Nanna Egidius Rune Midtgaard Brit Kristin Rugland Martha Takvam Petter Steen Jr. employee representativeMay-Iren Walstad Wassås, employee representative Jarle Byre, Martin Skancke, BOARD OF DIRECTORS BOARD OF Else Bugge Fougner, GOVERNING BODIES GOVERNING

ANNUAL REPORT 2017 / PAGE 66 ANNUAL REPORT 2017 / PAGE 67

Manager, AUDITOR AL Deloitte AS Eivind Skaug, State Authorised Public Accountant INTERN Torger M. Jonasen, alternates to the employee Jonasen, alternates to the Torger M. representative, Senior Relationship KBN Board to the Supervisory Observers Director General, Ministry of Sølve Monica Steffensen, Government and Modernisation Local Ministry of Assistant Director General, Thor Bernstrøm, Government and Modernisation Local AUDITOR Ernst & Young AS Einar Hersvik, State Authorised Public Accountant Alternates county Troms CFO, Berit Koht, Mayor, Østre Toten municipality Hans Seierstad, former municipality Vågan CEO, Tommy Steinsvik, municipality Sør-Varanger CEO, Nina Bordi Øvergaard, BOARD PREPARATORY COMMITEES BOARD PREPARATORY Audit Committee Martha Takvam, Chair Nanna Egidius Rune Midtgaard Brit Kristin Rugland Committee Risk Chair Martin Skancke, Martha Takvam Else Bugge Fougner Committee Remuneration Chair Else Bugge Fougner, Rune Midtgaard Petter Steen jr. Jarle Byre GOVERNING BODIES GOVERNING OF DIRECTORS BOARD chair Else Bugge Fougner, Chair Vice Martin Skancke, Nanna Egidius Rune Midtgaard (from June 2016) Brit Kristin Rugland Martha Takvam Petter Steen Jr. employee representative May-Iren Walstad Wassås, employee representative Jarle Byre, representatives Alternates to the employee Marit Urmo Harstad Andreas Aleström BOARD SUPERVISORY Troms Chair, former County Governor, Svein Ludvigsen, county Chair, Mayor, Frøya municipality Vice Berit Flåmo, Eid municipality Alfred Bjørlo, Mayor, Klepp municipality Mayor, Ane Marie Braut Nese, Møre og Romsdal County Governor, ass. Rigmor Brøste, county Harstad municipality Arne Johansen, former CEO, Bjørn Ropstad, Mayor, Evje og Hornnes municipality Ida Stuberg, Mayor, Inderøy municipality Stor-Elvdal municipality Harald Walle, CEO, Leif Akershus county CEO, Bamrud, Tron Anne Kathrine Slungård, CEO, Stjørdal municipality Manager, Loan Terje Dalby, employee representative, KBN Kommunalbanken AS Telephone +47 2150 2000 PO Box 1210 Vika [email protected] N-0110 Oslo www.kbn.org