Sparebanken Møre, which is the Parent company of the Group, is a savings bank registered in Norway. The bank’s Equity Certificates (ECs) are listed on the Oslo Stock Exchange.

The Group consists of Sparebanken Møre (the Parent Bank) and its subsidiaries Møre Boligkreditt AS, Møre Eiendomsmegling AS and Sparebankeiendom AS.

The Sparebanken Møre Group provides banking services for retail and corporate customers, as well as leasing products and real estate brokerage through a large network of branches within Møre og Romsdal, this region being defined as the bank’s geographic home market.

The company’s Head Office is located at Keiser Wilhelmsgt. 29/33, P.O.Box 121 Sentrum, 6001 Ålesund, Norway.

The preliminary annual accounts were approved for publication by the Board of Directors on 28 January 2015. The final annual accounts were presented by the Board of Directors on 4 March 2015.

The Group’s operations are described in note 19.

The Group’s annual accounts have been prepared in accordance with the International Financial Reporting Standards (IFRS), which have been stipulated by the International Accounting Standards Board, and implemented by the EU as at 31 December 2014.

How to read the group`s accounting principles:
Sparebanken Møre describes the accounting principles in conjunction with each note. See the table below for an overview of in which note the various principles are described, as well as reference to relevant and important IFRS standards. 

Consolidation principles
The consolidated financial statements comprise Sparebanken Møre and all companies in which Sparebanken Møre has control through ownership. An entity is controlled when the owner is exposed to or has rights to returns from the entity and has the opportunity to influence these returns through its influence over the entity. This applies to subsidiaries mentioned in note 18.

Companies which have been bought or sold during the year are included in the Group accounts from the time at which control is obtained and until control ceases.

The Group accounts are prepared as if the Group were one financial unit.

All transactions involving companies which form part of the Group, have been netted out when consolidating the Group accounts. Uniform accounting principles have been applied for all companies which are incorporated in the Group accounts. In the Parent Bank’s accounts, investments in subsidiaries are valued at cost. The acquisition method is applied when recognizing acquired units/entities. The acquisition cost relating to an acquisition is assessed as the fair value of the items involved, such as assets, equity instruments issued and liabilities taken over. Identifiable assets bought, liabilities taken over and debt obligations are assessed at fair value at the time of the acquisition in question. The acquisition cost in excess of fair value of the Group’s equity stake of identifiable net assets is, according to IFRS 3, incorporated as goodwill. Transaction costs related to acquisitions are recognized as they apply.

Temporary acquired shares in connection with securing commitments are not consolidated, but are treated as available for sale at fair value through profit or loss.

Foreign exchange
The Group presents its accounts in Norwegian kroner (NOK). The functional currency for the Parent Bank and its subsidiaries is NOK.

All monetary items in foreign currencies have been recalculated into the bank’s functional currency (NOK) according to foreign exchange rates as at 31.12.2014 provided by Norges Bank. Current income and costs have been translated into NOK at the foreign exchange rates ruling at the time of the transactions in question, and changes in foreign exchange rates have been included in the profit and loss account on an ongoing basis during the accounting period.

Changes in accounting principles and presentation (classifications)
There are no material changes in accounting policies for 2014. For changes relating to presentation/classification, please see further information under the section "New standards".

New standards
The Group has implemented the following new standards in 2014:

• IAS 27 Separate Financial Statements
As a consequence of the publication of IFRS 10 Consolidated Financial Statements, IFRS 11 Joint arrangements and IFRS 12 Disclosure of Interests in Other Entities, the IASB made amendments to IAS 27. IAS 27 now only deals with accounting in the separate financial statements. The title of the standard was also changed in this respect. Within the EU / EEA, IFRS 11 is effective for annual periods beginning on or after 1 January 2014. The change has had no significant impact on the financial statements of Sparebanken Møre.

• IAS 32 Financial instruments – Presentation
IAS 32 is amended in order to clarify the meaning of "currently has a legally enforceable right to set-off", as well as clarifying the application of the IAS 32 offsetting criteria to settlement systems, such as central clearing house systems which apply gross settlement mechanisms that are not simultaneous. The amendments are effective for annual periods beginning on or after 1 January 2014, and have had no material impact on the Group`s financial position or performance.

• IAS 39 Financial instruments – Recognition and Measurement
The IASB has issued amendments to hedge accounting rules under IFRS. The outcome of the changes is not having to discontinue hedge accounting in cases where the derivatives designated as hedging instruments must be transmitted to conduct clearing by a CCP (central counter party) as a result of legislation or other regulation, provided that specific criterias are met. The amendments are effective for annual periods beginning on or after 1 January 2014, and have not had a material impact on the Group`s financial position or performance.

• IFRS 10 Consolidated Financial Statements and IAS 27 Separate Financial Statements
IFRS 10 replaces the portion of IAS 27 Consolidated and Separate Financial Statements that addresses the accounting for consolidated financial statements and SIC-12 Consolidation – Special Purpose Entities. IFRS 10 establishes a single control model that applies to all entities, including special purpose entities. The changes introduced by IFRS 10 require management to exercise significant judgment to determine which entities are controlled, and therefore are required to be consolidated by the Parent Bank. Within the EU / EEA, IFRS 10 is effective for annual periods beginning on or after 1 January 2014.This has not resulted in changes concerning which companies to be consolidated in the Sparebanken Møre Group.

• IFRS 11 Joint Arrangements
This standard replaces IAS 31 Interests in Joint Ventures and SIC-13 Jointly Controlled Entities - Non-Monetary Contributions by Ventures. IFRS 11 removes the ability to recognise the investment using the proportionate consolidation method. Any entity that meets the definition of joint ventures under IFRS 11 must be recognised in accordance with the equity method. Within the EU / EEA, IFRS 11 is effective for annual periods beginning on or after 1 January 2014. The changes have not had any effect on the Group`s financial position or performance.

• IFRS 12 Disclosure of Interests in Other Entities
IFRS 12 applies for enterprises which have interests in subsidiaries, joint arrangements, associates or structured entities. IFRS 12 replaces the disclosure requirements that were previously included in IAS 27 Consolidated and Separate Financial Statements, IAS 28 Investments in Associates and IAS 31 Interests in Joint Ventures. A number of new disclosures are also required. Within the EU/EEA area, IFRS 12 is effective for annual periods beginning on or after 1 January 2014. The changes have had no impact on the Group’s financial position or performance.

Future standards

Standards and interpretations that are issued up to the date of issuance of the consolidated financial statements, but not yet effective, are disclosed below. The Group’s intention is to adopt the relevant new and amended standards and interpretations when they become effective, provided that the EU approves the changes prior to issuing the consolidated financial statements.

• IFRS 9 Financial instruments
IFRS 9 will eventually replace IAS 39 Financial Instruments: Recognition and Measurement. In order to expedite the replacement of IAS 39, the IASB divided the project into phases: classification and measurement, hedge accounting and impairment. New principles for impairment were published in July 2014 and the standard is now completed. The parts of IAS 39 that have not been amended as part of this project, have been transferred into IFRS 9. IFRS 9 is effective for annual periods beginning on or after 1 January 2018. The Standard is not yet approved by the EU. The group is now in the process of clarifying the impact of the new standard. It is too early to conclude anything exact, but at the reporting date the preliminary assessment is that the standard will not have a significant impact on the financial statements.

The following approved IFRSs with future effective dates are expected not to be of significant relevance for the Sparebanken Møre Group, thus have no impact on the financial statements:
IFRS 15 Revenues from Contracts with Customers (new)
IAS 16 Property, Plant and Equipment (amendments)
IAS 41 Agriculture (amendments)
IFRIC Interpretation 21 Levies

Annual improvements

Minor changes have been done in a number of standards during IASB`s annual improvement projects. None of these changes are considered to have significant impact on the financial position or performance of the Sparebanken Møre Group.

Judgments in applying accounting principles

Financial assets and liabilities are allocated to the different categories in IAS 39, which subsequently determine the measurement in the statement of financial position. The bank has clear procedures for the categorisation, and the process normally requires only limited use of judgment.

Use of estimates and judgment in the preparation of the annual financial statements

Preparation of the annual accounts in accordance with certain IFRS accounting standards means that in certain cases management has to use best estimates and assumptions. The assessments are based on historical experience and assumptions deemed to be reasonable and sensible by management. The estimates and assumptions on which the abovementioned preparation is based, affect the reported amounts of assets, liabilities and off-balance sheet items, as well as income and costs in the submitted annual accounts. There is a risk of the actual results later, to a certain extent, deviating from the estimates and assumptions on which the abovementioned preparation is based.

Certain accounting principles are regarded as particularly important in order to illustrate the Group’s financial position, due to the fact that management is required to make difficult or subjective assessments, applying estimates which mainly relate to matters which are initially uncertain.

The executive management team makes assessments when choosing and applying accounting policies. The company's financial assets and liabilities are allocated to different categories in accordance with IAS 39. Little discretionary judgment is normally exercised in this context. Please refer to note 15 for the measurement policies.

In the opinion of the management, the most important areas which involve critical estimates and assumptions are as follows:

Impairment on loans
The Group examines the lending portfolio at least every quarter. Commitments are reviewed individually and deemed to require impairment when there is objective proof of impairment in value, or at the latest in the case of the commitment having been in default for more than 90 days. Furthermore, impairment assessments are done for groups of loans. Reference is made to note 7 for further description of principles and methodology. There are guidelines for conducting assessment of future cash flows. Significant commitments are reviewed by the central credit institutions in the bank before a final decision of impairment is made.

In connection with impairment assessments, all cash flows relating to the commitments in question shall in principle be identified, and an assessment shall be made as to which cash flows are vulnerable. Against the background of the large number of commitments which are subject to assessment both on an individual and group basis, such calculations must be done on the basis of approximation and figures from earlier experience.

Fair value of financial instruments – including derivatives
For financial instruments which are not traded in active markets, various evaluation methods are applied in order to ascertain fair value. Further information and a description of the techniques used may be found in note 17. Reference is also made to notes 11-16, which deal with financial instruments.

Pension liabilities
The present value of pension liabilities depends on several factors which are arrived at through the use of a number of actuarial assumptions. Any change in these assumptions would affect the amount of the pension liabilities shown in the balance sheet. The rate of interest to be applied when discounting is decided on at the end of the year. This is the rate of interest which is applied in order to calculate the present value of future necessary payments to cover the pension liabilities. The discount rate is based on the Norwegian market for covered bonds, and swap rates in the interbank market for the extrapolation of the curvature over 10 years, enabling us to arrive at an approximately similar maturity as that which applies to the pension liability. Other basic assumptions for the pension liabilities are partly based on actual market conditions. Mortality and death trend assumptions are based on standardized assumptions and other demographic factors. Please refer to note 24 for additional information.

Strategy
Sparebanken Møre’s long-term strategic development and target achievement are supported by high quality risk- and capital management. The overall purpose of risk management and -control is to ensure that goals are achieved, to ensure effective operations and the handling of risks which can prevent the achievement of business related goals, to ensure internal and external reporting of high quality, and to make sure that the Group operates in accordance with relevant laws, rules, regulations and internal guidelines. Risk-taking is a fundamental aspect of banking operations, which is why risk management is a central area in the day-today operations and in the Board of Directors’ ongoing focus.

Sparebanken Møre’s Board of Directors has agreed overall guidelines for management and control throughout the Group, as well as a separate risk policy. The Group shall have a low to moderate risk profile and revenue generation shall be a product of customer-related activities, not financial risk taking. In addition, the bank has introduced separate policies for each significant risk area: credit risk, counterpart risk, market risk and funding risk. The risk strategies are agreed by the Board of Directors and revised at least once a year, or when special circumstances should warrant it. The Group has established a follow-up and control structure, which shall ensure that the overall framework of the strategic plan is adhered to at all times.

Corporate culture, organisation and responsibility
The risk management process is based on the bank’s and group’s corporate culture. This includes management philosophy, management style and the people in the organisation. Staff’s integrity, value basis and ethical attitudes represent fundamental elements in a well-functioning corporate culture. Well-developed control and management measures cannot compensate for poor corporate culture. Against this background, Sparebanken Møre has established clear ethical guidelines and a clear value basis, which have been made well known throughout the organisation.

Sparebanken Møre attaches a great deal of importance to independence in the risk management. The responsibility for, and execution of risk management and control is therefore shared between the Board of Directors, management and operative units.

The Board of Directors of Sparebanken Møre bears the overall responsibility for ensuring the bank and the group have adequate primary capital based on the desired levels of risk and the group's activities, and for ensuring that Sparebanken Møre is adequately capitalized based on regulatory requirements. The Board shall also ensure that risk management and internal control is adequate and systematic, and that this is established in compliance with laws and regulations, articles of association, instructions, and external and internal guidelines. The Board also sets out the principles and guidelines for risk management and internal control for the various levels of activity, and regularly revises and adopts, at least once a year, various strategies and guidelines for risk management.

The Audit and Risk Committee is elected by and from among the members of the Board of Directors. The committee is a sub-committee of the Board. Its purpose is to carry out more thorough assessments of designated areas and report the results to the Board. The Audit and Risk Committee shall ensure that the institution has independent and effective external and internal auditors, and satisfactory financial statement reporting and risk management routines, which comply with all pertinent laws and regulations.

The CEO is responsible for ensuring the establishment of appropriate risk management and internal control on the basis of assessments, agreed principles and guidelines introduced by the Board. The CEO is responsible for ensuring that good control environments are established in all levels in the bank and shall continuously monitor changes to the bank's risks and ensure that these are properly addressed in accordance with the Board's guidelines. The CEO shall ensure that the bank's risk management and internal control is documented according to current laws, rules, regulations and statutes, and shall, at least once a year, prepare an overall assessment of the risk situation, which shall be presented to the Board for their consideration.

The Risk Management Department is responsible for preparing and designing systems, guidelines and procedures for identifying, measuring, reporting and following up the bank’s most important inherent risks. The department is responsible for ensuring that the total risk exposure of Sparebanken Møre, including results of conducted stress tests, is reported to the CEO and the Board of Directors. Further, the department bears primary responsibility for the IRB process in the Group. It is also a key setter of conditions and adviser in the strategy process concerning risk assessments, risk tolerance and operationalisation of the bank's overall goals with regard to risks. The department also has responsibility for supervising the annual ICAAP work, and to coordinate the annual internal control confirmations from the operational managers. The department forms part of the Financial Control, Risk Management, HR and Security Division, which reports directly to the CEO.

Pursuant to the requirements of the Securities Act and associated regulations, Sparebanken Møre has an own compliance function. Each year, the Board of Directors of Sparebanken Møre approves compliance instructions, and an annual work and action plan is prepared for the function. The head of the department reports to Sparebanken Møre's CEO, but is organizationally subordinate to the head of the Information and Compliance Division.

Finance & Accounting is responsible for the group's total financial management/reporting and accounting, and is part of the Financial Control, Risk Management, HR and Security Division.

Sparebanken Møre`s operative managers of important business areas shall actively involve themselves in the process surrounding the assessment of whether or not the established risk management and internal control is being conducted as assumed. It is assumed that all managers at every level of the organisation are monitoring the approved control measures within their area of responsibility.

Sparebanken Møre`s Credit Committee deals with larger commitments and matters of a special nature, and shall provide an independent proposal to the person holding the power of attorney. The Credit Committee attaches special importance to the identification of risk in connection with each credit application, and makes its own assessment regarding credit risk. In addition, consideration is made whether commitments are in accordance with the Group’s credit risk strategy, credit policy, credit-granting rules and regulations, and credit handling routines.

The internal auditing is a monitoring function which, independent of the rest of the bank’s administration, deals with systematic risk assessments, control and examination of the Group’s internal control in order to ascertain whether it works according to its purpose and in a reassuring manner. The bank`s Board approves the resources and annual plans of the internal auditing. The internal auditor should also discuss the plan and scope of the audit work with the Audit and Risk Committee. The internal audit in Sparebanken Møre is outsourced to BDO.
 

Reporting
Sparebanken Møre focuses on correct, complete and timely reporting of the risk and capital situation. Based on this, a number of different types of periodic reporting have been established, which are intended for the group's management group and Board, as well as reporting intended for the individual segments and departments, including customer account managers. The most important reports during the year are as follows:

ICAAP is carried out and reported at least once a year. The Board actively participates in the review and establishes ownership of the process, including through ICAAP's key role in the long-term strategic planning. Specific guidelines have been prepared for ICAAP in Sparebanken Møre. ICAAP is reviewed by the bank's management team, the Audit and Risk Committee, the Board of Directors and the Control Committee.

A balanced scorecard report is prepared every month. This illustrates the status and performance of the most important factors for Sparebanken Møre's target attainment. The report is being submitted to bank managers and the bank`s management team, and it is an integral part of the financial reporting to the Board of Directors.

A risk report is prepared every month. This is a key element of Sparebanken Møre's continuous monitoring of its risk situation. At the end of the quarter the risk report will also be expanded with supplementary comments from various disciplines within the Group, including the Chief Economist, the Corporate Market's Concept Manager, the Retail Market's Concept Manager, and the Head of the Treasury & Market Division. The report is dealt with by the bank`s management team, Audit and Risk Committee and Board of Directors, and the Control Committee also receives a copy of the quarterly risk report.

Internal control reports are produced for all business areas and regions every year. In this an assessment is made of whether or not the internal control is adequate in relation to the risk tolerance. This includes an assessment of and comments on their own work on internal control, a review of all important risk areas, an assessment of their own compliance with external and internal regulations, and suggestions for and planned improvement measures. The internal control reports are dealt with by the bank`s management team, Audit Committee and the Board of Directors, and are also presented to the bank`s Control Committee.

Compliance reports are prepared regularly and contain elements linked to an assessment of compliance risk and control, testing of compliance and the results of these tests, reassessments and plans for implementing guidelines, the follow-up of observations from external and internal auditors, the follow-up of observations from the FSA, deviation management in internal control, etc. The compliance reports are dealt with by the bank`s management team, Audit and Risk Committee and the Board of Directors, and are also presented to the bank`s Control Committee.

Reports from external and internal auditors are dealt with by the bank`s management team, the Audit and Risk Committee and the Board of Directors. Both internal and external auditors have at least annual meetings with the Audit and Risk Committee and the Control Committee.

Reports on mortgages are prepared quarterly for the bank`s Board of Directors.

A reporting portal has been established in Sparebanken Møre, in which each member of staff with customer responsibility has access to reports which show the position and development of credit risk in his or her portfolio. The portal has a hierarchical structure, allowing managers in Sparebanken Møre to monitor performance within their area of responsibility. The reports are also used to analyse customers, portfolios and different industries. The portal provides customer account managers with an overview of the customers' positions and limits in relation to exposure to financial instruments.

Finance and accounting reports are prepared monthly, and include monthly calculations of collective impairment, as well as loss reviews of portfolios with a focus on the need for individual impairment. The reports are dealt with by the bank`s management team, Audit and Risk Committee and the Board of Directors. After each quarter end, the Control Committee receives a special review of the quarterly financial statements, including the development of finance and risk related issues.

Capital structure
Sparebanken Møre’s equity and related capital is composed with regard to several considerations. The most important considerations are the Group’s size, Møre og Romsdal’s internationally orientated industry and commerce, and a stable market for long-term funding whenever external funding is required. Furthermore, the Group’s long-term strategic plan is a significant provider of conditions with regard to which capital structure Sparebanken Møre should adopt.

Assessments of risk profile, capital requirements and profitability are always based on the group's long-term strategic plan. The group's capital requirements are calculated, at least, in the annual ICAAP. The group's primary capital shall at all times fulfil the minimum requirements for capital adequacy, and comply with the group`s accepted risk tolerance. The ICAAP clarifies all the alternatives the group can implement if the group's capital adequacy is subjected to stress. The alternatives are listed in a prioritized order, with description of measures, and indication of planned implementation if necessary.

Sparebanken Møre's aim is to achieve financial results which provide a good and stable return on equity. The results shall ensure that all equity owners receive a competitive long-term return in the form of dividends and capital appreciation on the equity. The equity owners' share of the annual profits set aside as dividend funds, shall be adjusted to the equity situation. Sparebanken Møre's allocation of earnings shall ensure that all equity owners are guaranteed equal treatment.

Capital adequacy rules and regulations
The purpose of the EU’s capital adequacy directive is to strengthen the stability in the financial system through more risk-sensitive capital requirements, better risk management and control, more stringent supervision and more information provided for the market.
 

The capital adequacy directive is based on three pillars:
• Pillar I – Minimum requirement for equity and related capital
• Pillar II – Assessment of aggregate capital requirements and regulatory follow-up (ICAAP)
• Pillar III – Publication of information
 

Sparebanken Møre`s capital adequacy is calculated according to the Standard Approach for credit risk in mass market commitments and IRB Foundation approach for corporate commitments. Calculations related to market risk are based on the Standard Approach and operational risk on the Basis Approach. Sparebanken Møre’s Board of Directors insists that the group must be well capitalised, both during economic downturns and periods of strong economic expansion. Capital assessments (ICAAP) are conducted every year, and the group’s capital strategy is based on the risk in the group’s operations, different stress scenarios having been taken into consideration.

Reference is made to note 30 concerning "Capital adequacy" for further descriptions related to Sparebanken Møre`s approval process for IRB, as well as comments related to the new regulations in Basel III.

Risk exposure and strategic risk management
Sparebanken Møre is exposed to several different types of risk. The most important risk groups are:

• Credit risk: This is the group’s biggest area of risk. Credit risk is defined as the risk of loss due to customers or other counterparties being unable to meet their obligations at the agreed time, and in accordance with written agreements, and due to the collateral security held not covering the outstanding claims. Counterparty risk and concentration risk are also included in this area of risk.

• Market risk: The risk of loss involving market values relating to portfolios of financial instruments as a result of fluctuations in share prices, foreign exchange rates and interest rates.

• Funding risk: The risk of the group being unable to meet its obligations and/or fund increases in assets without incurring significant extra costs in the form of fall in prices of assets which have to be sold, or in the form of particularly expensive funding. The level of the institution`s capital is a key condition to attract necessary funding at any time.

• Operational risk: The risk of loss due to insufficient or failing internal processes and systems, or due to human error or external events.

Sparebanken Møre tries to take account of the interaction between the various risk areas when setting desired levels of exposure. Overall it is the internal conditions, general conditions, customer base, etc within the group which form the basis for setting the desired overall risk exposure.

Based on an evaluation of the risk profile, management and control, Sparebanken Møre has set the following overall levels of risk exposure for the various risk areas:

• Credit risk: A moderate to significant level of risk is accepted

• Market risk: A low level of risk is accepted

• Funding risk: A moderate level of risk is accepted

• Operational risk: A low to moderate level of risk is accepted

The group’s risk is quantified partly through calculations of expected loss and the requirement for financial capital in order to be able to cover unexpected losses. Expected losses and financial capital are calculated for all main groups of risk, and for different business areas within the group. Expected losses describe the amount which in statistical context the bank must expect to lose during a 12-month period. Financial capital describes the amount of capital the group deems to be required in order to cover the actual risk which has been incurred by the group. Statistical methods for the computation of financial capital have been used as a basis. Please also refer to note 30 regarding capital adequacy for further comments concerning financial capital.

Credit risk
Credit risk represents Sparebanken Møre’s biggest risk area. Included in this risk area are counterparty risk and concentration risk. The group is exposed to this type of risk through its lending and leasing products for the retail market and corporate customers, and through the activities of Sparebanken Møre's Treasury & Markets Division.

The credit risk strategy is revised and agreed each year by the Board of Directors. The strategy focuses on risk sensitive limits, which have been designed in such a way that they manage the group’s risk profile within the credit area in the most appropriate and effective manner. Furthermore, limits, guidelines, and power of attorney-related rules and regulations have been established, which underpin and support Sparebanken Møre’s credit risk strategy and long-term strategic plan.

The core values of Sparebanken Møre are “Dedicated, Close and Solid”. These values are to be reflected in all contact with the marked, create added value for the customers and help create a positive view of Sparebanken Møre. The credit policy is intended to promote a credit culture in which creditworthiness is viewed in a long-term perspective, where general and industry economic fluctuations are taken into account. Sparebanken Møre shall conduct itself in accordance with high ethical standards, and shall not be associated with activities, customers or industries of dubious repute. The group is open to all types of customers within defined market areas, and discrimination based on the customer`s age, gender, nationality, religion or marital status shall not occur.

Sparebanken Møre's geographic core region is the county of Møre og Romsdal. However, it is allowed to financially support investments/businesses outside its core region when, from an ownership perspective, they are linked to individuals or companies in/from Møre og Romsdal. Commitments outside the group's market area will also be considered as part of the deliberate diversification of the portfolio in terms of segment and geographical exposure. In such cases the group's strategy sets clear limits for the maximum risk level for an individual commitment.

The Department for Risk Management has established monthly portfolio management reports which ensure that any discrepancies from the strategic targets incorporated in the credit risk strategy are identified. Officers responsible for the concepts relating to corporate and retail banking respectively, have independent responsibility for the ongoing monitoring of the position, in order to identify discrepancies in relation to the same strategic targets, and in order to implement measures in the case of any discrepancies having occurred.

The Board of Directors is responsible for the group’s granting of loans and credits. Within certain limits, power of attorney is delegated to the bank’s CEO for the operational responsibility with regard to decisions in credit matters. Within his powers of attorney, the CEO may delegate powers of attorney to other officers in the bank. The grant authorisations are personal and graded after criteria like the size of grant, the limit of the commitment (corporate customers), the customers total debt (retail customers), and class of risk. Further, the power of attorney is related to the employee`s job level.

Sparebanken Møre actively uses internal reports in order to monitor the level and development of the group’s credit portfolio. Each member of staff with customer responsibility has access to reports which show the position and development in the credit risk in his or her portfolio. The reports are prepared on a hierarchical basis, enabling the bank’s management to monitor the development within their own area of responsibility. The reports are also used to analyse customers, portfolios and different sectors.

The group has prepared separate risk models for the corporate and retail markets, which are used in monthly measuring and reporting of credit risk. The group has also developed application score models for the two customer segments, which are being used in the credit granting process.

There are mainly three central parameters within credit risk for which models are applied:

1. Probability of default (PD): PD is calculated per customer and states the probability of the customer defaulting on his or her outstanding commitment during the next 12 months. A separate PD is calculated for each customer, based on statistical models using variables of both external and bank-internal information, in the form of both financial key figures and non-financial criteria.

2. Degree of loss in the case of default (LGD): LGD indicates how big a part of the commitment is expected to be lost in the case of default. The assessments take into consideration the values of the collateral provided by the customer, and the costs which would be incurred in the case of the recovery/collection of commitments in default.

3. Expected exposure in the case of default (EAD): EAD indicates the level of exposure which is expected in connection with a commitment if and when it goes into default.

The abovementioned parameters form the basis for calculation of expected loss (EL), and are included in the computation of financial capital. By classifying customers according to probability of default, and by estimating the level of loss and the requirement for financial capital at customer level, the group obtains information about the level and development of the aggregate credit risk in the total portfolio. In-house migration analyses show the development of the number of customers and EAD between different risk classes during different periods.

Treasury risk
Treasury risk is part of Sparebanken Møre's total credit risk. Board adopted limits for the Group's credit exposure in this area have been defined.

Credit exposure is linked to bonds and certificates in the group's liquidity reserve portfolio, short-term lending to other banks, including accounts held in foreign banks, and exposure in connection with financial derivatives which are signed to neutralise already present interest and currency risk which the bank has assumed. The portfolio consists of reputable domestic and foreign relationships.

Sparebanken Møre's policy is that, especially in relation to placements in international banks and other debtors outside Norway, the group shall use assessments carried out by the major official ratings agencies. The credit risk shall be at a minimum, but even highly rated issuers/papers can be exposed to risk. If a counterparty's status is changed to a negative outlook or their rating falls, Sparebanken Møre carries out a new internal assessment of existing lines of credit. If necessary the line of credit, and any exposure, is reduced or eliminated.

Treasury risk is also viewed in the context of adaptations to the funding indicators LCR and NSFR, as well as the FSA`s two liquidity indicators. The LCR regulations entail a movement towards lower risk weighted counterparties, including state and state guaranteed papers and covered bonds.

The pre-classification process emphasises considering banks with which Sparebanken Møre has a mutual (reciprocity) and long business relationship. It is also necessary to have sufficient competition in products and instruments that are traded, as well as diversification in market and geography for Sparebanken Møre.

If changes occur in general conditions, the market, economic trends or Sparebanken Møre's activities that have a material effect on the group's risk positions, limits must be assessed and possibly set for investment opportunities. This involves, for example, not investing in some countries, groups of countries, individual counterparties, counterparties with certain attributes, etc.

Sparebanken Møre and Møre Boligkreditt AS require the signing of CSA (Credit Support Annex) agreement before trading of derivatives against any counterparties. This provides Sparebanken Møre with collateral in excess of any given exposure. The agreements with counterparties define when the collateral shall be transferred between the parties. Sparebanken Møre practices cash collateral in relation to its counterparties. The market value of all derivatives signed between Sparebanken Møre and the counterparty is settled either daily or weekly. This will largely eliminate the counterparty risk. EMIR - European Market Infrastructure Regulation – is a proposed regulation on infrastructure and derivatives sold on unlisted markets. EMIR will ensure the regulation and control of the market for derivatives traded outside regulated markets by requiring reporting of transactions to transaction records, and requirements for settlement (clearing) through central counterparties (CCPs). Sparebanken Møre will adapt to these regulations.
 

Market risk
Sparebanken Møre’s market risk is managed through defined position limits for each risk area. Management of market risk is set out in Sparebanken Møre’s market risk strategy. The strategy is adopted by the Board of Directors, and provides the overall guidelines for the group’s activities in the capital market, including the framework for Sparebanken Møre’s total exposures within currency, interest rate and shares.

The Group’s market risk can be divided into the following areas:

• Interest rate risk: Consists of market risk associated with positions in interest-bearing financial instruments, including derivatives with underlying interest instruments. Interest rate risk related to the liquidity reserve portfolio, as well as hedging transactions related to it, are considered separately and will have its own set of risk parameters. See note 12.1 for the group's interest rate risk.

• Equity risk: Consists of market risk on positions in equity instruments, including derivatives with underlying equity instruments. Shares in subsidiaries are not included. Sparebanken Møre has a very limited trading portfolio. The financial risk of Sparebanken Møre in 2014 is considered to have been low and reassuring. See note 15 for the equity risk of the Group.

• Currency risk: Consists of the risk of losses when exchange rates change. All financial instruments and other positions with currency risk are included in the assessment. Currency risk on the banking book, that is, foreign exchange risk arising as a result of hedging customer trading, including lending/deposit business, is considered separately and will have its own set of risk parameters.

Sparebanken Møre`s exposure to currency risk is a result of mismatch between the underlying business and hedging transactions, as well as the necessary reserves of the group's work accounts in foreign banks. Changes in exchange prices in the market cause changes in the value of Sparebanken Møre`s currency position. The currency position also includes Sparebanken Møre`s cash holdings of notes denominated in foreign currency. Sparebanken Møre has no trading portfolio of FX contracts. Sparebanken Møre`s currency risk is low and well within the limits specified in the regulations. See note 12.2 for the group's currency risk.

• Spread risk: Defined as the risk of changes in market value of bonds and commitments as a result of general changes in credit spreads.

• Total market risk: The overall risk assessment is obtained by comparing the opinions of areas of interest rates, equities and foreign exchange. The FSA`s methodology in this area form the basis for assessing the overall market risk. Assessments are based on three risk factors:
• Exposure
• Risk spreading
• Market liquidity
 

Any diversification effects between asset classes are not taken into account.

Based on the recommendation from the CEO's Balance Board Committee, the Board of Directors annually approves a total budget for the market risk of Sparebanken Møre. The framework is adapted to the group's activity level and risk tolerance. If required, the overall framework may be changed more frequently than the annual review.

Total limit for market risk is defined as the maximum loss on a stress scenario where the FSA`s methodology is applied. The approved overall market risk limit is delegated to the CEO, while the head of the Treasury & Markets Division has administrative authority for the overall market risk limit. The section leader is responsible for administration of the limits within the various sub-portfolios being complied with at all times.

Treasury & Markets Division has an independent responsibility for ongoing monitoring of positions within the various portfolios and daily follow up, or with the frequency required in relation to the level of activity. The Risk Management department has primary responsibility for monitoring, reporting and control of the market risk area. Back Office is responsible for transaction control and processing of payment transactions.

SimCorp Dimension (SCD) is the principal risk management system in Sparebanken Møre within the market risk area. The system provides current status of market development. All financial instruments are recorded in the system and monitored continuously. The risk management department is responsible for good quality in valuation of financial instruments.

The risk management department monitors the compliance of the risk management framework and strategy continuously. If activities exceed the limits or strategy, written reporting instructions are specified.

Reporting of the market activity is part of Sparebanken Møre`s periodic "Risk Report" to management, Audit and Risk Committee and Board of Directors. Monthly earnings performance reports are prepared, as well as actual risk exposure within each portfolio, both individually and in aggregate. The reports are compared to maximal activity frame and overall market risk limit (stress frame). The Board is also given a quarterly record of any violation of the framework, the strategy, or law and regulations.

There is no performance-based compensation to any person working in the market risk area beyond what is included in Sparebanken Møre`s general bonus scheme which deals with, and is equal to, all employees of the Group.

Funding risk
Liquidity may be defined as the group’s ability to fund increases in assets and to meet its obligations as funding requirements occur. Sparebanken Møre is liquid when it is able to repay its debt as it falls due.

Management of the group’s funding risk is based on the overall financing strategy, which is evaluated and approved by the Board of Directors at least once a year. The strategy reflects the moderate risk level accepted for this risk area.

The group's funding risk requires special monitoring. This is due to the group's special position as a manager of deposits for small and non-professional actors, as well as the central role the group plays in payment systems. The group's duty to accept deposits from a non-specific base of depositors and the fact that these deposits are normally available on the same day, means that it faces considerably greater risk than other financial institutions. The authorities' loan schemes and safety net for banks are based on these precise factors. The costs of reducing funding risk must be viewed in the context of the advantages lower funding risk provides. One fundamental prerequisite for maintaining the trust of depositors and other lenders is that the institutions always have sufficient liquidity to cover current liabilities.

LCR measures institutions' ability to survive a 30-day stress period. LCR increases the importance of high quality liquid assets. NSFR measures the longevity of an institution's funding. NSFR entails institutions having to fund liquid assets with the aid of a greater proportion of stable and long-term funding. In this context, deposits are not regarded as an equally stable source of funding, which means that the quality of the deposits will increase in importance. This also means that financial institutions must, to a greater degree, fund themselves through bond issues with a higher maturity. Until the definition and calibration of the NSRF is finalized, Sparebanken Møre will use Liquidity Indicator 1.

Sparebanken Møre is adapting to the new regulations, by both modifying its internal strategies and by making actual adaptations. The group also regularly reports on the trends for new liquidity indicators to the supervisory authorities in line with the disclosure requirements.

The group's long-term strategic plan, "Møre 2018", sets out a liquidity strategy in which Sparebanken Møre shall adapt to the structure and volume of the new LCR requirement. LCR will be introduced 1 October 2015 with a minimum fulfillment of 60 per cent, and then increase by 10 per cent annually until reaching 100 per cent on 1 January 2019.

At year-end 2014, the LCR indicator was 127 per cent, the FSA`s Liquidity Indicator 1 was 101 per cent and Liquidity Indicator 2 was 111 per cent. In the composition of the external funding, priority is given to having a relatively high share of maturities over one year.

The funding section of Sparebanken Møre is organised within the Treasury & Markets Division. The division controls the funding on a day to day basis, and has the responsibility to meet the funding requirements in Sparebanken Møre, including utilization of the mortgage company Møre Boligkreditt AS.

Liquidity control management is maintained by both the Treasury & Markets Division and by the Risk Management department. In this respect there is a distinction between the overall and the daily operational cash management and control. The daily operational management responsibility is handled by the Treasury & Markets Division, while the overall risk management, including strategies and framework controls, are handled by the Risk Management department.

Upon the occurrence of abnormal situations regarding liquidity, either in the market or within Sparebanken Møre, the bank's emergency task force comes together. The group consists of the following persons:
• CEO (leader)
• EVP Treasury & Markets
• EVP Information and Compliance
• EVP Financial Control, Risk Management, HR and Security
• EVP Sunnmøre Corporate Banking
• EVP Retail Banking Division
• CEO of Møre Boligkreditt AS
• Head of Treasury
 

The Board receives monthly reports of the liquidity situation. This report includes several key figures, such as the deposit to loan ratio, liquidity indicator 1 and 2, LCR, NSFR, net refinancing needs, composition of the liquidity portfolio, allocation of capital markets funding on various sources, largest depositors, etc. In addition, early warning signals are reported by viewing the development of financial strength, development of balance sheet numbers and income statement, losses/defaults, the development of the cost of funds for both foreign currency and NOK.

The funding risk is attempted reduced by spreading funding on different markets, sources, instruments and maturities. In order to ensure the group's funding risk is kept at a low level, lending to customers must primarily be financed by customer deposits and long-term securities issued. There is a heavy focus on efforts to increase ordinary deposits in all customer-related activities throughout the bank. The deposit to loan ratio in Sparebanken Møre was 58.1 at year-end.

The Board shall be informed of the bank’s liquidity situation on a monthly basis, and immediately of any important events which may affect the bank’s current or future liquidity situation. The reporting tries to identify the funding situation during normal operations, identify any “early warning” signs and assess the bank’s stress capacity.

Møre Boligkreditt AS has a license from the FSA to operate as a mortgage company, and it provides the group with increased diversification of its funding sources. During 2014, the company issued covered bonds quoted in Norwegian krone (NOK). The Parent Bank has throughout the year transferred parts of the residential mortgage portfolio to the mortgage company.

Operational risk
Operational risk includes all the potential sources of losses related to Sparebanken Møre's current operations. The group has classified various types of operational risk into the following main categories:
• Internal fraud
• External fraud
• Employment conditions and safety in the workplace
• Customers, products and business practices
• Damage to assets
• Interruptions to operations and/or systems
• Settlements, delivery or other transaction processing
 

The Board of Directors of Sparebanken Møre has decided that a low to moderate risk profile is accepted related to operational risk. An overall risk strategy for the risk area is not established, but there are several documents which support the group’s risk management. These documents include the ICT-area, contingency plans for personnel and property, security handbooks, authorisation structures, ethical guidelines and insurance strategies. Further, there are established guidelines for compliance of:
• Money laundering Act with regulations
• Securities Trading Act with regulations
• ICT-regulation
 

The group's Legal Department helps to monitor and reduce operational risk. The Compliance Department has established board adopted instructions, work plans and action plans. Sparebanken Møre has established an annual Security Forum for people responsible for security in the group, and meetings of the group's Security Committee are held four times a year.

Operational responsibility for managing and controlling operational risk, and thus also the quality of Sparebanken Møre's operations, is borne by each manager involved. This responsibility follows from job descriptions and various guidelines and routines. All managers annually confirm to the CEO the quality of and compliance with internal controls within the risk areas stipulated in this document. They also suggest areas for improvement which are incorporated into special action plans. The CEO presents the report to the Audit and Risk Committee and the Board of Directors. The annual ICAAP also involves a review of the group's material risk areas in which a great deal of attention is paid to operational risk.

Beyond the annual management report and annual ICAAP, the bank’s management and Board of Directors receive reports throughout the year which includes areas that are included in operational risk; compliance reports, safety reports, reports from the Internal Auditor, reports from the External Auditor, work environment surveys, internal service quality surveys, ICT-reporting, industry analysis, as well as any reports from the authorities.

For noted items in the reporting, measures are prepared to cope with deviations, and deadlines and persons in charge are given. Monitoring of the performance level for the measures is followed by the Business Committee on a monthly basis.

The group’s established internal control routines are an important tool for reducing operational risk with regard to both identification and follow-up.

Internal control
Internal control must be designed in order to provide reasonable certainty with regard to the achievement of goals and targets within the areas of strategic development, targeted and effective operations, reliable reporting and adherence to relevant laws, rules and regulations, including compliance with group-internal guidelines and policies. Furthermore, a well-functioning internal control shall ensure that the bank’s risk exposure is kept within the agreed risk profile.

The internal control at Sparebanken Møre is organised in a decentralized manner with the Division for Financial Control, Risk Management, HR and Security as the coordinating unit in the day-to-day operations and in the annual reporting to the Audit and Risk Committee and the Board of Directors. The Compliance Department monitors how the group operationalizes relevant laws, rules and regulations in operational context, and how the group’s staff adhere to relevant rules and regulations, laws, licenses, agreements, standards for different industrial and commercial sectors, internal instructions etc. in the day-today operations. The Risk Management Department is responsible for developing systems, guidelines and procedures in order to identify, measure, report and follow up on the group’s most important inherent risks.

Reports on the group’s operations and risk situation throughout the year are submitted to the Audit and Risk Committee and the Board of Directors on an ongoing basis. The bank’s CEO submits an annual report to the Board of Directors including an overall assessment of the risk situation and an assessment confirming that the established internal control features function in a satisfactory manner. This report is based on confirmations received from managers at different levels throughout Sparebanken Møre.

Sparebanken Møre’s internal auditor reports on a regular basis to the Audit and Risk Committee and the Board of Directors on the group’s internal control.

Portfolio management
The group provides portfolio management for investment clients. The portfolio management is performed on behalf of clients, and related assets belong to the clients and not the group.

Financial derivatives
Sparebanken Møre utilizes financial derivatives in order to handle risk incurred as a result of the bank’s ordinary operations. The bank uses financial derivatives in its own trading to a very small extent. In the case of customer claims, these shall as a main principle be immediately covered by an opposite transaction in the market.

The following derivatives are in use in Sparebanken Møre:

• Forward exchange contracts
An agreement to buy or sell a certain amount in a foreign currency, against a certain amount in another currency, at a rate agreed in advance, with payment at a certain time later than two working days after the agreement was entered into.

• Swaps
A transaction in which two parties agree to swap cash flows for an agreed amount over a certain period of time. In an interest rate swap, only the interest involved is swapped. In the case of an interest rate and currency swap, both the interest rate and currency conditions are swapped.

• FRAs
A legally binding agreement concerning a rate of interest which shall apply for a future period for a defined principal amount. Upon settlement, only the difference between the agreed interest rate and the actual market interest rate is exchanged.

• Options
A right, but not an obligation, to buy (a call option) or sell (a put option) a certain product at a rate agreed in advance (strike price). When entering into an option contract, the person or company buying a call or put option will have to pay a premium to the person or company writing the option. Options can be offered on the basis of a financial instrument or a raw material.

The risk relating to these financial instruments involves the credit risk of covering counterparts which are given prior credit clearance by the Board of Directors, as well as operational risk.
 

These instruments are primarily utilized to provide the bank's customers with reliable cash flows and a desired risk positions in the various markets. Limits for financial instruments involving customers are established by the staff responsible for the customers in question. The limits shall fix a maximum amount for the bank’s exposure against each individual customer in relation to the customer’s business volume in financial instruments and the market-related development in these. Each member of staff responsible for the customer in question, is responsible for the establishment of the limit and must make sure that such a limit has been subject to the necessary formal credit-handling procedures, and that a sufficient level of collateral and/or other security has been established to cover the limit. Furthermore, the member of staff responsible for the customer in question, together with the dealer involved, are both responsible for making sure that the credit risk as a result of the customer’s exposure to financial instruments is at all times within the limits which have been agreed. In the case of all customers involved with financial instruments, a set-off agreement must be obtained. The purpose of this agreement is to reduce the bank’s credit exposure to the customer by having all contracts netted out so that the bank ends up with just a net exposure towards the customer. It is the member of staff responsible for the customer in question who is responsible for establishing a set-off agreement with the customer, making sure that all customers who use this type of financial instrument are made aware of the bank’s usual business terms and conditions.

The Department for Risk Management is responsible for follow-up, and for all internal reporting and reporting to the relevant authorities relating to the bank’s exposure to different counterparts as a result of trading in financial instruments

Credit risk is the Group’s largest area of risk and is defined as the risk of loss relating to customers or other counterparts being unable to meet their obligations at the agreed time and in accordance with written agreements, and when the collateral held does not cover the outstanding claim. The Group is exposed to this type of risk through its lending and leasing products for the retail market and corporate customers, and through the activities of the Group's Treasury & Markets Division. Note 3 concerning Risk Management explains in more detail agreed strategies for the credit risk in the Group, as well as processes for management and control of the risk area. A central feature in this connection is the calculation of the probability of default for each individual customer and portfolio.

Credit also includes concentration risk, including risks associated with large commitments to the same customer, concentration within geographic areas or with similar industries.

Concentration risk is managed in relation to the relevant targets for sector-based percentages, the largest individual commitments and the aggregate target for large commitments. Periodic stress tests are carried out in order to assess the loss potential in the credit portfolio due to large, but not implausible, negative changes in operating conditions. Management and measurement of credit risk is further described in the report Risk and Capital Management (Pillar 3). See also note 30 where credit risk for the Group is quantified through risk-adjusted capital. As described in note 3, the probabilities of default (PD) for the commitments contained in Sparebanken Møre’s credit portfolio are calculated. PD is structured in order to be in line with the Capital Requirements Directive’s specifications for fundamental IRB. Calculated expected loss (PD x LGD x EAD) is used as the basis when assessing customer profitability and is taken into consideration when fixing interest rate terms and conditions.

Loans and receivables
All loans and receivables, including leasing, but with the exception of fixed interest rate loans, are assessed at fair value when first assessed, with the addition of direct transaction costs. When determining the loan’s value at the time of transaction (transaction price), establishment fees are deducted and subject to accrual accounting over the lifetime of the loan as part of the loan’s effective interest rate. Loans are subsequently assessed at amortised cost by applying the effective interest rate method. The effective rate of interest is the rate at the signing time which exactly discounts estimated, future cash flows over the loan’s expected lifetime, down to the net value of the loan as shown in the balance sheet. By conducting this calculation, all cash flows are estimated, and all contract-related terms and conditions relating to the loan are taken into consideration.

Purchased lending portfolios, including lending taken over by the takeover of business, have limited useful lifetimes and where excess values at the time of the transaction are recognised on the balance sheet at acquisition cost. The portfolio of purchased lending is depreciated using the effective interest rate method, divided over the expected average maturity of the portfolio (distributed by the corporate and retail market).

Collateral and other risk reducing measures
The Group accepts different kinds of collateral in order to reduce risk depending upon the market and type of transaction involved.

The main principle for value assessment of collateral is based on the realisation value of the asset in question, and what that value is deemed to be when the Bank needs the security. With the exception of commitments against which impairment has been made, the value of the collateral is calculated on the assumption of a going concern. When assessing the value of collateral, estimated sales costs are taken into consideration.

In this year's calculations of individual impairment on loans the Bank's valuation of the security objects is considered. Additional information is presented in note 7.

The main types of collateral used are: mortgage on property (residential and commercial), guarantees, surety, charge on tangible moveable property (chattels) which can be registered, charge on goods (stocks), operating equipment and licenses, or set-off agreements. Guarantees are a small part of the Bank’s risk exposure; guarantors relating to private persons (consumer guarantees), companies (professional), guarantee institutes and banks are accepted.

Collateral and other security is updated at least once every year or, in the case of the retail banking market, when a new credit proposal is dealt with. In the case of corporate customers, the security involved is updated either when a new credit proposal is dealt with or when certain commitments are followed up. Value assessment is part of the credit decision.

When calculating capital requirement for credit risk, the Bank does not apply set-off relating to exposure on, or off, the balance sheet.

Sparebanken Møre requires establishment of a CSA agreement before entering into derivatives trading with any interbank counterparty. This provides Sparebanken Møre with security for a given exposure. The agreement with the counterparty defines when the collateral is to be transferred between the parties. Sparebanken Møre practices cash collateral with their counterparties. The market value of all derivatives entered into between Sparebanken Møre and its counterparties are settled either daily or weekly.
 

Impairment
Losses on loans are calculated as the difference between book value and present value of estimated, future cash flows, discounted at the effective rate of interest. Only credit losses due to loss events occurring on the balance sheet date in question are recognised.

The discounting rate for loans at floating interest rates is equal to the effective rate of interest at the time of assessment. For loans at fixed interest rates, the discounting rate is equal to the original, effective interest rate. For commitments which have altered interest rates as a result of debtors’ financial problems, the effective rate of interest ruling before the commitment’s interest rate was altered is applied. When estimating future cash flows, a possible takeover and sale of related collateral is taken into consideration, also including costs relating to the takeover and sale.

Impairment of commitments is recognised in the profit and loss account as losses on loans. Interest calculated on loans which have previously been impaired, is recognised as interest income. Reversal of impairment is recognised in the profit and loss account as a correction of losses. When all collateralised assets have been realised and when there is definitely no likelihood of the bank receiving any more payments relating to the outstanding commitment, the loss is confirmed. The claim against the customer will still exist and be followed up, unless the bank has agreed to debt forgiveness for the customer.
 

Provisions for guarantee liabilities are made if the liability involved is likely to cease and the liability can be estimated in a reliable manner. Best estimate is applied when determining the amount of the provisions to be made. Claims for recourse related to guarantees in connection with which provisions have been made are included in the balance sheet as an asset, the amount at most being equal to the provisions in question.
 

The impairment amount is calculated as the difference between the carrying amount (principal + accrued interest at the valuation date) and the present value of future cash flows, discounted at the effective interest method over the commitments` expected time of life. Impairment is classified in the statement of income as losses. Estimates of future cash flows from a loan should also consider the acquisition and sale of related collateral. When evaluating security coverage there should be a qualified assessment of the collateral`s nature and market value, taking into account the costs of the acquisition and sale. Realisation values for different collateral in a realizable situation are determined by the use of best judgment. Timing for liquidation of loans with impairment is based on judgment and experiences from other liquidation engagements and bankruptcies.

Individual impairment
Individual impairment for credit losses is made when there are objective indications that there has been impairment of a loan’s value as a result of reduced creditworthiness. An impairment is reversed when the loss is reduced and when it can objectively be related to an event which has occurred after the time of impairment. All commitments which are regarded as significant, and a selection of other loans, are assessed in order to determine whether there is objective proof of impairment in value.

Individual commitments are subject for impairment in value if there is objective proof of:

a) The debtor having significant financial problems

b) Default of payment or other significant breaches of contract. A commitment is deemed to be in default if the borrower does not pay installments which have fallen due, or if an overdraft has not been covered, within a maximum period of 90 days.

c) Approved deferment of payment or new credit for the payment of an installment, agreed changes to the rate of interest or other terms and conditions relating to the agreement as a result of debtor’s financial problems. Renegotiation of loan terms to ease the borrower's position is regarded as objective evidence of impairment.

d) A likelihood of the debtor entering into debt negotiations, other financial restructuring, or of the debtor’s estate being subject to bankruptcy proceedings.

Collective impairment
Collective impairment is calculated on subgroups of loans, where objective evidence indicates that future cash flows from the commitments are impaired, where an individual review of all loans is not possible, or where information is not identifiable for each commitment. Commitments where individual impairment have been made, are not included in the basis for collective impairment. The impairment assessment is conducted on customer groups with largely similar risk- and value characteristics, and is based on risk classification and credit loss experience for the customer groups involved.

Groups of loans are written down for impairment in value if there is objective proof of:

a) Negative changes in the payment status of debtors within the group

b) Economic effects which have occurred and which, on the balance sheet day involved, have not been fully taken into consideration in the bank’s risk classification system

The accounting policies on commitments in default and estimated losses are disclosed in note 7.

The table Commitments in default shows the total of a customer's outstanding commitments broken down into the number of days past due caused by lack of ability or willingness to pay.  Defaulted loans and overdrafts are continuously supervised. Impairment is assessed for commitments where a probable deterioration of customer solvency is identified.

The table Problem loans consists of total commitments in default above 3 months and other commitments subject for individual impairment without being in default.
 

Financial guarantees
The Group issues financial guarantees as part of its ordinary operations. Credit risk is presented in note 4 and also includes financial guarantees and commitments. These guarantees are evaluated for impairment in accordance with the same principles as those applying to loans, and are referred to in note 7.

Uncertain liabilities

These numbers are uncertain liabilities and provisions which not directly is related to the lending activities in the Bank. An item of provisioning is shown in the accounts when the group has a valid (legal or assumed) liability as a result of events which have occurred, and if it can be argued as likely (more likely than not) that a financial settlement will be made as a result of the event involved, and that the amount can be estimated in a reliable manner. Any provisions raised are reviewed on each balance sheet date in question and their value assessed on the basis of the best estimate of the liability involved. In the case of insignificant time discrepancies, the amount of provisioning raised equals the cost of getting out of the liability. When the time discrepancy is significant, the amount of provisioning raised equals the present value of future payments to be made in order to cover the liability. An increase in the amount of provisioning raised as a result of the time involved, is shown as interest costs.

An uncertain liability where it is not likely that there will be a financial settlement, is regarded as a contingent liability. A provision shall not be made for contingent liabilities. Mention has been made of significant contingent liabilities, with the exception of contingent liabilities where the likelihood of the liability is low. A contingent asset is not included in the annual accounts, but mentioned if it is likely that a benefit will accrue to the Group.

Other liabilities amounted to NOK 207 million for the Group and NOK 202 million for the Parent Bank as at 31.12.14.

The management of Sparebanken Møre’s funding structure is defined in an overall liquidity strategy which is evaluated and agreed by the Board of Directors at least once every year. In this strategy document, the bank’s aims and targets relating to the maintenance of its financial strength are described, and actual limits for the bank’s liquidity management within different areas are defined. Liquidity management also includes stress tests according to which the liquidity effect of different scenarios is simulated by quantifying the probability of refinancing from the various sources of funding involved. Part of the bank’s strategy is to apply diversification to its funding with regard to sources, markets, financial instruments and maturities, the object being to reduce the overall risk.

To ensure the Group's liquidity risk being kept at a low level, lending to customers should primarily be funded by customer deposits and long-term debt securities. Liquidity risk is managed through both short-term limits that restrict net refinancing needs, and a long-term management target which determines the proportion of loans and other illiquid assets to be funded by stable sources such as customer deposits or loans with minimum 12-month residual maturity.

The deposit to lending ratio in the Group, calculated including transferred mortgages to Møre Boligkreditt AS, amounted to 58.1% at the end of 2014.

The average residual maturity of the portfolio of senior bonds and covered bonds were respectively 1.9 and 3.9 at the end of 2014, compared with 1.8 and 4.0 a year earlier.

The bank also has holdings of securities, which are included as part of the ongoing liquidity management. See additional information in Note 15 and 17.
 

The securities debt in the parent bank consists of bonds and certificates quoted in Norwegian kroner. Møre Boligkreditt has issued covered bonds quoted in NOK, SEK and Euro.

The bank’s loans at floating interest rate are assessed at amortised cost. In the case of the bank’s loans at fixed interest rate fair value hedging is applied, with value changes recognised in the profit and loss account. The bank hedges the value of interest rate risk on an individual basis. There is a clear, direct and documented relationship between value changes relating to the hedging instrument and the hedged object. The relationship is documented through a test of the hedging effectiveness when entering into the transaction and through the period of the hedging relationship. Hedging gains and losses result in an adjustment of the balance sheet value of hedged loans. The hedging adjustments are amortised over the remaining period of the hedging by adjusting the loans’ effective interest rate if the hedging no longer is effective, if hedging is discontinued or by other termination of hedging. By applying this principle, one establishes a correct accounting presentation which is in accordance with the bank’s interest rate management and the actual financial development.

Financial assets and financial liabilities are recognised in the balance sheet at the date when the Group becomes a party to the contractual provisions of the instrument. A financial asset is derecognised when the contractual rights to the cash flows from the financial asset expire, or the company transfers the financial asset in such a way that risk and profit potential of the financial asset is substantially transferred. Financial liabilities are derecognised from the date when the rights to the contractual provisions have been extinguished, cancelled or expired.

CLASSIFICATION
The Group’s portfolio of financial instruments is at initial recognition classified in accordance with IAS 39. The bank’s classes of financial instruments and the measurement basis for these are the following:
• Financial assets and derivatives held for trading purposes (trading portfolio)
• Financial assets and liabilities assessed at fair value, any changes in value being recognised in the profit and loss account
• Financial instruments assessed as held available for sale at fair value, any changes in value recognised in other comprehensive income
• Loans and receivables
• Financial assets and liabilities assessed at amortised cost

Financial assets and derivatives held for trading
The Group's criteria for the classification of the trading portfolio are the following:
• Positions in financial instruments held for the Group’s own account for the purpose of selling on and/or financial instruments acquired by the Group in order to take advantage on a short-term basis of any actual and/or expected differences between purchase- and sale prices or any other price- and interest rate fluctuations.
• Positions held by the Group in order to hedge other parts of the trading portfolio
• Other commitments which are related to positions which form part of the trading portfolio

The Group’s trading portfolio is defined within this group and is assessed at fair value through profit or loss.

Financial assets and liabilities assessed at fair value, any changes in value recognised through profit or loss
The Group’s portfolio of fixed interest rate loans and – deposits, and the liquidity portfolio, are classified at fair value, with any changes in value being included in the profit and loss account, since these portfolios are managed based on fair value.

Losses and gains as a result of value changes of those assets and liabilities which are assessed at fair value, with any value changes being recognised in the profit and loss account, are included in the accounts during the period in which they occur.

Instruments held as available for sale, assessed at fair value, with any value changes shown in other comprehensive income
The Group’s portfolio of shares, which are not classified as held for trading, are classified as available for sale, with any value changes shown in other comprehensive income. Realised gains and losses, as well as impairment, are recognised in the profit and loss account during the period in which they occur.

Loans and receivables
All loans and receivables, including leasing, but with the exception of fixed interest rate loans, are assessed at amortised cost, based on expected cash flows. The difference between the issue cost of the securities and the settlement amount at maturity, is amortised over the lifetime of the loan.

Financial liabilities assessed at amortised cost
Debt securities, including debt securities included in fair value hedging, loans and deposits from credit institutions and deposits from customers without agreed maturity, are valued at amortised cost based on expected cash flows. The portfolio of own bonds is shown in the accounts as a reduction of the debt.

Interest income is recognised as income using the effective interest rate method. This involves interest income being recognised when received plus amortisation of establishment fees. The effective interest rate is set by discounting contractual cash flows within the expected term. All fees exceeding the direct transaction costs related to interest-bearing loans and borrowings are included in the calculation of the balance sheet item's effective interest rate and are amortised over the expected term.

Recognition of interest income using the effective interest rate method is used for both balance sheet items valued at amortised cost, and balance sheet items valued at fair value through profit or loss, with the exception of the establishment fee on loans at fair value which are recognised as income when earned. Interest income on impaired loans is calculated as the effective interest rate on the impaired value. Interest income on financial instruments is included in the line item "Net interest income".

Loans are assessed at fair value when first assessed, with the addition of direct transaction costs. When determining the loan’s value at the time of transaction (transaction price), establishment fees are deducted and subject to accrual accounting over the lifetime of the loan as part of the loan’s effective interest rate. Loans are subsequently assessed at amortised cost by applying the effective interest rate method. The effective rate of interest is the rate at the signing time which exactly discounts estimated, future cash flows over the loan’s expected lifetime, down to the net value of the loan as shown in the balance sheet. By conducting this calculation, all cash flows are estimated, and all contract-related terms and conditions relating to the loan are taken into consideration.