Note 4

Strategy
The Sparebanken Møre Group`s, and thereby Møre Boligkreditt AS’, long-term strategic development and goal 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 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-to-day operations as well as in the Board of Directors’ ongoing focus. Sparebanken Møre’s Board of Directors has agreed overall guidelines for management and control throughout the Group. The Board of Directors of Møre Boligkreditt AS has agreed a separate risk policy for the company.

Møre Boligkreditt AS shall have a low risk profile and revenue generation shall be a product of customer related activities related to the company`s operations and purpose, not a product of financial risk-taking. In addition, the company has introduced separate policies for each significant risk area: credit risk, market risk, funding risk and counterparty risk. The risk strategies are adopted by the Board of Directors and revised at least once a year or when special circumstances should warrant it. The approved risk policies operationalize the business strategy set forth in the company's overall strategic plan. The company 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.

Reporting
Møre Boligkreditt AS 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 that are intended for the Group's Board. The most important reports during the year are as follows:

ICAAP (Internal Capital Adequacy Assessment Process) is carried out and reported at least once a year. Møre Boligkreditt AS is included in the assessments of overall ICAAP for the Sparebanken Møre Group, and the Managing Director of Møre Boligkreditt AS is involved in the process. The process is led by the department for Risk Management in Sparebanken Møre. Specific guidelines have been prepared for ICAAP in Sparebanken Møre. ICAAP is reviewed by the bank's management team and the Board of Directors.

Møre Boligkreditt AS’ internal liquidity adequacy assessment process (ILAAP) is included in the company’s Internal Capital Adequacy Assessment Process (ICAAP).

A performance management report is prepared every month. The report presents the status and performance of the most important aspects of goal achievement at Møre Boligkreditt AS. The report is an integral part of the reporting to the Board of Directors.

A risk report is prepared every quarter. This is a key element of Møre Boligkreditt AS' continuous monitoring of its risk position. The risk report is reviewed by the Board of Directors in quarterly board meetings.

Each quarter, a liquidity forecast with a 5-year horizon is prepared, contributing to a continuous control of the liquidity situation and the refinancing needs of the mortgage company.

Internal control reports are produced every year. In the report an assessment is made of whether or not the internal control is adequate in relation to the risk tolerance. This includes an assessment and comments on internal control work performed, a review of all important risk areas, an assessment of compliance with external and internal regulations, and suggestions for and planned improvement measures. The internal control report is discussed by the Board of Directors. Møre Boligkreditt AS` internal control report is consolidated in the Group`s total internal control reporting.

Reports from external and internal auditors are reviewed by the Board of Directors, as well as the Audit Committee of Sparebanken Møre.

A reporting portal has been established in the Sparebanken Møre Group, and customer relationship employees have access to reports which show the position and development in the credit risk in his or her portfolio. The portal has a hierarchical structure, allowing managers in Sparebanken Møre and Møre Boligkreditt AS to monitor performance within their area of responsibility. The reports are also used to analyse customers, portfolios and different industrial, commercial and other sectors.

Finance and accounting reports are prepared monthly (and include calculations of collective impairment, as well as loss reviews of portfolios with a focus on the need for individual impairment). The reports are reviewed by the Board of Directors.

Capital management
Møre Boligkreditt AS acquires mortgages from Sparebanken Møre of which minimum 80 per cent are funded through the issue of covered bonds. The funding of the mortgage company in excess of issues of covered bonds is done by equity and established credit facility in the Parent Bank.

Capital adequacy rules and regulations
The EU’s capital adequacy directive`s purpose 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:

• Pilar I – Minimum requirement for equity and related capital

• Pilar II – Assessment of aggregate capital requirements and regulatory follow-up (ICAAP)

• Pilar III – Publication of information

Møre Boligkreditt AS applies the IRB Approach when calculating capital adequacy for credit risk, the Standard Approach for market risk, and the base method for operational risk. Møre Boligkreditt AS’ Board of Directors ensures that plans for the capitalization of the Company are in place, both during economic downturns and periods of strong economic expansion. Capital assessments (ICAAP) are done every year, and the company’s capital strategy is based on the risk in the company’s operations, having taken into consideration different stress scenarios.

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

• Credit risk: This is the company’s most significant risk area. Credit risk is defined as the risk of loss due to customers or other counterparts being unable to meet their obligations at the agreed time in accordance with the written agreements, or that collateral held is not covering the outstanding claims. Included in the credit risk is also concentration risk, defined as the risk of loss resulting from the concentration of large individual clients, specific industries, geographical areas, collateral with the same risk characteristics, counterparties in interbank operations or trading in financial derivatives.

Møre Boligkreditt AS’ main credit risk is related to loans to customers with collateral in residential property and housing associations. Møre Boligkreditt AS acquires the loans from Sparebanken Møre, originally granted to customers by Sparebanken Møre, based on group policies and limits. At the time of the transfer of loan portfolios, only loans that qualifies as collateral for the issue of covered bonds, are accepted by Møre Boligkreditt AS. For all these mortgage loans, the value of the loan balance should not exceed 75 per cent of the total value of the property. The collateral value is monitored on an ongoing basis.

Møre Boligkreditt AS has adopted the credit risk policies as set by the Sparebanken Møre Group. The group manages and controls credit risk by setting limits on the amount of risk, and by monitoring exposures in relation to such limits. Collateral is taken to manage credit risk in the loan portfolios. According to the agreement relating to the transfer of loans between Sparebanken Møre and Møre Boligkreditt AS, the day-to-day monitoring of the loans are managed by Sparebanken Møre on behalf of Møre Boligkreditt AS. Sparebanken Møre`s risk classification system is based on the probability of default (PD), which estimates the likelihood of a customer defaulting on its contractual obligations.

See also the Group` s Pillar III document published on www.sbm.no.

• Market risk: The risk of loss due to changes in fair value of financial instruments as a result of fluctuations in market prices such as share prices, foreign exchange rates and interest rates.

Møre Boligkreditt AS minimizes currency risk through swap agreements with eligible counterparties.

The Board of Directors sets risk limits, positions are monitored on a daily basis, and quarterly exposure reports are prepared for the management and for The Board of Directors.

Fixed interest on the company's funding is managed through interest rate swaps with eligible counterparties.

• Liquidity risk: The risk that the company will encounter difficulty in meeting obligations associated with financial liabilities that are settled by delivering cash or another financial asset.

The Board of Directors sets annual limits for the company's liquidity risk, which means preparing liquidity risk limits, contingency plans, forecasts, stress tests, routines for monitoring limit utilisation and compliance with guidelines, management reporting and monitoring of management and control systems.

In a stress scenario where the mortgage company faces difficulties in refinancing its covered bonds through normal funding sources, Møre Boligkreditt AS can rely on a revolving credit facility in Sparebanken Møre covering the mortgage company’s payment obligations for the next 12 months, and a 12 month soft-call (12 month extendable maturity) on covered bonds issued.

Møre Boligkreditt AS` liquidity situation at year-end is considered to be sound.

• Operational risk: The risk of losses due to inadequate or failing internal processes, human error, system failures, or external events. Møre Boligkreditt AS has a management agreement with Sparebanken Møre. The services covered by this include administration, production, IT operations, and financial and risk management. Although the operational risk of Møre Boligkreditt AS is dependent of Sparebanken Møre's ability to manage this type of risk, Møre Boligkreditt AS independently bear risk associated with errors in the deliveries and services provided by Sparebanken Møre.

The evaluation of the management and control of operational risk is also afforded substantial space in the group's annual ICAAP. The operational and established internal control system in the mortgage company is also an important tool for reducing operational risk with respect to both uncovering it and following it up.

The internal control system should be designed to ensure reasonable certainty with respect to attaining goals within the areas of strategic development, efficient operations, reliable reporting, and compliance with acts and regulations, including compliance with intragroup and company-specific guidelines and policies. A well-functioning internal control system should also ensure the mortgage company's risk exposure being within the adopted risk profile. Reports are submitted to the company's Board concerning operations and the risk situation throughout the year. The Managing Director submits an annual report to the Board containing an overall assessment of the risk situation and an assessment of whether the internal controls are functioning satisfactorily.

Møre Boligkreditt AS tries to take account of the interaction between the various risk areas by setting desired levels of exposure. Overall, it is the internal conditions, general conditions, customer base etc. in the Group that form the basis for setting the desired overall risk exposure.

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

• Credit risk: A low level of risk is accepted

• Market risk: A low level of risk is accepted

• Liquidity risk: A low level of risk is accepted

• Operational risk: The acceptable risk level is low to moderate