Boligkreditt

Note 1 General information

SpareBank 1 Boligkreditt AS is the SpareBank 1 Alliance's separate legal vehicle established according to the specialist banking principle within the Norwegian legislation for covered bonds. The Company's purpose is to acquire residential mortgages from its ownership banks organised in the SpareBank 1 Alliance and finance these by issuing covered bonds.

SpareBank1 Boligkreditt main office is located in Stavanger, visiting address Bjergsted Terrasse 1.

The accounts are prepared in accordance with "International Financial Reporting Standards" (IFRS), as determined by the EU and published by "International Accounting Standards Board" (IASB).

The Financial Statements for 2014 is approved by the Board of Directors on February 12th 2014.

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Note 2 Summary of significant accounting policies

Presentation Currency
The presentation currency is Norwegian Kroner (NOK), which is also the Company's functional currency. All amounts are given in NOK thousand unless otherwise stated.

Recognition and De-recognition of Assets and Liabilities on the Balance Sheet
Assets and liabilities are recognised on the balance sheet at the point in time when the Company establishes real control over the rights of ownership to assets and becomes effectively responsible for the discharge of a liabilities. 

Assets are de-recognised at the point in time when the real risk of the assets has been transferred and control over the rights to the assets has been terminated or expired. Liabilities are de-recognised when they have been effectively discharged.

Lending
Lending is measured at amortised cost.Amortised cost is the acquisition cost less any repayments on the principal, adding or subtracting any cumulative amortisation from an effective interest rate method, and less any loss of value or risk of loss. The effective rate of interest is the interest that exactly discounts estimated future positive or negative cash payments made prior to the financial instrument’s maturity. Assessment of loans is thus carried out in accordance with the "lending regulation dated 21 December 2004" c.f. circular no 10/2005 from The Financial Supervisory Authority of Norway.

Evaluation of impairments (write downs) on mortgage loans
The Company evaluates the occurrence of impairment to loans or groups of loans at 31 December each year.  Impairment has occurred if there is an objective proof of a reduction in value that can lead to a reduction in the future cash flow needed to service the debt.  Impairment must result from one or more events that has occurred after the first entering into of a loan or group of loans (a loss incident), and the result of the loss incident (or incidents) must also be measured reliably.  Objective proof that the value of a loan or a group of loans has been impaired includes observable data that is known to the group on the following loss incidents:

• Substantial financial difficulties for the Issuer or with the borrower
• Default on the contract, such as missing instalments or interest payments
• The Company grants the borrower particular terms on the basis of financial or legal circumstances related to the borrower's financial situation
• The probability that the debtor will enter into debt negotiations or other financial re-organisations
• The active market for the financial assets cease to exist due to financial difficulties, or      
• Observable data indicates that there is a measurable reduction in the future cash flow from a group of loans since they were first entered into, even though the reduction cannot be attributed to a single loan in the group, including;
• An unfavourable development in the payment status of the borrowers in the group, or
• National and/or local financial conditions correlating to the default of the assets in the group       

The Company will first evaluate whether there exists individual objective proof of impairment for loans that are individually significant. For loans that are not individually significant, the objective proof of impairment will be evaluated either on an individual basis or collectively. If the Company concludes that there does not exist objective proof of impairment for an individually evaluated loan, whether it is significant or otherwise, the asset will be included in a group of loans having the same credit risk characteristics. This group will then be evaluated collectively for a possible impairment. Assets that are being evaluated individually for signs of impairment, and where an impairment is identified, or continues to be observed, will not be a part of a collective evaluation of impairment.

If objective proof of the occurrence of impairment exist, the magnitude of the loss will be considered to be the gap between the asset's book value and the present value of the estimated cash flow (exclusive of any future credit loss that has not yet occurred) discounted by the loan's last given effective interest rate. The book value of a loan will be reduced and the loss will be reflected in the income statement.

The future cash flow from a group of loans that has been collectively evaluated for impairment, will be estimated in accordance with the contractual cash flow of the group as well as any historical loss on assets with a similar credit risk. Historic losses will be adjusted in accordance with existing observable data in order to allow for the effects of any current circumstances that were not present at the time of the historic losses, as well as the adjustment of the effects of circumstances that are not currently present.

In December 2014 the Company distributed amended Servicing and Transfer agreements, which were effective from 31.12.2014.  As of 31.12.14 not all banks have signed the amended agreement, but it is expected that they will do so with effect from 31.12.14.  According to the amended agreement SpareBank 1 Boligkreditt has the right to off-set any losses incurred on individual mortgage loans against the commissions due to all banks for the remainder of the calendar year.  The Company has not since the commencement of its operations had any instances of off-sets against the commissions due to its owner banks.

Segment
Segments are organised by business activities and the Company has only one segment, mortgage lending to private individuals.  All of the mortgages have been acquired from the SpareBank 1 Alliance banks.  The Company's entire result for 2014 is therefore the result of the mortgage lending to private customers segment.

Established losses
When there is a prevailing possibility that the losses are final, the loss will be classified as established losses. Any established losses that have been covered by previously specified loan loss provisions will be set off against these provisions. Any established losses that have not been provided for in the loan loss provisions, as well as excessive or insufficient loan loss provisions will be reflected in the income statement.

Securities
Securities consists of certificates and bonds. These are either carried at fair value or hold to maturity. All securities that are classified at fair value in the accounts are recorded at fair value, and changes in value from the opening balance are allocated in the income statement as income from other financial investments.  Certificates and bonds that are classified as hold to maturity are recorded at amortised cost by means of the effective interest rate method. The effective rate of interest is the interest that exactly discounts estimated future positive or negative cash payments made prior to the financial instrument's maturity.            

Hedge Accounting
The company has implemented fair value hedge accounting for bonds with fixed rates and bonds in foreign currencies. These bonds are entered into a hedging relationship with individually tailored interest swaps and currency swaps. The company values and documents the efficacy of the hedge both at first entry and consecutively. In fair value hedging both the hedging instrument and the hedged object are entered into the accounts at fair value with respect to the relevant interest rate curve and currency, and changes in these values from the opening balance are recorded in net income.  The cash flow is therefore known for the entire contractual duration after the hedging relationship has been established.  Because the hedging relationship is intended to remain in place throughout the life of the hedged instrument, only those changes which the interest rate and currency swap agreements are intended to hedge have an influence on the valuation of the hedging instrument.

Valuation of Derivatives and Other Financial Instruments
The Issuer uses financial derivatives to manage essentially all market risk on balance-sheet items.  Interest rate risk is hedged to a NIBOR 3 months floating rate basis and currency risk is hedged mostly by derivatives and in some cases by natural asset liabilities hedges.  

Liabilities:

• The Issuer applies fair value hedge accounting under IFRS for fixed rate issued debt (covered bonds) utilizing derivatives (swaps) which hedge the fixed interest rate and currency elements of the issued bonds. 
• Issued floating rate debt in NOK is accounted for at amortised cost

Assets: 

• For liquidity management purposes the issuer maintains a portfolio of liquid assets (including bonds) of which a part is designated as held-to-maturity, and a part is designated as a trading portfolio utilizing the fair value option under IFRS.
• The trading portfolio is valued at fair value (market value) and the associated derivatives (swaps) which hedge interest and/or currency risk are valued at fair value.
• The designated held-to-maturity portfolio is valued at amortised cost and mainly include floating rate debt denominated in NOK.    

Though the issuer hedges all material interest rate and currency risk on its balance sheet, net unrealized gains (losses) from financial instruments may occur for the following reasons:

• Temporary mark-to-market differences in the value of an interest rate swap smay occur depending on the difference between the level at which the 3 months floating rate leg in the swap was last fixed and the 3 months interest rate level at the financial reporting date.  
• There is a credit risk element which forms a part of the fair value of the assets in the trading portfolio, which is not reflected in the value of the associated interest and/or currency swaps hedging the trading portfolio assets.  
• There may be floating rate assets (bonds) in the held-to-maturity portfolio denominated in foreign currency which are hedged via a corresponding foreign exchange liability (issued debt) also on an effective floating rate basis. In such natural asset liability hedges there may be a small element of foreign currency risk which may impact the P&L in that the floating rate coupons on the asset and the liability are not reset on the same dates and/or may be of different magnitude.  

Intangible Assets
Purchased IT-systems and software are carried on the balance sheet at acquisition cost (including expenses incurred by making the systems operational) and will be assumed to amortise on a linear basis over the expected life span of the asset. Expenses related to development or maintenance are expensed as incurred.

Cash and Cash Equivalents
Cash and cash equivalents includes cash and deposits, other short term available funds and investments with a maturity of less than three months.    

Taxes
Tax in the income statement consists of tax payable on the annual taxable result before tax and deferred tax. Deferred tax is calculated in accordance with the liability method complying with IAS 12.  With deferred taxes the liability or asset is calculated based on temporary differences, which is the difference between tax due according to the statutory tax calculations and tax calculated according to the financial accounts, as long as it is probable that there will be a future taxable income and that any temporary differences may be deducted from this income. In terms of deferred taxes, assets will only be included if there is an expectation that a future taxable result makes it possible to utilise the tax relief.  The assessment of this probability will be based on historic earnings and the future expectations regarding margins.             

Pensions
SpareBank 1 Boligkreditt AS maintains two types of pension plans.  Both plans are managed under the pension Scheme of SpareBank 1 SR Bank ASA.

Defined Benefit Plan
The plan is fully funded through annual payments to the pension scheme, and are determined by periodic calculations by an actuary. A defined benefit plan is one which grants a specified future benefit upon reaching the specified pension age. Factors which determine the benefit are age, the number of years in employment/membership in the plan and remuneration. The liability which is recorded in the balance sheet is the net present value of the defined benefit reduced by the fair value of the pension plan assets. . The liability is calculated annually by independent actuaries. The net present value of the future benefits are found by using the yields on Norwegian government bonds adjusted for differences in maturity dates.

Defined Contribution Plan
In a defined contribution plan the company pays a defined contribution into the pension scheme. The Company has no further oblilgations beyond the defined contributions. The contributions are recorded as salary expense in the accounts. Any prepaid contributions are recorded as assets in the balance sheet (pension assets) to the extent that the asset will reduce future payments when due.

The Company has eight employees as of year end 2014.  All employees are included in SpareBank 1 SR-Bank ASAs pension scheme and accrue the same benefits as the other membership in that scheme which are employees of  SpareBank 1 SR-Bank ASA.  For the Chief Executive Officer of SpareBank 1 Boligkreditt future pension obligations for remuneration above the limit of 12 times the basic allowance or limit as formulated by the national pension scheme are accounted for in the Company's accounts.  One person is on permanent hire in Boligkreditt from SpareBank 1 Gruppen, which covers all pension obligations for this person.

Cash Flow Statement
The cash flow statement has been presented according to the direct method, the cash flows are grouped by sources and uses.  The cash flow statement is divided into cash flow from operational, investment and finance activities. 

Reserves
The Company will create reserves when there is a legal or self-administered liability following previous events, it is likely that this liability will be of a financial character, and it can be estimated sufficiently accurately. Reserves will be assessed on every accounting day and subsequently adjusted to reflect the most accurate estimate. Reserves are measured at the present value of the expected future payments required to meet the obligation. An estimated interest rate which reflects the risk free rate of interest in addition to a specific risk element associated with this obligation will be used as the pre-tax rate of discount.

Supplier Debt and other Short Term Liabilities                
Supplier debt is initially booked at fair value. Any subsequent calculations will be at amortised cost, determined by using the effective rate of interest method. Supplier debt and other short term liabilities where the effect of amortising is negligible, will be recorded at cost.

Interest Income and Expense
Interest income and expense  associated with assets, and liabilities measured at amortised cost, are recorded according to the effective rate of interest method. Any fees in connection with interest bearing deposits and loans will enter into the calculation of an effective rate of interest, and as such will be amortised over the expected maturity.

Commission Expense
Commissions are paid by the Company to its parents banks and represent most of the net interest margin earned in Boligkreditt.

Dividends
Proposed dividends are recorded as equity during the period up until they have been approved for distribution by the Company's general assembly.

Events after the Balance Sheet Date
The annual accounts are deemed to be approved for publication when the Board of Directors have discussed and approved them. The General Meeting and any regulatory authorities may subsequently refuse to approve the annual accounts, but they cannot change them. Events up until the annual accounts are deemed to be approved for publication and that concern issues already known on the accounting day, will be part of the information that the determination of accounting estimates have been based on, and as such will be fully reflected in the accounts. Events that concern issues not known on the accounting day, will be commented upon, provided that they are of relevance.

The annual accounts have been presented under the assumption of continuing operations. This assumption was, in the opinion of the Board of Directors, justified at the time when the accounts were presented to the Board of Directors for approval.       

Share Capital and Premium
Ordinary shares are classified as equity capital. Expenses directly related to the issuing of new shares or options with tax relief, will be recorded in the accounts as a reduction in the proceeds received.

Fair Value Measurement
IFRS 13 establishes a single source of guidance under IFRS for all fair value measurements and disclosures about fair value measurements. The scope of IFRS 13 is broad; the fair value measurement requirements of IFRS 13 apply to both financial instrument items and non-financial instrument items for which other IFRSs require or permit fair value measurements and disclosures about fair value measurements, except for  share-based payment transactions that are within the scope of IFRS 2 Share-based Payment, leasing transactions that are within the scope of IAS 17 Leases, and measurements that have some similarities to fair value but are not fair value (e.g. net realizable value for the purpose of measuring inventories or value in use for impairment assessment purposes).

IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction in the principal (or most advantageous) market at the measurement date under current market conditions. Fair value under IFRS 13 is an exit price regardless of whether that price is directly observable or estimated using another valuation technique. Also, IFRS 13 includes extensive disclosure requirements.

IFRS 13 requires prospective application from 1 January 2013. Other than the additional disclosures, the application of IFRS 13 has not had any material impact on the amounts recognized in the consolidated statements.

Adoption of New and Revised International Financial Reporting Standards (IFRSs)
For the previous year, no new or revised IFRS have been incorporated into the Company's accounts

Standards issued but not yet effective
Standards issued but not yet effective up to the date of issuance of the Company’s financial statements are listed below. This listing of standards and interpretations issued are those that the Company reasonably expects to have an impact on disclosures, financial position or performance when applied at a future date. The new and revised IFRSs are not mandatorily effective for the year ended December 31, 2014. The Company intends to adopt these standards when they become effective.  The Company is targeting implementing IFRS 9 early when this is possible.

Financial Instruments: Classification and Measurement
IFRS 9 issued in November 2009 introduced new requirements for the classification of financial assets. IFRS 9 was subsequently amended in October 2010 to include requirements for the classification and measurement of financial liabilities and for derecognition, and in November 2013 to include the new requirements for general hedge accounting. Another revised version of IFRS 9 was issued in July 2014 mainly to include a) impairment requirements for financial assets and b) limited amendments to the classification and measurement requirements by introducing a "fair value through other comprehensive income" (FVTOCI) measurement category for certain simple debt instruments.

Key requirements of IFRS 9:

• All recognised financial assets that are within the scope of IAS 39 Financial Instruments: Recognition and Measurement are required to be subsequently measured at amortised cost or fair value. Specifically, debt investments that are held within a business model whose objective is to collect the contractual cash flows, and that have contractual cash flows that are solely payments of principal and interest on the principal outstanding are generally measured at amortised cost at the end of subsequent accounting periods. Debt instruments that are held within a business model whose objective is achieved both by collecting contractual cash flows and selling financial assets, and that have contractual terms of the financial asset give rise on specified  dates to cash flows that are solely payments of principal and interest on the principal amount outstanding, are measured at FVTOCI. All other debt investments and equity investments are measured at their fair value ant the end of subsequent accounting periods. In addition, under IFRS 9, entities may make an irrevocable election to present subsequent changes in the fair value of an equity investment (that is not held for trading) in other comprehensive income, with only dividend income generally recognised in profit or loss.
• With regard to the measurement of financial liabilities designated as at fair value through profit or loss, IFRS 9 requires that the amount of change in the fair value of the financial liability that is attributable to changes in the liability's credit risk in other comprehensive income would create or enlarge an accounting mismatch in profit and loss. Changes in fair value attributable to a financial liability's credit risk are not subsequently reclassified to profit or loss. Under IAS 39, the entire amount of the change in the fair value of the financial liability designated as fair value through profit or loss is presented in profit or loss.
• In relation to the impairment of financial assets, IFRS 9 requires an expected credit loss model, as opposed to an incurred credit loss model under IAS 39. The expected credit loss model requires an entity to account for expected credit losses and changes in those expected credit losses at each reporting date to reflect changes in credit risk since initial recognition. In other words, it is no longer necessary for a credit event to have occurred before credit losses are recognised.
• The new general hedge accounting requirements retain the three types of hedge accounting mechanisms currently available in IAS 39. Under IFRS 9, greater flexibility has been introduced to the types of transactions eligible for hedge accounting, specifically broadening the types of instruments that qualify for hedging instruments and the type of risk components of non-financial items that are eligible for hedge accounting. In addition, the effectiveness test has been overhauled and replaced with the principle of an "economic relationship". Retrospective assessment of hedge effectiveness is also longer required. Enhanced disclosure requirements about an entity's risk management activities have also been introduced.

The mandatory effective date of IFRS 9 is 1 January, 2018. IFRS 9 has not yet been endorsed for application in the European Union.

It is not practicable to provide a reasonable estimate of the effect of IFRS 9 until the Company undertakes a detailed review.  

IFRS 15 Revenue from Contracts with Customers

In May 2014, IFRS 15 was issued which establishes a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. IFRS 15 will supersede the current revenue recognition guidance including IAS 18 Revenue, IAS 11 and the related interpretation when it becomes effective.

The mandatory effective date of IFRS 15 is 1 January, 2017. IFRS 15 has not yet been endorsed for application in the European Union. (expected approval in Q2 2015).  It is expected that the effects of IFRS 15 will be minor and no effect would have been expected as of the date of these accounts. 

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Note 3 Risk management

SpareBank 1 Boligkreditt AS is an institution which acquires residential mortgages from banks in the SpareBank 1 Alliance. This activity is predominantly financed by the issuance of covered bonds.  The Company is therefore subject to the Norwegian legislation for covered bonds and the demands this imply for exposure to risk. In addition, the Company wishes to maintain the AAA/Aaa ratings from Fitch and Moody's, resepctively, with regards to the covered bonds, which also requires a high degree of attention to risk management and a low risk exposure profile. 

The purpose with the risk and capital adequacy management within SpareBank 1 Boligkreditt AS is to ensure a satisfactory level of capital and a responsible management of assets in accordance with the Company's statutes and risk profile. This is ensured through an adequate process for risk management and planning and implementation of the Company's equity capital funding and capital adequacy.  

The Company's risk- and capital management are aiming to be in accordance to best practices - and this is ensured through:

• A risk culture characterised through high awareness about types of risk and the management thereof
• A competent risk analysis and control environment
• A good understanding of which material risks the Company is exposed to"

Organisation and organisational culture
SpareBank 1 Boligkreditt AS is focused on maintaining a strong and alert organisational culture characterised by high awareness about risk management.

SpareBank 1 Boligkreditt AS is focused on independence and control, and the responsibilities are divided between different roles within the organisation:

• The Board of Directors determines the main principles for risk management, including determining the risk profile, limits and guidelines. The Board also carries the responsibility to review capital levels in accordance with the risk profile and the requirements of the regulatory authorities.
• The Chief Exceutive Officer is responsible for the day to day administration of the Company's business and operations according to laws, statutes, powers of attorney and instructions from the Board.  Staretgic items or operational items of an unusual nature or importance are discussed with and presented to the Board of Directors. The CEO may however decide a matter in accordance with a power of attorney from the Board. The CEO is responsible for implementing the Company's strategy and in cooperation with the Board to also develep and evolve the strategy. 
• The risk manager reports both directly to the CEO and to the Board.  The risk managere is tasked with developing the framework for risk managament including risk models and risk management systems.  The poistion is further responsible for the independent evaluation and reporting of risk exposure in addition to maintaing all relevant laws and regulations.
• The balance sheet committee is an advisory council for the operational management of the Company's balance sheet within the framework determined by the Board of Directors.  The committee is a an important component of Boligkreditt's operative management of liquidity risks.  The balance sheet committee is headed by the CEO and consists of the CFOs of the largest banks in the SpareBank 1 Alliance in addition to one representative from the smaller Alliance banks (Samspar).
• The investment committee is an advisory council for the evaluation of counterparty exposure limits and for the composition of the liquidity portfolio.   The committee is headed by the CEO and consists of Boligkreditt's financial director and director for asset liability management.  The committee advises on credit limits for counterparties and the composition of the liquidity portfolio.  The CEO has been tasked by the Board to make decisions regarding credit limits for counterparties and individual investments. "              

Risk Categories:

In its risk management the Company's differentiates amongst the following categories of risk:

• Credit Risk: The risk of loss as a result of that counterparties are unwilling and/or unable to meet their obligations to the Company.  Credit risk management is detailed in the Company's credit risk policy and this policy is approved by the Board of Directors annually. 
• Liquidity Risk: The risk that the Company is unable to meet its obligations and/or finance its assets
• Market Risks: The risk of loss as a result of changes in observable market variables such as interest rates, foreign exchange rates and securities.
• Operational Risks: The risk of loss as a result of insufficient or weak internal processes or systems, human errors or external events.

Further details about risk categories are discussed in later Notes

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Note 4 Important estimates and considerations regarding application of accounting policies

The presentation of financial information in accordance with IFRS results in that management uses estimates and makes assumptions which affect the outcome of certain accounting principles, including the amounts accounted for assets, liabilities, income and cost.

Loss on loans and guarantees
The Company makes loan provisions for individual loans if an objective incident has occurred which can be identified in relation to a single exposure, and the objective incident reduces the future expected cash flow for repayment of the exposure.  Objective incident may be the default, bankruptcy, lack of liquidity or other material financial problems. Individual loan loss provisions are calculated as the difference between the book value of the loan and the net present value of the future cash flow based on the effective interest rate at the time of the initial calculation of the individual write off.  Subsequent changes in interest rates are considered for loan agreements with floating interest rates to the extent this impacts expected cash flow. Group loss provisions are estimated on groups of loans where there are objective evidence that an incurrence of loss has taken place following the initial accounting recognition of these loans on the balance sheet. Objective evidence include observable data which allows for a conclusion that the future cash flow from the group of loans is reduced.  The development in probability of default over time is one such objective evidence which is utilised in order to identify a need for a group loan loss provision.  Where a requirement for a group write down exists, the loss on the group of loans is calculated as the difference between the book value and the net present value of the future estimated cash flow.  In order to calculate this difference (which equates to the amount of write downs) the starting point is the expected loss for the group of loans. The estimates of individual and group loan loss provisions are always evaluated and formulated with a considerable degree of uncertainty.  Futures estimates based on historical incidents may prove to be erroneous because it is uncertain which relevance historical data have as a predictior for the future.  Where loans are secured on collateral in stressed situations, such as when certain objects or industries are in distress, the proceeds from sales of collateral in relative illiquid markets may be subject to a high degree of uncertainty.

Fair value of financial instruments
The fair value of financial instruments which are not traded in a liquid market are determined using valuation techniques.  The Company utilises methods and assumptions which are as far as possible based on observable market data and which represent market conditions as of the date of the financial accounts.  When valuing financial instruments where no observable market data are available, the Company estimates values based on what it is reasonable to expect that market participants would use as a basis for valuation of financial instruments.

Pensions
Net pension obligations are based on a number of estimates including future investment returns, future interest rate and inflation levels, developments in compensation, turnover, development in the "G" amount (the basic level of pension as determined by the public pension system and used as a yardstick in several calculations nationally) and the general development in the number of disabled persons and life expectancy are of significant importance.  The uncertainty is primarily related to the gross obligation for pensions and not the net amount which is recorded in the financial accounts (balance sheet).  Changes in pension obligation estimates which may result from changes in the factors mentioned above will be charged directly against the Company's recorded equity.

Income Taxation
The calculation of the income tax also incorporates material estimates.  For many transactions and calculations there will be a degree of uncertainty related to the final tax obligation. SpareBank 1 Boligkreditt AS records tax obligations in tax- and other legal disputes based upon whether future income tax obligations are expected to materialise.  If the final outcome of a particular case deviate from the original accrued amount for tax, the difference will affect the profit and loss account for tax expense. The recognised amounts for deferred taxation in the period where the difference is established will also be affected. 

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Note 5 Net interest income

NOK 1 000						2014	2013
Interest income
Interest income and similar income from loans to and balances with credit institutions						205,278	264,755
Interest income and similar income from loans to and balances with customers						6,502,841	6,661,490
Interest income treasury bills						26,035	55,606
Commission expense (payable to shareholder banks) *						-2,258,058	-2,299,029
Total interest income						4,476,095	4,682,822
Interest expense
Interest expense and similar expenses to credit institutions						40,085	22,910
Interest expense and similar expenses on issued bonds						3,970,238	4,259,716
Interest expense and similar expenses on issued certificates						48,067	104,327
Interest expense and similar expenses on subordinated debt						62,240	0
Other interest expenses						92	682
Total interest expense						4,120,722	4,387,634
Net interest income						355,372	295,188

* Commissions to our parent banks are calculated daily for each mortgage loan transferred. whereby the commission equals the customer loan rate less a rate which incorporates the Company's average cost of funding and operational costs. The operational add-on element is expressed through an average rate which is from time to time decided by the Company's Board of Directors.

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Note 6 Net gains from financial instruments

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Note 7 Salaries and remuneration

* The company’s employees have shared employment between SpareBank 1 Næringskreditt and SpareBank 1 Boligkreditt. All remuneration is effectuated through SpareBank 1 Boligkreditt and a portion is reinvoiced to SpareBank 1 Næringskreditt. The company also buys administrative services from SpareBank 1 SR-Bank ASA and SpareBank 1 Gruppen. Pension benefit obligations are safeguarded in SpareBank 1 Boligkreditt through participation in the pension fund of SpareBank 1 SR-Bank ASA. This pension scheme meets the legal demands on mandatory occupational pension.

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Note 8 Salaries and other remuneration of management

Paid in 2014

The bonus shown is for 2013. but paid out in 2014. All employees have an offer of an employee mortgage loan from SpareBank 1 SR-Bank. The terms and conditions for this include an interest rate one percentage point below the standard rate as determined by the Norwegian Treasury Department from time to time.

Paid in 2013

The bonus shown is for 2012. but paid out in 2013.

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Note 9 Pensions

The following economic assumptions have been made when calculating the value of the pension obligations:

The use of a certain discount rate derived from a certain set of bonds require that there is an actively traded market in such bonds and that the bonds traded are of a high quality and of a longer duration in the same currency. The Norwegian foundation for financial accounting (NRS) has evaluated the market using inputs provided by participants in the market and publicly available information. The market for covered bonds is a market where the liquidity is evaluated for floating and fixed rate bonds together. Participants in the covered bond market have maintained that the market posesses a sufficient liquidity and that the pricing mechanism in the market is reliable. No detailed analysis have gone into evaluating the pricing and the market functionality. however. data which NRS has obtained do not indicate that the market would not provide a reliable pricing mechanism. Based on its evaluation. NRS has in its updated guidelines for pension assumptions as of 31.12.13 concluded that the interest rate for covered bonds can not be rejected as the basis for the determination of the discount rate. SpareBank 1 Boligkreditt AS agrees with NRS's conclusion and is of the opinion that the market for covered bonds is sufficiently liquid and that the pricing in the market is reliable. Because of this. SpareBank 1 Boligkreditt AS has chosen to use the covered bond interest rate as a basis for its pension plan discount rate as of 31.12.2014.

The assumption for mortality is based on published statistics and experience. ,Average life expectancy (in years) as of the date of these financial accounts for a person who retires when he/she is 65 years is as follows:

Expected paid-in premium is for 2014 is NOK 0,539 million.

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Note 10 Administration expenses

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Note 11 Other operating expenses

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

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Note 12 Taxes

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Note 13 Other assets

* Intangible assets

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Note 14 Lending to customers

Lending to customers consists of residential mortgages only. The mortgages generally have a loan lon-to-value and losses have been very low. The total amout of lending to customers at the end of 2013 were NOK 161.2 billion. All mortgages carry a variable interest rate.

*The entire customer loan balance is considered to be in default and will be included in overviews of defaulted loans when overdue instalments and interest payments are not received within 90 days or if credit limits on revolving loans are exceeded for 90 days or more

Changes to loan loss provisions

Loans sorted according to geography (Norwegian counties) *

* Loans sorted according to geography is presented exclusive of accrued interest and before accounting for group loan loss provisions

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Note 15 Share capital and shareholder information

The share capital consists of 55 105 482 shares with a nominal value of NOK 100

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Note 16 Equity

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Note 17 Liabilities incurred by issuing securities

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

Liabilities categorized by debt instrument and year of maturity (nominal value*) NOK 1.000:

Senior Unsecured

Covered Bonds in Central Bank Swap Facility

Covered Bonds

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

Liabilities incurred by currency (book values at the end of the period)

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Note 18 Subordinated debt

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Note 19 Financial derivatives

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Note 20 Classification of financial instruments

*Fair value calculation according to changes in market interest rates and currencies exchange rates

*Fair value calculation according to changes in market interest rates and currencies exchange rates

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Note 21 Financial instruments at fair value

Methods in order to determine fair value

General                
The interest rate curve that is used as input for fair value valuations of hedging instruments and hedging objects consists of the NIBOR-curve for maturities less than one year. The swap-curve is used for maturities exceeding one year.

Interest rate and currency swaps
Valuation of interest rate swaps at fair value is done through discounting future cash flows to their present values.  Valuation of currency swaps will also include the element of foreign exchange rates

Bonds   
Valuation of bonds at fair value is done through discounting future cash flows to present value.

With effect from 2009 SpareBank 1 Boligkreditt AS has implemented the changes in IFRS 7 in relation to the valuation of financial instruments as of the date of the financial accounts. The changes require a presentation of the fair value measurement for each Level.  We have the following three Levels for the fair value measurement:

• Quoted price in an active market for an identical asset or liability (Level 1).  Fair value of financial instruments which are traded in active markets are based on the market price at the balance sheet date. A market is considered to be active if the market prices are easily and readily available from an exchange, dealer, broker, industry group, pricing service or regulating authority and that these prices represent actual and regular market transactions on an arm's length basis. In this category are, amongst others, debt certificates and covered bonds listed on an exchange in the Eurozone and the US.
• Valuation based on observable factors either direct (prices) or indirected (deduced from prices used in level 1) other than quoted price for the asset or liability (Level 2). Level 2 consist of instruments which are valued using information which is not listed prices, but where the prices are directky or indirectly observable for assets or liabilities or, and which also include prices in active markets. In this category are included covered bonds issued in NOK and listed on the Oslo stock exchange or ABM.  The valuation of these instruments are largely affected by the change in interest rate curves and credit spreads.  Where prices are not directly observable these have been derived from observable interest rate curves and credit spreads produced by the Association of Fund Managers (VFF).

The valuation is based on factors that are not found in observable markets (non-observable assumptions) (level 3).  If valuations according to Level 1 or Level 2 are not available, valuations are based on not-observable information.  The Company has a a matter of principle neither assets nor liabilities which are valued at this level. 

The following table presents the Company's financial assets and liabilities at fair value as of 31.12.2014

The following table presents the Company's financial assets and liabilities at fair value as of 31.12.2013

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Note 22 Bonds classified as hold to maturity

Pr. 31.12.14

Market value of bonds in hold to maturity portfolio

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Note 23 Other liabilities

The Company does not have an overdraft facility or a revolving credit facility as of 31.12.2013 * Deposits represents temporary balances paid in by customers in excess of the original loan amount

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Note 24 Credit risk

Credit risk is defined as the risk that losses can occur as a consequence of that customers and others do not have the ability or willingness to meet their obligations to SpareBank 1 Boligkreditt as and when agreed. Credit risk mainly includes loans to customers which are collateralised by private residences (residential mortgage loans), but also includes credit risk in derivatives contracts (counterparty credit risk) and investment in bonds within the Company's liquidity portfolio.  SpareBank 1 Boligkreditt AS maintains a credit policy and limits in order to manage and closely monitor all credit risk the company is exposed to. 

In December 2014 the Company distributed amended Servicing and Transfer agreements, which were effective from 31.12.2014.  As of 31.12.14 not all banks have signed the amended agreement, but it is expected that they will do so with effect from 31.12.14.  According to the amended agreement SpareBank 1 Boligkreditt has the right to off-set any losses incurred on individual mortgage loans against the commissions due to all banks for the remainder of the calendar year.  The Company has not since the commencement of its operations had any instances of off-sets against the commissions due to its owner banks. 

Credit Exposure

Text from word file here. with the heading "Lending to customers" SpareBank 1 Boligkreditt AS will only purchase loans from the shareholder banks that have a high servicing capacity and low loan to value. This implies that the loans bought by the Company are in lower risk groups. The Company utilizes the same risk classification as the other banks in the SpareBank 1 Alliance. Presented below is an overview that shows how loans are allocated over the risk groups. The allocation in risk groups is based on expected loss (PD multiplied by LGD for each individual loan).

Lending to customers (residential mortgage loans)
The risk classification of the Company's lending is conducted on the basis of an evaluation of the exposures.  The evaluation is based on the following main criteria:

• Ability of the customer to pay (income and debt)
• Willingness to pay (payment remarks)
• Size of the loan
• Loan to value (maximum loan to collateral value is 75% and the collateral must be valued by an independent source,  Valuations are updated quarterly for the whole loan portfolio)
• Location

SpareBank 1 Boligkreditt AS utilizes the SpareBank 1 Alliance's IT platform and custom developed IT systems for the acquisition of loans from the banks in the SpareBank 1 Alliance. Credit risk is monitored by measuring the development of the mortgage portfolio's credit quality, details about missed payments, defaults and over the limit withdrawals.  For defaults and losses in the portfolio the Company has set the following limits:

• Maximum probability of default for the portfolio:  0.90 %
• Expected loss in the portfolio:  < 0.02 % of the loan volume
• Unexpected loss in the portfolio (at a 99.97% confidence level):  < 0,75 % of the loan volume

The following risk classification, step 1 to 3 is executed monthly based on objective data

1. Probability of default (PD): The customers are classified in PD classes depending on the likelihood for default within the next 12 months based on a long average (through cycle). The PD is calculated on the basis of historical dataseries for financial key numbers tied to income and source of income, as well as on the basis of non-financial criteria such as age and behaviour.  In order to group the customers according to PD, nine classes of probability of default are used (A to I).  In addition the Company has to default classes (J and K) for customers with defaulted and/or written down exposures.
2. Exposure at default:  This is a calculated number which provides the exposure with a customer at the point of default.  This exposure is usually of lending volume and the approved but not utilized credit lines.  Customers approved but not utilized credit lines are multiplied with a 100 per cent conversion factor.
3. Loss given default (LGD): This is a calculated number which expresses how much the Company potentially stands to lose if a custiner defaults on his or her obligations.  The assessment takes into consideration the collateral and the cost the Company could incur by foreclosing and collecting on the defaulted exposure.  The Company determines the realizable value on the collateral based on the experience of the SpareBank 1 banks over time, and so that the values reflect a cautious assessment in the lower point of an economic cycle.  Seven classes (1 to 7) are used to classify the exposures according to LGD. 

Definition of risk groups - based on probability of default

* Total exposures are presented as exposure at default exclusive of accrued interest and before group loan loss provisions. Loans to and deposits with credit institutions SpareBank 1 Boligkreditt only has deposits with financial institutions rated A-/A2 or higher as of 31.12.2014

Bonds and certificates

Fitch/Moody's rating classes are used. If the ratings differ. the lowest counts. All bonds are publicly listed.,Financial derivatives,Derivative contracts are only entered into with counterparties rated minimum A or A2 by Fitch Ratings and Moody's Ratings Service. respectively. If the value of the derivative exceeds the credit limits held by SpareBank 1 Boligkreditt for counterparty risk in derivative contracts the counterparty must post cash collateral in either NOK or EUR. SpareBank 1 Boligkreditt is not required to post collateral if the value of the contract should be in favour of the counterparty. Collateral received is included in the balance sheet under receivables with and debt to credit institutions.

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Note 25 Liquidity risk

Liquidity risk is defined as the risk that the business is not able to meet its obligations at maturity.  SpareBank 1 Boligkreditt AS issues covered bonds at shorter maturities than the residential mortgages which make up the largest portion of assets on the Company’s balance sheet.  The Liquidity risk which arises is closely monitored and is in compliance with the Norwegian covered bond legislation which amongst other things requires that the cash flow from the cover pool is sufficient to cover outgoing cash flows for holders of preferential claims on the cover pool (holders of covered bonds and counterparties in associated hedging contracts (swaps).  In order to manage the liquidity risk certain limits and liquidity reserves have been approved by the Board of Directors.  SpareBank 1 Boligkreditt AS maintains a liquidity reserve which will cover undrawn amounts under revolving loans, a theoretical temporary halt to incoming interest payments from the mortgage loans and at any point in time cover bond maturities for the next six months (100 per cent) and 50 per cent for maturities between 6 and 12 months, according to the proposals for a new Net Stable Funding Ratio (NSFR).   Liquidity risk is monitored on a regular basis and weekly reports are presented to the management and monthly reports to the Board.

Boligkreditt's shareholder banks have committed themselves to buying covered bonds in a situation where the primary market for issuance of covered bonds is not functioning.  This commitment has no liquidity effects on the SpareBank 1 banks because the covered bonds can be deposited with the central bank at any time.  The Company may require its shareholder banks to acquire covered bonds from it in an amount which is capped at the amount of the next 12 months of maturities amongst the Company's outstanding bonds, less what the Company holds as it own liquidity reserve.  Each shareholder bank's responsibility is pro rata in accordance with its ownership stake in the Company and secondary up to a level of twice its pro rata stake if other banks are unable or unwilling to meet their commitment.   Each bank may make a deduction in its commitment for bonds already purchased under this commitment. 

Liquidity Risk - all amounts in 1000 NOK

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Note 26 Interest rate risk

The table below presents a net change in market value in NOK for all the Company's asset and liabilities given a one per cent parallel move of the interest rate curve.

Sensitivity of net interest rate expense in NOK 1000

Mortgage rates (variable) are set by SpareBank 1 Boligkreditt AS. but for all practical purposes follow the recommendations from the local originating banks. The mortgage interest rates are set dependent on collateral and LTV. customer risk category and the competitive mortgage lending landscape.

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Note 27 Currency risk

The foreign exchange risk is the risk of a negative P&L impact as a result of changes in foreign currencies.  SpareBank 1 Boligkreditt AS balance consists mainly of lending to private individuals in Norway and in NOK, current deposits in NOK and liabilities issued in the Norwegian or international capital markets.  In accordance with the Norwegian covered bond legislation and its internal guidelines the Company hedges all currency risk, either by the utilisation of swaps or by way of asset liability management, i.e. maintaining exposures in assets and liabilities of the same currency.  Weekly risk reports are created by the management team and reports to the Board of Directors have a monthly frequency.  The currency risk (sensitivity to currency movements) are calculated by adding the exposure in the various currencies.  No other currencies than the NOK had a material net position on the Company's balance sheet at the end of the year.

Net currency exposure in NOK 1000

P&L effect before tax. in NOK 1000

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Note 28 Operational risk

The operational risk in SpareBank 1 Boligkreditt AS is limited due to the low complexity of operations. The Company is only engaged in lending to private individuals, the investment of liquid assets in high qulity debt instruments and the funding of these activities.  In addition the majority of the operational risk is associated with the management of the mortgage loans in the individual SpareBank 1 banks which also act as servicers of the mortgage loans. This relationship between Boligkreditt and the shareholder banks is regulated in the Transfer and Service Agreement which the Company has signed with each bank individually.

The Company has a contious focus on the evolution of the Company's own structure, systems and processes.  Many of the daily operational tasks have been outsourced to SpareBank 1 SR-Bank ASA, which by the nature of being a larger and more complex financial institution than the Company have many overlaps between its operational activities and those activities outsourced to it from the Company.  In addition there is a close working relationship between SpareBank 1 Boligkreditt AS and several of its larger shareholder banks.

In connection with changes in the operations of the Company, a specialist banking vehicle such as SpareBank 1 Boligkreditt AS is faced with the fact that the for example the expansion of operations, introduction of new products or replacement of IT systems will represent such a large and significant change that it will nearly always be necessary with heightened scrutiny risk assessment and analysis.  The Company has established a practice whereby annually all areas of risk or identified as carrying risk are evaluated.  The Company's management of operational risk is considered to be satiisfactory.

Based on the aspects discussed above, Management is of the opinion that the utilisation of the standard approach to measuring operational risks provides for more than adequate equity coverage for the actual operational risks that the business carries.  The Company therefore employs the standard appraoch with the capital adequacy framework (Basel II, Pilar 1) as the effective method for calculation the necessary amount of capital to cover operational risks.  This method uses a level of statistical confidence of 99.9%.  The capital requirements as calculated on 31.12.2014 is approximately NOK 35.7 million (refer also to the note on capital adequacy) and is seen as adequate.

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Note 29 Asset coverage test

The asset coverage is calculated according to the Financial Services Act § 2-31 (Covered Bond Legislation). There is a discrepancy between the asset coverage test and the amounts in the balance sheet because for the purposes of the test mortgage loans which may have migrated above the 75% loan to value level are reduced to reflect the decrease in the value of the underlying collateral so that only a maximum loan corresponding to a value of 75% of the collateral is considered.  Furthermore, the fact that market values are recorded for all bonds and certificates in the cover pool could have an impact.  In addition any defaulted loans, i.e. loans in arrears at or beyond 90 days, are excluded from the test (there have been no occurrences of any defaults starting with the commencement of operations through 31.12.2014). The company separates Cover Pool 1 and Cover Pool 2.  Cover Pool 1 is utilised for market issuances of covered bonds whilst Cover Pool 2 is a separate mortgage portfolio established solely for use in the swap facility with Norway's Central Bank in 2009.

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Pool 1

Pool 2

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Note 30 Capital adequacy

The primary goal for the Company's management of capital reserves is to ensure compliance with laws and regulatory requirements and maintain solid financial ratios and a high quality credit assessment in order to best support its business.  The Board of Directors have approved a target for the Company's risk weighted equity coverage of assets of 10%.

A new capital requirements directive was introduced in Norway as of January 1, 2007 (Basel II). SpareBank1 Boligkreditt AS obtained permission from the Financial Services Authority in Norway (Finanstilsynet) for the implementation of its own Internal Ratings Based (IRB) model for credit risks from the seond quarter of 2009.

Transitional rules have been implemented by the FSA whereby regulated financial institutions with approved IRB models will not be able to fully benefit from the results of such models until the year 2018. Regulated entities are allowed to reduce by 20% the total sum of risk weighted assets which would otherwise have been in place under the previous Basel I framework.  In the following years until the end of 2017, the transitional rules will lead to significantly higher capital requirements than what would otherwise have been applicable under Basel II.

The European Union has approved new regulatory requirements, CRD IV.  The new regulations places more robust requirements on capital adequacy, capital structure, liquidity buffers and funding.  CRD IV is gradually introduced in Norway up until the end of 2016. The requirement of 13.5% total capital from July 1, 2014 includes a 10% Core Tier 1 capital and 3.5% other capital. 

The Company's parent banks have committed themselves to keep the Equity Core Tier 1 capital at a minimum 9%. Primarily this commitment is pro rata according to the ownership stakes in the Company, but it is a joint and several undertaking if one or more ownership banks are unable to comply, up to the maximum of twice the initial pro rata amount. 

New CRD IV calculation

Capital Coverage

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Note 31 Related parties

The Company has 161 205 MNOK loans to customers. These are loans acquired from shareholder banks at market values (i.e. nominal value).

SpareBank 1 SR-Bank ASA
The Company purchases a substantial amount of their support functions from SpareBank 1 SR-Bank ASA. A complete SLA is established between the Company and SpareBank 1 SR-Bank ASA.

SpareBank 1 – Alliance
In addition the Company has a Transfer and Servicing agreement in place with each individual shareholder bank regulating amongst other things the servicing of mortgage loans.

SpareBank 1 Næringskreditt AS
All employees within SpareBank 1 Boligkreditt AS are also to various degrees working for SpareBank 1 Næringskreditt AS.  In accordance with a Board decision in SpareBank 1 Næringskreditt dated 17.09.09 one third of the administrative expenses in SpareBank 1 Boligkreditt AS are to be charged to SpareBank 1 Næringskreditt AS. This division of administrative expenses between the two companies reflect the actual resources utilisation in SpareBank 1 Boligkredit AS.

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Note 32 Contingencies

SpareBank 1 Boligkreditt AS is not a party to any ongoing legal proceedings.

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Note 33 Collateral received

SpareBank 1 Boligkreditt has signed ISDA-agreements including CSAs (Credit Support Annexes) with a number of financial institutions that are counterparties in interest rate and currency swaps. These institutions post collateral in the form of cash deposits to SpareBank 1 Boligkreditt. At the year-end 31.12.2014 this collateral amounted to NOK 27 181 million. This amount is included in the balance sheet, but represents restricted cash.

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Note 34 Events after the balance sheet date

The dividend is proposed to be NOK 203.9 million (NOK 3.70 per share).