ANNUAL REPORT Bolig- og Næringsbanken ASA

Transcription

1 ANNUAL REPORT 2007 Bolig- og Næringsbanken ASA

2 contents Report of the Directors...4 Income Statement...14 Balance Sheet...15 Change in Equity...16 Cash Flow Statement...17 Notes 1 Accounting policies Interest and similar income Interest expense and similar charges Change in value of financial instruments carried at fair value Other operating income, gains and losses Salaries and general administrative expenses Related party disclosures Loans to employees and elected officers Pension costs and commitments Intangible assets and tangible fixed assets Other operating expenses Other expenses, gains and losses Impairment losses and write-downs on loans carried at amortised cost Taxation Cash and receivables from credit institutions Loans and advances Repossessed properties Financial derivatives (assets and liabilities) Short-term securities investments Interests in group companies and associates Prepayments and accrued income Liabilities to credit institutions Customer deposits and accounts payable to customers Debt securities in issue Accrued expenses and deferred income Subordinated loan capital Shareholder structure and share capital Capital adequacy Fair value of financial instruments Risk in financial instruments - qualitative description Risk in financial instruments - quantitative description - Group Risk in financial instr. - quantitative description - Parent Bank Secured debt and guarantees at 31 December Proposed, not adopted dividend Correction of prior-period errors Events after the balance sheet date Transition to IFRS Elected Officers and Group Executive Management...78 Auditor`s report for Control Committee [ 2 ]

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4 report of the directors summary of has been a challenging year for the BNbank Group. Growing competition in our main areas of focus exerted pressure on earnings. This, combined with costs linked to development and restructuring measures, resulted in a consolidated net profit for the year of NOK 229 million, compared with NOK 242 million for Return on equity was 8.9%, while the figure for 2006 was 10.2%. A slight increase in volumes in both the lending and deposits businesses has made a positive contribution to earnings, while pressure on margins reduced earnings somewhat. Profits were also enhanced by the receipt of one-off penalty charges on extraordinary redemptions of business loans. As the Bank s equity is invested in interest-bearing assets with variable interest rates, the rises in interest rates in 2007 gave rise to increased net interest income for BNbank. Operating expenses have however also risen, and Glitnir Privatøkonomi posted a loss, among other things as a result of costs associated with various restructuring measures. Excess return was 5.6% (after tax), compared with 8.0% for BNbank achieved 3% growth in lending (NOK 1.5 billion) in 2007, while deposits rose by 15% (NOK 2.2 billion), compared with growth of 3% and 17% respectively in Loans and advances totalled NOK 46.6 billion at 31 December 2007, while customer deposits totalled NOK 16.7 billion at year-end. In personal banking, lending grew by 12%, compared with 4% in Competitive terms and conditions and increased distribution power have helped boost growth. The entire home loan portfolio is secured on up to 80% of the appraised value of the mortgaged property at the time the loan is granted, while 76% is secured on up to 60% of the appraised value. BNbank s personal banking business has been based on the distribution of standardised home loans and deposit products operated by customers using telephone banking, Internet banking and our branches in Trondheim and Oslo. In order to meet the increasing competition, pressure on margins and changes in customer behaviour in the personal banking market, BNbank has put into effect a number of measures aimed at maintaining profitability. To strengthen the distribution of our own banking products and other Glitnir products in personal banking, and to diversify the Bank s revenues, in 2007 BNbank purchased the majority shareholding in the independent financial consultancy Norsk Privatøkonomi ASA (now Glitnir Privatøkonomi) and the business in the property finance company Eiendomsfinans AS (now Glitnir Eiendomsfinans). Further, in order to refine the business, it was decided in January 2008 to concentrate the personal banking business to Trondheim. Through BN Boligkreditt, the Bank will be able to use bonds with pre-emptive rights as a source of funding, which will give more competitive financing to the home loans activity. During the year the Bank launched a number of new products, including the SeniorLån loan product, the Glitnir Sparekonto savings account and the Glitnir Brukskonto current account. Activity in the business market was dominated by tough competition in 2007 and a high debtor turnover in the loan portfolio. BNbank has prioritised profitability in preference to growth. Non-performing loans and impairment losses (bad debts) were at a very low level throughout This is largely owing to a good economic trend and the fact that the BNbank Group has remained highly focused on the quality of the loan portfolio. Impairment losses on loans and advances totalled NOK 1 million, while for 2006 NOK 4 million was recognised as income under Impairment losses. BNbank has been owned by the Icelandic banking group Glitnir banki hf since In 2007, Glitnir banki hf was engaged in designing the future organisation of Glitnir s activities in Norway. This involves co-ordinating BNbank s activities in the Norwegian market, including a merger between Bolig- og Næringsbanken ASA (BNbank) and Glitnir Bank ASA. BNbank will be the acquiring bank in the merger, following which the bank s name will be Glitnir Bank ASA. The Norwegian Ministry of Finance has approved the merger, which is planned for March Bolig- og Næringskreditt AS and BN Boligkreditt AS will be maintained as separate subsidiaries without any amendments to their articles of association. The Board recommends that the entire net annual profit for 2007 be retained. The retained profits will strengthen the Group s capital base and provide the capacity for future profitable growth in lending. Operations, objectives and strategy The primary objective of the BNbank Group s consolidated operations is to achieve optimum returns on equity within the guidelines for the Group s operations, current laws and other imposed parameters. The Group s businesses operate nationwide and are concentrated in two main areas, deposits/funding and lending. The Group has its head office in Trondheim and a branch office in Oslo. The subsidiary Glitnir Privatøkonomi has its head office in Oslo and 14 branch offices around the country, while Glitnir Eiendomsfinans s head office is in Drammen and it has 19 branch offices around the country. Glitnir Privatøkonomi provides a full range of financial consultancy services, while Glitnir Eiendomsfinans sells different types of loan products. BNbank provides long-term mortgage loans secured on real property. Loans are also offered against security in capital-protected savings products. In addition, business customers are offered secured lines of credit, building loans and guarantees. Loans are also offered with security in shares in property companies. The lending business is funded primarily by issuing securities and by customer deposits. Customer deposits consist mainly of deposits in BN accounts. Customers are also offered fixed-rate deposit accounts, equity-linked deposit accounts and tax with holding accounts. The Group s unrestricted funds (equity) finance interest-bearing assets with short-term fixed interest rates so that, viewed in isolation, annual profit and return on equity will vary with the short-term interest rates. Excess return is therefore a relevant indicator for measuring the Group s performance. The Group s low risk profile is also important when assessing returns. [ 4 ]

5 In connection with the reorganisation of Glitnir s Norwegian banking activities, BNbank s activity will be organised in the business areas of commercial property and personal banking. In addition, business areas will be established in corporate banking and shipping/offshore, based on the current activities in Glitnir Bank ASA. This means that the banks present business operations will be continued, while the corporate staff areas will be co-ordinated. Following the merger, the new bank will be headed by Morten Bjørnsen, who since August 2007 has been in charge of Glitnir s Nordic banking operations. The loan portfolio will increase by NOK 6.5 billion (14%) in connection with the merger, while aggregate deposits will rise by NOK 5.5 billion (33%), based on the figures at 31 December The head office for the merged bank will be in Trondheim, although it will also have a considerable presence in Oslo and Ålesund. Through Glitnir Privatøkonomi and Glitnir Eiendomsfinans, the new bank will have a nationwide distribution network in personal banking. The possible establishment of branch offices to serve business customers will also be considered. The merged bank will aim to serve as an attractive alternative in selected customer segments to financial groups offering a broad range of financial products and services. Financial developments BNbank presents its consolidated and corporate financial statements in compliance with International Financial Reporting Standards (IFRS). A description of the accounting policies applied by the Group to the preparation of the financial statements, and an explanation of the most important changes upon transition to IFRS, are provided in separate IFRS transition documents published on 30 April 2007 for the Group and on 31 July 2007 for the Parent Bank and BNkreditt. As a consequence of IFRS, the Group s results fluctuate more than under previous accounting policies. All figures for 2007 and 2006 have been prepared in compliance with IFRS. Previous figures have not been restated. Profit performance in 2007 Under IFRS, the return on some interest-bearing balance sheet items is reflected as a change in fair value. Viewed in isolation, therefore, the line Net interest income in the income statement will not give a complete picture of the trend in volumes and margins for the Group s lending and borrowing. The most relevant course is therefore to look at BNbank s income as a whole. Net interest income for 2007 was NOK 491 million, while other operating income totalled NOK 80 million for By comparison, the 2006 figures were, respectively, NOK 421 million and NOK 97 million. The Bank s income has thus increased overall by NOK 53 million compared with Increased volumes in both the lending and deposits businesses have contributed to the increase. Net interest income has also been boosted by the receipt of one off penalty charges on extraordinary redemptions of business loans. As the Bank s equity is invested in interest-bearing assets with variable interest rates, the rise in interest rates in 2007 produced an increase in net interest income for BNbank. Lending margins were, however, slightly down in Income from Glitnir Privatøkonomi totalled NOK 21 million for Income from brokering the sale of products from other companies in the Glitnir Group also contributed positively to earnings in Operating expenditure, excluding other gains and losses, was NOK 272 million for 2007, compared with NOK 186 million for Of the increase of NOK 86 million on 2006, NOK 45 million derives from the consolidation of Glitnir Privatøkonomi from the fourth quarter 2007 inclusive, while NOK 16 million arises from expenditure associated with the merger with Glitnir Bank and other restructuring measures. In addition, expenditure stems from the generally high level of activity, marketing activities, a larger number of full-time equivalents in sales-oriented functions, and the cost of adaptations to changes in regulatory requirements. Operating expenditure as a percentage of average total assets, excluding other gains and losses and Glitnir Privatøkonomi, was 0.46%, compared with 0.38% for Since the Bank took control of Glitnir Privatøkonomi, it has carried out a number of different measures aimed at strengthening the company s operational platform. Combined with slightly lower sales figures towards the end of 2007, the company charged NOK 30 million before tax against the Bank s profits. Impairment losses on loans and advances totalled NOK 1 million for 2007, while for 2006 NOK 4 million was recognised as income under Impairment losses. Loans past due (defaulted on) more than 3 months constituted 0.20% of all loans in 2007, while non-performing loans and repossessed properties represented 0.23% of all loans and repossessed properties. The corresponding figures at year-end 2006 were 0.15% and 0.19% respectively. More information on non-performing loans and risks attached to lending is provided in the section on Risk Management. In addition, Notes 13 and 17 to the financial statements provide further information on impairment losses and non-performing loans. The Group s net profit for the year was NOK 229 million after taxation of NOK 87 million. The comparative figures for 2006 were NOK 242 million and NOK 94 million respectively. EXCESS RETURN (AFTER TAX) 12% 10% 8% 6% 4% 2% [ 5 ]

6 Balance sheet development and solvency Total assets rose by NOK 2.4 billion in 2007 and stood at NOK 50.9 billion at year-end. The rise in total assets is attributable to the growth in lending. Capital adequacy for the Group was 10.5% at 31 December 2007, based on risk-weighted assets of NOK million and a capital base of NOK million. The tier 1 capital ratio at year-end 2007 was 7.6%. The Board considers that the Group s solvency is satisfactory. The financial statements give a true and fair view of the Group s assets and liabilities, financial position and result. The assumptions for continued operations are present, and the annual accounts have therefore been prepared on a going concern basis. Fourth quarter 2007 Below, the accounting figures for the fourth quarter 2007 are compared with the figures for the third quarter The Group achieved an operating profit after impairment losses of NOK 50 (71) million for the fourth quarter The decrease is largely due to the negative profit contribution by Glitnir Privatøkonomi, and costs associated with the merger with Glitnir Bank and other restructuring measures. Net profit was NOK 38 (51) million after an estimated tax charge of NOK 12 (20) million. This produced a return on equity after tax of 5.8% cent (7.9%) on an annualised basis, which works out as an excess return of 2.1% (4.5%) (after tax). Net interest income was NOK 138 (127) million, while other operating income for the quarter totalled NOK 26 (-3) million. Excluding Glitnir Privatøkonomi, income rose by NOK 24 million in the fourth quarter, as a result of slightly better margins on lending and deposits, the receipt of one-off penalty charges on extraordinary redemptions of business loans, and value changes in financial instruments carried at fair value. Other operating expenses, excluding Glitnir Privatøkonomi and restructuring costs, totalled NOK 54 (53) million for the fourth quarter There were no impairment losses on loans and advances during the last three quarters of Growth in loans and advances totalled NOK 0.5 billion (up 1%) for the fourth quarter, while deposits grew by NOK 0.3 billion (up 2%). Recommended allocation of net profit On the basis of the potential for growth and in light of the merger with Glitnir Bank ASA, the Board recommends that BNbank should retain the entire annual consolidated net profit for The Board recommends that of the Parent Bank s net profit for the year of NOK 51 million, the sum of NOK 3 million should be transferred to the unrealised gains reserve and NOK 48 million to other equity. Following the recommended allocation of net profit, the Bank s unrestricted equity totals NOK million. Operations The Group s fixed-rate loans are reported at fair value. The increase in interest rates in the first half-year 2007 has reduced the fair value of the loan portfolio. The reduction is largely equivalent to a change in fair value of the Bank s fixed-rate borrowings, and other financial instruments. Further, accrued interest is classified together with gross lending in compliance with IFRS. Lending business Total national growth in credit, measured in terms of the public s gross domestic indebtedness, was 14% in Credit growth in corporate banking was 18%, and in personal banking 12%. This growth in credit also includes loan products that BNbank does not offer. The Group s lending to business customers fell by 1% and to personal customers grew by 12% in In personal banking, BNbank saw 8% growth in regular home loans. The entire home loan portfolio is secured on up to 80% of the appraised value of the mortgaged property at the time of granting the loan, while 76% of the loan portfolio is secured on up to 60% of the appraised value. The growth in lending in the past year has not changed this breakdown to any great degree. Corporate loans accounted for 63% of total loans at 31 December 2007, compared with 66% at year-end LENDING BY SECTOR NOKbn Business Co-ops Personal [ 6 ]

7 Other products aimed at the corporate market, such as loans with security in shares in property companies, mortgage loans with borrowing of more than 80% of the value of the property, building loans and secure lines of credit, accounted for 10% of all loans at 31 December 2007, compared with 8% at year-end As in 2006, in 2007 the Bank experienced greater demand for variable-rate loans than fixed-rate loans. This is largely because variable rates have been lower than fixed rates. In addition, an increasing number of customers are using interest rate swaps to adjust the fixed-rate period on their loans. Lending margins were slightly down in the first half of 2007, but rose again slightly in the second half-year. The interest rate on variable-rate loans increased slightly more than the interest rate on deposits in BN accounts. Deposit and funding business The Group s net interest-bearing debt increased by NOK 2.0 billion in Securities debt was down by NOK 1.1 billion. Debts to credit institutions increased by NOK 0.9 billion, while customer deposits rose by NOK 2.2 billion. Total domestic growth in bank deposits was 15% in The BNbank Group also had an increase in deposits, of 16%, in Customer deposits grew by NOK million and totalled NOK million at 31 December Customer deposits represented 36% of interest-bearing debt at 31 December 2007, 3 percentage points higher than at year-end Securities debt was 40% of interest-bearing debt at 31 December 2007, as against 47% at 31 December CUSTOMER DEPOSITS NOKbn At year-end 2007, BNbank s subsidiary BNkreditt had NOK 10.7 billion in own securities borrowings, equivalent to 23% of the Group s interest-bearing debt. BNkreditt s share of the Group s total securities borrowing is 57%. Development of the business In order to create an ever better foundation for growth and profitability, the range of products and services offered by the Group to both personal and business customers is regularly assessed and evaluated. Any changes will take place within the guidelines adopted for the Group s operations. Net interest income from long-term mortgage loans is the Bank s most important source of revenue. This also means that fluctuations in revenue are low. At the same time, changes in the competition situation may reduce margins in the lending market without the Bank being able to reduce its costs correspondingly. To make us slightly less dependent on net interest income, the Bank will focus on increasing other forms of revenue. In corporate banking, Bank has also offered business customers, in addition to its own products, relevant products from other companies in the Glitnir Group. This has given customers a better range of offerings and has also contributed positively to BNbank s earnings. In corporate banking, income other than net interest income from long-term mortgage loans makes up an increasingly large proportion of revenue. The merger of the businesses of Glitnir Bank and BNbank will provide access to a better range of products for the Bank s business customers, particularly as regards interest rates, foreign currency, deposits and payment services. In personal banking, competition became even stiffer in BNbank has attempted to adapt to this situation by strengthening its distribution, establishing new sources of borrowing, making efficiency improvements, and launching new products. The objective is to provide a more attractive and broader range of offerings to customers and at the same time preserve the Bank s low-cost advantage. To strengthen BNbank s position in the market for sales of savings products, and increase its distribution power, during 2007 the Bank acquired an additional 35% of the shares in Norsk Privatøkonomi. The Bank already owned 45% of the shares and now owns 80%. In connection with the share acquisition, the company changed its name to Glitnir Privatøkonomi. Glitnir Privatøkonomi offers personal financial services. These comprise advisory services in finance, investment, pension savings, tax, inheritance and probate, as well as the sale of financial products. The company will offer products from both external partners and the Bank itself. The company has a total staff of 110 based at 14 branch offices in Norway and is licensed by the Financial Supervisory Authority of Norway as a securities firm. Since the fourth quarter inclusive, the company has been incorporated as a subsidiary of BNbank. With the aim of strengthening the distribution of BNbank s personal banking products, in 2007 the Bank acquired the property finance business of Eiendomsfinans. The business will be continued under the name Glitnir Eiendomsfinans AS. Glitnir Eiendomsfinans brokers loan products to personal customers through 19 branch offices in the country s largest towns and cities. The company has a staff of just over 50. The Bank will co-ordinate the activity of Glitnir Eiendomsfinans with Glitnir Privatøkonomi, although the entities will for the time being continue as two independent distribution channels. While Glitnir Privatøkonomi will focus on all-round financial advisory services, Glitnir Eiendomsfinans will direct its attention to the sale of loan products. [ 7 ]

8 In the first half of 2007, the Norwegian authorities adopted new regulations governing bonds with pre-emptive rights, which will permit credit institutions to issue this type of well-secured bond. BNbank has established its own credit institution, BN Boligkreditt AS, which has been granted a licence by the Financial Supervisory Authority of Norway to use bonds with pre-emptive rights as a source of funding. The BNbank Group plans to use this funding possibility in the first quarter 2008, although the situation in the credit markets will determine when. This will allow the Group to diversify its borrowing options and increase the number of potential bond investors. It will also permit competitive financing of home loans, and make possible a stable source of finance for this activity. Through Glitnir Privatøkonomi and Glitnir Eiendomsfinans, the Bank has a presence in all the most important areas of the country. The Bank s role in the personal banking market will be to offer banking products via telephone and Internet banking, and to be an efficient production entity for banking products to all distribution channels. In order to create optimally efficient operations within these areas, the Bank has decided to concentrate the entire personal banking business in Trondheim. In addition, through the use of technology, its own risk classification system and other measures, the aim is to further improve the Bank s efficiency. In the second quarter 2007, BNbank launched the new loan product SeniorLån, which is aimed at customers aged 60 and over who own their own homes in a central location. SeniorLån allows borrowers to release some of the equity in their homes, while giving them the security of being able to remain living in their own homes for the rest of their lives. No interest or instalments are paid as long as the borrower resides in the property. The market has shown plenty of interest in this product. The Bank also launched a number of new products in deposit accounts and payment services in The Glitnir Brukskonto current account has a competitive rate of interest and there are no charges on self-service banking such as Internet banking, cards and electronic invoicing. This has placed the account among the best in the market. Through the Glitnir Sparekonto savings account, the Bank offers one of the market s best bank savings accounts. Both products have been well received by the market. The task of making the public more aware of BNbank and its products is an important one. Surveys show that BNbank has satisfied customers, although the same surveys also show a relatively low awareness of BNbank among those who are not our customers. Relationship with Glitnir Apart from BNbank, Glitnir has several other subsidiaries operating in the Norwegian market. BNbank uses the competence and resources within the Glitnir Group to realise BNbank s strategy and ambitions. All transactions between the Bank and other Glitnir companies are effected on normal commercial terms and in accordance with normal commercial principles. Interest rates in was marked by rises in interest rates. Norges Bank (Central Bank of Norway) raised the key interest rate by 0.25 percentage points seven times during the year. As a result, the interest rate on three-month Norwegian treasury bills rose from 3.8% at 1 January to 4.9% at 31 December The average rate on three-month Norwegian treasury bills was 4.6% in 2007, compared with 3.1% in Also long interest rates rose during 2007, although the increase was not as great as for short interest rates. The interest rate on 10-year Norwegian government bonds was 4.5% at 1 January. Following a rise in the first half-year, the rate fell slightly in the second-half year, and ended at 4.7% at 31 December The yield curve in the Norwegian interest rate market became considerable flatter as 2007 progressed, and short interest rates were slightly higher than long interest rates as the year drew to a close. INTEREST RATES IN NORWAY IN /07 02/07 03/07 04/07 05/07 06/07 07/07 08/07 09/07 10/07 11/07 12/07 10-yr givt. bonds Risk Management 3-mnth T bills BNbank s earnings have been characterised by stability over time compared with other banks. Part of the Group s corporate strategy is to maintain a low risk profile in all its activities. This policy remained unchanged through In 2007, the Board adopted a general risk strategy which among other things determines the principles for the way in which BNbank relates to risk and defines risk tolerance. On the basis of the general risk strategy, the Board has adopted guidelines for managing all the relevant types of risk. These include risk tolerance, limits, choice of risk monitoring method, and reporting requirements. The principles established for risk management apply for the entire Group. The Board receives regular status reports on all relevant risks as well as an annual risk analysis. This report analyses the risk situation and identifies the most important risk factors. The risk analyses comprise both risk exposure and risk management/ control. Where there exist acceptable methods for quantifying risk, that is done. Risk of a more qualitative nature is assessed qualitatively. The risk analysis is an integral part of the Bank s strategy process and a basis for discussion of strategy within the Bank. [ 8 ]

9 The Group has no trading activity in financial instruments as defined by the Financial Supervisory Authority of Norway. Nor does the Group have any stock market exposure. New capital adequacy rules for banks (Basel II) came into force with effect from Financial institutions with low credit risk and good risk management systems may be subject to a lower capital base requirement under the new rules. The Group aims for its risk classification system to bring benefits such as better use of available information in the credit process and improved risk measurement. BNbank also aims to use this system in capital adequacy-related contexts. BNbank is planning to use the advanced internal ratings-based (IRB) method for the majority of the Bank s loan portfolio. In connection with the merger between BNbank and Glitnir Bank ASA, a transitional arrangement will be established for the additional loan portfolio. In connection with the reorganisation of Glitnir s Norwegian banking operations, risk management will be adapted to the activity concerned. An assessment of the most important risks is provided below. Credit risk Credit risk in the loan portfolio is a product of two factors, both of which must be present if a loss is to arise. One factor is the possibility that the borrower will be unable to repay the loan. The other is that the value of the underlying asset will be insufficient to cover the amount owed to BNbank in the event of default and subsequent realisation of the asset. Corporate borrowing Creditworthiness assessments place emphasis generally on the borrower s financial position, financial results/cash flow, ability to pay, amount of equity, utility of the collateral, financial soundness of tenants, and property location. For the most part, BNbank finances fully developed properties, i.e. properties leased out to one or more tenants. BNbank s first line of defence against impairment losses is therefore the financial performance of a broadly composed portfolio of tenants. The general economic trend in Norway will therefore have an impact on the trend in non-performing loans. The risk of non-performing loans and impairment losses among corporate borrowers is considered moderate. Price developments in the property market have led to a rise in value of many of the properties used as security. At the same time, the Bank s experience is that impairment losses frequently arise on loans given during an economic boom period. Personal borrowing The financial position of Norwegian households is still good overall, despite rising interest rates. These are factors which will keep defaults at a low level, also among the Bank s personal customers. Most of the loans given to personal customers are secured by a mortgage on residential property. The Bank s credit policy requires the property to be centrally located. House prices continued rising in 2007, although with a falling tendency towards the end of the year. Historically, house prices are high in relation to consumer prices and rents, but more moderate viewed in the light of developments in households disposable income. 76% of the home loan portfolio consists of loans secured on up to 60% of the appraised value of the mortgaged property at the time the loan is granted. The risk of non-performing loans and losses among personal borrowers is considered very low. See also Notes 13 and 17 to the financial statements for more information about non-performing and doubtful loans, as well as repossessed properties. Risk classification In 2006, BNbank began using a new risk classification system for loan commitments. The risk classification models used by the Bank classify the loan commitments in relation to the probability of default and the estimated loss which may arise from default. Different models are used, depending on what is considered to be the most significant risk factors relating to the loan. The models use different quantitative methods, such as simulation and logistical regression. In the case of business loans, quantitative methods are used in combination with qualitative analyses. Emphasis has been given to developing systems that are well adapted to the characteristics of the loans in BNbank s portfolio. This is important, both in order to carry further the fundamental ideas on which the Bank s credit work is based and to ensure broadest possible application of the system for control and management. The risk classification system and analysis of risk in the loan portfolio, as well as the new capital adequacy rules, are described in more detail in Notes 28, 30, 31 and 32. The portfolio divided into classes of risk, and other relevant information from the system, is reported regularly to the Board. [ 9 ]

10 Average accounting losses Below follows an analysis of accounting losses over a business cycle for the Group s operations. The analysis is based on historical figures. It should be emphasised that there is uncertainty attached to assessing losses. The figure below shows the trend in non-performing loans from 1990 to 2007 inclusive. DEFAULTS OVER 3 MONTHS AS A PERCENTAGE OF LOANS Impairment losses follow the same historical trend as for non-performing loans. Impairment losses in BNbank reached their peak in Despite this, BNbank made a profit in that year. The table below compares impairment losses in BNbank during this period with impairment losses in the other Norwegian commercial banks viewed as a whole. Impairment losses as a% of gross lending (average per year) BNbank Other commercial banks * * *) 2006 for Other commercial banks The level of losses over time in BNbank is closely linked to macroeconomic trends. The extent of the Group s losses between 1988 and 1993 was chiefly the result of an unusually strong economic recession with high unemployment and major falls in property prices, combined with high interest rates For the period 1988 to 2007, the Group had an average annual loss of 0.08% of its total loans and advances, broken down into 0.04% in personal and home loans (including loans to housing co-operatives) and 0.09% in corporate loans and advances. The level of default was at its highest during the crisis in the Norwegian banking industry at the start of the 1990s. Following a sharp decline in defaults, they rose again slightly up until 2002, but have fallen again considerably in the past few years. The default trend in the past few years is related to the generally good trend in the Norwegian economy and the low interest rates, which have had a positive effect on the ability of borrowers to service their debt. The figure below shows BNbank s impairment losses as a percentage of gross lending from 1988 to The figure below shows the loan portfolio broken down into risk groups measures according to expected losses. BREAKDOWN OF RISK GROUPS SHARE OF PORTFOLIO 60% 50% 40% 30% BAD DEPTS PERCENTAGE OF LOANS % 10% 0% 0%-0.01% 0.01%-0.05% 0.05%-0.20% 0.20%-0.50% > 0.50% INTERVALS (EXPECTED LOSSES) Home Busines Total [ 10 ]

11 Liquidity risk BNbank has a lower deposit-to-loan ratio than the average among Norwegian banks. This is because BNbank has a much shorter history as a bank authorised to accept deposits than as a credit institution with a lending activity. This means that BNbank is, relatively speaking, more dependent on the money and securities markets as a source of finance. As in 2006, growth in deposits exceeded growth in lending in There was good access to liquidity in the securities market and the bank syndicate market. The Board has adopted general guidelines for controlling liquidity risk, including setting requirements for measuring, monitoring and reviewing risk. In addition, the Board has adopted a contingency plan for use in any liquidity emergency, and has also set limits for net financing requirements within given time horizons. The Group s liquidity position is reported monthly to the Board. Stress tests are also carried out to monitor the liquidity position. Glitnir Bank ASA has a deposit-to-loan ratio of 84% measured in relation to loans at the end of 2007, while the equivalent figure for BNbank is 35%. In connection with the merger, the deposit-to-loan ratio will increase to 41%. An important part of the financing strategy will be to maintain and strengthen the Bank s deposit-to-loan ratio. Another important part of the future financing strategy will be to use the Bank s well secured loans as a basis for funding. A key element here will be the growth of the market in bonds with pre-emptive rights. The Bank s lending for commercial and business properties will be continued by Bolig- og Næringskreditt AS, within the limits of the company s articles of association. The company will also continue financing itself in its own name. Viewed overall, the Bank has a good foundation for future financing of its activities. Interest rate risk and foreign exchange risk The Group s interest rate and foreign exchange exposure is limited. The Group s borrowings shall have the same fixed interest rates as the Group s loan portfolio. Any differentials are equalised with the use of hedging instruments. In the same way, foreign exchange risk as a result of the Group s currency borrowing and lending is reduced with hedging instruments. The Group s unrestricted funds (equity) have a short investment horizon. This means that the return on these funds will vary with short-term interest rates. The Board has adopted guidelines and set limits for the Group s interest rate and foreign exchange exposure. Interest rate and foreign exchange exposure is reported monthly to the Board. The Board s guidelines for controlling financial risks are monitored by a separate committee. Commercial risk Commercial risk is defined as the risk of loss owing to changes in external conditions such as the market situation or the authorities regulatory decisions. The definition also includes reputation risk. The most important factors that can be affected by changes in the market situation or the authorities regulatory decisions are volume and margins in the deposits/funding and lending businesses, impairment losses and operating expenses. The Group s unrestricted funds (equity) finance interest-bearing assets with short-term fixed interest rates so that, viewed in isolation, profits will vary with the short-term interest rates. The table below shows a sensitivity analysis for these factors. It must be emphasised that the analysis does not capture the correlation between the different factors and should only be regarded as an estimate of the individual factors importance. BNbank s pre-tax operating profit for 2007 was NOK 316 million. The table below shows the change in operating profit before tax as a consequence of various positive changes. The effect of similar negative changes will be the same but with a minus sign. Lending volume 10% higher through whole year + NOK 33 million Deposit volume 10% higher through whole year + NOK 11 million Lending margins 0.10 per-centage points higher through whole year Deposit margins 0.10 per-centage points higher through whole year Operating expenses1 10% lower + NOK 46 million + NOK 16 million + NOK 22 million Short-term interest rate level 1 percentage point higher through whole year + NOK 24 million 1 Excluding operating expenses in Glitnir Privatøkonomi NOK 1 million was carried to expense under Impairment losses in If impairment losses in 2007 had been equal to the average percentage of impairment losses during the period 1988 to 2007, impairment losses would have totalled NOK 27 million for 2007, which is 9% of the operating profit before impairment losses for Operational risk The Group seeks to keep operational risk at a low level through the use of standardised products and services, the maintenance of a small, flexible organisation with clear division of responsibilities, and good working procedures and management and control systems. The Board receives an annual review of operational risks within the Group, and is also regularly updated on any significant operational disruption or deviation. [ 11 ]

12 Board activities The Board of Directors of BNbank held 11 board meetings in The Board also receives reports on the Group s development and performance in months when there are no board meetings. At a meeting of the Supervisory Board on 13 March 2007, Borger A. Lenth stepped down from the Board of Directors. The Board of Directors wishes to thank Mr Lenth for all the work he has done on behalf of BNbank since 1998, eight years of which were spent as Chair of the Board. For an overview of current members of the Board of Directors and of Group Executive Management, see Note 38 to the financial statements. Working environment and organisation The Group employed 229 full-time equivalents at 31 December 2007, including 114 full-time equivalents at Glitnir Privatøkonomi. For the banking business, this is an increase of 11 fulltime equivalents from year-end The increase is largely due to more staff being taken on in sales functions in personal banking. Since 1999, the Group has operated a performance-related pay scheme for all employees. The aim of the scheme is to inspire enthusiasm and effort in order to further increase the value of the company. The Group has few employees and all results achieved are therefore strongly linked to each individual s performance. The Board wishes to thank all employees for their efforts in 2007 and has made provision of NOK 8 million for performance-related pay. See Note 6 for further details of the scheme. The working relationship between management and employees is good. The Group has a Working Environment and Liaison Committee, which consists of representatives from group management and the salaried employees association. Topics discussed at the meetings held in 2007 included gender equality and the future organisation of the Norwegian part of the Glitnir Group. Sickness absence in the banking business was 4.7% in 2007, compared with 5.9% in the rest of the Norwegian finance industry (the last-mentioned figure was annualised at 30 June 2007). For 2006, sickness absence within the Group was 2.3%. The increase on 2006 is largely due to a rise in long-term sick leave that is not occupationally related. There were no significant injuries or accidents in The Group s objective is to be an equal opportunities workplace with gender equality between women and men. There shall be no discriminatory treatment on grounds of gender. Of the company s 123 employees, 62 are women. The Group aims to achieve a balance between numbers of male and female employees at all levels of the organisation, but there are still few women in management positions within the Group. There are no women in the group executive management team, and out of a total of 12 departmental managers three are women. BNbank s Board of Directors consists of two women and four men, of whom one man is an employee representative. The target of 40% shareholder-elected female representation on the Board has thus been fulfilled. Several employees undertook further education at college and university level in 2007, with more women than men undertaking further education. The Board takes a positive view of this enhancement of competence among employees. Gender equality was the theme of the Group s annual working environment survey. The results of the 2007 working environment survey show that the Bank has well-motivated employees and that there is a good degree of worker satisfaction. The Board considers the working environment within the Group to be good. The Group uses no products or energy sources in its operations that have a significant adverse impact on the environment. The Group s operations are therefore not of such a nature as to pollute the external environment. Outlook The forthcoming merger between BNbank and Glitnir Bank ASA will provide opportunities for increased growth and improved profitability. The establishment of a new management team and organisational structure will improve management capacity and strengthen the governance of Glitnir s activities in Norway. The aim of the merged bank is to serve as an attractive alternative in selected customer segments to financial groups offering a broad range of financial products and services. The merger between the two banks will provide a sound foundation for maintaining and developing the value that both banks have today. Both banks enjoy a good position in selected markets, and there is potential for growth in several of the segments in which the new bank will operate. The Board also believes that the new bank as a whole will have a good basis for funding its activities, although continuing unrest in the credit markets may have a negative impact on funding possibilities. Deposits will therefore be an important area of focus in Future growth in margins and volumes in the lending business is burdened with uncertainty. Interest rates, economic conditions, the general demand for credit, and competition in the market all have an effect. Profitability will continue to be prioritised in preference to lending growth. To make the Bank less dependent on net interest income, there will be a continued focus on increasing other forms of income. There were a great many transactions in the commercial property market in 2007 and property prices have risen. The Board expects rises in interest rates to raise the income return requirement in the commercial property market. Much of the rise in value in the market has therefore probably been extracted. However, against the background of the strong economic situation in Norway, the Board does not expect to see any significant fall in rent prices. The Bank will continue to remain highly focused on the quality of the loan portfolio. The economic position of Norwegian households is good overall. There are prospects of low unemployment and moderate growth in real income over the next few years. On the basis of the Bank s strengthened distribution and competitive terms, the Board expects to see continued growth in the personal banking market. The merger of the two banks is planned to take place in March The Bank will provide further details of the outlook for the merged bank in the interim report for the first quarter [ 12 ]

13 Trondheim, 12 February 2008 Frank O. Reite (Chair) Roar nyhus (Deputy Chair) Bjarni Ármannsson Guðrún Gunnarsdóttir Grete Komissar Bård idar kvam Gunnar Jerven (Deputy Chair) [ 13 ]

14 income statement nok million Note Interest and similar income Interest expense and similar charges Net income from interest and credit commissions Income from interests in associates Income from interests in group companies Change in value financial instr. carried at fair value Other operating income, gains and losses Total other operating income Salaries and general administrative expenses 6, 7, 8, Ordinary depreciation Other operating expenses Other expenses, gains and losses Total other operating expenses Operating profit before impairment losses Impairment losses on loans and advances Operating profit after impairment losses Tax charge Net profit for the year [ 14 ]

15 balance sheet at 31 december nok million Note Assets Deferred tax asset Intangible assets 10, Interests in group companies Interests in associates Tangible fixed assets Repossessed properties, Loans and advances 16, 29, 30, 31, Prepayments and accrued income 21, 29, 30, 31, 32, Financial derivates 18, 29, 30, 31, Short-term investment securities 19, 29, 30, 31, Cash in hand and receivables from credit institutions 15, 29, 30, 31, Total assets Equity and liabilities Share capital Retained earnings Total equity Minority interest Deferred tax Subordinated loan capital 26, 29, 30, 31, Liabilities to credit institutions 22, 29, 30, 31, Debt securities in issue 24, 29, 30, 31, Accrued expenses and deferred income 14, 25, 29, Other short-term liabilities Financial derivatives 18, 29, 30, 31, Customer deposits & accounts payable to customers 23, 29, 30, 31, 31, Total liabilities Total equity and liabilities Secured debt and guarantees 33 Trondheim, 12 February 2008 Frank O. Reite (Chair) Roar nyhus (Deputy Chair) Bjarni Ármannsson Guðrún Gunnarsdóttir Grete Komissar Bård idar kvam Gunnar Jerven (Deputy Chair) [ 15 ]

16 Changes in equity group Share minority other contrib. other total nok million CAPital interests CAPitl equity equity Balance Sheet at 1 January Dividend paid for Result for the year Minority interests Balance Sheet at 31 December Dividend paid for Result for the year Minority interests Other paid-up equity - share option scheme from Glitnir Banki hf Gain related to acquisition of associate of subsidiary Balance Sheet at 31 December parent bank Share other contrib. other total nok million CAPital CAPitl equity equity 1 Balance Sheet at 1 January Dividend paid for Result for the year Balance Sheet at 31 December Dividend paid for Result for the year Minority interests Other paid-up equity - share option scheme from Glitnir Banki hf Balance Sheet at 31 December The reserve for unrealised gains is included in Other equity. At provision had been made totalling NOK 3 million. [ 16 ]

17 cash flow statement nok million Cash flows from operating activities Interest/commission received and fees received from customers Interest/commission paid and fees paid to customers Interest received on other investments Interest paid on other loans Receipts/payments (-) on loans and advances to customers Receipts/payments(-) on customer deposits and debt Receipts/payments(-) on liabilities to credit institutions Receipts/payments(-) on securities in issue Receipts on written-off debt Other receipts/payments Payments to suppliers for goods and services Payments to employees, pensions and social security expenses Tax paid Net cash flow from operating activities Cash flows from investing activities Receipts/payments(-) on receivables from credit institutions Receipts/payments(-) on short-term securities investments Receipts/payments(-) on long-term securities investments Sale of operating assets etc Purchase of operating assets etc Net cash flow from investing activities Cash flows from financing activities Subordinated loan capital receipts Subordinated loan capital repayments Dividends paid Change in capital (share issues, etc.) Net cash flow from financing activities Net cash flow for the period Cash and receivables from central banks at 1 January Cash and receivables from central banks at 31 Dec. * * In the case of the Parent Bank, cash and receivables consist of deposits in Norges Bank and the Parent Bank s cash in hand. [ 17 ]

18 notes to the accounts Note 1. Accounting policies etc. Information about the company Bolig- og Næringsbanken ASA (BNbank) is a public limited company, established and domiciled in Norway, and with its registered office in Trondheim. BNbank also has a branch office in Oslo. The Bank has been part of the Icelandic banking group, Glitnir, since 1 April Within the framework of the Bank s articles of association and subject to the legislation that is in force at any time, the Bank may carry on all business and perform all services that it is customary or natural for banks to perform. Basis for preparation of the financial statements The BNbank Group and Parent Bank present the consolidated annual financial statements for 2007 in compliance with International Financial Reporting Standards (IFRS), as approved by the EU. IFRS 8 Segment Reporting will not come into effect until 1 January 2009, for which reason this standard has not been applied to the 2007 financial statements. Otherwise no other published IFRS standards and interpretations that have not yet come into force have been applied to the financial statements. Changes in accounting policies BNbank s financial statements for 2007 are the first set of annual financial statements prepared under IFRS. The first IFRS-compliant financial statements were reported for the first quarter There have been no changes in accounting policy under IFRS since the reporting of the first-quarter 2007 financial statements. The actual transition from generally accepted accounting principles in Norway (N GAAP) to IFRS does however involve considerable changes in accounting policies. These changes are described in a separate document entitled Transition to International Financial Reporting Standards that was published in connection with the publication of the first-quarter 2007 financial statements. The main substance of the transition document is reproduced in Note 37. Comparative figures All amounts stated in the income statement, balance sheet, cash flow statement and disclosures are given with one year s comparative figures. Comparative figures are prepared on the basis of the same principles as figures for the most recent period. Discretionary measurements, estimates and assumptions In applying the consolidated accounting policies, the Bank s management have in some areas exercised discretion and based the accounting on estimates and assumptions regarding future events. There will naturally be an inherent uncertainty associated with accounting items based on discretionary estimates and assumptions regarding future events. In exercising discretion and determining assumptions concerning future events, the management will have regard for the available information at the balance sheet date, historical experience with similar valuations, and market and third-party assessments of the matters in question. However, although the management use their best discretion and build on the best available estimates, in some cases the actual outcome may differ significantly from what the accounting was based on. Measurements, estimates and assumptions that represent a significant risk of material change in the capitalised value of assets and liabilities during the next accounting year, are discussed below. Fair value of financial instruments The fair value of financial instruments is based partly on assumptions that are not observable in the market. This applies particularly to setting a relevant premium for credit risk when determining the fair value of fixed-rate securities in the form of borrowing, lending and securities issued by others. In such cases, the management have based their measurements on the information available in the market, combined with their best discretionary estimates. Information of this kind will include credit evaluations made by other credit institutions. Write-downs on loans Write-downs for impairment losses are made when there is objective evidence that a loan or group of loans is impaired. The write-down is calculated as the difference between the capitalised balance sheet value and the net present value of estimated future cash flows discounted by the effective interest rate. Impairment losses on loans and advances are based on a review of the Bank s loan and guarantee portfolio according to the rules for valuing loans issued by the Financial Supervisory Authority of Norway. The Bank specifically determines all impairment losses on loans and guarantees at the end of every quarter. Non-performing loans and doubtful commitments are followed up with continuous assessments. Historically, BNbank s impairment losses have been small. Goodwill Goodwill is tested annually for impairment. The recoverable amounts for cash-generating units are determined by calculating the value in use. The calculations require the use of estimates. Goodwill in BNbank arises from the acquisition of Glitnir Privatøkonomi AS (formerly Norsk Privatøkonomi), and the cash-generating unit for goodwill has therefore been determined on the basis of that company. [ 18 ]

19 Pensions The present value of recognised pension commitments depends on the determination of financial and actuarial assumptions. Changes in such assumptions will give rise to changes in recognised amounts for pension commitments and the pension cost. Expected return is determined on the basis of historical return experience and how the pension assets in question are invested with a view to risk and the type of securities involved. The discount rate is determined on the basis of the interest rate on long-term Norwegian government bonds at the balance sheet date. Other important assumptions for the pension commitments are annual wage growth, annual adjustment of pensions, expected adjustment of the Norwegian national insurance basic amount (G), and the tendency to early retirement drawings under the AFP scheme. For such assumptions and for return and discount rate the management will have regard for the guidance and recommendations available at the balance sheet date. In the case of demographic assumptions, estimates and discretion will be based on experience material available from the actuaries. Period of use for tangible fixed assets and intangible assets with a limited useful life Estimates are made of the expected residual value, useful life and related depreciation rates for tangible fixed assets and of amortisation rates for intangible assets with a limited useful life. The expected useful life and residual value are measured at least once a year. Accounting policies Consolidation The consolidated accounts comprise the Parent Bank Bolig- og Næringsbanken ASA (BNbank), the wholly owned subsidiaries Bolig- og Næringskreditt ASA (BNkreditt), BN Boligkreditt and Glitnir Eiendomsfinans AS, as well as the partly owned subsidiary Glitnir Privatøkonomi ASA (formerly Norsk Privatøkonomi ASA). Uniform accounting policies have been applied for all companies included in the consolidated accounts. The consolidated accounts are required to show the assets and liabilities, financial position and results for the companies in the Group, as though they were one economic entity. All inter-company accounts, share ownership, significant transactions and gains/ losses arising on the transfer of existing assets, between the companies in the Group, have therefore been eliminated. Treatment of acquisitions Upon acquisition of control in an enterprise, all identifiable assets and liabilities are stated at fair value in accordance with IFRS 3. Any positive difference between the fair value of the payment for the purchase and the fair value of identifiable assets and liabilities is stated as goodwill. Associates Associates are companies in which BNbank has a considerable influence. Normally, this will mean a stake of 20% or more. BNbank had two associates in 2006, Bolig- og Næringsmegler AS (BNmegler) and Glitnir Privatøkonomi ASA. During 2007, BNbank disposed of the shares in BNmegler and bought sufficient shares to give it control of Glitnir Privatøkonomi AS. This means that BNbank had no associates at year-end Associates are included in the consolidated accounts using the equity method of accounting. The investment is stated at original cost and subsequently adjusted for changes in the Bank s share of book equity in the associate, and with amortisation and write-downs of excess value over and above book equity. Dividend received is carried as a deduction in the investment. The share of earnings from the associate is recognised in the income statement on a current basis. In the Parent Bank s corporate accounts, associates are accounted for at cost, but with periodic assessments of the need for write-down. Dividend is recognised as income when the dividend is finally adopted. Subsidiaries In the Parent Bank s corporate accounts, subsidiaries are accounted for at cost, but with periodic assessments of the need for writedown. Dividend is recognised as income when the dividend is finally adopted. Recognition of income and expenditure Interest earned from variable-rate loans, including loans with a rolling fixed-rate period, is taken to income over the term of the loan using the loan s effective interest rate. Income from fees and commissions is included in the calculation of effective interest. Interest earned from fixed-rate loans is recognised as interest income as it is earned, and changes in the fair value of expected future cash flows are carried in the income statement through the line for changes in the value of financial instruments carried at fair value. Fees, commissions etc., which are not included in the effective interest rate calculation for borrowings or loans, are recognised in the income statement as they are earned as income or accrued as expense. Premiums/discounts at the early redemption of fixed-rate loans are recognised in the income statement as they arise. Premiums/ discounts at the repurchase of bond issues are recognised in the income statement as they arise. Financial instruments Classification, etc. On initial recognition on the balance sheet, financial instruments will be assigned to a class of financial instruments or assets as described in IAS 39. The various classes defined in IAS 39 are Financial instruments at fair value with value changes carried through profit or loss, Loans and receivables at amortised cost, Liabilities at amortised cost, Held-to-maturity investments at amortised cost and Available-for-sale financial assets with value changes carried against equity. The two last-mentioned classes are normally not relevant for BNbank. [ 19 ]

20 Within the class Financial instruments at fair value with value changes carried through profit or loss, assigning the asset to a class may be obligatory, or the assignment can be voluntary if other specific criteria are fulfilled. In BNbank, all derivatives are obliged to be measured at fair value with value changes carried through profit or loss. In addition, all fixed-rate securities in the bank portfolio will be selected for measurement at fair value through profit or loss, including the Bank s own issued securities and fixed-rate borrowing and lending. In this context, all securities that have a fixed rate of interest over the entire term will be reckoned as fixed-rate securities. Securities that have a fixed rate on a rolling basis will not be reckoned as fixed-rate securities. Fixed-rate securities are selected for measurement at fair value through profit or loss in order to avoid what would otherwise be accounting asymmetry through the related interest rate hedging instruments being recognised at fair value. In that fair value recognition avoids the most material parts of this accounting asymmetry, the criteria for recognising the instruments at fair value are regarded as fulfilled. All financial instruments in the investment portfolio that are not derivatives will be selected for measurement at fair value through profit or loss. Selection is done on the basis of these securities being followed up and managed on the basis of fair value. There is a documented investment strategy for the investment portfolio. The investment portfolio is the Bank s liquidity reserve and shall be invested in interest-bearing securities with low risk and good liquidity. After account has been taken of the securities liquidity and investment portfolio risk, the objective is for the securities to make optimum contribution to the Bank s net interest income. The results of the investment portfolio are reported monthly to the management. Financial instruments other than those measured at fair value with value changes through profit or loss, will be accounted for at amortised cost using the effective interest rate method. All financial instruments are accounted for initially on the trading date of the instrument (and not the settlement date). Currency Income and expenditure in foreign currencies is translated into Norwegian kroner according to the rate of exchange at the time of the transaction. Balance sheet items in foreign currencies are mainly hedged by corresponding items on the opposite side of the balance sheet or by hedge transactions. Forward-exchange contracts are used only as hedges and are entered into in order to hedge identified items. Assets and liabilities in foreign currencies are translated into Norwegian kroner at the Bank s middle rates for currencies on the balance sheet date. Forward-exchange contracts are measured at fair value with changes in value carried through profit or loss. Loans, impairment losses and provisions for impairment losses measured at amortised cost The Group capitalises loans on the balance sheet at cost at the date of establishment. Cost includes the principal of the loan, as well as fees and any direct costs. In subsequent periods, loans are measured at amortised cost, and interest income is recognised as income according to the effective interest rate method. The effective interest rate is the rate by which the loan s cash flows are discounted over the expected term of the loan at the amortised cost of the loan at the date of establishment. The effective interest rate method also means that interest on written-down loans is recognised as income. For such loans, the internal rate of interest at the date of establishment is adjusted for changes in interest rate up until the date of the write-down. Interest is recognised as income based on the written-down value of the loan. Write-downs for impairment losses are made when there is objective evidence that a loan or a group of loans has become impaired. The write-down is calculated as the difference between the balance sheet value and the net present value of estimated future cash flows discounted by the effective interest rate. In the income statement, the item Impairment losses on loans and advances consists of write-offs, changes in write-downs on loans and provisions for guarantees, as well as recoveries on previous write-offs. Non-performing loans Non-performing loans are defined as loans where the borrower defaults on the loan agreement for reasons not due to normal delays or other chance circumstance affecting the borrower. Loans that are not serviced 90 days after the due date are in all events considered as non-performing loans. Doubtful commitments where bankruptcy or debt settlement proceedings have been instituted, debt recovery has been instituted through the courts, distress has been levied, the debtor s assets have been attached, or where there are other circumstances such as a failure of liquidity or solvency or breach of other clause of the loan agreement with the Bank, are also defined as non-performing loans. Renegotiated loans are treated as doubtful loans as they are loans that could otherwise become non-performing loans. Write-offs Write-offs are impairment losses on loans which are considered final and which are booked as write-offs. These include losses where the Group has lost its claim against the debtor as a result of bankruptcy or insolvency, affirmed voluntary arrangement, unsuccessful execution proceedings, final and enforceable judgment, or debt relief. This also applies in those cases where the Bank has in some other way stopped enforcement of payment or waived its claim for payment of some of the loan or the entire loan. [ 20 ]