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 ]

21 Loans and impairment losses measured at fair value Fixed-rate loans are capitalised on the balance sheet at fair value with changes in value carried through profit or loss. With measurement at fair value, losses are expressed through changes in the credit risk premium in the discount rate, and through adjustments of expected cash flows on which the discount is based. The objective evidence of a decline in value or impairment, which forms the basis for writing down the loan to amortised cost, is the same type of event which forms the basis for changed assessments of credit risk and expected cash flows at fair value estimations in the case of loans measured at fair value. Impairment losses connected with loans measured at fair value are presented as part of the fair value change on loans. Bonds and certificates Classification Bonds and certificates issued by others are classified mainly as short-term investment securities. Bond loans where the decision to acquire the bonds is taken on the basis of ordinary lending criteria are classified as loans. The accounting treatment of bond loans is thus analogous with that of ordinary loans. Own bonds and certificates are deducted from the bond debt and certificate debt respectively. Bonds and certificates Measurement of investment portfolio Bonds and certificates included in the investment portfolio are classified voluntarily at fair value with changes in value carried through profit or loss. Repossessed properties Properties which are repossessed through mortgage foreclosure as a result of non-performing loans, and where the Group does not intend to keep the property for long-term ownership or use, are presented in a separate item on the balance sheet. Repossessed properties are valued at the date of repossession at the lower of cost or estimated market value. In subsequent accounts the properties are valued at the lower of this purchase cost or estimated market value on the balance sheet date. Current changes in value and losses on the sale of repossessed properties are recognised as write-offs on loans, while realised gains are recognised as recoveries on previous write-offs up to the amount previously recognised in the accounts as a write-off on the loan in question. When a plan is adopted for disposing of repossessed properties, the properties will be presented as held for sale, on a separate line in the balance sheet. Realised gains in excess of this are presented as gains on the sale of assets on a separate line of the income statement. Financial derivatives Financial derivatives are obliged to be measured at fair value with changes in value carried through profit or loss. Where BNbank is concerned, such financial instruments are equity options, equity-linked options, forward exchange contracts, future rate agreements (FRAs), interest rate swaps, and combined interest rate- and currency swaps. Bonds and certificates In general Bonds and certificates issued by others consist of the investment portfolio and holdings acquired as a hedge against interest rate risk on the funding side. In the case of own bonds and certificates, a distinction is drawn between acquisition for refinancing purposes and the purchase/sale of own bonds in connection with the market promotion included in the investment portfolio. Bonds and certificates Estimation of gains/losses When estimating gains/losses on the sale of bonds and certificates, the opening value is set as the weighted average purchase cost of the entire holding of the bonds/certificates in question. Financial guarantees Financial guarantees are measured at fair value with changes in value carried through profit or loss. Financial instruments measured at fair value Financial instruments which are sold in an active market are valued at observed market prices. Financial instruments which are not sold in an active market are assessed using a valuation technique. Valuation techniques are based on recent transactions between independent parties, reference to instruments with approximately the same content or discounted cash flows. As far as possible, valuations are based on externally observable parameter values. All loans, borrowings and deposits which are measured at fair value are valued on the basis of discounted cash flows. Where the measurement of financial instruments at fair value is performed using a valuation technique, the valuation can potentially give rise to a gain or a loss on day one if the fair value according to the valuation model differs from the transaction price. Such gains and losses cannot be recognised in the accounts on day one. When measuring loans at fair value, BNbank will calculate a customer-specific margin on each individual customer commitment, and this margin will be included in all subsequent valuations, so that what might otherwise have given risen to a day-one gain or a day-one loss will be amortised over the entire term of the loan. In the case of borrowings and securities in the investment portfolio, the result of the valuation is checked against the transaction price, and where there are not immaterial differences a specific supplement will be calculated in the discount rate per contract that is added to the discount rate in all subsequent valuations, so that the day-one gain or day-one loss is amortised over the entire term of the security. [ 21 ]

22 Financial instruments Classification of accrued interest Accrued interest is shown throughout together with the value of the related financial instruments, both for borrowings, loans, derivatives and interest-bearing securities issued by others. In the case of borrowings and loans, this classification applies irrespective of whether the instrument is measured at amortised cost or fair value. Tangible fixed assets Tangible fixed assets are carried on the balance sheet at original cost less accumulated depreciation and write-downs. Ordinary depreciation is calculated on a straight-line basis over the expected useful life of the operating asset. If the fair value of an operating asset is substantially less than book value, and this is owing to circumstances that cannot be considered temporary, the operating asset is written down to fair value. Share-based payments The Glitnir Group has a share-based payment plan (share options) which also encompasses senior executives of BNbank. Settlement is made with shares in Glitnir bank hf. The fair value of the services which BNbank has received from the senior executives in return for the allotted share options is recognised in the accounts as an expense. The total amount to be carried to expense over the earning period is estimated based on the fair value of the allotted share options. The fair value of options is recognised as debt against equity. When making settlement to the Parent Bank for the value of such options, the settlement is recognised against equity. Pension costs and liabilities In line with IAS 19, both liabilities relating to group pension schemes with life insurance companies and unsecured liabilities are included in the accounts. The net pension cost for the year consists of the present value of the year s pension contributions and interest expense on the pension liability, less the anticipated yield on the pension assets and adjusted for the distributional effects of changes in pension plans, estimates and variance. The net pension cost is included in the item Salaries and general administrative expenses. Estimate variances are accounted for over the average remaining pension contribution period as long as the variance exceeds the higher of 10 per cent of the pension assets or 10 per cent of the pension liability. In the event of pension plan changes, effects relating to previous periods pension contributions are taken to expense in the period in which the plan change arises, while the unpaid contributions are accrued over the remaining period of service. Tax Tax is accrued as an expense irrespective of the date it is paid. The tax charge thus reflects the year s and future tax payable as a result of the year s activity. Tax which it is estimated will be assessed on the year s profit is included in the tax charge for the year and designated as tax payable. Deferred tax is calculated on the basis of differences between reported accounting and taxable profits that will be off-set in the future. Positive (tax-increasing) and negative (tax-reducing) temporary differences within the same interval of time are valued against one another. Any net deferred tax asset is stated as an asset on the balance sheet when it is probable that the negative temporary differences will be realised. Presentation of dividend The proposed distribution of dividend is presented as equity until a final resolution to distribute the dividend has been made. Distributed dividend is then presented as provision for dividend until the dividend has been paid. Provisions, contingent assets and contingent liabilities A provision is recognised only if it is a present obligation (legal or constructive) resulting from a past event, it is probable that an outflow of resources from the enterprise embodying economic benefits would be required to settle the obligation, and a reliable estimate can be made of the amount of the obligation. Provisions are recognised in the amount that expresses the best estimate of the expenditure required to settle the present obligation at the balance sheet date. Where the effect is material, account is taken of the time value of money when calculating the amount of provision. There is no recognition of contingent assets or contingent liabilities. Cash The line for cash includes cash in hand and deposits and receivables from credit institutions and central banks. Segments BNbank s lending business is nationwide, although lending is mostly concentrated to urban and suburban areas. As risk and return do not vary greatly between the various business areas, segments and geographical areas, segment information is not reported according to business area, sector or geographical area. [ 22 ]

23 [ 23 ]

24 2. Interest and similar income nok million Interest from financial instruments carried at amortised cost: Interest and similar income from loans to and receivables from credit institutions Interest and similar income from receivables from subsidiaries Interest and similar income from loans to and receivables from customers Interest and similar income from certificates and bonds Total interest from financial instruments carried at amortised cost Interest from financial instruments selected for fair value carrying through profit or loss: Interest and similar income from loans to and receivables from credit institutions Interest and similar income from receivables from subsidiaries Interest and similar income from loans to and receivables from customers Interest and similar income from certificates and bonds Total interest from financial instr selected for fair value carrying through profit or loss Total interest and similar income Interest expense and similar charges nok million Interest expense for financial instruments carried at amortised cost: Interest expense and similar charges on liabilities to credit institutions Interest expense & similar charges on cust deposits and accounts payable to customers Interest expense and similar charges on securities issued Interest expense and similar charges on subordinated loan capital Other interest expense and similar charges Total interest expense for financial instruments carried at amortised cost Interest expense for financial instruments selected for fair value carrying through profit or loss: Interest expense and similar charges on customer deposits and accounts payable to customers Interest expense and similar charges on securities issued Interest expense and similar charges on subordinated loan capital Total interest expense for fin instr selected for fair value carrying through profit or loss Total interest expense and similar charges [ 24 ]

25 4. Change in value of financial instruments carried at fair value nok million Change in value interest rate derivatives carried oblig at fair value through profit or loss Change in value currency derivatives carried oblig at fair value through profit or loss Change in value comb int. rate & currency deriv. carried oblig at fair value thr profit/loss Change in value equity-linked opt & equity opt carried oblig at fair value thr profit/ loss Change in value deposits selected for fair value carrying through profit or loss Change in value borrowings selected for fair value carrying through profit or loss Change in value loans & advances selected for fair value carrying through profit or loss Change in value short-term financial investments selected for fair value carrying Total change in value of financial instruments carried at fair value Other operating income, gains and losses nok million Guarantee commission Income from payment transfer commissions Total income and commission from banking services Commission charges on payment services and loan brokerage Total commission charges and banking services expenses Net commission income/charges Other operating income: Realised exchange gains/losses(-) bonds and certificates Realised exchange gains/losses(-) forward exchange contracts Exchange profit/loss borrowing and loans carried at amortised cost Exchange profit/loss borrowing and loans selected for fair value carrying Operating income from real property Miscellaneous operating income Total other operating income Total other operating income, gains and losses Net gain/loss on foreign exchange is largely attributable to exchange profit/loss effects which arise when borrowing and lending in foreign currencies is translated at the current rate of exchange. Forward exchange contracts and combined interest rate and currency derivatives are carried at fair value with changes in value carried through profit or loss. Exchange gain/loss effects on this line will therefore fully or partially equate to effects with the sign reversed under the line for change in value of financial instruments carried at fair value through profit or loss; see Note 4. [ 25 ]

26 6. Salaries and general administrative expenses nok million Salaries to employees and fees to elected officers Performance related pay Contracted labour Net pension cost Payroll overhead Salaries and other staff costs Computing costs Postage and telephone Office expenses Travel and entertainment Marketing General administrative expenses Total salaries and general administrative expenses Number of full-time employees at 31 December Number of part-time employees at 31 December Number of temporary staff at 31 December Number of full-time equivalents (FTEs) at 31 December Average number of FTEs during the year The Group has a performance-related pay scheme, which includes all permanent staff except for the Managing Director. The Supervisory Board fixes performance-related pay for the Managing Director. Performance-related pay is activated if the Group achieves a certain level of excess return, and is progressive with increased returns. The costs are maximised to the sum of two monthly salaries in 2007 as against three monthly salaries in The costs for 2007 are estimated at approximately NOK 8 million including employer s contributions, whereas the costs for 2006 were NOK 13 million. 50 % of performance pay is paid out in the year after it accrues, while 25 % is paid out in each of the two following years. The two last payments are conditional on the return on equity in the year prior to payment being equal to or higher than the defined minimum return (as a percentage) for the year in which it accrued. 2 See Note 9 for more details. 7. Related party disclosures BNbank has entered into transactions with related parties, as described in this note, and in Note 8. In addition, there are transactions with controlling companies as subsidiaries; compare Note 20. Transactions with subsidiaries are eliminated in the consolidated financial statements. BNbank s Parent Bank is Glitnir banki hf, which is listed on the Icelandic stock exchange and which presents its own consolidated financial statements. Apart from loans given on special conditions to employees and others, all transactions with related parties are entered into on commercial terms. Apart from the transactions identified in this note and Note 8, and eliminated transactions within the BNbank Group, there are no transactions or outstanding matters of significance with related parties. [ 26 ]

27 Remuneration to the Managing Director, Elected Officers and Auditor Remuneration to Senior Executives Group Executive Management consists of senior executives employed by the Parent Bank, and the head of the largest subsidiary. No-cash other Remun. & pension remun. from total pay loans Performance- other taxable premiums the glitnir and and Fees salery related pay 1, 2 payments paid group renum. security Senior Executives Managing Director 3, 4, 5, 6, 7, Deputy Managing Director 3, 7, Director Personal Banking, Business Support and IT 3, 7, Director Business Development and Finance 7, Lawyer 7, Director Corporate Banking Oslo 7, Director Corporate Banking Trondheim & Depository 7, Board of Directors Chair Deputy Chair Other board members Control Committee Jan Kaare Tapper, Chair Other members Total See Note 6 for more details. 2 The note refers to the amount of performance-related pay paid out in the financial year, accrued in previous years. 3 If the employment contract terminates, the pay conditions will be maintained for up to 18 months (contractual termination payment). Income from other sources during the period will be deducted in its entirety from the termination payment. Mr Jerven is also the Managing Director of BNbank s subsidiary BNkreditt. Under the terms of the agreement between the companies, half of Mr Jerven s salary is charged to the Parent Bank and half to BNkreditt. 4 At resignation after the age of 60, the termination payment is 70 per cent of salary at the date of resignation and any income from other sources is not taken into account. Any costs relating to termination payment will be charged as an expense in their entirety at the date of resignation. 5 In connection with Glitnir s acquisition of BNbank in 2005, Glitnir requested the Board of BNbank to adopt an amendment to the pay agreement with the Managing Director. Should it be concluded that BNbank should have a new Managing Director within five years of the takeover of BNbank, Mr Jerven will be offered another suitable position in the Bank. If it is preferred for Mr Jerven not to place his services at the Bank s disposal, he is ensured termination payment, on similar conditions to those above, until the expiry of the five-year period from the takeover. 6 For further details of Gunnar Jerven s pension agreement, see Note 9. 7 Remuneration to senior executives comprises remuneration paid to seven employees in total (see Note 38). The costs of these executives pensions are included in the pension cost; see Note 9 for more information. Loans to senior executives are provided on the same terms as to other employees (see Note 8). During the period 2005 to 2007, the Group Executive Management team were allotted options in Glitnir banki hf entitling them to purchase a total of 17.5 million shares, 7 million of which options were exercised in The exercise price for the option scheme was set from ISK to ISK on allotted options that were unexercised at 31 December 2007, and the exercise period on these is from 2008 to Glitnir banki hf. has no legal or implicit obligation to buy back the share options or settle them in cash. The fair value of the allotted options using the Black & Scholes option pricing model was NOK 5.8 million at 31 December The equivalent amount at 31 December 2006 was NOK 4.9 million. The option schemes are carried in the income statement. 8 Other remuneration to senior executives in the BNbank Group is the exercise of the options in Loans to senior executives are provided on the same terms as for other employees. [ 27 ]

28 Share-based payment During the period 2005 to 2007, the Group Executive Management were allotted options in Glitnir banki hf entitling them to purchase a total of 17.5 million, 7 million of which options were exercised in The exercise price for the option scheme was set from ISK to ISK on allotted options that were unexercised at 31 December 2007, and the exercise period on these is from 2008 to Glitnir banki hf. has no legal or implicit obligation to buy back the share options or settle them in cash. The fair value of the allotted options using the Black & Scholes option pricing model was NOK 5.8 million at 31 December The equivalent amount at 31 December 2006 was NOK 4.9 million. The option schemes are carried in the income statement. Options to Senior Executives - Movements through the year group/parent bank no. of optons weighted aver. exprice (ISK) no. of optons weighted aver. exprice (ISK) Outstanding at 1 January Allotted through the year Expired through the year Exercised through the year Outstanding at 31 December Options to Senior Executives - Valuation assumptions group/parent bank Dividend (%) 50.0% 30.0% Expected volatility (%) 20.0% 15.0% Historical volatility (%) 23.5% 16.5% Risk-free interest rate (%) 11.0% 10.6% Expected life of options (years) 3 3 Weighted average of share price For allotted options in 2006, historical volatility was the only reference point since at that time there was no market for share options. A series of 3-month, 6-month and 1-year rolling standard deviations was checked. In the last quarter of 2006, all three were approximately 15%. Assuming a weak falling volatility curve for the longer options, the volatility for 2006 was rounded off to 15%. For allotted options in 2007, the same historical volatility was calculated. At the start of the year, the 1-year standard deviation was about 23.5%. In addition there was a reference point concerning market volatility, since there was now a market for share options. At that time the noted volatility on the call price was 18% and on the put price 22%. On that basis, the volatility on which the calculation was based for the option allotment in 2007 was 20%. The amounts relating to the option scheme for senior executives carried in the income statement in 2007 and 2006 were NOK 0.5 million and NOK 1.9 million respectively. The amounts relating to the option scheme for senior executives carried in the balance sheet at the end of 2007 and 2006 were NOK 2.4 million and NOK 1.9 million respectively. In the balance sheet the option scheme for senior executives is carried under equity. [ 28 ]

29 Fees to appointed Auditor nok Fees to appointed Auditor Normal audit fees for statutory audit Other certification services Fees for other assistance Total fees paid to appointed Auditor (including VAT) Other assistance in 2007 comprised chiefly: transition to IFRS, co-ordination of companies in Norway, acquisition of Glitnir Eiendomsfinans AS and Glitnir Privatøkonomi ASA, legal assistance in connection with the establishment of BN Boligkreditt AS. Other assistance in 2006 comprised chiefly: tax advice, conclusion of internal audit engagement and assistance related to the Bank s risk classification system. Income, expenses, receivables and commitments with controlling companies group nok million Interest income Glitnir banki hf. Parent company 9 8 Glitnir Bank ASA Sister Company 4 0 Other income Glitnir banki hf. Parent company Glitnir Bank ASA Sister Company 0 0 Glitnir AB Sister Company 1 0 Interest expense Glitnir banki hf. Parent company Other expense Glitnir banki hf. Parent company 0 0 Glitnir Bank ASA Sister Company 0 0 Receivables at 31 December Glitnir banki hf. Parent company Glitnir Bank ASA Sister Company 2 0 Glitnir AB Sister Company 1 0 Glitnir Norway AS Sister Company 2 4 Liabilities at 31 December Glitnir banki hf. Parent company Intercompany accounts with the parent company Glitnir banki hf. relate to a loan received from the parent company, and that BNbank has invested in bonds issued by Glitnir banki hf. An intercompany account with Glitnir Bank ASA relates to a loan that BNbank has given to the sister company. All the transactions were entered into on commercial terms. [ 29 ]

30 Income, expenses, receivables and commitments with controlling companies Millioner kroner Interest income Glitnir banki hf. Parent company 9 8 BN Kreditt AS Subsidiary Glitnir Bank ASA Sister company 4 0 Other income Glitnir banki hf. Parent company 0 0 Glitnir AB Sister company 1 0 Interest expense Glitnir banki hf. Parent company BN Boligkreditt AS Subsidiary 2 0 Other expense Glitnir banki hf. Parent company 0 0 Glitnir Privatøkonomi ASA Subsidiary 2 0 Receivables at 31 December Glitnir banki hf. Parent company BN Kreditt AS Subsidiary Glitnir Eiendomsfinans AS Subsidiary 41 0 BN Boligkreditt AS Subsidiary 3 0 Glitnir Bank ASA Sister company 2 0 Glitnir AB Sister company 1 0 Glitnir Norway AS Sister company 2 4 Liabilities at 31 December Glitnir banki hf. Parent company BN Kreditt AS Subsidiary 1 0 Glitnir Eiendomsfinans AS Subsidiary 28 0 BN Boligkreditt AS Subsidiary Glitnir Privatøkonomi ASA Subsidiary 0 0 Glitnir Bank ASA Sister company 0 0 Risk relief from related parties Where BNbank enters into loan agreements that exceed the limits for individual commitments under the capital adequacy rules, risk relief agreements will be established with other banks. Such agreements are designed so that the loans qualify for deduction from the balance sheet and income statement with respect to the risk-relieved portion of the loans. Such risk relief has been agreed with Glitnir Bank and Glitnir banki hf. which are, respectively, BNbank s sister company and parent company and are thus related parties. The scope of such deducted loans where risk relief is provided by related parties is given below. nok million Nominal value of deducted loans risk-relieved by Glitnir banki hf. (Parent company) Nominal value of deducted loans risk-relieved by Glitnir Bank ASA (Sister company) Nominal value of deducted loans risk-relieved by related parties [ 30 ]

31 8. Loans to employees and elected officers nok Loans to employees at 31 December Loans to elected officers at 31 December Loans to companies where elected officers had controlling influence at 31 December Interest subsidy on loans to employees In addition, loans to companies where an elected officer is chair of the board or a board member totalled NOK 42 million at 31 December This subsidy cost is not shown in the income statement because the interest income from loans to employees is stated at the actual agreed interest. The criteria for making loans to employees, including senior executives, are the same as for ordinary personal customers, i.e. all employees are subject to the same creditworthiness and borrowing amount assessment as other customers. The only difference is that employees receive a subsidised interest rate on loans up to NOK The interest rate on these loans is set equal to the Group s interest expense on the loan, less 0.5 percentage points. Loans to elected officers and to companies where elected officers are board members and/or have a controlling influence, are provided on normal customer terms. Loans to the Chair of the Supervisory Board, Chair of the Control Committee, the Board of Directors and Group Executive Management nok 000 office/position principal Jan Kaare Tapper Chair of Control Committee Bård Ivar Kvam Employee representative on the Board of Directors Tove Hassel Deputy employee representative on the Board of Directors 885 Gunnar Jerven Managing Director Olav S.Austmo Director Svend Lund Director Inge Røstum Director 580 Tore Børøsund Lawyer [ 31 ]

32 9. Pension costs and commitments The Group has a group pension scheme for its employees invested in a unit trust scheme through a life assurance company. The scheme comprised 125 employees and 16 pensioners at 31 December The calculations take into account employees probable drawings from the AFP scheme (a State earnings-related pension scheme). The pension commitment linked to AFP is unsecured. The established pension scheme satisfies the requirements for mandatory occupational pension schemes (OTP). Spouse s pension and salary in excess of 12G (G = the basic amount under the Norwegian national insurance scheme) were removed from the group scheme in Salary in excess of 12G is covered through a separate defined contribution pension scheme from 2007 inclusive. The Managing Director has a contractual retirement age of 60. His pension will be 70% of normal salary at retirement, and will be adjusted annually in accordance with developments in the basic amount (G). Retirement before age 60 will reduce the pension proportionally according to the length of service. Pension from age 67 is secured through the Group s group pension schemes, while pension before that age is unsecured and covered through the Group s operational expenditure. All other employees have a retirement age of 67, and based on current Norwegian social security rules the pension shall be 70% of normal salary at the time the pension is paid out. The pension schemes are treated as defined benefit schemes where the future pension benefits are based on the number of contributory years and final salary at retirement age. The Group s group pension schemes are net pension schemes, while the unsecured pension commitments are gross pension schemes. When valuing pension assets, the estimated value on the accounts closing day is applied. This estimated value is adjusted each year in accordance with a statement from the life assurance company of the transfer value of the pension assets. When measuring the accrued pension commitments, the estimated commitment on the accounts closing day is applied. The estimated commitment is adjusted each year in accordance with a statement from the life assurance company of the accrued pension commitment. The accumulated effect of changes in the underlying financial and actuarial ratios, as a result of which the value of the pension assets and pension commitments has changed, is allocated to net income systematically over the average remaining contributory period. Actuarial calculations are made each year by an approved actuary, based on information provided by the Group. The Group s legal obligation will not be affected by the accounting treatment. Calculations for all years are based on the following assumptions % Discount rate Expected salary adjustments Expected adjustment of current pensions Expected adjustment of national insurance basic amount (G) Expected yield on pension assets Voluntary exit for employees aged under Voluntary exit for employees aged over Percentage making use of the AFP scheme Demographic disability assumptions IR02 IR73 Demographic mortality assumptions K2005 K63 The financial assumptions are assessed in a long-term time horizon. [ 32 ]

33 Composition of net pension cost nok million Present value of the year s pension contributions, group schemes Present value of the year s pension contributions, unsecured schemes Interest expense on accrued pension contributions, group schemes Interest expense on accrued pension contributions, unsecured schemes Amortisation of phased out schemes Amortisation of estimated losses/gains (-), group schemes Administrative costs of the scheme Expected yield on pension assets Accrued employer s social security contributions Net pension cost Specification of net recognised defined benefit pension commitment nok million Present value contrib pension commitment for defined benefit plans in secured schemes Fair value of pension assets Net pension commitment for defined benefit plans in secured schemes Present value of contrib pension commitm for def benefit plans in unsecured schemes Costs of prior-period pension contributions not recognised in balance sheet Employer s social security contributions Net pension commitment recognised in the balance sheet Movements in defined benefit pension commitment - secured schemes nok million Gross pension commitment at 1 January Present value of pension contributions Interest expense Actuarial losses (gains) on the commitment Costs of prior-period pension contributions Commitment upon phasing out of schemes Benefits paid Increase in commitment arising from new subsidiary Gross pension commitment at 31 December [ 33 ]

34 Movements in defined benefit pension commitment - unsecured schemes nok million Gross pension commitment at 1 January Present value of pension contributions Interest expense Actuarial losses (gains) on the commitment Costs of prior-period pension contributions Benefits paid Increase in commitment arising from new subsidiary Gross pension commitment at 31 December Total pension commitments, secured and unsecured schemes at 1 January Total pension commitments, secured and unsecured schemes at 31 December Movements in fair value of pension assets - secured schemes nok million Fair value of pension assets at 1 January Expected yield on pension assets Actuarial losses (gains) on pension assets Total contribution Benefits paid Increase in pension assets arising from new subsidiary Fair value of pension assets at 31 December Members of the pension schemes nok million Economically active scheme members Pensioners and disabled scheme members Total number of pension scheme members [ 34 ]

35 Investment of pension assets at 31 December group nok million amount % amount % Equity instruments Debt instruments Real estate Other investments Total pension assets Pension assets are not invested in own financial instruments or other assets in the Company. Expected payment of premiums to defined benefit pension schemes in 2008 is NOK 4.5 million for the Group, and NOK 2.9 millioner for the Parent Company. PARent company nok million Present value of pension contributions Fair value of pension assets Deficit/(surplus) Experience-based adjustments to pension commitments Experience-based adjustments to pension assets IAS 19 requires a five-year summary, whereas first-time reporting for the Company and the Group is 1 January [ 35 ]

36 10. Intangible assets and tangible fixed assets group 2007 development other machinery, buildings, tangible IT- intang. intang. fixt. and real fixed nok million Goodwill systems assets assets transport etc. property assets Original cost including revaluations at Additions Additions from acquisitions Disposals at original cost Original cost including revaluations at Accumulated depreciation, amortisation & write-downs at Disposals Ordinary depreciation/amortisation charge for the year Accumulated depreciation, amortisation & write-downs at Book value at Depreciation method Straight-line Straight-line straight-line Useful life Indefinite life 4 years Indefinite life/ 6 years 3-5 years 100 years parent bank 2007 development other machinery, buildings, tangible IT- intang. intang. fixt. and real fixed nok million Goodwill systems assets assets transport etc. property assets Original cost including revaluations at Additions Additions from acquisitions Disposals at original cost Original cost including revaluations at Accumulated depreciation, amortisation & write-downs at 1 Jan Disposals Ordinary depreciation/amortisation charge for the year Accumulated depreciation, amortisation & write-downs at Book value at Depreciation method Straight-line Straight-line straight-line Useful life Indefinite life 4 years Indefinite life 3-5 years 100 years Development of IT systems is classed as self-developed intangible assets, while all other intangible assets are purchased, either as individual assets, or through acquisitions. Other intangible assets include the customer files from the acquisition of Glitnir Privatøkonomi AS. The customer files were recognised at 31 December 2007 in the sum of NOK 25 million. Recognised goodwill relates to the acquisition of the businesses of Glitnir Privatøkonomi AS and Glitnir Eiendomsfinans AS (purchase of all that the companies own). Goodwill arising from both these acquisitions has been recognised in the balance sheet in 2007, and the recognised amounts for the two acquisitions totalled NOK 174 million and NOK 39 million respectively at 31 December Goodwill is allotted on the basis of the businesses expected results and their distribution of the Group s products. [ 36 ]

37 When conducting a write-down test of goodwill, the recoverable amount for goodwill is calculated on the basis of expected earnings and distribution over a certain period. The management have conducted a write-down test of recognised goodwill items without finding any basis for write-downs. In the light of Glitnir Privatøkonomi s results in 2007, a number of measures have been taken to improve the company s results. The expected effect of these measures has been taken into account in the write-down test. The depreciation schedule reflects the assumed useful life of the asset. The Group owns the properties Kongensgt. 18 and Munkegt. 21 at Torvet in Trondheim for operating purposes. These properties had a book value of NOK 61 million at 31 December 2007 and a total gross floor area of sq.m. Of this, sq.m. are for own use, while 584 sq.m. are let. The let area is occupied by two tenants and generates an income of NOK 0.6 million per annum. The lease contracts run until 30 November 2009 and 28 February group 2006 development other machinery, buildings, tangible IT- intang. intang. fixt. and real fixed nok million Goodwill systems assets assets transport etc. property assets Original cost including revaluations at Additions Additions from acquisitions Disposals at original cost Original cost including revaluations at Accumulated depreciation, amortisation & write-downs at Disposals Ordinary depreciation/amortisation charge for the year Accumulated depreciation, amortisation & write-downs at Book value at Depreciation method Straight-line Straight-line straight-line Useful life Indefinite life 4 years Indefinite life 3-5 years 100 years parent bank 2006 development other machinery, buildings, tangible IT- intang. intang. fixt. and real fixed nok million Goodwill systems assets assets transport etc. property assets Original cost including revaluations at Additions Additions from acquisitions Disposals at original cost Original cost including revaluations at Accumulated depreciation, amortisation & write-downs at Disposals Ordinary depreciation/amortisation charge for the year Accumulated depreciation, amortisation & write-downs at Book value at Depreciation method Straight-line Straight-line straight-line Useful life Indefinite life 4 years Indefinite life 3-5 years 100 years [ 37 ]

38 11. Other operating expenses nok million Operating expenses, real property Miscellaneous operating expenses Other operating expenses Other expenses, gains and losses Other gains and losses totalling NOK 18 million consist among other things of a success fee paid to BNkreditt in connection with the disposal of a previously repossessed property. The conditions for payment of the first part of the fee of NOK 13 million were fulfilled during the first quarter 2007, while the conditions for payment of the remaining fee of NOK 4 million were fulfilled in the second quarter. The item also includes a capital gain on the sale of shares in the associate BN Megler AS amounting to NOK 1 million in BNbank. The shares were sold in the second quarter Impairment losses and write-downs on loans carried at amortised cost The various elements included in impairment losses and write-downs on loans are set out in Note 1. Loans past due more than 3 months are defined as loans that have not been serviced under the loan agreement for 3 months or more. As a first mortgage lender, the Group can however gain access to revenue, either through the courts or by some voluntary solution. Impairment losses and write-downs on loans described in this note apply to loans carried at amortised cost. nok million Write-offs in excess of prior-year write-downs Write-offs on loans without prior write-downs Write-downs for the period: Change in individual write-downs Change in group write-downs Increase in loans with prior-year write-downs Provisions against loans without prior write-downs Decrease in loans with prior-year write-downs Gross impairment losses Recoveries on previous write-offs Impairment losses Revenue recognition of interest on written-down loans Individual write-downs to cover impairment losses at 1 January Write-offs covered by prior-year individual write-downs Write-downs for the period: Increase in loans with prior-year individual write-downs Write-down on loans without prior individual write-downs Decrease in loans with prior-year individual write-downs Individual write-downs to cover impairment losses at 31 December Group write-downs to cover impairment losses at 1 January Group write-downs for the period to cover impairment losses Group write-downs to cover impairment losses at 31 December [ 38 ]

39 Loans past due more than 3 months at 31 December nok million Gross principal Individual write-downs Net principal Other loans with individual write-downs at 31 December nok million Gross principal Individual write-downs Net principal Loans past due more than 3 months by sector and as a percentage of loans gross gross gross nok million outstanding 2007 % outstanding 2006 % outstanding 2005 % Corporate loans Personal and home loans Total [ 39 ]

40 14. Taxation Computation of tax payable mok million Profit before tax Permanent differences: Income from interests in associates Income from interests in group companies Non-deductible expenses Non-taxable income Changes in temporary differences relating to: Current assets/short-term liabilities Fixed assets/long-term liablities Other items charged directly to equity: Taxable income Tax payable (28 %) mok million Tax payable Change in deferred tax Realised price differentials relating to IFRS transition giving rise to perm. differences Tax charge Reconciliation from nominal to actual tax rate (28%) mok million Profit before tax Expected income tax at nominal tax rate (28%) Tax effect of permanent differences Tax effect of transitional effect relating to transition to IFRS etc Tax charge Effective tax rate 28 % 28 % 23 % 29 % [ 40 ]

41 Computation of deferred tax/deferred tax assets mok million Positive (tax-increasing) temporary differences: Buildings Profit and loss account Long-term investments Total positive (tax-increasing) temporary differences Negative (tax-reducing) temporary differences: Other fixed assets Short-term liabilities Long-term liabilities Net pension commitment Total negative (tax-reducing) temporary differences Tax base for computing deferred tax (+)/deferred tax assets (-) Computed deferred tax (+)/deferred tax assets (-) (28 % of the computation base) Deferred tax (+)/deferred tax assets (-) in the balance sheet mok million Deferred tax at 1 January Change in deferred tax in income statement Change in deferred tax charged to equity relating to IFRS transition Tax effect of group contribution Deferred tax from acquisitions Deferred tax at 31 December Early redemption of fixed-rate borrowings and loans gives rise to gains or losses. Under NGAAP, the Bank deferred recognition in the income statement of such effects, in order to compare them with future payments on interest swap agreements entered into for hedging purposes. Under IFRS, the effects of early redemptions must be recognised in the income statement immediately. This means that at the date of transition to IFRS, the deferred effects on the income statement were charged to equity and provision was made for deferred tax. In the tax assessment papers for 2007, in the Bank s opinion these items must be considered as having been realised for tax purposes. The items are therefore recognised as income for tax purposes as a permanent difference, which again means that the deferred tax provision now becomes payable. For BNkreditt, this means an increase in taxable income of 294, a decrease in deferred tax of 82 and an increase in tax payable of the same amount. [ 41 ]

42 15. Cash and receivables from credit institutions mok million Financial assets carried at amortised cost: Cash and receivables from central banks Undated loans and receivables from credit institutions Receivables from subsidiaries Short-term loans on sale and repurchase agreements Cash and receivables from credit institutions carried at amortised cost Financial assets carried at fair value: Cash and receivables from central banks Undated loans and receivables from credit institutions Receivables from subsidiaries Short-term loans on sale and repurchase agreements Cash and receivables from credit institutions selected for fair value carrying Cash and receivables from credit institutions Loans and advances mok million Loans carried at amortised cost: Lines of credit Building loans Amortised loans Loans via bearer bonds Total loans carried at amortised cost Loans selected for fair value carrying through profit or loss: Amortised loans Total loans selected for fair value carrying through profit or loss: Total loans and advances [ 42 ]

43 17. Repossessed properties At 31 December 2007, the Group had one repossessed property at a book value of NOK 15 million. This property was also repossessed at 31 December For more information on repossessed properties, see Note Financial derivatives (assets) mok million Interest rate derivatives Currency derivatives Combined interest-rate and currency derivatives Equity-linked options and equity options Total financial derivatives, assets Financial derivatives (liabilities) mok million Interest rate derivatives Currency derivatives Combined interest-rate and currency derivatives Total financial derivatives, liabilities All financial derivatives are obliged to be carried at fair value through profit or loss. 19. Short-term securities investments mok million Short-term investments carried at amortised cost: Subordinated loans provided to subsidiaries Bonds issued by Glitnir bank hf Total short-term investments carried at amortised cost Short-term investments selected for fair value carrying through profit or loss: Certificates and bonds issued by the Norwegian government Certificates and bonds issued by others Total short-term investments selected for fair value carrying through profit or loss Short-term securities investments [ 43 ]

44 20. Interests in group companies and associates Group companies Subsidary S Book value capital book value nok million share capital shareholding at increase etc. at Bolig- og Næringskreditt AS, Trondheim % BN Boligkreditt AS, Trondheim % Glitnir Eiendomsfinans AS, Trondheim % Glitnir Privatøkonomi ASA, Oslo 2 80 % Shares in subsidiaries Associates ANNual EieN ANNual Millioner kroner assets liabilities inncome profit assets liabilities inncome profit Bolig- og Næringsmegler AS 1 (BNmegler), Oslo Glitnir Privatøkonomi ASA, Oslo As of 31 December 2007, BNmegler was sold and Glitnir Privatøkonomi was consolidated as a subsidiary. Acquisition of Glitnir Privatøkonomi On 1 September 2006, BNbank purchased 45 % of the shares in Norsk Privatøkonomi (NPØ) (now Glitnir Privatøkonomi), and also acquired the right to purchase a further 5 % of the company s shares. In the 2006 annual financial statements, NPØ was recognised in the consolidated accounts as an associate. In the autumn of 2007, the option to purchase more shares was exercised and BNbank agreed to purchase a further approximately 47 % of the shares, approximately 34.5 % of which were taken over on 1 October, while the remaining 18.2 % of the shares will be transferred in The price of the shares to be taken over in 2009 will depend on the company s earnings in The payment will be at least NOK 32 million and maximum NOK 77 million. The purchase has been settled entirely in cash, although cash payment has been made only for those shares that have been transferred to date. BNbank now has control of the company, and NPØ was recognised as a subsidiary with effect from 1 October Since the acquisition, NPØ has changed its name to Glitnir Privatøkonomi. Glitnir Privatøkonomi brokers financial services from third parties to end-customers against commission on the sale of the financial services concerned. Glitnir Privatøkonomi also brokers financial services from BNbank. Cost price at acquisition nok million group Cash payment for 45 % of the shares 91 Cash payment for 34.5 % of the shares 91 Cash payment for 79.5 % of the shares 182 Cash received upon acquisition 0 Net cash flow at acquisition 182 Cash payment for 79.5 % of the shares 182 Share issue in NPØ first-half Expected payment for additional 18.2 % of shares 32 Transaction costs (fees to auditor and legal advisers) 3 Total cost price for 97.7 % of the shares 218 [ 44 ]

45 Assignment of cost price to assets and liabilities in Norsk Privatøkonomi (now Glitnir Privatøkonomi) at acquisition date group Book value at fair value at recognised nok million acquistion acquistion amount Intangible assets Tangible fixed assets Prepayments and accrued income Cash and receivables from credit institutions Total assets Deferred tax Accrued expenses and deferred income Other short-term liabilities Total liabilities Fair value of net assets 42 Gain on transition from associate to subsidiary 2 Goodwill at acquisition 174 Cost price at acquisition 218 Since the date of the acquisition, Norsk Privatøkonomi has reduced the Group s profit for 2007 by NOK 20 million, of which NOK 15 million is the result in GPØ for the period 1 October December 2007, and NOK 5 million has been charged as an expense under Interests in associates and relates to costs that should have been taken to account in previous quarters. If Norsk Privatøkonomi had been part of the Group through all of 2007, the Group s income for 2007 would have been higher by NOK 120 million, and NOK million in total, while the profit for the year would have increased by NOK 1 million, and been NOK 230 million in total. The above assignment of cost price at acquisition is temporary and may be changed subsequently. Acquisition of the business of Eiendomsfinans AS On 31 December 2007, Glitnir Eiendomsfinans AS, a wholly owned subsidiary of BNbank, purchased the entire business (everything the company owned) of Eiendomsfinans AS for NOK 44 million. Assignment of purchase price to assets at the acquisition date group FAir value at recognised Millioner kroner acquistion amount Intangible assets, customer files 6 6 Intangible assets, goodwill Tangible fixed assets 0 0 Cost price at acquisition (equal to net cash flow at acquisition) [ 45 ]

46 21. Prepayments and accrued income mok million Accrued unpaid income and prepaid unaccrued expenses Financial guarantees Prepayments and accrued income Liabilities to credit institutions All financial assets included here are carried at amortised cost mok million Loans and deposits from credit institutions Loan from Glitnir banki hf (Parent Company) Liabilities to credit institutions For more information on liabilities to credit institutions, see the section on Deposits and Funding. 23. Customer deposits and accounts payable to customers mok million Customer deposits and accounts payable to customers carried at amortised cost: Customer deposits and accounts payable to customers without agreed maturity date Customer deposits and accounts payable to customers with agreed maturity date Deposits from subsidiaries without agreed maturity date Customer deposits and accounts payable to customers carried at amortised cost Customer deposits and accounts payable to customers selected for fair value carrying: Cust dep & accts payable to cust, with agreed mat. date, selected for fair value carrying Total customer deposits and accounts payable to customers [ 46 ]

47 24. Debt securities in issue Face values mok million Face value of certificates Face value of own certificates Net face value of certificates Face value of bonds Face value of own bonds Net face value of bonds Net face value of debt securities in issue Recognised values mok million Certificates carried at amortised cost Certificates selected for fair value carrying Total recognised value of certificates Bonds carried at amortised cost Bonds selected for fair value carrying Total recognised value of bonds Total recognised value of debt securities in issue Accrued expenses and deferred income mok million Accrued not due expenses/payments received in advance of period Provision for liability Financial guarantees Tax payable (see Note 14) Net pension commitment (see Note 9) Accrued expenses and deferred income [ 47 ]

48 Provision for liabilities and charges - legal obligations mok million Opening balance New provisions during the period Expenses charged to provision Reversal of unused provision Effect of time value Closing balance Provisions relate to performance-related pay to employees. 26. Subordinated loan capital Subordinated loans carried at amortised cost: group and parent bank recognised nominal recognised nominal ISIN number value (nok mill) value (nok mill) currency maturity NOK , NOK NOK NOK NOK Perpetual Subordinated loans carried at amortised cost Subordinated loans selected for fair value carrying through profit or loss: group and parent bank recognised nominal recognised nominal ISIN number value (nok mill) value (nok mill) currency maturity , NOK NOK Perpetual Subordinated loans selected for fair value carrying Subordinated loan capital Loan was redeemed in June 2006 and replaced by loans and The interest rate is adjusted every three months. The interest rate on loans , and is set at 3-month NIBOR (Norwegian Interbank Offered Rate) plus 0.65, 1.45 and 0.60 percentage points respectively in arrears for the first 5 years, and thereafter at 3-month NIBOR plus 1.40, 2.20 and 1.35 percentage points respectively in arrears for the last 5 years. The loans can be fully or partially redeemed after 5 years. Redemption requires the consent of the Financial Supervisory Authority of Norway. The interest rate on loans , and at 31 December 2007 was, respectively, 6.66%, 7.46% and 6.61%. All three loans are included in their entirety in the capital base; see Note The interest rate on loan is fixed for 5 years and was set at 4.55% at 31 December The loan is included in its entirety in the capital base; see Note BNbank made two issues of perpetual subordinated loan capital securities in The interest rate on loan is fixed at 7.14% until 25 August 2014, thereafter at 3-month NIBOR plus 3.00 percentage points in arrears. The interest rate on loan is fixed at 3-month NIBOR plus 2.00 percentage points for the first 10 years, and thereafter at 3-month NIBOR plus 3.00 percentage points. At 31 December 2007 the interest rate was 8.01%. The loans may be fully or partially redeemed after 10 years. Redemption requires the consent of the Financial Supervisory Authority of Norway. Both the loans are included in their entirety in the Bank s tier 1 capital; see Note 28. [ 48 ]

49 27. Shareholder structure and share capital Shareholders at 31 December 2007 Glitnir Banki hf., domiciled in Iceland, owns 100% of the shares in BNbank. BNbank is included in the consolidated financial statements of Glitnir Banki hf., which are available at Share capital at 31 December , shares at NOK 50 each have been issued. The General Meeting has not authorised any increase in share capital or the purchase of own shares. There are no outstanding debt instruments with share conversion rights, nor have any form of share options been issued which may lead to an increase in the number of shares. 28. Capital adequacy Process for assessing the capital adequacy requirement BNbank has established a strategy and process for risk management and assessment of the capital adequacy requirement and how capital adequacy can be maintained. The collective term for this is ICAAP (Internal Capital Adequacy Assessment Process). Assessing the capital adequacy requirement includes assessing the size, composition and distribution of the capital base adapted to the level of risks that the Bank is or may be exposed to. The assessments are risk-based and forward-looking. BNbank s ICAAP is divided into five stages. 1. Identification of risk 2. Quantification of risk and equity 3. Assessment of capital adequacy requirement 4. Setting limits (ex ante control) 5. Risk monitoring and ex post control ICAAP is not focused on one single method or one single figure, but presents a set of calculations that include different time horizons, confidence levels and assumptions. The conclusion of the Bank s ICAAP is that the Bank s actual existing capital base is sufficient. Rules and regulations General Under the provisions of section 21 of the Commercial Banks Act (CBA) and section 3-17 of the Financial Institutions Act (FIA), the Norwegian Ministry of Finance has issued regulations for calculating capital base and has set minimum requirements for capital adequacy in financial institutions. The requirement is that the capital base must be at least 8% of risk-weighted assets. The requirements with respect to capital adequacy apply for commercial banks, savings banks and financial institutions, including credit institutions and insurance companies. The Ministry of Finance has also issued regulations on minimum capital adequacy requirements relating to market risks etc. for credit institutions and securities firms. As the Group does not trade in financial instruments as these are defined in the regulations, these rules have no significance for the Group s capital adequacy. According to the rules, the capital base consists of two main components: 1. Tier 1 capital: Equity capital (share capital, share premium account and other equity capital) and perpetual subordinated loan capital securities. 2. Tier 2 capital: Perpetual and fixed-term subordinated loan capital Intangible assets are deducted from the tier 1 capital. Fixed-term subordinated loan capital is included as tier 2 capital according to the following rules: - The original term of the loan shall be at least 5 years. Fixed-term subordinated loan capital is reduced proportionally over the last 5 years to maturity by 20% per annum. - The sum total of the items included in tier 2 capital may not be more than 100% of the tier 1 capital, and fixed-term subordinated loan capital may not be more than 50% of the tier 1 capital. Interests in other financial institutions in excess of certain limits are deducted from the capital base. Group capital adequacy requirements The capital adequacy rules also apply on a consolidated basis. FIA section 2a-9 states that, under the capital adequacy rules, consolidation must take place if the institution has an interest in another financial institution representing 20% or more of the capital. The consolidated accounts must be used as a basis, i.e. intercompany transactions must be eliminated when calculating capital adequacy on a consolidated basis. When calculating the Parent Bank s capital adequacy, shareholdings in subsidiaries are weighted by 100%. [ 49 ]

50 Capital adequacy mok million Share capital Other equity Perpetual subordinated loan capital (perpetual subord. loan capital securities funding) Deductions for: Intangible assets Tier 1 capital Fixed-term subordinated loan capital Net tier 2 capital Total capital base Risk-weighted assets Tier 1 capital ratio (%) 7,6 6,6 10,6 10,6 Capital adequacy ratio (%) 10,5 9,1 15,9 15,2 1 For more details, see Note The reserve for unrealised gains is not included in the capital base. Specification of risk-weighted assets nok million group r Recognised weighted recognised weighted Risk weighting Amount amount Amount amount 0% % % % % % % Investments included in the trading portfolio Tradeable debt instruments included in the trading portfolio Total risk-weighted assets Capital adequacy [ 50 ]

51 Specification of risk-weighted assets nok million parent bank r Recognised weighted recognised weighted Risk weighting Amount amount Amount amount 0% % % % % % % Investments included in the trading portfolio Tradeable debt instruments included in the trading portfolio Total risk-weighted assets Capital adequacy Fair value of financial instruments Methods of determining fair value Interest swap agreements, currency swap agreements and forward exchange contracts The measurement of interest swap agreements at fair value is performed using a valuation technique where future cash flows are discounted to present values. The calculation of expected cash flows and the discounting of these cash flows is performed using observed market interest rates for the various currencies (interest-rate swap curve) and observed exchange rates (from which forward exchange rates are derived). The calculated present values are checked against equivalent calculations from counterparties to the contracts. Certificates and bonds Certificates are measured at quoted prices where such are available and the securities are liquid. In the case of other securities, measurement is performed using a valuation technique and discounting of expected future cash flows. The risk-free interest rate is read from the market through the interest rate on loans between especially creditworthy banks (interest-rate swap curve). The premium for credit risk is determined on the basis of market players assessments of the creditworthiness of the issuer. Loans and advances For loans measured at fair value, the valuation is performed using a valuation technique where expected future cash flows are discounted to present values. The risk-free interest rate is read from the market through the interest rate on loans between especially creditworthy banks (interest-rate swap curve). The premium for credit risk and margins is determined on the basis of the original premium for credit risk and margin, but with subsequent adjustment of these premiums at a pace with changes in the market pricing of risk, the borrowers credit ratings and margin changes in the market. Borrowing/funding Where borrowing/funding is measured at fair value, quoted borrowings will be measured at quoted prices where such are available and the securities are liquid. In the case of other securities, measurement is performed using a valuation technique and discounting of expected future cash flows. The risk-free interest rate is read from the market through the interest rate on loans between especially creditworthy banks (interest-rate swap curve). The premium for credit risk is determined on the basis of market players continuous assessments of the Bank s creditworthiness. Deposits For deposits measured at fair value, the valuation is performed using a valuation technique where expected future cash flows are discounted to present values. The risk-free interest rate is read from the market through the interest rate on loans between especially creditworthy banks (interest-rate swap curve). The premium for credit risk is determined on the basis of market players continuous assessments of the Bank s creditworthiness. The premium for margins is determined on the basis of the original margin, but with subsequent adjustment of margin at a pace with margin changes in the market. [ 51 ]

52 Fair value compared with recognised value group nok million FAir value recognised value fair value recognised value Loans and advances Prepayments and accrued income Financial derivatives, assets Short-term securities investments Cash and receivables from credit institutions Subordinated loan capital Liabilities to credit institutions Debt securities in issue Accrued expenses and deferred income Other short-term liabilities Financial derivatives, liabilities Customer deposits and accounts payable to customers Total nok million FAir value recognised value fair value recognised value Loans and advances Prepayments and accrued income Financial derivatives, assets Short-term securities investments Cash and receivables from credit institutions Subordinated loan capital Liabilities to credit institutions Debt securities in issue Accrued expenses and deferred income Other short-term liabilities Financial derivatives, liabilities Customer deposits and accounts payable to customers Total In the case of short-term financial instruments, the recognised amount will normally always be a good approximation of fair value. Financial derivatives and short-term securities investments are carried in their entirety at fair value, and consequently no difference will be presented in the balance sheet between fair value and recognised value. [ 52 ]

53 Loans and receivables selected for fair value carrying through profit or loss - credit risk Loans and advances mok million Change in fair value during the period as a result of changed credit risk Change in fair value accumulated as a result of changed credit risk The accumulated change in fair value of loans and receivables as a result of a change in credit risk is calculated at the balance sheet date for securities that are still held. Accumulated change is calculated by comparing the fair value of the securities on the balance sheet date with the value the securities would have had if an alternative valuation had been made using the credit risk that existed when the security was initially recognised at fair value. Change in fair value during the period as a result of changed credit risk is calculated as the difference between accumulated change in fair value as a result of changed credit risk at the beginning and end of the year respectively. Financial obligations selected for fair value carrying through profit or loss - credit risk Borrowing/funding mok million Change in fair value during the period as a result of changed credit risk Change in fair value accumulated as a result of changed credit risk Fair value and contractual payment obligations at maturity group nok million FAir value payment obligation fair value payment obligation Subordinated loan capital Debt securities in issue Customer deposits and accounts payable to customers Total Fair value and contractual payment obligations at maturity nok million FAir value payment obligation fair value payment obligation Subordinated loan capital Debt securities in issue Customer deposits and accounts payable to customers Total The accumulated change in fair value of obligations as a result of a change in credit risk is calculated at the balance sheet date for securities that are still held. Accumulated change is calculated by comparing the fair value of the securities on the balance sheet date with the value the securities would have had if an alternative valuation had been made using the credit risk that existed when the security was initially recognised at fair value. Change in fair value during the period as a result of changed credit risk is calculated as the difference between accumulated change in fair value as a result of changed credit risk at the beginning and end of the year respectively. [ 53 ]

54 30. Risk in financial instruments - qualitative description Risk management in BNbank It is part of the Group s corporate strategy to retain a low risk profile in all its activities. This chapter on risk management is part of the supplementary disclosures on financial instruments contained in the consolidated financial statements. See Notes 31 and 32 for more information about risk relating to financial instruments. Organisation Board of Directors The Board of Directors has adopted the Bank s risk policy. This includes a set of principles designed to give the organisation an understanding of the type of risk profile the Bank wishes to have and of the measures that are taken to control risk. The risk policy also defines the Bank s risk tolerance. The risk tolerance says something about the Bank s willingness to assume risk, and is determined with the aid of relevant and both general and quantified objectives. This risk tolerance is necessary in order to set consistent limits for risk and to select suitable systems for monitoring risk. Internal auditor The Board has appointed an internal auditor whose duty is to perform a monitoring function which, independently of the administration in general, carries out risk assessments, controls and examinations of the Bank s internal control and management processes in order to assess whether they are functioning appropriately and satisfactorily. The Bank s management The Managing Director is responsible for general risk management within the Bank. The Managing Director receives regular reports of the Bank s risk exposure and the status of the work on internal control. The Managing Director has established a risk management group that meets regularly. Matters concerning changes to or implementation of new policy and strategy within the Group, must always be presented to the risk management group for discussion and decisions. The risk management group deals at least once annually with an assessment of the risk situation and the associated capital requirement. This assessment is then presented to the Board of Directors. The Managing Director has delegated tasks in accordance with the formal responsibility for internal control and risk management. The responsibility for implementing the annual assessment of the risk situation and capital requirement is delegated to the unit for risk analysis and control (ARK). This risk analysis shall be co-ordinated and integrated with the Bank s other planning and strategy work. Further, control tasks are delegated to the individual line managers within the framework of adopted principles, instructions and authorisations. Administration The Bank has a unit devoted to risk analysis and control (ARK), which covers the entire Group and which does not carry out activities that the control function is intended to monitor. This unit is charged with identifying, measuring and assessing all risks. The Bank has a compliance committee whose duty is to ensure that the relevance of new and amended laws, regulations, official circulars and the like is considered by the organisation. Following this, the committee has a duty to ensure that the relevant changes are implemented. The risk management process The Bank has in place satisfactory and appropriate strategies and processes for risk management and assessing capital adequacy and how this can be maintained. The collective term for this is ICAAP (Internal Capital Adequacy Assessment Process). In order to structure the framework, BNbank s ICAAP is divided into five stages. I) Identification of risk An analysis has been made of the risks the Bank is exposed to. For all risks there is a suitable system of risk monitoring. There is also a process for identifying changes to existing risks and any exposure to new risks. The latter applies especially in connection with changes in any existing or establishment of new products or business areas. II) Quantification of risk and equity In order to analyse the Bank s risk-bearing capacity, all risks are quantified and aggregated. [ 54 ]

55 III) Assessment of capital adequacy requirement The calculations are based on the requirement that the Bank is obliged to satisfy the regulatory requirements for capital base with a given probability. Calculations are also made for other confidence levels and time horizons. The level of capital is furthermore adapted to the Bank s business plans and growth ambitions, developments in framework conditions, capital planning and contingency planning. Calculations are also made of economic capital for different confidence levels and time horizons. IV) Setting limits (ex ante control) All significant risks have a limit. V) Risk monitoring and ex post control Procedures have been established for dealing with breaches of limit. In cases where risk is not quantifiable, the object of the risk monitoring is to check process-related requirements or qualitative requirements. Reporting of risk monitoring follows a fixed frequency and provides a full picture of the situation. In cases where risk exposure arises quickly or unexpectedly, ad hoc reports are to be prepared. Ex post control means that if the risk monitoring uncovers real exposure that is greater than the desired level of exposure, measures shall be taken. Relevant measures include risk relief, a change of limits (reallocation of risk capital) or increased equity. Ex post control can be viewed as the last stage of the risk management process and at the same time the starting point for a new process. Risk categories For risk management purposes, BNbank distinguishes between the following categories of risk: Credit risk Credit risk is defined as the risk of loss that arises if the Group s counterparties or customers fail to meet their payment obligations to BNbank. Credit risk concerns all receivables from counterparties/customers, mainly loans and advances, but also liability in accordance with other issued credits, guarantees, securities, credit granted but not drawn on, and the counterparty risk that arises through derivatives and forward exchange contracts. Settlement risk, which arises in connection with payment services as a result of the fact that not all transactions take place in real time, also give rise to counterparty risk. In the loan portfolio, credit risk is a product of two events, both of which must occur if a loss is to arise. One risk is the possibility that the borrower will be unable to pay. The other is that the value of the underlying mortgaged asset will be insufficient to cover the amount owed to BNbank in the event of default and subsequent realisation of the asset. Loans to business and personal customers are risk-classified before a decision is made to grant credit. The classification is updated at least once annually for businesses and quarterly for personal customers. Credit risk is defined in the risk policy as a significant risk. The desired exposure is low. Monitoring of credit risk is based on an internal risk classification system (Internal Ratings-Based or IRB system). The system ranks and quantifies the risk connected with each individual loan, and each loan covered by the system is assigned a PD (Probability of Default) class and an LGD (Loss Given Default) class. The PD classification indicates the probability that a loan will be defaulted on, while the LGD classification gives an estimate of the loss rate (in relation to the size of the exposure) given that the loan is defaulted on. The product of the PD and LGD that are assigned to an individual loan gives the expected loss on the loan as a percentage of the size of exposure. The risk classification system uses different rating models, depending on what is considered to be the most significant risk factors relating to the loan. In the case of property companies, the focus is on the level and uncertainty of the cash flows generated from the properties that are being risk-classified for finance in relation to the probability of default. For other types of enterprise, where the enterprise s activity is not connected with property-related activity, there is a greater focus on previously achieved results, the market situation, the management, etc. For classification in relation to impairment losses arising from default, the focus is on value and the uncertainty of the value of the properties that serve as security for the loan. Where personal borrowers are concerned, the focus is on the debtor s income and property in addition to various behaviour variables. In the case of LGD calculations, here, too, the key element is the security offered for the loan and the value of the mortgaged asset in relation to the size of the loan. The risk classification system covers most of the total loan portfolio. Those portions that are not covered are primarily financing of joint liability loans in housing co-operatives and financing of structured products. Both these types of financing are regarded as implying very low credit risk for the Bank, and to date the Bank has had no losses on them. The management are provided with regular credit risk reports based on the risk classification system. A key element in this connection is the trend in loans divided into different classes of risk. In Note 31 an assessment is provided of the Group s credit risk at the end of 2006 and 2007 respectively. See Note 32 for an equivalent assessment in the Parent Bank. [ 55 ]

56 Liquidity risk Liquidity risk is defined as the risk that the Bank will be unable to finance growth in lending and to discharge its commitments as they fall due (refinancing risk). Liquidity risk also includes the risk that financial markets that the Bank wishes to use do not function (market liquidity). Liquidity risk is defined in the risk policy as a significant risk. The desired exposure shall be moderate and in line with the average in the market. Liquidity risk monitoring is done by means of controlling exposure in relation to set limits and by control of qualitative requirements. The management receive regular reports of expected payments made and received. See Note xx for an analysis of the Group s liquidity risk at the end of 2006 and 2007 respectively. Stress tests are also carried out to monitor the liquidity situation. Commercial risk Commercial risk is defined as the risk of loss owing to change in external conditions such as the market situation or the authorities regulatory decisions. The risk definition also includes reputation risk. Commercial risk is defined as a significant risk. The desired exposure shall be moderate. The Group monitors commercial risk by means of qualitative and quantitative analyses of various factors. The most important factors that can be impacted by changes in the market situation or the authorities regulatory decisions are volume and margins in the lending and deposit/funding businesses, impairment losses on loans, and operating expenses. Interest rate risk Interest rate risk is defined as the total earnings-related risk to which the Bank is exposed if the fixed-interest periods for the Bank s commitments and receivables both on and off the balance sheet do not match. Interest rate risk is defined in the risk policy as a risk with some significance. The desired exposure shall be low. The Bank s equity shall in principle be exposed to short-term interest rates. This shall be achieved by commitments and receivables with a fixed interest rate of more than one year virtually neutralising one another. Interest rate risk monitoring is done by means of controlling exposure in relation to set limits. Interest sensitivity analysis has been chosen as the basis for setting limits because of the ability of this key indicator to quantify interest rate risk. The other important tool for managing risk is the gap analysis. The management receive regular reports of these connections. An analysis of the Group s interest rate risk at the end of 2006 and 2007 respectively is provided in Note 31. Stress tests are also carried out to monitor interest rate risk. Foreign exchange risk Foreign exchange risk is defined as the total earnings-related risk to which the Bank is exposed when foreign exchange rates change. Foreign exchange risk is defined in the risk policy as a non-significant risk. The desired exposure shall be low. Foreign exchange risk shall be monitored by means of controlling exposure in relation to set limits. Reports are drawn up showing the net position in each currency. This analysis contains all currency items (on- and off-balance sheet), as well as agreements entered into with foreign exchange risk that are not yet entered in the books. The management receive regular reports on this analysis. Note xx provides an analysis of the Group s foreign exchange risk at the end of 2006 and 2007 respectively. Stress tests are also carried out to monitor foreign exchange risk. Operational risk Operational risk is defined as the risk to which the Group is exposed in the event of inadequacy or failure of internal procedures, people, system or external events. Operational risk includes fraud risk. Fraud risk consists of several types of undesired events, including moneylaundering, corruption, criminal deception, internal fraud (embezzlement, misappropriation of funds, theft and the like). The last-mentioned actions fall under the term economic crime. Operational risk is defined in the risk policy as a risk with some significance. The desired exposure shall be moderate. Operational risk shall be monitored by means of regular qualitative analyses. [ 56 ]

57 Concentrations of risk Concentrations of financial risk arise when financial instruments with the same characteristics are affected uniformly by changes in economic or other factors. Identifying these concentrations of risk includes making discretionary assessments. The Bank encounters different types of risk concentration. If individual borrowers or groups of associated debtors make up a considerable share of the loan portfolio, this will represent a form of concentration risk since the portfolio will then contain company-specific or unsystematic risk. This form of risk concentration is called debtor concentration. Frequently, the risk associated with financing commercial property is in actual fact the exposure to the tenants in the buildings. If a large proportion of the buildings in our loan portfolio are leased to large individual tenants or if a large proportion of the tenants are connected with a particular trade or business, this also implies a form of concentration risk. We call this tenant concentration. Another form of risk concentration is as a result of high exposure to certain sectors or geographical areas. Some sectors and geographical areas may have different economic cycles, and any failure to spread the exposure over different sectors means that we may miss out on diversification opportunities. This form of concentration risk is known as sector concentration. Extra risk as a result of debtor concentration is present, as the Bank sees it, but does not represent a significant risk for the Bank. This is because, when one takes into account the quality of the collateral, exposure is low. Similar reasoning can be applied in relation to tenant concentration. BNbank has a concentrated loan portfolio as a result of its strategy of specialising in financing real estate in Norway. Therefore, sector concentration is the most important form of concentration in BNbank s portfolio. A high proportion of the debtors in BNbank s commercial loan portfolio are property companies. Consequently, a considerable share of the portfolio will be exposed to risk factors that affect property companies specifically. These risk factors are first and foremost vacancy, rental prices and interest rates. The last-mentioned is a general macrovariable, but property companies are more heavily exposed to interest rates than many other industries owing to the high proportion of loans and because property is an asset with a long life. On the level of individual loans, there will be big variations in relation to the sensitivity of the loan to these factors and therefore in how the loan contributes to the portfolio s concentration risk. This will depend on lease conditions, the location of the property, the type of building, and so on. The debtor s financial situation will also be very important. This will vary a great deal with differences in the amount borrowed and the debtor s ability to service the debt. BNbank has limited possibilities for reducing the portfolio risk by diversifying into other geographical areas and sectors. From a risk analysis and risk management perspective, it is therefore important to be consistently aware of this element of the portfolio risk. The IRB system permits the Bank to do this. Hedging instruments The Group employs the following hedging instruments: Interest rate swaps - contracts to exchange interest-rate conditions for a fixed nominal sum over a fixed number of periods. FRAs - Forward Rate Agreements - contracts to exchange an agreed interest rate for a future fixed rate for a specific nominal sum for a specific period. Equity-linked options and share- and interest-rate swaps - in this context contracts to receive the yield on one or more shares, share indexes or funds at a fixed future date against payment of a premium when the contract is made (equity-linked options), or against payment of a variable current interest rate over the term of the option (share- and interest-rate swaps). The contracts are made at the same time as borrowing in the form of equity-linked bonds or equity-linked term deposits. The contracts are designed so as to give BNbank no net exposure in equity instruments. Forward exchange contracts - contracts for the purchase or sale of foreign currency with settlement at a specified future date. The object of using interest-rate, currency and equity instruments is to secure future interest rates or to counteract the effect of exchange rate fluctuations. [ 57 ]

58 31. Risk in financial instruments - quantitative description - Group Market risk Interest rate risk Repricing date (gap) for assets and liabilities at 31 December 2007 group total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined 1 Loans and advances Financial derivatives Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total Net = gap Repricing date (gap) for assets and liabilities at 31 December 2006 group total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined 1 Loans and advances Financial derivatives Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total Net = gap Undefined at repricing date (gap) for assets and liabilities consists of excess/shortfall in value as a result of fair value calculations, and accrued interest at the balance sheet date. [ 58 ]

59 Repricing date for assets and liabilities shows the term up to the next agreed/likely interest rate adjustment date for all interest-bearing asset and liability items. It is assumed that loans with variable interest rates and customer deposits and accounts payable to customers excluding fixed-term deposits will be repriced after six weeks. Under the Financial Contracts Act, interest rate increases on personal and home loans must be notified to borrowers with at least six weeks notice, although a shorter period of notice is permissible if there is a significant increase in money market interest rates. The Group employs hedging instruments to manage interest rate risk; see Note 32. To arrive at a correct picture of the interest rate risk, these instruments must be viewed together with the asset and liability items, and they are therefore included in the note. Gap is defined as the difference between liabilities and receivables on and off the balance sheet for which interest rates must be fixed within each time band. Interest sensitivity The interest sensitivity of equity capital shows the financial exposure to changes in interest rates. The financial exposure is the present value of all future changes in profits resulting from the change in interest rates. The timing of these changes in profits in the accounts cannot be gleaned from this analysis. Equity sensitivity was 0.7 % at 31 December This figure provides an estimate of the change in equity value when all interest rates over the entire yield curve are increased by one percentage point. It is assumed when calculating the stated interest sensitivity that the interest rate on the BN account and on variable-rate loans will be changed with six weeks notice. As regards other interest-bearing asset and liability items, it is assumed that interest will run up until the date of the next interest rate adjustment. In the case of securities with return sale and repurchase clauses it is likewise assumed that interest will run up until the next possible exercise date. It is also assumed that no interest rate risk is attached to non-interest-bearing items. The Group s policy as regards interest rate risk is that the value of the Group s equity shall be as little sensitive as possible to interest rate changes. [ 59 ]

60 Exchange rate risk Currency breakdown, assets and liabilities at 31 December 2007 group nok million total principal NOK EUR DKK SEK CHF JPY USD Loans and advances Prepayments and accrued income Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Customer deposits and accounts payable to customers Total Financial derivatives Net foreign currency exposure Currency breakdown, assets and liabilities at 31 December 2006 group nok million total principal NOK EUR DKK SEK CHF JPY USD Loans and advances Prepayments and accrued income Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Customer deposits and accounts payable to customers Total Financial derivatives Net foreign currency exposure Sensitivitetsanalyse for endring i markedspriser - partiell analyse group nok million effect result effect equity effect result effect equity Interest +/- 1 percentage point Exchange rates +/- 10 % [ 60 ]

61 Sensitivity analysis - Description of model and assumptions Exposure to market risk is measured here by means of partial analyses, where we look one by one at the variation in market variables and their effect on results and equity. Where financial instruments are carried at fair value, measurements are made using alternative assumptions, and effects on fair value as a result of changed assumptions are reported as an effect against results and equity respectively, depending on whether the instrument s fair value changes are otherwise to be treated by carrying them against results or against equity. In the case of fixed-rate instruments measured at amortised cost, changes in interest rates will not give rise to changes in either the result or equity. For interest-bearing securities with variable interest rates, the effect against the result is calculated as though alternative interest rates had been used through the year on the loan principals that are represented in the balance sheet at the balance sheet date. Intervals for changes in market variables are set so that the determined interval will with high probability cover the market variable s actual outcome within the coming year, having regard for the average term of the instruments concerned that are included in the analysis. Partial analysis is carried out for the market variables whose variation is significant for the result and equity. The sensitivity analysis is thus not exhaustive in relation to the total number of market variables that affect the recognition of financial instruments. All effects on result and equity are presented net after tax. Credit risk Expected losses at 31 December 2007 group expected losses home and personal loans Business loans Total 0 0,01 58% 37% 45% 0,01 0,05 24% 27% 26% 0,05 0,20 17% 20% 19% 0,20 0,50 0% 11% 7% > 0,50 1% 5% 3% Expected losses at 31 December 2006 group expected losses home and personal loans Business loans Total 0 0,01 57% 33% 41% 0,01 0,05 22% 27% 25% 0,05 0,20 18% 22% 20% 0,20 0,50 2% 11% 8% > 0,50 0% 8% 5% Individual write-downs totalled NOK 1 million at 31 December Group write-downs totalling NOK 39 million at 31 December 2007 are not distributed among the various classes of risk. As the models are currently calibrated, the expected annual impairment loss on loans is approximately 0.12 % of the exposure. This applies to that portion of the loan portfolio covered by the IRB system, and expresses an expectation of the size of the annual average loss over an economic cycle. Expected losses are slightly higher than the average of accounting losses for the period 1988 to This is both because the concept of loss on which the IRB system is based is financial loss (which differs slightly from accounting loss) and because the estimates for PD and LGD are forward-looking and conservative. All loans to business customers are priced individually, based among other things on risk, the profitability requirement, and the competitive situation. The pricing therefore reflects, among other things, the risk in the loan, and the margins attained are generally higher with higher risk. Home loans are priced on the basis of a price matrix depending on the risk classification, where both the loan disbursement and calculated probability of default are reflected. There is uncertainty attached to assessing the risk of future impairment losses on loans and guarantees. See the Report of the Directors for a more detailed analysis of the risk of impairment losses. [ 61 ]

62 Loans and advances fallen due and written down at 31 December 2007 group nok million FAllen due, not written down not fallen due, < > 90 written gross write- net Not written down days days days days down loans downs loans Home and personal loans Business loans Total loans and advances Loans and advances fallen due and written down at 31 December 2006 group nok million FAllen due, not written down not fallen due, < > 90 written gross write- net Not written down days days days days down loans downs loans Home and personal loans Business loans Total loans and advances Individual write-downs shall be made when there is objective evidence that a loan is impaired. If objective indicators of impairment are identified for an individual loan, a write-down shall be calculated on the loan if the capitalised balance sheet value is greater than the present value of estimated future cash flows discounted by the effective interest rate. In the estimated cash flow, the value of the collateral is determined on the basis of the assumed net realisable value. In the case of loans that have been valued, there is a secured debt in the form of real security. At 31 December 2007, the fair value of secured debts for individual down-valued loans was NOK 0 million (NOK 0 million at 31 December 2006). Geographical breakdown 1 of outstanding loans and advances at 31 December group nok million Oslo/Akershus Rest of South/East Norway West Norway Sør-Trøndelag (Central Norway) Nord-Trøndelag and North Norway Total loans and advances Rest of South/East Norway: the counties of Aust-Agder, Vest-Agder, Telemark, Vestfold, Østfold, Buskerud, Hedmark, Oppland. West Norway: the counties of Rogaland, Hordaland, Sogn og Fjordane, Møre og Romsdal. North Norway: the counties of Nordland, Troms, Finnmark. 1 Geographical breakdown based on the borrower s residential/business address. Risk and return do not vary significantly between the various business areas, segments and geographical areas, and so no segment information according to business area, sector or geographical area is reported. See Note 33 for an overview of types of guarantee. [ 62 ]

63 Maximum exposure to credit risk group nok million On balance sheet: Loans and advances Prepayments and accrued income Financial derivatives Short-term securities investments Cash and receivables from credit institutions Off balance sheet: Financial guarantees Undrawn loan commitments, facilities and credits Maximum credit risk Maximum credit risk is reduced for some of the financial assets. All loans, and undrawn loan commitments etc, are secured through the provision of real security. Liquidity risk Remaining maturity for assets and liabilities at 31 December 2007 group total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined Loans and advances Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total [ 63 ]

64 Remaining maturity for assets and liabilities at 31 December 2006 group total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined Loans and advances Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total Remaining maturity on assets and liabilities shows the remaining term to maturity on all interest-bearing asset and liability items, including stipulated interest. Customer deposits and accounts payable to customers excluding fixed-term deposits are classified with an undefined remaining maturity. With regard to loans and advances, lines of credit, extended mortgages and building loans are classified with an undefined remaining maturity. The sum total of asset and liability items shows considerable variation within each time band. This is because loan agreements normally have a term of 20 to 30 years, while borrowings have shorter terms. Management of liquidity risk is described in the section on the Bank s risk management systems; see Note 30. [ 64 ]

65 [ 65 ]

66 32. Risk in financial instruments - quantitative description - Parent Bank Market RISK Interest rate risk Repricing date (gap) for assets and liabilities at 31 December 2007 total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined 1 Loans and advances Financial derivatives Short-term securities investments Cash and receivables from credit institutions Exposure interest rate risk BNkreditt Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total Net = gap Repricing date (gap) for assets and liabilities at 31 December 2006 total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined 1 LLoans and advances Financial derivatives Short-term securities investments Cash and receivables from credit institutions Exposure interest rate risk BNkreditt Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total Net = gap Undefined at repricing date (gap) for assets and liabilities consists of excess/shortfall in value as a result of fair value calculations, and accrued interest at the balance sheet date. 2 Interest rate risk is identified and managed at Group level. There is an internal agreement between BNbank and BNkreditt that adjusts any gap between the companies. [ 66 ]

67 Repricing date for assets and liabilities shows the term up to the next agreed/likely interest rate adjustment date for all interest-bearing asset and liability items. It is assumed that loans with variable interest rates and customer deposits and accounts payable to customers excluding fixed-term deposits will be repriced after six weeks. Under the Financial Contracts Act, interest rate increases on personal and home loans must be notified to borrowers with at least six weeks notice, although a shorter period of notice is permissible if there is a significant increase in money market interest rates. The Group employs hedging instruments to manage interest rate risk; see Note 30. To arrive at a correct picture of the interest rate risk, these instruments must be viewed together with the asset and liability items, and they are therefore included in the note. Gap is defined as the difference between liabilities and receivables on and off the balance sheet for which interest rates must be fixed within each time band. Interest sensitivity The interest sensitivity of equity capital shows the financial exposure to changes in interest rates. The financial exposure is the present value of all future changes in profits resulting from the change in interest rates. The timing of these changes in profits in the accounts cannot be gleaned from this analysis. Equity sensitivity was 0.7 % at 31 December This figure provides an estimate of the change in equity value when all interest rates over the entire yield curve are increased by one percentage point. It is assumed when calculating the stated interest sensitivity that the interest rate on the BN account and on variable-rate loans will be changed with six weeks notice. As regards other interest-bearing asset and liability items, it is assumed that interest will run up until the date of the next interest rate adjustment. In the case of securities with return sale and repurchase clauses it is likewise assumed that interest will run up until the next possible exercise date. It is also assumed that no interest rate risk is attached to non-interest-bearing items. The Group s policy as regards interest rate risk is that the value of the Group s equity shall be as little sensitive as possible to interest rate changes. [ 67 ]

68 Foreign exchange risk Currency breakdown, assets and liabilities at 31 December 2007 parent bank nok million total principal NOK EUR DKK SEK CHF JPY USD Loans and advances Prepayments and accrued income Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Customer deposits and accounts payable to customers Total Financial derivatives Net foreign currency exposure Currency breakdown, assets and liabilities at 31 December 2006 parent bank nok million total principal NOK EUR DKK SEK CHF JPY USD Loans and advances Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Customer deposits and accounts payable to customers Total Financial derivatives Net foreign currency exposure Foreign exchange risk is identified and managed at Group level. There is an internal agreement between BNbank and BNkreditt that adjusts any gap between the companies. Sensitivity analysis for change in market prices - partial analysis nok million effect result effect equity effect result effect equity Interest +/- 1 percentage points Exchange rates +/- 10 % [ 68 ]

69 Sensitivity analysis - Description of model and assumptions Exposure to market risk is measured here by means of partial analyses, where we look one by one at the variation in market variables and their effect on results and equity. Where financial instruments are carried at fair value, measurements are made using alternative assumptions, and effects on fair value as a result of changed assumptions are reported as an effect against results and equity respectively, depending on whether the instrument s fair value changes are otherwise to be treated by carrying them against results or against equity. In the case of fixed-rate instruments measured at amortised cost, changes in interest rates will not give rise to changes in either the result or equity. For interest-rate securities with variable interest rates, the effect against the result is calculated as though alternative interest rates had been used through the year on the loan principals that are represented in the balance sheet at the balance sheet date. Intervals for changes in market variables are set so that the determined interval will with high probability cover the market variable s actual outcome within the coming year, having regard for the average term of the instruments concerned that are included in the analysis. Partial analysis is carried out for the market variables whose variation is significant for the result and equity. The sensitivity analysis is thus not exhaustive in relation to the total number of market variables that affect the recognition of financial instruments. All effects on result and equity are presented net after tax. Credit risk Expected losses at 31 December 2007 expected losses home and personal loans Business loans Total 0 0,01 58% 23% 49% 0,01 0,05 24% 32% 26% 0,05 0,20 17% 23% 19% 0,20 0,50 0% 15% 4% > 0,50 1% 7% 2% Expected losses at 31 December 2006 expected losses home and personal loans Business loans Total 0 0,01 57% 33% 41% 0,01 0,05 22% 27% 25% 0,05 0,20 18% 22% 20% 0,20 0,50 2% 11% 8% > 0,50 0% 8% 5% Individual write-downs totalled NOK 1 million at 31 December Group write-downs totalling NOK 7 million at 31 December 2007 are not distributed among the various classes of risk. As the models are currently calibrated, the expected annual impairment loss on loans is approximately 0.09 % of the exposure. This applies to that portion of the loan portfolio covered by the IRB system, and expresses an expectation of the size of the annual average loss over an economic cycle. Expected losses are slightly higher than the average of accounting losses for the period 1988 to This is both because the concept of loss on which the IRB system is based is financial loss (which differs slightly from accounting loss) and because the estimates for PD and LGD are forward-looking and conservative. All loans to business customers are priced individually, based among other things on risk, the profitability requirement, and the competitive situation. The pricing therefore reflects, among other things, the risk in the loan, and the margins attained are generally higher with higher risk. Home loans are priced on the basis of a price matrix depending on the risk classification, where both the loan disbursement and calculated probability of default are reflected. There is uncertainty attached to assessing the risk of future impairment losses on loans and guarantees. See the Report of the Directors for a more detailed analysis of the risk of impairment losses. [ 69 ]

70 Loans and advances fallen due and written down at 31 December 2007 nok million FAllen due, not written down not fallen due, < > 90 written gross write- net Not written down days days days days down loans downs loans Home and personal loans Corporate loans Total loans and advances Loans and advances fallen due and written down at 31 December 2006 nok million FAllen due, not written down not fallen due, < > 90 written gross write- net Not written down days days days days down loans downs loans Home and personal loans Corporate loans Total loans and advances Individual write-downs shall be made when there is objective evidence that a loan is impaired. If objective indicators of impairment are identified for an individual loan, a write-down shall be calculated on the loan if the capitalised balance sheet value is greater than the present value of estimated future cash flows discounted by the effective interest rate. In the estimated cash flow, the value of the collateral is determined on the basis of the assumed net realisable value. In the case of loans that have been valued, there is a secured debt in the form of real security. At 31 December 2007, the fair value of secured debts for individual down-valued loans was NOK 0 million (NOK 0 million at 31 December 2006). Geographical breakdown 1 of outstanding loans and advances at 31 December nok million Oslo/Akershus Rest of South/East Norway West Norway Sør-Trøndelag (Central Norway) Nord-Trøndelag and North Norway Total loans and advances Rest of South/East Norway: the counties of Aust-Agder, Vest-Agder, Telemark, Vestfold, Østfold, Buskerud, Hedmark, Oppland. West Norway: the counties of Rogaland, Hordaland, Sogn og Fjordane, Møre og Romsdal. North Norway: the counties of Nordland, Troms, Finnmark. 1 Geographical breakdown based on the borrower s residential/business address. Risk and return do not vary significantly between the various business areas, segments and geographical areas, and so no segment information according to business area, sector or geographical area is reported. See Note 33 for an overview of types of guarantee. [ 70 ]

71 Maximum exposure to credit risk nok million On balance sheet: Loans and advances Prepayments and accrued income Financial derivatives Short-term securities investments Cash and receivables from credit institutions Off balance sheet: Financial guarantees Undrawn loan commitments, facilities and credits Maximum credit risk Maximum credit risk is reduced for some of the financial assets. All loans, and undrawn loan commitments etc, are secured through the provision of real security. Liquidity risk Remaining maturity for assets and liabilities at 31 December 2007 total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined Loans and advances Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total [ 71 ]

72 Remaining maturity for assets and liabilities at 31 December 2006 total up to From 1 to From 3 months From 1 year Over nok million principal 1 month 3 month to 1 year to 5 years 5 years Undefined Loans and advances Short-term securities investments Cash and receivables from credit institutions Total Subordinated loan capital Liabilities to credit institutions Debt securities in issue Financial derivatives Customer deposits and accounts payable to customers Total Remaining maturity on assets and liabilities shows the remaining term to maturity on all interest-bearing asset and liability items, including stipulated interest. Customer deposits and accounts payable to customers excluding fixed-term deposits are classified with an undefined remaining maturity. With regard to loans and advances, lines of credit, extended mortgages and building loans are classified with an undefined remaining maturity. The sum total of asset and liability items shows considerable variation within each time band. This is because loan agreements normally have a term of 20 to 30 years, while borrowings have shorter terms. Management of liquidity risk is described in the section on the Bank s risk management systems; see Note Secured debt and guarantees at 31 December nok million Secured debt Book value of securities as collateral for day-to-day loans Day-to-day loans from Norges Bank Guarantees Contractual guarantees Payment guarantees Other guarantees Total guarantees [ 72 ]

73 34. Proposed, not adopted dividend nok million Total proposed dividend 0 50 Proposed dividend per share ( shares) Correction of prior-period errors In relation to the figures that were reported for the Group in the IFRS transition document, and in the first quarter report for 2007, changes have been made in reported figures in two areas. These concern an acquisition analysis made in connection with the purchase of shares in Norsk Privatøkonomi (now Glitnir Privatøkonomi), and the calculation of the fair value of equity-linked bonds. The acquisition analysis was prepared on a temporary basis and was subsequently adjusted. The Group s consolidated balance sheet figures at 31 December 2006 have been revised to reflect changes in these two matters. In relation to the figures published in the transition document, the effect of the changes on equity at 31 December 2006 amounted to MNOK -4 for Norsk Privatøkonomi and MNOK 10 for equity-linked bonds. For further details, see the interim report for the second quarter Events after the balance sheet date The merger between BNbank and Glitnir Bank is described in detail in the Report of the Directors. Apart from the planned merger, there were no special post-balance sheet events. 37. Transition to IFRS BNbank s annual financial statements for 2006 for the Group and the Parent Bank were presented in compliance with Generally Accepted Accounting Principles in Norway (N GAAP). The Group reported under IFRS for the first time in the first quarter report for 2007, while the Parent Bank reported under IFRS for the first time in the second quarter report for In connection with the first-time reporting under IFRS, BNbank published an IFRS transition document describing the effects of the transition from GRS/// to IFRS, including effects on equity, the balance sheet and results. Below, the main points are reproduced from the transition document. The most important changes upon transition to IFRS relate to the fact that under IFRS all financial derivatives are recognised in the balance sheet at fair value, and all fixed-rate instruments relating to borrowings, loans and deposits are measured at fair value. Otherwise, please see the previously published information in the 2006 Annual Report, and the separate transition documents. IFRS comparative figures for 2006 have been corrected for prior-period errors; see Note 35. [ 73 ]

74 Income Statement 2006 nok million N GAAP IFRS Difference N GAAP IFRS Difference Interest and similar income Interest expense and similar charges Net income from interest and credit commissions Share of profit in associates Income from interests in group companies Change in value fin. instr carried at fair value Other operating income, gains and losses Total other operating income Salaries and general administrative expenses Ordinary depreciation Other operating expenses 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 period [ 74 ]

75 Balance Sheet at 31 December 2006 nok million N GAAP IFRS Difference N GAAP IFRS Difference Assets: Intangible assets Interests in group companies Interests in associates Tangible fixed assets Repossessed properties Loans and advances Prepayments and accrued income Financial derivatives Short-term securities investments Cash and receivables from credit institutions Total assets Equity and liabilities: Share capital Retained earnings Total equity Subordinated loan capital Liabilities to credit institutions Debt securities in issue Accrued expenses and deferred income Other liabilities Financial derivatives Customer deposits and accounts payable to customers Total liabilities Total equity and liabilities [ 75 ]

76 Balance Sheet at 31 December 2006 nok million N GAAP IFRS Difference N GAAP IFRS Difference Assets: Intangible assets Interests in group companies Interests in associates Tangible fixed assets Repossessed properties Loans and advances Prepayments and accrued income Financial derivatives Short-term securities investments Cash and receivables from credit institutions Total assets Equity and liabilities: Share capital Retained earnings Total equity Subordinated loan capital Liabilities to credit institutions Debt securities in issue Accrued expenses and deferred income Other liabilities Financial derivatives Customer deposits and accounts payable to customers Total liabilities Total equity and liabilities [ 76 ]

77 Equity at 1 January 2006 nok million group parent bank Equity under N GAAP at 31 December Intangible assets not qualifying for balance sheet recognition under IFRS -3-3 Pensions, estimate variances set at zero, etc Reversal of dividend provision Interests in subsidiaries/associates Changed valuation of fixed-rate deposits -2-2 Changed valuation of fixed-rate loans Financial interest-rate derivatives in bank portfolio off balance sheet under N GAAP Changed valuation of structured products Financial currency derivatives off balance sheet under N GAAP 2-2 Changed valuation of investment portfolio 0 0 Financial guarantees, assets 4 4 Financial guarantees, liabilities -4-4 Changed valuation of fixed-rate borrowing beyond structured products Deferred tax -2-4 Loan agreement Equity under IFRS at 1 January Equity at 31 December 2006 nok million group parent bank Equity under N GAAP at 31 December Intangible assets not qualifying for balance sheet recognition under IFRS -1-1 Pensions, estimate variances set at zero, etc Reversal of dividend provision Interests in subsidiaries/associates Changed valuation of fixed-rate deposits 1 1 Changed valuation of fixed-rate loans Financial interest-rate derivatives in bank portfolio off balance sheet under N GAAP Changed valuation of structured products Financial currency derivatives off balance sheet under N GAAP 2-2 Changed valuation of investment portfolio 0 0 Financial guarantees, assets 3 3 Financial guarantees, liabilities -3-3 Changed valuation of fixed-rate borrowings beyond structured products Deferred tax -2-4 Loan agreement Equity under IFRS at 1 January [ 77 ]

78 38. Elected Officers and Group Executive Management The Bank s shareholders exercise the highest authority in the BNbank Group through the General Meeting. Of the 14 members of the Supervisory Board, 10 are elected by the shareholders, while 4 are elected by and from among the employees. The General Meeting also elects the Control Committee. The Supervisory Board elects the External Auditor and the Board of Directors. The Parent Bank and the credit institution BNkreditt share the same Supervisory Board and Control Committee and the same Auditor. Supervisory Board members Elected by and from among the shareholders Finn Erik Engzelius, Chair Edgar Alsaker Kris Endresen Arvid Grundekjøn Sigthor Hilmar Gudmundsson Margit Aarnes Krog Ingvi Hrafn Óskarsson Siri Frost Sterri Frode Størdal Grethe Sunde Deputy members Trygve Ebbing Bente Gätzschmann Bjørn Richard Johansen Paul Hjelm-Hansen Lars Steffen Solberg Arnar Helgi Kristjansson Elected by and from among the employees Erik Ingier Harald Kierulf Pia Lislerud Sonja Svengård Deputy members Grethe Holm Sivertsen Heidi Sand Gravvold occupation/residence Lawyer, Thommessen Krefting Greve Lund AS law firm, Oslo Executive Vice President, Nordenfjelske Offshore AS, Trondheim Director, NWHF, Oslo Chair of the Board, Anders Wilhelmsen & Co AS, Oslo Lawyer, Glitnir banki hf, Iceland Bank Manager, Tolga Os Sparebank, Tolga Lawyer, Glitnir banki hf, Iceland Former Member of the Storting (Norwegian Parliament), Malvik Managing Director, E.A. Smith AS, Heimdal Chair of the Board, Regatta AS, Ålesund Business Economist, Albert Collett, Bangsund Centre Manager/General Manager, Solsiden shopping centre, Trondheim Executive Director, Glitnir Norway AS, Oslo Director of Finance, Det Norske Oljeselskap ASA, Trondheim General Manager, Labek AS, Trondheim Senior Consultant, Bearing Point, Oslo BNbank, Oslo BNbank, Trondheim BNbank, Oslo BNbank, Trondheim BNbank, Trondheim BNbank, Trondheim None of the members of the Supervisory Board owns shares in BNbank. Control Committee members Jan Kaare Tapper, Chair Edgar Alsaker Trygve Ebbing occupation/residence Lawyer, Tapper & Co Advokatfirma ANS, Trondheim Executive Vice President, Nordenfjelske Offshore AS, Trondheim Business Economist, Albert Collett, Bangsund Election Committee members Finn Erik Engzelius, Chair Jan Kaare Tapper Frank O. Reite Einar Páll Tamimi Tom Skundberg 1 occupation/residence Lawyer, Thommessen Krefting Greve Lund AS law firm, Oslo Lawyer, Tapper & Co Advokatfirma ANS, Trondheim Partner and Chair of the Board of Glitnir Property Group, Ålesund Lawyer, Glitnir banki hf, Iceland BNkreditt, Oslo 1 One election committee is elected by the Supervisory Board and one by the Annual General Meeting. The committees are identical, with the exception of the employee representative, who is only represented on the committee elected by the Supervisory Board. None of the members of the Control Committee or Election Committee owns shares in BNbank. [ 78 ]

79 External Auditor Number of shares PricewaterhouseCoopers AS, in the person of Rolf Tørring, State Authorised Public Accountant (Norway) 0 Board of Directors Members (age at 31 December 2007) Frank O. Reite, Chair (37) Partner and Chair of the Glitnir Property Group. Executive Vice President of Glitnir s business in Norway and member of the Glitnir Group s group management up to October Mr Reite trained as a Business Economist, and is a former bank director at Kredittbanken in Ålesund and director at Aker RGI. He has also sat on the boards of several companies in the Aker RGI system. First elected 2005; term of office expires Roar Nyhus Deputy Chair (55) Partner with the consultancy firm SPoN AS. Business Economist, former partner at Karl Johan Fonds ASA, national and international senior executive positions with the DnC banking group. First elected 2004; term of office expires Bjarni Ármannsson (39) Self-employed. Cand. mag (B Sc) in Informatics and MBA. Former CEO of Glitnir banki hf. and director at Kaupthing and FBA. First elected 2005; term of office expires Guðrún Gunnarsdóttir (47) Executive Director Credit Control Glitnir banki hf. B.Sc. in Management Science from Florida Institute of Technology and MBA from the University of Iceland. First elected 2005; term of office expires Bård Idar Kvam(32) Product Manager Financing, BNbank. Employee representative. Also a member of the Board of Bolig- og Næringskreditt AS. First elected 2007; term of office expires Grete Komissar (56) Director, Olavshallen AS, Trondheim. Market/local government economist, former Asst. Director General and Director General at the Ministry of Culture and Scientific Affairs. First elected 2003; term of office expires Deputy member for employee representative Tove Hassel (54) Secretary, BNkreditt. First elected 1999; term of office expires New members of the Board of Directors are elected in October 2007, and become operative with merge implementation. No member of the Board of Directors owns shares in BNbank. Group Executive Management Name (age at 31 December 2007) No. of yrs with Group position Main areas of responsibility Gunnar Jerven (54) 15 Adm. Director Stig Helberg (39) 15 Deputy Man. Dir. Treasury, Risk Analysis and Control Tore Børøsund (56) 22 Lawyer Legal Olav Sem Austmo (44) 3 Director Personal Banking, Business Support and IT Inge Røstum (51) 12 Director Corporate Banking Trondheim and Depository Jørn Aleksandersen (45) 4 Director Corporate Banking Oslo Svend Lund (37) 13 Director Business Development and Finance No member of the Group Executive Management owns shares in BNbank. Information on remuneration to senior executives and members of the Board of Directors appears in Note 7. Information on loans to Group Executive Management, Elected Officers and members of the Board of Directors is provided in Note 8. [ 79 ]

80 To the Supervisory Board and the Annual Shareholders Meeting of Bolig- og Næringsbanken ASA Auditor s report for 2007 We have audited the annual financial statements of Bolig- og Næringsbanken ASA as of December 31, 2007, showing a profit of NOK 51 millions for the parent company and a profit of NOK 229 millions for the group. We have also audited the information in the directors report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit. The annual financial statements comprise the balance sheet, the statements of income and cash flows, the statement of changes in equity, the accompanying notes and the group accounts. International Financial Reporting Standards as adopted by the EU have been applied in the preparation of the financial statements. These financial statements are the responsibility of the Company s Board of Directors and Managing Director. Our responsibility is to express an opinion on these financial statements and on other information according to the requirements of the Norwegian Act on Auditing and Auditors. We conducted our audit in accordance with the laws, regulations and auditing standards and practices generally accepted in Norway, including standards on auditing adopted by The Norwegian Institute of Public Accountants. These auditing standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and auditing standards an audit also comprises a review of the management of the Company s financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements have been prepared in accordance with the law and regulations and give a true and fair view of the financial position of the Company and the Group as of December 31, 2007 and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with International Financial Reporting Standards as adopted by the EU the company s management has fulfilled its duty to produce a proper and clearly set out registration and documentation of accounting information in accordance with the law and good bookkeeping practice in Norway the information in the directors report concerning the financial statements, the going concern assumption, and the proposal for the allocation of the profit are consistent with the financial statements and comply with the law and regulations. Trondheim, 12 February 2008 PricewaterhouseCoopers AS Rolf Tørring State Authorised Public Accountant (Norway) Note: This translation from Norwegian has been prepared for information purposes only. [ 80 ]

81 CONTROL COMMITTEE S REPORT FOR 2007 The Control Committee of Bolig- og Næringsbanken ASA held six meetings during the course of the year; four in Trondheim and two in Oslo. The Committee examined the minute book of the Board of Directors at each meeting. The Managing Director or Deputy Managing Director was present at all the Committee s meetings. Other representatives of the Bank s management, including the leader of the internal audit and the external auditor, were present in connection with the discussion of any business where the Committee deemed it desirable. The Chair of the Board of Directors was present at one meeting. The Committee has at all times been presented with the material requested and has also received satisfactory answers and information in relation to the matters discussed. In the opinion of the Committee, there is a good working relationship between the Committee and the external and internal auditors. The Committee has performed its control function in accordance with current legislation, the Articles of Association, given instructions and its own work plan. The Committee is of the opinion that the Bank s operations are conducted in a sound and appropriate manner and in accordance with current laws, regulations, the Articles of Association and the instructions given by the Supervisory Board. The Committee has examined the Board of Directors recommendations with regard to the financial statements, annual report and auditor s report. The Committee deems the Board s assessment of the Bank s financial position to be satisfactory. The Committee recommends that the financial statements and annual report be approved. Trondheim 20 february 2008 (Chair) (Deputy Chair) [ 81 ]

82 BNbank Trondheim Postal address: 7005 Trondheim Visiting address: Munkegt. 21 Phone: Fax: BNbank Oslo Postal address: Postboks 282 Sentrum, 0103 Oslo Visiting address: Dronningensgt. 40 Phone: Fax: The Register of Business Enterprises - Reg. no