2008 A NN u A l repor t 2008 w w w.s nn.no For North Norway!

Transcription

1 For North Norway! AnnuAl RepoRt 2008

2 Contents Side Contents From the Chief Executive Officer 1 Important events in Members of the Group Management Committee 2 Annual Report Group Key Figures 3 Historical background 4 Management structure 5 Annual Report The main board of directors of SpareBank 1 Nord-Norge Statement from the Board of Directors and Chief Executive Officer 25 Annual Report Income Statement 28 Annual Report Balance Sheet 29 Annual Report Cash Flow Statement 30 Annual Report Changes in equity 31 Annual Report Notes 33 Annual Report Group Profit Analysis 112 Auditor's Report Report from the control committee 113 Corporate Governance and Explanatory memorandum 115 SpareBank 1 Nord-Norge Org.nr.: no P.O.Box 6800 N-9298 Tromsø Phone Telefax Design and production: fagtrykk ide as

3 Annual Report A challenging year The main Board of Directors Annual Report refers to 2008 as a challenging year. The global financial crisis, the contours of which we saw already during the autumn of 2007, came more quickly to our region than we had believed and imagined. I am not going to comment in detail on the various areas which have had an impact on our overall result but would just like to confirm that the Bank s financial strength remains good and that we therefore remain capable of dealing with the challenges facing us. SpareBank 1 Nord-Norge was established on 1 July 1989 and its first years of operations were very turbulent due to the Norwegian banking crisis at the beginning of the 90s. After the Bank had recovered from that early crisis, there has always been a clear policy from the Bank s management and main Board of Directors that every effort must be made in order to build and develop SpareBank 1 Nord-Norge into a financially strong and robust bank. This has been the guiding principle throughout the 1990s and from the start of the new millennium. The result of these ongoing efforts has been well documented as the consequences of the global financial crisis became increasingly apparent in our region. The Bank, which is one of the financially strongest of the larger banks in the Nordic area, was able to deal with write-downs and losses on individual commitments and securities without having to ask for extra funding through the government s crisis packages. It has never been a problem for the Bank to obtain the necessary capital and funding even though the price of funding loans has been significantly higher than before the global financial crisis became a reality, and this is conclusive proof of the Bank s financial strength and good reputation. A good overall deposit coverage ratio of 67.4 per cent was one of the factors which enabled the Bank, together with the other large member banks in the SpareBank 1 alliance, to acquire the Norwegian part of Glitnir Bank, an acquisition which is proving to be very good business Is SpareBank 1 Nord-Norge entering 2009 with a relaxed attitude to what is happening with many of our customers? Not at all. At management level and throughout the Bank, every effort is being made in order to be aware of all developments in industry and commerce, always trying to see what the Bank can do to help. The fishing industry is especially exposed to the current difficulties, the producers selling in the international markets, and at present there are many crisis signals. The building- and construction industry is also an exposed sector. In North Norway, the biggest problems are being felt in the large towns and cities, whereas the districts are not experiencing the same problems. A large public sector in our region, amounting to 44 per cent of the overall economy approximately 10 per cent more than the national average represents a good buffer, which means that the financial crisis is not being felt as strongly in our region as in other places in the country. The government has proposed various measures to help parts of the country s industry and commerce. This is positive, but in North Norway too, observers would want the proposed measures to be implemented more quickly. So far this year, private households in the region have been enjoying a better financial situation, and this is due to the various interest rate reductions. According to our calculations, a family with two incomes and a loan of NOK 2 million will today have about NOK 4,000 more in monthly disposable income compared with the period before the financial crisis became a reality. In North Norway too, people have become more careful with their money despite their improved financial position. There is little doubt that the media s daily comments on the economic situation have made people more aware of the economic downturn. Summary 2009 will also be a challenging year for the Bank and for our region. With our 81 branches throughout the region, we are able to pick up signals about what is happening within all local communities. We must nevertheless be prepared for some unforeseen events. In spite of private households generally good financial situation, people losing their jobs clearly represent a problem in the regional economy. SpareBank 1 Nord-Norge is strongly committed to what is happening in its region. The Bank has a forward-looking strategy, a strong financial basis and good credit- and control routines. This means that we are able to provide proactive support also in an economic downturn. Hans Olav Karde administrerende direktør

4 2 Annual Report 2008 Important events in 2008 The period of strong economic expansion is levelling out and the unsettled global financial markets and their impact are now felt in North Norway too The Bank s core operations are strengthened The SpareBank 1-alliance adopt a new profile SpareBank 1 Nord-Norge acquires 10 per cent of Tavrichesky Bank in Russia. The intention is for Tavrichesky Bank s branch in Murmansk to be separated out and converted into a separate bank of which SpareBank 1 Nord-Norge is to own 75 per cent and Tavrichesky Bank 25 per cent SpareBank 1 Nord-Norge acquires Glitnir Norge ASA together with the other member banks in the Spare- Bank 1-alliance Positive risk development in the Bank s lending portfolio both within the retail banking- and corporate markets In 2008 too, through its publication of the Business Barometer for Nord-Norge, the Bank has helped to focus on the discussion of social issues within the region There has been a high level of activity within the area of the Bank s corporate social responsibility and active use of donations for various good purposes within the different communities of the region Members of the Group Management Committee Chief Executive Officer Hans Olav Karde Deputy Chief Executive Officer Oddmund Åsen Director, Information and Public Relations Kjell Kolbeinsen Risk manager Geir Andreassen Senior Group General Manager Support Functions Elisabeth Utheim Senior Group General Manager Corp. Banking Market Liv Bortne Ulriksen Senior Group General Manager CFO Rolf Eigil Bygdnes Senior Group General Manager Retail Banking Market Stig Arne Engen

5 Annual Report Annual Report Group key figures Amounts in NOK million and as a percentage of average assets 2008 % 2007 % 2006 % From the profit and loss account Net interest income % % % Net fee-, commission and other operating income % % % Net income from financial investments % % % Total income % % % Costs % % % Profit before losses % % % Losses % % % Profit before tax and minority interests % % % Tax % % % Minority interests % % % Profit for the year % % % Profitability Return on equity capital % 18.1 % 24.5 % Interest margin % 2.08 % 2.14 % Cost/income % 51.4 % 49.5 % Balance sheet figures Loans and advances to customers Loans and advances to customers including SpareBank 1 Boligkreditt AS Deposits from customers Deposits as a percentage of gross lending % 63.8 % 60.1 % Growth in loans and advances to customers past 12 months 2.1 % 8.6 % 11.0 % Growth in loans and advances to customers including SpareBank 1 Boligkreditt AS 7.4 % 13.6 % 11.0 % Growth in deposits from customers during the last 12 months 7.9 % 15.3 % 9.6 % Average assets Total assets Losses on loans and commitments in default Losses on loans to customers as a percentage of gross loans 0.36 % 0.03 % % Non-performing commitments as a percentage of gross loans 0.60 % 0.43 % 0.52 % Impaired commitments as a percentage of gross loans 0.88 % 0.69 % 1.12 % Net non-performing and impaired commitments as a percentage of gross loans 1.08 % 0.85 % 1.22 % Solidity Capital adequacy % 10.0 % 10.4 % Core capital adequacy % 8.9 % 9.8 % Core capital Net subordinated capital Risk-weighted assets base for capital Branches and number of man-years worked Branches Man-years worked Primary Capital Certificates PCC ratio overall % % % % % % Quoted/market price NONG as at Quotation value Equity capital per PCC (NOK) Profit per PCC (NOK) Cash dividend per PCC to be paid P/E (Price/Earnings) P/V (Price/Book Value) Profit for the period as a percentage of average total equity, calculated as average amount of quarterly equity and per and Total interest margin as a percentage of average total assets. 3 Total costs as a percentage of total net income. 4 Deposits from customers as a percentage of gross lending. 5 Average assets are calculated as average assets each quarter and at and Net subordinated capital as a percentage of calculated risk-weighted balance 7 Core capital as a percentage of calculated risk-weighted balance 8 PCC holders share of equity capital as at Quoted price on Oslo Stock Exchange multiplied by numbers of PCC's outstanding 10 PCC-capital + Premium Fund + Dividend Equalisation Fund, divided by number of PCC's outstanding 11 Profit for the period (parent bank) multiplied by PCC holders' share of the equity capital as at 01.01, in relation to total number of PCC's. 12 Cash dividend per PCC for the accounting year. Resolution made by Main Borad of Directors 13 Market price on Oslo Stock Exchange at end of period, divided by result for the period per PCC. 14 Market price on Oslo Stock Exchange at end of period, divided by book value of equity capital per PCC.

6 4 Annual Report 2008 Historical background SpareBank 1 Nord-Norge s history goes back to 1836, when Tromsø Sparebank was established. Today s financial services group has been built on the basis of four merged banks: Sparebanken Nord and Tromsø Sparebank merged on Nordkapp Sparebank was added to the Group on Sparebanken Nordland joined the Group on Through these mergers, SpareBank 1 Nord-Norge has become a group consisting of some 40 savings banks located in Nordland, Troms and Finnmark. SpareBank 1 Nord-Norge is a leading provider of financial products and services within the retail banking- and corporate banking markets throughout the region. The Bank has a total customer base of some 244,000 retail banking customers, approximately 36,500 corporate clients, including public sector companies, clubs and associations, and some 101,000 insurance customers. The Bank has 81 branches in Finnmark, Troms, Nordland and on Svalbard. SpareBank 1 Nord-Norge has its own representative office in Murmansk (Russia) and is a shareholder in Bank Tavrichesky OJSC which has its head office in St. Petersburg (Russia). Our co-operation with the SpareBank 1-alliance and our equity stake in SpareBank 1 Gruppen AS will help secure and safeguard SpareBank 1 Nord-Norge s independence and regional roots through high levels of competitiveness, profitability and capital adequacy. Through its co-operation with the SpareBank 1-alliance and its own subsidiaries, the Bank has gained access to various forms of expert knowledge and professional skills as well as special products and services which are in demand in the market. As a supplement to the Parent Bank s range of products and services, its subsidiaries help the Bank to fulfill its ambition of being a fullservice provider of financial products and services in North Norway. Reference is made to a separate description of the Bank s subsidiaries elsewhere in this Annual Report. Group Parent Bank SpareBank 1 Nord-Norge Invest AS Investment company Equity stake 100 % SpareBank 1 Nord-Norge Securities ASA Securities firm Equity stake 54 % Tromsø Bodø Sandnessjøen SpareBank 1 Finans Nord-Norge AS Leasing Equity stake 100 % SpareBank 1 Gruppen AS Financial services group Equity stake 19,9 % Tromsø Bodø Alta Hammerfest Kirkenes Mo i Rana Harstad Sandnessjøen Finnsnes SpareBank 1 Factoring AS Factoring Equity stake 100 % EiendomsMegler 1 Nord-Norge AS Real estate brokerage Equity stake 100 % SpareBank 1 Boligkreditt AS Covered Bonds Mortgage financing Equity stake 16,72 % Eiendomsdrift AS Real estate management Equity stake 100 % Organisation of the financial Group.

7 Annual Report Management structure Internal Auditing Main Board of Directors Risk Management and Compliance Chief Executive Officer Information and Public Relations Deputy Chief Executive Officer Strategy and Development Deputy Chief Executive e Officer Finance Senior Group General Manager CFO Retail Banking Market Senior Group General Manager Corp. Banking Market Senior Group General Manager Support functions Senior Group General Manager 5 Regional General Managers Capital Market Retail Market Troms Customer Service Troms Personnel Region Finnmark Financial Reporting Customer Center Market Communication Loan Administration Secretariat Credit Support Organisation and training Information Technology Safety and Security Region Hålogaland Region Salten Legal affairs Internal Service Region Helgeland Customer Related Activity Staff units Region North-West Russia

8 The Northern Regions: The Northern Regions have been designated Norway s most important strategic area of investment during the next few years. The aim of this investment is to create enhanced knowledge, activity and presence in the north, and to form the basis for sustainable economic and social development in the future. SpareBank 1 Nord-Norge has a presence throughout the region. We have established a representative office in Murmansk, with the aim of opening a branch for the benefit of businesses and persons establishing themselves in Northwestern Russia. The Northern Regions are the market of opportunities. Photograph: NASA

9 Annual Report 2008

10 8 Annual Report 2008 Annual Report 2008 A challenging year MAIN GROUP FEATURES (Figures in brackets refer to 2007) NOK 493 million pre-tax operating result (NOK 893 million) 8.1 per cent (18.1 per cent) after-tax cent return on equity capital NOK 4.09 profit/earnings per Parent Bank PCC (Primary Capital Certificate) (NOK 10.00) A big loss at SpareBank 1 Gruppen AS, the Bank s share thereof being NOK 151 million (a profit share of NOK 229 million) Losses on shares and securities totalled NOK 377 million (NOK 41 million) Losses on loans totalled NOK 183 million (NOK 17 million) Total costs under control; costs up by 0.9 per cent on 2007 Overall cost ratio: 59.0 per cent (51.0 per cent) Lending growth, including Boligkreditt: 7.4 per cent (13.6 per cent) Retail banking 8.5 per cent (including Boligkreditt) Corporate banking 5.4 per cent Deposit coverage ratio: 67.4 per cent (63.8 per cent) Income from negative goodwill relating to acquisition of BNbank ASA, NOK 415 million Proposed cash dividend for 2008: NOK 3.00 per PCC NOK 40 million has been set aside for the Donations Fund INTRODUCTORY COMMENTS The Bank has prepared Parent Bank and Group accounts in accordance with International Financial Reporting Standards (IFRS). The Parent Bank s accounts for 2006, which were prepared according to Norwegian accounting standards (NRS), have been restated according to IFRS in order to produce comparable figures. OVERALL RESULTS The Bank s 2008 result is to a significant extent affected by the change in the global economy which started during the autumn of 2007 and which has continued very strongly during The SpareBank 1 Nord-Norge Group s 2008 operating result, after credit losses, but before tax, totalled NOK 493 million. This is NOK 400 million down on The reduction is mainly due to the inclusion in the profit and loss account of unrealised losses on the Bank s bond portfolio, unrealised losses on strategic shareholdings, increased provisions for losses and a substantial loss at SpareBank 1 Gruppen. A substantial amount has been included as income in connection with negative goodwill following the Bank s participation (20 per cent) in the acquisition of Glitnir Bank ASA, now BNbank ASA. The tax cost for the year has been estimated at NOK 143 million. The result after tax and minority interests finished up at NOK 348 million. The return on equity capital was 8.1 per cent, as against 18.1 per cent in The main Board of Directors proposes payment of a NOK 3.00 dividend per PCC in the Parent Bank for As mentioned above, the overall result for 2008 is significantly affected by the global economic downturn. This has triggered substantial write-downs on the Bank s strategic shareholdings in Hurtigruten ASA and Helgeland Sparebank. In addition, SpareBank 1 Gruppen AS made a big loss in 2008, the Bank s share thereof being NOK 151 million. SpareBank 1 Nord-Norge s core operations before losses (excluding securities, the Bank s share of SpareBank 1 Gruppen AS s loss and negative goodwill relating to the Bank s participation in the acquisition of BNbank ASA) produced a result of NOK 760 million, up from NOK 709 in In 2008, together with the other members banks of the SpareBank 1-alliance, the Bank acquired Glitnir Bank

11 Annual Report ASA, now BNbank ASA. SpareBank 1 Nord-Norge s share was 20 per cent. After substantial loss provisions, coupled with a value assessment of BNbank ASA, SpareBank 1 Nord-Norge s share of the negative goodwill was booked as income in the Group s accounts, the amount totalling NOK 415 million. The 2008 result is not in accordance with the strategic profit targets agreed by the main Board of Directors. Against the background of the events in global financial markets in 2008 the main Board of Directors is nevertheless pleased that the Bank s core operations show significant improvement. Furthermore, the Bank benefits from good financial strength and a very good deposit coverage ratio. This shows that the Bank is well capitalised and well equipped to meet the challenges in 2009 and to be able to take care of its customers requirements for financial services in the future. THE GROUP S AREA OF OPERATIONS One of SpareBank 1 Nord-Norge s main aims is to be a comprehensive provider of financial products and services in North Norway. In addition to loans, deposits, payments transmission services, leasing and factoring, such financial products and services also include most savings products as well as life- and non-life insurance. Furthermore, the Bank is active within the areas of real estate brokerage, trading in securities, active investment management, value assessment and other corporate services. All products and services are made available either by the Bank and its subsidiaries, or through Sparebank 1 Gruppen AS s product companies. The Bank has also opened a representative office in Murmansk and aims to open a bank branch in the same location which will initially be able to provide financial products and services to Nordic companies and persons establishing themselves in Northwestern Russia. The Bank has implemented a multi-channel distribution strategy, making its products and services available through its 81 branches throughout North Norway, one customer service centre accessible by telephone on all weekdays, and the through the Bank s Internet-based bank. Reference is also made to a description of the Bank s various areas of operations in a separate document published on our website. See page 124 of the Annual Report for further information. SpareBank 1 for Nord-Norge Annual customer satisfaction- and market position surveys show that, in general, customers are satisfied with the Bank. A broad range of products and services, proximity and closeness to the customers, as well as proactive and competent staff, represent the Bank s most important competitive edges. One of the SpareBank 1 Nord-Norge's Group s strategic aims is to continue to work as an active and long-term partner as far as the further development of North- Norway is concerned: The Bank s primary task will be to offer complete financial solutions to local people, businesses, public sector entities, clubs and associations. The Bank s services will be characterised by closeness and proximity to its customers, solutions which have been adapted to users needs, local knowledge and corporate professionalism The Bank will also take an active part in the development of local communities through its commitment and the sharing of knowledge Through its direct and indirect involvement in equity capital markets, the Bank will try to ensure that the region benefits from local ownership as well as an environment of high skills and innovation The Bank wants to help develop active networks for the sharing of knowledge, both nationally and internationally SpareBank 1 Nord-Norge will support local commerce and industry through partnership solutions and development contracts. In 2008, the Bank made various contributions from its Donations Fund, supporting a number of good causes, and will actively use the Fund in order to support causes within the areas of sport, knowledge and culture in North Norway also in the future. Reference is made to a separate chapter in the annual report dealing with the Bank s role in the community. FINANCIAL PRODUCTS AND SERVICES One of SpareBank 1 Nord-Norge s strategic aims is to increase revenue generation from risk-free areas, by offering its customers a broad range of products and services within the savings-, placement- and insurance markets.

12 10 Annual Report 2008 Commission income from the abovementioned product areas has increased significantly in recent years. However, these revenues were down on The main reason for this is significantly smaller sale of savings products mainly unit trust certificates coupled with a smaller portfolio of unit trust certificates. SpareBank 1 Nord-Norge is an important player in the savings- and placement market within the region. Deposits from customers increased by NOK 2,538 million in INTEREST- AND CREDIT COMMISSION INCOME Total net interest- and credit commission income increased by NOK 60 million during the last 12 months. In relation to average assets, net interest and credit commission income amounted to 2.82 per cent (2.88 per cent). The Bank attaches great importance to the correct pricing of credit commitments in relation to risk. As a result of the re-pricing of credit risk in the financial markets, the Bank has increased its own risk margins, especially for higher risk commitments. The unsettled conditions in the financial markets with high interest rates in the inter-bank market, increased credit spreads in the capital markets, and strong competition, have contributed to a situation in which the Bank s ability to increase its own margins has been limited. The Bank has decided to waive usage- and monthly fees for cards and for electronic payments transmission for prioritised customers. This was done with effect from The income lost from this change has been estimated at NOK 35 million on an annual basis; it is hoped that this can be compensated for through increased other income and reduced costs. Reduced revenue generation from foreign exchange and financial assets is primarily ascribable to a charge to the profit and loss account in respect of unrealised losses on the Bank s portfolio of bonds and on strategic shareholdings in Hurtigruten ASA and Helgeland Sparebank. As at , a reclassification was made of large parts of the Bank s interest-bearing securities in the trading portfolio from «fair market value through the profit and loss account» to categories which are valued at amortised cost. This comprised NOK 3,807 million of the NOK 4,981 million book value of the portfolio as at The securities portfolio is managed within the limits fixed by the Bank s main Board of Directors. These limits also apply to exposure in respect of the portfolio of financial derivatives and other financial transactions. In this connection, reference is also made to the separate section below dealing with financial risk. Operating costs Aggregate Group operating costs totalled NOK 971 million in 2008, up by NOK 9 million or 0.9 per cent on In relation to average assets, however, operating costs amounted to 1.58 per cent, down from 1.66 per cent a year earlier. Personnel costs fell by NOK 10 million compared to The reason for the shrinkage was that in 2007 a charge of NOK 42 million was made to the profit and loss account in respect of profit sharing for staff, whereas no such provision was made in OTHER (NON-INTEREST) INCOME In 2008, other income totalled NOK 67 million, down by NOK 296 million on The change is made up of the following items: During the course of the year under review, the Group s overall manning level increased by 8 man-years. Of this, the Parent Bank and its subsidiaries accounted for 2 and 6 man-years respectively. Reduced shares of SpareBank 1 Gruppen AS s and SpareBank 1 Boligkreditt AS s results Negative goodwill relating to acquisition of BNbank ASA booked as income and share of company s result Reduction in other income Reduced income from foreign exchange and financial assets NOK 376 million nok 422 million nok 1 million nok 341 million Loan losses and commitments in default Since the autumn of 2003, North Norway has been enjoying a period of strong economic expansion with a strong national and international focus, particularly relating to the natural resources in the northern areas. This has brought about a good financial situation for private households and good results for regional businesses.

13 Annual Report During the course of 2008, the unsettled financial markets had an impact on the real economy. This has brought about increased loss provisions, both specific loss provisions and an increase in collective provisions, the latter due to expectations of increased future losses. Net losses of NOK 183 million have been charged to the profit and loss account. This amount was made up of losses of NOK 156 million in the corporate market, NOK 7 million recoveries in the retail banking market, and NOK 34 million in increased collective writedowns. Losses amounted to 0.36 per cent of gross lending. In 2007, losses totalled NOK 17 million. Collective write-downs on commitments amount to NOK 204 million or 0.40 per cent of gross lending. At the end of 2008, net commitments in default and bad and doubtful commitments totalled NOK 553 million, representing 1.08 per cent of gross lending. A year earlier, net commitments in default amounted to NOK 428 million or 0.85 per cent of gross loans. whereas the accounts show figures which exclude SpareBank 1 Boligkreditt AS. Gross loans, including loans to SpareBank 1 Boligkreditt AS, were up from NOK 52,542 million at the end of 2007 to NOK 56,455 at the close of 2008, an increase of 7.4 per cent. Retail banking loans grew by 8.5 per cent, corporate- and public sector borrowings by 5.4 per cent. After this, retail banking customers accounted for 66 per cent of the Bank s total lending, the corporate banking- and public sectors 34 per cent. After taking into consideration credit facilities and building loans granted, but not yet drawn against, the retail bankingand corporate/public sectors accounted for 59 and 41 per cent respectively of total loans and credit facilities at the end of In order to maintain overall credit risk at an acceptable level as far as its lending activities are concerned, the Bank attaches particular importance to borrowers ability to service their outstanding commitments, and also to satisfactory collateral or other security coverage. Allocation of profit for the year The main Board of Directors proposes that the profit for the year is allocated as follows : Amounts in NOK million Parent Bank s profit for the year after tax 214 Allocations: Set aside for the Dividend Equalisation Fund (incl. dividend) 73 Donations Fund 40 Savings Bank s Fund 101 Total allocations 214 A cash dividend of NOK 3.00 per PCC, totalling NOK 54.0 million, has been proposed. BALANCE SHEET Group assets rose by NOK 4,538 million, standing at NOK 65,507 million at the end of This represented a 6.9 per cent increase during the last 12 months. Towards the end of 2006, SpareBank 1 Nord-Norge started transferring house mortgage loans to SpareBank 1 Boligkreditt AS. In order to be able to make a proper comparison of the growth figures involved, the amounts transferred have been included in the comments below, Deposits from customers rose by NOK 2,538 million or 7.9 per cent to NOK 34,572 million during the last 12 months. Retail banking deposits were up by 9.9 per cent, the corporate- and public sectors by 5.4 per cent. Deposits from customers in relation to gross lending to customers produced a 67.4 per cent ratio for internally generated funding at the end of 2008, up from 63.8 per cent a year earlier. Corporate Covernance The governance of SpareBank 1 Nord-Norge is based on the principles mentioned in the Norwegian recommendation for corporate governance. The implementation at SpareBank 1 Nord-Norge is largely in accordance with this recommendation. Corporate governance at SpareBank 1 Nord-Norge is defined as the aims and overall principles according to which the Bank is managed and controlled in order to safeguard the interests of the Bank s PCC-holders, depositors and any other groups involved in this connection. The SNN Group s principles for good operational management shall ensure that the Bank s assets and liabilities are managed in an appropriate manner, providing additional assurance that all agreed aims,

14 12 Annual Report 2008 targets and strategies are realised and achieved. This is described in more detail on our website. See page 125 for further information. and relating to whether the internal control is working in an appropriate and reassuring manner. INTERNAL CONTROL, RISK MANAGEMENT AND CAPITAL ADEQUACY The main Board of Directors governance of SpareBank 1 Nord-Norge is based on the principles mentioned in the Norwegian recommendation for corporate governance. The Group s principles and framework for internal control and risk management are set out in the Bank s separate «Policy for Risk Management and Compliance», which is reviewed annually by the main Board of Directors. The Policy for Risk Management and Compliance is the Group s internal framework for good management and control, providing guidance for the Group s overall attitude and approach to risk management, ensuring that the Group has an effective and appropriate process in this connection. Reference is also made to a separate section in the Annual Report about Corporate Governance, where risk management and internal control are dealt with in more detail. Internal control In 2008, the main Board of Directors focused strongly on the auditing and revision of the framework for management and control and on ongoing follow-up of the development in central quality- and risk indicators. In this connection, systems and reporting routines for the follow-up of credit risk and operational risk etc. have been prioritised. Each year, all managers provide a statement confirming that framework, guidelines and routines are being adhered to, and that these systems are being used actively in the follow-up of each profit centre involved. The annual confirmation from managers is based on the framework which applies to SpareBank 1 Nord-Norge and ongoing control measures are documented through the use of various management information systems. Central parts in this connection are Balanced Scorecard, portfolio management system and the Bank s own riskand information data bases where areas for improvement and losses and events are followed up. Risk management Risk management at SpareBank 1 Nord-Norge shall provide support relating to the Group s strategic goals and development. It is a priority within the Group that good risk management shall safeguard financial stability as well as safe and secure management of assets over time. This shall be achieved through: a corporate culture characterised by high awareness of risk- and quality management a good understanding of the risks which have an important impact on revenue generation and risk costs, and which therefore help provide a better basis for decision-making making every effort to achieve good utilisation of capital and a stable, risk-adjusted return on the business from customers over time, within the Bank s agreed business strategy avoiding unexpected negative events which can have an adverse impact on the Group s reputation and operations SpareBank 1 Nord-Norge s main Board of Directors has the overall responsibility for setting limits for and monitoring the Group s risk exposure. The SpareBank 1 Nord-Norge Group s aggregate risk is measured and reported in accordance with the guidelines agreed by the main Board of Directors. The overall aim is that the Group s aggregate risk level should be moderate, reassuringly conservative and well within the limits fixed in relation to the Bank s equity and related capital, plus other provisions. Through good risk management, the Group shall achieve stable and predictable levels of revenue generation and results. The achievement of a competitive return on equity capital is the Bank s most important performance target. A sharper focus on risk-adjusted return on assets and risk pricing is accordingly a key factor in order to achieve the Bank s aim of a satisfactory return on equity capital. Each year, the main Board of Directors receives an independent assessment from the Bank s Internal Auditor and the responsible Auditor relating to all Group risks, Strategic risk At all times, the main Board of Directors focuses on the

15 Annual Report Bank s strategy, attaching a great deal of importance to current and continuing management and follow-up of risk as an effective way in which to meet the Bank s various strategic targets. In addition, it is considered very important to monitor and be aware of all changes occurring, both internally, within the markets, and as far as the Bank s overall framework conditions are concerned. This is done both through ongoing customer satisfaction surveys, staff satisfaction surveys and the publication of the Business Barometer for North Norway. The Business Barometer focuses on central macro-economic aspects and market-related circumstances which are important for the Group s long-term profitability, financial strength and market-related position in the Bank s region. SpareBank 1 Nord-Norge s aim is to apply a very comprehensive risk follow-up procedure at all times, thereby making sure that no single event should be able to damage the Bank s financial position. Balanced target management is a key factor as far as the follow-up of the Bank s operations is concerned. Continuing monitoring of and focus on those indicators in the Bank s Balanced Scorecard which are critical in order to meet the overall targets in question provides the main Board of Directors with good management information. Deposits from customers represent the Bank s most important source of funding and, at the end of the year, represented, together with long-term funding loans and equity capital, 104 per cent of the Bank s illiquid assets (loans and fixed assets). This ratio illustrates the extent to which the Bank s illiquid assets are covered by longterm funding; it is called Funding Indicator I («Likviditetsindikator 1») by Norges Bank (Bank of Norway). The Bank s overall funding risk is reduced through the diversification of funding loans through different markets, sources, financial instruments and maturities. The funding risk is not quantified as part of the calculation of the the risk-adjusted capital. The turbulence in the global financial markets, which was initially triggered by the US sub-prime mortgage loan crisis, became stronger in This brought about a further reduction in liquidity in the financial markets, making it difficult for financial institutions to obtain the required funding. In spite of this situation, SpareBank 1 Nord-Norge managed well throughout 2008 due to the fact that the Group benefits from a large share of long-term financing. After it became possible to use preference bonds as a new financial instrument, the Bank has transferred parts of its well secured house mortgage loans to SpareBank 1 Boligkreditt AS. This enabled the Bank to reduce its funding risk. The government s package of measures aimed at improving the banks liquidity and possibilities for financing, has also helped to reduce the uncertainty relating to the banks ability to fund themselves. During 2008, the Bank did not make use of these measures, but expects to take advantage of the authorities package of measures during the course of Financial risk Funding risk In a simplified way, funding risk may be defined as the risk of the Bank not managing to meet its financial obligations at maturity. The main Board of Directors pays a great deal of attention to predictability and stability, annually reviewing the Bank s funding strategy, where management of the Bank s financial structure is a key factor. The funding strategy reflects the Bank s conservative risk profile and it is important that incidental events do not have a serious impact on the Bank s overall ability to meet its payment obligations. For SpareBank 1 Nord-Norge, the biggest challenges relating to the financial crisis have been: The liquidity in the market for the Bank s funding loans became significantly impaired. This was particularly the case for medium- and long-term loans, especially from foreign sources. Increased funding costs for the Bank s loans Higher money market rates and a bigger differential between interbank interest rates (Nibor) and Norges Bank s benchmark rate of interest Higher credit spreads higher credit premiums Losses on the Bank s interest-bearing securities portfolio as a result of increased credit premiums Insufficient liquidity within large parts of the Bank s interest-bearing securities portfolio The Bank has not experienced a reduction in deposits from customers during the financial crisis. Furthermore, during this period the Bank has focused strongly on the importance of customer deposits as the Bank s most important source of funding.

16 14 Annual Report 2008 As a consequence of the financial crisis and the uncertainty relating to the refinancing of the Bank s funding loans, the Bank chose to maintain substantial liquidity reserves in This was done in order to safeguard the Bank s funding situation and in order to better enable it to meet its own customers funding requirements in a tight market. The main Board of Directors focused more strongly on the funding area in 2008 and the consequences for the Bank of the global financial crisis have been assessed on an ongoing basis. The Bank s experiences from the turbulence in the credit markets show that: from the second half of In connection with its ongoing market evaluation of securities, the Bank charged NOK 141 million to the profit and loss account in 2008 in respect of realised and unrealised losses on the Bank s bond portfolio. The Bank s positions in the stock market is affected by the unsettled global financial markets and plummeting share prices on international stock exchanges. Realised and unrealised losses on shares and unit trust certificates in 2008 totalled NOK 254 million. Of this, the realised loss on the Bank s shareholding in Hurtigruten Group ASA accounted for NOK 20 million, whereas the unrealised part amounted to NOK 92 million. The interest rate risk in the portfolio is low. The Bank s systems for liquidity management and its contingency plans were working well. The Bank s funding bearing in mind the circumstances has remained good throughout this period. The Bank s credit ratings from the two international rating agencies, Moody s and Fitch Ratings, are considered important, particularly as far as access to international funding sources is concerned. The Bank retained its rating from both rating agencies in 2008 but Moody s has placed the Bank on negative outlook as a result of the uncertainty relating to possible effects of the SpareBank 1 member banks acquisition of BNbank ASA. The Bank s long-term rating from Moody s is AA3 and from Fitch A. At the end of 2008, the ratio between deposits from, and lending to customers was 67.4 per cent, as against 63.8 and 60.1 per cent respectively one and two years earlier. Market risk Market risk is defined as the risk of losses occurring due to unfavourable changes in market prices, in this connection relating to the Group s positions and transactions within foreign exchange- and securities markets. The Bank has little exposure in the foreign exchange markets except that which relates to trading on behalf of customers. The main Board of Directors has decided to keep the Bank s overall interest rate risk at a low level. As at , the Bank s portfolio of interest-bearing securities (certificates and bonds) amounted to NOK 6,756 million. As a result of the turbulence in the credit markets, credit margins in this market have increased significantly, both domestically and internationally, Credit risk Credit risk is defined as the risk of loss if customers or counterparts are unable or unwilling to meet their financial obligations to the Bank. The Bank s strategy for credit risk is based on the Bank s main strategy, comprising guidelines relating to risk profile, the distribution of risk between the retail banking and corporate banking sectors, concentration risk, as well as separate rules for specific types of commitments or commercial and industrial sectors. The main Board of Directors continually follow up the risk contained in the Bank s lending portfolio, always trying to identify certain development features as early as possible in order to be able to make any necessary adjustments to the Bank s credit policy. The change in the economic situation has brought about increased challenges for certain industrial and commercial sectors and a rising level of unemployment. This is particularly the case for the building- and construction sector. In the case of certain urban areas, the changes in house prices and sales possibilities in the market have resulted in more uncertainty, and private households behavior has changed, both in the form of reduced spending and somewhat increased savings. Norges Bank s changes in its benchmark rate of interest coupled with falls in market interest rates, however, have meant that the financial situation both for households and businesses has been affected in a positive way. The Group s commitments in default and net credit losses increased somewhat compared to 2007, but remain at a moderate level compared to previous economic downturns.

17 Annual Report In the case of the credit strategy, emphasis is placed on the establishment of targets and limits for the ongoing management of the credit risk. The Bank s lending rules and regulations as well as delegated lending authority/powers of attorney are related to the probability of default, and security coverage, and apply within credit strategy and overall credit policy guidelines; these lending rules and regulations are evaluated by the main Board of Directors on an annual basis. Since 2004, the Bank s risk classification system has used a rating model as the basis for assessment of the probability of default and credit losses. The classification matrix comprises 77 different risk classes with regard to the probability of default, and with regard to security coverage. The Bank prepares an annual validation of the credit models in accordance with the agreed routines and principles for this work. The credit models form a central part of the Bank s credit process, and the results from the completed validation in 2008 show that the models are regarded as satisfactory, differentiating well between customers involving different levels of risk. In order to manage the Bank s lending portfolio according to the Bank s credit strategy, credit policy and the rules and regulations relating to the granting of credit, there has been an ongoing further development of and adaptation to credit systems and framework for the management of credit risk in Furthermore, a comprehensive training programme has been completed in order to enhance the quality of all credit work and in order to better understand what good management and control involve. The further development of credit systems and training programmes has been an important part of the adaptation to the Basel II requirements. Operational risk Operational risk is defined as the risk of direct or indirect losses, or the loss of the Bank s reputation in the market, brought about by: Insufficient professional competence Human errors Failure involving routines, internal systems and processes Crime, fraud and misconduct External events The satisfactory handling of operational risk must be based on good internal control and quality management. In 2008, the Bank continued its work relating to the development of processes and systems for current and ongoing identification, analysis and quantification of risk. The introduction of a separate Risk and Classification System has been an important contribution to a targeted focus on all quality work throughout the Bank and the enhancement of overall quality. In recent years, the focus on operational risk has become significantly sharper within industry and commerce in general, and within the financial services industry in particular. More and more companies have come to realise that the effective management of operational risk can represent a competitive advantage in an increasingly tougher and more unpredictable market. At the same time, an increasing degree of complexity is today evident within industry and commerce. Some of the factors involved are: a sharper focus on corporate governance increased internationalisation big market fluctuations and emergence of new markets constant development of new technology and quick technology changes a high rate of change and restructuring a need for a high degree of effectiveness and mobility development of the knowledge-based society more threats (terror, crime, internal fraud, irregularities, malpractice and misconduct) according to the capital adequacy rules and regulations (Basel II), the banking industry is required to have effective systems and the necessary competence for the management of operational risk. Explicit requirements have been introduced according to which the banks must have in place a certain amount of equity and related capital as a safety buffer for any future operational losses Together with SpareBank 1 SR-Bank, SpareBank 1 SMN, Bank 1 Oslo, SpareBank 1 Hedmark and DnB NOR, SpareBank 1 Nord-Norge has implemented a project in cooperation with the University of Stavanger for the further development of effective models and tools for the management of operational risk in line with the requirements contained in the Basel II directive. The Financial Supervisory Authority of Norway (FSAN) participates in the project as an observer. The FOU-

18 16 Annual Report 2008 project shall generate added value for the Norwegian financial services industry through training and competence development within the area of operational risk, coupled with the provision of actual tools and work processes for the effective management of operational risk. The Bank is represented in the steering group and in various work groups. The Bank s internal control is defined as line responsibility according to which an «self evaluation» is made and reported to the main Board of Directors. Such reports comprise all risk elements attributable to external and internal circumstances. Auditing External auditors: The Group s external auditors are KPMG. Internal auditors: The internal auditing is done by Ernst & Young. The internal auditors report to the main Board of Directors. Measures aimed at improving results and reducing risk The main Board of Directors attaches a great deal of importance to measures aimed at ensuring good and stable results for the Group as a whole. In 2008, together with the Bank s management, the main Board of Directors has been focusing on the following key areas which in the short and long run will ensure that the abovementioned overall targets are met: Further development of co-operation with the SpareBank 1-alliance Building and enhancing professional competence, coupled with recruitment of additional staff within all central and crucially important areas throughout the Group Work involving quality and risk management throughout the organisation Controlled growth, focusing on risk management and risk-reducing measures The Bank s liquidity- and funding strategy in order to further reduce the vulnerability to market swings The increase of other (non-interest) income, especially within the areas of saving and insurance Measures aimed at improving overall effectiveness both in terms of increased business volumes and better cost control The establishment of a separate region in Northwestern Russia Increased involvement in and commitment to the local community through the active use of the Bank s Donations Fund in order to provide financial support for cultural and competence-enhancing measures Basel II One of SpareBank 1 Nord-Norge s goals is to manage credit risk, operational risk and market risk in accordance with the best practice followed by comparable banks. Good communications with the market and supervisory authorities form an important part of this. EU s new directive for capital adequacy was implemented in Norway with effect from The new requirements make statutory minimum requirement more risk-sensitive to the extent that the capital requirement to a larger degree corresponds to the risk contained in the underlying portfolios involved. In its work with the new capital adequacy rules and regulations, the main Board of Directors has placed particular importance on the overall risk management, change in the competitive situation, and the opportunities for better utilisation of the Bank s financial capital. The implementation of the new rules and regulations has a positive impact on the capital adequacy, although the full effect will only be evident in During a transitional period, the intention is that the minimum requirement for equity and related capital in 2008 must not be lower than 90 per cent of the statutory minimum requirement according to the currently valid rules and regulations (Basel II). For 2009, the corresponding limitation is 85 per cent of the statutory minimum requirement. SpareBank 1 Nord-Norge would like to apply the Standardised Approach when calculating minimum capital coverage relating to operational risk. In 2008, the Bank has further developed the process of adapting to the new rules and regulations relating to risk management and the new capital adequacy requirements in accordance with the international rules and regulations. In addition, reference ins made to the document «Capital Requirements Directive» on our website.

19 Annual Report Capital management The Group s capital situation is assessed in relation to the Group s agreed capital strategy. The Group shall have a level of capital which supports the aim of maintaining the Bank s current credit rating, and which safeguards the Group s access to long-term funding. It is the Bank s targeted aim that the core capital coverage ratio shall be at least 9 per cent of the risk-weighted asset calculation basis. The purpose of capital management at SpareBank 1 Nord-Norge is to ensure the effective provision and employment of capital funds, coupled with appropriate and secure management of the Group s assets. Effective capital management is closely related to the Group s strategic plans, market opportunities (including growth strategies), risk tolerance and capital targets. This is done through a suitable process for planning and follow-up of the Group s capital requirements: The process is risk-driven and comprises all significant types of risks within the Group The process is an integrated part of the business strategy, management processes and decision structure The process is forward-looking and stress tests are done The process is based on accepted and reassuring methods and procedures for risk assessment The processes are reviewed at regular intervals, at least one a year, by the main Board of Directors Equity and related capital capital adequacy During the course of 2008, the risk-weighted assets for the Group as a whole increased by NOK 7,367 million or 19.7 per cent, to NOK 44,819 million. An important reason for the strong expansion in the weighted asset calculation basis is the necessity to factor 20 per cent of the calculation basis at BNbank ASA into the Group s capital adequacy. At the end of 2008, the core capital totalled NOK 4,060 million, after deductions of items not to be included when calculating the level of core capital. This translated into a core capital ratio of 9.06 per cent, up from 8.92 per cent a year earlier. The Parent Bank s core capital ratio was 9.61 per cent. Aggregate equity and related capital at the end of 2008 amounted to NOK 4,731 million. This produced a capital adequacy ratio of per cent (10.89 per cent for the Parent Bank), as opposed to per cent (10.35 per cent for the Parent Bank) at the end of SpareBank 1-alliansen and SpareBank 1 Gruppen AS The purpose of the SpareBank 1-alliance is to acquire and provide competitive financial products and services, taking advantage of economies of scale in the form of lower costs and/or higher quality. In this way, the alliance enables retail banking- and corporate customers to benefit from their banks local roots, competence and an easier way of having their various requirements met. In addition, the alliance shall help to safeguard the banks wealth creation for the benefit of their own regions and the banks owners. The SpareBank 1-banks conduct their alliance-related co-operation and the development of product companies through the jointly-owned companies, SpareBank 1 Utvikling DA and the holding company, SpareBank 1 Gruppen AS. SpareBank 1 Gruppen AS is owned by SpareBank 1 SR-Bank (19.89 per cent), SpareBank 1 Nord-Norge (19.89 per cent), SpareBank 1 SMN (19.89 per cent), SpareBank 1 Hedmark (11.14 per cent), Samarbeidende Sparebanker AS (19.89 per cent) (a group of 16 savings banks in the eastern and north-western parts of Norway), and LO (The Norwegian Federation of Trade Unions)/trade union federations connected with LO (9.29 per cent). SpareBank 1 Gruppen AS owns 100 per cent of the shares in SpareBank 1 Livsforsikring AS, SpareBank 1 Skadeforsikring AS, Bank 1 Oslo AS, ODIN Forvaltning AS, SpareBank 1 Medlemskort AS and SpareBank 1 Gruppen Finans Holding AS, and 75 per cent of the shares in Argo Securities AS and 24.5 per cent of the shares in First Securities AS. SpareBank 1 Gruppen Finans Holding AS owns 90 per cent of the shares in Actor Fordringsforvaltning AS and 100 per cent of the shares in SpareBank 1 LTO AS. In addition, SpareBank 1 Gruppen AS is a participant in SpareBank 1 Utvikling DA. SpareBank 1 Gruppen AS also has the administrative responsibility for all banking co-operation processes within the SpareBank 1-alliance, where technology,

20 18 Annual Report 2008 brand names, competence, joint processes/the application of best practice, and the purchase function are all key factors. The alliance also conducts development work through three competence centres, involving Training (Tromsø), Payment Transmission Services (Trondheim) and Credit (Stavanger). The SpareBank 1-banks participate to a large extent in the development work which is of interest for all the members of the alliance. The most important projects within the SpareBank 1-alliance in 2008 have been the development of a new credit solution, modernisation of self-service solutions and the enhancement of the overall effectiveness of member banks advisers work situation. The SpareBank 1-alliance has entered into a long-term strategic cooperation arrangement with EDB Business Partner ASA for the supply and development of a core bank solution. Research- and development activities The Bank is conducting as number of important development operations involving several dimensions. The Bank has its own development department which in 2008 utilised the equivalent of 4 man-years. In addition, there are 3 man-years involved within SpareBank 1-alliance s development area. The department conducts and coordinates different projects and development measures within the Bank. The Bank also publishes the Business Barometer for North Norway (twice a year). The purpose of this publication is to focus on expected developments within the region. Ongoing development work is also being done within different departments of the Bank. In 2008, in particular, a substantial amount of work has been done in connection with the implementation of improved routines and systems, after the Bank had been approved as an IRB-bank. The Bank s development activities have to some extent been related to capital investment in premises for customer use; every effort is being made in order to enhance overall customer-handling by providing suitable premises. The costs relating to this capital investment have been capitalised. In 2008 too, the most important projects within the SpareBank 1-alliance were EDB Kreditt (the former SpareBank 1 Kreditt) a further development of the alliance s credit- handling system and a new functionality in the Financial Portal. The new financial portal is already being used. The implementation of the new credit handling system will be an important activity in This will enhance both quality and effectiveness. The customers will benefit from new and better net bank solutions both in the retail banking- and corporate markets in The SpareBank 1-alliance has entered into an agreement of long-term, strategic cooperation with EDB- Businesspartner ASA about the provision and development of a core bank solution. This cooperation ensures ongoing improvements of technological solutions. Otherwise the Bank is not involved in any activities which could be described as research. It should nevertheless be mentioned that through several donations from its Donations Fund to regional colleges and to the university environment, the Bank contributes to research activities which in turn help to develop new knowledge within important areas in the region. PERSONNEL Equality between the sexes equal opportunities Actual position, with reference to the Equal Opportunities Act, paragraph 1 a As at , the SpareBank 1 Nord-Norge Group employed 871 staff (779 on a full-time-, and 92 on a parttime basis). There were 495 women and 376 men. This was equivalent to man-years, the Parent Bank and its subsidiaries accounting for and man-years respectively. The Parent Bank has 114 managers 39 women and 75 men. The average basic salary per man-year was NOK 405,000 at the end of 2008, NOK 449,000 for men and NOK 370,000 for women. Activities relating to equality between the sexes and equal opportunities The Group has a very clearly defined approach to the challenge relating to equality between the sexes and equal opportunities. According to the Bank, a working environment with both male and female staff will provide the Group with added value, both in relation to the achievement of good results and job satisfaction. A better distribution throughout the Group as far as the two sexes are concerned, with special emphasis on

21 Annual Report managerial positions, is therefore a clear target. Furthermore, it is felt that targeted development of professional competence, coupled with a stronger focus on the development of talent, will in due course bring about a better balance between female and male staff. Human resources Within the Group, a great deal of effort is being made in order to achieve good planning as far as the staff employed in the Bank s local branches are concerned. In addition, increased attention is given to the way in which the Bank s Regional General Managers make use of the Group s human resources, providing benefits to all concerned. The process of recruitment has become more efficient and there has been improvement as far as the introduction of new employees to our local branches and departments is concerned. Staff development and efficient remuneration systems continue to be a prioritised area. The SNN School has completed its first full year of operations, dealing with introductions for new staff, day-to-day management and courses for established advisory officers. The minimum requirement for financial advisory services staff has largely been met. The necessary preparations have been made by the Bank in anticipation of the statutory licence arrangements to be introduced by the authorities in cooperation with key persons at NAV, and assistance enabling the Bank to follow up on some difficult cases of absenteeism through illness. Furthermore, being a CW company has prepared the Bank better for dealing with people during the various phases of their lives and in different situations. Absenteeism through illness For SpareBank 1 Nord-Norge, absenteeism through illness in 2008 amounted to 5.8 per cent, up by 0.3 percentage points on Short-term absenteeism remained stable and low at 0.7 per cent. Systematic follow-up of the individual members of staff involved is done by the manager in question. In Finnmark, the Bank has established a project together with NAV for the purpose of looking in more detail at the problems relating to absenteeism through illness in the region. Occupational injuries No cases of occupational injuries has been reported in Inspection No inspection visits has been made within the working environment area in Pollution of the external environment as a result of the Bank s operations is minimal. Health, safety and working environment Job satisfaction surveys Surveys are done regularly in order to identify employees levels of job satisfaction. This is done to get an overview of possible areas for improvement and in order to maintain our focus on the working environment within the Group. About 75 per cent of the employees responded to the survey and the results were generally good. It is particularly pleasing that very few employees mention conditions in the workplace as a reason for absenteeism. Challenges at the different local branches and departments nevertheless vary and good, systematic efforts are being made in order to implement improvement measures. Care in the Workplace (CW) SpareBank 1 Nord-Norge has been part of Care in the Workplace for 4 years. This has given the Bank a sharper focus on the problems relating to absenteeism through illness, the establishment of a good level of SUBSIDIARIES SpareBank 1 Finans Nord-Norge AS The Company s products are leasing and vendor s lienbased loans. In 2008, factoring was transferred to the newly established subsidiary, SpareBank 1 Factoring AS. In addition, an agreement has been entered into with SpareBank 1 Gruppen AS relating to the sale of the shares in SpareBank 1 Factoring AS. According to the plan agreed, the sale will be implemented during the first quarter of The Company s products complete the Group s range of financial products and are distributed through the Bank s network of branches, dealers and by the company s own financial consultants. After the sale of its factoring business, SpareBank 1 Finans Nord-Norge AS s staff is equivalent to 29 manyears. Its core market area is North Norway.

22 20 Annual Report 2008 The 2008 after-tax result amounted to NOK 19.6 million. The equity capital totalled NOK million as at Total assets amounted to NOK 2,181 million at the end of the year. The after-tax result for SpareBank 1 Factoring AS was NOK 4.8 million and the equity capital totalled NOK 15 million at the end of Total assets amounted to NOK 134 million. EiendomsMegler 1 Nord-Norge AS (real estate brokerage) The property market throughout Norway has been difficult in This was also the case in North Norway where EiendomsMegler 1 Nord-Norge (EM1 NN) conducts its business. The challenges in the market had a negative impact on the Company s result. As a result of this, the Company s Board of Directors has made the necessary manning-related and structural adjustments. In 2008, the Company made a NOK 10.4 million loss after tax, including Bodø Boligbyggelags Eiendomsmegling (BBL-E). SpareBank 1 Nord-Norge Securities ASA 54 per cent of the company s shares is owned by the Parent Bank, 25 per cent by First Securities and 21 per cent by its staff. The company is active within the areas of stock exchange business, asset management, evaluations and other corporate services. The company has 14 employees. In 2008, the Bank s share of the company s after-tax profit amounted to NOK 1.8 million. The equity capital totalled NOK 15 million (100 per cent) as at NOK 3.4 million has been set aside for dividend payments (100 per cent). Eiendomsdrift AS The company s primary purpose is to provide suitable premises for SpareBank 1 Nord-Norge and the other companies within the Group. This is done by renting out own premises and by renting externally-owned premises. The company also develops bank branch premises and manages building projects throughout the region. The company s own building portfolio comprises 17 commercial properties which are all rented out wholly or partly to the Bank. The market-related challenges also bring about some opportunities. The Company has therefore implemented many proactive measures: Rana Eiendomsmegling was acquired in 2007 and incorporated in EiendomsMegler 1 Nord-Norge AS in 2008 Bodø Boligbyggelags Eiendomsmegling was acquired in June 2008 and incorporated in EiendomsMegler 1 Nord-Norge in Bodø. This makes EiendomsMegler 1 Nord-Norge the market leader in the town On , a separate branch was opened at Finnsnes Through the acquisition of Bodø Boligbyggelags Eiendomsmegling, EiendomsMegler 1 Nord-Norge acquired its own branch at Sandnessjøen In December 2008, EiendomsMegler 1 Nord-Norge decided to open a new branch at Harstad. This branch is already operational After the various measures which have been implemented, EiendomsMegler 1 Nord-Norge is well adapted for the future and to the real estate brokerage market in North Norway. The Company s new Managing Director starts on The company s strategy is to reduce its own property portfolio through the development and sale of properties other than those which just take care of the Group s needs. This has brought about the sale of 51 properties comprising a total of 62,500 square meter floor space since the company s reorganisation in In 2008, 6 commercial properties involving a total floor space of 12,500 square meters were sold. The purpose of the sales has been to reduce the Bank s operating costs. At the end of the year under review the company employed 5 people. The 2008 after-tax result was NOK 2.0 million. The equity capital totals NOK 55.1 million. SpareBank 1 Nord-Norge Invest AS SpareBank 1 Nord-Norge Invest AS is wholly-owned by SpareBank 1 Nord-Norge. The company s purpose is to participate, on a commercial basis, with equity capital, networks and competence in companies which conduct business primarily within the Bank s market area. The company shall invest in businesses with significant development potential in the Group s area of operations. The targeted return on invested capital is 20 per cent per annum. In 2008, SpareBank 1 Nord-Norge Invest AS acquired equity stakes in seven new companies and

23 Annual Report sold its shareholdings in two companies. The company employs 4 people. At the turn of the year, SpareBank 1 Nord-Norge Invest AS had shares and participations in 32 companies, involving an estimated aggregate market value of NOK million. The company made an after-tax loss of NOK 33.8 million in The equity capital at the end of the year was NOK 55.5 million and the equity capital ratio 39.2 per cent. THE BANK S PCCs AND PCC-HOLDERS At the end of 2008, SpareBank 1 Nord-Norge s PCC-capital totalled NOK million, consisting of 17,912,073 certificates, each with a nominal value of NOK 50. In accordance with currently valid dividend policy, PCC-holders are allocated a share of the Parent Bank s profit for the year which is commensurate with their share of the Bank s equity capital as at This share is in line with FSAN s guidelines, adjusted for added capital in connection with the dividend issue which was completed in After this adjustment, the PCC ratio ended up at per cent. The proposed dividend for 2008 has been fixed at NOK 3.00 per PCC. After allocation from the 2008 profit for the year, the Dividend Equalisation Fund amounted to NOK 277 million as at The Dividend Equalisation Fund also includes the amount set aside for payment of cash dividend, NOK 54 million, which, according to IFRS, is to be treated as equity capital until the proposed cash dividend has been formally agreed by the Bank s Supervisory Board. At the end of the year currently under review, the total number of PCC-holders was 8,371, as opposed to 8,569 a year earlier. Foreigners equity stake in the Bank amounted to 8.03 per cent, which is 6.07 percentage points down on Certificate holders with addresses in North Norway numbered 2,554 (2,536), representing per cent (22.6) of the Bank s total PCC-capital. One of the Bank s stated aims is that as many of its employees as possible should have an equity stake in the Bank. For several years, therefore, private placements and the sale of PCCs have been arranged for the benefit of the Bank s staff. On the basis of certain assumptions, the Group applies an arrangement of profit sharing for staff. This is done through allotment of PCCs. Reference is also made to further information on our website. See page 125 for more information. THE MAIN BOARD OF DIRECTORS AND GROUP MANAGEMENT Kjell Olav Pettersen is the Chairman of the main Board of Directors. Following the elections of members of the main Board of Directors in 2008, Tom Veierod and Rolf Pedersen stepped down from the main Board of Directors and Paal Andreas Pedersen and Ann-Christine Nybacka were elected as a new members. There was a change in the Group management in Olav Karlsen, Senior Group General Manager, Corporate Markets, retired from this position after having reached retirement age and has taken over another position at the Bank. Liv Bortne Ulriksen was appointed as a new Senior Group General Manager, Corporate Markets. The main Board of Directors has extended the CEO s contract of employment until his 65th birthday. His pension agreement with the Bank entitles him to a total pension equivalent to 70 per cent of annual leaving salary. Information about salaries, other remuneration and staff loans for the Bank s Chief Executive Officer and elected representatives may be found in Notes to the Account, Note 10, in the Annual Report and Accounts. PROSPECTS FOR was characterised by gradually falling demand as a consequence of the economic downturn and the impact of an increasing level of interest rates. The level of interest rates rose both due to Norges Bank s increases in its benchmark rate until October 2008 and due to significant increases in the banks funding costs (credit spreads) as a result of banks frequent reluctance to lend in the international markets, a situation which gradually also began to apply to domestic money markets. During the course of the autumn of 2008, it became apparent that the Norwegian economy would also be affected by the global economic downturn. The exportorientated companies experienced a substantial fall in demand from the autumn of Private households financial position became clearly tighter through higher

24 22 Annual Report 2008 interest rates coupled with increasing inflation. This triggered falls in property prices and a very low level of sales in the market, as well as reduced growth within the retail trade. Towards the end of 2008, Norges Bank decided to reduce its signal rate of interest by a total of 2.75 percentage points in order to dampen the impact of the strong economic downturn. In addition, the authorities introduced arrangements which should safeguard the banks liquidity and funding. Although 2008 turned out to be very turbulent, the overall impression is that both businesses and households can look back on a satisfactory year. Many companies will produce very good results for This is also reflected in the result from the Bank s core operations. In 2009, private households financial position will be significantly strengthened through the sharp reduction in the level of interest rates compared to In addition, increased use of public funds will encourage increased demand. The measures are aimed especially at the building- and construction sector. The uncertainty in 2009 is in particular related to the development in the corporate sector and in that connection to the changes in the employment situation. It is not unrealistic to assume that the jobless level in North Norway may increase by 4,000 6,000 persons (2 3 percentage points). In particular, export-orientated companies will experience challenges. This applies to industry (including fisheries) and tourism. Furthermore, the business services sector is likely to experience lower demand. The increasing unemployment within the buildingand construction sector will be dampened somewhat through the public sector measures which have been introduced. attention to risk assessment. This has brought about a closer connection between pricing of loans and the assessed risk involved. This is a healthy feature from a competition point of view. The physical network of distribution and proximity and closeness to the customers represent the core of SpareBank 1 Nord-Norge s operations. This competitive edge is further developed through increasingly sharp focus on qualitative advisory services for customers. The targeted competence development through the Bank s own school is producing positive results. Through the use of digital solutions for day-to-day banking services (Internet-linked bank, telephone bank etc.), significant further effectiveness gains are being achieved. This provides a good basis for safeguarding the Group s future competitive position involving a substantial network of local branches throughout the region. However, too low activity levels and demographic changes will bring about changes in the Bank s network of local branches. During the course of 2008, SpareBank 1 Nord-Norge acquired a 10 per cent shareholding in Bank Tavrichesky in St. Petersburg, Russia. This bank has a branch in Murmansk which is intended to be the core of the Group s bank establishment in Russia. However, difficult economic times in Russia are likely to delay this process. Through the strategic cooperation within the SpareBank 1- alliance and the equity stake in Sparebank 1 Gruppen AS, SpareBank 1 Nord-Norge is benefitting from a continuous development which ensures that our customers have access to modern and competitive products and digital solutions at all times. In summary, the economic outlook for 2009 is uncertain. In the case of the SpareBank 1 Nord-Norge Group, it is realistic to assume relatively low growth and to expect that some customers will experience difficulties with their cash flow. In spite of these factors, 2009 is expected to be a satisfactory year for the Bank. Competition in the banking market is clearly affected by the global financial crisis. The retail banking market in Norway and North Norway is still regarded as low risk, which means that competition will remain fierce. However, businesses are finding it more difficult to get access to credit as the banks are paying a great deal of CONCLUDING REMARKS The annual financial statement has been prepared on the assumption of a going concern, based on the Bank s long-term strategic plan and prognoses for the Bank s results for the next few years. The Bank is in a financially strong position. In 2008, the Bank made further efforts to increase the sales of financial products and services.

25 Annual Report VOTE OF THANKS All staff have shown great willingness and effort in order to contribute to the changed composition of the Group s revenues. The main Board of Directors would also wish to thank all the Group s customers and other good contacts for their cooperation during The main Board of Directors would like to express its appreciation to all employees for helping to further develop the SpareBank 1 Nord-Norge Group. Tromsø, 31. December February 2009 The main board of directors of SpareBank 1 Nord-Norge Kjell Olav Pettersen Erik Sture Larre jr. Hanne P. Bentsen (Chairman) (Deputy Chairman) Roar Dons Elisabeth Johansen Ann-Christine Nybacka Pål A. Pedersen Vivi Ann Pedersen Hans Olav Karde (Chief Executive Officer)

26 24 Annual Report 2008 The main board of directors of SpareBank 1 Nord-Norge From the left: Oddmund Åsen (Deputy Chief Executive Officer), Hanne P. Bentsen, Erik Sture Larre jr., Hans Olav Karde (Chief Executive Officer), Ann-Christine Nybacka, Pål A. Pedersen, Roar Dons, Gunnar Kristiansen (Deputy for Employees' representative), Kjell Olav Pettersen (Chairman), Elisabeth Johansen, Vivi Ann Pedersen (Employees' representative).

27 Annual Report Statement from the Board of Directors and Chief Executive Officer The SpareBank 1 Nord-Norge Group a Statement from the Board of Directors and Chief Executive Officer The Board of Directors and Chief Executive Officer have today discussed and approved the Board of Directors annual report and accounts and the abridged, consolidated annual report and accounts for SpareBank 1 Nord-Norge as at 31 December 2008 and for the 2008 accounting year, including abridged, consolidated comparative figures as at 31 December 2008 and for the 2007 accounting year. According to our full and firm conviction, the annual report and accounts have been prepared in compliance with the requirements contained in IAS 34, approved by the EU, and in compliance with Norwegian supplementary requirements forming part of the Securities Trading Act. According to our full and firm conviction, the 2008 annual report and accounts have been prepared in compliance with currently valid accounting standards, and the information provided in the report and accounts gives a true and correct picture of the Group s assets, liabilities and financial position and result as a whole as at 31 December 2008 and 31 December Furthermore, according to our full and firm conviction, the annual report and accounts provide a true and correct overview of important events during the accounting period in question and their impact on the annual report and accounts description of the most central risk- and uncertainty factors facing the operations during the next accounting period a description of close individuals significant transactions Tromsø, 24 February 2009 The main Board of Directors of SpareBank 1 Nord-Norge Kjell Olav Pettersen Erik Sture Larre jr. Roar Dons Elisabeth Johansen Hanne B. Berntsen Paal A. Pedersen Ann-Christine Nybacka Vivi Ann Pedersen Hans Olav Karde (Chief Executive Officer)

28 Oil and gas. In the search for new finds of oil and gas, attention is focused on the north. Natural gas is already being pumped ashore from the Snow White field. Production at the Goliath field in the Barents Sea is expected to start in four years time. The petroleum activity is moving northwards and gives reason for optimism in the region. Norway s strong competence within oil- and gas extraction in Arctic waters may also produce significant projects and orders from other areas than the country s own shelf, from our neighbour in the east, rich in natural resources. Photograph: BarentsPhoto.com SpareBank 1 Nord-Norge is a bank which is very aware of its corporate responsibility, a bank which is a good cooperation partner in an active industrial and commercial environment in the region. We develop knowledge, networks and competence in order to be able to contribute towards tackling new and exciting tasks in the north. We do this partly in conjunction with our alliance partner, SpareBank 1 SR-Bank, which has valuable experience from its work within the oil- and gas sector.

29 Annual Accounts 2008

30 28 Annual Report 2008 Annual Report Income statement Parent Bank Group Amounts in NOK million Notes Interest income Interest costs Net interest income Fee- and commission income Fee- and commission costs Other operating income Net fee- commission and other operating income Dividend Income from investments Gain/losses and net value changes from investments in securities Net income from investments Total income Personnel costs 10, Administrative costs Ordinary depreciation Other operating costs Total costs Result before losses Losses Result before tax Tax Minority interests Result for the year Allocation of result for the year Fund for Evaluation Differences Dividend Equalisation Fund Donations Saving Bank's Fund Total allocation of result for the year Result per PCC - Premium Capital Certificates (majority) Result per PCC 1) , Diluted result per PCC ,13 1) Result multiplied by PCCs' share of result, divided by number of PCCs.

31 Annual Report Annual Report Balance Sheet Parent Bank Group Amounts in NOK million Notes Assets Cash and balances with Central Banks Loans and advances to credit institutions Loans and advances to customers 20, Individual write-downs for impaired value 20, Collective write-downs for impaired value 20, Net loans and advances to customers Shares Bonds and certificates Financial derivatives Investment in Group companies Investment in associated companies and joint ventures *) Property, plant and equipment Intangible assets Other assets Total assets Liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Financial derivatives Other liabilities 25,26, Deferred tax liabilities Subordinated loan capital Total liabilities Equity Primary Capital Certificates Premium Fund Dividend Equalisation Fund Saving Bank's Fund Donations Fund for unrealised gains 6 Other equity *) Total equity exclusive minority interests Minority interests Total equity Total liabilities and equity *) The figures for 2007 have been altered in the Group s balance sheet due to fact that certain accounting transactions directly in relation to the equity capital included in SpareBank 1 Gruppen s final annual accounts had not been taken into consideration. kjell Olav Pettersen erik Sture Larre jr. Hanne P. Bentsen (Chairman) (Deputy Chairman) roar Dons elisabeth Johansen Ann-Christine Nybacka Pål A. Pedersen Vivi Ann Pedersen Hans Olav Karde (Chief Executive Officer)

32 30 Annual Report 2008 Annual Report Cash Flow Statement Parent Bank Group Amounts in NOK million Profit before tax Ordinary depreciation Write-downs, gains/losses fixed assets Losses on loans and guarantees Tax Group contributions Provided from the year's operations Change in sundry liabilities: + increase/ - decrease Change in various claims: - increase/ + decrease Change in gross lending to and claims on customers: - increase/ + decrease Change in short term-securities: - increase/ + decrease Change in deposits from and debt owed to customers: + increase/ - decrease Change in debt owed to credit institutions: + increase/ - decrease A. Net liquidity change from operations Investment in fixed assets Sale of fixed assets Change in holdings of long-term securities: - increase/ + decrease B. Liquidity change from investments Change in borrowings through the issuance of securities: + increase/ - decrease Change in PCC/subordinated loan capital: + increase/ - decrease C. Liquidity change from financing A + B + C. Total change in liquidity Liquid funds at the start of the period = Liquid funds at the end of the period Liquid funds are defined as cash-in-hand, claims on central banks, plus loans to and claims on credit institutions. The statement for the Parent Bank for 2006 has been restated according to IFRS-converted figures for Differences due to conversion are included under «Change in Various claims».

33 Annual Report Annual Report Changes in equity Amounts in NOK million Total equity PCC- Capital Premium Fund Dividend Equalisation Fund Saving Bank's Fund Fair value reserve Donations Fund for Attributable to Evaluation Differences Minority interests Group 1) Adjusted equity at IFRS Dividend issue Paid dividend for Result for the year 2005 included minority interests Set aside for dividends Paid donations -8-8 Reversal of dividend reserve Other adjustments to equity Total IFRS-related effects at Equity / IFRS Fair value reserve transferred 1) Dividend paid for Result for the year 2006 including minority interests Set aside for dividend payments Payments from Donations Fund Reversal of dividend reserve Other adjustments to equity Total IFRS-allocations at Equity at IFRS ) By implementing IFRS a classification error involving shares was made. This error has been adjusted in 2006 Group accounts. Dividend paid for Result for the year 2007 including minority interests Dividend issue Payments from Donations Fund Set aside for dividend payments Reversal of dividend reserve Other adjustments to equity Equity at IFRS Dividend paid for Result for the year 2008 including minority interests Dividend issue Payments from Donations Fund Set aside for dividend payments Reversal of dividend reserve Other adjustments to equity Equity at IFRS

34 32 Annual Report 2008 Annual Report Changes in equity Amounts in NOK million Total equity PCC- Capital Premium Fund Dividend Equalisation Fund Saving Bank's Fund Fair value reserve Donations Fund for Attributable to Evaluation Differences Minority interests Parent Bank Equity NGAAP at Effects of implementation ofl IFRS at Result for the year 2006 adjusted to IFRS Set aside for dividend payments Payments from the Donations Fund Reversal of dividend reserve Other adjustments to equity Equity at IFRS Share of Fair value Fund part of equity which cannot legally be paid as dividend Dividend issue Dividend payment for Result for the year Set aside for dividend payments Payments from Donations Fund Reversal of Dividend Reserve Total IFRS-allocations at Equity IFRS Share of Fair value Fund part of equity which cannot legally be paid as dividend Dividend issue Dividend payment for Result for the year Other adjustments to equity 6 Set aside for dividend payments Payments from Donations Fund Reversal of Dividend Reserve Total IFRS-allocations at Equity IFRS Share of Fair value Fund part of equity that legally can not be paid as dividend Result for the year after tax Fund for Evaluation Differences 1) Set aside for Dividend Equalisation Fund Set aside for cash dividend Basis for donations % set aside for donations ) Numbers for 2006 are calculated according to NGAAP.

35 Notes Annual Report Annual Report Notes Note Page 1 General information 34 2 Accounting principles 36 3 Financial risk management 41 4 Critical estimates and assessments regarding the use of accounting principles 45 5 Business areas 47 6 Net interest income 48 7 Net fee-, commission- and other operating income 49 8 Net income from investments 50 9 Other operating income Operating costs, loans and advances to- PCC's owned by- members of the Group Management Committee Tax Other asstes Property, plant and equipment Intangible assets Investment in Group companies, associated companies and joint ventures Shares Bonds and certificates Financial Derivatives Loans to- and liabilities to credit institutions Loans and advances to customers Losses on loans and guarantees Deposits from customers Debt securities in issue Subordinated loan capital and capital bonds Other liabilities Pensions Equity and capital adequacy ratio Related parties Fair Value on financial instruments Guarantees Maturities analysis of assets and liabilities Maximum credit exposure Credit quality per class of financial assets Credit exposure for each internal risk rating Breakdown of periods for loans due, not written down Remaining contract-related periods for liabilities Market risk relating to interest rate risk Market risk relating to foreign exchange risk Primary Capital Certificates Acquistion of businesses Events occurring after the end of the year 111

36 34 Annual Report 2008 Notes Note 1 General information Description of the SNN Group's business Parent Bank SpareBank 1 Nord-Norge aims to be a full-range supplier of financial products and services in North Norway. This comprises, apart from loans, deposits and payment transmission, also most savings products, life- and non-life insurance. Products and services are supplied either by the Bank and its subsidiaries, or by the product companies within the SpareBank 1 Gruppen AS. The Bank applies a multi-channel approach for distribution of its products and services through 81 branches, one customer centre accessible by telephone on all working days, and through Spare- Bank 1 Nord-Norge's Internet-linked bank. Manning levels were equivalent to 724 man-years. Reference is also made to the description of the Bank's business areas in a separate section of the Annual Report for Subsidiaries SpareBank 1 Finans Nord-Norge AS The company complements the Group's financial products and services by offering leasing and car financing. Manning levels were equivalent to 29 man-years and its core market area is North Norway. At the end of the year, the company established its own subsidiary, SpareBank 1 Factoring AS, to which the factoring business were transferred as at SpareBank 1 Factoring AS SpareBank 1 Factoring AS is a wholly-owned subsidiary of SpareBank 1 Finans Nord-Norge AS as at The company is a product company which deals with administrative- and financial factoring. The company s staff is equivalent to 9 man-years and its primary market area is where the SpareBank 1-banks are located in Norway. A sales agreement has been entered into between SpareBank 1 Finans Nord-Norge and SpareBank 1 Gruppen AS. The transfer of SpareBank 1 Factoring AS will take place during the first half of EiendomsMegler 1 Nord-Norge AS The company brokers the sale of all types of property: detached houses, flats, also including housing co-operatives, holiday cottages, new buildings/project development and commercial- and industrial property. The company has branches in Tromsø, Finnsnes, Alta, Bodø, Hammerfest, Kirkenes, Sandnessjøen and in Mo i Rana. As at manning levels were equivalent to 36,5 man-years. The company is a member of the national EiendomsMegler 1- chain. In 2008, the subsidiary, Rana Eiendomsmegling AS, was merged with the company. With effect from , employees from Notar Eiendomsmegling AS s closed branch in Harstad have been transferred to EiendomsMegler 1 Nord-Norge AS. BBL Eiendomsmegling AS On , EiendomsMegler 1 Nord-Norge AS acquired BBL Eiendomsmegling AS, which was a subsidiary of Bodø Boligbyggelag AS. The company mainly brokers sales of apartments in housing cooperatives and is located in Bodø. Its staff was equivalent to 5 man-years in During the course of 2009, the company will be merged with EiendomsMegler 1 Nord-Norge AS. SpareBank 1 Nord-Norge Securities ASA The company is owned by the Parent Bank (54 per cent), First Securities (25 per cent) and its employees (21 per cent). The company offers securities trading and discretionary asset management of shares, value estimates and other corporate services. As at manning levels were equivalent to 14 man-years. Eiendomsdrift AS The company manages and rents out properties. The property management part of the business mainly comprises buildings and property located within SpareBank 1 Nord-Norge's distribution network. The entire property portfolio is therefore located in North Norway and Svalbard. The company's strategy is to display an optimal location structure adapted to the Bank's needs. The company does its own development- and planning work for banking premises which are provided fully equipped and furnished for the Parent company. In 2008, the company concentrated on the sale of properties which do not form part of the banking group s strategy for ownership. In this connection the company has adapted premises for the Bank s longterm requirements as tenants in those buildings which the company has sold. After extension of its administrativeand operational set-ups, the company has taken over all the Group s rental agreements in commercial buildings with effect from According to an agreement entered into between the company and the Bank, the company manages the Group s undeveloped building plots and properties in outlying areas in Nordland, Troms and Finnmark. In 2008, 6 buildings involving 12,500 square meters were sold. The company s staff is equivalent to 4.5 man-years. SpareBank 1 Nord-Norge Invest AS The company is an investment company, whose corporate purpose is to participate with equity capital, networks and

37 Notes Annual Report competence in companies which conduct business primarily within the Bank s market area. The company shall invest in local and regional businesses with significant development potential. In 2008, the company acquired equity stakes in 7 new companies and sold its shares in 2 companies. Manning levels for 2008 were equivalent to 4 man-years. Business address The SpareBank 1 Nord-Norge Group's head office is located in Tromsø, its business address being 9298 Tromsø. Date of adoption of the Group accounts The 2008 annual accounts were adopted by the Parent Bank's main Board of Directors on

38 36 Annual Report 2008 Notes Note 2 Accounting principles Basis for preparation of accounts The 2008 Group- and Parent Bank accounts for Spare- Bank 1 Nord-Norge have been prepared in accordance with EU-approved IFRS rules and regulations and related interpretations which may be applied as at , and according to the further Norwegian information requirements in connection with the Accounting Act as at Those IFRS rules and regulations and interpretation statements which have appeared up to the time of the proposal for the annual accounts having been agreed, and for which obligatory application as at does not apply, are deemed based on the assessments which have been made so far not to have significant impact on the reported figures. The proposal for annual accounts was agreed by the main Board of Directors and the Bank s CEO at the time which appears from the dated and signed balance sheet. The annual accounts shall be discussed by the Bank s Supervisory Board on and considered for final approval. Up to the time of final approval the main Board of Directors has the authority to change the annual accounts. The Parent Bank accounts for 2007 have also been prepared in accordance with IFRS following the Ministry of Finance s resolution of which allowed the use of IFRS in company accounts with effect from the second quarter of The figures for 2006 have been restated according to IFRS in order to make them comparable with the figures for 2007 and Reporting currency Reporting currency is Norwegian kroner (NOK), which is also the Bank s functional currency. All amounts are in NOK million unless otherwise stated. Basis of consolidation The consolidated financial statement comprises the Bank and all its subsidiaries which are not planned to be sold in the near future and which therefore are to be classified as held for sale in accordance with IFRS 5. Subsidiaries are defined as companies in which the Bank has the power to govern the financial and operational policies with the objectives of acquiring advantages from the company s activities. Subsidiaries are consolidated from the date of acquisition, being the date on which the Group obtains control, and continue to be consolidated until the date on which such control ceases. On achieving a controlling influence in a company (business combinations), all identifiable assets and liabilities are incorporated in the balance sheet on the basis of their fair value at the time of acquisition in accordance with IFRS 3. Any positive difference between the cost of acquisition and fair value of identifiable assets and liabilities is recognised as goodwill, whereas any negative difference is recognised as income. Recognition of goodwill at the time of initial valuation is commented on under the paragraph Intangible assets. The Bank has not applied IFRS 3 retrospectively on business combinations which were implemented before In the Parent Bank s accounts, equity stakes in Group companies are shown at cost price, according to IFRS. The transition to IFRS in the Parent Bank s accounts involves the use of different principles for the incorporation of subsidiaries, joint venture businesses and associated companies into the two accounts. In IFRS-related group accounts, the equity method of accounting is applied, according to which of the results from the joint venture companies and associated companies are included in the Group s profit and loss account according to the equity stake involved, and this is taken into consideration as far as the stated value of the assets in the balance sheet is concerned. The subsidiaries results are consolidated into the accounts. In accordance with IFRS, only the cost method shall be used in company accounts. This means that the book value of subsidiaries in the Parent Bank s balance sheet represents historical cost. Only annual dividends received from these companies appear in the Parent Bank s profit and loss account. Intra-Group transactions, open accounts and unrealised profit between Group companies have been netted out. The minorities share of the Group s result is shown on a separate line in the profit and loss account. Under equity capital, the minorities share is also shown on a separate line. Associated companies An associated company is defined as a company in which the Bank has significant influence, but not control. Normally, there is deemed to be significant influence when there is an equity stake of between 20 and 50 per cent. Associated companies are included in the Group accounts according to the equity method of accounting. The investment is recognised for the first time in the balance sheet at cost and subsequently adjusted for changes in the Bank s share of the net assets of the associated company.

39 Notes Annual Report Note 2 Accounting principles The Bank s share of the associated company s result is incorporated in the Group accounts, whereas, in the Parent Bank s accounts, the equity stake is shown according to the cost method, in the same way as for Group companies, as mentioned above. Joint ventures A joint venture company involves jointly controlled operations, jointly controlled assets and jointly controlled entities. Joint control is regulated by an agreement between the Bank and one or several other partners. Jointly controlled operations and jointly controlled assets are recognised in the Bank s financial statements as the Bank s proportional share of assets, liabilities and other balance sheet items. Jointly controlled entities are, for the Group s annual accounts, accounted for according to the equity method of accounting. In the Parent Bank s accounts, such items have been incorporated according to the cost method of accounting, as mentioned above. SpareBank 1 Gruppen AS is owned by SpareBank 1 Nord-Norge, SpareBank 1 SR-Bank, SpareBank 1 SMN and Samarbeidende Sparebanker, in equal shares of per cent. SpareBank 1 Hedmark owns per cent of the shares and Landsorganisasjonen (LO) in Norway and associations connected with LO own 9.29 per cent of the company s shares. The structure of corporate governance for the SpareBank 1 joint venture is regulated by an agreement between the shareholders. The Bank s shareholding in the SpareBank 1 Gruppen AS is classified as an investment in a joint venture and incorporated in the accounts according to the equity method of accounting. SpareBank 1 Nord-Norge has equity stakes of per cent in Sparebank 1 Utvikling DA and per cent in SpareBank 1 Boligkreditt AS. Both companies are deemed to be joint ventures. The other shareholders in these two companies are the other member banks in the SpareBank 1-alliance. A consortium of the SpareBank 1 members banks acquired Glitnir Bank ASA, now BNbank ASA, in December SpareBank 1 Nord-Norge owns 20 per cent of the shares in BNbank ASA. This company is also regarded as a joint venture. Loans and allowance for losses on loans Loans are assessed at amortised cost in compliance with IAS 39. Amortised cost is defined as acquisition cost minus any repayments relating to the principal amount, plus or minus cumulative amortisation as a result of application of the effective interest method, minus any amounts involving a reduction in fair value or bad and doubtful loans. The effective rate of interest is defined as the rate of interest which, if applied to the discounting of future cash flows until maturity or the next interest rate fixing date, would produce the exact, corresponding value of the financial instrument in question as shown in the balance sheet. Loans in the consolidated financial statements are therefore assessed according to the same principles as in the separate financial statements and in accordance with the lending regulation dated , with reference to FSAN s circular no. 10/2005. Fixed rate loans are assessed at market value, discounted down according to the currently applicable interest rate curve. Any value changes are incorporated in the profit and loss account. Commitments in default bad and doubtful commitments A commitment is deemed to be in default if one of the following criteria applies: A claim has been due for more than 90 days and the amount is over NOK 1,000, or When the Bank considers it unlikely that the customer will meet his/her/its payment obligations A commitment is deemed to be bad and doubtful when objective proof excists showing that one or more events of loss have occurred and that this is having an impact on the expected future cash flow which can be estimated in a reliable manner. Leasing Financial leasing is classified as loans and recognised in accordance with the amortised cost principle. All fixed income during the ordinary leasing period is included in the calculation of the agreement s effective rate of interest. Classification of income from operational rental agreements The Bank does not have any «sale and lease-back» contracts with respect to property, plant and equipment.

40 38 Annual Report 2008 Notes Note 2 Accounting principles Securities and financial derivatives Securities and financial derivatives consist of shares, unit trust shares, certificates, bonds and currency- and interest derivatives. Shares and unit trust certificates are classified either as «at fair market value through the profit and loss account» or as «available for sale». Certificates and bonds are classified as «at fair market value through the profit and loss account», «to be held until maturity» or as «loans and claims». Financial derivatives are always classified as «at fair value through the profit and loss account», unless they are earmarked as hedging instruments for cash flow hedging. All financial instruments which are classified as «at fair value through the profit and loss account», and any change in fair value from the opening balance are recognised as income from other financial investments. Shares classified as «available for sale» are recognised at fair value, but any changes in fair value are recognised directly in equity. Where it has been proven impossible to determine the fair market value of unquoted shares, cost has been used. Certificates and bonds classified as «held to maturity» or as «loans and claims» are recognised at amortised cost in accordance with an approximate effective interest rate method reference is made to this method under the paragraph for loans. Securities and financial derivatives designated as hedging instruments are recognised at fair value in the balance sheet. Criteria for) and treatment of hedging items in the accounts are mentioned below. In addition, reference is made to notes 16, 17 and 18. Intangible assets Intangible assets consist of deferred tax assets and goodwill. Intangible assets are recognised in the balance sheet when the criteria are satisfied. Intangible assets are divided into categories having either a finite or indefinite economic life. Asset with a finite economic life are amortised over their economic life. Expenses in the development phase of internally generated intangible assets are capitalised only when the criteria in the development phase are satisfied. Other expenses are recognised in the profit and loss account gradually as they are incurred. Intangible assets other than goodwill are subject to an impairment test in accordance with IAS 36 when there is an indication that the value of the asset may be impaired. Goodwill arises as a positive difference between the cost of acquisition of a company and the fair value of identifiable assets and liabilities, with reference to the paragraph on Consolidation principles. Goodwill is not amortised, but subject to an annual test of impairment. If the cashgenerating unit s carrying amount exceeds the recoverable amount, goodwill allocated to the cash-generating unit is considered to be impaired and is written down to its recoverable amount, in accordance with IAS 36. Property, plant and equipment Property, plant and equipment, with the exception of investment property and owner-occupied property are recognised at cost of acquisition and depreciated on a straight-line basis over their estimated useful life. When determining a plan of depreciation, the separate assets are split up into components with different useful lives to the extent that this is regarded as necessary, taking into account estimated residual value. Property, plant and equipment, which individually are regarded as insignificant, for example PCs and other office equipment, are not assessed individually for residual value, useful life or impairment, but are considered as groups. When implementing IFRS on , all properties were value-adjusted to fair market value. According to IAS 16, these properties are deemed to have an estimated acquisition cost which corresponds to the value-adjusted amount at the time such value adjustment was done. Property, plant and equipment which are depreciated are subject to a write-down test in accordance with IAS 36 whenever circumstances should indicate it. Repossessed assets In connection with legal recovery of claims under outstanding loans and guarantees, the Bank in some cases repossesses assets which have been provided as security for such commitments. Such assets are assessed at their estimated realisation value at the time of repossession. Repossessed assets which are to be sold on are included in the balance sheet as current assets or as fixed assets held for sale and are recognised in accordance with IAS 2 and IFRS 5. Any losses/gains on the sale or reassessment of value of such assets are recognised as additions to or deductions from losses on loans. Write-down and impairment of asset values Amounts included in the balance sheet involving the Bank s assets, with certain exceptions, are evaluated on the balance sheet on the day in question, in order to

41 Notes Annual Report Note 2 Accounting principles consider whether there are any indications of impairment of value. If such indications were to exist, the asset s recoverable amount is estimated. In the case of goodwill, assets with an indefinite useful life and intangible assets not yet available for use, the recoverable amounts are determined annually. When the carrying amount of an asset or a cash-flow generating unit exceeds its recoverable amount, the asset or unit is written down. Impairment in value is recognised in the income statement. Impairment of goodwill cannot be reversed. Impairment in value of other assets is reversed if a change in the estimates used to calculate the recoverable amount occurs. Interest income and interest expense Interest income and interest expense related to assets and liabilities which are valued at amortised cost are recognised in the income statement in accordance with the effective interest rate method. All fees related to interest-bearing loans and borrowings are included in the calculation of an effective interest rate and are amortised over the expected life of the financial instrument. For interest-bearing instruments carried at market value, the market rate will be classified as interest income or interest expense whereas the effect of changes in the rate of interest is classified as income from other financial investments. Commission income and commission expense Commission income and -expense are generally recognised in accordance with the delivery of a service. Fees relating to interest-bearing instruments are not recognised as commission, but are included in the calculation of effective interest rate and incorporated in the profit and loss account accordingly. Consultancy fees are recognised when entering into a consultancy agreement, generally as the service is delivered. The same applies to day-to-day administrative services. Fees and charges related to the sale or brokerage of financial instruments, property or other investment objects that do not generate balance sheet items in the Bank s accounts, are recognised in the profit and loss account when the transaction is finalised. Foreign currency transactions Transactions in foreign currencies are converted into Norwegian kroner using exchange rates prevailing at the time of the transaction. Gains and losses related to completed transactions or to the conversion of holdings of cash or cash equivalents at the balance sheet date are included in the profit and loss account, unless they are adjusted directly against equity in accordance with the principles of hedging. Gains and losses related to the conversion of items other than cash or cash equivalents are included in the same way as the corresponding balance sheet item. Hedging The Bank assesses and documents the effectiveness of hedging, both at the time of initial recognition and on a current basis. In the case of fair-value hedging, both the hedging instrument and the hedged item are recognised at fair value. Any change in fair value is included on a net basis in the profit and loss account, as net gain or loss. In the case of cash-flow hedging, the hedging instrument is recognised at fair value, and any change in fair value is recognised directly in equity. Accumulated changes in fair value recognised against equity are reversed through the profit and loss account in the period during which the hedged cash flow is realised. Taxes Income taxes comprise tax payable for the period and the movement in deferred tax. Tax payable for the period is calculated tax on the current year s taxable profit. Wealth tax is calculated and recognised as other operating costs in the profit and loss account. Deferred tax is recognised in the balance sheet according to the liability method in accordance with IAS 12. Deferred tax liability or asset is recognised in respect of all temporary differences, which arise as a difference between the carrying amount and tax base of assets and liabilities at the balance sheet date. However, deferred tax asset or liability is neither recognised with respect to goodwill which does not give rise to tax-deductible expenses, nor with respect to items that are recognised for the first time, and which neither affect financial or taxable profit. Deferred tax asset is recognised with respect to accumulated tax losses carried forward at the balance sheet date. The deferred tax asset is recognised only to the extent that it is probable that the taxable profit will be available and unused tax losses can be utilised. Liabilities Initially, funding loans are shown in the accounts at

42 40 Annual Report 2008 Notes Note 2 Accounting principles their borrowing cost, which is the actual value of the amount received after deduction o f transaction costs. Loans at floating rates of interest are subsequently registered at amortised cost and any premium or discount involved is subject to accrual accounting over the loan period. Loans at fixed rates of interest form part of the hedging-relating accounting with discounting down according to the currently valid interest curve. Fair market value option is not applied to the Group s liabilities. A similar approach is used for financial derivatives on the liabilities side of the balance sheet. Deposits from customers are assessed at amortised cost. Pensions The pension calculations have been made against the background of international accounting standards (IAS 19). SpareBank 1 Nord-Norge has group occupational pension schemes for its employees. The Bank is required by Law of Obligatory Occupational Pension Schemes to provide occupational pension schemes for its employees. The pension schemes comply with the requirements of the abovementioned law. On , the Group established a contributory pension scheme. All new staff became members of this scheme. Employees who were members of the benefitbased scheme were offered the opportunity to move to the contributory scheme. According to the standard, the pension scheme is treated as a benefit-based plan. The pension cost for the year is the total of the present value of the pension accruals for the year, interest cost of incurred pension liability and expected return on the pension resources. The pension costs are recognised in the profit and loss account as personnel costs with the sub-specification, Wages, salaries and general administration costs. Under-funding of the pension liability is shown in the balance sheet as Other liabilities, with the sub-specification, Provisions for incurred costs and liabilities, whereas over-funding is included as Other assets, with the sub-specification, Prepaid costs, not incurred, and accrued income, not yet received. Under-funding/overfunding is shown as differences between the present value of incurred pension liabilities, including future wage growth, and the value of the pension resources. Both guaranteed and non-guaranteed schemes are included in the pension liabilities. At the closing of accounts, estimated values are applied when assessing the pension resources and when calculating incurred liabilities. These estimates are adjusted each year in accordance with the statement provided by Eikos AS, registered actuaries, setting out the estimated value of the pension resources and the actuarial calculations of the amount of the liabilities. The impact of changes in estimates and any discrepancy between estimated and actual return is included in the profit and loss account over the average, remaining accrual period only if the accumulated effect exceeds 10 per cent of the higher of the pension resources and pension liabilities («corridor solution»). Segment reporting Ordinary banking operations, involving private and business customers, represent the Bank s primary reporting format. Factoring and leasing represent the Bank s secondary reporting format. Reference is also made to note 5. Events occurring after the balance sheet date The annual accounts are deemed to be approved for publication when the main Board of Directors has approved the financial statements. The Supervisory Board and regulatory authorities will be able to refuse approval of the financial statements but will not be able to have them changed, after the approval of the main Board of Directors has been granted. Events occurring up to the time when the financial statements are approved for publication and which involve issues which were already known at the balance sheet date will form part of the basis of information for determining estimates and will thereby be fully reflected in the annual accounts. Events concerning issues which were unknown on the closing date will be reported if they are significant. Such circumstances are mentioned in note 41. The annual accounts are prepared on the assumption of a going concern. This assumption was valid according to the main Board of Directors opinion at the time the financial statements were submitted for approval. The main Board of Directors proposal for dividend is shown in the annual report and in note 39. Proposed dividend is classified as equity until its final approval.

43 Notes Annual Report Note 3 Financial risk management Risk management at SpareBank 1 Nord-Norge shall support the Group s strategic development and target achievement and shall contribute to ensuring financial stability and safe and secure asset management through: A strong organisational structure characterised by high awareness of risk management Making every effort to achieve optimal capital employment within the agreed business strategy Making every effort to achieve a risk-adjusted return on customer business over time within the agreed business strategy Making the most of all synergy- and diversification effects Having sufficient core capital/equity and related capital in relation to the chosen risk profile According to SpareBank 1 Nord-Norge s overall aim, the Group s aggregate level of risk shall be moderate and within the limits set by the Group s equity and related capital and other allocations. Through good risk management, the Group shall produce a revenue generationand result development which is stable and predictable. Business strategy and overall targets and aims represent the main Board of Directors instruments for managing the Group s risk profile and goal for financial development. The Chief Executive Officer is responsible for this being presented to the main Board of Directors at least once a year, or whenever other circumstances should make it appropriate to do so. The Group s aim is to at least maintain the Bank s current international rating in order to ensure long-term and good access to ordinary funding loans from the capital markets. The Group s risk is quantified amongst other things through calculations of: Expected losses which describe the amount which the Bank must statistically expect to lose during a 12-month period Unexpected losses which describe how much capital (risk-adjusted) the Group must have in order to cover the actual risk involved Risk-adjusted capital shall cover 99.9 per cent of possible, unexpected losses. Statistical methods are used as a basis for the calculations involved, but in some cases qualitative evaluations are also applied The return on risk-adjusted capital is an important strategic result-related target in the internal management of the Group. Significant business areas are allotted capital in relation to the calculated risk relating to the operations, and the return on capital is followed up. The calculations of risk-adjusted capital make it possible to compare risks across different risk groups and business areas. In addition, risk is measured and followed up through the reporting of the use of limits and of portfolio risk targets. In order to ensure an effective and appropriate process for risk- and capital management, the framework has been based on the following elements, which reflect the way in which the main Board of Directors and the Bank s senior management view the Group: Strategy Organisation and organisational structure Risk- and capital management Reporting Follow-up Contingency plans Compliance For further information, reference is made to the Pillar III document on our website. A more detailed description of financial risk management relating to credit risk, funding risk and market risk is provided below. CREDIT RISK Credit risk is defined as the risk of loss if customers or counterparts are unable or unwilling to meet their financial obligations to the Group. Credit risk is managed through the Group s credit strategy, limits for the credit business, guidelines for the granting of credit and the internal rules and regulations relating to power of attorney/delegated lending authority. SpareBank 1 Nord-Norge has received FSAN s approval to apply internal measuring methods (Internal Rating- Based Approach) to credit risk with effect from The Group s internal measuring methods are accordingly used for the calculation of the statutory minimum requirement for capital adequacy for credit risk. The minimum requirement therefore becomes more risksensitive and will to a larger extent correspond to the risk in the underlying portfolios. The Group experienced a positive impact on capital adequacy when the new rules and regulations were implemented, but, due

44 42 Annual Report 2008 Notes Note 3 Financial risk management to transitional rules, the full impact will only materialise in Credit strategy and limits for the credit business are agreed by the main Board of Directors and revised and updated at least once a year. The Group s credit strategy sets out the overall principles for the granting of credit and the way in which credit risk shall be managed and priced at SpareBank 1 Nord-Norge. The Bank bases itself on the principles which have been recommended by the Basel Committee in the document, «Principles for the Management of Credit Risk», and on the new capital adequacy rules and regulations (Basel II). In addition, the procedure is based on the management of credit risk being done within the framework of relevant laws, rules and regulations. The credit-related, strategic goals consist of targets for: Return on capital and growth Risk profile Concentration risk Operative credit targets The credit-related, strategic goals are subject to regular reporting to the Bank s senior management and main Board of Directors. The main Board of Directors is responsible for the Group s granting of loans and credits. The rules and regulations in this respect, which have to be approved by the main Board of Directors, set out the principles for the granting of credit-related powers of attorney/delegated lending authority and the principles for credit decisions, and describe the decision structure. The main Board of Directors delegates the powers of attorney/delegated lending authority to the CEO, who, according to the rules and regulations relating to the granting of credits, delegates his powers of attorney to others. The delegated powers of attorney/delegated lending authority are related to the size of the commitment in question and to the probability of default. Credit staff work in accordance with credit-related powers of attorney/delegated lending authority and credit-handling routines which stipulate clear quality requirements as far as the credit-handling process is concerned. The management and control of the portfolio are done through risk classification of individual customers, a riskpricing model and a portfolio system in order to manage the lending portfolio according to agreed limits and guidelines. The risk models on which management and control are built are initially based on statistical calculations, and are subject to ongoing, further development and testing. The models are based on three main components: 1. The likelihood of default: Customers are classified in risk classes according to the likelihood of the customers defaulting on their commitments during a 12-month period. The probability of default is calculated on the basis of historical data series for financial key figures, coupled with non-financial criteria such as behavior and age. In order to classify customers according to the probability of default, nine risk classes (A I) are used. In addition, the Group has two risk classes (J and K) for customers with commitments in default and/or written-down commitments. 2. Expected exposure in the case of default: This is an estimate of how big the expected exposure will be if a customer defaults on a commitment. 3. The extent of loss in the case of default: This is an assessment of how much the Group could potentially lose if the customer defaults on his/her/its commitments. The assessment takes into consideration the value of the collateralised assets which the customers have pledged as security, and the costs incurred by the Group in connection with recovering the commitment in default. These figures are estimated against the background of the Bank s experience over time. Seven different classes are used (1 7) for the classification with regard to the degree of loss incurred in connection with a commitment in default. The three abovementioned components also form the basis for the Group s portfolio classification and statistically-based computations of expected loss and the need for risk-adjusted capital. The purpose of the portfolio classification is to provide information about the level and development with regard to the aggregate credit risk in the entire portfolio, which is therefore divided into five different risk groups: lowest, low, medium, high and highest. The classification into different risk groups is done on the basis of a statistical computation of the likelihood, in the case of each individual commitment, of default, exposure in the case of default, and the degree of loss involved when default occurs. The Group is making every effort to price commitments in relation to the risk exposure involved, so that com-

45 Notes Annual Report Note 3 Financial risk management mitments with the highest risks attract the highest price. The price model is based upon the Group s requirements as far as return on risk-adjusted capital is concerned. For further information, reference is to «The Pillar III report» on our website and to notes 20, 32, 33 and 34. The Group also has credit risk relating to placements in interest-bearing securities. Such credit risk primarily becomes currently noticeable through changed prices/ values for the different securities involved. This is described in more detail under the section, «Market risk» below. FUNDING RISK Funding risk is defined as the risk of the Group being unable to fund increases in assets and being unable to meet its obligations as its overall funding requirements increase. The main Board of Directors focuses strongly on predictability and stability and at least once a year reviews the Group s funding strategy in connection with which the management of the Group s financing structure is the central factor. The funding strategy reflects the Group s conservative risk profile, and it is important that random events do not have serious consequences for the Group s ability to meet its financial obligations. The Group s foreign exchange- and finance area (Capital Markets) is responsible for liquidity management, whereas the department for risk management and compliance monitors and reports on the utilisation of the limits in accordance with the funding strategy. The funding risk is reduced through diversification of the funding loans with regard to different markets, funding sources, financial instruments and maturities. Deposits from customers represent the Bank s most important source of funding. At the end of the year currently under review, customer deposits together with long-term funding loans and equity capital amounted to 99 per cent of the Bank s illiquid assets. This ratio, which shows to what extent the Bank s illiquid assets are funded on a long-term basis, is called Likviditetsindikator I by Norges Bank. The Bank s funding risk is reduced through the diversification of funding loans as far as different markets, funding loan sources, financial instruments and maturities are concerned. The credit ratings issued by the international credit rating agencies, Moody s and Fitch Ratings, are regarded as important in connection with international sources of funding loans. The Bank was upgraded by both the abovementioned rating agencies in Moody s increased the Bank s long-term rating from A3 to AA3, whereas Fitch increased the Bank s long-term rating from A- to A. Last year, the financial markets became more demanding, with reduced access to funding. SpareBank 1 Nord-Norge has previously obtained a significant part of its long-term funding from abroad, but these international markets have not been very accessible last year due to the crisis in the global loan capital markets. The Bank has mainly obtained its long-term capital market funding loans through the Norwegian bond market and through the issuance of preference bonds by SpareBank 1 Boligkreditt AS. In spite of a more demanding situation in the financial markets the Bank has had satisfactory liquidity throughout the financial crisis. It has not been necessary either to reassess the ratios for liquidity indicators or to adjust limits for net refinancing risk. Although the credit spreads for capital market funding loans were increasing substantially throughout last year, the Bank was able to cover its requirements for long-term funding loans. In addition, the Bank has kept a larger amount of liquidity than normal in the form of cash and liquid assets. At the end of 2008, the Bank had only made insignificant use of the credit package launched by the Government last October. As at , deposits from customers funded 67.4 per cent of the Bank s lending to customers, up from 63.8 and 60.1 per cent respectively one and two years earlier. For further information, reference is made to «The Pillar III report» on our website and to notes 31 and 36. MARKET RISK Market risk is defined as the risk of losses due to changes in observable market variables such as interest rates, foreign exchange rates and securities markets. Market risk occurs mainly from the Group s investment in bonds, certificates and shares, as a result of activities which are pursued in order to support banking operations such as funding, interest rate- and foreign exchange trading. Market risk is assessed and monitored against the background of limits agreed by the Board of Directors. The

46 44 Annual Report 2008 Notes Note 3 Financial risk management limits are reviewed and renewed on an annual basis. The size of the limits is determined on the basis of stress tests and analyses of negative market movements. The department for risk management and compliance is responsible for the ongoing, independent monitoring of market risk. Interest risk is defined as the risk of losses occurring following changes in the level of interest rates. The risk is measured and monitored against the background of the framework which has been described above. The interest rate fixing for the Group s financial instruments is mainly short. Foreign exchange risk is defined as the risk of loss relating to changes in foreign exchange rates. The limits for foreign exchange risk are expressed through limits for maximum, aggregated foreign exchange position and maximum position in individual foreign currencies. The Group s foreign exchange risk is well within the position limit stated in the applicable rules and regulations. The price risk for securities is defined as the risk of loss occurring after changes in the value of bonds, certificates and equity capital instruments in which the Group has invested. The Group s exposure to this type of risk is regulated through limits for maximum investment in various portfolios. The global financial crisis had a big impact on the Norwegian financial market and SpareBank 1 Nord-Norge in The Bank s result is affected by the big changes in the market variables interest rates, foreign exchange rates and securities prices ruling during the course of the year. The limits which have been set in order to limit exposure to market risk have helped to make sure that the financial crisis has not involved any serious financial problems for the Bank. A marked increase in credit spreads/credit margins in the interest rate market has brought about substantial unrealised losses on the Bank s portfolio of interest-bearing securities. The problems in the global economy have resulted in an increased level of default within the market for loan capital, with higher ratios of default being expected during the period ahead. As a result of this, loan capital investors globally have become more careful as far as the granting of credit is concerned; at the same time, the demands for return on the capital invested have increased as a result of higher demands for risk premiums for interest-bearing securities investment. This has triggered a significant increase in credit margins within the loan capital market. As far as the Bank is concerned, this has resulted in write-downs of values of the Bank s bonds and certificates. It is expected that the unrealised losses will mainly be reversed as the maturities of the securities involved become shorter. The Bank s interest-bearing securities on the liabilities side of the balance sheet are not priced on the basis of credit spreads at «fair market value». The Bank accordingly does not benefit from the positive accounting effect of increased credit spreads related to the Bank s liabilities. During the course of the year under review, the Bank has reclassified large parts of its interest-bearing securities portfolio from the category «At fair market value through the profit and loss account» to the categories, «To be held until maturity» and «Loans and claims». The reclassification means that ongoing changes in market values for the reclassified portfolio are not included in the accounts. Reference is made to a more detailed description in note 17. Plummeting share prices have had an adverse impact on the Bank s portfolio of shares and unit trust certificates. This has involved relatively large realised and unrealised losses in In January 2008, the Bank substantially reduced its exposure in its trading portfolio, and this has lessened the negative effect. During the autumn of last year, the Norwegian krone weakened markedly against central currencies such as the US dollar and the euro. SpareBank 1 Nord-Norge has little net exposure in foreign currencies and its accounts have therefore been little affected by the fluctuations in the foreign exchange market. For further information, reference is made to «The Pillar III report» on our website and to notes 37 and 38. ACTIVE ASSET MANAGEMENT The Group is involved in active asset management on behalf of its customers, but does not act as a nominee of any kind in transactions. Assets included in agreements involving active asset management are not consolidated into the consolidated financial statements. The Group does not participate in «sale and lease-back» transactions involving its own assets, nor does it have financial interests in «Special Purpose Entities» as mentioned in SIC 12.

47 Notes Annual Report Note 4 Critical estimates and assessments regarding the use of accounting principles Losses on loans and guarantees The Bank assesses its entire portfolio of business customers each year and large and especially risky commitments are examined on a quarterly basis. Loans to private customers are assessed when more than 55 days have elapsed since agreed default or where there is a particularly bad history of payments. For each customer, a likelihood of default is calculated, based on historical financial data and remarks made about the way in which outstanding commitments are serviced and similarly for retail banking customers based on tax assessments and relationship history. The Bank today has 9 categories for healthy commitments and two categories for commitments in default, based on the likelihood of default for each customer. Classification into high-, medium- and low risk is arrived at in accordance with the likelihood of default. The entire portfolio is scored on a monthly basis using automatic data-capturing techniques based on objective data. Individual losses due to impairment in value are assessed for loans where there is objective evidence of the loan in question being at risk in accordance with FSAN s lending regulations and IAS 39. Individual write-down for impaired value is calculated as the difference between the loan s book value and present value of discounted cash flows based on the effective interest rate at the time of initial write-down. Subsequent changes in interest rates are taken into account for loan agreements with floating rates of interest. Collective write-down for impaired value is calculated on sub-groups of borrowings where there is objective information showing an increase in the credit risk after credits have been approved, but where it is not possible to examine all commitments on an individual basis or where it is not possible to specify the information at contract level. Such information can consist of a negative development in credit risk classification or information about a negative development in the value of assets pledged as collateral security, profitability in a particular industry or groups of debtors ability to meet instalments. The assessment of loss provisions will always involve a considerable degree of subjective judgment. Predictions based on historical information can be proven wrong because one can never know with certainty how relevant historical data are as a basis for decisionmaking. In many cases, assets pledged as collateral security are not sold in highly effective markets and the determination of fair market value may therefore be subject to considerable uncertainty. Fair value of equity capital instruments Financial assets assessed «at fair value through the profit and loss account» are normally quoted in the market and fair market value is determined with reasonable certainty. For financial assets classified as available for sale this is not necessarily the case. In the same way, disclosures of fair value in the notes for assets and liabilities measured at amortised cost may be estimates based on discounted future cash flows, multiplier analysis or other calculation methods. Such methods could be subject to significant uncertainty. With the exception of only a few cases of quoted shares, the Norwegian stock market is considered to have poor liquidity. Share prices will in most circumstances be the last known transaction price. In some cases where liquidity is poor and there is a great deal of unexplained fluctuations in the share price, the share price might be determined based on the weighted average over a specified time period, usually December. Value assessment of unlisted shares generally involves uncertainty was an extraordinary year with regard to the financial turbulence and plummeting share prices involving the Oslo Stock Exchange s main index. The fall in share prices occurred particularly after 1 September. All transactions involving the portfolio of unlisted shares before this date are therefore considered not to be representative. In the case of there being no representative transactions, the Bank has applied other value assessment methods according to the value assessment hierarchy in IAS 39. Fair value of financial derivatives Fair value of financial derivatives is usually determined by using valuation methods where the price of the underlying object, for example interest- and foreign exchange rates, is obtained from the market. In the case of share options, volatility will either be observable, implicit volatility or calculated volatility based on historical share price movements for the underlying object. If the Bank s risk position is approximately neutral, average share prices will be used. As an example, a neutral risk position can occur when the interest rate risk relating to a bond held to maturity is

48 46 Annual Report 2008 Notes Note 4 Critical estimates and assessments regarding the use of accounting principles approximately nil. In the opposite case, relevant purchase- and sale prices are used to assess the net position. In the case of a counterpart whose credit rating is weaker than that of the Bank, the price will reflect an underlying credit risk. To the extent that market prices are obtained on the basis of transactions with lower credit risk, this will be taken into account by amortising the original price difference measured against such transactions with lower credit risk over the life of the financial derivative. Intangible assets Intangible assets are subject to an impairment test which is mainly based on the discounting of expected future cash flows. There will always be considerable uncertainty relating to estimated cash flows, and in some cases there will also be uncertainty with regard to the methods for allocating cash flows to various assets. Pensions Net pension liabilities and the current period s pension cost are based on a number of estimates, amongst others the return on pension resources, future interest- and inflation levels, development in wage rates, turnover of staff and development with regard to the basic salary amount («G»); the general development in the number of persons receiving disability benefits and life expectancy are also significant. Uncertainty is to a great extent related to gross liabilities and not to net liabilities as shown in the balance sheet. Changes in estimates as a result of changes in the abovementioned parameters will to a large extent be accrued over average remaining working lives and will not be recognised in the profit and loss account immediately, as would be the case for other changes in estimates. Acquisition of a business On , the member banks in the SpareBank 1- alliance entered into an agreement to acquire all shares in BNbank ASA (the former Glitnir Bank ASA) for a total consideration of NOK 300 million. The transaction was completed on Through this transaction, SpareBank 1 Nord-Norge became the owner of 20 per cent of the shares in BNbank ASA. At the time of the acquisition, a Purchase Price Allocation was made, in accordance with which the purchase price is allocated to identifiable assets and liabilities in the acquired company. Additional values in excess of those which are allocated for identifiable assets and liabilities are included in the accounts as goodwill. Any shortfall in market value shall, after a thorough assessment, be booked as income in the profit and loss account during the year in which the acquisition was made (negative goodwill). According to IFRS 3, paragraph 62, the acquisition analysis may be regarded as preliminary or final. In connection with the acquisition of BNbank ASA, the member banks in the SpareBank 1-alliance have, in accordance with IFRS 3, completed such an acquisition analysis with the help of external experts. In the acquisition analysis, a total net amount in respect of shortfall in market value of NOK 2,377 million was identified. SpareBank 1 Nord-Norge s share of this is NOK million. These additional values and shortfalls in market value are related to BNbank s lending portfolio, its portfolio of funding loans, pension liabilities and contingent liabilities. The analysis contains both actual calculations and the use of best judgment in order to arrive at as correct a market value as possible for BNbank ASA at the time of acquisition. There is always some uncertainty related to a valuation on the basis of best judgment, but these estimates are in the best way possible supported by calculations of future cash flows, comparable transactions, earlier periods etc. Overall, a reasonable assessment has been made of the estimated value of BNbank in relation to the way in which other banks are priced in today s market (price/ book value)). The acquiring banks PCCs rose in value when the acquisition of BNbank was announced in the market, and this also supports our value assessment of BNbank in the acquisition analysis. Due to the fact that the acquisition transaction was completed very close to the finalisation of the 2008 annual accounts, the acquiring member banks of the SpareBank 1-alliance have chosen to regard the acquisition analysis as preliminary. A preliminary acquisition analysis may be changed within 12 months of the time of the acquisition, and any errors which might be identified during this period will be taken into account in the final acquisition analysis in According to IAS 8, such errors may involve adjustments of negative goodwill during the next 12-month period. In such cases, any errors are to be recognised in equity, whereas any changes in estimates are to be included in the profit and loss account during the period in which they occur. Reference is also made to note 40.

49 Notes Annual Report Note 5 Business Areas Management has made an assessment of which business areas are deemed reportable with respect to the form of distribution, products and customers. The primary format of reporting takes as a starting point risk and yield profiles of various assets and reporting is divided into retail banking customers and business customers, factoring and leasing. The Bank's own investment activities are not a separately reportable segment and appear under the item "unallocated" together with activities which cannot be allocated to either private- or business segments. A description of the Group s various areas of operations can be found in Note 1. The Bank operates in a limited geographical area and reporting along the lines of geographic secondary segments provides little additional information. Significant types of assets (loans) allocated geographically are included in a separate note under loans Amounts in NOK million Retail banking customers Business customers SP1 Finans AS Unallocated Totalt Net interest income Net fee- and commission income Other operating income Operating costs Profit before losses Net losses on loans and guarantees Profit before income tax Loans and advances to customers Individual write-down for impaired value Group write-down for impaired value Other assets Total assets per business area Liabilities to- and deposits from customers Other liabilities and equity Total equity and liabilities per business area Net interest income Net fee- and commission income Other operating income Operating costs Profit before losses Net losses on loans and guarantees Profit before income tax Loans and advances to customers Individual write-down for impaired value Group write-down for impaired value Other assets Total assets per business area Liabilities to- and deposits from customers Other liabilities and equity Total equity and liabilities per business area

50 48 Annual Report 2008 Notes Note 5 Business Areas Amounts in NOK million Retail banking customers Business customers SP1 Finans AS Unallocated Totalt Net interest income Net fee- and commission income Other operating income Operating costs Profit before losses Net losses on loans and guarantees Profit before income tax Loans and advances to customers Individual write-down for impaired value Group write-down for impaired value Other assets Total assets per business area Liabilities to- and deposits from customers Other liabilities and equity Total equity and liabilities per business area Note 6 Net interest income Parent Bank Group Amounts in NOK million Interest income Interest and similar income from loans to and claims on credit institutions Interest and similar income from loans to and claims on customers Interest and similar income from certificates, bonds and other interest-bearing securities Interest income from written-down financial assets Loans to and claims on customers Other financial instruments Total interest income Interest costs Interest and similar costs on liabilities to credit institutions Interest and similar costs relating to deposits from and liabilities to customers Interest and similar costs related to the issuance of securities Interest and similar costs on subordinated loan capital Payments made to The Norwegian Banks' Guarantee Fund 12 Other interest costs and similar costs Total interest costs Net interest income

51 Notes Annual Report Note 7 Net commission income Parent Bank Group Amounts in NOK million Fees and commissions receivable Guarantee commissions Interbank commissions The arrangement of credit Arrangement fee for SpareBank 1 Boligkreditt Arrangement fee for vendor's lien-based loans Securities trading, administration and trust department services Payment transmission services Brokerage commission Insurance services Other commission income Total fee- and commission income Fees and commissions payable Interbank commissions Payment transmission services Other commission costs Total fee- and commission costs Net fee- and commission income

52 50 Annual Report 2008 Notes Note 8 Income from financial investments Parent Bank Group Amounts in NOK million Dividends from equity capital instruments Income from Group companies Income from joint ventures Income from acquisition of BNbank ASA (badwill) Total income from equity stakes in Group companies and joint ventures Certificates and bonds assessed at fair value through the profit and loss account Certificates and bonds assessed at amortised cost loans and advances Certificates and bonds assessed at amortised cost hold to maturity Total income from certificates and bonds Net value changes on hedged bonds and financial derivatives Net value changes on fixed rate loans to customers and derivatives Value changes on other financial derivatives Total income from financial derivatives Gains/losses on shares classified at fair value through the profit and loss account Gains/losses on shares classified as available for sale Total income from shares Total income from currency trading Net gains/losses and net value changes on financial assets Income from financial investments Note 9 Other operating income Parent Bank Group Amounts in NOK million Operating income from fixed assets and property Management and sale of property Other operating income Total other operating income

53 Notes Annual Report Note 10 Operating costs Parent Bank Group Amounts in NOK million Personnel costs Administrative costs Ordinary depreciation Various operating costs Total operating costs Breakdown of operating costs Personnel costs Wages and salaries Pension costs Social costs Total personnel costs Administrative costs Development costs Electronic data processing costs Marketing costs Travel- and training costs Communications Postage Consultancy services Cost involving the handling of cash Office-related costs Collection costs Administrative costs Other operating costs Operating costs buildings External auditor 1) Rent paid premises and bank buildings Operating costs premises Other operating costs Total other operating costs

54 52 Annual Report 2008 Notes Note 10 Operating costs Parent Bank Group Amounts in NOK ) Fees external auditor Statutory auditing Other certification services Tax advisory services Other non-audit services Total remuneration for external auditor Personnel resources Average: Number of man-years Number of staff As at exact figures Number of man-years Number of staff Remuneration for the Bank s Chief Executive Officer Amounts in NOK The CEO s remuneration consists of the following elements: Ordinary salary Benefits in kind Pension premium Tax compensation SpareBank 1 Nord-Norge today has a pension scheme through its own pension fund which together with the pension from the National Insurance shall provide a pension of approximately 70 per cent of final salary at retirement age. For those members who have a salary in excess of 12 G (the basic amount), the Bank has established a group annuity («top hat») which takes care of those pension liabilities which fall outside the pension fund s liabilities. Following the introduction of new tax rules and regulations, such a pension premium shall with effect from 2008 be reported as salary and shall form part of the tax basis for each member. As a result of the change in the rules and regulations, the employer now gets (unlike earlier) tax-related deductions for payments into the scheme since these are treated as salary for the employee in question. This means that whereas the employee during the payment period will now be subject to an additional tax charge, the employer will be subject to less tax. In the case of the Bank s operations, this applies to 11 persons at the present time. For the period from to , the Bank s premium in respect of top hat insurance for these persons amounts to about NOK 2.6 million, of which NOK 1.2 million is accounted for by the premium paid for the CEO. The arrangement was established in April 2008 with retroactive force. This is the reason why the reporting in 2008 involves 2 years. As may be seen from the abovementioned comments, the increased salary reporting is a consequence of changed rules and regulations. The change involves an increase in reported salary for the employee without this implying increased actual payments to the employee. In 2008, a bonus of NOK 500,000 has been paid to the CEO, whereas the 2007 bonus payment was NOK 400,000. Fees paid to the Chairman of the main Board of Directors Kjell Olav Pettersen has been Chairman of SpareBank 1 Nord-Norge s main Board of Directors with effect from In 2008, as Chairman of the main Board of Directors, he received a total remuneration of NOK 300,000. Estimated value of fringe benefits was NOK 13,000.

55 Notes Annual Report Note 10 Operating costs Fees paid to members of the main Board of Directors Amounts in NOK Board fees Other remuneration Board fees Other remuneration Hanne Bentsen Roar Dons (from April 2007) Elisabeth Johansen Gunnar Kristiansen Erik Sture Larre (Deputy Chairman) Hanne Nordgård 76 0 Ann-Christine Nybacka (from April 2008) Åse Annie Opsjøn (left in Mars 2007) 32 0 Pål Andreas Pedersen (from April 2008) 97 0 Rolf Pedersen (left in Mars 2008) Vivi Ann Pedersen Kjell Olav Pettersen (Chairman) Tom Veierød (left in Mars 2008) Total Fees paid to members of the Control Committee Amounts in NOK Fees Other remuneration Fees Other remuneration Rigmor Abel (from April 2008) 52 0 Kåre Brynjulfsen (from April 2008) 30 0 Per Christiansen (Chairman) Dag Norvang Inger Johanne Pettersen (left in Mars 2008) Total Fees paid to members of the Supervisory Board In 2008, fees totalling NOK 390,000 were paid 32 members. The corresponding amount for 2007 was NOK 348,000 to 48 members.

56 54 Annual Report 2008 Notes Note 10 Operating costs Payments made to members of the Group Management Committee 2008 Title/name Salaries and other short-term emoluments Pension premium and tax compensation Fees from Boards of subsidiaries, SpareBank 1 Gruppen and other similar companies Bonus Profit sharing 1) Number Option of primary capital certificates received as profit sharing Payments in advance and collateral Amounts in NOK Risk Manager Geir Andreassen CEO SpareBank 1 Finans Hermod Bakkejord Senior Group General Manager-CFO Rolf Eigil Bygdnes Senior Group General Manager Stig Arne Engen Chief Executive Officer Hans Olav Karde ) Former Senior Group General Manager Olav Karlsen (new position with effect from ) Director, Information and Public Relations Kjell Kolbeinsen CEO SNN Securities Bjørn E. Kristiansen CEO EiendomsMegler 1 Børge Martinussen (left ) Acting CEO EiendomsMegler 1 Noel Pedersen (from ) CEO SNN Invest AS Kari Riddervold CEO Eiendomsdrift Ole Sandmo Senior Group General Manager Liv Bortne Ulriksen (from ) Senior Group General Manager Elisabeth Utheim CEO SpareBank 1 Factoring Niclas Aafos (from ) Deputy Chief Executive Officer Oddmund Åsen ) The fee has been paid back to SpareBank 1 Nord-Norge. Other terms and conditions Title/name Amounts in NOK Period Pay after Additional of notice termination of pension employment agreement Last year accrued pension rights Risk Manager Geir Andreassen 3 mnd. 0 mnd. 1) 142 CO SpareBank 1 Finans Hermod Bakkejord 3 mnd. 0 mnd. 120 Senior Group General Manager-CFO Rolf Eigil Bygdnes 3 mnd. 0 mnd. 1) 241 Senior Group General Manager Stig Arne Engen 3 mnd. 0 mnd. 1) 141 Chief Executice Officer Hans Olav Karde 6 mnd. 0 mnd. 2) Former Senior Group General Manager Olav Karlsen (new position with effect from ) 6 mnd. 0 mnd. 1) 539 Director, Information and Public Relations Kjell Kolbeinsen 3 mnd. 0 mnd. 1) 339 CEO SNN Securities Bjørn E. Kristiansen 3 mnd. 0 mnd. 118 CEO EiendomsMegler 1 Børge Martinussen (left ) 3 mnd. 0 mnd. 131 Acting CEO EiendomsMegler 1 Noel Pedersen (from ) 3 mnd. 0 mnd. 0 CEO SNN Invest AS Kari Riddervold 3 mnd. 0 mnd. 0 CEO Eiendomsdrift Ole Sandmo 3 mnd. 0 mnd. 95 Senior Group General Manager Liv Bortne Ulriksen (from ) 3 mnd. 0 mnd. 0 Senior Group General Manager Elisabeth Utheim 3 mnd. 0 mnd. 1) 259 CEO SpareBank 1 Factoring Niclas Aafos (from ) 3 mnd. 0 mnd. 26 Deputy Chief Executive Officer Oddmund Åsen 6 mnd. 0 mnd. 3) 339 1) Top Hat. 70 % of the income at the age of 62. Retirement at the turn of the year after the age of 62. 2) Top Hat. 70 % of the income at the age of 65. Retirement at the turn of the year after the age of 65. 3) Top Hat. 70 % of the income at the age of 62. Retirement at the turn of the year after the age of 60. All members of the Group Management appointed before have an ordinary pension agreement through the benefit-based scheme in Sparebanken Nord-Norges Pensjonskasse, as described in Note 26. The early retirement pension scheme for some of the members of the Group Management Committee is to be regarded as an operating pension scheme where traditional pension entitlements have not been accumulated. The Bank has nevertheless made allocations in its accounts for the share relating to future liabilities also for these pension schemes.

57 Notes Annual Report Note 10 Operating costs Payments made to members of the Group Management Committee 2007 Title/name Amounts in NOK Salaries and other short-term emoluments Fees from Boards of subsidiaries, SpareBank 1 Gruppen and other similar companies Bonus Profit sharing 1) Number Option of primary capital certificates received as profit sharing Payments in advance and collateral Risk Manager Geir Andreassen CEO SpareBank 1 Finans Hermod Bakkejord Senior Group General Manager-CFO Rolf Eigil Bygdnes Senior Group General Manager Stig Arne Engen Chief Executive Officer Hans Olav Karde Senior Group General Manager Olav Karlsen Director, Information and Public Relations Kjell Kolbeinsen CEO SNN Securities Bjørn E. Kristiansen CEO EiendomsMegler 1 Børge Martinussen CEO Eiendomsdrift Ole Sandmo CEO SNN Invest AS Kari Riddervold Senior Group General Manager Elisabeth Utheim Deputy Chief Executive Officer Oddmund Åsen ) Profit sharing is on the same basis as for other members of staff. Other terms and conditions Title/name Period of notice Pay after termination of employment Additional pension agreement Last year accrued pension rights Amounts in NOK Risk Manager Geir Andreassen 3 mnd. 0 mnd. 1) 180 CEO SpareBank 1 Finans Hermod Bakkejord 3 mnd. 0 mnd. 170 Senior Group General Manager-CFO Rolf Eigil Bygdnes 3 mnd. 0 mnd. 1) 337 Senior Group General Manager Stig Arne Engen 3 mnd. 0 mnd. 1) 204 Chief Executive Officer Hans Olav Karde 6 mnd. 0 mnd. 2) 844 Senior Group General Manager Olav Karlsen 6 mnd. 0 mnd. 1) 519 Director, Information and Public Relations Kjell Kolbeinsen 3 mnd. 0 mnd. 1) 269 CEO SNN Securities Bjørn E. Kristiansen 3 mnd. 0 mnd. 126 CEO EiendomsMegler 1 Børge Martinussen 3 mnd. 0 mnd. 198 CEO Eiendomsdrift Ole Sandmo 3 mnd. 0 mnd. 129 CEO SNN Invest AS Kari Riddervold 3 mnd. 0 mnd. 31 Senior Group General Manager Elisabeth Utheim 3 mnd. 0 mnd. 1) 300 Deputy Chief Executive Officer Oddmund Åsen 6 mnd. 0 mnd. 3) 399 1) Top Hat. 70 % of the income at the age of 62. Retirement at the turn of the year after the age of 62. 2) Top Hat. 70 % of the income at the age of 65. Retirement at the turn of the year after the age of 65. 3) Top Hat. 70 % of the income at the age of 62. Retirement at the turn of the year after the age of 60. All members of the Group Management appointed before have an ordinary pension agreement through the benefit-based scheme in Sparebanken Nord-Norges Pensjonskasse, as described in Note 26. The early retirement pension scheme for some of the members of the Group Management Committee is to be regarded as an operating pension scheme where traditional pension entitlements have not been accumulated. The Bank has nevertheless made allocations in its accounts for the share relating to future liabilities also for these pension schemes.

58 56 Annual Report 2008 Notes Note 10 Operating costs Loans to top team members and elected representatives with related parties and other employees The following loans had been granted as at Amounts in NOK Lending value Members of the main Board of Directors 2) Kjell Olav Pettersen, Chairman 0 Erik Sture Larre jr., Member 0 Elisabeth Johansen, Member 885 Roar Dons, Member 0 Ann-Christine Nybacka, Member 0 Pål Anderas Pedersen, Member 0 Hanne Bentsen, Member Vivi Ann Pedersen, Member 569 Members of the main Board with related parties 2) 3) Controlcommittee 2) Per Christiansen, Chairman 0 Rigmor Abel, Member 0 Dag Norvag, Member 0 Top management 1) Hans Olav Karde, CEO Oddmund Aasen, Deputy CEO Elisabeth Utheim, Senior Group General Manager Stig Arne Engen, Senior Group General Manager Liv Bortne Ulriksen, Senior Group General Manager Rolf Eigil Bygdnes, Senior Group General Manager-CFO Geir Andreassen, Risk Manager Kjell Kolbeinsen, Information Director Ole Sandmo, CEO Eiendomsdrift Hermod Bakkejord, CEO SpareBank 1 Finans Niclas Aafos, CEO SpareBank 1 Factoring Noel Pedersen, Acting CEO EiendomsMegler Bjørn E. Kristiansen, CEO SNN Securities 0 Kari Riddervold, CEO SNN Invest AS Other employees 1) ) The loan rate of interest represents 80 per cent of the best house mortgage interest rate applicable at all times for our ordinary customers (within NOK 2 million), within a maximum loan amount of NOK 2 million. No guarantees have been granted. Terms and conditions for the loans are the same as for other employees. 2) Terms and conditions, collateral and other security are the same as for ordinary customers, with the exeption of employees' elected representatives for whom terms and conditions are the same as for other employees. 3) Roar Dons is a shareholder and on the Board of Directors of 3 companies which have borrowed NOK 89 million. The loans were raised before he became a member of the Board of Directors. The aggregate value of interest rate subsidies relating to loans to employees amounted to approximately NOK 12 million in 2008.

59 Notes Annual Report Note 10 Operating costs Loans to top team members and elected representatives with related parties and other employees The following loans had been granted as at Amounts in NOK Lending value Members of the main Board of Directors 2) Kjell Olav Pettersen, Chairman 0 Tom Veierød, Member 0 Elisabeth Johansen, Member 0 Vivi Ann Pedersen, Member 591 Erik Sture Larre jr., Member 0 Roar Dons, Member 0 Rolf Pedersen, Member 0 Hanne Bentsen, Member Members of the main Board with related parties 2) 3) Control committee 2) Per Christiansen, Chairman 0 Inger Johanne Pettersen, Member 982 Dag Norvag, Member 0 Top management 1) Hans Olav Karde, CEO Oddmund Aasen, Deputy CEO Elisabeth Utheim, Senior Group General Manager Stig Arne Engen, Senior Group General Manager Olav Karlsen, Senior Group General Manager Rolf Eigil Bygdnes, Senior Group General Manager-CFO Geir Andreassen, Risk Manager 985 Kjell Kolbeinsen, Information Director Ole Sandmo, CEO Eiendomsdrift Hermod Bakkejord, CEO SpareBank 1 Finans 742 Børge Martinussen, CEO EiendomsMegler Bjørn E. Kristiansen, CEO SNN Securities Kari Riddervold, CEO SNN Invest AS Other employees 1) ) The borrowing rate paid by staff is 80 per cent of customers' standard interest rate for mortgage loans, up to a maximum loan amount of NOK 2 million. No guarantees have been granted. Terms and conditions for the loans are the same as for other employees. 2) Terms and conditions, collateral and other security are the same as for ordinary customers, with the exeption of employees' elected representatives for whom terms and conditions are the same as for other employees. 3) Roar Dons is a shareholder and on the Board of Directors of 3 companies which have borrowed NOK 91 million. The loans were raised before he became a member of the Board of Directors. The aggregate value of interest rate subsidies relating to loans to employees amounted to approximately NOK 8 million in 2007.

60 58 Annual Report 2008 Notes Note 10 Operating costs PCCs held by SpareBank 1 Nord-Norge' elected representatives as at Number of PCCs held Main Board members/deputy members Erik Sture Larre jr Kjell Olav Pettersen Vivi-Ann Pedersen Hanne Bentsen 614 Elisabeth Johansen 783 Supervisory Board members/deputy members Trond Mohn Erik Sture Larre Ole Ovesen Kjell Kræmer Bente Evensen Marie Fangel Herman Mehren Arnold Sjøteig Asbjørg Jensvoll Strøm Tor Lægreid Einar Frafjord Ann Kathrina Langaune Widar Slemdal Andersen Inger Løkken Rita Annie Strøm Dag Inge Lund 832 Kristin Langseth 795 Bodil Hanssen 722 Tone Marie Myklevoll 636 Alf E Erevik 400 Svein Brustad 286 Jan Hugo Sørensen 28 Top team members Hans Olav Karde, CEO Geir Andreassen, Risk Manager Oddmund Aasen, Deputy CEO Liv Bortne Ulriksen, Senior Group General Manager Kjell Kolbeinsen, Information Director Stig Arne Engen, Senior Group General Manager Rolf Eigil Bygdnes, Senior Group General Manager-CFO Elisabeth Utheim, Senior Group General Manager 496 The above figures show the number of PCCs held in SpareBank 1 Nord-Norge as at PCCs owned by close family members or by companies of which the abovementioned persons are general partners or directors have also been included.

61 Notes Annual Report Note 10 Operating costs PCCs held by SpareBank 1 Nord-Norge' elected representatives as at : Number of PCCs held Main Board members/deputy members Erik Sture Larre jr Rolf Pedersen Tom Veierød Kjell Olav Pettersen Vivi-Ann Pedersen Hanne Bentsen 614 Elisabeth Johansen 311 Supervisory Board members/deputy members Trond Mohn Erik Sture Larre Ole Ovesen Alf E Erevik Terje Vareberg Kjell Kræmer Bodil Steen Bente Evensen Herman Mehren Marie Fangel Arnold Sjøteig Asbjørg Jensvoll Alvhild Ytregård Ann Kathrina Langaune Einar Frafjord Widar Slemdal Andersen Inger Løkken 879 Rita Annie Strøm 759 Kristin Langseth 553 Bodil Hanssen 436 Tone Marie Myklevoll 358 Svein Brustad 260 Dag Inge Lund 177 Jan Hugo Sørensen 26 Top team members Hans Olav Karde, CEO Oddmund Aasen, Deputy CEO Geir Andreassen, Risk Manager Kjell Kolbeinsen, Information Director Olav Karlsen, Senior Group General Manager Rolf Eigil Bygdnes, Senior Group General Manager-CFO Stig Arne Engen, Senior Group General Manager 294 Elisabeth Utheim, Senior Group General Manager 178 The above figures show the number of PCCs held in SpareBank 1 Nord-Norge as at PCCs owned by close family members or by companies of which the abovementioned persons are general partners or directors have also been included.

62 60 Annual Report 2008 Notes Note 11 Tax Parent Bank Group Amounts in NOK million Major components of income tax Current tax costs Change in deferred tax Change in tax/deferred tax due to change in principles Shortfall/surplus in respect of accrual for taxation in the previous year Tax Capital (property) tax (from 2007 presented as other operating costs) Income tax for the period Tax payable in balance sheet Change in net deferred tax Change in deferred tax recognised in the income statement Changes in principles recognised directly to equity Total change in net deferred tax Composition of deferred tax carried in the balance sheet and deferred tax recognised in the income statement Deferred tax in balance sheet Deferred tax in balance sheet Temporary differences Tangible fixed assets Current assets Pension liabilities Other temporary differences Loss carried forward Total temporary differences Deferred tax in balance sheet 28 % Composition of deferred tax carried in the balance sheet and deferred tax recognised in the income statement Deferred tax recognised in the income statement Deferred tax recognised in the income statement Temporary differences Tangible fixed assets Current assets Pension liabilities Other temporary differences Loss carried forward Total temporary differences Change in deferred tax recognised in the income statement 28 % Reconciliation of tax charge for the period recognised against profit and loss to profit before tax % of profit before tax Non-taxable profit and loss items (permanent differences) Capital gains tax Shortfall of accrual for taxation in the previous year Taxation charge for the period % 27.2 % 40.3 % Effective tax rate (income tax for the period expressed as a percentage of profit before tax) 30.0 % 21.4 % 21.1 %

63 Notes Annual Report Note 12 Other assets Parent Bank Group Amounts in NOK million Accrued interest from customers, subject to accrual accounting Accrued interest from securities, subject to accrual accounting Accrued premium, subject to accrual accounting Capital contribution to the Sparebanken Nord-Norge Pension Fund Shares in temporary ownership Other debtors Other pre-paid costs, not yet incurred Internal accounts Not finally registered special deposit in subsidiary Client account property brokerage Miscellaneous Other assets Note 13 Property, plant and equipment Buildings and other property Parent Bank Machinery, fixtures, fittings and vehicles Total Amounts in NOK million Buildings and other property Group Machinery, fixtures, fittings and vehicles Cost of acquisition or adjusted value as at Acquisitions Disposals Revaluation Cost of acquisition or adjusted value as at Total Accumulated depreciation and write-downs as at Current period's depreciation Current period's impairment in value Reversed accumulated depreciation relating to buildings which have been sold Accumulated depreciation and impairment in value as at Book value as at Cost of acquisition or adjusted value as at Acquisitions Disposals Revaluation Cost of acquisition or adjusted value as at Accumulated depreciation and write-downs as at Current period's depreciation Current period's impairment in value Reversed accumulated depreciation relating to buildings which have been sold Accumulated depreciation and impairment in value as at Book value as at

64 62 Annual Report 2008 Notes Note 13 Property, plant and equipment Buildings and other property Parent Bank Machinery, fixtures, fittings and vehicles Total Amounts in NOK million Buildings and other property Group Machinery, fixtures, fittings and vehicles Cost of acquisition or adjusted value as at Acquisitions Total Disposals Cost of acquisition or adjusted value as at Accumulated depreciation and write-downs as at Current period's depreciation Current period's impairment in value Reversed depreciation Accumulated depreciation and impairment in value as at Book value as at % % Depreciation rates 1 5 % % 0 % Dwelling units, building plots and sites, works of art 0 % Provision of collateralised assets as security The Bank has not provided collateral security or accepted any other limitations of its rights to use its fixed tangible assets. The gross value of fully depreciated assets still in use The gross value of fixed tangible assets which are fully depreciated and still in use was NOK 385 million as as Revaluation The Bank does not make revaluations of fixed tangible assets on an ongoing basis. In connection with the initial implementation of IFRS, buildings were revalued at a total of NOK 39 million. The basis for this revaluation were independent assessments. Obligations The Bank has not entered into any binding agreements relating to the acquisition of fixed tangible assets as at Investment property group The Bank has no properties which are defined as investment properties as at

65 Notes Annual Report Note 14 Intangible assets Parent Bank Group Amounts in NOK million Deferred tax benefit Goodwill Total intangible assets Note 15 Investments in Group companies, associated companies and joint ventures Parent Bank Investments in Group companies Amounts in NOK million Equity stakes in financial institutions Equity stakes in other Group companies Total investments in Group companies Shares and equity stakes included in the Group accounts and shown in the Parent Bank's accounts according to the cost method of accounting Share of equity and voting capital Company names SpareBank 1 Nord-Norge Finans AS, Tromsø 100 % SpareBank 1 Nord-Norge Invest AS, Tromsø 100 % Eiendomsdrift AS, Tromsø 100 % EiendomsMegler 1 Nord-Norge AS, Tromsø 100 % SpareBank 1 Nord-Norge Securities ASA, Tromsø 54 % SpareBank 1 Factoring AS 1) 100 % BBL Eiendomsmegling AS 2) 100 % 1) The company is owned by SpareBank 1 Nord-Norge Finans AS. 2) The company was acquired during 2008 and is owned by EiendomsMegler 1 Nord-Norge AS. Shares in subsidiaries are not quoted on the stock exchange. Investments in joint ventures Amounts in NOK million Equity stakes in financial institutions Equity stakes in other joint ventures Total investments in joint ventures Shares and equity stakes in joint ventures, included in the Parent Bank's accounts according to the cost method of accounting Share of equity and voting capital Company names SpareBank 1 Gruppen AS % SpareBank 1 Utvikling DA % SpareBank 1 Boligkreditt AS % BNbank ASA % Intra-group balances relating to the Bank and the abovementioned companies: Reference is made to note 28.

66 64 Annual Report 2008 Notes Note 15 Investments in Group companies, associated companies and joint ventures Group Investments in associated companies and joint ventures Amounts in NOK million 2008 Total share SpareBank 1 Gruppen AS 19,89 % SpareBank 1 Utvikling DA 17,74 % BNbank ASA 20 % SpareBank 1 Boligkreditt AS 16,72 % As at Acquisition/sale Share of profit IFRS Share of result booked as administrative costs Items incorporated directly in equity capital Paid-out dividend As at Total share SpareBank 1 Gruppen AS 19,5 % SpareBank 1 Utvikling DA 17,74 % ANS Bygginvest. II 29,71 % sold SpareBank 1 Bilplan AS 26,70 % sold SpareBank 1 Boligkreditt AS 16,87 % As at Acquisition/sale Share of profit IFRS Share of result booked as administrative costs Items incorporated directly in equity capital Paid-out dividend As at Total share SpareBank 1 Gruppen AS 19,5 % SpareBank 1 Utvikling DA 18,37 % ANS Bygginvest. II 29,71 % ANS Bygginvest. III 28,43 % deleted SpareBank 1 Bilplan AS 26,70 % SpareBank 1 Boligkreditt AS 19,08 % As at Acquisition/sale Share of profit IFRS Share of result booked as administrative costs Items incorporated directly in equity capital Paid-out dividend As at

67 Notes Annual Report Note 15 Investments in Group companies, associated companies and joint ventures Group The Group's equity stakes in associated companies and joint ventures Name Assets Liabilities Income Profit/ loss 2008 Joint ventures Ownership share SpareBank 1 Gruppen AS % SpareBank 1 Boligkreditt AS % SpareBank 1 Utvikling DA % BNbank ASA % Total Joint ventures SpareBank 1 Gruppen AS % SpareBank 1 Boligkreditt AS % SpareBank 1 Utvikling DA % Total Associated companies ANS Bygginvestorer II, Havøysund % Joint ventures SpareBank 1 Gruppen AS % SpareBank 1 Boligkreditt AS % SpareBank 1 Utvikling DA % Total Note 16 Shares and participations SpareBank 1 Nord-Norge uses the following classification of shares and other equity capital instruments according to IAS 39: Fair value through the profit and loss account held for trading shares listed on various Stock Exchanges other shares not listed on any stock exchange Available for sale long-term investments unlisted shares bought with the intention of keeping them as a long-term investment, or when the actual market value cannot be estimated in a reliable manner. The shares are valued according to the principles described in Notes 2 and 3. Parent Bank Group Amounts in NOK million Fair value through profit and loss account Available for sale Total shares and parts

68 66 Annual Report 2008 Notes Note 16 Shares and participations Breakdown of shares and unit trust certificates as at Company name Number of shares/units Our equity stake per cent Our equity stake Market value Booked value Amounts in NOK Parent Bank Listed shares and parts assessed at fair value through profit and loss account PCCs Helgeland Sparebank (HELG) % Klepp Sparebank (KLEG) % Sandnes Sparebank (SADG) % SpareBank 1 Buskerud-Vestfold (SBVG) % SpareBank 1 Nøtterø-Tønsberg (NTSG) % SpareBank 1 Rygge-Vaaler (RVSBG) % SpareBank 1 SMN (MING) % SpareBank 1 SR-Bank (ROGG) % Totens Sparebank (TOTG) % Total PCCs Shares ABB Ltd % Aker Solutions ASA % Assa Abloy AB % Astra Zeneca % Biotec Pharmacon ASA % DnB NOR ASA % DNO International % Ementor ASA A-aksjer % Fred Olsen Energy ASA % Hurtigruten Group ASA % Husqvarna B-aksjer % Imarex ASA % Kongsberg Automotive Holding % Lighthouse Caledonia ASA % Norsk Hydro ASA % Norwegian Air Shuttle ASA % Norwegian Property ASA % Orkla ASA A-aksjer % Petroleum Geo-Services ASA % Remedial (Cyprus) Public % Renewable Energy Corporation ASA % Royal Caribbean Cruises % Seadrill Ltd % Sevan Marine ASA % SSAB B-aksjer (Svensk Stål) % StatoilHydro ASA % Subsea 7 Inc % Tandberg ASA % Telenor ASA % Yara International % Total shares

69 Notes Annual Report Note 16 Shares and participations Company name Amounts in NOK Number of shares/units Our equity stake per cent Our equity stake Market value Booked value Units in share-investment funds Diamond Trust Series I DnB NOR Obx Etf Ishares Euro STX Ishares MSCI emerging Markets Ishares S&P Europe 350 Index Fund Nasdaq- 100 Trust Xact Bull Fondsandelar Xact Omxsb Total units/participations in share investment funds/unit trusts Total listed shares and participations at fair value held for trading Company name Number of shares/units Our equity stake per cent Our equity stake Market value Booked value Amounts in NOK Unlisted shares assessed at fair value through the profit and loss account Målselv Utvikling AS % Nordito AS (previous Teller AS/BBS AS, Blå Holding AS) % Nord-Norge Eiendom IV AS % SpareBank 1 Eiendomsinvest 1 AS % Other shares Total unlisted shares at fair value Total shares and participations through the profit and loss account Available for sale - long-term investments Tavrichesky Bank, Russia Trygg Parkering S.W.I.F.T Sparebankmateriell AS Total shares available for sale long-term investments Parent Bank's total investment in shares and parts

70 68 Annual Report 2008 Notes Note 16 Shares and participations Group-related items Shares owned by Group s subsidiaries. The shares are included in the accounts at fair market value with value changes through the profit and loss account. The portfolio consists of unlisted shares. Value assessment of such unlisted shares is on a general basis subject to uncertainty was an extraordinary year, with the global financial crisis and the substantial fall in shares prices making up the main index on the Oslo Stock Exchange. The fall in prices happened in particular after All transactions in SpareBank 1 Nord-Norge Invest AS s share portfolio before this date are therefore considered not to be representative. Turmoil on the stock exchange probably affects the value of unlisted shares so that the re-pricing of quoted shares has also had an impact on the pricing of the unlisted shares in question. In cases where there were no representative transactions, other value assessment methods according to IAS 39 have been applied. If it is not possible to ascertain a reliable market value, historical cost is used. SpareBank 1 Nord-Norge Invest AS owns the following shares Unlisted shares assessed at fair value through the profit and loss account Company name Number of shares/units Our equity stake per cent Our equity stake Market value Booked value Amounts in NOK Aktiv Oljevernsenter AS % Blomstring AS % Bodø-Gruppen AS % Bodø-Gruppen Invest AS % Breivoll Inspection Technologies AS % Discover Petroleum AS % Finnmark Miljøvarme AS % Fonia AS % Hyttekonsepter AS % Ibidium Norden AS % Lofitorsk AS % Lytix Biopharma AS % Meløy Næringsutvikling AS % Nordlens AS % NordNorsk beredskapssenter AS % NorgesInvestor Opportunities AS (A-shares) % NorgesInvestor Opportunities AS (B-shares) % Norinnova AS % Norinnova Invest AS (A-shares) % Norinnova Invest AS (B-shares) % Olivita AS % Probio ASA % RFG Eiendomsholding AS % Såkorninvest Nord AS % Torskelandsbyen AS % Other shares Total investment in shares assessed at fair value through the profit and loss accounts in subsidiaries Group's total investment in shares and participations/ unit trusts

71 Notes Annual Report Note 17 Certificates and bonds The securities are classified according to IAS 39: «at fair market value through the profit and loss account», «loans and claims», «to be held until maturity». The value for the category «at fair market value through the profit and loss account» is based on published prices from the Oslo Stock Exchange and the financial information system Bloomberg, and if no observable prices are available, alternative value assessment methods according to IAS 39 are applied. The categories «Loans and claims» and «To be held under maturity» are included in the accounts at amortised cost. A more detailed description can be found under Value assessment of bonds, as well as a description of the structured products involved. Certificates and bonds according to type of issuer Parent Bank Amounts in NOK million Governments nominal value market value/fair value booked value Financial institutions nominal value market value/fair value booked value Non-financial institutions nominal value market value/fair value booked value Total certificates and bonds assessed at fair value Governments nominal value market value/fair value booked value Financial institutions 461 nominal value market value/fair value booked value 451 Non-financial institutions 348 nominal value market value/fair value booked value Total loans and advances 745 Governments nominal value market value/fair value booked value Financial institutions nominal value market value/fair value booked value Non-financial institutions 402 nominal value market value/fair value booked value Total hold to maturity Group Total certificates and bonds

72 70 Annual Report 2008 Notes Note 17 Certificates and bonds Assessment at fair value through the profit and loss account Parts of the Bank s portfolio of certificates and bonds is assessed at market value through the profit and loss account. «Market value«or «actual value» is the price at which an asset can be sold, or the price fixed for settling a liability item on the basis of a transaction «at arm s length», between well informed and voluntary parties. To the extent that there is an active market in the securities in question, known market prices are applied in order to establish actual value. Due to the financial crisis, observable prices were not available for one of the security in the portfolio assessed at market value through the profit and loss account; the Broadway CDO. The Bank has therefore applied alternative assessment methods according to IAS 39 in order to determine actual value («Fair Market Value») as at for the security involved. Assessment at fair value through the profit and loss account alternative assessment methods For parts of the portfolio (portfolio of CDOs Collateralised Debt Obligations), observable prices were not available due to the financial crisis, and the Bank has therefore applied alternative assessment methods according to IAS 39 in order to determine actual value («Fair Market Value») as at for the securities involved. account». The assessed market value as at is NOK 17 million. This represents about 0,25 per cent of the total portfolio of certificates and bonds. Value assessment at amortised cost According to changes in IAS 39 and IFRS 7, coupled with the rules and regulations from the Ministry of Finance dated , securities in a trading portfolio could be reclassified from the category «Fair market value with changes through the profit and loss account» to categories which are assessed at amortised cost, «To be held until maturity» or «Loans and Claims». The Group decided to apply such reclassification from to large parts of the Bank s interest-bearing portfolio held available for sale, as the securities in question are no longer expected to be sold before maturity. According to IAS 39, reclassification of securities is only permitted in rare cases. In the opinion of the Board of Directors and management, the global financial crisis in 2008 is deemed to be such a rare case. In case of the reclassified part of the portfolio, listed securities have been reclassified into the category «To be held until maturity». Unlisted securities have been reclassified into the category «Loans and claims». In the absence of direct prices for the financial instruments, broad market indexes are used. These follow fluctuations in the credit markets, and are thought to reflect relevant re-pricing of credit risk in relation to pricing of the types of securities in question. Credit indexes used are «Itraxx Europe Investment Grade Index», «CDX North America Index» and «CMBX North America» (with relevant rating in relation to the Bank s portfolio). In addition to the use of market indexes, the assessment of market value of these instruments is also made in relation to the maturities of the securities in question, coupled with estimated sensitivity as a result of other circumstances, including the extent of borrowing relating to each transaction involved. The assessment of market value is made on the basis of best judgment. Against the background of the situation in the global financial markets, the value assessment is still subject to uncertainty. The abovementioned alternative value assessment method has been applied to a CDO classified in the category «at fair market value through the profit and loss In the categories «To be held until maturity» and «Loans and claims», the securities in question are valued at amortised cost according to the straight-line method, due to the fact that the difference between the straight-line- and effective interest rate method is deemed to be insignificant. After the reclassification, write-downs made previously will be reversed over the portfolio s remaining life, which on average is 2.6 years, and included as income under Net interest income. In the case of two of the securities in the portfolio, is has been deemed necessary, as at , to apply writedown due to permanent impairment of value, totalling NOK 46 million. This applies to two CDOs, the securities «Sycamore» and «Obligasjonsforetaket I». Reference is made to a more detailed description of these securities elsewhere in this note. Reclassified bonds Reclassified on from the category «At fair market value through the profit and loss account» to the categories «To be held until maturity» and «Loans and claims».

73 Notes Annual Report Note 17 Certificates and bonds Value as at Change in third quarter Value as at Change in fourth quarter Value as at Amounts in NOK Hold until maturity Book value Nominal value (nominal amount) Theoretical market value Loans and claims Book value Nominal value (nominal amount) Theoretical market value Total book value Value change which has been included in the profit and loss account in previous periods and at the time of reclassification As at , NOK 115 million had been included in the profit and loss account in respect of unrealised value change/loss on the bonds, excluding currency change in total on the portfolio which was reclassified. In total, NOK 18 million was amortised during the period If the reclassification had not been done, the Group would have had to charge NOK 211 million to the profit and loss account during the last half of 2008 due to increased credit spreads. Write-down has been applied due to permanent impairment of value in this portfolio as at , totalling NOK 46 million. Unrealised premium on this portfolio totalled NOK 392 million as at After the reclassification, write-downs made previously will be reversed over the portfolio s remaining life, which on average is 2.6 years, and included as income in the profit and loss account in addition to current coupon interest receivable, under Net interest income. Broadway CDO The bond matures in June 2013 and originally had a AAA rating. The initial underlying exposure in the transaction was to 125 industrial companies internationally. 46 per cent of the exposure was to USA and about 40 per cent to Europe. After two credit events in the underlying portfolio, the transaction s rating has been reduced to the level of BBB/BBB+. The bond originally had a «subordination» of 5.5 per cent, but after the credit events the equity and related capital was reduced to about 4.4 per cent. This means that further loss in excess of 4.4 per cent will affect the principal amount of the bond. The tranche s size is 1 per cent. The bond can accordingly tolerate an aggregate loss of 1 per cent in excess of the equity and related capital. The invested amount is NOK 30 million. The bond is classified in the Bank s trading portfolio and as at assessed at market value, at a price of including value change loss on the swap. Portfolio of structured products a description Below is a brief description of the Bank s portfolio of structured products. The term «subordination» is applied in order to describe the size of that part of the risk capital which has a lower priority than the tranche of the investment in which the Bank participates. The term «tranche size» describes the relative size of that part of the risk capital where the Bank participates. If the bond incurs a loss corresponding to the entire «subordination», further losses will involve loss on the tranche in which the Bank participates. If the bond incurs a loss corresponding to the sum of the «subordination» and the «tranche size», the entire investment in the tranche in which the Bank participates will be lost. Sycamore CDO The bond matures in December 2013 and originally had a AAA rating. The underlying exposure is house mortgage loans and commercial property in USA and Europe. The bond has been downgraded twice and its rating as at was BB+. The reason for the downgrading is a significant deterioration in the underlying portfolio of asset backed securities, coupled with changed assumptions in Moody s rating model. It is expected that several of the underlying house mortgage bonds will be defaulted on during the course of 2009 as a result of the weak development in the US economy, with house prices still falling, negative economic growth prospects and a strong increase in the

74 72 Annual Report 2008 Notes Note 17 Certificates and bonds level of unemployment. The probability of the bond incurring a loss is considered to be relatively high. The bond has a subordination of 1 per cent and a tranche size of 3 per cent. The invested amount is NOK 48 million. The bond is classified under «Loans and claims» and has been written down due to assessed permanent impairment in value. The market price has been written down to NOK 15 million as at Bond Company I CDO The bond matures in September 2009 and originally had an AAA rating. The underlying exposure consists of financial instruments in the form of «Credit Linked Notes» (CLN). The main part of the exposure is to European and North-American companies within a number of different industrial and commercial sectors. As a result of several credit events the bond s rating was reduced to AA in December Initially, the bond had a subordination of 5.5 per cent, which in November 2008 had been reduced to about 3.5 per cent. The size of the tranche of this bond is 1 per cent in excess of the equity and related capital, i.e. between 3.5 and 4.5 per cent. The invested amount is NOK 50 million. The assessed market price as at was The bond is classified as «to be held to maturity» and has been written down to NOK 30 million as at The price is based on an offer from the Manager in December of early redemption at the same price. In January, the Bank took advantage of this offer and has accordingly realised a loss corresponding to the applied market price as at Grand River CDO The bond matures in December 2013 and originally had an AAA rating. The present rating is AAA. The bond has «default immunity» until May This means that any default and bankruptcy occurring in the underlying portfolio of investments before 2011 will result in the investment in the company in question being removed from the underlying portfolio of credits. So far, 7 companies of a total number of 120 have been removed from the underlying portfolio as a result of such credit events, and this has reduced the risk attaching to the bond. This has resulted in an increase in the level of equity and related capital from the original 5.5 per cent to 5.9 per cent at the end of December The invested amount is NOK 50 million. The assessed market price as at was The reason for the low market price is the increase in credit spreads for the underlying companies. The bond is classified as «Loans and claims» and as at included in the accounts at a price of It has been decided as not necessary to apply write-down due to permanent impairment of value of this investment. Palladium, Black Rock CDO The bond matures in June 2013 and originally had an AAA rating. The underlying exposure is to 107 industrial companies within a broad spectrum of sectors in 16 different countries, but with the main part being USA. The original subordination in the bond was 7.83 per cent. After a number of credit events occurring in the underlying portfolio during the course of the autumn of 2008, the equity and related capital has been reduced to 5.61 per cent. The size of the tranche is 1 per cent. The rating of this bond has been reduced to BBB as a result of several circumstances, including reduced subordination coupled with a more turbulent credit market involving a number of down-gradings for the companies in the underlying credit portfolio. In addition to this, Standard & Poor s has changed its methodology for rating of CDOs. The invested amount is NOK 48 million. The assessed market price as at is The bond is classified as «Loans and claims» and as at included in the accounts at a price of It has been decided as not necessary to apply write-down due to permanent impairment of value of this investment. Cavendish Square CDO The bond matures in February 2012 and has equity and related capital of 20.6 per cent. The rating is unchanged at AAA and so far there have been no credit events in the underlying portfolio. The high share of equity and related capital provides substantial buffer capital in this structure in order to withstand any future defaults relating to the underlying exposure involving European asset-backed securities. The invested amount is NOK 48 million. The assessed market price as at is The bond is classified as «Loans and claims» and as at included in the accounts at a price of It has been decided as not necessary to apply write-down due to permanent impairment of value of this investment. Zoo Collateral Fund Obligation The bond matures in February 2014 and consists of

75 Notes Annual Report Note 17 Certificates and bonds more than 100 underlying hedge funds actively managed by an international Manager, P&G SGR. The share of equity and related capital is 36.5 per cent, which is considered to be high. The rating of the bond remains AAA, but the rating prospects have been switched to «negative outlook» as a result of the generally increased level of uncertainty in global financial markets. The invested amount is NOK 48 million. The assessed market price as at is 7. The bond is classified as «Loans and claims» and as at included in the accounts at a price of 91. It has been decided as not necessary to apply write-down due to permanent impairment of value of this investment. Propellor CPPI (Constant Proportion Portfolio Insurance) The bond matures in December The bonds has a rating of AAA. In addition, the principal amount is guaranteed by Societe Generale at maturity. The bond consists of a zero coupon bond and an actively managed part. The price of the zero coupon bond will move toward par at the remaining life becomes shorter, and at maturity it will be redeemed at par. The actively managed part of the investment is managed by the Solent Capital Group, which applies a number of strategies with a view to achieving additional return in the credit market. The invested amount is NOK 48 million. The market price as at was The bond is classified in the Bank s portfolio as «At fair market value through the profit and loss account» and as at included in the accounts at a price of 92.98, based on quoted and legally binding repurchase prices from Societe Generale. Pimco CPPI (Constant Proportion Portfolio Insurance) The bond matures in October The principal amount is guaranteed by Deutsche Bank, which has a rating of A+ from Standard & Poor s and Aa1 from Moody s. The invested amount is NOK 36 million. The bond consists of a zero coupon bond and an actively managed part. The price of the zero coupon bond will move towards par as the remaining life becomes shorter, and at maturity it will be redeemed at par. The actively managed part of the investment is managed by Pimco, which applies a number of strategies with a view to achieving additional return in the credit market. The invested amount is NOK 36 million. The market price as at was The bond is classified in the Bank s portfolio as «At fair market value through the profit and loss account» and as at included in the accounts at a price of based on quoted and legally binding repurchase prices from Deutsche Bank. Note 18 Financial derivatives General description Currency- and interest rate contracts consist of: Interest rate swaps: Commitments to exchange one set of cash flow for another over an agreed period. Foreign exchange derivatives: Agreements to buy or sell a fixed amount of currency at an agreed future date at a rate of exchange which has been agreed in advance. Currency swaps: Agreements relating to the swapping of currency- and interest rate terms and conditions, periods and amounts having been agreed in advance. Interest rate- and currency Agreements involving the swapping of currency- and interest rate terms and swap agreements: conditions, periods and amounts having been agreed in advance. Options: Agreements where the seller gives the buyer a right, but not an obligation to either sell or buy a financial instrument or currency at an agreed date or before, and at an agreed amount. SpareBank 1 Nord-Norge enters into hedging contracts with respected Norwegian and foreign banks in order to reduce its own risk. Financial derivatives transactions are related to ordinary banking operations and are done in order to reduce the risk relating to the Bank s funding loans from the financial markets, and in order to cover and reduce risk relating to customer-related activities. Only hedging transactions relating to the Bank s funding loan operations are defined as«fair value hedging» in accordance with IFRS standard IAS 39. Other hedging transactions are defined as ordinary accounts-related hedging. The Bank does not use cash flow hedging.

76 74 Annual Report 2008 Notes Note 18 Financial derivatives Fair value hedging transactions Net loss charged to the profit and loss account in respect of hedging instruments in connection with actual value hedging was NOK 408 in 2008 and NOK 26 million in Total gain from hedging objects relating to the hedged risk was NOK 375 million in 2008 and NOK 23 million in The Bank's main Board of Directors has determined limits for maximum risk for the Bank's interest rate positions. Routines have been established to ensure that positions are maintained within these limits. Parent Bank and Group Foreign currency- and interest rate instruments Amounts in NOK million Fair value through profit and loss account Contract/ notional amount Fair value Contract/ notional amount Fair value Contract/ notional amount Fair value Assets Liabilites Assets Liabilites Assets Liabilites Foreign currency instruments Foreign exchange financial derivatives (forwards) Currency swaps Currency options Total, non-standardised contracts Standardised foreign currency contracts (futures) Total, foreign currency instruments Interest rate instruments Interest rate swaps (including cross currency) Short,-term interest rate swaps (FRA) Other interest rate contracts Total, non-standardised contracts Standardised interest rate contracts (futures) Total, interest rate instruments Hedging of funding loans Foreign currency instruments Foreign exchange financial derivatives (forwards) Currency swaps Total, non-standardised contracts Standardised foreign currency contracts (futures) Total, foreign currency instruments Interest rate instruments Interest rate swaps (including cross currency) Short-term interest rate swaps (FRA) Other interest rate contracts Total, non-standardised contracts Standardised interest rate contracts (futures) Total, interest rate instruments Total foreign currency- and interest rate instruments Total, interest rate instruments Total currency swaps and forwards Total

77 Notes Annual Report Note 19 Financial institutions - Loans and advances Parent Bank Amounts in NOK million Average interest rate % 1) Average interest rate % 1) Average interest rate % 1) Loans and advances to financial institutions Loans and advances without agreed maturity or notice of withdrawal % % % Loans and advances with agreed maturity or notice of withdrawal % % % Total % % % Broken down by the most important foreign currencies NOK GBP EUR USD SEK Other foreign currencies Total Deposits from credit institutions Loans and deposits from financial institutions without agreed maturity or notice of withdrawal % % % Loans and deposits from credit institutions with agreed maturity or notice of withdrawal % % % Total % % % Broken down by the most important foreign currencies CHF 597 EUR 314 USD JPY 5 DKK 1 NOK SEK 974 Other foreign currencies Total ) Average interest rate/(yield) is calculated as the sum of interest expense divided by average volume.

78 76 Annual Report 2008 Notes Note 19 Financial institutions - Loans and advances Group Amounts in NOK million Average interest rate % 1) Average interest rate % 1) Average interest rate % 1) Loans and advances to financial institutions Loans and advances without agreed maturity or notice of withdrawal % % % Loans and advances with agreed maturity or notice of withdrawal % % % Total % % % Broken down by the most important foreign currencies NOK GBP 28 EUR 2 14 USD SEK 4 Other foreign currencies Total Deposits from credit institutions Loans and deposits from financial institutions without agreed maturity or notice of withdrawal % % % Loans and deposits from credit institutions with agreed maturity or notice of withdrawal % % % Total % % % Broken down by the most important foreign currencies CHF EUR USD JPY 4 DKK 1 NOK SEK 971 Other foreign currencies 461 Total ) Average interest rate/(yield) is calculated as the sum of interest expense divided by average volume.

79 Notes Annual Report Note 20 Loans and advances to customers Parent Bank Group Amounts in NOK million Loans broken down by different types Factoring Financial leasing Overdraft- and working capital facilities Building loans Repayment loans Gross loans to and advances to customers Individual and collective write-downs for impaired value Net loans and advances to customers (amortised cost) Net loans and advances to customers (fair value) Lending broken down by markets Retail banking market Corporate market Public sector Gross loans and advances Individual and collective write-downs for impaired value Net loans and advances Of this, subordinated loan capital accounted for: Subordinated loan capital in financial institutions 20 Subordinated loan capital in other financial institutions Other subordinated loan capital Subordinated loan capital shown under loans to customers Loans to employees Loans to employees Interest rate subsidies to employees are not recognised as a separate operating cost, and are included in the Bank's net interest income. (See also Note 10 relating to loans to employees) Amounts in NOK million Loans broken down by different risk groups Total contracts Very low risk Low risk Medium risk High risk Very high risk Commitments in default Total

80 78 Annual Report 2008 Notes Note 20 Loans and advances to customers Parent Bank Group Amounts in NOK million Loans broken down by different risk groups Gross loans Very low risk Low risk Medium risk High risk Very high risk Commitments in default Total Individual write-down for impaired value Commitments in default Total Expected annual average net loss Very low risk Low risk Medium risk High risk Very high risk Commitments in default Total The Bank utilises a classification system for monitoring credit risk in its corporate portfolio. Default is defined as overdraft/arrears over 90 days, or when there is objective evidence of events which indicate a customer's default. The likelihood of default is calculated for each customer, based on historical financial data or remarks about the ability/willingness to service outstanding debt in a timely fashion during the time of the relationship in question. A corresponding likelihood is calculated for retail banking customers based on tax assessment figures and the customer's general behavior in financial context during the history of the relationship. The Bank today has 9 categories for healthy commitments and two categories for defaulted commitments, based on the likelihood of default for each customer. The entire portfolio is scored on a monthly basis using automatic data-capturing techniques based on objective data. Portfolio monitoring is done against the background of the size of the commitment, risk class and changes from one risk class to another. The risk in the portfolio was reduced in 2007 and However, developments during the second half of 2008 show that increased interest levels and uncertainty in the financial markets have had an impact on the credit portfolio. The level of risk in the portfolio stabilised in 2008 and the development in central macro variables will be of decisive importance for risk development and risk profile. A customer s total commitment is defined as the sum of loan balances, guarantee limits, credit limit and accrued interest. Private- and business commitments are assessed for value impairment individually in accordance with FSAN's regulations when identified as at risk for default. Risk pricing of corporate commitments reflects risk class and security coverage. In the case of pricing of risk relating to retail banking commitments, the ability to service outstanding commitments in accordance with standard rates and security coverage is taken into consideration. The definition of high-risk loans and loans being at risk of default has now been significantly changed and is calculated according to the likelihood of default. The proportion of loans involving high risk was 4.4 per cent in The proportion of loans at risk of default amounted to 1.1 per cent of the loan portfolio. Expected average annual net losses over an economic cycle have been fixed at one year s expected credit losses, calculated by using the Bank s classification system. During a period of strong economic expansion, which applied until 2007, the actual annual credit losses will be lower than in a future downturn in the economy. In addition, during a decline in economic activity, credit losses in each year are expected to exceed the level of anticipated average loss. Expected credit loss is one of the parameters factored into the Bank s pricing model when calculating the rate of interest to be paid by the customer.

81 Notes Annual Report Note 20 Loans and advances to customers Parent Bank Loans broken down by geographical areas Amounts in NOK million North Norway including Spitzbergen 91 % % % Other regions 8 % % % International 0 % 82 0 % 70 0 % 86 Total gross loans broken down by geographic areas 100 % % % Group Gross share Loans Gross share Loans Gross share Amounts in NOK million North Norway including Spitzbergen 91 % % % Other regions 8 % % % International 0 % 82 0 % 70 0 % 86 Total gross loans broken down by geographic areas 100 % % % Gross share Loans Gross share Loans Gross share Loans Loans Loans broken down by different commercial, industrial and other sectors Parent Bank Group Total commitments Government- and social security administration County municipalities and municipalities Agriculture, forestry, fisheries, hunting and fish farming Extraction of crude oil and natural gas Industry and mining Building and construction, power- and water supply Wholesale and retail trade; hotel- og restaurant industry International shipping and pipeline transport Other transport and communications Financing, property management and business services Other service industries Insurance, securities funds and other financial enterprises Retail banking market international Retail banking market domestic Total Gross loans Government- and social security administration County municipalities and municipalities Agriculture, forestry, fisheries, hunting and fish farming Extraction of crude oil and natural gas Industry and mining Building and construction, power- and water supply Wholesale and retail trade; hotel- og restaurant industry International shipping and pipeline transport Other transport and communications Financing, property management and business services Other service industries Insurance, securities funds and other financial enterprises Retail banking market international Retail banking market domestic Total

82 80 Annual Report 2008 Notes Note 20 Loans and advances to customers Parent Bank Group Individual write-downs for impaired value Government- and social security administration County municipalities and municipalities Agriculture, forestry, fisheries, hunting and fish farming Extraction of crude oil and natural gas Industry and mining Building and construction, power- and water supply Wholesale and retail trade; hotel- og restaurant industry International shipping and pipeline transport Other transport and communications Financing, property management and business services Other service industries Insurance, securities funds and other financial enterprises Retail banking market international Retail banking market domestic Total Expected annual average net loss Government- and social security administration County municipalities and municipalities Agriculture, forestry, fisheries, hunting and fish farming Extraction of crude oil and natural gas Industry and mining Building and construction, power- and water supply Wholesale and retail trade; hotel- og restaurant industry International shipping and pipeline transport Other transport and communications Financing, property management and business services Other service industries Insurance, securities funds and other financial enterprises 1 Retail banking market international Retail banking market domestic Total Loans and advances to customers relating to financial leasing Gross advances relating to financial leasing Maturities of less than 1 year Maturities of more than 1 year but not more than 5 years Maturities of more than 5 years Total Income received, not yet earned, relating to financial leasing Net investments relating to financial leasing Net investments in financial leasing may be analysed in the following way Maturities of less than 1 year Maturities of more than 1 year but not more than 5 years Maturities of more than 5 years Total

83 Notes Annual Report Note 21 Write-down for impaired value of loan and advances Parent Bank Group Amounts in NOK million Change in individual write-downs for impaired value during the period Change in collective write-downs for impaired value during the period Confirmed losses against which individual write-downs for impaired value was previously made Confirmed losses against which no individual write-downs for impaired value was previously made Payments received on loans, guarantees etc. previously written down Total losses on loans and guarantees Individual write-downs for impaired value Individual write-downs for impaired value on loans and guarantees as at Confirmed losses during the period on loans and guarantees against which individual write-downs for impaired value were previously made Reversal of previous years' impaired value Increase in individual write-downs for impaired value of commitments against which individual write-downs for impaired value were previously made Individual write-downs for impaired value of commitments where no allowance were raised in previous years = Individuelle nedskrivninger til dekning av tap på utlån og garantier per Individual write-downs for impaired value of guarantees, NOK 2 million, are included in the balance sheet as at under Liabilities. Accordingly the amount in 2007 was 1 mill NOK. Collective write-downs for impaired value Collective write-downs for impaired value on loans and guarantees as at Collective write-downs for impaired value on loans and guarantees in the period = Collective write-downs for impaired value on loans and guarantees as at Losses broken down by sector and industry Proportion of losses Loss Proportion of losses Loss Proportion of losses Loss Sector/industry Proportion of losses Loss Proportion of losses Loss Proportion of losses Loss 143 % % 0 18 % 41 Agriculture, forestry, fisheries, hunting and fish farming 17 % 41 0 % % % % % 78 Industry and mining 32 % % % % 4 8 % 3 3 % 7 Building and construction, power- and water supply 3 % 7 10 % 4-25 % 4-43 % 9 41 % 16 8 % 19 Wholesale and retail trade; hotel and restaurant industry 9 % % % 9 International shipping and pipeline transport -5 % 1 5 % 2 3 % 7 Other transport and communications 4 % 9 5 % 2-6 % 1-57 % % 7 13 % 29 Financing, property management and business services 12 % % 8-88 % % 3 5 % 2 0 % 1 Other service industries 1 % 3 5 % 2-25 % % % 6 7 % 15 Retail banking market 9 % % % % % -8 9 % 21 Collective write-downs for impaired value - corporate market 9 % % % % 9 0 % 0 4 % 9 Collective write-downs for impaired value - retail banking market 5 % 11 0 % 0-69 % 11 Collective write-downs for impaired value (losses on repossessed properties) 100 % % % 227 Losses on loans to customers 100 % % % Payments received on loans previously written-off as confirmed lost Net losses on loans

84 82 Annual Report 2008 Notes Note 21 Write-down for impaired value of loan and advances Net non-performing and impaired commitments Parent Bank Non-performing commitments, not impaired Impaired Non-performing and impaired commitments Individual write-downs for impaired value Interest on reversal of discounted impairment of value Net non-performing and impaired commitments Misligholdte og tapsutsatte engasjement morbank Interest on written-down loans, included in Income 1) ) Ordinary effective interest income, reduced by the amortising effect of interest related to individual write-downs, has been included in Income. Corresponding inclusion of income has been applied in the case of loans involving collective related write-downs, calculated at an average, effective rate of interest. Net non-performing and impaired commitments Group Non-performing commitments, not impaired Impaired Non-performing and impaired commitments Individual write-downs for impaired value Interest on reversal of discounted impairment of value Net non-performing and impaired commitments Interest on written-down loans, included in Income 1) ) Ordinary effective interest income, reduced by the amortising effect of interest related to individual write-downs, has been included in Income. Corresponding inclusion of income has been applied in the case of loans involving collective related write-downs, calculated at an average, effective rate of interest.

85 Notes Annual Report Note 22 Deposits from customers Parent Bank Amounts in NOK million Deposits Deposits Proportion Proportion Proportion Deposits Deposits from and liabilities to customers, without agreed maturity 88 % % % Deposits from and liabilities to customers, with agreed maturity 12 % % % Total deposits 100 % % % Average interest rate 1) 4.87 % 3.32 % 1.86 % Deposits broken down by sector and industry Central government- and social security administration 1 % % % 277 Counties and municipalities 14 % % % Agriculture, forestry, fisheries, hunting and fish farming 3 % % % 796 Production of crude oil and natural gas 0 % 2 0 % 1 0 % 0 Industry and mining 2 % % % 644 Building and construction, power- and water supply 4 % % % Wholesale and retail trade; hotel- og restaurant industry 4 % % % International shipping and pipeline transport 0 % 13 0 % 12 0 % 9 Other transport and communications 2 % % % 635 Financing, property management and business services 11 % % % Other professional services 5 % % % Retail banking sector 51 % % % Foreign sector 1 % % % 189 Insurance, securities fund and other financial enterprices 2 % % % 254 Total deposits broken down by sector and industry 100 % % % Deposits broken down by geographical area North Norway including Spitzbergen 92 % % % Other regions 7 % % % International 1 % % % 189 Total deposits broken down by geographical areas 100 % % % ) Average interest rate is calculated as annual total interest/average volume.

86 84 Annual Report 2008 Notes Note 22 Deposits from customers Group Amounts in NOK million Deposits Deposits Proportion Proportion Proportion Deposits Deposits from and liabilities to customers, without agreed maturity 88 % % % Deposits from and liabilities to customers, with agreed maturity 12 % % % Total deposits 100 % % % Average interest rate 1) 4.87 % 3.32 % 1.86 % Deposits broken down by sector and industry Central government- and social security administration 1 % % % 277 Counties and municipalities 14 % % % Agriculture, forestry, fisheries, hunting and fish farming 3 % % % 796 Production of crude oil and natural gas 0 % 2 0 % 1 0 % 0 Industry and mining 2 % % % 643 Building and construction, power- and water supply 4 % % % Wholesale and retail trade; hotel- og restaurant industry 4 % % % International shipping and pipeline transport 0 % 13 0 % 12 0 % 9 Other transport and communications 2 % % % 635 Financing, property management and business services 11 % % % Other professional services 5 % % % Retail banking sector 51 % % % Foreign sector 1 % % % 189 Insurance, securities fund and other financial enterprices 2 % % % 254 Total deposits broken down by sector and industry 100 % % % Deposits broken down by geographical area North Norway, including Spitzbergen 92 % % % Other regions 7 % % % International 1 % % % 189 Total deposits broken down by geographical areas 100 % % % ) Average interest rate is calculated as annual total interest/average volume.

87 Notes Annual Report Note 23 Debt securities in issue Parent Bank Group Amounts in NOK million Certificates and other short-term borrowings Bond debt Total debt securities in issue % 4.94 % 6.27 % Average interest rate for short-term borrowings 6.27 % 4.94 % 3.06 % 3.10 % 4.57 % 6.40 % Average interest rate for bond debt 6.40 % 4.57 % 3.10 % Bond debt broken down by maturities and later Impact from recalculation to market value of bonds hedging-related accounting Own bonds Bond debt and other long-term borrowings Broken down by the most important foreign currencies NOK EUR Total liabilities broken down by major currencies Average interest is calculated on the basis of actual interest cost for the year, including any interest rate- and currency swaps, as a percentage of the average security portfolio.

88 86 Annual Report 2008 Notes Note 24 Subordinated loan capital and capital bonds Parent Bank Group Maturity structure Amounts in NOK million Subordinated loan capital with definite maturities fixed rate of interest 6,03 (call opt. 2008) months Nibor + margin 1.35 (call opt. 2008) months Nibor + margin 1.25 (call opt. 2013) months Nibor + margin 2.75 (call opt. 2013) months Euribor + margin 0.45 (call opt. 2010) EUR Premium/discount relating to subordinated loans Currency premium, limited in time Total subordinated loan capital with definite maturities Perpetual capital bonds months Libor + margin (US$ 60 mill.)(call opt. 2013) Capital bonds currency premium Total perpetual capital bonds Total subordinated loan capital and capital bonds % 4.85 % 6.82 % Average interest rate NOK 6.82 % 4.85 % 4.31 % 7.30 % 6.89 % 6.06 % Average interest rate USD 6.06 % 6.89 % 7.30 %

89 Notes Annual Report Note 25 Other liabilities Parent Bank Group Amounts in NOK million Other liabilities Incurred costs / prepaid income Provision for incurred costs/obligations Total other liabilities Other liabilities Creditors Accrued tax Tax deductions Agreed payments from Donations Fund Miscellaneous liabilities Total other liabilities Incurred costs/prepaid income Incurred personnel costs Incurred interest Miscellaneous incurred costs Total Provisions for incurred costs/liabilities Pension liabilities (Note 26) Miscellaneous provisions for incurred costs Total Incurred costs/prepaid income Provisions as at Additional provisions incorporated in the profit and loss account Utilised during the year Provisions as at Securities pledged as collateral security Securities pledged as collateral security in Relevant liabilities in 2008 Securities pledged as collateral security in Relevant liabilities in 2007 Securities pledged as collateral security in Relevant liabilities in 2006 Securities pledged for D-loans/drawing rights from Norges Bank. Commitments relating to the acquisition of property, plant and equipment As at , the Group did not have any major commitments relating to the acquisition of property, plant and equipment. Through its subsidiary, SpareBank 1 Nord-Norge Invest AS, the Group has committed to share purchases of up to approximately NOK 32 million. Ongoing lawsuits As at , the Group did not have any provisions for ongoing lawsuits.

90 88 Annual Report 2008 Notes Note 26 Pensions Pension liabilities SpareBank 1 Nord-Norge provides group occupational pension schemes for its staff. SpareBank 1 Nord-Norge is obliged to provide group occupational pension schemes according to Law of Obligatory Occupational Pension. The pension schemes meet the requirements contained in this law. In 2006, the Group established a contributory pension scheme, which is provided through SpareBank 1 Forsikring. Employees who were members of the benefit-based pension scheme were offered to transfer to the contributory pension scheme. With effect from , all new employees have been included in the contributory pension scheme. From , the benefit-based pension scheme is a closed scheme for those who decided to retain their membership in this scheme. The benefit-based pension scheme is administered through a separate pension fund which manages the pension resources within the guidelines relating to pension funds. A full pension entitlement in the benefit-based pension scheme requires 30 years accrual and provides the right to old age pension on the difference between 70 per cent of leaving salary and estimated benefit from Folketrygden (National Insurance). On , the Group implemented a plan change in the benefit-based pension scheme. When calculating the pension from Folketrygden, the basis of «1 G» is applied when estimating the basic pension. With effect from , the pension scheme is altered by removing the pension entitlement of a spouse. This plan change has been taken into consideration in the calculations as at The pension age is 67 years. The scheme is adapted to the Law of Corporate Pension. In addition to the pension liabilities which are managed by the pension fund, the Bank has its own pension insurance with another insurance company for employees whose ordinary salary exceeds 12 times the basic amount «G». This insurance was moved to Storebrand in 2008 due to the change in the applicable law for such schemes. The financial impact of this has been factored into the pension cost for the year. When assessing the value of the pension resources, an when calculating incurred liabilities, estimated values are applied. These estimates are corrected each year in accordance with the statement of the pension resources value if moved to another employer and actuarial calculations of the liabilities total amount. Both the value of the pension fund s liabilities, pension insurance with another insurance company and the non-guaranteed liabilities have been included in the calculation set out below. The pension calculations for 2008 have been done against the background of international accounting standards (IAS 19). The Group shows discrepancies in estimates in its accounts according to the «corridor solution», with annual amortisations.

91 Notes Annual Report Note 26 Pensions Parent Bank Group Amounts in NOK million Net pension liabilities in the balance sheet Present value of future pension liabilities Estimated value of pension resources Net pension liabilities in guaranteed schemes Estimated discrepancies not included in profit and loss account Social security liabilities Net pension liabilities in the balance sheet Pension costs for the year Pensionable amounts accrued during the year Interest costs of pension liabilities Expected rate of return on assets in the scheme Estimated discrepancies Effects of changed, defined benefit plans Net pension costs relating to defined benefit plans excluding social security contributions Employer's social security contributions subject to accrual accounting Net pension cost relating to defined benefit plans Curtailment/settlement Other pension costs Total pension costs including social security contributions The actual rate of return on pension assets -3.1 % 8.2 % 8.3 % Change in net pension liabilities in the balance sheet Net pension liabilities in the balance sheet as at Current service costs Curtailment/settlement Charged to the Profit and Loss Account Benefits paid Net pension liabilities in the balance sheet as at Actuarial assumptions 4.50 % 4.80 % 4.00 % Discount rate 4.00 % 4.80 % 4.50 % 5.50 % 5.80 % 6.00 % Expected rate of return on scheme's assets 6.00 % 5.80 % 5.50 % 3.80 % 3.80 % 3.80 % Future wage- and salary developments 3.80 % 3.80 % 3.80 % 3.80 % 3.80 % 3.80 % Adjustment of basic amount (G) 3.80 % 3.80 % 3.80 % 3.80 % 2.50 % 2.00 % Increase in current pensions 2.00 % 2.50 % 3.80 % 5.10 % 6.00 % 6.00 % Social security liabilities 6.00 % 6.00 % 5.10 % % 6.00 % 6.00 % Social security contributions 6.00 % 6.00 % % 2.00 % 2.00 % 2.00 % Turnover for all ages 2.00 % 2.00 % 2.00 % % % % Staff's average estimated propensity to opt for SRPS at the age of % % % K1963 K2005 K2005 Mortality rate, marriage probability etc. K2005 K2005 K1963 IR2003 IR2003 IR2003 Disability IR2003 IR2003 IR Number of members

92 90 Annual Report 2008 Notes Note 27 Equity and capital adequacy ratio New capital adequacy rules and regulations (Basel II EU s new directives for capital adequacy) were implemented in Norway with effect from The new rules and regulations are based on Bank for International Settlements (BIS) proposal for a new standard for capitaladequacy calculations. SpareBank 1 Nord-Norge has received permission from Kredittilsynet (The Financial Supervisory Authorityof Norway) (FSAN) to apply internal calculation methods (Internal Rating-Based Approach) for credit risk from With effect from 2007, therefore, the statutory minimum capital adequacy requirement for credit risk will be based on the Bank s internal assessment of risk. This will make the statutory minimum capital adequacy requirement more risk-sensitive, which means that the capital requirement will to a larger extent correspond to the risk contained in the underlying portfolios in question. The use of internal calculation methods will involve comprehensive demands on the Bank s organisation, competence, risk models and risk management systems. As a result of transitional rules relating to the new directive mentioned above, IRB-banks will still not experience the full impact of the reduced regulatory capital requirements until Until 2010, banks have to report on a parallel basis, both according to the old capital adequacy calculations and Basel II. During the period , a 5 per cent annual reduction of the risk-adjusted calculation basis in relation to the old method (socalled correction of «floor») is permitted. The calculation basis in 2008 therefore amounts to 90 per cent of the calculated basis according to the Basel I rules and regulations. Parent Bank Group Amounts in NOK million NGAAP NGAAP Net equity and related capital Core capital Primary Capital Certificates Premium Fund Savings Bank's Fund Dividend Equalisation Fund Donations Fund for unrealised gains 6 Other equity Total equity exclusive minority interests Deduction set asite dividend Deduction Fund for unrealised gains -6 Deduction Fund for Evaluation Differences Share core capital from consolidated financial institutions Perpetual capital bonds Deferred tax, goodwill and other intangible assets Deduction subordinated capital in other financial institutions (50 %) Deduction adjusted expected amount lost (50 %) Core capital Supplementary capital Subordinated loan capital Share supplementary capital from consolidated institutions Deduction subordinated capital in other financial institutions (50 %) Deduction adjusted expected amount lost (50 %) Capital adequacy reserve Supplementary capital Net equity and related capital

93 Notes Annual Report Note 27 Equity and capital adequacy ratio Parent Bank Group Amounts in NOK million NGAAP NGAAP Risk-weighted assets base Credit risk Settlement/Delivery risk Position, foreign exchange and commodity risks Operational risk Standardised approach Deduction subordinated capital in other financial institutions (100 %) Deduction adjusted expected amount lost (100 %) Core capital adequacy reserve Total risk-weighted assets base 100 % Complements to overall floor Capital Requirements Total risk-weighted assets base IRB Risk-weighted assets base IRB in 2008 are 90 % of Basel-I assets base in % 9.69 % 9.06 % 9.61 % Core capital adequacy ratio 9.06 % 8.92 % 9.77 % 0.73 % 1.29 % 1.28 % Supplementary capital adequacy ratio 1.50 % 1.08 % 0.59 % % % % Capital adequacy ratio % % % The figures for 2006 have been calculated against the background of Norsk God Regnskapsskikk (NGAAP) and have not been restated according to IFRS. Note 28 Related parties Parent bank Subsidiaries Joint ventures SpareBank 1 Nord-Norge SpareBank 1 Finans Nord-Norge AS SpareBank 1 Gruppen AS EiendomsMegler 1 Nord-Norge AS SpareBank 1 Boligkreditt AS SpareBank 1 Nord-Norge Securities ASA SpareBank 1 Utvikling DA Eiendomsdrift AS BNbank ASA SpareBank 1 Nord-Norge Invest AS SpareBank 1 Factoring AS BBL Eiendomsmegling AS

94 92 Annual Report 2008 Notes Note 28 Related parties Current account ratio with subsidiaries Income items Parent Bank Amounts in NOK million Interest received and similar income from loans and claims from subsidiaries Deposit rate to subsidiaries Share dividend Accrued commissions from arranging vendor's lien-based loans Commisions and income from banking services Other operating costs The Parent Bank offers some administration of salary services for subsidiaries. Balance sheet items Parent Bank Loans and advances to subsidiaries Due to subsidiaries Other liabilities and incurred costs Claim on dividends As at , vendor's lien-based loans arranged for SpareBank 1 Finans totalled NOK 561 million. SpareBank 1 Nord-Norge Securities owned 146 PCCs (NONG) in SpareBank 1 Nord-Norge as at Transactions with joint ventures Income items Parent Bank Amounts in NOK million Interest received and similar income from loans and claims from joint ventures Deposit interest rate applicable to joint ventures Share dividends Balance sheet items Parent Bank Loans and advances to joint ventures Deposits from and liabilities to joint ventures Transactions with joint ventures As a participant in the SpareBank 1-alliance, different transactions between the Parent Bank and joint ventures are carried out. All transactions entered into are done on commercial terms as a part of ordinary business and at market prices. The most important transactions done between the joint ventures and SpareBank 1 Nord-Norge in 2008 are as follows: a) Purchase of management- and information technology, and development services from SpareBank 1 Utvikling DA, NOK 72 million (2008) and NOK 62 million (2007). b) The sale of insurance- and savings products with an insurance element for SpareBank 1 Gruppen AS totalled NOK 190 million and NOK 508 million respectively in 2008 and c) Loans sold to SpareBank 1 Boligkreditt AS as at NOK 5,187 million Accrued commission from SpareBank 1 Boligkreditt AS in 2008 NOK 23 million SpareBank 1 Boligkreditt AS's deposits with SpareBank 1 Nord-Norge NOK 2,033 million

95 Notes Annual Report Note 29 Fair value on financial instruments Booked value Parent Bank Change to market value Market value Amounts in NOK million Booked value Change to market value Assets Group Total loans and advances to credit institutions Net loans and advances to customers (amortised cost) Net loans and advances to customers (fair value) Net loans and advances to customers Shares Bonds and certificates (fair value) Bonds and certificates (loans and advances) Bonds and certificates (hold to maturity) Total bonds and certificates Total financial derivatives Total assets Market value Liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue (amortised cost) Debt securities in issue (fair value) Financial derivatives Subordinated loan capital (amortised cost) Subordinated loan capital (fair value) Total liabilities Guarantee liabilities and other liabilities (off balance) Liabilities Guarantee liabilities Securities pledged as collateral security Principles applied in order to ascertain market value for financial instruments which have not been included in the accounts at market value: Assets which are considered to correspond to market value book value Book value is considered to correspond to market value of financial assets and liabilities which are liquid or which are near maturity (less than 3 months). Financial instruments with fixed rates of interest Market value is estimated by comparing market interest rate from the first time the item has been included in the accounts to the market rate offered for similar financial instruments at the end of the balance sheet day in question.

96 94 Annual Report 2008 Notes Note 30 Guarantees Parent Bank Group Breakdown of guarantee liabilities Amounts in NOK million Payment guarantees Contract guarantees Loan guarantees Guarantees for tax payment Miscellaneous Guarantees in favour of the Norwegian Banks' Gurantee Fund (NBGF) Total guarantee liabilities Guarantees broken down by commercial, industrial and other sectors Agriculture, forestry, fisheries, hunting and fish farming Production of crude oil and natural gas Industry and mining Building and construction, power- and water supply Wholesale and retail trade; hotel- og restaurant industry International shipping and pipeline transport Other transport and communication Financing, property management and business services Other service industries Municipalities Retail banking market Total guarantees Financial institutions Total guarantees broken down by commercial, industrial and other sectors Guarantees broken down by geographical areas North Norway, including Spitzbergen Other regions Total guarantees broken down by geographical areas

97 Notes Annual Report Note 31 Maturities analysis of assets and liabilities The table shows whether assets and liabililties have maturity dates within one year after the balance sheet date. Parent Bank Amounts in NOK million Assets On demand Under 3 months 3 12 months 1 5 years Over 5 years Total Cash and balances with central banks Loans and advances to credit institutions Loans and advances to customers Individual write-downs for impaired value Collective write-downs for impaired value Net loans and advances to customers Shares available for sale Bonds fair value Financial derivatives Bonds hold until maturity Bonds loans and advances Investments in Group companies Investment in associated companies and joint ventures Goodwill 0 Property, plant and equipment Intangible assets Other assets Total assets Liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Financial derivatives Deferred tax Other liabilities Subordinated loan capital Total liabilities

98 96 Annual Report 2008 Notes Note 31 Maturities analysis of assets and liabilities Group Amounts in NOK million Assets On demand Under 3 months 3 12 months 1 5 years Over 5 years Total Cash and balances with central banks Loans and advances to credit institutions Loans and advances to customers Individual write-downs for impaired value Collective write-downs for impaired value Net loans and advances to customers Shares available for sale Bonds fair value Financial derivatives Bonds hold until maturity Bonds loans and advances Investments in Group companies Investment in associated companies and joint ventures Goodwill 1 1 Property, plant and equipment Intangible assets Other assets Total assets Liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Financial derivatives Deferred tax Other liabilities Subordinated loan capital Total liabilities

99 Notes Annual Report Note 31 Maturities analysis of assets and liabilities Parent Bank Amounts in NOK million Assets On demand Under 3 months 3 12 months 1 5 years Over 5 years Total Cash and balances with central banks Loans and advances to credit institutions Loans and advances to customers Individual write-downs for impaired value Collective write-downs for impaired value Net loans and advances to customers Shares available for sale Shares - fair value Financial derivatives Bonds - fair value Investment in associated companies and joint ventures Intangible assets Property, plant and equipment Other assets Total assets Liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Financial derivatives Deferred tax Other liabilities Subordinated loan capital Total liabilities

100 98 Annual Report 2008 Notes Note 31 Maturities analysis of assets and liabilities Group Amounts in NOK million Assets On demand Under 3 months 3 12 months 1 5 years Over 5 years Total Cash and balances with central banks Loans and advances to credit institutions Loans and advances to customers Individual write-downs for impaired value Collective write-downs for impaired value Net loans and advances to customers Shares available for sale Shares fair value Financial derivatives Bonds fair value Investment in associated companies and joint ventures Intangible assets Property, plant and equipment Other assets Total assets Liability Liabilities to credit institutions Deposits from customers Debt securities in issue Financial derivatives Deferred tax Other liabilities Subordinated loan capital Total liabilities

101 Notes Annual Report Note 31 Maturities analysis of assets and liabilities Assets and liabilities broken down by remaining life Parent Bank Amounts in NOK million Currency 0 30 days 1 3 months 3 12 months 1 5 years Over 5 years Without remaining life State and state- guaranteed certificates NOK for.currency Other negotiable certificates NOK for.currency Bearer bonds NOK for.currency Loans and advances to financial NOK institutions for.currency Loans and advances to customers 1) NOK for.currency NOK/for. Other assets without remaining life currency Total asset items Total Liabilities to financial institutions NOK for.currency Deposits from customers NOK for.currency Other negotiable certificates NOK for.currency Bearer bonds NOK for.currency Other loans from financial institutions NOK for.currency Subordinated loan capital NOK for.currency NOK/for. Other portfolio currency Total liabilities and equity capital ) Overdraft- and working capital facilities are included in the period up to 30 days.

102 100 Annual Report 2008 Notes Note 31 Maturities analysis of assets and liabilities Group Amounts in NOK million Currency 0 30 days 1 3 months 3 12 months 1 5 years Over 5 years Without remaining life State and state- guaranteed certificates NOK for.currency Other negotiable certificates NOK for.currency Bearer bonds NOK for.currency Loans and advances to financial NOK institutions for.currency Loans and advances to customers 1) NOK for.currency NOK/for. Other assets without remaining life currency Total asset items Total Liabilities to financial institutions NOK for.currency Deposits from customers NOK for.currency Other negotiable certificates NOK for.currency Bearer bonds NOK for.currency Other loans from financial institutions NOK for.currency Subordinated loan capital NOK for.currency NOK/for. Other portfolio currency Total liabilities and equity capital ) Overdraft- and working capital facilities are included in the period up to 30 days.

103 Notes Annual Report Note 32 Maximum credit exposure, not allowing for assets pledged as security The table below shows maximum exposure to credit risk for the various components in the balance sheet, including financial derivatives. Exposure is shown on a gross basis, before any assets pledged as security and before allowable set-offs. Parent bank Group Amounts in NOK million Assets Cash and balances with central banks Loans and advances to credit institutions Loans and advances to customers Individual write-down for impaired value Collective write-down for impaired value Net loans and advances to customers Certificates and bonds Financial derivatives Total assets Liabilities Contingent liabilities Unutilised credits Loan approvals Other commitments Total financial guarantee commitments Total credit risk exposure Credit risk exposure relating to financial assets broken down by geographical areas Amounts in NOK million Banking activities North Norway including Spitzbergen Other regions International Total Operations Capital Markets Department Norway Europe/Asia USA Total Total, broken down by geographical areas

104 102 Annual Report 2008 Notes Note 33 Credit quality by class of financial assets Parent Bank Neither in default nor written down Amounts in NOK million Very low risk Low risk Medium risk High risk Very high risk In default or individually written down 2008 Loans and advances to financial institutions Loans and advances to customers Retail market Corporate market Loans to and claims on customers, and financial instruments classified as financial assets at market value through the profit and loss account when the items involved are first included Total Financial investments Listed government bonds Listed other bonds Unlisted other bonds Total Total Total Loans and advances to financial institutions Loans and advances to customers Retail market Corporate market Loans to and claims on customers, and financial instruments classified as financial assets at market value through the profit and loss account when the items involved are first included Total Financial investments Listed government bonds Listed other bonds Unlisted other bonds Total Total Loans and advances to financial institutions Loans and advances to customers Retail market Corporate market Loans to and claims on customers, and financial instruments classified as financial assets at market value through the profit and loss account when the items involved are first included Total Financial investments Listed government bonds Listed other bonds Unlisted other bonds Total Total

105 Notes Annual Report Note 33 Credit quality by class of financial assets Group Neither in default nor written down Amounts in NOK million Very low risk Low risk Medium risk High risk Very high risk In default or individually written down 2008 Loans and advances to financial institutions Loans and advances to customers Retail market Corporate market Loans to and claims on customers, and financial instruments classified as financial assets at market value through the profit and loss account when the items involved are first included Total Financial investments Listed government bonds Listed other bonds Unlisted other bonds Total Total Total Loans and advances to financial institutions Loans and advances to customers Retail market Corporate market Loans to and claims on customers, and financial instruments classified as financial assets at market value through the profit and loss account when the items involved are first included Total Financial investments Listed government bonds Listed other bonds Unlisted other bonds Total Total Loans and advances to financial institutions Loans and advances to customers Retail market Corporate market Loans to and claims on customers, and financial instruments classified as financial assets at market value through the profit and loss account when the items involved are first included Total Financial investments Listed government bonds Listed other bonds Unlisted other bonds Total Total

106 104 Annual Report 2008 Notes Note 34 Credit risk exposure for each internal risk rating The Bank applies its own risk classification system for the monitoring of credit risk in the portfolio. The classification of risk classes is done on the basis of the probability of default for each individual commitment. In addition to the probability of default, the Bank applies estimated value of collateralised assets pledged as security as an element when putting customers into different groups according to risk. The allocation is done by linking the collateral assets to the individual loans in question. Each customer is then put into risk groups according to probability of default and security class, as is shown below. The classification matrix comprises 77 risk classes in relation to probability of default and security coverage. Parent Bank and Group Amounts in NOK million Average unsecured exposure % Total amount Average unsecured exposure % Total amount Average unsecured exposure % Total amount Very low risk Low risk 0.1 % % % 8 Medium risk 0.4 % % % 54 High risk 3.4 % % % 6 Very high risk 2.4 % % % 21 In default and written down 2.7 % % % 16 Total 0.3 % % % 106 Note 35 Breakdown of periods for loans due, not written down The table shows amounts due on loans and overdrafts relating to credit facilities/deposits, broken down by the number of days elapsed since the due date of the loan payment, not due to delays in payments transmission. Parent Bank Amounts in NOK million Under 30 days days days Over 91 days Total 2008 Loans and advances to financial institutions Loans and advances to customers Retail banking market Corporate market Loans to and claims on customers and financial institutions classified as financial assets at market value through the profit and loss account when the items in question were first included in the accounts. Total Loans and advances to financial institutions Loans and advances to customers Retail banking market Corporate market Loans to and claims on customers and financial institutions classified as financial assets at market value through the profit and loss account when the items in question were first included in the accounts. Total

107 Notes Annual Report Note 35 Breakdown of periods for loans due, not written down Parent Bank Amounts in NOK million Under 30 days days days Over 91 days Total 2006 Loans and advances to financial institutions Loans and advances to customers Retail banking market Corporate market Loans to and claims on customers and financial institutions classified as financial assets at market value through the profit and loss account when the items in question were first included in the accounts. Total Of the total amount of gross loans due, but not written down, to financial institutions and customers, the market value of the related assets pledged as security was NOK 973 million as at (NOK 933 million as at ). Group Amounts in NOK million Under 30 days days days Over 91 days Total 2008 Loans and advances to financial institutions Loans and advances to customers Retail banking market Corporate market Loans to and claims on customers and financial institutions classified as financial assets at market value through the profit and loss account when the items in question were first included in the accounts. Total Loans and advances to financial institutions Loans and advances to customers Retail banking market Corporate market Loans to and claims on customers and financial institutions classified as financial assets at market value through the profit and loss account when the items in question were first included in the accounts. Total Loans and advances to financial institutions Loans and advances to customers Retail banking market Corporate market Loans to and claims on customers and financial institutions classified as financial assets at market value through the profit and loss account when the items in question were first included in the accounts. Total Of the total amount of gross loans due, but not written down, to financial institutions and customers, the market value of the related assets pledged as security was NOK 1,156 million as at (NOK 1,047 million as at ).

108 106 Annual Report 2008 Notes Note 36 Remaining contract-related periods for liabilities Cash Flow Statement showing net outgoing payments including future interest payments at the different times involved Parent Bank Amounts in NOK million 2008 On demand Under 3 months 3 12 months 1 5 year over 5 years Total Liabilities to credit institutions Approved not yet drawn credits Deposits from customers Debt securities in issue Derivatives Contract-related outgoing cash flows Contract-related incoming cash flows Other liabilities Subordinated loan capital Total liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Derivatives Contract-related outgoing cash flows Contract-related incoming cash flows Liabilities relating to deferred tax Other liabilities Subordinated loan capital Total liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Derivatives Contract-related outgoing cash flows Contract-related incoming cash flows Other liabilities Subordinated loan capital Total liabilities

109 Notes Annual Report Note 36 Remaining contract-related periods for liabilities Group Amounts in NOK million 2008 On demand Under 3 months 3 12 months 1 5 year over 5 years Total Liabilities to credit institutions Approved not yet drawn credits Deposits from customers Debt securities in issue Derivatives Contract-related outgoing cash flows Contract-related incoming cash flows Other liabilities Subordinated loan capital Total liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Derivatives Contract-related outgoing cash flows Contract-related incoming cash flows Liabilities relating to deferred tax Other liabilities Subordinated loan capital Total liabilities Liabilities to credit institutions Deposits from customers Debt securities in issue Derivatives Contract-related outgoing cash flows Contract-related incoming cash flows Other liabilities Subordinated loan capital 0 0 Total liabilities

110 108 Annual Report 2008 Notes Note 37 Market risk related to interest rate risk This note is a sensitivity analysis done on the basis of relevant balance sheet items as at and ahead in time. The Bank s interest rate risk is calculated by simulating a parallel shift of 1 percentage point for the entire yield curve. Value changes are calculated for all items in the balance sheet when market risk relating to interest rate risk is assessed. The interest rate risk remained low throughout 2008 and well within the aggregate limit of NOK 30 million fixed by the Bank s main Board of Directors. The low exposure means that market risk relating to interest rate risk has little impact on the Bank s overall result- Parent Bank Sensitivity to net interest cost Amounts in NOK million Currency Change in basis points Group Sensitivity to net interest cost NOK Currency Note 38 Market risk relating to foreign exchange risk Foreign exchange risk is calculated as net foreign exchange exposure within each type of foreign currency where long and short positions are nettet out. The foreign exchange risk has been low throughout the year, and well within the limits fixed by the Bank's main Board of Directors. Parent Bank Group Net foreign exchange exposure NOK Amounts in NOK million Net foreign exchange exposure NOK Currency EUR USD Miscellaneous Total Total foreign exchange limits Total per currency Impact on overall result from a 3 percentage point change

111 Notes Annual Report Note 39 Primary Capital Certificates The Bank's PCC-capital amounts to NOK 895,603,650 made up of 17,912,073 certificates, each of a nominal value of NOK 50. As at , the Bank had 8,371 PCC-holders (8,569 as at ). Change in the Bank's PCC-capital and total certificates Year Change Change in PCC capital Total PCC capital Total number of certificates Issue earmarked for staff Bonus issue PCC split Dividend issue Dividend issue The 20 largest PCC-Holders Name Number of PCCs Share Pareto Aksje Norge % Pareto Aktiv % Frank Mohn AS % MP Pensjon % Tonsenhagen Forretningssenter AS % JP Morgan Chase Bank client account % Framo Development AS % Mellon Bank client account % Sparebankstiftelsen DNB % Karl Ditlefsen % Forvarets Personell Service % SpareBank 1 SR-Bank % Trond Mohn % Citibank N.A % Sparebanken Rogaland Pensjonskasse % State Street Bank and Trust % Olsen & Co's Pensjonskasse % Terra Utbytte VPF % Troms Kraft Invest AS % Lærdal Finans AS % 20 largest PCC-holders % Other PCC-holders % PCCs issued %

112 110 Annual Report 2008 Notes Note 39 Primary Capital Certificates PCC ratio overall The result for the accounting year is divided between the PCC-holders and the Bank according to the PCC-ratio fixed as at 01.01, adjusted for any issues during the accounting year. Issues regarding the last two years became effective from April/May, and was therefore weighted by 2/3 when adjusting the PCC ratio. Parent Bank Amounts in NOK Primary Capital Certificates Premium Fund Dividend Equalisation Fund, excluding dividends A. Equity attributable to PCC holders of the Bank Saving Bank's Fund Donations B. Total Saving Bank`s Fund Total equity, excluding dividends PCC ratio overall ( A/ (A+B)) % % % Note 40 Acquisition of businesses On , the SpareBank 1 member banks entered into an agreement relating to the acquisition of shares in BNbank ASA (the former Glitnir Bank ASA) for a total price of NOK 300 million. The transaction was completed on Through this transaction, SpareBank 1 Nord-Norge became the owner of 20 per cent of the shares. The management structure for the SpareBank 1 cooperation is described in a shareholders agreement between the owners. The Group accordingly classifies its participation in BNbank ASA as an investment in a joint venture and assesses its value according to the equity method of accounting. A preliminary acquisition analysis has been made in accordance with IFRS 3 which is used as the basis for the annual accounts as at The market value of the identifiable net assets is NOK 2,377 billion. The Group s share of the identifiable net assets is NOK million. The Group s share of the total acquisition cost is NOK 60 million. The difference between the identifiable net assets and acquisition cost has in accordance with IAS 28 been booked as income and included in the profit for the year. The Group has accordingly included NOK million as income in the profit and loss account in respect of negative goodwill as at In addition, NOK 7 mill has been booked as income as the Bank's share of the result from the time of acquisition until Excess or shortfall in market value relating to deposits, funding and loans are amortised over the average lives in the different portfolios. There may be some changes to the abovementioned acquisition analysis during 2009.

113 Notes Annual Report Note 40 Acquisition of businesses Preliminary PPA shows the following Amounts in NOK Value BNbank (total) SpareBank 1 NN (20 %) Book value of equity capital as at Not direct portfolio-related circumstances Result for December Shortfall in market value pension liabilities Provisions for possible claims Shortfall in market value deposits Glitnir Bank hf Total not direct portfolio-related circumstances Amounts in NOK Balance Excess of purchase price over net assets acquired or vice versa Value BNbank (total) SpareBank 1 NN (20 %) Portfolio-related circumstances Loans to business customers % Loans relating to commercial properties % House mortgage loans % Deposits % Funding loans from the money markets Tax Total portfolio-related circumstances Total equity capital according to analysis dated 30 November 2008 relating to excess of purchase price over net assets acquired or vice versa See also note 15 regarding investment in equity stakes. Note 41 Events occurring after the end of the year Proposed cash dividends amount to NOK 54 million in SpareBank 1 Nord Norge (parent bank). The proposal has not been approved on the balance sheet day in question and has therefore not been included in the balance sheet as liabilities on the balance sheet day, but is still shown as part of the Dividend Equalisation Fund.

114 112 Annual Report 2008 Notes Annual Report Group Profit Analysis Amounts in NOK million Amounts in % of average assets (IFRS) (IFRS) (IFRS) (IFRS) (NGAAP) (IFRS) (IFRS) (IFRS) (IFRS) (NGAAP) From profit and loss account Interest income % 5.61% 4.32% 3.93% 4.17% Interest costs % 3.53% 2.18% 1.54% 1.55% Net interest income % 2.08% 2.14% 2.39% 2.63% Dividend and other income from investments % 0.42% 0.34% 0.22% 0.11% Fees and commissions receivable % 0.87% 0.83% 0.90% 0.90% Fees and commissions payable % 0.11% 0.13% 0.14% 0.17% Net gain/loss on securities and foreign exchange % -0.07% 0.19% 0.17% 0.07% Other operating income % 0.05% 0.16% 0.17% 0.14% Net overall contribution % 3.23% 3.53% 3.71% 3.67% Wages, salaries an general administration costs % 1.32% 1.39% 1.58% 1.48% Depreciation etc. on fixed- and intangible assets % 0.09% 0.10% 0.11% 0.12% Other operating costs % 0.23% 0.23% 0.25% 0.30% Result before losses % 1.58% 1.81% 1.77% 1.78% Losses on loans and guarantees % 0.03% -0.08% 0.14% 0.40% Profit before tax % 1.55% 1.90% 1.62% 1.37% Tax % 0.33% 0.40% 0.38% 0.41% Profit for the year % 1.22% 1.50% 1.24% 0.96% Minority interests % 0.01% 0.01% 0.01% 0.00% Majority interests % 1.21% 1.49% 1.23% 0.95%

115 Notes Annual Report Auditor's Report Report from the control committee KPMG AS Storgata 70 Postboks 6262 N-9292 Tromsø Telephone Fax Internet Enterprise MVA Til representantskapsmøtet i SpareBank 1 Nord-Norge Revisjonsberetning for 2008 Ledelsens ansvar og revisors oppgave Vi har revidert årsregnskapet for SpareBank 1 Nord-Norge for regnskapsåret 2008, som viser et overskudd på kr 214 millioner kroner for sparebanken og et overskudd på kr 348 millioner kroner for konsernet. Vi har også revidert opplysningene i årsberetningen om årsregnskapet, forutsetningen om fortsatt drift og forslaget til anvendelse av overskuddet. Årsregnskapet består av selskapsregnskap og konsernregnskap. Selskapsregnskapet består av resultatregnskap, balanse, kontantstrømoppstilling, oppstilling over endringer i egenkapitalen og noteopplysninger. Konsernregnskapet består av resultatregnskap, balanse, kontantstrømoppstilling, oppstilling over endringer i egenkapitalen og noteopplysninger. Regnskapslovens regler og Internasjonale standarder for finansiell rapportering som fastsatt av EU er anvendt ved utarbeidelse av regnskapet. Årsregnskapet og årsberetningen er avgitt av selskapets styre og administrerende direktør. Vår oppgave er å uttale oss om årsregnskapet og øvrige forhold i henhold til revisorlovens krav. Grunnlaget for vår uttalelse Vi har utført revisjonen i samsvar med lov, forskrift og god revisjonsskikk i Norge, herunder revisjonsstandarder vedtatt av Den norske Revisorforening. Revisjonsstandardene krever at vi planlegger og utfører revisjonen for å oppnå betryggende sikkerhet for at årsregnskapet ikke inneholder vesentlig feilinformasjon. Revisjon omfatter kontroll av utvalgte deler av materialet som underbygger informasjonen i årsregnskapet, vurdering av de benyttede regnskapsprinsipper og vesentlige regnskapsestimater, samt vurdering av innholdet i og presentasjonen av årsregnskapet. I den grad det følger av god revisjonsskikk, omfatter revisjon også en gjennomgåelse av selskapets formuesforvaltning og regnskaps- og intern kontrollsystemer. Vi mener at vår revisjon gir et forsvarlig grunnlag for vår uttalelse. Uttalelse Vi mener at årsregnskapet er avgitt i samsvar med lov og forskrifter og gir et rettvisende bilde av sparebankens og konsernets finansielle stilling 31. desember 2008 og av resultatet, kontantstrømmene og endringene i egenkapitalen i regnskapsåret i overensstemmelse med regnskapslovens regler og Internasjonale standarder for finansiell rapportering som fastsatt av EU. ledelsen har oppfylt sin plikt til å sørge for ordentlig og oversiktlig registrering og dokumentasjon av regnskapsopplysninger opplysningene i årsberetningen om årsregnskapet, forutsetningen om fortsatt drift og forslaget til anvendelse av overskuddet er konsistente med årsregnskapet og er i samsvar med lov og forskrifter. Tromsø, 24. februar 2009 KPMG AS Stig-Tore Richardsen Statsautorisert revisor Offices in: KPMG AS is a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss coorprative. Statsautoriserte revisorer - medlemmer av Den norske Revisorforening Oslo Bodø Haugesund Sandefjord Alta Kristiansand Sandnessjøen Arendal Larvik Stavanger Bergen Lillehammer Stord Elverum Mo i Rana Tromsø Finnsnes Molde Trondheim Hamar Narvik Tønsberg Grimstad Røros Ålesund Report from the control committee During the business year of 2007, SpareBank 1 Nord-Norge s Control Committee has completed its task in accordance with paragraph 13 of the Savings Banks Act and according to the currently valid instructions for the Control Committee. The committee has monitored and seen to it that the Bank s operations have been conducted in compliance with the Savings Banks Act s rules and regulations, the Bank s bylaws and any other rules and regulations to which the bank must adhere. The Control Committee has examined the Annual Accounts, Annual Report and Auditor s Report and has no comments to make in that connection. The committee is of the opinion that the Board of Directors assessment of the Bank s financial position is true and fair, and would wish to recommend that the Annual Report and Accounts presented are adopted as Spare- Bank 1 Nord-Norge s Annual Financial Statement for Tromsø, 25. february 2009 Per Christiansen Dag Norvang Rigmor Abel

116 Research. The International Polar Year has in fact been in existence for more than two years and is probably the biggest international research cooperation arrangement ever. Over 60 countries have been involved. Two years of observations and collection of data for 160 different research projects will provide us with important information both on the Arctic and the Antarctic during the next few years. Norway has proud traditions in polar research and will remain a substantial contributor. Photograph: BarentsPhoto.com SpareBank 1 Nord-Norge is very keen to try to make sure that permanent values are created in the north, and we provide our support for a number of projects within the areas of knowledge and research. Amongst other things, we support the annual conference, Arctic Frontiers, which attracts research workers and scientists from all over the world to discuss sustainable strategies for the Arctic.

117 Corporate Governance