OP MORTGAGE BANK 1. Financial Statements 2007

Transcription

1 OP MORTGAGE BANK 1 Financial Statements 2007

2 OP MORTGAGE BANK 2 REPORT OF THE BOARD OF DIRECTORS The loan portfolio of OP Mortgage Bank (OPA) increased to 1,531 million (284) 1. The company s loan portfolio increased substantially in February and December through the purchase of housing loans from member banks of the OP-Pohjola Group to OPA s balance sheet. In May, OPA established a Euro Medium Term Covered Note Programme worth 5 billion and in June, it issued a bond with real estate collateral for a nominal value of 1,000 million. Thanks to growth in volumes, the bank s earnings before tax increased to 3 million (1.3). No impairment losses were booked during the period, and there were no non-performing receivables in the bank s balance sheet. OPA as part of OP-Pohjola Group OPA is part of the OP-Pohjola Group, a leading Finnish financial group. It comprises independent member cooperative banks and their central institution, OP Bank Group Central Cooperative, with its subsidiaries. The OP Bank Group Central Cooperative operates as the entire OP-Pohjola Group s development and service centre, and is a strategic owner institution and a central institution with responsibility for Group control and monitoring. OPA is a fully owned subsidiary and member credit institution of the Central Cooperative. The members of the Central Cooperative at the end of the year included 229 cooperative banks, OKO Bank plc, Helsinki OP Bank Plc, OP Mortgage Bank plc and OP-Kotipankki Oyj. The Central Cooperative and its member credit institutions jointly with entities belonging to their consolidated groups constitute an amalgamation of cooperative banks defined in the Act on Cooperative Banks and Other Cooperative Credit Institutions. According to the Act, the central institution and its member credit institutions are responsible for each other s liabilities and commitments, and their capital adequacy, liquidity and customer risks are supervised at the amalgamated level. The scope of joint responsibility does not include the insurance companies within the OP-Pohjola Group. OPA is a mortgage bank specialised in housing financing. Its operating policy is to acquire inexpensive refinancing for OP-Pohjola Group from the bond markets through the issuance of bonds. OPA has no independent customer business or service network of its own. OPA issues bonds with real estate collateral regulated under the Act on Mortgage Credit Banks. The housing loans used by OPA as collateral for bonds are primarily purchased from the Central Cooperative s member banks. Member banks that have signed an agency agreement and Helsinki OP Bank plc may also grant loans directly to their customers on OPA s behalf within the limits set by OPA. Agent banks also manage the customer relationships and the administration of loans locally. Operating Environment The operating environment in the financial markets in 2007 was divided. The economic boom that continued until the autumn maintained a brisk demand for banking and insurance services. An economic downturn started towards the end of the year as the culmination of problems in the US housing market brought uncertainty to the global economy. Uncertainty is expected to continue in 2008 but Finland s economic growth is still expected to remain moderate. The global economy weakened in However, growth in the European Union countries continued almost on a par with the previous year. On the other hand, growth slowed down clearly in the United States, and the downturn was boosted by the housing market crisis that emerged in the late summer. The weakened economic outlook for the US will also cast a shadow on the economy of the rapidly developing Asian countries. 1) The comparative figure for 2006 is given in brackets. For the income statement and other aggregate figures, the point of comparison is the figure for January-December Balance sheet figures and other benchmarks are compared to the previous balance sheet date (December 31, 2006).

3 OP MORTGAGE BANK 3 The housing market crisis tightened up lending in the international markets. Margins on lending also widened. Financial institutions in many countries suffered substantial losses caused by American housing loans, and more losses are expected in To reduce the risk of a credit recession, central banks pumped liquidity into the financial markets on several occasions. The US Federal Reserve also lowered its key interest rate. The European Central Bank maintained its key rate unchanged in the latter half of 2007 after two increases to 4.0% in the first half of the year. Finland s economic growth is expected to slow down in 2008 The economic boom in Finland in 2007 continued for longer than expected. However, economic growth saw a slight slowdown in the late autumn. The total output increased by 4%. Similarly to the previous year, growth was supported by exports that gained more strength particularly in Finland s main market area, Western Europe. Residential construction turned to a downswing but other building construction investments increased substantially. The relatively steady growth of private consumption continued. Similarly to before, the purchasing power of households strengthened as total wages and salaries increased and unemployment decreased. According to enterprise surveys, the general trend of the economy remained better than average in all major sectors. The growth of industrial production slowed down slightly towards the end of the year even though the order book remained strong. The order book of construction enterprises was also larger than normal but expectations turned towards a downswing. Sales growth in service enterprises has slowed down but sales expectations remained good. Economic growth is expected to slow down in 2008 but reach the long-term average. Growth is slowing down because exports and private consumption will increase less than this year. Consumer confidence in the economy remains strong Consumer confidence in the favourable development of their own economy remained strong in Consumers considered savings opportunities to be particularly beneficial, contrary to taking out loans. The increase in consumer prices accelerated in Increased housing costs were the most important factor contributing to this. Inflation is expected to accelerate to more than 3% mainly as a consequence of large pay increases and tightened energy taxes. Euribor interest rates increased in the first half of 2007 as the European Central Bank tightened its monetary policy through two interest rate raises. The US housing finance crisis added volatility to short-term market rates in the autumn. Indeed, short-term market rates increased more than long-term market rates. At the end of 2007, the 3-month Euribor was 4.69% and the 12-month Euribor was 4.75%. OP Prime, which is the OP-Pohjola Group s reference rate, was increased three times in the first half of the year and stood at 4.25% at year-end. A downswing in the economic boom in the euro area will support a decrease in Euribor rates in Increased uncertainty in the financial markets The banking market continued to increase at a good rate in 2007 for the fifth year in a row. Growth rates close to the previous years figures in 2008 will require the equity market s caution to settle down and consumers to demonstrate moderate boldness in taking out loans. Household indebtedness continued to increase, and the amount of debt exceeded available income for the first time. Major Events during the Financial Period OPA s loan portfolio increased substantially in February through the purchase of housing loans from member banks of the OP-Pohjola Group to OPA s balance sheet. After preparations early in the year, OPA established a Euro Medium Term Covered Bond Programme worth 5 billion in

4 OP MORTGAGE BANK 4 May and issued a real estate covered bond of 1 billion nominal value to the international market in June. OPA s first covered bond issue was successful, and the bond was sold to international investors very quickly. The bond is covered by housing loans purchased from member banks, also known as the collateral pool. Standard & Poor's Rating Services and Moody's Investor Services awarded their best credit ratings (AAA and Aaa) to the issued covered bond. The effects of problems in the US subprime market generally surfaced in the capital markets during the second half of the year. The 1 billion bond issued by OPA in June mostly covered OPA s funding requirements in 2007, and the unrest of the international capital markets had no impact on OPA s funding or associated costs in During the financial period, OPA has prepared for the upcoming capital adequacy reform (Basel II) as part of the OP-Pohjola Group s Basel II project. Earnings Development OPA s major earnings items developed as follows in 2007: Million euro 1-12/ /2006 Income Net interest income Net commissions and fees Net income from trading 0.1 Net income from investments Other operating income Total Expenses Personnel costs Other administrative expenses Other operating expenses Total Earnings before tax OPA s earnings before taxes increased to 3 million (1.3). The earnings improvement is based on improved net interest income, which is mostly attributable to the increased loan portfolio. Commissions paid to intermediary banks made net commissions and fees clearly negative. Commission income increased to 0.4 million (0.1) while commission expenses were 4.3 million (0.7). Approximately 4.2 million of the commission expenses constituted commissions paid to OP-Pohjola Group member banks for agency services concerning OPA s housing loans. The bank s expenses increased to 1.4 million (0.5). The increase was mostly attributable to expert costs associated with establishing the international bond programme. OPA did not book any impairment losses on loans during the year. Balance Sheet and Off-balance Sheet Commitments The bank s balance sheet total was 1,704 million (298) at the end of the year. The development of major asset and liability items is illustrated in the table below.

5 OP MORTGAGE BANK 5 Major Asset and Liability Items EUR million Dec 31, 2007 Dec 31, 2006 Dec 31, 2005 Balance sheet total 1, Receivables from customers 1, Receivables from financial institutions Debt securities issued to the public 1, Liabilities to financial institutions Shareholders' equity Off-balance sheet commitments Development of Loan Portfolio Funding Shareholders Equity According to the Mortgage Bank Act, the collateral for bonds must constitute loans or parts of loans with a principal of no more than 60 per cent of the fair value of collateral pledged for the loan. Furthermore, the book value of loans used as collateral for bonds must always exceed the aggregate book value of bonds issued. Receivables from customers, or loans granted, increased to 1,531 million (284) during the report year. The increase was mostly attributable to loans purchased from OP-Pohjola Group member banks. At the end of the year, 95 (66) per cent of the loan portfolio was granted to households and 5 (34) per cent to housing corporations. The loan portfolio pledged as collateral stood at 1,531 million at year-end and consisted of approximately 21,000 loans of 73,000 on average. The collateral for the loans consists of residential properties and shares in housing corporations. All of the collateral is located in Finland. The ratio between the book value of the loan portfolio and the outstanding amount of bonds covered by real estate was 146% at year-end. The bank s funding is based on bonds with real estate as collateral, where the assets pledged consist of housing loans granted by the bank. During the report year, the bank issued one covered bond to the international market, having a nominal value of 1 billion. The total number of bonds issued to the public was 7 and their book value stood at 1,060 million (146) at the end of the financial period. In addition to bonds, OPA funded its operations by financing loans taken out from OKO Bank plc. The balance sheet item Liabilities to credit institutions, 516 million (124) consisted of these financing loans. OPA also invests its short-term cash surplus in OKO Bank. At the end of the year, short-term investments stood at 138 million (11). Shareholders equity increased to 63.7 million (20.6). Shareholders equity increased by 40.9 million in February after OP Bank Group Central Cooperative made an additional investment in the company. Accrued earnings amounted to 3.7 million (1.4) at the end of the year.

6 OP MORTGAGE BANK 6 Own Funds and Capital Adequacy OPA s capital adequacy ratio decreased by 0.3 percentage points to 10.5 per cent during the year. Own funds and the capital adequacy ratio have changed as follows during the year: Own funds, EUR million Dec 31, 2007 Dec 31, 2006 Tier I funds of which capital loans - Tier II funds Decreases - Total own funds Risk-weighted receivables, investments and off-balance sheet commitments Capital adequacy ratio, % Tier I ratio to risk-weighted receivables, investments and offbalance sheet commitments Capital adequacy ratio of the amalgamation of cooperative banks, % 14.1 * * September 2007 At the end of the year, own funds amounted to 82.9 million and the equity capital shown by the balance sheet amounted to 63.7 million. The difference of 0.2 million between own funds and shareholders equity shown on the balance sheet is attributable to items that belong to own funds but not to equity on the balance sheet, as well as items deducted from own funds. The most significant item is a debenture of 20 million included in Tier II funds. The increase in shareholders equity arising from the measurement of pension liabilities and the asset items covering them in connection with the IFRS transition is not considered own funds. Furthermore, 0.5 million of intangible assets has been deducted from own funds. Risk-weighted receivables, investments and off-balance sheet commitments, EUR million Risk category Book value of balance sheet items Risk weight Risk-weighted items on December 31, 2007 Risk-weighted items on December 31, 2006 Group I % - - Group II % Group III 1, % Group IV % Group V 10% - Total 1,703.3 Off-balance sheet commitments Total risk-weighted receivables, investments and off-balance sheet commitments Total risk-weighted value of market risk - - Total risk-weighted items The increase in the amount of risk-weighted receivables, investments and commitments was due to an increased loan portfolio.

7 OP MORTGAGE BANK 7 Joint Responsibility and Joint Security Financial Indicators Risk Management OPA is a member of the OP Bank Group Central Cooperative, which is the central institution of the amalgamation of cooperative banks. The Central Cooperative and its member credit institutions jointly with entities belonging to their consolidated groups constitute an amalgamation of cooperative banks defined in the Act on Cooperative Banks and Other Cooperative Credit Institutions. The resources of the amalgamation secure the operations of all member banks since, according to Chapter 2, Section 3 of the Act, the Central Cooperative and its member credit institutions are jointly and severally responsible for each other s liabilities and commitments that cannot be paid from the funds of the Central Cooperative or the member credit institution in question. The members of the Central Cooperative at the end of the year included 229 cooperative banks, OKO Bank plc, Helsinki OP Bank Plc, OP Mortgage Bank plc and OP- Kotipankki Oyj. The scope of joint responsibility does not include the insurance companies within the OP-Pohjola Group. The Central Cooperative provides its member credit institutions with instructions concerning risk management, actions to secure liquidity and capital adequacy, as well as harmonised accounting policies. However, pursuant to Section 17 of the Act on Mortgage Credit Banks, holders of bonds with real estate collateral have the right to receive payment for the entire loan period of the bond in accordance with the agreement terms and conditions from the funds lodged as collateral for the bond before other claims, notwithstanding OPA s liquidation or bankruptcy. Indicator Return on equity, % Return on assets, % Capital adequacy, % Cost/income ratio, % Calculation of indicators Return on equity, % = Profit for the period / Shareholders equity (average equity at the beginning and end of the period) 100 Return on assets, % = Profit for the period / Average balance sheet total (average total at the beginning and end of the period) 100 Cost / income ratio, % = (Personnel costs + Other administrative expenses + Other operating expenses) / (Net interest income + Net commission income + Net income from trading + Net income from investments + Other operating income) 100 Capital adequacy, % = Equity capital / Balance sheet total The principal objective of risk management is to prevent such uncontrollable risks that might endanger the bank s profitability, capital adequacy or continuity of operations. Risk management is based on the professional expertise and caution of the people who make operational decisions, and on systematic measurement, assessment and limitation of risks. The Central Cooperative controls and monitors the risk management of all OP-Pohjola Group companies, including OPA.

8 OP MORTGAGE BANK 8 In its operations, OPA is exposed to credit risks, market risks and operational risks. The bank s Board of Directors has confirmed principles and guidelines applicable to risk management and has set limits for the most important risk indicators. The Board of Directors supervises risk management and regularly monitors the bank s risk tolerance and risk situation. The bank s overall attitude towards risk-taking is moderate. Risk tolerance OPA s risk tolerance remained at a healthy level in spite of the decline of capital adequacy by 0.3 percentage points to 10.5%. Profitability improved during the year. Return on equity was 5.3 per cent (4.6). OPA s policy is not to secure capital adequacy through accumulating earnings but to maintain sufficient capital adequacy through equity investments made by the Central Cooperative. The profitability level is determined by the sales commission policy. Being a service company, OPA does not aim to maximise its earnings. Instead, any profitability potential exceeding the minimum level set by the owner is allocated to increasing sales commissions. Credit risk exposure OPA s loan portfolio at the end of the financial period was 1,531 million. The quality of the loan portfolio was high. The bank has no non-performing or interest-free loans at all. The bank has not booked any write-downs during this or any previous financial period. Being a mortgage bank, OPA may only grant credit against collateral defined in law. On the other hand, OPA s credit granting criteria also support the upkeep of a high quality loan portfolio. The criteria are stricter than those generally applicable in the OP-Pohjola Group. OPA s credit risks have also been reduced through an arrangement in which banks acting as OPA s agents have provided a guarantee based on which OPA is entitled to receive compensation from the agent up to a certain limit to cover realised loan losses arising from loans intermediated by the agent. The bank's credit customers are private persons and housing corporations. Under certain conditions, the bank also funds developer-based residential construction. In the funding of such housing companies, OPA has, with relation to designated nationwide construction groups and with permission from the Central Cooperative s Credit Risk Committee, deviated from the maximum exposure to a customer of 25 per cent of own funds, stipulated in the Credit Institution Act. The permission procedure is based on Section 7 of the Act on Cooperative Banks and Other Cooperative Credit Institutions, in which case the maximum exposure to the customer is 40 per cent of own funds. The bank obtained permission for transactions involving the four principal nationwide construction groups during the year. The permission is linked to the rating results of the enterprises in question. At the end of the financial period, the permission was not applicable to any construction group. Thanks to the diversified loan portfolio, securing collateral and the guarantee scheme, OPA s credit risk exposure is very stable. Market Risks Market risks include funding, interest rate, foreign exchange, equity market and real estate risks. The Board of Directors has confirmed a balance management system, which defines the market instruments used by the bank, the extent of business in foreign currency, the principles for funding and investment operations and the applicable risk monitoring methods. The objective of funding risk management is to secure the bank's ability to meet its payment obligations in all situations. Interest rate risk refers to the effect of changes in the market rates on the bank s performance and capital adequacy. OPA has hedged the interest rate risk of its housing loan portfolio with interest rate swaps. By means of the interest rate swaps, base rate

9 OP MORTGAGE BANK 9 cash flows from the housing loans to be hedged are swapped to Euribor cash flows. OPA has also swapped the fixed interest rates for the bonds issued by it with short-term market interest rates. OKO Bank is the counterparty in all derivative contracts. The adequacy of funding and interest rate risk are measured using methods that describe the maturity and re-pricing structure of balance sheet items, as well as the availability and structure of liquidity reserves. OPA s Board of Directors has set risk limits for the bank s interest rate and funding risk. The bank s interest rate and funding risk taking are also restricted by the provisions of the Mortgage Bank Act. According to the Act, the total amount of any interest received from loans pledged as collateral for bonds with real estate as collateral during any 12 months must exceed the total amount of interest payable for such bonds during the same period. In addition, the remaining average maturity of bonds with real estate as collateral must be shorter than the remaining average maturity of assets pledged as their collateral. OPA s operations have been in compliance with the Act for the entire financial period with respect to interest flows as well as maturities. OPA has not been exposed to foreign exchange, equity market or real estate risks during the financial period. Operational Risks The objective of operational risk management is to reduce the probability of losses arising from personnel, processes or systems associated with operations, or external factors. The bank's losses due to operational risks were minor in Personnel and Incentive Schemes OPA had 4 employees (4) at the end of the financial period. The number of the bank s own personnel is reduced by the fact that all crucial support functions are acquired from the Central Cooperative. OPA belongs to the joint personnel fund of the OP-Pohjola Group. The personnel fund is a longterm personnel incentive scheme. The bank makes profit-related payments to the personnel fund according to predefined principles. Fund members may withdraw fund units on the grounds specified in the fund rules. The bank has adopted a management incentive scheme, under which the Managing Director may receive a reward partially settled in OKO Bank stock and partially in cash. The amount of the reward depends on the set targets. Rewards are paid after the entitlement earning and commitment period. Administrative Officers OPA is a mortgage bank fully owned by the Central Cooperative. Board of Directors The Board of Directors manages OPA s operations. According to the Articles of Association, the Board of Directors is responsible for attending to the bank s administration and the appropriate arrangement of its operations. The Board of Directors has general authority to decide on all issues related to the bank s administration and other matters that do not belong to the statutory duties of the General Meeting of Shareholders or the Managing Director. The Board of Directors decides on the bank s strategy and crucial business objectives. The Board of Directors is responsible for ensuring that the bank s accounting and asset management is appropriately supervised.

10 OP MORTGAGE BANK 10 Auditing According to OPA s Articles of Association, the Board of Directors comprises a minimum of three and a maximum of eight members. The current number of Board members is eight. The members of the Board of Directors are elected for one year at a time so that their term of office commences at the closing of the General Meeting deciding on the election and ends at the closing of the General Meeting deciding to elect a new Board of Directors. Members of the Board of Directors are obliged to resign at 65 years of age at the latest. The Board of Directors constitutes a quorum when at least half of its members are present. The Board of Directors convened eleven times during the year. The Annual General Meeting held in March confirmed the composition of the new Board of Directors. Mr. Harri Nummela, Senior Vice President, Mr. Hanno Hirvinen, Senior Vice President, and Mr. Jarmo Viitanen, Managing Director, were elected as new members of the Board of Directors, after which the composition of the Board of Directors is as follows: Chairman Harri Nummela Senior Vice President, OP Bank Group Central Cooperative Vice Chairman Mikko Hyttinen Senior Vice President, OP Bank Group Central Cooperative Members Sakari Haapakoski Managing Director, Oulun Osuuspankki Hanno Hirvinen Senior Vice President, OKO Bank Heikki Kananen Managing Director, Mäntsälän Osuuspankki Pekka Korhonen Managing Director, OP-Pohjola Group Pension Fund Risto Korpela Managing Director, Turun Seudun Osuuspankki Jarmo Viitanen Managing Director, Länsi-Uudenmaan Osuuspankki Managing Director OPA s Managing Director is obliged to diligently promote the bank s interests and attend to the day-to-day management of the bank in accordance with laws and the Board of Directors instructions and orders. The Managing Director may only take actions which, considering the scope and quality of the operations of the bank, are unusual or far-reaching if the Board of Directors has authorised him to this effect or if it is impossible to wait for the Board of Directors decision without causing essential harm to the operations of the bank. It is the statutory duty of the Managing Director to ensure that the bank s accounting is in compliance with the law and that the bank s asset management is arranged reliably. Mr. Lauri Karvonen acted as the Managing Director of the bank until 30 April OPA s Board of Directors elected Mr. Lauri Iloniemi Managing Director as of May 1, KPMG Oy Ab, Authorised Public Accountants, were elected auditors at the General Meeting in 2007, with Mr Raimo Saarikivi, Authorised Public Accountant, as principal auditor. The bank s internal audit is the responsibility of the internal audit function of the Central Cooperative Consolidated. Changes in Capital Adequacy Regulations for Banks The European Parliament and Council of Ministers have approved a new capital adequacy directive based on the recommendations of the Basel Committee (Basel II) in the autumn of The new capital adequacy regulations entered into force in the EU at the beginning of 2007.

11 OP MORTGAGE BANK 11 The new capital adequacy regulations are based on generally used risk management methods and are divided into three pillars. Pillar I regulates the calculation of the banks minimum capital and capital adequacy ratio. The objective of Pillar II is to ensure that banks have sufficient capital in relation to their risk profile and the level of their risk management systems and internal control. Pillar III regulates the disclosure of information pertaining to banks risk and capital adequacy position. The purpose of the reform is to increase stability in the financial market by improving the methods used to ensure banks capital adequacy in relation to risks. The objective is to encourage banks to develop better risk management systems and to promote appropriate risk pricing. In the development of the new capital adequacy regulations, one of the objectives was that despite changes in the way minimum funds are determined, the average minimum capital requirement in the banking sector on the whole would not change. Unlike the current regulations, the new capital adequacy regulations, which are currently being prepared, will allow several methods for minimum capital calculation. The capital requirement for credit risk may also be calculated on the basis of an external or the bank s own credit rating. The new regulations also stipulate a minimum requirement concerning own funds for operational risks. According to international surveys, the greatest benefit of the use of internal ratings in capital adequacy calculations is realised in banks focusing on retail banking, such as cooperative banks. The use of internal ratings increases the sensitivity to the minimum own funds requirement for economic fluctuations. OP-Pohjola Group s Preparations for the Reform Outlook OP-Pohjola Group s preparations for the capital adequacy reform are centralised in the Central Cooperative. A development programme is currently underway within the Central Cooperative that is responsible for the development required by the reform. OP-Pohjola Group s risk management methods and systems development is primarily based on the Group's risk management needs, and secondarily on the fulfilment of the capital adequacy regulations requirements. OP-Pohjola Group has utilised the transitional provision in the Credit Institutions Act that allows capital adequacy calculations in 2007 to be made in accordance with previous regulations. The new regulations will be adopted as of the beginning of 2008, and capital adequacy in accordance with the new regulations will be calculated as of March With regard to credit risk, the standard method will be initially used, followed by a gradual transition to the internal rating method. The capital requirement for operational risk will be calculated using the basic method, and the capital requirement for market risks will be calculated using the basic method like presently. OPA assumed a more significant role in the OP-Pohjola Group s housing financing in This resulted in a multiple increase of the loan portfolio. The existing issuance programme and continuation of the growth in the housing loan markets will make it possible to issue new covered bonds. Increased volume is expected to improve the efficiency of the bank s funding and other operations, as well as its profitability. Earnings before tax in 2008 are expected to at least equal the 2007 figure. The estimate is based on the assumption that the demand for housing loans will remain good and that there will be no major disturbances on the capital markets.

12 OP MORTGAGE BANK 12 BOARD OF DIRECTORS PROPOSAL FOR THE DISTRIBUTION OF PROFIT The equity capital of OP Mortgage Bank on December 31, 2007 stood at 63,681,341.04, with distributable equity made up as follows: + Profit for the period on the income statement 2,240, Retained earnings 1,440,427,43 Total 3,681, The Board of Directors proposes that no dividend be paid for ,681, shall be retained in distributable equity.

13 OP MORTGAGE BANK 13 INCOME STATEMENT Euro Note Change, % Interest income , ,79 Interest expenses , ,44 Net interest income , ,35 Net commissions & fees , ,73 Net income from trading , ,68 Net income from investments 6 850,00 765,00 11,1 Other operating income , ,12 78,5 Personnel costs , ,58 14,9 Other administrative expenses , ,44 75,7 Other operating expenses , ,66 Earnings before tax , ,70 Income taxes , ,50 Profit for the period , ,20 Key Ratios Return on equity, % 5,3 4,6 Return on assets, % 0,22 0,35 Cost/income ratio, % Average personnel 4 4 of which full-time 4 4 BALANCE SHEET Euro Note Change, % Receivables from financial institutions , ,68 Derivative contracts , ,52 Receivables from customers , ,12 Investment assets , ,00 0,0 Intangible assets , ,11 Tangible assets ,75 587,23-66,3 Other assets , ,64 Total assets , ,30 Liabilities to financial institutions , ,00 Derivative contracts , ,96 Debt securities issued to the public , ,80 Reserves and other liabilities , ,35 Tax liabilities , ,76 93,7 Subordinated liabilities ,00 - Total liabilities , ,87 Shareholders' equity Share capital , ,00 Accrued earnings , ,43 Total equity , ,43 Total liabilities and shareholders' equity , ,30

14 OP MORTGAGE BANK 14 CASH FLOW STATEMENT thousand Change, % Cash flow from operating activities Profit for the period Adjustments to profit Increase (-) or decrease (+) in operating assets Receivables from financial institutions Derivative contracts Receivables from customers Other assets Increase (+) or decrease (-) in operating liabilities Liabilities to financial institutions Derivative contracts ,4 Reserves and other liabilities Income taxes paid A. Total cash flow from operating activities Cash flow from investing activities Investments in tangible and intangible assets B. Total cash flow from investing activities Cash flow from financing activities Debt securities issued to the public, increases Debt securities issued to the public, decreases Share capital Dividends paid C. Total cash flow from financing Net change in liquid assets (A+B+C) ,3 Liquid assets at beginning of period ,0 Liquid assets at end of period ,4 Adjustments to earnings for the period Adjustments to profit Planned depreciation Taxes for the period or previous periods and change in deferred tax Pension costs and associated deferred taxes 2-23 Total adjustments STATEMENT OF CHANGES IN EQUITY Accrued Share capital earnings Total Shareholders' equity January 1, Share issue Profit for the period Dividends paid - Shareholders' equity December 31, Accrued Share capital earnings Total Shareholders' equity January 1, Profit for the period Dividends paid Shareholders' equity December 31,

15 OP MORTGAGE BANK 15 NOTES TO THE FINANCIAL STATEMENTS Table of contents for the notes to the financial statements 1 Accounting policies 2 Capital adequacy and risk management policies Notes to the income statement 3 Interest income and expenses 4 Net commissions & fees 5 Net income from trading 6 Net income from investments 7 Other operating income 8 Personnel costs 9 Other administrative expenses 10 Other operating expenses 11 Income taxes Notes to the balance sheet 12 Receivables from financial institutions 13 Derivative contracts 14 Receivables from customers 15 Investment assets 16 Intangible assets 17 Tangible assets 18 Other assets 19 Tax receivables 20 Liabilities to financial institutions 21 Derivative contracts 22 Debt securities issued to the public 23 Reserves and other liabilities 24 Tax liabilities 25 Subordinated liabilities 26 Shareholders' equity 27 Fair values of financial assets and liabilities Notes concerning contingent liabilities and derivatives 28 Off-balance sheet commitments 29 Leases 30 Derivative contracts Other notes 31 Related party transactions 32 Long-term incentive scheme 33 Post-fiscal events Notes concerning risk management 34 Risk tolerance 35 Financial assets and associated impairment losses during the period 36 Liabilities 37 Liabilities by sector 38 Credit risks 39 Liabilities by credit rating 40 Structure of funding 41 Maturity distribution of financial assets and liabilities by remaining time to maturity 42 Funding risk 43 Financial assets and liabilities of less than one year's maturity by due date or re-pricing 44 Interest rate risk 45 Real estate risk

16 OP MORTGAGE BANK 16 Appendix 1 Accounting Policies GENERAL OP Mortgage Bank (OPA) is a credit institution engaged in mortgage banking in Finland. The bank is part of a coalition of cooperative banks (OP-Pohjola Group) within which OP Bank Group Central Cooperative and its member credit institutions are, ultimately, jointly and severally responsible for each other s liabilities and commitments. The Central Cooperative is obliged to issue guidelines on the preparation of financial statements to its member credit institutions. According to the Act on Cooperative Banks and Other Cooperative Credit Institutions and the IAS 8 standard on accounting policies, the Central Cooperative s Executive Board must confirm any accounting principles for which no guidance is available in the International Financial Reporting Standards. OP Mortgage Bank is domiciled in Helsinki and its registered address is Teollisuuskatu 1b, P.O. Box 308, FIN Helsinki. The bank s Board of Directors approved the financial statements on February 14, ACCOUNTING PRINCIPLES The financial statements of OP Mortgage Bank have been prepared in accordance with the International Financial Reporting Standards (IFRS). The preparation of financial statements is subject to the IAS and IFRS standards and SIC and IFRIC interpretations valid on December 31, International Financial Reporting Standards refer to the standards and interpretations approved in accordance with European Parliament and Council Regulation (EC) No 1606/2002. In addition to the IFRS standards, the preparation of the financial statements of OP Mortgage Bank is subject to Chapter 9, Section 146(6) of the Credit Institutions Act. OPA has adopted the following new or amended standards and interpretations as of January 1, 2007: IFRS 7 Financial Instruments: Disclosures. IFRS 7 requires disclosures of the effect of financial instruments on the bank s financial standing and earnings, as well as the nature and extent of risks arising from financial instruments. Amendment to IAS 1, Presentation of Financial Statements Capital Disclosures. The amended IAS 1 requires disclosures of the level of the bank s capital and its management during the financial period. The income statement and balance sheet figures are presented in euro and cents, while other financial statement figures are presented in thousands of euro. Use of Estimates The preparation of financial statements in accordance with IFRS requires management to make estimates and exercise discretion in the application of accounting policies. Accounting policies requiring management to make estimates and exercise discretion are addressed in more detail in the section Accounting policies requiring discretion by management and crucial factors of uncertainty associated with estimates. ITEMS DENOMINATED IN A FOREIGN CURRENCY Assets, liabilities and other commitments denominated in a foreign currency are converted into euro at the exchange rate quoted by the European Central Bank on the balance sheet date. The exchange rate differences arising from the valuation are recognised under Net trading income on the income statement.

17 OP MORTGAGE BANK 17 FINANCIAL INSTRUMENTS Determination of Fair Value The fair value of a financial instrument is determined using either price quotations from an active market or, if there is no active market, using the company s own valuation methods. The valuation methods include the discounted cash flow method, present value calculation and comparison with similar instruments quoted in active markets. The valuation methods account for estimated credit risk, the applicable discount rates of interest, the possibility of premature repayment and other such factors that affect the reliable determination of the fair value of a financial instrument. If there is no established valuation practice in the market, market value is determined using a valuation model prepared for the product in question. The valuation models are based on generally used calculation methods and market quotations, and discretionary parameters are applied. Set-off of Financial Assets and Liabilities Financial assets and liabilities are not subtracted from each other unless a statutory right of set-off exists and the intention is to exercise such a right. Categorisation, Recognition and Locations on Balance Sheet At initial recognition, financial assets and liabilities are categorised in accordance with the measurement practices into financial assets and liabilities recognised at fair value through profit or loss, loans and receivables, financial assets available for sale, as well as other financial liabilities. Financial assets and liabilities recognised at fair value through profit or loss may be divided into two subcategories, which are financial assets and liabilities held for trading, and financial assets and liabilities recognised at fair value through profit or loss at initial recognition. On OPA s balance sheet, these financial assets and liabilities are presented as trading assets and liabilities, financial assets initially recognised at fair value through profit or loss, receivables from customers, investment capital, derivative contracts and other liabilities. Purchases and sales of financial assets and liabilities recognised at fair value through profit or loss, as well as financial assets available for sale, are recognised on the balance sheet on the transaction date that is, the date of commitment to purchase or sell the financial asset or liability item. Loans and receivables are recognised on the day the customer withdraws the loan. Financial assets are derecognised when the contractual right to cash flows from a financial asset ceases or when the rights have been transferred to another party. Financial liabilities are derecognised when the associated obligations have been fulfilled and the liabilities have ceased to exist. Financial Assets and Liabilities held for Trading Assets held for trading purposes include securities acquired for the purpose of sale or repurchase within a short period of time. Items held for trading also include all derivative contracts other than those constituting an efficient hedge relationship. Day 1 Profit/Loss It is typical of non-liquid products that the price calculated using a pricing model deviates from the actual sales price. However, the actual sales price is the best indication of the fair value of the product. The difference between actual sales price and price calculated using a pricing model is accrued on the income statement. However, the non-accrued proportion will be recognised immediately if a genuine market price becomes available or if a common pricing practice is established in the market. The amount of such financial assets on OPA s balance sheet is not substantial.

18 OP MORTGAGE BANK 18 Financial Assets and Liabilities Recognised at Fair Value through Profit or Loss at Initial Recognition Financial assets recognised at fair value through profit or loss include aggregate instruments in which the fair value of an embedded derivative cannot be determined separately. Financial assets and liabilities held for trading, as well as financial assets recognised at fair value through profit or loss, are measured at fair value, and changes in fair value are recognised on the income statement. Loans and Receivables Financial assets categorised as loans and receivables are non-derivative financial assets with fixed or determinable cash flows that have been created by handing over funds, goods or services. Loans and receivables are not quoted in an active market, and they are treated in accounting at acquisition cost. Write-downs on loans and receivables are recognised by receivable items and groups of receivables. Writedowns are assessed and recognised by receivable item if the customer s total exposure is significant. Other write-downs are assessed and recognised by groups of receivables. Write-downs are recognised as reductions in the balance sheet item for loans. Recognition of interest on the reduced amount continues after write-down. A write-down will only be recognised when there is objective proof of the customer s impaired solvency after the initial recognition of the receivable on the balance sheet. The value of a receivable item is impaired if the future cash flows recoverable from it including the fair value of the collateral are less than the book value of the loan and unpaid interest. Future cash flows are discounted at the loan s original interest rate. In the case of a variable interest rate loan, the discount rate is the rate in accordance with the contract at the time of assessment. The difference between the book value of the loan and a lower recoverable value of cash flow is recognised as a write-down. For the purpose of assessing impairment by groups of receivables, receivables are divided into groups with similar credit risk. A group-specific write-down is recognised for a group if there is objective proof that uncertainty is associated with the repayment of receivables included in the group. The level of write-down recognised is based on an average empirical assessment of future losses. Once all collection actions have been completed or management has otherwise made a decision to this effect, the loan is removed from the balance sheet. Any payments received after removal from the balance sheet are recognised as adjustments to write-downs on receivables. If objective proof has been received that the solvency of a customer has improved, the amount of previously recognised write-downs shall be reassessed and any change due to improved solvency shall be recognised on the income statement. Financial Assets Available for Sale Financial assets available for sale are non-derivative financial assets not included in the above categories of financial assets. Financial assets available for sale are recognised on the balance sheet at acquisition cost at the time of acquisition and valued at fair value. Changes in value are recognised in the fair value reserve in shareholders equity and transferred to the income statement when the asset is derecognised from the balance sheet or there is objective proof that its value has been impaired. Interest income and dividends are recognised on the income statement. Should the fair value of an impaired note or bond categorised as financial assets available for sale subsequently increase, and if the increase can be objectively attributed to an event subsequent to the impairment loss recognition, the impairment loss shall be reversed and recognised on the income statement. Should the fair value of an impaired equity instrument subsequently increase, the increase in value shall be recognised in shareholders equity.

19 OP MORTGAGE BANK 19 Liquid Assets Liquid assets comprise funds in cash and receivables from credit institutions repayable upon demand. Other Financial Liabilities Other financial liabilities include financial liabilities other than those recognised at fair value through profit or loss. After initial recognition, other financial liabilities are treated in accounting at acquisition cost. Derivative Contracts A derivative contract is a financial instrument or other contract whose value changes when the value of a specific interest rate, financial instrument or commodity price, foreign exchange rate, price or interest rate index, credit rating, credit index or similar underlying asset changes. A derivative requires only minor net investment at the time of entering into the contract, and it will be settled on a specific date in the future. Derivative contracts include interest rate derivatives, currency derivatives, equity derivatives, commodity derivatives and credit derivatives. Derivatives are always measured at fair value. The difference between interest received and paid on non-hedging interest rate swaps is recognised in interest, and the corresponding interest to be carried forward is recognised in other assets and other liabilities. Changes in the value of nonhedging derivatives are recognised under Net trading income on the income statement. Positive changes in the value of derivative contracts are recognised on the balance sheet under Derivative contracts, assets, while negative changes are recognised under Derivative contracts, liabilities. Derivative contracts are used only for hedging purposes. Derivative hedging aims at locking the interest rate margin of variable- or fixed-rate market-based receivables and liabilities. Hedge accounting in accordance with IFRS 39 is applicable to derivatives. Hedge Accounting Hedge accounting includes the hedging of interest rate risk using the fair value method. Hedging of fair value is associated with long-term fixed-rate liabilities (own issues) and individual loan portfolios, as well as individual loans. Hedge accounting is used to verify that changes in the fair value of a hedging instrument fully or partially cancel any changes in the fair value of the hedged item or in cash flow. The connection between hedging and hedged instruments is documented in a specified form. The documentation includes information on risk management principles, the hedging strategy and the methods used for proving the effectiveness of hedging. The effectiveness of hedging is proven at the time of entering into a hedge and during the hedging period by mutually comparing the changes in the fair values of the hedging and hedged instruments. A hedge is considered effective if changes in the fair values cancel each other with a range of variation from 80 to 125 per cent. Contracts cannot be treated according to the rules of hedge accounting in accounting if the hedging relationship between the hedging instrument and the related hedged object required by IAS 39 no longer meets the criteria of the standard. In the context of hedge accounting for fair value, changes in the values of the hedging and hedged instrument are recognised on the income statement under Net income from investments (bonds included in assets available for sale) and Net interest income (loans and own issues). INTANGIBLE ASSETS Intangible assets are valued at acquisition cost deducted by depreciation and impairment. Depreciation is recognised as expenses over the course of the estimated economic life, which is two to five years for computer software and licences. The economic life of assets is reviewed at each time of closing the accounts, and their value is tested for impairment as necessary.