Annual report KLP Banken AS

Transcription

1 Annual report KLP Banken AS 2009

2 2 ANNUAL REPORT 2009 KLP BANKEN AS

3 R E P O R T O F T H E B OA R D O F DI R E C T O R S 3 Report of the Board of Directors On 29 January Kommunal Landspensjonskasse (KLP) was granted a licence by Kredittilsynet (now Finanstilsynet, the Financial Supervisory Authority of Norway) to establish banking activities. In accordance with the regulations, KLP Banken AS is 100% owned by KLP through KLP Bankholding AS. KLP Banken AS has two wholly-owned subsidiaries, KLP Kreditt AS and KLP Kommunekreditt AS. KLP KLP Bankholding AS In the fourth quarter KLP Banken AS launched ordinary banking services such as deposit-taking, online banking and payment cards. In 2009 the products were only aimed at employees of KLP. From 1 February 2010 the banking services were made available to the Norwegian retail market. KLP KredittAS KLP Banken AS KLP Kommunekreditt AS KLP Banken AS manages a loan portfolio of NOK 28.3 billion for KLP. Of these loans, NOK 19.6 billion is to public sector borrowers and NOK 8.7 billion is housing loans. KLP Banken AS took over this task from KLP Kapitalforvaltning AS on 1 June At the same time, 27 employees of KLP Kapitalforvaltning AS were taken on by KLP Banken AS. Going forward, the bank will continue to manage KLP s existing housing loans, but from the first quarter of 2010 all new housing loans will be issued by KLP Banken AS. In the first quarter of 2009 KLP bought 100% of the shares in Kommunekreditt Norge AS from Eksportfinans ASA. Kommunekreditt Norge AS is a substantial long-term lender to public sector borrowers. In connection with the acquisition, its name was changed to KLP Kreditt AS. The shares in KLP Kreditt AS were then transferred to KLP Banken AS. At the turn of the year KLP Kreditt AS had loans with a book value of NOK 30.2 billion. The activities of KLP Kreditt AS are financed through a loan from Eksportfinans ASA which will be reimbursed over 2.5 years. In order to be able to finance lending to public sector borrowerson the best achievable terms, KLP Kommunekreditt AS was set up in the third quarter of This company satisfies the requirements for issuing covered bonds. The Company will purchase public sector loans from KLP or KLP Kreditt AS and use the loans as security for borrowing. In December 2009 KLP Kommunekreditt AS acquired loans for NOK 3 billion from KLP Kreditt AS and issued covered bonds for a corresponding amount in the Norwegian market. KLP decides to set up KLP Banken Takes over loan management and employees from KLP Kapitalforvaltning Launches bank services to KLP employees New housing mortgages issued by KLP Banken Launches KLP Banken externally Jan Feb Mars April Mai Juni Juli Aug Sep Okt Nov Des Jan Feb KLP buys Kommunekreditt, which changes its name to KLP Kreditt KLP Kommunekreditt AS purchases loans and issues covered bonds

4 4 ANNUAL REPORT 2009 KLP BANKEN AS Activities, objectives and strategy The combined activities of KLP Banken AS and its subsidiaries have two business areas, the retail market and public sector loans. The activities are nationwide and the companies head office is in Trondheim. THE RETAIL MARKET KLP Banken is a key element in KLP s drive to develop good products and services for the retail market. KLP Banken AS currently manages home mortgage loans of NOK 8.7. In 2008 KLP was voted Norway s best bank for home mortgages. One of the Bank s objectives is to strengthen KLP s position in respect of its owners and their employees. More than 10% (550,000) of Norway s population has an insurance relationship with KLP, and as an insurance provider the Company enjoys a high level of confidence and a good reputation among its customers. In its activities and marketing, KLP Banken AS has paid particular attention to members of pension schemes managed by KLP. KLP Banken AS will be a direct bank for customers looking for a long-term, predictable partner. In this way we aim to become the preferred bank for KLP s members and pensioners, and for other retail customers attracted by the Bank s services and values. KLP Banken is internet based and has no physical branch network. The new bank is an everyday bank with good, simple savings and loan products. From the start KLP Banken AS is offering the following services: current accounts, savings accounts, online banking, debit cards, ordinary housing loans, credit lines, loans for holiday homes and the senior loan Litt Extra (a little extra). More products and services will be introduced gradually. PUBLIC SECTOR LOANS The long-term financing of public sector borrowers by KLP takes place under the brand name KLP Kommunekreditt. This comprises the activities of the KLP Kreditt AS and KLP Kommunekreditt AS companies and the management of KLP s lending to the public sector. Altogether, KLP Kommunekreditt is a significant long-term lender for public sector value creation and care activities, and a leading national player in its field of activities. The objective of KLP Kommunekreditt is to be a leading lender to the public sector. In future the sector will also face major development tasks in the areas of, among others, care, nurseries, schools, roads, water, sewerage/drainage and waste disposal. In addition, an increasing focus on tasks related to the climate and the environment will lead to increased financing needs for our customer groups. KLP Kommunekreditt places emphasis on a high level of expertise in local government financing and advisory activities, cost-effective operation and competitive financing. An important part of the marketing work for KLP Kommunekreditt involves participation in the fora where our customers meet. KLP Kommunekreditt also arranges such gatherings itself. Kommunekreditt Norge AS held its annual local government conference in March. The topic for the year was Kommune- Norge etter finanskrisen (Municipal Norway after the financial crisis]. In order to shed light on this topic, introductory speakers were invited from politics, public administration, business and research. Almost 250 people took part in the conference, and the vast majority were representatives of the local government sector. In addition, people attended from organisations, the Storting (Norwegian Parliament), the Government and others working or interested in the public sector. The feedback from the participant evaluation confirms that the conference is highly recognized and valued among our customers and partners. The conference will be continued in Financial developments in 2009 KLP Banken AS submits group and company accounts in accordance with Regulation No 1240 Regulations on annual accounts for banks, finance companies and their parent companies of 16 December 1998 and Act No 56 Act on annual accounts (Accounting Act) of 17 July For further information, see Note 2. INCOME STATEMENT The KLP Banken AS Group achieved a profit of NOK 4.8 million for the year in As of the second quarter the results of KLP Kreditt AS are included in the group accounts of KLP Banken AS. This provides a contribution of NOK 29.8 million to the profits. KLP Kommunekreditt AS did not commence lending and deposit-taking activities until 15 December last year and the result for the year was a deficit of NOK 29,000. KLP Banken AS was established in 2009 so there are no comparable figures for previous years. Company Full year 1 Group 2 KLP Banken AS (parent) KLP Kreditt AS KLP Kommunekreditt AS KLP Banken AS, group The column Full year shows the result for the year for the individual companies 2 The column Group shows the contribution of the individual companies to the result for the KLP Banken Group In 2009 the activities of the company KLP Banken AS (the parent bank) consisted of preparations to establish and launch an internet based retail bank and funding and risk management functions for the banking group. Since 1 June 2009 the bank has managed KLP s lending. In 2009 the bank received NOK 17.9 million in management fees from KLP. The operating costs of the parent bank are largely related to the bank project and the loan management. Staff costs are NOK

5 R E P O R T O F T H E B OA R D O F DI R E C T O R S million, while NOK 17.1 million was charged to expenses as a result of the bank project. This includes costs in connection with the preparation of processes and strategy, planning and establishment of card and IT solutions. In addition, NOK 8.4 million was booked as costs in 2009 in connection with the acquisition of Kommunekreditt Norge AS. These are costs related to legal and financial advisory services. As at 31 December 2009 costs of NOK 25.4 million were capitalised as a result of the bank project. These are primarily IT investments. KLP Kreditt AS s contribution to the result for the year in the banking group is NOK 29.8 million. This is the result for the last three quarters of As a result of accounting rules, the income from the lending activities is a function of both net interest income and net realised and unrealised gains or losses on financial instruments carried at fair value. The operating costs were NOK 27 million. KLP Kreditt AS s result was adversely affected by a change in the valuation of KLP Kreditt AS s funding loan from Eksportfinans. This loan has a fixed credit margin throughout its lifetime and, as a reduction in credit margins in the securities market was observed over the year, a loss was recorded. Seen in isolation this reduces the result of KLP Kreditt AS by NOK 55.6 million. BALANCE SHEET DEVELOPMENT AND CAPITAL STRENGTH The total assets of the banking group were NOK 34.7 billion at the end of the year. The Group s capital base, based on the Board s proposed allocation of the result, amounted to NOK 1.2 billion at the end of the period, which corresponds to a capital adequacy of 16.0%. The core capital was NOK 1.2 billion, which corresponds to a core capital adequacy of 16.0% at the end of December The risk-weighted balance sheet total was NOK 7.2 billion at the same time. The capital adequacy is considered good, given the very good security for the loans. The cash flow analysis in the annual accounts shows that the liquidity situation is good, and it is considered satisfactory as at 31 December 2009 for both the Company and the Group. The Board considers that the income statement and the balance sheet for 2009 and the notes to the accounts provide satisfactory information on the operations during the year and the financial position at the end of the year. The annual accounts provide a true and fair view of the bank s assets and liabilities, financial position and results. The conditions for a going concern exist and the accounts have been prepared on that basis. PROPOSAL FOR THE ALLOCATION OF THE RESULT FOR THE YEAR The Board proposes that the parent bank s deficit of NOK 25.0 million be charged to the company s share premium reserve. The company has no distributable equity after the proposal for the allocation of the result for the year. LENDING Lending to customers is NOK 33.1 billion. In addition, KLP Banken AS manages loans of NOK 28.3 billion on behalf of KLP. Company Housing loans Public sector loans KLP Banken AS (parent) - - KLP Kreditt AS - 30,2 KLP Kommunekreditt AS - 3,0 KLP (management agreement) 8,7 19,6 Total 8,7 52,8 KLP Banken AS carries no financial risk associated with possible credit losses on the loans managed for KLP. The description of the loan portfolio in the rest of this section concerns the loans booked in the banking group. At the turn of the year the whole of the banking group s loan portfolio was to Norwegian municipalities or county authorities directly or to public sector businesses with guarantees from municipalities or county authorities. The risk in the loan portfolio is assessed as very low. The risk associated with loans to municipalities or county authorities in Norway is limited to payment deferral and not to the termination of payment obligations. Neither KLP nor previously Kommunekreditt Norge AS has had credit losses linked to this type of loan. For further information, please see the section on credit risk under Risk Management. The lending margins fell during 2009 after rising during the financial crisis in The lending margins are now almost at the same level as before the financial crisis. FUNDING Deposits from customers amount to NOK 36 million. In 2009 only employees of the KLP Group were able to open deposit accounts in KLP Banken AS. KLP Kreditt AS is largely financed through a loan from Eksportfinans which was established in connection with the acquisition of the company. The loan was booked at NOK 30.2 billion at the turn of the year. The repayment of the loan will take place in eight equal quarterly instalments of NOK 4.3 billion. The first instalment was paid in December The Bank s subsidiary, KLP Kommunekreditt AS, is in the process of establishing a rated programme for issuing covered bonds. In December 2009 KLP Kommunekreditt carried out a NOK 3 billion issue of covered bonds in the Norwegian market without such rating.

6 6 ANNUAL REPORT 2009 KLP BANKEN AS In its licence to establish a bank, KLP was granted dispensation from the Financial Institutions Act s provisions on intra-group loans so that, for a three year period, KLP may grant loans to or make investments in KLP Banken AS with resources from KLP s common portfolio. The total exposure is limited to 3% of the value of the common portfolio. At the turn of the year the maximum loan/investment amounts to around NOK 6 billion. No such loan had been granted as at 31 December In addition, KLP was authorised to purchase covered bonds issued by KLP Kommunekreditt AS. The authorisation is limited such that KLP can own up to a maximum of 15% of total outstanding bonds and a maximum of 25% of each issue, and the exposure may not amount to more than 5% of KLP s corporate portfolio or its common portfolio, which at the turn of the year corresponded to just over NOK 10 billion. At the turn of the year KLP owned covered bonds issued by KLP Kommunekreditt for around NOK 450 million. KLP Banken AS has also entered into an agreement with KLP which allows the Bank to exchange public sector loans for government bonds. Risk management ORGANISATION OF RISK MANAGEMENT The banking group has a control environment to ensure sound operation and reassuring control. Emphasis has been placed on following established standards for corporate governance. The figure below shows the relevant company bodies involved in this work Election Committee Risk Control Supervisory Board Board of Directors Managing Director Advisory Credit Committee Control Committee External Audit The banking group is exposed to various types of risk. The Bank has a risk management framework to ensure that risks are identified, analysed and managed with the aid of policies, limits, procedures and instructions. The Board of the Bank and the Boards of the Bank s subsidiaries have adopted risk policies which cover the most important individual risks and a general risk policy comprising principles, organisation, limits etc. for the bank s total risk. The risk policies are of a general nature and are supplemented by procedures, guidelines, limits and instructions laid down at an administrative level. The five risk policies are shown in the figure below. Liquidity policy Credit policy Risk policy Market risk policy Policy for operational risk Each of the policies covers the Bank and its subsidiaries and include principles, guidelines, limits, reporting requirements etc. which apply to the whole banking group. In individual areas the policies also contain specific limits for individual companies in the Group. RISK POLICY The risk policy concerns principles which are common to various types of risk, and in that regard the policy is a general policy for individual risks. The policy concerns, among other things, roles in the Bank s risk management, including requirements and guidelines for the Bank s risk control function. The purpose of the risk control function is, among other things, to check that the risk policies and other risk management guidelines are being followed. This function is performed by the risk analysis and control department which is responsible for preparing regular risk reports for the management and Board and reporting any breaches of policies or guidelines. The department also has other tasks related to the Bank s risk management, including responsibility for improving methods for risk measurement and stress testing, risk analyses and documentation of the Bank s internal capital adequacy assessment process (ICAAP). The department reports directly to the Bank s Managing Director. According to the description of the Bank s risk profile, the Bank s income shall be a result of its deposit-taking and lending activities and not come from other financial risk taking. The policy provides guidelines for the Bank s internal capital adequacy assessment process (ICAAP). In addition to being laid down by the Board, the process shall involve various communities within the Bank, and the aim is to implement and document the formal parts of the Bank s first ICAAP in the course of the first half of Both the general risk policy and the other risk policies are designed to use stress testing as a method for risk measurement and as a tool for communication and exchanging opinions about

7 R E P O R T O F T H E B OA R D O F DI R E C T O R S 7 risks. In this context, stress testing means both sensitivity analysis and scenario analysis. The policies include risk tolerances for the individual risks and for the Bank s total risk, and these risk tolerances are defined on the basis of various stress scenarios. Various forms of stress testing shall be performed frequently to measure whether the Bank s actual exposure lies within the adopted tolerance limits. It is a requirement that Internal Audit should examine the Bank s management and control of risks and submit an annual report to the Board on this. CREDIT RISK Credit risk is the risk that the Bank s loan customers, derivatives counterparties, issuers of securities and other counterparties cannot or will not meet their commitments at the agreed time and that the existing collateral does not cover the outstanding claim. The credit risk associated with the banking group s lending activities is very low because all existing lending is loans to or guaranteed by Norwegian municipalities or county authorities. When the Bank s lending in the retail market grows, this will largely concern loans secured on residential property with a loan-to-value ratio of 80% or lower. In organisational terms, the Bank s lending activities are divided into the retail market and the market for public sector loans. All lending is to Norwegian borrowers and the Bank s exposure to the public sector represent and will continud to represent a large proportion of the total loan volume. The risk associated with loans to municipalities and county authorities in Norway is limited to payment deferral and not to the termination of payment obligations. This is laid down in the Local Government Act. Under Section 55 of the Act, Norwegian municipalities and county authorities cannot be declared bankrupt. Sections 56 and 57 contain provisions on the procedures which a municipality/county must follow if payments have to be deferred. Section 58 contains the procedures for returning to a normal situation with the servicing of the payment obligations. According to these provisions, the State, in the form of the Ministry of Local Government and Regional Development, shall take over the management of a municipality if the municipality cannot meet its payment obligations. This protects lenders against the loss of accumulated debt in the payment suspension period as well as accrued interest. The portfolio is subsequently highly concentrated in one single sector, but the underlying credit risk with regard to this sector is so low that it is almost impossible to reduce this concentration without increasing the total risk in the portfolio. The concentration on the Norwegian public sector is therefore seen more as a strength than as a risk factor. The concentration vis-à-vis individual borrowers is limited by rules on the largest single exposure and by individual limits set by the Board. The credit policy contains the Bank s general guidelines, requirements and limits related to credit risk. The policy states that the Bank shall have a low credit risk profile and contains restrictions on the types of loan and principles for the organisation and operation of the Bank s lending activities. The policy also includes a general authorisation structure for loans and other counterparty exposures. The authorisations outside of the retail market are restricted by limits for individual borrowers set by the Board. In the setting of limits for borrowers, a risk classification methodology is used in which individual borrowers are assigned a risk class based on a set of criteria. Individual credit cases require consideration by a credit committee before a decision is taken. This applies to, among others, all cases which lie outside the management s authority and must therefore be decided by the Board. The credit committees have no authority and thus have only an advisory role vis-à-vis decision-makers. The credit risk associated with securities issuers, derivatives counterparties and other counterparties in the treasury area are also restricted by limits for individual counterparties set by the Board. In addition to the credit policy, a strategy document for the credit area is being drawn up. This document describes the competitive situation and other framework conditions for the credit activities, growth targets and other targets and how those targets are to be achieved. The strategy is adopted by the Board annually. LIQUIDITY RISK Liquidity risk means the risk that the Bank will be unable to meet its obligations and/or finance increases in assets without substantial additional costs arising in the form of a fall in the price of the assets which have to be realised or in the form of more costly financing or the complete absence of financing. The Bank s lending in the retail market will primarily be financed through deposits from retail customers, but such that in the slightly longer term it will be possible to establish a credit company in which the housing loans are financed through the issue of covered bonds. The Bank s lending in the public sector is currently financed through a loan from Eksportfinans ASA and covered bonds. Preparations for establishing a programme for issuing covered bonds in the euro market have been undertaken and bonds with a a credit rating will gradually replace the loan from Eksportfinans ASA in the course of 2010 and In the years to come the Bank will be affected by how well the market for covered bonds functions, but the Bank has extra security in connection with its ability to refinance as a result of the high credit quality of the loans to the public sector. These loans also represent an attractive asset type for KLP Banken AS s owners. An agreement has been established between the

8 8 A N N UA L R E P O R T Bank and its owners in which the possibility of selling loans to KLP has been formalised. The Bank s liquidity policy contains principles, guidelines, requirements and limits applicable to the management of the Bank s liquidity risk. The policy establishes that the Bank shall have a moderate liquidity risk profile and lays down various requirements and limits in order to comply with this, including targets for the deposit-to-loan ratio, limits for refinancing needs for various time horizons and requirements for liquidity buffers. The policy also contains some specific requirements for KLP Kommunekreditt AS to satisfy special liquidity requirements for issuers of covered bonds. In addition, the Board has adopted a contingency plan for liquidity crises as part of the liquidity policy. MARKET RISK Market risk in this regard means the risk of loss as a result of fluctuations in market prices of the Bank s assets and liabilities. KLP Banken AS will be exposed to market risk as a result of the Bank s funding and lending activities and its liquidity management. KLP Banken AS has no held-for-trading portfolio. The exposure is limited to interest rate risk and currency risk. Interest rate risk arises as a result of differences in the timing of interest rate adjustments on the Bank s assets and liabilities. The risk associated with such imbalances is mitigated through derivative contracts. The whole loan portfolio consists of loans in Norwegian kroner, but a currency risk will arise as and when the Bank issues debt in foreign currency. The risk associated with changes in exchange rates will be reduced with the aid of derivative contracts. The market risk policy is the Bank s general guidelines, requirements and limits related to market risk. The policy establishes that the aim is to reduce market risk so that the overall market risk is low. It also states that the Bank shall not actively take positions which expose the Bank to market risk. In addition, the policy sets limits for interest rate risk and currency risk. The limits are set relative to the Bank s capital, and the level of the limits is intended to ensure consistency with the Bank s low market risk profile. OPERATIONAL RISK Operational risk is the risk of loss as a result of inadequate or unsound internal processes or systems, human error or external events. Operational risk is, in relative terms, an important risk type for the Bank. KLP Banken AS will, as a result of new organisation and roles for individual persons, new systems and new products, have an exposure to operational risk. The Bank shall have good management and control of the operational risk, and to achieve this, the Bank must have good processes and a clear division of responsibilities in relation to operational risk. A separate policy for operational risk has been established. It contains general principles and requirements related to processes for identifying and assessing operational risk, how operational risks are to be managed, control activities and the sharing of responsibilities in relation to operational risk as well as reporting operational risk to the Board. OTHER RISKS In addition to the policies discussed above, a separate compliance function has been established in order to help reduce the risk that KLP Banken AS will incur official sanctions, financial loss or loss of reputation as a result of failure to comply with laws, rules and norms (including good business practice). A compliance function has been established which, among other things, shall ensure that relevant changes in rules are picked up and made known to the management of the Bank and help to ensure that the Bank s activities are adapted to such changes. The compliance function shall also keep the Board informed of changes in rules which may be of importance to the Bank and provide compliance-related advice to other parts of the Bank. KLP Banken is also exposed to risks other than those to which a separate policy is dedicated. This includes the Bank s commercial risk, where the greatest uncertainty is linked to margin developments on the Bank s funding and lending, and this is a risk to which the Bank s management and Board devote a lot of attention. Activities of the Board The Board held six meetings in For an overview of the Board s members and management, see Note 23 to the Annual Accounts. Working environment and employees KLP Banken AS and its subsidiaries had 48 employees at the end of The Board would like to thank the staff for their efforts in The cooperation between the management and the staff is good. There are regular surveys among all members of staff to measure commitment, working environment, well-being and adherence to KLP s values. The results of these surveys show that the employees are committed and happy in the KLP Group. The companies have a working environment and cooperation committee which consists of representatives of the management, KLP s HR Department and the employee representatives. Sickness absence in the Bank was 4.2% in The sickness absence is thus within the KLP Group s target of sickness absence of less than 4.5%. There were no significant injuries or accidents in 2009.

9 R E P O R T O F T H E B OA R D O F DI R E C T O R S 9 As a subsidiary of KLP, KLP Banken AS complies with the group s policy on equality and diversity in KLP in which targets, means and activities take into account the grounds of discrimination set out in legislation. KLP Banken AS also follows the Group s ethical guidelines and the Group s guidelines on whistle-blowing. Of the banking group s 48 employees, 24 are women. An effort is made to maintain a balance between women and men at all levels, but there are relatively few women in managerial positions at various levels. At the end of 2009 KLP s Board of Directors comprised three women and three men. The Board considers the working environment in the Bank to be good. External environment The KLP Group, including KLP Banken AS, takes its environmental impact seriously. As an office-based business, it is primarily energy consumption, transport, waste and purchases that might be affected. In its social responsibility strategy the KLP Group has committed itself to having good procedures for measuring and reducing the environmental impact of the companies. Subsequent events KLP Banken AS launched a new business area directed at the retail market on 1 February On that date the Bank s website was opened and it became possible for members of the public to set up a customer relationship with the Bank with loans, deposits, cards and payment services. The opening was supported by advertising in various media. In this phase, apart from general profiling, the emphasis was put on deposits as a product. KLP Banken AS has been well received in the market and so far developments have been in line with the plans that were made. Future outlook The Board expects the general tough competition in the retail customer market to persist. As part of KLP, the Bank will invest in developing greater brand awareness and loyalty among the target group, which is public sector employees. New technology will be used commercially to improve efficiency and enhance the customer experience. Technological solutions, such as e- signatures and BankID, shall be used to increase customer satisfaction and make the organisation more efficient. The business is based on an organisation that has extensive experience of lending to retail customers and the public sector and which has thus over a long period of time built up great expertise in the area of credit. New products and services lead to changes in the business and require adjustments in the organisation. One area of focus going forward will be a further strengthening of sales expertise. The Board considers that the demand for loans in the local government sector and for projects with local government guarantees and ownership will be substantial going forward. KLP Kommunekreditt has a good position in this market. Further growth in lending for KLP Kommunekreditt will be dependent on good funding conditions. This is a priority area in Oslo, 2 March 2010 The Board of Directors of KLP Banken AS Chair Vice Chair Employee representative Managing Director

10 Accounts

11 A C C O U N T S 11 Income statement KLP Banken AS KLP Banken AS Group Notes NOK thousands Total interest income Total interest expences NET INTEREST INCOME Net commission income Fees lending management Pay and general management costs Operating expenses Depreciation Net realised + gain/ - loss fin. instruments Net unrealised + gain/ - loss fin. instruments PRETAX OPERATING PROFIT Taxes PROFIT/LOSS BEFORE OTHER P/L COMPONENTS Other comprehensive income COMPREHENSIVE INCOME Allocated to/from share premium fund Allocated to/from other owners equity 0 0 Allocated to/from fund for unrealised gains TOTAL ALLOCATION OF PROFITS

12 12 ANNUAL REPORT 2009 KLP BANKEN AS Statement of financial position KLP Banken AS KLP Banken AS Group Notes NOK thousands ASSETS ,14 Loans issued to and receivables from credit insts ,14 Loans issued to and receivables from customers Holdings in group companies Financial derivatives Deferred tax Tangible fixed assets Intangible assets Other assets TOTAL ASSETS LIABILITIES AND OWNERS EQUITY LIABILITIES Debt to financial institutions Deposits Financial derivatives Tax payable Deferred tax Other liabilities Provision for accrued costs and liabilities TOTAL LIABILITIES OWNERS' EQUITY Share capital Share premium fund Other owners' equity 0 0 Funds for unrealised gains TOTAL OWNERS EQUITY TOTAL LIABILITIES AND EQUITY Oslo, 2 March 2010 The Board of Directors of KLP Banken AS Chair Vice Chair Employee representative Managing Director

13 A C C O U N T S 13 Statement of cash flows KLP Banken AS KLP Banken AS Group NOK thousands Pre-tax profit/loss Provision of funds from operation: -20 New lending Loan repayment Unrealised loss (reversing of previous years' provisions) Depreciation Income from holdings in jointly controlled companies 0 0 Taxes paid Change in: 0 Accrued income not yet paid Other receivables Other short term debt Total acquisition of funds from operating activities Fresh financial investments Investment in Group companies Investment in inventory and buildings Sale of inventory (net) Net cash flow from investment activities Change in liability to credit institutions Change in subordinated loan and hybrid Tier 1 securities Dividends paid Share issue Net cash flow from financial activities Change in rate adjustments on cash and bank equivalents NET CHANGE IN CASH AND CASH EQUIVALENTS Cash and cash equivalents at the start of the period CASH AND CASH EQUIVALENTS AT THE END OF THE PERIOD Statement of changes in owner s equity KLP Banken AS KLP Banken AS Group 2009 NOK thousands Owners' equity contributed on formation Capital expansion during the period Total contribution of owners' equity Transferred from annual profit/loss Total owners' equity as at ,3 Profit/loss per share (after tax) (figures in whole NOK) 0,6 The share capital comprises 7,500,000 shares at NOK nominal. There is one class of share. All shares are owned by KLP Bank Holding AS

14 14 ANNUAL REPORT 2009 KLP BANKEN AS Note 1 General information KLP Banken AS is a newly started commercial bank established on 25 February The company offers standard bank products to personal banking customers. The bank is an online bank without branches. KLP Banken AS is registered as domiciled in Norway. Its head office is at Beddingen 8 in Trondheim. The Company has a branch office in Oslo. KLP Banken AS owns all the shares in KLP Kredit AS (previously Kommunekreditt Norge AS) and KLP Kommunekreditt AS. The Company is a subsidiary of KLP Bankholding AS, which is in turn wholly owned by Kommunal Landspensjonskasse (KLP). KLP is a mutual insurance company. The financial statements presented represent the period 25 February December Note 2 Summary of the most important accounting principles Below is a description of the most important accounting principles used in preparation of the KLP Banken AS financial statements, Company and Group. 2.1 BASIC PRINCIPLES The KLP Banken AS financial statements have been prepared in accordance with the Norwegian Regulation 1240 «Regulations on financial statements etc for banks, financial enterprises and their parent companies, hereinafter referred to as the Annual Accounts Regulations of and Norwegian Act No. 56 «Act regarding annual accounts etc (Accounting Act)» of The Accounting Act and the regulations require that the Company use international accounting standards (IAS/IFRS) approved by the EU in preparing the financial statements, but allow certain exceptions from IFRS under Regulation No. 57: «Regulations on simplified application of international accounting standards» of (hereinafter referred to as «the Simplification Regulations»). The Simplification Regulations allow the presentation in the accounts of a provision for dividend and group contribution at the end of the reporting period even though the resolution is passed at a later date. This is the only accounting principle deviating in regard to IFRS. The Accounting Act contains certain supplementary information requirements not required in accordance with IFRS. This supplementary information is included in the notes to the financial statements. The annual accounts have been prepared based on the principle of historic cost, with the following exceptions: Financial assets and liabilities (including financial derivatives) are valued at fair value through profit and loss. To prepare the accounts in accordance with IFRS, management has to make accounting estimates and approximate valuations. This will affect the value presented in the accounts of the Group s assets and liabilities, income and expenses. Actual figures may deviate from estimates used. Areas in which discretionary valuations and estimates of material significance for the Group have been utilised are described in Note 3. The following new and changed standards have been adopted in 2009: IAS 1, Presentation of financial statements The accounts have been prepared in accordance with the going concern assumption. 2.2 CONSOLIDATION PRINCIPLES Subsidiaries All entities in which the Group has deciding influence/control are considered subsidiaries. Deciding influence is normally achieved through ownership of more than half of the voting capital. Subsidiaries are consolidated from the date on which the Group takes over control and they are omitted from consolidation when that control ceases. Purchase of subsidiaries is taken to account in accordance with the acquisition method. Acquisition cost is set at the same as fair value of assets provided by way of consideration for the purchase, equity instruments issued and liabilities assumed on transfer of control. The identifiable assets and liabilities of the acquired company are valued at fair value. If cost of acquisition exceeds fair value of identifiable net assets in the subsidiary, the excess is capitalised as goodwill. If the cost of acquisition is lower, the difference is taken to profit/loss on the date of acquisition. Internal Group transactions and accounts between Group companies are eliminated. Where Group companies present accounts in accordance with principles other than those of the Group, these are converted to correspond with the Group s accounting principles before they are consolidated. The Group s accounts are presented in NOK. 2.3 BUSINESS SEGMENTS The business segments have been defined in relation to business areas where risk and returns are differentiated from each other. The business areas are grouped in the personal market and public sector lending respectively. 2.4 CONVERSION OF TRANSACTIONS IN FOREIGN CURRENCY Functional currency and presentational currency The accounts are presented in NOK, which is the functional currency of the parent company Transactions and statement of financial position items Transactions in foreign currency have been converted to NOK by using the conversion rate on the date of the transaction. Currency gains and losses on transactions in foreign currency are taken to expenses. This also applies to conversion of money items (assets and liabilities) at the end of the reporting period. Conversion differences on non-money items are included as part of the gain and loss on valuation at fair value. 2.5 TANGIBLE FIXED ASSETS Tangible fixed assets comprise in the main office machinery, inventory and vehicles used by the Group in its business. Tangible fixed assets are booked at cost of acquisition including costs that can be attributed directly to the fixed asset, with deduction for depreciation. Subsequent costs relating to fixed assets are capitalised as part of the fixed asset if it is likely that the expenditure well contribute to future financial benefit for the Group and the cost can be measured reliably. Repair and maintenance are taken to profit/loss during the period the expenses are incurred. Depreciation is by straight-line so the acquisition cost of fixed assets or their reassessed value is depreciated to residual value over expected life, which is: Office machinery: Vehicles: Inventory: 3 5 yrs 5 yrs 3 5 yrs The utilisable life of tangible fixed assets is assessed annually. Where

15 N O T E S T O T H E AC C O U N T S 15 there are indications of value reduction in excess of residual value, the recoverable sum is calculated. If the recoverable sum is lower than the residual value, write-down is carried out to the recoverable sum. Gains and losses on disposals comprise the price of sale less the book value at the time of sale. Gains and losses on disposals are taken to profit/loss. On the sale of revalued fixed assets, any sum in the revaluation reserve linked to the fixed asset is transferred to retained earnings. 2.6 INTANGIBLE ASSETS In the main the Group s intangible assets comprise capitalised IT systems. Directly attributable costs capitalized on the purchase of a new IT system comprise those paid to the system supplier, as well as external consultancy support and internally accrued costs of having the system installed and readied for use. On further development of IT systems both external and internal costs are capitalized in accordance with the above. System changes regarded as maintenance are taken to expenses as they occur. When an IT system is operational the capitalized costs are depreciated by straight line over the expected life (3 12 years). In the event of subsequent capitalization because of further development this is depreciated over the originally set life unless the expenditure increases the total expected life of the system. If there are indications that the book value of a capitalized IT system is higher than the recoverable sum, a test of decline in value is carried out. If the book value is higher than the recoverable sum (present value on continued use/ownership), the asset is depreciated to the recoverable sum. 2.7 FINANCIAL ASSETS The Group s financial assets are divided into the following categories: financial assets measured at fair value through profit/loss and financial assets measured at amortised cost. The purpose of the asset determines the classification and management undertakes classification on acquisition of the financial asset Financial assets valued at fair value This category is divided into two subcategories: held for trading and voluntarily categorised at fair value over profit/loss on acquisition according to the fair value option. a) Financial assets held for trading are assets acquired primarily with a view to providing a profit from short-term price fluctuations. The Group s derivatives are included in this category unless they form part of hedging. Fair value is determined on the basis of observable prices in an active market, or where such prices are not available, through internal modelling with regular collection of external pricing to quality-assure the internal pricing model. b) Financial assets voluntarily categorised at fair value through profit and loss on acquisition comprise financial assets managed as a group and where their earnings are valued and reported to management on the basis of fair value. The size of the portfolio is decided on the basis of the Group s desired risk exposure to the interest market. Gains or losses from changes in fair value of assets classified as financial assets at fair value over profit/loss are included in the income statement in the period they arise. This is included in the line «Net gains from financial investments». Coupon interest is taken to income as it accrues and included in the line «Net unrealised gain/loss financial instruments». Fair value in this category is determined in relation to observable purchase prices in an active market or, where such purchase prices are not available, through internal valuation models based on external data Financial assets valued at amortised cost Loans and receivables are financial assets, with the exception of derivatives, with set or determinable payments, and that are not traded in an active market or that the Group intends to sell in the short term or has earmarked at fair value through profit and loss. Lending and receivables comprise loans to local authorities and enterprises with local government guarantee. Loans and receivables are initially recognized on the balance sheet at fair value. Subsequent measurement is at amortised cost using the effective interest rate method with write-down for credit losses if appropriate. The effective interest on loans and receivables in the investment business is taken to profit/loss and included in the line «Interest costs and similar costs». Fair value in this category is determined on the basis of internal valuation models based on external observable data. This is shown in Note Accounting treatment of securities Purchases and sales of financial assets are taken to account on the trading date, i.e. when the Group has committed itself to buy or sell that financial asset. Financial assets are valued at fair value. Direct costs of purchase are included in acquisition cost except for purchase costs associated with assets at fair value over profit/loss. For these assets purchase costs are taken to expenses directly. Financial assets cease to be recognized when the Group is no longer entitled to receive the cash flow from the asset or the Group has transferred all risk and entitlements associated with its ownership Calculation of fair value Fair value of market-listed investments is based on the applicable purchase price. If the market for the security is not active, or the security is not listed on a stock market or similar, the Group uses valuation techniques to set fair value. These are based for example on information on recently completed transactions carried out on business terms and conditions, reference to trading in similar instruments and pricing using externally collected yield curves and spread curves. As far as possible the estimates are based on externally observable market data and rarely on company-specific information. The different financial instruments are thus priced in the following way: a) Financial derivatives These transactions are valued using a valuation model in which the credit risk of the swap counterparty is implicit in the swap prices with the counterparty concerned. b) Lending to local authorities and enterprises with local government guarantee The receivables are valued using a valuation model that uses relevant credit risk premium adjustments obtained from the market. The lending is to municipalities, county authorities and local government supported projects. Observable interest-rate curves and credit spread curves are used in a valuation model that discounts future cash flows. The credit spreads used in the model calculations are based on quotations from three different price makers. An assessment is made of the quality of the quotations by comparing them with each other and against previously received observations as well as other market information. For guaranteed lending fair value is calculated as a discounted cash flow based on the same interest-rate curves as the direct loans, but the credit margin is initially based on the initial margin. Guarantees are traded bilaterally and not through open marketplaces such as for example a stock market (OTC) and are therefore not priced in the market. It is therefore the Group s view that initial margin agreed on the commencement date is the best estimate for market spread on the same date. Creditworthiness does not change just as much for the loan as for the guarantor or borrower individually. The borro-

16 16 ANNUAL REPORT 2009 KLP BANKEN AS wer is generally not credit rated by credit rating agencies or banks. The guarantor is either a local authority or bank (or both - triple default loan). Statistical analyses indicate that the credit margin on guaranteed loans fluctuates less than on non-guaranteed loans and bonds. Guaranteed loans are therefore not adjusted for credit risk premium before the guarantor has experienced a significant rating change since the initial margin was set. The Group s lending with both local government and bank guarantee is credit premium adjusted in relation to the initial margin only if both the guarantors have had their credit rating significantly changed since the date of payment. c) Investments with credit institutions Investments with credit institutions are short term deposits. Fair value is calculated by discounting contracted cash flows by market interest rates including a relevant risk margin on balance sheet day Write-down In assessing whether there is deterioration in value of a financial asset, weight is attached to whether the issuer/debtor has significant financial difficulties and whether there is breach of contract, including default. An assessment is made whether it is probable the debtor will be bankrupted, whether there is an active market for the asset because of financial difficulties or whether measurable reduction is being seen in expected cash flow from a group of financial assets. The assessment is based exclusively on historical data: future events are not considered regardless of the degree of probability. If there is objective proof, write-down is carried out. The write-down is calculated by comparing the new, anticipated cash flow with the original cash flow discounted by the original effective interest rate (assets with fixed interest) or by the effective interest rate at the time of measurement (assets with variable interest). The write-down is set against provisions and included within the income statement. Any reversal of previous write-down is returned to provisions via profit/loss. 2.8 DERIVATIVES AND HEDGING Derivatives are capitalised at fair value at the time they are contracted. On subsequent measurement the derivatives are booked at fair value. Booking of associated gains and losses depends on whether the derivative has been identified as an accounting hedge instrument and in which type of accounting hedge the derivative is included. The Group does not have derivatives included in accounting hedging. Gains and losses on derivatives are taken to profit/loss as they arise in the line for «Net gains on financial investments». These are included in the category «Financial assets at fair value over profit/loss». 2.9 SET-OFF Financial assets and financial liabilities are only set off to the extent there is a legal entitlement to set off liability against receivable as well as the maturity date of the asset corresponding with the date the debt is due payment CASH AND CASH EQUIVALENTS Cash holdings and bank deposits associated with daily operations are shown as cash and bank deposits. Bank deposits associated with the securities business are defined as financial assets. The statement of cash flow has been prepared in accordance with the direct method FINANCIAL LIABILITIES The Group s financial liabilities comprise liabilities to and deposits from customers, covered bonds issued and other financial liabilities Liabilities to and deposits from customers Liabilities to and deposits from customers are presented at fair value on the balance sheet when the deposit has been recorded as transferred to the customer s account Covered bonds issued Covered bonds have been issued in accordance with Chapter 2 IV of Act No. 40 «Act on financing activity and financial institutions (Financial Institutions Act)» of 10 June The bondholders have security in a security pool comprising loans with government guarantee (government loans) and a top-up security comprising a liquidity reserve. The top-up security may at any time represent up to 20 per cent of the security pool. The value of the security pool shall at all times exceed the value of the covered bonds in the security pool. A register is kept of the covered bonds in the security pool, as well as of the assets included in the latter. The FSA nominates an independent supervisor who monitors that registration is carried out correctly. If the issuer of the covered bonds ceases operations, becomes bankrupt, enters into debt negotiations or is placed under public administration, the bond owners are entitled to receive timely payment from the security pool during the debt negotiations. The bond owners have an exclusive, equal and proportionate entitlement to the assets in the security pool that have been provided for them. Covered bonds issued are brought to account in the first instance at fair value, i.e. nominal adjusted for any premium/discount on issue. On subsequent valuation the bonds are valued at amortised cost by the effective interest method. The interest costs are included in the amortisation and are shown in the line «Interest costs and similar costs» in the income statement. Fair value in this category is determined on the basis of internal valuation models based on external observable data Other financial liabilities Other financial liabilities are capitalised at fair value on acquisition. On subsequent measurement as a rule the liability is recognised at amortised cost in accordance with the effective interest rate method. The interest costs are included in the amortisation and are shown in the line «Interest costs and similar costs» in the income statement. To the extent it may reduce accounting inconsistencies in measuring the financial activity, fair value is used in subsequent valuation of other financial debt. Fair value is calculated using a valuation model based on observable, externally available data. The value change is included in the line «Net unrealised + gain/loss financial instruments» in the income statement OWNERS EQUITY The owners equity in the Group comprises owners equity contributed and retained earnings Owners equity contributed Owners equity contributed comprises share capital and the shares premium fund Retained earnings Retained earnings comprise mainly other owners equity and funds for unrealised price premiums. Ordinary company law rules apply for any allocation or use of the equity capital fund PRESENTATION OF INCOME IN THE ACCOUNTS Income on sale of goods and services is valued at fair value of the consideration, net after deductions for VAT and any discounts. Sales internal to the Group are eliminated Income from services Fees for the loan management are taken to income in proportion to the management carried out for the period up to the end of the period. Other services are taken to income by straight line over the contract period Interest income/costs Interest income and interest costs associated with all interest-bearing financial instruments valued at amortised cost are taken to income using the effective interest rate method. Setting-up fees for lending are included in the amortisation and taken to income over the loan s expected duration.

17 N O T E S T O T H E AC C O U N T S 17 For interest-bearing financial investments measured at fair value the interest income is classified as «Current returns from financial investments», whereas the effect of changes in interest is classified as «Net unrealised gains from financial investments» TAX The tax expense in the income statement comprises both the period s tax payable and change in deferred tax. Deferred tax is calculated at 28 per cent on the basis of the temporary differences existing between accounting and taxable values, as well the tax deficit to be carried forward at the end of the accounting year. Tax-increasing and tax-reducing temporary differences that reverse or may reverse in the same period are set off. Net deferred tax gains are recorded in the balance sheet to the extent it is likely they may be utilised PENSION OBLIGATIONS - OWN EMPLOYEES KLP Banken AS s pension obligations are partially insurance-covered through KLP s public sector occupational pensions through membership of the joint pension scheme for municipalities and enterprises («Fellesordningen»). KLP Kreditt AS does not have this scheme, but has a scheme in accordance with the Norwegian Act on Mandatory Occupational Pensions through another insurance company. Pension liability beyond these schemes is covered through operation. Pension costs are treated in accordance with IAS 19. Net pension liability is the difference between the pension assets fair value (i.e. transfer value) and the present value of the calculated pension obligations. These calculations have been carried out according to straight line accruals on the basis of assumptions on mortality, disability, voluntary cessation, take-up of early retirement (AFP), future pay developments (in the local authority sector for the joint pension scheme), future growth in the National Insurance basic sum ( G ), assumptions on future returns etc. The financial assumptions have been set in line with the principles in the Norwegian Accounting Standards Board s (NASB) guidance on pension assumptions. Net liability is classified as provision for obligations in the balance sheet. If the value of the pension assets exceeds the current value of calculated pension liabilities, net assets are shown as long-term receivables. The period s net pension costs comprise the sum of the period s pension accumulation, interest costs on the calculated liabilities and expected returns on the pension assets. The joint pension scheme is a multi-enterprise scheme, i.e. the technical insurance risk is spread between all of the local authorities and enterprises participating in the scheme. The financial and actuarial assumptions underlying the calculation of net pension obligations are thus based on assumptions that are representative of the whole group. Social security costs are calculated on net obligations. Gross pension liabilities as the basis for determining the amortisation basis for the corridor do not include social security costs. Note 3 Important accounting estimates and valuations The Group prepares estimates and assumptions on future circumstances. These are continuously evaluated and are based on historic data and expectations on probable future events considered on the basis of data available at that time of presentation of the accounts. It must be expected that the estimates will deviate from the final outcome and below the areas are discussed where there is significant risk of substantial changes in capitalised values in future periods. 3.1 PENSION OBLIGATIONS - OWN EMPLOYEES The present value of net pension obligations the Group has for its employees depends on a range of economic and demographic assumptions. Small changes in these variables can have a relatively large effect on gross accrued pension obligations and thus gross pension costs. The Company cushions the accounting effect of changed assumptions when quantifying pension obligations by allocating and taking to profit/loss over the remaining duration only estimate deviations in excess of 10 per cent of the higher of gross pension obligations and gross pension assets. The Group has followed Guidance for determining pension assumptions published by the Norwegian Accounting Standards Board (NASB), 6 January Guidance published on 5 January 2010 has been used as the basis for updated measurement of best estimate of accrued liability and assets as at Weight has been placed on the assumptions being mutually consistent. Those parameters that are of the greatest significance for net pension obligations are the discounting interest rate, assumptions on future salary growth, assumptions on future adjustment of the National Insurance basic sum (G adjustment), pension adjustments, assumptions on future longevity and future likely take-up of the contractual early retirement scheme (AFP). The discounting interest rate is set on the basis of government bonds interest and was assessed as at at 4.5 per cent and as at at 3.8 per cent (25 years weighted duration). For KLP Kreditt AS, which is consolidated into the KLP Group accounts for the first time, a discounting interest rate of 3.80 per cent and 4.5 per cent has been used for pension costs and pension obligations respectively. The assumptions on future salary growth, future G-adjustment/pension adjustment are set in line with the actual recommendations of the Guidance at 4.0 per cent (salary growth) and 3.75 per cent (G and pensions adjustment) respectively. The pension adjustment for the local authority pension scheme should be the same as the G-adjustment. The assumptions on longevity (mortality) are based on the latest mortality table (K2005). Future take-up of contractual early retirement scheme (AFP) has been assumed at 45 per cent, i.e. 45 per cent will take AFP on reaching the age of FAIR VALUE ON FINANCIAL ASSETS Financial assets classified as assets for which changes in fair value are taken to profit/loss are generally assets traded in a market, so the market value can be determined with a great deal of certainty. For listed securities with little turnover, assessment is made whether the observable price can be taken as realistic. If it is concluded the observable market price is not representative of the fair value of the asset or the security is not traded on a listed market, the market value is estimated. The estimate is based on the market circumstances prevailing at the end of the reporting period. Unlisted interest-bearing securities are priced on the basis of a yield curve with a risk supplement that represents the market s pricing of the issuer s industry-specific risk. 3.3 FAIR VALUE OF FINANCIAL LIABILITIES Fair value of financial liabilities is shown in Note 15. Fair value of financial instruments is set using a valuation model. The method of calculating fair value using a valuation model is to calculate the expected cash flows based on the terms of each individual contract and then to discount these values to a present value. The expected cash flows for each contract are determined either directly by reference to actual cash flows implicit in observable markets or by modelling the cash flows based on relevant models for market pricing. These models

18 18 ANNUAL REPORT 2009 KLP BANKEN AS use observable market prices and rates as a basis, including for example yield curves for the majority of the asset s or liability s duration and option volatilities. 3.4 LOSSES ON FINANCIAL ASSETS Financial assets not measured at market value are assessed for loss of value at the end of the reporting period. The Group s lending portfolio is valued individually for loans on which default has been observed. If there is an objective event on the balance sheet date that has influence on future cash flow, the loan is written down. In addition, valuation is carried out each quarter by groups of loans with uniform risk profiles. This is described in more detail under Note 2. The Group s lending portfolio has historically shown insignificant losses. The reason for this is that lending is almost exclusively directed at the public sector or enterprises with government guarantees. The Group has insignificant loss provisions, so any future losses will have a direct effect on the income statement. 3.5 FIXED ASSETS AND CAPITALISED SOFTWARE If fall in value is suspected, a write-down test is carried out to check whether the book value of fixed assets and capitalised software is present. In this context the recoverable sum is estimated. There are uncertainties associated with estimating cash flows and discounting factors in connection with calculating a recoverable sum. Note 4 Business segments KLP Banken AS Group Public sect. Loans Personal market NOK thousands Total interest income and similar income Total interest costs and similar costs Net interest income Loans issued to and receivables from credit institutions Loans issued to and receivables from customers Debt to financial institutions Norwegian secured bonds at amortised cost Deposits from customers KLP Banken AS has only the personal market segment. Note 5 Net gain / loss on items at fair value KLP Banken AS KLP Banken AS Group 2009 NOK thousands Realised gain / loss on interest rate instruments Net realised gain / loss on financial instruments Value change on interest rate instruments Foreign exchange and derivatives Net unrealised gain / loss on financial instruments Net realised and unrealised gain / loss on financial instruments

19 N O T E S T O T H E AC C O U N T S 19 Note 6 Fair value of financial assets and liabilities KLP Banken AS KLP Banken AS Group Capitalised value Fair value NOK thousands Capitalised value Fair value Assets measured at fair value Financial instruments at fair value through profit/loss Loans issued to and receivables from credit institutions Lending to Norwegian local authorities Lending to private customers Shares subsidiaries - - Financial derivatives Total financial assets at fair value Assets at amortised cost Lending to Norwegian local authorities Total financial assets at amortised cost Financial liabilities Debt to financial institutions Debt to financial institutions Norwegian secured bonds at amortised cost Deposits from customers Financial derivatives Total financial liabilities Note 7 Fair value hierarchy KLP Banken AS KLP Banken AS Group 2009 NOK thousands 2009 Certificates, bonds, as well as loans and receivables Value based on prices in an active market Value based on observable market data Value based on other than observable market data 0 Accrued interest Certificates, bonds, as well as loans and receivables Shares and holdings Value based on prices in an active market 0 Value based on observable market data Value based on other than observable market data Shares and holdings 0 Derivatives and other financial assets Value based on prices in an active market 0 Value based on observable market data 0 Value based on other than observable market data 0 0 Derivatives and other financial assets Total financial assets valued at fair value

20 20 ANNUAL REPORT 2009 KLP BANKEN AS Note 8 Net interest income KLP Banken AS KLP Banken AS Group 2009 NOK thousands 2009 Loans issued to and receivables from customers Loans to and receiv's from credit institutions Interest-bearing securities Total interest income and similar income Debt to financial institutions Covered bonds issued Deposits and loans from customers Other interest costs Total interest costs and similar costs Net interest income Note 9 Netto provisjonsinntekter KLP Banken AS KLP Banken AS Group 2009 NOK thousands Interbank commission 2 31 Short commission 31 0 Payments handling 0 0 Other commission income 0 33 Total commission income 33-2 Interbank commission Payments handling Other commission income Total commission costs Total net commission 4 Note 10 Financial risk management Organisation of risk management The bank s Board of Directors has established a risk management framework aimed at ensuring risks are identified, analysed and subjected to management using policies, limits, procedures and instructions. The Board has adopted risk policies covering the key individual risks as well as an overall risk policy that covers principles, organisation, limits etc for the bank s total risk. The risk policies are of a high level nature and are complemented by procedures, guidelines and instructions laid down at the senior management level. The policies state which departments are responsible for handling the various risks and also cover the establishment of a separate risk control function. The purpose of the risk control function is inter alia to check that the risk policies and other guidelines for risk management are being followed. This function is carried out by the Risk Analysis and Control Department, which is responsible for preparing periodic risk reports to senior management and the Board as well is reporting in the event of breaches of policies or guidelines. The Department, which has an independent role in relation to other departments, also has other tasks associated with the bank s risk management. The responsibility for the operational direction of the bank s liquidity risk, exchange-rate risk and interest rate risk lies with the Finance Department.

21 N O T E S T O T H E AC C O U N T S 21 Note 11 Credit risk Credit risk is understood here to mean the risk of loss associated with lending customers, counterparties in derivatives, issuers of securities and other counterparties being unable or unwilling to settle at the agreed time and in accordance with written contracts, and the securities established not covering the outstanding demand. The Group provides loans to Norwegian municipalities and county authorities, local authority enterprises, inter-local authority companies and to companies that are guaranteed by a Norwegian municipality, county authority, the state or bank(s). As at 31 December 2009 the Group had not initiated lending activity in the personal market. Loans according to type of security/exposure: Parent bank Group NOK thousands Lending to municipalities and county authorities (principal) Lending with municipal/county authority guarantee Security with guarantee from Norwegian banks Lending with Government guarantee Total Sums falling due more than 12 months after In addition to lending the Group has credit risk exposure in the form of deposits in banks and investments in interest-bearing securities, as well as derivative contracts struck. The purpose of such agreements is to reduce risks arising as a result of the Company s borrowing and lending activities Measurement of credit risk The Board has determined a credit policy that contains overall guidelines, requirements and limits associated with credit risk. The policy lays down that the bank is to have a low credit risk profile and includes limits on types of lending and principles for organisation and operation of the bank s lending activity. The policy also includes an overall mandate structure for lending and other counterparty exposure. The mandates within public sector are linked to Board-determined limits for a large number of the Company s individual borrowers and these limits derive from a risk classification in which the individual borrowers are assigned a risk class based on a set of fixed criteria. Further, requirements are set for reporting to the Board on usage of the limits. Credit risk associated with issuers of securities, derivative counterparties and other counterparties in the financial area is also limited by Boarddetermined limits on individual counterparties. These limits are based on the counterparty s solvency and other assessments of the counterparties creditworthiness Control and limitation of credit risk In processing all new loan applications in the public sector checks are made on whether the customer s credit limits are larger than the total of the loan amounts applied for and current lending. In the credit policy described above requirements are set for reporting to the Board on usage of the limits. Any exceeding of the limits is to be reported to the Company s Board regardless. 11. Maximum exposure to credit risk Maximum exposure is measured as a total of principal and accrued interest. Cash or securities security is not interchanged, nor are other credit improvements carried out. [Trans:??] The table below shows the maximum exposure for the parent bank and the Group as at 31 December Parent bank Group NOK thousands Lending to and receivables from credit institutions Lending to and receivables from customers Financial derivatives Total Loans fallen due or written down Selskapet har ikke påløpte tap på utlån. Selskapet anser alle fordringer som tilfredsstillende sikret. Parent bank Group NOK thousands Interest and instalments with 1-30 days' default Principal not fallen due on loans with payments with 1-30 days' default Interest and instalments with days' default Principal not fallen due on loans with payments with days' default Interest and instalments with more than 90 days' default Principal not fallen due on loans with payments with more than 90 days' default Total loans that have fallen due Relevant security or guarantees Lending written down 0 0 Neither the parent bank nor the Group have incurred losses on lending in excess of any effects of changes in fair value included in the income statement item Net gains/(loss) from financial investments at fair value. All receivables are considered satisfactorily secured Concentration of credit risk The Group s lending at the end of the year was in its entirety linked to public sector financing and the portfolio thus has high concentration against one single sector. The underlying credit risk against this sector is however so low that it is hardly possible to reduce this concentration without increasing total risk in the portfolio. The concentration against the Norwegian public sector is thus considered not to be a risk challenge. The concentration against individual borrowers is limited by individual Board-set limits. Lending to the Group s largest borrower as at 31 December 2009 was about 3 per cent of the Group s total lending Effects of changes in credit risk premiums Market values of lending are determined through credit risk premium adjusted theoretical discounting of future cash flows. The credit risk premium is adjusted by multiplying collected credit risk premiums from market operators by the credit risk premium sensitivity of each loan. Lending and receivables at fair value through profit/loss Parent bank Group (Beløp i tusen kroner) Maximum exposure to credit risk on lending and receivables on the reporting date

22 22 ANNUAL REPORT 2009 KLP BANKEN AS Market value change during the period on loans and receivables because of change in credit spread Accumulated market value change on financial liabilities because of change in credit spread 0 (31 763) Financial liabilities at fair value through profit/loss. NOK thousands Book value of financial liabilities at fair value Contractually set repayments on maturity Accrued interest and market value adjustments 0 ( ) Market value change during the period on financial liabilities because of changes in credit spread Accumulated market value change on financial liabilities because of changes in credit spread The credit risk premium effects are in proportion to fair value of the asset or the liability on the balance sheet. A negative figure in the table for liabilities thus means that the credit risk premium effect reduces the value of the liability and provides a positive effect in the income statement. Note 12 Market risk Market risk is understood here as the risk of reduced fair value of the bank s equity capital as a result of fluctuations in market prices for the bank s assets and liabilities. Changes in credit margins are however excluded since this comes under the term credit risk. The Group is exposed to market risk as a result of the Group s borrowing and lending activity and management of the Group s liquidity. The exposure is however limited to interest rate risk and exchange-rate risk. Interest-rate risk arises as a result of differences in timing of interest rate adjustment for assets and liabilities. The risk associated with such imbalances is reduced by using derivative contracts. The entire lending portfolio comprises loans in Norwegian kroner, but exchange-rate risk will arise in proportion to the Group issuing debt in foreign currency. The risk associated with changes in exchange rates will be reduced using derivative contracts Measurement of market risk Interest rate risk is measured as change in value on 1 percentage point change in all interest rates. Exchange-rate risk is measured as change in value on 10% unfavourable exchange rate change in all currencies Interest rate risk The market risk policy is the Group s overall guidelines, requirements and limits associated with market risk. The policy dictates that the market risk should be minimised so that the total market risk is low. It further states that the Group should not actively take positions that expose the Group to market risk. The policy also sets limits for interest rate risk both for the total interest rate risk for the infinite future and for rolling 12 month periods. The limits are set in relation to Tier 1 and 2 capital and the level of the limits should ensure that the low market risk profile policy is complied with. The operational responsibility for managing the Company s market risk lies with the borrowing department. The Risk Analysis and Control Department reports the Company s actual exposure in relation to limits in accordance with guidelines set by the Board. The table below shows repricing dates for the Group s interest-bearing assets and liabilities. Lending at variable rates is assumed to be able to be repriced within a 1-month horizon. Interest rate risk parent bank Repricing dates for assets and liabilities as at 31 December 2009 NOK thousands Total Up to 1 mnth From 1 mnth to 3 mnths From 3 mnths to 12 mnths From 1 yr to 5 yrs Lending Cash and receivables from credit institutions Total Liabilities created on issue of securities Total Gap Over. 5 yrs Interest risk Group Repricing dates for assets and liabilities as at 31 December 2009 NOK thousands Total Up to 1 mnth From 1 mnth to 3 mnths From 3 mnths to 12 mnths From 1 yr to 5 yrs Lending Cash and receivables from credit institutions Total Liabilities created on issue of securities Debt to credit institutions Total Gap Over. 5 yrs Financial derivatives Net gap The Group s interest-rate sensitivity as at 31 December, measured as described under 24.1, amounted to NOK 8 million Exchange rate risk All receivables and all liabilities as at 31 December 2009 were in Norwegian kroner and the Company was thus not exposed to exchange-rate risk.

23 N O T E S T O T H E AC C O U N T S 23 Note 13 Liquidity risk Liquidity risk means the risk that the bank does not manage to meet its liabilities and/or finance increases in its assets without substantial additional costs arising in the form of price drops in assets that must be realised, or in the form of more costly financing Management of liquidity risk A liquidity policy is established for the Group containing principles, guidelines, requirements and limits that apply to the management of the liquidity risk. The policy lays down that the Group is to have a moderate liquidity risk profile and various requirements and limits are set to achieve this, including targets for deposit cover, limits for refinancing requirements for various time periods and requirements for liquidity buffers. The Board has further adopted an emergency plan for liquidity crises as part of the liquidity policy. In addition to the requirements at Group level, separate specific requirements have been established for subsidiaries, including requirements for continually positive cash flows, limits for refinancing requirements and requirements for liquidity reserves and drawing rights. The operational responsibility for managing the Company s market risk lies with the borrowing department. The Risk Analysis and Control Department reports the Company s actual exposure in relation to limits in accordance with guidelines set by the Board Maturity analysis The table below shows the maturity analysis of the Group s assets and liabilities as at 31 December 2009 based on expected maturity and contractual maturity respectively. Liquidity risk Maturity analysis for assets based on expected maturity: NOK thousands Total Up to 1 mnth From 1 mnth to 3 mnths From 3 mnths to 12 mnths From 1 yr to 5 yrs Lending Receivables from credit institutions Total Maturity analysis of financial liabilities based on expected maturity dates: NOK thousands Total Up to 1 mnth From 1 mnth to 3 mnths From 3 mnths to 12 mnths From 1 yr to 5 yrs Liabilities created on issue of securities Liabilities created on issue of securities Debt to credit institutions Total Maturity analysis for assets based on contractual maturity: NOK thousands Total Up to 1 mnth From 1 mnth to 3 mnths From 3 mnths to 12 mnths From 1 yr to 5 yrs Lending Receivables from credit institutions Total Liquidity risk Group Maturity analysis for financial liabilities based on contractual maturity dates: NOK thousands Total Up to 1 mnth From 1 mnth to 3 mnths From 3 mnths to 12 mnths From 1 yr to 5 yrs Liabilities created on issue of securities Debt to credit institutions Total Over. 5 yrs Over. 5 yrs Over. 5 yrs Over. 5 yrs Note 14 Lending and receivables KLP Banken AS KLP Banken AS Group 2009 NOK thousands 2009 Loans issued to and receivables from credit institutions Investments with credit institutions at fair value Accrued not due interest on investments with credit institutions Lending credit institutions at fair value Total lending Loans issued to and receivables from customers 28 Lending customers at fair value Lending customers at amortised cost Total lending All borrowing customers of KLP Banken AS as at comprised Norwegian local authorities or enterprises with public authority guarantee. With the exception of an unrestricted sum of NOK 2.6 billion, lending to credit institutions and lending to customers is mortgage-secured in favour of Eksportfinans ASA as security for borrowing.

24 24 ANNUAL REPORT 2009 KLP BANKEN AS Note 15 Debt to credit institutions KLP Banken AS KLP Banken AS Group 2009 NOK thousands Covered bonds issued Debt to credit institutions Total liabilities to credit institutions Note 16 Deposits from customers KLP Banken AS KLP Banken AS Group 2009 NOK thousands Deposits from customers without agreed duration Total deposits Customer deposits divided by customer groups KLP Banken AS KLP Banken AS Group 2009 NOK thousands Personal market Total deposits Deposits from customers as at comprised entirely deposits from KLP Group employees. Note 17 Shares in Group companies NOK million Office and business address Holding % OE on first acquisition Acquisition cost Equity transaction Book value Enterprises in the same group KLP Kreditt AS Beddingen Trondheim ,6 869,6 0,0 869,6 ¹ KLP Kommunekreditt AS Beddingen Trondheim ,0 50,0 25,0 75,0 Total shares and holdings in companies in same Group 919,6 25,0 944,6 ¹ KLP Kommunekreditt AS was formed in 2009 Note 18 Intangible assets KLP Banken AS KLP Banken AS Group 2009 NOK thousands Book value Acquisition cost Additions Disposals Acquisition cost Accumulated depreciation previous years 0 0 Ordinary depreciation for the year 0 0 Write-down Book value Depreciation period 10

25 N O T E S T O T H E AC C O U N T S 25 Note 19 Fixed assets KLP Banken AS KLP Banken AS Group 2009 NOK thousands 2009 Machinery, inventory and vehicles 0 Book value Acquisition cost as at Acc. write-downs previous years Additions Assets held for sale Purchases linked to business acquisition 0 0 +/- Value adjustment 0 0 +/- Losses on value falls Depreciation /- Foreign exchange effect 0 0 +/- Other changes 0 0 Accumulated depreciation Book value yrs Economic life 3 5 yrs Straight-line Depreciation scheme Straight-line Note 20 Capital Adequacy KLP Banken AS KLP Banken AS Group 2009 NOK thousands Share capital and share premium fund Other owners' equity Owners' equity Unrealised value changes Interim profit/loss Deduction goodwill and other intangible assets Deferred tax Core capital Supplementary capital Tier 1 and 2 capital to count Capital requirement Surplus of Tier 1 and 2 capital Capital requirements for credit and operational risk - Local regional authorities Publicly owned enterprises Institutions Enterprises Holdings securities funds Other holdings Credit risk Operational risk Write down Total capital requirement assets ,0 % Core capital adequacy ratio 16,0 % 113,0 % Capital adequacy ratio 16,0 % Capital adequacy requirement The authorities minimum requirement for capital adequacy is set at 8 per cent for financial institutions.

26 26 ANNUAL REPORT 2009 KLP BANKEN AS Note 21 Tax KLP Banken AS NOK thousands 2009 Profit/loss before taxes Other permanent differences 14 Tax base for the year Group contribution received with tax effect 69 Reversal of value reduction market-based financial assets Reversal of value increase market-based financial assets Carry-forward deficit for the year Base for tax payable 0 Allocation of tax expense Tax payable on profit/loss for the year 0 Change in deferred tax Tax expense on profit/loss for the year Shares and other securities Accumulated deficit / credit to be carried forward Basis for deferred tax / deferred tax assets in the statement of financial position Deferred tax (-) / deferred tax asset (+), tax rate 28 % Of which non-capitalised deferred tax asset 0 KLP Banken AS Group NOK thousands 2009 Profit/loss before taxes Other permanent differences Tax base for the year Change in temporary differences related to: Fixed assets 98 Pension obligations Adjustment to fair value of financial instruments Dating realisation interest swap agreements Reversal of value reduction market-based financial assets Reversal of value increase market-based financial assets Carry-forward deficit for the year Group contribution paid with tax effect 69 Base for tax payable 0 Allocation of tax expense Tax payable on profit/loss for the year 0 Change in deferred tax Tax expense on profit/loss for the year Estimated tax 1st quarter (before our ownership) Tax cost Q2-4 (during our ownership) Calculation of deferred tax / deferred tax asset Fixed assets -98 Long-term receivables / long-term debt in foreign currency 0 Pension obligations Adjustment to fair value of financial instruments Dating realisation interest swap agreements Shares and other securities Accumulated deficit / credit to be carried forward Basis for deferred tax / deferred tax assets in the statement of financial position Change in deferred tax amounts to Capitalised deferred tax asset from previous years Non-capitalised deferred tax asset

27 N O T E S T O T H E AC C O U N T S 27 Note 22 Pensions The majority of the pension obligation is covered through KLP s joint pension scheme for local authorities and enterprises («Fellesordningen») and the Norwegian Act on Company Pensions (NCPA) (also frequently referred to in English as the «Norwegian Act on defined benefit pensions») The scheme covered about 36 people in The Company also offers pension schemes in addition to Fellesordningen. This obligation is covered through operation. Fellesordningen is a benefits-based pension scheme that satisfies the requirements for mandatory occupational pensions ( obligatorisk tjenestepension, or OTP). The company has a contract pension (AFP) scheme. The accounting treatment of pension liabilities is described in more detail in Note 1.. KLP Banken AS KLP Banken AS Group 2009 Fellesordningen 2009 Through operation 2009 Total NOK thousands 2009 Fellesordning/ NCPA 2009 Through operation 2009 Total Pension costs Accumulation for the year Interest cost Gross pension cost Expected return Administration costs/interest guarantee Net cost of pension including administrative cost Social security costs on net pension cost incl. admin. cost Estimate deviation taken to profit/loss Social security costs on estimate deviation taken to profit/loss Extraordinary costs Net pension cost incl. social sec. & admin. cost Pension obligations Gross accrued obligations Pension assets Net pension obligations before social security costs Social security costs (SSC) Net obligations incl. social security costs Estimate deviation not taken to profit/loss excl. SSC Estimate deviation not taken to profit/loss SSC Change of plan not recorded in the income statement Capitalised social security costs Capitalised net liabilities/assets incl SSC Financial assumptions (common to KLP FP and Group Annuity) 4,50 % 4,50 % 4,50 % Discounting rate 4,50 % 4,50 % 4,50 % 4,50 % 4,50 % 4,50 % Salary growth 4,50 % 4,50 % 4,50 % 4,25 % 4,25 % 4,25 % National Insurance basic sum (G) / Pension adjustment 4,25 % 4,25 % 4,25 % 5,70 % 5,70 % 5,70 % Expected return 5,70 % 5,70 % 5,70 % 14,10 % 14,10 % 14,10 % Social security contribution rates 14,10 % 14,10 % 14,10 % Amortisation period 14/15 8 8/14/15 Actuarial assumptions: The calculations are based on mortality and disability assumptions for the members of the pension scheme as well as frequencies of take-up of the contractual early retirement scheme (AFP)/early pension. The following has been assumed: Take-up of AFP for 2009 and 2010 (per cent in relation to remaining employees): On reaching 62 years there are 45% who retire with an AFP pension. The remainder retire on reaching pensionable age. Voluntary termination for Fellesordning during 2009 and 2010 (in %) Age (in years) Turnover < % % % ,5 % % % >55 0 % Longevity: A variant of K2005 has been used for mortality assumptions.

28 28 ANNUAL REPORT 2009 KLP BANKEN AS Note 23 Salary and obligations to senior management/governing bodies Senior management are defined as being the Managing Director of KLP Banken AS, as well is the Managing Director of the subsidiaries KLP Kreditt and KLP Kommunekreditt AS. The Managing Director is guaranteed salary until , even were the employment to be terminated before that date on the instigation of the employer. The sum will be reduced by any other income from employment earned during this period. The Managing Director is pensionable aged 65. None of the senior management has a bonus scheme. There are no obligations to provide the Chairman of the Board special consideration or other benefits on termination or change of the appointment. All employees in the Group may take up loans with KLP on lending terms and conditions for staff. No senior management have terms and conditions that deviate from this. Loans to external members of the Board of Directors, the Control Committee and the Supervisory Board are only made on ordinary lending terms and conditions NOK million Ordinary salary Other benefits Annual Interest rate as pension costs Loans 3) at Payments plan²) Ledende ansatte 1) Stig Helberg, administrerende direktør KLP Banken AS 0,96 0,07 0,32 0, Arnulf Arnøy, administrerende direktør KLP Kommunekreditt AS/KLP Kreditt AS 1,03 0,22 0,18 1,57 3,10 A2032 Fees Other benefits Annual Interest rate as pension costs Loans 3) at Payments plan²) Board of Directors 4) Sverre Thornes, Chair 0,00 6,91 3,10-3,35 A2038 Aage E. Schaanning, Deputy Chair 0,00 3,27 3,10-3,35 A2033 Mette-Jorunn Meisland 0,00 6,13 3,10 A2039 Mai-Lill Ibsen 0,00 0, Jan Otto Langmoen 0,00 0, Ann Eve Fjeldstad, elected from the employees 0,00 2,64 3,10-3,35 A2040 Total 0,00 18,95 Control Committee 5) Ole Hetland, Chair 0,06 Anne-Marie Barane, Deputy Chair 0,05 Aud Mork 0,05 Jan Rune Fagermoen 0,05 Trond Knudsen 0,05 Tor Berge 0,04 Total 0,31 Supervisory Board Total Supervisory Board, incl. staff representatives 0,07 3,96 1) Declared salary/remuneration applies only for the period the senior 2) S= Serial loan, A= Annuity loan, last payment. 3) All loans have been taken up from the Group parent - Kommunal Landspensjonskasse 4) Directors fees have not been paid during ) KLP Banken - the Group has a common Supervisory Board. All considerations in 2009 were paid out by KLP Banken. Note 24 Number of employees KLP Banken AS KLP Banken AS Group 2009 NOK thousands Total permanent employees in the Group Average number of employees in the Group 48

29 N O T E S T O T H E AC C O U N T S 29 Note 25 Operating costs KLP Banken AS KLP Banken AS Group 2009 NOK thousands 2009 By class Salary, pensions and social security costs Management costs Depreciation Other operating costs Total operating expenses Note 26 Transactions with related parties KLP Banken AS KLP Banken AS Group 2009 NOK thousands 2009 Income statement items KLP, fees lending management KLP Kommunekreditt, administrative services (at cost) KLP Kapitalforvaltning, fees services provided KLP, rent KLP, pension premium KLP, staff services (at cost) KLP, interest-subsidised employee loan TOTAL Statement of financial position items Net internal accounts to: KLP KLP Kapitalforvaltning AS KLP Bankholding AS KLP Kommunekreditt AS TOTAL Transactions with related parties are carried out at general market terms and conditions, with the exception of the Company s share of common functions (staff services), which are allocated at cost. Allocation is based on actual use. All internal accounts are settled as they arise. Note 27 Auditor s fee KLP Banken AS KLP Banken AS Group 2009 NOK thousands Ordinary audit Other services - - Total Auditor s fee 806 The sums include VAT. Audit costs have not accrued for KLP Banken AS or KLP Kommunekreditt AS during 2009.

30 30 ANNUAL REPORT 2009 KLP BANKEN AS Note 28 Purchase of businesses On 7 May 2009 Kommunal Landspensjonskasse entered into an agreement with Eksportfinans ASA in which KLP Banken AS was to acquire all the shares in Kommunekreditt Norge AS. The agreement was inter alia conditional on the necessary permissions and approvals being given by the Norwegian Ministry of Local Government and the Ministry of Finance as well as the Financial Supervisory Authority of Norway, and the Storting approving the Ministry of Local Government s purchase of KLP s holding in Kommunalbanken AS. The transaction was completed on 24 June 2009 when the conditions were lifted. Kommunekreditt Norge AS was acquired by KLP Banken AS which is a wholly owned subsidiary of Kommunal Landspensjonskasse through the intermediary holding company KLP Bankholding AS. The acquisition occurred with accounting effect from 1 April 2009, at book value as at 31 March 2009, NOK million plus interest of NOK 8.1 million for the period up to 24 June. In addition transaction costs of NOK 8.3 million were taken directly to expenses in the statement of income. The transaction was financed by the subsequent capital expansion in which Kommunal Landspensjonskasse first subscribed a capital expansion of NOK 880 million in KLP Bankholding AS which in turn subscribed a capital expansion of NOK 880 million in KLP Banken AS. NOK million Capitalised values Kommunekreditt Fair value Difference Loans issued to and receivables from credit institutions 11,0 11,0 0 Loans issued to and receivables from customers , ,2 0 Financial derivatives 14,6 14,6 0 Deferred tax 22,8 22,8 0 Tangible fixed assets 1,3 1,3 0 Other assets 35,8 35,8 0 Total assets , ,5 0 Long term debt , ,2 0 Current liabilities 84,0 84,0 0 Financial derivatives 256,7 256,7 0 Interim profit/loss 48,9 48,9 0 TOTAL LIABILITIES , ,8 0 Net assets 869,6 869,6 0 Purchase price 869,6 869,6

31 31 PricewaterhouseCoopers AS Postboks 748 Sentrum NO-0106 Oslo Telephone +47 Telefax To the Annual Shareholders' Meeting of KLP Banken AS Auditor s report for 2009 We have audited the annual financial statements of KLP Banken AS as of 31 December 2009, showing a loss of NOK for the parent company and a profit of NOK for the group. We have also audited the information in the Board of Directors' report concerning the financial statements, the going concern assumption, and the proposal for the coverage of the loss. The annual financial statements comprise the financial statements of the parent company and the group. Simplified IFRS according to the Norwegian accounting act 3-9 have been applied in the preparation of the financial statements. These financial statements are the responsibility of the Company s Board of Directors and Managing Director. Our responsibility is to express an opinion on these financial statements and on other information according to the requirements of the Norwegian Act on Auditing and Auditors. We conducted our audit in accordance with the laws, regulations and auditing standards and practices generally accepted in Norway, including standards on auditing adopted by The Norwegian Institute of Public Accountants. These auditing standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. To the extent required by law and auditing standards an audit also comprises a review of the management of the Company's financial affairs and its accounting and internal control systems. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements have been prepared in accordance with the law and regulations and give a true and fair view of the financial position of the Company and of the Group as of 31 December 2009, and the results of its operations and its cash flows and the changes in equity for the year then ended, in accordance with simplified IFRS according to the Norwegian accounting act 3-9 the company's management has fulfilled its duty to produce a proper and clearly set out registration and documentation of accounting information in accordance with the law and good bookkeeping practice in Norway the information in the Board of Directors' report concerning the financial statements, the going concern assumption, and the proposal for the coverage of the loss are consistent with the financial statements and comply with the law and regulations Oslo, 10 March 2010 PricewaterhouseCoopers AS Magne Sem State Authorised Public Accountant (Norway) Note: This translation from Norwegian has been prepared for information purposes only. Alta Arendal Bergen Bodø Drammen Egersund Florø Fredrikstad Førde Gardermoen Gol Hamar Hardanger Harstad Haugesund Kongsberg Kongsvinger Kristiansand Kristiansund Lyngseidet Mandal Mo i Rana Molde Mosjøen Måløy Namsos Oslo Sandefjord Sogndal Stavanger Stryn Tromsø Trondheim Tønsberg Ulsteinvik Ålesund PricewaterhouseCoopers navnet refererer til individuelle medlemsfirmaer tilknyttet den verdensomspennende PricewaterhouseCoopers organisasjonen Medlemmer av Den norske Revisorforening Foretaksregisteret: NO

32 32 To the KLP Banken AS General Meeting The KLP Banken AS Supervisory Board has examined the annual financial statements produced by the Board of Directors for KLP Banken AS and KLP Banken Group respectively, comprising the income statement, the statement of financial position, the statement of cash flow and the notes, the Board s report, the auditor s report and the Control Committee s statement. The Supervisory Board recommends that the annual report, financial statements and allocation of profits for KLP Banken AS and KLP Banken Group respectively for 2009 be approved in accordance with the recommendation of the Board of Directors. The KLP Banken AS financial statements show a result (loss) for 2009 of NOK -24,965, The share premium fund provides provision for the entire loss. The KLP Banken Group financial statements show a profit for 2009 of NOK 4,843, The annual result is to be allocated with NOK 64,963,000,- to the fund for unrealised gains whilst provision is made for NOK 60,119,819,-from the share premium fund. Trondheim, 10 March 2010 Ragna Dahl Grønnevet Chair of the Supervisory Board

33 33 To the Supervisory Board and General Meeting of KLP Banken AS THE CONTROL COMMITTEE S STATEMENT ON THE FINANCIAL STATEMENTS FOR 2009 In accordance with Section 8 of its instructions the Control Committee has reviewed the financial statements and the report of the Board of Directors, the income statement and statement of financial position as well as the auditors report for KLP Banken AS. The Control Committee recommends the KLP Banken AS Supervisory Board and the General Meeting adopt the annual financial statements and the report of the Board of Directors and, in accordance with the resolution of the Board of Directors, resolve to commit the following allocation and provision for the year: The KLP Banken AS financial statements show a result (loss) for 2009 of NOK -24,965, The share premium fund provides provision for the entire loss. The KLP Banken Group financial statements show a profit for 2009 of NOK 4,843, The annual result is to be allocated with NOK 64,963,000,- to the fund for unrealised gains whilst provision is made for NOK 60,119,819,-from the share premium fund. Oslo, 5 March 2010 Ole Hetland Tor Berge Trond Knudsen Anne-Marie Barane Jan Rune Fagermoen

34 34 A N N UA L R E P O R T KLP Banken AS is part of the KLP Group History

35 T H I S I S K L P 35 This is KLP KLP provides safe and competitive pensions, finance and insurance services to municipalities, county authorities and health enterprises, as well as to businesses both in the public and the private sector, and to their employees. Kommunal Landspensjonskasse KLP Skadeforsikring AS KLP Eiendom AS KLP Forsikringsservice AS KLP Bedriftspensjon AS KLP Kapitalforvaltning AS KLP Fondsforvaltning AS KLP Bankholding AS KLP Alternative Investments Plc. KLP Banken AS KLP Kreditt AS KLP Kommunekreditt AS The Group s parent company is Kommunal Landspensjonskasse gjensidig forsikringsselskap (the Norwegian national municipal pension fund mutual insurance company). KLP and its subsidiaries together have more than 744 employees. The Group s total assets are [NOK] billion (as at ). KLP is one of Norway s largest life insurance companies. The KLP Group The Group provides secure and competitive products and services in: Pension and pension fund services Banking Insurance Fund and asset management Property KLP is the market s leading provider of occupational pensions to the public sector and associated organisations. The parent Company s mutual ownership model means that the pension customers are also the owners of the Company. Subsidiaries KLP Skadeforsikring AS is the leading provider of accident, workman scompensation (occupational injury) and property insurance to Norwegian local authorities. The company also delivers personal insurance products, primarily directed at public sector employees. KLP Eiendom AS manages all KLP property interests. The company has offices in Oslo, Trondheim, Copenhagen and Stockholm. KLP Forsikringsservice AS is the market-leading service provider of pension fund services to the independent local government pension schemes. KLP Bedriftspensjon AS offers defined contribution and defined benefit pensions, with varying risk profiles according to the customer s wishes, both to private and to public sector organisations. KLP Kapitalforvaltning AS is one of Norway s largest asset management operations and offers a broad spectrum of investment and The Union of Norwegian Cities and the Norwegian Association of Rural Municipalities (forerunners to the Norwegian Association of Local and Regional Authorities - KS) decided to establish Kommunal Landspensjonkasse. KLP was established as a managed pension fund under Norsk Kollektiv Pensjonskasse in The Norwegian parliament, the Storting, passed a resolution to introduce National Insurance The pension scheme for nurses was established at KLP by special statute KLP exceeded NOK 1 billion in total assets

36 36 A N N UA L R E P O R T KLP S VISION: The best partner for the days to come THE CUSTOMER PROMISE In consultation with our customers we shall deliver durable and effective solutions. This means inter alia that KLP is to have wide-ranging consultations with its customers, listen to comments, operate cost effectively, be predictable and have the best expertise, service and accessibility. VALUES The values to which employees at KLP aspire are Open. Responsible. Clear. Committed. BUSINESS CONCEPT KLP will deliver safe and competitive financial and insurance services to the public sector and enterprises associated with the public sector, and their employees. management services. In its investment process KLP systematically applies and promotes ethical considerations based on international norms for such things as human rights, employee rights and the environment. KLP Fondsforvaltning AS offers a broad spectrum of funds with a variety of investment mandates and risk. The company has funds in active and index-tracking management suitable for institutions, companies and private clients investments. All the funds are managed in line with KLP s ethical criteria. KLP Banken AS is a bank focused on mortgage lending and deposits. This provides the basis for efficient operation and low costs. KLP received its permit to establish a banking operation on 29 January 2009 and the KLP Banken was launched on 1 February KLP Kommunekreditt AS and KLP Kreditt AS are subsidiaries of KLP Banken AS. These companies will help to secure favourable terms on loans for the public sector. KLP Alternative Investments plc enables KLP further to specialise active asset management and in this way to increase returns on the life company s money. Growth and profitability - the overarching goals Growth and profitability are overarching goals for KLP s activities. These goals provide the direction for implementing investment and product development initiatives. KLP aims to meet its customers needs, operate profitably and deliver quality in all its services. Its customers should find that KLP strengthens their finances, simplifies their everyday life and helps to make them good and attractive employers. Market leader KLP s main product is public sector occupational pension. At the start of 2010, 331 municipalities and county authorities had their pension schemes with the Company. The same applies to about 25 of the country s 27 health enterprises and about 2500 corporate enterprises. The Company s pension schemes cover more than 300,000 occupationally active individuals and 150,000 pensioners. In addition more than 115,000 members have a pension entitlement with KLP from previous employment. Profitable to be a KLP owner KLP s form of incorporation brings several advantages. KLP s customers themselves provide equity capital and are thus also owners of the Company. This produces good returns and considerable influence potential. KLP received its own licence as an insurance company and established a joint local government pension scheme the same year. Kommunal Ulykkesforsikring (KUF) obtained a licence to engage in property insurance. KLP bought Nora Eiendom KLP expanded its product range with group life and accident insurance for local authority employees. Establishment of KLP Skadeforsikring AS and KLP Fondsforvaltning AS. Nora Eiendom was renamed KLP Eiendom AS.

37 T H I S I S K L P 37 KLP s head office is in Oslo. The Company also has an office in Bergen, which services KLP s pension customers in West and South Norway. Other pension customers are serviced from Oslo. KLP Eiendom has offices in Oslo, Trondheim, Copenhagen and Stockholm. KLP Banken and KLP Kommunekreditt have their head office in Trondheim. The equity capital the customers contribute is managed as part of the corporate portfolio. In 2009 the return on these assets invested in the corporate portfolio was 6.7 per cent (4.0 per cent in 2008), whilst net return on the owners equity contribution assigned to the customers was 5.2 per cent (2.2 per cent in 2008). As well as the direct return there is also an element of profit in having equity in KLP. Being an owner of the mutual KLP means that the surplus on the premium elements accrues to the owners/customers. Were KLP a limited company, this surplus would go to the shareholders and not the customers. Being a customer and owner of KLP as a mutual company is therefore profitable. Social responsibility In its social responsibility strategy KLP is committed to developing good procedures for measuring and reducing the Company s environmental impact. The KLP Group was environmentally accredited in the first of the major financial institutions in the country. KLP Eiendom is accredited in accordance with the ISO standard, whilst other companies are accredited as Miljøfyrtårn ( Eco-Beacons ). KLP also impacts on the external environment through investments and ownership in almost 2000 companies throughout the world. All the companies in which KLP invests are monitored in regard to any discreditable circumstances and potential breaches of key UN conventions and declarations. In practice this means that KLP excludes companies that may be linked to breaches of conventions in the following areas: Human rights, including child labour Employees rights The environment Arms Corruption The exclusion of companies is not a goal in itself and KLP uses active dialogue with companies as an additional tool, both to prevent companies from having to be excluded and to achieve the re-inclusion of companies previously excluded. KLP is also a responsible owner in companies and works actively to promote environmental and social responsibility through dialogue, projects and voting at general meetings. For 2009, for the fifth time, KLP is publishing a separate Social Responsibility Report. The report is based on the international standard, the Global Reporting Standard (GRI). In this there is a more detailed description of how KLP managed its social responsibility during KLP passed NOK 100 billion in total assets KLP received a licence from the Financial Supervisory Authority of Norway to establish a banking activity. KLP buys Kommunekreditt Norge AS from Eksportfinans KLP Kapitalforvaltning AS was formed under the name Aktiv Forvaltning ASA. KLP Skadeforsikring AS launched sales of personal non-life insurance KLP passed NOK 200 billion in total assets KLP exceeded 300,000 occupationally active members KLP Banken is launched